Global Young Leaders Programme Aceh Project 2009

Strengthening the Cocoa Value Chain for Sustained Growth in Aceh

Table of Contents
Section 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Table of Contents Executive Summary Background Business Opportunity Business Model Governance Structure G St t Production and Operations Marketing Strategy Human Resources Community Benefits Financial Analysis Risk Assessment and Mitigation Implementation Plan Conclusion Appendix, Closing and List of Participants Pages 36 7 12 13 18 19 29 30 34 35 46 47 49 50 - 53 54 66 67 74 75 76 77 79 80 81 82 84

Section 1:

EXECUTIVE SUMMARY

Executive Summary
Introduction
Emerging from nearly 30 years of conflict, post-tsunami years post tsunami Aceh presents vast untapped business opportunities in resource-rich North Sumatra, Indonesia. Leveraging the global shortfall in quality cocoa supply and the production potential of Acehnese smallholder farmers, we present a creative proposition of bringing together various stakeholders through a corporate vehicle sourcing cocoa directly from farmers in Pidie District, Aceh. d ect y o a e s d e st ct, ce Farmers, traders, exporters and buyers will share ownership in a profit-driven yet socially-committed enterprise, Alami Kado PT. Alami Kado aligns interests of p , g all parties by restructuring the existing supply chain and improving farmer capabilities and consistency in cocoa quality in the Pidie cocoa value chain.

Executive Summary
Alami Kado Key Success Factors:
Alami Kado achieves alignment of interests through:

Providing market access and a clear price signal for farmers to upgrade their processes and cocoa
quality, thus improving livelihoods Providing technical training and assistance to farmers through strong and long-term partnerships with NGOs and/or donor agencies Strategically positioning buyers to leverage on existing local networks and gaining direct access to suppliers Maintaining a close relationship and obtaining support from local government Being true to its roots in Aceh, Alami Kado will propel Pidie to the global cocoa supply scene.

Alami Kado Operations and Processes:

The focus is to streamline and simplify farmers activities. This is based on getting them to provide consistent quantities of quality wet beans Wet beans are collected through a system based on existing beans. logistical networks for processing at 6 units conveniently situated close to Pidie cocoa farms. One central warehouse will be strategically placed in Biruen (50 km from new port Krukuh) for packaging and shipment. Through a tiered pricing system, and effective corporate governance, Alami Kado ensures that value gain is channeled throughout the value chain. This will be supported by investing in training the farmers.

Executive Summary
Alami Kado Key Facts: Once initial f di of USD1 031 000 i obtained th O i iti l funding f USD1,031,000 is bt i d through share capital, h h it l Alami Kado will work towards the following targets: Increase production levels from 450 tonnes/hectare at present to 825 tonnes/hectare in Year 5 Train 4000 Pidie cocoa farmers by year 3 Distribute profits to shareholders by year 4 Achieve three-fold increase in farmers income by year 5 yy

Section 2:

BACKGROUND
Background to Aceh History and Demographics Cocoa Industry in Aceh Challenges

Background to Aceh
Map of Aceh and General Information
Located on the northern tip of the island f Sumatra th i l d of S t Strategically located within the vibrant economic triangle of Malaysia, Si M l i Singapore and d Indonesia 98.6% of population in Aceh is Muslim M li Aceh is rich in natural resources especially oil, gas and conducive f agriculture d d i for i lt Rice, coffee and cocoa are the main agriculture products in Aceh A h
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Aceh
History and Demographics
The History
30 years of conflict ended in 2005 bringing peace and economic development opportunities to Aceh Aceh was heavily damaged by the Tsunami in 2004 and the economic losses amounted to 97% of Acehs GDP In the post tsunami era, Aceh s economic growth era Acehs has been primarily driven by reconstruction/ rehabilitation efforts supported by domestic and international aid The future depends on a self-sustained economy self sustained Population (2005): 4,010,539 Land Area: 57,365.57km2 GDP Growth (without oil and gas,2006): 7.7% GDP Per capita (2006): US$1,962.75 Net Export (% of GDP, 2007): 31.1%

Demographics

(Source: Aceh Economic Update, 2007, The World Bank)

Cocoa Industry in Aceh y

Indonesia has been the worlds third largest cocoa-producer since the 1980s. Despite high end chocolate fetching upwards of US$200/kg among affluent consumers, the average price paid to farmers in Indonesia for their cocoa beans can be as low as US$2.00/kg Cocoa has been identified as the major priority crop by the Aceh government for economic development and has received support from UNDP/APED Global demand for cocoa has been outstripping supply to the extent that prices were up 30% (Cadbury, 2008) All cocoa grown in Aceh is currently traded through Medan and transported by road Cocoa is easily established within existing farm systems as a cash crop and provides a quick and regular i l income
10

The number of cocoa farmers in Aceh is about 90 000 abo t 90,000

Challenges facing Cocoa Industry in Aceh

Productivity Challenges
Inconsistency in the supply of high quality cocoa Yield losses due to poor crop management, pests and disease problems Low cocoa farming skills amongst farmers Cocoa farmers lack adequate working capital ki it l Low farm gate prices and lack of price differentiation for quality cocoa lit
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Organizational Challenges
Lack of effective organization and mobilisation amongst cocoa farmers and others Lack of effective infrastructure in collection, processing and g warehousing Ineffective coordination and communication between major supply chain stakeholders and support groups

