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Small Farmers’ Agri-Business Consortium

Venture Capital Assistance Assessment Report 2011

Prepared for: Agriculture Finance Corporation Ltd

By: Jack Croucher, Ph.D.

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CONTENTS SFAC VCA ASSESSMENT REPORT

Page Glossary of Terms 4-5

I. Introduction 6-12 1.1 Purpose and Scope of Assessment 1.2 Approach, Methodology and Report Structure

II. Background 12-13 2.1 SFAC Programme 2.2 The Current SFAC - VCA Intervention Logic

III. Performance and Results 13-16 15-17 3.1 Relevance 3.2 Effectiveness 3.3 Efficiency 3.4 Sustainability 3.5 Impact

IV. The Revised Intervention Logic 16-18 4.1 Rural Development focus: Farmer Linkages 4.2 Rural Development focus: Agri-Business Development 4.3 Rural Development focus: Livelihoods 4.4 Rural Development focus: Convergence 4.5 International Competitiveness Focus: Farmer Linkages 4.6 International Competitiveness Focus: Agri-Business Development 4.7 International Competitiveness Focus: Livelihoods

V. Project Cycle Management 19-20

5.1 Identification and Formulation of Interventions 5.2 Design

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5.3 Implementation 5.4 Management and Backstopping

VI. A Forward Looking Perspective 20-24 6.1 Contextual Background 6.2 A Future SFAC Intervention Typology 6.3 Design and Implementation 6.3 Organization and Financing

VII. Conclusions and Recommendations 24-25 7.1 Summary of Findings

VIII. Lessons Learned 25-26

Annex A : Report of Findings from North East Assessment, D.V. Nityanand, AFC Annex B : List of Persons Contacted Annex C : Terms of Reference Annex D : List of Review Sample Annex E : Standardized Framework for Assessing Company-Farmer Linkage

Programme Annex F : Company-Farmer Linkage Questionnaire Form Annex G : Individual Company Questionnaires

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GLOSSARY OF TERMS

Term Definition

Baseline The situation, prior to an intervention, against which progress can be assured

Effect Intended or unintended change due directly or indirectly to an intervention

Effectiveness The extent to which the development intervention’s objectives were achieved, or are expected to be achieved.

Efficiency A measure of how economically resources/inputs (funds, expertise, time, etc.) are converted to results

Impacts Positive and negative, primary and secondary long-term effects produced by a development intervention, directly or indirectly, Intended or unintended

Indicator Quantitative or qualitative factor or variable that provides a simple and reliable means to measure achievement, to reflect the changes connected to an intervention, or to help assess the performance of a development actor

Intervention An external action to assist a national effort to achieve specific development goals

Lessons Learned Generalizations based on evaluation experiences with projects, programs, or policies that abstract from the specific circumstances to broader situations. Frequently, lessons highlight strengths or weaknesses in preparation, design, and implementation that affect performance, outcome, and impact

Log frame (Logical frame work) Management tool used to improve the design of interventions, most often at the project level. It involves identifying strategic elements

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(inputs, outputs, outcomes, impact) and their causal relationships, indicators, and the assumptions or risks that may influence success and failure. It thus facilitates planning, execution and evaluation of a development intervention. Related term: results based management

Outcome The likely or achieved short-term and medium-term effects of an Intervention’s outputs. Related terms: result, outputs, impacts, effect.

Output The products, capital goods and services which result from a development intervention; may also include changes resulting from the intervention which are relevant to the achievement of outcomes

Sustainability The continuation of benefits from a development intervention after major development assistance has been completed. The probability of continued long-term benefits. The resilience to risk of the net benefit flows over time.

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I. INTRODUCTION

1.1 PURPOSE AND SCOPE OF ASSESSMENT

The nature of this assessment is forward looking. By examining a sample of typical SFAC VCA interventions, both successful and unsuccessful, the purpose is to learn from experiences of the past in order to design a revised intervention strategy for the organization. The goal is to contribute towards the ongoing strategic planning SFAC is undertaking to continue and enhance its relevance as an important resource in agri-business in India in an ever evolving global economy.

Throughout the assessment answers were sought to a number of questions. This was done through face to face interactions with entrepreneurs, farmers, bankers and others in a systematic manner. The methodology is described below. But the essence of these questions are summed up here in the introduction:

1. Awareness level among entrepreneurs about SFAC All the entrepreneurs had a basic knowledge of SFAC due primarily to being recipients of the VCA and in some cases its Project Development Facility. This basic understanding is limited to the conditions of the VCA, primarily that it has a grace period of five years, must be paid back in full, and only the original amount dispersed is required to be returned. Although SFAC conditions also require an earlier return if the term loan is paid off, most if not all understand it to be a five-year grace period.

Some of the recipients of the VCA seemed unaware of the Project Development Facility and expressed the view that they could have made use of it.

A few entrepreneurs had some contact with SFAC staff either from the headquarters or from the state level staff seconded to SFAC. These had a greater awareness of SFAC in the sense that they not only recognized the value of the VCA but were keen to avail themselves of a second round should that become available

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It is clear that where SFAC has a solid presence on the ground, as is the case of the regional office in the Northeast, that awareness of SFAC is greatest. In the other states visited, the departments responsible for SFAC have a spotty record. The state SFAC officer in Kerala seemed very engaged, but that could have been due to the presence of a senior staff person from headquarters; in Kashmir, the consultant seemed minimally interested and in Maharashtra there was no response at all.

