Partnership for Growth: Linking Large Firms and Agro-Processing SMEs 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”. 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” 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 Executive Summary 6 1. Introduction 9 What Are Lead Firm-SME Linkages? 10 2. 2.1 Definitions and Theoretical Foundations 10 2.1.1 Private Sector Motivations 10 2.1.2 Barriers to Formation of Linkages 11 2.1.3 Motivations for Public Facilitation 11 2.2 Types of Lead Firm–SME Linkage Initiatives 13 2.2.1 Top-Down Initiatives 13 2.2.2 Bottom-Up Initiatives 13 2.2.3 Industry-Wide Initiatives 14 2.3 Empirical Foundations for Linkage Initiatives 14 2.3.1 Meta-Analysis 14 2.3.2 Linkage Initiatives According to Product Type 16 2.3.3 Raw Material Classification 18 2.3.4 Export-Oriented Versus Domestic Market Initiatives 21 Feasibility Criteria for Linkage Programs 23 3. 3.1 Market Opportunity 23 3.2 Mutual Business Advantages 24 3.3 Sufficient Capacity 25 3.4 Supportive Enabling Environment 25 4. Designing a Lead Firm–SME Linkage Program 26 4.1 Clear Definition of Project Objectives 26 4.2 Clear and Appropriate Roles and Responsibilities of Key Partners 27 4.3 Selection of Key Partners 29 4.4 Leveraging Cost Share 30 4.5 Implementation Instruments 30 4.6 Timeline for Linkage Initiatives 36 4.6.1 Phasing 36 5 Monitoring and Evaluation 37 5. 5.1 Monitoring and Evaluation Frameworks 37 5.2 Results 37 5.3 Cost–Benefit Analysis 38 5.4 Sustainability 38 Recommendations for Future Research 38 6. Annex 1: Illustrative Results of Publicly Supported Linkage Initiatives from Meta-Analysis 39 Bibliography 45 Endnotes 49 6 Executive Summary This report presents lessons learned from various models that public and private sector programs use to stimulate growth of agro-processing small and The projects were selected based on the medium enterprises (SMEs) through linkages to larger following criteria: firms in developing countries. The study considers oes the project target incorporated •D the unique barriers that SMEs face and the market- SMEs directly as beneficiaries of supplier driven approaches spurring SME growth by facilitating development programs, as opposed to linkages to lead firms in challenging development smallholder farmers’ associations? contexts which might serve as a reference for • Does the project target SMEs that in the policymakers, development practitioners, and private agro-processing sector specifically, as sector actors. The report presents approaches to opposed to organizations that are involved in successful, sustainable program design for public and more primary agricultural activities? private sector–led initiatives, in an effort to enrich the knowledge available to expand the opportunities for • Does the project work directly with a agro-processing, and to attract lead firms to partner lead/anchor firm, and through that firm’s with smaller ones. supply chain to target SMEs from a supplier development perspective? The study used a three-pronged approach to data collection, analysis, and synthesis. First, a literature The majority of programs that feature these raw review was conducted to identify results and materials were bottom-up and industry-wide outcomes of recently implemented lead firm–SME initiatives. Linkage development without a specific linkage programs. Second, the literature review helped sector focus was next most common, although this identify examples of initiatives focused on linking lead orientation is confined to PPPs and publicly supported firms and agro-processing SMEs in 56 countries in initiatives. Coffee and cacao were the most-frequent Africa, Asia, Eastern Europe, and Latin America. Data raw material targets of PPPs, although many cacao from 66 projects were examined in a meta-analysis to and coffee-based linkages were private sector led. refine the findings from the literature review. Finally, Dairy and livestock linkages were primarily publicly six linkage initiatives with a broad range of projects supported. in numerous locations were selected for in-depth The projects reviewed in the study were SMEs engaged analysis and inclusion in the report as case studies. in a range of processing activities that qualify as Level 1, 2, or 3, according to Austin’s (1981) four levels of agro-processing1. The literature review, six cases studies, and 66 linkage initiatives (40 in Africa and Asia) analyzed in the meta-analysis provide the empirical basis for the conclusions drawn in this study. The sample Lead Firm–SME Linkages population included 15 top-down linkage initiatives and 51 bottom-up and industry-wide initiatives. Lead firm–SME linkages are relationships between The linkage initiatives included products processed large companies (lead firms) and SMEs with agro- from a wide range of raw materials, including fruits, processing capacity in which the role of the lead firm is vegetables, dairy, livestock, nuts, extracted oils, to create a mutually beneficial supply chain structure grains, legumes, coffee, cacao, and flowers. to penetrate new markets, expand market share, or increase profitability. Often these linkages occur naturally. The ability of SMEs and lead firms to 7 to achieve real business benefit from the relationship Types of Lead Firm–SME Linkage Initiatives motivates, and ultimately sustains, the relationship. Three categories of linkage initiatives were derived from the analysis conducted for this report: top-down, In developing countries, there are many obstacles bottom-up, and industry-wide. to these linkages. For example, lead firms may Top-down initiatives are tailored to the needs of decide that the risks and costs of a linkage initiative lead firms and have strong leadership from them. outweigh the benefits. SMEs may not have the They work backwards in the chain to build the knowledge, technology, or capacity to contribute agro- capacity of SMEs to fulfill the needs of lead firms. processed products to the lead firm’s supply chain in There are two common subcategories of top-down a cost-efficient way or to adhere to quality standards. initiatives: —(a) privately led, which the lead firm’s Supply chain risks and constraints such as logistics own business objectives often motivate entirely and gaps, poor infrastructure, poor communications, a may emerge organically as part of a firm’s normal restrictive enabling environment, and lack of finance supplier development business operations, and (b) can stifle a lead firm’s attempts to link with SMEs a combination of public and private cooperation; in developing countries. When linkages between referred to herein as public–private partnerships lead firms and agro-processing SMEs do not occur (PPPs), which the private sector often leads, although naturally, the public sector or international donors they may have characteristics of top-down and may wish to encourage the formation of successful bottom-up initiatives. The active role of the lead firm linkage initiatives. and the public sector in the design and financing of the program distinguish PPPs from other top-down linkage initiatives. The lead firm and supporting Motivations for Public Sector Involvement entities (consulting firms, nongovernmental organizations, governmental agencies) usually There are two principal motivations for public sector implement these initiatives. facilitation of these linkages. First, development Bottom-up initiatives customize instruments to the practitioners increasingly identify the growth of needs of SMEs to position them as suppliers to larger the agro-processing sector as a way to achieve firms that may or may not have been pre-identified. sustainable economic growth. Second, these linkages These programs often focus on nascent industries can be fast, effective ways to improve domestic and may be implemented in preparation for a top- practices, stimulate agro-processing firm capacity, down initiative. Most bottom-up initiatives are and expand crop production. The initial motivation publicly managed and involve a variety of SMEs and for public sector involvement in supporting business intermediaries. linkages is based on the agro-processing sector’s potential to stimulate economic activity by creating Industry-wide initiatives promote broader on- and off-farm employment and demand-pull for competitiveness in the agro-processing subsector (or agricultural production and associated inputs and for a specific value chain). They are often a combination support services. The food and beverage processing of top-down and bottom-up initiatives and business- subsector has by far the most potential for economic enabling environment reforms (e.g., facilitation of transformation for lower- and lower-middle-income business linkages between lead firms and SMEs as an countries. The global trend of increasing demand for end goal). processed agricultural products has led to growth Activities under linkages initiatives focus on of agro-processing sectors and offers competitive improving coordination among value chain actors opportunities for SMEs in new, growing markets. An to affect shared goals and might include shared internationally competitive agro-processing sector infrastructure in corridors, zones, or parks; also contributes to more-efficient use of resources and investment in infrastructure; specific trade, tax, improves food safety. The structural transformation or investment reform; greater access to financial that occurs through a growing agro-processing services and information; investment in innovation subsector can catalyze knowledge and technology and entrepreneurship; and enforcement of norms and spillovers into other manufacturing subsectors. standards. Most industry-wide initiatives have some public or international donor support. 8 Linkage Program Feasibility Critical success factors for linkages projects include: The key to the success of programs that facilitate Clear definition of project objectives 1. relationships between lead firms and agro-processing SMEs is respecting and harnessing the private sector’s Clear and appropriate roles 2. primary motivations for commercial linkages. Four Key partner selection 3. commonsense recommendations emerged as integral 4. Cost-share leverage to successful linkage programs: Implementation instruments, including phasing with 5. Embark on a linkage initiative only if there is an • agricultural cycles identifiable profitable market opportunity. Timeline for linkage initiatives 6. Ensure that the capacity of supply chain stakeholders • is such that participants can respond meaningfully to business incentives. The following principles provide guidance for • Have reasonable assurances that enabling structuring successful initiatives that aim to environment constraints can be resolved. strengthen linkages. • Ensure the design of the initiative yields real business • Focus the role of the public sector on facilitating and benefits for the SME and lead firm. strengthening the enabling environment. • Engage directly with lead firms in the spirit of partnership and facilitation, with the lead firm Lead firms and SMEs, in addition to other supply chain providing substantial leadership. actors, will be most engaged, and their relationships will ultimately yield better results, when incentives • Clearly articulate roles and responsibilities. align with sought-after performance improvements. Incentives that lead firms offer to SMEs have motivated performance improvements that also Selecting the appropriate business partners (SMEs, benefit the lead firm. Incentives cited in past projects lead firms) is central to achieving results. Research include instruments and agreements that reduced from this analysis confirms that it is important to costs or increased revenues, such as price incentives select firms with sufficient capacity and willingness associated with higher-quality product and cost to undertake change. Selection criteria for lead firms sharing of capital investments to improve production and SMEs include sufficient capacity, potential to technologies. improve and grow through existing assets, access to investment and working capital, annual revenues, and certifications, particularly for SMEs. Designing a Linkage Program The study discusses key design features of linkage Implementation Instruments projects and highlights successful strategies based A wide range of implementation instruments are on project experiences. It is focused largely on the available to encourage or strengthen linkages perspective of the public sector but is relevant and between lead firms and agro-processing SMEs, adaptable to private enterprises that wish to pursue including supplier association development, cluster a supplier development program with agro-processing development, advisory services, training programs, SMEs in developing countries. Sustainability is facilitation of business meetings, policy and regulation considered throughout and woven into each design changes, tax incentives and regimes, contracts and consideration. advanced purchase agreements, and firm financing. 