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Burundi Leather Sector Profile

National estimates of livestock numbers for 2012 (FAO 2013) indicate that Burundi is home of 701,000 cattle, 259,000 sheep and 2.48 million goats. The livestock sector contributes 27.2% of Agricultural GDP and 12.7% of the national GDP. Meat consumption drives the market supply of hides and skins in Burundi with a similar trend observable in all the other countries in the region. With the off-take level estimated at 12% for cattle and 20-30% for small ruminants, the raw material available in Burundi is estimated at 100,000 cattle hides and 714,000 goat and 77,000 sheep skins per annum. Burundi also imports live animals form neighboring countries like Tanzania for meat purpose that clearly shows that the potential of raw material available in Burundi could be much higher than the figures indicated. Although the country has a tannery, up until recently, 80% of hides and skins were exported in raw form without any value addition, thus ‘starving’ a source of raw material to the existing tannery in Bujumbura. However, it is fundamental to note that Burundi has now imposed an export tax of 80% on raw hides and skins, and this has tremendously improved to the availability of hides and skins to the existing tannery.

Footwear production is very weak as it is currently dependent on the MSMEs, who are under equipped, lack technical support and most of them have not been formally trained. However there is positive development as the owner of the tannery, has bought reconditioned machinery, which have already been installed to manufacture footwear. When operations are initiated there is an intention of employing about 100 workers. COMESA/LLPI had a pivotal role in training the artisans who supported in the preliminary stages of the footwear production for the company. Most of the footwear consumed in Burundi is imported from China and the rest of the world.

Industry Structure and Value Chain Map

Promoting value chain development is increasingly being recognized as a promising approach to address economic development, job creation, inclusive growth and a wider range of social and environmental issues. The Burundian government believes that agriculture will serve as the catalyst for future economic growth to bring about food security, poverty reduction and increased employment. Hides and skins are products of the agricultural sector with huge potential for the planned economic development. Figure 4 shows the linear mapping of activities in the Burundi leather value chain, from the initial input suppliers at the very beginning of the production process to the final stage of leather goods and footwear production.

Industry Structure and Value Chain Map
Figure 4: Burundi Leather Value Chain
Designed by COMESA/LLLPI based on Stakeholders Consultations

Quality of hides and skins

Presently the quality of hides and skins is generally low. Quality of hides and skins is affected by nature of animal husbandry practices. These mal-practices include poor branding methodologies, deficient control and management of diseases/pests, improper flaying, poor storage, preservation and processing techniques which subsequently has strong influence on both domestic and export markets.

Animal husbandry practices and diseases

During the consultative meetings held with different stakeholders, it was pointed out that the quality of hides and skins in Burundi is affected by factors such as, breed, age, levels of animal nutrition, branding, scratches, horn rakes, tick bites, and poor transportation facilities. Moreover, local zebu breeds, which represent almost all the traditional herd, generally yield smaller sized hides. Hides/ skins from improved dairy or meat type animals have relatively bigger and good quality hides and skins because of their breed size through improved husbandry and feeding methods.

Infestation of ticks and other ecto-parasites on livestock causes damage to hides and skins. The healing of biting areas by such ecto-parasites normally leave behind pin-point scars and other related destruction of the grain layer. As such the raw material emanating from the affected animal is rendered inappropriate for the production of full grain leather. Raw materials affected by tick-infection are, therefore, down-graded and are of reduced value. Unfortunately in Burundi, as it is the case in many African countries, animal husbandry measures for controlling ticks are relatively expensive and inadequately practiced.

Branding of cattle with hot iron causes high damage to hides and impacts negatively to the leather industry. Burundi imports considerable number of animals from Tanzania for meat purpose and branding, as a means of identification, is said to be widely practiced in Tanzania. The practice of branding animals with hot irons as a treatment for certain diseases was also mentioned during the workshop conducted for the leather strategy. Resultant, hot iron branding defects, persist throughout the leather tanning process, finally affecting the quality of leather and leather products.

Existing slaughter facilities and tools

The Bujumbura abattoir/slaughterhouse is relatively better equipped with facilities and tools. In other urban and rural areas the slaughter facilities consist broadly of slaughter slabs and non-specific places by farms and households. Although the general situation varies from place to place, most of the slaughter facilities were indicated as usually lacking basic equipment such as hoisting facilities, lighting system and regular water supply. The tools are usually rudimentary and cause damage to the hides and skins. It goes without saying that the type of facility used largely determines the quality of the hides and skins produced.

