Partnership for Growth: Linking Large Firms and Agro-Processing SMEs A Guidance Note for Policymakers infoD v INNOVATION & ENTREPRENEURSHIP 2 © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Website: www.infodev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG This work is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the donors of infoDev, the World Bank Group, its Board of Directors, or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions: This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0) http:// creativecommons.org/licenses/by/3.0. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution: Please cite the work as follows: “Partnership for Growth: Linking Large Firms and Agro-Processing SMEs - A Guidance Note for Policymakers.” 2018. Washington, DC: The World Bank Group. License: Creative Commons Attribution CC BY 3.0 Photo Credits: Cover Photo: Stephan Gladieu / World Bank 3 Acknowledgements “Partnership for Growth: Linking Large Firms and Agro- Processing SMEs - A Guidance Note for Policymakers” was developed by the infoDev and Industry Solutions Units of the Finance, Competitiveness & Innovation Global Practice of the World Bank Group with technical support from Agland Investment Services and J.E. Austin Associates. Other contributors include the International Finance Corporation, and the Agriculture Global Practice of the World Bank Group. The study team included Anupa A Pant, Blair Edward Lapres, Ellen Olafsen, Loraine Ronchi, and Peter A Cook of the Finance, Competitiveness & Innovation Global Practice and William Mott, Martin Webber, Stephanie Haile, Madeleine Nelson, William Scott, Gareth Smail, Donald M. Taylor and Laya Hess-Skinner of a consortium of Agland Investment Services and J.E. Austin Associates. The team received guidance from a decision review panel chaired by Ganesh Rasagam and consisting of Dietrich Fischer, Milaine Rossanaly, and Christopher Ian Brett. The paper benefited from discussions with and guidance from numerous World Bank colleagues Bradford Roberts, Parmesh Shah, Roy Parizat, Selchuk Tanatar, Bas Rozemuller and Sarah Ockman. The study was made possible through the support from the governments of Norway, Sweden, Finland, and the UK’s Department for International Development (DFID). 4 Table of Contents Introduction 5 1. Part One 5 1.1 Why Agro-Processing? 1.2 Challenges Facing Agro-Processing SMEs 5 1.3 Policy Approaches to Support SME Growth 5 1.4 Lead Firm–SME Linkages 6 1.5 Lead Firm–SME Linkages Do Not Always Happen on Their Own 6 1.6 Types of Lead Firm-SME Linkage Initiatives 7 1.7 Results of Lead-Firm–SME Linkage Initiatives 7 2. Part Two 7 2.1 Feasibility Criteria for Lead-Firm–SME Linkage Initiatives 7 2.1.1. Responding to clear market opportunities 8 2.1.2 Realizing real business benefits 8 2.1.3 Sufficient commitment and capacity of supply chain stakeholders 9 2.2 Project Design Considerations 10 2.2.1 Clear definition of project objectives 10 2.2.2 Country-level diagnostic to understand agribusiness entrepreneurship ecosystem 11 2.2.3 Project phasing and timeframe reflect feasibility factors and agricultural cycles 11 2.2.4 Strategies to induce commitment to participate 12 2.2.5 Clear and appropriate roles and responsibilities of key partners 12 2.3 Implementation Instruments and Modalities 14 2.4 Results Framework Considerations 15 Bibliography 17 5 Introduction 1.2 Challenges Facing Agro-Processing SMEs The purpose of this note is to provide guidance to Starting and expanding a light manufacturing policymakers hoping to promote the growth of agro- business is not easy, and entrepreneurs face a number processing small and medium enterprises (SMEs) by of challenges in expanding their business, most often positioning them as suppliers to larger firms. challenges associated with access to finance and financial management, technology acquisition and maintenance, marketing channels and information, Part One addresses four key questions: sourcing of raw materials, packaging and other inputs, • Why agro processing and what are the key and manufacturing practices and standards. SMEs challenges facing the sector? therefore require a diverse array of financial and nonfinancial services to increase productivity and • What are the different policy approaches to advance accelerate growth. the agro processing sector? • What are the different models of SME – Lead Firm linkages and 1.3 Policy Approaches to Support SME • Why linkages do not always happen on their own? Growth Part Two provides guidance on the following four There are various policy options to promote growth of areas in facilitating partnership between local agro agro-processing SMEs. Most pertain to improvements processing SMEs and the large firms: in the enabling environment that indirectly help SMEs. Another category of policy options are those that • Feasibility criteria for lead Firm–SME linkage directly target SMEs, such as special agricultural initiatives economic zones, agribusiness parks, food networks, • Considerations for project design shared facility