March 2017 - Wilderness Markets

Overview

In 2015, Wilderness Markets completed a value chain summary of the blue swimming crab (BSC) fishery in Indonesia in which we analyzed the current state of fishery data systems, resource management, infrastructure, and enterprise capacity. Based on these findings, we recommend a lead firm strategy to move the fishery toward sustainability. Like many fisheries in emerging markets, the Indonesian BSC fishery lacks reliable data and, despite new national policies, functions largely without effective management. The value chain has strong, established commercial and social relationships, indicative of the power and influence of a small group of 16 processors buying from 400 mini-plants that, in turn, purchase crab from more than 65,000 fishermen.

In this case, the lead firm is a U.S. based company, Blue Star Foods. Blue Star is working to create financial and social incentives to enable fishermen to transition faster to sustainable fishing practices. Through its purchasing power and relationships, Blue Star is therefore in strong position to influence the practices of a range of processors, who have commercial relationships with a network of mini-plants, collectors, and fishermen.

Sumatran vessel with collapsible traps

Lead Firm Pilot Design

With Blue Star and local harvesters, we are developing an investment model based on a pilot partnership between the lead firm and a fishing cooperative (in development). The model brings together philanthropic and private capital and provides financial, social, and environmental returns. It includes:

Purchase commitments based on price, quality and standards
Investments in fishermen cooperatives to motivate gear improvements
Improved fishery data collection and traceability
Support for harvest control compliance

This pilot is designed to attract private, return-seeking impact investment and complement ongoing work by NGOs to improve fishery management. We expect this approach will enable local fishermen to adopt sustainable practices faster than waiting for the government to independently create and enforce management changes, and without the economic hardship for fishermen that often accompanies changes in fishery regulations. It will also bolster business advocacy for more effective fisheries management policies and enforcement through a local cooperative structure.

BSC fisherman with new vessel tracking device

Goals and expected outcomes

Ultimately, as a result of better data collection and effective management, the fishery will produce higher yields of BSC. It will also provide a traceable, sustainably harvested product with a competitive advantage in key U.S. and E.U. markets. This will then allow Blue Star and supporting investors to recoup their investments in sustainable practices.

By embedding this lead firm work within existing value chain relationships and practices, we aim to:

Demonstrate the financial viability of investments in fishery data collection and management, thus attracting additional private investment in these practices.
Create new norms that are sustained because of their business value and not ongoing philanthropic support or government subsidies.
Provide clear and reliable financial benefits for small-scale fishermen to make gear changes; follow harvest control measures; and take on other sustainable fishing practices. Immediate economic well-being is thereby aligned with sustainable practices to improve compliance and reduce the localized short-term, negative impacts of fishery restrictions.
Finally, test a new, “parallel” investment model for combining philanthropic, government, and private sector funding to address fishery management. If successful, other emerging market fisheries can tailor the model.

We are currently seeking additional partners to join us in this lead firm pilot project. Please get in touch with us if you would like more information and/or would like to get involved.

Why we are helping to setting up a harvester cooperative in Indonesia’s blue swimming crab fishery

Wilderness Markets, in collaboration with Blue Star Foods (USA), PT Blue Star Nusantara through one of its subsidiaries PT Siger Jaya Abadi, recently teamed up to assist in the formation of a harvester cooperative in Indonesia. We were recently honored to participate in the launch of the cooperative in Maringgai.

Based on our experience in coffee, cocoa, tea, cashew, macadamia and honey value chains, we have plenty of experience on the advantages and disadvantages of working with producer organizations (POs), usually cooperatives (1). They often fail, riven by poor management, member disagreement and poor financials. Indeed, Dalberg (2) attributes some of the main reasons for lack of smallholder participation to one or more of the following reasons:

POs provide poor services because of low internal capacity
Insufficient access to resources like financing and technical assistance
Exclusion of smallholders and women from POs
Weak governance and leadership of the PO
State intervention in POs for political gain

So why did we decide to support this initiative?

Improve harvester representation in the fishery: Many of the harvesters in this fishery are unregistered individuals, with limited access to services and no mechanism for representation
Secure access to technical assistance for harvesters for best fishing practices
Create access to financing for harvesters to support their transition to more sustainable fishing methods to decrease pressure on the fishery
Improve economies of scale: Developing an aggregation mechanism like a PO to permit harvester participation in a global value chain on key issues such as price, quantity and standards.

