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Strengthening WASH Business in Ethiopia: Manufacturing challenges and their impact on market development

Published on: 15/12/2021

Made in Ethiopia: Jump starting local WASH product manufacturing.

Manufacturing of plastic slabs in Ethiopia passed through various challenges

In a series of posts, we will present the main challenges that businesses face when expanding their range of WASH products and services in Ethiopia. In so doing, we will also put forward regulatory and policy actions recommended to help overcome these challenges.

This is the sixth of eight planned articles, which addresses challenges that businesses and investors face when starting up WASH-related manufacturing operations in Ethiopia.

Why does this matter?

Currently, only nine percent of Ethiopians have access to basic sanitation services – a serious situation that affects public health, tourism, education, and many other aspects of the country's economic and social well-being (JMP, 2021). Achieving universal access to basic WASH cannot be done by Government or NGOs alone; it will require a strong contribution from the country's private sector. The Government recognizes this, and is working to strengthen private sector businesses that offer WASH products and services (including household sanitation) as a key element of its greater focus on hygiene and environmental health (FMoH, 2016). These measures are necessary because the current market only meets a small fraction of the country's enormous needs.

To gain insight into how these challenges can be addressed, and to do so in a manner that ensures the solutions are affordable to all, the USAID Transform WASH team spoke with a wide range of experts – including business owners, government officials, and technical specialists) in Ethiopia and other East African countries – to get their advice and recommendations on how to develop and expand Ethiopia's private sector WASH market. The post which follows is largely based on these experts' reflections.
To explore this topic in more depth, follow this link to the Learning Note.

Manufacturing's place in the economy

Since 2004, the Ethiopian economy has been growing between three and 10 percent annually, and it currently stands as the seventh largest in Africa. Agriculture remains the dominant sector, but it has declined from about 45 to 35 percent of the economy since 2010, while industry has grown from nine to 23 per-cent.

Ethiopia's Second Growth and Transformational Plan (GTP II) sought to transform the country and place it on a path toward becoming a middle-income economy by encouraging a shift to high productivity industries, especially manufacturing. The policy has emphasized development of manufacturing through industrial parks, encouraging foreign investment, and attracting and supporting small- and medium-sized enterprises (MSEs). This has likely contributed to the country's growth in manufacturing value added goods (from around 3.5 percent in 2010 to 7.2 percent in 2017), although growth in manufacturing sector employment has been much slower (from 5.2 percent in 2010 to only 5.4 percent in 2017). As a result, Ethiopia is unlikely to achieve its SDG target of doubling the share of manufacturing employment by 2030 (UNIDO, 2020).

Challenges to growing the manufacturing sector

Ethiopia's manufacturing sector faces numerous challenges, including the following issues highlighted by business experts interviewed for this article.

Business knowledge and skills

Many business leaders raised concerns about the limited capacity of the manufacturing workforce. Although some enterprises may accept this as part of the cost of doing business in the country, low productivity ultimately increases manufacturing costs. The cost of labour is relatively low, which does help to reduce costs, but the flip side is that Ethiopia's relatively weak labour law system and its lack of a minimum wage are challenging factors for workers and are a constraint on the development of a strong and skilled industrial labour force. Low wages, low productivity, and high turnover are factors that can act as deterrents to manufacturing investment. The labour union movement in the country is growing but relatively weak, and progress toward improving workers' rights has been mixed. The Government does, however, recognize the importance of strengthening the skills of the country's workforce and has invested in technical training institutes, such as the Adama Technical University and several regional vocational colleges.

Weak infrastructure

Another challenge for the economy, in general, and specifically for industrial and manufacturing development, is the country's relatively underdeveloped infrastructure. This includes roads, transport systems, electricity, supply chain logistics, water and sanitation facilities, mobile and internet communication services. These factors make it difficult to access many parts of the country, to import and export goods, and overall makes the country less competitive from a global investment perspective. A related issue is the relative lack of industrial information for the country, including research studies that would assist (and attract) investors.

