Export Processing Systemic Change Pathways
Septmeber 2015 MDF Fiji Version-1
Summary MDF Fiji Country Strategy Poverty Fiji is a middle-income country. Nevertheless, 35 per cent of Fiji’s population is classified as poor and/or vulnerable to income shocks. Poverty is caused by and/or concentrated in: Traditional crops for export such as sugarcane and copra have become less profitable. The domestic market for food crops is mostly saturated; farmers grow a variety of crops in small quantities and are not very specialized; yields are low. There is a need for new markets for agricultural produce. There is rural-urban drift, which results in urban unemployment (and, in places, a rural labour shortage). Urban services have been expanding, but not enough to absorb all available labour. Employment in manufacturing and processing has been shrinking and only recently started to grow again. There is a need for employment opportunities outside agriculture, especially for lesser-skilled workers. Cyclones and droughts can jeopardize rural livelihoods; regular sources of income and means to save income help households deal with shocks.
Economy With a decline in traditional export crops, in which the state has a strong presence, new growth needs to come from new entrepreneurs and/or new markets. Growth is constraint by: Domestic markets are small; growth needs to be export-led. The local entrepreneurial base is small; indigenous-Fijian businesses are underrepresented. Small, often first-generation businesses have limited access to bank finance and other specialized support services (the Fijian market is too small to support them); entrepreneurs need to perform many business functions in house, while their financial and managerial capacity may be limited. Skilled labour is in short supply. Fiji ranks poorly (160 out of a possible 189) on the World Bank Doing Business index for starting up a new business.
MDF Focus in Fiji Encouraging (mostly export-led, but also tourism-led) diversification and commercialization in agriculture (‘turning farming into a business’). Creating off-farm employment for those who have left the land (in tourism, in processing).
Support local entrepreneurship in niche markets (mostly tourism-led, but also export-led). Develop better business services; improve aspects of the Business Enabling Environment. For example Biosecurity Authority of Fiji which is the regulatory body responsible for monitoring export of horticulture produce and issuing import permits for agro-inputs. Ensure geographic and ethnic inclusion. This will be achieved by working in the following ‘growth engines’ of the Fijian economy – Horticulture and Agro-Exports, Tourism and Related Support Services and Industries, and Export Processing.
Women’s Economic Empowerment (WEE) All sectors are relevant for WEE, integrated in the systemic change pathways (see below).
Alignment with Government of Fiji Over the last few years the government has pursued a mildly expansionary macroeconomic policy to strengthen investor confidence. In the last five years, the economy has grown steadily; to sustain it the government is emphasizing broad based growth focusing on infrastructure, agriculture, export and tourism. Generating jobs and creating more private sector investment are also key priorities. Such outlook aligns well with MDF works in its three sectors. Within these sectors, MDF is interacting with relevant government agencies, as in Fiji Revenue and Customs Authority (FIRCA), Ministry of Industry & Trade and Tourism, Ministry of Agriculture, Biosecurity Authority of Fiji (BAF) by engaging directly or indirectly through private sector partners. As opportunities, other government agencies would be identified also.
Geographic and ethnic inclusion Fiji is a country where majority of economic activity happens in Viti Levu and in business ownership and managements, indigenous Fijians are underrepresented. Addressing them, within the ambits of the systemic changes being fostered, ensure a greater quality of inclusive impact. Within the three sectors, MDF will have a special focus to support and nurture business growth in other islands including Vanua Levu, Kadavu, Levuka and Taveuni. With indigenous Fijians there is a need to reach out to communities and to small businesses to help nurture such growths. MDF will explore innovative partnerships methods (NGO, CSO, Community bodies) and work in the area of access to finance, among others, to support, develop and promote more indigenous representation.
