Trade Negotiations Insights • Volume 9 • Number 4 • May 2010

A business-led approach to trade and production adjustment: Lessons from the Caribbean rum programme

by ECDPM-CTA

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The competitiveness of private sector companies is critical for the African, Caribbean, and Pacific (ACP) countries to benefit from the market-access opportunities and adapt to the increased competition from imports that result from free trade agreements. Unfortunately, donor support to the private sector has often proven ineffective and the state-focussed procedures of the European Development Fund (EDF) have seemed at times ill suited. However, in some cases the European Commission (EC) has displayed an impressive openness to finding solutions to private sector-owned aid arrangements. A prime example is the €70 million Integrated Development Programme for the Caribbean rum sector. In light of the EC’s recent and controversial decision to cut off funds under the rum programme, this article evaluates its strengths and weaknesses and considers the lessons it offers for other sectors across the ACP.

The Caribbean rum programme: origins and structure

The rum programme finds its origins in the unilateral EU decision to liberalise access to its rum market under an EU/US agreement, which raised concern amongst Caribbean rum producers over the erosion of their preferential access to the EU market. A dialogue between EU and ACP stakeholders on possible policy responses led in December 1999 to a joint ACP-EU declaration on rum, which set out the main components of an “integrated sector-specific programme for the development of ACP exporters of rum”, designed to “assist the ACP rum industry to move out of bulk commodity production into higher value branded rum products“.

Operational since 2003 and financed from the 8th European Development Fund (EDF), the programme revolves around four complementary elements:

(1) Cost Sharing Grant Scheme (€46.6M): Aimed at enhancing the competitiveness of Caribbean rum by promoting the production and export of branded, high quality - high value rums. Involves the grant co-financing by the EC of agreed activities falling under four categories:

1. Modernisation and Capital Investment

2. Waste Treatment and Environmental Protection

3. Distribution and Marketing

4. Business Development Services. This window helped enterprises develop their business plans - a valuable support as these were a pre-requisite for the submission of project applications.

Once projects submitted for funding had been approved, enterprises had to pre-finance activities and follow procurement rules to secure reimbursement.

(2) Caribbean Rum Marque Programme (€16.9M): Aimed at supporting the establishment of an ‘Authentic Caribbean Rum’ marque to enable Caribbean rum producers to differentiate their ‘quality’ rum products from the mass of rum products in the target markets.

(3) Institutional support to the WIRSPA (€3.45M): This support transformed the association into a full-time secretariat comprising a dedicated Programme Management Unit (PMU).

(4) Technical Assistance (€2.1M): Both long term and short term

Overall, these elements seem to have offered - when optimised - a relatively quick way of committing and disbursing funds to support the competitiveness of ACP production in ways that are market-led and private sector-based. The rum programme therefore bears some valuable lessons for other sectors across the ACP.

Sustained advocacy and leadership

The Caribbean rum programme demonstrates that an early and sustained engagement from industry leaders is a key ingredient for success. The West Indies Rum and Spirits Producers’ Association (WIRSPA) was continuously active in the process. These efforts required the mobilisation of both financial and human resources. A European-based advisor was also recruited, facilitating the mobilisation of allies within different institutions.

Industry ‘ownership’ in a climate of dialogue

Secondly, for adjustment programmes to be market-led and commercially viable in the long run, it is critical that private sector knowledge inputs be brought into the programme’s design, management and implementation. Under the rum programme, decision-making fell under a Programme Steering Committee comprising representatives of the rum industry, the CARIFORUM Secretariat, the EC, and independent experts. In this overall climate of dialogue, the WIRSPA remained responsible for the day-to-day management of the programme, reducing the burden on public officials, whose role should be one of facilitator. Moreover, the integration of the PMU into the WIRSPA Secretariat not only helped to quickly identify problems, but it also kept rum producers involved in the process, given the position of trust and confidence the association enjoyed vis-à-vis beneficiary companies. Nonetheless, drawing on external expertise for fresh ideas and independent monitoring should also be encouraged.

