Establishing and governance for FPOs

Hyderabad

What we will broadly cover

What is Producer Organisation? Challenges in FPOs? Best Practices – in General Best Practices – in Governance

What is a producer organisation?

Simplest form a Producer Organisation is an organisation formed by a group of farmers (that may carry a particular status under law )

FPOs can be informal groups, formal associations, cooperative societies, producer companies and unions.

A Producer Organisation brings together people and businesses into a collaborative venture. For many, working with other producers will be a new and often alien way of working.

It involves aligned thinking, commitment to work with others and a joint approach to business.

If a farmer is not prepared to collaborate and operate in this way, a Producer Organisation is not for them.

Farmers organizations: intermediaries between farmers and other stakeholders

On behalf of its members, it organizes and regulates relations between members and other stakeholders in rural sectors and areas

Institutional Models of Producer Organisations

• JLG/Self-help groups

• Farmers

groups/Association

• Farmer’s Club

• Federations

Different models of producer organisations are discussed below:-

Informal collectives Formal collectives Producer companies

• Formal collectives like

Cooperatives (under

old Cooperative Acts,

Liberal Cooperative

Acts and Multi State

Cooperative Societies

Act) • Long history of producer

collectives - Cooperatives

in fishery, sugar and

dairy

• Societies and Trusts

• Producer companies

established under the

Companies Act

Challenges to FPOs

Social capital formation in PCs

Governance and Management capabilities of PCs

Scope and scale of PCs

Market landscape of PCs

Ownership issues in PCs

Convergence of resources from district administration

Institutional architecture of producer organizations in the district, and

Financial capital formation of PCs.

FPOs still evolving !

Challenge - Best practices across sector not documented ….

Fundamental difference between a Producer Organization and the other forms of business organizations is that in this case a group of producers (of a commodity or a set of commodities) come together to find an opportunity to maximize their Return on this commodity (ies) and is not a group of people coming together to maximize the return on the capital invested by them, may be utilizing an opportunity offered by the commodity

Best practices in - General

Leveraging ecosystem for scale and sustainability through four levers

This has always been the driving philosophy of CSA to achieve scale and sustainability Capacity of communities Power of the state Efficiency of markets Reach and attitude of facilitators

Best Practices

Size of the FPO – 500 to 2000 members

Multi-commodity is better (Agriculture, Horticulture, Forestry)

Combination of bulk and retail; raw and processing; local and distant markets; and niche and regular.

Paying strong emphasis on marketing efforts

Sub-contracting ways to generate adequate experiences

Farm-Farmer-Family – diversity of products and services for sustainability

 Ecosystem solution – CSA strongly believed in the convergence of multiple stakeholders (bringing together the efficiency of the market, power of the state, reach of the facilitator and strength of the communities) to ensure a sustainable eco-system for the intervention to work

Best Practices

Geo Spread – Contiguous villages 10-20 villages for one FPO

Spending time in identifying the leaders for the FPO

Not so diversified crops in the cluster

Financing – at farmer level directly with bankers (linkages);

At the FPO level through FPO financing, WH Receipt, Trade Financing (credit from supplier and advance from farmer) etc.

Pooling pricing - use variable payment schedules and marketing agreements

People Professional Partnership.

 Just phrases do not help. How they come together to bring good outcomes needs to be properly enunciated for someone from another context to understand.

Establishing an FPO – Best Practices

Some Best Practices

BUSINESS PLAN

Having a Business Plan in place - Business Plan will be a tool for the FPO for setting the direction of the company over the next few years and will support the company to set up the action plans and processes

Have an implementation plan in place - Business Plan implementation should be done in a phased manner, wherein business activities of higher priority of member farmers have been planned first.

Internal Systems Need to have strong internal systems in place

Setting up handling procedures for produce – grading and storage, quality control, humidity, procedure for minimizing losses and pilferage, etc.

Formation of committees – purchase committee, sales committee, Finance Committee

Procuring of trading infrastructure – weighing scales, tarpaulins, cleaning equipment, etc.

MIS system for supply chain management.

Accounting systems – internal control, cash management, working capital management.

Inventory management – closing stock, quantity, quality, prices

Risk Management systems – Insurance, Cash Handling procedures, transit insurance, stock insurance, etc.