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Note on Systemic Change Areas In general, beyond certain traditional sectors like Sugarcane, Copra which show signs of stagnation, Fiji, being a small island economy, has thin, emerging market systems. All three sectors, Horitculture and Agro Export, Tourism and related Services and Support Industries and Export Processing show good potential but at the same are broadly defined. This is done so to ensure that MDF reaches a certain scale of meaningful impact while having commonalities across market dyanamics in each respective sector. The implications therefore are that the systemic changes being envisoned and captured in his document also are necessarily broad and and represent the first tier of change. As a broad rule, it is expected that achieveing a high degree of systemic change is a process that takes around 8 to 10 years from inception. For MDF Fiji, which began its sector work in June 2012, as it goes about implementing partnerships in all three sectors, in line with these envisioned changes, new areas, with more defined needs are already beginning to emerge. Cross sector services like finance, transport, packaging information (media, agriculture and non-agriculture) are picking up with new market entrants but they need to be made more relevant (eg. product development, capacity improvement, promotion) to have a wider inclusive impact. In a similar vein, areas under enabling environment (eg. customs reform, agriculture policy, export strategies, business support and registration) are also emerging where there is potential for impact. Last but not least, infrastructure development (ports, airport strips, jettys, drainage), which could be viewed as embedded elements within each sectors or as a separate area, also has significant potential for inclusive impact. MDF sees it portfolio growing to include these cross sector services as a sector by itself in the coming year (post 2017). Beyond that there are opportunities for MDF Fiji to leverage on its learning in working in Fiji and broaden (if other Pacific DFAT posts are willings) to include other Pacific countries like Solomons and Vanuatu from its Fiji operation.
The MDF Framework for Defining and Populating Pathways to Systemic Change The systemic change pathway explained Competitiveness and change in sectors do not depend only on the actions of MDF. Sectors are complex and are influenced by a wide variety of factors such as global markets, changes in the policy and regulatory environment, the availability and quality of infrastructure, the cultural context and the environment. Some changes introduced by MDF will catch on quickly; others have faced barriers and moved slowly or not at all. MDF must be able to define which change areas it needs to focus on to make growth more robust and inclusive and then monitor progress towards achieving the quality of change that can be called ‘systemic’. For this purpose, MDF developed its Systemic Change Framework as outlined in the figure below. This framework is applied separately to each key strategic change that MDF aims to foster within a sector or market system. The annexes to this Strategic Guidance Note provide a detailed example of how the framework is applied in Fiji.
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MDF Systemic Change Pathway
Application of MDF’s Systemic Change Framework requires a deep understanding of a sector as well as experience working with market players to address constraints to pro-poor growth. The first step in applying the Framework is to develop an inclusive, pro-poor growth strategy for each sector. This sector strategy is typically based in on an Inclusive Analysis of Growth, Poverty and Gender at the sector level combined with a Household Level Analysis of Poverty and Gender Dynamics and defines a vision for inclusive growth as well key constraint areas to inclusive growth. MDF will then proceed to launch partnerships aimed at reducing the constraints identified and unlocking inclusive growth. At the same time, MDF uses the framework outlined above to further define its ‘strategic intent’ for a sector, as accurately as possible given that it will learn more from implementation about what is really needed and realistically feasible. Please refer to MDF’s Strategic Guidance Note on Systemic Change which shows how an inclusive sector growth strategy (for the Horticulture sector in Fiji) feeds into the country strategy, and how systemic change areas support the inclusive sector growth strategy. As mentioned, for each systemic change area, MDF applies the systemic change framework; the introductory section justifies the rationale for identifying the systemic change. Importantly, in time, based on the experience gained from implementing the first partnerships within a sector, it becomes clearer which systemic changes the programme should focus on. As the programme discovers more through implementing its partnerships within the sectors, it becomes clear that some constraint areas appear to be dimensions of, or seem to coalesce around more deepseated problems. MDF then develops a better idea of which changes the market is ready for, and which changes requires more innovative approaches address the problems. Through the interplay between traction gained through partnerships and strategic intent, emerges firmer systemic change areas, which then become the ‘compass’ for programme implementation in the sector. This typically happens around two years into implementation as the first batch of partnerships start to yield results. To help define (and manage, monitor and communicate) the dimensions of change that deserve to be labelled ‘systemic’, MDF asks two fundamental questions: 1) are there appropriate incentives for market players to interact with poor people and to continue, expand and adapt the new business model; and 2) is the adoption and adaptation of the new business model continuing to serve the interests of poor men and women? For each question it has defined three key parameters. The table below reiterates these questions and briefly defines the parameters related to this. It should be noted that the first three parameters refer to the strength of the business case underpinning the change, and other three parameters refer to the beneficiaries of the change. Together they define the quality of change as well as the scale of change, making it truly ‘systemic’.
