MDF Lead Firm Cases compilation, dec2008

Thematic Working Group - Working with Lead Firms

Compilation of Cases On Working With Lead Firms

Compiled by

IFC-SEDF

Dhaka 11 November 2008

‘PARAGON POULTRY CARE LABORATORY’ CASE STUDY Industry Overview: Poultry industry as an emerging agri-business started during the eighties in Bangladesh. With the beginning of small scale layer and broiler farming in the early 1990’s, the production stage has taken up the shape of an industry. In addition to production and sale of day-old chicks, live chickens, eggs and poultry feed, large companies in Bangladesh have also started to produce processed chicken meat and further processed products. The industry has attracted investors’ attention and has made notable changes in the last decade for commercial poultry production. As of 2005, the private sector has invested about US $887 million into poultry industry

Bangladesh Poultry Industry: At A Glance1

Total Investment (2005): US $887 million Output Market: About US $1 billion (1.6% of GDP) Employment Generation: 5 million (Direct and Indirect) Women Employment: 25% Livestock to Agriculture GDP: 16.42% [USD 1.98 billion] Meat consumption/person/year: 3 kg/person/year; (Thailand – 14 kg) Small Farm Size: 500-2000 Birds Number of Farms: 150,000

Access to good quality laboratory services is one of the major constraints in the poultry industry. This specific IFC-SEDF intervention facilitated improvement of laboratory services that were being provided to small (500- 2000 birds) and medium farms (including hatcheries) in the area. Gazipur is considered the ‘Poultry Capital’ of Bangladesh having about ten thousand micro, small and medium farms in and around the district. The Poultry Care Laboratory of Paragon Poultry Ltd. was established in Gazipur district to provide technical back-stopping services to poultry units under the umbrella of the Paragon Group. So even though the laboratory extended services to external customers on commercial basis, the laboratory was indifferent to customers needs and the customers were dissatisfied with the quality of services. Discussions with Paragon and Poultry farmers led to IFC-SEDF assistance to improve the existing diagnostic facilities and quality of services. The objective was to make it technically competent and financially sustainable. It was identified that without improvements in laboratory management, the technical services would not yield desired results. The technical assistance followed a structured approach and started with an analysis of the existing operations and management system. Active participation of the top management at Paragon facilitated fast decision–making to translate recommendations into actions. The firm received practical on-site advisory services2 and four out of nine recommendations were immediately adopted.

1 Sources: Sub-sector and Value Chain Analysis of Poultry, IFC-SEDF 2005; National Avian Influenza (AI) Plan, Government of Bangladesh, 2006 2 Example: Eight technologies transferred; 20 technical procedures generated; 18 technical guidelines generated; four key staff provided practical on-the-job training

1/3

After the departure of the expert, the management took steps to develop a new business strategy. The lab was established as a Strategic Business Unit (SBU) with clearly defined responsibilities of the technical staff, investment outlays, and a marketing approach and started to operate as a financially independent unit. The management expects that it will be viable through extending quality services within the firm as well as to external clients. The immediate results made the management more confident to undertake an initial investment of BDT 1 million. This investment and change in management system and attitude resulted in increased revenue. The following table provides summary of revenue generated and compares the before and after situation:

Paragon Poultry Care Lab, 2007 Indicator BDT US $ January – May (Monthly Average) 19,293 284June – August (Monthly Average, Post TA) 40,083 589Present Investment in Equipment (Post TA) 1,000,000 14,706Future Estimated Investment in Improved Laboratory & Infrastructure (Planned) 2,000,000 29,412

IFC-SEDF assisted TA, together with better communication between the local poultry association and Paragon, has spurred the management into looking at the laboratory as a viable business unit. Paragon has committed further investment in equipment and human resources. As the poultry industry in Bangladesh is moving to the next level and new threats such as bird flu enhance the value of sound technical back up, specialized services and providers will have a strategic importance in the value chain. The cooperation between Paragon and IFC-SEDF is also proving to be a lesson for other lead firms having similar operations. Poor quality laboratory services is only one element of making small poultry farms more sustainable. Other key issues such as poor but expensive feed nutrition, supply chain inefficiency3 are also impacting poultry farmers’ income and investments. To address these issues IFC-SEDF partnered with large poultry companies such as suppliers of Day Old Chicks and Poultry feed (lead firms). However significant challenges and opportunities remain on the environmental and social development side. Large poultry waste emerging from both small and large poultry farms is yet to be addressed. Similarly no analysis has been done so far on employment conditions in small poultry farms. This case study highlights that sub-sector analysis is key to identify what needs to be done and who in the supply chain is best placed to transmit change alongside ongoing market based interactions. This necessitates diversity of approaches, providers and interventions. Not all interventions succeed and most triggers causing significant change 3 For example Enterprises selling Day Old Chicks and Poultry feed send technical staff to agents selling these products to farmers. However there is absence of technical interaction between technical staff and farmers and farmers are unable to feedback to supply companies.

2/3

seem very simple after the event (not rocket science). But in the context of poorly linked supply chains, inadequate information and co-ordination failures, there are significant market failures. These market failures present opportunities for leveraging a significant development return on small timely investments by projects such as IFC-SEDF.

3/3

SEEP Network Annual Meeting

Role of Lead Firms in the Value Chain: Benefits to Micro and Small Enterprises

October 28, 2005

Lead Firms in the Value Chain: the Development of a Globally Competitive Cashew Industry in Mozambique

THE HISTORY OF MOZAMBICAN CASHEW IS A WELL KNOWN AND RECENTLY POSITIVE STORY

• World’s leading cashew nut producer (240,000 t/year at peak),

• Portuguese-run plantations

• Considerable domestic processing industry with reputation for quality

• Promising growth in medium scale decentralized processors through new entrepreneurs

• Little progress being made in orchard regeneration

* Significant differences in datasets examined exist although there is agreement on overall trends, ** 1973-1974 average onlySource: Cashew Week publications; ‘Developing the Cashew Nut Industry in Mozambique’ Report, INCAJU; FAO stat; ‘When Economic Reform Goes Wrong: Cashews in Mozambique’ McMillan, Harvard University

Collapse Attempted recovery Relapse New growth

1920’s to 1974 1975 to 1994 1995 to 1998 1999 to 2001 2002 +

• Production collapses in the space of a few years, due to:–Exile of white

plantation owners, technicians and entrepreneurs

–Marxist policies of fixed raw nut prices

–Dislocation of rural population, due to civil war

• Raw nut export banned

• Marxist policies abandoned

• Civil war ended• New investment in

processing technology, based on large plants and mechanical processing technology

• Introduction of high export taxes on raw nuts, to support domestic processing industry

• Abandonment of raw nut export taxes, forced by World Bank leads to collapse of uncompetitive domestic processing industry

• Continued lack of investment in tree planting and clearing hamstrings raw cashew nut production

Raw nuts, period average, 000’s tons*

175

51 26 12 3

55

621 42 62

Raw nuts processed in Mozambique

Raw nuts exported from Mozambique

**

**

Growth

2

Africa*

CASHEW MARKET OVERVIEW

*Excluding MozambiqueSource: Indian Cashew Association, TechnoServe estimates; includes only traded nuts (excludes nuts processed/consumed at village level)

Market size/split

Market size/split

CommentsComments• US and Europe are the main

single markets• Mozambican domestic

market is insignificant (<0.04%)

• India processes the bulk of world cashew kernels, and has to import raw nuts to supply its factories

• Mozambican processing is insignificant (<1%)

• Mozambique produces only 3% of world cashew nuts, down from more than 20% in 1972

• 90%+ of Mozambican nuts are processed abroad

3

Processing ConsumingGrowing

India

Vietnam

US

Europe

100%=1,470,000 tons raw nuts

Brazil

Africa*

OtherMozambique

100%=230,000 tons finished kernels

100%=230,000 tons finished kernels

India

India

Other

Vietnam

Brazil

Africa*Other

Brazil

THE CASHEW MARKET IS DIVIDED INTO THREE STAGES: GROWING, PROCESSING, AND CONSUMING

Source: Interviews, team analysis

TO REALIZE THE POTENTIAL FOR MOZAMBIQUE TO GROW, THE INDUSTRY MUST OVERCOME SEVERAL CHALLENGES

Shrinking margins

Demand uncertainty

Capacity limitations

Challenges to future growth and success

• Raw nut factory gate prices rising due to exporter competition and increasing transport costs

• Raw nut export tariff protection (18%) likely to fall eventually

• NGO support likely to be gradually reduced in recognition of industry success

• Kernel price falls, especially short term, possible due to increasing production and market speculation

Resulting priorities for industry

1. Ensure low total cost to market

• Global production expanding• Mozambique still relatively less attractive for

buyers due to scale, quality and delivery reliability

• Many existing entrepreneurs appear to be approaching effective capacity

• Aging tree orchards means declining raw nut supply and falling quality

4. Encourage replanting and quality nut production

3. Expand production

2. Secure future demand through reputation building

5. Ensure national significance of industry is reflected in policy making

4

MOZAMBICAN CASHEW INDUSTRY – FUNDAMENTAL BELIEFS Comments

Excellent future prospects

for cashew nuts

Excellent future prospects

for cashew nuts

• High US per capita consumption (250g per person per year) –strong catch-up potential for other markets, both EU, Asia and emerging economies

Mozambique has strong potential…Mozambique has strong potential…

• Mozambican climate is excellent for cashew growing evidenced by fact that 30 years ago Mozambique was the leading producer

• High availability of low cost labor

…if approached in the right way

…if approached in the right way

• The failures of the last 30 years can be ascribed to a combination of civil war, Marxism and inappropriate industrial policy (focus on large scale, expensive, but ineffective processing plants, lack of farmer incentives)

• Currently, liberalized industrial and economic policy leaves the field clear for new players

• Suggested approach is to use smaller scale processing plants with technology and management appropriate to local conditions

5

THE POTENTIAL FOR A GLOBALLY COMPETITIVE CASHEW INDUSTRY IN MOZAMBIQUE IS HIGH. IN 2002, TECHNOSERVE BEGAN WORKING WITH A LOCAL ENTREPRENEUR TO DEVELOP SMALLER SCALE PROCESSING PLANTS

*Process is based on manual processing method used in Kerala, India [world’s leading cashew processor], but adapted to Mozambican conditions** 120 ton pilot plant example; total equipment cost is around $40.000, plus around $30.000 for necessary buildingsSource: Antonio Miranda, TechnoServe cashew client

7. Sorting 8. Packa-ging

2.Steaming 3.Air drying 4.Shelling 6. Peeling5. Oven drying

1.Calibration

Basic processing Post-processing

DescriptionDescription• Raw nuts

are steamed under high pressure

• Kernels are sorted and graded (size, wholes, butts, white, scor-ched)

• Kernels are peeled

• Kernels are CO2-flushed and vacuum-packed in 25 lbs bags (2 to a carton)

• Kernels are oven-dried

• Nuts are cracked (shelled), to free the kernel

• Steamed nuts are dried, to make shell brittle and easy to crack

• Raw nuts are graded into batches based on nut size

25lbs

25lbs

50 lbs

6

THE HEART OF SMALL SCALE APPROACH IS A SIMPLE, 8-STEP MANUAL CASHEW PROCESSING METHOD DEVELOPED BY TECHNOSERVE & MIRANDA INDUSTRIAL. THIS PROCESS IS IMPLEMENTED IN RURAL AREAS – CLOSE TO THE SOURCE OF RAW MATERIAL

• Push processing costs as low as possible - a function both of level of salaries, and efficiency of workers

• Low cost compared to mechanical shelling–Effective manual shelling method–Low labor cost in rural areas–Well-managed operation

2. Low operating cost2. Low operating cost

• Push capital costs per kg. of processed nut as low as possible -a function of level of investment, capital efficiency and capacity utilization

3. Low capital cost3. Low capital cost

• Smaller scale plant’s capital costs only 25% of large scale plant

• Smaller scale plants more likely to achieve 100% utilization

• Profits are highly dependent on average sales prices - reliant on the proportion of valuable whole nuts in the finished product

• Manual shelling has superior quality to mechanical shelling, if workers are properly trained and incentivized

4. High output quality4. High output quality

1.Competitive sourcing of quality raw nuts

1.Competitive sourcing of quality raw nuts

Description

• Buy nuts at low but fair price (including transport costs)

• Buy best possible quality nuts

• Placing smaller factories in rural areas allows for shorter transport distances, and cuts out middlemen

• Large plants do not source raw nuts at lower prices than smaller plants

Advantage of smaller scale methodologySuccess factor

SEVERAL KEYS TO SUCCESS WERE IDENTIFYING THE RIGHT PROCESSING TECHNOLOGY AND ORGANIZING FOR COMPETITIVENESS

Source: TechnoServe, World Bank report on Mozambican cashew industry7

• 300 jobs created paying >$15,000 in salaries per month

• ~35% female labor force

• Employment conditions include:–Minimum wage salary–1 month paid holiday–All insurance, health and

pension entitlements–1 meal per day–Child care facility

8

EACH PROCESSING FACTORY CREATES MEASURABLE POSITIVE IMPACT FOR EMPLOYEES, FARMERS, RURAL COMMUNITIES AND THE BROADER ECONOMY

• Reliable direct procurement from ~10,000 farmers

• Increased payment for qualityraw nuts (exporters mix quality and underpay for good nuts)

• Extension program–Provision of seedlings from

processor-owned nursery farm–Farm management training–Input supply at reduced cost

• Increased export earnings

• Essential infrastructure investment (e.g. roads, airstrip)

• Processor-funded projects (e.g. schools, healthcare)

• Employment creation for support services (construction, maintenance, transport etc)

• Stimulus to community economy, secondary effects

• Reducing HIV/AIDS risk from employment-driven migration

• Additional industry creation for by-products (e.g. CNSL processing)

Single factory: 1000MT pa raw

nut capacity

Impact for employees

Impact for smallholder farmers

Impact for community and economy

TechnoServe, CLUSA, and ACDI/VOCA are implementing USAID’s Emprenda program in Mozambique to drive

development of supporting industries, improve coordination of stakeholders, and build local capacity to carry this forward

“LEAD” FIRM -- TECHNOSERVE ASSISTED AN ENTREPRENUER TO LAUNCH A SINGLE PILOT PLANT

9

• Assessing global performance benchmarks and developing initial business plan

• Providing world class advice focusing on processing productivity and quality

• Creating links to producers and supporting raw nut quality improvement

• Creating links to export markets

• Assisting in raising investment and working capital

• Identifying additional entrepreneurs

TechnoServe and partners helped by:• In 2001, Antonio Miranda, a

Mozambican entrepreneur, piloted a small-scale, manual, rurally located processing plant

• In 2004, he opened a second 1,000-ton factory – with revenues over $1 million

• In 2004, we worked with 11 other entrepreneurs – trained by Miranda – totalling more than 7,000 tons of processing capacity. Over 1,800 processing jobs created in areas with little formal employment.