9 Results Measurement From an examination of the meta-analysis and case 1. Introduction studies, we can draw some broad conclusions about Increasing the participation of SMEs in economic project indicators. activity in developing countries through expansion Overall, PPPs and bulk product linkages achieve the 1. of agro-processing sectors can create enormous greatest per-project results in several categories. In opportunities for market-led economic growth, in turn terms of SMEs and number of farmers reached and leading to increases in efficiency and productivity of SME overall sales revenues, PPPs achieve the greatest agricultural value chains and eventually to structural average results. transformation2. The focus on agribusiness value 2. Industry-wide initiatives gave the highest cost– chains is timely, with agribusiness sectors worldwide benefit ratios for SMEs financed and sales facilitated. benefiting from greater international integration of value chains; increasing demand from growing middle- Sustainability was strongest with the privately income populations; and greater attention to food led initiatives, with 46% describing their sourcing quality, security, and safety. (Food and Agricultural relationships as on-going. Of the initiatives with public Organization 2017; Reardon 2015; McMillan and funding, the PPPs achieved the highest sustainability Rodrik 2011), although the linkages between value- rate, with 38% recording continued supplier adding agro-processing SMEs and the lead firms development initiatives and sourcing relationships that stimulate this agro-processing-based economic without public support. The sustainability is greatest growth are not well understood and have not been the when the key actor required to make this work (the focus of much research (UNCTAD 2013). buyer) is involved from the very start and hence fully involved in design based upon their specific needs and requirements.. Nevertheless, it should be noted that in BOX 1: DEFINITION OF TERMS this sample, less than half of all initiatives resulted in ongoing sourcing relationships in the medium- to long- Agro-processing, for the purposes of this term; this likely indicates the extremely challenging study, refers to the action of adding value to nature of developing long-term sourcing relationships, raw agricultural material through product even in the best of scenarios. transformation grading, sorting, washing, packaging, storage, and distribution. Firms that do not add significant value beyond production The literature reviews and meta-analysis revealed and aggregation (collecting and sorting) were not interesting trends in the differences between publicly considered for this study. and privately driven approaches. Private sector lead firms tend to prefer smaller, tighter supplier bases, Small and medium enterprise refers to a private cultivating relationships with fewer yet stronger enterprise operating in a developing country. supplier networks. This tends to keep the number of Definitions of “small” and “medium” vary SMEs reached lower for private interventions than for according to country, although the International public ones (and consequently the numbers of farmers Finance Corporation provides a standard global reached). There is a positive relationship between definition based on a firm’s employees, sales, and project duration and number of SMEs reached. Public assets. Producer organizations may be included initiatives are often regional and may be more inclined if they add significant value beyond primary towards farmer outcomes and often result in more production or aggregation. farmers reached, whereas private sector linkage Lead firm refers to a large, dynamic business projects are primarily focused on SMEs as processors that has an established market presence at and aggregators. the national, regional, or international level. Examples of lead firms include supermarket chains requiring finished products, industrial food and beverage manufacturers and global traders requiring semi processed products, and hotels and other food service providers. 10 2. What Are Instead, the policy dialogue has long been focused on crop production, on-farm improvements, agricultural value-chain development, and industrial growth, leaving a gap in the understanding of the contributions that agro-processing and logistics can make to economic development and value Lead Firm-SME chain competitiveness, particularly in lower-income countries. Analysis of this sector reveals that the middle segment of value chains, such as processing, Linkages? logistics and wholesale functions, make up 30 to 40 percent of the value added to food value chains 2.1 Definitions and Theoretical (Reardon 2015), but these elements appear to be Foundations3 substantially absent from mainstream discussion. The United Nations Conference on Trade and Development (UNCTAD) describes business linkages between SMEs and lead firms as mutually beneficial To explore this important aspect of agribusiness, arrangements whereby domestic and international the World Bank Group undertook a study with three lead firms “benefit from linkages with domestic firms analytical components to identify existing knowledge because these linkages can reduce costs; enhance about lead firm–SME linkages. First, a literature access to local tangible and intangible assets; review was conducted to identify the results of lead increase affiliates’ specialization and flexibility; adapt firm–SME linkage programs, what lessons have been technologies and products better and faster to local learned, and what models are emerging to guide such conditions; and facilitate ‘rooting’ in the local setting.” programs. Second, a literature review identified 66 (UNCTAD 2004, p. 3). examples of initiatives focused on linking lead firms and agro-processing SMEs in 56 countries in Africa, A joint study by Harvard University and the United Asia, Eastern Europe, and Latin America. Data were Nations Industrial Development Organization (UNIDO) examined in a meta-analysis to add to and refine the uses a broader scope in its definition of business findings from the literature review. Third, six linkage linkages, incorporating backward linkages through initiatives were selected from the 66 examples and procurement of raw and processed material, forward analyzed in-depth as case studies to derive detailed linkages such as sales and distribution (access to contextual insights. markets), and horizontal linkages for industry-level collaboration (Jenkins et al. 2007). This document provides a summary of the aggregate findings from the literature review, the meta-analysis, This report draws primarily on the UNCTAD (2004) and the six case studies. Guidance notes were definition above and the linkage between lead firms developed for policymakers and implementers of lead and agro-processing SMEs in developing countries, firm–SME linkages to provide practical guidance when emphasizing the role of lead firms in working with implementing a lead firm–SME linkage. SMEs to create a mutually beneficial supply chain structure with the objective of penetrating new markets, increasing market share, or increasing profitability. 2.1.1 Private Sector Motivations The ability of SMEs and lead firms to both benefit from the relationship motivates, and ultimately sustains, the relationship (UNCTAD 2004). Motivations for the Lead Firm. Business benefits for lead firms include sales or profit growth through access to new markets, increased product volume, better quality, greater product differentiation or innovation, lower costs and fewer losses, more timely 11 delivery, and lower supply and supply chain risk. If lead firms’ attempts to link with SMEs in developing there is no tangible, quantifiable benefit from linking, countries. If the barriers to linkage are too great, lead lead firms will not have an incentive to be supportive firms will often pursue an “in-house” approach by partners or catalysts for change (Lusby 2008). integrating vertically so as to control supply chain quality, costs, and supply; seek higher-cost, more- Motivations for the SME. Similarly, if there is not reliable suppliers in more developed economies; or a quantifiable business benefit to linking with the even leave a supply chain altogether. Often the lead lead firm(s), SMEs will not be motivated to improve firm considers the vertically integrated supply chain performance. Business benefits for SMEs include to be the lowest-cost, lowest-risk solution, yet with increased sales or profits through access to new each additional activity that the lead firm manages, markets, enhanced skills and standards, and more- there is a lost opportunity from a local economic stable relationships with buyers and suppliers. development perspective. This report starts with A detailed list of business benefit motivations is the hypothesis that these relationships are desirable presented according to firm type in table 1. precisely because they can present win/win solutions for both SMEs and lead firms, and sets out to test this Business benefits differ for lead firms and SMEs. The hypothesis with an empirical review. As the meta- linkage arrangement must serve the needs of each so analysis and cases will demonstrate, lead firm-SME that both have incentives to enter into constructive, linkages are not always win/win, the reason for which mutually beneficial relationships. lead firms may incline toward vertical integration at times. When such linkages do not form organically, outside support from the public sector or NGOs 2.1.2 Barriers to Formation of Linkages can provide capacity-building that allows these relationships to develop into win/win scenarios for all Although agro-processing activities in developing parties. countries are expanding, business-to-business relationships between lead firms and agro-processing SMEs are often constrained (Reardon 2015). 2.1.3 Motivations for Public Facilitation Specifically, the presence of a lead firm in a supply chain serviced by agro-processing SMEs, and the There are two principal motivations for public presence of realizable benefits from linking, may not in sector facilitation of linkages. First, development themselves be sufficient to ensure linkage formation. practitioners have increasingly identified growth of the SMEs may not have the knowledge, technology, or agro-processing sector as a way achieve sustainable capacity to contribute agro-processed products economic growth (Reardon 2015; FAO 2012; FAO to the lead firm’s supply chain. Supply chain risks 2017). Second, lead firm–SME linkages can be one of such as logistics gaps, poor infrastructure, enabling the fastest, most-effective ways to upgrade domestic environment constraints, and other factors can stifle practices, increase firm capacity, and expand crop 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 and/or increasing quality More-stable relationships with buyer and possibly • • Enhanced reputation and local license to operate producer organizations • Risk sharing through joint funding or operations • Reduction of foreign exchange needs through import • Improved access to finance substitution 12 production. (AFE 2014; Ahmed and Hendry 2012; convenience. This results from global trends such as Da Silva et al. 2009; FAO 2017; Jenkins et al. 2007; growing middle-income populations, urbanization, Reardon 2000; Ruffing 2006). participation of women in the workforce, and presence of supermarkets and greater competition driving The initial motivation for public sector involvement in supply chain diversification, product innovation, supporting business linkages comes from the agro- differentiation, and opportunistic market expansion processing sector’s potential to stimulate economic (Reardon 2015; McMillan and Rodrik 2011). activity by creating on- and off-farm employment and demand pull for agricultural production and associated inputs and for support services (da Silva These global trends have encouraged the growth et al. 2009). The food and beverage processing of agro-processing sectors and offer competitive subsector has by far the most potential for economic opportunities for SMEs through development of new, transformation for lower- and lower-middle-income growing markets. Agro-processing also contributes countries. Local products that locally owned (and to the more-efficient use of resources and offers largely informal) SMEs process dominate most improvements in food safety. The structural domestic food markets (Reardon 2015). In contrast, transformation that occurs through a growing agro- export food markets are highly structured, often with processing subsector can also catalyze knowledge high entry costs to meet industry standards. and technology spillovers into other manufacturing The demand for processed agricultural products (and subsectors (da Silva et al. 2009). Publicly supported for related, innovative forms of packaging and sales) lead firm–SME linkages have a wide range of has grown, responding to demand for preservation and objectives (figure 1) (CIPS 2013). FIGURE 1: OBJECTIVES OF PUBLIC LINKAGE INITIATIVES Objectives • Make industry more attractive to Focused on trade and investment with lead Lead Firms firms • Technological upgrading • Skills upgrading Objectives • Build capacity to meet specific Development Focused on industry standars (e.g. quality, Objectives labor conditions, sustainability) SMEs • Poverty reduction • Job creation • Move up value-chain (i.e. retain more value-added • Reduce barriers to entry for agro-processing SMEs activities in country) • Improve enabling environment (policy and physical • Support infant industry infraestructure) • Multiplier effects (particularly by creating demand- • Raise ROI of firm-specific investment pull for raw manterials and services) • Direct investment in certain value-chain gaps (e.g. • Gender empowerment packaging, value-addition, logistics services, R&D, innovation networks) • Decentralization • Improve coordination constraints and asymmetric • Improve health / nutrition information Source: Literature Review 13 2.2 Types of Lead Firm–SME Linkage The private sector often leads PPPs, although they have characteristics of top-down and bottom-up Initiatives initiatives. The active role of the lead firm and public sector lead firm(s) in the design and financing of Linkage initiatives are categorized into three distinct the program distinguish PPPs from other top-down approaches based on their mechanism of action and linkage initiatives. The lead firm and supporting delivery: top down, bottom up, and industry-wide parties (consulting firms, nongovernmental (figure 2). organizations, governmental agencies) often implement these initiatives. Discussion about PPPs has increased in recent years because of their unique 2.2.1 Top-Down Initiatives ability to secure commitments from private enterprise Top-down initiatives are tailored to the needs of for developmental benefits, with governmental identified lead firms and have strong leadership from oversight and commitment (WB 2014; McKinsey the lead firms. They work backward in the chain to 2009; Abdulsamad et al. 2015). build the capacity of SMEs to fulfill these needs. 2.2.2 Bottom-Up Initiatives There are in general two subcategories of top-down initiatives—those that are completely privately led Bottom-up initiatives customize instruments to and those that have a combination of public and the needs of SMEs to position them as suppliers to private cooperation (PPPs). The lead firm’s business larger firms. These programs often focus on nascent objectives are often the sole motivator of privately industries and may be implemented as preparation for led initiatives, which may emerge organically as part a top-down initiative. The vast majority of bottom- of a firm’s normal supplier development business up initiatives are publicly managed, according to the operations. meta-analysis. FIGURE 2: TYPES OF LEAD FIRM - SME LINKAGE INITIATIVES “Top-down” or “Privately Led” “Bottom-up” through Lead through SMEs Firms • Instruments customized to needs of lead firms • Instruments customized • Strong lead firm to needs of SMEs leadership & engagement. Often in the form of a PPP • Focus to reduce key or entirely private-led constraints to growth and seize market opportunities Industry-wide initiatives • Broader industry competitiveness objective • Enabling environment is an important emphasis Source: Literature Review 14 2.2.3 Industry-Wide Initiatives and entrepreneurship; and establishing or enforcing norms and standards. The meta-analysis showed that Industry-wide initiatives assume the broader most industry-wide initiatives have some element of objectives of promoting industry-wide public or international donor support. Box 2 provides competitiveness in the agro-processing subsector (or examples of these types of linkage initiatives. sometimes a specific value chain). These initiatives are a combination of Top Down and Bottom Up initiatives, along with a focus on improving the underlying policy framework and business environment. Aspects of 2.3 Empirical Foundations for Linkage business environment reform often include facilitation of business linkages between lead firms and SMEs as Initiatives the end goal but might not engage directly with either type of firm or customize products for either group. 