CARE International in Kenya 

CARE Market Engagement Case Study

Livestock Marketing and Enterprise Project and Livestock Purchasing Fund in Kenya

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PART A: How to Make Markets Work for the Poor?

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In 2004 the United Nations Development Program urged nongovernmental organizations (NGOs), governments, and private enterprises to work together to fight poverty. In response to

their call to action, CARE implemented the Livestock Marketing and Enterprise Project in Kenya that advocated for new market-based approaches to poverty reduction, providing technical

assistance and linking the poor with existing commercial value chains. As George Odo packed up his office at CARE Enterprise Partners in Nairobi, Kenya, in June 2009, he looked around the room at various gifts he had collected during his nine years as a sector manager. As he carefully placed an ornamented cow horn in a cardboard moving box, he recalled the Livestock Marketing and Enterprise (LIME) Project that he managed. As he felt the weight of the horn in his hands he remembered the rationale for the project, its execution, and the challenges that the project encountered over its various iterations.

BACKGROUND AND ORIGINS

______________________________________________________________________________ This case study was made possible with the generous support of the Australian Agency for International Development, AusAID. It was authored by Kevin McKague, PhD Candidate at the Richard Ivey School of Business, The University of Western Ontario, Farouk Jiwa, Christian Pennotti and Shamim Noorani of CARE with support from the staff of CARE International in Kenya. It is intended to serve as a teaching tool for internal staff trainings and external international development workshops.  

George Odo’s ornamented horn had come from the Garissa Region of eastern Kenya, a drought- prone and largely impoverished area where most people relied on the livestock industry for income. CARE had been operating in the eastern and northeastern regions of Kenya since 1991 when the Dadaab refugee camps opened their doors to Somali refugees. CARE currently manages three camps in the region, which are home to over 160,000 refugees from Somalia, Sudan, Uganda, the Congo, and other conflict-affected countries. Since 1991, CARE has implemented programs in the camps and surrounding region focused on food distribution and

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emergency relief as well as longer-term projects in education, social services, water and sanitation, microfinance, economic development and women’s empowerment. Through this work CARE has an established reputation in the region as a valuable service provider and humanitarian organization that the community can trust and depend on for assistance. Despite CARE’s longstanding presence and work with residents in the region beyond the refugee camps, high rates of vulnerability and poverty among livestock pastoralists have persisted. Pastoralists remained chronically threatened by drought with minimal access to markets and limited access to risk-mitigation opportunities like credit, savings and insurance. Communities in the region were also affected by HIV and AIDS. Due to these factors pastoralists in the Garissa Region were chronically food insecure, highly vulnerable to shocks and generally impoverished. Predecessor projects to LIME had tried to address some of these issues. In 2003 the Garissa Pastoralist Program sought to improve the provision of clean water. The project helped communities take control of their water sources and make their management and upkeep sustainable by charging a fee in order to maintain the equipment used to treat and dispense the water. The successes of this initial project led to the subsequent Water User Association project, which provided capital investments to rehabilitate pre-existing boreholes in the Garissa district. Although access to water improved, the pastoralists in the region remained poor with limited opportunities to improve their livelihoods. George Odo was the coordinator of the Water User Association project and, as it drew to a close, George and his team considered the relative successes and challenges of their work. The team decided that despite some marked gains achieved through past programming, CARE needed to take a new approach to the issues before them if they were to address some of the long-term income constraints that trapped pastoralists in poverty. They turned to CARE’s emergent thinking about how markets and private sector enterprise could be leveraged to achieve the organization’s development objectives. Many within CARE saw this new approach as an important way to contribute to sustainable poverty alleviation. And, it was not just CARE that saw the power of the idea. The United Nations Development Program and others were also moving toward a new wave in international development, one that saw engagement in private sector markets as a powerful potential force for poverty alleviation. LIVESTOCK MARKETING AND ENTERPRISE PROJECT George and his project team began an open dialogue with Garissa community stakeholders to discuss the economic obstacles they faced. The general consensus of the community was that, following access to water, livestock market access was the next most pressing matter because their livelihoods were based on the sale of cattle. George Odo began to think about how CARE could establish a market-based intervention whereby the pastoralists could be more effectively linked to external markets for their livestock.

