Previous - Next
M. Cutler
Rural Investment Overseas Limited
Abstract
Investment criteria to ensure a successful private sector post-harvest enterprise
The major factors affecting private sector enterprises are discussed, with examples of successful projects from Ghana, Tanzania and Thailand.
Post-harvest technologies such as drying, storage and processing require high levels of capital and so great care must be taken in the planning and management of projects. This presents the greatest risk to a new business.
The promoter is the key factor in any private enterprise.
Résumé
Critères d'investissement pour assurer une entreprise réussie dans le secteur privé post-récolte
Les principaux facteurs qui affectent les entreprises du secteur privé vent examines, avec des exemples de projets couronnés de succès au Ghana, en Tanzanie et en Thaïlande.
Les technologies post-récolte comme le séchage, le stockage et le traitement exigent d'importants capitaux et il s'agit done de veiller a la planification et a la gestion du projet. C'est la que reside le plus grand risque d'une nouvelie entreprise.
Le facteur clé de toute entreprise privée est l'element qui en prend l'initiative.
INTRODUCTION
Over the past five years more interest has been taken in the development of the private sector than ever before. This is especially true in the emerging, developing countries. There has been a general realization that this is where the future prosperity of the countries will come from and that money spent on, and support given to this area will provide long term, sustainable benefits. However, the private sector cannot flourish without considerable support from financial organizations and technical institutions such as yourselves. Neither can it survive and grow unless the 'public' sector provides the stability (from government), and general infrastructure, such as roads and communications, within which the private sector can operate.
My own background has included work concerning the introduction of grain post-harvest technology to the private sector, largely in developing countries, and more recently I have been involved with the running of enterprises handling perishable horticultural crops, in Asia and East and West Africa. The company I work for, Rural Investment Overseas (RIO), works almost exclusively with the private sector and undertakes feasibility studies at the request of a promoter or international development institutions; assists in the raising of the necessary finance; and, if appropriate, can be involved in the management of the enterprise. We therefore have practical experience in the development of the private sector in the areas outlined.
For this presentation I would therefore like to outline the various factors which we look for when we are undertaking a study, or other involvement, in a private sector enterprise. I shall also relate these factors to post-harvest and similar projects that we have been involved in and how we believe the work being carried out by international institutions, such as yourselves, can inter-react with and assist these emerging enterprises.
When we talk about post-harvest enterprises we are looking at a very wide range of products, from instruments and expertise supplied by pest control companies through to large grain stores and drying/processing plants. Many agricultural enterprises, for example, horticultural producers, also have a large post-harvest element in their business. Therefore, my comments have to be very general, but can also be applied to a wide range of enterprises.
There are many factors which have to be considered when looking at, and running, a new or expanding enterprise, but the major ones that I would like to concentrate on are:
One of the examples of a project which I shall use to demonstrate the importance of some of these factors is Camsi Farms in Ghana. This is a business owned by a local company which grows, packs and exports fresh pineapples and mangoes. In 1989 RlO was approached by the Africa Project Development Facility (APDF) who commissioned RlO to undertake a feasibility study to ascertain Camsi's future viability and funding requirements. We then worked with institutions, including the Commonwealth Development Corporation (CDC), to raise the necessary equity and loans, and finally entered into a management agreement whereby we provide technical assistance and market co-ordination (through our associate Farm Services Company-FSC).
FSC has had a full time expatriate manager on the farm for three years and he has been responsible for the establishment of the growing programme, infrastructural development and training. We also bring in specialist horticulturalists and post-harvest technologists when required. Day-to-day marketing is carried out directly between the farm and the customers but, from the United Kingdom (UK), we are able to assist in identifying customers, following up shipments and helping to resolve any problems that arise.
I would now like to expand further on the issues highlighted earlier whilst providing examples and anecdotes from our experiences in developing Camsi Farms and other private sector projects.
