Economics and Management in Developing Countries

A bottom-up approach: Integrated Coconut Processing Centers (ICPCs) in the Philippines

Group Assignment

By BUSTARRET CONSTAIN DE WITH HETROY LIM TSAUR Martin Pablo Hans Stphane Zarah Chen-en

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Introduction Every single member of our group strongly believes in the bottom-up approach as a credible means of development, but in the same time we are all conscious of the problems linked to such a strategy (the main problems being execution and change of scale). Our papers goal is to give an example of a bottom-up development project, the challenges it faced and the potential solutions we would implement to give it a chance of success. The project weve chosen is the development of coconut centers in the Philippines.

In a first part we will present the virtues of coconut and give an outline of the world trade of coconuts. Then we will show that a gap exists between the international perspectives and the actual abilities of coconuts farmers in the Philippines, pointing out the need of new structures to develop this activity in this country.

In a second part we will present the ICPC initiative brought by a private bank in the Philippines and detail the realities that go with its launch.

In a third part we will describe the oppositions that such a plan raised, like in most development approaches: resistance to change from the beneficiaries of the project, and fierce opposition from the powers in place.

Then in the last part we will try to assess which solutions would help such a bottom-up project to be launched and meet success.

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1. THE COCONUT INDUSTRY

1.1 A Complete Product The coconut tree is called "The Tree of Life" because of the endless list of products and byproducts derived from its various parts, making it an ideal product for developing areas.

Coconut Meat: from coco meat can be obtained coco flour, desiccated coconut, coconut milk, coconut chips, candies, copra and animal feeds. o Coconut flour can be used as a wheat extender in baking certain products without affecting their appearance or acceptability. o The coconut milk is a good protein source. Whole coco milk contains about 22% oil, which accounts for its laxative property. o Coco chips, which are curved and wrinkled coconut meat, is crisply toasted and salted. It is very popular in Hawaii. o Coconut Oil: Copra is dried coconut meat that has a high oil content (as much as 64%). Coconut oil is the most readily digested of all the fats of general use in the world. Its chief competitors are soya bean oil, palm oil and palm kernel oil. Coconut oil is also used in the detergent industry. Other products from coco oil are soap, lard, coco chemicals, crude oil, pomade, shampoo, margarine, butter and cooking oil.

Coconut Leaves: coconut leaves produce good quality paper pulp, brooms, hats and mats, fruit trays, waste baskets, fans, lamp shades, placemats, bags and utility roof materials.

Coconut Water: it is a very rich and healthy drink. A recent breakthrough use is in coconut water therapy to cure renal disorders.

Coconut Husk: Coconut husks are made of bristle fiber (10%), mattress fiber (20%) and coir fiber (70%). The abundance of fiber makes it good, stable supply for cottage industries that make brushes, doormats, carpets, bags, ropes, yarn fishing nets, and mattresses, etc. Coir fiber can also be used as substitute for jute in making rice, copra, sugar, coffee bags and sandbags. It is also suitable for making pulp and paper.

Coconut Pith: Out of its pith can be produced coco pickles, but also helmets, caps, wooden shoe straps, handbags, fans, picture and house decor like lamp shades.

Coconut Shell: Coconut shell produces the core of the most saleable household products and fashion accessories that can be turned into lucrative, wide-selling cottage
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industries. Among them are shell necklaces, shell bags, cigarette boxes, shell ladles, buttons, lamp shades, fruit and ash trays, guitars, placemats, coffee pots, cups, wind chimes, briquetted charcoal and activated carbon. The most important use of coconut shell is activated carbon produced from its charcoal. It is utilized in air purification systems such as cooker hoods, air conditioning, industrial gas purification systems, and industrial and gas masks. Coconut Trunk & Roots: Out of the coconut trunk, hardy and durable wood is obtained to make benches, tables, carvings, picture frames, tables, tool boxes, and construction materials, among many others. Paper pulp can also be extracted from the coconut trunk and other woody parts of the tree.

1.2 A vital trade for a large number of people The total world coconut area in 1996 was estimated at 11 million hectares and around 93 percent is found in the Asian and Pacific region. The two biggest producers Indonesia and the Philippines have about 3.7 million ha and 3.1 million ha respectively. India is the third largest producer.

World Production of Coconuts (Measured in Million Nut Equivalent)

Asia and Pacific Africa America To t a l

1992 42,114 2,129 3,352 47,595

1993 43,672 2,231 3,097 49,000

1994 45,462 2,181 3,487 51,131

1995 48,296 2,196 3,523 54,015

1996 47,935 2,193 3,470 53,598

Source: Statistical Yearbook 1966, Asian and Pacific Coconut Community (APCC)

Coconut is a subsistent crop which has provided the basic needs of a number of countries in the tropics for centuries. With the use of coconut oil in the production of soap and margarine in Europe in the 19th century, it was converted into a commercial crop. In the beginning of 20th century copra was the king among the oil seeds. However the period after the Second World War saw the substitution of vegetable oils and oleo chemicals for coconut oil in international trade. The increase in the output of coconut was marginal. Price of coconut oil fluctuated heavily due to frequent short supply situations.

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With the depressed price of coconut oil, coconut-producing countries have now moved from traditional products to the processing of value added products. Consequently, recent years have seen coconut oil being further processed to produce coco-chemicals. Export of coconut shell charcoal and activated carbon is on the increase though in small quantities; products like coconut cream, nata de coco, fibre dust, coconut powder, coconut water, geo-textiles are finding their way into the international market.

Another interesting feature that is becoming evident increasingly is the shift of the foreign markets from the traditional base to new areas. The newly industrialized countries in the East as Taiwan, South Korea are fast emerging as key importers of coconut products. Coconut products are also drawing attention as environmentally friendly. Research carried out has proved the adaptability of coconut oil as biodiesel. Coir is an excellent natural fibre which is strong, durable and biodegradable.

A wide range of coconut products are internationally traded. There are more than 50 unprocessed, semiprocessed or processed coconut products entering the international markets in small and big quantities. Aside from copra and coconut oil (which represent more than 50% of the trade of coconut related products), other exports which have a significant volume are desiccated coconut, copra meal, cocochemicals (fatty acids, fatty alcohol, methyl ether), shell charcoal and activated carbon, fibre products, coconut cream, milk, powder made with the coco flesh.

