4. TRANSACTION COSTS

Transaction costs are defined as the costs of exchanging ownership titles. Market efficiency, in the sense of price integration at various levels of agents found in a horizontal or vertical arrangement, requires that these costs need to be minimised (Demsetz, 1968; Cook et al., 1990). The elements of transaction costs vary depending on the type of the goods transacted. Under the specific case of cross-border livestock trade, a trader incurs costs on market license, transport, feed and water, loses due to animal disease or theft, and market fees by the government at various sites. All these costs are incurred by various livestock traders interviewed at border markets found in Ethiopia and Kenya.

4.1 Market Information and Brokerage Fee

Information about prices and alternative markets is poorly available in the region Information about prices of different types of livestock is private. Official sources are limited. Some NGOs such as GTZ/ BLPDP and CARE and government organisations of MOA zonal and wereda operating in the area collect prices on different types of animals, grain and fuel wood. However, the dissemination is limited and their market coverage is limited. Moreover, neither farmers nor livestock traders used this information. This made the market search by individual trader complex to buy and sell animals. Market search by pastoralists (primary suppliers) and traders involves negotiations and in most cases it is facilitated by brokers locally known as delala. A broker has to be trust worthy, cooperative and make sure that his client gets the best service eventually as a broker can become a full fledged trader. The broker's role is to match the buyer with a seller and to insure the legitimacy of the sale. Out of the total livestock traders interviewed, 89 percent of them used brokers to purchase and 85 percent to sell animals (Table 16).

The use of brokers by traders is important in many of the livestock markets. In larger markets, traders responded to the interview that it was advisable to use. Important markets identified by many traders where brokers could play vital role are Dubluk and Negelle in Ethiopia and Mandera, Moyale and Nairobi in Kenya.

Lack of standardisation and the importance of subjective judgements by the agents on the quality of different types of livestock as well as the absence of information on different prices and alternative markets, made it mandatory the facilitation of brokers. However, some traders responded that it was not their choice to use brokers in some markets, but the brokers could affect the negotiation if they are not consulted. In such instances the brokers either offer better price to the seller or better quality cattle and/or lower price to the buyer depending on the agent who is not willing to trade with them.

Table 16. Percent of Trader Responses for the Use of Brokers to Purchase and Sell Livestock

	Yes	No
Use brokers to purchase livestock	89	11
The broker from the same ethnic group	44	56
Use of brokers to sell livestock	85	15
The broker from the same ethnic group	39	61

SOURCE: Survey Result, 1999

There are two modes of payment for a brokerage fee in the study area. The most often used is fixed charge by type of livestock and market. The broker charges this fixed amount both from the buyer and the seller. The fixed payment arrangement from both actors in a market implies that the broker does not have any incentive to favour the buyer or the seller. The broker rather maximises sales subject to his costs. The broker must be able to convince both the seller and the buyer to effect the transaction. Such objective function that the broker is facing requires trust and reputation. Brokerage fee for different types of livestock is presented as follows.

Table 17. Range of Brokerage Fee by Type of Livestock (in Birr)5

Type of animal	Amount paid to the broker per animal bought		Amount paid to the broker per animal sold
	Minimum	Maximum	Minimum	Maximum
Cattle	4	20	4	50
Sheep	1	5	1	10
Goat	1	5	1	6
Camel	5	20	6	50

SOURCE: Survey Result, 1999

The values in Table-17 show that the amount paid to the broker are higher at the selling than buying markets. This implies that although the payments are made based on fixed arrangement there is a positive association between selling price and brokerage fee. This is also justified when we see the amounts paid by type of livestock. Thus, the amount increases as the value of the animal increases. The other mode of payment is that the seller or the buyer sets the price to the broker and the broker gets any amount above or below this price. Under such information asymmetry the seller or the buyer minimises information costs and sets the highest or the lowest possible price for the livestock to be sold or bought.

4.2 Transport

Transportation is the most important element of marketing. The demand centres are widely separated from the livestock producers. The means of transport between producer and consumer area is an important constraint to livestock trade and will have implications for organisational solutions.

The transport aspect includes rewards to drovers, truck costs and other personnel in the transport of livestock trade, feeding costs, fattening costs, enclosure costs and risk of theft and mortality. Traders incur costs when moving cattle either on the hoof or using trucks. Most of the cross border trade was chartered by trekking. Trucking takes place once the border is crossed or to domestic markets. Poor transport infrastructure in the Ethiopia -Kenya and Somalia triangle is a constraint for efficient cross border livestock trade. Motorised transport is not easily available to the livestock trader when and where he needs it. The livestock trader not only has problems for easy access to feed and water but also suffers from quality deterioration of livestock due to live weight loss as a result of long distance trekking

Livestock transportation from southern and southeastern rangelands to domestic markets and external markets such as Kenya and Somalia is undertaken by trekking. The region is characterised by poor transport infrastructure. Motorised transportation is limited and is restricted within the range of official channels. These include from border markets of Kenya to Nairobi and from boarder markets of Ethiopia to central markets like Nazareth and Addis Ababa. The border is exclusively crossed on hoof and this is regarded as contraband trade. However, ethnic ties and the structure of livestock production in the area, which often involve transhumance, facilitate trekking to markets in the neighbouring countries.