PROJECT PLANNING AND INVESTMENT
The thorough planning of the project, the investigation of all the factors which concern it and the identification of those factors which can make or break it, are essential to the enterprise's future viability. Too many projects start off with unrealistic resources and goals and therefore fail. It is essential that a comprehensive study be carried out and a realistic bankable document produced. Contrary to popular belief, such a document is not designed to prop up uneven desk legs in an office, but is produced to show that the project is viable and will therefore attract the necessary funding to make it a reality.
The main purpose of the study is to produce a set of financial projections, but the assumptions on which these are based can only be made by efficient research and realistic analysis.
Gauging the realities of the market is particularly difficult, but of extreme importance. Statistics can be used to determine trends, but can prove misleading. It is therefore important to talk to as wide a cross-section of people representing the local and export markets as possible in order to confirm the project promoter's figures and market potential.
The level of investment required for the project and its source are always contentious issues. However, in simple terms, the lower the investment necessary (particularly capital investment) to meet the objectives, and the more the promoter can contribute, the better. A word of caution, however, is that the level of investment, especially in capital equipment, must be sufficient to allow the projections in the business plan to be met. You cannot take short cuts at this early stage, especially when you are having to satisfy overseas buyers and repay foreign exchange loans.
In our experience, many promoters begin with unrealistic expectations of the size of the project and the level of borrowing, compared with their intended equity investment and realistic incomes. Thankfully the proportion of promoters requiring 100% financing now appears to be decreasing. However, it is still necessary to stress the need for realistic debt/ equity ratios in order to maintain interest payments at a reasonable level and provide other investors with the confidence that the promoter is totally committed to the business.
With post-harvest projects involving drying equipment, grain silos, and so on, capital investment can be very high. In addition to the working capital requirements (including interest payments), storing the crop for some time can result in high initial borrowing requirements. It is hoped that projected earnings will outweigh these costs, but in the first few years the project may be at risk if targets and projections are not met. It is for this reason that it is often advisable to phase the project so that the risks are spread in these early, critical, years.
In Tanzania we are presently involved in the support of a cashew nut processing project. A feasibility study has been undertaken and the project appears to be viable but, on paper, it would be more profitable if we were to put in a larger processing plant. However, this would also increase the working capital requirement considerably as the cashew nuts have to bought in over two or three months and stored for processing for a further eight months. It has therefore been decided to introduce the smaller processing facility as stage 1 of the project and add an additional line when the project has proved in practice that it is viable.
The project should also avail itself of any assistance available from the country's government. In particular, this means tax holidays, reduction or waiving of import and sales taxes, export retention schemes and other incentives. After all, the project will almost certainly be earning increased foreign exchange for the country, giving additional employment, and providing examples for other businesses to follow.
A final word: it will always take longer to implement the project than expected. On average we find that projects take about two years from initiation to implementation; this can prove a large financial drain on promoters and those assisting the project at this stage.
PROMOTER
The promoter is the most important factor in the long-term success of the project. It has long been held that if there is a strong project but a weak promoter it will be difficult for the project to succeed; however, if there is a strong promoter but a weak project, the promoter will make all the difference in ensuring success.
RIO is frequently approached by prospective entrepreneurs requesting finance and assistance, as I am sure many of you here today are. I must be frank and say that many will waste your time, a fact that is as true for the developed as well as the developing parts of the world. The first approach is often by letter and fax and it is our policy to reply with a few specific questions.
If the reply is clear, positive and fast, then it is worth progressing to the next stage, which is meeting the promoter. It is at this point that you get a real feel for the potential of the promoter and his project. To make the project succeed you will have to work very closely with him and this can only happen if you believe he can drive the project through and that you can work together. After all, going through figures over a desk is one thing, but having to work with him during the planning period, raising the project finance and during the implementation of the project, is another matter completely.
Two good examples of very different promoters are Salim Tindwa, the main instigator of the cashew nut project in Tanzania, and Khun Preecha, an upcountry maize trader with whom we have worked in Thailand.
