During the last few years, MDF has developed a portfolio of about ten partnerships in agriculture to tackle inclusive growth bottlenecks. These cover innovations in input distribution and processing for:
A range of staple and horticultural crops as well as spices to commercialise their production; and
Coffee, to further enhance Timor-Leste’s competitiveness in the international coffee market.
Indeed, one of MDF’s most recent successes has been achieved with a boutique coffee exporter, Café Brisa Serena. Most Timorese coffee processors now show falling export volumes against other exporting countries because they don’t focus on quality control and export only low grade coffee. Café Brisa Serena instead targets the high-end, high-priced coffee market. It developed linkages with boutique buyers worldwide and sought MDF’s support to install an international-standard quality management system to increase buyer confidence and secure larger orders. The system also enables tracing different coffee grades to farmers, as a basis for targeted advice on improvements.
Three further partnerships in agro-processing and input distribution are featured in detail below.
TIMOR GLOBAL – THE COUNTRY’S FIRST COMMERCIAL FOOD TESTING LABORATORY
The Business and Inclusive Growth Opportunities
Timor Global is a budding agro-processing company which originally focused on two business lines: exporting coffee combined with efforts to diversify into nut and spice exports; and producing maize-based fortified food for school children and lactating mothers under contracts with the government and the World Food Programme (WFP).
Both business lines shared the same constraint: The lack of a local testing facility for food contaminants such as aflatoxins – cancerous chemicals created by some moulds occurring in many staple commodities after bad harvest and post-harvest management, particularly storage. When Timor Global sourced maize locally in 2010, it turned out to be highly contaminated. Cleaning the factory required a six-month production stop and WFP requested the exclusive use of imported maize to ensure a safe and consistent supply. For Timor Global’s export business, the only way to test nuts and spices was to send samples to Singapore, which cost time and money. Timor Global then had the idea of starting its own commercial testing laboratory to be able to source and process raw materials. As 60% of rural households grow maize, this would also generate new income for female and male farmers.
MDF partnership activities
MDF worked closely with Timor Global to refine this business idea and to develop a joint plan of activities. In particular, MDF saw the need to help stem the cost of physical infrastructure – the testing laboratory and a storage silo to maintain grain quality until processing – as a pre-condition for local sourcing and testing services. As part of a second set of activities, Timor Global committed, among other things, to hiring a food safety laboratory expert (facilitated by UNDP and WFP) to implement staff training.
Over time, MDF and Timor Global realised that more active engagement with farmers was required for a consistent supply of good quality maize.Farmers were not familiar with selling to a regular buyer, or the links between quality and price. As aflatoxin contamination was still common, Timor Global also saw the need to test samples before buying large quantities. As a result, MDF later:
Contributed to the cost of quick-testing kits that could be used directly at the farm gate; and
Collaborated with Timor Global in farm-based demonstration events and pilot purchases, by hiring a quick-testing expert to supervise.
All of MDF’s support has been conditional on Timor Global’s fulfilment of its share of costs and activities. particular, MDF monitored Timor Global’s efforts to invest in building longer-term relations with female and male farmers to meet its sourcing targets, including by offering competitive prices and living up to key commitments such as a regular buying schedule.
Business Results and Impact
Timor Global has implemented two initial roadshows to raise awareness about aflatoxins among farmers and has started to buy maize from local farmers based on the quick-testing kits. Timor Global aims to buy local maize at a price competitive to import, which is 42¢/Kg. It is estimated that up to 30% of Timor Global’s current requirement of 4,500 metric tons (MT) of maize could be sourced locally in 2017, meaning that more than 1,000 farmers could benefit from extra income. More farmers are expected to benefit once Timor Global’s demand for raw materials grows and training sessions help to increase maize quality and yields. Indeed, the newly found access to a commercial market creates incentives for farmers to upgrade production.