2.3.1 Meta-Analysis These activities are instead focused on improving The following sections are based on a meta-analysis of coordination among value chain actors to effect 66 initiatives focused on linking lead firms and agro- shared goals and include a wide range of instruments: processing SMEs, from across various development shared infrastructure in corridors, zones, and parks; organizations, government initiatives, and pure investment in quality infrastructure; trade, tax, and private sector approaches. The research team for this investment reforms; access to financial services; report reached out to development organizations and addressing information gaps; investment in innovation private sector actors to take stock of past public and BOX 2: EXAMPLES OF LINKAGE INITIATIVE ACCORDING TO TYPE The meta-analysis and case studies examined 66 projects. Below are examples of projects. Top-down initiatives: A number of projects involving large multinational cocoa companies were studied in the meta-analysis (Stella Bernrain in Peru, Rizak in the Dominican Republic, Barry Callebaut in Ivory Coast). These projects all have some element of a privately led initiative focused on the lead firm’s needs—supporting local SME cocoa processors’ associations with training and providing financing, infrastructure investments, and traceability improvements to support sustainability in their supply chains. The projects are considered top-down because they are focused primarily on the needs of the lead firms and are run through the lead firms’ supply chains. Bottom-up initiatives: The meta-analysis surveyed several World Bank projects focused on improving the overall competitiveness and productivity of SMEs in select sectors, often implemented in partnership with a government agency and with specific SME-focused goals in mind such as productivity improvements, encouraging entrepreneurship among special groups such as youth and women, and upgrading skills and access to new information. Examples of these projects are the creation of an enterprise development center in Chad (WBG P554685), a women’s entrepreneurship development project in Ethiopia (WBG P122764), and a micro, small, and medium enterprise development project in Guinea (WBG P12844). This is a common approach to linkage development for a government agency or a trade and competitiveness project implemented by a multilateral organization such as the World Bank. Industry-wide initiatives: A classic example of an industry-wide project is one that is focused on a specific industry or cluster and may involve elements of top-down and bottom-up initiatives, along with assistance to support organizations, government agencies, and business environment reforms. A U.S. Agency for International Development (USAID) program, the Regional Quality Coffee Program for Central America (Guatemala, El Salvador, Nicaragua, Costa Rica, Honduras, Panama, Dominican Republic), illustrates this mechanism. The project worked with national coffee organizations, government agencies, producers’ associations, and potential lead firm buyers to increase productivity and improve business practices along the supply chain. 15 private programs that aimed to enable the growth of and private sector programs that aimed to enable agro-processing SMEs through linkages with larger the growth of agro-processing SMEs through linkages firms. While the sample contained in the meta- with larger firms and selected 66 projects from in 56 analysis does not include all possible projects, it does countries in Africa, Asia, Eastern Europe, and Latin represents a robust attempt at finding an illustrative America that met the selection criteria mentioned sample of relevant projects. Projects were selected above. See Annex II for more information on the 66 based on the following criteria: projects. • Does the project target incorporated SMEs directly Projects in the meta-analysis: Several products and as beneficiaries of supplier development programs, as lead firms recorded more than one linkage initiative opposed to smallholder farmers’ associations? with SMEs. Asia, Africa, Europe, and Latin America each had two or more initiatives (figure 3). Fourteen • Does the project target SMEs that in the agro- countries are represented in Asia, 25 in Africa, 13 in processing sector specifically, as opposed to Latin America, and four in Europe. organizations that are involved in more primary agricultural activities? What is the level of value Top-down private sector–led projects were found that is being added in the processing/manufacturing principally in Africa and Latin America and somewhat activities of these firms? less in Asia (figure 4). Bottom-up initiatives were found in Asia and Africa and to a lesser extent in Europe. • Does the project work directly with a lead/anchor Industry-wide linkage initiatives were fairly evenly firm, and through that firm’s supply chain to target spread across Africa, Asia, Europe, and Latin America. SMEs from a supplier development approach or does it The public sector supported the European initiatives, merely work to improve the quality of SMEs in service which were more focused on supermarkets and higher of accessing markets without a specific lead firm in value added than those in Africa, which were more mind? focused on export quality of minimally processed bulk products. The team reached out to development organizations and the private sector to take stock of past public FIGURE 3: GEOGRAPHIC DISPERSION OF THE 66 LEAD FIRM-SMALL AND MEDIUM ENTERPRISE INITIATIVES IN THE META-ANALYSIS 16 FIGURE 4: GEOGRAPHIC DISPERSION ACCORDING TO INITIATIVE TYPE 2.3.2 Linkage Initiatives According to Product Type Brown (1994, p. 65) defines agro-processing as “an operation or series of operations performed on a raw material to change its form or composition.” Most Figure 5 shows the objectives of different initiatives processing methods for agricultural products focus on according to type. Improving productivity and preservation or separation (Brown 1994). Preserving competitiveness is the major goal of industry-wide products by drying, fermenting, and cooking makes initiatives, followed by market linkage creation. The them less susceptible to deterioration. Separation main objective of bottom-up initiatives is to create isolates certain elements such as flour or oil from market linkages, followed by of improving productivity the primary natural product (seed) using solvents or and competitiveness. The main objective of top- mechanical processes. Austin (1981) describes four down initiatives’ is to improve quality, with a second categories of agro-processing organized according to objective of lowering costs. The major objective complexity of transformation (figure 6). of PPPs is to create market linkages, followed by increasing income. Private sector participation in top- The projects reviewed in this study involve SMEs down initiative was from companies’ business units engaged in a range of processing activities that and corporate social responsibility units. For example, qualify as Levels 1, 2, and 3. Level 1-type processing linkage initiatives were managed from business units by the SMEs is most common in the cases studied for Alquería Dairy in Colombia and Olam’s cashew (42%), but there are SMEs engaged in Level 2- and project in Côte d’Ivoire. Olam had another project 3-type processing. Level 1 processing most common in Côte d’Ivoire for cocoa that was managed from a among top-down and PPP initiatives in part because corporate social responsibility unit. many lead firms want to source a wider range of suppliers of minimally processed products. 17 FIGURE 5: INCIDENCE OF OBJECTIVES ACCORDING TO INITIATIVE TYPE 18 At the same time, top-down initiatives are interested 2.3.3 Raw Material Classification in differentiating their products in the marketplace The linkage initiatives include products processed and hence seek specialty products such as “fair trade” from a wide range of raw materials, including fruits, coffee, shade cocoa, and high-quality jasmine rice. vegetables, dairy, livestock, nuts, extracted oils, Level 4 processing does not take place in this grains, legumes, coffee, cacao, and flowers. Linkage study’s initiatives. One thing to note about lower initiatives based on fruits and vegetables are the best levels of processing, is that Level 1 and 2 processing represented in this study (figure 8). are typically less capital-intensive, and thus the Most programs that process these raw materials operations provide fewer resources which might are publicly supported. Linkage development be used as collateral, reducing opportunities for without a specific sector focus is next most common expanding access to finance. For this reason, lower characteristic, although this is confined to PPPs and levels of processing may present the need for publicly supported initiatives. Coffee and cacao are the alternative financial instruments to fund upgrading most-frequent raw material targets of PPPs, although of SME capacity as compared to higher levels, where the private sector leads a plurality of cacao- or coffee- collateral is more readily available as a means to based linkages. Dairy, livestock, and oils linkages are secure access to commercial finance. primarily publicly supported. It is worth noting that the meta-analysis revealed a Figure 7 shows that the greater the extent of private trend that shows that successful food crop linkage sector involvement, the lower the processing level of programs are mostly publicly-supported, while PPPs the participating SME. Industry-wide and bottom-up and privately-led initiatives have tended to focus on initiatives tend to have a mix of processing levels. cash crops (cocoa and coffee are common for PPP and lead firm initiatives). FIGURE 6: LEVELS OF AGRO-PROCESSING • Cleaning LEVEL 1 • Grading • Storage LEVEL 2 • Ginning • Cutting • Miling • Mixing • Cooking • Canning • Freezing • Extraction LEVEL 3 • Pasturization • Dehydration • Weaving • Assembly • Chemical alteration LEVEL 4 • Texturization Source: Austin, 1991 p.2 19 FIGURE 7: SMALL AND MEDIUM ENTERPRISE PROCESSING INTENSITY INCIDENCE ACCORDING TO INITIATIVE TYPE Source: Meta-analysis The reason for this may be that food crops often Global demand for these products is generally involve geographically-dispersed and weak supply increasing, as are quality and traceability chains, where public support may be necessary as a requirements. Publicly led programs tend to focus pre-requisite, due to the lack of initial private sector on higher levels of processing in an effort to increase interest. In addition, there may be social or political investment in greater value-added processing pressure for the public sector to be involved in supply capabilities in developing economies. Privately led chains that have implications for food security and initiatives and PPPs tend to focus on improving farmer welfare. Where cash crops tend to involve raw material collection and other agro-processing smaller, tighter supply bases, lead firms may see a activities (figure 9). more direct or obvious entry point. Partnership structures reflect the strength and sophistication of the specific agro-processing industries. The meta-analysis found that most linkage programs in developing countries, including publicly led, privately led, and PPPs, are organized around improving the quality and quantity of bulk products. Processing of these products (e.g., coffee, cacao, oils, nuts, grains, fruits, vegetables) usually entails minimal technological sophistication, with the aim of partially processing or preparing raw materials to make them more transportable for lead firms. Geographically dispersed smallholder farmers involved in weak and fragmented value chains produce many of these products. 20 FIGURE 8: COMMODITY INCIDENCE ACROSS POPULATION OF INITIATIVES STUDIED Source: Meta-analysis FIGURE 9: OBJECTIVES ACCORDING TO INITIATIVE LEAD ACTOR AND FUNDING 21 The meta-analysis found that linkage initiatives are Lead firms in this segment often include hotels, less common for specialty or finished goods that restaurants, supermarket chains, and their buyers. require higher levels of technological sophistication. An Lead firms that are retail outlets generally do not exception to this is food safety initiatives, which are want to be vertically integrated and depend on common among bottom-up and PPP initiatives and suppliers, some of which are SMEs, for supplies, that target SME processors and suppliers of finished particularly in developing economies. Examples found goods supplied directly to supermarkets that act as in the meta-analysis include Wal-Mart’s project lead firms. sourcing fresh fruit and vegetables in China and This observation may reflect a prevalence of vertical Metro’s and Auchan’s food safety project focused on integration in agro-processing activities (from SMEs in Ukraine. upstream and downstream actors), which can be largely attributed to the risky nature of agro- BOX 3: THE RANGE OF COMMODITY processing in developing countries and to the low VALUE CHAINS STUDIED IN THE META- capacity of SMEs and their limited access to finance. ANALYSIS Classification of commodity supply chains can also encompass the degree of processing to include As raw materials move downstream along the bulk commodities, specialty products, and finished value chain from commodity to finished product, products (box 3). the level of processing increases, which in turn 1. Bulk tradeable products are highly traded requires more SME facilities, technology, and commodities such as coffee, cacao, grains, and nuts. financial capability. Accordingly, lead firm– They generally have international quality designations SME linkages can be of more interest to lead and use relatively more-sophisticated financial tools firms downstream in the value chain. Lead firm such as auctions, spot purchases, futures contracts, purchases of unprocessed commodities may and hedging instruments to reduce price volatility. present a limited role for agro-processing SMEs, These products face fierce competition because there but the opportunity to provide a processed is often a high degree of substitutability of product product at a lower cost and higher quality sources. is an opportunity to create a lead firm–SME linkage. Products studied in the meta-analysis Specialty products can also be traded commodities 2. include chocolate, coffee, processed fruits and but often have unique attributes that make them vegetables, processed dairy, beer, cashews, scarce or targeted for niche market segments. raw nuts, insect repellents, hazelnut-derived Examples of these products are fair trade and organic confectionary products, tea, fresh semi products, specialty coffee, and indigenous natural processed produce, juice and smoothies, flowers, products (e.g., hoodia, argan oil). In some cases, the fresh fish, baobab, cut flowers, palm oil, vanilla product is marketed with place of origin branding products, milled rice, groundnuts, edible oils, initiatives such as Ethiopian coffee and Moroccan maize feed, and sunflower cakes. (argan) oil to signify a differentiated product with a signature quality or other attributes. Value addition can involve all levels of processing, although it 2.3.4 Export-Oriented Versus Domestic typically involves rudimentary processing. Market Initiatives Finished products include a wide array of inputs 3. Business-to-business relationships in developing and often require greater levels of transformation countries are generally limited, and most such to cook, cut, pasteurize, and package them for linkages are within the domestic economy because consumption. Greater levels of transformation require local production dominates most food economies. larger technology investments and reliable access For example, Reardon (2015) estimates that 90 to forward and backward linkages of goods and to 95 percent of the food economy is local in Asia, services. For example, dairy products require cold with international trade in food accounting for only chain infrastructure and services throughout the 5 to 10 percent. Furthermore, informal, small to value chain.Exports of cut fruit require cold chain microenterprises conduct most agro-processing in infrastructure and access to reliable air freight. developing countries and sell to local markets. 