Value Chain Approach
There is increasing interest in the development of fostering value chains, including the transport and logistics aspects. The value chain describes the full range of activities to bring a product or service from conception through production to delivery to the final consumer. The value chain actors may be supported by technical advisors and financial services.
One example is the development and processing of agricultural products for local and regional markets. With 53% of the employed Kyrgyz population involved in farming and a large number of those in subsistence farming, linking small farmers to markets and ensuring sustainable business development for processors and traders is a major way to address rural poverty. Constraints faced by local farmers include (1) lack of trust between producers and potential buyers, (2) lack of reliable information about markets and finance, (3) small production volumes, (4) lack of inputs, and (5) lack of mechanization. Value chain analysis assesses the relationships in a value chain to understand the economic benefits and costs. Factors that affect contracts among producers, processors and traders are:
- Bargaining power,
- Information gaps and risks affecting price,
- Time of delivery, and
- Party responsibility for transport and volume of product.
For Kyrgyzstan, the case is complicated because the domestic market is small and incomes are low, the distribution channels were disrupted with the collapse of the Soviet Union, transport costs are high (fuel, old vehicles, poor roads, informal payments) and there is a lack of working capital.
The main advantage of written contracts is to reduce marketing risks and thus income fluctuations for farmers. Price, quality and transportation are important contract components. Honesty and faithfulness to the contract are investments in longer term relationships that are important to any value chain. Private enforcement of contracts is much better than resorting to the courts which are slow and costly. An example of a self-enforcing contract developed in transition countries is one in which processors supply inputs to the growers for which the grower doesn't pay until he is paid for the produce. Access to information and trust are major issues in Kyrgyzstan. Monthly meetings of actors on the value chain to share information help build the personal relations necessary to a successful venture.
Kyrgyzstan has a small internal market and therefore depends on export markets such as Russia and Kazakhstan where they have a 3-8% share of total imported products. Barriers to expansion into these export markets include:
- Transport costs are high.
- Long distances and high competition from other countries mean that high value, specialty products are likely to be more successful.
- Disconnected small producers and processors are unlikely to meet the demand.
- It is possible for several processors to combine production but there may be quality differences.
- Trading companies for food products are insufficient
- There is a lack of working capital
- Relationships with Russia and Kazakhstan lack a record that generates trust.
Overcoming these obstacles and developing effective sales channels would take time. Therefore it was decided to concentrate on the home market first where the percentage of local products was small and the customer base very favourable to buying locally. It was decided to develop a new brand of fruit and vegetable processed foods, "Taste of the Sun". The brand was introduced in 2004 and by 2005 the demand was higher than 7 local processors could produce. The constraint was access to capital and underdeveloped relations with farmers. Initially, extension service training for farmers could be provided by existing government or donor-supported programs. To become sustainable, the extension service needed to commit that their farmers could achieve higher yields and the processor needed to pay a portion of the additional earning to the extension program for on-going training and sales channel development. Access to capital and transport development was also addressed by the extension service in the early years of the project. By fully developing the value chain system locally, the project was ready to begin expanding into the international market, including the more complex transport and logistics challenges.