F ACTORS OF SUCCESS AND FAILURE - OF LARGE AGRO ENTERPRISES ( , ) PRODUCTION PROCESSING AND MARKETING G A PILOT STUDY IN HANA R ESULTS OF CASE STUDIES IN THE , , S - FRUIT MAIZE AND PALM OIL UB SECTORS MICHAEL BRÜNTRUP, TONY SWETMAN, MIRJA MICHALSCHECK, FELIX ASANTE i Table of content 1 Rationale 1 2 Methodology 5 2.1 A simplified model of systemic competitiveness for agro-enterprises 6 2.2 A (limited) consolidated list of large agro-enterprises in Ghana 8 2.3 Selection of case study enterprises 11 2.4 Methodology of case study analysis 12 2.5 Strengths and limitations of the pilot study 13 3 Findings 15 3.1 Large scale agro-entrepreneurs in Ghana 15 3.2 Brief overview of selected sub-sectors 17 3.3 Factors of success and failure 18 3.3.1 Entrepreneur 18 3.3.2 Enterprise 20 3.3.3 Local Environment 26 3.3.4 National Environment 34 3.3.5 International Environment 41 3.3.6 A partial comparative summary 45 4 Conclusions and outlook 46 4.1 Factors of success and failure 46 4.2 Impacts of large agro-investors 47 4.3 External support for large agro-investors 49 4.4 Role of large agro-processors for development and policy (processes) 50 4.5 Outlook on methodology / information gathering 51 ii List of Tables Table 1: Data sets used to compile the list of large agro-enterprises .................................... 9 Table 2: Interviewed Enterprises ......................................................................................... 11 Table 3: Number of large agro-enterprises of the consolidated list, and crops grown ........ 16 Table 4: Problem areas ranked by a selection of entrepreneurs .......................................... 45 List of Figures Figure 1 Schematic design of geographic and thematic clusters of factors affecting enterprise success and failure .................................................................................. 8 List of Boxes Box 1: Client assessment – difficulties of sales on credit ................................................. 19 Box 2: Lack of entrepreneurial foresight and buffer capacity in the start-up phase ......... 19 Box 3: The need for enterprise-independent access to credit............................................ 20 Box 4: Factors for wrong start-up size .............................................................................. 21 Box 5: Supplementary energy from waste through biogas ............................................... 23 Box 6: Particular industry’s staff obstacles and attempts of overcoming them ................ 26 Box 7: The availability and costs of facilities as locational factors for large agro- processors .............................................................................................................. 26 Box 8: Special staff problems in remote areas .................................................................. 27 Box 9: Relationship between processor and a supplier cooperative in the pineapple industry .................................................................................................................. 28 Box 10: Broken contracts through side-selling ................................................................... 29 Box 11: PPP in grain production ......................................................................................... 30 Box 12: CSR according to websites of large agro-processors ............................................ 33 Box 13: Public Private Partnership (PPP) to facilitate the start-up phase ........................... 40 Box 14: Lack of adaptive capacity of the national innovation system – the case of pineapple exports ................................................................................................... 41 iii List of Abbreviations AGI Association of Ghana Industries AGOA Africa Growth and Opportunity Act CSIR Council for Scientific and Industrial Research CSR Corporate Social Responsibility ECOWAS Economic Community of West African States EDAIF Export Development and Agricultural Investment Fund EIA Environmental Impact Assessment EPA Economic Partnership Agreement ERP Economic Recovery Programme FPMAG Fruit Processors and Marketers Association of Ghana GEPC Ghana Export Promotion Council GHG Green House Gases GIPC Ghana Investment Promotion Centre GIZ Gesellschaft für Internationale Zusammenarbeit (German Agency for International Cooperation) GOPDC Ghana Oil Palm Development Company ISSER Institute of Statistical, Social and Economic Research LSLA Large Scale Land Acquisition MOAP Market Oriented Agriculture Programme MOFA Ministry for Food and Agriculture PPP Public Private Partnership SSA Sub-Saharan Africa SSP Structural Adjustment Programme WTO World Trade Organisation iv 1 Rationale In recent years there has been an increasing interest in large agro-enterprises in the agricultural sector of developing countries. The drivers of this trend are manifold, the most important being: high prices for agricultural products and the widespread expectation that they will remain so because natural resources are getting scarcer while global consumption is still rising; globalisation of agricultural markets and trade liberalisation which opens up new trade avenues for international players; increasing standards and regulations including traceability from field to fork for ever more sensitive consumers in rich countries, favouring larger players in food value chains; changing consumer preferences in developing countries through urbanisation and income growth leading to “supermarketisation” of food markets as well as quality and food safety concerns which follow rich countries; technology and management developments at the farm and processing level which create economies of scale in sectors which previously were rather favouring smaller family farms; changes in financial markets which favour