The goal of what would become the Livestock Marketing and Enterprise project was beginning to take shape. The goal, George thought, would be to develop a commercially viable yet socially responsible livestock marketing system that would integrate 5,000 pastoralists from the Garissa district of Kenya into the livestock markets in Nairobi and Mombasa, thereby improving pastoralist incomes. The objectives of the project would be: 1. Creating a sustainable business that could act as a social enterprise and be profitable for the

pastoralists long after donor project funding was finished. 2. Providing honest and fair cattle prices to the pastoralists by including them in pricing

decisions and using forward contracts that would be based on a pre-agreed price per kilogram.

3. And, in addition to the market-based interventions, a social component of encouraging gender equity and providing HIV/AIDS awareness education to the pastoralist communities.

This project, George thought, would be a perfect opportunity for CARE to apply its newly emerging market-based development thinking. GARISSA LIVESTOCK SECTOR Pastoralists in the arid east and north-east areas of Kenya base their livelihoods on the sale of livestock: mostly cattle, as well as some camels, sheep, and goats (see picture, Figure 1). The livestock sector accounts for 10% of Kenya’s overall GDP, 30% of the agriculture sector’s activity, and employs about 3 million people or 50% of the agriculture labor force.1 Although livestock plays an important role in rural livelihoods in Kenya, most of the government’s livestock services and policies are aimed at large-scale livestock production rather than small-scale farmers. As a result, the majority of pastoralists in Kenya are included in the 56% of the population that live on incomes below $1 per day. In addition to low and irregular incomes, the pastoralists are exposed to major challenges including inadequate watering facilities, land

Figure 1: Herd of cattle for sale at the Garissa market

                                                            1 Livestock Sub-Sector Analysis and Market Study in Garissa District, chapter 3 “Livestock Production and Marketing in Garissa District, Agrisystems,” July 2004, page 22.

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degradation, disease, low levels of animal husbandry knowledge and lack of market information and contacts. Garissa district is located in Kenya’s Arid and Semi-Arid Land area which is flat with no hills or mountains, and which suffers from high drought prevalence. The population of Garissa district is approximately 240,000 with 66,000 people living in the town of Garissa, the district capital (see map, Figure 2). Most of the people living in Garissa district are ethnic Somalis. The region is relatively under-developed due to inadequate water for crop and livestock production, poor infrastructure, high illiteracy rates, insecurity from the conflict in neighboring Somalia, and the negative impact on the environment from Somali refugee settlements. VALUE CHAIN ACTORS With his initial ideas for a market-based development project in mind, George Odo travelled to Garissa district in late 2004 to talk to the stakeholders and market actors. In his initial assessment of the Garissa livestock value chain, George identified several key stakeholders and market actors including pastoralists/herders, the government, NGOs, transporters, and market brokers.

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Pastoralist/Herders Ninety percent of the people in Garissa district are involved in the livestock industry in some way. In addition to actual livestock owners, other Garissa residents are involved in transporting and trekking livestock to market, trading cattle at the market, gathering or growing inputs for sale in the local market including water, grass and other feeds, and providing rudimentary veterinary services. The bulk of actors involved in the livestock industry have limited access to external markets either to purchase inputs for resale or to sell their cattle directly. Among those residents that do own cattle, herd sizes vary from 20 – 200 cattle per household herd.

Figure 2: Map of Garissa District

Government Veterinary Officers and Animal Health Assistants

The provision of veterinary services is undertaken by the Garissa District Veterinary Officer and the Deputy District Veterinary Officer along with assistance from 10 animal health assistants. This government department operates with inadequate resources and staff to improve animal husbandry or carry out effective disease control in the district. Garissa Market The Garissa livestock market is open for trade every Wednesday in the town of Garissa. Pastoralists, transporters, traders, brokers, and government tax collectors are present at the market. Cows, goats, camels, and sheep are traded, while grass and other feeds are also sold (see picture, Figure 3). During a good season there is high traffic volume at the market with approximately 2,000 pastoralists, herders, traders, and brokers and 30 to 50 transporters present every week. Approximately 10,000 healthy cattle weighing between 120 and 350 kilograms are sold for between US$160-$460 each. However, when there is a drought fewer people come to the market and there is an inconsistency in the supply of animals due to increased livestock mortality and decreased mobility of the animals to trek the long distance to the market. The average range in animal weight during a drought season is 80 to 250 kilograms, and they are sold for US$100-$200. The only thing that is consistent in the market during good season and drought is the tax that the government charges per head of cattle traded: approximately US$2.00.

