INCLUSIVE BUSINESSES IN AGRICULTURE

Ward Anseeuw & Wytske Chamberlain

University of Pretoria / CIRAD

Outline

IBs Definitions of IBs

Contextualising IBs Drivers behind IBM South Africa

Assessing IBs Instruments of inclusiveness Dimensions of inclusiveness

Transversal analyses/Discussion/Conclusion

Definitions and assessment of IBs

What is an Inclusive Business?

A profit oriented partnership between a commercial agribusiness and low-income communities or individual, in which the low-income community or individual is integrated in the commercial agricultural supply chain as suppliers of land, produce or value-sharing employment with a particular aim to develop its beneficiaries.

What is an Inclusive Business? Inclusion of smallholders: production of primary

crops, excluding purely agro-processing initiatives and consumers Beneficiaries - Suppliers of land, produce or

(value-sharing - see hereafter) employment. Partnerships – an essential aspect often lacking

Arrangements for sharing ownership, decision-making, risk and reward between smallholders and agribusinesses or large commercial farms.

Inclusive: Collaborative relationship, but also fair and equitable terms

Pure employment contracts are not considered (unless linked to other instruments - equity sharing, added value distribution mechanisms, etc.

What is an Inclusive Business?Not to be confused with Inclusive growth

Microeconomic dimension captures the importance of structural transformation

Macro dimensions of growth and development referring to changes in economic aggregates such as the country’s gross national product (GNP) or gross domestic product (GDP), etc.

Inclusive development Macro-economic trends Integrates principles of human rights, such as

participation, non-discrimination and accountability, and social safety nets, public services and fiscal policy

South Africa and beyond

Cross road of several observations

Rush for land and renewed interest in agriculture

Impacts must be nuanced… …especially on smallholder farmers

Call for alternative models Non land based investments Equitable/sustainable

Linking smallholders to large investments

Cross road of several observations The “modernization” of markets

Dismantling of international commodity agreements and the Restructured markets: Increasingly vertically integrated

markets Rise of supermarkets and closed value-chains in developing

countries (Swinnen, 2007). Industrialization and globalization of agriculture

Tighter alignment of supply chains and emergence of fewer larger farms and agribusinesses (Reardon et al., 2003)

Exclusion small-scale and emerging farmers from mainstream agro-food markets (Louw et al., 2008). Smallholder and emerging farmers lack economies of scale Limited access to inputs/technology …to respond to competition and to norms

Cross road of several observations Basic inclusive instruments, such as contract

farming, are not a panacea Positives: Improve production, access to services,

access to resources, participate in competitive markets subject to strict standards

Negatives: very few smallholder contract farmers results mitigated (dependent on internal and external

factors) transfer of production management and decision-making

processes to agribusinesses

The need of something more structured/inclusive

South Africa – Similar predecessor Extreme liberalization of agricultural and agri-

food markets, Consumer-driven and vertically integrated

20 years of land reform, segregated configuration persistent Status quo of the smallholder agricultural

activities - high rate of failure of many of the land reform projects

Policy and governance are often highlighted Also market-related (lack of access to markets),

managerial (financial management of commercial enterprises), and institutional aspects (not recognized ownership structures, lack of access to credit)

Call for IBs

South Africa – Similar predecessor Longer term engagement of large

agricultural enterprises (agribusiness & commercial farmers)

Well-developed business and financial instruments

Large number of cases, some with track record

South Africa as an « ideal » case study, to learn from

Why Inclusive Business Models?Drivers

Linking smallholders to large agri-businesses and commercial farm enterprises

Towards a new paradigm 60-80’ - State driven agriculture 80 – 2000’- Private agriculture, in a

liberalised environment Present - Linking small to big

Why Inclusive Business Models?Drivers for stakeholders

Agribusiness Access to land/crops Corporate Social Responsibility Favourable financing (government/DFI)

Beneficiaries Access to knowledge, market, financing,

inputs Government support/guidelines

Assessing IBs

Dimensions of inclusiveness

Internal inclusiveness Ownership: land, assets, produce Voice: decision taking power Risk: financial, production Benefits: financial, social

External inclusiveness / linkages (Local Economic Development potential) Input Market Labour

Scalability Internal growth potential Sustainability Replicability

Instruments of inclusiveness

Instrument DescriptionBeneficiary-owned organization

Group of farmers or community members (beneficiaries) organized in a (commercial) collective with a common goal. Beneficiaries can be active farmers, passive landholders, workers or a community association.

Contracts Beneficiary growing crops for commercial agribusiness based on pre-signed agreement

Mentorship (Temporary) assistance to emerging farmers (beneficiaries) to overcome lack of knowledge on agricultural and business practices and market access.

Lease Agreement between land holder(s) (beneficiary) and commercial entity for the commercial entity to operate on the beneficiary’s land. Payment based on benefit-sharing clause and/or fixed amount.

Equity Commercial entity with shared ownership between beneficiary (community or employees) and commercial agribusiness.