It is not clear, with the exception of the regional staff located in Guwahati, how much local SFAC representatives actually represent SFAC and its interests. As far as communications with the headquarters it generally seems to be minimal after the VCA is awarded. While there was no clear indication from the recipients, the lack of communication could lead to their taking the pay-back requirement less seriously then they should.

2. Entrepreneurs experience with banks and SFAC including past disbursements and operational problems.

Experience with the banks was mixed. The entrepreneurs in Kashmir seem most satisfied with their experience with the lending institutions; the experience in the Northeast region was most problematic. Maharashtra and Kerala fall somewhere in between satisfactory and problematic depending on the case in question. In almost all cases the length of time between initiating an application to actual disbursement was seen as unnecessarily long and the access to working capital remains a major constraint to the success of many ventures.

There are a number of problems associated with the lending institutions’ functioning in the SFAC projects assessed in the sample which are summarized below:

A) In most venture capital investments the venture capitalist and the entrepreneur jointly prepare a project feasibility proposal that they then jointly present to a bank for financing of both fixed and working capital. In SFAC procedures it seems that the entrepreneur initially arranges for a feasibility assessment prepared along

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traditional lines which he presents to a bank. If the bank agrees to a term loan then SFAC is approached for its VCA participation.

This latter approach leads to a number of weaknesses in the process.

Project Appraisal: To begin with a project’s feasibility is appraised primarily on its financial and technical merits. Other essential criteria including a clear understanding of end markets, of the complete value chain and its degree of competitiveness and future growth potential, the scope and type of farmer linkages, and the potential for off-farm employment generation are not given much consideration. Technical feasibility is seldom a problem for small enterprises these days in India and while it is essential that it be included in all project appraisals, a project is rarely rejected on technical grounds. Financial viability, while is also an important criteria, is seldom found to be a reason for rejecting a project. (Any project can be made to look profitable in a business plan given the right set of assumptions). Therefore, in addition to financial and technical viability, potential projects need to be assessed on the nature of the value chain in which they are to function, on the clarity of understanding end markets and the competition they will face in those markets, on the enterprise’s ability to adapt to changes in the value chain including its ability to upgrade to keep pace with an ever evolving economy and on the scope, transparency and nature of farmer linkages.

Access to capital: Working capital: In almost all sample enterprises, access to working capital is a major constraint. In many cases working capital is not even purposely considered in the financial planning or calculations. This practice appears illogical on the part of the lending institutions. In case after case when the entrepreneur approached the lending institutions for working capital, he was either denied, or was approved for an amount far less than required, or was faced with substantial delays in taking a decision or in disbursements. In some cases when working capital was approved, the lending institution then applied a portion of the sanctioned working capital

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loan against the interest of the term loan again leaving the entrepreneur with insufficient resources with which to operate successfully. This approach to providing working capital has resulted in enterprises running far below installed capacity, lengthening the time to reach a break-even point, greatly reducing revenues and ultimately threatening the viability of the business and hence its ability to repay both the term loan and the VCA.

Interest rates: in most term loans the interest rate is set at the going rate for

conventional business lending. There is reason to argue that since these businesses are directly part of the agriculture sector and are the next logical step in the agriculture value chain, that term lending and working capital lending should be given priority sector status and interest rates accordingly adjusted

B) Ministry of Food Processing Subsidy. Most enterprises were eligible for and did receive this subsidy after the qualification criteria were met. In some cases, the lending institution appropriated this subsidy and applied it toward the term loan principal, without the entrepreneur’s consent. If lending institutions are to insist on appropriateing this subsidy for themselves, such should be stated upfront in the term loan agreement and the interest rate should be adjusted to reflect the reduced risk and exposure of the bank. This practice leads to the impression that the banks are more concerned with reducing their exposure and risk than in contributing to the success of the enterprise that they have already assessed as a viable investment. It also needs to be ascertained whether the Ministry of Food Processing is aware that this subsidy that is meant for the agri-business entrepreneur is actually being used to subsidize the lending institution’s exposure. Ideally this practice should be discouraged.

C) In only one case was there a complaint voiced about SFAC. It had to do with the

amount of VCA sanctioned being greater than the amount actually dispersed. The

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complaint had more to do with the entrepreneur’s opinion that the explanation given by SFAC was not satisfactory.

In one other case, SFAC VCA was being held back by the loan officer of a particular bank (along with the sanctioned term loan) without explanation. SFAC’s response to this situation - sending a letter requesting release of the VCA funds does not seem to have the desired effect. Perhaps a more proactive stance is needed.

3. Experiences with local authorities There has been little convergence among SFAC VCA participants with other government or non-government programs that might be beneficial to the companies. Particularly in the Northeast there are many programs specifically designed to promote agriculture development. Organic certification of many products has good potential particularly in the Northeast, where cultivation is by and large de facto organic. Also, The Spice Board has several programs for Northeast that could benefit those enterprises engaged in spice production and processing. Clean Energy Assistance Schemes are another that could be availed. Also of great relevance to small enterprises is the Interest on Delayed Payments to Small Scale and Ancillary Industries Act, 1993. These are just four illustrative examples. There are numerous government programs and donor funded projects that could be tapped by small enterprises if their existence were known. The one good example from the sample undertakings is Kerala Aqua Ventures which has made very profitable use of state government programs and assistance.

