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   3. Enterprise Analysis

In response to a growing demand for information on community enterprises, BCN has made enterprise analysis a focus of this year's Annual Report. This section represents the first of a number of analyses that the BCN staff and partners will present before the end of the program. Although it is too soon to make definitive statements about enterprise-based strategies and their effect on conservation, it is not too soon to identify common problems that BCN-supported enterprises have faced and assess the variety of solutions attempted. Our goal with this report is not to answer every question and address every issue, but to describe a few of the most vexing issues facing our project partners. As a network, we plan to create a dialogue on these conservation and business issues. One of the means that will be used to foster this dialogue is the BCNet site on the World Wide Web.

Before launching into the key issues facing BCN-supported projects, it is important to keep in mind that the enterprises have a dual role in a community: They are the engines that power socio-economic development as well as the mechanisms for raising conservation awareness within the communities. It is both the cash benefit and the raised awareness that lead to actions to conserve biodiversity. BCN-supported enterprises not only have to meet the test of financial viability, but they also must meet social and ecological criteria. Hence, the problems that enterprises face are an amalgam of social, economic, and biological issues.

As described in last year's report, BCN has found that enterprise-based strategies are generally insufficient in and of themselves to accomplish conservation. Instead, they must be viewed as one part of an overall solution to conservation problems at a given site. When using an enterprise-based approach, the following six problems should be given priority consideration in the planning process:

  1. The lack of secure resource tenure creates a critical obstacle to enterprise development.

  2. The impact of enterprise activities on the biodiversity of the area is uncertain.

  3. Most businesses are inadequately accounting for costs.

  4. There is inadequate managerial and technical capacity.

  5. Without an increase in local value added, communities will receive a low return on their labor and remain vulnerable to swings in commodity prices.

  6. Separating non-government organization (NGO) project management from the enterprise and its management is an essential but difficult task.

While these key problems are common across BCN, the solutions are not. The approach is necessarily project and site specific and requires innovation and adaptation to local or national conditions. The following sections contain a discussion of each of these problems and examples of how project partners have begun to solve them.

Problem 1. The lack of secure resource tenure creates a critical obstacle to enterprise development.

The major problem remains one of tenure. The ultimate control of the forests and forest resources still largely rests in the hands of the government and not in the hands of the people who are directly involved and affected...This means that the funds generated by sale of wood, grazing rights to outsiders, fines and other fees are not at the disposal of the Van Panchayat [local forest users group] but rather under the control of the Revenue Department, which takes most of the funds for its own purposes. This arrangement is a serious disincentive for the villagers. [Silk and Honey in India, #3]

Partner Solutions: As a first step in many projects, communities must gain some control over their resources if the benefits are to be long-term and motivate conservation. The solution is to work with local NGOs who are knowledgeable of the political climate and the existing legislation and have the expertise to make the law work for communities. In cases where no such law is in place the community must organize to demonstrate that there is a need and a justification for tenurial rights. The approach is country and situation-specific, as the following examples demonstrate.

Nepal: Regulations passed in 1996 allowed the formation of Community Forest User Groups (CFUGs), putting into action the principles of the 1992 Forest Act. The Essential Oils in Nepal [#1] project took full advantage of the new law by starting the process of obtaining resource control for 19 communities. As a result, two of these communities now have official title to the land and the right to manage it themselves, including the right to all revenue derived from the land. This project team is using the CFUGs to establish a sounder base to the business. In addition, the newly recognized tenure is having a broader positive impact on the community. As the team writes:

Community Forest Handover activities accelerated as communities became aware of the benefits, in the form of direct royalty payments on materials harvested from registered community forests.

Philippines: All projects are involved in assuring that local people benefit from the Certificate of Ancestral Domain Claim (CADC). Possession of a CADC empowers local communities to begin the process of consolidating territorial and financial control of their ancestral lands. It is not yet by any means a secure and easily administered tenure instrument from the perspective and experience of the BCN groups. But it does represent a step in the right direction. For example, the three sites of the Rattan and Resin in the Philippines [#13] project have received CADCs as a basis of protection for community-developed business. On the other hand, the Abaca and Rattan in the Philippines [#12] project has seen flaws in the delineation process. As they report:

In the Provinces of the Region, political developments of a complex nature are leading to massive land claims by tribal groups that sometimes extend to 60,000 hectares. One such claim threatens the stability of this area and although the community has expressed its interest in an independent small claim, we are unsure whether the national program staff responsible for granting the Certificate of Ancestral Domain Claims (CADC) will support the actual people in the forest, or those closer to the urban centers. The people have been clear in the presentation of their case and have gained attention, yet rights are not yet theirs.

