Global Young Leaders ProgrammeGlobal Young Leaders ProgrammeAceh Project 2009

Strengthening the Cocoa Value Chain for Sustained Growth in Aceh

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Table of Contents

Section Table of Contents Pages1 Executive Summary 3 – 62 Background 7 – 123 Business Opportunity 13 – 184 Business Model 19 – 295 G St t 30 345 Governance Structure 30 – 346 Production and Operations 35 – 467 Marketing Strategy 47 – 498 Human Resources 50 - 538 Human Resources 50 539 Community Benefits 54 – 6610 Financial Analysis 67 – 7411 Risk Assessment and Mitigation 75 – 7612 Implementation Plan 77 – 7913 Conclusion 80 – 8114 Appendix, Closing and List of Participants 82 – 84

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EXECUTIVE SUMMARYSection 1:

EXECUTIVE SUMMARY

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Executive Summary

IntroductionEmerging from nearly 30 years’ of conflict, post-tsunamiEmerging from nearly 30 years of conflict, post tsunamiAceh presents vast untapped business opportunities inresource-rich North Sumatra, Indonesia.

Leveraging the global shortfall in quality cocoa supply andLeveraging the global shortfall in quality cocoa supply andthe production potential of Acehnese smallholder farmers,we present a creative proposition of bringing togethervarious stakeholders through a corporate vehicle sourcingcocoa directly from farmers in Pidie District, Aceh.cocoa d ect y o a e s d e st ct, ce

Farmers, traders, exporters and buyers will shareownership in a profit-driven yet socially-committedenterprise, Alami Kado PT. Alami Kado aligns interests ofp , gall parties by restructuring the existing supply chain andimproving farmer capabilities and consistency in cocoaquality in the Pidie cocoa value chain.

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Executive SummaryAlami Kado Key Success Factors:

Alami Kado achieves alignment of interests through:• Providing market access and a clear price signal for farmers to upgrade their processes and cocoa quality, thus improving livelihoods

• Providing technical training and assistance to farmers through strong and long-term partnerships with NGOs and/or donor agencies

• Strategically positioning buyers to leverage on existing local networks and gaining direct• Strategically positioning buyers to leverage on existing local networks and gaining direct access to suppliers

• Maintaining a close relationship and obtaining support from local government

Being true to its roots in Aceh, Alami Kado will propel Pidie to the global cocoa supply scene.

Alami Kado Operations and Processes:

The focus is to streamline and simplify farmers’ activities. This is based on getting them to provideconsistent quantities of quality wet beans Wet beans are collected through a system based on existingconsistent quantities of quality wet beans. Wet beans are collected through a system based on existinglogistical networks for processing at 6 units conveniently situated close to Pidie cocoa farms. Onecentral warehouse will be strategically placed in Biruen (50 km from new port Krukuh) for packaging andshipment. Through a tiered pricing system, and effective corporate governance, Alami Kado ensuresthat value gain is channeled throughout the value chain. This will be supported by investing in training

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the farmers.

Executive Summary

Alami Kado Key Facts:O i iti l f di f USD1 031 000 i bt i d th h h it lOnce initial funding of USD1,031,000 is obtained through share capital,Alami Kado will work towards the following targets:• Increase production levels from 450 tonnes/hectare at present to

825 tonnes/hectare in Year 5825 tonnes/hectare in Year 5• Train 4000 Pidie cocoa farmers by year 3 • Distribute profits to shareholders by year 4• Achieve three-fold increase in farmers’ income by year 5y y

Section 2:

BACKGROUNDBackground to AcehHistory and DemographicsHistory and DemographicsCocoa Industry in AcehChallenges

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Background to AcehMap of Aceh and General InformationMap of Aceh and General Information

• Located on the northern tip of th i l d f S tthe island of Sumatra

• Strategically located within the vibrant economic triangle of M l i Si dMalaysia, Singapore and Indonesia

• 98.6% of population in Aceh is M liMuslim

• Aceh is rich in natural resources especially oil, gas

d d i f i ltand conducive for agriculture• Rice, coffee and cocoa are the

main agriculture products in A hAceh

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AcehHistory and DemographicsHistory and Demographics

The History• 30 years of conflict ended in 2005 bringing peace

and economic development opportunities to Acehand economic development opportunities to Aceh• Aceh was heavily damaged by the Tsunami in 2004

and the economic losses amounted to 97% of Aceh’s GDP

• In the post tsunami era Aceh’s economic growth• In the post tsunami era, Aceh s economic growth has been primarily driven by reconstruction/ rehabilitation efforts supported by domestic and international aid

• The future depends on a self-sustained economyThe future depends on a self sustained economyDemographics• Population (2005): 4,010,539• Land Area: 57,365.57km2• GDP Growth (without oil and gas,2006): 7.7%• GDP Per capita (2006): US$1,962.75• Net Export (% of GDP, 2007): 31.1%

(Source: Aceh Economic Update, 2007, The World Bank)

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Cocoa Industry in Acehy• Indonesia has been the world’s third largest

cocoa-producer since the 1980s. • Despite high end chocolate fetching upwards of

US$200/kg among affluent consumers, the average price paid to farmers in Indonesia for their cocoa beans can be as low as US$2.00/kg

• Cocoa has been identified as the major priority crop by the Aceh government for economic development and has received support from UNDP/APED

• Global demand for cocoa has been outstripping supply to the extent that prices were up 30% (Cadbury, 2008)

• All cocoa grown in Aceh is currently traded• All cocoa grown in Aceh is currently traded through Medan and transported by road

• Cocoa is easily established within existing farm systems as a cash crop and provides a quick and

l i

The number of cocoa farmers in Aceh is abo t 90 000regular income about 90,000

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Challenges facing Cocoa Industry in AcehAcehProductivity Challenges Organizational Challenges

• Inconsistency in the supply of high quality cocoa

• Yield losses due to poor crop

• Lack of effective organization and mobilisation amongst cocoa farmers and others

• Yield losses due to poor crop management, pests and disease problems

• Low cocoa farming skills

• Lack of effective infrastructure in collection, processing and warehousing• Low cocoa farming skills

amongst farmers

• Cocoa farmers lack adequate ki it l

g

• Ineffective coordination and communication between major supply chain stakeholders andworking capital

• Low farm gate prices and lack of price differentiation for

lit

supply chain stakeholders and support groups

quality cocoa

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Overall Scenario

• The aid assistance including funding from donors is in decline hence threatening the sustainability of Aceh’s economic recovery unless self-reliant economic activity commences

• Unstable supply from leading producer countries such as Ghana, Ivory Coast and Indonesia has motivated buyers to not only

b l b t l i t isecure cocoa beans early, but also invest in farmers to improve yields and quality.