Slaughter practices and skills employed

Hides and skins damages that occur during slaughtering are not only due to poor slaughtering facilities, equipment and tools but also due to poor slaughter practices and skills. In slaughter slabs and homestead-slaughtering, it is in some instances, common to see, hides and skins used as mats during slicing of carcasses into meat cuts. This exercise results in inflicting holes and gorges to the hides and skins making them unfit for the subsequent usage in the upper levels of leather value chain. Thus slaughter defects result more often from inadequate flaying skills, lack of motivation and less value attachment to hides or skins.

Preservation and storage techniques

After slaughter, improper curing and storage of hides and skins also cause considerable loss. Preservation by ground drying method, widely practiced in rural areas, results in poor quality hides and skins which is exhibited with high putrefaction or exposure to rotting. Salt is the best preservation method if the right quality and stipulated duration is adhered to (though a potential to environmental concerns). It ensures good quality hides and skins. But the lowered usage of the resultant raw material is hindered by unawareness towards its quality management by primary producers; inadequate purchasing power and little price incentive through use wet salting as a curing method. Moreover, apart from preservation aspects, poor storage techniques were also mentioned by the workshop participants as another factor affecting the quality of hides and skins resulting from putrefaction and damage by pests.

Grading knowledge and skills

Grading of hides and skins during trading is almost nonexistent. Thus hides and skins are bought or sold as mixed grades averages (as if they are of the same grade and quality i.e. Shelabela) with no price motivation for primary producers to produce good quality hides and skins.

Income Distribution in the bovine hides marketing

The distribution of incomes among value chain players is very important in the development of leather value chains. Thus the relationship between income distribution and the level of contribution by each economic agent along the value chain contributes significantly to sustain the efficiency and effectiveness of a value chain. Skewed distribution of income, which fails to offer a fair return to investment or contribution by any agent along the value chain, may undermine the effectiveness and efficiency in the performance of the chain.

This is mainly because economic agents who feel cheated may offer a compromised service, which they deem to be commensurate to the income they are receiving. For instance, hides and skins collectors may economize on the use of salt, thus downgrading the quality of hides and skins; low collection levels of hides and skins may be recorded, as hides produced far away from the collection centre may go uncollected, once the price paid, does not compensate for the increased transport cost. A simulation of the amount of gross margin earned at each level of the value chain in Burundi from the moment the hide is harvested from the carcass to the production of wet blue is illustrated in Figure 7.

Figure 5: Gross Margin Distribution for Bovine Hides and Skins
Source: COMESA/LLLPI based on Stakeholders Consultations

Livestock traders/butchery owners received approximately US$ 1.7 million per annum as gross margin, placing them in second place after tanners. This scenario is attributed to the fact that livestock purchase price excludes the fifth quarter; thus they do not pay for it. Thus the skin of an animal assumes economic value the moment it is separated from the carcass, livestock traders/butcheries are thus the first beneficiary, and they usually sell it to collectors or tanners in green state without incurring any cost.

Past projects have concentrated on supporting slaughterhouse owners to work on the reduction of flay cuts. The results have been disappointing, as the intervention focused on the wrong agent (slaughter house owner), who does not directly benefit from the marketing of the hide in instances, where hides and skins are not used as slaughter fees. The hides and skins are owned by the livestock trader, who in reality only pays to the farmer 60% of the live weight, and gets the hide, blood, bones, intestines/casings, fat and organs for free. Hence there is low economic incentive for the livestock trader to invest in ensuring that the quality of hides and skins is improved, as any amount he receives is a bonus. It is therefore imperative to note that any work aimed at the reduction of peri slaughter defects, should design and implement a mechanism to ensure that that these livestock traders/butcheries are made accountable, and thus contribute to the elimination of peri slaughter defects.

In the final analysis, the livestock traders/butcheries are the major beneficiaries, because their gross margin equates to net profit; as they receive the hide/skin for free. Also they are usually not involved in the preservation of hides and skins, as they sell them immediately they are produced. The hides and skins traders earn approximately US$0.6 million per annum, and they are third placed. Although tanners are estimated to earn the highest gross margin, it is imperative to note that this is a fair return to their investment, given their capital investment and working capital invested in the tanning.

