Value Chain Investments

SEDCO helps community groups and rural entrepreneurs establish efficient and sustainable enterprises through value chain investments. We use the term "value chain investment" to refer to an investment that increases the share of the value chain captured within a rural area. A value chain investment could support:

• Input production (e.g. ice plant for the fisheries sector, coconut husk processing facility for the coir yarn sector)

• Collection, storage or transport (e.g. seed paddy storage facility, cooler truck for fresh fish marketing)

• Processing and packaging (e.g. kithul bottling facility, rice mill, fish filleting and packing facility)

• Retail outlets (e.g. fruit juice shop, handmade lace outlet)

Most value chain investments also require initial working capital and support services.

Need for Service

• Microfinance has received considerable international attention in recent years. Although microfinance institutions have improved access to credit and other financial services for millions of poor households in Asia, Africa and Latin America, the approach has its limitations. Microfinance does not address all of the structural inequalities and economic constraints that contribute to rural poverty.

• If rural producers want to invest in an initiative to capture more value from the supply chain, they need to be able to access a larger investment loan over a longer time frame than a microfinance lender is able to provide. Despite the positive implications for the rural economy, this type of initiative falls in the gap between microfinance programs and commercial lending institutions.

• Even if larger loans were available, loan capital is not appropriate for all income generating activities. Loan repayment is usually according to a strict monthly schedule that often starts immediately after disbursement, but a new enterprise can take months before it reaches its break-even point and begins to generate profits. New enterprises also require complementary support services. During the start-up period, it is difficult to repay loan capital. A different type of capital is required.

Our Approach

SEDCO has supported value chain investments through two different strategies.

Equity Investments (Venture Capital Model)

If a producer group is well-established and has a strong institutional capacity, SEDCO uses a 'venture capital' approach with a clear exit strategy.

SEDCO focal points help the producer group prepare a feasibility study, business plan and investment proposal, which are reviewed by the SEDCO Board of Directors. The SEDCO Board serves as an independent body that manages the SEDCO investment fund and makes decisions based on financial viability and social impact.

If the investment proposal is approved, the fund manager will work with the producer group to clarify the investment parameters, exit strategy, and terms of partnership. The community enterprise will have a transparent shareholder structure and manager hired by the shareholders. SEDCO becomes an equity shareholder and has a vested interest in coordinating training and business advisory services. Progress reports for the investment are presented at the quarterly SEDCO Board meetings. When the enterprise reaches its breakeven point, the producer group can begin repurchasing SEDCO shares.

Project Financing (Build-Operate-Transfer model)

In some cases, grant funding is available for a value chain investment before a producer group has a strong institutional capacity. This is particularly common in areas affected by natural disaster and conflict. In this situation, SEDCO uses a Build-Operate-Transfer (BOT) approach.

The producer group participates in the design and development of the enterprise, but SEDCO takes a more active role in developing the proposal, procurement, construction and initial operations. This enables SEDCO to recover its expenses. As the producer group becomes stronger, a shareholder system is established, independent management is recruited and ownership is transferred to the producer group. This system was used to establish yogurt production centers, ice plants and rice mills in tsunami-affected areas.