The Coffee-Bike Program 1. Executive Summary 1.1 Situation Rwanda has nearly 500,000 small holder coffee producers who possess an average of 200 coffee trees each. Each small plantation is managed like a small garden and is the principal generator of cash for rural Rwanda. Depending on annual production volumes and the New York Board Of Trade (NYBOT) commodity price for coffee, the Rwanda coffee sector has generated between $15M and $35M in annual foreign exchange earnings. In 2002, Rwanda sold its first production of high-value specialty coffee whose price does not depend on the NYBOT. This achievement was due to a series of quality interventions along the coffee value chain including the establishment of central washing stations for uniform quality wet processing and direct sales to US coffee roasting companies. Farmers received three times the price for their coffee compared to traditional coffee farmers. The idea changed the face of Rwanda s coffee sector. These improvements were a direct result of the USAID PEARL and PEARL II projects. The SPREAD initiative (Sustaining Partnerships to Enhance Rural Enterprise and Agribusiness Development) is a continuation of those projects. Picture above: the de-pulping process at one of SPREAD s washing station. In 2006, Rwanda had over 60 central washing stations and is selling specialty coffee direct to over 25 US and European companies for prices significantly higher than the traditional system allowed. Moreover, the price is no longer pinned to the whims of the volatile coffee commodity market. The Rwandan coffee sector has enormous potential to create a dynamic and prosperous rural economy through the pursuit of extreme-quality specialty coffee for the U.S. and European markets. Rwanda s one billion coffee trees indeed have the potential to generate over $150M in annual foreign exchange earnings. In addition, when farmer-owned cooperatives sell directly to American buyers, approximately 80% of the total gross amount returns to the rural communities. As such, this sector has the power to fully drive the rural economy of Rwanda, empowering the population, creating employment and generating increased revenues. These are key elements for Rwanda s continued stability, peace and welfare.
The Specialty Coffee market is a $20 billion per year industry in the US alone. Growth is estimated at 10% annually. In order to grow however, the specialty coffee market must have continued supplies of high quality coffee. Coffee products continue to differentiate at the level of the consumer. American companies continue to push the quality envelope of coffee and are paying higher and higher prices for extreme quality. The industry is here to stay and has enormous potential to dramatically change the livelihoods of millions of poor, rural families. 1.2 Opportunity Rwanda has a comparative advantage over most coffee origins since farmers can give maximum husbandry skills to the small garden-like coffee plots where the old heirloom bourbon varieties still reign. This is where quality is created : the interaction between the farmer and his trees. However, because the Rwandan coffee farm is so small, it takes about 500 of them to produce one container load of exportable green coffee! The organizational burden on processing plant management is great. Trucks must be rented and coffee cherry collection points must be installed in order to get the cherry from the farm to the processing plant or washing station. Farmers cannot use animal transport because of over population and lack of biomass to feed the animals. Hundreds of farmers walk in their cherries from their fields 2 to 4 kilometers to the collection points. Then they sit and wait for the truck, they wait for weighing and quality control, they load the truck and off it goes to the washing station. Picture above: a woman arrives at one of Maraba cooperative s washing station with her daily harvest around 4:30 PM. She has been walking for over 2 hours. The above method results in the cherries arriving at the washing station 6-12 hours or more after picking and sorting. This delay deteriorates the quality of the coffee. Every hour that passes after the cherry is picked and before it is de-pulped degrades the quality by allowing bacteria to ferment the sugars in the cherry finally imparting a barnyard off-taste to the coffee 20 hours after picking. It destroys all the effort the farmer has given his small coffee garden plot. If the transport time of cherries coming from the coffee field to the washing station was reduced from 6-12 hours to 2-4 hours, research has shown that cup quality will increase significantly from 82/100 to 86/100 on sensory evaluation scores from which coffee prices are determined. This translates into a $0.15 or higher premium per pound of green coffee sold. Page 2