real estate and hardware investments; fears for national food security which bring governments on board to foster self- sufficiency and supplies from abroad under (partially) own control, often by supporting agro-business; concerns of large agro-businesses for their long-term raw material supply in times of high prices and new competitors; new business opportunities through government interventions in energy and carbon markets to produce bio-energy and carbon sinks with advantages of scale. Most of these drivers have quite robust fundamentals, thus the push of large agro-business is likely to continue (Jaffee et al. 2003, DFID 2004, Louw et al. 2008, UNIDO 2009, OECD / FAO 2012, FAO 2012, Heumesser / Schmid 2012). The increased entrance of large players into the agricultural sector is not only happening in advanced and emerging countries with relatively well functioning markets, governance and rule of the law, but also in poor countries where these conditions are not given. Sub-Saharan Africa (SSA) is particularly concerned because it has the largest underutilised (and often cheap) agricultural resources (supply argument) and some of the fastest growing economies and populations in the world (demand argument). In addition, SSA agriculture is increasingly well connected to the world market. 1 SSA agriculture and agri-value chains are generally characterised by smallholder farming, small and informal processing and trade, low capital and technology use, low productivity and market as well as governance failures. Exceptions are some classical export (colonial) sub- sectors where large structures have persisted (Jaffee et al. 2003). The massive entry of new Large Scale Land Acquisitions (LSLAs) and large agro-processors poses serious challenges, as the worldwide debate on “land grabbing” illustrates (Deininger / Byerlee 2011, De Schutter 2011, FAO 2012, GRAIN 2012, Anseeuw et al. 2012, ILC 2013). How large and small scale agriculture and agro-processing compete or harmonise with each other is far from evident. There is a long history of discussion about optimal farm size, and whether small scale farmers are more or less competitive than larger ones (Schulz 1964, Collier / Dercon 2009, Hazell et al 2010). In contrast, it is more evident that in food processing and marketing economies of scale play a larger role which explains the concentration of large players in these segments of the food value chains (Louw et al. 2008, UNIDO 2009, UNCTAD 2009, Yumkella et al. 2011). Yet, there are different degrees and patterns of concentration worldwide, and in developing countries the majority of the food chains are still dominated by small players. The question of “best” or “appropriate” scale entire value chains (production, processing and marketing) are even more complex, since they transcend comparative advantages of individual entities and are co-determined by value chain linkages. At times, scale in production may be linked to scale in processing, but this is not necessarily the case. In fact, it depends on products (perishability, bulkiness, special and intrinsic characteristics), processes (economies of scale and scope, by-product integration, fixed costs particularly of processors) and markets (bulk and size, formalisation, export orientation, fixed costs, minimum size, reputational risk of seller) whether a closer integration is more prone to be successful than an open market regime with anonymous exchange of goods. Asymmetries of power, of information and of business alternatives also play a role about what kind of business model (between isolated players and integration) will evolve. Some hopes for development are linked to the presence of the new large actors (Brüntrup 2010, summarising findings in the literature cited above): They can bring in dearly needed capital which neither smallholders and informal enterprises have nor banks and governments are able and willing to inject into informal and small scale businesses; They have access to more lucrative formalised markets, both in-country and abroad, which are hardly accessible for smallholders, processors and traders due to high requirements in terms of standards and regulations and costs to fulfill and to certify them; In addition, they are often the only ones able to supply the necessary quantities reliably and in time needed by large retailers and other actors further down the value chain; Agro-processing often has more important economies of scale than agriculture; thus, as spear-heads in their market segments they can show what is possible and what is not, and others can potentially learn from their experiences; They are hoped to provide stable, well-paid jobs in the formal sector for both unskilled and skilled labour; 2 They can constitute important demanders of local inputs and services, animating the rural downstream industries; If they work with smallholders as outgrowers, hopes are typically strong for spill-overs in the form of credit, inputs, technical advice, experience, managerial know-how, services and others, and to provide a stable market and attractive prices for farmer products; It is often assumed that a part of the infrastructure that they create for their own purposes is useful for others, too; They are usually expected to pay for social infrastructure and services in the rural areas in the framework of Corporate Social Responsibility (CSR) programmes or as part of the compensation to rural populations which lose out due to the investments, e.g. through loss of land, access to natural resources, contamination or other negative side-effects; Finally, some see them as powerful political voices of the sub-sectors they are operating in, defending the interest of smaller, often unorganised competitors. On the other hand, negative consequences of large players are