Project rationale, Goal, specific objectives, strategies, implementation policy

Smallholders empowerment in commercial organizations

Empowering smallholders to control crop processing and marketing operations. The key to increasing the share of smallholder producers in the processing and marketing margins of the coffee and tea trade is the control of processing and marketing operations by the smallholders. The experience of the FT organizations in several countries supports this view. The experience of some Kenya tea factory privatization projects have been recalled in Chapter IV (Section F). In Rwanda, the poverty reduction mandate of IFAD, the weak current situation of most growers and associations, and other reasons, suggest that a gradual approach must be followed without, however, deviating from the principle that a controlling interest in processing and marketing enterprises supported by the project must be formally owned from the outset by cooperatives of smallholders, the members of which qualify as IFAD target group.

The project must establish modern production organization units with legal entitlement to engage in all the operations and financial transactions required by a modern economy. At the same time, the project must find ways to develop the necessary skills, and above all the organizational culture, among poor farmer cooperative members, that are required for the cooperatives to become capable of managing a relatively complex business along modern organizational lines. The project must concurrently secure efficient business operations with the confidence of cooperative members that they will be enabled, within a reasonable time, to exercise their rights as full owners of the facilities, and therefore run them in such a way as to maximize returns on the cropping efforts. To this end, the project may adopt, in the case of tea and coffee, an especially designed financial package, whereby the actual taking over of the business administration by the poor smallholder planters, but not the formal property of controlling interests of the industrial facilities, will be phased.

Tea and coffee processing and marketing activities will be entrusted to newly established companies. This form of production organization responds to the operational requirements indicated above, permits the creation of joint ventures of small farmer cooperatives with private sector companies, and complies with the absence of differentiation, under Rwanda fiscal law, between cooperatives and private companies.

There will be several coffee processing and marketing (ccoperative) companies (CPMCC) and are tea company at Nshili (NTC). At farmer level, the project will work through primary cooperative societies of poor planters. Around each processing unit, there will be several primary cooperative societies of planters that accept the conditions for participating in the project. The size of the primary societies will be such as to secure effective democratic management and control of the affairs of the society by its members. Members must be resident smallholder planters that qualify as IFAD target group. Continuous membership over time will depend on delivery of crops acceptable quality, such crops being actually produced in the members’ own farm. Initially, primary society members will be those smallholder coffee and tea planters who demand to participate, and are accepted by the general assembly without external intervention, except for ensuring that they are actually resident poor HHs and that the conditions of project intervention regarding the crop husbandry practices and crop quality requirements are fully understood. Thereafter, the same criteria will apply for new members, whereas the existing members must confirm their participation with the acceptable quality of the crops they deliver for processing.

Pre-financing the equity capital on behalf of the smallholders. The CPMCCs and the NTL will be funded according to standard commercial practices, which require a sound relationship between the risk (equity) capital and borrowed funds. To enable the primary societies to acquire the equity capital of the companies, the project would pre-finance the funds necessary to pay-in the shares. In the case of each company, such shares, issued in the name of the participating primary societies, will be deposited in a fund in trust with the Rwanda Development Bank (RDB), opened on behalf of the societies. The fund is established with the understanding that the shares will be actually acquired by the primary societies through the mortgage of the future dividends paid by the companies, and that the societies would acquire control of the companies when full payment of all the shares deposited in the fund has been completed.

By this procedure, the primary societies will have formal title deed to the ownership of the companies, but the related right to control them is suspended and must be earned through the cooperatives’ full participation in the efforts of the companies to make profits. As the payment of sufficient dividends to buy back the shares would take several years, the project would have the time to train the primary society members and their leaders so that they would acquire understanding and experience in handling the problems that they will face when in full control. Such sharing training and experience with the management of the companies is a major undertaking of the project.

During the interim period, when the shares of the primary societies are kept in the fund-in-trust of the RDB, the CPMCC and NTC will be controlled by Boards of Directors, in which the nominal majority shareholders will be represented by the Trustee of their shares, the RDB. Other Board members will include minority private shareholder (in case of apossible joint venture with an FT organization), and one representative of MINECOFIN, of MINAGRI, and of the Rwanda National Bank. Representatives of the primary societies will attend the Board meetings without voting power. For an initial period of five years the project will provide a general manager and a financial controller to run all the coffee companies established, each company will employ technicians and plant managers. The management contract will provide for training primary societies leaders and associating them to the day-to-day running of the companies so that they will learn how to run all the aspects of the coffee business effectively by the time the primary societies have acquired full control.

