The story of the first rose farm in Ethiopia

 

For our research on African competitiveness in light, simple manufactured products , we recently visited the first Ethiopian rose farm, created in 2000. In the course of ten years, the farm triggered the rapid emergence of a competitive rose export industry that now involves more than seventy-five firms, hires more than 50,000 workers and is bringing in more than US $200 million a year.

We learned that the idea to start a rose farm first came to Ryaz’s (Owner of the farm) father, an Indian- origin head of a successful Ugandan conglomerate, after a visit to Ethiopia, where he scoped out potential business opportunities.  Although he considered banking and bottled water, highly favorable soil and climatic conditions (warm days and cold nights), competitive fuel and electricity costs and, above all, competitive air freight costs - which account for more than fifty percent of the export-related production costs - made rose farming an easy choice, despite Ethiopia not having any flower industry to speak of at the time. 

The first big constraint for Ryaz to overcome was finding seven hectares of usable land.  Because there was no land market, this took a year and needed the intervention of the highest level of the authorities, who eventually gave Ryaz’s farm a thirty year lease (at very favorable conditions) on land that was abandoned following a failed NGO-led beans project. The second constraint to overcome was financing, as no private banks were willing to lend money to a completely new venture in Ethiopia.  The government finally agreed to provide, through the state owned Ethiopia Development Bank, a loan to finance thirty percent of the project (US$1 million) at an eight percent interest rate.  Ryaz told us that they would not have proceeded with the investment if it wasn’t for this loan. Another big concern was ensuring a reliable water supply, so Ryaz investigated the options with the help of an Israeli company specializing in farm irrigation systems.  The final big constraint -- - a lack of specialized managerial capability was overcome by convincing (through generous employment terms) an Indian from Kenya and an Israeli to come to Ethiopia.

Ryaz’s Fair Trade certified firm made a profit almost immediately.  The first crop of roses yielded good profit and he decided to stay on. By 2002, following Ryaz’s farm’s success,  the Prime Minister agreed to support the sector by facilitating access to land, tax incentives, duty free imports  and  long term financing on up to seventy percent of the initial investment.  With this support and the demonstration effect of Ryaz’s profitable rose farm, investors poured in and allowed the government to meet its five year target of developing 800 ha of rose farms by 2007. Eight years since the government announced its support, seventy-four new firms have entered the rose industry. The emergence of this cluster improved overall competitiveness as the industry was now able to negotiate air freights collectively, decrease the cost of chemicals through bulk imports and jointly market products abroad through a trading company owned by the rose farm owners. This industry also encouraged private leasing of agricultural land as traditional farmers were now willing to trade their land with rose farmers for an initial down payment (with which they could buy livestock) and jobs for their families on the rose farms. The government also earmarked land for investors in high value agricultural products and began making it available to them in a relatively short time.  Ryaz estimates that this resulted in a doubling of income for a farmer’s family (around $940 a year at the current exchange rate). 

The last three years, however, have been tough on the industry, with much lower demand as a result of the global financial crisis, higher fuel costs and tough competition from an increasing number of countries.  The rose farm owners are fighting to reduce the cost of doing business in Ethiopia – poor quality electricity costs Ryaz $36,000 a year (the extra cost of running a generator), red tape takes up the time of one and a half qualified personnel ($20,000 a year), but his most important problem is undue delays at customs in importing chemical inputs, resulting in the impossibility of selling one crop on average a year ($200,000). This amounts to more than twenty percent of Ryaz’s turnover - the difference between making and losing money.  Like others in the business, Ryaz would now like to diversify into fruits and vegetable, but lacks the time and resources to investigate seriously.

Ryaz and other floriculturists suspect that, like roses, the potential for horticulture is also large, but no one knows which fruits are smart investments for that region – peaches, apples or something else. After all, even the green beans that earlier failed feasibility tests are now coming back. A feasibility report could easily cost over $80,000 per fruit, and several may be needed. With seventy four eager incumbents and many potential entrants waiting to cash in, even Ethiopia’s pioneer rose farmer is unwilling to bear the first mover’s disadvantage.

Ryaz’s story embodies the highs and lows associated with African firms’ entry into agribusiness as well as light, simple manufactured products: “first entrepreneur’s” risks, how these risks were reduced by specific government policy actions, the government’s high level of facilitation and interventions, the benefits of clustering, and how business’s continuing growth depends on steady reforms in critical areas.