Parameters with Systemic Change Framework
Questions
Parameters
Definitions
Are there appropriate
Autonomy
Independent action by businesses or other
incentives for the market
market players to adopt and/or improve a
players that interact with poor
business model promoted by the programme.
people to continue, expand and adapt the new business model?
Sustainability
The extent to which the business model promoted by the programme is sustainable and/or profitable.
Resilience
The extent to which the market system supporting the business model can adapt to stay competitive, take advantage of new opportunities and recover from adverse shocks.
Is the adoption and adaptation
Inclusiveness
The extent and depth to which the business
of the new business model
model as practiced by market players includes
continuing to serve the
and benefits the target group
interests of poor people?
Scale
The proportion of the potential target group that gets the goods, services and/or jobs promoted by the programme.
Women’s
The extent to which the business model
Economic
includes and benefits women with respect to
Empowerment
income, access to opportunities, access to assets, life chances, jobs, manageable workloads and decision making power.
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Then, by asking these two questions using these six parameters, the framework seeks the programme to define a ‘beginning state’ for each parameter. This is the state of the sector or market system at the start of the implementation process (‘at the beginning of the pathway to systemic change’). Once the programme is being implemented it defines the key market or regulatory gaps it seeks to address to make the market system work better. This is followed by a description of the ‘end state’ for the same parameter. It outlines how the programme wants to see the market system work. If this state is achieved, the work is done. The end state should be defined as per market needs to work well. Therefore, it may occur that the programme defines an end state that it cannot achieve given its current resources and implementation window (contract duration). This makes the Systemic Change Framework a management tool not only for the programme, but also for its investors. It starts to define the ‘total potential’, the ‘total need’ and the ‘total time and resourcing’ required to meet those needs. As mentioned, the space between the beginning state and end state is the gap in the market system that needs to be filled, the pathway to systemic change that needs to be populated. MDF identifies four stages of progression along this pathway, captured for each parameter. These stages are ‘initial’, intermediate, ‘advanced’ and ‘matured’. In time, MDF will make progress against these parameters, but not at an equal pace (there may be very inclusive partnerships that lack scale and to some extent resilience, and partnerships that are strong on autonomy and scale, but less on WEE). Each partnership design needs to be strong and sustainable enough to be considered for co-investment by MDF, but no partnership is perfect. By managing its portfolio MDF will ensure quality of change at scale in a systemic manner. Nevertheless, MDF does not expect that all changes will reach the same level of institutionalisation in the market system within the life of the programme. Some changes may only reach an initial or intermediate level of systemic change, while others may reach an advanced or matured level of change. Using the knowledge and understanding gained from several years of experience, MDF can project the level of systemic change it expects to catalyse two years beyond the life of the programme.1 MDF assesses the progress of systemic change against these projections and analyses why change is happening faster or slower than expected. This helps the programme to better understand market dynamics and adjust its strategies appropriately. Finally, for each parameter, MDF will describe the beginning state and end state of where it is situated in moving forward along the pathway to achieve systemic change. This helps the reader
1
The processes of change that MDF catalyses during the programme will continue beyond the end of the programme. MDF uses the DCED recommended two years post programme timescale for its projections.
understand how far MDF has progressed in terms of achieving its strategy objective, with whom (which partners), and why. As implementation and insight progresses, MDF periodically updates these stories (as well as, if needed, the desired ‘end state’).