• Producers are paid premiums up to 60% over that paid by traders

• In 2005 the firms will purchase almost $3 million in raw material, from 80,000 small-scale farmers

Antonio MirandaEntrepreneur’s qualities:• Innovative• Visionary• Thrifty• Socially conscious

IMPACT OF GROWTH OF CASHEW PROCESSING ON SMALLHOLDER PRODUCERS

2003

# of smallholder producers

10

Value of purchases from smallholders

2007

2004

2005

2006

146,000

Source: TechnoServe client data and projections

9530

41,800

79,800

111,500

$ 5.1 Million

$ 574,000

$ 1.4 Million

$ 2.8 Million

$ 3.9 Million

HAVING STARTED WITH A SINGLE ENTREPRENEUR, TECHNOSERVE NOW WORKS WITH 11, WHO ARE EXPECTED TO PURCHASE FROM 80,000 SMALLHOLDER PRODUCERS THIS YEAR

• Each family sells between 80-100 kg of raw cashews• Average payment per family is $40• Additional extension services (such as assistance with replanting cashew trees, groundnut production) to be offered by processors

11

*Over 1,000 local residents applied for the first 70 positions at Miranda Industrial’s factory

Atija Soalahe, 33 years old, widow, 6 children, factory worker at Miranda Industrial

“I really like working, and I really like working here. Now I have money to feed and educate the children.”

“I’m very satisfied with the working conditions here.”

“Many people cried because there weren’t enough positions at the factory for them to get a job”.*

“I want the factory to grow really big.”

“Maybe one day we can have a hospital and a daycare center.”

CASHEW PROCESSING IS ALSO BECOMING A SIGNIFICANT GENERATOR OF EMPLOYMENT IN RURAL MOZAMBIQUE. IN 2003-4, 11 NEW CASHEW PROCESSORS CREATED 1,800 JOBS IN NORTHERN MOZAMBIQUE…

12

CRITICAL TO THE SUSTAINABILITY AND SUCCESS OF MOZAMBIQUE’S CASHEW PROCESSORS IS A NEW HOLDING COMPANY: ASSOCIATION OF AGRIBUSINESSINDUSTRIES (AIA), ANOTHER “LEAD” FIRM

• A private holding company (not an association) formed by leading cashew processors (TechnoServe clients) in Mozambique

• The primary marketer of kernel for its members

• Acts as quality control agent (HACCP, EurepGap) with a “three strikes and you’re out” system

• Provides training (and other technical assistance) to members

• Currently in the process of launching a new brand – Zambique – to communicate the superior quality of Mozambican kernel

• Coordinating industry to increase t ki it l

TechnoServe is assisting AIA to build its capacity so that it replaces TechnoServe as the major industry service provider within three years

WE ARE APPLYING THE LESSONS LEARNED IN OTHER GEOGRAPHIES AND SECTORS…

•Mozambique:

– 11 processors operating

– Entrepreneur owned service company launched

– Capacity to process >25% of country’s raw nuts

•Partnership with Olam (through a GDA) to develop processing across Sub-Saharan Africa

•Application of lessons learned underway in Tanzania, Kenya, South Africa, Benin

•Active exploration in rest of W. Africa

Source: TechnoServe analysis

Cashew consequences

•Coffee – milling and marketing (Tanzania)

•Dairy – bulk cooling and processing (Kenya)

•Horticulture – quality production, packing, processing, wholesaling and distribution (Ghana, Kenya, Uganda, Mozambique, South Africa)

•Field crops (maize, cassava, sorghum, sunflower) – food processing, pre-processing of inputs into other value chains (Ghana, Mozambique)

•Poultry – feed preparation, broiler processing (Mozambique)

Application of approach in other value adding sectors with growth potential

13

14

…SO THAT AFRICA CAN BECOME A LEADING PLAYER IN THE GLOBAL CASHEW INDUSTRY AND OTHER INDUSTRIES AS WELL

Working with Lead Firms through Public, Private Partnerships September, 2008

One of the tools which GTZ uses to work with lead firms in different sectors is establishing public, private partnerships (PPPs). When companies setup production units or outsource production facilities abroad or develop business relations, they often work on topics which are also important for development policy. Examples include introducing environment-friendly technologies, caring for security and health at the workplace, or establishing vocational training centers. In doing so, however, they sometimes encounter obstacles, which might be overcome more easily with the support of an experienced partner. This is why the German Federal Ministry of Economic Cooperation and Development (BMZ) initiated its Public-Private Partnership Programme (PPP) in 1999 implemented by GTZ. Mutual Benefits PPP cooperation arrangements serve the interests of both parties. For GTZ, focus is placed on development-policy objectives. The benefits for our corporate partners include: • GTZ offers valuable expertise and contacts in about 130 countries resulting from 30 years of

international cooperation. • GTZ can facilitate access to public and private institutions as well as to decision-makers.

GTZ is experienced in managing complex processes - especially under politically and economically difficult circumstances.

• PPP projects can improve the framework for entrepreneurial success and minimize risks for investment.

PPP – How does it work? PPP projects between GTZ and the private sector are jointly planned, financed and implemented. Four criteria must be met: 1. The projects must have solid economic and developmental objectives, making a tangible

contribution in the partner country. 2. The scope of the project must extend beyond the company's core business, as PPP

contributions are not subsidies. 3. The private partner must bear a significant proportion of the project costs, generally at least

50 per cent. 4. The project must be in line with the basic principles of German government development

policy. GTZ executes PPP projects around the globe: from Mexico City to Manila, from St. Petersburg to Pretoria. Commonly, GTZ's partners are small and medium sized enterprises as well as multinational corporations. PPP projects range from vocational training to environmental protection, the development and implementation of standards and new technologies. Promising partnerships are possible in many ways - what matters is an innovative idea. Most successful are PPPs when linked with local entrepreneurs and bilateral technical cooperation projects in developing countries. In this case, the private sector can benefit directly from governmental agreements between Germany and its partner countries. Especially interesting are strategic alliances with several companies (cluster approach), business associations and chambers.

1

PPPs in Bangladesh 1. Social Compliance Background Tchibo is one of the major German retailers who are operating retail stores in Europe. In order to reduce production costs, most retailers have outsourced their production to developing countries. Tchibo is no exception. Currently, Tchibo is sourcing from wide range countries around the world. There is always skepticism from different interest groups regarding the working conditions in such countries where the European and American brands source from. Nowadays, consumers are also becoming very aware of where and how their purchased items are being manufactured. In order to address these concerns, Tchibo took the initiative to be proactive and work with their suppliers on improving working conditions in their global supply chain. To implement this initiative, Tchibo teamed up with GTZ in a public private partnership project. This project is taking place in three Asian countries where Tchibo is currently sourcing from. The time frame of the project is three years (2008 to 2010). One of these countries is Bangladesh. In Bangladesh, Tchibo, in partnership with GTZ, is working with 10 readymade garments manufacturers and several service providers. Objectives The two main objectives are to: - Improve the social compliance status, productivity aspects and quality issues in the ten

participating factories, and - capacitate private consultants, consulting firms and public training institutes with the aim to

deliver better services to the readymade garments sector in the field of social compliance.

Approach The project is jointly planned and implemented by Tchibo and GTZ. GTZ’s contribution to this partnership is to: • Provide technical expertise such as the training curricula, materials and trainers • Manage the project in the implementing countries • Monitor the impact of the project activities Tchibo’s responsibilities include: • Financial contributions for the project implementation • Nomination and access to suppliers to implement project activities • Sharing project management and monitoring responsibilities with GTZ Achievements Major results realised during the past six months since the start of the project in April 2008 are:

- Establishment of a joint project vision, mission and understanding regarding project objectives, strategies and roles and responsibilities of each party involved

- Availability of baseline data about: (i) current social compliance status in the participating factories and (ii) capacity of local service providers offering social compliance services

- A better understanding among about 100 mid-level factory managers and workers regarding social compliance in general and better relationships and communication between workers and managers, in particular.

2

2. Solar Home Systems (SHS) Background A crucial point for the acceptance and dissemination of solar home systems (SHS) in majority of the least developed countries, such as Bangladesh, are the costs for purchase and maintenance of the SHS, as well as availability of maintenance services. The quality of the products, especially of the charge controllers in the SHS, as well as the correct handling of the SHS by the users, has an important influence on the lifespan of the systems. Cost reduction and with that a wider use of the technology can be gained by a prolongation of the systems’ lifespan as well as through local production which meets certain quality standards. In order to address these quality and maintenance issues of SHS especially related to locally produced components, such as, charge controllers, light emitting diodes, CFL, photovoltaic panels and batteries, a PPP was initiated in 2006 and implemented for three years comprising of the four following parties: • Phocos AG: A German company who are one of the leading manufacturers of components

for photovoltaic solar systems. • Grameen Shakti: A local company which belong to the Grameen enterprise family. The

company supplies solar home systems and biogas plants particularly in the regions of Bangladesh where conventional power grids are not expected to be set up within the near future.

• Bangladesh University of Engineering and Technology (BUET): The largest engineering university in Bangladesh.

• GTZ through its project titled “Promotion of the Use of Renewable Energies (PURE)” Objectives The overall objective of the PPP was to ensure that a pool of trained personnel is able to provide improved quality for locally manufactured products and servicing of renewable energy technologies (RET) in Bangladesh, in particular solar lighting equipment. One sub-objective was to establish a quality management system, as a pilot project, in a local production facility for solar systems, following the ISO 9000 standard. Approach Capacity development activities comprised of training of the personnel from BUET, Grameen Shakti and other Bangladeshi consultancy firms, on manufacturing and maintenance skills of SHS components and also in the application of ISO 9000 standards into their work processes. All the training curriculum, material and processes were documented in a handbook and made available through the training courses which were established at BUET. GTZ assisted with the preparation, coordination and impact monitoring of the training measures. Phocos AG contributed by providing technical expertise and financial inputs as well as developing all the training tool kits and materials. Achievements After three years, the project was successfully completed and achieved the two main results which are as follows: • Improved services regarding SHS manufacturing and maintenance offered by a pool of 15

master trainers and three organisations equipped with quality training material comprising training tool kits and handbooks on quality management systems, and

3

• Increased quality of SHS components manufactured in Bangladesh by setting up a model, at Grameen Shakti, for an ISO 9000 compliant quality management system and through the installation of two testing machines at BUET and Grameen Shakti.

4

A CASE STUDY:

Lead Organization: International Development Enterprises (IDE) Project Name: Agriculture Input Service Delivery Project (AISD) Project Length: 2007 – 2008 (First phase was Nov. 05 to Dec. 06) Donor: Swisscontact-Katalyst Coverage: Bogra, Joypurhat and Sirajgonj districts

Contact: William J. Collis, Country Director: [email protected]

Shyam Sundar Saha, Program Director: [email protected]

Challenges and experiences: In the beginning the lead company was lesser interest due to their promotional strategies. The company bears different sets of fixed promotional strategies and limited resources which limit them to take such interventions. They need additional cost, skilled human resources, and time; less aware on corporate social responsibility and sustainable impact of services. IDE’s initiatives, marketing approaches assured them to be part to promote business services to the farmers to create permanent business relationship and trustworthiness among the clients which will contribute in business growth, and it happened.

IDE–Katalyst funded Agriculture Input Service Delivery (AISD) Project began on November 2005 with the aim to promote business solutions in the agriculture input (seed) and poultry sectors. The components, operating separately, both use BDS approaches to build private sector capacity to reach small and medium sized entrepreneurs in the poultry and seed sectors. Target is 25,400 farmers and 870 Business Development Service providers or families increased their annual income by an average 15-20% as a result of project activities by 2008. Beside, two specific objectives are to: a) improve the agricultural inputs delivery system and services for the farmers and b) improve the competitiveness of poultry sub-sector and its actors. AISD used a combination of research, advocacy, facilitation, and capacity building approaches to develop sustainable interventions to improve the agriculture input delivery system and poultry service market. AISD is assisting smallholders to improve access to relevant inputs and services (horticulture and poultry) through strengthening the capacity of poultry and vegetable input service providers. One of the major strategies was to work with private sector lead companies and make them a sustainable source of services for the input sellers and householder farmers. In the light of market constraint and study findings, AISD worked with the lead companies to facilitated services for the target clients. Major problem faced by the farmers in agriculture input markets as found by the assessment study were: poor seed quality, lack of production information and related risk factors from seed sources, lack of knowledge on proper cultivation practice; constraint for poultry input market were: high feed conversion ratio (FCR), lack of management practices, high mortality; production cost, limited farmers’ knowledge on commercial farm management, Service providers(Paravets, lead farmers and input retailers) lack technical skills and limited coordination among the members of existing poultry farm owner association.

