160413 systemic change pathways leather coverpage

Leather Systemic Change Pathway

October 2015 MDF Pakistan Version 1

Summary MDF Pakistan Country Strategy Poverty In Pakistan an estimated 45% of the population is poor. Poverty levels vary widely between geographic regions and between rural and urban environments. 

Poverty incidence is high in rural areas and extremely high in remote rural areas. 60% of the rural population is dependent on agriculture and 80% of farmers are small or landless. There is a need to improve connection between rural producers and developing markets to improve rural household incomes.

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While incidence is lower in urban areas, numbers are high and growing due to rural to urban population drift. Poor in urban areas work in informal supply chain activities and there is need to develop more formal employment opportunities.

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The poor in both rural and urban areas are vulnerable to climatic and economic shocks.

There is a need to improve the resilience of poor households.

Economy Pakistan has a two tier economy. At one level there are large, listed and private companies that are well-integrated into the economy and participate in both domestic and export markets. The second level is the large traditional economy populated by an enormous number of small to medium enterprises serving the domestic market. 

Pakistan has a trade deficit of USD 22 billion mainly driven by energy imports.

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GDP growth has averaged 3.9% over the past five years, significantly below similarly developing economies in the region. Whilst manufacturing has seen above average growth; the agriculture sector growth has been below average.

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Foreign Direct Investment (FDI) has declined due to perceived high security risk.

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Agriculture is a backbone for the economy providing employment for 43% of the population and accounting for 21% of GDP.

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There is growth in manufacturing, urban services and in agricultural value addition but local ancillary services and supply chains remain underdeveloped.

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The agriculture sector is poorly connected to innovation, information and high-quality demand in the cities and overseas.

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Capital and connections are concentrated in the hands of few, limiting the ability of new entrepreneurs and regional entrepreneurs to fill the gap in the country’ economic fabric and improve its overall competitiveness.

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Economic growth is impacted by imported fuel costs, poor power infrastructure and a high international perception of security risk.

MDF Focus in Pakistan Development challenges in Pakistan include: 

Development of formal distribution networks and supply chains that reach small farmers and distant regions and improve the connection between farmers and customers in Pakistan and international markets.

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Improving export competitiveness through establishing production inputs and services and product and process innovation to meet international standards.

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Supporting expansion of small, innovative and regional business ventures to scale up and broaden the entrepreneurial base of the Pakistan economy.

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Increasing the engagement of women in the economy through improved access to information and services and development of employment opportunities.

To address these challenges MDF considers Dairy and Meat, Leather and Horticulture sectors to be effective vehicles for change and will focus on: 

Agricultural sectors that have the potential to connect rural and regional households to demand in cities and overseas; focus on an urban sector that allows poor workers to acquire skills and offers opportunities for women.

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Horticulture offers opportunities to exploit specific agro-climatic advantages of (mainly borderland) regions to supply Pakistan or the world market; there is a strong focus on establishing better connections and regional entrepreneurship, processing and value addition.

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Better access to inputs and information on the one hand, and innovations in supply chains on the other will allow small dairy and meat farmers (mainly in Punjab and Sindh) to become more productive and commercially oriented; for this local and innovate entrepreneurs will have to work alongside established players.

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Making retail ready finished leather goods more internationally competitive with improvements in product innovation, process innovation and the availability of ancillary services; it also allows workers to gain skills and increase wages in time and offers opportunities for women.

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Partnerships that help to increase the reach and scale of rural value chains and information channels, that help diversify local services, foster new entrepreneurship and reduce the cost of doing business in Pakistan.

Women’s Economic Empowerment (WEE) Poor women in most rural areas participate in economic activities within the household especially in relation to expenditure decisions and provision of on-farm labour. Their participation visibility depends on social and cultural aspects of the area. In some conservative areas, despite the household being poor, women participate to a lesser extent. In more liberal areas, women are greater economic actors even working as lead farmers. In this complex environment MDF will look at each partnership through the lens of the WEE framework.

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Alignment with Government of Pakistan The Government of Pakistan’s Vision 2025 includes achieving sustained growth in agriculture through various interventions in production and pre and post harvesting. Private sector and entrepreneurialled growth, gender empowerment, investment, innovation, and capacity building through training and skills development are also emphasised in Vision 2025. MDF’s sectors and focus in Pakistan are aligned with Vision 2025. However on ground business environment is complicated by devolvement of power to provincial and local public sector actors particularly in relation to agricultural policy development and implementation.

