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InnovatIve polIcIes and InstItutIons

to support agro-IndustrIes

development

InnovatIve polIcIes and InstItutIons to support agro-IndustrIes developm

ent

Agro-industries are an important source of

employment and income generation worldwide,

occupying a dominant position in the manufacturing

sector of the economy and representing a significant

demand driver for agricultural products. As part of

its mandate to provide food security for the world’s

growing population, FAO promotes the development

of agro-industries through its technical programs,

including activities in the areas of policy advice,

capacity building, advocacy, awareness raising and

investment promotion.

This book represents a contribution of FAO

to broaden the understanding of approaches

and mechanisms to foster the emergence and

sustainability of agro-industries that are competitive

and inclusive. With emphasis on experiences from

the developing world, the book presents and

discusses innovative policies and institutions that

are supportive of agro-industries development.

InnovatIve polIcIes and InstItutIonsto support agro-IndustrIes development

Cover photos: ©FAO/Aris Mihich ©FAO/Bay Ismoyo

FAO

I2420E/1/10.11

ISBN 978-92-5-107036-9

9 7 8 9 2 5 1 0 7 0 3 6 9



development

Edited by

Carlos A. da SilvaSenior Agribusiness Economist

andNomathemba MhlangaAgribusiness Economist

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONSRome, 2011

The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned. The views expressed in this information product are those of the author(s) and do not necessarily reflect the views of FAO.

ISBN 978-92-5-107036-9

All rights reserved. FAO encourages the reproduction and dissemination of material in this information product. Non-commercial uses will be authorized free of charge, upon request. Reproduction for resale or other commercial purposes, including educational purposes, may incur fees. Applications for permission to reproduce or disseminate FAO copyright materials, and all queries concerning rights and licences, should be addressed by e-mail to [email protected] or to the:

Chief, Publishing Policy and Support BranchOffice of Knowledge Exchange, Research and ExtensionFAOViale delle Terme di Caracalla00153 Rome, Italy

© FAO 2011

iiiiii

preface ixcontributors xiiacknowledgements xv

1. Introduction: Innovative policies and institutions to support agro-industries development 1Carlos A. da Silva and Nomathemba Mhlanga

2. Business networks as innovative institutions to support the development of agro-industries 9Edward Mabaya

3. public–private partnerships for agribusiness development in thailand and India: experiences, issues, and strategies 41Sukhpal Singh

4. export support for el salvador’s smes: Fusing technical capabilities with collective efficiency 63Francisco J. Bueso, Mario Cáceres, Edward Moncada and Luis F. Osorio

5. the emergence of sme agro-industry networks in the shadow of agribusiness contract farming: a case study from the south of Brazil 87John Wilkinson, Clovis Dorigon and Luiz Carlos Mior

contents

INNOVATIVE POLICIES AND INSTITUTIONS TO SUPPORT AGRO-INDUSTRIES DEVELOPMENT

iv

6. public–private partnerships for agro-industry development: sustainability options for fertilizer subsidies 121Paul Thangata, Malcolm Blackie and Paul Seward

7. agro-industrial investment promotion in tunisia 149Mustapha Jouili

8. policy reforms for agribusiness and rural development: the case of township and village enterprises in china 173Hugh Deng

9. Institutional innovations and models in the development of agro-industries in India: strengths, weaknesses and lessons 203Vasant P. Gandhi and Dinesh Jain

10. linking farmers to market through processing: the role of agro-industry clusters with special reference to mango in south India 259Mysore Sudha and Froukje Kruijssen

11. process and product innovations in the cassava agro-industrial sectors in africa: the stimulating effect of presidential initiatives 283Lateef O. Sanni

12. transiting cassava into an urban food and industrial commodity through agro-processing and market driven approaches: lessons from africa 305Adebayo B. Abass, Mpoko Bokanga, Alfred Dixon and Paula Bramel

13. development and diffusion of vegetable post-harvest and processing technologies in the greater mekong subregion of asia 353Katinka Weinberger and Antonio L. Acedo Jr.

v

CONTENTS

Tables

2.1 Classificationofbusinessnetworks 132.2 Supplychainintegrationdimensions 152.3 Macro-environmentalfactorsinfluencing agro-industriesindevelopingcountries2.4 Innovativeinstitutionsforagro-industrydevelopment 212.5 ListofcurrentSODPNetworkmembers 242.6 SWOTanalysisofatypicalemergingseedcompany 272.7 PerformanceindicatorsformembersoftheSODPNetwork 294.1 CategorizationofSMEsforaccesstotheProgram’s exportpromotionservices 714.2 TrainingcalendarforthephaseIIofExport PromotionProgramme 724.3 PromotionactivitiesfinanciallysupportedbytheProgram duringphaseII 734.4 PeopletrainedduringphasesIandII 754.5 ValueofElSalvador’stotalagro-industryexports, 2003–2008(US$ millions) 754.6 ElSalvadorexportsofselectednon-traditionalfoods totheUSA,2004–2008(US$millions) 764.7 ExportperformanceofSMEsonphasesIandII 774.8 PreviousexportexperienceofSMEsparticipatinginphaseII 774.9 IncreaseinSMEsalesfromApril2006toDecember2008 784.10 TotalsalesperformanceofSMEsinphaseII 784.11 TotalsalesbysectorofSMEssupportedinphaseII 794.12 PermanentandtemporaryjobscreatedinphaseII 804.13 RefusalsofSalvadoranproductsbytheFDA,2003–2009 815.1 Evolutionintypesofagro-industrialization,socialactors andpublicpoliciesinthewesternregionofSantaCatarina 905.2 Numberofruralindustriesbyrawmaterialprocessed byregionandforthewholestate 955.3 ProductsprocessedonthefarmintheStateof SantaCatarina,1995 965.4 Comparativeevolutionintheruralprocessingofdairy, porkandsugarcane(StateofSantaCatarina andthewesternregion) 975.5 Numberofunitsattendedbythe'Desenvolver' programmeaccordingtotype 1035.6 Monthlyincomeoffarmersassistedby'Desenvolver' 1045.7 AcomparisonoftheAPACO,EPAGRIandland settlementnetworks 1126.1 ActualfertilizerprogrammecostsinMalawi 1346.2 Frameworkforlinkingpublicandprivatesectors inagriculturalinputsubsidyprogrammes foreconomicdevelopment 1387.1 Upgradeapplicationsbysector(endApril2009) 156


vi

7.2 Investmentsinthemanufacturingsector,1988–2007 (Annualaverageinmillionsofdinarsandatcurrentprices) 1577.3 Evolutionofproductioninthesectoroffoodindustry 1597.4 Breakdownofenterpriseswith10ormoreemployees byactivityandbysystem 1607.5 Upgradeapplicationsbysector(endApril2009) 1648.1 SelectedstatisticsofChina’sagricultureandagribusiness 1928.2 China’sGDPbyownership(billionYuan) 1938.3 SelectedstatisticsonChina’sTVEs (millions,unlessindicated) 1948.4 GrowthandemploymentofTVEsinChina,1978–2004 1969.1 Importanceoftheagro-industrysectorinIndia: somefeatures(2005/06) 2059.2 Somestructuralandfinancialfeaturesofagro-industries inIndia(2005/06) 2069.3 AMULataglance 2099.4 GrowthofNandini 2149.5 MotherDairydailymilksales–July2007(litres) 2229.6 Broadcomparisonofdifferentmodels oninstitutionalperformanceparameters 24210.1 Pricespreadalongthetotapurimangosupplychain(Rs./kg) 26610.2 Incomedistributionandriskborne 26710.3 TrendofmangoareaandproductioninChittoor,AndhraPradesh 28010.4 Marketingmarginsandpricespreadalongthesupplychain fortotapurimango 28111.1 MillenniumDevelopmentGoalsandtherolesofPICs andotherparties 28811.2 GCDS-relatedinitiatives 29412.1 Somecostparametersofcassavaflourproduction bysmall-scaleprocessorsduringthepilotphase 31912.2 Traineesduring‘CassavaforBread’Project,1996–2001,IITA 32412.3 EquipmentrequiredforproductionofHQCF duringpilotandcommercialphases 33812.4 Summaryofindicativecostofcassavaproduction undertraditionalandmodernmethodsinUganda,2007 34112.5 AnalysisofthepotentialbenefitsoftheHQCFuseinNigeria 34212.6 SomecostparametersofHQCFproductionby medium-scaleprocessorsinNigeriaduring thecommercialphase 34413.1 Post-harvestlossestimatesinthevegetablesupplychain 35813.2 Totalvalueofpost-harvestlossesinthevegetable supplychainbycropandcountry 35913.3 Technicalandmonetarybenefitsofusinggrid-polystyrene cratewithpapershredsinreducingfruitdamageof differenttomatovarietiesrelativetotheuseofcartonbox 36213.4 Tomatofruitdecayreductionusing2percent bicarbonatewashingpriortostorageinevaporative cooler(EC)anditsmonetaryreturnbasedon partialbudgetanalysis. 363

vii

CONTENTS

13.5 Promisingtreatmentsforthecontrolofbacterial softrotincabbageinCambodia,Laos,andVietNam andmonetaryreturnbasedonpartialbudgetanalysis 36413.6 Daystoachievelessthan10percentmoisturecontent ofdifferentvarietiesofchilidriedusingasolardryer andinthesun 36513.7 Retentionandadoptionratesoftrainingparticipants aftertwoyears 36813.8 Averagenumberoftechniquesadoptedbyrespondent 36813.9 Overviewofpost-harvesttechnologiescurrentlyinuse 36813.10 Benefitsofusingpost-harvesttechnologies 37013.11 Impactofpost-harvesttechnologyadoption onfarmers’livelihoods 37113.12 Somecostparametersofcassavaflourproduction bysmall-scaleprocessorsduringthepilotphase 372

Figures

2.1 AverageannualsalesofSODPFellowsvis-à-visindustryaverage 293.1 CFsysteminThailandasPPPs 465.1 MapsofBrazilandSantaCatarinawiththewestern regionhighlighted 886.1 Impactonhouseholdfoodsecurityamongparticipating andnon-participatingfarmersinEmbu,Kenya 1278.1 ChinaGDPrealannualgrowthrate,1977–2008 1758.2 Comparisonofper capitalandinChinaandtheWorld 1778.3 LabourforceandemploymentinChina 1788.4 China’sTVEemployment 1798.5 Chinaanditsprovinces 1829.1 OutlineofthestructureandfunctioningoftheAMULmodel 2119.2(a)MilkdistributionnetworkofNandini 2169.2(b)MilkproductssupplychainofNandini 2169.3 Nestlé’smilkvaluechain 2189.4 TripartitemodelofPepsiCoIndia 2299.5 ModelofITCe-Choupalsupplychain 23310.1 Marketchainandsalepriceforfreshmangosale(domesticmarket) 26410.2 Marketchainandsalepriceforprocessedmangosale(exportmarket) 26510.3 ExporttrendofmangopulpfromIndia(1993–1994to2007–2008) 26811.1 GariMarket,EdoState,Nigeria,2005 29111.2 Instantfufuflour12.1 TheIITAR4Dapproachtocassavadevelopment 30712.2 Effectsofmechanizationandimprovedprocessingtechniques onfoodlosses,labourinputtoprocessingenterprises andoutputproducts 31312.3 Highqualitycassavaflourprocessing(HQCF)technology 31412.4 Frameworkforvaluechaindevelopmentatpilotscale 315


viii

12.5 Nigeria,showinglocationsofHQCFprocessorsandendusers duringthepilotphase 31812.6 ConceptualframeworkfortheimportsubstitutionpolicyinNigeria 32812.7 PresidentialInitiativeonCassava(PIC)showing theninecomponentparts,thetwoprecursorprojects andthetwopolicydrives 33112.8 TrendsinsupplyofcassavamachinerybyIntermech EngineeringLtdandTonnetEnterprisestoBurundi, Rwanda,Malawi,Tanzania,Uganda,andZambia 33512.9 Cassavaproduction,areaplantedandyieldinTanzania,1998–2007 33512.10 Nigeria,showinglocationofwheatflourmillsand themedium-andlarge-scalecassavaplantsprocessingHQCF duringthecommercialphase 33712.11 CassavaproductiontrendinNigeriabefore,duringandafterthePIC 33912.12 TrendoffreshcassavarootpricesinNigeriabefore,during andafterthePIC 33912.13 HQCFpricetrendinNigeria 34312.14 Worldwheatpricetrend 34313.1 Vegetableproductionarea,volumeandaverageyield, inCambodia,LaosandVietNam,1980–2007 35313.2 Overviewofthesupplychainforfreshvegetables 35713.3 Distributionoflossalongthevegetablesupplychain 360

Boxes

2.1 ToptenlessonsforSMEbusinessnetworking 335.1 TheSantaCatarinaProgramforSmall-ScaleRural Industry(PROIND) 1005.2 ProgrammeforthePromotionandDevelopmentofSmall-Scale Agro-industryforFamilyFarmingandFisheries(PROPAGRO) 1015.3 'Desenvolver'programme 1025.4 ThePRONAFagro-industryprogrammeincludesthelines ofactionsummarizedbelow.Apilotprojectwasbegunin1997 butthenationalprogrammeonlygotoffthegroundin2003. 1065.5 AnillustrativeexampleofbeneficiariesofthePRONAF agro-industryprogramme–theMalaguttiextendedfamily 1087.1 KeymeasuresoftheInvestmentIncentivesCode 152

ixix

Aspartofitsmandatetoleadinternationaleffortsinachievingfoodsecurityfortheworld’s growingpopulation, theFoodandAgricultureOrganizationof theUnitedNations (FAO)promotesthedevelopmentofagro-industries through its technicalprogrammes, including activities in the areas of policy advice, capacity building,advocacy, awareness raising, investment promotion, and resource mobilization.ThisworkisspearheadedbyFAO’sRuralInfrastructureandAgro-IndustriesDivision(AGS), which is engaged in field and normative activities in many developingcountriesworldwide.

Since 2008, in collaboration with the United Nations Industrial DevelopmentOrganization (UNIDO) and the International Fund for Agricultural Development(IFAD), FAO has organized a number of global and regional events focusing onpromotingthedevelopmentofagro-industries,thefirstofthesebeingtheGlobal Agro-Industries Forum, held inNewDelhi, India, inApril 2008.Subsequent eventstookplaceinChina,PeruandNigeria,focusingrespectivelyonAsia,LatinAmericaandAfrica.These foraaimed tobuildupa sharedvisionabout thedrivers criticalto the future development of agro-industries, the key factors affecting theircompetitiveness, and potential areas for priority action.Appropriate policies andinstitutions,askeyelementsofabusinessenvironmentconduciveto investmentsinagro-industries,emergedaspriorityactionareasintheexpertdiscussionsheldintheseevents.

Againstthisbackdrop,FAO–AGS,incollaborationwiththeInternationalAssociationof Agricultural Economists (IAAE), convened a workshop on ‘Innovative PoliciesandInstitutionstoSupportAgro-IndustriesDevelopment’,aspartofthetechnicalprogramme of IAAE’s 2009TriennialConference in Beijing,China.Theworkshop

preface


x

gathered researchers, government officials, private sector representatives anddevelopment practitioners together, to discuss proven, innovative approaches topromotethedevelopmentofcompetitive,equitable,andinclusiveagro-industries.

ThispublicationpresentsthepaperscommissionedbyFAOfromqualifiedresearchersanddevelopmentpractitionersthroughacompetitiveprocessheldinternationally.Comprising 12 chapters and preceded by an editorial overview, the papers coverawide rangeof country and regional experienceson thedesign, implementationandevaluationofpoliciesandinstitutionstrengtheningprogrammesandprojects.It is hoped that collectively they can represent an important contribution to policy-makersandotherprofessionalsinterestedinpromotingthedevelopmentofagro-industries.

xixi

Editors

Carlos A. da Silva, Senior Agribusiness Economist, Rural Infrastructure andAgro-IndustriesDivision,FAO,Rome,Italy.

Nomathemba Mhlanga, Agribusiness Economist, Rural Infrastructure andAgro-IndustriesDivision,FAO,Rome,Italy.

Authors

Adebayo Busura Abass, Food Technologist, International Institute for TropicalAgriculture(IITA),Ibadan,Nigeria.

Antonio L. Acedo Jr. PostharvestScientist andDeputyGlobalTheme Leader for'PostharvestManagementandMarketOpportunities',TheWorldVegetableCenter,Shanhua,Taiwan.

Malcolm Blackie,VisitingSeniorFellow,UniversityofEastAnglia,UnitedKingdom.

Mpoko Bokanga,ExecutiveDirector,AfricanAgriculturalTechnologiesFoundation(AATF),Nairobi,Kenya.

Paula Bramel, Deputy Director General, Research for Development at theInternationalInstituteforTropicalAgriculture(IITA),Ibadan,Nigeria.

contributors


xii

Francisco Javier Bueso, Associate Professor, Zamorano Agro-industry (FoodScience) Department, andManager,Zamorano FoodAnalysis Laboratory (LAAZ),ZamoranoPan-AmericanAgriculturalSchool,Honduras.

Hugh Deng,EconomistandVisitingResearcher,CarletonUniversity,Canada.

Alfred Dixon,CassavaBreeder,InternationalInstituteforTropicalAgriculture(IITA),Ibadan,Nigeria.

Clovis Dorigon,Researcher,FamilyFarmResearchCenter(CEPAF),SantaCatarinaAgriculturalResearchandRuralExtensionCompany(EPAGRI),Brazil.

Vasant P. Gandhi,Professor,IndianInstituteofManagement,Ahmedabad,India.

Dinesh Jain,DoctoralStudent,IndianInstituteofManagement,Ahmedabad,India.

Mustapha Jouili, Associate Professor- Faculty of Economics and Management,Nabeul and Associate Researcher, The Laboratory of International EconomicIntegration(LIEI)/FacultyofEconomicsandManagement,Tunis,Tunisia.

Froukje Kruijssen,Associatescientist,BioversityInternational,Asia-PacificRegionalOffice,Malaysia.

Lateef O. Sanni,Professor,FoodScienceandTechnology,andDirector,A.G.LeventisMemorial Centre for Learning (LEMCEL), University of Agriculture, Abeokuta(UNAAB),Nigeria.

Edward Mabaya, Research Associate, The Dyson School of Applied EconomicsandManagement,andAssistantDirector,Cornell International Institute forFood,Agriculture,andDevelopment,CornellUniversity,Ithaca,NewYork,USA.

Luis Carlos Mior,Researcher,CenterforAgriculturalPlanningandSocio-Economics(CEPA), Agricultural Research and Rural Extension Company, (EPAGRI), SantaCatarina,Brazil.

Edward Moncada,Chief,SeedandGrainsProcessingPlant,andAssociateProfessor,Food Agro-industry Department, Zamorano Pan-American Agricultural School,Honduras.

Mysore Sudha, Senior Scientist, Indian Institute of Horticultural Research,Bangalore,India.

Luis Fernando Osorio,Chairman,FoodScienceandTechnologyDepartment,andManager,DairyProcessingPlant,Honduras.

Paul Seward, Managing Director, Farm Input Promotions Africa (FIPS-Africa),Nairobi,Kenya.

xiii

CONTribuTOrS

Sukhpal Singh,ESRC-ICSSRExchangeScholar,UniversityofManchester,UK.

Paul Thangata, Research Fellow, International Food Policy Research Institute(IFPRI),EasternandSouthernAfricaRegionalOffice,AddisAbaba,Ethiopia.

Katinka Weinberger, Socioeconomist andGlobalTheme Leader for 'PostharvestManagement and MarketOpportunities', TheWorldVegetable Center, Shanhua,Taiwan.

John Wilkinson,AssociateProfessorinEconomicSociologyandAgrifoodSystemsattheGraduateCentreforDevelopment,AgricultureandSociety(CPDA),FederalRuralUniversity,RiodeJaneiro,Brazil.

xvxv

CARlOS A. dA SIlVA ANd NOmAThEmBA mhlANgA

acknowledgments

Thisbookwasmadepossiblethroughthecontributionsofseveral individualsandinstitutions.Firstandforemost,thechapterauthorsaresincerelythankedfortheirwillingness to share their experiences and analytical insights on agro-industrialdevelopmentissuesduringtheBeijingworkshop,aswellasfortheircollaborationandreadinesstorespondpatientlytotheroundsofcommentsandobservationsoftheeditorsontheirmanuscripts.Thanksarealsoextendedtoallparticipantsoftheworkshopfortheirvaluablecontributionstothediscussions.

AwordofthanksisduetoGeoffreyC.Mrema,formerDirector,Rural InfrastructureandAgro-IndustriesDivision(AGS),FoodandAgricultureOrganizationoftheUnitedNations(FAO),andtoDoyleBaker,SeniorTechnicalOfficer,AGS,fortheirsupporttothisbookproject.DoyleBakerisspeciallythankedforhiscontributionsintheselectionofthechapters’authorsinthecompetitiveprocessundertakenforthatpurpose.

The editors are also grateful for the support of Jo Cadilhon, formerly with FAOBangkok, during the organization of the workshop and the development of itssummary report. We are likewise grateful to the International Association ofAgriculturalEconomists(IAAE),especiallytoboardmembersWaltArmbrusterandJohanKirstern, fortheirwarmreceptivitytothe ideaoftheworkshop,andfor itsaccommodationinthetechnicalprogrammeoftheAssociation’smainconference.

TheworkofthemembersofFAO–AGSPublicationsandCommunicationCommitteeinreviewingthebookdraftisalsomuchappreciated.

Finally we wish to thank Larissa D’Aquilio at FAO for the coordination of theproductionprocess,DamianBohleforthelanguageediting,SimoneMoriniforthedesign,TomasoLezziandMarianneSinkofordesktoppublishingwork.

11

CARlOS A. dA SIlVA ANd NOmAThEmBA mhlANgA

cHapter 1Introduction:

Innovative policies and institutions to support

agro-industries development

Defined as a component of the manufacturing sector where value is added toagricultural raw materials through processing and handling operations, agro-industriesareanimportantsourceofemploymentandincomegenerationworldwide(da Silva et al., 2009). Indeed, in most developing countries agro-industries aredominant in terms of their contribution to value-added in manufacturing. Inagriculture-based countries, this contribution is as high as 66 percent, whereasin transforming and urbanized countries it reaches 38 percent and 37 percentrespectively(WilkinsonandRocha,2009).

Investments in agro-industries are known to have significant multiplier effectsthrough both their backward and forward linkages along the value chains. Agro-processing enterprises generate demand for agricultural rawmaterials; thisin turn createswork opportunities at the farm level and contributes to increaseddemandforagriculturalinputssuchasfertilizers,feedsandveterinaryproducts,tonamea few.Thedemand for ancillary agro-processing inputs, such as packagingitems and product ingredients, tends also to rise with new investments in agro-industries.Bythesametoken,economicactivityisgeneratedinthedownstreamareasoflogistics,distributionandserviceprovision.

Manytypesofagro-processingandhandlingenterprisescanbeoperated feasiblyatthesmall-andmedium-scalelevel,usinglowcost,labourintensivetechnologies.Assuch,small-andmedium-scaleenterprises,mostofwhicharelabourintensive,predominate in much of the agro-industrial sectors of the developing world. Withatendencytobelocatedclosetotheirsourcesofrawmaterials,agro-processingenterprises favourtheattractionof investmenttotheruralspaceandthusareanimportantdriverinthecreationofnon-farmruralemployment.Highlevelsoffemale


2

labour are another characteristic of employment generated by agro-industries,withwomenintheworkforceamountingtoasmuchas90percentinsomespecific agro-industrialsegmentsofdevelopingcountries(WilkinsonandRocha,2009).

Increases in per capita incomes, higher urbanization, and growing numbers ofwomenintheworkforcehave ledtogreaterdemandforprocessedfoods, furtherpropellingtheimportanceofagro-industriesdevelopment.Globally,totalprocessedfoodssalesperyearareestimatedatwelloverUS$3trillion,oraboutthree-quartersofthetotalfoodsalesinternationally(Rabobank,2008).

Therecognizedbenefitsofagro-industriesdevelopmenthaveledgovernmentsandotherplayers in internationaldevelopmentpromotiontopay increasingattentionto the experiences and approaches that have been conducive to investments inthissector.Whatlessonscanbelearnedinagro-industrialdevelopmentpromotionworldwide, thatcanbevaluable to thedesignofpoliciesandstrategies to favourinvestments, improve efficiency, and foster competitiveness and inclusiveness inthis economic sector?To help address this question, the Rural Infrastructure andAgro-industriesDivision(AGS)ofFAOlaunchedacompetitiveprocesstoseekthecontributionsofscholars,researchersanddevelopmentpractitioners:thesepartieswere invited to an agro-industrial development workshop held in Beijing,China,August2009,aspartofthetechnicalprogrammeoftheTriennialConferenceoftheInternationalAssociationofAgriculturalEconomists.

ThechaptersinthisbookwerepresentedanddiscussedattheBeijingworkshop,andcanbeclassifiedbroadlyintothreecentralthemesthatformthestructureofthebook:

Z modelsandapproachestoagro-industrialdevelopment; Z agro-industrialdevelopmentexperiencesinAfrica,LatinAmericaandAsia; Z internationalexperiencesincommodityandtechnologydevelopment.

The first four chapters discuss alternative business models and approaches to agro-industrial development. In Chapter 2, EdwardMabaya explores the use ofbusinessnetworksasaninnovativeinstitutiontosupportthedevelopmentofagro-industries.Businessnetworksarecontrastedwithotherinnovativeinstitutionssuchasbusinessclustersandtechnologyparks.Unlikethelatter,businessnetworksarenotboundbygeography,andthereforedonotnecessarily involvedirectface-to-facemeetings or direct transacting amongmembers. However, they are similarto business clusters in that business networks can either be vertical networks,horizontalnetworks,orcross-sectoralnetworks.Afteranalysingbusinessnetworksinthecontextofboththemicroandmacroenvironmentsfacingagro-industries,Mabayaoutlines theessentialconditions forsuccessfulbusinessnetworks.Usingthe empirical case study of the Seeds of Development Program – a network of30 emerging seed companies in nine African countries – the author illustrateshowsuchbusinessnetworkscanimpactindustrystructure,participants’conduct, andoveralleconomicperformance.Mabayaidentifies10lessonscriticaltoestablishing

3

CHAPTEr 1

Introduction: Innovative policies and institutions to support agro-industries development

and maintaining successful small- and medium-sized enterprise (SME) businessnetworks.HeconcludesthechapterbyoutliningfivestepsthatcanbeadaptedfortheformulationandimplementationofSMEbusinessnetworksintheagro-industrialsectorandinsightsonthepossibleroleofgovernmentinsuchnetworks.

Public–privatepartnerships(PPPs)asamechanismforfacilitatingagro-industriesdevelopment,particularlyinareaswherethereispartialorcompletemarketfailure,are explored inChapter 3 bySukhpalSingh.The author compares and contraststhe IndianexperienceofPPPswith thatofThailand.Thechapter concludeswithsuggestions on strategies for managing and creating an enabling environmentfor PPPs. These include a sound legal and regulatory environment, commongoals among participating entities, and clarity on institutional roles. Specific totheagribusinesssector,theauthoremphasisesfocusonassessingtheroleofthePPPacrosstheentirevaluechaintomitigateagainstpossiblebottlenecks.Oneofthemajorconclusionsoftheanalysisisthatgovernmenthasanimportantroleinpromotingandfacilitatingtheparticipationoftheprivatesector.

InChapter4,FranciscoJ.Bueso,MarioCáceres,EdwardMoncadaandLuisF.OsorioempiricallyevaluatetheeffectivenessoftheUnitedStatesAgencyforInternationalDevelopment(USAID)ExportPromotionProgramforSMEs inElSalvador,whichwas implemented over a six-year period. They detail how a combination oftargeted training/technical assistance and funding accelerated the developmentofexport-orientedsmallandmediumagro-industriesinElSalvador.Theexampleshows how aid can be used effectively to address challenges faced by SMEs inaccessingadvancedtechnologiesandinternationalmarkets,particularlyasregardscompliance with international food standards and quality. The chapter drawsattentiontothe importantroleof researchanddevelopment (R&D)byacademicinstitutions and research centres in agro-industrial development, and how thisR&Dcanbeappliedtoleveragedonorfunding.Additionally,theauthors’analysisidentifiesbusinessnetworksasanimportantelementforasuccessfulagribusinessexportsectorinElSalvador,throughtheirroleoffacilitatingknowledgeflow.

In Chapter 5, JohnWilkinson, Clovis Dorigon, and Luiz Carlos Mior review twodecades of interventions in the western region of the State of Santa Catarina,Brazil.These interventions were designed to promote small and medium agro-industries as a strategy for the sustainable renewal of the family farm sector,together with its food processing traditions. In particular, the authors examinethedifferentinstrumentsandpoliciesdirectedatformsoforganization,financing,technologicalmodels,management andmarketing, and explore the importanceof social networks in sustaining these emerging organizations and markets. Theyarguethatakeyexplanationfortheemergenceandpersistenceofthesenewmodelsofagro-industrialdevelopmentintheregionhasbeenthediversityoftheactorsandtheexperimentsundertaken,aswellasthepartnershipsbetweenpublicandprivateinterventions.Usingtheagro-industrypilotprojectPRONAF(NationalProgramfortheStrengtheningofFamilyAgriculture)asanexample,theauthors


4

illustrate the critical role played by public policy in aiding the development oflarge-scale agribusinesses in parallelwith family-based enterprises.Additionally,theyhighlight the important roleofcivil society in facilitatingthesuccessfulandsustainabledevelopmentofagro-industries.

Chapters 6 to 9 present agro-industrial development experiences in selectedAfrican countries, China and India.An emerging and consistent theme in thesechapters is that policies and institutions must evolve to address the prevailingeconomic and social circumstances in the globalmarket and in their respectiveeconomies.InChapter6,PaulThangata,MalcolmBlackieandPaulSewardrevisitthe subject of public–private partnerships in agro-industries development, butfocusingonPPPsformulatedtoimprovemarketaccessforproducersandsuppliers.Threemodels fromKenya,Malawi andTanzania – the Farmer Input Promotions(FIPS) partnershipmodel, theMalawiAgriculture Partnership (MAP)model, andthe Tanzania Agricultural Partnership (TAP) model – are used to elaborate onstrategies for the development of smallholder farms. Such partnerships provideplatformsforknowledgesharingamongpublicandprivatesectoractorsandalsoempowerfarmerstomakeinformedchoicesaboutthemostappropriateinputsfortheirneeds.Theauthorsintroduceafour-stepPPPframeworkforagriculturalinputsubsidyprogrammesinsub-SaharanAfrica.

Mustapha Jouili discusses agro-industrial investment promotion in Tunisia inChapter7,focusingonfiscalandfinancialincentivesprovidedbytheGovernmentofTunisiaundertheCodefortheEncouragementofInvestment(CEI)andtheNationalUpgradeProgram.Through the programmes, theGovernment ofTunisia soughtto improve quality standards and reduce transaction costs for its key sectors,including agriculture.Theprogrammeshavebeen instrumental in increasing thecompetitiveness of agro-industrial enterprises. They have also been successfulin attracting investment in the sector and are inclusive of small producers. For instance, they have enlisted particular incentives for small and mediumenterprises (SMEs) in agriculture, industry and services, whereby SMEs canbenefit fromanequityparticipation from theStateandagrant coveringpartoftheexpendituresincurredforfeasibilitystudiesandtechnicalassistance.However,Jouili notes that investment in agro-industries in Tunisia remains hamperedby several constraints, mainly related to insufficient supply and poor quality ofraw materials for agro-processing. The supply problem is exacerbated by high post-harvestlosses,poorpackaging,lackofsuitablewarehousingandcoldstoragefacilities,weekorganizationamongproducers,andunnecessarymultiplehandling,allofwhich lead tohigh transactioncostsandcontribute to lowproductquality.Thesearetheareasthattheauthorsuggestsshouldbeaddressedbyinstitutionsandnewpolicymeasures.

TheChineseexperience,detailedinChapter8byHughDeng,hasbeencharacterizedbykeypolicyandinstitutionalreformsthatwereinstrumentaltothedevelopment

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of township and village enterprises (TVEs) and subsequently the development oftheruraleconomyofChina.HeemphasisestheintegralrolethatTVEsplayedinthedevelopmentoftheagribusinesssectorandhowsomeTVEshavegrowntobecomeflagshipenterprisesinthissector.Indeed,TVEsareoftendescribedastheremarkableinnovationoffarmersinChina.Takingmanyformsoforganization,TVEsaremostlySMEs located in rural areas. They have played an important role in promotingruralemployment,economicgrowthandrural infrastructuredevelopment,and inreducinginequalitybetweentheurbanandruraleconomiesinChina.Inconclusion,the author identifies three areas for furtherTVE policy reform: improvements inthe property rights system, technical upgrading, and the promotion of the foodprocessingsector.TheauthornotesthattherearesignificantlessonstobelearnedbyotherdevelopingcountriesfromtheChineseexperiencewithTVEs.

InChapter9,VasantGandhiandDineshJainexamineseveralinstitutionalmodelsforlessonstoinformfuturepolicyreformsconcerningagro-industriesdevelopmentin India,andothercountriesof thedevelopingworldwithsimilar circumstances.Agro-industry models are assessed against the following five attributes: (1) theability toorganizeproductionandprocurement fromsmall-scale farmers; (2)theextenttowhichmoderntechnologiesandpracticesareadoptedbysmall-scale farmers; (3) the aptitude tomobilize financial and other support services; (4)thecapacityforbuildingcompetitivenessinbothdomesticandglobalmarkets;and(5) thestructureandsustainabilityof themodels inthe longterm.Themainmessage emerging from this analysis is that ownership by key stakeholders andtheirfullcommitmenttotheventureconcernedareimportanttothesustainabilityofagro-industrialdevelopmentmodels.

The third theme, concerning commodity and technological development in theagro-industrialsector, iscoveredinChapters10to13.Anin-depthanalysisoftheroleofagro-basedclustersinagro-industriesdevelopmentisundertakenbyMysoreSudhaandFroukjeKruijssen inChapter10,usingthecaseof thetotapurimangobelt inSouthern India.Theauthorsapproachthesubject fromtheperspectiveofcluster partnerships and supply chainmanagement.They perform an economicanalysisofvalueadditionatdifferentstagesalongthevaluechain, inanattempttounderstandtherisksateach levelofthechainandthedistributionofmarginsamongthechain’sactors.Thestudyhighlights theroleofmarket informationtothe smooth functioning of the agro-industry cluster. The integration of mangosupplychainsappearstobeincomplete,giventhatthebenefitsofhigherpricefromexportsdonotseemtotrickledowntothelowestplayersinthechain,theproducers. To provide guidance on how the mango cluster can be improved, Sudha andKruijssencomparesuccessfulmodels fromothercropsandsuggests institutionalsupport for settingupa suitablealternatemarket integrationmechanism,e.g. acommodityboardforexport-orientedproductionofsemi-processedmango.

Takingacommodityspecificapproach,LateefO.SanniinChapter11examinestheeffectofthe‘PresidentialInitiatives’instimulatingprocessandproductinnovations


6

inthecassavaagro-industrialsectorinsub-SaharanAfrica.Therolesofinternational,regionalandnationalinstitutionsinfosteringpositivepolicythruststomobilizenewinvestmentsinthesectorarediscussed.ThelessonsthathaveemergedfromNigeriaandGhanaare that the involvementofhigh-levelpolitical leadership isuseful tofosteragro-industrialdevelopment.The‘PresidentialInitiativesonCassava’helpedcreateawarenessaboutthediversepotentialusesofcassava,generatinggrowthindemand.Toinformfuturepolicy-making,theauthoroutlinesstrategiesforfurthercommercializationofcassava,suchastheprovisionofbasic infrastructurethat issupportivetocottageindustries,investmentincentives,andtheestablishmentoftheCassavaDevelopmentCommission.

The commercialization of cassava inWest Africa is presented in Chapter 12 byAdebayo Abass and co-authors. In contract to the previous chapter where thefocuswasonPresidentialInitiatives,thischapterdetailshownumerouspublicandprivateinstitutionshaveparticipatedinthedevelopmentofthecassavamarketinWestAfrica.Theauthorsidentifythreelessonsfromtheexperienceinthisregion.The first is that partnership in technological development and testing in diverselocations hastens commercial use.The second is that continuous interaction ofstakeholder partners along the continuum of research to development hastenstechnologicaladoptionanddevelopment.Thethirdisthatcapacitydevelopmentisimportantfortechnologiestospreadandimpactpositivelyonthesector.

Finally chapter 13 by KatinkaWeinberger andAntonioAcedo Jr. documents thedevelopmentanddiffusionofvegetablepost-harvestandprocessingtechnologiesin theGreaterMekong subregion ofAsia.One of themain contributions of theauthors is to quantify the impact of post-harvest technologies developed by TheWorldVegetableCenter(AVRDC).

Despite the broad geographic coverage and subject matter contained in allthe chapters, a number of salient issues emerge.All authors acknowledge thatsupportive policies and institutions are critical for accelerating the developmentofagro-industries.They illustratehow institutionalandpolicy interventionshaveevolvedovertimeandspaceinresponsetoprevailingchallengesandopportunities.Most of the institutional and policy interventions discussed in the book havefocusedonSMEs,confirmingthedominanceofSMEsintheagro-industrialsectorofdevelopingcountries.

Avarietyofbusinessmodelsandapproacheshavebeeninuseinthedevelopmentof agro-industries in developing countries. These include business networks, agro-based clusters, food parks, export processing zones, and other types ofalliances or partnerships.While some of the initiatives have solely been privatesectorledorpublicsectordriven,public–privatepartnershipsemergeasafavouredmechanismforagro-industriesdevelopment.Essentially,PPPsfacilitatesharingofrisksandcosts,hasten technologicaldevelopment,dissemination,andadoption,and have the potential to realize greater impact where resources are limited.

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PPPshave takendifferent formsandoccur indifferentpointsof thevaluechain. Forinstance,inMalawiPPPshavebeeninstrumentalinensuringaccesstoinputsbysmall-scaleproducers;thisinturnhasimpactedproductivitypositivelyandresultedinasteadyflowofrawmaterialsforagro-processing.Ontheotherhand,PPPshavealsobeenusedinthemarketingofproduce,forexampleindairymarketinginIndia.In general, cluster-based approaches seem to be especially beneficial to SMEs, astheyoffereconomiesofscalethatenhancecompetitiveness.

The role of the public sector and government in creating an enabling policyenvironment for agro-industries development is recognized by many authors.Specifically noted is the importance of fiscal incentives and other promotionalactivities toenticeprivate sectorparticipation.Beyond the traditional incentivesof tax cuts and tax holidays,Governments across theworld have come upwithinnovativemarket incentives suchasmandatoryblendsof cassavaflour,ethanolblendswithgasoline,and institutionalpurchases (associatedwithschool feedingprogrammes,forexample)tocreateorincreasedemandandguaranteemarkets.

As illustrated in the last chapters of the book, national or local governmentshaveattimeschosentopromoteselectcommoditiesinpursuitofagro-industrialdevelopment.Thechoicesoftargetedcommoditiesarestrategic innatureeitherfrom a comparative/competitive advantage or economic development/povertyreductionperspective.Forexample,inGhanaandNigeriawherecassavaisastaplecrop,thegovernmentshaveprovidedincentivesandresourcescollectivelyknownasPresidentialInitiativesfortheprocessingandutilizationofthecrop.Furthermore,to promote export diversification and competitiveness, somegovernments haveestablishedExportProcessingZones(EPZ)andagro-processingunits.

Additionally,thechaptersidentifykeyelementsofsuccessfulmodelsoradoptionofinnovativetechnologies,suchasdesigninginitiativesthattacklethewholevaluechain, incorporation of capacity-building activities (including extension services) in initiatives, giving initiatives access to financial services, andminimizing post-harvest losses.Ultimately,manyof theauthors admit thatnumerous challengesstill remain in building strong and viable agro-industries; they emphasize theimportance of stakeholder ownership and commitment to initiatives if newapproachesaretobesustainableandsuccessful.

The chapters that form this book attempt to address the question posed in theintroductory paragraphs of this first chapter.They have illustrated the fact that,in order to be promoted as competitive, equitable and inclusive enterprises,agro-industries require not only access to the key pre-requisites of technology,financingandmarkets,butalsogovernmentpoliciesthatfavourcostefficiencies,foster competition and promote stability of raw material supplies. Additionalrequirementsincludeinnovativebusinessmodels,stronginstitutionsandadequatesupport services in areas such as research and development, quality and safetystandardsandinformationsystems,tonameafew.


8

References

da Silva, C.A., Baker, D., Shepherd, A., Jenane, C. & Miranda-da-Cruz, S.2009.Agro-industries for development.Wallingford,UK,CABIPublishing.

Rabobank.2008.The Boom Beyond Commodities: A New Era Shaping Global Food and Agribusiness.HongKong,Rabobank.

Wilkinson, J. & Rocha, R.2009.Agro-industries:trends,patternsanddevelopmentImpacts.IndaSilva,C.A.,Baker,D.,Shepherd,A.W.,Jenane,C.&Miranda-da-Cruz,S. Agro-industries for Development.Wallingford,UK,CABIPublishing.

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EdwARd mABAyA

cHapter 2Business networks as

innovative institutions to support the development of

agro-industries

2.1 Introduction

Thecentralroleofagricultureintheeconomicgrowthanddevelopmentofpoornationshaslongbeenwidelyrecognized.Tospurruraldevelopmentandfoodsecurity,boththetheoryandpracticeofdevelopmenteconomicshastraditionallyfocusedonincreasingagricultural productivity on the farm. More recently, development practitioners andpolicy-makers have broadened their attention to include agro-industries – the post-harvest activities involved in the transformation, preservation and preparation ofagriculturalproductsforintermediaryorfinalconsumption(WilkinsonandRocha,2009).Becauseagro-industriesareuniquelysituatedbetweennaturalsourcesoffoodsupplyandthedynamicsofdemandforfoodandfibre,promotionofagro-enterprisedevelopmentcanhavenumerousbenefits.These include:positive impactsonemployment inbothrural and urban areas; offering market access to agricultural smallholders; businesslinkages to smallandmedium-sized enterprises (SMEs); enhanced food security byreducingpost-harvest lossesandextendingtheshelf-lifeoffoodstuffsfortherapidly-increasingpopulationofurbanpoor.Thecombinedeffectsofemploymentgainsandfood security through improved agro-industry competitiveness can be an importantstrategyforreducingtheoverallpovertywithindevelopingcountries.

Developing strong and viable agro-industries requires a different mix of policiesand institutions from the traditional type, which were mostly farmer focused. Agro-enterprises, the building blocks of agro-industries, have a different objectivefunction–maximizingprofits–andoften requireanenablingenvironment to thrive.Tofill thisgap,amultitudeofnewpolicies, initiativesand institutionshaveemergedindevelopingcountriesinthelasttwodecades.Theseinterventions,mostlydesignedto facilitate theparticipationofSMEs, includewarehouse receipts, business clusters,


10

microfinanceinstitutions,technologyparks,businessdevelopmentservices,contractfarming, and public investment in transport and infrastructure. Much has beenwrittenaboutthetheoreticalbasisforandempiricalevidenceoftheseinterventions.However, thepotential of businessnetworks in fosteringagro-industrygrowth indevelopingcountriesisrelativelyunderexplored.(Businessnetworksinthiscontextare defined as ‘alliances of SMEswith common interests and goals that operatethroughexchangeofbusinessinformation,ideas,andsupport.’)

First,thischapterexplorestheuseofbusinessnetworksasaninnovativeinstitutionthatwillsupportthedevelopmentofagro-industries.First,theconceptofabusinessnetworkisexploredwithinthemicroandmacroenvironmentsfacingagro-industries.Thechapterdistinguishes,compares,andcontraststhefollowing:

Z formalnetworksandinformalnetworking;

Z verticalnetworksthatspandifferentlevelsofthesamesupplychainversusthehorizontalnetworksoffirmsatthesamelevel;

Z virtualnetworksversusface-to-facenetworks.

Second,theeconomicrationaleofabusinessnetwork isexploredwithafocusonagro-industries. For example, companies in an agri-business network can sharebuyers and suppliers, leveraging strength in numbers for better deals. However,thesamecompaniescanbecompetingforthesameresources inanothersphere.Businessnetworksoftenneedtostrikeadelicatebalancebetweenminimizingintra-networkrivalryandmaximizingcollaboration.

Third, the chapter delineates the essential conditions for successful businessnetworks.Comparisonsaremadebetweenbusinessnetworksandotherinnovativeinstitutionssuchasbusinessclustersandtechnologyparks.

Fourth,thechapterdescribestheempiricalcasestudyoftheSeedsofDevelopmentProgram–anetworkof30emergingseedcompaniesinnineAfricancountries–toillustratehowsuchbusinessnetworkscan impact industry structure,participants’conduct and overall economic performance.Among itsmany achievements, thisnetwork has resulted in increased trade of seed across neighbouring countries,increased sales revenues, expanded production capacities, and sustained growthfor itsmembers.Bestpracticesandpotentialrisksaredrawnfromthiscasestudyandafewotherexamplesofagribusinessnetworksthatcanbeusedbygovernmentandotherdevelopmentpractitionersarehighlighted.Synthesizingalloftheabove,thechapterconcludeswithamethodologyfortheformulationandimplementationofbusinessnetworkdevelopmentprojectstosupportagro-industries.Followingastructuresimilartothe‘sixstepstopromoteclusters’approachdevelopedbyUNIDO(theUnitedNationsIndustrialDevelopmentOrganization),thechapteradaptsthisframeworkforpromotingagribusinessnetworks.

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Business networks as innovative institutions to support the development of agro-industries

2.2 Business clusters and networks

Despite the recentflurryof interest indevelopmenteconomics, thephenomenonofbusinessnetworksisnotnew.Businesses,governmentsandresearchinstitutionshavealwaysnetworkedinthecollectionofinformation,obtainingmaterialresources,diffusingnewideasandexercisingpoliticalinfluence(Stableret al.,1996).Todefineand explain business networks, it is easier to start with the closely related andmorecommonlyunderstoodconceptofbusinessclusters.Neoclassicaleconomicshaslongrecognizedtheeconomiesofagglomeration,bywhichfirmsbenefitfromlocatingneareachotherandlowertheirproductioncostsasaresultofcompetingsuppliers,greaterspecializationanddivisionoflabour(Marshall,1890;Schumpeter,1912).The resultant ‘clustering effect’, inwhich buyers and sellers of a particulargoodorserviceconvergeinacertainplace,hasasolidtheoreticalunderpinningandnumerous empirical examples are evident, e.g. computer technology companieslocatedinSiliconValley,California.Itisarguablytheindustrialdrivingforcebehindurbanization.

PopularizedbyMichaelPorterinThe competitive advantage of nations(1990),industryclusterscanbedefinedasgeographicconcentrationsofcompeting,complementary,orinterdependentfirmsandindustries,thatdobusinesswitheachotherand/orhavecommon needs for talent, technology, and infrastructure. It is important to notethatfirmswithina clustermaybe,andoftenare,bothmutually competitiveandcooperative.Thenomenclatureofbusiness clusters isusually framedaround fourgroups:

1. geographical clustersthatareidentifiedbylocation2. sectoral clusters of businesses operating together from within the same

commercialsector3. horizontal clusters between businesses at the level of shared resources

(e.g.knowledgemanagement)4. vertical clustersofbusinessesalongasupplychain.

Building on the above description of business clusters, business networks can bedefined as an alliance of SMEs with common interests and goals, that operatesthroughexchangesofbusinessinformation, ideas,andsupport.Bythisdefinition,abusinessclusterisatypeofbusinessnetwork;however,noteverytypeofbusinessnetworknecessarilyexistswithinacluster.Thefeaturethatmostaptlydistinguishesbusinessnetworksfrombusinessclustersisgeographicspecificity.Unlikeclusters–whicharedefinedwithinandoftenlimitedbyphysicallocation–networksarenotboundbygeography.Membersof abusinessnetwork canbe located indifferentcities, countriesandcontinents.Asa consequence,neither face-to-facemeetingsnordirecttransactingarenecessaryformembersofabusinessnetwork.However,the theoretical underpinningsof conglomerationeconomics,with thegeographicrestrictions relaxed,doapplyequally tobusinessnetworksas theydo toclusters.Framed in the terminology of institutional economics, business networks are


12

“an efficient mechanism for coordinating strategic action across firms, withoutsacrificing organizational autonomy, either legally or functionally” (Stabler et al., 1996). The increased efficiency results from reduced transaction costs andknowledgesharing;thepotentialforcollectiveactionmakesbusinessnetworksaninvaluable tool forSMEsalong theagro-industryvaluechain. It is thisaspectandapplicationofbusinessnetworksthatisthemotivationandkeyfocusofthischapter.

Itisimportanttodistinguishbetweenabusinessnetwork,whichisaninstitutionalarrangement or organizational form, and the verb form, ‘business networking’. Thelaterreferstotheprocessofestablishingamutuallybeneficialrelationshipwithotherbusinesspeople,theemphasisbeingontheindividualandnotthefirm.Whileeconomicbenefits,betheydirectorin-direct,areessentialtoabusinessnetwork,thesearenotprerequisitestosustainbusinessnetworksbetweenbusinesspeople.Indeed,mostsuchnetworkingoftenservesasocialneedforconnectionwithpeers,while leaving open the possibility of future collaboration. However, it should benotedthat informalbusinessnetworks,whichareoftenbasedonfamilyorethnicconnections,dofallsomewhereinthemiddleofthespectrum–somewherebetweenpurelysocialbusinessnetworksandformalbusinessnetworks.

Businessnetworkscanbeclassifiedintothreegroups:verticalnetworks,horizontalnetworks and cross-sectoral networks (Matopoulos,Vlachopoulou andManthou,2005).A vertical network –more commonly referred to as a supply chain – is anetwork of producers, retailers, distributors, transporters, storage facilities andsuppliers,thatparticipateinthesale,deliveryandproductionofaparticularproduct.Bycontrast,horizontalnetworksconsistoffirmsthatareonthesamelevelofthevalue chainwithin one sector.The relationships amongmembers of a horizontalnetwork are often characterized by pooled and reciprocal interdependence(Matopoulos,VlachopoulouandManthou,2005).Mosthorizontal linkagespertainto largeandsmallagribusinessandagro-industries,whilevertical linkagespertaintolargeagribusinessandagro-industriesandfarmergroups.Ofthetwo,horizontallinkagesare lesscommon,becauseofthe lackof incentivesfor largeagribusinessand agro-industries to pursue such business relationships. In contrast, largeagribusinessfirmsmaysubcontracttotheirsmallercounterpartsinordertosatisfyamarketopportunity.Sucharrangementsmaynothavedirectspillovereffectssuchasthetransferoftechnologyandinformation.Alternatively,largeagribusinessesmayjointlybidforcontractswithsmallerfirmsand,insodoing,increasetheiraccesstomarkets. Lastly, cross-sectoral networks,more commonly referred to asbusinessclusters, consist of enterprises operating in close proximity and “characterizedby the existence of pooled, sequential and reciprocal type of interdependencies”(Matopoulos, Vlachopoulou and Manthou, 2005). Table 2.1 summarizes thedistinguishingfeaturesandcharacteristicsofthethreetypesofbusinessnetworks.

The evolution and history of business networks ismore complex and difficult totrace.Arguably,evenattheoutsetoftheinventionofprivateenterprises,strategicalliances have been formedmostly among family members and friends in ways

13

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thatmeetthemoderndaydefinitionofabusinessnetwork.Inmorerecenthistory,interestinbusinessnetworksseemstohavebeenspurredbyeconomicglobalizationandthegrowthofmulti-nationalcooperations(MNCs),especiallyinthemid1980s.During thisperiod,MNCscreatedawideplethoraof complex corporatealliancesresulting in “corporate galaxies in which a large MNC is linked to a cluster ofsmallerMNCs and national firms via joint ventures, sub-contracts andmarketingagreements” (Dunning,1988). It is fromsuchalliancesbasedoncommoninterestthatmodern day formal business clusters and networkswere born.The growingpopularityofnetworksvis-à-visothercooperativealliancesmostlyhingesonhowthey“allowformsofinternationaleconomiccoordinationtoarisewhichmaybelesscostlytoadministerthanarms-length,market-basedtransactionsbutwhichdonotrequiretheformationofthemanagerialhierarchiesofconventionalinternalizedfirmstructure”(CassonandCox,1993).

Characteristic Vertical network(Supply chain)

Horizontal network Cross-sectoral network(Business cluster)

Membership Usually needed, often with exclusivity

Usually required Not required

Type of interdependence

Sequential Pooled

Reciprocal

Sequential

Pooled

Reciprocal

Major outcomes Reducing risk and uncertainty, improving logistics performance

Switching partner capacity

Shared resources

Information and knowledge sharing

Increasing innovation capacity

Value base Optimization of production and operations

Knowledge diversity and network externalities

Regional assets

Geographic character

International

National

International and National

Regional

Source: Adapted with modifications from Matopoulos, Vlachopoulou and Manthou, 2005.

taBLE 2.1

classification of business networks


14

2.3 The theoretical basis of business networks

The broad diversity and flexibility of business networks makes them difficult toanalyse (Stabler et al., 2006; Fafchamps et al., 2006). Networks differ in theirgoals, memberships and modus operandi, such that no two networks are alike.Eventhesamenetworkcanvarysignificantlyacrossbothtimeandspace,dependingon the micro and macroenvironment in which it operate. Consequently, muchof theempiricalworkonbusinessnetworksutilizes thecasestudy1 approachandoften has limited generalizability for development practitioners when comparedwith other institutional innovations forSME development. In otherwords,manyof the conclusions and lessons from one business network cannot necessarilybe extrapolated to other networks, because the context may be very different. Itisnowonder,then,thatnosingleunifiedtheoryexiststhatexplainsthebasisandstructureofbusinessnetworks.Instead,thetheoriesborrowfromseveralparadigmsincludingneo-classicaltheory,strategicmanagement,transactioncosttheory,andsocialexchangeandsocialcapitaltheories.Abriefdiscussionofthesetheoriesandhowtheyapplytonetworksisoutlinedinthefollowingparagraphs.

2.3.1 neo-classical economic theory

Neo-classicaleconomictheoryisbasedonthenotionthatfirmsseektomaximizeprofits and consumers seek to maximize utility. The unit of analysis is often afirm or consumer acting alone to maximize their objective function.Within thiscontext,businessnetworksareviewedasmaximizingagglomerationeconomiesorcapturingpositiveexternalities.Forexample,knowledgespilloverofinventionsandinformation(suchasaproductiontechnique)arelikelytobediffusedmorerapidlywith a network of enterprises.To take a specific agricultural case, pasteurizationtechniques will spread faster in scenarios whereby enterprises along the dairyindustryvaluechainareorganized intoanetworkorassociation. In thiscase, thenetworkservesprimarilyasamechanismtofacilitatethefreeflowofinformation,apublicgood.

2.3.2 strategic management

Strategicmanagementliteratureframesbusinessnetworksasameanstoenhancingcompetitive advantages through collaboration strategies. Attributed mostly toMichaelPorter’swork,thistheoryespousesthestrategicadvantagesofcollaborationthrough strategic alliances or joint ventures.According toPorter and Fuller, such

1 The case study research method is an empirical inquiry that investigates a contemporary phenomenon within its real-life context, when the boundaries between phenomenon and context are not clearly evident, and in which multiple sources of evidence are used (Yin, 1994).

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collective strategies do confer the following advantages: economies of scale,improvedaccesstotechnologyandexpertise,reductionofrisk,andimprovementinthecompetitivestructureofthefirm(PorterandFuller,1986).Porter’sframeworksview networks and collaborations as transitional forms, designed to exploit thebenefitsofintegrationwhilesavingonthepotentialcostsoffullverticalintegration(Porter,1990).Morerecently,strategicmanagementresearchhasfocusedonsupply chain integration which has further evolved into supply networks. Adapted fromHarrisonet al.2003,Table2.2summarizesthedimensions,elementsandbenefitsofsupplychainintegrationthatcanbeextendedtobusinessnetworks.

Dimension Elements benefits

Information integration

• Information sharing and transparency

• direct and real-time accessibility

• Reduced bullwhip effect

• early problem-detection

• faster response

• Trust building

Synchronized planning

• collaborative planning, forecasting and replenishment

• joint design

• Reduced bullwhip effect

• lower costs

• Optimized capacity utilization

• Improved service

Workflow coordination

• coordinated production, planning and operations, procurement, order processing, engineering change and design.

• Integrated, automated, business processes

• efficiency and accuracy gains

• fast response

• Improved service

• earlier time to market

• expanded network

New business models

• Virtual resources

• logistics restructuring

• Mass customization

• New services

• Better asset utilization

• higher efficiency

• Penetrative new market

• create new products

Source: Adapted from Harrison et al., 2003.

taBLE 2.2

supply chain integration dimensions


16

2.3.3 transaction cost theory

EstablishedbyCoasein1937andlaterdevelopedbyWilliamsoninthelastquarterofthecentury,transactioncosttheoryassertsthatsomeinstitutionalarrangementsaremoreefficientthanothersincompletingatransaction(Coase,1937;Williamson,1983). The objective function and effect of economic entities is centred onminimizingtransactioncosts (or ‘friction’) inthetransactionresultingfromsearchfor information, negotiation, adapting to change, monitoring transactions, andcontrolling transactions. Williamson distinguishes between ex ante transactioncosts (incurred before the transaction) and ex post transaction costs (incurredafter the transaction). Examples ofex ante transaction costs include the costs ofdrafting,negotiating,andenforcinganagreement.Ex posttransactioncostsincludehagglingcosts,disputeresolution,andeconomicbodingcosts(Williamson,1983).Byenhancingtheflowofinformationbetweenmemberships,businessnetworkscancontributesignificantlytominimizingtransactioncosts.

2.3.4 social exchange and social capital theories

Theaboveeconomicandmanagementframeworksfail torecognizetherolethatthe human element plays in the execution of business transactions. For this, welookattwokeycontributionsfromthesocialsciences:socialexchangetheoryandsocialcapitaltheory.Socialexchangeisbasedonthe‘configurationofinterestsandresources’byindividuals,whileeconomictransactionsaremadeupofinterdependentexchangetransactions(Coleman,1986).Allexchangetransactionsarecharacterizedby ‘reciprocal stimuli andmutual reinforcements’which,whenbroken, can resultinaterminationoftherelationship (Zafirovski,2003).Socialcapital theoryontheotherhandisanchoredinthevalueofsocialnetworksinbondingpeopleofsimilarinterests and connecting between diverse groups based on norms of reciprocity. Inotherwords,thegoodwill,trust,andsolidaritythatiscreatedthroughinteractionwithotherindividualsorenterpriseshasbothaneconomicandsocialvaluethatcanbeutilized.Oftenasanunintendedorevenunanticipated consequence,businessnetworksplayakeyrole increatingandmanagingsocialcapitalamongmembersofthenetwork.

2.4 Agro-enterprises and business networks

Theprecedingsectionsummarizedthetheoreticalbasisforbusinesscollaborationvia networks from various academic fronts. This section narrows the focus byexploringways inwhich theagricultural valuechain, includingboth farmingand off-farmactivities,isparticularlysuitabletotheestablishmentofbusinessnetworks.In framing these arguments, it is important to recognize that agro-industries indevelopingcountriesoperatewithinabroadermacroenvironmentthatpresentsboth

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opportunities and challenges.Amacroenvironmental analysis of agro-industries indevelopingcountriesispresentedinTable2.3.

Theabilityofbusinessnetworkstopromoteagro-industriesindevelopingcountriesdependslargelyonhowtheycapturenewopportunitieswhileminimizingtherisksposed by external threats. For example, the creation of business networks is apowerfultoolforovercomingsizeconstraintsandlimitedaccesstoinformationforSMEsindevelopingcountries,wheremarketenvironmentsarehighlyvolatileand

Factor Opportunities Threats

Political

legal

• Political stability in most countries

• Regional harmonization of policies

• Preferential trade agreements

• Political conflicts in some countries

• corrupt government regimes

• limited enforcement of property rights

• Poor business climate

economic • economic liberalization well underway

• high economic growth rates increasing foreign direct investments

• central role of agriculture in most economies

• Remittances from the diasporas

• Global recession

• Poor transport infrastructure

• legal barriers to trade

• high interest rates

• high levels of inflation and unemployment

Social

cultural

human

demographic

• Growing population – increasing market-rapid urbanization

• Improved access to education and health

• Gender – increasing role of men into farming, women’s rights

• hIV/aIdS

• limited adoption to new technology

• cultural preferences for specific staples

Technological • Improved access to information (mobile phone and Internet)

• advances in bio-technology

• Technology leap-froging

• Investment in public research (NaROs and cGIaR)*

• diverse agro-ecologic conditions limit technology diffusion

• Weak national scientific and research institutions and universities

• limited enforcement of intellectual property rights

* NAROs: National Agricultural Research Organizations; CGIAR: Consultative Group on International Agricultural Research.

taBLE 2.3

macro-environmental factors influencing agro-industries in developing countries


18

competitive(Matopoulos,VlachopoulouandManthou,2005).Discussedbelowarethekeyfactorsthatfavourthebusinessnetworksasaninstitutionalinnovationtosupportagricultureandagro-industrydevelopment.Followingthesamestructureasthemacroenvironmentalanalysis,thefactorsareframedintoaPESTanalysis, i.e.dividedintofourcategories:Political,Economic,SocialandTechnological.

2.4.1 political and legal factors

Inbothdevelopedanddevelopingnations,thegovernmentplaysakeyroleintheagriculturalsectorthroughpoliciesandregulations.However,inthedevelopmentofagro-industriesindevelopingcountries,governmentinterventionoftenactsasadouble-edgedsword.Ontheonehand,governmentpoliciesandregulationscanbecreditedforcreatingenablingenvironmentsthroughinvestmentininfrastructure,provisionofpublicgoods,correctionofmarketfailures,andprotectionfromforeigncompetition.Ontheotherhand,thedistortionaryeffectofgovernmentinventionshas led to increased risk of doing business, crowding out of the private sectorconsumers, and increased transaction costs. If enterprises along the agriculturalvaluechainareorganizedintobusinessnetworks,theyarebetterabletoexpresstheirwantsand lobbygovernment to support theirneeds.Asanexample, smallmillers in Botswana have recently created an association that, among otherobjectives, represents its members’ interests to government representatives(Selekaet al.,2008).Furthermore,horizontalnetworksorassociations,especiallyatproducerlevel,makeiteasierandmoreeffectivetodeliverdevelopmentassistancethat is in linewith the interestsof theprimary stakeholders. Farmergroupsandcooperativesareatypicalexampleofsuchnetworksthroughwhichassistancecanbetargeted.

2.4.2 economic factors

Atthecoreoftheeconomicfactorsthatfavournetworksforagricultureandagro-industries are the unique physical attributes of agricultural goods. Agriculturalproducts, including food, fibre and biofuels, are perishable, bulky, seasonal inproduction, and highly susceptible to weather conditions. Perishability oftenresultsinveryhighpostharvestlosses,estimatedtobebetween10and40percentinmostdeveloping countries (FAO, 1997).Thehigh volume, lowvaluenatureofmostagriculturalcommoditiesimpliesthatreductioninintermarkettransfercosts– consisting of loading and off-loading charges, trading fees and transportationcosts–willresult in increasedspatialmarket integrationandlowerpricesfortheconsumer.Wellcoordinatedverticalnetworkssuchassupplychainsandcoldchainsarewidelyacclaimedforreducingpost-harvestlossesandsignificantlyloweringthecostoftransportation.Furthermore,theseasonalityofagriculturalproductionoftenresultsinharvestingandprocessingbottlenecks.Horizontalnetworkscouldbeused

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to facilitate the leasing of underutilized capacities in similar enterprises. Lastly, the high production risks in agriculture that emanate fromweather conditions,pests and diseases can be mitigated through business networks. For example,if farmers are organized into associations or networks, pests and diseases thatthreatentheviabilityoftheentireindustrycanbedetectedearlierandpreventativemeasurescanbeimplementedmoreeasily.

Increased consumer awareness coupled with food contamination scares hasresultedintighterfoodsafetylaws.Inresponse,agri-foodcompanies“developedcollaboration strategies between entities at different levels of the value chainto achieve undistorted information exchanges and track and trace efficiency”(Matopoulos,Vlachopoulou andManthou, 2005). New labelling standards, suchasthosefororganicfoodsandFairTrade,willalsorequiremorestringentproducttraceabilitythatisbestachievedthroughverticalintegrationornetworks.

ForsmallholderfarmersandSMEsinagro-industries,businessnetworksofferuniqueopportunitiestoenjoysomeeconomiesofscale,andtopenetratelucrativemarketsthatwouldotherwisebeinaccessible.Forexample,increasedfarmmechanizationin India since the 1970s has largely been attributed to farmers organizingthemselves intogroups and sharing the costs of large-scale biased technologiessuchastractors(Singh,1995).Similarly,farmersandsmallprocessorsinEastandSouthernAfricaarestartingtousenetworksasameanstoaggregatetheirproductsand penetrate lucrativemarkets such as supermarket chains. Examples of suchnetworksincludetheKenyaOrganicAgriculturalNetwork(KOAN),theTanzanianFarmersNetwork,and theMountainGorillaOrganicCoffeeFarmer’sAssociationinUganda. Lastly, the hourglass-shapedmarket structure ofmost agro-industrysupplychainsindevelopingcountriesimpliesthatpowerisoftenconcentratedatprocessor,wholesalerandretailerlevels.Establishinghorizontalnetworksatbothendsofthesupplychaincanbeahighlyeffectivewaytobalancepowerrelationsalongthevaluechain.

2.4.3 social factors

Asaconsequenceofruraltourbanmigrationinpursuitofhigherlivingstandards,rapidurbanizationisakeytrendinmostdevelopingcountries.Morefoodnowneedstobetransportedtourbancentresfromfarmingareasthatareofteninremoteruralzones.Theincreasedseparationofproductionfromconsumption–bothphysicallyand as measured by number of intermediaries – requires vertical networks bywhichinformationonpricesandconsumerpreferencescanbeconveyedalongtheentirevaluechain.AsnotedbyReardonet al., supermarketchains indevelopingcountrieshavebeenshiftingtheirmodelsoverthepastfewyears–awayfromtheoldwholesaleprocurementmodeltowardanewmodelthataimstoclosethegapbetweentheirsuppliesandtheirneeds(Reardon,TimmerandBerdegue,2004).


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2.4.4 technological factors

Both productivity and efficiency in agriculture rely heavily on the use andapplication of cutting-edge technology. For agro-industries, technologicalinnovation has long been amajor contributor to progress and will continue toinfluenceagricultural inputs,production,processing,distributionandmarketing(Weick, 2001). Four key areasof technological innovationwill play a key role inshaping the future of agro-industries: global positioning systems, geographicinformationsystems,biotechnology,andtheInternet(Weick,2001).Indevelopingcountries,thediffusionandadoptionofsuchnewtechnologiesisslowespeciallyamong smallholder farmers and SME working in agro-industries. Numerousstudieshaveshownthattechnologicalinnovationismorelikelyinenterprisesthatareconnectedtoothers throughbusinessnetworks thatcanhelp themto learnabout the existence of new technologies and how to adapt these technologieswithin their firms (Newell andClark 1990;Abernathy,Clark, andKantrow 1983;Porter1990).Inthepast,technologyandinnovationparkshaveplayedthisrolefor agro-industries. However, due to the rapid growth of information andcommunication technologies over the last two decades, distance betweenenterprisesismuchlessofaconstraintforcollaborationandinformationsharing.

2.5 Business networks vis-à-vis innovative institutions

Several other institutional innovations have been tried for supporting agro-enterprise development in bothWestern and developing countries (Table 2.4).Business development services, incubators, agribusiness parks, warehousereceipts, and contract farming are being utilized to assist in agro-enterprisecreationandgrowth.Theeffectiveness,meritsandtheappropriatenessofeachofthese interventionsor institutionalarrangements indevelopingagro-enterprisesdependslargelyonthecontextandthedesiredgoals.

Two key features distinguish business networks from all the other innovativeinstitutions – business development services, research and technology parks,warehouse receipt systems, contract farming, out-grower schemes, commodityexchanges,certificationagencies–alloutlinedinTable2.4.Thefirstdistinguishingfeature of networks, vis-à-vis other institutional innovations, is their relativelylow costs of establishment and maintenance. Huge capital investments arerequired to establish the requisite infrastructure such as buildings and humanresources, especially for research and technology parks, warehouse receiptsystems and certification agencies. In contrast, business networks requireneither physical infrastructure nor highly skilledmanagement staff to function. Thelowmaintenancecostofbusinessnetworksmakesthemmoresustainableandallowsforshorttermexitstrategiesfordonors.

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innovative institution / intervention

Outputs Outcomes

A. Business development services

• Management training workshops that are specific to the needs of agribusiness and agro-industries

• Modules, case studies and other training materials that are specific to agro-industries

• Improved performance of agro-enterprises as measured by: increased sales revenue, increased profitability, increased market share, wider range of products and services offered

B. Business incubators for agro-enterprises

• Programmes designed to accelerate the successful development of start-up and early-stage agro-enterprises

• Increased likelihood that a start-up agro-enterprise will stay in business for the long term

C. Agro-industry research and technology parks

• Investment in research and technology parks that house established agro-enterprises and government or university labs

• Increased production efficiency and improved technology transfer

• More agro-industries located closer to source of raw materials

D. Warehouse receipts systems for agricultural commodities

• facilities that guarantee the quantity and quality of a particular agricultural commodity being stored within an approved facility

• high income for farmers as they capitalize on higher off-season prices

• decrease in seasonality of agricultural prices

E. Contract farming and out-grower schemes that integrate farmers into the agricultural value chain

• Increased use of contract farming to coordinate linkages between farmers and agribusiness firms

• agro-enterprises providing services to smallholder farmers

• Tighter coordination of supply chains

• higher income for smallholder farmers

F. Commodity exchanges for agricultural commodities

• exchange where various agricultural commodities and derivatives products are traded

• efficient trade of agricultural commodities

• linkages between domestic, regional and international markets

G. Certification agencies for agricultural products

• Institutional mechanisms to ensure traceability and certification of agricultural products

• Increased premiums for high quality products

• Increased consumer confidence in value-added agricultural products

taBLE 2.4

Innovative institutions for agro-industry development


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The second distinguishing feature of networks is that they can be very effectivein supplementing investments inother institutional innovations. Indeed, it canbearguedthatalltheotherinstitutionalarrangementsoutlinedinTable2.4bearsomeaspectsofbusinessnetworks,whetherbydesignorasaby-product.Itisthereforeprudent for development practitioners and policy-makersworking on any aspectof agro-industry development to understand how business networks function, andhowtheirexistinginterventionscanbenefitbyintegratingandformalizingkeystakeholders into networks. Described in the next section, the case study of theSeedsofDevelopmentProgramillustrateshowbusinessdevelopmentservicescanbepairedwithabusinessnetworktoenhancethecompetitiveadvantageofSMEseedcompaniesinEastandSouthernAfrica.

2.6 Case study of the Seeds of Development Program

This section illustrates the concept of a business network through the Seeds ofDevelopment Program (SODP), an innovative programme designed to improveaccess to appropriate and affordable seeds for low-income smallholder farmersthroughmanagementtrainingforsmall-tomedium-sizedlocalseedcompaniesinEastandSouthernAfrica2.Established in2003,SODPisanawardwinningprojectthathascreatedabusinessnetworkof30locallyowned,emergingseedcompaniesoperatingineightAfricancountries(Kenya,Tanzania,Uganda,Zambia,Zimbabwe,Malawi, Mali andMozambique). SODP operates through a business network forselectedseedcompaniesthatservesmallholderfarmersinAfrica.ThelistofcurrentlyactivemembersoftheSODPNetwork,showingthebroadgeographicalcoverageofthenetwork,isgiveninTable2.5.

SODPseekstoalleviateruralpovertythroughimprovedaccesstoappropriateseedvarieties.This goal is accomplished through a business development service andnetworkingprogrammeforsmalltomedium-sizedseedcompanies,complementedbymarketanalysisofdomesticseedindustries.ThespecificobjectivesoftheSODPareto:

Z buildthemanagementcapacityofsmall-tomedium-sizedlocalseedcompaniesinordertoimprovetheirmarketdeliverysystemsforlow-incomefarmers;

Z create platforms for networking among African seed companies, researchinstitutions and other seed industry stakeholders, to improve the former’seffectivenessinmeetingtheneedsofsmallholderfarmers;

2 The author of this chapter is also the founder and coordinator of the Seeds of Development Program. As such, data and information relating to the programme is presented herein without citation because it is primary data gathered by the author in managing the network. Annual monitoring and evaluation (M&E) reports of the programme are available upon request. More information about the programme is available online at http://sodp.marketmattersinc.org/

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Z conduct research on the seed industry that will guide the strategies of locally-ownedseedcompanies serving resource-poor farmers,andalso informpublicpolicy.

The programme is coordinated by a not-for-profit organization, Market MattersInc., (with offices in the USA and SouthAfrica) and works in collaboration withthe Emerging Markets Program at Cornell University and other seed industrystakeholders.

Small-andmedium-sizedseedcompaniesthatservesmallholderfarmersinAfricaare carefully selected to become members of a Fellows Program. The FellowsProgramconsistsoffivemajorcapacitybuildingandnetworkingactivitiesdescribedbrieflybelow:workshoptraining,distancelearning,fieldvisits,seedtradingforum,andstudentattachments.SODPfullysponsorstheparticipationofonepersonfromeachFellowcompanyattheseevents;thecostsofanyadditionalparticipantsarecoveredbythecompany.

Workshop training: Each year, selected managers from the participating seedcompanies attend the ‘Making Markets Matter’ workshop in Stellenbosch, SouthAfrica.Inadditiontothegeneralagribusinessmanagementtrainingreceivedby all workshop participants, seed industry fellows participate in specializedactivitiesandsessionsdesignedexclusivelyfortheseedindustry.Startingin2006,anadditionalworkshopexclusivetoseedcompanieshasbeenadded.

Distance learning: Management modules suitable for the seed industry areprovidedtoFellowsbasedonidentifiedneeds.Fellowsarekeptup-to-datewithnewdevelopmentsintheglobal,regionalanddomesticseedindustrythroughane-maillistservice.

Field visits: Fellows are awarded travel grants to allow them to visit successfulseedcompaniesinacountryoftheirchoicetolearnaboutrelevantaspectsofseedproductionandmarketingandtoexplorebusinessopportunities.

Seed trading forum: Every year between harvest and the next planting season,SODP brings together managers from participating companies to network andexploreopportunitiesforseedtradingandothercollaborativeinitiatives.

Student attachments: Aspartofitscapacitybuildingeffort,SODP,incollaborationwith the EmergingMarket Program atCornellUniversity, facilitates attachmentsforuniversitystudentstoaddressspecificmanagementandmarketingchallengesfacingFellowcompanies.


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Company Location

1 agri Seeds and Services harare, Zimbabwe

2 drylands Seeds limited Nairobi, Kenya

3 fIca Seeds Kampala, Uganda

4 freshco Seeds ltd Nairobi, Kenya

5 funwe farm ltd Blantyre, Malawi

6 fuso Kaba Bamako, Mali

7 harvest farm Seeds Kampala, Uganda

8 hygrotech lusaka, Zambia

9 Kamano Seeds lusaka, Zambia

10 leldet ltd Nairobi, Kenya

11 MRI Seeds lusaka, Zambia

12 NaSecO, ltd Kampala, Uganda

13 Oil crop development Nairobi, Kenya

14 Pristine Seeds harare, Zimbabwe

15 Progene Seeds harare, Zimbabwe

16 Seed–Tech Blantyre, Malawi

17 Qualita Seeds chimoio, Mozambique

18 Semente Perfeita chimoio, Mozambique

19 Suba agro Trading arusha, Tanzania

20 Tanseed International dar es Salaam, Tanzania

21 Tropical Seeds (Nhimbe Seeds) harare, Zimbabwe

22 Victoria Seeds Kampala, Uganda

23 Western Seeds Nairobi, Kenya

24 Zanobia Seeds arusha, Tanzania

taBLE 2.5

list of current sodp network members

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2.6.1 Background to the sodp: agriculture and seed systems in africa

About70percentofsub-SaharanAfrica’spopulationliveinruralareas,wherethemainsourceof livelihoodsisagriculture.Agricultureisthemainstayofmosteconomiesinsub-SaharanAfricaasitcontributesto70percentofemployment,33percentofGross Domestic Product (GDP), and 40 percent of export earnings.Agriculture’scentral economic role makes its development and growth a key component foroveralleconomicgrowthandtheeradicationoffoodinsecurity.

African agriculture is characterizedby lowproductivity.While inWestAsia cerealyields grew by about 2.3 percent per year in the past two decades, cereal yieldsin sub-Saharan Africa were practically stagnant (FAOSTAT, 2009). Furthermore, in the last four decades less than 40 percent of the gains in cereal production inAfricacamefromincreasedyields(FAOSTAT,2009).Themajorityoftheincreasedproductionwasaresultoftheexpansionofcultivatedland.

Thislowagriculturalproductivityhasbeenattributedtoahostoffactors,including:the range and intensity of biophysical constraints to plant growth, large agro-ecological variation, the absence of policies that encourage crop improvement,very lowanddecliningsoil fertility,andtheunderdevelopedstateofseedsectorsinmostcountries(DeVriesandToenniessen,2001;Nkonyaet al.,2005). Increasedproductivityintheseagrariansystems,complementedbyimprovedaccesstobothinputandoutputmarkets,iskeytoreducingpovertyandimprovingfoodsecurity.PioneeringAfrica’s ‘GreenRevolution’requires increaseduseofhigh-yieldingcropvarietiesthatcansurviveharshterrainsandrecurrentdroughts.

The seed sector in sub-Saharan Africa is dominated by informal supply systemswith farm-saved seeds accounting for approximately 80percentof planted seeds,compared with a worldwide average of 35 percent (Bay, 1998; Scowcroft andScowcroft, 1999). This informal seed supply system is characterized by on-farmproductionofself-pollinatednon-hybridcropsandadistributionsystem limitedtobartertradeandsalesinlocalmarkets.Improvingsmallholderfarmers’accesstonewhigh-yieldingvarietiesandhybridcropsrequiresbettercoordinatedmarketingeffortsandexpandeddistributionsystems.

Since themid-1970s, sub-SaharanAfrica governments and thedonor communityhave“recognizedthecriticalroleofseedinagriculturaltransformationandbegunto provide substantial support for seed system development” (Maredia andHoward,1998).Manyof those investmentswere inexperiment researchstations,public certification boards and parastatalswith an exclusivemandate to produceand market seeds. Initially, the research and extension system was geared toaddresstheneedsofthecommercialsectorandwaslaterbroadenedtocoverthesmallholdersector.Likemostothergovernmentparastatals,theseinstitutionswerebureaucratic, inefficient, and subject to volatile government budget restrictions


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(Bay, 1998). Consequently, they offered a limited range of seed varieties andinconsistent seed quality to smallholder farmers (Maredia and Howard, 1998). WiththepossibleexceptionofhybridmaizeinSouthernAfrica,“sustainedadoptionofimprovedvarieties”bysmallholderfarmershasbeenlimited.(Rusike,HowardandMaredia,1997;ChristouandTwyman,2004).

Thederegulationofseedmarketsintheearly1990s,undertheEconomicStructuralAdjustment Programs initiated by the International Monetary Fund/World Bank,ended state-ownedmonopolies in seed production, marketing, and distribution. As a result, multinational companies and domestic SMEs entered these newlyaccessible markets, each serving different segments. Because of the highlyheterogeneous nature of smallholder farmers and the diverse agro-ecologicalconditionstypicalofsub-SaharanAfrica,thelargemultinationalcompaniestargetthemostattractivemarketsegments,suchaslarge-scalecommercialfarmerswhopurchaseseedinbulk.SMEseedcompaniesprimarilytargetnichemarketsmostlymadeupofsmallholderfarmers.Recentresearchindicatesthatsmallholderaccesstoimprovedvarietieshasworsenedinanumberofcountriesfollowingthereform(MarediaandHoward,1998;Mtolera,2001).

2.6.2 the rationale for intervention

Because of their size and market orientation, small- to medium-sized emergingseedcompanieshavea‘potentialcompetitiveadvantage’inmeetingtheneedsofsmallholderfarmersinAfrica.Thereasonsforthispremiseareasfollows:

Z First, most SME seed companies’ primary market is smallholder farmers, whoaccountfor60–80percentoftheirseedsales.

Z Second, most SME seed companies are located in close proximity to theirmarket tominimize transportation costs.Consequently, the companies are inclosecontactwithsmallholderfarmersandthusbestpositionedtounderstandlocal agro-ecological and socio-economic conditions affecting the farmer. Duringtherainyseason,whenroadinfrastructureisfurthercompromisedbythewetconditions,proximitytomarketsiscriticaltoensuringtimelyavailabilityofagriculturalinputs.

Z Third, the diverse agro-ecological and social conditions in African countriesminimizeanyeconomiesof scale that favour largecompanies inEurope,Asia,andtheAmericas.Thehighlyfragmentedmarketfavoursnichemarketing.

Z Fourth, because of relatively low overheads, SME seed companies are able toproduceandsellseedatalowerper-unitcostthanlargercompanies.InUganda,theentryofSMEseedcompaniesintotheindustryhasloweredtheaveragepriceofhybridmaizeseedfromaboutUS$2perkilogramtoaboutUS$1.2perkilogram

Z Lastly,themacroeconomicenvironmentinAfricaishighlydynamicandchangesdrastically across countries. These conditions favour smaller companies withlocalorientationthatcanchangemorequicklythanlargeMNCs.

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Despitetheseadvantages,emergingdomesticSMEsfacesomecompetitionfrom(a) formerly subsidized government parastatals that have been privatized and (b)largeMNCsthathaveenteredthemarket.Additionally,theyhavelimitedfinancialandmanagerial resources and are oftenobstructedby complex andbureaucraticlegalframeworks.Asinfantsintheindustry,small-tomedium-sizeddomesticseedcompanies need assistance in establishing a solid financial base and developingmanagementcapacity.Table2.6presentsaChangeto:SWOTanalysis(Strengths,Weaknesses,OpportunitiesandThreats)ofatypicalSMEseedcompanyoperatinginEastandSouthernAfrica.

internal strengths internal weaknesses

1. Good working capital from the ‘alliance for a Green Revolution in africa’ (aGRa)

2. Well-established distribution system

3. Intimate knowledge of local market dynamics

4. low overhead costs

5. locally adapted seed varieties

6. Good working relationship with government and development institutions

7. flexible and adaptive to dynamic environment

1. Over-reliance on out-growers for seed production

2. limited business management capabilities in operations (production, processing) marketing, financial and strategic management

3. limited or no product research and development (lack of in-house breeding programmes)

4. highly centralized management systems (one-man shows)

External opportunities External threats

1. Untapped 80 percent market potential of farmers not using improved seed

2. Opportunities for public–private partnerships

3. Progressive new pro-market governments

4. Stronger ties between seed companies and the government

5. harmonization of regional seed policies (market expansion)

6. New development initiatives supporting agricultural and seed enterprises

1. Very low adoption rate of improved seeds

2. Regulatory influences and government policy changes

3. Proliferation of fake seeds

4. absence of well-defined intellectual property rights

5. entry of large multi-national companies

6. Natural disasters such as droughts, pests and diseases

7. heavy reliance on non-governmental organization (NGO) market

8. harmonization of regional seed policies (increased competition)

9. hIV/aIdS

10.Unstable economic and political environments

taBLE 2.6

sWot analysis of a typical emerging seed company


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2.6.3 the sodp programme model

Theguidingtheory of changebehindSODPisthatinitiativesaimedatboostingtheperformanceofsmall-tomedium-sizedseedcompanieswillultimatelyimprovethesocio-economicconditionsoftheruralpoortheyserve.Thismodelofinterventionhasbecomethehallmarkofanewapproachtopromotingthedevelopmentofsmallenterprisesindevelopingcountries(OldsmanandHallberg,2002).

Strengtheningsmall-tomedium-sizedindigenousseedcompaniescanpromotefoodsecurityandpovertyreductionwithineconomicallydisadvantagedruralcommunities.Giventhat80percentofsmallholderfarmersinAfricausefarmer-savedseeds,thesizeandgrowthpotentialof thesemarkets isgreat.Sincesmall- tomedium-sizedseedcompaniesprimarilytargetsmallholderfarmers,supportprogrammesthat improveperformancewithin these companieswill result in timely availability of affordable,quality,andappropriateagriculturalbiotechnologiestoAfrica’sruralpoor.

2.6.4 performance indicators

The outcomes and successes of the Seeds of Development Program are mostvisible in the programme’s direct impact on participating companies.Monitoringand evaluation reports indicate thatSODP Fellows have experienced statisticallysignificant gains in the following areas: sales revenue, maize seed production,otherseedproduction,numberofvarietiesofferedandtotalvolumeofseedsales. Basedonabaselinesurveyconductedin2006,acomparisonofgrowth(asmeasuredbyannualsalesrevenue)betweenSODPcompaniesandtheindustryaveragesforEast andSouthernAfrica (excludingSouthAfrica) is given in Figure 2.1. In 2006,theprogrammewasawardedtheL.A.Pottsaward3 foran innovativeprogrammeshowing significant impacts on economically disadvantaged communities. Akeyelementofthecompanies’successliesinthecapacitybuildingandnetworkingprovided by SODP. Fellows consistently report that they value andmake use ofopportunitiestoexchangeinformationandexperienceswithotherseedcompaniesfrom the continent. Further, SODP Fellows have created numerous successfulbusiness deals. These collaborations not only include seed sales but also otherproducts,suchaschemicals/fertilizers,equipment,andgerm-plasmprocessesthatareessential to increasedprofitabilityof the seedcompaniesandproductivitybyruralfarmers.Inshort,theSODPnetworkallowsFellowstoexpandtheircontacts,participate in business deals they would not otherwise have access to, and gainexperienceinprovidingseedproducts/servicesindomesticand/orregionalmarkets.

3 In December 2006, SODP was awarded the L.A. Potts award for “an innovative programme showing significant impacts on economically disadvantaged communities” at the Professional Agricultural Workers’ Conference (PAWC) at Tuskegee University, Alabama, USA.

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$0

US$200 000

US$400 000

US$600 000

US$800 000

US$1 000 000

US$1 200 000

US$1 400 000SODP FellowsIndustry average

20062005200420032002

FIGURE 2.1 Average annual sales of SOdP Fellows vis-à-vis industry average

Through itssuccessfulworkwithAfricanseedcompanies,SODP’sbroader impactin smallholder farming communities has become visible. First, Fellow companiescreateadditionalemployment,asvirtuallyallcompanieshaveexperiencedgrowthandtheconcurrentneedforadditionallabour,theearningsofwhichinturnsupportimmediate and extended families. Company sales data also show that the bulkofsales(morethan80percent)arefromsmallholderfarmers.Byofferingawidervarietyofseeds,includinghigher-yielding,disease-anddrought-resistantvarieties,aswellasotherinputssuchasfertilizers,SODPcompanieshelpsmallholderfarmersincrease food security for their families and communities. Other performanceindicatorsforSODPFellowsaregiveninTable2.7.

Performance indicator (averages) 2003 2006 increase

Sales revenue US$450 370 US$1 232 112 174%

area under maize seed production 198 000 (ha) 448 000 (ha) 126%

area under other seed production 146 000 (ha) 312 000 (ha) 113%

Number of maize seed varieties offered 4.2 7 166%

Volume of total seeds sold 229 (M tons) 682 (M tons) 299%

taBLE 2.7

performance indicators for members of the sodp network


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2.6.5 Impacts of sodp networking

The opportunities available to Fellow companies through theSODP training andnetworking activities have enabled these small start-up companies to improvecompetitivenesscomparedwithestablishedmultinationalcompanies.Companiesin the SODP network have benefited from economies of scale, and have takenadvantage of their linkages to share information and develop jointmarket entrystrategies.From2009theyhavealsobeenpreparingfortheplannedharmonizationof regional seed trading regulations inEastandSouthernAfrica.Beloware someexamples of this collaboration in the following categories: formation of newenterprises,crossregistrationofvarieties,purchaseandsaleofseedsandequipment,sharingofinformation.

Z Attheseedtradingforumin2005,QualitaSeeds(Mozambique)negotiatedforanexportdealfromitsvegetableseedswithKamanoSeeds(Zambia),TanseedsInternational (Tanzania)FICASeeds (Uganda),FreshcoSeeds (Kenya)andMRI(Zambia).QualitaalsoagreedtodoseedproductionforZanobiaSeeds,andsetup a Macadamia nursery for Freshco. Finally,Qualita partnered withVictoriaseedstoimportvegetablesinbulkfromIndia.

Z FollowingafieldtriptoIndiain2006,fiveSODPFellowcompanies,representedbyJohnMakoniofPristineSeeds(Zimbabwe),negotiatedadealwithanIndianagrochemical company – United Phosphorus Ltd – to source seed treatingchemicals jointly, at lower prices than domestic suppliers. Buying in bulk alsoloweredtheperunitcostsofshippingandhandling.

Z FICASeedsLtd(Uganda)haspartneredwithPristineSeeds(Zimbabwe)tosupplyseedstoanunderservedmarketinMalawi.In2005,theyregisteredacompanycalledZUMSeeds (ZUMbeing ‘Zimbabwe,Uganda,Malawi’) which now sellsmaizeseedinMalawi.

Z PristineSeedsiscurrentlymarketingmanyofitsproductsthroughanotherfellowcompanyinZimbabwe(NationalTestedSeeds).

Z In2005,SubaAgro-Trading(Tanzania),arelativelysmallstart-upcompany,wonatendertosupplytheFoodandAgricultureOrganizationoftheUnitedNations(FAO)withonemillionUSdollars’worthofseeds.Unabletosupplysuchvolumefromitsownstocks,SubareliedonSODPFellowsinneighbouringcountriestomeet this demand.They received seeds fromWesternSeeds in Kenya (worthmorethanUS$60000),FICASeeds inUganda (US$85000)andVictoriaSeedsinUganda(US$65000).“Infact,withouttherelationswebuiltduringourSODPcoursethingscouldhavebeenverydifficultforus,”acknowledgesMrMuya,themanagingdirectorofSuba.

Z FICALtd (Uganda) isexpanding intohighly lucrativeregionalmarkets throughFreshco.Ltd(Kenya)andPristineSeeds(Zimbabwe).Havingapartnerinthesecountrieswillreducecostsandlegalbarrierstoentrybyregisteringthreevarietiesthroughlocalpartners.

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Z In 2006,WesternSeedCompany (Kenya) exported 250 tonnes of sorghum toTanzania through another SODP Fellow, Suba Agro-Trading. They are alsoexploringopportunities toexport someof theirOpenPollinatedVariety (OPV)maizevarietiestoZimbabwethroughPristineSeeds.

Z ZenobiaSeeds(Tanzania)istakingadvantageofitslargeandwellisolatedfarmtoproducemaizeseedforanotherlocalSODPFellow,SubaAgro-Trading.Thetwocompaniesenjoysomeeconomiesofconglomerationbysharingseedprocessingandstoragefacilities.

Z Pristine Seeds (Zimbabwe) has sourced seed processing equipment from a Zimbabwean supplier for Western Seed Company (Kenya). Pristine alsofacilitatedregistrationofWesternSeedCompanyvarietiesinZimbabwe.

2.6.6 sustainability and exit strategy

TheorganizationandstructureoftheAfricanseedindustryare importantfactors,ifnotdeterminateones,thatinfluencethesustainabilityandexitstrategyofSODP.In the long term, two likely scenarioswill ensure that the network survives afterthewithdrawalofdonorsupport–activeSeedTraders’AssociationsandstrategicalliancesamongFellowcompanies.

First scenario: Active Seed Traders’ Associations

OneofthesalientfunctionsoftheSODPistoprovideanetworkingplatformforsmall-tomedium-sizedseedcompaniesinEastandSouthAfrica.Theemergenceoflocalandregionalseedtraders’associationsinmostofsub-SaharanAfricainthelastdecadeis seenas apositivedevelopment.Whilemostof these associationshave focusedlargelyonlobbyinglocalgovernmentstodevelopdesirableseedtradepoliciesandregulations,theyhavethepotentialtodevelopintoanetworkingplatformforvariousseedindustrystakeholders.Astheybecomemoreactive,SeedTraders’AssociationscouldreplacethenetworkingfunctionsofSODP.Forthisreason,SODPencouragesitsFellowstobeactivemembersof theseassociationsandnottoviewSODPasasubstitutebutratherasacomplementtothese.Wherepossible,SODPactivitiesareplannedtocoincidewithregionalSeedTraders’Associationmeetingstohelpbuildinstitutionsinthissector.However,itshouldbenotedthattheexistingassociationsdo not distinguish between the small- tomedium-sized seed companies and themuchlargermultinationals.This‘onesizefitsall’approachcouldpotentiallylimittheeffectivenessoftheseassociations,becausetheinterestsofthelargemultinationalsmaydifferandattimesconflictwiththoseoftheirsmallerlocalcompetitors.

Second scenario: Strategic alliances among Fellow companies

ThetrainingandnetworkingactivitiesofSODPhaveenabledthesesmallstart-upcompaniestocollaborateonvarietyregistration,marketresearch,staffrecruitment,equipmentprocurement, influencinggovernment regulations, and the facilitationofexports.WhileSODPcantakecreditforcreatingthenetwork,thecollaborations


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havebeen initiated, fundedandexecutedentirelyby theFellows. It is reasonableto expect that such collaboration will continue to expand and last beyond thelifespanoftheSODPinitiative.Forexample,sixSODPFellowshaveproposedtheformation of theUnitedAfricanSeedCompanies Pvt. Ltd (UASC) in preparationfor the harmonization of seed industry regulations in East and Southern Africa. Underthisarrangement,eachparticipatingcompanywouldcontinuetooperateasanindependententitywhileinvestinginajointcompanythatwilloffereconomiesofscaleplusthebenefitsofmultipleproduction,processingandmarketingfacilitiesto small- and medium-sized seed companies. Such strategic alliances amongFellowcompanieswillguaranteesustainabilityoftheSODPinitiative indeliveringappropriateseedvarietiesataffordablepricestosmallholderfarmers.

2.7 Developing business networks for SMEs

Thissectiongivesguidancetodevelopmentpractitionersseekingtoestablishandmaintainbusinessnetworkswiththegoalofsupportingagro-industriesindevelopingcountries.Thesectionisdividedintothreeparts.FirstaresomekeylessonsforSMEbusiness networking drawn largely from the SODP case study discussed above.Second isa summaryofkey steps involved in thedevelopmentofSMEnetworksbased mostly on guidelines from the United Nations Industrial DevelopmentOrganization(UNIDO).Lastisanexaminationoftheroleofgovernmentsinfosteringbusinessnetworks.

2.7.1 lessons for sme business networking

Based on the case study of SODP, observing other networks and following theliterature on the subject, this section shares some of the valuable lessons thatare critical to establishing and maintaining successful SME business networks.Recognizing that every business network differs in its objectives, membership,modus operandi,andthemacroenvironmentinwhichitfunctions,thelessonsaretobetakenonlyasguidingprinciplesandnotgoldenrules.Box2.1outlinesthetoptenlessonsofbusinessnetworking(listedinnoparticularorder).

2.7.2 steps to developing sme networks

Despite their numerous advantages, business networks are difficult to establishandmaintain,especially forSMEs.This sectionoutlinesa step-by-stepprocessofdevelopingSMEnetworks.TheprocessismostlybasedonguidelinesfromUNIDOentitled‘DevelopmentofClustersandNetworksofSMEs’(UNIDO,2001).Toprovidecontext,anexplanationof theUNIDOterminology isappropriate.UNIDOdefinesclusters as “sectoral andgeographical concentrationsof enterprises thatproduce

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1. The network belongs to its members: From the start, it is important for members of a

business network to feel a sense of ownership of the institution. Every major decision

about the structure and direction of the network should be made in full consultation

with members. Whenever possible, conflicts should be resolved through a democratic

voting process.

2. The enterprise, not the owner or manager, is the member of the network: Due to

high employee turnovers for enterprises in developing countries, it is important to

extend membership to the entire firm and not to individuals. This also allows various

managers and staff within the enterprise to participate in the network. Staff turnovers

are less likely to affect the functioning of the network.

3. Make use of information and communication technologies: Regular communication is

vital for the functioning of a business network. Network coordinators can facilitate

communication among members through modern information and communication

technologies such as: network web sites, e-mail list servers, online working groups or

group-hubs, Twitter, newsletters, and short messaging systems (SMS).

4. Face-to-face meetings among members are important: Despite the widespread use

of information and communication technologies, face-to-face meetings are still

important to establish trust among members. There is no substitute for a handshake.

5. Membership should be exclusive: One value to being a member of a business network

is its exclusivity. If anyone can join the network, this value is eroded. Every business

network should have clearly-defined eligibility criteria and/or a selection process for

membership.

6. Pay attention to group size: The network should be big enough to create opportunities

for its members. However, there may be some diminishing returns to size

(e.g. coordination problems, reduced exclusivity).

7. All members of a network are equal: Given heterogeneity among network members,

it is often tempting to create subgroups or division within the network. However, this

can result in some stratification or ranking of members which can hinder networking.

8. Coordinators should remain neutral arbiters: Network coordinators will often be

called upon by its members to intervene in conflicts or moderate transaction between

members. In such cases, they should remain as neutral mediators and not take any sides.

9. Business networks are dynamic: Networks should evolve to meet the ever changing

needs of their members and adapt to the macroenvironments within which they operate.

10. Develop a code of ethics: A code of ethics, agreed upon by all members, should set the

minimal standard of expected behaviour among network members. This minimizes

transaction costs and reduces internetwork conflicts resulting from opportunistic

behaviour by some members.

box 2.1 Top ten lessons for SmE business networking


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and sell a range of related or complementary products and, thus, face commonchallengesandopportunities”.Itdefinesnetworksas“groupsoffirmsthatcooperateonajointdevelopmentprojectcomplementingeachotherandspecializinginordertoovercomecommonproblems,achievecollectiveefficiencyandpenetratemarketsbeyondtheirindividualreach”(UNIDO,2001).

Basedonasolidtrackrecordofdevelopingandmaintainingclusters,UNIDOdesigneda methodology for the formulation and implementation of cluster developmentprojects.Aspublishedontheirwebsite,theclustersandbusiness linkagesunitofUNIDO follows a five step approach to promote clusters (UNIDO, 2009). Below, thesamefivestepsareadaptedforthedevelopmentofSMEnetworkprojects:

1. Network selection: This first step involves the careful selection of a businessnetwork based on the primary objectives of the development practitioner. Itshouldbeclearatthisstagewhetherthenetworkwillbevertical(alongasupplychain),horizontal(similarlevelplayers),orcrosssectoral(withinabusinesscluster).

2. Diagnostic study: The second step involves conducting a rigorous diagnosticstudyofthebusinessnetwork.Severalframeworkscanbeusedtostructurethisanalysis.Thekeyfactorsaffectingtheindustrycanbeidentifiedusinga‘PEST’analysis (Political/Legal, Economics, Social/Demographic, and Technologicalfactors).Porter’sfiveforcesmodel–entryofcompetitors,threatofsubstitute,bargainingpowerofbuyers,bargainingpowerof suppliers,and rivalryamongtheexistingplayers–canbeusedtoevaluatetheattractivenessoftheindustry.ASWOTanalysiscanbeusedtoevaluatetheinternalStrengthsandWeaknessesandExternalOpportunitiesandthreatsofthenetwork.

3. Vision building and action planning:This thirdstepentails the formulationofavisionandacorrespondingdevelopmentstrategysharedbytheentirenetwork.Eligibilityorselectioncriteriaforthenetworkaresetatthisstage.

4. Implementation:Thisfourthstepreferstothemanagementandcoordinationoftheactivitiesoutlinedintheactionplan.Itcanbebrokendownintofivestepsasfollows:a. Promotionalandmotivationalactivitiesofpotentialnetworkpartnersb. Assistanceinstrategicplanningofnetworkactivitiesc. Pilotprojects(usuallyshort-termactivitiestopromotetrust)d. Strategicprojects(longer-termandofamorestrategicnature)e. Self-managementofthenetwork

5. Monitoring and evaluation:Thisfinalstepreferstotheongoingtaskofmonitoringandevaluatingbothqualitativeandquantitativeoutcomesofthebusinessnetwork.

2.7.3 role of the state in fostering business networks

Literatureonthestate’sroleinnetworkdevelopment,boththeoreticalandempirical,isratherscant.Whatexistsinsteadisawideplethoraofstudiesexaminingthebroader

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questionofhowgovernmentpolicyandactionaffectstheperformanceofanindustry.Based on this literature, the consensus is that government is critical in providingsuitable macroeconomic conditions, improving microeconomic capacity, andestablishingasupportiveandprogressiveregulatoryenvironment.Forbrevity, thisliteratureisnotreviewedhere.Insteadthissectionlimitsthediscussiontomeasuresthatarespecificallydesignedbygovernmenttopromotebusinessnetworks.

Recognizingthatthesocialbenefitsofabusinessnetworkmaybesubstantialwhiletheprivatecostsforsomeparticipantsmayexceedprivatebenefits,itfollowsthatgovernments and development agencies should play a role in the formation andmaintenanceofnetworks.AccordingtotheUnitedNationsEconomicCommissionforEurope’s(UNECE)recentreport,Enhancing the innovative performance of firms: policy options and practical instruments, public intervention can help in addressingissuesthatemergeatvariousstagesofthenetworkingprocess,inparticularregarding:

Z awarenessofanetworkingpossibility; Z searchforpartners; Z buildingtrustandasharedknowledgebase; Z organizingthenetwork; Z ensuringcomplementaryresources;and Z activecooperationintheactivitiesofthenetwork(UNECE,2009).

