economic impact of heineken in sierra · pdf fileeconomic impact of heineken in sierra leone...

© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved

Economic impact of Heineken in Sierra Leone

Amsterdam, November 23 2006

Economic Impact Assessment model commissioned by NCDO and Heineken International

© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 1

In March 2006 NCDO and Heineken commissioned a project to develop an Economic Impact Assessment model that is:

• User-friendly• Expandable• Data-friendly• Re-usable

The model was to be tested at the Heineken operating company in Sierra Leone

Triple Value Strategy Consulting and InReturn Consultancy have executed the project

Today the results of this project are presented

Agenda


Introduction and summary

Some model results reflecting Heineken economic Impact• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model

What is needed to adjust the model for other companies and regions

Information about participating NCDO, Heineken, Triple Value and InReturn

Multinational companies in developing markets:Earthworms or Eggplants


Earthworms take what they need from the soil, but put back in the

form of rich humus. Thus they enrich the soil and leave it better than they found it. In so doing they co-

operate with one another and work together

Eggplantstake all the goodness out of the soil and leave it totally

denuded. They put nothing of value back and each eggplant operates alone, with only its own interests at

heart and is dependent on the soil for sustenance

Analogy by Darlyne Bailey and Rose Bator

Foreign companies can contribute to development but some perceive their presence in emerging markets negatively


Companies can contribute to development … … but some perceive their presence negatively

Foreign company

Economic activity

Industrial production

Incomes and taxes

Jobs

Foreign company

Extraction of (hard) money

Low salaries and tax

advantages

Unfair labour

practices

Exploitation

Two views are two sides of the same coin

A better insight into economic impact of (foreign) companies may benefit many different parties in different ways


Companies:Enables management to tune decisions more towards enhancing the local economic impact and thereby achieving a better fit in society

Governments:Understand the wider impact that a company has on development and tune policies and legislation towards enhancing it’s economic impact

Non-Governmental Organizations:Maximize development impact in cooperation with companies

A model has been developed that enables analysis of the economic impact of companies in (emerging) markets


The model enables companies to develop an informed opinion about their economic and societal impacts

• Look at the company and its societal environment through a different set of glasses

The model enables management to analyse different scenarios regarding their local economic impact

• Develop a broader view when taking management decisions

The model has proven useful and reliable in a real life situation• The model has been tested for Sierra Leone Brewery Limited (SLBL) in which

Heineken has a controlling stake

The model focuses on the economic impact and does not regard environmental degradation etc

• Such topics can be added but are too specific to include in a general model

Model delivers production, incomes, taxes and jobs generated and includes direct and indirect economic impacts


Industrial production

Incomes and taxes

Jobs

Modeloutputs

Direct inputs Indirect effect(respending effects)

Total economicimpact

Effects included in model

Model can be tailored to other companies and to other regions


Mapping of theprofit & loss /

cash flowof the company or

operating unit

Model ResultsInputs

Table that summarizes the

financial interactions

between different sectors and

households within the economy

Agenda



Some model results reflecting Heineken economic impact in Sierra Leone• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model




Doing business in Africa is hard work. The World Bank study measures things like red tape and taxes. […] But of the 35 least business-friendly countries, 27

are in sub-Saharan Africa. Some are impossibly hard: if firms paid all taxes due in Sierra Leone, they would spend almost three times their total profits;

September 8, 2006

Sierra Leone Brewery is a case in point:it pays all its taxes and makes a loss


-20

0

20

40

60

80

100

2005 Grossrevenues

Sierra Leonesuppliers

Households(employees)

Imports Taxes Loss

Index(revenues = 100)

Indexed profit and Loss statement of Sierra Leone Brewery

Taxes represent 33% of gross revenues

and 50% of net revenues

Sierra Leone Brewery is of major direct importance to Sierra Leonean economy


Some indicators of the importance of SLBL for the Sierra Leonean economy(without considering the informal economy):

• SLBL product consumption as % of household final consumption: 2.0%

• SLBL value added as % of GDP: 0.5%

• Workforce as % of estimated people with formal jobs: 0.3%

• Total tax payments as % of Sierra Leone tax revenues: 3.7%

When facing Sierra Leone Brewery in a stand alone mode it appears to be an extractor of (hard) cash


-250

-200

-150

-100

-50

0

50

100

Cash into SLeconomy (loss

exported to foreignshareholders)

