1
November 2009 - October 2010
BERGAMO STATE UNIVERSITY
Final Thesis
Title:
INTEGRATING THE VALUE CHAIN APPROACH TO
SME FINANCING
:
a case study of SMEs in the tourism sector of
Fogo, Cape Verde
Student:
Dilnessaw Amdework Berhanu
Supervisor:
Yaron Jacob
Date : October 28, 2010
MASTER in MICROFINANCE
2 Declaration
I Amdework Berhanu Dilnessaw hereby declare that all the information in this research is my original work and has never been published by any organization or institution other than the State University of Bergamo, Italy for academic credit.
3 ACKNOWLEDGMENT
I would like to thank Mrs. Magali Paulos, director of ADA Microfinance for providing me with an internship opportunity, and facilitating the desk research in Luxembourg and the field work in Cape Verde. Similarly, my gratitude goes to Mr. Bernardino Fernandes Goncalves, director of FAM-F (Association for Microfinance institutions in Cape Verde) for his valuable guidance and support through out the research work in Cape Verde. Many thanks to the staff of NGOs , Ministry of Tourism, ADEI, Banks, MFIs, BDS providers and several other institutions in Cape Verde for providing me with valuable information on the tourism sector and financial sector of Cape Verde. I would like to thank the stakeholders in the tourism sector of Fogo and the people in general for their valuable time and collaboration during the several FGD and interview sessions. Last but not least, I would like to thank my supervisor Professor Yaron Jacob for his diligent supervision and guidance of the research work.
4 ABSTRACT
The research paper applied the value chain analysis method on the tourism sub-sector of Fogo, Cape Verde to understand the key processes and agents working within and outside the chain and where the benefits of the chain flow. The result of the VCA exercise showed segments of the tourism value chain in Fogo that have the potential for improving income of the poor and the constraints and opportunities facing actors in each of the segments. Based on the upgrading opportunities identified and the financing needs of actors in the tourism cluster of Fogo, financing options and institutional arrangements are suggested.
5
Contents
Chapter one: Themes and Methods ... 8
1.1 Introduction ... 8
1.2 Objectives of the research and relevance of the study... 9
1.3 Conceptual Framework ...10
1.4 Limitations of the study ...11
1.5 Expected output ...11
Chapter two: Literature Review ...12
2.1 Economic Growth and Poverty Reduction...12
2.2 What is a Value Chain ...13
2.3 Value Chain and Cluster Approach ...14
2.4 Value Chain Analysis ...16
2.4.1 Value Chain Selection Criteria...16
2.4.2 Mapping the Market...17
2.5 Value Chain Finance...17
2.6 The application of value chain analysis to tourism ...19
Chapter Three : Methodology ...20
3.1 Introduction ...20
3.2 Methods of data collection ...21
Chapter Four : Overview of the tourism sector in Cape Verde ...22
4.1 Introduction ...22
4.2 Supply and Demand ...24
4.3 Tourism and poverty...25
Chapter Five: Analysis of the tourism value chain in Fogo Island ...27
5.1 Back Ground...27
5.2 Map of the tourism value chain in Fogo ...28
5.3 Value Chain Analysis ...30
5.4 Benefit Flows in the tourism value chain of Fogo...31
5.4.1 Accommodation...31
5.4.2 Food and Beverage...33
5.4.3 Tour guides...34
5.4.4 Transportation services...34
5.4.5 Handicraft...35
5.4.6 Tour operators...35
5.4.7 The wine cooperatives in Cha Chaldeiras...36
Chapter Six : Constraints and Opportunities ...37
6.1 Constraints...37
6.2 Opportunities ...40
Chapter Seven : Financial Intervention ...43
7.1 Intervention areas...43
7.2 Financing Needs ...44
7.2.1 Accommodation Facilities...44
7.2.2 Cooperatives and small holder farmers...45
7.2.3 Tour guides...48
7.3 Review of Existing Financial Institutions and Financial Products...49
7.4 Suggested Financial Products...52
Chapter Eight : Conclusions and recommendations...54
8.1 Conclusions ...54
8.2 Recommendations...56
6
BIBLOGRAPHY
ANNEXES
ANNEX1 :LIST OF PERSONS CONTACTED... 60
ANNEX2 :DATA ON THE NUMBER OF TOURIST ARRIVALS, BED STOCK, AND BED NIGHTS IN CAPE VERDE IN 2008, BY ISLAND... 61
ANNEX3 :DATA ON NUMBER OF HOTEL ESTABLISHMENT IN CAPE VERDE,2009... 61
FIGURES FIGURE 1 :MAP OF CAPE VERDE... 22
FIGURE 2 :GROWTH IN NUMBER OF TOURIST ARRIVALS,2000 TO 2008(IN MILL.) ... 23
FIGURE 3 :BED NIGHT SPENT IN 2008, BY ISLAND... 24
FIGURE 4 :MAP OF THE ISLAND OF FOGO... 28
FIGURE 5 :MAP OF THE TOURISM VALUE CHAIN IN FOGO... 29
FIGURE 6 :ESTIMATED PERCENTAGE SHARE OF THE TOTAL TOURIST EXPENDITURE IN FOGO... 31
FIGURE 7 :ANALYSIS OF SEASONALITY OF INCOME,EXPENDITURE,SAVING AND CREDIT OF SMALL HOLDER FARMERS IN CHA CHALDEIRAS (SCALE OF 1-5) ... 46
FIGURE 8 :SEASONALITY ANALYSIS OF INCOME,EXPENDITURE,SAVING, AND CREDIT FOR TOUR GUIDES IN CHA CHALDEIRAS (SCALE OF 1-5) ... 48
TABLES TABLE 1 :SOCIO DEMOGRAPHIC STATISTICS... 25
TABLE 2 :NUMBER AND TYPE OF ACCOMMODATION ESTABLISHMENTS IN FOGO, IN 2009... 32
TABLE 3 :PERSONS WITH A SAVING,%... 44
TABLE 4 :OTHER FORMS OF SAVING,%... 45
TABLE 5 :TOTAL ESTIMATED COST OF PRODUCTION FOR THE WINE FARMERS IN CHA CHALDEIRAS... 47
TABLE 6 :FINANCIAL INSTITUTIONS AND LEVEL OF INTERVENTION... 49
TABLE 7 :DISTRIBUTION OF COMMERCIAL BANKS IN CAPE VERDE... 50
TABLE 8 :PROFILE AND ORIENTATION OF MFIS IN FOGO... 51
7 ACRONYMS
ADEI Association for Enterprise Development
ADF African Development Foundation
BCA Banco Commercial Di Atalntico
BCN Banco Caboverdeano Negocios
BI Banoc Interatlantico
BAI Banco Africano de Investimentos
BCV Banco de Cabo Verde
CE Caixa Economica de Cabo Verde
COSPE Italian Cooperation
FAM-F Federacio das Associacoes que Operam nas Microfinancas
GTZ German Technical Assistance
INE Inistituto National de Estatisticas Lux. Devlopment Luxoumberg Development Assistance
MFI Microfinance Inistitutions
OMCV Organizacao das Mulhers de Cabo Verde
Sol Di FOGo Organizasao das associacoes de solidaiedade social para Desenvolvimento da ilha do Fogo
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Chapter one: Themes and Methods
1.1 Introduction
Cape Verde has experienced robust economic growth since 2000, with real GDP averaging 6.6 percent during 2004–2009 and peaking at 10.8 percent in 2006. The strong economic performance in recent years also reflects a major economic transformation in the economy towards a service-based economy led by the tourism sector. Tourism has been particularly important in light of Cape Verde’s beaches and proximity to the key European market, and has accounted for around 20 percent of GDP. The government is attempting to extend the benefits of this tourism from the islands of Sal and Boa Vista, where it has been concentrated thus far, to other islands, by strengthening the value chain and diversifying the tourism product. (The World Bank, 2010)1
Growth and Poverty Reduction and Strategy Paper (GPRSP II) submitted to the IMF by the government of Cape Verde in May 2008, stresses on the need to improve competitiveness of the tourism sector to fully unleash the potential for income generating employment opportunities. One of the strategies designed to this end, is to enhance domestic private investment in the sector. Moreover, the government plans to develop a set of policies integrating the gender approach, with the aim of encouraging the development of viable small and micro enterprises in various downstream and upstream segments of this sector, such as catering, transportation to hotels, car rental, local crafts, agricultural production, maintenance services and mechanical and electrical services, among others. (2008, IMF Country Report No. 08/242)2
To insure the creation and flow of start-up and working capital for enterprise development, the strategy paper further elaborates on the need to transform the financial sector with the objective of enhancing competitiveness and deepening its outreach. This would require the establishment of effective institutional arrangements, entry of new financial institutions, and designing of specialized financial products that cater for the need of small and medium businesses at all levels and for all actors in the value chain.
