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 InstrumentDescription Beneficiary-owned organizationGroup 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. ContractsBeneficiary 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. LeaseAgreement 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. EquityCommercial 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 InstrumentBeneficiariesCommercial partner Beneficiary-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 InstrumentBeneficiariesCommercial partner Mentorship 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 InstrumentBeneficiariesCommercial partner Contract 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 InstrumentBeneficiariesCommercial partner Lease 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 InstrumentBeneficiariesCommercial partner Equity Access to knowledge, finance and market Profit sharing Access to input / land Government policies / financing Joint ventures Equity sharing

Instruments/Dimensions – in theory 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

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