Salim Tindwa is the director of a co-operative farmers' association, but an accountant by profession. What makes him different from the usual promoter is his understanding of the detail required to give other investors confidence, and the need for fast and frequent communication.
Khun Preecha is a typical up-country Thai maize trader but one who had the foresight to understand that a good quality product would obtain a higher price on the market. This involved the introduction of expensive and sophisticated drying equipment as well as more up-to-date management techniques. It also meant a change in the traditional relationship between the merchant and his farmer/suppliers. Khun Preecha was able to undertake these changes with the result that he now has a very successful business based on quality, as well as quantity.
Therefore, in summary, the ideal promoter must meet the following requirements.
Well, I did say this was an ideal person!
PRODUCT
It may appear strange, but correct product identification is often overlooked in the initial planning of many projects, probably from complacency and lack of market intelligence. The following factors should be considered as being most important.
Product variety
The type of product which is to be handled by the new enterprise must be analysed to show its suitability for storage, handling, and for the intended markets. In a grains post-harvest application the particular variety and type of produce will determine the type of capital equipment required, for example, for drying, cleaning, etc., and the practical storage times. This in turn will affect the working capital requirements.
Growing conditions and raw material supply
Can the produce be grown well in the area of the project? This may sound obvious, but if the project is to succeed the produce chosen must not only grow, but grow well with a yield and a potential quality which will enable the project to be viable.
This is critical for the farmer but is also important for the post-harvest enterprise dealing with the crop. Its viability will largely be dictated by the efficient utilization of equipment; if this is not possible the project will not be successful.
An example of poor attention to the supply of the raw material was a cannery built in Thailand to produce canned baby corn. Because the owners were in the fruit processing business and baby corn was grown in large quantities in the area of the factory, they assumed that raw material supply would not be a problem. However, this was not the case, and because of this lack of attention to raw material supplies and the competition, the factory closed down after one year's intermittent operation.
An additional factor in some smaller grain stores is the cleaning and storage of grain which is still owned by the grower, but stored under contract. The decision to store the individual grower's produce separately or in bulk must be agreed at the collection stage.
Quality and transport
Will the product reach the market in good condition? Fresh horticultural produce has a short shelf-life and needs to be transported quickly from farm to customer. These days it is often too expensive to send produce by air and therefore refrigerated shipping is required. Durable produce is easier to handle, but again, factors such as protection during transit from water, heat and pests will determine the final delivered quality of the produce. These factors, as well as the infrastructural requirements, must be analysed for the chosen produce.
Markets
Markets will be considered in more detail in the next section, but the question of produce type and variety has to be considered with regard to local and export markets. If the project is concentrating on export markets a considerable percentage of the crop may still need to be sold on the local market. It may therefore be that the enterprise which is storing, processing and marketing the produce is contract-growing the raw material for a specific export or local market. If this is the case, it is necessary for the surplus to be sold at a price which will not affect the viability of the produce.
MARKET AND COMPETITION
As has been explained previously it is important to ensure that the product which is handled is compatible with the market requirements.
Market intelligence
Prior to and following the implementation of the project it is essential that regular market intelligence is available. Other than through direct contact with the buyers, information is available on a regular basis from many local and international organizations. Many items such as cocoa, coffee and grains have internationally published commodity prices, and for horticultural produce, institutions such as COLEACP and the International Trade Centre (ITC) in Geneva provide weekly European price data. However, it must always be remembered that the information (apart from the futures market) is historic and does not guarantee future prices and trends. These can only be gauged through regular contact with the companies' buyers, both locally and overseas.
Local markets
As briefly outlined in Quality and transport, it has to be remembered that any project will at any one time produce and/or handle food which varies widely in quality and standard. Therefore, more than one market will almost certainly be required, or produce will be wasted. As an example, the export trade for horticultural produce is very fickle and generally only takes the highest grade. In the case of pineapples this may be between 50% and 75% of the crop, whereas with, for example, baby corn, it can be as low as 25%. Therefore it is essential to have access to other markets. For export-orientated produce this usually means local sales and processing/animal feed outlets, but can also include export to markets which take different quality levels and standards.