Overall Scenario
The aid assistance including funding from donors is in decline hence threatening the sustainability of Acehs economic recovery unless self-reliant economic activity commences Unstable supply from leading producer countries such as Ghana, Ivory Coast and Indonesia has motivated buyers to not only secure cocoa b beans early, b t also i l but l invest i t in farmers to improve yields and quality. Consumer demand for organic fair trade and organic, specialty products has driven exporters such as Armajaro, Olam and others to pay closer attention to traceability and supply chain issues
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Section 3:

BUSINESS OPPORTUNITY
Background of Opportunity: Drivers and Conditions Market Opportunity Investment

13

BUSINESS OPPORTUNITY:
Drivers and Conditions
Chocolate consumption increasing with improving prosperity worldwide. The supply of cocoa is also subject to volatility due to political instability from years of conflict in the producing nations. Indonesia is one of the four regions in the world which p g produces significant volumes of cocoa. Aceh is a rich and diverse province which is located within the vibrant economic triangle of Malaysia, Thailand and northern Sumatra. Post tsunami and conflict resolution has lead the people of Aceh to commit to improving their standard of living and this includes reviving the cocoa industry. Sustained economic activity is key to the alleviation of poverty and raising the income of farmers. The building of a commercially well managed cocoa industry in Aceh can be a key contributor to economic growth in Aceh.

ACEH COCOA

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BUSINESS OPPORTUNITY:
Market Opportunity
There is significant potential to produce higher grade cocoa through simple but well managed production process throughout the supply chain. chain Potential increases in productivity can be realized through a business forum. Production in Aceh currently averages 400 kg per ha. as opposed to the international benchmark of 1000 kg per ha There ha. exists great potential to increase production through a new business model. There is potential to increase the land areas for cocoa cultivation p through rehabilitation of land which has been neglected (24,739 ha Aceh). Organized domestic production and supply of good quality cocoa will increase the confidence of buyers in Aceh cocoa. Through simple but creative training programmes and technical assistance for the farmers, quality cocoa could be produced which will lead to l d t an i increase i th opportunity f i t in the t it for international t d ti l trade.

ACEH COCOA

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BUSINESS OPPORTUNITY:
Investment

Improvement in productivity and increasing in crop areas will boost cocoa revenues in Aceh. This will both need and present investment opportunities. A well structured b i ll t t d business model and i l d l d implementation plan will t ti l ill attract potential investors and help secure financial assistance from donors thereby transforming the supply chain in the industry.

ACEH COCOA
The high price for cocoa being traded in the commodity market is a reflection of the sustained demand for the product. This should ensure good returns for investors. Added benefit is the high social impact as per capita farmer income is projected to increase by threefold in 5 years, presenting a winwin situation.

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BUSINESS OPPORTUNITY:
Profits with high social impact
Three-fold increase in farmer per capita income in five years Farmer Income Per Capita Farmer's Income Per Capita (USD)

USD

1,000 800 600 400

792 626 302

Current

865

989

200 -

460

Y1

Y2
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Y3

Y4

Y5

PIDIE DISTRICT
The Pidie District of Aceh lies on the North Eastern area of the island Banda Aceh local government has designated Pidie as a cocoa growth area Cocoa production in Pidie began in 1980 with local communities planting cocoa plants with government assistance Cocoa can be considered as the main perennial crop in Aceh involving thousand of small holders The number of cocoa farmers in Pidie district is approximately 8,500 The area under cocoa has gradually increased over the years. The cocoa growing area in Pidie District extends from low altitude (close to sea) to the high lands near the mountains.
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Section 4:

BUSINESS MODEL
Aceh Cocoa Industry Constraints Demand and Supply Constraints D d dS l C t i t Key Success Factor Alignment of Stakeholders Strategic Positioning in the Value Chain Shareholding and Management Structure g g Proposed Structure Proposed Solution - Operations Rationale and Benefits of New Company

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IV. Business Model

Aceh Cocoa Industry Constraints
Cocoa has grown into a major income stream for smallholders in Pidie over recent years. However, Continued growth is affected by inconsistent and poor quality bean production. Widespread pest infestation (e.g. from the cocoa pod borer) is a major cause of poor cocoa bean quantity and quality. Despite t i i i iti ti D it training initiatives, th adoption of the d ti f improved farming and post-harvest methods has been limited Farmers are poor and lack access to capital. The sector suffers from lack of alignment of interests amongst various parties.

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IV. Business Model

Demand and Supply Constraints
Demand Constraints Supply pp y Inertia

Demand Constraints Multi-national buyers, processors and manufacturers want to improve the quality and consistency of their raw materials. To achieve this, they need to establish closer and more efficient supplier relationships. However, they: lack incentives to move their procurement operations closer t th f ti l to the farmers without ith t any guarantee or influence over the supply process. face resistance from entrenched local traders.