Note on Systemic Change Areas Pakistan is a big country with a big economy and a vast number of businesses with whom MDF can potentially connect. However only a limited number of businesses provide national coverage and MDF will need to work with regional operators and with businesses interested in growing towards providing national coverage. Larger businesses are principally interested in exporting, supplying products to national level value chains, and providing products and services to large customers.

While agricultural production volumes are concentrated in a large number of small farmers these farmers are disconnected from both the product markets and the supply of services and inputs.

Finding the right companies to engage in entrepreneurial activity in product value chains and the supply of services and inputs will require working with a range of partners and through these activities MDF will learn more about the sectors and how to engage in development activities that flow down to small farmers. This will of necessity involve a learning period and will be impacted by seasonal supply cycles. Therefore it is expected that achieving significant outcomes from interventions in the dairy, meat and horticulture sector will require a timeline of 8-10 years.

Systemic change in horticulture has been captured in two broad pathways. As experience is gained over time we may discover that in each region there is much more to be done, hence change pathways may develop specific to regions.

Interventions to expand economic activity in the leather sector, which is not impacted by seasonal supply cycles, are expected to be somewhat easier to both implement and to measure and it would be expected that significant outcomes could therefore be seen in a shorter period such as 5-7 years.

Pakistan commenced intervention activity in 2014 and therefore the timeline to make significant impact is expected to go out towards 2024. In the short term it is considered that MDF will need to double activities to make the significant gains outlined in this document. This expansion will of course depend on the availability of resources, however it is not expected to be constrained by the ability to recruit a competent team of business advisers.

This document has been prepared on the basis of limited observation of outcomes from the current intervention portfolio and as such should be seen as a living document which may change direction and impact projection as knowledge and experience of outcomes from on-ground experience improves.

The MDF Framework for Defining and Populating Pathways to Systemic Change The systemic change pathway explained Competitiveness and change in sectors do not depend only on the actions of MDF. Sectors are complex and are influenced by a wide variety of factors such as global markets, changes in the policy and regulatory environment, the availability and quality of infrastructure, the cultural context and the environment. Some changes introduced by MDF will catch on quickly; others have faced barriers and moved slowly or not at all. MDF must be able to define which change areas it needs to focus on to make growth more robust and inclusive and then monitor progress towards achieving the quality of change that can be called ‘systemic’.

For this purpose MDF developed its Systemic Change Framework as outlined in the figure below. This framework is applied separately to each key strategic change that MDF aims to foster within a sector or market system. The annexes to this Strategic Guidance Note provide a detailed example of how the framework is applied in Fiji.

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MDF

Systemic

Change

Pathway

Application of MDF’s Systemic Change Framework requires a deep understanding of a sector as well as experience working with market players to address constraints to pro-poor growth. The first step in applying the Framework is to develop an inclusive, pro-poor growth strategy for each sector. This sector strategy is typically based in on an Inclusive Analysis of Growth, Poverty and Gender at the sector level combined with a Household Level Analysis of Poverty and Gender Dynamics and defines a vision for inclusive growth as well key constraint areas to inclusive growth. MDF will then proceed to launch partnerships aimed at reducing the constraints identified and unlocking inclusive growth.

At the same time, MDF uses the framework outlined above to further define its ‘strategic intent’ for a sector, as accurately as possible given that it will learn more from implementation about what is really needed and realistically feasible.

Please refer to MDF’s Strategic Guidance Note on Systemic Change which shows how an inclusive sector growth strategy (for the Horticulture sector in Fiji) feeds into the country strategy, and how systemic change areas support the inclusive sector growth strategy. As mentioned, for each systemic change area, MDF applies the systemic change framework; the introductory section justifies the rationale for identifying the systemic change.

Importantly, in time, based on the experience gained from implementing the first partnerships within a sector, it becomes clearer which systemic changes the programme should focus on. As the programme discovers more through implementing its partnerships within the sectors, it becomes clear that some constraint areas appear to be dimensions of, or seem to coalesce around more deepseated problems. MDF then develops a better idea of which changes the market is ready for, and which changes requires more innovative approaches address the problems. Through the interplay between traction gained through partnerships and strategic intent, emerges firmer systemic change areas, which then become the ‘compass’ for programme implementation in the sector. This typically happens around two years into implementation as the first batch of partnerships start to yield results.