Figure 3: Women selling grass at the Garissa market

Councils The Garissa County Council and the Garissa Municipal Council have authority over the entire district and receive over 50% of their revenue from the tax they collect from livestock sales. Transporters: Trekkers and Truckers Transporters are vital stakeholders that are involved in many stages of the livestock market. Transporters are of two types: 1) trekkers who walk the distance with the animals or 2) traders with their own lorry trucks who are hired to deliver the livestock to terminal markets. A majority of pastoralists trek their own cattle from their rural farms to various local village assembly markets, but from there trekkers are hired to take the cattle to Garissa where they can be sold to slaughterhouses or ranches. Upon arrival at the market with the trekkers, cattle are either sold to a ranch or a slaughterhouse. If the animals are sold to a ranch they are trekked from the market to

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the ranch, but if sold to a slaughterhouse, truckers are hired to complete the final leg of the journey. The transport service is a competitive field that draws 30 to 50 trekkers and truckers to the market each Wednesday. Brokers Ranches and slaughterhouses use brokers to buy cattle for them at the market. It is estimated that there are about 1,000 brokers in the Garissa market every Wednesday. Brokers buy cattle at the market, paying the pastoralists and then collecting money from the slaughterhouses and ranches. Brokers play a significant role by acting as a cartel in price determinations. Large Ranches Garissa does not have the facilities within its town to fatten cattle, but between the Garissa market and the terminal markets in Nairobi and Mombasa there are over 40 larger-scale commercial beef or dairy ranches where cattle are either milked or fattened for market. These ranches can usually accommodate at least 1,000 cattle, and are equipped with barns and modern feeding systems, access to veterinary services and connections to end markets in Nairobi or Mombasa. Terminal Market By far the most significant terminal markets for fattened beef cattle in Kenya are in Nairobi and Mombasa where animals are slaughtered and consumed by the large urban populations. Non-Governmental Organizations (NGOs) Various NGOs and other organizations are implementing poverty reduction programs in and around the region including the United Nations, FARM-Africa, VSF-Suisse, OXFAM, Kenya Pastoral Forum, Action Aid, ILRI, Terra Nuova, and ALRMP. Many of these organizations focus on improving one or a limited number of aspects of the lives of the pastoralist households, such as water, animal husbandry, or crop management. However, other organizations in the area such as OXFAM are similar to CARE in that they holistically combat the many faces of poverty through the lenses of women’s empowerment, education and health. CARE’s market-based and value chain oriented approach was relatively unique for NGOs in the region, however, though a USAID-funded partnership with First Community Bank to finance livestock traders was beginning to receive some attention. The increasing number of organizations that are trying to assist the community has led to a series of overlapping projects with no coordination. Communication among organizations is an ongoing challenge and despite the common goal, staff poaching and changes frequently occur and disturb the progress of the project. Despite these ongoing challenges CARE has a comparative strength as a result of its 20-year presence in the region. NEXT STEPS

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George Odo came back from the Wednesday market in Garissa town where he had a chance to learn about all of the stakeholders in the livestock value chain in the district. Two important tasks were before him. First, to more clearly describe to his colleagues how the existing players in the market were related to each other - from small pastoralists through to terminal markets. Second, he needed to think about the most effective role for CARE to play in helping overcome constraints to make markets work for the poor.

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EXERCISE Your task: Draw a value chain diagram to clearly describe how the livestock market works in Garissa district (including how it is connected to the terminal markets in Nairobi and Mombasa). A generic value chain diagram is included in Appendix A. With this diagram in hand, and the overall objectives for the project that George has laid out, you now have a budget of $10 million over five years to design a market-based project to improve the livelihoods of small scale pastoralists in Garissa district. Your proposal will be presented to AusAID for consideration for funding. Use your value chain diagram to indicate how CARE will contribute to the functioning of the value chain. Note that there are at least three major ways that an NGO such as CARE can get involved in the value chain: as a service provider; as a service provider and a market linkage; and as a market facilitator. Each of these approaches is described in more detail in Appendix B.

Appendix A: Diagram of a Generic Value Chain

Understanding Value Chain Terminology A value chain can be understood as the set of enterprises that add value to a product or service from the initial inputs through various processes, to distributing and selling it to an end consumer. Enterprises are linked by a series of business transactions in which the product is passed on from one enterprise to the next. A value chain actor refers to all individuals, enterprises and public agencies related to a value chain. In a wider sense, certain government agencies at the macro level can also be seen as value chain actors if they perform crucial functions in the business environment of the value chain in question.