To address those problems- by the joint effort of IDE and the private lead companies (Novartise, Intervet, Navan, Eskayef Pharmaceuticals, Laleer Seeds Ltd., Supreme Seeds Limited, and Dynamic Agro Science Ltd) facilitated technical assistances and business services to strengthened the capacity of poultry farmers associations, trained and build up capacity of Health Care Service Providers, poultry & agriculture input retailers and, Mobile Seed Sellers. Set several seed demonstrations, established information resources centers at association level so that farmer can access to information. Developed linkages with local and forward market traders to procure

inputs and selling products. A total of 231 unions of 29 upazillas have been covered as of September 2008 by the project interventions. As of end September 2008, about 32,000 households are being severed by more than 800 AISD trained service providers (seed sellers, soil testing entrepreneurs, lead poultry farmers, poultry service providers/paravets, poultry de-beakers, poultry input sellers) available in the value chain. Inputs company now bearing a positive attitude to provide right and quality information to the farmers to face market competitiveness. Farmers feel comfortable to contact with service providers to get services when they are in need and they know the alternatives. Facilitating services, company got sales growth, accessed to remote and new market, established product and quality image in the target markets. Now the lead companies are treating the services as part of corporate social responsibility and a copping strategy to sustain in the market. An impact monitoring survey revealed that the project contributed in increasing income by 26% for vegetable farmers, 18% for mobile seed sellers, 15% for seed retailers, 25% for dealers, 11 % for poultry farmers and 63% for poultry service providers (paravets). Vegetable production cost reduced by 3-5% due to increased use of quality seeds and production increased by 10-15%. In case of poultry, production cost reduced by about 5%, medicine cost by 30% and reduced mortality by about 5%, the FCR has reduced from average 2.81 to 1.50 and average broiler production has increased by 20%. AISD initiatives boosted market competitiveness, created service demand among the farmers and also prepared the service markets for better market system.

mailto:[email protected]


Case on Lead Firm in Developing Dairy Value Chain in Bangladesh The "Strengthening the Dairy Value Chain in Bangladesh" is a project of CARE Bangladesh which will be implemented in 9 districts of North and Northwest of Bangladesh for a period of 4 years (2007-2011). The project design is based on investment from the private sector and development of profit-driven infrastructure, making it sustainable. The vision of success is that targeted landless and smallholding households in North and Northwest Bangladesh have more sustainable livelihoods through incorporation into a strengthened milk value chain. The core objective is to eliminate existing bottlenecks and establish a value chain where all stakeholders (e.g. from producer to final consumer and people who are directly and indirectly related to the chain) will be benefited. In Bangladesh the production of milk is very low and can barely meet local demand. In addition, the production cost is very high compared to other countries. It’s quite impossible to export with this limited amount of milk after trying to cater to local needs. Average milk production per cow is very low (0.75 liters according to the dairy value chain study carried out by the project). Lack of producers’ knowledge and information regarding animal health and nutrition is the major factor impeding upon productivity. That is why increasing milk production and developing a dynamic milk collection system in rural and remote areas are primary objectives of the project. Furthermore, producers do not have sufficient produce- in volume and in quality to attract the formal sector and are not organized into groups to take advantage of market opportunities. Price incentive is based on fat content of milk whereas there is very limited example where small scale producers get direct fat based price from the formal sector who are the only users of digital milk tester in the dairy sector. Poor understanding of business principles and lack of information have been largely constraining small scale producers’ productivity, growth and strong formal sector development. Therefore the project is providing appropriate awareness to producers and also to motivate the formal sector to actively participate in the value chain development process. The project has been successful in promoting the fact that both producers and the formal dairy sector have much to gain from higher milk production and a skilled workforce. “We do not get good prices for the milk”, is a complaint that most of the producers made whenever they were asked about the constraints they were facing with their dairy venture. The problem contributes significantly to disincentives for producers to increase production. With this in mind, the project has designed interventions with the view to ensuring best available selling prices for producers from amongst existing market opportunities. CARE is also designing future program interventions in the fields of raising awareness, increasing productivity and livestock service development in rural and remote areas. To ensure competitive market price for producers the project is now facilitating the development of milk collection models together with the formal sector lead firms. There are existing chilling plants in the project area owned by formal sector lead firms, but both formal and informal milk processors have poor integration with small scale producers. Operating on average at only 10-20% capacity, 37 chilling plants are within the project area, all of which are owned by leading private sector processors with many scheduled to be established soon. Integration of processors with the producers is largely absent. At many locations producers are not even sure which processor they are selling their milk to, since they tend to interact only with the collectors. From a processor point of view, organizing producer groups with such low volume only adds more transaction costs to their business operations. On the other hand the processors also pointed out that this procurement system also results in acquisition of poor quality of milk,

because most of what they are getting at the chilling plant gates is of the same poor quality. To address this significant constraint, drawing the progress of the chain backwards, the project has developed a workable milk collection model with the private sector lead firms, to increase quality milk production and ensure services for producers.

Lead Firm

Collectors Existing/New

Producer Group

30 members

Collection Point

Producer Group

30 members

Group

Expansion

Gro

up

Exp

ansi

on

IMPACTS: - Lead firm is willing to offer more services if group continues volume of milk with quality - Lead firm will introduce BSTI (Bangladesh Standard & Testing Institution) approved milk measurement pot. - Lead firm will develop improved milk transportation system. - Lead firm will provide information on price, quality, farm management and health and medicine services. - Lead firm will arrange awareness session for both collectors and producers to increase milk production. - Lead firm will arrange training for their staffs to work effectively with value chain actors.

IMPACTS: - Lead firm develop horizontal linkage for milk aggregation &information dissemination. - Lead firm will provide milk can, lactometer, interest free loan to producer group - Lead firm will provide competitive price with bonus, feed & fodder, veterinary service and other facilities to the producer. - They will also monitor to ensure fat testing, pricing, bonus and other facilities - They will introduce digital fat testing machine if milk collection reached 200 liters - Lead firm is placing the collection system near the group or community. It will increase the transportation cost of the lead firm but will provide them long term benefit by getting quality and continuous supply.

Horizontal Integration

Dire

ct

Project has already facilitated Facilitation is in process

Livestock Officers Para-vets

Feed & Fodder Supplier

Artificial Inseminator

Medicine Suppliers

Service Providers

Figure 1: Lead Firm Approach in Developing Dairy Value

In rural areas where producers are located more than a kilometer away from the formal or informal milk market, the collectors play the most important connecting role between producers and the informal / traditional market value chain. Collectors however, are careless in procuring milk from producers and therefore maintain low product flow. The project has focused on building informed and efficient producer groups and collectors who will understand the quality and quantity of milk lead firms demand. Firms like BRAC, Milk Vita, Rangpur Dairy and PRAN have already contributed to designing the model around producer groups- CARE is playing the leading role in facilitation. The lead firms are also motivated to provide more support and services once producer groups start to sell quality milk to each firm. In project areas, collectors create misunderstanding between processors and producers by misrepresenting facts. This poses even more of a challenge for formal sector processors who are tied to buy quality milk (at

least with 3.5 percentage fat) to meet market standards, whereas the informal sector players do not.

Under such conditions the project is progressing towards leveraging existing collection systems where they are comparatively robust and effective and where the opportunity exists to strengthen and formalize collectors, while increasing the transparency of transactions between lead firms, collectors and milk producers. Project field staffs have been active in mobilizing collectors and teaching them business principles and ethics, and mutually beneficial ways of increasing profit while collecting milk from small scale producers- acquiring more milk in the process. (Collectors get Tk. 1 bonus for each liter of milk they supply to processors and extra bonus based on volume). Where there are uncompromising collectors, the producer groups are motivated to select and function through their own collectors. These decisions are made on an ad-hoc basis by producer groups and hinge on the local situation. As of now, initial sets of beneficiary groups have been formed; confidence and trust of processors have been gained; and the project is working further on the model with lead firms.

Identified advantages, challenges & opportunities in the model:

Challenges: In some instances, lead firms involvement and transparency is limited, which produce

distrust among producers, collectors and processors. Difficulty in creating a commercially viable milk transport system Resistance from traditional milk collectors Milk yields and quality improvements are largely constrained by unavailability and high

costs of appropriate feed and lack of producer awareness on improved feed/fodder practices.

Many paravet training modules have been produced by different non governmental organizations, but there is no single accepted version that might be adopted widely by various stakeholders.

Lead firms fall back on management capacity Lead firms unable to make a profit from their existing chilling plants due to low milk

volumes Short-sightedness of entrepreneurs seeking quick payoffs rather than long-term

investments.

Advantages: Small scale producers are getting appropriate price for their milk. Direct contact between producers, collectors and lead firms established. Producers get updated information on quality product, price, feed & fodder, health care

and services provided by lead firms. Lead firms are getting quality milk as they desired. Lead firms are well informed on current market situation. Accountability within the actors has been established. Tendency of milk adulteration has decreased. More business opportunities has been created for feed and fodder supplier, medicine

supplier, artificial insemination and etc. Producers are now more interested on rearing cattle.

Opportunities: Small scale producers (SSPs), collectors and processors are directly linked to efficient

collection mechanisms. Milk collection to be faster than before. Possibilities of spoilage and adulteration will diminish. Bring private investors together with financing institutions. Build relationships and clarify expectations between value chain actors. Develop marketing, collective bargaining, and leadership skills.

M&E framework for the approach: Care SDVC project staff will implement the following M&E System (Figure 2). Lead firms will provide all relevant support in this regard. Staff will work closely with lead firms and at the same time advocate between producers and collectors to produce and transport quality milk. There will be in effect, a monthly and quarterly monitoring reporting system, in a given format, for the monitoring team. The monitoring framework for the lead firm model is given bellow.

Producer Group Collector SDVC Inputs Paravet

FF FF-Vet FF FF-Vet Team

Others Action

Team

3 Month Compilation of Team Report (Quantitative)

Quarterly Monitoring Report (Quantitative & Qualitative)

Group Register

UDVCSF Meeting Minutes

Case Study

Observation Checklist

Farm Record

Others

PO, F

F-V

FF

PO

, TO

, P

O-M

RD

FF

Team

, O

ther

s

FF, F

F-V

Regional Mgt.

Team Mgt

M&

E S

yste

m &

Rep

ortin

g D

iagr

am

3 MONTHS COMPILATION

Monthly Team Report (Formative)

FF-V= Field Facilitator Vet, PO=Project Officer, TO= Technical Officer, MRD=Market Research & Development, UDVCSF= Upazila Dairy Value Chain Strengthening Forum

Figure 2: M&E framework for the approach

1 Wiegratz, J., P. Nyabuntu, and C. Omagor (2007), Supported by UPTOP with funds from the EU

UPTOP

Uganda Programme for Trade Opportunities and Policy

Case studies of lead firm governance systems in the context of

commercialization of smallholder agriculture in Uganda

By Jörg Wiegratz, Paschal Nyabuntu, and Charles Omagor

INTERNET VERSION OF THE FOLLOWING REPORT PART:

‘SUMMARY AND DISCUSSION OF MAIN FINDINGS’

This study was commissioned by the Uganda Programme for Trade Opportunities and Policy (UPTOP) with funds

from the European Union (EU).


About the researchers

Nyabuntu P. is an Agricultural Economist (Makerere University, Wye College - UK). His field of

academic specialisation is farm planning/business management and agricultural trade policy. He

has wide experience of Uganda’s agricultural sector and has provided services to USAID, ILO,

DFID and EU funded projects as well as international and local N GOs. His major interests are in

agricultural enterprise development, value chains and market linkages for smallholder farmers.

Assignments have included issues of enterprise identification and profitability, monitoring and

evaluation of agricultural projects, development of BDS for smallholder enterprises, value chain

design and analysis, sub-sector analysis, trade liberalization, and training of trainers. He was a

researcher of the team’s earlier UPTOP study on Global Value Chains. In the present report, he was

the researcher responsible for the Ibero case study and contributed to the summary. E-mail:

[email protected].

Omagor C. is a Senior Lecturer in the Department of Marketing and Procurement, Makerere

University Business School (MUBS). He is a Marketing specialist (Makerere University,

University of Lancaster - UK). At MUBS, he has facilitated the MBA programmes in the fields of

marketing and management. His research interests include: business growth, value chains, network

marketing, and spiritualism in business. He has carried out assignments for, among others, Uganda

Management Institute (DFID funding) and the Uganda Veterinary Association (EU). He also

conducts training courses in marketing and management for members of the Uganda Manufacturers

Association. He was a researcher of the team’s earlier study. In the current report he was

responsible for the Outspan case study and contributed to the summary. E-mail:

[email protected].

Wiegratz J. researches matters of value chains, competitiveness, political economy and human

resource development (HRD). He is an Economist (University of Cologne - Germany) and Political

Scientist (University of Warwick - UK). He has worked as a consultant and researcher for the

Government of Uganda (UPTOP, Ministry of Tourism, Trade and Industry), UNIDO, and the GTZ.