1
The World Bank (2010), Country profile of Cape Verde. www.worldbank.org
2
International Monetary Fund (2008), Cape Verde: Poverty Reduction and Growth Strategy Paper – II. IMF Country Report No. 08/242
9 One of the major tourism product diversification strategies adopted by the government of Cape Verde is to promote rural, cultural and eco tourism for equitable pro-poor tourism development3. One of the islands selected for pro poor tourism development, is the island of Fogo. It is the island with the second highest level of poverty incidence in Cape Verde. The government of Cape Verde has restricted all inclusive tourism (mass tourism4) to this island and a couple of other islands. This is meant to open up opportunities for the locals to participate in the tourism value chain of the islands through small and micro enterprises.
1.2 Objectives of the research and relevance of the study
In light of the above mentioned strategic goals of poverty reduction and growth through the development of value chains in the Tourism sector of Fogo, the research tries to answer the following questions (1) which segments of the tourism value chain in Fogo offer greater potential for competitiveness and profitability? (2) do large number of small producers actively participate in these segments? (3) What is the level of participation of women in these segments? (4) What are the constraints and financing gaps that hinder their overall growth and (5) which institutional arrangements and financing options are needed to feel these gaps?
The aim of the paper is to
1) Identify small and micro enterprises (SMEs) that have the potential for competitiveness and profitability in the Tourism sector in Fogo, Cape Verde.
2) Explore opportunities to improve income of actors at all levels in the selected value chains
3) Assess existing financing gaps that have constrained investment in these enterprises and have hindered their overall growth
4) Propose viable options and institutional arrangements to finance the selected value chains
3
Strategic Plan for the development of the tourism sector of Cape Verde 2010/2013 4
All inclusive tourism is where the international tour operators, airline, hotels supply a complete package of services to the tourist
10 Despite the focus on small and micro enterprises and pro poor tourism development adapted as a guiding principle by the government of Cape Verde and the presumed need for it, to the author’s knowledge, there is very little evidence of value chain financing being exercised by banks and MFIs in the archipelago. It is hoped that the results of this study will help illuminate the opportunities that exist in this regard, and provide practical and feasible options of financing micro and small enterprises in the tourism value chain of Fogo.
1.3 Conceptual Framework
Raphael Kaplinsky and Mike Morris (2000)5, define the value chain as the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. The authors further elaborate the importance of value chains in the rapidly globalizing world, and the opportunities and the challenges it presents to industries in the developing world.
In the context of a tourism value chain, value chain analysis (VCA) is used as tool that enables the identification of stakeholders along a chain of transactions, from conception through production to consumption and after-use. The analysis helps structure ideas around what are the key processes and agents working within and outside the chain and where the benefits of the chain flow.
For all practical purposes the emphasis of the study will be on improving access to financial services for micro and small enterprises in the tourism sector of Fogo; however, this is only one piece of the puzzle. Olaf Kula and Elisabeth Farmer (2004)6, argue that financial services are but one component of a larger bundle of services required by firms in value chains, industries, and clusters with high growth potential. This underscores the importance of focusing on a unit of analysis wider than the financial sector—namely, the value chain
5
Raphael Kaplinsky and Mike Morris (2000). A Handbook for Value Chain Research. Prepared for IDRC 6
Olaf Kula, Jeanne Downing and Michael Field (2006), Globalization and the Small Firm: An Industry Approach Value Chain Approach to Economic Growth and Poverty Reduction. microREPORT#42 Prepared under AMAP/Financial Services, Knowledge Generation Task Order.
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1.4 Limitations of the study
Due to the shortage of data on costs of value chain actors, the benefit flows in the tourism value chain in Fogo are analyzed solely based on the gross benefit that accrues to each of the actors. However, attempts have been made to explain the nature of the costs and their likely portion of the overall revenue that accrues to the actors in the value chains.
The definition of the poor made in the paper, is based on the poverty context in Cape Verde and the local perceptions of poverty. A direct comparison of results from other studies in other poverty contexts is not considered appropriate.
1.5 Expected output
Expected outputs of the research are:
1. Comprehensive value chain analysis of the tourism value chain in Fogo, Cape Verde 2. Analysis of opportunities and constraints in the tourism value chain of Fogo
3. Analysis of existing financing gaps
4. Analysis of key intervention areas to improve the competitiveness of the tourism value chain in Fogo and the Tourism sector of Cape Verde in general
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Chapter two: Literature Review
2.1 Economic Growth and Poverty Reduction
There are two divergent views as to whether economic growth is enough to reduce poverty. On one hand, the protagonists of economic growth insist that growth in itself would eventually lead to rising incomes, including among the poor. The other side emphasized on the pattern of growth instead, the concern was not so much on the extent of the economic growth as it was on the breadth of the growth.
Dollar and Karay (2002)7, in their policy research paper for the World Bank, argue that the poor and rich benefit alike from growth. Branko Milanovic (2002)8 found corroborating evidence that growth, in the aggregate, has a positive effect on poverty reduction. However, he also concluded that rapid economic growth reduces poverty in different contexts at different rates.
Likewise, Ravaillon (2004),9 found that in countries where there are large income gaps between the rich and the poor, the rich benefit from economic growth far earlier and for longer than the poor. Peter Timmer (1997),10posits that where the disparities between the rich and the poor are less severe, economic growth is more sustainable than in countries with highly skewed income distributions.
