1. COLLABORATING WITH THE PRIVATE SECTOR FOR PRO-POOR MARKET DEVELOPMENT Action for Enterprise (AFE) Frank Lusby FAU-DDRN-DFM Seminar / Copenhagen Business School November 19 th, 2012

2. AFE Experience: Value Chain Program Design & Implementation CountryValue Chain  Afghanistanalmonds, poultry  Bangladeshcrafts (export), potatoes, vegetable seed, beans  Bhutanmandarins  Botswanatourism, construction  Bosniamedicinal & aromatic plants  China village-based tourism, herbs  Cambodiacashews  East Timorcoconut, construction  Ethiopiavegetables  Ghanabaskets (for export)  Indiaorganic agriculture, poultry  Indonesiacocoa beans  Haiticrafts (export) CountryValue Chain  Kenyavegetables, milk  Kosovowood furniture  Lebanonapples, table grapes  Philippinesseaweed, woven products, pork  Malishea, crafts, cereals  Mongoliapork  Nepaltourism (‘pro poor’)  Rwandagreen beans, pineapples  Senegalbeef, vegetables  Sierra Leonevegetable seed, fertilizers  Tibet (China)construction, yak dairy  Vietnamtourism (‘pro-poor’), beef  Zambiatourism, crafts, agribusiness 2

3. Presentation Topics  The rationale for collaborating with private sector “lead firms” as a means of generating sustainable impact for the poor  How to identify lead firms with incentives to invest in the micro, small and medium scale enterprises (MSMEs, including farmers) they transact with  How to support these firms in carrying out initiatives to improve their competitiveness as well as the products, services, and market access they provide to MSMEs  How donor programs “facilitate” these initiatives and promote market development for the poor 3

4. What is a Lead Firm?  Small, medium, and large firms that have forward/ backward commercial linkages with targeted MSMEs  Dynamic market actors that can promote greater integration of MSMEs into value chains (VCs)  Have commercial incentives to provide important products, services and support to MSMEs operating within value chains  Often serve as industry models and respected thought leaders in their industries  Provide market access to MSMEs 4

5. Lead Firms in Value Chains 5 Processors Input Suppliers Global Market Producers Exporters Wholesalers Domestic Market Supporting Market Actors (banks, transporters, trainers, consultants, etc.)

6. Why would a Development Organization (DO) work with Lead Firms?  Sustainability of Impact  LF’s that rely on MSMEs as suppliers or clients have incentives to sustain relationships with them beyond DO program  Scale of Impact  working with several LFs in a Value Chain, DO can multiply scale of impact  Promotion of “embedded” support to MSMEs  LFs often provide products, services, and market access to MSMEs suppliers/buyers as part of their commercial relationships with them  Greater industry competiveness  Dynamic LFs set model for other firms; can drive MSME growth and promote VC change or improvements 6

7. Working with Lead Firms 7 SELECT Lead Firms IDENTIFY LF Interventions STRUCTURE LF Collaboration FACILITATE LF Collaboration MONITOR LF Collaboration

8. What are examples of DO criteria to select LFs to collaborate with? 8 Commercial linkages with large number of MSMEs (i.e. the project’s target group) as buyer and/or supplier of products and services Willingness to make investments to improve/expand relations with MSMEs Sufficient financial strength to make investments or dedicate resources to improve/expand relations with MSMEs Able to compete successfully in end markets for their products or services Potential to influence other lead firms and actors in value chain Acceptable track record and reputation as a business

9. Request for Expression of Interest from Agricultural Input Supply Companies An international development organization is inviting agricultural input supply companies to submit expressions of interest to build their capacity to provide greater access to quality inputs for small scale farmers (less than 4 acres). The opportunity to benefit from technical support from the project is open to all agricultural input supply companies which meet the following criteria:  must currently be selling products (either directly or through their distributors) to at least 500 small-scale farmers.  must have been in operation for at least one year.  must be selling products of acceptable quality that respond to the needs of small-scale farmers.  must have policies in place to ensure that no dangerous or illegal products are sold to farmers.  must have commercial interest and incentives to invest in the farmers they sell to through training, new products, field days and/or other forms of support.  investment in the proposed initiative must be at least 30% of the cost of the initiative.  NGOs, consulting firms, and associations are not eligible to apply. Interested companies are requested to send an email to [email] to request the application format. Phone inquiries can be directed at [phone number]. All expressions of interest are due by [date].[email] Example Advertisement 9

10. Determining How Many LFs to Select 10  DOs should work with as many LFs in targeted VC as possible (based on project capacity) in order to:  expand outreach and impact  increase MSME options  increase opportunities for replicating approaches, and  ensure program continuity if some LFs drop out