1. Improve Harvester Representation

Field research in the fishery indicated low levels of harvester registration via the national fisher identification card (Kartu Nelayan). Therefore, these individuals are unable to access a range of government services.

At the same time, the Government of Indonesia has established benefits for cooperative structures to effectively serve its population; however, by not having a cooperative structure in place the harvesters are unable to access these services.

2. Secure Access to Technical Assistance

In addition to government assistance, strong opportunities exist for other value chain stakeholders to provide technical assistance and financing for harvesters. Working closely with Blue Star Foods and its subsidiaries, primarily around reducing environmental impacts and improving harvest value, Wilderness Markets has identified a series of technical assistance measures that Blue Star Foods has committed to supporting. These include access to improved pricing, changes in gear to address the ecosystem impacts of gill nets and increasing access to cold storage and ice to improve product quality.

3. Create Access to Financing

Extensive interviews with a range of national and international banks focused on supporting producer organizations revealed considerable barriers to participating in this sector. These included the lack of individual registration, the lack of payment and history records and the lack of harvester aggregation. Furthermore, most banks stated a preference for at least three years’ worth of records and transaction history for producer organizations.

4. Improve Economies of Scale

While harvesters have historically been able to access markets at the collector or mini-plant picking stations, they have done so at a significant disadvantage to their financial interests. Historically, this may not have been an issue to the remainder of the value chain, but increasing concerns regarding quality and sustainability are resulting in a greater focus on the role of mini-plants and their relationships with harvesters. In the blue swimming crab fishery in Indonesia, where over 90% of production is exported into an increasingly global and competitive market, the value chain can no longer afford to ignore the harvesters and if the harvesters are to remain competitive, they must increase their participation.

“In fact production organized based on GVCs [Global Value Chains] and production networks, governed in part through the use of standards, has increased the need for farmers to be organized in order to be included in modern market trade.” –Dr. Eva Csaky, 2014 (3)

A final consideration relates to equity. Across a range of fisheries Wilderness Markets has evaluated, there is a striking lack of any formal organization to represent harvester’s own interests, to aggregate services and access value chains. This has, more often than not, resulted in harvesters being “price takers” for their efforts, while financial benefits have aggregated in the middle of the supply chain.

Conclusion

Wilderness Markets is only too aware of the failure rate associated with cooperatives. A key difference in this case is the close involvement of the value chain partners to ensure market access; a price incentive for improved practices and gear change; and technical support. Building-in a financial incentive for the cooperative and its members to change practices is a key consideration in the process, as is building a financial track record for the organization and its members to permit them to effectively access financing from the formal banking sector in the future.

A key finding of Csaky’s 2014 dissertation (4) was that “Cooperatives are at a disadvantage compared to other producer organization (PO) forms in achieving the conditions of global value chain access.” Additionally, lead firm driven efforts linking smallholders to markets like the international crab market have been more successful than those initiated by producers, i.e., top-down efforts are more successful than bottom-up efforts in these markets. In light of this, Wilderness Markets is actively exploring how the cooperative structure, which is recognized in Indonesia, can be formally partnered with existing value chain actors to effectively achieve financial, social and fishery management objectives to create a hybrid structure.

1. The terms “producer organization” and “cooperative” have different legal implications in different countries. Here we use producer organization in keeping with the original authors language or as an umbrella term that includes multiple forms of producer organizations, including cooperatives.
2. Dalberg. “Farmer Aggregation and Access to Finance”. 2013. Presentation. http://www.ico.org/documents/cy2012-13/forum/forum-3-zook-e.pdf
3. Csaky, Eva Szalkai. (2014). “Smallholder Global Value Chain Participation: The Role of Aggregation” (Unpublished doctoral dissertation). Duke University, Durham, NC. http://dukespace.lib.duke.edu/dspace/bitstream/handle/10161/9384/Csaky_duke_0066D_12557.pdf?sequence=1
4. Ibid

Lead Firm Strategy Implementation – Indonesian Blue Swimming Crab