Supply Inertia Farmers would like to receive higher prices for their crops via a direct relationship with buyers as opposed to traders. However: The market offers little price differentiation for higher quality beans. Therefore, smallholder farmers have little incentive to upgrade their production and post-harvest practices. At the same time cocoa bean collectors and traders have little incentives to upgrade their supply chain

Solution:
Create a company that aligns interests

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IV. Business Model

Company s Companys Strategic Positioning
Domestic Production
Local Collector Local Exporters

International Production
Regional Processors

Multinational Manufacturers

Food Markets

Smallholder Farmers

Multinational Processors

Local Trader

Multinational Affiliate Exporters

Multinational Traders

Multinational Processors and Manufacturers

Cosmetic Markets

Legend: Raw Product

Processed

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IV. Business Model

The Company p y

The brand l Th b d colours th t h that have b been chosen have their own meaning and representation. Light brown represents cocoa White emphasizes purity and White peace elements

In the Acehnese language, Kado means A gift and Alami means Natural

Red represents the communitys p y richness in culture.

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Partnership Architecture:
Farmer Training and Stakeholder Dialogue
Buyers/ Investors $ Price Signal Donor / Financing Agencies g g Partnership

Buyer

Buyer

FARMER TRAINING

Partnership

Technical Assistance

Partnership

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IV. Business Model

Companys Business Model: Alignment of Stakeholders
Maintain close and effective interaction with local government. Gain development support for the local cocoa industry Anticipate and mitigate impact on the company arising from potential government action or intervention.

Government Buyers an Processors nd s NGO / Donor agencies Form effective partnerships with donor agencies and NGOs. Benefit from their expertise and resources in providing training to smallholder farmers. Convince key p y y players that they will y benefit from moving procurement closer to the supply. Buyers leverage on existing local networks while minimising opposition from local traders.

Local Farmers & Traders Link farmers and collectors to a ready market, which requires consistency in i supply and quality. l d lit Provide impetus for farmers to organise themselves at the local level and upgrade their processes. Empower farmers with the capacity to access and adopt better practices and also to be able to respond to market opportunities. Allow participation of farmers, collectors and traders at shareholder level.

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IV. Business Model

Proposed Solution
Shareholding & Management Structure
The formation of a for-profit company, Alami Kado PT brings all together key cocoa stakeholders (farmers, traders, exporters and end buyers) as shareholders.

Proposed Shareholding Structure

Alami Kado PT will have four primary shareholders Exporters and Buyers/ Investors will provide cash for 30% stake each Co-op shareholding of 20% is contributed as sweat equity Collector / Trader shareholding is suggested at 10% cash, 10% contributed via sweat equity

Alami Kado Proposed Shareholding Structure

Exporter 30% Co-Op, 20%

Buyer(s)/ Investors

30% Trader, 20%

Proposed Management Structure

Management Structure: Alami Kado PT will employ a CEO g p y who will manage the day-to-day operations (including field officers and processing and warehouse). The company will have a Board of Directors to advise management.

Alami Kado Management Structure

HQ

HQ Operations

Field Mgmt, Warehouse Field Mgmt, Processing Centres

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IV. Business Model

Proposed Solution - Company Structure
Formation of Alami Kado PT: Aligning interests of all stakeholders
Shareholding g Structure Operating Company Business Activities Partners
Farmer Loans NGO Farmer Training and Welfare Bean Processing Aceh Government Storage and Packaging Transportation Services Co-Op C O Collector / Trader Exporter E t Buyers / y Investors

Donor Agencies

Stakeholder Objectives in Alami Kado PT

Farmer - Receives loans, training and processing support to grow p better crops Collector / Trader Trader - Operates buying units and QC cocoa - Together co-op and trader, leads and organizes farmers Exporter - Plays key role in providing technical expertise in g g designing processing units and warehouse
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Buyers / Investors Investors - Gains direct access to suppliers

NGO / Donor Agencies Agencies - Provides funding and/or technical training to farmers, collectors or traders

Aceh Government Government - Develop infrastructure for processing unit and warehouse

IV. Business Model

Proposed Solution Operations
Alami Kado PT aims to boost the farmers capabilities and generate revenue via the following activities:
Company Function p y Processing, Storage and Packaging Description p The company will operate: - 6 Processing Units, serving approximately 300-400 farmers in the surrounding vicinity with fermentation, drying and sorting services. - 1 centralized Warehouse, to store cocoa beans and ensure the highest quality before shipping th lit b f hi i them t b to buyers. To alleviate farmers capital constraints through microloans as well as crop and personal insurance options. Support farmers to sell their goods and promote Aceh cocoa. Focus training on farmers, collectors and traders in collaboration with key partners. The company will facilitate the provision of these services with the partners.

Loans, Finance and Insurance Services Trade Facilitation and Marketing Technical Assistance and Training

In support of its business aims, the company will operate facilities including: Processing and collection units Warehouse Transportation services Alami Kado PT will establish partnerships with key interested parties including the UNDP, Swiss Contact, the Aceh Government and NGO th A h G t d NGOs.