2. Project Description 2.1 The coffee-bike program Bicycles can solve the transport problem if a program could make the bikes available to farmers for a reasonable price on credit and where quality premiums would cover the bike s cost. This is where the Coffee Bike program comes into play. This collaborative program between Project Rwanda (www.projectrwanda.org), RitcheyLogic Inc. (www.ritcheylogic.com) and SPREAD has resulted in the creation of a new development oriented bicycle that has been named the Coffee Bike. Its characteristics are the following: Specifically designed by Tom Ritchey the inventor of the mountain bike in the US to enable coffee growers in Rwanda to carry their production. Elongated frame to allow for bulky loads to be carried on the rear. 8 gears to ease riding in The Country of One Thousand Hills. Extremely sturdy: can carry up to 200 Kg (440 lbs), in addition to the rider. Estimated lifetime: 12-16 years. Could easily be adapted to other products in Rwanda: tea, milk, potatoes and rice for example. Site visits have shown that the coffee growers have made the bike their own by customizing it: putting ringing bells, tire protections, side bars on the rear wheel for a passenger to rest his feet on, etc. Coffee farmers are extremely proud of their bikes in comparison to the old gearless bikes that are available in Rwanda. In 2007, year 1 of the program, 1,000 coffee-bikes were delivered to two cooperatives, Maraba and Karaba. The bikes were financed by a grant from Texas A&M University (one of SPREAD s major partners); this grant was in turn extended as loan credit to coffee growers. This pilot phase has allowed the Coffee Bike program to identify issues and to prepare for the next wave of roll-out. 2.2 Program Objectives 1. Increased coffee quality: farmers systematically deliver their coffee harvest to the washing station before 3 PM over the harvest period, from March to July. This deadline will guarantee higher coffee quality a prerequisite to a higher income. 2. Increased family income: the average rural income in Rwanda is between US$ 175 and US$ 260. Increased coffee quality will generate between US$ 27 and US$ 36 of Page 3
additional annual income per family by the end of the harvest (July). This equals to a +10% to +25% in annual income. 3. Development of side businesses: a. Rwanda is a very hilly country with few means of transportation. Bicycle taxi are both cheap for users and profitable for taxi drivers (no fuel needed); bike owners are likely to use the coffee bike to generate additional income. Cooperative members also see it as a way to provide unemployed youth with a job (carrying coffee or people) while keeping their operating costs low (no fuel spent on coffee transportation). b. Coffee bikes will need maintenance: on-site maintenance will be provided by small businesses that will be operated independently from the project. 4. Side benefits of the coffee bike: this asset can in turn be used as collateral for loans, reduce transport costs and time for water carrying and going to the market, and provide a means to gather socially for community events or other social engagements that were impossible to attend otherwise. Picture above: this original way of using the coffee bike illustrates how useful it can be for daily activities, even outside of coffee production. 2.3 Project Activities The Coffee Bike program, which has been spearheaded by SPREAD until now, would benefit from being managed independently from it, in order to allow replication and scaling-up. The Coffee Bike program is made of two elements: on one hand, the financing and credit management to the coffee growers, and on the other hand, the management of the bike lifecycle. The project faces four major obstacles to its success and growth: 1. SPREAD does not have the financial resources to offer credit schemes to coffee growers to acquire the coffee bike. 2. SPREAD does not have the capacity or the expertise to manage credit schemes. 3. Scaling-up the program to many cooperatives and private coffee companies throughout Rwanda implies a specialized organization to manage the coffee bike lifecycle (procurement, technical support, maintenance, etc.). 4. Although coffee growers have been using the coffee bike, they did not consistently meet SPREAD s requirement to bring their harvest to the washing station by 3PM, thus limiting the program s effectiveness in raising their income through quality increase. Page 4