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Export Processing Sector Scale, constraints and opportunities This constitutes a number of industries that have similarity in operation and market dynamics and show good growth potential in the years to come. These are Garments, Food Processing, Sea Resources, and ICT (call centers) which generate significant employment opportunities for the poor in the urban sector. Combined, based on government statistics and market interactions, it is estimated that the sectors contribute 14% to the GDP, provides employment to around 12,000 people with around 100 companies involved. For Garments and ICT which generates the bulk of the employment, over 70% is female. Constraints and opportunities in the sector are as follows:  Other than ICT (Call centers), the remaining areas under the sector have growth potentials driven by niche opportunities. In Garments it is about quality products, short turnaround times and small orders. Food processing and sea resources have potentials, driven by the Pacific market and to an extent, markets in US, Australia and New Zealand; China is an emerging market for the sea resources segments. For ICT, geographical positioning and stable IT connectivity and infrastructure allows a much more global appeal; however a more conducive enabling environment is required to translate the potentials into reality.  For exporters to grow, they need to become more competitive and efficient by investing in product development, promotion, technology, factory efficiency, supply chain integration and capacity building of staffs. Almost all of these exporters are based in Viti Levu with a low representation of the Indigenous Fijian communities.  In terms of sector organizations, there are a number of business membership organizations (BMO) present (maximum around 20) although a few are functional. Having said that, there is precedence in the past where the active roles of the BMO have led to constructive government interventions. Considering, that Fiji has a relatively restrictive international trade environment (one of highest number of days and permits required for international trading) and that some of its current laws (eg. Duty suspension scheme) are not so conducive, there is urgent need for the sector to raise these issues at the appropriate level to address these constraints. Doing so, would create more re-investment in this sector leading to more jobs and income.
The position of the poor in the sector There are two categories of poor in the sector; one, who are workers within factory and other are the poor farmers who supply the produce for the exporters (this only applies for the food processing and sea resource segment). MDF studies indicate that for the worker, they come from both
ethnicities- Indigenous Fijians and Indo Fijians- and generally reside in urban informal settlements (40% of whom live below absolute poverty). For the poor worker, lack of access to adequate skills and work experience, constrains them from entering the work market although businesses within the export processing sector are known for their ability to hire unskilled people when expanding. In terms of farmers, the poor primarily come from the coastal communities supplying the sea resources to the exporters; they typically reside in some of smaller islands in Fiji. Some of the poor also come from horticulture farmers that supply the root crop to the export processors that target the other Pacific countries for their products.
The position of women in the sector As mentioned earlier, majority of workforce in the areas under this sector constitute women coming from both ethnicities. In both Garments and ICT, they tend to hire unskilled workforce and then build their capacity in-house; a major ongoing concern for these players has been the relatively high turnover of female staff once they start having their own families. Hence there is an urgent need for support systems to be in place (flexible time, transport drop, day care facilities) to help retain staff. Females living in urban informal settlements also cite lack of security measures in their home, as one reason why they are reluctant to take up work or leave work. Those who take up jobs generally are in a better position to decide on how to spend their income.
Systemic changes in Export Processing In general, while the picture of systemic intent is clear from the onset, the evidence of systemic change happening starts getting clearer after two years of implementation. Export processing sector is in that transition stage where implementation experineces are slightly more than a year old hence the picture of systemic change is still forming. Hence given this caveat and based on its analysis and current set of experinces, the changes being posited by MDF are as follows:: 1. The private sector is better organised and proactive to address the interests of exporters. 2. Exporters are better able to source, develop and promote their products to export markets. It is very likely that these changes would be refined and better articulated in the next few years. Beyond these areas, other areas where changes could be explored lies in having a more conducive enabling environment to facilitate more international trade. Currently these issues are being addressed, embedded in the systemic changes above but considering the wide scope of this area, and current capacity of differnet bodies and agencies (public and private), it is very likely more effort would be needed for consolidation. The other evolving area that would merit MDF’s involvement would be on geographic inclusion. For the current set of changes, the impact is still going to be
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largely dominated within Viti Levu and existing businesses. Enhacing the impact to other island would involve focusing on connectivity to islands (transport, sea freigths, barge etc), nurturing and supporting entrepreneurship growth in those islands and connecting them to mainland exporters.