Dealing with tendering and procurement issues up front

Tendering and procurement issues should also be dealt with during the design stage of the programme (for instance, through specific manuals of procedures). Under the CSGS of the rum programme, normal EDF tendering and procurement rules could be waived provided the process was in line with good business practices. In addition, where commercially justified, procurement of goods and services could take place outside of the normal EU-ACP geographical area. These exceptions contributed to enhanced efficiency and competitiveness.

Determining the level of co-financing

Furthermore, an efficient CSGS requires a sufficiently high level of co-financing by the EC to encourage private sector operators to pro-actively engage with the adjustment process. In 2008, the EU increased deployment of technical assistance support and expanded co-financing to 65% for activities falling under the environmental protection window of the rum programme’s CSGS, which effectively boosted project approvals under this window. Higher EU co-financing levels could thus encourage companies to address a number of issues that would not otherwise have had an immediate call on corporate financial resources. This holds interesting lessons for other sectors.

Moreover, the procedures of any initiative requiring companies to finance ‘up-front’ should be light and efficient so as to allow speedy reimbursement of approved expenditures.

Building in flexibility

Further, when the adjustment programme comprises a multi-window CSGS, it is necessary to ensure that a reallocation of funds between windows can quickly respond to demand. In the Caribbean, as the implementation of the rum programme got underway, it became apparent that demands for funding under the “modernisation and capital investment” window substantially exceeded the initial allocation. Because it required riders to initial agreements, rebalancing the financial allocations between windows took over a year, suggesting the need for more flexibility. A possible solution could be an approach whereby the sum of fixed minimum allocations to each window is only a certain percentage of allocated funds (e.g. 60%). This would allow the remaining funds to be directed quickly to the areas of greatest demand, facilitating programme implementation in an uncertain market context.

Allowing sufficient time for marketing activities

Finally, without effective support in the area of marketing, production adjustments on their own yield little benefit. However, the design and implementation of complex and innovative marketing initiatives takes longer than conventional development cooperation programmes. In addition, market-led marketing and promotion activities, by their very nature, need to be responsive to changing market conditions. Therefore, it is critical that the timeframes for the implementation of these activities be driven by the economic realities on the ground, rather than donor procedures. Unfortunately, this aspect seems to be the only serious shortcoming of the programme.

An early demise?

While overall the rum support programme could be an example of successful adjustment assistance under the EDF, failure to allow sufficient time for completion is currently jeopardising the progress achieved so far. Crucially, the marketing campaign has just started to take off and will require sustained engagement in order to establish the Authentic Caribbean Rum marque. Notwithstanding these concerns, the EC announced last month that it will not consider claims for reimbursement after June 2010, even though around €8 to €10 million of funding allocated to the programme is still available.

While formally a second extension of the timeframe for this programme is no longer possible under the programme rules, the granting of a special dispensation by the responsible EU authorities would appear to be warranted given the potential value of this programme as a ‘model’ for future market-led, private sector-based production and trade adjustment programmes across the ACP. A climate of trust and dialogue has been established between ACP and European stakeholders to set up this innovative programme, the future will show whether those seeds will continue to bear fruit.

This article is a summary of a more detailed discussion paper, written by Paul Goodison and Corinna Braun-Munzinger, which will be published as part of the ECPDM-CTA paper series in Aid for Trade and Agriculture.

Cotonou Agreement Final Act.

Towards the end of the programme period, the time lag between submission of application and the full implementation of the activities supported had, in some instances, been reduced to as little as 3 months.

In the sugar sector for instance, a high level of EU co-financing for transitional activities linked to social service provision could potentially encourage those sugar companies which had disengaged from social service provision (following the reductions in the administratively determined EU price for raw sugar imports from ACP countries) to redefine their priorities.

Originally the payments date was 31 March 2010 but WIRSPA seems to have recently received approval to continue payments for another 3 months.