TechnoServe talks partnership power plays

It seemed apt timing that Nespresso’s pledge to invest US$554 million over the next six years in sustainability, came around the same that the Fairtrade Foundation released a study criticising the power imbalances in public private partnerships (PPPs). A company with pockets deep enough to pledge that level of investment begs some questions about how much weight private companies carry in the supply chain. At the simplest level, the old adage that “with money comes power” causes reason for caution. How much power can a smallholder coffee farmer have in a relationship with a company as affluent as Nespresso? To put it into perspective, the half a billion dollar investment makes up around half of what  15 million Ethiopians are hoping to earn from coffee in 2015. With so many lives in the hands of private companies like Nespresso, how can the public be assured that farmers’ interests are being properly balanced? These are issues that Will Warshauer, who took the reins as CEO of US-based TechnoServe this past August, is ready to field. TechnoServe’s tagline “Business solutions to poverty” is telling of an approach where corporate investment like Nespresso’s is not only seen as healthy, but as fundamental in bridging the rich-poor world divide. Warshauer argues that the position where businesses can only profit at the cost of others – especially in coffee – is no longer relevant in an industry where supply concerns are running high.  “It’s not a zero sum game,” he says. “If we can help farmers increase their yields, then there is a net addition to the GDP, and a net addition to coffee companies.” Taking the argument one step further, Warshauer says that relationships where one party suffers for the profits of the other should be viewed as an unsustainable business model. “A project is not going to succeed in the long run if you’re not meeting the needs of all parties,” he says. “You need to build a model so that all parties are winning.”  Warshauer says the rich world’s understanding of this model has changed remarkably over the years, with corporate investment in developing countries now largely the norm. He says that for every dollar of aid, around $6 is spent in foreign direct investment. He says smaller agencies that have specialised in handouts are having to rethink the nature of their work. “Historically, the problem with aid is that it has distorted the market,” he says. “Things worked well when aid was flowing, however once the money stopped, it stopped working. We need to create sustainable business environments.”  Warshauer feels similarly about too much government intervention. He points to one Western African nation (which he prefers not to name) as one example. At one point, the government was subsidising 60 per cent of fertiliser costs. The subsidy was removed, putting the price of fertiliser out of a price range that farmers could afford. Finally the government stepped in and said it would provide fertiliser free of charge, however it was too late to fertilise the current crop. “This is an example of market distortion,” says Warshauer. “In these situations, you need financial institutions to provide credit. It’s smarter aid.” Warshauer still sees a place for governments to help.“Government involvement can be essential for encouraging private investment, by minimising risk and helping jump-start activities. But the best PPPs then evolve to the point where public support is no longer needed, and sound market dynamics carry things forward,” he says. The nature of these corporate partnerships, Warshauer says, has changed significantly over time. He says initially, any corporate investment was categorised under a company’s philanthropy work, with the belief among management that the work was mostly about helping the company look good. Now, he says companies approach these projects as necessary for the sustainability of their business. “We’ve seen a very healthy evolution towards shared value where the interests of society and business align, and both can benefit in a sustainable way,” he says. Although a registered non-profit-organisation, TechnoServe is an example of corporate success in its own right, seeing an 86 per cent increase in its revenue over the past five years to US$82.5 million in 2013.  So what makes TechnoServe’s work so highly sought-after? Fairtrade’s concerns about smallholder farmers not having a say is exactly where TechnoServe sees its value. Its highly qualified staff, many of whom previously worked in the private sector, work largely on-the-ground to “translate” the needs of the developing world into a corporate and public arena. In the coffee space, TechnoServe has been supporting projects at origin level for the past 50 years. David Browning is Senior Vice President of Strategic Initiatives and the head of TechnoServe’s global coffee practice. He describes the group’s earlier work, efforts to save smallholder coffee farmers following local conflict. He cites examples such as the Rwandan genocides of the mid 1990s that killed anywhere from 500,000 to 1 million people, and two Sudanese civil wars that claimed more than 2.5 million lives in just under two decades. These kinds of tragedies naturally result in the devastation of agricultural industries. TechnoServe worked to help rebuild these industries, to ensure survivors had an ongoing source of income. “Our focus is to help create sustainable livelihoods, and work with farmers to develop their skills and knowledge,” explains Browning. TechnoServe’s funding comes from a variety of sources, including philanthropy groups like the Bill and Melinda Gates Foundation, governments including the Swiss and US, large coffee roasters (like Nespresso) and individual donors.  The work has been largely about financing projects that improve quality at the farm level, for instance, moving from hand-pulpers to mechanical eco-pulpers. “We don’t provide things for free. We’re not handing out seeds or fertiliser,” says Browning. “Historically, we know there have been challenges in that approach. It creates a cycle of disincentives. When you receive something for free, you’re just going to keep looking for something for free. It’s about providing a hand up – not a handout.” Browning has been on the ground enough to know that too many handouts can also lead to good will ending up on the black market. So how does a company like TechnoServe decide where to spend its dollars? Although the funding may come from the rich part of the world, Browning says the best ideas come from the farmers themselves.  “We always start by listening to farmers,” says Browning. “We need to understand their needs and aspirations. What we can bring to that conversation is which global best practices exist to protect water resources, improve yields, and so on.” Working with farmers, TechnoServe helps identify where farmers can obtain, or already have, a global competitive advantage. The next step is then finding funding to get the project off the ground. “Then the realities of the world kick in. Whatever we’re excited about needs to be matched with resources and we need to match that with the excitement of the farmers,” he says. Improving yields and quality at the farmer level has been one of TechnoServe’s most admirable achievements; one that Browning says is truly a win-win among all parties involved. From 2007 to 2008, using funds from the Bill and Melinda Gates Foundation, they worked with 200,000 farmers, providing training and also wet milling equipment. Of the farmers TechnoServe has followed up with since, the group has found yields have increased 40 per cent, while quality has improved 20 – 30 per cent. “Overall, over US$100 million of incremental profits went to farmers in the past five years, and that money will just keep flowing year after year,” he says. For coffee companies, although the “feel good” factor of helping farmers secure more income is naturally there, securing their own supplies of quality coffee is an obvious factor in the win-win equation. Nespresso has been a well-recognised player in this regard. A leader in the single-serve realm, Nespresso can be equally applauded for bringing premium coffee into households. As it continues to succeed, a key challenge has been ensuring it can source enough coffee to meet high demand. “Sustainability has always been an important part of what we do,” Nespresso’s Le Cunff tells GCR Magazine. “It is our way of securing our brand promise of quality and taste, so it is about building a sustainable future for our business. It is also about securing the future of the farmers we work with and ensuring they run sustainable businesses, so we can deliver on our brand promise to our customers.” Nespresso announced in August that it would be making the over half a billion dollar investment towards sustainability in the next six years. In addition to committing to purchase 100 per cent of its coffee under its AAA Program (see sidebar on left) the money will also go towards sustainably managed aluminium and carbon “insetting” (Nespresso defines carbon insetting as different from offsetting because the activities will take place in the heart of the company’s activities and networks rather than off-site). On the coffee sourcing goal, Nespresso will be using that money to pay premiums to farmers, provide technical assistance via agronomists, fund public-private partnerships and plant new trees in coffee producing ecosystems, to increase farms’ climate resilience. Nespresso will be working with TechnoServe and local governments in Ethiopia and Kenya, in PPPs which aim mainly to increase quality and yield. Nespresso has been buying coffee from East Africa, mainly the two countries mentioned, since 1998. With this experience, Nespresso is all too familiar with the challenges that exist in the region. “Expanding our AAA Sustainable Quality Program in Africa presents multiple challenges, including farmer poverty, a lack of investment in coffee quality, environmental degradation, and a lack of an established infrastructure to drive shared value through the supply chain,” says Le Cunff. “Although marketing channels exists, they constitute a challenge for our usual AAA model.” Le Cunff points to Ethiopia and Kenya’s commodity exchange or auction systems as one of these challenges. The systems were established to help ensure farmers receive a fair market price, by providing a single purchase point where they could sell their coffee and not rely on green bean traders. The auction systems have been criticised by many in the specialty coffee realm as limiting traceability. For Nespresso, it limits the company’s ability to purchase directly from farmers who take part in its AAA model. Because of this, Nespresso will focus on supporting 300 wet mills that purchase coffee from 200,000 smallholder farmers. Despite East Africa’s challenges, Le Cunff says investing in the region was necessary to secure the supply of quality coffee Nespresso needs. “We estimate that only 1 – 2 per cent of the coffee produced worldwide meets our strict quality and taste profile requirements,” he says. “It is a challenge to ensure a continuous supply of these highest quality coffees due to increased demands, as well as the risks and challenges in producing countries.” Through this approach and in working with TechnoServe, Le Cunff says not only do farmers have a say in the work, but that smallholder contribution is indeed as the most valuable in the PPP equation. “The most important partner is of course the coffee grower,” he says. “The effective management and deployment of these partnerships is a critical success factor for our sustainability efforts. Public-private partnerships allow us to leverage expertise, scale, and funding and reinforce the impact that programs are having on the ground in coffee growing communities.” TechnoServe’s Warshauer says we’ll only keep seeing more companies like Nespresso make this level of investment. As supply concerns keep mounting, he says we might even see some unexpected partnerships emerge: “We’re seeing very interesting pre-competitive businesses. Companies that are competing with each other, but have shared interests in better planning, are coming together to support sustainable sourcing.” Browning agrees, saying that the coffee world is already showing great interest in the supply chain. “We’re really noticing increasing engagement among coffee companies in the world who are interested in protecting the supply chain of the future,” he says. “It’s a wonderful win-win. These companies have an investment interest in the future of the supply chain. They are interested in having suppliers who are prosperous, and who can secure the supply of coffee for generations to come.” GCR