Pathway 1: The private sector is better organised and proactive to address the interests of exporters Background (‘before picture’) There are around 20 private sector associations and/or chambers that are relevant to this sector with three to four being more prominent (Fiji Exports Council, Fiji Commerce & Employers Federation, Textile Clothing and Footwear Council, Local Tuna Boat Owners Association). While the prominent few have adequate and sustained memberships, almost all the BMOs are not organized properly. As a result, issues constraining the sector are not properly raised to relevant authorities. Promoting availability of skilled workforce has been one area where these BMOs have been moderately active but then again, success has been limited. In terms of role of government there is clearly room for improvement. Distortionary influence of Ministry of Fisheries’ extension services and also agriculture dissuades food/sea resource exporters to invest in supply chain. Bureaucratic and dated rules and inadequate resources of the government impede export and import by creating delays (processing takes at least 19-22days with 8-9 documents required). Relevant support markets within this space are media and skilled workforce (training). Their outlook is surmised below
No in-depth reporting or adequate business reporting in broadcast media leading to poor issues being raised. Watchdog functioning of media very limited. Based on 1% of payroll training levy imposed on all organizations, FNU provides training to businesses. However strong disconnect exist between business and what is offered.
Majority of workforce in the export processing sector are women. As sector based association (with the exception of women based associations), they have played little role in advocating for a more supportive environment (flexible time for young families, transport, day care services etc) in work place for women.
Anticipated ‘end picture’ (when markets work well) Majority of the sector based associations are self-sustaining and organized; they successfully address issues constraining growth of the sectors including skills related issues. Associations are more knowledgeable and service-driven to members and have constructive relationships with relevant authorities. For Government, there is a shift from service provision role to a regulatory and facilitative role (e.g. Ministry of Fisheries, Agriculture). Adequate policy instruments are in place and
being implemented; developed in consultation with private sector. Broadcast and print media also play a more constructive role to highlight issues for both public and private sectors. The training market is now better functioning: need/demand based training products are available in the market which business tap into and improve skills for both women and men. Prominent associations take up issues relating to supportive environment for women workforce and have successfully set up information/schemes leading to member companies starting to adopt these measures.
Expected Pathway to Systemic Change (likely number, types and focus of partnerships)
Directly partner with key private sector associations to help them address sector related issues and constraints. Likely support areas are policy reforms, institutional strengthening and member outreach programmes. Expected partnerships: 4~5; no crowding-in expected. Work with Ministry directly or through private sector associations like Ministry of Fisheries, Fiji Maritime Academy, Fisheries associations. Expected partnership 2~3; no crowding-in expected Work with media agencies (print and broadcast) to effectively cover industry issues. Key areas are to improve skill and business journalism capacity/presence in these media. Expected partnership 2~3. Crowding in 1-2. Facilitate interaction between training institutions and industry; work with industry to help develop proper programmes. Expected partnership 2~3; no crowding-in expected
Women’s Economic Empowerment MDF work is expected to help retain and/or increase income for women in the urban circle. The idea is to encourage more female worker participation by ensuring supportive environment exists for women to participate in the workforce more effectively... Work load issues of females in the households will also be looked into.
Partner with prominent associations to take up the issue on providing a more supporting environment for women. As a result of this, it is expected that members of the association would have heightened awareness of these issues and take concrete steps in this regard. Consequently there will be less absenteeism and turnover of women workforce. These workers are expected to have a higher income and control of their earnings. Expected partnership 1-2; no crowding-in expected In partnership with exporters featuring rural households, women will feature as part of households supplying to exporters. See Horticulture, systemic change pathway x.
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Results in time Over a 10 year period (starting 2012), the result of the work on getting the private sector better organised is likely to have large scale effect on creating more private sector investment, creating more jobs and income for women and men. It is expected to create 600 FTE jobs (400 for women) and benefit 2,000 people. While industries in Vanua Levu will have a growing presence, a large impact will still be in Viti Levu (it will take even more time to have impact on Vanua Levu).
Feasibility, efficiency and risks There are synergies within these change areas that MDF is promoting that is not only in this sector but also with other sector as well. For instance, the work in horticulture also involves improving connectivity across islands and once that is there, that would also help exporter for fish and processed food to source from other parts of Fiji. Owing to varied natures of the export sector, MDF’s flexibility in approach allows it to be well placed to address the individual needs of the private sectors and stimulate systemic change overall. There are risks along with this pathway and these are:
Government seeing their role more as provider than as regulators. MDF’s partnership with government agencies, directly and/or indirectly, will be one way to mitigate this. As some of the existing preferential trade agreements come to a close, new bi/multilateral agreements are being discussed and agreed to by the current government with other Pacific countries, Australia and other trading partners to help ensure growth. MDF will encourage more industry consultations with association to ensure export industry interests are well served.
