Second Phase Proposal for setting up a Community Owned Company in Bhutan - Artisans Microfinance Private Limited (AMFPL)

Table of Contents
I. Executive Summary Crafts Sector ............................................................................................. 2 II. Executive Summary Agriculture .............................................................................................. 4 III. Executive Summary - Community Tourism ........................................................................... 6 IV. Second Stage Activities.................................................................................................................. 7
a. Crafts ................................................................................................................................................................. 7 b. Agriculture ...................................................................................................................................................... 8 c. Community Tourism .................................................................................................................................... 9

V. Implementation Steps and Timeline ....................................................................................... 10

Based on the feasibility study looking at three sectors - crafts, agriculture and community tourism efforts, AMFPL proposes to move forward with the second phase of activities to set up a Community Owned Company in Bhutan that helps link rural producers to markets and create sustainable employment opportunities. The following are summaries of the findings and recommendations of the feasibility studies.

I. Executive Summary Crafts Sector

Based on an initial review of commercial potential, the feasibility study focused on the following four sets of craft processes: Hand-woven Textiles: Under the current production framework, there are three different segments of weavers. One segment of weavers work independently and make products for self-consumption or local sales. They procure expensive raw materials from local shops often in limited options of yarn type and quality. In the second category, in some areas, where the weavers are easily accessible and concentrated, traders become the source of providing raw materials to the weavers, get the woven products, and add a high profit margin, sometimes up to 100%, before selling it to the end customers. The third category is the section of the weavers who are organized under established public institutions/NGOs and private handloom enterprises. These institutions set up handlooms in their premises and employ weavers to work full time or provide training and other institutional services including yarn, design and technical support to the weavers, with buyback arrangements. These institutions then sell the products through their marketing channels or retails outlets. This accounts for about 20% of the weavers working in the cluster Cane and Bamboo Craft: The value chain of cane and bamboo craft starts with the collection and preproduction processing of raw material from nearby forests. The cane and bamboo is then processed and treated to increase their life. The processed raw material is then split and dyed according to the requirements. The next important step in the value chain is design and product development inputs. Despite comprehensive product innovation training provided at the Cane and Bamboo Technology Center, Guwahati, most artisans continued to make traditional products. This is because artisans felt the new designs are not feasible or too sophisticated for ensuring continued production. The existing production capacity is about 250 pieces in 3 months; these include banchungs (basket), baikhors, dapas. An average artisan takes about 2.5 to 3 days to produce 1 pair of banchung nyekelma. Considering the existing number. of artisans, the productivity is significantly below the optimum level. Currently only 10-15 artisans are working full-time; others produce as and when cash is required. Also, current production practice is limiting production capacity as these artisans undertake all the activities individually. The artisans produce are deposited at the collection centre, usually twice a month, where their products are graded. The payment is done as per the prices fixed by the CFMG, which the artisan prefers to collect once a month or as required. The products are usually sold through traders and the CFMG Sales Counter (in Zhemgang) established through UNDP support. Despite provision of a Sales Counter, some artisans continue to sell their produce to the traders, as they do not have to bear the transportation costs and are usually paid some advance amount to start the work. The products at Sales 2

Counter are sold at 30% mark-up (including 15% as contribution to the community development fund and the rest includes transportation and other costs). Wood Turning Craft : The products made out of wood-turning are the traditional household items such as bowls with lids (laphor), rice plates with lids (dapas), cups with lids (gomphor), cups, platters, etc. There has not been any product diversification seen in these products; the artisans still continue making the traditional products. The price of the end-product depends on many factors that include the major ones like the size of the product, quality and type of the wood, transportation, design and labour. Though the pricing of these products is arbitrary; the artisans dont follow any fixed costing structure for these products. They price them according to their estimations of the value a particular product can fetch in the market.The next and final stage is the marketing of the finished goods. The available market for these products can be categorized as local markets (predominantly handicrafts and souvenir shops in Trashiyangtse and Thimphu) and exhibitions & fairs (adopted by artisans working with institutions/NGOs like Tarayana). Metal Craft : The product range for copper and brass is usually restricted to traditional utensils and ritualistic articles for monasteries or dzongs; but some of the artisans are also producing decorative items such as vases, wall hangings and idols as per buyer demands. The metal process involves making of design, annealing, hammering, shaping, designing, joining or soldering, cleaning and buffing. At the first step in the value chain is raw material i.e. metal procurement. Most of the metal is bought from India especially from Bihar, Jharkhand and West Bengal by traders based in Thimphu. The artisans buy the raw material from them at the current rates depending on the market conditions. The metal is then worked upon by the artisans using the tools of their trade. The working rates are different for each metal, and if intricate designs need to be done on the metal piece, the working rates increase accordingly. These artisans have experienced some interventions in terms of designs and forms as per the needs of the market. The price of these products depends on the size, weight of the metal used and the intricacy of the designs done on the piece. The final stage is the marketing of the finished goods. The available market for these products can be categorized as - the local market, exhibitions & fairs, and retailer. Recommendations The intervention strategy is based on the principles of aggregating the existing artisans, scaling up operations to increase the income levels of the artisans and promoting commercially sustainable production and marketing structures in Bhutan. Based on these principles, the following strategic recommendations are proposed: Incorporate existing NGOs, entrepreneurs and master trainers into project: As highlighted in the value chain, there is a major role played by the institutions or organizations in these clusters. These include artisan collectives such as SHGs and NGOs. These can be revived and can be the nodal points in crafts clusters through which more numbers of artisans can be roped in.

