Amanco: Providing Irrigation Systems to the Rural Poor

Latin America & the Caribbean • Mexico / Guatemala

Amanco: Providing Irrigation Systems to the Rural Poor Prepared by • Loretta Serrano (Mexico) Sector • Agriculture Enterprise Class • Southern MNC

Summary For decades, small farmers in Latin American have faced low productivity, inefficiency and as unfair prices due to the prevalence of commercial intermediaries. Against this backdrop, Amanco, a subsidiary company of GrupoNueva, developed a hybrid value chain model for serving this low-income market. As part of its endeavour, first in Guatemala and then in Mexico, 1 the company experienced a shift from selling water conveyance supplies to offering integrated irrigation solutions per hectare of land. The solution came with a set of attached services to help increase productivity on the farm and maximize efficiency of water use. To this end, the company partnered with unconventional civil society organizations, those that were closer to the base of the pyramid clients, as well as others that provided micro-credit and access to alternative commercialization channels. As a result of better irrigation methods, productivity for Amanco customers had increased up to 22 percent, related labour costs had dropped 33 percent and water efficiencies that allowed extending the irrigated land by 50 percent with the same supply were achieved. “I reckon that ten years from now, our low income market- or base of the pyramid- sales must be around 30 to 40% of the total.” Francisco de la Torre. General Director, AMANCO Mexico

GrupoNueva GrupoNueva is a private holding, integrated by three companies (Amanco, Masisa and Plycem) with commercial activities in the American continent related to forestry, wood and fiber, cement, pipes and various water conveyance accessories. With headquarters in Sao Paulo, operations in fifteen countries 2 and a slogan of “successful companies for a better world,” GrupoNueva employed more than 17,000 people in 2005. 3 Founded by Stephan Schmidheiny (see a brief description of the founder in Appendix A) with the goal of ensuring that its companies contributed to improving the societies in which they operated, GrupoNueva’s current vision is to be recognized as a leading industrial group operating in a framework of ethics, eco-efficiency and social responsibility that generates value and improves the quality of life of its neighbours and the regions in which it operates. Its companies follow a “triple bottom line” management strategy, under which success is defined as the simultaneous achievement of positive results in the economic, social and environmental spheres. Accordingly, triple bottom line scorecards have been adopted to monitor and assess progress in all of GrupoNueva’s operations. In 2005, maintaining a continuous growth trend for the fifth consecutive year, GrupoNueva had sales of US$1,433 million, 15 percent higher than 2004 and profits of US$240 million. 4 GrupoNueva’s CEO and President since 1998, 1

The initiative has also been replicated in Brazil; however, this case does not cover the Brazilian experience. 2 US, Mexico, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica, Panamá, Colombia, Ecuador, Venezuela, Perú, Brasil, Argentina and Chile. 3 GrupoNueva website. Available at www.gruponueva.com. 4 EBIDTA.

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Julio Moura, believed that companies in Latin America must change their "mental maps" to incorporate sustainability thinking. 5 Through Moura’s leadership, GrupoNueva’s companies were making Schmidneiny’s vision a reality not only by operating in a socially and environmentally responsible manner, but also by building alliances with civil society organizations to help create sustainable communities.

Low-Income Market Drive “Everybody wins” Contest

at

GrupoNueva:

In 2003, Stephan Schmidheiny announced his decision to donate 100 percent of his personal GrupoNueva stock to the VIVA Trust. 6 Since then, all dividends generated are earmarked for the promotion of sustainable development throughout Ibero-America, mainly through the work being done by the AVINA Foundation. 7 According to Schmidheiny, 8 VIVA was a learning experiment with no limits as to how to bridge what is traditionally considered a wide gap- the worlds of business and social entrepreneurship. In reality the two face a number of common challenges at the levels of structure, organization and management tools. Schmidheiny says, “There clearly is a potential for synergy that was not commonly recognized by those who live and work in only one of the two worlds. I set out to search for ways to take advantage of this synergy potential.” As part of its plan to open up new business frontiers, in mid-2003 GrupoNueva designed an internal competition aligned with its aim of collaborating with the achievement of the United Nations Millennium Development Goals and within the framework of the World Business Council for Sustainable Development (WBCSD). 9 As a result, employees were asked to submit new business ideas for low-income markets through the launch of the contest “Everybody wins: Imagine unimaginable businesses.” This contest was aligned with GrupoNueva’s corporate value of encouraging employees to become proponents in the group's efforts toward sustainable development. In Moura’s vision, bottom of the pyramid thinking needs to be in the hearts of everyone in the company. The business plans had to be developed with the following criteria: • • • •

Target the poor with goods and services that improve quality of life Be innovative, profitable and consistent with the company’s strategy Establish partnerships Foster a high level of participation among employees.

