Changing the role of capital: Redefining rural finance


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In the agricultural sectors of emerging economies such as India, capital is king. It dictates power and ownership and therefore providers of capital capture the lion’s share of surpluses created in agribusiness value chains. Now a new investment model which employs Participative Capital is challenging the status quo. The concept was developed by community-led initiative Just Change, and is the first plan of its kind which links producers, consumers and investors to ensure more equitable and sustainable economic systems. This participatory model allows for investments to be made in a manner where ownership, benefit and risk are shared by all participants.

In November 2011, 25 executives from 12 countries representing 15 organisations spent a week in India to produce a viable plan for Just Change to operationalise Participative Capital. This diverse group was comprised of emerging leaders from countries including Japan, India, Nigeria, and Malaysia nominated by global companies such as FedEx, BASF, NEC, Orix and Infosys.

The business plan presented to JCI focussed on creating a new independent operating company with the governance structure that would allow the participation of producers, consumers and investors in the production and sales of tea and paddy - a model that was created with the means to be used for other commodity products.

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Changing the role of capital: Redefining rural finance

  1. 1. Just ChangeBusiness Plan To Operationalise Participative CapitalChanging The Role Of CapitalFor Sustained Growth In Rural IndiaProduced by the participants of the Global Young Leaders Programme, November 2011
  2. 2. Table Of ContentsExecutive Summary 3Introduction 5Background 6Business Model 14Business Development 27Supply Chain Management 37Community Benefits 44Financial Analysis 50Recommendations & Conclusion 65Appendix 69
  3. 3. Executive Summary 1 of 2• Just Change is a community led initiative thatgrew out of the struggle of the Adivasis ofGudalur, Tamil Nadu to improve and sustaintheir livelihoods in the face of adverse marketforces• An examination was conducted in the way thecurrently economy is structured• Just Change India has developed a concept toaddress this issue – an internationalcooperative of producers, consumers andinvestors, enabled through a ParticipativeCapital business model• The business model outlines the establishmentof a new “Operational Company”, that linksproducers, consumers and investors to providemutual economic and social benefits3
  4. 4. Executive Summary 2 of 2• To operationalise Participative Capital anestimated capital investment of INR 100million (10 crore) is required in which areturn will be expected by the fourth year• By sharing returns between investors andcommunity groups, rural communitylivelihoods will be improved – returns are tobe managed through a robust governancestructure within a sustainable business model• Community groups will re-invest the returnsinto community programs such as education,skills training and healthcare services as wellas channel a portion into stability funds• The recommendation outlines a pilot projectwith Tea and Paddy in Tamil Nadu , with theintention for expansion into neighbouringstates and other commodity products4
  5. 5. Just ChangeBackground and ObjectivesI. Just Change IndiaII. Adivasis JourneyIII. Global Tea MarketIV. Global Paddy MarketV. The ChallengeVI. Investment Plan Objectives
  6. 6. 3Just Change India• Just Change is a concept that grew out of the struggle of the Adivasi farmers ofGudalur, Tamil Nadu to secure their livelihoods and live in dignity• Around 2003, “Market forces” saw prices of tea leaves plummet to a level that isthreatening the farmers’ livelihoods, yet consumers worldwide continued to payhigh prices• “Just Change” pioneered an alternative way of doing business which links poorproducers, consumers and investors to work together for mutual benefit“a grassroots response to the global economy that has left thevast majority of people powerless with little or no control overfactors that influence their lives...”- Stan Thekaekara, Founder of Just ChangeTo foster a more just, equitable and sustainable economy for farmers7
  7. 7. 3Global Tea Market - Overview• Tea is the highest consumed drinkin the world - productiondominated by China, India, Kenyaand Sri Lanka• Export Market is dominated by SriLanka, China and India with themajor players in the Import Marketbeing Pakistan, Japan and China• No global institution exists in thetea industry, only individual nationshave national Tea Boards or TeaAssociations• Tea production is labour intensivewhere the livelihoods of millions inthe rural areas are largelydependent on tea picking andprocessingGLOBAL TEA PRODUCTIONSource: Tea Board of India,
  8. 8. 33Tea Market – Sustainability Issues• Global prices have been decliningsince 2000 due to the pricecollusion by the oligopolistic teamanufacturing industry• A combination of price volatilityand the domination of the teasupply chain by a fewinternational companies isadversely affecting thesustainability of the tea sector• Working conditions andlivelihoods of plantation workersand small scale farmers in teaproducing countries are undergrowing pressure - most earn lessthan Rs.100 a day.10
  9. 9. 3Global Paddy Market – Overview• Rice cultivation is the principal activity and source of income formillions of households around the world• At the beginning of the 1990s, annual production of rice was around350 million tons and by the end of the century it had reached 410million tons• Globally, India has the largest rice area and is second in riceproduction, after China• Among the exporting countries, Thailand, Vietnam, India andPakistan are the major countries exporting rice in sizeable quantity11
