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Inclusive and sustainable businesses: Strengthening local supplier competitiveness

Date
Time (GMT +01) 16:00 18:00

Speakers:

Richard Morgan - Director of Communications, Africa, Middle East & Turkey, Unilever

John Harrod - Corporate Relations Director, Africa, Diageo

Djordjija Petkoski - Program Leader, World Bank Institute, World Bank Group

Sophie LeMouel - Director, Marketing and Corporate Partnerships, TechnoServe

Steve Wiggins - Research Fellow, ODI  

Chair:

Graham Baxter - Director, Responsible Business Solutions, International Business Leaders Forum

Djordjija Petkoski, Program Leader, World Bank Institute, World Bank Group

The workshop kicked off with Djordjija Petkoski introducing the World Bank’s latest issue of its flagship publication Development Outreach on "Business and Poverty: Opening Markets to the Poor", which considers how businesses can create value and opportunities for the four billion people living at the "Base-of-the-Pyramid".

Djordjija pointed out that inclusive and sustainable growth isn’t going to happen without sustainable business. He also pointed out that there is too much focus on the pyramid base as simply consumers. This focus isn’t helping to reduce poverty. We also need to consider the poor as producers and work together in order to engage the poor in enhancing their well-being and wealth by increasing their economic opportunities and access to services.

We also need to disseminate research findings to a wider audience – this is part of increasing capacity development. We need to increase learning opportunities through developing partnerships. But are public-private partnerships easy? Actually, they are a real challenge. In order to be sustainable they need to link with the right skills and mix of finance etc. Often such partnerships are brokered with multi-lateral institutions and private sectors, but there needs to be more engagement with both the public and the private sector in developing countries.        

John Harrod, Corporate Relations Director, Africa, Diageo

John presented information and figures on the number of local people employed by Diageo, worldwide and within developing countries. Out of the total Diageo workforce 25% are in the developing world; around 45 factories are producing under licence.  Diageo is very proud to say that there is no difference between the standard of Guinness produced in Africa compared to say, Dublin.

Guinness has been operating since 1823 out of Nigeria and supports 27,000 farmers. In Uganda barley is known as the ‘school fees’ crop; the money earned by selling barley to the local Guinness factory is used to pay for school fees.  
When developing country governments have increased the barriers to importing quality products, Diageo has worked to improve technology so as to increase local sourcing. Diageo has risen to the challenge of the Business Call to Action introduced by Gordon Brown, Prime Minister, UK, in order to meet the Millennium Development Goals (MDGs). But it is not only who you work with that is important, but also how you work with partners; this may include both NGOs and government.

For Guinness the development of sorghum based products for use in production has created a win:win situation in Nigeria and Uganda. The crop is used as a ‘school fee’ crop; it contributes to local rural development; and in addition the creation of a new market. Guinness has been able to reduce the amount of raw material imported and significantly increase local sourcing whilst contributing positively to livelihoods and the development of the rural economy.  They have helped to improve yields by 50%.

Q: But isn’t there also a risk of creating dependency?
Diageo: If policy changes result in production within country as no longer being sustainable from a business perspective, Guinness would of course reconsider its strategy and model. Of course, this would also have repercussions for the local economy. However, since all farmers are trained, even if Guinness were to cease production overnight, farmers will still have been equipped with transferable skills.

Sophie Le Mouel, Senior Director of Marketing and Corporate Partnerships, Technoserve

The ethos of Technoserve is how to link up the private sector with the poor; how the private sector can be harnessed to increase the livelihoods of the poor. Technoserve is a not for profit company based in the US which operates in a number of developing countries and employs over 500 people. In terms of the topic of the workshop  “Inclusive and sustainable business: Strengthening local supplier competitiveness”,  the following two main points need to be considered.

1. It always comes down to capacity building. 5,000 individual farmers cannot access credit facilities on an individual basis. A Multinational company cannot deal with farmers on an individual basis – but it can deal with 5,000 farmers as a group. Technoserve works so as to train the whole value chain and establish commercial relations, including contracts between producers and buyers.   
2. It always comes down to competitiveness and sustainability/ scalability. One strategy for one group of producers is not necessarily going to be replicable. Technoserve seeks to establish which strategies are both competitive and are also going to be sustainable.
For example, in Mozambique, the cashew nut industry collapsed in the 1970s. The challenge now is to rebuild the industry in a competitive environment. But how can 140,000 farmers deal with Multinationals? There needs to be a central point of reference between CSR and business interests. What is built on philanthropy is not sustainable; there needs to be a sound business footing.      

Q: Governments can wipe out competitiveness in one fell swoop – so how do you manage that?
Technoserve works with the government. If competitiveness becomes an issue they discuss the issues with the government.  

Richard Morgan, Corporate Relations and Communications Director (Africa, Middle East, and Turkey)

Half of all Unilever factories are in the developing world: around 145 out of a total 300. Some developing countries are more price competitive than others. For example, Lagos compared to China. There is a cost price differential of around twenty times; this information is well known to all working within Unilever supply chains.   