Financial Management Ensuring required capital and general financial management is

a pre-requisite for running the business successfully. This is required for

Arranging initial capital for the company;

Organising working capital for stock / inventory;

Arranging finance for investment in infrastructure;

Fixing margin for input and output selling;

Distribution of margin / profit amongst stakeholders;

RISK MANAGEMENT SYSTEMS

Strengthen risk management systems Identification of risks In both external and internal environment of the organization

(Systematic issues , Human lapses, misuse and frauds), Market risk,

Environmental risk,

Political risk etc.

To identify the areas and act on mitigating risks Design, Develop, Strengthen systems

Some examples of risks

Input Risks

•Shortage of seeds and fertilizers.

•Unavailability of quality seeds

•Middlemen Involvement

•Delay in Supply

Production Risks

•Shortage of Skilled Labour

•Adverse weather conditions

•Infrastructure failures: Power, Water etc.

Processing Risks

•Machinery Failure•Shortage of skilled manpower•High demand of leasing machinery increases the cost and time.

•Poor or no warehouse for finished goods, Infrastructure Failure

Logistic Risks

•Transport Failure

•Accident

•Damage due to food perishing

•Strikes etc

Compliances for Farmer’s Groups Registered under Producer Companies Act

Internal

The FPO’s promoted will have following compliances.

Election:

The group will ensure that the Board of Directors is elected before the expiry of the term of the existing directors. These elections need to be in accordance with the by-laws.

Meetings:

The general body needs to meet at least once a year and the board of directors at least once in three months. AGM has to be held within 6 months of the completion of financial year. The by-laws of the society may prescribe a higher frequency of meetings. The AGM minutes have to be circulated to all attendants within 30 days of the meeting.

Statutory Records:

Some of the important books of account that the Act requires of all producer companies are:

Cash book Accounts of assets and liabilities Accounts of all purchases and sales of goods Updated register of members Copies of audit reports and special audits Copy of the law Updated bylaws with all amendments Minutes Book Bye laws book

Internal Audit:

A producer company may get its accounts audited internally twice a year

Internal Audit has become an important management tool for following reasons:

It ensures compliances of Companies (Auditor’s Report) Order, 2003.

Internal auditing is a specialized service to look into the standards of efficiency of business operation.

Internal auditing can evaluate various problems independently in terms of overall management control and suggest improvement.

Internal audit is an integral part of “Management by System”. Internal audit ensures the adequacy, reliability and accuracy

of financial and operational data by conducting appraisal and review from the independent angel

Financial Reporting Submission of Returns

A Producer company needs to submit the following returns within 30 days of conduct of the annual general body meeting:

Annual report of activities Annual audited statements of accounts with auditor’s report List of members at the close of the year under reporting with

services provided to each member Statement on the disposal of surplus or on the allocation of deficit List of names of directors, their addresses and their terms of

office and Compliance reports relating to audit, special audit and inquiry, if

any.

External Compliances: Registration of the organization:

The Act deals with number of members required for incorporation of a producer company after complying with the requirements and provisions of the act in respect of registration. 

The producer institution needs to follow the following compliances to register under producer company Act:

Form No. Brief Description

Form-1–A

1. A fee of Rs. 500 will be also sent .the applicant shall give four alternative names. The name of the promoters should also be the subscribers to the memorandum. The last words of the company should be “……………..producer company limited” 2. The registrar’s confirmation of availability of name will be valid for six months and if a company with that name is not registered within six months, a fresh application will have to be made to the registrar with fees of Rs. 500

Registration compliances:

The producer company need to submit following document for registration:

Document required Form No. Brief DescriptionNo of copies

Memorandum of association -Memorandum of association duly signed by the subscribers and witnessed

2 copies

Articles of association -Articles of association duly signed by the subscribers and witnessed

2 copies

Declaration -

Declaration need to be made by an advocat or a charted accountant or the director as per the MOU that all the requirements of the act and the rules there under have been complied with in respect of registration

1 copies

Declaration of director Form-29List of persons named in the MOA as first directors and their consents

1 copies

Particulars of director Form -32 duplicate giving particulars of the said persons named as directors

1 copies

Address of register office Form -18 situation of registered office 1 copiesDeposit of incorporation fee - The receipt of incorporation of fee deposit 1 copies