22 The literature review and meta-analysis found The 66 projects in the meta-analysis are primarily anecdotal evidence that there is a prevalence of export-oriented linkages between international buyers vertical integration in agro-processing activities (from and SMEs. The meta-analysis of linkage initiatives upstream and downstream actors) and that this includes initiatives that exclusively target domestic makes up the largest share of business-to-business markets and those that target domestic and export relationships between SMEs and lead firms, rather markets. There are examples of successful projects than outsourcing or specialization. oriented to the domestic market, such as those described in boxes 4 and 5, where the market focus New agro-processing businesses that are rising to shifted from international to domestic market. Dual meet specific opportunities, particularly local and end market targets are the primary orientation of regional market demand for products and services are bottom-up and industry-wide initiatives. being established in many developing countries. This phenomenon includes forward and backward vertical integration of SMEs and lead firms. BOX 4: NILE BREWERIES TARGETS LOCAL MARKET FOR LOW-COST BEER Nile Breweries Ltd. (NBL), the leading Ugandan beer producer and marketer, wanted to develop a competitively priced beer for the local market. NBL saw an opportunity to produce a new, low-cost sorghum-based beer rather than use expensive imported malted barley and developed a supply chain through strategic partnerships with small and medium enterprises (SMEs) that could reliably deliver raw material of consistent quality. The resulting success created benefits throughout the value chain, with additional SMEs becoming suppliers; fostered knowledge spillovers and replication on a pan-African scale; and improved grain yields and farmer incomes. Eagle Extra is now the best-selling brand in the country and the best-selling product of NBL’s mix of brands. Last year, the company acquired 12,000 tons of sorghum from SME agro-processors and farmer associations representing approximately 20,000 small farmers who received revenue of US$4 million. BOX 5: WHEN THE MARKET FOCUS SHIFTS FROM INTERNATIONAL TO DOMESTIC— INTERSNACK AND MARKS & SPENCER Intersnack is a leading EU snack food company that has a strategic objective and an active program to increase the quality and quantity of tree and groundnut sources from Africa by working with local small and medium enterprises. Intersnack improves local processing and grading at the source, reducing processing expenses in their UK factories and the level of inputs that do not meet its import specifications. Through its involvement with the Department for International Development Food and Retail Industry Challenge Fund (FRICH), Intersnack reached out to Equatorial Nut, an established Kenyan nut processing firm, to be a supplier and partner in developing a source of aflatoxin-free peanuts, with the goal of improving quality for export to Europe. After an internal strategic review of the project, Intersnack concluded that, without further public subsidy, it was unlikely that they would continue to invest their own capital in an outgrower model for export. Instead, FRICH funding helped to consolidate Equatorial Nut’s relationship with outgrowers, with the groundnuts going to the domestic market in Kenya. Although Intersnack did not reap the immediate rewards of this enterprise through prolonged exports, they appear to have benefitted over the long term from increased public interest in the Kenyan groundnut outgrower model, and a future potential supplier was strengthened.Similarly, Marks & Spencer worked with Iriani, a Kenyan tea company, through FRICH, initially with the idea of developing a Kenyan packaged tea ready for export to the United Kingdom. 23 The project did not generate large sales for Marks & Spencer, probably because of the traditional nature of the tea market in the United Kingdom, but Iriani was able to take advantage of their knowledge of the local Kenyan market and introduce their branded products there. Although the project was not as successful in the export market as originally planned, it had an important effect on factory management and cooperative members, strengthening their ability to market locally. Despite the obvious importance of public sector support, one of the key lessons from studying the FRICH cases is that the most successful partnerships occur when lead firms and SMEs are directly involved with project implementation, rather than merely delegating implementation to a third party. For example, Intersnack had limited experience in crop production and sourcing in Africa, and had to rely primarily on several NGOs who had local agricultural experience. In comparison, both Fullwell Mill and Marks & Spencer, together with local SMEs, brought considerable commercial African experience to the table, which contributed to the project’s results. These two firms were able to provide hands-on experience to partner SMEs, improving their chances of success and allowing midstream corrections to be made when required. 3. Feasibility the cases examined did not succeed precisely because this premise was not met. For example, Phase 1 Criteria for of the West Bank Olive Oil Project did not clearly identify market opportunities for lead firms to work in partnership with olive oil SMEs, so they were unable to Linkage sustain sales volumes (box 6). The pyrethrum project in Rwanda also had problems identifying market opportunities, and much of the pyrethrum produced Successful lead firm–SME linkages have several did not meet the quality standards of the lead firm. common characteristics: profitable market Understanding the factors driving market demand opportunities, mutual business advantages, sufficient helps leverage the motivation of lead firms to engage capacity of supply chain stakeholders to respond with agro-processing SMEs in developing countries. to business incentives, and a supportive enabling Growth (expansion, degree of saturation) and changes environment4 . in the enabling environment (trade policy, product standards) commonly drivers influence market demand, in turn influencing business decisions 3.1 Market Opportunity to differentiate products, improve quality, and A profitable market opportunity is one of the most streamline supply chain functions. Meeting changing important preconditions for a successful linkage market demand of processed agricultural products between lead firms and agro-processing SMEs. often entails improving operational efficiencies and A review of the 66 projects in the meta-analysis quality controls throughout supply chains, from input suggests that the objectives of linkages can only provision to postharvest handling. be reached by successfully exploiting a market Maintaining a supply-chain perspective is important opportunity and that achieving those objectives during the market analysis process to identify involves developing programs that are responsive to opportunities for capacity building, investment, market supply and demand at the firm level, market and facilitation of financing. Identifying lead firm trends, parameters for product competitiveness, champions and agro-processing SMEs is essential to opportunities for growth, exogenous risk, and the conducting market analysis and defining the market motivations of lead firms for supply chain linkages to opportunity (See Guidance Note for Policymakers and agro-processing SMEs. Without a profitable market Development Practitioner, p. 3). Box 6 discusses the opportunity underpinning the lead firm–SME linkage, role of olive oil enterprises over time in the design and there are few incentives for either market actor to execution of the West Bank Olive Oil Development maintain and invest in the supply relationship; some of Project. 24 3.2 Mutual Business Advantages BOX 6: WEST BANK OLIVE OIL - UNDERSTANDING THE MARKET The lead firm and the SME must perceive tangible business benefits of linking, or supplier capacity- OPPORTUNITY building efforts will not achieve desired results (table 1). Common challenges to establishing benefits for both parties include lack of supplier commitment, Led by the International Finance Corporation insufficient supplier resources, lack of trust between (IFC), olive oil bottlers in the West Bank parties, poor alignment of organizational cultures, undertook a series of steps to foster linkages and insufficient inducements to supplier improvement. between agro-processors (olive oil bottlers) Some challenges correlate with lack of lead firm and olive oil importers and to address capacity buying power, and others are related to lack of problems that inhibited market access within financial resources to implement needed changes the value chain, particularly for small and (Ahmed and Hendry 2012) medium enterprises (SMEs). The two phases of Lead firms and SMEs, in addition to other supply chain IFC support evolved from a bottom-up SME- actors, will be most engaged and their relationships focused capacity-building and market linkage will ultimately yield better results when incentives project focused on improving the quality of align with sought-after performance improvements. and expanding the overall export market for Incentives that lead firms offer to SMEs have been Palestinian olive oil, but the combination of small part of a practical, successful strategy to motivate producers and small processors resulted in a performance improvements that also benefit the product that, if treated as a commodity, was lead firm. Incentives cited in past projects include not competitive in international markets. It was instruments and agreements that reduced costs then necessary to change the project focus in and increased revenues, such as price incentives the second phase and position the olive oil as associated with higher-quality products and cost- a specialty product. The next stage therefore sharing of capital investments for better production converted the project to a lead firm–focused technologies. One example of this can be seen in the top-down program that targeted marketing Alquería–Colombia Dairy Supply Chain Development efforts specific to an importer’s strategy and Case Study, which is summarized briefly in box 8, with suggestions. The evolution of project focus many more details in the full case. Another example is from Phase 1 to Phase 2 of the IFC Olive Oil the Olam project (referenced in box 11), in which Olam Development Project reflects trade-offs between helped organize cooperatives and then paid a premium sustainability and scale and how different to cooperatives that hand-shelled cashews because objectives are met using bottom-up and top- of the higher quality and better price received in the down approaches. Phase 1, through a bottom-up international market. approach, emphasized scale in terms of number of beneficiaries and processing SMEs (bottlers) that received training and participated in The key to success of linkages that facilitate European trade fairs; Phase 2, through a top- relationships between lead firms and agro-processing down approach, focused on lower volume and SMEs is to respect and harness the private sector’s a higher-priced, packaged consumer product, primary motivations for commercial linkages (table 1). working directly with a few SME bottlers that the lead firm selected to participate in the supplier development program. Learning from the discontinued business linkages with importers in Phase 1, the implied emphasis of Phase 2 became sustainability of market linkages through targeted facilitation between qualified Palestinian bottlers and specialty product importers. 