Introduction
In this chapter we present an alternative business model for rural development,
which we were able to develop with support from Stichting Het
Groene Woudt (SHGW), and the help of the intellectual leadership and vision
of its director, Mr Meindert Witvliet. Since 2007, Shri Jagdamba Samiti
(SJS), Fresh Food Technology (FFT) and SHGW have worked together in
developing and implementing this model in the Himalaya region in India.1
Why a new approach for the development of India’s farmers is
needed
Although India is rapidly transforming itself into an open, more efficient
and rapidly developing market-driven economy, in rural areas this transition
has been lacking or progressing at a painfully slow pace for most farmers.
Marginalised and small farmers in particular are unable to escape the powerful
grip of and dependence on middlemen, informal lenders and other
intermediaries. Although there have been several attempts to assist farmers
in escaping from their poverty trap, the results have been disappointing.
Loan and grant schemes, if they reach the individual farmers at all, do not have the desired effect as these schemes do not tackle the core problems of the dependence of the farmers,
which keep them in poverty in the first place. As a result, most loan
and grant schemes are in effect only patching solutions rather than a structural
solution. Other attempts have been focused on strengthening the
farmer’s position by organising them in self-help groups, in cooperatives
or other forms. These interventions have been more successful in breaking
the farmer’s dependency on intermediaries, but their success and failure
are mainly determined by their leadership and/or continued government
intervention. Only a few exceptional examples exist where these farmer
groups have been able to move up the value addition chain, become fully
self-sustainable without (excessive) political interference. Apart from the disappointing, and costly results, the heavy government support to such groups creates an additional
problem of local market distortion: investments are not made on the basis
of healthy business opportunities and creates once again dependency on
external support. It also results in unfair competition towards new private
investments / companies that wish to set-up viable businesses in similar
sectors, but which have no access to similar (seemingly) unlimited, free financial
support from government. As a result the rural population at large
and the small and marginal farmers in particular, hardly benefit from the
development of India’s modern, urban-based economy.
A new tripartite partnership to move farmers up the economic
chain With support from SHGW, a new approach for the advancement of small
and marginal farmers is now being tested in India and other countries. This
approach is an attempt to find a critical entry point for rural development
by concentrating on setting up healthy agro-businesses in which farmers
themselves gradually gain economic ownership, supported by both Non-
Governmental Development Organisations and experienced private entrepreneurs.
Similar to the self-help groups and cooperatives, the aim is to set up
healthy businesses in handling, processing and trading farmer’s commodities
on a commercial basis. The main difference in the new approach is that
the farmers, along with social-conscious corporate partners, become equal
business partners of the social investor (SHGW in this case). The farmers
are to gain full economic ownership once the investment is repaid fully. No
paternalistic form of aid, but a sound economic partnership between an
investor and a (farmer-owned) company, supported by experienced entrepreneurs.
Along with a corporate business partner (FFT in this case), the farmers
are to set up a commercially-run business (a joint venture in the form of a
private limited), based on a solid feasibility and business plan. This farmerrun
joint venture enters into a loan agreement with (social) investors and
becomes responsible for setting up and running the business in a commercially
responsible manner. The joint venture is to generate sufficient profit
to: i) meet its loan obligations, ii) capitalise the company, iii) pay premium
prices to the farmers who supplied produce and/or iv) invest in new profitable
business ventures (allowing the farmer to move further up the valueaddition
chain). As a result, the farmers benefit in the form of good and
assured prices for their commodities and possibly additional premium or
dividend payments if sufficient profit is realised.
In such a partnership, the (social) investor, the social conscious entrepreneurs
and the farmers become mutually dependent business partners.
Whereas the financial risk remains largely with the (social) investor, the
farmers have the most interest in making the business a success for their
own future and village/region.
Aim of the new approach
The aim of the new approach is to create a profitable partnership between
investors and farmer groups, by setting up joint agro-processing enterprises,
based on solid feasibility studies and business plans. The new agro-businesses
are to become sufficiently profitable and economically independent
from further external support. The value-addition created is used, among
others, to repay the investment to the investor and, at the same time,
transfer the economic ownership to the farmer groups. To avoid that the
management of the agro-business is driven by the short-term benefits for
the farmers (main draw-back of the cooperative model), the majority of
the board members (who appoint and oversee the daily management) is
to remain with professionals, rather than farmer representatives only. The
economic ownership of the companies however, can be fully transferred to
the farmer groups. By doing so, the long-term success and profitability of
the company prevails in running the business.
As most of the investment is to be repaid and will be re-invested in new
farmer businesses, the model becomes self-perpetuating. In addition, the
model creates no market distortion or unfair competition. Instead, farmers
become equal and fair business partners, boosting their pride and confidence
as well as commitment to fulfill their financial obligation to its supporting
business partner/investor.
Some of the guiding principles behind the projects where the new model is
being tested, are:
- Invest in profitable agro-business ventures: set up farmer-owned businesses,
based on professional feasibility analysis and business plans.
- Farmers are equal business partners: farmers are not merely ‘beneficiaries’
or ‘the target group’, instead they are an equal business partner of
their private business partner(s) and investor.
- Loan, no free money: the investment required is brought in by a private
business partner, driven by its social corporate responsibility, rather than
by its profit seeking objectives, but is to be repaid to sustain the model.
- Farmer ownership: as repayments are made on the investments, the
economic ownership of the company is automatically transferred to the
farmer groups.
- Continued strategic guidance by professional/business partner: whereas
farmers are to gain 100% economic ownership over the business, and
they are to be represented in the governing body (Board of Directors),
the majority of the BoD will remain professional or business partners, to
ensure that the long-term interest of the company and continued strategic
guidance is secured.