The Potential of the Burundi Leather Value Chain

The industrialization agenda in Africa has been greatly compromised by the export of raw materials, which earn a small fraction of income in comparison to the finished products. In the case of leather value chain, finished leather products earn approximately 1200% in comparison to hides and skins. The plight of the poor countries has also been worsened because of the rapid fluctuation in the prices of most primary commodities. This scenario has created a big opportunity cost to these countries with regard to the lost value addition opportunities, incomes and jobs.

In the case of the leather value chain, the export of raw hides and skins and, wet blue implies the exportation of jobs, foreign currency earning opportunities and other indirect benefits. The processing of the raw material could have generated in Burundi great socio-economic gains mentioned, had the large proportion of hides and skins been transformed into finished leather/leather products. Therefore, it is sad to note that more losses are incurred due to the resultant production of low quality hides and skins, which fetches lower prices in the regional and international markets. As was reported earlier, the prevalence of pre, peri and post slaughter defects is very high in Burundi; this renders more than 70% of hides and skins produced to be categorized to grade three or worse.

Burundi has appreciable potential to be a supplier of raw hides and skins, semi-processed leather, finished leather, footwear and leather products. If value addition up to finished leather, footwear and leather goods are encouraged, it will provide backward and forward linkages in the value chain thereby benefiting primary producers, manufacturers and consumers of leather and leather products. As late as 2013 most of the hides and skins were being exported in raw state, consequently denying the only operational tannery in Burundi of vital source of hides and skins. The situation changed dramatically in 2014, with the Government enforcing an export tax on raw hides and skins. This action translated to tremendous improvement to the country’s supply of hides and skins for tanning domestically. Furthermore, prospects of an additional tannery in Burundi are rife adding vibrancy to once a subdued leather sector.

The dressed carcass is composed of four quarters of an animal, after slaughter that contains the main cuts of both prime and processing meat. The dressed carcass makes up about 60% of the live weight of cattle and two-thirds of the live weight of pigs. The remaining live weight is taken up by the hide, blood, bones, intestines/casings, fat and organs known as the fifth quarter.

In a broader scope, the leather sector industries consist of three key sub-sectors namely: the tanning industry, footwear and leather goods. It involves processing of hides and skins into semi-finished and finished leather, footwear and leather goods respectively. Currently, Burundi has two privately owned tanneries, one operating and the other one just set-up. It is estimated that approximately 95% of hides and skins by mid 2014 were being exported in wet blue state and the balance was processed up to finished leather.

The leather supply chain is characteristic of a non-integrated chain in which most participants operate independently instead of interdependently across the value chain. As mentioned earlier, prices do not reflect premiums for different grades of quality. Value addition to higher end products (footwear and other leather goods) is very minimum mostly done by artisans and SMEs operating with out-dated equipment.

A partial equilibrium was used to estimate the potential losses that Burundi was incurring per annum due to pre, peri and post slaughter defects and the export of 95% plus of total hides and skins in the country in wet blue state. Based on the hides and skins production of 2012, the Burundi leather value chain has the potential of reaching a minimum direct value of USD 3.4 million per annum, based on the current trade of raw hides and skins.

Gross losses recorded due to the downgrading of hides and skins due to pre, peri and post slaughter defects were calculated using Equation 1, and the disaggregation between pre and peri/post slaughter defects was informed by Mwinyihija(2014)’s research in Kenya that revealed that 48% and 52% of defects were due to pre and peri and post slaughter defects respectively. The formulation of the partial equilibrium analysis model is summarized in Equation 1.

= +) equation 1

Where

  • G1 is 100% first grade
  • Pn prices with respect to grades 1 to 6
  • a to f: Ratios of grades of hides
  • TQ: Total output of hides by a country

 

Table 5: Estimates of the Pre, Peri and Post-Slaughter Defects on Bovine Hides and and Goats/Sheep Skins

Type of Hides/Skins

Potential Earnings Assuming all Hides are First Grade

Actual Earnings

Loss

Pre-slaughter

Peri and post slaughter losses

Apportionment Ratio

 

 

0.48

0.42

Bovine

900,000

577,000

323,000

155,040

167,960

Goat and Ship

2,531,200

1,254,900

665,100

319,248

345,852

Total Estimate

3,431,200

1,831,900

988,100

474,288

513,812

Source: Computations based on FAO data.