C. K. Prahalad and S. L. Hart (1999)11 argue that broad distribution of wealth creation is itself a growth multiplier. Broad-based growth reduces poverty, diminishing the burden on public
7
David Dollar and (2002), “Growth is Good for the Poor”, Development Research Group, World Bank, Washington, DC.
8
Milanovic, Branko (2002), “Can We Discern the Effect of Globalization on Income Distribution?: Evidence from Household Budget Surveys.” World Bank Policy Research Working Paper 2876.
9
Ravaillon, Martin (2004).“Competing Concepts of Inequality in the Globalization Debate.” World Bank Policy Research Working Paper 3243.
10
Timmer, C.P. (1997) “How Well Do the Poor Connect to the Growth Process?”CAER Discussion Paper No. 178, Harvard Institute for International Development, Cambridge.
11
Prahalad, C. K., and S. L. Hart (1999), “Strategies for the Bottom of the Pyramid: Creating Sustainable Development.
13 resources to mitigate poverty’s adverse effects. More importantly, broad-based growth increases the purchasing power of poor consumers who will increase their consumption of goods and services that are more often locally produced than those of wealthy consumers. This demand for goods and services, in turn, creates demand for a larger workforce that is capable of producing those goods and services, which in turn increases employment, wages, and consumption.
The evidence presented in the litreature reviewed thus far tends to suggest that a broad based growth is better. Downing, Field and Kaula (2008)12, argue that the best way to achieve a broad based economic growth is through some combination of investing in enterprises with the capacity to provide jobs for large numbers of the poor and in industries where the poor participate through large numbers of micro- and small enterprises.
2.2 What is a Value Chain
The value chain, also known as value chain analysis, is a concept from business management that was first described and popularized by Michael Porter in his 1985 book, Competitive Advantage: Creating and Sustaining Superior Performance.13
The definitions provided by various authors vary according to their area of focus and the industry they are trying to analyse. What can be seen from the bulk of the literature on value chains in the area of rural finance is a thematic emphasis on commodity value chains, particularly agricultural products. For instance, Bob Fries and Babu Akin (2004)14, define value chains as a sequence of activities that a product passes through, with value added in each stage—from design, to the transforming of inputs, to the final market. The focus here was on agricultural value chains and their roles in addressing the rural finance challenge.
12
Olaf Kula, Jeanne Downing and Michael Field (2006), Globalization and the Small Firm: An Industry Approach Value Chain Approach to Economic Growth and Poverty Reduction. microREPORT#42 Prepared under AMAP/Financial Services, Knowledge Generation Task Order.
13
Porter, M. E. (1996). What is strategy? Harvard Business Review, November-December, 61-78.The value chain
14
Fries R. and Babu Akin (2004). value chains and their significance for addressing the rural finance challenge. Accelerated Micro enterprise Advancement Project. AMAP. MicroREPORT No.20.
14 A more broader definition is given by Raphael Kaplinsky and Mike Morris (2000)15, which defines the value chain as the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. The definition recognises the flow of services as well as products in value chains. This definition is taken as a guiding framework for the tourism value chain analysis in this research paper.
2.3 Value Chain and Cluster Approach
According to a USAID brief (2008)16 The premise underlying both value chain and cluster approaches is that individual firms often face sector-level constraints that they cannot address alone. Therefore, any effort to increase competitiveness must do more than support individual firms, since inter-firm cooperation is important to achieving this goal. These two approaches have common intellectual roots in Harvard’s Michael Porter, who played a key role in developing both theories.
The differences between the approaches may be subtle. The value chain approach considers a broad market system and the development of products/services from input suppliers to end- market buyers. Essentially, the value chain focuses on the flow of a developmental process. It differs from a supply chain in its emphasis on creating value in each segment of the chain.17
The cluster approach also considers an industry value chain, but it focuses on geographic concentrations of interconnected companies and their interactions. In particular, it concentrates on the synergies between these enterprises, including those between firms in different segments of the value chain. As a result of this geographic focus, the cluster approach does not always focus on the entire value chain but on core and supporting
15
Raphael Kaplinsky and Mike Morris (2000). A Handbook for Value Chain Research. Prepared for IDRC 16
(2008), Value Chains and the cluster approach: best practices in transforming relationships to increase competitiveness and micro REPORT # 148, prepared by Chenomics International under contract to AMAP P.1
17
(2008), Value Chains and the cluster approach: best practices in transforming relationships to increase competitiveness and micro REPORT # 148, prepared by Chenomics International under contract to AMAP P.4
15 companies in specific locations. It sees collaboration between cluster members as the source of resolutions of common problems18 (e.g. tourism related companies in a specific area).
A cluster approach may be most effective in strengthening a value chain when: (1) the value chain is very unstructured throughout its segments, thus requiring intervention by numerous stakeholders who could not resolve any single issue alone; (2) trust among stakeholders is weak and hence a special effort to create trust or “social capital” is necessary; or (3) obstacles to objectives need to be addressed by multiple stakeholders and value chain segments.19
According to Reidel, Bekelman and Canavari (2009)20, both approaches have short comings:
1. Cluster analysis doesn’t theorize the links of regional cooperation system to the external world. This is a great handicap because decisions made in the cluster-external surrounding have a clear impact on how coordination is carried out locally.
2. Value chain theory instead tends to overlook that not only decision made in the chain are responsible for coordination structure. In this sense also the local level counts, because an important part of the chain is integrated in a locally bound network and is influenced in its decisions by the integration in exchange relationships in the local network. This issue is particularly relevant for farmers.
The authors further recommended that, advancements can be made through a combination of both approaches. 18 p.5 19 p. 8 20
Bettina Riedel1, Wolfgang Bokelmann1, and Maurizio Canavari (2009), Prepared for presentation at the 113th EAAE Seminar “ A reilient food industry and food chain in challenging world”, September 3-6,2009,chania, Greece, p.4-8
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2.4 Value Chain Analysis
2.4.1 Value Chain Selection Criteria
A briefing paper prepared by USAID (2008)21 encourages the use of four criteria to help guide the selection process: competitiveness, impact, cross-cutting issues and industry leadership.
Competitiveness: is defined as an industry’s ability to achieve and maintain an edge over market rivals through an optimal combination of efficiency, product differentiation and access to new or niche markets. Significant, sustainable increases in income and employment are dependent on industry growth and competitiveness. When measuring competitiveness, it is important to remember that value chains and their end markets are dynamic, and that some possible chains may not exist or may be only nascent at the time of the analysis.
Impact can be measured by an industry’s capacity to sustain income gains, employment and asset development. Growth in industries with high rates of employment or micro- and small enterprise (MSE) participation will impact (i.e., reduce) poverty more than growth in industries with low employment and minimal MSE participation. Assessing the potential breadth and depth of benefits resulting from the development of various industries is an essential aspect of value chain selection.
Cross-cutting Issues: Governments and donors often have a complex set of objectives to consider in determining how and where to allocate resources. For some donors, economic growth is the goal; for others it is a means to another end, such as improved health, gender equity, poverty reduction, conflict mitigation or sustainably managed environmental resources.