- Invest, but also plough back profits: while investing in higher value-addition
processing, the model is intended to plough back part of the profits
to the farmers and into new economic activities in the region.
- Collective action to save time, energy & money.
- Improve bargaining position.
- Take out intermediaries, e.g. the middlemen or informal lenders.
- Overcome difficulties of farmers in handling & logistics, e.g. inaccessibility
and transportation, especially in undulating terrains, leads to excessive
wastage. Collectively, the farmers can more easily organise solutions or
obtain external support (e.g. from (local) government or private sector).
Limitations of the present legal forms of farmer collectives
In India, the most popular form of legal structures for farmer groups are cooperatives,
producer companies and self-help groups. Contrary to Private
Limiteds, where wealth creation for a selected few prevails, these forms of
collectives are designed to make farmers stronger and protect them from
exploitation by middle men or other buyers. Most cooperatives, farmer
companies and self-help groups are considered successful if this objective
is met. There are only rare cases however, where these collectives are selfsustainable,
and even fewer grow and flourish, similar to healthy private
limited firms. The two most important reasons for this limited success are
(i) political/government interference and (ii) the fact that the daily management
is directly appointed by the farmers. As a result, the managers
are often forced to let the short-term interest of (selected) farmers prevail,
instead of the long-term economic health of the business. The absence of
such business rigour and professional management often prevents the businesses
from flourishing over a sustained period. It is in this context that this
new model of farmer ownership through a partnership of (social) investor
and farmers is now being tested. The business rigour of a private firm
is combined with the distribution of benefits and rural economic development
objectives.
Background of the promoter, SHGW
The new business approach to help small and marginal farmers, originates
from SHGW, a Dutch private foundation. This foundation was created by a
successful business family, who started as small vendors on local markets in
Holland. The self-made business flourished and the family expanded their
business to various sectors. Over time, the business expanded to various
successful chains of stores all over the country, and new business opportunities
were taken on board, from drug stores to real estate. Part of the family
capital has been allocated to a development fund, which aims to help
poor families in rural areas of developing countries. It does so, by providing
Fostering farmer organisations with business rigour
them with opportunities to collectively build up successful business ventures
through honest, hard work and wise investments, which would allow
them to flourish and become economically independent.
Micro versus meso credit, loan versus grant
This new business approach towards development, whereby the farmers
and investors become equal business partners, has a lot in common with
the well-known micro-credit schemes.
At present, the approach is tested as a combination between a grant
and loan component of the project. The loan component is meant for all
hardware investments and initial running cost of the commercial business.
The grant component is utilized for the assessment of the business opportunity,
to write a good business plan and for external organisations (NGDOs)
to inform and organise farmers and guide them through the process.
How to ensure the farmers are the real beneficiaries?
In order to translate the above ideas and principles into reality and have the
farmers benefit from the new approach, it essential to properly organise the
farmers. Some critical aspects to consider in this respect are:
- Membership open to small and marginal farmers
- Farmer participation in a democratic control body
- The farmer organisations are to be autonomous and independent bodies
- Trading in high and reliable quality goods
- Proper, transparent price settings, based on actual, prevailing market
prices and cost incurred
- Political and religious neutrality
- Education, training and information to improve (quality of) yield & profitability
- Trading by immediate payment to the farmers
- Concern for the community
In addition, the legal arrangements of the farmer organisation, the new
companies and the transfer of ownership and supervision are to be properly
worked out, taking into account prevailing local legislation and available
legal entities. Separate papers are (to become) available on legal arrangements
per project per country. Critical aspects to consider are:
- Legal form of the farmer organisation (e.g. association, trust or other
form)
- Legal form of the joint venture (e.g. private limited)
- Initial share value and distribution among farmer organisation, investor
and/or other (private) caretakers
- Principles behind possible transfer of shares
- Type of shares are rights
- Initial and eventual composition of supervisory body, e.g. Board of Directors
- Profit distribution based on supply
- Common understanding of the corporate principles
The model in practice
Since 2007, SJS, FFT and SHGW have been implementing this model in
the Himalaya region in India. Aim of this project is to empower small apple
farmers in India and to increase their income level substantially, by providing
them with opportunities to:
- Create formal farmer organisations through which they will jointly handle
and sell their apples.
- Provide these farmer organisations with appropriate financial means and
equipment to allow them to collect, sort, pack, pre-cool and handle the
apples in a professional manner, which allows them to directly market
their premium produce to main markets, trading companies or retailers.
- Generate profits through the legally registered entities of the farmers, for
premium distribution and repayment of investment, to transfer owner-
Fostering farmer organisations with business rigourship of the companies in due course of time.
Under the first phase of the project (2007), apple growing farmers in
six locations were assisted in setting up joint collection points for sorting,
grading, packing, pre-cooling and marketing of their apples. Under the second
phase (2008) two additional collection points in Uttaranchal have been
set up and organised. The primary collection, sorting and grading centres
have demonstrated their capability in running the business through four
business cycles during the harvest season of 2008 to 2011. These collection
point business units (in the form of joint companies with FFT) meanwhile
operate as full, independent business ventures, with limited external support.
In 2010, preparations were made for the next phase of the project, by
moving up the value-addition chain. This envisaged:
- The construction of long-term storage facilities to enable the farmers to
sell their apples off-season
- Establishment of juice processing facilities (including other local agricultural
produce like rhododendron flowers and apricot fruits)
By the time this paper was written, September 2011, the long-term storage
facility just commenced operation and the juice factory was being installed.