All these coconut products represent a major source of foreign exchange for several small nations, especially in the Pacific area (the keys numbers of the industry of coconuts in the Philippines can be found in the Annex A). Moreover, coconut is a smallholder crop and millions of rural people depend on it for survival. Its development particularly in post harvest activities could be the base for rural development in the coconut producing countries.

1.3 There is a gap between international needs and the present situation of a single peasant What we have described previously shows a large and rising market for a very complete fruit but a lot of issues prevent the local farmers in the Philippines (and more generally in the South-East Asia) to get their share of this market.

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Access to knowledge: the farmers (often located in remote areas making access to education and social services difficult and expensive) are poorly educated and lack the basic management and technical tools, which can cause them significant losses. o For instance, the harvesting of immature nuts causes the production of rubbery copra with high moisture content. o On the other hand, if one allows the nuts to fall naturally, without harvesting or picking the nuts from the tree, losses due to over-ripe nuts or germinated nuts are likely to occur. o The efficiency of the drying process at the farm level is the most critical stage and it can incur subsequent losses in terms of product quality and reduced prices if wrongly managed. o All these losses can yield up to 30 percent of the total harvest. In addition to these issues, in most of the cases, the farmers just use/sell a fraction of the fruit (the water or the flesh) and waste the remaining.

Access to capital: the farmers are generally very poor, and are completely out of the regular bank system, which makes them susceptible to usurious interest charges by informal financiers.

In the Philippines, coconut production largely comes from fragmented small farms as a result of inheritance and land reform, which means that the farmers have no marketing leverage in negotiating with traders and processors as well as financiers.

Therefore, there is an urgent need for the farmers to syndicate in a way that would protect their interests and help them to have an access to the regional and international markets of coconut products, with the best products developed with the highest yield possible.

2. THE INTEGRATED COCONUT PROCESSING CENTER (ICPC) PROJECT

2.1 The ICPC is a better way for the farmers to be efficient We have established that in order to create the conditions needed for sustainable economic growth in the coconut industry, there needs to be a major change in the systems and institutions of coconut production and processing.

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The model of the Integrated Coconut Processing Center uses the ideology that giving the farmers the resources and financing inputs with which to maximize an already existing knowledge base (that must also be improved) will lead to increased sales/income and better quality of life.
Resources

Knowledge

Sales

Financing

Exhibit 1

The ICPC project is designed to combat the underutilization of the fruit and the low quality by-products. ICPC will become, ideally, the vehicle of a countryside industrialization system that helps coconut farmers climb out of poverty. The following advantages can be achieved through ICPC: 1. Assured increased harvest of coconuts because of proper fertilization and cultivation of the coconut farm. With the financial and technical support, the productivity can be increased three times to 120 nuts per tree per year. 2. Assured quality of the coconut raw material as a result of methodical sequence of harvesting 3. Integrated basic processing of the coconut to provide at least seven basic products instead of only two (oil and copra meal). Sales from the coconuts byproducts will increase income by at least 40%. 4. Reduction of production and marketing costs by sharing equipment, transportation, and overhead with other producers. 5. Utilization of the heat energy generated by carbonizing the shell of the coconut into charcoal. 6. Utilization of modern methods which will eliminate toxins as well as ensure hygienic production of the oil and meal 7. Utilizing the ICPC as engine for increasing coconut farmers income through projects that will improve land use of the coconut farms 8. ICPC to set up a trading post to supply household and medical needs of the community at wholesale price

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9. Improved income of the farmers from their coconut farms will encourage preservation and hopefully increased acreage of coconut farms 10. Opportunity for the participating coconut farmers to eventually own the ICPC, thereby increasing their income further.

The ICPC created the following strategies in order to realize these goals.

Productivity and share of knowledge Coconut farming communities must be industrialized in order to firmly establish the ICPCs. Farmers would initially need assistance in managing their farms in order to increase nut production. The ICPCs objective is to move from the current average of 40 nuts per tree per year to 120 nuts through fertilization and replanting and in the processing of the entire nut (husk to core). Additionally, further improvements in farm productivity through

intercropping, expanded land utilization (usage of the land under the coconut trees) animal raising, etc. would also increase the number of product lines that a single farm would produce with the same amount of land and minimal increase of resources. The project intends to source professional management to teach and transfer the capabilities to the local managerial workforce. The Philippine Coconut Authority could provide support from their manpower and resources to provide technical know-how and farm supervision as well as the Department of Agriculture for fertilization, intercrop and livestock raising support.

Financing Financing programs must be reformed in order to provide the farmers better access to microfinance loans in order to provide access to funds to implement these new methods (yield increase, more efficient farming, intercropping, etc). Meanwhile funding must be sourced for the total capitalization per ICPC, which amounts to around Php 80 million (1998 prices). The capital may be partially generated from a loan from local banks plus equity participation from private investors. Gross sales are projected to generate annual revenues of between Php 300 to 400 million and a net income at Php 46 million. The project will, under favorable

circumstances, have a pay back period of 2 to 4 years, depending on market prices of the products.

Centralized marketing of the various farm produce, which would then exist as a result of using the land under the coconut trees, would cut down transaction costs and create a better marketplace for the other products.

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By-products The impact of the increased supply of coconuts and by-products as well as the consolidated production of new crops under the coconut trees will attract processors to locate near the ICPCs and expand domestic and export market. Additionally, better quality copra will lower production costs and make the Philippine coconut products more competitive. The success of the initial ICPCs may also attract new financiers and trigger industrialization of other coconut communities

Social Impact: Expanding Community Prosperity Ideally, the ICPC would also be operating within the larger umbrella of the Coconut Community Center (CCC) which would serve as an adjunct project that will provide support system for all the farmers and their families and improve access to social services by providing housing clusters around the economic centers. To build better communities, they can form alliances with other community development organization to improve the living conditions of the coconut farmers/workers by establishing housing clusters around the CCCs. The idea behind this is that the increased family incomes multiplier effect will generate new economic activities, more jobs and wealth for the communities and LGUs. Furthermore, localized production and distribution of the provisions by the participating communities will lower the prices of staple food items. When established these CCCs, would provide easy access to electricity, clean drinking water, bathrooms, health services and cheaper medicines which would lessen rural infant mortality and medical costs, which would free up even more disposable income for the farmers.

