Service Delivery Models: Investing for Impact, ITC chili peppers in India

ITC Spices worked with IDH to understand the impact of their service delivery model (SDM) investments on chili pepper farms in India. The analysis showed positive return on investment for both the farmer and ITC. On average, a farmer in an ITC program experienced a 42% increase in income compared with a non-ITC farmer.

The services provided by ITC Spices aim to help participating farmers increase their capacity for meeting international export standards, and include proper training in Good Agricultural Practices (GAP), access to inputs and technology, as well as financing. ITC Spices investments also have wider impact beyond the participating farmers through initiatives aimed at improving health and education in the surrounding community.

The IDH analysis of the ITC Spices SDM showed positive return on investment for both the farmer and ITC. More than 3,000 farmers were trained between 2015 and 2016 through services provided by ITC, and the adoption rate of the practices from these trainings is 90%. By year 10, participating farmers are anticipated to increase their profitability by 42% (mainly attributed to higher yields and increased quality of production). Another exciting outcome was the discovery that, on average, a farmer in an ITC program experienced a 42% increase in income compared with a non-ITC farmer.

In addition to higher farm productivity, the pass percentage (% of volume bought from a farmer that meets international food safety requirements and can be sold for export price) of production increases almost 40%, from 60% to 99%. The increase in farmer productivity and pass percentage of production translate into direct benefits to ITC Spices as well. Farmer loyalty improves by 30% in only 5 years as training and subsidies for best practices along with Rainforest Alliance premiums make ITC the preferred buyer for farmers. The increase in individual farmer yields also means that ITC can buy 80-90% higher volume. For every one dollar invested by ITC Spices in the services provided to the farmer, nearly three dollars of return is generated to the business in improved supply of product for export.

Lessons Learned

The results of the analysis present a strong business case for both ITC to operate the SDM and the farmer to engage with ITC’s services. However, through the SDM analysis IDH identified that the success of the model also depends on key financing factors, namely the subsidy injections ITC provides to farmers to access technologies. Further research and development may eventually bring down these costs and new funding structures can be explored to make the model more sustainable for both operator and farmer in the long-run. IDH is pioneering in this space to prototype with partners interested to innovate for efficiency improvements in their Service Delivery Model.

For more information about the SDM Innovation Lab contact:

Iris van der Velden vandervelden@idhtrade.org

Context 

Chilies that meet strict international regulations can be sold at a higher price, and if the product meets certification label requirements the farmer is entitled a premium. This is a benefit for the farmer, however, the costs required to ensure compliance with these standards are often prohibitively high for the chili farmer to incur on his or her own. Farmers often face difficulties in accessing the training, finance and services that can help them meet standards and improve their farm profitability and income.

ITC Limited, a multi-business enterprise based in India, is working to change this. As one of India's most respected corporations, ITC believes that a company’s performance must be measured by its Triple Bottom Line contribution to building economic, social and environmental capital by embedding sustainability in business. This includes understanding and investing in the capabilities of farmers embedded within the supply chain of the products they source.

At IDH, the Sustainable Trade Initiative (IDH) we help companies like ITC reach their goal. For example, we help them understand how they can invest more efficiently in the service structures that serve the farmers they source from. For this, IDH developed a methodology to analyze Service Delivery Models (SDMs): supply chain structures which provide services such as training, access to inputs and information to farmers required to increase their performance sustainably. Through a better understanding of the SDMs that they operate, service providers can understand the impact and cost on their businesses and for the farm(er). This level of transparency is catalyzing a shift in thinking on for value chain players in agri-commodities. As they understand the needs and economics of a farm(er), they establish relationships with farmers as clients, instead of recipients. These client-minded service relationships also help develop funding strategies that can improve the commercial viability of the model.