DRAFT NOTE: October 27, 2009

DO NOT QUOTE

Poverty Reduction and Economic Management

Africa Region

The World Bank

High Marketing Costs and Inefficient Policies in Tanzania’s Maize Market

A Poverty Perspective

Sergiy Zorya and Shireen Mahdi

This note is a technical document of the Staff of the World Bank and does not represent an official position of the World Bank or of its Executive Board. A copy of the report can be obtained by sending an email to Mary-Anne Mwakangale at mwakangale@worldbank.org

Draft – 10/27/2009

Summary and main conclusions

A significant quantity of Tanzania’s maize is produced by smallholder farmers. Around 65 percent of Tanzania’s households grow maize; these include a large proportion of Tanzania’s poorest households, making maize one of the key markets for poverty reduction efforts. The maize market reforms increased competition among buyers and made maize more attractive for production. Market prices went up and the area of maize harvested increased. Yet despite the gains accrued through the reform effort, the maize market suffers from high transaction costs, especially due to poor rural roads, hurting many poor producers and consumers.

Marketing costs are largely determined by transport costs. Other important costs are loading and unloading of trucks at various stages of the supply chain. These costs arise from the need to have several layers of traders and markets before the loads are consolidated for transportation by trucks. These costs are also inflated by weak enforcement of contractual agreements, weak standard/grade compliance, and thus, a lack of trust between sellers and buyers, as well as unloading required for taxation purposes. While these costs are high, public interventions are unlikely to succeed, as it reflects the thin market structure, small-scale farming, and poor rural roads. At the same time, non-tariff barriers such as costs at weighbridges and roadblocks and export ban could and should be addressed to reduce marketing costs.

Improving the quality of local roads (district and rural), reducing the costs of fuel, and promoting load consolidation will be critical for increasing market efficiency and prices for maize producers. Public investment in transport infrastructure should be prioritizing toward connecting rural areas that offer a combination of rich natural and economic potential and high population densities to major deficit markets, both domestic and across the borders. It goes mainly about district and rural (local) roads that connect primary and secondary markets with national roads. Investments in wholesale markets and promotion of private storage are also desirable to increase loads and improve transparency of price formation.

In addition, non-tariff barriers need to be reduced, including the export ban. The latter should be lifted as soon as the food security situation permits. The export ban reduces prices for producers, especially in southern Highlands, and is unsustainable in the long term. Its use also makes it unprofitable to invest in private storage for temporal arbitrage and risk management tools.

The recently-introduced inputs subsidy programme is an important program to induce supply response in the short run but its impact would not last without reduction in marketing costs. This makes it urgent to allocate more public expenditure for local roads and address non-tariff measures to preserve the benefits being generated by the input voucher scheme and other productivity-enhancing programs in the agriculture sector.

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1. Introduction1. Tanzania’s most recent household budget survey showed that income poverty (as measured by the poverty line) has been particularly stubborn in rural areas (see 2008). Whilst the incidence of poverty declined, the effect was not large enough to outweigh population growth. As a result, the actual number of the poor increased by roughly one million persons. This note takes a close look at the maize sector because maize is the staple food of choice for the majority of Tanzanians. For many households, it forms the basis of the main family meal. Around 65 percent of Tanzania’s households grow maize1; these include a large proportion of Tanzania’s poorest households. So, it is a crop that has a double impact on the poor, through production and consumption.

2. The purpose of this note is to show how high marketing costs resulted from low investments in rural roads and policies that tax farmers and traders may provide some explanation of the trends revealed by the household budget survey. While the farm income can be increased through the adoption of improved technologies (and thus increased yields) at given marketing costs, the long-run sustainability of such a productivity growth greatly hinges on the access to markets and costs of inputs. So, reducing marketing costs would allow not only increasing output prices but also reducing input prices and thus sustain productivity improvements. At the same time, lower marketing costs are uniquely positioned to reduce consumer prices without hurting the competitiveness of producers. The strong empirical proof exists that shorter travel distances to markets increase profitability of adopting the yield-rising technologies (Diao et al., 2008; Dorosh et al., 2008). Diao et al. (2008) also show that without reduced marketing costs the annual agricultural growth in Africa would be two percent lower that would be the case with marketing costs lowered.

3. Marketing arrangements for maize in Tanzania are complex and multi-layered. They involve several layers of traders, given the large number of smallholders selling maize and the need for load consolidation to pay-off the trucks that transport grains. These arrangements are defined by market conditions and not by the government interventions, except the existence of the export ban at the national level. Overall, the marketing arrangements in maize sector contrast the arrangements for the most export (cash) crops such as cashew, coffee, and cotton, where they continue to be subject to the government regulations and interventions. This note argues that for going forward it will be essential to make public investments in rural roads and undertake concerted efforts to reduce other transactions costs of maize trade to reduce poverty in rural and urban Tanzania.

2. Background and PerformanceLiberalisation brought some important gains to the maize market

4. The process of liberalising Tanzania’s maize market began in 1984. The reform was essentially a liberalisation reform that introduced market based pricing and competition through the withdrawal of the state marketing function. Prior to liberalisation, maize marketing was operated by cooperative societies and the National Milling Corporation (NMC), a government parastatal. In the first stage, cooperative societies procured maize from the maize growers, and in the second stage the NMC procured the accumulated maize from the cooperative societies, and distributed the maize nationally. This setup operated under a pan territorial pricing policy, whereby prices were set by government in each season.

1 This is according to the national census of agriculture 2002/03.

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5. By the late 1980s, the restructuring of this marketing system was well under way as part of Tanzania’s structural adjustment programme. Pan territorial pricing was abolished. Initially, cooperative societies were permitted to sell directly to private traders, instead of only to the NMC. In 1990, individual farmers were also allowed to sell directly to private traders. So over a period of a few years, private traders were competing with both the NMC and the cooperative societies. Eventually, the role of the NMC diminished until it ceased to buy crops from growers in 1991/92, and no longer operated the strategic grain reserve. Private traders responded rapidly with start up funds to trade in maize from agricultural savings. By the late 1990s, the private traders handled around 90 percent of all marketed maize (Skarstein, 2005).

6. The reform had some important positive outcomes. Market prices increased and the area of maize harvested increased. The expansion in the area harvested has led to a significant increase in the quantity of maize produced since 1986. Much of this expansion in area cultivated occurred between 1995 and 1998. The marketing chain itself became more efficient and competitive with leadership from the private sector. Yet despite the gains accrued through the reform effort, the maize market still suffers from some serious weaknesses.

Declining maize yields and production per capita (long term decline: short term stagnation)2

7. In the post reform period, the growth of maize production has been driven by the area expansion (Figure 3). The area expansion could not compensate the decline in yields, however, to have the growth in per capita output (Figures 1 and 2). Maize yields in Tanzania are lower than in neighbouring Kenya and Uganda, partially due to the low use of fertilizers and improved varieties (Figure 4) but also due to the high marketing costs as described in the below sections.3

8. A considerable level of variation exists between the producing regions in terms of productivity. Much of Tanzania’s maize is produced in the southern highlands, with significant levels of production through the central belt and the northern regions. Out of the 21 regions in Tanzania, four of them in the southern highlands (Mbeya, Rukwa, Ruvuma, and Iringa) account for 35-40 percent of Tanzanian maize production. With unimodal rainfall, this area produces just one harvest per year. The northern highlands, including the regions of Arusha and Kilimanjaro, have bimodal rainfall and good conditions for growing maize, but the area is limited so they contribute just 10-15 percent of total maize production.