  10. 10. The Challenge“The YLP participants work closely with Just Change to address the challenge ofoperationalising, on a larger scale, the concept of Participative Capital which isenvisioned to generate a more equitable economic and social benefit for the networkof producers and consumers as well as provide a return of investment to theinvestors.”*Sources: International Fund for Agricultural Development & China vs. India: A Taleof Two Plans, The Economist NetworkTwo thirds of India’s population are ruralfarming communities with 30% living below the poverty line.While the economy has been growing at 8% , agricultural output hasrisen at only 3.3% per year*POVERTYCommodity retail prices largely benefit the intermediary branding andpackaging companies, wholesalers and retailersMARKETINEQUITYAccess to basic commodities like tea, rice and spices have becomedisproportionately expensive for consumers and less profitable forproducersCOMMODITYACCESSRESTRICTIONS12
  11. 11. Investment Plan Objectives• To create an investment framework for the operationalising ofParticipative Capital• To allow investors with aligned interests to become activeparticipants of social change while realising a financial return• To ensure fair prices for producers so they have more control• To deliver good quality products at fair prices to consumers• To enhance and improve the overall societal development• To create an investor framework that can be applied acrossdifferent commodity products and states in IndiaCreating a more just, equitable and sustainable economy13
  12. 12. Just ChangeBusiness Modeli. Purposeii. Participative Capitaliii. Benefits of Co-Destinyiv. The Key Playersv. Business Modelvi. Organisational Structurevii. Governance Overviewviii. Governance Approach
  13. 13. Purpose• To outline the enterprise operating on the principles ofsustainability to also be run as a profitable business• The bases of the enterprise is on the principle of ParticipativeCapital, to include the participation of producers, consumersand investors• The governance structure of the enterprise is to ensureequitable returns are delivered to all stakeholders15
  14. 14. 16•Relationship reinforced among participants via co-existence and co-operationtowards a common destination and mutual economic and social benefitsCo-destiny•The transactional value derived from the commodity, consumption and capitalfrom the network of producer groups, consumer groups and investors results insurplus which in turn is redistributed equitably into the business or contributesto improving the standard of living of the people in rural IndiaValue andSurplus•A structured Operating company linking consumer groups and producergroups, focusing on supply chain efficiency and surplus distributionCentralGovernanceParticipative CapitalParticipative Capital is a concept that generates a more equitable economic andsocial benefit for the network of producers and consumers as well as provide areturn of investment to the investors.Sustainable businessincome and growthEquitable distributionof economic benefitsExtend social benefits tothe greater community
  15. 15. Participative Capital - Visual Model17
  16. 16. Benefits Co-DestinyCapitalInvestorsProducerGroupsCommunity& IndiaConsumerGroupsCo-destiny•Receive goods at a fairprice•Improved quality ofproducts via improvedsupply chain model andgoverned process andfederation aggregator•Better price stability viaFederation’s risk fund•Enjoy economic & socialbenefits from surplus•Improve standard ofliving in rural India•Strenghting communityrelationships•Fair price for theirproducts•More consistentdemand via a morestructured supply chainand loyalty incentives•Enjoy economic andsocial benefits fromsurplus•Financial return oninvestment•Contribute tobetterment of societye.g. minimise povertyand improve standard ofliving, healthcare andeducation•Small investment – Bigimpact18
  17. 17. The Key PlayersProducer GroupsFarmers represented throughLocal Societies at Village/TalukalevelsConsumer Groups• Cooperatives• Mid-size wholesalers• Local consumers in villagesOperating Company(JCI Producer Company)• Deploy ‘Capital’ provided by investors• Process commodities provided by theProducing Groups• Distribute commodities to Consumer Groups• Distribute financial returns to all stakeholdersInvestorsProvide capital with the intent to generate financial return19
  18. 18. Organisation StructureExternalAuditorsBoard of DirectorsJCIPC ( Just Change India Producer Company )JCT PG Shareholders GM InvestorOversight /ApprovalFinance & Admin OperationsSupply ChainPurchasesITGeneral Manager (GM)Community RelationsMarketing & Bus Dev OperationExecutive DirectorJust Change Trust (JCT) Advisory/Think tank21
  19. 19. Just Change India Producer CompanyJCIPC - an Independent Operating Company• JCIPC is to facilitate return on investment and build capacity to expandproduct(s) and services• JCT will continue to operate as a think tank, independent of JCIPC butwill also take an advisory role on Board of Directors• Board of Directors consists of representatives from all the majorstakeholders to oversee and approve the major decisions made withinJCIPC, ensuring the direction and purpose of the entity remainscommunity driven• The day to day operation of the entity is split into several business unitsincluding: Finance & Administration, Operations and CommunityRelations22
  20. 20. Business Units 1 of 2Role of Finance & Administration• Investment management• Governance of capital andsurplus• Provide funding managementto Operations• Distribute funding to producermembers• Identify and manage financialprivileges for members (i.e.,rebates)• Human resourceadministration andmanagement• Internal audit2323