• Consumer demand for organic fair trade andConsumer demand for organic, fair trade and specialty products has driven exporters such as Armajaro, Olam and others to pay closer attention to traceability and supply chain issuesissues

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BUSINESS OPPORTUNITYSection 3:

BUSINESS OPPORTUNITYBackground of Opportunity: Drivers and ConditionsMarket OpportunityMarket OpportunityInvestment

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BUSINESS OPPORTUNITY:Drivers and ConditionsDrivers and Conditions

• Chocolate consumption increasing with improving prosperity worldwide.

• The supply of cocoa is also subject to volatility due to political instability from years of conflict in the producing nations.

• Indonesia is one of the four regions in the world which produces g psignificant volumes of cocoa.

• Aceh is a rich and diverse province which is located within the vibrant economic triangle of Malaysia, Thailand and northern Sumatra. ACEH COCOA

• Post tsunami and conflict resolution has lead the people of Aceh to commit to improving their standard of living and this includes reviving the cocoa industry.

• Sustained economic activity is key to the alleviation of poverty and raising the income of farmers.

• The building of a commercially well managed cocoa industry in Aceh can be a key contributor to economic growth in Aceh.can be a key contributor to economic growth in Aceh.

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BUSINESS OPPORTUNITY:Market OpportunityMarket Opportunity

• There is significant potential to produce higher grade cocoa through simple but well managed production process throughout the supply chainchain.

• Potential increases in productivity can be realized through a business forum. Production in Aceh currently averages 400 kg per ha. as opposed to the international benchmark of 1000 kg per ha Thereopposed to the international benchmark of 1000 kg per ha. There exists great potential to increase production through a new business model.

• There is potential to increase the land areas for cocoa cultivation ACEH COCOA

pthrough rehabilitation of land which has been neglected (24,739 ha –Aceh).

• Organized domestic production and supply of good quality cocoa will increase the confidence of buyers in Aceh cocoa.

• Through simple but creative training programmes and technical assistance for the farmers, quality cocoa could be produced which will l d t i i th t it f i t ti l t dlead to an increase in the opportunity for international trade.

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BUSINESS OPPORTUNITY:InvestmentInvestment

• Improvement in productivity and increasing in crop areas will boost cocoa revenues in Aceh. This will both need and present investment opportunities.

A ll t t d b i d l d i l t ti l ill• A well structured business model and implementation plan will attract potential investors and help secure financial assistance from donors thereby transforming the supply chain in the industry.

• The high price for cocoa being traded in the commodity market is aACEH COCOA

• The high price for cocoa being traded in the commodity market is a reflection of the sustained demand for the product. This should ensure good returns for investors.

• Added benefit is the high social impact as per capita farmer incomeAdded benefit is the high social impact as per capita farmer income is projected to increase by threefold in 5 years, presenting a win-win situation.

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BUSINESS OPPORTUNITY:Profits with high social impactProfits with high social impact

Three-fold increase in farmer per capita income in five years

Farmer's Income Per Capita (USD)1,000

Farmer Income Per Capita USD

600

800

460626

792 865989

400

302460

-

200

Current Y1 Y2 Y3 Y4 Y5Current Y1 Y2 Y3 Y4 Y5

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PIDIE DISTRICT

• The Pidie District of Aceh lies on the North Eastern area of the island

• The Pidie District of Aceh lies on the North Eastern area of the island

• Banda Aceh local government has designated Pidie as a cocoa growth area

• Cocoa production in Pidie began in 1980

• Banda Aceh local government has designated Pidie as a cocoa growth area

• Cocoa production in Pidie began in 1980 with local communities planting cocoa plants with government assistance

• Cocoa can be considered as the main perennial crop in Aceh involving

with local communities planting cocoa plants with government assistance

• Cocoa can be considered as the main perennial crop in Aceh involvingperennial crop in Aceh involving thousand of small holders

• The number of cocoa farmers in Pidie district is approximately 8,500

perennial crop in Aceh involving thousand of small holders

• The number of cocoa farmers in Pidie district is approximately 8,500

The area under cocoa has gradually increased over the years. The cocoa growing area in Pidie District extends from low altitude (close to sea) to the high landslow altitude (close to sea) to the high lands near the mountains.

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Section 4:

BUSINESS MODELAceh Cocoa Industry Constraints D d d S l C t i tDemand and Supply ConstraintsKey Success Factor – Alignment of StakeholdersStrategic Positioning in the Value ChainShareholding and Management Structureg gProposed StructureProposed Solution - OperationsRationale and Benefits of New Company

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IV. Business ModelAceh Cocoa Industry ConstraintsAceh Cocoa Industry Constraints

Cocoa has grown into a major income stream for smallholders in Pidie over recent years.

However, •Continued growth is affected by inconsistent and poor quality bean production.•Widespread pest infestation (e.g. from the cocoa pod borer) is a major cause of poor cocoa bean quantity and quality.D it t i i i iti ti th d ti f•Despite training initiatives, the adoption of

improved farming and post-harvest methods has been limited•Farmers are poor and lack access to capital.•The sector suffers from lack of alignment of•The sector suffers from lack of alignment of interests amongst various parties.

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IV. Business ModelDemand and Supply ConstraintsDemand and Supply Constraints

Demand Supply Constraints

pp yInertia

Demand Constraints Supply Inertia

Multi-national buyers, processors and manufacturers want to improve the quality and consistency of their raw materials.

Farmers would like to receive higher prices for their crops via a direct relationship with buyers – as opposed to traders.

