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Advancing local development through meso-credit, Farmer Private Ltds and economic chain development
For the last 8 years, Fresh Food Technology B.V ran a pilot project that had farmers run a joint venture and enter into a partnership with (social) investors. On the basis of its success I recommend that donor governments support projects that: 1) Include farmers as equal business partners in setting up agro-businesses; and 2) Create country-level revolving funds to enable these partnerships between farmers and entrepreneurs, for the benefit of enhancing farmer income.
Example India: Why a new approach for the development of India’s farmers is needed
Although India is transforming into an open, more efficient and rapidly developing market-driven economy, in rural areas such transition has been lacking. Marginalized and small farmers in particular are unable to escape the powerful grip and dependence on middlemen, informal lenders and other intermediaries. Although there have been several attempts to assist farmers in escaping from their poverty trap, the results have been disappointing.
Loan and grant schemes, do not have the desired effect as these schemes do not tackle the core problems of dependence of the farmers, which brought them in poverty in the first place: such schemes are in effect only patching solutions.
Other attempts have been focused on strengthening the farmer’s position by organizing them in self-help groups, in cooperatives or other forms. These interventions have been more successful in breaking the farmers dependency on intermediaries, but their success and failure are mainly determined by their leadership and/or continued government intervention. Only exceptional examples exist where these farmer groups have been able to move up the value addition chain, become fully self-sustainable without (too much) political interference.
Piloting a new tripartite partnership to move farmers up the economic chain
With support from private investors, originating from successful business families, a new approach for advancement of small and marginal farmers has been pilot tested in India. This approach is an attempt to find a critical entry point for rural development by concentrating on setting-up healthy agro-businesses in which farmers themselves gradually gain economic ownership, supported by both NGOs and experienced private entrepreneurs.
Similar to the self-help groups and cooperatives, the aim is to set-up healthy business in handling, processing and trading farmer’s commodities on a commercial basis. The main difference of the new approach is that the farmers, along with a social-conscious corporate partners, become equal business partners of the investor. The farmers will only gain full economic ownership, once the investment is repaid fully. No paternalistic form of aid, but a sound economic partnership between an investor and a (farmer-owned) company, supported by experience entrepreneurs.
Along with a corporate business partner, the farmers are to set up a commercially-run business (a joint venture in the form of a private limited), based on a solid feasibility and business plan. This farmer-run joint venture enters into a loan agreement with (social) investors and becomes responsible for setting-up and running the business in a commercially responsible manner. The joint venture is to generate sufficient profit to: i) meet its loan obligations, ii) capitalize the company, iii) pay premium prices to the farmers who supplied produce and/or iv) invest in new profitable business ventures (allowing the farmer to move further up the value-addition chain). As a result, the farmers benefit in the form of good and assured prices for their commodities and possibly additional premium or dividend payments if sufficient profit is realized.
In such partnership, the (social) investor, the socially conscious entrepreneurs and the farmers become mutual depend business partners. Whereas the financial risk is to remain largely by the (social) investor, the farmers have most interest in making the business a success for their own future and village/region.
Aim of the new approach: a win-win for investors and farmer groups
The aim of the new approach is to create a profitable partnership between investors and farmer groups, by setting up joint agro-processing enterprises. The new agro-businesses are to become sufficiently profitable and economically independent from further external support. The value-addition created is used, among others, to repay the investment to the investor and, at the same time, transfer the economic ownership to the farmer groups. To avoid that the management of the agro-business is driven by the short-term benefits for the farmers (main draw-back of the cooperative model), the majority of the board members (who appoint and oversee the daily management) is to remain with professionals, rather than farmer representatives only. The economic ownership of the companies however, can be fully transferred to the farmer groups. By doing so, the long-term success and profitability of the company prevails in running the business.
As most of the investment is to be repaid and will be re-invested in new farmer businesses, the model becomes self-perpetuating. In addition, the model creates no market distortion or unfair competition. Instead, farmers become equal an fair business partners, boosting their pride & confidence as well as commitment to fulfill their financial obligation to its supporting business partner/investor.
The above is an extract of a paper written by E.Willemsen and L.P. Semwal (SJS, India). The full paper can be accessed, among others, on: http://www.fftcompany.com/Rural_development.html
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