Koa 1

KOA’S ECONOMIC OPERATING MODEL IN GHANA

This entry is part 2 of 2 in the series KOA’S BUSINESS EXPLOITS IN THE GHANAIAN COCOA SECTOR

During my master’s Thesis in 2019, I reflected on almost all the known initiatives the Ghana Government and industry stakeholders announced to have implemented to address the livelihood changes of smallholder farmers. I concluded that:

It is not real for smallholder farmers to sustainably gain sufficient income to solve their income-driven challenges if they attempt to enhance their value capture from within the cocoa-chocolate value chain.

This is due to the high level of power relations, firm network entrenchments, technology and infrastructure setbacks, and operational and competitive risks that disadvantage the smallholder farmer.

However, enhanced value capture is only real when the strategy to capture does not interfere with the power relations, firm network entrenchment, and the operational and competitive landscape of the established stakeholders within the cocoa-chocolate value chain. At this point, they can gain the moral support of the lead firms and generate sustainable incomes to solve their livelihood challenges driven by income constraints.

This conclusion wasn’t supposed to absolve these influential stakeholders, including Ghana Cocoa Board, from a fierce fight from smallholder farmers but rather to equip farmers with the financial capacity to fight fiercely without holding back.  For example, if the farmer can earn income from the by-product processing, they can think of hoarding as a strategy to demand better prices for their dried beans and decide to delay supply so long as they don’t go hungry.

I was excited when I heard of KOA’s operations in Ghana, which focused on value addition to Cocoa pulp. But one thing many people ask is, was the Ghanaian investor, government, or the cocoa farmers unaware of the economic value of cocoa pulp to have exploited it and have had to wait all these years for KOA to pioneer its commercialisation in Ghana? In Ghana, an enabling environment has been created for companies that produce for the export market.

In addition, when the exporter or investor is from Europe or the USA, where most of these sweet tooth markets are domiciled, the tariff and non-tariff market access advantages sit essentially with investments their citizens lead.  Also, access to cheaper business support services and financing are opportunities limited to the local Ghanaian investor. Lastly, the legacy of a century-long wrong and generalistic way of portraying Africa and Africans as a place and a people that can’t be trusted or do not have the environment to produce food products worthy of consumption by our ever “healthy” westerners.

How have these reasons facilitated KOA’s ability to explore these blue ocean business opportunities within Ghana’s cocoa sector as a Foreign Direct Investor?

I would argue that KOA’s pioneering move into cocoa pulp processing in Ghana is fixated on many conducive business incentives they have as an export-focused and European-owned company, which indigenous Ghanaian investors who want to produce for local consumption do not have access to.

Therefore, advice like “Producing countries should encourage the local consumption of cocoa products” and “buy made in Ghana or Africa products” is just rhetoric with no policy backing. Value addition in Africa seems to be only acceptable to the west when it’s fronted by one of their own.

Ghana and Ivory Coast produce over 60% of the world’s Cocoa beans, yet the entire continent consumes less than 0.5% of the world’s chocolate. It is an indicator that regardless of how we develop our local markets for chocolate, unfortunately, we cannot ignore the need to access these financially resourced and sweet tooth markets for any value addition agenda we embark on. After all, the reason Cocoa was termed as a “Cash” crop in the agricultural textbooks in Ghana was due to its foreign exchange earning abilities to resource our industrialisation drive.

Below are details of some of the incentives KOA has as an export-focused European Direct Investment in Ghana:

  • Incentives as members of the Ghana Freezones Authority.
  • Access to cheaper loans in Switzerland as opposed to the over 20% annual lending rates in Ghana as shown in graphs 1 & 2 below. With Ghana’s continued currency depreciation, it’s much cheaper for KOA to operate in Ghana as a business that buys cocoa pulp in Ghana Cedi and sells its final products in US$, Euros or Swiss Francs. This makes it more affordable for them to service their Swiss loans and make more profits while they await competition in the space.
Image
Graph 1 – Average Lending Rate (%) – Switzerland. Source: World bank

Source: World bank

Image 1
Graph 2 – Average Lending Rate (%) – Ghana. Source: Trading Economics

Source: Trading Economics

  • Easy access to a sweet tooth market, i.e., European markets. KOA Switzerland, which focuses on marketing and distribution of their products in the west with the owner being European, has much leverage in capturing the western market as opposed to a Ghanaian-owned manufacturer seeking markets in Europe. The most straightforward argument will be, “why don’t Ghanaians develop an African demand for such products to gain the African advantage” too? Compared to the Western market, Africa’s low income and development status doesn’t incentivise the development of a large sweet tooth market for luxury products like “well-packaged cocoa pulp juice or concentrate”. With Africa being a low-income continent, the products need to be cheaper before a substantial market can be developed. Financiers require the justification of the existence of a sweet tooth market before loans can be awarded.

Africa’s current focus on export-oriented industrialisation (i.e., Economic Freezones), which incentivises export more than import substitution industrialisation, makes it much cheaper to produce solely for export, hence in addition to cheap labour and close supply proximity, FDIs thrive in Ghana and Africa than internally driven investments focused on creating for local consumption. The trade missions by Western countries around the world see it as their duty to support their homegrown business to thrive by using their soft power and connection across the globe to negotiate policy changes that favour their homegrown companies and those entering new markets. Compared to Africa, our trade missions and high commissions are not only inaccessible to business but also see any support, no matter how little it is for its homegrown business, as a favour.