Importing materials and goods

Many manufacturers cannot source their needed manufacturing equipment or material inputs from the local supply chain so are dependent on importing these goods. The importation process can be costly, logistically challenging, and time consuming. Some informants noted that it can take six to nine months to receive an order from an international distributor. Depending upon the product and process, once these materials are finally in the hands of an importing company, they may get used up within just a few weeks or months of production. A consequence of this inefficiency is that manufacturers often choose to produce only well-known products that have strong existing consumer demand (requiring little to no marketing), rather than taking a risk on a new product line with unproven demand or profit margins (such as most WASH-related products). A related challenge is the degree to which Ethiopia's customs duties and taxes – as applied to imported goods as well as the sale of WASH products and services to consumers – can greatly increase their cost. This is a disincentive to businesses and investors, as well as decreasing consumer demand in the country's price-sensitive market (see News Item 3 in this series).

Product certification

WASH products to be introduced into the Ethiopian market may require review and approval by the Ethiopian Food and Drug Authority (EFDA) and the Ethiopia Conformity Assessment Enterprise (ECAE). For example, EFDA rates household water treatment technologies (on a zero to three-star basis), according to the product's pathogen removal efficiency. However, EFDA does not currently have any in-country laboratories to test for this, so the tests must be conducted outside of Ethiopia. A similar situation exists for testing and certification of bottled water. Some businesses reported that the ECAE and EFDA have overlapping responsibilities, and it can be difficult to coordinate the review and certification process between the two agencies. Laboratories and even the World Health Organization may also be involved to certify products linked to human health, such as water filters. Another concern cited by a manufacturer was the changing of classification of a specific product from one round of importation to the next, leading to increased fees, delays, and additional expenses. Other businesses expressed frustration that the certification process itself could change between rounds, resulting in further delays and increased storage charges.

Foreign exchange currency

A scarcity of foreign exchange (Forex), a serious issue discussed in News Item 1 in this series, remains a key challenge for the manufacturing sector. It can take weeks or months for a Forex request to be processed, and the full amount requested is not always granted. This creates a significant bottleneck in the process of importing raw materials and finished goods, as well as in making loan and profit-sharing payments. The disruption that this causes in manufacturing production also deters investment.

Political stability

Political and security issues in various parts of Ethiopia are not new, but a crisis that began in November 2020 involving the northern Tigray region continues, and there are related and unrelated security issues arising in Amhara, Afar, Oromia, and other regions. These situations impact not only the communities and individuals involved, but generally create a less favourable investment climate for the country.

Recommendations
  • Advocate for stronger government support for manufacturing enterprises, especially those focused on providing products and services to low-income households. Such support should include improving access to credit, reducing regulatory bottlenecks, and other approaches discussed in more detail in News Item 5 of this series.
  • Work with the Technical and Vocational Education and Training (TVET) system and the country's science and technology universities to expand technical training relevant for employment in the manufacturing sector, especially programs aimed at unemployed youth.
  • Support efforts to strengthen the country's infrastructure and supply chain logistics and improve monitoring and dissemination of business information.
  • Work with relevant government agencies (e.g., ERCA) to advocate for streamlining, easing, and speeding up the process and reducing the cost of importing materials and goods needed for manufacturing, especially for smaller-sized and start-up manufacturers.
  • Advocate for establishing a formal government office or point person(s) to promote small-scale manufacturing industries in Ethiopia and to provide technical advice and help to resolve challenges. Such a position or positions could be located within ERCA and/or the Ministry of Trade and Industry.

 About Transform WASH

USAID Transform WASH aims to improve water, sanitation and hygiene (WASH) outcomes in Ethiopia by increasing market access to and sustained use of a broader spectrum of affordable WASH products and services, with a substantial focus on sanitation.
Transform WASH achieves this by transforming the market for low-cost quality WASH products and services: stimulating demand at the community level, strengthening supply chains, and improving the enabling environment for a vibrant private market.

USAID Transform WASH is a USAID-funded activity implemented by PSI in collaboration with SNV, Plan International, and IRC WASH. The consortium is working closely with government agencies, including the Ministry of Health, the Ministry of Water, Irrigation and Electricity, the One WASH National Program, and regional and sub-regional governments.

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