  21. 21. Role of Operations• Business Development & Marketing• Marketing & communications• Promotional materials• Public relations• Brand awareness• Pricing• Supply Chain• Manage the market place• Manage logistics• Manage warehouse• Purchasing• Inventory management• Supplier management• IT• Manage technology vendor• Provide day to day technologysupportBusiness Units 2 of 224Role of Community Relations• Communication withcommunity• Community developmentinitiative• Community fundManagement
  22. 22. Business model and organisation structure will ensure:• Compliance with all applicable laws and regulations• Transparency and segregation of duties in the overalladministration of the Operating company (see businessmodel)• Accountability of key stakeholders• Effective management of the capital and financial surplusdistribution amongst investors, consumers and producers• Profitable management of a multiple commodity productsenterprise (Rice, tea)• Execution of strategyGovernance and management organisation structure is scalable formultiple product(s).25Key Aspects of Governance
  23. 23. 26Governance Approach• Exclusive participation via shareholding inOperating company, assurance of fairprice and quality goods and incentives topromote continuous supply and demandof commodity• Selection criteria of participants in supplychain for worthiness• Central governance on surplus managementvia Board of Directors of Operating companybenefitting consumer groups, producergroups and investors• Operating company to focus on businessdevelopment; match demand and supply aswell as ensure fair price, price stability andquality goods• Central governance on surplusmanagement via Board of Directors ofOperating company• Dedicated community relations personnelto focus on community developmentinitiatives• A structured Operating company linkingconsumer groups and producergroups, focusing on marketing and supplychain efficiency• Selection criteria of vendors/suppliers forworthinessSustainable business incomeand growthEquitable distribution ofeconomic benefitsExtend social benefits to thegreater communityImproved and efficientmarketing and supply chain
  24. 24. Just ChangeBusiness Developmenti. Purposeii. Market Strategy Overviewiii. Marketing Planiv. Branding Strategy
  25. 25. Purpose• Participative capital is a new concept being introducedamongst producers, consumers and investors and therefore astrong marketing plan is required for successful businessdevelopment• As a ‘start-up’ the main goal is to increase awareness and gainthe confidence of producer and consumer groups• A secondary goal is to develop a strong brand which will buildtrust and loyalty to JCPC28
  26. 26. Marketing Strategy OverviewTop priority is“Attracting Consumers & Producer Groups”Marketing StrategyBrandingAttractingConsumer & ProducerGroupsSTEP 1 STEP 229
  27. 27. Marketing Plan – Year 1 and 2Main focus:To attract Consumer and Producer GroupsMethod• Year 1 and 2 – focus on maintaining and extending consumer demands andensure production levels increase accordingly as well• JCIPC will be using their in-house resources to achieve their first two years’marketing goals• The approach in the first two years do not require substantial investment• After the first 2 years, once the base of producer/consumer have been foundedwith investment flowing in, more substantial marketing activities are planned inaccordance with an increased budget for marketing expense• Plans to attract producer and new consumer groups are outlined in the next twoslides30No substantial marketing expenses expected in years 1 and 2
  28. 28. Attracting Producer GroupsFor existing producer groups/circle:Suggested methods:• Supply contract: premium atsigning of contract: e.g: INR20/kggreen leaves• Guaranteed fixed buying price:e.g: INR45/kg green leaves• Share of surplus/volume unit• First right to invest• Group representative haveaggregated vote in decisionmaking process• Access to education and healthcare as members• All groups benefiting fromparticipative capitalFor new producer groups/circle:Suggested methods:• Multi level marketing:producers earn eventual shareof surplus increases• At signing supply contract:entitled to the benefit packageoffered to existing members31
  29. 29. Attracting New Consumer GroupsSuggested methods• Initially use word of mouth, goingthrough trusted organisations andthen using the success stories toattract others, highlighting all thebenefits of participating• Benchmarking against market priceand offering discounts• Partnership with cooperatives in TamilNadu, Kerala, and other states: % pertotal volume to the cooperatives ;mutual technical support;• Referral scheme• Membership discount for loyalconsumers32
  30. 30. Marketing Plan – Years 3-5Year 3 Year 4 Year 5Producers Educate and visit new villageson concept to get buy in anddevelop relationshipsRoll out rewards scheme fornew producers (commission)Media campaignPolicy advocacyTrade showBest producer of the year awardTeaConsumersNewspaper adsFlyersWebsiteTV adTea tastingProduct PromotionTrade showStudy tourPaddyConsumersNewspaper adsFlyersRice tastingRoadshowTV adsWebsiteRoadshowTrade showStudy tour*Eakgon Cellphone is a cellphone service for illiterate farmers to provide them with information on cultivationStarting in year 4 the budgeted marketing expenses will increase allowing foradditional efforts in scaling up JCIPC’s operations.33
  31. 31. Market Expansion PlanTea to besold [MT]No. ofSocietyHouseholdsYear 1 100 5 20,000Year 2 125 6 25,000Year 3 188 8 47,000Year 4 281 10 132,070Year 5 422 15 557,335Year 6 633 25 3,527,933PeriodRice to besold [MT]No. ofSocietyHouseholdsYear 1 2000 8 20,000Year 2 4000 12 40,000Year 3 8000 18 160,000Year 4 14000 25 1,120,000Year 5 21000 35 11,760,000Year 6 30000 40 176,400,000PeriodIn order to achieve the above mentioned figures, we will do the followingsteps:Step 1: Promote brand and bring societies on boardStep 2: Branding*Projections are conservative and expected to be exceeded based on selling goods in open market34
