An Investment Gone Right
We’re development practitioners applying a systemic approach to address youth unemployment. We take pride in our way of doing things: we don’t subsidise, we’ve a vision to generate local ownership and scale-up from the outset, we don’t distort the markets, and we tackle root causes and not just symptoms. We strongly believe in these principles here at RisiAlbania. Yet we aren’t dogmatic – we’re open to windows of opportunity on different levels, and want to be flexible to engage with these opportunities.
“Avoid paying for or performing activities that are central to a partner’s routine operations”. This is one of the principles of a systemic approach. It’s a cornerstone of our thinking at Helvetas, and the logic behind the much sought-after systemic change – long-term and large-scale impacts.
And yet.
This blog is about something that challenges applying principles of systemic approach, particularly in complex and ever-changing contexts. It’s about RisiAlbania “paying for activities that are central to a partner’s routine operations” – with the effect of motivating others to change or improve their business models through reinvestments, and improved working conditions for poor people. It’s about Risi taking an informed decision to intervene in a sector with growth and unemployment reduction potential, and in a business model which needed a kick-start to generate jobs. It’s about Risi deciding to invest in assets to demonstrate that such a type of business could work and generate strong pro-poor employment outcomes.
So how did this happen?
Mediterranean Export – Imports Albania (MEIA): a willing and capable partner
Emiland Skora is the main shareholder of MEIA. He’s an interesting story. When he came across Risi, he had already taken up loans which he was in the process of repaying. He could not access any more formal finance, and was struggling to meet demand from his international customers. Having spent a long time in the US, Emiland had connections abroad, international demand and a market for his high quality essential oils produced from Medicinal and Aromatic Plants (MAPs) – particularly for producing helichrysum essential oils. He had a strong vision and the business and technical abilities to make it happen.
The sector that Emiland chose to work was also one of Risi’s priority areas of intervention. Our assumption is that if the private sector performs better, it’s create more jobs.
In 2016, the project was in its last year of implementation: we had a good understanding of constraints and opportunities in the labour markets. When we came across MEIA, we realised we had a very good potential partner in front of us.
One of Emiland’s major constraints was that he could not produce enough to satisfy the demand: the only way he could ever meet it was through investing in additional distilling facilities.
When Risi approached MEIA in 2016, it became clear that a “business as usual way” of supporting partners, which is centred around capacity building such as marketing, would not be useful for Emiland.
Instead, there were three main reasons why we believed that MEIA’s success was worth a flexible approach to our support and its potential success:
- Innovation: MEIA was a first of its kind, as Albanian MAPs are usually exported dry, without any added-value. MEIA’s approach would introduce processing oils for the cosmetics industry in Albania as an innovation, with the added introduction of contract farming with its out growers.
- Job creation and job quality: to meet its clients’ quality standards, MEIA was clear in their need to establish trust relationships with their supplier farmers. This had the potential not only of creating jobs, but of increasing the quality of existing jobs.
- Sustainability: Emiland’s strong business plan and clear strategy for growth, as well as his proven market connections, guaranteed the sustainability of Risi’s investment.
An investment gone right
Risi gave Emiland a lifeline. We acted as impact investors, which isn’t a core function of a project that applies systemic approach. However, we had enough data to confirm it was worth the risk. Much as an impact investor, we decided based on numbers but also on the confidence that the business owner inspired us.
And it paid off.
On a recent evaluation visit to their most recent investment in northern Albania, the findings were promising:
- From 15 contract farmers in 2015, MEIA had now 232 contract farmers (out growers). While this increase alone is encouraging, the quality of the contracts is even more important: in Albania, contract farming is not a common practice. To guarantee the quality of the raw MAPs he gets, Emiland is signing three to five-year contracts with his suppliers: he’s absorbing price fluctuations, and the farmers we interviewed during the visit were pleased with the arrangement. Behar Zaraj and his wife mentioned that selling to MEIA was good because of “diligent payment, fixed prices and the fact that transport costs are handled by MEIA”. Other farmers added that MEIA is transparent and correct: “there are no additional discounts - other collectors apply a discount rate, based on their on-the-spot assessment of the quality of MAPS”, said Zyber Coka.
- In addition, MEIA directly hires labour to work its own fields – from nurseries, to planting and harvesting the plants. From 15 hired labour in 2015, MEIA now had 90 hired farmers. Most of them are women: in Emiland’s words, “women are simply better”.
- MEIA has reinvested the profits generated from its increased production capacity: they have just completed a new distilling facility in Koplik worth USD 500,000, thanks to sales figures having jumped from USD 141,000 in 2015 to USD 2,200,000 last financial year. They are also going to open a distillery in Delvina in the coming months.
Other industry players are taking notice of this – an indication of scalability. At a recent MAPs industry conference, Agim Ramaj, a large farmer from Malësi e Madhe district where Koplik is, said that “MEIA is the only exporter signing fair contracts with their farmers”. He added that due to the downward trends over the past years of prices for other MAPs (such as sage and lavender), farmers had started to turn away from the cultivation of MAPs. But with MEIA’s arrival, they are confident in the commercial benefits of cultivating MAPs again – mainly helichrysum.
Importantly, Emiland attributes the change to Risi’s investment. In his own words: “if it wasn’t for Risi’s investment we would have remained stuck. We were not able to expand our capacity and meet market demand. Nobody would lend us any more money. Investing in the distillery allowed us to grow our production, sell more and expand as a business”.
So how systemic was it?
You may rightly wonder if this investment had any impact beyond MEIA’s success. So did we.
Measuring crowding-in or scalability is never easy, but we have gathered enough evidence to feel confident that this investment is changing the way things work in the MAPs industry on two fronts.
Firstly, other businesses are entering the oil processing field. This is good news because Albania has the potential to start exporting with higher value added. At least two others are copying MEIA’s business model. In addition, systemic change rarely happens by itself. The demonstration effect is extremely important, and Risi’s constant dissemination efforts are contributing to raising awareness of MEIA’s success.
Secondly, other farmers are seeing the benefit of growing MAPs that are demanded by the market. Behaviours are slowly switching from wild MAPs harvesting to using fields for growing the plants. These are encouraging signs that Risi will monitor over the next four years.
Lessons learned for replication
These are some of the factors that contributed to the success of this intervention:
- Co-investment: Risi did invest in equipment that was vital to MEIA’s operations. But our agreement with them specified a similar level of investment from their side on building the capacity of their out growers and staff to maintain the facilities.
- Drafting contracts that allow for accountability on both sides is essential. It’s worth spending time agreeing on performance-based payments.
- Additionality: we would not have done this investment if it hadn’t been completely clear that MEIA had no alternative. We always prioritise a facilitative role: most of our partners have not exhausted other financing options and we always redirect them accordingly. MEIA was an exception.
- Making sure there are no alternative existing solutions in the market is essential if we’re to avoid distorting the market.
- Relationship: both before, during and after the investment, Risi has been working closely with MEIA with the double goal of creating a trust relationship and monitoring the impact of the intervention. The role of the team building and managing this relationship is extremely important.
- Investing in the soft aspects of a relationship with a private sector partner is as important as the actual investment. The private sector needs to change its view of projects that apply systemic approach as yet another type of donor project: it’s up to us practitioners to ensure they see us as partners that can trigger change.
- Deep understanding of the potential impact: Risi would not have invested if didn’t have enough data to support investment was highly likely to succeed.
- Doing our homework before deciding proved essential for the success of this intervention. Even a small cost-benefit analysis can help understand whether an investment will pay off and ensure value for money.
Let us know if you’ve similar experiences applying principles of systemic approach in a flexible and adaptive way.