Cash extractedfrom SL economy

(imports)

Net cash extractedfrom SL economy

Index(“exported” loss = 100)

SLBL spends money in the Sierra Leonean economy which is subsequently re-spend causing indirect economic effects


Cash of SLBLto local suppliersand households

Cash of SLBL toimports

SLBL spending

Cash of local suppliersand households to

imports

Cash of localsuppliers and

households thatremains in

Sierra Leone

Re-spending 1

Cash of local suppliersand households to

imports

Cash of local suppliersand households that

remains inSierra Leone

Re-spending 2

Cash of local suppliers andhouseholds that remains in

Sierra Leone

Cash of local suppliers andhouseholds to imports

Re-spending 3

Direct effects Indirect effects

Overview of direct and indirect cash flows and leakage


SLBL

Households

Industry

Directcash flows

Leakageout of SL

Indirectcash flows

Every bottle of beer that SLBL produces requires productionfrom suppliers and labour from their workers.

This indirectly generates economic activity and wages

Impression of how the SLBL cash is being re-spend in the (model of the) Sierra Leonean economy


This does notindicate a timeeffect since themodel is static

Indirect impacts make the importance of SLBL for the economy more pronounced


0

5

10

15

20

25

30

35

40

45

50

Cash fromindustry

Direct cash toindustry

Indirect cash toindustry

Total cash toindustry

USD (mln)

Direct and Indirect cash flows from Sierra Leone Brewery to industry

Indirect cash due to

households


industry Very conservative

estimate

Maximum total impact

Most likely value closer to

maximum impact

And despite the cash spent on beer the direct and indirect cash flows to households and taxes is positive


-25

-20

-15

-10

-5

0

5

10

15

20

25

Cash fromhouseholds

spent on beer

Direct cash tosalaries and

taxes

Indirect cash tosalaries and

taxes

Total cash tohouseholdssalaries and

taxes

USD (mln)

Direct and Indirect cash flows from Sierra Leone Brewery to households and taxes

Unrealistically conservative

estimate


households


industry

Maximum total impactConservative

since they would buy beer

anyway

(1)

(1) Household spending on beer is larger than SLBL revenues

Because of the labour-intensive nature of beer distribution SLBL indirectly supports a large number of jobs


Direct jobs provided (for employees and casual workers): 175

Jobs provided by distributors: 180

Jobs provided by retailers that can be attributed to SLBL: ~5.400

Jobs provided by suppliers attributable to SLBL: ~1.200

Total employments due to presence of SLBL: ~6.900

Each job at Sierra Leone Brewery generatesapproximately 40 jobs in indirect employment

• 32 in distribution and retail• 8 in Sorghum agriculture

A customer officer is permanently on site to assure tax revenues


SLBL carries almost the entire tax burden (90%) of its entire supply chain due to narrow tax base of Sierra Leone

Agenda






With the EIA model the effect of SLBL on inequality can be quantified


24% of the people in Sierra Leone

Have too little to feed themselves sufficiently

Because they live on less than $0.35 per day

Therefore they typically do not consume SLBL products

Food Poor Poor


Have too little to meet their broader daily needs

Because they live on less than $0.75 per day

They typically consume only locally brewed Star and Guinness

Non Poor


Are not considered poor

Because they live on more than $0.75 per day

They consume imported Heineken and Star/Guinness

SLBL impact on inequality can be quantified using EIA model

Information about salaries provided by SLBL and the average dependency rate in Sierra Leone

SLBL specific information

Information about how the three income groups earn and spend money in Sierra Leone economy

Household economic information

Although non-poor benefit the most from SLBL’s presence it is also beneficial for the food poor and the poor


0 5 10 15 20

Cash inflow – SLBL consumptionfor the three income groups

Which makes them net beneficiaries of

SLBL’s presence

$ mln0 5 10 15 20

(In)direct SLBL-related cash inflow to the three income groups

But SLBL’s presence generates indirect cash flows for the food

poor (in the supply chain)

$ mln

Direct cash

Indirect cash

Beer is only consumed by the poor and especially non poor but not by

the food poor

SLBL consumption SLBL by the three income groups

0 5 10 15 20$ mln

Non poor

Poor

Foodpoor

Agenda






SLBL increases the “local content” of its beers by substituting imported Barley with locally grown Sorghum


Barley Sorghum

Sierra Leone is one of the countries where Heineken has programs to increase the “local content” of its beer