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Appendix B: Three General Types of Value Chain Intervention (Adapted from the value chain work of Engineers Without Borders)

Service Delivery

Service Delivery and Market Facilitation

Market Linkage

Service Delivery An NGO can become involved in the value chain by providing needed services to small-scale farmers and producers such as access to microfinance, crop or livestock inputs, veterinary services and basic business training. As indicated in the diagram above that shows a disconnect between small-scale producers and the formal commercial market, service delivery may address the short-term needs of farmers as long as project funding is available, but does not necessarily allow them to increase their incomes by establishing connections to larger markets. Service Delivery and Market Linkage The second general type of value chain intervention combines service delivery, as described above, with the NGO also playing a role in the value chain, buying produce from small-scale producers and selling it into the larger-scale commercial market. The NGO in this case becomes directly involved in the value chain itself, trying to address the missing market linkages between small producers and larger buyers. Market Facilitation The third role that an NGO can play in supporting value chains is the role of market facilitator. In this type of intervention, the NGO does not become involved in the value chain itself (i.e. it does not buy and sell goods), but instead, uses its resources to remove obstacles and bottlenecks that limit small scale producers from participating in the value chain. This can include

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guaranteeing loans, working to create economies of scale by aggregating the produce of farmers and making the business case for larger companies to purchase from small producers.

 

CARE International in Kenya 

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PART B: Getting Into the Value Chain

______________________________________________________________________________ It was now December 2007, three years after George Odo’s first planning visit to Garissa and his presentation of how he saw the livestock value chain and CARE’s market-based strategy for improving incomes of small-scale pastoralists (see Appendix C for the value chain diagram that George had constructed). George’s project idea, the Livestock Marketing and Enterprise project (LIME), had been funded by AusAID for $11 million over 5 years with the goal that pastoralists would increase their household incomes by receiving better prices for their livestock. George had identified the main problems that small-scale pastoralists faced in improving the productivity of their animals and accessing the market. They included inadequate: • knowledge of animal husbandry practices – including nutrition and veterinary care – that

resulted in poor quality of animals sold to the market; • information about market prices and bargaining power; • access to capital for purchase of livestock and herd maintenance; • transportation infrastructure that increased costs; and • access to markets beyond Garissa.

In response to these challenges, George devised a twofold plan that consisted of both a commercial pillar and social pillar. The commercial aspect focused on raising household incomes and improving livelihoods, while the social pillar concentrated on gender equality and HIV and AIDS awareness. The social pillar of the project had been created to meet donor funding requirements. BUILDING A LIVESTOCK TRADING COMPANY In order to raise income levels CARE made a strategic decision to take on the role of creating market linkages by becoming involved in the value chain itself. Looking at the critical challenges

______________________________________________________________________________ This case study was made possible with the generous support of the Australian Development Agency, AusAid. It was authored by Kevin McKague, PhD Candidate at the Richard Ivey School of Business, The University of Western Ontario, Shamim Noorani, Farouk Jiwa and Christian Pennotti of CARE with support from the staff of CARE International in Kenya. It is intended to serve as a teaching tool for internal staff trainings and external international development workshops.

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in the value chain, CARE decided that the best role it could take on would be to become an alternative buyer for pastoralist livestock. In this position, CARE aimed to establish itself as a social enterprise embedded in the livestock value chain. The business model called for CARE to establish groups of pastoralist livestock holders (Pastoralists Production Groups or PPGs) from which the organization would subsequently buy cattle for fattening. The PPGs were intended to improve cooperation among pastoralists, reduce their costs for transport and consolidate supply to reduce CARE’s purchasing costs. This approach was also intended to improve the collective bargaining power of the pastoralists over time. In addition to working with PPGs, CARE also established a contract with a large ranch to house and fatten the cattle until they were ready for CARE to sell them through forward contracts to slaughterhouses in Nairobi and Mombasa. The plan, if executed correctly, projected that CARE would be able to cover its operational costs for both the livestock operation and the social pillar of the project through the profits it would generate through cattle sales. The business model was expected to establish a demonstration that, once illustrated to be profitable, would be copied by other market actors. George initiated the process of setting up LIME by working with his staff to engage small-scale pastoralists around Garissa and organize them into PPGs. Initially this was challenging as the pastoralist community in the region tended to be individualistic and were wary of working with others. Ultimately, however, George was successful in organizing 537 members to form nine PPGs from pastoralists who were already trading weekly at the Garissa market. Once the PPGs were established, the LIME team provided them with guidance on animal husbandry practices as well as guidance on group organization and governance. George intended to staff the project with three trained technical CARE employees and a project officer. However, the project ultimately only operated under one technical staff member and no project officer. The CARE staff member was responsible for purchasing cattle from PPGs and did this by following basic guidelines for the weight of cattle to be purchased. The CARE staff member then worked with the community-based animal health workers to vaccinate the cattle and make sure they were free of disease. After the cattle were healthy the CARE staff member would then arrange for the animals to be delivered to a ranch or trucked to the terminal markets in Mombasa and Nairobi. Through this process, CARE hoped to make a profit. George and his staff member worked to establish the relationships necessary to enhance the value of the cattle purchased from the PPGs and ensuring CARE had a reliable buyer for fattened cattle. To mitigate the risk of potentially having cattle they were unable to sell, George sought to establish forward contracts with several ranches and terminal markets that would accept a range of animals and standards. George was able to negotiate formal contracts with 15 market providers that agreed to pay a set price per kilo for the cattle that CARE would deliver. He also explored partnerships with the larger-scale ranches in the region, eventually signing a contract