Increase accessibility to raw material and technical input : Difficulty in procuring quality raw materials at an affordable price is a key step in scaling up crafts production in Bhutan. This needs to be a focus area in the second phase of the project. Develop new product lines more suited to urban markets: New design inputs and color trends through the market research will be induced in the clusters. Product lines that are more suited to urban markets would be developed. Key objective would be to highlight the handmade craft aspect and fetch the appropriate price for the craft in the market. For each craft specific design and product development would be done keeping the craft uniqueness in mind. Create market linkages to multiple market segments: Increasing sales and wages of artisans will depend not only developing new products, but also on ensuring that such product developed can be sold at higher price points.

II. Executive Summary Agriculture

With the current global movement toward clean environment and natural products, Bhutan with a very low usage of chemical inputs could easily become a pioneer in organic (Natural) farming. But the agricultural marketing system is under-developed and there is an absence of organized market structures. The Royal Government of Bhutan (RGOB) has just initiated the process of organizing markets. The lack of markets, marketing infrastructure and market yards has led to very fragmented supply chains for agricultural commodities. Market infrastructure in terms of markets, warehousing and cold storage facilities and value addition facilities are also not adequately available as per requirements. Based on our research and field visits, the following conclusions can be drawn regarding current status of agriculture in the country: Agriculture is practiced as subsistence activity by most of the farmers instead of a commercial activity, productivity levels are very low and there is limited motivation amongst farmers to grow more, probably due to lack of market linkages. Volume of all the products in any given cluster for any given product is very low, which creates challenges of lack of economies of scale. Scope for increasing production of various commodities exist in all the geographical regions of the country by optimizing land resource, mechanization of farm activities to extent possible, use of improved variety of seeds and better farm practices. The farm gate prices of most of the commodities have been kept artificially very high by the producers, which make these products uncompetitive in the international markets. Bhutan has one of strongest network / team of agricultural extension workers and outreach to almost all the farmers at individual level. However, need exists for training of extension workers and goal setting based on local agro-climatic conditions. It was observed during the field visit that there is lack of coordination and communication amongst central and field officials. Lack of market information system results in lack of awareness of the growers, this has resulted into total disconnect of farmers from the market. Growers are not able to take advantage of the prevailing higher price in different markets. The marketing system in Bhutan is in pre-mature form and needs a lot of interventions in terms of organizing producers, putting trade system in place, creation of market infrastructure such as collection centers near production clusters. 4

Transportation cost of agricultural commodities is very high, specifically from the areas which are not connected through roads. In some cases the cost of transporting initial 15-20 Kms is as high as Nu. 10 per Kg, this makes trade unviable for farmers as well as for traders. There is no post-harvest infrastructure in the region for primary processing, grading or storage of commodities in the country. Farmers store the commodities for household purpose in traditional manner, however for trade and marketing purpose, infrastructure is absent. Young entrepreneurs are not aware of the agri-business opportunities in the country and are not participating at any stage of supply chain. Government has taken initiatives to form farmers group for collective production and marketing, however these groups are so informal, there are no - or very limited - group activities taking place. These groups have not served the desired purpose due to lack of handholding, guidance and absence of desired training and capacity building on various aspects of cooperation, technical inputs, business attitude and market participation. It was also observed during the field visit there is lack of coordination amongst various government departments, resulting into repetition of same work by various departments / agencies. There is need for convergence of programs and schemes of different department to optimize the outcomes. Organic certification Bhutan agriculture has its recognition as natural and organically grown produce. Large numbers of agricultural products are grown organically in the country without use of any chemical pesticide or fertilizers. However, these crops are not certified as organic by any internationally accredited agency. This is biggest hurdle in targeting international markets, where premium of organic production can be targeted, but due to lack of certification buyers will be hesitant to procure from Bhutan as they will not be able to claim these products as organic. Government has initiated the process of promotion of organic agriculture and various areas have been announced as organic, but until these areas are certified as organic, it will be difficult to convince consumers. Based on these observations, which are more or less common for all the crops, the following is a summary of recommendations for linking farmers to markets through establishing Community Owned Companies (COCs) Horticultural crops (Apple, Orange, Potato, Ginger) Yes

