Possibilities
for replication to advance India’s rural development
By Laxmi Prakash Semwal-SJS & Edwin willemsen-FFT
Introduction
Farmer owned companies – Now a
reality
Eventually
Farmer- owned companies is an
innovation in the path for successful Agri Enterprises.
Since 2006, a new
approach to local economic development has been pilot tested in India, by
setting up farmer-lead companies. In this novice approach, farmer organizations
become equal business partners with private sector parties and social investors.
The social investor S.H.G.W( Stichting Het Groene Woudt ) is willing to
invest in setting up of agro-businesses, which can create sufficient value
addition to the farmer’s products in order to become healthy, self-sustaining joint venture companies.
The farmers, through their organizations, become shareholders in these
companies, alongside private sector parties, that secure the interest of the social
investor and the business rigour. The ultimate aim of this approach is that the
economic benefits of the company are ploughed back to the participating
farmers, mostly in the form of premiums over their supply (based on quantity
and quality), while the investments made by the social investor are fully
repaid on commercial terms, for reinvestments in new social ventures.
To what extent is this new approach? Similar to the
self-help groups and cooperatives in India, the aim is to set-up healthy
business in handling, processing and trading farmer’s commodities on a
commercial basis. The main difference in this new approach is that the farmers,
along with social-conscious corporate partners, become equal business partners
of the investor. No government or political influence. Instead, the company is
run by a professional management and professional board to secure business
rigour and hence the long term interest of the company is
secured.
Rights of a farmer in this new
model
Similar to
the cooperative model, the farmers have full rights to the economic gains of
the company, though they have no direct
control over the daily management, which is in the hand of professionals that
reports to the Board of Directors of the joint
venture companies. In this Board, the farmers are represented, but a
majority of the tasks
is in the hands of professionals and representatives of the Entrepreneurs, along with
the social investor and knowledge institutions /
Motivators. The
farmers will gain full economic ownership, once the investment is repaid fully,
but the management and BoD remains with professionals.
Pity vs Partnering
There is no paternalistic form of aid, but a sound
economic partnership between an investor and a farmer-owned trust, supported by
experience social business entrepreneurs.
Paternalism funding is passé, this model
works on partnerships with the farmers having limited resources and
help them achieve their own dreams.
Pilot test of this model : ‘Apple
Project’
This new approach is pilot tested with apple
growing farmers in Uttrakhand since 2006. A more detailed description of the approach
is given in the paper “Fostering farmer organization with business rigour”, by
the same authors. Based on this experience, it is the intention of this paper to
explore how and with whom the approach could be replicated in India.
Although India is positioning itself as a worldwide
leading economic power, it is still home to one-third of the world’s poorest people, concentrated mostly in its rural areas. In contrast to the
strong urban-based economic development, rural development is lacking behind as
farmers are caught in traditional trade relations with middlemen. The growth
potential of rural India however, is enormous with an increasing concern about
food security and increasing food prices. The new approach could well
capitalize on the immense potential of rural India and break through the
inefficiencies of the current rural production-trade relations.
The
scope of this paper is to engage in
a broader debate in India with different actors ( businesses)
- ranging from banks, knowledge institutions, government, finance
institution, private sector, NGOs, committed individuals and others: how we can
build up on the lessons learned from the new approach, implemented on a
relatively small scale. Can it be used as a basis for new, innovative
collective initiatives to advance India’s rural development? Let’s first take
stock of some of the lessons learned in implementing the new approach so far.
Lessons learned:
The Intention behind
the approach : (Partnership experience in Apple Project)
The project with
apple growing farmers was started with the intention to set into motion a
self-perpetuating model to assist small scale apple growing farmers in
Uttrakhand and Himachal Pradesh states of India. To do so, the social investor
SHGW (a Netherlands-based private foundation), Fresh Food Technology (FFT, a
Dutch private company) and SJS (an Indian NGO based in Rishikesh) started with
the farmers, to have them organized in trusts, which would become their legal
business partners in the new business. Subsequently,
joint venture companies were formed for value addition at primary level
(sorting, grading, packing and pre-cooling at orchard level) and later also at
secondary level (for long-term storage of premium apples, for off-season
sales, as well as for juice processing of inferior quality apples).