4. Relationship of units to markets: While access to markets is never easy, in the sample cases it does not seem to present a major problem. This can be attributed to the tenacity of the entrepreneurs and their ability to select subsectors that have growth potential. As these enterprises grow they will need assistance in finding new markets and in access to market intelligence. Of the twelve active investments, seven are able to access both domestic and international markets;

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while three are selling mainly to national markets and two are limited to local or regional markets. Access to markets is one issue but the ability to compete in those markets is another. It is here where the weakness of the initial feasibility assessment comes into play. Lack of guidance leads some commercial undertakings to choose markets in which their ability to compete is questionable. This is particularly true for small-scale units attempting to establish their own brand name. This will be an uphill battle that they are unlikely to win in the face of competition from major companies with well- established brands. This is particularly characteristic of the processed foods market where consumers are more likely to purchase a well-known brand name product.

5. Path forward after VCA stage: A few enterprises have exited the VCA stage or are about to exit and they are well placed to succeed at their current levels of operation. However, if they wish to grow they may face difficulties accessing the needed financial and non-financial business services. Much depends on the size of the enterprise, which in turn is positively correlated to the promoter’s level of sophistication and ability to work the system to his advantage. In addition to concern about a post VCA path forward, of greater concern is assisting existing enterprises to reach the post VCA stage. In both situations there is currently no facility available to assist small entrepreneurs in dealing with the myriad of problems and issues that they face on almost daily. While the entrepreneurs in the sample assessment represent the tenacity of Indian entrepreneurs in general, continued success in the global economy will require more than tenacity alone. 6. Farmers’ views: By and large the farmers who were interviewed are very satisfied with their relations with the linked companies and the benefits they were enjoying. In every case the farmers first and foremost appreciated the security that linkage gave them in terms of assured markets, assured prices, assured transparency in all transactions. The degree and nature of other

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services provided to the linked farmers by the companies varied greatly from no additional services at all to extensive interaction in the form of providing inputs, credit, advances, and extension assistance. In all case both farmers and company promoters and others interviewed including banking officers and government officlas strongly supported the need for some form of organization of farmers, either formal or informal. All see this as a win-win innovation benefitting both the farmers and the companies. 1.2 APPROACH AND METHODOLOGY The assessment was managed by the Agriculture Finance Corporation Ltd. (AFC) and carried out by one consultant and by one senior officer from AFC. SFAC/AFC provided additional support as needed. The assessment encompassed the following steps: 1. Desk review, SFAC staff interviews and analysis:

A desk review will be carried out in order to select targeted enterprises for assessment; to gather information on the performance and results to date of selected enterprises; on SFAC’s perceptions of the strengths and weaknesses of investment design, implementation and management. This step will include:

systematic review and analysis of previous SFAC evaluation reports review of SFAC investment documentation on selected enterprises such as project

reports, completion reports, progress reports, technical reports. Discussion with relevant SFAC staff at headquarters on assessment issues and

possible ways forward Based on the above key assessment issues the assessment consultant and AFC

staff associate will develop a standardized framework for assessing each selected enterprise in order to ensure consistency when reviewing projects and to extract comparable information. The assessment framework will employ aspect of value chain analysis and will be consistent with SFAC’s investment logic.

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2. Development of SFAC Agribusiness Investment logic(s) 1

Based on the steps described above, the assessment consultant will construct the investment logics (premises of change expected by SFAC interventions) of typical SFAC support interventions. These premises will map out how inputs and activities should have logically led to outputs, outcomes, and impacts. This will enable the assessment to conduct analysis along the causal chain from inputs (equity and loans and perhaps other development services) to impacts, to build the story around these interventions and to determine if these interventions have worked as planned. The investment logics will be validated through discussions with the SFAC staff members. This consultation between the consultant and SFAC will be useful for SFAC to validate its own strategy and make necessary changes to keep pace with an evolving rural economy.

3. Reporting The main deliverable of the assessment exercise is the final report in English. The report will cover the key assessment issues outlined above in section I. It will describe the methodology used and highlight any methodological limitations, highlight key concerns and present evidence–based findings, conclusions, recommendations and lessons learned. The draft report focusing on lessons learned, best practices, and recommendations will be shared with SFAC staff for initial review and consultation. They may provide feedback on any error or fact and may highlight the significance of such errors that find their way into conclusions. The consultant will seek agreement on the findings and recommendations and will take comments into consideration when preparing the final report, but the consultant will be independent to draw his own conclusions and recommendations.

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1 SFAC investment logic: promotion of agribusiness ventures in cooperation with commercial banks; catalyzing private investment in establishing/expanding agribusiness projects; strengthening backward linkages with primary producers; generation of rural employment opportunities; and, enhanced participation in value chains for farmers, producer groups, small-scale entrepreneurs, and agriculture graduates.��

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Field Interviews: The assessment was undertaken on a sample of 15 companies that had received venture capital assistance from SFAC. These 15 units varied in a number of ways: some were mature and had either graduated out of the VCA programme or were close to leaving; some were very recent recipients; most were successful operating businesses while a few were listed as non-performing assets; they were located in four distinct parts of the country: The Northeast, Kashmir, Kerala, and Maharashtra. The one thing all had in common was their backward linkage to farmers.

A questionnaire was developed and systematically applied to all the available units. This is found in Annex F. The individual questionnaires are found in Annex G. The main focus was on the nature and substance of backward linkages to farmers and the entrepreneurs’ experiences with the lending institutions.