Even though the testing lab is only due to start operations in early 2017, it is already opening new doors to business growth. Timor Global has received an order enquiry from foreign buyers about organic peanuts even before the lab was open. It also sees export opportunities for spices, such as pepper, turmeric and ginger, which can now be tested on site – where six jobs have been created so far.
Significance for Timor-Leste’s economy
Beyond Timor Global’s impact on its workers and suppliers, the testing lab is of high strategic relevance for Timor-Leste’s agricultural sector as a whole:
Designed as a commercial lab, it will enable any processors and exporters to get cheaper and faster access to testing services as a basis for accessing domestic and export markets. This creates strong incentives for businesses to source locally, and unlocks new opportunities for value-added production by small farmers. MDF also sees new business opportunities arising from maize that is unsuitable for human consumption as it could be processed for animal feed.
Timor Global also demonstrates that the private sector can fill critical gaps in service-provision where state capacity is weak. The company had been anticipating the set-up of a national testing lab for several years but finally decided to take matters into its own hands. Instead, Timor Global is now in talks with the government about giving them access to the lab for public testing and certification services. This will be a further critical step for the country’s export market access.
MDF’s work with Timor Global is also a good illustration of how MDF promotes commercial business growth in a heavily aid and government- dependent environment.Timor Global’s maize business stems from donor and government contracts, and benefits from the support of other development agencies. As a result, MDF had to be savvy about finding its role and promoting a commercial food testing business model. MDF’s broader lessons in this regard are summarised below.
Lesson 2: Between ‘staying out’ and ‘getting involved’: Careful choices are required when working in a heavily aid-and government-dependent private sector
The combination of a small, heavily state- and donor-dependent private sector makes it harder for MDF to find the right partners: If firms can do well out of government or donor contracts, they are less likely to agree to the risky and innovative investments needed to stimulate inclusive growth. Even if they agree to work with MDF, they may be less inclined to fulfil partnership obligations or lack the capacity to expand into commercial activities. Finally, it is harder to help companies become viable if they receive donor support at all levels of operations. MDF drew the following lessons for its work:
Stay away from businesses that depend on donor grants at all levels of their operations or that source their income almost entirely from government contracts. Ideally, business owners have already had some commercial success, even if that involved defined assistance from external parties.
Be realistic about businesses’ growth opportunities in a nascent economy and the positive role of government contracts in the transition to commercial viability: While MDF avoids working with public-sector dependent businesses, it has also learnt that government contracts can play a role in allowing businesses to grow and recoup their initial investment costs. In the case of Timor Global, the continuation of publicly funded school feeding programmes was considered essential for getting the food safety testing business off the ground. Another example is MDF’s work with Mahanaim Garment (see chapter 3.2): Supplying school uniforms to the government provides the company with an important financial backbone while it explores the launch of commercial clothing lines.
Find niche areas without the involvement of other donors that offer a ‘clean slate’ for collaboration: MDF aims to be smart but cautious about which parts of a business operation to support. For example, if another programme works on supply side constraints, MDF would try to focus on marketing.
Work jointly with other development programmes on ambitious projects: MDF has actively joined forces with other development partners in more ambitious partnerships. For example, UNDP has provided critical support to Timor Global’s laboratory equipment, and the identification and payment of a food safety expert – an area where the agency had previous experience.
Encourage other programmes to adopt market-based approaches: MDF has also actively shared knowledge about market-based approaches with the government (see chapter 3.3) and other donor programmes. For example, MDF found that the most common growth constraint of agricultural input retailers was seed hand outs by donor and government programmes (see also Agi Ag’s partnership profile below). MDF therefore engaged in discussions with a major Australian Government-funded seed programme on market-based alternatives to seed distribution.
SERVING THE RURAL POOR AS CORE BUSINESS - AGI AGRICULTURA’S INVESTMENT IN LOCAL SEED DISTRIBUTION AND EMBEDDED ADVISORY SERVICES
The Business and Inclusive Growth Opportunities
Farmers need quality inputs, such as seeds, compost, fertilisers and pesticides, to increase productivity and grow their income from selling their produce.Timor-Leste’s farmers often have to travel to the larger urban centres to purchase inputs, which are often of poor quality and don’t include instructions on how to use them.