To achieve this, they need to establish closer and more efficient supplier relationships. However, they: •lack incentives to move their procurement

ti l t th f ith t

However: •The market offers little price differentiation for higher quality beans. Therefore, smallholder farmers have little incentive to upgrade their production and

Solution: Create aoperations closer to the farmers without

any guarantee or influence over the supply process.•face resistance from entrenched local traders.

incentive to upgrade their production and post-harvest practices. •At the same time cocoa bean collectors and traders have little incentives to upgrade their supply chain

Create a company that

aligns interests

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IV. Business ModelCompany’s Strategic PositioningCompany s Strategic Positioning

Domestic Production International Production

LocalCollector

LocalExporters

RegionalProcessors

Food Markets

MultinationalManufacturers

Smallholder Farmers

Markets

MultinationalProcessors

Local

MultinationalProcessors

andLocalTrader Multinational

Traders

CosmeticMarkets

andManufacturersMultinational

AffiliateExporters

Raw Product ProcessedLegend: 22

IV. Business ModelThe Company

Th b d l th t h bTh b d l th t h b

p y

The brand colours that have been chosen have their own meaning and representation.

The brand colours that have been chosen have their own meaning and representation.

•Light brown represents cocoa

•White emphasizes purity and

•Light brown represents cocoa

•White emphasizes purity andWhite emphasizes purity and peace elements

•Red represents the community’s

White emphasizes purity and peace elements

•Red represents the community’s In the Acehnese language, p yrichness in culture.

p yrichness in culture. Kado means ‘A gift’ and

Alami means ‘Natural’

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Partnership Architecture: Farmer Training and Stakeholder DialogueFarmer Training and Stakeholder Dialogue

Buyers/Investors Partnership

Buyer

Donor / Financing Agencies

$ Price Signal

Buyer

g g

FARMER TRAINING

Technical AssistancePartnership Partnership

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IV. Business ModelCompany’s Business Model: Alignment of StakeholdersCompany’s Business Model: Alignment of Stakeholders

• Maintain close and effective interaction with local government. • Gain development support for the local cocoa industry• Anticipate and mitigate impact on the company arising from potential

Form effective partnerships with donor

• Anticipate and mitigate impact on the company arising from potential government action or intervention.

• Convince key players that they will Government an

• Form effective partnerships with donor agencies and NGOs.

• Benefit from their expertise and resources in providing training to smallholder farmers.

y p y ybenefit from moving procurement closer to the supply.

• Buyers leverage on existing local networks while minimising opposition from local traders.

Buyers

nd ProcessorsNG

O /

Don

or

agen

cies

• Link farmers and collectors to a ready market, which requires consistency i l d lit

s

Local Farmers & Traders

in supply and quality. • Provide impetus for farmers to organise themselves at the local level and

upgrade their processes.• Empower farmers with the capacity to access and adopt better practices

and also to be able to respond to market opportunities.• Allow participation of farmers, collectors and traders at shareholder level.

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IV. Business ModelProposed Solution –Shareholding & Management Structure

The formation of a for-profit company, Alami Kado PT brings all together key cocoa stakeholders (farmers, traders, exporters and end buyers) as shareholders.

Buyer(s)/InvestorsExporter

Alami Kado Proposed Shareholding Structure

• Alami Kado PT will have four primary shareholders• Exporters and Buyers/ Investors will provide cash for 30%

stake each

Proposed Shareholding Structure

Investors30%

Trader, 20%

Co-Op, 20%

Exporter30%

stake each• Co-op shareholding of 20% is contributed as sweat equity• Collector / Trader shareholding is suggested at 10% cash,

10% contributed via sweat equity

• Management Structure: Alami Kado PT will employ a CEO HQ

Alami Kado Management StructureProposed Management Structure

g p ywho will manage the day-to-day operations (including field officers and processing and warehouse). The company will have a Board of Directors to advise management. Field Mgmt,

WarehouseHQ

Operations

Field Mgmt, Processing

Centres

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IV. Business Model Proposed Solution - Company Structure

Shareholding

Proposed Solution Company Structure

C O Collector / E t Buyers /

Formation of Alami Kado PT: Aligning interests of all stakeholdersg

Structure

Operating Company

Co-Op Trader Exporter yInvestors

Business Activities

Partners

Bean Processing

Storage and Packaging

Transportation Services

Farmer Loans

Farmer Training and

Welfare

NGO Aceh Government Donor Agencies

Farmer… Collector / Trader

Exporter… Buyers / Investors

NGO / Donor Agencies

Aceh Government

Stakeholder Objectives in Alami Kado PT

- Receives loans, training and processing support to grow better crops

Trader…

- Operates buying units and QC cocoa

- Together co-op and trader, leads

- Plays key role in providing technical expertise in designing

Investors…

- Gains direct access to suppliers

Agencies…

- Provides funding and/or technical training to farmers, collectors or

Government…

- Develop infrastructure for processing unit and warehouse

pand organizes farmers

g gprocessing units and warehouse

traders

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IV. Business Model Proposed Solution – OperationsProposed Solution Operations

Alami Kado PT aims to boost the farmer’s capabilities and generate revenue via the following activities:

Company Function Descriptionp y p

Processing, Storage and Packaging

The company will operate:- 6 Processing Units, serving approximately 300-400 farmers in the

surrounding vicinity with fermentation, drying and sorting services. - 1 centralized Warehouse, to store cocoa beans and ensure the highest

lit b f hi i th t bquality before shipping them to buyers.

Loans, Finance and Insurance Services

To alleviate farmer’s capital constraints through microloans as well as crop and personal insurance options.

Trade Facilitation and Marketing Support farmers to sell their goods and promote Aceh cocoa.

In support of its business aims, the company will operate facilities including:

Technical Assistance and Training Focus training on farmers, collectors and traders in collaboration with key partners. The company will facilitate the provision of these services with the partners.

• Processing and collection units • Warehouse• Transportation servicesAlami Kado PT will establish partnerships with key interested parties including the UNDP, Swiss Contact,

th A h G t d NGOthe Aceh Government and NGOs.