To help define (and manage, monitor and communicate) the dimensions of change that deserve to be labelled ‘systemic’, MDF asks two fundamental questions: 1) are there appropriate incentives for market players to interact with poor people and to continue, expand and adapt the new business model; and 2) is the adoption and adaptation of the new business model continuing to serve the interests of poor men and women? For each question it has defined three key parameters.

The table below reiterates these questions and briefly defines the parameters related to this. It should be noted that the first three parameters refer to the strength of the business case underpinning the change, and other three parameters refer to the beneficiaries of the change.

Together they define the quality of change as well as the scale of change, making it truly ‘systemic’.

Parameters with Systemic Change Framework

Questions

Parameters

Definitions

Are there appropriate incentives for the market players that interact with poor people to continue, expand and adapt the new business model?

Autonomy

Independent action by businesses or other market players to adopt and/or improve a business model promoted by the programme.

Sustainability

The extent to which the business model promoted by the programme is sustainable and/or profitable.

Resilience

The extent to which the market system supporting the business model can adapt to stay competitive, take advantage of new opportunities and recover from adverse shocks.

Inclusiveness

The extent and depth to which the business model as practiced by market players includes and benefits the target group

Scale

The proportion of the potential target group that gets the goods, services and/or jobs promoted by the programme.

Women’s Economic Empowerment

The extent to which the business model includes and benefits women with respect to income, access to opportunities, access to assets, life chances, jobs, manageable workloads and decision making power.

Is the adoption and adaptation of the new business model continuing to serve the interests of poor people?

Then, by asking these two questions using these six parameters, the framework seeks the programme to define a ‘beginning state’ for each parameter. This is the state of the sector or market system at the start of the implementation process (‘at the beginning of the pathway to systemic change’). Once the programme is being implemented it defines the key market or regulatory gaps it seeks to address to make the market system work better.

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This is followed by a description of the ‘end state’ for the same parameter. It outlines how the programme wants to see the market system work. If this state is achieved, the work is done. The end state should be defined as per market needs to work well. Therefore it may occur that the programme defines an end state that it cannot achieve given its current resources and implementation window (contract duration). This makes the Systemic Change Framework a management tool not only for the programme, but also for its investors. It starts to define the ‘total potential’, the ‘total need’ and the ‘total time and resourcing’ required to meet those needs.

As mentioned, the space between the beginning state and end state is the gap in the market system that needs to be filled, the pathway to systemic change that needs to be populated. MDF identifies four stages of progression along this pathway, captured for each parameter. These stages are ‘initial’, intermediate, ‘advanced’ and ‘matured’.

In time, MDF will make progress against these parameters, but not at an equal pace (there may be very inclusive partnerships that lack scale and to some extent resilience, and partnerships that are strong on autonomy and scale, but less on WEE). Each partnership design needs to be strong and sustainable enough to be considered for co-investment by MDF, but no partnership is perfect. By managing its portfolio MDF will ensure quality of change at scale in a systemic manner. Nevertheless, MDF does not expect that all changes will reach the same level of institutionalisation in the market system within the life of the programme. Some changes may only reach an initial or intermediate level of systemic change, while others may reach an advanced or matured level of change. Using the knowledge and understanding gained from several years of experience, MDF can project the level of systemic change it expects to catalyse two years beyond the life of the programme.1 MDF assesses the progress of systemic change against these projections and analyses why change is happening faster or slower than expected. This helps the programme to better understand market dynamics and adjust its strategies appropriately.

Finally, for each parameter, MDF will describe the beginning state and end state of where it is situated in moving forward along the pathway to achieve systemic change. This helps the reader understand how far MDF has progressed in terms of achieving its strategy objective, with whom (which partners), and why. As implementation and insight progresses, MDF periodically updates these stories (as well as, if needed, the desired ‘end state’).

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The processes of change that MDF catalyses during the programme will continue beyond the end of the programme. MDF uses the DCED recommended two years post programme timescale for its projections.

