AIMVC Tanzania Study i

ANALYZING THE INTEGRATION OF MICRO AND SMALL ENTERPRISES INTO VALUE CHAINS EVIDENCE FROM TANZANIAN HORTICULTURE

October 2008

This publication was produced by The Louis Berger Group, Inc., Harvard School of Public Health, DevTech and ACDI/VOCA for the United States Agency for International Development under the Accelerated Microenterprise Advancement Project Business Development Services Knowledge and Practice Task Order.

AIMVC Tanzania Study ii

ANALYZING THE INTEGRATION OF MICRO AND SMALL ENTERPRISES INTO VALUE CHAINS (AIMVC) EVIDENCE FROM TANZANIAN HORTICULTURE

OCTOBER 2008

David E. Bloom, Harvard School of Public Health

Elizabeth Dunn, ACDI-VOCA

Shehnaz Atcha, Louis Berger Group, Inc.

Victoria Fan, Harvard School of Public Health

Vikas Choudhary, Louis Berger Group, Inc.

Patrick Salyer, Harvard School of Public Health

Shand Evans, Louis Berger Group, Inc.

Banu Akin, ACDI/VOCA

Phillip Church, DevTech International

DISCLAIMER

The authors’ views expressed in this publication do not necessarily reflect the view of the United States Agency for International Development or the United States Government.

AIMVC Tanzania Study iii

ACKNOWLEDGEMENTS

The authors wish to acknowledge helpful comments received from Jennefer Sebstadt, Charlie Bell (Louis Berger Group), Jeanne Downing (USAID), David Nyange (USAID), Larry Rosenberg (Harvard University), David Nevin (DAI) and Donald Snodgrass.

We also appreciate the survey assistance provided by Research International Kenya, and the Tanzania enumeration team lead by Dr. Melissa Baker and Mr. Michael Muindi. We would also like to recognize the field leadership of Ms. Gudila Ngalo and Ms. Joyce Mataso and their excellent team of enumerators.

Accelerated Microenterprise Advancement Project (AMAP) is a four-year contracting facility that USAID/Washington and Missions can use to acquire technical services to design, implement, or evaluate micro-enterprise development, which is an important tool for economic growth and poverty alleviation.

For more information on AMAP and related publications, please visit www.microLINKS.org.

Accelerated Microenterprise Advancement Project

Contract Number: GEG-I-00-02-00015-00

Task Order: Knowledge and Practice

Contractor: Louis Berger Group, Inc.

Contact: Shehnaz Atcha, Program Manager

Tel: (202) 303-2717

E-mail: satcha@louisberger.com

AIMVC Tanzania 1

ANALYZING THE INTEGRATION OF MICRO- AND SMALL ENTERPRISES INTO VALUE CHAINS: EVIDENCE FROM TANZANIAN HORTICULTURE

ABSTRACT

The research project on “Analyzing the Integration of Micro- and Small Enterprises into Value Chains (AIMVC)” seeks to promote economic growth with poverty reduction by increasing opportunities for beneficial participation of micro- and small enterprises (MSEs) in competitive value chains. AIMVC research studies seek to enhance understanding of the systemic constraints faced by MSEs in value chains and the ability of firm owners to respond to the dynamics of value chain governance, risk, profits, information, transaction costs, and social capital. The research hypotheses focus on vertical and horizontal relationships, the power dynamics embedded in these relationships, MSE upgrading opportunities or constraints, and the benefits MSEs are able to capture as a result of upgrading investments.

The purpose of this paper is to examine the factors which increase the opportunities for smallholder farmers to participate in competitive value chains. HVEV is a market sector that has been growing, and inversely the participation of smallholder farmers have been decreasing as SPS standards and other quality and quantity controls have increased. The demand may decrease yet with the global economic downturn – making it increasingly difficult for small and medium enterprises to participate even as Tanzania increases investment in infrastructure bottlenecks. However, global export is only one market channel for HVEV – other channels also provide good opportunities for smallholder farmers such as domestic retail and institutional buyers. Since crop income makes up the largest portion of household income across all respondents, it is important that smallholder farmers have access to information and opportunities as market opportunities and end buyer preferences shift. The findings of this research show that there are a number of factors which greatly improve the competitiveness of smallholder farmers and it is possible to refine and target interventions based on the opportunities available in the domestic and global market for high value vegetable crops.

Smallholder Farms in Arusha

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CONTENTS

CONTENTS ________________________________________________________________________ 2 

FIGURES ___________________________________________________________________________ 4 

GRAPHS AND TABLES _______________________________________________________________ 5 

ABBREVIATIONS AND ACRONYMS _____________________________________________________ 7 

EXECUTIVE SUMMARY _______________________________________________________________ 8 

1. INTRODUCTION __________________________________________________________________ 9 1.1 AMAP Research Agenda on Value Chain ________________________________________________ 9 

1.11 Literature Review _____________________________________________________________ 10 Links between Value Chains and Upgrading _______________________________________________ 12 1.2 AIMVC Tanzania Study ___________________________________________________________ 14 

1.21 AIMVC Hypotheses ___________________________________________________________ 14 1.22 Research Methods ____________________________________________________________ 15 

1.3 Outline of Paper ________________________________________________________________ 17 

2. THE HIGH-VALUE EXPORT VEGETABLE (HVEV) VALUE CHAIN ________________________ 19 2.1 HVEV Global Markets and Value Chain Governance ______________________________________ 20 2.2 Kenya’s HVEV Industry ___________________________________________________________ 22 2.3 Tanzania’s Emerging HVEV Industry _________________________________________________ 23 

2.31 Tanzania HVEV Value Chain Map __________________________________________________ 26 2.32 Business Enabling Environment ___________________________________________________ 28 2.33 Vertical Linkages _____________________________________________________________ 29 2.34 Horizontal Linkages ___________________________________________________________ 30 2.35 Supporting Markets ___________________________________________________________ 31 

3. SMALLHOLDER VEGETABLE PRODUCERS IN NORTHERN TANZANIA _____________________ 32 3.1 Overview of Study Population and Geography ___________________________________________ 32 3.2 Overview of Three Study Producer Associations __________________________________________ 33 3.3 Overview of Study Smallholder Vegetable Producers ______________________________________ 33 

4. LINKING SMALLHOLDERS TO MARKETS: VERTICAL RELATIONSHIPS _____________________ 35 4.1 Overview of Smallholder Relationships with Top Buyers ____________________________________ 35 

4.11 Market Channels, Buyers and Producer Preferences ____________________________________ 36 4.2 Factors of Trust in Vertical Relationships _______________________________________________ 40 4.3 Vertical Relationships and Transaction Costs ____________________________________________ 41 4.4 Factors of Commitment Failure _____________________________________________________ 43 4.5 Summary of Vertical Relationships ___________________________________________________ 44 

5. LINKING SMALLHOLDERS TO SMALLHOLDERS: HORIZONTAL RELATIONSHIPS ____________ 46 5.1 Respondent and Producer Association Characteristics _____________________________________ 46 5.3 Factors Associated with Trust in Horizontal Relationships __________________________________ 50 5.4 Factors in Reducing Transaction Costs ________________________________________________ 51 

5.41 Social Capital and Reducing Transaction Costs ________________________________________ 52 5.5 Summary of Horizontal Relationships _________________________________________________ 53 

6. UPGRADING BY SMALLHOLDERS ___________________________________________________ 55 6.1 Types of Upgrading ______________________________________________________________ 55 

6.11 Process Upgrading ____________________________________________________________ 56 6.12 Product Upgrading ____________________________________________________________ 57 

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6.13 Functional Upgrading __________________________________________________________ 60 6.2 Risk-Adjusted Returns and Upgrading _________________________________________________ 61 

6.21 Estimating Risk-Adjusted Returns _________________________________________________ 62 6.22 Linkages between Firms ________________________________________________________ 65 6.24 Information and Learning _______________________________________________________ 67 

6.3 Summary of Upgrading by Smallholders _______________________________________________ 67 

7. RELEVANCE OF FINDINGS FOR IMPLEMENTATION AND RESEARCH ______________________ 69 

BIBLIOGRAPHY ____________________________________________________________________ 71 

ANNEX A: DEFINITIONS ____________________________________________________________ 78 A.1 General Value Chain Definitions _____________________________________________________ 78 A.2 Definitions Specific to Tanzania and Horticulture ________________________________________ 80 

ANNEX B: TESTS FOR INTERNAL CONSISTENCY AND REPRESENTATIVENESS _______________ 82 B.1 Background ____________________________________________________________________ 82 B.2 Results and Discussion ____________________________________________________________ 82 

B.21 Equilibrium Distribution ________________________________________________________ 82 2.22 Population Estimates ___________________________________________________________ 84 

B.3 Conclusions ____________________________________________________________________ 86 

ANNEX C: RESEARCH HYPOTHESES __________________________________________________ 87 

Questionnaire Separate Document Instruction Manual for Field Surveyors Separate Document Research Protocol Separate Document

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FIGURES

FIGURE 1 Enumerator with Farmers in Arusha___________________________________ 18

FIGURE 2 Tanzania High Value Export Vegetable Value Chain Map________________ 27

FIGURE 3 Vegetable Vendor in Arusha Market___________________________________ 31

FIGURE 4 Land Cover Map of Tanzania________________________________________ 32

FIGURE 5 Workers at GEL Packing House_______________________________________ 36

FIGURE 6 Arusha Market Vegetable Survey______________________________________ 50

FIGURE 7 MIM Coordinators at Member Farm__________________________________ 54

FIGURE 8 Natural Channel Irrigation, Arusha____________________________________ 68

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GRAPHS AND TABLES

Table 1. Respondents (%) by Producer Association and Region (N=1,928) ................................. 17 

Table 2. Sub‐Saharan African Fresh Fruit and Vegetable exports to the UK, 2006 ...................... 22 

Table 3. Comparison of the Fresh Vegetable Sector, 2004/2005 ................................................. 24 

Graph 1. Countries to which Tanzania Exports High Value Vegetables (Tonnes) ........................ 25 

Graph 2.  Percentage of Income by Source and Membership (w/out top 1%)* .......................... 34 

Table 4. Respondents by Most Favorable Market Channel and Producer Association (%) (N=1,927) ...................................................................................................................................... 37 

Graph 3. Market Channel Providing Largest Sales by Producer Association (%) (N=1,927) ........ 38 

Table 5. Respondents by Reason for Most Favorable Market Channel and Producer Association (%) (N=1,928) ................................................................................................................................ 39 

Graph 4. Total Number of Types of Services Provided by Various Buyers and Other Sources to Respondent by Producer Association (N=1,609) .......................................................................... 39 

Table 6. Respondents Who Agree to Statements on Top Buyer, By Producer Association (%) (N=1,612) ...................................................................................................................................... 40 

Table 7. Mean (SD) Years of Relationship with Top Buyer by Respondents Who Agree to Statements on Top Buyer (N=1,611) ............................................................................................ 41 

Graph 5. Respondents Whose Buyers Who have Failed to Meet Agreement by Producer Association (%) (N=1,609) ............................................................................................................. 43 

Table 8. Respondents Who Always Make Agreements in Advance about Sales to Top Buyer, By Producer Association (N=1,612) (%) ............................................................................................. 44 

Table 9. Basic Characteristics of Respondents by Producer Association (N=1,928) .................... 47 

Table 10. Reported “Yes” Association Characteristics by Producer Association (N=725) ............ 49 

Table 11. Reported “Yes” to Member Activity by Producer Association (N=725) ....................... 49 

Table 12. Respondents Who Agree with Statements on Trust of Members (%) by Producer Association (N=725) ...................................................................................................................... 51 

Table 13. Mean (SD) Hours Spent in Group Activities during Month by Producer Association (N=725) ......................................................................................................................................... 52 

Table 14. Respondents who Maintained Records By Producer Association (N=1,928) (%) ......... 56 

Table 15. Respondents by Irrigation Method and by Producer Association (N=1,928) ............... 57 

Table 16. Mean (SD) Acres of Farmland by Irrigation Method and Producer Association (N=1,928) ...................................................................................................................................... 57 

Table 17. Number of HVEV* Product Types Planted in Past 5 Years (N=1,928) ........................... 58 

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Table 18. Respondents (%) by GAP Certification and Producer Association (N=1,928) ............... 59 

Table 19. Mean (SD) Months to Receive Certification by Producer Association (N=1,928) ........ 59 

Table 20. Respondents (%) by Organic Certification and Producer Association (N=1,928) ......... 60 

Table 21A. Crude and Adjusted* Odds Ratio of Associations between Price Premium and Various Measures of Upgrading ................................................................................................... 62 

Table 21B. Crude and Adjusted* Odds Ratio of Associations between Credible Assurance of Future Transactions and Various Measures of Upgrading ........................................................... 63 

Table 21C. Crude and Adjusted Associations between Highest Household Income Quintile and Various Measures of Upgrading ................................................................................................... 64 

Table 21D. Crude and Adjusted* Associations between Having Received any Cash Advances and Various Measures of Upgrading ................................................................................................... 64 

Table 22A. Crude and Adjusted* Associations between Acquired Social Capital and Various Measures of Upgrading ................................................................................................................. 65 

Table 22B. Crude and Adjusted* associations between Relational and Captive Governance and Various Measures of Upgrading ................................................................................................... 66 

Table 22C. Crude and Adjusted* Associations between Awareness of Successful Upgrading and Various Measures of Upgrading ................................................................................................... 67 

Graph B1.  Equilibrium Distribution for Respondent Gender ....................................................... 83 

Graph B2. Equilibrium Distribution for Distance from Farm to Nearest Trading Center ............. 84 

Table B1. Population and Sample Proportions for respondent’s gender ..................................... 84 

Table B2. Population and Sample Proportions for distance from farm to nearest town ............ 85 

AIMVC Tanzania 7

ABBREVIATIONS AND ACRONYMS

AIMVC Analysis of the Integration of MSEs in Value Chains

AMAP Accelerated Microenterprise Advancement Project

BDS Business Development Services

BRC British Retail Consortium

EPA United States Environmental Protection Agency

EU European Union

EUROPGAP Euro-Retailer Produce Working Group’s Good Agricultural Practices

FDA United States Food and Drug Administration

GEL Gomba Estates, Ltd.

GLOBALGAP Formerly known as EUROPGAP

Lishe Trust Usambara Lishe Trust (also known as ULT)

MIM Market Intermediary Management

MSE Micro- and Small Enterprise

RDS Respondent Driven Sampling

SPS Sanitary and Phyto-sanitary Standards

ULU Ubiri Lushoto Union

USAID United States Agency for International Development

AIMVC Tanzania 8

EXECUTIVE SUMMARY

Tanzania is the second country to be studied under the AIMVC project. With per-capita income of $340 and 36% of its population of 39.5 million living below the national poverty line, it is one of the poorest countries in the world.1 Approximately 28 million Tanzanians (5 million households) live in rural areas. The economy depends heavily on agriculture, which accounts for almost half of GDP, provides 85% of exports, and employs 80% of the work force.2 Topography and climatic conditions, however, limit cultivated crops to only 5% (5.1 million ha) of the surface area of Tanzania.3 Plantation crops such as coffee and cotton make up the majority of agricultural production. Of rural households, only one in five is likely to be growing vegetables with the purpose of selling them. Rural households engaged in the sale of cash crops are less likely to be poor than those engaged in growing food for their own consumption.4

Tanzania is the second country to be studied under the AIMVC project; the first study took place in Guatemala. In this study of Tanzanian smallholder vegetable producers, we describe how these producers are currently linked into the high-value export vegetable (HVEV) value chain as well as their current and potential role in this value chain to better enable economic growth with poverty reduction. The most lucrative cash crops are those grown for the export market. The Tanzanian value chain for high-value export vegetables (HVEV) is relatively small and undeveloped. There are few producers, a tiny domestic market, and only two exporters. On the other hand, there are approximately one million smallholders engaged in commercial vegetable production and many of these are located in the cooler highland areas, which are most suitable for growing HVEV. In addition, in the appropriate agro-climatic region there is ample arable land and water for irrigation. This value chain has been identified in several recent donor studies as having high potential for development and economic growth with poverty reduction. However, in spite of many environmental advantages, Tanzania remains uncompetitive in the HVEV market.

Data for this report were gathered through qualitative and quantitative surveys, which took place in the northern Tanzanian highlands during 2006 - 2007. In this paper we report the findings on a set of research hypotheses related to: (1) Mechanisms by which smallholder producers are linked to their end markets (vertical linkages) and factors affecting the strength of these vertical linkages. (2) Mechanisms by which smallholder producers collaborate with each other (horizontal linkages) and factors affecting the strength of these horizontal linkages. (3) Mechanisms through which MSEs upgrade and factors affecting smallholders’ willingness and ability to upgrade. This paper explores the factors associated with developing strong vertical and horizontal linkages as well as product, process, and functional upgrading.

1 Tanzania at a Glance, World Bank 2007 2 Tanzania DTIS Report, p. 5 3 Government of Tanzania http://www.tanzania.go.tz/lands.html 4 Tanzania DTIS Report, p. 5

AIMVC Tanzania 9

1. INTRODUCTION

The global value chain is a relatively new conceptual and analytic construct that has its origin in transnational production networks that proliferated during the 1990s following the processes of globalization and liberalization. The 21st century’s expansion of multinational buyers and the buying power of global end markets linked suppliers of goods and commodities in developing countries to consumers in developed countries through sophisticated coordination mechanisms. New conceptual frameworks were needed to analyze both the mechanisms and the governance of these relationships. Value chain frameworks borrowed ideas from number of fields, including: input-output linkages in economic theory, supply chain analysis, sub-sector analysis, cluster analysis, and corporate strategy. Value chain analysis, in many ways, could be seen as a continuation of work done under sub-sector analysis with additional focus on understanding inter-firm co-operation, power relationships between firms, distribution of benefits across the chain, and mechanisms of diffusion of learning and innovation.

Value chain analysis is currently seen as an important analytic and implementation tool used by researchers and practitioners to understand economic development in the context of globalization. Value chain analysis takes a systemic approach, adopts a global perspective, and focuses on the horizontal and vertical linkages between economic actors, thereby providing a nuanced understanding of entire industries, which in some countries may be critical for spurring economic development. The Global Value Chain Initiative describes a value chain as “the full range of activities that are required to bring a product from its conception, through its design, its sourced raw materials and intermediate inputs, its marketing, its distribution and its support to the final consumer”.5 This industry-centric view of economic globalization highlights the linkages between economic actors and across geographic space.

The research project, “Analyzing the Integration of Micro- and Small Enterprises into Value Chains” (AIMVC), is a component of USAID’s Accelerated Microenterprise Advancement Project (AMAP) initiative and augments the industry-centric value chain perspective by examining the integration of the micro- and small enterprises that constitute the initial links of many global value chains. By focusing on the micro- and small enterprise perspective in the value chain, USAID has integrated issues of poverty and equity.

1.1 AMAP Research Agenda on Value Chain

One of the goals of USAID’s AMAP initiative is to generate economic growth while reducing poverty. To ensure that the poor are not left out of economic growth strategies, AMAP focuses on linking micro- and small enterprises (MSEs) into sustainable global, regional and local markets. USAID’s value chain approach has two objectives: (1) improving the competitiveness of value chains with large numbers of small firms and farmers; and (2) enhancing the extent to which small firms and farmers benefit from this participation through market-oriented interventions. The value chain perspective with its focus on dynamic nature of marketplace can help researchers and policymakers understand mechanisms through which MSEs can move into more productive value chains or position themselves more effectively in the value chain. AMAP looks at the global value chain both from a lead buyer perspective (as captured by the DAI-Promar study “Export Markets for Tanzanian High Value Export Vegetables”) and from the perspective of the MSE producer as presented in this paper.

5 Global Value Chain Initiative (http://www.globalvaluechains.org/)

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As a component of the AMAP initiative, the research project on “Analyzing the Integration of MSEs into Value Chains” (AIMVC) seeks to promote economic growth with poverty reduction by understanding opportunities for beneficial participation of MSEs in competitive value chains. The AIMVC research hypotheses (presented in Section 1.2.1), when tested empirically, may enhance understanding of the systemic constraints faced by MSEs in value chains and the ability of firm owners to respond to the dynamics of value chain governance, risk, profits, information, transaction costs, and social capital. In particular, the research hypotheses focus on the vertical and horizontal relationships of MSEs as well as the opportunities, constraints, and benefits of MSEs to upgrade. These hypotheses provide a framework for empirical research of the AIMVC research project and are continually refined through field and desk studies. The research project has studied micro- and small enterprises in Guatemala and Tanzania.

1.11 Literature Review

Value Chains and MSE Performance

The value chain describes the full range of activities required to create a product or provide a service6. A simple value chain might involve design, production, marketing, and distribution, as well as a range of activities within each one of those categories. The value chain concept was introduced in the 1960s by analysts mapping a development path for mineral-exporting economies.7 In the 1990s, value chain analysis became widely used, thanks to literary contributions by Michael Porter and Womack and Jones.8 At its most basic level, a value chain is a construct to collect data.9 More recent developments in the literature have used value chains as an analytical tool to identify opportunities for and constraints to industry growth.10

Value chain analysis moves away from individual actors, and considers interaction between firms as well as external factors. Value chain analysis considers the actors themselves (firms), linkages among firms, supporting markets, end markets, and the enabling environment (international, national, and local). Committing value chain relationships to paper in the form of a value chain map provides a baseline of information about the industry and its functioning.11 The value chain map, as the name implies, expands outward from firms to include the chains in which firms participate and highlights the linkages and contractual relationships among them.12 All the activities in the value chain work together to add value.13 Identifying activities which produce the highest returns is key to understanding how to compete in the increasingly competitive and global marketplace.14

A primary focus of value chain analysis is on the relationships of various firms in the value chain, and their impact on competition.15 Specifically, the literature demonstrates that links between firms, in the form of coordination and cooperation, reduce transaction costs, increase the ability of the chain to meet

6 Kaplinsky, 2000 7 Girvan, 1981 8 Porter, 1985; Porter, 1990; Womack, 1996 9 Kaplinsky, 2000 10 Kaplinsky, 2000; USAID, 2005 11 Kaplinsky, 2001 12 UNIDO, 2002 13 Guiliani, 2005 14 Ibid. 15 Humphrey, 2002

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and adjust to consumer demands, and affect the distribution of learning and benefits within the chain.16 When functioning efficiently and effectively, these elements of chain dynamics can potentially improve the competitiveness of participating firms, and as a result, the entire value chain.17 The value chain literature describes two main types of linkages: 1) horizontal linkages – relationships among firms at the same level of the value chain; and 2) vertical linkages – relationships between buyers and their suppliers. These linkages provide a means for MSEs to actively participate in, and benefit from, an increasingly global market.18

Secondary factors have been demonstrated to significantly influence coordination and cooperation and thus value chain competitiveness. The literature finds that trust is central to sustaining cooperation19 and reducing transaction costs20. Also, long-term competitiveness is associated with long-term relationships, which have been shown in part to depend in part on trust.21 This demonstrates the cyclical and reinforcing benefits of trust, cooperation to value chain competitiveness and reduced transaction costs.

Upgrading and MSE Performance

Upgrading is a process through which those who run enterprises acquire new knowledge, often through relationships with other firms in the value chain or with firms in supporting markets, and increase “value added” of their offerings.22 Upgrading is essential to value chain competitiveness,23 as it ensures that the chain is able to meet the consumer’s changing preferences for lower price, improved quality, and, in the case of the horticulture sector, improved safety. Five ways have been singled out in the literature through which enterprises have achieved upgrading: 1) process upgrading: increasing efficiency (more output for same level of inputs); 2) product upgrading: improving product quality; 3) functional upgrading: moving to a new, higher value-added level in the value chain; 4) channel upgrading: selling into a new market channel within the value chain; and 5) chain upgrading: moving to a new value chain.24 Since some of these forms of upgrading can be inter-related, it is not unusual for firms to undertake more than one type of upgrading, either simultaneously or in sequence.25 The forms of upgrading have been suggested to be inter-related through a hierarchal chain, where a firm begins process upgrading, and gains progressively more technical knowledge and skills, working its way up to chain upgrading.26 Therefore the existence of one form of upgrading could signal the increase in likelihood of having another form of upgrading, or undertaking another form of upgrading in the future

Benefits from upgrading on MSE performance are well documented. It has been theorized that upgrading leads to higher returns for MSEs due to offerings which are more desired by consumers and

16 Dyer, 1998; Galizzi, 1999; Goldmark, 2005; Humphrey, 2001; Morris, 2004 17 Dyer, 1998 18 Guiliani, 2005; Humphrey, 2003; Humphrey, 2002 #49; Schmitz, 2004; USAID, 2005 19 Galizzi, 1999; Morris, 2004 20 Galizzi, 1999; Morris, 2004 21 Galizzi, 1999; Morris, 2004 22 Dunn, 2006 23 Ernst, 2004 24 Humphrey, 2000 25 Dunn, 2006 26 Gereffi, 1999; Kaplinsky, 200; Kaplinsky, 2001

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thus have increased value add, as well as increases in value chain growth and competitiveness.27 In addition, upgrading results in gaining a more secure and steady income source, as well as providing knowledge and capacity which will allow firms to remain flexible in changing market and competitive environments.28

The literature suggests that a firm’s response to upgrading opportunities is determined upon making a calculated decision based on information related to several different criteria. Ultimately, firms consider the level of profits they expect to receive from upgrading (incorporating their expected returns and risks). Often, MSE owners will not know the exact value of future profits, and must make decisions about upgrading opportunities on the basis of risk-adjusted returns. MSE owners take into account a number of economic and non-economic considerations when assessing risk-adjusted returns.29 Common criteria most firms consider include profits, risks, sustainability, and the household economic portfolio.30 It is the availability of this type of information (or lack thereof) which often determines a firm’s choice to upgrade.