Leadership: The concept of industry leadership refers to the willingness of one or more lead firms to invest time and resources (including non-economic resources such as political and social influence, intellectual contributions, etc.) in industry growth, employment and overall value chain competitiveness in a way that benefits MSEs and the poor.
21
17
2.4.2 Mapping the Market
According to Jon Hellin and Madelon Meijer (2006)22, the most important step in doing a value chain analysis is mapping the market, “If we want to understand more about the rationale behind farmers’ decisions vis-à-vis the types of seeds that farmers purchase etc. then we also need to know about the extraneous factors that influence the way that the value chain works. This is where the market map comes in useful. The market map is a conceptual and practical tool that helps us identify policy issues that may be hindering or enhancing the functioning of the chain and also the institutions and organizations providing the services (e.g. market information, quality standards) that the different chain actors need in order to make better informed decisions”.
The Market Map is made up of three inter-linked components: Value chain actors, enabling environment (infrastructure and policies, institutions and processes that shape the market environment). Service providers (the business or extension services that support the value chains’ operations)
2.5 Value Chain Finance
According to Jean Downings and others (2008),23 Finance in value chain analysis is defined as going beyond conventional finance analysis in two ways. First, it includes finance that is based on the relationship between two or more actors in the value chain, either directly (one actor provides credit to another) or indirectly (one actor obtains credit from a financial institution based on a sales relationship with another actor). Second, it includes a broader, systemic multi-level perspective on finance. This suggests approaching finance not from the perspective of a specific target group (e.g., rural finance) or type of finance (e.g., microfinance). Rather it includes all actors in the value chain and all types of financing.
22
Jon hellin and Madelon (2006), Guidelines for Value Chain Analysis . p.4 23
Jean Downing, Don Snodgrass, Zan Northtrip and Gary Woller (2006), The New Generation of Private Sector Development Programming: The emerging path to economic growth with poverty reduction. microREPORT # 44, prepared for review by the United States Agency for international Development by Development Alternative, Inc.
18 According to Annica Jansen (2007)24, Value chain finance is defined as that finance which enables one or more types of upgrading to occur, whether that finance is provided: (1) through and among the value chain actors; (2) from financial institutions to value chain actors; or (3) some combination.
The term upgrading refers to improvements in one or more of four different areas, as defined by Kaplinsky and Morris (2000)25:
Process Upgrading: Increasing the efficiency of internal processes such that these are significantly better than their rivals, both within individual links in the chain and between links.
Product Upgrading: Introducing new products or improving old products faster than rivals
Functional Upgrading: Increasing value added by changing the mix of activities conducted within the firm
Chain (or Channel) Upgrading: Moving to a new value chain, e.g., switching from the production of transistor radios to calculators, or moving to a new market channel.
An example of process upgrading might be an increase in productivity due to mechanization, such as increased agricultural output from irrigation. A well known example of product upgrading, also from agriculture, is an improvement of the product so that it complies with food safety standards. Functional upgrading occurs when a firm takes on new functions, such as when an in-country intermediary decides to become an exporter or when an MSE producer buys a truck and begins brokering on behalf of other producers in a distant wholesale market. Channel upgrading occurs when firms begin to sell in new end markets, while inter-sectoral (inter-chain) upgrading occurs when firms move to a completely different sub sector26.
The type of upgrading needed will determine what, if any, financing is appropriate. However, one shortcoming of looking at financing in terms of upgrading is that the resulting financial product may not adequately take into account the financial flows (in and out) of the household, for instance when cash is needed to pay land use or school fees. Also, many poor
24
Annica Jenson (2004), Mali value chain finance study. micro REPORT notes issue No.2, USAID 25
Raphael Kaplinsky and Mike Morris (2000). A Handbook for Value Chain Research. Prepared for IDRC. 26
19 households are engaged in more than one value chain, either simultaneously or sequentially. This must be taken into consideration when designing financial products. Finally, finance will not necessarily be the binding constraint for any of the upgrading steps needed, and it will most likely not be the only constraint27.
2.6 The application of value chain analysis to tourism
The application of value chain analysis to the tourism sector is fairly new. The practice started around the turn of the millennium. Organizations such as the World Bank and ODI have conducted tourism value chain analysis in Ethiopia, Mozambique, Tanzania and Gambia. According to Jonathan Mitchell and Jojoh Faal (2008)28, in the context of a tourism value chain, value chain analysis is used as tool that enables the identification of stakeholders along a chain of transactions, from conception through production to consumption and after-use. The analysis helps structure ideas around what are the key processes and agents working within and outside the chain and where the benefits of the chain flow.
The over riding emphasis for most studies done on tourism value chain is to identify key interventions areas for pro poor tourism. The World Bank definition of pro poor tourism is: tourism is pro poor if it results in increased net benefits to the poor.29
27
Annica Jensen (2004), Mali Value Chain Finance Study, micro REPORT # 81 Prepared under AMAP/Financial Services, Knoledge Generaration Task Order, USAID
28
Jonathan Mitchell and Joioh Faal (2008), The Gambian tourism value chain study 29
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Chapter Three : Methodology
3.1 Introduction
The conduct of the study was undertaken in three stages:
The first stage, prior to the field work in Cape Verde, included an extensive literature review of the tourism industry in Cape Verde, value chain analysis and SME financing. These included the review of existing research work on the tourism value chain in regional and global markets and a review of the newly approved strategic plan for tourism of Cape Verde 2010/13.
The second stage involved the selection of a sub-sector in the tourism industry of Cape Verde. This was done with the help of interviews with the stakeholders in the tourism industry, such as the tourism industry in Cape Verde. Ministry of Tourism, BDS providers such as the newly created training Centre for tourism and travel of Lux Development and government agencies for tourism and enterprise development such as ADEI. The selection criteria used for the sub-sector selection was:
- The sub-sector’s potential for profitability and competitiveness
- The participation of the poor through large numbers of small and micro enterprises (SMEs)
- The participation of women in the sub-sector
The criteria were communicated to the stakeholders and their responses recorded. The final result indicated the island of Fogo and S. Antao as possible candidates; these were the islands in Cape Verde with high levels of poverty incidence. The researcher traveled to Fogo,for about a week for a rapid appraisal of the situation in Fogo and make a decision. Finally, the island of Fogo was selected for the value chain study.
The third stage was undertaken on the field in Fogo. This was the stage for primary and secondary data collection on the tourism value chain in Fogo.
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3.2 Methods of data collection
The major data collection means for the value chain used were qualitative tools i.e. semi-structured interviews and discussion with focus groups. These tools are preferred because of their better potential to represent the complex perceptions and realities of value chain actors. Quantitative means such as questionnaires, often fail to capture many of these realities and perceptions. However, the shortcoming of using qualitative tools is that a certain degree of accuracy and validity is sacrificed. To complement for this shortcoming, the researcher has made full use of survey results of recent research work done by ADA microfinance and Statistics from INE (the department for statistics of Cape Verde) as stated in the reports and strategic plan of the Ministry of Tourism.