For the mechanics of a sample project please see Annex B.

2.2 Basic requirements to launch the ICPCs In order to boost development in the farming sector in the Philippines, the approach was not different from other development projects: injection of capital and knowledge. This injection was planned to be in the form of ICPCs. As mentioned above, these centers are independent companies that have the technology and the needed capital to tenfold the efficiency of coconut production and processing. They possess the structure of any company and are designed to run as any company. The planning of how this companies should function, was flawlessly addressed in the design stage and shows little areas for improvement. However, the

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success of ICPCs relied in 3 premises that had to be taken as given; otherwise they would not work, as simple as that.

The first premise is that coconut farmers should provide at least 50,000 coconuts per day to the ICPC. Thus, they should understand and appreciate the total project concept. Furthermore, in order to make the project financially viable, the coconuts should come from farms located no further than 20Kms from the plant. In other words, the ICPCs functioning depends on convincing a vast majority of the coconut farmers in the area to join the project, if the project leaders were unable to convince the critical mass of farmers to get the 50,000 nuts, the project would not provide the expected figures of production and therefore profitability.

The second premise assumes that all the workers should come from the community. One of the principles of the project is that one of the ways of increasing the income per farmer, is that they would not only provide their coconuts but also they would join the workforce to share knowledge and make use of their technical capabilities to have a more efficient operation. They would get paid for working in the ICPCs and therefore get money from two sources. Hence, these workers should come from the local communities as well. Although the second premise is by definition attached to the first one, the amount of employees needed to run the ICPCs would increase since the output in these production centers is expected to increase significantly. Therefore, the need of recruiting more people from the local communities is evident. The ICPCs need the availability and support of the local workforce in order to succeed.

The last premise states that the project is funded by either public or private organizations and that ICPCs are profitable enough to pay an interest of 2% per month and provide investors a payback time of 2 to 4 years. As well, each ICPC requires a two year grace period to advance in the learning curve and get on track to be a profitable on going business. The sourcing of the project is conditioned to the willingness of capital providers to understand these conditions and bear the risk of such a complex set of operations. Given that investors assess risk and return in very conventional ways, ICPCs managers need to have the tools to convince them that their investments are safe and profitable.

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3. OPPOSITION, OBSTACLES AND PROBLEMS As mentioned above, the creation of ICPCs benefits a lot individuals and communities. It benefits the farmers, because they can get a higher return for a more efficient use of their land and products. It benefits the current workers of coconut farms, because they are paid in a more fairly way and have opportunities to absorb knowledge and grow within the company. As well, as ICPCs produce new finished products and in higher numbers, it creates new employment, benefiting the unemployed. ICPCs are companies, but they are communities as well. Health, housing and education programs are planned to result from the creation of these processing centers, these programs will benefit the community as a whole. Furthermore, ICPCs would be formal firms registered properly and with all the regulations. Producing a higher output with a higher level of formality, results in higher taxes to be collected by the government, and therefore more funds to invest in the villages.

Consequently, as farmers, workers, families, communities and government will benefit from this project, one expects to see fully cooperation to make this plan a reality. It result obvious to anticipate a lot of hard work, teamwork and support from all the involved stakeholders to make ICPCs successful and take a step further towards welfare and development. However, this has not been the case so far. Why?

Several similar examples of attempts to promote development have failed in many industries in almost every undeveloped country. The specific reasons and technicalities vary among situations, but some of the root causes are the same: Resistance to change from the affected parties (even if it is to improve), and opposition from the individuals in power who benefit from the status quo. Of course, the case of ICPCs in the Philippines is not different at all.

3.1 Resistance to change Coconut farmers have been doing their job for generations. Even though the conditions in which they live are not the best (among the worst indeed), they are in a comfort zone in which coconut planting and harvesting is part of a routine with deep and strongly attached roots. For some of them, that is the only way of planting and selling coconuts, and thinking about changing it sounds out of question. However, the resistance to change is caused by a deeper and more delicate issue: trust. Coconuts are all what most coconut farmers have, they provide them the means to survive and do something with their lives, without their coconuts, they are

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nothing. Therefore, the idea of just placing the coconuts in a truck that takes them away from the farmers hands, which could seem a subtle change for us, results in a complicated issue of trust and resources processing getting out of their hands. Furthermore, the fact that they have to work differently on the coconuts (i.e. improved processes), and that another individual will make the sale and collect the fruits of the farmers work makes the problem more complex and farmer are psychologically wary, reticent to this transition. Good communication is essential at this point, and given the results it has not been that easy to execute it properly.

The same case is similar for the workers that need to be recruited in the ICPCs, they normally perform different jobs and are not used to the company life that the ICPCs offer. Hence, these workers have been hard to hire and retain, the lack of company culture or work formalities in this area, makes a capable workforce very difficult to obtain.

3.2 Opposition from Individuals in Power It is not a secret that undeveloped countries are helped to stay undeveloped by some people who benefit from them. These people are the ones usually located in the upper part of the power pyramids or the ones benefiting from inequality of income and lack of reliable institutions. Although it would not be fair to generalize, in the typical stereotype of an undeveloped country, they are bureaucrats from the government (local and/or national), union leaders, or people taking advantage of the lack of government control such as informal lenders or resources owners having people working for them in conditions which are not far from slavery.

For the case of ICPCs, the panorama is not different. More specifically, ICPCs face problems with local government bureaucrats and farm leaders. The first group is making it hard to obtain permits and legal processes in order to obtain financing. The second group is making everything it can to stop ICPCs from being launched, this includes threatening the farmers who are willing to join, or brainwashing the ones who are having doubts and grouping them into opposition crowds.

Local bureaucrats are used to work with corruption. They control their processes and get bribes for every favor they make, even if these favors are basic rights backed up by the constitution. When they see that private banks are planning to invest a higher amount of money of what they are used to see, some of them become greedier. The dynamics are as

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expected: government individuals ask for bribes and investors do not accept to give them, for one reason or another. The result: stagnation of the project. For the case of the farm leaders, although they are motivated by greed as well, their methods for inflicting power are a little bit different. These individuals run the show in the current situation without ICPCs, and of course, they like it. They are exploiting the farmers and they plan to continue doing so. As they are powerful in their groups and much respected (feared) by the farmers, they have a high influence over the farmers and in most of the cases they have the last word in what they do, they own them in a certain way. Therefore, they use all their means (ie. fear or respect) to discourage farmers from joining the ICPCs.

