Advancing urban value chain development to help millions of people work their way out of poverty
SEEP would like the thank the Bill and Melinda Gates Foundation for their on-going support of this project.
VIP Indonesia aims to increase income, improve working conditions, and diminish the environmental impact of tofu and tempeh production for small enterprise owners throughout greater Jakarta. Mercy Corps’ strategy is to improve market linkages, upgrade products and packaging, and increase production efficiency in order to create a stronger tofu and tempeh value chain that is hygienic, efficient, and market-driven.
|Implementing Agency||Mercy Corps - Indonesia|
|Partners||Swisscontact Indonesia, MICRO (an MFI capacity building NGO), PUPUK (An NGO business development organization)|
|Sector||Tofu and Tempeh in Jakarta: traditional, large, informal sector industry|
|Strategy||Market linkages to support markets, product upgrading to target middle class, general quality and efficiency improvements|
|Targets||40,000 ME owners, family-based producers, vendors and workers|
|Social Challenges||Poor returns, insecure tenure, access to water/electricity, pollution|
|Social Solutions||Advocacy around tenure, identity cards, improved environment, empowerment|
|Business Challenges||Poor health practices, traditional packaging, high competition|
|Business Solutions||Advocacy/organizing, finance, technology/training, market linkages|
Greater Jakarta, Indonesia, is a megalopolis of 25 million people that includes Jakarta, Bogor, Depok, Tangerang, and Bekasi. It is a thriving hub of economic activity, and its informal sector is one of the economic engines of Indonesia, employing roughly 40 percent (4 million) of the urban workers in Jakarta. Many of these workers live in slums, barely earning enough to survive, and are linked together by complex social networks based on their communities of origin, and through sophisticated business networks based on informal reciprocity.
The Value Initiative Program in Jakarta, Indonesia (VIP Indonesia), introduced cleaner production technology 11,534 sector tofu and tempeh producers in Greater Jakarta, between 2009 and 2011. The tofu and tempeh (staple food from soy beans) value chains are exemplary of many urban, informal sector industries. They operate outside of regulations with little support from government or economic development initiatives, amid poor working conditions, yet provide a living to hundreds of thousands of people, who support each other through social ties based on their community of origin.
VIP Indonesia took on the challenge of strengthening the tofu and tempeh value chains, which primarily provide affordable food to customers with low-to-moderate incomes. Rather than help a few, better off producers reach high-value markets, the program turned to “cleaner production” technology as a key upgrading strategy, which was likely to benefit more lower income producers, traders and customers. VIP introduced stainless steel vats and boilers, gas cookers, and other modern equipment; cleaner production practices; and access to finance through equipment leasing. The immediate benefits to producers were reduced fuel costs and higher productivity; the side social benefits for employees were improved working conditions with lower temperatures and a smoke-free environment. The added environmental plus was cleaner air and better water waste management for the neighborhoods around the factories. Producers report an average of 15 percent increase in profits after adopting the technology.
VIP Indonesia engaged lead producers, who established tofu or tempeh clusters some 25 years ago, to demonstrate cleaner production in their factories. The results from the demonstrations stimulated demand. The technology was spread by an innovative combination of public agencies and private businesses. The project partnered with the Ministry of Energy to train the entrepreneurs and cooperative leaders to become distributors of clean production equipment and technology, and market clean production packages to producers.
The distributors receive orders, purchase equipment from one of several manufacturers, arrange financing through a private leasing company (if the customer desires), and then install the equipment and train the producers in cleaner production. This kind of leasing arrangement was offered by a medium sized firm, SNP Finance, that offers equipment leasing to registered, formal firms, but has no experience leasing to informal sector businesses. To guarantee the financing, either the cooperative or the distributor agrees to repossess the equipment and take over the lease in case of non-payment. To jump start the market, VIP Indonesia subsidized one component of the package for a short time, but has since phased out the subsidy. The market for cleaner production technology is now expanding on its own.
VIP Indonesia reached almost 24,000 enterprises by December 2011, of which over 1,100 demonstrated financial benefits. On average, tofu enterprises experienced an income gain of nearly $600 annually over other enterprises, representing a 23% increase. Tempe owners experienced a 6% increase over other enterprises at over $100 annually gained. By December 2011, these enterprises in total increased their annual incomes by nearly $150,000. By December 2013, it is anticipated that almost 3,500 enterprises will demonstrate financial gains of over $416,000 annually.
Upgraded production equipment through innovative financing. VIP Indonesia’s exploration of various financing channels resulted in a successful business model in which tofu and tempeh producers access productivity- and health-enhancing production equipment through leasing companies with local producers’ cooperatives acting as brokers. This enables producers unable to access other financing channels such as banks and MFIs to access finance while also connecting them to reliable equipment suppliers with preferential pricing deals. Further, this arrangement reinforces the provision of information services and awareness of producers from the cooperatives, strengthening the likelihood of positive behavior change and increasing scale.
Increased productivity. As a result of greater access to financing through leasing companies, the introduction of improved production equipment substantively improved the efficiency of production both for tofu and tempeh owners and renters. Consequently, the individuals responsible for the production process, including workers, are able to produce larger volumes of product during each workday or utilize newly free hours in their day with other income-generating activities or leisure. Conversely, the productivity gains may have negative effects on wage employment in the project enterprises; some producers were observed reducing their number of workers as they are less in demand. The long-term effects of such productivity gains are unclear, but likely to be negative in the short-term and positive in the long-term, as productivity gains foster increased production volumes, necessitating rehiring and increased numbers of workers.
Strengthened horizontal linkages improved access to supporting services. Horizontal linkages in the form of producers’ cooperatives played an important role in securing important supporting services. Linking producers of tofu and tempe to service providers such as equipment suppliers and leasing companies through producer cooperatives was highly effective and resulted in large numbers of producers being more aware of cleaner production equipment and sources of access to finance. Producers purchased and used the cleaner production equipment accessed through the cooperatives, resulting in decreases in costs. Accordingly, producers achieved better product quality, resulting in increased sales and incomes while their communities experienced less air pollution.
Increased income through branding. Encouraging producers who already adopted the new cleaner production equipment to brand their own product and introducing producers with feasible branding company increased the awareness of producers to brand their product. For those producers, as quality has improved it has been explicitly promoted to customers through branding, resulting in new, higher-margin customers that increase producers’ sales and incomes.
Uptake higher amongst tempe producers. The number of tempe producers observed adopting and/or planning to adopt VIP Indonesia interventions such as upgraded production equipment and branding was higher than amongst tofu producers, indicating significant changes in tempe sector in the future compared to the tofu sector. Reasons for this difference in scale include greater numbers of tempe producers in the Greater Jakarta region and significantly greater capital investment requirements for tofu producers.
Photos of the project:
 The Ministry of Energy trained a cadre of entrepreneurs and cooperative leaders in cleaner production.