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a report of the csis

project on u.s. leadership

in development

May 2012

Authors

Michael Levett

Ashley E. Chandler

Contributing Authors

Thomas Patterson

Conor M. Savoy

Maximizing Development of LocalContent across Industry Sectorsin Emerging Marketshow private-sector self-interest can help

u.s. development policy

CHARTING

our future


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Blank


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Maximizing Development of LocalContent across Industry Sectorsin Emerging Markets

how private-sector self-interest can helpu.s. development policy

May 2012

Authors

Michael Levett

Ashley E. Chandler

Contributing Authors

Thomas Patterson

Conor M. Savoy

CHARTING

our future

a report of the csisproject on u.s. leadership

in development


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About CSIS50th Anniversary Year

For 50 years, the Center or Strategic and International Studies (CSIS) has developed practicalsolutions to the worlds greatest challenges. As we celebrate this milestone, CSIS scholars continueto provide strategic insights and bipartisan policy solutions to help decisionmakers chart a coursetoward a better world.

CSIS is a bipartisan, nonprofit organization headquartered in Washington, D.C. Te Centers220 ull-time staff and large network o affiliated scholars conduct research and analysis and de-velop policy initiatives that look into the uture and anticipate change.

Since 1962, CSIS has been dedicated to finding ways to sustain American prominence andprosperity as a orce or good in the world. Afer 50 years, CSIS has become one o the worlds pre-eminent international policy institutions ocused on deense and security; regional stability; andtransnational challenges ranging rom energy and climate to global development and economicintegration.

Former U.S. senator Sam Nunn has chaired the CSIS Board o rustees since 1999. John J.Hamre became the Centers president and chie executive officer in 2000. CSIS was ounded byDavid M. Abshire and Admiral Arleigh Burke.

CSIS does not take specific policy positions; accordingly, all views expressed herein should beunderstood to be solely those o the author(s).

Cover photos: opa glassblower at Ngwenya Glass finishes off a stunning hand-crafed vaserom recycled glass; photo by Darron Raw, http://www.flickr.com/photos/whltravel/4303962782/;bottommarket stalls; photo by Nick MacJewell, http://www.flickr.com/photos/macjewell/4230362182/in/photostream/.

2012 by the Center or Strategic and International Studies. All rights reserved.

ISBN 978-0-89206-711-4

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el: (202) 887-0200

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iv |

As with any effort whose content is drawn rom many industry sectors and economic development

projects, this report benefited greatly rom the knowledge, insights, and experiences o many individ-

uals, not all o whom would agree with all o the policies and practices supported by the authors. Te

authors want to recognize the expertise volunteered by individuals and organizations dedicated to

improving the methods utilized by the private and public sectors to expand economic development.

Specific thanks must begin with Johanna Nesseth uttle, codirector o the CSIS Project on

U.S. Leadership in Development, and Daniel Runde, director o the CSIS Project on Prosperity

and Development. Te entire effort was made possible by their early recognition o the expanding,

intended role o the private sector in economic development in emerging and rontier markets and

the unmatched opportunities created by global supply chains and local content development.

As part o the research process, two working groups were convened. We owe our deepest

thanks or the individuals who participated in these groups and shared insights developed rom

their vast collective experience: Susan Bornstein, echnoserve; Bradley Buck, Land OLakes Inter-

national Development; Mildred O. Callear, Small Enterprise Assistance Funds; Sarah Catterson,

Abbott Laboratories; Elizabeth Boggs Davidsen, Inter-American Development Bank; imothy W.

Docking, Emerging Markets Funding (EMF) Group, IBM; Shaun Doherty, CDC Development

Solutions; om Drum, Small Enterprise Assistance Funds; Andrea Durkin, Abbott Laboratories;

Pierre U. Ferrari, Heier International; William Garvelink, CSIS; George Ingram, U.S. Global

Leadership Coalition (USGLC); Paul Guenette, ACDI/VOCA; Jeri Jensen, Initiative or Global De-velopment (IGD); Saurabh Lall, Aspen Network o Development Entrepreneurs (ANDE); Hardin

Lang, CSIS; Bob Love, BAE Systems; Jorgette J. Mariez, PepsiCo International; Bruce McNamer,

echnoServe; Johanna Nesseth uttle, CSIS; Elena Oskolskaya, ExxonMobil; Gregory Sanders,

CSIS; Stephanie Sanok, CSIS; Santiago Sedaca, CARANA Corporation; Asi Shaikh, International

Resources Group; K.C. Stewart, Chevron; Faith aylor, Wyndham Worldwide; Mark Ward,

USAID; and Holly Wise, Wise Solutions LLC.

Among the those who contributed to the authors knowledge and insights into both private-

and public-sector policy and practice are John Lindley, BP; Isabel Hill, U.S. Department o Com-

merce; Paula Luff, Hess Corp.; Clare Lockhard, Institute or State Effectiveness; Bill McKinney,

then-USAID; im Miller, Goldcorp; and Deirdre White, CDC Development Solutions.Te team would like to offer particular thanks to ACDI/VOCA, the Coca-Cola Company,

IBM, and the Initiative or Global Development or valuable contributions based on consider-

able institutional knowledge and experience. Special thanks go to imothy W. Docking rom

IBM, Bruce McNamer rom echnoServe, Elena Oskolskaya rom ExxonMobil, Mark Ward rom

USAID, and Sarah Catterson rom Abbott or their insightul presentations and leadership dur-

ing these discussions. As principal authors, we acknowledge the vital roles played by contributing

authors Conor Savoy and Tomas Patterson and the beneficial in-depth research support rom

Jordan Apeld, Cindy Brenner, and Lee Williams.

acknowledgments


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|1

While the promise is still ar greater than the reality, strategies and programs built on the positive

impact on development rom private-sector initiatives in rontier and emerging markets is gaining

acceptance and driving change in corporate boardrooms and NGO projects. Multinational corpo-

rations (MNCs) engaged in these initiatives represent sectors as diverse as extraction and agricul-

ture, tourism and technology, and pharmaceuticals and electronics. Corporations point to their

balance sheets as the motivation or policies, projects, and practices that create businesses, jobs,

national and amily wealth, and new economic opportunities across the developing world. While

these outcomes have long been the goal o international donors and development organizations,it now appears that the private sector may be better prepared to accomplish many o them using

their own unds, skills, and practicesand with motivations that are less lofy.

Te power o the private sector to have a positive impact on development has requently been

unrecognized or undervalued by many members o the traditional development community, and

viewed as an unintended or irrelevant consequence by MNCs. As Holly Wise and Sokol Shtylla

explained it, As Milton Friedman might say, the business o business is businessand this is

exactly what gives firms the capability and credibility to expand economic opportunity. Business

activity creates jobs, cultivates inter-firm linkages, enables technology transer, builds human

capital and physical inrastructure, generates tax revenues or governments and, o course, offers

a variety o products and services to consumers and other businesses. Each o these contributions

has multiplier effects on development.1

Recognition o the relatively ew corporate business strategies and programs that include the

positive impact on developmentor the potential or private-sectordriven developmentcould

not come at a more propitious time. As MNCs and other businesses continue to expand the global

reach o their supply chains and resource acquisitions and increasingly require new markets or

sale o their products, materials, and services, the budgets o the United States Agency or Interna-

tional Development (USAID) and other international aid agencies are, at best, holding steady and

are, more probably, decreasing. Tese parallel realities hold the promise o expanded economic op-

portunities, benefits and stability or men and women in many countries o tremendous economic

need and social stress using ar ewer, better targeted and integrated resources o development

agencies and donor groups.MNCs impact development in many ways: rom their large investments to their corporate so-

cial responsibility programs, rom direct hiring to technology and skills. However, nowhere are the

current and potential activities o large companies more dynamic and influential on development

than through their local-content policies, programs, and practices.Nothing matches the scope and

1. Holly Wise and Sokol Shtylla, Te Role o the Extractive Sector in Expanding EconomicOpportunity, Harvard Kennedy School o Government, 2007, http://www.hks.harvard.edu/m-rcbg/CSRI/publications/report_18_EO%20Extractives%20Final.pd, p. 4.

1 introduction


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2 | maximizing development of local content across industry sectors in emerging markets

impact o the continuing demand by large global companies or both supply-chain inputs and new

markets or their products and services along with the financing available to meet the demand.

