Partnering With The Private Sector to Solve Complex Problems: Some Observations About PSE in Thin Markets

February 6, 2021

This is one of two posts reflecting on private-sector engagement in a complex, thin market system (read the companion post). It relates to a previous four-part series you can read on Marketlinks.

Glossy public-private partnerships and big investment deals conjure an appealing vision of how to engage the private sector to make the world a better place.  Large dollar figures and the household names of agro-chemical manufacturers, oil majors, and tech giants speak to significant, long-lasting impact.  And they can be all that.  But in much of the world, that is not what private-sector engagement looks like.  Often, sound businesses are few and far between, competition is stifled, and there is little appetite for innovation.  Finding common ground with such partners can be challenging and feel like a diversion from a donor-funded project’s master plan for inclusive economic growth.  And the unpredictability of complex systems can flummox efforts that depend on linear models like results chains to make sense of their work.

During its first four years promoting innovations and inclusive growth in Mozambique’s agricultural market system, FTF Inova* discovered that it could share ownership of activities with private-sector partners without losing its strategic direction.  It did that by developing ‘probes’, potentially transformative innovations with a built-in learning objective, that it tested across a portfolio of partners.  One such probe took the form of farmer clubs you can read about in this companion post.

As FTF Inova moves into its final year, it is reflecting on its whole portfolio of probes and partnerships and has been thinking about what it means to meaningfully engage the private sector in thin markets like Mozambique’s.  Here are a few observations from the team:

Thin markets offer fewer promising partnerships…

‘Thin’ market systems are ones with less diversity, competition, and specialized services than their more developed cousins.  Distrust between actors in the market means that firms often try to vertically integrate even when it means sacrificing the comparative advantage of letting companies do what they do best.  High-margin, low-volume models are also typical, and that stifles growth and makes some products inaccessible to poorer consumers.

What this means for a market systems development project is that there are fewer potential partners to choose from, and those few don’t necessarily have strong incentives to innovate.  Some companies are invested in the very exploitative systems that need to change (for example, despite making agricultural output markets a primary focus of the project from the beginning, FTF Inova struggled to gain traction with large crop buyers at the beginning, partly for this reason: some of their business models were built on a system that paid rock-bottom prices to farmers for low-quality products).

…but MSD project staff should keep an open mind.

Those challenges do not mean that there are not good partnerships to be had, though.  Some of FTF Inova’s have been quite unlikely.  For example, a strict value chain approach would have ruled out the cotton concessionaire described in this companion post, since cotton itself is not a promising cash crop for smallholder farmers.  However, other value chains and companies (including a national cashew association sourcing from over 200,000 families) are beginning to imitate the approach, sparking real changes in farmer livelihoods.  In thin markets, it is sometimes hard to find any single ideal partner, but taking a more oblique approach to promoting systemic change can be effective.

Some partnerships simply come as a surprise. FTF Inova had stopped focusing its attention on one partner company interested in guar and castor beans because the company seemed to face too many internal challenges and struggled to get activities off the ground (one important principle of the project’s approach is to move at the partner’s pace, and not to push something that doesn’t seem sustainable). The team was surprised but pleased when at the end of the most recent season, the company had implemented most of the ideas we had developed together.

Intellectual capital is just as important as financial capital.

The example of the guar-and-castor-buyer shows the importance of ideas.  During FTF Inova’s first deal note with that partner, it provided traditional consulting support in the context of a deal note with a formal activity budget.  But none of those budget lines explains the progress made long after that first deal note expired: it was FTF Inova’s intellectual capital that mattered more than its money.

Similarly, because more traditional assistance in the form of equipment, activity funding, or risk buy-down requires more time to plan, there is often a space of several months to a year before “real activities” start.  But in that space, FTF Inova has watched partners begin to assimilate new approaches and begin to experiment.  One exciting partnership, with the Mozambican subsidiary of a major agro-chemical company, only officially reached the deal note stage in late 2020 even though the company had been making changes in its networks of agro-dealers for nearly a year during its preparatory work with FTF Inova.  All this work was based on the co-investment of intellectual and relationship capital—not money.

