SOCIALLY RESPONSIBLE ECONOMIC DEVELOPMENT: THE SHAMALI MODEL FARMS

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1 Effective Private Sector Contribution to Development in Afghanistan SOCIALLY RESPONSIBLE ECONOMIC DEVELOPMENT: THE SHAMALI MODEL FARMS Case study prepared for the Enabling Environment Conference I. BACKGROUND Afghanistan has a long tradition of exporting raisins. This tradition is continuing today but with mixed success. The quality of the export product does not often meet international standards and therefore obtains only sub-optimal prices. The fertile Shamali Valley north of Kabul is renowned in Afghanistan for its superior conditions for growing grape varietals, fruits and vegetables. The Shamali Model Farms (SMF) is located in the Shamali Valley approximately 20 km north of Kabul. SMF is a private enterprise started in 2004 by an Afghan businessman and is entirely selffinanced. Initially designed as a recreational hobby farm, the idea has now grown into the concept for an enterprise that combines significant and long lasting benefits to the local farmers and a strong ethical corporate profile with sustained economic growth and profits. Although the initial preparations for launching SMF began in 2004, SMF was registered with AISA as a private limited operation in It is anticipated that all preparatory work, including the building of a processing hall, land preparation, drip irrigation systems, access roads, etc. will be completed by mid 2007, when the company will be fully operational. It is being planned to introduce the first SMF grape products to the Afghan market in 2008 and to international markets in Dubai in For this purpose, a separate export business has been established. The farm also intends to produce fresh vegetables, herbs and salads for the Kabul-based market, particularly targeting international hotels, embassies, ex-patriots and foreign agencies. In this initial stage of the development of the enterprise, Shamali Farms has been able to take advantage of a number of factors in its favor. Particularly, the typically small plot sizes of five to ten acres helped shape the concept of a niche farm, producing high quality export products through a concept of winning over adjacent small farmers who would become Affiliate Farms and produce under a standardised brand name. 1 Also, the low level of interference from the Government although this may have been more the result of a lack of government capacity than a pro-business attitude has meant that SMF has set up operations with relative ease. SMF has a strong commitment to high quality products and business standards, as well as to high ethical standards with regard to the treatment of employees and customers and adherence to sound and legal business practices (see Vision and Values statement in the annex). Key aspects of the SMF idea include: 135

2 SMF aims to introduce concrete methods to improve the quality of the grapes and the resulting raisins in order to meet the demand in high-value international markets. All products will be processed under the Shamali Farms label and will meet the highest food safety and hygiene standards. The Model Farms is used as a practical and tangible learning tool for the local farmers for using new, more productive and more environmentally responsible farming and processing techniques to increase value and yield. SMF uses, wherever possible, local or regional materials that local farmers can procure inexpensively and affordably in Afghanistan or in neighboring countries. The enterprise promotes sustainable and informed farming methods to reinvigorate Afghanistan s traditional farm products and increase exports to better markets. Farmers that take up SMF farming methods can receive a Stamp of Affiliation to the Shamali Farms brand, and benefit from SMF processing, packaging and marketing their products. Affiliated farms can also benefit from financing opportunities for farm conversion. By marketing its products directly, SMF intends to showcase a comprehensive seed to shelf process of farming, processing, logistics and marketing. II. THE BUSINESS ENVIRONMENT: ANALYSIS OF CONSTRAINTS AS EXPERIENCED BY SMF The post-war conditions and continued hostilities and uncertainty in Afghanistan create an acutely challenging environment. Any business person in Afghanistan swims against a stronger current than he/she would in other countries and has to be more creative in navigating these waters. SMF s experience with establishing an agro-based business in Afghanistan includes the continuing struggle with a range of constraints related to regulatory frameworks, government attitudes and the lack of appropriate infrastructure. Afghanistan. Unclear ownership records create space for widespread corruption leading to: High costs: It has been communicated to SMF by more than one source that it will cost Shamali Farms US $ 10,000 to US$ 15,000 to get its title processed. This cost is not bearable for only 15 acres of land. No transparency: Going back to even before the war to the present time, land titles are not changed in the government books/logs at the time of inheritance, marriages and sales and new title sheets are not provided. Untangling the mess and verifying ownership is complicated at best and bribes are required to get access to the books. Falsification of documents and claims on property is widespread: This is often done in collusion with government officials. This causes uncertainty on the part of the new buyer. The negative impact of these issues translates into the following constraints: Lack of security of land tenure: Any business requires assurances that the property that one pays for in earnest is rightfully, recognisably and clearly titled. In the absence of legal protection, investors and entrepreneurs limit their investment, given the real risk that ad hoc claims could be made on their property. No access to external finance: Shamali Farms requires financing for its drip irrigation system, modern processing plant for fresh fruits and logistics support such as refrigerated trucks, containers, etc. Following standard procedures, banks and other lending institutions ask for clear titles for the property where the equipment will be used. Since Shamali Farms only has a Horfee title 2, financing opportunities do not exist. The Government of Afghanistan, as it was highlighted directly to the President at the London conference, must address this critical issue of land tenure head on. Open economic policies and other market-based regulations will remain meaningless without legal property ownership documented in titles. Business logistics and infrastructure Land titling and related uncertainties Most business owners and private citizens would agree that at this time it is nearly impossible to receive a clear title from the Government of Logistics cover the movement of farm products from the farm to the processing centers, to markets and export points while maintaining freshness, hygiene and food safety standards (i.e. HACCP, GAP and GMP). The particular issue is lack of processing centers located within reach of small Kabul, Afghanistan June