He is a Research Associate with the Economic Policy Research Centre (EPRC) and a part-time

lecturer with Makerere University (Faculty of Economics and Management) and Makerere

University Business School (Department of Marketing and International Business). He was the lead

researcher of the Global Value Chain study. In the present study, he was the lead researcher with

overall responsibility for the project. He wrote the introductory and summarizing sections of the

report and undertook the case studies of Bee Natural Products, Sulmafoods and Jesa. Since October

2007, he is a PhD Researcher at the University of Sheffield (Department of Politics) where he

continues his work on value chains in Uganda. E-mail: [email protected].





Acknowledgement

Thanks are due to the following: The main funding partner UPTOP (the entire tea m and especially

Dr. Lindani Ndlovu and Steven Kamukama) for the financial and technical support and the MTTI

for its overall support in carrying out the research. The Economic Policy Research Centre for its

logistical support. David Opero (Makerere University) for his work as a Research Assistant. Rose

Nakayi (Makerere University), Ruth Achimo Etibot (Gulu University) and Robert Ayine (Gulu

University) for providing services as Research Assistants during interviews with farmer groups

(conducting interviews in local language when required). Betty A.K.Businge, and Rose Nakayi for

typesetting, and text editing respectively. Rose Nakayi for her personal support. Furthermore, we

are very grateful for the immense inputs and comments provided by all respondents. F inally, we

thank numerous colleagues for their support.

Note

This report has been produced under the UPTOP research pillar (competitive research grant

competition). The core working period was about seven months (March-September 2007). The key

findings of the report have been disseminated to stakeholders in Kampala in September; the full

report of 416pp. was handed over to UPTOP at the end of October. About 500 copies of the report

will be distributed by UPTOP at the beginning of 2008. The researchers currently try to find

funding for a related book publication in 2008 to allow for wider distribution, among others. Note

this internet version of the report summary is a slightly improved version compared to the one in

the original UPTOP report; improvements were made mainly in terms of expression (clarity of the

writing); no major new analytical content has been introduced. However, we have added a brief

section on methodology which is in the main text in the printed report. Finally, as readers please

keep in mind that the UPTOP report (and this summary of it) is an effort to begin to discuss the

vast interview material and other information we got from the field research. Follow up analysis is

actually required to explore certain issues in more depth, apply additional analytical perspectives,

where required, and so on. At times we can only highlight in the report issues emerging from the

interviews but not explore them further. This is also related to the concern of our funding partner

with report size and the normal limitations of the main analytical approach applied in the study.

The usual disclaimers apply. If you as a reader identify any mistakes or have any comments we

would be pleased to receive feedback.

Copyright © 2007 Authors All rights reserved. No part of this publication may be reproduced, in any form or by any means,

without permission from the authors.


Summary and discussion of main findings

Introduction

The study is set in the context of: (a) overall weak farmer-buyer relations in most parts of

Uganda’s agro-sector which affect the development prospects of small holder farmers (SHFs) 1,

and (b) a growing interest by the private and public sector, including the Government of

Uganda (GOU) and development agencies in the contribution of value chain (VC) analysis and

support interventions to economic development in the country. This study analyzes the

governance of domestic value chains (DVCs) in the agricultural sector in Uganda. It

focuses at exploring how agricultural produce buyers set up, coord inate and monitor - that is

govern - the DVCs with their supplying farmers. Particularly how buyers govern the latter’s

activities and performance and thus the division of labour in the DVC. Governance in this

context constitutes for instance: (i) setting the requirements for farmers in terms of product

quantity, quality and delivery, or production processes, (ii) monitoring compliance, and (iii)

assisting farmers to meet the set requirements. This study focuses on such governance systems

of various buyers which operate a DVC with SHFs. The buyers are called lead firms (LFs) of

the DVC. The research was concerned with: the rationale and functioning of the business

relation between the LF and SHFs, related benefits and costs as well as lessons- learnt, farmers’

upgrading as well as opportunities and challenges which will have to be addressed by the VC

actors or call for assistance from for instance GOU and respective support institutions.

Research methodology

The study explores five case studies: Bee Natural Products (BNP - honey), Sulmafoods (SF -

fruits and vegetables), Outspan (OS - sesame and chilli), Ibero (IB - coffee), and Jesa (JE -

dairy products). All cases are selected from the agricultural sector. Depending on the sub-

sector, the LFs interviewed are processors or traders who sell their products on domestic and/or

international markets. The main selection criterion for LFs to be included in the study was that

the LF was known to engage directly with SHFs and in a more long-term and developmental

manner which could include provision of training, advice, pre-finance, or inputs.

The study is based on presentation and analysis of in-depth interviews with LFs and SHFs as

well as support institutions and industries (SIs/SIDs) that interacted with the LFs and SHFs and

thus - in some way - carried out governance functions in the DVC. SIs are non-commercial

players such as government and donor agencies/programmes and NGOs. SIDs are commercial

1 We use the terms SHFs and farmers interchangeably.


partners of the LFs and SHFs and e.g. supply some of the inputs used by SHFs. At times, this

supply comes along with embedded services such as product specific or general training and

advice. Interviews were conducted using a questionnaire which was developed by the

researchers.2 Qualitative field research by a team which consisted of researchers and research

assistants was carried out between the months of April to August 2007. LFs’ interviews were

held with the LFs’ management (managing directors, general managers, owners) and/or field

coordinators (operations managers, farm managers, purchase managers, field supervisors). For

each case study, interviews were also held with two to four farmer groups of between 3-15

people, and three to four SIs/SIDs.3

The main purpose of the interviews was: (a) to understand the governance structures in place

between the two VC actors involved in the actual trade (LFs and farmers) and (b) the

interaction of the LFs and SHFs with SIs and SIDs respectively. In this sense the researchers

did not analyze the entire VC but only a particular part of it. Other actors in the VC, e.g. other

buyers in Uganda (supermarkets or final consumers) and abroad (importers) were not

interviewed. This was beyond the scope of the study. 4 The team did also not provide extensive

further background information in the case sections or undertake further follow up research and

analysis on issues raised by LFs, SHFs and SIs/SIDs as this would have exceeded the scope of

the study.5 In this sense, the very positions that LFs, SHFs and SIs/SIDs put forward and their

links to the theme of VC governance are the findings.

A small note: quite often there is an inclusion of (lengthy) quotations of the respondents’

statements in the main report. These quotations are supposed to help the reader to get a

personal impression of the statements being made by the respondents. The statements are

2 The questionnaire for the LFs had the following sections: (1) Background of the buyer’s business, (2) Basis of the

relationship with farmers, (3) Governance of the VC, (4) Farmers’ upgrading, (5) Role of other VC actors,

especially support institutions, and (6) Outlook regard ing VC with SHFs. The team also had specific

questionnaires for supervisors of the LFs. The questionnaire for the SHFs had similar sections (adju sted to the

farmers’ perspective), while the questionnaire for SIs/SIDs examined the assistance provided to the VC which

forms part of the VC governance. 3 The interview focus was rather on SIs than SIDs. However, in some VCs, there were few or none SI active while

some SIDs carried out significant governance work which was then explored through interviews. With some of the

SIs, no face-to-face interviews were carried out; only the written responses to the questionnaire were used then. 4 Some months after the beginning of the research activities, the NGO Land O’Lakes (U.S.) provided additional

funding which allowed carrying out two more case studies in the dairy sector: Sameer and Paramount. The

responsible researcher was William Ekere (Department of Agricu ltural Economics and Agribusiness, MUK). The

findings of these two cases were not included in the UPTOP report however. The research team plans to publish all

the seven case studies at a later point in time if the necessary co-funding can be secured. 5 The team could not further verify the statements made by the respondents. By interviewing a wide range of actors

for each case, however, the situation described by the various respondents, if read together, can be seen to be close

to ‘reality’ (within the usual limits of a report setting). In a strict sense much of the write up would start with

‘according to the respondent’ - for matters of readability of the report, these phrases are left out most times.


furthermore used to allow the actors at first describe the governance situation in the respective

VC and give their views on the relevant matters. We intend to give them a voice by presenting

their positions in their own words. This description of the situation by the actors is the

foundation of the report; the researchers then analyse (comment and interpret) these statements

where appropriate. The respective researcher had the responsibility to make the analysis to

his/her best knowledge, understanding and assessment of the situation at hand.6 Due to limited

report space and research time this cannot be done with every aspect raised or after every

respondent’s statement that is presented. Some statements are indeed also self-explanatory.7

The general picture: governance activities of the LF and results regarding SHFs

All LFs have undertaken efforts to establish and maintain direct and constant relations with

their farmers and build their production capacities and group organization. Below are the

reasons that explain the above: (i) the desire to strive for sufficient product quantity and

quality in the context of an often weak supply base due to low farmers’ capacities, (ii) control

of diseases and pests in the production area, e.g., cattle diseases, (iii) meeting standards of the

target market, e.g., traceability requirements in case of organic agriculture (OA), (iv) putting

into practice the LF’s Corporate Social Responsibility (CSR) plans, (v) publicity and marketing

needs of the LF, (vi) statutory regulation, (vii) market dynamics such as enhanced competition,

and (viii) interest in local development around the LF’s rural base (processing plant, own farm,

supplying farmers). Most LFs studied realized that having good relations with farmers and their

local communities and creating mutual interest in the LF’s success (a win-win situation for the

LF and farmers) is a pre-condition for meeting production objectives. In this context, some of

the LFs actively tried to enhance: the interest of farmers and surrounding communities in the

LF’s business project and prospects, and develop attitudes and behaviours among farmers and

community members that could directly and indirectly benefit the LF (higher farmers’ supply,

information provision, and loyalty levels) and, in turn, the supplying farmers.

6It was at times difficult fo r the researcher to interpret a particu lar feature of the governance system based on

several hours of interviews with the respective actors only; indeed, every reader (based on e.g. reference to

different assumptions about ‘the market’) can read the situation (e.g. respondents’ statements) in different ways. 7 A key objective of the study was to document the actors’ views. By bringing their information and views on

paper, we wanted to shed some more light on the issue of governance in DVCs in Uganda. The broad scope of and

extensive interviews for the study was intentional in that we aimed at presenting as much as possible the different

governance issues in the DVCs. As mentioned, a number of quotes and points raised are thus merely documented.

However, we are of the view that even then they can still inform the VC actors and stakeholders as well as the

debate in general and stimulate future in-depth research.


Findings reveal: LFs have to consider social aspects such as the community’s sentiments in

order to be accepted and grow in a rural setting. In this context, setting up a factory (or project

office) in the respective local area helps LFs get security from farmers and other local

stakeholders ensuring the factory is not a ‘white elephant’ but protected (in the wide sense) by

the relevant actors. A factory is also a booster of trust and confidence as it indicates to the

farmers and stakeholders a more formal business approach and long-term commitment of the

LF to the locality, especially compared to on and off ‘middle men’. Moreover, it is evident that

standards (organic, fair trade, quality and others), or market requirements in general - which

necessitate LFs and farmers to be in close contact (beyond spot transaction) have fostered

relations and cooperation between the two parties.

LFs governance activities offer significant benefits to SHFs in form of: (i) training, advice,

inputs and encouragement on matters of production and group dynamics (organization,

management, activities, and leadership). Given the report’s findings, a mix of technical and

non-technical training topics can be considered essential for successful VCD. Also, the

identification of successful farmers amongst the group of SHFs is important. LFs often

designate such farmers as lead farmers (LFAs) who act as role models and champions of

innovations the LF would like to see adopted by other SHFs. LFAs also help to build and

deepen trust and loyalty of farmers with LFs. The use of LFAs was found to be effective for

farmer-to-farmer learning.

Besides, farmers noted as positive : (ii) the provision of production inputs and equipment as

well as related services by the LF8, (iii) linking farmers to SIs/SIDs and other farmer groups for

training, finance, input supply or professional advice, (iv) providing a stable market and thus

incentive for farmers’ upgrading, (v) helping to address farmers’ risks, and (vi) allowing

farmers to have access to premium prices.

LFs further assist farmer groups in handling internal control systems necessary to meet foreign

buyers’ requirements, hence assurance of a market for the produce. LFs such as JE also deduct

a farmer’s financial obligation to the respective cooperative (or any other VC player, e.g. a

bank, or input supplier), which could be a useful arrangements also in other DVCs. Generally,

such service can be particularly useful for agricultural credit, as it provides means for loan

recovery at no or limited administrative costs to the financial institution. For specialty markets

(e.g., organic markets), the LFs meet the costs of certification which would initially be

8 Services were offered by LF with/without charge, at subsidized prices, or related to soft loans.


prohibitive to SHFs. However, the certificate is issued to and is owned by the LF, which puts

SHFs at a disadvantage in case they would want to change the buyer. In such cases of

switching buyers, farmers would lose the premium price attached to the certification scheme

since they would have no evidence of certification.

Farmers in all the 5 case studies, appreciate the relationship with their LF; despite existing

challenges in each of the relationships. Farmers stressed the point of learning from the LF and

benefiting directly and indirectly from its presence. There are cases where, following the

success of the pioneer group of farmers in dealing with the LF, other farmers expressed their

desire to join the respective VC - at times however, limited markets do not allow the LF to take

extra farmers on board (SF case).

The upgrading results of the interaction and cooperation between LFs and farmers are usually

significant: respective farmers (not all though) have increased their skills, operate with better

processes, expand their fields, achieve higher productivity, increase quantity and improve

quality (the latter resulting in lower rejects by the LFs), have better group organization,

coherence and activities, or develop a more business oriented mind with incidences of long

term thinking and planning. Farmers’ upgrading also shows that farmers can improve their

production practices and products yet face a more substantial challenge in terms of

technological advancement. Farmer groups that are well linked with a supportive LF are also

foundations for setting up SACCOs which are institutions for encouraging rural savings and

credit services and can also be intermediaries for the implementation of the Warehouse

Receipt System (WRS), which is meant to ease SHFs access to credit after depositing their

produce in certified buyer’s store (including farmers’ cooperative society or any farmers’

buying entity).