Leather MDF Sector Statement The leather sector involves recovery of hides and skins through to the production of retail ready leather goods. Pakistan currently has a functional tanning sector producing finished leather. While there are constraints in this sector, MDF does not intend to work with tanning enterprises. MDF will work to increase the conversion of finished leather to retail ready products in Pakistan.

The Leather Market Scale, Constraints and Opportunities China currently dominates global conversion of leather into finished goods, however, with rising labour costs production is shifting to other developing economies. Pakistan is well-positioned in this regard because of availability of finished leather and competitive labour costs. Pakistan exports over USD 1 billion of leather and leather goods per annum. Finished leather exports are 27 million m2 of finished leather valued at USD 450 million, while finished leather goods consume 4.5 million m2 of finished leather they contributed USD 550 million to export receipts.

The value add in converting finished leather to finished goods is considerable and increased conversion would make a significant contribution to balance of payments. Increased production of finished goods will significantly increase the number of people employed (estimated 250,000 people currently employed in formal and informal tanneries, footwear manufacture, garment production, sports goods, gloves and accessories). A considerable number of semi-skilled workers are employed in both formal and informal processes converting leather to retail ready goods (the formal footwear sector employs in excess of 120,000 people directly and indirectly).

Growth has been restrained by an inability to meet rigorous customer requirements including fast turnaround for fashion items and compliance certification ranging from physical and chemical testing to environmental, social and responsible business (ESRB) issues. While global demand for leather garments is stable, demand for shoes, accessories and upholstery products continues to expand. The formal footwear manufacturing sector is confident of its ability to compete and increase production for export and for import replacement.

It should be recognised that modern leather goods involve components of both natural leather and composites and some items may not contain leather. Manufacturing employment expansion in the production of shoes, accessories etc. in situations where finished leather input is limited will not be ignored.

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The Position of Poor in the Sector Factory floor employees in enterprises producing retail ready goods are predominantly residents from poorer urban areas who have been trained for semi-skilled production activities. An example of employment profile in the retail ready goods production is that over 85% of the 120,000 workers in the formal footwear sector work on the factory floor. Outsourced workers and artisans also provide a large labour resource for the retail ready goods sector producing a range of intermediate components and fully finished items and this labour is also predominantly from poor urban based households.

Urban poor are less resilient than rural poor; while there are more employment opportunities in urban areas, costs are high and there is less opportunity to diversify or produce food for household needs compared to rural households.

Increased production of retail ready goods which incorporate leather will employ significant numbers of poor urban residents and the well-being and resilience of their households will improve.

The Position of Women in the Sector Women are currently involved in the sector and a small number of factories directly employ women.

Women are also employed as outworkers on detailed tasks more particularly in the medium to small and informal enterprises. There is discussion with industry indicating that there is growing interest in employing women in factories however there is a need to address challenges such as segregation, security, cultural and infrastructure issues which need to be addressed to improve shop floor environments for women.

Systemic Change Pathway Based on identified constraints and opportunities, MDF has identified the following systemic change pathway for Leather sector: 

Retail ready goods manufacturers using leather build capacity and have access to improved support services and inputs enabling them to expand production and supply new products to current and new markets.

Background (‘before picture’) Enterprises that convert finished leather into retail ready products containing leather already exist in Pakistan. There is some clustering that has occurred. In general, Karachi produces light leathers and leather garments, Lahore produces heavy leathers and footwear and Sialkot produces a wide range of products (from industrial gloves to sports goods) involving significant outsourcing to SME enterprises. The Karachi and Lahore enterprises are engaged in the formal economy while many of the SMEs in Sialkot are informal.

While retail ready products containing leather components have been exported for some period the industry has been constrained by a lack of quality inputs and services that result in both sourcing challenges and extended delivery times for samples and products. The formal sector producing retail ready goods is confident of its global competitiveness and capacity to grow but is constrained by the services required to certify compliance with customer specifications including QC, physical and chemical testing, and ESRB. The enterprises are further constrained due to customer reluctance to travel to Pakistan.

While a large proportion of manufactured retail ready items are based on detailed customer design specifications there is limited in-house design and innovation capability able to interact with customers and develop new designs appropriate to Pakistan production systems and markets.

In recent years, several well-organised and governed business membership organisations representing the enterprises in the areas of footwear, gloves, garments and finished leather have been active in representing the needs of their specific interest groups but there has been limited representation across the leather and finished leather goods value chain.