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IV. Business Model Rationale and benefits of new companyRationale and benefits of new company

1. The company provides a vehicle bringing together the interests of all parties, with direct economic benefits to farmersfarmers.

2. Farmers gain:• Loans as working capital, critical to enabling their daily

cash flow needs.T h i l t i i bli f t f th i ff t• Technical training, enabling farmers to focus their efforts on boosting quality in their cocoa beans.

• Direct access to a ready market of international buyers and exporters, providing understanding of their ultimate buyers’ needsbuyers needs.

• Possible dividend payouts from the company.3. Collectors and traders are acknowledged as crucial to Pidie district’s cocoa production

as they enable and can help organise the farmers.4 I t ti l b d t b fi f4. International buyers and exporters benefit from:

• Direct links with their supply source, ensuring the desired quality in production process.

• Consistent cocoa supply at pre-negotiated prices.

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• Traceability of cocoa to the original supply source.

Section 5:

GOVERNANCESTRUCTURESTRUCTUREProposed Governance StructureGovernance Obligations and ActionsBoard of DirectorsBoard of DirectorsMemorandum of Understanding

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V. Governance Structure

To ensure consistent financial performance in Indonesia’s challenging business environmentIndonesia s challenging business environment, transparent and effective corporate governance is vitalvital.

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V. Proposed Governance Structure: Ensuring Competitive and Consistent PerformanceEnsuring Competitive and Consistent Performance

Corporate StructureArticles of

Legal Structure

Shareholders Shareholders Agreement

Articles of Association

Transparent and

Ensures fair representation of and profit-sharing between all shareholders

Board of Directors

Management Team

Management Agreement

paccountable

Ensure implementation of best management practices

Audit

Team

Partners

Pidie District Memorandum of Ensure long-term active Pidie District Government

Technical Advisors (egUNDP, Swiss

Understanding partnership in the Pidie cocoa value chain

Contact)

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V. Governance Obligations and Actions: Board of DirectorsBoard of Directors

Obligations Actions

S t t l A t i b t i t t f Al i K d PT• Set corporate values• Provide strategic direction and management• Set corporate governance standards• Oversee financial reporting

E l l li

• Act in best interests of Alami Kado PT• Attend regular and ad-hoc meetings

as required by the business• Adhere to company procedures

M i t i fl f i f ti• Ensure legal compliance• Implement HR best practices

- Fair wages- Health and safety standards- Employee training

• Maintain open flow of information• Provide full disclosure of personal

interests• Maintain diligence and competence

Employee training• Implement risk management and internal

controls- Operational- Financial- Environmental- Social

• Implement environmental and social best practices

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V. Proposed Governance Structure:Memoranda of UnderstandingMemoranda of Understanding

MOU ensures provision of:Partner

MOU ensures provision of:

• land for warehouse

• road networks to speed up logistical process

• other infrastructure

Pidie District Government

Memorandum of Partner

MOU

• Provides funding framework

• Defines precise role of technical

Understanding

Donors provide funding for technical

assistance

• Identifies opportunities for technological improvement and logistical streamlining

• Governance oversight

funding for technical assistance (e.g. UNDP, USAID, Swiss Contact)

Governance oversight

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Section 6:

PRODUCTION AND OPERATIONS Farmers Operation and ProcessCollector ActivitiesProcessing UnitsWarehouseSummary of Transactions in the Supply ChainProductivity Density of Pidie Cocoa AreaNumbering of Processing Units Seasonal Distribution of Cocoa Harvest Cocoa Harvest AnalysisMost Efficient Transportation Arrangement

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Farmers Operation ProcesspTraining

Cocoa Pod Collection

Pod Open for Beans

Wet Bean Waiting for Collection

Collectors pick up Beans

1) Farmers collect pods daily in their respective areas.2) After pods are collected, farmers then open pods to release beans.3) Beans are then spread out for 2 hours or until collectors pick them up

Total Time: 1 dayFinal Output: Wet and Dry BeansWet Price Farmers get: 17,000 per kg

3) Beans are then spread out for 2 hours or until collectors pick them up.

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Collector Activities

Training

Collectors Gather Beans

Farm Gate Quality Control

Farm Gate Record Keeping

Beans transport to Processing

Units

$

-Size-Mold-Disease

-Farmer ID (Basket Label)-Weight (25 Kg minimum = 300 Pods)-Payment

1) C ll t th b (b th t d d )1) Collectors gather beans (both wet and dry).2) Quality Control for size, mold, and diseases.3) Record keeping for traceability and weight. Transaction happens here if beans

pass quality control.4) C ll t th t t th b t i it (PU )

Total Time: 1 dayFinal Output: Beans and Records

4) Collectors then transport the beans to processing units (PUs).

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Processing UnitsOwned and Operated by Alami Kado PTOwned and Operated by Alami Kado PT

Purchase Soaking inDrying by

Solar Dryer Transport toPacking &

(5 – 7 days) (2 – 4 hrs) (5 – 6 days) (5 – 6 hrs)

by Company

Fermentation Soaking in Water

Solar Dryer and other methods

Transport to warehouse

Packing & Sorting

1) PU accepts the bean for quality control and the record for accountability Transaction happens here1) PU accepts the bean for quality control and the record for accountability. Transaction happens here.2) Workers place beans in fermentation boxes with identification tags. Ferment for 5 – 7 days with mixing of bean every 2

days.3) Fermented beans are soaked in water for 2 – 4 hours.4) Workers then place soaked beans on solar dryers and other dryers. Drying takes 5-6 days. Solar dryers help minimize

mold, maintain temperature, and can be operated in rainy season.

Total Time: 11 – 14 daysNumber of Employee: 5

mold, maintain temperature, and can be operated in rainy season.5) Workers then sort dry beans to sort for quality and pack them in bags ready to be transported to the warehouse.6) Batches of beans with consistently low quality can be identified for accountability at the farmer level.

p yEquipments: Fermentation, Drying, Sorting, Packing, Computer

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Warehouse (One for Company)Owned and Operated by Alami Kado PTOwned and Operated by Alami Kado PT

Quality Control and Record Keeping Storage Sale to Buyers

$$Trucks collect dry beans from PUs

1) Trucks sent to gather bags of dry beans from processing units and return to warehouse.2) Bags unloaded from the trucks for quality control and record keeping (computerized).3) Bags are put into storage facility/warehouse.3) Bags are put into storage facility/warehouse.4) Bags are ready to be shipped to buyers locally and internationally. Transaction happens

here.