Indonesia: Five of the six projects in Indonesia are trying to demonstrate to the government that local people are capable stewards of the land and deserve more resource control rights. As an example, in 1996, 23 tons of damar resin was collected from the forest floor in the Participatory Forest Management Area in West Kalimantan at the Forest Products in Indonesia [#8] project. The damar was gathered by local farmers and given to Yaysan Dian Tama (YDT, the local NGO) in the hopes that they would have access to markets and potential buyers. YDT did find buyers but because neither YDT nor the community association had a permit to tap and sell damar, they were forced to place the resin in storage for an indefinite period. After almost one year, the project successfully lobbied local government authorities, and the provincial Governor awarded them a permit to tap, process and sell damar. This is a significant step as it establishes precedence for resource tenure. However, the permit is limited to one year and must be renewed. This hinders the business' and hence the community's ability to do long-term planning.

Solomon Islands: In general, the Melanesian countries are advanced in formally recognizing traditional landowner resource rights. The Arnavon Islands at the Fishing in the Solomon Islands [#18] site are located in an area that could not be controlled by any one community, being too far away from their traditional ěowners' and too close to other stakeholders who were using the resources without any mechanism for controlled harvest. When the three principal communities involved realized that the resources of the Arnavons were depleted -- decimated in fact -- they decided to create a management institution to regulate access to the Arnavons and to stop harvesting of certain species for a given time period. The idea of a conservation area managed by three distinct communities was unique in the Solomons and is now being observed by the government. The example of the Arnavons demonstrates that community-based conservation need not be confined to one community.

Problem 2. The impact of enterprise activities on the area's biodiversity is uncertain.

We have made little headway in linking sustainable harvest with conservation...we still do not know the level of sustainable harvest. [Forest Products in India, #5]

Ideally, an enterprise will have a positive or at worst, neutral effect on the area's biodiversity. However, in a majority of the BCN-funded projects, the businesses are not operating in isolation. There are other subsistence and market demands putting pressure on the resource base. Whether the pre-existing resource use was sustainable or not was unknown when the enterprises began. The new enterprise may not have increased resource demand if it only substituted for previous activities but more than likely it is increasing the demand for raw materials since a cash enterprise cannot completely replace the subsistence activities. For example, at the Silk and Honey in India [#3] project, oak leaves are essential to the silkworm enterprise but they are also used as fodder for dairy cattle.

A small-scale forest product enterprise may grow over time. Therefore, it is imperative that the monitoring of the resource base (in terms of stock, yield, harvest rate, regeneration) begin with the start of the enterprise. The success of the monitoring and evaluation activities will depend on whether all the users of the resource can use such information to change their resource use if it is found to be unsustainable. Tenurial status also determines the optimal use of the resources (see Problem 1).

Partner Solutions: Thirteen of the twenty BCN-supported projects have concentrated on community-based monitoring and it appears that developing the skills at that level is not only possible but also has a catalytic effect on other aspects of local natural resource management. The Forest Fruits in the Philippines [#14] project team reports:

We have found that food web seminars are an excellent way to facilitate community understanding of how their local ecosystems function. In each community, the food web seminar comes up with a unique observation. In one, they observed the need to protect the rat snakes in order to reduce the rats which have become horrible pests in the food production fields. Our pastor was hiking with some young people shortly after one seminar where this observation was made and they saw a rat snake crossing the trail. Because of their fear of green vipers, the villagers previously had a habit of killing any and all snakes that they saw. This time his companions made no move to kill the snake.

Similarly, a revamped monitoring activity sparked community involvement in the Butterflies in Indonesia [#10] project when, as the team states:

A major challenge for the project has been to implement a coordinated biological monitoring plan. Without a clear coordinator, the monitoring surveys which have taken place have been piecemeal and failed to build upon previous surveys. It became clear that the earlier monitoring plans were overly complicated with too many diverse activities and that a very simple plan was required if it was to be carried out...John [Parks, BCN Consultant] led a workshop on biological monitoring for Arfak butterfly farmers from six villages around the Arfak Nature Reserve. Despite a tight schedule and all the setbacks, the workshop was a great success. The objectives set out...were accessible and meaningful to the community. They clarified that the biological monitoring should be community monitoring and that the primary purpose was that the results were useful to the community. Monitoring methods and techniques which could be understood and put into effect by the community were established....A week after the field study course had been completed, Agus Wonggor, group leader of Mbenti Butterfly Farmers, arrived in the office and presented us with a completed butterfly count...Furthermore, the group had sent a question ěwhen are we having a meeting so we can agree responsibilities for the monitoring, sort out who can help which group and coordinate between areas?î [A meeting was immediately planned]. For further information on community-based monitoring see the final community-based monitoring reports by John Parks for Nut Oil and Tourism in the Solomon Islands [#19] and Butterflies in Indonesia [#10] projects posted on the BCNet Web Site.