As a result of these two powerful opponents, the project does not have the required workforce nor the required amount of coconuts to operate and breakeven. This lack of certainty added to the bureaucracy dead spiral that comes from denying bribes to local government officials, the project does not have funds neither.

These problems need to be addressed if we want ICPCs to be a reality.

4. SOLUTIONS The promoters of this project definitely have to work on two distinct sets of actions to get the best chances of success: solutions to the new problems raised in the early stages of development (presented in the last part), actions that will raise the efficiency of the project.

4.1 Overcoming resistance to change and oppositions: a gradual approach One way of breaking the mould of old habit might be to take a gradual approach:

Immediate actions Communication: farmers could be gathered in groups to attend information sessions about the program. Therefore, farmers would understand the real benefits and costs of ICPCs, and on the other hand, ICPCs would understand the farmers concerns and requests.

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Pilots: leverage on the success of the two pilots currently operating to show farmers that they can be better off with the initiative, and bring some farmers to see the current operations and talk to the people involved. Successful stories will make farmers understand that they can be better off. It would also trigger the fact that they could regret not joining before and blame informal lenders and farm leaders for this

Providing them with a better life: we strongly believe that the best way to convince the farmers is that they experience the immediate benefits of the program: other farmers who are doing better of or the construction of health and training centers, schools and housing that would result from the ICPCs in the communities. At this step we could try to involve the government in these initiatives. If they see that ICPCs will bring them more than money, the idea can be more attractive for them.

Solutions to other problems Start with a micro-credit project, combined with capacity building: when we teach the farmers how they can increase their productivity and make the funds available to make the small investments needed, they can gradually break out of the loan shark debt entrapment and get production up the level necessary for the plant. Once that we have sufficient insight in the local community, we can decide on how to handle the farm/union leaders through a proactive approach and selecting interlocutors in the union who would like to see the project succeed and will act as facilitators. Attract more private investors while gradually transferring ownership of part of the assets or the revenues to the farmers in order to strengthen the feeling of participation and control. Increase the implication of the people or small batches of farmers (e.g. as you need a big number of participants in a 20km range, small groups of farmers could be organized by ICPCs and the profit divided proportionally to the participation of each groups; the transition in China in some areas, when they move to an ownership on the asset and the profit, led to the enrollment of energetic and motivated people in the process who were willing to succeed). In this case a natural mechanism (i.e. market approach?) must be implemented to evict or correct as time goes the less productive farmers and reward the most efficient and proactive farmers.

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4.2 Enhancing the chances of success: Training - farmers and managers - and risk/knowledge management As highlighted in the first part of this report, the products and by-products of coconuts are numerous and represent nowadays slowly growing markets which can build up momentum quickly if well targeted and with a production enabling to satisfy the demand. However, to transform this natural resource into a strong income flow, important training and managerial issues need to be addressed to make the project sustainable: education and loyalty of skilled workers, management, commercial targets and distribution channels.

Farmers Preparation The Operation Manuals (See Annex B) gives already a good and simplified idea of the functioning and different objectives of the ICPC. The training of the farmers will be required in order to improve or transform some steps in the process (e.g. respectful follow up of instructions for pesticides use). This should be done before and during the implementation phase through a learning/testing approach with an imposed feedback mechanism from the farmers (to allow testing of the processes and training tools used). This method should lead to an increase efficiency and productivity.

Farmers will also learn to work in a more accountable manner due to the results of their plant directly linked to their own work quality. They will have an incentive perhaps of being lenient sometimes but overall as other farmers from the same community will keep an eye on the process and outputs, free-ride or cheating events should be low due to peer pressure and manager supervision (e.g. microcredit peer pressure when co-guarantee among a small group for refunding). Another incentive which can be achieved only via a strong communication and an education program is to present the future long term indirect benefits of the projects (i.e. positive impact on the community through development of a better health system, education level raise, etc.). This last point is very important as in communities with a low level of education people could have a tendency to not reinvest or save their small earnings for longer term purposes. Furthermore, the long-term investment in human capital through the education opportunity for their children could be overseen by non-educated parents. They typically do not see the importance of school basics or assume this is a waste of time or a waste of money.

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Managerial Issues At the managerial level, the need exists to structure the organization and the links between the different groups. The Coconut Community Center (CCC) and the Integrated Coconut Processing Center (ICPC) will lead to a shift in responsibilities and functions with clear segmentation, this is partly illustrated in the draft for the Integrated Coconut Processing Corp. functioning (See Annex C). An option to strengthen the project would be to involve local and foreign managers with a previous experience in this type of agricultural project; they will train people and transfer at the same time knowledge that should stay locally. Another and complementary idea could be the creation of an independent or centralized risk-help office that will help farmers and managers in case of sudden issues (i.e. group of people with broad competencies who will collect each time that a problem has been solved the answer and manage these intellectual capital => knowledge management; for example, problem on a complex chemical process or a legal/commercial matter). This training will also progressively cover topics such as marketing, market entries, competition, law and regulation. The potential of this project is important and to meet the optimal forecast, the marketing strategy must be clear and based on a long term approach. Thus, markets and segments identification, use of diverse distribution channels, marketing campaign and sales people preparation will require a strong and continuous observation of a multiple set of factors unknown probably at the local level. For example, the impact of a substitute or complement product introduction in a market overseas will be difficult to assess for a manager without an international exposure. Among the operating activities, the financial and accounting training will also be important to optimize and present the results, as well as minimize the risks (e.g. currencies, taxes, accounting recognition, customs, etc.).

The Funding The numbers we got from the initial research may be a little outdated (98), but their relative positions remain very impressive: with a projected pay back period of 2-4 years and an annual net profit of more than 40 million pesos on an 80 million capital investment, it sounds like there should be no shortage of potential investors, either from a public, multi-lateral of even private source.

The initial idea of using the coconut levy fund to invest in these production centers has been blocked by the political caste. This is a bad omen, but still, there are a large number of organizations active in the Philippines who could potentially invest in a community based capacity building project especially if it includes health centers and schools, because then

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you could include the WHO, UNICEF etc. under the UNDP umbrella. There is also the ADB who may be willing to invest in smaller scale community oriented infrastructure. The potential returns should be high enough to even attract private investors.