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IV. Business Model

Rationale and benefits of new company
1. The company provides a vehicle bringing together the interests of all parties, with direct economic benefits to farmers. farmers 2. Farmers gain: Loans as working capital, critical to enabling their daily cash flow needs. T h i lt i i Technical training, enabling f bli farmers t f to focus th i efforts their ff t on boosting quality in their cocoa beans. Direct access to a ready market of international buyers and exporters, providing understanding of their ultimate buyers needs. buyers needs Possible dividend payouts from the company. 3. Collectors and traders are acknowledged as crucial to Pidie districts cocoa production as they enable and can help organise the farmers. 4. International buyers and exporters b 4 I t ti lb d t benefit f fi from: Direct links with their supply source, ensuring the desired quality in production process. Consistent cocoa supply at pre-negotiated prices. Traceability of cocoa to the original supply source.
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Section 5:

GOVERNANCE STRUCTURE
Proposed Governance Structure Governance Obligations and Actions Board of Directors Memorandum of Understanding

30

V. Governance Structure

To ensure consistent financial performance in Indonesia s Indonesias challenging business environment environment, transparent and effective corporate governance is vital. vital

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V. Proposed Governance Structure:

Ensuring Competitive and Consistent Performance
Corporate Structure Legal Structure
Articles of Association Shareholders Agreement Transparent and p accountable Audit Board of Directors Management Agreement Ensures fair representation of and profit-sharing between all shareholders Ensure implementation of best management practices

Shareholders

Management Team

Partners Pidie District Government Technical Advisors (eg UNDP, Swiss Contact) Memorandum of Understanding Ensure long-term active partnership in the Pidie cocoa value chain

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V. Governance Obligations and Actions:

Board of Directors
Obligations Actions

Set S t corporate values t l Provide strategic direction and management Set corporate governance standards Oversee financial reporting Ensure l E legal compliance l li Implement HR best practices
- Fair wages - Health and safety standards - Employee training

A t in b t i t Act i best interests of Alami K d PT t f Al i Kado Attend regular and ad-hoc meetings as required by the business Adhere to company procedures M i t i open flow of information Maintain fl fi f ti Provide full disclosure of personal interests Maintain diligence and competence

Implement risk management and internal controls

Operational Financial Environmental Social

Implement environmental and social best practices

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V. Proposed Governance Structure:

Memoranda of Understanding
Partner MOU ensures provision of: land for warehouse

Pidie District Government

road networks to speed up logistical process other infrastructure

Memorandum of Understanding

Partner MOU

Donors provide funding for technical assistance (e.g. UNDP, USAID, Swiss Contact)

Provides funding framework Defines precise role of technical assistance Identifies opportunities for technological improvement and logistical streamlining Governance oversight

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Section 6:

PRODUCTION AND OPERATIONS

Farmers Operation and Process Collector Activities Processing Units Warehouse Summary of Transactions in the Supply Chain Productivity Density of Pidie Cocoa Area Numbering of Processing Units Seasonal Distribution of Cocoa Harvest Cocoa Harvest Analysis Most Efficient Transportation Arrangement

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Farmers Operation Process p

Training

Cocoa Pod Collection

Pod Open for Beans

Wet Bean Waiting for Collection

Collectors pick up Beans

1) Farmers collect pods daily in their respective areas. 2) After pods are collected, farmers then open pods to release beans. 3) Beans are then spread out for 2 hours or until collectors pick them up up.
Total Time: 1 day Final Output: Wet and Dry Beans Wet Price Farmers get: 17,000 per kg

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Collector Activities
Training

Collectors Gather Beans

Farm Gate Quality Control -Size -Mold -Disease

Farm Gate Record Keeping

Beans transport to Processing Units

-Farmer ID (Basket Label) -Weight (25 Kg minimum = 300 Pods) -Payment

1) C ll t Collectors gather b th beans (b th wet and d ) (both t d dry). 2) Quality Control for size, mold, and diseases. 3) Record keeping for traceability and weight. Transaction happens here if beans pass quality control. 4) C ll t Collectors th t then transport the beans to processing units (PU ) t th b t i it (PUs).
Total Time: 1 day Final Output: Beans and Records

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Processing Units
Owned and Operated by Alami Kado PT
(5 7 days)
Purchase by Company Fermentation

(2 4 hrs)
Soaking in Water

(5 6 days)
Drying by Solar Dryer and other methods

(5 6 hrs)
Packing & Sorting Transport to warehouse

1) 2) 3) 4) 5) 6)

PU accepts the bean for quality control and the record for accountability Transaction happens here accountability. here. Workers place beans in fermentation boxes with identification tags. Ferment for 5 7 days with mixing of bean every 2 days. Fermented beans are soaked in water for 2 4 hours. Workers then place soaked beans on solar dryers and other dryers. Drying takes 5-6 days. Solar dryers help minimize mold, maintain temperature, and can be operated in rainy season. Workers then sort dry beans to sort for quality and pack them in bags ready to be transported to the warehouse. Batches of beans with consistently low quality can be identified for accountability at the farmer level.

Total Time: 11 14 days Number of Employee: 5 p y Equipments: Fermentation, Drying, Sorting, Packing, Computer

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Warehouse (One for Company)

Owned and Operated by Alami Kado PT

Trucks collect dry beans from PUs

Quality Control and Record Keeping

$$

Storage

Sale to Buyers

1) 2) 3) 4)

Trucks sent to gather bags of dry beans from processing units and return to warehouse. Bags unloaded from the trucks for quality control and record keeping (computerized). Bags are put into storage facility/warehouse. Bags are ready to be shipped to buyers locally and internationally. Transaction happens here.

Total Time: 1 2 days plus storage time. y p g Number of Employee: 12 Equipments: Trucks, Storage Facility, Computer

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Summary of Transactions in the Supply Chain

Wet Beans Wet Beans Dry Beans Packaged Beans

Farmers
$$

Collectors
$$

Processing Units

Warehouse
$$

Buyers

Tiered Price

19,500 20,000 IDR

24,00025,000 IDR IDR*

30,000 - 32,000 IDR

*assumes 9,500 IDR conversion rate USD

Incremental Price Increase % I (Value Added)

20 25% 20-25%

25 28%

*Price Quotes are subject to market fluctuation, cocoa availability, and other relevant factors that may not be captured in this example.