Regarding the above improvements, farmers stated to be significantly advanced compared to

farmers who are not in the DVC of the respective LF and do not generally have relations with a

buyer. To a significant extent, the better performance of farmers who work with the LFs is due

to regular interaction with a buyer who gives farmers more than just payment for their product,

but sets supply standards and assists farmers (directly and indirectly) to meet them. The

socio-economic benefits for SHFs due to their participation in DVCs and upgrading and hence

increased incomes (through better and more regular payment and less quality related rejects)

were noted to be: improved quality of life, better health and housing as well as better schools

for their children. The differences noticed above offers an important insight to DVC


proponents including state officials: considerably positive effects in terms of development of

both farmers and DVCs can be achieved if proponents would support LFs, their farmers and

other VC partners in relevant matters of VC development (VCD).

Given that the LFs studied were usually the only ‘developmental buyer’ with the most explicit

governance system in the locality where farmers were interviewed; one can assume that the

above mentioned positive developments would have been less significant and slower (or

entirely lacking) in the absence of these LFs and their governance efforts. That is why GOU

and its partners have to get more serious about promoting VCD through enhancing LF-SHFs

systems. A key message of this report to GOU and its development partners: given the

historical context of private sector development (PSD) in Uganda, business practices that fall

short of commitment, cooperation, trust and long-term perspective in business with the VC

partners (which seems the common practice of the majority of economic actors in the agro-

sectors at the moment), undermine or slow down the process of VCD in the country.

Besides, LFs still experience deficits among farmers in terms of: adoption of improved

agronomic practices and environmental management, technology advancement, group

organization and governance, understanding VC matters and applying a more long-term

business perspective, risk taking behaviour, as well as trust, loyalty and honesty (e.g.,

honouring the payback-scheme for inputs in the BNP case). Due to their investment in the

farmers’ capacity and the need to get the farmers’ output, LFs often favour a continuation-

approach with the farmers; thus they find it hard at times to actually punish and (temporarily)

exclude defaulting or disloyal farmers from the DVC. LFs responses moreover revealed the

importance of farmers improving on the soft factors in VC business: communication,

commitment, trust, responsiveness, and eagerness to improve. LFs appreciate farmers who can

govern themselves. It was also noted that enhanced farmers’ awareness about commercial

agriculture (after trainings) does not guarantee that they practice it successfully.

The findings indicate that LFs have to be ready to (continue to) invest in SHFs also in future

in terms of: innovation, improved inputs, promotion of best agronomic practices, certification

costs, or linkage building with SIs and SIDs to mobilize assistance. Such continued support can

yield positive returns in the long run. There are high expectations - among farmers and VC

stakeholders such as SIs and SIDs - that LFs further increase the scope of their support and

enhance VC governance. Respective farmers’ suggestions imply that there is room for

governance improvement in every VC studied, in addition to improvements on price issues. To


fulfil some of these expectations and take DVC governance to a higher level, LFs will have to

show a continued good, and in some issue areas improved performance on various fronts (not

just price) to keep or enhance the contentment and loyalty of the farmers. LFs need to be strong

in market expansion (marketing), amongst others, to finance its support measures and make or

keep the set up with farmers sustainable. Some of the expectations that are directed towards the

LF (e.g., in areas of pre-finance or input provision) are related to the fact that the weak or

uncommitted SIs do not provide respective services or assistance.

Various challenges in the governance systems studied

Farmers emphasized that the LFs’ measures and behaviour is generally different from other

buyers or agents operating in the respective areas. Other buyers mostly purchase the produce

(sporadically) but do not develop farmers’ production or group capacities. They often prefer to

interact with individual farmers instead of groups, and limit these interactions to the buying

season only. Other buyers are also rather informal (less visible, e.g. have no factory or field

office) and less trustworthy than the LFs studied. The study thus differentiates between

‘developmental’ (LFs studied) and ‘non-developmental’ buyers9. Based on the interviews,

part of the deficient characteristics of non-developmental buyers are as follows: (i) being less

concerned with enhancing farmers’ product quality and volume (due to respective

characteristics of the buyer’s product, target market and business vision), (ii) not caring for

farmers, (iii) seeing investment in farmers’ capacities not as their role: not as an investment in a

sustainable and long-term oriented business structure (DVC) but a waste of the buyers’

resources, (iv) being overwhelmed by the numbers of farmers in their supply system, (v)

lacking the competencies and/or motivation to address loyalty and trust issue in the DVC, or

(vi) fearing that providing farmers support might strengthen the technical capacities and thus

bargaining power of farmers.

There is an important effect in this context: the ill-treatment of farmers by some (non-

developmental) buyers affects farmers’ perceptions and attitudes vis-à-vis (developmental)

buyers that are interested in establishing relationships. It makes the latter’s more difficult and

costly. One can compare this externality effect to unregulated environmental pollution: the

buyer who has to handle the damage by investing in perception and attitude change of and trust

building with farmers is not compensated by the ‘polluter’ (the previous buyer whose

9 A respondent from the s tate SI NAADS referred to them as ‘sub-standard buyers’.


behaviour caused farmers’ scepticism towards buyers in general). This lasting effect in terms of

possibilities and ‘costs’ of trust and relationship building between VC actors should be of

concern for stakeholders who wish to promote DVCs. The state should look into this

externality effect and establish if there is a role for it to intervene. It seems more effective to

regulate buyers’ behaviour (and that of other actors) in the first place than dealing with the

direct and indirect costs of their actions for the process of VCD afterwards. VCD proponents

need to promote appropriate behaviour of buyers (and VC actors in general); this is

cooperative, transparent, and long-term oriented behaviour. Thus, what can GOU do to limit

ill-treatment of farmers by certain buyers; besides maybe: (a) starting to blacklist VC actors

with improper business practices, and (b) promoting good relations between farmers and

buyers in various ways?

Despite the upgrading efforts and related results of both LFs and SHFs, some LFs face a

supply problem (farmers produce too little or sell to other buyers); while other LFs face a

market access problem (the farmers’ supply is sufficient but the LF lacks a strong market or

buyer).

Further, there is conflict of interest between promoters of organic and conventional agriculture

with the latter advocating for the use of chemicals. Chemical dealers bring chemicals to the

organic project areas where the use of artificial chemicals is not allowed. Chemicals persist in

the soil for years and therefore could constrain the wide adoption of organic farming in an area

for many years to come, thus affecting prospects of respective organic DVCs.

Moreover, almost all LFs suffer (actually or potentially) from the loyalty-problem: Farmers

who benefit from the LFs’ support - in the beginning of and often later on in the relationship -

sell to other on-off buyers who can pay a higher price to farmers because they had not invested

in their capacities (or supported them in other ways) in the first place. While LFs can reap some

loyalty benefits from the initial: (i) ‘eye opening effect’ of introducing a new business to

farmers (e.g., modern beekeeping) and/or (ii) assistance more general, this initial boost can

fade out to some extent over time with farmers’ loyalty levels - for various reasons - getting

lower; before getting up again at times, e.g. when the farmers ‘get burned’ in their transactions

with cheating buyers. We refer to these dynamics as ‘loyalty cycle’. Given the competition for

farmers produce, LFs will have to find new ways of boosting or refuelling the farmers’ loyalty

in later phases of the relationship; often through better prices but better in combination with

other measures as well.


Some LFs face a problem of deficient payback practices of farmers and difficulty in

enforcing contracts and agreements with defaulting farmers. Enforcement of ‘supply and

pay-back’ contracts seems not feasible with SHFs. For instance, when it comes to deducting the

expenses made or money advanced by the LF for equipment, some farmers default by side-

selling to buyers offering slightly higher prices ostensibly to meet other pressing financial

needs. Farmers’ refusal to pay back the LF through selling their produce to the LF and adhering

to an agreed deduction scheme constrains relationship building and further development of the

DVC. The limited enforcement efforts or successes of the LFs are related to the following: (i)

limited staff capacity of the LF to enforce contracts, (ii) fear to lose reputation among farmers

by being rigid and running after defaulting farmers, (iii) need for LFs to keep farmers in the VC

to ensure higher supply (in a low supply-high demand environment), (iv) lengthy and costly

court processes and (v) (in the BNP case) pressures from local politicians who de-campaign the

LF. Overall, it is not clear if enforcement is not economical (in a broad sense, including

reputation costs)10 for the respective LF or if other reasons are decisive. It could point to

management deficits (see the thin staff level) or general problems of (young) LFs that makes

limited profits which cannot cover such enforcement activities.

The described problem is particularly severe in the BNP case as acknowledged by BNP and its

supporting partners; it was estimated that about 50% of the farmers who have received inputs

on a loan basis from BNP are not straightforward in terms of repayment. This should worry

proponents of VCD in Uganda: LFs face considerable risks in extending financial services to

farmers. Again, the state has to think about possible interventions in support of VCD in this

context. BNP is already approaching public SIs like NAADS (National Agricultural Advisory

Services) to assist in issues of price negotiations, farmers’ loyalty in VC operations and re-

payment for inputs, and partnerships in the DVC in general. Further to the point, in case the

arguments of the de-campaigning local politicians are actually (technically) flawed, public SIs

such as NAADS might need to carry out sensitization seminars for politicians and other

stakeholders to point to the role of LFs vis-à-vis other less developmental buyers in VCD. In

particular local governments and other stakeholders need to understand that in VC operations

LFs provide, among others, a guaranteed market access to SHFs’ produce hence stimulating

further production.

10

In some cases enforcement is not financially sustainable: for example if a court awarded a LF costs to be paid by

SHFs, the latter will no be able to pay such fees and the LF will lose not only the produce that farmers side-sold

but also the cost of taking farmers to court.


Some case studies reveal that the LF’s farm gate price for agricultural produce grown by

farmers under VC arrangement should be both competitive and flexible. Competitive in that it

should be somehow bench marked on the prevailing open market spot prices at harvest time to

avoid temptation by some SHFs to breach their contractual obligations. Flexible in that the LF

might have to consider adjusting the contract price somewhat upward (where feasible) if the

market prices at the harvest season turn out to be higher. Most LFs search for market niches in

domestic and foreign markets that allow them to give SHFs a premium price to increase

farmers’ loyalty and supply. For instance, LFs of organic products in general pass a portion of

the world price premium for OA to farmers, thus offer a premium price above the prevailing

local price which keeps farmers motivated to engage in the more labour-intensive and costly

OA (compared to conventional agriculture).

LFs stressed the high level of initial and continuous training efforts needed to keep the

farmers motivated, committed and knowledgeable. Costs for training and monitoring of

farmers typically constitute the majority of a LF’s governance costs - because these activities

require considerable field staff and logistics in the context of many scattered SHFs with low

production capacities. Infant LFs in particular have challenges of costs recovery due to little

capital outlay. Most LFs solicit the support of stakeholders (SIs/SIDs including NGOs, or

donor/state agencies) to enhance the assistance provision to farmers and/or lower the financial

burden on the LF. Overall, LFs try to recover the costs of VC governance through: (1) higher

prices of the final product they sell, (2) increased volume traded and (3) involving farmers in

payment (via deduction) for services and inputs. As the VC system with farmers expands (thus

the governance workload), some LFs, for various reasons, do not adequately expand their staff

system including staff levels, remunerations, and qualifications as well as rules of engagement

of staff with farmers.

Lessons learnt from interacting with farmers as noted by LFs’ Managing Directors (MDs)

and supervisors (SVs) point to technical and non-technical aspects, for instance the importance

of: (a) being transparent and patient, (b) investing in farmers to get the product, (c) treating

farmers with respect and developing a social relation, (d) fulfilling promises made, (e) taking

into account group dynamics, (f) communicating well with VC partners and having feedback

circles, (g) enhancing reputation as a buyer, and (h) having communication, training and

leadership skills (e.g., being able to guide, advice and counsel farmers). SVs particularly

reported that they had to learn how to better interact, pass on information, make joint decisions

and be patient in the relation with farmers.


Formation and dynamics of farmer groups is another major issue in DVCs. Often different

from farmers outside the LF VC, all farmers interviewed are organized in groups. Frequently,

the LF has initiated the group formation process. The group arrangement has brought many

advantages for farmers such as: (i) sharing of equipment and certain labour cost, (ii) collective

crop production from clearing the farm land to harvesting or (iii) learning from each other, e.g.

through knowledge sharing on good agricultural practices, among others. Due to group

processes, the output per farmer has increased. Enhanced group organization and management

has also boosted coordination including communication with the LF. LFs’ SVs assessed that

enhanced group cohesion of farmers is linked to issues of common interests among farmers and

between farmers and the LF, as well as training, sensitization about market requirements, and

incentives provided by the LF. The characteristic of the respective group leadership has been

singled out as another decisive factor for success or failure of a group.