Thesamereportconcludesthattherearefourkeylessonsfromrecentpractice inpublicprogrammessupportingnetworks:

Z Presence of a formal organizational structure:This is meant to encourage theformation of a long-term sustained relationship that supports mutual trust.Informationalresourcescanbeprovidedbythepublicsectortopromotethesestructures,butconcretearrangementsshouldbelefttotheparticipants.

Z Bottom-up support: Programmes that support existing or emerging self-organizing networks (a bottom-up approach) tend to give better results thanthosethatreflect‘top-down’technologicalpriorities.

Z Long-term: Building trust takes time; longperiodsof support and institutionalstabilityareessential.Insufficientcoordinationofinitiativesandavolatilefundingandinstitutionalsettingareparticularlydamagingfornetwork-orientedpolicies.

Z Tailor-made: Programmes need to take into account the different needs,incentives and capabilities of participants. This implies, for example, payingparticularattentiontotheneedsofSMEs(UNECE,2009).

Foradifferentperspectiveonthegovernment’sroleinfosteringbusinessnetworks,one can adapt a framework designed by Porter (1998) on how governmentscan facilitate and upgrade cluster development and create opportunities forbusiness networking. Replacing the word ‘clusters’ with ‘networks’ in Porter’srecommendations,thefivekeygovernmentfunctionsinfosteringbusinessnetworkareto:


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Z playaroleas‘broker’,‘facilitator’,‘initiator’,‘participant’and‘listener’toengagepartnersinaproductivedialogueandcreateasenseofurgencytocauseaction;

Z conductongoingnetworkassessmentstodeterminetheirviabilityandrelativestrengthtoensureglobalcompetitiveness;

Z institutionalizenetworkupgrading,e.g.restructuringgovernmentprogrammesand services, diffusing new knowledge, and collecting and disseminating data/informationbyclusters;

Z directly invest inandprovide investment incentives for technical,physicalandknowledgeinfrastructure;

Z sponsor business network conferences and fora to promote ‘social capital’opportunitiesforparticipants(Porter,1998).

Again, it is important to emphasize that the diversity of networks in theirmemberships, goals, structure, socio-cultural context, and the micro andmacroenvironments inwhich theyoperate,makeeverybusinessnetworkunique.Assuch,any lesson learned fromothernetworksmustbecarefullyadaptedtofitlocalconditionsandagenda.Tothisend,governmentsmustbeflexibleinadaptingtheirinterventionsaccordingtothedifferentneedsofeachnetworkandbewillingtochangeacrossspaceandtimeasconditionschange.

2.8 Conclusions

This chapterexplored theuseofbusinessnetworksasan innovative institution tosupport the development of agro-industries. The concept of a business networkwas explored within the micro and macroenvironments facing agro-industries. Thiswasfollowedbyananalysisofthetheoreticalbasisofabusinessnetworksandwhy they are especially important for agro-industries. Comparisons were madebetweenbusinessnetworksandotherinnovativeinstitutions,showinghownetworksaremuchcheapertodevelopandcanbeusedtosupplementotherinstitutions.Toillustratetheconceptofanagro-industrynetworkindevelopingcountries,thecasestudy of the Seeds of Development Program, a network of thirty emerging seedcompaniesinnineAfricancountries,wassummarized.ThecaseoftheSODPillustratesthatbusinessnetworkshaveanenormouspotential todevelopagro-industries forSMEs in developing countries. More importantly, when used in conjunction withothertools–suchasbusinessdevelopmentservices,incubators,agribusinessparks,warehouse receipts and contract farming – the effectiveness and contribution ofbusinessnetworkstothedevelopmentofsuccessfulSMEsmaybeevengreater.

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cHapter 3public–private partnerships for

agribusiness development in thailand and India:

experiences, issues, and strategies

3.1 Introduction

Agricultural development is key to economic development in many developingcountries, especially India,where a large proportion of its population still relies onagriculture, directly or indirectly, for its livelihood. A strong agricultural sector isessentialtopovertyreductionandsocialprogress.Agriculture is importantnotonlyfor food security: it is also important because of the employment opportunitiesit offers, and also for other sectors of the economy because of demand-sideimpacts. Additionally, its role in environmental sustainability is paramount. Yettheconditionsunderwhichagriculturaldevelopmentneedstobeachievedhavechanged in the last decade in India, due to the opening up of domestic markets,liberalizationofdomesticpoliciesunderitsStructuralAdjustmentProgram(SAP),andtheinclusionofagriculturaltradeundertheWorldTradeOrganization(WTO)remit.

Given the change in trade structures as a result of global value chains andoutsourcing(andAsiahasbeenaffectedperhapsmorethananyotherregioninthisregard), there has been a corollary double shift, first in the composition of tradeand second in the poles ofworld trade. In the composition of commodity trade,therehasbeenamoveawayfromagriculturalproducts(foodandagriculturalrawmaterials).Theseusedtoaccountfornearly50percentofexportsin1960;in2001that figure had dropped to just 7 percent.There has also been a correspondingincrease in exports of manufactured goods – from less than 20 percent in 1960to almost 70 percent in 2001 (The United Nations Conference on Trade andDevelopment, UNCTAD, 2002; UNCTAD, 2004). Exports of food and agriculturalraw materials have, therefore, steadily become less and less important in theexportsofdevelopingAsiancountries.Alargepartofagriculturaltradeisbetween


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similarly-developedcountries(e.g.70percentofdevelopedcountrytradeiswithinthe developed world), yet intra-developing country trade has also grown, fromaround 23 percent in 1965 to around 40 percent in 1995. In 2001, 41.5 percentof exports in developing Asia were to developing Asia itself (UNCTAD, 2004). Inmiddle-tolow-incomecountries,growthofincomeleadstoagrowthindemandfor agricultural commodities,more than indevelopednations.Thishasbenefitedeconomiesthatmainlyexportagriculturalcommodities.

However,thecompetitivenessofcerealandlivestockproductioninIndiahasbeenlow.Furthermore,tradeinprocessedandhigh-valuefoodproducts isexpandingrapidly (80 percent of total) at the cost of raw materials and commodities. Trade in processed food products is concentrated in a few countries, with 30 developed nations accounting for 84 percent of processed food imports. This trading is also increasingly ‘intra-industry’, i.e. a country simultaneouslyimports and exports close substitute products. Market concentration in foodprocessing industriesand retailing isalso increasing: forexample,80percentofmeatandsoyabeanprocessingintheUSAisdominatedbyonlyfourfirmsineachindustry.Overall,itisclearthatinternationalagritradeisincreasinglyoligopolistic.

Thereisalsoincreasingconcentrationwithinglobalvaluechainsaccompaniedbyincreasingly toughpublic andprivate (collectiveandcompany)product,process,and social standards, such as Sanitary and Phyto-Sanitary measures (SPS),GlobalGAP(‘GoodAgriculturalPractices’–formerlyknownasEUREPGAP,referringtostandardsoffoodproductionlaiddownbytheAssociationofEuropeanRetailers),organicfarmingandfairtrade.Thesetrendsleadtohighercostsofcompliancetostandardsinexportingcountries,bothforexportersandprimaryproducers.

Finally,thecontextofagriculturaldevelopmenthaschangedatthenationallevel,with demand for high value products growing nationally and globally, growingtechnologicalandinstitutionalinnovationsinthefaceofincreasingpressuretobecompetitive, redefinitionof theroleof thestate inagricultureprovidinggreaterscopeforprivatesectorinvolvement,andtherisingscopeandpowerofcivilsocietyorganizations given the background of state and market failures. As a result, thenewagricultureismarketdriven,stateassisted,influencedbycivilsocietyandgroundedintechnologicalandinstitutionalinnovations(WorldBank,2007).

Major problems of small and marginal farmers in India include spurious inputsupply, inadequate and costly institutional credit, lack of irrigation water andcostly access to it, lackof extension services for commercial crops, exploitationinmarketing of their produce, high health expenditure, and lack of alternative (non-farm) sources of income (Dev, 2005). Employment, which is the only wayto raise these farmers’ incomes, is low in these fields because of the limitedemploymentelasticityofoutputresultingfromincreasingmechanizationandthekindofcropsbeinggrown(MullerandPatel,2004).

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Public–private partnerships for agribusiness development in Thailand and India: experiences, issues, and strategies

The policy and development regime characterized by the diminishing role of thestateasanagentofdevelopment,and theexpanding roleof themarket (privateentities)andcivilsocietyorganizations,makes leveragingthestrengthsofprivateandcivil societyactorsmore relevant. Italsohelpsavoid the state in termsof itsoverwhelmingpresence,whichattimeshasbeencounterproductivetodevelopmentandpovertyreduction.

There is an increasing corporate interest in agriculture in India.This has largelyresulted from the policy focus on the role of the private sector in agriculturaldevelopment, in the guise of free markets combined with Public–PrivatePartnerships(hereafterPPPs).ThischapterexaminestheextentandnatureofPPPsinIndia.SectiontwofocusesontheconceptanddimensionsofPPPs;sectionthreediscussestheinternationalexperience,mainlyThai,ofPPPs;sectionfourfocusesontheIndianexperience;sectionfiveoutlinesthemainconstraintsontheexpansionofPPPsinagribusinessanditspotentialinIndia;sectionsixsuggestsmechanismsforpromotingmeaningfulPPPs.Sectionsevenconcludesthechapter.

3.2 PPPs in agribusiness

PPPs refer to a “working arrangement based on mutual commitment (over andabovethatimpliedinanycontract)between/amongpublicsectororganization/sandanyorganization/soutsidethepublicsector”(Bovaird,2004).Thepartnershipscancomeindifferentsizesandshapes(Hihorstet al.,2007).Thenatureofpartnershipcan be sectoral in terms of public sector agencies partnering with the privatesector,civilsociety,Non-GovernmentalOrganizations(NGOs)oracombinationofthese.Further, itcanberelational,rangingfroma loosenetworktocollaborative,power-sharing,consultativeorcontractualarrangements.Intermsoftheeconomicaspectitcanbesupply-sideoriented,demand-sideoriented,ormixed.Thescopeofpartnershipcouldbevertical,horizontal,oracombinationofboth.

The reasoningbehind thisparadigmofagriculturaldevelopment comes from thefollowing:

Z Financialconstraintsinthepublicsector/state,resultingina‘marriageformoney’bythestateorpublicagencies.

Z Management expertise in the private sector – the private sector offers ‘valueadded’ contributions, such as technological development and dissemination,farmingsysteminnovations (e.g. intensification,diversification)andmarketingexpertise.

Z In agricultural economies, especially where smallholders dominate, farmerorganizationsmayalsodrivetheformationofPPPsfortheirmutualbenefit.

Z Similarly, natural resourcemanagement, and sustainability and safety issues insoil,waterandfood,canbringpartnerstogethertominimizelossofresourcesor


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toconserveorregeneratethemforbetterproductivityandqualityproduce.Foodquality improvement for export and domestic markets – which has become aprerequisiteforparticipationinglobalandnationalmarketspost-WTO–isanotherimportant impulse for such partnerships.These require not only large financialresources, but also scientific and managerial expertise to fully understand themarketstheywishtosucceedin.GrowthofsupermarketvaluechainsasaresultofForeignDirectInvestment(FDI)intheretailsectorsofmanydevelopingcountries–bothfordomesticconsumptionandforexport–isalsodrivingsuchpartnerships.

Z Theemergenceofbiotechnologyasameansofpro-poorgrowthhasalsodrivenmanyPPPs,especiallyinagricultureandfoodprocessing.

Z Linking up smallholders with modern markets, which requires competitivemarketingskillsandeffectiveextension,isanotherreasonformanypartnerships.

Z More importantly, innovations in value chains are themost significant logicalreasonfortheadoptionofPPPsbymanydevelopmentprojects,becausetheseinnovationsrequirediverseresourcesandcapabilitiestotransformthemselvesintosuccessfulenterprises.

Z Thepushforruralpenetrationfromthebankingandagriculturalinputindustries,as seen in rural retail chains and contract farming (CF) projects in India andneighbouring countries, is also bringing various players in the banking andagri-input sectors together to their mutual benefit, given that thesemarketsrequirebundlesof servicesandproductswhich individualfirmscannotdeliver. Thisismademorecomplexbytheagriculturalslowdownandagrariandistressinmanypartsofthedevelopingworld,wheretheviabilityofsmallholdersisatstake.

ThepolicyobjectivesofPPPscouldbe:

Z improvementofproductivityandefficiency; Z empoweringclientsandthedisadvantaged;tacklingsocialexclusion; Z cost cutting and quality improvements via economies of scale, of scope, andmutualexchangesofknowledgeintermsofbestpractices,thefactorsrequiredtosucceed,andtheobstaclestoovercome;

Z provisionofmulti-actorintegratedsolutionssuggestedbythescopeandnatureoftheproblembeingaddressed;

Z movementawayfroma‘nowin’situationamongmultipleactorstoacompromiseandpotential‘win–win’situation;

Z promotionofabroaderoperationalizationof thepublicgood (BrinkerhoffandBrinkerhoff,2004).

MutualityachievedthroughPPPscanhelppartnerstocomeupwithnewideasandpropose new andmore effective approaches; this enables partners to contributewith fewer constraints and greater legitimacy. Partners can gain access to newskills, resources and information, andexpandandenhance the relevanceof theirprojectsandprogrammes(BrinkerhoffandBrinkerhoff,2004).Thepartnersinsucharrangements, besides public agencies such as state ministries and para-statalagencies,canbe:

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Z agribusinessenterprisesincludingagri-inputcompanies; Z extensionagenciessuchasagriclinicsandinputdealers; Z individuals such as contract farmers, master farmers, contact farmers, linkfarmers,farmerfriends;

Z farmercooperatives,associations,andgroups,waterusers’associations(WUAs),self-helpgroups(SHGs),farmerinterestgroups(FIGs),producercompanies;

Z NGOs; Z PanchayatiRajInstitutions(PRIs)underPublic–Private–Panchayatpartnerships.

3.3 International experiences of PPPs

There have beenmany experiments with PPPs in agricultural extension in LatinAmerican countries such as Chile, Mexico, Colombia, Venezuela and Nicaragua.Theserangedfrompuresubcontractingtoaprivateagency,towiderinvolvementoftheagenciesaspartners(Umali-Deininger,1997).TheAsianexperienceofPPPsincludesnon-timberforestproductsinNepal,inwhichDaburNepalcollaboratedwiththeMinistryofLocalDevelopmentandICIMOD(InternationalCentreforIntegratedMountainDevelopment)tocultivateayurvedicplantswithincommunities.Thisledtocommercializationofsevenhigh-valuemedicinalplantsthatDaburagreedtobuyback(Shakya,2005).InThailand,fruitsandvegetableshavebeencultivatedviaPPPsinvolvingtheTopsretailchain.InIndia,casesincludethatofHindustanUnileverLtd(HUL),Mahagrapes,agriculturalextensioninMadhyaPradesh,andCFinthestateofPunjab.InThailandtoo,CFhasbeenpromotedthroughPPP,andisthefocusoftheanalysisbelow.

3.3.1 contract farming in thailand

Thailand has the most extensive and the longest experience of CF in Asia. Itemergedmore than threedecadesago, initially inpoultry, sugarcane, tobacco,pineappleandvegetableproduction.Bytheearly1990s,CFwasestablishedintheproductionofthefollowingcrops/commoditiesinThailand:poultry,dairying,palmoil,pineapple, tobacco,sugarcane,kenaf,asparagus,maize,maizeseed,castoroil,eucalyptus,babycorn, cashewnuts, sunflower,bamboo,barley, seashrimp,cotton, tomato, tomato seed, rubber, gherkins, peas, string beans, silk worms,swine,asparagus,bambooshoots,ginger,mushroomandfragrantrice(KusakabeandHiguchi,1992;GossandBurch,2001).Bytheearly1990s,productionofcannedbaycorn,bambooshoots,tomatoesandvariousfruitswaslargelyundercontracts(Burch,1994).Bythelate1990s,almost100percentofcommercialproductionofpoultryinthecountry,especiallyforfrozenchickenexports,wasundersomeformofcontract(Burch,1994).Later,CFexpandedtovegetableseedsandcropssuchastomato(Saenjan,1998).


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The state and contract farming in Thailand

ThoughCFwasinitiatedinmostcasesbytheprivatesector,thestatesooncametoplayamajorroleinitsdevelopment,bothintermsofsettingbroadpolicydirectionsfordiversificationandunderwritingprivatesectoractivity,throughvariousinstitutionslike the Board of Investment (BOI), National Economic and Social DevelopmentBoard(NESDB),andAgriculturalLandReformOffice(ALRO).ThoughBOI,setupin1954andinitspresentformsince1977,hadnoparticularbrieftopromoteCF,thishasbeenan inevitableby-productof itsactivitiesgiven its involvement insectorswhichuseCF (Burch,1994).Besides, therearetwootherwingsof thestate–theMinistryofAgricultureandCooperatives(MOAC)andtheMinistryofFinance(MOF)–whichpromoteCFthroughtheirownagencies,i.e.theDepartmentofAgriculturalExtension (DOAE) and the Bank for Agriculture and Agricultural Cooperatives(BAAC),respectively(Figure3.1).

ItwasinitsfifthplanthattheNESDBaccordedhighprioritytoagribusinessforthefirst time,butonly in thesixthplanwasa lead rolegiven toprivateagribusiness,includingCFsystem(GossandBurch,2001).Analysingtheproductionandsaleofagriculturalproducts,thesixthplannotesandrecommends,“Contractfarminghasprovedviableandshouldbefurtherpromoted,onconditionthattheprovisionsofsuch agreements are amended to bemore effective and beneficial to all partiesconcerned” (NESDB,TheSixthNational Economic andSocialDevelopmentPlan,1987–91; 218). This plan focused on four-sector cooperation (agribusiness firms,farmers,state(MOAC)andfinancialinstitutions,popularlyknownasthe‘four-sector

Broker/Collector/Cooperative/Local Co.

(Direct)

State (BAAC and DOAE)

Farmer/Farmer group

CompanyVerbal

Seed/Inputs/Payments Seed/Inputs/Payments/Commission

Coordination and facilitation

Credit and extension

Produce Produce

Written

FIGURE 3.1 CF system in Thailand as PPPs

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cooperationplan’) forthepromotionofCFandagribusiness.Therationalebehindtheplanwastheneedtoharnesstheresourcesandskillsoflargeagribusinessfirms,andthemoreefficientwaysthesefirmshaveinreachingsmallfarmersandhelpingthemtolinkprofitablywithmarkets(Christensen,1992).

TheseventhplancarriedthispolicyonCFfurtherbymakinganexplicitmentionofitandseekingitspromotion.Itstatedundertheguidelinesforagriculturaldevelopment:

“Expand scopeof agricultural credit and encourage contract farmingbusiness byusingthefollowingmeasures:

Z Encourageagribusinesses,withthegovernmentasco-ordinatoramongvariousagricultural groups to co-operate with entrepreneurs in agriculture-relatedbusinessestohaveopportunitiesforcontractfarmingarrangements,andtohavejointinvestmenttoexpandandincreasethetypesofproductsofagro-industries.

Z Supervisecontractarrangementsbetweenagriculturalinstitutionsandbusinessentrepreneurstoensurefairnesstoallparties”(NESDB,TheSeventhEconomicandSocialDevelopmentPlan,1992–1996;36).

The only departure of the seventh plan from the sixth plan seemed to be itsemphasison‘group’contractingasopposedtoindividualfarmercontracts.ThereisnoexplicitmentionofCFintheeighthandtheninthplans.Nonetheless,individualdepartmentswerestillimplementingitontheground.Forexample,a1999orderoftheDepartmentofInternalTrade(DIT),whichissuedastandardCFagreementforcompaniesandfarmers,notonlysaidthatthatagreementshouldbeused,butalsospecifiedthatit(DIT)wouldregulatecontractcompliance.ItisadifferentmatterthatthestandardagreementdesignedbytheDITwasusedonlybyacoupleofcompanies,evenin2002,anditwasalsopoorlydesigned.Surprisingly,ithadnoclausesoninputsupplyandpaymentforinputs,orotherconditionsregardingthese,whichweresocrucialinsometypesofCFarrangements.Assuch,thestandardcontractwasmoreofanagreementaboutthebuyingandsellingofproducebetweentwoparties.

ThoughpermissionwasnolongerrequiredtostartCFinanyprovince,tobuildfarmerconfidencecompaniesoftenacceptedthehelpoftheprovincialagriculturalofficewhen contacting farmers for the first time.Some companies, such as River KwaiInternational(RKI),acknowledgedthesupportgivenbytheMinistryofAgricultureandCooperativesthroughitsDepartmentofAgriculturalExtension,andthatofferedbytheBankforAgricultureandAgriculturalCooperativesoftheMinistryofFinance(itmentionsthisonitswebsiteaswell).Infact,thiscompanywastheonlyonethatrecognizedtheroleofstateagenciesinitsoperations,asfollows:

1. Theextensiondepartmentsometimespromotestheproductionofsweetcornbybuyingseedfromacompanyandsellingittofarmersatasubsidizedprice. About10percentofthecompany’sfarmersreceivethisseedsupply.


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2. BAAC provides concessional credit to groups of farmers who work with acompany.The company gives a commitment to BAAC to buy these groups’produce and this works as a guarantee for loan. About 10 percent of thecompany’s growers make use of this credit facility. In fact, under the four-sector plan, companies can request special extension and credit assistancefromgovernmentforspecificcropsandareasofoperationwhenbudgetingisdoneforsuchprogrammeseveryyear.

TheMOAC through itsDOAEstill carriedout training inCF for farmersand localofficialsthatincludedaspectssuchas:guidelinesforimplementationofCF(i.e.typesofproductssuitableforcertainkindsofcontractingarrangement);familiaritywiththeCFsystem;supervisionofcontractarrangements;specialfinancialassistancetocompaniesundertakingCF;guidanceonimplementationoftheCFprojectintermsofcoordinationbetweenpublic–privatesectorsandchoosingfarmersandtheproduceto be contracted. Its guidelines even specified requirements before aCF projectwas undertaken, namely: farmer willingness and exposure to the concept ofCF, feasible standards of quality of produce, price flexibility, and production andmarketing plans. These guidelines assigned specific roles and responsibilities tofarmers, farmergroups, companiesandgovernmentagencies in termsofdealingwitheachotherduringtheproject.Finally,theDOACrecommendedsuitabletypesof CF system for different types of commodities, and advocated CF via farmerorganizations instead of through individual farmers. It evenwent on to advise intermsofhavingmultipleoutletsforproduce–bothcontractandnon-contract–fordifferentgradesofproducefromthesamegroupoffarmers(MOAC,2002).

3.3.2 the Bank for agriculture and agricultural cooperatives and contract farming

TheBAACstartedoperatingCFintheearly1980swiththeChoroenPokphand(CP)group,inwhichothercommercialbanksalsoparticipated.JoiningaprivatefirmtomakemarketcontractwithfarmershelpedBAACreduceitsbusinessrisk,becausethefirmdeductedtheloanandinterestfromfarmers’salesreceipts.Atthesametime,thefirmdidnothavetoextendinputcredititselfandfarmerswereabletoobtain the credit they needed.All three partiesweremademore secure in thisway.TheBAACprovidedcredit,bothincashandinkind,tofarmersparticipatinginCFwiththefirm,but farmerswhoactually joinedtheproject receivedspecialprivileges,suchasbeingeligibletoborrowdoubletheamountavailableordinarily(60 000 baht in 1991 compared with 30 000 baht), and without collateral(ManarungsanandSuwanjidar,1992).Since1993,BAAChasnoCFprojectsaspartof the four-sector cooperation plan; contract farmers take loans from the bankas individualsorgroupguarantee loans.TheCFprojectwas inoperationforfiveyearsonly.AccordingtoaBAACofficial interviewed,thebanklaterabolisheditsagribusinesssection,andinsteadhadasocialandenvironmentsection.

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There isnodoubt thatevensmallandmarginaloreven landless farmerswereparticipating in CF, thus making the process all-inclusive. The farmers were, by and large, happywith the systemas it prevailed then.Though state policyhelpedcontractingtotakerootinthecountry,itlaterworkedbetweenfarmersandcompaniesmorebywayofamarketmechanism,andtherewereallkindsof arrangements in place in the name ofCF.The companies relied on brokers(middlemen) toworkwith farmers. State intervention helped the farm sectoranditsfarmersbecauseitpromotedcompetitionthatwasbeneficialtogrowers,suchaspotatocultivatorsinnorthernThailand,andalsoledtocapitalinjectionintothefarmsectorthroughtheBAACloansforcontractgrowers.

3.3.3 the Indian experience of ppps

InIndiaunderthenewagriculturalpolicyregime,PPPsarethemainroutebeingtakentobringabouttransformationinagriculture.Thestateisprovidingincentivesto corporate entities to enter the agribusiness sector, including through CF. CF isa risk reduction intervention/institutionorpolicystrategyandoneof themany instrumentsof farmer riskmanagement.CFhasalsobeenused inmanysituations as a policy step by the state to bring about crop diversification toimprove farm incomes and employment (Benziger 1996; Singh, 2000). CF isalsoseenasawaytoreducecostsofcultivationbecause itcanprovideaccessto better inputs and more efficient production methods. The increasing costof cultivation was the reason for the emergence of CF in Japan and Spain inthe 1950s (Asano-Tamanoi, 1988) and in the Indian Punjab in the early 1990s (Singh,2002).

CF as public–private partnership

ThegovernmentofthePunjabthroughitsPunjabAgroFoodgrainsCorporation(PAFC) reimbursedextensioncost to theCFagencies/facilitatorsat the rateof 150 rupees (Rs.)peracre for threeyears, inorder to facilitateCFwith theaimof achieving crop diversification.Thiswas a case of PPP. But, it provided thisreimbursement without due regard for the size of holding of the contractgrowers.To a large extent, this defeated thepurposeof thePPPas it did notensure the inclusion of small and marginal farmers who could not afford topay for extension and who needed to be brought into the contract system.Similarly, the Ministry of Food Processing industries (MFPI) was providingan incentive during the 9th Five-Year Plan in the form of a reimbursementof 5 percent of the value of raw materials procured through CF, with amaximum ceiling of Rs. 1million per year for amaximumof three years.Thecondition for this incentive was that any organization (whether private,public, cooperative, NGO, joint venture, assisted) should work with at least 25farmersundercontractforatleastthreeyears(MFPI,1998).


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Basix, an NGO involved in livelihood promotion through microfinance schemes,enteredintoacollaborationwithFritoLayIndia(asubsidiaryofPepsico)forpotatoCF, whereby it facilitated the production of chip grade potatoes at the farmerlevel inJharkhand. In2005–2006thecompanyagreedtobuyatpre-agreedpricesand specifications, as part of theCF arrangement facilitatedbyBasix in termsofcontract coordination andprovisionof credit for 424 small contract farmerswith83 acres.This increased to 1 442 contract growers with 585 acres in 2007–2008. The partnership led to higher yields, better prices and higher net returns forcontract chip potato growers compared with those achieved from conventionalpotatoes, though the cost of production was somewhat higher under contracts. Theagency(Basix)alsomadeasurplusin2005–2006andasmalllossin2006–2007(Mishra,2009).

Creating producer bodies through PPPs

AnotheroutstandingcaseofPPPsisthecreationofMahagrapesbytheMaharashtraStateAgricultural Marketing Board (MSAMB), the Department ofCooperation,GovernmentofMaharashtra,theNationalHorticultureBoard(NHB),theNationalCooperativeDevelopmentCorporation(NCDC),theAgriculturalProductsExportDevelopment Authority (APEDA), and the grape growers themselves for thebenefitofgrapegrowers.

Theprojecthasbeenextremelysuccessful.Mahagrapeswassetup in1991asamarketingarmofthegrapegrowers’cooperativesinMaharashtrabyMSAMB,andsupportedfinanciallybyNCDCandAPEDA,topromotethemarketingofgrapesgloballyandtoattendtotheproblemsofqualityandrejectionintheglobalmarketfacedbythegrowers’produce.Ithasfeaturesofbothacooperativeandacompanyintermsofitsorganizationalstructureandfunctioning.ItisauniqueorganizationinIndia,bornin1984asaresultofthespecialprovisionofthe(amended)cooperativelawattheprovincial level,wherebycooperativeswereallowedtoassociatewithotheragencies,includingmarketingpartners.

MahagrapeswasregisteredasapartnertotheproducercooperativesunderaclausefollowingtheamendmenttothecooperativeAct.Twoexecutivepartnersheadtheorganization,whichhasanexecutivecouncilcomprisingsevenelectedcooperativeheads,followedbyaboardofdirectorscomposedoftheheadsof16membergrapegrowers’cooperatives.Mahagrapesisa‘forprofit’organizationanditsprimarysourceoffundingismembershipequity.Mahagrapeshasnowassumedamuchbiggerroleinmanagingandfacilitatingtheentirevaluechainofgrapes, includingextensionandmarketinformation,aswellasnegotiatingpricesforgrowerswithnationalandglobal buyers. It only charges a facilitation fee fromgrowers for its services anddoesnot retain theprofits it earns. It iswholly ownedandgovernedby farmersandtheircooperatives.Ithasbeenabletodeliverbetternetreturnstoitsmembergrowersthanthoseearnedbynon-members.Noteworthyinthiseffortistheroleof

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thestateagenciesinhelpingtheapexorganizationofgrowerstoestablishitselfandstabilize.TheMSAMBpaidthesalariesofthefirstgoverningofficersofMahagrapesfor three years,whowere seconded fromother state government departments. NCDCprovided loans tograpecooperatives forcreating localvalueadditionandvaluepreservationfacilities(RoyandThorat,2006).

Agricultural extension as PPPs

InMadhyaPradesh (MP), therewas aPPP in agricultural extension involving theNational Institute of Agricultural Extension Management (MANAGE) based inHyderabad, the Department of Agriculture (DoA), the Government of MP andtheDhanukaAgritechGroup,whichmarketsplantprotectionchemicals including eco-friendlyproducts.Thepartnershipwasintendedtofosterincreasedproductivityon farms and improve the standards of living, of farmers, providing services likesoil testing, trainingprogrammes, farmers’visits forexposuretonewtechnology,demonstrations,promotionoforganicfarming,cyberdhabas(countryside/highwayeateries in India serving local ethnic food), exhibitions and market linkages foragriculturalproduce.Outstandingfarmersreceivedawards,andfilmswereshownon success stories in farming. Moreover, encouragement was given to self-helpgroups and cooperatives, at the same time as infrastructure development waspromoted.Theservicesalsoincludedagro-climaticresearchandextensionplanning,productionofseedsofhighquality,andconductionofparticipatoryprocessesinalltheseactivities.

UnderthePPPMemorandumofUnderstanding(MoU),theDoAhandedoverthesoiltestinglaboratorytotheDhanukaGroupforaperiodoftwoyearsandsuppliedall thechemicalsneeded foranalysisof soil samples, freeof charge. Itwithdrewits entire staff from the lab which was later managed and maintained by theprivatesectorpartner(Dhanuka)atitsownexpense.Thesoilsamplesfromvariousstakeholdersweresent to this lab foranalysisandreportsweresentbackto thefarmersbyrespectivechannels,i.e.DoA’sSeniorAgriculturalDevelopmentOfficers(SADOs), andDhanukadoctors.Thiswas themost successful componentof thePPPamongall the18activitiesundertheMoUremit.Theotheractivitiescarriedoutincludedfarmertraining,farmerstudytours,fielddemonstrations,exhibitionsandfarmerfortnights.Yet,otheractivitiessuchascyberdhabas,supplyofinputs,joint accounts, linkages formarketing of agricultural produce, facilitating accessto institutionalcredit,awardsforsuccessfulfarmers, infrastructuredevelopment,strategicresearchandextensionplans,andpromotionoforganicfarming,didnotreally takeoffunderthePPParrangement.Someof thereasons identifiedwere:lackoforientationforPPPamongemployeesofvariousagenciesinvolved,lackofclarityofroles,excessivecommercialorientationofprivatecompaniesandlackoftheirregulationbythestateagency,frequenttransfersofprivateandpublicagencyemployees,lackoffocusonthesubjectofPPPbytheDoA,andlackofparticipatorymonitoringandevaluation(ChandraShekara,BalasubramaniandCharyulu,2006).


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Organic production as PPP

InanotherPPPproject,organiccultivationofamedicinalplant,Picrorhiza kurrooa (Kutki), was attempted at Ghees village in Chamoli district, Uttarakhand, incollaborationwiththeHighAltitudePlantPhysiologyResearchCentre(HAPPRC)and Dhawan International, Delhi (an exporter). HAPPRC has been working onvariousaspectsofhighaltitudemedicinalplantspeciesforthepasttwodecades.Themain objective of HAPPRC in initiating the scheme was to transfer usefultechnologiesforcommercialpurposes.HAPPRCprovidedtechnologyandtrainingtofarmersincombinationwithabuy-backagreementwithDhawanInternational,anexporter.Thiscollaborationisofmutualadvantagetothethreepartiesinvolvedbecause:

Z DhawanInternationalbenefitsfromassuredaccesstoalargequantityofhighqualitymaterial;

Z thefarmershaveanassuredmarketfortheirproduct,receivingagoodprice; Z HAPPRC has seen its technology being used for the benefit of the farmers,whichisthemainobjectiveoftheInstitute(NautiyalandNautiyal,2004).

In Uttarakhand again, Kohinoor Food Ltd (KFL), formerly known as SatnamOverseasLimited–oneofIndia’s leadingcompaniesintheorganizedmarketingofriceincludingBasmatirice–attemptedaPPPinorganicbasmatirice.Itholdsa leading position in the branded Basmati rice business in India with about 38 percentmarket share.To increase its supplies, KFL tried to identify farmersfor the organic programme and to this end approached various state agenciessuch as the State Agricultural University, the Rice Research Station and theSeed Development Corporation. They also approached some farmers’ groupsand, in2004,aftersomefalsestarts,KFLmadecontactwithaBasmati farmers’federationinDehradundistrict.ThisfederationwasorganizedbytheUttrakhandOrganicCommodityBoard(UOCB),astategovernmentagencythathadbeensetup in 2003 topromoteorganic farmingandallied sectors throughout the state.UOCBtookresponsibilityfortheinternalcontrolsystemandorganiccertificationwhichenabledKFLtoavoidthepre-operationalworkofmotivatingthe farmerstoadoptorganiccultivation.SincethemajorityofthefarmersinUttarakandhavesmall holdings, one federation was not sufficient for KFL’s requirements. KFLandthefirstfarmerfederationtherefore identifiedsevenotherUOCBpromotedfarmer federations; a total of eight federations – four each in Dehradun andUdhamSinghNagardistricts–wereorganizedtoparticipateintheprogrammes. Formal contracts between each federation and KFLwere signedwithUOCB asorganic certification service provider and mediator. The technical support tofarmerswasprovidedbyKFL.Thefarmerfederationsprocurepaddyfromfarmersand pay individual farmers, because they have amandi (agricultural wholesalemarket) license, paymandi charges and receive payments and service charges(2.5percent)fromKFL(Singh,2009).

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Compared with the mandi system, the KFL farmer realized approximatelyRs.235permetrictonnemore(oneUS$isequalto50Indianrupees).Theorganicyieldwashigher,thecostofproductionwaslowerandthepricewashigherthanthatofconventionalBasmatirice.KFLalsosavedRs.245permetrictonnefromthis, a quarterofwhichwas spentonextension support to farmers.A subsidyofRs.250perfarmeroraboutRs.10perkg isprovidedbyUOCBaspartof itssupportfororganiccertification.Thefarmersarealsoabletomakesomemoremoneybyweighingandbaggingtheirproducethemselves.Theyarepaidforthework,whereas previously they had to do this for nothing in themandi duringpeak times.Moreover, the 1.5 percent commission paid to the federation notonly covers its operation costs but also serves as a cash reservewhich canbeusedtomakeemergencycashloanstomembers.Startingwithonly190farmersand 119 acres under the organic project in 2005, the project had expanded tocover864farmersand748acresby2007.BecausetheOrganicBasmatiExportProgram of theUOCB is a government supported project, it has placed greatemphasisontheinclusionofsmallandmarginalfarmers.Thismeantthatalargenumberoffarmershadtobecoveredtoproducesufficientquantitiesofpaddy.

However,itwasverydifficulttoensurethatallsmallfarmersadheredtoorganicpractices.Everyyear,UOCBhadtoexpelabout5percentofthefarmersfromtheprogrammesbecausetheydeviatedfromorganicpractices.KFLwastrainingthefarmersinpaddygradinganditwashopedthatwithinayearortwoitwouldbepossibletostartgrade-basedpricing.Overtime,theconfidenceofthefarmersinKFL,andinorganicfarmingingeneral,hadincreased.(Singh,2009).

Linking farmers with retail chains in PPPs

A more recent experience of tomato CF in Uttarakhand highlights the roleof an NGO – the Himalayan Action Research Centre (HARC) – and farmers’organizations in helping farmers to overcome the marketing problemsassociatedwithperishableproducebybuildingasuccessfulsupplychain:linking small-scale farmers producing tomatoes with Metro Market place (Delhi). In2001,thefarmerswereorganizedintosixfederationsacross80villages,whichsupply off-season vegetables (mainly tomatoes) to Mother Dairy through apurchase agreement with the federations.Mother Dairy, an enterprise of theNationalDairyDevelopmentBoard–anautonomousbodyoftheGovernmentofIndiaestablishedin1965topromotedairydevelopment–wassetuptodistributeliquidmilkinmajorcitiesofIndia.IthasrunhundredsoffruitandvegetableretailoutletsinDelhisincetheearly1990swithafruitandvegetableprojectbasedinDelhi.

Tomatoes were brought by farmers to designated collection centres, whichwere managed by an employee/volunteer of the federation. The farmersgraded tomatoes at the collection centre according to the quality parametersprovidedbyMotherDairy,whichweremonitoredbyafederationrepresentative.


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Aftergrading, tomatoeswerepacked inplasticcratesprovidedbyMotherDiary;thisreducedlossesduringtransportationandthecostofpackagingby70percent.Althoughthefarmers’ federationsandMotherDairyhada legalrelationship,theindividual farmers were not contractually obliged to sell to Mother Dairy. Thefarmerswere sellingonlyabout30percentof their tomatoes toMotherDairy in2006;therestweresoldtoprivatedealers.Similarly,MotherDairywasnotobligedtobuyafixedquantityoftomatoesfromthefarmers.Thequantitytobepurchasedwas determined every year through negotiations between the federations andMotherDairy.

In order to supply to Mother Dairy a farmer must be a member of a farmers’federation.Thefarmershadnodifficultyinformingfarmers’federations,butwerenot compliant to the grading standards. Many farmers (especially in the largefederations)triedtocheatthesystembyincludingpoorqualitytomatoes.BecauseMotherDairyitselfwasconductingasample-basedqualitycheckatitsfacility,thissometimesledtotherejectionofawholetruckloadonaccountoftheactionsofjustafewfarmers.

Thefederationsprovidedthefollowingservicestotheirmemberfarmers:

1. Preparation of an annual production plan and negotiation of supply targetswithMotherDairy.

2. Organizationoftheprocurementofvegetablesattheircollectioncentres.3. Monitoringthegradingofproducebeforeitispackedatthecollectioncentres.4. ActingasamediatorbetweenfarmersandMotherDairy.5. Providingpackagingcratesonrent.6. Sellingagri-inputstomembers.7. ReceivingpaymentfromMotherDairyanddistributingthesametofarmers.8. Arrangingforfarmers’training.9. Arrangingtosellfarmers’surplusvegetableproductiontoprivatedealerswhen

MotherDairywasunabletopurchasefarmers’produceduringthepeakseason.10.ChargingRs. 2 for every 10kilogramsofproduce sold through them for the

relieffundtoassistgrowersduringnaturalcalamities.

Thefederationsreceivedincomefromthefollowingactivities:

1. Aone-timemembershipfeeofRs.250.2. A1.75percenttransactionfeefromMotherDairy.3. Aservicefee(5percentoftransaction)chargedtomembersforbulkpurchases

ofseeds,fertilizers,pesticidesandotherinputsfromagri-inputcompanies.4. RentingofplasticcratesatRe.1percrateperdaytomembersandRs.2for

non-members.

ThefarmerssupplyingtoMotherDairyhadlargerlandholdings(3.25acres)thanthenon-MotherDairyfarmers(2.8acres).ThefarmerssupplyingtoMotherDairy

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also had higher yields (2.5 times higher), higher costs of cultivation (resultingfrom increased use of pesticides – almost double – tomeet quality standards),butalsoenjoyedmuch lowermarketingcostsand lowerprices for theproduce,resulting in higher net returns per kilogram and per acre comparedwith thoseinprivatechannels.Thedifference inprofitabilitywasnotdue toadifference inthepricegiven to farmersbyMotherDairyandprivatedealers: itwasprimarilydue to the lower costsofmarketing (Rs.0.14/kg) incurredby farmers supplyingtoMotherDairy,comparedwiththoseofnon-MotherDairyfarmers(Rs.1.83/kg). Thedifferenceinthemarketingcostswaslargelyduetohightransportationcostsandcommissionspaidbythenon-MotherDairyfarmers.

FollowingMotherDairy,privatedealersalsostartedtoprovidefarmerswithplasticcrates.But, rejection rates for some federationswere as high as 50–60percentin2006becauseofthesmallsizesofthefruitsharvested,pestinfection,andtheexcessive distance of transporting produce to Delhi, where final quality checkstookplace.Besides,deliberatelypoorgradingbyfarmersandlackofsupervisionledtohighrejections,althoughitwasalsonotedthatrejectionsweresometimesdeliberatebytheMotherDairy,toavoidoversupply(AlamandVerma,2007).

PPPs in the non-farm sector

In thenon-crop sectororallied sector category,HindustanUnileverLtd (HUL)launched theVindhyaValley project in partnership with the Madhya Pradeshgovernment-ownedKhadiGramUdyogBoard(HandspunCottonRuralIndustryBoard).The idea was to help increase the income of farmers and small-townentrepreneursengaged inagro-processingandcottage industries in the state,by providing support infrastructure for marketing and distribution of theirproducts.HULtogetherwith‘VindhyaValley’–anumbrellabrandforfoodandotherproductsmadebytheDevelopmentofWomenandChildreninRuralAreas(DWCRA)groups–hassupportsoftwarefortheirmarketing,manufacturinganddistribution through their own outlets. Marketing of the products is effectedentirely through individuals and private firms. The products include spices,pickles, papads, honey, agarbattis (incense sticks), herbal tea and shampoo,murabbas(sweetenedfruitpulps),masalas(cookingpowders)andkasoori methi (fenugreek). The product upgrading was expected to generate higher salesandhigherreturnsforruralartisancommunities,manyofwhomwerewomen. Toimpactevenlargergroups,HULwashelpingthegovernmentsetuppermanenthandicraftfairsacrosstopcitiesandtownsinthestate.Thegovernmentalreadyoperatedabout15000‘fairprice’shops,althoughtherewerestillvillageswhichdidnothaveaccess to such shops.Those villageshadbeen identified and fairpriceshopsweretobeestablished,eachwithaclusterofvillagesasacatchmentarea.Theyweretoberunbyself-helpgroupsandcooperatives.


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3.4 The potential of and issues with PPPs

PPPscanbeused insituationsofpartialorcompletemarket failure.Atabroaderlevelofrurallivelihoodimprovement,itcanbeappliedincasesof:

Z diversificationoflivelihoods/incomesources; Z informationprovisionaboutnewopportunitiesandnetworking; Z savingsandreasonably-pricedproductionandconsumptioncredit/loans(Krishna,2003).

This can bemade possible through the combined strengths of different partnerswhobringdifferentresourcestogether–suchastechnology,marketing,financeororganizationalefficiency–inthelocalproductionandmarketsystem.TheHUL–MPcasejustdescribedfallsintothiscategory.

In agriculture per se, arrangements designed to reduce or share production andmarketrisk(includinginsurance)canbedesignedunderPPPsinvolvingtechnologyandextension,CF,valueaddition,andmarketdevelopment.TheCFinThailandandintheIndianPunjabareexamplesofthiskindofarrangement.

In infrastructure creation, bridge financing for irrigation development and agri-infrastructure development, development of drylands, agricultural researchcapability, farmmachinery centres, and provision and access of Information andCommunicationTechnology(ICT)arepotentialareasforPPPs(Birneret al.,2005).Even organic farming and organic inputs such as biofertilisers and biopesticides,thepromotionof organic producemarkets and certification systems, and settingup new value addition facilities (especially secondary products), can be achievedthroughPPPs.Productqualityimprovements,whicharekeytonationalandglobalmarketing,needsuchpartnerships.Promotionoffarmers’groupsandassociations,or even producer companies for bettermarket orientation and viability, is in thedomain of organizational and institutional PPPs. Farming systems innovations,naturalresourceconservation,augmentationandmanagement,andmarketlinkagesforgrowersandtheirgroups,areotherhighpotentialareasforPPPs(Sharma,2002).

3.4.1 major issues in managing ppps

PPPsareeasy toget intobutdifficult tomanagesuccessfully.Accountabilityandtransparency–mainlyofprivateagenciesandNGOs– intheactualoperationsofthePPPprojectsandactivities isamust; ifthesearenotensuredtobeginwithinthe initial design of projects and partnerships, sub-optimal results may be theconsequence.Generally there isa fearof lost remit,orautonomy,orcontroloverresources,inthemindsofmainlystateorNGOpersonnelinvolvedinPPPS.Thiscanbehardtodealwithifpartnershipsarenotopenandsharedwidely.SustainabilityofpartnershipandmanagementofconflictsiskeytosuccessfulPPPs(Bovaird,2004).

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Excessive commercialization and profit orientation – which can be against thepublic interest– isanothermajor issuewhen there isaprivatecommercialentityinvolved insuchpartnerships.Thismayundermine the largergoalsof theprojectandtheverysustainabilityoftheactivity.Conflictovertheextensionandtypesoftechnologiesused,especiallywhenNGOswithideologiesandvaluesareinvolved,isanothercomplexissuetoresolve(Hilhorstet al.,2007).Theremaybestronganddiffering opinions between different partners as regards a specific technology orresource,resultingfromthedifferentorientationsoftheagencies.Lackoftrustand/ortheinvolvementofvariouspartnersintermsofintentions,goalsandcredibilityofachievements in thecontextofmissingsocial capital canbequiteproblematicfor the sustainability of the arrangement (Hilhorst et al., 2007). Therefore, it isimportanttochooselike-mindedpartners.Differingincentivesstructuresbetweenpublic and private systems are also problematic, because they may drive theirpersonneltoperformornottoperform.Ifthesearenotaligned,workculturesarenot synchronized and efficiency suffers. Furthermore, the inability to overcomenegativeperceptionsofeachothercanbeapermanentstumblingblock.

Hidden costs of partnership that are not accounted for and power imbalancesbetweenandacrosspartners,aswellasproceduralcomplications,mayunderminethe spirit of partnership (Brinkerhoff and Brinkerhoff, 2004). Lack of appropriatemapping of proprietary assets and responsibilities between or across sectorsor partners for effective functioning can be troublesome for the partnership(Mruthyunjaya, 2007). Limited use of innovative and creative organizations andmechanismsbydifferentpartnersisanotherproblemthatrestrictscreativity,whichiskeytopartnershipsandtheirsuccessfulfunctioning(Shakya,2005).Aboveall,itissocialcapital–thefoundationforsuccessfulpartnerships–thatisfoundlackingorweakinmanypartnershipcontexts.

3.5 Strategies and enabling environments for PPPs

The facilitating environment for PPPs includes: changes in legal structures andmechanisms, setting up of a robust legal and regulatorymechanism, and overallmacroeconomic and macro-political stability (Phansalkar, 2005). A sound policyenvironment for agricultural development is basic to any effective partnership. TheroleofpublicpolicyinPPPsincludes:policyframeworkdesignandanalysis;policyredirectiontowardscreatingtheenablingenvironment;qualitycontrol;regulationofactors;encouraging/facilitatinginstitutionalinnovations.However,forsuccessfulPPPs it is importanttohavecommonality ingoals,complementarity instrengths,andsharingofresponsibilityandcosts, inadditiontoappropriatemechanismsforconflictresolution(Katyal,2005).

Themajor success factors that act as preconditions are: politicalwill to promotePPPs, clarity in institutional roles, adequate capacityofpartners for the specified


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role, andaneffectivemarket forproductsofPPPs.Theoperational requirementsof successfulPPPs include selectionofpartners, theirmonitoring, evaluationandcertification, and sharing of the costs and benefits of the services among them, inadditiontothecontentandtargetoftheservice(Riveraet al.,2000).

Furthermore,forthepartnershiptoresultintangiblebenefitsrightuptothefarmerlevel,itisimportanttoaddresstheentirevaluechainofaproductandnotjustspecificbottlenecks.Thereisalsoaneedtoframebroadguidelinesforthepublicsectortofacilitate engagement with the private sector, facilitate the secondment of staffacrosssectorsofthepartnership,anddevolvepowersinnationalresearchandpolicysystems, for efficient initiation and disposal of various projects and interventionsunderPPPmode(Mruthyunjaya,2007).

3.6 Conclusions

The above analysis and discussion of the PPP experiences inThailand and Indiashowsthatit is importantforthestateanditsagenciestofacilitatetheentryandoperationsofprivateplayersinagriculturalmarkets,andprotectthefarmerinterest,sothattheprojectsarebothefficientandfairforbothparties.Thestateneednotdirectly intervene in such situations, but rather set the framework within whichpublicagenciesandprivateentitieswork togetherwithotherplayers,performingtheirrespectiveroles.Stateagenciescanbeusefulto introduceprivateplayerstoprojectareasintheruralsetting,giventhatgenerallythereisalackoftrustamongfarmersconcerningagribusinessfirms.Thestateshouldsetthepolicyagendaandgovernancemechanisms toensure that the interestsof theprimaryproducerarenotcompromised.

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Singh, S.2002.ContractingOutSolutions:PoliticalEconomyofContractFarmingintheIndianPunjab.InWorld Development,30(9),pp.1621–1638.

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cHapter 4

export support for el salvador’s smes: Fusing technical capabilities with

collective efficiency

4.1 Introduction

El Salvador is a developing country with a population of 6.8 million peoplein an area of 21 040 km2, the most densely populated of Central America.According to theMinistry of Economy (MINEC, 2009), El Salvador has aGrossDomesticProduct(GDP)ofUS$22114millionandaper capitaGDPofUS$3916.It is therefore considered among the 10 poorest countries of Latin America. ThelargestcomponentofGDPistheservicesectorat61percent,followedbytheindustrialsectorat30percent.UnliketherestoftheCentralAmericancountries,the agricultural sector represents only 12.5 percent ofGDP. El Salvador’s mainexportmarketsaretheUSA(54percentin1997and48percentin2008)andCentralAmerica(22percentin1997and36percentin2008)(MINEC,2009).

InflationhasbeenlowcomparedwithotherCentralAmericancountriesduringthepast five years, staying below 5 percent until 2007 and increasing to 5.5 percentin 2008 (MINEC, 2009). For the period 2008–2009, El Salvador ranks at position 79among134countriesintheGlobalCompetitivenessIndex.ElSalvadorranksloweroninnovation(118),highereducationandworkforcetraining(95)andtechnology(90);atthesametimeitrankshigheroninfrastructure(56)efficiencyofitjobmarket(57)andmarketefficiency(59).

Sincetheendofthecivilwarin1992,ElSalvadorhasbeentakingstepstodiversifyitseconomyandreducedependenceoncoffeeexports.Integrationwiththeglobaleconomyhasacceleratedsince2001,whentheUSdollarwasadoptedasthelegaltenderalongside theColon. In2004,ElSalvadorand fourotherCentralAmericancountriessignedtheCentralAmericanFreeTradeAgreementwiththeUnitedStates


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(CAFTA).FreetradeagreementshavealsofollowedwithMexico,Chile,PanamaandtheDominicanRepublic(MINEC,2009).

Governments have designed export promotion programmes to help small andmedium-sized enterprises (SMEs) overcome obstacles when the opportunity toexpandinternationallypresentsitself(Spence,2001).TheUSAhasadoptedtheAidforTrade(AfT)initiativepromotedbytheWorldTradeOrganization(WTO)tohelpCentral American countries take advantage of CAFTA. The programme involvesproviding seedmoney to strengthen productive supply capacity, institutions andtradeinfrastructure(DeLombaerdeandPuri,2009).TheWTOmandatealsoincludesprovisionstoassesstheeffectivenessofsuchprogrammes.

In 2003 the United States Agency for International Development (USAID)establishedaprogrammeforpromotinginternationalizationofSalvadorianSMEs,withemphasisonhelpingthemovercomenon-tariffbarriers.Thisway,SMEswouldtakefulladvantageofCAFTAtoexporttotheUSA–whereapproximately2.3millionSalvadorianimmigrantslive–andtherestofCentralAmerica.

The USAID Export Promotion Program (hereafter referred to as the Program)designed a strategy based on the experience of similar programmes establishedaroundtheworldduringthepast20years.TheProgramcombinedtheapproachofstrengtheningtechnicalcapabilities(FischerandReuber,2003;RuzzierandAntoncic,2007;Owusu-Frimpong andMmieh, 2007)with the collective efficiency approachproposedbyCaniëlsandRomijn(2003)amongothers.

The objective of this study was to evaluate empirically the effectiveness of theProgramforSMEsinElSalvador,whichranintwophases:phaseIfromJuly2003toMarch2006,andphaseIIfromApril2006toJune2009.

4.2 A review of the literature and hypotheses on SME behaviour

4.2.1 characterization of smes

Enterprises have been classified according to their main business activities –manufacturingorservices–becausetheseactivitiesmayimpactupontheresponseobtainedfromthemarket(Erramili,1991).

Erramili andRao (1990) have differentiated between ‘hard’ service firms – suchas car rental firms, restaurants and health care – where consumption andproductionneedtohappenalmostsimultaneously,and‘soft’servicesfirms–e.g.consultantsandsoftware–whereconsumptionandproductioncanbedecoupled.

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export support for el Salvador’s SMes: fusing technical capabilities with collective efficiency

Whereastheinternationalizationbehaviourofhardservicefirmsissimilartothatofmanufacturers,softservicefirmscannotuseexportasan internationalizationstrategyandneedtorelymoreonmarketentrymodes,suchascontractualentry,licensing,franchisingorforeigndirectinvestment(Spence,2001).

The size of enterprises (micro, small, intermediate and large) has been definedlooselyaroundtheworlddependingonthecountryandthesizeof itseconomy.Themostpopulardescriptorsusedtocategorizeenterprisesbysizehavebeenthenumberofemployeesandtotalannualsales(AabyandSlater,1989;Miesenbock,1990;Kimet al., 1997;Spence, 2001;Calderónet al., 2005; Fischer andReuber,2003;Owusu-FrimpongandMmieh,2007).InEurope(Calderónet al.2005,Spence,2001; Ruzzier and Antoncic, 2007), Africa (Owusu-Frimpong and Mmieh, 2007)and LatinAmerica (De Lombaerde, 2009), microenterprises have been definedas having less than 10 employees, small enterprises as having between 11 and50,medium-sized as having between 50 and 100 (Calderónet al. 2005,Spence,2001)orup to250 (RuzzierandAntoncic,2007),and largeenterprisesashavingmorethan250employees.Bycontrast,inKoreaandtheUSAasmallenterpriseisdefinedashavinglessthan100employees,whileamedium-sizedenterprisehaslessthan500employees(Kimet al.1997).

Classification of enterprises by total annual sales is evenmore varied betweencountries. Spence (2001) defines a small enterprise in the United Kingdom ashaving total annual sales of less thanUS$1.6million (about £1 000 000), whileOwusu-Frimpong and Mmieh (2007) define Ghana’s small enterprises as thoseearninglessthanUS$0.1millionperyear.

Czinkota and Johnson (1985), Reid (1987), andWolff and Pett (2000) suggestthat the size of a firm does not make any difference in terms of its exportingactivities, needs or attitudes. By contrast, Calderón et al. (2005) suggest firmsassign importance toobstacles for internationalizationdependingon their size, definedbytheirnumberofemployees.

4.2.2 obstacles to smes’ internationalization

Afirmcanencounterimpedimentstoexportingatanystage,fromthepre-exportstagestothemoreadvancedlevelofinternationalinvolvement(Owusu-Frimpongand Mmieh, 2007). SMEs seeking to penetrate foreign markets often encounterobstaclesthathindertheirinternationalexpansion,suchaslackofmarketknowledge,non-tariffbarriers,competitionandinstabilityintheregion(Calderónet al.,2005).

Onthesupplyside,rigiditiesintheproductprocess,lackoftechnology,researchanddevelopment,andlackofknow-howhavebeencitedbySMEsintheDominicanRepublicascriticalconstraints(Kaplinsky,1993).Otherimpedimentstoexportingcommonly cited by LatinAmerican SMEs include finance (shortage of working


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capital),operational/logisticalproblems(excessivedocumentationrequirements),communicationproblems,anddifficultforeignmarketregulations(daSilvaandDaRocha,2001).

In 2006, 58 percent of refusals of Salvadorian products by theUSA’s Food andDrugAdministration (FDA)weredue to labellingerrors (MINEC,2009).RefusalscauselossestoexportersandincreasethefrequencyofinspectionsonSalvadorianproductsatUSAports.Typicallabellingerrorsincludedlackofanutritionfactspanelora formatnotconformingtotheNutritionLabelingandEducationAct (NLEA)2006 (whichmademandatory the reportingof trans fats), and thedetectionofingredientsthatwerenotlistedonlabel.In2006,theProgramjoinedtheMinistryof Economy (MINEC), the Economic andSocialDevelopment Foundation of ElSalvador (FUSADES), the Foundation for thePromotion ofCompetitiveness forMicro and Small Enterprises (CENTROPYME), the National Council on ScienceandTechnology (CONACYT), and the Export PromotionAgency of El Salvador(EXPORTA),toformaSalvadorianFoodLabellingCommittee.TheobjectivewastosignificantlyreduceFDArefusalsofSalvadorianproductsthroughinformationandtraining.

Calderón et al. (2005) affirm that companies with less than 50 employees givemore importance to logistics and transport problems, market knowledge,sales promotion andfinancial problems,whereasbusinesseswithmore than 50employeesgivemoreimportancetoproblemsinvolvinghumanandtechnologicalresources,anddifficultiesarisingfromforeigninvestment.

Thissuggeststhat,tobesuccessful,exportpromotionprogrammesforSMEsmustaddress all these problems at once.However, allocation of resources should bedoneconsideringthesizeanddegreeofinternationalizationofthefirm.

SMEs are frequently incapable of solving these problems on their own. In suchcases,public(Calderónet al.2005)andprivate(Kimet al.,1997)organismsgenerateexportpromotionpolicies–suchasprovisionofmarketknowledge,assistanceviatradefairs(Spence,2001),searchingfordistributors,exportinsurancesandtraining–withtheaimofcollaboratingintheprocessofSMEs’internationalization.

4.2.3 strengthening collective efficiency vs. technological capabilities

The technological capability (TC) literature puts SME intra-firm knowledgeaccumulation at centre stage. The term TC was coined in the early 1980s byresearchers probing intra-firm technological dynamics in developing countries,wherefirmstypicallyoperatefarfromtheworld’stechnologicalfrontier(CaniëlsandRomijn,2003).

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The learningprocess causesfirms to accumulate so-called ‘capabilities’, bundlesofrelatedroutinesgoverningtheexploitationoftheirresources.Capabilitiesareresidentin a particular function (Javidan, 1998). Examples are marketing, production, andhuman resource management capabilities. Capabilities that are cross-functionallyintegrated and coordinated are denoted as ‘competencies’, which express what afirmisabletodowell(PrahaladandHamel,1990).Asubsetofsuchcompetenciesisthebasisforafirm’suniquecompetitiveadvantageatanygivenpointintime.Thesedistinctivecompetenciesarecalled‘corecompetencies’(CaniëlsandRomijn,2003).

‘How to’ skills are the necessary starting point for the ultimate development ofdynamicorganizational–managerialcapabilities.TheTCliteratureinlessdevelopedcountriesseestheindividualfirmastheprimeactorinthegenerationofknowledge(Caniëls and Romijn, 2003). However, collective support is useful when complextechnologiesareinvolvedorwhenprivatemechanismsareweak.ThepromotionofhealthyclustersofSMEs,andSMEsclusteredwith largefirms, is likely tobeveryhelpfulinbuildingmarketingandtechnologicalcapabilities(Lall,2000).

Morgan(1997)usedthenotionofthe‘learningregion’,inwhichinstitutionalactorsare seen to play a central role in promoting and facilitating regional innovativebehaviour. Isaksen (2001), a proponent of the Region Innovation System (RIS),observesthattheinnovationperformanceofaregiondependstoalargeextentonhowfirmsutilizetheexperienceandknowledgeofotherfirms,researchorganizationsandgovernmentsectoragenciesininnovationprocesses,andhowinturntheyblendthiswiththefirm’sinternalcapabilities.

Again,aneffectivenationalexportpromotionprogrammewouldhavetocombinebothapproaches:developingSMEs’internaltechnicalcapabilitiesthroughtrainingand‘learningbydoing’,andtheirexternalcollectiveefficiencythroughclustering.

4.2.4 Human capital and the internationalization of smes

Humancapitalrepresentsaninvestmentineducationandskillsandiscreatedwhenaperson’s skills andcapabilitiesare improved (RuzzierandAntoncic,2007).Onceengagedintheinternationalizationprocess,suchindividualsshouldhaveasuperiorabilitytoexploitopportunities(DavidssonandHonig,2003).RuzzierandAntoncic(2007) identify fourdimensions in thehuman capital of anSME’s entrepreneur(s)thatwillhelpthemtorelatepositivelytointernationalization:internationalbusinessskills,internationalorientation,perceptionofenvironmentalriskandmanagementknow-how.Bytravellingabroad,entrepreneursaremorelikelytolearnaboutforeignbusiness practices, meet prospective clients, and identify market opportunities(Leonidouet al.,1998).

Amongtherangeofexportpromotionprogrammesoffered,thosemostfavouredby exporters are programmes which provide experiential knowledge about


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foreign countries (Reid, 1980).Trademissions areone such type,with theaimofencouragingSMEstoenterorexpandintoforeigncountrieswhentheirexperiencewiththemarketisstilllimited.Asecondpopularprogrammeistradeshowsorfairs.The objective of trade shows is to furtherSMEs’ expansion into foreignmarketsonce thefirm isalreadyestablished in targetedmarkets (SeringhausandRosson,1990).BoththeacquisitionofmarketknowledgeandthebuildingofnetworksareimportantactivitiesinSMEs’overseasexpansion(CovielloandMunro,1997).KediaandChhokar(1986)havedemonstratedthatlackofmarketknowledgewasthemostsignificantinhibitortoexportexpansionamongSMEs.

4.2.5 the role of e-business in smes’ internationalization

Whileover60percentofSMEs in theUSAandCanadahaveadopted some formof business through a computer mediated network such as the Internet, othercountries have significantly lower adoption rates. In Asia and Latin America, whereasmanyas99percentofallfirmsareclassifiedasSMEs,lowadoptionratesmaybeanimpedimenttoincreasedinternationaltrade(JohnstonandWright,2004).

Web sites, e-mail contact and low cost telephone calls with customers canall contribute to improved customer service and an expanded customer base(Matthews,2007).Websitesareanexcellentcommunicationstoolwhichcanreachnewinternationalaudiences(Raymondet al.,2005).

Lookingat the individual enterprise, there is someempirical evidence to suggestthat SMEs employing Information and CommunicationTechnologies (ICT) enjoyenhanced profitability and outreach and thus can better position themselves formore wholesale expansion (Matthews, 2007). Firms using e-mail for customercommunication, for instance, can grow 3.4 percent faster in terms of sales thanthosethatdonot(Qianget al.,2006).

Matthews(2007)reportsVenezuelanSMEs’greatestpriorityafterInternetaccesswastobuildawebpresence,with58percentofSMEscitingawebsiteasakeyrequirement.E-commerce,marketingandnetworkingwerecitedasmotivatingfactors.

Mexican SMEs cited online ordering/quoting, order fulfillment and tracking, andcustomerserviceandsupport,asthemostfrequentlyadoptednetworkedprocesses.Theleastadoptedprocesswasonlinepayment(JohnstonandWright,2004).

4.2.6 evaluation of export promotion programmes

Export promotion policies are government financed. Consequently, in order toassesstheeconomicefficiencyoftheseprogrammes,aperiodicevaluationoftheirresultsisnecessary(Calderónet al.2005).TheInternationalTradeCentre(ITC,2002)

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points out that the performance of promotion organisms should be measuredquantitativelyandevaluatedtoensuretheireffectivenessandefficiencyaspartofaconstantprocessofself-improvement.

Export performance evaluation includes qualitative and quantitativemeasures inorder to address the shortcomings of both approaches (Spence, 2001). Researchonevaluationofexportpromotioncoverstwoareas:first,aglobalevaluationwithquantitative results, and second, evaluationat abusiness level usingquantitativeandqualitativeindicators.

The most common measures of export performance at the global level used inacademic studies have been exports as a proportion of sales, export profitabilityandgrowthinexportsales(Spence,2001).Qualitativestudiesatthebusinesslevelrely on surveying export programme beneficiaries periodically (Kim et al., 1997;Spence,2001;Calderónet al.,2005;LuandBeamish,2006).

FortheUSAIDElSalvadorExportPromotionProgramevaluation,bothquantitativeand qualitative measures were gathered at the national and business level.Theobjective of this study was to document the effectiveness of the Program inpromotingSalvadorianSMEs’exportsalongwithitscollateralbenefits(jobcreation,clusterorganization,etc).Afollow-upacademicstudyonrelationshipsbetweenSMEdescriptors (size, age,anddegreeof internationalization)and their achievements(exportsales,marketsreached,etc)isrecommended.

Thefollowinghypotheseswereformulatedforthisstudy:

H1: TheProgrammeisabletopromoteasignificantincreaseinSalvadorianSMEs’exportstotheUSAandCentralAmericaduringtheperiod2003–2009throughacombinationoftechnicalcompetenceandcollectiveefficiency.

H2: TheProgrammeisabletocollaboratewithothernationallabellingcommitteemembers topromoteasignificant reduction inFDAproduct refusalsdue tobadlabellingofSalvadorianSMEsintheperiod2003–2009.

4.3 The Program’s methods of promoting SME internationalization

4.3.1 structure of the program

TheUSAIDProgram forPromotionofExports inElSalvador ran in twophases:phaseI(officiallynamedUSAID/EXPRO)fromJuly2003toMarch2006andphaseII(officiallynamedUSAIDExportPromotionProgram)fromApril2006toJune2009.


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Phase I had a US$10 million budget while phase II was implemented withUS$9million,totallingUS$19millionforthewholeProgram.

Both phases of the Program contained the following components: SMEstrengthening, external collaborations and promotions, and technical andcommercial assistance. However, phase I technical assistance emphasizedstrengtheninginternalaspectsofenterpriseswhilephaseIIputmoreemphasisonexportlogistics.

AllthesupportawardedtoSMEswasintheguiseofcofinancing.EithertheSMEitselforpublicandprivate institutionsprovided50percentoffunds. Inaddition,SMEs had access to discounts negotiated by the Program on product design,improvementandanalyticalservices.

TheWeb site http://www.usaidexpro.org was established to help promote andexplain the services theProgramoffered toSalvadorianSMEs.The informationanddocumentationnecessaryforanSMEtoapplyforProgramservicescouldbedownloadedfromthewebsite.

4.3.2 smes’ access to the program

TheProgramusedamixtureoftheUSAandEuropeandefinitionsof‘SME’(Calderónet al.,2005;DeLombaerdeandPuri,2009).InordertoaccesstheProgramanSMEhadtomeetthefollowingthreerequirements:

Z lessthan100permanentemployees; Z totalannualsalesbetweenUS$70000andUS$3000000; Z hasaproductwithexportpotential.

Forreportingresults,theprogrammecategorizedSMEsaccordingtothenumberofemployees:lessthan5,6–25,26–50and51–100.

AnSMEaspiringtoaccesstheProgramwasaskedtosubmitannualauditedfinancialstatements,acopyofitsbusinessregistrationpayment,andanapplicationform.Theapplication formasked forSME informationon:yearsofoperation, currentproductdescription(number,types,markets,price,annualsales,exportedornot),descriptionoffacilitiesandadministrativesystem,andasurveyonexporttrainingandexperience.

A 0–100 point scalewas used to determine the type of assistance anSMEwaseligibleforthroughtheProgram(Table4.1).Amaximumof20pointswasassignedfor financial stability, 30 for market and product potential, 30 for productioncapabilitiesand20forexportattitudeandexperience.AnSMEwasthenassignedatrackallowingittoaccessallapprovedcomponentsduringoneorbothphasesoftheProgram.

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4.3.3 training component

During the second semester of 2004 the Program partnered with ZamoranoUniversity (EAP – Escuela Agrícola Panamericana), located in Honduras, toimplement the training component during the rest of phase I and all of phaseII. EAP’s Food Science and Agribusiness departments defined training coursesbasedontheUniversity’sphilosophyoflearningbydoing.Aportfolioincludingatrainingworkshop(40hours),shortcourse(24hours)andaconference(8hours)wasdesignedand impartedby theEAPfacultyaccording toneeds identifiedbySMEs,TheMinistryofEconomy(MINEC),theSalvadorianInstituteofProfessionalFormation (INSAFORP) and the Salvadorian Foundation for Development(FUSADES). These institutions surveyed SMEs in different instances to assesstrainingneeds.

TrainingcoursesandshortconferenceswereimpartedinSanSalvadortobetween20and40attendeespersession,whileproductinnovationworkshopsweregivenattheEAPcampusinZamorano,Honduras,toanaverageof25attendees.Itwasencouragedthathalfofthetrainingbeneficiariesshouldbewomen.

CounterpartfinancingforattendeesfromqualifyingSMEswasprovidedbyINSAFORP(US$125perattendee).Attendeesdidnotpayforaccesstotrainingcourses.

InadditiontoSMEs’employees,governmentofficialsandprivateconsultingagentswere given access to training courses.Thiswas part of the strategy to transferProgramcapabilitiesbothtothepublicandprivatesectorsbytheendofitsrun.

Inphase I,37courseswere imparted,14ofwhichweregivenbyEAPstarting in2004. Courses on Food Safety (ISO 22000 and prerequisite programmes) andworkshops on food product innovation comprised the training programme.EmphasiswasmadeontrainingorganicandspecialtycoffeeSMEclusterswithapotentialtoexport.

SME Level Grade Qualifying assistance

entry less than 50 Training only

Basic 50–65 Technical assistance and commercial promotion as a guided visit

Intermediate 66–80 Technical assistance and commercial promotion

advanced More than 80 access to all services

taBLE 4.1

categorization of smes for access to the program’s export promotion services


72

Table 4.2 describes the training component of phase II. The EAP Food Sciencefaculty covered training on food safety systems, product innovation, USAlabelling legislation, packaging, statistical production control and quality control. TheAgribusinessfacultycoveredmarketsurveys,entrepreneurship,exportlogistics,accounting, development of business plans, export management, new markettendencies,freetradeagreementsandoperationsadministration.

4.3.4 Financial assistance component

Financial assistancewas awarded toSMEs through twomethods: fast-track smallgrantsofuptoUS$5000,andUS$25000FONDEPROgrants(ProductiveDevelopmentFund).Smallgrantscouldalsobeaccessedtofinanceattendanceattrademissionsand fairs (Table 4.3), obtain technical assistance (e.g. consulting and analyticalservices)andproduct improvement.FONDEPROgrantswereprocessedbyMINECandrequiredaninvestmentplan.Inbothcases,SMEshadtomatchfundsawardedbytheProgram.Fundswerenottobeusedforcoveringoperationalexpenses.

EAPoffered20–40percentdiscountsonproductdevelopmentand improvement,shelfstabilityandnutritionallabellinganalyses.

4.3.5 cluster export support

Thecollectiveefficiencyapproach(CanielsandRomijn,2003)wasappliedtodevelopclustersofSMEsandhelpthemexport.EightclusterswereorganizedbytheProgram.Theyreceivedassistanceinbecominglegallyconstituted.Threeclustersofgourmetfoodprocessorswereorganizedtoexporttheirproductsundertwobrands(CocinaMaya and Latin Foods) throughwholesalers in theUSA (Whole Foods, Bestway,etc). An e-commerce cluster (Suprema LLC), a handcrafts cluster (Deco Mayan)and three art and culture clusters (Export Arte, Expocultura andVisual ArtsTC)werealsoorganized.Theseclustersbenefitedfromsupportingproviders,whogave

Period Courses Workshops Conferences

april 2006 – March 2007 13 (40) 2 (25) 5 (50)

april 2007 – March 2008 18 (40) 2 (25) 9 (50)

april 2008 – june 2009 16 (40) 2 (25) 6 (50)

( ) Scheduled number of attendee

taBLE 4.2

training calendar for the phase II of export promotion programme

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servicesforproductandpackagedesign,marketing,foodsafetyandexportlogistics. TheclustersarefullyownedbytheirparticipantSMEs.

Additionally,sevenexistingclusterswerefinanciallyandlogisticallysupportedbytheProgram to increase exports:ADIES furniture, Exportsalud Healthcare, Paax Muulacoustic guitar artisans, Maki footware, TI Hub translation services, Cy-Soft, andExsource software. In addition, the Program provided support for e-commerce totheseandotherclustersbycreatingthehttp://www.cuscatrading.comWebsiteandbylinking itwith thehttp://www.amazon.comWebsite.The http://www.paaxmuul.com websitefortheguitarartisanclusterisunderconstruction.

4.3.6 assessment of export performance

Phase I objectives included training 1 000 SME employees and promoting salesof US$40 million. Phase II objectives included training 1 500 SME employees,governmentofficialsandprivateconsultants,promotingdomesticandexportsalesincreasesofUS$35millionfrom350SMEsandcreating7100newjobs.

TheProgram significantly improvedmonitoring and information acquisition fromphaseItophaseII,startingon2006.

AnnualsurveyswereconductedonSMEsstartingin2006toassessphaseIandphaseIIdomesticandexportperformance.All847SMEstrainedinphaseIand1112SMEstrainedonphaseIIwerecontactedandanaverageof87percentrespondedtothe

Promotion activity region 2006 2007 2008

Trade fairs asia 0 1 5

central america 8 18 26

USa 9 28 51

europe 3 6 8

commercial missions central america 8 13 25

USa 7 20 22

South america 0 0 11

europe 1 3 4

Inbound buyer missions el Salvador 2 11 3

taBLE 4.3

promotion activities financially supported by the program during phase II


74

surveys.Domesticandexportsales,numberofjobscreatedandnumberofpeopletrainedwerereporteduptoDecember2008.Dataforthelastsemesteroftheprojectwerenotreadyforpublicationatthemomentofwritingthischapter.

Official exports and FDA refusals datawereobtained fromMINEC for the period2004–2009.TotalexportsalesbyfoodsectorandFDArefusalsduetolabellingerrorswerereported.

4.4 Results and discussion

Official statistics (MINEC,2009)and theProgram’sstatisticscoincide in reportingthatfrom2004to2008,ElSalvadorhasbeenabletotakeadvantageofCAFTA,andotherfreetradeagreementssignedafterwards.

Collateral benefits of export promotion programmes (MINEC’s EXPORTA andUSAIDEXPRO)includedincreasedexportstoEuropeandothermarkets(especiallyorganic foods), increased domestic sales, development of clusters in food,furniture, software, andguitarmanufacturing, and strengtheningof institutionsandconsumereducationonnutrition,arts,etc.Aneffectivetransferofcapabilitiesfrom temporal export promotion programmes to permanent public and privateprogrammes and institutions is key to making internationalization sustainable(CaniëlsandRomijn,2003).

4.4.1 training

ByDecember2008,theProgramwasabletofulfilitsgoaloftraining2500people (1000 inphase Iand1500 inphase II) fromSMEs,government institutions,non-governmental organizations (NGOs) and private consulting agencies (Table 4.4).TrainingcoursesandworkshopswerestillimpartedduringthefinalsemesteroftheProgram(January–June2009).

In phase I of the programme, 1 241 people fromSMEs and fromgovernment andconsulting agencies – 50 percent of them women – received theory and practicaltrainingonfoodsafety(ISO2200andpre-requisteprogrammes)andproductinnovation (Table4.3).Businesspersonsfrom847SMEscomprised80percentofattendees.

InphaseII,1904people–49percentofthemwomen–hadbeentrainedbyDecember2008.Theemphasisoftraininginthisphasewasonexport logistics–procedures,legislation and international quality standards. However, training on operationsstrengthening–administration,foodsafetystandardsandfoodproductinnovation–continuedtobeimparted.Businesspersonsfrom1112SMEscomprised87percentofattendees.Therestweregovernmentofficialsandconsultingagents(Table4.4).

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4.4.2 smes sales and exports

Agro-industrialtotalexportstotheWorldandtotheUSAhavemorethandoubledin the period 2003 to 2008 (Table 4.5).This suggests Salvadoran exporters havebeenabletotakeadvantageofCAFTA,whichtookeffectin2004.ItalsosuggeststhatnewexportcapabilitieshelpedexporterstoexpandtoothermarketsbesidestheUSA.Totalexportscontinuedtobedrivenbythetextileindustry,whichhasalsoexperiencedsignificantgrowthincreaseduringthisperiod.

Traditionalproductssuchascoffeeandsugarcontinuedtomakeupthemajorityofagro-industrialexports.However,exportsofethanolandglucosesyrupssignificantlyincreased from 2003 to 2008, reaching US$171 million in 2008 (MINEC, 2009).Exports to theUSAofothernon-traditional foodproducts–organic foods,dairy,cocoa,chocolatesandpickledfoods–alsosignificantly increased,especiallyafter2008 (Table 4.6). Organic coffee exports comprised 95 percent of organic foodexports.ThemainmarketfororganiccoffeewasEurope,butexportstotheUSAalsosignificantly increasedandareexpectedtocontinuegrowinginthecomingyears.Roastedorganic sesameseedsalsodrove the increaseoforganic foodexports toEuropeandtheUSA.

Phase businesspersons Government officials Consulting agents

Male Female Male Female Male Female

july 2003 – March 2006 523 487 21 38 85 87

april 2006 – june 2006* 862 799 21 39 88 95

Total 1 385 1 286 42 77 173 182

*Data collected in December 2008

taBLE 4.4

people trained during phases I and II

Market 2003 2004 2005 2006 2007 2008

World 271 308 403 440 522 628

USa 89 96 114 121 150 193

Source: MINEC, 2009.

taBLE 4.5

value of el salvador’s total agro-industry exports, 2003–2008 (us$ millions)


76

Dairy food exports to the USA quadrupled from 2004 to 2008 (Table 4.6). Thissuggests that Salvadoran processors benefited from the lifting of USA tariffson imports of dairy foods in 2004, whenCAFTA took effect.This is also a directindicationthatSalvadorandairyprocessors–99percentofthemSMEs–wereabletomeettheFDA’sfoodsafety,labellingandnutritionalrequirements.Furthermore,between 2004 and 2008 El Salvador displaced Costa Rica as the second largestCentralAmericandairy foodsexporter to theUSA,behindNicaragua.SalvadoranexportsofdairyfoodstotheUSAdecreased7percentfrom2007to2008,possiblyresultingfromtheeconomiccrisisthatdeepenedduringthelastsemesterof2008.

TheimpactoftheProgramontheincreaseinSMEtotalsalesandtotalexportsfrom2004to2008ispresentedinTables4.7through4.11.Trainedandfinancially-assistedSMEsreportedexportsinphasesIandIIthatsurpassedthegoalssetbytheProgram(Table4.7).

Inphase I, all 400financially-supportedSMEs reported increases in total exportsales. In phase II, 373 of 1 112 (34 percent) supportedSMEs reported increasedexportsthatmetthegoalsoftheProgramsixmonthsbeforetheendofitsrun.TheproportionofSMEsthathavetranslatedtrainingandfinancialsupportintoexportsissimilartootherinternationalizationprogrammes(Kimet al.,1997;Spence,2001;Calderónet al.,2005).

However, Czinkota and Johnson (1985) and Lu and Beamish (2006) warn thatincreases in total domestic and export sales do not always translate to increasesin profits for SMEs. It is therefore recommended that the Program continues tomonitor supportedSMEs, andplacemoreemphasisondocumentingprofitabilityindicators,thansimplyassessingtotalincreases.

Spence (2001) reported that the international experience of SMEs’ chiefentrepreneursisdirectlyrelatedtotheirsuccessintheinternationalizationprocess.Of1112supportedSMEsinphaseIIoftheProgram,68percenthadneverexportedatall,and81percenthadneverexportedtotheUSAorEurope(Table4.8).

Product 2004 2005 2006 2007 2008

Organic foods 1.03 1.18 1.64 2.32 3.80

dairy foods 0.24 0.23 0.72 0.98 0.93

cocoa and chocolates 0.26 0.32 0.35 0.37 0.61

Pickled foods 0.00 0.38 0.24 0.50 0.40


taBLE 4.6

el salvador exports of selected non-traditional foods to the usa, 2004–2008 (us$ millions)

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TheProgram implemented a strategy that combined activities to develop bothinternal technical capabilities and clusters of SMEs with enhanced collectiveefficiency.ThemajorityofSMEsthatqualifiedforsupporthadlittleornoexportexperienceinhighlycompetitivemarkets(Table4.8).SMEsfacehigherconstraintsin terms of finance, information andmanagement capacity, aswell as externalbarriers such as market imperfections and regulations (Hollenstein, 2005).Officialdata(Tables4.6)andProgramdata(Tables4.7through4.11)suggesttheProgram’s combinedapproachwaseffective inpromotingexports inSMEswithlittle international experience, especially in the caseofmicroSMEs (less than 5employees).

FromApril2006toDecember2008,microSMEsshowedthehighestproportionalincrease(sixtimes)inexportsalescomparedwiththerestofSMEs(fourtimes,onaverage)(Table4.9).However,averageincreasesintotalsaleswasdirectlyrelatedtoSMEsize,confirmingthefindingsofHollenstein(2005).TheeffectivenessoftheProgram’sefforts to transfer its capabilities to thepublicandprivate sectorsbyJune2009remainstobeseen.

Export experience SMEs

Never exported 760 (68%)*

central america 142 (13%)

Other 210 (19%)

Total 1 112 (100%)

*() Percentage of SMEs.

taBLE 4.8

previous export experience of smes participating in phase II

Phase Total SMEs Financed Trained Exports (uS$ millions)

july 2003 – March 2006 847 400 447 42.1

april 2006 – june 2006* 373 179 194 41.4

Total 1 220 579 641 83.5

*Data collected until December 2008

taBLE 4.7

export performance of smes on phases I and II


78

Table4.10showsthat85percentofSMEssupportedbytheProgramfellinthemicroenterprise (43 percent) and small enterprise (42 percent) categories. Intermediateenterprisescomprised15percentof supportedSMEs.Only34percentof supportedSMEsinphaseIIwereabletotranslatetraining,financialandexportlogisticssupportintoincreaseddomesticandinternationalsalesbyDecember2008.Smallerenterpriseswerethesmallestpercentage(24percent)ofsupportedSMEsthatwereabletoincreasetotal sales,while almost half of supported largerSMEswere able to increase sales. ThesmallestSMEsprovidedonly8percentoftotalsalesincreasewhilethelargestSMEsprovided37percentofincreasedsales.ThisconfirmsthefindingsofHollenstein(2005)regardingadirectcorrelationbetweenfirmsize,totalsalesandexportsalesincrease,andcontradictsCzinkotaandJohnson(1985),Reid(1987),andWolffandPett(2000).

Employees 2007 2008

Jun Sep Dec Jun Sep Dec

< 5 1.4 (45)* 2.0 (60) 5.1 (86) 6.0 (104) 7.6 (112) 8.6 (116)

5–25 4.8 (78) 7.0 (94) 12.9 (139) 16.2 (164) 19.4 (174) 22.0 (184)

26–50 3.5 (18) 4.7 (25) 7.9 (32) 9.6 (33) 11.2 (35) 13.4 (38)

51–100 6.3 (16) 9.6 (22) 14.2 (27) 19.0 (30) 21.2 (33) 25.6 (35)

Total 16.0 (157) 23.3 (201) 40.1 (284) 50.8 (331) 59.4 (354) 69.7 (373)

*() Number of SMEs with increased sales.

taBLE 4.9

Increase in sme sales from april 2006 to december 2008

Employees Supported SMEs SMEs with increased sales 2006–2008 increase in total sales (uS$ millions)

< 5 481 116 (24%)* 8.6 (12%)^

5–25 469 184 (39%) 22 (32%)

26–50 81 38 (47%) 13.4 (19%)

51–100 81 35 (42%) 25.6 (37%)

Total 1 112 373 (34%) 69.7 (100%)

*() Percentage of supported SMEs ^() Percentage of total sales.

taBLE 4.10

total sales performance of smes in phase II

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A total of 29 percent ofSMEs that increased sales during phase II belonged totheagro-industrialsector(25percentfoodprocessingand4percentagriculture), while SMEs dedicated to services represented 44 percent, and 23 percentbelongedtothecraftsmanufacturingsector(Table4.11).Only4percentofSMEsthatincreasedtotalsalesandexportswereinthepharmaceuticalbusiness.Foodprocessors and SMEs producing natural and organic products had the highestaverage increase in total sales,whileSMEs from theagricultural sectorhad thelowest.This data coincides with the traditional importance and profitability ofproductivesectorsinElSalvador(MINEC,2009).Italsosuggestsprocessedfoods,gourmet coffee, natural and organic foods and dietary supplements are theproductswiththegreatestpotentialforinternationalizationatthismoment.

SMEsincraftmanufacturing(guitars,furniture,etc)andservices(healthcareandsoftware)wereresponsiblefor52percentofincreasedsales.TheseSMEsalongwithfoodprocessorswerethebestperformers,suggestingthattheclusterapproachwas effective. Supporting these clusters in attending trade fairs, linking themto wholesellers and enabling e-commerce through Amazon and Cuscatrading,appearedtobeeffective.SMEstendtoexportthroughintermediariesduringtheearlystagesofinternationalization(Hollenstein,2005).

Employees Supported SMEs SMEs with increased sales 2006–2008 increase in total sales (uS$ millions)

< 5 481 116 (24%)* 8.6 (12%)^

5–25 469 184 (39%) 22 (32%)

26–50 81 38 (47%) 13.4 (19%)

51–100 81 35 (42%) 25.6 (37%)

Total 1 112 373 (34%) 69.7 (100%)

*() Percentage of supported SMEs ^() Percentage of total sales.

Sector SMEs Sales (uS$ millions)

food products 83 (22%)* 20.6 (30%)^

Manufacturing 85 (23%) 18.4 (26%)

Services 163 (44%) 18.1 (26%)

Pharmaceuticals 15 (4%) 5.6 (8%)

agricultural products 19 (5%) 3.6 (5%)

Natural and organic products 3 (1%) 2.8 (4%)

Speciality coffee 5 (1%) 0.6 (1%)

Total 373 (100%) 69.7 (100%)

*() Percentage of supported SME ^() Percentage of total sales.

taBLE 4.11

total sales by sector of smes supported in phase II


80

The apparent success of the Program in promoting increased sales andexportsbySMEsstillneedstobereflected inan improvementofElSalvador’scompetitivenessindicators.From2004to2008ElSalvador’srankingintheGlobalCompetitivenessIndexfellfromposition50to79(MINEC,2009).ReversingthistrendwillonlybepossibleiftheProgramisabletotransferitscapabilitiestothepublicandprivatesector.

4.4.3 employment

InphaseII,theProgramwasnotabletofulfilitsgoalofcreating7100jobsbyJune2009 (Table4.12).This suggests that increases in salesandexports fromSMEsatthisearlystageof internationalizationhaveyettotranslate intogrowthforfirms.Czinkota and Johnson (1985) and Lu and Beamish (2006) have reported similarbehaviourofSMEsintheearlystagesofinternationalization.

Thefact thatmorethanhalfof jobscreatedaretemporary,andthat95percentofthemareforproduction,suggestsSMEsarebeingconservativeat thisstage,giventheconsequencesoftheeconomiccrisisthatdeepenedinlate2008andisstillwithus.

4.4.4 Fda product refusals

Participation of the Program in the effort initiated by MINEC in 2006 to reducetherefusalofSalvadoranproductsbytheFDAbecauseof labellingerrorshasyettoproduceapermanenteffect.Significantreductionsinrefusalswereobservedin2007as comparedwith2006 (Table4.13). In2008,however, theFDA refused the

Position Permanent jobs Temporary jobs

Production 1 164 (73%)* 1 737 (95%)*

administration 242 (15%) 57 (3%)

Middle management 128 (8%) 22 (1%)

Upper management 61 (4%) 13 (1%)

Total 1 595 (100%) 1 829 (100%)

*() Percent of permanent or temporary jobs.

taBLE 4.12

permanent and temporary jobs created in phase II

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highestnumberofshipmentsinsixyears.Atotalof26correspondedtothesamepharmaceutical company. Ingeneral, themajorityof refusalsbasedon labellingwerefrompharmaceuticalproducts.Noneoftherefusals involvedSMEstrainedbytheProgram.ThemostcommonerrorswerealackoflabellinginEnglish,lackof a nutrition facts panel and incorrect ingredients lists. It is now up toMINECandprivate institutions tocontinuetheeffortof informingandtrainingSMEs incomplyingwithFDAlabellingregulations.

4.5 Conclusions

TheProgramstrategyofcombiningthestrengtheningofSMEs’internaltechnicalcapabilitiesthroughtrainingbasedon‘learningbydoing’,andenhancingnationaland regional collective efficiency through clusters, has had early success inincreasing total sales and exports. Efforts to create jobs and help reduce FDArefusals resulting from issues such as labelling errors have so far fallen belowexpectations. Success in those areas will depend on the effectiveness of theProgramtotransferitsknow-howtopublicandprivateinstitutions.

reason for refusal 2003 2004 2005 2006 2007 2008 2009

Wrong ingredient list 3 5 5 2 4 10 1

Missing nutrition facts panel 5 13 11 9 1 9 6

Missing weight information 3 8 3 6 2 8 2

Missing product name 2 1 0 7 1 9 0

Missing manufacturer information 2 6 3 0 3 10 0

label not in english 1 6 20 12 0 29 12

false label 0 0 0 0 3 1 2

Missing instructions 0 0 0 1 0 2 0

Non-authorized health claim 0 0 0 0 0 8 1

Wrong product name 0 0 0 0 0 2 0

Total 16 39 42 37 14 88 24


taBLE 4.13

refusals of salvadoran products by the Fda, 2003–2009


82

ContinuedmonitoringoftheProgrambeyondJune2009isnecessarytodocumentfully its impact on promotion of exports.This should include determining profitsearned by supported SMEs. Another study with a more academic emphasis isrecommended.ThestudyshouldrelatethecharacteristicsofSMEsandthesupporttheyreceivedtotheirdegreeofsuccessintheinternationalizationprocess.

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JOhN wIlKINSON, ClOVIS dORIgON ANd lUIz CARlOS mIOR

cHapter 5the emergence of sme agro-industry

networks in the shadow of agribusiness contract farming:

a case study from the south of Brazil

5.1 Introduction

This chapter proposes to review two decades of interventions in the westernregionof theStateofSantaCatarina,Brazil, topromotesmallandmedium-sized agro-industries, either individual ormanaged on a group basis, as a strategy forthesustainablerenewalofthefamilyfarmsectortogetherwithitsfoodprocessingtraditions.Theregionwasoccupiedintheearlyyearsofthe20thcenturybyItalianandGerman farmer immigrants with their mixed arable and livestock practices,fromwhichemergedthe largestpoultryandpigagro-industrialcomplex inSouthAmerica. Initiallya largeproportionof the family farmsectorwas integrated intothiscomplex;however,bythe1980sconcentration inboth industrialandfarmingactivities led to large-scale exclusion. Since then there have been a series ofefforts topreserve rural incomesandemploymentand revitalize local economiesthrough the promotion of small-scale agro-industries based on local foodtraditions,knownas ‘colonial’products,whichhavepersistedandareappreciatedboth in the region and outside. Local governments and Santa Catarina State organizations – particularly rural extension groups, rural trade unions, socialmovementsandfederalgovernmentprogrammes–haveallcontributedindifferentforms to thecreationofaviable institutionalandpoliticalenvironment favouringstrategies of regional development, anchored in the promotion of networks ofsmall-scale agro-industries. Equally important have been pre-existing traditionalfoodconsumptionandprocessingpractices,whichhaveguaranteedahighlevelofautonomousinitiativeonthepartoffarmersandlocalcommunities.

This chapter will review the different instruments and policies directed at formsof organization, financing, technological models, management, and marketing.

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Atthesametime,wewillexplorethe importanceofsocialnetworks insustainingthese emerging organizations and markets. The authors will argue that akey explanation for the emergence and persistence of these new models of agro-industrialdevelopmentintheregionhasbeenthediversityofactorsinvolvedand theexperimentsundertaken,and thesynergies–oftenunintendedandevenconflicting–betweenpublicandprivateinterventions.

5.2 Peculiarities of the region

The western region of the State of Santa Catarina in the South of Brazil hassome 1.15million inhabitantswith 360 000 of these – around 30 percent – livingin rural areas (Brazilian Institute of Geography and Statistics, IBGE, 2007).Occupying only 25 percent of the State’s territory, this region is responsiblefor 50 percent of the State’s agricultural production, and 51 percent of theeconomically-active population in the region work in the primary sector. Ninety-fivepercentofruralpropertiesarefamilyfarmswithlessthan50hectares,70percenthaving less than20hectares.Atypical family farm in the1980swouldproduce chickens or pigs in a contract relationship with large agro-industries orcooperatives.Itwouldgrowcornforfeed,beansandmaniocforfamilyconsumptionandsaleonlocalmarkets,andwouldgenerallyhaveanorchard.Itmightalsoproduce

Brazil

Paraguay

Argentina

Uruguay

Paraná

Rio Grande do Sul

Western region

Santa Catarina

FIGURE 5.1 maps of Brazil and Santa Catarina with the western region highlighted

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The emergence of SMe agro-industry networks in the shadow of agribusiness contract farming: a case study from the south of Brazil

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tobacco, contracted in the sameway by the agro-industry.The farmwould havesomecowsfordomesticconsumptionwithsurplusproducebeingtransformedinto‘colonial’cheesethatwouldbesoldinthelocalcommunity.Thisdairybaseexplainsthelaterrapidexpansionofmilkproductionintheregion,andwasalsotheoriginofavibrantinformalartisanagro-industrysector.Thefactthatunder3percentoftotalpigproductionandonly17percentofmilkareconsumedintheregionitselfgivessomeideaofthesizeofitsagro-industrialbase(Silvestroet al.,2001).

This agro-industrial base was built up in the 1920s and 1930s, producing porkfat for the São Paulo market.The shift to margarine inaugurated a new phase,with theadoptionofgeneticstockdesigned forgreatermeatproductionandtheorganizational innovation of contract integration with the family farmers of theregion.Brazil’sleadingwhitemeatsfirmsandcooperativesemergedinthisregionandarestilllocatedthere,eventhoughtheyhavesinceexpandedthroughoutBraziland into neighbouring countries.They are now global leaders in exportswith anincreasingpresenceinkeyinternationalmarkets.PerdigãoandSadia(nowBrazilianFoods,BRF)wereestablishedhere,asalsowereSeara(nowCargill)andAurora,thelargestwhitemeats cooperative. Dairy and tobacco agro-industries also have animportantpresenceintheregion.

In the1980s some67000outofa totalof80000 farmersproducedpigs foragro-industries,decliningdrasticallyto20000by1995(Testaet al.,1996)andto10000by2008.Ruralexodusfromthe1980sonwardsledtoadeclineintheregion’spopulationgrowth relative to the total for the State, and to a sharp shift in the rural–urbanpopulationratiowithintheregion.In1980,theruralpopulationnumbered576051asopposedto327137inurbanareas.By2007thishadinvertedsharply,withonly361000peopleremaininginthecountrysideand791712peoplenowintheregion’stowns.

Fromthebeginningofcolonization,theregionwasmarkedbyitsassociativedynamic.Ithadbeensettledattheturnofthetwentiethcenturywithanequaldistributionoflotsandaccesstoresources(waterandroads),andwasorganizedonacommunitybasis.TheItalianandGermanoriginsofthecolonistsaccountedforthetraditionsofmixedfarming,andtheimportanceofpork,wineandcornproducts.SugarcanewasalsoimportanttothecommunitiesofGermanorigin.ThisbackgroundalsoexplainsthestrongpresenceoftheCatholicChurchintheorganizationoftheruralpopulation,particularlyintheformofthePastoralLandCommission(CPT).Cooperativismwasequally important,andwith the returnofdemocracy inBrazil in the1980s, socialmovementsandcivilsocietyorganizationsemergedinforce.

Inthefollowingsectionsweexplorethedifferentinitiativeswhichhaveemergedin response to the crisis in the traditional forms of family farm integration inthe region. Table 5.1 presents a synthetic overview of the evolution of theseinitiatives,focusingontypesofagro-industry,thenatureofsocialactorsandthecharacteristicsofpublicpolicies.


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5.3 First responses to the crisis

By the early 1980s thewhitemeats agro-industry situated in thewestern regionofSantaCatarinahadalreadyconsolidateditsleadershipposition,bothwithinthedomesticBrazilianmarketandinexports.Poultryledthewayintermsofproductionand turnover, but the very high levels of productivity per farmermeant that onefarmer could produce 100 tonnes in one year.Typically, a farmer only needed tofatten the day old chicks received from the agro-industry.This involved a mere 42-dayturnover,allowingforfivetosixlotsayear,withtwelvethousandchickensatatimebeingraisedina100×12metreaviary.Asaresult,relativelyfewcontractfarmerswereneededcomparedwithpigproduction.

1970s 1980s 1990s 2000 onwards

Types of agro-industrialization

conventional large-scale industrial model …

… with increasing integration of pig and poultry farmers

Process of concentration and exclusion in pig production

Increasing value attached to artisan food production

Growing exclusion of pig farmers

Rapid growth of dairy production

entry of large dairy firms into the region

emergence of family-based agro-industries

Numerical expansion of family-based agro-industries

emergence of networks of family-based agro-industries side by side with the conventional pig and poultry agro-industries

Social actors Rural Trade Unions still subordinate to the State

creation of State agricultural Research Organization (eMPaSc) with unit in chapecó

establishment of National Research Unit of eMBRaPa for poultry and pigs in the western region

association of condominiums

The Pastoral land commission

Beginning of the landless Movement (MST)

alternative Trade Unionism

constitution of aPacO

Solidary credit Movement

cePaGRO

emergence of the association of the Municipalities of Western Santa catarina (aMOSc)

Growth in rural unions and social movements: feTRaf-SUl, Movement against the dams (MaSB), Movement of Women Peasants (MMc)

establishment of the intermunicipal entities aMOSc and the SaGa Institute

Networks of agro-industries

The Ucaf network. Quality seal ‘Sabor colonial’ (colonial flavour) adopted by aPacO associates

New networks of small-scale cooperatives

taBLE 5.1

evolution in types of agro-industrialization, social actors and public policies in the western region of santa catarina

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Until the1980s itwascommonalsoforfarmerstobe involved inwhatwascalledthe‘fullcycle’ofpigproduction–farrowing,weaningandfattening–alsoamuchlonger process than for poultry.A typical pig farmer would have 7–15 sows andwouldhandover80–150pigstotheagro-industryeachyear.Thenumberofsowsdepended on the area cultivated with corn, on the basis of one hectare for onesow.Inreturn,eachsowproducedenoughmanuretofertilizehalfahectare.Giventhis production system, a high proportion of the region’s farmerswere involved. When the leading firms introduced a new integration model separating out therearing and the fattening phases into specialized activities, economies of scalekicked inandaprocessof concentrationensued, sharply reducing thenumberoffarmerscontractedbyagro-industry.