9. Although the central Shinyanga and Dodoma regions have almost double the area planted as the southern Iringa and Mbeya regions, they only produce a little over half of the output. Households in the central region dedicate a larger proportion of their land to their maize crop, but they have a lower level of input use and productivity compared to southern and northern maize producing regions. Regional variations in price behaviour exist. Prices tend to be lower in surplus regions and in the less developed regions (in terms of infrastructure). Deficit regions, regions that are more developed, and those that border a neighbouring country show higher prices and lower volatility (Kilima et al., 2008). In all regions, the supply of maize is seasonal; it peaks during the harvest seasons. Maize prices tend to be at their lowest during these periods.

2 The data presented in this section is from FAOSTAT unless otherwise indicated.

3 The low use of fertilizers and improved seeds is also a result of the high marketing costs itself as described in Introduction.

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Figure 14 Figure 25

1985

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7090

110130150170

Per Capita Pro-duction

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Yield

Figure 3 Figure 4

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Production and Area Harvested

Production (tonnes)Linear (Production (tonnes))Area Harvested (Ha)Linear (Area Harvested (Ha)) 19

8519

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9119

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010.000000.500001.000001.500002.000002.50000

Fertiliser Con-sumption (per

capita)

10. Tanzania has most recently been a net exporter of maize. This status however fluctuates regularly, subject to production levels domestically and in neighbouring countries, and subject to trade policies such as export ban. Over 2000-2005, the formal export was 8,000 tons per year. However, these figures do not reflect substantial cross-border (informal) trade between Tanzania and its neighbours. According to the Eastern Africa Grain Council (EAGC), Tanzania has exported about 120,000 tons of maize annually to Kenya in recent years with the peaks in June and July since the Tanzania maize harvest in the north occurs earlier in the year than the Kenyan harvest and generally corresponds to the high Kenyan prices at that time. Maize is also exported from the southern highlands to northern Zambia, northern Malawi, and eastern DRC. As a result, some surplus maize has been diverted (by better price margins across the borders) from Dar es Salaam and the central region markets, which are semi-arid and have chronic maize deficits.6

11. How significant is maize export in terms of national production and in consumption? Measured in terms of total production and consumption, export is very small, being only 3-4 percent of both total production and consumption. But it is known that producing farmers sell about 17-20 percent of produced maize, using the largest remaining part for their own household consumption. With the maize production at 3.2 million tons and export at 120,000

4 Gross per capita production index for cereals (base 1999-2001).

5 Yield in hectogram/hectare.

6 Detailed description of cross-border trade and price integration can be found in World Bank (2009).

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tons, the share of export in marketable surplus is about 20 percent, which is a significant volume able to affect domestic prices and respond to trade incentives such as an export ban (see on the discussion on export ban in section 5).

Weak price transmission

12. Whilst it is recognised that market integration and price transmission in Tanzania have improved in the post reform period (Van Campenhout, 2007), price transmission continues to suffer serious from inefficiencies. It results in slow transmission of price signals to farmers in various parts of the country and as a result, they slowly react to increased prices in other regional within and outside of the country.

13. The recent World Bank analysis of the maize price transmission in Kenya, Tanzania and Uganda reveals that the maize market in Tanzania is less integrated than in Kenya and Uganda (WorldBank, 2009). Kenya and Uganda, both individually and together, represent a relatively integrated market, with comparatively high long-run elasticities of price transmission and adjustment parameters correcting deviations from long-run equilibrium levels. While there is some evidence of integration within Tanzania and between Tanzania and Kenya, price transmission involving Tanzania is for the most part considerably weaker and slower than in the rest of the region. Partially this is explained by the large size of the country and the market linkages of southern highlands (largest maize producing area) with southern neighbours, but it is also a result of the poorer rural roads and very likely of export ban (see section 5).7

14. While the combined adjustment parameters for market pairs8 that include Dar es Salaam are moderate (with the exception of Dar es Salaam/Mbeya they are all over 27 percent), the integration between the production centres in Tanzania is only moderate or weak, ranging from 5 percent to 29 percent (Table 1). It means that price transmission between the latter is generally very slow, and it takes many months for price signals on one market to be incorporated into prices on other markets. Overall, note that the strongest combined rate of adjustment in Tanzania (35 percent between Dar es Salaam and Arusha), is smaller than the weakest combined rate in Kenya (38 percent between Eldoret and Nakuru (WorldBank, 2009).

Table 1: Long-run PT elasticities and total price changes in TanzaniaMarket A Dar es

SalaamDar es Salaam

Dar es Salaam

Dar es Salaam Arusha Arusha Iringa Iringa

Market B Arusha Iringa Mbeya Songea Iringa Songea Mbeya Songea

PT elasticity 0.908 0.734 0.196 1.224 -0.73 4.991 1.05 1.37Combined adjustment 35% 30% 17% 27% 5% 5% 27% 29%

Source: World Bank (2009).

Quality

7 The spread of cell phones is also likely to be among the important reasons for improved price transmission in the region but is unlikely to explain differences in price transmission between countries given that the cell phone coverage seems to be uniform across East Africa.

8 This parameter shows the percentage of price disequilibrium to be restored within one month.

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15. At the national level, the Tanzania Bureau of Standards and the National Food Control Commission have determined two standards for grading maize (RATIN, 2005). The grades are mainly differentiated by moisture content, inclusions of foreign matter and pest damage. However, maize transactions across Tanzania do not refer to grades in either marketing or consumption. It is sold as an undifferentiated crop throughout the supply chain. In addition, data on maize production and marketing trends by grade is not available. For these reasons, we will not consider the institutions for quality determination in this note.

3. Market Structure, Groups and Transactions16. Before identification and quantification of the marketing costs, this section describes the market structure, groups and transactions that take place in Tanzania. There is no unified supply chain for maize. Tanzania’s maize market is geographically and commercially fragmented. Maize is grown across the whole country. No one group dominates marketing, with traders and businesses of many different sizes participating in the marketing and processing of maize. Whilst some large producers and some big businesses exist, vertical integration is not the dominant mode of organisation in the market. Maize passes through the hands of several traders before finding its way to the large trading centres of Dar es Salaam. This pattern gives important clues to the nature of transaction costs in the market.