Table 6 summarizes the potential losses that Burundi is incurring due to the export of raw hides and skins and partly processed leather. The value addition threshold that is expected per stage is shown in the last column of Table 7. Trade data shows that Burundi exported raw hides and skins valued at US$5.3 million. This is above its potential earnings accruals at US$3.4 million if based on its livestock size. This scenario is explained by slaughter of animals which are sourced from other countries mainly Tanzania as earlier indicated. Another explanation, which was provided, relates to smuggling of hides and skins from the neighboring countries such as Tanzania, Burundi and Uganda. These countries equally operate an effective export tax system on raw hides and skins; as such Burundi was used as a conduit for exporting raw hides and skins. The cumulative loss is estimated at USD 29 million, with regard to the second level of loss, which is associated with non value addition. If the loss associated with pre-, peri- and past-slaughter defects, which is illustrated in Table 6 is taken into account the total loss is estimated at USD 30 million per annum. The smuggled hides or hides from imported livestock, which is slaughtered in Burundi, had the effect of reducing the potential loss.

Table 6: Value Addition and Estimated Losses


Stage of Processing

Potential Earnings

Current Actual Earnings

Estimated Losses

Value Addition Threshold

Raw hides and Skins Current Value

3,431,200

5,256,000

-1,824,800

1

Wet Blue

6,862,400.00

1,694,000

5,168,400

2

Crust

10,293,600.00

0.00

10,293,600

3

Finished Leather

13,724,800.00

0.00

13,724,800

4

Finished Products

41,174,400.00

0.00

41,174,400

12

Cumulative Loss

29,186,800

 

COMESA/LLPI Computations based on FAO (2012)

The Tanning Subsector

Leather tanning is a capital and knowledge intensive process of transforming raw hides or skins into leather. Hides and skins have the capacity to absorb tannins and other chemical substances that prevent them from decaying, make them resistant to wetting, and maintain their reparability, suppleness and durability. The surface of hides and skins contains the hair and oil glands and is known as the grain side. The flesh side of the hide or skin is much thicker and softer. The three types of hides and skins most often used in leather manufacture are from cattle, sheep, and goats. However, in the general east African markets, emerging livestock based skins such as fish, crocodile, ostrich and lizards have started to enter the markets at very minimal levels especially at designated farms nurturing the species.

The Wet Blue Production Cost Structure and the Implication of Hides and Skins Quality

The production cost structure of wet blue reveals that raw hides and skins contributes 85%, with the reminder split among chemicals, water, electricity and labour. This situation clearly demonstrates the significance of raw hides and skins in the production function of leather. Thus fluctuations in the price and the quality of raw hides and skins significantly impacts directly on the profitability and competitiveness in the production of wet blue. A sharp change in the prices of hides and skins would impact negatively or positively on the cost of production and consequently on the gross margin of tanning operations.

FAO (2009), reported and asserted that a gross margin of 25-35% and greater than 45% is considered normal and robust respectively. The Burundian tanning sector is earning-an average of 56% gross margin, reflecting a very high profitability potential. Table 8 below illustrates the costs breakdown in the production of hides and skins equivalent to 58,000-60,000sqft
Table 7: Tanning Production Function


Inputs into Wet blue Production

% Contribution to Final product

USD

Raw hides and skins

85

42,500.00

Chemicals

5

2,500.00

Water & electricity

3

1,500.00

Labour

7

3,500.00

Total Ex Factory Cost for Wet Blue Container

100

50,000.00

FOB price

?

78,000.00

Gross Margin

(56%)

28,000.00

Source: COMESA/LLPI Estimates

In Burundi, it was reported that a large proportion of hides and skins were traded at uniform price irrespective of grade category. This situation discourages quality improvement among the primary producers and collectors of hides and skins. For instance slaughter houses may not pay attention during the flaying process whilst collectors’ under-salt and shorten the curing duration, as a measure of preserving their profit margin. The ultimate effect would impact negatively to the value chain, because it would push up the tanning cost and also reduce the export price of wet blue, as wet blue is priced according to grades globally. The tanner is thus squeezed from two sides that is increasing cost of tanning and deterioration in the price of wet blue.

Figures 6 and 7 below illustrate the inverse relationship between the cost of tanning and quality of hides and skins. On the other hand, there is a positive correlation between wet blue yield and hides and skins quality; as the declining in quality is associated to deterioration in the wet blue yield. The cost of tanning a kilogram of hides and skins doubles from USD 0.8 to USD 1.6, from first to the sixth grade respectively; pushing down the yield ratio from 95% to 55% respectively. Consequently this pushes up the cost of tanning and rendering the tanning industry to be uncompetitive. It is therefore imperative that appropriate measures to promote grade-based pricing system and quality improvement (extension services) programs are put in place, as a measure of boosting the Burundi tanning industry in aspects related to profitability and competitiveness.