  32. 32. Branding Strategy – Just Change Tea & RicePromotion• The brand will beassociated withcertaincommunities i.e.Raitasanga• Create sense ofownership /relationship withthe brand• Offer free samples topotential consumers• Multilevel marketing• Use referrals andword of mouth toincrease awareness• Business tie-up withentrepreneur groupsin the society• Price penetrationwithin the differentgroups of society• Premium pricing fordifferent quality oftea / rice• Leverage on existingretail chain outlets inYR1 to mid YR2• Set up new exclusiveretail outlets• Location basedbrand will serve aspotential touristdestination site35Product PlacePricePromotion
  33. 33. JustChangeBranding“Supporting thecommuniTEA”“Just Change your rice”Enabling a sense of ownership within the community36
  34. 34. Just ChangeSupply Chain ManagementI. Traditional Supply Chain Model & IssuesII. Solution to the Traditional ModelIII. Benefits of 3 Tier Supply ChainIV. Why a Marketplace is NeededV. Marketplace FrameworkVI. Warehousing
  35. 35. FarmersMandis(Market)AggregatorProcessingPackagingStateProcurementSystemIntermediaryDistribution HubsConsumerRegisteredDealerTraditional Supply Chain Model & IssuesIssues• Exploitation by dealers andaggregators• No common marketplace to:• Buy and sell product• Identify producers andconsumers beyond localboundaries• Share information• No warehouse for temporary storage• Lack of logistics networkLack of marketplace between Producers and Consumers limitsfair trade and equitable growth38
  36. 36. VillageFarmersProducerGroupOperatingCompanyConsumerGroupsOpenMarketConsumerWarehouseSolution to the Traditional ModelTier 3 : Consumer Groups• Sales & distribution to end consumerTier 2 : Operating Company• Marketplace to link up producers andconsumers• Warehousing/stock managementTier 1 : Producer Group• Process goods, packaging• Sell goods to Operating Company3 Tiers Supply Chain Model3 Tier model links up producers and consumers directly39
  37. 37. Benefits of 3 Tier Supply Chain ModelProducers enjoy:• Increased margins due to direct sale to consumergroups• Easy access to information• Ability to retain personal relationshipsConsumers enjoy:• Ability to search and price compare• Lower prices due to direct purchase• Decreased costs through the use of online auction• Easy access to information to facilitate dailyoperationsThese benefits are obtained by using the marketplaceplatform within the Operating Company.Marketplace is the essence of 3 Tier Supply Chain Model40
  38. 38. Why a Marketplace is NeededA marketplace enables Producers and Consumers to:• Communicate effectively– Linking rural communities toconsumer groups– Visibility of supply and demandbeyond local networks• Trade, Buy and Sell– Price creation and determination– Match up willing buyer and sellerMarketplace brings producer and consumer groups together41
  39. 39. Marketplace Framework• Concept• Create a marketplace platform online and through a mobile phone network forSellers and Buyers to go beyond the current limits of a traditional market• Role• Enable Producers and Consumers to buy and sell products beyond currentboundaries, by leveraging on the information and logistics network providedand recommended by the Operating Company• Establish the connection between Producers and Consumers, allowing them tointeract and communicateSuccessful marketplace implementation needs warehousing42
  40. 40. Warehousing• Concept• Serves as storage of products when thereis no immediate match in the Marketplacebetween producers and consumers• Operating company manageslogistics to Consumer for warehouseproductsWarehousing enables sales at the right time and price• Role• Provides Producers with stable income with stable sales of products• Provides Consumers with reliable supply of products• Operating company’s purchase of product during oversupply eliminatesprice volatility for Producers43
  41. 41. Just ChangeCommunity BenefitsI. Community Services OverviewII. Impact OpportunitiesIII. Financial BenefitsIV. Women EmpowermentV. Community Benefit Indicators
  42. 42. Community Services OverviewPrimary issues faced by the community:• Availability and usage of public health services and facilities is stillminimal at best - critical care services are often 100KM or moreaway.• Significant school dropout rates among children• Market fluctuations often lead to significant income loss for ruralfarmers who lack access to emergency funds, which results in theloss of land – this has also led to a disturbing increasing trend ofalcoholism and suicide rates45
  43. 43. Impact OpportunitiesA Board of Directors of the Operating Company is to allocate certainfunds to address the community needs. This pilot program is tofocus on:• Education and Skills Training• Healthcare services• Improved communication• As returns increase as the operations scales up, additionalservices may be introduced to address needs of other targetcommunities, including:• Women’s empowerment• Financial assistance through community funds forcontingencies• Community services will roll out all activities & services viaexisting community structures46
  44. 44. 47Financial BenefitsCurrent scenario, as is:• Currently the producers areorganised only to a limited extentwhile the power of collectivefinancial capability is not realisedso far• The community borrow moneyfrom local money lenders at a veryhigh interest rate when in need -interest rates are often 3% /monthNew initiatives:Community loan fund• To address financial constraints caused byunforeseen events• It is paid out as a low interest loan i.e.interest sufficient to coveradministration, supervision & loan loss costwith no element of profit taking• Initial funding from Investors portion• Kept sustainable by a) repayment byborrowers b) surpluses generated by businessImplementation Needs:• Group lending by way of cross guarantee• Cap on borrowing size per borrower, loans are short term in nature 1-2 years• Cap of number of loans to be lent in each financial year.• Governance at project level to ensure compliance of operational/administrativeprocedures & policies.• Set up a team to operate the fund
