13 August 2013
The case of Hivos and PT Nestlé Indonesia
This
case study highlights an example of a public-private partnership which
invests in agricultural infrastructure or services that benefit
small-scale farmers. In the Indonesia Domestic Biogas Program (IDBP),
Hivos collaborates with Nestlé to support small dairy farmers to invest
in biogas digesters as an affordable and sustainable source of cooking
fuel using local resources. This multi-actor project has led to the
construction of almost 9,000 biodigesters, of which more than 5,500 for
Nestlé milk suppliers.
The Indonesia Domestic Biogas Programme (IDBP)
Domestic
biogas plants convert animal dung and various other organic materials
into combustible methane gas, known as biogas. It has a wide range of
uses, from simple gas stoves for cooking to lamps for lightning. The
slurry left over from this process is easily collected and can be used
as organic fertiliser to improve crop yields. On average, farmers with
at least two cows can generate sufficient biogas to meet their daily
basic cooking and lighting needs.
Although the technical
viability of small-scale biogas technology has repeatedly been proven in
several Asian countries, mass dissemination of this technology has not
been accomplished in Indonesia. Leaning on worldwide experience, IDBP is
the first large-scale multi-stakeholder approach to support the
development of a market-based biogas sector in Indonesia.
IDBP,
also known as the BIRU programme, is implemented by Hivos, working
closely with the Indonesian Ministry of Energy and Mineral Resources and
SNV Netherlands Development Organisation. The first phase (2009-2012)
has been funded by the Dutch embassy in Indonesia. Nestlé Indonesia
facilitates access to its network of dairy cooperatives and provides
loans to individual farmers. The programme seeks to distribute 8,000
biogas digesters as a local sustainable energy source by developing a
commercial, market-oriented sector that also provides job and business
opportunities for masons and partner organisations in construction.
Hivos
develops the biogas sector in Indonesia by establishing and developing
construction partners, but also develops the biogas market by providing
an investment incentive to the farmers, not exceeding 40% of the price
of a digester. The level of this incentive is based on the expected
return of investment for the farmer. A farmer who invests in biogas can
have his investment back within around three years if the household only
uses the biogas, and even within two years if the bioslurry is applied
appropriately (leading to higher yields and lower dependency on chemical
fertiliser). A digester can serve its owner for 15 to 20 years with
minimum maintenance costs.
Partnership process
In 2008,
a feasibility study of the IDBP identified the dairy sector in East
Java province as a highly potential target area. The dairy sector
farmers are organised in cooperatives with a high level of organisation
and the farmers have a steady stream of income from their daily milk
deliveries. This allows them to undertake small investments using loans,
which are repaid through monthly instalments. To enable project wide
access to credit for the targeted biogas users, IDBP entered into an
agreement with the Rabobank Foundation. In practice, it appeared
difficult for farmers in most of the IDBP target areas to access the
loans, due to the limited number of local micro-finance organisations
which could meet the loan criteria applied by the Rabobank Foundation.
By
the end of 2009, the Rabobank Foundation introduced Hivos RO Indonesia
to Nestlé Indonesia. Hivos’ large-scale biogas dissemination approach
was interesting for Nestlé and its supplier base. Nestlé had tried to
link up with UNDP, which was running a small biogas programme, but the
collaboration was not successful. Nestlé considered the loan conditions
and interest rate of the Rabobank, but instead decided to enter into a
partnership with Hivos, thereby allocating corporate funds to enable a
zero percent interest rate to its suppliers. Both organisations seized
the opportunity to work together, combining their mutual interest in
disseminating biogas among dairy cooperatives. Hivos provides the
expertise and management capacity to ensure large quantities and
high-quality digesters for the cooperatives. Nestlé ensures access to
credit and stimulates its thirty five cooperatives of cattle farmers to
invest in biogas in East Java province.
Funding strategy
This
partnership is based on a financing concept where the milk buyer Nestlé
provides financing to its suppliers on a zero per cent interest basis.
Hivos’ construction partners offer their biogas digester construction
services at an affordable and subsidised price, allowing the farmers to
invest at low-risk. The biogas construction services cooperation model
is merely based on an agreement to work together without exchange of any
funds between Hivos and Nestlé. Initially, Nestlé provided the amount
of one million dollars for a revolving fund, which has been increased to
3.1 million dollars. For Nestlé the cooperation with Hivos fits
extremely well in its CSR programme called Creating Shared Value (CSV),
which has a major focus on nutrition, water and rural development.
Nestlé actively promotes the use of biogas, not only to modernise the
cattle farming practices, also to strengthen its relation with farmer
cooperatives and its corporate image.
The initial investment in
the development of the biogas sector is considerable. Funds are used by
Hivos to finance the selection, training and guidance of construction
partner organisations (CPOs), undertake inspections and maintain a
comprehensive monitoring system and to manage the programme and
coordinate with stakeholders, especially the Indonesian government (the
Ministry of Energy and Mineral Resources and local government entities).
Other important activities are promotion activities, user (operation
and management) and bioslurry management training and a range of
knowledge networking activities. While Dutch government funding is
phasing out by the end of 2013, the ENDEV (Energizing Development)
programme of GIZ will enable Hivos and its partners to continue the
biogas sector development activities. IDPB is planning to construct
another 26,000 digesters in the second phase period 2013-2016. Nestlé
expressed commitment to continue financing loans to reach at least 50%
of the 33,000 milk suppliers in East Java.