25 3.3 Sufficient Capacity 3.4 Supportive Enabling Environment A minimum level of SME capacity is necessary to A supportive enabling environment is a critical establish a linkage and consistently meet lead firm foundation for encouraging business linkages between requirements for scale, quality, cost, and labor and lead firms and agro-processing SMEs, because it environmental standards (box 7). Managerial capacity ensures healthy industry competition and access is particularly important and positively correlated to services at a reasonable cost (World Bank 2017). with SME productivity growth and other measures Enabling conditions such as ease of starting a of firm progress. It entails knowledge of production business, contract enforcement, ease of hiring and processes, quality oversight, fair and competitive firing employees, absence of corruption (e.g., bribes), business practices, and financial and personnel and transparent taxation are important to SME and management. Technological capacity and workforce lead firm operations. The agro-processing sector’s skills are also important components of internal reliance on linkages for its agricultural raw materials SME capacity and directly affect product quality. exposes sector actors to a wide array of enabling Quality improvements often require investments in factors along the entire supply chain, including new technologies, quality assurance procedures, and access to agricultural land (land tenure, property certifications. rights), access to production inputs (seed, fertilizer, irrigation, farm machinery), provision of transport and logistics infrastructure and services, access to potable water and electricity, and clear policies and efficient public service provision for product-specific BOX 7: META-ANALYSIS REVEALS THAT quality standards and regulations. Many firms in the SMALL AND MEDIUM ENTERPRISE case studies and meta-analysis sought support from CAPACITY BUILDING IS THE MOST the host government before proceeding with linkage initiatives. COMMON ACTIVITY AND A FREQUENT OBJECTIVE OF LINKAGE PROGRAMS These legal, regulatory, service, and infrastructure factors constitute the broader enabling environment Capacity development objectives are second only within which linkages occur. Each factor contributes to market linkage objectives in how frequently to firm-level productivity, reduces the cost of doing they are included in linkage programs, with half business, and enables technological innovation and of the 66 initiatives recording a capacity-building investment. When SMEs are weak in capacity, the goal. The most-common implementation tools of risks and costs for lead firms increase. linkage programs were also capacity building– A number of linkage initiatives, such as Alquería’s focused activities, such as training, advisory dairy supply chain (box 8), Nile Breweries sorghum services, and business linkage activities (e.g., beer supply chain (box 4), and those under FRICH (box industry trade fair participation, mentoring, 5), were initiated or expanded based on improvements other matchmaking activities). Financing tools, in the enabling environment. The FRICH final report such as loans on good terms, credit facilities, stated, “Though the challenge fund did not target input financing, matching grants, and equity policy change in its design, there were several policy investments, are the next-most-frequent environment changes that allowed certain FRICH implementation instrument. supply chains to be particularly successful”5. For example, the liberalization of the tea sector in 2010 from the Tea Amendment Act led to the FRICH tea sector linkage initiatives in Kenya. A lead firm directly lobbied for the market reform. Liberalization allowed suppliers to choose to sell to a factory of their choice and set up supplier agreements—both of which create incentives for SME supplier upgrading. In this case, the regulation was changed before the initiative (after the 26 leading supermarket chains lobbied heavily for it), Sustainability is considered throughout and woven and the initiative was able to take advantage of the into each design consideration. improvement in the environment. The Alquería dairy Linkage project design features contributing to project case (box 8) in Colombia is an example of a private success include: initiative whose success depended on government policy. 1. Clear definition of project objectives 2. Clear and appropriate roles and responsibilities of key partners BOX 8: CHANGE IN COLOMBIA’S 3. Selection of key partners POLITICAL AND ECONOMIC SITUATION EXPANDS ALQUERIA’S MARKET 4. Leveraging of cost-share 5. Implementation instruments, including phasing with Better security and macroeconomic stability in Colombia in the mid-2000s played a pivotal 4.1 Clear Definition of Project Objectives role in growing market demand for Alquería’s shelf-stable liquid milk and made expansion of Three sets of objectives come into play in linkage its supply chain into new regions possible. For programs—those of the lead firm, the SME, and the years, Colombia’s profound political, economic, public sponsor—so it is advisable to invest significant and security crises emanating from guerrilla time in clearly articulating the objectives, which wars and the drug trade hindered Alquería’s informs program approach, partner selection, roles growth. When security and the business and responsibilities, instrument selection, and environment improved in the early 2000s, expected results and provides structure for successful Alquería began acquiring processing plants, linkage initiatives. which allowed it to break into the national The priority of scale and sustainability should be market and expand its supply zone across the discussed during this step. Important trade-offs are country. Its expanded connectivity, through often required between sustainability and scale, job new public infrastructure and improved creation and technological upgrading, and pro-poor security, greatly improved milk collection in outcomes and firm competitiveness. previously remote areas of the country under guerilla influence such as El Meta. Problematic designs were the most commonly listed challenges to sustainable linkages, such as West Bank Olive Oil, the Allanblackia oil plant in Ghana, and Johnson & Johnson’s effort to expand pyrethrum production in Kenya. All of the unsuccessful linkages 4. Designing a between lead firms and agro-processing SMEs involved overly ambitious designs or designs that poorly matched objectives and market conditions. Lead Firm-SME This is common, for example, in oil-based specialty products, where international quality and price demands were too rigorous for local SMEs to meet. A Linkage Program number of successful initiatives have credited their design’s adaptability to changing market conditions as critical to their success This section discusses key design features of lead firm–SME linkage projects and highlights successful strategies based on experience. It is focused largely on the perspective of the public sector but is relevant and adaptable to private enterprises that wish to pursue supplier development programs with agro-processing SMEs in developing countries. 27 4.2 Clear and Appropriate Roles and should be limited to addressing market failures and constraints, which will in turn catalyze lead firm Responsibilities of Key Partners engagement with agro-processing SMEs and reduce Partners can play different roles depending on the the risks and constraints associated with agro- development approach. The public sector usually processing firms in developing countries (boxes 10 and leads bottom-up and industry-wide initiatives, with 11). In the case of PPPs, the public sector may also be close collaboration with lead firms, whereas lead firms involved in financing, providing needed infrastructure usually lead top-down initiatives, with some degree of or collaboration in community initiatives. public participation or partnership in the case of PPPs. Often there are financial contributions from the lead firm, SMEs, and public entities to reflect shared goals BOX 9: MANAGING THE ROLES OF and commitment. The following principles provide THE PUBLIC AND PRIVATE SECTOR IN guidance for the public sector (when the project is run LINKAGE INITIATIVES entirely publicly or as a PPP) for structuring successful initiatives that strengthen linkages between lead firms and SMEs. Several examples of projects studied in the meta-analysis demonstrate how the public and private sectors can be most effective in linkage • Clearly articulate roles and responsibilities. activities by specializing their activities. World Bank and International Finance Corporation Limit the role of the public sector to strengthening • programs that target an entire sector will often the enabling environment and addressing market use public sector agencies as facilitators (bringing failures. together various sets of actors) while still relying Engage directly with lead firms in the spirit of • on private actors such as consultants and training partnership and facilitation, with the lead firm providers for service delivery. For example, the providing substantial leadership. Uzbekistan Horticulture Development Program • The public sector serves as a facilitator, not an (WBG P133703) seeks to improve on-farm intermediary. productivity through policy review, coordination with relevant ministries, and backing loans • Provide training and advisory services. to facilitate access to finance through local • Manage the difference in corporate cultures. financial intermediaries and training providers. Similarly, the Mozambique Integrated Growth Clearly articulate roles and responsibilities. The roles Pole Project (WBG P127303) includes public and responsibilities of each partner need to be clear investments in smallholder associations but does so that each party can designate the appropriate so through a local Innovation and Demonstration staff time and resources to meet their responsibilities. Catalytic Fund. This fund improves the ability of Formalization of agreed objectives, roles and smallholders and small and medium enterprises to responsibilities, financial and staff commitments, access the market through private loan funds and timelines, and management arrangements of each complementary public investments. public and private partner are needed to manage linkage projects effectively through the end of public support. Given that agribusiness entails diverse Engage directly with lead firms in the spirit of supply chain actors, stakeholder consultation and partnership and facilitation, with the lead firm collaboration should be assigned as a distinct task to providing substantial leadership. Lead firms are be led by one responsible party (box 9). essential partners for market-led linkage programs. Limit the role of the public sector to strengthening It is important to identify lead firm champions that the enabling environment and addressing market have the capacity and business interest to source failures. The public sector creates and enforces the from agro-processing SMEs. (See the case of Olam enabling environment for market competition and summarized in box 11.) Ideally, lead firms serve in a cooperation, addresses market failures, and fosters leadership capacity, helping to determine project investment in physical infrastructure and knowledge scope and engage constructively with agro-processing capital. In most cases, the role of the public sector SMEs to achieve mutually beneficial results. It is 28 generally advised to identify lead firms and develop BOX 11: LEAD FIRM LEADERSHIP close relationships with them early during the initiative design phase to generate more-effective Olam Corporation’s involvement in Ivory Coast is and -sustainable results. In some cases, complex an example of strong leadership and commitment agreements can be formed among lead firms, a supply from a lead firm that helped ensure the success chain partner, SME suppliers, and a public entity such of a linkage initiative. Olam worked with the as the government and/or an international NGO. The government of Ivory Coast and small and medium Olam case in Box 11 below is one such case where a enterprises (SMEs) to expand the supply chain lead firm initiative effectively worked as a public- for cashews and cocoa and increase efficiencies private arrangement. within the supply chain. The company assisted in the formation of producer cooperatives (SMEs) that provided training in how to hand shell cashews and thereby increase the quality and BOX 10: ROLE OF PUBLIC SECTOR value of the product, as well as increasing rural jobs. Additionally, Olam was assisted by IDH INVESTMENT (Dutch Sustainable Trade Initiative) to develop a network of traders, processors, roasters and The coffee sector in Rwanda enjoys an ideal retailers to provide a completely transparent, climate for high-quality coffee production but was traceable supply chain of cashews. (Machine mired in producing commodity coffee because shelling is done on a larger scale, but the process the of the lack of the market information, profit mechanically damages a significant percentage incentives, quality control, infrastructure, and of the nuts, and the end product receives a organization needed to produce a higher-quality, lower price.) The availability of a larger supply of higher-priced product. In the early 2000s, higher-quality cashews allowed Olam to expand the government of Rwanda, U.S. Agency for sales and increase the price it paid for the hand- International Development projects PEARL I shelled product. Olam has initiated similar models and II, foundations, and private sector investors in other African and Asian countries to expand identified the problem and initiated a bottom-up their supply of specialized commodities and linkage project, providing programs to help coffee created a US$20 billion company over 25 years. farmers and cooperatives improve plantings, SMEs have played an important role in the Lead build washing stations, and improve product Firm’s supply chain projects. Further research uniformity and quality, as well as US$10 million in into the role that the public and NGO sectors can funding over 11 years. While donors provided the play in facilitating lead firm leadership would money, the Rwandan government allowed direct provide additional insights. sale of coffee to importers instead of using the old system in which sales were made through a government-controlled coffee board. A production Program designers should seek the lead firm’s base for high-quality coffee was developed, and input regardless of developmental approach (top- experts were hired to provided advisory services down, bottom-up, industry-wide), although the and training and established business linkages degree of the lead firm’s leadership and financial with lead specialty coffee companies from commitment will vary according to the approach. the United States and European Union. Today Designing projects with lead firms leverages their Rwanda is an established source of quality coffee role as buyers and their relationships with supply receiving premium prices in the marketplace chain actors, which can provide incentives for agro- based on linkage of lead firms with SMEs. This is processing SMEs to improve performance. Lead an example of a government recognizing the need firms are also useful in diagnosing constraints to and for intervention in the market but doing so in a opportunities for growth within their supply chain. limited, indirect way the allowed it to service as a Direct involvement of lead firms ensures that project catalyst, not an implementer. designs and implementation approaches are market led, encourages ownership of results, and creates communication networks that can respond 29 effectively to changing market dynamics once public When SME strengthening directly by lead firms is support is no longer available. Supplier development not feasible or desired (such as in publicly sponsored programs6 should improve lead firms’ bottom