  45. 45. 48Women EmpowermentCurrent scenario, as is:• Women’s power is not fullyutilised for the community’sbenefit• Each woman is an individualworker, therefore no leveragingon the power of women as agroupNew initiatives:• Build a stronger, happier and valuedriven community through the groups,focusing on:– Managing household financials andsavings– Collective bargaining of goods forthe community• Visit other communities and villages tolearn and share best practices• Reskill in areas to support execution ofthe model (i.e., SNEHA group)• Increase awareness of governmentschemes and ways to take betteradvantage of themImplementation Needs:• X* salaried women to visitcommunities• Driver(s)• Car(s)• Administrative support*Number is scalable, depending onmembership
  46. 46. Community Benefit IndicatorsCommunity Intangible benefits Tangible indicatorsProducers Steady income Net increase in average incomePrimary Education Number of children enrolled in primaryschoolLiteracy rate: percentage of peopleHealthcare Number of injury deathsNumber of deaths in children age 1-59monthsSkills training Percentage of revenue growth incommunityCommunications Number of people who has access to thebroadband internet including commonfacilitiesConsumers Lower retail price Discount rate: the percentage of deductionof price compared to the market price49*Additional details on community opportunities in appendix
  47. 47. Just ChangeFinancial AnalysisI. Key TargetsII. Shareholding PrinciplesIII. Capital RaisingIV. Surplus DistributionV. Key AssumptionsVI. Financial OverviewVII. Sensitivity AnalysisVIII. Future Growth Driver
  48. 48. Key Targets• Sustainable• Multiple revenue streams creates surplus stability• There will be two rounds of capital raising to maintain stablecashflow for working capital and business expansion• Scalable• Profitability of business is highly dependent on scale and volume• Model is dependent on Just Change’s ability to attract producers andconsumers• Lowering marginal costs and capital expenditures create attractivemargins for business expansion• Large potential for growth• Flexibility of business model promotes expansion into morecommodities (such as spices, vegetable oil, cotton, cocoa etc.)• Case study of tea and paddy is highly promisingThe economics of participative capital delivers financial gains51
  49. 49. Shareholding PrinciplesParticipativeShareholdingModel90 (Capital to be repaid) 10218Surplus 2090%10%90-18 = 72 284272-14 = 5814 6Surplus 2072%28%52The Shareholding structure is not only determined by capital contribution but also byparticipative contribution to the businessThe shareholding of producers increases as the initial capital investment is repaidInvestors will provide the capital for the business,and producers will be providing their labour andsweat capitalExample of Participative Shareholding
  50. 50. Capital Raising - ShareholdingPRODUCERSHAREHOLDINGCOMPANYCapital10%Capital90%INVESTORCapital100%Sweat CapitalShareholdingInterest on day 110% 90%Producers become shareholders by investing labour capitalThe operating company willmake an upfront commitmentof 10% of capital raised toinvest in a community fund onday 1The shareholding structure islinked directly to the amountof invested capital left to berepaidThe long term stableshareholding relationship willprimarily benefit theproducersCOMMUNITYFUNDFUND TOBUSINESS53
  51. 51. Capital Raising - OverviewBridging the gap90%10%Investor Capital BreakdownBusiness CapitalCommitment to CommunityTotal Participative CapitalInvestmentINR 100MUpfront commitment to communities• Capital raising will occur in two rounds, bothraising INR 50M• Second round will take place in year three ofoperations• Producer communities will have anopportunity to invest in the second round ofcapital raising50%20%30%Business Capital BreakdownWorking Capital MarketingStability Fund54
  52. 52. Capital Requirements - Overview50%20%30%Working Capital Marketing Stability FundThe capital raised will be primarily used for working capitalTo mitigate financial risks arising fromsupply and demand mismatches andproduction shortfalls due to naturalforces, a stability fund will beestablishedMarketing and brand building will beessential in establishing our businessoperations and is a key considerationduring the capital raising processThe business will require a largeprovision of capital for working capitalneeds especially in the beginning stagesof operationsINR 90M55
  53. 53. Overview – Surplus DistributionThe distribution of surplus will filter through 3 levelsFirst 3YearsStableDistributionBeginningDistributionStableDistributionMulti-level surplusdistributionstructure56
  54. 54. Overview – Surplus Distribution• The operating company will retain 100% of the surplus in the first threeyears to build the business• Thereafter, the operating company will retain a constant 25% of surplusto maintain operations• Of the remaining 75%, surplus will be distributed to both the producersand investors with the division skewed towards the investors until theoriginal capital invested has been repaid• The producers’ share of the surplus will be returned in the form of cashand community investments via the community fundInvestors benefit more at the start of the venture. Uponcapital repayment, majority of surplus goes to producer57
