September 23, 2014

Kenneth Kyaw Shein
Group CEO & Managing Partner, PRIME Holdings

Integrating Social Impact in AgInvesting: Myanmar

Foreign Direct Investment (FDI) in Myanmar is concentrated across the usual suspect sectors: infrastructure, oil&gas, real estate and property, FMCG, textiles. Agri accounts for less than 1% of last year's USD2.6bn FDI, according to the Myanmar Investment Commission. However, 70% or nearly 40 million of the country's population, predominantly subsistence farmers in agrarian rural areas, are largely excluded from the benefits of trickle-down economics, which are rarely realized at the base of the pyramid.

California supplies over 40% of America's fresh produce, fruit & nuts, and dairy products totaling nearly USD50bn per annum. Myanmar is naturally endowed with five distinct climate zones, greater water, land, and human resources than California, and proximity to large burgeoning deficit markets. HOWEVER, amongst other factors, this latent potential will not be realized without a reliable raw material supply chain that includes and mobilizes the 10 million households at Myanmar's base of the pyramid.

PRIME Agri is investing risk capital in an integrated agri and food platform to supply food-safety and sustainability compliant fresh produce, intermediate, and finished foods for export markets. In addition to tangible assets (e.g. land bank, water and irrigation, packing houses, processing, cold chain and logistics, greenhouses), PRIME has made a control stake investment as the main sponsor of Smallholder Prosperity Enterprises Pte Ltd. SPE is a for-profit business that is developing smallholders from subsistence farming to higher income commercial production by directly integrating these rural farmers into PRIME's value chain.

SPE integrates key elements that have been fragmented and insufficiently incorporated by NGO's, aid and donor institutions into their non-profit models for smallholder development and poverty alleviation. SPE integrates five critical elements at hub and spoke clusters, adjacent to PRIME's commercial operations throughout rural Myanmar:
 

• Infrastructure: suitable farmland, year round water resources and irrigation, high yielding commercial grade drip irrigation in partnership with Netafim
   
• Crop Inputs: pre-determined crop plans based on market requirements (kits of commercial seed varieties + food safety crop nutrition and protection) in cooperation with Syngenta, Haifa, etc.
   
• Training & Certification: Work-study program of 3 to 6 crop cycles, on-site support, training and education, resulting in certification of localized Global GAP equivalent (good agricultural practices) and skilled farming; advanced farmers can progress towards a Certificate or Diploma accredited by a leading international agricultural institution (worldwide partners with SPE).
   
• Market Access to PRIME Agri Ltd’s international and domestic sales channels and PRIME’s commitment to allocate a minimum of 20-30% of its orders to SPE farmers.
   
• Startup Financing: bridge initial startup period (one year, 3 crop cycles); maintain a rolling reserve for input requirements of next 2 crop cycles.
   

SPE aims to reach at least 10% of this market segment or 1 million households over the next 10 years. Based on SPE’s business model, 10% penetration, and an average adoption rate of one acre per household (1mn acres), revenues can exceed US$1.5 billion from one-time fees for infrastructure; and recurring sales can exceed US$200mn per year for crop inputs based on average of two growing cycles per year (well over $200/acre).

SPE’s sponsors believe that a target for sustainable net income generation per smallholder of USD1,000/acre/year is achievable in the first two years. A medium-term target of USD4,000 per acre per Smallholder will be achievable as the rate of farmers’ skills and adoption of higher productivity technologies increases, thereby allowing them to reliably supply higher value crops to higher value markets. The trickle-up effect on national wealth and GDP per capita, from the base of the pyramid, will result in an equitable distribution of wealth and more balanced socio-economic development. As SPE’s penetration in Myanmar grows, SPE’s founders and shareholders plan to expand the SPE model through their respective channel partners in other areas of Asia, Africa, and South America.

PRIME Agri is a developer, sponsor, and operator, deploying a control private equity approach together with structured trade and project financing models.

Kenneth Shein was a member of the speaking faculty at Global AgInvesting Asia 2014 at the Marina Bay Sands in Singapore, 23-25 September.

The opinions expressed in this editorial are the author's own and do not reflect the view of Global AgInvesting.