A survey by MDF found that farmer yields are held back by the poor quality and high mortality of seedlings. The first company that saw this gap in rural input access and information as an opportunity to capture an entirely new market is Agi Agricultura (Agi Ag) – a Dili-based distributor of horticultural inputs.
Developing a network of district-based retailers near the farmers’ production centres;
Recruiting and supporting field staff in monitoring input purchase and usage, and training retailers and farmers on the use and benefits of different products; and
Developing and distributing promotional materials to raise awareness among farmers about the new concept of buying inputs at local retail stores.
Business Results and Impact
Agi Ag’s distribution model is making progress, if only slowly.Four retailers had been integrated in the network and trained by 2016. These now stock a much larger range of products and sell them to farmers on credit. An impact assessment for two of these retailers found that they had trained 108 farmers in the first year and more than doubled their revenues from selling inputs. Agi Ag is committed to expanding its retailer network and retaining field extension staff after the end of MDF support – thereby making agricultural advice a core part of its business model.
Most importantly, improved input access is helping farmers to increase productivity and incomes:Farmers report an increased ability to grow vegetables throughout the year; a 10% increase in their total production; and a 7% increase in net income. This largely results from better compost and an appropriate pesticide dosage (about half the amount farmers used before). The compost also reduced the need for chemical fertilisers and farmers now take safety measures during chemical application. They were also trained in making their own high-quality compost; as a side effect, both a retailer and one farmer have started to sell compost commercially. Key results figures are summarised below.
Farmer benefits from Agi Ag’s rural input distribution network and embedded training service
With MDF’s support, Agi Ag is also adapting its business model to meet farmers’ needs even more effectively, including by targeting products and services at women.Future training will include separate modules for women and men as they typically handle different aspects of the cultivation process. An MDF survey also revealed that women were particularly concerned about irrigation. Agi Ag therefore is looking into selling lighter tools and new irrigation systems that reduce women’s workload.
Significance for Timor-Leste’s economy
Agi Ag’s innovative business model showcases the kinds of changes that are now possible in Timor-Leste’s horticulture sector:previously isolated farmers can be connected to input markets; over-stretched government extension services can gradually be replaced by efficient embedded training by retailers; and increasing yields can empower farmers to pay for further inputs, household goods as well as the continuation of their children’s education. Feedback from farmers shows that they are increasingly shifting from rice cultivation to horticulture, as it requires less water, and it is easier to compete against imports than in the subsidised rice sector.
There are two important caveats:Among the many practical challenges that ‘first movers’, such as Agi Ag, face are the continuing import of illegal inputs as well as seed hand-outs by the government and development partners; both of which represent big scaling-up barriers in the input market. To advocate for change, MDF is supporting Agi Ag and others in forming Timor’s first input business association (see chapter 3.3).
TIMOR-LESTE’S FIRST LOCAL RICE BRAND – HOW ACELDA DEMONSTRATES OPPORTUNITIES FOR IMPORT SUBSTITUTION
The Business and Inclusive Growth Opportunities
Acelda is an agro-processor with a mature business in sourcing, processing and exporting candlenut.Its director, Higino da Costa Freitas, aspired to broaden the scope of his business – and the economy – by becoming the country’s first commercial rice miller. Rice in Timor-Leste has so far been largely cultivated for subsistence purposes. The country covers its demand almost entirely through 130,000 MT of imported rice, of which 30,000 MT were directly imported by the government for subsidised distribution.40 Even if just a quarter of this rice could be produced domestically, this could bring extra income of almost USD 20 million to Timorese farmers.41
Feedback from local businesses indicates that they find it very difficult to compete in the market due to government subsidised imports and distribution of rice.Those that engage in local sourcing only do so to cater to irregular government buyback initiatives. Many farmers also felt that there was no point in growing rice for sale as there was plenty of cheaper rice on the market.42
MDF partnership activities
In this environment, it was unclear how long it would take to achieve commercial viability in rice milling, if at all.MDF, however, saw the bigger picture: if Acelda can succeed, other businesses could too – whether in processing rice or other crops for the local market. MDF decided to shoulder part of the cost and risk of the initial investment, including:
Developing a sourcing plan for purchasing rice paddies from farmers in target areas;
Setting up a modern processing, packaging and storage facility to enable Acelda to compete with imported rice on taste, freshness and quality; and
Designing an effective marketing campaign to raise awareness of the product and its qualities.
