Risk capital directed to production chains of organic products

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Risk capital directed to production chains of organic products

Bolivia
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Despite the fact that agribusiness appears unattractive to the traditional financial system due to the fact that they do not adjust to the rigid norms and the needed guarantees, risk capital generates the possibility of financing them, constructing capacities, providing technical assistance and inserting them in the fair trade market.

About Project

Solution: What is the proposed solution? Please be specific!

The application of capital market finance instruments in rural SMES under the utilization of Capital Risk mainly: introduces investment and running capital at low cost (6% average annual) directly to the enterprises, it mobilizes few productive assets, it strengthens its productive capacity by providing technical assistance, it focuses the management activities in improving competitively and growth as well as the quality of what is being planted and above all it strengthens its exposition in the fair trade market. This innovative financing tool shreds away the existing restrictions in financing and traditional credit which is not adequate to the necessities of agribusiness. On the other hand, it allows and stimulated an entrepreneurial culture, it develops criteria of corporate governance, it generates standards of accepted accountability, it formalizes productive activities and above all it changes the logic of the debtor to strategic financial partner under the logic of a culture of trust and development.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

The social and economic impacts that generate the shared risk operations are: • Income and employment generation in SMES as well as a productive basis (suppliers of commodities and services). • Inclusion of small rural productions to productive activities with market focus. • Improvements in the competiveness of the productive chains; • Concretion of the business opportunities and opening of market opportunities; • Fostering of entrepreneurial capacity at the SMES with clear projections of growth and development; • Promotion of a culture of productive investment. The SMES increase their assets and in consequence increase the possibility of accessing other financial services; The small firm PRO-RURAL, in the last years has reached important levels of development as a result of risk sharing. This financial product allowed its current manager Mr. Raúl Chambi, a small producer of quinua from the Municipio Challapata del Departamento de Oruro, to develop his entrepreneurial capacity, developing from being a simple provider from Empresa SAITE SRL., to a business men in the market of quinua. He developed a new firm that has its own data base of suppliers that dedicates itself to storage, processing and commercializing quinua real in national markets with an exporting perspective in the medium term. The first operation of shared risk (year 2008) consisted of a total investment of USD. 63.872.-, which allowed SINAI SRL to increase its sales values by 8% (de USD. 122.206.- a USD. 132.107.-) and increase its assets by a 18,7% (from USD. 213.839.- to USD. 253.926.-). Currently, there is a second risk capital total investment USD. 135.950.- and USD. 35.000.- additional in PDP Financiero (producto financiero complementario).
About You
Organization:
Asociación Civil Boliviana para el Desarrollo Rural (pro-rural)
About You
First Name

Gonzalo

Last Name

Calderon

Website
Your Organization
Country

, LPZ

About Your Organization
Organization Name

Asociación Civil Boliviana para el Desarrollo Rural (pro-rural)

Organization Phone

591 2 2433336/2435006

Organization Address

casilla 3233 correo central la Paz Bolivia

Organization Country
Organization Type

Non-profit/NGO/Citizen-sector Organization

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Latin America and the Caribbean.

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

$us 60.000 sesenta mil dolares americanos

Number of employees in your target firms

5-24.

Average number of employees of your target firm

20 (veinte empleados)

Specify the size, average and range of expected loans or investments in each target firm

The size of the investments to be developed by the rural SMES is between the range of USD 20.000 and USD 20.000, which is with an average of USD 60.000. The investments lie in the framework of Rural Capital Risk dedicated for production and commercialization of certified organic products, which are inserted in the chains of production, aimed at generating value, inclusive business between the different actors, strengthening in this way their capacity of negotiating and reaching new markets.

What stage is your solution in?

Operating for 1‐5 years

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

The program of Rural Risk Capital allows mobilizing resources in the international cooperation arena, as well as in the internal saving of micro and small rural firms, under the criteria of co-financing, eliminating assistential criteria, privileging the principles of efficiency and responsibility from the beginning of the initiative.
Within the programs of productive support (productive municipalities), this initiatives foster the resources of the public sector in a direct manner generating the provision of public services such as electricity, water, infrastructure, grain bins with a high impact in the development of the productive sector.
It allows for high levels of visibility to the productive sector dedicated to organic production as a new and profitable source of public and private investment.
Through these joint initiatives such as PRO-RURAL as a financer and the productive SMES the capacity of negotiating is strengthened with the state and with the financing system.
This generates the association of various SMES by means of the articulation and the presence of PRORURAL in the corporate governments. This action strengthens the negotiating capacities with the different levels of the government.
It allows for the investors in the developed countries to support the rural SMES by means of the injection of temporary capital, turning themselves into partners of the development of the organic production and impacting on the environment due to the characteristics of the certified organic production.