In particular, access to information on standards has become an important factor affecting upgrading opportunities among MSEs. Firms have been facing a growing demand for standard certifications which are designed to control quality, safety, and environmental impacts of production. Demands for standard certifications have been suggested to have a disproportionate impact on MSEs.31 Small firms are overwhelmed with the fixed costs of compliance auditing which can often be very high. Also, the total number of standards is growing so rapidly that many cannot keep up.32 In order for firms to participate in process upgrading opportunities, they must have constant access to information related to standards and the means to obtain certification.

Links between Value Chains and Upgrading

Value chain relationships can play a decisive role in a firm’s ability to upgrade, and sometimes influence a firm’s decision to upgrade.33 Value chain linkages are potential sources of learning, technical assistance, and efficiencies, all factors which can help facilitate MSE upgrading.34 Further, linkages provide what the literature defines as “collective efficiency”, or competitive advantages from local external economies and joint action with firms operating both vertically and horizontally.35

Horizontal linkages can encourage upgrading by providing learning opportunities and production efficiencies. The literature draws upon network theory and transaction cost analysis.36 Firms operating individually offer few advantages to buyers other than lower prices due to competitive pressures. If firms work together through cooperatives, associations, producer groups, or other structures they are

27 Dunn, 2006 28 Ibid. 29 Dunn, 2006; Keeney, 1979; Yoon, 1995; 30 Dunn, 2006 31 Kaplinsky, 2001 32 Kaplinsky, 2001 33 Caspari, 2003; Humphrey, 2000; Kaplinsky, 2000; Kaplinsky, 2001; McCormick, 1999; Rabellotti, 1998; Schmitz, 1998; Schmitz, 2000 34 Goldmark, 2005; Humphrey, 2001; Morris, 2004 35 Nadvi, 1999; Schmitz, 1995 36 Hakansson, 1993; Williamson, 1979; Williamson, 1985; Williamson, 1993

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often able to benefit from synergistic collaboration, resulting in increased capacity and decreased transaction costs.37 For example, producer groups arise in an attempt to eliminate the role of the intermediary. In that sense, they offer producers the chance to engage in functional upgrading and earn higher revenues. Producer groups might also be formed as a way to lower the costs of inputs, marketing, and business services. Horticulture producers often band together during labor-intensive periods of planting, cultivating, and harvesting to assist each other in their crop management on a shared labor basis. This type of labor sharing arrangement may evolve into more formal cooperative output marketing and input purchasing arrangements, with the goal of increasing marketing power to obtain better prices. These efficiencies also encourage those higher up in the value chain to include MSEs into their networks, resulting in chain upgrading.

Vertical linkages are often the primary mechanism through which MSEs obtain information about upgrade opportunities, and access the knowledge and capital to fulfill these opportunities. This has been characterized by backward linkages (from buyer to seller). Sometimes the buyer will present the MSE with “market prerequisites” (e.g., policy, upgrading, financing, and technology) that MSEs do not know about or are not equipped to provide for themselves.38 This happens because the competitiveness of individual firms is linked to the competitiveness of the entire value chain, therefore buyers sometimes have a financial interest in the ability of their suppliers to meet the quality, price, and safety demands placed on them. MSEs are constrained in their decisions to make the investments necessary to keep up with the demands placed on them in the public sector. Given this market failure (i.e., the fact that credit is not adequately available to MSEs) and the need to obtain consistent supplies of high-quality, low-priced products, buyers might do well to provide some form of assistance.39 Ultimately, the knowledge, training, and capital that lead firms might provide a key catalyst for upgrading.

Governance structures characterizing vertical linkages between buyer and producers may uniquely impact MSE upgrading opportunities. Governance expresses the way in which some firms in a value chain set and enforce the parameters under which other firms in the chain operate. The most recent literature on governance and upgrading has analyzed the implications of the full typology of governance (market, modular, relational, captive, hierarchy) in terms of opportunities for firm-level upgrading in developing countries.40 The discussion of the links between governance and upgrading has placed particular emphasis on process, product, and functional upgrading. Captive relationships are generally assumed to provide the strongest support for process and product upgrading, because buyers have a material interest in improving supplier capability. In captive relationships, buyers can be both very demanding and very supportive in assisting suppliers’ efforts to improve products and processes. On the other hand, buyers in captive relationships seek to maintain control over the design and marketing functions, thus seeking to discourage functional upgrading on the part of their suppliers.41 Similarly, buyers in a relational system have incentives to support process and product upgrading among their existing suppliers, since there are high costs associated with switching to new suppliers and developing efficient communication mechanisms. By contrast, market relationships are assumed to be neutral with respect to upgrading; they neither support nor block it.

37 Humphrey, 1995; Nadvi, 1999; Rabellotti, 1997; Schmitz, 1995 38 USAID, 2005 39 Gereffi, 1994; Goldmark, 2005; Humphrey, 2001 40 Humphrey, 2002; Schmitz, 2006 41 Guiliani, 2005; Schmitz, 2006

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1.2 AIMVC Tanzania Study

Tanzania, with per-capita income of $340 and 36% of its population living below the national poverty line, is one of the poorest countries in the world.42 The economy depends heavily on agriculture, which accounts for almost half of GDP, provides 85% of exports, and employs 80% of the work force.43 Cereal crop production currently dominates the agriculture landscape. However, vegetable cultivation is expanding, and while the majority of vegetable production is for household consumption, twenty percent of rural households are engaged in vegetable production for the purpose of selling them.44 High-value export vegetables (specialty, exotic, organic, ‘Fair Trade’, and convenience-packed vegetables for which some consumers are willing to pay a premium) are currently a very small share of aggregate vegetable production in Tanzania. The development community in Tanzania has evinced a lot of interest in this value chain because of the higher return it provides to the producers, its tremendous growth potential, and smallholders’ engagement in high-value export vegetable (HVEV) production. The HVEV market requires little mechanized input and a high level of labor, which offers a competitive advantage for smallholder farms. The HVEV market may provide an opportunity for both economic expansion in the agricultural sector as well as poverty reduction, particularly among the one million rural households in Tanzania currently producing vegetables commercially.

Tanzania is the second country to be studied under the AIMVC project.45 The purpose of this report is to describe how Tanzanian smallholder vegetable producers are currently linked into the high-value export vegetable (HVEV) value chain and to improve our understanding of the current and potential role of smallholder producers in this value chain to better enable economic growth with poverty reduction. Data for this report were gathered through qualitative and quantitative studies that took place in the northern Tanzanian highlands in 2006 – 2007.46 The focus of this paper is to report the findings on three sets of AIMVC research hypotheses related to factors leading to: (1) vertical linkages between smallholder producers and end markets; (2) horizontal linkages among smallholder producers; (3) upgrading by MSEs.

1.21 AIMVC Hypotheses

The “Analyzing the Integration of MSEs into Value Chains (AIMVC)” research seeks to promote economic growth with poverty reduction by increasing opportunities for beneficial participation of MSEs in competitive value chains. USAID’s approach to value chains has two objectives: (1) improving the competitiveness of value chains with large numbers of small firms and farmers; and (2) enhancing the extent to which small firms and farmers benefit from this participation through market-oriented interventions. The AIMVC hypotheses presented below are designed to enhance our understanding of the systemic constraints faced by MSEs in value chains and the ability of firm owners to respond to the systemic interactions of value chain governance, risk, profits, information, transaction costs, and social capital. AIMVC research hypotheses focus on vertical and horizontal relationships, the power dynamics embedded in these relationships, MSE upgrading opportunities or constraints and the benefits MSEs are

42 Tanzania at a Glance, World Bank 2007 43 Tanzania DTIS Report, p. 5. 44 World Trade Organization 2005, Vol. 1 p. 4 45 USAID 2007, Integrating Micro and Small Enterprises into Value Chains: Evidence from Guatemalan Horticulture and Handicrafts, www.microlinks.org/aimvc 46 Detailed information on the questionnaires and research protocol are available in microReport #72 AIMVC: Tanzania Research Protocol.

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able to capture as a result of upgrading investments. These hypotheses provide a framework for the AIMVC research agenda and are continually refined through field and desk studies.

The purpose of testing these hypotheses is to generate information on the factors for improving the effectiveness of interventions focused on value chain development. The first three hypotheses (1-3) highlight leverage points for enhancing vertical cooperation and coordination, focus on understanding the power dynamics in these vertically linked firms, and identify barriers to MSEs’ access to information and other resources needed to effectively compete in value chains. These hypotheses should shed light on how to create win-win relationships between MSEs, intermediaries, and lead firms that improve value chain competitiveness and MSE benefits. The next three (4-6) hypotheses underscore factors affecting horizontal cooperation and coordination in order to improve the effectiveness of MSE producer groups and/or organizations. While firms higher up the chain may also cooperate horizontally, this research is only focused at the producer level. The following three (7-9) hypotheses aim to improve our understanding of the incentives, disincentives, and systemic constraints to MSE upgrading. Some of these constraints are transaction based and others are more systemic.

1. Vertical Relationships 1. Risk in vertical relationships can be reduced by strengthening value chain governance. 2. Trust in vertical relationships can be increased by improving information. 3. Lead firms will be more willing to form vertical relationships with MSEs if the transaction costs

can be reduced. 2. Horizontal Relationships

4. MSE owners will be more willing to form horizontal relationships if the transaction costs can be reduced.

5. Trust in horizontal relationships can be increased through organizational innovation and improvements in human capital.

6. Social capital plays an important role in influencing horizontal relationships between MSEs. 3. Firm-Level Upgrading by MSEs

7. MSE owners base their upgrading decisions on their assessments of the risk-adjusted returns to upgrading.

8. Upgrading can be encouraged by strengthening the linkages between firms. 9. Lack of information is a critical barrier to upgrading.

1.22 Research Methods

This report was designed to study the factors associated with upgrading and participation in high-value export markets. Following on the findings of the qualitative assessment, three distinct producer associations were identified for the quantitative survey: (Market Intermediary Management (MIM) which was established by the private sector for export to global markets with strong control over production and quality; Usambara Lishe Trust, which was established by an international donor to participate in high value domestic markets and group coordination, and; Ubiri Lushoto Union (ULU), which was established by a loose collection of local producers and minimal governance. The three organizations and non-member sample represent a range of distinct horizontal and vertical governance structures in which smallholder farmers can participate. (Further information on the associations is found in Section 3.2).

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Qualitative Assessment – An initial qualitative assessment of the value chain was undertaken in December of 2005. The primary purpose of the activity was to develop a detailed understanding of all the actors and functions in the chain and the factors and conditions affecting them within the context of the HVEV value chain in Tanzania. The study team collected information through document review and qualitative field methods, including: individual interviews of value chain participants (farmers, buyers, retailers, distributors, exporters, input suppliers, NGOs, etc) and experts; group interviews of smallholder vegetable producers; and direct observations of wet markets, supermarkets, packing houses, and smallholder farms.

During the field work, the following high-value vegetables with similar agro-climatic requirements and known export potential were emphasized by the field research team: snow peas, baby carrots, patti pan squashes, zucchini, sugar snap peas, baby corn, broccoli, french green beans, baby leeks, and cauliflower.

Quantitative Survey – The second component of the study was a quantitative survey and analysis undertaken in 2006 - 2007. The primary aim of the survey was to collect data to test the AIMVC hypotheses on vertical and horizontal linkages of MSEs and MSE upgrading (also listed in Section 1.2.1 and in Annex 3).

The questionnaire consisted of information on enterprise characteristics, marketing practices, contracting, the flow of information and services between firms, producer association activities and leadership, trust between firms, social capital, transaction costs, upgrading knowledge and practices, household income, and demographic information. The producer questionnaire is available as a separate document from the Microlinks/AIMVC web page (www.microlinks.org/aimvc).

Survey data were collected from smallholder commercial vegetable producers, including those who grow HVEV and those who do not. HVEV vegetables, such as sugar snap peas and baby corn, are not typically grown in Tanzania, farmers growing HVEV vegetables are most likely linked to a vegetable exporter linked in to global end markets. The survey sampled allowed the test for differences between groups which are connected to the global value chain through HVEV production and those who were not.

The prospective respondents were owners or principal decision makers at the farm level in this value chain. Respondents were from two areas of the Northern Highlands of Tanzania (Arusha-Moshi and Lushoto). In each region, two types of people, “members” and “non-members,” were surveyed depending on their membership in a producer association. A great deal of funding is directed at the development of associations and producer groups; the sampling of members and non-members allows the test of differences between these two groups. The member sample was randomly selected from existing membership lists, which enumerate the total number of members. The non-member sub-samples were selected using a respondent-driven sampling (RDS) approach, from which the total number of non-members is not known.

In the Arusha-Moshi area, “members” are those currently affiliated with MIM, which includes membership in one of six sub-groups (Kimnyaki, Midawe, Enaboishu, Machame 1, Machame 2, Lyamungo), while in the Lushoto area “members” are those affiliated with ULU or Lishe Trust. In the Arusha-Moshi area, there are an estimated 706 farmers in total who are members of producer

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associations, while in Lushoto there are an estimated 521 farmers in total who are members of producer associations.47

RDS is a relatively new sampling method that utilizes a form of chain-referral sampling useful for surveying hard-to-reach populations. Unlike other chain referral sampling methods, RDS has the potential to lead to a sample with known statistical properties. This potential has been acknowledged in the literature on the study of hidden populations, such as injection drug users, and the application of RDS continues to grow. RDS is essentially a hybrid of (a) chain-referral network sampling (also known as “snowball sampling”) according to which an initial set of respondents is surveyed and then used to identify peers who can subsequently be located and surveyed in a next wave of interviews, and so on, and (b) a statistical model that adjusts for the non-randomness of the process generating the sample. The non-randomness is inherently associated with the choice of initial seeds and the selectivity associated with the referrals generated by the initial seeds. A detailed description of the RDS methodology is provided in Appendix 9.2.

A total of 1,970 smallholder vegetable farmers were interviewed. Forty-two respondents, however, were eliminated due to incomplete data, illegibility, or errors occurring in the data entry process, leaving a total of 1,928 respondents for data analysis (Table 1).

Table 1. Respondents (%) by Producer Association and Region (N=1,928) Region MIM Member Lishe Trust

Member ULU Member Non-Member Total Sample

Arusha-Moshi 367 (39.4) - - 564 (60.6) 931 (100.0) Lushoto - 184 (18.5) 214 (21.5) 599 (60.0) 997 (100.0)

Note: Members were randomly selected from existing membership lists. Non-members were selected using respondent-driven sampling (RDS).

A variety of statistical methods were used to analyze data, the compilation of descriptive statistics, bivariate tests, and linear and logistic multivariate regressions. To test associations between binary dependent variables of interest and categorical independent variables, stratified analysis was applied to examine odds ratios. When the dependent variable was continuous, analysis of variance was applied.

1.3 Outline of Paper

Section 2 provides a brief synopsis of the HVEV industry, including a description of the end markets in the EU, the nature of global quality and sanitary and phyto-sanitary standards (SPS), and their influence on developing country producers. After a brief discussion of Kenya’s HVEV industry, the rest of the section focuses on Tanzania’s HVEV chain, including an overview of end markets, the business and enabling environment, vertical and horizontal linkages and supporting markets. Section 3 follows with a brief overview of the culture, political economy and physical environment of the study region and descriptions of the producer associations studied, and a description of smallholder vegetable producers included in the study.

Section 4 analyzes the vertical relationships between smallholder farmers and their buyers and explores contract and commitment failure, issues of trust, and transaction costs. Section 5 describes the

47 MicroReport #72: AIMVC Tanzania Research Protocol (URL: xxx), p. 16.

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horizontal relationships among smallholders in producer associations. This section analyzes transaction costs and alternative group structures, factors improving trust in horizontal relationships, and the role of social capital in horizontal relationships among smallholder farmers. Section 6 focuses on process, product, functional upgrading of smallholder farmers, risk-adjusted return of upgrading, and the role of linkages with other firms, information exchange, and learning in upgrading. This paper concludes with a brief description of factors affecting smallholder farmers and an overview of the main findings of the study and its implications for future research and practice.

Figure 1 Enumerator with Farmers in Arusha

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2. THE HIGH-VALUE EXPORT VEGETABLE (HVEV) VALUE CHAIN

High-value export vegetables consumption is currently small in comparison to overall vegetable consumption, but rapidly growing worldwide with increasing urbanization. HVEV includes specialty, exotic, organic, ‘Fair Trade’, and convenience-packed vegetables for which some consumers might be willing to pay a premium – as much as 35% in some cases. 48 Growing these vegetables is in many cases a labor-intensive process and is well suited to smallholder farms rather than large, mechanized agro-enterprises. USAID’s (2007:18) export market study reports, “Leading U.K. importers of these products estimate that the market for these specialty baby vegetable products is growing at around four percent annually. This is compared to less than one percent annual growth for the overall vegetable market by volume, meaning that higher-value products are slowly growing their share of the overall vegetable shopping basket.”49 These niche, as well as mainstream, segments of the horticulture market in EU and USA are some of the most lucrative as well as some of the most demanding markets. HVEV producers in developing countries often receive around 11-13 percent of the retail sales value of the UK supermarkets. 50

High-value vegetables fetch much higher prices as exports than what producers can command in their domestic markets. EU and US markets represent significant and attractive opportunities for developing country suppliers; however, stringent compliance requirements of these markets also represent significant barriers to participate in those markets. Suppliers are expected to meet Sanitary and Phytosanitary (SPS) measures to ensure that food consumed by consumers meet certain minimum safety criterion. Also, there are safety and environment requirements which require ‘tracking and tracing’ of the production and supply chain. Moreover, retailer-led standards like EUROPGAP (the European Retailer Protocol for Good Agriculture Practices, now GLOBALGAP) are much more stringent than standards created by Government (Tanzania Bureau of Standards) and international bodies (WHO/FAOs Codex Alimentarius) and are gaining prominence with EU importers. Adoption of GLOBALGAP protocol requires significant investment and know-how by developing countries suppliers and farmers.

Adoption of GLOBALGAP is expensive. It is not surprising, then, that few small farmers are able to participate in this lucrative market without assistance. The investment cost incurred on ensuring compliance to the end market standards acts as a hindrance to developing country suppliers and is leading to consolidation of suppliers in the developing countries. The market for uncertified products in Europe is all but non-existent and all major western European retailers now usually trade only with the suppliers who have achieved GLOBALGAP certification. Based on interviews with Tanzanian producers, UNCTAD (2005) calculated typical costs of GLOBALGAP compliance to along the value chain for farmers and exporters to be $98,690 (set-up cost) and $20,500 in recurring costs.51 In addition to compliance, logistics infrastructure and direct air-freight links also play a significant role in the vegetable export competitiveness of a developing country.

Despite these limitations, the volume and value of vegetables exported from Africa and other developing countries is increasing. In 2005, EU imported 955,000 tons of vegetables worth US$1.3 billion from

48 Export Markets For High-Value Vegetables From Tanzania, p. 10 49 Export Markets For High-Value Vegetables From Tanzania, p. 18 50 Ibid. 51 UNCTAD (2005:35) Costs of Agri-food safety and SPS compliance: United Republic of Tanzania, Mozambique and Guinea: tropical Fruits. UNCTAD; Geneva

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developing countries.52 The value chain structures of different developing countries and their respective enabling environment, which is discussed in the next section in reference to Kenya and Tanzania, play a critical role in determining the fate of vegetable exports and smallholder farmers’ participation in the vegetable exports industry.

The United Kingdom is currently the largest market for Tanzanian high-value vegetables, however; Tanzania lags far behind other African countries, i.e. Kenya, Zambia, and Zimbabwe, in exports to the U.K. Other countries within the European Union may also be potential export partners. Additional marginal markets may also include the Middle East and South Africa. While there is a global growing market for high-value vegetables, Tanzania – in spite of many climatic and location advantages – has failed to become competitive in this market.

2.1 HVEV Global Markets and Value Chain Governance

Since the 1970s, economic growth in horticulture has far exceeded other agricultural commodities. During the 1990s annual growth rates for vegetables surpassed cereals by 200% to 800%.53 The increasing world consumption of horticultural products is driven by rising incomes, urbanization, awareness of health, and changing labor practices. Developments in production practices, postharvest technology, shipping and storage allow for sourcing of materials throughout the world, providing year-round product availability and increased market opportunities. Urbanization and changes in the labor market, including the expanded presence of women in the workforce, amplify the demand for convenience foods (prepared salads, fresh-cut fruits, restaurant food, etc.). Novel and exotic horticultural products that appeal to urban and upscale markets will also play a significant role in future demands of high-value products.54

Over the past twenty years, the traditional wholesale markets for fresh fruits and vegetables in the US and Europe have been supplanted by supermarket retailers who have shortened their supply chain (thereby decreasing costs), while increasing their contact with growers and exporters (thereby ensuring quality and quantity). In other words, they have shifted the governance structure of the value chain, typically from a market to a directed or captive structure. Traditional markets structures in which products flowed through a variety of intermediaries and brokers before arriving at supermarkets and then consumers were often inconvenient and inefficient. The increasing explicit coordination of value chains has led to dynamic changes in sector governance and opportunities for international growers.55

Value chain governance is a fundamental concept for understanding global value chains and refers to how some firms in the value chain set and/or enforce the parameters under which others in the chain operate.56 This is critical to producers because governance can impact market access, the acquisition of production capabilities and the distribution of gains. For example, growers selling directly to

52 Export Markets For High-Value Vegetables From Tanzania, p ?? 53 Rubin, D., Cummings, R., and R. Harwood. 2005. “Agriculture and Natural Resources Management Research Priorities Desktop Review”, 1st draft. USAID, Washington, D.C. http://www.usaid.gov/our_work/agriculture/ag_natural_resources_management6_01_05.pdf 54 UC Davis, Global Horticultural Assessment 2005, pp.11-12. 55 Temu, A.E. and Marwa, N.W. 2007, “Changes in the Governance of Global Value Chains of Fresh Fruit and Vegetables: Opportunities and Challenges for Producers in Sub-Saharan Africa.” Research Paper 12, The South Center, Sokoine University of Agriculture, p. 4. 56 John Humphrey and Hubert Schmitz, Governance in global value chains. IDS Bulletin, Vol. 32, No. 3, 2001.

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supermarkets may have better market access than those who sell through wholesale markets. However, supermarkets may demand very specific standards for quality, quantity and packaging that cannot be met by most small growers, so they are marginalized from the market. Growers favored by the supermarkets (‘lead firms’ in the vegetable sector) may get assistance from the buyers in meeting SPS and GLOBALGAP standards and therefore receive a better price for their produce.

Rationalization of the supply chain has led to consolidation in all areas. Supply chains are often much shorter and a few powerful lead firms now dominate and capture the major share in the international fresh produce sector. Producers, exporters, importers and retailers are more intricately linked and exhibit integrated or hierarchical governance structures. In many instances, smallholder producers are increasingly losing out to larger commercial operations because they cannot make the upgrading investments required to meet the standards and volume of lead firms. For example, in 1992 approximately 75% of Kenyan fruit and vegetable exports were supplied by smallholders.57 By 1998, four of the largest Kenyan exporters were sourcing only 18% of their exports from small farms.58 While few firms are minimizing their risk by creating out grower programs, many large firms are looking at

57 Harris, S. 1992. “Kenyan Horticulture sub-sector survey. Kenya Export Development Support Project, Nairobi. 58 Dolan, C. and Humphrey, J. 2000, “Governance and Trade in Fresh Vegetables: The Impact of the UK Market on the African Horticulture Industry”, Journal of Development Studies 37.2:147-76.