Total Time: 1 – 2 days plus storage time.y p gNumber of Employee: 12Equipments: Trucks, Storage Facility, Computer

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Summary of Transactions in the Supply ChainChain

Wet Beans

Wet Beans

Dry Beans

Packaged Beans

Collectors Processing Units Warehouse

$$Farmers

$$

Beans Beans

$$

Beans

Buyers

19,500 –20,000 IDR

30,000 - 32,000 IDR *assumes 9,500 IDR conversion rate USD

24,000-25,000 IDR*

Tiered -Price

IDR IDR

Incremental Price I % 20-25% 25 – 28%Increase %(Value Added)

20 25% 25 28%

*Price Quotes are subject to market fluctuation, cocoa availability, and other relevant factors that may not be captured in this example.

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Traceability in the Supply Chain

Farmers Collectors Processing Units Warehouse Buyers

B f th d b ill b bl t t h th b f t h tBuyers of the dry cocoa beans will be able to trace where the beans came from at each step of the value chain all the way to the farmer level.

Traceability will be implemented through a simple system of:R d k i ( d t )- Record keeping (paper and computer)

- Farmer identification code- Labeling of beans in batches at all levels

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The Productivity Density of Cocoa Area

Blue shade is Pidie which is the focus( productivity is 2.3K tons /annually); white shade is Pidie JJaya

Processing Unit Location

Bandar baruReubei

Glumpang tigaGlumpang tiga

TangseKeumala

There will be 6 P.U with capacity of 250 tonnes each. Two routes will be established; one from

Geumpang

p y ;P.U 1 to P.U 4 (55km) and one from P.U 5 to P.U 6 (10km)

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Warehouse Location

New Port Krukuh

W

BireunPidie Area

The warehouse is strategically based in Bireun district which is 2 hours from Pidie and only 1 hour to the new port Krukuh. It is along the main road from Pidie to Medan. p g

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Dedicated multi-purpose ALAMI KADO warehousewarehouse

• Only one hour toEfficient transport logistics

• Only one hour to new port Krukuh

• Two hours from Pidie

Bridge between B

• One stop service f B dBuyer,

Farmers and Coop

for Buyers and traders

Accommodate expanding to other districts

• Cover Pidie at first stage

• Expand to cover Pidie jaya, Bireuen , Aceh utara and Lhoksumawe;

Cost effective

warehousing• Similar cost as

PidieOffice

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gOffice space

Efficient Transportation Solution

Seasonal cocoa harvest distribution by thl t

16%

18%

20%

monthly percentage

8%

10%

12%

14%

We need two trucks for the peak months

0%

2%

4%

6%peak months

Harvest season varies tremendously every month, Peak harvest (from Nov to Feb) contributes to nearly 69% of annual productivity ;The peak 4 months is the focus of logistic;

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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MARKETING STRATEGYSection 7:

MARKETING STRATEGYTargets and PlanPotential PartnersBranding the CompanyBranding the Company

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Marketing Approach

Alami Kado PTCurrent landscape provides an optimal scenario for investment and– Current landscape provides an optimal scenario for investment and engagement of cocoa industry in Aceh

– Alami Kado Pt represents a coordinated approach to realizing the Aceh cocoa market’s immense potential and connecting market participantscocoa market s immense potential and connecting market participants

– Value Proposition of Alami Kadoo Qualityo Consistencyo Consistency o Dependability o Traceabilityo Sound Governanceo Sound Governanceo High Social Impact

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Marketing Approach

•Align potential partner interests to achieve market growthPotential Partners

•Align potential partner interests to achieve market growth•Highlight relationships in the region to raise profile of the cocoa industry

Penetrate •Engage all parts of the value chain to promote superior product to ultimately benefit the end buyer•Segment target market – local and international buyers

Differentiation•Set the brand of Alami Kado apart as image of enhanced quality, consistency and deliverability•Achieve market share growth

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HUMAN RESOURCESSection 8:

Human Resources Management TeamHuman Resources – Total StaffOrganisational Chartg

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Human Resources – Management Team Role Job Description

CEO The CEO acts as the public face of the company, and as such engages in PR activities. Within the company structure he acts as a consensus builder between all shareholders. He defines the strategic direction for the company He will give special attention to theHe defines the strategic direction for the company. He will give special attention to the company’s role in the positive social transformation at the farmer level. He will be responsible for the day-to-day operations and logistics of company facilities.Requirements: We are looking for a person with 5 years of project management experience in Indonesia, preferably in Aceh. He will have had international exposure. The qualified person will be business oriented, able to interact with all stakeholders, and speak fluent Bahasa. The person shall adhere to strict ethical standards.Initial salary: 35 000 USD/yearInitial salary: 35,000 USD/year.

Finance Manager The finance manager is responsible for budgeting, financial reporting and forecasting. He will ensure the long term financial viability (health) of the company. He will be in charge of profit reinvestments and redistributions. He will help the cooperative with improved access to working capital, recommending the latter to international agencies (e.g. UNDP, SwissContact, USAID). He will explore new/other avenues for profit generation.Initial salary: 15 000 USD/yearInitial salary: 15,000 USD/year.

Field Facilitator/ Training Coordinator

The Acehnese field officer will act as the intermediary between farmers, collectors , NGO trainers and the Forestry and Plantations Department. He will deal with bottlenecks on the ground and facilitate between stakeholders.Initial Salary: 10,000 USD/year

HR / M k ti M The primary task of the HR Manager is the recruitment and the retention of OperationsHR / Marketing Manager The primary task of the HR Manager is the recruitment and the retention of Operations staff. He will evaluate the needs for additional recruitment as production increases. In addition, he will be in charge of brand building and the cocoa bean certification process. Finally, he will give back office and administrative support.Requirements: A marketing degree. Initial Salary: 10,000 USD/year.

