In the Indian Himalayas, Farmers as Owners proves that farmers, joint venture companies, social investors and development cooperation organizations can successfully work together to serve themselves and the common good. Imagine that you are a farmer in an isolated village in the Indian Himalayas. Your family is growing apples on a small piece of land. Every harvest season you have to bargain with unreliable middle men about the price of your apples. Some years, the crop is good and so are the prices. But in years of crop failure, proceeds are miserable. You cannot afford to buy technology to improve quality and increase production, let alone invest in things like packing material, trucks to transport your apples to the market or a cold storage facility. Now, imagine that you are a Dutch entrepreneur. Your company produces state-of-the-art technology for the agricultural sector. You are a leading company in cold store technology for fruits. While growth in your home market has been stagnating, you look abroad to sell your products. India, a potential agricultural giant, seems to be a very interesting market for your machines and technologies. But how do you enter the Indian market with your superior, but expensive machinery? Further think to help the producers for providing them the optimum financial support to earn a respectful livelihood in their village and get them out of poverty to minimise the migration from green and healthy rural areas to fast growing slums in suburb of metro cities and at the same time get the fresh and healthy sustainable foods for yourself and your next generation. what to do and how to invest as a social investor no way except looking on either the tradition NGO led rural development or Govt. delivery system where hesitations seen in competency or commitments. It is not so easy to bring these groups together. The farmer cannot afford to pay for the technology of the Dutch entrepreneur – even when the farmer is organized in a cooperative or an association. Besides, where are does two potential partners going to meet each other? They do not speak the same language and their culture and geographical location form major obstacles to meet each other, let alone successfully work together. Joint venture Partnerships led by an Indian non-profit organisation SJS, developed and tested an innovative model that bridges the gap between the Indian farmers, Dutch social investor and the Dutch technology company. The model aims to set in motion a self-perpetuating structure that helps farmers to invest in their business, expand their roles in the value chain and capture incremental value for themselves. SJS, SHGW and FFT established joint venture companies in which Indian farmers (who are themselves organised in legal trusts) have become equal business partners with Dutch social investor SHGW and Dutch agro-technology company Fresh Food Technology and SJS itself. Financed with a loan of a social investor, the joint ventures have invested in facilities that improve efficiency and profitability. More specifically, the joint ventures invested in apple collection centers at the village level, where individual farmers can collectively sort, grade, pack and pre-cool their apples. Later on, the joint ventures collectively invested (again financed with a loan of a social investor) in the construction of a long term cold storage, in refrigerator trucks and in an apple juice processing plant. Self interest with shared interest In theory, all four partners in this model (producers collective, joint venture agri-company, social investor and non-profit) serve both themselves and the common good. Through the joint venture, farmers get access to and become owners of technology and infrastructures that improves the quality of their produce and reduces waste. More importantly, the cold store enables farmers to sell off-season at far higher prices. The increased profits that are generated are partly used to pay off the loan (and interest) to the social investor, and partly flows back to the farmers. When the farmers have paid off the loan, their financial benefits will be even higher. Fresh Food Technology realised market entry in India. The Dutch company can sell and show its technology and obtain business experience in a new market with huge potential. In addition, it contributes to rural (job) development in line with its CSR policy. The social investor realizes social impact by structurally improving farmers’ incomes, creating jobs in rural areas and thereby mitigating migration to cities. Also, the investor creates social impact by reducing food waste. On the financial side, the investor gets invested funds back. Finally, non-profit SJS, realizes its goal of structurally contributing to rural prosperity and promoting entrepreneurship among farmers. It can use its position in the joint venture companies to protect its long term mission, balancing the social interests and the business mindset. SJS can prove itself as an innovative non-profit organization that embraces business as a major partner for development. Successful pilot project So far for the theory. Let us look how the partnership model worked in practice. In fact, Farmers as Owners, as the partnership has been called, has been a great success. At the end of 2014, over 3.500 farmers in the state of Uttarakhand are participating in 9 joint ventures. These farmers have seen their incomes rise significantly (20-30%). Their transport and trade risks have reduced tremendously and they have saved time on packaging, transport and sales. In the mean time, Fresh Food Technology (FFT), the Dutch agro-tech company, has successfully entered the Indian market through its wholly-owned daughter company Fresh Food Technology India (FFTI). The cold store that was commissioned by Farmers as Owners has attracted a lot of interest from industry, government and media. Since 2011 the company has build over 100 cold stores (small and larges) for commercial parties throughout India. So both commercially and socially, Farmers as Owners has turned out to be a success for FFT. The social investor has many reasons to be satisfied as well. Its loan to Farmers as Owners has not only structurally increased the incomes of farmers by 20-30%, it has also created 60 full-time jobs and part-time employment for a total of 10.000 man-days. Further, it has significantly reduced food waste in the area where it operates (down from national average of 30% to 6%). On the financial side, 10% of the initial investment has been repaid in 2014 – exactly according to schedule. Based on above-mentioned results, SJS can easily claim that its pilot project Farmers as Owners is a success. The non-profit has made an important step towards its goal to structurally contribute to rural prosperity and promote entrepreneurship among farmers. It has also gained experience working with different partners and developing the partnership model. In doing so, SJS has put itself on the map as an entrepreneurial non-profit organization, but most importantly, it has created a pilot project that can be scaled and replicated in the future. Future projects All partners believe that this partnership model can be applied throughout India, and potentially the world. To replicate the concept and scale the impact, SJS-chairman Laxmi Prakash Semwal has established the Annamrit Farmers as Owners Foundation in January 2015. This foundation will initiate new projects based on the partnership model. For these new projects, the foundation is looking for producers, entrepreneurs and social investors. Besides the foundation wants to encourage and inspire interested parties to copy its partnership model independently.