To solve the above obstacles, the following approach is being proposed: A. To set-up an independent financing source to allow coffee growers to acquire coffee bikes. This is where World Vision / Vision Finance will play a role. B. To set-up an independent Bike Company to manage the lifecycle of the coffee bike. C. To establish an incentive scheme to ensure that coffee growers deliver their harvest to the washing station by 3PM, and thus guarantee that the quality increase potential is fulfilled. The roll-out of the program will be done in two phases: 1) 1,200 bikes will be delivered to coffee farmers by February 2008 (throughout 3 cooperatives) 2) 1,800 bikes will be delivered to coffee farmers by February 2009 (throughout 4+ cooperatives) Although the potential of the bike is huge, both for coffee as well as for other products (milk, rice, potatoes, tea, etc.), the next phases of the program are not defined yet. A. Set-up an independent financing source to allow coffee growers to acquire coffee bikes A.1 Finance the coffee bike through a microleasing program Vision Finance will finance the coffee bike acquisition through a microlease scheme. Microleasing is almost unheard of in Rwanda (as is leasing in general throughout East Africa). Leasing is a 3-way agreement in which: Vision Finance buys the asset (coffee bike) from the vendor (SPREAD / Bike Company) Vision Finance (the lessor) leases the asset to the coffee farmer (the lessee); Vision Finance retains ownership of the asset during the lease term while the lessee uses it; the lessee becomes the owner of the bike at the end of the lease term. Leasing offers several advantages: Advantages for Donors / Project Sponsors: 1. No possible diversion of funds. The coffee bike is the object of the agreement: no cash is disbursed. 2. Coffee bikes can be repossessed in case of default and leased to another coffee grower: the investment (coffee bike) is not lost. The durability of the bike ensures that redeployment is indeed feasible. Advantages for the Lessor (Vision Finance / World Vision): 1. Leasing gives Vision Finance a stronger legal position to repossess the asset in case of default (formally and informally) because Vision Finance owns the equipment. 2. Leases have lower delinquency rates than loans in general 1. 1 Glenn D. Westley, Equipment Leasing and Lending, A Guide for Microfinance, Inter-American Development Bank Sustainable Development Department, Best Practices Series June 2003, Page 2. Note: it is also interesting to consider the experience of OOO Micro leasing company in Russia that financed 260 leases for $2 million with a 100% repayment rate Source: IFC, World Bank Group. Page 5
3. Because the asset serves as collateral, the administrative process is reduced (lower paperwork = lower cost). 4. Lower risk of fraud as no cash is handed out to customers. Advantages for the Lessee (coffee grower): 1. By lending equipment that will be used for agricultural purposes, Vision Finance will not have to charge sales tax to the customer under Rwandan law. Thus, the farmer is saving the amount of the sales tax (18% - or almost 1/5 of the price) by leasing vs using a loan to buy the same equipment on the open market. 2. Because of the stronger legal position that leasing provides, Vision Finance can offer a longer credit term (>12 months), remove the need for outside collateral requirement, bypass the progressive loan scheme (standard microfinance industry practice) and accept brand new clients. This point is particularly important since coffee growers have difficulty with credit repayments on a term shorter than 24 months. 3. Acquisition of an asset and thus an increase in wealth. The IFC-World Bank has been advising Vision Finance in setting-up the microleasing scheme in accordance with best practices. As part of the IFC Rwanda Leasing Program, the IFC has sponsored a study trip to Tanzania. Vision Finance s management will be visiting Sero Lease and Finance Company (SELFINA) to benefit from the experience of this company. SELFINA is a microleasing company that makes capital available to women and indigenous businesses in Tanzania. The study trip will reinforce Vision Finance s capacity to set-up a sound microleasing scheme for coffee growers. Vision Finance will train and appoint dedicated Credit Officers to work with the cooperatives on the Coffee Bike program. They will be supervised by the Leasing Manager in charge of all the lease products in Vision Finance. A.2 Cooperative selection for pilot phase Vision Finance and SPREAD will select 3 cooperatives to launch this new phase of the Coffee Bike program. The selection will be based on the quality of the cooperative s organization; in this regard, Vision Finance will first follow SPREAD s advice and then meet directly with the cooperative s management, extension agents and some coffee growers to conduct its own evaluation. So far, the following cooperatives have been considered: 1. Musasa. Potential: 600 bikes. Status: visited and approved. 2. Gashonga. Potential: to be defined. Status: to be visited. 3. Humure. Potential: to be defined. Status: to be visited. A.3 Cooperative training The cooperative trainings will include two elements: Microleasing training: Vision Finance and the IFC will conduct a 1 day training session with each one of the cooperatives selected. This training will also involve local authorities. The training will include a general session with both members of the Page 6
