Case Study: Best Practices to Ensure Success of USAID Agricultural Private Sector Partnerships
USAID is undertaking a strategic reorientation to more systematically embrace enterprise-driven development and to drive private sector engagement (PSE) in every development sector. As part of that effort, USAID’s Bureau for Resilience and Food Security (RFS) has engaged the Promoting Excellence in Private-Sector Engagement (PEPSE) mechanism managed by Resonance, a global consulting firm, to examine effective models for the private sector to interface with finance service providers in developing countries based on a series of case studies. This blog post focuses on the lessons learned from one of the case studies examined, including: 1) a more detailed understanding of a partner, their project financial and operational needs, and risk mitigation opportunities, potentially in partnership with the United States Development Finance Corporation (DFC); 2) developing a reporting framework that speaks to those needs and 3) agreeing on a shared success language that can support a longer-term relationship that may go beyond an individual engagement.
Case Study Summary
As per KPMG’s 2019 Rice Industry Review, Nigeria is the sixth largest global consumer of rice with a market value of more than $2.5 billion (2018), and it is expected to continue to increase based on its population growth. However, only 57% of the rice consumed in Nigeria is locally produced, and most of it tends to be of lower quality than imported varieties.
In 2005, a global agribusiness decided to shift its business strategy by developing local rice production capabilities that could complement and potentially substitute its volume of imported rice. To that end, it leased and upgraded a large paddy processing mill from the government. Additionally, it launched a smallholder farming program in partnership with local smallholder rice farmer groups and USAID Markets, a program designed to strengthen agricultural competitiveness and food security in Nigeria, which was implemented between 2005 and 2010.
This partnership sought to encourage the adoption of improved technologies and best practices by smallholder farmers to produce superior paddy varieties for processing at the rice mill. In exchange, the agribusiness provided the farmers with secure markets and prices and a quick payment process. The agribusiness also offered seeds and other farm inputs to farmers, helped aggregate them into groups and set up demonstration farms for training and capacity building.
The first years of the USAID Markets partnership saw an increase in farmer productivity and incomes, which in turn encouraged a local Nigerian retail bank to launch in 2007 a smallholder farmer lending program targeting those farmers. More than 10,000 smallholder farmers adopted new and improved technologies and best practices along the rice commodity value chain. Notably, farmer rice yields increased by more than 200%, and gross sales and revenues of assisted farmers reached $30.4 million, compared to the original target of $5.6 million.
However, from a financial standpoint, the results to the private partners were below expectations. The agribusiness was not able to source sufficient paddy rice of good enough quality for its mill to break even, let alone reach its profitability targets. When the agribusiness expanded procurement beyond its initial catchment area (which was adjacent to the mill), it experienced significantly higher sourcing costs. This further increased the minimum volume needed for the mill to break even. To increase the volume of rice sourced in 2009, the agribusiness decided to pivot its sourcing strategy and change its paddy rice sourcing model from a 100% smallholder farming system to a hybrid nucleus and smallholder farming model, and to end its partnership with USAID Markets. In 2009, the Nigerian retail bank also decided to cancel its smallholder farmer lending program after suffering high farmer default rates and write-offs during the previous year, due to weather shocks and an ineffective insurance system.
Key Lessons Learned
The brief case study above illustrates the need to ensure that the financial performance of a USAID-funded project with a private sector partner is tightly linked with the project’s own social and environmental success, especially when considering its long-term sustainability once USAID’s support has concluded.
What does this mean in practice? Conversations with USAID and the agribusiness staff have helped surface the following four potential areas for consideration:
1. USAID’s due diligence on the private sector partner and the project should also focus on understanding the partner’s financial and operational needs and risk appetite.
In addition to the risk analysis routinely conducted on these opportunities, USAID should consider performing a detailed financial and operational due diligence on any future project, and assess the likelihood it is financially successful for its private sector partner. At a minimum, the analysis should include a detailed evaluation of the profitability drivers of the project on the private sector partner (i.e., how does it make money?), including an assessment of operational risks and market dynamics. Ideally, the analysis should be standardized by developing a financial and operational due diligence questionnaire template, while also being mindful that the template may need to be adjusted based on the project specifics (i.e., one size does not fit all).
A key outcome of this analysis would be to: 1) identify the volume, margins and other key assumptions under which the project reaches target profitability for the private sector partner; 2) estimate the cash and time necessary to reach such target profitability and 3) evaluate the key risks that may prevent it from happening. A useful tool to bring together this analysis may be joint financial and impact projections that explicitly model how positive financial and impact returns go in tandem with each other, including alternative scenarios, such as a financial break-even scenario and potential walk-away scenarios for the private sector partner.
2. Different private sector partners can have very different risk appetites and risk mitigation needs.
Organizational risk appetites depend on a broad range of factors, such as organizational culture, regulatory pressures and leadership, to name a few. For instance, banks are typically more risk averse and more highly regulated than agribusinesses. This means that based on its due diligence analysis, USAID may want to focus on mitigating downside risks for banks, while potentially looking to increase upside opportunities to agribusinesses. To confirm the risk appetite of potential private sector partners, it is crucial that a financial and operational due diligence, like the one proposed in this document, is done in a collaborative and transparent manner with the prospective private sector partner.
USAID may partially or fully outsource the financial and risk assessment (as per the first lesson learned) and the decision on potential risk mitigating products to DFC. This would also help identify potential bundled service offerings between USAID and DFC that may help reduce financial and operational risks for private sector partners.
3. Based on the due diligence analysis, USAID and the private sector partner may also want to agree on a reporting framework that helps the private partner track the project’s success in its own terms.
The reporting framework should, ideally, help the private sector partner track the project’s financial and operational performance and identify any challenges during execution as early as possible. To support this goal, USAID may consider adopting the same financial and operational key performance indicators (KPIs) than those used by the private sector partner. This may include volumes sourced and gross product margin (for agribusinesses), or portfolio at risk and write-off ratios (for banks).
By agreeing on a common set of financial and operational KPIs that speak directly to the private sector partner’s own financial targets, it is easier to systematically track the latter’s satisfaction with the engagement and the project’s long-term financial viability. Ideally, the data reported by the partner to USAID can also help populate the partner’s own management dashboard (which USAID may also help develop), which would then be reviewed periodically by the partner’s own senior management.
4. Managing relationships for the long term is pivotal to the success of the project, ensuring its long-term financial sustainability and potential follow-on shared opportunities.
By developing a shared “success language” during the due diligence and supervision of any project, including shared project management tools (such as a management dashboard) and a bundled service offering with DFC, USAID and the private sector partner will have a higher chance of developing longer-lasting relationships based on a set of common goals and mutual trust. Eventually, this partnership may extend throughout multiple projects.
For key private sector partners, Washington, D.C.-based or Mission staff may also consider empowering any current and future private sector relationship managers to act as an “institutional bridge” with the private sector partner. This means that a relationship manager would be tasked with contextualizing USAID decisions to the partner, while also ensuring USAID develops direct, trust-based relationships with key senior management, becomes attuned to any business strategic changes and identifies emerging opportunities for collaboration.
The adoption, facilitation and dissemination of these four lessons learned could well be led by USAID Mission staff. At the Mission’s request, Washington, D.C.-based expert staff may be engaged to support execution when a more technically adept skill set is required, including DFC staff, or this can be outsourced to external advisors.
Overall, by developing a deeper understanding of a partner’s and project’s financial and operational needs, and potentially developing bundled services with DFC, the impact of USAID activities will be better aligned with the financial success of USAID private sector partners, and ultimately support its long-term sustainability once USAID’s support has concluded.