Governance Patterns in Global Value Chains

Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The governance of global value chains,” Review of International Political Economy, vol. 12, no. 1, 2005. http://www.globalvaluechains.org/concepts.html

1. Markets. Value chains governed by markets contain firms and individuals that buy and sell products to one another at a distance with little interaction beyond exchanging goods and services for money. The central governance mechanism is price.

2. Modular. Typically, suppliers in modular value chains make products or provide services to a customer's specifications. Suppliers in modular value chains tend to take full responsibility for process technology and often use generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer-supplier interactions can be very complex.

3. Relational. In this network-style governance pattern we see mutual dependence regulated through reputation, social and spatial proximity, family and ethnic ties, etc. The most obvious examples of such networks are in specific communities, but trust and reputational effects can operate in spatially dispersed networks as well. Since trust and mutual dependence in relational value chains take a long time to build up, and since the effects of spatial and social proximity are, by definition, limited to a relatively small set of co-located firms, the costs of switching to new partners tends to be high.

4. Captive. In this network-style governance pattern, small suppliers tend to be dependent on larger, dominant buyers. Depending on a dominant lead firm raises switching costs for suppliers, which are "captive." Such networks are frequently characterized by a high degree of monitoring and control by the lead firm. The asymmetric power relationships in captive networks force suppliers to link to their customer in ways that are specified by, and often specific to a particular customer.

5. Hierarchy. This governance pattern is characterized by complete vertical integration (i.e. “transactions" take place inside a single firm). The dominant form of governance is managerial control.

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mechanisms of ensuring greater control over supply chain and investing in direct ownership of farms and more integrated operations. Today, smallholder participation in the HVEV market is once again increasing through investments made by KenyaGAP, international donor projects, and the private sector.

All five types of governance relationships are found in the vegetable sector in general in Tanzania. Typically the smallholder farmers in the highlands rely on markets relationships and the intermediaries (delali) who aggregate and transport goods from their area to regional and urban markets in Tanzania and Kenya. The four types of groups chosen for this survey reflect different types of governance patterns occurring in the high-value vegetable sector. For those smallholder farmers not participating in a formal organization the governance pattern is a markets relationship – with little information flowing in either direction regarding product, quality or quantity. The ULU and Lishe Trust Associations are responsive to urban clients, but meet product requirements generally independent of their buyers. The smallholder farmers working with MIM, however, are part of a governance relationship with the export company GEL, where inputs and post-production handling is directed and funded by the buyer.

2.2 Kenya’s HVEV Industry

While Tanzanian exports may have increased considerably since 2000, Tanzania lags well behind other Sub-Saharan African (SSA) countries (Table 2). Imports into the EU from SSA are mainly supplied by Kenya and South Africa, which together account for over 60% of the imported vegetables. In 2003, Tanzania was 13th on the list of SSA suppliers of vegetables to Europe.59 Of the East African exporters to the UK in 2006, Tanzania’s volume of fresh fruit and vegetable exports remained far less than all its neighbors, however Tanzania does have a greater proportion of Small Scale Growers participating in the export market.

Table 2. Sub-Saharan African Fresh Fruit and Vegetable exports to the UK, 2006

Exporting Country Volume (tons) Value (US$) Small Scale Growers

Main Export Crop

Kenya $ 35,984 50,236.638 6.955 Peas and beans Ghana $ 16,535 21,403,200 3,938 Pumpkins, yams Zambia $ 3,796 10,774,400 10 Peas and beans Uganda $ 3,353 4,531,600 14 Okra Tanzania $ 1,323 1,601,600 2,070 Green beans Source: Natural Resources Institute, IIED, 2006, www.agrifoodstandards.net Note: Volume provided in metric tonnes and multiplied by 1.10231131 to get US short tons. Value provided in GBP and multiplied by 1.456 to get US$

The vegetable exports industry in Kenya is more than three decades old and considered a mature industry. Kenya’s export of vegetables has grown in value by 78% since the 1990s and has surpassed coffee exports in terms of value.60 After Morocco (32 percent share), Kenya is the second largest developing country supplier (16 percent share) of vegetables to European Union.61 Ninety-five percent of Kenyan vegetable exports are destined for EU markets, with over 63,000 tons of vegetables exported

59 Tanzania DTIS Report Vol.2, p. 23 60 Dolan, C.S., “The Good Wife”: Struggles over Resources in Kenyan Horticulture Sector. 2001 Journal of Development and Change 33(4):39-70. 61 EU Market Survey 2004: Fresh Fruit and Vegetables, September 2004

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in 2005.62 The UK is the main EU buyer of Kenyan vegetable exports and historical links between the two countries are often cited as one of the reasons behind their trade success; however, a far more significant reason is the ability of Kenyan vegetable industry to successfully meet stringent commercial and technical demands of UK buyers. The national plant inspection service (KEPHIS) in 1997 is seeking recognition by the European Commission as a “competent authority”, meaning that most inspection responsibilities would be delegated to KEPHIS, thereby facilitating the entry of Kenyan exports into the EU.

The governance models in the agricultural sector are more formalize, either relational or captive depending on the product and exporter. Kenyan growers are typically well organized and linked with exporters through large number of out-growers schemes which has encouraged the formal banking sector to provide credit to the vegetable exporters. In many cases, exporters are also assisting its out-growers to meet the GLOBALGAP compliance requirements. Many exporters have also provided credit to smallholder farmers who hold a production contract with the company.

Macroeconomic and political stability set the stage for private-sector investments in enterprises and infrastructure. Private-sector investment, one of the most crucial catalysts for sector growth, started in the 1970s by multinationals like Unilever and Tate & Lyle. The development of trade increased the confidence of local Kenyan entrepreneurs who began making long term investments, and now locally owned businesses, both Kenyan Asians and Kenyan Africans, are major investors in this industry. Investments have included logistics infrastructure for air-freighted perishable exports, supply control, upgrading packing house facilities, traceability systems and food safety assurance systems.

Many export companies have developed excellent relationships with EU importers and have attracted investment through joint ventures in Kenya. They have also attracted foreign direct investment from countries such as Israel, the Netherlands, etc. Owing to relatively higher returns for small farmers from horticulture activities, this sector has also been focus of government development policies establishing sector support entities such as Horticulture Crop Development Authority (HCDA) and Fresh Produce Exporters Association (FPEAK).

2.3 Tanzania’s Emerging HVEV Industry

Agriculture is the leading sector in the economy of Tanzania, accounting for more than 50% of gross domestic product and 60% of its export earnings. Moreover, about 80% of the people in Tanzania, who depend to a large extent on agriculture, livestock and related activities, live in rural areas.63 The agricultural sector is often considered to be the backbone to the national economy and the basis for further economic development. Over the past decade, the agricultural sector in Tanzania has maintained a modest, but steady growth rate of 3% per year. The growth rate of agricultural exports has been around 7 percentage points higher over the past decade than the overall agricultural growth.64 The agricultural export comprises mainly typical commodities like coffee, cotton, tobacco, tea and sisal whereas cashew nuts and pyrethrum are major non-traditional export products. Fruits, vegetables and flowers are considered to be non-traditional or emerging export crops.

62 HCDA: http://www.hcda.or.ke Annual Values, 2005. 63 Tanzania DTIS Report Vol.2. p 1. 64 Ibid, p 2.

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HVEV is a very small portion of the overall vegetables produced in Tanzania, particularly compared with the production area devoted to horticulture in Kenya and Uganda (Table 3). Tomatoes, cabbages and onions comprising 98% of vegetables produced and of the total vegetables produced, less than 2% is exported.65 Smallholder farms supply 90% of the vegetables consumed in the domestic market. For the purpose of this study, HVEV was defined as “specialty, exotic, organic, ‘Fair Trade’, and convenience packed vegetables for which some consumers might be willing to pay a premium.” HVEV in this study encompasses: snow peas, sugar snap peas, French green beans, baby corn, baby carrots, patty pan squashes, baby leeks, broccoli, cauliflower, and zucchini.

Table 3. Comparison of the Fresh Vegetable Sector, 2004/2005Indicator Tanzania Kenya Uganda Ethiopia Zambia Production area (ha) >2000 >250,000 >90,000 >2500 2500 Number of Commercial Export Farms 2 >25,000 30 – 40 8 3 Export Value (million EU) 6 375 8 – 10 10 – 12 25 Source: Partnership for Market Access – The export horticulture in Tanzania, p. 25

In spite of the high potential for vegetable production in many parts of the Tanzania, the sector has developed in only a few regions like Arusha, Kilimanjaro, Tanga, Mbeya and Iringa. These regions have relatively well-developed infrastructure, water supply, agro-climatic conditions and easy market access.

In the 1970s the export of fresh vegetables from Tanzania to Europe started with mainly beans and Asian vegetables for the UK market. The vegetable export increased slowly and reached a total export volume of 600 tons by the mid-1990s (Table 4). However, exports to Europe virtually collapsed soon after in 1998 – 1999 and did not recover until 2000. In 1997, Government of Tanzania enacted the Agriculture and Livestock Policy of 1997 and The Cooperative Development Policy of 1997 which attempted to liberalize the agriculture markets and restructure cooperatives. Reducing government controls and role in different markets was one of the professed goals behind both these policy changes. However, it should be borne in mind that, perhaps, prior to 1997, the government was involved in most of the vegetable export, and export by the private sector was virtually non-existent. After the promulgation of the policies, government organizations stopped performing the export functions and as result, the vegetable export came to a standstill to 6 and 3 tons in 1997 and 1998 respectively.66

Between 2000 and 2002 the export volumes of fresh vegetables increased enormously due to the establishment of two export companies – Gomba Estates Ltd. (GEL) and Serengeti Fresh – from 400 to close to 1000 tons annually. Exports comprise mainly peas (mange-tout or snow peas, sugar snaps etc.) and to a lesser extent beans, Asian vegetables, baby corn, baby carrots, cauliflower, leeks, and shallots. As noted earlier, the most important export destination is the UK followed by The Netherlands and Belgium. Other relevant importing countries of certain products are India and the United Arab Emirates. The vegetable exporters in Tanzania supply mostly directly to retailers (especially UK supermarkets) and wholesalers.67

Transportation is a critical constraint in getting HVEV to the market. The majority of smallholder –farmers who do not belong to an export association – sell their produce to aggregators at the farm gate,

65 Ibid. 66 Tanzania DTIS 2005 67 The export horticulture in Tanzania. p. 10

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or ride the bus or rent space in unrefrigerated trucks to take their produce to the Dar es Salaam or the Nairobi market. They also bring produce to sell back from those markets. The smaller associations use unrefrigerated trucks to take produce to Dar overnight when it is cooler. Horticulture exporters (i.e., GEL, Serengeti Fresh) fly produce out through Kilimanjaro International Airport (KIA) in Arusha. Cold storage and freight facilities are provided through Swissport. Swissport shipped approximately 2,000 tons of produce through KIA in 2005. Up until December 2008 there were severe constraints since only one airline, KLM, flies directly to Europe and there is not enough freight capacity. As of December 2008 a weekly cargo flight to Europe has been established to Belgium by MK Airlines. Produce which previously needed to be sent by refrigerated trucked to Dar or Nairobi for flights to Europe can now leave directly from KIA.

In comparison to Kenya, Tanzania is still in its nascent stage of development in high-value export vegetable industry. In 2005, Tanzania exported 3,016 tons of vegetables to the EU (up from 973 tons in 2002), in comparison with Kenya’s 63,000 tons. In 2005, 23% of Tanzania’s vegetables were exported to Kenya, and in 2006 this share rose to 40%.68 With better infrastructure, cold chain facilities, efficient logistics, and long-established contacts with buyers, Kenyan exporters are able to source vegetables from Tanzania for further exporting to EU. This fact alone demonstrates the significant opportunity for Tanzania to actively participate in HVEV value chain.

Source: Development Alternatives, Inc., l 2007

Despite the clear potential, very little investment has been made in Tanzanian vegetable industry and Tanzania is still largely unknown in the EU fresh produce sector outside the U.K. Tanzania has been unable to develop adequate linkages between farmers and buyers. Lack of adequate infrastructure facilities, lack of cold storage and frequent flights, lengthy bureaucratic customs procedures and lack of exporters have all constrained Tanzania from reaching its potential in vegetable exports.

In addition, particular, taxes on export commodities are roughly 20% of sales prices. Kenya’s agricultural sector, on the other hand, has benefited from many tax concessions and incentives, as well as the

68 Development Alternatives, Inc., 2007

Graph 1. Countries to which Tanzania Exports High Value Vegetables (Tonnes)

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removal of import duties for agricultural equipment introduced by the government in 2005.69 Additionally, local taxes in Tanzania are collected as cess or tax on the bases if volume, which means that per unit taxes are a much higher percentage of total price in low price-years than in high-price years, a punishing constraint in global markets. The Prime Minister’s Office has issued a directive that district cess should not exceed 5%, yet local taxes often exceed that ceiling.

Private-sector participation and investment in the vegetable sector is also limited in Tanzania, Serengeti Fresh Ltd, an independent operation owned by Sunripe Farms based in Nairobi and Gomba Estate Ltd. (which was in operation during the study but has recently gone out of business, although MIM is still functioning) being the notable exceptions. GLOBALGAP certification is a pre-requisite to export to most of the super markets in EU and both Serengeti and GEL support their out growers to obtain the necessary certification. Government and NGOs programs have diverted a great deal of resources towards horticulture development in Tanzania. But due to poor quality of produce, lack of market linkages, and absence of lead firms, only a very small volume of the total vegetable production of Tanzania is eventually exported. Green beans and mangetout (snow peas) are the most significant export items followed to some extent by peas and sweet corn.

2.31 Tanzania HVEV Value Chain Map

The value chain map for Tanzanian high-value export vegetables indicates the four basic levels of the value chain: 1) input supply, 2) production, 3) wholesale, and 4) retail. The value chain consists of two main market channels: 1) the smaller domestic market, and 2) the larger export market, which sends to Kenya, the UK and other EU countries. The vegetables are grown by small, medium, and large (integrated) farmers, with almost all current production taking place in the Arusha-Moshi and Lushoto areas. Firms in the value chain include input suppliers, producers (farmers), farmer associations, intermediaries, brokers, distributors, wet market wholesalers and retailers, hotels, supermarkets, two major exporters, international distributors, international wholesalers, and supermarkets in the EU.

The domestic market for HVEV is extremely small, although the exact value of annual domestic consumption is not known. The Tanzanian population does not generally consume these HVEV, with cauliflower and zucchini being possible exceptions. There is a small domestic demand from expatriate and minority populations (i.e., Indian, Chinese, European) in Dar es Salaam. There is also some demand from the hospitality industry, primarily tourist hotels, and ethnic restaurants.

The domestic market channel includes hotels, supermarkets, and wet market retail outlets, primarily in Dar es Salaam. Most of the vegetables arrive to the Kariakoo wet market and are distributed from there to hotels, supermarkets, or smaller specialty wet markets, such as Kisutu and Kinondoni TX markets. The products may reach the retail level through brokers, regional distributors, and intermediaries. Sometimes, farmers sell directly to supermarkets and hotels through their associations or they sell directly to the retailers in wet markets. Some of the restaurants make special arrangements with producer groups such as Ubiri Lushoto Fruit and Vegetable Cooperative Society (ULU) or Lishe Trust or buy directly from trusted sources at the Dar wet market. The chain length for the domestic market passes through 2-3 levels of intermediaries before reaching the final consumer.

69 African Economic Outlook 2005 – 2006, AfDB/OECD 2006

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Figure 2. Tanzania High Value Export Vegetable Value Chain Map

DISTRIBUTORS

EXPORTERS

NATIONAL: DOMESTIC MARKETS INTERNATIONAL: EXPORT MARKETS

RETAIL

WHOLESALE

PRODUCTION

INPUTS STOCKISTS

INTERMEDIARY or Cooperative Society

WET MARKET INTERMEDIARIES

DISTRIBUTORS

DISTRIBUTORS

WET MARKET RETAIL VENDORS

HOSPITALITY INDUSTRY

SUPERMARKETS & SMALL SHOPS

SUPERMARKETS OUTSIDE TANZANIA

BROKERS

WHOLESALERS

INTERMEDIARIES

Outside

Inside

FARMERS (small, medium, and large)

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In the Arusha and Kilimanjaro regions, the export industry for fresh vegetables consists of two companies: Serengeti Fresh Ltd and GEL. GEL produces the bulk of its export produce on direct order from abroad on its own farm. But due to increasing problems of water supply for irrigation, GEL is pursuing opportunities to source more produce from both large and smallholder outgrowers on the condition that they are certified (GLOBALGAP, BRC etc. depending on country of the ordering party). Moreover, it is actively trying to diversify its marketing channels, opening up trade with wholesalers and retailers in South Africa, Zimbabwe and the Middle East.

The second company, Serengeti Fresh which has been exporting produce to Tanzania since 2000, used to source its produce mainly through an outgrowing scheme; however, in response to the increasing export standards and requirements like certification and traceability, it now only targets outgrowers with a minimum of 50 ha. Since the majority of Tanzania’s 25 million producers have farms only 1- 3 ha in size, only a very small percentage can participate with this outgrowing scheme. However, with the assistance of the Smallholder Horticulture Outgrower Promotion Project (SHOP) members of Lishe Trust and Serengeti Fresh are developing market linkages.70

Both companies have taken up initiatives to involve more small- and medium-scale farmers as a way to increase their export volume and live up to export orders, but they are hampered by the investments that are required to make it work (especially for training, technical assistance and organization of farmers). It is estimated that more than 2600 people are either employed directly at the vegetable farms and pack houses or indirectly employed as contract farmers and/or outgrowers for these two companies. GEL has established its own NGO arm, Market Intermediary Management Limited (MIM), to undertake the training and organization of small-scale farmers.

Current capacity for vegetable processing is very low in the country. A small share of vegetables like beans and peas is frozen or canned for export. The national vegetable market has a low level of stratification as compared to that of a country like Kenya, where rejected export produce is often absorbed by the upper segments of the national market. Kenyan exporters focus on the export market only and need to comply with high export standards from the beginning of the production process. Moreover, exporters in Kenya have many opportunities to source produce from other producers if they cannot fill an order themselves, which is not the case in Tanzania.

2.32 Business Enabling Environment

The residual constructs from the socialist experimentation of Ujamaa villages in 1967 by Julius Nyerere still seeps through the business and enabling environment in Tanzania in the form of village co-operatives, parastatal agencies, community groups and strong government presence in all realms of the economy. With the dismantling of many socialist controls, cooperatives, associations and farmers groups are only just reorganizing and are less structured when compared to countries like Kenya, Uganda or Zambia.71

Generally, Cooperative Societies in the country were run efficiently based on International Cooperatives Principles until 1976 when cooperative unions were dissolved and their functions were taken over by crop marketing parastatals. In 1982, following the poor performance of parastatals, the Government decided to re-establish cooperatives. However, cooperatives lacked member support and control due

70 Baby Vegetables for EU Market Sub Sector Quick Scan Tanzania, March 2008, SME Competitiveness Facility, pg. 11. 71 Export horticulture in Tanzania, p.6.

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to active Government involvement and political interference with their affairs. In 1989 the Government introduced cooperatives reforms to enable the development of member controlled and sustainable cooperatives. The major activities on the reforms included the enactment of the Cooperatives Societies Act of 1991 and its subsequent amendments of 1997; formulation of the Cooperative Development Policy of 1997; and restructuring of Cooperatives Societies to divest non-core functions and enhance efficiency. The bottom line of the reforms was to rebuild community confidence in cooperative associations and empower the cooperative members to be able to run and manage their societies on commercial basis according to their needs and in line with the cooperative principles accepted by International Cooperative Alliance (ICA).72

Tanzania is a member of a larger number of regional and international trade agreements including WTO, all of which have different impact on its agribusiness sector. East African Community (EAC) and South African Development Community (SADC) are two major regional integration schemes and Tanzania is a member of both. Tanzania subscribes to the Cotonou Agreement which links the European Union (EU) and 77 African, Caribbean and Pacific (ACP) states. Tanzania is included in African Growth and Opportunity Act (AGOA) that provides it opportunity to access the vast US markets. Tanzania was a member of Common Market for Eastern and Southern Africa (COMESA) but pulled out of it in 2000. Despite the multiplicity of regional and international trade agreements, however, Tanzania vegetable sector has not been able to leverage them and most of vegetable export is to Tanzania’s traditional trade partners UK, Netherlands, and Kenya.

Additional agents critical to enabling the horticulture sector in Tanzania include: Ministry of Agriculture, Food and Cooperatives which sets policy for the sector and its Plant Health Services which conducts pre-shipment inspections at the Kenya border and Dar es Salaam and Kilimanjaro airports; the Tropical Pesticides Research Institute which regulates and controls pesticides under the MOAFC; Tanzania Official Seed Certification Agency (TOSCA); Board of External Trade, and; the Ministry of Local Governments and Rural Development which holds the mandate for agricultural extension services.

Impeding the development of the market is the dilapidated public infrastructure in Tanzania. Erratic supply of water and electricity hampers the vegetable production while poor condition of road leads to very high level of post harvest losses. The availability of airfreight is also a serious bottleneck to most exporters, with only a single passenger flight operated by KLM coming at Kilimanjaro airport that carries on to Dar es Salaam and then Amsterdam. As far as possible, freight is loaded onto this flight (at times, incoming freight is even unloaded at Kilimanjaro and trucked to Dar es Salaam). In December 2008 an international cargo flight was established to carry flowers, vegetables and fruit from Kilimanjaro directly to Europe – a development which will greatly improve market access for the region.

2.33 Vertical Linkages

The vast majority of Tanzanian farmers (approximately 25 million) are smallholders, with farms 1 to 3 hectares in size resulting in a total of 1,372,185 hectares devoted to smallholder farming. Of these smallholder farmers, only one in five produce vegetables commercially. At the other end of the spectrum are Tanzania’s 970 large-scale farms, which cover an area of 109,939 hectares.73

72 Tanzania Ministry of Agriculture, Food and Cooperatives, http://www.agriculture.go.tz/cooperatives.htm. 73 Tanzania DTIS Report, p. 5.

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Community and cooperative structures often act as benign intermediaries between farmers and consumers. The majority of vegetable farmers are linked to their end clients through a chain of 2 -3 levels of intermediaries before reaching the final consumer in the domestic market. These intermediaries include local aggregators, such as dalali, which pick up goods to transfer to regional and then transfer on or ship directly to national markets, as well as producer groups who aggregate production and collectively ship good to market points and institutions. The international market at the time of surveying, however; is reached only through two export firms, the previously mentioned Serengeti Fresh and GEL, a marked contrast with Kenya with 556 registered exporters.

2.34 Horizontal Linkages

Intermediaries play an important role for smallholder farmers in the vegetable and HVEV value chains in Tanzania. Access to markets, particularly high-value export markets and the wet markets in Dar es Salaam and Nairobi is extremely difficult for most small producers. Roads in the highland areas are rudimentary at best and very few farmers own their own vehicles, and dalali – local intermediaries and brokers – are therefore critical for collecting produce and transferring them to higher value markets. These intermediaries also play a crucial role allowing distant producers to aggregate their production for larger markets. For those that are members, producer groups and local cooperatives can also play an important role in vegetable production through the sharing of field labor, organizing transportation, negotiating sales, and assisting smallholder farmers to achieve collective economies of scale so that they can meet buyer quantity requirements.

In terms of representing the private sector in agricultural policy, two organizations in particular – the Tanzania Horticulture Association and FAIDA MaLi have been essential in creating market links for grower associations and private sector enterprises.

Tanzania Horticulture Association (TAHA)

In the late '80s the export-oriented floriculture industry in Arusha and Kilimanjaro regions organized into the Tanzania Floriculture Association. In early 2005 it changed its name to Tanzania Horticulture Association (TAHA) as vegetable and fruit exporters became members. After running on a limited budget for several years, TAHA received donor support to hire an Executive Officer to carry out the daily management and facilitate the further development of the association. TAHA has a limited membership (13 large-scale companies out of which 11 are flower farms) with differing levels of influence in the organization. The association is making progress to form a collective and strengthen its institutional capacity and the Executive Officer has been able to position the association as a leading voice in national export issues. TAHA has recently been instrumental in the establishment of cargo flights from KIA to Europe.