These joint
venture companies are collectively owned by the investor, the private sector
partner and the farmer trusts. Special provisions are made, to ensure that:
-
The
investments and provisions (loans) for working capital are to be fully repaid
to the investor, from the profit that the company makes
-
The farmer
trusts have full economic rights to the additional income that the company is
able to generate
-
The joint
venture companies are sufficiently capitalized
for its long-term survival and expansion.
Lessons learned:
Actors & their Roles in delivering joint Success
Essential for
the new approach as described above, is that the actors involved are mutually
supportive and complementary in terms of expertise, experience, networks and
access to external resources. These actors, in this paper collectively referred
to as the “Social business consortium”, should obviously have a shared vision
on social/economic development as prime drive to participate in this approach.
At the same time, these actors come from “different perspectives” and
backgrounds. They can be categorized in four clusters with
diverse inclusive roles:
-
Farmer representation: particularly social
entrepreneurs, farmer groups (as primary producers) and supporting NGOs with
thorough understanding of market-driven businesses & entrepreneurship.
-
Inclusive development by
different agencies:
particularly knowledge/training institutions, government and (international)
development agencies, supporting the farmer groups and the joint venture
company with their knowledge, support programs and network.
-
Business rigour through
entrepreneurs:
experienced & social conscious entrepreneurs, that are to ensure the
business rigour & entrepreneurship of the joint venture company is
engrained for long-term survival of the company.
-
Financial accountability maintained by investors: Social investors, banks and financial institutions;
making available financial resources, knowledge and experience, ensuring the
economically viability and accountability of the joint venture business.
So far, in
apple project the leading partners were the Farmer Trusts, the supporting NGO
SJS, the private company FFT and the Social Investor SHGW that jointly engaged
in setting up the joint venture companies in a step-by-step approach; from
analysis, feasibility, securing financial resources, (legal) organization,
design, construction to implementation and operational management.
Lessons learned:
Step 1: Analysis & Feasibility
As
a first step, it should be well understood what potential the farmers have to
move up the value chain, based on the commodities or resources they have. What
form of processing of produce could add such
value to the final product and how viable
are these? How much value could be added based on the prevailing local market? What technologies are
available and how much investments are required? Are all the various levels of
processing (primary, secondary etc.), likely to be economically viable by
themselves?
This
kind of quick scan should give good insight into the potential of the various
value-addition options that could be explored. For these options, a more
thorough assessment of the practical and economic feasibility is to be made.
Given the amount of uncertainties and potential threats that surround these
initiatives (often in remote, backward areas), this is not an easy exercise and
is to be done with practical knowledge about the local circumstances, as well
as with a good understanding of the value addition chain of the commodity
involved. What technology options are available and how can the foreseen
famer-led company distinguish itself in the market with this technology?
In
this context, it is important that all assumptions and choices,
that form the basis for the feasibility, are well substantiated (preferably
based on verifiable past data) with source references. In this manner, the
feasibility can also be a good management tool during implementation, to update
and actualize the assumptions to the prevailing (expected) circumstances.
In
addition, the assumptions in the feasibility should at least be assessed for a
worst, best and a realistic, conservative scenario. Based on this feasibility
study, an overall risk analysis can be
made to gain insight in the financial consequences of these scenarios.
Apart from the financial risks, a thorough assessment of other factors that may
jeopardize the foreseen business in due course of time (e.g. openness of the
market, subsidies, price inflation, harvest losses etc.), should complete the
risk assessment. By categorizing these factors according to the influence the
operational management of the farmer-led company may have on them, the risk assessment
can be used during operation as a management tool as well.
Lessons learned:
Step 2: Securing Financial Resources through sound investment plans
Based on the above
feasibility, an investment plan is to be prepared for the social investor(s)
and banks, to secure sufficient funding. Besides the social investor and the
banks, also other funding options are to be explored, e.g. subsidies related to
promotion of rural development or relevant clusters, export/import subsidies,
grant support from development organizations, soft-loans from development banks
etc.
Important to
include in the investment plan, is the working capital requirements during the
operational phase. Particularly for new companies, without a financial
track-record, it may prove difficult to secure regular loans from local
banks.