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II. BACKGROUND

2.1 SFAC PROGRAMME

Small Farmers’ Agri-Business Consortium (SFAC) is a society organized under the Department of Agriculture and Cooperation of The Government of India with a mandate to catalyze private investment in setting up agri-business undertakings that will enhance rural incomes and generate both farm and off-farm employment. It has been in operation since 1994 and currently has over three-hundred active investments.

The primary vehicles used by SFAC are its Venture Capital Assistance to agri-business undertakings (VCA) and its Project Development Facility (PDF) to assist producer groups/organizations in the preparation of economically viable detailed project proposals. In close association with commercial banks the scheme envisages a single-window approach for extending venture capital along with term loans and working capital to agri-business applicants.

Qualifying projects should meet the following criteria:

a) Should be in the agriculture or allied sector (i.e. horticulture, floriculture, medicinal and aromatic plants, minor forest products, sericulture, organic farming, vermi-composting, apiculture, plantation crops and fisheries.

b) Should provide assured market to farmers/producer groups

c) Should encourage diversification into high value crops to increase farm household income. And

d) Should qualify for term lending by participating banks.

2.2 THE CURRENT SFAC-VCA INTERVENTION LOGIC

a) To facilitate setting up agri-business ventures in close association with commercial

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banks

b) To catalyze private investment in establishing agri-business projects and thereby providing assured market for producers for increasing rural income and employment.

c) To strengthen backward linkages of agri-business undertakings with primary producers

d) To assist farmers, producer groups, and agriculture graduates to enhance their participation in the value chain through the Project Development Facility. And

e) To arrange training and exposure visits of agripreneurs interested in setting up identified agri-business projects.

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III. PERFORMANCE AND RESULTS

Of the 15 companies in the assessment sample, three are considered genuine non-performing assets (NPAs). Twelve are operational to varying degrees.

3.1 RELEVANCE

Relevance means that the VCA investment is appropriate for achieving the objectives in accordance with the needs and priorities of the target groups (the promoters of the commercial ventures and the farmers linked to those ventures) and is aligned with the objectives of SFAC and its VCA programme.

Relevance is assessed as relatively high in most of the operational companies. The interventions are well aligned with the objectives of SFAC and its VCA programme; the venture capital infusion has generated participation of financial institutions, although not to the extent desirable; has generated investment by the promoters; and has created genuine backward linkages to farmers. In many cases the businesses sampled would not have been able to secure term financing with out SFAC VCA.

3.2 EFFECTIVENESS

Effectiveness is the extent to which the intervention’s objectives were achieved, or are expected to be achieved.

Effectiveness is mixed. In some cases where the promoters have considerable experience and resources, the interventions have been quite effective. A case in point would be Trimurti Corns. It initially proposed backward linkages with 168 farmers and seven years later has linkages with over 2000 farmers. Its annual turnover last year was several crore and it employs over 250 off-farm workers most of whom are women from the surrounding villages. It markets fresh baby corn and frozen corn nibblets to markets throughout the world. At the other end of the spectrum would be Madhu’s Foods, which has yet to receive its sanctioned term loan and its sanctioned venture capital assistance for no valid reason.

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But size is not the only measure of effectiveness. Pragati Agro in Maharashtra has only 39 linked farmers, but significantly all 39 are shareholders in the private limited company – in other words, it was formed by the cultivators as a producer company before the Producer Company Act came into effect. It is primarily theworking capital problem noted above that is having serious consequences on the effectiveness of the VCA programme. Thus it would have to be rated as average or below average in terms of effectiveness.

3.3 EFFICIENCY

A measure of how economically resources/inputs (funds, expertise, time, etc.) are converted to results. Being a qualitative assessment, this study was not able to undertake an assessment of efficiency as defined above.

3.4 SUSTAINABILITY

Sustainability is understood as the continuation of benefits from the VCA intervention after assistance has been completed. The probability of continued long-term benefits. The resilience to risk of the net benefit flows over time.

There is no clear trend in the sample toward sustainability. The absence of service providers for both financial and non-financial business development services results in those entrepreneurs who are surviving by tenacity alone to face an uncertain future. Small-scale units such as Rity Food and Madhu’s Food which are trying to establish their own brands in a highly competitive processed food market could make good use of professional assistance in determining where their best end-market options lie.

Another determinant of sustainability if the knowledge and resources to upgrade in a growing subsector. Upgrading can involve products, processes, outsourcing and/or diversification into other subsectors. A good example of the ability to upgrade is Upland Floritech. It not only operates in a growing and vibrant cut flowers value chain with strong end market presence, it has also upgraded in two ways: by diversifying into the high value

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fruits value chain and by introducing state of the art technologies backed-up with good technical assistance. When considering sustainability for small agri-businesses, a missing component is the provider/facilitator of financial and non-financial business services both during and after the project assistance is completed. Where do these entrepreneurs go for such guidance?

3.5: IMPACT

Impact can be positive and negative having primary and secondary long-term effects produced by interventions, directly or indirectly, intended or unintended.

Impacts in the sense of clear contributions to enhanced economic security are difficult to catch. There is often a long cause-effect chain from the intervention inputs and activities to this goal. Log Frame Analysis results termed as outputs and/or outcomes can give some indications of the direction in which impacts are moving. In cases where relevance, effectiveness and sustainability are all determined to be low for the same intervention, there is most likely little doubt that impact will be small.