Activity / Crop

Rice

Buck wheat, maize & barley

Lemongrass

Mushroom

Profiling/Selection Yes of farmers Training and capacity building Organic Certification Yes

Yes

Yes (already done) Yes

Yes

Yes

Yes

Yes

Yes (group certification)

Yes (group certification)

Yes

Yes (ongoing program to be continued)

yes

Post harvest storage and marketing infrastructure

Yes (Collection centre, warehousing)

Yes (Collection centre, Warehousing)

Yes (CS for Apple, CC, Grinding & packaging for ginger & turmeric) Yes (Grinding & packaging facility for ginger & turmeric, Mandarin processing centre for pulp and dried products)

Existing facility Yes to be maintained and upgraded

Processing facility

Yes (Rice mill)

Yes (multi-grain breakfast cereals)

Existing facility Yes to be maintained and upgraded

III. Executive Summary - Community Tourism

For the study on community tourism, the AMFPL team, after discussions and recommendations by RGOB, focused on areas within the National Parks. There are 10 designated National Parks in the country which account for 50% of the total available land in Bhutan. It is estimated that approximately 75,000 to 100,000 people live in villages within these Parks. Therefore, we felt that, by focusing community-based tourism within the Parks, we would be directly addressing this population. The study is limited in its scope as it was done in only one national park. But the AMFPL team felt that it would be more useful to initiate pilot projects in one to two areas selected with RGOB input, rather than study additional areas, since (unlike agriculture and crafts) the needs of each area will differ widely according to local conditions. However, there are some common limitations and corrective measures that will need to be taken to encourage community tourism efforts. A holistic program will need to address two broad areas: (a) General infrastructure such as access roads, improving accommodation options both en route and within the parks; signage on trekking routes; and garbage management facilities; and (b) Community-specific destination-development initiatives such as developing trekking routes and other activities for tourists within each selected area; developing and disseminating information and

promotional materials; training local community members as guides; developing facilities for improving food options; and helping local communities to develop home stays for tourists. A focus on Community-based tourism within the Parks and development of infrastructure outside the parks will ensure that the marginalized sections of society benefit economically and develop even as the country reaps the benefits of tourism.

IV. Second Stage Activities

Based on the above studies, AMFPL proposes the following deliverables in the second phase: Setting up of Community Owned Company (COC) AMFPL will initiative activities toward registration of a COC. Initial mobilization efforts will target 800 producer shareholders within the first year and seek to scale up to 4,000 producer shareholders within a 3 year period. Initial mobilization efforts will be conducted in collaboration with existing cooperatives and NGOs in the Bhutan. Local staff will be hired to coordinate mobilization efforts. Eventually, the objective will be to list the Bhutan COC on the local Bhutanese stock exchange. Co-investment from Fabindia/AMFPL ( subject to Bhutan foreign investment rules) FabIndia will seek to become a co-investor in the Bhutan COC to help capitalize the company and to ensure that FabIndia has a stake in the success and growth of the COC. Training for COC Staff: AMFPL will undertake training of staff of to facilitate scaling up of operations Trade Fair Participation: The newly developed products will be represented at international trade fairs to create linkages with commercial buyers and generate bulk orders.

a. Crafts
AMFPL will work with the Department of Cottage and Small Industries (DCSI) and existing NGOs within Bhutan to mobilize and train 1,000 crafts producers in the next phase of the project and incorporate them into a Community Owned Company. AMFPL will be responsible for the following activities: Establish Design Development Center: AMFPL will set up a design development centre in Bhutan and collaborate with Indian and Bhutanese Designers where possible to work on new product development in the selected craft genres. Product development workshops will be undertaken in each of the four target crafts to develop new product lines more suited to urban markets. Training AMFPL will develop and hold training workshops for artisans to introduce new and improved tools and processes where applicable and improve product quality. 7

Marketing: AMFPL will establish dedicated display space for Bhutanese craft products in 100 FabIndia stores across the country. Develop promotional campaign AMFPL will develop a promotional campaign to build a Bhutan Crafts brand including posters, product tags and write-ups on the selected craft genres and communities.