lines, so bottom-up programs), it is better to work with or participation in linkage programs should be embedded through a local partner to help build local institutions in their core business operations rather than be stand- and knowledge. Finding the right local partners is alone corporate social responsibility activities. Where also a low-cost way to save time, lower the cost possible, initiative designers should make lead firm of logistics, and help organize the gathering of commitment or endorsement explicit. participating SMEs. Serve as a facilitator, not an intermediary. The meta-analysis indicated that the public sector Manage the difference in corporate cultures. can be supportive of lead firm–SME projects but is Engagement of lead firms must be sensitive to rarely a direct intermediary. Programs should avoid their internal decision-making timelines. Managing the public sector or intermediaries performing “go project design and implementation timelines between” functions such as negotiating contracts or requires understanding of the different decision- relationships with lead firms on behalf of suppliers making steps of public and private institutional (Lusby 2008), which would interfere with the firms structures. The public sector often has several layers establishing sustainable relationships and can be of hierarchical decision-making steps, whereas the distortive. Instead, the public sector should adopt a private sector decision-making structure is flatter. facilitating approach to encourage communication, Incorporating effective communication mechanisms to commitment, and ultimately business linkages accommodate different timelines and structures is an between the lead firm and agro-processing SMEs. important contributor to building trust among parties The World Bank has used the concept of “productive and designing a linkage program. alliance” to describe a situation in which an intermediary uses a group of organized producers, a buyer, or lead firm; an investment in production and marketing; and technical assistance to bring together 4.3 Selection of Key Partners a lead firm and SME participants (World Bank 2016). The criteria for selecting the lead firms and SMEs (depending on developmental approach) that will Provide training and advisory services. The case participate in a program are central to achieving studies and meta-analysis suggest that it is best results. Although it may seem that applying selection practice for market actors (lead firms, private criteria falls into the category of “picking winners,” it consultants) to provide training and advisory services has categorically been cited as critical to achieving for SMEs. In most cases, lead firms are best placed to successful results in linkage projects. Experience undertake supply chain strengthening directly, rather suggests that it is important to select firms of than through third-party intermediaries. sufficient capacity and willingness to undertake change. For lead firms and SMEs to be successful, they must: One of the best examples is the Alquería case study (above), in which Alquería provided veterinarians and emonstrate sufficient capacity or potential to •D technical advisors to assist their SMEs in solving improve and grow through existing assets (equipment, problems and increasing productivity. This direct facilities); access to investment and working capital; approach guarantees that SME strengthening is annual revenues; and certifications, particularly SMEs customized to meet market requirements and that market actors retain the necessary skills to continue emonstrate sufficient commitment by contributing •D strengthening SMEs after public funding ends. By to project costs (co-financing; cost sharing); extension, direct assistance is more cost effective dedicating adequate personnel time and financial and ultimately sustainable compared to public sector resources; embedded within core business operations; or third party led support. Some assistance to lead commitment to transparency; and open access. firms to develop their early capacity to provide direct assistance may be needed. Analysis of the case studies suggests that lead 30 firms should be identified and close relationships public goods such as non-sector-specific developed with them early during the project design infrastructure improvements, training, and changes phase to generate effective, sustainable results. For due to policy reform. example, the Cambodian rice case suggests that Arrangements vary based on key partner motivations project designers and implementers worked closely and capacities and local and market contexts. In- with rice processors from the beginning of the project kind contributions, including time and expenses of and with the rice millers’ associations throughout the professional services and project staffing, meeting project to adjust the design according to changing facilities, and new purchases of assets specifically circumstances. Program designers should seek used for the project, are valid cost-sharing resources. the lead firm’s input regardless of developmental Examples of top-down and bottom-up cost-share and approach, although the lead firm’s leadership and program models are captured in table 2 below. financial commitment will vary according to the approach. Designing projects with lead firms (anchor companies, market movers) leverages their role as buyers and their relationships with supply chain actors, which can 4.5 Implementation Instruments provide the right incentives for agro-processing SMEs to improve performance. Lead firms are also useful The gap between what the lead firm needs and in diagnosing constraints to and opportunities for what the SME can provide and the reasons for that growth within their supply chains. Direct involvement gap vary. Therefore, the range of implementation of lead firms ensures that project designs and modalities and instruments also vary. A wide range implementation approaches are market led, builds of instruments is often provided through publicly ownership of results, and creates communication supported intermediaries in direct partnership with networks that can respond to changing market lead firms to encourage or strengthen linkages with dynamics once public support is no longer available. SMEs (DCED 2012; USAID 2015; AFE 2014; UNCTAD Supplier development programs should improve 2004). The design of each instrument should be lead firms’ bottom lines, so participation in linkage customized to the needs of lead firms and SMEs (box programs should be embedded within their core 12). business operations rather than as stand-alone A wide range of implementation instruments is corporate social responsibility activities. available to encourage or strengthen linkages between lead firms and agro-processing SMEs when these linkages do not occur organically. These can be 4.4 Leveraging Cost Share categorized into nine major tools or “instruments” that members of the World Bank and study teams have Cost sharing of SMEs and lead firms has been a identified. particularly effective selection and engagement strategy for linkage initiatives. Cost sharing reflects commitment from the partners and ensures that they have a stake in the long-term sustainability and outcome of the project. Examples of cost sharing can be found in the cases of Alquería (box 8 and case study), Olive Oil (box 6 and case study), and the Agribusiness and Marketing Project in the Kyrgyz Republic (box 13 and case study). Cost-share contributions and institutional mechanisms vary in form. The mechanisms selected should be negotiated among key stakeholders, align with business benefits, and reflect clear distinctions between public and private goods. Lead firms and SMEs will contribute only to costs that have clear benefits to them. Generally, the public sector funds 31 TABLE 2: EXAMPLES OF PROGRAM CONTRIBUTIONS ACCORDING TO LINKAGE MODEL Partner Type of Linkage Program Top-down Bottom-up Program focused on quality improvements Program focused on SME capacity-building Note: This can be structured as a public– Note: The public sector usually leads bottom-up private partnership, with a lead firm providing programs leadership, or can be entirely privately led • Provide guidance on performance • Share knowledge on minimum qualifications for improvements that the market requires or other key markets and identify key constraints to linkages market information (enabling environment and SME capacity) • Establish performance incentives • Provide on-site advisory, educational, and training or personnel transfer programs Lead firm • Offer purchase guarantees or cost-sharing for new equipment • Share costs of capital investments for improved technologies and equipment for SMEs • Lead facilitation of and provide “convening power” for stakeholder coordination Partially fund food safety certification trainings • • Fund technical assistance from a BDS provider and and on-site technical assistance investments in new technologies required according SME • Finance capital investments for improved to performance improvement plans production technologies Partially fund food safety certification trainings • • Build capacity of local BDS providers and supportive on-site technical assistance for • Provide matching grant to SME for training, implementation of food safety improvements for certifications, and other assistance many SMEs • Partially fund technical assistance for lead firms to • Partially fund technical assistance for lead build their supplier development capacity (when they firms to build their supplier development are clearly identified and engaged) capacity • For SME capital investments, offer guarantee to • For SME capital investments, offer guarantee banks to cover financial losses incurred by lending Public to banks to cover financial losses incurred to targeted SMEs participating in program; create sector (if by lending to targeted SMEs participating in lending fund through existing financial institutions applicable) program; create lending fund administered through existing financial institutions • Assist SMEs with targeted marketing efforts to lead firms (buyers) to foster business linkages • Finance public, non-sector-specific infrastructure improvements and “last-mile” • Finance public, non-sector-specific infrastructure connectivity improvements • Lead policy reform effort with input from • Lead policy reform effort with input from private private partners partners • Facilitate stakeholder coordination Source: Guidance Note for Policymakers and Development Practitioners Note: SME, small and medium enterprise; BDS, business development services 32 1. Assistance to supplier associations may include capacity building, organizational improvements, training, or provision of infrastructure to associations. BOX 12: EXAMPLES OF LEAD FIRM- For example, Alquería, a leading diary processor in SMALL AND MEDIUM ENTERPRISE Colombia, worked with a number of dairy producer associations to improve their organizational capacity, (SME) BOTTLENECKS FROM THE CASE invest in production technology, and use existing STUDIES government training programs for the farmers. This helped achieve the dual goals of expanding the lead firm’s reach into new territories and improved the dairy farmers’ quality, traceability, and prices. The type of lead firm–SME linkage program, For better and deeper understanding of productive implementation modality, and instruments interactions between private firms and smallholders, used will depend to a great extent on the types IFC has developed “Working with Smallholders -a of bottlenecks between the needs of the lead Handbook for Firms Building Sustainable Supply firms and the capability of the SMEs. Some Chains”. examples from the case studies can help to 2. Cluster development involves working with existing illustrate this. local development organizations to improve business In Cambodia, the rice processing sector linkages and infrastructure within clusters. This had serious bottlenecks. Custom mills were is particularly important in regional development typically small operations that milled primarily projects. The World Bank Women’s Entrepreneurship for the farmers’ own consumption and were not Development Program in Ethiopia worked with local used to meeting commercial demands. Mills cluster development agencies to promote forward were constrained by low levels of technology, linkages between lead firms and women-owned SMEs lack of working capital, low-quality paddy, and in the food and agro-processing sectors, combining a lack of drying and storage facilities, leading to gender-based methodological and training approach estimates from losses from harvest to storage with existing economic cluster development plans. of 20 to 50 percent. These bottlenecks helped 3. Advisory services are specialized management shape the International Finance Corporation’s or technical assistance services from private sector (IFC’s) intervention in the Cambodian rice firms, local nongovernment organizations, and other sector, for example by investing in new local and international organizations to supply chain technology, developing product standards, participants. improving infrastructure such as storage facilities, providing farmer training to improve 4. Training programs are common elements in product quality, and linking the supply chain to strengthening members of a supply chain and sources of debt finance. may involve assistance to SMEs in adopting new accounting systems, new processing equipment, Similarly, in the West Bank, the olive oil special gender programs, and various agricultural processing sector has had a high degree of extension activities. In the Cambodian rice marketing fragmentation, with little to no uniform quality case, the introduction of new accounting software or sanitation standards, and many oil pressers for the rice millers allowed them to control their costs lacked sufficient mechanization. Accordingly, better and meet the demand from a variety of EU and the IFC program focused on sector organization Asian rice importers. by creating a producers’ consortium and providing advisory services on quality and 5. Business linkage programs are direct efforts to standards. link businesses together through marketing seminars, trade shows, industry meetings, and dissemination of marketing materials and other marketing efforts and include trade fairs and business-to-business meetings. In the Kyrgyz food processing case, many of the food processors were not familiar with foreign market needs and requirements. Specialized trade fairs were 33 an efficient, one-stop way to introduce SMEs to new implementation instrument. markets. Matching grants have been implemented by the 6. Policy and regulation change: The liberalization World Bank for over two decades. They remain of the Kenyan tea sector in 2010 paved the way a very popular instrument for private sector for the success of the FRICH tea sector linkage development interventions, despite often challenging initiative. The Tea Amendment Act allowed suppliers implementation and insufficient evidence of impact. to sell to factories of their choice and set up supplier The report on “How to Make Grants a Better Match agreements, creating incentives for SME supplier for Private Sector Development” by Diana Hristova upgrading. Before the act was passed, tea buyers provides project teams with a better understanding of could purchase only through the government the matching grant instrument and help them choose marketing board. Marks & Spencer cited the ability to the design and implementation arrangements that are buy directly from Iriani tea as a success factor in the best fitted to their project objectives. initiative. 