incubators and co-packers, clusters, • Implementation instruments and modalities accelerators, group training, and SME finance. This note discusses a particular approach to a targeted • Considerations for result framework SME solution, one that leverages large firms to expand the capacity of the SMEs in their value chain. BOX 1: UGANDA: INNOVATIONS IN Part One BEER CREATES OPPORTUNITIES FOR LOCAL AGRO-PROCESSING SMALL AND MEDIUM ENTERPRISES 1.1 Why Agro-Processing? Expanding agro-processing can create on- and When Nile Breweries wanted to develop a off-farm employment, creating jobs in the light competitively priced beer for the Ugandan manufacturing of agricultural materials and market, it came upon a new variety of sorghum associated industries such as trucking and packaging. that resulted in a suitable flavor profile and price It can also generate demand pull for agricultural level. The development process for the new beer production, associated inputs, and support services, created a market for small and medium agro- creating jobs up the chain and potentially reducing the processors collecting and preparing the grain for tremendous postharvest losses that many farmers brewing and for an estimated 20,000 smallholder incur (FAO and UNIDO 2010; Da Silva et al. 2009). farmers selling 12,000 tons of specialty sorghum Investments in agro-processing may also contribute at US$4 million annually. Nile Breweries’ parent to inclusive growth targets, given that women often company is replicating the model in other constitute 50 to 90 percent of employees in agro- countries of operation. processing firms (IFC 2013). 6 1.4 Lead Firm–SME Linkages or distribution, which can have a vital effect on their business. In the Senegal example, the large The most-significant growth opportunity for agro- juice manufacturer could not rely on sufficient and processing SMEs is selling to large buyers, including consistent quality of mango pulp. In an example in wholesalers that aggregate products from a Zambia, a dairy manufacturer could not rely on the wide range of suppliers; manufacturers that need freshness of milk delivered because of poor access semiprocessed products (e.g., mango pulp) to produce roads and limited availability of refrigerated trucks, finished products (mango juice), retailers such as resulting in the milk spoiling before it reached the supermarkets that sell to large urban populations, factory. and large corporate or government institutions that require a stable supply of product over an extended period of time. The term “lead firm–SME linkage” Although the lead firm can overcome some of the refers to an arrangement in which a large buyer (lead constraints that SMEs face by investing in SMEs so firm) has a buying relationship with SMEs. that they can fulfill requirements, this requires time and resources that are an opportunity cost for their core business activities. An external intervention— There are many reasons why working with large in the form of public support—may therefore be firms to promote the growth of smaller ones could be warranted to catalyze a sustainable business beneficial (AFE 2008). relationship between local SMEs and large buyers. The • Lead firms have proximity to market and market purpose of such interventions is to reduce the risks information and are often innovators and respected and constraints that prevent linkages from occurring thought leaders in their industries, so knowledge on their own and to establish a sustainable business can be transferred to SMEs that develop long-term relationship that will last over the medium to long relationships with lead firms. term. • A primary goal of growth-oriented SMEs is to expand their customer bases, so leveraging a large buyer to influence SME behavioral change is more likely to yield change than providing generic training programs. BOX 2: KYRGYZSTAN: UPGRADING Lead firms are able to influence supply chain • SMES IN FRUIT, VEGETABLE, AND DAIRY dynamics because of their connection to market demand and their upstream linkages to value-chain PROCESSING participants, so initiatives that involve them are likely to lead to systemic change in a value chain. In Kyrgyzstan, 40 SMEs received assistance to improve their management, marketing, and technological capabilities, enabling them 1.5 Lead Firm–SME Linkages Do Not to reduce inefficiencies and increase their Always Happen on Their Own competitiveness in domestic and export markets and secure 142 new sales contracts, There are many examples of large firms buying from valued at $17.5 million. smaller firms as part of their normal business of sourcing or distributing products, but there are also many examples of large firms integrating vertically, investing in each stage of the value chain themselves, or importing products to use as inputs. For example, in Senegal, a large juice manufacturer imports mango pulp from Egypt despite the abundance of quality mango supply locally. The most-common reason that these lead firm–SME linkages do not happen on their own is the lead firm’s fear of losing control of the quality, consistency, and timeliness of supply or 7 1.6 Types of Lead Firm-SME Linkage instruments: shared infrastructure in corridors, zones, and parks; investment in infrastructure; trade, Initiatives tax, and investment reforms; increasing access to Linkage initiatives can broadly be categorized as top- financial services; addressing information gaps; and down, bottom-up, or industry-wide initiatives. establishing or enforcing norms and standards. Top-down (or lead firm–focused) initiatives meet the needs of identified lead firms and have strong 1.7 Results of Lead-Firm–SME Linkage leadership from these firms. They work backward in Initiatives the chain to build capacity of SMEs to fulfill these needs. There are two common subcategories of top- Although lead firm–farming linkage initiatives have down initiatives: privately led and a combination existed for years, there is less experience with lead of public and private cooperation (public–private firm–SME linkages in which large firms source finished partnerships (PPPs)). The lead firm’s business or semifinished products (e.g., mango pulp for further objectives are often the motivation for privately led processing into juice). Although an analysis of 51 initiatives, which may emerge organically as part publicly supported lead firm–SME linkage initiatives of a firm’s normal supplier development business found that 25% are not complete, our study analyzed operations. Private companies often lead PPPs, 66 linkage initiatives across Africa, Asia, Europe, and which may exhibit characteristics of top-down and Latin America and found that such programs have bottom-up initiatives. The lead firm and third parties achieved significant results. Some of these positive (consulting firms, nongovernmental organizations, results include increases in sales revenues of agro- governmental agencies) each undertake part of processor SMEs, job creation, and lasting commercial implementation. Discussion regarding PPPs has relationships. Publicly supported linkage initiatives increased in recent years because of their unique appear to have a significant on facilitating access to ability to secure commitment from private enterprise finance, with a cost–benefit ratio of 1.72 to 22 for the for development benefits with government oversight amount of finance facilitated per public project dollar. and commitment. Development practitioners and policymakers may suse this approach when there is a clear lead firm in an industry that could have a wide supplier or distribution base. In bottom-up (or SME-focused) initiatives, instruments are customized to the needs of SMEs, with the goal of positioning them as suppliers to Part Two larger firms (AFE 2015; Reji 2013; SEEP 2001). These programs often focus on nascent industries and 2.1 Feasibility Criteria for Lead-Firm–SME may be implemented as preparation for top-down Linkage Initiatives initiatives. The linkages that a lead firm led had the most- sustainable results, which illustrates the challenge of maintaining focus on realizing business benefits even Industry-wide initiatives are a combination of in lead firm–SME linkage initiatives that the public top-down and bottom-up initiatives but focus on sector leads. improving the underlying policy framework and business environment. Business environment reforms often include facilitation of business linkages between Successful lead firm–SME linkage initiatives respond lead firms and SMEs but may not engage directly to clear market opportunities, result in business with either type of firm or customize products benefits for the lead firm and the SME, and are directly to either group, instead focusing on improving premised upon the commitment of the lead firm and coordination among value chain actors to facilitate the SMEs. shared goals. They can include a wide range of 8 2.1.1 Responding to clear market bottlenecks that government can address, having an opportunities enabling effect not only for the linkage initiative in question, but also for a much broader set of private Firms must meet competitive requirements related sector actors. to product cost, quality, quantity, and timeliness of delivery and have capacity to adapt to market demands. This sounds self-evident, but many linkage initiatives have been launched and failed because of lack of attention to the fundamental premise of BOX 4: COLOMBIA’S CHANGED whether a market opportunity truly exists. POLITICAL AND ECONOMIC SITUATION It is also important to keep in mind that market EXPANDS ALQUERIA’S MARKET requirements are often higher in high-income countries, so it may be more difficult to establish a linkage program if the export market is the target. Greater security and macroeconomic stability Therefore, the majority of business linkages between in Colombia in the mid-2000s played a pivotal lead firms and agro-processing SMEs are within the role in expanding market demand for Alquería’s domestic economy. shelf-stable liquid milk and making expansion of its supply chain into new regions possible. For years, Colombia’s profound crises emanating BOX 3: IS THE MARKET OPPORTUNITY from guerrilla wars and the drug trade hindered Alquería’s growth. When security and the INTERNATIONAL OR NATIONAL? business environment improved in the early 2000s, Alquería began acquiring processing A large European snack food company was plants, which allowed it to expand its milk anxious to work with a small to medium nut collection in remote areas of the country processing enterprise in Kenya with a joint previously under guerilla influence. Read the full interest in processing and exporting groundnuts case study at <>. produced in Kenya. There was an export market, but the technical and cost factors made it difficult to produce peanuts that could compete in Europe. The net result was that the European lead firm did not continue with the project, but 2.1.2 Realizing real business benefits the Kenyan firm expanded commercial peanut production for the domestic market, where its The ability to achieve real business benefits from products could compete. the relationship motivate, and ultimately sustain, lead firm–SME relationships (UNCTAD 2004). These business benefits can take many forms (Jenkins et al. 2007; UNGC 2011) but ultimately come down to It is critical to ask, therefore, whether SMEs would whether the initiative increases profits or sales or be able to provide a competitive product nationally, reduces risk in the short, medium, or long term (table regionally, or internationally even if barriers related to 1). firm capability, technology, standards, and access to finance were overcome. For example, cost of shipping or length of time it takes to ship are not easily Privately led, top-down initiatives have the best addressable through linkage initiatives. sustainability, with 46% of these initiatives ongoing after formal programmatic support had ended, compared with 20% of bottom-up and industry- When assessing the market for a linkage initiative, coordination efforts. The fact that top-down, privately it is critical to assess the full range of factors that led initiatives are likely to consider business interests may affect whether it truly is an opportunity. This from all sides of the relationship may explain this. assessment process may lead to identification of 9 BOX 5: ALQUERIA - SMALL AND MEDIUM ENTERPRISE (SME) LINKAGES MOTIVATED BY REAL BUSINESS BENEFITS TO BOTH PARTIES The Colombian private dairy processor Alquería has grown rapidly since 2005. As the company has sought to expand its supply of raw milk, it has also facilitated the growth of SMEs in its supply chain. Alquería uses capacity-building and financial incentives to improve its productivity and product quality by developing sustainable relationships with suppliers that will ensure sufficient quantity and quality of raw material. The company also used public sector training and support programs to accelerate milk collection into new milk-producing regions. The agro-processing SMEs were motivated and sought help to improve quality standards and productivity to secure a reliable relationship with a buyer. These win– win relationships have fostered productive collaboration and positive growth trajectories and reduced the risk of all parties involved. Read the full case study at <> TABLE 1: SME - LEAD FIRMS MOTIVATION FOR LINKAGES SMEs Lead Firms • Enhanced skills, standards, productivity, and • Reduced procurement, production, and distribution innovation costs mproved or maintained competitive edge by •I • Access to new domestic and foreign markets improving timeliness of delivery or increasing quality More-stable relationships with buyer or producer • • Enhanced reputation and local license to operate organizations Risk sharing through joint funding or operations • • Reduction of foreign exchange needs through import • Facilitation of access to finance substitution 2.1.3 Sufficient commitment and capacity of When selecting lead firms and SMEs to participate in supply chain stakeholders the initiative, look for demonstrated creative thinking and willingness to think strategically and have a long- Lack of commitment, lack of trust between parties, term perspective and commitment, illustrated by and poor alignment of organizational cultures are willingness to contribute to project costs. common reasons for discontinuation of lead firm– SME linkages (Ahmed and Hendry 2012). The level of commitment and suitability can be assessed at the beginning of the relationship, and trust and alignment need to be built as part of the project design and execution. 10 BOX 6: PROJECT RED FLAGS market opportunities and that real business benefits to lead firms and SMEs are achieved. While clarifying the objectives, trade-offs are often The following are danger signals if there are not required, such as between sustainability and scale specific, positive answers or solutions to these (box 7). questions at the end of the feasibility phase. BOX 7: WEST BANK OLIVE OIL • Has a clear market opportunity been defined? SUSTAINABILITY AND SCALE TRADE- I s sufficient raw material and SME capacity • available to provide the desired product? OFF DISCUSSION • Is the lead firm providing the management time, training, technical resources, and investment to create successful SMEs? Led by the International Finance Corporation (IFC) Sustainable Business Advisory, olive Is the infrastructure sufficient to complete the • oil bottlers in the West Bank of Palestine project? undertook a series of steps to foster linkages • Is the financial capacity of the lead firm and between agro-processors (olive oil bottlers) SMEs sufficient? and olive oil importers and address capacity limitations that inhibit market access within • Are there sufficient volume, growth, and the value chain, particularly for small and profitability incentives to create sustainability medium enterprises (SMEs). The two phases of for all parties? IFC support evolved from a bottom-up, SME- • Has trust been established between all parties? focused, capacity-building and market linkage project, which focused on improving the quality of and expanding the overall export market for Palestinian olive oil. The combination of small producers and small processors, when the oil was 2.2 Project Design Considerations treated as a commodity, was not competitive Linkage project design features contributing to project in international markets. It was necessary to success include: change the project focus in the second phase and position the olive oil as a specialty product. • Clear definition of project objectives To do so, the project was converted to a lead • Country-level diagnostic to understand agribusiness firm–focused top-down program that targeted entrepreneurship ecosystem marketing efforts specific to an importer’s • Project phasing and timeframe that reflect feasibility demand. The evolution of project focus from factors and agricultural cycles Phase 1 to Phase 2 reflects trade-offs between sustainability and scale. Phase 1 emphasized Strategies to induce commitment to participate • scale in terms of number of beneficiaries and • Clear and appropriate roles and responsibilities of processing SMEs (bottlers) that received training key partners and participated in European trade fairs; Phase 2 focused on lower volume and a higher- priced, packaged consumer product. Learning 2.2.1 Clear definition of project objectives from the discontinued business linkages with importers in Phase 1, the emphasis of Phase The lead firm’s business objectives drive lead firm– 2 became sustainability of market linkages led linkage initiatives. Publicly supported linkage through targeted facilitation between qualified initiatives are more complex because they reflect the Palestinian bottlers and specialty product objectives of three parties: the government, SMEs, and importers. Read the full case study at <>. imperative that there is a commitment to focus on 11 2.2.2 Country-level diagnostic to 2.2.3 Project phasing and timeframe reflect understand agribusiness entrepreneurship feasibility factors and agricultural cycles ecosystem Lead firm–SME linkage initiatives are not short-term Lead firm–SME linkages should be based on a strong fixes. It takes time to clarify objectives and roles, analysis and customized to meet market opportunities establish trust, and arrive at incentives that work. A at the country level. Thus, before deciding on an common pitfall in agro-processing linkage projects instrument for a linkage program, opportunities and is failure to align project timelines with agricultural challenges that growth-oriented agribusinesses face, cycles. Agro-processing enterprises often operate stakeholders affecting the ability of an agribusiness on the production cycles that determine the supply entrepreneur to build sustainable linkages with large of their raw agricultural materials. At least three firms, and the gap between what is available and what production cycles, sometimes more, depending on the is required for agribusiness SMEs and large firms to product, are required for effective implementation and take advantage of market opportunities should be institutionalization of change. identified. The identification process uses a model of eight thematic areas that define the enabling ecosystem for agribusiness SMEs. Each of these eight Linkage projects may also require a phased approach areas affects the ability of entrepreneurs to expand to achieve success, depending on how well feasibility their businesses and the feasibility of implementing an factors are met. As discussed above, weak firm- agribusiness SME–focused project. level capacity of agro-processing SMEs is the most- cited reason for lead firms’ reluctance to engage. Insufficient or undermining enabling environments are a close second. There may be a need to address fundamentals before a hands-on linkage initiative is started. Box 8 illustrates a phased approach. Note: SME, small and medium enterprise 12 2.2.4 Strategies to induce commitment to participate In publicly supported linkage initiatives, it is advised to develop a close relationship with lead firm(s) early during the feasibility and project design phases. Full support of the lead firm’s top management is also pivotal during implementation. Such direct involvement of lead firms contributes to building trust BOX 8: PHASED APPROACH and increases the likelihood that the project design will TO CAMBODIA RICE SECTOR yield results that correspond to market needs. MODERNIZATION While building the relationship with the lead firm, the public sponsor should be mindful that there are several steps in making decisions in the public sector often In 2008, the International Finance Corporation– that can take significant time to complete, whereas sponsored Cambodia AgriSector Support Project the private sector decision-making structure is flatter was established to support the Cambodian rice and quicker. sector as Cambodia emerged from decades of Cost sharing by SMEs and lead firms has been civil unrest, political upheaval, and bad economic effective in ensuring private sector commitment in policy. By first supporting small and medium publicly supported initiatives, ensuring that firms have rice millers in the supply chain and gradually a stake in the long-term sustainability and outcome improving other elements of the supply chain, and thus increasing the likelihood of commitment. millers and lead firms could capitalize on Table 2 provides an overview of commonly used cost- changed market dynamics to expand export sharing contributions. marketing programs and increase investment in the sector. The project initially focused on a bottom-up approach of modernizing and improving the capacity of small and medium mills to produce export-quality rice and then 2.2.5 Clear and appropriate roles and focused on market development. The case responsibilities of key partners describes how identification of markets and lead Lead firms and SMEs, driven by their bottom lines, are importing firms became the focus of the project’s at the heart of linkage programs, although the public second stage and developed close relationships sector can play a valuable role. between lead importers and small and medium millers and exporters as the initial orders led to longer-term relationships. Exports of Cambodian Government plays a crucial role in addressing rice increased dramatically from an estimated constraints in the enabling environment related to 20,000 metric tons in 2009 to more than hard infrastructure, such as roads and electricity, 500,000 metric tons by 2015. Read the full case quality and standards infrastructure, such as study at <>. laboratories for testing products and standards agencies that can certify manufacturing companies, and regulations and policies that affect the industry, such as import or export barriers and procedures for obtaining licenses and permits. The public sector can help form lead firm–SME linkages by providing budgetary support to co-fund programs needed to upgrade the SMEs to a level where they can be reliable suppliers, although the public sector should not perform go-between functions such as negotiating contracts or relationships with lead firms on behalf of suppliers (Lusby 2008), which will interfere with 13 the firms themselves establishing sustainable sector may act as a catalyst by partially subsidizing relationships and can be distortive. Instead, the capacity-building services; clear reporting that public sector should adopt a facilitating approach incorporates lead firm feedback must be required to encourage communication, commitment, and to ensure that the technical assistance provided ultimately business linkages between lead firms and meets market requirements. In such arrangements, agro-processing SMEs. In a linkage program, lead it is advisable to formalize the agreed-upon firms ideally serve in a leadership capacity, helping objectives, roles and responsibilities, financial and shape project scope and engaging constructively staff commitments, timelines, and management with agro-processing SMEs to achieve mutually arrangements of each public and private partner, beneficial results. In most cases, lead firms are better allowing each party to designate the respective staff placed to strengthen supply chains than third-party time and resources to accomplish their responsibilities intermediaries. This direct approach guarantees that and minimizing the risk of confusion and frustration SME strengthening is customized to meet market over unclear division of labor. Given that agribusiness requirements and that market actors retain the entails diverse supply chain actors, stakeholder necessary skills to continue strengthening SMEs after consultation and collaboration should also be assigned the end of public funding. When SME strengthening by as a distinct task that one party is responsible for. lead firms is not feasible, a local private sector partner can perform this function. In such cases, the public TABLE 2: COST-SHARING CONTRIBUTIONS Partner Cost-sharing contributions • Provide guidance on performance improvements required by the market • Establish performance-based incentives such as higher price for higher-quality product • Provide on-site advisory, educational, training, and personnel transfer programs Lead firm • Offer purchase guarantees or advance payments to help SMEs access working capital • Cost sharing of capital investments for improved technologies for SMEs, buying equipment on behalf of SMEs, or lending equipment to SMEs on favorable terms (e.g., cooling tanks, collection trucks) • Provide input financing for bulk procurement • Partially fund food safety certification and on-site technical assistance to meet standards SME • Finance or partially finance capital investments for improved production technologies • Pay for or partially pay for technical assistance to upgrade manufacturing and management practices • Partially fund food safety certification trainings and on-site technical assistance for implementation of food safety improvements for SMEs • Partially fund lead firms’ technical assistance programs for supplier development capacity building Public or SME capital investments, offer guarantee to cover banks’ financial losses incurred by lending to •F sector (if targeted SMEs participating in program applicable) • Finance public infrastructure improvements and “last-mile” connectivity • Fund capacity building of local business development service providers • Fund facilitation of stakeholder coordination 14 BOX 9: ROLE OF PUBLIC SECTOR 2.3 Implementation Instruments and INVESTMENT Modalities The climate in Rwanda is ideal for high-quality A variety of implementation instruments are available coffee production but commodity coffee was to encourage and strengthen linkages between being produced because of a lack of market lead firms and agro-processing SMEs. Instruments information, profit incentives, quality control, generally fall into four categories: capacity building infrastructure, and organization needed to of SMEs, access to finance, access to market, and produce high-quality, high-priced product. In enabling environment. the early 2000s, the government of Rwanda and U.S. Agency for International Development projects PEARL I and II, foundations, and private SME capacity building is by far the most-often-used sector investors identified the need and initiated instrument to promote lead firm–-SME linkages. a bottom-up linkage project, providing programs Capacity includes knowledge of production processes, to help coffee farmers and cooperatives improve quality oversight, fair and competitive business plantings, build washing stations, and improve practices, and financial and personnel management product uniformity and quality, as well as US$10 (Lapres and Hristova 2015). Technological capacity million of funding over 11 years. Donors provided and workforce skills are also important components the money, and the Rwandan government of internal SME capacity and directly affect product allowed direct sale of coffee to importers instead quality. of using the old system in which sales were made through a government-controlled coffee board. Experts were hired to provide advisory There is insufficient evidence to suggest the relative services and training and worked to establish effectiveness of these instruments, but regardless business linkages with lead specialty coffee of the instruments used, successful delivery models companies from the United States and European share common characteristics, including that: Union. Today Rwanda is an established source • Instruments are customized to the needs of lead of quality coffee receiving premium prices in the firms and SMEs and work toward achieving mutually marketplace based on linkage of lead firms with beneficial outcomes (business benefits) small and medium enterprises. • Assistance to SMEs is comprehensive to the greatest extent possible mplementation structures are flexible to allow •I BOX 10: KYRGYZ REPUBLIC - WORLD for adjustments in response to changing market dynamics BANK AGRIBUSINESS AND MARKETING PROJECT Cost and Timeframes The project comprehensively, individually, and Data from 66 linkages projects examined in a flexibly addressed the needs of 42 carefully meta-analysis suggests that public support for selected small and medium agro-processing most programs ranges from two to ten years, and enterprises. Detailed action plans customized to estimated linkage initiative costs from public funds each business’s needs enabled these businesses range from $230,000 to $18 million, with an average to create new products, improve product quality cost of approximately $7 million. through technology and process upgrades, and secure new contracts with domestic and international buyers. A cadre of local agribusiness professionals was trained by pairing them with foreign experts. 15 TABLE 3: INSTRUMENTS TO ENCOURAGE LINKAGES BETWEEN SMALL AND MEDIUM ENTERPRISES (SMEs) AND LEAD FIRMS SME capacity building Access to finance Access to markets Contract and pricing schemes Training, advisory services, (e.g., dynamic contract extension), business linkage programs, Improved credit terms, credit advance purchase agreements, industry trade fair facilities, input financing, matching trade fairs, study tours, export participation, mentoring, grants, credit guarantee schemes, promotion agencies focusing on matchmaking between SMEs equity investments a particular SME-heavy sector, and lead firms public announcements on cost and quality requirements Enabling environment Policy and regulation reform (market liberalization, reduction in regulation), tax incentives, infrastructure, support to supplier development associations, cluster development BOX 11: KYRGYZ REPUBLIC 2.4 Results Framework Considerations AGRIBUSINESS COMPETITIVENESS Figure 4 illustrates a results framework that can be CENTER (ABCC) FLEXIBLE adapted for individual linkage initiatives. In line with IMPLEMENTATION STRUCTURE good monitoring and evaluation practice, it depicts a logical progression from inputs to activities to changes to impact indicators. The design of Kyrgyz ABCC’s organizational structure was flexible and responsive to external events and market changes. The Because lead firms and SMEs are the primary actors public–private composition of the Supervisory in achieving sustainable results, project outcomes Board encouraged coordination, alignment with should incorporate indicators reflecting their primary market dynamics, and accountability for ABCC motivations for participation, such as sales growth results. ABCC assigned qualified consultants for the SME suppliers, greater market certainty for to clients based on customized scopes of work the SME suppliers, and greater profits for the lead aligned with detailed action plans. In addition, firm and SME. The lead firm’s objectives are generally the Agribusiness and Marketing Project was focused on achieving greater, more-reliable supply and divided into implementation periods, which built better product quality. in milestones for assessing project effectiveness and making decisions to adjust components in response to market changes. The economy The public sector may use some of these same and the needs of agro-processing SMEs indicators but may also want to include indicators changed every two to three years over the life aligned with public objectives, such as number of of the seven-year project. Thanks to the short beneficiaries reached, job creation, investment, and implementation periods and milestones, the tax revenues. project could make changes to stay ahead of changing SME needs (Broka 2016). Read the full case study at <>. Cost benefit and economic rate of return analyses can be used to measure inputs and output over time. 16 FIGURE 4: LINKAGE PROGRAM RESULTS FRAMEWORK INPUTS OUTPUTS OUTCOMES IMPACT Support capacity SMEs trained in: Improved product quality Growth of value-added building of SMEs and quantity (greater exports and domestic - Quality control throughput of local raw sales certifications materials) - Workforce development - Procurement of raw material Reduced cost of - Post-harvest handing procuring raw materials technologies Expanded agro- processing sub-sector TA provided to lead firms Improved SME /BDS providers to service managerial capacity / SMEs workforce skills Facilitate access to First-loss bank guarantee SMEs make capital finance established investments for Greater economic technology upgrades diversification Credit on-lending facility established Matching grants to SMEs SMEs have improved provided cash flow to expand raw material purchases Facilitate access to Matchmaking events held B2B linkages established Jobs created markets Promotional events conducted Sales growth Fund enabling Laws / regulations Reduce barriers to entry environment reformed for new agro-processing advisory services SMEs Reduction in poverty Regulatory bodies trained in improved service Reduced cost of doing provision business Key infrastructure Greater productivity improved Higher profits 17 Bibliography AFE (Action for Enterprise). 2008. “Defining Lead Firms and Principles of Facilitation.” Field Facilitation Working Group Working Paper. 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SEEP (Small Enterprise Education and Promotion Network). 2001. “Donor Committee Guiding Principles, 2001 SEEP Guide to Business Development Services and Resources.” Donor Committee of Enterprise Development. www.seepnetwork.org/bdsguide.html Jenkins, Beth, A. Akhalkatsi, B. Roberts, and A. Gardiner. (2007). Business Linkages: Lessons, Opportunities and Challenges. IFC and Harvard University. UNCTAD (United Nations Conference on Trade and Development). 2004. “Business Linkages: Roster of Good Practices.” UNCTAD, Geneva, Switzerland. UNGC (United Nations Global Compact). 2011. “Partners in Development: How Donors Can Better Engage the Private Sector for Development in LDCs.” UNGC, United Nations Development Program, and BertelsmannStiftung. © 2018 The World Bank Group 1818 H Street NW Washington, DC 20433 Website: www.infodev.org Email: info@infodev.org Twitter: @infoDev Facebook: /infoDevWBG infoD v INNOVATION & ENTREPRENEURSHIP