With an export-orientated project it is very easy to spend too much time going after the 'jam' and not giving enough time to securing the 'breed and butter' markets. By this I mean that equal emphasis must be placed on securing the local and processing/feed market as on export, as one market sector on its own is very unlikely to support the whole project.
Quality and consistency of supply
The need for high quality and the consistency of supply of all products, whether destined for local or for export markets, cannot be overemphasized. However, with export crops this is the 'holy grail', especially when applied to high-value commodities such as horticultural produce. In addition I would also add that exporters must listen to the requirements of their customers and, however strange the request, make every effort to comply. Quite simply, if you do not, there is plenty of competition waiting to take your place.
Communication
Good communication is of paramount importance if the project is to maintain a close association with its customers. Again, this is true for local sales as well as for export. However, with more expensive transport, distances and cultures, communication with export buyers is critical. This is difficult in many developing countries, but experience has shown that if there is a will, there is a way! Much too often lame excuses are given for not communicating, but after a while these wear very thin. Customers must be kept constantly up to date with export plans, data on shipments such as airway bill numbers, etc., and any problems which arise. A good principle is that if it is uncertain that the fax or telex did not get through the first time, it should be sent again. It may be expensive, but if you can't afford the cost you should not be in the business.
Don't forget, the importers like to be kept happy, otherwise they will 'forget' to communicate, which could result in delayed payments!
Packaging
Packaging is essentially used to protect the produce during transport and marketing. However, the design and presentation of the packaging may, to the market, be as important as the quality of the produce itself. This can often cause problems in developing countries as good quality packaging may not be available locally. This means that it has to be imported, thus creating greater expense for the company and requiring longer term planning to incorporate manufacture and delivery.
Durable produce such as grains may not have the same constraints, but the forms of packaging can be equally critical to the enterprise, particularly those involved in storage and drying. In developing countries there is still great variance between those involved in bulk transport and those using bags. The methods of packaging used in the supply of produce from the growers and that required by the buyers will greatly influence the equipment needed for storage, processing and transport. All these factors need to be taken into account in the project parameters.
Competition
Competition can both be a threat and an advantage to the business. Any promoter who identifies a 'niche' market has to develop it and become established before the competition can move in. However, there are greater risks in 'being the first' and history shows that it is not necessarily those who open up the market that will prove to be the most successful in the long term. Potential competition must therefore be closely analysed before the project is begun and regularly monitored during its implementation.
In a number of developing countries it is often difficult for businesses, particularly export businesses, to expand because of their industries being below a viable size. An example is the horticultural industry in Tanzania and, to a lesser extent, that in Ghana. Both countries rely on frequent air and sea freight to export their goods, but have now reached a level where all airspace is taken up or there are difficulties with sea freight. The industries are simply not large enough either to justify investment by other parties in larger or better facilities, or to be able to 'lobby' the necessary authorities.
INFRASTRUCTURE
To obtain high quality produce and consistency of supply, a certain minimum level of infrastructure, both in the enterprise and in the country in general, is required. Infrastructure on the project can largely be controlled by investment and good management, but off the farm it is largely out of the control of the enterprise. This has to be taken into account during the initial project appraisal.
The physical infrastructure of the business is usually taken to consist of utilities such as electricity, fuel and water, and capital items such as tractors, trucks, packhouses, workshops, storage, processing facilities, etc. Whilst it is essential that the business does not invest too heavily in these items, especially capital equipment, there is a minimum level below which the business cannot be sustained. In a developing country it is also sensible to plan to purchase two smaller pieces of equipment rather than one large one. If, for example, one of two trucks fails, the business can still operate, whereas if there is only one larger vehicle, breakdown could lead to considerable difficulties.