FAIDA MaLi

The FAIDA Market Link Company (FAIDA MaLi) in Arusha is a not-for-profit company with the mission of empowering rural households in the northern parts of Tanzania through improving their access to markets and building up their economic capacities. The core of its activities is to promote business opportunities in rural areas. FAIDA MaLi plays a facilitating role in the setting up of market linkages between traders or exporters on the one hand and farmers' or producers’ organizations on the other hand with mutual benefits through outgrower programs or contract farming. In addition, it offers a variety of business related training and consultancy services.

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2.35 Supporting Markets

The agricultural sector in Tanzania has been experiencing a withdrawal of support services while the demand for services has been increasing, both in quantity and quality. The national agricultural extension system has been decentralized to the local authorities and affiliated institutions. However, this decentralization measure was not accompanied with the transfer of sufficient funds and resulted in a significant decrease provision of extension services to farmers and other rural households. The extension system tends to focus on national food self-sufficiency and agricultural productivity and is based on the traditional model of transferring technology from experts to farmers. Post-harvest losses can still account for 40% of production. Market-oriented production is hardly taken into account in this system. Large-scale producers, agribusinesses and trading companies have entered into providing extension services to their contract farmers and outgrowers.

With few companies in horticulture export and low production volumes, there is not enough critical mass to trigger the development of a support sector of related companies and service providers (like suppliers of inputs, technology and packaging material, transport, marketing, financial administration, laboratories and training). Tanzanian horticulture industry depends to a large extent on clustered support structures of neighboring Kenya as well as The Netherlands. Additionally, due to relatively low total export volumes, all horticultural produce from Tanzania is checked for sanitary and phytosanitary issues upon arrival in the EU, which is a disadvantage (in cost and time) as compared to countries which produce is checked through sampling only.

In short, a large set of interlocking weaknesses forms a bottleneck that prevents firms in the sector from achieving economies of scale. These weaknesses include a lack of access to quality inputs, poor collection and disbursement of market information, absence of a coherent policy framework, low availability of airfreight, inadequate supporting institutions and businesses, inconsistent pesticide registration, lack of qualified extension workers to undertake farm inspections, 100% examination of all products for SPS standards upon arrival at the importing country, and a lack of skilled middle managers in agricultural enterprises.

Figure 3 Vegetable Vendor in Arusha Market

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3. SMALLHOLDER VEGETABLE PRODUCERS IN NORTHERN TANZANIA

This section presents a brief agricultural, economic, and demographic description of the two regions surveyed, Arusha-Moshi and Lushoto. It describes the historical formation and current organization of three producer associations: MIM, ULU and Lishe Trust. Using descriptive statistics from the quantitative survey data, a general snapshot of smallholder commercial vegetable-producing households, its demographics, economic activities, alternative crops, access to information and communications technologies, technical challenges, and the implications of HVEV as a new product (output) is also presented.

3.1 Overview of Study Population and Geography

Tanzania is the largest of the East African nations just south of the equator. In the northeast of Tanzania, the survey site, is a mountainous region that includes Mt. Meru (14,979 ft/4,566 m) and Mount Kilimanjaro (19,340 ft./5,895 m), the latter being the highest point in Africa. Population distribution in Tanzania is extremely uneven. Density varies from 1 person per sq. km. (3 per sq. mi.) in arid regions to 51 per sq. km. (133 per sq. mi.) in the mainland's well-watered highlands to 134 per square kilometer (347 per sq. mi.) on the archipelago of Zanzibar. More than 80% of the population of Tanzania is rural.

According to the 2002 Household Census, Arusha has an urban population of over 270,500, making it the largest urban area in the northern part of Tanzania. Moshi has an urban population of over 143,800. Arusha is an important way station for the safari

and tourism sector, while Moshi also serves as a station for Kilimanjaro climbers. Lushoto is a much smaller urban area with a population of just over 23,300. All of these areas are surrounded by densely cultivated area with thousands of smallholder farms and dozens of large plantations.

The Arusha-Moshi and Lushoto areas covered in the survey lie in the Northern Highlands region of Tanzania. The areas surveyed are in areas suitable for rainfed agriculture and survey sites were at altitudes between 3,000 and 4,500 feet. These are ideal areas for growing a variety of crops, including HVEVs. The farm areas of the region are in continuous cultivation, and have been so for hundreds of

Source: FAO, www.fao.org/countryprofiles/maps

Survey Area

Figure 4 Land Cover Map of Tanzania

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years. Crops are primarily rain fed and the soil fertility in the region has been decreasing over time due to erosion, crop removal and lack of replenishing nutrients through fertilizers or rotating crops.74

The African population of Tanzania consists of more than 120 ethnic groups, of which the Sukuma, Haya, Nyakyusa, Nyamwezi, and Chagga have more than 1 million members each. The majority of Tanzanians are Bantu-speaking groups. Generally, each ethnic group has its own language, but the national language is Swahili, a Bantu language with strong Arabic and later English borrowings. English is also an official language. As described in Section 5, one type of social capital is in-born social capital, based on ethnicity and linguistic categories, the variety of linguistic groups provide an opportunity to test the impact of in-born social capital on horizontal relationships among producer associations.

3.2 Overview of Three Study Producer Associations

Three distinct producer associations were chosen to participate in this survey: (Market Intermediary Management (MIM) which was established by the private sector for export to global markets with strong control over production and quality; Usambara Lishe Trust, which was established in 2000 by GTZ, an international donor, to participate in high value domestic markets and group coordination, and; Ubiri Lushoto Union (ULU), which was established by a loose collection of local producers wanting to collaborate to take advantage of market opportunities and with a minimal governance structure. The three organizations and non-member sample represent a range of distinct horizontal and vertical governance structures in which smallholder farmers can participate. However, less than 3% of non-member respondents reported that they participated in any ‘formal’ producer groups. Details of these groups are found in Section 5.11.

3.3 Overview of Study Smallholder Vegetable Producers

Smallholder vegetable producers living in the villages of Arusha-Moshi and Lushoto areas were included in the survey (Table 4). Forty percent of the respondents were female and 96% were living in a rural area. Eighty-three percent of respondents had completed their primary education while 13% had finished their secondary education. While 12% of the farmers planted less than 5 acres of land, the majority planted between 6 and 10 acres (42%) or 11 and 15 acres (37%). Approximately 10 mother tongues were spoken by respondents in the Arusha-Moshi and Lushoto areas of the survey. Sambaa (30%), Chagaa (22%), Pare (16%) and Arusha (11%) were the main languages represented. (A detailed table is on page 47).

All of the households participating in the survey had several sources of income. Additional sources of income are particularly important when farming on small plots of lands and distinct payment periods are spread out through the year based on agricultural seasons. Crop income is particularly affected by the size of plot and volume available for sales. Members living closer to the urban areas of Arusha and Moshi, also have access to a greater number of non-farm employment opportunities. Most of the MIM participants were only in their first year of participation in the group, and many had not yet received the first payment from their first season of production under contract.

74 Kaihura, F.B.S., M.Stocking and E. Kahembe, Soil Management And Agrodiversity: A Case Study from Arumeru, Arusha, Tanzania, Paper for the Symposium on: Managing biodiversity in agricultural systems, Montreal, 8-12 November, 2001.

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Graph 2. Percentage of Income by Source and Membership (w/out top 1%)*

Note: Crop income refers to typical income for up to six crops in season. Livestock income refers to typical income in a month for up to six types of livestock (or livestock products). Similarly, business, job, labor, and pension income refer to typical income in a month for up to six types of a particular income source. Business income can refer to income such as cooking and selling food, making and selling home brew, handicrafts, store, car repair business, and hair dressing (i.e. self-employed). Job income refers to income from a full- or part-time job such as taxi driving, bookkeeping, working in a packing house, or working as a maid (i.e. employed by someone). Labor refers to income from day labor or occasional labor, including harvesting someone else’s crops. Pension refers to pension or remittances.

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4. LINKING SMALLHOLDERS TO MARKETS: VERTICAL RELATIONSHIPS

Vertical relationships are largely defined by the governance patterns in the value chain. Three questions are addressed by this study: What are the power dynamics between producers and the intermediaries and buyers to which they are vertically linked? How does this affect the flow of resources to producers? And what are the leverage points for enhancing vertical cooperation and coordination in the value chain to improve its competitiveness and MSE benefits? Testing of the hypotheses below may shed light on how to create win-win relationships between MSEs, intermediaries, and lead firms that improve value chain competitiveness and MSE benefits.

1. Risk in vertical relationships can be reduced by strengthening governance.The risk to each firm that the counterpart firm in a vertical relationship will fail to meet its agreements (i.e., the risk of commitment failure) can be reduced by strengthening governance through alternative means, including:

a. the development of linking social capital, b. the development of stronger network types of governance, c. increasing the formality of contracts, and d. strengthening legal enforcement of contracts.

2. Trust in vertical relationships can be increased by improving information.Trust between firms in vertical relationships can be increased by improving the information that firms have about each other in several ways, including

a. building information over time about the trustworthiness of counterpart firms through a series of increasingly larger “riskable steps”,

b. increasing the face-to-face interaction between representatives of counterpart firms, c. increasing transparency about distribution of rents in the value chain, and d. increasing the transparency about risks faced by firms in the value chain.

3. Lead firms will be more willing to form vertical relationships with MSEs if the transaction costs can be reduced. 

Transaction costs are a major constraint to lead firms forming vertical relationships with MSEs, but the transaction costs that lead firms incur in working with large numbers of dispersed MSEs (i.e., the costs of communication, knowledge sharing, contract management, production coordination, etc.) can be reduced through the use of

a. commercial intermediation (i.e., private intermediaries), b. organizational arrangements to coordinate MSE activities, and c. cost-effective information and communication technology (ICT).

4.1 Overview of Smallholder Relationships with Top Buyers

The governance patterns of vertical relationships between smallholders and buyers within the Tanzanian HVEV value chain differ by market channel. Based on the qualitative assessment the export channel has two lead firms and is characterized by well-established, directed relationships between lead firms and mostly medium- and large-scale farms. Firms within the domestic market channel operate mostly through arms-length market relationships with a few firms operating under more involved modular and relational arrangements. As illustrated in the value chain map (Figure 3 in Section 2.31), the Tanzanian HVEV value chain has two end markets: 1) the domestic market, which includes local, regional and national dry and wet markets, as well as hotels, supermarkets, and retail outlets - primarily in the Dar es Salaam urban area, and 2) the export market, which sends to the UK and other EU countries, and to Kenya (often for re-exporting to the UK and EU markets). The vegetables are grown by small, medium, and large (integrated) farmers, with almost all current production taking place in the highland area of Northern Tanzania.

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The two export firms in business at the time of this survey (Serengeti Fresh and GEL) have established direct relationships with medium- to large- scale outgrowers and have attempted to develop more structured and directed relationships with smallholders. Supply contracts between exporters and the medium- to large-scale outgrowers clearly define the schedule of delivery, quality requirements, and price of the produce. Information flows within this relationship are also regularized. The export firms exert a certain level of control through regular monitoring of the production practices and provision of technical assistance on GLOBALGAP compliance issues. However, medium- to large-scale outgrowers have the flexibility at the end of each supply contract to pursue other market options. This creates an incentive for the exporter to diversify risk by identifying other supply sources, such as from smallholders.

The producer groups participating in this study have a variety of relationships with their buyers. Members of the MIM producer group are part of a captive HVEV value chain which sells directly to GEL. MIM insures that its member meets GEL quality, quantity and documentation requirements. Inputs such as seeds and pesticides are also provided by MIM in accordance with GEL requirements. Members of Lishe Trust was established with funding by GTZ through the Soil Erosion Control and Agro Forestry Project (SECAP) from 1981 – 2000. Members purchase inputs in bulk and market together. Lishe Trust has a modular and relational relationships with several institutional and retail buyers including the Royal Palm Hotel and Shopright supermarket. ULU was established by 10 members in 1992. Members report primarily market relationships, selling the majority of their produce into markets in Tanga, Arusha and Dar es Salaam. Additional buyers in a more relational relationship include supermarkets, individual households and brokers in wet markets in Dar es Salaam.

4.11 Market Channels, Buyers and Producer Preferences

Vertical relationships are critical to market access, particularly in the HVEV market where there are very limited market channels with strict rules for participation. Since 88% of all respondents identified a single buyer to whom they sold 50% or more of their production, management of vertical relationships is critical across all respondents. Consistent relationships with this “top buyer” can reduce financial risks by established agreements on volume of purchase and price for produce. A top buyer can also provide information on end buyer demand, ensuring that the right products are planted for the market.

All respondents sell their products directly and in local markets, activities which do not typically require buyers. Farmers may aggregate goods for larger regional markets such as the market in Arusha. However, in order to sell into higher value market channels, produce must travel long distances or meet specifications of type, quantity and quality – such as goods going to the Dar and Nairobi wet markets, or to brokers, exporters, and retail outlets. Selling into these market channels, which make up the majority of all respondent sales, requires information, preparation, and coordination with transporters and

Figure 5. Workers at GEL Packing House

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buyers. Since a farmer receives payment after harvest, information is critical to make planting and production decisions.

A farmer’s relationship with a buyer or buyers in his or her top market channel (channel with largest sales volume) on average lasted nearly four years, with nearly 40% of all respondents with a relationship of five or more years. Lishe Trust, ULU members, and non-members had a mean length of buyer relationship with that was significantly longer when the top channel was a market vendor or an institution than neither of these channels (Lishe Trust: 9.9 years compared with 8.4 years; ULU: 9.4 years compared with 7.4 years; Non-Members: 7.1 years compared with 6.8 years). In contrast, MIM members’ mean length of membership is five years (which is consistent with the establishment of GEL’s smallholder relationships).

Producer groups also differed significantly in the number of buyers to whom they sold produce: Among MIM members, 62% had a single top buyer, compared with only 13%, 3%, and 10% for Lishe Trust members, ULU members, and non-members respectively. On average, MIM members had 2 buyers in their top channel, Lishe Trust members had 4.6 buyers, ULU members had 4.8 buyers, and non-members had 4.1 buyers. Having a single top buyer has many benefits as 73% of respondents reported that sales volume today is larger than when a farmer first sold to his or her top buyer, 13% said that total sales had stayed the same, and 14% said that it was smaller.

Note: Supermarket can also refer to shop. Institution can refer to restaurant, hotel, hospital, or school.

Members by each producer association varied in what they viewed as “most favorable market channel for a producer similar to the respondent”75 (Table 4), responses reflected the market with which they had the largest sales volume (Graph 3). More than 56% of MIM farmers, who produce for exporter GEL, responded that an exporter in Tanzania was the most favorable market channel, while only 11% each of Lishe Trust and ULU members said that an exporter in Tanzania was the most favored channel. Among Lishe Trust members, the most favorable channels were their major outlets market vendors in Dar es Salaam (26%) or institutions (24%). ULU members also responded with the same most favorable

75 See Questionnaire (microReport #72) for precise question language.

Table 4. Respondents by Most Favorable Market Channel and Producer Association (%) (N=1,927) Market Channel MIM Lishe Trust ULU Non-Members N (%) 367 (100) 184 (100) 214 (100) 1,162 (100) Direct 36 (9.8) 3 (1.6) 15 (7.0) 161 (13.8) Market vendor Local 48 (13.1) 18 (9.8) 27 (12.6) 178 (15.3) Dar es Salaam 20 (5.5) 48 (26.1) 59 (27.6) 194 (16.7) Nairobi 11 (3.0) 2 (1.1) 2 (0.9) 26 (2.2) Tanzanian broker 6 (1.6) 11 (6.0) 16 (7.5) 50 (4.3) Kenyan buyer 1 (0.3) 1 (0.5) 3 (1.4) 18 (1.6) Exporter in Tanzania 208 (56.7) 21 (11.4) 23 (10.8) 235 (20.2) Importer outside Tanzania 17 (4.6) 18 (9.8) 16 (7.5) 96 (8.3)

Supermarket 4 (1.1) 18 (9.8) 21 (9.8) 67 (5.8) Institution 16 (4.4) 44 (23.9) 32 (15.0) 137 (11.8)

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channels (28% chose market vendors in Dar es Salaam; 15% chose institutions). Among non-members, most favorable channels were exporters in Tanzania (20%) or market vendors in Dar es Salaam (17%).

Eighty-eight percent of all surveyed farmers responded that their perceived ‘most favorable channel’ accounted for 50% or more of sales volume; in other words, most respondents achieved most of their sales volume in the channel that they viewed as most favorable for a producer similar to them. When asked why respondents viewed a market channel as ‘most favorable’, 41% of respondents gave reasons of perceived ‘higher unit profits’, 18% for ‘higher total sales’, 12% for ‘dependable sales’ and 14% for many buyers (Table 6).

When asked what buyer (of what market channel) provided the largest sales revenue (or ‘top buyer’), respondents gave answers similar to that of ‘most favorable market channel’. For 49% of MIM members, ‘top buyers’ were Tanzanian exporters, while only 4% and 9% of Lishe Trust and ULU members reported that same channel. Among Lishe Trust members, top buyers were market vendors in Dar es Salaam (35%) or an institution (20%), which were the same two market channels viewed as ‘most favorable’. In contrast, 39% of ULU members reported a ‘top buyer’ as market vendors in Dar es Salaam and 25% reported local or regional market vendors (not institutions). Among non-members, 29% reported ‘other channel’, 22% reported market vendors in Dar es Salaam and 20% reported local or regional market vendors. That the ‘top buyer’ among ULU members and non-members did not always match their perceived ‘most favorable’ market channel would suggest that ULU members and non-members believe that a channel different from their ‘top buyer’ may offer better sales value and/or volume.

Graph 3. Market Channel Providing Largest Sales by Producer Association (%) (N=1,927)

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Table 5. Respondents by Reason for Most Favorable Market Channel and Producer Association (%) (N=1,928)

Reason MIM Lishe Trust ULU Non-

Members N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) Higher unit profits: Price per item is higher 142 (39.0) 78 (42.4) 83 (38.8) 479 (41.3) Higher total sales: Total value of sales revenue is higher 80 (22.0) 30 (16.3) 39 (18.2) 188 (16.2) Dependable sales: Sales are more reliable, predictable; sales vary less over time 33 (9.1) 28 (15.2) 28 (13.1) 134 (11.6)

Many buyers: Buyers are easier to find 30 (8.2) 22 (12.0) 27 (12.6) 195 (16.8) More assistance: Buyers are more helpful to producers 45 (12.4) 12 (6.5) 11 (5.1) 67 (5.8) Less time: Sales are closer and/or more convenient, take less time or travel 30 (8.2) 9 (4.9) 21 (9.8) 73 (6.3)

Better information: Information about this market is more available and/or easier to obtain 4 (1.1) 5 (2.7) 5 (2.3) 23 (2.0)

In the domestic market, firms tend to operate primarily through market relationships, although there is still good information exchange on buyer preferences. Hotels and supermarkets may have formalized supply contracts with fresh produce distributors and these contracts dictate the quality of produce, delivery schedule, prices, and payment terms. On the other hand, supply contracts between distributors and their agents or even directly with farmers seem to be very informal. Even under the informal contracts, information on product quality and supply schedule seems to be communicated through well-defined channels. Farmers as well as market agents seem to have a good understanding of the requirements of their buyers and this is established through regular contact, mostly by telephone and face-to-face interaction.

The nature and quantity of services provided by buyers in a market channel to smallholders varies greatly by producer association (Graph 4). In total, 46% of respondents did not receive any services at all by their top buyer, other buyer, or other sources. While 68% of Lishe Trust members and 66% of ULU members did not receive any services from their top buyers, only 29% of MIM members did not receive any services from their top buyer, but many of them had just joined MIM and had not begun receiving association services.

Graph 4. Total Number of Types of Services Provided by Various Buyers and Other Sources to Respondent by Producer Association (N=1,609)

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4.2 Factors of Trust in Vertical Relationships

Trust between smallholders and top buyers have been shown to be instrumental in establishing long-term and sustainable relationship between the buyers and smallholders.76 Relationships between Tanzanian producers and their top buyers are reported as generally longstanding and trusting. These strong relationships can reflect a “store” of social capital between buyers and producers. The second hypotheses describe factors which can further support the development of these relationships; that trust can be developed by (1) building information over time about the trustworthiness of counterpart firm, (2) increasing face-to-face interaction between counterpart firms, (3) increasing transparency about distribution of rents in the value chain, and (4) increasing transparency about the risks faced by firms in the value chain.

Several measures of producer’s trust of one’s top buyer were obtained from the survey (Table 6). In general, farmers appear to vary in their level of trust of their top buyer: 50-51% agreed that one’s top buyer could be trusted to look out for one’s interests and be fair and 54% agreed that one’s buyer could be trusted to keep agreements. Forty-five percent agreed that one’s buyer was concerned about one’s welfare. Only 33% agreed that one’s buyer would help one out if needed, and 50% agreed that one buyer would take advantage of oneself if not careful.

Several independent variables were tested for association with trust of the buyer. The variables on length of relationship with top buyer and trend in sales over time were used to examine associations between trust and changes over time (Table 7). For example, the mean length of relationship among those who agreed with Statement A is significantly different from those who did not (Anova, p<0.0001), without controlling for other variables. Among those who did not trust their top buyer (or disagreed with Statement A), the mean length of their relationship was 4.6 years; among those who trusted their top buyer (or agreed with Statement A), the mean length of their relationship was 3.3.

76 Woolcock, 2001

Table 6. Respondents Who Agree to Statements on Top Buyer, By Producer Association (%) (N=1,612) Statement MIM Lishe Trust ULU Non-MemberN (%) 360 (100) 183 (100) 214 (100) 852 (100) A. Buyer can be trusted to look out for interests of farmers like you. 173 (47.8) 110 (59.8) 117 (54.7) 411 (48.2)

B. Buyer can be trusted to be fair with farmers like you. 182 (50.3) 110 (59.8) 129 (60.3) 401 (47.1)

C. Buyer is concerned with the welfare of farmers like you. 162 (44.8) 97 (52.7) 96 (44.9) 365 (42.8)

D. Buyer will help farmers like you if you need it. 142 (39.2) 75 (40.7) 77 (36.0) 237 (27.8)

E. Buyer will take advantage of farmers like you if you are not careful. 157 (43.4) 119 (64.7) 124 (57.9) 399 (46.8)

F. Buyer can be trusted to keep agreements made with farmers like you. 186 (51.4) 135 (73.4) 133 (62.2) 421 (49.4)

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Table 7. Mean (SD) Years of Relationship with Top Buyer by Respondents Who Agree to Statements on Top Buyer (N=1,611) Statement Disagree Neutral Agree F-score (p-value) A. Buyer can be trusted to look out for interests of farmers like you. 4.6 (4.8) 3.5 (3.2) 3.6 (3.3) 11.47 (<0.0001)

B. Buyer can be trusted to be fair with farmers like you. 4.4 (4.8) 3.6 (3.1) 3.7 (3.5) 5.40 ( 0.0047)

C. Buyer is concerned with the welfare of farmers like you. 4.5 (4.6) 3.5 (3.1) 3.6 (3.5) 10.10 (<0.0001)

D. Buyer will help farmers like you if you need it. 4.2 (4.2) 3.8 (3.6) 3.5 (3.3) 4.00 ( 0.0185)

E. Buyer will take advantage of farmers like you if you are not careful. 3.4 (3.2) 3.4 (3.1) 4.2 (4.2) 8.81 ( 0.0002)

F. Buyer can be trusted to keep agreements made with farmers like you. 3.5 (3.9) 3.7 (3.5) 4.0 (3.8) 2.31 ( 0.1000)

Note: F-score and p-values refer to analysis of variance tests between statements and years of relationship.

However, when examining trust of buyer and trends in sales without controlling for other variables, those who experienced increase in sales in the past 12 months were 1.5 times likely to agree with Statement A (chi-square test, p<0.0001), 1.5 times likely to agree with Statement B (chi-square test, p<0.0001), 1.6 times likely to agree with Statement C (chi-square test, p<0.0001), 1.7 times likely to agree with Statement D (chi-square test, p<0.0001), and 1.9 times likely to agree with Statement F (chi-square test, p<0.0001). Statement E was not statistically significant.

