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Export production villages: Sri Lanka's novel approach.

Sri Lanka has introduced a new type of village company that develops and promotes exports from rural areas.

The rural sector in many developing countries offers potential for increased exports, as well as for expanded employment opportunities in what is often one of the poorer segments of the economy. Introducing programmes to stimulate exports from rural regions is a challenge in many countries because of the lack of entrepreneurial skills among the farming population, scattered and sometimes widely dispersed locations of producers, the small scale of production operations and lack of knowledge of market opportunities.

As a response to this challenge, Sri Lanka has adopted a new approach to develop rural-based exporters. The programme, called the "Export Production Village" scheme, was started in 1981 and has led to increased exports of several types of products as well as higher income levels of the producers concerned. Although the scheme has not been without problems, its overall results have been quite positive. The way in which the arrangement operates should be of interest to other developing countries attempting to institute export-oriented development in the rural sector.

Background

Almost four-fifths of Sri Lanka's population is located in the rural areas, dependent mainly on agriculture for a living. Until the last decade three plantation crops dominated the country's exports -- tea, rubber and coconut. The sluggish demand for, and unstable prices of, these products in the international market, however, resulted in low and uncertain export revenues. Successive Governments took measures to reduce economic over-dependence on these three by diversifying the export base. As a result, industrial exports accelerated and succeeded in surpassing traditional plantation exports a few years ago. The development of exports of industrial and nontraditional products during that period however centred on urban and semi-urban areas. Despite the high priority given to rural development by the Government, until the early 1980s most production of non-plantation products in the countryside (mainly of agricultural produce and handicrafts) was geared to the domestic market. Very few nontraditional rural products entered export trade without further processing or finishing in the urban areas.

During the early 1980s various measures were taken in the country to influence and support rural export development. One of the most important was the establishment of Sri Lanka's Export Development Board. The Board soon launched a comprehensive programme for rural export development, as its officials were of the view that considerable potential existed for increasing exports and generating new export items through organized production at the village level.

The central concept of the programme was -- and still remains -- a new rural institution -- the export production village company. The company is designed to promote production for export. It also has a parallel objective, that of supply development, in support of the national export diversification and expansion programme coordinated by the Export Development Board. Other objectives include upgrading business and international marketing skills and, more generally, improving living conditions in the villages by generating new income and employment opportunities.

Village companies

An export production village company (EPV) is composed of a group of small producers. The ownership of the institution is broad-based, as at least 50 shareholders are required by law to constitute an EPV, with no single individual owning more than 10% of the shares. The institution has a special legal status under Sri Lanka's Companies Act.

The strategy behind the creation of an EPV is to develop a viable and commercially oriented village institution, capable of mobilizing the production capacity of the small producers and building a new supply source of exportable products. The company is linked to an established exporter.

The Export Development Board encourages the two parties to build up a long-term business relationship and works with both in this effort -- it assists the company to develop its supply of export products, and it supports the exporter in market development.

Although such companies can legally engage in a range of business activities including exporting, it was not envisaged that they should venture into international marketing in the immediate future. Nor was it intended that the company would go into direct production. Rather it was foreseen that the EPV company should function as an intermediary between the individual village producer and the exporter, by linking up with an exporter or a group of exporters to sell the company's products on foreign markets.

Setting up companies

The initial step in establishing an export production village company is product selection, which is crucial to the success of the scheme. The next stage is identifying a suitable village to undertake the project. Appropriate exporters must also be found to undertake the marketing.

Product selection:

The Export Development Board first determines priority products for export development, based on Sri Lanka's comparative advantages in supplying and exporting specific items. The products selected for the EPV schemes should be producible at the village level in adequate volumes and in acceptable qualities, and the production technology should be appropriate for use in the village context.

One of the reasons the formation of EPVs is carried out on a "product sector" basis is that exporters in the country specialize in narrow product sectors and are organized into associations of exporters in those sectors, such as fruits and vegetables, wood products and hand-loom products. Another is that the small-scale producers involved can compete more effectively by focusing on a narrow range of items. The Export Development Board has staff specialized along product lines, which facilitates its work with the village companies.

Choice of the village:

After a product or a group of products has been chosen as suitable for production under the EPV scheme, the village in which the article is to be manufactured or processed is identified. The choice of location depends on several factors -- the village's supply potential, its accessibility to the main export points and the commitment of its producers to the projects.