5

Webb, Tobias (2007). VIVA stands for: Vision and Values. Available at www.vivatrust.com 7 Avina website. Available at www.avina.net 8 Extract from 2006 interview. Available at www.gruponueva.com/databases/comunicacion/sitenueva.nsf/pages/entrevistastephaneng.html 9 GrupoNueva (2003), pg. 31. 6

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There were a total of 246 business proposals, which targeted five low-income segments identified by the company. 10 Out of the proposals received, GrupoNueva selected twelve pilot projects for implementation. A year later, in mid-2004, the progress of the projects implemented was evaluated in financial and social terms. A small-scale irrigation project from Amanco Guatemala, titled “Sustainable Rural Communities in the reach of globalization” was selected as the winner given its outstanding results. 11 Following the contest’s experience, an ambitious challenge was set by Julio Moura, GrupoNueva’s President and CEO: by 2008 at least ten percent of the total sales of the holding had to be generated from “socially inclusive businesses,” offering low-income customers opportunities through the market to break the vicious cycles of poverty. While this was a commercial target, it also aimed to actively promote sustainable livelihoods. According to Moura, “A project promotes sustainable livelihoods when it is profitable, generates new businesses and benefits clients. And all this must be accomplished without reducing the quality of our products.”

Amanco Amanco leads the production and marketing of water management systems in Latin America with a focus on the building sector and on drip-feed irrigation for agriculture (see Appendix B for a list of Amanco’s products by market segments). Its corporate headquarters are located in Sao Paulo, it operates 21 plants and markets its products in 29 countries in the Americas and the Caribbean. In 2005, its net sales were US$688 million, it employed 7,133 people, 12 and its regional breakdown of its net sales was as follows: Breakdown of net sales distribution (by percent of sales per region) Brazil

27%

Central America and Panama

23%

Colombia

18%

Andean countries (except Colombia)

17%

Mexico

11%

Argentina

4%

The Latin American sales of Amanco’s water management solutions covered the following market segments are illustrated below:

10

The poor lacking basic services, carpenters and artisans, small rural producers, informal workers and the unemployed and youth at risk. 11 Grupo Nueva (2005). 12 This includes direct and indirect employment.

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Breakdown of Amanco’s market segments (by percent of net sales) Urban building

55%

Infrastructure

25%

Agriculture

13%

Other

2%

In 2006, Amanco strengthened its participation in base of the pyramid markets. The segment’s net sales increased by almost ten times- reaching more than 15,000 beneficiaries with access to irrigation solutions and efficient water use. As part of its commitment to assume a leadership role in water issues, Amanco organized more than ten discussion panels and events in 2006 with the participation of government, NGOs, academics and private companies in different Latin American countries. In Mexico, Amanco had four factories, seven sales offices and three distribution centers. In 2005, following GrupoNueva’s base of the pyramid initiative, Amanco Mexico piloted several pro-poor market initiatives, one of which targeted small-scale farmers following the experience of Amanco Guatemala with its “Everybody wins” contest. 13

Amanco Guatemala’s: Drip Irrigation Systems for Small Farmers Amanco Guatemala faced a dual motivation for undertaking the “Sustainable Rural Communities in the reach of globalization” low-income market pilot project: first, its institutional commitment to sustainability and social responsibility, which took particular significance in the face of the high poverty levels prevalent in Guatemala; and second, tapping into a new market and client base. CHALLENGES AND INNOVATIONS For more than 800,000 small farmers in Guatemala, land is the only income source. About 87 percent of the poor depend on agriculture and only three percent of them receive technical assistance. The average area of low-income farmer’s land plots are from 0.5 to 5 hectares and their annual average income ranges from US$1,500 to US$2,000. 14 The vast majority of small-scale Guatemala farmers are subject to archaic irrigation systems and the natural rainwater cycle, restricting their annual production to two seasons. As a result of the “Everybody wins” contest, Amanco Guatemala designed a water efficient drip irrigation system. New products to target low-income markets were not developed. Instead, the available irrigation technology was adapted to the farmers needs. The pro-poor

13 14

The other one was directed to small-scale do-it-yourself shops. IESE case.