Business counts among its bottom-line arguments or local-content strategies the potential to

reduce the costs and time needed to obtain goods and services as well as the creation o a sup-

portive operating environment. Te latter argumentreducing risk or obtaining a social license

to operatehas been more important to companies in the extractive industry or manuacturingthan building positive name identification or helping to meet host-government operating man-

dates. However, the value o positive name identification becomes even more important as U.S.

and European companies find that their plans or expanding sales depend on countries labeled

developing, or emerging market, or rontier. Over time, the most powerul argument may be

a play on the of-told Henry Ford tale o his willingness to pay workers the outrageous sum o $5

per day not or their own good, but so that they would be able to buy Ford automobiles. Local-

content strategies may be seen as Ford writ large: i MNCs are to sell to local markets, the residents

o those countries must be part o successul economies and afford to buy the MNCs goods and

services.

Local small and medium-size enterprises (SMEs) that currently lack access to the globalsupply chain, and small armers who do not meet the requirements o large agricultural buyers,

have the chance to benefit rom corporate investments in training, inrastructure build-out, and

changes in corporate procurement policies. Tese initiatives make it easier or small armers to

have their products aggregated with those o their neighbors and purchased by large buyers, as

well as or small businesses to compete or and win supply-chain contracts. Tere is nowhere that

U.S. government agencies can have greater impact and influence on immediate and near-term

development activities than through targeted, need-driven, timely interventions that fill gaps in

corporate potential, such as training, acilities, access to inormation and financing, or technology.

Te costs o filling these gaps can be ar less than traditional economic development programs;

however, given the scale, scope, and duration o corporate involvement as a buyer or end-user,

the total expenditures benefiting local businessmen and women can dwar those o the traditionaldevelopment programs.

Will large private-sector companies benefit rom U.S. government participation? Absolutely.

Is this troubling to some in the development community? Certainly. But most importantly, local

companies, employees, and amilies will benefit at a higher level and on a continuing basis, as

candepending on the initiative or projectlocal and national governments through expanded

tax revenues, improved physical inrastructure, expanded access to technologies and know-how,

and more capable, competitive companies that meet domestic commercial and consumer demand.

Corporate purchasing or sourcing o local goods, services, and raw materials, and the pro-

grams and practices that expand opportunities or more SMEs to enter the global supply chain,

are not the only high-impact activities overtaking donor dollars or scale and scope. Indeed, directoreign investment and remittances both surpass traditional sources o development unding. But

local content and local-content development are the low-hanging ruit o private-sector develop-

ment. Te very corporate rules and processes that create barriers to entry into the supply-chain

world also provide the opportunity or the SMEs that can overcome those barriers.

Businesses must buy goods and services, products, and labor required or their supply chains

rom one source or another and they create policies, develop practices, and take significant time

to support their procurement spend. Te argument or business value in putting that spend


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michael levett and ashley e. chandler | 3

into local content now can justiy a pro-development strategy or what is already inevitable use o

corporate resources.

Te potential or local content can be ound in almost every sector, but any recognition o its

strategic role as a development tool is stove-piped on a sector-by-sector basis. Tis stove-pip-

ing leads to undervaluing the entire arena, and results in a ailure to share lessons learned across

sectors, take advantage o assets and resources created by local-content development in one sector,or make changes in policies and practices that would support donor intervention development

financing.

Local-content development may operate in one sector under the flag o government mandates,

while activities in another sector may be identified with corporate social responsibility or with

the more ambiguous social license to operate. And any o these drivers may continue to motivate

expansion o local content. Te expansion of local-content-for-development activitiesgrowth in

number of supporting companies, breadth of sectors being considered, approaches, or the overall

type of contentis becoming noticeably more prominent in private and public spheres. But as that

is happening, corporations are increasingly pointing to corporate strategic planning and bottom-line

business practice as the prime movers for investing in the expansion of local content.

Te time is now to support existing and endorse new private-sector strategies, programs, and

practices that expand economic development in emerging and rontier markets, while inorming

and shaping U.S. government policies and practices that stimulate and assist selected private-

sector activities. o do so, we must understand what motivates the private sector today, what cre-

ates barriers to such activities, and what will drive uture expansion.

Tis report makes broad policy recommendations that apply to the general use o a local-

content strategy by the private-sector companies and the U.S. government agencies such as USAID

that historically provide technical assistance and the Millennium Challenge Corporation (MCC)

and the Overseas Private Investment Corporation that can take positions that maximize local eco-

nomic opportunities and growth. Key recommendations include the ollowing:

Nothing makes the point better than successul practice. Te U.S. governments own procure-

ment and contracting regulations and practices should seek to realize the ull benefits o local

sourcing. (USAID should be recognized or recently changing some policies to expand local

sourcing. At the same time, MCC has maintained a source-neutral procurement policy; it

would appear worthwhile or MCC to study how its procurement practices could strengthen

local capacity in the sectors where it invests.)

U.S. government agencies should identiy and use opportunities that build on and support

private-sector initiatives that enhance the creation o local businesses, jobs, and economic

opportunitiesmaximizing the development impact o MNCs local-content initiatives with

targeted, timely interventions that are specific to the sector, country, and project. Such a use odonor dollars and donor know-how is the basis o a do more with less strategy.

U.S. government agencies should seek to maximize their role as (1) a convener o all stakehold-

ers in high-potential development activities in order to build on corporate plans and the variety

o available resources; (2) a creator o development policy that includes roles or the private

sector; and (3) a motivator and under or projects that build local-content-riendly legislative

and regulatory environments or both local SMEs and MNCs in host countries.


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Our goal was to examine why and how the private sector, nongovernmental development ac-

tors, and the U.S. government, particularly USAID, can employ policies and practices to expand

local content in order to drive economic development and create economic opportunities. Ac-

cordingly, this report identifies and highlights the development benefits o a local-content strategy

while recognizing the commercial benefits o such a strategy accruing to large participating com-

panies. In chapter 2, the report uses three case studies to identiy existing successes and challenges.

Chapter 3 provides recommendations or those businesses and government agencies as well as

host governments working on local-content development, and chapter 4 provides the conclusion.


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| 5

Te ollowing are three case studies rom three very dierent business sectorsextraction

(oil and gas), tourism, and agriculture. Naturally, there are many inherent dierences in the

basic components o each sectormost obvious, perhaps, the products and services that

multinational or major local companies need and will be purchasing along their speciic sup-

ply chains that will ultimately combine to meet the demands o their customers. But it is the

shared elements of the case studies that begin to create the picture of potential for private-sector

driven development:

he international private sectors need to purchase identiied goods or services;

he international private sectors recognition o the value to their businesses o using

local suppliers;

he international private sectors ability to spend time and money to ensure the (quality)

participation o local entrepreneurs and armers as suppliers;

Inputs rom NGOs;

Local companies and armers getting and taking advantage o the opportunity to provide

those goods and services;

Continuing participation in and contribution to local economies by the private sector

because o the ongoing demands and purchasing power o the buyers; and

Continuing beneits (revenues) going to SMEs as well as governments at multiple levels.

he three case studies demonstrate: the drivers and motivations o the various players;

the strategies and (consistently well-timed) planning; the alliances and various roles o the

dierent participants; the implementing practices and key beneits and results; and many

o the lessons learned in bringing the concepts to reality. Perhaps most important, the case

studies demonstrate that (1) the corporate business driver-targeted intervention approach is

not limited to one sector, to one type o local business or entrepreneur, or to one size end-

user or corporate beneiciary; (2) the small businesses, armers, and local economies con-

tinue to beneit without the need or new or continuing public or donor unds; and (3) the

approach will contribute to the sustainable development outcomes called or in the adminis-

trations development policy.

2 case studies


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Case Study 1Extraction Sector: Oil and Gasand SME Development in Angola

Background

Oil was discovered in Angola in 1910 with the first well drilled in 1915.2By 2010, Angola sur-

passed Nigeria as sub-Saharan Aricas largest oil-producing country (17th in the world).3Te

country is now Chinas second-leading source or crude oil and one o the top suppliers to the

United States.4

Te oil industry is not labor intensive rom the standpoint o operations. Even though re-

source extraction does not produce many direct jobsthe oil sector runs heavily on contractsit

does generate economic returns5that can be appropriated by national governments. Te high stan-

dards and quality requirements o the oil industry make it difficult or local companies to meet the

procurement needs o international oil companies (IOCs) and their first-tier, largely international

suppliers. Because IOCs requently import manpower and materials, local companies are ofen

unable to reap the benefits o the oil sector.6Most oil-producing nations, including Angola, have

responded to this practice by enacting national mandates requiring the IOCs to source or hire lo-cally as a part o their license to operate. However, both the policies and their implementation vary

dramatically between countries.