The frequency of face-to-face meetings was used to examine associations between trust and face-to-face interactions. Several chi-square tests between frequency of face-to-face meetings and agreement with the above six statements were significant, suggesting that those who had face-to-face meetings daily or several times a week were more likely to trust their buyer than those who did not. Those who had face-to-face meetings daily or several times a week were 1.5 times likely to agreement with Statement A (p<0.0001), 1.8 times as likely to agree with Statement B (p<0.0001), 1.6 times as likely to agree with Statement C (p<0.0001), 1.7 times as likely to agree with Statement D (p<0.0001), and 1.6 times as likely to agree with Statement F (p<0.0001); Statement E was not significant (p<0.134).

Knowledge of final sale location and price product were used to examine associations between trust and transparency of the value chain. Several chi-square tests suggested that producers who had knowledge of the price product were more likely to trust the buyer (Statement A: OR=1.6, p<0.04; Statement B: OR=1.7, p=0.03; Statement C: OR=2.2, p=0.001; Statement D: OR=1.7, p<0.02; Statement E: OR=0.70, p=0.131; Statement E: OR=3.1, p<0.0001). Producers who had knowledge of the final sale location were also more likely to trust the buyer (Statement A: OR=1.3, p<0.04; Statement B: OR=1.2, p=0.13; Statement C: OR=1.1, p=0.33; Statement D: OR=0.834, p=0.11; Statement E: OR=1.07, p=0.53; Statement E: OR=1.3, p=0.006).

4.3 Vertical Relationships and Transaction Costs

Whereas the relationships between medium- to large-scale outgrowers and export firms are well established, the relationships between exporters and smallholders are relatively new. The strict requirements on product quality and traceability under GLOBALGAP have tended to create a barrier to the entry of smallholders into the European export market. Their small scale of operation makes the

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cost of certification and compliance with GLOBALGAP standards very high relative to farm-level profits. Moreover, exporters such as GEL, who work directly with large numbers of smallholders face high transaction costs unless organizational efficiencies can be created (as it has been with MIM) at the smallholder level both in terms of production practices and information management to ensure compliance with the requirements of the exporter.

Transaction costs are hypothesized to be a major constraint to lead firms forming vertical relationships with MSEs, but the transaction costs that lead firms incur in working with large numbers of dispersed MSEs (i.e., the costs of communication, knowledge sharing, contract management, production coordination, etc.) can be reduced through: (1) the use of commercial intermediation, (2) organizational arrangements to coordinate MSE activities, and (3) cost-effective information and communication technology. To test these hypotheses, the outcome of interest (dependent variable) is whether the respondent had sold products in the past 12 months to an exporter located in Tanzania who sells outside of Tanzania. Of all 765 respondents in a producer association, 242 (31.6%) sold to a Tanzanian exporter.

To examine the role of commercial intermediation, the independent variables were whether they communicated only indirectly with the buyer and how the respondent made the sale to an exporter (as an individual, part of a group, or both). A crude chi-square test (p<0.0001) suggests that those who communicate indirectly with their top buyer is 3.9 times likely to have a top buyer that is a Tanzanian exporter.

The variables to examine the role of organizational arrangements were three aspects of group work that coordinate multiple micro- and small enterprises, i.e. group sale, group negotiation, or group transport. Three crude chi-square tests suggest that those who engage in these three aspects of group work were less likely to have a top buyer who was a Tanzanian exporter (Group sale: OR=0.49, p=0.003; Group Negotation: OR=0.59, p=0.016; Group Transport: OR=0.34, p<0.0001). After controlling for association, gender, and age, association with group sales became insignificant (p=0.42), those who were in MIM were 95.0 times (p<0.0001) likely to be have a Tanzanian exporter than not. Similarly after controlling for other variables, association with group negotiation became insignificant (p=0.29), and members of MIM were 95.3 times (p<0.0001) likely to have a Tanzanian exporter than not. Association with group transport remained significant (p=0.026) after controlling for other variables, while MIM members were 91.4 times (p<0.0001) likely to have a Tanzanian exporter. In other words, we are unable to discern an effect of three aspects of organizational arrangements after controlling for producer association, namely MIM membership.

The variable to examine the role of cost-effective information and communication technologies were access to a cell phone, landline telephone, e-mail or internet. Use of at least one of these modes of communication was significantly associated with having a Tanzanian exporter as one’s top buyer (chi-square test, OR=1.8, p<0.0001). This association become insignificant (p=0.128) after controlling for producer association, respondent’s age and gender (not including non-members); in particular, MIM members were 101 times (p<0.0001) likely to have a Tanzanian exporter. Nevertheless, it is likely that communication with cell phones has led to some impact on smallholder farmers by allowing them to make more timely arrangements, rather than waiting for intermediaries to travel into farming areas and make arrangements with farmers.

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4.4 Factors of Commitment Failure

A key risk faced by producers is commitment failure, that is, the failure of counterpart buyers to meet the contract. Of all respondents, members and non members (17.6% and 16.1% respectively) reported that their top buyer failed to meet the agreement in the past 12 months. The hypothesis tested is that the risk to producer can be reduced by developing linking social capital and increasing the formality of contracts. In this survey, risk was measured by whether a buyer had ever failed to meet a contract. Over 40% of non-members had never entered into any type of agreement.

Social capital was measured by perceived trust by producer of buyer as well as frequency and kind of communication and non-business connection to buyer. Seventy-nine percent of respondents trusted his or her top buyer to meet their contract. Among producers who reported commitment failure with their top buyer, only 55% trusted the top buyer to meet the agreement. In contrast, among producers who reported not experiencing commitment failure, 84% trusted the top buyer to meet the agreement. In other words, those who did not trust their top buyer were 4.2 times likely to experience commitment failure than those who did (p<0.0001). This crude observation would lead one to hypothesize that trust between producers and buyers are maintained until the buyer fails to keep the producer’s trust, or that trust can help to mediate or reduce the risk of commitment failure.

The frequency of commitment failure was compared with the frequency of various kinds of communication including face-to-face meetings, cellular telephone call, landline telephone call, e-mail or internet, fax, and indirect communication via a group representative. Only indirect communication appeared to have a significant association between communication frequency and commitment failure (chi-square test, p=0.05). Respondents were 1.6 times as likely to experience commitment failure when using indirect communication through a representative daily or several times a week.

Any non-business connection to the buyer (e.g. relative, neighbor, church) appear to have a slight positive but insignificant association with experiencing commitment failure with that buyer (chi-square tests, OR=1.3, p=0.079). However, among all members of producer association, those who had any non-business connection with their top buyer were more likely to experience commitment failure than those without (chi-square test, OR=1.6, p=0.021).

Graph 5. Respondents Whose Buyers Who have Failed to Meet Agreement by Producer Association (%) (N=1,609)

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Formality of contracts was measured by whether statements had been written and whether contracts had been made in advance of a sale. Forty percent of all respondents had at least once made an agreement in writing with his or her top buyer. Among all respondents, putting an agreement in writing was negatively associated with commitment failure (chi-square test, OR=0.74, p=0.05). That is, among producers who had their agreement in writing, 14% experienced commitment failure. In contrast, among producers who did not put an agreement in writing, 19% experienced commitment failure. However, among members of producers associations, there did not appear any significant association between commitment failure and putting an agreement in writing (chi-square test, p=0.31).

Among all respondents, there was no significant association between setting particular aspects of sales, i.e., type, quantity, quality, date, price, or use of pesticide (chi-square tests, p>0.05). Lishe Trust and ULU members were more likely to report that they always made agreements in advance about particular aspects of their sales (e.g. kinds, quantity, dates, price, and quality of vegetables) to their top buyer than non-members and MIM members (Table 8). However, MIM member receive their inputs and technical assistance directly from MIM so agreements are part of their membership terms and not separate contracts. Only 26% of all respondents said that they had made agreements in advance about the types of pesticides used in growing their vegetables. Only 18% of non-members had made agreements in advance on types of pesticides used in growing their vegetables with their top buyers.

Table 8. Respondents Who Always Make Agreements in Advance about Sales to Top Buyer, By Producer Association (N=1,612) (%)

Aspect of Sales MIM Lishe Trust ULU Non-Members

N (%) 360 (100) 183 (100) 214 (100) 852 (100) A. Kinds or types of vegetables 168 (46.4) 137 (74.5) 129 (60.3) 441 (51.8) B. Quantity of vegetables 148 (40.9) 137 (74.5) 132 (61.7) 430 (50.5) C. Dates of supply 152 (42.0) 121 (65.8) 122 (57.0) 379 (44.5) D. Price the buyer will pay 175 (48.3) 131 (71.2) 129 (60.3) 468 (54.9) E. Quality that the buyer will accept 166 (45.9) 123 (66.9) 115 (53.7) 355 (41.7) F. Types of pesticides used 134 (37.0) 79 (42.9) 52 (24.3) 155 (18.2) Note: Pesticides here also include insecticides, herbicides, and fungicides.

4.5 Summary of Vertical Relationships

Selling into different market channels result in difference governance patterns. As producers participate in higher value markets, particularly those markets with stringent GLOBALGAP requirements, there are increasingly more requirements established by buyers that must be met. For non-members, all the costs and risks of producing for high value channels must be borne by the producer. For producer groups such as Lishe Trust and ULU inputs can be procured together, transportation can be arranged together, and agreements can be negotiated collectively, giving them a greater ability to meet buy requirements and negotiate terms that can cover their costs. However, a great deal of time must be invested by the members to coordinate activities. MIM members receive inputs and coordination directly from their top buyer, greatly decreasing their own risks. However, costs for inputs and management are taken out of their overall profits by the association resulting in a lower per unit cost.

Hypothesis 1: Our first hypothesis is that producer risk in vertical relationships, such as risk of commitment failure – that buyers will not honor formal or informal contracts, can be reduced by strengthening governance of the value chain. Governance may be increased by developing linking capital,

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(i.e. relationships beyond the market relationship); the development of stronger network governance77; and increasing the formality of contracts; and strengthening the legal enforcement of contracts.

From crude analyses, commitment failure occurred less frequently for those respondents who had put agreements in writing, additionally formality of contracts is significantly associated with lower risk of commitment failure. Those who trusted the top buyer were also less likely to have experienced commitment failure. There is no significantly association of formality of contracts with commitment failure among members as many of the agreements are made at the association level, suggesting that formality of contracts may be more beneficial for individual non-members than individual members.

Hypothesis 2: The second hypothesis states that trust between producers and buyers built when firms have better information about each other (transparency of risks and rents), and; experience with a series of increasingly larger “riskable steps” over time.

Relationships with buyers are generally trusting and long term. Trust, as measured by perceived trust in the buyer to look out for the producer and trust in the buyer to meet advance agreements, is significantly associated with increased sales in the past 12 months, frequent face-to-face meetings, and knowledge of final sale location and price of produce. Shorter business relationships are also associated with more trust which may indicate that producers enter into new agreements with a positive attitude about buyers, and may become disappointed as there are market downturns in prices so that final prices or volumes do not meet initial expectations. Nevertheless, improved information and face to face meetings are associated with greater levels of trust.

Hypothesis 3: The survey’s third hypothesis posits that lead firms will be more willing to form vertical relationships with MSEs if transaction costs can be reduced. Transaction costs are a major constraint to lead firms forming vertical relationships with MSEs, but transaction costs that lead firms incur in working with large numbers of dispersed MSEs (i.e., the costs of communication, knowledge sharing, contract management, production coordination) may be reduced through the use of commercial intermediation, organizational arrangements to coordinate MSE activities, and cost-effective information and communication technology (ICT).

The respondent population lives in a largely remote region with poor roads and where less than a third of producer group members and a tenth of non-member owned cell phones. Several measures for decreasing buyers’ transaction costs, such as communicating with a buyer indirectly, coordinating group activities (selling, negotiating prices, and transporting as part of a group) and access to a cell phone, land line, and email, were all positively associated with working with an exporter. Coordination of group activities and use of ICTs, however, were not significant after controlling for producer association, as well as gender and respondent’s age. Coordination still primarily takes place either directly with buyers or their representatives at markets or association meetings, or through community organizers hired by the producer association (in MIM’s case) or part of the Ministry of Agriculture’s extension program.

77 Gereffi, Gary, John Humphrey, and Timithy Sturgeon. The Governance of Global Value Chains, International Political Economy, 2004.

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5. LINKING SMALLHOLDERS TO SMALLHOLDERS: HORIZONTAL RELATIONSHIPS

The next three hypotheses focus on horizontal cooperation at the producer level. The analysis considers factors affecting horizontal cooperation and coordination within three producer associations, and the extent to which this improves smallholders’ upgrading, market linkages, and the overall functioning of the value chain. While firms higher up the value chain may also cooperate horizontally, this research only focused at the producer level. The survey responses that may test these hypotheses are those by members of the three study producer associations: MIM, Lishe Trust, and ULU.

4. MSE owners will be more willing to form horizontal relationships if the transaction costs can be reduced. Transaction costs, especially the opportunity cost of time, are a major constraint to MSE owners forming horizontal relationships. There are several ways that these transaction costs can be reduced, including the use of:

a. alternative organizational structures, b. cost‐effective information and communication technology (ICT), and c. measures to improve trust (see hypothesis 5 below). 

5. Trust in horizontal relationships can be increased through organizational innovation and improvements in human capital. Lack of trust can be a rational but critical barrier to the formation of horizontal relationships between MSEs. Trust in horizontal relationships can be improved by reducing the scope for opportunistic and fraudulent behavior in several ways, including through:

a. organizational innovations that limit the power of leaders (e.g., rotating group leadership, member input to decisions, and transparency), 

b. formalized record keeping, c. training in leadership and group management skills, and d. increased human capital among all group members (i.e., literacy, numeracy, language skills, and market 

knowledge).  6. Social capital plays an important role in influencing horizontal relationships between MSEs. Social capital can have both positive and negative effects on the formation of horizontal relationships between MSEs:

a. in‐born social capital reduces the transaction costs of forming horizontal relationships because firm owners are more likely to trust each other and less likely to behave opportunistically and 

b. high levels of bonding social capital can reduce investments in acquired forms of capital, including both bridging social capital and physical capital. 

5.1 Respondent and Producer Association Characteristics

Three producer associations with distinct governance patterns in their vertical relationships were chosen to participate in this survey: (Market Intermediary Management (MIM) which was established by the private sector for export to global markets with strong control over production and quality; Usambara Lishe Trust, which was established in 2000 by GTZ, an international donor, to participate in high value domestic markets and group coordination, and; Ubiri Lushoto Union (ULU), which was established by a loose collection of local producers wanting to collaborate to take advantage of market opportunities and with a minimal governance structure. Members of these producer groups span the Northern Tanzania climatic region in which this research was focused. Respondents lived largely in communities which shared a common language/ethnicity. On average, the respondents had primary school educations with farms of similar size and had begun selling vegetable in the last decade. Almost all members of the producer groups reported growing one or more types of HVEV – significantly more

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that the non-member participants of this survey of which only 64% reported growing HVEV, and of that number more than a quarter only grew one or two HVEV varieties (Table 9).

Table 9. Basic Characteristics of Respondents by Producer Association (N=1,928)

Indicator MIM (N=353)

Lishe Trust (N=174)

ULU (N=198)

Non-Members (N=1203)

N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) Females (%) 104 (28.3) 133 (72.3) 94 (43.9) 426 (36.6) Highest level of education Primary (%) 284 (77.4) 157 (85.3) 180 (84.1) 994 (85.5) Secondary and high school (%) 75 (20.5) 23 (12.5) 34 (15.9) 131 (11.2)

Rural (%) 363 (98.9) 167 (90.8) 166 (77.6) 1151 (99.0) Distance to trading post or town if rural (%) < 3 km 93 (25.3) 62 (33.7) 62 (29.0) 291 (25.0) 3 to 6 km 106 (28.9) 58 (31.5) 50 (23.4) 347 (29.8) > 6 km 164 (44.7) 47 (25.5) 54 (25.2) 513 (44.1) Access to cell phone (%) 118 (32.2) 50 (27.2) 75 (35.1) 125 (10.8) Decisions to sell vegetables are made by husband (%) 267 (72.8) 66 (35.9) 124 (57.9) 775 (66.6)

Number of members selling HVEV 347 (94.5) 183 (99.5) 204 (95.3) 745 (64.0)

Mean years producing and selling vegetables (SD) 6.7 (6.7) 9.1 (8.1) 8.2 (7.4) 6.9 (6.3)

Mean land area planted in past 12 months (SD) 9.1 (4.9) 11.2 (3.7) 11.0 (3.9) 9.6 (4.6)

Mean household size (SD) 6.0 (2.4) 6.6 (2.5) 6.6 (2.6) 5.9 (2.1) Mean age in years (SD) 42.3 (13.0) 41.9 (11.7) 41.8 (10.7) 38.9 (10.6) Years of membership by producer association (SD) 8.7 (4.7) 17.5 (13.3) 15.9 (11.2) N/A

Note: For continuous variables, mean (SD) are reported. For categorical variables, number (%) of respondents is reported, where percentages are calculated by producer association.

Market Intermediary Management Limited (MIM) was established in 2005 as the NGO arm of Gomba Estates Limited (GEL). GEL exports about 50 MT of hot weather crops (chilles, okra) and cool weather crops (sugar snap, peas etc) per week to larger supermarkets in UK and wholesalers in France and Holland. GEL sources its fresh produce from its own farms, 8-9 out-growers with 20 hectares of land under cultivation and eight smallholder associations organized under MIM. GEL started working with smallholder farmers in the past three years and through the eight smallholder associations it works with about 40 – 200 families in each association, 367 of whom participated in our survey.

MIM facilitates the farmer-GEL linkages, performing the functions of organizing farmers, building capacity of farmers, management and handing of agrochemicals, and production coordination. Farmers participating in MIM attend regular group meetings as well as meet regularly with MIM coordinators. Farmers pay a percentage of their sales to MIM as a fee. In 2005 for each $1/kilo that GEL paid, 20¢ went to MIM and 80¢ to the farmers. MIM has been provided sufficient autonomy in operations and management, and can utilize profits as the members see fit. Profits have been used to issue dividends or community works such as church building. Because GEL is not currently active, MIM has now expanded

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services to other organizations such as Tancan, which includes former GEL management, and it has been contracted to continue sourcing from small farmers for buyers in the UK and the Netherlands.

Participating MIM farmers are organized into groups such from Masaii communities on the western side of Mount Arusha to primarily Chagga villages on the western side on Mount Kilimanjaro. MIM members generally have had more secondary education than other producer associations (20.5% of members), husbands are the primary decision makers on farm issues (72.8%), and MIM members are generally further from urban centers than the other producer groups (44.7% of members are further than 6 kilometers to trading post or town).

Usambara Lishe Trust Farmers’ Association (Lishe Trust) was formed in 2000 to assist farmers in the Usambara area to find profitable markets for their produce. Lishe Trust was supported by the Soil Erosion Control and Agro Forestry Project (SECAP) funded by GTZ from 1981-2000. The association has 218 members with average land size between 0.5- 2 acres. Lishe Trust undertakes bulk purchase of agrochemical input and assists its members in marketing their produce. Buyers for Lishe products include the Royal Palm Hotel, Shoprite supermarket, ten other smaller grocery stores and a host of market intermediaries or wholesalers in Dar es Salaam market.

Unlike the other two producer groups in this study, the primary members and decision makers on the farm are wives (74.1%). Lishe Trust members were also members longer than the two other groups on average 17.5 years. Lishe Trst members also had the lowest access to cell phones of all respondent groups (27.2%).

Ubiri Lushoto Fruit and Vegetable Cooperative Society (ULU) started in 1992 with 10 members with the objective to find better markets for its members. Currently ULU reports 308 registered members from Ubiri and Lushoto region who grow vegetables on their 5 to 2.5 acres of land. ULU provides a variety of services to its members, including extension advice, farm input (seeds and agrochemicals), transportation, and market linkage services. As part of the extension training, ULU leased a large farm to provide a demonstration plot for teaching quality control and standards adherence. A government extension officer is seconded by the organization, which pays his allowance out of the revenue, to advise farmers on different agronomic practices.

ULU is actively engaged in marketing and direct selling to buyers on behalf of its members. Members also have the option to sell to ULU or directly to another buyer without ULU’s involvement. ULU had previously entered into a small contracting arrangement with Serengeti Fresh to produce snow peas, sugar snaps and passion fruit; however, due to its members’ inability to comply with GLOBALGAP, the order was rejected. Members reported selling most of their produce into markets in Tanga, Arusha and Dar es Salaam. ULU also sells to supermarkets, individual households, and brokers in wet markets in Dar es Salaam.

Reported characteristics were fairly consistent across groups; however, there is some respondents’ variation knowledge of association characteristics (Table 10). Nearly 98% of all members knew that leaders were directly elected by members, but gave varied answers for the frequency of leadership change. About 21% reported that they knew of a paid manager for their groups. MIM members consistently reported to have a smaller association size suggests that sub-groups within the MIM association are not aware of the membership size of other sub-group members. It is likely that because MIM is a larger umbrella association consisting of six sub-groups spread from west of Arusha and to Moshi, there would be greater variation in the knowledge and practice of various types of sub-group activities. However, MIM members reported a larger proportion of members who knew of group

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opportunities for training in leadership and management, compared to Lishe Trust and ULU members indicating information of group-specific opportunities may be more effectively shared within the smaller subgroups.

Table 10. Reported “Yes” Association Characteristics by Producer Association (N=725) Characteristic MIM Lishe Trust ULU N (%) 353 (100) 174 (100) 198 (100) How many members are in the group?* 64.0 (62.8) 112.6 (94.0) 91.0 (86.0) Are leaders directly elected by members? 336 (95.2) 173 (99.4) 196 (99.0) How frequent does leadership change?

Every year Every 2 years

65 (18.4)

288 (81.6)

21 (12.1)

153 (87.9)

54 (27.3)

144 (72.7) Is there a paid manager for the group? 79 (22.4) 25 (14.4) 47 (23.7) Does the group maintain written business records? 314 (89.0) 166 (95.4) 194 (98.0) Is information on financial dealings made available to all group members? 269 (76.2) 164 (94.3) 174 (87.9)

In the past 2 years, have there been opportunities for group members to receive training in leadership and group management skills

219 (62.0) 82 (47.1) 105 (53.0)

Note: The characteristic above denoted with an asterisk indicates that values are mean (SD). All remaining characteristics display n (%).

The activities reported by respondents were relatively consistent across producer associations (Table 11). MIM reported activities were different due to MIM’s technical assistant to meet GEL requirements and GEL providing transportation and procurement of produce.

Table 11. Reported “Yes” to Member Activity by Producer Association (N=725) Member Activity MIM Lishe Trust ULU N (%) 353 (100) 174 (100) 198 (100) Do members sell together? 291 (82.4) 165 (94.8) 183 (92.4) Do members purchase together? 219 (62.0) 88 (50.6) 93 (47.0) Do members negotiate prices together? 284 (80.5) 157 (90.2) 174 (87.9) Do members transport together? 246 (69.7) 163 (93.7) 170 (85.9) Do members operate a retail location together? 91 (25.8) 89 (51.2) 80 (40.4) Do members advertise together? 116 (32.9) 140 (80.5) 156 (78.8) Do members help each other with technical advice? 247 (70.0) 154 (88.5) 161 (81.3) Do members seek technical advice from other sources? 142 (40.2) 107 (61.5) 115 (58.6)

Do members borrow money to/from each other? 130 (36.8) 120 (69.0) 138 (69.7) Do members help each other in the fields?* 207 (58.6) 113 (64.9) 124 (62.6) Do members rent machinery together?* 142 (40.2) 68 (39.1) 83 (41.9) Do members borrow money outside the group? 52 (14.7) 41 (23.6) 49 (24.8) Note: Chi-square tests produced p < 0.01, except for measures noted with an asterisk.

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5.3 Factors Associated with Trust in Horizontal Relationships

Forming horizontal relationships allow smallholders to improve their position on the value chain and become competitive in higher value channels. Twenty five percent of all respondents reported that selling products together was the most helpful group activity – allowing farmers to aggregate produce to enter higher value market channels unavailable to them individually. Helping each other in the fields, particularly during the demanding harvest time, was reported as the second most helpful activity (12%). Negotiating prices together, borrow and lend money to each other, and help each other learn new farming techniques were reported as helpful by 10%, 9%, and 8% of respondents respectively.