Relationship between hides and skins Grade and Yield

It is estimated that 60% of hides and skins produced in Burundi are in grades three and six; hence implying a yield range is 45-75% and USD 1.3 to 17 cost of production per kilogram. Processing poor quality hides and skins, results in lower yield and consequently the viability of business.

Gap analysis is synonymous with benchmarking; it is an attempt to take the focus outside the Burundi Leather Value Chain, business size category and even outside the country. It leads to the identification of generic insights into the value chain’s key drivers of success. The Gap analysis was taken to analyze the Burundi leather value chain vs. Turkish leather value chain. The use of this tool is important in the sense that it assists in building awareness among the Burundi leather value chain stakeholders about the fundamental factors for building competitiveness. Limited knowledge about factors that are driving success of other similar enterprise within or outside the country undermines innovativeness. The Gap analysis findings are presented in Table 8.

Gap Analysis of the Burundi Leather Value Chain


Critical Success Factors

Importance

Burundi

Matured Footwear Supply chain

GAP

Comment

Livestock base

Has a bearing on the potential of hides and skins availability

1

5

-4

Burundi’s livestock size is far lower than that of Turkey; however it is imperative to note that Thailand is among the top ten global producers of footwear, despite the fact that it has a very negligible livestock base. It therefore implies that the livestock base may be a necessary but not sufficient condition for growing the leather value chain.

Off-take rate

The most important determinant of hides and skins production

1

5

-4

The off take rate in Burundi is still very low because a number of pastoralists consider livestock as status of wealth rather, as a source of revenue. Thus, on average, livestock is disposed usually to deal with a family crisis or culling for some during drought period. In addition to this, the meat consumption per capita is still very low.

Animal Husbandry and extension Service

The state of animal husbandry and extension services has a bearing on the frequency of pre slaughter defects.

1

5

-4

The civil war in Burundi impacted negatively on the service delivery. Animal husbandry and veterinary support is now in the hands of the private sector. Turkey has very high standard facilities and support in animal husbandry and extension service.

Peri Slaughter

The skills and handling practices contributes to the absence or presence of cuts, ganges etc. on the hides and skins produced.

1.5

5

-3.5

The high frequency of peri-slaughter defects is mainly attributed to the fact that most of the slaughter is done on contract, thus, the more livestock slaughtered the higher the revenue of slaughter houses owners and the earnings of flayers. In addition, at the point of livestock purchase from farmers, traders do not pay for the fifth quarter, however, they sell it after slaughter. Thus this is free income to livestock traders, and because their investment in its generation is near zero, not much attention is paid to the hides and skins during flaying.

Post Slaughter

The level of preservation techniques, handling and transportation are important in ensuring that hides and skins are delivered the tannery in the desired state.

2.5

5

-2.5

Most hides and skins collection points are located within the proximity of slaughter facilities; consequently, the lead time between flaying and preservation is short. Hides and skins from slaughters facilities outside Bujumbura are normally not well preserved in comparison to those produced in Bujumbura. However, it has been observed that a lot of collectors reuse salt, which consequently impact negatively on the preservation process

Number of Tanneries, which produce finished leather

This reflects the absorption capacity of the material produced

0

5

-5

Turkey has approximately 700 tanneries registered against Burundi’s 1.

Finished leather

It contributes 50% in terms of value to footwear with leather uppers, thus this is the main input.

0.5

5

-4.5

Less than 5% of wet blue produced in Burundi is transformed into finished leather. Most of the SMEs depend on informal imports of leather from Kenya and Uganda.

Cutting dies

It’s a tool, which is used for cutting; it is very important in ensuring speed in cutting and also ensures consistency.

0

5

-5

No local production of cutting dices, most of the cutting is done manually

Lasts

A last is a mechanical form/mould that has a shape similar to that of a human foot. Without a last, footwear manufacturing is next to impossible

0

5

-5

No local production of lasts, and they are in short supply

Heels/soles

Second important component of a shoe after leather.

0

5

-5

No local production, SMEs depend on informal imports from Kenya and Uganda

Accessories (e.g. rivets and buckles)

Important especially for finishing sandals and other types of footwear.

0

5

-5

No production of accessories in Burundi and to make it worse the accessories are not readily available in local markets, hence SMEs depend on informal imports from Kenya and Uganda.