Pathway 2: Exporters are better able to source, develop and promote their products to export markets. Background (‘before picture’) Exporters do generate employment/income for the poor in terms of factory worker or suppliers. They have the potential to grow and generate more income and jobs but are constrained by their capacity to source, develop and promote their products. They lack the backward linkages and either prefer to import the ingredients (processed food sector) or rely heavily on the government to ensure their sourcing (sea resources). There are constraints relating to compliance and technology where exporters have not adequately invested in these measures resulting in inefficiency. In general, the story of export processing is one of niche segments and exporters need to become very nimble and
efficient in their operations to tap these segments on a sustainable manner. Relevant support markets within this space are discussed below:
Risk-averse financial market. Only lend based on much secured collateral and large companies. Under representation of indigenous Fijian owned business.
Poor transport connectivity across islands
High bureaucracy leads to increased delays and documentary requirement for export and import and thereby discourages international trade.
Majority of workforce in the export processing sector are women, however the support systems (day care, flexible time for females with young families, transport pick up and drop) in these workplaces for women is very limited, if not absent. Hence there is large turnover and/or absenteeism of such female workers. Some of the large exporters are realizing the gravity of these issues but struggling on how to address them
Anticipated ‘end picture’ (when markets work well) More than 50% of exporters have re-invested in their operations to grow, increase their efficiency factor and create more jobs for women and men. Innovative product diversification has taken place and at least 20 exporters have done that. Niche segments in Australia, New Zealand, European Countries, China are being served effectively. The poor enjoy more work in these companies and or supply in greater volume, raw materials through more supply chain integration. With support markets, banks have become more liberal and aggressive in targeting small businesses with their financial products; the Reserve Bank of Fiji also plays a more constructive role to ensure that financial institutions are lending more to small businesses (in sectors such as export, tourism and agriculture) ho. This enhances more organizations to become or increase their export volumes as well as enhance the scope for more indigenous Fijian based businesses to enter and grow in the market. Government agencies undertake reform initiatives and improve the efficiency through streamlining processing dealing with export and import. Top companies provide a supportive environment for female workers (day care, flexible times, and transport facilities) as a way to retain and motivate their staff.
Expected Pathway to Systemic Change (likely number, types and focus of partnerships)
Work with partner exporter companies to help them source, develop and promote better. Work with scale agents (Media, BMO, Lead companies) where possible. However it is likely that the strategy will be more dominated by replication since effective scale agents hardly exists. Expected partnerships: 6~8; 2~3 crowding-in expected
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Work with financial institutions (banks) to promote more SME lending. Working with banks to support SME growth would create more indigenous Fijian presences in economic activity. Expected partnership 2~3; 1~2 crowding-in expected Work with shipping/logistics companies in other sectors (horticulture) would impact on this area since this would facilitate exporter to source more other islands in Fiji.
Women’s Economic Empowerment
Work with 2-3 lead exporters to install supportive environment for women (day care, flexi time, transports etc.) and highlight success in media to encourage crowiding in. Expected partnership 2~3; 1~2 crowding-in expected
Results in time Over a 10 year period (starting 2012) the work in this systemic change is likely to result in some overlap with the work on getting the sector more organized (systemic change Ex-1). Overall, the results expected from this systemic change will help the poor get more income and jobs. It is expected to create 300 FTE jobs (70% for women) and benefit 2,000 women and men.
Feasibility, efficiency and risks There are synergies within these change areas that MDF is promoting that is not only in this sector but also with other sector as well. For instance, the work in horticulture also involves improving connectivity across Islands and once that is there, that would also help exporter for fish and processed food to source from other parts of Fiji. The risk within this change area is that:
For export sector to flourish they would need to target niche segments. These at times tend to be quite volatile in their demands; MDF will work with exporters to identify niche that have sustainable demand and also increase the product basket to minimize risk of being dependent on few markets.