1970s 1980s 1990s 2000 onwards

Types of agro-industrialization

conventional large-scale industrial model …

… with increasing integration of pig and poultry farmers

Process of concentration and exclusion in pig production

Increasing value attached to artisan food production

Growing exclusion of pig farmers

Rapid growth of dairy production

entry of large dairy firms into the region

emergence of family-based agro-industries

Numerical expansion of family-based agro-industries

emergence of networks of family-based agro-industries side by side with the conventional pig and poultry agro-industries

Social actors Rural Trade Unions still subordinate to the State

creation of State agricultural Research Organization (eMPaSc) with unit in chapecó

establishment of National Research Unit of eMBRaPa for poultry and pigs in the western region

association of condominiums

The Pastoral land commission

Beginning of the landless Movement (MST)

alternative Trade Unionism

constitution of aPacO

Solidary credit Movement

cePaGRO

emergence of the association of the Municipalities of Western Santa catarina (aMOSc)

Growth in rural unions and social movements: feTRaf-SUl, Movement against the dams (MaSB), Movement of Women Peasants (MMc)

establishment of the intermunicipal entities aMOSc and the SaGa Institute

Networks of agro-industries

The Ucaf network. Quality seal ‘Sabor colonial’ (colonial flavour) adopted by aPacO associates

New networks of small-scale cooperatives

1970s 1980s 1990s 2000 onwards

Public policy Modernization of agriculture

Subsidized credit and tax exemption for conventional agro-industry

consolidation of large-scale slaughter plants

Rural extension oriented to large-scale agro-industry

Work with rural youth

continuation of support for conventional large-scale agro-industries

Training in food production carried out in the farmers’ kitchens (acaReSc and its social extension workers)

cooking courses for women farmers (baking, cheeses, cold meats, pickling)

Preoccupation with family subsistence and the improvement of nutrition

constitution of pig rearing condominiums and storage associations

establishment of first agrarian reform settlements in Santa catarina

State research unit in chapecó with 50 researchers becomes exclusively dedicated to small-scale production


Professionalization of farmers in epagri’s Training centres

Microbacias (Watershed) 1 Project

Pilot Project – PRONaf agro-industry

legislation for artisan agro-industry in Santa catarina

ePaGRI project for the promotion of value added activities

Recognition of the region as ‘in crisis’ (Testa et al., 1996 publication)

Beginning of the implementation of PRONaf

Municipal support for local food markets

Beginning of municipal inspection service (SIM)


deSeNVOlVeR Project

National family agro-industry Program Mda

Microbacias (Watershed) 2, Project

The large Mesoregion frontier of the MeRcOSUl programme of the Ministry of National Integration

taBLE 5.1 (continued)

evolution in types of agro-industrialization, social actors and public policies in the western region of santa catarina


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TheStateofSantaCatarinaatthistimehadahighly-effectiveruralextensionservice(ACARESC) and high levels of organization in the family farming sector in thewesternregion.Inaddition,cooperationprogrammeswithEuropemeantthattheleadingcadreinACARESCcoulddrawonawiderangeoffamilyfarmingmodelsandorganizationalsystems.Toconfrontthesharpchangesbeingputintoplacebytheagro-industry, collectivemodelsof farmerorganizationwere introduced–knownas ‘condominiums’ –particularly forpigproductionbutalso for storageand farmpurchases.Inthecaseofpigs,groupsofaround10farmerswouldcollectivelyassumethe responsibility for the rearingphase.Whenthepigswereweanedeach farmerwould fattenhis share andwouldmarket his ownproduce,whether to the agro-industriesortothecooperatives.Initiallythismodelwasextremelysuccessfulandby1990therewereover150condominiumsinoperationinvolvingaroundathousandfamilyfarmers,manyfinancedbytheBrazilianDevelopmentBank(BNDES).

Success led to efforts to extend the model in the direction of an integratedagro-industrial complex. The municipality of Coronel Freitas would be a goodexamplehere,where23condominiumsinvolving180farmersaccountedforsome 40percentofitstotalproduction.Aunifiedorganizationwascreated(OCELCOSUL) andplanswereputinplaceforthecollectivepurchaseofinputsandmarketing,thecentralizationofrearing,constructionofafeedplant,andconstructionofanotherplantfortheindustrializationofmeatproducts.Asimilarinitiativewaspromotedinthecaseofstorageforgrain–acrucialcomponentofthepigproductioncycle–andby1990thereweresome170groups involving1500farmers. InthatyearaStatelevelAssociationofCondominiums(AECOS)wasalsocreated.

Thisfirstreactiontotheshiftinthedominantagro-industrialmodel,however,didnotsucceedinconsolidatinganalternativeandmanyoftheinitiativeswereassimilatedwithinthenewmodel.Officialsupportfortheinitiativebytheruralextensionservicewasalsowithdrawn.Nevertheless,this initialreactionwastomarkanewstageintheorganizationoffamilyfarmingintheStateandespeciallyinthewesternregions.New organizational forms had been experimented with and the challenges ofcollectiveactiontested.Aboveall,thegoalofcreatingalternativestothedominantagro-industrialmodelhadbeguntotakeroot.

5.4 New levels of association

Akey expressionof thesenew levels of organizationwas the creation in 1989oftheAssociationofSmallFarmersofWesternSantaCatarina(APACO)anon-profitcivil societyorganizationwhichrepresents itsaffiliatedsmall farmingcooperationgroups.Amongitsstatedobjectivesare:

Z tobeaforumforpoliticaldiscussionofproblemsrelatingtosmallfarmers; Z toprovidepolitical,administrativeandtechnicalsupporttoitsaffiliatedgroups;

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Z to coordinate joint marketing activities of the affiliated groups (withoutsubstitutingindividualactivities).

ThefoundersofthisorganizationhavetheirrootsinthePastoralLandCommission(CPT), but the APACO is premised on the self organization of small farmers,first in community groups for agricultural cooperation (CGAs), then inmunicipalsupportcentres(CEMAs)andfinallyintheregionalorganization.Withintwoyears, 144 CGAs were in operation in 24 municipalities, with 10 CEMAs incorporating1968smallfarmingfamilies.Togetherwithtwootherregionalorganizationsofthisnature,aStatelevelorganization,CEPAGRO–aStudiesandPromotionCentreforgroup-basedagriculture–wascreated,towhichtheState’sruralagriculturalunion(FETAESC)alsosubscribed.

Parallel civil societyorganizations thereforeemerged,working closelywith socialmovements,localgovernments,andthepublicsector.Thisdevelopmentcoincidedwith a decline in the role of rural public extension services, and cadres movedeasily between the public sector, non-governmental organizations (NGOs), socialmovementsandlocalgovernment.Aswewillsee,APACOcametoplayacentralroleinthedevelopmentofalternativeagro-industrialstrategies.Atthebeginningofthe1990sACARESCwasannexedtotheSantaCatarinaState’sresearchorganization,EMPASC,tobecomeEPAGRI,whichthenterminatesitsworkwiththecondominiumstoconcentrateonastrategyoffarmerprofessionalization.RuralextensioninitsturnbecametheresponsibilitynotoftheStatebutofthemunicipalities.

Theagrarianreformmovementalsobecameparticularlyimportantinthewesternregionwiththeconsolidationofasignificantnumberofsettlements.Theseprovidedidealterrainfortheexplorationofalternativestrategiesforfamilyfarming,amongwhichagro-industrywastobecomeacentralconcern.Italsodramaticallyincreasedthe importanceof socialmovements in the region,particularly in the formof theLandlessWorkersMovement(MST),aswellasthepresenceoftheFederalStateinthefinancingofthelandsettlements.Atthesametime,itshouldbenotedthatthefarming sector in the regionwas traditionallyhighlyorganized into cooperatives.Data for 1997 indicate 10 cooperatives in the regionwith some 35 000members(FECOAGRO,2000).

In the early 1990s the State launched its first ‘microbacias’ (small watersheds)project,inpartnershipwithmunicipalgovernmentsandimplementedbyEPAGRI,to counter the environmental problems of modern farming and agribusiness. Thiswas concluded in 1998 andwas followed by a second programme begun in2003,nowfocusingonthesocialproblemsofagribusinesswhereconcentrationwasacceleratingruralexodus,aphenomenonwhichaffectedSantaCatarinalaterthantheothersouthernStates.BothprojectswerefinancedbytheWorldBank.Thefirstincludedacomponentofsupportforgroup-basedfarmingandthesecondprovidedmoreexplicitsupportforsmall-scaleagro-industries.


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ThewesternregionalsoplayedanimportantroleintheconsolidationoftheCre$olsystem,arotatingcreditfundforfamilyfarming.FoundedintheneighbouringStateof Paraná with support from international organizations (Miserior), APACO wasimportant in the consolidationof a cooperativebase for this initiative. Its centraloffice, theCre$olCentral, is located inthecityofChapecó,capitalof thewesternregion.This body is recognizedbyBrazil’a central bankandnow implements thePRONAF1 credit lines.The system has 50 000 associates in 56 cooperatives andoperatesinsome300municipalities.

5.5 ‘Added value’

Ifoneideaweretobeidentifiedasembodyinganalternativeperspectiveforfamilyfarmingatthistime,itwasthenotionof‘addedvalue’.Thiswasprimarilypromotedby the new ‘civil society’ organizations, which emerged alongside the publicsector, theunions and the cooperatives. In 1994CEPAGROarticulatedanetworkincluding regional NGOs such asAPACO, local governments and different publicsector bodies, and launched the Small-ScaleAgro-industry Program.A range of agro-industriesemerged fromthis initiative,particularly smalldairyplants,whichwere a harbinger of the important shift to dairy production in the light of theincreasingcrisisinpigfarming.Asecondcomponentofthisprogrammewasequallyimportantandinvolvedworkatthelegislativeleveltodevelopaseparateregulatorystructure,withoutwhichartisan-styleagro-industrywasnotviable.

Studieswereundertakentomapthisnewworldofsmall-scaleagro-industry,whichuntil thenhad remained invisible: squeezedoutas the rural sectorwas seenonlyin terms of agriculture on the one hand andmodern agro-industry on the other. The first such study was carried out byOliveira, Schmidt andTurnes (1999) andidentified 1 116 ‘Small-scale Rural Industries’ as they were then called.Of these 345werelocatedinthewesternregion.Some79percentofthesewereinformalwithnojuridicalstatus,andmorethanathirdwereessentiallyrun‘fromthekitchen’withno specialized facilities.Table5.2givesan ideaof thediversityofproductsbeingprocessed.

StudiesrevealedthatinSantaCatarinatheinformalsectorproducedasmuchcheeseastheformalsector(WilkinsonandMior,1999).OfficialcensusdataonagriculturalproductsprocessedinsomewayonthefarmforsaleintheStateofSantaCatarinaidentified33211producersselling33105tonnesofproductsintheearly1990s(IBGE,1996).Prideofplaceherewenttocheese,followedbymeatproducts,animalfat,butter,andsugar-canesyrup/treacle,ascanbeseeninthefollowingTable.

1 PRONAF is the acronym of the Brazilian National Family Farm Program, spearheaded by the Ministry of Agrarian Development.

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raw material

Number of units which process raw material

West Southern Highland

Northern Highland

High Valley

Northern Coast

Metropo-litan Area

Southern Coast

Total

Milk 112 58 11 56 87 9 30 363

Sugar cane 75 1 – 7 18 65 78 244

Fruits and horticulture

47 5 10 6 83 8 21 180

Pork 88 8 6 8 6 8 26 150

Manioc 2 1 – 7 10 31 68 119

Wheat flour*

19 4 2 2 23 3 11 64

beef 27 4 3 7 5 7 8 60

Honey 9 14 3 9 3 2 14 54

Grapes 21 – – – 2 4 9 36

Poultry 10 1 2 9 3 – 1 26

Quail eggs 7 – 1 – 11 1 2 22

Corn 15 – 2 – – – 4 21

Fish and seafood

2 1 – – 6 – 6 15

rice 6 – – – – – 3 9

Wheat 3 – 1 – 1 – 2 7

Hen eggs 1 – – – 2 – 3 6

Green tea 4 – 1 – – – – 5

Manioc flour

– – – – – 2 3 5

*The authors assume that wheat flour is the raw material for bakeries.

Source: Oliveira et al. (1999), adapted by the authors.

taBLE 5.2

number of rural industries by raw material processed by region and for the whole state


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Theaddedvaluestrategywasalsoapplied inthenewly-formed landsettlements.ThesettlementswereassistedbythesameNGOsandpublicsectorprofessionalsas the family farming sector, and shared in the experience and eventual collapseofthecondominiummovement.Initswakeanumberofdairieswerecreatedandcheeseproductionwasundertaken.Othersettlementsoptedtoestablishplantsfortheslaughterofchickensandyetothersfortheprocessingoffruit.Theseparationbetweentheagrarianreformsectorandthe family farmsector thereforebecamelessmarked,asbothgroupsbegantoinvolvethemselvesinthesameinitiatives.

The importance of the western region of Santa Catarina in rural agro-industryproductioncanbegaugedinthecomparativeTable5.4.Morerecentcensusdataarestillnotavailableforthecrucialperiodwhichmarkstheintensificationofpoliciesandstrategiestopromoteruralagro-industries.

Product processed Producer’s number

Quantity produced (tonnes)

Producers with sales number

Quantity sold (tonnes)

Value of production (r$ 000)

% in total production value

beef 80 802 21 743 2 579 4 412 32 037 27.5

Pork 108 451 22 233 1 815 3 204 26 175 22.5

Sausages/Cold meats 20 398 2 002 483 659 5 996 5.1

Animal fat 94 760 9 119 2 176 578 6 144 5.3

Cheese/Cottage cheese 59 741 13 837 21 376 8 918 33 021 28.4

butter 15 864 557 2 049 201 1 040 0.9

Manioc flour 3 918 11 115 786 8 978 3 660 3.1

Syrup/Treacle 12 172 4 076 891 2 714 2 745 2.4

rice grain 32 946 9 046 170 1 334 3 095 2.7

Tobacco 821 718 585 588 1 507 1.3

Corn flour 17 058 3 183 81 228 1 034 0.9

Grape wine 2 672 2 591 220 1 291 1 535 1.3

Total – 100 220 33 211 33 105 116 454 100.0

Source: Agricultural Census , IBGE 1995/6.

taBLE 5.3

products processed on the farm in the state of santa catarina, 1995

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98

5.6 A new municipal and state institutional framework

Itwas undertood from the outset thatwithout an appropriate regulatory systemthis agro-industrial strategy was doomed to failure. Existing sanitary legislation,inspection criteria, tax regulations and marketing requirements all conspired tomake the transition from informal to formal operations unviable.The possibilityof separate municipal inspection services provided the first loophole enablingtheseagro-industriestooperateopenly inthelocalmarketandbenefitfromlocalgovernment support in the form of publicmarkets and procurement policies forschoolmeals.Veryoften,however,themunicipalityprovedtoosmallamarketwhichinhibitedgrowth;thisinturnledtotheadoptionofpoliciesofmutualrecognitionor‘freetrade’regimesbetweenadjacentmunicipalities.

Amajoradvancewas thepassingofStatesanitary legislation in1997, specificallygearedtotheproductionandmarketingofartisanfoodanddrinkproducts,includingexemptions for costs relating to inspectionand theneed to register theproductstobemarketed.Thislegislationfollowedanearlierinitiativeexemptingmicrofirmsfromtaxesonthecirculationofgoods,whichhadprovedineffectiveinruralareas,whereforavarietyofreasonsthejuridicalformofthemicroenterprisehasnotbeenadopted.Inanefforttoovercomethisproblemtheindividualfarmerwasgiventhestatusofamicroenterpriseforthepurposesoftaxation,buthereagainthetermsunderwhichamicroenterprisecouldoperate–only individuallyandonlyforsalesdirectly to the final consumer –were not appropriate for the neworganizationalformswhichthemovetoagro-industrializationwastaking.

The State of Santa Catarina also benefited from a rural research and extensionservice(EPAGRI,previouslyACARESCandEMPASC)whichgavegreatimportancetotheprofessionalizationofthefamilyfarmingsectorandwastoprovedecisiveindisseminatingknowledgeonagro-industrialprocesses.Initiallytheobjectiveofthistrainingprogrammewastoimprovethenourishmentofruralfamilies;classeswereconducted in the farmer’s kitchen. Later theseweremoved to theorganization’strainingcentresofwhichthereweresome14intheStateasawhole,anexceptionalsituationwhencomparedwithotherstates.

Fromimprovingfamilynourishmenttheorientationofthecoursesshiftedtothatofpromotingartisanindustries.In1990twocoursesweregiven,oneforprocessingmilkandthesecondforprocessingpork.Bytheyear2000,18coursesweregiven,increasingto25by2007.Inthefirstyearsome270farmersweretrained,butby2000thisnumberhadreached2340.Whenanalysedintermsofnumberofcoursesandparticipantsthefiguresareevenmoreremarkable.Indairyprocessing,503courseswereofferedand6676farmersweretrained; inmeatprocessingthefigureswere 528and6802,respectively.Morerecently,baking(249coursesand4061farmerstrained)andfruitprocessing(218coursesand2978farmerstrained)havebecomethemostpopular.Thereis,however,adownsidetothistraining.Whilethesecoursesprovide crucial inputs in terms of hygiene and technical knowledge, they often

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upholdindustrialnormsanddownplaythevalueofartisanproductsandtechniques.Thismayleadtoalossoflocalvariationandpractices.Ontheotherhandthereisfieldevidencethatfarmersadoptpracticestheyconsiderimportantwithouteliminating‘thetraditionalwayofdoingthings’.

5.7 A region officially in crisis

The perception of a region in crisis was consolidated through the publication ofresearch carriedoutby theState’s rural extension research centreon small-scalefarming(CPPP)locatedintheregion(Testaet al.,1996).Thisstudyprovidedadetailedmapof thecrisis in thedominantagro-industrialmodel fromthepointofviewofthefamilyfarmer.Itfocusednotonlyontheexclusionaryeffectsofconcentrationbutalsoontheenvironmentalimpactofintensivepigproduction,togetherwiththeresultsof increasingsoilerosiononagriculturalproductivity. Inthenewsystemofintegration,cornandpigproductionwasincreasinglydisassociatedandtheregionmoredependenton imports for the former. Itwasalso felt that thenextstage inthegrowthstrategiesofagro-industrieswould involvea shift innew investmentsto the centre-west frontier in Brazil, the new centre for grains production. The research also pointed to the opportunities opened up through the rapidconversion to dairy production underway in the region, largely a spontaneousresponsetothecrisisofperspectivesinthewhitemeatssector.Atthesametime, it made clear that organizational innovations would be necessary if this was tobecome a viable option for large sections of family farmers (primarily logisticsandmilk collection).The publication and diffusion of this study consolidated theperceptionofaregionalcrisis,callingintoquestiontheexistingdevelopmentmodel,andhelpedconsolidatearegionalconsensusontheneedfornewsolutions.

All the region’s actors were drawn into this debate.The major firms in poultry,pigs and tobacco presented their ‘year 2000’models for a sustainable future forfamily farming in articulationwith thedominant agro-industrymodel (Wilkinson,1996).TheAssociation of LocalGovernments in the region (AMOSC) contractedinternationalconsultantswhoseinputsinthedebatewerelargelyinfluencedbythe‘ThirdItaly’model,favouringdevelopmentstrategiesbasedonclustersofsmallandmedium-sizedfirms.AMOSCledinitiativestocreatetheSagaInstitute,whichwasresponsibleinturnforcreatingthe‘GreaterFrontierMeso-RegionoftheMercosul’,whichsupportedthepromotionofsmall-scaleagro-industries.Aproactiveresponsetotheperceivedshifttodairyfarmingwasseentobekeytoensuringbroadsocialinclusioninthisnextwaveofagro-industrialintegration.Aboveall,however,hopeswereincreasinglyplacedinthepotentialforthedevelopmentofanalternativeagro-industrialmodelbasedonsmall farmergroupsandthepromotionofthequalitiesof traditional ‘colonial’ products – dairy produce, cheeses, salami, rustic chicken, coldmeatsandsausages,fruitproducts,sugar-basedproductsandconfectionary.


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In parallel with this, the StateGovernment created the Santa Catarina Programfor Small-Scale Rural Industry (PROIND) in 1996, although this was quicklyovershadowedbythescopeandmorefavourableconditionsprovidedbytheFederalfamilyfarmingprogramme(PRONAF).

Twoyears later theState legislatureapprovedaprogramme for thePromotionandDevelopment ofSmall-Scale Fishing and FamilyAgro-industry (PROPAGRO)whichincluded thecreationofa specialquality label: ‘SaborColonial’ (ColonialTaste).ThislabelwassubsequentlytakenoverbyAPACOandregisteredwiththeNationalInstituteforIndustrialProperty(INPI)forusebyitsassociatedgroupsinthewesternregion.Aswewillsee,APACOwasalsotoplayakeyroleinthearticulationbetweentheregionandtheFederalprogrammeinsupportoffamilyfarmingandsmall-scaleagro-industry.

A further important development for the adoption and diffusion of small-scale agro-industry initiatives was the approval of the programme fortheDevelopmentofSantaCatarinaFamilyFarmingthroughtheVerticalizationofProduction('Desenvolver').

This programme was inspired by a small-scale agro-industry programme –PROVE–developedintheFederalDistrictofBrasiliaandinitiatedafewyearsearlier.CEPAGROandAPACOweretheprincipalproponentsoftheprogramme

The Program was created in 1996 to give technical and financial support to

small farmer reconversion initiatives for activities which generate income and

employment in the countryside. Initially the Program was oriented to the provision

of credit, but later it developed into an integrated support programme for the

development of small-scale agro-industry. Although the Program was short-lived,

it provided the seeds for the subsequent development of support programmes for

family farm based agro-industry.

In 1997 the project 'Adding Value to the Products and Services of Small-Farming

and Artisan Fishing' was established as one of eleven priority programmes for

EPAGRI. In partnership with CEPAGRO*, the Federal University of Santa

Catarina (UFSC) and EMBRAPA, the project evaluated the potential for small-

scale industry in Santa Catarina. 1 116 small-scale agro-industries were identified,

but the study concluded that this figure considerably underestimated the total

number of these activities in the State.

* In collaboration with other NGOs and farmers organizations, CEPAGRO has been active since 1994 in supporting small-scale agro-industries, particularly mini-dairies, in the State of Santa Catarina. In the western region of the state, this partnership was made with APACO.

box 5.1 The Santa Catarina Program for Small-Scale Rural Industry (PROINd)

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On the initiative of the Santa Catarina State Legislature, a State Law was

passed and subsequently regulated by Decree establishing the PROPAGRO

programme, which among other provisions included the allocation of financial

incentives for the creation of small-scale agro-industries.* The Law obliges

the Agriculture and Rural Development Secretary to provide support for

all aspects of value-added projects, from production to marketing. For this

purpose the Rural Development Fund (FDR) was transformed into a financing

body and the organizations associated with it assumed the execution of

projects in conjunction with NGOs and local governments. In addition to

providing credit for family-based agro-industries, the FDR also made possible

the implementation of the Great Meso Region Mercosul Frontier project,

which supported the purchase of machines and equipment by some 50 family

agribusinesses for the consolidation of processing facilities. Another important

aspect of the law was the creation of the quality seal ‘Sabor Colonial’ (Colonial

Taste), to be used by firms tha complied with legal, tax, environmental and

sanitary criteria. Such firms were also to be exempted from Santa Catarina

State taxes. To access these benefits, the farmer owners of the agro-industry

had to comply with the criteria established for inclusion within the definition

of family farming given by the Federal PRONAF programme. The quality

seal was adopted by the family-based agro-industries that participated in the

APACO/UCAF network in the western region of Santa Catarina.

* Parallel to this programme the State Government also launched the PRODEC AGROINDUSTRIAL for large-scale conventional agro-industry: testimony to the continued political force of this sector.

box 5.2 Programme for the Promotion and development of Small-Scale Agro-industry for Family Farming and Fisheries (PROPAgRO)

andof the 32municipalities included, 20of thesewere in thewestern region.From 1997 the programme was financed by the National Research Council(CNPq), and enabled the contracting of a technical team to provide assistancefor the implementation of small-scale agro-industries in a range of activities,rangingfromtheelaborationoftheprojecttothemarketingofproducts.Intheprogramme’s 2001 Report, a total of 130 small-scale agro-industries had beenaccompanied in the western region, involving 721 families. Direct and indirectemploymentgeneratedbytheseagro-industrieswascalculatedat3640full-timepositions, with a further 356 temporary posts being created for constructionactivities.Asforthenumberofunitsattendedbytheprogramme(discriminatedbyagriculturalrawmaterialsused),Table5.5capturesthediversityinthethreepolesoftheprogrammeinthewesternregion.


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Inthereportpreparedtoevaluatethesocio-economicimpactsoftheprogramme,61 percent of those interviewed said that their economic situation had improvedwiththeinstallationoftheiragro-industry(seeTable5.6).For10.2percentofthoseinterviewed the agro-industry was their only source of income; for 33.9 percentit had become the major source of income and for 54.2 percent it represented acomplementaryincome.Legalizationwasseentobetheprincipalproblembothfor the plant itself and when marketing products. Eighty-five percent of thoseintervieweddeclaredthattheyhadreceivedtechnicalassistanceservices,butmoreworryingly, 71percent stated thatwithout such support theywouldbeunable tocontinueintheactivity(Carlos,2001;SchmidtandTurnes,2002)

5.8 The national family farm programme (PRONAF)

Withtheendofthemilitarydictatorship,arangeofsocialandeconomicissuesthathadbeen suppressed re-emerged, among them thedemand for agrarian reform.Perhaps more important than this was a renewed questioning of agriculturalmodernizationpolicies and an insistenceon the continued roleof family farming

The Programme for the Development of Family Farming through the Verticalization

of Production – ‘Desenvolver’ – supports the creation or consolidation of

agricultural production processing in all its stages, from production of raw materials

to the marketing of the processed products, by providing technical assistance and

producing and diffusing appropriate technologies. It began in 1998 as the result of

a convergence of interests between State bodies, local governments and NGOs,

with the support of the National Research Council (CNPq) through the provision

of grants to contract professionals for technical assistance in family-based

agro-industries.

The Programme made it possible to contract 30 professionals to promote this

value-added strategy: engineers (agronomic, food chemistry, civil and sanitary),

management, veterinarians, pharmacists and publicists. These professionals were

responsible for organizing the farmers, designing the processing plants, selecting

the equipment, obtaining credit, improving the quality of the producers, and

assisting in management and marketing.

The Programme was made possible through partnerships with EPAGRI,

local governments, NGOs and producer organizations in 41 municipalities,

organized in three poles in the western region and three along the Santa

Catarina coast.

box 5.3 'desenvolver' programme

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eveninadevelopedagriculturalsetting.Thisargument–promotedbyincreasinglywell-organized social movements and backed by significant academic researchefforts – led to the creation of a separate Ministry of Agrarian Development(MDA) whose centrepiece was the Secretary for Family Farming (SAF). At the same time, the category of family farming was enshrined in Brazilianlegislation. In the mid-1990s a National Programme for the Strengthening of

raw materialWestern region

Pole i Pole ii Pole iii Total

Sugar cane 05 07 06 18

Cereals 02 02 02 05

Tea – 01 01 02

Poultry 02 01 02 05

rabbits – –1 – 01

Fruit jams 04 04 01 09

Horticulture (minimally processed) – – 02 02

Horticulture (pickled) 03 03 02 08

Orange juice 01 – – 01

Milk 10 05 13 28

Honey – 01 01 02

Eggs 02 01 02 05

Quail eggs – – – –

bakery – – 02 02

Fish 02 02 02 06

Pork/beef 10 11 06 27

brushes 01 02 01 04

rural tourism 02 – 02 04

ice cream – – 01 01

Total 43 41 46 130

Source: Schmidt and Turnes, 2002.

taBLE 5.5

number of units attended by the 'desenvolver' programme according to type


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Family Farming (PRONAF) was launched. Initially this programme was focusedfundamentallyonagriculture,but includeda lineofcredit for infrastructure tobeimplementedbylocalgovernments.InthewesternregionofSantaCatarinatheseresourceswereappliedtotheconsolidationofsmall-scaleagro-industries.Theruralfamilyfarmtrade-unionFetraf-Sul,whichwascreatedinthewesternregionin1997,wastoplayanimportantroleintheimplementationofthePRONAF.

Theissueof‘valueadded’wascentraltotheconcernsofthePRONAFprogrammeand ‘verticalization’ was expected to provide a strategic way forward. A newcomponentofthePRONAFwasthereforecreatedin1998–PRONAF-Agro-industry.Theviabilityofagro-industriesinthefamilyfarmsettingwasseentodependonanumberofkeyfactors.Inthefirstplace,itwasthoughtnecessarytosupportgroupsof agro-industriesratherthanindividualactivitiesifthenecessaryscaleforoperatinginthemarketwastobeachieved.Scalewasalsonecessarytopayforthetechnicalservicesthoughttobeapre-conditiontoensuringcompetitiveness inthemarket.Such services would involve marketing, management and technical support. Themodelproposed, therefore, requiredaminimumnumberof agro-industries inoperation in the same location, all serviced froma central unit.Sucha set-upwasnot easy to identify in the Brazilian family farm sector and the first stage of theprogramme’simplementationinvolvedasearchforcandidatesforpilotprojects,totestthemodel.ViçosaUniversityandlaterAPACOwerecontractedtoproducetechnicalspecificationsfordifferenttypesofagro-industriesadaptedtotheprogramme.

Atthistime,the‘Testaet al.,1996’publicationhadbeendiscussedbytheMinistry’spolicystaffinBrasiliaandservedtochangetheprevailingideaofSantaCatarina’swesternregionasaparadigmofdynamicgrowthbasedonfamilyfarmintegrationwith agro-industry. As a result, the region was now included among those seen aspriorities for the PRONAFAgro-industry programme and theCPPP; the EPAGRIunit inChapecó,nowCEPAF(ResearchCentreforFamilyFarming),was invitedtoimplementapilotprojectinthewesternregion.

income % before implementation

% after implementation

Above 3 minimum salaries 30.5 49.1

between 1 and 3 minimum salaries 25.4 44.1

below 1 minimum salary 35.6 1.7

Total 100 100

taBLE 5.6

monthly income of farmers assisted by 'desenvolver'

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5.9 The PRONAF agro-industry pilot project in Santa Catarina’s western region

TheprojectelaboratedbytheCPPPteambuiltontheindividualandgroupinitiativesalreadyunderwayintheregionandfocusedonthoseagro-industriesthatalreadyshowedaminimallevelofconsolidationandorganization.Thecentralissuewasseentobethatofbringingtheseagro-industriesoutoftheirinformalityandclandestinitythrough the financing of projects, which would allow for an adaptation of the agro-industriestothevarioussanitaryandfiscalrequirements.Themarketdynamicoftheseagro-industrieswasunderstoodtocomprisethreelevelsinwhich,ideally,theagro-industrywouldtransitfrominformalitytoformality,andfromtheretothedevelopmentofspecialqualityartisanproducts.

Giventhenumberofinitiativesandtheirgeographicaldispersion,theprojectwasdividedintotwo,onebeingcoordinatedbytheNGO,APACO,andtheotherbyaunitofthepublicsectorresearchandextensionservice,EPAGRI.ThismixingofpublicandprivatewasnotwithoutitstensionsandEPAGRIwasinitiallyreluctanttoworkonthebasisofequalitywithanNGO.However,thesituationwasfinallyacceptedandthis‘hybridity’ of public and private partnershipswas in fact a typical feature of the networks builtaroundthepromotionofartisanagro-industriesinthewesternregionofSantaCatarina.

With differing juridical adaptations the broad conception of the PRONAF Agro-industry programme was adopted. It involved an articulation between thedifferentagro-industrygroupsandunitsprovidingthenecessarytechnicalservicesidentifiedbytheprogramme,allundertheumbrellaofaCentralSupportstructure.The project represented a major challenge for the public sector organizationEPAGRI,giventhatithadtraditionallydefendedtheviewthatfarmersshouldlimitthemselvestoprimaryproduction, leaving ‘valueadded’productionto large-scaleagro-industries.Formany,theideaofpromotingaverticalizationoffamilyfarmingintheheartlandofthelargestagro-industrialcomplexinLatinAmerica, ifnottheworld,wasdifficulttostomach.

Some 52 agro-industries committed themselves to the project, covering 23municipalitiesandinvolving481families.Intermsofactivitiestheagro-industriesincluded: 12 dairies, 12 sugar-cane products, 11 porkmeats and sausages, threepickled cucumbers, three fruit jams and confectionary, two cereal products, twochickenslaughterhouses,twoeggpackagingplants,oneorangejuice,onebakery,one brush factory, one jeans factory and one undertaking dedicated to ruraltourism.Allofthesewerelocatedinruralareasandrunbyfamilyfarmersasdefinedby the national family farm programme. It was expected that 620 employmentopportunitieswouldbecreatedbytheproject.

Although the project was promoted by the Federal Government, the necessaryfunds were not made available by the PRONAF. Nevertheless, the project wentaheadandfundswereraisedforthemajorityoftheagro-industriesthroughasimilar


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1. Rural creditThe programme provides both operational and investment credit for family

farmers involved in agro-industries.

2. Training and publications Activities include: organization and management of networks; finance and

accounts management; guidance on environmental management and compliance

with legislation; assistance on working conditions and insurance; participation

in representative associations; elaboration of agro-industry projects either

individually or in the form of networks; organization of courses on good industrial

practices and processing techniques.

3. Science and technologyActs in support of: small-scale technology development; the development of

agro-industrial project profiles; new products and natural food preservatives;

technology capacity building; provision of technical assistance.

4. Promotion, publicity and marketingPromotion and publicity:

• International, National and State fairs.

Identification of markets:

• Macro market studies;

• Studies of institutional markets;

• Logistics of network creation;

• Technological and market forecasting.

Institutional market promotion:

• School dinners, provision of food baskets, acquisition /donations, etc.

5. Other sources of support for agro-industries• Partnership with other Ministry Secretaries;

• Conducting of surveys and elaboration of strategies for individual States;

• Consultancy and technical assistance;

• Teaching and demonstration models.

box 5.4 The PRONAF agro-industry programme includes the lines of action summarized below. A pilot project was begun in 1997 but the national programme only got off the ground in 2003.

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lineofcredit(Agregar)fromtheBankofBrazil.Thislineofcredit,however,hadthedrawbackofonlyfinancing individualproposalsbasedon theproductivecapacityof each property. Projects where the viability of the agro-industry depended onthe combined efforts of various families suffered discrimination; poorer farmersthereforetendedtobeexcluded.ChangesinorientationatFederallevelalsoledtothediscontinuationofthePRONAFAgro-industryprogramme.

Inspiteoftheseproblemsthemodelpromotedbythepilotproject–whichinvolvednotonlyagrouplogicbutalsoarecognitionoftheneedforasystemoftechnicalservicescoveringmanagementandmarketing–becamethereferenceforfutureinitiativesintheregion.Inaddition,theideathattheobjectiveofpromotingtheseagro-industrieswas not exhausted in their adaptation to the fiscal and sanitary requirements oflegality,butratherinvolvedtheirconsolidationassuperiorquality,‘colonial’products,alsobecamefirmlyentrenched.AnindicationoftheimportancethisprojectacquiredfortheregioncanbegaugedfromthepresenceoftheStateGovernorandtwoFederalMinistersatitslaunch,inadditiontodeputies,prefects,tradeunionleadersandmorethanathousandfarmers.Givenitssize,theprojectwasdividedintotwo:undertheresponsibilityofAPACOinChapecóandEPAGRIinConcordia.

5.10 Apaco’s vision for the region

TheendofthePRONAFAgro-industryprogrammeandtheopportunityforinnovativeformsoffinancingwhich itentailedhighlighted the importanceofNGOsandsocialmovementsforthecontinuityofactionsinsupportofdevelopmentstrategiesbasedonthepromotionandconsolidationofsmall-scaleruralagro-industries.ThestrategyofthePRONAFAgro-industryprogrammewasinmanywaysconvergentwiththatofAPACO,whichconsolidatedtheorganizationalmodelithadproposed.ArecentpresentationbyGomesandMarchioro(2008)providesasuccinctviewofAPACOsactivities.

In 2000, APACO coordinated some 50 agricultural community groups (GCAs). By2004–2005 these had doubled, and at the last count in 2008 there were 130 suchgroups.InAPACO’sexperience,individualagro-industriesareingeneralunviable,with50percentfoldinginthefirstyearand80percentbythesecondyear,fundamentallybecauseof thecostofservices (technicalandmarketing)whichcanbemoreeasilybornewhendilutedwithinanumberofagro-industries.Initialeffortshadfocusedonthepromotionoflargeprojectsinvolvingmanyfamilieswiththeobjectiveofcreatingeconomies of scale.These first efforts proved unsuccessful, both as a result of thecomplexityofcollectiveactionproblemsandthelackofsufficienttechnicalknow-how.Theemerging‘cooperationmodel’wasbasedonfourtosixfamilies,oftenwithfamilytiesormutualexperienceinsocialmovementsandtradeunions.Itwasimportantthatsuchfamilieshadorganizationalexperienceandtechnicalcontrolovertheproductionchain.APACO built on the earlier experiences of condominiums andmany of thegroupshadbeeninitiallysupportedbytheruralextensionservices.


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In 1995 three families of Italian origin – two brothers and a cousin – decided to

join forces and set up a group. One of the members had a small piece of land, some

five hectares, dedicated to dairy production. The other two lived on their father’s

property of some 33 hectares where dairy and tobacco were the principal activities.

Eleven years later, now with two more families, also cousins, the group finds

itself at the head of four firms – a cheese plant, a shop selling agricultural inputs,

a frozen pizza industry, and a plant still under construction for grated cheese.

The dairy transforms 140 000 litres of milk per month into eight different products.

The group also collects 300 000 litres of milk a month from as many as 190 farmers,

which are processed via two partnerships with other firms.

How was such a transformation possible? Part of the explanation for the family’s

success was the culturally strong, communitarian, kinship relations soldered in

the harsh conditions of frontier life. But equally important were the many years

involved in social movements, political parties, trade unions and the Pastoral Land

Commission. In these environments, habits of discussion were formed, a critical

stance in relation to the dominant agro-industrial model was consolidated, and

networks of access to information and expertise on a range of possible alternatives

were established.

The group gained experience and confidence in collective organization during

a period involved in relatively low cost, low risk, but low return agricultural

activities. The decision to process products for sale on the market was seen as

an option to stay in farming rather than move out to the city. Experience had

already been gained in the sale of ‘colonial’ (non-pasteurized) cheeses at a small

open market in the parking lot of the municipal football ground. This activity

was made possible by the support of the local government – which set up the

market – and the fact that little or no costs were involved. In this activity a

client base was formed which extended beyond this market as unsold products

were then negotiated in homes and commercial establishments in the town.

This period also served to test which products had the best possibility of being

profitable. The decision to shift from informal to formal markets involved

heavy investment in a processing plant – achieved initially through the sale

of land and animals – which could be certified by the Municipal Inspection

Service (SIM), and in the establishment of a micro-firm to deal with the legal

and fiscal implications.

box 5.5: An illustrative example of beneficiaries of the PRONAF agro-industry programme – the malagutti extended family

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Thegoalinmostcaseswastoemergefrominformalityandbeabletooperateunderthefiscal,sanitaryandmarketingconstraintsimposedbylegalization.Thechallengesoflegalityshouldnotbeunderestimatedandmanyproducersprefertheirinformalstatus.Theimplementationofanagro-industryinBraziltodayinvolvesacquiringanenvironmentalpermit, thescalingof theagro-industryandthedrawingupof theplant.Thismustthenbesubmittedtoarangeoforgansforapproval.Theproperty’swatermust also be subjected to testing.When approved, a technical project forfinancialoperationsneedstobedrawnupandlabelspreparedfortheproduct;thesemustbesentforapprovaltotheappropriatebody.IntheAPACOcase,theproducermust also participate in or create a subsidiary of the broader group cooperative.Once implemented, the producer must deal with accountancy issues, negotiatecontinuouslywiththeenvironmentalauthority,subjecttheproductstomonitoringby the relevant sanitary body, undertake quality analysis of the product, devisemarketing strategies, use the label ‘ColonialTaste’ togetherwith personal labels,and use barcodes. These services are provided by the central support structure(UCAF)andmustbepaidforonamonthlybasis.Theagro-industrythereforemustbeagoingconcern.

But was this growth based on the distinctiveness of traditional colonial qualities?

Here the issue is more ambiguous. Innovations under the pressure of scale

were adopted – industrial pasteurization, and the adoption of cheeses of non-

traditional shapes to accommodate packaging and transport – and activities were

undertaken that are the antithesis of traditional values, as in the case of frozen

pizza. In addition, half the milk collected was out-sourced to other firms in

conventional markets. On the other hand, traditional agro-ecological products

continue to be sold by the group on the open market and the extra milk continues

to be collected to maintain income opportunities for the group’s traditional

suppliers. In interaction with the market the traditional shape of colonial cheeses

was maintained. The Malagutti group crystallizes many of the dynamic tendencies

at work in the region, which help to explain how family farmers with apparently

few resources are able to launch successful undertakings that not only guarantee

a livable income for themselves, but also provide a viable alternative for their

children in the rural setting. At this stage, however, it would seem that the key to

success is the pragmatic ability to mix the advantages of tradition, particularly as

they relate to social and social movement networks, with the adoption of varied

opportunities in conventional and institutional markets.

box 5.5 (continued): An illustrative example of beneficiaries of the PRONAF agro-industry programme – the malagutti extended family


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IntheregionunderthecoordinationofAPACO,therearenow12cooperativesand 117 family agro-industries involving600 families. 784 itemsarebeing soldon theformalmarketat4000salespoints.TherehasbeensomeUS$6millionofinvestmentforanoverall turnoverof someUS$10millionperyear.Net incomeperperson iscalculatedataroundUS$200amonth. ‘Valueadded’ isgenerallybetween50and100percentofthepricetheproductwouldgainasrawmaterial.Theagro-industrygeneratesonaverageoffourjobsperfamily.

5.11 EPAGRI and the territorial network

Untilthisinitiative,EPAGRIhadnotprovidedanyspecificsupportforagriculturalprocessingorvalueaddedinitiatives.Itsinfluence,however,hadbeencrucialintheprofessionalizationcoursesandintheearlierexperienceswithcondominiums.Theseassociativeactivitieswere importantfortheconsolidationofsocialattachmentsandwereoftentheembryoofthegroupagro-industries.ThepilotprojectservedasablueprintforEPAGRI’spromotionofagro-industriesintheConcordiaregion (whereSadia,theleadingagro-industryinwhitemeats,hasitsheadquarters).

Unlike Chapecó, there was no history of group organization in the Concordiaregion nor was there a network structure such as that created by APACO. Thefarmersinvolvedintheprojecttendedtobemorecapitalizedandtheirprojectsweregenerallyonalargescaleandclosertotheindustrialmodel,sincetheyhadnoprior experience in the informalmarketing networkswhich predominated intheAPACOnetwork.TheFederalGovernment’sTerritorialDevelopmentProgramwaselaboratedinthissameperiodandtheConcordiaareacoincidedwithoneoftheterritories(AltoUruguai)adoptedinthisprogramme.TheEPAGRItechniciansintegratedthetwoinitiativesandtheirorganizingactivitysubstitutedforthelackof socialnetworks.Both trustand theconfidence toengage in collectiveaction–whichhadbeenconsolidatedinformallyovertheyearsinthecaseofChapecó–wasbuiltupinthemeetings,discussionsandnegotiationspromotedbyEPAGRIintheelaborationoftheproject.

In the case of Concordia the function of the support centre – which providesmanagement and marketing assistance – was attributed to a second degreecooperative uniting some 16municipality-based cooperatives of family farmerswith rural agro-industries. In total, some 194multi-family agro-industries werepromoted, incorporating1000familiesproducing23differenttypesofproductsand generating 800 direct jobs. Table 5.7 provides a comparison of the twoexperiences.

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5.12 The experience of the settlements

While theAPACOand theEPAGRImodelsmaycorrespondmore to the realityoffamilyfarmingstructuresinthewesternregionofSantaCatarina,theyarenottheonlyalternativespossible,ornecessarilyalways themostappropriate. In theverydifferentconditionsoftheagrariansettlementsundertheleadershipoftheLandlessWorkers Movement (MST) and therefore with a very collectivist orientation, averydifferentagro-industrialmodelhasemerged.Mentionedabovewasthefactthatanumberof small-scale initiativeshadbeenpromoted in the settlementsofthe western region, including dairy products and chicken abattoirs. These werefollowedbyamuchmoreambitiousprojectin1998involvingadairyoperationfortheproductionofUHTmilk,LongLifemilkandpackagedmilk.In2002,processingcapacitywas100000litresperday,increasingto300000litresperdayin2008.

Suchamodelinvolvesasharpseparationbetweenfarmersastheproducersofrawmaterial and the processing and distribution activities conducted centrally underthe control of the cooperative.Unlike the case of colonial products, we are alsodealing here with an undifferentiated commodity typical of large-scale industry.Thetechnology is importedandthepackaging issuppliedbyamultinational;thisamountstosome30percentofthefinalproductprice,leavinglittleroomforpricenegotiation.Forthefarmerthereislittleinthewayofinnovationandtechnologicallearning: scale efficiencies and price become the dominant considerations. Indefenceofthisoptionitcanbeshownthattheplantnotonlyprovidesincomeforthemembersofthesettlementbutisalsoanimportantoutletforfamilyfarmersintheregion.Inaddition,thesettlementisintheextremewestoftheregion,wherethereislittleinthewayoflocalmarketsandproductionisdistantfromimportantconsumercentres.

The option for this traditional large-scale commodity model may be largely areflectionof an ideological commitment to collectivist strategieson thepart oftheMST.On the other hand the specificmarketing justification carriesweight,and the option for aUHT plantmay be an appropriate response in the case oflandsettlementssituatedinisolatedareaswithverysparselocalmarkets,alongway from themajor consumer centres.The results so far are quite impressive. The settlement cooperative has some 300 members but there are as many as 3000suppliersofmilkforanoperationwhichhascreated200direct jobs,hasaturnoverof someUS$5millionamonth,and isnowthesecondmost importantactivityinthemunicipalityfromthepointofviewoftaxgeneration.Thesettlementcooperative has established a partnership with a transport cooperative and itspresidenthasnowbecome themayorof themunicipality.TheLongLifemilk issoldunderthecollectivebrand,TerraViva,whichalsoservesasanumbrellabrandforpoultry,jamsandpickledvegetables.


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The APACO network Epagri’s territorial network

Land settlement networks

Origin of the network

Social and trade union movement with the support of the cPT

Initiative of ePaGRI technicians in concordia

Movement of landless Rural Workers (MST) and the Pastoral land commission (cPT)

Organizational form

Ucaf – association with participation of representatives from the agro-industries

agro-industries are affiliated to the regional or municipal cooperative

cooperative in each municipality with the agro-industries ceded to this via contract. The cecaf is a central cooperative to which the 16 municipal cooperatives are affiliated

cooperatives and associations (integration between settlements and neighbouring small farmers)

Objectives of the support centres

(uCAF, CECAF)

create value added to family farm production; promote the Groups for agricultural cooperation (Gca); support processing of artisan and agro-ecological products for local and regional markets; provide technical assistance for marketing; management of the label ‘Sabor colonial’ (colonial Taste)

cecaf’s principal function is to enable marketing outside the region and for scale in both purchases and sales

large-scale organization of production, processing and marketing

Articulation with other networks

Network of agro-industries (Ucaf)

cre$ol system

Networks of NGOs and social movements

Municipal unions and fetraf-Sul

federal Government: Ministry of agrarian development (Mda)

International networks of fair trade and slow food

association of the Municipalities of alto Uruguai

Municipal Governments

Municipal unions of rural workers

The Microbacias Project, The Territories Project: Secretary of Territorial development (Mda)

Secretary of Regional development

UNdP

Regional producer and transport cooperatives

Small farmers’ Movement (MPa) and the Via campesina. Partnerships with conventional industries

relation to the State

Greater autonomy of agro-industries in relation to local Governments and State bodies

Greater influence of local Government and technicians of ePaGRI in the cooperatives and in the central cooperative

large autonomy in relation to the State, but initiatives based on public funding from the federal Government

taBLE 5.7

a comparison of the apaco, epagrI and land settlement networks

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The APACO network Epagri’s territorial network

Land settlement networks

Dominant values Promotion of artisan values Greater weight of the industrial values of scale and costs, but also promotion of artisan values

dairy agro-industry organized on industrial lines, but with emergence also of artisan family agro-industry. appeal to consumers on the basis also of civic values

relations with the market

Members of the agro-industries are responsible for marketing; farmers make their markets on the basis of mutual trust between producers and consumers

Sales manager of cecaf organises the pre-sale of the local cooperatives production with the market

The cooper-Oeste cooperative establishes itself as the marketing arm. It develops its own distribution network for the conventional market (supermarkets and principal consumer centres)

Formation of agro-industries

Began in the informal market. as they build the market the farmers enter the Ucaf network and build their agro-industries with a view to their legalization

farmers join the cooperative and build their agro-industries, marketing their products from the outset within the formal market

Began with pig rearing condominiums and the production of the most popular type of milk (Milk category c)

Production of colonial cheeses on the basis of informal associations

construction of a UhT dairy plant to access distant consumer markets

use of the quality seal

The collective brand – ‘Sabor colonial’ – aims to create a collective identity in relation to the local and regional market

No brand for collective use. The network aims to create an identification with the ‘territory’ of the aMaUc

Use of the collective brand name Terra Viva. Tries to establish an identity with consumers for its products on the basis of the agrarian reform

Technical assistance

Technicians hired by the Ucaf and supporting agencies

Technicians from epagri and local governments

The cooperative provides extension services with professionals who are mostly the sons of settlement farmers

taBLE 5.7 (continued)

a comparison of the apaco, epagrI and land settlement networks


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5.13 Comparative overview of the three experiences

InTable 5.7 we provide a comparison of the dynamics behind each of the threenetworksconstitutedinthewesternregionforthepromotionoffamily-basedagro-industries. This comparison focuses respectively on: the origins of the networks,the organizational form which they assumed, the objectives established by thecoordinatingbody,typesofarticulationwithothernetworks,relationsestablishedwiththeState,thedominantvaluesespoused,relationswiththemarket,theformationoftheagro-industries,usesofthequalityseal,andformsoftechnicalassistance.

5.14 Conclusions

ThewesternregionoftheStateofSantaCatarinaisintransition.Thetraditionalwhite meats agro-industry remains strong although the intergenerationalcontinuityofcontractintegrationisinquestion.Evenhere,however,evidenceofout-sourcingbyintegratedfarmerssuggeststhatstrategiesofconcentrationandscaleareadaptingtotherealitiesof theregion’s farmingstructure (Mior,2003).Withurbanizationandnewlevelsofinfrastructure(hotels,airportsetc)theregion’sreputationhasledtoitbecomingacentreforinternationaltradefairsrelatedtothesector.Thetobaccosectorandparticularlythedairyagro-industryhavealsogrownconsiderablyasmoreandmorefarmersexcludedfrompigproductionlooktothesesectorsforalternatives.

Alongsidethesetendencies,aconvergencehasemergedamongsocialandpoliticalmovements and small farmer organizations that an alternative path of regionaldevelopmentisnecessaryandpossible.Suchapathisseentobebasedonstrategiesofdirectaccesstomarketsforprocessedagriculturalproductsfromagro-industriescreatedbythefamilyfarmsector.Manyinitiativesaredrivenbyasupplylogic–thatoffindingmarketsandgeneratingincomeforfamilyfarmproduction.Asaresult,theprofileofthismovement ismixedandtheappealtosuperiorproductqualitybasedon artisan, colonial values is combinedwith competition in conventional local andregionalmarkets. In addition, institutionalmarkets are gaining in importancewiththemoreaggressiveroleofpublicpurchasingpoliciesandlegislationfavouringlocalproduction for school meals. This latter provides a stimulus to organic and agro-ecologicalproduction.

Surveyresearchinthelate1980sshowedthattherewasahighlevelofsupportfor‘colonial’productsbothinthecitiesandtheruralareasoftheSouthernBrazilianStates(Oliveira,SchmidtandTurnes,1999).Morerecently,Dorigon(2009)hasshownhowtheextra-regionalmarketforcolonialproductsisbeingcreatedthroughtheextensionof the region’s social networks via migration and trading routes.The support forcolonialqualitymarketsisalsoseenascentraltothepromotionofthetouristqualitiesoftheregion.Itremainstobeseen,however,howextensivethemarketsandservicesarethatcanbegeneratedonthebasisofacolonialqualitystrategy.

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As the authors have argued, there is noonemodel for family farmdevelopmentstrategies.Herewehaveidentifiedthreedifferentmodel:

Z the NGO/APACO approach promoting agro-industries based on small farmergroupsandorientedtoartisanqualityproducts;

Z the public sector EPAGRI model encouraging the creation of individual agro-industries, organized in cooperatives for marketing, by better situatedfamilyfarmersandwithgreaterconcernforindustrialnorms;

Z theagrarianreform,MST-inspiredinitiativebettingontheadvantagesofscalethroughaggregationinmarketsfortraditionalcommodities.

EachofthesestrategiescanbedefendedascomplementarygiventheheterogeneouscharacteroffamilyfarminginBrazilandthevarietyofmarkets.Atthesametime,theydrawonthedifferentcomparativeadvantagesoftheorganizationscentralinpromoting each initiative.On the basis of different strategies, each organizationhasbeenabletomobilizenetworks,whichhaveopenedupalternativemarketsandprovidedaccesstodifferentresources.

In addition, eventual conflicts and competition have not annulled the importantlevelsofcooperationachievedbetweenthedifferentactorsintheregion,whetherpublic or private, socialmovement or trade union.This has led to a region-widemovement,which has identified new roles for family farming that are no longerlimitedtoformsofcontractintegrationwithlarge-scaleagro-industry.Whilethesewillremainanimportantandperhapsdominantcomponentoftheregion’sdynamic,a strengthening of the autonomous capacities of the family farm sector and itssupporting socialmovements, drawingon the valuesof its ‘colonial’ artisanpast, isnowseentobecrucialtotheregion’sfuture.

Whatare the lessons thatcanbe learned fromthisexperience? In thefirstplace,theSantaCatarinaexperiencesuggeststhereareneithersimple,norrapid,noruni-dimensionalpathwaysfordevelopment.Thisappliestobothstrategiesandactors.Theheterogeneity of the ruralworld implies thatdiverse formsof economic andsocialintegrationcanbeequallyappropriate.Norisitaquestionofpolarizingpublicversusprivate,localversusglobal,marketversussociety.Notonlyarethefrontiersincreasinglyfluid,butcivilsocietyorganizationscanbeasgreataguaranteeofthecontinuity of initiatives as the public sector. Collective action is a pre-conditionfor success,but suchactionmustbecapableofbringing togetherheterogeneousorganizations, interests and capacities into networks of committed cooperation. Itmust,atthesametime,becompatiblewithindividualandsmallgroupactionwhosecapacitytoconfrontuncertaintyandadversityisrootedinsharedsocialnetworks.Above all, the Santa Catarina experience points to the key role of cumulative,collective learning concerned asmuchwithorganizational skills aswith technicalskills.Inparticular,theskillsandknowledgegainedinsocialmovementsareoftenasteppingstonetomarketsuccess.However,thetransformationoftheseresourcesintoadurablebasisforsustainabledevelopmentdependsverymuchontheability


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tonegotiateaninstitutionalandregulatoryframeworkappropriatetosmallfarmerinitiatives.Evenwiththesupportofsuchafavourableframework,successintheendwilldependonconsolidatingmarketsoutsidetheregion.Theachievementoftheseobjectives requires the construction of broader alliances closer to consumption,committedtothespecificvaluesoffamily-farmfoodproduction.

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Dorigon, C.1997.Microbacias como Redes Sociotécnicas: uma Abordagem a partir do Enfoque do Ator-Rede.RiodeJaneiro,CPDA/DDAS/UFRRJ.

Dorigon, C., Ferrari, D.L., Testa, V.M., Silvestro, M.L. & de Mello, M.A. 2005.Agricultores pobres: os invisíveis do campo. In Brumer, A. & Piñeiro, D. (eds)Agricultura Latino-americana: novos arranjos e velhas questões.PortoAlegre,UFRGS,pp.85–106.

Dorigon, C. (ed)2000. I seminário macrorregional da atividade leiteira.Florianópolis,EPAGRI.

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EPAGRI, DESENVOLVER & APACO. 1999. Projeto de Agroindústrias Associativas dos Agricultores Familiares do Oeste Catarinense.Chapecó,EPAGRI/DESENVOLVER/APACO(Mímeo).

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Ferrari, D.2003.Agricultura familiar, trabalho e desenvolvimento no Oeste de Santa Catarina.Dissertation:InstitutodeEconomia,UniversidadeEstadualdeCampinas,Campinas.

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Prezotto, L. 2005. A sustentabilidade da agricultura familiar. Implicações e perspectivas da legislação sanitária para a pequena agroindústria. Fortaleza,FudaçãoKonradAdenauer,InstitutodeAssessoriaparaodesenvolvimentohumano.

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Wilkinson, J.1996.AgroindústriaePerspectivasparaProduçãoFamiliarnoBrasil.InPolíticas Agrícolas,Ano.11,Vol.11,No.1,101–137.

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PAUl ThANgATA, mAlCOlm BlACKIE ANd PAUl SEwARd

cHapter 6

public–private partnerships for agro-industry development:

sustainability options for fertilizer subsidies

6.1 Introduction

The private sector plays an essential role in the socio-economic developmentstrategiesofcountries.InIndiaforexample,theshareoftheprivatesectorincapitalformationinagricultureisreportedtobeapproximatelythreetimeshigherthaninthepublicsector(Kumar,2005).Theprivatesectorisalsotheengineforeconomicgrowth. Harmony between public and private sector actors is a prerequisite forequitable growth (Uliwa, 2007). Private sector driven enterprises create not onlyemploymentopportunitiesbutalsoaddedvaluethroughtheirforwardandbackwardlinkageswithothersectorsandthedeliveryofservicesandproductstothesocietyasawhole.Globally,theprivatesectoristhelargestandmostsuccessfulinvestorinnewtechnologies.Theprivatesectorcontributestwo-thirdsoftheglobalinvestmentin research.The value of research investments by the private sector in theUSAaloneisestimatedtobeUS$180billion/annum.However,thesituationisdifferentindevelopingcountries.Asaresultofseveralbottlenecks,oftenofaninstitutionalnature, the full potential of public–private cooperation and that of private sectorinvolvementinsocio-economicdevelopmenthasnotyetbeenfullytappedinsub-SaharanAfrica(SSA).

Public–privatepartnerships(PPPs)areincreasinglybeingemphasizedasamechanismforimprovingpublicserviceprovisionandimplementingdevelopmentprogrammes.ImportantbenefitscanbeobtainedbyfosteringmoreeffectivePPPs.Indevelopingcountries,suchpartnershipsareoftenusedtomobilizecomplementaryandscarceresourcesinthepublicandprivatesectorsforprojectsinvolvingthedevelopmentofinfrastructure,communitiesandagriculture.Therearemanycasesofpartnershipsamong farmers, private companies, government agencies, and nongovernmental


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organizations (NGOs), under which each entity contributes human, physical andfinancialresourcestofosterthegenerationanddiffusionofinnovations,newformsof technologies, and knowledge to redress gaps in thedevelopment, production,processingandmarketingofimprovedagriculturalproducts.

Therearedifferentdefinitionsofpublic–privatepartnership(PPP).SpielmanandvonGrebmer(2006)andreviewsbyOladeinde,(2003)andScanteam(2004)havedefinedPPPsorstrategicpartnershipsascollaborativearrangementsoralliancesbetweenpublic,private,and/orcivilsectorentitiesinwhichpartnersjointlyplanandexecuteactivities that seek to achieve social goals that can produce benefits for all thatwouldotherwisehavebeenprovidedthroughtraditionalGovernmentprocurement. The idea is to accomplish mutually agreed-upon objectives while sharing thecosts,risks,andbenefits incurredintheprocess. Insomecases,theaimisforthepublic sector to promulgatepolicies,make investments, provide tax concessions,or otherwise offer calculated measures to stimulate private sector growth. TherationalebehindthecreationofPPPsismorerelevanttothischapter.

Thebenefits associatedwithPPPs include increasedeconomicgrowth, improvedefficiencyinservicedeliveryandserviceexpansion,reductionoffinancialburdensongovernment,andpovertyreduction.Whencorrectlystructured,PPPscanimproveaccesstobasicservicesandcanalsoplayavitalroleinrelevantsectorsinAfrica,suchasagricultureandruraldevelopment(Rwelamira,2002).Additionally,collaborationssuchasPPPshelpovercomemanyof the impedimentsposedbymarket failures,institutional constraints, and systemic weaknesses in agricultural research, bybuildingoncomplementarities,exploitingsynergies,anddistributingcostsandriskbetweenthepublicandprivatesectors(Spielmanet al.,2007).ThePPPprocessrecognizes that both the public and the private sector have certain advantagesrelative toeachother in theperformanceof specific tasks,andcanenablepublicservicesandinfrastructuretobeprovidedinthemosteconomicallyefficientmanner,byallowingeachsectortodowhatitdoesbest.PPPsentailasharingofresponsibilitybetweengovernmentandtheprivatesector.

Collectively,partnershipsimprovethecapacityofresearcherstoaddressproblemsinagriculturethatcannotbesolvedbyasingleactor(SpielmanandvonGrebmer,2006).Inastudyofsevencasesofpublic–privatepartnershipbuildinginwhichprivatesectorcompanies,producerassociations,andresearchorganizationsengageincollaborationforthepurposeofdevelopinginnovationsinagriculturalproductionandvaluechains,Hartwichet al.(2007a)foundthatmanyPPPsfailbecauseofalackbothofskillsamongthepartneringagentsandeffortstostrengthentheseskills.Inanattempttoanalysetheunderlyingcausesof limitedsuccessesandtheoriginsofnegativeperceptionsinPPPsbetween largemultinationalfirmsworkingwith smaller researchers,SpielmanandvonGrebmer(2006)foundmistrustandsuspicionatanindividualleveltobethemajorcontributingfactors.Thereislimitedemphasisplacedonhowthepartnerswillinteracteffectivelyorhowrelationshipsmightbeimproved.Hence,PPPsoftensufferfromlackoftrustandcommitment,withtheresultthattheyfailtomeettheirpotential.

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Public–private partnerships for agro-industry development: Sustainability options for fertilizer subsidies

Thegoodnewsisthatdevelopingcountriesarestartingtoembracetheroleoftheprivatesectorinresearchanddevelopment.Insub-SaharanAfricaagriculture,newinitiativesarestartingtoappearandthesesmall‘islandsofsuccesses’inPPPsrequireencouragement and support, to be shared as models in the development arena. Thestructuraladjustmentprogrammes(SAPs),meantthatgovernmentscontrolledallinputmarketsbytheirdirectengagementinproducemarkets.Thishasbeencitedas a reasonwhy the private sector in sub-SaharanAfrica has not responded verystronglytothederegulationofinputmarkets.Therealityisthattheprivatesectorhasbeenunabletofillthegapleftbyparastatalagenciesbecauseofalackofpublicsectorsupport.OnereasonwhytheprivatesectorcouldnotfillthegapisthattheSAPshadmissedoneimportantstepinitsimplementationstructure:notenoughmechanismswereputinplacetosupportthecreationandgrowthoftheprivatesector.

Thischapterintendstooutlinesomesolutionstofillingthegapleftbythe‘missedstep’inthecreationofavibrantpublic–privatepartnershipduringtheSAP-era.Thefirstsectionpresentsabackgroundreviewofpublic–privatesectorpartnerships inagriculture.The second section describes the lessons from the three agriculturalpartnershipmodels inKenya,MalawiandTanzania. Insectionfourwe lookat therole of fertilizer subsidies in agriculture.We use the case ofMalawi’s agriculturalinput subsidy programme to show how subsidy programmes can be costly togovernments,hence theneed forPPPs. In sectionfive,we illustrateaconceptualframeworkdetailinghowtoinitiateaPPPinanagriculturalinputsubsidyprogramme.Thechapterendswithaconclusioninsectionsix.

6.2 Promoting agriculture and public–private partnership models in sub-Saharan Africa

It is recognized that PPPs constitute a new mode of operation in many fields ofdevelopment,includingthedevelopmentofinnovationintheagriculturalsectorsofdevelopingcountries.ForPPPStobesuccessful,capacitiestoidentifyopportunities,develop common interests, and negotiate commitments, are all prerequisites(SpielmanandvonGrebmer,2006).InLatinAmerica,PPPsarenewwaysofcarryingoutagricultural researchanddevelopment(RandD).Thesepartnershipsspur innovationfor agricultural development and have various advantages over other institutionalarrangements fostering RandD. From a review of Latin American partnerships byHartwichet al.,(2007a),thefollowinghavebeenhighlightedasimportantaspects:

Z partnershipsreducethecostsandrisksentailedinresearch; Z they improve the quality and relevancy of research results due to synergiesamongthepartners,andensuregreateradoptionbyusergroups;

Z theyleadtotheaccumulationofcomplementaryabilities,skills,andresources; Z theyleadtohighercompetitivenessandbettermarketpositioningasaresultofimprovedcompetencies;


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Z they promote development and poverty reduction by providing small-scalefarmerswithaccesstoknowledgeandtechnologies.

InLatinAmericanagriculture,Hartwichet al.(2007a)foundthatPPPsarejustifiedwhenaddressingaproblem,orcapitalizingonanopportunitythatrequirescollectiveactionorthepoolingofinnovativecapacity.Partnershipscannotbeestablishedasa quick fix but rather require cautious organizational development. Public-sectorpromoting agents such as donors play a crucial role in building partnerships,particularlyinordertomotivateactorsintheagri-chain,buildtrustamongpartners,andprovidecredibility.Aspartnershipsareformalized,thereisaneedforleadershiptosupportthedaytodayneedsofthepartnership.

Theagricultural sector insub-SaharanAfrica isvitalbecause it is themainsourceoflivelihoodforsmallholders.However,studiesonagriculturalRandDsuggestthatmanycountriesintheregionareunabletobringpublicandprivatesectorassetsandresourcestogetherasameansofadvancingagriculturalRandD.Evidencesuggeststhat the constraints to greater cross-sectoral collaboration result from mutuallynegativeperceptionsbetweenthesectors,unresolvedissuesofriskandliability,andhightransactionsandopportunitycosts.Abroadrangeofeconomicpoliciescouldchange this, thereby putting the proper incentives in place tomeet sub-SaharanAfrica’stechnologicalneedsandstimulategrowth(Spielman,2004).

The era of structural adjustment programmes (SAPs) was marked by the driveto reduce government direct support to farming communities and increasecompetition between producers, processing companies and supermarkets withinagriculturalmarkets(KIT,FaidaMaLiandIIRR,2006).Tosomeextentthishappened,buttodate,mostsub-SaharanAfricacountriesaredependentonthepublicsectortoprovideservicesintheagricultureandruraldevelopmentsectors.Fordevelopmenttotakeplaceinsub-SaharanAfrica,variousactorsinthesupplychainmustinvestinacoordinatedway.InIndianagriculture,forexample,Kumar(2005)hashighlightedthattheinvolvementoftheprivatesectorinagriculturehasadvantagessuchas:

Z making the agriculture supply chain more efficient and enabling value to bedeliveredtoitscustomers;

Z eliminatingtheexistinginefficiencyinagriculturemarketingduetomultiplayerstructureofintermediaries;

Z providinggoodinfrastructureandtechnologiestocaterfortheagriculturesector.

The challenge facing many governments in sub-Saharan Africa is to improvesignificantly the enabling environment that will encourage private sectorparticipation in supporting smallholder farmer development. The private sectorneeds to learn how to operate effectively, and build a customer base, amongdispersed poor farming communities.This can be accomplished in a partnershipenvironmentwherethepublicandprivatessectorsworktogetherforthepurposesofhelpingsmallholderfarmersimprovetheirlivelihoodsystems.

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6.3 Case models of agricultural public–private partnerships

6.3.1 the Farm Input promotions (FIps) partnership model – Kenya

Fertilizersubsidieshavebecomepopularinmanysub-SaharanAfricacountriesforbothpoliticalandeconomicreasons.However,inKenyathegovernmenthasoptedforasupportiveenvironmenttopromotethegrowthoftheprivatesectorintheinputmarketingsystem.Manyprivateestablishmentsarenow involved in fertilizerandseedmarketingtosmallholders.OnesuchprivateestablishmentistheFarmInputsPromotionsAfrica, Ltd. (FIPS).Themodel encouragesprivate sectorpartnershipsthat aim to facilitateefficiencies in themaizevalue chainby improvingaccess toappropriatefarminputs,plusthepromotionofagribusinessforthewiderbenefitofsmallholderfarmers.Thisisachievedbycreatingaselfsustainingfarminputsupplysystemwhichwould serve smallholderseffectivelyandata cost that thepoorestcanafford.Theprojecthasanemphasisonfarmer-participatoryresearchandfarmerexperimentation.

TheFIPS isan independentNGOwiththeaimofmakingappropriatefarminputsmore accessible to small farmers in Kenya. It is a successor to the SustainableCommunity-OrientedDevelopmentProgram(SCODP),alocalKenyanNGOaimedatincreasinginputuseamongpoorfarmersinKenya’sNyanzaProvince–particularlyKisumu andSiayaDistricts – by promoting fertilizer and quality seed to improvefood security.TheNGOstartedbyusing the ‘mini-packs’ approach, involving thepackaging of improved fertilizers in 100–200 gram packs and vegetable seeds insmallquantities,andpromotingthesetosmallfarmercommunitiesinmarketplaces,schools,andchurches.Togettheinputstothefarmers,FIPS-Africaco-coordinateswiththeprivatesectorinthere-packagingoftheappropriateseedsandfertilizersinsmall,affordablepromotionalpackages.With150grammini-packsofseedandimprovedmaize varietiesdonatedby commercial seed companies such asKenyaSeedCo.,WesternSeedCo.andMonsanto,FIPS-Africahasbeenabletopromotetheseamongsmallholderfarmers.

Main aspects of the FIPS model

The FIPS strategy relies on a push–pull scenario – on the one hand farmers aremadeawareofbenefitsfromimprovedinputs,includingmanagement;ontheotherdealershipsareprovidedwithappropriateinputstomeetthedemandcatalysedbypromotions.Farmertofarmerexchangeofinformationisencouraged.

TherearethreeveryimportantaspectstotheFIPSmodel:

1) Private sector and value chain analysis: FIPSdevelopedpartnershipswithprivatesector seedfirmssuchasMonsanto,WesternSeedCompanyandKenyaSeed


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Company to make seed available to local stockists in small packs (1–5 kg). Italsoworkswithstockiststocreateawarenessofavailableinputssupplies,andconductawarenessraisingcampaignsatmarketsandwithfarmer,church,andothervillagebasedgroups.ThroughFIPStheseedcompaniesprovided,freeofcharge,100–200grammini-packsoftheirvarietiestoFIPSforpromotionsandfarmerevaluation.Later,FIPScollaboratedwithaKenyanmineralfirm,AthiRiverMining(ARM),toproducetworevisedblendsofmultinutrientfertilizerscalledMavuno, a planting formulation containing nitrogen, phosphorus, potassium,sulfur, calcium,magnesium, and traces of boron, zinc, molybdenum, copper,and manganese, and a top-dressing fertilizer supplemented with additionalnitrogen(ThangataandBlackie,2005).FIPShasbuiltagoodreputationamongthedifferentplayersintheinputsupplysystem.

2) Skills and capacity development for farmers and stockists: FIPS staff incollaborationwith staff from the Kenya Research Institute (KARI) establishedfarmerfieldschools(FFS).IntheFFSconcept,groupsoffarmerslearntogetherand are empowered in basic principles of crop nutrition and management.Theapproachemphasizesjointproblemanalysis,learningandproblemsolving.Alltheactivitiesarecarriedoutinthefarmers’ownfields.

3) Experimentation and farmer participation: Farmers are encouraged toexperiment with new technologies through innovative promotion exercises.After promotional awareness among small farmer communities in marketplaces,schools,andchurches,farmerscanexperimentontheirownsmallplotsusingseedsand fertilizers. Incentivesareprovidedto farmers todo theirownexperimentation.

Lessons from the FIPS partnership model

An evaluation of the FIPS model in Kenya has shown that appropriate inputssupportedbygoodagronomictrainingweredirectlybenefitingsmallholderfarmers.Thiswasattributedtotheavailabilityandaffordabilityofthe inputsneeded.FIPShasearnedthereputationofan‘honestbroker’inlinkingresource-poorsmallholderstothemarket.Importantobservationalimpactsinclude:

1) Incremental strategy in the purchase of inputs: Smallholder farmers adopt anincrementalstrategyinthewaytheypurchasetheirinputs.Theyfirsttakesmallstepsbyexperimenting,atlowriskandlowcost,withsmallpacksofinputsandareinformedbydatawhichtheygeneratethemselves.Theystartwithverysmallquantitiestoapplytocropssuchaskaleorcabbages.Asfarmproduceincreasesandmoreprofitsaccruefromthesales,convincingthemthatthetechnologyhasapositiveimpactontheirlivelihood,theythenpurchasemoreoftheinputs.

2) Crop diversification:Oncefarmersareassuredoftheaccessibilityandaffordabilityof productive and reliable inputs andgain experience in using the inputs, thehouseholds quickly diversify their farming systems into higher value options.As food security becomes assured, those with small land holdings expandproductionbyrentingmoreland.

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3) Direct and indirect impact on food security: Evidence fromFIPSareas suggeststhatbothdirectandindirectbenefitsoftheapproachareimpressiveandcouldfurtherenhancetheeffectivenessoftheinitiative.Figure6.1showsdatafromtheimpactanalysisofFIPSinKenya(ThangataandBlackie,2005).Atthebeginningof the programme, even among the better off households, food insecurity isprominent.Only29percentoftheFIPSadoptinghouseholdswerefoodsecureatthestartoftheprogrammein2002.Withinthreeyearsthisgrouphadincreasedto 52 percent (an increase of 23 percent). The number of FIPS participatinghouseholdswhowerefoodinsecuredroppedsubstantiallyby24percentfrom31percent.But,evenmoreimportantly,thereisasubstantialimpactbeyondthosedirectlycollaboratingwithFIPS.Atthestartoftheprogrammeonly15percentofthenon-FIPSparticipatinghouseholdswerefoodsecure.By2005thenumberhad risen to 27 percent.The percentage of non-participating households thatregardedthemselvesasfoodinsecurewhentheprogrammebegan–25percent–hadfallento14percent,adecreaseof11percentbytheendofthethreeyearperiod.Taking these trends and incorporating them into a standard adoptionmodel,theregioncouldveryquicklybetransformedthroughsustainedsupportfortheFIPSmodel.

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FIGURE 6.1 Impact on household food security among participating and non-participating farmers in Embu, Kenya

Source: Thangata and Blackie, 2005.


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6.3.2 the malawi agriculture partnership (map) model

TheMalawiAgriculturePartnership(MAP)wasbornoutoftheSustainableAgri-BusinessInitiative(SABI).TheSABIisaprogrammemanagedbytheMalawicountryofficeoftheAfricaCorporateCitizenship (AICC-Malawi).TheAICC-Malawi isanon-governmentalorganization committed to promoting responsible growth and competitiveness inAfricaby changing theway companiesdobusiness tobenefitpeople, theeconomyandtheenvironment.WhentheSABItriedtointroduceaFIPStypemodelintoMalawiin2008amodifiedversionofitsconceptwasneeded,fundamentalforthestrategytoworkwithinthatcountry’scontext.Thewidespreadofthepartnerships’activitiesandtheemphasisonlinkageswithotherpartsofthevaluechain–asseenintheFIPSmodel–demandsthewillingnessandthecapacitytoappreciateotherparties’perspectivesandrequirements,andadeterminationtothinkandact‘outsidethebox’ofusualduties.

Today,theSABIhascreatedaplatformfortheprivatesectortoworkasateamto improve collaborative initiatives and encourage dialogue between the publicsectorandotheragri-sectorstakeholders.ThemaingoaloftheMAPistoimprovespecific value chains within a public–private partnership framework to supportsustainableandprofitablesmallholderagricultureinMalawi.Thiswillsupportthegovernment’sAgriculturalDevelopmentProgram(ADP),whichemphasizesclosepartnership with the private sector.This PPP initiative being supported by theADPisanewconcepttomostprivatesectororganizationsinMalawi.Previously,therehadbeennoplatformfortheprivatesectortoworkasateamandthereforenopartner tosupport theADP initiativeofpovertyalleviation throughremedialactionsonallrelevantpartsofthevaluechain.Thisalsomeantthatsmallholderfarmershadnoorverylittleinfluenceonpolicydevelopmentsandprojectactivitiesthatinfluencedtheirlivelihood.

Main aspects of the Malawi Agriculture Partnership (MAP)

TheMAP initiative focuses on encouragingdialogue and learningoptions for thefollowingstakeholders:

1) Smallholder farmers, the main actors: Fewfarmersareintegratedintoproductiveandprofitablecommodityvaluechains.TheMAPthereforeaimstoensurethatfarmershaveappropriateaccesstoinputsandprofitableoutputmarketsthrougheffectiveinstitutionalarrangements(e.g.outgrowerschemesanddevelopmentofstrongerfarmerassociations).

2) Malawi Government, the Ministry of Agriculture: The overall policy-maker,theMalawiGovernment isakeypartner.Withhelpfromthegovernment, it isplausiblethatsupportservicessuchasfinanceandpublicextensionserviceswilltakeonamorefocusedandeffectiveroleinvaluechaindevelopment.

3) Private firms working in agriculture and agribusiness:This focuseson improvinglinkagesbetweenfarmersandprivatefirmsthatprovidevariousservicestotheagricultural sector.TheMAP has already started analysing the strengths and

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weaknesses of all players in the value chain.This aims to encourage relevantinvolvement by value chain partners and improved transaction efficiency andreducedrisk,toencouragefurtherprivatesectorinvolvement.

Lessons from the Malawi Agriculture Partnership (MAP) model

TheMAPisaneweffortinthecountry.Theprocessisanattempttoestablishanewway for agricultural business development that supports the aims ofADP.Somelessonsfromtheinitiativeinclude:

1) Developing the market-commodity value chain: TheMAPdevelopmentprocess(andspecificallythericeandcottonpartnerships)hasbeendrivenbyneedsandtrustratherthanformalities.Todate,theMAPhasdevelopedthecottonandricevaluechains.Theprogramme isworkingonothersimilar initiatives ledbythevaluechain.

2) Trust among private sector players: While in the FIPSmodel different privatesectororganizationsshowcaseanddemonstratetheirproductthroughoneNGO,theSABImodelallowspartnerstoshowcasetheproductsatoneplace.Eachisallowedtoshowthebestfromtheireffortswithoutanynegativecompetition.Thereistrustamongtheprivatesectororganizations.Whileit issimilartotheFIPSmodelinKenya,itisuniqueinthesensethattheagri-businessdevelopmentfarm at the Natural Resources College has both profit and developmentobjectives.The different private sector players at the farm have different yetsupportiveroles.

3) From smallholders to small-scale commercial farmers: LikeintheFIPSmodel,thefarmsarerunasabusiness–thereforedemonstratingthemovefromsmallholderfarming to smallholder-commercial farming. The fact that different privatesector organizations demonstrate themanagement of different crops at onefarmencouragescropdiversification,andallowssmallscalefarmerstovisualizemovingfromsubsistenceagriculturetobusiness-orientedfarminginsmallsteps.Italsoprovidesalearningenvironmentfortheseprivatesectororganizationstolearntooperateeffectivelyamongdifferentsmallholders.

6.3.3 the tanzania agricultural partnership (tap) model

In Tanzania, a significant proportion of small-scale farmers cannot get reliablesuppliesoffertilizers.Inadequatesupplyandthelackoftimelyarrivalofappropriatefertilizersaresomeofthemajorconstraints toproduction.Others include limitedaccess to extension support. The Tanzania Agricultural Partnership (TAP) is aninnovativepublic–privatepartnershiptosupportagriculturaldevelopment,profitablecommercialactivities,andpovertyreduction.InitiallycoordinatedbytheAgriculturalCouncilofTanzania,TAPisagroupingoflocal,national,andinternationalpartnerswilling to work together to respond to the major challenges and opportunitiesin agriculture. The Partnership combines commercial and development goals.


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Bydoingso,itaimstoprovideincreasedchoicesandmoreservicesthatareefficienttoTanzanian farmers.Thiswillestablisha sustainable,business-based foundationfor small-scale farmers to move from subsistence agriculture to profitable anddiversifiedcommercialfarming.

SomeoftheTAP’simmediateobjectivesareto:

Z improvetheaffordabilityandaccessibilityofappropriateinputstosmallholders; Z improveoutputmarketlinkages; Z increaseprofitableagriculturalproduction; Z stimulateprivatesectorinvestment; Z establishbenchmarksforbestpracticesindevelopmentandcommerce.

Main aspects of the Tanzania Agricultural Partnership (TAP)

TheTanzaniaAgricultural Partnership (TAP) was established from existing skills,knowledge,andinstitutions.Itfocusesoninformalefficiency,operationallinkages,and effective communication between partners. The TAP model aims to forgelinksand improve trustandunderstandingbetweenkeypublicandprivate sectoroperators. It is a vehicle for providingmore choice and improved services to thecountry’sfarmersandagri-businesses.Forthesmall-scalefarmerinparticular,thismeans an opportunity to move from subsistence agriculture to sustainable andbusinessorientedfarming.

1) Commodity Investment Plans: TheTAPworksonthepromotionofCommodityInvestmentPlans(CIPs),anewapproachtobringthepublicandprivatesectorstogethertofocusonbusiness-basedagriculturalgrowth.TheCIPsaremeanttoestablishandsupportvaluechainlinkagesoveraspecifiedtime,usually3to5years.

2) Knowledge and skills sharing: TheTAPprovidesagoodbasisforshowcasingnewtechnologiesandproductionoptions.The‘farmerexperimentation’encouragedbyFIPSprovidesavaluabletestbedforevaluationandwidespreaduptakeofinnovationamongbothfarmersandtheirinputandoutputmarketingpartners.Farmersexperimentwithdifferentcropvarietiesandfertilizersthatcanincreaseproductivity.

3) Promotes partnerships among stakeholders: TAP promotes partnerships forcollaborationinproduction,trading,processing,planning,andmarketlinkages.

Lessons from the Tanzania Agricultural Partnership (TAP)

So far, TAP has developed broad-based commercial development programmesto improve fertilizer supply,distribution,andprofitableuse inTanzania throughapublic–private partnership. The TAP is already collaborating with FIPS-Tanzania(Farm Input Promotions-Tanzania), a newNGO piloting small input package anddemonstrationplotssince2007.LessonsfromtheTAPinitiativeinclude:

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1) Support to value chain linkages: TheCIPhelps facilitatecollaborationbetweenthe public sector, local producers, agro-businesses and other commercialservices.Astep-by-stepguideonCIPtrainingabouthowtoprepareacommodityinvestmentplanisunderdevelopment.

2) Knowledge and skills sharing: TheTAPprovidesagoodbasisforshowcasingnewtechnologies andproductionoptions.TAP is piloting small input packageanddemonstrationplots.

3) Warehouse Receipt System (WRS): Thisisanothernewinitiative.TheobjectiveoftheWRSistoensurethatfarmershaveaplacewheretheycanstoretheirproduceimmediatelyafterharvest,whenpricesareverylowbecauseofoversupply,andsellthemforabetterpricelaterintheseason.TAPprovidestraininginWarehouseReceiptSystem(WRS),especiallyforfarmersreluctanttotaketheirproducetothewarehouseforfearofembezzlement.

6.4 The role of fertilizer subsidies in agriculture

Inthe1950sand1960s,fertilizersubsidieswereconcentratedmostlyonexportcropsandweregeared to educate farmers in the proper use of fertilizers (IFDC, 2003).However,ifnotwellplanned,fertilizersubsidiescanresultinanumberofdistortions.Oftentheyfailtoreachthetargetfarmergroupsandbenefitthosewhoalreadyhaveaccesstoinputs.Theycaninhibitthedevelopmentoffertilizermarketingbasedintheprivate sectorand result in costlyand ineffective statemonopolydistributionsystems.Inaddition,thepricedistortionscanleadtotheinefficientapplicationofthisimportantinputbyfertilizerusers(IFDC,2003).

Prior to the structural adjustment programme (SAP) years, sub-SaharanAfricagovernments’ control over input and output prices by direct state engagementin produce markets was believed to have held back the emergence of privatetraders and service providers, and possibly stifled innovation at the farm level. Ontheotherhand,theprivatesectorresponsetoderegulationhasreportedlybeenweak.Theprivatesectorisunwillingtogotoareasroutinelyvisitedbygovernmentemployeesinthepast.However,theproblemwiththeSAPswasthatsub-SaharanAfrica governments were coerced to reduce their role in the production anddistribution of food without assuring a private sector strong enough to fill theresultinggap(Howell,2005).

Recently, fertilizer subsidies have become popular in many sub-Saharan Africacountries.MostgovernmentsinAfricaareinterestedinpromotingtheincreaseduseoffertilizersthroughinputsupportprogrammes,becausethiscancontributetolong-termimprovementsinagriculturalproductivityandpovertyalleviation.Economically,thebenefitsoutweighthecostsof fertilizersubsidies in termsof foreignexchangesavingsresultingfromimportsubstitution.Notallsubsidiesareunproductive,iftheirmainobjectiveistostimulatethedevelopmentofanefficientandprofitablefertilizer


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marketingsystem(Morriset al.,2007).Subsidiescanalsobeausefulpartofabroaderstrategytoovercomemarketfailuresfromhightransactionscostsandrisksresultingfrompoorinfrastructureandaccesstoinformationonnewtechnologies.Nevertheless,fertilizersubsidies,ifnotwellplanned,canpreventthedevelopmentofthepotentialfortheprivatesectortomarketfertilizers.Ingeneral,subsidiescreatedistortionsthatleadtoinefficientapplication(IFDC,2003).Presentdaysubsidieshaveashort-livedimpactandneedtobemodeledtomakethemsustainableinthelongrun.

IthasbeenquestionedwhyAfricanpolicy-makersshouldreducefertilizersubsidieswhenfarmersinOECDcountriesenjoygeneroussubsidiesandprotectionism(Eicher,2004).OneoftheargumentshasbeenthatthesecountriescanmanageandsustainsubsidieswhilemostAfricancountriesaredependentondonoraid.UnderstandingtheissuefromtheperspectiveofAfricangovernmentsbringsinadifferentdimension.Subsidizing the price of fertilizers to farmers is justified as oneway to encouragesmallholder farmers indevelopingcountriestousegreateramountsof fertilizer toincreaseagriculturalproduction.Usingfertilizerisriskyinsub-SaharanAfrica’srain-fed agricultural systems, where unreliable weather can make crop responses tofertilizerhighlyvariable.Reducingcostsmayincreasethechancesoffarmerstakingthatrisk.Manyfarmershavedifficultyraisingenoughcashtobuyinputs,soasubsidymay make the purchasing of such inputs more attractive. Subsidies offset highfertilizerprices, reducing input–outputprice ratios.Theyalsoprotectpoor farmersfromvolatileworldmarketprices(BlackieandThangata,2006;Thangata,2006).

Insub-SaharanAfrica,agribusinessdevelopmentcanprovidepartoftheanswertothecollapseinsupportservices,whichoccurredinmostAfricancountriesfollowingstructural adjustment. In many instances, agribusiness firms provide marketing,finance,inputsupply,andadvisoryservicestoproducers,orserveasintermediariesfor improving producer access to services. In brief, agribusiness development isinevitable.Thereal issuesarenotwhethertoacceleratebuthowtodoso,howtoensurethatmaximumbenefitsarerealized,andhowtoaddressequityandensurefairnessinthechangesthatwillbetakingplace(FAO,2005).

6.5 Redefining the role of government in agriculture

Effortstopromotesubsidiesoffertilizersforfarmersshouldbemadeinwaysthatdonotdistortordisplacetheseemergingruralinputmarkets.Toensurethis,fertilizersubsidies could be provided to poor and vulnerable households in the form ofvouchers.Ifthevouchersarespecifiedasredeemablefromcertifiedruralstockists,thensuch ‘smartfertilizersubsidies’couldbeusedtofurtherdevelop,ratherthanundermine,ruralagriculturalinputmarketsthatservethepoor(Morriset al.,2007).

Ontheonehand,agriculturalpolicyshouldpromoteincreasedcompetitivenessand,indoingso,avoidgivingthewrongsignals tothemarket– inotherwords,stickto

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research, infrastructure, and trade policy. On the other hand, agricultural policyshouldcontributetoruralwelfarepolicybysubsidizingthepoorinwaysthatreducetheir vulnerability – inotherwords, direct incentives to increaseproduction.Publicresourcescanbeusedtopromotefertilizeruseinawaythatismorelikelytofostertheemergenceofasustainableinputmarketingsystemledbytheprivatesector(Morriset al.,2007).Gabre-Madhin(2007)hasemphasizedtheneedfor‘gettingmarketsright’instead of ‘getting prices right’.Gettingmarkets right implies that markets’ orderdependsonunderlyinginstitutionsandsupportinginfrastructure,requiringguidancefroma‘visiblehand’andaconcertedeffortforthepublicsectortofacilitatetheroleandperformanceof theprivate sector.Withpoor infrastructure, the transportationcostsinsub-SaharanAfricaareboundtocontinueskyrocketing.Addressingthelongerterm infrastructural issues that hamper trade should therefore also be prioritized.Otherimportantareastobeaddressedare:irrigation,commodityexchanges,marketinformationsystemsbasedonruralradioandshortmessagingsystems,warehousereceipts,andmarket-basedriskmanagementtools(Gabre-Madhin,2007).

As has been shown above, fertilizer subsidies and SAPs are/were not necessarilyflawedprogrammes.ThefactisthattheprivatesectorplayersthatemergedduringtheSAPimplementationweretoosmallandtooweaktoprovidetheservicesneededbysmallholderfarmers(Howell,2005).Additionally,therewasamissingstepintheSAPimplementationthatshouldhavebeenfollowed.Thereisastronglinkbetweenlong-term, carefully-implemented policies to transform the agricultural sector,and effective responsive programmes to alleviate the immediate impacts of foodinsecurity.Additionalmeasurestotransformtheagriculturalsectorintoamoremoderncommercial one – aimed at helping smallholder farmers increase food productionandruralincomesinasustainablemanner–arenecessarytoensurethatafertilizersubsidyprogrammegeneratesthedesiredlong-termresults.InthefollowingsectionweusethecaseofMalawitoillustratehowanagriculturalinputsubsidyprogrammecanberolledoutviaapublic–privatesectorpartnership,withtheaimofdevelopingtheprivatesectorintoaviableeconomicsector–andhenceagovernmentpartnerinthedevelopmentofagricultureandeconomicgrowthingeneral.Butfirst,wegiveabriefbackgroundtothepresentdayMalawiagriculturalinputsubsidyprogramme.

6.6 The challenges of agricultural input programme policy in Malawi

Over75percentofMalawi’spopulation is reliantonsubsistenceagriculture.Sinceindependencein1964,Malawihaspursuedanagriculture-leddevelopmentstrategy.Fertilizer subsidiesmadea substantial contribution toMalawi’s economic growthandmacroeconomic stability from independence until the early 1980s.Then thefiscalcostsofsustainingthemgrewoutofcontrolasaresultofbothendogenousandexogenousfactors(BlackieandMann,2005).In2003,adisastrouscroppingseason


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left3.2millionpeopleinneedoffoodaid.Povertywasdevastatingevenaheadofthiscrisis.Themajorityofthepopulation inMalawiwerealreadyconsuming lessthan1500caloriesperdayandfewhouseholdshadanyassetstosell. In2005,closeto5millionpeople faced starvation.During the2004/2005 season,about1.3millionpeoplerequiredemergencyfoodassistance,estimatedat56000tonnesofcereals.

Anewinputsubsidyprogrammewasinitiatedin2002wherebyimprovedseedandfertilizers are given to resources-poor smallholder farmers at a subsidized price.In2007,MalawiexportedmaizetoZimbabwe.Nowinitsfourthyear,theMalawiagriculturalinputsubsidyprogrammehasbeenreportedasasuccessstory.In2009Malawiwasreportedtohavehadabumpermaizeharvestof3.66milliontonnes,whichwasattributedtothesuccessofanagriculturalsubsidy.The2008/2009maizesurplus is expected to contribute to Malawi’s economic growth rate. However,Malawi is still heavily dependent on outside development assistance, whichaccountedfor42percentofexpenditureinthe2006/2007budget.This isunlikelytochangeintheshortorevenmediumterm.MostMalawiansstilldependonmaizeas their staple foodcrop,and this in turn is linked toadependenceonchemicalfertilizer.Thepolicyonmaizeself-sufficiencyastheonlymeanstoachievingfoodsecurityinMalawimaythereforebequestionable.

Table 6.1 shows the cost of the Malawi input subsidy programme from the2005/2006 season to the 2008/2009 season. The programme’s national budgetshare keeps growing every season.Serious questions are being asked about thefinancialcontrolandsustainabilityoftheprogrammeasaresultofitsburgeoningcostandincreasingdemandonthenationalbudget.Therehasbeenconsiderabledebateaboutthesustainabilityof inputsubsidiesandtheir impactontheprivatesector, and about the impact of the programmes’ costs on other social sectors(DorwardandChirwa,2009).

Inpolicy terms, there are two ‘African agricultures’.One is for those farmers in aposition to produce for themarket, and the other is for those rural familieswhopartlyrelyontheircropsandanimalstokeepthemselvesfrompoverty,withonly

Costs 2005/6 2006/7 2007/8 2008/9

Programme cost (US$ million) 51.0 74.0 115.0 221.4

cost as percentage national budget 5.6 8.4 8.9 13.5

cost as percentage of GdP 2.1 3.1 3.4 5.5

Source: Extracted from Dorward and Chirwa (2009).

taBLE 6.1

actual fertilizer programme costs in malawi

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tinyandoccasionalmarket sales.The lattergroup requiresdirect subsidizationofinputs (Howell, 2005). However, subsidized input programmes should be timelimited,temporarymeasurestoincreasefoodsecurityandreducepoverty.

Theincreaseinprogrammecostshasnotonlyarisenbecauseofincreasedfertilizerprices.Thescaleandscopeoftheprogrammehasalsobeenontheup.Increasesinscalearedemonstrablefromtargetedsubsidizedfertilizersalesrisingby24percentbetween2005/6and2008/9,andactualsalesincreasingby65percentfrom2005/6to 2007/8.The scope of the programme has expanded with the introduction in2007/8and2008/9offlexivouchers(forlegumeandcottonseedaswellasmaize),cotton chemicals and grain storage pesticides, and an announced extension oftheprogrammetosupportteaandcoffeefarmersin2009/10.Concernsaboutthesustainability,cost,scaleandscopeoftheprogrammerequireparticularattentiontoeffectivenessandefficiency.

Theprogramme’scostscannotbesustained.Amarket-basedagricultural reformthatenhancestheroleoftheprivatesectorisnecessary.Toachievefoodsecurityandeconomicstability,andtobreaktheviciouspovertyandfoodinsecuritycyclein which many smallholders are trapped, requires more than the provision ofsubsidized fertilizer. Subsidies are not inherently bad, but their implementationin amannerwhichdoesnot actively reinforce theefficient andprofitableuseofinputssimplybuildsupunsustainableproblemsforthefuture.Theinputsubsidiesshouldberegardedasashort-termstrategyaimedathelpingfarmersgetoutofaviciouscircle.Theyareviewedasa ‘lesserevil’ incontrastto food importsasamoreefficientuseofgovernment foreignexchange resources.However,despiteits short-term successes and commendations from both international and localorganizations,thefertilizersubsidy isnotsustainable inthe longterm.Theinputsubsidyprogrammecanbeusedasapolicytoencouragefarmerstousefertilizersandimprovedseed,whilebuildingastrongprivatesectorina‘fasttrackmode’.

6.7 Towards a framework for linking the private sector to public agricultural input subsidy programmes

Insub-SaharanAfrica,theroleofgovernmentisincreasinglybeenquestionedasanenginetotheeconomicgrowthofcountries.Someoftheactivitiesbeingcarriedoutbythepublicsectorcanequallybeundertakenbytheprivatesector.Inrecentyears,policy-makersinsub-SaharanAfricacountrieshavetakeninitiativestoworkinclosecollaborationwiththeprivatesector.However,someactorsintheprivatesectordonothavetheexpectedknowledgecapacitiestopromoteeconomicgrowth. Therearen’tmanyexamples thatsub-SaharanAfricacountriescan learn from inbuildingpublicandprivatesectorpartnerships,especiallyintheagriculturalinputsubsidyprogrammes.


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There are several ways to create partnerships. For example, Hartwich et al. (2007b)documented a five step process: (1) identifying a common interest; (2) negotiatingthepartnershipcontract, includingfinancingandorganizationaldesign; (3)operatingthepartnership itself; (4)evaluating it; and (5)deciding to terminateor continue thepartnership.IntheUnitedKingdom,threestageshavebeenidentified(ReeveandHatter(undated)citedbyHartwichet al.,2007a)whileintheUnitedStatesthreephaseshavebeen suggested (Warner, 2003 cited byHartwich et al., 2007a).Tennyson (2003) hasdocumentedaprocessof12phasesfortheGlobalAllianceforImprovedNutrition.

The authors recognize that partnership building is a dynamic process, not astatic event. However, the framework illustrated in this chapter is for a specificpurpose: the linkingof thepublicand theprivate sectors in theagricultural inputmarket as an exit strategy, an alternative to publicly-supported agricultural inputsubsidyprogrammes,whichareontheriseinthisregion.Theauthorsseethisasa pre-defined partnership, with the public sector on one side and only privatesectoractors interested intheagriculturalsectorsontheother.Foraviable inputsubsidypartnership,wesuggestedfourmainsteps: (1) thestart-upphase; (2) theemergencephase;(3)theexpansionphase;and(4)thematurityphase(Table6.2). However, depending on the country’s level of private sector growth, differentcountrieswillhavedifferententrypointsinlinkingtheprivatesectortoagriculturalinputsubsidyprogrammes.Thismeansthestartingpointofthepartnershipshouldbeflexibleandcanthereforestartfromanystep,fromItoIV(Table6.2).Thenumberofyearsateachstageisalsoboundtochangedependingonthestageofthecountry’sprivateparticipation.However,itisadvisablethatthewholeprocessshouldtake10yearsorless.Theevidenceofthepast50yearsdemonstratesthecriticalroleoftimeandlearningasimportantingredientsinthedevelopmentprocess(Eicher,2004).

Inthissuggestedframework,asafirststepthepublicsectorwillstillbeincontroloftheinputsprogramme(Table6.2).Thereisstillthestrategicimportanceofanactivegovernment’sroleintheearlystageofdevelopment,becauseitisunlikelythatprivatetraderswilldeliverresearch,extensionandcreditservicestosmallholders,especiallytothoseinremoteareas(seeEicher,2004,onZimbabwe).However,thepublicsectorshouldmakesurethattheinfantprivatesectorissupported;thiscouldinvolvekeysectoralministriessuchasfinance,ruraldevelopmentandagriculture.Government’sroleistocreateanenablingenvironmentforbusinessdevelopmentwhichincludesprovidingmacroeconomicstability, investment-friendlypoliciesand infrastructuredevelopment. In addition to this, governments should continue strengtheningagricultural research and development in order to improve responsiveness tofarmers.ThereisaneedforgovernmenttosharplyincreaseinvestmentsinRandD.Governmentpolicy is influencedthroughstronger lobbygroups intheagriculturalandagribusinesssector.Theiraimscanbeachievediftheprivatesectorplayershavestronglinkagesandspeakwithonevoicetoinfluenceanyrequiredpolicychangesthatwillsupportprivatesectorgrowth.However,itisnecessarytounderstandthatgovernmentwill stillbe in controlofmostof the inputmarket systemswhile the

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privatesectorisgettingitselfupandrunning.Additionally,thegovernmentwillhavesomeprivatesectorenforcementmechanismstoactasamoderatorinthesystem.

Oneofthedeterminingfactorsofsuccessfulpartnershipisgoodleadership(Hartwich,et al.,2005).Inordertofomentastrongprivatesector,thereisaneedtostrengtheninstitutional arrangements for coordination. At this time, the entire stakeholdercommunity should start establishing a neutral management body that will helpfosternetworkingbetweenthepublicandprivatesectors.Itisthereforeimportantthataprivatesectormanagementstructureorsecretariatisestablished.Thiscouldbeanexistingbody,aswasthecaseinMalawiandTanzania,oranewtransparentbodyabletomediateandsupportallactorsequally.The inclusionofConsultativeGrouponInternationalAgriculturalResearch(CGIAR)organizationsandNGOs,bothnationalandinternationalandincludingfaithgroups,playsavitalroleatthispoint;support fromdonors is verycrucialat this infant stage.AsarguedbyHartwichet al. (2005),brokeringisattimesaprerequisitetothesuccessfulestablishmentofapartnership.ThereforedonorshavearoletoplayascatalyzingagentsinthisearlystageofthePPPs.Otheraspectsofdonorrolescouldrangefrombudgetarysupportspecifictoagriculturetosupportforpublic–privatedialogue.

Thesecondstage is theemergenceof theprivatesector: this isacrucialphase.It will require the newly-established management structure to work towardsdevelopingvaluechainsforallmajorcommodities,andidentificationofthemainactors in the chain.Similarly, the public sector is expected to assist the privatesectorby,forexample,strengtheningmicrocreditfacilities,reviewingandstartingto repeal anypolicies thatmight affect theproper growthof theprivate sector(suchasrestrictiveimportpolicies,licensingortaxdisincentives),andeliminatingdutiesandtaxesonfertilizers.Itisalsoimportantthatgovernmentcontinuesitssupportforthecreationoffarmerorganizationsandthestrengtheningofresearchand development (RandD), in order to improve responsiveness to farmers. It isnecessary that government continues to oversee the private sector, given thatthere is potential for the early days ofPPPs tobeovercrowdedwith ‘briefcase’type private sector dealers that are only interested in tapping into sources ofgovernment or donor funding. Donor support for capacity development of theprivatesectorandthecorollaryfinancialserviceswillberequired.

Inthethirdstage(years4–6), theprivatesectorbeginstoshowsignsofgrowthby starting to build its reputation; it is getting ready to be trusted with theresponsibilityofrunningtheinputprogrammeswithoutgovernmentinterference.Communication,knowledgesharingandcapacitydevelopmentshouldcontinuetobeaddressedatthisstage.Similarly,knowledgesharingandmarketinformationsystems improvesupplychaineffectiveness.Still, theprivatesectorneedsmorepublicanddonorsupport.

