DAIMG comments on Value chain Analysis report

Comments on Value Chain Analysis for Olive Production of Nangarhar Valley Agricultural Corporation Summary of the Report Objective To identify production trends and opportunities for policy intervention to increase production and profitability of the Nangarhar Valley Agricultural Corporation (NVAC). Methodology Quantitative and qualitative data was obtained through surveys, interviews and focus group discussions with farmers and company officials. A survey questionnaire was developed. Several qualitative analytical tools were employed to evaluate company performance and business sector threats and opportunities. Results Key problems identified are a) management process weaknesses b) “inefficient” production, c) insufficient financial resources, d) machinery obsolescence, e) excessive use of manual labor, f) lack of product quality control, g) inadequate marketing skill and pricing procedures and h) inadequate private sector interaction. Recommendations a) Greater involvement of the private sector in production/processing and marketing b) Introduction of a long term public-private partnership (PPP). The PPP contract to include details of financing risks, returns, design and performance standards c) The private sector partners be entirely responsible to management, innovation and renovation d) Government subsidization to continue e) NVAC be responsible for marketing Perspective Afghanistan produces olive oil only in Nangarhar through NVAC farmlands. NVAC had three processing factories in 1997. The processing plants produce olive oil. Under utilization of production capacity is essentially due to obsolescence of plant and machinery and occupation of NVAC owned olive growers by local farmers. NVAC had a virtual monopoly in the production and marketing of olive oil and pickles in 2016. Link between NVAC and its wholesalers, retailers and consumers have been weak. Value Chain Analysis (VCA)

VCA seeks to identify: The share of wages, profits, interest and rent in the total output through the production and marketing of raw olives, pickles and olive oil by farmers, NVAC wholesalers and retailers – that is the difference between the price and cost of production and rates of all olive products, all valued in monetary terms. The current production and marketing practices and NVAC’s olive production. Research Technique a. Surveys, interviews and focus group discussions wre organized with NVAC functionaries, farmers, shepherds, exporters, private sector representatives, bank officials and some government officials. The survey was limited to the farmer segment only b. The CANVAS business model gives a broad overview of NVAC’s business practices, identifies its business partners, main activities and operating cost structure, contractor requirements and distribution channels. A value chain map was developed to determine value added at different levels of marketing and production and their relative share in the value chain of NVAC farmers wholesalers and retailers. Political economy, technological and environmental (PESTEC) influences on the activities of NVAC and its suppliers and customers were be identified and strengths and weaknesses of NVAC were evaluated. (SWOT) Problems a. Yield per hector on NVAV very low in comparison to international standards as is oil extraction. b. Plant and machinery obsolete c. Produces only for domestic markets. In 2016 domestic olive production represented a very small proportion of olive consumption in Afghanistan and of which was imported. Findings CNVAS model (Table 4, p. 23) shows NVAC’s key partners are government, suppliers (farmers, wholesalers and donors). Its main output are production of olive oil and pickles leasing land water and irrigation services. In 2016, 95 percent of total output costs absorbed in salary payments, and only 3 percent in retooling and equipment maintenance. Total expenditure approximates AFN 90 million. Total revenue as indicated in table 4 equals AFN 73.2 million – but does not include government subsidy and donors funding. Stakeholder Analysis Identifies the following problems:

a. Lengthy process of input procurement b. Insufficient government subsidies c. Insufficient funds for working agricultural land. In 2016 only about 15 percent of the grooves could be cultivated d. Inefficient production and pricing methods, inadequate supply of fruit e. Inefficient packaging labelling and storage f. Procurement contract frequently delayed. g. Price uncompetitive with imports. h. Weak marketing activities by NVAS and no market survey to determine demand i. Lack of donor commitment. j. Inadequate supply of electricity k. Low shareholder interaction l. Inadequate transportation Distribution of Value Price over cost of production is described in Table 6 (p. 29) of the value generation by the production and sale of one kilogram of oil. The farmer receives 3.49, NVAC receives 79 percent, the main wholesaler receives 13 percent, other wholesaler 21percent and retailer receives 6 percent of net value addition. In the case of 1 kilogram of pickle production the added value of share of the farmer is 0.9 percent, NVAC is share is 80 percent, main wholesaler is share is 9 percent, other wholesaler share is 4 percent and the retailer share is 7 percent. Input Cost Table 7 (p. 28) lists raw material input cost of olive cultivation. The most expensive inputs are insecticides and fungicides. Together they account for 87 percent of total input cost. Procurement process is haphazard leading to large variation in annual output of fruit on NVAC farms and olive oil and pickles production by the factory. Farm production is almost entirely manual. Agriculture machinery cost therefore represented only about 16 percent of cost per hector. Table 8 (p.31) shows that input cost accounts for 20 percent of aggregate cost per hector of production. Fuel procurement accounts for about 55 percent and packaging (bottling) for 30 percent of processing cost. Packaging (bottling) accounts for 53 percent of processing cost of pickles – raw material input costs for pickle processing is only 16 percent per unit. Marketing Marketing is through primary wholesaler who may sell to other wholesalers or directly to consumers. The prime wholesaler’s price margin is about 20 percent for olive oil 12 percent for pickles. Retailers’ price margin is significantly lower but super market price margins are