Drivers

When Angolas 27-year civil war ended in 2002, the country was lef with a significant human capital

deficit and a nonunctioning economy apart rom oil and gas, which constituted 76 percent o the

countrys GDP in 2000.7Te Angolan government responded by introducing a local content initia-

tive that required oil companies to hire Angolans and source rom locally run businesses. 8Te war,

however, created an environment where the oil industry could not do business under the conditions

set by the initiative because o the dearth o qualified local enterprises. Business development ser-vices (BDS) were also significantly underdeveloped, which compounded this shortage o suppliers.9

With the Angolanization mandate or IOCs to source locally, an entity was needed to assist local

businesses in growing their technical capacity.

2. Angolan Embassy in Canada, History o Oil in Angola, last modified May 25, 2011, http://www.embangola-can.org/oil.html.

3. Central Intelligence Agency, World Factbook,Country ComparisonOil Production, last modifiedDecember 7, 2011, https://www.cia.gov/library/publications/the-world-actbook/rankorder/2173rank.html.

4. U.S. Department o State, Background Note: Angola, Bureau o Arican Affairs, October 13, 2011,http://www.state.gov/r/pa/ei/bgn/6619.htm.

5. Te payment to a actor o production in excess o what is required to keep that actor in its present

use. David R. Henderson, Rent Seeking, Te Concise Encyclopedia of Economics,Library o Economics andLiberty, http://www.econlib.org/library/Enc/RentSeeking.html.

6. CDC Development Solutions, Angola: A Legacy or Supply Chain and Local Content Development,CDS Supplier raining Initiative, http://www.cdcdevelopmentsolutions.org/cds-supplier-training-initiative.

7. Earthrends, Economic IndicatorsAngola, Earthrends Country Profiles, 2003, http://earthtrends.wri.org/pd_library/country_profiles/eco_cou_024.pd.

8. U.S. Department o State, Background Note: Angola.9. U.S. Agency or International Development/South Arica, Developing the Supply of Financial Services

and Improving the Efficiency of the Banking Sector in Angola, submitted by the Services Group, Inc., andNathan Associates, January 2008, http://pd.usaid.gov/pd_docs/PNADX263.pd.


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Activities

CDC Development Solutions (CDS), an international NGO that specializes in linking global

supply chains and local enterprise development, began working with the Angolan oil industrys

stakeholders in 2003 to improve the capacity and competitiveness o local companies in Angola

that could serve as contractors and suppliers to the oil industry.10Te first step was to conduct a

gap analysis o the countrys SMEs.11Juxtaposing the commercial needs o IOCs with the capabili-ties o the Angolan business community, the research revealed six major components necessary to

oster local businesses capable o working with the oil industry:

raining programs specifically geared toward the requirements o the IOCs were needed;

Local businesses would benefit rom the provision o on-site business assistanceincluding

technology and knowledge transers;

Inormation about the IOCs procurement needs and the availability o SMEs to meet that

demand and a system to communicate it were necessary in order to link the budding supply o

oil with the industrys demand;12

An enterprise development center (EDC) should be developed;

Expanded access to finance was needed to allow the businesses to expand; and

Te success o local businesses required the active participation o and partnership between the

IOCs, EDC, and the participating SMEs, with the Angolan governments overarching approval.13

Initially working with BP and the Angolan Ministry o Petroleum, CDS developed a com-

prehensive strategy to increase the ability o local companies to compete as suppliers to the oil

industry.14In 2005, representatives rom the Angolan state-run company, Sonangol P&P, and IOCs

represented by BP, Chevron, ExxonMobil, and otal,15established theCentro de Apoio Empresarial

(CAE) to serve as the recommended EDC. Te oil companies provided the capital and the market

demand,16while CDS was contracted to run CAE.

10. CDC Development Solutions, Angola: A Legacy or Supply Chain.11. According to the Private Enterprise Partnership or Arica (PEP Arica), supply chain development

should involve our steps: consultation/supply chain assessment, gap analysis o specific sector, gap-specificdesign o technical assistance needs, and then implementation o supply-chain development programs.Michael Hackenbruch, Local Content and Supplier DevelopmentA conceptual toolkit, InternationalFinance Corporation and PEP Arica, October 2006, http://www.menas.co.uk/App_Data/elib/Michael%20Hackenbruch.pd.

12. CDS also proposed that a unit would be necessary to house a database listing local companiespossessing the capacity to serve the oil and gas industry and acilitate linkages between SME businesses.CDC Development Solutions, Angola: A Legacy or Supply Chain.

13. CDC Development Solutions, Angola: A Legacy or Supply Chain and Local ContentDevelopment, News from CDC Development Solutions: Development Solutions, April 2010, http://www.cdcdevelopmentsolutions.org/sites/deault/files/DSApril2010.pd.

14. CDC Development Solutions, Supply Chain Development: CAEApoio Empresarial ransers toLocal Control, January 2011, http://www.cdcdevelopmentsolutions.org/January2011CAEandSupplyChain.

15. Tese five companies made up the enterprise development subcommittee o the AngolanGovernments Local Content Initiative.

16. Business Action or Arica and Harvard Kennedy School: Corporate Social Responsibility Initiative,Business Partnerships for Development in Africa: Redrawing the boundaries of possibility, 2010, http://www.hks.harvard.edu/m-rcbg/CSRI/publications/BAAReport_2010.pd.


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One o the goals o CAE was to produce a unctioning, and eventually sustainable, market o

local enterprises to meet the mandated needs o IOCs.17Once up and running, CAE improved the

capacity o Angolan SMEs to serve as contractors and suppliers and then prepared them to bid or

oil-industry contracts.18Initially, CAEs services ranged rom assisting SMEs with financial analysis

and business training to the specific elements associated with the provision o goods and services

needed by the oil industry.19

o receive CAE services, SMEs serving the oil industry must either have 100 percent Angolan

ownership or be a joint venture with at least 50 percent Angolan participation.20Successul SMEs

are then indexed on CAEs Certified Supplier Directory that details the strengths o individual

enterprises, including their current capacity in areas relating to the oil industry. CAE clients tend

to be a part o the missing middle, meaning they are too big to qualiy or microfinance but too

risky or mainstream financial services. In 2010, CAE expanded its client services and created

the program Access to Finance (A2F) to help qualifiedSMEs gain access to capital, ofen vital

to implement contracts they have captured and their largest constraint to growth.21Also in 2010,

Chevron unded an Angolan business plan competition or local entrepreneurs. CAE contributed

by running a five-week intensive course or ourteen CAE-certified companies to prepare business

plans.22

Results

CAE strengthened Angolas supply chain network and improved the ability o Angolan enter-

prises to source to the IOCs. By the projects end, more than 1,500 Angolan-owned businesses had

participated in the CAE program through training and technical assistance, 124 companies were

certified as suppliers or the oil industry, and some 300 contracts and contract extensions resulted

rom CAE involvement.23CAE generated more than $214 million in oil-industry contracts, while

supporting the creation o more than 2,700 Angolan jobs.24

17. CDC Development Solutions, Angola: A Legacy or Supply Chain; and Business Action or Arica,Business Partnerships for Development in Africa.

18. Business Action or Arica, Business Partnerships for Development in Africa; CDC DevelopmentSolutions, Angola: A Legacy or Supply Chain; USAID, Developing the Supply of Financial Services.

19. USAID, Developing the Supply of Financial Services.20. Tese businesses also had to be operational or one year or more beore applying and be a legally

registered and legitimate company (e.g., no shell companies). CDC Development Solutions, News rom

CDC Development Solutions; and CAE Apoio Empresarial/Angola, Developing Local Content in theAngolan Oil & Gas Industry, http://www.caeangola.com/home_en.html.

21. CDC Development Solutions, Supply Chain Development: CAEApoio Empresarial ransers toLocal Control.

22. Chevron Human Energy, Cabinda Gulf Oil Company Limited: 2010 Corporate Responsibility Report,http://www.chevron.com/documents/pd/2010-AngolaCR-English.pd.

23. USAID, Developing the Supply of Financial Services.24. U.S. Center or Citizen Diplomacy, 5 Questions or Member Organization,

CDC Development Solutions, http://uscenterorcitizendiplomacy.org/blog/entry/5-questions-or-member-organization-cdc-development-solutions-20110829/.


