Inclusive Business Models How investment and appropriability hazard shape governance structure written by: W. Vellema, C. Ménard, M. D’Haese presented by: W. Chamberlain

To start: a definition Inclusive business models are defined as private sector for-profit initiatives which include the poor with the stated intention to improve their well-being through governance structures which go beyond arms-length market transactions.

The operating environment Financial imbalance between firm and farmer forcing firms to make most investments Weak public institutions making public enforcement costly

The problem: appropriability hazard The firm invests, but the farmer controls This situation creates appropriability hazard How to design the governance structure?

10 case studies Selected to capture diversity Different governance structures Different products (investment needs) BOOK: “Is inclusive business for you?”

Collected information Type and size of investment Distinguishing between training, inputs, and physical assets Appropriability hazard f (risk of side-selling, asset specificity, total investment) Safeguards contained in the governance structure Dispute resolution mechanisms, embedded transactions, price setting, monitoring, and associations

Example: Sugar cane* Cooperative land-lease model Farmers lease land to the cooperative Cooperative management organizes production Firm investment Training (cooperative management + contractors) Rootstock Inputs and labor in the first year * Published as Vellema and D’Haese (2015). Explaining hybrid “personalities” in smallholder sugar cane sourcing

Example: Sugar cane* Appropriability hazard (low) High asset specificity High investment BUT: local monopsony Safeguards contained in the governance structure Company extension staff meets weekly with cooperative management Government-regulated market prices Coordination with individual farmers through cooperative * Published as Vellema and D’Haese (2015). Explaining hybrid “personalities” in smallholder sugar cane sourcing

Appropriability hazard CountryProductOther buyersFirm investmentAsset specificity Appropriability hazard Kenyadairy n/aLow Mozambiquecassava Low Burundisorghum Medium Ethiopiasesame Medium Ethiopiateff, wheat, maize Medium South Africasugar cane High Low Ethiopiapassion fruit High Low Mozambiquefresh eggs HighLowHigh Mozambiquebroiler chickens HighLowHigh South Africavines and winesn/a Highn/a

Safeguards Case Dispute resolution Embedded transactions Price settingMonitoringAssociations KenyaDMFarmer investmentMarket-Yes Mozambique, cassava Fixed- Burundi, sorghum FixedLowYes Ethiopia, sesameIS Market + premiumMediumYes Ethiopia, seedsIS MarketMedium SA, sugar caneIS MarketMediumYes Ethiopia, passion fruitIS Market + minimumHigh Mozambique, fresh eggsISFarmer investmentPerformanceHigh Mozambique, broilersISFarmer investmentPerformanceHigh SA, vines and winesDMFarmer investmentInternalHigh

Common elements More investment is accompanied by more diverse safeguards When alternative markets are present.. and products are low-value: firms make limited investment.. and products are high-value: safeguards are high and diversified and farmer co-investment is required High investment is also observed when alternative markets are absent

Zooming out: The Big Picture Closing the yield gap and alleviating poverty Positive impact requires alternative markets - DaSilva (2005)* However, our results indicate that: absence of alternative markets encourages investment in the presence of alternative markets, co-investment is required In other words, either not equitable or excluding small farmers * DaSilva (2005). The growing role of contract farming in agri-food systems development

Going forward Study design allowed detecting common elements, not details Next steps More detail – South African case studies: keep institutional context constant Measure poverty alleviation directly, as well as pathways What is the potential role for the public sector? Thursday, 1pm, session “New approaches to land tenure improvements in Africa”

Thank you! Questions? -> Sponsors Partners

CountryProductGeneral description BurundiSorghum Sorghum, a local crop, is bought for beer production, through farmer associations, model farmers, and formal contracts. Ethiopiapassion fruit Fruit processing plant with own plantation and the ambition to source 50% from smallholder cooperatives with shareholding. Ethiopiateff, wheat, maize Seed production on own farm and from smallholders, with full-service provision. Formal contracts are signed. EthiopiaSesame Hulling and export company, ‘legally-binding’ contracts with smallholder cooperatives which receive pre-planting credit. KenyaDairy Dairy business hubs bring farmer services and collection / bulking together. Services are deducted from milk payments. MozambiqueCassava Mobile cassava processing unit buys at fixed price, offers transport services, and sells to local beer company. Mozambiquefresh eggs Joint venture of rearing and selling company, providing services and inputs for fresh egg production to local farmers. Mozambiquebroiler chickens Chicken breeding, hatchery, feed-mill and slaughterhouse operation has local out-growers rearing the broiler chickens. South Africavines and wines Equity share scheme, where former employees became shareholders with board and management representation. South AfricaSugarcane Land is leased to farmer-owned cooperatives, which become production centres, using contractors for field management.