higher. Details of the price estimation at the producer, wholesaler and retailer levels are not given in the document. Constraints on the Supply Chain Table 5 (p.37) lists problems in production and marketing identified by government, NVAC, wholesalers, retailers and experts. Major problems are: a) lack of market promotion, b) low quality, c) government regulations inflexibility, d) indirect constraints. Scoring in Table 15 is ambiguous. NVAC identifies government regulatory practices, low budget allocation and lack of machinery as major constraints. The study argues that low quality and quantity of fruit production is the main problem faced by NVAC. Recommendations a. The main recommendations are set out in Table 16 (p. 0) – again scoring is ambiguous. The Table is based on the opinions of government officers, NVAC executive, wholesalers, retailers and experts. b. The government does not regard the existence of NVAC as representing a viable business opportunity – neither the factory nor its farm. NVAC regards both the factory and farm as viable and lists lack of skilled manpower resources as a production enhancement requirement. No opinions are expressed by wholesalers/retailers and experts advocating the continuing operation of NVAC farms. They advocate the investment of the private sector in NVAC operations. c. The PESTEC/SWOT analysis summarizes strengths and weaknesses, opportunities and threats faced by NVAC according to the opinions of stakeholders (Table 17, p. 41). Opportunities are:1) continued government support in the form of infrastructure investment, 2) continued donor support, 3) existing domestic product demand, 4) good climate and 5) equipment/technology imports. Threats are: 1) insufficient government support, 2) excessive government interference, 3) insecurity, 4) existence of land mafia and misuse of NVAC by farmers, 5) illegal cutting down of olive trees, 6) adverse weather conditions, 7) growth of plant pests and diseases. d. Table 18 (p. 42) shows that 33 percent of small farmers and 100 percent of medium sized farmers are not interested in leasing land from NVAC e. Table 24 (p. 51) shows that NVAC and experts support greater involvement of the private sector and favors the formation of public private partnership contracts in the sector. Scoring again is ambiguous as is analysis of the focus group discussion. f. The study advocates that NGAC solicits private sector investment in production, processing and marketing. It also recommends the continuous use of market research and also the shortening of the distribution chains – though details of this are not provided. PPP contracting is advocated. NVAC’s role is to be restricted to provision of land, water and product processing. Faith is expressed in the private sector’s ability to relieve all the supply chain constraints through adroit management, financial and technological support. No justification is provided for the expression of this faith. The study also advocates a lengthening of land lease, contracts with individual farmers,

ensuring rights of lease renewals. According to the report government should provide technical, capacity building and imports (of machinery and foreign expertise) and support to private investment in the PPP contracts. It should also subsidize private investment and extend marketing support. Again specific details are not provided. If these recommendation are enacted the study anticipates that NVAC output will increase six fold (time percent not specified). It is also expected to contribute to an equalized distribution of added value among NVAC wholesaler and retailers. The “new business model” will also contribute to environmental sustainability, income flow opportunities and provide social benefits. All these assertions are faith based and not justified by the analysis undertaken. Da Afghan Iqtisad Mashwarti Group’s (DAIMG) evaluation of the Report and Recommendations 1. The study does not contextualize the activities of NVAC within the local or national economy. It does not raise the question of the share of olive production in regional or national production, investment or employment –thus demonstrating the relative influence and weight of the olive sector. It cannot therefore serve as a guide to the allocation of resources on a national or regional/local basis. 2. The findings of the study are mainly based on interviews and focus group discussants. The problem is that the sample of interviewees and discussions have not been shown to be representative of their cohort. We cannot know whether the opinions expressed by them can be generalized as representative of the whole population of policymakers, NVAC officials, wholesalers, retailers or consumers etc. This is a major weakness of the study which limits its usefulness for policy formulation. 3. The statistical analysis undertaken is ambiguous – scores assigned in the statistical tables are not clear. It is not shown how they have been derived from the data produced by the survey, interviews or focus group discussions. Estimated correlation coefficients are extremely low and independent variables in the correlation estimations (age, education) have not been regarded as policy variables. The correlation analysis is therefore not drawn upon in the recommendations made in the study. 4. The financial infrastructure of the Company is not focused upon. The study does not quantify the amount of finance required to enable NVAC to achieve full capacity utilization. Similarly the various policy measures are not costed so that the total cost or its allocation – of rehabilitating NVAC cannot be estimated. 5. The belief that the private sector will relieve all the constraints faced by NVAC does not follow from the analysis – it is merely the opinion of some stakeholders and conventional wisdom. The private sector in Afghanistan is weak and public-private partnership arrangements have often failed in many countries. This does not mean that private investment in public enterprises cannot play a useful role but a wholesale abandoning of the managerial prerogative by public authorities is neither desirable nor efficient or realistic.

6. The study was undertaken at the time of the ghaddar rule (2019) and of course does not have anything to say about the impact of property form change on values and morals of management, employees, customers and the community in general. This should be a major consideration of the policymakers of the Islamic government. DAIMG’s Recommendations a. As we have suggested in our comments on the report of the Group on Emirate Enterprises, a rehabilitation program should be developed for: a. Grain processing b. Armament manufacture especially anti-aircraft drones c. Mining d. Pharmaceutical e. Fertilizers and f. Steel sector b. Emirate Enterprise companies in these sectors should be consolidated according to the recommendation of the above report. c. Companies selected for consolidation/rehabilitation should be those that are with a. Existing operational surplus (especially from core activities) b. Relatively low debt c. Low machinery obsolescence d. Adequate domestic demand e. Supply chain linkages with the private sector d. Companies selected for consolidation/rehabilitation should be subjected to due diligence exercise by competent auditors. e. Re-financing arrangements should involve equity financing by governments, private investors and foreign private sector enterprises. Issue of musharka/modarba certificates to the general public may also be envisaged for this purpose. f. The rehabilitation plan for enterprise companies should be fully integrated into a medium term National Economic Plan and National Credit Plan/ g. According to this perspective, it appears that there is no prima facie case for prioritizing olive oil or pickles production in the national rehabilitation plan (as its production is confined to a small locality and farmers are not enthusiastic about increase in its production) or for rehabilitating the Nangarhar Agricultural Processing Company