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Te A2F program succeeded in increasing awareness and knowledge o financial services and

helped SMEs create innovative investment and lending models.25Tis CAE project led to the pub-

lishing and distribution o the first guide to financing instruments available or SMEs in Angola,

Financiamento em Angola.26

Te business plan competition culminated with a $7,500 award to the top two plans.27Te

three CAE-certified Angolan companies benefited not only rom having comprehensive businessplans, but also rom the connections they made with local banks and potential buyers.28Tis com-

petition was touted as a success by Chevron.29

Some o the SMEs trained by CAE have gone on to become larger-scale operations thriving

as a result o the oil industrys needs. For example, NASA Commercial Import and Export Ltd.

has provided personal protective equipment (PPE) or the oil industry in Angola or the past 10

years,30growing rom a two-person outfit to a staff o 20.31Prompted by Chevron, NASA was

one o the first clients at CAE, which provided training including financial management, human

resource management, bidding, and contracting. NASA was CAE certified in 2008 and is now

Cabinda Gul Oil Company Ltd.s (CABGOC) supplier o saety shoes and coveralls under con-

tracts totaling more than $5 million.32NASAs additional contracts include ones with Halliburton,

Schlumberger, Vector Gray, Inc., Petromar, and Allead Energy.33

Another successul CAE trainee is Luaanda Reparaes, LDA, an Angolan plumbing and

electrical SME. Prior to receiving CAE services, Luaanda Reparaes was run by an independent

contractor and perormed small jobs or clients in and around Luanda.34Te business was reerred

to CAE or help with essential tasks like crafing invoices, as well as advance financing to purchase

the necessary supplies. Luaanda received technical assistance and training or more than a year

and transormed into a company capable o taking advantage o the growing services market in

Luanda. In 2010, the company won a $680,000 contract with BP or the repair and maintenance o

stairway lights in a modern high-rise in Luanda.35

25. CDC Development Solutions, Access to Finance or Development.26. Finance in Angola is a financing guide or SMEs. See Chevron Human Energy, Cabinda Gulf Oil

Company Limited: 2010 Corporate Responsibility Report.27. CDC Development Solutions, News rom CDC Development Solutions.28. Te three winners o the first business plan event were Casa ema, a amily-owned hotel chain;

Angolan Purchasing & Supply, a Soyo-based service provider; and Pembele Comrcio, a supplier o personalprotective equipment. Angolan Purchasing & Supply was able to make two valuable bank contacts thathave agreed to finance the business up to $300,000. CDC Development Solutions, Access to Finance orDevelopment.

29. Ibid.30. Chevron Human Energy, Cabinda Gulf Oil Company Limited: 2010 Corporate Responsibility Report.

31. CAE Apoio Empresarial, Small Family Business Becomes Multi-Million Dollar Supplier,Strengthening Relationships with the Oil & Gas Industry, http://caeangolanews.weebly.com/uploads/3/6/6/4/3664955/historia_de_successo_-_nasa_-_eng.pd, accessed March 21, 2012.

32. Chevron Human Energy, Cabinda Gulf Oil Company Limited: 2009 Corporate Responsibility Report:Enabling Economic Development in Angola, 11, http://www.chevron.com/documents/pd/AngolaCRenglish.pd, and CDC Development Solutions, Access to Finance or Development.

33. CDC Development Solutions, Access to Finance or Development.34. Luanda is where Angolas sole refinery, which is operated by Sonangol, is located. U.S. Department

o State, Background Note: Angola, October 13, 2011, http://www.state.gov/r/pa/ei/bgn/6619.htm.35. CAE Apoio Empresarial, Small Family Business Becomes Multi-Million Dollar Supplier.


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Committing its efforts to ensuring the sustainability o the project, CDS ocused rom the

beginning on employing, training, mentoring, and empowering the CAE staff with the aim o

eventually transitioning the project, including its leadership, to the Angolans.36On January 1,

2011,37in conjunction with Sonangol and the Ministry o Petroleum, and in association with the

Angolan Chamber o Commerce and Industry, CAE was officially under the direction o an Ango-

lan director.38Rather than simply being an enabler, the nationalization o CAE is itsel evidence

o the growth o local content in Angola.39

Lessons Learned

Local Content StrategyCAE

Beginning with the end in mind, this program leveraged the assets o each participating actor:

the Angolan government, IOCs, and CDS. CAE had the Angolan governments approval, and the

unding that IOCs provided to CDS or CAE helped to fill the capacity gap, something the IOCs

were less than unanimously inclined to do on their own. In the five years that CAE used third-

party technical assistance, it grew into a unctioning and Angolan-run entity that built a portion o

the countrys SME capacity up to international standards.

Increasing SMEs access to credit also helped to address the disconnect between the lo-

cal banking sector and Angolan SMEs. Te unds generated or SMEs allowed them to expand,

enabling them to better compete with larger oreign firms working with the extractive industry.40

Growing the number o qualified local SMEs helped to put downward pressure on the rising prices

associated with the increased demand.41

CAE acted as a space or the providers o goods and services to share inormation and ideas

or streamlining the supply chain.42CAE is a great example o the power o an EDC to grow the

local supply chain and illustrates the impact o this kind o mutually beneficial partnership, stated

CDS.43

Many o the lessons CDS applied in Angola were learned in earlier local content development

projects that were unded totally, or in part, by USAID both in the Russian Far East and in Azer-

baijan. In the latter setting, the U.S. government accepted CDS assurances that a two-year invest-

ment by USAID would not only produce new contracts, jobs, and skills, but would also result in

one or more o the IOCs creating their own ollow-on programs. Following the successul two-

year program, BP created its own enterprise center that continued to upgrade the capacities and

the contract captures o local firms.

36. Business Action or Arica, Business Partnerships for Development in Africa.37. CDC Development Solutions, Supply Chain Development: CAEApoio Empresarial.38. Ibid.39. Tis inormation is rom a quote by John Lindley, BPs vice president o procurement and supply

chain management. Lindley, who helped create CAE, is a significant proponent the program. CDCDevelopment Solutions, Angola: A Legacy or Supply Chain.

40. CAE, Supply Chain Development, program presentation.41. Ibid.42. Ibid.43. CDC Development Solutions, Angola: A Legacy or Supply Chain.


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Starting small is more than acceptable but aiming high is an imperative. Te first win o a local

content program may be around very basic servicesood, security, transportation, or clean-

ingbut the goal should be to move as quickly as possible to greater upstream, midstream, and

downstream opportunities. At various stages, all streams can include abrication and construc-

tion, logistics, operations support, and proessional services, consulting, business office support.

Te key to meaningul, sustainable success is the move rom the basic and manpower services

to abrication, construction, and such while recognizing that not all activities are equal in their

impact on local content. Construction impacts job creation more than subservice activities, while

subservice activities have a greater impact on innovation and technology transers than do logis-

tics or maintenance.

Involving all stakeholdersIOCs, first-tier suppliers, national and local government agencies,

local SMEs and trade associations, business services providersrom the earliest stages possible

allows or greater understanding o both existing procurement patterns and real-world barriers

to expanding local content and will deliver outcomes with ar greater efficiency and effectiveness.

Establishing targets and benchmarks; monitoring, evaluating perormance, and adjusting on-the-

ground; and integrating best practices are vital to success.

ransparent, open, air, and accountable procurement policies and practices o the IOCs

with a ree flow o inormation and equal opportunities or local firms to compete and wincan

have a positive effect on public perception o the role o those oil majors in the nations economy

and society. And they create the opportunity or a more pervasive effect on the publics expectation

o how business and government can operate in the best interests o the citizenry.

While there are requent assumptions that expanding local content or the oil sector will

reduce costs and increase timeliness o delivery o goods, this is not always the case. Over time, as

local firms become practiced contractors and develop the skills and expertise they are introduced

to in training and consulting sessions, costs should all and speed should increase. Experience

shows that these are not always the most compelling arguments or early-stage local content devel-

opment projects, but rather mandates, risk insurance, and social license to operate are more ofenemployed.

Working with local and national governments is as important as it can be complicated. While

a lack o quality, basic, early education may be a problem in many resource-heavy nations being

targeted by extraction companies, there is too ofen a lack o coordination between government

agencies that i overcome could produce significant benefits to local firms and individuals who

want to compete or supply chain contracts. For example, i the IOCs sit down with both the Min-

istry o Petroleum and the Ministry o Education, the result could be business education and skills

training programsat universities and vocational-technical schoolsthat would significantly

minimize the need or later development projects (e.g., Intel in Costa Rica and Penang).