Problem 3. Most businesses are inadequately accounting for costs.

Forty-six different enterprises have been planned using BCN support. Of these, nine have still not been initiated due to a variety of issues ranging from awaiting the government go-ahead (Logging In Indonesia, #7) to the need to gain concession rights (Rattan and Resin in the Philippines, #13). Of the remaining 37, we have data in-hand that 30 of these are operating at least on a positive variable margin basis. BCN staff cannot make definitive statements about the other 7 due to the lack of information and the possibility that, in at least two of these cases, given either the inexperience of the NGO management team or radically changing conditions which have undermined initial pro forma projections, these business may in fact not be covering their variable costs.

Based on our experience, we suggest that those interested in establishing community-based businesses for conservation plan to invest considerable time in understanding cost accounting. In the majority of our BCN-supported enterprises the businesses have kept adequate revenue records. However, it is the minority that have adequately captured anything approaching a 'true' cost of the business. This has been a significant problem as we try to draw conclusions about enterprise viability. As an example of a rarely captured cost, in many of these businesses, subsidies provided by the NGO partner for international marketing and resource monitoring have not been factored into the cost analysis.

Partner Solutions: The first part of the solution practiced by the majority of the supported businesses is to first capture the operation's variable costs. Two examples of projects providing data to illustrate their positive variable margins are shown below.

The next level of cost analysis is to assess the status of the business when variable and fixed costs are included. Because few of our businesses are stand-alone activities, it requires some allocation of fixed costs from the broader project activities or perhaps other businesses to the BCN-supported enterprise. Depending on the allocation basis used -- and we hasten to add that these can be somewhat subjective -- some business will appear to be losing money as illustrated using the Kalahan fruit processing business Forest Fruits in the Philippines [#14] above for 1994 and 1995.

Here is where the issue of the differing goals of a business and NGO become most noticeable: Kalahan's perspective is that the business is creating much valued jobs and a better understanding of the local environment. BCN staff agree. Our role as technical advisors is to point out, however, that under some costing regimes, the business is losing money and, in the event that the NGO in the future cannot subsidize the business, the business will either have to adjust its pricing or its cost structure to address the net loss issue.

The above analysis of KEF's operations by BCN staff was used by KEF management to adjust their costs and pay more attention to fixed costs. As a result, the business now operates in the black and sales of its 'Mountain Fresh' line of jams and jellies have continued to rise quickly.

An example of another business which is covering its fixed and variable costs is the Butterflies in Indonesia [#10] project as shown below.

The final step towards enterprise viability, is reached when a business accounts for all costs, including monitoring of natural resources. Based on our analysis, only one enterprise, the Honey and Fruit Processing Unit at the Forest Products in India [#5] project has reached this self-sustaining level.

Even so, the Western Ghats team is quick to point out that they still have not reached a conclusion regarding the ecological sustainability of the extractive activity.

Problem 4. There is inadequate managerial and technical capacity.

Different enterprises have different needs for capacity and technology -- some operate at higher risk and require more technology than others. Different investments are needed depending upon those criteria. Some skills are readily transferable or already exist in the community, while other skills such as marketing are foreign to many communities. The idea is not only to design an enterprise that draws on the existing skills and resources as much as possible, but also to realize the value in using outside training or assistance to jump start the enterprise.

Partner Solutions: Given the limited time frame of the projects, most are bringing in qualified staff from outside or finding business partners. An example of this is the Honey, Butterflies, and Rafting in Indonesia [#9] project:

One of the major challenges faced by the butterfly enterprise is to ensure that a local marketing capacity is in place during the next butterfly export season. It's difficult to see this capacity arising in the village itself, particularly if we are looking to export directly from Central Sulawesi; the level of education isn't high enough. There are several options: to involve a local business to open a branch in Palu. Or to organize shipping to an existing butterfly business for them to export. The latter seems the best course, especially as the company we are currently working with has its own butterfly farm which can receive excess stock. Shipping within the country is easy, cheap, and involves a minimum of bureaucracy -- the latter would be a major problem for villagers to overcome.

However, recognizing the need for the community to eventually rely on itself, most projects are at the same time building the business management capacities of the local people. Such a process takes time and expectations should be properly gauged. An illustration of this is Abaca and Rattan in the Philippines [#12] project, where the team writes:

It is naive to think of them [local, rural people in Mindanao] as entrepreneurs. Other support must be sought over time, like broader abaca growing that will form a significant portion of the local market so much so as to influence it, along with the identification of interested parties to invest in the resource development. The biggest challenge is to work with reality and not be confined by the prism of project accomplishments which have a short lifetime.

