Sustainability issue: FPO Blues

About ICCo

ICCo India is a not-for-profit development organization based in New Delhi.

ICCo stands for „Innovative Change Collaborative‟ in its vision and operational principles

as it believes that innovative strategic thinking and collaborative efforts are the key to bring

about the desired change in our society and systems. Overall, ICCo‟s work is grounded by

the twin core principles of: Securing sustainable livelihoods, and justice and dignity for all.

For the past 35 years, ICCo has built its expertise in providing solutions that are

innovative, sustainable and aimed at improving the lives at the base of the pyramid

population across India through the participation of multi stakeholders including the

private sector. Besides supporting work aimed at creating developmental impacts, ICCo

also offers a wide range of expert and responsive technical services to civil society

organizations (CSOs), governments, donors and private sector organizations. Vision

To be a high quality, benchmark resource, supporting social enterprises and businesses that ensure fair and sustainable development

Mission

We will enable fair and sustainable development by:

Designing and supporting innovative ideas and solutions in strategic collaboration with diverse stakeholders

Adherence to the highest quality standards in all spheres

Context and Background Challenge

Enhancing agricultural livelihoods is an important challenge in a country with the world‟s largest farming population (including small and marginal farmers whose

income growth has remained modest or stagnant in the twenty-first century). This despite India‟s

role as world leader in the production of several agricultural commodities. While co-operatives

have served the sector well in the past, governmental interference, poor reach (only 1 in 5 farm

households are estimated to have availed services of co-operatives), elite capture, and

organizational challenges have necessitated the launch of new institutional forms to meet certain

contemporary challenges concerning enhancing farm incomes through collective action. With a

new legal framework in place producer collectives (co-operatives and companies) and Farmer

Producer Organizations (FPOs) have been contributing valuable services to the agricultural value

chain. The SFAC (Small Farmer Agribusiness Consortium) figures indicate a reach of 887427

farmers in 30 states organised through 879 (483 registered, 396 under registration) FPOs with

over 21 civil society organizations providing technical and organizational support for the last 4-5

years.

The Companies Act of 2002 went into effect in India, creating a new kind of legal classification

for companies termed “producer companies.” Under this law, small-scale farmers that form

producer companies face many legal hassles and do not have a conducive political climate for

their businesses. For example, they are limited to accessing loans, grants and subsidies and are

not able to access private equity under the current system. Since they are not viewed as part of

the private sector but are seen as something more akin to NGOs, early stage companies have

little to no access to support or incubation.

These issues have been the centre of debate in the Indian government and yet, with the ruling and

opposition parties saying exactly the same thing, they hardly ever reach a consensus. We need to

identify a way of dealing with these externalities. Various policies implemented in the

agricultural sector have not been able to make a serious dent in the farmers‟ crisis. These

policies need to be scrutinised given the paucity of information regarding how various actors

perform under a policy umbrella in terms of reaching benefits to the farmers. An issue dogging

the new generation collectives involves the financing and working capital not reaching them. The

need of the hour is identifying how subsidies actually work and whether the issue of subsidies

not reaching the collectives is embedded within the FPOs per se, or if it is a weakness in the

implementation process. Strategies and Approach by ICCo

ICCo has created a 36-month incubation process, specifically for early-stage producer companies

that facilitate access to certain market players and finance. As part of the incubation process,

ICCo has created a rating and assessment tool in collaboration with SCOPE insight. All producer

companies receive a rating at the beginning and end of the incubation period. This rating helps

them gain access to finance from banking institutions and private funders.

ICCo’s Strategic Pilot on Incubating Producer Companies In 2013, ICCo launched a Strategic Pilot on „Incubating Producer Companies‟

to bring about a paradigm shift in the way Producer Organizations are promoted in the country through the following three- staged approach.

The pilot focused on moving away from a Capacity Building Approach for PCs, which need to

be treated as business organizations. The pilot provided immense learning on the best practices

to be adopted for incubating POs.