Collaboration

Collaboration and networking amongst value chain is very important in building synergies and promotes joint action, which normally leads to improved competitiveness.

1

5

-4

Whereas there are registered associations, collaborations in areas of joint procurement, production and marketing, which are critical in boosting economies of scale have not yet been implemented.

Relationship with Academia

Research, development and incubation are the bedrock of innovation in production development and entrepreneurship.

0

5

-5

Nonexistent in Burundi

Relationship with Government

Government support with regard to policy, supply and demand aspects is fundamental for industrialization. Most countries have grown at the back of Government policy, financial and procurement support.

1

5

-4

Limited relationship from Government and Academia.

Access to finance

Availability of finance with terms, which boosts industrial viability is of paramount importance

0

5

-5

This is one of the major constraints in the industry as finance is available at minimum lending rates of 22% plus collateral. The cost of finance is very low and Government has played a significant role in supporting the construction of industrial parks and export economic zones, associated with huge incentives.

Equipment and machinery

Improved productivity and quality of products is greatly influenced by the availability of adequate and suitable machinery and equipment

0.5

5

-4.5

Most SMEs are using basic, old and rudimentary machinery.

Labour productivity

High labour productivity is very important given the intensity in the use of labour in the footwear supply chain.

1.5

5

-3.5

3 to 5 pairs per person per day, below productivity of 10 plus pairs per day in Turkey.

Skilled manpower

Footwear production is labour intensive, hence there is a need of highly skilled labour force to ensure the production of quality footwear

2

5

-3

Limited training most SMEs have received short training courses from UNIDO and COMESA/LLPI

Industrial Collaboration

Industrial association is important in building industrial synergies and also engaging with policy makers. Robust organization improves the enactment of supportive policies and also financial and infrastructural support from Government

0

5

-4

The industry in Burundi is disjointed and most of the associations have no viable Secretariats, whereas in Turkey there are numerous associations, which are well staffed with experts, whose agenda is to obtain concession s of the industry, consequently improving its bottom line.

 

Total

25.9

105

-79.1

 

Source: Stakeholders Consultations by COMESA/LLPI

The Gap analysis shows that Burundi leather value chain performance lags behind that of Turkey by -79.1 points out of a total of 105 point, which translates to -75.3 percent. Strategic interventions should be designed to deal specially with the identified gaps, in order to transform the Burundi leather value chain.

Trade Analysis

The use of exports figures to gauge the performance of a leather value chain has now been adopted as standard, given that the data on leather with regard to other economic indicators such as turnover, employment, value addition thresholds and capacity utilization is not readily available. Figure 10 illustrates the rapid growth, which has been registered in the export of articles of Chapter 41, which includes raw hides and skins, wet blue and finished leather in the period 2002 to 2012.. Exports of articles of Chapter 41, have grown from below US$1 million in 2002 to close to US$7 million in 2012. This is attributed to improved exports of wet blue. See Figure 10 for the depicted trends in exports.


Figure 8: Burundi Exports of Hides/skins and Wet blue
Source: COMESA/LLPI based on ITC Trade Map data

Imports of Footwear

The consumption of footwear in Burundi is estimated at 7.3 million pairs per annum, based on footwear per capita of 0.85. The absence of well organized footwear enterprise, have forced Burundians to depend on imported footwear. Imports of footwear rose from below half a million dollars in 2002, to reach US$4.5 million in 2012. It should be noted that this excludes importation of second hand shoes, whose import figures cannot be easily ascertained as it is classified in the same HS codes with second hand clothes.


9: Burundi Imports of Footwear
Source: COMESA/LLPI based on ITC Trade Map data

Support in the development of SMEs Clusters is imperative, as the market for footwear is growing rapidly; this would create employment and also save foreign currency. This is in line with the “Buy Burundi” campaign and the drive to empower Youths and Women and create employment.

Regional Comparative Analysis

This section analyses the competiveness of the Burundi leather value chain through the use of a battery of indicators, which are normally used to gauge trade competiveness of a value chain. In addition to this, the main trade policy instrument, which is the tariff, is assessed with regard to MFN, COMESA and the East African Community (EAC). In order to present a comprehensive picture, Burundi’s scenario is compared with the situation in Egypt, Ethiopia, Rwanda, and, Zambia. The rationale of the comparative analysis would assist Burundi in drawing practical lessons from countries, whose leather value chains are growing rapidly.