abundant and visible worldwide in the literature on land grabs (see above). The emergence of large business companies in agriculture and in related backward (credit and finance, seeds, inputs, machinery, construction, advice) and forward (storage, processing, trade) linked sectors creates structural disruptions in agricultural markets hitherto dominated by informal, small to medium size actors (farmers, processors, traders and their workers). It may have massive negative implications for local and national poverty and food security and can create strong social and political tensions. Typical concerns are (De Schutter 2010, Brüntrup 2012 in addition to the literature cited above): Smallholders and small processors are squeezed out and rural livelihoods are weakened or destroyed (“land grabbing”); Concentration of market power and suppression of informal trade reduces informal sectors which are the backbone of poor people’s livelihoods; Large landholdings destroy the environment by creating large monocultures, applying agro-chemicals more easily and extensively than smallholders; Creation of structural change into non-desired pathways (high-input agriculture and global value chains); Creation or increase of conflicts in rural areas. While the list seems to be shorter, the critics of large scale farming and agro-industry are much stronger and louder than their supporters. In fact, the evidence of many serious negative consequences of such investments has made it into the top news of all media worldwide. An issue which is yet much less examined and regarded is the fact that many of the large agro-investments including LSLAs do not work properly. Policy and research attention has been largely oriented towards the process of land acquisition per se. The fact has been neglected that failure of agro-investments also creates important problems on their own. They throw local populations, which had to abandon or change old livelihoods and often rely on 3 jobs, income and service upon the investor, into new problems. After a collapse, they have to find a new basis for livelihoods, while often their old resources (land, water, livestock, nature products) are no longer or not yet available. If local structures such as alternative credit, input and service-supply have been neglected or suppressed, they will take time to re-emerge (if at all). Social investments, often linked to (or at least promised by) large investors in rural areas, do not materialise or cannot be continued. The uncertainty about the future of large investments creates uncertainty in many consecutive decisions and whole regions. Social unrest can spread, authorities who had defended or supported the investment will lose reputation and power, and government can be forced to pay for attenuating the impacts. Finally, the whole process of agro-industrialization will be damaged and future investors, governments, banks and local populations discouraged to accept such risks, to the joy of its critics but, in addition to the described damage, with the risk that necessary structural changes will not be financed anymore and African agriculture increasingly disconnected from ever changing agricultural markets. The sheer size and dynamic of the emergence of the new large private actors in SSA agricultural markets and their potential impacts on food security, poverty, conflicts and political instability merits thorough investigation, and most likely regulation and supervision. It is evident that their anchorage in the rural economies and in formal markets at once makes them distinct from many other investments, that stakes are very high in terms of potential negative impacts, and that therefore this class of investments requires much more care than investments in most other sectors. The potentially important impact of both successful establishment and of failure makes it important to understand what determines the success and/or failure of large agro-enterprises. One would like to be able to eliminate or discourage those which are unlikely to succeed and to select those who are viable and have a realistic capacity to induce pro-poor and sustainable agricultural growth. It would also be important to understand the support that they need, to avoid risks of failure and to prepare for managing failures. Understanding factors of success and failure will help to design appropriate regulatory and support instruments. The aim of the study is to contribute to the knowledge about the factors leading to the likelihood of success and/or failure of large-scale agro-investments and derive recommendations for policy makers, donors, local populations and other stakeholders on how this knowledge can be used to better handle large-scale agro-investments. The guiding question was: What are the factors of success and failure (or challenges) of large scale agro- enterprises in Ghana? In particular, potential investors and their supporting organizations are one target group of the study. The results should help them to assess whether they have not only included the factors for technical feasibility but also sufficiently taken into account the complex, complicated and difficult factors of the particular social, policy and institutional environment prevailing in the agricultural sectors and rural areas in SSA countries. The Ghana Study is intended as a pilot. It was commissioned by the Deutsche Gesellschaft für 4 Internationale Zusammenarbeit (GIZ), sector programme Agricultural Policy and Food Security, and supported by its Ghana Market Oriented Agriculture Programme (MOAP). It shall serve to elaborate a more generic methodology to expand this exercise to more cases, other sub-sectors and other countries. Therefore, lessons learned from the test case have to be carefully collected, reflected and used to overhaul the initial methodology. 