Lessons learned:
Step 3: (Legal) Organisation : To register the entity (farmers) under legal institution
Once it is
clear which business is feasible and funds can be secured, the legal
organization of the initiative is to be arranged. The legal organization should
well integrate the key principles on which the initiative operates, such as:
-
Anchoring the
farmer interests as prime objective through legal
representation
-
Business
rigour is achieved through professional management
and oversight; Board of Directors (BoD) is to reflect the professional
disciplines, alongside (minority) farmer representatives. BoD is to appoint the
company’s management responsibly to reports to
the BoD.
-
Alignment
of the Articles of Association of the farmer trusts/associations, with the
Articles of Association of the joint venture companies.
-
Long-term,
gradual ownership transfer arrangement anchored in Share Holders Agreement
-
The
interests of the (social) investors are to be guaranteed, e.g. through representation
in Board of Directors.
-
Make
provisions in case one or more groups of farmers are to discontinue (e.g. when not
supplying enough produce or some malfunction):
the continuity of the company should not be jeopardized.
-
Profit of
the company is to be allocated for:
o
Repayment
of the investment to the social investor
o
Capitalization
of the company
o
Premiums
to supplying farmers
-
Sharing of
the economic benefits with the farmers (like premium
payments) are to stimulate sufficient supply of good quality.
Lessons learned:
Step 4: Design, construction, team building
& start-up
In the design
& construction phase, to create the necessary infrastructure, the best
available technologies and suppliers are to be sourced, preferably under
supervision of one single responsible party with a proven & verified track
record. Clear contractual agreements and payment conditions should secure an
efficient construction s, to be realized within the allocated budget and time lines.
At the same
time, a professional team of qualified staff is to be recruited (from
management, finance, quality to operational staff), that is able to run the
company upon completion of the construction. This team is not only expected to
operate the business in a profitable manner, but also understand and cope with
the complexity of the social business, in particular to involve and report to
all stakeholders concerned: from farmers to the (social) investors.
The
key points to be addressed are :
-
The role
of the farmers should be clear and the management should make optimum use of (the
leaders within) these groups
-
Look for
solutions that work for all partners, not just the company
-
The
operational manager cum director is responsible to the board of directors at
all times
-
The board
is to have a pro-active supportive role to the company, particularly in the
start-up phase: their experience, expertise and network should be utilized
optimally.
-
Robust procedures
and protocols are to be in place for all critical work flows of the company.
Particularly on the financial side, the sufficient safeguards should be in
place for maximum transparency, control and reporting to all stakeholders,
including the farmers.
Lessons learned:
Results & Spinn-off
Some of the major results and spin-offs of the apple project in
the Himalayas are:
-
Six
profitable collection points at orchard level (primary level) established
-
700 MT of
premium apples stored in the Long-Term Storage (secondary level) and sold
off-season during pilot phase
-
15.000
litres of juice successfully produced as commercial test pilot phase
-
Many of
the main apple traders have visited the collection points and/or long term
storage and have become regular customers
-
Farmers
have seen significant increase of their income, in comparison to their
traditional sales channels
-
High
commitment from the farmers and their representatives
-
All
collection points are moving into collective
buying/grading/sorting/packing/processing of other commodities as well (apart
from apples).
-
The
region is enjoying much more attention now as a main apple growing area
-
Farmers do
not need to spend time on sales of their product, but can concentrate on proper
picking/harvest of the apples and on their orchard management.
-
Women
groups have been formed, specifically for the juice manufacturing
Ideas at a glance : How to move forward
Based on the positive
experience gained through the apple project so
far, could this new approach be taken forward with more actors? We recognize
that it is not desirable to set up new organizations or entities to take this
initiative to a new phase. Yet, the authors believe that a group of like-minded
actors or a “Social Business Consortium” could well collectively take the
approach to a new and higher level and create access to a revolving “Social
Business Fund” proposed
to governed by social business consortium
Essential for
this, is a good mix of partners that can collectively support the establishment
of new businesses, based on the above approach. As elaborated earlier, these
actors can be clustered in the four groups:
