42721 Series 1, Note No. 2 " M a k i n g M a r k e t s W o r k f o r t h e P o o r " Community- Managed Procurement Centers for Small and Marginal Farmers in Andhra Pradesh, INDIA K. P. Rao, Vijaysekar Kalavakonda, Shweta S. Banerjee & Parmesh Shah Context What's innovative? Small and marginal farmers in rural Andhra Pradesh Community-managed, decentralized units for have been subject to intensive exploitation by storing, assessing, and trading agricultural moneylenders, traders, and middlemen. Lack of access commodities have generated significant to the market, lack of power to negotiate prices due economic, gender equality, and other benefits, to extreme poverty levels, and the daily challenge of while integrating the poorest producers with the meeting minimum subsistence needs had made them market. vulnerable to unfair terms of trade. Procurement was done from distant markets or through village-level traders and aggregators. into 28,282 village organizations, 910 sub-district organizations, and 26 district organizations. The The opening of community-managed procurement poor and their organizations have cumulative savings centers an innovation piloted under the Andhra exceeding US$ 340 million and have leveraged more Pradesh Rural Poverty Reduction Project,1 successfully than US$ 1.2 billion of credit from commercial banks demonstrates ways to combat this inefficiency. since 2000. Diversification of livelihoods and asset The procurement centers are specifically defined as building has increased incomes sevenfold increase in community-managed, decentralized units for storing, six years. The social and economic mobilization of assessing, and trading agricultural commodities. Some community institutions, building strong community of the unique features include management by women institutions and investing in human capital are a self-help group members and their institutions. necessary pre condition for developing procurement Social and Economic Mobilization centers as well as making this activity achieve scale and sustainability. Figure 1 below provides the process in the Project at a glance, as well some of the other innovations The project has mobilized eight million women which have been developed on the foundation of these into about 630,000 self-help groups,2 covering 90 institutions. percent of the poor. These groups have been federated 1 e Andhra Pradesh District Poverty Initiatives Project (APDPIP) and the Rural Poverty Reduction Project (APRPRP) (total IDA lending: US$ 260 million) are two statewide, community-driven rural poverty reduction projects implemented since 2000. Key investments include: building institutions of the poor and developing social capital; deve loping financial services for the poor; promoting and expanding livelihoods through private-sector partnerships; reducing vulnerability; promoting social action; and improving local governance. 2 A typical self-help group comprises 10­15 women from the poorest of the poor and the poor. e members meet once a week, collect savings, and maintain books of accounts. e groups are then federated into village organizations. 2 Livelihoods Learning Series 1, Note No. 2 Figure 1: Community Institutional Arrangements and Mobilization First 2 Years: Building Social and Financial Capital for the Poor Accumulate savings, Managing money, Lending within small groups, Accessing credit Village Sub-district District Organization Federation Federation Commercial Banks ·Federates about 20 ·Federates about 300 VOs ·Federates about I ·Secures links with Govt. Phase SHGs 40 sub-district ·Strengthens SHGs Depts. federations ·Arranges lines of ·Audits VOs credit to SHGs ·Microfinance functions Self Help ·Social action Group 10­15 in idual 10­15 individuals (SHG) Year 2 Onwards: Converting Social Capital into Economic Capital Creating assets; developing technical, business and management skills Phase Members of different 2 SHGs form a producer group based on a common Village District activity Sub-district Organization Federation Federation ·Markets · Manages bulk milk ·Interfaces w/ markets ·Manages procurement chillers ·Maintains MIS/IT centers · Links to system Markets, Private Sector ·Manages Community cooperatives, private ·Manages Community Health Fund companies Insurance ·Identifies jobs for youth Problem Analysis quality specifications and had no local institutional arrangements for technical assistance to meet Small and marginal landholders find it difficult to agribusiness standards. transact with markets. The public and private market players also find the transaction costs of procuring Key Elements from dispersed farmers prohibitive. As a result, these agencies are unable to provide low-cost and adequate To eliminate the unfair practices of local traders extension support services to these landholders. and enhance smallholders' bargaining power, village procurement centers, owned and operated by women's Their state policy is to provide Minimum Support self-help group members, were opened in 2003. The Price (MSP) operations at agricultural market yards. village procurement center addresses the lack of credit, However, farmers from far-off villages, especially the quality control, aggregation, and market linkage under poor farmers, did not receive remunerative prices a single umbrella. The key innovations that have because of the long distance to the market yards, helped to empower the rural poor both socially and nontransparent transactions at the yards, and increase economically are: in transaction costs for smallholders who could not aggregate their produce. 1. Creating an institutional mechanism for aggregation: Each CMPC on an average aggregates Because small-scale farmers could not access formal produce from about five hundred small-scale, sources of credit, they remained indebted to traders dispersed producers and supplies it directly to the for inputs, and even if their land produced well, market yard or buyer. For private as well as public nearly half of their income was devoted to the interest buyers, it is cost-efficient to procure directly from payments on loans and the revenue lost from accepting farmers. low unit prices for their produce from traders. In most 2. Localizing the value chain, bringing the market to cases, farmers ended up making distress sales of their the village level, and providing a "one-stop shop": output to the trader. Suppliers (commercial banks, input suppliers, Formal, large agribusinesses could not interact with companies trying to source raw materials) do not smallholders because they were uninformed about have to deal with a multitude of smallholders, Livelihoods Learning Series 1, Note No. 2 3 and users (small-scale and marginal farmers) do self-help group or their families. Over one not have to deal with different organizations hundred thousand grass-root functionaries for credit, inputs, and selling their produce. A participate in supply chain management by procurement center typically covers villages within operating these centers, including bookkeepers, a 20-mile radius, so farmers need not travel long quality controllers, business managers, and distances to sell their produce. The centers have botanists. Training this cadre of resource persons also adopted transparent quality control measures has served to demystify technical assistance and that enable private and cooperative agribusinesses make it available at the grass-root level. "technical to obtain produce of good quality and reduce the sustainability"--in other words, a continuous transaction costs for members. supply of "low-cost" trained staff--is thus assured. Village botanists also engage in research and 3. Promoting business expertise within the village development for forest products. and increasing transparency in transactions: The network of grass-root functionaries in the form The second innovation is the use of "low-cost" of trained quality controllers, bookkeepers, and technology to improve efficiency and transparency. storage specialists from within the community Community resource persons3 use mobile phones ensures transparency and efficiency in the to ascertain determine the latest market price operation of procurement centers. Market before entering into contracts to purchase farmers' information on price and quality, displayed in produce. Similarly, women quality controller use the centers, is available to farmers. Now even digital technology to measure moisture and fat farmers in the remote and tribal villages can content and weigh produce. access market-based information in real time by mobile phone. Quality testing and weighing 5. Public and private agencies use procurement centers are conducted by community members in a to outsource or franchise services: In the franchising transparent manner, as opposed to profit-seeking partnership model, procurement centers are used middlemen. Farmers receive cash payment on the as forward procurement and marketing agents for spot, which makes the process more efficient and community organizations. The project provides favorable to the poor. community members with working capital, which is used for small-scale infrastructure. It also trains 4. Innovations in supply chain management: The the community resource persons in value addition, first innovation is building a cadre of low- quality control, bookkeeping, and business skills. cost technical specialists drawn from the local The value proposition for partners lies in the community--that is, members of the women's following features: 3Community resource persons: or community professionals are project participants from within the community who have undergone training in either one or multiple facets of project implementation such as institution building, community procurement and marketing, health services etc, be- coming a key resource for the community and the project. Creating a cadre of such grass root professionals has been instrumental in scaling up project activities at a low cost and will contribute to sustainability in the future. ere are currently over 100,000 such resource persons. 4 Livelihoods Learning Series 1, Note No. 2 Companies achieve scale across the state in Benefits and Impacts multiple commodities. Outreach in remote areas is Since, 2003 the procurement centers have handled facilitated. more than 100 commodities with a cumulative turnover in excess of US$ 120 million and 450,000 It is a cost-effective channel, because the cost of tons. In FY08, center turnover is projected to exceed value addition, quality control, and operation is US$ 80 million; by 2010, the procurement centers extremely low. are projected to achieve an annual turnover in excess of US$ 200 million. Apart from procuring crops, Transparency and quality assurance are provided the marketing concept has been extended to milk by the women, who (being the final users) are procurement. The project has formed more than efficient controllers. The institutions provide a 1,200 milk procurement centers at the village level strong support structure for operations. and 60 bulk milk chilling units at the sub district level. The current turnover from dairying surpasses A responsible and traceable channel is available US$ 34 million, benefiting more than 100,000 milk for products for emerging global markets, such as producers. More than 2 million self-help group non-pesticide, organic, and fair trade products. members transact with the procurement centers every year, and this number is estimated to reach 5 million Box 2: How to set up a community-managed procurement center A community-managed procurement center is a physical warehouse or depot at the village level, which is owned and operated by the members of the formal village organization. A typical procurement center contains weighing machines and other instruments, packing materials (gunny bags, a stitching machine, and markers, for example), tarpaulins, and moisture meters. The key design elements are: 1. Conducting a value chain analysis and market survey of various commodities to identify gaps and the potential for scaling up opportunities and to identify potential procurement centers at the village level. 2. Building human resource capacity at the local level. Potential community resource persons are identified and trained in book-keeping, quality control mechanisms, and business development. Every procurement center is assisted by an organizational structure in the form of various committees, such as a purchase and sales committee, quality control committee, and village social audit committee, each of which has a clearly defined role in each committee. A committee has between 3 and 5 members, depending upon the volume of trading. Mandatory training is provided for committee members on various aspects of commodity trading and handling. 3. Developing a marketing activity calendar. Given the seasonal nature of various commodities, it is essential to prepare an activity calendar for every procurement center to plan resource needs (both human and financial, such as working capital). 4. Estimating working capital requirements in line with the marketing activity calendar prepared by the village organization. In deciding how much working capital is required, consider the seasonality of the different commodities, the estimated quantity that will be procured, and the approximate storage time needed. 5. Finalizing quality and grading parameters, including a protocol for the random inspection of stocks for various commodities prior to start of the procurement. Parameters used to assess the quality of produce are usually related to size, color, moisture, refraction, and free fatty acids. Livelihoods Learning Series 1, Note No. 2 5 by 2010. Quality control and upstream value addition are compelled to offer the same rates, if not more, opportunities are now available on the ground. when they purchase in that village. The market intermediation effect has influenced other trading Economic Benefits and Impacts practices, such as proper weighing and testing for Increase in Income moisture, which has been favorable for small-scale producers. The close proximity of procurement centers to farmers raised farmers' incomes by helping them to obtain Employment Generation at the Local Level better prices and reduce their marketing costs. The The procurement centers, milk collection centers, and income gain on some commodities such as neem chilling units create employment for the rural poor. and lac has exceeded 200 percent. A recent impact Dairying generated more than 5,000 new jobs at the evaluation of the partnership with APMARKFED for village and sub-district level. The partnership with maize procurement showed that the additional gain APMARKFED created 6,000 new jobs, even during of decentralized marketing is highest for marginal a lean economic period. An impact study on maize farmers, who gained an increase of US$ 58 in one procurement concluded that each procurement center agricultural season. Through the partnership with generated an additional wage income of US$ 400 over APMARKFED to collect maize, the cumulative a three-month period for its employees. additional income generated for farmers across the state in 2005­06 was US$ 22 million. Cash Payment Unlike traders and middlemen, who make partial Increase in the General Market Price payments in cash and offer the balance in the form An evaluation conducted on the impact of maize of inputs and other supplies, the procurement center procurement conducted by APMARKFED in pays producers in cash at the time of purchase. This 2005­06 stated that the activity increased the market payment method gives farmers, particularly small-scale price by 10 percent. For milk marketing during the and marginal farmers, the freedom to source inputs same period, local market prices increased by 15 more cheaply, and in the process it eliminates the percent.5 The procurement center's price has become "regressive" tied sales that were rampant in the villages. a sort of benchmark for the village, and local traders Putting cash in the hands of small-scale and marginal 5Subrahmanyam, Nagireddy, and Nalini (2006). 6 Livelihoods Learning Series 1, Note No. 2 farmers eliminates the need to resort to informal credit Intra-household Support to finance consumption needs. The maize procurement study indicates that because women work in the centers for over 10 hours, often Gender relations until late at night, their families provide support. Their Increase in Participation, Leadership, and domestic workload is being shared by other women in Technical Skills of Women in the Rural Market the family and husbands. This finding demonstrates Women are managing village enterprises, an activity women's increased mobility and enhanced decision- that requires them to take on duties that were making space within the household. previously in the male domain. Women are becoming active players in the rural market--negotiating Making community institutions with traders and representatives of the private and sustainable public sector. They also handle such roles as quality Collective marketing by procurement centers has controllers and logistics managers, and they engage strengthened village organizations in many ways. in research and development for new products. First, by generating income and adding to the They supervise hamalis , organize transport, and 6 institutional corpus of funds, the procurement work with district administration officials, thus centers serve as a business model for village proving their capacity as leaders and technical service organizations. In the paddy procurement season of providers. May­June 2007, 300 centers received a commission Increase in Respect from the Larger Community of over US$ 850,000 for six weeks of work from The procurement centers benefit not only members the Civil Supplies Corporation. Second, members' of self-help groups but members of the village as a participation in the activities of self-help groups whole. Owing to the benefits of their services, the and village organizations has risen because of the women have garnered support from village elders and benefits yielded by the centers. Finally, the successful leaders, who in many places collaborate to provide operation of procurement centers as franchises infrastructure and logistics support to the centers. for public and private partners has changed the perception of the centers' viability and potential. 6Hamali workers are laborers who are involved in transporting agricultural produce Livelihoods Learning Series 1, Note No. 2 7 They are now considered profitable partners rather Investments in community institutions, human than mere recipients of grants. Mr. Sinha, Managing capital, and credit should be integrated to produce Director of the Andhra Pradesh Civil Supplies maximum impact on economic returns. Corporation, observed that "At first we used to procure from agri-market yards directly. We did Physical infrastructure like procurement centers can be run more efficiently by women's not have the capacity to spread into the villages. organizations because they are able to cultivate However, this program has given us a platform by financial discipline and transparency, which which we can bridge the gap between the government is more difficult with traditional men's and the small/poor farmers." organizations. Lessons Learned and Issues for Future directions and scaling up: Wider Replicability Integrate the procurement centers operating across the state within a common trading platform, There is tremendous social capital in various either at the district or state level. Integration will community organizations managed by women, involve building an information technology (IT) such as the self-help groups and other user groups. structure to link the procurement centers, which Systematic initiatives to build human capital will provide multiple benefits. Linked centers through training in business development, quality will service an "internal market"; in other words, control, and market research can enable local they will be able to meet the demand and supply institutions to generate significant economic gaps of village organization and self-help group capital and other benefits, while enabling small- members across districts, will link them to the scale producers to integrate with the market. market directly, and will offer all of their products This kind of economic empowerment requires and commodities in an aggregate manner. significant investments in market-based and management skills for women. 8 Livelihoods Learning Series 1, Note No. 2 Link with commodity exchanges and IT-enabled help to scale up innovations such as nonpesticide procurement center: These centers can be linked technology and organically grown bioproducts, with IT-enabled models like "e-choupal" and which have resulted in increased incomes for commodity exchanges, enabling the community- farmers in select districts. based procurement centers to engage in real-time transactions. References Integrate farmer field schools with the procurement S. Subrahmanyam, C. Nagireddy, and Nalini. 2006. centers: The integration of farmer field schools "Maize Procurement by Village Organizations: An and procurement centers will help to organize Impact Analysis". Society for Elimination of Rural agricultural extension services and lead to Poverty (SERP), Hyderabad. improved production and productivity. It will Series 1. Note No. 2. December 2007. K.P. Rao is the Director of Marketing, Society for Elimination of Rural Poverty, Hyderabad, India. Vijaysekar Kalavakonda is a Senior Insurance Specialist, Finance and Private Sector of the World Bank. Shweta S. Banerjee is a Junior Professional Associate and the Learning Coordinator for the Rural Livelihoods Program, South Asia Sustainable Development of the World Bank. Parmesh Shah is the Lead Rural Development Specialist, South Asia Sustainable Development of the World Bank. Comments were provided by Mr. Vijay Kumar (CEO, Society for Elimination of Rural Poverty, Andhra Pradesh). Diagrams were courtesy Melissa Williams (Knowledge Management and Communications), South Asia Sustainable Development of the World Bank. Photos courtesy Society for Elimination of Rural Poverty, Andhra Pradesh. This document was reviewed by Riikka Rajalahti, Natasha Hayward and Melissa Williams (World Bank). "Livelihoods Learning" Note Series is published by the Rural Livelihoods Cluster in the South Asia Sustainable Development Department of the World Bank, 1818 H Street NW, Washington DC 20433, USA. For additional copies contact livelihoods@listserve.worldbank.org The findings, interpretations, and conclusions expressed in this note are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations or to members of its Board of Executive Directors or the countries they represent.