cooperatives and representatives from local authorities. It will be followed by two separate sessions, one for the cooperative s members and one for the local authorities to address specific issues. Among the specific issues that will be addressed with the cooperatives: use of the coffee bike, obligations of the lessee, ownership, interest, payment, term, default, repossession, etc. Among the issues to be addressed with local authorities: use of the coffee bike, obligations of the lessee, ownership, default, repossession. Coffee Bike management training: SPREAD shall emphasize that the goal of the coffee bike is primarily to increase coffee quality and thus the cooperatives income and that of their members. To that end, the cooperative will be trained to put an incentive scheme to ensure that daily harvests reach the washing station no later than 3PM. A.4 Definition of the Memorandum Of Understanding (MOU) between Vision Finance and the Cooperative In order to ensure the success of the microleasing scheme, there are a few critical elements in the relationship between Vision Finance and the Cooperative: 1. Vision Finance recognizes that the Cooperative has the best knowledge about its members and cannot use its normal screening process (EX: a cooperative of 2,000 growers, scattered throughout the hilly countryside of Rwanda would prove extremely difficult to assess precisely for Vision Finance). Therefore, the Cooperative will be responsible for selecting which coffee growers, among its members, will be eligible for credit. Two criteria are critical. First, the ability of the coffee grower to repay: this is mainly determined by the number of coffee trees he owns. SPREAD s recommendation is to set a minimum threshold of 300 trees to ensure that the coffee grower will generate enough revenue to repay the credit without putting too much stress to their base revenue which is used for food, health, education, home, etc. Second, trustworthiness or credit culture. This is to ensure that the lessee will meet its obligations. 2. The leasing terms will be adapted to the Cooperative s specificities within certain limits. For example, Vision Finance can offer a repayment term between 24 and 36 months. It will enable the Cooperative s members to make the optimal choice between total cost of credit and the size of the periodic repayments. 3. The Lease Agreement will be signed between Vision Finance and the coffee grower. In case of payment default, the bike will be taken back and leased to another coffee grower. 4. The Cooperative will be responsible to manage the lease repayments to Vision Finance. Several mechanisms may be chosen: when the farmer brings its harvest to the washing station, the payment he received is reduced by a certain percentage to cover for the lease amount; another way is that parts from the proceeds from the coffee sales to the buyers (US or European companies) are reserved; etc. Each cooperative has its own process to pay farmers, thus the process will be established for each cooperative. Motivating the Cooperative management will be a key player in minimizing payment default and in reducing subsequent costs (repossession, re-lease, etc.) Therefore, Page 7
Vision Finance is considering establishing a specific cash-back program: if the Cooperative meets a 99% repayment level in any 12-months period, Vision Finance will refund 0.5% basis point of the lease interest rate; if that level reaches 100%, Vision Finance will refund 1.0% back to the cooperative. The scheme will be profitable both to the Cooperative (program success and more dividends to distribute to its members) and to Vision Finance (lower repossession cost means higher profit, even after the cash-back). B. Set-up an independent Bike Company to manage the lifecycle of the coffee bike The reasons to establish the Bike Company are twofold: 1. Professionalize the current Coffee Bike program activities done under SPREAD to enable scaling-up to all Rwanda. 2. Remove an activity which is not a core competency of the SPREAD project. Although Vision Finance will work as closely with the company as it is with SPREAD, the two entities will be completely independent and will work under a MOU. Vision Finance will not be involved in either the establishment or the on-going operations of the company. The Bike Company will be set-up in Kigali the capital and geographical center of the country in order to be able to serve the various cooperatives scattered in the different regions of Rwanda. It will likely be established by the summer of 2008. Part of this establishment is to create the administrative entity; it is not yet decided what the status of the company will be (whether an NGO or a forprofit). Another part of the establishment is spinning-off the bike activities from SPREAD: relocating the assembly facility and the personnel of the Coffee Bike program from Butare to Kigali. Picture above: the shaded green areas indicate the coffee production regions; the black and yellow spots indicate the location of coffee cooperatives and of private producers. The Bike Company will ensure the following activities (most being done today): Procurement: ordering the bikes, managing business relations with the Chinese manufacturer, taking delivery of the bikes in Kigali. Assembly: when the coffee bikes parts are delivered, they need to be assembled. Currently, the program uses 26 trained mechanics that can assemble 52 bikes a day. A container of 1,000 bikes thus needs 20 days to be assembled. Bike delivery to cooperatives. Page 8