Bythefourthstage,fromyears7–10,theprivatesectorshouldhavematuredandbeabletotakeovercontroloftheinputssectors.Theresultisanefficientandeffective


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bet

wee

n t

he

pu

blic

an

d

pri

vate

sec

tors

an

d b

e ab

le

to m

edia

te. T

his

co

uld

be

an e

xist

ing

or

a n

ewly

-es

tab

lish

ed b

od

y

2. c

apac

ity

bu

ildin

g f

arm

er

emp

ow

erm

ent

and

far

mer

o

rgan

izat

ion

s

3. S

up

po

rt t

he

esta

blis

hm

ent

of

rura

l ret

ail n

etw

ork

s fo

r in

pu

t tr

adin

g s

yste

ms;

in

volv

e ke

y g

ove

rnm

ent

min

istr

ies

such

as

fin

ance

, ru

ral d

evel

op

men

t an

d

agri

cult

ure

; in

clu

de

NG

Os,

fa

ith

gro

up

s an

d c

GIa

R

org

aniz

atio

ns

1. In

pu

ts m

arke

ts v

ery

mu

ch u

nd

er

stat

e co

ntr

ol

2. e

stab

lish

a v

ou

cher

sys

tem

re

dee

mab

le a

t se

vera

l pri

vate

ag

ri-

dea

ler

sho

ps

3. G

ove

rnm

ents

sta

rt w

ork

ing

on

p

olic

y re

form

s th

at s

up

po

rt s

pac

e fo

r p

riva

te s

ecto

r ac

tors

to

tak

e ro

ot

4. c

reat

ion

of

sup

po

rtiv

e p

riva

te s

ecto

r en

forc

emen

t m

ech

anis

ms

5. R

evie

w r

estr

icti

ve im

po

rt p

olic

ies,

lic

ensi

ng

or

tax

dis

ince

nti

ves

6. In

fras

tru

ctu

re d

evel

op

men

t ai

med

at

red

uci

ng

tra

nsa

ctio

n c

ost

s

7. In

crea

sed

fu

nd

ing

fo

r R

and

d a

nd

m

arke

t in

form

atio

n s

yste

ms

8. S

up

po

rt p

riva

te s

ecto

r cr

edit

fi

nan

cin

g

1. S

up

po

rt c

apac

ity

dev

elo

pm

ent

in f

arm

er

org

aniz

atio

n

2. S

up

po

rt g

ove

rnm

ent

in

cap

acit

y d

evel

op

men

t fo

r w

ork

ing

wit

h a

nd

su

pp

ort

ing

th

e p

riva

te

sect

or

3. T

rain

ing

an

d b

usi

nes

s su

pp

ort

dev

elo

pm

ent

for

smal

l an

d m

ediu

m-s

ized

ru

ral e

nte

rpri

ses

4. d

edic

ated

gra

nts

fo

r th

e ag

ricu

ltu

re s

ecto

r

5. P

lay

the

role

of

cata

lyzi

ng

ag

ent

in b

roke

rin

g p

ub

lic–

pri

vate

sec

tor

dia

log

ue

Exp

ecte

d o

utc

om

e: A

wel

l co

ord

inat

ed p

ub

lic–p

riva

te p

artn

ersh

ip f

ram

ewo

rk t

o a

chie

ve m

arke

t co

hes

ion

, effi

cien

cy a

nd

co

st e

ffec

tive

nes

s in

pla

ce.

139

CHAPTEr 6


taBL

E 6.

2

Fram

ewor

k fo

r lin

king

pub

lic a

nd p

rivat

e se

ctor

s in

agr

icul

tura

l inp

ut s

ubsi

dy p

rogr

amm

es for

eco

nom

ic d

evel

opm

ent

Ste

pSta

ge

Key p

rivate

sect

or

role

sK

ey p

ub

lic

sect

or

role

sK

ey d

on

or

role

s

II.eM

eRG

eNc

e

[Yea

r 2–

3]

(lim

ited

p

riva

te s

ecto

r in

volv

emen

t)

1. e

ffec

tive

co

ord

inat

ion

an

d

adm

inis

trat

ive

pro

ced

ure

s in

p

lace

2. c

om

mo

dit

y/ m

arke

t/ v

alu

e ch

ain

an

alys

is f

or

all m

ajo

r co

mm

od

itie

s

3. Id

enti

fyin

g k

ey s

take

ho

lder

s in

th

e d

iffe

ren

t m

arke

t ch

ain

s (i

nit

ially

th

is w

ill b

e cr

ow

ded

wit

h m

any

acto

rs)

4. c

apac

ity

dev

elo

pm

ent

of

farm

ers

and

far

mer

o

rgan

izat

ion

s

5. B

uild

ing

tru

st a

mo

ng

p

artn

ers

and

exp

erie

nce

sh

arin

g in

op

erat

ing

wit

h

smal

lho

lder

s

6. S

up

po

rt a

ctiv

itie

s th

at c

reat

e tr

ust

am

on

g p

artn

ers

7. T

he

com

mu

nic

atio

n p

roce

ss

star

ts t

hro

ug

h k

no

wle

dg

e sh

arin

g a

mo

ng

th

e d

iffe

ren

t ac

tors

in t

he

mar

ket

chai

n

1. R

emo

val o

f re

stri

ctiv

e im

po

rt

po

licie

s, li

cen

sin

g o

r ta

x d

isin

cen

tive

s; e

limin

atio

n o

f d

uti

es

and

tax

es o

n f

erti

lizer

s

2. c

on

tin

ue

to s

up

po

rt c

reat

ion

of

farm

er o

rgan

izat

ion

s; c

on

tin

ue

the

vou

cher

sys

tem

3. c

on

tin

ue

imp

rovi

ng

tra

nsp

ort

in

fras

tru

ctu

re t

o r

edu

ce f

erti

lizer

d

istr

ibu

tio

n c

ost

s

4. c

on

tin

ue

the

stre

ng

then

ing

o

f R

and

d in

ord

er t

o im

pro

ve

resp

on

sive

nes

s to

far

mer

s

5. R

evie

w t

arif

f b

arri

ers,

tra

de

agre

emen

ts a

nd

tra

de

neg

oti

atio

ns

that

mig

ht

det

er t

he

gro

wth

of

the

pri

vate

sec

tor

6. S

tart

lice

nsi

ng

th

e b

est

pri

vate

se

cto

r p

artn

ers

(th

ose

wh

o s

har

e th

e p

rin

cip

les

and

val

ues

of

dev

elo

pm

ent)

7. S

tren

gth

en m

icro

cred

it f

acili

ties

8. S

up

po

rt p

lura

listi

c d

eman

d-d

rive

n

exte

nsi

on

ser

vice

s

9. P

riva

te s

ecto

r lo

an g

ran

tee

1. c

on

tin

ue

sup

po

rt f

or

cap

acit

y d

evel

op

men

t o

f th

e p

riva

te s

ecto

r

2. e

nco

ura

ge

the

fin

anci

al

serv

ices

sec

tor

to s

up

po

rt

the

pri

vate

sec

tor,

incl

ud

ing

far

mer

s

3. S

up

po

rt t

he

crea

tio

n o

f a

pri

vate

sec

tor

inn

ova

tio

n

fun

d

4. M

atch

ing

gra

nts

5. S

up

po

rt le

sso

n le

arn

ing

st

ud

ies

Exp

ecte

d o

utc

om

e: In

vest

men

t-fr

ien

dly

clim

ate

sup

po

rtin

g t

he

pri

vate

sec

tor.

(Continued)


140

taBL

E 6.

2

Fram

ewor

k fo

r lin

king

pub

lic a

nd p

rivat

e se

ctor

s in

agr

icul

tura

l inp

ut s

ubsi

dy p

rogr

amm

es for

eco

nom

ic d

evel

opm

ent

Ste

pSta

ge

Key p

rivate

sect

or

role

sK

ey p

ub

lic

sect

or

role

sK

ey d

on

or

role

s

III.

PRIV

aTe

Sec

TOR

G

RO

WTh

[Yea

r 4–

6]

1. P

riva

te s

ecto

r b

eco

mes

pu

blic

se

cto

r’s

relia

ble

par

tner

in

the

inp

ut

mar

keti

ng

2. d

emo

nst

rab

le p

rog

ress

wit

h

mar

ket-

chai

n in

no

vati

on

s th

rou

gh

rep

uta

tio

n. T

his

is

the

win

no

win

g s

tag

e. O

nly

re

pu

tab

le a

cto

rs s

urv

ive

at

this

sta

ge

3. h

um

an c

apac

ity

dev

elo

pm

ent

to im

pro

ve t

he

bu

sin

ess

acu

men

fo

r b

oth

fa

rmer

s an

d p

riva

te s

ecto

r

4. d

eale

rsh

ip c

apac

ity

dev

elo

pm

ent

to b

e ab

le

to m

ake

go

od

bu

sin

ess

dec

isio

ns

at t

he

loca

l le

vel a

nd

ad

vise

far

mer

s o

n p

rop

er f

erti

lizer

use

; si

te s

pec

ific

tech

no

log

y d

isse

min

atio

n m

od

els

5. f

arm

ers

are

able

to

ex

per

imen

t w

ith

new

te

chn

olo

gie

s

6. S

up

po

rt p

riva

te s

ecto

r an

d

farm

ers’

en

trep

ren

euri

al

cap

acit

y

1. a

bo

ut

75 p

erce

nt

of

inp

ut

mar

ket

un

der

pri

vate

sec

tor

2. R

evie

w a

ny

un

inte

nd

ed u

nd

esir

able

o

utc

om

es f

rom

po

licie

s d

isco

ura

gin

g

mar

ket

liber

aliz

atio

n

3. c

on

tin

ue

the

dev

elo

pm

ent

of

infr

astr

uct

ure

su

ch a

s ro

ad n

etw

ork

, ir

rig

atio

n, e

tc

4. M

on

ito

r, re

view

an

d d

rop

pri

vate

ac

tors

no

t fa

llin

g w

ith

in a

n a

gre

ed

thre

sho

ld

5. G

ove

rnm

ent

pro

gre

ssiv

ely

han

ds

ove

r in

pu

t m

arke

t sy

stem

re

spo

nsi

bili

ties

to

pri

vate

sec

tor

6. P

rom

ote

reg

ion

al in

vest

men

t-fr

ien

dly

clim

ate

to s

up

po

rt p

riva

te

sect

or

gro

wth

1. M

ore

fu

nd

ing

to

pri

vate

se

cto

r (c

ou

ld b

e th

rou

gh

m

atch

ing

gra

nts

)

2. S

up

po

rt t

he

stre

ng

then

ing

o

f g

ove

rnm

ent

po

licy

coo

rdin

atio

n t

o im

pro

ve

the

bu

sin

ess

envi

ron

men

t an

d m

arke

t o

pp

ort

un

itie

s.

3. P

ub

liciz

e su

cces

s st

ori

es a

nd

‘bes

t b

ets’

in

terv

enti

on

s an

d p

rovi

de

sup

po

rt f

or

scal

ing

ou

t

Exp

ecte

d o

utc

om

e: W

ell d

evel

op

ed d

om

esti

c m

arke

ts, a

nd

mo

re c

om

pet

itio

n a

mo

ng

pri

vate

tra

der

s to

ben

efit

farm

ers.

(Continued)

141

CHAPTEr 6


taBL

E 6.

2

Fram

ewor

k fo

r lin

king

pub

lic a

nd p

rivat

e se

ctor

s in

agr

icul

tura

l inp

ut s

ubsi

dy p

rogr

amm

es for

eco

nom

ic d

evel

opm

ent

Ste

pSta

ge

Key p

rivate

sect

or

role

sK

ey p

ub

lic

sect

or

role

sK

ey d

on

or

role

s

1. S

up

po

rt li

nka

ges

bet

wee

n

pri

vate

sec

tors

an

d c

red

it

pro

vid

ers

2. S

up

po

rt c

om

mit

ted

par

tner

s,

i.e. f

ee p

ayin

g f

or

the

secr

etar

iat

1. G

ove

rnm

ent

sup

po

rt f

or

ban

kin

g

sect

or’

s in

volv

emen

t in

th

e ag

ricu

ltu

re s

ecto

r

1. S

up

po

rt f

or

stu

die

s o

n

trad

e p

riva

tiza

tio

n

2. S

up

po

rt fi

nan

cial

ser

vice

s se

cto

r

Exp

ecte

d o

utc

om

e: S

tro

ng

lin

kag

es b

etw

een

pri

vate

sec

tor

(in

clu

din

g f

arm

ers)

an

d e

nh

ance

men

t o

f th

e fi

nan

cial

sec

tor.

(Continued)


142

taBL

E 6.

2

Fram

ewor

k fo

r lin

king

pub

lic a

nd p

rivat

e se

ctor

s in

agr

icul

tura

l inp

ut s

ubsi

dy p

rogr

amm

es for

eco

nom

ic d

evel

opm

ent

Ste

pSta

ge

Key p

rivate

sect

or

role

sK

ey p

ub

lic

sect

or

role

sK

ey d

on

or

role

s

1. K

no

wle

dg

e m

anag

emen

t:

imp

rove

info

rmat

ion

sh

arin

g

is f

un

dam

enta

l to

far

mer

s’

ado

pti

on

of

tech

no

log

y

2. S

up

po

rt e

ffec

tive

far

mer

ex

per

imen

tati

on

wit

h n

ew

tech

no

log

ies

and

op

tio

ns,

an

d f

arm

er p

arti

cip

atio

n in

th

e g

ener

atio

n o

f in

no

vati

ve

mar

kets

3. S

up

po

rt t

he

div

ersi

fica

tio

n o

f sm

allh

old

er a

gro

-eco

no

mic

ac

tivi

ties

4. B

road

en v

alu

e ch

ain

to

b

rin

g in

wea

ker

mem

ber

s th

at m

igh

t h

ave

no

t h

ad t

he

cap

acit

y to

co

ntr

ibu

te in

th

e in

itia

l sta

ges

(fo

r ex

amp

le,

smal

l see

d c

om

pan

ies

that

u

se p

ub

lic g

erm

pla

sm a

nd

w

ho

are

ver

y ef

fect

ive

at

reac

hin

g c

ash

po

or

and

re

mo

te f

arm

ers

5. d

ata

colle

ctio

n, a

nal

ysis

an

d d

isse

min

atio

n t

o a

ll st

akeh

old

ers

1. R

evie

w t

he

po

ten

tial

to

pri

vati

ze

trad

e in

fer

tiliz

er w

ith

an

o

bje

ctiv

e to

tra

nsf

er t

he

fert

ilize

r m

anag

emen

t an

d d

istr

ibu

tio

n

serv

ices

to

pri

vate

sec

tor

han

ds

1. S

up

po

rt s

tud

ies

on

kn

ow

led

ge

man

agem

ent

2. S

up

po

rt t

o p

lura

listi

c ex

ten

sio

n s

ervi

ces

Exp

ecte

d o

utc

om

e: In

crea

sed

co

mm

un

icat

ion

an

d o

ng

oin

g f

eed

bac

k b

etw

een

pri

vate

sec

tor

and

go

vern

men

t o

n t

he

po

siti

ve im

pac

ts

of

the

po

licy

refo

rm m

easu

res.

(Continued)

143

CHAPTEr 6


taBL

E 6.

2

Fram

ewor

k fo

r lin

king

pub

lic a

nd p

rivat

e se

ctor

s in

agr

icul

tura

l inp

ut s

ubsi

dy p

rogr

amm

es for

eco

nom

ic d

evel

opm

ent

Ste

pSta

ge

Key p

rivate

sect

or

role

sK

ey p

ub

lic

sect

or

role

sK

ey d

on

or

role

s

IV.

Ma

TUR

ITY

[Yea

r 7–

10]

[Pri

vate

sec

tor

exp

ansi

on

]

1. P

riva

te s

ecto

r b

eco

mes

tr

ust

ed p

artn

er o

f g

ove

rnm

ent

2. P

riva

te s

ecto

r ab

le t

o a

ssis

t g

ove

rnm

ent

exte

nsi

on

se

rvic

es w

ith

ow

n s

taff

at

the

loca

l lev

el

3. P

riva

te s

ecto

r fi

rms

mak

e in

pu

ts a

vaila

ble

to

far

mer

s co

un

try-

wid

e in

a t

imel

y m

ann

er

4. f

arm

ers

are

emp

ow

ered

w

ith

th

e in

form

atio

n t

hey

n

eed

to

sel

ect

(an

d a

dap

t if

n

eed

ed)

the

bes

t te

chn

olo

gy

com

bin

atio

ns

for

thei

r co

nd

itio

ns

5. f

arm

pro

du

ctiv

ity

rise

s,

farm

ers

gra

du

ally

div

ersi

fy

into

oth

er p

rod

uct

ion

ac

tivi

ties

1. c

om

ple

te g

ove

rnm

ent

dis

eng

agem

ent;

inp

ut

mar

ket

un

der

th

e p

riva

te s

ecto

r; c

om

ple

te

pri

vati

zati

on

of

inp

ut

mar

ket

syst

ems

2. B

road

-bas

ed p

arti

cip

atio

n in

th

e m

arke

t b

y in

dig

eno

us

entr

epre

neu

rs

and

sm

allh

old

ers

3. G

ove

rnm

ent

still

pro

vid

es o

vers

igh

t o

n t

he

pri

vate

sec

tor

4. G

oo

d r

oad

net

wo

rk

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144

private sector that is able toprocure anddeliver inputs in a timelymanner to itsbeneficiaries.Dependingontheprivatesector’sdevelopmentalstage,countriescanstarttheprocessfromanylevel.Thisprocessshouldbeaniterativeonethathastobemonitoredcontinuously.Bythistime,theprivatesectorshouldhavestandardizationofpractices inplaceandhencebeself-regulated.Public resourcescanbeusedtopromote fertilizer use in a way that is more likely to foster the emergence of asustainable,privatesector-ledinputmarketingsystem(Morriset al.,2007).

6.8 Conclusions

This chapter has assessed three case examples of public–private partnerships in sub-SaharanAfrica, one in its early growth stages and the others in their infantstages.Ithasbeenarguedthatagriculturalinputsubsidesarenotaproblemper se. Theproblemhasbeeninthewaytheyareimplemented.Theauthorshavearguedthatwiththespiralingofthecostsofinputsubsidyprogrammes,subsidiescannotbesustaineddespitebeingpoliticallygood.Economically,theirbenefitsoutweighthecostsoffertilizersubsidiesintermsofforeignexchangesavingsresultingfromimportsubstitution.Wehaveshownthatunlikeinthestructuraladjustmentprogrammes(SAP)era,privatesectordevelopmentcanprovidepartoftheanswertothepresentdayagricultural inputprogrammes through the creationof partnershipsbetweenthepublicandprivatesectors.Thesecanworktogethertodeveloptheprivatesectorsothatitisabletohandletheresponsibilities.WehaveshownthiswasthemissinglinkintheSAPsofthe1980sand1990s:mostsub-SaharanAfricagovernmentswereaskedtoprivatizewhentherewasnostrongprivatesector.

Themainmessage of this chapter is that in considering possible entry points forpublicinterventionstoincreasefertilizeruseinsub-SaharanAfrica,itisimportanttoadoptalong-termperspective.Theissueisnotwhetherfertilizerssubsidiesarebadornot.Governmentshaveasocialserviceroletoplay.However,governmentsalsounderstandthattheywillnotbeabletofinanceinputsubsidyprogrammesforeverat theexpenseofother services. It is ingovernments’ interest topartnerwith theprivatesector,although inAfrica, theprivatesectorwillneedgovernmentsupportinmanyaspects.Itisthereforeimportantthatthepublicandprivatesectorsworkasateamwiththeaimofdevelopingtheeconomy.Governmentshouldthereforeuseitssupporttodevelopdemandandkeyactorsonthesupplyside.Thiswillrequireadeliberatepolicyonthepartofthegovernmentandachangeintheroleoftheprivatesector.Small stepswill have tobe taken inbuilding strong relationships and trustbetweenthepublicandprivatesectorplayers.Otherwise,farmers–whoarethemainstakeholdergroups–willloseout.

Understandingprivatesectoractivitiesandpublic–privateinteractionsisindispensablefordesigningappropriatepublicpoliciesandallowingtheprivatesector toplay itsfullroleinanation’sdevelopmentprocess.Apublicsectorbiasagainstrecognizing

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theroleoftheprivatesectordiscouragesitsgrowth.Theauthorshavepresentedafour-stageprocessthatshouldfomentastrongprivatesectorabletotakechargeoftheinputmarketingsystemsinmostofSSAs.Theexpectedoutcomeisanimproved,sustainableandprofitableagriculturesectorthatisabletohelppoorsmallholdersinAfricaimprovetheirlivelihoodsystems.Theframeworkpresentedinthischapterhasshowntheneedforsupportingbothsmallholdersandtheprivatesectortoincreasedemandononeside,and improvesupplyontheother.Governmentshouldsee itssupport to the private sector as a sustainable ‘exit strategy’ to the input subsidyprogrammes.

The authors conclude that improving service provision and developing amarketfor services through stimulating innovation and experimentation at the grouplevel,ratherthansubsidizingthemarketforinputs,providesacosteffectiverouteto broad-based uptake of economically-viable improved technologies and toimproved incomesamongthepoor. Ifwelldevelopedandproperly implemented,this framework allows for a gradualwithdrawal of subsidies in a phasedmanner. Theendresultisaliberalized,sustainable,private-sectordriveninputeconomy.


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Brenes, R. 2004. The need for public–private sector strategic partnerships – Who does what? (Available at: http://www.intracen.org/execforum/ef2005/ montreux/Country-Papers/Nicaragua_Brenes.pdf).

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Spielman, D.J. & von Grebmer, K. 2006.Public–PrivatePartnershipsinInternationalAgriculturalResearch:Ananalysisofconstraints. InJournal of Technology Transfer, 31,pp.291–300.

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mUSTAPhA JOUIlI

cHapter 7

agro-industrial investment promotion

in tunisia

7.1 Introduction

In April 2007, a document submitted to theAgriculture Committee of the Foodand Agriculture Organization of the United Nations (FAO) stressed the growingimportance of agriculture and agro-industries in developing regions, and therole the sector plays in economic development and poverty reduction. Indeed,almost 75 percent of the world’s poor live in rural areas and agriculture is theirmain livelihood. Rising incomes combined with increasing urbanization has ledto the growing importance of agro-industries development (World Bank, 2007). Despitethisrecognition,thepotentialofagricultureandagro-industriesasanengineofgrowth remainsunder-exploited inmanydevelopingcountries.Agro-industriesdevelopment is a key driver to increasing agricultural productivity and increasingfood availability. These industries are also an important source of employmentandincomeinruralareas.Inthiscontext,thecreationofanenablingenvironmentthrough political incentives for investment in this sector, including investment inimprovedproductivity,infrastructureandinstitutionaldevelopment,areofparticularinterest(FAO,2009).ThischapterpresentsasynthesisofpoliciesbytheGovernmentofTunisiaaimedatencouraginginvestmentinanddevelopmentofagro-industries.

In Tunisia, Agro-Food Industries (AFI) have been developed through a dynamicprocess of division and restructuring of labour between agriculture and industry.Initially,theseindustriesdependedheavilyonagricultureandweremostly limitedtoaddingminimalvaluetoagriculturalproductsbysimpleprocessessuchasbasicpackagingandstorageactivities.Astheyimprovedtheirmanufacturingprocessesand services, increasingly incorporating technology and furthering the degree ofprocessingandindustrialtransformation,thisdependencewasreduced.Currently,


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the food sector is an essential component of the industrial fabric and occupies animportantplaceintheeconomy.

This change in thedynamicsof the food industry is the resultofa seriesoffiscalandfinancial incentives introduced in theearly 1990s,whosemainobjectivesarethepromotionof investment and improvement in productivity.However, despitethe improvedperformanceofthesector, investment inthefood industryremainshamperedbyseveralconstraints, includingthoselinkedtoproductionandsupply.Inadditiontoissuesrelatedtopricesandqualityofrawmaterials,theseasonalityof agricultural production, the lack of an efficient agricultural product assemblynetworkandthehighprocurementcostsassociatedwithinboundlogistics,meansthat the quantities delivered to the industry are insufficient, compared with theexistingprocessingcapacity.

Thechallengesofpromotingagro-industrialinvestmentsinTunisiaarereviewedinthischapter.Followingthisintroduction,theinvestmentpolicyinTunisiaispresentedin section two, after which a discussion of the performance of food industries ismade in section three.Section fouranalysesconstraintshindering thepromotionof investmentinagro-industries. Italsoshowsthatbeyondthefinancialandfiscalincentives, investment promotion in the food industry requires an extension oforganizedand controlled collection, increased storage capacity, andorganizationofmarketing.Furthermore,institutionalmeasuresareneeded;theyshouldaimtoconsolidatetheroleofproducerandservicecooperativesandregulatetherelationsbetweenthedifferentstakeholders.Sectionfiveconcludesthechapterandsuggestspolicyrecommendations.

7.2 The main components of the investment policy

Fourphasescanbedistinguishedintheevolutionofgovernmentpolicyinencoura-ging investment in Tunisia (Euro-Mediterranean Forum of Economic Institutes ofSciences, FEMISE, 2005), 2005). The first phase (1962–1969) was marked by thepredominanceofpublicinvestment.Thesecondphase(1970–1980)correspondstoaperiodwherethestatewasfocusingmoreheavilyonprivatesectordevelopmentandwhereincentivesweregrantedaccordingtospecificsectoralcodes.Thethirdphasecoincideswith the implementationof thestructuraladjustmentprogramme (1987–1992). It entailed opening up to international trade, raising the need to revise theexistingcodestoreflectthechangingsituation,andtoenactdevelopmentsrelatingto the companies involved in international trade (1998) and services (1989). Since1994,theobjectiveof investmentpolicyhasbeentheintensificationof investment,increasing efficiency of production factors and strengthening the private sectorcontributiontoinvestment.TheInvestmentIncentivesCode(1993)andtheNationalUpgradeProgram(1996)arethetwomainpillarsofthebenefitsgrantedtocompanies.

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agro-industrial investment promotion in Tunisia

7.2.1 the Investment Incentives code

Since1994, investment inTunisia isgovernedby the Investment IncentivesCode,which serves to simplify previous legislation that had become too complex andwhose effectiveness was questioned by both public policy-makers and investors.Thiscode,presentedas‘unique’,wasdevelopedtoreducethedistortionsgeneratedbythecoexistenceofamultitudeofpastpoliciesandlaws.ThemainobjectivesoftheCodearetherevivalofinvestment,exportpromotionandpromotionofregionalandagriculturedevelopment.

The Investment Incentives Code is characterized by a set of regulations andnumerousincentivesgoverningbothnationalandforeigninvestment.Establishedin1993,thecodewasamendedin1995withtheemergenceofnewlegislationrevisingandaddingnewprovisionstothesetexts,particularlyin1999and2001,definingandredefiningtheregionaldevelopmentareas,newinvestors,small-andmedium-sizedenterprises(SMEs)andnewtechnologies.TheCodereinforcestheopennessoftheTunisianeconomyandcoversallsectors,exceptmining,energy,thefinancialsectoranddomestictrade,whicharegovernedbyspecificlaws.

TheCodeandallrelatedtextsprovideasetoffiscalandfinancialincentivesfavouringexportregions,smallandmedium-sizedenterprises,newinvestorsandothermorespecificaspects.Theincentivesofferedarebothfinancialandtaxrelated,designedtoreducethecostofinvestmentgenerally.

The tax code applies to investments made in the following activities: agriculture,fisheries, manufacturing, public works, tourism, handicrafts, transport, educationand training, vocational training, cultural production and animation, animation foryoungandchildhoodagegroups,health,environmentalprotection,realestate,other non-financialservicessuchasITservices,studies,expertadviceandassistance,aswellasservicesrelatedtomaintenanceofequipmentandfacilities.Otherfinancialandtaxbenefitsaregrantedasadditionalbenefitsandinactivitiesconsideredpriorities,suchasexports, regionaldevelopment,agriculturaldevelopment,promotionof researchandtechnologydevelopment,newentrepreneursandSMEs,andinvestmentsupport.

Specifically for agricultural development, the following provisions are made:

Z Fulltaxexemptiononreinvestedprofitsandincome. Z Fulltaxexemptionforthe10firstyearsofoperation. Z ValueAddedTax(VAT)suspendedonimportedcapitalgoodsthathavenolocally-madesimilarcounterparts.

Z The State may incur infrastructure expenses to develop areas meant for fishfarmingandforcultivationsusinggeothermalwater.

Z 7percentbonusoninvestmentvalue. Z 8 percent additional bonus on investment value, that can be granted foragricultural investments achieved in hard-climate regions: Gabes, Gafsa,


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Fiscal measures• Tax relief for shareholders up to 35 percent of profits or net revenue subject

to corporate tax or personal income;

• Tax relief on profits reinvested back into the company up to a limit of

35 percent of taxable corporate profits;

• Ability to opt for the accelerated depreciation of equipment and production

equipment;

• Exemption from customs duties, charges having equivalent effect, and

payment of VAT (10 percent), for imported equipment not manufactured

locally;

• Suspension of VAT on locally manufactured equipment when this was

acquired before the entry into production;

• Payment of VAT (10 percent) for equipment acquired locally after the entry

into operation of investment creation;

• Exemption from tax on profits during the first 10 years for: revenue from

exports, agricultural projects, projects for regional development;

• 50 percent reduction of tax rate for export earnings from the 11th year for an

unlimited period, 10 years for the regional development projects.

Financial measures • Premiums investment – grants are provided for the protection of the

environment, 20 percent of the cost of facilities, and regional development:

15 percent or 25 percent of project costs according to the location and the

agricultural development; 7 percent of project cost with an additional

8 percent for agricultural projects in arid areas; 25 percent for fisheries projects

in the north coastal ports from Bizerte to Tabarka.

• Full support by the State of social security contributions for a period of five

years in the following cases: employment of new graduates and projects

established in areas of regional development promotion.

• Support by the State of 50 percent of social contributions for five years for the use

of second and third shifts, for companies that do not work with continuous fire.

• Coverage of costs of infrastructure: support provided in whole or in part

by the State for certain infrastructure expenses, e.g. for the development of

aquaculture and crops using geothermal energy, where projects are established

in the fields being given encouragement.

Source: http://www.tunisianindustry.nat.tn/en/doc.asp?mcat=12&mrub=92&msrub=207&dev=true#dev.agricole

box 7.1 Key measures of the Investment Incentives Code

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Medenine, Kebili, Tataouine and Tozeur. This premium can reach as high as 25 percent for areas aroundGafsa that are in the process of converting fromminingtootheractivities.

Z 25percentadditionalbonusoninvestmentvalueforfishingprojectsinthenorthcoastlineportsfromBizertetoTabarka.

Although it has become an incentive framework for investment, this Code hasbecomerathercomplexforinvestors.Thereisanincompatibilitybetweenthespiritof auniquecodeand theplethoraof textsgoverning thebenefits to investment.Indeed, the new code has resulted in a proliferation of legislation to clarify itsprovisionsandinalargenumberofchanges(Aissa,2002).Legislativechangeshavebeen enacted to respond to the changing economic situation facing the country,but the increasingnumberofclarificationshas introducedanegativeclimateanduncertaintyforbusinessdevelopment.Todate,morethan100amendmentstothecodecanbeidentified,themajorityofwhichweremadebylaw.(FEMISE,2005)

TheinstabilityoftheregulatoryframeworkmainlyconcernsthescopeoftheCode.ThelistofsectorseligibleforbenefitsisextensiblebecausethedecreeestablishingtheactivitiesundertheCodewassubjecttoninechanges–oncein1995,threetimesin1996,twicein1997,twicein1998andoncein2000.Projectseligiblefor‘additional’benefitshavealsobeensubject to repeatedchanges.From1994until2000, fortydecrees granting additional benefits are identifiable (Centre for AdministrativeInnovation in the Euro-Mediterranean Region,C.A.I.MED, 2003).This uncertaintyplaguingthe‘new’regulationofinvestmentincentivesisagainwasteful,andisnotlikelytoencourageinvestmentbecauseitintroducesacomplexity,alackofclarityand transparency, and a sense of discrimination betweenbeneficiarieswhowerepreciselythesourceofitsrevision.

7.2.2 the national upgrade program

Technologyremainsoneofthemostdecisivefactorsforindustrialcompetitiveness.Given the changing international environment, it has become increasinglyimportant for exporters from developing countries that have adopted an exportpromotion strategy to monitor and adapt to changes in the global industry toremain competitive. Countries that until recently had a comparative advantageassociatedwithlowwagesnowneedtocompeteinaworldwheretechnologyhasbecome an important criterion of competitiveness.Today, the product life cyclecanbeextremely short,newproduction techniques lead toa restructuringof theinternational division of labour that reduces the direct costs of labour, and theincreasinguseofartificialmaterialsisreducingtheneedforimportedrawmaterials.In theabsenceof technologicalprogress, the competitivenessof labour-intensiveindustrieswouldbethreatenedandwouldbeincreasinglydependentonotherformsofcostreduction,particularlythedeclineinrealwages.


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WhilesomelargeTunisianenterprisesuseadvancedtechnology,this isnotthecaseforsmallerenterprisesthathavelittleaccesstoit.However,theimportanceof technology for the successof exportson theonehand, and the inabilityofexistingindustrialstructurestosupporttechnologicaldevelopmentintheearlystages of their industrialization on the other hand, raised the question aboutthe desirability of State intervention in technology development in supportof industries that are not yet equipped to copewith competition.This debatesets head-to-head the critics of state intervention,who refer to the failure ofinterventionistpolicies toensure sustainabledevelopmentandgrowth, and intheoppositecampthosewhoadvocateanactive industrialpolicy,basingtheirargumentsontheimperfectionsofinformation,capitalandtechnologymarkets,externalities, economies of scale and learning by production. The successof the newly-industrialised countries during the 90s has revived the debate,highlightingtheeffectsofa focusedandselective industrialpolicytopromoteinfantindustries.TheexperienceofthesecountriesshwsthattheStatecanplayanimportantrole intechnologicalandindustrialdevelopment,aswellas long-termgrowthofindustrialproductivity.Industrialexpansionandthesuccessesofproduction forexporthavecertainlybenefited from industrialpoliciesand theselectiveinterventionsofgovernments.

In Tunisia, the objective of export promotion, diversification and growing arange of exports makes the creation and accumulation of new technologicalcapabilities a necessity for the economy.Use of technology affects the ability ofindustries to modernize and become competitive in markets increasingly opento foreigncompetition–hencethe importanceof theNationalUpgradeProgram(NUP). This Program – spearheaded by the State for the modernization of the economy–emphasizestheadaptationtonewcompetitiveframeworkofstrategiesand training practices, research and development and the use of technologies.TheNUPbegunin1996andaimstoachieveinternationalstandardsinqualityandcosts, and increase the competitiveness of industrial enterprises. This Programwas developed by the Government to allow the Tunisian production system toadaptbettertotheexigenciesofhighly-competitiveglobalmarkets.It isintendedfor companies in thriving businesses,without economic difficulties, and acting inindustryandrelatedservices.

SomespecificaimsoftheNUPareto:

Z help themanufacturing industry to adapt andmodernize strategies,methodsandpractices–organizational,management, innovation,training,distribution,marketing;

Z encourageindustrialpartnershipsandstrengthenthesocio-economicenvironmentof the enterprise, e.g. by improving basic infrastructure and technologicalmodernizationofpublicinstitutionsinvolvedwiththeprivatesector;

Z meet the challenge of increased competition through association agreementswiththeEUandviathedismantlingoftheMultiFibreArrangement(MFA).

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The Program provides public financing for the implementation of upgrade plansthrough a Development Fund for Industrial Competitiveness. This is financedthroughataxof1percentonlocalandimportedproducts.Exportenterprisessubjecttothistaxareexempt.

Measuresundertakenareexclusivelyorientedtoincentivesforinvestment,whethertangible or intangible.The aim is clearly to increase the rate of competitive andsustainableprivatesectorinvestmentstoalevelthatcaninitiateamovementtowardsacceleratedgrowth.Theseinvestmentsneedtobedirectedtotheimprovementofcompetitiveness–only thosecontributing toproductivitygainsareeligibleunderNUP. Investment capacitieswhich do not entail a technological leap are therebyexcluded.InvestmentseligibleforincentivesprovidedintheUpgradeProgramaredefinedbythefollowingthreeareas:

1) Intangible investments:Theseareallintangibleinvestmentscontributingtotheimprovementof theenterprise’s competitiveness, includinghuman resources,organizationalskills,studiesandexploration.Theseinvestmentsincludesharesoftechnicalassistanceconcerning:

Z theproduction,controlandplanningprocessesintheorganizationoftheenterprise; Z improving the quality of products, technology transfer and acquisition ofpatentsandlicenses;

Z thetrainingandqualificationsofhumanresources.

2) Capital equipment: This involves all equipment investment contributing toimproving the competitiveness of the company, including the replacementofequipmentfortechnologicalimprovement,theacquisitionofequipmentleadingtoincreasedefficiency(reducedcostsand/orwaste;improvedproductivity),thepurchaseofequipmentforthebalancingofproductionlines,andoptimizingtheutilizationofexistingequipment.

3) Financial restructuring:Theupgradingofenterprisesinsomecasesmayrequirefinancialrestructuring.Thisrestructuringencompassesstrengtheningofcapital(injection of newmoney), consolidation of the balance of financial structures(working capital), reducing the volume of inventories (in connectionwith theactivity),thefinancingofinvestmentsonadequatepermanentcapital,andtheoptimizationofresourcestomanagecreditdebts.

Toencouragecompaniestoundertakesuchinvestmentprogrammes,theNUPprovidesthepaymentofpremiumsfixedbyArticle6oftheDecreeof18December1995,asfollows:

Z 20percenttotheshareofinvestmentinmodernization–productivityaspartoftheupgradefinancedbyownresourcesand10percentofthoseinvestmentsiffinancedbyotherresources;

Z 70percentofthecostofthediagnosticstudytoamaximumof20000TunisianDinar(TND)and50percentofthecostofotherintangibleinvestments.


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These last two levels of premiums will be adjusted later (Decree No. 97–2126of 10 November 1997) with a ceiling set at 30 000TND for the diagnostic studyand a premium for intangibles increased to 70 percent.Moreover, it is expectedthat the premiumon the diagnostic studies is granted –with the consent of the company–directlytotheorganizationthatconductedtheanalysis.

Notwithstanding the late disbursement of premiums, the National Upgrading Programcanbeconsideredasuccessbecauseithasdirectlycontributedtoaboostinprivateinvestment,especiallyforoperationalcompanies.AsurveycompletedbytheUpgradeOffice in2002,concerning1103companies inwhichtheprogrammewasapprovedbytheSteeringCommittee,showsthatcompanieshadintegratedtheexigencyofcompetitivenessinalocalandinternationalcompetitiveenvironment.BylateMay2004,2950industrialenterpriseshadjoinedtheProgram,accountingformorethanhalfofindustrialfirmswithmorethan10employeesand25percentofallindustrialenterprises.Amongthese,67percenthaddiversifiedtheirproduction,78percenthaddevelopednewproductlineswhileimprovingtheirmanufacturingprocess,andnearly 82percentofcompanieshad improvedtheir rateofequipmentuse.Furthermore, 75percentof companieshadadoptedaqualityandcertificationprogramme,and 69percenthadundertakenarestructuringoftheirbusinessfunctiontofocustheirefforts on improving their export development strategy. In 2007, the number ofcompaniesaffiliatedreached4187withaninvestmentof2594millionTND,almost70 percent of the investment made by the entire industry. Table 7.1 shows thesituationin2009.

Sectors Applications approved

investments (million TND)

Share of investment by sector

Premium granted (million TND)

Agro-food industry 359 911 19% 122

Leather and footwear industry 218 173 4% 27

Chemical industry 159 346 7% 45

Diverse industries 395 643 13% 94

Construction materials industry 140 953 20% 83

Mechanical industry 360 830 17% 127

Textile and clothing industry 1 279 939 20% 172

Total 2 910 4 795 100% 670

Source: API 2009.

taBLE 7.1

upgrade applications by sector (end april 2009)

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Beyond the quantitative achievements, these measures tend to have benefitedlargecompaniesandhaveresulted,essentially,inphysicalinvestments(Table7.2). Indeed,forlargecompanies,theopportunityofferedbytheUpgradeProgramhascometofillavacuumintermsofincentives.Itiscurrentlytheonlyprogrammeforwhichtheyareeligible(withtheexceptionofcaseswheretheyhavearegionalortechnologicalinvestment). This is the only instrument in Tunisia that supports investmentwithout conditions related directly to the Investment Incentives Code. As such, itcomplementstheCode,whichhasignoredthelarge-scaleenterprises.

However, given the structure of Tunisian industry – mainly composed of smallenterprises – this Program will in future focus more on smaller enterprises andintangible investments such as organization, information systems, methods ofmodern management, marketing, and research quality. Indeed, after its initialphases,whichbenefitedmainly large companies, theProgramhasbecomemoreorientedtowardssmallenterprises(whoseaverageinvestmentislessthan3millionTND). The share of small enterprises in the programme has increased from 21percentin1996to64percentin2006,andthistrendispersisting.

7.3 The performance of agro-food industries in Tunisia

In the recent past,TheTunisian agro-food industry has registered improvementsinallofitseconomicindicators.Thisresulthascomeaboutthroughthedynamismofinvestmentsinthissectorandtheconsolidationofitscontributiontoincreasedproductionandemployment.

industry Sectors 1988–1992 1993–1997 1998–2002 2003–2007 Average annual growth, 1988–2007

Agro-food 80.97 133.64 207.10 235.00 8.58%

Construction materials 69.57 107.52 145.38 196.76 6.51%

Mechanical 78.72 83.92 152 .00 211.00 7.54%

Chemical 34.25 65.84 87.22 111.42 7.15%

Textile and clothing 142.57 144.72 219.26 183.28 2.22%

Diverse 51.45 75.20 113.78 127.04 6.62%

Total 457.55 610.84 928.74 1 064.50 6.07%

Source: Central Bank of Tunisia.

taBLE 7.2

Investments in the manufacturing sector, 1988–2007 (annual average in millions of dinars and at current prices)

Sectors Applications approved

investments (million TND)

Share of investment by sector

Premium granted (million TND)

Agro-food industry 359 911 19% 122

Leather and footwear industry 218 173 4% 27

Chemical industry 159 346 7% 45

Diverse industries 395 643 13% 94

Construction materials industry 140 953 20% 83

Mechanical industry 360 830 17% 127

Textile and clothing industry 1 279 939 20% 172

Total 2 910 4 795 100% 670

Source: API 2009.


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7.3.1 Investment

Theagro-food industry ranksfirstamong themanufacturing industries in termsofinvestments(Table7.2).Theinvestmentsmadebytheagro-foodindustryhaveincreased from24millionTND in 1986 to 270millionTND in 2007,which is tentimesmorethantherateofaverageannualgrowthof12.2percent.

Afteraperiodofstagnationduringthe1980s,annualinvestmentsintheagro-foodindustry resumedgrowth.During theperiod 1995–2000 they recorded a steadyincrease,from130millionTNDin1995to241millionTNDin1999.Startingfrom2000 the trend reversed,down to200millionTND in2002. In2003 therewasarecovery which has registered an investment of 210 millionTND (+5 percent). Thisrecoveryhascontinued,reaching270millionTNDin2007.

In relative terms, the share of food in the Gross Fixed Capital Formation (GFCF) ofmanufacturingexperiencedadeclineuntilthemid-80s.In1986,theGFCFofAFIsrepresentedlessthan10percentof investments inmanufacturing.Startingin1987,theshareoftheagro-foodindustryinmanufacturinginvestmentexperiencedastrongrecovery.Inthelate1990s,thisshareexceeded20percent.Overtheperiod2003–2007,nearly24percentofmanufacturinginvestmentwasmadebytheagro-foodindustry.

Newinvestmentopportunities inthesector,generatedbythe implementationoftheStructuralAdjustmentProgramsince1986,areoneofthemainreasonsforthisrecovery.Inaddition,theNationalUpgradingProgramhasenabledthesectortoengageinanewdynamism based inter alia on innovation, compression of costs, and quality control,throughcomplementaritiesbetweenphysicalandintangibleinvestments.

For the agro-food industry, the Upgrading Program seeks the restructuring ofproductionandthemodernizationofprocessingfactories,aswellastheachievementof stringent standards of quality and food security, enabling enterprises to bemorecompetitive.ByjoiningtheUpgradingProgramthesectorhasshownagoodadhesionofenterprisesintheimplementationofqualityassurancesystems,aswellasbettermanagementandtheestablishmentoflaboratories.

Investmentinthefoodindustryisprovidedmainlybytheprivatesector,withashareofabout90percentofinvestments.Privateinvestorscovertheentireinvestmentinthecannedfoodindustry(40millionTND),thecerealsprocessingindustry(33millionTND)andtheoliveindustry(22millionTND).Publicinvestmentinthesector(atotalof21millionTND)mainlyinvolvesassistancetorestructuresomelargeenterprises,suchasStateparticipationintobaccoprocessing(12millionTND),sugarproduction(5millionTND)andmilkprocessing(4millionTND).

Foreign investment in the agro-food industrial sector remains relatively low. Thesectorrecordedatotalof125unitsformedinpartnershipwithlocalbusinesses,ofwhichonly69havemorethan10employees.Ofthese,59companiesarejointventureswhileonly10werefullyforeign-owned.

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7.3.2 production and ‘value added’

The evolution of agro-food productionwas achieved at a slower pace than theeconomy as a whole, but at a faster rate than that of agricultural production. Asaresultofitsroleinprocessingagriculturalproducts,thesector’sperformancewasmoderateandliesbetweenthatofagricultureandmanufacturing.Intheperiod1997–2007, agricultural growth averaged 2.4 percent per year; food industriesaveraged3.5percentwhilemanufacturingindustriesgrewatarateof5.4percent.

However,thisgrowthhasnotbeensteady.Thesectorrecordedanimpetuousgrowthduringtheyears1995–1999,progressingfrom3180millionTNDin1995to4928millionTNDin1999.Inthefollowingyears,mainlybecauseofthepoorperformanceoftheolivesub-sector,thecontributionoftheagro-foodsectortoeconomicactivitywasreduced,reducingtherateofcontributionoftheentiremanufacturingsectorintheformationofnationalincome.Theyear2003isconsideredaturningpoint,whenapositivevaluewasrecordedfor thecontributionof theagro-foodsectorwithagrowthrateof3percent.Dependingonthesituationofagriculture,thefoodindustryhassuccessivelyexperiencedstronggrowth(in2004)andaslightdecline (in2005),causedbyadverseeconomicconjunctureandclimateconditions.

Among the sub-sectors, the highest growth rates were achieved by the dairyindustry,whoseproductionregisteredanaveragegrowthof4.0percentperyearbetween 1988 and 2007 (Table 7.3).The national production ofmilk achievedself-sufficiency in drinkingmilk by 1999 and still covers almost all ofTunisia’smilkneeds.During the sameperiod theproductionof canned food rose at anaveragegrowthrateof3.6percentperyear.Theproductionofoliveoilrankedthird,withanaveragegrowthrateof3percentperyear.

1988–1992 1993–1997 1998–2002 2003–2007 Average annual growth 1988–2007

Cereal processing (1 000s tonnes) 1 184.48 1 412.52 1 520.16 1 482 1,63%

Canned food (tonnes) 97 928.2 95 203.8 135 889 148 100 3,61%

Milk (1 000s Hectolitres) 1 902.54 2 242.2 2 970.08 3 488 4,08%

Olive oil (1 000s tonnes) 142.8 157 128 174.4 2,98%

Source: Ministry of Agriculture, Yearbook of agricultural statistics 2007.

taBLE 7.3

evolution of production in the sector of food industry


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However, despite these performances, food industries are characterized by thepredominanceofprimaryprocessingofagriculturalproducts.Nearly55percentof food industries are accounted forbygrainprocessing (18percent), slaughterof animals (22 percent) and manufacturing of olive oil (15 percent). Bakeries (2400units),andoilprocessing(1440units)constitutethebulkofagro-industrialunits, representing80percent of companies in that sector.Some largemoderncapitalist industries exist in the processing of cereals, sugar refining and dairyproduct processing, but the sector remains dominated by individual smallenterpriseswithlowtechnicalandfinancialresources.

Theevolutionoftheproductionofagro-foodindustriesisconfirmedbyasteadygrowth in added value. Between 1984 and 2007, the added value of the foodindustry increasedwithanannualaveragerateof9.2percentatcurrentpricesand6.3percentatconstantprices.Thus,negligibleuntilthemid-1980s,theshareofthefoodindustryinGDPgrewtoaround3.5percent(average2003–2007).

Theagro-foodindustryisthesecondrankingintermsofcontributiontotheaddedvalueofmanufacturing industries.Withsomeoftheaddedvalueof17.5percent (average1994–1998), the food industry comes after the textile and leather industry (35.4percent)andaheadoftheengineeringindustry(13.2percent).In2003–2007,nearly20percentoftheaddedvalueofmanufacturingindustrieswascreatedbytheagro-foodindustry,against18percentformechanicalindustriesand29percentfortextiles.

Activities Totally exporting Other than totally exporting Total

Oils and fats industry 14 312 326

Fruit and vegetable industry 17 45 62

Cold storage 56 81 137

Fish industry 39 37 76

Cereal and derivatives industry 4 234 238

beverage industry 8 51 59

Milk and derivatives industry - 37 37

Sugar and derivatives industry 2 24 26

Meat industry 1 24 25

Other food industries 21 59 80

Source: API 2008.

taBLE 7.4

Breakdown of enterprises with 10 or more employees by activity and by system

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The dynamics of investment and production permits the food industry sectorto consolidate its role in job creation. In 1994, the agro-food industry employed 48600personsrepresenting10.7percentofmanufacturing jobs.Withanaverageof2000postscreatedannually,thenumberofjobsreached73000in1999.In2008,thesectorhadabout5500enterprises,ofwhicha thousand included10ormoreemployees,employingatotalof85000personsandrepresenting13percentofalljobsinthemanufacturingsector.

7.4 Constraints that still exist

Agro-food industries in Tunisia are experiencing difficulties and constraintsassociated with issues such as low-skilled workers, irregular supply of inputs,variabilityof thequalityofagriculturalproducts,outdatedequipment in severalunits, non-compliance with food safety standards (particularly hygiene andquality)andthepredominanceof individualsmallenterpriseswith lowtechnicaland financial resources.The strong protection of domestic enterprises and theweakpresenceofinternationalfirmsaccountsformuchofthefragilityofseveralcompaniesandtheircontinuedactivityonlyattheearlystagesoftheprocessingofagriculturalproducts.However,itistwoconstraintsthataremainlyresponsibleforholdinguptheimprovementofagro-foodinvestment:theunder-utilizationofprocessingcapacityandtheproblemofqualitymanagement.

7.4.1 under-utilization of processing capacity

Thepartialoperationofinstalledcapacitypenalizestheprofitabilityofinvestments.Examplesfromprocessingofcerealproducts,thedairyindustryandtheprocessingoftomatoesillustratethissituation.

Grain processing

Thetransformationofcerealproducts,particularlydurumwheat,includesthefirstprocessing phase (grinding at themill) and the second processing phase (bakingbread, producing pasta and other products). In Tunisia the sector comprises 28mills.Sevenunitshavebeennewlycreatedinthelast10years;theyhaveacrushingcapacityequalto0.66milliontonnesperyearbutoperateonlyat0.21milliontonnes.Twelveunitswererehabilitatedandupgradedduringthesameperiod,andthoughtheircrushingcapacityisaround1.66milliontonnes,theyoperateatonly1.2milliontonnes.Theremainingnineolderunitshaveacrushingcapacityof1.2milliontonnes,butusedonly0.55milliontonnes.

Nationally, the rateofutilizationofavailable capacity is about58percent forallprocessingunitsand53percentfor28mills.Thisisinlargeparttheconsequenceof the anarchic development of processing capacity, particularly that relating


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tomillingandpasta,whichhas led to thedecrease inuseofexistingprocessingcapacity.This rate was 90 percent in 1988, falling to 86 percent in 1991 and to 70percentin1996;by2006itstoodatjust58percent.

Milk processing

Despitetheincreaseinmilkproductioninrecentyears,severalchallengesstillhinderthe development of the dairy sector. Tunisia has 13 dairy centrals with variableproduction capacity, of which only 11 are operational.The combined productioncapacityof11operationaldairycentrals(1980000litres/day)farexceedstheamountofmilk collected at the national level (1 566 300 litres/day) and the population’sconsumptionneeds.Utilizationofproductioncapacityvariesfromonedairycentraltoanother,of course,butaroundhalfof themoperateat a rateof 50percentoftheinstalledcapacity.Itislikelythatsomefactoriesusingonlyhalfoftheircapacitywill at somestage facefinancialdifficulties thatwill result in their closure.This isasituationthatseriouslythreatenstheindustryifthequantityofmilkrequiredbyconsumers does not increase significantly.The closure of processingplants couldalso lead to the ceasing of operations in milk collection centres, also impactingproducerslinkedtothese.

Tomato processing

The transformation of the tomato is themain activity of 32 units of production ofcanned fruits and vegetables inTunisia. It represents 75 percent of their turnover,estimated at 150 million TND per year. The daily processing capacity rose from 19680tonnesin1990to33630tonnesin2005,andthenumberofunitsfallfrom41to32respectivelyoverthesameperiod.Untilthefirstquarterof2005,22processingunitsbenefitedfromtheupgradeprogrammeforatotalinvestmentof64678millionTND.

Despitethegreatpotentialfortransformation,theaveragecapacityutilizationrateof factories isabout30percent.Theyoperateat66percentof their full capacityduring one month per year (from July 10 to August 10) and most often for 24daysonly,ashappened from1996 to2002.At thebeginningand theendof theseason,totallingsixtosevenweeks,theutilizationrate isonlyaround8percent.Consideringtheaveragecapacityof31000tonnes/dayduringthefirstthreeyearsof the10thPlan, theauthorsbelieve that factories ranat full capacity foronly18daysin2002,20daysin2003and24daysin2004.Thisfigureislowcomparedwithothercountries,wherethepotentialforproductionoffreshtomatoatamaximumtheoreticalprocessingcapacitywas,in1996and1997,80.9daysinCalifornia,55.5daysinBrazil,28.5daysinFranceand41.7daysinTurkey(GICA,2000).

A priori, the underutilization of production capacity may be attributed to theinadequacy,irregularityandseasonalityofagriculturalproduction.ThisisespeciallytrueinthecaseofTunisia,wheretheperformanceoftheagriculturalsectorremainsrelatively modest and where production is highly dependent on the weather.However, it is also important to note that the quantities actually delivered to

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the processing units are often insufficient and in some cases much lower thanthe quantities produced (milk, tomato).This is explained by the inadequacy andinefficiencyoftheproductassemblynetworkandthehighcostoftransportationofagriculturalproducts.

Thus, if the intensification of agricultural production is a necessary condition forthe promotion of processing activities, the development of the food industry isalso dependent on the conditions of rawmaterial supply.The development andintensificationofthesystemforcollectingagriculturalproductsshouldenablethesupplyofrawmaterialstotheindustryinmorecompetitiveconditions,inparticularbyensuringaregularstreamof inputs.Thisconstitutesan important leverforthepromotionofinvestmentandincreasedproduction.

Indeed, milk production has increased significantly, particularly through thereorganization of the dairy sector and in particular through the establishment oftheprimarynetworkofmilkcollection.Thenetworkofmilkcollectionhasincreasedfrom11centres in1983withacapacityofnearly50000 litres/yearto281centresin2005,withadailycollectioncapacityofnearly2000000litres.Thequantitiesofmilkcollectedincreasedfrom20500tonnesin1987to489000tonnesin2004.The10thPlanenvisagestheestablishmentof21newcollectioncentreswithacapacityof63000litres/day,aswellastheexpansionofcapacityof18existingcentresforanadditional54000litres/day.

Theestablishmentofa fairlydensecollectionnetworkhasalloweda significantproportion of produced milk to be channelled to the industry. Thirteen dairyfactories producing drinking milk and derivatives have been installed. Thequantities ofmilk processedby thedairy industryhasbeenmultipliedby 5.5 in15years,from104000tonnesin1989(27percentofmilkproduction)to562000tonnes in 2002 (60 percent of production).The quantities processed increasedfrom 104 000 tonnes in 1989, representing 29 percent of milk production, to 297000tonnesin1996,representing48percentofproduction,and523000tonnesin2003,or59percentofproduction.

However,despitetheimportanceandextensionofthecollectionnetworkformilk,40percentof production still escapes theorganized collection.This suggests theimportance of continued efforts and resources to increase the reach of themilkcollectionnetwork.Inparallelwiththeintensificationofproduction,thedevelopmentofthecollectioncircuitofmilkisurgentasapre-requesitetothecompetitivenessofthesector.ThisisespeciallysogiventheintroductionofmilkquotasinEuropeandthedepletionofsurpluses;thepriceofmilkpowderhasincreasedinproportionsthatmademoreattractivetheuseofdomesticratherthanimportedmilk.

For cereals, their collection remains dependent on climate conditions,with largedifferences from one year to the next. The quantity of grain collected by Stateagencies,inparticulartheGrainBoardandcentralcooperatives,isestimatedtobe


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7.7millionquintalsonaverageperyear(1988–2007),orapproximately49percentofthetotalproduction.Thisaverage,varyingfromoneproducttoanother,hassufferedforafewyearsfromaslightdownwardtrend,asshowninTable7.5.

Tobetterunderstandthe reasons for the lowcollection rateofgrain, theGeneralDirectorateforResearchandAgriculturalDevelopment(DGEDA)carriedoutasurveyconcerningthedestinationofgrainaftertheharvest,forthecropyear2004/2005.ThemainfindingsofthesurveyshowedthattheOfficeofCerealsandthecentralcooperativeshadcollected40percentoftotalproduction,whilethequantitiessoldtointermediariesexceeded21percent.Theremainingquantitiesarepartlyretainedand storedbyproducersandpartly soldon theparallelmarket.The same surveyindicatedthatthemainreasonsfortheretentionofthecropattheproducerlevelaretheurgently-neededliquidityatharvesttime,thelowpricesofferedbytheOfficeofCereals,andtheremotenessofproducerlocations.

TherealproblemliesinthemonopolystillheldbytheOfficeofCerealsoncollectionandmarketing.Since its inceptiontheOfficewastheprimarycollectorofgrains.Grainmarketing is entrustedexclusively to theOfficeofCereals (byDecree-LawNo. 62–10 of 3April 1962, amended by Decree-Law No. 70–7 of 26 September1970),whichhasthesoleauthoritytocollect,importanddistributegrainproductstoindustriesaswellastolivestockfeedfactories.UndertheguidanceoftheState,

1988–1992 1993–1997 1998–2002 2003–2007

Durum wheat Production (tonnes)collection (tonnes)collection rate (%)

8 288.8 5 044.4 60.86%

8 941.8 5 711.9 63.88%

8 329.2 5 374.3 64.52%

13 069.0 6 441.5 49.29%

Tender wheatProduction (tonnes)collection (tonnes)collection rate (%)

1 976.4 1 385.2 70.09%

1 755.3 1 244.3 70.89%

1 773.8

969.9 54.68%

2 982.0 1 816.1 60.90%

barleyProduction (tonnes)

collection(tonnes) collection rate (%)

4 061.8 1 318.6 32.46%

3 396.3

721.7 21.25%

2 551.6

195.2 7.65%

5 772.6

474.2 8.21%

Total cerealsProduction (tonnes)collection (tonnes)collection rate (%)

14 326.9 7 748.2 54.08%

14 093.4 7 677.9 54.48%

12 654.6 6 539.5 51.68%

21 865.8 9 214.6 42.14%

Source: Ministère de l’Agriculture « Budget économique 2008 » et « Annuaires des Statistiques Agricoles.

taBLE 7.5

upgrade applications by sector (end april 2009)

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whichhasencouragedtheOfficetograduallydisengagefromprivatesectortypeactivities,graincollectionalsobegantobecarriedoutbytwocentralcooperatives,two service cooperatives and two cooperatives specialized in the collection ofcerealseeds.Sincethe2004/2005season,twoprivatecollectorshavealsoenteredthismarket.

The sharing of collection by different types of operator shows that cooperativesaccountforabout67.8percentofthecollection,followedbytheOfficeofCerealswith31.4percent.Butthemillersarestilldependentonasinglesupplier,whichistheOfficeofCereals.EvensupplyfromthecentralcollectioncooperativesiscarriedoutwiththepermissionoftheOfficeonamonthlybasis.Theeffortstoencouragethe private sector to invest in the collection of grain do not seem to be yieldingresults.With only two operators, the private sector does a very small proportionofcollection,some0.8percentofthetotalamount(MinistryofAgriculture,2008). The supply problem arisesmainly during the years of poor harvest, particularlybecauseveryfewmillershaveinvestedinstoragegiventhelackofencouragement,andthisdespitetheexistenceofregulationsintheInvestmentIncentivesCode.

Finally,forthetomatoindustry,althoughthelastfewyearshaveseenaremarkableimprovementinyieldsandproduction,theamountflowingtotheprocessingunitsremains insufficient.Theaveragequantitiescollectedanddeliveredtotheseunitsrepresent only 43 percent of production. The number of designated collectionoperatorsvariesfromyeartoyear.Fortheperiod1990–1997therewereanaverageof211centresperyear.Thenumberdecreasedto184in2002and2003,and125in2004.Thiscanbeexplainedbytheseasonalityoftheproductionoftomatoes,butalsobythefactthatcollectorsdeemtoolowthecommissiontheyreceive,3percentofthevalueoftheproduct.

Theseexampleshighlighttheimportanceofcollectionandsupplyinthepromotionofinvestmentintheagro-foodindustry.Thecollectioniscertainlyoneofthemostimportantlinksinthefoodchain.Thenetworkofcollectioncentresplaysakeyrolein the production line but also as a centre of influence and service to producers. The collection centres aim to help small and medium-sized producers sell theirproducttomanufacturerswithminimumcostandrisk.Itisalsoameanstoprovideindustrial supplies in sufficient and regular quantities. Hence, there is a need toimprovethesprawlandthedensityofthecollectionnetwork.

To achieve this objective, the density of the collection network should beincreasedtoreachsmallproducers,oftenremotefromroadsandnetworkcentres. The establishment of centres in certain areas would allow the gathering of asignificantpartofproductionwhichstillescapestheorganizedcollection.Economicand institutional measures towards this goal should be higher on the present agro-fooddevelopmentagendainTunisia.


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In economic terms, consideration should be given to extending the applicationoffinancial and taxbenefits thatexist in theagricultural sector to theprocessingindustrytoo.Additionally,theconstructionofcollectioncentresshouldreceivethebenefitsoftheinvestmentcode.Attheinstitutionallevel,alargeeffortisrequiredintermsofrestructuringmarketingandthecollectioncircuit,inadditiontostreamliningadministrativestructures.ThisisparticularlyimportantinthecaseoftheOfficeofCereals,whosemissionshouldberedefinedtobelimitedtomarketregulation,grantmanagementandcommercialactivitiesthatare limitedtoensuringfoodsecurity.Collectionandmarketingactivitiesshouldbedelegatedtocooperativesandprivatesectorinvestors.Theencouragementofprivateoperatorstoinvestincollectionmayevenreducethecostofcollectionandthusallowitsextensiontoreachthemajorityofproducers.

These measures may be supported by the introduction of contract farming togovernthetransactionsbetweenproducersandprocessors.Theuseofcontractsallowsproducers tohaveaguaranteedmarketoutlet andensures that industryprovidesaregularandsufficientsupplyofrawmaterials.Theprocessingindustrythrough itsassociationsandproducerorganizationscan, in this respect,playanimportant role in creating a climate of trust and ethical relationships betweenproducersandtheirfirstbuyers.

7.4.2 the problem of quality management

Tradeliberalization,changesinconsumptionpatternsandtheformationofregionalgroupingshaveresultedinprofoundchangesintheglobalfoodsystem.Thefiercecompetitiontogainand/ormaintainmarketshare,forcingfoodcompaniestoaddvalue to their products, is expressed by a differentiation process incorporatingqualityasafundamentalaspect.

Intoday’shighlycompetitiveagriculturalandagro-foodmarkets,qualitybecomesanessentialelementofacompany’sstrategyandadeterminantofconsumerchoice.Withthedisseminationofincreasinglystrictqualityandsafetystandards,governmentand businesses are forced to adapt, by respectively ensuring that appropriateregulatoryinstitutionsareinplaceandbyconformingtotheircertificationnorms.

In developing countries, one of the greatest challenges that the public sectorfacesinpromotingtheagro-foodsectoristheproliferationofindustrialstandardsandqualitycriteriaestablishedbyprivatecompaniesand industrygroups.SimilarchallengesexistincomplyingwithcertificationnormssetoutbyinternationalNGOspromotingfairtrade,organicfoodandsustainableagriculture.

InTunisia,theeconomicopennessachievedbyenteringintoafree-tradeagreementwith the European Union signified that quality assurance and certification havebecomeessentialmeanstomeettherequirementsoftheinternalmarketandtowin

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newinternationalmarkets. It is inthiscontextthataNationalProgramofQualityPromotionwaslaunchedin2005.

TheNationalProgramofQualityPromotionispartofeffortstoprovidetheTunisianindustrial sector with modern quality management. For this purpose, it offersto industrial and service enterprises the possibility of achieving a certification atinternational standards and benchmarks in various areas. The programme, whichspansfiveyears (2005–2009), receivesfinancialsupport fromtheStatethroughtheIndustrialCompetitivenessFund(FODEC-ITP)andfromtheEuropeanUnionthroughtheIndustrialModernizationProgram(IMP).ItprovidesbeneficiaryenterpriseswithTunisianand internationalexpertswhowilldeliver technicalassistanceandsupportduring the period of implementation.The areas covered are qualitymanagement,safety,hygiene,environment,andsectormanagementsystemsleadingtocertification.TheNationalProgramofQualityPromotionalsoprovidesassistancetolaboratoriesfortests,analysisandmeteorology,andsimilarservicestoinspectionorganizationsfortheimplementationofqualitysystemsinaccordancewithISO17025andISO17020.

In terms of achievements, 333 companies joined the programme in 2007 against233 in 2006. This number increased to 492 in 2008, reaching 530 companies inFebruary 2009.The objectivewas to reach a total of 600member companies bytheendof2009.Meanwhile,thenumberofTunisiancompaniescertifiedtoQualityBenchmarksstandardovertheperiodunderwentanexplosiveevolution,risingfrom10companiescertifiedin1995tomorethan800inlate2007.AttheendofFebruary2009,thetotalnumberofcertifiedcompaniesreached1106,whichcorrespondstotheachievementof85percentofthenationalgoalof1300companies.

For the agro-food industry, the National Program ofQuality Promotion plans toassist companies according to specific sector norms (HazardAnalysis andCriticalControl Point (HACCP)/ISO22000: management system of food security specifictofoodindustry;BritishRetailConsortium/InstituteofPackaging(BRC/IoP):safetyrequirementpackagingoffood).In2008,foodcompaniesrepresented21percentofallthosejoiningthenationalprogrammeofquality.Amongthecompaniesthatarecertified,17percentofthemareagro-foodbusinesses.

ATechnicalAgro-FoodCentre (TCAF)was established in 1996; it is an advisory andassistanceorganismforcompaniesinthefoodindustries.Itactsasaserviceprovider,respondingtoenterprises’requirementswithintheframeworkoftechnicalassistancemissions, product development, training and information, prospective studies andinnovation awareness. Some services are undertaken on behalf of administration.Recently, theCentreTechnique de l'Agro-Alimentaire/AgribusinessTechnical Center(CTAA)wasendowedwithananalyticallaboratory,whichwillshortlybemadeavailabletoservicetheindustry’sneedsforphysico-chemical,microbiologicalorsensoryanalysis.

Despite the positive results achieved so far, a significant effort to improvefoodqualitystillneedstobemade.ThequalityofthefinishedproductsTunisia


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producesisstillnotalwaysinconformitywiththestandardsdesiredorexpected.Of course,onecanneverachievequalityproductswhenqualitymanagement,masteryofmanufacturingprocesses,andregularmonitoringatcriticalpointsofproductionarenotaconcernforallprofessionals,whichseemstobethecaseinthecountry.Inthecaseoftheagro-foodindustry,theproblemiscompoundedwhentheinputsthemselves,theagriculturalproducts,donotmeettherequiredindustrystandards.

Illustrating these difficulties, The Study on the Positioning of the Milk andDerivative Sector concluded that Tunisian milk quality is poor as regards fatcomposition, organoleptic properties, bacteriological counts and milk fraud,e.g. milk watering and the addition of bacteria inhibitor substances.The lowquality of milk is a major obstacle to sector development. Large volumes ofmilkproducedinTunisiaarenotofmerchantablequalityorfitforindustrialuse(Ministèredel’Industrieetdel’Energie/MinistryofIndustryandEnergy,2005).This situation can be attributed to quality issues that start at the dairy farmswheregoodpracticesof feedingandhygienearenot followed.Theproblemisaggravatedbytheinefficienciesthatstillexistinthemilkcollectionsystems.

The number of collection centres is still insufficient to handle the production. Animportantpartofmilkproductiondoesnotflowthroughorganizedcollectionroutesandahighpercentageofmilkproducediscollectedandsoldbyhawkers.Theseinformaltradersconstituteamobilecollectionsystemthatservesacertaintypeofproducer,becausehawkersoftenoffermoreattractiveproducerpricesthan thoseof collection centres.Theyalso serve small andmediumproducerswhocannotdelivertocollectioncentres,becausetheylackmeansoftransport.Nocontrolisperformedonmilkthatissolddirecttodealersintermsofhygieneandsanitationcontrol.Addingtothis,thereiswidespreadfraudbywateringandbytheadditionofformaldehydeandotherillegalproductstothemilk.

Theseproblemshaveseriousimplicationsintheprocessingindustry,impairingthedevelopmentofproductsderivedfrommilk.Fraudulentpracticesarewidespread,aseffortstoimprovethequalityofmilkremainineffective.Theindustryforitspartalso shares responsibility for theproblem, since someof its segmentsaccept thehawker’sremainingunsoldmilklateintheday,especiallyduringperiodsoflowmilkproduction.AlthoughTunisian legislation prohibits milk hawking, the authoritiesarereluctanttoenforceitbecauseofthepotentialsocio-economicconsequences,as informal milk trade generates employment along the distribution chain. Assuch, informalmilk tradersbenefit fromthe lackoforganizationofproducers,the opportunism in some segments of the industry and the tolerance of theGovernment.Similarqualityissuesexistinthecerealprocessingindustry.Thequalityofwheatdeliveredtotheprocessorsisgenerallyveryheterogeneous,whichisstillacontentiousissuebetweentheGrainBoardandmillers.Severalfactorsnegativelyaffectthequalityofcereals,includingthepurchasingsystemandtheconditionsofcollectionandstorage,tonameafew.

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Currently theOffice ofCereals has started a quality initiative by creating severalregional laboratoriesandacentral laboratory foranalysisof localwheat.Theuseof these facilities by the central cooperatives of grain collection can improve thepurchasing system, by permitting the consideration of quality differentials inpaymentstofarmers.Producerswill thereforebeenticedtodeliverbetterqualityproductsiftheywishtoreceivebetterremuneration.Theproblemremainsunsolvedforimportedwheat,however.Indeed,80percentofcrushedwheat,whichistenderwheat,isimportedbytheGrainBoardasthesingleoperatorinthesector.

Finally,forthecollectionofprocessingtomatoes,manyproducersarenotequippedwiththenecessaryequipmentforpackagingandtransportation inaccordingwithrequiredstandards,giventhatthisisaseasonalactivitywhichoccupiesthecollectorsforthreemonthsatmost.Moreover,itisoftenthecase,especiallyattheendofthecampaign,thatsomecannersacceptbatchesoffreshor‘table’tomatothatshouldnormallyberefusedwithoutdiscussion,evenifaseveresortingisthenperformed.

In summary, to ensure high quality management of the agro-food sector itappears necessary that the actions of the Program ofQuality Promotion shouldbestrengthenedviaeconomicandinstitutionalmeasures, inordertoimprovethequalityofinputsandagriculturalproductssuppliedtoindustrialunits.Forexample,ineconomicterms,itisnecessarytopromoteaqualitypaymentsystemaccordingto a price that reflects the quality standards of agricultural products supplied toindustrialunits.

At the institutional level, laws and regulations for the collection of agriculturalproductsneedtobedevelopedfurther.Similarly,itisimportanttostandardizethequalitystandardsofproductsanddevelopqualitymanagementobservanceatthefarm,collection,industryandthedistributionlevels.

7.5 Conclusion

The financial and tax incentives introduced by the Investment Incentives Code,or as part of the Upgrade Program, have certainly boosted investments in theTunisianfoodindustry.Theperformanceofthissectorhasbeenpositive:increasedinvestment,improvementofproduction,addedvalueandasignificantcontributiontojobcreationinthecountry.

However,thedevelopmentofthesectorremainshamperedbycertainconstraintsthat need to be addressed.Among these, a key issue to be tackled is the under-utilization of production capacity caused by inadequate and irregular supply. This can be explained by the disorganized and low density (deficiency) of thecollectioncircuitandmarketingofagriculturalproducts.Improvedapproachestothecoordinationoftheproductionchainfrombeginningtoend,includingcontracting,


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arethereforeneeded.Furthermore,despiteeffortstoimprovequalitymanagement,thequalityoffinishedproductsisbelowcurrentexpectedinternationalstandards;naturally this adversely affects the success of Tunisian food businesses in anincreasinglyglobalandcompetitivemarket.

Soinadditiontothefiscalandfinancialincentiveswhichhavealreadyproventheireffectiveness inpromotingagri-food investments,othermeasuresto improvetheeconomic and institutional framework of the agribusiness sector of Tunisia areneeded.Thesemeasures should aim to strengthen and improve the efficiency ofthecollectioncircuit,encourageprivateoperators to invest,and increasetheroleof producer organizations in the coordination of relations between the variousstakeholders.

Overall,thereisaneedtostrengthentheintegrationandlinkagesbetweendifferentcomponentsoftheagro-foodsystem(Goodman,2002;Wilkinson,2002).Ensuringsuch integration requires a set of institutional measures to strengthen the roleplayed by industry and producers’ associations. Moreover, as emphasized in theGlobalAgro-IndustriesForum(2008),institutionalreformsareimportantdriversofagro-industrial development, particular in developing countries.The same reportemphasizedthatassociations, includingproducerorganizationsandcooperatives,have a valuable role to play in bringing producers nearer to their clients and incrystallizing and expressing the views of such groups. This can be achieved byadoptingcollectiveactioninbuildinglinksbetweengroups,facilitatingrelationshipswithother companiesandorganizationsbyproviding training,anddisseminatinginformationtechnologyandlegalsupport.

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References

Abbate, F. 2002. L’intégration de la Tunisie dans l’économie mondiale: Opportunités et défis. UNCTAD/EDM/Misc.198 (Available at: http://www.unctad.org/fr/docs/poedmm198.fr.pdf).

Aissa, L. 2002. Le rôle du réseau d’acteurs locaux dans la réussite du technopôle agroalimentaire de Bizerte (Tunisie) Pour un meilleur développement du secteur. ColloqueSyal.Agropolis,MontpellierFrench(Availableat:http://gis-syal.agropolis.fr/Syal2002/FR/Atelier1.1/AISSA.pdf).

Banque Centrale de Tunisie. 2008.Rapport Annuel 2007.(Availableat:http://www.bct.gov.tn/bct/siteprod/documents/Rapport_Annuel_2007_Fran%C3%A7ais.pdf).

Centre for Administrative Innovation in the Euro-Mediterranean Region. 2003. Politiques pour les entreprises dans la Région Méditerranéenne Tunisie. ArcoFelice, Italy. C.A.I.MED (Available at: http://unpan1.un.org/intradoc/groups/public/documents/CAIMED/UNPAN018863.pdf).

Centre National des Etudes Agricoles (CNEA). 2005. Revue du secteur agricole. Tunis.

FAO. 2007. Les défis du développement des agro-industries et du secteur Agroalimentaire. 20thSessionoftheAgricultureCommittee,Rome,25–28April2007.

FAO. 2009. Pour un secteur agroalimentaire et agro-industriel compétitif dans le contexte de la mondialisation et de la libéralisation des échanges.29thsessionoftheRegionalConferenceforAsiaandthePacific(APRC),Bangkok,26–31March2009.

FAO-UNIDO. 2000. Study on the strategic path for tomato industry.GlobalAgro-Industries Forum: ‘Improving competitiveness and development impact’ FAO/UNIDO/IFAD,NewDelhi,8–11April2008.

FEMISE. 2005.Profil Pays Tunisie. Institut de LaMéditerranée, France, EconomicResearchForum,Egypt.CoordinateursFemise.(Availableat:http://www.femise.org/PDF/cp/cp-tunisie-0512.pdf).

Goodman, D. 2002. Rethinking food production – consumption: integrativeperspectives.InSociologia Ruralis, Vol42.N°4,pp.270–277.

Groupement des industries de concerves alimentaires (GICA). 2000. Study on the strategic path for tomato industry.Mimeo.Tunisia.(Availableat:http://www.gica.ind.tn).

Ministère de l’Agriculture. 2007. Budget Economique 2008, Agriculture et Pêche. Tunis.


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Ministère de l’Agriculture. 2007.Annuaire des Statistiques Agricole. Tunis.

Ministère de l’Industrie et de l’Energie.2003.Etude de positionnement stratégique du secteur des Industries Agroalimentaires.LescahiersduCEPIN°3.

Ministère de l’Industrie et de l’Energie. 2005.Etude de positionnement de la branche lait et derives.LescahiersduCEPIN°18.

UNIDO. 2006. Le secteur agricole et agroalimentaire et de la peche en Tunisie. UnitépourlaPromotiondesInvestissements,Tunis.

Wilkinson, J.2002.Thefinalfoodsindustryandthechangingfaceoftheglobalagro-food system.InSociologia Ruralis,Vol42.N°4,pp.329–346.

World Bank. 2007.World Development Report 2008: Agriculture for Development Washington,DC,WorldBank.

Internet resources

Ministèredel’Industrieetdel’Energie,BulletindeMiseàNiveau. http://www.tunisianindustry.nat.tn

AgencepourlaPromotiondesInvestissements(API). http://www.tunisianindustry.nat.tn

GlobalAgro-IndustriesForum(GAIF).http://www.gaif08.org

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8.1 Introduction

TheFoodandAgricultureOrganizationoftheUnitedNations(FAO)has identifiedthatfoodandagriculturalsystemsintheAsia–Pacificregionareundergoingprofoundchanges.Alongwithrisingpercapitaincomes,technologicaladvances,urbanizationand trade growth, the role of governments in policy reforms for agricultural andagribusinessdevelopmenthasbecomesignificant.This chapteraims topresentapreliminary overview of the policy reforms for developing agribusiness and ruralenterprisesinChina.

AccordingtoFAO,agribusinessrepresentsthecollectivebusinessactivitiesthatareperformedfromfarmtofork.Itcoversthesupplyofagriculturalinputs,theproductionandtransformationofagriculturalproductsandtheirdistributiontofinalconsumers.AgribusinessandruralenterprisedevelopmentinChinahasbeenaccompaniedbycontinuouspolicyand institutional reforms.Duringthisprocess, thedevelopmentofaparticularformofagribusinessandruralenterprisedevelopment,i.e.townshipandvillageenterprises (TVEs),becameanextraordinarily successfulphenomenoninChina’sagriculturalandruralareas.China’sLaw on Township Enterprises in1997defined TVEs as enterprises in townships or villages under jurisdiction in whichthe rural collective economic organizations or peasants’ investment exceeds fiftypercentofthetotal,orhasadominanteffect,andwhichhavethedutyofsupportingagriculture.

China’s TVEs played a significant role in engineering growth for the nationaleconomy.Asmillionsof rural residentswereemployedbyTVEs, thesebusinessesexerted a considerable influence on the development process in the country.

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Forexample,TVEemploymentgrewfrom28millionin1978toapeakof135millionin1996,witha9percentannualgrowthrate.TVEvalueadded,whichaccountedforlessthan6percentofGDPin1978,increasedto26percentofGDPin1996.TVEs’shareofindustrialoutputincreasedfrom9percentin1979to30percentin1990and47percentin2000(YanoandShiraishi,2004).Attheirpeak,TVEscontributedaboutone-thirdofGDPandmorethan50percentofindustrialvalueadded.

ThischapterseekstoexplainwhytheChinesepoliciesonTVEscouldsustainarapidgrowth for thenationaleconomyandpeasants’ income.Questionsareaddressedon China’s agricultural system, rural enterprises and agribusiness development. Twogeneralapproaches,corporationvs.cooperation,arecurrentlyunderdebate.The‘corporationapproach’arguesthatthereisaneedtoexpand‘agrariancapitalism’,includinglandrightstransformationandtrading.The‘cooperationapproach’insiststhat‘agrariancapitalism’isnotanappropriatewaytoincreasefarmers’incomesbutrather forcespeasants towithdrawfromtheir landrights,and is linkedtoseriousrural–urbanmigrationproblems1.

The debates surrounding the corporation and cooperation approaches affectagriculturalpolicyreformsandthefuturedirectionofagricultureinChina.Thischapterwill investigate theChineseTVEs’ experience as regards these two approaches byconsideringhistoricalstudies,statisticsandcomparativeanalyses.Whiletheincomegapbetween rural and urban residents continues to grow,Chinese agriculture andagribusinesshavemaintainedahighgrowthrateduringthepastdecades.Chinahasissued a number of ‘NumberOne Documents’ (NODs) to address agriculture andagribusinesspolicies.BasedontheseNODsandotherrelevantdocuments,thechapterreviewsChina’spolicyreformsforagribusinessandruralenterprisedevelopmentwithaviewtoidentifyinglessonsthatcanbeusefulfordevelopingcountries.

The chapter also provides general information related to Chinese agribusinesspolicy, its evolution and development, based on a brief review of the literature.Several unique features affecting China’s agricultural production, consumptionand trading patterns are reviewed to understand better and anticipate how thecountry’sagribusinessmightchangeinthenearfuture.ThediscussionbeginswithanassessmentofChina’sagricultureandagribusinesscharacteristics,followedbyareviewoftheevolutionofitsagriculturalandagribusinesspolicyreforms.TherecentdevelopmentofChina’sagribusinesspolicyanditsfuturedirectionwillbediscussedfurther.The chapter closes with some remarks on the challenges and prospectsfacing the sector, along with possible recommendations for China’s agribusinessdevelopment and implications for other developing countries in theAsia–Pacificregion,fromaglobalperspective.

1 While the ‘corporation approach’ is represented by Justin Lin, Chief Economist of the World Bank (Director of the China Centre for Economic Research at Peking University), the ‘cooperation approach’ is represented by Tiejun Wen, Director of the School of Agricultural Economics and Rural Development in the People’s University in China.

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Policy reforms for agribusiness and rural development: The case of township and village enterprises in china

8.2 Characteristics of China’s agribusiness

Some general characteristics of the Chinese agribusiness related to its economicdevelopmentareidentifiable.Sincethebeginningofitsinstitutionalandpolicyreformsthreedecadesago,China’seconomicgrowthhassurpassedthatofBrazil,RussiaandIndia(whichalongwithChina,arecalledthe‘BRICs’–anacronymbasedonthefirstletterofthesecountries’names).Thecountryhas integratedrapidly intotheglobaleconomythroughtradeandforeigndirect investment.Thissection looksatChina’seconomicandagribusinesscharacteristics,focusingonitspolicyreformsandeconomicgrowth,waterandlandresources,demographicsandagriculturalemployment.

8.2.1 rapid economic and agribusiness development

China’seconomyandagribusinesssectorhavemaintainedapersistentgrowthoverthreedecades.Until its recenteconomic slowdown, the countryhadexperienceda sustained period of rapid economic expansion, with GDP growth averaging 9.5percentoverthelasttwodecades.Inthewakeoftheglobaleconomicrecession,China’sGDPgrowthslowedtoaseven-year lowof9percent in2008(Figure8.1).Nonetheless, China remains the single largest contributor to global economicgrowth.Itistheworld’ssecondlargesteconomyinpurchasingpowerparityterms.Attheendof2007,ChinaovertooktheUSAtobecometheworld’ssecondlargestexporter of goods, and it is now the third largest exporter of goods and servicescombined,aftertheUSAandGermany.Despitethisgrowth,China’spercapitaGDPremainsrelativelylowataroundUS$3180.

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During this period agribusiness and rural enterprises became an important part oftheeconomy.Between1981and1990,thetotalindustrialoutputofTVEsgrewatanaveragerateof28percent,whichdoubledthatofthenationalaverageandmorethantripledthatofthestatesector(XuandZhang,2009).AsaresultofTVEs’rapidgrowth,thenon-statesector’sshareofindustrialoutputincreasedfrom22percentin1978to 47percentin1991,whilethestatesector’ssharedeclinedfrom78percentto53percentinthesameperiod(QianandXu,1993).TVEs’developmentpeakedinthemid-1990s,asshownintheAppendix(Table2),withemploymentinTVEsreaching61millionin1995.TVEs’shareofGDPincreasedfrom14.3percentin1980to37.5percentin1995(Table3).ItisnotanexaggerationtoaffirmthatTVEswerethemajorengineofChina’sgrowthandindustrializationintheearlystagesofChina’spolicyreforms.

The growth of agribusiness and rural enterprises asTVEs inChina can partly beexplainedbytheChinesepolicyreformsandGovernmentsupportprovidedthroughthese.Inthelate1970s,China’seconomywasindifficultywithanagriculturalcrisisontheway.Whilethepopulationgrew,foodwasinashortsupply.Percapitagrainproduction never averagedmuch above 300 kilograms.Of 800million peasants, 250 million were impoverished (Du, 2004). Since 1978, when the 3rd Plenum ofthe 11th Central Committee of the Communist Party of China (CPC) took place,Chinadefineditssocialismasmeaningthatdevelopmentofthecountry’sproductiveforces moving together towards wealth. The policy focus shifted to supporteconomicandagriculturaldevelopment.ThispolicyreformwasessentialinfreeingChinesepeoplefromthepreviousideologicalandinstitutionalconstraints,providingthepossibilityofestablishinganewinstitutionalandideologicalenvironmentand, inturn,encouragingfurtherpolicyreformsanddevelopment.

8.2.2 limited land and water resources

China’s policy reform in its agribusiness and rural enterprise development isconstrainedby limited landandwater resources (Figure8.2).Before the reforms,the exploitation of land and water resources was beyond sustainable levels. Thecultivationofsteephillsideswascausingmassivesedimentationloss,estimatedat over 2 billion tonnes per year, decreasing productivity in areas losing topsoil,reducing water storage capacity in reservoirs, and increasing the likelihood offloods.IntheNorthPlain,groundwaterwasfallingrapidlyinsomeareas,andseveral surface-watersourcesperiodicallydryupbeforereachingthesea.Forexample,theYellowRiverrandryforlongperiodsoftheyearinthe1990s(LohmarandGale,2008).

IndustrialandurbangrowthincreasescompetitionforChina’s limitedlandandwater.Thenon-farmeconomicboominthecountrymeansthathousingcomplexes,industrialparks, power stations and other projects, are being built on land converted fromagriculture.Competitionforlandwithinagricultureisintense.Theincreasingproductionof meat, dairy products, fruit and vegetables, competes with grain cultivation.

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Until the 1990s, watermanagement inChina was associated with exploiting it as acheap resource to boost agricultural and industrial production without consideringthe opportunity costs.While reforming land and water policies helped improve theefficiencyof resourceallocation,otherapproaches, suchasencouragingagribusinessandruralenterprisedevelopment,alsoconsideredtheurgentneedtobringaboutmoresustainablepracticesandcontributetoeconomicandagriculturalgrowth.

China’s policy reforms include the integration of urban and rural areas, and ofagriculture and industry, by taking the road of leaving the limited land but notthevillage,enteringthefactorybutnotthecity.ThispolicybecameanimportantmotivationforTVEsasaparticularformofagribusinessandruralenterpriseinChina.Moreover,TVEswereguidedby thenationalplanand industrialpolicies,orientedby the market, led by local governments and run by rural collective industriesand cooperatives.All of these led to farmers’ and enterprises’ self-development, self-adjustment, and self-management for profits and losses. The objective ofabsorbingsurplusrurallabourwasalsosupportedbythebroaderruralmarkets.

8.2.3 population and employment situation

ApersistingchallengeforChinesepolicy-makersisthegenerationofemploymentinthefaceofthegrowinglabourforce(Figure8.3).TVEsbringsteadyjobsandincometothevastsurplusofrurallabour,whicheasestheimpactofmassivemigrationtocities.Sincethe1980s,asTVEsroseinlargenumberstheabilitytoabsorbsurplus

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workersincreasedgreatly.In1998,125millionworkersservedinTVEs,representing27percentofChina’sworkforceandover50percentofsurpluslabourinruralarea.In2000,thefigureroseto128million,representinganincreaseofmillionsoverthepreviousyears.By2007,thefigurehadreachedmorethan150million(Table2).

GivenChina’sdensepopulation,TVEsprovidesignificantrelieftotheemploymentsituation. It is projected that the country’s population will increase from around 1.3billionpresentlyto1.5billionaroundtheyear2030,thendeclineslowlythereafteruntilitisunder1.4billionin2050.China’surbanpopulationisprojectedtoincreasefrom just over 450million in 2000 to almost 970million by 2050, an increase of 520millionpeople.Partofthisincrease,around130million,willbeattributabletothe ‘natural’ increaseof theurbanpopulation.The lion’s share, some390million,will come about through rural–urban migration, with China’s urban populationexceedingitsruralpopulationbyabout2015(GilmourandCheng,2004).

WiththedevelopmentofTVEs,pressurefromChina’srurallabourforceflockingtocitiesmayberelieved,althoughfromthemid-1990sonwardstherateofruralsurplusworkersabsorbedbyTVEsseemstobeslower(Figure8.4). Insufficient jobsandaslowingincreaseinincomefortheruralpopulationmaybecomeanewimpetusforpromotingTVEsinChina.

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8.2.4 a significant agriculture and agribusiness sector

China has sustained a growth of almost 10 percent a year since the introductionof economic reforms in the late 1970s.Among themost remarkable phenomenaof theChineseeconomicboomis theemergenceofTVEsestablished in ruraland peri-urban areas, owned and operated by local governments and rural people.The gross output ofTVEs registered an average annual growth of approximately25percentbetween1980and1995.Asoneof themostdynamicelementsof theChineseeconomy,theTVEsectorhascontributedbysubstantialmeasurestoChina’soveralleconomicgrowthandagriculturaldevelopment,especiallyinruralareas.By1995,TVEsaccountedforapproximatelyaquarterofChina’sGDP,two-thirdsofthetotalruraloutput,45percentofthegrossindustrialoutput,andmorethanone-thirdofChina'sexportearnings(Zhang,1999).

TVEs built China’s foundation of rural craft and for the processing of agriculturalproducts.Startingfrom1978,TVEshaveboomedtobeapillaroftheruraleconomy.In1987,theoutputofTVEsoutranthetotalagriculturaloutput.By1990,TVEsearnedUS$13 billion, representing 23.8 percent ofChina’s total foreign currency earnings.In1999,Chinahadmore than2millionTVEs,with127millionemployeesgenerating2500billionYuan inaddedvalue,whichmadeupmorethan60percentofthesocial

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addedvalueoftheruralareas.In2000,theaddedvalueofChina’sTVEsstoodat2720billionYuan,ora9.14percentincreaseoverthepreviousyear.Thenetincomeper capita oftheruralpopulationrosefrom134Yuanin1978to2210Yuanin1999(Bramall,2007).

As a particular form of agribusiness and rural enterprise, China’s TVEs includemanufacturing, agriculture, traffic and transport, construction, commerceand catering services. The products of TVEs are wide ranging, including ruralcommodities,articlesfordailyuse,foodproducts,agriculturalprocessingproducts,and light industrial products.Many of these products have been launched in theinternationalmarketandTVEsbecameanimportantsourceofChineseexports.

8.3 The evolution of TVEs

TVE is the collective term foragriculture-relatedenterprises runby rural villages,whicharenotstate-ownedorprivate.Duringtheperiodofthepeople’scommunes,industriesorsmallenterprisesrunbycommunesorproductionbrigadeswerecalled‘commune/brigade-runenterprises’(CBEs).Afterthedisintegrationofthepeople’scommunes,thistermwastransformedtoTVEs,whichbecamethemainstayofruralenterprises.Sincethebeginningof the1980s,various formsofenterprisesrunbyvillagesandindividualshaveemerged.In1984,thetermTVEsformallyappearedinofficialdocumentsforallcollective-basedruralenterprises.

TVEsarenotunique toChina.Manycountries,especially those in thedevelopingworld,implementprogrammestopromoteruralindustriesoragribusiness.However,the evolution of this particularChinese form of agribusiness and rural enterprisedemonstrates some extraordinary characteristics and roles, which have figureddifferentlyduringthedevelopmentperiodscomparedwiththeexperiencesofothercountries.The evolution of China’s policy reforms related toTVEs’ developmentsincethelate1970sisreviewednext,focusingonthe1990sespecially.Thisevolutiongenerallyinvolvedthefollowingstages:

Z institutional and policy reform to establish initially agricultural-related TVEs,fromthelate1970stothemid-1980s;

Z developmentandexpansionofTVEsandagribusinessinthe1980stothemid-1990s; Z re-establishingagribusinesssincethelate1990s.

8.3.1 the rise of tves (late 1970s – mid 1980s)

There was an attempt at various levels of Chinese government to developagribusiness, and promote the productivity and profitability of TVEs, onceChina’spolicyandinstitutionalreformswereinplace.TVEsunderwenttheir initialestablishmentandexpansionfrom1978toabout1985.Atthisstage,becauseofthe

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recentlyenacted‘opendoor’policy,mostcontrolsonTVEs2werelifted,andrestrictionsonbank lending toTVEswere also removed.During this period the administrativestructure known as people’s communeswas replaced by the townships.CBEswasrenamedasTVEsandtheseincludedindividualandprivateenterprises.ThenumberofTVEsrosefrom0.15millionin1978to1.22millionin1985.TVEs’shareofGDPincreasedfrom14.3percentin1980to16.3percentin1985(Table3,Annex1),andemploymentin theTVE sector reached 69.8million in 1985.Within this figure, employment incollectiveenterprisesincreasedfrom28.27millionin1978to41.52millionin1985.

ThedevelopmentofTVEsatthisstageshowedthatChina’spolicystronglyimpactedagribusiness in rural areas. During this phase, Chinese policy reforms providedguidelines and an environment conducive to encouraging agribusiness. In 1978, the3rdPlenumof11thCentralCommitteeoftheCPCproposedtheemancipationofthemindbyseekingtruthfrompracticesandfacts.Thismilestoneconferenceacknowledgedthat ‘socialism’ means developing productive forces and moving together towardswealth.Subsequently, anumberof specificpolicieswere introduced to increase theefficiencyofCBEsandopenawindowforindividualandprivateenterprises3.Particularly,thepolicyreformsatthisstagestartedandfocusedontheagriculturalsector,whichincluded an attempt to transit fromCBEs toTVEs as part of the de-collectivizationprocess.Inthemeantime,localgovernmentsappliedthereformpoliciestocreateruralenterprisesinordertogenerateemploymentandenhancerevenues.

ThisparticulartypeofagribusinessandruralenterprisebecamearemarkableinnovationforChinesefarmers.TVEsinthisperiodhadanumberoffeaturesunderaflexiblepolicyscheme. In terms of ownership structure, TVEs were set up by townships, villages,householdsandevenindividuals,whichwascalled‘self-employment’atthattime;TVEswere even jointly developedwith foreign partners. In terms of ownership structures,somehadacollectivebasisand/orpartnershipentities;otherswereindividualorprivateoperations.Intermsofthescalesofbusiness,thesecoveredthefullgamutfromlargetomedium-sizedtosmall.Geographically,TVEswerelocatedinruralareas:thesebusinessesoriginatedfromthecountryside.Typically,mostTVEsatthisstageoriginatedfromthreemajor areas:Wenzhou inZhejiangProvince,Suzhou,Wuxi andChangzhou in JiangsuProvinceandthePearlRiverDeltainGuangdongProvince(Figure8.5).TheriseofTVEsinChinaundoubtedlyplayedanactiveroleinpromotingruralemploymentandeconomicgrowth.Inparticular,TVEstoacertainextextreducedthedisparitybetweentheurbanandruraleconomy,andencouragedthedevelopmentofagribusinessandruralenterprises.

2 Until the end of this stage, TVEs were called commune and brigades enterprises (CBEs). According to Zhang (1999), the name CBEs has been replaced with TVEs since 1984. Article 2 of the Law of the People's Republic of China (PRC) on TVEs in 1997 defines TVEs as “various types of enterprises set up with investment mainly from rural collective economic organizations or peasants at township and towns (including villages) responsible for supporting agriculture”. This is what we understand that China’s TVEs are a particular agribusiness.

3 As a result of the policy changes, China registered its first individual enterprise in Wenzhou, Zhejiang Province in December 1980 and its first private enterprise in Dalian, Liaoning Province in April 1984.


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8.3.2 development and expansion (mid 1980s – mid 1990s)4

After the mid-1980s, China’s policy reforms focused on building and developinga market-oriented mechanism. The first stage of the reform focused on theinstitutionalchanges,namelybuildingthehousehold responsibilitysystem(HRS),whenitbecamenecessarytodevelopamarketing-orientedmechanism.Thisstageexperiencedalongjourneyfromthemid-1980stothemid-1990s,includingthetwochairmanshipsofZhaoZiyangandJiangZemin.Duringthisperiod,Chinadevelopedand expanded agribusiness rapidly to reach a peak in terms of TVEs’ output, GDPshareandemployment.

Withtheworld’shighestlong-termeconomicgrowth,ChinaowesitsfirststepsinthepolicyreformsthatbroughtthisabouttoZhaoZiyang.ItwashewhointroducedagriculturalreconstructioninSichuan,breakingupcollective-basedcommunesandentrustingtheuseoflandtofamilies.DuringZhao’stime,agriculturalproductionrapidly increased. Zhao set the stage for so-called ‘socialism with Chinesecharacteristics’.DengXiaopingiswellknownas‘thearchitectofmodernization’,but thefirst steps, thosebreakingwith thepast,wereenactedbyZhaoandhispredecessor, HuYaobang. InOctober 1987, the 13th National PartyCongress of

4 Annex 2 presents a summary of the key policy statements related to the reform processes enacted in China since 1978.

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FIGURE 8.5 China and its provinces

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theCentralCommitteeoftheCPCtookplace.Inhisspeech,March along with the Chinese Characterized Socialist Road,Zhaopointedout that theultimategoalofthereformswouldbethelegalizationandsystemizationofdemocracytosupportandnurtureahealthymarketeconomy.

InOctober 1992, at the 14th National PartyCongress of theCentralCommitteeof theCPC, Jiang delivered a speech on behalf of theCentralCommittee titledAccelerating the Reform, the Opening to the Outside World and the Drive for Modernization, so as to Achieve Greater Successes in Building Socialism with Chinese Characteristics. AsaGeneralSecretary,JiangindicatedthattheCentralCommitteegaveprioritytostrengtheningagricultureandincreasingfarmers’incomes.Duringhis presidency, Jiang reiterated the fundamental contribution of agriculture toChina’sdevelopment.

TVEs at this stage experienced a process of development and expansion,culminatinginthefastgrowthofthemid-1990s.Theeconomicslowdowninthelate1980s led tostagnation inTVEs’numbersatabout1.9million from1989to1991.ThegrowthofemploymentinTVEssloweddownfrom95.45millionin1988to 92.65 million in 1990. However, this period of stagnation was short.WhenChina’seconomygrewin1991and1992,TVEsalsorevived.By1994,thenumberofTVEsreachedahistoricalpeakat2.5million,andemploymentincreasedfrom96millionin1991to135million.Duringthisperiod,whileemploymentincollectiveenterprises increased constantly, private enterprises – of which TVEs were a part–experiencedespeciallyrapidgrowth.

Bythemid-1990s,thedevelopmentofTVEsinChinarevealedsomenewfeatures,particularlythatthestructureofTVEs’productionwasdiversifyingcomparedwiththatofthelate1970s.TakingTVEsinZhejiangprovinceasanexample,weseethatamongthethreemajorsectors,theoutputvalueoftextileswassmallercomparedwith the other two, building materials and electrical machinery. By 1994, thetextilesectorbecamethelargest,accountingforover27percentoftotaloutput,more than theshareofelectricalmachinery (24percent)andbuildingmaterials (8 percent) (Bramall, 2007). This evidence suggested that TVEs’ production inChinawasmoreconsumer-oriented,whichmighthavebeenbeneficialtopeoplewho lived in thecountryside,and to increasing farmers’ incomesasa target forChinatodevelopthistypeofagribusiness.

8.3.3 agribusiness reconstruction (mid 1990s – present)

When reviewing theChinese experience in agribusiness development in a broadperspective, the growth ofChina’sTVEs in both output and employment duringthe 1980s and 1990s was extraordinary in two senses. First, the rate of growthwas exceptionally fast by international standards. Nothing comparable has beenseen inSouthAsia,sub-SaharanAfricaorLatinAmerica.Second, thegrowthrate


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oftheruralnon-agriculturalsectororagribusinesswasunprecedentedbyChinesehistoricalstandards–andthereforeunexpected(Bramall,2007).EventheChineseleadersweresurprised.AsDengXiaoping,a late leaderofChina,pointedout: “Intheruralreformourgreatestsuccess–anditisonewehadbynomeansanticipated– has been the emergence of a large number of enterprises run by villages andtownships…thisresultwasnotanythingthatIoranyoftheothershadforeseen;itjustcameoutoftheblue”5.