Maize producers

17. The largest group in the maize market is the maize producers. Some three million households grow maize, representing 65 percent of the crop growing households in Tanzania. Large to medium size growers represent only a small share of total production. Some of the most important characteristics of the most vulnerable small maize growers are as follows:

Low productivity and input use

Distress sales when prices are low during the harvest season

Purchase of maize when prices are high during the lean season

Home or farm distant from centre of village or nearest market

Infrequently attends village meetings and participates in local decision making

Village based traders

18. Maize traders can be broadly categorised under two main groups. The first group is the small itinerant traders that collect maize directly from the producers. They originate from and operate mostly at the village and ward levels. They are well known to the maize growers in the locality and have in some cases established a relationship of trust with producers through repeat transactions as they purchase and sell maize in the village all year round. The first transaction in the maize marketing chain takes place between the maize grower and these itinerant village based traders. They perform the function of collecting maize and aggregating maize in to larger consignments. Their business typically involves buying maize directly from the growers, aggregating their consignments and selling them either at the nearest urban market, or neighbouring villages that have a maize deficit. They also act as buying agents for external buyers. They typically operate with low capital, no storage facilities and seek a quick return to their investments (less than one week). They are also well informed about market prices, and manage their transactions to minimise price fluctuation risk.

Non-village based traders

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19. The second group is medium to large maize traders that originate from outside of the village or ward. They buy maize from the village based traders and directly from the producers at the farm gate during the harvest season. They operate as wholesalers and handle relatively large quantities of maize and transact across regions and borders. These buyers collect maize from villages, rural towns and urban buying centres such as the markets is Iringa, Mbeya and Arusha. They work with more capital than village based traders. They benefit from some economies of scale is transport but do not store maize for long durations either, no longer than approx one month (Santorum and Tibaijuka, 1991). The buyers and agents that work for the large vertically integrated maize processing and trading companies (such as Bakharesa & Mohammed Enterprise) are included in this group.

Other groups

20. Another important group in the maize market is the public sector buyers such as the Government of Tanzania’s strategic grain reserve and the World Food Programme that engage in the market for purposes other than commercial gain. These maize buyers do not interact directly with small maize growers; they procure maize from large farms and traders.

21. Cooperatives have not been a feature of the maize market since the liberalisation reform period, as maize in mostly marketed by individual households through the above described marketing agents.

Maize transactions at the village level – mostly farm gate buying

22. Maize growers retain a proportion of their annual output for household consumption. This maize is stored throughout the year, and milled in to flour at the local “posho” mill at a high cost: approximately 15 to 30 percent of the value of the maize.9 The rest of their maize, the surplus, is sold mostly at the farm-gate. Only a small proportion of maize growers sell their output (about 17-20 percent, according to the agricultural census 2002/03 and various household budget surveys). Small itinerant maize buyers typically travel around the village on a bicycle announcing prices and searching for growers that have maize to sell. Once the buyers have procured a sufficient quantity of maize, they return with a large vehicle such as a lorry to collect the purchased maize. The maize is sold on the spot, ungraded and on a cash basis. In some instances the payment is deferred and the buyer pays the maize grower after he or she has sold the maize they collected. This mostly occurs when the buyer is well known to the seller.

23. The number of traders in the maize market varies throughout the year. Buyer entry peaks during the harvest season when maize is abundantly available, and when many maize growers are ready to sell due to the erosion of their cash savings from the previous season. Traders from neighbouring villages, regions and even from Dar es Salaam travel out to maize growing villages to collect the grain. In contrast, the lean season sees a sharp reduction in the number of maize buyers at the village levels, given high search costs and low maize stocks. At these times, the only buyers that remain are the resident village traders. Non resident buyers tend use the village buyers as agents during seasons of scarcity.

24. The further away a seller is from market point where buyers and sellers congregate, the more difficult he or she is to find, causing buyers to incur higher search costs in transacting with them. Figure 6 below shows that being further away from the market place is associated with lower maize prices. Figure 7 shows the coefficient of variation (a measure of price dispersion being the ratio of the standard deviation to the mean) by distance to market

9 Field interviews with farmers and mills owners.

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quartiles and by season. It shows that price dispersion increases with distance from the market place. So households that are further away from the market experience larger price fluctuations than those near to the market in both the harvest and lean seasons.

25. Figure 7 also shows that price dispersion is lower during the harvest season irrespective of distance to market. In other words, distance matters less during the harvest season. This phenomenon indicates a pattern of price dispersion that is related to both temporal (seasonality) and geographical (distance to market) factors, and can be best understood in the context of search costs. As previously described, search costs are low during the harvest season because maize sellers are abundant – high seller density. So a buyer can access a seller that is located further away from the market place at a relatively low cost, allowing him to offer a farm gate price that is close to that received by households that neighbour the market. The lean season however has a lower number of maize sellers within the same area (or low seller density), raising search costs for the buyer, making less profitable for larger trucks to transport maize, and resulting in wider price dispersion. So, maize farmers that do not readily have access to markets receive lower farm gate prices because as price takers, they effectively compensate the buyer for search costs, and more volatile farm gate prices because they are more strongly affected by seasonality than sellers that neighbour the market place.

26. The effect of distance to markets is marked in this context because the homogeneity of the good being sold and the absence of grading means that the product sold is largely undifferentiated. Information asymmetries are an alternative explanation for price dispersion, if producers that reside closer to the market place are better informed about market prices. Since reducing search costs for maize at village level is impossible without reducing marketing costs (transport and other costs), the next sections present the recent estimates of typical marketing costs in Tanzania and provides recommendations on how to reduce them.

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Figure 6 Figure 7

0 5 10 15 20 25 30100

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jan-feb mar-apr may-junjul-aug sep-oct nov-dec

Distance to market (in km.)

Pric

e of

mai

ze g

rain

(in

Tsh

.)

1st Q

uarti

le

2nd Q

uarti

le

3rd Q

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le

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le0%

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25%

Coefficient of Variation by Distance to Market

and SeasonLean SeasonHarvest Season

Distance to MarketCoeff

icie

nt o

f Va

riat

ion

Source: Tanzania Household Budget Survey 2007.

4. Marketing Costs for Maize in Tanzania10

27. The marketing costs are estimated by utilizing the supply chain approach. All marketing/transaction costs are estimated across three major segments of the domestic supply chains: (i) from farm-gate to primary market (usually located in small rural towns); (ii) from primary to secondary markets (usually located in regional capital towns); and (iii) from secondary to wholesale market (located in large regional cities and countries’ capitals). Such an analysis helps effectively isolate the constraints that affect maize trade in a systematic manner. The data was collected in Njombe in Iringa district (southern highlands), the producing areas supplying Dar es Salaam through Kibagwa in December 2008, through the survey of farmers, traders and transporters.11

28. The supply chain analysis is complemented by the analysis of transport prices and costs, based on the methodology presented in Teraveninthorn and Raballand (2009). Transport prices paid by end users (farmers and traders) are analyzed for various modes of transportation and then compared with transport costs. Transport costs are disaggregated into vehicle operating costs (VOC) and indirect costs. VOC include various fixed and variable costs of operating vehicles. The fixed transport costs are comprised of labor costs, financing costs, depreciation, and administration costs. The variable transport costs include fuel, tires, maintenance, and batteries. Transport costs also include other indirect costs such as roadblock and weighbridge payments, licenses, and insurance expenses.