Key activities
The
IDBP focuses on implementation through a multi-stakeholder sector
development approach, creating a market-based biogas sector, involving
locally trained contractors and masons who are supported by vocational
training institutions. Biogas digesters do not come cheap, so to reduce
the cost barrier, farmers need access to low interest loans. The role of
rural development NGOs, dairy cooperatives as well as governmental and
private agricultural and live-stock extension services are integrated in
the programme.
Since the start of the IDBP project activities,
it became clear that the dairy cooperatives could fulfil a key role in
the biogas sector as construction partner organisations (CPOs). Even
small cooperatives could play a role by guaranteeing a loan for their
farmers and arranging the repayments through the regular milk deliveries
over a period of 2 to 3 years. Nestlé has around 35 active milk
suppliers (cooperatives) with around 33,000 cattle farmers. Ten of these
cooperatives have a participation agreement with Hivos as Construction
Partner Organisation (CPO).
The cooperatives, both the CPOs as
well as non-CPO cooperatives are eligible for a bulk loan from Nestlé
dedicated to be used for biogas digester construction. The non-CPO
cooperatives are seen as Lending Partner Organisation (LPO) with the
role of guaranteeing the repayment of the bulk loan from Nestlé,
promoting biogas to their members and ensuring that the farmers who are
investing in a biogas digester will neatly pay their instalments.
Until
the end of 2012 an investment incentive of 23% to 40% was offered by
the programme to the farmers, depending on the size of the digester. The
programme provided a flat subsidy (investment incentive) of USD 200 per
digester. An average loan was around Rp. 5,000,000 or USD 500) and
repayment to the cooperative taking place during three years without
interest (each instalment around USD 14). The cooperative repays the
loan to Nestlé with a repayment rate of 100%. Since January 2013 the
digester market price has been adjusted upwards with a current average
market price of Rp. 7,500,000 and a mixed subsidy (government and Hivos)
of Rp. 3,000,000 (40% of the market price), requiring an average loan
amount of Rp. 4,500,000 (USD 450).
Gradually, many of the
cooperatives supplying milk to Nestlé became construction partner
organisation and have developed into prominent players in the Indonesian
biogas sector. At present, some 40 construction partner organisations
and 3 manufacturing partner organisations (producing biogas stoves,
lamps and other appliances) are active. Approximately 500 masons have
been trained. The cooperatives managed to produce around 5,500
biodigesters between late 2009 and April 2013, more than 80% of which
were financed by Nestlé. The digester output of these cooperatives
counted for almost 65% of the total output of the Indonesian Domestic
Biogas Programme (5,500 out of 8,700 by the end of April 2013).
Replicability and scale-up potential
The
2008 biogas feasibility study indicates a technical potential for
domestic biogas of 1 million units in Indonesia. The IDBP has come to
the conclusion that the potential is even higher and might reach 2
million units. However, factors of affordability and willingness to pay
need further attention to properly assess the market potential of
biogas.
There is still scope for scaling up of the cooperation
with Nestle, with a potential of around 15,000 farmers out of the total
of 33,000 suppliers meeting the criteria for having a biogas digester
(sufficient number of cows, can afford it, site characteristics, etc.).
In
the long run scaling-up of the overall biogas programme is limited if
the programme would only focus on the dairy sector. Therefore, extension
to other sectors, such as slaughter cows, chicken and even pigs is
worth considering. Within such a different context, the financial
mechanisms should be reconsidered, since regular instalments like in the
dairy sector are difficult to apply in the non-dairy husbandry sector,
because farmers tend to depend on incomes from incidental sales.
Replication of the approach involving other milk buyers is an option,
which would require a thorough awareness process towards these companies
on biogas.
Exit strategy
The original concept to
develop a market-based biogas sector anticipates an exit strategy
characterised by actors (construction partner organisations), which are
able to develop their biogas business further from the demand created
among cattle farmers and other relevant target groups.
The
Indonesian Ministry of Energy and Mineral Resources is looking into
options for faster upscaling by providing higher subsidies or at least
with a segmented market, in which certain target groups have higher
subsidies. This will provide accelerated access to renewable energy for
many farming households, but will limit the possibilities of developing a
market-based biogas sector. Intensive discussions about the way forward
are ongoing.
Challenges and lessons learned
- The partnership with Nestlé is unique in the sense that there is no transfer of funds between the two partners, but just a joint target group;
- It remains a challenge for Nestlé and Hivos to reach poorer segments of the cattle farmers, since the investment required by the farming households is fairly high, in spite of the investment incentive provided by Hivos;
- The cooperation provided Hivos with new insights in the CSR agenda of companies, which usually represent a smart combination of the company’s commitment to development while using these activities intensively for promotion of the company;
- There is therefore a need to have a clear agreement on the exposure strategies during the cooperation. In practice it was difficult for both partners to keep to exposure agreements which seemed clear at the start, but got diffuse as the cooperation continued. It was for example difficult for Nestlé to identify itself with the Dutch embassy as donor, since it is a Swiss company, while Hivos is expected to present the IDBP as a Dutch programme.
- The dilemma about swift upscaling on the one hand or maintaining a market-based on the other hand remains a matter of discussion.
Robert de Groot
Programme Manager, Indonesia Domestic Biogas Programme/Hivos
[email protected]