More than 30 structured interviews were held with hotel owners, tour operators, small and micro entrepreneurs, financial institutions, NGOs, government official (see list of contacted people). 12 FGD sessions (6-8 participants) were held with farmers, tour guides, artisans, taxi drivers and entertainment people in Fogo. Some of the FGDs involved the use of well known financial product development tools such as the seasonality analysis of income, expenditure, saving and credit and Ranking of risks and coping mechanisms. Finally, the results were used to do a detailed value chain analysis, SWOT analysis and financial gap analysis.
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Chapter Four : Overview of the tourism sector in Cape Verde
4.1 Introduction
Cape Verde is a small archipelago of ten islands (Santo Antao, Sao Vicente, San Luzia, Sao Nicolau, Sal, Boavista, Maio, Santiago, Fogo and Brava). It’s located in the Atlantic Ocean 500 miles off the coast of West Africa just below the Euro zone (four hour flight from Portugal). Its islands of white and black sand beaches, the volcanic mountains and diverse flora and fauna found on the islands make it an attractive and exotic destination for tourists interested in surfing, trekking, canyoning, hiking and other sports. The unique complexion of Cape Verdeans and their diverse culture enriched by infusions from the near by continents of Europe, Americas and Africa makes it a fascinating destination for tourists interested in art, music and culture.
23 According to the Ministry of Tourism, the last decade has seen dramatic growth in tourism receipts. Tourism receipts constitute about one-fifth of the economy and a high proportion of total exports. The number of tourists arriving in Cape Verde increased at the rate of 4.1% per year from about 682 thousand tourists in the year 2000, reaching a total of 924 thousand tourists in the year 2008. The revenue generated by the industry in this year amounted to about 642 million Euros. This is economically significant for a country of about 500 thousand people with a GDP of about 1 billion Euros.
According to a report by the Ministry of Tourism (using INE data, 2008). Europe remains to be the principal source of tourists coming to Cape Verde. The report indicates that, of the 924,000 tourists that arrived in Cape Verde in 2008, 487.9 are from Europe, 184 thousand from the Asia – pacific region, 147 thousand from the Americas, 55.6 thousand from Mid East and 47 thousand are from Africa (most of them emigrant workers).
Figure 2 : Growth in number of tourist arrivals, 2000 to 2008 (in mill.)
0 100 200 300 400 500 600 700 800 900 1000 2000 2001 2002 2003 2004 2005 2006 2007 2008
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4.2 Supply and Demand
Tourist destinations in Cape Verde are very limited. The majority of tourist activity is highly concentrated in four islands (Sal, Boavista, Sao Vicente and Santiago). Over 70 % of all tourist bed-nights in Cape Verde (1.3m nights out of a national total of 1.8m in 2008)30 were spent on the island of Sal. The figure below illustrates the degree of concentration of Cape Verde’s tourism industry.
Figure 3 : Bed night spent in 2008, by island
S a n to A n ta o S a o V ic e n te S a o Ni c o la u S a l B o a v is ta M a io S a n ti a g o F o g o B ra v a S1 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Source: INE, 2008
According to the report, foreign tourists spent an estimated USD 944 million (or 642 million Euros) on goods and services in Cape Verde in 2008. This equates to a gross spend per tourists of about 700 Euros. However, it should be noted that the net yield will certainly be lower, when the value of imports generated by the tourism demand is taken into account and deducted from the gross expenditure of tourists. For instance, according to Satellite Tourism Estimate (STA) of Cape Verde in 2007, travel and tourism imports (goods imported by direct and indirect travel and tourism industry) amounted to ECV 10.7 billion (97 million Euros)31.
30
See annex 2 31
25
4.3 Tourism and poverty
There are two opposing views on the effects of tourism in Cape Verde. The first is that as long as the rapidly developing tourism remains to be one of the major drivers of economic growth of the country then there is a need to build more of the same quickly. The other widely held view is that the industry is dominated by large tour operators and big international hotels and the benefits are not trickling down to the poor.
It is highly problematic to try and present empirical evidence to support either of the above opinions. However, there are a number of reasons to expect tourism in Cape Verde to have a weak link to people from poor backgrounds. The bulk of the tourism in Cape Verde does not take place where poor people live. The centers of tourism activity are located on Sal, Santiago, Boa Vista and Sao Vicente which are the four richest islands on the Archipelago. Not only are Sal and Boa Vista comparatively affluent they also have a very small population to interact with the tourist sector.
According to the discussion with the Ministry of Tourism, this has initiated a major strategic shift towards promoting the development of rural eco-tourism in islands such as Fogo and S. Antao. These are the islands with a high level of poverty incidence in Cape Verde. In theory, one of the principles of ecotourism is bringing benefits to the local communities at the destination site. Benefiting the local communities, in turn, offers an opportunity for community development of the local populations32. This is one of the main themes in the newly approved strategic paper for tourism in Cape Verde (2010-2013). Major strategic steps have already been taken by the government, such as limiting all inclusive mass-tourism to few islands only.
Table 1 : Socio Demographic Statistics
S. Antao S. Vincent Sal Santiago Fogo
Population in 2009 49,932 82,463 20,956 299,920 38,379 Population in 2009 % 10 16 4 58 7 Urban Population 2009 % 33 96 90 59 31 Incidence of poverty % 46 14 4 25 39 32
26
Illiteracy rate % 28 14 9 22 24
Unemployment rate % 23 28 9 21 22
People /Household 4.8 4.2 4.4 5.3 4.7
27
Chapter Five: Analysis of the tourism value chain in Fogo
Island
5.1 Back Ground
The island of Fogo is known as ‘the island of volcano’, because it holds the only active volcano in Cape Verde (the last eruption was in 1995). The island has a conical shape which culminates at 2,829 meters above sea level, the highest point of the whole archipelago. Cha das Chaldeiras, the tip of the mountain holds an active crater of 8 kms in diameter. Here and there are fields of lava traces from previous eruptions. The volcano is a major attraction of tourism to Fogo.33
Fogo has an area of 476 km². The population of the island is approximately 38,000.The slopes on the North-Eastern part are green and grassy all year round. The rest of the mountain is dry and barren. The economy of the island is based on agriculture and fishing. INE statistics in 2007 indicated that Fogo has the second highest incidence of poverty in Cape Verde (39 %). However, Fogo has very fertile land on the South-Western slopes and receives a lot of precipitation due to its height above sea level. Coffee and wine are among the main products34.
The traditional wine ‘Manecon’ is famous in Cape Verde; it is used as a brand name that attracts domestic and international tourists to Cha and Sodade. Monte Velha, the forest perimeter that surrounds the mountain of Bordeira is rich in bio-diversity and represents a huge potential for development of eco tourism.
33
Strategic plan of tourism for Cape Verde (2010/2013) 34
28
Figure 4 : Map of the island of Fogo
Moreover, the island has unique socio-demographic, cultural and architectural heritage reflecting its historical evolution from the colonial era. The major city, St. Filipe, is full of colonial type buildings and debris. The water front has black sand beaches (such as the beach in Bila low) and deep waters that are rich in bio-diversity, that offer good opportunities for tourism activities such as diving and deep sea fishing. St. Filipe and the small village of Cha das Chaldeiras at the base of the volcano receive the bulk of the tourism in Fogo.