29. Total marketing costs along the studied supply chain were found to average US$91 per ton (Table 2). Transport charges make up about 83 percent of total marketing costs. The second largest cost is hired labor for loading and unloading trucks, averaging 11 percent of total marketing costs. These costs are quite high because a maize bag often goes through a number of markets and traders (as described above) before reaching a final consumer in large

10 This section is derived from World Bank (2009).

11 Note that these findings might not representative for the whole country.

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cities and thus requires loading and unloading at each intermediate stop. These costs are also inflated by weak enforcement of contractual agreements, weak standard/grade compliance, and thus, a lack of trust between sellers and buyers, as well as unloading required for taxation purposes. Other marketing costs include local cess, storage costs, and drying tents.

Table 2: Marketing costs of trading maize, US$ per tonUS$ per ton In % to total costs

Transport charges 74.80 82.6Loading and unloading 9.92 11.0Cess 3.20 3.5Storage 2.11 2.3Drying tents 0.50 0.6Total costs 90.53 100.0

Source: World Bank survey carried out in November-December 2008.

30. In absolute terms, the most costs are incurred during the last two segments of the supply chain (primary-secondary markets and secondary-wholesale markets). According to Table 3, the costs incurred from farm-gate to primary markets (on rural roads) account for only 10 percent of total marketing costs. But in relative terms, per ton-km US$ costs are larger from farm-gate to secondary markets than from secondary to wholesale markets due to the poorer quality of rural roads and the low volumes of trade at the first stages of the supply chain (see the discussion below).

Table 3: Marketing costs at various stage of the supply chainMarket segment Cost element US$ per ton Farm-gate-primary market Storage/rental fee 0.80

Transportation charges 6.40Hired labor loading/unloading 1.92Council cess 1.60Roadblocks and weighbridges Drying tent/empty bagsTOTAL SEGMENT 1 10.72

Primary-secondary market Storage/rental fee 1.20Transportation charges 27.00Hired labor loading/unloading 4.00Council cess 1.60Drying tent/empty bags 0.5TOTAL SEGMENT 2 34.30

Secondary-wholesale market/miller Storage/rental fee 0.11Transportation charges 41.40Hired labor loading/unloading 4.00Council cess 0.0TOTAL SEGMENT 3 45.51TOTAL COSTS 90.53

Source: World Bank survey carried out in November-December 2008.

Transport prices and costs12

31. As shown above, the payments for transportation services make up the major share of marketing costs. The analysis of marketing costs, therefore, begins with an assessment of transport charges, staring from the first stage of the supply chain, i.e. from farmer to primary markets. Transport prices for small (often hired) trucks on this segment in Tanzania are

12 Transport price (or charge) is a payment of end user for using/renting truck. Transport costs are the costs incurred by a tracking company. Profit of the trucking company is estimated as transport price minus transport cost.

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estimated at US$0.4 per ton-km (Table 4). Transport prices for other (intermediate) modes of transportation are much higher than for hired trucks. The payment of public buses, for example, was estimated at US$0.9 and for carts US$1.0 per ton-km.

Table 4: Transport prices and distances between farm-gate and primary markets, assuming hired trucks of 5 MT load

Maize price, US$ per ton

Transport price, US$ per

ton-km

Distance to primary

market, km

Transport price from farm-gate to primary market, US$ per ton

Small scale farm 180.4 0.4 15 6.0Large scale farm 180.4 0.4 17 6.8

Source: World Bank survey carried out in November-December 2008.

32. Starting from the primary market with larger maize loads, a 10MT truck was found to be a mostly common mode of transportation, while some traders use trucks with a capacity of between 24 and 32 metric tons. As a result, transport charges are smaller than on remote rural roads. Table 5 shows the assumed distances and charges per ton-km between various market pairs. Overall, on tarmac roads (from secondary to wholesale markets) the transport costs per ton-km is about four times smaller than on rural/district roads. Lower costs on tarmac roads are also explained by larger volumes of maize traded.

33. Overall, transport charges disproportionately add to total marketing costs in the first two segments of the supply chain (i.e. on rural roads). According to Table 3, about 45 percent of average transport charges occur during the first 25 percent of the distance between farmers and urban wholesalers. The rest 55 percent of the charges are accumulated during the remaining 75 percent of the route.

Table 5: Distances and transportation prices at various segments of the supply chains

Category of marketMode of

transportationAverage distance,

km

Transport prices,

US$/ton-km

Transport prices,

US$/tonFarm-gate to first primary Lorry 5MT 16 0.40 6.40Primary to secondary Lorry 10MT 100 0.27 27.00Secondary to wholesale/miller Lorry 10MT 345 0.12 41.40

Source: World Bank survey carried out in November-December 2008.

How different are these transport prices compared to other African regions?

34. The transport prices for Kenya and Uganda (from World Bank, 2009) and from main international transport corridors in Africa (from Teraveninthorn and Raballand, 2009) are used for comparison.13 Figure 9 illustrates that transport prices per ton-km in Tanzania are high but they are not too much different from the prices in other parts of Africa along domestic routes and international corridors. They are close to prices in Kenya and to the average for the East African transport corridor from Mombasa to Kampala. The difference with Southern and West Africa corridors is substantial, however. Overall, per km transport prices in Tanzania do not seem to be much higher than in neighbouring countries, but the large size of the country and the large distances between major surplus areas (Southern Highlands) and deficit areas (Dar es Salaam, central part and Northern Highlands) turn this per km costs into serious disadvantage for farmers and consumers in Tanzania.

13 While the transport prices are not entirely comparable between domestic and transboundary corridors, between maize and other goods, and between the quality of national and cross-country roads, the information is still indicative.

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Figure 9: Comparison of transport prices in the countries under review with those along the main transport corridors in Africa (US$ per ton-km)

0.00

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West Africa East Africa Kenya Tanzania Central Africa Uganda

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Source: World Bank (2009) and Teraveninthorn and Raballand (2009).

35. What is the reason of high transport prices in Tanzania? The first suspect is a monopoly position of truckers who extract high rents from the end users of transport services. There are however reasons to believe that the transport sector in Tanzania is competitive. Many truckers compete for transporting grains and make profits only by overloading, as was found in the survey undertaken by EAGC. Teravaninthorn and Raballand (2009) also found the trucking industry in East African countries to work in the competitive environment, in contrast to the situation in West Africa. There are many reasons to believe, therefore, that high transport prices in Tanzania are caused by high transport costs.

36. Transport costs consist of variable and fixed costs. Variable costs account for 70 percent of total costs (Table 6). The major variable costs are fuel and lubricants, which account for 58.6 percent of these costs. Costs of tires and maintenance account for another 12.2 percent and non-tariff measures faced by transporters account for 7.3 percent of total costs (or 10 percent of variable costs). Low fixed costs can be attributed to the low costs of labor and the use of cheap, secondhand trucks (as old as 10-15 years and often run into the ground). Staff costs account for 30.1 percent of total fixed costs. Administration costs that include insurance, licenses, income taxes, and other overhead costs might be underestimated.

Table 6: Transport costs breakdown in Tanzania (US$ per km)Costs US$ per km In % to total costsVariable CostsFuel and lubricants 0.72 58.6Tires 0.09 7.3Maintenance 0.06 4.9Batteries 0.002 0.2Non-tariff measures 0.09 7.3Total variable costs 0.962 78.3Fixed CostsStaff 0.080 6.5Financing costs 0.080 6.5Depreciation 0.105 8.6Administration costs 0.001 0.1Total fixed costs 0.266 21.7Total Transport Costs 1.228 100.0

Source: World Bank survey carried out in November-December 2008.