If the product is not already in production in or near the village, the project should have the potential to generate an adequate supply for export within a reasonable time. In the case of agricultural products, the village must have sufficient land nearby for growing the item. For manufactured or processed products, the availability of raw materials and of trained or trainable labour are the most important criteria for village selection.

Sri Lanka has a good network of road and rail facilities linking outlying areas with the capital, Colombo, which is the exclusive outlet for both sea and air freight. Accessibility has however been an important consideration in determining the location of EPVs for the production of perishables, which have to be transported within the shortest possible time.

The commitment of producers, exporters, leading citizens and political authorities of the village is also a criterion in the selection of locations for EPVs. The presence of proven business leadership in the village, whose services can be obtained to support the EPV management in the initial stages, is likewise an important factor.

Suitable exporters:

The marketability of the product depends not only on the international sales possibilities but also the existence of an exporter committed to purchasing the products. One essential precondition for the Export Development Board's approval of a project is therefore the existence of an "export-ready" exporter prepared to cooperate with the EPV. The exporter should have experience in that product line or in associated products, and also either already have orders in hand or be in a position to obtain orders within a short period.

Exporters cooperating with the EPVs are expected to provide feedback from the market on buyers' requirements; assist in product upgrading; provide quality control, packaging and post-harvest advice (in regard to agricultural products); contribute transport and other servicing facilities if the EPV is unable to afford them; support producers in their requests for bank credit; and assist in technical and management training of EPV personnel.

Other factors:

Other considerations in setting up EPV schemes usually include:

* Short start-up time: A project that can get off the ground in a short time is preferred to one that takes longer to become operational.

* Employment benefits: Projects that are labour intensive, and therefore provide employment, are given preference over capital-intensive projects.

* Added value: Projects that add value to rural resources are favoured over those that do not.

* Appropriate technology: Projects involving familiar technology, or where skills development will not be too difficult, are selected over more complex schemes.

Motivating participants

Once an EPV scheme has been set up, the next step is to motivate the villagers to participate. In most EPVs established in Sri Lanka, production for export has been a totally new activity or has involved major changes in local production systems, and potential members need to be convinced of the worth of the project.

Particularly for the first several EPVs, the Export Development Board and the local and regional government officials carried out extensive educational programmes at the village level to introduce the concept and explain its objectives and operational mechanisms.

Some of the measures that have been applied to stimulate participation have included identifying a core of village leaders to take the initiative in getting the project underway; arranging demonstration visits for potential participants to other EPVs; organizing visits of prospective exporters of the product concerned to the village; and conducting public meetings, with the participation of ministers, parliamentarians and other national officials.

The active interest taken by the Minister of Trade and other officials in Sri Lanka's scheme made the motivational task much easier.

Starting operations

After the company has been registered, a formal general meeting of the shareholders is held. This meeting is usually also attended by the exporters, the Minister of Trade, district and local officials, members of Parliament and other parties concerned with the project.

Board of directors:

At that first general meeting, the shareholders elect the members of the board of directors. The composition of the board is designed to ensure representation of the different shareholders in terms of their production areas, products and age groups.

The Export Development Board also often encourages the election of at least one experienced business executive from the EPV area to serve on the board as a non-voting, non-paid member in an advisory capacity.

The Export Development Board can also appoint up to four advisory (non-voting) directors to each EPV, who usually include a regional representative of the Agriculture Development Authority or the Department of Agriculture, the manager of the commercial bank in the area, and possibly the area representative of the Industrial Development Board. A representative of the exporter may also be invited to serve in an advisory capacity.

The person holding the post of managing and executive director of the EPV is a key to the success or failure of the company. The Export Development Board frequently nominates the "Assistant Government Agent," who is the highest level public administrator in the area, to this post.

Functions of the board:

The board of directors is responsible for managing the business of the company. It usually meets monthly and has the following duties:

* Formulate production and marketing plans for the EPV in consultation with exporters, government authorities and other agencies cooperating in the scheme.

* Negotiate, on behalf of the producer-shareholders, with exporters on purchase orders for EPV products, including product specifications and quantities, prices, terms of payment and delivery schedules.

* Liaise with government authorities, banks and other agencies on matters affecting the interest of the shareholders.

