Status of Cotton Sector Reform in Selected African Countries

EU-Africa Cotton Forum,

Paris, July 5th and 6th, 2004

Why Reform (1) ?

• Cotton industries in most African countries were integrated national monopsonies characterized by the following challenges:– In times of high world prices, the monopsonies

absorbed the extra profits and producers were taxed

– When world prices fell, the monopsonies turned to national governments for budgetary support

– National governments have little recourse to international financial markets

Why Reform (2) ?

• Incentives for transparent and efficient management in the sector were compromised by system

• The benefits from risk reduction to producers < costs in foregone mean income– The distribution of income from the filiere was

opaque

What reform (1) ?

• Allow free entry and competition at all levels of the cotton sector

• Develop private mechanisms to ensure credit recovery linked to marketing

• Adopt pricing mechanisms that allow producer prices to reflect changes in world prices

What reform (2)?

• Develop mechanisms to reduce price risk

• Build the capacity of producer organizations to participate in input supply and technical services

• Improve research and extension.

Status of Reform

• The pace of reform varies across countries

• The structure of the industry after reform will also differ by country

• Moving from a public monopoly to a privatized and/or liberalized sector has presented universal challenges in revitalizing private supply of inputs, marketing and credit.

Benin• Ginning: 52% SONAPRA (parastatal) and

48% private companies

• Govt. evaluating bids for the privatization of SONAPRA (Bank not informed of process and cannot endorse/reject it)

• Private interprofessional organizations created for: credit, marketing and inputs

• Need regulatory framework for input distribution and ginning.

Burkina Faso

• Ginning: SOFITEX (1/3 producers, 1/3 state and 1/3 Dagris) divesting from two producing areas, but keeps 75% of capacity

• Tenders awarded to Rheinhardt and Dagris • UNPCB has chance to participate – 30 % w/

Dagris and 10% w/ Rheinhardt • Interprofessional organization for prices,

inputs and sector development.

Chad

• Ginning: 100 percent with Cotontchad • Technical and financial audit of Cotontchad

complete • Oil and soap division privatized • Analysis of scenarios for reform complete

and awaiting decision from Government • Completing study on inputs, transport,

marketing and exports.

Mali

• Ginning: 100 percent with CMDT (which is 60% state and 40% Dagris)

• Seek agreement in principle to divide into 3 or 4 private companies through the sale of assets

• Government is identifying an advisor

• System of price support still evolving.

Tanzania

• Marketing and Ginning: 25 percent cooperative unions and 75 percent private (since 1994 liberalization of cotton purchasing and ginning)

• Tanzania Cotton Lint and Seed Board still sets indicative prices and acts as buyer of last resort

• Increased producer price and ginning capacity, but decreased inputs and quality. Production up and down.

• Need to: rationalize tax rates reduce role of Cotton Board and invest in infrastructure and seed multiplication.

Lessons Learned• Privatization (full or partial) needs to be

accompanied by a clear plan for the transition to private provision of credit, inputs, marketing and road maintenance

• Cotton sector reform takes time, but requires continual progress and action

• Reform is more effective when producers are organized and participating

• Interprofessional agencies on inputs, marketing and credit help with sector reform.

The Unfinished Agenda

• Credit and financial intermediation • Marketing of Seed Cotton • Cotton Ginning • Import/Distribution of Fertilizers and Pesticides • Seed Production/Multiplication • Pricing Policies • Price risk management

Bank view is NOT doctrinaire on privatization

• Reforms are specific to each country • No major reform – e.g., privatization – will succeed

without political commitment• We do not seek to impose privatization on member

countries …• … But we do warn about moral hazard implicit in

traditional filiere systems in which bills for failed price stabilization are sometimes handed to the donors which compromises our ability to assist with other national priorities (health, education, transport, water, energy)