Problem 5. Without an increase in local value added, communities will receive a low return on their labor and remain vulnerable to swings in commodity prices.

The level of value added is a function of:

  1. Level of investment, which in turn determines the scale of operation,

  2. Technology, which is also correlated with investment levels, and

  3. Availability of local technical and managerial capacity now and in the foreseeable future.

Value addition and relatively high returns are one side of the coin. The other side is risk. Some of our partners' most valuable lessons (many in hindsight) have to do with risk assessment and their capacity to manage risk.

Partner Solutions: An important consideration in selecting the BCN projects was the grantees' ability to add value at the local level to a product. As a result, all of the product enterprises in the network involve value added processing of a local resource. This varies from the distilling of essential oils in the Himalayan mountains of northwest Nepal to lumber production at 'walkabout' sawmills in Papua New Guinea. To continue to add local value to a product year after year the key is to 1) select technologies that are appropriate for the location, and 2) train community members to maintain the operation. For example, the team at the Essential Oils in Nepal [#1] project describes how the new distillery unit at the is now sufficiently maintained by the local people such that last year the business experienced no down time from equipment problems:

Distillation activities began in October [96] and the unit has been in continuous operation since then, producing Jatamansi oil exclusively. The manager-technician and workers were trained in the operation of the facilities by the staff from the Kurilla factory. No assistance from outside Humla was needed for the actual start-up and operation of the facility in Rodikot. While technical and managerial support was provided from Kathmandu, only Humli people were involved in the construction of the building, installation of the equipment, and start-up of operation. The unit has continued in operation since start-up and is operating well.

Problem 6. Separating the NGO project management from the enterprise is an essential but difficult task.

Enterprises that are part of a conservation effort are subject to the constraints and conditions facing any business. In addition, because so many of the projects are led by NGOs, the challenges particular to NGOs must also be considered. NGOs often have goals other than enterprise development and these goals require a responsible image in the community, a need to be fair to all sectors, and a good relationship with government. The NGO often has relatively little business experience. These factors can render NGO-based businesses 'less competitive' than businesses that can afford to place image second to profit. Hence there is a need to assess the business separately from the NGO in order to understand if it is competitive.

Partner Solutions: As NGOs, the project partners generally have expertise in social issues and natural resource conservation. An NGOs tends to view an enterprise project as an addition to their usual range of conservation activities and does not analyze its performance separately of the whole project. As time has passed, and the BCN enterprises have been exposed to the vagaries of the market, the project managers are beginning to realize the importance of tracking specific aspects of business performance using full cost accounting, including overhead for related activities such as monitoring. These are necessary steps towards making the community enterprise accountable without the NGO. The team in the Forest Products in India [#5] project describes how the first steps are being taken by the local villagers who:

Were encouraged by the partners to form another community organization to take over the honey processing and food processing plant, to initiate other enterprises and to eventually participate with VGKK [a local NGO], in participatory resource monitoring and other community outreach activities associated with enterprises, conservation, and environmental education. The organization would obtain income tax exempt status, and VGKK will transfer the assets and provide working capital to the new organization, and maintain a close working relationship with it.

As another example, the Butterflies in Indonesia [#10] project has tried to get a permit to establish an affiliated but separate for-profit company based on the sale of butterflies and other products coming out of the Arfak Mountains communities. As of yet, their applications have not been approved by local government authorities. In spite of this delay, YBLBC (the lead NGO) recognized the importance of separating YBLBC's 'regular' community development and conservation functions from the butterfly business, and decided that in December 1997, the enterprise accounts will be separated from other YBLBC activities.

Summary

In summary, our advice to any group considering an enterprise-based strategy to conservation is to treat the business like a business. It sounds simple enough but we've seen too many NGO's mix the NGO's agenda and systems too closely to the business. Successful businesses stay focused on what they are good at, are creative to responding to changing customer needs and market forces, and develop and reward individuals who work for or with (e.g. suppliers) the company. In addition to these, successful natural resource-based businesses are attuned to the impacts that they are having on their resource base and the local community and modify operations accordingly.

Over the next sixteen months, BCN staff and grantees will continue to develop more detailed descriptions of the types of business problems encountered and the remedies tried. We would also encourage the serious conservation program planner that intends to use an enterprise-based strategy as part of a broader set of interventions to review the considerable amount of literature available on microenterprises in rural environments. The publications and experience of more business-focused NGOs such as Appropriate Technology International and Technoserve should also be consulted.


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