* Plan and oversee timely delivery of all production, technical and extension inputs to the producers.

* Ensure that every producer-shareholder honours all requirements of sales and any other agreements entered into by the company on behalf of the producers.

* Carry out training programmes and implement other measures to increase the EPV members' efficiency and productivity.

* Ensure that all legal obligations of the company are discharged promptly.

Sources of finance

As EPV companies are not intended to venture into direct production, their financial requirements are mainly of two types. They need small amounts of capital investment funds to set up offices and buy equipment such as weighing machines and quality control and testing equipment. They also require a larger sum of working capital for their trading activities.

EPVs depend on three principal sources for their trade and other working capital funding needs. The first is the share capital of the producer-shareholders. Each share is priced at only 10 rupees (approximately US$0.25). Most shareholders, however, purchase only the minimum requirement of one share.

The second source is the Export Development Board, which as a shareholder takes shares in each EPV equal to the number of shares held by the other members. The commercial banks, the third source of funds, extend credit to the companies in the form of working capital loans or overdraft facilities.

The companies also benefit from trading commissions on sales to exporters. The commission varies from product to product and company to company. The margin retained by some EPV companies is as high as 20%, to cover the cost of collecting and transporting the goods to the exporter's warehouses in Colombo.

In a few instances the company does not charge a commission but instead receives a bonus from the exporter based on the value of the products received or the piece-rate payments made to EPV workers.

Institutional framework

Several government agencies are associated with the EPV scheme. Within the central government, the Export Development Board and the Ministry of Trade have been the key organizations. At the district and divisional levels local government agents have been actively involved.

Export Development Board:

The Board is responsible for sponsoring and supervising the scheme. The scheme is serviced by a special unit of its Product Management Division. Product specialists in this division have in many cases identified the potential for organizing EPVs and have initiated action to set them up and link them with exporters. In addition they assist the exporters and the companies in marketing, pricing, production, post-harvest technology and related subjects. With their colleagues in the special EPV unit, they participate in the production planning and price negotiation meetings of the village companies.

Ministry of Trade:

The Ministry of Trade has overall responsibility for export development and supervision of the Export Development Board. Concerning the EPV scheme, the Ministry not only has a supervisory function but also has been active in the scheme's key activities.

The Minister of Trade conceptualized the programme in 1981 and played a strong role in convincing members of Parliament in the rural areas and the district authorities of the importance and benefits of the scheme. He chaired monthly meetings with EPV management, exporters and officials to review the performance of each village company. Along with other senior officials of the Ministry he has also participated in important EPV functions, such as inaugural and annual general meetings, and has visited the companies regularly.

Local officials:

Both the provincial and district administrators have likewise been active in motivating and organizing village producers and guiding the management of EPV companies.

Gradual development

The first EPV was formed in 1981 to produce betel leaves and subsequently reed packs. The second began in 1982 for the production of green chillies. The operations of these two companies were closely monitored before nine EPVs were established in 1983, and another 11 in 1984. At the end of the latter year the Export Development Board decided to go slowly on the creation of new ventures until more experience had been gained. Five were set up in 1985 and another five in 1986, bringing the total registered under the scheme to 32. Eleven of those later either ceased or suspended operations, for a variety of reasons, including unrest in the country in the late 1980s.

The distribution of EPVs by product category is as follows: fresh fruits and vegetables, 14; pulses and oilseeds, 3; coconut fibre and other coconut products, 5; palmyra products, 2; cashew-nut processing, 2; component assembly, 3; and others, 3.

Examples

The background for establishing EPVs in the principal product sectors is described below.

Fresh fruits and vegetables:

Prior to the launching of the EPV scheme, the main source of fresh produce for export was the wholesale market in the capital, and only a fraction of the volume sold there was channeled to the export trade. In addition to having widely fluctuating prices, those fruits and vegetables were not of consistent size and quality. In 1981 the Export Development Board carried out a concerted promotional effort for fresh produce in the United Arab Emirates. Although prospective buyers were identified, Sri Lankan exporters found it difficult to enter into long-term business arrangements because of the uncertain supply base. These circumstances led the exporters to request the establishment of EPVs for these products.