3 Shamali Farms farmers, refrigerated transportation and paved roads to keep the look and feel of the product consistent and predictable: There is no use producing the best product if the product cannot make it to the market maintaining its qualities. is clearly to get more out of their land, reduce risks and in summary earn more income. According to the experience of Shamali Farms thus far, the farmers are likely to be more responsive to learning new techniques if the following conditions are in place: As a result, farmers and agro-businesses are faced with a considerable loss of income potential. 3 All knowledge transfer is practical/ hands-on and on the farm Generally speaking, encouragement should be given to farmers to form cooperatives where processing and refrigeration facilities can be shared. Shamali Farms, through its own processes and initiative, advocates the conversion of farms to new farming and handling techniques where the converted farms obtain a seal of Affiliation from Shamali Farms. This seal would also permit those farms to participate in the processing, logistics and sales processes owned by Shamali Farms. The cost to the farmer is limited to adapting good farming techniques and he thereby has the opportunity to sell his products at a higher price or simply has an improved chance to sell all of his harvest. Human Capacity The lack of skilled and educated personnel is generally seen as a major constraint to business development in Afghanistan. SMF has made the experience that training efforts face a number of challenges: Illiteracy and lack of training in structured learning itself can prevent knowledge transfer to happen effectively. Only repetition and knowledge transfer in small doses and with consistency eventually produce results; Time to change is generally long. Afghan farmers that have worked with Shamali Farms are receptive of the new ideas, but will not adapt them to their farms until and unless they see real results. This is understandable as their livelihoods depend so much on their small harvest. Risk taking becomes unthinkable without tangible proof. They prefer to see someone else take the risk first. SMF has, however, had the experience that although human capacity is at an overall low level, there is a strong willingness to learn across the board. Shamali Farms experience in the last three years clearly indicates that from its own hired labour to the visiting farmers, everyone is ready to learn new farming techniques, to understand what their counterparts in other parts of the world are doing and to generally improve their knowledge base about their primary livelihood. The motivation Actual results are more important to farmers than talk of more yields or better quality. This is not a question of suspicion but of caution and risk management Learning is much more effective when the knowledge transfer is from Afghan to Afghan and from farmer to farmer Institutional capacity Afghanistan has had a rich tradition in agriculture which was more or less institutionalised during the 1970s, specifically through government services. Extension of agricultural support went as deep as districts and sometimes villages. With the destruction of these capacities as a result of the war, the relevant constraints here are lack of institutional capacities to provide clear guidance on best practices (GAP, HACCP, etc.), define product quality standards, certification, disease management, information management, technical support and other critical support that governments are expected to provide to their citizens. As a result, many income opportunities are lost, leading to an overall stunted growth in the agrobusiness sector. Specifically, Afghan agricultural products have less access to international markets, or to the local, substantial expatriate market for high quality products. They also lose out on the domestic market, as they cannot compete with products imported from Iran and Pakistan. SMF sees possible solutions through enhanced partnerships between the public sector, the private sector and civil society. Although tradition in Afghanistan dictates that the Government is seen as the sole responsible party for delivery services to the citizens, the reality is that the Government should accept the limitations that will exist if it does not reach out to the private sector and civil society for joint efforts. The challenge will be to define mutual benefits and the mechanism for cooperation to create a lasting and bonding relationship. 137 Case Study

