To promote financial sustainability within ICCO's SIDA-supported Flying Food project in Kenya we make use of hands-on experiences and lessons learned from other parts of the world. We are happy to share some of these trough this blog, elaborated by Andre Vording, Specialist Fair Economic Development
Many NGO’s are starting to generate income from other sources than donor funds, some are more successful than others. One of our partner NGO’s in Kyrgyzstan, Central Asia is learning by doing, with processors and traders starting to pay the NGO 10% of the value of crops delivered as a fee for training and organizing the farmers. Though it does not make the NGO a profitable venture in the short run (because it takes a lot of training before the first sizeable volumes of a uniform product are timely organized), it does provide them with a much needed exit strategy: well trained and productive farmers do no longer require subsidized services as the commissions from traders and processors cover these costs provided the farmers are productive enough.
Of course this model has some drawbacks as well: ideally a producer organization rather than an NGO would take up this production organizing role. There are two main reasons why this does not happen much yet in Kyrgyzstan, firstly because farmers have bad memories of cooperatives of the Soviet era, secondly because they have bad memories of the 1990s when surviving cooperatives were taxed to the limit. So definitely there is some work on enabling environment (there now is a VAT exemption on agricultural products in the chain for 6 years) as well organization of farmers. This creates a dilemma for NGO’s: are they to organize farmers in to independent producer organizations, who will then receive the commissions rather than them? A more visionary and inspired NGO would do so as they see themselves as temporary supporter of development processes, a more service driven NGO sees its business model going down the drain.
A second issue is the fact that by taking a commission from traders or processors, the NGO is perceived as an actor in the chain, rather than a supporter of the chain. This is all right as long as transactions are over relatively short distance with parties which trust each other, but becomes trickier when borders are crossed with produce. Something could go wrong in the shipment or payment and without proper insurances and either of the other parties might hold the NGO accountable. It seems that most NGO’s are not really aware of these risks so far.
So, considering the pros and cons, I see the current model as a ‘transitionary’ model, which as soon as it becomes really successful outgrows the coordination, financial and business capacities of most NGO’s. It would have to grow in to another model either with producer organization under an umbrella union (to realize necessary scale) or a commercial trading house taking up this brokering role. The Union or trading house, which ever model is developed, could then still hire the NGO’s for specific services in capacity building in technical and organizational issues, but would keep the commercial risks away from the NGO’s. Some of ICCO’s NGO partners have started such a commercial venture on a small scale last year, while also some farmers have grouped themselves in to a producer organization directly selling to processors.
The producer groups tend to sell locally, which does not require much trading capital. But especially for trading houses, whose comparative market advantage is abroad or in year round supply of produce to supermarket chains, working capital is a big challenge. Commercial loans are hardly available for something as risky as trade (if at all, only at local interests of 30% or more) and agricultural seasons being rather short (harvesting between June for early crops to September) it is difficult to make longer term capital profitable the year around. As both models are being tried, we will see which one will be more successful. Scaling seems to be one of main challenges in both cases, though the way of scaling is different.
To read more about the transition from an NGO programme to a self-sustaining inclusive business see our KnowHow page on commercialising NGOs, which includes links to our March Newsletter on this theme, links to related blogs, projects and more.
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