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with Laikipia Echuka Ranch, which was chosen due to its reputation for being one of the most successful dairy farms in the area. Echuka Ranch’s role was key to CARE’s business model in that the cattle purchased from the PPGs would be fattened at the ranch before being transferred to the slaughterhouses to meet the forward contract obligations. CARE’s agreement was that they would deliver cattle to the ranch and then after a few months of fattening the cattle would be sold. Echuka Ranch would pay CARE for the value of the cattle when they were originally delivered and would keep the additional profit. MEETING SOCIAL OBJECTIVES To meet the social objectives of the project, CARE decided to partner with a local organization focused on improving the well-being of women, SIMAHO. The organization’s responsibilities under the grant were to provide healthcare and HIV and AIDS information to PPG communities that were located on the periphery of the district. INITIAL RESULTS Though not all transactions went smoothly and George struggled at times to get LIME off the ground, three years into the project, the team had achieved some significant successes. Each participating PPG household saw an increase in the number of animals sold to the market from two to nine animals per year. At the pastoralist level, by selling to CARE, the annual incomes of PPG members increased by a range of US$700 to $1,200 per participating pastoralist over the course of the project. This increased market access due to CARE’s forward contracts for the cattle led to an added value of approximately US$170,000 to the livestock industry in the Garissa region. LIME was also successful in securing market contracts for pastoralists, improving the health of their livestock supply, and promoting HIV and AIDS awareness in the PPG communities. SIMAHO visited each PPG community once a month and assessed 100 people per visit on general ailments, nutrition, and HIV and AIDS. CHALLENGES George had developed the market-based intervention to sustainably improve the incomes of pastoralists and had adopted a model where CARE directly played the role of value chain actor. However, by December 2007, the project began to face a number of serious challenges. Staffing Challenges CARE had a major challenge in recruiting qualified staff from the commercial livestock sector to work for long periods of time in a rural area. The staff members that were recruited were relatively inexperienced in livestock purchasing, which ultimately led them to purchase animals based on weight without considering the age or body condition of the animals. This posed a

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significant risk to CARE’s business model as pastoralists became aware of CARE’s purchasing procedures and saw no incentive to supply them with stronger or healthier animals.

Lack of Financial Sustainability CARE’s strategic placement as an actor in the value chain with limited experience in the livestock industry led the enterprise to lose substantial amounts of money. This was largely due to the high purchase price CARE offered PPG members coupled with costs for veterinary care and transportation and the decreasing quality and quantity of livestock from PPGs. Frequently, the contracts CARE had established with the buyers defaulted due to a lack of clarity on quality expectations and capacity to produce livestock of the quality or quantity required by buyers in the market. In the face of these defaults, CARE was left to bear the losses. Aligning Business and Social Components CARE’s position in the livestock sector was also challenged by the decision to merge social activities with LIME’s overall objectives. With a long history of acting in the area strictly as a non-profit organization, the inclusion of a social focus within the otherwise commercial operations of LIME served to reinforce existing perceptions of market actors, and buyers in particular, that CARE was a charity. This perception made it difficult for the LIME team to negotiate favorable cattle prices, even though forward contracts were drafted to establish pre-agreed prices with the buyer. On the social component, LIME faced significant monitoring challenges to assessing the impact of the interventions. As a tangential component of the overall project, the HIV and AIDS work distracted project staff and resources from the commercial requirements of the enterprise activities. Laikipia Echuka Ranch Court Battle When CARE agreed to work with Laikipia Echuka Ranch they negotiated a verbal contract in which CARE would deliver a fixed number of cattle every month to the ranch, and after three months CARE would receive the profits from the consignment. The first consignment of cattle delivered by CARE was executed as planned but the following consignments resulted in Echuka Ranch defaulting on payment and rejecting CARE’s cattle. Due to defaulted payment CARE filed a law suit against Echuka Ranch. The case is currently still in arbitration court with Echuka Ranch admitting that they did not pay CARE. However, Echuka Ranch is justifying its non-payment on the grounds that the cattle CARE provided did not meet the agreed-upon terms.