37. About 7 percent of transport costs are caused by non-tariff measures. They include (i) bribes paid at roadblocks and weighbridges and (ii) foregone income of transporters due to

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delays (measured at opportunity costs). In spite of the fact that these costs are relatively low in Tanzania in comparison to total marketing costs and to the neighbouring Kenya and that the government has been serious about limiting corruption at roadblocks (through prohibiting to stop trucks to check the payment of cess, for example), more effort is still required to eliminate these unnecessary costs at all. Much bribe appears to be paid at weighbridges. While the introduction of weighbridges to control axle load weight is beneficial, operational problems cause major delays. It is reported that the scales used are often outdated and operate in an uncoordinated fashion. The weight recorded for a given load may differ from one weighbridge to another. Moreover, Tanzania uses a higher legal limit for axle load than Kenya and Uganda, which also exceeds the load specifications under SADC (WorldBank, 2008). This all adds unnecessary transaction costs, which increase transport costs and thus reduce farm-gate prices.

38. Local cess is also often mentioned amongst barriers to trade. Cess does not exceed 5 percent of the farm-gate price and the most common taxation base is a bag of maize. This tax does not appear to significantly contribute to the marketing costs, though the measures system in Tanzania remains prone to misuse and the actual costs might be higher, for example due to the weak measurements systems (see Box 1). Some additional costs from cess might come from a multiple taxation of maize as it crosses different districts. Yet in most cases this is a result of multiple owners (and payers of cess) who handle a bag of maize to reach wholesale market from the farm-gate. Once the bag of maize is delivered to the primary market with a cess paid, it might be purchased by a secondary market trader who is then required to pay cess again charged per truck and so on. Note that the 2008 December survey indicated that cess was not charged from secondary to wholesale markets (or on national roads). Overall, the abolishment of cess is unlikely to significantly reduce marketing costs but is likely to reduce local government revenues in some locations. So, any changes to the cess regulations should be recommended with caution.

Box 1: In bags and buckets: The measures system of the maize market lowers producer information and thus lowers producer prices

Maize transactions at the village level are made using the traditional gunia na debe or bag and bucket measurement system. As opposed selling by kilogram, maize is sold by bag or by 20 litre bucket units. Cups or smaller paint buckets are also widely used for smaller transactions. The approximate relative measures are as follows:

Name English Name Kiswahili

Description Traditional conversion

Metric Conversion

Margin for error

Cup Kilo Mbili Long plastic cup - 2 kg n/a

Small Bucket Sado Paint bucket 2 cups 3.75 - 4 kg 7%Large Bucket Debe 20 litre plastic bucket 4 – 5 tins 18 - 20 kg 11%Bag Gunia Large litre polythene

sack6 - 7 buckets 100 - 140 kg 40%

In principle, using bags and buckets to measure value is not so different to using pounds or kilograms if the measure captures quantity in a constant and comparable manner across the market chain. This however is not the case in Tanzania’s maize market.14 The bag and bucket system prevails in villages whilst metric measures are used in towns and cities. The bag and bucket system itself is not uniformly applied. For instance, in some areas, a bag consists of six buckets whilst it consists of seven in others. The phenomenon of the over spilling maize bag is well recognised in the market, and is commonly known as Rumbesa. It is interesting to note that Rumbesa is more prevalent in southern producing areas where farm gate buying is dominant when compared with the northern maize producing regions, where maize producers have more access to market places (due to

14 This also applies to most other food crops.

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the better roads and lower marketing costs).

This weights and measures system establishes an asymmetry of information between the buyer and seller. Village buyers establish market prices in kilograms before setting their village buying price for the day in bags and buckets. Their incentive therefore is to maximise the number of kilograms they collect at the village. The techniques used include heaping and shaking the buckets and bags, and lengthening the polythene bags with additional materials to hold excess maize. In contrast, maize producers are under-informed price takers. Most of them do not own scales or use them when selling maize. Their lack of capacity to monitor the market values of their transactions leaves them open to losses from under selling their maize.

The bag and bucket measures system weakens market outcomes in two ways. The first is that it creates an opportunity for traders to extract rents. An enticing opportunity exists to extract rents through this weights and measures system that reduces producer prices. The market player that can do this is the trader that buys in bags or buckets in the village, and sells in kilograms in the town markets. The table above shows the potential surplus (being the loss to the producer) that could be earned by such a trader, particularly when transacting with poorly educated rural producers.

The second is the information effect. The system reduces the level information and the monitoring capacity of the maize producer. Information is critical for making the correct marketing decisions and also for bargaining power. A producer that transacts in bags and buckets, without using scales, will find it very difficult to calculate the value of their sales and to compare it with kilogram based prices in the market of nearest town.

5. Recommendations39. While the reduction in non-tariff barriers is necessary area of attention, the reduction in total marketing costs for trading grains largely depends on the reduction of transport costs. So, this section begins with recommendations to reduce transport costs. In addition, it shows another potential area for reducing transaction costs (and thus improving farm-gate prices), namely lifting the export ban. Finally, this section explains why the recently scaled up input voucher scheme is a poor substitute for the reduction in marketing costs.

Transport costs

40. How to reduce these costs? In Tanzania (and other Eastern African countries), due to competition, measures that would reduce transport costs would also lower transport prices.15 According to the econometric estimates from Teraveninthorn and Raballand (2009), the most effective measures would be improving the conditions of roads and lowering fuel prices (Table 7). Reducing the border crossing time and informal payments (non-tariff measures) would also have a positive although less significant effect. While these results cannot be blindly applied to the domestic routes for trading grains in Tanzania, they are informative about approaches to reduce transport charges, which would benefit farmers and consumers in East Africa.

15 Reducing transport costs in other regions would not necessarily result in reducing transport prices. In Western and Central Africa, for example, regulatory constraints limit competition in the trucking industry and thus limit the pass-through of lower transport costs (caused by lower fuel prices, for examples) to the end users of transportation services.

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Table 7: Measures and outcomes for reducing transport prices along the main transport corridors in East Africa

MeasuresDecrease in

transport costs (%)

Increase in sales

(%)

Decrease in transport price (%)

Rehabilitation of corridor from fair to good -15 NS -7/-1020% reduction in border-crossing time -1/-2 +2/+3 -2/-320% reduction of fuel price -12 NS -6/-820% reduction of informal payment -0.3 NS +/0

Source: Teravaninthorn and Raballand (2009).

41. Policy recommendations for reducing transport costs need to distinguish between public investments (“hardware”) and policy measures (“software”). On the investment side, improving the quality of roads is a powerful intervention to reduce transport costs and consequently transport prices for end users. Roads in poor condition result in higher variable costs of operation because they (i) reduce fuel efficiency; (ii) damage vehicles, leading to high maintenance and higher operation costs; (iii) reduce life of tires; (iv) reduce vehicle utilization because of lower speeds; and (v) reduce life of the truck. The focus needs to be on improving the conditions of local roads, given that the most marketing costs per km are incurred on these roads and it is also where the economic returns from road improvements will be the largest.

