2.7.5. Buying Down Risk to Develop Win-Win Relationships

The starting point for establishing any commercial relationship is the transaction. In weak and highly confused markets the perceived risks associated with initial transactions—where trust is established—can be prohibitive. As a result, a project can use its subsidy to reduce the risks leading into a transaction, especially for new clients or for firms entering new markets where risks are perceived as too high to warrant investment. It should be noted, however, that a transaction is not necessarily good and is more often bad for one side in weak markets. Therefore, tracking transactions without regard to how they are conducted is useless, if not dangerous, from a development perspective.

Project resources need to be used in such a way as to "crowd in" other actors. That is, while project subsidies often have the unintended consequence of driving away the private sector, which can not compete with subsidized products or services, a facilitation approach to value chain development uses subsidies to increase the number of private sector actors and foster sufficient and appropriate interaction between them to enable relationships to form out of the transactions. Projects must maintain a low profile in order to strengthen, and not distract from, the core relationship engaging in a transaction. The mere presence of a project participating in a transaction can shift perceptions, rendering the transaction useless as a means to forming a supportive and lasting commercial relationship. For example, a project that promotes its role in providing subsidies—to input firms to enable them to sell discounted products, or to buyers who then offer price premiums—will divert the attention of the microenterprise or smallholder farmer away from the input firm or buyer and on to the project.

Output subsidies (to the buyer): Many lead firms view investment in a microenterprise or smallholder supply chain manager as overly risky given the unreliability of small firms. By reducing this risk through sharing the cost of the manager and fostering shifts in how the manager engages with the small-scale suppliers, a project can demonstrate the benefits of a well-managed supply chain based on microenterprises or smallholder farmers. The small firms do not see the project as their contact, but the lead firm. The project plays a supporting role as moral guarantor and hides its support to the lead firm. It is important in such cases that project assistance is offered to all lead firms that self select into the program, and that clear time and resource ceilings are established. Often in such cases some form of declining subsidy is useful to gradually shift the financial burden to the lead firm.

Input subsidies (to input suppliers or service providers): Projects can cost-share promotional events or price discounts by working through the commercial firm so that the end client is unaware of the use of project resources. The subsidy is hidden as part of a one-time promotional cost that mimics typical marketing tactics, but with some of the risks taken on by a project. The project would have to be careful to offer a similar mechanism to all firms that have self-selected themselves into the program, but also limit word of mouth to avoid all MSEs or smallholder farmers from knowing that a project is funding the discount. The key is that the end client sees the transaction as solely commercial and coming from the seller and any price savings as a one-time promotional opportunity to try the product or service.

Combined input and output subsidies: Integrating third-party service providers into lead firm supply chains can be an effective way to introduce more players, extend product and process upgrading to a much wider supplier base, and diffuse risks. The risks of fostering localized third-party service providers can be reduced by cost sharing i) special discounts via the lead firm to microenterpreneurs or smallholder farmers who reach certain performance targets, ii) the training of service providers, and/or iii) discounts for service providers through the input providers that sell to them.

The end goal is to leave behind a functioning, supportive commercial relationship through which firm- and industry-level upgrading can happen. Project involvement can often be more effective through low-profile interventions than through highly promoted ones. Assessing critical "tipping points" in terms of sufficiently reducing risks to enable transactions to happen, and providing support before and after transactions, can promote a shift from adversarial relationships to supportive ones.