PRESSING NEED FOR CHANGE As the challenges mounted and deepened, the project team convened a meeting in July 2007 with AusAID and expressed concern that the project would not be sustainable after the funding ended. AusAID reviewed the project in hopes of restructuring it in order to mitigate the various problems that were hindering the project’s success. With the benefit of hindsight, it was clear

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that the analysis and understanding of the market and the existing value chain were not sufficiently developed and used as a basis for the development of the project strategy. The project’s most pressing challenge was CARE’s active role in the value chain, which resulted in a significant loss of money. CARE also had difficulties practicing proper business practices as an NGO.   EXERCISE Your Task: It was clear that CARE needed to get out of being directly involved in the value chain. But what are the options? It is July 2007 and you have two years left in the project and $1.4 million left in the budget. Brainstorm a list of feasible options to maximize positive project impacts with a view to the sustainability of value chain improvements at the end of the project in 2009. Give consideration to the ease of implementation of the options, considering CARE’s organizational capacity and the area’s limitations. Refer back to your value chain diagram (or George Odo’s) if helpful and describe your options with reference to it.

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Appendix C: George Odo’s Value Chain Diagram of the Livestock Marketing and Enterprise Project

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CARE International in Kenya 

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PART C: Learning Towards Sustainability

TRANSITION TO LIPFUND After reviewing a number of alternative options, George and his colleagues decided to address the challenges facing the Livestock Marketing and Enterprise project by discontinuing CARE’s role of buying and selling cattle. Instead, CARE would implement a Livestock Purchasing Fund (LipFund). Initially, AusAID was very uneasy about the transition because it was rare for a project to be significantly changed midway through implementation. However, the project had numerous obstacles that could not be overcome, and CARE’s activity on the ground had been halted when it pulled out of the value chain in January 2008. AusAID reviewed LipFund’s proposal for one year and in July 2008 made the decision to approve the LipFund proposal and resume working on the livestock value chain in Garissa district until June 2009. In the spring of 2009, AusAID approved a further one-year project extension. THE LIVESTOCK PURCHASING FUND The main objective and goal of LipFund was the same as its predecessor project but the strategy to achieve them was different. Instead of being a value chain actor, CARE would play the role of value chain facilitator. In setting up the LipFund, CARE partnered with Equity Bank to develop a reliable source of finance for livestock traders and ranchers. The LipFund provides short-term lines of credit for traders and ranchers for working capital and to finance the purchase of livestock, feed and veterinary services. In order to ensure LipFund benefitted poor pastoralists, access to LipFund was contingent on traders and ranchers purchasing cattle from pastoralist groups that CARE had organized.

______________________________________________________________________________ This case study was made possible with the generous support of the Australian Agency for International Development, AusAID. It was authored by Kevin McKague, PhD Candidate at the Richard Ivey School of Business, The University of Western Ontario, Farouk Jiwa, Christian Pennotti and Shamim Noorani of CARE with support from the staff of CARE International in Kenya. It is intended to serve as a teaching tool for internal staff trainings and external international development workshops.