Sincethemid-1990s,China’seconomicandagriculturalreformshaveenteredintoanewstage.China’spopulationhasincreasedbyabout90millionoverthepastdecade.Amongthe900millionruralinhabitants,by2007about150millionworkedforurbanandtownshipenterprises.Inthesecircumstances,thekeytoensuringfoodsuppliesandfarmers’incomesliesinendeavourstoconsolidatethebaseofagricultureandagribusiness. Inthisperiod,Chinacalledforgreatereffortstoaddressagriculturalandruralissuesbyconstructingaso-calledsocialistnewcountrysidetobalancethedisparitiesbetweenurbanandruralareas.Duringthe1980s,thecentralcommitteeoftheCPCandtheStateCouncilissuedfiveNODstoaddressagriculturalandruralissues. From 2004, there have been successive years inwhichNODs focused onagriculturalandruralissues.Thekeymessagesofthesedocumentsweretoincreasefarmers’ incomes (2004), improve agricultural production capacity (2005), pushforwardthe ‘newcountryside’scheme(2006),developmodernagriculture(2007),andconsolidatethefoundationofagriculture(2008).

The mid-1990s marked a turning point in the TVE development process. Sincethen,China’seconomicandagriculturalreformshaveappearedinpolicydebatesaimedattherestructuringandevenprivatizationofstateandcollectiveenterprises,includingTVEs.From1995onwards,Chinaconductedpolicyreformsstartingwithitsstate-ownedenterprises(SOEs).This includedtwomajorreforms:privatizationof small state-ownedenterprises at the county level, andmass lay-offsof excessstateworkersatthecitylevel.LocalgovernmentsinitiatedthesereformsforSOEsandTVEsthatwereproceedingineconomicallysensibleways.‘Privatization’intheChinesemodelisbasedonanadequateeconomicfoundation.Therewerearangeofincentivestodrivelocalgovernmentstowardsreform,includingtheimpositionofsignificantbudgetconstraintsandincreasedcompetitionfromthenon-statesector.

Chinasetup its ‘zhuada fangxiao’ (graspingthe largeand lettinggoof thesmall)policy at the 15th National PartyCongress in 1997, in order to reformSOEs.ThispolicywasalsoappliedtoTVEsandthereforeaffectedTVEsinmanyways,asmuchas it did small-scaleSOEs.The recentralizationof theChinesefiscal system from1995putincreasingpressureonthebudgetsofTVEs;thiscombinedwithgrowingpressuresonChinesebankstorestrictlendingtoTVEs.Themainresponseoflocalgovernmentstothesepressures,introducedbythemid-1990s,wastheprivatization

5 Deng, 1987

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ofTVEsinordertoraiserevenues.Statisticsrevealedthatemploymentincollectiveenterprisesdecreasedfrom60million in1995to33.7million in2001. In thesameperiod,employmentinprivateenterprisesincreasedfrom68millionto97million.

8.4 Recent policy developments

Sincethelate1990s,TVEsinChinahaveexperiencedarelativeslowdowninoutputandemployment.Theeffectofthisreducedgrowthisan importantconsiderationwhen discussingChinese agricultural and agribusiness development. It has beenargued that the slowdownofTVEsdemonstrates a collapseor a shift away fromexistingbusinessmodels.OneparticulareffectofTVEs’developmentwastoabsorbruralworkersinproductiveenterprisesandpreventsignificanturbanmigration.WiththeslowdownofTVEs,urbanmigrationgrew,reaffirmingthatTVEswereplayingaroleinincreasingfarmers’incomesbyemployingalargenumberofruralworkers.

However,TVEs are currently facing challenges to develop further. As a particularformofagribusinessandruralenterprise,theroleofTVEsasgrowthpromoterswillnotbefulfilleduntilthedifferenceinincomesbetweentheruralandurbansectorsisminimized.Thiswillbealong-termprocessinChina,inwhichwecanenvisagethatTVEswillmoveonthroughanumberofreadjustmentandrestructuringpolicies.Yet,TVEshavealreadyplayedasignificantroleinfosteringChina’sruralandnationaleconomy.Aftertheinitialpolicyandinstitutionalreformsinagricultureandthedevelopmentofamarket-orientedsystem,TVEsaccumulatedexperienceallowingforfurtherreforms,particularlyofcollectiveandruralenterprisesandagri-relatedbusinesses.

It is recognized thatTVEsneed to continueupgradingwith furtherdevelopment;thereisaneedtosetupanumberofpoliciesandactionstoencourageinstitutionalreforms. In that respect and as observed earlier, two general policy approachesare being debated in China: corporation versus cooperation. The corporationapproacharguesthatthereisaneedtoexpand‘agrariancapitalism’,includinglandrights’ transformation and trading in order tomodernize agriculture anddevelopagribusiness.Thecooperationapproachinsteadpostulatesthat‘agrariancapitalism’isnotanappropriatewaytobuildastrongagriculturalsectorandincreasefarmers’incomes,becauseitforcespeasantstowithdrawfromlandrights,leadingtoseriousrural–urbanmigrations.ThenextsectionlooksatthechangesandchallengesthatTVEsarefacinganddiscussestheirpolicydirections.

8.4.1 changed situation and challenges

Beginning in the twenty-first century,China was urged tomake efforts to increasefarmers’incomes,recognizingthatthisgoalisofenormoussignificancetooverallnationaldevelopment.Bycontinuingeffortstopushforwardtheadjustmentofagriculturaland


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ruraleconomicstructures,Chinaislookingtoincreasefarmers’incomesbydevelopingagricultureandagribusiness.TheGovernmenthascalledforfocusedattentiononraisingthequalityandcompetitivenessofagriculturalproductsandhasforcefullyimplementedastrategytorevitalizeagriculturethroughscientificandtechnologicaladvances.

Currently, China’s rural reform has been further deepened and agribusinessdevelopmentisencouraged.Attheendofthetwentiethcentury,Chinastartedtovoiceitsplansonagriculturalindustrializationandmaintainingstabilityinruralareas.InSeptember1997,the15thNationalPartyCongressoftheCentralCommitteeoftheCPCtookplace.JiangZemin,onbehalfoftheCentralCommittee,deliveredareporttitledHold Highly Great Banner of Deng Xiaoping Theory for All-Round Advancement of the Cause of Building Socialism with Chinese Characteristics into the 21st Century. Thisreportmadeasummaryofthehistoryofreform,preparedforthefuture,anddrewupsomeschemesforChina’seconomicandagriculturalmodernization.

InNovember2002,the16thNationalPartyCongressoftheCentralCommitteetookplace.Onbehalfof theCentralCommittee,JiangZemindelivereda report to theCongress entitledBuild a Well-off Society All-round Way and Create a New Era in Building Socialism with Chinese Characteristics. In theFirstPlenumof the16thCPCCentralCommittee,HuJintaowaselectedtobeGeneralSecretaryoftheCPC,whichmarkedthebeginningofanewperiodforChina’sreforms,particularlyforagriculturalandagribusinessdevelopment.InOctober2003,atthe3rdPlenumofthe16thCentralCommitteeoftheCPC,Decision on Several Issues about Perfecting Socialist Marketing Economic System wasputintoforce.

Againstthisbackground,TVEshadamajor impactontheeconomicriseofChina.Theyservedasamajorsteppingstoneofinstitutionalchangewhenlegalprotectionswerenotinplace.TVEsalsofilledamarketnichefordailygoodsandforincreasingfarmers’ incomes along with the economic and policy reforms. As developmentandreformgofurther,China’sTVEsneedtoovercomeanumberofdifficultiesandchallenges.Thesemainlyincludetheout-of-datemanagementsystems,thelimitedapplicationoftechnology,andtheregionaldisparitiesandimbalances.

8.4.2 outdated management systems

China’sTVEsaremostlysmall,withadominantmodelof‘family-based’operations.These small and privately-run businesses generally lackmanagement knowledgeandskills,whichputs themat riskof losingmarket tocompetition. Inappropriatemanagement approaches lead to a slowdown in the absorption of excess laboursupply,apotentialsourceofdevelopmentinChina.ManyTVEsexcludeprofessionalmanagement talents withmarketable skills.AlthoughChina’s policies encouragehighly educatedpeople towork for rural development, thepresentmanagementsystems ofTVEs are not benefiting from the increased availability of educated,youngerworkerscomingoutofuniversitiesandcolleges.

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Inspiteofthesechallenges,manyTVEsareundergoingchangeandfurtherreforms.TVEs are businesses that can take advantage of both public and private sectorincentives, as they are run on a family or private basis but participate in and aresupported by local governments.This particular characteristic allowed someTVEmanagerstoacquiretheskillsnecessarytodeveloptheirenterprises.

8.4.3 limited technology application

AnotherchallengethatTVEsarefacingislimitationsintheapplicationoftechnology. Asurveyof37sectorshasshownthattechnology-intensiveindustriessuchasmachinery,electronicsorpharmaceuticalsmadeuponly20percentoftheadded-valueoflargeTVEs.Inthemeantime,traditionallabour-intensivesectors,suchastextiles,clothes,lightindustry,andbuildingmaterials,remainthepillarsofTVEs.Therearealimitednumberofagri-foodprocessingbusinessesandtheirproductionisalsolow(Liang,2006).China’sTVEsweresuccessfulinthepastpartiallybecausetheysuppliedinternalandexportmarketswithlabour-intensiveandlow-techproducts.Fueledbythenationaleconomicgrowthandpolicyreforms,TVEscreatedthe‘MadeinChina’brandforinternationalmarkets.TVEsnormallyreliedonsomenetworkofoverseasChineselinks,mainlyintheSouthAsianregions,forcapital,technology,productdesignandqualitycontrol. They benefited from instant access to globalmarkets through these special links.However,globaldevelopmentwithahightechnologicalprofilewillpreventTVEsfrommaximizingtheiradvantagesiftheyremainconstrainedbytechnologylimitations.

8.4.4 regional disparity

Giventheenormousgrowth inforeigndirect investment inChinaafterthe1990s,foreignentrepreneursworkingwithknowledge-basedmultinationals thatpossessstrong global business insight generated serious competitive pressure for TVEs.TheeconomiesofBeijingandShanghai aredrivenparticularlyby theworld-classmultinationals that deal with a vast range of Chinese suppliers. Since the 1980scoastalbusinesses inChinahavemaintainedhighproductivityandefficiency,andenterprises in these regions havebecome serious competitors for businesses likeTVEs.Under these circumstances,manyTVEmanagers found their opportunitieswerebetterservedthroughgrowing inlandChinesebusinesses in ruralareas,andagricultural-relatedsectorsthatarerelativelyflexiblecomparedwithdevelopmentincoastalareasdrivenbyforeigninvestment.

Accordingtoa2006survey,TVEs in theeasternregion in2003created2.4billionYuan of added-value, 15.3 percentmore than that of the previous year.Those inthecentralpartofChinaproducedabout1billionYuan,anincreaseof8.9percentover the previous year, while the western region generated 2.1 billionYuan, or 12.9percentmorethanthepreviousyear.Thegrowthrateintheeastwas6.4percent


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higherthanthatofthecentralregion,and2.4percenthigherthanthewesternregion(Xue,2006).Thesethreeregionsmadeup66.2,28.0,and5.8percentrespectivelyofthenationaltotaladded-value,indicatinganeverwideningregionaldisparity.

8.4.5 policy recommendations

Since the beginningof the twenty-first century,China has launched a number ofnational policies, including six NODs concerned with agriculture, agribusinessand farmers’ income.Thesepolicies intended toencouragemanagement reform,increase technology and narrow both the regional disparity between east andwestandtheincomegapsbetweenruralandurbanresidents.Duringthisprocess,astrongcall for furtherpolicy reformwasmade,soastodevelopagricultureandagribusinessinordertoincreasefarmers’incomesbyfacilitatingtheflowofcapitaltothecountrysideandruralareas.Thisargumentproposestotransferfarmers’landto businesses, such that farmers become agriculturalworkers or shareholders. Inordertofacilitatetheflowofcapital,landwouldbetransferredfromagriculturaltonon-agriculturaluse.

The above-mentioned approach has been under debate. For agricultural-basedcountrieswithahighpopulationdensity,likeChina,thepolicieschosenforagricultureandagribusinessdevelopmentareofgreatnationalimportance.Ifacountrychoosesthecapitalintensiveroute,smallfarmersmaybedisplaced,increasingthesupplyoflowcostlabour.Whilethismaybebeneficialfortheattractionofforeigninvestment,it forces farmers to liveoff the land,whichmay lead to socialandenvironmentalproblems.Ultimately,thisstrategymaynotimprovebusinessdevelopment.Arouteofagribusinessdevelopmentinwhichfarmersareorganizedintocorporationsandassociationscouldbeanalternative.

Chinahasahugeruralpopulation,acharacteristicthatcanonlybechangedviaalong-term process.The rural economy and agribusiness are themain sources ofincomefor farmers.Fromapolicyperspective, it is thereforenecessarytoensurethat farmershaveashareof thebenefitsofgrowth.Farmersare themain forcesto develop agribusiness and agriculture. In order to organize them and developagribusiness, the Chinese government is developing policies on reforming thestructureandownershipofTVEs. It is also supportingTVEs in reconstructingandapplyingtechnologyanddevelopmentstrategies,aswellasencouragingenterprisesinthefoodprocessingsector.Thesepoliciesneedtobereinforced.

8.4.6 ownership and management reform

There is awareness about the need to reform the ownership structure of TVEsin order to develop them in an era of globalization. In the early stages of theirdevelopment,TVEswereestablishedonthebasisofcollectiveownership.Sincethe

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beginningofthiscentury,mostTVEshaveundergoneownershipstructurereformsandtownadministrationshavegenerallywithdrawnfromtheirpreviousleadershipoverTVEs.TofurtherreformtheTVEs’ownershipstructurethereisaneedtoallowdiversifiedformsofpropertyrights.Forexample,relativelysmallTVEsmaybesetupaspartnershipsandshareholdingcooperatives.LargerTVEsmaybeestablishedunderaformalshareholdingsystem.ThiswouldalignthegovernanceofTVEswithamodernbusinesssystem,stimulatingthemtofaceglobal-levelmarketcompetition.

TVEs in China are particular because of their distinction from SOEs and privatebusinesses.Inotherwords,TVEscouldberapidlydevelopedintermsoftheiradvantagesvis-à-visbothSOEsandtheprivatesector.TheparticularityandflexibilityofTVEsallowsthemtocompeteeitherwithSOEsorprivatebusinesses.Intermsofhiringpractices,for example,TVEs may have employees recruited from farms or other enterprisessupportedbygovernment,inperiodsoflabourshortages.AlthoughTVEsaresubjecttothecompetitivepressuresofthemarketplace,theyhavemoreflexibilitytoaccesstocapitalfromthegovernmentorcollectives.Additionally,comparedwithbothSOEsandprivateoperations,managersfromTVEstendtohavemoreauthorityandautonomy.

8.4.7 Innovation and technology development

Innovationand technologydevelopment inTVEs isakey forgrowthandsuccess.China’sTVEs inmany sectors arenothi-techor innovative. For example,TVEs inthebrick,cement,cokingandmetal-castingsectorsweresetupprimarilytoabsorbrurallabour,toprovideessentiallowcostproducts,andtocontributetoimprovinglivelihoods in a localized area.As a result of limited exposure to market forces,trainingandtechnologytransferintheseTVEsectorshasbeenneeded,alongwithcorrespondinginnovationandtechnologydevelopment.

Inorder to facilitate theupgradingof technologies,TVEsneed to increase theirattention to research and development (RandD). While taking advantage oftheir labour-intensivenature,China’sTVEsmustalsonowraise their technologyprofiles, including the adoption of environmentally-friendly and energy-savingtechnologies, in order to compete in the global market. Via innovation andtechnologicaldevelopment,TVEswillcontinuetobeanimportantpartofChineseeconomic production and socialwelfare, andwill contribute significantly to theimprovement of the local and global environment. TVEs in the brick-making,cement,metal-casting and coking sectors continue to use outdated, inefficienttechnology,whichleadstohighpollution,particularlygreenhousegasemissions.The finance needs to be available for technological upgrades so thatTVEs canreducepollutionandproducehigherqualityproducts.Inmanycasessuchupgradeswouldbeeconomicallyandfinanciallyjustifiablealone.ChinashouldconsidertheTVE sector to be strategic to the development of the rural economy.As such,policiesareneededtobringTVEsintoacompetitivemarket,whilecontinuingtosupporttheirroleasemployersandenginesofruraldevelopment.


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8.4.8 Food processing

The foodprocessing sector is of central significance to thedevelopmentof largeagricultural countries likeChina.As such, there is an important role forTVEs toplayinpolicyreformsrelatedtothepromotionofthissector.Recognizingthisrole, the Chinese government has fostered the sector through fiscal concessions toencourageinvestmentsinvalueadditiontoagriculturalproduction.

Indeed,developingtheproductionchainsbypromotingprocessingtoincreasevalueadditionprovidesspecialopportunitiesforTVEs,asChina’sagri-foodindustryhasanurgentneedtocatchupwithdevelopedcountries,becauseofits largepopulationand growing demand for food and agriculture products. In China, the ratio ofprocessingoutput value relative toagriculturalproductionhasbeenestimatedat0.6to1,comparedwith3to1 indevelopedcountries(Liang,2006).Becauseonly30percentofTVEsareinvolvedinthissector,therearesignificantopportunitiesforfurthergrowth(Liang,2006).

FurtherbenefitsfromincreasedparticipationofTVEsintheagri-processingsectorcanbeexpected.AccordingtoKumar(2007), thegrowthanddevelopmentofthefoodprocessingsectorisexpectedtostrengthenthelinksbetweentheindustryandagriculture.Growthinfoodprocessingwouldenhancetheprofitabilityoffoodcrops,byincreasingdemandfortheseandbypromotingbetterlinksbetweenfarmersandmarkets, avoiding excessive intermediation. The cultivation of produce for foodprocessingwouldmake agricultural productionmore efficient,while the demandfor consistency in foodqualitywouldhelp standardizeproductionandprocessingpractices.Moreover,improvementsinthevalue-addedchainfromfarmtoforkcouldleadtomorefavourabletermsoftradeforagriculture(Kumar2007).

8.5 Conclusion

China’sTVEshavebeencharacterizedhereasparticularformsofagribusinessandruralenterprises.EveniftheymaynotbefullytakenintoaccountbyGovernmentinvestmentplansorproductiongoals,TVEscanbe freely setupwith thesupportofbankfacilitiesand/orviacollectiveorindividualcapitaloutlays.Althoughmostlysmall in scale and laggards in terms of technology adoption, TVEs have manyfeaturesthatarefavourabletotheircompetinginChineseandinternationalmarkets,andcandevelopevenfurther.Theyalsoplayanimportantsocio-economicrole,bycontributingtovalueadditionandabsorbingsurplusworkersinruralvillages.

ThedevelopmentofTVEs inChinawaspromptedand supportedbyanumberofGovernmentpolicyreformsreviewedinthischapter.Thesereformsweregraduallyimplementedandadjustedaslessonswerelearnedovertheyears.TheexperiencesofChinawithTVEsmaybeausefulguideforothercountriesaswell,especially in

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theAsia region,wheretherearemanysimilareconomicandsocialcircumstancesintownsandvillages.Indeed,China’sreformsandexperienceshaveinspiredsimilareffortsinanumberofdevelopingcountries,suchasVietNam,forinstance.

The TVE experience in China is particularly interesting for agribusinessesdevelopment.Many agri-foodbusinesses utilize local resources, including humancapital,todeveloptheirenterprises.Byusinglocalinputs,agribusinessesstrengthenthe local economy, particularly benefiting local farmers via increased incomes,aswell as other enterprises and industries through the linkages that are createdbackwardandforwardintheagri-foodchains.

Theprogress ofTVEs inChina has attracted attention fromdeveloping countriesinparticular.Byandlarge,theChineseexperiencerepresentsaproofofvitality,inspiteofthetransitionalproblemsandchallengesoverthethreedecadesorsothatTVEshavebeenindevelopment.Thesectorhasprovidedanexampleofreplacingtraditionalindustrializationapproacheswithaspecialformofagribusinessandruralenterprisedevelopmentpromotionviainstitutionalreforms,includingtheownershipstructuresoffirmsand the roleof localgovernment in fosteringagribusinessandruralenterprisedevelopment.Theconclusionthatcanbedrawnisthat,althoughtheexperienceofonecountrymaynotnecessarilyapplytoallothers,thereareusefullessonstobelearnedfromtheChineseTVEdevelopmentexperience.


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annex 1: statistical tables

Year Population

(10 000s)

Gross output*

(100s millions RMB)

Household

(10 000s)

rural persons**

(10 000s)

Agri machinery

(10 000s kw)

irrigated area

(1 000s hectares)

Chemical fertilizer

(10 000s tonnes)

Sown area

(1 000s hectares)

Sown grains

(1 000s hectares)

1978 96 259 1 118 17 347 N/a 11 750 44 965 884 150 104 120 587

1980 98 705 1 454 17 673 N/a 14 746 44 888 1 269 146 380 117 234

1985 105 851 2 506 19 077 1 946 20 913 44 036 1 776 143 626 108 845

1990 114 333 4 954 22 237 2 593 28 708 47 403 2 590 148 362 113 466

1991 115 823 5 146 22 566 2 727 29 389 47 822 2 805 149 586 112 314

1992 117 171 5 588 22 849 3 118 30 308 48 590 2 930 149 007 110 560

1993 118 517 6 605 22 984 3 703 31 817 48 728 3 152 147 741 110 509

1994 119 850 9 169 23 165 4 064 33 803 48 759 3 318 148 241 109 544

1995 121 121 11 885 23 282 4 380 36 118 49 281 3 594 149 879 110 060

1996 122 389 13 540 23 438 4 416 38 547 50 381 3 828 152 381 112 548

1997 123 626 13 853 23 406 4 706 42 016 51 239 3 981 153 969 112 912

1998 124 761 14 242 23 678 4 874 45 208 52 296 4 084 155 706 113 787

1999 125 786 14 106 23 811 4 799 48 996 53 158 4 124 156 373 113 161

2000 126 743 13 874 24 149 5 442 52 574 53 820 4 146 156 300 108 463

2001 127 627 14 463 24 432 5 615 55 172 54 249 4 254 155 708 106 080

2002 128 453 14 932 24 569 5 816 57 930 54 355 4 339 154 636 103 891

2003 129 227 14 870 24 793 6 186 60 387 54 014 4 412 152 415 99 410

2004 129 988 18 138 24 971 6 102 64 028 54 478 4 637 153 553 101 606

2005 130 756 19 613 25 223 6 242 68 398 55 029 4 766 155 488 104 278

2006 131 448 21 549 157 021 105 489

* Gross outputs value of farming ** Rural persons engaged in non-agricultural industries

Source: National Statistics Bureau of China, 2007 (some data is not available).

taBLE 1

selected statistics of china’s agriculture and agribusiness

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Year Total SOEs TVEs Private

1980 199.7 151.7 28.5 N/a

1985 344.9 223.7 56.3 21.0

1990 685.8 374.5 167.3 83.1

1995 2 495.1 830.7 935.9 523.6

2000 4 003.4 1 377.8 942.5 1 773.1

Source: Xu and Zhang (2009).

taBLE 2

china’s gdp by ownership (billion Yuan)


194

Year TVEs

(number)

Employment

(total)

Employment

(collective)

Employment

(private)

Percentage share

(rural)

Fixed asset

(b)

Value-added

(b)

revenue

(billion Yuan)

1978 0.15 28.27 28.27 N/a 9.23 22.96 20.83 9.55

1979 N/a N/a 20.09 N/a N/a 28.02 22.83 11.16

1980 0.14 30.00 30.00 N/a 9.42 32.63 28.53 12.63

1981 N/a N/a 29.70 N/a N/a 37.54 32.15 12.23

1982 N/a N/a 31.13 N/a N/a 42.93 37.44 12.80

1983 N/a N/a 32.35 N/a N/a 47.56 40.84 13.67

1984 N/a N/a 38.48 N/a N/a 57.50 63.32 15.50

1985 1.22 69.79 41.52 28.27 18.83 75.04 56.27 20.40

1986 N/a 79.37 45.41 33.96 N/a 94.67 61.12 21.10

1987 N/a 88.05 47.18 40.87 N/a 122.96 96.20 24.90

1988 N/a 95.45 48.94 46.52 N/a 158.43 117.24 34.98

1989 1.87 93.67 47.20 46.47 22.88 192.07 138.41 33.39

1990 1.87 92.65 45.92 46.72 19.42 220.20 167.29 31.85

1991 1.91 96.14 47.69 48.44 20.01 262.63 201.83 39.90

1992 2.09 106.25 51.76 54.49 22.00 349.08 300.79 53.48

taBLE 3

selected statistics on china’s tves (millions, unless indicated)

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Year TVEs

(number)

Employment

(total)

Employment

(collective)

Employment

(private)

Percentage share

(rural)

Fixed asset

(b)

Value-added

(b)

revenue

(billion Yuan)

1993 2.45 123.45 57.68 65.78 25.43 516.09 513.81 109.30

1994 2.49 120.17 58.99 61.19 24.62 631.56 701.93 135.20

1995 2.20 128.62 60.60 68.02 26.24 912.33 935.93 177.53

1996 2.34 135.08 59.53 75.55 27.55 1 002.23 1 025.85 203.56

1997 2.02 130.50 53.27 77.24 26.61 1 253.93 1 004.94 203.40

1998 2.00 125.37 48.29 77.08 25.57 1 344.31 997.13 196.90

1999 2.07 127.04 43.69 83.35 25.94 1 391.58 991.33 201.28

2000 2.09 128.20 38.33 89.87 26.20 1 368.52 942.49 200.90

2001 2.12 130.86 33.72 97.13 26.66 1 351.45 911.78 195.00

2002 2.11 132.88 N/a 115.02 27.14 1 774.67 1 206.73 272.18

2003 2.19 135.73 N/a 123.37 27.82 N/a N/a

2004 2.21 138.66 N/a N/a N/a N/a N/a

2005 N/a 142.72 N/a N/a N/a N/a N/a

2006 N/a 146.80 N/a N/a N/a N/a N/a

2007 N/a 150.90 N/a N/a N/a N/a N/a

Source: The data is mainly collected from the School of International Relations and Pacific Studies, University of California at San Diego, USA (http://irps.ucsd.edu/assets/022/8597.xls), along with other sources, such as the China

Statistical Yearbook and China’s TVE Yearbook (some data is not available).

taBLE 3 (Continued)

selected statistics on china’s tves (millions, unless indicated)


196

Year ALL TVEs industrial TVEs

industry share (%)

Total employment

County-level employment

County share (%)

1978 37.8 22.3 59 74.51 24.02 32

1979 40.1 24.2 60 N/a N/a N/a

1980 48.2 28.8 60 80.19 26.93 34

1981 53.2 33.5 63 N/a N/a N/a

1982 62.0 37.3 60 N/a N/a N/a

1983 66.9 41.3 62 N/a N/a N/a

1984 98.8 55.9 57 N/a N/a N/a

1985 109.4 66.3 61 89.90 26.92 30

1986 118.3 72.6 61 93.33 28.09 30

1987 182.7 127.2 70 96.54 29.45 31

1988 200.3 142.6 71 99.84 31.11 31

1989 220.1 159.7 73 101.10 31.37 31

1990 250.4 185.5 74 103.50 31.97 31

1991 278.4 216.0 78 106.70 33.38 31

1992 389.6 309.9 80 108.90 34.85 32

1993 607.0 479.0 79 108.90 37.81 35

1994 691.4 566.9 82 108.80 39.41 36

1995 815.9 676.3 83 N/a N/a N/a

1996 931.9 756.4 81 112.40 43.01 38

1997 1 086.1 868.2 80 110.44 42.77 39

1998 1 190.5 981.5 82 90.58 36.76 41

1999 1 365.7 1 134.5 83 85.72 35.43 41

2000 1 476.5 1 211.5 82 81.02 34.10 42

2001 1 577.5 1 310.3 83 76.20 32.71 43

2002 1 744.7 1 471.1 84 71.63 31.12 43

2003 1 934.9 1 643.4 85 N/a N/a N/a

2004 2 058.8 1 757.9 85 67.10 30.03 45

Note: a) data source: Bramall, 2007:56/58 (some data is not available) - b) numbers of TVEs in thousand - c) employment in millions.

taBLE 4

growth and employment of tves in china, 1978–2004

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annex 2: significant events related to china’s policy reforms and tve development (1978–2008)6

1978, December (18–22),the3rdPlenumofthe11thCentralCommitteeofChineseCommunist Party (CPC). Background: Per capita grain production under 300kilograms; and of the 800 million peasants, 250 million impoverished. Turning points: Emancipatingthemindofpeople,andseekingtruthfromfacts.

1979, Spring, Fengyang County, Anhui Province: contracting collective land tofamilies. National Agricultural Commission established. The Central CommitteerelayedtheSummary of Discussions on Rural Issues fromtheNationalAgriculturalCommission’s PartyGroup: the authorization of this document by HuaGuofeng,President of theCentralCommittee of theCPC, opened a small window for theHouseholdResponsibilitySystem(HRS).

1980, Fall, No. 75 Document, Some Issues in Further Strengthening and Improving Agricultural Production Responsibility System:YaoYilin,DirectoroftheNationalPlanCommission,DengXiaopingandHuYaobang,et al.Agreed:Hardship regionsareallowedtocarryoutHRS.

1981, Winter,TheCentralCommitteeheld a national conferenceon rural issues.Soonafter theconference, theCentralCommittee’sfirst specialNOD in 1982 fortheagriculturalsector,namely,Summary of the National Conference on Rural Issues, was released: public ownership of land and othermeans of productionwould beunchanging,aswouldtheresponsibilitysystem.

1982, 1–11 September,the12thNationalPartyCongressoftheCentralCommitteeoftheCPCandHu Yaobang’s Creating a New Stage of Socialist Modernization:Thevariousformsoftheproductionresponsibilitysystemhadliberalizedtheproductiveforcesandneededtobemaintainedforalongtime.PremierZhaoZiyangreaffirmedthat the output-linked contract system effectively displays the superiority of thesocialisteconomicsysteminruralChinainthepresentstage.RunshengDu,SecretaryGeneral,RuralDepartmentoftheCPCatthisCongressinaspeech,Historic Shift in Rural Development,arguedthathouseholdoutputcontractingandhouseholdworkcontractingcouldembodytheunificationofpublicandprivatebenefitsandofnear-termdevelopmentandthedistantgoalofmodernization.

6 This information is collected by the author from a variety of sources, including China Rural Reform: Review and Outlook, Chinese Ministry of Agriculture, 2007; The Evolution and Characteristics of Agricultural Policies in China, the Chinese Ministry of Agriculture, 2008; The Course of China’s Rural Reform Runsheng Du, International Food Policy Research Institute, 2006.

Year ALL TVEs industrial TVEs

industry share (%)

Total employment

County-level employment

County share (%)

1978 37.8 22.3 59 74.51 24.02 32

1979 40.1 24.2 60 N/a N/a N/a

1980 48.2 28.8 60 80.19 26.93 34

1981 53.2 33.5 63 N/a N/a N/a

1982 62.0 37.3 60 N/a N/a N/a

1983 66.9 41.3 62 N/a N/a N/a

1984 98.8 55.9 57 N/a N/a N/a

1985 109.4 66.3 61 89.90 26.92 30

1986 118.3 72.6 61 93.33 28.09 30

1987 182.7 127.2 70 96.54 29.45 31

1988 200.3 142.6 71 99.84 31.11 31

1989 220.1 159.7 73 101.10 31.37 31

1990 250.4 185.5 74 103.50 31.97 31

1991 278.4 216.0 78 106.70 33.38 31

1992 389.6 309.9 80 108.90 34.85 32

1993 607.0 479.0 79 108.90 37.81 35

1994 691.4 566.9 82 108.80 39.41 36

1995 815.9 676.3 83 N/a N/a N/a

1996 931.9 756.4 81 112.40 43.01 38

1997 1 086.1 868.2 80 110.44 42.77 39

1998 1 190.5 981.5 82 90.58 36.76 41

1999 1 365.7 1 134.5 83 85.72 35.43 41

2000 1 476.5 1 211.5 82 81.02 34.10 42

2001 1 577.5 1 310.3 83 76.20 32.71 43

2002 1 744.7 1 471.1 84 71.63 31.12 43

2003 1 934.9 1 643.4 85 N/a N/a N/a

2004 2 058.8 1 757.9 85 67.10 30.03 45

Note: a) data source: Bramall, 2007:56/58 (some data is not available) - b) numbers of TVEs in thousand - c) employment in millions.


198

1983, NOD, Some Issues on Current Rural Economic Policy, proposedafurthergoalto strive for the ‘two shifts’ (from self-sufficiency to comparatively large-scalecommodity production, and from traditional to modern agriculture) and ‘threebits’(abitmoreliberalizationofideas,abitbolderreform,andabitmorerealisticattitude,tohelpspeedupthetwoshifts).

1984, NOD, Notes on the Rural Work in 1984,toperfecttheproductioncontractsystemandfostermarketmechanisms:a)theperiodoflandcontractsshouldbeextendedto15years,duringwhichpaidtransferoflanduserightsshouldbepermitted;b)thefreeflowofruralprivatefundsshouldbeallowed,combiningthecooperativejointstocksystemwiththebuyingofstocktoearndividends;c)peasantsshouldbeallowedtogotocitiestoseekemploymentand/ordobusiness;d)individualsshouldbeallowedtorunenterprisesandhirestaff;e)stateoperatedbusinesses,supplyandcooperativesshouldgraduallyopenuptomarkettransactionsandwithdrawfromtheirmonopolies.Inthisyear,thecentralgovernmentandstatecouncilcirculatedtheReport on Creating New Development for Commune-run Enterprises formulated by the thenMinistry ofAgricultureinsupportoftownshipandvillageEnterprises(TVEs).

1985, NOD, Ten Policies on Further Invigorating the Rural Economy, focused onreforming purchase and marketing system with developing forestry, enhancingtransport,supportingruralenterprises,encouragingfreemovementoftalentedpeople,enliveningfinancialmarkets,perfectingtheruralcooperativesystem,strengtheningthe building of small cities, and developing the foreign trade oriented economy.InOctober, the3rdPlenumofthe12thCentralCommitteeoftheCPConDecision on Reforming Economic System: a) reconstructing the urban and rural relationship; b)reformingtheunifiedprocurementsystem;c)adjustingtheindustrialstructure.

1986, NOD, On Development of Rural Work in 1986,madeacommitmenttoincreaseinvestment in agriculture and water facilities, and to guarantee a rise in grainproductionto450billionkilograms,startingwiththe7thFive-YearPlan.

1987, October, the13thNationalPartyCongressoftheCentralCommitteeoftheCPC.TheNationalPartyCongress is thehighestbodyof theCPC,which isdistinguishedfromtheNationalPeople’sCongress.Afteritsascenttopowerin1949,thepartyheldnocongressuntil1956,whenitwastheeighthcongresssincetheparty’sfoundingin1921.The9thNationalPartyCongressconvenedinApril1969,the10thinAugust1973,the11thinAugust1977,andthe12thinSeptember1982.Inhisspeech,March along with the Chinese Characterized Socialist Road, Zhao Ziyang proposed a plan for politicaland economic reform to the 13thPartyCongress.The ultimate goal of this reformpackagewasthelegalizationandsystemizationofdemocracy,toestablishthekindofdemocraticpoliticsthatcouldsupportandnurtureahealthymarketeconomy.

1992, 12–18 October,the14thNationalPartyCongressoftheCentralCommitteeoftheCPC.Jiang Zemin,onbehalfoftheCentralCommittee,deliveredareporttitledAccelerating the Reform, the Opening to the Outside World and the Drive

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for Modernization, so as to Achieve Greater Successes in Building Socialism with Chinese Characteristics.

1993, 11–14 November,the3rdPlenumofthe14thCPCCentralCommitteeoutlinedthe framework of a socialist market economy.Thismeeting passed theDecision on Issues of Building a Socialist Market Economy.Themeeting pointed out that asocialistmarketeconomysystemwasintegratedwithabasicallysocialistsystem.Insuchasystem,themarketplaysafundamentalroleinresourceallocationwithinthecontextofStatemacroadjustmentandcontrol.

1997, 12–18 September,the15thNationalPartyCongressoftheCentralCommitteeoftheCPC.Jiang Zemin,onbehalfoftheCentralCommittee,deliveredareporttitledHold Highly Great Banner of Deng Xiaoping Theory for All-Round Advancement of the Cause of Building Socialism with Chinese Characteristics into the 21st Century.Thereportmadeasummaryofthehistory,preparedforthefuture,anddrewupacross-centuryblueprintforChina’sreform,openingandsocialistmodernizationdrive.

1998, 12–14 October,the3rdPlenumofthe15thCPCCentralCommitteeapprovedtheDecision on Important Issues of Agriculture and Countryside Work and set thegoalofbuildinga socialistnewcountrysideby2010.Theplenumsummedup theachievementsandexperiencesofreformssince1978,outlinedagriculturalandruraldevelopment goals, and issued strategies andpolicies on economic, political andculturalconstructioninruralareas.TheDecisionreflectedtheParty’sunderstandingoftheneedtostrengthenruralreformanddevelopment.

2002, 8–14 November,the16thNationalPartyCongressoftheCentralCommitteeoftheCPC.OnbehalfoftheCentralCommittee,JiangZemindeliveredareporttotheCongressentitledBuild a Well-off Society All-round Way and Create a New Era in Building Socialism with Chinese Characteristics. In theFirstPlenumof the16thCPCCentralCommittee,Hu JintaowaselectedgeneralsecretaryoftheCPC.

2003, 11–14 October,the3rdPlenumofthe16thCPCCentralCommitteeapprovedTheDecision on Issues of Completing the Construction of a Market Economy, whichmappedoutreformanddevelopmentforthenext10years.Itdisplayedanoutlookon development and put forward ideas andmeasures for constructing a socialistmarketeconomy.Theoutlookondevelopmentembodied‘fivebalances’:urbanandrural;amongregions;economicandsocialdevelopment,manandnature,domesticdevelopment,andopeninguptotheoutsideworld.

2004, NOD, Several Policy Issues on Promoting the Increase of Farmers’ Income, released by the CPC Central Committee and the State Council. This was thesixth such document issued by theCentralCommittee sinceChina implementedagricultural reform in 1978.The previous five documentswere all released in the1980s.Thedisseminationofthisdocumentdemonstratesthatthenewgovernmentstartedpayingattentiontothegapbetweenurbanandruralincomesandintendedtorevitalizeitsstagnantagricultureinthenearfuture.


200

2005, NOD, Several Policy Issues on Further Strengthening Rural Work and Increase Comprehensive Capacity of Agriculture Productivity,putforwardtherequirementsforagriculturalandruralworkin2005andstressedthattheideasadoptedbythecentralauthorities aimed to improve agricultural infrastructure, make faster progress inagro-scienceandtechnology,andincreasethecapacityofagriculturalproductionasamajor,urgentstrategictaskforthecountry.

2006, NOD, theCentralCommitteeandtheStateCouncil issuedSeveral Opinions Concerning Promoting Construction of a New Socialist Countryside.TheNODof2006notedthatthehistorictaskofbuildinganewsocialistcountrysidewasputforwardattheFifthPlenumofthe16thCentralCommittee.

2007, NOD, Several Policies on Vigorously Developing Modern Agriculture and Steadily Promoting the Construction of a New Socialist Countryside was released on January29, being the 9th NOD since reform and opening-up. The document stipulatesthat developingmodern agriculturewas a toppriority in building thenew socialistcountryside. Modern equipment, science and technology, industrial systems,managementanddevelopmentideaswereusedtopromoteagriculturaldevelopmentinordertoimprovequality,economicreturnsandcompetitivenessofagriculture.

2007, 15 October, Hu Jintao, general secretary of theCentralCommittee of theCPCandChinesePresident,addresses theopeningceremonyof the17thNationalCongress.On behalf of theCentralCommittee,Hu delivered a report titledHold Highly Great Banner of Socialism with Chinese Characteristics and Strive New Victories in Building a Moderately Prosperous Society in All Respects.

2008, NOD, Several Policies on Essentially Strengthening to Construct Agricultural Infrastructure and Further Promoting the Development of Agriculture and Increase of Farmers’ Income,callingforgreatereffortstoaddressruralissueswhenthenation,witharuralpopulationof900million,iscombatingmountinginflationarypressureand striving for sustained, rapid and healthy economic growth. The documentpointedoutthatanenduringmechanismforconsolidatingthebaseofagricultureshould be quickly developed; great importance should be attached to grainproduction;supplyanddemandformajor farmproductsshouldbebalancedwithproductsafetyguaranteed.

2009, NOD, Thoughts on How to Further Stabilize the Development of Agriculture and Increase Farmers’ Income, facilitatingthetradingandtransferofhousehold-levellanduserights;increasingagriculturalsubsidiestocovermorecerealcrops,agriculturalinputs,andagriculturalmachinerypurchases; reducingadministrative layers fromfourtothreetoimproveefficiencyandaccountability.Inpursuingpolicyprioritiesforitsagriculturalsector,Chinafaceschallengeswithrespecttorural–urbanmigration,ruralcredit,transportinfrastructure,waterscarcity,andenvironmentalissues.

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References

Bramall, C. 2007. The Industrialization of Rural China. New York, USA. OxfordUniversityPress.

Deng, Hao 1987.‘WeShallSpeedUpReform.’InDeng,X.P.(1994)Selected Works of Deng Xiaoping,vol.III.Beijing,ForeignLanguagesPress.

Du, R. 2006. The Course of China’s Rural Reform.Washington,DC,InternationalFoodPolicyResearchInstitute.

Du, R. 2004.“Rangnongminjianlizijidezuzhi.”InterviewinZongguo gaige (nongcun ban),No.239(April2004).

Ghose, A.K. 2005. Employment in China: recent trends and future challenges. EmploymentStrategyPaper2005/14.InternationalLabourOrganization.

Gilmour, B. & Cheng, G. 2004. EnablingChina’sAgri-FoodSector. InTso,T.C. &Kang,H(eds).Vision 2050,Maryland.

Hao, X. 1996. Sustainable Land Management in China. Application of the ECCO Methodology.InstituteofSpatialPlanning&RegionalEconomy.TheStatePlanningCommission.Beijing.

Kumar, S. 2007. Rural Development through Rural Industrialization: Exploring the Chinese Experience. IssueNumber03.Bangkok,(Avilableat:http://www.asianscholarship.org).

Liang, X. 2006. PolicyPerspectives:TheEvolutionofTVEs inChina. In Journal of Small Business and Enterprise Development, Vol. 13, No. 2. Bingley,UK, EmeraldGroupPublishingLimited.

Liang, X.2006.Theevolutionoftownshipandvillageenterprises(TVEs) inChina.InJournal of Small Business and Enterprise Development,Vol.13,Issue2,pp.235–241.

Lohmar, B. & Gale, F.2008.WhoWillChinaFeed?InAmber Waves,June2008issue.Washington,DC,UnitedStatesDepartmentofAgriculture(USDA).

Naughton, B. 2007. The Chinese Economy: Transitions and Growth. Cambridge,MA:MITPress.

Qian, Y. & Xu, C.1993.WhyChina’sEconomicReformDiffer:TheM-formHierarchyandEntry/Expansionof theNon-stateSector. InEconomics of Transition 1(2),June1993,pp135–170.


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Xu, C. & Zhang, X. 2009. The Evolution of Chinese Entrepreneurial Firms: TVEs Revisited. Washington, DC. International Food Policy Research Institute (IFPRI),DiscussionPaper00854,April2009.

Yano, G. & Shiraishi, M. 2004.EfficiencyofChineseTownshipandVillageEnterprisesand Property Rights in the 1990s: Case Study ofWuxi. In Comparative Economic Studies,Vol.46(2)June2004.

Zhang, Z. 1999. Rural Industrialization in China: From Backyard Furnaces toTownship and Village Enterprises. In East Asia: An International Quarterly, 22-SEP-99.Berlin,Springer.

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VASANT P. gANdhI ANd dINESh JAIN

cHapter 9

Institutional innovations and models in the development

of agro-industries in India: strengths, weaknesses and lessons

9.1 Introduction

Agro-industries have been given high priority in India due to their significantpotential for contributing to ruralandsmall farmerdevelopment.Theemphasison village-basedagro-industrieswasinitiatedbyMahatmaGandhiinthe1920sasapartofIndia’sindependencemovement.However,eventodaythedevelopmentofagro-industriesisacentralpartofthenationaldevelopmentstrategyduetotheirsignificantrole inbringingvalue-addition toagriculture’soutput, increasing rural incomesandemployment,andalleviatingpovertyinthecountryside(India,PlanningCommission2008).Havingsaidthis,thesectorfacesanumberofchallengesandbottleneckstoits growth including difficulties sourcing rawmaterials, ruralmarket imperfections,supply-chaininefficiencies,investmentconstraints,andproductmarketingchallenges(Srivastava and Patel, 1994;Goyal, 1994; CII-Mckinsey, 1997;Gandhi et al., 2001).Questionsremainastowhatinstitutionalarrangements/modelswouldbeappropriateandshouldbeencouragedfortheorganizationofagro-industrialactivitythatwouldworkandmaximizethecontributiontoruralandsmallfarmerdevelopment.

MahatmaGandhi’sapproachofvillageagro-basedindustrieswasfoundedonastrongeconomic,socialandpoliticalideology(Goyal,1994),butlaterfailedbecauseitbecamea blanket basis for nationalists to favour less efficient techniques of production,oppose modern industry, and foster incompatibilities with market preferences. Afterindependenceanduptotheearly1980s,agro-industrialpolicywasdominatedby the thinking of Prime Minister Nehru and his economic think-tank led by P.C.Mahanalobis, who argued that India needed large industries for the capital goodssector, while the consumer goods sector should be reserved for small-scale agroand rural industrieswhichwere labour-intensive and required less capital.Thiswas


204

consistentwith reducing demand on the limited available capital and savings, andexpanding employment.However, such agro-industries failed because of outdatedtechnology andmanagement, and their inability tomeet changing and expandingdemandforqualitygoodsfromarapidlygrowingpopulationwithrisingincomes.

Fromtheearly1980sandparticularlyafter liberalizationreformsintheearly1990s,therehasbeensignificantopeningouttowardspromotionofagro-industries,stressingmarket demand, up-to-date technology and efficient management of the supplychain.However,thistrendmayleadtolarge,private,capital-intensiveagro-industrialenterprises anda strong risk that the interestsof small farmers and the rural poorwillbebypassed.Thiswouldresultinanegativeoutcomeforruralemployment,andaweakeningofthedevelopment linkageforwhichagro-industrieshavebeengivenpriorityinIndia.Majorquestionsforthefutureremainonwhatpoliciesandinstitutionalmodelswouldbeappropriate.Inthiscontext,thischapterexaminestheexperienceofvariousinnovationsandinstitutionalmodelsoforganizingagro-industriesthathavebeenexperimentedwithinIndia.Theexperiencesandlessonslearnedmaybeusefulforfutureagro-industrialdevelopmentinIndia,aswellasinotherdevelopingcountries.

9.2 Features of agro-industries in India

Data from the Annual Survey of Industries (India Ministry of Planning, 2007)shows that 41 percent of all factories in India are agro-industries that contribute 19 percent of the manufacturing value added and 43 percent of manufacturingindustry employment (this does not include the employment generated in theagriculture sector).Thesefigures indicate that agro-industry contribution tobothemploymentandmanufacturingGDPisverysignificant,substantiatingthenationalprioritystatusthathashistoricallybeengiventothissectorinIndia(Table9.1).

What are the structural and financial characteristics of agro-industries in India?Table9.2showsthatonly21percentof total industrialfixedcapital is invested inagro-industries,whilethesectoremploys41percentofIndiansengagedinindustrialemployment.Thistellsusthat,onaverage,agro-industrycontinuestoberelativelylabour-intensive and capital saving. The share of payment to labour out of thetotal value added is also greater at 35 percent in agro-industries, comparedwith 21percentinotherindustries.

Furthermore, agro-industries require relatively lessfixed capital andmoreworkingcapitalascomparedwithotherindustries(43percentvs30percent).Agro-industriesonaverageareabletogenerateemploymentfor31personsperfixedinvestmentof 100000rupees(Rs.),whereasthefigureforotherindustriesismuchlowerat11persons.These figures do not include added employment generated in agriculture and theinputsupplychainthroughbackwardlinkages.Onaverage,agro-industriesgenerate47percentvalueaddedincomeoverinvestedfixedcapitalannually,ascomparedwith

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Institutional innovations and models in the development of agro-industries in India: Strengths, weaknesses and lessons

53percentforother industries.Agro-industriesarealsoabletoabsorbmoreinputsfromothersectors(e.g.agriculture)asapercentageofthevalueofoutputcomparedwithotherindustries.Thesefeaturesindicatethattheagro-industrialsectordeservestheprioritygiventoitinthenationalstrategyofdevelopmentwithemployment.

The Food andAgriculture IntegratedDevelopmentAction Plan (FAIDA) report oftheConfederationofIndianIndustry(CII)andMcKinseyandCompany(1997)showsthat there is great scope and potential for development of food processing andagro-industries in India.However,therearevariousmajorconstraintstotherapiddevelopmentandgrowthofagro-industriesinthecountry.Theliteratureindicatesthatagro-industrialgrowthinIndiahashistoricallybeenconstrainedbybothsupplyofrawmaterialsandslowgrowthinconsumerdemandforagro-industrialproducts(SrivastavaandPatel, 1994;BoerandPandey,1997).SrivastavaandPatel (1994),Kejriwal (1989) andGulati et al. (1994) indicate that apart from the quantity ofrawmaterials, thequalityof therawmaterial isalsoamajorconstraint.Availablerawmaterial isoftenofunsuitablequality,processingvarietiesare frequentlynotavailable,andtheperiodofavailabilityoftherawmaterialistooshortandunreliable.Gulatiet al. (1994) indicatethatonlyabout5percentofthefruitsandvegetablesgrown in India are commercially processed. Both quantity and quality supplyconstraints indicate that there is amajor need to improve the linkages betweensmall farmer suppliers –who constitute themajorityof rawmaterial producers –andagro-industries.Effectiveandinnovativeinstitutionalarrangementsthatwouldaddressmultipleobjectivesarerequired.

SrivastavaandPatel (1994) indicatethatanothermajorconstraint is theobsoletetechnologyusedinprocessing,resultinginlowefficiencyandpoorqualityofoutput.

Percentage share

industries No. of factories Employment Net value added

Agro-based food industries 18.35 15.27 7.52

Agro-based non-food industries 22.69 27.63 11.45

Total agro-based industries 41.05 42.90 18.97

Other (non-agro) industries 58.95 57.10 81.03

All industries 100.00 100.00 100.00

Source: Ministry of Planning, 2007.

taBLE 9.1

Importance of the agro-industry sector in India: some features (2005/06)


206

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AccordingtoBoerandPandey(op.cit.)amajorproblemin improvingtechnologyistheverysmallsizeoftheaverageagro-processingunit,suggestingaclearneedtointegrateinordertoachievealargerscaleofoperation.However,Goyal(op.cit.) andothershaveshownthatprivatesectorindustrialconcentrationisoftenassociatedwithdelinkingfromsmallfarmersuppliersandlossesinruralemployment.

Srivastava and Patel (1994) show evidence of two additional major constraintsto Indian agro-industrial development, namely the small market size for manyprocessedproducts,anddifficulties inobtainingadequatefinancing.Thefinancialinstitutions in India are mainly geared to lending for fixed capital requirements, whileagro-industries,asshownintheanalysisabove,havealargerequirementofworkingcapital.Bankslendworkingcapital,ifatall,athigherinterestratesthanothercapital loans.Furthermore, thegovernmentof Indiatypicallyconsidersprocessedandpackagedgoodsasluxuryitems;asaresult,theirproductionisheavilytaxed.There are alsomyriad special regulations and licensing requirements for specificagro-industries,suchastheMilkProductOrderforthedairyindustry.Thesepoliciescreatedisincentivesforinvestmentinhighervalue-addedagro-processing.

9.3 Agro-industry models in India

The challenges arising from the aforementioned constraints in the creation andfunctioning of agro-industries on the one hand, and the need for their continuedgrowthtocontributetoruralandsmallfarmerdevelopmentontheother,callfornewandinnovativeapproachesandmodelsfortheirorganizationinIndia.SeveralmodelshavebeentriedandneedtobeevaluatedtoprovidelessonsforwhatisrequiredinthefutureinIndia,andperhapsotherpartsofthedevelopingworldaswell.

Whateverthenatureofthemodel,a fewkeysuccessfactorshavebeenobserved(Gandhiet al.,2001):

Z creationofsufficientincentivesforfarmerstoproducetherequiredquantityandquality of rawmaterials, and supply the produce as stipulated in the contract(ratherthansellelsewhere)

Z required farm inputsand technologyneed tobeprovidedand thequestionofwhobearswhatcosts(andrisks)shouldbetransparentandwellunderstood;

Z accesstohighqualityprocessingtechnology; Z abilitytoaddressnewandchangingconsumerdemandthrougheffectivemarketintelligence;

Z adequate performance and capability to attract capital for investment andgrowth;

Z overall, adequate attention to the crucial issues of ownership, organization,managementandqualitycontrol.


208

Somesignificantquestionsaskedinthislightare:

Z How do themodels perform in organizing production and procurement fromlargenumbersof small farmers, therebyensuringasignificant impacton ruralincomesandemployment?

Z Towhatextentarethemodelsabletoensureadoptionofappropriatemoderntechnologyandpracticesbythefarmers,generatingtherequiredquantityandqualityofoutputatareasonablecost?

Z Are the models able to ensure the use of up-to-date modern technology inprocessing andmeeting thehighworking capital andother capital needs in abusinesscharacterizedbyseasonalityandvariability?

Z Arethemodelsabletodeliverthenecessarystrongmarketingeffortstocompeteinandopenupnascentmarketsforprocessedagri-foodproducts?

Z Aretheissuesofsoundownership,managementandcontrol,adequatelydealtwithtoensuresustainedperformanceindeliveringbenefitstothemainstakeholders,includingthefarmers,consumers,investorsandthegovernment(nation)?

9.4 Study of different agro-industry models

Thissectionexaminesarangeofdifferentagro-industrymodelsthathaveemergedanddevelopedinIndia.Theyincludegovernment,cooperativeandprivatebusinessinitiatives,andspanmanysub-sectorsincludingdairy,fruitsandvegetables,grainsand oilseeds, horticulture and poultry. Using the available literature, the sectionexamines their evolution, structure and operation, and provides observations ontheirperformancewithrespecttothequestionsposedabove.

9.4.1 model 1: the amul cooperative model

Amodelwhichhasbeenquitesuccessfulincertainagro-industries(suchasdairying)isthecooperativemodeloftheKairaDistrictCooperativeMilkProducers’Union(AMUL).ThisapproachevolvedoutofasuccessfuldairycooperativeinitiativeintheKairadistrictofGujaratstate.EventhoughmilkwasproducedefficientlyintheruralareasofIndia,itsmovementfromruralareastourbanmarkets,wheredemandwashigh,wasdifficult.Asaresultofthisprivatedairyinghadpickedupinurbanareasandtheurbanperiphery,but this productionmethod proved troublesome, unhygienic and inefficient. Seeing theopportunity,aprivatedairyatAnandinGujaratstate,Polsons,developedabusinessof milk procurement from the rural areas in the Kaira district through middlemen,for its processing and transport to Bombay some 425 km away (Korten, 1981).

In the mid-1940s, however, in the face of Polsons’ exploitative practices andresentmenttowardsitsmiddlemen,themilkproducers/farmersofKairadistrictwentonstrike,refusingtosupplytoPolsons.OntheadviceofaprominentleaderofIndia’sindependencemovement,SardarVallabhbhaiPatel,theydecidedtocometogether

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to formacooperativebodyof theirown.Thisbody laterbecametheKairaDistrictCooperativeMilkProducers’Union,popularlyknownasAMUL(basedonitsoriginalnameofAnandMilkUnion Limited).The cooperative union started procuringmilkthroughaffiliatedvillagemilkcooperativesocieties,processingit,andsendingitbyitsownmeanstoBombay.Themodelanditsmethodswereperfectedbythecooperativeunder the leadership of its enlightened chairman, Tribhuvandas Patel, and itscompetentprofessionalmanager,DrVargheseKurien.Ithasgrownenormouslyovertheyears,spawningotherdistrictunionsandbecomingastatecooperativefederationthatnowmarketsmilkproductsacrossthewholecountry(Table9.3).

Members: 15 district cooperative Milk Producers’ Unions

No. of producer members: 2.7 million

No. of village societies: 13 141

Total milk handling capacity: 10.21 million litres per day

Milk collection (total 2007–08): 2.69 billion litres

Milk collection (daily average 2007–08): 7.4 million litres

Milk drying capacity: 626 metric tonnes per day

Cattle feed manufacturing capacity: 3 090 metric tonnes per day

Sales turnover rs. (millions) uS$ (millions)

1996–97 15 540 450

1997–98 18 840 455

1998–99 22 192 493

1999–00 22 185 493

2000–01 22 588 500

2001–02 23 365 500

2002–03 27 457 575

2003–04 28 941 616

2004–05 29 225 672

2005–06 37 736 850

2006–07 42 778 1 050

2007–08 52 554 1 325

Source: http://www.AMUL.com/business.com.

taBLE 9.3

amul at a glance


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AMUL’s structure

In this model, ownership rests with the farmers on a cooperative basis. It has athree-tier organizational structure,with primary cooperatives at the village level,acooperativeunionatthedistrict level,andacooperativefederationatthestatelevel.Broadly, the village cooperatives take responsibility for procurementof theproduce fromthe farmers, thedistrictunion is responsible for transportationandprocessing,andthefederationisresponsibleformarketingandstrategicplanningand investment. The cooperatives are governed by a rotating board of farmer-electeddirectors,butthemanagementiscarriedoutbyprofessionalmanagerswhoareproperly empoweredand largely independent.Apart from the agro-industrialactivityofthedairybusiness,thecooperativeundertakessubstantialdevelopmental,agricultural,anddairyextensionactivities,and providesveterinary,breedingandotherservices.

Theprimarylevelunderthethree-tierstructureistheVillageCooperativeSociety.Itsmembership consists of villagemilk producers (usually 200 ormoremembersper village) and is governed by an elected Managing Committee consisting of 9to12electedrepresentativesofthemembers.TheManagingCommitteeelectsaChairmanandappointsaSecretaryandstaff.Themainfunctionofthiscooperativesocietyistocollectmilkfromthemilkproducersofthevillageandmakepaymentsbasedonquantityandquality.Italsoprovidessupportservicestothememberssuchasveterinaryfirstaid,anartificialinseminationbreedingservice,saleofcattle-feed,mineralmixtures,andfodderseeds,andtrainingonanimalhusbandryanddairying.

The district-levelMilkUnion is the second tier under the three-tier structure. Itsmembership consists ofVillage Societies of the district through their Chairmen,and is governed by an elected Board of Directors consisting of 9 to 18 electedrepresentativesfromamongtheVillageSocietyChairmen.TheBoardofDirectorselectaChairmanandappointaprofessionalManagingDirectorandstaff.ThemainfunctionoftheMilkUnion istoprocurerawmilkfromtheVillageSocietiesofthedistrict, transport it from the villages to the Milk Union owned dairy plant, andprocess it into pasteurizedmilk andothermilk products. It also offers significantsupporting activities such as veterinary services, breeding services, cattle feedandotherinputsforthevillagesocietiesandproducers,andundertakesinitiation,trainingandsupervisionofthevillagelevelsocieties.

The State-level Federation is the apex tier under the three-tier structure. ItsmembershipconsistsofMilkUnionsoftheStatethroughtheirChairmen,andisgovernedbyanelectedBoardofDirectorsfromamongtheChairmenofMilkUnions.It elects a Chairman and appoints a professional Managing Director and staff. ThemainfunctionoftheFederationisthemarketingofthemilkandmilkproductsmanufacturedbyMilkUnions.TheFederationmanagesthedistributionnetworkformarketingofmilkandmilkproductsandmaintainsthesupplychainnetwork.ItalsoprovidessupportservicestotheMilkUnionssuchastechnicalinputs,management

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supportandadvisoryservices.ThestructureandservicesofthemodelareoutlinedinFigure9.1.

Though not as significant at the national level, the National Cooperative DairyFederation of India (NCDFI), is another national body that formulates, promotesand lobbies for policies and programmes to help safeguard the interests ofmilkproducers.

Primary milk producerCooperative societies(collection, weighing

and grading)

Milk producers at village level

(milking, carrying milk)

District Cooperative Milk Producers’ Union

(planning, processing, and packaging)

State Cooperative Milk Marketing Federation

(marketing and distribution)

Consumer (demand and fulfilment)

Payments twice a day (deferred payment –

15days)

Payment every 10 days

Payment on a regular basis

Cash payment (retail stores, parlours and outlets etc)

Veterinary first aid, artificial insemination,

breeding service, sale of cattle feed and fodder seeds,

training

Technical inputs,

management support, advisory services

Milk products

FIGURE 9.1 Outline of the structure and functioning of the AmUl model

Source: based on Sridhar and Ballabh (2006).


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Political functioning

At the village level, a Dairy Cooperative Society is formed with primary milkproducers. A milk producer becomes a member by paying an entrance fee andbuyingashareoftheSociety.AfarmerproducerbecomeseligibleforavotingrightintheSocietyifshe/heisamemberandsuppliesatleast700litresofmilkperyear,with180daysofsupplyinayear.Theallocationofvotingrightsisby‘onememberonevote’.MembersoftheSocietyelectamanagingcommitteeaspertheby-laws,andthecommitteeelectsitsChairman.Committeemembersarehonoraryandtheirroleisrestrictedtopolicyformulationandoverseeingtheprogramme.TheSocietyundertakesafewcriticalfunctionslikecollectingmilk(twiceaday),makingregularpayments to milk supplier members, and providing cattle feed, fodder, animalbreedingandhealthcareservicestomembers.

Memberproducersbringmilk to theSocietyeverymorningandevening. Initially,the Union provides each Society with a fat testing machine free of charge. Thequality(i.e.fatcontent)andquantityareassessed,andtheamountpayabletoeachproducerisworkedout.Whentheproducercomestothecentreintheevening,she/heispaidforthemorningdelivery;forthemilkdeliveredintheevening,moneyispaidthenextmorning.Apartfromthedailycashincome,membersalsoreceivebonusesandadifferenceinpriceattheendoftheyear.TheamountofthebonusisproratatothevalueofmilksuppliedbytheproducersattheSociety.TheSocietyalsomakesprofitonthemilkitsellstotheUnionandreceivesthedifferenceinprice.Theentireprofitof theSociety isgenerallynotdistributedtomemberproducers.Apart is allotted fordevelopmentalactivitieswithin thevillageandmaintenanceoftheSociety.SocietiesalsoactasdisseminatorsforvariousactivitiesoftheUnionsuchasmembereducationandproductionenhancement.ThestaffattheSocietiesarealsotrainedtoundertakeveterinaryfirstaidandartificialinsemination.

TheCooperativeUnion is the representativeofall theVillageSocieties locatedatthedistrictlevelandisgovernedbyaBoardofDirectorsmadeupofrepresentativesfromvillagesocieties,financialinstitutions,theStatecooperativedepartment,dairyexperts,theFederation,governmentnominees,andtheManagingDirectoroftheUnion.TheBoardelectsaChairmanandViceChairmanandappointsaManagingDirectorwho inturnappointssupportingstaff.TheBoard is responsibleforpolicyformulationandthestaffareresponsibleforlookingafterthedaytodayoperations.One-third of the village representatives on the Board retire every year and thevacanciesarefilledbyelection.TheChairmaniselectedeveryyear.

Practical functioning

Giventheperishablenatureofmilk,itwasimperativefortheCooperativetodeviseways and means of transporting the milk procured from distant villages in theshortestpossible time,andunder refrigeratedconditions to theprocessingunits.Hence, milk transportation routes are designed in amanner that all villages arecoveredintheshortestpossibletimeandinacost-effectivemanner.

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Bulk cooling units and chilling centres are often set up along these milk routes. Milkiscollectedbyunionsfromvillagestwiceadaywiththehelpofcontractedprivatetransport vehicles. Milk from the Society is measured for its quantity and quality (FatandSNF,i.e.‘SolidsNotFat’)andispaidforonthisbasis.PaymentstotheSocietiesaremadeevery10days.CooperativeUnionsalsoprovidemanyservicestotheirfarmermembers.TheUnionrunsmobileveterinarydispensariestoprovideveterinarycarefreeoratasmallchargetothemembers,runssemenproductioncentresforbreeding,trainstheSocietystaff inartificial insemination(AI),andconductsvarioustechnicalextensionprogrammesforincreasingtheproductionofmilk.

TheGujaratCooperativeMilkMarketingFederation(GCMMF)isthesolemarketingagencyfortheproductsproducedbydifferentcooperativeunions,underthepopularbrandnames‘AMUL’and‘Sagar’(Kurien,2003)andhasanetworkcoveringover3500dealersand500000outlets(Subramanyam,2004).Thereare47depotswithdryandcoldwarehousestocarryinventoryoftheentirerangeofproducts.Thedistributionnetwork comprises 300 stock keeping units, 46 sales offices, 3 000 distributors,100000retailerswithrefrigerators,an18000-strongcoldchain,and500000non-refrigeratedretailoutlets.Productsmarketedincludefreshmilk,UHTmilk,brownbeveragemilkdrink,infantmilk,milkpowders,sweetenedcondensedmilk,butter,cheese,ghee,yogurt/curd,breadspreads,pizza,mithaee(ethnicsweets),icecreams,chocolateandconfectionery.Thenetwork followsanumbrellabranding strategy.AMUL is the common brand for most product categories produced by variousunions.Byinsistingonanumbrellabrand,GCMMFavoidsinterunionconflictsandcreatesopportunityfortheunionmemberstocooperateindevelopingproducts.

GCMMF’stechnologyinitiatives includedevelopmentofnewproducts,processingtechnology,measures to enhancemilk production and quality, and e-commerce.Village societies are encouraged through subsidies to install chilling units.Automationinprocessingandpackagingareasisadopted,asisHazardAnalysisandCriticalControlPoints(HACCP)certification.GCMMFactivelypursuesdevelopmentof embryo transfer and cattle breeding in order to improve cattle quality andincreasemilkyields.Anotherinitiativeunderwayistoprovidefarmerswithaccesstoinformationrelatingtomarkets,technologyandbestpracticesinthedairyindustry,through Internet-enabled kiosks in the villages.GCMMF has also implemented aGeographical InformationSystem(GIS)atbothendsof thesupplychain, i.e.milkcollectionaswellasthemarketingprocess.

Conclusions

AMULrepresentsamethodologyofbuildingandsustaininganeconomicenterpriseandhasensuredhighlevelsofpatronage,cohesiveness,governanceandoperationaleffectiveness (Shah, 1996). The cooperative model benefits from commitmentfromthe farmers,andcost-efficiency in rawmaterialproductionandprocurement.It also extensively engages with small farmers as well as the landless rural poor, who despite their impoverished state may keep 1–2 animals, and is reportedto contribute significantly to rural incomes and employment through its


214

three-tierorganization.However,itsdrawbacksincludeitsneedforenlightenedandcommittedleadership(throughitsgoverningboard),andcapablemanagement,whichis sometimesdifficult to ensure.Theboard is electedandmaybecomepoliticized,detractingfromsoundcooperativeandbusinesspractices.Further,antiquated lawsgoverningcooperatives invitegovernment interferenceandpreventuseoffinancialmarketsforraisingequitycapital,therebyconstrainingexpansionandgrowthtosomeextent.

9.4.2 model 2: the nandini model

Anothersimilaragro-industrymodeloncooperativelinesis‘Nandini’oftheKarnatakaCooperativeMilkProducers’FederationLimited(KMF).KMFistheApexBodyofdairyfarmers’cooperativesinKarnatakastateinsouthIndia,andisthethirdlargestdairycooperative in thecountry. Insouth India it standsfirst in termsofprocurementaswellassales.Thebrand‘Nandini’isahouseholdnameinKarnatakastateforpureandfreshmilkandmilkproducts.KMFhas13milkUnionsthroughoutKarnatakastatethatprocuremilkfromprimarydairycooperativesocieties,anddistributeittoconsumersinvariouscities,townsandruralmarketsinKarnataka.Thedistrictmilkproducerunionsreceivemilkfrom11000primarydairycooperativesocietieswhichareatthetaluka (sub-district)andvillagelevels.AbouttwomilliondairyfarmersinKarnatakastatearecovered.ThegrowthofKMFovertheyearsissummarizedinTable9.4.

ThecooperativeevolvedunderadairydevelopmentprogrammeinKarnatakabegunin1974withfinancialassistancefromtheWorldBankunderOperationFloodIIandIIInationaldairydevelopmentprogrammes.Villagedairycooperativeswerepromoted

1976–1977 2007–2008

Dairy cooperatives Numbers 416 11 063

Membership Numbers 37 000 1 956 163

Milk procurement Kgs/day 50 000 3 025 940

Milk sales litres/day 95 050 2 129 790

Cattle feed consumed kg/dcS* 220 3 010

Daily payment to farmers Rs. 100 000s 0.90 342

Turnover Rs. billions 27.07

Source: http://www.kmfnandini.coop/* DCS means District Cooperative Society. There are currently 13 such unions and the statistic are average per union.

taBLE 9.4

growth of nandini

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intheAMULstyle,inathree-tierstructurewiththevillageleveldairycooperativesformingthebaselevel,thedistrictlevelmilkunionsthemiddleleveltotakecareofprocurement,processingandmarketing,andtheStatemilkfederationastheapexbodytocoordinateattheStatelevel.CoordinationofactivitiesamongtheUnionsand developingmarkets formilk andmilk products is the responsibility of KMF.However,unlikeAMUL,themarketingofmilkinthedistrictjurisdictionisorganizedbytherespectivemilkunions.Thesurplusordeficitofliquidmilkamongthememberunionsismonitoredbythefederation.Allthemilkandmilkproductsaresoldunderacommonbrandname,Nandini.

Themilkunionsalsoprovidethefollowingtechnicalinputsatsubsidizedratesorfreeofchargetotheirmembers:

Z veterinaryemergencyservicesroundtheclockatthemilkproducer’sdoorstep; Z freeanimalhealthcampsconductedbyveterinarystaffatvillagelevel; Z provisionofanimalfeedandplantingmaterialtogrowfoddercrops; Z artificial insemination (AI) services to crossbreed animals, and free infertilitycampsatvillagelevel;

Z free vaccination to protect animals against diseases like Foot and Mouth,Theileriasisetc;

Z freetrainingformilkproducersandDistrictCooperativeSociety(DCS)staff; Z empowermentprogrammesforwomeninassociationwiththeGovernmentofIndia(GOI)byformingwomen’scooperativesgovernedbywomen;

Z onthedeathofamilkproducer,paymentbytheUnionofRs.10000tonext-of-kinthroughdairyfarmers’welfaretrusts,providingscholarshipsandfellowshipsfortheeducationofthemilkproducer’schildren.

KMF supports the livelihoods of around 1.95 million dairy cooperative membersthroughover11000dairycooperativesocieties.KMFhasbecomethesecondlargestmilk-procuringorganizationinthecooperativesector,withdailymilkprocurementof 3.02 million litres.This has resulted in a ‘white revolution’ in Karnataka: milkprocurementhasincreased2.5timesinthelast10years;thesaleofmilkperdayhasreached1.7million litres, increasingby1.4 times;milkprocurement isgrowingat9.65percentannuallyagainstthenationalaveragegrowthof4.8percent.Improvedtechnical inputs such as animal health care, artificial insemination services andcattle feed supplyhavemadea significant contribution to this trend.The surplusmilkissoldtoneighbouringmilkdeficitstatessuchasKerala,AndhraPradesh,Goa,MaharastraandPondicherry,andtherest isconverted intoproducts.TheNandiniproductfamilyconsistsof35productsandnewproductsarefrequentlyaddedaftermarketresearch.ThemarketingsystemandnetworkareoutlinedinFigure9.2(a).

ThemajorchallengesfacingtheNandinimodelare:

Z inadequateprocessingfacilities; Z difficultiesinmaintainingthequalityofrawmilkundertheprevailingconditions;


216

Source: Based on Revanna (2006).

Source: Based on Revanna (2006).

ParloursWholesalers

and distributors

Dairy (indents, payments and delivery dispatch)

RetailersConsumersBusiness customers (factories, hotels and caterers, etc.)

Agents

FIGURE 9.2(a) milk distribution network of Nandini

Dairy

Depots (4)

Wholesalers and distributors (150)

Retailers (16 000)

Consumers

Delivery dispatch

Indents

FIGURE 9.2(b) milk products supply chain of Nandini

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Z increasingcostsoftransportationandprocessing; Z unhealthycompetitionfromprivatedairiesinprocurement; Z inadequateroadsandpowerinfrastructure.

SomeoftheseproblemsseemtostemfromarelativelylimitedroleoftheFederation(comparedwithAMUL), and as a result, inadequate scale economies and lack ofsupportinlargerrolessuchasmarketing,investmentandlogistics.

9.4.3 model 3: the nestlé model

Nestléisthelargestfoodandbeveragescompanyintheworld.Thecompanyusesthemilkdistrictmodelforitsagro-industrialactivityinIndia.NestléIndiastarted its operation in theMoga district of Punjab in 1961 by setting up itsfirstmilkfactoryinIndia.Thefactoryproducesmilkpowders,infantproductsand condensedmilk.The annual freshmilk intake of theMoga factory rosefromlessthan12000tonnesin1970to240000tonnesin2003,obtainedfrom 85 000 farmers. By 2008, it covered 100 000 farmers and had an intake of1.25 million litres milk/day. Nestlé India states that it supports a system ofsustainabledairyfarmingwithregularmilkpaymentsandsustainablemethods,andclaimsthatithasapositiveimpactonthecommunityandruraleconomyofMogaasawhole.

Settingupamilkdistrictinvolved:

Z negotiatingagreementswithfarmersfortwice-dailycollectionoftheirmilk; Z installingchillingcentresatlargercommunityandcollectionpointsoradaptingexistingcollectioninfrastructure;

Z arrangingtransportationfromcollectioncentrestothedistrict’sfactory; Z implementingaprogrammetoimprovemilkquality.

NestléIndiahasitsmilkprocessingfactoryinthetownofMogaandsourcesrawmilkfromthedistrictsofMoga,Ludhiana,Sangrur,Mukatsar,FerozepurandFaridkot.Thesedistrictshavebeencollectivelyreferredtoas‘MogaMilkDistrict’.

Selectingalocationforcollectionpointsisbasedonseveralfactors:

Z presentmilkproductionandthepotentialoftheareabasedonavailablefodderresources,agriculturalland,andfarmers’interestindairying;

Z presentmilkproductioncostsandmilkpricesinthearea; Z theincomefarmerscouldearnfromfreshmilkversustheincomefromalternative(i.e.notsupplementary)crops;

Z presentmilk collection systems (if any), the presence of competitors, presentmilkqualityandthepotentialtoachievetherequiredquality.


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Toensurequality,Nestléundertakestrainingandhasmanualsdetailinggoodfarmpractices foreachdistrict.The farmsareaudited regularly tomakesure the rightpracticesarefollowed.Thecompanyprovidestechnicalsupporttofarmerstoguidetheminreachingthequalitystandards.Testingisdoneatthecollectioncentresandcoolingcentres(Goldberg,2006).SurplusespresentachallengeforNestléandthefarmer:thecompanytriestooffsettheexpenseofbuyingupsurplusinthespringseasonagainstthesecurityofasteadysupplyatastablepricethroughouttheentireyear.ThechainstructureisoutlinedinFigure9.3.

Some 64 320 dairy farmers supply milk under contract and the companymaintains their records. The company has stringent quality specifications.Nestlé staffmembers regularlymonitormilk quality and performance vis-à-viscontractualobligations,andthefarmersobtainfeedbackonmilkqualityatthecollectionpoints.Companytechnologistsdeterminequalityinlaboratorieswithsamplesbeingtakeninthepresencebothofthefarmersandthecompanyrepresentatives. Nestlé is not obliged to collect milk that does not meetthe quality standards specified in the contract.The contract also allows thetechnologists to penalise the producer with a 30-day ban; if antibiotics arefound,thepriceofmilkisreducedby15percent.Repetitionofanydiscrepancyisconsideredaseriousbreachofcontract.Farmershavetherighttocomplainthrough registers located at each collection point if they believe there is aproblem.Thesystemstillworksbecauseitprovidesanassuredmarketforthefarmersatremunerativepricesforthemilk.

Source: Nestlé.

Quality control, understanding of balancing

market demands and capacity

Quality policy, training, expertise, know-how

Technical assistance, training

and education

Milk producers

Milk procurement

unit

Milk processing

unit

Marketing and

distribution unit

Consumers

FIGURE 9.3 Nestlé’s milk value chain

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Nestléstatesthatthemilkdistrictmodelhaschangedthelivesoffarmersandalsoboostedthecompany’sbottomline.ThesmalltownshipofMogainPunjabistodayontheworlddairymap.Mogaprocessesover1millionlitresofmilkeveryday,twicetheamountprocessedintherestofPunjab.Thecompanyprocuresover1.1millionkgofmilkperdayfromthestatesofPunjabandHaryanaduringthepeakseason,covering14000squarekilometresand98000dairyfarmersthroughanefficientmilkcollectionsystem,withanetworkof2240milkagencies,and698milkcoolingcentres.Italsoprovidesfarmerswithtrainingandadviceoncorrectdairyfarmingpractices.Anewsreportindicatesthatcoveringeven 90000farmersandensuringtimelypayment,linkedtobothquantityaswellasqualityforthemilksupplied,isnosmalltask.Itiscertainlysomethingthatveryfewprivatecorporateshaveattemptedandactuallysucceededindoing(Business Line,9December,2001).

Comparison of the Nestlé model with the AMUL model

Inthe‘Anandmodel’runbyAMUL,theprimarymilkcollectioncentreisthevillagecooperativesociety,anelectedbodythatisownedanddirectlyaccountabletothedairyfarmersthemselves.Inthe‘Mogamodel’,thejobofsourcingmilkfromfarmersiscarriedoutnotbyacooperativesociety,butaprivatecommissionagentappointedbythecompany.Nestléoperatesanetworkof1100agentswhoreceivea2.3percentcommissiononthevalueofthemilksuppliedtothedairy.Theagentandthefarmersarepaidonaconsolidatedfortnightlybasis,unlikethesystemofdailymilkpaymentstofarmersusedbyAMUL.

Intermsofscaleandreach,Nestlé’smilkprocurementpalesincomparisonwiththatofAMUL.During2000–2001,AMUL’sunionsprocuredanaverageof4576millionkgofmilkperdayfromover2millionfarmer-membersinGujarat.Theunionsprocured31.4 percent ofGujarat’s estimatedmilk production of 5 313million tonnes in thatyear, implying that almost every third litre leaving a milch animal’s udders in theStateendedupbeingcollectedbysocietiesaffiliatedtoAMUL.MeanwhileNestlé’soperationsaremuchsmallerandconfinedtodistrictsaroundMoga.Thecompany’saverageprocurementof0.65millionkgperdaycoversbarely3percentofPunjab’sannualmilkoutputof8milliontonnes.TheaverageNestléfarmerpoursabout7.25kgofmilkperday,whereasthecorrespondingfigureforAMULisslightlyover2kgperday,indicatingthatthelatter’sreachperhapsextendstosmall/marginalfarmersandlandlessfarmlabourerswhomayownonly1–2milchanimals(Business Line,op.cit.).

With respect to price,Nestlé in 2000–2001 paid an average price of Rs. 9.84 perkg,lowerthantheRs.13–14perkgthatAMULpaidtoitsfarmers.However,about 45percentofNestlé’sprocurementiscowmilkwithfatcontentofabout3.5percent,asagainstthebulkofAMUL’sprocurementbeingbuffalomilkwithafatcontentofabout6.5percentormore.Adjustingforthis,thereislittledifferencebetweenthefarmgatepricespaidbyNestléandAMUL.Thiswouldbealsobeoffsetbythehigherproductivityoftheanimals–especiallycross-bredcows–thatenablestheNestléfarmertodelivermorethanthreetimesthequantityofmilkthatanaverageAMULfarmerpours(Business Line,op.cit.).


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In2000–2001,Nestlé’spaymentstoMoga’sfarmersforprocurementofmilkamountedtonearlyRs.1950million.Ifoneaddstothisthevalueofvariousdevelopmentalinputsprovidedby the company – free veterinary aid, breed improvement and extensionservices, subsidies on installation of farm cooling tanks, etc – the amount paid tofarmerswouldbearoundRs.2040million.Thisamountstoalmost47percentofthevalueofthecompany’ssalesofmilkproducts.Incomparison,thisproportionforAMULanditsunionsisover80percent.AspartoftheequationitmustbenotedthatNestléisacompanyaccountabletoitsshareholdersandinvestors,whileAMULisanentityaccountabletoandownedbythefarmersthemselves(Business Line,op.cit.).

9.4.4 model 4: Heritage Foods

The HeritageGroup based in Andhra Pradesh was founded in 1992 by ChandraBabu Naidu, the former Chief Minister of Andhra Pradesh. It is a fast-growingprivate enterprise with three business divisions, dairy, retail and agri, under itsflagship companyHeritageFoods (India)Limited (HFIL).Heritage’smilkproductshaveamarketpresenceinthestatesofAndhraPradesh,Karnataka,Kerala,TamilNaduandMaharastra,andithasretailstoresinthecitiesofHyderabad,Bangalore, andChennai.IntegratedoperationsinChittoorandMedakdistrictsformthebackboneoftheretailoperations.Heritageisconsideredasuccessfuldairyenterpriseandisknownforitshighqualitystandardsandpremiumrangeofmilkandmilkproducts.Itfollowsinternationalstandardsinmanufacturing,packinganddistributionpracticesandhasbecomeanISO22000certifiedcompany.Heritagehas12packingstationsand74chillingcentres/bulkcoolerswithoperationally-safeprocessingequipment.Theproductsaresoldunderthebrand‘Heritage’.

The company covers about 200 000 farmers and has the capacity to process 1.5millionlitresofmilkperday.Productsincludefullcreammilk,tonedmilk,double-tonedmilk,cowmilk,UHTmilk(tetrapack),cowghee,buffaloghee,cookingbutter,freshcream,skimmedmilkpowder,curd(cupandpouch),flavouredmilkinbottlesandtetrapacksofbutter,milklassi,paneerdoodhpeda,icecreamandbreadcookies.TheannualturnoverreachedRs.34.7millionin2006–2007.

Heritagehasestablishedasupplychainwhichprocuresmilkfromfarmersinruralareas,mainlyinAndhraPradeshandsomepartsofKarnataka,MaharashtraandTamilNadu.TheHeritagemodel’s startingpoint involvesharnessing the currentmilk collectioncentres–whicharealsoruralretailpoints–andthususethemtopenetratetheruralmarket.Two-wayorreverselogisticsareusedtotransferandsellgoodsfromtheurbanmarkets to ruralmarkets,andthroughthisdirect retailpresencealsomobilizemilkprocurement.Thisenableseconomiesofscaleinsupplychaincosts,servesboththeruralcustomerandproducer,andimprovespenetrationintheruralareas.

It connects to consumers through representatives – who are also milk collectionrepresentativesofHeritage – that sell consumergoods.This providesopportunities

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forHeritage to launch its private labels in ruralmarkets.The company’s rural retailnetworkhasincreasedto1515storeswith13distributioncentres.Atypicalruralstoreisabout10squaremetresinsizeandisbasedonafranchisemodeltocatertovillageswithapopulationof less than5000.Theobjective is todeliverpopular fast-movingconsumergoods(FMCG)productsandqualitygroceriesataffordablepricestointeriorvillagesacrossSouthIndia,leveragingthemilkprocurementnetwork.Apartfrommilk,vegetablesandseasonalfruitsarealsoproducedandprocuredthroughcontractfarmersandreachpackhousesviacollectioncentresstrategicallylocatedinidentifiedvillages.Thecollectioncentresundertakewashing,sorting,gradingandpackinganddispatchtoretailstoresthroughdistributioncentres.Otherfeaturesofthemodelinclude:

Z promotionof anannual crop calendarof sourcing that seeks toensurehigherannualincomeperunitarea;

Z technical guidance – agri-advisory services, regular training of farmers, creditlinkageandinputsupply;

Z apackageofimprovedfarmpracticesforbetterproductivityandquality; Z anassuredmarketatthedoorstep; Z assuredtimelypayments; Z transparencyinoperations.

TheHeritagemodelprovidesanexampleofusingtheexistingmarketingpointsandchainsforthepurposeofagro-industryratherthanbuildingnew/dedicatedchains.Thismay achieve faster roll-out and reach. It also provides an example of using two-wayorreverselogisticsforimprovingtheefficiencyandeconomicsofthesupplychain.BoththesemethodsarenotseenintheAMUL,NandiniorNestlémodels.

9.4.5 model 5: mother dairy

MotherDairy(Delhi)wassetupbytheNationalDairyDevelopmentBoard(NDDB)underthefirstphaseoftheOperationFloodProgrammein1974,withtheobjectiveof improving the availability of liquid milk to city consumers. Mother Dairy is asubsidiaryoftheNDDB.EventhoughMotherDairyisnotownedbythefarmers,itisassociatedwiththeAnandModelcooperativeset-up.Giventhepotentialmarketsforliquidmilkinthebigcities,entitieslikeMotherDairywereestablishedinallthefourmajorIndianmetros–Mumbai,Kolkata,ChennaiandDelhi–andwerealsosetup inall statecapitals.Theobjectivewas tohelp thosecooperativeswhoneededhelptoprocessandmarketthemilk.

It isestimatedthatMotherDairyDelhicommands40percentmarketshareintheorganizedliquidmilksector inandaroundDelhi.TheMotherDairybrandnameisusedfordistributingmilkintheDelhinationalcapitalregion.InDelhiandatnationallevel,MotherDairyalsomarketsdairyproductssuchasicecreams,flavouredmilk,dahi,lassi,mishtidoi,ghee,butter,cheese,dairywhitener,theDhararangeofedibleoils,theSafalrangeoffreshfruitandvegetables,frozenvegetablesandfruitjuices.


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MotherDairysourcesitsentirerequirementof liquidmilkfromdairycooperatives–itbuystheliquidmilkfromstatefederations.BecauseitrunsontheprinciplethatthelandedpriceofmilkatDelhishouldbethesameforall,onlystatefederationsnear Delhi supply milk to Mother Dairy. Profitability is not the core motive andprocurementisdonemoreorlessatthemarketprice.Marketingismainlycarriedoutthroughbulkvendingmachines,apartfrom12packagingstationsforpolypackpreparation that are outsourced from the state federations. The costs of theprocessing units are borne by the federations whereas those of the distributioncentresarebornebyMotherDairy.

Mother Dairy pays almost 70 percent of the market price to the milk suppliers. Thepaymentismadethroughchequesandthemilksuppliersreceivethepaymentwithin 10days.The surplus from the remainingamount is sharedamongMotherDairy, state federations, district unions, and the village-level societies. For theprocurementoffruitandvegetables,thegrowerassociationsarepaidacommissionof1.75percenttomeettheexpensesofrunningtheassociation.

TheannualturnoverofliquidmilkdistributionisaboutRs.12–13billionandthetotalturnoverofMotherDairy isRs. 27billion.Bulk vendingmilk sales aregrowingat 3–4percentperannum,whereaspolypackmilksalesaregrowingat12–13percent.

MotherDairybroughtsignificantbenefitstothefarmersbyassistinginthemarketingofthedairycooperative’smilk.Recently,MotherDairyhasbeenfacingcompetitionfromotherorganized retailers, andmaintainingquality is alsoamajor challenge. The reach of the Mother Dairy model to farmers depends substantially on theefficiencyandtheeffectivenessofthecooperatives,giventhatitdoesnotconnectwiththefarmersdirectly.Ontheotherhanditassiststhefarmerbodiestomarketthemilkinthevastmarketsofthemajorurbanareas–acapabilitymanyofthemlack. Italsoundertakes thenecessary investments forprocessinganddistributionwhicharedifficultforsomeofthefarmerbodiestocarryout.

Variant Milk shop retail Total

bulk vending milk 646 854 189 849 836 703

Polypack milk 333 781 1 075 149 1 408 930

Total 980 635 1 264 998 2 245 633

Source: http://www.motherdairy.com/

taBLE 9.5

mother dairy daily milk sales – July 2007 (litres)

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9.4.6 model 6: suguna poultry

India has a rapidly growing poultry market and its size is now estimated to bearoundRs.12billion(BusinessStandard,July2008).However,thepoultryindustryis highly fragmented and disorganized. In this sector, Suguna Poultry is one ofthe largest organized players and is believed to rank among the top ten poultrycompanies worldwide. The company is based in Coimbatore, Tamil Nadu state,andhasoperations in 11 states in India, offering a rangeof poultry products andservices. Suguna Poultry started its operations in 1984.The company pioneeredcontract farming in thepoultry industry in Indiaandsources itsproducts through 12000contractfarmersacrossdifferentstates.

IntheIndianmarket,consumersusedtopreferlivebirdstofrozenchicken.Sugunacameintotheunorganizedmarketwiththeconceptofbrandingchicken.Ithasbeenable tocreateaspace for itselfandwasable tomake itsbrandprominent in thismarket,becomingapartofthegrowingfrozenpoultrysector.SugunahadaturnoverofRs.11billionin2005–2006anda14percentshareintheRs.80billionbroilermarket.By2010,SugunahadrisentobealeaderinthebroilermarketinIndiaandamongthe top ten poultry companiesworldwide. By 2010–11, it had a sales turnover of Rs.32billionwithover20percentmarketshareinIndia.Interestingly,itdidsowithoutowninga singlepoultry farm:by2007, the companyhad sold livebirdsandeggsworthRs.20.2billionwithoutowningasinglefarm.Itsfullyintegratedoperationsextendfrombroilerand layerfarmingtohatcheries, feedmills,processingplants,vaccinesandexports.Sugunasellslivebroilerchicken,valueaddedeggsandfrozenchicken,andhassetupachainofmodernretailoutletsaimingtoprovideconsumerswithfresh,cleanandhygienicpackedchicken.

In 1993 Suguna set up a ‘parent farm’ where the parent breed was reared. Day-oldchickshatchedbythesebirdsaresenttothecontractfarmers.In2000,thecompanybegantodirectly import ‘grandparentchicks’ fromtheUK– thesehavethebestgeneticmake-upforbreedingbroilers–andsetupa ‘grandparentfarm’. The company also forayed into the layer (egg) segment of the poultry businessin2007,andgrabbeda6.6percentmarket share in thefirstyear.VenkateshwaraHatcheries(90percentmarketshare)isthedominantplayerinthelayersegment.

Suguna’soperationsaredividedinto13regions,eachunderthechargeofamanagerwhohasindependencetodecideonissuesinhisregion.ProductsincludeSugunaChicken,SugunaAnytime (frozenchicken),SugunaDailyFresh,SugunaHomeBites,SugunaValueAddedEggs.Thecompanycollaborateswithleadinginternationalcompaniestobringthelatesttechnologyandpracticestoserviceitsmassivebaseof15000farmsandhasinvestedinsophisticatedtechnologyandinfrastructure.Thisincludes:

Z state-of-the-arthatcheries Z anadvancedRandDcentre Z feedmills


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Z veterinarians Z scientists Z otherprofessionals.

Throughthisset-up,qualityendproductsareassuredthroughaproductionchainthat can count on the best quality chicks, feed and professional care. Suguna’sscientistsandemployeestrainthefarmersinGMP(GoodManagementPractices).Throughthese,Sugunabringssubstantialvaluetotheindustryaswellasitsfarmers,whoontheirownmaynothavebeenabletogainaccesstothesetechnologiesandservices.Qualityproductsresultfromstringentprocessesandultra-hygienicrearingmethods that are accepted worldwide. Suguna’s presence is now established in 11 states across the country and it has obtained ISO certification, further proofof its commitment to quality. It has also implemented the HazardAnalysis andCriticalControlPoints(HACCP)systemandiswellpreparedwithitsstate-of-the-artprocessingplanttomeetgrowingdemand.

Suguna’sbusinessmodelcanbecalled‘contractbroilerfarming’,aformoffranchisefarming, and was introduced in 1991. Farmers who own land and have access toresourcessuchaswater,electricityandlabourcanbecomegrowersofSuguna’sRossbreedofchicks.Alltherequiredinputs–dayoldchicks(DOCs),feed,medicinesandexpertise–areprovidedbySuguna,whichhassuccessfullyreducedmiddlemeninthepoultrychainfrom14to4.Theprocessofgrowingthechicksisstandardizedandmustconformtotheexactingstandardslaiddownbythecompany;qualitycontrolchecksare carried out by company staff to ensure the norms are beingmet.The broilersareprocuredbySugunaaslongastheycomplywithestablishedqualitynorms,andthe farmer is paid a ‘growing’ commission or charge.On average, a typical farmerfranchiseecanearnRs.10000monthlyforbreedingbroilerchickensontheirfarm.

Ifafarmerdoesnotcomplywithproceduresaslaiddowninthebreedingmanual, orsellschickenstoanotherparty,thisisconsideredabreachoftrustandthecontractis unlikely to be renewed.Suguna also provides farmer franchiseeswith a safetynet:notonlydoesthecompanybearproductionandmarketrisks,italsoshouldersthe responsibility for any damage from a change in the market environment. Forinstance,ariseinfeedpriceswouldnotaffectcontractfarmersbecausetheyaresuppliedwithfeeddirectlybySuguna.Similarly,whenanattackofbirdfluoccurred,Suguna took on the financial losses suffered by the farmers. Farmers deal onlywiththecompanyandreceiveassuredreturns.Regardlessofthemarketprice,thefarmersstillreceivetheassuredgrowingcharge/cost,andincentives.

SugunahasbeenabletoprovethateverystateinIndiaisfitforpoultryoperationswith itspresence in11states. Ithasbenefited largenumbersof ruralhouseholds,improving their lives with its innovative business model. Seeing the impact ofSuguna’s initiativeson ruraldevelopment,ChiefMinistersofotherStates suchasAndhraPradesh,WestBengal,PunjabandJharkandhave invited thecompany tosetupoperationsintheirStates.Themodelhasalsoattractedvisitorsfromacross

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bordersthatarekeentolearnfromSuguna’sinitiativesandsuccessandtoadoptthesamemodelintheircountries.

Thismodelprotectsthe interestsbothofthefarmerandthe integrator (Suguna).The integrator takes responsibility for providing day old chicks, feed, medicinesand supervision to the farmers. In addition, the integrator brings GMPs andtechnical know-how that leads to higher productivity. In the absence of these,independent farmers required heavy investments,multiple interactions, and hadpooryieldsoverall.Farmerswhofollowthepracticesareassuredofgoodearningsintheintegrated/contractfarmingmodel.TheSugunamodeloffersfastscalabilitybecausethecompanydoesnothavetobuyorleasefarms.Itkeepscostslow,andofferseconomiesofscaleincludinginbuyingrawmaterials,feedandmedicines.

9.4.7 model 7: the nddB safal auction market

The NDDB’s Safal Auction Market was set up in Bangalore in 2003 as a highlymodernmarketforthemarketingoffruitsandvegetables.ToenabletheNationalDairyDevelopmentBoard(NDDB)tosetupthismarketoutsidethemarketyardsgoverned by theAgricultural ProduceMarketCommittee (APMC), theKarnatakastate government passed a special amendment to theAPMCAct.This Rs. 1 500millionauctionmarketisontheoutskirtsofBangaloreon60acresofland,andhasastate-of-the-artmarketinginfrastructure:

Z Ithasseparateauctionroomsforfruitsandforvegetableswhichhaveelectronicdisplayboardsandelectronicauctionequipment.

Z Theauctionisconductedbythestaffandthereisaviewinggalleryforfarmerswitnessingit.

Z Therearenocommissionagents,andnocommissionisrequiredtobepaidbythefarmers,althoughthereisaservicechargethattheyneedtopay.

Z There are storage facilities for farmers and traders including cold storageandripeningchambers.

The supply chain is simple and direct.The farmersmay either bring the producedirectlytotheSafalAuctionMarketwiththeirownorhiredtransport,ortaketheproduce to the closest SafalGrowers’Association. In the latter case, a round ofgradingiscarriedoutbeforetheproduceissenttothemarketintheAssociation’stransport.Iftheproduceisbroughtdirectlybythefarmers,gradingtakesplaceattheauctioncentrebeforetheauction.Theproduceusuallyarrivesintheeveningofthedaybefore.Farmersmaycomealongwith theirproduce toviewtheauction.Buyersarerequiredtopayadeposittoparticipate intheauction;afterwards,theproduceistransportedoutbythebuyer/trader,includingtomarketsinotherStates.

Despitetheworld-classfacilitiesthatindicateefficiencyandhygiene,theSafalAuctionMarket,evenafterfiveyears,isoperatingatonly15–20percentcapacity.Officialshope


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themarketwilloperateatfullcapacityafteranotherfiveyearsorso.Themainreasontheyciteforthecurrentsituation istheboycottofthefacilitiesbythewholesalers;theseandalsosomeretailersindicatethatthemaindrawbackisthelackofproductchoice.Officialsalsostatethatthedependenceoffarmersonthecommissionagentforcreditdiscouragesthemfromcomingtothisfacility.Nevertheless,somefarmersandconsolidatorsmakeuseofthecoldstorageandripeningchambersavailableatthemarket,eveniftheydonotselltheirproduceattheauction.

9.4.8 model 8: Hpmc

Himachal Pradesh Horticultural Produce Marketing and Processing Corporation(HPMC)isagovernmentownedandmanagedorganizationfortheprocessingandmarketingofhorticulturalproduce,especiallyapples,grownintheStateofHimachalPradesh.TheproduceispurchasedbyHPMCfromthefarmersatannouncedprices.Itisthenstored,processedandmarketednationallybythecorporation.HPMChassetupprocessingfacilitiesandinfrastructureincludingproducecollectioncentres,warehouses, cold storage facilities and processing plants in Himachal Pradesh,principally for apples: two collection centres, ten packing/grading houses, threewarehouses,andfivecoldstorages.IthasalsosetupcoldstorageinthemetropolitancitiesofDelhi,Mumbai,andChennai.

HPMCwasestablished in 1974as agovernmentundertakingwith theobjectiveofmarketingfreshfruitsandprocessingsurplusfruits.HPMCprovidesvariousservicestotheState’sfruitgrowersfortheprocessingandmarketingoffruits.Thecorporationhassetuptwomodernfruitprocessingplantsthatcanmakearangeofprocessedproducts.Between 1974 and 1982, HPMC established pre- and post-harvest infrastructure,comprisinganetworkofmechanically-operatedpackhouses,coldstoragefacilities,trans-shipmentcentresandfruitprocessingplants,besidesanetworkofsalesofficesintheterminalmarkets.Theinfrastructureforgrading/packing,pre-coolingandcoldstoragewasestablished in rural areas toprovidepre-andpost-harvest facilities tofarmersclosetotheirfarms.HPMCproducesavarietyofprocessedproductsincludingapplejuiceconcentrate,concentrateoforange,pear,plum,andstrawberry,andpulpsofalltheabovefruits.Italsoproducesfruitjuicesintetrapacks,naturalandblendedjuices,squashes, jams,cannedproducts,applecider,cidervinegar,appleandplumwine,babycorn,mushroominbrineandvarietiesofpickles.

HPMCseekstobringremunerative returnsto fruitgrowersandnutritivequalityproductsatareasonablepricetoconsumers.Duringtheyear2005–2006,HPMCsold processed products worth Rs. 117.7 million in markets across the country. It signed a memorandum of understanding with theAgri-Business InformationCentreoftheFederationof IndianChambersofCommerceand Industry (FICCI),whichnowprovidesservicesandinformationtoHPMCformarketingitsproductsin the domestic and international markets. HPMC is supplying its products to

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IndianAirlines,AllianceAirIndiaandIndianRailways,earningRs.2.1billionrevenueannually. Italsosuppliedproducts,worthRs.13.7million in2005–2006,toprivatecompanies such as Heinz, Parle,MohanMeakin and Britannia.To export apples,HPMChassignedamemorandumofunderstandingwiththeprivatecompanyIndiaTobaccoCompanyLimited(ITC),underwhichHPMChelpedITCprocure10000boxesofapplesworthRs.4.7millionandHPMCextendeditsstorageandpackingfacilitiestoITCin2008.UndertheMarketInterventionScheme(MIS)ofthegovernment,thecorporationprocured0.4millionmetrictonnesapplesin2010–11.

HPMCprocures some fruits such as apples under the government’sMIS,whichhelps support prices, preventing them from crashing.The efforts made by thecorporationhave resulted ina stabilizationof thepricesof fruits in themarket.ApartfromprocuringunderMIS,HPMCalsodirectlyprocuresotherfruitssuchaspeaches,pears,plums,lycheeandalmondsgrownintheState,formarketingandprocessingunderhygienicconditionsinitsprocessingplants.Thishelpsincreasethe capacity utilization of the plants and assists farmers in receiving additionalreturnsfortheirproduce.