Business Results and Impact
Acelda launched Timor-Leste’s first local rice brand ‘Fos Timor’ in September 2014 and has since become an official supplier of eight supermarkets in Dili.Between 2014 and 2015 its sourcing volume and number of suppliers almost doubled to 154 MT and 374 farmers, respectively. In 2015 each of these farmers earned about USD 90 in extra income. Acelda also employs six staff in the milling factory. In 2016, however, drought prevented farmers from growing surplus rice in Acelda’s sourcing area. Acelda also saw a need to improve agricultural practices to boost productivity. To that end, MDF has agreed to help Acelda with the logistics of sourcing from more distant areas not affected by drought. MDF will also support the development of embedded training services for women and men in line with their specific roles in the production process.43
In the bigger picture, Acelda and MDF have learnt that it is harder than expected to compete in the heavily distorted rice sector – and that the focus needs to be on quality and branding, rather than trying to achieve cost-effective mass production of regular rice.The most significant evolution in Acelda’s business model seeks to address this by focusing increasingly on specialty red and black rice. These varieties are relatively new to the local market and could help Acelda secure an extra 55¢ per kg and pass on a premium to farmers.
Significance for Timor-Leste’s economy
Acelda’s experience also has wider implications for doing business in Timor-Leste:
It demonstrates that there are opportunities for local businesses to capture market share from importers, even if it is small, and boost local, value-added production. Acelda has also created new links and trust between formal and informal markets: After years of erratic government buyback schemes, it is the first time that farmers have had a regular and commercial buyer.
In a context where supply chains are still fragile and the costs of local sourcing are high, Acelda shows that businesses have to be highly adaptive and creative to improve prospects for commercial viability (see also Lesson 6). Acelda’s planned investment in farmer training and specialty rice production are examples of how it is dealing with these issues. Changes in the policy environment will, however, be required for domestic rice millers to operate on a larger scale. Acelda’s owner is very frank about this with the government, and notes that “if the government wants to be active in the sector, it could more usefully assist in the set-up of milling plants in other parts of the country.”