11. LF Interventions 11  LF activities and initiatives to:  expand or develop products, services, or support (market-based solutions) to MSMEs they buy from or sell to  improve their competitiveness  Activities the LF might not otherwise undertake in the near term due to risk, cost, lack of technical support, etc.  LFs take responsibility for organization and implementation of these interventions  Activities the DO can justify for technical and cost-share support based on impact they will generate for targeted MSMEs

12. Types of LF Interventions 12 Activities undertaken by LFs to expand or develop:  access to markets  sale of products or services needed by MSMEs  procurement from MSMEs  access to finance  technology / operations / product development  management and organization  resolution of policy and regulatory issues

13. 13 Access to Markets  participate in trade shows or exhibitions  visit potential buyers  gain certifications (organic, ISO, HACCP, Globalgap, etc.) Sale of Products or Services to MSMEs  conduct market research on new MSME markets (BOP)  adapt products or services to needs of targeted MSMEs  develop/improve distribution networks

14. 14 Procurement from MSMEs  develop outgrowing operations  build capacity of producers through training, technical assistance, demonstrations, field days, etc Access to Finance  create linkages with financial institutions  business plan development Technology/Product Development  access technical specialists (e.g. product design, processing, etc.)  conduct learning/exposure visits to identify best practices and suppliers of needed equipment and inputs

15. 15 Management and Organization  develop improved management information systems  develop business plans Resolution of Policy and Regulatory Issues  establish or revise industry standards for products or services  create or strengthen coalitions or associations to lobby for specific changes in policy or regulation

16. Supporting Private Seed Company Initiatives to Launch Mini- Packets of Seed in Bangladesh 16

17. Supporting companies to use tissue culture for potato seed production 17

18. Farmer Field Days Organized by Organic Chili Sauce Company 18 FARMER FIELD DAY

19. Dairy Company Exchange Visits for Farmers 19 Company organized exchange visits for farmers

20. Tools for Working with Lead Firms 20 Initial LF Identification Structured Interview Invitation for Application Due Diligence and Planning Agreements to Support LF Initiatives Applications from LFs

21. Soliciting LF Input through an Application Process 21 “Invitation for Applications” (IFA) assist LFs to identify and propose interventions that could be supported by DO DO invites LFs to propose THEIR initiatives to build competitiveness and upgrade MSMEs (a better process than having the DO come up with initiatives) negotiations and discussions done by carefully going through proposals with LFs to discuss and negotiate strategy, timing, technical support and cost shares not a competitive process but an opportunity for LFs to submit ideas, analysis and solicit LF input for DO facilitation activities

22. Example Format for LF Application (in response to IFA) 22 Cover Page Activities and Impact (up to 2 pages): Personnel (up to ½ page): Experience (up to ½ page): Sustainability (up to ½ page):

23. Rationale for Cost Share 23  Collaboration between DOs & LFs  DO helps offset some costs and reduces LF risks in investing in new initiatives (that benefit MSMEs)  cost shares provide LF incentives to move forward with initiative that they might otherwise not be willing/able to do  Justifiable Cost Shares:  LF capacity building activities  initial training and demonstration activities conducted by LF for MSMEs  linking LFs to new markets, buyers, equipment/input suppliers, etc.  market research and feasibility studies  technical assistance for R&D and new product development

24. Problematic Cost Shares 24  Unjustifiable Cost Shares:  recurring operational or working capital costs of LF  physical assets  LF personnel  provision of finance or loans  Problems with these types (Unjustifiable) of Cost Shares:  promotes dependency and creates problems when cost share ends  can attract ‘wrong’ type of LFs (e.g. only interested in acquiring cost- shared assets)  reduces LF commitment  creates unfair playing field for other firms DO is not working with  risk of asset being diverted for other uses or sold

25. Questions for Review of LF Applications 25 What is the importance of each of these questions in the LF application review? 1.Is there a strong end market for the LFs product of service? 2.What are the incentives of LFs to conduct the initiative? 3.How many MSMEs will benefit?  how will they benefit?  who are they?  where are they located? 4.What is the relationship between the LF and targeted MSMEs?  is this relationship sustainable? 5.What is the benefit to the MSME/producer?