5. CONCLUSION At first sight it seems that a bottom up approach with involving capital inflows from the private sector, would avoid all the traps frequently found when countries try work towards development. However, in the implementation of these ideas, most of the same challenges arise. We discovered that resistance to change is present in a bottom up approach as much as in top down initiatives. As well, corruption and individuals protecting their powerful positions are found in both formal and informal institutions in both public and private organizations. Pursuing comfort and greed are human characteristics, as simple as that.

Furthermore, the economic principle states that a good combination of capital and knowledge can boost development. We believe that this statement is true, but at the same time, resolving these two issues is far from being enough. Implementation must be almost flawless. Processes should be clear, structured and well communicated. As well, there should be a clear understanding of the roles of the different stakeholders and their interests must be taken into consideration before suggesting any implementation plan. None of them should be considered as weak, since in an environment that lacks institutions different rules apply.

Finally, we learnt that a bottom up approach is rather a long term initiative. As the bottom of the social pyramid is wider, the work to be done is indeed much larger. The results are not evident from day one, hence it results harder to get buy in from the involved parties. At the same time, as value is more equally spread it is less tangible. Having said that, a well implemented bottom up approach creates great amounts of value and impulses exponential sustainable growth, such a critical mass is harder to stop once it starts advancing towards development.

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Annex A: The Industry of coconuts in the Philippines The coconut industry is considered a major dollar earner that provides livelihood to one-third of the country's population.

Areas Planted to Coconut: o 3.135 M hectares o 27% of total agricultural land o 68 out of 79 provinces are coconut areas o 1,195 coconut municipalities Number of Coconut Trees: o 324 Million (total) o 304 Million bearing Nut Production: o 12.160 Billion nuts/year o 39 nuts/tree/year (average) Contribution to the Economy: o Constitutes 6% of Agricultural Gross Value Added and 1.2% of Gross National Product o Top agricultural export with an average yearly export revenue of US$774 Million or PhP 38 Billion (1997 - 2001) o Belongs to the top 5 merchandise exports of the Philippines o No. 1 among all agricultural product exports with 52 various coconut products to 63 different countries o No. 1 supplier of coconut products in the world with 64% share of total global requirement o RP CNO export equivalent to 64% world coconut oil Farmers' Profile o Total number of coconut farmers, estimated at 3.4 million with 1.5 farmers and 1.9 farmworkers o To date, there are 11,109 coconut farmers' associations, 953 coconut farmers' cooperatives and 9 coconut farmers' federations o Considered poorest among the poor with an average income of only about PhP 10,000/ha/year (source: Philippine Coconut Authority, Department of Agriculture)

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Annex B:

OPERATIONS MANUAL FOR THE OROQUIETA CITY MISAMIS OCCIDENTAL FIRST INTEGRATED COCONUT PROCESSING CORPORATION

I. INTRODUCTION

II. OPERATIONS OF THE BASIC CPC

III. BASIC CPC MATERIAL BALANCE AND PROCESS FLOW

IV. SCHEMATIC LAYOUT OF THE BASIC CPC

V. ORGANIZATIONAL ASPECTS

VI. FARMERS PROGRAM

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I. INTRODUCTION The main objective is to increase the income of the farmers, both immediate and in the long run. To achieve this objective the farmers have to commit their coconuts to the CPC. Without such commitment, the CPC cannot operate efficiently, and also the farm productivity program will be compromised. CPC management will therefore have to ensure the regular supply of nuts before the commencement of its operations. The other objective is to lower the cost of production in order to be able to pay the farmers a higher price for their whole nuts. This however runs counter to a third objective, which is to lower the cost of investment, and a fourth objective, which is to provide as much employment as possible. The challenge is to create the right mix. The Misamis Occidental First Integrated Coconut Processing Corporation (CPC) in Oroquieta City is conceptualized and envisioned to achieve the above stated objectives. However, the success of the CPC is dependent on the following: 1. The preservation of a balance in CPCs corporate mission to help the coconut farmers and the desire to maximize profits 2. Maintaining a professional management team to operate the CPC 3. Timely distribution of profits and benefits to the shareholders and farmers The CPC shall buy only whole nuts and process all components into the following primary products: 1. 2. 3. 4. Dried coconut meat Coconut shell/charcoal Baled and twined coconut fiber Bio-organic fertilizer components and/or other cocopeat products

The rated capacity of the CPC is 50,000 whole nuts per day. The CPC purchases the whole nuts from farmer members at a price that will generate a higher net income to farmers. Aside from a better price of the whole nuts compared to the buying price of copra, farmer members will also be assisted by CPC to access loans for fertilizing their trees. They will also be assisted to avail of loans for intercropping under the coconut trees. The basic CPC is only the first step in the integrated processing of whole coconuts. The primary products will eventually be processed into high-end products, like granulated charcoal, soap, woven fibers, VCO, bio-diesel, flour and feeds. This will enable the farmer members to receive a higher income for their coconuts, but also provide employment opportunities for the farmers and their family members. II. OPERATIONS OF THE BASIC CPC 2.1 Receiving of the whole nuts Receiving 50,000 whole nuts requires 4 recorders and 1 cashier. Around 40 to 50 farmers will deliver their whole nuts to the CPC daily. Unloaders unload the whole nuts in the presence of the recorders. The recorder counts, records and issues an acceptance receipt to the farmer. The farmer presents the acceptance receipt to the cashier for payment.
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2.2 Dehusking Dehusking requires around 30 piece meal workers and 1 supervisor/recorder. Around 30 dehuskers dehusk the whole nuts. Work standard is 1,500 to 2,000 nuts per day per dehusker. The group of dehuskers prepares 4,000 nuts per batch and should finish around 1.5 batch per hour.

2.3 Dried coconut meat production Dried coconut meat production requires around 50 piece meal workers at 8 hours per worker, and two supervisors (2 shifts). 8 splitters open 4,000 nuts per hour. 4 loaders load one hot air drier with 4,000 nuts per hour One drier is loaded every hour, and fired for around 10 hours. 1 unloader unloads 4,000 nuts per hour After unloading 16 scoopers remove the dried meat at 4000 nuts per hour.