Before turning to MDF partnerships in manufacturing and tourism, it is useful to consolidate and contextualise some of the lessons learnt that have emerged from the examples so far and which are indeed relevant across MDF’s work.In particular, being a multi-country programme, MDF has gained nuanced insights into structural differences between Timor-Leste and bigger and/or more advanced developing economies, and the implications for how to engage businesses in inclusive growth programming. The table provides a comparative overview of Timor-Leste’s private sector:
Structural differences between Timor-Leste’s small island, post-conflict economy and bigger and/or more advanced developing countries
In essence, these features imply that private sector development in Timor-Leste is about helping to build businesses and economic systems from the bottom-up, rather than merely improving, adapting or expanding what market players do.Lesson 3 brings together some of MDF’s key conclusions for partnership design and sequencing in such contexts
Lesson 3: What to focus on when so much needs to be built from scratch: Implications for designing and sequencing partnerships with first-generation entrepreneurs
Pragmatic, individually designed support packages to businesses have proven to be especially relevant in Timor-Leste’s small and early-stage economy: Both MDF and first-generation entrepreneurs are on a steep learning curve about how to manage the complexities of business growth, and reach full-scale and profitability. Thus, as illustrated in the examples above, MDF had to be particularly flexible in responding to the needs of business partners at different stages of their development. More standardised and narrow support programmes can struggle to overcome businesses’ growth constraints: For example, the Ministry of Commerce has provided simple grants to entrepreneurs interested in manufacturing, but most of the businesses are no longer functional.44
Working with a nascent private sector requires a gradual sequencing of partnership activities – often with an initial focus on the foundations and ‘front end’ of business operations - followed by deeper engagement with a supply chain or market: The partnership examples above have illustrated a range of support services that MDF may facilitate or provide in the short term:
While MDF may fill discrete gaps in all of these areas wherever it works, getting businesses started in Timor- Leste has required more substantial engagement around basic issues, such as cash flow management or buying processing machinery, to create the conditions for engaging with impoverished suppliers. MDF has also facilitated different kinds of technical assistance over time, often beginning at the ‘front end’ of on-site business operations, and then moving to the ‘back end’, such as supplier training, once the business achieves certain milestones. This is different from many partnerships in more advanced economies, where the financial and managerial capacity of businesses often allows MDF to tackle various inclusive growth constraints at once.
Several of MDF’s partnerships illustrate this: In the case of Acelda’s rice processing facility or Timor Global’s testing lab, MDF started by helping to introduce new facilities and providing support on the marketing side. It then moved on to tackling issues in the supply chain in a second partnership phase (e.g. farmer training and awareness-raising). More recently, MDF has also begun to address wider issues in the market, such as government policies and access to finance (see chapter 3.3).
In addition to aligning with business capacity, using a step-by-step approach is necessary for risk management: Due to high upfront capital investments and the difficult operating environment, many businesses remain fragile for longer than in other countries, and their priority is survival rather than growth. Hence, they typically move more slowly to manage risk. For example, Agi Ag tests new retailers for six months before signing contracts. Overall, a carefully sequenced approach means that MDF’s engagement periods may be longer than in other countries.
For MDF as a whole, the presence of inclusive growth constraints at all levels makes it more important to plan for a strategic division of labour with other development programmes: One example of this is the livestock sub-sector: As an entry point, MDF has considered helping an abattoir to expand its facilities and source more meat. However, wider development efforts and business investments are needed on all fronts: There is currently no local producer of animal feed; no commercial vaccination provider; and no effective extension service provision. This means that coordination of engagement areas with other development programmes is ever more important to build the foundations for inclusive growth. One outcome of such considerations is the complementary Australian Government programme, called TOMAK, beginning implementation activities in 2017: One of its foci is tackling production-base issues in communities involved in livestock production as well as legumes and cereal crops.
As outlined in Lesson 3, MDF often performs services and functions that neither its partners nor other market players are currently fulfilling. A defining feature of MDF’s approach is its operating principles, which serve to avoid discouraging market players to provide similar services to MDF, and to avoid open-ended support to businesses without achieving growth. These are summarised in the box below
Do’s and don’ts when acting as a facilitator and short-term provider of business services:
Do’s and don’ts when acting as a facilitator and short-term provider of business services: MDF only takes over support functions that the market does not currently provide and MDF’s partnership agreements are designed to allow the businesses gradually to take over functions that MDF provided (e.g. paying the salaries of specialised staff). Similarly, MDF’s wider engagement strategy is designed to reduce its role in the market and encourage commercial business service providers to take over such functions in the medium term (see section 3.3).
Partnership agreements also make the transfer of funds conditional on activities and milestones to be achieved by the businesses. This way MDF has a clear exit strategy once the desired results have been accomplished or if the businesses don’t manage to demonstrate any progress.
And there are boundaries to what kinds of assistance MDF provides. For example, MDF does not ‘pay’ partners to do things they do not want do in the long run. Businesses always have to remain in the driving seat, with MDF acting as a reliable partner in their growth journey.