There are two indications that imply that impacts in the overall sample will be positive and could be significant. One is the satisfaction expressed by virtually every farmer and every entrepreneur interviewed with the backward linkage arrangements. From the farmers’ perspective this primarily has to do with the guaranteed market for produce at agreed upon prices and, as importantly, on the transparency with which the businesses conduct their procurement from the farmers. In most cases the only other option is dealing with traditional brokers or mandis. Institutions that have yet to come to the realization that short-changing farmers is not going to be viable option for much longer.

The second indication of positive impacts is the significant number of off-farm jobs generated by these investments. In the sample of 12 operational companies these number in the thousands. More importantly, most of these jobs are filled by women and in many cases are sensitive to the working needs of women both in terms of working conditions and time availability.

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In this age when accountability in development activities has become the most important issue, it is definitely in the interest of SFAC to implement a solid monitoring and evaluation system that will capture these impacts in a more systematic and convincing manner.

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IV. A REVISED INTERVENTION LOGIC

The current intervention logic (described on page 11, footnote 1) has been by and large successful albeit with some notable weaknesses. Backward linkages to farmers are present and satisfactory ranging from 25 in Kairali Coconut Oil to over 2000 in Trimurti Corns. Off-farm employment, especially for women, may be the untold success story with the creation of thousands of employment opportunities through just a handful of enterprises.

But along with these successes there are outstanding shortcomings that can be addressed through a revised intervention logic. The current role of banks needs to be thoroughly reassessed:

Working capital problems persist both in availability, timeliness, and sufficiency. The current threshold of Rs 50 lakhs total project cost is far to high to interest small

entrepreneurs and producer groups wanting to commercialize their operations Of the 29 million small-scale units in India, employing 90% of the work force,

producing over 6000 products, receive only 10% of all bank loans Inexplicable delays in disbursement still exist in some places Lack of follow-up after a loan of disbursement unless payments are overdue Overly focused on technical and financial details with too little attention to other

investment criteria Little attention to forward and backward linkages Minimal end market analysis Shallow knowledge of the economic vibrancy of the sector

All of these raise questions as to the effectiveness of the current SFAC investment logic in an ever-evolving global economy.

A FUTURE SFAC INVESTMENT TYPOLOGY:

A revised typology takes note of the changing global economy as it relates to agri-business in India. Beyond considering the financial requirements of a business, it focuses

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from both a domestic and an international perspective on farmer linkages both backward and forward, on agri-business development, on rural livelihoods and on convergence.

4.1RURAL DEVELOPMENT FOCUS – FARMER LINKAGES : Interventions both organizational and technological are required that lead to greater integration of producers into value chains that serve domestic markets – local, regional and national and that lead to greater economic security of producers in a sustainable manner. Farmer linkage models may take many forms, but past experience has proven two necessary conditions for sustaining whatever form is chosen: associations, particularly at the farm level, should as much as possible be self-selective; and secondly they should be of a manageable size. Numbers of small, self-selected groups can be federated into larger entities to achieve economies of scale and to increase power in business relationships. Of major concern is whether such interventions include small-holder farmers, or rather marginalize them in relation to general agricultural development trends. (There is some evidence that emerging corporate agribusiness strategies are beginning to focus on linkages with larger farmers). If SFAC intends to expand its impacts and services to farmers groups and /or small entrepreneurs it needs to address two issues. First it needs to use its Project Development Facility in a more proactive manner to scout out newer clients and to assist them in preparing convincing project applications. Secondly it certainly needs to lower its project cost threshold from the current Rs 50 lakhs to Rs 5-10 lakhs range.

4.2 RURAL DEVELOPMENT FOCUS – ARGI-BUSINESS DEVELOPMENT: A value chain analysis must examine the entire chain but with a focus on interventions that i. upgrade domestic agribusiness value chains and ii. strengthen wider rural economic development impacts through the spread effects of investments and employment in other rural-based activities. The impact of investments in agri-business on the wider economy needs to be better understood and a value chain analysis is one good tool that can be used to get a generate a better understanding on such impacts as well as identify components in the value chain that can benefit most from upgrading. Addressing food

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insecurity would seem to be more promising by focusing on domestic value chains. Domestic value chain upgrading in certain agri-business sectors would appear a natural for SFAC interventions. However, gains can also be made from global food value chain interventions by analyzing the whole value chain, including agricultural raw material production aspects, by more attention to post-harvest loss activities (technologies and institutional aspects) and by building synergies among all three subsector levels – micro-, meso- and macro-levels of the chain.

4.3 RURAL DEVELOPMENT FOCUS - LIVELIHOODS: Non-farm employment generation is a significant achievement of SFAC interventions. This achievement needs to be better recognized and understood more deeply, particularly from poverty alleviation and gender perspectives. SFAC needs to become more relevant agri-business force in those 29 million small scale units that are employing 90% of the work force that relate to agriculture. 4.4 RURAL DEVELOPMENT FOCUS - CONVERGENCE: Beyond Ministry of Food Processing subsidies, there is a need for a mechanism to identify and publicize other forms of assistance available to small enterprises and producers that can contribute toward the survival and success of the enterprise. The larger, more experienced businessmen know how to work the system to their advantage, but the smaller, new entrants often do not. A study conducted in Uttarakhand discovered 936 schemes operating in one block. While not all of these relate to small agri-business development, most likely some of them do, but are unknown to both the farmers, business promoters, and other interested parties. SFAC needs to assist small agri-business to become more competitive in the Darwinian environment in which they exist by taking greater advantage of the wealth of other resources that are available to them.