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irrigation systems are the same as conventional irrigation systems, minus one detail: the water supply and distribution lines are portable. These are mobile pipelines normally used for water extraction that have been adapted to be used as irrigation systems. The system was named “Irrigation 4 x 4,” because it enabled production to increase to four annual seasons obtaining four harvests. This system integrated several of Amanco’s products into one irrigation solution, designed to account for the terrain conditions, the type of water source and distance to it, as well as the type of crops. The lack of available resources and financing products prevented small farmers from investing in adequate irrigation systems. Beyond the sale of irrigation systems, Amanco’s pro-poor business approach aimed to increase the competitiveness of the agricultural sector. For example, new farming practices 15 according to international standards, farming of nontraditional crops, as well as the transference of best practices helped to increase quality of crops while preserving water and land resources. Also, it had the purpose of increasing the presence of Guatemala farmers in international markets by helping them to establish longterm contracts and alliances with trading companies. The new business approach called for the development of a hybrid value chain in collaboration with key partners such as NGOs, government and financing agencies, as well as trading companies. The farmer is the ultimate end-user and client; however, in the first stage, Amanco directed its efforts to identify organizations that involved a considerable number of low-income farmers. They looked at cooperatives, NGOs and farmers associations. Besides facilitating coordination and organization, these partners provided credit and technical assistance so that small farmers could afford and install drip irrigation systems in their plots. In Guatemala, Amanco worked with a diverse group of partners including the NGO Opción, the dealer Aj Ticonel, Inter-American Development Bank (IADB), World Bank, Soros Foundation, Ministry of Agriculture of Guatemala, and CentraRSE, partner of the World Business Council for Sustainable Development (WBCSD) in Guatemala. RESULTS Between 2004 and 2005, 273 small farmers benefited from Amanco’s project in Guatemala 16 generating sales of US$238,529 and exceeding Amanco’s expectations. For 2006, a 42 percent increase was expected. The gross sales margin was 31 percent, although Amanco projected that it would stabilize at 25 percent on average during the following years. Small producers were able to harvest twice as much (from two up to four times a year), with savings of 33 percent in terms of labour costs, yield increases of over 22 percent and significant water efficiencies. With the same amount of water they could irrigate an extra 50 percent of land. Manuel Yax, Leader of the Chirijuyú community and member of the agricultural cooperative “Horticultores Unidos,” expressed: "Before we started using Amanco’s irrigation system we

15

Some of these practices were: higher quality, use of pesticides, hygiene practices, etc. The Guatemala project focused in the communities of Chimaltenango, Sololá, Quetzaltenango, Quiché and Huehuetenango.

16

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harvested about 60,000 lettuces, some 2,727 crates. Now our production has increased to 3,333 crates." Moreover, drip irrigation provides regular humidity directly to the roots without sprinkling the leaves or fruits. This helped plants to grow stronger and healthier while reducing water spills which are normal under other irrigation methods. In this way, producers obtained better quality products with greater access to the formal economy. Amanco Guatemala, through its partnerships, also facilitated the establishment of long-term relationships between small-scale farmers and trading companies. Amanco had plans to engage with 2,000 additional small farmers by 2010. It had identified a total of 2,500 potential projects, with a monetary value of US$2,000, which represented potential sales of US$5 million. Given its outstanding results, at the end of 2005 the Inter-American Development Bank (IADB) authorized a loan of nearly US$1 million for Amanco so that other farmers in Guatemala could have access to this initiative. REPLICATION IN OTHER MARKETS The experience in Guatemala generated valuable know-how for Amanco. A year and a half after the launch of the pilot project in Guatemala, GrupoNueva decided to replicate the model as a profitable Latin American business to achieve a leadership position among low-income market segments. It was estimated that by 2015, annual sales of small-scale irrigation systems in Latin America could account for 14,000 units, with a value of US$28 million. In 2005, the project began its replication in Mexico and Brazil. Following the steps of Guatemala, Amanco Mexico partnered with Ashoka, 17 an international civil society organization which promotes social entrepreneurship worldwide, to develop the Mexican version of the base of the pyramid business model.

Pilot project in Mexico: “Irrigation Initiative for Low Income Producers” The first step for Amanco Mexico, conducted in collaboration with Ashoka, was the selection of a social entrepreneur who could act as the grass-roots partner for the pilot project. Ashoka, acting as a development broker, initially identified and invited a total of six of its Mexican social entrepreneurs and fellows who worked in rural projects. For some of them, collaborating with a private firm was inconceivable. For others, upgrading irrigation systems was not among their priorities. Out of this process, Amanco and Ashoka selected two social entrepreneurs: Arturo García the Director of the Sustainable Farmers Network in Guerrero (RASA, Red de Agricultores Sustentables) and Juan José Consejo, Director of the Nature and Society Institute of Oaxaca (INSO, Instituto de la Naturaleza y la Sociedad de Oaxaca). This case only covers the experience of the former, RASA, which is an NGO helping small farmers located in poor regions of Guerrero State attain higher living standards under a

17

In Sanskrit, Ashoka means “the active absence of sorrow.” Ashoka official website. Available at www.ashoka.org

