This is a Category B project according to IFC’s Procedure for Environmental and Social Review of Projects because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines or design criteria. Due to the global nature of the company’s operations, a systems approach was taken for the review of this project. IFC environmental and social specialists met with Olam representatives in Singapore in order to understand the corporate business model and the systems which underpin it. Appraisal visits were subsequently made to Viet Nam, Ghana and Gabon to verify their on-the-ground effectiveness. The appraisal visits covered coffee and cashew (Viet Nam), cocoa (Ghana), shea nut (Ghana) and timber (Ghana, Gabon). The following paragraphs summarize the outcomes from these activities.
- Olam’s Business Model
Olam operates a flexible business model, tailoring its trading activities to fit the country, sector and situational context. For some commodities such as rice and sugar, the model is typically as an origin exporter and/or destination importer/distributor. For others, Olam participates in many more stages of the value chain. Olam’s business model centers on two core principles:
- where it makes economic sense to do so, to purchase as low down the supply chain as possible (‘at the farm gate’) and
- to secure the highest quality relationships with community based suppliers.
These principles achieve important development impacts while improving Olam’s own margins. By purchasing at the farm gate, producers often gain a higher percentage of the FOB (export price) than if they sell through a chain of middlemen – in other words, they retain more of the value. This is a strong incentive in itself, but in some instances Olam supplements this with a series of other support programs for farmers, including the following (with specific crop/country examples reviewed during appraisal in parenthesis):
- full transparency on the price discovery mechanism and paying in cash at the time of sale - no IOUs or credit notes;
- taking the post-harvest deterioration risk by providing warehousing and transportation infrastructure;
- not renegotiating contracts if market prices subsequently fall i.e. not seeking to share the downside (Viet Nam – cashew);
- distributing a dividend if (government controlled) prices subsequently rise i.e. sharing the upside (Ghana – cocoa);
- provision of zero interest, off-season financing (Ghana – cocoa);
- provision of pre-season cash advances (Ghana – shea nut);
- involving communities in the selection of the local buying agents to serve them (Ghana – cocoa);
- serving marginal areas, in spite of the increased logistical costs (Ghana – cocoa and shea nut);
- establishment of a Social Development Fund with a fixed amount contributed per ton of commodity traded (Ghana – cocoa);
- funding and subsequent financial support to implement a community needs program (Ghana – shea nut);
- commitment to longer term contracts with toll processors in order to secure improvements to the fabric or the operations of the facility (Viet Nam – cashew).
These initiatives illustrate an important aspect of Olam’s operation – its business model and its corporate social responsibility model are largely indistinguishable from each other. Both aim to achieve the same result – mutually beneficial, stable business relationships between the company and its suppliers.
In the forestry sector, Olam’s approach is comparable to the business model outlined above. Timber procurement amounts to 4.6% of Olam’s revenue, with operations on the ground in Cote d’Ivoire, Ghana, Togo, Gabon, Mozambique and Myanmar. Olam purchases from small harvesting firms, processors or communities, ensuring that timber is sourced from properly managed areas and is legal in all respects (procurement, harvesting, transportation). Olam supports its partners through a variety of programs, including provision of equipment and operational financing, technical assistance, establishment of community development funds and related support for community development. It currently does some trading on an FOB basis, but as this provides little or no oversight of the supply chain, Olam is consciously decreasing the level of such activity and may exit completely. Olam has declined participation in the timber sector in some African countries due to concerns regarding inadequate forestry management practices.
- Operational Compliance
While the social impacts of its community trading operations are the most significant, Olam’s logistical and processing operations do generate some environmental, health, safety and social (EHSS) issues. Commodity processing operations are basic however – typically limited to cleaning, sorting and grading, with some manual processing for specific crops (e.g. cashew in Viet Nam). Timber operations include a number of very small scale saw-milling plants. During appraisal, a number of owned processing units and toll processor operations were visited. The majority appeared to be generally in compliance with IFC environmental emission guidelines (or had budgeted upgrades in place to bring them into compliance), although in several cases worker health and safety practices require management attention and improvement.
In both cases, operational compliance issues will be an important aspect of the EHSS management system that the company will be required to develop and implement. This is likely to include the development of Standard Operating Procedures based on IFC guidelines and international best practice. Proposed Mitigation for Environmental and Social Issues provides further detail.
