Amsterdam, The Netherlands

Financing the value chain Anna Laven Senior advisor sustainable economic development Royal Tropical Institute (KIT) 27 September 2010

Amsterdam, The Netherlands Today 1. Mapping a value chain 2. Chain actors and chain supporters 3. Flow of product, money, information and services 4. Two cases: honey chain in Kenya and rice chain in Rwanda 5. Assignment for work session 1 6. Exchange of business cases

Amsterdam, The Netherlands Value chain A value chain refers to the entire system of production, processing and marketing of a particular product, from inception to the finished product. A value chain consists of a series of chain actors, linked together by flows of products, finance, information and services. At each stage of the chain the value of the product goes up, because the product becomes more convenient for the consumer Besides value, costs are added at each stage in the chain.

Amsterdam, The Netherlands Chain actors The chain actors are the individuals or organizations that produce the product, or buy and sell it. When a farmer sells a product to a trader, two things change hands: the product goes in one direction, and money goes in the other. This exchange is repeated at each stage in the chain, forming two parallel flows, of produce and money. In addition, each of the actors may be prepared to invest in the chain and to support the other actors to make sure that it functions smoothly. This gives rise to additional flows of finance between the different actors in the chain. These flows may go in either direction. In addition, the farmer and trader exchange information and provide services to each other.

Amsterdam, The Netherlands Value chain mapping (1)

Amsterdam, The Netherlands Chain supporters Often other individuals and institutions, surrounding the chain actors, provide services to them. We call these “chain supporters”. Chain supporters may provide various financial services to the chain actors. These supporters include moneylenders, savings and credit groups, microfinance institutions, banks, equity funds, and so on. It is not just financial institutions that provide financial services; for example, an input supplier may give a farmer a loan in the form of fertilizer, in return for repayment plus interest after harvest. Chain supporters may provide non-financial services to the chain actors, such as technical assistance, support in business management, financial management, organizational strengthening, and so on. These supporters include financial service providers, governmental bodies, NGOs, and so on.

Amsterdam, The Netherlands Chain supporters CHAIN ACTORS CHAIN SUPPORTERS

Amsterdam, The Netherlands Two examples of value chain mapping Honey value chain in Kenya Rice value chain in Rwanda

Amsterdam, The Netherlands Mapping the traditional honey chain in Kitui, eastern Kenya (1) Honey from Kitui used to be well-known: for many years a regional government agency (TARDA), processed it and guaranteed a market for beekeepers. But in 2003 this service was run down because of political interference, and the processing unit was moved to another area. Without a viable market, local beekeepers could no longer make a profit, and the quality of their honey deteriorated. Lower quality meant lower prices. Rather than selling at such low prices, many producers consumed their honey at home, sold it to local brewers, or gave up producing altogether.

Amsterdam, The Netherlands Chain actors and supporters Actors: Beekeepers Local traders Home brewers and herbalists Consumers Supporters: Artisan hive makers Moneylenders Microfinance institutions

Amsterdam, The Netherlands The honey chain in Kenya

Amsterdam, The Netherlands Problems and financial needs Beekeepers use poor techniques  low production of honey and low quality Beekeepers are not organized  low volumes  low prices Production of modern hives  too costly for beekeepers Production falls far below demand Potential of honey production underused

Amsterdam, The Netherlands Mapping the rice chain in Mukungli, Rwanda (1) In the 1970s rice production was encouraged by Chinese entrepreneurs. They bought most of the paddy rice from the farmers. The farmers gained little: they used the land of the Chinese entrepreneurs (in return for 20% of their rice production) and output was low. Farmers turned to local moneylenders for loans so they could buy inputs. They repaid these loans in the form of dried paddy. The moneylenders took around 50% of the farmers’ rice. The farmers used the rest of the rice partly for home consumption (10%) and sold the remaining 20% to local shopkeepers. After the genocide of 1994 the Chinese fled the country, as did the farmers and many others. The farmers later returned and started to cultivate rice again. Individually the farmers still had low yields. They knew that they could benefit by coming together to bulk their rice, negotiate better prices and seek new markets. Plus, being organized would grant them better access to inputs, extension services and credit. In 2003, rice growers established the Rice Producer Cooperative (COPRORIZ).

Amsterdam, The Netherlands Chain actors and supporters Actors: Farmers Rice Producer Cooperative: COPRORIZ Crop traders and wholesalers Millers Retailers Consumers Supporters: Credit provider Transporter

Amsterdam, The Netherlands The rice chain in Rwanda

Amsterdam, The Netherlands Problems and financial needs Lack of working capital  farmers cannot afford inputs Lack of inputs  low yields Slow payment to farmers  side-selling at low prices Loss-making cooperative  costs were not covered by fees

Amsterdam, The Netherlands Working group session 1. Mapping your value chain Step 1. Chain actors Map the value chain. Indicate the flow of the product and the flow of money. Indicate the additional financial transactions between chain actors Include the flow of services and information between chain actors Step 2. Chain supporters Indicate flow of services, information and money between chain actors and chain supporters

Amsterdam, The Netherlands 2. Arrangements and relationships Step 1 chain actors: -Indicate the arrangements on product, payment, quality, volume, additional financial transactions and services, and the quality of these arrangements. -Indicate the kind of relationships between chain actors: formal/informal, spot-market/contract, long-term/short-term, enabling/hindering. Step 2 chain supporters: -On kinds of services and what they accomplish -The requirements to have access to these services -Indicate the kind of relationships between chain supporters and chain actors: long-term/short-term, formal/informal, etc.

Amsterdam, The Netherlands 3. Prepare your business case What are the business opportunities within your chain? What is your business case? How will different actors benefit from this? What finance do chain actors need? What about the context in which your case is embedded? Link to ZATAC presentation What kind of new opportunities do you see to finance your business case? 4. Present your business case in 3 minutes (plenary)

Amsterdam, The Netherlands Working groups Cotton Jatropha Dairy Honey Rice Each group has a facilitator and a group leader The facilitator has the instructions. SUCCESS and ENJOY!