  55. 55. Key AssumptionsAssumptions provided from sources within the producer communitiesRice TeaY1 Y3Commodity Annual Growth RateTea 25% 50%Y1 Y3 Y5CommodityPaddyCompositionCostINR/kgSell INR/kgUnbroken Rice 68% 18.5 22 24 26.25Broken Rice 7% 9 11Husk 20% 4 5Rice Bran 3% 27 37Y1 Y2 Y3 Y4 Y5Commodity Annual Growth RateAll Rice Products 100% 100% 75% 50% 43%• Rice production anticipated for high growth in the first three years thatwill then taper off• Conversely, tea’s growth rate is expected to accelerate after the secondyear of production• No expected growth in broken rice, husk and rice bran in 5 years as theircontribution in terms of value is smallY1 Y2 Y3 Y1 Y2 Y3Commodity Cost INR/kg Sell INR/kgTea (Mass) 70 75 80 100 112 12558
  56. 56. Financials – Income StatementMargins increase with scaling efficiencyFinancial Overview (INR M) Y1 Y2 Y3 Y4 Y5 Y6Total Sales 45.7 85.4 177.2 304.3 488.6 702.0Total Cost of Goods Sold 43.6 79.6 157.9 269.9 404.6 578.8Net Profit -1.4 -0.5 9.3 17.5 49.8 72.9Gross Margins 19.9% 20.4% 20.1% 19.8% 25.1% 25.1%Net Profit Margin (%) -3.1% -0.6% 5.2% 5.8% 10.2% 10.4%59
  57. 57. Financials – Gross IncomeHigher margins obtained with economies of scaleWarehousing (INR M) Y1 Y2 Y3 Y4 Y5 Y6Total Paddy (MT) 2000 4000 8000 14000 21000 30000COGS 29.6 59.3 126.7 221.8 332.6 475.2Sales 35.7 71.4 153.6 268.8 435.3 621.9Total Tea (MT) 100.0 125.0 187.5 281.3 421.9 632.8COGS (INR M) 7.0 9.4 15.0 22.5 33.8 50.6Sales (INR M) 10.0 14.0 23.4 35.2 52.7 79.1Cash Surplus (INR M) 9.0 16.7 35.3 59.7 121.7 175.2Gross Margins 19.8% 19.6% 19.9% 19.6% 24.9% 25.0%Participation Fee (INR M) Y1 Y2 Y3 Y4 Y5 Y6Paddy Volumes handled (MT) 1360 2720 5440 9520 14280 20400Paddy Value 29.92 59.84 119.68 209.44 314.16 448.8Tea Volumes handled (MT) 50 250 500 700 1200 1800Tea Value 5 25 50 70 120 180Participation Fees 0.35 0.85 1.70 2.79 4.34 6.29Participation & Vendor Fees 0.35 0.89 1.85 3.09 4.84 7.2960
  58. 58. Financials – Operating MarginsOperating Cost (INR M) Y1 Y2 Y3 Y4 Y5 Y6Headcount 5 6 7 8 8 9Salary and Wages 1.7 2.3 2.9 3.6 3.9 4.1Office exp. Including rental(SGA) 1.2 1.2 1.8 1.8 2.2 2.2Marketing(SGA) 0.9 1.8 1.4 2.3 2.5 3.6Promotion(SGA) 0.9 1.8 1.4 2.3 2.5 3.6Warehouse costs 0.3 0.6 1.2 2.1 3.2 4.5Transport Costs 4.2 7.0 10.9 18.6 29.9 42.9Training Camp costs(SGA) 0.9 1.8 1.4 1.6 2.5 3.6Interest (10% rate) 0.0 0.0 0.0 1.2 3.0 6.0Total Operating Cost 10.1 16.4 20.9 33.6 49.5 70.5Operating Margin -4.3% 0.0% 7.7% 8.8% 15.3% 15.8%Supply chain costs make up the majority of OPEX61
  59. 59. Financials – Returns to InvestorsInvestor Interests Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10Investor Shareholding (%) 90.0% 90.0% 90.0% 88.7% 85.5% 69.5% 35.0% 35.0% 35.0% 35.0%Surplus to Investors (INR M) - - - 6.3 11.6 32.0 38.0 21.1 23.2 25.5Investor IRR (%) - - - -86.3% -48.8% -15.6% -0.6% 4.3% 8.1% 11.0%Participative capital investing is a fairly newinvestment conceptThe expected return is relatively lower incomparison with conventional investmentsThis model offers an investor theopportunity to enhance the community’swell being in IndiaInvestors can fulfill an engaging relationshipwith a community for better living.The investment gives the community a sense of purpose62
  60. 60. Sensitivity AnalysisNet Profit (INR M) Y1 Y2 Y3 Y4 Y5 Y6Best Case (+20% Production) 5.0 11.4 34.1 60.1 118.2 171.2Base Case -1.4 -0.5 9.3 17.5 49.8 72.9Worst Case (-20% Production) -7.8 -12.5 -15.5 -25.1 -18.6 -25.4Investor IRR Y4 Y5 Y6 Y7 Y8 Y9 Y10Best Case -79.5% -39.0% -7.8% 3.8% 9.2% 13.1% 16.1%Base Case -86.3% -48.8% -15.6% -0.6% 4.3% 8.1% 11.0%Worst Case -93.5% -59.0% -26.4% -9.1% -1.6% 1.8% 4.7%Water and weather conditions have a strong impact on cropproduction and financial performance63Because weather conditions will change year to year, theworst case scenario where production is consistentlybelow estimates is highly unlikely
  61. 61. Future Financial Growth DriverScale up requires additional margins to be obtained throughthe optimisation of the supply chain64
  62. 62. Recommendations & ConclusionI. Implementation MilestonesII. Risk Assessment MatrixIII. Recommendations & Conclusion
  63. 63. Implementation MilestonesCreateOperatingCompanySource &ImplementSupply ChainYear 2Year 1 Year 3SecureCapitalYear 4 Year 5InvestorSurplusDistributionCommunityInvestmentsAttract and enlist Producer and Consumer Groups66Sign upproducer, consumer groupsCommunitybenefitsdefinedCreatebrandCommunitybenefitsdefined5 year implementation plan*Additional details on Implementation Plan in Appendix
  64. 64. Risk Assessment MatrixLack of alignment of goals of members of OperatingCompany and Board of DirectorsLack of transparency in the administration of theOperating Company and Board of DirectorsThin spread of surplus due to overwhelmingcommunity requestsIneffectiveness of and lack of outreach of communityprogrammesLimited market penetrationLack of confidence of investors in profitability ofbusiness ventureCommodity price volatilityInability to secure funding to commenceimplementation of business modelProduction downtime due to poormaintenance and power outages12345789Poor quality commodity10Supply chain failure impacting commodity distribution1112 Commodity supply outweighs demand58237LikelihoodImpact9Low Medium HighLowMediumHigh14 610111267
  65. 65. Recommendations & Conclusion• In keeping with the vision of Just Change, a methodology in‘operationalising ‘ a Participative Capital business model has beencreated• Recommendations include the establishment of a new ‘OperationalCompany’ that not only links the producers and consumers but alsoinvestors• The recommendation outlines a pilot project with Tea and Paddy inTamil Nadu and Kerala regions respectively, with the intention forprogressive expansion• With a capital investment of INR 100M, estimated initialinvestments will enable scaling resulting in operating profits fromyear 3 onwards• The venture is expected to improve the livelihoods of ruralcommunities, producers and consumers alike, whilst providing asustainable business model for the success of stakeholders68
  66. 66. Just ChangeAppendixI. AssumptionsII. Financial DetailsIII. GovernanceIV. Community OpportunitiesV. Detailed Implementation PlanVI. Risks and Mitigation