26. Tools for Working with Lead Firms 26 Initial LF Identification Structured Interview Invitation for Application Due Diligence and Planning Agreements to Support LF Initiatives Site visits Inquiries

27. Due Diligence of Lead Firms 27 Structured interviews Site visits Investigations to determine if it is a reputable and registered company Strategic or business planning exercises

28. Tools for Working with Lead Firms 28 Initial LF Identification Structured Interview Invitation for Application Due Diligence and Planning Agreements to Support LF Initiatives MOU and Addendums

29. Documents to Structure LF Collaboration 29  Memo of Understanding (MOU)  broad understanding of the purpose and objectives of collaboration  Addendums to MOU  describes specific LF initiatives along with associated responsibilities, technical support, cost share, etc.  there may be several addendums to an MOU with a LF - each one for a specific LF initiative

30. Lead Firm MOU and MOU Addendums MOU MOU Addendum 1 MOU Addendum 2 30

31. Key Steps in Working with Lead Firms 31 SELECT Lead Firms IDENTIFY LF Interventions STRUCTURE LF Collaboration FACILITATE LF Collaboration MONITOR LF Collaboration

32. What is facilitation (by a DO)? 32 promoting impact/benefits that will continue once DO program ends building capacity, fostering linkages, and encouraging VC actors to address problems in sustainable manner promoting interests of VC without competing with market actors in any way creating incentives and ‘buying down the risk’ for LFs to invest in MSMEs in their value chain helping to expedite improvements in targeted VCs (through promotion of LF interventions that benefit targeted MSMEs)

33. Public sectorPrivate sector Donor Facilitator (project, NGO) Lead Firm Facilitation of Market-based Solutions Among VC Actors MSME Legend: : market-based solutions : facilitation activities 33

34. Example Question Guide to Facilitate Outgrowing Operation What advantages would an outgrowing operation provide your company compared to the way you now source raw materials and products? What are immediate and long-term prospects for your end-market? Does an outgrowing operation make sense given this scenario? What risks and challenges might you face in developing an outgrowing operation? Why would farmers be interested in participating in your outgrowing operation? What risks would farmers face participating in your outgrowing operation? Which outgrowing organization model do you want to use? What are projected costs of your outgrowing operation? In what geographic areas will you conduct your outgrowing operations? 34

35. Examples of Impact in Bangladesh 35  Built capacity of four craft export companies to train 4,000 producers who were able to increase earning 250 USD per year on average.  Supported four agribusiness companies to develop outgrowing operations and provide more than 5000 farmers with training, inputs, new varieties, technical support and market access.  Supported input supply companies to launch and sell 1 million vegetable seed “mini-packets” impacting production and nutrition of more than 200,000 marginalized farmers.  Facilitated potato companies to introduce new varieties and develop tissue culture capacity resulting in improved access to quality potato seed and greater productivity for several thousand farmers.  Assisted LFs to participate in international trade shows resulting in 10% increase in sales and over $1 million in new orders

36. Examples of Impact in Zambia 36  Provided technical and cost share to support the initiatives of 24 Lead Firms (LFs) in the agribusiness, craft, and tourism sectors to:  train producers  organize demonstration and trial plots  carry out business and strategic plans  implement quality management systems  conduct exposure visits and participate in trade shows  develop outgrowing operations  Resulting in increased skills and income for over 10,000 MSMEs

37. Challenges 37  Targeting  Market Changes  Changes in Lead Firm Strategies  Impacting the poorest of the poor  Evaluation and attribution  Requires skills and impartiality for implementation

38. Examples of Access to Finance 38  Agribusinesses often provide seed and inputs on credit to producers they procure from  LFs provide supplier credit to agro-dealers making inputs available to farmers  Tripartite credit arrangements between LFs, banks, and producers  Craft exporters pre-finance and provide raw materials for artisans they source from 

39. Guiding Principles for Value Chain Programs and Working with LFs 39 Promote Relationships between LFs and other market actors in VC DO should stay out of commercial, intermediary, or negotiation roles in VC allow LFs and producers to determine most appropriate structures for buying/selling without imposing preconceived organizational structures Professionalism manage collaboration with LFs in businesslike fashion; deliver what is promised

40. 40 Understand Private Sector and Business Principles demonstrate understanding of private sector competitive and operating environment recognize LFs as innovators and economic drivers understand and appreciate LF risks Guiding Principles for Value Chain Programs and Working with LFs

41. Terminology In Working with Lead Firms 41  Avoid referring to LFs as “partners” or “partner organizations”  LFs are not assisting DO to implement projects – they have ongoing commercial relationships with targeted MSMEs  DO should see themselves as supporting LFs’ initiatives  Avoid referring to Lead Firm MOUs as “contracts”  contract has connotation of hiring someone to provide services (not the case in DO supporting LF initiatives)  Spirit of agreements should be DO providing technical and cost share support to LFs to “buy down” their risk of investments in improved/expanded relationships with MSMEs

42. Terminology In Working with Lead Firms 42 * All initiatives/interventions referred to here should lead to sustainable impact and benefits for MSMEs that LFs transact with (and are target group of DO)

43. Thank You 43 Frank Lusby Action for Enterprise (AFE) flusby@actionforenterprise.org www.actionforenterprise.org