During project implementation the participation of a private sector partner that may wish to acquire a minority participation in the share capital of the cooperative companies could be considered. This partner would assume overall company management responsibility, and act as sales agent. Because of economies of scale, only two private partners could be envisaged, one in coffee and one in tea. In both cases, the private partner must be a reputable company engaged in international marketing of coffee or tea, should have established linkages with one or more of the Fair Trade organizations, and must accept to liquidate its interests when all the cooperative shares are paid for, transforming its relationship with the companies from being a shareholder to that of a preferred trading partner. The possibility of this option depends on the interest and capacity to participate of the FT organizations, the statutory mandate of which is very similar to IFAD’s. Few other private interests might be ready to accept conditions imposed on investing risk capital for a relatively short-lived operation.

The participation of Rwanda national intervention in the equity capital of the CPMCC and the NTC (other than local members of IFAD target group) will only be allowed if they are suppliers of coffee and tea respectively, organised in a primary cooperative society

Checks and balances, penalties and incentives. The scheme is carefully designed to provide a system of interlocked checks, balances, penalties and incentives. The members of the primary societies have a very interest in remunerative and stable prices for their crops from the start of the operations, but must produce the quality that can command such prices. On the other hand, they must accept to limit their claim on the trading margins if they want the processing companies to make profits, out of which the societies will acquire the final right to control processing and marketing operations, and ultimately the price of their crops. Growers must understand that failure to produce the required quality of crops will reduce their income, affect the profit of the companies, and delay the acquisition of controlling rights by their primary cooperative societies.

The private management contractor has an interest in the profitability of the operations he is is responsible for managing because part of his remuneration will depend on the level of profit. Transparency of operations will be ensured: (a) with regard to the quality of products, by the TWIN independent control and certification of the quality of all the products of the companies, and by the option of the FT organizations to buy at their announced preferential price the share that meets their standards, and (b) on the financial side, by the independent audit of the accounts under commitment of full disclosure, controlled by the RDB.

In case a private partner with a Fairtrade corporate culture is prepared to subscribe to the companies equity capital on a minority basis, its primary long-term interests would be to secure access to remunerative markets for the primary producers, and to develop a favorable business environment for Rwanda partners that can reliably supply such products. The private partner equity investment should not be so large as to be perceived as an excessive risk, but should be adequate to show the stakeholders’ commitment, and to motivate the investor’s keen interest in the profit of the companies that he would manage during the interim period. The company profits would ensure the returns on his equity investment, and the value of the shares that he will eventually sell when the cooperatives are in full control. The conditions of such participation are discussed in Working Paper 12.

The shares of the coffee and tea processing cooperative companies supported by the project will only be issued in the name of primary cooperative societies of producers, each primary society having right to holding one share, irrespective of the size of the membership and of the quantities of crops delivered for processing by its members. The number of primary societies that own shares in any one crop processing (cooperative) company would vary from site to site. Members would be a very maximum of 500 individual HHs, so that direct and active participation of all members to the affairs of the society will be possible in practice. Accordingly, given the number of poor smallholder planters expected to participate in the project, there will be a minimum or 12 primary societies at Nshili, and a minimum of 9-12 primary societies holding shares in the CPMCC. The membership of these primary societies must be IFAD target group. To these, a maximum of 2 other primary societies of non-IFAD target group members could eventually be added. Individuals or organizations not involved in producing crops for processing will not be allowed to buy shares in the processing companies, except for the case of an international FT organization that would accept to become a temporary shareholder with the objective of promoting the business in the primary interest of the smallholder producers, as suggested above and further discussed in Working Paper 12.

Policy regarding disbursement of project funds for tea development. Disbursement of project funds earmarked for tea plantation development in Mushubi, and for factory construction in Nshili will be made conditional to: (a) the successful distribution of the Nshili plantation to smallholders, including a minimum of one third beneficiaries being women head of household; the selection of beneficiary; HHs will be done by the Cell DC of the sectors neighbouring the estate. The Cell DCs will call for general assembly meetings to ensure transaprency of and fairness in the distribution. Selection criteria are broadly defined in Working Paper 2, Appendix 3, and to (b) the successful organization of cooperatives among the beneficiaries, all such cooperatives having obtained the relevant legal personality, and thus being entitled to own shares in the Nshili Tea Company, that alone can draw project funds to construct and operate the factory.

Policy regarding terms and conditions of funding the NT and the CPMCCs established under the project. Project funds channeled to the tea and coffee (cooperative) companies will be extended by Rwanda Financial Institutions on terms which must be adequate to secure: (i) a sound financial structure; (ii) the smooth start-up and development of profitable commercial operations; (iii) the acquisition of the cooperative shares through dividends in a reasonable period of time; and (iv) the coverage of the financial institutions transaction costs and reasonable profit.