  67. 67. Assumptions• Governance and structure created with a focus on the tea andrice business• Marketplace system can be set up to be used via mobile phonenetwork and online – platform software to be developed• All producer and consumer groups have access to mobilephones (SMS)• Logistics infrastructure exists for the delivery of goods• Surplus distribution and implement plan assumes profit70
  68. 68. Income StatementBrokerage Y1 Y2 Y3 Y4 Y5 Y6Volumes handled (MT)* 3660 7283 14331 24806 37359 53518Brokerage & Vendor Fees** 0.05 0.29 0.65 1 1.7 2.8Warehousing Y1 Y2 Y3 Y4 Y5 Y6Total Tea (MT) 250 313 391 586 879 1318COGS (INR M) 18.8 23.4 29.3 43.9 65.9 98.9Sales (INR M) 31.3 39.1 48.8 73.2 109.9 164.8Gross Margin 12.5 15.6 19.5 29.3 43.9 65.971With economies of scale, better margins can be generated*Volume reflects the total volumes handled for brokerage as well as warehousing for tea andpaddy** Brokerage & Vendor Fees are one of the income streams along with Warehousing, incomefrom brokerage reflects only the brokerage volumes
  69. 69. Financial Overview(INR M) Y1 Y2 Y3 Y4 Y5 Y6lNCOME 67 110 192 323 485 701COGS 60 101 177 299 445 639PBIT 2.2 1.1 1.5 3.7 7.4 13.6SalesCOGSPAT0100200300400500600700800Y1Y2Y3Y4Y5Y672
  70. 70. Operating Costs(INR M) Y1 Y2 Y3 Y4 Y5 Y6Salary and Wages 1.16 1.36 1.51 1.61 1.61 1.71Offic exp. Inclu rental 1.2 1.2 1.8 1.8 2.16 2.16Marketing 0.06 0.08 0.10 0.15 0.22 0.33Promotion 0.06 0.08 0.10 0.15 0.22 0.33Warehouse costs 1 1 0.8 0.8 1 1Transport Costs 3.8 4.7 5.9 8.8 13.2 19.8Training Camp costs 0.25 0.31 0.39 0.59 0.88 1.32Total Operating Costs 7.49 8.72 10.51 13.83 19.27 26.6273Transport costs is the majority of operating costs – accountsfor more than 50%
  71. 71. Capital Required90%10%Investor Capital BreakdownBusiness CapitalCommitment to Community50%20%10%20%Business Capital BreakdownWarehousing Working CapitalMarketing Stability FundTotal requiredparticipativecapital investment• 2M USD (100MINR, 10 crores)74Investment :2M USD100 M INRBusiness Capital1.8M USD90M INR
  72. 72. Member Role Hiring profileGeneral Manager [1] -Decision maker in GeneralManagement Group (GMG)-A dynamic individual who is experienced in agriculturebusiness (Min. 5 years experience)Finance Manager[1] -Manage daily operation related tofinance such as surplus management orcapital management-A dynamic individual who is experienced in agriculturesbusiness as well as with the financial industry (Min. 3 yearsexperience)Supply Chain Manager[1]-Manage daily operation related tosupply chain-A dynamic individual who is experienced in agriculturesbusiness as well as with Supply Chain management andinventory control (Min. 3 years experience)Purchasing Manager [1 ] -Manage daily operation related toprocurement-A dynamic individual who is experienced in agriculturesbusiness as well as with previous procurement experience(Min. 3 years experience)Marketing & Bus DevManager [1+1member]-Manage daily operation related tomarketing & Business Development-A dynamic individual who is experienced in agriculturesbusiness as well as experienced with marketing andbusiness development in the rural sector (Min. 3 yearsexperience)IT Manager [1] - Manage daily operation related toBusiness Development such asdistribution strategy-A dynamic individual who is experienced in agriculturesbusiness as well as IT experience in the rural sector (Min. 3years experience)Community RelationManager [1+1member]-Manage daily operation related tocommunity relations-A dynamic individual who is experienced in agriculturesbusiness (Min. 3 years experience)Detail of JCIPC General Mgmt Group77
  73. 73. Community Opportunities: EducationCurrent State• High rate for school dropouts• Dominant child laborNew Initiatives• Increased access to educationfacilities by actively engaginggovernment in partnership withNGOs• Extend financial assistance toimpoverished households• Obtain computers for schoolsthrough donations fromcorporationsEducation for the Future79
  74. 74. • Rural farming communities havelimited skill sets that preventthem to pursue secondarysources of income• Growers among thecommunities are not exposed toeffective cropcultivation/production methodsand have less than optimaloutputCurrent State New Initiatives• Impart training to generatesecondary source of income• Partner with agriculturalagencies to provide trainingson latestcultivation/productionmethods• Extend training in basicbusiness for enterprisingmembers so that they cansuccessfully start and runsmall businessesCommunity Opportunities: Skills TrainingTraining for Alternate Livelihoods80
  75. 75. • Rural communities often underutilise the public health servicesmainly due to lack of awareness• Insufficient specialists available:Critical cases referred to places ofdistances of 100KM or moreCurrent State New Initiatives• Increase awareness on theneed for healthcare with thehelp of local communityorganisations and publichealth officials• Encourage expectant mothersto go for continued follow upchecks• Bring public health officials tovillages for basic medicalchecks ups and immunisationfor children and womenCommunity Opportunities: Healthcare ServicesHealthcare is key for good well being81
  76. 76. Current State New Initiatives• Lack of awareness ofgovernment schemes• Very limited interactionbetween producers andconsumers resulting in lostopportunities• Build community groups toinfluence governmentpolicies/decisions to protectcommunity interests.• Increase awareness on governmentschemes and programs related todevelopment of rural communities• Build communication channels(phone & internet access) tofacilitate interaction & informationsharing between producers,consumers, investors, governmentetc.Community Opportunity: Access to InformationKeeping Communities and Stakeholders Connected82