Anticipated ‘end picture’ (when markets work well) More than 40% of finished leather produced in Pakistan will be converted into a wide range of retail ready goods to supply export and domestic market customers in factories in urban areas. The retail ready goods include footwear, garments, sports goods, gloves, handbags, accessories, household goods and craft items. In particular, there is growth in production and delivery of fashion items that require quick response manufacturing.

The industry is supported by a robust group of enterprises supplying services and locally manufactured consumables associated with retail ready goods. The improved access to inputs and services allow retail ready goods manufacturers to meet the response and timeliness demands of customers.

The ability of the business membership organisations to represent the sector and present issues to Government across the value chain is strengthened; business membership organisations’ support of member enterprises is strengthened and as a consequence enterprises are able to increase production and customer compliance.

Large and medium sized businesses invest in infrastructure and employment conditions to support engagement of women through investing in skills development and an increasing the number of women employed in shop floor activities and under outsourced worker arrangements.

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Expected Pathway to Systemic Change (like number, types and focus of partnerships) MDF expects to work with a portfolio of partnerships to address weaknesses in market access, product development and diversification, customer compliance and input and services suppliers that will result in an increase in leather goods production and urban employment. 

Five partnerships with enterprises that provide consumables including leather, ancillaries and accessories, to retail ready goods manufacturers.

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Five partnerships with enterprises that provide services to retail ready goods manufacturers including testing, compliance certification, ESRB certification, quality control and business services (e.g. technology advise, manufacturing productivity, etc.).

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Two partnerships addressing improving access to global markets through the industry and public sector engaging to improve trade agreements and increase deliveries under these arrangements.

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Four skills development partnerships addressing the wide range of skills from shop-floor to design and new product development.

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Five partnerships to assist leading enterprises to set new norms in employment of women.

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Two partnerships with business membership organisations to engage with the public sector to improve the business environment for retail ready goods manufacturers.

Women’s Economic Empowerment A study into household level poverty and gender dynamics in relation to urban regions is has been conducted looking at dynamics in Sialkot and greater Lahore area.

As the manufacturing sector targeted under this systemic change expands, women will benefit from skills development, increased employment opportunities, increased household incomes and improved employment conditions (including benefits such as child care, maternity provisions, assistance to manage household finances, etc).

Results in time Over 5-7 years MDF Pakistan seeks to generate sufficient increase in the manufacturing of retail ready goods containing leather to increase employment by 37,5002.

Manufacturers will be able to access Pakistani based inputs and services to support in-time manufacturing, improved product development and testing and compliance certification.

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The formal footwear sector currently employs around 120,000.

MDF will seek to target an employment increase of at least 7,500(20%) women through these systemic change activities.

Feasibility, Efficiency and Risks The leather retail goods sector in Pakistan includes a wide spectrum of manufacturing enterprises from large formal manufacturers through to small and informal SMEs. While the sector lacks wellstructured consumables and services support, companies with the capacity to provide support to the leather sector already exist particularly those servicing the large textile and garment sector. MDF will work with these enterprises to increase their connection to the leather goods sector.

There are several risks in this systemic change pathway including: 

Closure of important markets (international or brand/customer level) due to changes in rules, regulations, trade policy or any other unspecific event (e.g. customer response in the event of a serious OHS event). MDF partnerships will improve the ability of enterprises to understand and respond to changes in market and customer requirements.

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The benefits due to preferential trade arrangements such as GSP+ are reduced. This may be due to other competitive countries achieving similar market access. MDF intends to partner with service providers to improve industry productivity and assist competitive positioning.

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Expansion may be constrained by tannery environmental issues. Should this occur, MDF will work with partnerships to identify tanneries that are more compliant with environmental standards (e.g. tanneries connected to the Korangi waste treatment facility).

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Labour reduction from technology and productivity improvements are greater than labour gains from increased production. MDF’s focus is on market development and compliance and partnerships addressing productivity gains will require careful assessment.

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Downturn in the global economy and production of clever composites that simulate leather result in a reduced demand for leather based retail ready goods. In reality leather is a byproduct of the meat industry and hide and skin prices reflect market demand. Since it is a byproduct, leather will still be consumed in some form until tanning and processing costs exceed the value of the end product.

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