5.2 Map of the tourism value chain in Fogo
What makes a tourism value chain different from the usual product value chain is that the consumer (the tourist) goes to the products and services instead of the product coming thorough the value chain to the final consumer. For instance, a tourist in Germany sees a booklet from an international tour operator and books a visit to Cape Verde, on his trek to the destination, he will use services of the airline companies, take a taxi, bus or a boat as required to rich the visit site. Then he will use the accommodation services of hotels and restaurants during his stay at the site and so on and so on, creating the value chain.
29 Each node in the value chain represents services and products offered to the tourist for which he is willing to pay. A number of suppliers are involved in the value chain offering their products and services, adding value to the tourists experience and getting money in return. Directly linked to the tourism value chain are the enterprises that offer tour and travel services, airlines, hotels and restaurants. On the other hand, there are enterprises that supply products and services to these enterprises, therefore, indirectly linked to the tourism chain. Among these are construction companies and agricultural suppliers. Indirect linkage, however, does not necessarily mean weak linkage. (Figure 5, illustrates such a value chain)
Figure 5 : Map of the tourism value chain in Fogo
Construction Agricultural supplies Handi craft
Promotion and contract
Transportation Accommodation Excursion & Visit Transportation Tour operators Tour guide Airlines Restaura nts Bus/yus Taxi Hotels Residenc ias Guest houses Pensions Parco di Fogo Wine farmers Guides Bars Airlines Bus/ Yus Taxi Boat Boat
Ministry of Tourism Ministry of construction Ministry of agriculture Lux Development
Chain Supporters
Italian cooperation (COSPE) Parco di Fogo GTZ / Kfw European Union
Cha tour
30
5.3 Value Chain Analysis
According to the discussions with the tour operators and hotels, an average tourist that comes to Fogo and spends 4 to 5 days (4.5 days is the national average) and stays at a decent hotel, uses one guide, sleeps in a single bed, goes to excursion and climbs the volcano will pay 150 - 200 Euros, this does not include any prior expenses of traveling to the island. Let’s say 7000 tourists arrived in Fogo in 2009, (this is a cautious estimate based on the INE statistics of 6900 for 2008). This will roughly suggest a total tourist expenditure of 1.2 million Euros on the island.
The analysis above is over simplified; of course, the prices of the tour operators vary according to the needs and preferences of the tourist. Moreover, most tourists have out of pocket spending for buying artifacts, wine, beverages, cigarette, internet cafes, tips and other petty activities. Most tourists interviewed reported spending a maximum of 50-60 Euros out of pocket during their stay. This will suggest an additional expenditure of roughly 385,000 Euros. This adds up to a rough estimate of total tourist expenditure of about 1.5 million in Fogo.
Moreover, there is a chartered plane that comes from Sal and Boa vista to Fogo 3-4 times a week carrying a maximum of 18 tourists that hop on a tour bus, just for a lunch at a hotel in Cha and an excursion visit to the wine cooperative, take pictures of the volcano and return to Sal or continue to other islands. These groups are island hoppers that are a part of the larger tourism value chain in Sal, and they are not included in our total tourist arrival and expenditure estimate of Fogo in the analysis above.
The hotel charges 7 Euros for the lunch and the cooperative charges 10 Euros per person for an induction and wine tasting session. Assuming 4 trips/week of 18 tourists during the high season (3 months) and 3 trips/week of 18 during the low season, suggests a total of about 3500 island hoppers. This fetches a value of roughly 24,000 Euros for the hotel and 35000 Euros for the wine coop., adding up to a total of 59,000 Euros. According to the interview with the management of the cooperative, 10% of total production of wine is sold at the sales point in the coop. to tourists, and an estimated 40% of this is sold to this group. According to the study done in 2009, total production was 108,500 bottles of four varieties of wine.
31 Therefore, taking a weighted average price of 5 Euros this gives us sales of 21,700 Euros to the group of island hoppers.
Figure 6 : Estimated percentage share of the total tourist expenditure in Fogo
Estimated percentage share of total tourist expenditure in Fogo
33% 23% 11% 7% 5% 15% 6% 0% Accomodation Food and Beverage Tour Guides
Transportation services (in land) International tour operators Local our operators The wine coop erative Others
In the final analysis, the total value of tourist expenditure in Fogo is roughly 1.6 million (1.5 million from expenditures of regular tourists and about 100,000 Euros from island hoppers). This is the total value of the pie chart depicted above. The airline services are not included in our value chain analysis for the purposes of this paper and the whole analysis is based on what the tourist spends once he lands in Fogo.
5.4 Benefit Flows in the tourism value chain of Fogo
5.4.1 Accommodation
In spite of the huge potential Fogo has for attracting tourists, there were only 10 registered establishments for accommodation in 2008. However, this number has increased (by 40%) to 14 in 2009 (see table below). The largest hotel in Fogo has 39 rooms, the rest of the establishments are small sized businesses with 6-10 rooms. The low availability of accommodation facilities has little to do with lack of demand as can be seen from the strong
32 negotiation power hotels have with tour operators, according to the author’s survey ,tour operators can only manage to get 10-15% discount on hotel prices.
The statistics suggest that it has more to do with the government policy to restrict all inclusive tourism to few islands only, which limits foreign direct investment in other islands such as Fogo. Of the total number of establishments in Fogo, 12 (85%) of them are established by Cape Verdeans, except for 1 foreign and 1 foreign and local joint venture (INE data)35. This highly contrasts with the situation in other islands, in Sal for example, 40 % of the establishment are fully foreign owned and 9 % are joint venture. Secondly, the fact that most of the owners interviewed during the hotel survey are Diaspora returning to their home land and investing seems to reinforce the idea that there is low level of local capital formation in Fogo.
The policy rationale is clear, as all inclusive tourism is seen to highly favor international tour operators and big hotels and leave very little for the local small and micro enterprises (SMEs). However, the protectionist policy needs to be complemented by a build up of local capital to be effective.
Table 2 : Number and type of accommodation establishments in Fogo, in 2009
Source: INE, 2009
The accommodation facilities in Fogo have room rates that range between 800 to 2700 escudos (8-27 Euros)36, there are about 14 registered hotel establishments in Fogo with 166 rooms. The big differences in room in prices are a reflection of the lack of standardization in
35
See annex 3 36
An approximate exchange rate of ECV 100 = 1 Euros
Type of establishment No. in 2008 No. in 2009
Hotels 1 2 Pensions 7 7 Hostels 1 1 Tourist resorts 0 1 Hotel apartments 1 1 Residential 0 2 Total 10 14
33 terms of quality of the rooms. In Fogo, there are 117 rooms with hot & cold shower, 29 rooms with cold shower, and 20 rooms without (INE data, 2009). As per the discussion with the tour operators, the rooms with a proper bathroom are booked full ahead of time during the high season. This suggests that there is plenty of room for value addition in this regard. This will not only make the tourist spend more but also stay longer.
The weighted average room price is around 19 Euros, it is skewed to the upper limit because about 88 % of the rooms have hot and cold shower inside the room. Multiplying this figure by the estimated tourist bed nights (7000*4 nights), we get a value of roughly 532,000 Euros (33% of total estimated tourist expenditure).
