Many rural areas have high a potential for milk production, but lack facilities to collect, process, transport and market the product, causing production to be wasted or undeveloped. Small-scale dairy farmers, even if formed as a cooperative, rarely have the capacity to raise affordable loan and equity capital for investment in land acquisition and processing facilities, or have the technical and financial expertise to conduct feasibility studies or operate such complexes. Likewise, their capability to market in bulk is also limited.
7.1.1 Siongiroi Dairy Plant Limited, Kenya145
The Siongiroi Dairy Plant Limited (SDPL) is a milk collection, chilling, marketing and transportation facility for small dairy farmers in three sub-divisions of the Bomet District, Rift Valley Province, Kenya. The plant is a joint venture between US-based NGO Heifer Project International (HPI) (40% equity) and a dairy farmers cooperative (60% equity) – the Siongiroi Dairy Farmers Cooperative Society (SDFCS). SDFCS has 2,138 members, all small-scale dairy farmers, of whom 724 have paid in shares to SDPL. As well as cooling equipment, the plant also operates a 12-ton milk tanker and a veterinary service. The facility became operational in 1998. At the time of writing it had a cooling capacity of 30,000 litres/day, with milk production at 28,000 litres/day.
Bomet Municipal Council granted land for the original facilities, and provides regulatory services to ensure quality control. Grant capital was provided over three years by the USAID Smallholder Dairy Enterprise Development Programme. Other features of the project follow:
The presence of the facility has lead to growth in the demand for milk and complementary milk products in the local urban centre of Siongiroi. This is significant because it demonstrates the potential
effect of strategic infrastructure on the development of new ‘local’ markets, in contrast with its role in enabling farmers to compete in existing, larger and more distant urban or international markets. Extension training provided by HPI (including fodder management and artificial insemination) and
diffusion of best practices between farmers have improved dairy production methods and raised productivity.
The achievement of volume production by SDPL has facilitated a significant purchase agreement from an upstream milk processing company in Nairobi, providing a market for farmers and incentivising on- farm investment in improved production.
Farmers who have paid in capital to SDPL have benefited from a dividend payout (unspecified). Economic multiplier effects of the plant include employment opportunities for farm workers, milk
transporters, and retailers selling farm inputs to meet the surge in dairy production. It has also been noted that the facilities have contributed to ‘food security in the area [with] … residents no longer dependent on relief food from the government’146.
7.1.2 Farmer-NGO Joint Venture with Public Subsidy: Model Components.
Table 7.1 draws on the joint venture construct between Heifer Project International and the Siongiroi Dairy Farmers Cooperative Society to present a PPP model for developing a local agro-processing facility. Table 7.1 Agro-Processing: Farmer-NGO Joint Venture with Public Subsidy: Model Components
PFI Component Characteristics
Strategic Purpose Incentivise growth in a particular agricultural sector or sub-sector through the development of local, market-orientated, agro-processing facilities.
Infrastructure
Coordination Water for irrigation and livestock, feeder roads to the processing facility, and development of local agro-processing facilities further up the value chain.
Organisation Joint venture (SPV) between farmers’ cooperative and a private entity (for-profit or not-for- profit). The private party to be technically and managerially competent and able to raise or secure affordable capital, and manage commercial risks.
Resourcing Equity in joint venture raised from (i) private entity (ii) farmer cooperative members (farmers can elect to contribute share equity, but all must pay a registration fee). Capital subsidy from the public sector or donors (eg land grant, capital grant). Concessional debt (eg donor sourced), secured in part against long-term contracts
with upstream processors.
Private entity (or third parties) provide credit risk guarantees to improve debt terms.
Cost Recovery User fees collected on basis of volume of milk delivered (deducted from payments).
Contractual
Arrangements Long-term ‘captured’ contracts with upstream processors. Equity from farmers ensures loyalty to processing facility.
Risk Demand risk owing to (i) seasonal climatic risks (mitigated by developing alternative sources of revenue, eg invest in processing of other commodities, land development), and (ii) long-term, secure priced, contracts with upstream processors (but can incentivise farmers to sell to local traders for higher price).
Regulatory
Framework Regulatory authority to oversee health and hygiene standards of facility. Flexibility in terms of land grant (if relevant) to enable generation of alternative income, eg wholesale market development, land resale.
7.1.3 Lessons
Third-Party Private Capital
Situations where farmers are able to raise their own capital to finance agro-processing infrastructure is likely to limited to all but the most commercial farms. The problem is compounded where the proposed facility depends on a single commodity grown by small-scale farmers carrying high levels of production risk (such as in the Siongiroi Dairy Plant project), Capital subsidies from the state (in the form of land or grants) and concessional donor finance, are part of the solution. Complementing farmers’ paid-in capital with that from a second, established, for-profit or not-for-profit private entity is another. This role could be played by either a for or a not-for-profit private entity (such as the NGO Heifer Project International). Critical is that this private party should (i) bring access to technical and managerial expertise related to the development and operation of the process facility in question, and (ii) have a capability to raise affordable finance, be that through its own contribution of equity and access to loans on affordable terms and/or by offering (or arranging) credit guarantees. In effect, this model is a variant on the irrigation PPP model (see Section 5.1) that places a commercially competent third party between the producing farmers and the market.
Infrastructure Coordination
The Siongiroi Dairy Plant project demonstrates the importance of infrastructure coordination. In the project region, water supply, and its transportation to livestock areas, is limited, requiring farmers to herd their cattle to distant water points during the dry season. Further, the benefits of the secure market provided by the fixed, long-term contract with the urban milk processing plant in Nairobi is challenged by the higher prices that farmers can secure from local traders, ie there would seem to be a need for more local upstream milk processing capacity. Finally, the poor quality of feeder roads within the Siongiroi Plant’s catchment area increases the cost of delivering milk to the plant. This further fuels the benefits to farmers of selling their milk direct to local traders who collect from the farm gate. In planning the use of public resources to support investment in agro-processing facilities, consideration clearly needs to be taken of the parallel public investments in supporting infrastructure.
Reducing Demand Risk
As noted, agro-processing plants that depend on a single product, with the commodity produced by small farmers on land vulnerable to the climate variations, are highly risky. Achieving a very high debt to equity ratio in financing the project may provide comfort to lenders and improve loan terms. Alternative solutions involve public investments in infrastructure in other parts of the value chain to reduce supply vulnerability; developing additional processing capacity aimed at a different commodity (with the choice being one that hedges the climatic and other production risks); or raising revenues in other ways than processing, eg through land development. Although agro-processing facilities do indirectly generate public goods, they are viewed essentially as business-to-business private operations. It is therefore unlikely that the raising of debt, and the high risks of repayment, could be transferred to a public body (as an earlier example in this report has sought to do).