1071 Presentation to SEEP agribusiness workshop fv

Slide1: 

Presentation by Lucas Black/Dennis O’Brien Agribusiness Models and Innovations of Private Sector Linkages October 28th, 2004 From Community Project to Commercial Venture: The case of REAP Kenya

Opening thought:: 

Opening thought: “We are both strong believers in the need for substantial aid flows to the world’s poorest countries. We believe equally strongly in the public sector’s role in providing essential services and infrastructure…but we believe that private investment must be the main source of income growth & job creation in poor countries, as it is in industrialized nations…(we need to) identify specific measures that work to unblock the private sector’s potential…when the business potential of the developing world is unleashed, the benefits will be more than economic.” Paul Martin (PM of Canada) & Ernesto Zedillo (former President of Mexico) Co-chairs of the UN Commission on the Private Sector & Development which produced the recent report Unleashing Entrepreneurship: Making Business Work for the Poor

Who is CARE Canada? What makes us different?: 

Who is CARE Canada? What makes us different? Member of CARE International, a federation of 12 member organizations including CARE USA, CARE UK and CARE Australia; CARE Canada was established in 1946. We are the lead CARE member responsible for coordinating the overall efforts of the CARE International network in Cameroon, Colombia, Cuba, East Timor, Indonesia, Jamaica, Kenya, the Russian Federation (Ingushetia and Chechnya), Zambia and Zimbabwe. CARE Canada operates projects in a total of 48 countries. Making Markets Work for the Poor is one of the key programming areas in CARE Canada’s most recent strategic plan. We embrace the UN Commission’s findings! Established track record of innovation in market-based programming, including a portfolio of projects in MSE development, microfinance, BDS delivery, agricultural marketing and trade facilitation. Particular concentration on commercialized smallholder agriculture. Social investing is a major focus - investor in Microvest, investment fund in MFIs; strong interest in public/private partnerships and non-traditional funding sources.

The origination of REAP: basic facts: 

The origination of REAP: basic facts In 2000/2001 CARE Kenya launched a pilot horticultural marketing and promotion project called the Rural Enterprise Agri-Business Promotion (REAP) Project (w/ support from IFAD, CIDA, AusAID). The project targeted smallholder farmers and its main objective was “to increase incomes of smallholders through commercial horticultural production and marketing opportunities on a sustainable basis.” To achieve this, REAP Kenya helped organize smallholder horticultural groups in Makueni district (incorporated as limited liability companies and owned and operated by smallholder farmers), and supported them with an integrated bundle of fee-based services in marketing, credit, inputs, extension and management through a Central Management Unit (CMU). The REAP CMU used a market-driven approach by securing forward market contracts for farmer groups and using this guaranteed income to secure services and inputs.

Why the horticulture sub-sector?: 

Why the horticulture sub-sector? Kenyan smallholders supply 60% of export produce. Sector employs 500,000 people (formal) & 2-3 million (informal); accounts for 10% GDP; ranks 3rd in foreign exchange earnings. Kenya has comparative advantages in cost of labor, location (tourist spin-offs; proximity to export markets in EU & ME) and climate. Horticulture sector, of all the agriculture sectors, is least controlled by GoK; high year-on-year growth. Profitability! - Given its high value, returns per hectare in horticulture exceed those from maize by a factor of 6 to 20. Though riskier than staple food crops and available only to farmers within close proximity to major transportation arteries, horticulture production for export remains highly lucrative. Consumer trend: increased purchases of fruits and vegetables from supermarkets, who demand reliability, trace-ability, & quality.

A few photos…: 

A few photos…

Weeding: 

Weeding

Aubergine (eggplant): 

Aubergine (eggplant)

Weeding aubergine: 

Weeding aubergine

Baby corn: 

Baby corn

Packing okra: 

Packing okra

Weighing/displaying vegetables: 

Weighing/displaying vegetables

Final product: 

Final product

The initial rationale behind REAP Kenya…: 

The initial rationale behind REAP Kenya… If we can develop a business model that…. aggregates a critical mass of ‘bottom of the pyramid’ farmers and links them to markets, is profitable for all players in the production to market chain, and is environmentally- & socially-responsible …then it will lead to significant and sustainable increases in income for poor farmers; and will be sustained and replicated by private sector investor capital and markets

REAP approach and results to date: 

REAP approach and results to date Key principles Farming as a business, not a hand-to-mouth survival strategy. Start with the market and work backwards. - Determine what the market wants (e.g. quality, standards, quantities, consistency, prices) Determine means of production/economies of scale that meet market requirements and is profitable for all players in the production to market chain All support services must eventually be sustainable by fees charged at competitive rates Results to date Length of relationship with exporters > 3 yr Sales in 2002 - US$89,247; Sales in 2003 - US$275,952; Sales in 2004 - US$383,558 # farmer owners/laborers – 975 Change in income – 1 to 4 times Uses of income – school fees; health care; assets; micro-enterprises.