Local Content StrategyChevron

CAE was one o several lines o activity that involved the IOCs, Angolan government, third-party

NGOs such as CDS, and the United States through USAID. In addition to CAE, Chevron unded

programs that provided technical assistance to more than 3,000 armers through the creation o


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around three dozen associations (Angola Partnership Initiative)44and helped create NovoBanco, a

thriving micro- and small-business finance institution.45

CAE and the other initiatives listed above illustrate the benefitsor both local economies and

the IOCso a procurement strategy that invests in and then utilizes local resources. As a result

o its experience in Angola, Chevron took steps to shif its strategyin some areas o operation

rom a more a transactional approach to a longer-term one based on early engagement, alliances,and inclusivity with its supply chain.46Te long-term benefits o these programs justified Chevrons

investment o time and money, and the company now publicly claims to see the value o structuring

its operations to make a systemic impact within a particular location or economic value chain.47

Local Content StrategyAngola

en years ago, the situation in Angola was bleak, with low rates o education, skilled labor, and

enterprise development. Te country had been torn apart by almost three decades o civil war. Te

oil industry was the only unctioning industry, as the agricultural and financial industries barely

unctioned. Tereore, the provision o business development services (BDS) was necessary or

creating a viable supply chain and improving the ability o SMEs to compete or contracts and pro-

vide quality services.48Tere is no quick fix or the gap in education and skills needed to diversiythe Angolan economy, but taking a long-term outlook to build more effective and qualified supply

chains is a smart approach that can also provide some positive near-term operational benefits.

In many ways, Angola suffers as it did 10 years ago rom the lack o available human capital,

local enterprises, and access to credit; with the exception o CAE, there are ew providers o high-

quality BDS. At the end o 2010, the oil sector was responsible or 58 percent o Angolas GDP and

80 percent o government revenue.49More work needs to be done to diversiy the goods and ser-

vices side o the Angolan economy, but the economic opportunities rooted in the demand o IOCs

are real. Angola still has a long way to go to strengthen its economy outside o oil revenues, but the

governments proactive measures and its partnering with a variety o players has been the driver o

the growth o the Angolan economyand the gains o the oil industry.

Local Content StrategyThe Oil Industry

Because the extraction industry, more than any other, is subject to national mandates to source

and hire locally, there was a ready-made market or the goods and services the CAE-trained SMEs

were providing. However, even though the mandates in Angola were a catalyst, the process by

which local content was developed is what makes this example a success story. Getting host-nation

buy-in; ormulating a consortium o IOCs to support the provision o BDS and access to finance

44. Wise and Shtylla, Role o the Extractive Sector.45. Te $50 million API was launched in 2002 to support education, ood security, government

institutional capacity, and small-business development. Trough this initiative, and in conjunction withUSAID, NovoBanco was ormed to provide credit to SMEs. Chevron Human Energy, Chevron and USAIDPledge New Support or Better Outcomes in Angola: Agreement Latest in Companys Multimillion DollarInitiatives in Angola, August 19, 2009, http://www.chevron.com/news/press/release/?id=2009-08-10.

46. Wise and Shtylla, Role o the Extractive Sector.47. Tis inormation is in relation to Chevrons API. For more about this development and investment

program, see Business Action or Arica, Business Partnerships for Development in Africa.48. USAID, Developing the Supply of Financial Services.49. Revenue Watch Institute, Angola: Extractive Industries, http://www.revenuewatch.org/countries/

arica/angola/extractive-industries, accessed March 21, 2012.


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or local enterprises; and using an entity (public, private, or NGO) to provide technical assistance

or SME development are not yet the norm in the industry.

Te ideas that were put to work in Angola could translate to the IOCs business models in

other oil-producing countries, but currently the IOCs do not take ull advantage o the opportuni-

ties available in local sourcing.50Te case o Angola also shows that the IOCs can make significant

gains rom collaborating with each other. Part o the problem in ostering this collaboration couldbe that the positives associated with it are straightorward (e.g., sharing costs and being able to

speak collectively on politically sensitive issues), but the processes necessary to make it happen

are less clear.51Replicating the best practices rom the CAE experiment in other countries has the

potential to combat the ar-too-prevalent natural curse associated with resource-rich, develop-

mentally poor countries, all the while meeting the private sectors bottom linecost savings over

the long term.

Case Study 2Tourism: The Spier Group and LocalSourcing in South Africa

Background

Apartheid ended in South Arica in 1993. In the decade that ollowed, the country underwent a

democratization process accompanied by a political push toward black economic empowerment

(BEE).52Te countrys GDP grew at 33 percent rom 2000 to 2008. Te tourism industry sprang

into lie as well, growing rom 4.6 percent o the countrys GDP in 1993 to 8.3 percent in 2006. Te

industrys boom, however, remained largely confined within white-run and white-operated estab-

lishments.53Te Spier Group is an example o a white South Arican amily-run hotel group that

got its start at the end o the apartheid. Te Group runs, among other things, Spier Leisure, which

includes a 155-bed Spier Hotel conerence center, two restaurants, and a delicatessen, located in

the Western Capes Stellenbosch Winelands region.

54

Te tourism industry is a cluster o goods and services that incorporates numerous related in-

dustries (inrastructure, transportation, construction, hotels, agriculture, restaurants, and crafs),

which can create a spillover effect or other sectors. Even though this sector has the potential to

stimulate significant local economic development, tourism and hotels in particular tend to use

large wholesale retailers rather than smaller enterprises.55Tere are a variety o reasons or this,

50. Wise and Shtylla, Role o the Extractive Sector.51. Ibid.52. A black-empowered business means more than 25.1 percent black shareholding. Anagaw Derseh

Mebratie and Arjun S. Bedi, Foreign Direct Investment, Black Economic Empowerment and LabourProductivity in South Arica, IZA, Discussion Paper No. 6048, October 2011, p. 8, http://fp.iza.org/dp6048.pd.

53. SouthArica.Com, South Arica: economy overview, Big Media Publications, accessed December8, 2011, http://www.southarica.ino/business/economy/econoverview.htm#ixzz1d8mFCh2R.

54. Caroline Ashley and Gareth Haysom, Bringing local entrepreneurs into the supply chain: Teexperience o Spier, Overseas Development Institute, Project Briefing No. 20, April 2009, http://www.odi.org.uk/resources/docs/4259.pd.

55. Caroline Ashley et al., Te Role o the ourism Sector in Expanding Economic Opportunity,Economic Opportunity Series, Harvard University, Overseas Development Institute, InternationalBusiness Leaders Forum, 2007, http://www.hks.harvard.edu/m-rcbg/CSRI/publications/report_23_EO%20ourism%20Final.pd.


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including a shortage o capacity, poorer quality, and general unreliability. As a result, companies

will import goods, services, and skilled labor, which diminish the industrys impact on the local

economy. Because the revenue ofen flows back to oreign investors, the industry has a history o

exacerbating income gaps in the destinations it targets.56

DriversTe end o South Aricas political divide catalyzed the countrys economic rise. However, even

with the BEE legislation, black South Aricans were not experiencing the same economic rise that

accompanied the countrys GDP growth. Tis was particularly true within the tourism industry.57

In 2001, the Fair rade and ourism South Arica (FSA), a nongovernmental organization,

began offering certification o sustainable tourism58on a voluntary basis. FSA certification

ocused on labor standards, procurement, and corporate citizenship, with some emphasis placed

on environmental impacts and standards.59

In an effort to identiy the best local sourcing practices within the countrys tourism industry,

Mboza, a South Arican tourism company, and the UK-based Overseas Development Institute

(ODI) collaborated to start the Pro-poor ourism Pilot project (PP Pilots) in 2002.60Tis pro-gram helped acilitate strategies or tourism companies to incorporate a local-content strategy in

a way that would benefit their business financially while simultaneously increasing the benefits to

the local economy.61

56. anapat Sangaroon and Faikhum Tiraporn,Poverty reduction through pro-poor supply chains:Te role o hotel industry, accessed December 8, 2011, http://iscthlr.turismo.wu-wien.ac.at/files/papers/p100_ullpaper.pd.

57. In South Arica, black people comprise 74.1 percent o the economical active population (EAP) yetonly 18.8 percent are employed. White people make up 12.5 percent o the EAP but they have 68.2 percento the jobs. Martha Matiadza Nyazema,Can sustainable tourism development be an important contributoror the success o broad-based black economic empowerment (BBBEE) in South Arica? European

Doctoral Programmes Association in Management and Business Administration (EDAMBA), July 2010,http://www.edamba.eu/userfiles/file/Nyazema%20%20Martha%20-%20edamba.pd.

58. Te World rade Organization defines sustainable tourism as tourism which leads to managemento all resources in such a way that economic, social and aesthetic needs can be ulfilled while maintainingcultural integrity, essential ecological processes, biological diversity, and lie support systems. TeInternational Centre or Responsible ourism, Cape own Declaration, August 2002, http://www.capetown.gov.za/en/tourism/Documents/Responsible%20ourism/oruism_R_2002_Cape_own_Declaration.pd.

59. Jennier Sei, Fair rade in ourism South Arica (FSA), Presentation, accessed December 8,2011, http://www.airtourismsa.org.za/pdffiles/IB_Presentation.pd.

