Cotton- Textile -Apparel Value Chain Report For Uganda April 2003 The RATES Center P.O. Box 1555-00606 Nairobi, Kenya email:[email protected] Centre for Regional Agricultural Trade Expansion Support; P.O. Box 1555-00606, Nairobi, Kenya; [email protected] Table of Contents Table of Contents ........................................................................................................ 2 Acronyms ............................................................................................................................ 4 Executive summary ............................................................................................................. 5 1.0 Introduction ................................................................................................................... 7 1.1 Uganda’s trade commitments ................................................................................... 7 1.2 Regional Markets ...................................................................................................... 8 1.3 Implications of the trade commitments................................................................... 9 1.4 Key concerns on the cotton sector ....................................................................... 11 1.4.1 Competitiveness of Cotton in the Farming System ......................................... 11 1.4.2 Access to Services, Markets, Credit and Inputs ............................................... 11 1.4.3 Access to Basic Market Information for both Inputs/Outputs ......................... 12 1.5 Background, objectives and purpose of assignment ............................................. 13 1.5.1 Background ...................................................................................................... 13 1.5.2 Objective, Purpose & Scope ............................................................................ 13 1.5.3 Methodology .................................................................................................... 14 2.0 Supply and demand analysis ....................................................................................... 15 2.1 Raw Cotton ........................................................................................................... 16 2.1.1 Exports and Imports of Cotton ...................................................................... 16 2.2 Cotton Lint ............................................................................................................ 18 2.2.1 Prospects for operationalising stalled ginneries ............................................ 23 2.2.2 Institutional framework .................................................................................... 23 2.3 Cotton Yarn ........................................................................................................... 24 2.4 Textiles and apparel ............................................................................................. 26 2.4.1 Institutional Framework ................................................................................ 27 3.0 Cotton sector development initiatives ....................................................................... 30 3.1 Production ............................................................................................................. 30 3.2 Ginning ................................................................................................................. 31 3.3 Textile & Garments .............................................................................................. 32 4.0 Cotton value chain analysis ...................................................................................... 34 4.1 Value chain ........................................................................................................... 35 4.2 Exporters ............................................................................................................... 36 4.3 Importers of cotton products ................................................................................. 36 4.5 Value along the supply chain (2001/2 season) ....................................................... 39 4.6 Issues, Problems and Constraints ............................................................................ 40 4.6.1 Underutilization and Technologically Aging Ginneries .................................. 40 4.6.2 Maintenance of Cotton Quality ........................................................................ 40 4.6.3 Low labor productivity at manufacturing levels .............................................. 41 4.6.4 Under capitalization of the textile & garment sector ....................................... 41 4.6.5 Duty-Free Access to Imported Raw Materials to Produce for export .......... 41 4.6.6 Cost of financing for textile sector ................................................................ 41 4.6.7 Inadequate Information Support ...................................................................... 42 4.7 Constraints for the Textiles and clothing industries in Uganda ............................. 43 5.0 Policy and regulatory environment ........................................................................... 44 RATES Enhanced Regional Cotton Trade 2 5.1 Import/Export procedures ....................................................................................... 44 5.2 Non-tariff charges ................................................................................................. 45 5.3 Phytosanitary requirements ................................................................................... 45 6.0 Towards enhanced regional cotton trade .................................................................. 47 6.1 Regional Trade Policy and Regulations ................................................................ 47 6.2 Other factors affecting regional cotton trade .......................................................... 47 6.2.1 Market Competitiveness ............................................................................... 48 6.2.2 Negotiate for improved access under the EAC Trade Protocol .................... 