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 Lowitt25 July 2008

Project Context

15 Year Review of Second Economy Key findings:

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: Under funding/low appetite for risk Lack of advocacy/voice Problems with market interfaces Project level focus Downward raiding

The market interface problem•Continued thin markets•Continued low incomes•Continued low returns•Limited opportunities for incomeAnd employment growth•Continued instability of income

• Access to dynamic marketsWith high disposable income•Ability to generate higher incomes•Ability to generate increased returns•Improved ability to generate incomeAnd employment•Ability to increase security of income

Producer baseIn

Marginal areas

WHAT NEEDS TO BE DONE

TO CHANGE THISTRAJECTORY

*External mkt = any 1st economyMkt eg. Local hotel, urban retailerProvincial processor, national Wholesaler, export mkt

What we are trying to accomplish

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

Chosen to use value chain analysis because : 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

FRAMEWORK3 Foundation Chpts1. Value chains2. Product selection3. Linkage options

STRATEGY1. What to do2. How to do it

REAL ON THEGROUND ISSUES

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 higherWill be harder to access chainsUnlikely 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 aggregationNeed 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, orNeed 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 distributionNeed 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 etcNeed to include market maturation/saturation strategy

Real on the Ground Issues (Product Chapter cont)

ISSUES IMPLICATIONS FOR STRATGEY

Second economy producers do not have the knowledge, skills, expertise to identify and investigate these niches

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 goCo-op’s based on existing collectives can possibly workLook 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?

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. Private has the expertise (mkt’s, methods) Private sector is better positioned to deliver on ground Private sector has experience and skills Private sector can provide scalability

Government should focus on facilitating this private sector activity.

First Prize

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

Provide strong enoughfinancial incentive to induce required behaviourchange.•BEE scorecard and gov tender preference system equivalent.

•Options:•0 rate VAT from 2nd econ prod•Tax rebate on profits•Other ?

Gov to provideservices to private sector directly inareas where PShas NO competency•Setting up ‘co-op’s’/equi•Facilitating skills, upgrades of ‘co-op’ memb•Dealing with tribalissues; hierch issues•Options

•Specialized limitedlife span SPV, small,highly skilled

ImplementingComplementary Strategies ( seeNext slide)

2

1 3

Strategy 2 and 3: Complementary Programmes

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

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

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) 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???

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

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??