Barley is an essential ingredient of beer but it does not grow in the tropics

However, Barley can be (partly) substituted by other cereals like Sorghum which is grown locally

• Reduce cost for SLBL and reduce dependence on foreign currency• Increase local development impact• Increase local embedding of company

Heineken currently runs substitution projects in several countries in Africa among others in Sierra Leone

• Co-operation with NGOs and farmers to efficiently grow Sorghum• Training of farmers who have never been involved in commercial farming• Involvement of women in farming• Construction of facilities (drying floors, warehouse, schools etc)• Stimulation of co-operatives and credit groups

The model enables analysis of the economic impact of these import substitution projects

The economic effect of substituting Sorghum is positive for the local economy


In 2005, Heineken spent USD 210.000 on the substitution project• Approximately 3.000 farmers participate

The indirect impact of keeping this money in the Sierra Leonean economy was approximately USD 790.000 which brings the impact on Sierra Leonean production close to USD 1.000.000

This increase of production generates USD 630.000 in household income

Buying Sorghum locally benefits the poor relatively the most


Distribution of household income increase over the three income groups

(100% = USD 630 k)Household income increase per group

0% 2% 4% 6% 8% 10% 12%

Food poor

Poor

Non poor

Non poor (301k)

Poor (257k)

Food poor (77k)

Agenda






A scenario has been constructed to compare SLBL economic impact to its non-producing importing competitors


SLBL is the only local beer producer in Sierra Leone

The competitors only export beer to Sierra Leone that are subsequently distributed by different channels

It would be useful to know how SLBL’s economic impact compares to that of competitors

Therefore a scenario has been constructed to analyse (using the EIA model) what would happen if SLBL ceased local beer production and reverted to importing beer

• Discontinuing Star and Guinness production• Assuming that the total beer consumption does not change in money terms and in

origin from the three income groups• The imported (Heineken) beer carries the tax rates and margins as currently


If you want local beer youhave to brew it yourself

A situation in which SLBL would not produce but only import and wholesale beer would be detrimental for Sierra Leone


In case SLBL would focus entirely on importing and wholesaling Heineken beer it would have a greatly reduced economic impact:

• A 64% smaller total impact on industrial production• A 60% smaller total impact on household income

However, perversely, it would pay 66% more taxes due to fact that imported (Heineken) beer is taxed more heavily

• Because of the narrow tax base, the reduction of industrial production would not induce a large decrease in taxes (SLBL pays almost all the taxes of the entire supply chain)

An import scenario would reduce SLBL cash flows to industry by 64%


0

5

10

15

20

25

30

35

40

45

50

Cashfrom

industry

Directcash toindustry

Indirectcash toindustry

Totalcash toindustry

Reductionof direct

cash

Reductionof indirect

cash

Scenariototal cash

toindustry

USD (mln)

Direct and Indirect cash flows from Sierra Leone Brewery to industry

Current situation Import scenario

-64%

In the import scenario SLBL would be a cash extractor from the point of view of households


Cash flow(USD mln)

-6 -3 0 3 6

Food poor

Poor

Non poor

Current cash flows to different income groups

Cash flows to different income groups in import scenario

-6 -3 0 3 6

Food poor

Poor

Non poor

Cash flow(USD mln)

Perversely the tax income of the government would increase by 66% due to higher excise duties


0123456789

10

CurrentSLBLtaxes

Currentindirecttaxes

generated

Currenttotal taxes

paid inSLBLsupplychain

Extra taxpaid inimport

scenario

Impact onindirecttaxesimport

scenario

Total taxesin supply

chainimport

scenario

USD (mln)

Direct and Indirect taxes resulting from presence of Sierra Leone Brewery

+66%

Current situation Import scenario

Heineken behaves more like a Bee than as a Locust


Agenda






What to do when you are a different company and/or you operate in a different region


Different company in same (or economically similar) region

Map company P&L on stakeholders

Direct economic impact Direct and indirect

economic impact

Economic impact of a different company in

same regionDetermination of coefficients ofInput-output matrix of regional economy

Different company in different region

Map company P&L on stakeholders

Direct economic impact Direct and indirect

economic impact

Economic impact of a different company in a

different regionDetermination of coefficients ofInput-output matrix of regional economy

Coefficients and parameters change but the model does not

The cost of tailoring the model to your needs are modest and may be reduced when companies join forces