2 Methodology The starting point for the elaboration of the methodology was the development of a holistic model of the factors contributing to the competitiveness of an agro-enterprise. The reasons for failure and success can be manifold, internal to the investor (motivation, knowledge and know-how, financial capacity, ability to act in a difficult environment, patience, …), in relation to the actors on which he/she depends (contract farmers, workers, local and national authorities, suppliers, advisors, political patrons, …) and to the larger environment (prices and their erratic movements, infrastructure, trade policies, labour regulations, international treaties and movements including anti-LSLAs). A comprehensive model was searched for that would be able to accommodate and classify these factors in any easily readable way easy to translate into policy recommendation domains (see Chapter 2.1). Next, an attempt was made to establish a consolidated list of large agro-investments based on available information in the country. Various lists were collected, compared and collated, with additional information gathered through internet research and key informant interviews (see Chapter 2.2). Originally, one option had been to select sub-sectors and case studies guided by that consolidated list through a more or less stratified random sampling (stratification of sectors, then random sampling of failed and successful enterprises). However, due to data and time constraints and considering the experience of other researchers that it is difficult to get access to open dialogue with such actors (at least requiring much longer time), it was decided to select primarily according to personal and professional direct linkages to agro-entrepreneurs of researchers and supporting GIZ staff from the MOAP. Three sub-sectors were selected for better comparison of individual enterprises: fruits (pineapples, mangos, etc.), maize, and palm oil (see Chapter 2.3). In-depth semi-structured interviews were then conducted with about one dozen entrepreneurs. It served both to understand the particularities of the enterprise and its place in the value chain, and to collect the entrepreneurs’ opinions on the challenges of the enterprise and its environment in general. More interviews for triangulation and a further understanding of the business environment were carried out with persons or groups involved in agro-processing. In addition, a questionnaire was developed for a quantitative follow-up, ranking external factors that affect agri-business (see Chapter 2.4). The analysis and compilation of findings was done according to salient issues, structured by the model (Chapter 3). Since it is a pilot study, experiences with the preliminary instruments and results have been used to further improve 5 the methodology and its instruments. The attached interview guideline and questionnaire are revised editions of the various test versions. The work was carried out between January and March 2013 in Ghana in collaboration with staff from GIZ’s MOAP and the Institute of Statistical, Social and Economic Research (ISSER) - University of Ghana. Some further details of the methodology are provided in the following Sub-Chapters. 2.1 A simplified model of systemic competitiveness for agro-enterprises A stylised version of the model of systemic competitiveness underlying this study is shown in Figure 1. It was chosen to bring together two perspectives of the enterprise and the sector development which are often separated but which were deemed incomplete on their own when looking at the factors of success and failure of large agro-enterprises: The internal perspective, which looks at the individual capabilities and capacities of businesses, their skills, financial means, market networks and other characteristics that an individual enterprise needs to survive and thrive. Support measures derived from this perspective are typically enterprise capacity-building, training, and targeted financial, technical, marketing and managerial support. The external perspective, which looks at factors beyond the reach of the individual firm but which influence some or all firms, thereby their individual competitiveness and finally the competitiveness of a sector and of the economy as a whole. This perspective is for instance represented in doing-business-surveys which provide systematic indicators of important dimensions of the regulatory environment as they apply to local firms. The annual World Bank doing-business-survey, for instance, provides quantitative measures of regulations for starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency (World Bank 2013). Also, broader surveys of entrepreneurs’ assessment of their experiences with the (regulatory and other types of) environmental factors such as the Global Competitiveness Index (World Economic Forum 2012) are part of this group of assessments. Measures derived from this perspective usually aim at improving the macroeconomic environment of businesses including general facilities for all enterprises. In addition, some other considerations were taken into account when designing the model and the methodology: One is to distinguish between entrepreneur and enterprise to highlight that in larger economic entities these two may be far from synonymous or closely related, in contrast to the typical cases of smaller entities such as small and medium enterprises or rural livelihoods (although these latter ones are also extremely complex consumption and production units, but under personal union of a person or household). In fact, enterprise and entrepreneur spheres in large enterprises may be only marginally overlapping. How exactly both interrelate, cannot be generalised. For instance, an entrepreneur may own one 6