4 As an example, the Ministry of Agriculture could get more engaged with private sector efforts like Shamali Farms to gain an understanding and to seek ways in which it could carry and enhance the message from this farm, and other enterprises similar to it, to other parts of the country. In addition to their reluctance to change before they can see concrete evidence, there is a cost involved in the change process. As an example, planting grape vines as per the new recommendations, installing drip lines and trellises would require upfront funding 5. True partnership between government agencies that plays a part from farming to sales of Afghan products is a must. There must be a chain of services that are offered in varied levels of quality and competencies through the Government which must be synchronised. Organisations such as the Export Promotion Agency of Afghanistan can play a significant role in coordinating this synchronisation effort. This is an immense challenge but there is hardly any choice. Water shortage For the most part where the farm is located, the traditional sources of water (Karaiz and surface) have dried up and are no longer viable. This is the result of years of drought but also ill-conceived and unplanned water diversions. As a result: The land area for cultivation is reduced due to the higher costs of investment in creating water sources and operations. Yields are substandard and do not meet the quality expectations of the market. Digging deep wells is the only way to reach any water source. The cost of digging each well and the related equipment is nearly US$ 3,000 to US$ 4,000 and most farmers cannot afford the operational costs. A potential solution lies in digging community wells combined with drip irrigation systems, which can serve the needs of several adjacent farms. The world over, drip irrigation is now the preferred method of watering farms even in areas where water is found in abundance. Drip systems are simple to design and implement, and can be sourced at low costs from India, Pakistan, Iran and China where multiple manufacturers and distributors exist. 4 As long as the environment is such that farmers a) feel they cannot take any risk and b) do not have access to appropriate external financing mechanisms, the private sector has to try to find its own solutions to this problem. SMF sees a potential solution to this problem in the following approaches: Keep the cost of investment low by developing techniques that use local materials. As an example, Shamali Farms will freely donate poplar tree saplings so that farmers can mature them and then later use them to build their trellises. Each farmer will then do the same for the next farmer, repaying his debt for the trees he received. The poplar trees are of a hyper variety which can grow three meters or more per year and are extremely easy to proliferate. By keeping the investment low and scheduling the conversion over several years, the amount of required funds may likely fall in the range where microfinancing could apply. Further investigation is obviously required but there is merit in the solution. Buyers could be convinced to enter into exclusive buyer/seller relationships with those farms that have converted and would produce a better product. In this case, the buyers would provide the investment upfront and would be guaranteed that the product be sold only to them. Affiliations similar to Shamali Farms would be the facilitators. Cost of conversion to new techniques Farmers who have visited the Shamali Model Farms have been very positive and would like to adapt the new techniques based on evidence of improvements in yield and quality. They understand the link between change and better income. Kabul, Afghanistan June

5 Shamali Farms III. CONCLUSION AND RECOMMENDATIONS Having created a healthy farm with an outlook of good yields to come, SMF has good cause to view the overall picture from its own vantage point as positive and optimistic. It is already a laudable demonstration of the combination of a for-profit company, operating on the basis of a strong ethical corporate profile, which offers long lasting benefits to local farmers. However, summing up the young experiences of Shamali Farms and weighing the challenges that have existed for the private sector in general, the overwhelming conclusion is that as a nation, Afghanistan will only be able to resolve its issues and reach its goals if the Government and private sector work better together. The first steps must be taken by the Government to address the following issues in priority order: 1. Solve the issue of land titles. Having proper property titles from the Government will open up financing opportunities and will build the confidence of investors who are staying away. 2. Remove the deep seated corruption that exists throughout the country. 3. Encourage model activities and encourage more of them by providing real incentives. The Government should do what it can to reduce the initial cost of investment. 4. Widely propagate and make accessible information on best practices such as drip irrigation and hygiene management. 5. Government agencies must make a choice on how they interact with the private sector in the business of exporting agricultural goods. Many existing export issues could be addressed successfully if Government assumed a true caretaker role, which would include ensuring that barriers are removed and facilities are created that ease the process of exporting: a) Product testing Availability of labs with low cost and easy accessibility b) Certification for various international hygiene and food safety standards (depends on destination) c) Low cost collection and processing centers with transparent and efficient processes d) Assistance to farmer groups to procure and operate refrigeration centers and cool trucking services e) Encouragement by Government with low cost financing to establish production facilities for materials that support and enhance the capacity of the country to export. Specifically this includes carton boxes, PET clear plastic containers, wax paper and other similar items that are required routinely by international buyers. f) Unhindered paperwork management at customs. A dedicated service for fresh products to move the process forward very efficiently with knowledge of cost and damage that can occur to fresh products. Exporters are willing to pay their share of tariffs but they expect proper and considerate service in return. IV. DISCUSSION QUESTIONS 1. In the case of the Shamali Model Farms, land acquisition was based on tapping into the traditional land tenure system, by acquiring land from a known party and on obtaining sufficient de facto assurances that the Horfee would not be put into question. a) What are the challenges of dealing with overlapping land tenure systems? b) How often have enterprises abandoned investment projects due to difficulties in obtaining land with clear titles? c) In other cases, how have entrepreneurs worked through the challenges? d) What recourse does an investor have in case of land dispute? Have the court system and/or alternative dispute resolution mechanisms been able to resolve disputes? e) What can be done about the land title issue in the short to medium term, until land reform programmes have been fully implemented? 2. The initial investment in Shamali Model Farms could be financed by the capital of the investors. SMF will have to do the same for further expansion if it cannot turn to banks to obtain a loan. In most cases, investors would need to borrow investment capital and/or working capital. a) What are the principal challenges that investors face in obtaining bank credit? 139 Case Study