Preparing to seek credit

Documentation to be in place

Brief profile of the PC and resumes of the key Director/CEO

Background, Company and Business overview, Shareholder profiles, Infrastructure, Geography, Demography, Agriculture and Irrigation, Existing Organogram, Roles and Responsibilities of management

Copies of leases, if any Letters of reference Contracts/work order/MoU for selling produces etc. Legal documents (registration, business license, etc.) Details on existing institutional mechanism – including

promoter organization Past Sources of Funds

Plans and Studies

Business Plan ( Evolving – If possible SWOT should be carried out)

Value Chain Study

Market Study for

Existing Products and Services

Future Products and Services

Preparing to seek credit

Financial Documents

Cash flow statement ( past and projections) Income statement ( past and projections) Balance sheet ( past and projections )

Break-even analysis

Debt-service ratio

Focus on Key Ratios Profitability Ratios

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Efficiency Ratios

Inventory Turnover Ratio

Operating/Cash Conversion Cycle

Return on Average Equity

Return on Average Assets

Capital Structure Ratios

Interest Coverage Ratio

Debt-to-Total Capital Ratio

Debt-to-Equity Ratio

Governance Best Practices

What is Governance in FPOs? Governance relates to consistent management, cohesive policies,

guidance, processes and decision-rights for a given area of responsibility

FPOs are created to perform and function as a Business and have responsibility to ensure economic benefits to its members.

Why do we need Good Governance ? For increased efficiency – so that we can maximise the benefits we

provide to members with limited resources For effectiveness – so that our work actually benefits those who are

not adequately served by the state and the market institutions For ethical behaviour, so that we can influence actors in state and

market institutions as well to behave ethically

What comes to your mind when you think of of good governance and successful farmer groups ????

Membership base and member ownership Organizational structure, constitution and legal recognition Management systems, regularity of statutory meetings Responsible and responsive leadership, accountable to members Internal knowledge and skills, professionalism of the organization Culture, values and integrity Open communication and internal trust Financial management and accountability Financial autonomy, independence from external financial

support Political independence, no Government interference Relations with other stakeholders Quality of service provision to members

Elements of good governance

Why do we need Good Governance in FPOs

POs are accountable to their communities POs have to be committed to the highest level of accountability especially to its

members For a PO, being accountable means

Demonstrating regularly to members that it uses its resources wisely and Ensuring inclusive and equitable support to all members The Board/Managements does not take advantage because of their special status and

decision making powers. An accountable PO has to be

Transparent and ethical in all transactions with its stake holders Prepared for public scrutiny of its accounts and records by funders, beneficiaries, and

others.

Main reasons POs run into difficulties or collapse: Poor governance and the breakdown of trust between members, leaders, and

managers. Managing a group of producers with different priorities is a difficult task, especially

when POs become larger

How will Good Governance happen in POs?

In almost all POs governance is by a two-level structure. First level is made up of all the PO’s members also known as the General Body. All

major decisions are made at the General Body meeting – either an Annual General Body Meeting (AGM)or Special meetings called for.

Second level is made up of the leaders elected at the AGM. These leaders or ‘directors’ form a management group, which is often called the

board of directors. Role for the Board of Directors should be clear Role of Management of the company and the Chief Executive Having transparent and efficient systems and procedures and MIS Decision making is done by a committee of representatives of the Board and

Management. Diligent and efficient staff to carry out the directions of the decision making

authority.

Who should be on the Board? Elected representatives from the members

The “ideal” Board size is between seven to eleven

Ideally the Board Members should have an inclusive composition including with representation from women

The “ideal” tenure for a Board member is six to eight years, split into two terms of 3-4 years each.

Members should have different specialisations – including not directly the subject matter of the PO.

External Experts can be inducted to the Board – but they have no voting rights

New Board members must be systematically identified and one or two inducted every year.

New Board members must be given an orientation to the PO’s mission, strategy, operations and history.

Boards should annually appraise their own contribution to the PO.

A Good PO should have the following characteristics

A well developed vision and mission - goals and objectives

Goal-oriented constitution that is understood by all members

A vision of running the PO on clear business parameters – making a it a good business for the members as well as the PO itself

Clear definition of responsibilities, both for leaders and members

Elections of group officials as per constitution

Democratic and transparent leadership

Set rules and procedures to control decision making

Strategic planning

Open two-way communication and feedback mechanisms

Regular meetings

Proper record keeping and accountability procedures

Effective conflict management procedures and capacities

Basic functioning and dynamics of a PO

A producers’ organization is like a boat…

The boat symbolizes the social capital of the organization, members have put some money together to undertake collective action (going by boat instead of swimming alone).