42. Many studies show the high return of investing in rural roads. Investments in rural transport infrastructure have a higher internal rate of return than comparable investments in secondary roads or main roads as long these roads are at least in fair condition (Fan et al., 2004; Fan et al., 2006). The statistically significant correlation between the quality of feeder roads (distance to all-season roads) and agricultural productivity is also found in Malawi in the recent Country Economic Memorandum (Lall et al., 2009). But in Tanzania for years, the public expenditure for rural roads has been neglected. The most spending has gone to tarmac/national roads, and as a result, about half of these roads are paved, at the expense of rural and regional roads (Table 8). Only 1.4 percent of district and feeder roads and 3.6 percent of regional roads are reported to be paved in Tanzania.

Table 8: Road network in Tanzania, kmRoad Class Paved Unpaved Total % PavedTrunk Roads 5,123 5,478 10,601 48.0Regional Roads 702 18,544 19,246 3.6District, Urban, Feeder Roads 790 55,835 56,625 1.4Total 6,615 79,857 86,472 7.65

Source: TANROADS June 2009.

43. According to Figure 10, in 2009/10 only 10 percent of development and 35 percent of recurrent expenditure of the road budget is planned to be used for regional and rural roads (WorldBank, 2009). Dominance of the Ministry of Infrastructure Development (MOID) in providing recurrent finance for road maintenance signifies continuing focus on trunk roads.

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Figure 10: Development and recurrent FY2009/10 budget for road subsector (TZS’000)

Source: Approved budget for 09/10 (Budget book).

44. With the available budget, only 21,175 km of local roads of the total 33,108 km will be subject to routine maintenance in FY2009/10. Similarly, only 1,858 km will be subject to periodic maintenance of the expected 6,500 km – assuming that the whole network of 33,108 km is assumed to be maintained over a 5-year cycle. According to the sub-sector report on local roads presented at the 2009 JISR, the FY2009/10 approved budget only meets 74 percent of the maintenance needs of the local roads not including the accumulated backlog.

45. Although the focus on rural roads has been recently increased, through launching of foreign-funded Village Travel and Transport Programme and National Rural Transport Programme (Denmark and Norway and the EC among key donors), the levels of funding remain insufficient as to achieve the goal of providing basic rural access.16 Table 10 below compares the Local Government Transport Programme framework budget with disbursements by the key stakeholders.

Table 9: LGTP Funding compared with LGTP Framework Budget, TZS millionFunding Source FY

2007/08FY 2008/09

FY 2009/10

FY 2010/11 FY 2011/12

Total

Disbursed Disbursed Budget Projection ProjectionGoT 38.4 2,930.4 9,908.4 10,040.0 10,040.0 32,957.2Roads Fund 6,532.8 6,498.5 8,450.0 8,900.0 9,300.0 36,681.3NORAD 8,006.5 1,863.5 0.0 0.0 0.0 9,870.0DANIDA 3,008.6 4957.6 8,018.0 2,500.0 0.0 18,502.2EC 0.0 0.0 10,200.0 10,200.0 10,200.0 30,600.0Total Committed Funding

17,586.4 16,268.0 36,576.4 31,640.0 29,540.0 131,610.7

LGTP Framework Budget

16,575.0 27,750.0 40,250.0 48,925.0 52,350.0 185,850.0

Financial Gap 1,011.3 -11,482.0 -3,673.6 -17,285.0 -22,810.0 -54,239.3

Source: Tanzania Road PER (2009).

46. Investments in roads require proper planning and implementation. Connectivity of rural roads with national roads is especially critical. Providing inner roads closest to markets

16 Local Government Transport Programme has been under implementation since FY2007/08 with support of Norway, Denmark, and the European Commission.

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is a necessary pre-condition for the provision of outer roads, more distant from markets, to be effective. To enhance agriculture-led economic growth, public investment in transport infrastructure should be prioritizing toward connecting rural areas that offer a combination of rich natural and economic potential and high population densities to major deficit markets, both domestic and across the borders.17 So, it goes mainly about district and rural (local) roads that connect primary and secondary markets with national roads.

47. Investments in rural roads should also be accompanied by the measures to promote load consolidation. Investment in infrastructure is economically justifiable as long as consolidated production enables reasonable agglomeration to justify economically transportation per truck. A load consolidation may be promoted through (i) producer groups; (ii) on-farm and village storage; (iii) wholesale markets.18 Larger loads would also reduce the costs of loading and unloading along the supply chains.

48. Investments in rural roads will also need to be complemented by developing transport services. As large truckers are unlikely to find many rural routes profitable, alternate modes of transportation need to be identified. It may be useful to consider options for promoting appropriate intermediate means of transport for connecting rural areas to at least primary markets. Carts, bicycles, and other intermediate forms of transportation are very important in rural areas. Thus investments in rural roads should be adjusted to service the most cost-efficient transportation modes, which may not be trucks. In many rural areas, the size of agricultural surplus would not justify heavy truck traffic.

49. Improved feeder roads will reduce fuel and other variable costs but additional “software” actions are also necessary to reduce fuel costs. This is very critical as future oil prices are likely to be much higher than the current one, in spite of the temporary relief brought by the global financial crisis. Fuel accounts for 58 percent of total transport costs, thus reducing fuel costs would significantly reduce transport cost and prices. Transporters should be encouraged to use trucks with lower operating costs, for example through changing truck import duties to encourage the import of newer trucks.19 This would lead to the modernization of the trucking fleet and higher fuel efficiency. Efficiency of Dar es Salaam port needs to be improved to reduce the costs of importing fuel. Reducing fuel taxes might also be an option, but review of these taxes should take into account that budget revenues from fuel taxes are usually used to maintain roads thus adjusting fuel taxes downwards would need to be offset by other budget revenues to sustain road maintenance.

50. Finally, investments in railroads would also reduce transport prices through increased competition with trucking companies. With the rising global fuel prices mentioned above, these investments will become more profitable but it goes beyond the scope of this study to determine a break-even point for fuel prices to make rail investments attractive for connecting markets in East Africa. Increased competition from rail services benefits transport users through comparable or lower transport costs. In the parts of Africa without rail services such as in Western Africa, transport prices are very high (Teravaninthorn and Raballand, 2009). But where rail services exist as in Central and Eastern Africa, road prices are lower as they are established by taking into account rail prices, especially for heavy and bulky commodities.

17 The World Bank report “Increasing Roods Investment Efficiency in Rural Areas”, draft from August 2009, sets up a framework for effective and efficient public expenditure in rural roads to enhance agricultural growth.

18 See the World Bank report “Increasing Roods Investment Efficiency in Rural Areas”, draft from August 2009, on the link between transport costs and loads.

19 It seems that Tanzania has recently exempted the import of new trucks from import taxes.

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Export ban

51. Another potential area for reducing costs of trading maize is the export ban. The recent food security crisis in the region and in the world has renewed the fear that hunger and food insecurity will return. Tanzania was among several countries that introduced the export ban to keep maize for domestic consumption. While this measure might be justifiable in the short run, its longer-term effects are negative. Tanzania would need to lift this ban in the near future to minimize these negative costs.