However, the still existing weak group structure (or, generally farmer institutions from

grassroots to higher levels in the VC) in most farmer groups is a major challenge for SHFs and

the LFs that interact with them. Some farmers still relate their involvement in farmer groups as

part of strengthening their cohesion based on the tradition of strong ties etc. among rural folk;

or, what some analysts call ‘social capital’ and which is apparently weakening nowadays. A

major challenge is thus to use the farmers’ norms and practices of joint action and networking

as well as common goals (‘social capital’) which are applied to certain areas (e.g. the

commitment to help each other in matters of production) also for cooperation in investment,

financial and other business operations for enhanced economic development. Higher trust

levels and better cooperation practices amongst farmers are required to foster members’

collaboration in such matters. Indeed, all LFs called for improved farmer organization. Given

the above findings, this issue area should be of major concern for SHFs and LFs as well as the

GOU and its development partners. One LF for instance stated that it would increase prices for

farmers if there is a higher level of group organiza tion thus reducing the LF’s supervision costs.

Other LFs expressed willingness to enhance cooperation with farmers when farmers’

organization improves (making farmers a more advanced business partner for the LF).

It has to be noted in this context that very few of the LFs studied have group oriented

rewards and sanctions in their VC which would foster group development. The study argues

that for purposes of transforming and commercializing agriculture it is imperative for LFs (and

other stakeholders) to also emphasize group performance and use incentive schemes which

target groups, not just individual farmers.


There are moreover general weaknesses in most LF governance systems in terms of

designing and implementing a system which rewards and sanctions farmers’ performance and

non-performance respectively; reasons for this could only be established to a limited extent and

need further investigations. An exception is the inter- farmer competition in the SF case. The

annual assessment is done considering parameters such as volumes, soil management, record

keeping, food security and planting. There are different categories: winner, run up, and token

for participation. Participation in the competition is compulsory. Accordingly, the competition

has a range of positive effects: the farmers’ level of motivation, effort, learning and group

actions, as well as their loyalty and sense of belonging to the LF has improved.

Further, bulking of produce (farmers’ collective marketing) still faces challenges of lack of

stores in villages where produce can be bulked by SHFs as they wait for the buyer to pay for

and collect the produce. There are also behavioural challenges: SHFs generally need time to

practice collective marketing and thus understand the issues of this approach (compared to the

traditional practice of individual sales to spot buyers at local markets). In some cases, farmers

want to be paid as soon as they deliver the produce to the store, and find it difficult to store the

produce and wait for the buyer, especially if it is a first-time-transaction and trust levels vis-à-

vis the LF are low. This is where the WRS comes in: farmer cooperatives would borrow money

from financial institutions or government programmes like ‘Bonna Bagaggawale (Prosperity

for all)’, and issue to farmers receipts for their produce. Farmers in immediate need of money

could then discount their produce receipts at SACCOs formed alongside their marketing

cooperatives. The buyers would then enable SACCOs to offset their indebtedness to fina ncial

institutions/programmes when they pay for the produce.

The LF’s delay to pick the produce from stores or pay for the produce or any other related hick

up in the buying season interrupts the confidence building of farmers in bulk marketing. The

reported experiences of bulk marketing reveals: VCD is a process in terms of: (i) learning of all

actors and (ii) gradual improvement of the systems and practice in the VC. For instance,

farmers need time to practice, learn about and gain trust in collective marketing; LFs time to

practice and learn about other issues. Overall, VC actors need to invest in mutual trust

building; any hick-ups (operational and other problems) in a buying season, caused by any of

the VC actors, prolong and thus destabilize this gradual process. Only with time and successful

repeated interactions can practices in the DVC be improved towards advanced or more

commercial levels.


Handling trust and relationships in the DVC

Trust is another major issue in VCs: Many respondents - both farmers and LFs - refer to trust

as the basis of the mutual business relationship. The LFs have usually a high awareness of the

importance of trust and try to develop trust with farmers; especially in the absence of use of

any or enforceable contracts. Indeed, where contracts do not exist to guide expectations, the

level of trust - defined as suspending uncertainty and having positive expectations about the

behaviour and good intentions of the other - has to compensate for the insecurity in the

arrangement. However, the research identified varying levels of trust: weak, fair and strong;

declining, unchanging and improving.

Farmers showed awareness of the role of trust in the VC (often due to experience with the LF)

and highlighted actions that target developing trust with their LF, e.g. improving quality and

quantity of the produce, applying the LF’s advice, practicing what was learnt in the trainings,

being patient with LF’s deficits and believing in the LF, complying with contract provision,

selling to the LF on credit, selling only to the LF and informing the LF when they sell to other

buyers (e.g., in times when LF cannot take produce, SF case), reserving produce for the LF as

opposed to selling to other buyers at higher prices, communicating to the LF internal dynamics

in the farmer group or issues of supply and demand in general. Farmers referred to a mix of

tangible/technical (quality, quantity) and non-tangible/social (patience, belief) dimensions

when reflecting on their active trust building efforts; this should be noted by LFs, other farmers

as well as researchers.

A number of groups reported that during their relation with LF they have learnt about the

importance of relationships, loyalty, honesty and trust in business or the relevance of working

with a developmental buyer (e.g., SF case). When assessing the costs and difficulty of

switching the buyer, groups referred to indirect (loyalty) and direct (price, market, future

business) costs. Farmers who have a perspective of several seasons ahead apparently tend to

weigh the loyalty factor higher in their decision about switching business partners than more

short term oriented farmers who focus predominantly on price. Many of the issues raised above

point to significant learning steps in the context of development of SHFs; they touch a mix of

technical and non-technical aspects.

Respondents further indicated that LFs built trust and relationships with farmers by the

following: providing an assured market (regular high level transactions improve relations) and


taking all or most of the farmers’ produce, buying from and working with a group for a longer

time and fulfilling promises over that time (having a clean record in terms of not breaking

promises or outright cheating). Further: by paying a more than average local price, paying

regularly, being flexible in terms of payment methods and other matters, providing assistance

(in forms of inputs, advice, visits, training, pre-finance, or problem solving). Important in the

context of LFs’ trust and relationship building with farmers is finally: giving incentives to

improve farmers’ performance and exposure, increasing farmers’ identification with the LFs’

project, being transparent, reliable and physically visible and approachable (accommodate

farmers concerns),being part of farmers’ social life11, and being concerned with farmers

development and well being. Across the case studies regular payment is on of the strongest

factors that binds farmers to a LF; thus, LFs should try to minimize incidences of late payment

and/or late collection of the product.

Regular face-to-face interaction between the LF (including field staff) and farmers both in

good and bad times (periods of high/low demand) is crucial for establishing, keeping and

enhancing relations in DVCs and keep or boost the farmers’ motivation and confidence in the

LF. It is thus important that buyers are willing to invest in a good field presence. Training

farmers is also effective in increasing farmers’ commitment and loyalty regarding the LF, and

improving the farmers’ understanding of VC matters. There is an interesting example of one

BNP supervisor (honey) referring to the social or family context of farmers when he trains and

sensitizes them about issues such as bee care or loyalty to BNP. He asks farmers: ‘How would

you feel when you bring up a child and it turns against you’ (to make a point on loyalty

towards BNP); or explains ‘killing a bee is like killing a baby or killing the unborn baby inside

the mother[’s womb]’ (to make a point on improved beekeeping practices). Besides, there are

examples that trust in the VC has been improved by using an advanced machine (equipment)

for quality control or weighing when farmers supply their produce to the LFs. Generally, such

machines can be useful governance tools in agricultural VCs in Uganda; they help stabilizing

the LF-SHF relationship. A machine which is correctly measuring the parameters of concern

(milk quality, coffee weight etc.) is perceived to be neutral or fair and additionally provides

valuable information and feedback to farmers (on their produce quality etc.).

11

By developing a social relat ion, participating in village events, making small contributions to school fees,

helping to build a school, renovate a church, or fund raise for other causes, among others.


To sum up, the above mentioned various factors that have a positive impact on trust in the VC

suggest the following: LFs have to do well12 on various13 relevant trust dimensions to win and

keep the trust of farmers.

Interestingly in this context, the level to which a LF’s actions are seen as ‘fair’ depends on the

fairness (behaviours) of other buyers in the locality. Besides, some farmers could not assess the

‘fairness’ in the relation with the LF since they had no information about the price structure in

the VC. Indeed, the case studies show that it is important for the stability, growth and

sustainability of the VC that farmers are aware of: (i) the benefits (and costs) of being in a

constant relation with a developmental buyer, and (ii) their own role and contributions to this

arrangement so that the VC stabilizes in a win-win situation where positive expectations about

the other are fulfilled, thus trust enhanced, and both parties gain from long term benefits of

steady VCD. In this context, some LFs have the challenge of exploring ‘fair trade’ practices

where the final selling price, as well as costs and the profits earned at the end of the transaction

are known to all actors in the VC. For instance, one SI was of the view that the respective LF

was retaining a greater proportion of the organic export price premium compared to what it was

paying the SHFs. We argue that LFs clarifying to farmers and where appropriate adjusting the

cost/payment structure in the DVC could be one of the effective ways of winning the loyalty of

the farmers.

However, LFs are not always successful in developing and deepening trust and relationships

with farmers. Farmers indicated that LFs’ deficits in the following categories undermine

relations and trust between the LF and farmers: timely payment of farmers, price levels

(compared to non-developmental buyers), price negotiations with farmers (giving farmers a

voice), flexibility, timely and logistical arrangements to pick the produce, communication, as

well as field staff treatment by the LF and staff turnover. On the latter point, LFs have to

realize that (i) (actual or perceived) unfair treatment of its field staff (in terms of low job

security and remuneration) and (ii) a high staff turnover (no matter what the reasons)

undermine relations with farmers. Farmers get scared and lose confidence and trust in the LF

when field staff change too often. Relations are also undermined by LF’s buying agents

cheating either (i) farmers on price or (ii) the very LF (by misusing company money, taking

produce to a competitor, among others). Based on the BNP case, one can say that farmers

(especially LFAs) and other stakeholders of the VC (such as SIs) closely follow human

12

Perform well as VC governors and act with some considerations of the farmers’ interests in mind; be pro -farmer. 13

Do well in terms of regular payment and others issues.


resources changes and this may make farmers emotional in a particular way. In such situations,

to restore confidence, LFs - after they have resolved the matter - need to communicate to

farmers the actual events, their reasons, the company response and the way forward. For that,

LFs need public relation competences; which some of the LFs studied in this report generally

seem not to have at sufficient level. Not communicating, even in times of crisis, creates a

vacuum for rumours and instability of expectations on the farmers’ side which can affect trust

levels and make trust building more difficult (costly) in later periods of the relationship.

Further to the point, LFs have to take into account that relations between (good) field staff and

farmers are something of value to the company: field personnel are important on the technical

front (giving farmers training and advice) and the trust front. Field staff can be creators (or

destroyers) of trust. The issue of field staff thus needs to get sufficient attention and support

from the LF’s management. This includes careful recruitment of field staff to avoid as far as

possible having to fire for instance a SV because of his/her cheating. Staff- farmer relationships

are an asset for LFs which it can lose if a SV leaves the company. Besides, fired field staff can

later turn against the LF and de-campaign the firm (BNP). Changes of field staff need to be

communicated to farmers to keep their confidence in the relation and business with the LFs.

There are moreover external factors that affect the LFs’ success in trust formation with

farmers: (1) competition for farmers’ produce and related ‘interference’ of other buyers into the

VC in that they try to capture the produce after the LF has developed farmers’ capacities , (2)

‘price wars’ with other (often non-developmental) buyers (LFs studied are usually the price

setter in the area), and (3) de-campaigning of the LF by other buyers and their political allies.

Indeed, the competition for produce from other buyers is a major risks that some LFs (after

having developed farmers’ capacity) have to bear. To address this risk, codes of conduct (CoC)

for buyers are in the making for instance in the Ugandan Fruits and Vegetables (FV) industry

which aims at limiting the local traders’ taking over of both farmers and foreign buyers

(importers). It is hoped that this will bring stability in the operations of the FV industry through

behavioural change. It is important that stakeholders including policy makers follow up and

support the initiative on CoC in this industry. Good practices and lessons learnt need to be

transferred to other sectors.

Overall, there are expectations among some respondents that buyers in Uganda (in certain

sectors) are under business pressure to enhance their relationships with farmers in the near


future: to meet targets in terms of quantity, quality and standards. Thus, buyers that are on the

edge of setting up direct and long term oriented relations with SHFs should benefit from

available knowledge in the country on the specifics of such a move (some of them are

documented in this report). Lessons learnt from the cases should be utilized. The LFs’ learning

process needs to be linked to respective SIs that can partner with LFs on governance matters.

Besides, LFs emphasized that the following farmers’ deficits undermine the establishment of

high-trust DVCs, and makes DVC governance more costly and risky:

the price focus/obsession (switching the buyer for a few Ushs thus not honouring

agreements with the LFs),

deficits in loyalty and honesty after farmers have received inputs from the LF on credit and

are supposed to engage in repayment via deductions from payment for supplied produce,

unpredictable behaviours and

short term business orientation, as well as

low organizational level of farmers.

In one case (BNP), the LF and farmers called for intervention of GOU in price setting and

sensitisation of farmers about relationships and loyalty matters in DVCs. Overall, the adverse

impact of weak farmer organization on VCD should be of great concern to stakeholders,

especially farmers and GOU; the latter having the primary responsibility of developing her

people. Farmer groups have incoherencies that limit the impact of the support provided by

GOU and the LF; low mobilization, or low training participation in some incidences are related

issues. Groups can fall apart because of low activity and coherence levels. These findings point

to the relevance of the success of the recovery of collective action of farmers (cooperatives) in

Uganda. Better group organization and governance enhance the performance of the farmers

(thus LF/DVC) and reduce the LF’s governance costs thus potentially allowing the latter to

increase prices for farmers (as stated by some LFs). The work to do in the organisation and

development of farmer institutions is significant, with roles for various parties in this respect.