4.5 INTERNATIONAL COMPETITIVENESS FOCUS – FARMER LINKAGES Interventions that result both in organizational and technological improvements at the producer level need to reflect the international competitive nature of many agribusiness enterprises. Upgrading primary producers to more value adding activities beyond

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supplying raw materials will also require a fresh look at what technologies and organizational options are appropriate given the growing international nature of Indian agribusinesses.

4.6 INTERNATIONALCOMPETITIVENES AGRI-BUSINESS DEVELOPMENT: A value chain analysis can identify interventions that are intended to ensure that the productive capacity of an agri-business subsector has a standard that makes the industry able to export products that meet international standards and at the same time are able to compete with imports of same or similar products in the national market. Need to recognize that within the industry, cooperation, not competition, will improve competitive advantage. The competition is not the company down the road or in the next town, it is in China, Sri Lanka, Bangladesh, Thailand, Indonesia and The Philippines. The majority of businesses examined in the sample, even those of modest size, had significant sales in international markets. Again value chain analysis can identify such opportunities.

4.7 INTERNATIONAL COMPETITIVENESS - LIVELIHOODS: Recognizing that non-farm employment is processing goods that may need to compete in international markets. This may require preparation for a different set of skills, technologies, and work environments if Indian agri-businesses are to continue to become internationally competitive. �

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V. PROJECT CYCLE MANAGEMENT

5.1 IDENTIFICATION AND FORMULATION OF INTERVENTIONS In order to broaden its reach and make its services more accessible to larger numbers of clients, especially smaller entrepreneurs and farmer groups who wish to move from being simple suppliers of raw materials or subsistence players to take on a more commercial role SFAC needs to make a number of adjustments:

Lowering the project cost threshold to Rs 5-10 lakhs Expanding the Project Development Facility, making it more proactive and using it

as a tool to scout out new clients. Expanding its partnership beyond commercial banks to other institutions that are

ready to supply term and working capital and are also prepared to provides other needed business development services of a non-financial nature

SFAC needs to join with clients in taking the lead in project preparation and feasibility assessments that include a broader array of criteria in addition to technical and financial viability

Continued support to existing projects. Reasons for continued support to existing projects can vary, from building on to something that has already proven successful (Upland Flori Tech in Kashmir diversifying to high value fruit cultivation and using state of the art technology) to correcting problems (Rity Foods in Meghalaya) or ensuring sustainability of less well-functioning activities that have good promise (Pragati Agro in Maharashtra). In any case the experience gained from the first phase of the programme should be the point of departure for formulating a second phase. These obvious opportunities are not currently being exploited.

5.2 DESIGN A project design must include a workable plan for constant monitoring and

evaluation of investments Must include convergence with as many other resources as possible Must view its mission as promoting the long-term success of its clients Must realize that effort put in at this stage will be more cost effective than trouble

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shooting at a later stage due to weak project design The Project Development Facility can play a far greater role in these areas.

5.3 IMPLEMENTATION

SFAC needs far more dedicated personnel on the ground. This does not necessarily mean raising a large bureaucracy. Outsourcing to competent organizations and agencies is one option that should be looked into.

SFAC needs to keep in frequent contact with its clients, particularly the smaller and newer ones, that may need additional handholding and trouble shooting

5.4 MANAGEMENT AND BACKSTOPPING At headquarters SFAC will definitely need more staff both professional and support

and a reorganization of staff if it is to achieve its new objectives.

5.5 INNOVATION AND PILOT TESTING

There are many innovative ideas and models both in India and abroad that have relevance to the promotion of agri-business in the global economy.

SFAC should seriously consider creating a small, flexible unit that is dedicated to identifying and pilot testing new ideas and organizational and investment models. Those that are found to have merit could then be expanded by SFAC or other responsible agencies.

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VI. A FORWARD LOOKING PERSPECTIVE

6.1 CONTEXTUAL BACKGROUND Global inequalities and resulting in a deepening of world poverty has in recent years increased rather than decreased due largely to the general global financial and economic crisis as well as the food crisis most prominently felt by rising food prices even for essential commodities.

This has caused agriculture development to become prominent again in development and poverty alleviation agendas. The World Bank Development Report 2008, 2009 has brought this to the forefront and has been followed up by a publication by FAO, UNIDO and others (Agro-Industries for Development, 2009) on the importance of the role of agro-industries for promoting economic growth and relieving poverty based on agriculture development.

Growth in agriculture production is a key driver in overall economic growth and a large part of the world’s poor, including India, live in rural areas and derive their livelihoods from farming and farm-related economic activities. Non-farm rural employment in MSMEs which are typically processing agriculture products are also located in rural areas.

Increased agriculture production (including allied sectors of horticulture, forestry and fisheries), climate change and increased general environmental concerns will place increasing pressure on natural resources: land, forestry and particularly water. Both agricultural and related agro-industrial technology transfers will therefore need to take natural resource effects into consideration in the future. Energy saving and cleaner production technologies for agro-industries will gain increasing importance as will technologies for renewable energy sources. As climate change is likely to hit the poorest most severely, productivity capacity enhancements towards poverty reduction will in future need to be viewed in relation to future climate adaptation investments.

Food processing interventions will be clearly affected by increasing intensity of droughts and floods implying reduced food production and increased food insecurity. All of thee have clear implications for agro-processing interventions. Changing consumptions patterns such as the increased demand for processed and ready made products will at the other

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end of the income spectrum have implications for food processing industries. The same is the case with changing market systems and more generally with the need to link production and processing interventions up to markets and marketing chains.