A lack of trust can form a significant barrier to the formation of horizontal relationships and coordinating these helpful activities. This study tested several factors that improve trust in horizontal relationships: (1) organizational innovations that limit the power of leaders (e.g., rotating group leadership, member input to decisions), (2) formal record keeping, (3) training in leadership and group management skills, or (4) increased human capital among all group members. These actions reduce the scope for opportunistic and fraudulent behavior within the group.

Organizational innovations were measured by knowledge of rotating group leadership, directly elected group leaders, and a paid manager. Those who knew that group leadership changed every two years (compared to every year) were more likely to believe that most group members were willing to help if needed (crude chi-square test, OR=1.4, p=0.002). Those who knew that group leaders were elected directly were more likely to believe that most group members were willing to help if needed (crude chi-square test, OR=2.5, p=0.041). Those who knew that group leaders were elected directly were more likely to believe that members generally trusted each other to make decisions that benefited the group (crude chi-square test, OR=2.1, p=0.001).

Formalized record keeping was measured by knowledge of maintained written records, and financial information available to members. Those who knew that financial information was available to all members were more likely to believe that most members of the group could be trusted (crude chi-square test, OR=2.1, p<0.0001) and more likely to believe that members generally trusted each other to make decisions that benefited the group (crude chi-square test, OR=5.4, p<0.0001). Those who knew that the group maintained written records were more likely to believe that most group members were willing to help if needed (crude chi-square test, OR=1.9, p=0.03) and more likely to believe that

members generally trusted each other to make decisions that benefited the group (crude chi-square test, OR=2.7, p<0.0001).

Training in leadership and group management skills was measured by knowledge of whether there had been any opportunities for group members to receive training in leadership and group management skills in the past two years and whether the producer had ever received training in group management or leadership skills provided by his or her top buyer, another buyer, or some other source in the past 12 months. Those who knew of training opportunities in the past two years were less likely to trust members of their group (crude chi-square test, OR=0.7, p=0.035), but were more

Figure 6 Arusha Market Vegetable Survey

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likely to believe that members of the group would help them if needed (crude chi-square test, OR=2.5, p<0.0001), and more likely to believe that most of the members could be trusted to make decisions that benefited the group (crude chi-square test, OR=1.6, p=0.004). In contrast, having received management or leadership training from one’s top buyer, other buyer, or other source did not have a significant association with the above measures of trust in horizontal relationships.

Increased human capital among all group members was measured by knowledge of whether members of the group help each other with technical advice and whether members of the group seek technical advice from other sources. Members who knew that members of the group help each other with technical advice were more likely to believe that most of the group could be trusted (crude chi-square test, OR=1.5, p=0.019), more likely to believe that members in the group were willing to help if needed (crude chi-square test, OR=3.3, p<0.0001), and more likely to believe that members of the group made decisions that benefited the group (crude chi-square test, OR=3.1, p<0.0001). Similarly, members who knew that the group had sought technical advice from other sources were more likely to believe that group members were willing to help if needed (crude chi-square test, OR=2.0, p<0.0001) and more likely to trust members of the group to make decisions that benefited the group (crude chi-square test, OR=1.8, p<0.0001).

Trust in horizontal memberships was measured through respondent agreement with various statements on trust (Table 12). Compared to MIM or ULU members, Lishe Trust members were more likely to believe that most group members could be trusted, that most group members were willing to help if needed, and that most members trusted each other to make decisions that benefited the group (chi-square tests, p<0.0001).

OR=1.8, (p<0.0001).

5.4 Factors in Reducing Transaction Costs

Transaction costs, especially the opportunity cost of time, are hypothesized to be a major constraint to MSE owners forming horizontal relationships. There are several ways that these transaction costs can be reduced, including the use of (1) alternative organized structures, (2) cost-effective information and communication technology, or (3) measures related to transparency of organizational processes.

In this study, transaction costs were measured by time spent in group activities (for example, hours per month spent in meetings) and acceptability of that time spent. Lishe Trust members spent the most amount of time, followed by ULU members, then MIM members (Table 13). The mean length of time spent on group activities for each producer association differed significantly (anova, F-score =11.0, p<0.0001).

Table 12. Respondents Who Agree with Statements on Trust of Members (%) by Producer Association (N=725) Statement MIM Lishe Trust ULU N (%) 153 (100) 174 (100) 198 (100) A. Most of the people in the group can be trusted. 200 (56.7) 132 (75.9) 142 (71.7)

B. Most people in group are willing to help if you need it. 211 (59.8) 139 (79.9) 135 (68.2)

C. Members generally trust each other to make decisions that benefit group. 203 (57.5) 158 (90.8) 141 (71.2)

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However, more than 80% of respondents felt that the time they spent on group activities was acceptable; the remainder felt that too much time was spent on group activities. There was no significant difference in acceptability of time spent in group activities among the producer associations (crude chi-square test, p=0.08), i.e. ‘alternative organization structures’, namely the three producer associations, do not appear to differ in the acceptability of time spent, despite the differences in time spent.

All modes of communication (i.e. cell phone, e-mail, internet, and landline) did not have a significant association with respondent’s acceptability of the time spent after controlling for producer association (chi-square tests, p>0.05).

Transparency was measured by specific knowledge of member activities: whether leaders are directly elected, whether there is a manager, whether the group maintains written records, and whether financial information is available. Knowledge of these activities were not significantly associated with perceived acceptability of the time spent in group activities (crude chi-square tests, p>0.05).

5.41 Social Capital and Reducing Transaction Costs

Building social capital, who one knows and the network of associations, can also help producers to acquire other forms of capital such as bridging social capital (social networks across socially heterogeneous groups: “distant friends, associates and colleagues”78 – such as producers and buyers) and physical capital (e.g. irrigation systems). As Woolcock writes, “A multi-dimensional approach allows us to argue that it is different combinations of bonding, bridging, and linking social capital that are responsible for the range of outcomes we observe…”79 Specifically, bonding, bridging, and in-born social capital may reduce the transaction costs of forming horizontal relationships.

This study tested whether bonding (i.e. relations to family, friends and neighbors), bridging, and in-born (i.e. ethnic group) social capital are associated with trust in horizontal relationships and transaction costs. Results from the survey found a mix of impacts from different types of social capital. Bonding social capital was measured in this study by frequency of participation in community activities as well as the presence and frequency of interactions with vegetable producers who are relatives or church members. Interestingly, those who see and interact with producers who are relatives or church members are not more likely to trust their group members (chi-square tests, p>0.05). There was no association between those who see and interact with producers who are relatives or church members and the amount of time spent in group activities (ANOVAs, p>0.05), or the acceptability of the time spent in group activities (ANOVAs, p>0.05).

Additionally, the number of other producers that the respondent knows by name, where they produce, and who know the same information about the respondent was not associated with any measures of trust in horizontal relationships, the amount of time spent, or the acceptability of the amount of time spent (ANOVAs, p>0.05). The number of times per month that the respondent participates in

78 Woolcock, Michael, 2001. “The Place of Social Capital in Understanding Social and Economic Outcomes.” ISUMA, p. 13. 79 Ibid.

Table 13. Mean (SD) Hours Spent in Group Activities during Month by Producer Association (N=725) MIM (N=353) Lishe Trust (N=174) ULU (N=198)

14.1 (21.2) 22.7 (23.0) 16.3 (13.2)

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neighborhood or community activities was not associated with any measures of trust in horizontal relationships, the amount of time spent, or the acceptability of the amount of time spent (ANOVAs, p>0.05). Bridging social capital was measured by those who see and interact with producers in the marketplace, in groups, or in other settings. Those who interact with producers in the marketplace are more likely to trust most members in their group (crude chi-square test, OR=1.7, p=0.022). Those who see and interact with producers who are members in groups are more likely to believe that members of their group are willing to help if needed (crude chi-square test, OR=1.8, p=0.037) and more likely to believe that members of their group make decisions that benefit the group (crude chi-square test, OR=4.4, p<0.0001). Neither interactions with producers in the marketplace or in groups, however, were significantly associated with time spent in groups or the acceptability of the time spent in groups (ANOVAs, p>0.05).

In-born social capital was measured by shared language as each of the tribal groups spoke their own language. Those who shared the language of the majority of people in one’s community were not more or less likely to trust their group members nor more likely to spent more time in group activities or find that time spent acceptable (ANOVAs, p>0.05).

5.5 Summary of Horizontal Relationships

Horizontal cooperation and coordination is an important condition for improving the effectiveness of micro-and-small-enterprise producer groups and associations. Coordination of groups can greatly lower the transaction costs for lead firms and build economies of scale that allow producers to participate in market channels unavailable to small producers. In order to achieve cooperation, producers must trust each other and their group leadership to represent their best interests and achieve best value for production in their negotiations.

Hypothesis 4: The fourth hypothesis tested whether transaction costs, i.e. the opportunity cost of time, can be reduced through alternative organizational structures, training in leadership and group management skills, cost-effective information and communication technology (ICT), and measures of transparency of organizational processes.

None of these hypothesized factors, except for alternative organizational structures, were significantly associated to lower transaction costs. Lishe Trust members, who are predominantly women and reported being members for the longest period of time and must meet the specific demands of institutional buyers, spent much more time in group activities, but were not any more likely to view that time spent as unacceptable or too long. This would suggest that despite larger transaction costs by Lishe Trust members to maintain horizontal relationships, it is not perceived as more unacceptable, suggesting they feel they are receiving good value for the time invested.

Hypothesis 5: Lack of trust can be a rational but critical barrier to the formation of horizontal relationships between MSEs. In this study, it is hypothesized that trust in horizontal relationships is associated with organizational innovations that limit the power of leaders (e.g., rotating group leadership, member input to decisions, transparency); formal record keeping; training in leadership and group management skills; and increased human capital among all group members.

The factors which support horizontal cooperation are trust, formal record keeping and organizational innovations which limited the power of leaders. Knowledge of organizational innovations, knowledge of maintained written records, and knowledge that financial information was available to members were all significantly associated with greater trust in group members. Having knowledge of opportunities for

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training in leadership and group management appeared to be significantly associated with greater trust in group members, but having actual training in leadership and group management was not associated with greater trust in horizontal relationships. Finally, greater human capital, namely the knowledge of whether members gave each other technical advice, was strongly associated with greater trust in members.

Hypothesis 6: Social capital plays an important role in influencing horizontal relationships between MSEs.

This study found that bridging capital – marketplace and producer group relationships is significantly associated with trust in producer relationships. Social capital (in-born, and bonding) is found not significantly associated with greater trust in or reduced transaction costs of horizontal relationships. This poses the question as to whether bonding capital with friends and relatives may be depleted in the course of commercial relationships rather than built up. As shown later in Section 6, bonding social capital does play a role in willingness to upgrade, but not in trust between members of a producer group.

Figure 7 MIM Coordinators at Member Farm

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6. UPGRADING BY SMALLHOLDERS

Upgrading is a process through which those who run enterprises acquire new knowledge, often through relationships with other firms in the value chain or with firms in supporting markets, and increase “value added” of their offerings. Benefits from upgrading on MSE performance are well documented. It has been theorized that upgrading leads to higher returns for MSEs due to offerings which are more desired by consumers and thus have increased value add, as well as increases in value chain growth and competitiveness. In addition, upgrading results in gaining a more secure and steady income source, as well as providing knowledge and capacity which will allow firms to remain flexible in changing market and competitive environments. This section reviews the current state of upgrading across the four respondent groups and the factors which influence upgrading.

6.1 Types of Upgrading

Upgrading is the process of adding value to a product. There are three types of upgrading that will be examined in this study: (1) process upgrading, (2) product upgrading, and (3) functional upgrading. Overall, business upgrading in this study was measured by seven indicators, specifically, two process upgrading indicators (use of agrochemicals and pesticides, use of drip irrigation or natural gravity), four product upgrading indicators (whether the respondent produced any HVEV product, the number of types of HVEV produced, GAP certification (current and in process), and one functional upgrading indicator (whether they sold produce that the respondent did not grow him or herself).

7. MSE owners base their upgrading decisions on their assessments of the risk-adjusted returns to upgrading. MSE owners make their upgrading decisions based on their estimates of risk-adjusted returns, which include expected returns (profits), variability of returns (risk), impacts on future opportunities (sustainability), and their individual resources and objectives (household economic portfolio). MSE owners will be more likely to upgrade their businesses if

a. there is a price premium for the upgraded product, b. they have credible assurances of repeated future transactions and/or required investments are not highly 

asset specific, c. their household income is above the poverty level and/or the range of possible profits are all positive, and d. they have access to required investment capital. 

8. Upgrading can be encouraged by strengthening the linkages between firms. Vertical and horizontal linkages between firms help to improve the risk-adjusted returns to upgrading. MSE owners will be more likely to upgrade if

a. they have higher levels of acquired social capital (networking), b. they are linked to lead firms through network types of governance structures rather than only through 

market type governance, and c. they are aware of successful upgrading by MSE owners with whom they share bonding social capital. 

9. Lack of information is a critical barrier to upgrading. MSE owners often lack the information that would allow them to understand the possible advantages to upgrading. MSE owners will be more likely to upgrade if

a. they have basic awareness of the existence of upgrading opportunities, b. they have the information needed to calculate risk‐adjusted returns, and c. the transaction costs of gathering upgrading information are relatively low. 

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10. Learning by MSE owners, the acquisition of new knowledge and skills, as well as access to end-market information, facilitate upgrading. Upgrading often requires the acquisition of new knowledge and skills, which might be provided through supporting markets, embedded services or horizontal linkages. Firm owners will be more likely to engage in upgrading if they receive education and training in the following areas:

a. production technologies, b. management (e.g., strategic decision making), c. marketing and market dynamics, and d. information and communication technologies (ICT). 

6.11 Process Upgrading

Process upgrading involves improvements in the efficiency of the production process, which leads to greater production for the same amount of inputs, i.e. the ability to produce the same amount of production using fewer inputs. Firm owners in the HVEV value chain identified at least two processes in which upgrading is needed to improve the efficiency of smallholder vegetable production:

Improved inputs such as hybrid seeds and agrochemicals

Use of improved inputs is inhibited primarily by lack of capital, but there is also a low level of understanding about the value of improved seeds and about the proper handling of pesticides. The majority of HVEV seeds in Tanzania are imported, but they are very expensive for local farmers. Many seed distributors have difficulty planning three or four years in advance of demand, since it requires 18 months to produce and condition seeds and the market demand for seeds can vary dramatically from year to year depending on a wide variety of factors from rainfall, market fluctuations and new seed introductions. Seed availability within Tanzania can be poor for some types of vegetables, particularly for HVEV. Additionally, farmers often do not know the cultivation practices associated with new types of seeds. Farmers may also lack training on the use of chemicals and pesticides and can often ruin crops with improper application. Fertilizer use is generally low.

Associations play an important role in giving farmers an opportunity to share farming techniques and new varieties of crops as well instilling discipline into the production process with tools such as harvest registries and written records of pesticide use. More than half of the members of different association have maintained a written harvest registry, compared to only one third of non-members (Table 14).

Table 14. Respondents who Maintained Records By Producer Association (N=1,928) (%)

Type of record MIM Lishe Trust ULU Non-Members

N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) Maintain a written harvest registry, which includes information on the amount harvested and who respondent sold to

191 (52.0) 98 (53.3) 115 (53.7) 438 (37.7)

Maintained a written record of pesticide use in past year 167 (45.5) 92 (50.0) 107 (50.0) 369 (31.7)

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More efficient irrigation methods

Production is seasonal with rain-fed agriculture. Farmers who have irrigation can produce vegetables on a year-round basis. The three types of irrigation commonly found are furrow and pan, natural or channel irrigation, and drip irrigation (Table 15). A detailed description of these irrigation techniques can be found in the definitions in Annex 1. Among MIM members, natural channel was the most common form of irrigation, as MIM organizers provided technical assistance and worked with farmer groups to build channels since the quantity of water is critical to the proper irrigation of export crops. Among Lishe Trust and ULU members, furrow and pan was the most common, followed by rain. Non-members were split between furrow and pan or natural channel.

Table 15. Respondents by Irrigation Method and by Producer Association (N=1,928)

Irrigation method MIM Lishe Trust ULU Non-Members

N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) Rain 106 (28.9) 94 (51.1) 103 (48.1) 411 (35.3) Furrow and pan 75 (20.4) 144 (78.3) 165 (77.1) 673 (57.9) Natural channel 292 (79.6) 71 (38.6) 75 (35) 600 (51.6) Drip 8 (2.2) 61 (33.2) 52 (24.3) 150 (12.9) Note: percentages do not add up to 100 since some producers use multiple irrigation methods.

Pan irrigation, the process of throwing water onto crops from a pan, is the most widely practiced form of irrigation, as well as the most inefficient from the perspective of both labor and evaporation. Due to the cost and labor requirements, irrigation methods of natural channel and drip are rarely invested in by a single producer. Instead the entire producer group or neighboring farms collectively invest in improving irrigation. It is not surprising, then, that many producers who use natural channel irrigation also appear to apply this method on a larger plot of farmland than producers using other irrigation methods (Table 16). Establishing predictable irrigation, such as natural channel, is particularly important when producing export vegetable crops.

Table 16. Mean (SD) Acres of Farmland by Irrigation Method and Producer Association (N=1,928)

Irrigation method MIM Lishe Trust ULU Non-Members

N (%) 367 184 214 1,163 Rain 8.1 (4.9) 8.7 (3.0) 9.5 (3.2) 8.0 (3.6) Furrow and pan 6.9 (4.8) 8.6 (3.3) 8.3 (3.2) 8.1 (3.7) Natural channel 10.3 (3.3) 9.3 (1.2) 9.2 (2.1) 9.7 (2.9) Drip 9 (8.1) 7.7 (3.6) 8.9 (3.7) 7.8 (3.9)

6.12 Product Upgrading

Product upgrading is the process of improving product quality or changing the product to meet specific market needs. During the qualitative study, at least four opportunities for product upgrading within the Tanzanian HVEV value chain were observed including (1) cultivation of higher value-added crops, (2) adoption of sanitary and phyto-sanitary standards, (3) organic farming, and (4) product quality, grading, and standardization.

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Higher value-added crops

A key type of product upgrading is for smallholders to begin cultivating HVEV for the first time. Of the surveyed population, 23% of farmers have no experience of producing high-value export vegetables, which include snow peas, sugar snap peas, French green beans, baby corn, baby carrots, patty pan squashes, baby leeks, broccoli, cauliflower, and zucchini. Most of these vegetables are not traditionally consumed by the Tanzanian population.

These vegetables are typically grown in higher altitude, temperate (cool climate) zones and have export potential. These crops can be sold at higher prices than vegetables traditionally grown by smallholders (e.g. tomatoes, onions, or cabbage). However, the opportunities to market HVEV are limited. Like most farmers, Tanzanian farmers are risk averse and will only change crops when they have a contract with a specific buyer, rather than risk losing money in an uncertain market, particularly when it can take two to three growing seasons to learn to grow a crop properly.

Local associations, such as FAIDA MaLi, encourage farmers to diversify crops so that they are not dependent on a single buyer. Lishe Trust members have the most diversified portfolio with 71% of their members growing five or more high-value export vegetables. A diversified portfolio allows producers to spread their risk over a number of buyers, allowing a greater ability to negotiate prices and maintain market outlets even if some buyers stop sourcing from them. This is particularly true for Lishe Trust which sells into retail market outlets which prefer a variety of vegetable products. MIM members, however, are meeting the specific market demands of their exporter and may only plant one or two varieties since the exporter provides the seed and is looking to aggregate large quantities of HVEV. Significantly, 36% of non-members who are less linked into high value market channels have never grown HVEV (Table 17).

Table 17. Number of HVEV* Product Types Planted in Past 5 Years (N=1,928) Types MIM Lishe Trust ULU Non-Members N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) 0 20 (5.5) 1 (0.5) 10 (4.7) 418 (36.0) 1 58 (15.8) 11 (6.0) 24 (11.2) 178 (15.3) 2 105 (28.6) 5 (2.7) 21 (9.8) 127 (10.9) 3 78 (21.3) 20 (10.9) 16 (7.5) 94 (8.1) 4 53 (14.4) 16 (8.7) 19 (8.9) 80 (6.9) 5+ 53 (14.4) 131 (71.2) 124 (57.9) 266 (22.9) Note: HVEV refer to snow peas, sugar snap peas, French green beans, baby corn, baby carrots, patty pan squashes, baby leeks, broccoli, cauliflower, and zucchini.

Sanitary and phyto-sanitary standards (SPS)

An important issue for the expansion of Tanzanian HVEV is the need to increase sanitary and phyto-sanitary (SPS) standards in order to be able to participate in the export market. Since the safety of a vegetable cannot be readily observed from visual inspection, the main ways to verify food safety in fresh produce is either through laboratory testing or through producer participation in certification programs. Tanzania has a basic SPS legislative framework in place, but an updated framework with expanded and strengthened institutional structures is required. For some agricultural commodities Tanzania exporters have adopted a defensive posture, channeling commodities only to markets where standards are less stringent or not enforced.

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At present, there are few Tanzanian smallholders who are SPS certified according to GLOBALGAP and BRC (UK) standards. Improvements in horticulture products to meet increasing SPS standards represent an important type of product upgrading. EUROPGAP started in 1997 as an initiative of retailers belonging to the Euro-Retailer Produce Working Group. These standards combine principles from Good Agricultural Practices (GAP), Integrated Crop Management (ICM), and Integrated Pest Management (IPM). EUROPGAP/GLOBALGAP is concerned with practices on the farm; once the product leaves the farm, it comes under food packing and processing certification schemes. Compliance with GLOBALGAP is not required by all importers; however, certain retailers in the UK and EU markets, such as Sainsbury’s, require it.

In order for Tanzanian smallholders to produce for export markets, they will need to increase their compliance with costly sanitary and phyto-sanitary (SPS) standards. Because of the relatively small scale of their revenues, smallholders have difficulty absorbing the full cost of obtaining GLOBALGAP certification. These costs include high initial investment costs, plus annual maintenance and certification renewal costs. An expert informant estimated the annual certification costs to be between US$1,500 and US$5,000 per farm. Exporters employ personnel in both technical assistance and quality control departments who are responsible for working with smallholders, other medium/large size outgrowers and with packing house workers to meet standards. Traceability and record-keeping requirements associated with SPS certification create a “paper trail” documenting practices at every stage of the production and packaging process, including all the fertilizers, pesticides, and chemicals used during production. One of the difficulties in meeting the SPS standards is the lack of knowledge of how to select and use approved chemicals.

GLOBALGAP certification is one of the necessary prerequisite for entering the lucrative European export market. In total, only 104 respondents (5.4%) had GLOBALGAP certification, of which 46 (44.2%) were MIM members. Although a larger share of MIM members are certified, a larger share of Lishe Trust and ULU members are in the process of certification (Table 18). In total, 423 respondents (23.2%) are in the process of certification.

Table 18. Respondents (%) by GAP Certification and Producer Association (N=1,928)

Certification MIM Lishe Trust ULU Non-Members

N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) Good Agricultural Practices Certification 46 (12.5) 14 (7.6) 19 (8.9) 25 (2.2)

In the process of GAP certification 63 (19.6) 66 (38.8) 67 (34.4) 227 (20.0)

Respondents also report significantly different mean lengths of time to obtain certification for Lishe Trust members (10.5 months) was about twice that of MIM members (5.5 months) or more than three times that of ULU members (3.3 months) (Table 19).

Table 19. Mean (SD) Months to Receive Certification by Producer Association (N=1,928) MIM Lishe Trust ULU Non-Members 5.5 (7.3) 10.5 (8.8) 3.3 (2.6) 6.2 (4.2)

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Organic farming

There are important niche markets, especially in Europe, for organic products. As with SPS certification, organic certification is expensive and there are third-party certification programs. The organic certification process can take several years. While awaiting certification, farmers must demonstrate that they are consistently following organic practices. Based on interviews with buyers in Dar es Salaam, the Lushoto area is gaining a reputation for organic farming in Tanzania. Many of the large farms producing coffee and tea have received organic certification.

Some farmers may use organic practices, even though they are not pursuing a formal certification process. With many farmers the high costs of chemical pesticides and fertilizers forces them to “default” into organic farming, for example, by using locally grown garlic and chilies to control pests. There are middle-ground markets for these products that are “organically grown” but not “certified organic.” It is likely, then, that the 816 (42.3%) respondents who reported to be certified in organic practices is an overestimate since some respondents who follow some organic practices may have reported themselves as certified organic without actually having been certified.