48 6.2.3 Introduce Export Processing Zones (EPZ) ................................................... 48 6.2.4 Encourage local consumption ....................................................................... 48 6.2.5 International trade ......................................................................................... 48 Appendix 1: List of contacts made ................................................................................ 49 RATES Enhanced Regional Cotton Trade 3 Acronyms AGOA – African Growth and Opportunities Act ACP - African, Caribbean and Pacific countries CDO – Cotton Development Organization CRDB- Centenary Rural Development Bank COMESA – Common Market for Eastern and Southern Africa COMPETE– Competitive Private Enterprise & Trade Expansion DCA - Development Credit Authority EAC – East African Community FTA – The East African Community Free Trade Agreement EU – European Union GOT- Ginning Out Turn GOU – Government of Uganda IITC-Inter-Institutional Trade Committee IDEA – Investment in Developing Export Agriculture MTS- Multilateral Trading System MTTI – Ministry of Tourism, Trade and Industry NTB - Non-Tariff Barriers RATES- Regional Agricultural Trade Enhancement Project SADCC- Southern Africa Development Coordinating Conference SPEED – Support for Private Enterprise Expansion & Development UGCEA – Uganda Ginners & Cotton Export Association UIA - Uganda Investment Authority UMA- Uganda Manufacturers Association USSIA-Uganda Small Scale Industries Association UWEAL- Uganda Women Entrepreneurs Association Limited VCA- Value Chain Analysis USAID – United States Agency for International Development WTO – World Trade Organization RATES Enhanced Regional Cotton Trade 4 Executive summary Uganda’s trade policy is attuned to a national strategy of promoting economic growth, diversifying the export sector, attracting investment, and improving productivity and efficiency in the international and domestic trade activities. Apart from addressing fundamental domestic impediments to trade, Uganda has been active in participating and building market coalitions and economic partnerships intended to expand trade within respective trading arrangements, both regional and international. The volume of trade between the countries in the East African Community is still small, accounting for less than 10% of total trade. The community envisages increased harmonization of monetary and fiscal policies that should aid trade, industrial growth and investment among members. A key feature of this integration is expected to be simplified procedures and lower tariffs, which will make it easier for Ugandan exporters to reach regional markets. Increased regional trade as a result of tariff reduction is expected to spur production and widen the tax base. These, however, are likely to be medium- to longer-term benefits, the immediate implications for Uganda being loss of revenue. Cotton was introduced into Uganda in 1903 and dominated the economy as a leading cash crop and foreign exchange earner until the 1950's, when it was superseded in its importance to the agricultural sector by coffee. Cotton can be produced in most parts of Uganda, but over 50 percent of the crop is today produced in the areas north and east of River Nile. Uganda has adequate land resources, labor, and conducive weather for the production of high quality cotton. It has in the past demonstrated its capacity to produce quality cotton and, with appropriate incentives to farmers, Uganda could regain its prime position in the world market. The achievement of its cotton potential will, however, require a satisfactory resolution of certain constraints. These include the limited acreage of cotton, inaccessibility to markets, services, credit and inputs, and lack of basic market information. Cotton exports within the region are minimal although it is acknowledged that a lot of intra-regional in agricultural products trade is unrecorded. Uganda’s cotton is regarded as high premium on the world market. Given that Uganda’s production is low, there tends to be a shortage on the local market during some seasons, which fuels intra-regional trade. Apart from raw cotton, there exists trade in other cotton products such as yarn, garments and apparel. The supply chain for cotton and textiles reveals concentration both upstream and downstream, with a large number of farmers and tailors. Players in these groups, though numerous, are small and operate informally as individual or family owned income generating activities. Farmers and tailors also tend to be heterogeneous in terms of skill, technology and location. Products are sold at virtually all stages of the value chain on both small and large scale. The amount of value added ranges from 25% for spinning and weaving, to 55% for knitted and crocheted fabrics. The manufacture of apparel and RATES Enhanced Regional Cotton Trade 5 clothing in Uganda still very minimal, partly due to the low purchasing power of consumers, which has fed trade in second hand clothing. Government policy is to discourage this trend through the imposition of excise duty on used clothing. There are a total of 38 ginneries throughout Uganda; 31 of which are operational at present, 7 are dormant. The ginneries are operated by 38 ginners, consisting of co- operatives, contract ginners and private operators. For a vast majority of them, the owners double as managers. 23 ginneries are privately owned with many being in the hands of African-Indians. 