Use the model for a company in a region for which the economic infrastructure has been modeled already

• Starting from EUR 10.000

Use the model for a company in a region for which the economic infrastructure has not been modeled yet

• Starting from EUR 25.000

In order to minimize costs the plan is to create a set of “generic” regional-economic kernels for a group of companies with geographic overlaps

• Sub Saharan Africa• Latin America• China• South East Asia• Etc

Through this set one can cost effectively combine company data with the generic kernels to obtain answers that may have some inaccuracy but are directionally correct

Agenda







The Dutch National Committee for International Cooperation and Sustainable Development’s (NCDO) core goal is to strengthen and highlight public support for international cooperation and sustainable development and achievement of the Millennium Development Goals.

NCDO does this through campaigns, documentaries, subsidies for projects and events. It also initiates its own programmes and projects if feels other organisations are not devoting enough attention to important themes. One of these themes is the role of business in development. For this purpose NCDO has run a ‘Business in Development programmesince September 2003.

The Business in Development programme aims to engage Dutch companies and its employees in market-oriented approaches to poverty reduction. This programme stimulates cooperation between companies in the Netherlands anddeveloping countries. The Business in Development programme has initiated:

• BiD Challenge www.bidchallenge.org• Dutch Design in Development www.ddid.nl• BiD Network www.bidnetwork.org• MDG measurement framework www.bidnetwork.org/mdgscan• Economic impact assessment tool www.bidnetwork.org/eiaheineken• BiD Seminars www.bidnetwork.org/bidseminars• Small Business Guide www.bidnetwork.org/smallbusinessguide

Visit www.ncdo.nl


The story of Heineken® began in 1864 when Gerard Adriaan Heineken bought a brewery in the heart of Amsterdam. Over 140 years, four generations of the Heineken family have strengthened and expanded our brands and company in Europe and around the rest of the globe.

The business of Heineken is about building great brands. The Heineken brand is sold in almost every country in the world. In addition to the Heineken brand, the company brews and sells more than 170 international premium, regional, local and specialty beers. TheAmstel® brand of the Heineken group is Europe’s third-largest brand. Other famous brands in its portfolio include Cruzcampo®, Tiger®, Zywiec®, Birra Moretti®, Ochota®, Murphy’s® and Star®. Heineken has the widest presence of all international brewers, thanks to its global network of distributors and 115 breweries in more than 65 countries. The popularity of the beers of the Heineken group is growing daily in rapidly-expanding beer markets, such as Russia and China.

In the beer markets of Western Europe, Heineken is the largest brewer and beverage distributor and the region accounts for more than half of its global sales. Heineken wholesalers also distribute wine, spirits and soft drinks to the on-trade channel. The company has now extended that leadership to Central and Eastern Europe. Heineken also has an international export operation, shipping beer to major profitable markets such as the US. In some markets, the company also produces soft drinks.

Heineken is committed to growth and has embraced innovation as a key component of its strategy. The company works to continuallyanticipate and meet the changing needs of consumers. Innovations of Heineken are in the areas of production, marketing, communication, packaging and, in particular, draught beer systems, where the company is an acknowledged leader.

Heineken takes seriously its commitment to conduct business responsibly and sustainably. The company continuously expands its initiatives to combat alcohol abuse and misuse and works to set and exceed ever-higher standards in the social and environmental areas of our business.

In 2005, the Heineken group employed an average number of employees of 64,305 worldwide.

See also www.heinekeninternational.com and www.enjoyheinekenresponsibly.com


Triple Value helps its clients to connect Access, Allocation and Agility

Triple Value’s clients are mostlyleading multinationals

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Access

Allocation

Access tokey markets

Effective andefficient

organisation

Connected tosocietal trends

Value-based managementNon-financial value drivers

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Transparency &reporting

StakeholderengagementReputation

management

Trend analysisEconomic impact

assessment

Base-of-the-pyramidstrategies

Eco-efficiencyCustomer analysisInvestor analysis

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Products:– Initiate and managing commercial funds investing in SMEs and MFIs in developing

countries– Provide strategic and financial advisory services regarding investments in SMEs and MFIs

in developing countries

Advisory services:– Investing in SMEs and MFIs– Desk research and due diligence on SMEs and MFIs– Economic impact analysis of SMEs in developing countries– Public Private Partnerships– International development and development finance

Partners:The economic impact study for Heineken/NCDO was performed together with Econovision

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