60. Tere were several PP Pilots in multiple regions, including sub-Saharan Arica and the Caribbean.Mboza and ODI collaborated on five pilots in South Arica: Spier Leisure, Wilderness Saaris RocktailBay, Sun Internationals Sun City Resort, Southern Suns Sandton Complex, and Ker & Downeys saari andhunting sites. Te results were compiled into an area guidebook o best practices that were designed to serveas reerence guides across the industry. For the South Arica guidebook, see Caroline Ashley, Facilitatingpro-poor tourism with the private sector: Lessons learned rom Pro-Poor ourism Pilots in SouthernArica, Overseas Development Institute, October 2005, p. 7, http://www.odi.org.uk/resources/docs/2486.pd.

61. Te tourism industrys local-content strategies can preserve the cultural identity, thus creatinga draw or tourists. I measures are not taken to integrate tourism with other sectors (e.g., music, craf,estival), market opportunity may be lost, and local traditions, which are a source o tourism attraction, willbe replaced with an imported liestyle.


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Having supported a number o one-off social projects prior to 2002,62Spiers ocus on the prin-

ciples o social equity and environmental integrity made it a good fit or the project. However, the

company also participated in the pilot program to demonstrate the financial benefits that accom-

panied pro-poor tourism policies and a more widespread adoption o the BEE legislation.63Te

leadership at Spier believed that businesses across South Arica were going to find it increasingly

difficult to survive in a market where the customer base is extremely limited by a lack o resources

and opportunity.64

Activities

With the support rom the PP Pilots, the Group conducted a thorough examination o Spier

Leisures supply chain.65As a result, it systematically changed the procurement process or Spier

Leisure holdings in 2004.66While across South Arica, various industries were seeking out op-

portunities to source rom BEE suppliers, Spiers approach went even urther. Te Groups new

enterprise development (ED) procurement approach67set new priorities, established perormance

indicators, implemented new procurement practices, and measured supply chain perormance.68

Te procurement reorm is depicted in figure 1.

Te Group also sought out local black entrepreneurs and took steps to support them.69Te

majority o the contracts the Group issued were or new services in areas such as laundry, petro-

leum, gas, construction and building, clearing vegetation, collecting firewood, and staffing restau-

rants.70Te first contract sourced through their ED process was with a newly established black-

owned business, Klein Begin Laundry. Previously, the Group outsourced its laundry needs, but

as the hotel and restaurant grew, so did the costs. Te Group decided that it made better financial

sense to build the inrastructure onsite and then find a local entrepreneur to run the business; thus

Klein Begin Laundry emerged.71Te Group also ound it worthwhile to invest in training o a local

black entrepreneur to clear alien vegetation. Not only did the Groups investment adhere to the

goals o the PP Pilot program, but the costs associated with growing the local business owners

62. Caroline Ashley, Facilitating pro-poor tourism with the private sector, p. 3.63. Ibid., p. 2.64. Ibid., p. 1.65. Te review was led by the Sustainability Director with strong support rom the owner. Ashley and

Haysom, Bringing local entrepreneurs into the supply chain.66. Gareth Haysom, part-time acilitator, lent support to Spiers procurement reorm as a part o

the Pro-Poor ourism Project. DFIDs ourism Challenge Fund unded this position rom 20022005 inorder to catalyze, demonstrate, and learn rom shifs in core business practice in the tourism sector thatcontribute to poverty reduction. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.

67. Spiers new ED approach combined conventional commercial practices with additional support,such as mentoring, procuring expertise, finance, and clauses to acilitate the employment o ormerlyunemployed workers. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.

68. Ibid.69. Spier, Klein Begin Laundry, September 26, 2011, http://www.spierblog.co.za/blog/2011/09/26/

klein-begin-laundry/. And Overseas Development Institute, How to ? ips and tools or South Aricantourism companies on local procurement, products and partnerships. Brie 1: Boosting procurement romlocal businesses, September 2005, http://www.capetown.gov.za/en/tourism/Documents/Responsible%20ourism/ourism_how_to_boost_procurement.pd.

70. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.71. ourism-Review.com, ourism: Innovation, Risk-taking, and Protection o Core

Business, Business: Innovations and Risk, January 2008, http://www.tourism-review.com/travel-tourism-magazine-business-innovations-and-risks-category375.


22/44


capacity to meet landscaping needs paid off financially, as the ees were less than what the com-

petitors charged.72

Additionally, the Group took stakes in several companies in its supply chain, including several

involving the Groups employees. Debinisa ransport is an example o a black-empowered joint

venture that resulted rom the Groups new approach. Tis business got its start because a Spier

employee approached the Groups management with a plan to create his own transport company.

By working with one o its own transport contractors, the Group helped Debinisa get off the

ground by offering the joint venture a portion o its transport business.

Tis approach also allows less developed SMEs to compete or bigger opportunities. Forexample, Spier owns the majority stake in a new brick-making business, but intends to sell the

company to the employees in the long term. Ensuring sustainability through training and mentor-

ing, the brick-making business has served the Groups construction needs, as well as created stable

job opportunities or local entrepreneurs.73

72. Ibid.73. Caroline Ashley et al., Te Role o the ourism Sector in Expanding Economic Opportunity, p. 34.

Figure 1: The Process of Strategic Supply-Chain Reform at Spier

Note: Spiers new ED approach combined conventional commercial practices with additional support, such as mentor-

ing, procuring expertise, finance, and clauses to facilitate the employment of formerly unemployed workers.

Source: Caroline Ashley and Gareth Haysom, Bringing local entrepreneurs into the supply chain: The experience ofSpier, Overseas Development Institute, Project Briefing No. 20, April 2009, http://www.odi.org.uk/resources/docs/4259.pdf.


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Results

Te Groups ED strategy combined conventional commercial standards with added benefits that

included mentoring and knowledge transers, assistance with finance and use o the Groups acili-

ties, and contract stipulations requiring the employment o ormerly unemployed workers.74In

2004, Spier Leisure received the FSA certification, and the ED approach produced measurable

development gains. In its first year o implementation, contracts with more than 33 new jobs werecreated. As o 2006, Spier Leisure was one o only 29 companies to have earned this accreditation,

with 41 South Arican hotels certified through FSA in 2011. By 2006, 89 percent o the com-

panys procurement was rom businesses with ewer than 50 employees, and more than 90 percent

o contracting was with local suppliers. By the ollowing year, the Group more than doubled the

amount o local jobs created (79 jobs), with hal o the jobs being held by women and 75 percent

held by people who were previously unemployed. Furthermore, because most contracts were or

new services, Spier did not take jobs rom previous suppliers.75

Spier not only created new opportunities, but the stability o its contracts also increased the

sustainability o jobs in smaller, more vulnerable enterprises. In addition to their ED approach to

increase local procurement, the Group increased its direct local hiring and training. Since 2006,the number o permanent employees at Spier increased by 19 percent.76As a part o this increase, it

has made efforts to move toward a living wage by 2017. Spier also doubled its investment in train-

ing, with more than 90 percent o the beneficiaries labeled as previously disadvantaged (PD).

While more labor intensive, the Groups method o locating an opportunity, finding the entre-

preneur to fill the gap, and then supplying technical assistance to the local business proved com-

mercially beneficial to the Group as well as to the local economy. Tis was accomplished at times

by taking an initial equity stake in a business with which it worked. Tis business model optimizes

outcomes or both the Group and the local economy. For example, Klein Begin generated our

times the local income o the Groups previous arrangement, while the hotel was able to save money

through lower prices.77Te company continues to work with Spier Leisure in the restaurant and the

hotel, handling up 2,000 to 2,500 items every day during the hotels high season. 78More important-ly, the laundry company achieved independent commercial expansion with several new contracts.79

In addition, the head o Debinisa ransport went rom being a local hire to being a local entre-

preneur and contractorand he was not the only actor to profit rom this venture. Te Groups

original transport contractor was able to qualiy as a BEE as a result o this venture, which the

Group touts as helping it to ulfill one o [its] procurement aims. 80Tis business model, accord-

74. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.75. Ibid.

76. Spier, Spier Sustainability Report 2010, Stellenbosch, South Arica,http://www.spier.co.za/spier_sustainability/.

77. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.78. South Arican Wine, Klein Begin Laundry, October 2011, https://www.kenorresterwines.com/

Directory/News.aspx?NEWSID=18879&CLIENID=1190.79. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.80. Spier, Spier Sustainability Report 2010.