17 ginneries are owned by cooperatives, but seven of these have leased out their ginneries to private operators. In addition, 5 co-operatives have made joint ventures with private firms. Many ginneries are now in need of substantial repair and/or upgrading to ensure that the high quality cotton that Uganda can produce is properly maintained through good post harvest handling. The textile/ apparel section of the cotton value chain typically consists of three types of firms. These are textile mills that primarily carry out spinning and weaving; finishing mills that do bleaching, dyeing, printing, and garment cutters and household manufacturers. Most of the larger firms are vertically integrated, carrying out spinning, weaving, finishing, converting, and in some cases, tailoring. Textile firms are mainly small to medium sized, and use only modest technology. Low capacity utilization is common in the industry. There are 6 large-scale textile mills in Uganda, 2 of which are not fully operational. The manufacture of apparel and clothing in Uganda is limited, and dominated by micro and small-scale tailors of various garments, mainly for domestic consumption. Local consumption of cotton is less than 20%, a reflection of the processing capacity in Uganda. There is, however, a vibrant cottage industry of hand made items, comprising mostly household items. For the development of cotton production and exports/imports in Uganda, several key factors need to be addressed. Firstly, aging ginneries need to be revamped in terms of technology, management and integration to increase their capacity utilisation. Secondly, the quality of cotton must be kept high through improved post-harvest handling. At the manufacturing level, labour productivity must be improved through appropriate skills training, remuneration, adopting flexible work schedules and re-tooling. Thirdly, the cost of financing needs to be made more attuned to the specific needs of the textile and garment sector, to increase their capitalization of the textile & garment sector. Fourthly, duty-free access to imported raw materials to produce for export as well as the smoother implementation of the duty draw back system and the manufacturing under bond would greatly enhance the export of textiles and apparel. Lastly, the sector would benefit from support through the timely provision of relevant information, inputs and infrastructure, including communication, road and rail transport. RATES Enhanced Regional Cotton Trade 6 1.0 Introduction 1.1 Uganda’s trade commitments Uganda’s trade policy is now broadly attuned to a national strategy of promoting economic growth, diversifying the export sector, attracting investment, and improving productivity and efficiency in the international and domestic trade activities. This strategy is intended to meet the country’s poverty alleviation objectives and its effective integration into the evolving multilateral trading system. The formulation of the trade policies is undertaken through a consultative process between relevant ministries, major stakeholders and the private sector through the Inter-Institutional Trade Committee (IITC) led by the Ministry of Tourism, Trade and Industry (MTTI). The status of Uganda’s current trade regime is mainly underpinned by the continued effort to liberalize trade activities and the economy within the framework of macro- economic stabilization policies and measures designed to spur growth and economic performance. Such measures supportive of trade activities include those intended to remove uncertainties within the overall trade environment and to instill price and economic stability necessary for efficient allocation of resources, while helping to boost confidence in the role of international trade in Uganda. Apart from addressing fundamental domestic impediments to trade, Uganda has also been active in participating and building market coalitions and economic partnerships intended to expand trade within respective trading partners. On the international scene, Uganda is member to the World Trade Organization (WTO), the Cotonou Agreement that governs trade between the European Union and some countries in the Africa, Caribbean Pacific (ACP) region. Within Africa, Uganda is a member of the Common Market for East and Southern Africa (COMESA) and the East African Community (EAC). These regional trading agreements are expected to culminate in customs unions. While Uganda is negotiating on two fronts, it has been agreed that the EAC will be a fast track to COMESA. Serious concern has been expressed over the practicality of belonging to 2 Customs Unions simultaneously, and consultations are underway to resolve this. As regards COMESA, Uganda has attained 80% tariff reduction, but has not joined the Free Trade Area (FTA). Therefore trade with her COMESA counterparts is based on the principle of reciprocity. The EAC customs union is expected to come into force in November 2003. In addition to the above, Uganda is a beneficiary to several market access initiatives. Notable of these is the Africa Growth Opportunity Act (AGOA), which grants duty free and quota free access to the American market for specific products, until 2004. It is expected that AGOA II will follow in 2005. Uganda enjoys similar GSP-based preferences for access to markets in Canada and Japan. Under the “Everything-But- Arms” (EBA) initiative, the European Union has decided to do away with entry quotas and tariffs for all products, except for arms, exported into its market by the 49 poorest RATES Enhanced Regional Cotton Trade 7 countries, of which Uganda is part. This decision came into force on March 5, 2001. The market’s opening will nonetheless be progressive for three sensitive products: rice, bananas, and sugar, which are produced in the European territory. Since the Trade Policy Reviews of Uganda in 1995 and subsequently in 2002, the GOU has continued to implement policies consistent with free trade including through the liberalization of the exchange system and marketing of inputs and products, elimination of trade-distorting biases, and reduction of undesirable trade barriers. In keeping with the ideals of the multilateral trading system (MTS), Uganda has effectively undertaken to reform its trade policies and trade-related institutions in order to unwind previous rigidities that often impeded trade. The GOU under its Strategic Export Initiative is giving full support to the review and adjustment of the policy agenda in eight targeted export sectors including cotton and its related products. Through this initiative the GOU is working to ensure that funding is made available in support of cotton production, ginning, research, extension