As part of Unilever’s commitment to working towards the Millennium Development Goals (MDGs) we are participating in a village scheme which find crops that do not compete with food resources but which are in demand by the market. In Kenya, herbs and spices have been identified through Unilever working with Technoserve. But Unilever needs large scale; production needs to be competitive; business modelling needs to be carried out in order to establish where value can be added.     

In the case of palm oil production in West Africa, it is possible to treat the region as one market. Where you can get scale, investments can be made. An enabling environment is crucial. There is also a need to work in partnership, Unilever has often worked with Technoserve, but in addition developing country governments and banks. 

Sustainable business requires a mindset change all round. For example, although it may be possible to negotiate a deal under WTO trade talks – the missing link is capacity building; this needs to be across sectors.

Q: What about working with other partners such as your competitors, Nestle and P&G?
Unilever does to a certain extent. Since those suppliers trained with Unilever will also be able to work with Nestle and Procter and Gamble. Unilever tries to avoid a paternalist culture. Suppliers trained are able to in turn work with other partners and train others elsewhere.

Steve Wiggins, Research Fellow, Overseas Development Institute (ODI)

Steve opened up the discussion taking a small farmer’s perspective. If we are talking about poverty reduction and rural development then we need to talk about small farms. Good that previous presentations haven’t just focused on large farms.  

Steve firstly looked at the overall supply chain and costs. Some studies have looked at the share of final retail prices which accrue to different cocoa producers around the world, which varies hugely. Some have also looked at the cost of getting into Fair Trade schemes and accessing niche markets; compared to the initial cost of investments. In some cases the initial costs of investment exceed the benefits received such as additional share of final retail price received.

In Africa the major bottleneck is transport and infrastructure. It costs four times as much to transport goods within country as it does in South East Asia.
Transactions costs associated with working with small farms are high.  Trust is also an issue that goes both ways – that buyers will continue to buy from you, and that small farmers will continue to produce according to the required standards.   

The challenge is – how can we increase the capacity of smallholders in adhering to the standards required to access markets and in order to access links with larger players and manufacturers?     How can we bridge the gap?

There are some solutions, such as contract farming, supply chain forums, public underwriting of investor risk, and challenge funds which can underwrite innovative practice.  
But the question remains – who is going to make the first move? NGOs? MNEs? What is the solution? And how replicable is this? Governments and Ministries of Agriculture should better manage supply chains and make use of ‘Challenge Funds’ available.  

Q&A
Q: What is replicable? How can we scale up those mechanisms that work? 
Unilever: Some of the MDG village projects have worked. This means that quite possibly replication and scaling up is possible. But it will be incremental. Technoserve: Replication is a real difficulty. What may have worked in one market and with one set of producers may not necessarily work elsewhere. It depends on the market. Diageo: When talking about scaling up you also need to think about rolling out across sectors and looking to integrate. It is necessary to demonstrate successful business models, which send signals to other actors who try to replicate. World Bank: The doing business indicators are useful since they can provide some benchmarking.
Q: Do you feel that the benefits you are providing through sourcing locally and investing in supplier capabilities are advertised enough, or captured by current labelling schemes?
Diageo: Well, times have changed and it is now difficult to advertise that ‘Guinness is good for you’. So, to some extent it depends on the product. But for some products were just haven’t considered that aspect, despite the product being a fabric of society in some countries.  It is something we may consider further. Unilever: It often depends on the crop. In the case of tea we felt that some aspects of production were important and that this was important to the brand, such as sustainable practices and ensuring increased benefits from farming.
Q: What is the objective of inclusive and sustainable development? Is it to reduce poverty, or to stimulate development, which means moving up the value chain and increasing value added?
ODI: In terms of increasing shares of value added and moving into processing, this is a dynamic process which changes fast.  World Bank Institute: There are many reasons why shoes made in Italy command a higher unit price than those made in Brazil. Both have moved up the value chain, but in terms of increasing value-added, it also depends on branding.      
Q: How does business engage with the government?
World Bank Institute: There is a real risk of state capture; this may relate to both the short-term and long-term interests of countries and companies. So in reality, things are much more complex and what has been so far discussed is a much more simplified story. Technoserve: A value chain will be developed if it makes business sense. However, even when it makes business sense – there may still be a need for government to get on board, particularly for capacity building.

Description

A workshop to discuss strategies for strengthening the competitiveness of local suppliers in developing countries. The event will explore how this contributes to inclusive and sustainable business engagement.

The World Bank is launching the latest issue of its flagship publication Development Outreach on "Business and Poverty: Opening Markets to the Poor", which considers how businesses can create value and opportunities for the four billion people living at the "Base-of-the-Pyramid".

The edition highlights the experiences and challenges of companies that have attempted to engage the poor in enhancing their well-being and wealth by showcasing a wide range of regional and sectoral examples that have increased economic opportunities and access to services for the poor.