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framework of participatory democracy and social responsibility. RASA was legally constituted in 1993 but had over 25 years of experience in rural projects, providing farmers with commercial and manufacturing rural services, as well as specialized advisory and training. It was integrated into a network of farmer associations and more than 500 members, with indirect benefits for more than 1,500 families. Arturo Garcia’s decision to partner with Amanco was part of a broader strategy to contribute to the rehabilitation of the lemon sector in Guerrero in a context of a production shortage in the local markets. The community selected for the pilot project was La Testaruda, with which RASA was already working. The pilot project was initiated in 2005. This community was comprised by a total of 52 small lemon farmers, who on average owned two hectares of land. Living conditions in this community were of high deprivation. Inhabitants had no access to sewage services and the majority of houses had soil floors. In terms of farming activities, low-income lemon producers were subject to low levels of productivity due to the old age of their plants, the prevalence of archaic irrigation methods, the need for modern equipment and the lack of capital to invest in it. Small farmers had access to groundwater, mainly through wells and boreholes, because there were no piped water services. Water inefficiencies were common, since traditional irrigation methods implied manual irrigation with a hose for two or three hours until the available water deposits emptied. Under those circumstances only farmers with adequate water availability were able to produce enough to make a living. Those without access to water deposits depended on the rainy seasons. Farmers from La Testaruda sold their lemons in the local markets and nearest cities without being able to reach larger wholesalers or supermarket chains. Agriculture involved the whole family with siblings and wives traditionally supporting with the farm duties. Low-income farmers were desperate to break free from their impoverished conditions. Hence, there was high migration to the nearest cities or to the United States. One of the farmers commented, “People have lost hope, as agriculture does not provide sustainable livelihoods.” The public sector’s role was characterized by a few areas of opportunity. Small farmers felt neglected and stated that agriculture was not a priority for the government. Public resources were commonly distributed without a pro-poor approach and the lack of supervision and accountability meant that farmers who were not in need of resources received support. The fact that small farmers of La Testaruda community had associated in a cooperative and a formal Irrigation Unit before the pilot project was launched enabled them to lobby and more effectively demand support from the municipal government. As a result, they achieved transportation infrastructure and public lighting services in 2005, among several other community improvements. The 104 hectares that integrated the community of La Testaruda represented the first stage of Amanco Mexico’s pilot project, which ultimately aimed to reach more than 1,000 hectares.

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Early obstacles farmers

in

serving

small

Mexican

GEOGRAPHICAL DISPERSION AND LACK OF COORDINATION As clients, small farmers were characterized as being geographically dispersed and disorganized. Therefore, serving them entailed higher costs in terms of personalized services, increased promotion of the products and their benefits, specialized designs, new distribution channels and higher financial risks. As mentioned earlier, La Testaruda farmers owned two hectares on average, whereas a profitable irrigation system for Amanco required a minimum of ten hectares. Weak social capital among small farmers in La Testaruda was another obstacle. The Irrigation Unit representatives mentioned the importance of promoting social gatherings among farmers and their families as a key point that ultimately helped in the sharing of collaborative activities, such as preparing the roads for excavations. Low levels of organization and coordination among small farmers also translated in a limited access to national and international markets. LACK OF KNOWLEDGE Low-income market initiatives necessitated an inherent need for exploring and learning. As part of the new endeavor, both the company and small farmers- who were potential clients for Amanco- had to invest significant time and effort in gradually grasping the new model. From the supply-side, Amanco faced an initial lack of understanding of low-income markets. The first challenge was to understand how to serve small farmers profitably, because irrigation for base of the pyramid markets was initially conceived as being “completely different than irrigation for the traditional market.” The fact that the company had grasped the new model in Guatemala did not mean that the process in Mexico would be simple. Amanco faced certain lacks of competency when entering the new market. Personnel in charge of the new project had a highly technical perspective. It was a real challenge to achieve internal understanding regarding the financial and time implications of entering this new market. This was particularly the case for the commercial unit, because they were not used to working with NGOs. Moreover, it was thought at times that as the project was addressing a social problem, it was unnecessary to monitor and evaluate it in terms of its economic value. This put the initiative’s financial sustainability at risk, as well as its investment prospects. From the demand-side, there was a lack of interest and scant awareness among farmers of La Testaruda regarding the need for change and the potential to improve. In particular, it was hard to convince small farmers, who apparently had good water access, of the benefits of new irrigation systems- even if they experienced high inefficiencies. Whereas high income clients demanded state of the art irrigation systems, there was a clear need to communicate and explain the benefits to small. Furthermore, there were obstacles related to a lack of enthusiasm and confidence for renewing old lemon plants, because they had an emotional value and were the only source of income -even if a low productivity one- for the majority of

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small farmers. New lemon plants took at least two years to bear fruit. It was a significant sacrifice to make and only ten out of 52 of La Testaruda small farmers had gone through it by 2006 as part of the pilot project. The Irrigation Unit representatives thought that incentives would be realized gradually through demonstrations among small farmers. In addition, NGOs working with small farmers lacked accurate information on the benefits and prices of modern irrigation systems. LACK OF RESOURCES Small farmers were unable to afford the total cost of modern irrigation systems and, as mentioned previously, public subsidies were not reaching them as would be expected. In addition, low-income farmers were unable to meet the traditional financial criteria and standards for capital raising that would allow them to invest in adequate irrigation systems.

