Sustainability issue: FPO Blues

About ICCo
ICCo India is a not-for-profit development organization based in New Delhi.
ICCo stands for Innovative Change Collaborative in its vision and operational principles
as it believes that innovative strategic thinking and collaborative efforts are the key to bring
about the desired change in our society and systems. Overall, ICCos work is grounded by
the twin core principles of: Securing sustainable livelihoods, and justice and dignity for all.
For the past 35 years, ICCo has built its expertise in providing solutions that are
innovative, sustainable and aimed at improving the lives at the base of the pyramid
population across India through the participation of multi stakeholders including the
private sector. Besides supporting work aimed at creating developmental impacts, ICCo
also offers a wide range of expert and responsive technical services to civil society
organizations (CSOs), governments, donors and private sector organizations.
Vision
To be a high quality, benchmark resource, supporting social enterprises and businesses that
ensure fair and sustainable development
Mission
We will enable fair and sustainable development by:

Designing and supporting innovative ideas and solutions in strategic collaboration with
diverse stakeholders

Adherence to the highest quality standards in all spheres

Context and Background

Challenge
Enhancing agricultural livelihoods is an important challenge in a country with the worlds
largest farming population (including small and marginal farmers whose

income growth has remained modest or stagnant in the twenty-first century). This despite Indias
role as world leader in the production of several agricultural commodities. While co-operatives
have served the sector well in the past, governmental interference, poor reach (only 1 in 5 farm
households are estimated to have availed services of co-operatives), elite capture, and
organizational challenges have necessitated the launch of new institutional forms to meet certain
contemporary challenges concerning enhancing farm incomes through collective action. With a
new legal framework in place producer collectives (co-operatives and companies) and Farmer
Producer Organizations (FPOs) have been contributing valuable services to the agricultural value
chain. The SFAC (Small Farmer Agribusiness Consortium) figures indicate a reach of 887427
farmers in 30 states organised through 879 (483 registered, 396 under registration) FPOs with
over 21 civil society organizations providing technical and organizational support for the last 4-5
years.
The Companies Act of 2002 went into effect in India, creating a new kind of legal classification
for companies termed producer companies. Under this law, small-scale farmers that form
producer companies face many legal hassles and do not have a conducive political climate for
their businesses. For example, they are limited to accessing loans, grants and subsidies and are
not able to access private equity under the current system. Since they are not viewed as part of
the private sector but are seen as something more akin to NGOs, early stage companies have
little to no access to support or incubation.
These issues have been the centre of debate in the Indian government and yet, with the ruling and
opposition parties saying exactly the same thing, they hardly ever reach a consensus. We need to
identify a way of dealing with these externalities. Various policies implemented in the
agricultural sector have not been able to make a serious dent in the farmers crisis. These
policies need to be scrutinised given the paucity of information regarding how various actors
perform under a policy umbrella in terms of reaching benefits to the farmers. An issue dogging
the new generation collectives involves the financing and working capital not reaching them. The
need of the hour is identifying how subsidies actually work and whether the issue of subsidies
not reaching the collectives is embedded within the FPOs per se, or if it is a weakness in the
implementation process.
Strategies and Approach by ICCo
ICCo has created a 36-month incubation process, specifically for early-stage producer companies
that facilitate access to certain market players and finance. As part of the incubation process,
ICCo has created a rating and assessment tool in collaboration with SCOPE insight. All producer
companies receive a rating at the beginning and end of the incubation period. This rating helps
them gain access to finance from banking institutions and private funders.

ICCos Strategic Pilot on Incubating Producer Companies

In 2013, ICCo launched a Strategic Pilot on Incubating Producer Companies

to bring about a paradigm shift in the way Producer Organizations are promoted in the country
through the following three- staged approach.
The pilot focused on moving away from a Capacity Building Approach for PCs, which need to
be treated as business organizations. The pilot provided immense learning on the best practices
to be adopted for incubating POs.
Technical Approach: Business Incubation
ICCo takes a Business Incubation Approach that is clearly differentiated from a capacity
building approach. The difference lies in two major fronts. While the former is a traditional
approach of first forming the companies and subsequently working on the Business Plan, the BI
approach empathizes on conducting a market survey and a Value Chain Analysis first and then
based on requirement form companies.