Technical Approach: Business Incubation ICCo takes a Business Incubation Approach that is clearly differentiated from a capacity

building approach. The difference lies in two major fronts. While the former is a traditional

approach of first forming the companies and subsequently working on the Business Plan, the BI

approach empathizes on conducting a market survey and a Value Chain Analysis first and then

based on requirement form companies.

The former focuses on providing trainings, exposures, learning programs etc, the later approach

is more comprehensive, professional and business oriented with a clear exit plan for the support

organization once financial linkages are established. And, in order to establish this exit after

financial linkages, it is necessary to work on NINE core parameters enumerated below:

1. Internal Management 2. Operations 3. Financial Management 4. Market 5. Supply Chain 6. Identify and plan to minimize External risks 7. Continuous improvement of Financial Performance 8. Identify and optimize use of Enablers and 9. Focus on Sustainability

The BI approach has a defined and well targeted process with clear timelines and

deliverables. It is a result based management approach in a way. It is aimed to increase the

entrepreneurship at the bottom of the pyramid. It includes a wide array of professional

services which are customized, beneficiary oriented, having clear deliverables, indicators and

sub sets of indicators with result check mechanism. This perspective has clear defined exit

beforehand and is measurable and verifiable. Ratings and assessment will be done and

comprehensively documented against the baseline on various parameters which are clear,

transparent and credit worthy. These ratings will help the prospective formal financial

institutions and other technical public and private institutions as well. Challenges faced

The organization expresses the following challenges while incubating the FPOs:

i. Limited access to capital investment and working capital: Requisite finance

(capital investment and working capital) is not available to FPOs when required.

Access to working capital is inadequate towards meeting programme expenses.

Supporting agencies (aid agencies) do not have a long-term commitment to FPO

promotion. It takes about eight years to sustain an FPO (three years go by during the

registration process and the rest of the time is taken up by the business cycle), yet

the support lasts for a very short duration.

ii. High taxation leading to poor financial viability: While some of the taxes are

acceptable high VAT, IT, and interest rates affects the financial viability of FPOs.

FPOs that are treated on par with normal private limited companies with a taxation

rate of 30.9% face a huge liability on their resources. iii. Subsidy Vs. business tradeoff: All the collectives comprise women and there have

been difficulties in shifting from the subsidy orientation approach, which has got

rooted in the community to loan/equity/business orientation. iv. Productivity enhancement vs. value enhancement: The focus of FPOs is more on

productivity enhancement rather than on enhancing value for production (through

processing, value addition, and market linkages). v. Low capability of local leadership: Professionals trained externally are not willing to

work in rural areas. The existing leadership at the community level has low capability

and nurturing it becomes a difficult and time-consuming task. vi. Poor membership: Maintaining 100 percent active membership has been difficult and

impossible so far. vii. Poor business orientation and huge statutory compliance: Business orientation

awareness regarding new age collectives is low among farmers. The statutory compliance on the part of FPOs is huge (including quarterly returns filing and

renewal) while poor understanding prevails among BoDs and CEOs in this context. For each business activity the FPOs need a separate license such as TIN, Agri-input licenses, Mandi licenses, TAN etc. The stocking of branded inputs, seed, and fertilizers requires advance payment. Even for stocking 2-3 months before the season‟s onset the FPOs often do not have adequate capital.

viii. Finance and investment: FPOs are reluctant to invest in share capital and banks are

not keen on opening bank accounts and lending to the FPOs as they have no assets to

provide collateral security or requirements such as minimum three years‟ balance.

Even if the government or private credit institutions agree to providing support timely

working capital is not available affecting the input supply while farmers lose trust in

the FPC.

Based on the challenges faced by ICCo and the FPOs they promote, suggest a suitable

strategy to mitigate risks. We do not expect a complete turnaround but some tweaks to the

model or even a parallel model are welcome. You may have a look at other organizations

working with FPOs and mould their strategies to suit ICCo’s mission and vision. Please

include examples from field if adopting some other organization’s strategies.

Round 1 Deliverables

A Write up on the case solution: Word Limit - 600 words

A presentation on the solution – Max 8 slides.