Finally, the trend towards greater dependence on the private sector is an important factor and necessary for economic growth, but the question remains is it possible to ensure economic equality and security in a socially balanced and poverty reducing “pro-poor” growth by supporting the private sector. Private sector support in one form or another is subsidization and can lead to market distortions. Thus the need to be constantly aware of securing competitiveness in all components of the value chain.

Small Enterprises: Some Hard Cold Facts: Employ as much as 90% of India’s workforce in 29 million units Make 6000 products ranging from apple juice to acchar; from generators to

garments But

They receive a fraction, maybe 10%, of overall bank loans Late payments by clients, climbing interest rates impact small business harshly Chinese imports have hot small players the hardest Despite schemes, difficult finding one-size-fits-all formula for fragmented sectors

As such small enterprises exist in a Darwinian world.

The meaning in all this for SFAC is how to remain relevant and the challenge for SFAC is to assist more and more agri-businesses to become strong enough to survive. SFAC has to move from its present interventions of VCA and PDA toward a greater comprehension of the value chain in which its clients will operate and this will require a new more all-encompassing intervention logic along with adequate resources to implement it. 6.2 A FUTURE SFAC INTERVENTION TYPOLOGY The Intervention Logics detailed in Chapter 4 concern what is expected to be achieved in terms of the application of various components of financial and non-financial assistance to

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applicants both large and small that commit to bringing farmers within their operations and move the state of agri-business in India forward.

It presents a revision to SFAC strategy that broadens the nature of the organization’s approach to project identification, design and implementation through a more clearly defined typology. This can contribute to a sharpened focus on the organization’s ultimate goals as well as improving the basis for monitoring and evaluation of the extent to which impact is actually achieved. It specifically calls for a change of strategy that will promote the inclusion of small-scale entrepreneurs closer to the beginning of the value chain and farmer producer groups as clients for Venture Capital Assistance. It recognizes not only the existence but more importantly the relevance of both domestic and international markets .

To move this typology forward keeping in mind the ever-evolving economic, social and environmental realities of the 21st century, this revised intervention typology is suggested for further debate and discussion within SFAC.

Recommendation:

It is recommended that SFAC:

Adopts the revised intervention logic and typology identified above and develops Log Frame Analytical structures for its interventions with specific attention to developing indicators, means of verification and assumptions related to the steps from outputs to outcomes and from outcomes to impacts.

Collects information and undertakes analyses, which makes it possible to assess and compare direct and indirect farm income creation and direct and indirect employment creation in different agri-business subsectors.

Demand and market analyses (international and domestic) are included in all value chain analyses

Efforts are made to include more food processing interventions in the SFAC portfolio, which add value to food products from agricultural (and allied sectors) production over the full domestic value chains and which contribute to basic food

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security needs Food processing value chains in particular shall include the post-harvest linkages

from agricultural (and allied sectors) production (harvesting, handling, transport and storage) and take natural resources management into consideration

Livelihood interventions shall aim particularly at establishing productive capacity to international competitiveness standards.

6.3 DESIGN AND IMPLEMENTATION:

Past experience on project cycle management point towards four key areas for improvements: a) SFAC has addressed one part of the puzzle well (project finance), but now needs to look at the whole puzzle; b) more time and resources devoted to context analyses including the institutional context and key stakeholder groups at all levels of the value chain; c) involvement of all key stakeholder groups (including decentralized government structures and potentially financing donors) in the preparatory as well as the design and implementation activities and d) more attention paid to the design of project organizational and management structures and to decentralized implementation, monitoring and evaluation. Recommendation:

It is recommended that:

More time and resources are allocated for analytical work to be used to strengthen project identification and design

The Project Development Facility be strengthened and used more proactively to scout out new clients and to assist then in preparing sound business proposals.

SFAC take the lead in project formulation and that all key stakeholder groups are involved throughout the preparation, design and implementation process

The project organization and management (decision-making) structures needed for effective implementation, including decentralized management, shall be thoroughly analyzed and described in the project appraisal.

The project appraisal in addition to technical and financial analysis, include value

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chain analyses and end market identification specifically to allow for the realistic inclusion of farmer producer groups and small-scale entrepreneurs in SFAC programmes.

6.4 ORGANIZATION AND FINANCING

The SFAC staff is presently overloaded with work and opportunities and challenges lying ahead point towards a larger, not a smaller workload. Also, a considerable amount of the available time is presently spent on project management, related not only to the technical aspects, but also to many administrative aspects. The addition of smaller projects will further exacerbate this situation. The management burden could be lifted from the technical staff, if management was concentrated in a few positions, which were given administrative support and which would also be responsible for “marketing” SFAC. The rationalization and streamlining of interventions, suggested above, could also imply some re-organization measures as they imply some staff positions with types of work and management responsibilities requiring social, economic and institutional rather than specific technical expertise. With respect to financing the key issue is to secure sufficient funding for the preparatory work, including value chain analyses, required for improved identification, design and follow-up activities.

Recommendation:

It is recommended that:

The predominantly technical expertise of the present SFAC staff is supplemented with some social/economic/institutional expertise to broaden the expertise available in SFAC for institutional analyses in relation to e.g. value chain analyses, demand and marketing analyses and economic, ecological and social aspects of natural resources management analyses in the light of climate change impacts on agriculture.