7. Tax incentives and regimes can be modified or introduced to add incentives for firms to expand or BOX 13: IMPORTANCE OF BUILDING shift focus of their businesses to facilitate linkages. In TRUST IN KYRGYZSTAN Uganda, a reduction of the excise tax on beer allowed Nile Breweries to introduce a new, low-cost beverage that dramatically increased consumption and The Agribusiness and Marketing Project was a increased excise tax revenue. World Bank–funded technical and marketing 8. C ontracts and advanced purchase agreements assistance project to modernize and expand the from lead firms are a common mechanism to food and beverage processing industry in the encourage SMEs to supply in quantity and quality Kyrgyz Republic. The project used an innovative required. Purchase agreements that establish volume, bottom-up approach to address the needs of price, and quality specifications can provide the 42 carefully selected agro-processing SMEs in SME the opportunity to obtain commercial bank a comprehensive, customized, flexible manner. financing to meet working capital needs. In the case of SMEs were primarily concentrated in fruit and Alquería Dairy, it was particularly important to have vegetable processing and secondarily in dairy contractual relationships between producer SMEs processing. and the lead firm. Dairy cows produce milk every day, The project used an independent Agribusiness and producers must know, in advance, the conditions Competitiveness Center (ABCC) to build and price of milk to make the necessary long-term capacity and train local consultants who would investments in cows and facilities. then provide advisory services to agribusiness 9. Firm financing: Of 66 initiatives reviewed in the enterprises. The ABCC consultants reported meta-analysis, 35 used some form of firm financing that it took considerable time to build trust mechanism in addition to other instruments such as and establish collaborative relationships training, business linkages, and advisory services. Firm with client firms. At first, consultant visits to financing examples includes the Olam Corporation, client sites were treated mostly as a courtesy, Nile Breweries, Intelligentsia for green coffee and consultants were not expected to be too purchases, and Divine Chocolate in Ghana. Financing inquisitive or request too much of managers’ was used for a wide array of products, including time, but by the time the second set of 22 cocoa, chocolate, cashews, dairy, and confectionary. companies was selected, the clients began The implementation tools that linkage programs to appreciate the value of ABCC services used most commonly were capacity building–focused and accepted the additional cost and time activities such as training, advisory services, and commitment. business linkage activities (e.g., industry trade fairs, mentoring, and other matchmaking activities). Financing tools such as good terms on loans, credit facilities, input financing, matching grants, and equity investments were the next-most-frequently used 34 The selection of an instrument mix depends various instruments. Regardless of the instruments on the needs of the supply chain and linkage used, successful delivery models share common stakeholders and on the program’s objectives. Correct characteristics. instrument selection and the use of instruments in Instruments are customized to the needs of lead implementation requires participation from public and firms and SMEs and work toward achieving mutually private sector stakeholders. beneficial results (business benefits). Projects must The firm-level training instruments reflect the most- be designed to achieve outcomes that motivate those basic objectives of linkage initiatives—improving ties actors to participate, including sales growth for SME between lead firms and their suppliers and addressing suppliers; greater market certainty for SME suppliers; gaps in capacity that constrain the organic growth of greater, more-certain, less-costly, better-quality those ties (figure 10)—although there is insufficient supply to lead firms; fewer risks throughout the value evidence to determine the relative effectiveness of the chains; and greater profits for both parties (box 14). FIGURE 10: INCIDENCE OF INSTRUMENT USE ACCORDING TO INITIATIVE TYPE BOX 14: SUPPLIER DEVELOPMENT ACTIVITIES CUSTOMIZED TO SUIT SMALL AND MEDIUM ENTERPRISE NEEDS Rizak is a family-owned cocoa grower that has been in business in the Dominican Republic since 1905. It has 27 of its own farms but also has links with 4,500 small cocoa farmers. The grower groups are linked to Rizak through an independent farmer-run foundation called Fuparoca. Farmers deliver wet beans to the foundation and are paid a fixed price. Fuparoca ferments the beans, because that is a critical quality factor, and provides technical assistance and certification services to farmer members. The advantage to farmer members is that Rizak pays all the expenses of the foundation, whereas farmers in other free-standing cooperatives in the Dominican Republic must absorb operating expenses, which are deducted from the farm price. Rizak’s ability to process and grade ensures maximum quality, which allows Rizak and Fuparoca members to command a premium price for their products. 35 Implementation structures are flexible to allow Linkage initiatives are less common for specialty for adjustments in response to changing market or finished goods that require higher levels of dynamics. Attention to the structure of delivery technological sophistication, with the exception of mechanisms, project milestones, and accountability food safety initiatives targeting the small and medium mechanisms can contribute significantly to speed and processors and suppliers of finished goods supplied quality of responses to changing market dynamics. directly to supermarkets acting as lead firms. This Delivery mechanisms for technical assistance may reflect a prevalence of vertical integration should be explicitly needs driven, with processes in in agro-processing activities (from upstream and place to solicit and incorporate frequent feedback. downstream actors), largely attributed to the low Periodic project milestones build in decision-making capacity of SMEs to produce quantity and quality opportunities that assess performance. Reporting needed and their limited access to finance. structures should be representative of public and private sector actors to more-deftly navigate market changes and external events (box 15). Assistance to SMEs is as comprehensive as possible. BOX 15: KYRGYZ REPUBLIC The assistance package should be designed to meet all of the SMEs’ needs. Failure to factor in a AGRIBUSINESS COMPETITIVENESS complete solution package to address SME problem CENTER (ABCC) FLEXIBLE can render the assistance ineffective. For example, IMPLEMENTATION STRUCTURE when the Agribusiness and Marketing Project in the Kyrgyz Republic was asked to help a client replace an old piece of equipment, the assistance included the following complete list of tasks: identify the The design of Kyrgyz ABCC’s organizational supplier with the least-costly equipment that meets structure was flexible and responsive to the relevant specifications, help develop a business external events and market changes. The plan and application for credit to pay for purchase, public–private composition of the Supervisory design flow charts and plan the processing line layout, Board encouraged coordination, alignment supervise the installation, advise on new product with market dynamics, and accountability for specifications, and train client personnel in the use of ABCC results. ABCC staffing and procurement the equipment. vehicles assigned qualified consultants to Partnership structures reflect the strength and clients based on customized scopes of work sophistication of the specific agro-processing aligned with detailed action plans. In addition, industry (UNIDO 2009). No single partnership the Agribusiness and Marketing Project was structure will fit all situations. Product complexity divided into smaller implementation periods, and technical requirements will influence the need which built in milestones for assessing project for specific advisory services. Most linkage programs effectiveness and making decisions to adjust in developing countries are organized around components in response to market changes. improving the quality and quantity of bulk products The economy and the needs of agro-processing for export (e.g., coffee, cacao, oils, nuts, grains, fruits, SMEs changed every two to three years over vegetables). Processing of these products usually the life of the seven-year project. Thanks to the entails minimal technological sophistication, with the short implementation periods and milestones, aim of partially processing or preparing raw material the project could make changes to stay ahead to make them more transportable for lead firms. of changing SME needs (Broka 2016). Geographically dispersed smallholder farmers involved in weak, fragmented value chains produce many of these products. Publicly led programs tend to focus on higher levels of processing of these products in an effort to catalyze investment in greater value-added processing capabilities in developing economies. Privately led initiatives and PPPs tend to focus on improving basic agro-processing activities. 36 4.6 Timeline for Linkage Initiatives that is responsive to industry needs and changing market dynamics (box 16). Successful linkage initiatives led by the private sector, usually by a single lead firm, tend to extend over decades and expand to new SMEs and regions. These successful models adapt as needed to changing market conditions or SME capacity. Unlike BOX 16: PHASED APPROACH the extended lifetimes of successful privately led TO CAMBODIA RICE SECTOR initiatives, most publicly supported initiatives last five MODERNIZATION years or less and have finite implementation periods at specific funding levels, although in a number of cases, publicly supported initiatives are modified or extended. Most often, it is the success of the private In 2008, the International Finance Corporation sector players that creates the momentum to carry established the Cambodia AgriSector Support the project forward. To create sustainability, it is Project to provide needed support to the important to consider in the initial planning process Cambodian rice sector as Cambodia emerged how to structure the project so that it will continue to from decades of civil unrest, political upheaval, expand and prosper after public funds are no longer and bad economic policy. By first supporting available. small and medium rice millers in the supply A common pitfall in agro-processing linkage projects chain and gradually strengthening other is failure to align project timelines with agricultural elements of the supply chain, lead firms and cycles. One example is the recent Millennium Challenge millers could capitalize on changed market Corporation irrigation modernization project in dynamics to expand export marketing Moldova, where technical assistance to create farmer- programs and increase investment in the sector. led water user associations was provided three years The project initially focused on a bottom-up before delivery of irrigation water—much too early approach of modernizing and improving the for the technical assistance to be useful. The inability capacity of small and medium mills to produce to have more than one crop per year increases the export-quality rice and then focused on difficulty of coordinating production, processing, and market development. The case describes how marketing activities. Variability in climate patterns identification of markets and lead importing and crop production is also an important variable that firms became the focus of the project’s second is missing in standard manufacturing enterprise. stage and close relationships developed between lead importers and small and medium millers and exporters as the initial orders led to 4.6.1 Phasing longer-term relationships. Linkage projects may require a phased approach to achieve success depending on the degree to which feasibility factors are met. Weak firm-level capacity of agro-processing SMEs was the most commonly cited reason for lead firms’ reluctance to engage in a timely, phased manner. Insufficient or undermining enabling environments were a close second. Market opportunities often cannot be seized or mutually beneficial linkages structured without sufficient firm-level capacity of agro-processing SMEs and a supportive enabling environment. The feasibility of a two- or three-phase approach to facilitating sustainable linkages between lead firms and agro- processing SMEs should be considered in certain cases. A phased approach with incremental milestone objectives allows for flexibility and course correction 37 5. Monitoring and • For publicly financed initiatives, SME and lead firm sales revenues, jobs created, number of SMEs involved, and number of farmers involved should be measured. Evaluation • For privately led initiatives, changes in revenue, volume of raw materials used, average product cost, and quality indicators should be measured. • The same lead firm or others should be able to 5.1 Monitoring and Evaluation replicate the model. Frameworks The most-telling measure of a linkage’s sustainability Harnessing lead firms to enable the growth of agro- is whether the business relationship lasts after the processing SMEs is a new development approach. end of the initiative. Of the 66 linkage projects in the There are a variety of results frameworks to help meta-analysis that had a prescribed time duration, 12 monitor and evaluate lead firm’s contribution to were discovered to be ongoing after completion. development. It is useful early in the project to consider how it can be monitored and how linkages influence the impact, cost–benefit ratios, and 5.2 Results sustainability. From an examination of the meta-analysis and case The general novelty of lead firm–SME initiatives offers studies, we can draw some