52. What has been the impact of export ban? An accurate measurement of its impact is difficult because the export ban is not the same as export tax that can be converted into ad valorem tariff, and because the Tanzanian borders are porous, keeping cross-border trade flowing irrespective of the ban (as reported in the regular EAGC reports). So, two indirect approaches are utilized. First, price margins between Nairobi and several markets in Tanzania are compared in the period with and without bans. Second, regional price transmissions are estimated with and without Tanzania. Both approaches demonstrate the negative impact of ban on prices, especially in the southern Highlands.

53. Price margins are found to coincide with export ban. Figure 11 shows the margins between Nairobi (major destination of exports) and three markets in Tanzania: Dar es Salaam, Arusha, and Mbeya (the periods with ban are shaded). The visual evidence suggests that periods with bans are often associated with higher margins. This is supported by the evidence in Table 10. Based on T-tests of differences in means there were statistically significant (at the 5 percent level) differences between average margins in phases with and without export bans for Nairobi-Dar es Salaam and Nairobi-Mbeya. As expected, these differences were such that margins were higher in phases with export bans than in phases without. For Nairobi-Arusha, however, the increase in margins in phases with export bans was not large enough to be statistically significant.

54. Thus, the impact of the export ban differs across regions. It has a significant effect on the prices of maize from the southern highlands but little effect on that from the northern highlands. The reasons are that the cross-border trade between the northern region and Kenya is reported to take place whether the ban is in effect or not, and because of significant price incentives for northern highlands’ farmers and traders to export to Kenya.20

20 The Eastern Africa Grain Council, www.ratin.net.

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Figure 11: Price margins and Tanzanian export bans (ban in effect in the shaded periods)

-150

-100

-50

0

50

100

150

200

2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Pric

e (U

SD /

t)

Nairobi - Dar es Salaam Nairobi - Arusha Nairobi - Mbeya

Source: www.ratin.net.

Table 10: Comparison of average margins in phases with and without Tanzanian export bans

MarginAverage margin Value of the

t-statistics p-value ConclusionNo ban Ban

Nairobi - Dar es Salaam 46.5 59.8 -2.60 0.006 IncreaseNairobi – Arusha 52.1 60.5 -1.59 0.059 No increase*Nairobi – Mbeya 81.5 97.2 -1.89 0.031 Increase

Note: * No significant increase at the 5% level, but significant at the 5.9% level.Source: World Bank (2009).

55. The second reason to believe of the negative impact of export ban is the lower price integration of Tanzania with the regional market in East Africa. As the geographic distance between two markets increases, price transmission between them can be expected to weaken, all other things being equal. Transfer and transaction costs will generally increase with distance, making arbitrage more costly and increasing the average time required to complete a transaction. Of course, the quality of the infrastructure joining two markets can modify the effect of distance on price transmission; distant markets that are linked by good infrastructure (e.g. a paved highway) might display a higher degree of price transmission than nearby markets that are linked by a dirt road.

56. Ceteris paribus, international borders can also be expected to weaken price transmission. Crossing a border usually involves formal (and sometimes informal) costs and delays. The effect of a border will depend on the nature of customs procedures, whether border stations are well staffed, whether procedures are transparent and automated, and, where informal trade is prevalent, whether there are high costs of evading border controls. Finally, along with general distance and border effects there may also be country effects that result when price transmission within or with a particular country is stronger or weaker than in its neighbours. Country effects could be caused by differences in the quality of physical infrastructure or the institutions that govern or influence trade (e.g. the quality of roads, contract enforcement, etc.).

57. Distance matters for price transmission for the East African maize market but also the cross-border with Tanzania does. Table 12 presents the results of regressing the combined adjustment parameters for the 39 market pairs in the region on distance, distance squared, a dummy variable that equals 1 whenever the markets in the pair are separated by a border to

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Tanzania, and a dummy that equals 1 whenever Nairobi is a member of the market pair. The results demonstrate that the impact of distance on combined rates of adjustment is non-linear, with combined rates of adjustment falling at a declining rate as distance increases. While the combined rate of adjustment for direct neighbours is estimated to equal 54.2 percent, it falls by 22.9 percent to 31.3 percent for markets that are separated by 500 km, and by an additional 5.4 percent to 25.9 percent for markets that are separated by 1,000 km. That combined rates of adjustment (i.e. the speed of price transmission) should fall at first rapidly but then progressively slower with increasing distance between markets is plausible since not all costs of trade will be variable with distance, and fixed cost components per unit of distance will fall as the distance increases.

Table 12: The impact of distance and border effects on combined rates of adjustment: regression results (dependent variable is the combined rate of adjustment)

Variable Coefficient Standard error t-statistic p-valueConstant 54.20 8.49 6.38 0.000Distance (100km) -6.33 2.75 -2.29 0.028(Distance)² 0.35 0.19 1.85 0.073DNairobi 30.55 5.87 5.21 0.000DBorderToTanzania -26.45 8.67 -3.05 0.004n = 39 R² = 0.500 Adj.R² = 0.441

Source: World Bank (2009).

58. Table 12 also points to a significant positive ‘Nairobi effect’ on price transmission, and a significant negative effect of border crossings that involve Tanzania. All other things being equal, the combined rate of adjustment is approximately 30.6 percent higher if Nairobi is a member of the market pair in question. Hence, the combined rate of adjustment between Nairobi and a market that is located 100 km away will equal almost 80 percent meaning that deviations from the long-run equilibrium relationship between prices on these markets will be almost completed corrected within two months.

59. But if trade between the markets in question involves crossing a border with Tanzania, the combined rate of adjustment falls by roughly 26.5 percent. This explains in particular why price transmission between Nairobi and relatively distant markets in Uganda is relatively strong (e.g. the combined rate of adjustment between Nairobi and Lira, which are located 730 km apart, is 59 percent – the regression predicts 57 percent), while price transmission between Nairobi and closer markets in Tanzania is comparatively weak (e.g. the combined rate of adjustment between Nairobi and Arusha, at a distance of only about 250 km, is 37 percent – the regression predicts 44 percent).

60. Conclusions : While the objectives of the ban, i.e. limited cross-border trade and lower maize prices in Tanzania, have been partially achieved, it has brought negative social impacts. The export ban involves price control, which reduces potential output, causing losses to the economy as a whole. Lower output prices result in lower incentives for farmers to produce greater output, which hurts net buyers since maize output is kept below its potential. Tanzania is actually the country with the highest production potential in the region to feed the surrounding neighbours that have structural food deficits. But the export ban simply means lower exports, slower agricultural growth, and lost opportunities for farmers and consumers.

61. Export bans and other trade restrictions also negatively affect the private sector development and investments. Survey evidence from private traders and potential investors in Africa during the 1990s showed that fear of policy reversal was a major impediment to investment (WorldBank, 2006). Building private-public partnerships in increasing grain

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storage capacity is especially promising but efforts to support the private-sector are unlikely to go far until incentives are provided for the private sector to operate.