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Traceability in the Supply Chain

Farmers

Collectors

Processing Units

Warehouse

Buyers

Buyers of the d cocoa b B f th dry beans will b able t t ill be bl to trace where th b h the beans came f from at each step t h t of the value chain all the way to the farmer level. Traceability will be implemented through a simple system of: -R Record k d keeping ( i (paper and computer) d t ) - Farmer identification code - Labeling of beans in batches at all levels

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The Productivity Density of Cocoa Area

Blue shade is Pidie which is the focus( productivity is 2.3K tons /annually); white shade is Pidie Jaya

Processing Unit Location

Bandar baru Reubei

Glumpang tiga

Keumala

Tangse

Geumpang There will be 6 P.U with capacity of 250 tonnes each. Two routes will be established; one from p y ; P.U 1 to P.U 4 (55km) and one from P.U 5 to P.U 6 (10km)
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Warehouse Location
New Port Krukuh
W

Pidie Area

Bireun

The warehouse is strategically based in Bireun district which is 2 hours from Pidie and only 1 hour to the new port Krukuh. It is along the main road from Pidie to Medan. p g

44

Dedicated multi-purpose ALAMI KADO warehouse

Efficient transport logistics Only one hour to new port Krukuh Two hours from Pidie Bridge between Buyer, B Farmers and Coop One stop service for B f Buyers and d traders

Accommodate expanding to other districts

Cover Pidie at first stage Expand to cover Pidie jaya, Bireuen , Aceh utara and Lhoksumawe;

Office space

Cost effective warehousing g

Similar cost as Pidie

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Efficient Transportation Solution

Seasonal cocoa harvest distribution by monthly percentage thl t
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

We need two trucks for the peak months

Harvest season varies tremendously every month, Peak harvest (from Nov to Feb) contributes to nearly 69% of annual productivity ;The peak 4 months is the focus of logistic;

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Section 7:

MARKETING STRATEGY
Targets and Plan Potential Partners Branding the Company

47

Marketing Approach
Alami Kado PT
Current landscape provides an optimal scenario for investment and engagement of cocoa industry in Aceh Alami Kado Pt represents a coordinated approach to realizing the Aceh cocoa markets immense potential and connecting market participants market s Value Proposition of Alami Kado o Quality o Consistency o Dependability o Traceability o Sound Governance o High Social Impact

48

Marketing Approach

Potential Partners

Align potential partner interests to achieve market growth Highlight relationships in the region to raise profile of the cocoa industry Engage all parts of the value chain to promote superior product to ultimately benefit the end buyer Segment target market local and international buyers Set the brand of Alami Kado apart as image of enhanced quality, consistency and deliverability Achieve market share growth

Penetrate

Differentiation

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Section 8:

HUMAN RESOURCES
Human Resources Management Team Human Resources Total Staff Organisational Chart g

50

Human Resources Management Team

Role CEO Job Description The CEO acts as the public face of the company, and as such engages in PR activities. Within the company structure he acts as a consensus builder between all shareholders. He defines the strategic direction for the company He will give special attention to the company. companys role in the positive social transformation at the farmer level. He will be responsible for the day-to-day operations and logistics of company facilities. Requirements: We are looking for a person with 5 years of project management experience in Indonesia, preferably in Aceh. He will have had international exposure. The qualified person will be business oriented, able to interact with all stakeholders, and speak fluent Bahasa. The person shall adhere to strict ethical standards. Initial salary: 35 000 USD/year 35,000 USD/year. The finance manager is responsible for budgeting, financial reporting and forecasting. He will ensure the long term financial viability (health) of the company. He will be in charge of profit reinvestments and redistributions. He will help the cooperative with improved access to working capital, recommending the latter to international agencies (e.g. UNDP, Swiss Contact, USAID). He will explore new/other avenues for profit generation. Initial salary: 15 000 USD/year 15,000 USD/year. The Acehnese field officer will act as the intermediary between farmers, collectors , NGO trainers and the Forestry and Plantations Department. He will deal with bottlenecks on the ground and facilitate between stakeholders. Initial Salary: 10,000 USD/year The primary task of the HR Manager is the recruitment and the retention of Operations staff. He will evaluate the needs for additional recruitment as production increases. In addition, he will be in charge of brand building and the cocoa bean certification process. Finally, he will give back office and administrative support. Requirements: A marketing degree. Initial Salary: 10,000 USD/year.