Members are the passengers in the boat. The boat allows them to arrive together at destination instead of swimming alone

Elected leaders steer the boat.

The mast of the sails symbolizes the constitution, as the backbone of the organization.

The sails are put up and positioned to go in the direction defined by the members and the leaders.

Three types of resources determine the power of the wind and the speed of the boat: human resources, financial resources and collaboration with other stakeholders.

Ask yourself ‘Boat’ questions !!

Are the farmers’ organizations in your areas really the boat that brings farmers to their destination ?

Who put up the sail and steer the boat ?

Is there a favourable wind for sailing the boat in your area?

Did you encounter cases where parts of the boat are lacking? What happened?

Constitution (AoA, MoA)

Mast of the boat; backbone of a farmers’ organization

Reference document

Pre-requisite for formal registration

Provides purpose, direction and guidance

Many situations when a constitution is specifically needed

Eligibility of members Election procedures Member roles and obligations Utilization of profits Sanctions

Producer Organization Governance Structure

Board appoints full-time managers, as employees of the PO,

Manage the business and report back to the board on a regular basis.

Number of professional staff would depend on the volume of business, diversity of activities and geographical spread of the business operation. 

Main reasons why POs hire professional managers :

1. Difficult for elected leaders to govern the PO, manage the business, and have time to manage their own private production.

2. Insufficient business and management skills and experience to manage the business effectively.

3. Cutting down on bureaucracy - Managing a business in a dynamic market requires quick decisions and a rapid response to changing conditions and new opportunities in the market.

Professional managers with delegated independence can often manage the business more effectively

Producer Organization Governance Structure

Annual General Body Meeting of Members

( Primary Producers)

Board of Directors

Professional Managers appointed

by Board

Good governance involves the separation of governance and management

Challenge all POs face is to :

Adapt governance structures and systems to the capacity and needs of members, the demands of the business, and their stage of development.

POs can be governed in many different ways and there is no single, ‘best’ approach.

However good governance involves the separation of governance and management.

.The board governs and the staff manages

.The separation of governance and management involves a division of both duties and personnel.

The usual rule is that management runs the organization from day to day, while the board sets policy, exercises oversight, and strategically guides the organization.

Basic tenet of good governance is that management and governance are separate.

Separation makes possible the checks and balances

That ensure the organization is well run and important decisions are made with the public interest in mind.

Good Governance in POs: Role of the Board

The PO Board is the body for its governance It must lay down the value framework and the vision of the

PO The Board must articulate / re-validate the mission every 4-5

years (Mission Validation) The Board must ensure compliance with the mission in

every review (Mission Compliance) The Board should lay down policy and work only through the

CEO and not be involved in operations The Board must hold itself ultimately accountable

Some Good Governance Practices in POs

The Board must meet at least once every 3-4 months, on dates pre-specified well in advance.

Attendance should be at least two-thirds of members A member who is absent, even with leave, for three

consecutive meetings should step down The Board should seek detailed staff presentations /

interaction at least once every alternate meeting The Board must meet part of the time in each meeting without

the staff, and the CEO if needed The Board members should set some of the agenda

Professional staff and their relation with PO leadership and members

Farmers as employers; delegation of executive tasks from farmers to staff members

Separation of roles and functions between farmer leaders and personnel

Redesign of organization chart and internal regulations and procedures

Main areas of responsibility of most Chief Executive Officer / Management

Hiring, firing, and supervising the staff. Managing and evaluating programs and operations. Identifying, acquiring, and managing resources. Preparing an annual budget. Proposing policies and strategic initiatives to the board. Communicating with stakeholders. Promoting the organization in the community. Supporting the board in its work.

Risks and dilemmas

Staff often have a higher educational level than leaders

Staff setting the direction, or even taking over leadership of the organization.

Staffs are recruited and may stay longer in office than elected leaders.

Staff, through their executive functions, may become the actual fund managers, with risks of financial mismanagement and orientation at external support organizations

Staff get a salary, while leaders (in principle) work on a voluntary basis

Board members have political roles and staff has a technical role.

Consequences for organisation chart and internal regulations and procedures