Competitiveness Analysis

Exports as a share of Total Exports (%): this index refers to the share of an industry’s exports in relation to a country’s total exports; hence it shows the importance of this industry in the national export portfolio. Burundi’s index for Chapter 41 stood at 0.38. Burundi is however below the regional average of 1.5%. With regard to footwear exports, Burundi’s ratio is below the regional average. These ratios could be raised if Burundi adds value to its wet blue to crust or up to finished leather and support the production of footwear and leather-goods.

Exports as a share of World Exports (%): This index shows, for a specific industry, the percentage share of exports of the selected country in total world exports. The world market share indicates how important a specific national industry is in terms of global export for the industry under review. The ratios for Burundi is 0%, thus below the regional average of 0.3%.

Growth of Export in Value (% PA): This index is based on the least squares method, shows the average annual percentage growth of export values over the most recent 5-year period. Industry with rapid export growth in value terms suggest that the country is competitive on the world markets, while stagnant or declining growth rates indicate the reverse. Everything else being equal, fast growing exports, even in small absolute numbers, point at product groups for which the country has a particular export potential. See details in Table 10

10: Summary of Competitiveness Indicators of Selected COMESA Countries


Country

Contr. To total Export (%)

Contr. To total World Export (%)

National Growth rate (%)

Revealed Comparative Advantage Index

Lafay Index

Chapters

41

64

41

64

41

64

41

64

41

64

Burundi

0.38

0.03

0

0

-41

140

2.2

0

0

0

Egypt

0.37

0.03

0.36

0.01

24

3

2.2

0

0

0

Ethiopia

3.84

0.77

0.22

0.01

-7

8

22.6

1.2

1

0

Kenya

1.88

0.37

0.25

0.01

12

-21

11.1

0.6

1

0

Rwanda

2.4

1.36

0.04

0.01

40

61

13.8

2,2

1

0

Uganda

1.77

0.19

0.14

0

36

11

10.4

0.3

1

0

Zambia

0.16

0

0.03

0

8

-62

0.9

0

0

0

Uganda

1.56

0.04

0.09

0

30

-14

9,2

0.1

1

0

Average

1.5

0.3

0.1

0.0

12.8

15.8

9.0

0.3

0.6

0.0

Source: ITC

Notes: Chapters 41 and 64 are harmonized systems for raw hides, semi-processed and finished leather and footwear respectively.

Specialization (Balassa Index/RCA Index): This index, known by the description “Revealed Comparative Advantage” (RCA), tries to identify product groups where the targeted country has an obvious advantage in international competition. This is of special importance in order to promote trade of products that are more likely to be competitive. However, for trade analysis, it is more appropriate to consider RCA simply as an Index of Specialization (IS).

If it takes a value of less than 1, this implies that the country is not specialized in exporting the product. Similarly, if the index exceeds 1, this implies that the country is specialized in exporting the item. Chapter 41 exports stands at 2.2, which reflect that Burundi is specializing in the export of the given commodity, however it is below the regional average of 9.0.

Trade Policy Comparison

Burundi’s trade policy, as reflected by the main trade instruments MFA and preferential tariffs are not significantly different from some of the selected comparators listed in Table 10. Burundi has the potential of becoming a regional powerhouse in the production of finished leather, footwear and leather goods. Its MFN duty on footwear is very low to the detriment of SMEs in Burundi. See details in the Table 12

Table 11: Trade Policy Comparison


Countries

MFN (%)

Ethiopia (%)

COMESA/FTA (%)

EAC/SADC (%)

HS

41

64

41

64

41

64

41

64

Burundi

10

25

9

22.5

0

0

0

0

Egypt

0

35

0

 

0

31.5

 

 

Ethiopia

0

35

0

 

0

31.5

 

 

Kenya

10

12

1

2.5

0

0

0

0

Rwanda

10

25

9

22.5

0

0

0

0

Uganda

10

25

9

22.5

2

5

0

0

Zambia

15

25

13.5

22.5

0

0

0

0

Source: ITC Market Access

Trade Policy on Hides and Skins

The trade policies on hides and skins export currently obtained in selected regional countries, and the actual impact, which have been registered in the past years are summarized in the Table 13(. The export restriction policies based on export tax has generally contributed to the growth of the tanning sector in Ethiopia, Kenya and Uganda. See summary of current policies in the region.