The above work standards still have to be tested in actual operation. They are based on 10-hour drying time (this might be reduced with modification of the process). The objective is to process 4,000 nuts per hour in batches, maximize the capacity of the driers and achieve constant quality of the meat (in other areas with different nut conversion or larger driers, the batches might actually be 5,000 nuts). Since the dehuskers dehusk in batches of 4,000 pieces, counting has to be done only once. At the end, it will be a matter of weighing the meat, which should not be less than 800 kg per batch.

2.4 Husk decorticating and fiber drying Husk decorticating requires 10 piece meal workers and 1 supervisor. The husks are conveyed to the decorticator. As per experience, around 10 people are needed to operate the machine. As a starting standard it is assumed that at least 4,000 husks can be processed per hour, Drying of the fibers to less than 20% moisture using a new process will cut drying costs

2.5 Fiber baling Fiber baling requires 6 piece meal workers and a supervisor (same as under 3.4). Twining requires 2 workers per machine. The fiber-baling machine is aligned with the decorticator. Assume they can bale an average of 500kg per hour, operated by 6 workers. The work standard here has to be revalidated.

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2.6 Bioorganic soil enhancers production Bio-manure for soil enhancers (fertilizer) production requires 12 piece meal workers and supervisor. The final blending of the bio-manure and cocopeat mixture and fermentation process to produce the final soil enhancers will be out-sourced to the families of enrolled farmers. The coconut peat is screened (1), using a simple engine driven screen, 2 people will be needed to operate the screening The screened short fibers are brought to the driers and mixed with the coco shell as fuel 50% (around 5,000kg) of the cocopeat is mixed with copra meal (or equivalent), coconut water and bio-manure inoculants in a simple mixer. 3 people load the mixer and unload into bags (without plastic lining). The bags are then stored for 24 hours to produce 8,000 kg of bio-manure. Another ingredient consisting of cocopeat, coconut water and bio-organic soil enhancers inoculants will be pre-mixed to be supplied to the families of farmers who will do the blending of the final soil enhancers. The operations will require the same people as in the bio-manure production. This next activity will be out-sourced to the families of enrolled farmers who will be provided with micro-financed loans to buy the ingredients. They will buy the bio-manure and the pre-mixed ingredients, which will be delivered to their households where they will mix the two components manually using shovels then put into bags (without lining), weighed and sewed. Weight per bag should not be less than 55kg (the residual weight of the composted material is around 75%, or not less than 40 kg per bag after 4 weeks). The total daily production of bio-organic soil enhancers will be around 16,000kg gross and 12,000kg net, equivalent to around 300 bags of 40kg. The bioorganic soil enhancers mix bags are stored in the farmers families households and will be purchased by CPCs partner for the Farmers Program. The purchase price will provide for a profit to the families and will be picked up for delivery to the farmers participating in the fertilization program.

2.7 Coco shell processing Coco shell crushing and bagging requires 2 piece meal workers. The shells not used in the copra driers (around 50%) are crushed manually and bagged which will be sold to the oil mills Any charcoal produced in the copra driers will be bagged and sold to farmers families who will become charcoal dealers

2.8 Coconut water Coconut water saved from the splitting operations are saved and piped to a tank for blending with soil enhancers production. No labor cost involved in this operation. 2.9 Loading/unloading/internal transport of products Around 30 people will be needed for loading and unloading whole nuts and finished products. Payment for loading and possibly internal transport will have to be determined at actual operation. Cost hereof is included in copra making, fiber processing and fertilizer processing cost.

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III. BASIC CPC MATERIAL BALANCE AND PROCESS FLOW

+/-400,000 trees (+/-4,000ha) at 40nuts/tree/yr and 312 working days, +/- 50,000 nuts/day, 56,000kg gross weight

Nut receiving, quality control and recording, 3 nut accumulators, 50,000 nuts each

16,000 kg of husks, 12,000kg dry Decorticating and fiber drying section

Dehusking section

50,000kg husked nuts

Nut opening, drying and scooping section

5-6,000 kg long fiber

10,000 kg wet dust and short fibers

Short fiber screening

10,000 kg dried coconut meat

10,000 kg shell

10,000 kg coco water

Fiber baling section

Bio-manure production section. +/- 300 40kg-bags (12,000kg)

Bagged and delivered daily

5,000kg crushed and bagged

Storage capacity max of 2-3 days or stuffed into containers daily

Concentrated coconut water, 1,500 2,000 kg

Vinegar/inoculants production, small scale

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IV. SCEMATIC LAYOUT OF THE BASIC CPC

Entry point, ideally highest

Load bearing cemented receiving area, max load around 10-15 ton truck, area depends on actual site

Nut accumulators, Simple dividers

Capacity 50,000 nuts each

Say around 15 m x 10m x 1-2 m high

Around 30 x 6 m (1.5 x 3) = 180m2 dehusking area, cemented and covered, no load Dust accumulation , small transfer area Small covered area for mixing and bagging, around 100m2. Preferably located at the side or even lower than the vinegar and inoculants production area, so that coconut water can free flow. Around 300 m2 decorticating area, cemented + covered (10 x 30m), including fiber drying (see also actual design)

Initially shell crushing and bagging area of around 50m2, future carbonizing, granulated charcoal and briquette production area, allocate at least 1,000m2 for expansion

Husked nut accumulation, small transfer area

Future fiber processing area, allocate at least 1,000m2 for twining machines, etc.

Around 50m2 cemented, covered baling area (and small scale twining start-up)

10 hot air dryers in 1 or 2 rows, with 10 small, stainless steel sinks, connected to collection tank and connected to water supply at beginning for flushing, with pathway for transporting shells to shell crushing and bagging section, around 600 m2 covered area (refer also to actual design at Oroquieta City)

Around 300m2 cemented, covered storage area and collection point, with protecting walls and recording facilities (allocate room for expansion) Vinegar and inoculants production area, preferably a lower lying area to accumulate the coconut water from the nut opening section, allocate around 2-300 m2 to include tank storage and barrel accumulation area (still for discussion)

Load bearing cemented pick-up area, max load around 20-ton truck, area depends on actual site, partially covered at exit point Exit point, ideally lowest Small office building with room for expansion

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V. ORGANIZATIONAL ASPECTS There are three key managers that must be selected carefully to work in the CPC. Honesty, diligence and dedication are basic qualities required of each of them. Knowledge and familiarity of all aspects of the jobs and activities under his supervision is a prerequisite for their assumption as heads of their units.

