English for Cross-National Analysis

0615783cov.qxd 3/15/06 5:29 PM Page 1 Environmentally and Socially Sustainable Development (ECSSD) Public Disclosure Authorized THE WORLD BANK Europe and Central Asia Region in EasternEuropeandCentralAsia The Dynamics Coordination inAgrifoodChains ofVertical Working Paper No. 42 Public Disclosure Authorized Public Disclosure Authorized CASE STUDIES The Dynamics of Vertical Coordination in Agrifood Chains in Eastern Europe Public Disclosure Authorized and Central Asia THE WORLD BANK edited by Johan F. M. Swinnen Washington, D.C. 37050 Working Paper No. 42 CASE STUDIES The Dynamics of Vertical Coordination in Agrifood Chains in Eastern Europe and Central Asia edited by Johan F. M. Swinnen Environmentally and Socially Sustainable Development (ECSSD) Europe and Central Asia Region THE WORLD BANK This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission to repro- duce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 22 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected]. Contents Acknowledgments v Acronyms and Abbreviations vii CHAPTER 1 Introduction 1 Johan F. M. Swinnen 2 A Comparative Study of Agrifood Chains in Moldova, Armenia, Georgia, Russia, and Ukraine 5 John White and Matthew Gorton 3 Vertical Integration in an Agroindustrial Complex: Agrofirms and Agroholdings in Russia 45 Ekaterina A. Gataulina, Vasiliy Y. Uzun, Alexander V. Petrikov, and Renata G. Yanbykh 4 Vertical Coordination in the Cotton Supply Chains in Central Asia 73 Marc Sadler 5 Foreign Investment and Vertical Coordination in Supply Chains in Europe and Central Asia: Lessons from Dutch Agrifood Companies 115 Siemen van Berkum and Jos Bijman iii Contents 6 A Comparative Study of Vertical Coordination in the Dairy Chains in Bulgaria, Poland, and Slovakia 135 Liesbeth Dries and Nivelin Noev 7 Restructuring and Vertical Coordination in the Dairy Sector in Romania 167 Siemen van Berkum iv Acknowledgments The case studies were financially supported by the World Bank under the ESW “The Dynamics of Vertical Coordination in ECA Agrifood Chains: Implications for Policy and Bank Operations”; and by the Bank- Netherlands Partnership Program (BNPP) with the grant “Vertical Coordination in ECA Agrifood Chains as an Engine of Private Sector Development: Implications for Policy and Bank Operations.” Steven Jaffee, Richard Henry, Csaba Csaki, and Ali Mansoor reviewed the study proposal and provided very useful comments and suggestions. William Sutton, Maria Amelina, and Maurizio Guadagni advised on the preparation of the study. Mark Ludwick, Karin Rosskopf, Gail Lee, and Maria Gabitan provided editorial assistance. Benoit Blarel, sector man- ager, and Laura Tuck, ECSSD director, provided much appreciated en- couragement and critical guidance throughout the duration of the study. v Acronyms and Abbreviations ADB Asian Development Bank AFER Agency for Foreign Economic Relations AIB Agroinvestbank BNPP Bank-Netherlands Partnership Program CARs Central Asian Republics CEE Central and Eastern European Countries CIS Commonwealth of Independent States ECA Europe and Central Asia EU European Union FAO Food and Agriculture Organization FBC Foreign Business Companies FDI Foreign Direct Investment FIP Farm Improvement Plan FSU Former Soviet Union HVI High Volume Instrumentation IFDC International Fertilizer Development Center IFI International Financial Institution IMF International Monetary Fund ISPA Instrument for Structural Policies for Pre-Accession NYCE New York Cotton Exchange RAS Rural Advisory Services RF Russian Federation SAPARD Special Accession Programme for Agriculture and Rural Development SIPU Swedish Institute for Public Administration TUGE Tajik commodities exchange UPS UzPakhtaSanoatish USDA United States Department of Agriculture VC Vertical Coordination WB World Bank vii 1 Introduction JOHAN F. M . SWINNEN A major problem in the Europe and Central Asia (ECA) agricultural sector and rural areas during the transition was the breakdown of the relation- ships of farms with input suppliers and output markets. The simultane- ous privatization and restructuring of the farms and of the up- and downstream companies in the agrifood chain have caused major disruptions. The result is that many farms and rural households face serious constraints in accessing essential inputs (feed, fertilizer, seeds, capital, etc.) and in selling their products. The problems are worsened by the lack of public institutions necessary to support market-based transactions, such as for enforcing property rights and contractual agreements. In the absence of appropriate public institutions, private contractual initiatives, often from large food and agribusiness companies, are emerg- ing to overcome these obstacles. Large traders, agribusinesses, and food processing companies, often as part of their own restructuring or follow- ing foreign investment, start contracting with the farms and rural households and provide basic inputs in return for guaranteed and quality supplies. This process of interlinked contracting is growing rapidly in ECA agriculture and rural areas. These private contract initiatives can be quite substantial. Empirical evidence indicates that they include farm management assistance, extension services, quality controls, farm input assistance programs, trade credit, and even bank loan guarantees. The programs generate important improve- ments in the credit situation of the farms, as they contribute directly to 1 WP 42 Case Studies improved access to finance (e.g., through trade credit), and indirectly as they improve contracting farms’ access to loans from banks or external financial institutions (through loan guarantees, enhanced farm profitabil- ity, and improved future cash flows). Arguably, the transition disruptions and contract enforcement problems have been even more severe in the rural credit markets than in other markets. In combination, the direct and indirect effects of the farm assistance programs create important benefits for the farms and households supplying to these companies; they lead to improved input access, productivity, product quality, and market access. There is increasing evidence that these processes have been growing and have been an engine of productivity growth in the agrifood supply chains of ECA countries. Yet, several important issues are unresolved on this process of vertical coordination. Specifically, related to the efficiency implications, remaining questions include: Under which conditions does such a process emerge spontaneously? Which are the key policy factors in this process? What is the role of foreign direct investment (FDI) in this process? What triggers beneficial spillover effects to other companies and suppliers? How general are these developments? Are they limited to cer- tain subsectors? In which sectors is this process more likely to emerge? Does an optimal model of contracting exist? Are there ECA specific fea- tures of these vertical coordination programs? Concerning equity implications, key questions include: Does this process of vertical contracting lead to the exclusion of small farms? Does the emergence of contracting with downstream companies lead to rent extraction of farmers by creating dependency? Finally, several policy issues need to be addressed. Is it sufficient for the government to create the right environment for private investments in the food industry and agribusiness in order to set this process in motion? If so, which are the key policy factors in this process? How can government policies or interventions contribute to the emergence of these institutions and to desirable efficiency and equity effects? These questions were the focus of a major study organized by the World Bank. The objective of the study was to analyze vertical coordination (VC) in agrifood supply chains in ECA and to identify options for improved policies, institutions, and investments which Governments could make, and which the World Bank could support, in order to improve links in the agricultural marketing and processing chain and increase access of farmers to input and output markets. This is especially important in those countries where contractual arrangements are slow to develop. It is also important if farmers are to be lifted out of subsistence farming and into

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