We are an equal opportunity provider

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Human Resources – Total Staff

Facility HR Resources Required

No of Facilities

Headcount Per Facility

Total Headcount over all Facilities

Budget Required (per annum, USD)

• CEO

Mgmt Team

CEO• Finance Manager• Field Facilitator/

Training Coordinator• HR / Marketing

Manager

N/A 4 4 $70,000

• Account clerk: 1 (part-

Warehouse

Account clerk: 1 (parttime)

• Processing: 5 (2 QC officers, 3 store keepers)

• Drivers: 2• Guards: 2

1 10 10($2,595/month for all 12 employees) x 1 Warehouse = $31,140

Processing Units

• Processing: 3 (of which 1 store-keeper)

• Guards: 2 (working in shifts)

6 5 30($1,120/month for all 5 employees) x 6 PUs = $80,640

C 44 $181 780Total Company Resources Required 7 44 $181,780

Additional Resources

• Part time Consultant assisting in cocoa branding

1 (Part-time) 1 (Part-time) $2,500 / 6 months = $15,000

Total Budget Required 45 $196,780

*data source: Local Traders, YLP Analysis52

Human Resources – Organizational Chart (Total Headcount: 45 incl 1 part-time consultant)( p )

CEO (1)

Headquarters(Total HC: 4) Field Facilitator /

Training Coordinator (1)

HR & Marketing Mgr (1)

Finance Manager (1)

Warehouse(Total HC: 10)

Accounts Clerk (1) Storekeeper (1) Guards (2)

Quality Control

Officer (2)

Processing Technician

(2)Drivers (2)

Processing Units (5

Storekeeper (1)Units (5

resources per unit x 6 Units = Total HC: 30) Guards (2)

Processing Technicians

(2)

53

COMMUNITY BENEFITSSection 9:

COMMUNITY BENEFITSProgram Targets, Activities and ImpactDemonstration Plot - ConceptImplementation of Demonstration PlotsImplementation of Demonstration PlotsBest PracticesCommunicationFarmer Field SchoolTraining ScheduleSocial Benefits

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Programme Targets, Activities & Impacts

• The Community Programme is designed to support proposed Business Model with 3 key pp p p yinitiatives which are the demonstration plot, farmer field school and communication outreach

• The key 3 initiatives will bring the community together so as to, increase the level of productivity and awareness. Most importantly the increase in productivity willimportantly, the increase in productivity will also improve per capita farmer income by more than 3 times over the period of 5 years

• To maintain a sustainable industry it is vital to incentivise the farmers, the first link in the chain. This is best achieved by ensuring improved income per capita

55

Demonstration Plot - Concept

• A commitment to improved quality & productivity through sustainable farmingproductivity through sustainable farming practices

• A facility that demonstrates best practice and invests in expanding the knowledge of localinvests in expanding the knowledge of local farmers to realise greater revenue

• A training ground that can also be used for research and analysis

• A concept that can be easily replicated to complement/support the processing unitscomplement/support the processing units

• The demonstration plot is also a place for investors to visit and view the process

56

Demonstration Plot – ConceptDemonstration Plot Concept

The location is an important consideration– The location is an important consideration– Our recommendation is to use an existing

farm which is 1 hectare– In selecting the farm, a collective decision

from the community should be made to yavoid any negative sentiment issues

– The farmer will be given the necessary training and assistance to develop his land. The farmer will draw a minimum monthly– The farmer will draw a minimum monthly wage

– The demonstration plot will be funded through the partners of Alami Kado

– Our partners will have the responsibility of p p ycoordinating and monitoring the demonstration plot as part of a planned programme

57

Best Practice

• Farming Practices to be implementedStudies show that majority of farms in the Pidie district don’t use basic farming techniques and thedemonstration plot will implement the following practicesdemonstration plot will implement the following practices

-Frequent Harvesting -Prunning-Sanitation of pod husk -Fertilization-Bio-Control -Side Graftingg

• Cash Crops– Farmers operating demonstration plots will be trained in the farming of additional crops

ddi t f f d it d i t bilitadding to resources for food, security and income stability

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Best Practices

Improving the harvest cycle• The weakness of harvest pattern in Pidie is due to the fact that peak harvest

t k l d i th t i N b d D btakes place during the wet season in November and December• Good cocoa pruning techniques lead to a more conducive harvest pattern, with

regards to seasonality, thereby reducing the rate of mouldy beans• Availability of cocoa bean dryers is important to the processy y p p• Ensuring the consistency in supply

Best practices lead to a positive change in harvest season

59

Demonstration Plots

Financial Requirements

The effectiveness of a demonstration plot leads to a potential of 400kg of increased cocoa production per hectare per year(based on a study that was done in Sulawesi by the Sustainable Cocoa Enterprise Solutions for Smallholders (SUCCESS) Alliance Indonesia)(SUCCESS) Alliance – Indonesia)

60

Connectivity and Traceability

• Connecting the farmers through a visible and disciplined process is key toand disciplined process is key to bringing the change in mindset required.– Implement a registration system,

connecting farmers to the warehouse to ensure traceability

– Each farmer receives an identification card, capturing information on quality, q antit and consistenc of prod ctionquantity and consistency of production

– This system will also provide visibility to the payment process, including payment of trainingof training

– Regular communication updates via SMS to farmers on initiatives such as training dates, outcomes of training and updates on pricing

61

Farmer Field SchoolConceptConcept

• A 3-year Farmer Field Schools (FFS) programme to be implemented by trainers from three sources:

– Farmers from the community of Pidie – Employees of Dinas Perkebunan (DISBUN)– Employees of local agencies

• The FFS concept teaches farmers e S co cep eac es a e sthrough practice, on-farm observation and farmer led research.

• The Training of Trainers (TOT) approachThe Training of Trainers (TOT) approach will be applied and each session will have a class size of 50 trainees. The Trainers are then expected to train 20 farmers in a year. y

• Farmer teachers are initially schooled on their own plot, then paid monthly when they begin training others.