5.1 Resident Manager Must be a college graduate with at least 5 years of management experience and must also be willing to stay with CPC for at least 3 years. The Resident Manager is mainly responsible for coordinating all activities from farm to final markets, and constant evaluation of input-output variables is crucial especially during start-up phase. Thereafter more attention can be given to planning new projects and expansion. He/she is responsible for the operations of the plant and will need 3 supervising assistants and technical maintenance personnel. He must ensure that capacity potential of the plant is achieved, organize preventive maintenance, and first-in-first-out inventory management of raw materials and finish products. He coordinates with the leaders of the piece meal production teams. Supply chain and production planning Process and product flow management Inventory management Quality control Marketing and sale of CPC products

The management team is in charge of around 180 piece meal workers and 30 to 35 regular employees. This first CPC require a highly energetic and innovative management team to face the many known and unknown challenges ahead. Thereafter younger managers can be hired and trained in-house.

5.2 Logistics and Community Development Supervisor Must be a college graduate, with agricultural background, with at least 5 years of work experience. He/she will require around 8 organizing assistants/farm supervisors to go around the farms, and will be in charge of a small quality control team, receiving and recording clerks of the whole nuts in the field and marketing assistants. His Units functions will include the following activities: Farmer organizing Farm enrollment Farm management and productivity assistance Ensures timely supply of good quality (not over or under mature) whole nuts to the Plant Logistics and Transport of whole nuts, and other materials to and from the CPC plant Promotes use of fertilizer components from CPC Liaises between credit providers and farmers and their families for intercropping, animal raising, micro enterprises requirements Promotes community economic projects related to coconut farming and designing of new product movement schemes from the farms to the trading centers Promotes food production for community self-sufficiency Devise schemes to enable farmers to access health insurance, educational plans as incentives for farmer participation in the supply base build up for whole nuts

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5.3 Administrative And Finance Supervisor Must be a college graduate with accounting background and with at least 3 years in administrative supervisory work. He/she will be assisted by a cashier, accounting/bookkeeping clerk, encoder and other support staff. Financial reports Cashiering Procurement of supplies for the Plant Human resources and personnel support services Inventory control Security Maintenance

The team of managers will be in charge of the contracting and supervision of the piece meal workers and regular employees. Since this is the first CPC to be established, it is imperative to have a highly skilled and energetic management team to fix any kinks that will surface in the course of its operations. It is therefore suggested that the operations should start gradually with 10,000 nuts per day and increasing only when the team is comfortable with the smoothness of the operations. Thereafter younger managers can be hired and trained inhouse.

VI. FARMER PROGRAM The first important aspect in the operations of the CPC is buying of the whole nuts. Quality and quantity assurance, i.e. assuring delivery of more or less 50,000 ripe nuts, and not under-mature nuts, a day is a crucial consideration. The best option is to control and regulate the harvesting, even if it would require a major organizational and preparatory effort that will take time. CPC will have to partner with the Partner Organizations of CPC to implement the Farmers Program. The first step is to organize a farmer enrollment and monitoring team to launch an information campaign in Oroquieta and neighboring municipalities to enroll in the CPCs Farmers Program. Farmers-suppliers of whole nuts who enroll will be able to enjoy special benefits compared to non-member suppliers. Farmer members shall be provided with the option to avail of production loans for fertilization, intercropping, livestock raising and other micro-financed projects for them and their families. They will also receive technical assistance in their choice of intercrop or livestock project.

6.1 CPC Farmers Program member benefits 6.1.1 Higher year-round guaranteed buying price of whole nuts The CPC buys the whole nuts from the farmers based on the mill gate price of the buyer of its copra, less processing and transport costs divided by 5. The CPC guarantees the purchase of each whole nut based on the following price formula: (Copra mill gate price CPC copra processing cost transport cost of copra to oil mills) divided 5. For example, if the mill gate buying price for copra 6% moisture content, at POMS or Granex is P20/kg, and the copra processing cost is P2.00/kg, transport cost at P0.50/kg, then the whole nut buying price is (20.00 2.00 0.50)/5 = P3.50. In comparison to the income of the

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farmers under the current multiple middlemen system, 5 whole nuts make 1 kg of copra for which the farmer would receive P20.00 less copra making cost of P1.50, transport cost of P0.50 less discounts of 25% for wet/dirty copra and profits of the middlemen resulting to a net price of around P13.50. Under the whole nut buying scheme the farmer would receive 5 x 3.5 = P 17.5 per kilo copra equivalent, more than the copra price and without copra processing cost, or a net additional income of P4.00 per kilo of copra! 6.1.2 Farmer ownership of the CPC or Extra Income Extra benefits for farmer members are that they will receive a credit point per peso value delivered, which will be converted into shares of stock, i.e. they will become part owners of the CPC, or, they may opt to exchange the points earned with cash. Farmer members will receive loans for bioorganic soil enhancers. Payments will be deductible from their increased harvest after one year when the productivity has increased. This includes seedlings for replanting, and labor for fertilizer application.

6.2 Farmer information and enrollment campaign Explaining the above benefits of the CPC to the potential farmer members will require a specific information and enrollment campaign. The campaign should initially focus on progressive farmers and farmer organizations with a proven record of accomplishment (e.g. existing whole nut suppliers), and with farms nearby the proposed CPC (ideally with a radius of more or less 10 km). Papers to be prepared are: information materials, farmer fact sheet and enrollment forms. 6.2.1 CPC information material The information material explains what a CPC is and why it will benefit the farmers in the short, as well as in the long term. 6.2.2 Farmer fact sheet The farmer fact sheet collects information about the exact location of the farm, the number of coconut trees, date and yield of latest harvest, family members and educational attainment, economic data, etc. 6.2.3 Farmer enrollment form The enrollment form formalizes the commitment to supply the CPC with whole nuts every 45-days from a given number of trees, as well as the CPC commitment to buy all the whole nuts from the given number of trees and based on the agreed price formula, subject to quality control and CPC random monitoring of the harvest. After enrollment, the farmers will be issued a membership I.D. 6.2.4 Scope of the information and enrollment campaign The scope of the information and enrollment campaign will depend on the average farm size, the level of farmer organization of the area, and average yield. If the average yield is 4,000 nuts/ha/year and the CPC operates 312 days a year, it will need a supply base of around 4,000ha (50,000nuts/day x 312 days = 1,560,000. 1,560,000 nuts divided by 4,000

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nuts/ha/year = 3,900ha). In the case of Oroquieta City the average farm size is 2 to 3 hectares, which means that the CPC may have a membership of up to 1,400 to 2000 farmers.