What barriers does your proposed solution address?

Informality, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate.

If you checked any of these barriers, describe how your solution addresses them

Rural Risk Capital is based on an investment relation between two or more partners, where the transparency of information is an indispensable requirement. This situation is achieved only when the SMES has formalized their action, which is, by means of a critical mass of SMES which can achieve accountable and formal systems that are applicable to productive chains taking care of all the aspects inherent to their administration.
Rural Risk Capital eliminates the restriction to mayor investments in relation to the existence of “real” guarantees, given that the relation is based upon a relationship of partners and not debtors-creditors. In this relationship, they are both interested in the accomplishment of the business plans and the constant development.
The founding partner not only injects the financing capital, but also transfers abilities and knowledge for a better understanding of the SME, in order to achieve better technical assistance, higher levels of organic certification and a broader market with higher levels of profitability.
Rural Risk Capital is the best financing instrument to develop agribusiness, given that it adapts itself to the needs and characteristics of the rural business. It aims at the growth and improvement of the SME. Under this concept, PRO-RURAL is not interested in the payment of the interests or in the financial business, but in the integral development of its partners.
Under the concept of risk capital, the strategic alliance that is created does not have a relation of sowing and harvesting. It goes beyond the agricultural campaign. It is by means of the organic certification and the maintaining of the market that a long term relationship is established, hence growth and economic independence.
Within the group of actions being developed, formalization, corporate government, transparency, technical assistance, and access to fair trade markets, one can visualize the important market that exists in terms of organic production in the rural areas and this manner the climate of investment is improved by means of visibility of profitability and the increasing potential of the initiatives.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

The Rural Risk Capital program has allowed to revalue the business that are led by the SMES dedicated to agribusiness with organic products, that no longer find in the inexistence of real guarantees a threat to their growth. Hence, this motivates the SMES to create new and interesting business options, as well looking for partners willing to take the risk for the SMES.
This program has managed to increment in the last three years the volume of the sales and exportation by 30% of the SMES associated to this program and has managed to facilitate them to enter new markets. At the same time 15% of their clients are actually new, situation that is a result of counting with a partner which is willing to invest in new business opportunities.
The concretion of new deals has means that the SMES have demanded a larger amount of agricultural production, which has in turn meant bigger and better markets for the smaller rural producers, which in turn mean san increase in the demand of the employment to take care of the harvesting and posterior stages.
PRO-RURAL has mobilized in the last three years more than 6 million USD in investments in rural SMES dedicated to production and commercialization of organic products.
Another big impact is the demonstration that there is a very big opportunity of investment on this type of businesses and that they can be financed with an annual interest rate of 6%. This means that the average growth rate of the SMES is 12% per year if one take into account a financing of up to 50% of investment in capital and operations as a direct cost of the SMES and only a 6% annual which is the lowest cost in the market for these types of firms.

How many firms do you expect to reach?

The rate of growth of the clients of the portfolio of the Rural Risk Capital in the local market in the last three years has reached 25% per year. By replicating this model to Peru, Ecuador y Paraguay, it is estimated to reach 200 SMES dedicated to production and commercialization of organic products.

What is the volume of private SME finance you aim to catalyze?

The Model of Risk Capital proposed, mobilized an average of USD 50,000 per SME, and applied in 4 countries. It is estimated to attend 80 SMES during a period of 4 years. This means a level of investment of USD 16,000,000, as the new productive chains are re paid

What time frame will be required to reach these targets?