An emphasis on group strengthening constitutes a vital pillar of sustainability of VCD efforts.

The role of Government as well as support institutions and support industries

There is a close link between the nature and level of success of state measures on one hand,

and the level of effectiveness and success of measures of the DVC actors and SIs in promoting

VCD on the other. Also, state decisions impact on: (i) relationships between DVC actors


including the division of labour in the DVC, and thus (ii) the structure of incentives/profits of

each actor, among others.

The efforts and results of the state in supporting the VCs studied have been mixed. On one

hand, characteristics of public sector operational regulations, guidelines and implementation

levels (or lack and gaps thereof) are sometimes a challenge to LF’s efforts towards effective

VCD. Respondents also noted that some government decisions and interventions were

insufficiently researched prior to the move and/or suffer from ad-hoc methods and corruption

in the state system.

On the other hand, government policies and programmes have helped the DVC, the LF and/or

the farmers, mostly in terms of training and equipment provision or infrastructure improvement

and general security. The partnership between BNP is probably the most advanced cooperation

between GOU and the LFs in the case studies. Farmers were trained in both technical and

organizational issues and linked to BNP. Technology was provided to farmers on credit with a

binding arrangement to supply BNP with honey for matters of repayment. Since NAADS

supports the idea of having farmers contractually bound to the buyer in the PPP (Public Private

Partnership), it has to clarify in future the methods of contract enforcement given that many

farmers did not honour the MOU because of better prices from other buyers who were not part

of the PPP. For situations like this - in which a LF (and partner in a PPP for farmer

development) and many other buyers are severely competing for the produce in the locality -

the GOU (in partnership with farmers and the LF) has to find a more lasting arrangement to

ensure its PPP meets the set targets.

Both NAADS and BNP stressed the point that price setting and loyalty matters need to be

resolved in the West Nile honey industry and are in favour of a regional price setting

mechanism that handles price setting prior to the harvesting season. The NAADS support for

meetings between BNP, farmers and DVC stakeholders in this context is commendable, so is

the plan to equip farmers with knowledge and skills relevant for price calculations and

negotiations with BNP. Some of the above support tools need clarification in terms of rules

of engagement for the state for the BNP and other DVCs (see below). The details and results

of this PPP should be studied more and lessons learnt for such forms of PPP established.


The BNP case also shows: public interme diaries such as the Local Government Production

Officers can be essential in helping the economic actors to set up and improve the DVC.

Within the experimental context of VCD in Uganda, there is need for the state: (a) to spell out

and sensitize public employees such as the Production Officers about their role in VCD as well

as (b) to train and counsel them and organize exchange of experience between public servants

who are in similar position regarding their role in promoting VCD.

In other cases, the government support in crucial issue areas is largely non existent, which

leaves the LF with a significant burden regarding the development of both the DVC and the

farmers. Some LFs noted that by ‘doing the work others should be doing’ they considerably

overstretch their scope of activities beyond core functions (buying produce and training

farmers in essentials) to develop farmers’ capacities (at times from scratch). This is a crucial

observation: the more committed LFs in Uganda, especially in sectors that are new to an area

(or the country), risk getting overwhelmed by the governance activities they have to carry out

to develop the DVC sufficiently. This is due to the weak farmers’ capacities and the low

effective support provided by SIs. LFs thus appeal to the responsible authorities to play their

part more effectively in future.

Getting other stakeholders involved in the development of farmers’ capacities is a major

strategy of all LFs to reduce their governance burden and costs. Such partners are NGOs,

development agencies, government institutions and input suppliers. In this sense LFs take on a

linking and mediatory function for farmers. There are examples of good cooperation between

LFs and SIs/SIDs; which benefit farmers, the LF and the DVC. Further, SIDs such as input

suppliers - due to their commercial and partly developmental interests - can provide more than

the products they sell to farmers, but also ‘extras’ such as advice and training on both the use of

their products and general related issues, At times, actors of the SIDs are filling the gaps left by

the weak public support system. A government policy should aim at optimizing: (i) the extra

benefits farmers get out of such collaborations, (ii) the regulations of the SIDs, and (iii) the

existing PPPs of buyers, input suppliers and other VC actors/stakeholders at national and local

level for regular and cost effective training provision (see JE case).

Some non-state support programmes and SIs made useful interventions. In many cases, the

support from SIs was essential for the LF to build the DVC with farmers. It is thus important

that both public and private SIs keep designing and effectively implementing relevant


interventions so that LFs and SHFs benefit. Interviews with SIs suggest that it is possible to

carry out interventions which foster direct relations and thus interaction between LFs

(exporters) and farmers, and thus can stabilize the prices farmers get for their produce. Market

requirements (e.g. traceability, quality based competition) can be used as a pushing factor for

relationship building purposes in the VC. In this context, the case studies reveal the importance

of joint emphasis in terms of product priorities by GOU and LFs to coherently promote a

particular product in a particular geographical area.

Overall, SIs and SIDs (including agro-consultancy firms) have to fulfil an important linking

and mediatory function between farmers and buyers. This therefore makes their ability to fulfil

their function an important factor in VCD. Development agencies should thus be concerned

with involving local SIs/SIDs (including training and technology providers) in their work -

instead of over reliance on project staff - so that meaningful interactions between local VC

actors and stakeholders can take place and continue after the project. Some donors/state

support interventions face a sustainability problem after the end of the project.

Further, there are examples where two or more SIs partner with a LF and other VC actors to

complement one another and improve the performance of the DVC actors (including farmers)

and the entire DVC. This was witnessed for instance in the cases of both BNP and IB. In

particular, different SIs may have different (yet relevant) interests like food security and

standards, welfare of children, sustainable agriculture of other crops and livestock and

environment conservation which all combine to address issues of poverty and performance of

farmers. This approach can be more effective than stand alone, single development

programmes that target on only single issues in the DVC. Overall, GOU and development

agencies have to learn to design and implement programmes that include (not just farmers but)

the buyers and other VC actors such as agents and transporters and improve issues along the

DVC. BNP for instance received support from a SI for improved quality systems in its DVC -

the support targeted both the LF and the supplying farmers.

Overall, LFs seem to be ever looking for partnerships with effective SIs that would like to

engage in giving assistance to farmers. LFs highlighted that they at times face difficulties in

finding appropriate partners (cases of BNP and JE). This does also apply to outsourcing of

functions such as marketing, transport and farmers’ training. In some incidences there is

surprisingly little interaction between the LF’s field staff and the coordinators and


implementers of government programmes, which indicates lack of understanding and

cooperation in VC operations, among others.

A notable observation by some SVs (SF case) was that the level of commitment towards

developing strong farmers to supply future markets is higher among LF’s field staff than the

private service providers (PSPs) who work on short term/seasonal contracts, get paid for their

services and move on (e.g., NAADS’ PSPs). This comment raised the issue of sustainability

levels of: (a) embedded services provided by the LF because of an inherent (commercial)

interest in development of farmers and VCD, vis-à-vis (b) external short term service provision

based on cycles and contract incentives of state or donor programmes. NAADS and other

public SIs have to consider how: (i) to incorporate more the developmental LFs in their

activities, and (ii) to strengthen the provision of meaningful embedded services to SHFs by LFs

or LFs’ long-term SID partners (e.g., agro-consultancy firms).

Importantly, uncoordinated (or an inappropriate mix of) interventions from different

development agencies (including NGOs) can lead to ‘confusion of farmers’ as well as

confusion and setbacks in the VC in general. For instance, different private sector actors as

well as SIs are currently promoting organic and conventional farming in the same areas. There

are reports about a conventional project (of one SI- promoting use of chemicals and treated

seeds) next to an organic project (of a different SI). However, the organic code has stringent

conditions which make the adoption of the two types of farming mutually exclusive. Related

complaints by farmers and LFs that are active in OA point to regulation gaps in terms of

conventional and organic areas. If these practices continue, organic VCs can lose their organic

certification and be sanctioned for several years; which would be to the disadvantage of those

farmers who currently benefit from organic price premium. There is thus a need for agricultural

areas to be zoned clearly, demarcating areas for organic and conventional farming.

There are furthermore incidences where the design and implementation of development

programmes shows poor awareness of prevailing DVC issues and/or inadequate

cooperation with the LF. For instance, in the BNP case, beekeepers are supported by a SI

with skills and technology for honey processing to become more independent from the

dominant LF and (supposedly) sell at better price to any (often non-developmental) buyer;

without any meaningful consultation with the LF prior to the intervention thus neglecting

important relationship dimensions of the DVC (‘whoever is the buyer is not of great concern to


us’ - respective programme officer of the development agency). In general, isolated

interventions which assist one VC actor (e.g., the farmers) without involving other VC actors,

at least at the level of meaningful consultations, could have negative consequences regarding

the relationship and development of the respective DVCs.

In another incident in the BNP case, a SI’s provision of low-quality production equipment to

farmers has advanced product quality standards lower than the one preferred or promoted by

the LF. Such apparently insensible interventions - that do not adequately consider the existing

VC context (e.g. the LF’ strategies) - can, first, cause confusion and setbacks in both the LF

VC and the sub-sector in a location. Second, they may leave the farmers worse off in future

when for instance (i) the low-quality equipment produces lower product output and quality

levels or (ii) the link with the LF has been cut, and thus, training, advice and market access is

not offered anymore by the LF to the farmer group while the other (better paying) buyers are

not advancing such embedded services.

Noticeably, related to the IB case study, some local administrators (LC3s) would want to tax

activities of the LF’s projects of farmer development (including coffee buying). This would be

counterproductive to farmers as the tax would be passed on to the farmers in the pricing

mechanism. It would also discourage donors and LFs to engage in similar projects.

Given the above evidence and the respective demand by LFs and SHFs for better stakeholder

coordination, the report recommends that GOU, donors and SIs (and to some extent SIDs)

should be concerned with promoting a more harmonized, integrated and coordinated

system of: standards, practices, and knowledge, as well as economic development strategies

and priorities and thus support interventions for proper VCD in a specific location. VCD can be

carried out with good results in partnership between VC actors and stakeholders, where all

players need to know about and follow their roles and responsibilities. The option of promoting

and investing in such partnerships is both a chance and challenge given the overcrowded aid

sector in some geographical or issue areas in the country. The LFs have to keep shouldering

part of the related actors’ coordination, but without the efforts of the powerful state and donor

SIs results oriented coordination of support measures remains illusory.

Further evident, staff of SIs can improve their understanding of VCs by working with both

the technically knowledgeable staff of the LF and the farmers over some time, which can


eventually improve the SIs’ service provision (case of NAADS-BNP). From the experience of

the private sector SI NOGAMU (National Organic Movement of Uganda, see SF case), it is

evident that it takes time and effort to make institutions adjust to working within a VC

framework and carrying out meaningful VC informed interventions. Designing and

implementing appropriate measures requires a lot of ever updated information and knowledge -

thus research, interaction and experience - about the VC; its actors (farmers, exporters,

importers abroad and, if possible their clients) and the governance of their relations. Given the

current weaknesses of the institutional structures of the relevant public support system, the state

has a significant task ahead to make full (or better) use of the VC approach in designing and

implementing respective support measures including regulatory improvements.

No doubt, public SIs have to create meaningful relations with LFs (and smaller buyers) and

farmers and use these relations for promoting VCD. This however would constitute a

significant challenge for public servants who have kept distance from such forms of

interactions with private sector actors in the recent past. In the absence of meaningful relations

(or in the transition period towards such a state of affairs), more state support might have to be

provided to private sector institutions such as NOGAMU (National Organic Movement of

Uganda) to play a useful role in VCD. The state should however try to involve all professionals

(from the public and private sector) who have experience in linkage building of VC actors, or,

generally, working according to a VC approach. Such experts could help the state, where

required, in training and assisting public servants at both central and local government level in

VCD. There should be training workshops on VCD support interventions and institutional

processes. It is also timely to have workshops and consolidating trainings organized for field

staff of LFs (and for LFAs) who are involved in the governance of VC. This can help in taking

stock of various approaches to VC governance, sharing lessons- learnt and providing state

officials and other VCD proponents with insights about issues on the ground.

Moreover, in the context of its economic diversification agenda, GOU has to consider more the

contribution of those LFs who are pioneers in: developing the supply base of a new sub-

sector in a particular geographical area (e.g. by training farmers in a new activity) and

demonstrating to following actors that this new commercial activity is possible and viable in

this area. Given these positive externalities where the benefits for society are much higher than

the private benefits the pioneer can reap commercially, there is an argument for support of the

LFs’ (risky and costly) efforts and investment into VCD in new sub-sectors or activities to

arrive at a social optimum (increased level) of such efforts, especially in the early phase of sub-


sector development (Rodrik 2004, Lall 2004)14. Without such state support (including

protection from copy-cats, e.g. non-developmental agents who reap the benefits of the capacity

building), the pioneer firm (LF) will invest less than desired in capacity building (including

technological upgrading) of farmers which slows down sub-sector’s development, hence

diversification. The pioneer will scale back these investments because it knows following

buyers will later trade with farmers and thus benefit from the demonstration and capacity

building effect and out-compete the pioneer on price; because these buyers have not invested in

VCD (e.g. farmers’ training). This scenario is at play in the case of BNP regarding honey

production in the West Nile region. There is a market failure in terms of information,

technology and capacity building externalities which have to be addressed by policies (ibid).

Again, not all buyers are willing to co-operate in support activities that benefit farmers,

because they don’t want to invest in long term development and feel that the state should do

that anyway. That is why GOU should seek to enhance cooperation with those VC actors

(LFs and others) that are not just purely short-term commercial (money for product) but also

somehow developmental (which is long term commercial in a way) in their orientation towards

matters of VCD.