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Under the facilitation strategy, CARE invested US$450,000 to create the Fund. However, the Fund would be entirely administered by Equity Bank. This allowed Equity Bank to interact with potential clients on purely commercial terms. Value chain actors accessing the LipFund would not know of CARE’s involvement. The financial institution would interact directly with the beneficiaries and conduct business practices under their own name. By masking CARE’s participation the project would avoid the barriers it faced to conducting business transactions as a socially oriented organization and generate a profit in a socially appropriate way that would not distort the community’s view of CARE. The approach also established the potential that Equity Bank would, once the Fund succeeded, begin to invest its own capital in the LipFund establishing a sustainable financial vehicle that did not need CARE’s investment. To achieve the social component of the project CARE continued fostering its partnership with SIMAHO. Equity Bank and SIMAHO are the main partners in the project and share responsibility with CARE to achieve its objectives. SELECTION OF EQUITY BANK CARE placed an advertisement in search of a financial institution that could manage a livestock purchasing fund. Several banks that catered to small borrowers and focused on small- and medium-sized enterprise development answered the ad. The top three institutions that CARE considered for the position were Equity Bank, Family Finance Bank, and K-REP Bank. After evaluating the strengths and weaknesses of each institution, Equity Bank was selected due to its presence across Kenya including branches in Garissa district. Other reasons for selecting Equity Bank included its reputation as being the leading micro-finance bank in the country as well as its experience in providing financial services to the agriculture sector. Equity’s structure also differentiated it among the other banks; Equity has an agriculture credit department that is divided into crops and livestock, and at the branch level there is a designated officer devoted only to livestock. Once the financial institution was selected, CARE and Equity Bank worked together to develop criteria that eligible borrowers needed to meet in order to be approved for a loan. Equity Bank would receive the US$450,000 that CARE had allocated for the Fund in two transactions in the form of a line of credit and pay CARE back the amount at an interest rate of 3% per annum. In return, Equity Bank would offer what it called a “Mifugo Biashara” livestock purchasing loan. The amount of money advanced would be dependent on the applicant’s risk assessment and be done in accordance with the bank's credit policies and procedures. The loan would be available and accessible to livestock traders or brokers who purchased cattle from CARE-registered PPGs. The traders or brokers had to have a signed contract with the pastoralists in order to apply for the loan. Loans would be offered for up to US$6,600 (Kshs 500,000) unsecured or up to US$66,000 (Kshs 5 million) secured. The interest on the loan would be 13% with 3% due to CARE and 10% due to Equity Bank. In addition to the loan product, Equity Bank also offered a savings account for PPGs to better facilitate payment for their livestock. A savings account for the remittances of

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their proceeds instead of cash payment for the sale of their livestock was also developed in hopes that it would lead to savings for the community. After deciding upon the fundamentals of the loan, CARE and Equity Bank legalized their partnership by signing a Memorandum of Understanding (MOU) in January 2009, six months after the project was initiated. The Memorandum stated the objectives of the fund and outlined each party’s responsibilities. CARE’s main responsibilities were to identify and recommend potential clients to Equity Bank, place a deposit to cover the total lending under the program, and assist the bank in collecting debts in cases of default. Equity Bank’s main responsibilities were to receive and process applications, disburse loans to livestock traders and ranchers, and pay the agreed interest on the Fund to CARE quarterly. Jointly the two parties agreed to share the responsibility of monitoring and evaluating the loan to make continuous improvements. Once LipFund was approved, a new staff member was recruited to implement the project. The new LipFund staff consisted of two individuals who facilitated and operated the project to meet its commercial and social objectives: a fund administrator based in Nairobi and a field coordinator based in Garissa. The fund administrator worked closely with the financial institution to monitor and manage the fund, and the field coordinator supported the pastoralist producer groups and provided technical support to the community based health organization. LIPFUND ACHIEVEMENTS As of October 2009, LipFund had disbursed eight loans to brokers and traders totaling almost US$5,000. A major achievement was removing CARE from its previous role as a value chain actor. CARE’s dominant role in the value chain in the LIME project was the central problem and was the main driving force for the switch to the LipFund model. CARE’s new role is more of a value chain facilitator than a value chain operator. In addition, because CARE is no longer an actor in the value chain PPGs have networked with terminal markets and established their own contracts to sell their cattle. PPGs have gained independence and recognition in the livestock market as established traders, which was the main objective of the project to begin with. LIPFUND CHALLENGES

“In building learning organizations there is no ultimate destination or end state, only a lifelong journey.”

-Peter Senge, The Fifth Discipline

In addition to the accomplishments, however, one of the major problems LipFund faced was that the Fund was not being accessed by the target groups of brokers and traders. This may have happened as a result of a number of challenges.