and value added activities. Through legislation GOU has created these support institutions that are playing a critical role in the cotton sector. One more indication of the positive support coming from GOU is the passing of enactment of required changes to permit Uganda participation under AGOA. 1.2 Regional Markets The volume of trade between EAC countries is still small; taken together, intra-regional trade accounts for less than 10% of total trade. The only significant flow of goods is between Kenya and Uganda, the former exporting 15% of its goods (mainly finished consumer goods) to the latter. The EAC envisages increased harmonization of monetary and fiscal policies that should aid trade, industrial growth and investment among members. Table 1.0: East African Trade Kenya Uganda Tanzania Total Population (m) 29.3 24.6 32.1 82.3 Real GDP (US$ billion) 9.9 7.7 6.4 24 GNI per capita (US $) 360 310 280 Total trade (US$ billion) 6.7 2.7 3.6 13 Total trade within EAC (US$ m) 435 6.0 63 504 With: Uganda 350 25 Kenya 1.0 38.0 Tanzania 85.0 5.0 Net FDI (US$ m) 127.0 248 193 568 Source: African Development Indicators 2002, World Bank Database On the other hand, a number of regional markets most notably COMESA, a regional economic co-operation group of 20 African countries with an estimated population of 367 RATES Enhanced Regional Cotton Trade 8 million people; and possibly SADCC continue to offer market access prospects for Ugandan goods and services. Under COMESA’s customs union, all tariff and non-tariff barriers are supposed to be eliminated in line with the establishment of a free trade area, which requires the emergence of uniform legislation and procedures. 1.3 Implications of the trade commitments Simplified procedures and lower tariffs will make it easier for Ugandan exporters to reach regional markets. These, however, are likely to be medium- to longer-term benefits. The immediate implications for Uganda will be revenue loss on regional trade. Studies conducted on the FTA in the COMESA region indicate that Uganda could experience a direct loss of up to 5% of total revenue1 as a result of joining a regional FTA. Increased regional trade as a result of tariff reduction is expected to spur production and widen the tax base. This with lower levels of smuggling could partially compensate for the loss. On the policy management side, the implications of negotiating several regional and multilateral agreements cannot be overlooked. Uganda has to commit numerous resources to officials attending these frequent meetings. Further, trade negotiations are often complex and the capacity to effectively participate is not sufficient. Civil service reforms saw the downsizing of the public service. With staffing levels at the bare minimum, key decisions are sometimes deferred because ministries are heavily involved in negotiations. Although efforts have been made widely involve stakeholders, the pressure and urgency of the process results in inadequate consultation and lack of rigour in the necessary analysis of the impact of given negotiating positions on the various sectors of the economy. A related concern is on co-ordination. While the MTTI is the line ministry for trade related issues, other ministries such as Finance, Foreign Affairs and, to some extent, Office of the President, take leadership on different trade agreements. Uganda has a relatively small domestic market due to the population size, low purchasing power and the dominance of the subsistence economy. Internal markets could be promoted through improved infrastructure, dissemination of market information, value addition to products and product diversification, and establishment and enforcement of product grades and standards. Uganda does have some comparative advantage within the region for the export of agricultural products including cotton; although it requires the supply of products of the right volumes and quality. However, some fundamental problems relating to the modalities for conducting effective trade within the membership of these regional groupings still remain. For instance, COMESA still faces problems of implementation mainly on account of weaknesses in customs procedures and regulatory control. In the EAC region, there are challenges faced 1 COMESA Report on the Revenue Implications of the elimination of intra-COMESA tariffs on trade (March 2000) put the figure for the whole region at 1.6% of total revenue. This figure is not likely to vary much for EAC because the only significant trade between Uganda and any regional partner is with Kenya. A 1999 IMF study on the same subject put the figure in the 1-2% range. An earlier study by International Development Consultants (IDC) estimated this to be about 5.2% of the 1994/95 revenues. Only the World Bank study (1999) warned of bigger implications (6.2% or more depending on the level of tariff reduction). RATES Enhanced Regional Cotton Trade 9 on how to effectively monitor NTB’s to make their removal a permanent feature, and to develop a mechanism of control so as to have some degree of predictability. Further, it appears that binding decisions made at the EAC headquarters in Arusha are not transmitted to policy implementers in a timely manner. The issue of membership to multiple trading arrangements is likely to have an impact on trade in the region. While Kenya and Uganda are members of COMESA, Tanzania is not. Among the 3 states, Tanzania is the only member of SADCC. There is fear that goods from strong SADCC countries (eg South Africa) may eventually end up in the other EAC countries at very low prices, hurting local industry and diverting intra-regional trade. This is a valid concern, which would normally be overcome by strict Rules of Origin. However, strict rules of origin could be expensive to enforce and lead to delays and high compliance costs to businesses in the region. On the whole, developments in the regional and multi lateral trading system are likely to make it easier and less cumbersome for goods and services to flow both within the region, and beyond. RATES Enhanced Regional Cotton Trade 10