KEY LEARNINGS FOR A SUCCESSFUL PARTNERSHIP Producers The producers are at the core of the partnership model. Their understanding of the concept, their long term commitment to it and trust in the partners is crucial for success. As the concept is quite complex, it is not always easy to explain this to often illiterate farmers. However, it is necessary to make clear that the farmer group becomes the equal business partner in the joint venture next to the non-profit and the (foreign) agro-company. This means that the farmers own the facilities of the joint venture together with these partners. If this ownership is not stressed enough, farmers will continue to regard the partners as just another middle man and the facilities of the joint venture as being of someone else. Whenever there is something to celebrate, bring all partners together and celebrate. The long term commitment of farmers to the partnership depends on their understanding of it. While the partnership will lead to increased prosperity in the long term, in the short term, this could be perceived otherwise. This becomes clear in the farmers choice for which crop to grow. When the joint venture invests in facilities for a certain crop, it has to be sure that the farmers continue to grow this crop. This is not always evident. When crop failure hits regularly, government subsidies change or world market prices vary, farmers can be tempted to shift to other crops that are more lucrative in the short term. This possibly creates a problem for the profitability of the made investments. Keep in mind that the producers are not natural born entrepreneurs. In fact, they are mostly rather risk averse. All partners have to invest heavily in building mutual trust. This is a necessary, time consuming and sometimes challenging task. Isolated farmer groups have often been treated badly by outsiders in the past. While non-profits might have a natural bond with producer groups, entrepreneurs and investors are mostly regarded with deep mistrust by both farmers and non-profits. Make professional agricultural training a part of the partnership. Bring regular visits to farmer communities and make a point of honest and open communication. Stick to the shared mission and keep your promises, especially whereas finances are concerned. Also, remember that you do not operate in a vacuum. Villagers with good connections to by-passed middle can spread rumours or try to undermine your efforts to build trust. The trust relationship is also essential to improve the feedback of producers to the other partners. The partners must understand the difficulties that producers face in the production process and in the value chain to come up with solutions. Keep in mind that whatever the joint venture decides to invest in, the costs of equipment, technical assistance and working capital must be recovered by the additional income that farmers’ companies are able to generate as a result of the investments.
-> Entrepreneurs The company that joins the partnership should offer services and products that increase agricultural output, improve infrastructure, ease market access or otherwise add sufficient value to the produce of the farmers. These products or services must give the joint venture company a clear competitive advantage in the market. Apart from know-how and technology, the company partner will be in charge of the day-to-day management of the joint venture. The business mindset and experience of the company partner are essential for the success of the joint venture. The company partner is also expected to continuously improve efficiency and drive innovation, thereby reassuring the investor that the money is well invested and managed.
-> Organizers The organizing non-profit functions as the glue between all partners. The organizer is primarily responsible for building relations of trust between all parties. It has to balance and guard over the social purpose of the business on the hand side, and the business rigour and financial accountability on the other. The organizer is the driving force behind the initiative and the partner that probably has the most complete overview of its progress.
-> Investors As the partnership model is developed for a social business enterprise, finance should ideally come from an investor who understands and has experience with the two-sided character of a social business. Yes, the business has a social goal, but more importantly, it should be a profitable business to be sustainable. The investment should therefore be a loan that has to be repaid (with interest) and cannot be just philanthropy or a gift. To guarantee the interests of the investor and to minimize risks, the investor will be represented in the board of the joint venture. By doing so, the joint venture company can also benefit from the financial knowledge of the investor.
THE PARTNERSHIP MODEL: STEP BY STEP
Step 1. Analysis and feasibility study
->What potential do producers have to move up the value chain?
->What sort of processing could add value? How much value could be added? How viable is this?
->What products/services are needed?
->What investment is required? Include working capital requirements during the operational phase.
Step 2. Business plan / secure funding
->Write and present your business plan to social investors and (development) banks.
->Explore all other funding options (subsidies related to the promotion of rural development, export/import subsidies, grants from development organizations, soft-loans from development banks)
Step 3. Set up the legal organization
->Protect producer interests
->Secure business rigour by professional management
->Install Board of Directors that includes representatives of all partners. Farmers have a minority in the board.
->Company management reports to the Board of Directors.
->Align the Articles of Association of the farmer groups with the Articles of Association of the joint venture companies.
->Anchor long-term, gradual ownership transfer arrangement in Share Holders Agreement.
->Make provisions in case one or more groups of farmers are to discontinue. Protect the continuity of the joint venture company.
-Anchor the allocation of profits of the company to be
1) repaid to the social investor
2) capitalize the company
3) pay premiums to supplying farmers. Sharing the economic benefits with the farmers (like premium payments) are to stimulate sufficient supply of good quality.
Step 4: Design, construction, team-building and start
->Source the best available technologies and suppliers
->Secure clear contractual agreements and payment conditions
->Recruit a professional team of qualified staff
->Train the team to understand and cope with the complexity of the social business, in particular to involve and report to all stakeholders concerned: from farmers to the (social) investor.