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ing to a recent ODI report,81optimizes the benefits to the local economy as it quadrupled the

amount o income in the local economy while allowing the Group to reduce costs by 25 percent.82

Currently, the Spier Groups product offerings include retail outlets, art organizations, hotel

services, restaurants, and wine production. Due to the success seen in Spier Leisures initial supply-

chain reorganization, the Group instigated supply-chain reorm in other areas, such as its gol and

wine holdings.83Spier provided the seed capital to Primo Vino, a company created to customizeSpiers wine bottles in order to comply with international market requirements. Primo Vino now

employs approximately 20 people who change the labeling to meet export requirements.84Follow-

ing this effort, the Groups two wine brands rom its Stellenbosch Vineyard, Spier and Savanha,

received sustainability awards, and the Spier Group was the first South Arican winery to receive

the South Arican Wine Industrys Ethical rade Association Certification.85

Spier Wines sources more than two-thirds o its resources rom the local community, through

hiring practices and local procurement. Using seasonal laborers instead o labor brokers has al-

lowed the wine company to empower the local community instead o importing the hiring oppor-

tunities through labor brokers.86Additionally, the two restaurants in the Groups holdings source

locally, and their organic ood has been rated the highest quality by the South Arican Sustainable

Seaood Initiative.87

As a result o these actions, Spier Leisure received international accolades, including the 2011

Sustainable ourism Award and Cond Nasts ravelers Doing It All award. Tese highlight the

Groups efforts around the environment, individuals, and cultural heritage. In this way the Spier

Group is able to leverage these practices to gain competitive advantage because educated visitors

requently seek out companies that benefit local communities

Lessons Learned

The Spier Group

Since its initial push or FSA certification and ollowing its participation in the PP Pilot pro-

gram, the Group adapted its supply-chain procurement, doubled and tripled the shares procured

locally and rom black economically empowered business, and enabled approximately one dozen

local black-owned businesses to enter the supply chain and become established.88Despite its small

81. Spier partnered with the UKs Overseas Development Institute to produce a case study o Spiersoverhaul o procurement through supply chain transormation (2004). ODI wrote a project briefing onSpiers work in 2009. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.

82. Spier, Spier Sustainability Report 2010.83. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.84. Spier, Spier Sustainability Report 2010.

85. Te Wine Industrys Ethical rade Association Certification (WIEA) was launched in 2002 tobring together South Arican stakeholders in the wine industry to find best sustainability practices in thewine trade. Spier, Our Wines, accessed December 8, 2011, http://www.spier.co.za/our_wines.

86. South Arican Wine, Klein Begin Laundry.87. Te South Arican Sustainable Seaood Initiative was initiated in 2004 in order to educate the

country on seaood sustainability issues and to locate best practitioners that support preserving theoceans ecosystem. Spier, Hotel Restaurant Wine Bar, accessed December 8, 2011, http://www.spier.co.za/spier_hotel/restaurants/.

88. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.


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scale, the Groups efforts in sustainable tourism highlight why local-content strategies are impor-

tant as well as how to initiate such a restructuring.89

By adopting a local-content strategy that ostered a close connection with the providers o lo-

cal goods and services, the Group demonstrated the value o using a long-term approach rooted in

a localized supply-chain reorm. Te Spier experience eatures many successul practices that are

beneficial or both the local poor and the companys bottom line. Business benefits ranged romcost-saving mechanisms to government and industry recognition, public sector business contracts,

and good scoring on the BEE scorecard. Te Group, which is an outspoken proponent o its local-

content strategy through its blog and in published articles, finds that the procurement spend is a

powerul agent o change.90

Te company links financial success with strength o leadership, long-term vision, transpar-

ency, and good communication. Te Group adopted a policy that valued mentorship, improved

service standards, payment reorm, and smaller contracts, all o which allowed or quick wins.

Tis experience highlighted the importance o the staff using key perormance indicators and o

training to bring small businesses to scale, which they see as important tips or others.91Mean-

while, the stable, sustainable addition o jobs and demand or goods outweighed any possible flow

o philanthropic dollars or the development o the community.

Tourism in General

Te hotel industry can play a role in economic development as an actor to promote production

while generating jobs. Te economic development benefits multiply when local content is used in

this industry, as new businesses grow, creating the need or more products.92Tere are requently

low barriers to entry (education, finance, etc.) and women requently play key roles in the tour-

ism arena. As seen in the Spier Group case, creating a better distribution o income can enhance

the lives o the poor while having positive externalities or the tourism industry. By shifing just 10

percent o total procurement, Spier was able to inject more money into the local economy than it

had through its traditional philanthropy program. In addition, the shif would create more dy-namic impacts that had a multiplier effect beyond that o a much larger philanthropic donation.93

While it may not be plausible to replicate this experience in all environments, the case does

indicate the importance o value chain analysis as a key to the sectors economic growth.94Adopt-

ing policies that target supply chains work, in that doing so increases commercial returns though

cost-saving while simultaneously creating development impacts that ar outweigh the benefits o

philanthropic flows.95Isabel Hill, deputy director or policy in the Office o ravel and ourism at

the U.S. Department o Commerce, noted the ollowing on Spiers activities:

Tis is particularly true in the tourism sector, because there is a market advantage to engag-

ing in sustainable practices, as the Cond Nast Award demonstrates. Te Spier case repre-

89. Ibid.90. South Arican Wine, Klein Begin Laundry.91. Sangaroon and Tiraporn,Poverty reduction through pro-poor supply chains, p. 12.92. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.93. Ashley, Facilitating pro-poor tourism with the private sector.94. Raphael Kaplinsky and Mike Morris, A Handbook or Value Chain Research International

Development Research Centre, 2000, p. 9, http://www.globalvaluechains.org/docs/VchNov01.pd.95. Ashley and Haysom, Bringing local entrepreneurs into the supply chain; and Michael Warner,

Reraming Local Content as Local Economic Development, Overseas Development Institute, http://www.odi.org.uk/resources/docs/848.pd.


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sents an important development where sustainable practices are integrated into the busi-

ness model, enhancing the value o the brand in the mind o the consumer, while lowering

costs and providing greater control over the supply chain. Tus it provides a more sustain-

able transactional basis than one based on philanthropy.96

As the largest industry in the world, a countrys tourism industry provides numerous econom-

ic benefits, yet historically, these do not trickle down to the local economy because o the wide-spread practice o hiring and procuring rom imported sources. Examples have shown that these

benefits can be more effectively distributed at the local level by strengthening the local supply

chain. Local enterprises, armers, and households earn significantly more when supplying hotel

chains with their products.97Te multiplier effect o a proper supply chain or the tourism industry

is immense. ourists bring investment, which generates jobs and income or the local people; this

improved and sustainable source o income improves health, lowers crime, and decreases corrup-

tion within the local community.98

Examples are plentiul o hotels and restaurants that cater to tourists in developing nations im-

porting all or nearly all o the ood provided to visitors; this is as true or hotels in Jamaica catering

to visiting Americans as it is or hotels in Cross River State, Nigeria, catering to Nigerians visiting

rom other parts o the country. With the goal o increasing the authenticity o the tourists experience

and lowering import costs, hotels and restaurants can use their demand or quality ood products

delivered in a timely ashion to build supply chains that run rom local armers (who obtain financing

based on hotel contracts) to local truckers (whose companys revenues increase with new con-

tracts) to local produce and meat suppliers to the hotels and restaurants. Key to this market-driven

support or expanding small-business and armer income can be the presence o NGOs to provide

training to the armers in quality, management, and other subjects, and to work with them to ob-

tain financing; NGOs may be financed by government agencies or other donors or by the buyers

(i.e., hotels, restaurants). Rather than use significant levels o donor unding to create a large-scale,

agriculture-driven economic growth program that may or may not result in ongoing business or

the armers (sustainable or profitable) let the private-sector players spend their money becausethey have the promise o a ar greater return and the armers have continuing demand.

ourism has the ability to diversiy an economy in areas where other sectors may be insuffi-

cient.99Expanding the tourism industry increases local, state, and ederal tax revenues, which can

then be unneled back into the community through improved public-utilities inrastructure and

transportation inrastructure.100From the perspective o the donor, investing in a sustainable busi-

ness like the Spier Group represents a smart use o unds and the possibility o development and

commercial returns.101

96. From authors interview with Isabel Hill, deputy director or policy, Office o ravel and ourism,U.S. Department o Commerce.

97. Sangaroon and Tiraporn,Poverty reduction through pro-poor supply chains, p. 5.98. For example, agriculture. Sangaroon and Tiraporn,Poverty reduction through pro-poor supply

chains, p. 12. 99. United Nations Economic and Social Commission or Asia and the Pacific, Sustainable Integrated

ourism Planning, accessed December 8, 2011, http://www.unescap.org/ttdw/Publications/PS_pubs/Pub_2019/pub_2019_ch1.pd.