Spare parts management: 28 different spare parts types are currently being handled. Maintenance advice and training to cooperatives and coffee growers. C. Establish an incentive scheme to ensure that coffee growers deliver their harvest to the washing station by 3PM, and thus guarantee that the quality increase potential is fulfilled The goal of the incentive scheme is to motivate the coffee growers to bring coffee cherries to the washing station before 3 PM, and to use the bikes for their intended purpose. Premium Amount per Kg of coffee cherries delivered to the washing station: Coffee grower: FRW 10.00 Extension agent: FRW 0.5 Cooperative mgmt: FRW 0.5 TOTAL Premium: FRW 11.00 This scheme has been tested for some months during the pilot phase in Maraba and has brought successful results. Coffee growers immediately acknowledged the benefits of receiving an instant cash premium on each Kg of coffee. Moreover, as the whole value chain benefits from the incentive, including extension agents and the Cooperative s management, coffee growers receive a consistent message to bring their daily harvest by the 3PM deadline. 3. Evaluation The coffee-bike coffee will be processed separately from all other coffee entering the station after 3PM. The bike-coffee will then be sold at the premium prices to participating American and European coffee companies. Therefore, SPREAD will be able to track the impact of the coffee bike on quality and on the cooperatives income. SPREAD had implemented several impact assessment measures: 1. Income impact at household level through a sample survey in the cooperatives 2. Impact on the Cup of Excellence competition: will assess coffee quality, coffee industry development and coffee prices. Vision Finance will consider the following measures: 1. % of repayments on time. 2. Profit % on the coffee bike microlease program. 3. % of coffee growers asking for another credit, during or after the coffee bike leasing period. 4. Sustainability Vision Finance is planning a payback period of 32 months, over a total period for the project of 48 months. The NPV for the project is positive and should generate free cash flow that be reinvested into subsequent credit schemes, either to extend the Coffee Bike program or to finance existing loan products. Page 9
5. Budget USD Year 1 Year 2 Year 3 Year 4 TOTAL x-rate 550 Feb 08 - Jan 09 Feb 09 - Jan 10 Feb 10 - Jan 11 Feb 11 - Jan 12 Feb 08 - Jan 12 # of New MicroLease contract signed 1,200 1,800 0 0 3,000 # of active MicroLease contracts (end of period) 1,200 3,000 2,400 900 A - CASH IN 1. Advances received 21,818 32,727 0 0 54,545 2. Interest Income 30,101 75,252 60,201 33,863 199,417 3. Payments on Principal 73,776 184,441 256,373 82,998 597,588 TOTAL CASH IN 125,695 292,420 316,574 116,862 851,551 B - CASH OUT 4. Leases Commited 177,063 265,595 0 0 442,658 5. Expenses Direct Expenses FTE Leasing Manager 1.00 5,455 5,455 5,455 5,455 21,818 Credit Officers wave 1 2.00 5,236 5,236 5,236 5,236 20,945 Credit Officers wave 2 3.00 655 7,855 7,855 7,855 24,218 Training 166 77 155 155 553 Travel 3,845 15,545 13,364 5,591 38,345 Consultants 13,278 0 0 0 13,278 Printing & Copying 0 0 0 0 0 Contracts 982 1,473 0 0 2,455 Brochures 0 0 0 0 0 Forms 436 655 0 0 1,091 Telephone & Fax 709 1,309 1,309 1,309 4,636 Coffee Bike Product Mgmt 0 0 0 0 0 Meet local authorities 736 1,023 818 982 3,559 Meet Cooperatives 518 750 600 655 2,523 Insurance & Taxes 23 57 57 57 195 Motorbikes (acq.+maint.) 9,364 14,545 909 909 25,727 Repossession cost 2.0% 3,356 8,389 6,711 2,517 20,973 TOTAL Direct Expenses 44,759 62,369 42,469 30,720 180,317 Indirect Expenses FTE Operations Mgr 0.15 2,585 2,585 2,585 2,585 10,342 New Product Mgr 0.50 6,273 6,273 6,273 6,273 25,091 Finance 0.10 1,796 1,796 1,796 1,796 7,183 IT 0.10 1,610 1,610 1,610 1,610 6,441 TOTAL Indirect Expenses 12,264 12,264 12,264 12,264 49,056 TOTAL Expenses 57,023 74,633 54,733 42,984 229,373 TOTAL CASH OUT 234,086 340,228 54,733 42,984 672,030 C - CASH FLOW = A-B -108,391-47,808 261,842 73,878 179,521 D - FINANCING 6. VF Own Funds 0 0 0 0 0 7. Grants 184,545 180,182 0 0 364,727 TOTAL FINANCING 184,545 180,182 0 0 364,727 NET CASH FLOW = C+D 76,154 132,374 261,842 73,878 544,248 Timing of the grants: the grants should be made available to Vision Finance by October of each year at the latest for the order to the bike manufacturer in China to be placed. This will insure delivery of the bikes by January of the following year and allow sufficient time for assembly and distribution to coffee growers by February, the harvest beginning in March. Page 10