What did CARE & VegPro learn from REAP?: 

What did CARE & VegPro learn from REAP? Interests & purpose overlap at the poor farmer - CARE => achieved development objectives (poverty reduction) through poor farmers owning commercially-viable businesses - VegPro => achieved business objectives (e.g. more product, consistency, profit, shareholder value, ETI compliance & corporate social responsibility) through smallholder producers However, producer-buyer relationship was not exploiting our complementary advantages. REAP missed out on: - VegPro’s horticulture value chain expertise - CARE’s social development expertise …and it was not commercially sustainable. VegPro had difficulty organizing farmers; REAP CMU had trouble making money; client farmer groups were not meeting production targets. Moreover, CARE was assuming all the risk, and project staff struggled wearing both an NGO and business hat.

A new way forward…the creation of ‘VegCARE’: 

A new way forward…the creation of ‘VegCARE’ Form a partnership to acquire complementary advantages, and compensate for each other’s competence gaps. Joint investment to share risk and reward…takes the relationship beyond producer-buyer. Create a new, for-profit business as an intermediary between smallholder farmers and markets to provide business services=> active intervention in the value chain. CARE needed to acquire expertise rather than try to develop it: - agronomy - export markets/business - Eurepgap compliance processes - business culture & acumen in a tough sector CARE Kenya secured US$450K in GDA funding from USAID to leverage co-investment (in-kind & cash) from CARE and VegPro ($450K); REAP CMU will be rolled up into a commercial company serving the needs of smallholder farmers.

Key features of the business model: 

Key features of the business model Organize farmers for vegetable production (group development, production planning, agronomy) Eurepgap certification & compliance, Ethical Trading Initiative (ETI) compliance Market linkages (with exporters, local buyers, business service providers) Donor supports company (incubation) for 2-3 years

CARE - VegPro Business Model: 

CARE - VegPro Business Model CARE DONOR PRIVATE SECTOR - knowledge of market/segment - good ideas (hypothesis =>research =>pilot) - technical expertise - on-going client support - social investment capital - market access - investment capital (minority equity stake) - technical expertise (agronomy) - delivery structure (e.g. branches, depots) allows us to go to scale; vertical & horizontal integration with markets and other sectors Who does what? social investment capital (leveraged funds from GDA) risk sharing (e.g. input supply fund) - technical expertise

Where we are right now: REAP to VegCARE : 

Where we are right now: REAP to VegCARE Roll-up of REAP and start-up of VegCARE is now underway Legal issues (formation of company, registration, shareholder agreement, board make-up, contentious issues, equity transfer, dividends, etc.) Strategic issues (vision, name, core values, logo/branding, regional focus, etc.) Operational issues (HR policies, financial, production systems, supervision/reporting structures, cost/revenue structure, etc.) Client selection (old & new clients selection) EUREPGAP/ETI strategies

What has REAP/VegCARE meant for CARE Canada?: 

What has REAP/VegCARE meant for CARE Canada? REAP Kenya has stimulated the development of several similar ventures in CARE Kenya and East Africa in a variety of sub-sectors: LIME (Livestock Marketing Enterprises Promotion) project - livestock AMI-Uganda (Agricultural Marketing Initiative) - sesame TUJIKOMBOE/REAP Tanzania - vegetables AGENT Zimbabwe, BDS Marketlink, etc. - other parts of value chain What do these projects have in common: - Start with the market and work backwards (sub-sector analysis, find leverage in value chain, mitigate risks, partner with private sector, etc.) - Focus is on grant-funding as seed capital; objective is spin-off/exit DBL approach: income for clients, income for CC/investors Investment analysis – IRR, DCF analysis, Sensitivity Analyses are used CARE is actively exploring a wide variety of investment vehicles for follow-on funding (“flow-through” limited partnerships, LSIFs, PRIs, SRIFs, etc)

Closing thought:: 

Closing thought: “I am enormously distressed that 200 million Africans remain hungry and malnourished…we Africans are the ones who must act to meet our food and nutrition needs in a sustainable way…The only way to stimulate and sustain measures to ensure food security, is to make access to markets possible. Agricultural production is only for three purposes: subsistence, commercial or as a hobby. Food production for subsistence only is not sustainable because you cannot feed the stomach only when you have no clothes, no shelter, no income to send your children to school and pay for medical bills…Engaging in Agriculture as a hobby is only sustainable for the rich and idle. Therefore, you cannot talk of sustainable food security without speaking of commercial agriculture, which means market access.” Uganda President Yoweri Museveni (2003)