6.3 Farm operations 6.3.1 Coconut productivity enhancement program Once the CPC starts its operations, the coconut productivity enhancement program commences. The CPC Partner organizations will be assisted to create fertilizer application teams funded as a micro-finance project. Each team will consist of 2 sets of 3 people each set and will be provided with loans to purchase the equipment that will allow them to fertilize and weed at least 100 trees a day. At this rate, each of the team members should be able to take home at least P150.00 per day. The teams will be contracted to perform the fertilization of the enrolled farms. To fertilize 4,000 hectares of coconut farms at 100 trees per hectare will require 40 people working 5 hours a day, 300 days a year. A farm supervisor will have to monitor the work in conjunction with scheduling the harvesting of the whole nuts and assist in developing the productivity enhancement program under the coconut trees. If needed, a replanting program can be included to replace non-productive trees. 6.3.2 Productivity enhancement program under the coconut trees Alongside the coconut productivity enhancement program, farmers will be assisted to develop the land under the trees. Such can include field crops, orchards, honey production, hog fattening, cattle fattening, chicken egg and broiler production or vegetable production for the members of the Peoples Organizations who are shareholders of CPC. A plan for intercropping and livestock projects has to be developed and markets assured before any intercropping is started. 6.3.3 Coconut harvesting and fertilizer distribution Eight farm supervisors will coordinate the harvesting of coconuts in around 500 hectares each (between 200 to 300 farms), and supervise teams of farm workers responsible for applying the fertilizer, harvesting the nuts and assist in developing the productivity enhancement program under the coconut trees. Each farm supervisor ensures that every day around 12-14 hectares (6-7 farms) are being harvested; he will visit the farms 1 or 2 days before the scheduled harvest, and arranges delivery of the whole nuts to the CPC. Around 43 to 44 days later the supervisor will visit the same farms and schedules the next harvest and delivery of the whole nuts.

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Annex C: RECOMMENDATIONS FOR THE ORGANIZATIONAL AND MANAGEMENT STRUCTURE OF THE MISAMIS OCCIDENTAL FIRST INTEGRATED COCONUT PROCESSING CORPORATION (CPC) The CPC, being the first of such venture to be formally organized under a corporate entity, needs an innovative approach to its organization and management structure. There are several components of the CPC operations that need to be addressed. A. Ownership of shares of stock of the CPC and the rights of its Stockholders The stockholders being the owners of the CPC elect the members of the Board of Directors who shall formulate the corporate and operating policies of the CPC in accordance to the Articles of Incorporation and By-laws as originally approved by the incorporators. The number of Directors and their election to the Board of Directors are determined by the majority votes of the stockholders during the annual stockholders meeting (majority votes are determined by the total number of shares held by the stockholders who voted for a particular candidate for the Board). At the annual stockholders meeting, the Board of Directors shall report to the stockholders on the financial and operational status of the CPC. The stockholders will then elect new Directors and/or reelect some or all of the existing Directors. The rights to represent shares of stock in CPC owned by an organization shall be manifested through an official document authorizing a certain individual to vote for and in behalf of their organization. B. Board of Directors as the Policy Forming Body of the CPC the duly elected members of the Board of Directors shall formulate the set of policies that in their view will protect and enhance the interests of the CPC, which are: balancing of CPC profitability, farmers benefits and social impact; employment generation and economic development in the community. Their duties will include the selection of the officers of the CPC, approval of contracts, instituting controls and safeguards against abuse of authority and misuse of the assets of the CPC while taking cognizance of the need by the corporate officers to make timely decisions to ensure efficient management of the activities of CPC. The complexity of the activities of the CPC will require initially quick decisions by the Board. Delays in convening enough Directors to constitute a quorum may not augur well in the operation of CPC. An Executive Committee composed of three members of the Board with the President of CPC as one of them can be created to decide on matters requiring Board decisions provided that the decisions of the Excom be confirmed by the full Board during its regular Board meetings. C. Management Team Considering that the CPC is an integrated approach to business, industrialization and community development, there is a need to integrate the different expertise under one management team.

The operation of the production facilities can be management more efficiently by people with technical expertise in operating the equipment and facilities, supported by community-based procurement and logistic expertise. This is to ensure that there will be continuous supply of whole coconuts to the CPC and the return of benefits to the farmers through better prices, lower transport costs, improved farm management, priority in employment, business and

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other social opportunities. Marketing and other technical expertise will initially be provided externally, while in-house expertise is being developed. The supervision of these varied aspects shall be under the corporate officers who must have prior experience in management and people skills. Prior knowledge of financial analysis, negotiating abilities and a certain degree of social concern are important qualifications for the chief executive. The management structure will therefore be composed of: the Office of the President/Chief Executive Officer and his staff to oversee the entire CPC operations. The CPC plant and other field operations shall be headed by a Resident Manager, who shall report to the President/CEO of CPC. As the Resident Manager, he coordinates the functions of the various unit supervisors. As the Head of the Processing Plant Unit, he supervises the operations of the processing plant, which start with receiving the whole nuts to processing of the whole nut into copra, fiber, fertilizer and/or feeds, shell/charcoal and other by-products. The Logistics and Community Development Unit is headed by a Logistics Supervisor whose functions start with enlisting farmers as suppliers of whole coconuts to the CPC, assisting farmers in proper farm management, collection and delivery of the nuts from the farms to the CPC plant site, liaising between farmers and credit providers for fertilization and intercrop production and other farm support services. He reports directly to the Resident Manager. The Administrative and Finance Unit is headed by a Supervisor and oversees all the administrative and personnel support needs of the CPC. He/she shall also operate the cooperative store of the CPC. He reports directly to the Resident Manager. Staff requirements will be hired on an as need basis. CPC should outsource as much of the services being performed in the plant on an activity basis and paid piecemeal. Salaried employees should be kept to a minimum.

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