Business Model Innovations in Mexico As was the case in Guatemala, there was no need to develop new products in Mexico. The innovations had more to do with the way irrigation systems were designed and used, as well as the business processes used to market them. There were many similarities in serving traditional and low-income markets, among them the processes of hydraulic design and topographic mapping. Three types of irrigation systems were offered to small farmers (drip irrigation, portable irrigation and micro-sprinkling. In contrast to Amanco’s experience in Guatemala with the “Irrigation 4 x 4,” in Mexico it was not possible to offer a standardized product. On the contrary, irrigation systems were designed and adapted to the particular needs of small-scale clients. ORGANIZATIONAL STRUCTURE Initially, Amanco’s low-income market initiative was managed from the Innovation Unit in Mexico. In 2006, a Base of the Pyramid (BOP) area was created within the Commercial Department. Targeting low-income markets prompted within Amanco Group a breakthrough in its business model: the provision of integrated irrigation solutions (products and services). As part of this evolution, a new division named “Amanco Agricultural Solutions” (ASA) was created. DISTRIBUTION CHANNELS Traditionally, the company dealt with distributors who sell the irrigation equipment to highincome clients. Serving low-income markets involved opening a new distribution structure able to reach end-users directly. This was possible through partnerships with grass-roots NGOs who became new distributors. As part of the agreement, Amanco provided training to the NGO technicians in charge of supporting and supervising the installation of the irrigation systems, which was the ultimate responsibility of small farmers. PROMOTION The initial launch of the value proposition elements to potential clients was under the responsibility of the NGO and was conducted through meetings and a word of mouth strategy Case Study • Amanco: Providing Irrigation Systems to the Rural Poor

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among small farmers. Exhibition parcels were set in plots lent by selected farmers to explain the functioning and benefits of the irrigation systems to the rest of the community. This type of practice was unnecessary for high income clients as they were already aware of the various products, their benefits and the technical features of irrigation systems. The promotion materials were developed and paid for by Amanco, whereas the active promoters or salespersons were from the NGO (RASA, in the case of La Testaruda). The point of departure for RASA’s sales strategy was not to directly sell the new irrigation systems to small farmers. Rather, they started helping them identify and understand the daily problems they were facing through technical diagnostic practices. Action plans with the committed small farmers followed. If a farming cooperative already existed, RASA took advantage of this to reach a greater number of small farmers. When cooperatives did not exist, their creation was actively promoted by RASA. HUMAN CAPITAL Amanco created new positions for which skills related to low-income markets were fundamental 18 and hired a person to be 100 percent devoted to the new project. Personnel with different skills were hired. 19 Moreover, Amanco had to establish different functions for its employees. Whereas the technicians serving traditional markets were highly focused on increasing sales and revenues, in the context of poor markets they had to get involved in a series of promotional and training activities. Hence, Amanco had to invest in training for its own technicians, as well as those from RASA in order to strengthen their skills and disposition to new ways of working. Amanco also assigned in-house technicians to be based in the NGOs offices and conduct activities such as hydraulic design, topographic mapping, gathering of data and preliminary budgeting. During the installation stage, the role of Amanco’s staff was to provide support and guidance for the NGO technicians. FINANCING MODEL The price of an irrigation system ranged from US$2,500 to US$3,000 20 per hectare. The financing model that developed as the ideal one for the pilot project was a hybrid combination of the following contributions: Financing

Responsible

Comments

20% Down payment

Small farmers

Paid in three installments

30% Microcredit

Small farmers

Managed by microlending agencies with funding from various sources. The contractual agreements were carried out with each farmer individually, while the cooperative acted as the guarantor or endorser.

50% Public subsidy

Mexican Ministry of Agriculture (SAGARPA) and the National Water Commission (CNA)

Either of the sources of public resources was accessed depending on the project location. These resources were channeled through public bidding processes and were negotiated by the social entrepreneurs.

18

Annual Report 2004-2005. An example was Raquel Salgado, an agronomist with a Masters Degree in international cooperation for Development who was hired in 2006 and designated as the BOP Manager. 20 This was equivalent to 25,000-30,000 MXP. 19

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Amanco offered price discounts of 15 to 20 percent to local NGOs depending on their technical capacity for supporting the design, installation and other services to be offered to small producers. PARTNERSHIPS The complexity of serving low-income markets, and its implied higher costs called for the involvement of actors who helped Amanco put in place the social development aspects needed to attain commercial success. As a result, Amanco established an array of alliances with several non-traditional actors, such as the ones already mentioned. In the following paragraphs the background and roles of the different partners of the hybrid value chain approach are described. Small farmers Responsibilities of the clients included clearing the terrain in which the irrigation system would be installed, replacing the old lemon plants with new ones, paying 50 percent of the total irrigation system cost (20 percent of initial payment and 30 percent through microcredits) and actively participating in the installation of the new irrigation system with the support of RASA and Amanco. Ashoka Ashoka’s social change model and strategy had evolved from promoting individual social entrepreneurship to fostering group social entrepreneurship under an initiative known as Full Economic Citizenship (FEC) into which Amanco’s base of the pyramid initiative fit. Ashoka’s FEC had the ultimate goal of helping low-income customers be recognized as viable and legitimate clients by companies. Its approach was the creation of hybrid value chains by facilitating the process of bridging the private and the social sectors. In the agricultural sector, Ashoka aimed to transform small farmers into autonomous microentrepreneurs linked to the market and aware of sustainable development issues. From Amanco’s point of view, the alliance with Ashoka was central, because the company lacked the capacity and means to promote its products and services among small farmers in the way it was possible through Ashoka’s social entrepreneurs or NGOs. RASA As explained earlier, Amanco partnered with RASA, an NGO that traditionally worked with small farmers in Guerrero. Through this partnership the company was able to serve groups of farmers, rather than individual farmers. Besides acting as a distributor and promoter for the company, RASA provided additional services such as technical assistance, facilitated access to financing and commercialization channels, as well as the administrative procedures for getting public subsidies. In exchange for the services provided to low-income clients, RASA received a 20 percent commission plus free training from Amanco. RASA assets were its community closeness and knowledge, its familiarity with the region and its problems, as well as the trust and legitimacy it had among its network of contacts.