One of the most rewarding things about watching FTF Inova move through its five-year lifecycle has been watching (some of) its partners move from an attitude focused on what material good or money it can extract from FTF Inova to one more interested in a partnership based around ideas.  Phone calls from many partners have evolved from “can Inova pay for…?” to “does Inova know of any studies on…?” to “our customers are giving us this odd feedback, what does Inova make of it?”  This shift to a relationship based on thought leadership, feedback and learning was one way FTF Inova knew it was making progress as a facilitator, and it is something that transcends Mozambique or thin markets generally.  For example, these are among the ‘relationship qualities’ that the Transforming Market Systems activity lists in this recent post about factors it observed as contributing to good private-sector engagement in Honduras.

Building trust and credibility takes time.

The Honduras activity also lists reputation and trust as a key relationship quality.  Any partnership relying so heavily on ideas must be built of trust, but establishing that credibility can take time, especially in thin markets. Often, the path to trust with private-sector partnerships requires showing, not telling. For example, despite many hours of meetings and many cups of coffee with two strategic multi-national partners—an agro-chemical giant, and a major agriculture company with a cotton concession—FTF Inova was unable to really test any probes with them until it helped broker a partnership with a third company to pilot professional spray services.  Even though the pilot was unsuccessful (and by traditional measures, it may be FTF Inova’s largest “failure” to date), their experience of how FTF Inova dealt with the setbacks built trust and understanding with the two bigger firms, opening the door to probe farmer clubs and new retailing strategies.

There is no straightforward recipe for trust and credibility, but FTF Inova found that it was particularly important to show empathy for the challenges of running a profitable business and a willingness to step into the background and put the partner first.  And the team did best when it showed these things through its working style and its actions—not the words they used or the documents they signed.

Innovation and impact are not always what they seem.

When people learn that FTF Inova is USAID’s “Agricultural Innovations Activity” in Mozambique, their first thought is usually something about cutting-edge technology.  And that is not entirely wrong: one FTF Inova partner, for instance, has launched an Uber-like smartphone application linking truck operators with customers looking to transport products in remote rural areas into cities and vice-versa.  But sometimes the most meaningful innovations can be as simple as good customer service, or collecting basic data to inform business decisions.  The companion post to this one talks about the ‘farmer club’ innovation in the agricultural supply chain, which is little more than acting on the insight that trust and performance incentives for your supplier base is a good thing.

Similarly, the complexity of thin markets means that it can be hard to discern ahead of time what kinds of partnerships will lead to what kind of impact.  Smaller firms may not have the leverage to impact hundreds of thousands of households, but they may be nimbler, and swifter to innovate.  Larger firms are sometimes more bureaucratic and slower to change, but they also have more resources at their disposal and greater influence on other market actors. The partnerships where we spend most of our money can still fail, and light-touch activities can lead to unexpected impact.  Failures can open new doors with partners we couldn’t access before.

It is difficult to extract any single, general lesson from so many tailored partnerships and different pathways to scale.  One observation is that the complexity of thin markets puts a premium on how a donor-funded project does its work—and less emphasis on brilliant technocratic solutions.  Where FTF Inova has succeeded in engaging Mozambique’s private sector to create pro-poor change, it has done so less through a master plan conceived in 2017, and rather through its day-to-day actions to putting its probe–sense–respond approach and partnership principles into practice.

*The Feed the Future Agricultural Innovations activity (FTF Inova) is a five-year, $21.7M market systems development activity funded by USAID and implemented in Mozambique since 2017 by DAI with support from Technoserve, MarketShare Associates, and EcoVentures International.  Its objective is to create pro-poor change in Mozambique’s agricultural sector by fostering innovation and a shift to more inclusive behaviours in all parts of the system. For more information, see the activity page on DAI’s website and its BEAM Exchange profile.