SFAC consider a matrix organization with technical responsibilities divided according to the required technical competencies for the different subsector type of

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interventions and with institutional and managerial expertise divided according to the two main categories , international competitiveness (global value chain) category and the rural development focus (domestic value chain category.

The administrative burden on the technical staff related to project management is reduced by concentrating over all management responsibilities in a few project management positions, to be supported with administrative personnel and also being responsible for marketing the services of SFAC.

Efforts are made to convince the financing sources that the preparatory work is essential for the VCA funds used in implementation to have the intended impact.

SFAC consider charging a modest return on its investments to help defray these additional costs and to make the VCA seem more like a true investment and less like a government handout.

Considerations on a revised SFAC strategy are taken as an opportunity to promote greater synergies for cooperation with other branches of the government as well as private and non-profit sectors.

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VII. CONCLUSIONS 7.1 SUMMARY OF FINDINGS

The SFAC VCA strategy, as expressed by the actual interventions in the assessment sample, has basically performed satisfactorily in the past, though impacts, i.e. the extent to which the interventions have contributed to poverty reduction, are not clearly revealed. This is due more to the lack of maturity of most investments. There are however strong indicators in the form of solid backward linkages to farmers and substantial off-farm employment generation that point toward positive impacts in the future. It seems certain that without SFAC participation many of the companies reviewed in the sample would never have come into existence on their own.

Non-performing assets were purposely included in the review sample to ascertain if there were and common characteristics to failed enterprises. This however was not forthcoming. In each of the three NPAs, the reasons for failure differed considerably and no common element was found. It may be useful to undertake a more complete assessment of failed ventures in the future to see if there are common lessons to be learned and situations to be avoided.

The major conclusion is that till now SFAC has concentrated on one aspect of a much larger challenge. It has performed well in its VCA role and some would argue why change a basically good programme. This assessment however is looking to the present and beyond. The state of the art knowledge in enterprise development clearly finds that one can no longer focus on one intervention without taking into consideration the whole picture. This is not to suggest that SFAC must take on all the multiple challenges of developing small-scale agri-business, but it at a minimum must understand what those challenges are and how it can best fit into the larger picture and make a substantive contribution.

The analysis has pointed towards the need for improvements and /or changes in a number of areas that will make SFAC more relevant in the years to come. These are detailed in the report above and the essential ones are once again summarized here:

broadening the source of finance beyond commercial banks to include a wide array of other sources of finance that often have a greater interest in providing needed

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non-financial services as well; reducing the project cost threshold to Rs 5-10 lakhs to promote greater accessibility

for potential stakeholders farther down the value chain; strengthening the use and scope of the Project Development Facility and to

broaden the project feasibility analysis to a wider value chain assessment paying close attention to end markets and a client’s ability to compete in them

there is a widespread call from all sectors for greater attention to organizing farmers into more larger, commercial groups that will provide them a greater presence in the value chain and in the marketplace;

there is a critical need to provide business development services of both a financial and non-financial nature to the VCA recipients

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VIII. LESSONS LEARNED

A thematic assessment can give valuable inputs to a strategy review but cannot in itself provide a complete basis for decisions concerning possible strategic changes and possibly important organizational and financial implications. However, the direct and systematic interactions with entrepreneurs and farmers, bankers and others have generated a wealth of information from which useful insights are gained and valid conclusions and recommendations can be made.

Indian entrepreneurs continue to be as tenacious as ever in the Darwinian world in which they operate and the SFAC participants are no exception. While tenacity will continue to be an important and necessary characteristic of small entrepreneurs, it alone will not be sufficient to guarantee continued success in an ever globalizing economy. Additional support that compliments and builds on this tenacity will be needed to assist Indian agri-businesses to grow and prosper. SFAC with its substantial experience can play a vital role in shaping the nature of this needed support.

Access to capital continues to be a major constraint facing agri-businesses. The sources of capital need to be widened beyond the limited role played by the traditional financial sector. There are several institutions that are prepared to provide not only capital but also other non-financial services to small agri-business. Among these are BASIX, Friends of Women’s World Banking, Rabobank, along with several private sector foundations that have a strong interest and commitment to small entrepreneurs. Even if all capital access problems are solved, this alone will not be sufficient to assure the viability and sustainability of small agri-business. There is a gap in terms of the provision/facilitation of both continued financial and non-financial services that needs to be addressed. The manner in which this gap is filled will be significant to the continued stability and growth of agri-business after SFAC assistance has ended.

Farmer organization is seen as the critical need of the moment. Virtually everyone in the agriculture and agri-business sectors agrees that facilitating the organization of farmers can be a winning proposition for all concerned. Again SFAC with its extensive experience

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in working with small-scale entrepreneurs is well placed to champion the cause of organizing farmer producer organizations that can play a vital role in the taking Indian agriculture forward as an important sector of the nation’s economy. There is a vital role for a public sector Venture Capital organization. It is highly unlikely that any of the businesses serviced would have meet the criteria and requirements of traditional venture capital companies nor of the newer breed of “socially oriented” venture capital firms. SFAC needs to continue and expand its own brand of venture capital. Finally there is an urgent need for new business models that recognize farmers as more than simple suppliers of raw materials, that build transparency and trust in business relationships, that promote the ability of farmers to share in significant added value to what are often low-skill, low value products. SFAC can play a pivotal role in bringing together on an informal basis a wide array of interested parties to share experiences and create a dialogue on how to move forward in the creation of new business models and the provision and facilitation of needed financial and non-financial services that are need to allow small agri-business to compete in the ever evolving global economy.