• Farmers will receive accreditation upon completion of training.

62

Implementation

Location:To ensure engagement and connectivity, training locations will be identified g g y, gcollectively by the Training Coordinator, farmers, community leaders and staff from DISBUN.

The curriculum/modules: The modules will prioritize areas of importance that would increase productivity level in a consistent manner. Core to the module will be the knowledge to combat the Cocoa Pod Borer (CPB) pest by using the PsPSP, a low cost low input cultural method for controlling the CPB and other pestsa low cost, low input cultural method for controlling the CPB and other pests as well as for increasing tree productivity.

Record:Participants will receive one logbook to write all business activities. This isParticipants will receive one logbook to write all business activities. This is an exercise in record keeping on a day-to-day basis that would enable farmers to obtain actual data on their activities to provide a tool for comparison, analysis, reflection and improvement of future business acti itiesactivities.

63

Training Schedule

Activity Duration Participants

Training coordinator communityIdentification of location 1 day

Training coordinator, community leader, farmers, staff from DISBUN

programme socialization i.e problem and solution analysis 1 day Training coordinator, farmers,

staff from DISBUNanalysis staff from DISBUN

Implementation of FFS modulesa. Basic ecosystem & ecological farmingb. Cocoa Pod Bearer lifecyclec Fertilizationc. Fertilizationd. Sanitatione. Pruningf. Side graftingg. Standardization & quality of beansh C h t t i

6 months(12-16 meetings)

Training coordinator, farmers, staff from DISBUN

h. Cash crops to generate incomei. Usage of logbook

meetings)

Total number of trained / skilled farmers by Year 3 = about 4,000 farmers

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Social Impacts

Improvements in Income and Livelihood• Improvement of income level for farmers due• Improvement of income level for farmers due

to productivity increase.• Livelihoods increased with education and

training. g• Community model leads to further

communication and conflict resolution that has impacted Aceh for some time.

• Encouragement of women to take leadership roles as farmer teachers and students.

65

Environmental Benefits

Environmental• Best practice leads to/promotes sustainable farming.• Solar cocoa bean dryers allow for sustainable energy production.

66

FINANCIAL ANALYSISSection 10:

Farmers’ Income (Pidie Area)Company Operating IncomeCompany Operating CostsCompany Net IncomeCompany Net IncomeWorking Capital and Investments Balance Sheet

67

Growth in Farmer's Income Per Capita (Pidie District)(Pidie District)

Current Y1 Y2 Y3 Y4 Y5Total Number of Hectares in Pidie Area 2,741 2,741 2,741 2,741 3,507 4,272 Total Production (kg) 2 362 000 2 755 667 3 149 333 3 543 000 4 596 320 5 796 231Total Production (kg) 2,362,000 2,755,667 3,149,333 3,543,000 4,596,320 5,796,231

Cost of Good Sold (mm Rupiah) 28,344 35,066 43,762 53,762 76,162 104,880 Sales (mm Rupiah) 39,579 52,169 67,045 83,236 117,306 162,197

Net Income (mm Rupiah) 11,235 17,103 23,283 29,474 41,144 57,317

Net Income per Capita (USD) 302 460 626 792 865 989

Farmer's Income Per Capita (USD)

800

1,000

460626

792 865989

400

600

302460

-

200

Current Y1 Y2 Y3 Y4 Y5

68

Business with Direct Farmer Participation

Company Operating Income Projectiony g j

(Rupiah mm)Y1 Y2 Y3 Y4 Y5

Commission Income from Sales 1,679 2,303 2,850 4,546 7,340 Interest Income from Loans to Farmers 303 473 629 928 1,277 Total Operating Income 1,982 2,776 3,479 5,473 8,618

Revenue (Rupiah mm)

8,000

10,000 Key Revenues for Company:

Processing

4,000

6,000Processing

Trading

Co financing working capital

-

2,000

Y1 Y2 Y3 Y4 Y5

Co-financing working capital

for farmers

Commission Income Interest Income

69

Company Operating Cost Projectiony g jRupiah mm

Y1 Y2 Y3 Y4 Y5Salary and Wages 1,727 1,886 2,059 2,249 2,456 y g , , , , ,Farmer training costs 342 6,840 6,840 - - Legal fees 238 - - - - Consultancy for brand building 143 285 285 - - Miscellanous 257 280 306 334 365 Offi i l di l 14 16 17 19 20

Operating Costs (Rupiah mm)10 000

Office expenses, including rental 14 16 17 19 20 Cost of running demonstration centre 3 3 3 3 4 Total Operating Costs 2,722 9,309 9,510 2,605 2,844

6,000

8,000

10,000

-

2,000

4,000

Y1 Y2 Y3 Y4 Y5

Salary and Wages Farmer training costs Legal fees Others

70

Company Net Income Projectiony j

Y1 Y2 Y3 Y4 Y5Net Income (mm Rupiah) -909 -6,726 -6,255 2,582 5,426 Net Income (USD '000) -96 -708 -658 272 571

Net Income (USD '000)Net Income (USD '000)

400

600

800

-200

-

200

400

Y1 Y2 Y3 Y4 Y5

800

-600

-400

-200

-800

71

Funding Requirements and StructuregFunding Requirements

Rupiahs mmY1 Y2 Y3 Y4 Y5Y1 Y2 Y3 Y4 Y5

Total Capital Expenditure 636 - - - - Profit after tax -909 -6,726 -6,255 2,582 5,426 Depreciation 127 127 127 127 127 Net operating profit -782 -6,599 -6,128 2,709 5,553

Increased in working capital 1,130 577 618 1,383 2,279 Capital Adequacy for Working Cap Lending Business 1,262 707 3,113 6,317 6,031

Total Funds Required 3,810 7,883 9,858 4,991 2,757

Peak Funds Requirements (mm Rupiah) 21,552 Peak Funds Requirements (USD 000) 2 269