Product quality, grading and standardization

Consistent product quality and standardization are important factors to exporters, who must meet appearance and quality standards of size, color, shape, level of damage, number of worms, etc. These standards are specified in contracts between importers and exporters. Exporters, such as GEL, provide farmers and farmer associations with product specifications. These specifications are enforced at the exporter’s packing house, which will reject products that do not meet standards. Sales to restaurants generally occur through intermediaries and are much more dependent on the flavor and ripeness of the product, since it will be prepared in the kitchen. Supermarkets, such as Shoprite, work with a group of farmers with whom they have long-term relationships. Based on interviews with the buyers, their purchases are based on the quantity, size, freshness, and quality of the product, but they do not require extensive standardization.

6.13 Functional Upgrading

The elimination of an intermediary—either above or below the producer in the value chain—is a stepping stone to functional upgrading and higher profits. Associations, clubs, and cooperatives allow producers to functionally upgrade by allowing them to work directly with buyers or lead firms rather than selling at the farm gate. Associations such as ULU and Lishe Trust, acting as distributors, may purchase trucks to transport vegetables directly to markets.

Table 20. Respondents (%) by Organic Certification and Producer Association (N=1,928)

Certification MIM Lishe Trust ULU Non-Members

N (%) 367 (100) 184 (100) 214 (100) 1,163 (100) Certified in organic practices 111 (30.3) 108 (58.7) 103 (48.1) 494 (42.5) In the process of certification in organic practices 75 (29.3) 25 (32.9) 25 (22.5) 139 (20.8)

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A less common type of functional upgrading is when an individual farmer becomes a distributor, broker, or intermediary by beginning to handle other farmers’ crops. Lishe Trust members were more likely to sell produce they did not grow compared to members of other producer associations (Table 21).

Table 21. Respondents Who Sold Produce They Did Not Grow by Producer Association (N=1,928)

MIM (N=367) Lishe Trust (N=184) ULU (N=214) Non-Members (N=1,163)

25 (6.8) 58 (31.5) 55 (25.7) 170 (14.6) Note: percentages refer to sub-total by producer association, e.g. 25 of 367 MIM members is 6.8%.

6.2 Risk-Adjusted Returns and Upgrading

Production of high-value fresh vegetables is highly dependent on climate and hence only a fraction of the total number of smallholder households in Tanzania can be involved in this sector. Where climatic conditions permit in the highland area , smallholders view production of high-value vegetables as a key source of income. In most cases, high-value fresh vegetables are viewed as a cash crop since most households in Tanzania do not consume them. In Kilimanjaro, for example, farmers indicated that they began producing high-value vegetables as a way of enhancing their income after coffee prices fell. The farmers who were interviewed in the qualitative phase of the research indicated that they were quite willing to take up production of a new crop, assuming that they can expect a high profit. Nevertheless, the adoption of a new crop entails various risks including market risk, production risk, post-harvest losses, and income and subsistence risk.

1. Market risk: This is the risk that the farmer will not be able to sell his or her produce at a price that allows him or her to make a profit. Seasonal oversupply presents the biggest market risk and, hence, the ability to bring produce to market in the off-season becomes critical. It is also very important for farmers to have an assured market both in terms of quantity demanded and price.

2. Production risk: This is the risk of crop failure that may come about due to various reasons such as drought, disease, flooding, etc.

3. Post-harvest losses: The perishability of high-value vegetables makes them especially susceptible to losses due to poor storage after harvest. Export markets and higher-end domestic markets demand high quality produce that can maintain an extended shelf-life. The inability of smallholders to afford cold storage facilities and the poor quality of transportation infrastructure increases the risk that the product will spoil prior to reaching the end market or be rejected due to compromised quality.

4. Income and subsistence risk: If the household invests its resources into a cash crop that fails, this will negatively affect household income. In addition, if they convert land from subsistence crop production to cash crop production, then the failure of the cash crop could place the household’s food consumption levels at risk.

Before making a decision on whether to adopt a new crop, producers need to be able to effectively assess the risks involved in the new activity as well as the costs of mitigating these risks. In most instances, smallholders lack adequate information, knowledge, and tools to make well-informed decisions.

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The next three hypotheses may improve our understanding of the incentives, disincentives, and systemic constraints to upgrading by micro- and small enterprises. Some of these constraints are transaction based and others are more systemic.

6.21 Estimating Risk-Adjusted Returns

It is hypothesized that MSE owners make their upgrading decisions based on their estimates of risk-adjusted returns, which include expected returns (profits), variability of returns (risk), impacts on future opportunities (sustainability), and their individual resources and objectives (household economic portfolio). This study tests whether MSE owners are more likely to have upgraded their businesses if (1) there is a price premium for the upgraded product, (2) they have credible assurances of repeated future transactions and/or required investments are not highly asset specific, (3) their household income is above the poverty level and/or the range of possible profits are all positive, or (4) they have access to required investment capital.

Price premium was measured by respondent’s knowledge of any buyers who pay higher prices to producers who are certified or use GAP. Knowledge of buyers who pay higher prices to producers who are certified was significantly associated with several indicators of upgrading (Table 21A). Knowledge of a price premium was not associated with use of natural channel irrigation, or having sold produce not grown by oneself.

Table 21A. Crude and Adjusted* Odds Ratio of Associations between Price Premium and Various Measures of Upgrading Measure of upgrading Crude OR Adjusted OR Process upgrading Use of pesticide in past year 3.7 (<0.0001) 3.3 (<0.0001) Use of natural channel irrigation 0.7 (0.0560) 0.8 (0.2140) Use of drip channel irrigation 2.1 (<0.0001) 1.8 (0.0170) Product upgrading Planted ≥ 5 types of HVEV in past 5 years 3.7 (0.0001) 3.0 (<0.0001) GAP certified 21.7 (<0.0001) 21.7 (<0.0001) In process of GAP certification 9.0 (<0.0001) 7.9 (<0.0001) Organic certified 2.3 (<0.0001) 2.3 (<0.0001) In process of organic certification 7.4 (<0.0001) 7.0 (<0.0001) Functional upgrading Sold produce not grown by oneself 1.6 (0.0280) 1.3 (0.2360) * Adjusted for association, gender, respondent’s age, and total income Note: Values in cells are odds ratios, followed by p-values in parentheses below.

Natural channel irrigation requires a concerted effort by a group of farmers and is a long term effort rather than a response to a price premium. Additionally, selling produce not grown by oneself may involve sharing any price premium, as do members of Lishe Trust who represent group interests when selling products other than their own.

Credible assurances of repeated future transactions was measured by whether the respondent’s buyers had ever paid for some or all of the certification process, preferred crops produced by certified producer, and helped certified producers find other markets for their products. Various measures of credible assurance of repeated future transactions were significantly associated with several measures of

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product upgrading (Table 21B). In terms of process upgrading, use of pesticide in the past year was significantly and positively associated with three measures of credible assurances, while use of natural channel was significantly and inversely associated with three measures of credible assurances. Because the investment for irrigation is large and requires up front cash payments for labor and equipment, they require the farmer to have cash on hand rather than an expectation of future transactions.

Table 21B. Crude and Adjusted* Odds Ratio of Associations between Credible Assurance of Future Transactions and Various Measures of Upgrading Measure of credible assurance Buyers pay for some

or all of certification process

Buyers prefer to purchase crops produced by certified producers

Buyers help certified producers find buyers for producer’s products

Measure of upgrading

Crude OR

Adjusted OR

Crude OR

Adjusted OR

Crude OR

Adjusted OR

Process upgrading Use of pesticide in past year

6.5 (<0.0001)

5.2 (<0.0001)

4.4 (<0.0001)

3.8 (<0.0001)

5.6 (<0.0001)

4.6 (<0.0001)

Use of natural channel irrigation

0.6 (0.065)

0.5 (0.016)

1.0 (0.882)

0.8 (0.702)

0.4 (0.003)

0.5 (0.017)

Use of drip channel irrigation

1.4 (0.266)

1.4 (0.265)

0.5 (0.238)

0.5 (0.244)

1.0 (0.960)

0.7 (0.335)

Product upgrading Planted ≥ 5 types of HVEV in past 5 years

2.2 (0.001)

1.9 (0.014)

2.2 (0.015)

2.3 (0.025)

4.5 (<0.0001)

3.1 (<0.0001)

GAP certified 18.0 (<0.0001)

12.5 (<0.0001)

17.1 (<0.0001)

12.4 (<0.0001)

11.8 (<0.0001)

9.6 (<0.0001)

In process of GAP certification

5.0 (<0.0001)

3.9 (<0.0001)

3.4 (0.005)

3.1 (0.011)

6.1 (<0.0001)

4.5 (<0.0001)

Organic certified 5.4 (<0.0001)

7.3 (<0.0001)

4.2 (<0.0001)

5.0 (<0.0001)

5.2 (<0.0001)

5.0 (<0.0001)

In process of organic certification

4.2 (0.005)

3.8 (0.010)

3.3 (0.064)

2.9 (0.095)

16.7 (<0.0001)

16.2 (<0.0001)

Functional upgrading Sold produce not grown by oneself

1.7 (0.064)

1.6 (0.108)

1.3 (0.484)

1.3 (0.493)

2.8 (<0.0001)

2.2 (0.011)

* Adjusted for association, gender, respondent’s age, and total income Note: Values in cells are odds ratios, followed by p-values in parentheses below.

Household income level was measured by top quintile of respondents by total household income. Highest income quintile was significantly associated with use of pesticide in past year, having planted five or more types of HVEV in the past five years, in the process of GAP certification, being organic certified, and in the process of organic certification.

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Table 21C. Crude and Adjusted Associations between Highest Household Income Quintile and Various Measures of Upgrading Measure of upgrading Crude OR Adjusted OR Process upgrading Use of pesticide in past year 1.6 (<0.0001) 1.6 (<0.0001) Use of natural channel irrigation 0.93 ( 0.5470) 0.84 ( 0.1480) Use of drip channel irrigation 1.1 ( 0.5250) 1.2 ( 0.2030) Product upgrading Planted ≥ 5 types of HVEV in past 5 years 1.2 (0.123) 1.3 (0.043) GAP certified 1.5 (0.068) 1.4 (0.150) In process of GAP certification 1.6 (0.001) 1.6 (0.001) Organic certified 1.4 (0.006) 1.4 (0.003) In process of organic certification 1.6 (0.010) 1.5 (0.012) Functional upgrading Sold produce not grown by oneself 1.0 (0.939) 1.0 (0.775) * Adjusted for association, gender, respondent’s age, and total income Note: Values in cells are odds ratios, followed by p-values in parentheses below.

Access to required investment capital was measured by having received cash advances or cash credit for production or knowledge by the respondent’s top buyer, other buyer, or other source. Access to having received cash advances or cash credit was significantly and positively associated with two out of three measures of process upgrading, and significantly and inversely associated with three out of five measures of product upgrading.

Table 21D. Crude and Adjusted* Associations between Having Received any Cash Advances and Various Measures of Upgrading Measure of upgrading Crude OR Adjusted OR Process upgrading Use of pesticide in past year 1.3 (0.0210) 1.4 (0.0010) Use of natural channel irrigation 1.5 (<0.0001) 1.6 (<0.0001) Use of drip channel irrigation 0.8 (0.1950) 0.9 (0.2880) Product upgrading Planted ≥ 5 types of HVEV in past 5 years 0.4 (<0.0001) 0.4 (<0.0001) GAP certified 1.1 (0.5310) 1.4 (0.0940) In process of GAP certification 0.6 (<0.0001) 0.7 (0.0020) Organic certified 0.5 (<0.0001) 0.5 (<0.0001) In process of organic certification 0.7 (0.0310) 0.8 (0.1150) Functional upgrading Sold produce not grown by oneself 0.9 (0.4430) 0.9 (0.6250) * Adjusted for association, gender, respondent’s age, and total income Note: Values in cells are odds ratios, followed by p-values in parentheses.

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6.22 Linkages between Firms

Vertical and horizontal linkages between firms are hypothesized to help improve the risk-adjusted returns to upgrading. This study tests whether MSE owners are more likely to have upgraded if: (1) they have higher levels of acquired social capital (networking), (2) they are linked to lead firms through network types of governance structures rather than only through market type governance or (3) they are aware of successful upgrading by MSE owners with whom they share bonding social capital.

Acquired social capital was measured by three indicators (Table 27A): having received assistance with farming techniques from buyers in the last 12 months, selling to market as part of a group, and most frequently interacting with producers in marketplace. Having any source of assistance or advice with farming techniques in the past 12 months was significantly and positively associated two measures of process upgrading and significantly and inversely associated with one measure of process upgrading. It was significantly and inversely associated with having planted five or more types of HVEV in the past 5 years, being in the process of GAP certification, and being organic certified. Selling together to market with members of a group was only significantly and inversely associated with having planted five or more types of HVEV. Most frequently interacting with producers in the marketplace was significantly and inversely associated with having used pesticides in the past year and having sold product not grown by oneself. It was positively and significantly associated with having planted five or more types of HVEV in the past 5 years, being in the process of GAP certification, or being organic certified. Table 22A. Crude and Adjusted* Associations between Acquired Social Capital and Various Measures of Upgrading Measure of acquired social capital

Any source of assistance or advice with farming techniques in past 12 months

Members of group sell to market together

Most frequently interact with producers in the marketplace

Measure of upgrading Crude Adjusted Crude Adjusted Crude Adjusted Process upgrading Use of pesticide in past year

1.7 (<0.0001)

1.7 (<0.0001)

0.9 (0.519)

0.9 (0.565)

0.7 (<0.0001)

0.7 (0.004)

Use of natural channel irrigation

2.1 (<0.0001)

1.7 (<0.0001)

2.4 (0.001)

1.6 (0.088)

0.8 (0.009)

1.0 (0.611)

Use of drip channel irrigation

0.6 (<0.0001)

0.8 (0.064)

0.4 (0.034)

0.8 (0.672)

1.3 (0.055)

1.2 (0.307)

Product upgrading Planted ≥ 5 types of HVEV in past 5 years

0.3 (<0.0001)

0.4 (<0.0001)

0.3 (<0.0001)

0.5 (0.019)

1.4 (0.001)

1.5 (0.001)

GAP certified 1.4 (0.109)

1.1 (0.768)

0.7 (0.476)

0.7 (0.322)

0.5 (0.001)

0.6 (0.073)

In process of GAP certification

0.6 (<0.0001)

0.6 (<0.0001)

0.8 (0.339)

1.0 (0.926)

1.2 (0.048)

1.3 (0.020)

Organic certified 0.6 (<0.0001)

0.6 (<0.0001)

1.0 (0.848)

1.3 (0.282)

1.5 (<0.0001)

1.5 (<0.0001)

In process of organic certification

0.8 (0.187)

0.8 (0.074)

1.1 (0.860)

1.1 (0.867)

0.7 (0.031)

0.8 (0.199)

Functional upgrading Sold produce not grown by oneself

0.7 (0.013)

0.9 (0.518)

0.3 (0.009)

0.5 (0.095)

0.7 (0.019)

0.6 (0.002)

* Adjusted for association, gender, respondent’s age, and total income. Note: Values in cells are odds ratios, followed by p-values in parentheses below.

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Linkages to lead firms with relational or captive types of governance structure was measured by making agreements in writing, receiving support related to certification by any source (e.g. top buyer, other buyer, or other source), and having a personal connection to top buyer (e.g. relative, church, neighbor, group, or friend). Making agreements in writing was positively associated with use of pesticide in the past year, but inversely associated with use of natural channel irrigation. It was not associated with any measure of product upgrading, but positively associated with the sole measure of functional upgrading. Having received any support related to certification was positively associated with two measures of process upgrading and inversely associated with one measure of process upgrading. It was inversely associated with three measures of product upgrading, and positively associated with one measure of product upgrading. Having a personal connection to one’s top buyer was associated with one measure of process upgrading, one measure of product upgrading, and the sole measure of functional upgrading.

Table 22B. Crude and Adjusted* associations between Relational and Captive Governance and Various Measures of Upgrading Measure of network governance Making agreements in

writing Receiving support related to certification

Having a personal connection to top buyer

Measure of upgrading Crude Adjusted Crude Adjusted Crude Adjusted Process upgrading Use of pesticide in past year

1.2 (0.02)

1.5 (<0.0001)

1.2 (0.071)

1.3 (0.006)

3.9 (<0.0001)

3.9 (<0.0001)

Use of natural channel irrigation

0.8 (0.004)

0.9 (<0.0001)

1.7 (<0.0001)

1.5 (<0.0001)

1.3 (0.009)

1.2 (0.115)

Use of drip channel irrigation

1.0 (0.800)

0.8 (0.157)

0.3 (<0.0001)

0.4 (<0.0001)

1.3 (0.058)

1.4 (0.017)

Product upgrading Planted ≥ 5 types of HVEV in past 5 years

0.9 (0.237)

0.9 (0.168)

0.3 (<0.0001)

0.3 (<0.0001)

1.2 (0.121)

1.2 (0.219)

GAP certified 0.6 (0.032)

1.0 (0.992)

2.5 (<0.0001)

3.0 (<0.0001)

1.8 (0.004)

1.5 (0.059)

In process of GAP certification

1.1 (0.477)

1.1 (0.263)

0.7 (0.003)

0.8 (0.038)

1.0 (0.843)

0.9 (0.539)

Organic certified 1.2 (0.044)

1.1 (0.171)

0.5 (<0.0001)

0.6 (<0.0001)

1.0 (0.843)

1.5 (<0.0001)

In process of organic certification

0.9 (0.623)

1.1 (0.475)

0.9 (0.442)

0.9 (0.695)

1.3 (0.010)

0.8 (0.253)

Functional upgrading Sold produce not grown by oneself

1.5 (0.001)

1.5 (0.003)

0.8 (0.175)

1.0 (0.932)

1.6 (0.001)

1.7 (0.001)

* Adjusted for association, gender, respondent’s age, and total income Note: Values in cells are odds ratios, followed by p-values in parentheses below.

Awareness of successful upgrading with whom they share bonding social capital was measured by knowledge of any producers that have received certification. It was significantly associated with all measures of process upgrading and product upgrading. In particularly, it was very strongly associated with being GAP certified or in the process of GAP certification. It was inversely associated with use of natural channel irrigation, but positively associated with use of drip channel irrigation and use of

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pesticide in the past year. This indicates that witnessing family and friends successfully implementing new technologies or making investments reduces the perceived risks for individual investments in upgrading.

Table 22C. Crude and Adjusted* Associations between Awareness of Successful Upgrading and Various Measures of Upgrading Measure of upgrading Crude OR Adjusted OR Process upgrading

Use of pesticide in past year 2.4 (<0.0001)

2.0 (<0.0001)

Use of natural channel irrigation 0.7 (0.062)

0.7 (0.014)

Use of drip channel irrigation 1.6 (0.020)

1.6 (0.034)

Product upgrading

Planted ≥ 5 types of HVEV in past 5 years 2.8 (<0.0001)

2.7 (<0.0001)

GAP certified 60.0 (<0.0001)

51.3 (<0.0001)

In process of GAP certification 10.8 (<0.0001)

10.0 (<0.0001)

Organic certified 2.1 (<0.0001)

2.3 (<0.0001)

In process of organic certification 3.5 (<0.0001)

3.1 (<0.0001)

Functional upgrading

Sold produce not grown by oneself 1.2 (0.296)

1.1 (0.560)

* Adjusted for association, gender, respondent’s age, and total income Note: Values in cells are odds ratios, followed by p-values in parentheses below.

6.24 Information and Learning

The ninth hypothesis is that MSE owners often lack the information that would allow them to understand the possible advantages to upgrading. This study tests whether MSE owners are more likely to have upgraded if: (1) they have basic awareness of the existence of upgrading opportunities, (2) they have the information needed to calculate risk-adjusted returns, or (3) the transaction costs of gathering upgrading information are relatively low. In Table 27C, we see that awareness of successful upgrading is highly correlated with various measures of upgrading. In Table 27A, we see that various measures of acquired social capital are correlated with being certified in organic practices and using pesticides. In Table 27B, having certain measures of modular and relational governance, especially having received support related to certification, are correlated with upgrading.

6.3 Summary of Upgrading by Smallholders

As the economy grows, so does the demand for high value vegetables. However, smallholder farmers in northern Tanzania, for all the climatic and seasonal advantage, will have to be more effective and efficient to compete with the growing agricultural production from China as well as the currently contracting economy. Upgrading to improve competitiveness, particularly by GLOBALGAP certification and

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improved market linkages to end markets, will play a critical role in the sustainability of the HVEV sector. Certification is particularly important since the health benefits of fresh fruits and vegetables are a primary reason for the sector’s continued growth.

Producer associations, particular those with a relational or captive governance pattern, can greatly assist in the organization, training, and marketing of products from smallholder farmers. Lack of information remains a considerable constraint for smallholder farmers even when they are part of a producer group as can seen by the unevenness in reporting association characteristics in Section 4. In particular, producer groups can improve the awareness of price premiums for upgrading, helping farmers determine the risks to investment. Sharing “Success Stories” of farmers who have received price premiums due to upgrading, particularly within communities will improve farmer’s willingness to take risks. Much of these risks can also be alleviated by establishing long term contracts with the producer and buyers at various points on the value chain.

Hypothesis 7: MSE owners are more likely to have upgraded their businesses if the owners know of a price premium (if respondents know of any buyers who pay higher prices to producers who are certified or use GAP), if they have credible assurances of repeated future transactions (if buyers pay for some or all of certification process, if buyers prefer to purchase crops produced by certified producers, if buyers helps certified producers find other buyers for the producer’s products), and if they are in the top quintile of respondents by total household income. Having knowledge of a price premium for upgraded products and credible assurances of repeated future transactions are both significantly associated with having participated in product upgrading (all five measures) and at least one measure of process upgrading. Having access to required investment capital did not appear to be significantly and positively associated with upgrading.

Hypothesis 8: Vertical and horizontal linkages between firms are hypothesized to improve the risk-adjusted returns to upgrading. MSE owners are more likely to have upgraded if they are linked to lead firms through network types of governance structures (i.e. if the respondent made agreements in writing, received support related to certification, or had a personal connection to their top buyer) and are aware of successful upgrading by MSE owners with whom they share bonding social capital. In general, MSE owners were less likely to have upgraded (except for one measure of process upgrading) if they had acquired various types of social capital. Knowledge of successful upgrading was strongly

associated with upgrading, especially measures of product upgrading.

Hypothesis 9: Lack of information is hypothesized to be a critical barrier to upgrading. Producers often lack awareness that upgrading opportunities exist, the information needed to calculate risk-adjusted returns. For individual producers, the transaction costs to gathering upgrading information are very high. MSE owners are more likely to upgrade if they know others who have successfully upgraded and know buyers who pay higher prices to producers who are certified (or ‘upgraded’) thereby having the necessary information to calculate risk-adjusted returns.

Figure 8 Natural Channel Irrigation, Arusha

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7. RELEVANCE OF FINDINGS FOR IMPLEMENTATION AND RESEARCH

The purpose of this paper is to examine the factors which increase the opportunities for smallholder farmers to participate in competitive value chains. The findings of this research show that it is possible to refine and target interventions based on the opportunities available in the domestic and global market for high value vegetable crops.

The vertical linkage between small producers and their buyers in this region of Tanzania was overall trusting with long-term relationships. The formality of contracts also plays less of a role in building trust for members of producers groups, who negotiate collectively with buyers. Non-members, however, are far less likely to have any agreements with buyers, receive services, or undertake product upgrading by growing HVEV. However, written agreements, typically found in captive governance relationships, were significantly associated with process and functional upgrading – so while agreements did not necessarily increase trust, they did reduce perceived risk. A buyer’s transparency regarding their final sale is also strongly associated with improving trust and reducing risk.

Horizontal linkages in general brought a greater number of opportunities to smallholder farmers because it allowed them to access a broader number of market channels and successfully negotiating captive, modular and relational governance structures. Specifically exports, institutional, and retail channels – which typically provide higher per unit costs, were available to members of producer groups far more than non-members. Being part of a producer group does not, however, result in the reduction of transactions costs, although most members feel that the time they spend in groups activities is acceptable. Being part of a producer group is consistently the factor most associated with all forms of upgrading.

Factors which improved trusts within producer groups to improve market coordination are those which limited the power of leaders and increased the knowledge of members – transparency of financial documents and prices, sharing of technical advice and knowledge of training opportunities. Knowledge of opportunities and was a greater factor in trust than actually participating in trainings. However, training is a significant factor in the occurrence of most forms of upgrading.