According to INE statistics, there are 79 people directly employed staff by the hotel establishments in Fogo37. A large proportion (80%) of the staff are non managerial. According to the discussions with the hotel owners, most of the non managerial staff are from poor backgrounds. The monthly salary ranges between 150 to 300 Euros. Taking an average salary of 225, the estimated total flow of income to direct jobs is roughly 175,000. Therefore, the share of benefits to direct jobs from the total tourist expenditure is roughly 11% (175,000 divided by 1.6 m). This suggests a high level of pro-poor benefit flow through direct jobs in the accommodation sub-sector.
5.4.2 Food and Beverage
The average tourist spends about 11 Euros per day on Food and Beverage in Cape Verde (ODI survey, 2008)38. This was also confirmed by interviews with the tourists and hotels in Fogo. Therefore, this fetches a value of roughly 370,000 Euros (7000 tourists staying an average of 4.5 days plus 24000 Euros from island hoppers) in 2009. This equates to 23 % of total tourist expenditure in Fogo going to the accommodation sub-sector from food and beverage consumption.
Almost all of the hotels interviewed buy imported food and beverage items from wholesalers in St. Filipe. Poor quality of local agricultural supplies and health safety reasons were
37
Extracted from a report by the Ministry of Tourism (2009) 38
34 mentioned for not using local agricultural supplies. Some hotels reported using the local goat cheese, wine products of the cooperatives in Cha and home made fruit (Fig and Apple) jams. Overall, there seems to be a high level of leakage39 of the benefits from food and beverage expenditure of the tourist to imported items. In view of the agricultural potential Fogo has, this segment of the value chain can potentially be made to benefit a large number of small holder farmers.
5.4.3 Tour guides
The guides charge 1500-3000 (15-30 Euros) escudos per person to go hyking on Pico di Vulcao in Cha Chaldeiras. 6000 escudos (60 Euros) for trekking on the Bordeira. According to the interviews with Chatour, guides and the tour operators, the average active guide that speaks good English or any of the international languages, makes on average 200 Euros per month in the low season to 800 Euros per month in the high season. There are three months of high tourist flow to Fogo (October, November and April).
It is problematic to get the accurate number of tour guides operating in Fogo, as they have no license and almost every young man claims to be a guide. However, the tour operators estimate a rough number of 40 active tour guides working in Cha and the surrounding areas. This makes total income of 96000 Euros in the three months of high tourist flow and 72000 Euros for the rest of the year, adding up to a total value of 168000 Euros (10.5% of total tourist expenditure in Fogo) accruing to the tour guides in Fogo.
5.4.4 Transportation services
The taxis charge 250 escudos (2.5 Euros) from airport to S. Flipe, and the min buses charge 5 Euros per person for a trip to Cha Chaldeiras. Assuming a tourist makes only one round trip using both services, a tourist spend 15 Euros on average. This gives us a total expenditure of about Euro 105,000 (7 % of the total tourist expenditure). Of course, a tourist that wants to take a taxi to cha can spend up to 30 -50 Euros but this rarely happens, so it is not considered here. Most of the taxi drivers are from poor background and do not own the vehicles. A taxi
39
Leakage are defined as payments made outside the tourist destination economy – or, the proportion of total holiday price that does not reach or remain in the destination. J. Mitchell (2009)
35 driver in Fogo earns a meager salary of about 180 Euros/month. This seems to suggest there is not much pro poor income flow in this part of the chain, but there is potential for improvement.
5.4.5 Handicraft
There is not much handicraft to speak off. There are some five local artisans in Cha Chaldeiras that make various artifacts from volcanic stones. Although the art work is impressive, not much of it is bought by tourists. Rarely does a tourist want to carry a heavy piece of stone in the luggage on his return trip. There are some small artifacts made of light weight stones that are sold by small kids on the street for about 200 CV or 2 Euros each. But the value created here is very insignificant.
5.4.6 Tour operators
There are five local tour operators in Fogo, (Zebra travel, Vista Verde, Qualitour, Renata and CITS). Except for one agency, all of them are foreign owned. The tour operators receive a margin of 20 % from the international tour operator and a discount of about 10-15% from the hotel establishments and excursion providers. Considering only the margin on the local prices (30 – 40 Euros per tourist) suggests an approximate total value of 245,000 Euros (7000 * 35 Euros). This suggests roughly 15% of the total tourist expenditure accruing to the local tour operators in Cha.
A number of international tour operators work with the local agencies, the most active are, One World, TUI and some other tour operators in Germany and France. The margin of the international tour operator is not known, however, by way of deduction the estimated total value that accrues to these actors from what happens inside Fogo, is roughly about 5 % of the overall tourist expenditure. This is not surprising because the value we are analyzing is actually, their expenditure item, given in advance to the tourist in the form of vouchers.
36
5.4.7 The wine cooperatives in Cha Chaldeiras
Wine is a major part of the tourism experience in Fogo. The traditional home made local wine Manecon is as famous as the volcanic mountain of Cha Chaldeiras in Cape Verde. In the last decade, however, two wine producer cooperatives have established factories that produce up to seven different varieties of bottled wines.
Cooperative Cha, established in 1998 with a collaboration of the Italian Cooperation (COSPE), the European Union, and the Ministry of Agriculture represents a large portion of bottled wine production in Fogo (74% of the 147000 bottles produced in 2008)40. Currently, the cooperative has 102 small holder farmers (> 1.5 ha of land)41. 30 % of the members are women. The cooperative has well established linkage with the tourism sector in Fogo. In fact, the management of the cooperative reported that 60 -70 % of total production in the initial years was consumed by tourists in Fogo. The cooperative still provides induction and wine tasting sessions 3-4 days/week to a group of a maximum of 18 tourists per day.
However, at the moment the cooperative is part of a larger supply chain, and it is reported that sales to tourists in Fogo represent only 10% of total production. 60 % of the production is supplied to a wholesaler and distributor in S.Flipe and the remaining 30% is sold in duty free shops at the airports of Praia, Sal and Boa Vista. This suggests that the wine business of the cooperative has grown to become part of a larger agricultural supplies and tourism value chain in Cape Verde.
In the final analysis, the estimated amount of benefits to the cooperative from the tourism value chain in Fogo is about 55000 Euros from direct sales to tourists and 35000 Euros from the induction sessions. This adds up to a share of 5.6 % of the total tourist expenditure in Fogo. However, it should not be forgotten that products of the coop. bought by the hotels were included in the estimate of the return from Food and Beverage in section 5.4.2 above. More over, the cooperative owns a bed and breakfast guesthouse that provides accommodation facilities. Therefore, the benefits accruing to the coop. from the tourism activities in Fogo can cautiously be estimated at around 7 % of total tourist expenditure.
40
Jean Philippe Leroy (2009), A thesis on the wine production of Cha Chaldeiras, Sommelier Conseil, Caviste | Université du Vin | 26790 Suze la Rousse - France | 2009
41
37 The cooperative retains 25 % of net income and the rest is paid as dividends to members based on their contribution of grapes. As most of the members are poor small holder farmers, this suggests a high level of pro poor benefits flow from this sub-sector in the tourism value chain.