100. Glen Kreag, Te Impacts o ourism, SeaGrant, p. 6, accessed December 8, 2011, http://www.seagrant.umn.edu/tourism/pds/Impactsourism.pd.

101. Ashley and Haysom, Bringing local entrepreneurs into the supply chain.


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Case Study 3Agriculture: SUCCESS AllianceSupporting Smallholder Cocoa in Ecuador

Background

Cocoa prices have risen steadily in recent years and are at or near record highs, representing a

great opportunity or smallholder cocoa armers. Worldwide consumption o cocoa products con-

tinues to grow at 23 percent or 60,00090,000 metric tons per year. Tis includes steady growth

in the area o dark and origin chocolates, which command premium prices. Projections show

global production remaining behind the increasing demand, indicating that there is a clear oppor-

tunity or expanded production o higher-quality cocoa. Te cocoa sector, however, aces myriad

challenges such as climate change, declining soil ertility, pests and diseases, inefficient arming

practices, and political ragility in some o the key supplier countries.

In 2009, Ecuador exported cocoa beans valued at $335 million, second only to the countrys

banana exports. Ecuadoran cocoa has a special status on international markets as a high-quality

fine flavor cocoa garnered by its Nacionalvariety.Nacionalcommands a premium price. In the

past, however, cocoa traders and brokers would ofen mix small-size Nacional with CCN51, alesser-quality cocoa, in order to get a composite higher grade and a premium price. Tis practice

threatened Ecuadors special status on the cocoa market and reduced the potential benefits or

thousands o rural cocoa armers.

In hopes o ensuring the uture supply o cocoa, ACDI/VOCAa global NGO working in

the agriculture sectoraddressed constraints to sustainable cocoa production and marketing to

increase the competitiveness o the sector. Its actions were in recognition o the importance o the

cocoa crop to smallholder armers, as well as the international cocoa industrys need or diversified

sources and its increased willingness to invest in capacity-building o the smallholder armers who

supply them.

ACDI/VOCA (A/V) is a ounding member o the Sustainable Cocoa Enterprise Solutionsor Smallholders (SUCCESS) Alliance, which improves the livelihoods o smallholder armers by

promoting cocoa production and marketing using economically, environmentally, and cultur-

ally sustainable methods. Te Alliance (which includes local governmental and nongovernmental

organizations) receives unding rom the U.S. Department o Agriculture (USDA), USAID, and

private-sector partners (including the World Cocoa Foundation and its member companies). Te

SUCCESS Alliance has been active in Ecuador, Liberia, Indonesia, Jamaica, the Philippines, and

Vietnam.

SUCCESS Alliance Ecuador

SUCCESS Alliance Ecuador aims to improve arm productivity, increase access to improved plant-ing material, and strengthen armer organizations. Te project began in the provinces o Guayas,

Los Ros, Manab, and Esmeraldas, and is currently active in Los Ros and Guayas. Te original

international donor-unded program was implemented by A/V with international cocoa-buying

partners. Te cocoa industry, both international and domestic, saw the merits o the initial techni-

cal interventions, and as a result, commercial industry contributed to a second program phase in

which Ecuador-based donor unding and unding rom an international cocoa buyer and proces-

sor enabled A/V to continue program interventions or several additional years. An Ecuadoran co-


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coa processor and exporter, with cooperation and technical input rom international cocoa buyers,

unded the program in its latest stage.

USDA (20052008) provided the initial support or A/Vs work with SUCCESS Alliance

Ecuador with approximately $5 million. During this phase, A/V helped 21,710 armers to reha-

bilitate old, unproductive cocoa trees and replant new, improved cocoa. When the USDA-unded

project closed, A/V received additional unding rom other sources to continue activities on amore limited scale: the PL480 Corporation (Ecuador government-run using unds rom U.S.

commodity sales), along with two international cocoa processors and exporters (including the

RANSMAR Commodity Group) and the World Cocoa Foundation (WCF). Te third stage,

a two-year extension, was unded through a public-private partnership between the National

Program or Rural Inclusive Business (PRONERI), sponsored by the Ministry o Agriculture and

Livestock (MAGAP) and RANSMAR. Finally, in 2011, a private export company, Ristokcacao,

contributed a 12-month grant to enable the SUCCESS Alliance to continue its work with a o-

cused set o cocoa armers.

ActivitiesA/Vs SUCCESS Alliance projects include technical assistance and training through the Farmer

Field School (FFS) methodologywhich builds social capital in producer communitieswith an

emphasis on arm planning, crop management, post-harvest management, commercialization,

and participation in armer organizations. Original project objectives were to

rain 21,000 armers through FFS to increase the quantity and improve the quality o cocoa;

Renew and rehabilitate 1 million cocoa trees through the promotion o improved planting

material and nursery establishment; and

Promote the development o 10 armers associations.

Te coastal region o Ecuador is populated by armers known or their individualism and the

region does not have a strong tradition o armer associations or collective marketing. Although

some associations did exist, they were the exception rather than the rule and required heavy

project input and ollow-up. A/V brought together small cocoa armers or the first time or many,

building social capital as armers got to know their neighbors through six months o FFS training.

Te FFS provided armers with the opportunity to carry out group work on practical exercises

designed to teach improved crop husbandry. Tis enabled armers to trust each other as armers

and neighbors and inspired many to organize themselves more ormally.

A/V had a local team on the ground to manage this process. Initially a resident team o 15

managed the project, but by the final phase o the program, the team was reduced to our ull-time

staff members complemented by technical consultants on short-term assignments.

Results

Seedling Production. Farmers trained in FFS produced more than 6 million seedlings at nurs-

eries owned and operated by armers and armer associations. Tey also rehabilitated 1,519 hect-

ares o old, unproductive cocoa trees and replanted 1,293 hectares o cocoa. Te estimated value of

the investments by farmers trained in FFS exceeds $4 million.


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Considering the number o nursery-grown cocoa plantlets (roughly 6 million), at a planting

density o 1,111 plants per hectare, the estimated cocoa area renovated by plants resulting rom

project training surpasses 5,500 hectares. Tis significant area o productive cocoa arms ensures

a greater volume o high-quality cocoa to Ecuadors exporters and the worlds consumers. Farmers

realizing the benefits o collective action are leveraging group purchasing and selling to improve

their access to lower-priced ertilizers and tools, to improve the quality and quantity o their pro-

duction, and to get a better price in the marketplace or their product.

Cocoa Plantlet Production. Te project did not originally have a goal in propagating nurs-

ery plants; the proposed objective was to provide technical assistance to 27 association nurseries

established during the first project phase to ensure that they continued working on a commercial

basis. However, the project also provided technical assistance via extension agents to many others

requesting such support.

Farmers propagated 1.6 million cocoa plantlets in 122 nurseries with seasonal sales approach-

ing $800,000. It is noteworthy that 93 percent o the plants propagated are fine-flavor cocoa

Nacionalvariety and only 7 percent are CCN51. Te armers have a new-ound opportunity to be

paid a premium or a superior product, and they are investing in quality and the variety preerredby international buyers.

Farmer raining. FFS trained 21,710 armers in cocoa-crop husbandry and post-harvest

handling through 872 FFS.102During the first phase o the project, 6,600 armers participated in

field days and cocoa airs that complemented the training and increased armers sense o how the

larger industry worked to produce, process, and commercialize their cocoa. Field days and cocoa

airs allow industry equipment and service suppliers, grower cooperatives, and industry experts to

network and build proessional relationships. Teir business deals during and afer the airs help

the industry strengthen business relationships and improve its overall perormance.

Integrated Crop Management and Bio-control Research. Te SUCCESS Alliance signed andfinanced an agreement with the National Agriculture Research Institute (INIAP) Pichilingue Ex-

perimental Station to conduct integrated crop management (ICM) and bio-control field trials on

smallholder cocoa arms. Tese trials proved that ICM and the application o bio-control agents

(richoderma species) can control witchs broom and rosty pod rot. Tese two diseases cost cocoa

armers in Ecuador an estimated $50 million in losses per year and are a main reason or cocoa

yields being among the lowest worldwide. Te bio-control agents available or testing were first

researched at the USDAs Beltsville, Maryland, station with support rom Mars, Inc. and the INIAP

Pichilingue acility. Te trials tested these agents under smallholder armer conditions.103Cocoa

is a perennial crop that takes 1.52 years to start producing and our to six years to reach stable

production afer ICM changes have been made. Tis work must be conducted over a period o five

to seven years to generate reliable data; direct unding rom chocolate-manuacturing firms hascontinued the work.

102. Te FF