The type of social capital also factored into the incidence of trust. Bridging capital – measured by the frequency of interaction with other producers in the market place, groups, or other setting – are significantly associated with trust within producer groups. Bonding and in-born social capital, inversely, are not associated with increased trust within producer groups. Bonding capital does play a critical role in upgrading, however, as producers are far more likely to upgrade when family, friends, or neighbors have successfully done so. Acquired social capital, in the form of assistance or advice on farming techniques from a buyer, was also significantly associated with several measures of upgrading – including use of pesticides, natural channel irrigation, variety of HVEV planted, and GAP and organic certification.

The findings of this research show that it is possible to refine interventions depending on the market channel, group composition, and target outcome. For example, the factor most strongly associated with process upgrading in the form of GAP certification, which is critical to competitiveness in the global HVEV market, is awareness of other farmers who had successfully upgraded. Also a significant factor is the credible assurance of future transactions, largely because the buyers participating in these forward agreements also provide technical assistance or funding of the GAP certification process.

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Credible assurance was not significantly associated with natural channel irrigation; however, this form of process upgrading requires an initial cash investment not accessible to most smallholder farmers. Farmers do not get paid for their crops until after harvest, and sometimes not until their buyer sells their produce. Although all respondents preferred the market channel and buyer which brought them the highest unit price, even a price premium was not a factor in natural channel irrigation. The focus on immediate returns rather than reliable sales over time underpins the difficulty of making long term investments in process upgrading, like natural channel irrigation or functional upgrading by aggregating and selling goods grown by others (outside of an activity as part of a producer group). These two forms of upgrading require initial cash investments for greater returns in the future.

HVEV is a market sector that has been growing, and inversely the participation of smallholder farmers have been decreasing as SPS standards and other quality and quantity controls have increased. The demand may decrease yet with the global economic downturn – making it increasingly difficult for small and medium enterprises to participate even as Tanzania increases investment in infrastructure bottlenecks. However, global export is only one market channel for HVEV – other channels also provide good opportunities for smallholder farmers such as domestic retail and institutional buyers. Providing the correct resources to smallholder farmers and understanding the factors which allow them to most effectively participate in participate will allow them to access to information and opportunities as market opportunities and end buyer preferences shift.

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ANNEX A: DEFINITIONS

A.1 General Value Chain Definitions

Buyer Firms (“Buyers”): Firms that buy the product for resale, including firms that buy the product from MSE producers. Buyer firms may resell the product in national and/or international markets. These firms may also participate in activities at other levels of the value chain, including supplying raw materials and production. Governance: The patterns of vertical relationships between firms in a value chain, which are characterized by a) the level of control that one firm exercises over another and b) the flow of information between firms. The three general types of governance, in order of increasing strength, are the following: Market Relationships: Arms-length transactions with little information exchange between firms. Network Relationships: Some firms in the chain exert a degree of influence or control over the operations of other firms, information flows between firms are more extensive, and suppliers supply products according to buyers’ specifications. Hierarchical Relationships: Value-added functions are vertically integrated under the ownership of a single firm. Horizontal Relationships: Market and non-market interactions between firms operating at the same level of the value chain. Horizontal linkages among MSEs can take the form of formal or informal groups, as well as networks that are managed through a third party (e.g., lead firm, broker, trader). Similarly, cooperation among larger firms can be important for creating industry standards, developing marketing campaigns or lobbying. Household Economic Portfolio: This is the synchronization of the household’s full set of production, consumption, and investment activities, given the set of available resources and the house-hold’s economic goals. Input Suppliers: Firms that provide raw materials and inputs used in production. Lead Firms: Firms that play central roles in the value chain and are involved in a significant percentage of total sector sales or value added. Because of their market share, they have an effective influence on governance patterns within the value chain and have incentives to invest in upgrading opportunities along the chain. MSE Producers: Firms at the production level of the value chain with fewer than 25 full-time and part-time employees. MSE producers in the Tanzanian HVEV value chain are smallholder farmers. In order to be included in the population for this study, MSEs producers need to be either currently producing vegetables in the agro-climatic zones where HVEV can be grown or have produced and sold vegetables in these zones during the past twelve months. Profits: Also known as net returns, these are the payments made to the firm for its products and/or services (revenues) minus the firm’s cash and in-kind expenses (costs).

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Retailers: Firms that sell the product to final consumers. Risk-Adjusted Return: In the most narrow sense, this is the projected returns (profits) adjusted for the probability of losses associated with upgrading investments under conditions of uncertainty. In the broader sense, risk-adjusted return encompasses attributes in addition to profit and risk, which are weighted to reflect the importance of each attribute to the decision maker. Risks: These are the chances of incurring losses not only in terms of profits, but also in terms of assets, household consumption flows, social capital, and business relationships. Social capital: The institutions, relationships, attitudes, and values that govern interactions among people; norms and networks that facilitate collective action. A high level of social capital is generally seen as a positive asset, since it can lead to more productive communities through higher levels of trust and shared information, lower transaction costs, and greater networking. However, it is possible for social capital to divide a community and exclude outside groups. Suppliers: Firms that sell the product to other firms. Sustainability: This concept includes the implications of the decision for future income flows, continued market access, long-run opportunities, and future economic security. Trust: Willingness to expose oneself to risk in a business agreement with another person or firm. Transaction Costs: Non-price costs associated with a transaction, including the costs of gathering information, the costs of negotiating a contract, and the costs of enforcing the terms of a contract. Upgrading: Innovation that increases value added. There are five specific categories of upgrading: Process upgrading is an increase in production efficiency, which results in either greater output for the same level of inputs or the same level of output from fewer inputs. Process upgrading reduces the cost of production and may be attributable to improved organization of the production process, such as better farm management, or by the use of an improved technology, such as the use of drip irrigation compared to furrow irrigation. Product upgrading is a qualitative improvement in the product that makes it more desirable to consumers, such as a more tasty or healthy vegetable. As used here, “quality” is defined very broadly to include any extrinsic, intrinsic, tangible, or intangible changes that result in the product being able to command a higher final price. Functional upgrading is the entry of a firm into a new, higher value-added level in the value chain. This moves the firm closer to the final consumer, requires the firm to take on new functions, and positions the firm to receive a higher unit price for the product. Channel upgrading is the entry of a firm into a pathway that leads to a new, higher value-added end market in the value chain, such as a pathway leading to local, national, regional, and/or global end market. Firms may operate in one or more market channels at the same time. Value Chain: Describes the full range of services and activities that are required to bring a product from its conception to its end use, including activities such as design, production, marketing, distribution,

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and support to the final consumer. The activities that comprise a value chain can be contained within a single firm or divided among different firms. Value chain activities can be contained within a single geographical location or spread over wider areas. Vertical Relationships: Market and non-market interactions between firms operating at different levels of the value chain. Relationships between MSE producers and their buyers are an important example of vertical relationships. Vertical linkages are critical for moving a product from inception to the market and for transferring benefits, learning and embedded technical, financial and business services from firms up the chain to firms down the chain or vice versa. Wholesalers: Firms that do not produce the product and do not sell to the final consumer. In the most direct case, these firms buy from MSE producers and sell to retailers. Examples include exporters, distributors, brokers, and intermediaries. A.2 Definitions Specific to Tanzania and Horticulture

BRC: British Retailer Consortium (BRC). The BRC is the lead trade association representing the whole range of retailers, from the large multiples and department stores through to independents. In 1998 the BRC developed and introduced the BRC Food Technical Standard to be used to evaluate manufacturers of retailers own brand food products. The majority of UK and Scandinavian retailers will only consider business with suppliers who have gained certification to the appropriate BRC Global Standard. Brokers: Firms that operate at the wholesale level in the domestic market channel. Brokers receive products from suppliers on consignment and resell the products at the wholesale level (e.g., to wet market intermediaries) or at the retail level. Brokers pay the suppliers (usually farmers) after the products are sold and the brokers’ costs plus fees are deducted. Unsold products are returned to suppliers. Brokers can be observed in Kariakoo market (Dar es Salaam), where farmers bring produce to brokers’ drop-off points. Certification: A validation process, usually performed by a third-party authorized certification individual or agency, indicating that specific practices are being followed with respect to SPS, organic production practices, labor practices, environmental practices, bioterrorism security measures, etc. Channel “Natural” Irrigation: Gravity-based “natural” irrigation is used only in mountainous areas. Water flowing down the mountain is diverted into a system of channels that can be opened or blocked to flow into selected fields. When a farmer’s field is receiving water, he or she uses a hoe to open and close temporary rivulets to reach all of the crops in the field. This is more efficient than furrow and pan irrigation, but still leads to high levels of soil and nutrient loss. Note that this type of irrigation requires group action. The group maintains the main channels and selects a “captain” whose job it is to select the irrigation schedule (who gets water on which days). Dalali: Local term for an intermediary or broker. Distributors: Firms that, as a sole or main business, sell to retail-level firms, including supermarkets, hotels, and restaurants. Distributors may buy from intermediaries, from brokers, or directly from farmers. Distributors usually provide retailers with a full range of fruit and vegetables, so they may supplement locally grown products by importing products from countries in the region, such as Kenya and South Africa.

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Drip Irrigation: The most efficient irrigation method is drip irrigation. Once it is installed it does not require much labor input. It conserves water and results in very low soil and nutrient loss as well as reducing moisture-related plant diseases). Drip irrigation is very expensive to install. EUROPGAP: EUROPGAP started in 1997 as an initiative of retailers belonging to the Euro-Retailer Produce Working Group (EUREP). It has subsequently evolved into an equal partnership of agricultural producers and their retail customers to develop widely accepted standards and procedures for the global certification of Good Agricultural Practices (GAP). EUROPGAP was driven by the desire to reassure consumers. Following food safety scares such as BSE (mad cow disease), pesticide concerns and the rapid introduction of GM foods consumers throughout the world are asking how food is produced; and they need re-assuring that it is both safe and sustainable. Exporters: Firms that sell to buyers outside of Tanzania. Foreign Distributors: Firms located outside of Tanzania that buy from Tanzanian exporters or from European wholesalers and sell to supermarkets in the UK and Europe. Furrow and Pan Irrigation: The most common type of irrigation used by smallholder commercial vegetable producers. It involves using a pan to manually throw water from irrigation ditches to crops. It has low efficiency due to high labor input and high evaporation levels. Good Agricultural Practices (GAP): GAP is a guideline, generally established at the national level, to ensure a clean and safe working environment for all employees while eliminating the potential for contamination of food products. GAP addresses issues of site selection, adjacent land use, fertilizer usage, water sourcing and usage, pest control and pesticide monitoring, harvesting practices (including worker hygiene, packaging storage, field sanitation and product transportation) and cooler operations. High-Value Export Vegetables (HVEV): For the purpose of this study, HVEV are defined as a group of vegetables that share similar production and market characteristics: snow peas, sugar snap peas, French green beans, baby corn, baby carrots, patty pan squashes, baby leeks, broccoli, cauliflower, and zucchini. These vegetables are typically grown in higher altitude, temperate (cool climate) zones and have export potential. Most of these vegetables are not traditionally consumed by the Tanzanian population.

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ANNEX B: TESTS FOR INTERNAL CONSISTENCY AND REPRESENTATIVENESS

As the methodology and statistical properties of respondent-driven sampling (RDS) have already been summarized in the research protocol for this study (Atcha, Dunn, Bloom et al. 2006) and are discussed in detail in publications by the author of the method, Douglas D. Heckathorn (Heckathorn 1997; Heckathorn 2002) and colleagues (Salganik and Heckathorn 2004), this appendix focuses on the effectiveness of the RDS sampling methodology in the study. However, a brief theoretical background is presented for context.

B.1 Background

It is theorized that RDS chain-referral recruitment approximates a regular Markov process. Hence, recruitment is a stochastic process where the characteristics of each recruiter affect the choice of the recruits. For example, study participants may recruit persons with whom they share certain characteristics such as sex or language. The probability of an individual recruiting a person similar to or different from him/herself on a particular characteristic can be modeled as a Markov process so that: 1) as the recruitment process proceeds from wave to wave, an equilibrium distribution of recruits will be achieved independent of the initial seeds, and 2) the set of recruits generated by RDS will approach equilibrium at a rapid (i.e., geometric) rate. If these properties hold true and an equilibrium distribution is achieved, then possible bias from the initial choice of seeds will be avoided. This equilibrium distribution does not represent the true population proportions (nor does the sample proportions), but the equilibrium distribution can be combined with information about the respondent’s social network and transition probabilities (the probability of referring a person who is either similar or different to the referrer based on selected characteristics) to estimate the true population proportions of the selected characteristics. This methodology provides a less expensive and reliable way to survey a hard to reach population compared to traditional random sampling from a complete population list.

B.2 Results and Discussion

B.21 Equilibrium Distribution

Three qualitative tests can be applied to determine whether equilibrium has been achieved for each characteristic examined. The first and most obvious is simply “eye-balling” the sample proportions/averages as they progress through waves and observing whether there’s a centering on certain values. Second, the RDS Analysis Tool has an algorithm that can be used to estimate the equilibrium percentage/mean, allowing us to see how close the later waves and the overall sample come to that estimated equilibrium. Finally, based on the wave-to-wave transition probabilities, we can estimate how many waves would be required for convergence to a stable equilibrium (operationally defined to occur when the estimated equilibrium proportion/mean does not change by more than about 2% between successive waves). The overall picture can support an inference as to whether or not there were sufficient waves for each variable to reach equilibrium.

Several characteristics were investigated to ascertain the attainment of an equilibrium distribution: gender, age, education, language, years producing and selling vegetables, MSE size, most frequent producer contact location, community involvement, and cell phone use. Respondent gender is presented in detail below as an example of the process.

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The initial choice of seeds closely approximates the equilibrium distribution for respondent gender (figure 1). The proportions therefore do not change significantly in progressive waves and are consistent with the final equilibrium distribution, which is 63.8% male and 36.2% female.

As a further test for whether equilibrium has truly been reached, we can estimate the number of waves required to reach equilibrium based on the transition probabilities. Based on an initial sample of all females or all males and a convergence radius of 2%, the number of waves required is 2. Given that 17 waves were carried out, we can be fully comfortable that the equilibrium was reached for respondent gender.

Graph B1. Equilibrium Distribution for Respondent Gender

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Graph B2. Equilibrium Distribution for Distance from Farm to Nearest Trading Center

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Wave

12th

Wave

13th

Wave

14th

Wave

15th

Wave

16th

Wave

17th

Wave

Recruitment Wave

CumulativePercentage of Respondents

Travel Less than3 KM

Travel 3 km -6km

Travel Above 6km

The number of waves necessary to reach equilibrium was estimated at 3 to 5, thus, the worst case scenario would require 5 waves to reach equilibrium. Overall, equilibrium on the basis of gender and distance seems to have been achieved, suggesting that the final sample was not biased by the initial choice of respondents (seeds) and that the recruitment process had progressed far enough for these characteristics.

2.22 Population Estimates

The RDS Analysis Tool can be used to estimate population proportions of the respondent characteristics using linear regression and data on the study participants’ self-reported network sizes and transition probabilities. The size of the respondent’s network was reported on the survey instrument and the transition probabilities were calculated by the Analysis Tool based on referral data. Taking respondent gender again as an example, the RDS Analysis Tool estimates that overall, 62.6% f MSE owners are male and 37.4% are female. These estimates are similar to the proportions calculated from the sample (table 1).

Table B1. Population and Sample Proportions for respondent’s gender Gender Male Female

Population Proportions 62.6% 37.4%

Sample Proportions 63.4% 36.6%

Equilibrium Proportions 63.8% 36.2%

According to the RDS Analysis Tool, it is estimated that 26.4% of MSE owners have farms less than 3 km to the nearest town, 28.6% 3 to 6 km, and 44.3% more than 6 km (with 0.7% urban). These estimates

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are less similar, but close, to the sample proportions of 24.4% less than 3 km, 30.4% 3 to 6 km, and 44.2% more than 6 km (with 0.9% urban). This difference can be attributed to the earlier waves which had not neared the equilibrium distribution but still counted toward the total sample, as well as the adjustment based on network characteristics needed to move from the equilibrium distribution to the estimated population proportions.

Table B2. Population and Sample Proportions for distance from farm to nearest town

Distance from farm to nearest town Less than

3 km 3 to 6 km More than 6 km Urban

Population Proportions 26.4% 28.6% 44.3% 0.7% Sample Proportions 24.4% 30.4% 44.2% 0.9% Equilibrium Proportions 24.0% 29.9% 45.2% 1.0%

While it is possible to exclude the earlier waves in order to only capture the later, more mature waves, this presents some difficulty for the overall sample since a different number of waves will be required for different characteristics, depending on the initial distribution of characteristics in the seeds, as well as referral preferences. Furthermore, the earlier waves do not significantly affect the final true population proportion estimates. Regression analysis should also be free of bias or inconsistency. There is an efficiency question, but using robust regressions and robust standard errors will, in principle, address this matter. Population weights should be used when generalizing to the population in order to be making inferences about the true population proportions and not the naïve sample proportions.

These same techniques for estimating the equilibrium distribution and population estimates were applied to the respondents’ age, education level, mother language, years producing and selling vegetables, MSE size, most frequent producer contact location, community involvement, and cell phone use.

All but one of these variables exhibited convergence in progressive waves toward a relatively stable equilibrium (figures 3-10). Only the variable respondents’ mother language was unstable in progressive waves (figure 5), possibly indicating that the likelihood of recruiting someone with a different mother language is very low for one or more languages. For example, respondents whose mother language was Kipare recruited respondents with other mother languages only 14.6% of the time. For respondents’ mother language, the number of waves required to reach equilibrium ranges from 23 to 29. The confidence intervals for the estimated population proportions are also very large, and the spread for the estimates range upwards of 20 percentage points. Given recruitment depends on the ability to be personally or professionally connected, it seems likely that inter-language recruiting most often occurs as one can assume cultural similarities. Accordingly, the referral process is very slow to reach an equilibrium given an initial set of seeds that does not reflect the exact distribution of languages in the sample.

For all the other characteristics examined, the number of waves required to reach the estimated equilibrium is less than seven. This indicates that based on the transition probabilities calculated from respondent referrals, if there were an equilibrium to be reached, it would have been achieved. Overall, it can be concluded that the sample is reliable for estimating the population proportions. The results from this study are strong enough to support the validity and usefulness of the RDS methodology.

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B.3 Conclusions

RDS is still in the early stages of development. This study demonstrates the potential application of RDS in surveying hard-to-reach populations in a statistically reliable way. Additional experimentation with the methodology is required, but its theoretical underpinnings are supported by this study.

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ANNEX C: RESEARCH HYPOTHESES

The Analyzing the Integration of MSEs in Value Chains (AIMVC) research seeks to promote economic growth with poverty reduction by increasing opportunities for beneficial participation of MSEs in competitive value chains. The value chain approach taken by USAID has two objectives: 1) improving the competitiveness of value chains that include large numbers of small firms and farmers and 2) enhancing the extent to which small firms and farmers benefit from this participation through market-oriented interventions. The AIMVC hypotheses presented below are designed to enhance our understanding of the systemic constraints faced by MSEs in value chains and the ability of firm owners to respond to the interactions of value chain governance, risk, profits, information, transaction costs, and social capital. The AIMVC research hypotheses focus on vertical and horizontal relationships, the power dynamics embedded in these relationships, MSE upgrading opportunities or constraints, and the benefits MSEs are able to capture as a result of upgrading investments. These hypotheses provide a framework for the AIMVC research agenda and are continually refined through field and desk studies.

The purpose of testing these hypotheses is to generate information for improving the effectiveness of interventions focused on value chain development. The first three hypotheses (1-3) highlight leverage points for enhancing vertical cooperation and coordination, focus on understanding the power dynamics among vertically linked firms, and identify barriers to MSE access to information and other resources needed to effectively compete in value chains. These hypotheses should shed light on how to create win-win relationships between MSEs, intermediaries, and lead firms that improve value chain competitiveness and MSE benefits. The next three hypotheses (4-6) underscore factors affecting horizontal cooperation and coordination among MSEs in order to improve the effectiveness of producer groups and other MSE organizations. While larger firms in the value chain may also cooperate horizontally, this research focuses only on horizontal linkages among MSEs. The following hypotheses (7-10) aim to improve our understanding of the incentives, disincentives, and constraints to MSE upgrading. Some of these constraints are transaction-based and others are more systemic. The last two hypotheses (11-12) focus on improving our understanding of the benefits received by MSEs from different types of upgrading and value chains and exploring what types of upgrading and governance result in greater or lesser benefits to small firms in value chains.

Vertical Relationships

1. Risk in vertical relationships can be reduced by strengthening governance.

The risk to each firm that the counterpart firm in a vertical relationship will fail to meet its agreements (i.e., the risk of commitment failure) can be reduced by strengthening governance through alternative means, including

e. the development of linking social capital, f. the development of stronger network types of governance, g. increasing the formality of contracts, and h. strengthening of the legal enforcement of contracts.

2. Trust in vertical relationships can be increased by improving information.

Trust between firms in vertical relationships can be increased by improving the information that firms have about each other in several ways, including

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e. building information over time about the trustworthiness of counterpart firms through a series of increasingly larger “riskable steps”,

f. increasing the face-to-face interaction between representatives of counterpart firms, g. increasing transparency about distribution of rents in the value chain, and h. increasing the transparency about risks faced by firms in the value chain.

3. Lead firms will be more willing to form vertical relationships with MSEs if the transaction costs can be reduced.

Transaction costs are a major constraint to lead firms forming vertical relationships with MSEs, but the transaction costs that lead firms incur in working with large numbers of dispersed MSEs (i.e., the costs of communication, knowledge sharing, contract management, production coordination, etc.) can be reduced through the use of

d. commercial intermediation (i.e., private intermediaries), e. organizational arrangements to coordinate MSE activities, and f. cost-effective information and communication technology (ICT).

Horizontal Relationships

4. MSE owners will be more willing to form horizontal relationships if the transaction costs can be reduced.

Transaction costs, especially the opportunity cost of time, are a major constraint to MSE owners forming horizontal relationships. There are several ways that these transaction costs can be reduced, including the use of

a. alternative organizational structures, b. cost-effective information and communication technology (ICT), and c. measures to improve trust (see hypothesis 5 below).

5. Trust in horizontal relationships can be increased through organizational innovation and improvements in human capital.

Lack of trust can be a rational but critical barrier to the formation of horizontal relationships between MSEs. Trust in horizontal relationships can be improved by reducing the scope for opportunistic and fraudulent behavior in several ways, including through

a. organizational innovations that limit the power of leaders (e.g., rotating group leadership, member input to decisions, and transparency),

b. formalized record keeping, c. training in leadership and group management skills, and d. increased human capital among all group members (i.e., literacy, numeracy, language skills, and

market knowledge).

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6. Social capital plays an important role in influencing horizontal relationships between MSEs.

Social capital can have both positive and negative effects on the formation of horizontal relationships between MSEs:

a. in-born social capital reduces the transaction costs of forming horizontal relationships because firm owners are more likely to trust each other and less likely to behave opportunistically and

b. high levels of bonding social capital can reduce investments in acquired forms of capital, including both bridging social capital and physical capital.

Firm-Level Upgrading by MSEs

7. MSE owners base their upgrading decisions on their assessments of the risk-adjusted returns to upgrading.

MSE owners make their upgrading decisions based on their estimates of risk-adjusted returns, which include expected returns (profits), variability of returns (risk), impacts on future opportunities (sustainability), and their individual resources and objectives (household economic portfolio). MSE owners will be more likely to upgrade their businesses if

a. there is a price premium for the upgraded product, b. they have credible assurances of repeated future transactions and/or required investments are

not highly asset specific, c. their household income is above the poverty level and/or the range of possible profits are all

positive, and d. they have access to required investment capital.

8. Upgrading can be encouraged by strengthening the linkages between firms.

Vertical and horizontal linkages between firms help to improve the risk-adjusted returns to upgrading. MSE owners will be more likely to upgrade if

a. they have higher levels of acquired social capital (networking), b. they are linked to lead firms through network types of governance structures rather than only

through market type governance, and c. they are aware of successful upgrading by MSE owners with whom they share bonding social

capital.

9. Lack of information is a critical barrier to upgrading.

MSE owners often lack the information that would allow them to understand the possible advantages to upgrading. MSE owners will be more likely to upgrade if

a. they have basic awareness of the existence of upgrading opportunities, b. they have the information needed to calculate risk-adjusted returns, and c. the transaction costs of gathering upgrading information are relatively low.