The other cooperative, Cooperative Sodade, was organized in 2005 by the Ministry of Agriculture with funding from the European Union. The cooperative owns a medium sized factory that registered a total production of 38000 bottles (26% of the total in 2008) of four varieties of wine. In 2008, the cooperative had a membership of 22 small holder farmers. However, at the moment very little is known about this cooperative. The discussions with the farmers seem to suggest that this coop. has grown weak because of internal problems and lack of adequate supply of wine grapes from members. However, the author was not able to verify this with the management of the cooperative.
Chapter Six : Constraints and Opportunities
6.1 Constraints
At the macro level, there a number of infrastructural problems that prevent from unleashing of the full tourism potential in Fogo. These include:
According to the discussions with various stakeholders in the tourism value chain, poor supply of water is the first and principal constraint to tourism in Fogo. Water in Fogo comes from desalination plants. It costs 10 escudos (0.10 Euros) to buy 20 liters of water. The main destination of tourists, Cha Chaldeiras, has no supply of piped clean water at all. The community uses wells to accumulate rainfall water. Two of the hotels and the wine factories in Cha transport their supply of water from St. Filipe. Only one hotel provides individual rooms with hot and cold shower in Cha. Water is an expensive commodity in Fogo and in Cape Verde in general. The government of Cape Verde has a joint project with Lux. Development to address the issue of water in Fogo.
38 Cha does not have any electricity supply. The hotels and other enterprises use their own generators to get electricity. The municipal is currently working on a project to provide electricity to the village town. However, from the discussions with tour guides, hotels and tour operators, there seems to be mixed feelings about this. It is feared that the provision of electricity will detract from the true rural experience of the tourist. None the less, the lack of water and electricity supply certainly raises the cost of operation for the enterprises in Cha, and ultimately it results in relatively high and uncompetitive prices of goods and services offered to the tourist. The lack of facilities also makes their stay in Cha shorter as reported by some of the tourists interviewed.
The tour operators reported that there is no direct regular flight from the major tourist destination Sal to Fogo (except for the chartered plane of the Cape Verde express). According to the Ministry of tourism, Sal represents about 50% of tourist receipts in Cape Verde. A flow of 1-2 % of tourists from Sal could have major implications for the tourism value chain in Fogo.
The policy of the government to restrict all inclusive tourism to a few islands only, has resulted in less foreign investment in the tourism sector in Fogo. Although, this was done with good intentions to protect local investors, the findings of the researcher suggest that it has limited the supply of accommodation and other facilities to tourists coming to Fogo
There are two divergent views on the effect of the growth in the tourism sector in Cape Verde. The first is that the economic growth driven by the rapidly growing tourism will inevitably benefit all, so there is a need to build more of it quickly. The other widely held view is that the industry is dominated by large tour operators and big international hotels and the benefits are not trickling down to the poor. It is highly problematic to try and find empirical background which supports either of the above claims. The natures of the arguments resemble the long standing debate of various economists on growth and poverty reduction (See sec. 2.1).
However; all inclusive tourism characterizes the bulk of the tourism that takes place in major destination islands, Sal and Boa Vista. The international tour operators provide their own air and ground travel services and accommodation and even excursion guides. In effect, taking over the whole domestic value chain and leaving very little room for small and micro
39 enterprises to participate. This seems to be the rationale behind limiting all inclusive tourism in relatively poor and populated islands such as Fogo, Maio and Sao Antao.
On the other hand, the islands of Sal and Boa Vista generate much of the tourism revenue that drives the economic growth of the country. This begs the question, as to whether this has been possible without the large foreign investments made in the tourism sector of these islands. It is also clear that the big international hotels and tour operators that characterize their market generate employment for many. It is not hard to imagine the effects on the number of tourist arrivals if the promotional clout of the tour operators was removed from the equation. All of this calls for a careful and substantiated empirical evidence to support claims on the benefits of having this or that type of tourism in Cape Verde.
The policy makers seem to have taken a combination of approaches, depending on the characteristics of the islands. In the islands where there is a high incidence of poverty, the policy approach is bent towards improving the participation of the poor through small and micro enterprises and therefore limiting all inclusive tourism. In other islands, the government encourages foreign direct investment in the tourism sector through various incentives (e.g. duty free import of construction materials and a five year holiday on corporate tax). In the researcher’s opinion, in the absence of concrete empirical evidence to support either of the above stated claims, this seems to be the right political approach.
At the micro level, the following major constraints are observed:
There is the lack of inter-sectoral linkage between agricultural suppliers and accommodation providers in Fogo. Most of the food and beverage is imported (see section 5.4.1 for details). This is also true for the overall economy of Cape Verde. According to the discussions with various stakeholders, it is one of the reasons that make the food and beverage prices in Cape Verde higher than other competitive tourist destinations.
There is a lack of skilled man power in tourism and hotel services in Fogo. Hotel staffs do not receive adequate training and there is poor professionalism. Similarly, tour guides are not professionals that are registered and licensed. Although, the tour guide and their clients are exposed to personal risks during hiking and trekking on the Pico and the Bordeira, tour guides have no insurance for accidents that happen on the job. Efforts to
40 organize an association for guides to deal with this kind of issues failed, apparently because of lack of funds.
During the discussions with the guides, farmers and accommodation providers it was reported that the tourism flow is highly seasonal. October, November and April are the months with the highest amount of tourist receipts. The rest of the year sees tourists in much less numbers. This creates significant fluctuations in the level of income earned by the chain actors. Most of the tour guides in Cha are involved in farming and construction activities to smooth out the variations.
Some members of the wine cooperative in Cha reported that they do not get adequate feed back on income and expenditure from the management of the cooperative. It was also reported that there are suspicions of one family getting most of the benefits. The management of the cooperative reported that there are regular quarterly meetings to disclose financial information to members. In any case, these kinds of conflicts are a threat to the long term performance of the cooperative.
Finally, accessing loans from banks to set up new businesses is not easy. The banks require collateral plus one or two persons to stand as a guarantor. Most of the FGD participants reported that they have never borrowed from a bank or an MFI (this is discussed in detail in chapter 7).
6.2 Opportunities
There are a number of internal and external opportunities the development of the tourism value chain in Fogo, among these are:
According to the ministry of tourism, the flow of tourists to Fogo is increasing at around 5 % per annum since 2007. The major reason for this is the newly opened climbing routes on the Bordeira. The government of Cape Verde in collaboration with GTZ financed the construction of a safety mechanism (block syndicate) for climbing in 2007. This was advertised in news papers and journals in Germany. This attracted many more tourists to come from Germany.
41 Alpinism (Trekking) is becoming a main stream sport for tourists globally. Destinations that offer similar type of tourism like Turkey and Thailand receive hundreds of thousands of tourists every year. Building a tourism brand such as this has huge implications for Fogo. This type of tourists do not require high standard accommodation facilities and recreation services as the once that come for sun and sandy beaches, and they tend to stay longer days.