One point, which may appear minor, is the purchase of equipment through recognized importers wherever possible. It is often cheaper to import equipment privately, but experience has shown that the project may not end up with the same model as that available locally, which can lead to difficulties with spare parts. Also, the recognized importer, understandably, may be reluctant to service a vehicle which he has not supplied.
The supply of inputs such as packaging materials has already been mentioned, but if such materials cannot be obtained locally they may have to be imported.
Arguably the greatest threat, or asset, to any private business is the policies and stability of the government, how it is prepared to support private enterprise, and the degree to which it will ensure basic infrastructural facilities such as banking, export incentives, tax holidays, and so on. Without these it is very difficult for industry, as opposed to the service or trading sectors, to flourish.
The physical infrastructure in different countries varies greatly and in many cases there are problems with roads, communications and general facilities. Companies dealing with perishable produce are possibly most at risk from inadequate infrastructural development within a country. RlO's experience with growing, packaging and exporting produce in Asia and Africa confirms this. Delays after harvest and damage in transport and storage are some of the main enemies of horticultural produce; unfortunately such factors are often exacerbated by the lack of infrastructure.
As already stressed, efficient communication between the producer and the buyer is essential. The same is true of good communications between the company, its suppliers and the growers. Orders, transport instructions and so on can vary by the hour and if these requirements cannot be rapidly communicated, then business will suffer.
The local bureaucracy and paperwork which often has be endured by an exporter will add to his costs and reduce his efficiency. This is an area which may on the surface appear to be well designed and controlled; but in reality it is open to a great deal of abuse. This is not confined to documentation, but applies to such areas as the availability of officers at the ports and airports and, in some cases, the obtaining of approval for exports from the central banks.
Phytosanitary documentation is essential for all exports of fresh produce, and whereas exporters do not want lengthy investigations and delays of their produce at the port, efficient inspection is required to maintain standards. There are many cases of countries gaining a poor reputation in the market because a few exporters have consistently shipped poor quality produce. If these exporters are not prevented from doing so then their poor standards will reflect on those exporters with high standards. Efficient and knowledgeable phytosanitary officers can help maintain high standards.
The provision of technical knowledge to the grower, processor and marketing company is essential in keeping them in touch with the latest information and research. However, the dissemination of this knowledge within the country is often difficult. It could be said that it is the responsibility of the company to ensure that it receives such information regularly but often all their time has to be spent concentrating on the shorter term aspects of their business. It is therefore essential that assistance is given to ensure that there are efficient means of disseminating such information, received either from international or local sources, within the country.
Experience has shown that it is possible to circumnavigate many of these problems, but that it requires a superhuman effort by the staff and management. However, this effort can only be sustained for so long, and if the problems are not resolved, it is very difficult to maintain consistent standards.
FREIGHT AND EXPORT REQUIREMENTS
The safe and efficient transport of produce both in the country and for export is one of the most critical areas for any enterprise. It is therefore surprising that many businesses concentrate on the purchase of storage and processing equipment, but often ignore the transport aspects.
The available hire transport in most developing countries is unreliable. This also applies to the suppliers of the raw materials, and inspection of their transport facilities must be part of the responsibility of the enterprise. Transport of finished goods to the end user or port must be closely controlled, and in many cases the trucks should be owned and run by the company. Regular maintenance is another necessity, especially where roads are bad and spare parts are difficult to obtain.
When considering a project which involves exporting produce, it is essential that transport facilities are available to ensure that the produce can be exported to the required market. Most durable produce is exported by sea, but many horticultural products are still exported by air because of their perishable nature. However, in order to compete in the market place, sea freight is becoming a necessity. It is essential that the type of transport, destinations and transit times match the requirements of the product and the intended market.
