A common business model among clients in our Agri, Food and Water (AFW) portfolio is that of vertically integrated companies, i.e. companies where two or more stages in value chain are effectively controlled by a single entity. This comes with clear advantages like more control over the supply chain and business resilience to external shocks. Additionally, sustainable and resilient vertically integrated supply chains are linked to positive development impacts, including contributing to economic growth and decent work. This impact is central to objectives of Building Prospects, a government subsidized program from the Dutch Ministry of Foreign Affairs. However, the hypothesized impact of vertically integrated agri-companies has not yet been put to the test with an impact evaluation.
FMO commissioned KIT to perform an evaluation to assess what impact a vertically integrated company has on agri value chains, using as a case study FMO’s investment via BP funds in HPW Fresh and Dry, a tropical fruits processor in West Africa. The evaluation sought to test and attribute HPW’s impact against 3 distinct pathways: local processing, local sourcing and local job creation. Centered around HPW, the team at KIT drafted a Theory of Change which revolves around three themes: (1) the introduction of new (processing) technologies, (2) the local creation of employment, and (3) local sourcing. Mapping out this impact narrative allowed the evaluators to collect evidence in favor and against this hypothesized impact. The literature allowed for findings to be complemented and triangulated, which led to several interesting insights.
The evaluation confirms there is strong evidence for HPW’s contribution to structural transformation of the Ghanaian economy through its introduction of new food processing technologies, contributing to enhanced value addition and capital accumulation.
The evaluation confirms there is strong evidence for HPW’s contribution to structural transformation of the Ghanaian economy through its introduction of new food processing technologies, contributing to enhanced value addition and capital accumulation. This is typical when comparing manufacturing to primary production due to various factors, including high productivity, value add & capital accumulation, technical knowledge and the need for an educated workforce. There are clear indications of these for HPW’s case. For example, when comparing 2012 with 2023, the workforce increased four times, while the export volume increased seven times in the same period, showing a high increase in labor productivity. This impact is attributable to the drying technology introduced in the first two factories which allowed HPW to respond to global export demand, as well as organizational improvements to production. The importance of improving productivity was also underscored by our corporate evaluation of SDG 8.
Regarding spillover effects, the picture is slightly more mixed. While there were spillover effects for generic technologies, when possible, HPW tends to organize its services in-house or by engaging with experts in Europe, South Africa, or China. This is due to capacity gaps on behalf of local suppliers. This is consistent with the literature on vertically integrated companies, which have sometimes been described as ‘enclaves of excellence’, meaning they can achieve high quality but are less integrated in the local economy. One way the evaluators recommend mitigating this is by contributing to local technology network development, through increased collaboration with local universities.
HPW also significantly contributed to local job creation, including on reduced inequalities and enhanced well-being of workers and families. Wages paid to its factory employees are much higher than minimum wage and higher than industry standards, and HPW is clarifying its commitments to the complex topic of living wages. HPW also pays specific attention to supporting female workers, exemplified by the addition of an on-site creche, to accommodate female workers participation in the workforce. HPW’s formal-only employment is not the norm in Ghana and it grants workers more predictability and other benefits. Anecdotally, the benefits of the good employment conditions may have further indirect effects, as local police connect the enhanced employment prospects for young people to a reduction of crime in the town.
Finally, vertically integrated companies can have a positive impact on local farmers, by offering a stable demand and access to new markets, though here the picture is also mixed.
Finally, vertically integrated companies can have a positive impact on local farmers, by offering a stable demand and access to new markets, though here the picture is also mixed. The support provided by HPW, which includes training, inputs, credit and certifications, has helped increase quality and quantity of fruit produced and led to increased income, reduced post-harvest losses and waste
On the other hand, the evaluation also highlighted some challenges farmers faced, including clarity on contracts, (a perceived) low bargaining power and inflation. Furthermore, some farmers tailored their production to pineapple and mango in the hope to access lucrative export markets, which however left them dependent on HPW as major buyer. This combined with HPW prioritizing larger, more reliable suppliers, left them vulnerable.
These challenges are more structural in nature, and they have also been uncovered in literature reviews which cover companies with similar business models throughout Africa. They are challenging for HPW and FMO to fully address. While there is value for smallholder integration in supply chains, there is a certain tension with the goal of the businesses maintaining a viable business model, and this tension should be navigated wisely.
HPW offers a convincing investment case for Building Prospects with high development relevance, financial additionality and potential indirect mobilization effects. Moreover, a technical assistance project, also funded by Building Prospects, aimed at supporting dried mango fruit processors in Burkina Faso can generate demonstration effects, for example by upgrading equipment and capacities of fruit processors, making fruit processing more popular and creating further demand for fresh fruit like mango. The investment in HPW was done with Building Prospects and not FMO’s own balance sheet, as it was considered too early for FMO to invest its own funds right away. The evaluation was positive about HPW’s ESG performance, while noting FMO’s role here was more limited given HPW’s relatively advanced practices.
In conclusion, the HPW case, complemented by a literature review, shows that there is a large potential for impact by investing in vertically integrated agri companies. However, some nuances in attributing impact must be taken into consideration.
The reliability offered by vertical integration can be a mixed blessing. While it enables the business to perform well, the spillover effects can be more limited compared to companies which rely on other local suppliers to optimize their technologies.
The findings on the effects through the supply chain shows the limitations of this business model in reaching smallholder farmers, and some difficulties in contributing beneficially to their incomes. There can be a tension between smallholder inclusion and reliability of sourcing. Going forward, FMO will continue to invest in customers active in agri processing . The evaluation highlighted both success stories and challenges, some of which are structural in nature and difficult for either FMO or HPW to fully address. Nevertheless, there are items where marginal contributions are possible, like supporting the development of a technology network through cooperation with universities or paying extra attention to supplier strategy. Moreover, the evaluation highlights specific interventions made by a customer that relate to FMO’s strategic impact ambitions on decent work and gender.
