Transcript TIPS development dialogue_25 July 2008

TIPS DEVELOPMENT DIALOGUE
Breaking The Cycle Of 2nd Economy
Poverty: Strategic Options To Link
Marginalized, Small Producers To 1st
Economy Value Chains
“Work in progress Update”
Sandy Lowitt
25 July 2008
Project Context
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15 Year Review of Second Economy
Key findings:
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Delivery of social services has been significant and
at scale
Delivery of market based employment
opportunities has been modest to poor
Reasons for poor performance of market
based employment programmes:
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Under funding/low appetite for risk
Lack of advocacy/voice
Problems with market interfaces
Project level focus
Downward raiding
The market interface problem
• Access to dynamic markets
•Continued thin markets
•Continued low incomes
•Continued low returns
•Limited opportunities for income
And employment growth
•Continued instability of income
With high disposable income
•Ability to generate higher incomes
•Ability to generate increased returns
•Improved ability to generate income
And employment
•Ability to increase security of income
S
ER
UC
OD
PR ON
OF ED
TH US S
PA OC ET
TH F K
W EAS AR
RO AR AL M
T G AL OC
EN IN L
RR ARG TO
CU M NG
IN LLI
SE
WHAT NEEDS TO BE DONE
TO CHANGE THIS
TRAJECTORY
Producer base
In
Marginal areas
S O
ER G T
C
U IN
OD ELL
R
S
P
OF D ON
TH E
P A CUS
H O
WT S F
O
A
GR ARE TS.
L
E
TIA NAL ARK
N
I
TE RG L M
PO MA NA
IN TER
EX
*External mkt = any 1st economy
Mkt eg. Local hotel, urban retailer
Provincial processor, national
Wholesaler, export mkt
What we are trying to accomplish
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Develop a framework and tool kit to analyse :
markets, market interfaces and the distribution of
income
Develop a strategy which will: support systemic
change in the interactions between the 1st and 2nd
economies so that marginalized small producers
can be lifted out of poverty
Success will constitute: sustainable, scalable
linkages that result in returns to 2nd economy
participants that are sufficient to lift them out of
poverty. i.e. not just increased transaction but
increased transactions where the distribution of
income supports poverty alleviation
Theoretical Paradigm
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Chosen to use value chain analysis
because :
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It emphasizes issues of governance and power
which create barriers to entry ( and
opportunities) for 2nd economy producers
It directly addresses how and why economic
and other rents are distributed across a chain
Upgrading is an intrinsic part of its theory and
hence capacity issues of 2nd economy
producers can be dealt with endogenously
It is a demand driven approach which supports
pull rather than push interventions and
strategies
Theory versus Reality: Our approach to
bridge the divide
FRAMEWORK
3 Foundation Chpts
1. Value chains
2. Product selection
3. Linkage options
REAL ON THE
GROUND
ISSUES
STRATEGY
1. What to do
2. How to do it
Real on the Ground Issues (VC Chpt)
ISSUE
IMPLICATION FOR OUR STRATEGY
DEMAND: increased importance of
large buyers; increasing
concentration along all points in
the value chain; increased private
and public standards
Barriers to entry getting higher
Will be harder to access chains
Unlikely for 2nd economy producers
to service final demand market
(look further down the chain)
INCOME DISTRIBUTION:
returns shifting away from
producers towards buyers
Will need to select products very
carefully (no traditional
commodities)
Need to select chains/ points of
entry with serious upgrading
potential
SUPPLY: decrease in the no. of
handover points; increased
codification and certification; lead
firms wish to deal with large
competent suppliers
Need to deal with aggregation of
2nd economy output & upgrading
activities at aggregation
Need to look at getting lead firms
to change their buying preferences
Real on the Ground Issues (Product
Chapter)
ISSUES
IMPLICATIONS FOR STRATGEY
Immiserising growth:
traditional commodity crops
face decreasing terms of trade
Need to decommoditise
commodities, or
Need to select non traditional,
niche products
The lower the critical success
factor bar is the lower the income
share distributed to producers
Need to find tipping point btw CSF
and poverty alleviating Y
distribution
Need to ensure upgrading is built
into the linkage so higher CSF’s
can be accommodated
Product segmentation is key
Need to focus on niche markets.
Need to consider: credence goods,
novel new products, branding,
organics , trade marking etc
Need to include market
maturation/saturation strategy
Real on the Ground Issues (Product
Chapter cont)
ISSUES
Second economy producers do not
have the knowledge, skills,
expertise to identify and
investigate these niches
IMPLICATIONS FOR STRATGEY
Will need to set up system for
product selection and development
Real on the Ground Issues (Linkages
Chapter)
ISSUES
IMPLICATIONS FOR STRATEGY
Trust and Relationship
Building: continuous S a
problem, consignment rejection
and price changes are problems,
extra contractual marketing a
problem
One to one; face to face
relationships likely to yield better
results than long distance
contracting (local traders, lead
farmers, processors)
Group Formation: fail if vehicle
to implement policy, need strong
internal cohesion, less likely to
succeed if low assets, low educ,
weak leadership, impinge on
cultural hierach. Pty Ltd preferable
to co-op’s
Large, broad marketing co-op’s
not the way to go
Co-op’s based on existing
collectives can possibly work
Look at alternative structuring of
horizontal integration (SAPPI,
TSC)
Real on the Ground Issues (Linkages
Chapter cont…)
ISSUES
IMPLICATIONS FOR STRATEGY
Financing: provision of subsidies
and direct services to 2nd econ
producers lead to dependence
unsustainable
Look for ways to finance
facilitation of desired activity not
activity itself.