Share Capital

33%

Proposed Funding Structure

Peak Funds Requirements (USD 000) 2,269

USD Thousands

Grants (UNDP / Government / USAID / Other Agencies) 1,509 33%

Balance Share Capital 760

Buyers / Investors 30%

Exporters 30%

Farmers Coop 20%

Grants 67%

Farmers Coop 20%

Collectors 20%

Company Balance Sheety

Rupiahs mmY1 Y2 Y3 Y4 Y5Y1 Y2 Y3 Y4 Y5

Cash 17,741 9,858 2,663 3,209 5,276 Inventory 507 774 1,064 1,698 2,741 Receivables 623 933 1,261 2,010 3,246 Short term loans to farmers 4 208 6 564 9 677 15 994 22 025Short-term loans to farmers 4,208 6,564 9,677 15,994 22,025 Total Current Assets 23,079 18,130 14,665 22,911 33,289

PP&E, net 509 382 254 127 - Total Assets 23,588 18,511 14,919 23,038 33,289

Share Capital 7,218 7,218 7,218 7,218 7,218 Grants 14,334 14,334 14,334 14,334 14,334 Short term debt for lending 2,946 4,595 7,258 12,795 17,620 Accummulated Reserve -909 -7,635 -13,890 -11,309 -5,883 Total Liabilities & Equity 23,588 18,511 14,919 23,038 33,289

73

EXIT STRATEGY

f• The business is profitable in year 4 onwards

• A profitable and financially stable company is likely to attract good valuation based on future y gcash flows

• Farmers, Cooperative, Traders and Buyers are long term stakeholders who could considerlong term stakeholders, who could consider buying out “exiting investors”

• New investors could replace “exiting investor”

Profits with Social Impact

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Section 11:

RISK ASSESSMENT AND MITIGATION

Section 11:

MITIGATION

75

Risk MitigationRisk Implication Mitigation Measures Risk

Level

F ’ l k f L li b d T i i f f i h fi i l

Prod ction risk

Farmers’  lack of education in proper cultivation and harvesting techniques

Low‐quality beans and unsecure supplies

• Training programs for farmers with financial compensation for time opportunity cost• Cooperatives dividends used to invest in training, creating continuous improvement cycle of harvests• Quality control and traceability through all

H

Production risk • Quality control and traceability through all levels (collectors’ level, process units and warehouse)

Quality control in transportation and storage

Loss of quality and quantity, such as beans going moldy

• Strategic location of processing units close to farmgate (10 kilometer radius)• Standardized warehouse management for

Mstorage beans going moldy • Standardized warehouse management for 

quality control 

Market riskCocoa price volatility  Fluctuation in profits • Alternative revenue streams through

complimentary agriculture practices taughtthrough the training modules

M

Governancerisk

Potential conflict of interest between stakeholders

Inefficient decision making

• Clear decision making procedures in theManagement and Shareholders’ Agreement toensure open flow of information, transparencyand efficiency

H

Non‐performing loans Negatively impact on • Apply stringent approval processFinance risk

Non performing loans Negatively impact onProfit & Loss account

Apply stringent approval process• Restructure loan to become performing loans

L

76

IMPLEMENTATION PLANSection 12:

Short Term ImplementationMid-Long Term Implementation

77

Mid-Long Term Implementation

Midterm Long TermY 2 Y 3 Y 4 YYear 2 Year 3 Year 4 Year 5

Governance Independent financial auditingDirectors responsible for corporate governance

Human Continue to recruit people to address operational requirements as volume increasesHumanResource

Continue to recruit people to address operational requirements as volume increases

Production/Operations

Continue to coordinate with farmers to plant

Increase equipment at Processing

Development and expansion of processing units and collection centers

seedlings to cover unused land

Facilities and Warehouse to cover increased productivity

Market Continue to enhance market presence W k ith ffili t ti ff t t t A hPresence Work with affiliates on continuous efforts to promote Aceh cocoa

Community Local Agencies to continue the training program

78

Short Term Implementation

Short Term

1-6 months 6-12 months

Governance Setup a company in IndonesiaEstablish Board of Directors, which is accountable to the shareholders. Obtain government approval.Prepare and sign legal documents

Directors responsible for corporate governance

Human Resource Identify and employ management team (4)Coordinate current field workers for operations process (hire 16)Recruit operations team

Production/ Operations

Setup processing units and collection centersCoordinate with collectors to guarantee supply to the Processing Unit

Coordinate with farmers to plant seedlings to cover unused land

Market Presence Build communication with local and international buyers

Enhance market presence of high quality Aceh cocoainternational buyers cocoa

Community Set up the demonstration plots

Local Agencies to set up farmer schools and start the training program

79

CONCLUSIONSection 13:

CONCLUSION

80

Conclusion

• Aceh is open for business.

W i t t t f th i lt l t th t i• We propose a unique corporate structure for the agricultural sector that is commercially focused, yet works in favor of improving farmer livelihoods.

• The key success factors are: Th ti f b i d l th t b i t th f d ll t• The creation of a business model that brings together farmers and collectors with exporters and international buyers/investors.

• The share holder mix aligns the interests of all parties to build a financially viable and socially responsible company. I t t i t t l d i d tit th h• Improvements to ensure consistent supply and improved quantity through:- Strategic partnerships to ensure farmers acquire the skill-sets through training and education, - Access to working capital for farmers

Al i K d Pt ti l t th i th l h i- Alami Kado Pt. proactively strengthening the cocoa value chain. • The precondition for farmers to organize themselves, which will ensure

exporters and international buyers/investors closer procurement to the source of supply (ie. Smallholder farmers).

81

• The model is replicable and modular, creating business opportunities for scaling up operations, and including other districts.

APPENDIXSection 14:

APPENDIX

82

Thank you

If you are interested in this investment opportunity, please contact Chandran Nair at GIFT at (852) 3571 8103 or cnair@global-inst.com. ( ) @g

83

List of Participants

Marcella Cheung Emilia RahmangNoor Azmi IbrahimNorshahzan Halin

Yanyang He

Fazul Ikmar SomBob Van Damme

Siwat Vilassakdanonty gSanjay Jain

Jack LiuXinru Mo

Xiaojuan WangBecky YangAmanda Yik

Cindy RafanelliChaow Chiun Ong

Amanda YikAnna YoungHong Zheng

84