Pulses and oilseeds:

The EPVs in this product sector are based on the cultivation of black gram (a leguminous plant), sesame and castor seed. Export demand existed for all three items, but production was not well organized. Black gram and sesame were grown as a subsidiary crop between the two main agricultural seasons, while castor seed was collected from home gardens. The potential for increasing output of these crops was high. Both producers and exporters were thus interested in organizing production under the EPV scheme.

Coconut-fibre products:

As in the case of fruits and vegetables, the creation of EPVs for coconut-fibre products was demand-generated. A few large factories producing such products as fibre mats and carpets could not fully utilize their capacity because of a severe shortage of white-fibre yarn. At the same time the Government had launched a programme to mechanize white-fibre extraction, which up to that time had been done manually. The resulting rapid increase in the availability of white fibre, matched with the demand that existed, created an opportunity for a number of EPVs to undertake yarn production.

Palmyra products:

Unlike the EPVs above, those set up for palmyra palm were stimulated by the large supply available, rather than demand, and the need in the north of the country for export diversification. Although the leaves and the wood were used domestically in traditional forms, they had no commercial importance. The Export Development Board had for some time recognized the potential for nontraditional products from the palm, such as fibre items and basketwork, and a programme for product development and technical upgrading was in place. A market for fibre products had likewise been identified in Germany and Japan. The EPVs for palmyra products filled a vacuum by organizing production for the export market.

Cashew nuts:

The processing of cashew nuts, which requires considerable manual skill, has been a traditional cottage industry in the western part of the country. Before the advent of EPVs, intermediaries provided the raw nuts to the processors and then repurchased the processed nuts at a minimum price. In general, the producers were at the mercy of the intermediaries, and the unorganized processing methods resulted in poor quality and lack of uniformity. The EPVs set up aimed at overcoming those problems by eliminating the intermediaries, upgrading the quality and introducing new processing technology.

Component assembly:

Several types of assembly operations were established under EPV schemes, including those for umbrellas and electronic products.

The impetus for an EPV for umbrellas came from the leading Sri Lankan producer and exporter of these items, whose factory capacity was inadequate to meet expanding demand. He saw an opportunity to transfer one of the more labour-intensive operations (the assembly of umbrellas) to workers in the home, provided that this was organized effectively and a quality-control system was introduced. The EPV for this product was able within a short period not only to assemble umbrellas, but also to take on other operations such as stitching the umbrella cloth.

In the early 1980s the international market for electronic components was highly competitive and volatile, and investing large amounts of capital in this sector was risky. The EPV scheme offered an opportunity for rapid growth in output while minimizing overheads and investment in physical assets. The EPV was launched in 1984 with 102 young village women, who had no previous experience in the electronics industry (or any other industry for that matter). Their good educational background however enabled them to understand instructions and assembly diagrams easily, and they mastered the production techniques rapidly.

Spices:

Most of the spices produced in Sri Lanka come from smallholdings, including home gardens. Until a few years ago the spices were collected by a village trader, who held a monopoly position on the market. This situation was depressing producers' prices, and product standardization was lacking. The Export Development Board, with the concurrence of the government agencies responsible for the cultivation of spices, established a pilot EPV for spice trading. It is located in the marketing centre of a major spice-growing area. Among its objectives are to provide a fair price to the spice producers; upgrade the quality by educating producers; add value to the spices through cleaning and grading; and encourage improved cultivation, harvesting and post-harvest practices.

Reed boxes:

The village company for the production of reed boxes was the first company in the EPV scheme. It started as a pilot project to cultivate betel leaves for export, and then developed into a project for reed boxes. The reed boxes, used for consumer tea packs, have been a remarkable success, and today this company is the leader in income generation, employment and many other aspects of product and socio-economic development among the EPVs in operation.

Organization of production

The focus of the EPV scheme is the individual producer, who is encouraged to work in his or her own setting. The scheme has deliberately avoided production options calling for radical readjustments in the lifestyle and working conditions of the village producer. As far as possible, production is carried out on small individual farms (in the case of agricultural products) or at home (for manufactured products).

Farm production:

In the case of EPVs involved in agricultural products such as fruits and vegetables, the products are grown on individual plots. The farmer's family assists in the planting and harvesting. Each farmer functions as a subcontractor supplying the exporters through the EPV company.