  77. 77. Community Opportunities: Additional Initiatives• Take initiatives that willempower the communitythrough creation of Stree-shakti groupsImproving Standards for Community Stability• Develop a community loan fundto address emergency financialneeds by extending a lowinterest loan83
  78. 78. Implementation Plan – Year 1Identify Project Manager/Lead for Participative Capital Initiative JCTAttract investors JCTSecure 1M Capital JCTHire Operating Company resources (Finance, Operations, BusinessDevelopment)JCTEstablish fund to manage 1M capital FinanceDefine and implement producer group membership requirements,needs & structures (i.e., tracking)Bus DevDefine and implement consumer group membership requirements,needs & structuresBus DevCreate outreach materials to attract producer/consumer groups Bus DevIdentify and attract producer and consumer groups (i.e., Tea/Ricetasting road shows, community visits)Bus Dev84
  79. 79. Implementation Plan – Year 1Hire additional Operating Company resources (Communityrelations, additional Operations)JCTSign up producer and consumer groups Bus DevSource supply chain resources (warehouse, logistics, Market Placesoftware)OperationsSecure financing for supply chain resources FinanceImplement supply chain solutions OperationsCreate Board of Directors & elect Chairperson JCTDefine methods to communicate with producers/consumers Bus Dev85
  80. 80. Implementation Plan – Years 2-5Year 3Research Community Service needs of producer communitiesDesign Community benefit indicatorsDefine and create branding and packagingYear 4Prioritise community services based on needsDesign operation plan and budget for community servicesDistribute surplus to investorsYear 5Launch community services to producer communities86
  81. 81. Risk Assessment & Mitigation87No. Risk FunctionalAreaLikelihood Impact Risk Mitigation1. Lack of Alignment of Goals ofmembers of the OperatingCompany and Board ofDirectorsGovernance LOW HIGH 1. Define clear roles andresponsibilities of each role inthe Governance Structure2. Rotation through election of keyroles in Operating Company andBoard of Directors3. Just Change to play anintermediary role in any disputesor alignment issues2. Lack of transparency of theadministration of theOperating Company andBoard of DirectorsGovernance LOW MEDIUM 1. Establishment of a strongcorporate governance model,transparency in systems,processes, decision making withclear roles and responsibilitiesand segregation of dutiesembedded in the organisation3. Overwhelming requests forcommunity and social benefitprogrammes resulting in thinspread of surplus andminimising social impact ofinitiativesCommunity MEDIUM MEDIUM 1. Community and social benefitprogrammes to be agreed uponand prioritised (eg. top 5) by theestablished Governancestructures
  82. 82. Risk Assessment & Mitigation88No. Risk FunctionalAreaLikelihood Impact Potential Risk Mitigation4. Community programmes arenot effective and reach only acertain portion of thecommunity resulting inminimal social impact,potential escalation of socialissues, disparity, jealousy andconflictCommunity MEDIUM MEDIUM 1. Establishment of KeyPerformance Indicators(KPIs) for measuring benefitsof community programmes2. Implementation of robustcommunication channels tothe various stakeholders ofthe business model5. Limited market penetrationresulting in low revenuegrowthBusinessDevelopmentLOW HIGH 1. Implementation of effectivemarketing strategy striking abalance of economic and socialbenefits6. Lack of confidence ofinvestors in profitability ofventure and supporting riskmanagement and controlprocessesFinance MEDIUM MEDIUM 1. Establishment of a strongfinancial and risk managementpolicies and procedures withclear segregation of duties anddelegation of authoritiesframework embedded in theFinance Function of theOperating Company2. Provision of a robust financialmodel outlining profitability andcash flow projections
  83. 83. Risk Assessment & Mitigation89No. Risk FunctionalAreaLikelihood Impact Potential Risk Mitigation7. Commodity Price volatilityresulting in uncertainty inrevenue streamsFinance MEDIUM HIGH 1. Monitoring undertaken byOperating Company oncommodity markets andpricing trends2. Utilise Delayed Marketingmechanism to manage pricevolatility8. Inability to secure funding tocommence implementation ofbusiness modelFinance MEDIUM HIGH 1. Secure strong investors withlike-mindedness on both theeconomic benefits and long termsocial view9. Production downtime due topoor maintainence and poweroutage resulting in supply notbeing able to meet demandand a loss of revenueSupply Chain LOW HIGH 1. Implement robust preventivemaintenance plans2. Implement backup generators tosupplement primary source ofelectricity
  84. 84. Risk Assessment & Mitigation90No. Risk FunctionalAreaLikelihood Impact Potential Risk Mitigation10. Poor Quality Commodityimpacting business ventureeconomic and social interestsSupply Chain LOW MEDIUM 1. Stringent Quality Criteriaestablished by OperatingCompany2. Quality Control checksundertaken by OperatingCompany11. Failure in supply chain todistribute commodities toconsumer groups on a timelybasisSupply Chain LOW HIGH 1. Establishment of KeyPerformance Indicators(KPIs) for measuring andmonitoring supplierperformance2. Multi supplier strategy toensure contingency suppliersin the event of supplier failure3. Stringent SupplierAssessment as part ofselection criteria12. Supply outweighs Demandresulting in excesscommodity and wastageSupply Chain MEDIUM HIGH 1. Channel excess supply toauction houses and othertrading houses2. Stringent Demand andProduction Planningundertaken by OperatingCompany3. Maintain contingency funds tosustain farmers livelihood
  85. 85. Thank youIf you are interested in more details about the business plan please contact the Global Institute For TomorrowSuite 1111, CityPlaza One, 1111 King’s Road, Taikoo Shing, Hong KongTel: (852) 3571 8103