62. Finally, with the increased food price volatility in East Africa and in world markets, a predictable and undistorted policy environment becomes increasingly critical. Several risk management instruments show considerable promise in managing food price risks, including facilitation of private storage (warehouse receipt systems), futures and options markets, and weather-indexed insurance (WorldBank, 2006). Yet transparent and predictable agricultural trading policy is a pre-condition for these alternatives to be used in Tanzania.

Input voucher scheme

63. Some negative impact of export ban and high marketing costs are being moderated by the recently introduced input voucher scheme. This scheme has many merits but its benefits cannot compensate high transaction costs. Even more important, the benefits of the input voucher scheme will not sustain at the current marketing costs.

64. The new input promotion program in Tanzania is better than the old ones. Over the years, the government has sought in various ways to improve farmers’ access to inputs, especially chemical fertilizer and improved seed, and with this reduce production costs and enhance agricultural productivity. Its last program, which operated from 2003 to 2007, subsidized transport costs to enable input suppliers to deliver an agreed quantity of fertilizer to farmers at fixed prices. The subsidized fertilizer was sold to farmers by designated agro-dealers in the districts. Several lessons emerged from the transport subsidy program. Inputs did not reach many smallholders. Agro-dealers dealers lacked skill in trading agricultural inputs and the financial capacity to buy the allocated inputs, and it was easy for them to sell the subsidized inputs at the market price.

65. Given the low efficiency of this public expenditure and the limited benefits to smallholders, in 2008 the government of Tanzania decided to design the National Agricultural Input Voucher Scheme (NAIVS). Tanzania had compelling reasons to initiate the scheme. Vouchers have proven more effective and less apt to distort the market than methods used commonly in the past, such as direct subsidies and centralized control of fertilizer procurement and distribution. The benefits of a “smart” subsidy include increased farmer output, stronger private input markets, and increased adoption of new technologies by poor farmers. These benefits ultimately result in sustained poverty reduction, but achieving these benefits depends greatly on how the subsidy program is designed and implemented.

66. In 2009, the NAIVS was scaled up with the support of the World Bank. Over the next three years, input vouchers are projected to benefit a cumulative total of 2.5 million maize and rice farmers.21 The vouchers allow farmers to obtain a predetermined package of inputs from private suppliers. Each package provides sufficient inputs for half of a hectare of land at subsidized prices.22 The subsidy consists of 50 percent of the prevailing market price for the input package. Each eligible farmer will receive vouchers for a maximum of three years.23

67. The provision of input vouchers has been complemented by critical activities such as a public awareness campaign, support to private agro-dealers to improve their capacity to deliver inputs, support to strengthen the national seed systems, the development and

21 The total number of agricultural/rural households in Tanzania is estimated to be about 5.5 million in 2009.

22 Vouchers are designed as securities and thus protected by special features to avoid fraud.

23 One farmer per household is eligible for the voucher scheme. Thus the terms “farmers,” “beneficiaries,” and “households” are used interchangeably in this document.

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dissemination of integrated soil fertility management practices (including conservation farming), and rigorous M&E.

68. Among the new entrants to the scheme, the two groups given highest priority for receiving vouchers are (i) resource-poor farmers who have not used fertilizer in the last five years and (ii) female-headed households. Farmers who have not used fertilizer for five years are targeted to minimize the displacement of commercial fertilizer sales. In line with the government’s broader strategy to assist resource-poor farmers, the voucher scheme supports longer-term development objectives by promoting the adoption and efficient use of these critical productivity-enhancing inputs.

69. What is NAIVS likely to achieve? As it is designed, the program would intensify food production in areas with high agro-ecological potential for producing maize and rice, two of the major staples grown and consumed in Tanzania. It is also well-positioned, if well implemented, to reduce costs of fertilizers as private agro-dealers increase their outreach, settle down closer to farmers and build trustful relationships with their new customers.

70. Yet, the longer-term sustainability of NAIVS largely depends on whether input prices decrease and/or output prices increase to permit profitable production without subsidy. It simply means that if marketing costs remain at current high level, the benefits of any technology promotion scheme would not be lasting. This again calls for increased attention of the government to the infrastructure problems in the rural areas to spur lasting agricultural growth in the country.

6. ReferencesDiao, X., S. Fan, D. Headey, M. Johnson, A. Nin Pratt and B. Yu (2008). Accelerating Africa's Food Production in Response to Rising Food Prices: Impacts and Requisite Actions. Washington, D.C., IFPRI Discussion Paper 00825.

Dorosh, P., H. Wang and L. You (2008). Crop Production and Road Connectivity in Sub-Saharan Africa: A Spatial Analysis. Washington, D.C., IFPRI and the World Bank Spatial and Local Development Team, FEU, SDN.

Fan, S., D. Nyange and X. Zhang (2006). Uganda and Tanzania: Pro-poor Public Investment., ESCAPAPA and IFPRI.

Fan, S., J. Zhang and N. Rao (2004). Public Expenditure, Growth, and Poverty Reduction in Rural Uganda. Washington, D.C., IFPRI DSDG Discussion Paper 4.

Kilima, F., C. C., P. Kenkel and E. Mbiha (2008). "Impacts of Market Reform on Spatial Volatility of Maize Prices in Tanzania." Journal of Agricultural Economics, Vol. 59 (2): 257-270.

Lall, S., H. Wang and T. Munthali (2009). Malawi: Country Economic Memorandum: Seizing Opportunities for Growth through Trade. Volume II: Infrastructure Investment in Malawi: Insights from Spatial Analysis. Washington, D.C., World Bank, PREM1, Africa Region.

NBS (2008). "Household Budget Survey 2007 Analytical Report’, < http://www.nbs.go.tz/HBS/Main_Report2007.htm>. "

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RATIN (2005). Regional Agricultural Trade Intelligence Network ‘Food Trade Bulletin for East Africa’, 1st September 2005, Issue 26.

Santorum, A. and A. Tibaijuka (1991). Trading Responses to Food Market Liberalization in Tanzania, edited version of a paper presented at a workshop on ‘Market Liberalization and Private Sector Response in Eastern and Southern Africa’, Harare, Zimbabwe, 2-4 October 1991.

Skarstein, R. (2005). " Economic Liberalization and Smallholder Productivity in Tanzania. From Promised Success to Real Failure, 1985-1998." Journal of Agrarian Change, Vol. 5 (3): 334-362(29).

Teravaninthorn, S. and G. Raballand (2009). Transport Prices and Costs in Africa: A Review of the Main Trade Corridors. Washington, D.C., The World Bank.

Van Campenhout, B. (2007). "Modelling Trends in Food Market Integration: Method and an Application to Tanzanian Maize Markets." Food Policy 32: 112-127.

WorldBank (2006). Managing Food Price Risks and Instability in an Environment of Market Liberalization. Washington, D. C., Agriculture and Rural Development Department.

WorldBank (2008). Non-Tariff Measures on Goods Trade in the East Africa Community. Washington, D.C., World Bank Report No. 45708-AFR, PRM2-AFCRI.

WorldBank (2009). East Africa: A Study of the Regional Maize Market and Marketing Costs. AFTAR Report 49831, Washington, D.C.

WorldBank (2009). Tanzania Road Public Expenditure Review. Draft Report Dar es Salaam.

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