Table 12: Summary of the Policies and Impact

Country
Nature of Policy Recorded Impact General Comment
Ethiopia Punitive export tax of 150% on raw hides and skins up to crust leather. The sector has grown significantly, with approximately 28 tanneries operating and a sizeable number of footwear making factories and thousands of SMEs< The implementation of such a policy should be supported by competent institutions and complimented with other support measures. In some of the countries, which have implemented this kind of policy there has been reports of hides and skins being exported through second party countries (smuggling)
Kenya Export tax on raw hides and skins The industry is showing great recovery from the effects of Economic Structural Adjustment, and exports from the sector has grown from USD10.6 million in 2001 to USD166 million in 2012, dominated by wet blue
Uganda Export tax on raw hides and skins This has seen the number of tanneries rising from one to seven, and export value from USD25 in 2003 million to USD63 million in 2013
Burundi Export Tax

The enforcement of export tax beginning end of 2013 has seen the prospects of establishing a second tannery and also the production of finished leather with one the old tannery, which has been existence.

Situational Analysis of SMEs in the Footwear Industry

Baseline survey conducted by COMESA/LLPI show that SMEs represent more than 95% of enterprises involved in raw material marketing; production and marketing of finished leather goods. Most of these SMEs were/are operating informally, characterized by low productivity, poor quality products and serving small localized markets.

Average employees’ number per SME was 6.12 ±3.2 people with female workers representing 35.2 of the total. Female owned SMEs were, however, very few in numbers (less than 10%). The very small proportion of women in SME ownership, most likely due to resource limitation. There is a need to mainstream gender

The SMEs owners had good academic education, however very few of them attended trainings in leather and leather products manufacturing. It is thus imperative that the skills levels need to be improved through capacity building training. The good academic educational base would enhance the uptake of technical and entrepreneurship training.

The SMEs were/are using very old and inadequate number of tools and machineries for footwear production. This scenario has negatively impacted on the quality of their products and productivity. Thus SMEs, to be competitive, should be facilitated and have their capacities built in machineries and tools. Technological interventions are pivotal in addressing the underlying value addition initiatives that are pertinent in driving the region’s desire to be a global player.

The competitiveness of the SMEs in Burundi was being undermined further due to the limited availability of all the material inputs required for footwear manufacturing. Most of the inputs are imported informally from Uganda and Kenya in small quantities.

Eighty percent of the interviewed SMEs said that they had neither personal savings nor access to credit facilities from financial institutions when starting their respective small business in the leather sector. Loans from friends and families and some support from non-governmental organizations (NGOs) were the ones that helped them to realize their dreams.

Gross Margin and Break Even Analysis

The viability of a business enterprise depends, among other, by its ability to yield gross margin that could produce enough cash for raw materials purchase, payment of employees and all associated expenses. Any business that is unable to produce more cash than it consumes will die. Thus the higher the gross margin, the larger the profit. The lower the gross profit margin, the smaller the amount of cash available to fund business operations and investment in future growth. Table 13 gross margin of sandals, which are produced in Burundi.

Table 13: Gross Profit Margin per Unit


Country

Shoe type

Production cost per unit (USD)

Ex factory Price
per Unit (US$)

Gross Profit per
Unit (US$)

Gross Margin (%)

Burundi

Sandals

7.18

10.33

3.15

43.87

Source: COMESA/LLPI SME Survey (2014)

The Gross margin of 43.87% reflects the potential of viability of SMEs in Burundi; however this can also imply overpricing. Overpricing whereas it increases the profitability of a business, it may also work to undermine the expansion of SMEs, as it may impact negatively on their turnover.

Constraints of SMEs

Working capital, poor equipment, lack of adequate working space, lack of technical support and power shortage (electricity) were the most frequently cited constraints by the Burundi SMEs. Although there were some differences in the ranking of the constraint, the overall trend in the type of constraints identified and their importance remained comparable between SMEs. The constraints were indicated as affecting their overall performance. The inadequacy of machineries and tools and low quality of raw materials observed during the visits were also in agreement with the problems cited by the SMEs. This observation shows that, irrespective of the potential of the leather sector to contribute towards poverty reduction, wealth creation and job creation there are dire lack of services and facilities geared towards strengthening the SME sector for the development of the leather industry.

Mwinyihija, M. (2014). A prognosis of the leather sector in Kenya; The upheavals and antidotes associated with value creation. Management Vol.4 (1), pp. 21-29.

Gross margin is the difference between revenue and cost before accounting for certain other costs. Generally, it is calculated as the selling price of an item, less the cost of goods sold (production or acquisition costs, essentially).

FAO Agribusiness Handbook (2009)