broad conclusions about ample opportunities to refine still-fluid monitoring project indicators, including the level of change that systems and to address the challenges of collecting beneficiaries of linkage initiatives experience (e.g., empirical evidence of the developmental effect of increase in sales volumes or values, productivity, these linkage approaches. Despite the lack of widely export revenues, job creation; decrease in costs), the available data on linkage initiatives, the existing number of stakeholders realizing benefits (indirect data provide some insights into the effectiveness of beneficiaries may also benefit, such as producers lead firm–SME linkages in relation to private sector selling to the SME and other businesses servicing the development goals. value chain), knowledge and technology spillovers induced over the medium and long term, and One thing the meta-analysis revealed was the wide replicability of the model by the same lead firm or variation across projects in the types of data collected. others. This variance in data availability poses difficulties in making comparisons or drawing conclusions based Overall, PPPs and bulk product linkages achieved the on the use of various implementation instruments. highest per-project results in several categories. In Concentrating on more-rigorous reporting of a terms of SMEs and number of farmers reached and common set of simple data points such as lead firm SME overall sales revenues, PPPs achieved the highest purchases and exports, SMEs reached, SME sales average results. The higher success rates of PPPs revenues, farmers reached, and jobs created may are not surprising, considering that they combine improve reporting and reduce reporting fatigue the technical expertise and project management of of the initiatives’ private sector partners and the private sector with the development objectives beneficiaries. Amassing a body of comparable data and funding of the public sector. The private sector points is essential to identifying empirical evidence manages most PPPs, with development institutions of development effect and illustrating what does and foundations occupying leadership positions. and does not work for the lead firm–SME linkage Rarely are governments directly involved in managing development approach in agro-processing. There are PPPs. several factors to consider in establishing a results Aligned with the predominantly smallholder-based framework. production systems for bulk products (e.g. coffee, • Selection of standardized indicators will aid in cacao, nut, fruits, vegetables), the number of farmers project comparisons. reached is substantial, regardless of target market. • For publicly financed initiatives, SME and lead firm The literature review and meta-analysis found some sales revenues, jobs created, number of SMEs involved, interesting trends regarding differences between and number of farmers involved should be measured. publicly and privately driven approaches. Private 38 sector lead firms tend to prefer smaller, tighter conclusions about the sustainability of these supplier bases, cultivating relationships with fewer programs. Therefore, it is too early to say which type yet stronger supplier networks, which means that of implementation modality yields a more-sustainable private interventions tend to reach fewer SMEs (and business relationship in the long term; additional consequently fewer farmers) than public ones. As examples and research will help address questions of might be expected, there is a positive relationship sustainability. between project duration and number of SMEs reached. Public initiatives are often regional and may be more inclined towards farmer outcomes and often reach more farmers, whereas private sector linkage projects are primarily focused on SMEs as processors and aggregators. 6. Recommendations for Future 5.3 Cost–Benefit Analysis This study focused on the important role that lead Cost-benefit analysis is uncommon for agro- firms and agro-processing SMEs can play within value processing linkage initiatives, and the inconsistency chains for their mutual benefit, the nature of the of results reporting limits their representation. Only linkages between the value-adding SMEs and the lead bottom-up and industry-wide initiatives provided firms, and how to generate and deepen these linkages. cost-benefit analysis figures, yet publicly supported Further research will help define opportunities to bring linkage initiatives often provided program budget lead firms together with agro-processing SMEs and information, which allows cost per results to be should include: calculated. Preparation of additional case studies to examine i. Industry-wide initiatives record the highest cost- the various approaches that can be taken to create benefit for the indicators of SMEs financed and sales successful linkage initiatives according to the needs of facilitated. Where reported, figures varied widely, with different value chain actors the level of sales generated per project dollar ranging Creation of a larger sample of linkage projects that ii. from US$3.12 to US$13 and the amount of finance bring together lead firms and SMEs leveraged per public funding dollar ranging from US$1.72 to US$22. Industry-wide initiatives reported Uniform definition and collection of empirical iii. the highest cost-benefit analysis figures for both evidence to measure and compare the effects of categories project development 5.4 Sustainability The collection of case examples describes a wide range of specific projects and linkage initiatives. Information The most-indicative measure of the sustainability of was obtained from private– and public sector–led a linkage is whether the business relationship lasts projects that provide insights into bottom-up and after the end of the initiative. Sustainability was top-down business linkage initiatives. The wide range strongest with the 15 privately led initiatives; 46% of emerging value chains provides real opportunities described their sourcing relationships as ongoing. for the private sector, governments, and development Of the 51 initiatives with public funding, the 13 PPPs institutions to be innovative and pursue opportunities achieved the highest sustainability rate, with 38% in developing economies. recording continued supplier development initiatives and sourcing relationships without public support. That said, more than one quarter of the 51 publicly supported initiatives examined were still in their prescribed period of public funding, limiting 39 Annex 1: Illustrative Results of Publicly Supported Linkage Initiative Farmers SMEs Other Project Cost per Cost per Raw material Countries name reached reached results cost ($) farmer ($) SME ($) Bottom-up (includes overlap with Industry-wide) 23 new marketing channels, processing 15% greater volume of throughput; farm yields Souther increased Ukraine 50%, losses Horticulture Ukraine 157 67 40,000,000 254,777 597,015 Vegetable reduced Supply from 22% to 2%, 1 policy reform, $5 million financing facilitated, $13 million sales revenue $20 million sales revenue, 4 policy Vinnitsya reforms, Fruit Supply Horticulture Ukraine 2,150 52 $6 million 3,182,260 1,480 61,197 Chain financing Development facilitated, 32 new marketing channels Losses reduced from 40% to CM Gikonko 5%, $60,000 Rice sales Mill/ U.S. revenue, Agency for 3 policy International Grains Rwanda 83,676 358 9,100,000 109 25,419 reforms, Development $1.6 million Post-Harvest finance Handling facilitated, and Storage 53 new Project marketing channels 40 Farmers SMEs Other Project Cost per Raw Cost per Initiative name Countries farmer material reached reached results cost ($) SME ($) ($) Bottom-up (includes overlap with Industry-wide) Moldova Agriculture Horticulture Moldova 5,000 18,000,000 3,600 Unknown Competitiveness Project Vinnytsya Dairy Milk Ukraine 244 48 1,400,000 5,738 29,167 West Bank/Gaza West Bank / Olive oil 1,000 9 693,784 694 77,087 Olive Oil Palestine $4 million sales revenue, 240 jobs Horticulture created, Exports 2 Horticulture Afghanistan 1,446 4 $404,000 1,748,261 1,209 437,065 finance facilitated, 8 new marketing channels Processing increased from 2% to 37%, $13 million Cashew, sales Agri-Sector Cambodia 5,082 299 Unknown Unknown Unknown Rice revenue, 3 new firms operating, 1 new marketing channel Production, Finance and Grains Zambia 250,000 24,000,000 96 Unknown Technology Project Plus 41 Initiative Raw Farmers SMEs Other Project Cost per Cost per Countries name material reached reached results cost ($) farmer ($) SME ($) Bottom-up (includes overlap with Industry-wide) 2,500 jobs created, $270,000 sales revenue, 4 policy reforms, Production, $180 Finance and Livestock, million Zambia 629,489 4,000 22,000,000 35 5,500 Technology specialty finance Project Plus facilitated, 5 new firms operating, 1 marketing channel established 6,152 jobs created, $12 million sales New Horticulture, revenue, Opportunities dairy, Kosovo 7,803 137 11,848,958 1,519 86,489 1 policy in Agriculture specialty reform, 422 new marketing channels $2M finance facilitated, 1700 jobs Action for supported, Sustainable Horticulture, Lebanon 1,785 82 increased 6,900,000 3,866 84,146 Agro-Industry livestock income in Lebanon $10M for producers and $100k for SMEs Dairy Enterprise Milk Zambia 2,020 18 1,999,875 990 111,104 Initiative Dairy Development Milk Nigeria 2,500 15 Unknown Unknown Unknown Program 42 Initiative Raw Farmers SMEs Other Project Cost per Cost per Countries name material reached reached results cost ($) farmer ($) SME ($) Bottom-up (includes overlap with Industry-wide) 10,500 jobs created, $61 million sales revenue, Economic Horticulture, 2 policy Prosperity specialty Georgia 8,577 301 reforms, 50 40,000,000 4,664 132,890 Initiative (hazelnuts) new firms starting, 6 new marketing channels average 66,729 415 13,913,318 21,444 149,735 median 2,500 67 9,100,000 1,480 84,146 Industry wide only Private 3 policy Investment reforms, 772 Nuts Senegal 19,138 44,440,000 2,322 Promotion new firms Project operating Armenia Food safety $2 million Food Safety of final Armenia 70 finance 495,000 7,071.43 7,071 Project products facilitated 44% Ukraine Food safety improvement Food Safety of final Ukraine 15 1,959,703 130,646.87 130,647 in food Project products safety scores Ukraine, Belarus, Agribusiness Moldova, Standards Kyrgyzstan, Advisory in Food safety Armenia, Europe and of final Serbia, 56 4,553,700 81,316.07 81,316 Central Asia products Tajikistan, - Auchan Kazakhstan, Food Safety Uzbekistan, Program Azerbaijan, Georgia 43 Farmers SMEs Other Project Cost per Initiative Raw Cost per Countries farmer name material reached reached results cost ($) SME ($) ($) Industry wide only 5% reduction of losses, 13 jobs created, $7 million SME revenue, Food safety 2 policy Georgia Food of final Georgia 391 reforms, 1,200,000 3,069.05 3,069 Safety products $22.7 million finance facilitated, 10 SMEs certified, 2 new marketing channels $19 million SME Guatemala, revenue, El Salvador, 1 policy Nicaragua, reform, 17 Regional Costa Rica, new firms Quality Coffee Coffee Honduras, 30,000 35 Unknown Unknown Unknown operating, Program Panama, 1100 firms and the certified, Dominican 16 new Republic marketing channels average 30,000 3,284 10,529,681 55,526 44,885 median 30,000 63 1,959,703 44,194 7,071 44 Farmers SMEs Other Project Cost per Initiative Raw Cost per Countries farmer name material reached reached results cost ($) SME ($) ($) Lead-firm driven Direct 54 1 policy Farm Pilot Horticulture China 500 Unknown Unknown Unknown communities reform Program Specialty West Bank 1 West Bank / Gaza Olive Oil 576 2 marketing 796,916 398,458 398,458 / Palestine Olive Oil 2 channel 1210 jobs IFC Cocoa Cocoa Ivory Coast 32,110 1,210 1,400,000 1,157 1,157 supported average 16,343 571 1,098,458 199,808 199,808 median 16,343 500 1,098,458 199,808 199,808 All projects average 59,090 1,253 11,785,923 47,394 126,173 median 3,750 67 3,867,980 3,069 79,202 45 Bibliography Chavhan, Rajendra, S.K. 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There is a growing body of literature on supplier processing, organized according to the complexity of development programs of private entities (buyers transformation. Examples of Level 1 processing are and suppliers) because they are perceived as building grading and transport-stabilization, such as cooling blocks of supplier management practices and are and drying. Level 2 processing involves extraction, considered important to maintaining a competitive pressing, cutting, and fermenting. Level 3 processing edge in the marketplace. The literature review is final consumer packaging. Level 4 processing does discusses the findings from two literature reviews not take place in this study’s initiatives. that summarize theories and practices in this area (Ahmed and Hendry 2012; Chavhan et al. 2012). Lead 2. The agro-processing subsector, in particular, is firms working with SMEs are often involved in supplier highly integrated with the agriculture and services development programs. sectors of the economy, thereby having a broad effect through its economic footprint (da Silva et al. 2009). Agro-processing activities create a demand pull for upstream raw materials; inputs; veterinary services; production and harvest equipment; aggregation; wholesale; sorters; graders; and professional support services such as financial services; third-party certifications; and packaging, storage, warehousing, and logistics services. In turn, opportunities for income growth and greater value generation are created for every actor in the value chain from production to distribution and sales (da Silva 2006; Austin 1982). 3. This report drew from two literature reviews that summarize theories and practices in the area of supplier development (Ahmed and Hendry 2012; Chavhan et al. 2012) and the Chartered Institute of Procurement and Supply report (CIPS 2013), which provides practical guidance to buying firms on supplier development initiatives. Ahmed and Hendry (2012) distinguish direct from indirect supplier development activities. Indirect supply development activities require minimal engagement or resources and include instruments such as performance evaluation and feedback and provision of incentives for performance improvements. Direct capacity-building activities transfer knowledge, skills, and in limited cases, capital to suppliers. These instruments include establishing performance-based incentives, sharing product or market information, on-site consultation, educational and training programs, and personnel transfer programs. 4. Section 3-5 are based on the literature review, the case studies, the meta-analysis, and the guidance note for policymakers and development practitioners. 5. Strategic Review of the Food and Retail Industry Challenge Fund, DFID, Nov. 2014. © 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