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First, LipFund was proposed to AusAID for review in 2007 and approval was received one year later. The delay and the several months of project inactivity in 2008 severely weakened the project and CARE’s relationship with the various stakeholders. In addition, staff changes occurred during the transition from LIME to LipFund and communication during the transition was not ideal. A large portion of project documentation as well as tacit knowledge about the project was lost. Once LipFund was approved in July 2008 a fund manager and field coordinator were recruited, but shortly after the project’s inception, the fund manager left the team and was replaced months later by an emergency relief coordinator. The lone field coordinator has been responsible for monitoring nine PPGs monthly. This task is overwhelming for one person and additional support is needed. In addition to poor internal staff communication, there was also poor communication with stakeholders on the status of the project and the changes that would occur with the shift to LipFund. For example, the private sector was not consulted about the change, and a revised market assessment was not conducted.

Communication was a major challenge between the LipFund team members and Equity Bank, with neither party following through with the terms agreed upon in the MOU. In a subsequent review, the financial institution selection process was found to be poorly documented. In addition within the community that LipFund operates in, there is hostility towards Equity Bank because they are not Sha’ria compliant. A majority of the pastoralists in the project area are Muslim and they live in accordance with Sha’ria law which prohibits paying interest. The fact that interest is applied to loans has severely hindered the project’s marketability and slowed its uptake in the community. Other issues that Equity Bank is experiencing in marketing the loan is that as an institution they require collateral from their borrowers; however, in the project area, title deeds are not common and there are rarely any documents to support claims of property ownership. Due to inadequate collateral, many applications are rejected due to the borrowers being too high of a risk for Equity Bank to approve.

Interestingly, however, six months after LipFund was implemented in Garissa, a USAID-funded livestock financing loan program was established through a partnership with First Community Bank, a small Islamic bank that was not established in Garissa when CARE selected its financial institution partner. First Community Bank’s product aims to finance livestock traders and has achieved greater success than LipFund due to the bank’s awareness of its Muslim clients and the simpler application process. The product that First Community Bank is marketing is identical to the Mifugo Biashara, but the main difference is that First Community Bank sidestepped the central problems that were preventing the Mifugo Biashara loan from taking off: Sha’ria compliance and proof of title deeds and other forms of collateral. First Community prides itself on trust and brotherhood, which are the fundamental underpinnings of the Islamic faith and therefore requires reference letters signed in honor as opposed to ones notarized.

SUMMARY OF LESSONS LEARNED Back in his office, George Odo placed the elaborately ornamented cow horn carefully into its moving box. Although he was no longer directly involved in managing LipFund, he had paid

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close attention to its evolution – both accomplishments and challenges. Ultimately, LIME and LipFund had been a valuable learning experience for him personally and for CARE as an organization increasingly engaged in working with value chains, private sector companies and markets to harness their potential to improve the livelihoods of the poor. If nothing else, George thought, he would take with him some important lessons: Market Level Perspective To achieve sustainable impact at scale, value chain facilitation organizations must understand the full scope of the market (including service providers) including the incentives, norms, attitudes, rules and other factors that govern how it operates. A clear understanding of existing market dynamics would be required for the success of future value chain projects. NGO as Value Chain Facilitator The role of NGOs such as CARE should usually be to facilitate and strengthen a value chain to benefit low-income producers and employees, not take on a direct role as a business in the marketplace. Value chain facilitation requires engaging multiple actors within the value chain and then establishing systems to gather and act on signals from a broad cross-section of market actors. The opportunity costs of alternative approaches should be highlighted. A major problem in LIME was that CARE was seen as a welfare organization and the community disapproved of it trying to make a profit. By partnering with a financial institution CARE was able to make a profit and conduct business in a socially appropriate way. Project Focus Splitting the focus of a project across related but unintegrated issues - i.e. social and economic - can detract in multiple ways from the ability to achieve either one. All activities must be clearly aligned with the core objective of economic sustainability. Partnering Partner selection (public, private and non-profit) is critical and must be driven by clear, objective criteria and a consistent process. The process needs to be informed by relevant business and technical expertise. MOVING FORWARD Moving forward, as CARE became increasingly involved in market-based approaches – including a US$5 million dairy value chain project in Bangladesh funded by the Bill and Melinda Gates Foundation, a US$3 million agricultural supply chain project in Zambia funded by the Alliance for a Green Revolution in Africa and a US$1 million multi-country initiative funded by the Wal-Mart Foundation working in agricultural value chains in India and Peru – both George and CARE would have the capability to facilitate pro-poor, economically viable changes in private sector value chains and markets.

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EXERCISE What additional lessons could be drawn from CARE’s experience with the LIME and LipFund projects?

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