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Wal-Mart The Wal-Mart Mexican Foundation had among its key social responsibility concerns to promote the commercialization of rural and indigenous products. In 2005, they launched a program named “Contributing is also an art” through which handicraft products made by more than 1,300 members of the Mazahua and Tarahumara indigenous communities were offered to clients in more than 100 Wal-Mart stores nationally. Aware of the fact that its base of the pyramid initiative would only be financially and socially sustainable if small farmers were able to widen their commercialization alternatives, Amanco established a partnership with Wal-Mart’s Mexican Foundation through negotiations conducted by Ashoka. The aim was to promote the direct sale of small farmers’ agricultural products. Although the agreement with Wal-Mart had not resulted in any commercial exchanges at the time of this research, it was expected that it would increase small farmers’ profit margins by avoiding commercial intermediaries in the sale of agricultural products (such as lemon), fostering the financial sustainability of the project. Ashoka was responsible for coordinating the partnership between Amanco and Wal-Mart.

Development Outcomes The outcomes derived from the pro-poor project of Amanco in Guatemala are described above. While the results in Mexico were still not as clear, there were some evident signs of progress: INCREASED PRODUCTIVITY AND HIGHER INCOME PROSPECTS Small farmers had the possibility of elevating their productivity not only through the introduction of new irrigation systems, but also through the replacement of their old plants. Amanco irrigation systems allowed for continuous production for eight to ten months per year. The current annual yield was nine tons per hectare, and the project’s goal was to reach a level of 25. The representatives of the Irrigation Unit in La Testaruda estimated that the new irrigation systems would allow them to increase their income by at least three times, although they still had not sold the products generated by the new plants. LABOUR COSTS SAVINGS The installation of new irrigation systems represented reductions in labour costs or time devoted to irrigation. What required from three to four days under manual irrigation schemes could be done automatically, freeing up small farmers’ time for other farm and personal duties. WATER SAVINGS Amanco’s irrigation systems made a more efficient use of water possible. There were different percentages of water savings, depending on the irrigation system used, with a maximum of 60 percent. Besides the rationalization of the use of water, the new irrigation systems helped to halt land erosion.

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NEGOTIATING INFLUENCE The greater level of organization and coordination among small farmers yielded the most positive results. Because of their association, they realized that there was a huge difference between the real market prices and those paid to them by commercial intermediaries: while the intermediary paid them two pesos per crate (from 22 to 25 kilos), in the market the price was up to 13, which is 6.5 times higher. SENSE OF PRIDE AND OPTIMISM Amanco’s project had helped to renew small farmers’ hopes. La Testaruda producers expressed that they knew they were going to become an exemplar community for other towns, municipalities and states: “There is a renovated hope as we are starting to see the transformation.” SOCIAL ENTERPRISE DEVELOPMENT Amanco was contributing to the development of social micro-enterprises within existing NGOs, such as RASA, by involving them as distributors and designing financially-sound models for the sale of irrigation systems.

Challenges Amanco and Ashoka faced pressing issues in the short-term. They had established a sales target of US$1 million for June 2006 which had not been achieved due to delays in the access to public subsidies (the government worked under annual budgets and not according to agricultural cycles). Further delays resulted from difficulty in finding a local institution that could manage rural microcredit in La Testaruda and underestimation of the human resources required to serve small farmers. Besides, small farmers still faced a financing restriction in terms of the resources available to them for investment. According to farmers, getting the money for the initial down-payment was still hard. In the medium to long-term, the project had to consolidate access to alternative commercialization channels for farmers’ products as a fundamental element in the viability of Amanco’s project. Another key point would be how to guarantee that higher incomes would in fact result in better quality of life and not only in short-term consumption. The following paragraphs explain some specific challenges: PAYMENT DELAYS AND RETURN ON INVESTMENT The financing mechanisms (subsidies and credits) that operated in low-income markets implied common delays which called for greater flexibility and patience from Amanco’s Commercial and Finance Departments, as well as greater accountability and communication on the side of RASA. The main cause for the delays was the difficulty in getting public subsidies, as well as the difficulty for small farmers to collect the resources for down payments. Delays and longer payment periods made it difficult to maintain constant prices. The experience had prompted a reflection in Amanco: the need to extend the expected investment return period from three to five years, which was the common framework, up to seven to nine years to take into account the processes of community trust building, social capital and partnering.