The organization of production in the EPVs concerned with the collection and processing of agro-based raw materials and their conversion into intermediate or finished products follows another pattern. For cashew nuts, individual workers purchase their own raw material for processing in the group production centres, and the processed product is then centrally graded and packaged for export by the company. The EPVs dealing with coconut products collect, clean and bundle the product and deliver it to collection agents or direct to the EPV collection centre. The EPV for spices acts as a trading house and employs specialized staff for selecting, purchasing and grading the spices.

The EPVs producing coconut white-fibre yarn are involved in a wide range of activities and carry out a certain degree of processing. The company purchases the raw material, fresh coconut husks, in bulk from coconut growers. The husks are mechanically decorticated in the EPV processing facility and the fibre is made available to company members for manufacturing yarn in their homes. The finished product is marketed through the company.

Craft industries:

The production of hand-loom textiles is currently organized in EPV group production centres for convenient supervision, using looms owned by the company. When the weavers have sufficient experience they will be encouraged to obtain their own looms and produce textiles in their homes. The yarn, marketing facilities and certain other central services will continue to be provided by the EPV centre.

The production of reed boxes for consumer tea packs is also carried out in EPV group production centres. Each centre is managed by a supervisor who is responsible for meeting production targets and maintaining product quality, as well as training workers to use new designs. The more experienced workers do the job at home. The supervisors frequently visit the home production units.

Component assembly:

In the EPVs producing umbrellas and electronic products the components are delivered to the producers at the company premises and the exporter's factory respectively. Members assemble the components in their homes. For umbrellas, the family members of the shareholders actively assist in the production, collection of components and delivery of finished products. The final finishing of some electronic items, which requires the use of machine tools and equipment, is done in the factory.

Training

The EPV scheme has given high priority to training. The training needs are wide ranging -- from production technology to business management -- and the number of persons to be trained is large.

The greater part of the specifically product-related training of EPV members (for example in post-harvest handling and packaging of pineapples and vegetables) is undertaken by the exporters themselves. For manufactured products such as umbrellas and electronic components, quality is controlled when the producer delivers the article to the exporter. The exporter's quality controllers supervise the immediate rectification of production defects by individual producers, training them in the process.

For agricultural products, training in agronomy and farm management is the responsibility of specialized government agencies. Training of a general nature is organized by the Export Development Board -- for instance for directors of EPV companies. The Board also sometimes provides grants to EPVs to cover part of the cost of approved training programmes. The EPVs themselves also organize training, for instance in cashew-nut processing and the production of reed boxes.

Results

The EPV scheme in Sri Lanka started as a pilot exercise to test a concept and design a methodology for the systematic development of rural exports. Of the 32 EPVs organized, roughly one third did not become fully operational. The remainder have also faced certain problems, some to a greater degree than others, which should be seen within the context of the pioneering nature of the activity and the unsettled situation in the country during the period when the EPVs were starting up.

The operations of the scheme over a decade have highlighted the problems inherent in institutional development at the rural level. In addition to the special constraints in production for export, difficulties of management -- and particularly financial management -- have adversely affected some of the EPV companies.

Such problems have stemmed from the limited management and entrepreneurial skills in the sector, insufficient internal financial control systems and inadequate attention to the legal requirements of managing a company.

Whatever the shortcomings of individual EPVs, the scheme has on the whole achieved the objective of validating the concept and the methodology adopted. The overall performance of 21 EPVs indicates that, in relation to the total investment made, the scheme has produced satisfactory results in income generation, export earnings and employment generation.

From a national export development point of view, the scheme has pioneered certain export products, induced exporters to work directly with village producers and demonstrated the potential for export supply development in the rural sector. It has generated greater awareness of the potential for export development in general and rural export development in particular, on a national scale.

EPVs have demonstrated that with proper organization, they can not only retain a higher share of the export benefits at the village level but also bring greater overall advantages to the country as a whole.

Above all, the scheme has created a rural producers' institution capable of doing business in the competitive field of export.

Sugathadase Kulatunga is a former Director General of Sri Lanka's Export Development Board, which pioneered the export village concept described in this article. He now works as a consultant to government ministries and international agencies on rural-based export development. This article is based on a new ITC publication that he wrote, Export Production Villages: A Study of a Sri Lankan Scheme for Rural Export Development.

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Author:Kulatunga, Sugathadase
Publication:International Trade Forum
Date:Jan 1, 1993
Words:4611
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