HPMCdidwell in thebeginningbutsubsequentlycouldnotperform in theactivemarket.ProducersdidnotbringapplesinsufficientquantitiestoHPMConaccountoftheirscattered,hillyanddistantproducinglocations,whichmadetransportationfromtheproducingareasexpensive.Bringingproducefromaproducingareatothegradingandpackingcentreswastimeconsumingandtheyhadtowaitalongtimefortheirturntogettheproducegraded.Becausetheappleseasonisveryshort,theproducerspreferred to send theproduce immediately to the terminalmarkets toavoidlossesandgetbetterreturns.ColdstoragefacilitieswereoftennotfullyutilizedandHPMCthereforeneededtodivertitsutilizationtomushroomcultivation,aftermodifications(DhankarandRai,2002).

WhenHPMCfounditdifficulttoprocessthefruitprocured,itsentittomarketsforsaleinfreshform.Thisaffectedthemarketandpricesforfreshfruits:forexample,goodqualityapplepricescrashedwhenHPMCtooksuchsteps.Thoughthecorporationhasexperienceinthepost-harvestmanagementoffruits, it lacksinbusinessskillsandcapabilities.Therehasbeenagradualdecreaseinitsactivitiesandanincreaseinitslosses.Thecapacityutilizationofgradingandpackinghouseshasbecomeverylow.HPMCattributesthis lowutilizationtotheremovaloffreetransportfacilitiesthatwerepreviouslyavailabletogrowersthroughHPMC(DhankarandRai,2002).

As indicated, even thoughHPMCwas fairly successful at one time, reports showthat it has not been able to sustain the performance (Vaidya, 1996; Gandhi et al.,2001). Ithasbeenunableeither toattractenough farmersuppliersorexpanddistributionbeyond itsownoutlets.Whilegovernment-ownedagro-industriesarewell fundedas far as investment in infrastructure and technology are concerned,theyalsodependonbureaucratsformanagement,andtheseindividualsoftenhavelimited business skills.Managers are frequently transferred to other areas at the


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whimof changing governments and are accountable primarily to their superiors, nottothefarmersorconsumers.Theyareunabletosustainacommitmenttoprocurefromsmallfarmersontheonehand,andtomeetdynamicmarketingdemandsontheother,thwartingthelong-termperformanceoftheenterprise.

9.4.9 model 9: pepsico India

PepsiCo has beenworking with farmers in Punjab since the 1980s, starting withprocuring tomatoes from farmers and producing tomato pulp, as an initial pre-conditionforobtaininggovernmentpermissiontoproduceandsellitssoftdrinksinIndia.Intheoperation,PepsiCointroducednewtomatovarietiesthathelpedboostthestate'stomatocropfrom18000tonnesin1988to300000tonnesin2006–07.PepsiCo’s involvement in Indian agriculture also stems from its aimof creating acost-effective,localizedagri-baseinIndia,andinreturnforthis,providingfarmerswith exposure and access toworld class agricultural practices.The company hasworkedwithfarmersandStateGovernmentstoimproveagriculturalsustainability,cropdiversificationandraisefarmer incomes.PepsiCohelpedfarmersrefinetheirtechniquesandincreaseproductivitybyofferingcustomizedsolutionstosuitspecificgeographiesandlocations.

In 1989PepsiCohad launcheda joint initiativewithPunjabAgricultureUniversity(PAU), Ludhiana and Punjab Agro Industries Corporation (PAIC), Chandigarh,for the production, procurement and processing of tomato.Thismodel involvedbackward integration by a private company with strong marketing capabilitiesandestablishedproductsandbrands.TheinitiativeledtoPepsiFoodssettingupatomatoprocessingplantatZahurainHoshiarpurdistrict,Punjab,in1989.By1994,350farmersoveranareaof2700acreswerecoveredand650tonnesoftomatowereprocessedeveryday(Gulatiet al.,1994).Underthismodelcontractsforproductionandprocurementoftomatoesweremadewithsmallfarmers–thecontractsweremoralinreality,ratherthanlegal.Thecompanyinvestedinbuildingrelationshipsoftrustwith farmers throughtheircommitmenttoprovidingextensionservicesandproductioninputs.PepsiCobroughtinexpertsandpromotedtheuseofappropriatefarmtechnologyandvarieties,bringing tobear researchandknow-howavailableworldwide.Seedlingswereprovidedtothefarmersandplantingwasscheduledandprogrammedusingcomputers.Thebestavailabletechnologywasusedinprocessingandthecompanyapplieditsstrongmarketingcapabilitiesandnetworks insellingthequalityendproducts.

More recently, a similar initiative has been launched for potato. The initiativehas sought to improving agricultural practices substantially and help Punjabfarmers produce internationally competitive products. PepsiCo used contractfarming under which the company transferred agricultural best practices andtechnologies, andprocured theproduceat aguaranteedprice – seeFigure9.4.

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Tosupporttheinitiative,PepsiCoalsosetupa27-acreresearchanddemonstrationfarminPunjabtoconductfarmtrialsfornewvarietiesoftomato,potatoandothercrops.Theyhaveevaluatedmorethan100varietiesandhybridsoftomato,morethan200varietiesandhybridsofchilli,25varietiesandhybridsofcorn,morethan60varietiesofpeanutandseveralvarietiesofbasmatirice.

The quality parameters put in place through the chain are driven by the specificneeds of processing, and buyer requirements. Processing requires potatoes withlowsugarcontent(0percent)andhighsolidscontent(between15to20percent).Apart fromthis,because thecompany isalsoHACCPand ISOcertified, stringentqualitycontrol is requiredatall levels in thechain.Specific requirementsaremetbyensuringqualitycomplianceateverystage:RandD,farming,storing,processing,andpackaging(Punjabi,2008).

Beforeintroducingthevarietiestofarmers,extensivetrialsareundertakenandapackageofagronomicpracticessuitabletothelocalagro-climaticconditionsaredevelopedby

Banks and other credit institutions (Party 3)

Government schemes and support

Pepsi’s collection centre (weighing, grading

and storage)

Input company (Party 3)

Pepsi Company (Party 2)

Government and private extension and research

services (Party 3)

Growers (Party 1)

Supporting infrastructure and initiation

Payment for produce and credit

Payments

Package of extension and other practices

Inputs (quantity

and quality)

Payments and

commission

Supply of produce

Select growers, negotiate

and contract

Payments and

commission

FIGURE 9.4 Tripartite model of PepsiCo India

Source: Based on Singh, 2007.


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PepsiCo in collaborationwithCentralPotatoResearch Institute (CPRI).Thepackageincludes specific fertilizer recommendationsand spraying schedules (Punjabi, 2008). Thecompanyensuresavailabilityof inputstofarmersworking inthearea,andseedpotatoes of specific varieties for processing are also provided by the company.The‘vendor’ in the region ensures that farmers falling under their supervision have allthe required inputs at the right time. If the company is providing inputs, the costsaredeductedduringbuybackofpotatoes.Apartfromensuringinputs,thecompanyhadalso introduced crop insuranceunder theauspicesof theAgricultural InsuranceCompany (AIC), andweather insurance from ICICI Lombard. In Karnataka, PepsiCocreated an institutional framework roping in the Central Potato Research Institute(CPRI),agrochemicalgiantDuPontandtheICICILombardGeneralInsurancecompany.

Forproducingspecificvarietiesandenhancingproductivity,PepsiCoisverycloselyinvolvedwithitscontractfarmersinpotatoproduction.Thecompanyhasemployedteams of agricultural graduates who work with the farmers to provide technicalinputandtomonitorproductionintheirspecifiedarea.Onetechnicalexpertdealswithapproximately100farmers.Asaresult,farmersreportedthatbecauseofthetechnical information provided by company agronomists, the use of chemicalsandfertilizersismuchmoretimelyandeffective(Punjabi,2008).Theagronomistsregularly monitor the fields at the time of planting, spraying, harvesting etc; ifthereisexpectationofanoutbreakofanydiseaseorpest,theyinformthefarmersabouttimelyspraying.Anymajorproblemsareattendedtoinconsultationwiththecompanyresearchersifnecessary.ApartfromPepsiCo’scontractfarmers,allpotatogrowers benefit fromearly detection of diseases as a ‘positive externality’ of thecompany’soperations(Punjabi,2008).

To emphasize the care required in post-harvest management, the companyagronomistsoften transmitmessages suchas ‘Handlepotatoes likeeggsnot likestones’ (Punjabi, 2008). Traditionally, jute bags have been used for packagingpotatoes.Insteadofthesethecompanyhaspropagatedtheuseofplasticbagsforpackagingbecausethisensuresbetterstorage.Atthecompany’sunloadingdock,thepotatoesaremechanicallygradedforsizeandpotatoesthataretoosmall forprocessingareseparated.Avisualinspectionfordamagedpotatoesisalsocarriedout,andatest forsugarcontent isundertakenby fryingasmallsample fromthelot.Sampletestsarealsoundertakenforsolidcontent;potatoesthatdonotmeetalltherequirementsarerejected.Thepotatoesarestoredat12degreestoregulateconversion of sugar to starch; at this temperature they can be stored for up to 4months.Theyarealsotreatedtolimitsprouting.

Selectedpotatoesaretakentotheprocessingplant.Theyarewashedandpeeledandinspectedforphysicaldamageanddiscolouration,arerunthroughrotatingslicers,andaredeep fried.Ricebranoil isused for fryingbecause ithasa lowsaturatedfatcontent,andthefriedchipsareopticallytestedforcolour.Finally,thechipsaremixedwithspicesandpacked.Theplanthasawell-equippedqualitytestinglabandthoroughtestingofinputsandpackagingmaterialsisalsoconducted.

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New tomato varieties are said to have contributed to an increase in annualtomatoproductionfrom28000tonnestoover200000tonnesinPunjab(Punjabi,2008),andyieldshaveincreasedfrom16tonnesto54tonnesperhectare.Manyhighquality,highyieldpotatovarietieshavealsobeen introduced; thesehavehelpedincreasefarmincomesandhaveenabledPepsiCotoprocureworldclass chip-gradepotatoesforitsFritoLaysnacksdivision.Thecompanyhaspartneredwithmorethan10000farmersworkingover10000acresofpotatoacrossPunjab,UttarPradesh,Karnataka,JharkhandWestBengal,KashmirandMaharashtra.

This model involves more than simple procurement or contract farming, bydevelopingamutuallybeneficialpartnershipbetweentheagro-industryandthefarmers.Theprocessmayentailsubstantial financial losses inthe initialyears,but isexpectedtobefollowedbyprofitabilitythereafter.Themodelcanresultinexcellentbenefitsforsmallfarmersperhapsina limitedarea,but itrequiresa long-termviewandcommitmentfromthecompanyandawillingnessbytheenterprise toabsorbsubstantial start-upcostsand initial losses (Gandhiet al.,2001).

Singh and Bhagat (2004) analysed the PepsiCo model and concluded that,though it is a better model of contract farming as compared with HindustanLever Limited (HLL) andNijjer, there are various operational problems in thefunctioning of contract farming practices. The authors indicate that manyfarmers rate thePepsiCoexperimentwithcontract farmingasabettermodel.But in the larger sense, PepsiCo has treated farmers as their supply base andhadworkedonlywiththeintentionofcreatingsustainablesupplybases.Astheacreageunder tomato crop increases, production also increases and theopenmarket pricesmay fall.The company thenmaybase its pricepaidor contractpriceonthislowopenmarketprice.FarmersinSangrur,aswellasGanganagar,indicatedthatPepsiCohadstartedpayingthemaslowapriceasRs.1.50perkg(SinghandBhagat,2004).Attimes,asreportedinDainik Bhaskar(2ndSeptember,2000),theyhavealsofailedtofulfiltheircontract.

Thesameauthors indicatethatsuchawonderfulagreementcangohaywire ifPepsiCodoesnotlearntocareforthefarmers.PepsiComustfulfilcommitmentsand should enter into an option contract with farmers group, i.e. when openmarketpricesarehigher than thecontractprice they shouldpayopenmarketprices, and vice versa. They should learn from the experiences of HLL thatcontractfarmingwithoutbuildingmutualtrustwithsupplychainpartnersmightbeproblematicforthecompanyitself.PepsiCoshouldtreatfarmersaspartnersand pass on benefits to them, thereby creating a long-term and sustainablerelationship for a sustainable business.Singh andBhagat (2004) indicate thatPepsiConeedstoshareitsbenefitstogainthetrustofthefarmers.IndianfirmsneedtopartnerwithIndianfarmerstobringaboutanagriculturalrevolutionthatwillleadtoawin–winsituationforboththefarmersandcorporates.


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9.4.10 model 10: Itc e-choupal

ITC isa largecorporategroup in India.Through its InternationalBusinessDivision(IBD)itundertakesprocurement,processingandexportofagriculturalcommoditiessuchas soybean,wheat, shrimpand coffee.Over thepast fewyears ITC-IBDhasdeveloped a unique IT-enabled procurement, information andmarketing channelinruralareas,throughvillagecentrescallede-Choupals thatcoverahugenumberofvillages.Thismodelhasbeenusedto increaseefficiency intheprocurementofagriculturalcommodities,resultinginvaluecreationforboththecompanyandthefarmer. Inaddition,themodelhascreatedvaluebytakingInternetpenetrationtoremotevillages,makingglobalcommercialcontactpossiblewhereinfrastructural,economicandsociallimitationshadpreviouslyrenderedthisimpossible.

TheprojectwaslaunchedinJune2000inthevillagesofMadhyaPradesh(see,forexample,http://www.soyachoupal.com). ITC had opened three soya processing and collectioncentresandthenstartedthefirstsixvillagee-ChoupalsinJune2000.Soon,thismodelbecamerural India’s largest Internet-basedinitiative.There-engineeredsupplychainofe-Choupallooksverydifferentfromtheexistingmarketingsystemandhasseveralcomponents(Bowonder,GuptaandSingh,2002).Thecompanyfirstlookedforafarmerfromeachvillagearoundthecollectioncentretoheadthevillagee-Choupal.Thispersonwascalledthesanchalakandwouldbecomethetrainedvillageindividualinoperatingandcoordinatingtheactivitiesinthee-Choupal.Afterselectionofthesanchalak,apersonalcomputerwas install in his house and hewas given training in using it (Bowonder, GuptaandSingh,2002).Thecomputerhadback-uppowerandwasconnectedtotheInternetviatelephoneaswellassatellite.ThesanchalakhelpsthefarmerinusingthesystembyguidinghiminseeingtheprevailingpricesandotherrelatedinformationonthePC.Thesanchalaksispaid0.5percentoftheprocurementpriceforeachtonneofsoyaprocuredbyITCfromtheire-Choupal.Beforeimplementinganynewinitiatives,ITCconsultsitssanchalaks,andregulare-Choupalmeetsareheld.Thisnotonlyprovidesthecompanywithfeedbackfromthefarmerbutalsogeneratesnewideas.

ByMay2007,e-Choupal servicesreachedmorethanfourmillionfarmers inabout40000villagesthroughmorethan6500e-ChoupalsinUttarPradesh,MadhyaPradesh,Rajasthan,Maharastra,Karnataka,AndhraPradeshandKerala.ITCisextendingitsbusinessmodel to other IndianStates includingWest Bengal,Himachal Pradesh,Punjab and Haryana. The digital infrastructure at the village is complementedand completed with a physical infrastructure in the form of choupal saagars. Thesechoupalsaagarsoffermultipleservicesunderoneroof:amarketingplatform,ashopforagri-equipmentandpersonalconsumerproducts, insurancecounters,apharmacyandhealthcentre,anagri-extensionclinic,afuelstationandafoodcourt.TheITCe-ChoupalmodelisshowninFigure9.5.

Forsmoothfunctioningofitsproject, ITCcouldnottotallyignorethecommissionagents,whonaturallywouldresistanychange.Therefore,thecompanydevisedanewroleforthemandcalledthemsamyojkas.Thesamyojkaswereresponsiblefor

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collectingtheproducefromvillagesthatwerelocatedfarawayfromtheprocessingcentres and bringing it to the ITC centres. The samyojka was paid a 1 percentcommissionforhisservice.

AccordingtoBowonder,GuptaandSingh(2002),thepreviousday’smandiclosingprice isusedtodeterminethebenchmarkFairAverageQuality (FAQ)priceat thee-Choupal.Thebenchmarkprice isfixed foragivenday.This informationandtheprevious day’s mandi prices are communicated to the sanchalak through thee-Choupalportal, i.e.http://www.itcibd.com.Thecommissionagentsatthemandis are responsible for entering dailymandi prices into the e-Choupal system. If andwhentheInternetconnectionfails,thesanchalakcallsanITCfieldrepresentativetoobtaintheinformation.

To initiate a sale, the farmer brings a sample of his produce to the e-Choupal.Thesanchalak inspects the produce and based on his assessment of the quality,makes

e-Choupal supply chain(Direct: bypassing of many intermediaries)

Conventional supply chain(Indirect: many transactions, higher transaction cost)

Input company, Department of Extension, Department of Agriculture etc

e-Choupal (Sanchalak)

Money lender

Few intermediaries

Processor

Many intermediaries Input retailers Money lender

Commission agents (Kuccha and

Pakka Adatiyas)

Farmer

FIGURE 9.5 model of ITC e-Choupal supply chain

Source: Based on Bowonder, Gupta and Singh (2002).


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appropriate deductions (if any) to the benchmark price and gives the farmer aconditionalquote.Thesanchalakperformsthequalitytestsinthefarmer’spresenceandmustjustifyanydeductionstothefarmer.IfthefarmerchoosestosellhissoytoITC,thesanchalakgiveshimanotewithhisname,hisvillage,particularsaboutthequalitytests(foreignmatterandmoisturecontent),approximatequantityandconditionalprice.

ThefarmertakesthenotefromthesanchalakandproceedswithhisproducetothenearestITCprocurementhub,ITC’spointforcollectionofproduceanddistributionofinputs.AttheITCprocurementhub,asampleofthefarmer’sproduceistakenandsetasidefor laboratorytests.Achemistvisually inspectsthesoybeanandverifiestheassessmentofthesanchalak.Laboratorytestingofthesampleforoilcontentisperformedafterthesaleanddoesnotaltertheprice.Thereforepricingisbasedsolelyuponteststhatcanbeunderstoodbythefarmer.Thefarmeracceptsforeignmatterdeductionsforthepresenceofstonesorhay,baseduponthevisualcomparisonofhisproducewithhisneighbour’s.Aftertheinspection,thefarmer’sproduceisweighedonanelectronicweighbridge.Whentheinspectionandweighingarecomplete,thefarmerthencollectshispaymentinfullatthepaymentcounter.Thefarmerisalsoreimbursed for transportinghis crop to theprocurementhub. Every stageof theprocessisaccompaniedbyappropriatedocumentation.Thefarmerisgivenacopyoflabreports,agreedrates,andreceiptsforhisrecords.Attheendoftheyear,farmerscanredeemtheiraccumulatedbonuspointsthroughthee-Choupalforfarminputs,orcontributionstowardinsurancepremiums.

ThetransactionattheITChubisfasterthanatthemandi,usuallytakingnomorethantwoorthreehours.ITC’selectronicweighingscalesareaccurateandnotsusceptibletosleightofhandlikethemanualweighingsystematthemandi.Thesystemalsodoesnotrequireproducetobebagged;thisavoidstheassociatedlossofproduce.Thee-Choupalallowsthefarmerdailyaccesstopricesatseveralnearbymandisandcanmakebetterdecisionsaboutwhenandwheretosellhiscrop.Thus,e-Choupal attempts to provide farmers with a better price for their crops.The incrementalincomefromamoreefficientmarketingsystemisestimatedtobeUS$6pertonneonaverage,oranincreaseofabout2.5percentoverthemandisystem.

Farmers can also make use of the information available to them through thee-Choupaltoimproveyields.Seed,fertilizerandconsumerproductsareofferedtothemthroughe-Choupalscostlessthanthroughotherlocalsourcessuchasvillagetraders.Thus there are other economic benefits to farmers. It is reported that inareascoveredbye-Choupals,thepercentageoffarmersplantingsoyhasincreaseddramatically, from 50 to 90 percent in some regions, while the volume of soymarketedthroughmandishasdroppedbyasmuchas50percent.

Amajorimpactofthee-ChoupalsystemisinbridgingtheinformationandservicegapofruralIndia.Informationandservicesprovidedbythee-ChoupalWebsiteande-commercesysteminclude:

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Z weather –The availability of accurate rain informationmay cut losses due toweatherbymorethanhalf.

Z agricultural best practices–InformationonscientificpracticesisavailableontheWeb site.Additional questions can be answered through FAQs and access toexpertsbye-mail.

Z customized quality solutions – Farmers aregiven customized feedbackonhowtheycanimprovecropqualityandyield.

Z product deployment–Inputssuchasfertilizersandpesticidesaresuppliedalongwithrecommendationsandservicessuchassoiltesting.

SinghandBhagat(2004)findthatmostfarmersdidnotagreewiththeITCclaimthatfarmershavebeengettingbetterpricesfortheirproduce,andthatinrealitythereareonlyminorbenefits likede-baggingexpensesetc.Farmersalso indicatedthatthecompanydoesnotpaythepriceagreedbythesanchalaks.Sometimes,qualityisdowngradedandfarmerincomeisreduced.Onesignificantadvantagehoweveriscorrectweight,whichhadbeenamajorworryintraditionalmandi.

Theauthorsfoundthattheportaldidnothavetherequisiterichnessforittobecomean information and knowledge dissemination kiosk. The information as regardsbestpractices,integratedcropproduction,inputs,fertilizerandseeds,wasofpoorquality.Informationwasnotcustomizedtothefarmingneedsoftheseagroclimaticregions.Inallthesevillages,theonlyinformationdisseminatedwasthepricesandweatherconditions.

Theauthorsfindthatasregardssellingpesticidesandfertilizersandseeds,ITChasnottakencaretoseethatthereisacceptabilityof inputtradingbyitse-Choupals. Sellingtheinputsofanothercompanydoesnottakethebusinessrelationshipsintoaccount,andproperpartnershipswiththesecompaniesareoftenabsent.

9.4.11 model 11: mccain India

The McCain Foods subsidiary, Canada-McCain Foods India (Private) Ltd, wasestablished in 1997 and its potatoprocessingplant inGujarat (Mehsana)becameoperationalin2007,withaprocessingcapacityof30000metrictonnesperannumor4metrictonnesperhour.Theplantaimstoproducefrenchfriesandotherpotatoproductssuchasflakes,patties,mashedpotatoes,aloo tikki andwedgesforretailandfoodservicebusinessesacrosstheIndiansubcontinent.Itwillemploy100and125peopleatfullcapacity.Itwillalsocreateindirectemploymentinstorage,supplychainsandoutsourcedservices.

McCain has been buying its potato stock for processing via contracts, of which 85percentwereinGujaratand15percentinPunjab.McCainhasachoiceofthreetypesofcontractswiththefarmers:fixed,flexibleandopen.Infixedcontractsthepriceisfixedandthetransactionatharvestatthatpriceisguaranteed,irrespective


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ofthemarketprice.Inaflexiblecontractarangeisfixedwithinwhichthedealwillbesettledfinally.Ifpricesatthetimeofharvestingaremorethantheupperboundarythen the farmer is bound by the upper price. In case prices are below the lowerboundary,thecompanyisobligedtopaythelowerprice.Intheopencontract,bothpartiesarefreetotransactornottoo.Anothertypeofcontractmayinvolveamixoftwoofthethreekindsjustdescribed,insomeagreedmonetaryproportion.

Comparison of McCain and PepsiCo (Frito Lay)

Both McCain and Frito Lay contract directly from the growers, specifying clearqualityparameters.Bothshifted fromacreagecontracts tocombinationacreage/quantitycontractsthatspecifiedtheminimumquantitytobedeliveredperunitarea.The firms require delivery at a specified place,with growers bearing the deliverycosts.However,therearedifferences:McCainhadasmallerareaofoperationandamorespecializedmarketforitsproducts.WhileFritoLaypaidmarketprices,McCainofferedarangeofpricingoptionstoitsgrowers.

FritoLaycontractsofferedonlyonepriceforallrejectedchip-gradepotatoesandcouldrejectproduceatitsowndiscretion,buyingitatthelowerpricestipulatedforrejectedproduce.ThefinalqualitytestswerecarriedoutatthefactoryatChannoand undersized potatoes were not returned to the farmer (Singh, 2007). TheMcCaincontract specified that if therewasadeviationofmore than2percent insomequalityparameters (size,machinedamage,mixingof varieties,presenceofsolidmatter),thecompanycouldreducethepricespaidbyanunspecifiedamount. Thus, there was uncertainty and risk for growers resulting from informationasymmetryandlowerbargainingpower.

Bothcompany’scontractdocumentswererepletewithvariousobligationsonthepartof the farmeras regardsqualitymaintenance,quantity,cultivationpractices,post-harvestcareoftheproduce,etc,butwithverylittleobligationonthepartofthecompany.Allproductionriskswerebornebythefarmersandneitherfirmprovidedanyreprievetoacontractfarmerincaseofcropfailure.Evenhavingenteredintoacontractand followedall instructions, therewasuncertaintyaboutwhether theproducerwouldhaveamarket,becauseneitherfirm’scontractobligedthecompanytobuytheproduce(Singh,2007).

The cost of production for McCain potato contract growers was found to beslightly lower than the McCain non-contract growers, but much higher thanthose selling at the APMC (Agricultural Product Market Committee) or at farm-gate. The yield and marketing costs for McCain contract growers werehigherthananyotherchannel.MarketingcostswerehigherforgrowersinvolvedwithMcCain than theywere for theAPMCalternative,whilenet income fromMcCainwashighercomparedwithincomefromalternativechannels.Variationinnetincomebetweengrowersinthesamecategorywasmuchlowerinthecaseof contractgrowersbecauseof setprices.TheMcCaingrowers found that the

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useofsprinklersratherthanfloodirrigationreducedtheirlabourrequirements,improvedsoilquality,increasedpotatoyieldsandquality,andalsosavedwaterandextractioncosts(Singh,2007).

In the case of Frito Lay, the cost of productionwas higher and transaction costssomewhat lower than for APMC and farm-gate growers, despite the fact thatcontractgrowershadtodelivertothefactory.Grossandnetincomewaslowerthanthatofgrowersusingotherchannelsdue to loweryields; contractprices forhighqualityproduceandrejectedproducewerelowerthanpost-harvestandoff-seasonprices.Thetrendwasforfarmersdirectlysupplyingthecompaniestohavehigherproductioncosts,regardlessofwhetheracontractwasinvolved,thanthosesellingtoothermarketoutlets.

9.4.12 model 12: desai Fruits and vegetables (desai cold storage)

The large scale production of fruits and vegetables in the south Gujarat areagavetwofamiliestheideaofstartingacoldstoragefacility, in2001.Thereweretwopartners in this venture.MrAjitbhaiDesaiwas theactivepartnerwhile theother partnerwas associatedwith a sugarmill in the area.The construction ofthecoldstoragewasbegunin2001andwascompletedin2002.Inventuringintothis business themain intentionwas to help other traders and farmers to keeptheirproduceforalongertime.Butnosuitableenquirywascarriedoutastotheextentthefacilitywouldbeused;intheend,nosuchservicewasprovidedtoanycustomer.Thefacilityisnowusedonlybythepartnersthemselves,andtheydonotkeepanyoftheirproductsincoldstorageforverylong.Nevertheless,theyhavedeveloped a highly-successful businessmainly trading in fruits and vegetables,notonlylocallybutalsonationallyandinternationally.Itisthisbusiness,initiallynamedDesaiColdStorage,thatwewillassessinthissection.

Themajorproblemthepartnersencounteredattheoutsetwasconvincingfarmerstoselltheirproducetothem.Toovercomethis,theydevisedanumberofactivitiesto create awareness among farmers in their area about the facilities they wereoffering. In2001Desaiorganizedanumberofface-to-facemeetingswithfarmersindifferentvillages.Toattract farmers theyoffered integratedpestmanagement(IPM)withoutanycharge.Theyalsoofferedtheharvestingandhandlingtechnologythroughwhichfarmerscouldsavelabourandobtainhigherqualityproduce.Someoftheotherbenefitsofferedwere:

Z waverofanycommissiononthetransactions(normalmarketchargesamounttoabout10percent)

Z assuranceof100percentbuying Z qualitybasedpricing–higherthantheprevailingmarketprice Z directbuyingfromthefarmgate Z anassuredminimumprice.Theminimumpricewouldbe calculatedon the


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basisof theproduction cost andharvest labour cost,withamargin for thefarmersaddedin.Throughthismechanism,evenifthemarketpricecrashedthefarmerswouldreceivethepre-determinedminimumpriceagreedupon.Ifmarketpricesincreased,thenthetransactionswouldbecarriedoutattheprevailingmarketprice.

Desai began trading only in mangoes. During the first year of operation in2002,withthehelpoftradersfromCanada,France,theNetherlandsandothercountries,theyexported600tonnesofthefruit;in2003thisincreasedto1200tonnes,againwiththehelpofmerchanttraders.In2002theyalsotriedtosellinthedomesticmarketthroughsomesupermarketchains inmajorcities,andtothesystemrunbyNDDBMotherDairy.Butthisexperiencewasdisappointing:theresponsefromconsumerswasnotasexpectedandtheventuredidnotwork.By2004theywereexporting17000tonnesofmangoes.Themaindestinationsfor thesewere theMiddleEastand theUK.Theyalsocontinued to sell locallyon a minor scale through merchants and Mother Dairy on a demand basis. Thoughthemangoesbusinessisitsmajorone,Desaialsoexportsbanana,papayaand pomegranate. It has now succeeded in expanding its export destinationsto includeChina andAustralia; the required approvals/contracts have already beensigned.

ThemangoseasoninIndiaisspreadoveraperiodofabouteightmonths.ItcanstartasearlyasJanuaryorFebruaryinKerala,movinguptoAndhraPradeshandtheKonkan region ofKarnataka as the year progresses, then further north toMaharashtra,ValsadandtheSaurashtraregioninGujarat,endingduringAugustinUttarPradeshandBihar.As such,Desai canexpect tohavea viablemangobusinessforabouteightmonthsperyear.Tomeettherequirementsofexpandingthebusinessintoaneight-monthoperation,DesaiarebuyinginlocalmarketsinGujaratandarecarryingoutimprovementsandvalueadditionstotheproduceattheirpresentunit.InthefuturethecompanyplanstoimplementtheprocurementsystemithasalreadydevelopedatGujaratinotherstatesandareas.Desaihasalreadycontactedwith farmers in someof theabovementioned regions,whohavebeenguaranteedthebenefitsandfacilitiesofferedtoproducersinGujarat.The stategovernments ofAndhraPradesh andMaharashtrahave also startedsomeprocessingunitstohelpthefarmers.

Desaihasnoticedthatduringtheinitial2–3monthsoftheseasontheywillnothaveanycompetitorsfromanyAsiaregioncountries;hencetheirbusinesscanhave a major competitive advantage during this period. Major competitioncomes from Pakistan but only towards the end of the season (July–August),whentheChosavarietiesofmangofromUttarPradeshandBiharareavailable.

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To improve andmaintain quality andprevent deterioration in exports, certainprocessingandhandlingmeasuresare followedstringently in thecoldstoragepremises.Theseinclude:

Z deshaping: Therawmangoesbroughtfromthefarmfirstundergodeshaping.Inthisprocesstheextralengthofthestemiscutuniformly(toaboutoneinchlength)toavoiddamagethatmayresultfromtheacidicdischarge;

Z hot water treatment: After deshaping the mangoes are put through anautomatichotwatertreatmentplanttoremoveanddestroyfruitflyeggs;

Z fungicide treatment: Afterthehotwatertreatment,thelotgoesforfungicidetreatment,whichextendstheshelflifeoftheproduct;

Z grading: Theproduceisthenpassedthroughanautomaticgradingmachine.In this process themangoes are sorted into different lots according to theweightofeachfruit;

Z washing/waxing: Aspertherequirementsofthebuyers,washingandwaxingservicesarecarriedoutonselectedlots;

Z packing: This is carried out according to weight of fruits and the buyer’srequirementsvis-à-visthenumberofmangoesinacarton;

Z pre-cooling: The entire lot is thenmoved to a pre-cooling treatment plant.Pre-coolingbringsthefruitsatauniformtemperaturebeforetheymovetothecoldstorageshelves;

Z storing:After pre-cooling the packages aremoved to specified locations inthecoldstoragefacility;

Z loading:Whenanexportordomesticorderisreceivedthelotsareloadedintocontainersfortransportationtotheirdestinations.

To expand into the banana business, Desai is planning to import moderntechnology in all aspects of its operation, including farming, handling andprocessing; the company plans to spend about Rs. 5million for this purpose.Large-scalebananafarmersaroundNavsariandinnearbyareasofGujarathavealready been contacted and offered the same benefits and guarantees as themangofarmers.Contactmeetingswiththesefarmershavealreadytakenplaceatdifferentlocations.

SinceinceptionDesaihasalsobeendealingingreenvegetables,themainonesbeing lady finger (okra), bitter gourd, bottle gourd, and otherminor interestssuch as chilly and lemon. During the first year of this operation (2002) thecompanybought thisproduceon themarketbutalsopurchased fromfarmersaroundthecoldstorage facility.Aswith themangoes,vegetableexportswerealsoinitiallydistributedviamerchanttraders.Desaiexportedabout40percentof its procured produce through these traders and sold the remainder in thedomesticmarket.HereMotherDairywasthemajorpurchaser.


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Inthisinitialperiodthecompanyconvincedfarmerstotie-updirectlywiththemonthesamelinesaswiththemangofarmers.Slowly,directinputarrivalshavepicked up. Farmers are required to sort their produce intoA, B andC qualitycategoriesbeforedelivery,andthisistakenintoconsiderationindecidingprices.ThepurchasepricesofvegetablesarefixedslightlyhigherthantheSuratAPMCdailymarketprice.Thepaymentismadetofarmersthenextday,aftertheexactmarketpricesofSuratAPMChavebeenascertained.In2003DesaistarteddirectexportofvegetablestotheUKandMiddleEasterncountries.InadditiontothistheyarestillkeepinguptheirexportbusinessthroughmerchanttradersandinthedomesticmarketthroughMotherDairy.

To maintain the quality of the produce, Desai has devised a plan that alsobenefits the farmers significantly. Typically, small and marginal farmers hadbeen exploited by retailers in the supply of inputs such as seeds, pesticidesandfertilizers.Thesefarmershadalsobeenexploited insellingtheiroutputtotraders and commission agents.To liberate farmerswhoagreed to supply thecompanywithproduce,Desaidevisedaninnovativeidea.Inputssuchasseeds,pesticidesandfertilizersareprocuredinbulkandaresuppliedtofarmerswithoutanymarginandoncredit,freeofanyinterest.Thecostisthentakenintoaccountagainstpaymentforsupplyoftheoutput.

In2004Desaidistributedabout3000kgoflady’sfingerseeds(okra).Bysupplyingthistoitsfarmers,aswellasbottlegourdandbittergourd,thecompanyensuredthattheoutputwouldbeofthesamegoodvarietyandquality.Forlemon,chilly,beans and other vegetables, Desai did not provide seeds but a bulk purchaseagreementwassigned.Inchillyalone,the2004businessamountedtomorethan500tonnes,whiletheweeklyprocurementoflemonwasasmuchas15tonnes.

ContractFarmingIndia(CFI)AG,acompanybasedinZug,Switzerland,hasmadesignificant investments in Desai Fruits andVegetables (DFV) – the new nameforDesaiColdStorage sinceApril 2006 – to enhance its financial, operationalandmanagementcapabilities.DFVhas sincecreatedmultiple integratedpackhouses for bananas and continues to invest in creating facilities at the farmand village levels. Since its inception the company has invested in RandD foragriculturalpracticesandindevelopinglong-distancetransportprotocols.Theseinitiatives have helped Desai emerge as one of the leading exporters of highqualityfruitsandvegetablesinIndia.Itnowsuppliesawiderangeofhighqualitytropical products: the portfolio includes over 10 types of fruits and 30 typesofvegetables.However, thekey focusover theyearshasbeenon four fruits–mangoes,bananas,pomegranatesandgrapes.Thisflagshipproducemakesupover90percentoftotalsales.

Over2500smallandmedium-sizedfarmerssupplytoDesai.Thecompanyhasauniquecontractfarmingmechanismbywhichitcontrolstheinorganicinputs,

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technology andwork practices at the farm level to ensure that the product isabsolutely natural and safe.Themodel has been so successful that Desai hasa waiting list of over 800 farmers wishing to be included in its programme. The company works with its customers to create specialized, customizedsolutionsinordertodeliverqualityatareasonablecost.Itensuresthequalityofeveryproductthatitsuppliesbycontrollingeverystepinvolvedintheproductionprocess,fromlandpreparationtologistics.Thequalityassurancesystemisbasedonthefollowingprinciples:

Z process control –achievedthroughcontractfarmingandtechnicalcontrol; Z farm approval system – extensive checks are conducted forwork practices,use of chemicals and quality of products, before any farm is approved forprocurement;

Z traceability–ofthefarm,inputsused,processinglocationandtransportation; Z quality checks –aDesaiproductpassesthroughastringentqualityassuranceprocess:o qualitycontrolbyasupervisoratthepointofprocurementfromfarmer;o qualitychecksatthepointofpacking;o randomchecksofconsignments;o randomsamplingatlaboratoriesforresidueanalysis.

Desaihasbeenconsciousof the importanceofsuperior infrastructure from itsinception.Asaresult,oneofthemostmodernandstate-of-the-artpackhouseshas been developed, innovative trailer designs have been created for smoothtransportation,reefervanshavebeenbought,andpre-cooling,coldstorageandprocessingfacilitieshavebeenenhanced.

9.5 Comparison and evaluation of different models

Howdothedifferentmodelscomparevis-à-vistheinstitutionalperformanceofagro-industriesindevelopingcountries,asdiscussedabove?Table9.6providesabroadcomparison;thisisfollowedbyamorein-depthdiscussion.


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9.6 Production and procurement from small farmers by different models

9.6.1 do different models reach out well to large numbers of small farmers?

Access or reach to large numbers of small farmers is amajor problem formostmodels and is very important for cost effectiveness, quality and developmentimpact.Small farmersoftendonothave theability toconnecton theirownwiththemainstreamofagro-industrydevelopment initiatives.Onaccountof itshugemembershipofvillagecooperativesocieties,theAMULmodelisabletocoveraverylargenumberofsmallfarmers:itisabletocollectmilkevenfromfarmerswhoonlykeepasingleanimal.TheSugunamodelisalsoabletoreachouttoalargenumber

Agro-industry model reaching large numbers of small farmers

Ensuring adoption of suitable technology and practices by farmers

use of modern processing technology and meeting capital costs

Delivering a strong marketing effort

Effective management and control to meet the needs of all stakeholders

AMuL Strong limited Strong Strong Strong

Nandini Good limited limited Reasonable Reasonable

Nestlé limited Strong Strong Strong limited

Heritage Good limited Good Good limited

Mother Dairy limited Good Good Good Reasonable

Suguna Strong Strong Strong Strong Strong

Safal Market limited limited Good limited limited

HPMC limited limited Good Poor Poor

Pepsi limited Strong Strong Strong limited

iTC e-Choupal Strong limited Strong Strong limited

McCain limited Strong Strong Strong limited

Desai Cold Storage Reasonable Good Good Strong Reasonable

taBLE 9.6

Broad comparison of different models on institutional performance parameters

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ofsmallfarmers,mainlybecauseof its lowcapitalrequirements;thefarmersonlyhavetofeedandrearthechicksuntiltheygrow.ITCe-ChoupalalsoreachesalargenumberoffarmerseveninremotevillagesthroughtheInternet,andbysettingupweb-linked e-Choupals run by local operators or sanchalaks.The Nandini model,anothercooperativemodellikeAMUL,alsohasasubstantialreachbutnotasdeepasthatofAMUL.HeritagefoodshasdevelopedagoodpresenceinsomeruralareasbyusingtheexistingretailnetworkforFMCGgoods,butisalittleconstrainedbecauseitdoesnotdirectlycountonfarmers’involvement.DesaiFruitsandVegetableshasachievedgoodreachwithsmallfarmersinasmallareaofoperation.

Bycontrast,othermodelssuchasNestlé,MotherDairy,Safal,HPMC,PepsiCoandMcCain,thoughsuccessfulinotheraspects,aregenerallyunabletoconnectwithalargenumberofsmallfarmersandexpandtheirreach,eventhoughtheymayoftensuggest that they contribute substantially to their development. In the cases ofNestléandMcCain, thismaybeexplainedbytheirstringentquality requirementsandlimitedquantityrequirements.

9.6.2 do the different models try to organize production of raw material from small farmers?

AMUL leaves milk production to the farmers but it promotes the organization offarmers intocooperativesforthecollectionandmarketingofmilk. Italsohelpsthefarmersinmilkproductionthroughthesupplyofnutritiouscattlefeed,fodderseed,veterinary services, vaccination, artificial insemination services, and extension.Sugunaleavesrearingofpoultrybirdstoitsfarmersbutprovideslarge-scaletechnicalinputs,includingthebestbreedsofday-old-chicks,qualityfeed,veterinarycare,andextensionguidance.ThePepsiComodelalsoworksextensivelywithsmallfarmerssothattheyusethebesttechnologyandachievethequalityandquantityrequiredbythecompany,makinggoodprofits.McCaintoo followsthisapproach inalternativeways.PepsiCoandMcCaingivetechnologicaladviceandofferinputstothegrowers.PepsiCohascollaborativetri-partyagreementswithfarmersandinputcompaniesaspartners.McCainprovidesdiggers,planters,advisoryservicesandextensionservicestoitsgrowers.ITChassanchalaksandawebportaltogiveadvice.Desaialsoprovidesinputsandadvisoryservicestoitsmembers.HPMC,Nandini,HeritageFoods,MotherDairyandNestléprovidesomeextensionservices,albeitinalimitedrole.

9.6.3 Is the procurement activity organized efficiently? If so, how?

Three critical aspects of performance are quantity, quality and cost. AMULstandsout inquantityandcost.This isbecause itusesacooperativemodel toaccessremotesourcesandsharesthecostswiththefarmersthroughthevillage


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anddistrictcooperatives.Nandinitakesasimilarapproachbutisnotasefficient.MotherDairyisnotownedbythefarmersandthereforeisunabletofullyleveragethis model. However, it helps the cooperatives in distribution and marketingso that they can become more viable. Heritage achieves good efficiency inprocurementbyusingtheexistingretailnetworkforconsumergoods,achievinga two way flow of goods. Suguna organizes procurement efficiently via acontractingarrangementwith the farmers inwhichcostsandrisksareshared.ITC leveragesthe Internettoorganize itsprocurementefficiently.PepsiCoandMcCainarenotabletobeasefficientonthiscountastheyhavearelativelylooselinkwiththefarmers.

9.7 Adoption of appropriate technology and practices by farmers and performance on quantity and quality

9.7.1 are the various models able to adopt appropriate technology and practices through the farmers?

PrivateplayerssuchasNestlé,PepsiCo,McCainandSuguna,whicharedemandormarket-driven,seemtodocomparativelybetter inensuringtheadoptionofgoodtechnologyandpracticesbyfarmers.Thisappearstobebecausetheyareespeciallyconcernedaboutsellingqualityproducts,giventhefiercecompetition:ensuring quality in the rawmaterial is critical to their operations. Because ofthis theymake special efforts topush theadoptionofappropriate technologyby farmers, and they enforce this discipline through strict quality controlin purchasing from the farmers. Desai is also focused on adopting the righttechnologybecause it isprivately runand is engaged inexport, and thereforeneedstocomplywithhighinternationalqualitystandards.

FarmerorsupplydrivenmodelssuchasAMULandNandiniareoftennotabletodoaswell inensuringtheadoptionofappropriatetechnologyandpracticesbyfarmers.Thisissuedoesnotgarnerasmuchimportancebecausetheinclinationistoacceptthefarmers’produce,giventhattheyareultimatelytheownersoftheenterprise.However,toachievesuccess,thesemodelscannotignoremarketrequirements. ITC e-Choupal needs to focus on the adoption of appropriatetechnology,but its linkwith farmers ismoreremote– forexample, extensionknowledge is sent through the Internet only – and hence it cannot exert therequiredpressureaseffectively.However,thepricepaidandtheacceptanceoftheproduce is linked strongly toquality, and this servesasa signalofwhat isrequired from the farmers. Heritage Foods, working through retail outlets, isabletodolittleforadoptionoftechnology;SafalandHPMCarealsonotabletoplaymuchofarole.

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9.7.2 are the models able to procure a high quantity and quality of output from the farmers?

AMULdoesverywellonquantitycriteria;itprocures7.4millionlitresofmilkperdayfromthefarmers.Italsomaintainsbasicqualitythroughlocalqualitytestingautomatedbymilktesters,weighingmachinesandcomputerswidelydistributedto the village cooperatives.Themodel is able to achievehighquantityoutputandsatisfactoryquality.

Nestlé on theother handprocuresmuch less at 1.1million kgofmilk per day(1kg is slightlymore thana litre formilk)during thepeak season,butpushesverystronglyforhighqualitythroughvariousmeasuressuchastrainingongoodfarm practices, auditing of farms, technical support to farmers to help themreachqualitystandards,andstricttesting/acceptancepoliciesatthecollectioncentres.ThisisdrivenbyNestlé’shighqualitystandardsandrequirements.

Sugunahasachievednotablesuccessinbothquantityandquality.ThecompanydoesbusinessworthRs.20.2billion(2007)inlivebroilerchicken,frozenchickenandeggs,by sourcing itsproducts through12000contract farmerson15000farmsacross11states.Ithasreducedmiddlemeninthepoultrychainfrom14to4.ItaimsforaturnoverofRs.30billionby2010anda20percentmarketsharein the Indian poultry industry. It maintains high quality through importationof breeds, state of the art hatcheries, an advanced RandD centre, feedmills,veterinarians, scientists and other expert professionals, assuring farmers thebestqualitychicks,feedandprofessionalcare.Itsscientistsandemployeestrainthefarmersingoodmanagementpractices.Thesystemresultsintheproductionofhighqualitypoultrybirdsinthequantitiesdemandedbythemarket.

For its limited quantity requirements, PepsiCoworks closely with its contractfarmers to produce the specific varieties of produce needed and enhanceproductivity. It employs a team of agricultural graduates to provide technicalinput and monitor the farmers in their specified area. McCain also works ina similar way to generate high productivity and quality raw materials for itprocessingrequirements.

ITCdependsonitsInternetenablede-Choupalnetworktoobtainthequantitiesofproduce itneeds from the farmers. Itdoeswellon reachingoutwidelyandachievingthevolumesitdesires.However,wherequalityissuesareconcerned,itonlyworksindirectlywithfarmersbymakingavailablehighqualityagri-inputsatreasonableprices,andprovidinginformationaboutbestagronomicpracticesthroughitswebportals.


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9.7.3 How cost effective are different models in procuring from the farmers?

AmajorstrengthoftheAMULmodelisthecosteffectivenessofitsprocurement.AMULhasshortenedthemilksupplychainandhasmadeitveryfinanciallyviable.Moreover,AMULpassesonthebenefitsofthiscost-effectivenesstothefarmers,whoiflinkedtoAMULreceiveabout80percentofwhattheconsumerpays.TheITCe-ChoupalisalsohighlycosteffectivebecauseitusestheInternetveryeffectively,thusreducingtransactioncostssubstantially.TheincrementalincometoITCfromthe more efficient marketing process is about US$6 per tonne, which is about2.5percentoverthemandisystem.Sugunaisalsocosteffective,mainlybecauseof itsefficientcontractingarrangementsandachievementofscaleeconomies intechnology and technical services.The PepsiComodel andMcCain models arealsomoreefficientthanalternativechannelsandprovidemoremarginstofarmersas comparedwith traditional potatogrowing.But their highprocurement costspreventthemfromexpandingwidely.ThisisalsotrueforNestlé.Besides,gainsinprocurementefficiencieswouldmainlygotothecompaniesintheNestlé,PepsiCo,McCainandITCmodels.HPMC,SafalMarketandMotherDairylackcosteffectiveprocurementprocesses.

9.8 Processing technology and capital requirements

9.8.1 are the models successful in using or promoting good processing technology?

AMULhasagood recordofusingmodernstate-of-the-artprocessing technologyandadopting it innovatively to localneedsandconditions.This ismainlybecauseits leaders have always believed in employing professional management that ishighlyempowered.Ahighlyefficientprocurement systemand theneed tofindamarketforthegrowingmilkproductionofmembershaspropelledtheuseofgoodtechnology.PrivateplayerslikeNestlé,PepsiCo,McCain,ITCandSugunaallhaveagoodrecordofexcellentprocessingtechnology,andthishasbeendrivenlargelybyinternal standardsandmarkets.PepsiCoandMcCainhaveworld classprocessingfacilities for making various products such as chips and french fries. Desai usesgoodprocessingtechnologybecauseitsproducemustmeethighexportstandards.HPMCandNandinihavenotdonesowellonthiscount.HPMCplantsworkatonly 15–20percentoftheircapacitywhichperhapspreventsthemfromupgradingmuch.Theyareneitherhighlymarketorientednorhighlyfarmeroriented,andhavelesspressureforgeneratingareturnoninvestment.

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9.8.2 are the models able to meet the high capital requirements of agro-industry?

AMUL has been able to meet the high capital requirements of it dairy plants andprocessingtechnologybecauseofitssoundmanagement,particularlyitscosteffectiveprocurementandstrongmarketing.Ithasmadeuseofcreditwhichitcouldeasilyobtain,aswellasgovernmentassistanceandinternationalaid,giventhatitwasacooperativeof farmersservinghighprioritydevelopmentobjectives. ITCcouldtaptheresourcesof its highly diversified and profitable parent businesses, PepsiCo and McCain, itsmultinationalparentorganization.ThecapitalresourcesavailabletoNandini,DesaiandSugunaweremorelimited.HPMCandMotherDairycouldtapgovernmentresources.

AMULcouldmeetpartofitsworkingcapitalrequirementsbydelayingthepaymentsformilk.Thedistrictmilkunionspaythevillagemilksocietiesafter10days.IntheMcCainmodelfarmersarepaidfortheirproduce7–17daysaftertheprocurements.Thisprovidessomeworkingcapitalforthemodel.InthecasesofITCandPepsiCo,paymentsaredelayedby somedaysandhelpmeet the requirementsofworkingcapital. Some working capital management is built into contracts in the case ofSuguna.Additional requirements in all these casesneed tobemet throughbankcredits,forwhichthebasicsoundnessofbusinessmodelsisveryimportant.

9.9 Marketing and product innovation

9.9.1 are the different models able to deliver a strong marketing effort?

AMUL,Nestlé,Suguna,ITCe-Choupal,PepsiCo,McCainandDesaialldemonstratestrongmarketingperformance,whileMotherDairyandHeritagefoodscanberatedas good. Nandini’smarketing performance can be rated as reasonablewhile themarketing performance ofNDDB’sSafal is limited.HPMC is not very effective inmarketing.

The top tier ofAMUL’s three-tier structure, i.e. the state federation, focuses onthemarketingofmilkandmilkproducts.Byinsistingonanumbrellabrand,AMULskilfully avoided interunion conflicts and also created an opportunity for unionmembers to cooperate in developing products.Nandini is not so effective in thisregard becausemuch of itsmarketing is done by the district unions themselvesandnotbythestatefederation.AMULproductsareavailableinover500000retailoutletsacrossIndiathroughitsnetworkofover3500distributors.AMULhasusedverysimplebuthighlyeffectiveadvertisingcampaignsascomparedwiththestar-studdedcampaignsofPepsiCoandNestlé.ItisfairtoconcludethatAMUL,PepsiCo,ITCandNestléarehighlysuccessfulinmarketingtheirproduce.


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PepsiCohasa strongsoftdrinksmarketingnetworkand theagribusinessdivisionuses the samenetwork tomarket its products under the brandnameFrito Lays.ITCusesmarketingchannelsandthemarketingexperienceofitsFMCGdivisionstogoodeffect.McCainFoodsIndiahasstronginstitutionalbuyerssuchasMcDonald’s,KFCandPizzaHut.Sugunahasalsodevelopedstrongmarketingwithsubstantialretailreach.HPMC’smarketing,thoughinitiallysuccessfulhasnotbeensustainable,perhapsexplainedbyitsnon-marketorientation.

9.9.2 are the different models able to develop new innovative products?

AMULinitiallywasmakingonlyafewmilkproductsandmainlyconcentratedonliquidmilk,butterandmilkpowder.Butitisnowproducingawholerangeofproductssuchasicecream,srikhand,dahi,chaas,chocolates,flavouredmilksandmore.PepsiCoiscontinuouslyinnovatingandhasahugenumberofproducts.McCain,ITC,SugunaandDesaiareaddingtotheirproductranges.Theprivateplayersaregenerallyattheforefrontofcreatinginnovativeproducts,barringexceptionssuchasAMUL.Privatemodelsaremoreproactiveincreatingnichesandinnovativeproducts,anddevelopthenecessarytechnologythatgoeswiththis.Sugunahaslaunchedanewcategoryofhomemealreplacements–SugunaHomeBitesandSugunaAnytime–arangeofready-to-eatchickenproducts.Nestlé,PepsiCo,McCainandITCinvest largesumsofmoneyonresearchanddevelopmenttobringoutinnovativenewranges.Mostcooperative and government-run models are less market oriented, perhaps as aresultofbureaucraticandstructuralbottlenecks.

9.10 Ownership and control

9.10.1 Who are the major owners in the model and how does this affect performance?

AMULandNandiniareownedbythefarmers.Thefarmerselectthetopmanagement–managing committees or boards of directors of the village cooperatives, districtunionsandstatefederations–onarepresentativebasis.Thisensuresthattheconcernsandneedsoffarmersaregivenhighpriority,andalsobringsloyaltyandcommitmentonthepartofthefarmerstosupplygoodproduce.However,particularlyinthecaseofAMUL, professionalmanagement is appointedbelow this level and empoweredto handle the strategic and operational management. This helps to ensure thatexcellentstrategicandoperationaldecisionsaremade,givingabusinessedgetotheorganization.Becauseoffarmerownershiptheorganizationcontinuestoreinvestinthebusinessandofferavarietyofnecessarygoodsandservicestothefarmers.

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InprivatemodelssuchasNestlé,PepsiCo,McCain,ITC,HeritageFoodsandSuguna,theownershipandcontrol remainswith theprivatecompanywhich reports to itsshareholders. The private profit motive and generating shareholder value willnaturally dominate. In the cases of PepsiCo, McCain and Suguna, a partneringapproachthrough,forexample,contractfarmingmodelshasbeendevelopedwiththeproducers,therebyrecognizingtheircriticalroleinproductionandsupply.Inthiswayproducerconcernscanbetakenintoconsideration.However,inthecaseofITCandHeritage,partneringisnotexplicitlydevelopedandtherelationshipcontinuestobebasedmainlyonprocurement. In thegovernment-drivenmodelsofHPMC,MotherDairyandSafal, theownershipandcontrol remainswiththeState,whichhelpsbring insubstantialstatecapitalandgovernmentsupport.Butperformanceremains dependent on governmentmanagement and commitment,with varyingdegreesofsuccess.

9.10.2 Is the management of the model professionalized?

Professional management is very important to the success of most models. The topmanagementofAMUL is largelynotprofessionalandconsistsofelectedfarmers’ representatives. However, strategic and operational management havebeen strictly professional to date. This may be somewhat less so in the moredecentralizedNandinimodel,andthismayaccountforitsmorelimitedsuccess.Inthegovernment-ownedmodelsofHPMC,MotherDairyandSafal, administrativemanagementisappointedbythegovernmentandmayormaynotconsistofsuitableprofessions,whointurnmaytendtoreportmoretothegovernmentbureaucracyratherthanproducers,consumersorshareholders.PrivatemodelssuchasNestlé,PepsiCo, McCain and ITC do very well in hiring highly-qualified professionalmanagementandhave thecapacity topay for suchmanagement.Toeconomize,ITC also uses local non-professional sanchalaks and samyojaks after training.OtherprivateplayerssuchasHeritageandSugunaemployprofessionalmanagementtoo,butmaynotbeabletopayaswellandthereforemaynotattractthebesttalent.

9.11 Addressing the interests of various stakeholders: producers, consumers, investors and government

9.11.1 producers

The AMUL model, given its ownership by producers and strong professionalmanagement, is perhaps best able to meet the interests of farmers. In recentyears,withsignificantmarketshareandpowerinitshands,AMULappearstohaveenhancedthebargainingpoweroftheproducers,oftenallowingittoraiseconsumer


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pricesintheinterestsofitsfarmers.Suguna,PepsiCoandMcCainalsoclaimtomeettheinterestsofproducersthroughwin–wincontractingmodels.TheNestlé,ITCandHeritagemodelsappeartobefocusedmoreonreducingprocurementandsupplychaincosts to thecompanies; theysharebenefitswiththeproducers toa limitedextentbutclaimtoprovidethemwithabettermarketingchannel.

9.11.2 consumers

Nestlé,PepsiCoandMcCainarefocusedentirelyonconsumersandaimtoprovidebestqualityproductstotheircustomers,whoaretheraison d’etreoftheirbusiness.SugunaalsotriestodothesameandAMULisnotfarbehind.Thesetwoorganizationsnaturally seek markets for the increasing supply of produce from their farmers, andthereforeneedtodeliverhighqualitytotheircustomers,servethemwell,andkeep offering new productswhich consumerswill want.Government-runmodelssuch as HPMC, Mother Dairy and Safal often lack this fundamental customer-orientedphilosophy.

9.11.3 Investors

GiventhatcooperativesharessuchasAMULarenottradedandthereforedonothaveamarketvalue, there isnooutside investor interest insuch ‘shares’, thoughof course, the farmerownersare interestedpartiesand thereforeare themselvesinvestorsofsorts.AMULprofitsareoftensharedthroughtheirdistributionaspricebonusesatyear-end.Bycontrast,privatemodelssuchasNestlé,PepsiCo,McCainandHeritagenaturally try tomaximizebenefits to shareholder investors throughincreases in share value.As such, theyare ideal vehicles for all kindsof investorswhomay,forexample,seeagri-industryasa‘safebet’indifficulteconomictimes.Government-runmodels such asHPMCandSafal areusually not concernedwithshare values; however, in the present economic environment, the Governmentdoesnottolerateloss-makingenterpriseseither,andassuchmaybeanactiveandinterestedinvestor.

9.11.4 government

TheGovernment gets involved in these enterprises mainly for social objectives.TheseareservedwellbyAMULbecause itsactivities substantiallybenefita largenumberofproducers,allruralpeople,andtheirwell-beingisahighpriorityfortheGovernment.TheGovernmentisalsobehindotherinitiativessuchasHPMC,MotherDairyandSafal,giventhattheseengageincriticalactivitieswhichare ignoredbytheprivatesector.However,iftheyfail,theybecomeaburdenontheGovernment.Meanwhileifprivatemodelsaresuccessfulincontributingtoagriculturalandrural

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development, they are also doing theGovernment and the nation a service. In amoreextensiveway,ITCandSugunaseemtohavedemonstratedsuchanimpact.Nestlé,PepsiCoandMcCaintoohavecontributed,butinlimitedareasandtolimitednumbersofpeoplecomparedtomodelssuchasAMULandSuguna.

9.12 Conclusions

Agro-industrieshavebeengivensignificantpriority in theeconomicdevelopmentof India.MahatmaGandhi’semphasisondevelopingvillage-basedagro-industriesin themovement for independencemarked the beginning of this strategic view.Is theprioritygiven toagro-industries justified today?Thisanalysisfinds that theagro-industrialsector in Indiacontributessignificantlytoemployment in industry,aswellastovalueadditionandincomegeneration.Itscontinuedroleinpromotingdevelopmentandreducingpovertywilldependonitscapacitytocontributetosmallfarmincomesandruralemployment,particularlyamongthelandlesspoor.

Managerially,oneofthemajorchallengesliesinorganizingsustainedproductionandprocurementfromlargenumbersofsmallfarmers.Apartneringapproachappearstobemostpromising inovercomingmultiple constraints. It canbe implementedeither through building cooperative organizations, or by building confidence andtrustthroughamutuallybeneficialbusinessrelationshipinvolvingprivateenterpriseandfarmers.Inbothcases,andwithothersuccessfulmodels,thegovernmentmustplayafacilitatingrolethroughenablingpolicies,regulations,financingoptionsandresearchanddevelopment.

If the development objectives of agro-industrial growth are to be served, smallfarmers must benefit from this growth, and the landless should at least benefitindirectly. However, this depends substantially on the nature of the organizationand the commitment of the agro-industry to their involvement as partners. It also depends on the bargaining power of the small farmerswithin themodelsand structures that are created.Cooperatives have often done better in bringingbenefitstotheruralpoor,sometimeswiththeassistanceofNGOsasintermediaries.Supply contracts with small farmers are rarely formal and are therefore mostly non-enforceable in India – as elsewhere in developing countries – remainingagreements that are only morally-based. In order to make contract farmingsuccessful,muchdependsonthedevelopmentoflonger-termrelationshipsbetweenagro-industries and farmers through transparent contract terms, fair pricing,effectiveextension,andgoodmarketing.This ispossibleforprivateagro-industryfirms,asshownbythePepsiComodel.

There is a need for new indigenous models to emerge for the organization ofagro-industries.Governmentmodels alone do not demonstrate a good record ofperformance.TheAMULcooperativemodelisonepromisingapproachthatbrings


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benefits to small farmers and gives them ownership of the enterprise. However, itneedstoovercomepolitical,legalandmanageriallimitations.ThePepsiComodel,involvingcogentbackwardintegrationwithfarmersbyaprivatecompanybasedonastrongproductmarket,offersanotheralternative.However,itrequireslong-termcommitmentandfinancialstrengthwithlimitedscopeforbenefitinglargenumbersof rural poor. It is critical that alternative agro-industrialmodels are encouragedandreceivestronggovernmentbacking,especiallythosemodelswhichcontributepositivelytoruralemployment,povertyalleviationandsustainabledevelopment.

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cHapter 10

linking farmers to market through processing:

the role of agro-industry clusters with special reference to mango in south India

10.1 Introduction

In recent times, worldmarkets have become truly globalized.World exports haveincreased and commercial stakeholders from across the globe are now able toparticipateintradeatthegloballevel.Thistrendistrueforagricultural/horticulturalcrop-based products as much as any other good. It is becoming increasinglyimportantthatallparticipantsalongagrifoodvaluechainsareeffectivelyorganizedtobecompetitiveglobally.Yet,valueadditioninthegloballycompetitiveproductionprocesswillonlybeeffectiveifthefinalconsumerpriceisfairlydistributedtoallactorsalong the supply chain (FAO, 1997).The effectiveness and smooth functioning ofsuchsupplychainsisalsodependentonaccesstomarketinformation,whichinturndependsonfactorssuchastechnology,infrastructure,institutionalpolicyandfinancialresources,aswellasmarketforces.Thegoalofglobalcompetitiveness isespeciallychallenginginsupplychainsinvolvinghighlyperishablecommoditieslikehorticulturalproducts. Cross border supply chains involving horticultural products have provento be instruments that stimulate the development of local agro-industry, generateemploymentandimproveaccesstotechnology,iftheconnectionbetweenproducersandthedifferentactorsacrossthechainiswellmanaged(Roekelet al.,2002).

India, with its strong horticultural crop production base, appears to have hugeuntappedpotentialtobeaglobalcompetitorforanumberofhorticulturalproducts.Mango and mango-based products constitute an important segment of India’sagrifoodeconomy.Thecountryistheworld’slargestproducerofmango,accountingfor about 40 percent of global output (Hanemann, 2006). Although less than5percentofthisproduction isprocessedintomangopulp,this isthemainexportproduct,bothintermsofvalueandvolume(Babitha,2009).TheChittoordistrictof


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AndhraPradeshisthemainsupplybaseformangopulp(MehtaandGeorge,2003)inthecountry,followedbytheKrishnagiridistrictofTamilNadustate.BotharelocatedinSouthernIndia,whereanascentagro-industryclusterforthesupplyofmangopulphasbeeninoperationforalongtime.Thisagro-industryclusterisratherdynamic, yetstillinefficientforwantofappropriateinstitutionalsupport.Realizingtheuntappedpotentialofthissectorforsupplyingprocessedproductsandgeneratingincomeandemployment,strongpolicysupportfordevelopinginfrastructureandlogisticssupportbegantoreceivehigherpriorityfromtheGovernmentinrecentyears.

The creation of a separateMinistry of Food Processing Industries, aswell as theenhancementoftheinstalledcapacityoftheindustryandtheliberalizationofthepolicyof importingmodernizing technology, area fewof the recentgovernmentinitiatives aimed at uplifting the processed product sector.The installed capacityofthefoodprocessingsectormorethandoubledwithinonedecade,fromamere 1108000million tonnes (MT) in1993/94 toover2 774000MT in2006/07. In the2006/07budget, the foodprocessing sectorwasdeclaredapriority area forbankcreditandarefinancingwindow,withanallotmentofsomeUS$2billion,especiallyforagro-processinginfrastructureandmarketdevelopment.

Oneofthemainobjectivesofthisdrivehasbeentoimprovethelinkageoffarmerswiththemarketthroughvalueadditionandprocessing,agoalwhoseaccomplishmentcontinues to be far off. This is especially so with regard to the totapuri mangoagro-industry sector, given its persisting domination by market intermediariessuchasthepre-harvestcontractorsandcommissionagents.Whileseveralmodelsof effective linkagesbetween farmers andmarkets throughprocessing, includingpublic–private partnerships, have been initiated successfully, they could not besustained for long. In a highly competitive and mature market, initiating andsustainingamarketlinkagerequiresspecialefforts.Thischapterpresentsananalysisoftheagro-industryclusteroftotapurimangoinSouthernIndia,fromthepointofviewofclusterdevelopment,distributionofmargins,changingpartnershippatterns,governmentpoliciesandinitiativesandsupplychainmanagement.

The authors’ analysis uses data from both primary and secondary sources. Theprimarydatahasbeencollectedfromasampleofover50producers,processorsand other stakeholders involved in totapuri mango inChittoor district ofAndhraPradesh.Thesecondarydatahasbeendrawnfromvarioussources.Discussionswithkeystakeholderscomplementtheinformationsourcesutilized.Thedatapertainstoagriculturalyears2006/2007and2007/2008.

The chapter is organized into three sections. Section 2 outlines the status andperformanceof the totapurimangoagro-industryclusterandtheexistingpatternofmargindistributionalongthesupplychain.Section3providesadiscussionontheagro-marketingclusters,includingvariousmodelsoflinkageinvolvinghorticulturalcrops.Section4highlightstheuniquenessofthetotapurimangoclusterandmakessuggestionsforimprovingthisagro-industrycluster’sperformance.

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linking farmers to market through processing: The role of agro-industry clusters with special reference to mango in south India

10.2 Status of processed mango in south India

TheIndianagriculturalexportbasket,whichcomprisesbothfreshandprocessedproducts,istraditionallydominatedbymango(Mangifera indica)despiteeffortsatdiversification.Theprocessedproductsectorisespeciallydominatedbythesemi-processedformofmango–themangopulp–makinguparound43percentoftheexportofprocessedfruits and vegetables and over 80 percent of all mango products (Agricultural andProcessedFoodProductsExportDevelopmentAuthority,APEDA,2008).Astheworld’slargestmangoproducer,Indiaaccountsforapproximately40percentofworldmangoproductionandisanaturalhomeforover1000varietiesofthisspecies,witharound20varietiesbeingtradedcommercially.Alphanso(fromthewesternpartsofIndia)andtotapuri(fromthesouth)arethetwovarietieswhichcatertothedomesticandexportdemandforprocessedmango.Nearly80percentoftotapuriproducedinthesouthisprocessedintomangopulp,muchofwhichisexported,whilearound20percentisuseddomesticallyforthemanufacturingofjuices,jamsandothermangoproducts.Thefactthat semi-processedmangofromtheChittoorregionhasbeenthemainsourceofmangopulpexportfromIndiaforovertwodecadeshighlightsthecomparativeadvantagethisregionhasfortheproductionoftotapurimango.

10.2.1 the totapuri agro-industry cluster

The South Indian state of Andhra Pradesh accounts for over 29 percent of thecountry’s mango area and contributes around 39 percent of production, with aproductivityofaround8tonnesperha.Chittoordistrict,withanareaofover59380ha undermangocultivation,isthemainmangobelt,contributingabout12percentoftheregion’smangoproduction(GovernmentofAndhraPradesh,2008–Annex1).

A typical mango orchard in this region houses over ten varieties, each cateringto a specific market demand, of which totapuri is the main mango variety usedexclusivelyforprocessingpurposes.TotapurimangoproductioninChittoordistrictrepresentsatypicalagro-industryclusterforprocessedpulp,whichemergedduetotheagroclimaticsuitabilityoftheregionformangocultivation.Theclusterhousesawidelyspreadandvibrantmangoproductionbase,plusafewsemi-processingunitsthatoperateforfourmonthsannuallyduringthemangoseason.Thesehavebeenconvertingtotapurimangointopulpforseveralyearsnow.Withinthelastdecade,the number of semi-processing units operating in this region grew to around 50,withvaryinglevelsofinvestmentinprocessinginfrastructure.Thesearespreadoutoveraradiusof50kmaroundtheproductionbase,formingthemainplayersofthe agro-industryclusterinChittoor.

Estimatesindicatethattheregionproducesaround4157928tonnesofmango,withinwhich70–75percentisthetotapurivariety(MinistryofFoodProcessingIndustries,2008. http://mofpi.nic.in/). In terms of financial value, Chittoor exported around


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Rupees(Rs.)1416.3million(US$29.63million)ofmangopulpfromtheagro-industrycluster(Departmentofcommerce,2007).Theregionalsohousesawholesalemarketexclusively formango tradeandhasgoodaccess toan internationalairport, about 180kmawayinBangalore.Theprocessingunits,beinglocatedclosetotheproductioncentre,givetheproducertheoptionofsupplyingdirectlyforprocessingintopulp.

10.2.2 the totapuri mango supply chain in chittoor

The supply chain of totapuri mango is characterized by a large number ofstakeholders and chain actors, who operate without any formal written supplyagreements or pre-fixed price contracts. These include producers, suppliers,market intermediaries, processors and consumers.The totapuri mango cluster inChittoorisoneofthelargestsupplybelts,withover8500mangogrowersandover 1000pre-harvestcontractors,tradersandothermarketintermediaries.

Producers and production

MangoinChittoorisusuallyproducedinamixedcommercialorchardmaintaininga number of varieties and trees of different ages.Theorchards in this region aremainly large farms of over 10 hectares each, although farm size varies from lessthanonehectare to over twenty hectares. Because they constitute an importantsourceoffarmincome,mangoorchardsintheregionareusuallywellmaintained.Annualapplicationoffarmyardmanure,andoccasionalapplicationoffertilizerandirrigation,areundertakenaspartof regularagriculturalpractices.Annualaveragemaintenancecosts range fromRs.5000 (US$125) toRs.35000 (US$830)perha,dependingonthebearingageoftheorchard.

Mangotreescometobearfromthefourthyearafterplantingandcontinuetoyieldforupto60years.However,theeconomicbenefitsaremostapparentinyears8to40.Afullygrownmangotreeinfullbearingcanyieldupto60kg.Butmangocultivationis constrainedbybiennial bearing, i.e. yearswithhigh and lowyields alternately. This specific characteristicofmango trees requiresappropriate strategies todealwiththeinstabilityinproduction,suchasdiversificationinageandvarieties.

Suppliers

Irrespectiveofthevarietyororchardtype,mangoismainlysoldthoughpre-harvestcontractors (PHCs), with few undertaking self-marketing.The PHC enters into acontractwithafarmerthreetofourmonthspriortotheharvestseason,basedonthefloweringoftheorchard.ThePHCwillalsoundertakesomeofthemaintenanceof the orchard, plus the harvest of the produce and its transfer to the marketorprocessingunitathis cost.Byentering intoacontractwith thePHCs, farmerstransfertheirproductionandmarketingrisksdownthemarketchain.Thespecificcharacteristicsofmangoproductionandsale–suchasbiennialbearingofmangotrees, high transaction costs and a lack of access to credit – can force producers

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intodistresssalestoPHCs;thusthepricepaidbythePHCisoftenlowerthanthatprevailing at thewholesalemarket at any given time.Since the PHC enters intosuch a contractwith a number of producers, he undertakes the transfer functionandmakeshismarginthroughbulkingandeconomiesofscale.Despiteeffortsatcreating marketing infrastructure such as markets closer to production centres, thedominanceofPHCsstillpersistsinmangomarketing.

Market intermediaries: wholesalers/commission agents and retailers

The farmer or PHC transports the harvested mango to the wholesale market, aspecializedmarketsolely trading inmangowitha largenumberofauction lots,whereit isauctionedbyawholesaleorcommissionagent.Thecommissionagentrentstheauctionlotduringtheperiodofthemangoseasonorbuysitandauctionstoprocessors,retailersandpettyvendors.Forthistransactionacommissionischargedtoboththesellerandthebuyer.Thewholesalerorcommissionagentthensellsthemango to retailers or processors within the samemarket or by transporting theproducetodistantdestinations.Directsaletoprocessorsiscommon,especiallyinthecaseoftotapuri,thoughthisinvolvesafewlarge-scalefarmersonly.

Processors

Processorsformanimportantmarketintermediaryinthetotapurimangomarketingnetwork,asmuchoftheproduceisconvertedtoavalueaddedintermediaryproduct,thepulp.Chittoorhostsaround50mangoprocessingunits thatoperateduringthemango season for three to four months, from May through August every year. Most of these processing units are small-scale canning units, with investmentsof up to Rs. 2 million (US$47 620), with a capacity of 10 tonnes per hour (IndiaMinistryofAgriculture,2008).Thereare fourunitswithstate-of-the-art technologyfor undertaking aseptic packaging, involving an investment of over Rs. 5 million (US$120000).Incontrastwiththetypicalprocessingplantsoftheregion,thesehavea5tonneperhourcapacityonly,asasepticpackagingtakeslongerforprocessing.

The processing units undertake custom processing based on the orders fromexporters.Therawmaterialandthepackingmaterial(tincans)aresuppliedbytheexporter,whilethesemi-processingunitssimplyconvertthefruitintopulpusingtheavailableinfrastructureandlabour.Theamountpaidtotheprocessortoconductthisactivity isRs. 3500 (US$85)per tonneofpulp.A fewof theprocessingunitsalsoundertaketheirownprocessing,procuringtherawfruitfromthemarket,involvingaworkingcapitalofoverRs.200000(US$4750)perexportcontainer(of6000cansor18.6tonnesofpulp).

Thefinalproductofthisprocessingstageisasemi-processedproduct,mangopulp,whichisusuallycannedor insomecasespackedinasepticpackaging.Theexporterbearsthecostsoftransportingthepulptotheportandexportstodifferentdestinationsbysea.Thepulpthussoldisrepackedtoservethedomesticandexportdemandforfreshjuiceandothermangobasedproducts,suchasjams,jelliesandthandra.


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Exporters

Nearly 80 percent of themango pulp is exported to different destinations basedon prior orders. Mango exporters are generally the large industrial groups thatarealreadyintoexportbusinessor individualentrepreneurswhoactasagentsforforeignbuyers.MuchofthemangopulpfromIndiaisexportedtotheMiddleEast,EuropeandUSA.

10.2.3 value addition and margins along the supply chain

Inamarketchain,eachmarketintermediaryperformsaspecifictransferfunctionorvalueaddition, inanticipationofa remunerationthat isdirectlyproportional to thequalityofservicerendered.However,whenpowerinthechainisnotfairlydistributedamongthechainactors,therewillbenoequitabledivisionofvalueaddedinthechain.The concentration of power with a specific market intermediary may stem fromtheiraccesstomarketinformationandtheirabilityandcapacitytotakehigherrisks (Preckelet al.,2004),Thiscanleadtodifferencesinmarginsamongthechainactors.

The role played by each of the market intermediaries, and the costs incurred andmarginsearnedalongthefreshandprocessedmangovaluechains,arediscussednext.Themarketchainofprocessedtotapuriisanalyseduptothelevelofexport;thereforethesemi-processor’ssalesandmarginsarealsocalculatedasashareoftheexportprice.

InFigures 10.1and10.2anoverviewof the costs andmarginsof freshand semi-processed totapuri mango is presented, taking into account all the marketingchannels and the most popular market channel adopted by the producer.

Mango producer Rs. 3.00/kg

Producer cooperative

Commission agent

Pre-harvest contractor Rs. 3/kg

Wholesaler Rs. 5.25/kg Rs. 8.50/kg

Retailer Rs. 8.50/kg Rs. 16.00/kg

Cooperative retailer

Consumer Rs. 16.00/kg

FIGURE 10.1 market chain and sale price for fresh mango sale (domestic market) (The highlighted channel is the focus of this analysis)

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Theproducercontractstothepre-harvestcontractor,whotransportstheproducetothenearestwholesalemarketandauctionsit.Theretailerpurchasesandsellstodomesticconsumers.

Thehighestmargin in the fresh totapurimangochain isearnedby the retailer(28percent), followedby thewholesaler (16percent), farmer (10percent)andlastly the PHC (9 percent). In the processed chain the exporter receives thehighestshare (17percent).ThePHC isbetteroff in thischainthan inthefreshone (11 percent) and is then followed by the processor (7 percent) and finallythefarmer(6percent).Inreal(rupee)terms,thereisnopricedifferenceforthefarmer;thePHC,however, isabletoincreasethemargininrealtermsbecauseof the elimination of the commission agent from the chain.Some large-scaleproducersthatarelocatedinthevicinityoftheprocessingunitsareabletomakedirect deliveries to the processing units, thereby substantially increasing themargintheyreceive.

Theprocessor’smarginreflectsthelevelofriskundertakenbythischainactor.Theworkiscontractedandowninvestmentsarethereforelimited,resultinginarelativelylowlevelofrisk.Alongthemarketchain,thematerialisincreasinglybulked,givenaconcentrationoftheproducewithareducingnumberofplayersateachstage;thisimpliesthatincomeinrealtermswillalsoincreasesignificantlyalongthechain.

Mango producer Rs. 3.00/kg Wholesaler

Commission agent

Domestic consumer

Importer Rs. 26.54/kg

Pre-harvest contractor Rs. 3.00/kg Rs. 6.00/kg

Processor Rs. 6.00/kg Rs. 7.97/kg

Exporter Rs. 7.97/kg Rs. 26.54/kg (FOB)*

Retailer

Consumer in importing country

Market network in imported country

FIGURE 10.2 market chain and sale price for processed mango sale (export market) (The highlighted channel is the focus of this analysis)

*FOB: Free On Board.


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The difference between the price paid by the ultimate consumer and the pricerealized by the producer is the price spread. In the case of fresh and processedtotapuri mango this is Rs. 14.37 and Rs. 24.91 per kg respectively (Table 10.1).Althoughthepricespreadissignificantlydifferentinthetwochains,becauseofthehighdifferencesincosts involvedinprocessingthis isnotreflectedinthemarginsearnedinrealterms.(SudhaandKruijssen,2008).Theflowofmarketinformationalongthechainislimited;thisisshownbyalackofdifferentiationatfarmerlevelintermsoftotapurimangoproduction.

Further,theexacttermsandconditionsofthecontractbetweentheexporterandtheimporterarenotclearlyknown.Thepricespreadandmarketmarginswillreducesubstantiallyifthefinalpricepaidbytheconsumerattheimportingcountryistakenintoaccount.Inatypicalexporttransactionofmangopulpfollowingthestandardmarketing channel, the proportion of consumer’s price received by the producerdoesnotshowanydifferencefromwhatitiswhenobtainedinthemarketforfreshproduct.Theexporter’sshareisimproved,buttheadvantageofahigherexportpriceisnotdistributedtoalltheotherplayersalongthechain.The‘fagend’player,liketheexporterwhohasaccesstomarketinformation,improveshismarginfromtheexportofmangopulp.Itisherethatthetotapuriagro-industryclusterfailstocoordinateafairdistributionofthemarketmargins,unlikeinthecaseofotherexport-orientedmarketlinkages.

Sale price Fresh Proportion of consumer’s price (%)

Processed mango pulp

Proportion of consumer’s price (%)*

Proportion of consumer’s price (%)**

Farmer’s sale price 3 18.75 3 18.75 6.67

PHC’s sale price 5.25 32.81 6 37.5 13.33

Wholesaler’s/processor’s price 8.5 53.13 7.97 49.81 17.71

retailer’s/exporters price 16 100.00 26.54 100.00 58.98

Final consumer’s price (Europe) 45 100.00

Price spread (up to exporter’s price) 14.37 24.91

Price spread (export sale price) 42

Table based on authors’ own calculations and Europe mango price. * Proportion based on exporter’s price.

** Proportion based on price paid by the final consumer in the imported country. Source: Authors’ own data, compiled from sample collected.

taBLE 10.1

price spread along the totapuri mango supply chain (rs./kg)

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10.2.4 Income and employment generation along the supply chain in the totapuri mango agro-industry

An analysis of the totapuri agro-industry cluster’s performance is incomplete if anassessmentofthelivelihoodsupportthatitprovidestoseveralstakeholdersalongthemarketchainisnotcarriedout.BesidestheprominentactorsinthechainsuchasthePHC, thewholesaler/commission agent, the retailer, the processor and the exporter,othersalsoplayanimportantroleinthemangosupplychain.Employmentisprovidedtoalargenumberofpeoplethatareinvolvedinoddjobssuchasloading,unloading,sortingandgradingatthemarketyard,andalsoinsorting,cleaning,cuttingandpackingattheprocessingunits.Transportatallstagesinthechainalsoprovidesemploymentformany.

Duringthemangoseason, familiestemporarilymigratetothemarketyard intheurban area or the processing units to earn a living, from as far as 200 km away. Intheyearswhenquantity ishigh, it isnotuncommonthatsomeofthemigrantsalsoactassmall(onthespot)retailers.Nearly150daysofemploymentisgeneratedat each processing unit during the mango processing season, as each one ofthe transformation units processes over 500 tonnes of fresh mangoes annually. TheChittoormangoclustercouldbegeneratingemploymenttoover1000000mandaysduringthe3to4monthmangoseasonannually.Yet,thejobsperformedattheprocessinglevelareunderthreatfromtheincreaseinautomatedmachinerythatisrequiredfortheasepticpacking.

Sl No Name of the market intermediary

Function performed

risk involved Proportion of mango handled along the market chain (% share)

Proportion of value realized (% share)

1 Producer produces production risks – low 1 2

2 Phc collects and transports

shares much of the producer’s risk

4 7

3 Wholesaler arbitration moderate 27 42

4 handler transfers low 53 10

5 Transporter transfer low 3 8

6 Processor value addition low 6 9

7 exporter exports high 7 22

Source: Authors’ own data, compiled from sample data.

taBLE 10.2

Income distribution and risk borne


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Withregardtoincome,theproportionearnedinthedifferentsupplychainechelonsseemsdirectlyproportionaltotheriskborneateachstage.Table10.2outlinestheroleplayedbyeachofthemarketintermediaries,theperceivedriskborneandtheproportionofincomeearned.

While thehighproportionof incomeearnedby theexporter is justifiedgiven thelevelofriskborneforprocessedmango,theproportionofincomeearnedandtherisktakenbythewholesaler,eitherforfreshorforprocessedmango,isnotjustifiedbytheamountofrisktaken.Thewholesalerprimarilyhelpsinarbitrationandcollectsamarketfeefromboththesellerandpurchaser,takingawayamajorchunkofthemarginmerelyfrombulkingproducts.

10.2.5 export trade of mango pulp

Mango pulp is one of the most important commodities traded internationally in theprocessedfruitsandvegetablesmarket.IndiaisthelargestexporterfollowedbyMexico.Indiacontrolsnearly63percentoftheworldmarketandnearly70percentofitsexportsgototheMiddleEast,while12percentareshippedtoEuropeand5percenttotheUSA.EstimatesshowthatoverRs.7000million(US$54million)areearnedannuallyfrommangopulpexportsfromIndia.Ofthistotal,totapurimangoaccountsformorethan50percent(Figure10.3).ThemajorIndianandoverseasplayersinthefoodprocessingindustry,andespeciallyinmangoprocessing,areIndianTobaccoCompanyLimited(ITC)andHindustanUnileverLimited(EMC,2009).HindustanUnileverLimited,asubsidiaryofUnilever,hasa

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largemarketandconsiderablebargainingpower,andhasitsowndivisionforfoodandbeverageexports (HUL,2009). ITCLimited is themarket leader inagro-exports (ITC,2009).Besides these ‘big two’ arehundredsof small-scale exporters (APEDA,2009).According to a recent study, aseptic packed totapuri mango pulp with 14 brix fetchesaroundUS$850/MT,equaltoRs.45/kg.Theproducerreceivesonlyabout2–5percentofthisprice,suggestinginequitabledistributionofmarginsintheexport-orientedsupplychains.

10.2.6 efforts and innovations that lead to the current status of the totapuri mango supply chain

The totapuri mango agro-industry cluster is probably among the oldest marketnetworksthathavebeeninoperationinIndia.Theclusterasitstandstodayisaresultof several favourable policies and innovative efforts. These include governmentpolicyandinvestmentinitiativesbythechainactorsthemselves.

Government export promotion initiatives

A series of policy initiatives and institutional support from theGovernment haveimpactedthetotapurimangomarketchainovertheyears.

(a) APEDA:SettingupoftheAgriculturalProduceExportPromotionandDevelopmentAgency (APEDA) in 1984 provided a boost for export promotion of horticulturalproduce in India.Mostof theexporthousesbenefit fromthe services renderedbyAPEDAtoitsmembers,includingmarketinformationservices,exportinfrastructurecredits, periodic assessment of consumer preferences from importing countries,and adjusted terms and conditions for export to different destinations. In keepingwith the changes in the post World Trade Organization (WTO) period, APEDAalso initiated efforts at implementation of HACCP1 standards, with partialfinancial assistance from the Ministry of Food Processing Industries, coveringa total of 24 mango processing units based at Chittoor and Krishnagiri districtsin a phased manner. These units have also been assessed and certified by theInternational Standards Certification (ISC) South Asia Pvt. Ltd. in 1998/1999. TheNationalSanitationFoundation (NSF)hasalso certified the same.CompliancewiththeMinimumResidueLevel(MRL)forseveralpesticidesandfungicidesisnotaproblemformangoexporters,giventhatmangocultivation inthis region is largelyorganic,withverylimiteddosageofchemicalsbeingusedforsprayandotherpurposes.

(b) AEZs: Product-specific exclusive production regions were identified asAgriculturalExportZones(AEZs)during2000bytheGovernmentofIndia,whichhelpedtocreateexportandprocessinginfrastructurespecifictodifferentcropsclosertoproductioncentres.Theideawastoprovidefocusedattentionontheproblemsfacedbythegrowersinthesespecificregions.

1 Hazard Analysis Critical Control Points (HACCP).


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(c) Liberalization of import policy: This was one of the most important policyinitiatives that enhanced private sector participation in Indian agriculture andalliedsectors.Priorto1997,importsoffreshanddriedfruitswereprohibitedwiththeexceptionofdatesandfigs.Followingtheliberalizationoftradeinagriculturalcommodities,importsofallfreshfruit(exceptcitrus,grapesandlychees)havebeenpermittedgenerallyonanOpenGeneralLicense(OGL)basis.Inthecaseofcountriesbelonging to theSouthAsianAssociation for RegionalCooperation (SAARC), animporttaxof44percentad valorem is levied,whileforothercountries it issetat45.6 percent. There are no reported export duties on fruits from India. Withadditionalfacilitiessuchasdutydrawback,exportmarketpromotionconcessionshavehelpedgrowersgearingupforexportorientedproduction.However,liberalizedimport policies helped foster the importing of state of the art technology forprocessingandpackaging,includingthatformangopulpingandasepticpackaging.

(d) State-of-the-art aseptic packaging facility: As a result of the increasedattentiongiventofoodsafetystandardsinthepostWTOperiod,thedemandforasepticpackagingofpulpforexportmarketsisincreasing.Thistypeofprocessrequires substantial investments in sterile processing and packing technologyand material and lab testing facilities. Two such facilities have been set upexclusivelyformangoprocessingandpackaginginsouthIndia,oneofthematChittoorandoneinBangalore.Thedailyrequirementofrawmaterialfortheseunitsisaround160tonnesoffreshmango–for24hoursafterwhichtheprocessis interrupted by a sterilization process required for production according toHACCPstandards–hencesourcingofrawmaterialintheappropriatequantity,maturityandprice isacrucialconstraint in theprocess.Withthehigh leveloffixedinvestmentinvolved,itisessentialforprocessorstoutilizetheunitatfullcapacityatalltimesduringthemangoseason.

Initiatives for market integration

Several attempts have beenmade to attain and sustain vertical integration acrossthe marketing network and supply chain of fresh and processed mango. One ofthemostsignificantattemptsandbyfartheearliestwasaninterventionwithintheexistingchain,initiatedbyalargeprivatesectorexporter.Astate-of-the-artprocessinginfrastructureforlarge-scaleexportwasestablishedclosertotheproductioncentres,withtheprimaryobjectiveofreducingtransittimesandpost-harvestlosses,therebystrengthening the link between producers and processors.With a pre-determinedprice, the set-up entered into contractual agreements with producers or PHC forthesupplyofrawmaterial, freshtotapurimangoes.Thoughtheattemptsucceededinitially, theadvantageof ‘price information’didnot trickledown to thebase levelplayer, the producer (ITCModel)2.As a counter to this attempt, soon a number ofsemi-processingunitssprungupintheregion,mostofthembeingsmall-scaleunits

2 A model established by the Indian Tobacco Company during 1990s.

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with a crushing capacity of around 10 tonnes per hour/day.These processing unitsstartedformingcartelsduringtheseason,allowingthemtocontrolthemarketprice,nullifyingthespecificadvantageoftheprocessinginfrastructurethatwascreated.

In yet another attempt, an effort has been made by the State Government topromotetheestablishmentoftechnologyparks.Theseprovidecentralizedfacilitiesat reducedrates forprocessingandpackingtoproducersorsemi-processors thatwishtosetupaprocessingcentre,therebyallowingthemtoenjoythesebenefits,given that fixed investments and overheads are reduced. In addition, the centralunitalsoprovidesmarketinformationonqualityparameters,standards,arrivalsandprices in different export destinations, in order to assist entrepreneurs to benefitfromtrade(TIP)3.Itisimportanttoensurethatthepriceadvantagerealizedbyaneffectivemarketinformationsystemisdistributedalongthemarketchain.However,thissecondeffortalsodidnotachievetheverticalintegrationthatwasanticipated.Afewlargefarmersdominatethemangoprocessingsegmentbyacquiringtheunitsofothersmall-scaleplayersoperatingonjobworkorcustomprocessing.Inamorerecentattemptunderapublic–privatepartnershipmodel,anefforthasbeeninitiatedwith farmers cooperatives in order to assure the supply ofmango for processingpurposes4.Mostoftheeffortsatcreatinghorizontallinkagesthroughcooperativeshave not been successful in the past, given the administrative bottlenecks thecooperativestypicallybecomeentangledin.

10.3 Agro-industry clusters of horticultural crops in India

Thissectionprovidesadiscussionoftheproblemsandprospectsofagro-industryclustersandalsoconsidersotherimportantIndiancrops,relatingtheobservationstothespecialfeaturesofthetotapuriagro-industrycluster.

10.3.1 efforts at linking farmers to markets

Beinghighlyseasonalandperishable,horticulturalcropsarealsocapitalandlabourintensive and need care in handling and transportation. Their bulkiness makeshandling and transportation a difficult task, leading to huge post-harvest losseswhich are estimated at around Rs. 230 billion, or nearly 35 percent of the totalannualproduction(CII,McKinsey,1997).Theirseasonalproductionpatternresultsin

3 Technology Infrastructure Park (TIP), 1999.

4 There have been some attempts at creating horizontal linkages across the chain actors by creating cooperatives among producers with the goal of empowering them. Notable among these are the efforts initiated by AgriTerra of the Netherlands, through the Food and Agriculture Organization of the United Nations (FAO), Federation of Farmers Associations (FFA) and the Horticulture Department of Andhra Pradesh. This project, helping farmers to develop these cooperatives, has been implemented since 2007–2008.


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frequentmarketglutsandassociatedpricerisk,therebyforcingfarmersintodistresssalestopre-harvestcontractorsandcommissionagents.Atypicalmarketingchannelofahorticulturalcropthusinvolvesanumberofintermediarieslikethepre-harvestcontractor, commission agent, wholesaler and retailer, all operating between theproducer and thefinal consumer.Eachof thesemarket intermediariesperformsaspecificmarketfunctionthatinvolvesacosttothem,therebyyieldingashareinthemarketmargin.Someeconomictheoriessuggestthatanefficientmarketprovidesfor the distribution of marketmargins in proportion to the aggregation of utilityperformedbyeachmarketintermediary;however,marketfailuresmightdistortthechainmarginstructure.Inamarketfunction,thephysicalmovementoftheproduceoccurs from farm tomarket along the chain,while themonetary and informationflowshappeninthereversedirection.Theasymmetricaccesstoinformationtendstoempowermarketintermediariesandgivethemastrongerbargainingposition,thusallowingthemtosecurehighersharesinthechain’smarketingmargin(FAO,1997).

Fostering coordinated linkages of farmers to traders and processors has beena recognized means to reduce seasonal gluts and associated price crashes,especially for perishables (Eaton&Shepherd, 2001;Subrahmanyam, 2000;SudhaandGajanana, 2001). However, the linkage between producers and processors isratherweakunder Indian conditions,given reasons suchashighprocessing costs,inadequatesupplyoftherightquantityofrawmaterialforprocessing,dualtaxationpolicies,andinconsistentdemandfortheprocessedproduce.Effortshaveconstantlybeenmadetolinkfarmerstomarkets,sothatthemarketingchannelsandtheroleplayed by different market intermediaries are better coordinated. These effortsinclude the creation of alternate marketing channels that provide better pricingpolicies and reduce the margins, the promotion of contract farming for assured buy-backandcorollaryassuredprices,andthedevelopmentofstreamlinedsupplychainstocreateandsustainvalueadditionforsomecommodities(Dileepet al.,2002).

Contract farming

Contract farming isoneof themostaccepted formsof integratingproducerswithindustrythroughvalueaddition.Severalformsofcontractinghavebeensuccessfullyimplementedinhorticulturalcrops.Someofthesemodels,suchastheoneadoptedbyPepsiorHindusthanLeverfortomatoandpotatoinIndia,areworthmentioning(Singh,2000).Thesecontractsseemtohaveworkedwell,buttheinclusionofsmallfarmers and the benefits to them are debatable (Dileep et al., 2002). However,evidencepointstowardsthepositiveimpactofcross-bordercontractproductionoffreshvegetablesforsupermarketsinvolvingalargenumberofsmallfarmers.Inthisglobalsupplychain,smallfarmers’microcontractsarecombinedwithextensivefarmassistanceand supervisionprogrammes to fulfil the complexquality requirementsand phyto-sanitary standards of supermarkets. Small farmers that participate inthesecontractsenjoyhigherwelfaregains,more incomestabilityandshorter loanperiods(Mintenet al.,2005).

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Cooperatives for domestic market linkages

ThecooperativestructureisthemostcommonandratheroverstressedorganizationmodelforthemarketingofhorticulturalcropsinIndia.BananacooperativesfromtheJalgoanregionofMaharashtrahaveshownthewayforwardinaccessingdistantdomesticmarkets,bypoolingandtherebycuttingdowntransportcosts.Mostofthese cooperatives seem toworkwell inmarketing fresh horticultural produce. Oneofmost popular and successful cooperativemarketing initiatives is that ofmilkandsugarratherthanforhorticulturalcrops.Havingsaidthis,successfulvaluechaincoordinationthroughprocessingcooperativeshasbeenreportedformangoinTamilNadu.Thismodelincludesahierarchycoordinationinvolving600mangogrowersfortotapurimango(Aharam,2009).However,thecooperativemodelhasnotbeensustainable,giventheadministrativeandlegislativebottlenecksthatareembeddedinthecooperativelegislation.

Linkages involving export-oriented production

There have been other innovative models integrating production to marketsthrough value addition in horticultural crops, such as the export-orientedproductionoffreshgrapes,plusthecasesofcoffeeandtea.

Grape: One of the more recent accounts of a successful agro-industry clusteris that of a fresh grape export production group based in Narayana Gao, Punedistrict,Maharashtra.PopularlyknownastheAbhinavexportgroup,thisisafarmer’sassociationsetupin2002byagroupof110grapegrowers,bringingabouthorizontal integration among the supply group for export-oriented production.Each farmer enrolls in the society as amember throughanominal payment (inthe range of Rs. 5 000/farmer). The group plans the annual export-orientedproductionamongthemembers.Theinfrastructurefacilitiesforpre-cooling,coldstorageandpackinghavebeenprovidedbyAPEDAand theStateGovernment.The association ensures the timely supply of inputs and also provides technicalexpertiseforexport-orientedproduction,includingcleancultivationpracticesandother HACCAP standards. The association invites buyers from across differentdestinations, provides them with information on cultivation practices and thusensures they achieve a collective bargaining power.Within a short span of fiveyears,theassociationhasbeenabletoexportover100tonnesoffreshgrapetodifferent European countries. The model thereby helps farmers overcome theproblemofdistresssalestoPHCs,prolongingthemarketingseasonandcreatingaccess to alternate and distant markets where higher prices may be reaped. Thebenefitofhigherexportpricesrealizedbyfarmersisdistributedacrossthechainplayersequitably.Themodelalsoeliminatesanumberofmarket intermediariesandhelpsproducersgainhighermarketshare.Throughcollectiveaction,farmersare also able to import better technical know-how for value addition on-farm. Themodelprovidesforhorizontalintegrationandvalueadditionthroughimprovedpackaging,butisavailableonlytoasmallsetofgrapegrowers.


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Coffee and Tea: The export market linkage models existing for coffee and teaprovideinsightsintoacomprehensivelinkagescheme,whereevenasmallgrowerisabletorealizethebenefitsofquality-basedexportmarketpricesforhisproduce. The fact that the prices of these commodities are internationally establishedprovides an opportunity for producers to benefit from a quality-based pricingsystem.These commodity groups provide an example of how an internationally-determined competitive price is effectively transmitted to the farthest upstreamplayersalongthesupplychain.Effectiveinstitutionalsupportandstrongproducercollectivescanbeidentifiedasthemostcriticalfactorsresponsibleforthesuccessoftheseinitiatives.ThecaseofDarjeelingteaisanexampleofchainempowermentchanneled through Mercy Corps and its local partner, Darjeeling Earth Group. Thislinkagearrangementgavefarmerstherighttoselldirectlytoteaestatesandrealizehigherpricesthanwhensellingtomiddlemen.

Mostof theseexperiencesormodelsdonotseemtoapplydirectly tothemangosupply chain, given the sheer size of the cluster and also because of its uniquecharacteristics. Section 4 examines these features and makes inferences andsuggestionsforthefuture.

10.4 Feasibility of standardizing supply chains for totapuri mango pulp

Takingonboardthelessonsfromtheexamplesofothercrops,thissectionaimstoassessthefeasibilityofemulatingasimilareffortfortotapurimangopulpfromChittoor.At theoutset, it is important to understand theunique characteristicsof the totapurimangoagro-industry cluster in comparisonwithother cropsandclusters.

The totapuri mango agro-industry cluster is one of the oldest naturally-formedclustersthatemergedfromthecomparativeadvantageoftotapuriproductionintheregion.Italsorepresentsahighlydynamicmarketnetworkthatismatureyetfiercelycompetitive. Inatypicalagro-industryclusterofthisnaturetherearenowrittenagreementsnorpre-determinedpricesupports.Entrybarriersarelow,competitionisfierceandthemarketismature.Thetotapurimangoclusterfocusesonaprocessedproduct, distinct from others such as grape which is for fresh consumption. Though both are seasonal crops they differ with regard to capital and labourrequirements.Itscapital-intensivenaturemakesgrapeahighlycommercialcropthroughwhichproducersarekeentogainhighreturns.

In the case of totapuri mango the crop is the most convenient farm enterpriseoptionavailabletotheproducer,giventhelimitedrainfallandotheragro-climaticconditions in the region.The area’s hilly landscape actually saves the producersseveral costs, such as those stemming from watch-and-ward needs and from

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wind-induceddamagetothemangocrop.Thiscomparativeadvantageandlowcostofestablishmentandmaintenancemakestheproductionbasehighlydifferentiatedintermsofholdingsize;thisisnotthecasewithotherperennialfruits.

Anotherfeatureuniquetomangoisthebiennialnatureofitscultivationcycle,whichmeansthatnotallthetreesinanorchardwillbearfruiteveryyear.Growersthereforemaintainorchards involvingdifferentvarietiesanddifferentagegroups,suchthatoverall,theorchardsustainsitselfthroughincomefromoneorothervarietyeveryyear.These unique features of mango differentiate it from other fruit trees andmakeitdifficulttomaintainanyregularfarmergroup.Thegrapemodelhighlightsthescopefororganisinggrowersintofewerandsmallergroupsoffarmerssharingcommon interests. Such associations develop uniform practices and allow theformationofaregularsupplybase.