It is proposed to replicate the Risk Capital by PRO-RURAL in the next four years (2011 – 2015), in Bolivia as well as in 3 other countries: Ecuador, Peru y Paraguay. This growth will demand a period of identification of those institutions interested in replicating the model; a second stage of adaptation of the model to the legal norms of the country; a third stage of transfer of technologies to the local institutions; a fourth stage where the first operations are developed by the local financial institutions.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

The main threats that have been identified against the mode are: a strong and long term decrease in the process of foods (commodities), which would lead to the need of new investments in rural SMES, making the rural business unfeasible, and hence the flow of new investments will be reduced.
The performance of the investments is the result of the relationship with the market, which can be altered if in the financial market there are resources that answer to other criteria, which is the case of the subsidized credit, which makes the investment process less interesting- damaging the culture of payment.
A financial legislation that changes the rules of the game that have been established and that binds a bigger prevision in to the credits in the productive rural area or a higher demand of supervision and monitoring that makes financing more expensive.
A sustained global financial that manages to affect the export market of organic products and of fair trade.
If after the investments in rural SMES, natural disasters are presented in great magnitude that affects production, the entire business model will suffer a great impact and the recuperation of the investment will demand more time than planned.

Sustainability
List all the funding sources that are required for the sustainability of this solution

Investment Funds: Funds made up mainly of cooperation resources, these resources are administrated by PRO-RURAL in the implementation off risk capital, directed to producers in the rural area of SMES;
Development Banking: by means of state policies of financing, resources can be directed to this initiative;
Public Programs: these resources can be directed to productive development in different stages of the State, with emphasis on the municipal resources;
Developed Market Value: Once the companies have a formalization of their activities, their standards of transparency and generation of financial reports, they can obtain financing by means of emission of stocks in the market in the Market Value.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

As a result of the successful application of the Risk Capital model, the SMES develop and demand larger capitals that lead to major utilities (re-investment) for the program. Due to the characteristics of the program, the amounts of investment are high, which allows that with low personnel (low operational cost) one can manage big volumes of investment.
In the Risk Capital model, the biggest utility source is the generation value of the SME and its posterior sale, that is profits due sales, that is capital.
With an important volume of simultaneous initiatives one may generate alliances and synergies especially in exportation markets, achieving a low cost of association, hence an accelerated repaying rate of invested capital. The assigned funds have a faster velocity of circulation which results in the sustainability of operations in no more than 5 years.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The rural productive development is a national priority in the four countries suggested to apply the Risk Capital, considering the strategic importance of the sector. There will always exist public national programs or international cooperation programs interested in supporting the rural productive development, this meaning a larger production.
Given a larger production, the model of the Risk Capital, will always be applicable, given that it generates its own demand.
Another option of survival is the ability that producers have of association which enables them to increase their volumes of commercialization, originating again an option of business at a larger scale.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Natural alliances that are produces as a result of the interaction between PRO-RURAL and the SMES that use this financial tool; alliances that are achieved through the association between SMES within a same value chain; alliances; of the suppliers of technical assistance that coordinate efforts and capacities within a value chain; alliances that are produced in the moment of strengthening the abilities of negotiation of the SMES due to the graduation of the value market or other more traditional financial instruments.
Other types of alliances are produced with the public and private financing entities of these initiatives, that is multi or bilateral organisms; NGOs, civil society organizations,
Private-Public partnerships in common enterprises between municipalities and other levels of the State and the SMES, that is in the provision of public services or public politics directed to stimulating the development of organic production.
Alliances with unions that bring together agricultural producers, the Risk Capital model, base their success (profitability) in the volume, a situation that can only be reached when one is certain that many rural producers are willing to put togethe

Are there non-financial issues that could threaten the sustainability of your proposed solution?

In the first place, in terms of that related to the agribusiness, we refer to the natural disasters that may happen which may stop any of these initiatives.
Many countries adopt restrictive exterior commerce policies, which restrict the volumes of the business.
The moral risk and the adverse selection of the elected business are inherent risks of the operations, given that they are economic informal actors from the beginning.
A new technology applied to the massive production of foods (production of transgenic foods) that generates a larger volume of basic foods and that pressures the prices of the finances products.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

The SMES dedicated to agribusiness articulate themselves with different actors of the chains of production. The application of Risk Capital reduces the probabilities of failure of the risk is distributed during the whole chain and between the various actors, that is why the model demands the growth of the chain and in consequence, that of the sector.
The strategy of growing in neighboring countries enables the possibility of geographic growth, given that these countries have similar characteristics.
The demand of the agricultural products in the developed countries is ever-increasing, which means that the rural SMES that apply to these norms of production and commercialization will have a sustained growth and hence the development of the sector is assured.