The former focuses on providing trainings, exposures, learning programs etc, the later approach
is more comprehensive, professional and business oriented with a clear exit plan for the support
organization once financial linkages are established. And, in order to establish this exit after
financial linkages, it is necessary to work on NINE core parameters enumerated below:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Internal Management
Operations
Financial Management
Market
Supply Chain
Identify and plan to minimize External risks
Continuous improvement of Financial Performance
Identify and optimize use of Enablers and
Focus on Sustainability

The BI approach has a defined and well targeted process with clear timelines and
deliverables. It is a result based management approach in a way. It is aimed to increase the
entrepreneurship at the bottom of the pyramid. It includes a wide array of professional
services which are customized, beneficiary oriented, having clear deliverables, indicators and
sub sets of indicators with result check mechanism. This perspective has clear defined exit
beforehand and is measurable and verifiable. Ratings and assessment will be done and
comprehensively documented against the baseline on various parameters which are clear,
transparent and credit worthy. These ratings will help the prospective formal financial
institutions and other technical public and private institutions as well.
Challenges faced
The organization expresses the following challenges while incubating the FPOs:
i.

Limited access to capital investment and working capital: Requisite finance

(capital investment and working capital) is not available to FPOs when required.
Access to working capital is inadequate towards meeting programme expenses.
Supporting agencies (aid agencies) do not have a long-term commitment to FPO
promotion. It takes about eight years to sustain an FPO (three years go by during the
registration process and the rest of the time is taken up by the business cycle), yet
the support lasts for a very short duration.

ii.

High taxation leading to poor financial viability: While some of the taxes are
acceptable high VAT, IT, and interest rates affects the financial viability of FPOs.
FPOs that are treated on par with normal private limited companies with a taxation
rate of 30.9% face a huge liability on their resources.

iii.

Subsidy Vs. business tradeoff: All the collectives comprise women and there have
been difficulties in shifting from the subsidy orientation approach, which has got
rooted in the community to loan/equity/business orientation.

iv.

Productivity enhancement vs. value enhancement: The focus of FPOs is more on

productivity enhancement rather than on enhancing value for production (through
processing, value addition, and market linkages).

v.

Low capability of local leadership: Professionals trained externally are not willing to
work in rural areas. The existing leadership at the community level has low capability
and nurturing it becomes a difficult and time-consuming task.

vi.

Poor membership: Maintaining 100 percent active membership has been difficult and
impossible so far.

vii.

Poor business orientation and huge statutory compliance: Business orientation

awareness regarding new age collectives is low among farmers. The statutory
compliance on the part of FPOs is huge (including quarterly returns filing and

renewal) while poor understanding prevails among BoDs and CEOs in this context.
For each business activity the FPOs need a separate license such as TIN, Agri-input
licenses, Mandi licenses, TAN etc. The stocking of branded inputs, seed, and
fertilizers requires advance payment. Even for stocking 2-3 months before the seasons
onset the FPOs often do not have adequate capital.
viii.

Finance and investment: FPOs are reluctant to invest in share capital and banks are
not keen on opening bank accounts and lending to the FPOs as they have no assets to
provide collateral security or requirements such as minimum three years balance.
Even if the government or private credit institutions agree to providing support timely
working capital is not available affecting the input supply while farmers lose trust in
the FPC.

Based on the challenges faced by ICCo and the FPOs they promote, suggest a suitable
strategy to mitigate risks. We do not expect a complete turnaround but some tweaks to the
model or even a parallel model are welcome. You may have a look at other organizations
working with FPOs and mould their strategies to suit ICCos mission and vision. Please
include examples from field if adopting some other organizations strategies.
Round 1 Deliverables
A Write up on the case solution: Word Limit - 600 words
A presentation on the solution Max 8 slides.