VC Analysis: Rooting Out Detractors

The rather significant ass-u-m-ption in using the term value chain (VC) as opposed to supply chain is that only processes or people that add value to a product or service are considered to be a part of the value chain. In reality, this is often not the case, especially where middlemen often are observed to be detracting, rather than adding, value.

Which, is precisely where the value chain analyses methodology can fit in, first of all in developing economies such as Pakistan’s: Eliminating the people who detract disproportionate economic gains in relation to their roles in the VC.

Creating Stakeholder Value Along VCs

CSR Value chain initiatives examine every stakeholder along the supply chain (including the planet as a stakeholder), exploring where mutual value initiatives may be untapped. Following the stakeholder mapping exercise, companies must analyse the value exchange and honestly evaluate where they can manage their operations to add more value to parties involved in a particular process.

Through even a basic study, the company may often find that through its current role, it is not adding value to significant VC actors; or worse, that it is playing a role in an exploitative process; albeit sometimes without being cognizant of it. Hence the Nike child labour and similar scandals. Clearly it is wise for companies to initiate such studies internally and act themselves, before the media or civil society begin highlighting the weak links in their supply chains.

Why Value Chain Analysis?

In addition to the obvious synergies manifest in the areas of producti-vity, business development and market access, from the social or macroeconomic progress aspect, developing country populations seem to have much to gain from Value Chain Analysis (VCAs) since they are often along the down-stream end of global value chains, if at all a part of them.

Pakistan’s largest export revenue generating industry, the hailed, albeit troubled textile industry, contributes to less than 3 percent of its global value chain. Although until recently, Pakistan was still confirmed as the fourth largest producer of cotton in the world. The nation’s output was until 2007 close to 8.5 percent of the total global cotton production, according to the Pakistan Textile Journal. Pakistan’s peak production was in 2005, contributing 14.3 million bales of cotton to the global cotton VC, according to the Textile Institute of Pakistan. It’s been a negative trend since, with a 13.4 percent decrease in our output the next year.

Clearly, value addition to our agricultural produce remains relatively limited. The disparity between our production and our role in the global VC may be where a localized beneficiation imperative kicks in (see beneficiation box on next page). Why the apparent tangent? We’re small global VC players, even if vicariously through our larger industries: hence our negotiation powers tend to remain limited.

Hence all the more critical for us to examine fair practices throughout our end of the value chain, where the need for global price competitiveness urges a blind eye towards ideas such as fair wages.

Actors, Exploitation and Opportunities

“More important than belonging to a value chain is the role people play in it, i.e. their negotiation power in the value chain,” reinforces Daniel Roduner of the Swiss Center for Agricultural Extension and Rural Development (AGRIDEA). For instance, farmers or sharecroppers that live in generations of debt, seemingly cannot exert any negotiation power in situations where the bonded labour label would be a euphemism for their circumstances.

“Some actors are stuck in value chains that exploit low income possibilities,” Roduner asserts in a report based on the insights gained during the online debate on the forum ‘Value Chains in Rural Development’.

“Value chain actors are those who directly deal with the production, processing, packaging, trading etc. of a product,” Roduner clarifies. “Usually they own the product for some time as it travels along the chain.”

Highlighting the macro-development angle, Roduner adds that “by strengthening one actor in a value chain there is the possibility of creating competitive advantages for the whole system.” There’s a positive ripple effect here and several groups of stakeholders competing in local or global markets can benefit from such advantages.

As a nation, being a part of the downstream global VCA means that Pakistan’s factories or businesses negotiation influence or global leverage is dwarfed by the buyers at the end of global supply chains. The multinationals and other large corporations at the end of global supply chains unabashedly flex their muscle over the factories whose very viability is dependent on the orders from the macho end of the supply chain.

Remaining Cautious

Apparently enough, value chains are intrinsically dynamic, constantly evolve and can swiftly change. Any value chain analysis faces the limitation of providing a static picture, a snapshot at one moment in time, Roduner cautions. VC analysts or other practitioners, he adds, must learn to supplement VCA methodologies with analytical tools that help them understand these dynamics and tendencies.
Hence, VC actors themselves need to learn the skills to explore their value chains and how markets are evolving, so that they too can evolve and remain competitive. People only temporarily a part of the value chain, such as development agencies, must be careful to structure required VC interventions that nurture entrepreneurial solutions along value chains and do not stifle them.

As with all tools, VCAs must have strict metrics to measure success. The Foreign Investment Advisory Services, for instance centres its success measurement on increased competitiveness in global value chains and inward investment promotion.

Developing Economy Examples

The Indian government introduced its own carpet labeling initiative, Kaleen, in response to European consumer awareness of child labour in the South Asian carpet industry. Initially civil society groups introduced the ‘Rugmark’ initiative in response to demand for human rights along VCs. Carpet exporters perceived ‘Rugmark’ as foreign intervention and overly stringent. So they initiated ‘Kaleen’, their own industry-wide, self-regulated code of conduct administered by the quasi-governmental Carpets Export Promotion Council and a national monitoring committee chaired by a government representative.

There are similar examples underway in Pakistan. The ambitious Pakistan Compe-titiveness and Compliance Initiative (PCCI) adopted by the FPCCI (Federation of Pakistani Chambers of Commerce and Industry), for instance, aims to bring all social, environmental and security compliances into one scorecard within the next decade. That means almost reducing the average 35 not-directly-product-related audits into one complete system. The first industries participating in this are of course the export-intensive textile and leather industries.