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AVAILABILITY OF PUBLIC SUBSIDIES Scaling up the pilot project in Mexico would require enormous additional lobbying in order to obtain the needed public subsidies. Furthermore, Amanco planned to work more closely with the Mexican public authorities to facilitate a pro-poor resource allocation regarding the acquisition of small-scale irrigation technology. To date, public subsidies had been negotiated by social entrepreneurs on behalf of producers, on a farmer to farmer basis. MARKETING Additional efforts were needed to persuade a greater number of small farmers on the benefits of the new irrigation systems through a wider campaign communicating to small farmers how their lives could be transformed. This was also one of the main challenges for RASA. EVALUATION AND TRAINING Comprehensive performance assessment, under a triple bottom line framework, was pending. To date, the project only monitored the sales and number of beneficiaries. Also, the need to continuously train the company in relation to the new business paradigm and training for NGOs to relate to the commercial approach were recognized needs. COMPETITION Bringing in new competitors so that the transformation occurred at an industry level and lowincome markets could have diverse alternatives in terms of goods, services and prices was considered fundamental. Hence, Ashoka was searching for other supplier companies besides Amanco. There was no exclusivity agreement between Amanco and Ashoka. NGO SELECTION AND CAPACITY Ashoka had to find an effective way to systematically identify other NGOs which could become partners of hybrid value chains since the process of searching and selecting social entrepreneurs who were interested in participating as distributors could become a future test. Regarding NGO capacity, a further concern of Ashoka was that, in the drive of scaling-up and replicating the pilot, NGOs competencies in managing their new commercial activity could be overestimated causing them to suffer from a mission-drift and cultural change as they engaged in commercial initiatives. This was not an issue for RASA, because this NGO was originally conceived as an entity providing services. In fact, its revenues– even before Amanco- resulted from the products and services offered to small farmers’ cooperatives.

Further Scalability and Replication Prospects Amanco had already replicated and adapted the experience from Guatemala in Mexico. Within the Mexican project, a diversity of opportunities for scalability and replication existed, because each of the different actors involved were working towards that end. •

The pilot project had given incentives to a competitor company of Amanco for providing irrigation services to small farmers in Guerrero. Certain imitations were already taking place.

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•

• •

• •

RASA planned to expand the initiative’s reach beyond lemon growers to banana, mango, avocado and coffee growers, estimating that up to 60 percent of its total future income could result from a new business model that considered irrigation as part of integral agribusiness. Small farmers’ committees from other Mexican States such as Colima and Michoacan had visited Guerrero to learn from its experience and try to replicate it. Ashoka had plans to test the hybrid value chain business model in various sectors besides irrigation (e.g. health, housing) and in various countries (e.g. Brazil, India) with the aim of provoking systemic transformations. Amanco Mexico had contacted other NGOs 21 in order to expand its reach to as much as 17 Mexican States and attain its BOP goal. Amanco Mexico presented a project proposal to the IADB, in collaboration with the Business Commission for Sustainable Development of the Business Coordinator Council (CCE-CESPEDES). 22 The project was titled “Network of partners and small enterprises specialized in rural BOP.” Approval was expected by mid-2007. Through this project Amanco Mexico intended to create small local enterprises which could act as distributors of agriculture solutions (e.g. modern irrigation systems, greenhouses) and was expected to benefit about 400 small producers, representing 1,000 hectares with new irrigation methods by 2008.

Conclusion Three key lessons 23 were derived from Amanco’s low-income market experiences in Guatemala and Mexico: first, the importance of partnering with a myriad of organizations working in development projects, facilitating a broader and long-term view of the commercial initiatives towards BOP markets, as well as leveraging the social capital and trust of local social entrepreneurs with the communities; second, promoting access to credit through adequate financing mechanisms; and third, provisioning tailor-made solutions according to the local needs of small-scale farmers.

21 The CSO referred to is “Fundación Mexicana para el Desarrollo Rural” (FMDR). Available at http://www.fmdr.org.mx/ 22 Comisión de Estudios del Sector Privado para el Desarrollo Sustentable. Available at http://www.cce.org.mx/cespedes 23

Sustainability Report 2004-2005, page 26.

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References Ashoka. Official website. Available at www.ashoka.org. Budinich, Valeria, Kimberley Manno and Stephanie Schmidt. 2006. “Hybrid Value Chains: Social Innovations and the Development of the Small Farmer Irrigation Market in Mexico.” Ashoka Innovators for the Public. Article submitted for inclusion in HBS Global Poverty Book. Available at http://www.hbs.edu/socialenterprise/pdf/5-BudinichSchmidtReottPresentation.pdf. Changemakers. Official website. Available at www.changemakers.net. Fundación Wal-Mart de Mexico. “Social Responsibility www.walmartmexico.com.mx/files/2005rsSP.pdf

Report.”