Table 18: Number of Days Taken in Trekking from Origin to Destination Market by Livestock type

SOURCE: Survey Result, 1999

Table 18 shows that almost all types of livestock are trekked from origin to destination within 12 days period. The origins are all markets in the cross-border market shed and the destination markets in Kenya and Somalia. Markets in Kenya are located in the border areas including Moyale, Mandera, Ramu, Thakaba and Banissa. However, markets in Somalia such as Mogadishu and Baidoa are not in the border areas. From Table 18, we see that more than half of all types of livestock reach the neighbouring markets in less than five days.

In most cases, amount paid to motorised transporters from origin to destination market, e.g. Moyale to Nairobi or Negelle to Addis Abeba is based on the capacity of the trucks: the bigger the capacity the higher the price. In some cases, payments are made on per number of animals transported. Unit transport costs of trekking cattle from different markets in Ethiopia to some Kenyan border markets are presented as follows.

Table 19. Cattle Trekking Fee from Ethiopia to Kenya for Selected Border Markets*

Origin in Ethiopia	Destination In Kenya	Distance in Km	Days taken (Average)	Transport fee per cattle(Birr)	Unit Price per km/head (Birr)
Arero	Moyale	200	5	9	0.05
Chilako	Thakaba	50	3	5	0.10
Dollo-Ado	Mandera	40	2	8	0.20
Dubluk	Moyale	135	5	9	0.07
Filtu	Mandera	225	14	60	0.26
Filtu	Ramu	90	7	30	0.33
Galgalo	Thakaba	60	3	6	0.10
Mega	Moyale	100	4	6	0.06
Negelle	Moyale	275	10	17	0.08

SOURCE: Survey Result, 1999

*See Annex 4 for the details.

Unit transport costs are related to the total distance between the origin and destination. The percentage share of transport costs to total buying price increases as distance increases. The total transport cost also incorporates loss while transporting due to animal diseases and theft, and weight loss (see Table-20). In the survey it was found that 95 percent of the traders interviewed in the border catchment bought 51,117 cattle of all types of quality. Out of these 1 percent were lost due to animal disease, injury and disappearance during trekking. According to the survey, 77 percent of the loss are caused by animal diseases and the remaining 24 percent were caused by theft and physical injury while trekking. The average cost of trekking per head of cattle from origin to destination for export or domestic routes is found to be the same, i.e. Birr0.10.

Table 20. Number of Cattle that Died/Lost by a Trader in 1998

SOURCE: Survey Result, 1999

4.3 Feed and Water

These costs increase as one moves up in the marketing channel. For instance in bush and primary markets where animals are trekked for not that much far distance from home, communal pasture and water are used. However, at higher level markets and chains water and feed providers become important (see also Fig. 1).

Traders pay for the labour of hauling water from deep wells while trekking to border markets where natural pasture is easily available. Water is not a constraint while trekking to the domestic markets since the routes to these markets are highlands. However, pasture is a serious constraint when animals are trekked to these markets mainly due to cultivation. Trade animals are also trekked on the highway and have been affected by traffic accident.

Table 21. Trader's Annual Expenditure for Feed and Water in 1998(in Birr)

SOURCE: Survey Result, 1999

Mean = 905, Stdev. = 2510, Range = 0-20100.

4.4 Veterinary Services

Out of the total 100 livestock traders interviewed in the border catchment 89% incurred costs of veterinary services and there were no such expenses made by 11% of the traders (Table 22). About 55 percent also paid less than 500 Birr which is about half of the price of one first quality cattle at Moyale, Kenya.

Veterinary services for animals crossing the border are not provided in an organized way, i.e. animals traded are not checked by a formal veterinary institution. Instead livestock traders themselves treat common animal diseases using veterinary drugs bought in Kenyan border towns. It is claimed by the Kenyan livestock officers that formal inspection is done in Kenya before the animals are trucked to central markets such as Nairobi. However, based on our repeated visits to the border areas we were not able to confirm the above claim. Rather, livestock were trucked directly to the hinterlands of Kenya particularly to Nairobi without any veterinary inspection.

Table 22. Trader's Annual Expenditure for Veterinary Services in 1998(in Birr)

SOURCE: Survey Result, 1999.

Mean 1,107, Stdev. 1941 Range 0-8000

In the cross-border trading, cattle bought in the Ethiopian border markets of southern and southeastern rangelands are immediately trekked to the neighbouring countries. Therefore, veterinary costs are unlikely to be a constraint.

4.5 Market Fees

Market fees are charged by municipalities and both the seller and the buyer pay a fixed amount of money per animal. Trader interviews revealed that these fees are constraints next to bans and restrictions by the government in cross-border trade.

Some traders evade this by effecting the transaction out of the market centre. However, this limits the information available by the seller and the buyer, as there is no option to cross check the prices from a larger number of offers by other buyers and sellers in the market.