6 b) What limits the access to credit? c) What other financial services are required (e.g. insurance)? What needs are unserved? 3. As the case study indicates, there is no use producing the best product if the product cannot make it to the market maintaining its qualities. a) What are the primary challenges in terms of transport? Export? b) What market linkages are missing? c) Can Government play a role in providing a supportive regulatory environment to encourage the creation of farmers and traders associations and their investment in relevant processing centers, refrigerated transport, etc.? 4. Afghanistan s agricultural extension services were decimated during the years of conflict. It is noted in the case study that institutional capacity is lacking in terms of guidance on best practices, quality standards, certification, disease management, information management and technical support. a) What extension services are most acutely missing? b) What capacities to deliver in this area are missing? c) What would be the best way to move toward working relationships between Government, private sector and civil society groups on this issue? 5. What other constraints are faced by other agricultural and agro-processing firms in Afghanistan? What features of an enabling environment are lacking? Kabul, Afghanistan June

7 Shamali Farms ANNEX: Vision SMF VISION AND VALUES STATEMENT Our customers and fellow farming associates will be treated as our guests and partners at all times. We will provide them with unparalleled services and will aim to solve their problems and add value to their lives with our work. Significantly increase yield and quality of traditional export products from Afghanistan. We will steer clear of any corruption directly or indirectly in all matters of our business. Be the best and exceed expectations at all times. Be the best grower, the best processor and the best marketer of superior Afghan agricultural products. This case study was prepared by the Proprietor of Shamali Model Farms, Mr. Tamim Samee. Create a marked difference from the old to the new. Practically and convincingly demonstrate improved farming practices for traditional export products to the local farmers and win them over. Be a change agent and improve the income level of every farmer who adopts the new techniques. The local farmer must be able to replicate and apply methods given the limited resources available to him/her. Values At Shamali Model Farms we believe in making a positive improvement in the conditions in which we find ourselves in. We are in business to earn a fair income from the product and services that we provide, and in the process, we will seek to improve the conditions in Afghanistan. We are passionate about our employees and farmers and share a deep respect for their humanistic needs, regardless of gender, ethnicity or rank. Respect at Shamali Model Farms means: - Fair and reasonable salary or earnings from the farm - Ideas will be given a fair chance to be proven there are no bad ideas and no bad sources - Safety and well-being - Learning and self improvement - Pleasant and clean workplace - Dignified and pleasant interactions with all whom we have contact with - Information about the enterprise will be provided with most clarity and honesty and no one will be spared from opportunities 1 Smaller plots are usually seen as a problem in developing large and industrial farm businesses. For SMF, however, the availability of smaller plots of land for purchasing and leasing within a reasonable distance from major urban settlements turned out to be an opportunity. Overall, it was felt that small plot sizes have a positive impact as they allow initial investments to be lower for those willing to start smaller agro-based businesses and can run entirely on local labor. The chance for converting existing and antiquated farms in the surrounding area of the new farm is also much more feasible. Since the labour will be from the area and more than likely from farming background themselves, good practices will be adapted more quickly as they will have first-hand and practical contact with the benefits and improvements. 2 When purchasing land parcels, in the event that government issued titles are not available, the owner and the buyer can execute a customary Horfee title. Most Afghans are familiar with the process and accept its genuineness. The document is signed and fingerprinted by the local Malek and the land owner. However, this is only a temporary arrangement until a government issued title can be obtained. With a Horfee title, the new buyer can occupy the land, start work and build on the land, but not gain access to financing. 3 As an example, on a wholesale basis a kilogram of Shondol Khani grapes in the local Kabul market will fetch Afghanis. If processed properly for export, the same grapes will fetch more than three times in Dubai. 4 Shamali Farms has reached agreement with several brands in the region and will represent them in Afghanistan. In addition to providing the product, SMF will provide design, implementation and training services. 5 To convert one acre of land with existing grape vines to the new method, the average cost will be between US$ 3,800 to US$ 4,600. The farmer would have created 350 percent more capacity for production, but the upfront cost cannot be recovered until at least four to five years down the road. 141 Case Study