Beneficiary owned organization

Ownership Potentially high

Voice – Increases through beneficiary organization Negotiation power dependent on skills and internal

organisation Risk

External low - Always shared amongst beneficiaries Internal high - Grant funding required, positive impact on risk

Benefits Considerable, although often to be shared Take time to materialise

Instrument Beneficiaries Commercial partnerBeneficiary-owned organization

• Scale economies• Improved market access /

bargaining power• Risk sharing

• Lower transaction costs

Cooperative structures

Mentorship

Ownership High – own land Produce belongs to beneficiary

Voice Should be strong, but mentor often in charge

Risk Risks remains with farmer

Benefits Enables increase in production and skills Market access

Instrument Beneficiaries Commercial partnerMentorship • Access to knowledge,

finance and market• Government policies /

financing• Corporate Social

Responsibility

Mentorships

Contract

Ownership Shift in ownership - Beneficiary does not own produce

Voice Dependent on the agreement with commercial partner

Risk Shared with commercial partner Limited through support from commercial partner

Benefits Considerable due to market opportunity

Instrument Beneficiaries Commercial partnerContract • Access to inputs,

knowledge, finance and (input/output) market

• Access to produce / land

Contract farming Outgrower

schemes

Lease

Ownership Land owned by beneficiary as leaseholder, no control over production

Voice Through lease, no control over what happens to land

Risk Considerable for commercial partner operating in “hostile” community Can be shared in case of equity in operating company

Benefits Limited – although can share in produce/profit as rental fee …but at little to no effort

Instrument Beneficiaries Commercial partnerLease • Income from land with

limited effort• Possible profit sharing

• Access to land

Lease-management

Equity

Ownership Is essence of equity instrument Always in name of beneficiary-owned organization

Voice Depends on agreement Needs time and support from commercial partner

Risk Through ownership, beneficiaries are exposed to operational

risk Equity funded through grants, no individual financial risk

Benefits Considerable: skills, economic, usually employment But can take long time to materialise

Instrument Beneficiaries Commercial partnerEquity • Access to knowledge,

finance and market• Profit sharing

• Access to input / land• Government policies /

financing

Joint ventures Equity sharing

Instruments/Dimensions – in theory

Ownership

Voice

Reward

Risk 0

20

40

60

80

100

Beneficiary owned organization Mentorship

Contract farming Lease

Equity

In reality:- Combination of instruments- To overcome obstacles

IBs

The cases

Situated across the countries: subject to different provincial policies

Crops include staples (maize), cash crops (vegetables/sugar), orchards (fruit), dairy and cattle farming and forestry

Production for both domestic and export market

All cases implemented after 2002

Transversal analyses/

Discussion/Conclusion

Diverse outcomes

Complex models Combining numerous instruments. Over time,

instruments change within same project (f.e. TechnoServe/Massmart where TS steps out, mentorship changes to equity in pack house)

Diverse outcomes, even for same instrument It is not the instrument itself that only

determines the inclusiveness and the outcomes Leader, drivers and project circumstances play

role

Diverse outcomes

BMBBenoni

Mphiwe Siyalima

Winterveld Farmers Union

Technoserve/massmart

Tongaat SugarMoletele Richmond

Mondi Kranskop

Moletele New Dawn

Seven Stars

Gxulu Berries

0

2

4

Ownership

Ownership

BMBBenoni

Mphiwe Siyalima

Winterveld Farmers Union

Technoserve/massmart

Tongaat SugarMoletele Richmond

Mondi Kranskop

Moletele New Dawn

Seven Stars

Gxulu Berries

0

2

4

Voice

Voice

BMBBenoni

Mphiwe Siyalima

Winterveld Farmers Union

Technoserve/massmart

Tongaat SugarMoletele Richmond

Mondi Kranskop

Moletele New Dawn

Seven Stars

Gxulu Berries

0

2

4

Risk

Risk

BMBBenoni

Mphiwe Siyalima

Winterveld Farmers Union

Technoserve/massmart

Tongaat SugarMoletele Richmond

Mondi Kranskop

Moletele New Dawn

Seven Stars

Gxulu Berries

0

2

4

Benefits

Benefits

Outcomes – Internal inclusiveness

Ownership …. but no control Often rent-seekers

Voice …. Low, if no capacitation, empowerment, control Skills divide commercial partner / beneficiary

makes true empowerment in short time frame unrealistic

Risk … reduced, but …

Benefits (financial/social) Low

Outcomes – External inclusiveness External inclusiveness

Input/Market/Labour – on project basis, more nuanced on beneficiary basis

Linkages to Local Economic Development low Scalability

Internal growth potential (especially smaller projects)

Sustainability questionable Government support necessary… but dependency,

inefficiency Low replicability

Complexity Dependency on driver individuals

Common conditions Ownership – land, produce!

Although not a a panacea, positive impact Power-sharing

Equity Decision-making entities

Effective capacitation Combination of ownership, empowerment and voice

The importance of third parties … with ownership Separation/balancing of power control Financing to kick-start and overcome lack of finance of

beneficiaries

Common conditions

Necessary support IBs alone, not alternative/panacea

Realistic IBs Financial sustainability Community trap (limited skills transfer,

expectations beneficiaries, additional risks for partners)

Transparency IBs – between partners Within partners (community/traditional

leadership)

Towards genuine transformation? Avoiding large-scale land acquisitions

Marginalising local farmers, particularly smallholders

IBs = alternative for large-scale land acquisitions Can lead to significant results, especially on

project basis Results depend on specific conditions Different inclusive instruments allow overcome

certain obstacles

Towards genuine transformation? Ibs - Project basis

Specific impact Impact marginal (per project / overall)

Shift towards corporate farming/value-chains If not through ownership, it is through control

No long term reflection on structural agrarian transformation Danger of approving IBs as sole model

What about endogenous growth of farmers???? I think it is all about finding the farmer… …but also about giving farmers opportunities