NUCLEUS ENTERPRISE CONCEPT

It is extremely difficult (although not impossible) to develop commercial agro-industry enterprises based on smallholders alone. Smallholders in developing countries typically lack adequate access to credit and capital, production inputs, modern production and post harvest techniques, current technology, management skills and markets. They are generally unable to guarantee a reliable volume of product that meets market specifications. Attempts to organize smallholders into cooperatives or other organized production groups have had varying success in developing countries. Utilizing smallholder production groups as the sole base for developing commercial agro-industry enterprises has in most cases not been successful.

The most productive approach to developing subsistence smallholders into commercial agro-producers is through the involvement of a private sector nucleus enterprise that will function as a catalyst for such development. A nucleus enterprise is defined as a private agro-industry firm with access to markets, technology and production inputs and with the management skills and financial resources required to extend that access to associated smallholders. It is in the interest of the nucleus enterprise to extend support services and production inputs to associated smallholders in order to obtain additional volumes of higher quality raw materials and/or semi-finished products to supply the market. Any commercial firm that meets the above criteria, such as a nucleus estate, food processor, trader or a group of growers organized into a corporation, can function as a nucleus enterprise.

The nucleus enterprise system treats the out-growers as partners in the enterprise rather than as mere contract suppliers. The nucleus enterprise provides production inputs on a loan basis, extension services and a guaranteed market outlet. To be effective, however, the nucleus enterprise must go beyond this and exercise some degree of management control over the smallholders’ production and post harvest practices and must take some responsibility for the general well being of the smallholder and his family. Properly designed and carried out, the nucleus enterprise system benefits both the agro-enterprise and the associated smallholders households, enabling both to enjoy higher income levels.

Despite worsening conditions in the countryside, a number of plantation and nucleus estate-based agro-industry enterprises are still doing business in rural PNG. These surviving agro-enterprises have learned how to work within the rural sector constraints. All of these enterprises are currently engaged in some form of interaction with smallholders, including purchasing their products, engaging them in formal outgrower schemes, providing technical and marketing support and by other means. In all cases, due to the lack of further availability of government land, any future expansion by these enterprises must utilize customary land owned by smallholders. In addition, new forms of nucleus enterprise are already evolving in PNG, including broiler and aquaculture contract growing schemes, cattle dispersal programs and others. The Nucleus Enterprise Model can also be applied to high value vegetable and fruit and other food crop production as well as to industrial crops.

The nucleus enterprise system treats the out-growers as partners in the enterprise rather than as mere contract suppliers. The nucleus enterprise provides production inputs on a loan basis, extension services and a guaranteed market outlet, similar to the nucleus estate. To be effective, however, the nucleus enterprise dealing with food crops must go beyond this and exercise some degree of management control over the smallholder’s production and post harvest practices and must take some responsibility for the general well-being of the smallholder and his family.

The nucleus enterprise system requires a higher level of production inputs and a significantly greater commitment of financial and management resources than other formal prior arrangements for purchasing harvested crops from smallholders. If managed properly, however, the increase in productivity and the greater market value of the resulting commodities more than compensate for the additional investment.

The most significant element in the nucleus enterprise system is the guaranteed market. All of the other necessary elements may be in place, but if the products grown by smallholders cannot find profitable markets, the system will not function.

The Smallholder - Nucleus Enterprise Model

Extension

• The nucleus enterprise has the focused technical capability to provide productivity enhancing advisory services to smallholders.
• It is advantageous for the nucleus enterprise to provide such technical advisory services to affiliated smallholders because it increases the quality and volume of products marketed by the nucleus enterprise.
• The nucleus enterprise can also provide a valuable service by helping government and/or quasi-government research institutions prioritize their research efforts to focus on activities that directly address commercial productivity improvement.
• The technical extension services provided by the nucleus enterprise are continually upgraded; in order to remain competitive, the nucleus enterprise must ensure that their smallholder suppliers continue to improve their own production and post harvest techniques.
• The technical extension services provided by the nucleus enterprise are by definition sustainable as long as they continue in business; a continuing smallholder extension effort is required to maintain productivity and market access.

Market Access

• The nucleus enterprise possesses the market access that smallholders often lack due to volume, quantity and other constraints.
• The most important criterion defining a nucleus enterprise is its access to profitable markets; in order to remain viable, the nucleus enterprise must not only maintain its access to present markets, but must also continually seek out new and more profitable markets.
• The ability of the nucleus enterprise to maintain and extend market access depends on the capability of its smallholder suppliers to produce to constantly changing market specifications.
• In order to do this, the nucleus enterprise must continually work with its smallholder suppliers to upgrade their technical production and post harvest skills.
• The sustainability of market access by the nucleus enterprise is dependent not on government budgetary support or donor funded projects, but on the business capabilities of the enterprise.

Supply logistics

• The nucleus enterprise has the technical capability and access to information required to select production inputs based on the most rational productivity criteria.
• The nucleus enterprise because of its volume purchases can usually provide production inputs at a significantly lower cost than can individual smallholders.
• The nucleus enterprise must also have the financial capability or access to commercial financing required to provide production inputs on a reasonable credit basis to its smallholder suppliers.
• The nucleus enterprise either possesses the in-house logistical capability of delivering production inputs at the time, place and in the volumes required by their supplier smallholders or has the financial and management resources required to outsource these logistical services; most smallholders lack this capability.

Production Credit

• The nucleus enterprise has the optimum capacity to both provide production credit and to ensure that credit is repaid, through distributing the physical production inputs to the smallholder suppliers, marketing smallholder production and deducting loan repayments from product sales.

Infrastructure investment and maintenance

• The most immediate and significant economic impact from infrastructure investment is derived from relatively small investments that directly address commercial, particularly market access, constraints, such as farmer to processing plant roads and bridges, wharves, public markets, etc.
• Coursing infrastructure investment through nucleus enterprise operators ensures that the funds will be spent effectively, since the commercial viability of these operators is to a large degree dependent on being able to move goods regularly to market at reasonable cost while maintaining quality.

Smallholder Food Crop Marketing

• Building effective partnerships between nucleus enterprise operators and smallholder suppliers of industrial commodities such as tree crops can establish a useful base for incorporating the marketing of smallholder food crops, particularly high value products such as vegetables and fruits, into the already established transportation and distribution networks of the nucleus enterprises. The margins provided by reduction of in-transit losses and improvements in product quality can both improve smallholder returns and provide additional profit to the nucleus enterprises.

Ancillary Business Development

• The nucleus enterprise can also act as a catalyst to develop ancillary business enterprises in the local community, through outsourcing services such as trucking, nursery operation, land preparation and others, including assisting local entrepreneurs source the required investment and business skills.