Finance Manager

Field Facilitator/ Training Coordinator HR / M k ti M Marketing Manager

We are an equal opportunity provider

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Human Resources Total Staff

Facility HR Resources Required CEO Finance Manager Field Facilitator/ Training Coordinator HR / Marketing Manager (part Account clerk: 1 (part time) Processing: 5 (2 QC officers, 3 store keepers) Drivers: 2 Guards: 2 Processing: 3 (of which 1 store-keeper) Guards: 2 (working in shifts) No of Facilities Headcount Per Facility Total Headcount over all Facilities Budget Required (per annum, USD)

Mgmt Team

N/A

$70,000

Warehouse

10

10

($2,595/month for all 12 employees) x 1 Warehouse = $31,140 ($1,120/month for all 5 employees) x 6 PUs = $80,640 $181,780 $181 780

Processing Units

30

Total C Company Resources Required Part time Consultant assisting in cocoa branding

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Additional Resources

1 (Part-time)

1 (Part-time)

$2,500 / 6 months = $15,000 $196,780

Total Budget Required

52

45

*data source: Local Traders, YLP Analysis

Human Resources Organizational Chart

( (Total Headcount: 45 incl 1 part-time consultant) p )

CEO (1)

Headquarters (Total HC: 4)

Finance Manager (1)

Field Facilitator / Training Coordinator (1)

HR & Marketing Mgr (1)

Warehouse (Total HC: 10)

Accounts Clerk (1)

Quality Control Officer (2)

Storekeeper (1)

Guards (2)

Processing Technician (2)

Drivers (2)

Processing Units (5 resources per unit x 6 Units = Total HC: 30)

Storekeeper (1) Processing Technicians (2)

Guards (2)

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Section 9:

COMMUNITY BENEFITS
Program Targets, Activities and Impact Demonstration Plot - Concept Implementation of Demonstration Plots Best Practices Communication Farmer Field School Training Schedule Social Benefits

54

Programme Targets, Activities & Impacts

The Community Programme is designed to support p p pp proposed Business Model with 3 key y initiatives which are the demonstration plot, farmer field school and communication outreach The key 3 initiatives will bring the community together so as to, increase the level of productivity and awareness. Most importantly, importantly the increase in productivity will also improve per capita farmer income by more than 3 times over the period of 5 years To maintain a sustainable industry it is vital to incentivise the farmers, the first link in the chain. This is best achieved by ensuring improved income per capita

55

Demonstration Plot - Concept

A commitment to improved quality & productivity through sustainable farming practices A facility that demonstrates best practice and invests in expanding the knowledge of local farmers to realise greater revenue A training ground that can also be used for research and analysis A concept that can be easily replicated to complement/support the processing units The demonstration plot is also a place for investors to visit and view the process

56

Demonstration Plot Concept

The location is an important consideration Our recommendation is to use an existing farm which is 1 hectare In selecting the farm, a collective decision from the community should be made to y avoid any negative sentiment issues The farmer will be given the necessary training and assistance to develop his land. The farmer will draw a minimum monthly wage The demonstration plot will be funded through the partners of Alami Kado Our partners will have the responsibility of p p y coordinating and monitoring the demonstration plot as part of a planned programme

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Best Practice
Farming Practices to be implemented
Studies show that majority of farms in the Pidie district dont use basic farming techniques and the demonstration plot will implement the following practices -Frequent Harvesting -Sanitation of pod husk -Bio-Control -Prunning -Fertilization g -Side Grafting

Cash Crops
Farmers operating demonstration plots will be trained in the farming of additional crops adding to resources for food, security and income stability ddi t f f d it di t bilit

58

Best Practices
Improving the harvest cycle The weakness of harvest pattern in Pidie is due to the fact that peak harvest takes l t k place d i th wet season i N during the t in November and D b d December b Good cocoa pruning techniques lead to a more conducive harvest pattern, with regards to seasonality, thereby reducing the rate of mouldy beans Availability of cocoa bean dryers is important to the p y y p process Ensuring the consistency in supply

Best practices lead to a positive change in harvest season

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Demonstration Plots
Financial Requirements

The effectiveness of a demonstration plot leads to a potential of 400kg of increased cocoa production per hectare per year
(based on a study that was done in Sulawesi by the Sustainable Cocoa Enterprise Solutions for Smallholders
(SUCCESS) Alliance Indonesia)

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Connectivity and Traceability

Connecting the farmers through a visible and disciplined process is key to bringing the change in mindset required.
Implement a registration system, connecting farmers to the warehouse to ensure traceability Each farmer receives an identification card, capturing information on quality, quantity q antit and consistenc of prod ction consistency production This system will also provide visibility to the payment process, including payment of training Regular communication updates via SMS to farmers on initiatives such as training dates, outcomes of training and updates on pricing
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Farmer Field School

Concept
A 3-year Farmer Field Schools (FFS) programme to be implemented by trainers from three sources:
Farmers from the community of Pidie Employees of Dinas Perkebunan (DISBUN) Employees of local agencies

The FFS co cep teaches farmers e S concept eac es a e s through practice, on-farm observation and farmer led research. The Training of Trainers (TOT) approach will be applied and each session will have a class size of 50 trainees. The Trainers are then expected to train 20 farmers in a year. y Farmer teachers are initially schooled on their own plot, then paid monthly when they begin training others. Farmers will receive accreditation upon completion of training.