Sincethemangoindustryisbasedonahighly-differentiatedproductionbase,anyeffortaimedatmarket intervention seems tohave sparkedoffmarketexpansionthrough additional processing infrastructure. The fact that the totapuri mangocluster has been expanding continuously is an indication of the growing andsustainableprofitabilityofthecommodityindomesticandexportmarkets.MostoftheearliereffortsinitiatedbytheGovernmenttocreateinfrastructureandfacilitatesmoothfunctioningofthevalueadditionchainhavebeensuccessfullycounteredbyalternateefforts fromprivateownersandgrowers themselves.Despite this therehasnotbeenadeclineintherevenuesearnedorquantitytraded.

TheimpactofGovernmentpolicyintermsofdisseminationofmarketinformationbyAPEDA,infrastructurecreationthroughtheNationalBankforAgricultureandRural Development (NABARD), and a drive towards refinancing and promotionof liberalizedexports, canbe seen in theexpansionof theagro-industry clusterandthesubsequentenhancedexportsofmangopulpfromtheregion.Nowthatmangopulphasbeenstandardizedasaninternationally-tradedcommodity,thereisaneedtoputinplaceamechanismforpricedeterminationinthefreemarketthat canbe passed along the chain to the lowest level player.Themost criticalpoint in themango pulp cluster is that themargin involved in converting freshmangointopulpisrathersmall.Anumberofplayersalongthechain,includingtheprocessor,earntheirprofitsfrombulking.Itisherethatsupplychainmanagementneedstopayspecialattentiontoavoidthesmallestplayerinthechain,thegrower,sufferingtheconsequencesofunfairtradepractices.Thechainmodelneedstobedevelopedsothatthecluster incorporatesasafetymechanismtosafeguardtheinterestsofthesmallestlinkinthesupplychain.ThemodeladoptedbyDarjeelingtea,discussedearlier,seemstoofferasuitableapproachinthisrespect.

Furthermore,thereisaneedtoaddresstheproblemofnon-competitivebehaviour,whichappearstocharacterizetheactionsofmarketchainplayerssuchaswholesalersor commission agents. While these market intermediaries retain nearly half oftheproducers’sharefromtheconsumers’rupee,therearenoindicationsthatthe


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functionstheyperformwouldjustifythemarginsobserved.Indeed,thereisevidencethat suggests the failure ofmarkets to disseminate price information effectivelyacrossthedifferentplayersinthechain,thuscreatingasymmetriestothedetrimentofthegrowers.Assuch,akeyfunctionofanyattemptatmarketorganizationfortheclustershouldensurethatmarketpriceinformationiseffectivelydisseminatedalong the chain. Similarly, redundant and non-essential market intermediationshould be minimized. Being a processed commodity, totapuri mango could bemarketedthroughdirectlinkssetupbetweengrowersandprocessingcompanies.Sincetotapurimangopulpisaninternationally-recognizedcommoditythatcanbemeasuredonstandardbrixandtheinternationalpriceisdirectlyproportionaltothebrix,thereisscopeforsettingupanefficientpriceinformationsystem.

10.5 Suggestions and policy implications

Creatingacommodityboard,orasimilarchaincoordinationmechanismexclusivelyformangopulp,appearstobeatangiblesolutionforlinkingproducerstomarkets.Theprimaryobjectiveof theboardorassociationwouldbeto facilitateaprocessthroughwhichmangoproducersareempoweredtoparticipate inthemarketandbenefitfromtheinternationaltradeoftheprocessedproduct.Ashasbeendiscussedearlier,ampleexamplesareavailable forcreatingandsustainingsuchcommodityboardsorassociations.Aneffortofthisnaturewouldrequirethecreationofa‘brandname’,bringingalltheproducersandprocessorsunderonebanner,ensuringuniformqualityofthefinishedproductfromtheregion,andguaranteeingamoreuniformbenefit-sharingmechanism,irrespectiveofthesizeoftheoperatingunit.Becausethe product from the region is unique, it is also possible to obtain a ‘geographicindication’ for the produce, create a brand name, trademark the logo, and bringall theproducersandprocessorsunderoneumbrellathroughafranchisescheme. Oneoftheprerequisitesforthisisthestandardizationoftheendproduct,themangopulp.Sincemangopulp and the specific case of totapurimangopulp are alreadystandardizedandinternationallytraded,allthesestepsarefeasiblewithappropriateinstitutionalsupport.

At this juncture, it is imperative that the requisite interventions are actioned atinternational level.Sincemangopulp is a homogenous, standardized commoditythat can be traded internationally, an organization of international repute suchas FAO could play a significant role in initiating and sustaining such an initiative.Theprimaryobjectiveofsuchan initiativewouldbetoassisttheprocessof ‘pricediscovery’anddisseminationtothelowestplayersalongthesupplychain.

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Apartfromtheinterventionsrequiredatprocessingleveltoensureuniformquality,effortsarealsoneededtoincreasecompetitionatthewholesalerlevelofthechain.Thiswould require collective action in a three-tier structure, grouping farmers atcommunity level intoself-helpgroups, identifyingprocessorsatdistrict levelwhoprocurefreshmaterialdirectlyfromthesegroups,andwhointurnareintegratedwithexporterstoexportthesemi-processedpulpunderonebrandname.Obstaclesthathavetobeovercomeforsuchaninterventiontosucceedaremanifoldandinclude:inconsistenciesinexportdemand;lackoftransparencyandinformationsharinginthemarketintermsofprice,quantityandquality;alackoftrustamongthechainactors;difficultandcumbersometaxationpolicies;theabsenceofinitiativestobuildbrandnames.Thecommodityboardorassociationwouldbeexpectedtoaddressmostoftheseissues.


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Aharam.2009.Farmersasentrepreneurs.InLeisamagazine,Vol25(2).

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Babitha, M. 2009.Export of Fresh Mangoes and Mango Products from India.(Availableat:http://icaap.org.in/node/59.dask.2008).

Burks, R. 2008.Unity takes root in Darjeeling.Portland,USA.MercyCorps(Availableat:http://www.mercycorps.org/countries/india/11694).

CII, McKinsey Report.1997.TheFruitandVegetableOpportunity.InFood and Agriculture Integrated Development (FAID) Action Report,pp.140–152.

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Department of Commerce (Press Release). 2007.BOA grants formal approval to 23 and in principle approval to 6 SEZs.NewDelhi,MinistryofCommerceandIndustry.(Availableat:http://commerce.nic.in/May07_release.htm).

Dileep, B.K., Grover, R.K. & Rai, K.N. 2002. Contract Farming in Tomato:AnEconomicAnalysis.InIndian Journal of Agricultural Economics,Vol.57(2),pp.197–210.

EMC Consultants Pvt. Ltd. 2009.Indian Food Processing Industry.

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FAO. 2001. Contract farming, partnerships for growth: a guide.FAOAgriculturalServicesBulletinNo.145,Chapter3,pp.43–54.Rome.

Government of Andhra Pradesh.2008.Annual Action Plan 2008–09: Horticultural Profile of Andhara Pradesh. (Available at: http://www.aphorticulture.com/actionplan_2009/Horticultureprofile.html).

Gupta, S.P. & Rathore, N.S. 1998. Marketing of Vegetables in Raipur District ofChhattisgarhState:AnEconomicAnalysis.InIndian Journal of Agriculture Economics, Vol.53(3),p.393.

Hanemann, L.P. 2006. An Assessment of the Export Competitiveness of the Banana, Mango and Mango Pulp Sectors in the State of Tamil Nadu. Paper for theWorldBank,Abt Associates, Inc. (Available at: http://www.farm2marketconsulting.com/Projects/ABT(INDIA)-EXECUTIVE%20SUMMARY.pdf).

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Mehta, R. & George, J. 2003. Processed Food Products Exports from India: An Exploration with SPS Regime. New Delhi, Research and Information Systemfor the Non-Aligned and Other Developing Countries (RIS). (Available at: https://digitalcollections.anu.edu.au/bitstream/1885/41962/1/aciar%20_2003_mehta_george.pdf).

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Minten, B., Randrianarison, L. & Swinnen, J.F.M. 2006. Global Retail Chains and Poor Farmers: Evidence from Madagascar.Leuven,Belgium.LICOS–CentreforInstitutionsandEconomicPerformance.

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Sudha, M. & Kruijssen, F.2008.VarietalDifferencesintheSupplyChainofTwoMangoVarietiesinSouthIndia.InActa Horticulturae 787,pp.379–386.


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annex 1: trend of mango area and production in

chittoor, andhra pradesh

Chittoor Area (ha)

State total area (ha)

% of total State area

Chittoor production (tonnes)

State total production (tonnes)

% of total State production

1998–99 33 032 281 914 11.72 106 785 2 269 571 4.71

1999–00 42 766 297 449 14.38 342 128 2 379 592 14.38

2000–01 45 077 306 192 14.72 360 161 2 449 536 14.70

2001–02 45 559 341 191 13.35 368 912 2 445 824 15.08

2002–03 47 834 370 267 12.92 382 672 2 962 136 12.92

2003–04 52 721 402 154 13.11 421 768 3 217 232 13.11

2004–05 48 913 391 896 12.48 391 304 3 135 168 12.48

2005–06 59 155 459 713 12.87 391 304 3 306 032 11.84

2006–07 59 380 471 367 12.60 486 916 3 865 209 12.60

2007–08 59 380 483 480 12.28 510 668 4 157 928 12.28

Source: Statistical data of Government of Andhra Pradesh.

table 10.3

trend of mango area and production in chittoor, andhra pradesh

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annex 2: marketing margins and price spread along

the supply chain for totapuri mango

Chittoor Area (ha)

State total area (ha)

% of total State area

Chittoor production (tonnes)

State total production (tonnes)

% of total State production

1998–99 33 032 281 914 11.72 106 785 2 269 571 4.71

1999–00 42 766 297 449 14.38 342 128 2 379 592 14.38

2000–01 45 077 306 192 14.72 360 161 2 449 536 14.70

2001–02 45 559 341 191 13.35 368 912 2 445 824 15.08

2002–03 47 834 370 267 12.92 382 672 2 962 136 12.92

2003–04 52 721 402 154 13.11 421 768 3 217 232 13.11

2004–05 48 913 391 896 12.48 391 304 3 135 168 12.48

2005–06 59 155 459 713 12.87 391 304 3 306 032 11.84

2006–07 59 380 471 367 12.60 486 916 3 865 209 12.60

2007–08 59 380 483 480 12.28 510 668 4 157 928 12.28

Source: Statistical data of Government of Andhra Pradesh.

Fresh Processed

Value (rs./tonne)

% of total

Value (rs./tonne)

% of total

Farmer Farmer

Net price 1 630 10.19 Net price 1 630 6.14

PHC PHC

Buying price 3 000 18.75 Buying price 3 000 11.30

costs costs

Transport 120 0.75 Transport 10 0.04

Handling Handling

Commission 420 2.63 Commission 10 0.04

Margin 1 410 8.81 Margin 2 970 11.19

Wholesaler Processor


costs 650 4.06 costs 60 0.23

Margin 2 600 16.25 Margin 1 910 7.20

table 10.4

marketing margins and price spread along the supply chain for totapuri mango


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annex 10.4 (Continued)

marketing margins and price spread along the supply chain for totapuri mango

Fresh Processed

Value (rs./tonne)

% of total

Value (rs./tonne)

% of total

retailer Exporter


costs costs

Transport 2 500 15.63 Cans 3 330 12.55

Handling 500 3.13 Reforming and filling 1 670 6.29

Margin 4 500 28.13 Packing 20 0.08

Transport to port 250 0.94

Sea freight 2 530 9.53

Commission 640 2.41

License 5 560 20.95

Margin 4 570 17.22

Consumer price 16 000 100.00 Export price 26 540 100.00

Price spread 14 370 Price spread 24 910

Source: Author’s own calculations based on sample data.

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lATEEF O. SANNI

cHapter 11

process and product innovations in the cassava agro-industrial sectors in africa:

the stimulating effect of presidential initiatives

11.1 Introduction

Theproduction,processingandmarketingofcassavaprovidesamajorsourceofincome for about 450million people, oftenwomen and low-income earners, insub-SaharanAfrica (FAO,2004).Cassava isnotonly strategically importantasafoodsourceandfaminereserve.Combininghighcalorificefficiencywithversatile/lowcost inputand reliableandflexibleproduction, it isnowseenasapro-poorvehicle for economic development (NEPAD, 2004). The New Partnership forAfrican Development (NEPAD) hence adopted the slogan ‘Cassava:A PowerfulPovertyFighterinAfrica’foritsPanAfricanCassavaInitiative(Whingwiri,2004).

Nweke et al. (2002) classified cassava development in Africa into five stages.Inthefirststage,cassavaisconsideredafaminereservecrop,especiallyinareaswhereruralconsumptionisbasedoncereals.InsuchdryregionsofKenya,Malawi,Tanzania,Mozambique,andZambia,aswellasinthenorthernSaharanzonesofmostcountriesinWestAfrica,cassavaisafaminereservecropduringperiodsofscarcityanddrought.

In the second stage, cassava is considered a rural food crop because it is themainsourceofcaloriesinthedietsofruralconsumers.Althoughcassavahasthisimportantrole,farmersonlyuselocalvarietiesandtraditionaltechnology,largelybecause of the limitedmarket incentives to adopt new varieties and improvedtechnology. As a result, farm output is relatively low and cassava is mainlyconsumedonthefarm.Thistypeofproductionisoftenfoundinremoteareasofthecassavabeltinsub-SaharanAfrica(SSA).

Fresh Processed

Value (rs./tonne)

% of total

Value (rs./tonne)

% of total

retailer Exporter


costs costs

Transport 2 500 15.63 Cans 3 330 12.55

Handling 500 3.13 Reforming and filling 1 670 6.29

Margin 4 500 28.13 Packing 20 0.08

Transport to port 250 0.94

Sea freight 2 530 9.53

Commission 640 2.41

License 5 560 20.95

Margin 4 570 17.22

Consumer price 16 000 100.00 Export price 26 540 100.00

Price spread 14 370 Price spread 24 910

Source: Author’s own calculations based on sample data.


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In the third stage, cassava is considered a food and cash crop, based ontraditional technology and traditional low-yield varieties. Average yields are7–10tonnes/haandmanualprocessingisverycommon.Cassavaisabasicruralandurbanfoodstaple;asignificantpartoftheharvestissoldinprocessedform. This type of production is found in regionswithmarket access in the coastal,forest and savannah zones of some countries in western and central Africa:examplesincludeNigeria,DemocraticRepublicofCongo,Cameroon,Guinea.

The fourthstage iswhencassava isconsidereda foodandcashcropbasedonimproved technology, involving a broad adoption of high yielding varietiesandmechanization of certain processing stages (grating, pressing, frying andmilling).At this stage cassava is both a rural and urban food crop. ExamplesaboundinNigeriaandGhanaasaconsequenceofpresidentialinitiatives.

Atthefifthstagecassavaalsobecomesanindustrialcrop,providingrawmaterialforstarch,ethanol,flour,andthelivestockfeedindustries.Atthisstage,lessthan75percentofthetotalcassavaoutputisdevotedtodirecthumanconsumptionin both rural and urban areas. A significant number of cassava growers inNigeria have made the transition to the fourth stage (high yielding varietiesandmechanized processing), even though farmers have not yet attained thedesired technical efficiency in cassava production. This low efficiency resultsfromalackofknowledgeofthelatestavailabletechnologyincassavacultivationand other improved inputs such as fertilizers and herbicides. However, the wide-scaleadoptionofhighyieldingvarietiesandtheresultingincreaseinyieldsfrom11tonnes/hato40tonnes/hahaveshiftedtheproblemofthecassavasectorfromsupplyissues(production)todemandissues,suchasfindingnewusesandmarketsforcassava.

11.2 Presidential Initiatives on Cassava (PIC)

According to Tonah (2006), the development of the cassava sub-sector isemerging as a key component of a regionally strong and diversified economyabletogenerateemployment,contributetofoodsecurity,andsustainincomesforthepopulationsofsub-SaharanAfrica.Toachievethesepotentials,however,itisnecessarytoputinplacemechanismsandpoliciesthatguaranteearegularsupplyofgoodqualitycassava.

To this end a number ofSSA countries, especiallyGhana andNigeria inWestAfrica, have launched Presidential Initiatives on Cassava (PICs) as part ofelaborateeconomicreformprogrammesaimedatpromotingthediversificationof the foreign exchange earnings base for these countries. The PIC policieswere expected to encourage public–private partnership by creating, throughwell-designed interventionmechanisms, a practical enabling environment for

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Process and product innovations in the cassava agro-industrial sectors in africa: The stimulating effect of presidential initiatives

competitivelyadvantageousindustriesidentifiedashavingthepotentialforfastgrowthanddemandfromexportmarkets.

The Ghanaian Presidential Special Initiative (PSI) on cassava began in 2001,as part of theGovernment’s policy of transforming cassava production from itssubsistence nature into a commercially viable agribusiness that can generatesubstantialrevenuelocallyandthroughexports.ThespecificobjectivesofthePSIoncassavawereto:(1)transformthecassavaindustryintoamajorgrowtharea;(2)establish10cassavastarchprocessingplants;and(3)generateannualexportrevenuesofUS$100millionbytheendof2006.Inadditiontheinitiativeaimedtoensurethat50percentoffarmersparticipatingintheprojectshouldbewomen.

AlthoughtheGhanaianGovernmentisthemainsponsorofthePSI,theprojectwasto be executed through a farmer-ownership scheme called theCorporateVillageEnterprise(COVE).TheCOVEmodelseekstobringruralcommunitiesintomainstreameconomic activity by establishing large-scale export-oriented enterprises, whichwillbeownedbyfarmersthemselvesbutmanagedbyprofessionalswithindustrialexperience who are engaged on performance contracts. In line with this policy,farmerswereencouragedtoformcooperatives.Membersofthecooperativeswereexpectedtogrowthecropontheirindividually-ownedfarmsandthenbeassistedbytheGovernmenttoownastarchprocessingplantcollectively,establishedbythegovernmenttoprocesscassavaintostarch(Tonah,2006).

TheGovernmentanditsdevelopmentpartnerswereexpectedtocomplementtheeffortsoftheprivateentrepreneursbysupportingtheprojectwithinfrastructurefacilities:constructionandupgradingofaccessroads,provisionofcommunicationfacilities, adequate power for the processing plant, and potable water for thefactory aswell as the surrounding communities.Advocacy structureswere alsoset up using project field staff (with the assistance of theMinistry of Food andAgriculture) to inform the farmers about the impending project and the rolesexpected of farmers and the Government in the project. They also needed toconvinceruralfarmersaboutthebenefitsofcassavaproductionandthereadinessoftheproducemarkettoreceivetheiroutput.

InJuly2002,ayearandahalfafterthelaunchofthePSIinGhana,thePresidentoftheFederalRepublicofNigeriaannouncedasimilarinitiative.Thisaimedtocreateawarenessamongfarmersabouttheopportunitiesthatexistinthecassavamarketthroughexpandedcassavautilizationandprimaryprocessing.Tothisend,actionswastakentoincreaseproductivityandexpandannualcassavaproductioninorderto achieve global competitiveness, while integrating the rural poor (especiallywomen and young people) into themainstream ofNigeria’s national economicdevelopment. Furthermore, new market opportunities were identified anddevelopedtostimulateincreasedprivatesectorinvestmentintheestablishmentofexport-orientedcassava industries (FNGandUNIDO.2006;Knipscheeret al.,2007;Ezedinmaet al.,2007).


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ThespecificobjectivesoftheNigerianpresidential initiativeoncassava(PIC),whichwastobeachievedby2007,included:

1. Enhance the productivity and production of cassava by increasing the areacultivatedto5millionha,withthehopeofharvesting150milliontonnesoffreshcassavatuberannually.

2. Produce 37.5million tonnes of processed cassava products (i.e.gari,HQCF (highqualitycassavaflour),pellets,chips,starchandethanol)forlocalandexportmarkets.

3. Organize the export of cassava and processed-cassava products as a revenue-generatingproject.

4. EarnaboutUS$5billionannuallyfromexportingvalue-addedcassavaproducts.

AccordingtotheUnitedNationsIndustrialDevelopmentOrganization(UNIDO,2006),existingandnewpoliciesaimedatsupportinginvestmentandmarketdevelopmentinthecassavaindustryinNigeriainclude:

Z Policy on national strategic food reserve. The food reserve policy was aimedat ensuring food security, guaranteeing food and industrial raw materials andproviding employment opportunities for the rural labour force.Gari, the mostproduced and traded cassava product, has recently been added to the list ofproducts.Thisshouldstimulatethegariproductionindustry,creatingmorecassavaplantations,essentialforthegrowthoftheoverallcassavaindustry.

Z Policy on Pioneer Status Investment Incentives: Companiescanobtainpioneerstatusinseveralways:iftheyproduceproductsdeclared‘pioneerproducts’underthe IndustrialDevelopment (IncomeTaxRelief)ActNo.22of1971asamendedin 1998; if theNigerian InvestmentPromotionCouncil (NIPC)hasdeclared it adeservingenterprise;ifthecompanyislocatedinan‘economicallydisadvantaged’area.Pioneerstatusprovidesafive-yeartaxholidaytoqualifiedinvestors,withatwo-yearextensionforthoselocatedineconomicallydisadvantagedareas.TheseareasaredefinedintheNIPCguidelinesforinvestmentincentivesinNigeria(NIPC,1998).However,itmustbenotedthatpioneerstatusisnotautomaticandmustbeappliedfor;evenwithpioneerstatussuchcompaniesmustreporttaxestotheFederalInlandRevenueService(FIRS)eventhoughthetaxisnottakenfromthecompany.

Z Policies on export incentives for non oil sector: These include (a)a10percenttax concession for five years for industries exporting no less than 60 percentof their products; (b) retention of export proceeds in foreign currency; (c) anExport Development Fund (EDF) that provides financial assistance to privatesector exporting companies; (d) an Export Grant Fund Scheme (EGFS) thatprovides cash inducements for exporters that have exported a minimum of ₦500001worthofsemi-manufacturedproducts;(e)adutydrawback/suspensionandmanufacture-in-bondscheme;(f)anexportadjustmentfundschemeprovidingsupplementaryexportsubsidiestocompensateexportersforthehighcostoflocal

1 ₦ = Nigerian naira.

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production arising mainly from infrastructure deficiencies and other negativefactors beyond the control of the exporter; (g) Nigeria Export/Import (NEXIM)BankForeignExchangefacilities;(h)acapitalassetsdepreciationallowance,whichisanannualallowanceoffivepercentonplantsandmachinerytomanufacturingexporterswhoexportatleast50percentoftheirannualturnover,providedthattheproducthasatleast40percentlocalmaterialscontentor35percentvalueadded.

Alloftheseincentivesarealsoapplicabletocassava-basedindustries(e.g.starchorethanol)thatareproducedforexportpurposes.

Z Policy on the provision of credit loans for agriculture producers throughspecialized banks like the NigerianAgriculture, Credit, and Rural DevelopmentBank(NACRDB).

Z Policy on mandatory substitution of 10 percent wheat flour with high quality cassava flour intheflourmill industry.Thispolicywill linkhighqualitycassava flour processors to large-scale wheat flour millers in Nigeria, andconsequentlycreatethedesiredjobs.

Z Policy on provision of gainful employment for the country’s population.ThepresentgovernmentofNigeriastronglysupportsagrowth-orientedeconomywiththecapacitytocreatejobs.

Z Policy on blending of 10 percent Ethanol in fuel. TheNigeriangovernmentaspartofitscommitmenttothe2000KyotoAgreementhasdecidedtoimplementapolicyofblendingfuelwith10percentethanol.Ethanolblendedfuelswilllowertheemissionofcarbonmonoxideintotheatmosphere.

Nigeria’s PIC was to have been implemented during the period 2002–2007. Toachievetheseobjectives,therewasaneedtodevelopthedomesticmarketandcreatenationalpoliciesinordertopromotecassavadevelopmentinthecountry.

11.2.1 stimulating effect of presidential Initiatives

These Presidential initiatives on cassava generated great excitement and hope,andgreaterexpectationsonthepartofrelevantstakeholders,contributingtotheachievementoftheUnitedNations’MillenniumDevelopmentGoalsasexplainedinTable11.1.

Ingeneral,thePICshavehelpedcreateawarenessaboutthemultipleusesofcassavatoproducevalue-addedproductssuchasflour,starch,cassavachips,glucosesyrup,animalfeed,ethanol,andcomposite(cassava–wheat)bakingflour.Boththepublicandprivatesectorshavebeengivingincreasingattentiontothecassavasub-sector.InNigeria,thePIChasstimulatedanincreaseincassavaproductionandprocessingactivities.ThepromotionofHQCFinthebakingandconfectionaryindustrieswasgiven furtherpolitical support toenhancepublic and industrial acceptance.Withstrongadvocacyatalllevelstherewassupportforprocessingandexport.


288

A policy was promoted to add 10 percent of cassava flour to the wheat flourused in bread, to open additional market opportunities for smallholder farmers. The growth in demand activated the industrial scale-up of HQCF and starchprocessingbyabout48percent(Maziya-DixonandOnadipe,2007).Theawarenesscreated greater interest and increased investment in the industry by foreign andlocal investors. During the period, private sector participants established over 500microprocessingcentres(MPCs)and100small-andmedium-sizedenterprises(SMEs) for the production of intermediate cassava products. The enterprisesprovidedsubstantialjobopportunitiesfortheyoung,technicians,professionalsandartisans(Sanniet al.,2006).Thereweresubstantialinvestmentsinnewfactoriesforthemanufacture of glucose syrup, starch andHQCF.Such factories includeEkhaAgroFarms,OgunState,aglucosesyrup factorybuilt in2007;DutchAgriculturalDevelopmentCompanyNigeriaLtd,BenueState,anautomatedHQCFfactorybuiltin2006;andMatnaFoods,OndoState,acassavastarchfactorybuilt in2005.ThemarketforHQCFinGhanaisalreadyestablishedwiththePlywoodmanufacturersandthebiscuitfactories(PiccadillyBiscuitsandParleBiscuits).Thereisalsoinstantfufubeingmanufacturedandavailableonthemarket.Finally,acompanynamedLeeChemicalsthatischieflyintoexporttradealsopurchasesHQCF.

Somecompaniesattemptedregionalmarketingofcassavastarch,e.g.MatnaStarchIndustryexportedcassavastarchthroughNestlePlctoCoted’Ivoire,whileAyensuStarchMills,Ghana, attempted to enter theNigerianmarket.Therewas a policyon5percentinclusionofHQCFinbread,butithasnotbeenpassedintolawasthebillhadnotgonethroughparliamentaryscrutiny.TheGhanaAgro-FoodCompany

Millennium Development Goal roles of PiCs and others

Eradicate extreme poverty cassava is a secure source of food and nutrients. Post-harvest processing adds value and enables farm-gate businesses to boost farmers’ incomes.

Promote gender equality Women benefited especially from improved cassava farming and processing activities. Women’s participation in cassava initiatives increased their knowledge and skills, and enable them to make better enterprise decisions.

reduce child mortality PIcs have contributed to this goal by reducing hunger and raising farmer-processors’ standards of living.

improve maternal health Through better nourishment, PIcs directly improved the health of women and their unborn children.

Develop a global partnership More partners involved in cassava for development.

taBLE 11.1

millennium development goals and the roles of pIcs and other parties

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(GAFCO)hadasignificantinterestinHQCF,providedthattheothertwoflourmillers(IraniBrothersFlourMillsandTakoradiFlourMills)wouldbewillingtouseitintheproductionofcompositeflour.

TheNigerian PIC rested its successmore on strong financial support to relevantinstitutions,mostespeciallytheInternationalInstituteofTropicalAgriculture(IITA),theNational RootCrops Research Institute (NRCRI), the RawMaterials ResearchDevelopmentCouncil(RMRDC)andtheRoot&TuberExpansionProgramme(RTEP),towardstheachievementoftheobjectivesoftheinitiative.

Theperiodbetween2007andthepresentdayhasseenanewoutlookinliberalizationoffoodtrade,includingcassavaproducts.Unlikepreviousregimes,Africanleadersaredecreasingtradebarriersonflourproducts,includingcassava.Thisconflictswithresearchfindingsthatsuggestnationalsmademoremoneyinlocalsubstitutionwithhightariffsonimportationoffoodproducts.Today,Africais lackingintheareaofreliableandsustainablepolicyimplementationontradeliberalization.

Variousreports(mainlyinthenewsmediainNigeria)andanimpactstudypublishedinGhana(Tonah,2006)havebeenhighlightingdifficultiesintheirimplementation.For example, processors failed to meet the deadline of January 2005 related togovernmentpolicyon10percentcassavaflourinclusioninbreadmakinginNigeria.InGhana,Tonah (2006) foundthat farmerswereunhappywith lowpricespaidbytheprocessorswho,inturn,complainaboutinsufficientsupplyofrawcassavaroots.

ThecoordinatingGovernmentMinistriesinNigeria(FederalMinistryofAgricultureandWater Resources, FMAWR, and FederalMinistry ofCommerce and Industry,FMCI) failed to provide strong influence to ensure early commencement of theinitiative.Therewere also conflicting positions as regards the implementation ofPIC,whichshowsaserious lackofmonitoringandevaluation;thisproblemisstilllingering.

Pricehasalwaysbeentheboneofcontentionamongallstakeholdersinthecassavasector.Farmerscomplainofthepricesofferedforthecassavarootsbyprocessors,whileprocessorsinturncomplainofthepricesthatmajorendusersareofferingtopurchasetheirfinishedproducts.Furthermore,Nigerianprocessorswereunabletosellhighqualitycassavaflour(HQCF)toflourmillingindustriesbecauseofapricedisagreement.Atpresent,HQCFissoldat₦65000(US$439)pertonneinNigeriawhile processors are clamouring for₦90 000 (US$608) per tonne.There are twotypesofHQCFavailableintheGhanaianmarket–thefoodgradeHQCF,whichsellsforGh¢700/tonne, and the other grade for the plywood industry, which sells for Gh¢600/tonne.KokortesellsforGh¢400/tonne.Priceisgreatlyaffectedbyseasonaldifferencesinthispartoftheworld.

The perceived challenge at present is that ongoing efforts are not adequate andthat the cassava sub-sector needs a further push for it to play a leading role in

Millennium Development Goal roles of PiCs and others

Eradicate extreme poverty cassava is a secure source of food and nutrients. Post-harvest processing adds value and enables farm-gate businesses to boost farmers’ incomes.

Promote gender equality Women benefited especially from improved cassava farming and processing activities. Women’s participation in cassava initiatives increased their knowledge and skills, and enable them to make better enterprise decisions.

reduce child mortality PIcs have contributed to this goal by reducing hunger and raising farmer-processors’ standards of living.

improve maternal health Through better nourishment, PIcs directly improved the health of women and their unborn children.

Develop a global partnership More partners involved in cassava for development.


290

theagriculturalandeconomicdevelopmentofSSAcountries.Tothisend,Africanleadersmadeacall,throughtheNewPartnershipforAfrica’sDevelopment(NEPAD),togiveprioritytocassavainregionalagriculturaldevelopmentstrategies.Thisledto the creation of the NEPAD PanAfricanCassava Initiative (NPACI), a strategicinstitutionalarrangementthatisaimedatlinkingnationalagriculturalresearchandextensionsystemstoregionalinitiativesoncassava,inordertoensurefoodsecurityandincomegenerationinAfrica.

Changes in successive governments and leaders have been a bane in sustainableagro-basedindustrializationinsub-SaharanAfricancountries.Incentivesthatopenedwindowsofmarketopportunitybasedonparadigmshiftsfromproductiontomarket-orientedapproachesareeasilywithdrawn,simplybecauseofchangesinleadership,withoutanypolicydialogueinvolvingthestakeholders.Thishasimplicationsforproductandprocessinnovationsthatcanenhanceagro-industrialdevelopment.ItispertinenttonotethatthesustainableandstimulatingeffectofacassavadiversificationpolicyinAfrica rests heavily on supportive and amiable approaches, continuous politicalwill,constantdialoguewithstakeholdersandcollaborationbydevelopmentpartners. ThishasbeenexemplifiedbySouthAmericancountriessuchasBrazilandColombia,which have advanced cassava development systems that play a vital role in theirsuccessfulindustrialization.With70percentofSouthAmericanmarketshare,thesetwonations,especiallyBrazil,havebecomeleadingworldproducers,processorsandmarketeersofcassavaanditscorollaryproducts(UNIDO,2006).

11.3 Influence of Presidential Special Initiatives on product innovations

Effortsmadesofartowardsimprovingthequalityandsafetyoffermentedcassavaproducts(gari,attieke,instantfufuflour,agbelima)basedonPresidentialInitiativesinNigeria andGhana are presented as case studies.Advancesmade in the localsubstitution,fortificationoftraditionalandnewproductsarepresented.

Findings from the Collaborative Study of Cassava in Africa indicated that themajority of cassava consumed on the continent is fermented (Nweke, 2003; Tanya et al., 2006). These include fufu, gari (Figure 11.1), eba, attieke, kokonte, chikwangue, placani,cassavabeer,fermentedboiledcassava,etc(KuyeandSanni,1999).InmanyAfricancountries,age-oldtraditionalmethodswereemployedbeforethepresidentialinitiativesintraditionalfermentationprocesses.

Pilotinitiativesin2002–2006undertakenbyNaturalResourcesInstitute(UK)anditspartnersinGhanademonstratedthetechnicalandcommercialfeasibilityofproducingnew/improvedcassavaproductssuchas instant fufu (Figure11.2), instantagbelima, and improvedkokonte inGhanaandNigeria,applyingtheHACCPprinciple (HazardAnalysisandCriticalControlPoint)(Johnsonet al.,2006;Tomlinset al.,2007).

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11.4 Process innovations

According to Nweke et al. (2002), there are three types of cassava-processingmachinesinuseinAfrica:graters,pressers,andmills.MechanizedgraterswerefirstintroducedintheRepublicofBeninbytheFrenchinthe1930s,andweremodifiedinNigerian in the 1940sbywelders andmechanics, using localmaterials such asold automobile motors and scrap metal.The mechanized graters are owned byvillage entrepreneurs, who provide grating services to farmers. In Nigeria, thePICs encouraged remarkablemodificationswith technical backstopping from theInternationalInstituteofTropicalAgriculture(IITA)incassavaprocessingtechniques,and equipment manufacturing for peeling, grating, drying, frying and milling (Sanniet al.,2006a,b).

Local(mainstream)manufacturershavecomeupwithdiverseformsofinnovationand improvements to enable processors to overcome some of their limitations. The locally adapted post-harvest technologies were introduced by the IITA-implemented cassava enterprise development project (CEDP) in support ofthePIC(Sanniet al.,2005,2006,2007).Thesemachineriesincludemobilegraters,flash dryers, pulverizers, centrifuges and plate mills.Other low cost innovationssuitable for micro-processing included: the improvement of the cassava presserfromscrewstohydraulicmechanism;thedesignofamobilegrater;improvementincassavasieves;thedevelopmentofalowcostcassavadryerthatcanusecharcoalsandkerosene(fordryingofcassavachipsandpellets);theintegrationofthecassavagrater,cassavapress,cassavasieveandgarifryerinasinglepackage.

Thedevelopmentofpeelingmachines inNigeriabeganinthe1980s(Olukunleet al.,2006).IITA,incollaborationwiththeAfricanRegionalCentreforEquipmentDevelopmentandManagement (ARCEDEM), theA&HEngineeringConstructionCompany (Iwo),FataroySteelIndustry(Ibadan),andotherengineersfrompublicinstitutionsinNigeriacommenced modification of cassava peelers in 2005. Based on the assessment,minimum peel retentions were 5.7 percent, 6 percent, 11 percent, 0 percent and 0percentrespectivelyforA&H,FUTA,FATAROY,HandFedModelandmanualmethod,

FIGURE 11.1 gari market, Edo State, Nigeria, 2005 FIGURE 11.2 Instant fufu flour


292

withcapacitiesof0.25tonnes/haand1tonne/ha.Varioussuggestionswerediscussedand manufacturers were encouraged to improve on their designs. Consequently,ARCEDEMproducedaprototypepeelerincollaborationwithIITA(Sanniet al.,2006b).

ArecentfieldvisitbyengineersfromtheNationalCentreforAgriculturalMechanization(NCAM) toA & H Engineering revealed some improvement in innovative cassavapeelers (Olowonibi et al., 2009). The peeling machine comprises three cylindricalrotating rollerswitha crestof about0.5-inchesand2mmmild steelwound roundthe rollers, which serves as the peeling blade.The bladewinds round the top leftandwooden rollers anticlockwisewhile the top right roller bladewinds clockwise.Thereisastationaryhollowcylindricalgalvanizedpipepositionedexactlyatthetopdownroller;thethreerollersconnecttogetherwithachainviasprockets.Themachinehasanefficiencyof85–90percentwithsmallcassavarootsand90–95percentwithlargeroots.Processors(CottagetoSMEs)inotherpartsofAfricaarestillusingmanualpeeling,whichislaborious.ItisonlyAyensuStarchMillthatusesmechanicalpeelers,whicharenotaccessibleforusebyacriticalmassofprocessorsinGhana.SomeSMEsarecurrently testingusingARCEDEM-WABAMACO,FataroyandA&Hpeelers,withsomedegreeofsuccess.However,thereisstillaneedforfurthercollaborationinthedevelopmentandperfectionofcassavapeelingmachinesbeforetheymaybeusefullyintegratedintocassavaprocessingmethodsbyotherendusersinAfrica.

Basedonconsiderabledemand fromvulnerablegroupsandprocessors in remoteareasofNigeria,amobilegraterwasdesignedandmanufacturedbyengineersfromtheInternationalInstituteofTropicalAgriculture,theFederalInstituteofIndustrialResearch,StateAgriculturalDevelopment,andmanufacturers(Sanniet al.,2007).ThebestversionwasproducedbytheScientificEquipmentDevelopmentInstitute(SEDI) – aGovernment-owned engineering centre in Enugu, Nigeria.Themobilegrater has the following features: a stainless steel hopper/delivery chute, a 7 HP(Horsepower)dieselengineprimemover,asteelchassis,amotorcyclewheelthatsupportsandreducesvibrations,apushhandle,andarest/supportmetalframe.

This initiative resulted in the large-scale commercialization of the production ofcassavaderivativessuchasgari,whichculminatedintheshiftfromtheuseoflocalroasterstostainlesssteeldoubleroastersandautomaticroasters.

Cassava processors in particular have perceived that the PIC has improved theiraccesstoimprovedprocessingtechnologiesthatreducedrudgeryandfacilitatetheprocessingofhighqualitycassavaproducts.Theyalsobelievethatthesetechnologieshaveenhancedtheiropportunitiestoearnincome(SanogoandAdetunji,2008).

OnenotablebenefitofprocessinnovationfromPICwasthepositivecollaborationfrom2006to2008betweentheIITAandotherpublicagencies(e.g.theInternationalFund for Agricultural Development (IFAD)-sponsored Root and Tuber ExpansionProgramme (RTEP)) and in Godilogo farms, Obudu, Cross River State, on thedesignandmanufactureofmoreefficientflashdryers.Thenewflashdryerinstalled

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at Godilogo was commissioned in August 2008 with financial support from theIITA, the International Fund forAgricultural Development (IFAD)-Root andTuberExpansion Programme (RTEP), Godilogo farms, and the Raw Material Researchand Development Council (RMRDC) under the Federal Ministry of Science andTechnology. It is an impressivemachine that canproduce250kg/hourof cassavaflour(Kuyeet al.,2008).

11.5 Institutional support for cassava agro-enterprise development in Africa

Emphasis by the Global Cassava Development Strategy (GCDS) to turn cassavaas an engine for industrial development inAfrica spurredgreater understandingsofnationalandglobalcassavamarkets (FAO,2001;UNIDO,2006).TheGCDShasinfluenced a number of larger initiatives including NEPAD’s Pan-AfricanCassavaInitiative,PICsinNigeriaandGhana,andInternationalinitiatives(Table11.2).

Amajor conceptual approach for these initiatives is to link activities that reduceproductionrisksandcosts (e.g. improvedanddiseaseresistancevarieties),createreliable supply (agronomyand adoption), add value, and create reliabledemand.The international, regional and national institutions played active roles to fosterpositivepolicythrustsasavehicletopromoteemploymentgeneration,earningofforeignexchange,andencouragenewinvestorsincassavaenterprises.

Some of the major actors involved in the implementation of the initiatives arepresentednext,withabriefdescriptionoftheirmainrolesandresponsibilitiesintheexecutionoftheprogramme,especiallyasregardsproductandprocessinnovationsinNigeriaandGhana(SanogoandAdetunji,2008).

11.5.1 government agencies as stakeholders

The initial design and planning of the structure and objectives of the PIC inNigeriawere coordinated by the Federal Ministry of Agriculture, in collaboration with theFederalMinistryofCommerceandIndustries.Mostoftheactivitieswereimplementedbynationalagencies suchas theNationalRootCropResearch Institute (NRCRI), theRaw Materials Research and Development Council (RMRDC), the Federal Instituteof Industrial Research atOshodi (FIIRO), theScientific andEquipmentDevelopmentInstitute at Enugu (SEDI), the Nigerian Stored Products Research Institute (NSPRI),theStandardsOrganizationofNigeria(SON),theNigerianExportPromotionCouncil(NEPC),theIFAD-sponsoredRootandTuberExpansionProgramme(RTEP),aswellasotherinstitutions.MeanwhileinGhanathesecretariatofthePresidentialSpecialInitiative(PSI)oncassavacoordinatesallaspectsofthedesign,planningandimplementationofthePSIon cassavawith the followinggovernment institutions: theMinistryof FoodandAgriculture(MOFA),theCropsResearch Institute(CRI)atKumasi, theRootsandTuberImprovementProject(RTIP),andtheAyensuStarchCompanyLimited(ASCO).


294

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296

11.5.2 primary actors of the cassava value chain

ThePresidential InitiativesonCassava (PIC)strengthenedthe rapid formationandcontribution of cassava growers’ associations, cassava processors (medium-scaleprocessors and microprocessors), equipment manufacturers, cassava traders,transporters,masterbakersandNGOs.TherolesperformedbysomeoftheNGOs,such as the Farmers’ Organization Network of Ghana (FONG) and the CassavaGrowers’ Association of Nigeria, included the multiplication and distribution ofcassava planting materials to farmers (in collaboration with the Root and TuberImprovement Programme (RTIP) in Ghana and the Roots and Tuber ExpansionProgramme(RTEP)inNigeria),capacitystrengtheningoflocalprocessorstoproducecassavastarchusingtraditionalprocessingtechnologies,andthecoordinationandtechnicalbackstoppingoffarmers’groups.

The RTEP contributed positively to the promotion of cassava production andmarketing in Nigeria.With funding from IFAD, the RTEP coordinated a cassavamultiplicationprogrammewithfarmers;thiswasfollowedbythereleaseofthetenbest improvedcassavavarieties.TheimplementationofthecassavadevelopmentsinNigeriawascentredontheactiveparticipationofRTEP,theNationalRootCropResearchInstitute(NRCRI),andtheInternationalInstituteofTropicalAgriculture,aswellasotherpublicandprivateactors.

11.5.3 support institutions

International Institute of Tropical Agriculture (IITA)

Sinceitsfoundationin1967, IITAhasworkedwiththenationalagriculturalresearchsystem as well as agricultural development organizations on the improvement ofcassavaandthedisseminationofimprovedvarieties.Morerecently,IITAworkedontheexpansionofcassavaenterpriseinNigeria.TheimplementationofthePICinNigeriahasbeenbuiltlargelyontheachievementsofIITA’sresearchactivities.TheInstituteprepareda research reportentitledOpportunities in the industrial cassava market in NigeriathatwasmadeavailabletotheGovernmentofNigeriaandotherstakeholdersin 2002/2003 in support of the PIC. IITA is currently collaborating with nationaland international agencies tobackup thePICon cassavabypromoting innovativetechnologiesforthedevelopmentofindustrialutilizationofcassavainNigeria.

Inaddition,theCassavaEnterpriseDevelopmentProject(CEDP),whichsupportsthePIConcassava,isbeingimplementedthroughIITAasaleadinstitution.Thisprojectisapublic–privatepartnershipbetweentheUSAIDandtheShellPetroleumDevelopmentCompany,aimingtosupportthedevelopmentofthecassavasectoroverfiveyears(2004/05to2008/09).Ithastheglobalobjectiveofincreasingeconomicopportunitiesthrough sustainable and competitive cassava production, and marketing and agro-enterprise development in selected communities of the South–South and South–East States of Nigeria.Under theCEDP, IITA strengthened the human and

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institutionalcapacityofproducers,processors,commoditytradersandmanufacturerstoproduce,processandmarketcassavaefficiently,aswellasfosterincreasingprivatesectorinvestmentintheproduction,processing,storageandmarketingoftheproduct.

The implementationof thePSIoncassava inGhanahadalsobuiltgreatlyon thecassavaimprovementresearchatIITA.Thethreemajorcassavavarietieswithgoodstarchcontent(afisiafi, doku duade andagbelefia)deployedontheimplementationofthePSIwerealldevelopedatIITA,Ibadan,Nigeria.IITA’slinkswithnationalsystemsareofgreatimportancetotherealizationofcommongoals.IITAhasbeenactiveinmaintainingandfurther improving linkagesbetweenthecassavaprogrammeandthenationalrootcropsprogrammesinGhanaandotherAfricancountries.

NEPAD Pan African Cassava Initiative (NPACI) Secretariat

NPACI’sSecretariatworkedwithactorsintheFederalGovernmentofNigeriaontheconceptualizationanddevelopmentoftheobjectivesofthePIC.TheSecretariathasbeencollaboratingwithallrelevantpartnerstoensurethesuccessfulimplementationof theprogramme. It assistswith theorganizationofworkshopsand fora for theplanning,fundingallocationandexecutionofPIC’sactivities.

11.5.4 global support

Over the years there have been agro-industrial initiatives from various national,regionalandinternationalinstitutions,aswellasdonoragencies.TheGlobalCassavaDevelopmentStrategy(GCDS)providedarecentadditionalapproachtointerventionin the cassava sub-sector. It was endorsed at an international forum in Rome in2000 attended by FAO, the International Institute of Tropical Agriculture (IITA),the International Center forTropicalAgriculture (CIAT),Agricultural Research forDevelopment(CIRAD),theNaturalResourcesInstitute(NRI),andtheInternationalFund forAgriculturalDevelopment (IFAD). Itpromotesanapproachto“spur ruralindustrial development and raise incomes for producers, processors, and traders, andcontributetothefoodsecuritystatusofitsproducingandconsuminghouseholds”.Thekeytotheapproachisthatitismarketdriven,i.e.drivenbydemand.Theideaisthatgroupsorindividualsusean‘industryanalysisbasedapproach’toimprovetheirtechniquesbyadoptingthefollowingprinciples:

Z regardingstakeholdersasequalpartners; Z buildingapractical,sharedvision; Z helpingtomakeactionplansforindustry; Z buildingbetterlinkageswithprivatesectororganizations; Z buildingbetterlinkswithandamongpublicsectorinstitutions; Z ensuringco-stewardshipofresearchandserviceoutputswithusers; Z facilitating the rapid introduction of high-impact technologies through publicandprivatesectorpartnerships.


298

AttheFAO/GFAR(GlobalForumforAgriculturalResearch)conference‘GlobalInitiativeon Post-HarvestTechnology, Phase 1’, held in Entebbe,Uganda, 17–19September2001, two strategies for promoting thepost-harvest sectorweredevelopedby theparticipants. One was based on the existing post-harvest system and traditionalcommodities. It suggested upgrading products and processes, and improvingvalue addition and quality, thereby allowing the products to enter higher valueurban and regionalmarkets.This strategy also encompassed storage of traditionalcommodities,foron-farmuseortotakeadvantageofhigherpricesintheoff-season.Thesecondstrategyfocusedonthedevelopmentofnovelornon-traditionalexport commodities/products,aimedatbothregionalandglobalmarkets,includingproductswithlargevolumesandthosewithanichebuthigherunit-valuemarket.

TheAfricanAgriculturalTechnologyFoundation(AATF)–IITAIbadanStrategicPlanof 2005 encouraged the industrialization of cassava inAfrica based on availableresources, a global competitive framework, and vertically-integrated agriculturalbusiness ventures. The UNIDO Abuja 2006 Master Plan declaration promoteddomestic,regional,andinternationalmarketstrategiesforthecassavasub-sector,inlinewiththeFAOEntebbe2001actionplansforthecassavaagro-industrializationsystem in Africa. Meanwhile IFAD’s cassava processing and marketing regionalinitiativeworkshop–theAccradeclarationofMarch2006–alsoaffirmedpreviousaction plans with the private sector as the key driver.Various action plans wentin tandemwith theFAOEntebbeplansand theCommission forAfrica initiatives. TheCommissionforAfricawassetupbyTonyBlairinearly2004.Itrecognizedthateveryonewouldbenefitfrom–andhasaroleincreating–astrongandprosperousAfricausingcommoditieslikecassava.

The action plan proposed a commodity chain approach, which is by definition apragmatic,results-orientedapproach.Acommoditychaindescribesthefull rangeofactivitiesrequiredtobringaproduct(e.g.freshcassava)fromitsconception(e.g.production) throughout all intermediary phases, transformation (e.g. processing)anddelivery(e.g.marketing)toitsfinalconsumers.

11.6 Dissemination of strategies for successful and appropriate processing systems

Successes recorded in thedevelopmentofappropriateprocessingsystemsthroughthe implementation of cassava initiatives, especially in Nigeria and Ghana, needfurther dissemination toAfricanmanufacturers and processors.Most of the soundinnovationsonappropriateprocessingsystemsarestilllimitedtoonepartoftheAfricanregion.Thereisaneedforprojectimplementerstoharmonizetheirimplementationsand release information through documentation, peer learning workshops, studytours,andregional‘trainthetrainer’workshops.National,regionalandinternationalexchangesofexperiences,skillsandtechnologiesalsoneedtobeencouraged.

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11.7 Conclusions

There have been noticeably successful outcomes to the introduction of cassavapresidentialinitiativesinAfrica,withsoundprocessandproductinnovationsinthecassavaagro-industrialsector.Thetechnologiesandmachineryinvolved,particularlyfor mobile graters, peeling, drying etc, are still not well known in manyAfricancountries.Aneffectiveandcompletecassavaproduction–utilizationsysteminAfricarequiresacoalitionofprivate–publicpartnerships,withtheprivatesectorinvestinginmarketdevelopmentandprocuringthemachineryrequired.Clearandeffectivepolicies that cover the influence of presidential initiatives on trade liberalisation,accesstomarkets,equitabledistributionofbenefits,gender,environment,credit,infrastructure,taxes,legalrequirements,gradesandstandardsneedtobeembarkedupon.The examples outlined in this chapter show that through political will andappropriate policy incentives, much can be accomplished in the promotion of agro-industrial development. The lessons learned from these examples, andsome critical success strategies for cassavadevelopment that have emerged, aresummarizedasfollows:

LessonslearnedfromthePICs:

Z The rightpolicyenvironment is critical toattractingadequate investmentandstimulatinggrowthinAfrica.

Z Without legislated policy support, gains in cassava development will not besustained.

Z Access to long-term investment finance at low (single digit) interest ratescontinuestobeamajorbottleneckthatdeniesAfricanprivatesectoroperatorstheabilitytorespondtonewmarketopportunities.

Strategies that will enhance proper legislation for the advancement of commercially-drivencassavasectorsinAfricainclude:

Z increased ‘research for development’ efforts and investment in the area ofcassavainnovations;

Z initialsubstantialinvestmentbygovernmentfortheestablishmentoffarmgateprocessingcentres;

Z jointpartnershipsbetweenentrepreneursandforeigninvestorsforthesuccessfulprovisionandoperationofadaptedandefficientprocessingunits;

Z formal legislation and enforcement to facilitate the compliance of relevantimplementingactors for thesuccessfulachievementofPICobjectives, suchastheinclusionofcassavainbaking(composite)flour;

Z promotingtheestablishmentofacassavadevelopmentcommission; Z provisionofbasicinfrastructurebytheGovernment,especiallyenergysourcesataffordableratesforcottageindustriesinruralandsemi-urbanareas;

Z provisionoftax-freeregimesforSMEsintheirfirst5–7yearsofoperation.


300

Various issues for sustaining cassava equipment development in Africa, such asintellectualpropertyrights,thetechnicalknow-howofmanufacturers,environmentalrisks(renewablevs.non-renewableenergysources),genderinfluenceandflexibilityofequipmentuse,adoptionrates(viabilityanddurabilityofequipment),andqualityhazards, are becoming more important and must be addressed for sustainabletechnologytransfer.

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Raji, A.O., Kanwanya, N., Sanni, L.O., Asiru, W.B., Dixon, A. & Ilona, P. 2008.Optimisation of cassava pellet processing method. International Journal of Food Engineering, Vol4:2.

Sanni, L.A., Dixon, C., Ezedinma, P., Ilona, R., Okechukwu, G., Tarawali, G. 2006. Cassava Enterprise Development Project (CEDP) – synergy between marketing, territorial opportunities, capacity building and sustainability. Presented during theCRS–WARO–CARO/CIAT Learning Alliance on Agro-Enterprise Development, 2ndWorkshop,12–18February2006,Banju,TheGambia.

Sanni, L.O., B. Maziya-Dixon, J., Akanya, C.I., Okoro, Y., Alaya, C.V., Egwuonwu, R., Okechukwu, C., Ezedinma, M., Akoroda, J., Lemchi, E., Okoro, E. & Dixon, A. 2005.Standards for cassava products and guidelines for export.Ibadan,Nigeria.IITA.

Sanni, L.O., Adebowale, A.A., Filani, T.A. Oyewole, O.B. & Westby, A. 2006a. Qualityofflashandrotarydriedfufuflour.InJournal Of Food Agricuture Environment 4(3&4):74–78.

Sanni, L.O., Ezedinma, C., Okechukwu, R.U., Patino, M., Akoroda, M.O., Maziya, B., Dixon, J., Lemchi, P., Ilona, E., Okoro, G., Tarawali, T., Awodeyi, B., Bamkefa, N., Nnaji, F. Ogbe & Dixon, A.G.O. 2006b.Catalogue of post-harvest equipment for cassava processing.Ibadan,Nigeria.InternationalInstituteofTropicalAgriculture.

Sanni, L.O., Alenkhe, B., Edosio, R., Patino, M. & Dixon, A. 2007.Technologytransferindevelopingcountries:Capitalizingonequipmentdevelopment.InJournal of Food, Agriculture & EnvironmentVol5(2):88–91.

Sanni, S.A.2008.Nutritional and sensory qualities of iron fortified cassava gari and fufu flour. Abeokuta,Nigeria.PhDThesis,UniversityofAgriculture.


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Sanogo, D. & Adetunji, O. 2008.Presidential initiatives on cassava in Africa: case studies of Ghana and Nigeria. NEPADPan-AfricanCassava Initiative, IITA/NEPAD,Malawi.

Tanya, A.N., Darman, R.D., Ejoh, R.A., Mbahe, R. & Hamidou, M.J.A. 2006. Physicochemical and sensory analysis of fermented flour 'Kumkum' from threeimprovedandone local cassavavarieties in theAdamawaProvinceofCameroon. InPakistan Journal of Nutrition5(4):355–358.

Tomlins, K., Sanni, L., Oyewole, O.B., Dipeolu, A., Ayinde, I., Adebayo, K. & Westby, A.2007.Consumeracceptabilityandsensoryevaluationofafermentedcassavaproduct(Nigerianfufu).InJournal of the Science of Food and Agriculture 87:1949–1956.

Tonah, S. 2006.ThePresidentialInitiativeonCassava:AbaneorblessingtoGhana'ssmallholderfarmers.InGhana Journal of Development Studies 3(1):66-84.

United Nations Industrial Development Organization (UNIDO). 2006. Master Plan on Cassava Development in Nigeria. Abuja,UNIDO/FederalMinistry ofCommerceandIndustry.

Westby, A., van Oirschot, Q., Tomlins, K., Graffham, A., White, J., Gallat, S., Collinson, C., Ndunguru, G., Ngendello, T., Kapinga, R., Sanni, L., Ayinde, I., Mlingi, N., Adebayo, K., Johnson, P., Oyewole, O. & Jumah, A. 2004. Innovative approaches for cassava research and development: post-harvest in Africa. InvitedpaperpresentedattheSixthInternationalScientificMeetingoftheCassavaBiotechnologyNetwork,8–14March2004,Cali,Colombia.

Whingwiri, E. 2004. NEPAD Pan Africa Cassava Initiative. Presented at ISTRC-ABSymposium,31Octoberto5November2004,WhitesandsHotel,Mombasa,Kenya.

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AdEBAyO B. ABASS, mPOKO BOKANgA, AlFREd dIxON ANd PAUlA BRAmEl

cHapter 12

transiting cassava into an urban food and industrial commodity through

agro-processing and market driven approaches: lessons from africa

12.1 Introduction

Sub-SaharanAfrica (SSA) has the largest population of poor people in theworld(WorldBank2009).Agricultureaccounts for70percentof the labour forceandassuchisveryimportantforeconomicgrowth,butproductivityformanyagriculturalcommodities is low. Rapid urbanization, food aid, and an increased taste forcheapforeignfoods,areallcontributingtosignificant food importexpenditure in sub-SaharanAfrica.In1995,per capitaimportationofwheatintoAfricawasestimatedat8.25kg/year.Africanfarmersarenotabletosupplyagriculturalproductstoboththelocalandexportmarkets,partlybecauseoftoughpricecompetitionintheworldmarket.Africanmarketsarethereforefloodedwithsurplusfoodproductsfromothermarketswhere farming isprobablysubsidized (IITA,1999).Graffhamet al. (1999)observedthatfluctuationsinwheatflourpricessuggestthatthewheatflourmarketwaslikelyinfluencedbythepoliticalwishtokeeppricesoffoodstapleslow.Suchlowpricesincreasetheaccessoflowincomefamiliestocheapfood,buttheyalsocreatenegative impactsontheruralpoorbecausefarmershaveno incentiveto increaseproduction of local crops. The lack of technologies to transform crop produceinto higher-value products further exacerbates the problem. Rural populationsresponsible for the processing of staple foods at village level – particularly women–areunabletoincreasethequantityandimprovethequalityoftheiroutputsbecause of limited access to labour- and energy-efficient processing machinery.Excessproductionthereforeleadstohugespoilageandlossofincomes.

Scott et al. (2000) showed that the production of the most important root andtuber staples of sub-Saharan Africa – cassava, yams and sweet potato – hasbeen increasingsince1968andwill continue to increase till2020.Theproduction


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increasescanbeexplainedbyanincreaseintheareacultivatedandtheintroductionofhighyielding,disease-freeandpest-resistantcultivars.However,demandissuesanduncertainmarketsremainmajorconstraintstothedevelopmentofthecrops.According toHartmann (2004), cassava isoneof themostconsumedstaple foodcrops in sub-SaharaAfrica; the per capita consumption (kg/year) is 103, followedby maize (40), banana/plantain (28), yam (28), sorghum (23), and millet (17).Althoughcassava,maize,banana,yam,sweetpotato,beans, sorghumandmilletformthebulkofwhattheruralpoorinSSAproduceandrelyonforfoodsecurity, themarketsforthesecropsareseriouslyunder-developed.Theeffortsconcentratedon the development of markets for traditional export crops such as coffee, teaand cotton is disproportionate when judged on the basis of the values of tradeinvolved.The annual value of staple food crops inAfrica exceedsUS$150 billion,comparedwiththegrossvalueofthetraditionalexportcropswhichstandsataround US$8.5billion/year,andnon-traditionalexportcrops(especiallyhorticultureandfish)whichstandsataroundUS$7.8billion/year (Adesina,2008).Therefore,processingandvalue-additiontostaplefoodcropsinsub-SaharanAfricacanimprovemarketopportunities forAfrican farmers,whomay therebygain the full benefits of newproductiontechnologies(Abasset al.,2009).

Thecassavasubsector inAfrica is largelysubsistentandrudimentary.Smallholderfarmersaredispersedoverlargeareasandthereislittlecoordinationofproduction,processing and marketing activities. Average farm holdings in many countriesare less than 0.5 ha; the farmers operate using low input technologies andlack mechanization. Yields are very low, typically 10 tonnes/ha compared with 25–40tonnes/hainIndia,Thailand,Brazil,andColombia.Farmholdingsandyieldscan vary considerably from location to location in the same country.While theaveragefarmholdinginthemajorcassavagrowingareasofNigeriais0.75ha/farmer,itis0.43hainthemoderategrowingareas.Althoughrootyieldsaredeterminedbyecologicalfactors,cassavaproductionismorestronglydeterminedbytheavailabilityoflabour-savingtechnologiesforproductionandprocessingthanecologicalfactors(Ugwu,1996).Plantpopulationdensityisoftenlowinmanycountrieswherecassavaisconsideredasubsistencecrop;thiscontributestothelowyieldsperhectare.

InhighproductioncountriessuchasNigeria,cassavaproductionexhibitshighlevelsofvariabilityandcyclicalgluts,mainlybecauseoftheinabilityofmarketstoabsorbsupplies.Asaresult,pricesdeclinesharplyandproductionlevelsreduceinsucceedingyearsbeforepickingupagain.MostofthepoorestofthepoorinAfricadependoncassava,andarethereforevulnerabletosuchadverseshort-termsupplyandpricefluctuations (Scottet al.,2000),significantly increasingtheir incomerisk.Thiscanresultinmorepeoplebecomingpoorerandfarmersbeingdiscouragedfromtakingup improvedproduction technologies. Insufficientprocessingoptions for cassava,inadequatemarketingchannels,andalackoflinkagesbetweenproducersandendusers are other factors preventing higher production and greater profitability forproducersandprocessors.

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Transiting cassava into an urban food and industrial commodity through agro-processing and market driven approaches: lessons from africa

To resolve these problems, the International Institute of Tropical Agriculture(IITA)andnational institutions inSSAhave,since1974,continuedto invest in thedevelopment of technologies and innovations that improve the productivity andtradabilityofcassavaandothercrops.AholisticvaluechainorfoodsystemsapproachisusedtodevelopprovenagriculturaltechnologiesthataddresstheconstraintsofAfrican farmers from inputsupply toproductionandmarketing.This is combinedwithaconcurrentdeliveryoftechnologiestonationalinstitutions,capacitybuilding,information exchange, policy dialogue and technical support to the agriculturaldevelopmentagendasofvariousAfricangovernments(Figure12.1).Theresearchfordevelopmentactivitieswasredesignatedas‘rootandtubersystems’whichbecameoneof thesevenmedium-termprogramsthathavebeenrecently integrated intothe consultative group on international agriculture research programs (CRPs). These measures in total constitute the IITA Research for Development (R4D)approachtoenhancefoodsecurityandimprovelivelihoodsofsmallholdersinAfrica.

The model is implemented through development platforms that use long-termagricultural development needs of Africa for designing research and choosingpartners.Itinvolvesaprocessofmid-termresearchoutcome,impactandexitstrategy(http://www.iita.org/what-we-do). This approach contributes to the developmentof agro-industries, and supports a more commercially-based farming systemcomparedwiththeconventionalproduction-basedresearchstrategy.Thecombinedeffortsof IITA,other internationalresearchcentresand internationalandbilateraldevelopmentagencies,havecontributedtothechangeinstatusofcassavafroma‘poorman’scrop’ toacommoditywithhighpotential for industrialuse.Althoughcassava commercialization is spreading acrossAfrica, faster advances have beenmadeinNigeriaandGhanathaninothercountries.Yet,cassavacommercializationstill facesmajor problems arising from the high cost of primary production thatmakescassavaproducts lesscompetitive insomecases.Processing infrastructurein many countries (except Nigeria and Ghana) is poor; institutional support formobilizing investmentanduseofmodern technologies is low; implementationofpolicyinstrumentsthatsupportcassava-basedagro-industrialprocessingisweak.

12.2 The integrated food systems approach

According to Nweke et al. (2002), African policy-makers and members of theinternationaldonoragenciesandNGOsaresearchingforasolutiontoAfrica’sfoodproductioncrisis.However,solutionsaredifficulttoofferbecausestatisticsandotherinformationontheeconomicsofproduction,processing,andmarketingofmostcrops,includingcassava,areunavailable.Inthepast,increasingfoodsecurityinAfricawastackledvia a single-stepapproach: increasingproductivity.Plant-breeding researchwascarriedoutwith littleknowledgeof theagronomic,processing,andmarketingproblems faced by small-scale cassava farmers and traders (Nweke et al., 2002).Thisapproachdidnotachievethedesiredsuccessbecausetheapplicationofasingle


308

Research and partnership

development

Food Systems Approach

to technology development

Cereals and Legumes

Systems

Banana and Plantain

Systems

Root and Tubers Systems Program

Post-harvest processing, value addition

and marketing project

Scientific understanding of constraints

and identification of opportunities

Research to develop technologies

and strategies that overcome agricultural constraints

along the whole value chain

Technology testing in different agro-ecologies and in commercial

environments with national institutions and the eventual

users of the technologies

Technology adaptation and transfer

Impact measurement

and policy research

EXIT

Information exchange

Capacity building

Raw material quality

improvement

Post-harvest machinery

and storage technologies

Processing and utilization technologies;

marketing innovations

Capacity building

Policy dialogue

Technical support to African

agricultural development

agenda

FIGURE 12.1 The IITA R4d approach to cassava development

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solutiontoaspecificprobleminthe‘foodpipeline’withoutconsideringtheupstreamanddownstreamproblemsleadstoablockageinthefoodsupplysystem.Itmakesthecontinualsupplyofadequatefoodunachievable.

The integrated food systems approach at IITA involves investigating theproblemsfacedandthedevelopmentneedsofthesmallholderfarmer,includingpoorruraldwellers,anddesigningagriculturalresearchtotacklethoseproblems.Thedevelopmentneedsare identifiedthroughdiagnosticsurveys,stakeholderconsultations and participatory identification of challenges and opportunities(RobertAsiedu, personal communication).TheCollaborativeStudy ofCassavain Africa (COSCA study) implemented between 1989 and 1997 demonstratesthe procedure used to identify research anddevelopment needs, on the basisof which strategic research at IITA is designed. During the COSCA study,researchers collected primary data on cassava in themain cassava producingcountries of Africa, namely the Democratic Republic of Congo, Côte d’Ivoire,Ghana,Nigeria,Tanzania,andUganda.Thesedataincludedcassavaproductionsystems,processingandfoodpreparationmethods,marketsandconsumptionpatterns.Theinformationwassubsequentlyusedinthefoodsystemsapproachtoresearch,design,developandextendprogrammesandpoliciesforreducingfoodinsecurityandpovertyinmanyAfricancountries(Nwekeet al.,2002).

The food systems approach focuses on the poor, the markets for theircommodities,andtheprofitsinvolvedinmarketingacrop.Itusesnewapproachestoimprovetraditionalproductionandprocessingmethodsandtodevelopnewmarketopportunities(IITA,1999).TheapproachhasbeenimplementedthroughstructuredmultidisciplinaryresearchprojectsorprogrammesatIITA;theseareeitherbasedonthemesorarefocusedonspecificproductionsystems.CurrentlythemainIITAresearchprogrammesare:AgricultureandHealth,Agrobiodiversity,BananaandPlantainSystems,CerealsandLegumesSystems,HorticultureandTreeSystems,RootandTubersSystems,OpportunitiesandThreats.TheInstitutealsohoststheSystem-wideProgramonIntegratedPestManagement(SP-IPM)oftheConsultativeGrouponInternationalAgriculturalResearch.

Manyprojectsdealingwithdifferentaspectsofthefoodsystem,suchasinputs,production,post-harvestandother issuesarecarriedoutwithinmostof theseprogrammes. The ‘Improving post-harvest systems’ project adopted in 1994was part of the food systems approach. It involved post-harvest processing,value addition andmarketing research. It emphasized the links between cropcharacteristics,farmers’resources,croppingsystems,commodityhandlingandstorage problems, processing requirements, food quality characteristics andconsumptionpatterns,seasonalandspecialpricevariability,andthemovementof agricultural products between rural and urban areas. The emphases weremeant to improve food availability, increase accessibility by consumers, andraisethe incomeofsmall-scale farmersandprocessors (IITA,1999).Fourmain


310

areaswereinvolved:rawmaterialquality,post-harvestmachineryandstorage,processing, utilization and marketing, and capacity building and informationexchange(IITA,1999).

12.2.1 raw material

The quality of fresh roots in terms of storability, processing characteristics,palatabilityandthesafetyoffoodproductsarecriticalfactorstoenhancemarketprices and rate of adoption of improved varieties by farming communities (IITA 1997).The cassava breeding research is focused on incorporating marketquality requirements in new varieties in addition to the usual breeding for highyieldanddiseaseresistance.

New technologies and improved practices have been developed in partnershipwith other international and African institutions to limit or manage the majorproductionconstraintssuchaspoorsoilsandagronomicpractices,anddevastatingcassava diseases and pests. Between 1987 and 1996, new varietieswere testedthroughon-farmadaptive research involving farmers inmanyagro-ecologiesofNigeria incollaborationwiththeNationalRootCropResearch Institute(NRCRI),the National Seed Service (NSS) Nationally Coordinated Research Project, andlarge-scaleagricultural extensionprogrammes suchas theNationalAcceleratedFood Production Project (NAFPP) andAgricultural Development Project (ADP). SixIITA-improvedvarieties(TropicalManiocSelectionorTMSseries)werereleasedthroughtheNationalVarietyReleaseCommittee(NVRC)andsomeweregivennewnames:TMS50395,TMS91934,TMS63397,TMS30555,TMS4(2)1425 (NigerianCassava: Savanna), and TMS 30572 (Nigeria Cassava Idioshe). The NationalVariety ReleaseCommittee (NVRC) later released an additional 17 varieties forcultivation.ThenationalresearchandextensioninstitutionsalsoengagedinveryelaboratemultiplicationanddistributionofplantingmaterialsoftheTMSseriesof IITA-improved varieties in Nigeria (Nweke et al., 1999). The well coordinatedactivities of the various extension programmes – with support from privatecompanies such as Shell BP,Texaco Agro industries Limited, and Nigeria AgipOil Company Limited – in the multiplication, promotion, and distribution ofthe improved cassava varieties, contributed to their rapid spread in Nigeria.By theendof1990,plantingmaterialsof improvedvarieties for9130haat therate of 10 000 planting stakes/ha had been provided to the state agriculturaldevelopmentprogrammes(ADPs)while400demonstrationplotswerecompletedbytheADPsandtheNationalSeedsServiceofNigeria(NSS)(Nwekeet al.,1999).The collaboration and support given to the Nigerian National AgriculturalResearchandExtensionSystems(NARES)contributedimmenselytotheincreasein production of cassava from 1991. The existence of improved processingtechnologies in Nigeria acted as a catalyst to increased production through anupward pull effect on the market demand for cassava (IFAD and FAO, 2005).

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Theincreaseddemandandincreasedproductionofcassavacontributedtoareductionin poverty and hunger because the cash income for cassava-dependent farmersincreased,whilemorefoodproductswereavailableatlowercosts(Nwekeet al.2002).

Collaboration,capacitybuildingandsupporttonationalrootandtuberprogrammesin many African countries were further strengthened for the transfer, testingand selectionof newvarieties adapted to their specific agro-ecologies. In 1993,Ghana officially released three improved varieties (TMS 4(2)1425 (Abasa Fitaa),TMS 50395 (GlemoDuade), andTMS 30572 (Afisiafi). In 1994,Uganda officiallyreleasedthreevarietiesTMS60142(Nase1),TMS30337(Nase2),andTMS30572(Migyera).Additionally,siximprovedanddiseaseresistantvarietiesofIITAoriginwerereleasedinUgandain1999.Theseimprovedvarietieslatercontributedtotheimprovementofyieldsandtheslow-downorcontrolofmajordiseaseepidemicsthatthreatenedthefoodsecurityofmillionsofthepoorestfarmersinsomeAfricancountriessuchasNigeria,GhanaandUganda(IITA,1986;IFADandFAO,2005a).Majorachievements in thedevelopmentofadditionalvarietieshavebeenmadesincethen,withhundredsofthosenewvarietiescurrentlybeingtestedbymanynationalprogrammes.

12.2.2 post-harvest machinery

Grating and milling machines were already in commercial use in most Nigerianvillages before the post-harvest activities started at IITA. From 1988 to 1998,collaboration and knowledge from many research and development institutionssuchastheInternationalCentreforTropicalAgriculture(CIAT),theFederalInstituteofIndustrialResearchOshodi(FIIRO),theNigerianStoredProductResearchInstitute(NISPRI),andtheRuralAgro-IndustrialDevelopmentServiceoftheNigeriaMinistryofAgricultureandNaturalResources(RAIDS),amongothers,ledtotheintroductionof some modifications that further reduced labour input to cassava processing (IITA,1998aandb).Addedtotheexistingandwell-usedmachineryandtoolssuchasgraters,wetgrinders,drygrindersetc,weretrailer-typefieldcarts,modifiedwheelbarrows,doublescrewpresses,manualchippers,powerchippers(with3.5HPpetrolengines),combinedgrating-chippingmachines(with5.0HPpetrolengines),peelingbaysandtools,fermentationracks,dryingrackswithtraysandstoves,double-stagefrying stoves, agricultural waste-fired stoves, kerosene burners, and bucket-typestarchsifters.Whentested,theprocessingmachineswerefoundtoreducelabourinput and post-harvest losses, and increase product output, quality and safety(Figure 12.2).Theoutputproductswereofhigherqualityandoutput volumehadincreased. The use of improved processing technologies increased the relativeimportanceof cassava inmanyvillagesandcontributed to theoverall increase inutilizationofcassavainNigeria(Nwekeet al.,1999).Cassavafieldareaswerefoundto behigher in villageswhere farmers had access tomechanical grating systemsthaninvillageswheretheydidnot.Inaddition,highrootyieldsachievedwiththe


312

adoptionofimprovedcassavavarietiesdidnotbringsubstantialcost-savingbenefitstofarmerswithouttheuseofmechanicalprocessingmachines(Nwekeet al.,1999).

12.2.3 processing, utilization and marketing

From 1976 to 1985, a combination of increased urbanization, rising incomes,marketpromotionsandspecificpolicydecisionsfavouredtheimportationoflargeamountsofwheat intoNigeria.Theannualaverage importof riceperperson inNigeriaalso increasedmorethan1500percentbetween1960and1987 (Nwekeet al.,1999). Inaddition,Nigeriabecamethe largest importerofwheat inAfricawith imports totaling US$37 million representing 2.2 percent of the nation’sforeignexchangeearningsin1985.Manufacturersofadiverserangeofproductssuchassoftdrinks,confectionery,automotive/drycellbatteries,paints, textiles,pharmaceuticals, ironore,paper,soap,detergent,packaging,andcosmetics,alldependedonimportedsyrupconcentratesandstarch(AbassandShiwachi2003a).

FollowingtheadoptionofastructuraladjustmentprogrammeinNigeriain1985,thegovernmentbannedthe importationofcertain foodsand industrial rawmaterialsin December of that year, notably wheat, rice and maize.The government waslooking forways to reduceexpenditureon importsanddevelopmarkets for localrawmaterials.VariousnationalinstitutionssuchastheFederalInstituteofIndustrialResearch(FIIRO)andtheNationalCerealResearchInstitute(NCRI)weremandatedto investigate the suitability of locally-sourced rawmaterials for use in industrialbaking processes, tomodify such processes to suit local conditions, and to seeksolutions to the basic technical problems of bakers in the use of locally-sourcedrawmaterials.Althoughin1985cassavawasnotconsideredanimportsubstitutioncrop, the ban onwheat imports presented an opportunity to develop flour from locally-growngrains,rootsandtubers,aswellasothercrops.

In collaboration with many advanced research centres such as the KatholiekeUniversiteit Leuven (KULeuven) under the ‘Cassava for Bread project’, fundedby the BelgianAdministration for Development (BADC), research efforts at IITAledtothedevelopmentof thehighqualityunfermentedcassavaflourtechnology (fromherereferredtoashighqualitycassavaflour,orHQCF)in1985(Figure12.3). Themethodrequiredtheuseofcassavaprocessingequipmentalreadyincommonuse inNigeria forpreparationofgari,andtherebyminimizedtherequirement forcapital investment (Onabolu and Bokanga, 1995; Abass and Shiwachi, 2003a;Abass,2006).Thisnewtechniquewasquickandeffectiveformakinglargevolumesofprocessedcassavaflour.RecipesweredevelopedfortheuseofHQCF inbakedand fried foods and for various industrial applications. The recipes for makingconvenience food products such as composite bread (20 percent HQCF and 80percentwheatflour),meatpies,sausagerolls,cakes,cookies/biscuits,doughnutsandchinchin)weredevelopedandpopularizedatthistime(Onaboluet al.1998).

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Traditional processing

Home-based family processing

Modified processing equipment• grater • dewatering • chipping device machine • sifters• grinder • fryers

Improved processing

Village processing centre

CASSAVA PRODUCTION

• Often for home consumption• Low output volume• Poor aesthetic appeal• Prone to contamination with microbes and toxins• Sometimes containing high residual cyanide• Sometimes of low market value

• Home consumption and industrial use • High output volume• Improved aesthetic appeal• Reduced possibility of contamination • Low residual cyanide• Mostly of high market and industrial value

22.3 PROCESSING LOSSES [%] 10.1

CONSUMPTION / MARKETING

Loss reduction is due to:• technology 6.5%• system arrangement 2.2%• attitude 2.6%• training 0.5%

295.2 LABOUR INPUT (person hours/10 tonnes ha) 87.6

Labour contributed by:• Husband 9.6 hrs• Wife 256.8 hrs• Children 26.4 hrs• Hired labour 2.4 hrs

Labour saving is due to:• Technology 77.3 hrs• System arrangement 60.9 hrs• Attitude 43.1 hrs• Training 26.3 hrs

Labour contributed by:• Husband 3.1 hr• Wife 61.6 hr• Children 19.7 hr• Hired labour 3.4 hr

OUTPUT PRODUCT

FIGURE 12.2 Effects of mechanization and improved processing techniques on food losses, labour input to processing enterprises and output products


314

12.2.4 capacity building and information exchange

Aswithallnewproducts, therearebarriers to theadoptionofnewtechnologies,particularly among low-income groups who are averse to risk, have poor accessto capital, lack information, and may have limited business skills (IITA, 1997). Toovercome theseproblems, testingof agroprocessing technologieswas carriedoutunderpilotsystemsindifferentlocationstodevelopthevaluechainforcassava,while simultaneously developing manpower and mentoring of stakeholders.Capacitybuildingforallcategoriesofstakeholderswaspromotedthroughuniversitydegreetraining,shortcoursesorworkshops.

Pilotoperationsforvaluechaindevelopment involvedthe integrationofavailabletechnologiesalongthecassavavaluechainandpilottestingwithfarmers,processors,andindustrialendusers inselectedlocations.TheframeworkforpilottestingandtransferofnewtechnologiesisshowninFigure12.4.

Freshly harvested cassava roots

Peel and wash

Grate (mechanical grater)

Dewater (screw or hydraulic press)

Pulverize

Sun-dry in a thin layer

Mill finely

Package

FIGURE 12.3 high quality cassava flour processing (hQCF) technology

Source: Onabolu et al. 1998.

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Thesequenceofactionsinvolvedinpilottestingincluded:

Z Identifyingcassavaproductsforwhichtherewerepromisingmarkets;identifyingkeystakeholders,theirwaysofoperationandconstraints.

Z Selectingthesitesandtheparticipatinggroupsorcooperativesofsmallholderprocessorsandendusers;developingmarketstrategiesforthemostpromisingcassavaproducts.

Z Training farmers/processors in the new processing technologies for makingcassavaproductswiththerequiredqualitycharacteristics.

Z Producing and supplying cassava product(s) to end users, or urban-basedsupermarketsnearthepilotlocations.

Z Trainingpotentialenduserindustriestoadoptthenewproductsasrawmaterialsintheirrecipesorprocesses.

Z Useofsuitableimprovedvarietiesandagronomicpracticestoensuresufficientandtimelysupplyofrawmaterialsforprocessing.

Pilotoperationsalsoinvolvedtraining,informationexchangeandtechnologyrefining.Duringpilotoperationsexperiencesweresharedontheperformanceofthetechnologiesandotherinnovationsbeingtested.Theapproachemphasizedthecollectionoffeedbackalongthe ‘researchtodevelopment’continuum,duringthefieldorpilottests,duringadaptationbynationalinstitutions,andfromhigherlevelsofpolicy-makers.Correctiveactionsweretakenbydesigningnewresearchactivitiesbasedonthefeedback.

Technologiesandinnovationsarerefinedbasedonfeedbackfromvaluechainactorsduring pilot testing. For example, previous knowledge before the developmentof high quality cassava flour technology in 1995 suggested that fermentationwas critical to removing cyanide from cassava, so that flours to replace wheatflour could bemade from certain cassava varieties.However, the productsmadefrom the fermented flours deteriorated rapidly (IITA, 1988) because of spoilingmicroorganisms in the fermentedflour. It thereforebecamenecessary todevelopa new technique for processing cassava to flour with suitable baking properties. TherefiningofthistechnologyledtothecurrentHQCFprocessingmethod.

Pilot testing of HQCF technology was carried out in Nigeria from 1995 to 1998. ThemeritsofusingHQCFweredemonstratedtopotentialuserfactories(biscuitsandnoodles)inOgun,OyoandLagosstates.Aclient-supplierrelationshipwasdevelopedbetweenHQCFproducersanduserfactories.Nationalresearchinstitutesandstateagricultural development projects (ADPs), local NGOs and a credit institution(the Farmers Development Union), community-based organizations, farmers’associations,aswellastheprivatesector,wereallinvolved.Smallholderprocessorsand entrepreneurs were supportedwith respect to cassava value addition, agro-enterprisedevelopment,andmarketingactivitiesemphasizingbetterorganization,collective action, better marketing, and private sector participation throughinvestment.Thefarmersortheirlocalgovernmentauthoritiesprovidedfarmer-levelinfrastructure,includingthepilotprocessingbuildingsusedfortechnologytesting.

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Capacity building through group and individual training

Capacity building and transfer of technology were achieved through degree andnon-degree training, international training workshops for the demonstration of thetechnologies,participationinexhibitionsandagriculturaltradefairs.Selectedcountriesweregroupedintotwozones:WestandCentralAfrica(WCA),andEastandSouthernAfrica(ESA).CountriesinWCAincludedBenin,Congo(DR),Côted’Ivoire,Ghana,andTogo;inESAtheyincludedKenya,Madagascar,Tanzania,UgandaandZimbabwe.Ineachcountry,interdisciplinaryandinterinstitutionalgroupsofprojectpersonnelresponsibleforcoordinatingthedisseminationofcassavatechnologiesweretrainedinthedesignand execution of pilot projects for promoting cassava processing and utilization. Inaddition to these, equipmentmanufacturers were trained inGhana, Nigeria, Benin,Tanzania,Uganda,Cameroon,etc.,onequipmentdesign,buildingandservicing.

Information exchange

Market information service (MIS) was designed to benefit farmers, traders andconsumers.MISwas initiatedfirst inUganda, by thePost-harvest andMarketingResearch Network for Eastern and Central Africa (FoodNET). Market data werecollected on current prices of agricultural commodities and products in differentmarkets, including the variation in prices due to season or qualities.These weredisseminated through radio broadcasts, newspapers, e-mail, fax, or post officecouriers(IITA1999).Accesstomarketinformationhelpedfarmerstobetternegotiatepricesoftheirproductsbasedoncurrentmarketprices,insteadofacceptingpricesofferedbytradersorlocalmarketingagents.Itenabledfarmerstotakedecisionsontheneedtobulktheirproduceforhighervalueintimesofbestmarketprices.

12.3 Selected cases and outcomes of capacity building through pilot tests, and training on agroprocessing technologies

Pilot tests in West Africa

Before 1994, there was no producer or user of HQCF in Nigeria whatsoever. By1999,afterfouryearsofpilottestinginNigeria,25to30groupsofHQCFproducerswere involved in regularprocessingandtradingofcassavaflouratcommercialorhouseholdlevels.DemonstrationoftheuseofHQCFtopotentialenduserindustriesled to the use of HQCF in 1995 by three biscuit factories and the only noodlefactory inNigeria.By1999,thenumberof industrialusers increasedto11while9 small-scalebakersandcatererswereusingHQCFforbakingbreadandmakingothersnackfoods(Figure12.5).

HQCFwasusedinabout18brandsofbiscuits(10–50percentofthecountry’stotalbiscuit output) and in a brand of noodles amounting to about 10 percent of the


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country’soutput.Homecaterersused10 to 100percentHQCFdependingon theproductstheymade,e.g.cake,pies,chinchinorbuns.Theproductsweresoldfreelyin Nigerianmarkets.According to the end users, the benefits of HQCF includedincreased profits as a result of the lower cost of HQCF compared with wheat, andincreasedproductqualityandyield.Tomaintainproductquality,usersofHQCFsetqualityspecificationsforscreeningHQCFbeforepurchase(Abasset al.,2001).

The main factor that favoured the use of HQCF as wheat flour replacement inNigeriawasitslowercostcomparedwithwheatflour.ThepriceofHQCFwasabout 55percentofthepriceofwheatflourdeliveredatbreadbakeries(Abasset al.,2001).ProcessorsalsomaintainedthattheHQCFprocessingenterpriseswereprofitable.However,thecostoffreshcassavaconstitutedaveryhighpercentageofthetotalcostofHQCFprocessing(Table12.1).Althoughtheuseofcassavaflourinthebakingindustryprovedtobetechnicallypossibleandappearedeconomicallybeneficialtoprocessors, farmers,andusersalike, itsproductionandusewerehinderedby thedisorganizedstateofitsmarketingstructure(Abasset al.,2001).Duetothesmall-scaleprocessingmethod,whichwasbasedonsun-drying,productioncapacityinthedryseasonbyprocessors(2.5tonnes/week)wasreducedtonearly1.0tonneduringtherainyseason.

Lake Chad

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Legend End users of HQCF (1995–1999) HQCF processors: sun-drying (1995–1999)

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FIGURE 12.5 Nigeria, showing locations of hQCF processors and end users during the pilot phase

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ItbecameobviousthattheuseofbetterdryingtechnologiesforHQCFprocessing,better organization of themarket and targeted national policieswere needed tohelp expand themarket for cassava, increase farmers’ incomes, and create jobsfor more people, especially women, who are the majority involved in cassavaproductionandprocessing.In2000,aflashdryerownedbyFemtexStarchfactoryinLagoswas tested fordryingHQCF.The resultof the testwasencouraginganditwassubsequentlyproposedthatflashdryingtechnologyneededtobepromotedforHQCFprocessing toelevate the scaleofprocessingand to resolve thedryingdilemma once and for all (Abass et al. 2001). By 2002, a partnership with theRawMaterial andDevelopmentCouncil of Nigeriawas initiated to develop flashdryingtechnologyinNigeria.Overalltheresultsofpilottestingshowedthat,whilethe use of intermediate cassava products by industries provided the opportunityto reduce the cost of rawmaterial importation, it also proved to be a successfulapproachtodevelopingmarketsforsmallholderfarmers.

ThereplicationoftheNigerianexperiencethenbeganinGhanaandBenin.ThepilottestingofHQCFprocessingwascarriedoutintheOuemeandMonoregionsofBeninby the Departement de Nutrition et SciencesAlimentaires, Université Nationaledu Bénin and the Laboratoire deTechnologie Alimentaire, Institut Nationale deRecherchesAgronomiquesduBénin.TheprojectstaffhadearlierreceivedtrainingonproductdevelopmentfromIITAin1998.ResultsinBeninshowedthatsubstitutingstarchwithHQCF inbiscuits and ‘galettes’, and substitutingwheatwithHQCF in‘atchonmon’improvedthequalityofthetraditionalproducts.IncorporationofHQCF

Parameters 1996 1998

Cost of fresh cassava roots (uS$/tonne) 54 32

Cost of transporting fresh cassava from the farm to the processing centre (uS$/tonne)

8 8

Cost of production (uS$/tonne) 256 209

Selling price, delivered at end user’s gate (uS$/tonne) 291 314

Cost of production attributable to fresh cassava (%) 81 57

Cost of production attributable to labour and other inputs (%) 19 43

Wheat flour price, delivered at end user’s gate (uS$/tonne) 538.9 570.8

HQCF to wheat flour price ratio 0.55 0.54

Source: Abass et al. 2001

taBLE 12.1

some cost parameters of cassava flour production by small-scale processors during the pilot phase


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asa 15percent substitute forwheat inbread loafandFrenchbaguetteproducedproductswith100comparativequalityvis-à-viswheatbread(IITA,1999).

A studyonexpandedmarkets for locally-produced cassavaflours and starches inGhanafundedbytheUnitedKingdom’sDepartmentforInternationalDevelopment(DfID)wascarriedoutinthe1990sbytheNaturalResourcesInstitute,FoodResearchInstitute (FRI),University ofGhana and the Forestry Research Institute ofGhana(FORIG).Amarketingsamplesurveyconductedin1997bytheteamclearlyshowedthatcompositeflourwitha20percentcassavainclusionratewaswidelyacceptedby theGhanaian public as comparable to 100 percentwheat flour.Thiswas thenfollowedupbyFRIdemonstratingHQCFprocessingtechnology,theproductionofvariousnewconvenience foods fromHQCF,andtheadoptionnewtechniques forusingHQCFinplywood(IFADandFAO,2005c).

ThemarketpotentialofHQCFasapartialortotalreplacementforwheatinfood,andfor themanufactureofplywoodandpaperboard,began to increase significantly inGhana(Dayet al.,1996).TheincreaseincostofwheatflourinGhanainthelate1990sincreasedthepotentialtouseHQCF,whichwascheaper.WhilethecostofproducingHQCFwasbetweenUS$0.13/kgandUS$0.22/kg,thewheatflourpricewasUS$1.30/kg.Bakerswereabletosave32percentofthecostofflourwhenHQCFwasusedtosubstitute35percentofthewheatflour,andthereplacementofwheatflourwithHQCFinadhesiveformulationsledtoareductioninthecostofadhesiveextenders(Graffhamet al.,1999).TheapplicationofHQCFforpartialreplacement(20percent)ofimportedwheatflour(2500to300000tonnes/year)andimportedindustrialstarch(about2500tonnes/year) inGhanathereforeprovedtobe technically feasibleandeconomicallycompetitive(Graffhamet al.1999).ItwasevidentthatanexpandeduseofHQCFforfoodandnonfood industries inGhanawouldreducethedepencyon importedrawmaterialsfortheseindustries(AbassandShiwachi2003b).

Pilot tests in East and Southern Africa

InEastandSouthernAfrica(ESA)from2000,pilotactivitiesweresupportedbymoreNGOs,FoodNET,bilateraldevelopmentagenciesandothers,forthedevelopmentofagroprocessingandmarkets forcassava.Theseactivitieshelped in thetransferof the agroprocessing technologies for transforming cassava into intermediate shelf-stable industrial rawmaterials (HQCF,chips,pelletsandstarch),andrefinedfood items such as rale orgari, biscuits, noodles, andbread. From2003, the IITAsmall-scalecassavaprocessingprojectfundedbytheCommonFundforCommodities(CFC) adapted the IITA pilot testing approach to Tanzania, Uganda, Zambia,Mozambique,andMadagascar.Resultsfromthepilotactivitiesinthefivecountriessuggested that processing of cassava to high quality industrial raw materialssuch as HQCF, chips and starch provided opportunities for smallholder farmerstoaccessmoreprofitablemarkets (MbabaaliandAbass,2008).Testsby industrialusersshowedthattheintermediatecassavaproducts(e.g.HQCF,chipsandstarch) weresuitableforvariousindustrialapplications(paper,biscuits,etc).

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Enduser industrieswerethereforeencouragedtotryouttheuseoftheproducts. Estimatesofmarketopportunitiesforcassavaproducts,particularlyHQCF,showedthatthereweresignificantopportunitiesforincreasingtheproductionandsupplyoffreshcassavabyprimaryproducersofcassava.

InMadagascar, endusers such as bread andbiscuit factories expressed theneedto expand the processing capacity for making HQCF to meet growing demand.As of 2005, the demand for HQCF by eight bread bakers in Antananarivo was 425 tonnes/year, while the demand by makers of pastries was estimated at 1 000 tonnes/year. In Tanzania, two supermarkets, six food processing factoriesandtwotextilemanufacturersthattestedcassavain2005demanded95tonnesofHQCFand42tonnesofcassavastarchpermonth.Theannualmarketopportunityforfreshcassavacreatedbythesetenenduserswas4500tonnesoffreshcassava (MbabaaliandAbass,2008).

In 2004Tanzania imported about 10 484 tonnes of starch at the rate ofUS$400/tonne, and 730 000 tonnes of wheat at US$168/tonne, an expenditure of overUS$124million.Assuming10percentoftheimportedwheatwasreplacedwithHQCF(theratecouldbemuchmoreforbiscuits,bread,etc),thedemandforfreshrootswouldhavebeenabout297000tonnes.Upto1240smallagroprocessingindustrieswould have been required to supply HQCF and at least US$12.5 million foreignexchange expenditurewould havebeen saved.The amountwould bedistributedamong the farmers, processors and other people who are involved in ancillaryactivitiessuchasharvesting,transportation,bulkingandmarketingactivitiesintheagroprocessingindustry.WhilethepriceofwheatflourwasUS$164/tonnein2005,operatorsofsupermarketsinDaresSalaamofferedhigherpricesforHQCF,betweenUS$169andUS$253pertonne.TextilefactoriesthatimportstarchatUS$400/tonneofferedUS$350/tonneforHQCF.

InZambia,sevenendusersrequested505tonnes/yearofHQCFfortheproductionof various items such as biscuits, paper, and packaging materials, providing anopportunityforsmallholderfarmerstosupplyabout2000tonnesoffreshcassavaannually(MbabaaliandAbass,2008).

However, in terms of HQCF processing, small-scale operations with sun-dryingwere again found to be amajor constraint, as previously reported inWestAfrica (Abasset al.2001,2009).Outputvolumeswerelow,supplytoendusersbysmall-scaleprocessorswas irregular, and product quality was inconsistent.The uncertaintiesabout the available volume of products of acceptable quality to meet end userrequirements,thepoorimageofcassava,thewidespreadbeliefthatcassavaisafoodsecuritycrop,andthelackofpolicysupportfortheuseofcassavaintheindustry,continuedtohinder itswideadoptionasa reliable rawmaterial.Theopinionofafewpolicy-makersintheESAregionisthattheuseofcassavainlargevolumesintheindustrialsectormightdisruptfoodsupplysystems.Theyarethereforereluctantto support or promote industrial utilization of cassava.The successes in Nigeria


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andGhana,however,haveshownthatthisviewisquestionable.Adetailedanalysisof theprofitabilityofprocessingenterprises (for starch,HQCFandchips)andthefactorsthatinfluencedtheoverallsuccessofsuchenterprisesinTanzaniahasbeeninvestigated(Abasset al.,2009a).Thefactorsidentifiedinclude:

Z The lowabilityofsmallholderprocessorsor farmerstooperatetheprocessingplantsatoptimumprocessingcapacityforasignificantnumberofdaysperyear.Villageprocessorsdidnotensurethattheoutputvolumesoftheplantsexceededthebreak-evenvolumes.Thepotentialtoachievethiswasfoundtobeaffectedbythelengthoftherainyseasonandthetimefarmersspentonotherfarmingactivities.

Z Efficientuseofinputssuchaslabourandaccesstowater.Suchinputsareoftenlimiting inmany rural villageswhere cassavaprocessingoccurs, and thereforeaffectefficiencies.

Z Ability of the processors to maintain the quality of products. Quality wasalso affected by insufficient supply of water and dependence on sun-drying. Thesemadeitdifficulttoavoidfermentation,contaminationandspoilageduringtherainyseason.

Z Availabilityofsufficient rawmaterialat lowcost. Insufficient rawmaterialwasfound tobeamajor issue inESAvillages,unlike theWestAfricancountriesofNigeriaandGhana.Mostcassava farmers inESAarenotyetmarketoriented;theyproducemostlyforsubsistenceandhavelittleornoexcesscassavatoselltoprocessingplants.

Z Access toaproductmarketwaspoor.Most rural farmers/processorsshyawayfrom getting their products to end users in the cities; transacting businessor negotiating prices with urban-based factory owners was difficult for most rural-basedfarmers.Theprocessorsresortedtosellingtheprocessedproductstotraderswhobuyatlowerpricesthanthoseofferedbytheenduserindustries.

Z Managerialskillswerenotgoodenough. Z Supportinfrastructuresuchaselectricity,water,roadsandaffordabletransportsystems are generally inadequate in rural areas and affected the enterprisesnegatively.

Training

Between 1996 and 2001, during the implementation of the ‘Cassava for BreadProject’ alone, more than 550 trainees from national research and extensionagenciesin25Africancountriesweretrainedoncassavaprocessingandutilization(Table 12.2). Over 350 Nigerians (farmers, processors, caterers, bread bakers, biscuit manufacturers, etc) received classroom and practical skills enhancementduringthetrainingoftrainers.Theprojecthelpedinthedevelopmentofresearchers,extensionofficersanduniversityscientists frommorethan40partner institutionsinthe25Africancountries.Inaddition,otherunitsandprogrammesofIITAsuchasthepost-harvestengineeringproject,theEastAfricanRootCropsResearchNetwork(EARRNET), the Southern African Root Crops Research Network (SARRNET),

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and the Post-harvest and Marketing Research Network for Eastern and CentralAfrica (FOODNET),conductedsimilar trainingsessions inCentral,East,Southern,andWestAfrica.Performancetestingofsmallmachines,andtrainingofequipmentmanufacturersonthedesign,operation,andmaintenanceofpost-harvesttoolsandequipmentwascarriedoutincollaborationwithotheragenciessuchasFAO,nationalcassava programmes, post-harvest programmes, and roots and tubers (RandT)programmes ofCentral, East, Southern, andWestAfrican countries (IITA, 1999).About9000peopleweretrainedfrom2003to2008duringtheIITA-ledPreemptiveManagement of virulent CMD (cassava mosaic disease) in the south-south andsouth-eastofNigeria(theCMDProject),andtheCassavaEnterpriseDevelopmentProject(CEDP)implementedinNigeria.

The results of the pilot tests improved knowledge of the constraints against thecassava agroprocessing sector in ESA, andwere bases for additional research toimprovethesectorthroughadditionalout-scalingandup-scalingprogrammesandprojects.In2008and2009theCommonFundforCommoditiesprovidedadditionalfundingtoIITAtoadoptlessonsfromthepastpilotprojectsandtestahigher-scaletechnologyforHQCFprocessing.ThisoccurredwithfarmersandlocalentrepreneursinTanzania,MadagascarandZambia,ensuringthattheentrepreneursparticipatedasconstructivelyaspossiblebytakinga‘businessoutlook’.TheUnitedStatesAgencyfor International Development (USAID) also provided funds to IITA to apply theapproachinNigeria,Ghana,DemocraticRepublicofCongo,SierraLeone,Malawi,MozambiqueandTanzania.ThegovernmentofItalythroughFAOandtheMinistryofAgricultureandCooperative (MACO) is replicatingtheapproach inZambiaandMalawi.Similarly, the Bill andMelindaGates Foundation (BMGF) provided fundsto theNaturalResources Institute (NRI) to implementavalue-additionprojectoncassava (‘Cassava:AddingValue toAfrica’, orCAVA), focusing specifically on theprocessing of HQCF in Nigeria, Ghana, Uganda,Tanzania, and Malawi. The NRIselected IITA to participate in the project to provide both production and post-harvest support. Several organizations and governments are currently involvedin the development of the cassava sector and there aremany on-going projectsor programmes through which the pilot tests are carried out inmany countries. Thenextsectionswillexplainhowmulti-countryinvestmentsoncassavahavehadpositiveeffectsonthedevelopmentofcassava-basedagro-industriesinESA.

Having acquired the necessary expertise on cassava processing and productdevelopment,nationalinstitutionstookonthedisseminationofthenewprocessingtechnologies to thewider public at national and regional levels duringmeetings,trade shows, etc. End usersweremade aware of the possibility of using cassavaflourintheirproductsandprocesses.TherecipesandbakingtechniquesdevelopedbyIITAwereadaptedtothefoodtastesandpreferencesofconsumersindifferentcountries(Gensiet al.,1998;Mlingiet al.,1998;Sanniet al.,2006).Thedevelopmentofmoreexpertiseforcassavaprocessing,productdevelopment,anduseofHQCFisanongoingactivityinvariousAfricancountriesandisnowundertakenbyprevious


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a


326

traineeswhoapplytheknowledgeacquiredtotheimplementationofnewprojectsin various countries. For example, two metal manufacturers in ESA – TonnetEnterprises inUganda and Intermech Engineering inTanzania – provide trainingservices to othermanufacturers in the region.They also provide appropriate andaffordableequipmenttofarmers,processorsandinvestors.