Scalability: what you need to get
right to externally catalyze a
linkage program is massive. It is
not scalable – non replicability, no
economies of scale, masses of
resources and skills needed
To get systemic change and
massification need to
ENDOGENIZE catalytic
programmes – need to change
BUYER BEHAVIOUR
How to approach developing a strategy?
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Our framework informed our list of ‘on the ground real
issues’
The aim of the strategy is to find ways to deal with
these issues ( there are lots of them and they are
complicated!!)
Our big point of departure in the strategy is that we
feel that government and its agencies should directly
deal with as few of these issues as possible and get
the private sector to deal with them instead.
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Private
Private
Private
Private
has the expertise (mkt’s, methods)
sector is better positioned to deliver on ground
sector has experience and skills
sector can provide scalability
Government should focus on facilitating this private
sector activity.
First Prize
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First Prize would be to get the private sector to
change their buying behaviour – i.e. to want to
source products from small, marginalized 2nd
economy producers thereby increasing demand
and competition for their output.
Could try to force them to change behaviour
(moral suasion, legislation). Not likely to yield
good results
Better option is to make them WANT to change
their behaviour by incentivizing them to do so and
assisting them to make the shift.
Strategy 1: shifting private sector
buying behaviour
2
1
3
Implementing
Complementary
Strategies ( see
Next slide)
Provide strong enough
financial incentive to
induce required behaviour
change.
•BEE scorecard and gov tender
preference system equivalent.
•Options:
•0 rate VAT from 2nd econ prod
•Tax rebate on profits
•Other ?
Gov to provide
services to private
sector directly in
areas where PS
has NO competency
•Setting up ‘co-op’s’/equi
•Facilitating skills, up
grades of ‘co-op’ memb
•Dealing with tribal
issues; hierch issues
•Options
•Specialized limited
life span SPV, small,
highly skilled
Strategy 2 and 3: Complementary
Programmes
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Programmes which stand on their own merit, but
which will aid private sector in increasing demand
for 2nd economy outputs
Lead farmer programme: link 2nd economy
farmers to commercial farmers – commercial
farmer remains supplier to lead firms but includes
2nd economy producers output with their own.
Gov to partner with commercial farmers to set up
the programme.
Local Trader Programme: Develop more and
better local traders. Gov to set up programme to
support development of middlemen (quantity and
quality). Can create easy first level aggregation
for private sector by improving conduit.
Strategy 4: New Product Development
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Stand alone strategy, but may also be service to private
sector i.e. Strategy 1 (3)
Government to set up mechanism using existing
resources ( universities, agri research centers, CSIR,
private sector consultants) to research and develop ‘new’
products and how to bring them to market. E.g. Marula
story(new), Kiwi fruit (trade marked), coffee (credence,
branded)
Must offer proactive and reactive service, programme
must provide funding ( possibly on cost recovery basis);
access to skills ( slate tender)
Not sure on how to feed outputs of programme into the
market place i.e. how to implement ( needs additional
work)
Strategy 5: Improve government
procurement from 2nd economy
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Cannot ask or expect private sector to rise to this
challenge if government doesn’t do the same
Preferential procurement not happening on the
ground.
Several options ( still undeveloped needs work)
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Local trader programme ( strategy 3) should help or
design it to definitely help
Marketing co-op’s specifically designed to service
hospitals, schools, SANDF bases
Specific programme/intervention for companies with
government catering contracts (stick or carrot
options available)
Municipal support programmes to develop above
options
A sixth strategy???
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We are receiving some pressure to
include a strategy to establish marketing
co-op’s.
Literature and case studies show them to
be highly problematic
We believe the private sector will find a
way to aggregate that is more efficient
than co-op’s and that the development of
local traders and the lead farmer
programme will also help
Not sure about this – views/opinions??
Specific area where help/advice is
required
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Literature/people who can assist in developing product
selection information in relation to the merits of certain types
of crops for 2nd economy producers e.g.. High skills in
pastoral products but limited by land constraints. Field crops
and industrial crops a no no econs of scale. Horticultural
crops good but tree based crops versus annually sown crops?
What are the necessary characteristics? Where should the
focus be?
Literature/people who can help in unpacking the idea of a
demand side measure and point towards examples where it
has and hasn’t worked. Seems an obvious option but cant
find anything on it – am I missing something big??