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Implementation
Location: To ensure engagement and connectivity, training locations will be identified g g y, g collectively by the Training Coordinator, farmers, community leaders and staff from DISBUN. The curriculum/modules: The modules will prioritize areas of importance that would increase productivity level in a consistent manner. Core to the module will be the knowledge to combat the Cocoa Pod Borer (CPB) pest by using the PsPSP, a low cost low input cultural method for controlling the CPB and other pests cost, as well as for increasing tree productivity. Record: Participants will receive one logbook to write all business activities. This is an exercise in record keeping on a day-to-day basis that would enable farmers to obtain actual data on their activities to provide a tool for comparison, analysis, reflection and improvement of future business activities. acti ities
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Training Schedule
Activity Identification of location programme socialization i.e problem and solution analysis Implementation of FFS modules a. Basic ecosystem & ecological farming b. Cocoa Pod Bearer lifecycle c. c Fertilization d. Sanitation e. Pruning f. Side grafting g. Standardization & quality of beans h. Cash h C h crops t generate i to t income i. Usage of logbook Duration 1 day Participants Training coordinator community coordinator, leader, farmers, staff from DISBUN Training coordinator, farmers, staff from DISBUN

1 day

6 months (12-16 meetings)

Training coordinator, farmers, staff from DISBUN

Total number of trained / skilled farmers by Year 3 = about 4,000 farmers

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Social Impacts
Improvements in Income and Livelihood Improvement of income level for farmers due to productivity increase. Livelihoods increased with education and training. g Community model leads to further communication and conflict resolution that has impacted Aceh for some time. Encouragement of women to take leadership roles as farmer teachers and students.

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Environmental Benefits
Environmental Best practice leads to/promotes sustainable farming. Solar cocoa bean dryers allow for sustainable energy production.

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Section 10:

FINANCIAL ANALYSIS
Farmers Income (Pidie Area) Company Operating Income Company Operating Costs Company Net Income Working Capital and Investments Balance Sheet

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Growth in Farmer's Income Per Capita (Pidie District)

Current Total Number of Hectares in Pidie Area Total Production (kg) Cost of Good Sold (mm Rupiah) Sales (mm Rupiah) Net Income (mm Rupiah) Net Income per Capita (USD) 2,741 2,362,000 2 362 000 28,344 39,579 11,235 302 Y1 2,741 2,755,667 2 755 667 35,066 52,169 17,103 460 Y2 2,741 3,149,333 3 149 333 43,762 67,045 23,283 626 Y3 2,741 3,543,000 3 543 000 53,762 83,236 29,474 792 Y4 3,507 4,596,320 4 596 320 76,162 117,306 41,144 865 Y5 4,272 5,796,231 5 796 231 104,880 162,197 57,317 989

1,000 800 600 400

Farmer's Income Per Capita (USD)

792 626 302

Current

865

989

200 -

460

Y1

Y2

Y3

Y4

Y5

Business with Direct Farmer Participation

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Company Operating Income Projection y g j

(Rupiah mm) Y1 Commission Income from Sales Interest Income from Loans to Farmers Total Operating Income 1,679 303 1,982 Y2 2,303 473 2,776 Y3 2,850 629 3,479 Y4 4,546 928 5,473 Y5 7,340 1,277 8,618

Revenue (Rupiah mm)

10,000 8,000 6,000

Key Revenues for Company: Processing Trading

4,000 2,000 Y1 Y2
Commission Income

Co-financing Co financing working capital for farmers

Y3 Y4 Y5

Interest Income
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Company Operating Cost Projection y g j

Rupiah mm y g Salary and Wages Farmer training costs Legal fees Consultancy for brand building Miscellanous Office Offi expenses, including rental i l di l Cost of running demonstration centre Total Operating Costs
10,000 10 000 8,000 6,000 4,000 2,000 Y1 Salary and Wages Y2 Y3 Y4 Legal fees Y5 Others Farmer training costs
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Y1 1,727 , 342 238 143 257 14 3 2,722

Y2 1,886 , 6,840 285 280 16 3 9,309

Y3 2,059 , 6,840 285 306 17 3 9,510

Y4 2,249 , 334 19 3 2,605

Y5 2,456 , 365 20 4 2,844

Operating Costs (Rupiah mm)

Company Net Income Projection y j

Y1 Net Income (mm Rupiah) Net Income (USD '000) -909 -96 Y2 -6,726 -708 Y3 -6,255 -658 Y4 2,582 272 Y5 5,426 571

800 600 400 200 -200 -400 -600 -800 800 Y1

Net Income (USD '000)

Y2

Y3

Y4

Y5

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Funding Requirements and Structure g

Funding Requirements
Rupiahs mm Y1 Total Capital Expenditure Profit after tax Depreciation Net operating profit Increased in working capital Capital Adequacy for Working Cap Lending Business Total Funds Required Peak Funds Requirements (mm Rupiah) Peak Funds Requirements (USD 000) 636 -909 127 -782 1,130 1,262 3,810 21,552 2,269 2 269 Y2 -6,726 127 -6,599 577 707 7,883 Y3 -6,255 127 -6,128 618 3,113 9,858 Y4 2,582 127 2,709 1,383 6,317 4,991 Y5 5,426 127 5,553 2,279 6,031 2,757

Proposed Funding Structure

USD Thousands Grants (UNDP / Government / USAID / Other Agencies) Balance Share Capital Buyers / Investors Exporters Farmers Coop Collectors 1,509 760 30% 30% 20% 20%