RGOB will be responsible for the following activities: Infrastructure: Collection centers at the village level will need to be developed. Assistance from the relevant RGOB departments will be required in using already existing infrastructure as collection centers. Transportation costs: Transportation costs are a major issue in terms of linking to some of the target areas that were part of the field visit. This needs further discussion with RGOB to look at what solutions are feasible in terms of either some form of transportation subsidy directly to the local village or setting up some transportation mechanism whereby craft products can be efficiently transported to a central shipping point. Negotiating preferential rates with Druk Air for shipments will also be required in scaling up linkages to Indian markets. Mobilization: Existing field staff can assist AMFPL in identification of artisans and mobilizing them into the COC.

b. Agriculture
AMFPL will work with the Ministry of Agriculture and Forests (MOEF) to identify, mobilize and train 400 farmers growing the following commodities: Red rice, buckwheat, selected horticultural crops (mandarins), lemongrass and mushrooms. Based on feedback from MOEF, selected farmer groups and cooperatives from the following areas will be selected for capacity building and eventually, induction into the COC. AMFPL will be responsible for the following activities: Product exhibitions in India: Launch a Bhutan Agri (actual name to be decided in consultation with MOEF) label in India through a series of six product exhibitions in selected FabIndia stores in year 1 and 12 exhibitions in year 2 and 20 exhibitions in year 3. Build linkages with US food chains: After organic certification of produce has been initiated in identified areas and commodities, AMFPL will assist in building linkages with US food chains such as WholeFoods for export of organic agricultural produce. Product development: Based on market demand, AMFPL will seek to work with existing cooperatives and government-owned processing facilities in Bhutan to develop selected processed, packaged products. 8

Jams and Fruit Preserves: Particular focus will be put on developing fruit preserves and jams. This has been identified as a key opportunity based on the availability of fruit locally and a shortage of high quality processed fruit products from Bhutan. AMFPL will bring in technical expertise to develop premium preserves and jams, honey, green tea and lemon grass infusions amongst other products.

RGOB will be responsible for the following activities: Organic Certification: Initiating organic certification efforts in the selected commodities and geographical areas that will be incorporated into the COC. Infrastructure: Developing post-harvest storage and marketing infrastructure mainly, collection centers in villages and warehousing facilities in the major transit points. For some commodities, additional processing infrastructure may also need to be built. Mobilization: Existing field staff will assist AMFPL in selection of farmer groups and mobilization of farmers into the COC.

c. Community Tourism
AMFPL will pick two areas to implement pilot projects on community tourism based on RGOB inputs and areas where the COC can also work with local producers in agriculture and craft products. AMFPL will need to partner with the relevant RGOB departments to implement the recommendations of the feasibility study in the selected pilot areas. AMFPL will be responsible for the following activities, with significant support from RGOB in identifying participants: Developing Homestays: Creating local home-stay options through developing 10 bed and breakfast locations in each area. AMFPL will work with the RGOB and local village committees to identify potential community-members whose houses will be developed into local home-stay options. These community members will be part of the COC and will be trained in hosting tourists. Based on the pilot project, AMFPL will develop a template for home-stay management that can then be expanded to other areas in the future. Develop local trekking routes and activities: AMFPL will hire specialist consultants to work with the relevant RGOB department staff and local village committees to develop local activities for tourists. Recommended itineraries will be developed for each selected area. Develop web-site: AMFPL will develop a community-tourism web-site and coordinate listings in travel sites. Training of local guides: AMFPL will partner with the relevant government department and local village communities to identify local youth who could serve as guides. A training program for the 9

guides will be developed and held in the selected area. The template for the training program developed can then be used to scale up similar efforts in other areas. RGOB will be responsible for the following activities: Infrastructure: RGOB will need to review and set up required public infrastructure where needed, including access roads, physical signage and garbage management facilities in the selected areas. Promotion in existing government forums and initiatives: RGOB will assist in promoting the pilot community tourism efforts through its own existing web-sites and in travel trade fairs. Partnerships with local travel companies: RGOB could assist with bringing existing travel companies on-board in promoting the pilot community-tourism efforts. Centralized reservation system: Since there may be multiple community tourism efforts through multiple projects, it would be best for a centralized directory and reservation system for community tourism efforts to be managed by the concerned RGOB department. But AMFPL can assist in developing and building such a system as part of the pilot project and the feasibility of incorporating it into the community tourism web-site can be explored.

V. Implementation Steps and Timeline

Initial activities will be undertaken through an existing COC in West Bengal through which all products will be routed to India. AMFPL will hire staff to implement initial second-phase activities such as product development workshops in Bhutan. After a product range has been selected and a minimum product volume is reached, AMFPL will formally register a COC in Bhutan. AMFPL suggests that a implementation committee be set up to oversee the project with one liaison to the RGOB for each target area (Crafts, Agriculture and Community Tourism) who will be responsible for coordinating government efforts in that area in the second phase. The following is the proposed timeline for implementation and release of funds in the second stage of the project:

[See Attached Excel Sheet]

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