Secondly, KOA’s first-mover advantage in cocoa pulp processing in Ghana and their focus on the high-end European market have allowed them to set up a bespoke incentive structure and cost-free operating procedure for their partner farmers. This will increase the barriers to entry for an investor who wants to produce for the African market. KOA affirmed during our interview that they would have to scale their production and gain advantages of economies of scale before they could sell their products at the price the farmer can afford.

  • Thirdly, KOA’s incentive structure and bespoke operating procedure allow the farmers to spend $0 and gain more than $300 per metric ton when harvesting the cocoa pulp for KOA. This will lead to more farmers willing to sell their pulp to KOA than to local investors who may find it difficult to match or exceed KOA’s offering to the farmer. The farmer wins in this case. The community also wins as more jobs are created. The community starts to see development because KOA’s factory sits at the supply base (Assin Akrofuom).  But the idea of local consumption dies off because the community can’t consume or enjoy the benefits of what they produce as the price is over and above what they can afford. The idea of retaining the profits from such business in Ghana to boost our foreign exchange earnings dies off as Ghana itself, through the Ghana Freezones act, for which KOA is a member, allows for 100% repatriation of profits. So as European citizens, they have no reason to let their revenues and profits sit in Ghana.
  • The advantages of the African brain drain and the never-erasing trust issues western and African businesses and customers have of products and services produced by Africans and in Africa disproportionately benefit Western originating FDIs and products. I am sure it’s easier said than done to advise Africans and westerners to change their attitudes after centuries of indoctrination from both sides.

Instead of the Ghana government creating an enabling policy and business supporting environment to encourage young Ghanaians to go into cocoa by-product processing, we are encouraging young people to go into cocoa farming. As Western NGOs are backing this agenda, it will only lead to the collapse of the sector very soon to the advantage of cocoa processing and chocolate manufacturing.

A focus on cocoa farming only creates excess production. Further, it deepens our reliance on cocoa beans for income instead of diversifying the income generation streams for households in cocoa farming households. A focus on by-product manufacturing for local consumption and export does not only create new jobs (than farming) and improves the livelihoods of indigenous Ghanaians, but it also disincentives cocoa farmers from focusing on producing more cocoa beans, hence serving as a natural check on world cocoa prices for the benefits of producing countries (though it may not necessarily trickle down to the Ghanaian cocoa farmers’ producer price).

In summary, KOA deals directly with the farmers to ensure traceability and for the farmer to retain all the margins that would otherwise have gone to intermediaries. They provide good communication and continuous stakeholder engagement with the farmers and communities to ensure they are in touch with the issues and concerns. They demonstrated that their product prices have halved due to economies of scale; hence as they keep scaling, the price will keep declining for it to be affordable to the ordinary farmer or Ghanaian.

They agreed to investigate the possibility of my suggestion for the cocoa farmers to pay in Dollars rather than Ghana Cedi so that the farmers can use the appreciated value of the dollar to offset their home inflation rate.

They agreed to investigate the possibility of my suggestion for the cocoa farmers to pay in Dollars rather than Ghana Cedi so that the farmers can use the appreciated value of the dollar to offset their home inflation rate. Appreciation can help the farmers offset inflation. Whereas they do not have a set percentage of their revenue that goes into community development and capacity building for farmers, they agreed to investigate its viability in the future. They decided not to reduce the minimum price when purchasing Cocoa pulp from the farmers even when their economies of scale grow and drive down their product prices. Lastly, KOA said that KOA Ghana receives all the sales revenue into their Ghanaian bank account.

However, I remain sceptical about this because KOA Ghana is the subsidiary of KOA Switzerland that oversees product distribution in Europe. I am not sure how KOA-Switzerland will pay the entire purchase cost to the Ghana bank account of their subsidiary in Ghana rather than just sending them the money they need to fund their operations in Ghana (That’s my thought).

Finally, I agree with their three-tier approach to sustainability: putting the people first, investing in them, and ultimately, a trickle-down effect on improving the farmers’ environment and communities. KOA’s business model will remain sustainable if they keep innovating and deepening their trust with the farmers to increase their switching costs to potential competition. As KOA is enjoying the first movers’ advantage, the introduction of competition will lead to this new sub-sector of by-product processing becoming a suppliers’ market in favour of the farmer. KOA has the advantage of increasing the barrier to entry by creating a solid partnership with the farmer that new entrants will find it hard to compete with.

Cocoa Farmers need to resist any attempt by Ghana Cocoa Board to infiltrate the sub-sector to overly regulate it as it’s doing for the dried cocoa beans. KOA’s intimate relation can set a more significant standard that the competition would need to beat all in favour of cocoa farmers, as opposed to the existing cocoa processing and chocolate firms whose sustainability activities with farmers are business-biased and focused only on environmental sustainability with absolutely no recourse for economic and social sustainability for the farmers and their communities.

It was fantastic having the interview with KOA executives. In the end, a company whose business creates an additional minimum net income of Gh¢2,062.5 (equivalent to US$344 as of Feb 2022) is worth applauding. 

In the next article about KOA, I will deep-dive into the details of their newly launched “Radical Blockchain transparency system” to explore the good, bad and the ugly.

Many Thanks to the executives of KOA

Author

  • Kwame

    organisation:

    Agricultural Trade Policy Analyst | Cocoa-Chocolate Industry Expert | Digital & Industrial Project Manager | A persuasive Negotiator | Columnist. Email: Kwame.a.Kwarteng@gmail.com / Kwame.Kwarteng@PolicyCON.com Twitter: @asamoahpeters

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