Share Capital 33%

Grants 67%

Company Balance Sheet y

Rupiahs mm Y1 Cash Inventory Receivables Short-term Short term loans to farmers Total Current Assets PP&E, net Total Assets Share Capital Grants Short term debt for lending Accummulated Reserve Total Liabilities & Equity 17,741 507 623 4,208 4 208 23,079 509 23,588 7,218 14,334 2,946 -909 23,588 Y2 9,858 774 933 6,564 6 564 18,130 382 18,511 7,218 14,334 4,595 -7,635 18,511 Y3 2,663 1,064 1,261 9,677 9 677 14,665 254 14,919 7,218 14,334 7,258 -13,890 14,919 Y4 3,209 1,698 2,010 15,994 15 994 22,911 127 23,038 7,218 14,334 12,795 -11,309 23,038 Y5 5,276 2,741 3,246 22,025 22 025 33,289 33,289 7,218 14,334 17,620 -5,883 33,289

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EXIT STRATEGY

The business is profitable in year 4 onwards f A profitable and financially stable company is likely to attract good valuation based on future y g cash flows Farmers, Cooperative, Traders and Buyers are long term stakeholders, who could consider stakeholders buying out exiting investors New investors could replace exiting investor

Profits with Social Impact

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Section 11:

RISK ASSESSMENT AND MITIGATION

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Risk Mitigation
Risk Implication Mitigation Measures Risk Level

Farmerslackof F l k f educationinproper cultivationandharvesting techniques

Production risk Prod ction

L Lowqualitybeansand li b d unsecuresupplies

T i i Trainingprogramsforfarmerswithfinancial f f i h fi i l compensationfortimeopportunitycost Cooperativesdividendsusedtoinvestin training,creatingcontinuousimprovement cycleofharvests Qualitycontrolandtraceabilitythroughall Quality control and traceability through all levels(collectorslevel,processunitsand warehouse) Strategiclocationofprocessingunitscloseto farmgate(10kilometerradius) Standardized warehouse management for Standardizedwarehousemanagementfor qualitycontrol Alternative revenue streams through complimentary agriculture practices taught through the training modules Clear decision making procedures in the Management and Shareholders Agreement to ensure open flow of information, transparency and efficiency Applystringentapprovalprocess Apply stringent approval process Restructureloantobecomeperforming loans

Qualitycontrolin transportationand storage Cocoapricevolatility

Market risk

Lossofqualityand quantity,suchas beansgoingmoldy beans going moldy Fluctuationinprofits

Governance risk

Potentialconflictof interestbetween stakeholders Non performing Nonperforming loans

Inefficientdecision making

Finance risk

Negativelyimpacton Negatively impact on Profit&Lossaccount

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Section 12:

IMPLEMENTATION PLAN
Short Term Implementation Mid-Long Term Implementation

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Mid-Long Term Implementation

Midterm Year 2 Y Governance Human Resource Production/ Operations Year 3 Y
Independent financial auditing Directors responsible for corporate governance Continue to recruit people to address operational requirements as volume increases

Long Term Year 4 Y Year 5 Y

Continue to coordinate with farmers to plant seedlings to cover unused land

Increase equipment at Processing Facilities and Warehouse to cover increased productivity

Development and expansion of processing units and collection centers

Market Presence Community

Continue to enhance market presence Work ith ffili t W k with affiliates on continuous efforts to promote Aceh cocoa ti ff t t t A h Local Agencies to continue the training program

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Short Term Implementation

Short Term 1-6 months 6-12 months
Directors responsible for corporate governance

Governance

Setup a company in Indonesia Establish Board of Directors, which is accountable to the shareholders. Obtain government approval. Prepare and sign legal documents Identify and employ management team (4) Coordinate current field workers for operations process (hire 16) Recruit operations team Setup processing units and collection centers Coordinate with collectors to guarantee supply to the Processing Unit Build communication with local and international buyers Set up the demonstration plots

Human Resource

Production/ Operations Market Presence Community

Coordinate with farmers to plant seedlings to cover unused land Enhance market presence of high quality Aceh cocoa

Local Agencies to set up farmer schools and start the training program

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Section 13:

CONCLUSION

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Conclusion
Aceh is open for business. We W propose a unique corporate structure for the agricultural sector that is i t t t f th i lt l t th t i commercially focused, yet works in favor of improving farmer livelihoods. The key success factors are: The Th creation of a business model th t b i ti f b i d l that brings t together f th farmers and collectors d ll t with exporters and international buyers/investors. The share holder mix aligns the interests of all parties to build a financially viable and socially responsible company. Improvements to ensure consistent supply and improved quantity th I t t i t t l di d tit through: h - Strategic partnerships to ensure farmers acquire the skill-sets through training and education, - Access to working capital for farmers - Al i K d Pt proactively strengthening th cocoa value chain. Alami Kado Pt. ti l t th i the l h i The precondition for farmers to organize themselves, which will ensure exporters and international buyers/investors closer procurement to the source of supply (ie. Smallholder farmers). The model is replicable and modular, creating business opportunities for scaling up operations, and including other districts.
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Section 14:

APPENDIX

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Thank you

If you are interested in this investment opportunity, please contact Chandran Nair at GIFT at ( (852) 3571 8103 or cnair@global-inst.com. ) @g

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List of Participants
Marcella Cheung g Noor Azmi Ibrahim Norshahzan Halin Yanyang He y g Sanjay Jain Jack Liu Xinru Mo Cindy Rafanelli Chaow Chiun Ong Emilia Rahman Fazul Ikmar Som Bob Van Damme Siwat Vilassakdanont Xiaojuan Wang Becky Yang Amanda Yik Anna Young Hong Zheng

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