Available

at

GrupoNueva. 2003. “Reporte de Sostenibilidad 2002-2003.” GrupoNueva. 2005. “Una nueva oportunidad de negocios: El segmento de menores ingresos. ¡Todos Ganamos!” GrupoNueva. “Negocios Base de la Pirámide.” Available at www.gruponueva.com/databases/comunicacion/sitenueva.nsf/files/reppdfneg/$file/negociosse gmentos.pdf Webb, Tobias. 2007. “Latin America: Time to be bold, daring, and reach new markets.” Ethical Corporation. 12 January 2007. Available at www.ethicalcorp.com/.

Interviews Budinich, Valeria. Vice President, Full Economic Citizenship (FEC), Ashoka. 18-21 October 2006. López, Rodolfo. Director, FEC, Ashoka. 18-21 October 2006. Bayona, Yadira. Coordinator, FEC, Ashoka. 18-21 October 2006. García, Arturo. Director, RASA. 18-21 October 2006. de la Torre, Francisco. General Director, Amanco. 18-21 October 2006. De La Garza, María Luisa. Marketing Director, Amanco. 18-21 October 2006. Téllez, Rubén. agricultura Solutions Manager, Amanco. 18-21 October 2006. Salgado, Raquel. BOP Manager, Amanco. 18-21 October 2006. Noble, Gisela. Director, Wal-Mart Mexico Foundation. 18-21 October 2006. Leaders of the Guerrero State Lemon Council (COELIM, Consejo Estatal del Limón). 18-21 October 2006.

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Appendix A: Stephen Schmidheiny Swiss-German business and social entrepreneur, author and expert on sustainable development, part of the fourth generation of a successful family that owned globally important cement and asbestos cement holdings. After graduating in law from Zurich University in 1976, planning never to practice law but curious to see how law and its associated institutions work, he quickly took over the asbestos cement part of the family business. Realizing that he did not want to be associated with this material, he exited the asbestos industry and diversified into a number of business activities, which included being a founding investor in the Swatch watch company, owning Leica Instruments, and serving on the boards of companies such as Nestlé, ABB and UBS. In 1995 he decided to focus business interests on Latin American forestry, building materials, and water systems companies. Stephan has loved Latin America since he worked in Brazil in his early twenties as a trainee foreman. In 1992, he served as the principal business advisor to the Secretary General of the UN conference on Environment and Development in Rio de Janeiro. He founded the World Business Council for Sustainable Development (WBCSD) of which he now is Honorary Chairman. In 1994, he established the AVINA Foundation 24 to encourage civil society and business leadership for sustainable development in Ibero-America. Through AVINA Foundation, Mr. Schmidheiny supports a number of sustainable development projects throughout Latin America. In 2003, Schmidheiny retired from formal positions with corporations and other organizations and donated his stock in the GrupoNueva holding company he founded to a trust called VIVA (standing for Vision and Values). He added other stock to bring the value of the gift up to $1.1 billion. In its ownership of GrupoNueva, VIVA makes sure that the company is a leader in corporate social responsibility. VIVA also uses the resource stream from GrupoNueva to fund AVINA, provided that AVINA lives up to its mission. Thus, VIVA is an unusual philanthropic structure that creates checks and balances for both NUEVA and AVINA. This was Mr. Schmidheiny’s innovation, which by their reckoning does not exist elsewhere in the philanthropic world. Stephan also hopes that if it passes the tests of time, it might serve as a model. His publications include “Changing Course: a Global Business Perspective on Development and the Environment” (1992), “Financing Change: the Financial Community, Eco-efficiency and Sustainable Development” (1996) and “Walking the Talk: the Business Case for Sustainable Development” (2002). He is also a board member of the Institute for International Economics (IIE) and the World Resources Institute (WRI). Sources: Stanford University, World Association for International Studies and theglobalist.com: http://www.stanford.edu/group/wais/topics/week091504/stephenschmidheiny091804.htm http://www.theglobalist.com/AuthorBiography.aspx?AuthorId=46

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AVINA stands for "acción, vida y naturaleza" or "ação, vida e natureza."

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Appendix B: Amanco’s Products Building. Pipes for hot and cold water, water tanks, sanitary drainage, drainage for rainwater, septic tank systems, gutters and drainpipes, electrical conduits Infrastructure. Water pipes, sanitary drainage systems, rainwater drainage systems, gauges and inspection chambers and telephone conduits Agriculture. Agricultural watering systems Other. Geosystems (synthetic textiles for engineering applications), sanitary ventilation systems, transport of natural gas in public distribution systems, mining systems

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September 2007 The information presented in this case study has been reviewed and signed-off by the company to ensure its accuracy. The views expressed in the case study are the ones of the author and do not necessarily reflect those of the UN, UNDP or their Member States. Copyright @ 2007 United Nations Development Programme All rights reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted, in any form by any means, electronic, mechanical, photocopying or otherwise, without prior permission of UNDP. Design: Suazion, Inc. (N, USA) For more information on Growing Inclusive Markets: www.growinginclusivemarkets.org or [email protected] United Nations Development Programme Private Sector Division, Partnerships Bureau One United Nations Plaza, 23rd floor New York, NY 10017, USA

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