As important as the connections and the journey time is the infrastructure present at the air and sea ports. This is crucial when contemplating sea freight, as the port handling facilities must enable the produce to be handled quickly and efficiently. With durables this will depend on whether the exports, or imports, are to be in bags or bulk, whereas with horticultural exports facilities will be required to handle cool (reefer) containers. In addition to the physical facilities there are those which are required to process the necessary export documentation. Unfortunately this can be very time-consuming, as documents often have to be filled in and signed by many different authorities every time there is a shipment. In many cases the offices are in different places and the people concerned keep changing, thus creating great difficulties to the exporter. What is needed is a one-stop centre, at the port, where most of the documentation can be completed.
TECHNOLOGY
With all projects a compromise must be reached on the level of technology that is introduced, especially in the initial stages. Whilst accepting that there is a minimum level that must be utilized if product quality and consistency of supply is to be achieved and sustained, it is often counter-productive for the project to be overburdened with complicated technology. In the first instance it may place an unacceptable strain on finances, and it may constitute too large a step into the unknown for the staff and management. At a later stage maintaining and repairing equipment may be difficult.
Experience has shown that initially it is best to introduce a minimum of new technology and to integrate it with the current methods used, so long as they are acceptable. This can then form the basis for the introduction of more advanced technology at a later stage when staff have more experience, and when it can complement other activities.
In Thailand, where RIO and NRI were working on the production and marketing of low-aflatoxin maize, the initial trials were undertaken using basic static bulk driers. One of these trials was run with the merchant previously mentioned, Khun Preecha, who organized growers, monitored the trials and helped to transport and market the grain. Over two years he saw their success and proved to himself the viability of the project. Based on these results he then purchased a $ 1 m continuous flow drier, which has since been extended.
MANAGEMENT AND TRAINING
Even with the best product in the world, good infrastructure and appropriate equipment, it will not be possible to meet customers' requirements consistently if good management and training are not implemented.
It is often the case that an entrepreneur does not make a good manager; thus attention has to be paid to ensuring that he has the necessary professional staff as back-up. In many countries family ties can make this difficult, but it is essential that every job is filled by a well trained and competent person. One weak link in the chain and it will break!
Wages and salaries in developing countries can appear very low, especially to people in the West. However, all is not what it seems as other 'support' may also be given. Whatever their level, it is essential that all staff have the necessary 'incentive' to work in what may be a new industry, and to higher standards than those they have previously experienced. In many projects people are being asked to work in a disciplined manner for the first time in their lives. Therefore, close attention has to be paid to giving them incentives which will ensure their continuing presence-and this is not always money.
Everybody has their strengths and weaknesses; therefore training in order to increase the knowledge of the staff and to upgrade their ability is necessary. Key staff should have the opportunity to experience what the customer requires by travelling to the market and seeing for themselves. Properly controlled this acts as a strong incentive and the staff concerned will work harder to produce the quality required.
The need for technical and other management advice is the main reason why RIO are involved in a number of horticultural projects in East and West Africa. Through this we can bring in new methods and technology and also train local staff in the requirements of the overseas markets.
SUMMARY
Establishing any new enterprise is difficult, particularly in developing countries. Many agricultural enterprises, whether for durable or perishable goods, include some degree of post-harvest technology. If this involves the drying, storage and/or processing of produce, purchased by the company, then high levels of fixed and working capital are required. Therefore great care has to be taken in the planning and management of the business as substantial investment is at risk and loans will have to be repaid.
It is in these areas of planning and management where the greatest risk can be to a new or expanding enterprise. If the project is well researched, with good management in all departments, it will probably succeed. If this is not the case, then all the investment and equipment in the world will not save it.
In this paper I have tried to highlight some of the areas on which all enterprises, be they private or public, should concentrate. The degree to which these factors will affect the business will depend on its activities, size, etc. Obviously a business concerned with the supply of moisture meters or pest control services will not have the same investment as a large grain drying and storage operation. However, the same fears and opportunities are there for both forms of company and the factors which will make or break the businesses are fundamentally the same.
In conclusion I would therefore select the promoter as the key factor in any private sector enterprise. It is he who has to build it, lead it and commit himself wholly to it. Without him there is no business. With a good promoter there is a strong possibility of creating a success.