Proudly Pakistani?

Proudly South African is a non-profit company that promotes South African companies, products and services in order to support job creation and economic growth. Equally as important, it also requires companies to demonstrate their commitment to social responsibility. A logo signifies to consumers that the company satisfies criteria on local content, quality, commitment to fair labour standards and sound environmental practices.

Not only do such initiatives promote a focus on truly beneficial local economic growth, but they also improve member companies’ competitiveness. For instance, membership status was already recognised as a factor in government procurement decisions by the Department for Education. Members were given preference in tenders. Similar labelling initiatives can be found in many countries, but South Africa’s is among the few that requires labour and environ-mental ethics to qualify for the label.

There are numerous global VC initiatives that Pakistan can become a part of, such as the Fairtrade label.

Remember, when looking at effective VC initiatives, the more the merrier: the more stakeholders that are invested in an initiative, the more effective it is likely to be. Taking key groups into confidence is, well, key to the long-term sustainability of any VC actor.

Reforming Political Financing: Anywhere on the Horizon for Pakistan?

Over eleven years ago, in 1997, the Thai Constitution introduced new party, political finance and election laws. Under the Organic Law on Political Parties and the Organic Law on Elections, it empowered an independent Election Commission of Thailand (ECT) with exacting oversight authority. These laws and the Commission were set up to regulate party operations and accounting practices to enhance transparency and accountability within the party system. A key objective of the legislation was also to strengthen parties as ideological bodies and broaden their membership bases – with the aim of reducing the prevalence of patronage and vote buying. Now that’s a great euphemism, especially if applied to Pakistan’s current political context.

CSR Buzzwords

Examining Beneficiation Prospects in Global (and Local) Supply Chains

Among the buzzwords in the ‘real’ world of CSR is anything related to value chains. This is old news for many, perhaps particularly the organized development sector. Michael Porter articulated his value chain model in 1985, mainstreaming it via his best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.

Many have since successfully run with the idea. And there are plenty of exciting, relatively newer manifestations of value chain-based CSR opportunities.

For instance, beneficiation. In the inclusive economic development or CSR context, the term describes the proportion of the value derived from asset exploitation which stays ‘in country’ and benefits local communities. We didn’t just make this up: the beneficiation idea was inspired from the series of processes through which ore extracted from mining is reduced to particles that can then be separated into mineral and waste. The former is suitable for further processing or direct use, the next series of value addition processes.

Since the concept took root in the extractive industry, we’ll take the diamond industry as an example. Beneficiation would advocate that the cutting and polishing processes within the diamond value chain should be conducted in the same country as they were mined, to maximise the industry’s local economic contribution.

The case, however, is often that the countries with the mines process the ‘waste’ and the valuables extracted are shipped and processed within the company’s country of preference. The latter is often developed countries with the technological manufacturing already in place. Beneficiation would contend that while the company is investing its reaping mining expertise -often developing- country, it must also invest in setting up further processes of its value chain in the host country: thereby truly adding value via employment, technology transfer etc. to its extractive initiatives in the developing country.

Truly Local Economic Growth

The beneficiation philosophy can be further narrowed to fit non-multinational perspectives, focusing on bringing economic growth to the local-most or rural levels. For instance, for a Pakistani agri-based manufacturer, the CSR VCA would explore how to retain or shift select processes upstream. Upstream of a manufacturer means closer to the farmer, and unfortunately in our case, closer to dire poverty. Where there is poverty in a value chain, the CSR Value Chain Analyst sees opportunity, although not without caveats.

If a set of people, e.g. sharecroppers, are adding value to a supply chain and not being fairly compensated for it, it is, (over-)simplistically put, a matter of identifying where that value is usurped and passing it on to the source(s) of value addition. Even if social dynamics including the feudalistic reality complicate such a solution-process infinitely, hope is still visible, with successful examples serving as motivation in the face of ongoing frustrations.

For instance, in a globally notorious industry, the timber industry, Ghana managed to institute a law that stipulates legal agreements with communities that live where timber companies cut wood. This is a progressive step for an industry that tended to subtract environmental and social value from local communities. Instituted in the 1990s the regulation stipulates that companies tendering for timber cutting permits would be assessed in terms of their respect for the social and environmental values of local residents.

Under the new law, which came into operation a decade ago in 1998, logging companies are required to secure a ‘Social Responsibility Agreement’ with the customary owners of the land.

This agreement follows a standard pattern, to include a code of conduct for a company’s operations – guiding environmental, employment and cultural practices – and a statement of social obligations, which is a pledge of specific contributions to local development, seemingly akin to Pakistani laws for exploration companies. Each agreement must be fully negotiated with the local community. There is a strict procedure for developing an Agreement with local representatives and the district forest office before submission to a central evaluation committee.

While at the time of research these agreements were still in their infancy, the policy itself already provided useful lessons for other countries where high-value timber is logged. They provide guidance on how to implement a fairly simple, cost-effective, accountable system to support sustainable and socially responsible logging – all while maintaining a sharp focus on the interests of the stakeholders at the beginning of the forestry value chain, the communities hosting the trees and the value chain’s impact on their lives.

Be Sociable, Share!

• 
•