12.4 Policy dialogue

Thesafetyandqualityofprocessedcassavaproductsfordomesticandexportmarketsare essential to establish confidence in consumers and importers and to ensuretheir long-termwillingness topurchase.Assuranceofqualitymayalsocontributetopricepremiumsandconsumerbrandloyalty.Manynationalinstitutionsfacethechallenge of developing cassava-based food quality standards, andmanagementsystems that cassava processors can implement easily and cost-effectively. Endusersoftenavoidusingcassavaintheirproductsforanumberofreasons,includingthelackofapprovedstandards,lackofrequiredknowledgeforusingcassava,andtheuncertaintyofobtainingproductcertificationfromrelevantregulatoryagencies. Ofcourse,anunfavourablepolicyenvironmentalsoconstrainsthecommercializationofcassava.ExperiencefromNigeriasuggeststhatfiscalpoliciesthateffectincreasesinthedomesticpricesofrice,wheatandmaize,alsoleadtoincreasesinthedemandfor cassava and cassava products. Similarly, inTanzania, shortages in the supplyofcerealcropsresultingfromnaturaldisasterssuchasdroughtshavealso leadtoa rise in thedomestic priceof cassava. In these situations, political leadersoftenencourage farmers to growmore cassava to fill the gap in food supply; farmersusuallyrespondbyincreasingproduction.Unfortunately,reversalsofsuchpoliciesinwaysthatdepressedcerealpricesafterfarmershadincreasedproductionhaveinthepastcausedmajorfinanciallossestofarmers.Adoptionoffoodimportationasaquickfix,withoutanysupportivesystemsofmarketingthesurpluscassavaalreadyproducedbyfarmers,haveoftenledtoadropbothinthedemandforandthepriceofcassava.Suchseriousinconsistenciesdiscouragefarmersfromcassavaproductionandmaybecontributingtotheirreluctancetoadoptnewtechnologiesthatenhanceproductivity. IITA and the national institutions engage in policy dialogue andinformationexchangewithpolitical leadersonways toachieveeconomicgrowthandfoodsecuritywithoutresortingtoarbitrarypolicymeasuresthatfurtherworsenthefarmers’situations.

12.4.1 some selected cases and outcomes of policy dialogue

Nigeria

Following the evident enthusiasm of the Government of Nigeria to acquireknowledge and develop suitable policies to move the cassava industry forward,

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aninternationalworkshopon‘CassavaCompetitivenessinNigeria’washeldin2002incollaborationwithnationalinstitutions,suchastheRawMaterialsandResearchDevelopment Council (RMRDC), the Federal Ministry of Agriculture and NaturalResources (FMANR), the United Nations Industrial Development Organization(UNIDO), the National Seeds Service (NSS), the NigeriaChamber ofCommerce,and private sector companies such as AGIPOil.Various recommendations wereproposed for improving the competitiveness of the Nigerian cassava sector. For example, three areas of policy intervention for the development of cassavamarketsandagro-industryforpovertyreductionwereproposedbyAbass(2002):

Z A composite flour policy: a five-year development plan tomake all flourmillsinclude10percentcassavaflourinbakingflour.

Z Anationalethanolproductionpolicy:alcoholdistilleriesshouldderive80percentof their ethanol from cassava in order to progressively reduce importation of(crude)ethanol.

Z Anationalstarch-usepolicy:aphaseddevelopmentplanfor industriessuchasconfectionery,textiles,paper,gum,tosourcetheirstarchrequirementslocally,withtheaimofmeeting70–100percentstarch-basedrawmaterialneedsinthefood,pharmaceutical,oildrillingandtextileindustriesfrominternalsources.

AconceptualframeworkfortheimplementationoftheHQCFpolicywasproposed(Abass, 2002). It was suggested that the implementation should involve directblending of locally-sourced wheat, HQCF, and imported wheat by flour millersbeforemarketingtobreadbakersandotherusers(Figure12.6).Directblendingbytheflourmillerswasexpectedtoreduceproblemsassociatedwithirregularquality,low supply volume, fear by cassava users of sanctions from regulatory agencies,and possible negative consumer reaction to these cassava-containing products.Itwasprojected that thepolicieswouldopensignificantmarketopportunities forsmallholder farmers and reduce poverty and hunger, given that more industrieswouldberequiredtousesecondarycassavaproducts–suchaschips,bakingflourandethanol–asrawmaterials.Thepotentialbenefitsof implementingthepolicyproposals from IITA were further discussed by the Federal Institute of IndustrialResearch(FIIRO)Oshodi-LagoswiththeNigerianGovernmentin2004.

In2005, theNigerianGovernmentfinallyannounced its intention to implementapolicy onmandatory inclusionof 10 percent locally-sourcedflour in bakers’ flour.Thiswas followedbytheapprovalofaBiofuelPolicyby theNigeria legislature in2007; the policy aimed to integrate the agricultural sector with the downstreampetroleumsector.Thepolicymade special reference to theuseof cassava, sugarcane, oil palmandother crops asbiofuel feed stocks. In addition, thepolicy alsoidentifiedtheNationalRootCropResearchInstitute(NRCRI),theRootandTubersExpansionProgram(RTEP)andtheIITAassomeoftheinstitutionschargedwiththeresponsibilityofdevelopingbiofuelfeedstockinNigeria(FGN,2007).FurtherpolicydialogueswerecarriedoutwithrelevantGovernmentagenciesandpolicy-makersat two levels to support cassava development programmes. Discussions were


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heldwithtechnocratssuchasagriculturalandmarketingextensionexpertsatthe 36StateandFederal levelsand inAbuja,andalsowiththeprogrammemanagersof all the agricultural development projects (ADPs). Discussions were then alsoheldwithhigh-levelpolicy-makersincludingStateCommissioners,theMinistersofrelevantMinistries,andthePresidency.

Development of quality standards to strengthen the cassava industry in other countries

ThroughtheCommonFundforCommodities(CFC),theCMDandtheCEDPprojects,SARRNETandEARRNET,IITAestablishedpartnershipswithstandardsbureausinmanycountries,aswellasotherorganizationssuchastheEasternandCentralAfricaProgramforAgriculturalPolicy(ECAPAPA),concerningtheanalysisofcassavafoodsafetyandqualityandthedraftingofstandardsforcassavaproducts.From2004,countriessuchasTanzania,Zambia,Madagascar,Malawi,NigeriaandGhanahaveeither revisedoldstandardsordraftedandapprovednewstandards forcassavaproducts in food, feed or other industrial applications (HQCF, edible cassavaflour,cassavastarch,chips,gari, raleetc).Inmanycases,IITArepresentativesandleadexpertsonpost-harvestissuesinpartnerinstitutionsservedinthetechnicalcommitteesforstandardsdevelopmentandothercommitteesforpreparingcassavadevelopment programmes in the various countries. Nigeria, Tanzania, Zambia

Bread bakersBiscuit factories

Noodle factoryHome caterers

Wheat flourmillers

(blending)

HQCFfactories

Cassavafarmers

Wheatfarmers

Globalmarket

Other end users

HQCF

Cassava roots

Locally-grown wheat

Imported wheat

Wheat/cassava flour mixes

Wheat flour

FIGURE 12.6 Conceptual framework for the import substitution policy in Nigeria

Source: Abass, 2002.

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andMadagascararesomeofthecountrieswheresuchcollaborativeactivitiesarestrong. InTanzania, IITA serves as amemberof the technical committeeof thebureauthatdevelopedthestandardsforcassavaproducts(starch,HQCF,chips). It was represented in the committees of the Commission for Science andTechnology (COSTEC), and the Ministry of Agriculture and Food Security andCooperatives (MAFSC), responsible for cassava sector development, includinga programme on the development of composite flour technology.The nationalinstitutions responsible for the coordination of the ‘IITA small-scale cassavaprocessingproject’–CentreNationaldeRechercheAppliquéeauDéveloppementRural (FOFIFA) in Madagascar and the ZambianAgricultural Research Institute(ZARI)–aremembersofthetechnicalcommitteesofthestandardsbureausthatdevelopedthestandardsforcassavaproducts–starch,ediblecassavaflour,chips–inthetwocountries.

12.5 Technical support for the African agricultural development agenda

IITA partners with national institutions, the private sector, NGOs and otherparticipants in theagriculturalsectorofmanyAfricancountries toapplyavailabletechnologiesintheiragriculturalprogrammes.Mosttechnologiesrelatetotheareasof production, processing andmarketing,with the aimofdeveloping staple foodcropsasaremedyforhunger,povertyandtheunderdevelopmentofagro-industryinAfrica.

12.5.1 support for national cassava initiatives1

The government of Ghana announced a Special Presidential Initiative (SPI) oncassavain2001.Theideawastotransformcassavaproductionfromitssubsistencenatureintoacommercially-viableagribusinessthatcangeneraterevenuethroughexports.TheSPI planned to establish ten cassava starch processing plants underthe farmer-ownership scheme called Corporate Village Enterprises (COVE). Theten starch plants to be installed by the International Starch Institute would beownedby farmers,asameansofbringingruralcommunitiesandcooperativesoffarmers intomainstream economic activity. Revenuewas expected to be earnedthroughtheexportof starch fromthestarchplants.Farmers,particularlywomenfarmers, were to supply cassava roots to the processing plants established with government-backedfundingfromthreebanks.

1 Further information on these initiatives is provided in Chapter 11.


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The processing plants were to be managed by management professionals. TheprojectstartedwiththeestablishmentoftheAyensustarchplantandthedistributionof high yielding varieties to farmers.Someof thesehigh-yielding cassava varietieswere from the TMS series, e.g. Afisiafi (TMS 30572), Doku Duade, and Agbelefia. Through its links with the Root andTuber Improvement Program (RTIP) and theNationalRootcropsprogramme,IITAcontributedtotheSPIthroughcapacitybuildingpreviously provided to most of the institutions involved in the SPI. Some of theprocessingexpertswentthroughdegreetrainingorgrouptrainingpreviouslyorganizedbyIITAbothinGhanaandinNigeria.IITAhasalsobeenprovidingbackstoppingsupporttotheRTIPsincethe1990s.ExtensiveanalysisoftheoutcomeandconstraintsoftheSPIhavebeenwelldocumented(Tonah,2006;SanogoandOlanrewaju,2008).

The Presidential Initiative on Cassava (PIC) was announced by the GovernmentofNigeria inAugust 2005. PICwas a three-year initiative (2004–2007) to increasethecontributionofcassavaasanengineofeconomictransformation,tospurruralindustrialdevelopment,togenerateemployment,toreducepoverty,toensurefoodsecurity,andtogenerateandconserveforeignexchangethroughexportsandimportsubstitution. It aimed to enhance the productivity and production of cassava byincreasingtheareacultivatedto5millionha–withatargetyieldof30tonnes/ha–inordertoproduce37.5milliontonnes/yearofproductsforlocalandexportmarkets.

ThePICwasdesignedtoinvolveacoordinatedsetofactivitiesthatwouldpromoteacompetitivecassavaproduction,processingandmarketingsystem,andgeneraterevenue of about US$5 billion annually. The PIC was implemented through twopolicyinitiatives–oneoncompositeflourandtheotheronbiofuelproduction–witheightmajoroutputtargets.Complementarytothese,twomajorcassavavaluechaindevelopmentprojectswereimplementedasprecursorstothePIC.Thetwoprojects,led by IITA, formed extensive partnerships with national institutions to delivercassavatechnologiesandmarketinginnovationstoallactorsintheNigerianvaluechain,todevelopinstitutionalarrangements,andtofacilitatethedevelopmentofthecassavaindustry.Theprojectswere:

Z thepreemptivemanagementofvirulentCMDinthesouth-southandsouth-eastofNigeria(theCMDProject);

Z theCassavaEnterpriseDevelopmentProject(CEDP),fundedbytheGovernmentofNigeriaandPetroleumcompanies(Figure12.7).

Technologies that addressed multiple cassava constraints from production toconsumptionwere introducedtofarmers,processorsandotherstakeholdersusingthe commodity chain approach. Production technologies were integrated withvalue-addingpost-harvestprocessingandstoragetechnologies,microenterpriseandmarketdevelopment,thedevelopmentofsupply-chainstructuresandmanagement,thepromotionof agro-inputs and servicedelivery systems, and the enhancementof farmers’ access to credits. They also improved the links between producers/processorsandendusers.

331

Closepartnershipsweremaintainedwithawide rangeof stakeholders frombothpublicandprivatesectorinstitutions:theRootandTuberExpansionProject(RTEP),the National Root Crops Research Institute (NRCRI), Agricultural DevelopmentProjects(ADPs),strategicprivateindustries,NGOsandindividuals,CIAT,theLatinAmericanConsortiumforCassavaResearchandDevelopment(CLAYUCA),andtheprivatesectorinBrazil.Theseledtotheintroductionofwiderangeoftechnologies,includingnewdesignsandhigherscalemachineryforcassavaprocessing.

The machinery designs introduced provided opportunities for equipmentmanufacturers in Nigeria to improve on the efficiency and cost-effectiveness oflocal machinery, and also to acquire additional expertise in the manufacture of

HQCF POLICYCreating sufficient market

in the flour milling industries in order to integrate smallholder farmers in mainstream

national economy

9. Facilitate the emergence of public–private sector alliance

for the sustained development

of cassava in Nigeria

8. Facilitate the establishment

of targeted support to

infrastructure development

CEDP(IITA, 2004–2009)

Initiate the development

of cassava-based enterprises in Nigeria

CMD PROJECT(IITA, 2003–2008)

A precursor for the Presidential Initiative on Cassava

production and export

4. Make available clean planting

materials

5. Increase yield productivity and

expand production

BIOFUEL POLICY

Create opportunities for smallholder farmers to supply fresh cassava

to ethanol factories.

1. Expand processing

and utilization to mop up production

glut

2. Identify and

develop new

market opportunities

PRESIDENTIAL INITIATIVE ON CASSAVA(2003–2007)

Increased cassava utilization; reduced nutritional

deficiency; > US$1/ day income for the poor;

1.2 million jobs created by 2007; import substitution

for ethanol, starch, feed, flour; $5 billion import

substitution/export revenue

7. Integrate the rural poor

into the mainstream of the national economy

6. Conducive policy and

institutional reforms

3. Stimulate increased

private sector investment

in the industry

for export

FIGURE 12.7 Presidential Initiative on Cassava (PIC) showing the nine component parts, the two precursor projects and the two policy drives

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awider range of newmachinerywith the higher capacity needed to support theemergingcassavaagro-industry.Inadditiontothepreviouslyexistingcassava-basedassociationssuchastheRootandTuberGrowersAssociationofNigeria(RATGAN),newassociationssuchastheNigeriaCassavaProcessorsandMarketersAssociation(NICAPMA)andtheAgriculturalMachineryandEquipmentFabricatorsAssociationofNigeria(AMAEFAN)haveemerged,andarecurrentlydrivingcommercialactivityinthecassavasector.

12.5.2 support for regional cassava initiatives

ThroughtheEastandSouthernAfricanRootCropsResearchNetwork(ESARRN),the East African Root Crops Research Network (EARRNET) and the SouthernAfricanRootCropsResearchNetwork(SARRNET), IITAsupported linksbetweennationalprogrammes in ten countries, providedaccess to suitable varieties andintegrated pest management (IPM) technologies for major pests and diseases,improved cassava post-harvest techniques, and helped develop the NAREShumanresourcecapacity(IFADandFAO,2005).Inaddition,IITAandtherootcropsnetworks, SARRNET and EARRNET, support the NEPAD (New Partnership forAfrica’sDevelopment)Pan-AfricanCassavaInitiative(NPACI)totapthepotentialofcassavatoworkforfoodsecurityandincomegeneration,viaatransformationstrategy that emphasizes expandingmarkets, better organization of producersforcollectiveaction,andincreasedprivatesectorinvestment.IITAprovidesbothsecretariat and leadership in research on specific issues related to NPACI andsupports NPACI’s efforts to promote best practices for cassava development.NPACIprovidessuitableinformationonmodelsforenergizingthecassavasectorandagro-industrydevelopment incassavagrowingnations.Such information isneededincountriessuchasTanzania,Mozambique,Madagascar,Zambia,Bénin,GabonandSierraLeone,wherethereareongoingdiscussionsonhowtoformulatenationalinitiativesandpoliciesoncassavadevelopment.Mozambique,GhanaandSierra Leone are also currently discussingmodalities for the blending of HQCFwithwheatflour,whileTanzaniaandZambiahavenationalcommitteesdevelopingstrategies for the expansionof cassavautilization, and thepossibleblendingofcassavawithotherflourssuchaswheatorsorghum2.

12.5.3 support for global initiatives

ThevisionoftheGlobalCassavaDevelopmentStrategy(GCDS)asdescribedin2001isthat“cassavawillspurruralindustrialdevelopmentandraiseincomesforproducers,processorsandtraders,andwillcontributetothefoodsecuritystatusofitsproducing

2 Available at: http://allafrica.com/stories/200709181014.html.

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andconsuminghouseholds”.ThespreadofcassavatechnologieshasbeenpossiblethroughcollaborationswiththenetworkofNARES,RootandTuberCropnetworks,regionalprojectsoncassava, the InternationalFundforAgriculturalDevelopment(IFAD),theprivatesector,NGOs,andpolicy-makers.Sofarthetechnologieshavemadeitpossiblefortheprivatesectortoinvestincassavaproduction,processing,andmarketingofhigh-valuecassava-basedproducts.

12.6 Transformation of research outcomes to development impact

As part of the IITA R4D approach, the research outputs used by research anddevelopment partners to achieve outcomes are further made available to abroader numberof partners including theultimate endusers of the technologies–farmers,NGOs,theprivatesector,policy-makersandotherdevelopmentagents– for out-scaling and up-scaling to generate the desired development impacts. TheinvolvementofIITAintheprocessfosterstheanalysisoftheevolvingbenefitsof the new technologies being used, through measurement of their impact ontheirultimatebeneficiaries.Suchanalysishelpsinthedetectionofnewchallengesemergingintheprocessofcreatingpositivedevelopmentalimpacts.

12.6.1 the outcome of the use of new cassava varieties and HQcF technology in africa

AccordingtoNwekeet al.(2002)andNweke(2003),therearefourstagestocassavatransformation, based on the role cassava plays in a county’s economy or foodsystem.Thestageshavebeenclassifiedas:faminereserve(stageI),ruralfoodstaple(stageII),urbanfoodstaple(stageIII),rawmaterialforfood,feedandindustry(stageIV).Sincethe1990stheincreasedactivitiesoncassavadevelopmentbynationalandinternational research centres, multilateral development institutions, NGOs andothers,havehelpedmanycountriesprogressonthecassavatransformationladder.In the past 12 years, organizations such as IITA,CIAT,SARRNET, EARRNET,NRI,FAOandNGOs,have collaboratedwith theNARES inESAcountries, particularlythecassavaprogrammes,onimplementationofcassavaresearchanddevelopmentactivities.Theseactivitieshaveincludedtestinganddisseminatingmarket-orientedcassavaprocessingtechnologies.

In Zambia, the Program Against Malnutrition (PAM) has been involved in thedistributionofplantingmaterialinmanypartsofthecountry.In2004,theZambiaAgriculturalResearchInstituteincollaborationwithIITAestablishedthefirstHQCFpilot plant inMansa,Zambia.The capacity of processor groupswas enhanced tosupplyHQCFtopaper,cardboardandfoodfactoriesinthecopperbeltareaofZambia.


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Compared with traditional cassava products, the significant improvement in thequalityofcassavaproducesuppliedtotheindustriesusingthenewIITAprocessingmethods andmachinery led to an increase in industrial demand for new cassavaproducts. Subsequently, the PAM, the Ministry of Agriculture and Cooperatives(MACO), FAO and someNGOs, collaborated to out-scale the cassava processingtechnologies through testing and adaptationwithmore smallholder farmers andprocessorsinotherlocationsinZambia.PresentlytheCFC,FAO,InternationalTradeCentre (ITC), United Nations Conference on Trade and Development (UNCTAD)and theWorldBank (WB) are collaborating in the implementationof value chaindevelopmentactivitiesinZambia.

InTanzania,collaborationsbetweentheRootandTuberProgramsonthemainlandand Zanzibar, IITA, SARRNET, district and regional governments and the prisonservice, have improved the availability of new high-yielding disease-tolerantcassavavarietieswithacceptablefoodqualitytraits.Pilotcassavaprocessingplantswere established in collaboration with the Tanzania Food and Nutrition Centre(TFNC)andMAFSC,e.g.aCFC-fundedprojectonsmall-scalecassavaprocessing, a CIAT–IITA starch processing project, and the Livelihood project funded by theUSAID‘InitiativetoEndHungerinAfrica’programme.Subsequently,manydistrictandregionalgovernmentsandNGOsbecameactiveintheformationoffarmers’andprocessors’groupstotakeupandoutscalethenewprocessingtechnologies.Therehas been a significant demand for HQCF, starch and chips from industrial users. However, the private sector is yet to invest in cassava agroprocessing (Abass, 2008). Most investment was carried out by the public sector and NGOsto promote processing technologies and enhance food security (Figure 12.8).Consequently, industrialdemandsforcassavaproductshavenotbeenmetbythesmall-scaleprocessinggroups,althoughconsumptionofcassavaflourbytheurbanmiddleclasshasbeenontheincreasesince2004/2005.

ThesaleofcassavaflourinTanzania’scitysupermarketshasincreased.Inaddition,theconsumptionoffreshcassavaasasnackhasbeenontheriseinthecities.Publicopinion seems to suggest that the high energy content and the lower glycaemicresponse properties of cassava are contributing to increased consumption. The activities of national and international research and bilateral institutions, NGOs and local governments, combinedwith the increased demand for cassavarootsandproducts,indicateagrowingrecognitionofcassavaasanurbanfoodandindustrialrawmaterialinTanzania.ThecassavasectorinTanzaniaappearstohavetransformedfromtheruralstaplestageofthe1990stotheurbanstaplestage.

The increased demand has influenced production; cassava cultivation in villagesaroundmajorcitieshasincreased.ThesefactorsmayhavecontributedtoincreasesincassavayieldandtotalproductioninTanzania.StatisticsfromFAO(Figure12.9)showthat for thefirst time inover tenyears,cassavayieldsandproductionhavebothincreasedconsistentlyforfouryears.

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3.0

5.0

7.0

4.0

6.0

8.0

9.0

10.0

2007

2006

2005

2004

2003

2002

2001

2000

1998

1999

Area (×105 ha)

Units

Year

Yield (tonnes/ha) Production (million tonnes)

FIGURE 12.9 Cassava production, area planted and yield in Tanzania, 1998–2007

0

100

200

50

150

250

350

300

400

450

2008

2007

2006

2005

2004

2002

2003

Development agencies/NGOs

Year

Cum

ulat

ive

num

ber o

f mac

hine

s

District, regional & central governments

Ministries/research institutions Farmers/private sector

FIGURE 12.8 Trends in supply of cassava machinery by Intermech Engineering ltd and Tonnet Enterprises to Burundi, Rwanda, malawi, Tanzania, Uganda and zambia

Source: Sales records of Intermech Engineering Ltd (Tanzania) and Tonnet Enterprises (Uganda).

Source: FAOSTAT 2009.


336

12.6.2 assessing the impact: case studies of ghana and nigeria

In Ghana, the SPI energized further investment by the private sector. Additionalmedium- and large-scale cassava-based commercial enterprises are beginningto emerge in Ghana. These include Amasa Agro-processing Limited (Amasa) andCaltechVenture Limited (CVL).Amasa has been involved in the processing offermentedcassavafoodsformanyyears.ThecompanyhasrecentlydevelopedanewinvestmentplantoinstallaflashdryerforthemanufactureofHQCF.CVLwasestablishedin 2006 with the objective of producing ethanol, starch, and HQCF.The companystarteditsoperationwiththesupplyofcassavarootstotheSPI’sAyensustarchplant.SincetheclosureofAyensu,CVLhasinstalledmedium-scalecabinetsandflashdryersformakingHQCFandiscurrentlysellingtotheplywoodindustryinGhana.Thecurrentplantcapacityis3.5tonnesofHQCFperday.CVLadopted5–8TMSvarieties,andusestherapidmultiplicationtechniqueonitscurrent500hacassavaplantation,whichthecompanyplanstoexpandto2000ha.

Oneofthevarieties,Afisiafi,yieldsat least25tonnes/hawithouttheuseoffertilizerattheCVLfarm; incomparison,smallholderfarmers inGhanadidnotachievemorethan10tonnes/hayieldwiththesamevariety.Similarly,commercialfarmersinNigeriaare also achieving 25–40 tonnes/ha with the Nigerian varieties. The higher yieldshave clearly come about because of good production practices, which smallholderfarmers often do not give much priority. Without a doubt, good managementpracticescan improvethecompetivenessofcassava,whetherwiththeexistinghighyielding varieties such asAfisiafi or theother IITA–TMSvarieties grownby farmers.Smallholder farmers seem to lose thefinancial and competitivenessbenefits of thenew high varieties because they lack knowledge of good production techniques. ItwouldthereforebenecessaryforthenewR4Dagendatoincludethedemonstrationofbestproductionpracticesthrough‘clustersystems’inamannersimilartohowthe‘pilotprocessingsystem’wasusedtotransfertheHQCFtechnologyacrossAfrica.

DuringthePIC inNigeria,significantmanpowerdevelopmentwasachievedthrougha series of training sessions and distribution of training manuals. Model cassavaprocessingplantswerebuiltinnearlyallthestatesthatparticipatedinthetwoprecursorprojects(SanogoandOlanrewaju,2008).Before2003,limitedsuccesswasachievedinthemechanizationofharvesting,peeling,pelletizingandfryingofgariatsmall-andmedium-scales(Nweke,2003).Startingfrom2005,collaborationbetweenmachinerymanufacturers (e.g.FataroyEnterprises,NijiLukasNigeriaLimited,NobexTechnicalCompany Limited, Peak Precision Products Nigeria Limited, Adebash, etc), manynationalinstitutionsanduniversities,CIAT,CLAYUCAandIITAledtothedevelopmentofneworhighercapacitylabour-savingmachinerythroughhybridizationofthelocaltechniquesandwithdesignsfromBrazil,Germany,andothercountries.Newdesignsand higher capacities were realized for peelers, dryers, pellet-making machines,hydraulic presses, and fryers for gari. For example, a new design of cassava peelersuitableformedium-scaleenterprisesemerged,anditisnowoncommercialsaleforthe

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firsttimeinNigeria.Inaddition,alargercapacityflashdryerwithahigherfuelefficiencyanddoubleoutputwasdesigned, testedandcommercialized.Amajor scaling-upofcapacityandmoreadvancedmechanizationintermsofunitoperationsofthecassavaprocessingindustrywastherebyachieved.ThisachievementwasrecognizedwithanawardbytheCGIAR(ConsultativeGrouponInternationalAgriculturalResearch)foranoutstandingexampleofagriculturaltechnologyinSSAin2008.FollowingtheCGIARaward,doubtsabouttheneedforagroprocessingandvalue-additionresearch–whichformpartofthe IITAR4Dapproach–seemstohavebeenresolvedandtheScienceCounciloftheCGIARfinallyadoptedtheR4Dapproachin2008.

ThecombinedeffectsofthenineaspectsofthePIC,twopolicyplans,andthetwoIITA-ledprojects,jumpstartedtheestablishmentofseveralmedium-scalecassavaprocessingenterprisesbetween2005and2008.By2009,thenumberofcompaniesandentrepreneursthathadinvestedinflashdryersforHQCForstarchproductionhadincreasedtocirca140–150,fromameresixorsointheyear2000(Figure12.10).

Nearly 95 percent of the enterprises were for HQCF processing with additionalfacilities for making traditional products such as gari and fufu. These includethe model processing plants established under the CMD and CEDP projects. ThecapacitythatexistedforprocessingHQCFwithmechanicalflashdryersincreased

Lake Chad

Kebbi

Sokoto

Zamfara

Katsina

Kano

Jigawa YobeBomo

Niger

Kaduna Bauchi

Gombe

Adamawa

KwaraFederal Capital Territory Nassarawa

Plateau

TarabaOyo

Osun Ekiti KoglBenue

OgunOndo

Edo

Anambra

EnuguEbonyi

Cross River

Lagos

Delta ImoAbla

BayelsaRivers Akwa

Ibom

Legend Wheat flour millers Large and medium scale HQCF plants (2005–2009)

CAMEROON

NIGER

ATLANTICOCEAN

BENIN

FIGURE 12.10 Nigeria, showing location of wheat flour mills and the medium- and large-scale cassava plants processing hQCF during the commercial phase


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fromnear zero in 2003 to about 85 000 tonnes per year in 2009.The productionof higher volumes of HQCF at consistent quality, even during the rainy season, was made possible. This represents a major achievement compared with thesituation during the pilot testing stage inNigeria,when groups of 14 small-scaleprocessors dried HQCF by sun-drying (Abass et al., 2001).At themedium scale,thecostofthemachineryforHQCFprocessingandthedailyoutputvolumesweremuchhigherthanobtainedduringthepilotingstage(Table12.3).

In addition, new factories were established for the production of ethanol andglucosesyrup.Thedemandfortheintermediatecassavaproductsincreased–HQCF,starch,andglucosesyrup–andcamefromwheatflourmills,textilefactoriesandmultinationalfoodfactoriessuchasCadburyandNestlé.Farmersrespondedtothedemands for cassava roots by increasing production.Total production in Nigeriaincreased from 34.1 million tonnes in 2002 to 45.7 million tonnes in 2006, and farm-gate prices also increased (Figures 12.11 and 12.12). Average farm sizeincreasedandtrulycommercialcassavafarmsemerged.Theincreasesinthepriceof

item Pilot phase (1995–1998) Commercial phase (2005–2008)

Capacity Cost (uS$) Capacity Cost (uS$)

Mechanical peeler 0.6–0.8 tonnes fresh roots/hour; 60–90% peel removal

2 966

Mechanical grater (two required for commercial processing)

0.3–0.5 tonnes fresh roots/hour

870 2.0–3.0 tonnes fresh roots/hour (two units/plant)

4 237

Double screw press 0.05–0.10 tonnes fresh roots/hour

300

Twin basket hydraulic press (brazilian design)

8 tonnes fresh roots/day (two units/plant)

11 017

Filter bag (used with twin basket hydraulic press)

20 pieces/day 424

Wooden drying racks (sun-drying)

Set (15) 30

Flash dryer 4 tonnes flour/day 33 898

Hammer mill 0.25–0.40 tonnes flour/hour

1 550 5.0 tonnes flour/day 5 508

Total per processing plant 129–153 tonnes flour/year

2 750 960 tonnes flour/year 55 085

Source: Abass et al. 2001, SIS Engineering Ghana Limited, Niji Lukas Nigeria Limited, Nobex Technical Company Limited, and Fataroy Enterprises.

taBLE 12.3

equipment required for production of HQcF during pilot and commercial phases

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20

40

60

30

50

70

80

90

100

110

2009

2007

2008

2006

2005

2004

2003

2002

2001

1999

2000

Fresh cassava roots price

Year

Price

(US$

/tonn

e)

FIGURE 12.12 Trend of fresh cassava root prices in Nigeria before, during and after the PIC

Source: HQCF processors, and Agroprocessing Unit, Ogun State ADP.

30 000 000

34 000 000

38 000 000

32 000 000

36 000 000

40 000 000

42 000 000

44 000 000

46 000 000

48 000 000

2007

2005

2006

2004

2003

2002

2001

2000

1999

1998

Cassava production

Year

Prod

uctio

n vo

lum

e (to

nnes

)

FIGURE 12.11 Cassava production trend in Nigeria before, during and after the PIC

Source: FAOSTAT 2009.


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freshcassavaduringtheyearsofincreasedproductionsignifyareversaloftheusualpricecollapsefollowingproductionincreasesforanAfricancrop.

Thepurposeofexpandingmarketopportunitiesforcassavawastoincreasefarmers’incomes.SuchincreaseshelpedNigeriatoreduceruralpovertyinthe1990s(Nweke,2003).ManysmallholderfarmersinNigeriabenefitedfromtherecentincreasesinprices, between 2006 and 2008, at the same time as they increased production.However,raisingsmallholderfarmers’incomesthroughsignificantreductionsinthecostofproductionismoredesirablethanincreasingincomesfromhigherpricesofcassavaorlandexpansion.Reductionsinthecostofproductionwillmakecassavaanditsproductsmorecompetitive,bothinthedomesticandinternationalmarkets.

12.6.3 assessing new challenges in the development process: the case of the HQcF industry in nigeria

The R4D approach requires assessment of new challenges arising from thedevelopmentimpactsoftheuseofIITAtechnologiesbypartners.

ArecentassessmentoftheemergingchallengesoftheHQCFindustry,followingtheimpactbeinggeneratedinNigeria,showedthatthemajorchallengeinthecassavaproductsmarketisthecheaperpricesofimportedsubstitutes.Ahighcostofcassavaproduction translates into a high cost of cassava products and uncompetitiveprices.At the same time, lowerpricesof importedsubstitutes reduce themarketopportunities for cassava products becausemost consumers buy cheaper items.Farmers are then discouraged and drop out of themarket; import volumes andnational import expenditure grow once the local farmers are forced out of themarket(WorldBank,2009).Suchsituationshaveoftenbeenfollowedbyincreasesinthepricesoftheimporteditemsalreadydominatingthemarket.

AccordingtotheUnitedStatesDepartmentofAgriculture(USDA),Nigeriaimportsup to 85 percent of the wheat it consumes from theUSA (USDA, 2009).About 3.2milliontonnesofwheatwasimportedinthe2008/2009season;partofthismayhavebeentradedintheregionalmarket.ThemillingcapacityinNigeriagrewfrom 1.2milliontonnesperyearin1985toabout6.2milliontonnesperyearin2008.AccordingtoUSDA (2009) only about 52 percent of the 2008milling capacitywas utilized. ItisestimatedthattheaverageimportpriceofwheatintoNigeriaduringthe2008/2009seasonwasaroundUS$395.3/tonne.ThisimpliesthatNigeria’sexpenditureonwheatimportsalonein2008/2009wasaboutUS$1.3billion(Table12.4).Thesubstitutionof10percentofthiswithHQCFwouldsaveNigeriaUS$130millionyearly.MeanwhileoverUS$49million canbe injected into the rural economy through thepurchaseof freshcassavafromfarmersandtoengagethousandsofunemployedyouths intheproduction,processing,transportationandmarketingoftheHQCF(Table12.5). ThepossibilityofachievingthisdependsonthecompetitivenessofHQCFcomparedwithwheat,cornstarchandmaize,towhichthepriceofHQCFisstronglylinked.

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Cost item/activity Traditional production

improved varieties and production methods

Yield (Fresh, tonnes/ha) 10 25

unit cost of production (uS$/tonne) 6.74 7.11

Current farm gate price for fresh roots market (uS$/tonne) 19.13

Most probable farm gate price for processing plants; high volume

or high turnover opportunity for farmers (uS$/tonne)

15.30

Gross value of output (current, uS$/ha) 191 478

Net income (uS$/ha) 124 300

Net income (uS$/tonne) 12 12

Net income ratio (improved production method to traditional production method) 2.43 : 1

Source: Starcas Ltd, Uganda.

taBLE 12.4

summary of indicative cost of cassava production under traditional and modern methods in uganda, 2007

ThepriceofHQCF inNigeriahas risengradually fromthe timeofpilot testing in1995–1998.AlthoughHQCFhasmoreaddedvalueintermsofitsstageofprocessingcomparedwith importedwheat, processors and end users often settle for about75percentoftheon-goingpriceofimportedwheatforHQCF.TheHQCFpricewasaboutUS$290/tonne in2000, andwas tradedatUS$609/tonne in2007when theimplementationofthemandatoryinclusionof10percentHQCFinwheatflourwasimplemented (Figure 12.13).This relatively high pricewas also influenced by therecentglobal foodpricecrisiscausedby lowglobalwheatstockandgeneralhighprices of food items. By 2008, the imported price ofwheat inNigeria decreasedfrom the US$450–550/tonne in 2007 to about US$280–510/tonne (Figure 12.14).WheatflourmillersbecamereluctanttobuyHQCFatthe2007price.ThepricewasnotacceptabletothemajorityofHQCFprocessors,particularlythosethatadoptedflashdryingtechnology,whoarguedthatthepriceoffreshcassavawashighandtheprofitmarginwastoolow.


342

Yet,wheatmillerspointedout that thepricewasacceptable toHQCFprocessorslocatedinsemi-aridordryregionsofNigeriawhoareusingsun-drying.ThecostofHQCF processing was cheaper when sun-dryingwas used, although themethodcanleadtosuppliesoflowqualityandinconsistentvolumeduringtherainyseason. The safety of the sun-dried HQCFmay be easily compromised and could causeseriousfinanciallossestowheatflourmillsandbreadbakerswhousethecompositeflour(Abasset al.,2001,2009).

AccordingtosomeoftheprocessorsthepurchasepriceofHQCFshouldbeatparwith–ifnotmorethan–thefactorygatepriceofwheatgrains.HQCFisofhigher added-value than whole wheat grains in terms of the extent of processing andreadinessforbaggingandmarketing.Therewerenoadditionalmillingcostsincurredbywheatflourmillsfortheuseof10percentHQCF,giventhatHQCFenterstheflour

Wheat use and HQCF development in Nigeria Estimates

Installed capacity of flour mills in Nigeria (tonnes/year)* 6 200 000

estimated annual volume of wheat importation into Nigeria (based on 2008/2009 season, tonnes/year)*

3 200 000

current capacity utilization of wheat flour mills in Nigeria (%) 52

estimated price of imported wheat (estimates for 2008/2009 season, US$/tonne)* 385.3

estimated value of wheat imports by Nigeria (based on 2008/2009 season costs, US$) 1 232 960 000

hQcf needed to meet national target based on 10 percent substitution set by the Presidential Initiative on cassava (tonnes/year)

320 000

estimated processing days per year 240

Number of hQcf processing plants needed (based on 2.5 tonnes hQcf/plant/day) 533

estimated number of existing hQcf processing plants 140

average installed capacity of existing hQcf plants (tonnes/plant)** 2.5

estimated existing hQcf flash drying capacity (tonnes/year) 84 000

Potential annual savings from import substitution which could be saved from export to boost the internal economy had the 10 percent substitution been achieved (US$, based on 2008/2009 season)

123 296 000

estimated amount from import saving that could be injected annually into the rural economy through the purchase of fresh cassava from farmers, based on 40 percent value of savings from import (US$/year)

49 318 400

* USDA, 2009; ** Data supplied by Nigerian flash dryer manufacturers.

taBLE 12.5

analysis of the potential benefits of the HQcF use in nigeria

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200

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Aug-

08

Jun-

08

Mar

-08

Dec-

07

Oct

-07

Wheat price

Month

Price

(US$

/tonn

e)

FIGURE 12.14 world wheat price trend

Source: USDA 2009.

300

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600

650

2009

2007

2008

2006

2005

2004

2003

2002

2001

2000

HQCF price

Year

Price

(US$

/tonn

e)

FIGURE 12.13 hQCF price trend in Nigeria

Source: HQCF processors, and Agroprocessing Unit, Ogun State ADP.


344

millingprocessatthefinalsifting,blending,andbaggingstages.TheHQCFprocessorsobserved that therewas no evidence that the reduction in the price of importedwheatsince2008resulted inanycommensuratereduction intheprice–US$835–848/tonne–whichbreadbakerspayforthewheatflour.Inaddition,consumerswereobservednottohavebenefitedfromthereductioninimportpriceforwheatbecausethepricesof loavesofbreaddidnotreduceproportionately.ProcessorsthereforearguedthatthesavingsgainedbyusingHQCFandthesubstantialreductioninthepriceofimportedwheatin2008/2009havebothbeentothealmostexclusivebenefitofwheatflourmillers.FielddatahasshownthatforanefficientHQCFprocessingplant,theprofitmarginwouldbenearUS$47/tonne(Table12.6).

A model of marketing margins also showed that smallholder cassava farmers, HQCFprocessorsusingflashdryingtechnology,HQCFdistributors,andbreadbakers,can achieve additional benefits of US$14.92, US$14.92, US$4.47 and US$48.47respectivelyforeverytonneofHQCFsoldforbreadbaking,andthisincludingthepotentialforreductioninpricesoffooditems,particularlybread.ClearlythecurrentpriceformationmodelintheHQCFindustryisnotunderstoodverywellbyallthestakeholders,particularlyfarmers,processorsandusers.ThisevidentdisorganizedstateofthemarketisamajorfactorslowingdownprogressinHQCFdevelopmentin Nigeria.A similar situationwas observed in 1996–1998 during the pilot phase

Costs uS$/tonne HQCF

Fresh cassava 203

Peeling labour 34

Washing labour 8

Permanent staff costs/ tonne 34

Diesel (15 litres/ hour) 85

Electricity 8

Cost of equipment 42

Overhead costs 21

Packaging/ Transportation 42

Contingency (5%) 24

TOTAL 503

Source: HQCF processors, 2009.

taBLE 12.6

some cost parameters of HQcF production by medium-scale processors in nigeria during the commercial phase

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(Abasset al.,2001).Nearly96percentoftheHQCFplants inNigeriaarenowidlebecauseofthesepricingproblems.ItisthereforenecessarythatmarketingmarginsarediscussedbyallstakeholderstoimproveconfidenceandbusinesscooperationintheNigerianHQCFindustry.

TheexistingHQCFplants inNigeriaare constrainedby theunreliable supplyofelectricity.Theprocessingenterprisesrelyonfuel-operatedelectricitygeneratorsthatmaketheprocessingoperationsexpensive.Nigeriaoftenexperienceschronicshortages of fuel, especially diesel, which results in a complete shutdown ofprocessingoperations.IfthecurrentstateofinfrastructureandinputspermitsitisadvisableforidleHQCFplantsinNigeriatodiversifyintodryingofotherproducts,such as plantain flour, ogi, fufu, and soy flour. Although the composite flourpolicyoftheGovernmentofNigeriaseemstobeslowingdownasaresultoftheconfusingpricing situation resulting from thedisorganizedmarketing structure,wheatflourmillersareawarethattheGovernmentcouldsanctionerringflourmills, asoccurredin2007whenmanyoftheflourmillsdidnotcomplywiththerequirement(USDA,2009).Thehugecapacityofwheatflourmillersandtheimplementationofthepolicyon10percentimportsubstitutionprovideanopportunityforagriculturalgrowthandpovertyreductioninNigeria.Thecapacitytogrowwheat(ifpossible)and toproduceanduseHQCFwill need tobedevelopedand sustained (Abass,2002).ThecompetitivenessofHQCFasanimportsubstituteinthemediumtolongtermdependsonthepossibilityofreducingtheproductioncostoffreshcassava.However, organization and training of the entrepreneurs who have invested intheHQCFplantswillfacilitatepropermanagementoroptimizationofthedryingoperations,whichappear tobe inefficientat themoment.TheNigeriancassavaindustryneedsa robustprice formation strategy toensurea fair distributionofprofitsandbenefitsalong thewhole chain.The stakeholders– cassava farmers,processors, wheatmillers, bread bakers and other players – needmentoring indevelopinggoodbusinessrelations.

12.6.4 translating new challenges to development interventions: the case of HQcF plants in nigeria

ThenewchallengesidentifiedintheHQCFindustryinNigeriarequiredevelopmentintervention, particularly in the area of infrastructure development and policyinterventions.

However, the stakeholders at the cassava competitivenessworkshopheld at IITA(Nigeria) in 2002 before the announcement of the import substitution policy bythegovernmentofNigeria in2005,hadcautionedthattherewereno ‘quickfixes’forachievingeconomicgrowthandpovertyalleviation.Adeliberate,strategicandsustained set of actions were recommended for a private-sector-led agriculturaltransformation and long-term commitment (e.g. for 15 to 25 years) to invest in


346

market-oriented strategies, with an emphasis on value addition and productivityenhancement along the entire cassava value chain.The provision of an enablingenvironment for the adoption of modern techniques by stakeholders will makecassavacompetitivewithinandoutside thecountry.The focus for the immediatedevelopmentof the cassava sector shouldbe the sale of cassavaproducts in thedomesticandregionalmarkets,ratherthanexportoutofAfrica.Africancountriesneedtomakethefoodstheywantfromwhattheygrow,andgrowwhattheyeattofeedthemselvessufficientlybeforeconsideringexportingfood.Assuch,successinprovidingmarketopportunitiesforAfricanfarmers inthe immediateandmediumtermwoulddependongoodstrategiesandpoliciesthatencourageinternaluseofsecondaryprocessedcassavaproductsasfood,feed,andindustrialrawmaterials.Exportdoesnotseemtoprovidean immediatecompetitiveadvantagetoAfricancassava farmers because of the high cost of production, and poorly organizedor expensive logistics of production and marketing activities. Improvement inthe marketing structure of cassava products can be achieved with an efficient real-time national and regional market information system (MIS) with readilyavailabledisaggregatedpricedata.TheMISwouldallowcomparisonsofvolumes,prices,seasonalityofsupply,andevaluationsofopportunitiesinthedomesticandexport cassava markets. It would also assist existing and potential investors tomakeinformeddecisionsonhow,whereandwhentoinvestinthecassavaindustry, andwouldhelptoattractmoreinvestmentsinthecassavasub-sector.

Recently, consumers in Nigeria seem to have accepted the inclusion of cassavainbreadandother food items.Consumer rejectioncanno longerbea reason forthe baking industry not to use HQCF: the public perception of cassava is betterin Nigeria than in any otherAfrican country. Newmarket outlets for HQCF canbe created through product development research and promotion activities. Forexample, the promotion of a maize–cassava flour blend for home consumptionmightbeconsidered.SuchproductsmaybelessaffectedbythefluctuatingpricesofimportedfooditemsandcouldstabilizethepriceofHQCF.Thisstrategywillworkeven better for ESA countries where there are larger populations dependent on moisture-sensitive crops (such as maize or rice) as staple foods. Most of thesecountries are prone to droughts that cause frequent food shortages and foodprice instability.Theseoften leadtofrequentrelianceonfoodaidandcheapfoodimportsthatmakeitevenmoredifficultforsmallholderfarmerstocompete,therebydestabilizingagriculturalgrowth.SomemillershavesuggestedtaxconcessionsforwheatmillerswhouseasetminimumquantityofHQCF,orotherincentivessimilartothevitaminandiodinesupplementationstrategiesusedinsomecountries.MillersinNigeriaalsonotedthat10percentinclusionwasdifficulttoachieve,particularlyatthebeginning,sincetheHQCFplantswerefewanddidnothavethecapacitytosupply the requiredvolumeofHQCF.Agradual increase from3percent inclusionrateto10percentoveraperiodof5–8yearsisproposedforNigeria,andGhanaiscurrentlydevelopingitsowncompositeflourstrategy.

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OthercountriessuchasMadagascar,Mozambique,TanzaniaandZambia,allofwhichare hoping to transform their cassava industries, may adopt a similar approach. Theexperiencesandlabour-savingtechnologiesdevelopedinNigeriacanhelpthesecountriesintheirtransformationprocesses.DeliberateeffortsshouldbemadetotapintotheNigerianexperienceandtechnologiesthroughinternationalcollaboration.It is proposed thatAfrican governments planning to implement composite flourpolicies should ensure that HQCF is not a burden, but rather an acceptable andpositive input formillers in termsof thequality, quantity and competitivenessoftheirbusinesses.

12.6.5 transfer of roles from the IIta to national institutions

IITA facilitates the building of partnerships with national and internationalinstitutionsinthedevelopmentoftechnologiesbasedonthespecificdevelopmentobjectives ineachsub-SaharanAfricancountry. Ingeneralterms,partnershipsareformedfromthepointofidentificationofagriculturalconstraints.Solutionstotheseconstraintsaredevelopedtogetherwiththenationalandinternationalinstitutionsin specific research locations; the results are widely applied by the partners andotherbeneficiaries,e.g.smallfarmersorprocessors,toachievedesiredoutcomes.This approach contributes to the development of institutional capacity, sincenational institutionsareoftenabletotakeover theadaptationandapplicationofthe research results to achieve impacts after IITA’s exit. IITA’s role reduces to thelevel ofmonitoring and evaluation of the impacts on the beneficiaries, and theidentificationof furtherdevelopmentneeds3.This transferof responsibility to thenational institutions and theprivate sector ensures sustainabilityof developmentprogrammesonagricultureinthevarioussub-SaharanAfricancountries,suchasispresentlyoccurringinNigeriaandGhanaforthedevelopmentoftheHQCFindustry.

12.7 Conclusion

TheIITAR4DapproachemphasizesthedevelopmentoftechnologiesthatsolvetheproblemsofAfrican farmersalongthewholevaluechainofeachmandatedcrop,from input supply to consumption.The technologies are designed to reduce riskandgenerate incomeforpoorfarmers.Theapplicationofaholisticvaluechainorfood systems approach isworking: in partnershipwith national and internationalresearch partners, in the development of proven agricultural technologies thataddress the constraints ofAfrican crops, combinedwith a concurrent delivery ofthese technologies to the national institutions, capacity building, and technicalsupport totheagriculturaldevelopmentagendasofvariousAfricangovernments.

3 Available at: http://www.iita.org/cms/details/research_summary.aspx?a=1570andz=63.


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The continuous interaction of partners along the research to developmentcontinuum,andthedevelopmentofthecapacityofNAREStoadapttechnologiestotheirspecificneeds,areanimportantfactorforthespreadoftechnologiesandtheireventualimpact.Theengagementinpolicydialoguewithvariousgovernmentshelpstoensurethatfavourableeconomicandpolicyenvironmentsarecreatedforthe application of the technologies to benefit smallholder farmers and help thedevelopmentofnationaleconomies.

ThisapproachplayedasignificantroleinthecassavatransformationthatoccurredinNigeriafromthe1960stothe1990sbecauseofthespreadofhigh-yieldingcassavavarietiesandtheavailabilityofprocessingtechnologies.TheinvestmentandpolicyinitiativesadoptedbyGhanaandNigeriafrom2001–2007,aimedatcommercializingtheHQCFtechnologydevelopedbyIITA,haveenhancedtheacceptanceofcassavaas an urban food and as an industrial rawmaterial.The level of processing andmarketing activities by the private sector in the two countries during the periodrepresentsashifttotheindustrializationsteponthecassavatransformationladder.However, those development activities have led to new challenges that need tobeaddressed.Nonetheless,theexperiencesofIITAapplyingtheR4DapproachoncassavainAfricahaveproventobesuccessful,andtothegreatestextentinNigeriaandGhana.

Acknowledgements

Theauthorswouldliketothankallthecassavavaluechainactors–farmers,HQCFprocessors, equipment manufacturers, bread bakers, wheat flour millers andgovernmentagencies–whoprovidedtheiropinionsonthecurrentsituationofthecassavasectorinGhana,Nigeria,Tanzania,UgandaandZambia.

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Abass, A.B. 2006. How to make High Quality Cassava Flour (HQCF). Ibadan,Nigeria,InternationalInstituteofTropicalAgriculture.

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KATINKA wEINBERgER ANd ANTONIO l. ACEdO JR.

cHapter 13

development and diffusion of vegetable post-harvest and

processing technologies in the greater mekong subregion of asia

13.1 Introduction

Cambodia, Laos andViet Nam have experienced sustained growth in vegetableproduction, from about 2.9 million tonnes in 1980 to 9.3 million tonnes in 2007 (Figure 13.1) (FAOSTAT, 2008). Harvested acreage also increased by approximatelythreefold,from337850hato875400ha.InVietNam,widespreadvegetableproductionandcommercializationhasbeenobservedeveninthemostimpoverishedcommunitiesofthenorthernuplands(InternationalFoodPolicyResearchInstitute,IFPRI,2002).

0

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a)

FIGURE 13.1 Vegetable production area, volume and average yield, in Cambodia, laos and Viet Nam, 1980–2007

Source: FAOSTAT (2008).


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Post-harvest losses negatively impact on the economic benefits derived fromvegetableproduction.Theyareusuallyhigh indevelopingcountriessuchasthosein the Greater Mekong subregion – Cambodia, China’s Yunnan Province, Laos,Myanmar,ThailandandVietNam–wherealackofknowledge,skills,technologies,techniquesandfacilitiesforproducehandlingandprocessingarecompoundedbytheperishablenatureofmostvegetablesandtheregion’shotandhumidclimate.Thelossoffoodandeconomicopportunitiescontributestothepersistentproblemsofpoverty, unemploymentandmalnutrition in the region.Reducingpost-harvestlossesthroughtheproperapplicationofappropriatepost-harvesttechnologieshasfar-reaching benefits. It improves the incomes of farmers andmarketers, makesdiversification into vegetable production less risky and more attractive, createsrural employment and income generation opportunities through value-addedactivitiesandpost-harvestenterprises,enhancesproductivityandcompetitivenessinvegetable industries, increasesopportunities forexport,andsustainseconomicgrowth(JaffeeandGordon,1993).Astheworldeconomybecomesmoreintegrated,post-harvest technologies could enable developing countries to position theiragriculturalproducemoreeffectivelyindomesticandexportmarketsatcompetitivequalityandprices.Post-harvestindustriescontributetogreatergenderequalityandempowermentofwomen,whooftenplayanimportantroleinpost-harvestactivitiesforfreshandprocessedvegetables(JaffeeandMorton,1995).

Recently, AVRDC – The World Vegetable Centre – launched an initiative tostrengthenthevegetableindustryandadvanceeconomicgrowthandfoodsecurityin Southeast Asia. The initiative aims to provide the groundwork and directionfor future development activities within a supply chain setting, to improve the well-being of disadvantaged actors in Southeast Asia’s vegetable industry,particularlyinCambodia,Laos,andVietNam.

Inthischaptertheapproachesusedwillbedescribed;theseincludedanassessmentof post-harvest losses of vegetables along various points in the supply chain, anoverview of the technologies developed, and an assessment of how adoption ofpost-harvesttechnologiesimprovesthelivelihoodsoftheruralpoor,includingsomeofthefactorsthatcontributedtoadoptionanduptake.Therelevantmethodologiesappliedwillbediscussedundereachsection.Thechapterwillconcludebydiscussingthe major achievements of the project, and will offer recommendations for thereplication of models that aim to support the rural poor by providing access to post-harvesttechnologies.

13.2 Post-harvest loss in vegetables

Post-harvest loss adversely affects the profitability and efficiency of supplychains. Reports on post-harvest losses in vegetables vary considerably, withstudies reporting losses in developing countries of 50 percent or even higher.

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development and diffusion of vegetable post-harvest and processing technologies in the Greater Mekong subregion of asia

Field observations have reported that 40–50 percent of horticultural cropsproducedare lostbeforetheycanbeconsumed,mainlyasaresultofhighratesof bruising, water loss and decay during post-harvest handling (Kader, 2003).Poorpost-harvesthandlingandstoragecanalsoleadtolossinnutritionalquality,becauseof lossofvitaminsandthepotentialfordevelopmentofhealthhazards(e.g.mycotoxins indriedchili).Post-harvestrelated losses inqualityalsoreduceopportunities for export and export revenues (Weinberger and Lumpkin, 2007).Typically, post-harvest losses vary greatly between different vegetable types,productionareasandseasons.Themagnitudeof the lossesand their impactonfarmincomescanbedifficulttocalculatebecausethepost-harvesthandlingchainincludes all the steps between harvesting and consumption, including sorting,cleaning,packing,cooling,storage,transportandprocessing.

Reducingpost-harvestlossesforfreshproducehasbeenshowntobeanimportantpartofsustainableagriculturaldevelopmenteffortswhoseaimsaretoincreasefoodavailability,butwhichusuallyattractlittlefunding(Kader,2005;Weinbergeret al.,2009).Duringthepast30years,lessthan5percentofthefundingprovidedgloballyforhorticulturaldevelopmenteffortshasbeendirectedat thepost-harvestphase(FAO,2004).

Reasonsforhighpost-harvestlosscanincludepoorpre-harvestingandharvestingpractices (e.g. harvesting leafy vegetables during the hottest time of the day),inappropriate post-harvest handling and packaging (e.g. packing tomatoes inwoven bamboo baskets that can be crushed when stacked), post-harvest pestsand diseases, and lack of storage, cooling and cold chains (e.g. the transport oftomatoesoverlongdistancesonthetopoftrucksandtankers).Knowingwherelossoccursalong thechain isessential to identifyappropriate researchstrategiesandtraining programmes.Thus, an initial activity during theAVRDCproject assessedand quantified post-harvest loss in Cambodia, Laos and Viet Nam for priority vegetables–includingchili,tomato,yard-longbean,cucumber,andChinesekale–and,according toproductionquantitiesand sales, identifiedcritical technologicalentrypointsforreductionofpost-harvestloss.Basedontheoutcomesofthestudy,subsequentresearchfocusedoncertainareasandcropstoreducepost-harvestloss.

To analyse the supply chains and post-harvest loss for vegetables, detailedinterviewswereconductedwithactorsatvariouspointsinthesupplychainusingastructuredquestionnaire.Threetypesofquestionnairesweredevelopedtogathergeneralandspecificinformationfromsupplychainactors.Thegenericinformationsought included: socio-demographic data, post-harvest loss estimates, tradinginformation,marketinginformation(e.g.themonthlyvolumeofproducepurchasedandsold, thepricesachieved, themaintradingpartners, themonthly turnoveroftheentirebusiness), andattitudes towardspost-harvest loss. For farmers,detailsabout production and harvesting practices were obtained based on the pastyear’s production cycles. An upstream interview approach (retailers to farmers)was applied.Through proportionate sampling the objective was to ensure equal


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representationofretailers,intermediaries(collectorsandwholesalers)andfarmers,allfromimportantproductionareasservingthelargercitiesofthecountriesinvolved.All actors were required to identify their main sources of the crop in question. After establishing the different forms of retail outlets for vegetables and theirapproximate share of total vegetable sales based on interviews with the keyinformant, the sample size of supermarkets, wet market vendors, small grocerystoresandstreetvendorswasdetermined.Theinitialrespondentswereselectedatrandomfromalistofretailersintwomajorcitiesineachcountry.Attheconclusionof the retailer interview, intermediarieswere selectedbasedon the list ofnamesprovidedbyretailers;farmerswerechosenfromthelistfurnishedbyintermediaries.The sample included retailers, intermediaries and farmers.The number of actorssurveyedwasapproximatelyequal:190retailers,181intermediariesand187farmers,foratotalof558respondentsinthethreecountries.

Inthestudy, lossreferredtoproduceunfitforhumanconsumption,andexcludedproduceoflowerqualitythatwasstillsaleable.Forfarmers,post-harvestlosswasquantifiedinabsolutetermsforproduce lostafterharvest,andthencalculatedasa percentage based on total harvested quantity. For intermediaries and retailers,losswasestimatedasthedifferencebetweenquantitypurchasedandquantitysold1. Toobtainamonetaryvalueofthelossexperienced,actuallossinkilograms(kg)wasmultipliedbytheaveragesellingpriceachievedineachmonthorharvest.Thisvaluewasdividedbythetotalamountofvegetablesproducedorpurchasedbyeachactor(kg)toobtainavalueoflossbasedonauniformdenominator;thevaluewasthenaddedacrossallactorsinthesupplychain.Thetotalnumberofobservationsusedforcollectors,wholesalersandretailerswasthemonthlyobservationscollectedfortheentireyear.Forfarmers,thetotalnumberofobservationsamountedtothepastyear’s production cycles (amaximum of three production cycles in each countrywithonewetandtwodryseasons).Thedatapresentedareasummaryforwetanddry seasons. Data for post-harvest loss by individual actors along the chain wasaggregatedtoobtainthetotallossalongthechain.

Figure13.2mapsouttheflowoffreshvegetablesfromtheproducertotheconsumerlevel.Supplychainchannelsaresimilaracrossthevariouscrops.Respondentswereaskedtoidentifythemainactortheysoldtheirproduceto,andtoestimatetheshareofproducesold.Thepercentagesingreenarrowsrepresentthesharesofvegetablesthatsuppliersatdifferentlevelssoldtotheirmaintradingpartnersasashareoftotalproducesold.Dottedlinesrepresentminimaltransactionsbytheactors(lessthan 5 percent).Where our analysis generatedmissing links between actors and theirmain buyers, the main sources of their vegetable produce, represented by solidlineswithnopercentagevalue,wereaddedintotheflowcharttoobtainacompletepictureof thedemandandsupply sideofvegetable transactions ineachcountry.

1 This approach may include small errors due to personal consumption.

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Themainflowofvegetablesishighlightedbythethickblacklineandusuallymovesfrom farmers to collectorsandwholesalers.Wholesalerseither resell theproducetootherwholesalerswhodistributetheproducttootherregions,orselltogrocerystoresandwetmarketvendorswhothensellvegetablestofinalconsumers.

Table 13.1providesanoverviewof thepost-harvest loss situationacross cropsasperceivedbyvariousactors in thesupplychain.Post-harvest losswas incurredbymostsupplychainactors,with94percentoffarmers,93percentofintermediariesand87 percent of retailers experiencing vegetable losses.The volumeof loss permilliontonnesofproduceharvestedorsoldwashighestforfarmers,slightlyhigherthan intermediaries and about 30 percent higher than that of retailers. Seasonaleffectsescalatedtheproblem,especiallyamongfarmers,wherelossesincreasedby20percentduringthewetseasoncomparedwithotheractors.Themedianoflosswaslowerthantheaveragevalueforallactors,butstillsubstantial,indicatingthat

Cooperative

Collectors Wholesalers INTERMEDIARIES

Street vendors

Grocery stores

Wet market vendorsSupermarkets RETAILERS

Farmers FARMERS

Restaurants

Consumers CONSUMERS

8%32%

18%

15%

6%

40%

34%

22%

22%17%

10%

40%

100%

95%

19%

64%

6%

FIGURE 13.2 Overview of the supply chain for fresh vegetables

Source: Weinberger et al. (2008).


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mostsupplychainactorswereaffectedbypost-harvestloss.Themaximumlossthatasinglesupplychainactorexperiencedwas50percentforfarmers,91percentforintermediaries,and69percentforretailers.

Table13.2showstheaccumulatedlossvaluesforspecificvegetablesinthesupplychainpercountry.Tomatowastheonlycropsurveyedinthethreecountriesandhadthehighestphysicalloss–amountingtoabout20percentofproduction(205kgpermilliontonnes)–ofallthecropscovered.Themonetaryvalueoflosswashighestforchili,ataboutUS$75permilliontonnes.Cambodiahadthehighestpost-harvestlossamongthethreecountries.Factorsthatcontributedtothehigh loss inCambodiamay have included relatively complex supply chains2 – withmore backward andforwardlinkagesthaninLaos–andlackoftechnologicalexpertiseinpost-harvesthandling and processing compared with Viet Nam. Across crops and countries, theaveragelossthroughoutthesupplychainwasabout17percent.

2 The vegetable supply chain in Laos was rather short and direct. In contrast, there was a higher retailer participation in Cambodia and Viet Nam, i.e. supermarkets, wet market vendors, grocery stores and street vendors. In addition to final consumers, wet market vendors also cater to restaurants and grocery stores. A certain contingent of vegetables was supplied by importing suppliers and there was evidence that during certain months when local production was low, the share of imports to domestic supply was substantial.

Parameter Farmer intermediary retailer

Number of respondents (N) 187 181 190

Percentage share with loss 94.0 93.4 86.8

Loss values

kg per million tonnes 64.8 61.1 43.0

uS$ per million tonnes 13.4 18.6 21.9

Percentage loss

Dry season 6.0 5.9 4.2

Wet season 7.2 6.2 4.4

Average 6.4 6.0 4.3

Median 5.0 3.9 3.0

Maximum 50.0 90.8 69.4


taBLE 13.1

post-harvest loss estimates in the vegetable supply chain

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Intermsoflossdistribution,farmersincurredthehighestphysicallossofproduce,estimatedatnearly40percentofthetotalquantitylostintheentiresupplychain,withamonetaryvalueofabout25percentof thetotalvalueof loss (Figure13.3).Thecaseisreversedforretailers,wherethemonetaryvalueoflosswasestimatedatmorethan40percentandphysicallosswasonlyabout26percent.Thesedifferencesinphysicalandmonetaryvaluesoflossatthefarmandretaillevelscanbeexplainedby the retail–farmpricemargins.Bothphysicalandmonetaryvaluesof losswerelowestforcollectors,giventhattheymerelytransporttheproduceandhavelimitedinvolvementinothervalue-addingactivitiessuchasre-packing.

Theresultsshowedthatconcentratingeffortsonlyatthefarmleveltotrytoreducepost-harvestlossisnotsufficient,andthatlossesfurtherdownthesupplychainarerelevantandlarge.Themonetaryvalueoflossandtheconsequentlossofeconomicopportunitiesisenormous.In2005,thecombinedtotalvegetableproductioninthethreecountrieswas8.5milliontonnes,worthUS$2612.3million(FAOSTAT,2006).Assumingthat17percentofthiswascompletelywastedafterharvest,thismeansa lossof 1.5million tonnesofproduce,worthUS$461million.The lossquantified

Country Tomato Yard-long bean

Cucumber Chinese kale

Chili Average

Cambodia N 50 50 50 50 200

Kg/MT* 245.7 217.9 197.1 163.9 207.6

US$/MT 56.8 57.9 28.5 59.3 51.4

Laos N 31 69 27 73 200

Kg/MT 169 122.4 87.1 107.1 123.9

US$/MT 84.2 48.5 12.8 88.2 64.2

Viet Nam N 105 53 158

Kg/MT 191.2 168.7 184.5

US$/MT 35.3 60.1 43.1

Average N 186 119 77 50 126 558

Kg/MT 204.6 167.0 146.8 163.9 126.1 168.9

US$/MT 49.1 54.2 21.8 59.3 75.2 53.9

*MT = million tonnes. Source: Weinberger et al. (2008).

taBLE 13.2

total value of post-harvest losses in the vegetable supply chain by crop and country


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wouldbeevenlargerifthelosscausedbyreducedquality(qualitativeloss),whichalwaysreducesproductprices,andthelossofnutrients(nutritionalloss)werealsofactoredin.

13.3 Technological options developed

Supply chain actors provided information on various causes of loss that requiredtechnological and non-technological interventions. Some technologicalinterventionshadalreadybeenestablished (e.g. timeandmethodofharvesting),andthusweredirectlyavailabletoovercomecertainproblems.Othertechnologiesunderwentresearchforadaptationandoptimizationtolocalconditions.Technologyverification is importantbecausea technologyproveneffectiveelsewheremayormaynotwork inanother location,givenanumberofvaryingfactorssuchascropvarietyandgrowingconditions.Othertechnologiesmaynotbepracticalincertaincountriesorlocalities,andmayneedtobemodifiedusingavailableresources.

Technology development under this post-harvest research and developmentprogrammeaddressedfreshproducehandlingandprocessing.Resultsofthesupplychain surveys were validated and priority setting for research and development(RandD) to develop selected technologies was carried out during workshops.


Value of loss

Physical loss

Farmer Collector Wholesaler Retailer

Percentage share of total loss

0 20 40 60 80 100

FIGURE 13.3 distribution of loss along the vegetable supply chain

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RandDprogrammesinitiallyfocusedontomatoandchili.Beforeundertakingtheseprogrammes,however,capacitybuildingwascriticalbecausepost-harvestRandDinvegetableswasnewtoCambodiaandLaospartners,andthecapacityofVietNampartners required upgrading. Post-harvest laboratories with basic facilities wereestablishedinCambodiaandLaos,thepost-harvestlaboratoryinVietNamacquirednewequipment,andtrainingonpost-harvestresearchandtechnologydevelopmentwasconductedwithacomponentworkshoptodeveloptheRandDplan.Atrainingmanual incorporating a review of post-harvest techniques based on simple and low-costtechnologiesthatshouldbeadaptedandoptimizedwasselectedforuseintheworkshops(AcedoandWeinberger,2006b).Later,leafyvegetableswereincludedandaworkshopattendedbyGMS(GreaterMekongSubregion)networkmemberswasconductedtoreviewthebestpracticesinpost-harvestmanagementofleafyvegetables (AcedoandWeinberger,2007),determinepriorities,andplanforRandDprogrammes.

A series of post-harvest trials was conducted following standard experimentalprocedures.For tomatoandchili, theAVRDC linesandcommercialvarietiesusedincludedthoseidentifiedashavingagoodyield,andgoodshippingandprocessingqualitiesinon-stationandon-farmvarietytrialsineachcountry.Forleafyvegetables(cabbage,Chinese/greenmustard,Chinesekale,aromaticmustard,andkangkongor Ipomoea aquatica),commercialvarietieswereused.Briefdescriptionsoftheresearchthattookplacetoidentifythemostpromisingtechnologiesarenowoutlined.

13.3.1 cooling

Precooling

It was thought that rapid removal of product heat by precooling could improvethe storability of tomato. A simple, portable, knockdown-type hydrocooler wasdeveloped(Acedoet al.,2008b).Waterwascooledusingiceto10°C,monitoredwithanordinarybulb thermometer, and the fruitwasdipped for4–12minutesbeforestorage at ambient or chilling temperature (10 °C). Hydrocooling for 12minutesprovedtobethemostpromising: itretardedfruitreddeningandmaintainedhighsolublesolidsatbothstoragetemperatures.Italsoslowedtherateofaciditylossandreducedchillinginjuryat10°C.

Evaporative cooling storage

Evaporative coolers usually create slightly reduced temperatures but providehigher relative humidity (RH) than that at ambient temperature, which couldbe effective in improving shelf-life of fresh produce. Three simple evaporativecoolerswere developed: a brick-walled coolerwithmoistened sawdust (type 1) ormoistenedsand(type2)aswallinsulation,andabox-typecooler(type3)coveredwithmoistenedjutesackingsewntofitthestructure(Acedoet al.2009c;Vanndyet al.,2008a;Vanndyet al.,2008c).Thevegetableswereplacedintraysinsidethestorage chamber. During storage, the evaporative cooler temperature and RH


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wereabout1–10°Clowerand10–25percenthigherthanatambienttemperature: 22.5–42°Cand32–89percentRH,respectively.Asaresult,weightlossdecreasedandshelf-lifeincreased.

13.3.2 packaging

Modified atmosphere packaging

Keeping produce in polymeric films creates low oxygen, high carbon dioxide, andhighhumidityconditionsthatretardqualitydeterioration.Modifiedatmospherepackaging(MAP)trialswereconductedusingthreecommerciallyavailableplasticfilms: low-density polyethylene (LDPE), high-density polyethylene (HDPE) andpolypropylene (PP) of different thicknesses (25–75 microns) with and withoutperforations as vents (Acedoet al., 2009b.Acedoet al., 2008d;Chanthasombathet al., 2008;Vanndyet al., 2008b;Vanndyet al., 2008d).Storagewasat ambienttemperature. The inclusion of an ethylene scrubber sachet (0.1–0.4 percentpotassiumpermanganate)inMAP-wrappedleafyvegetablesforcontrolofyellowingwastriedandinsometrials,storageatambienttemperatureandinacoldchamber(10–13 °C) was compared (Acedo et al., 2009a). Cost-benefit analysis by partialbudgetingshowedthatthetechniquesarepotentiallyprofitable.

Harvest maturity Variety Fruit damage reduction (%)

Net returns* (uS$/kg)

breaker fruit clN2123a (aVRdc) 13 0.03

clN2498e (aVRdc) 18 0.05

Perfect 89 (Syngenta) 18 0.05

Turning fruit fM1080 (local) 11 0.02

clN2123a (aVRdc) 13 0.03

clN2498e (aVRdc) 18 0.05

Perfect 89 (Syngenta) 15 0.04

fM1080 (local) 11 0.02

* Calculated as the difference between the monetary saving attributable to damage reduction, and the added cost of using grid-polystyrene crate with paper shreds over the cost of carton box. Cost of 25 kg carton box (used only once) = US$1; 25 kg grid-polystyrene crate (assumed to be used 3 times) = US$3; paper shreds = US$0.2/kg (1 kg/container); labour = US$3.5/person-day (1 crate packed in 5 mins). Price of tomato = US$0.5/kg.

taBLE 13.3

technical and monetary benefits of using grid-polystyrene crate with paper shreds in reducing fruit damage of

different tomato varieties relative to the use of carton box

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Packaging system

Different packagingmethods for tomato inVietNam (a 25 kg carton box and grid-polystyrenecratewithandwithoutpapershredsascushioningmaterial)wereevaluatedfor reducing physical damage through simulations of handling hazards by drop test(Thanhet al.,2008).Theuseofgrid-polystyrenecrateswithpapershredswasthemostpromisinganditsfinancialreturnwasestimatedbypartialbudgetanalysis(Table13.3).

13.3.3 commodity treatments

Tomato decay control

Tomatostorageislimitedbydecay.Pre-storagewashesin1–2percentbicarbonatesolution(preparedusingfood-gradebakingsoda)for2minutes,or100–200ppmchlorinesolution(preparedusingcommercialbleach,5.25percentsodiumhypochlorite)for 3minutes,weretriedaspossibledecaycontroltreatments(Acedoet al.,2008a;Acedoet al.,2008c).Afterwashing,thefruitwasrinsed inwater.Promisingresultswereobtainedonlywith2percentbicarbonatewashduringstorage in theevaporativecooler.ThetechnicalandeconomicbenefitsareshowninTable13.4.

Cabbage soft rot control

Bacterial soft rot is the most serious post-harvest problem of cabbages in thehumidtropics,causingenormouslossesduetotrimmingaftertransportandduringmarketing. As possible control measures, three indigenous and safe treatmentsweretested:limepastepreparedas1:1limepowderandwatermixture;15percent

Tomato variety Decay incidence (%) Net return*

With bicarbonate wash Water wash (control) (uS$/kg)

CLN1462A (AVrDC) 14 18 0.26

TLCV15 (AVrDC) 9 27 0.40

T56 (local) 4 37 0.33

TMK1 (local) 0 15 0.31

* Calculated as the difference between the monetary saving due to decay reduction and shelf-life improvement and added cost of bicarbonate wash and EC storage over that of water wash and ambient storage. Costs per 1 000 kg tomato per year: baking soda = US$2; EC annual depreciation = US$100 (EC used 10 times/year); labour = US$5; water (4 m3/year) = US$2. Price of tomato= US$0.5/kg.

taBLE 13.4

tomato fruit decay reduction using 2 percent bicarbonate washing prior to storage in evaporative cooler (ec)

and its monetary return based on partial budget analysis.


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alumsolution(15galumgranulesin100mLwater);guavaleafextractas1:1pureextractandwatermixture(Acedoet al.,2009d).Thesecontrolagentswereappliedusinganysuitableapplicator(e.g.finebrush,cloth,orcotton)atthecutbuttendofthecabbageheadwheresoftrotusuallydevelops.Waterservedasacontrol.Afterair-drying,apastemadefromsoft-rotaffectedcabbagebuttswasspreadonthecutsurface, simulating possible infection of cabbages during post-harvest handling.Responses were consistent and promising treatments for soft rot control wereidentifiedforeachcountry(Table13.5).

13.3.4 processing technologies

Solar drying

Dehydrationcanextendthemarketabilityandusabilityofvegetables.IndevelopingcountriessuchasCambodia,LaosandVietNam,vegetablesareusuallysun-driedintheopenair,whichisslow,weather-dependent,andsubjecttophysiologicaland

Country Treatment Trimming loss due to soft rot (%)

Net returns* (uS$/kg)

Cambodia lime 8.7 0.15

alum 20.3 0.09

Guava leaf extract 7.2 0.15

Water (control) 44.3

Laos lime 0.0 0.12

alum 0.0 0.12



Viet Nam lime 0.0 0.16



* Calculated as the difference between the monetary saving due to trimming loss reduction and added cost of the treatment over that of the control. Costs per 1 000 kg cabbage: lime = 1 kg at US$1; alum = 0.5 kg at US$1/0.5 kg; mortar and pestle for guava leaf extraction = US$4 (2 units at 2US$/unit); labour = 5–7 person-days at US$3.5–5.0/person-day. Price of cabbage: US$0.5–0.7/kg.

taBLE 13.5

promising treatments for the control of bacterial soft rot in cabbage in cambodia, laos, and viet nam and

monetary return based on partial budget analysis

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hygiene-related problems.These constraints could be minimized by placing theproduceinanenclosedsolardryingchamberwhereitisprotectedfromdust,rain,strayanimals,andsoon.SimplesolardryersweredesignedandmanufacturedinCambodia (cabinetsolardryerandasolardryerwithheatcollector–RoyalUniversityofAgriculture,PhnomPenh),Laos(solardryer–NationalUniversityofLaos),andVietNam(asolardryerthatcombinedthefeaturesoftheCambodiaandLaosdesigns).Thesolardryersmaintainedmuch higher temperatures and lower RH than those achieved under sun-drying conditions. In Cambodia, drying trials were conducted for chili andcabbage, with the latter first being shredded, mixed with 5 percent salt, andfermentedovernight(asintraditionalpractice)beforedrying.Thetwosolardryersaccelerateddrying to less than 10percentmoisture content in chili in threedaysinsteadofsixdaysforsun-drying,andincabbagetoonedayinsteadoftwotothreedays for sun-drying. In theLaos chili drying trials, drying ratesdifferedaccordingto variety, apparently as a result of differences inmorpho-anatomical structures.Nevertheless, the solar dryer again accelerated drying of the produce comparedwithsun-drying(Table13.6).Dippingin65°Cwaterfor3minuteswasincludedasapre-dryingtreatmenttopreservetheredcolourofthefruit.IntheVietNamtrials,theuseofthesolardryersimilarlyresultedinfasterdrying.Costandreturnanalysisshowedthatdriedchiliproductioncouldyield32.5percenthigherincomethanfreshchiliproduction.

Paste/sauce processing

Tomato paste and chili-tomato sauce processing trialswere conducted.One trialdeterminedtheeffectsoftomatovarietyonthepasteproductprocessedfollowing

Chili variety* Days to <10% moisture content

Solar dryer Sun-drying

CCA 321 (AVrDC) 2 12

CCA323 (AVrDC) 6 12

PbC142 (AVrDC) 1 6

DemonF1 (commercial variety from Thailand) 6 8

Local variety 2 6

*All varieties belong to Capsicum annuum, except the local variety, which is C. frutescens.

taBLE 13.6

days to achieve less than 10 percent moisture content of different varieties of chili dried using a solar dryer and in the sun


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the method developed at the Royal University of Agriculture, Phnom Penh. TwoAVRDClines(CLV1462AandTLCV15)andtwocommercialvarieties(T56fromVietNamandthe localTMK1)wereused.Thevariations inpastequalityresultingfrom different crop varieties provided useful benchmarks for choosing fruit forprocessing.Forexample,freshpastefromT56showedthebestquality,mainlyonaccountofthedeepredcolourofthefruit,whilepastesfromCLN1462AandTLCV15hadmorestablestoragequalitybecausecolourandflavourwasbettermaintained,especiallycomparedwithTMK1.Inanothertrial,differentcombinationsoftomatoes(CLN2498E and CLN2123A fromAVRDC, Perfect89 from Syngenta, and FM1080from the Fruit and Vegetable Research Institute, Hanoi) and chili (9955–15 andCCA321 fromAVRDC,andOxHorn,a localvariety)were tested.Thesauceswereofgoodsensoryqualityregardlessofchili-tomatovarietycombination,exceptforthe9955–15andFM1080combination,whichhadinferiorcolour,texture,andtaste.Darkstorage–keepingthebottlesofsauceinaclosedcartonbox–maintainedbettertastequality thanstoringbottles in theopen.Profitanalysis calculated thenet returnofchili-tomatosauceproductionatUS$0.04per250gramjarandUS$151.5permilliontonesofproduct.

Fermentation

CabbageandChinesemustard fermentationwasoptimized inVietNam inwinterand summer using different salt concentrations (6–14 percent) and fermentationperiods(2–10days).Cabbagerequiredhighersaltconcentration(10percent)thanChinesemustard(8percent),buttheoptimumfermentationperiodforbothcropswasthesame,4daysinwinterand2daysinsummer.Thefermentedproductshadbettersensoryqualitiesandshelf-lifethanthoseproducedusingothersaltlevelsandfermentationperiods.Costandreturnanalysisforcabbagefermentationrevealedthat it could realize 23.2 percent higher income than fresh market production. ProfitanalysisforChinesemustardfermentationshowedanetincomeofUS$0.09per500gjarandUS$190permilliontonnesofproduct.TheoptimizedfermentationprocedureforcabbagewasadoptedinCambodiaandforChinesemustardinLaos;it was compared with traditional methods and those developed by the nationaluniversities.Inbothcountries,theVietNamprocesswasfoundtobeverydesirablefor longer shelf-life. However, the products produced by the localmethodsweremorepositivelyappreciatedintermsofcolourandtaste.

13.4 Evaluation of project outcomes

Thetechnologiesdescribedaboveweredisseminatedtosupplychainactorsthroughaseriesoftrainingprogrammes.Inlate2006toearly2007,atotalof237actorsalongthesupplychaininCambodia,LaosandVietNamreceivedtraininginpost-harvesthandling and/or processing of vegetables. These training sessions were held totest theapproach for large-scale trainingprogrammescurrentlybeing conducted

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with2000supplychainactorsinCambodia,LaosandVietNam.Trainingmanualson post-harvest technologies for tomato, chili and leafy vegetables (Acedo andWeinberger,2009,2006a)weredevelopedbasedontheresultsofRandDworkandotherinformationonbestpracticesfromvarioussources.Theseweretranslatedtocountrylanguages,distributedduringtrainingsessions,andforwiderdisseminationwere uploaded to theAVRDC post-harvest web page3. Demonstrations of sometechnologieswere set up prior to the training so that trainees could observe theactualoutcomesorresultsbroughtaboutbyusingthetechnologies.Thisincreasedthecredibilityofthetrainingprogrammesandhelpedtobuildthetrainees’trustandconfidenceinthetrainingproviders.

Monitoring and evaluation are tools to helpmanage the resources and activitiesof a project to enhance its impact throughout its term, and beyond.Under thispost-harvest project a number of monitoring and evaluation tools were applied.Theseincludedregularassessmentsoftrainingcoursesbyparticipants,aninterimassessmentoftrainingimpacts,andaformalassessmentoftheimpactofthepilottrainingstwoyearsaftertheywereconducted.Theevaluationofthesepilottrainingsisdescribednow.

Aquestionnairefortheevaluationofthepilottrainingwasdistributedtopartnersforfeedbackandtranslationintolocallanguages.Fifteenrespondentspercountrywere selected at random, based on the list of training participants available foreach country; thoseunavailablewere replacedaccordingly.The complete sampleincluded45respondents.Thequestionnairewasorganizedaroundtenopen-endedquestions.Thesecoveredaspectssuchasretentionofinformation,detailsaboutthetechnologiesadopted,impactonfarmoperationsandlivelihoods,andconstraintstoadoption.Thesurveywasconductedinearly2009,withthefollowingresults.

13.4.1 adoption of technologies

Averyhighshareofrespondents(allbutone)inVietNaminitiallyadoptedoneormoreofthepost-harvesttechniques(Table13.7).ThesharewaslowerinLaosandCambodia.Inthesetwocountries,around50percentofrespondentsinitiallyadoptedoneormoreofthetechnologiescoveredinthetrainingprogrammes.Twoyearslater,60percentoftherespondentsinVietNam,40percentinLaos,and27percentinCambodiastillusedoneormoreofthetechnologies.Ofthese,oneortworespondents ineachcountrymodifiedthetechnologiesandalsousedthemonothercrops.

Farmers adopted practices for fresh produce and for processing (Table 13.9).Morefarmersadoptedfreshproducehandlingtechnologies(10)thansun-dryingtechnologies(7)orprocessingtechnologies(6).Freshproducehandlingpractices

3 Available at: http://www.avrdc.org/post-harvest.


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Particular Cambodia Laos Viet Nam All

N % N % N % %

Adoption of techniques 6 40 8 53 14 93 62

Currently using the techniques 4 27 6 40 9 60 44

Modified the techniques 1 7 1 7 2 13 11

Stopped using the techniques 2 13 2 13 5 33 20

taBLE 13.7

retention and adoption rates of training participants after two years

Country Mean Number of farmers

Cambodia 1.8 6

Laos 2.4 8

Viet Nam 2.1 14

Total 2.1 28

taBLE 13.8

average number of techniques adopted by respondent

Classification Share (%) Specific technique

Fresh produce handling techniques 63 careful harvesting and harvesting produce with calyx intact

careful handling of fresh produce

Proper storage

Sun drying techniques 37 chili sun-drying

Tomato sun-drying

Processing techniques 32 Tomato paste processing

chili sauce processing

Average number of technologies adopted by each farmer is two, based on number of farmers (19) Source: Weinberger et al. (2009).

taBLE 13.9

overview of post-harvest technologies currently in use


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included:harvestingwithanintactcalyx(tomato)andusingscissorstocutthefruitfromthevine;harvestingattheappropriatestage,i.e.whenthefruitturnspink;carefulhandlingofproduceafterharvest,e.g.usingsoftleavesoroldnewspapersto cover baskets before loading; gentle loading into appropriate containers;storageofharvestedproduceincoolroomsor intheshade;sortingandgradingby colour and size; packaging into suitable containers. Farmers who adoptedpracticesforhandlingfreshproduceusuallychangedarangeofpracticesbetweenharvestingandselling.

Theprocessingtechnologiesthat farmersadopted includedpractices forchiliandtomatodryingusingasimplesolardryer,andforthepreparationofchilisauceandtomatopastewithimprovedhygienicstandards,byfilteringwaterandboilingglassbottlesandlids.

13.4.2 Benefits of using post-harvest technologies

The adoption of the post-harvest technologies presented in the training courseshasledtoanumberofbenefitsforthetrainees(Table13.10).AlladoptersinLaos, 86percentinVietNam,and67percentinCambodia,providedspecificexamplesofthebenefitstheyexperiencedfromapplyingtheimprovedtechnologies.

Therangeofbenefitsincludes,amongothers,thereductionofpost-harvestlossandenhancedproductquality.Eightoutof24trainees(33percent)reportedareductioninpost-harvestloss,andeighttraineesreportedanimprovementinproducequality.Forexample,severalfarmersinVietNamrecountedhowtheirlossesdroppedtoaslittleas1–2percentfromalmost30percentbeforethetraining.

The results also show that impact on farm profits is large. Around 71 percent (17 of 24) of the adopters reported that their farmprofits increasedbecause ofhigher prices, price differentiation for products of different grades, and beingabletosell largerquantities.Forexample,onetraineereportedthathersalesofdriedchiliincreasedfrom1–2kg/monthto30–40kg/monthaftertraining.Anotherretailer recounted that, while previous processing of dried chili was for homeconsumption only, after the training he began selling about 20–30 kg/month.OnefarmerfromVangViengDistrictinLaos,whopreviouslysoldapproximately 40kg/yearofdriedchiliforLaotianKip(K–)15000/kg,wasabletoincreasesalesto100kg/yearforanaveragepriceofK–20000/kg,ariseinpriceof33percent,anda2.5-foldincreaseinvolume.Anotherfarmerwasabletoobtaina25percenthigherpricefortomatoesasaresultofachangeinharvestingpractices.

The majority (80 percent) also reported an improvement in their buyer-sellerrelationship.Whilesomefarmerswereabletofindalargernumberofbuyers,manyfarmersreportedthattheirbuyersweresatisfied,andcropscouldmoreeasilybesold.Therewerecases inwhich thenumberofbuyersdoubledorevenquadrupledafter


370

participationinthetraining.Inonecase,afarmerfromHadxayfongDistrictincreasedthenumberoftradingpartnerstotencollectors,upfromfivecollectorsin2007.Anotherfarmerreportedincreasingthenumberofhisbuyersto20,comparedwithfivetoseveninthepast.Severalfarmersmentionedthatoverallitbecameeasiertosellproduce.

Other benefits respondents referred to related to enhanced knowledge andincreasedconsumption.

Main benefit Share (%) Specific benefit Share (%)

buyer network 79 Satisfied buyers 54

Increased number of buyers 29

crops can now be easily sold 29

Farm profit 71 Price differentiation 54

higher quantity sold 21

Product diversification 17

reduced loss 33 Reduced loss 33

Product quality 29 Better appearance 21

Tomato paste is guaranteed clean 12

longer shelf-life for dried chili 8

income stability 13 contract arrangement 4

Regular income 8

Other benefits 42 Improved knowledge 29

higher consumption of tomato paste 8

Solves the problem caused by overpacking 4

Time saved 4

Wastes used as animal feeds 4

expanded relationship with neighbours 4

Based on number of farmers (24) Source: Weinberger et al. (2009).

taBLE 13.10

Benefits of using post-harvest technologies

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13.4.3 Impacts on livelihoods

Oneimportantaspectofthisevaluationwastoassesswhethernewknowledgeandskillsacquiredthroughthetrainingprogrammesmadeadifferenceinthelivelihoodsofrespondents.ResultsshowpositiveimpactsonthelivelihoodsofalltheadoptersfromLaos,andhalfof those fromCambodiaandVietNam(Table13.11). Increasedincomewasusedmainlytoinvestinappliances(e.g.gascooker,TV),equipmentforfarmoperations(e.g.ageneratorforanelectricpump,amotorbike)andland.InLaos,educationalexpenseswerecoveredandadditionalsavingsweredepositedinthebank.OnerespondenteachinLaosandVietNamreportedopeninganotherbusiness.

OneparticulartraineefromVietNamwasaremarkableexampleofthehighpotentialfor employment creation in a favourable environment. A former collector from Hai Hau District, Nam Dinh Province, he invested in a processing plant becausefarmers inhisareahadexpandedvegetableproduction,onaccountof thehigherincomethatcanberealizedcomparedwithproducingrice.

Therewasasurplusoftomatoandchiliduringproductionpeaks.ThetrainingcourseheattendedinJanuary2007providedhimwithhandlingandprocessingtechnologiesandadviceonfactoryconstructionandprocessingequipment.Afterattendingthetrainingcourse,heborrowedcapital fromtheVietNamBank forAgriculturalandRural Development (AGRIBANK) to invest in land, a building/factory, equipment,andtwotransporttrucks.HestarteddryingtomatoandchiliinDecember2008,andsubsequentlyexpandedhisdryingoperationstootherproductssuchasVietnamesepalm,onion,pumpkin,gingerandgarlic.Hereportedthatforthefutureheintendstomove intoproducing tomatopaste and chili sauce, aswell as otherprocessedproducts such as pickled cucumber and syrups. Currently he employs up to 100people.Thisrespondenthasalsoinitiateddiscussionswithtwoexportcompanies.

impact factor Share (%)

increased income 100

Able to purchase other assets (e.g. land, motorbike, TV, etc) 61

Sent children to school 17

Saved money in the bank 17

Opened another business 11

Provided employment to family members 6


taBLE 13.11

Impact of post-harvest technology adoption on farmers’ livelihoods

Main benefit Share (%) Specific benefit Share (%)

buyer network 79 Satisfied buyers 54

Increased number of buyers 29

crops can now be easily sold 29

Farm profit 71 Price differentiation 54

higher quantity sold 21

Product diversification 17

reduced loss 33 Reduced loss 33

Product quality 29 Better appearance 21

Tomato paste is guaranteed clean 12

longer shelf-life for dried chili 8

income stability 13 contract arrangement 4

Regular income 8

Other benefits 42 Improved knowledge 29

higher consumption of tomato paste 8

Solves the problem caused by overpacking 4

Time saved 4

Wastes used as animal feeds 4

expanded relationship with neighbours 4



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13.4.4 constraints to adoption

BecausearelativelylargenumberoffarmersinCambodiachosenottoadoptanyof the technologies after the training, it is interesting to identify the underlyingcauses. The largest number of farmers (56 percent) did not adopt any of thetechnologiesbecauseofalackoftime,landorcapital.Lackoftimemayalsoreflectalackofinterestinthepost-harvesttechnologies.Foreightparticipants,mostfromCambodia,thetrainingwasirrelevant.ThestudyfoundahighnumberofCambodianrespondents who were not (or who are no longer) chili or tomato growers. Sixtraineeswerenotinterestedinthetrainingtopicsofferedandchosenottoadoptanyofthetechnologies.

Inallthreecountries,theadoptionofprocessingtechnologieswaslesssustainablethanfreshproducehandlingpractices.Twofarmers(22percent)inLaoswhogaveupfreshproducehandlingtechnologiesdidsobecausetheyleftthefarmingsector. Allotherrespondents(78percent)simplystoppedusingtheprocessingand/ordryingtechniquesbecauseofalackoftimeandcapital.Thishighlightstheneedforaccessto credit; lack of credit can be a constraint to adoption, especially of processingtechnologies.

Technology Share (%) reason for discontinuing use Share (%)

Tomato paste processing 44 Lack of time to do processing 44

Chili drying 33 Lack of capital and/or machinery 22

Chili sauce processing 33 Stopped collecting/retailing 22

Fresh produce handling technique 22 Only wanted to try and test the technique 11

Tomato sauce processing 11 Chili sauce is readily available in the market 11

Prefers fresh tomato to tomato paste 11

Year-round production of tomato: no need for processing

11


taBLE 13.12

technologies initially adopted but later discontinued

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13.5 Discussion

13.5.1 relevance of the problem

Nearly all supply chain actors reported that they incurred large volume losses. Theaveragelossofthesevegetablesalongtheentiresupplychainfromfarmerstoretailerswasabout17percent,butdifferedbycountry, typeofproduceandevengrowingseason.Thiswasanticipatedaseverycountryhas itsownpeculiarities insupplychainandhandlingpractices.Differentvegetableshavedifferentdegreesofperishabilityandsusceptibilitytohazardsinthepost-harvestperiod,duringwhichenvironmentalconditionsvarywithtimeofyear. It is likelythatthis losssituationprevailsintheentirevegetableindustryofthethreecountries.Allactorsalongthesupply chain were affected, indicating that solutions to reduce post-harvest lossmustaddressdifferentstagesalongthesupplychain.

Supplychainactorswouldhavebettercontroloverproductquality, longevityandmarketability through appropriate storage and processing techniques, as well asthroughbettermarket coordination. Improvedmarket coordinationwould lessentheoversupplyofproduceandthusreducewaste.Amajorcomponentofimprovedmarketcoordinationismarketinformation,yetstudiesintheregionindicatealackof availability or use of information (Genova et al., 2006a;Genova et al., 2006b;Genova et al., 2006c). Interventions that address the availability of informationrelated to produce volume and quality requirements could help to reducewaste.Anotherimportantrequisiteforensuringmarketcoordinationisthestandardizationofproductquality.Productqualitystandardsserveas theuniversal languagethatguides supply chain actors in producing, handling and marketing agriculturalproduce.Withoutproductqualitystandards,poorqualityproducewillbeapersistentprobleminthesupplychain.Poorqualityproducewasthesecondleadingcauseoflossattheretaillevel,likelycausedinpartbypoortransportationduringdistributionfromthefarmorwholesalemarkettotheretailmarket.Animmediatesolutiontothisproblemisgreatercareduringharvesting,aswellasinterventionsthataddresspackagingandtransportconditions.

13.5.2 Factors that contributed to the successes and failures of the project

Technically and economically feasible packaging systems (e.g. MAP, polystyrenecrates)andcommoditytreatments(e.g.bicarbonatewashfortomatodecaycontrol,lime treatment for cabbage soft rot control) were developed that can enhancequalityandshelf-lifeandreducelossduringtransportandstorage.Theseandothertechnologies developed for fresh produce handling (e.g. precooling, evaporativecoolers) and processing (e.g. solar dryers, tomato paste and chili-tomato sauce


374

processing, fermentation of leafy vegetables) provided farmers and other supplychain actors with more alternatives for better control of product quality andmarketing,andforgeneratingmoreincome.Itisvitalthatthesetechnologiesandother best practices in produce handling and processing reach the users of suchtechnologies. Thus, a training programme was developed to address this need.Careful planning and preparations are essential for successful training, includingcapacitybuildingofcountrypartners,trainingteams,anddevelopingtheRandDandtrainingmasterplans.

Adopters of technologies noted the benefits of post-harvest technologies. Themajorityoftheintermediarieshadanexplicitlypositiveattitudetowardsthetechnologychangesbecauseofthepositiveimpactonproducequality.Improvednetworks,whichinturnleadtogreaterdemandforproducefromalargernumberof buyers, weremost important to farmers. Inmany cases this translated intohigher farmprofits andprofit stability. Farmers reportedan increase inpriceof 25–30percent, and inmany cases, substantial increases in the volumeof sales.There were reports that losses had gone down to 2–3 percent, from previousrates of 20–30 percent. Substantial improvements in income were observedfor those who adopted the improved post-harvest technologies, ranging from 25–30percent.Otherbeneficialimpactsatthecommunitylevelwerealsoreported,andthemoststrikingamongthesewasemploymentgeneration.

Freshproducehandlingtechnologiesinvolvelittleadditionaleffortandinvestment,thereforeadoptionrateswerehigh.Incontrast,amovetocommercialprocessingrequiresinvestmentininfrastructureandequipment,whichisdifficultwithoutaccesstocapitalandriskyinasituationwheresmall-scalebusinessesarenotsupportedbythepoliticalenvironment.Adoptionrates forprocessingtechnologieswere lower,therefore.

Becausethebenefitsoffreshproducehandlingarehighandattainablewithoutthe need for large investment, it isworth identifyingmajor constraints in theuptakeofthetechnologies.Ananalysisofnon-adopterssuggestedthatcarefulselectionofparticipantsiscrucialforthesuccessoffuturetrainingprogrammes.Trainers and trainees alike should be selected based on criteria that indicatethe likelihood of the respondent to make further use of the technologies. Currentinvolvementinproduction,handling,andmarketingoffreshorprocessedvegetables is one such indicator. Another approach could be to request thatparticipants make a small contribution to the training programme, perhapsin-kind, e.g. byoffering food.As in thepast, trainingprogrammeparticipantsshouldincludeallactorsalongthesupplychain,becauseintermediariesplayanimportantroleintheuptakeoftechnologies.

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13.5.3 recommended models of good practice for small scale post-harvest and processing technologies

Overall, the results discussed here indicate that several strategies can contributeto the development of the post-harvest and marketing sector for vegetables,with the objective of enhancing the livelihoods of small and marginal farmers. Thesestrategiesincludebothtechnologicalandorganizationalinterventions:

Z Tocontributetoareductionofpost-harvestlossforfarmers,moreresearchis requiredonpestanddisease-resistantvarietiesand improvedproductionmethods. Insectpestsandfungaldiseaseswere identifiedasmajor reasonsforloss.

Z Indesigningtrainingandotherdisseminationactivities,limitedaccesstocreditshould be considered. Previous studies indicate that farmers’ access to creditisvery limited,especially inCambodiaandLaos.NGOsprovidingmicrofinancecould become involved in training programmes.This may enhance uptake ofequipment-intensiveprocessingtechnologies.

Z Recruiting themost successful trainees to lead future training programmes isoneway toexpandonexperiential learning.Thepositiveexperiencesof thesesuccessfultraineescanconvinceothersabouttheusefulnessofthetechnologies.

Z ProcessingatfarmlevelisunderdevelopedinLaosandCambodia,andfarmersin both countries face high price variations. Farmers also reported a lack ofknowledge on how to conduct processing; access to the credit necessary forthe procurement of equipment is also a limiting factor.Training in processingtechnologies may be a viable approach, especially in collaboration withmicrocreditNGOs.

Z Technologiesandvarietiesthatallowyear-roundproductionofleafyvegetables–asisoccurringinVietNam–couldhelpreducepricefluctuationsandcontributetoyear-roundincome.

Z Encouragingvalue-additionatfarmlevelshouldfocusonthepromotionofgradesandstandards,especially inLaosandVietNam,astheseareimportantforthedevelopment of high-value agriculturalmarkets: currently an underdevelopedsectorinthesetwocountries.

Z Intermsofenhancedefficiencyofthesupplychain,twoareasfor interventiondeserveattention.Moreemphasisoncollectivemarketingbyfarmerscanreducemarketingcostsandenhancethebargainingpoweroffarmers.Contractfarmingis another area for development. Currently, very few farmers are engaged incontractfarmingandopportunitiesforfarmerstobecomeinvolvedincontractproductionandmarketingarelimited.


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13.6 Conclusion

AVRDC – The World Vegetable Centre – aims to address post-harvest loss invegetables through a supply chain approach administered through researchanddevelopmentefforts inCambodia,LaosandVietNam.Theseefforts include studying and quantifying loss in vegetables along the entire chain, identifyingappropriate strategies, conducting research for adaptation of availabletechnologies, and developing a training programme for wide dissemination oftechnologies. The benefits of adopting post-harvest technologies were highand involved improved supply chain networks, higher farm profit, and profitstability. Farmers reported an increase in prices of 25–30 percent, and inmanycasessubstantialincreasesinthevolumeofsales.Therewerereportsthatlosseshadgonedown to2–3percent, fromprevious ratesof20–30percent. In future,moreemphasis shouldbeplacedondevelopinganddisseminatingpost-harvesthandling and processing technologies and facilitating the access of smallholderfarmers to these technologies, especially in the upland areas of Cambodia, Laos and Viet Nam. The limited post-harvest and value-adding activities thatcurrentlycharacterizethesectorareapositivesteptowardsprovidingthescopeandpotential toenhancethe livelihoodsandwell-beingofmillionsofsmallandpoorfarmhouseholds.

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development

InnovatIve polIcIes and InstItutIons to support agro-IndustrIes developm

ent

Agro-industries are an important source of

employment and income generation worldwide,

occupying a dominant position in the manufacturing

sector of the economy and representing a significant

demand driver for agricultural products. As part of

its mandate to provide food security for the world’s

growing population, FAO promotes the development

of agro-industries through its technical programs,

including activities in the areas of policy advice,

capacity building, advocacy, awareness raising and

investment promotion.

This book represents a contribution of FAO

to broaden the understanding of approaches

and mechanisms to foster the emergence and

sustainability of agro-industries that are competitive

and inclusive. With emphasis on experiences from

the developing world, the book presents and

discusses innovative policies and institutions that

are supportive of agro-industries development.

InnovatIve polIcIes and InstItutIonsto support agro-IndustrIes development

Cover photos: ©FAO/Aris Mihich ©FAO/Bay Ismoyo

FAO

I2420E/1/10.11

ISBN 978-92-5-107036-9

9 7 8 9 2 5 1 0 7 0 3 6 9

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