However, GOU will have to clarify on its conception and involvement in PPPs in DVCs ; the

scope of support provided to both LFs (for building and managing the governance systems with

farmers) and the respective farmers. GOU needs to spell out guidelines (rationale and

principles) for its engagement in partnerships with a particular LF: On which basis (e.g.,

demonstration effect in case of the pioneer firm, public good character of LF’s governance

efforts) is the buyer chosen and supported? What are - based on the guidelines - the roles of the

state, the LF and farmers in this PPP? How does the state monitor that private sector parties

fulfil their obligations and work towards the PPP goals over a period of time. What are the

sanctions for breach of the obligations? The analysis of the BNP-NAADS case shows that this

clarification has to include to which extent the state wishes to engage with LFs not only on

matters of farmers’ production (training and equipment for farmers) but also sales and

marketing (loyalty, contracts, prices). Given current state of affairs, since (according to

respondents) NAADS supports that farmers are contractually bound to the buyer in the PPP of

14

Lall, S. (2004) Reinventing Industrial Strategy: The Role of Government Policy in Build ing Industrial

Competitiveness, UNCTAD, G-24 Discussion Paper Series. Rodrik, D. (2004) Industrial Po licy for the Twenty-

First Century, Paper prepared for UNIDO.


BNP, it has to clarify the methods of contract enforcement among others, and get farmers to

appreciate the link between LF’s investment in farmers and prices offered by it.

GOU will have to address the issue of ‘sub-standard buyers’ (NAADS term) whose practices

and behaviours (as well as products) undermine continuous, consistent and speedy VCD. It is

going to be interesting how GOU might attend to business practices in the agricultural-sectors.

It would be a rather new ground for the administration given its overall liberal stand on

regulating market actors and dynamics (due to its politics of ‘non-interference’ with market

forces). Yet, the state should think about how it can stimulate better buyer-farmers relations.15

Amongst others, it could consider fostering a national traceability system, quality based

competition and provision of other incentives to make buyers build relations and cooperate

with farmers. Further, specifically for coffee, GOU has to put in place more serious and

enforceable measures on all stakeholders who default on quality (poor harvesting and post-

harvesting, buying wet coffee). Farmers in the IB case associated poor quality control measures

with vote seeking of the L/C system; L/C leaders are not keen on assisting to apprehend wrong

doers because they fear losing votes.

Finally, GOU has to work on meaningful regulations and step up its support with regard to

VCD, including effectiveness of extension services and microfinance institutions, among

others, to enhance farmers’ capacities. The study has pointed to some respective gaps and

inadequacies that have hampered VCD in Uganda in the past years up to now. In short, there is

considerable effort in Uganda to address regulatory and bureaucratic bottlenecks to

investment; GOU should be concerned with the same in regard to VCD. However, more

regular practical support of VC actors on the ground that ensures effective assistance and

actors’ learning will require effective local support structure with staff who are willing and able

to interact meaningfully and regularly with the VC players. Market growth for LFs remains one

important but not the only crucial pre-condition for sustainability of VCD in Uganda in terms

of ability to finance governance activities and enhance the actors’ business and upgrading; the

GOU has to help in the issue areas discussed in this report.

15

A more general point is to re-consider the state’s role in ensuring the moral and normative preconditions for the

running of a (developmental) market economy in Uganda. See for a related discussion Wiegratz, J. ‘Beyond harsh

trade!? The relevance of soft competitiveness factors for Ugandan enterprises to succeed in Global Value Chains’,

in African Journal of Business and Law (AJOBAL), fo rthcoming.


LF deficits that need improvement

Based on respective deficits, there are indications that LFs (at least one respectively of those

studied) have to improve the following:

Enhance staff and logistics levels to improve DVC efficiency and minimize hick ups

(especially in the buying season) which delay the learning and trust building process in the

VC,

Minimize incidences of delayed payment to farmers,

Improve systems and relations with farmers and other DVC stakeholders thus DVC

efficiency. Below listed measures can improve the LF’s (and thus VC’s) competitiveness in

both soft (responsiveness, reputation, stock of information, loyalty from farmers and

customers) and hard (quality, quantity) dimensions,

o Improve communication with farmers (on price calculation and negotiations, or

business strategies, among others) and stakeholders of the VC, including the consumers

and general public. Already, several LFs have started to move away from price

declaration towards price negotiation with farmers,

o Improve relations with LFAs and regularly seek their views and advice on the gaps,

threats and strength of the LF’ governance system,

o Some LFs have to step up their methods of relationship management in the DVC

through meetings, suggestion boxes, public relations department, website, press articles,

or questionnaires to track governance performance of the LF and related views and

suggestions of farmers and VC stakeholders,

Improve field management through: (a) adequate field staff level and remuneration and (b)

improved rules and guidelines for field work with farmers. This part of management

functions of LFs did not in some cases studied get the appropriate attention from

management. Yet, not only can improved middle and lower staff levels (field management

and staff) improve supervision of farmers but also the relation of LFs with farmers and thus

the latter’s trust and confidence in the LFs and the future of the business relation,

Limit cheating of LFs’ buying agents/field staff, e.g., by proper publicity of the prevailing

price,

While the strategy of engaging other stakeholders in farmers training is correct, LFs have to

consider offering regular training as well. NGOs for instance are often not providing

regular training, but only on-off support interventions. There are furthermore always

newcomers in the LF supply system who need first time trainings while refresher trainings

are necessary for all farmers. LFs (such as JE which does not do farmers’ training itself)


should note that trainings do not only enhance farmers’ technical capacities but also their

loyalty to the LF. The loyalty factor might become particularly important when new

competitors enter the same sub sector in the LF’s geographical area,

Some LFs have to organize more ‘chain visits’ of their farmers to the LF’s headquarter,

outlets and customers such as supermarkets in Kampala. The farmers’ ‘learning by seeing’

is important not only in: (i) technical terms (learning about what happens to the product,

why quality inputs matter, how the LF product compares to other products in the Kampala

market), but also (ii) in terms of farmers’ motivation, loyalty and trust re the LF. Some LFs

could consider providing more information about their farmers (including farmer group

pictures) on both the respective LF’s products and website. That could be helpful, among

others: as a marketing tool (used already by some Ugandan exporters), in enhancing

farmers’ identification regarding the LF and its products (thus increase the their motivation

and loyalty to supply the LF and improve performance of the VC), and, generally,

strengthening LF-SHFs relations,

Work more innovatively with existing farmers in the VC on challenges of loyalty and side

selling, instead of merely expanding the number of supplying farmers to get the required

volumes. LFs need to give farmers a feel of inclusion, through communication,

consultation, and responsiveness, but they can as well consider measures such as end of the

year gathering or giving farmers company symbols (sticker for farmers guest book, t-

shirts), or pictures that illustrate other parts of the VC, for instance customers who enjoy

the LF’s product. The latter might make farmers feel proud to be part of a larger system of

quality production that links them to the country and the world,

LFs also has to invest in the management of farmers’ expectations - especially through

communicating what functions and price LFs is able to provide, and why other things such

as pre-finance, or technology provision should be the responsibilities of the SIs - as this is

an important channel to limit farmers’ expectations and thus disappointments (and trust

deterioration) in case the LF fails to perform as expected,

Initiate, develop and apply appropriate systems of rewards and sanctions for farmers for

performance (including loyalty) and non-performance (including disloyalty) respectively.

Note that not just rewards but also (monetary and symbolic) sanctions change the incentive

context for the respective farmers. LFs have to consider linking support provision (inputs

and training) with a more strict binding agreement for farmers. LFs that face a large

number of defaulting farmers have to ‘talk more’ about their rewards-sanction system (and


its application) to ensure a sensitization and demonstration effect to other farmers, e.g.

those who are indecisive about loyalty.

Regarding the four hypotheses of the study:

(I) Production and trade dynamics at the level of SHFs and LFs are related to forms of

relationships between VC actors; and thus to forms of VC governance. Deficits in terms of

loyalty and trust between SHFs and the LF for instance reduce the produce that SHFs sell to LF

and increase side selling. Further, speciality markets’ requirements (e.g., organic certification)

foster LF and SHFs to have a close and continuous relation which includes joint harvesting,

quality checks, and training; LFs need to build up a field presence for tha t. The training,

advice, or pre-finance offered by the LF strengthens the skills and capacities and thus

performance of SHFs in terms of output quantity and quality. LFs also link SHFs to SIs such as

NGOs or SIDs which again strengthens the SHFs. All these measures are a result of advanced

relations (the network type governance) between buyer and farmers that are markedly different

from the purely transaction based (arms- length) approach common in Uganda. (II) Thus

network relations with a LF offer better earning and upgrading conditions for SHFs than arms-

length spot-market relations.

(III) The case studies show that different forms of governance require different degrees of

farmers’ capabilities. Network relations with LFs come with requirement for SHFs to enhance

their skills in agronomic practices, post harvest handling, sorting, or storage. LFs offer

assistance to raise the required skills, yet also demand that the SHFs improve their work

practices over time. Further, SHFs need skills for intense communication, trust building, and

transparency vis-à-vis the LF; they also need to show loyalty. Integration into such relational

modes of governance requires a high degree of relevant capabilities.

Finally (IV) the report shows that enhanced skills and collective actions of SHFs reduce the

LF’s costs and risks of coordination and monitoring. For instance, training provided to farmers

(by the LF and its partners) reduce the monitoring costs of the LF in the later periods; through

better skills and performance as well as self-governing capacities of the farmers. In the same

vein, enhanced farmer group structures reduce coordination costs for LF. In addition,

governance costs are reduced by enhanced opportunities to efficiently transmit knowledge and

information between LF (and its partners) and SHFs which is a result of better farmers’ group


formation (thus acting increasingly as one voice), improved communication practices of

farmers, and the increasing mobile phone use.

Further research is needed on the following matters:

Case studies of governance systems of other LFs in Uganda, e.g. in the sugar (all main

players), textile (Phoenix Logistics), fish and coffee industry,

The challenges for LFs in setting up and enforcing systems of rewards and sanctions for

good and poor performance of farmers,

The relationship between rewards, sanctions and farmer groups performance in the DVC,

The relationship between LF’s support activities and farmers’ loyalty levels. The role of

LFAs as a link between LFs and farmer groups and the reasons for different outcomes of

LFAs’ activities e.g. in terms of mobilizing farmers and enhancing their loyalty towards the

LF. Similar research gaps exist for the role and ‘effectiveness’ of all other VC ‘governors’

including (1) SVs as links between LF management and farmers, (2) consultancy firms, and

(3) local government,

Effectiveness of different methods for farmers’ training, and impact of governance tools

such as quality testing machines on VC relations and actors’ performance,

Managing relationships in the DVC (from the perspective of all economic actors as well as

stakeholders),

Influence of dimensions that have been grouped under ‘social capital’ on the performance

of the LF,

Trust links in the DVC: different actors - their role, behaviour and impact regarding distrust

as well as high/low trust in different links in the DVC,

Farmers’ trust levels and commitment vis-à-vis the LF and farmers’ switching,

The link between a farmer group’s geographical distance from Kampala, its economic

options and the level of loyalty towards a specific buyer, generally: factors that impact on

loyalty and trust levels in the DVC,

The views and calculation of LFs regarding: (a) interacting with groups vs. individual

farmers, (b) enhancing loyalty vs. expanding the number of farmers to achieve supply

volumes,

The governance practices and rationale of ‘sub-standard buyers’, and in this context: the

motivation of what we call non-developmental buyers to only engage in arms-length trade

with farmers vs. the different approach of the apparently few more developmental buyers,


Experiences of the FV industry in designing and applying CoP for the industry,

Experiences (possibilities) of state measures to limit ill-treatment of farmers by certain

buyers,

Political economy issues in VCD: (a) links between the state and VC actors (LFs/SHFs)

and the impact on outcomes of VCD (e.g., relation between categories of links of various

LFs with the political and bureaucratic system on one hand and the LFs’ governance

practices and success on the other), (b) link between governance modes (actors’ practices)

in the DVCs and wider structural forces and imperatives in the domestic/regional/global

economy, (c) the role of SIs in the politics of VCD, and (d) politicians’ views and activities

regarding matters of LF’ governance and VCD,

Experiences and views of the farmers regarding various governance matters in their VCs,

Problems of farmer groups to cooperate internally on matters of finance and investment and

other strategic business issues,

Gross margin analysis (cost-benefit) along the VC to establish amongst others: (i) the unit

costs of a product for the SHFs, (ii) if additional upgrading efforts of farmers are

worthwhile in terms of extra income or higher sustainability of the economic activity, and

(ii) the LF’s calculation of prices and assistance given to farmers in the context of public

funding for the LF’s VCD,

The sustainability issue of public support for VCD (and related LFs calculation and

behaviour),

VC informed support interventions and institutional processes; for instance, the experiences

of SIs such as NOGAMU in applying a VC approach to guide its actions, e.g. in linking

importers and exporters with farmer groups. Comparable experience of state institutions in

marketing, linkage building and training. The question for the GOU should be how its SIs

(UEPB, MTTI, embassies, NAADS, and others) can be structured (staff organization, skills

and incentives) in a way to carry out VC interventions successfully, where appropriate,

Details and results (lessons learnt) of PPPs for VCD between the state and LFs (or the state

and SIDs).

Online version of the summary of the UPTOP study: December 2007

For comments, please e-mail: [email protected] .


Self Improvement

MDF Lead Firm Cases compilation, dec2008