20929 - Olam-Africa

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Environmental Review Summary

Project Number

20929

Company Name

OLAM INTERNATIONAL LIMITED

Date ERS Disclosed

May 8, 2003

Country

Africa Region

Region

Africa

Environmental Category

B - Limited

Status

Completed

Previous Events

Approved : Oct 9, 2003
Signed : Nov 15, 2003
Invested : Dec 19, 2003

Sector

Diversified Edible Agricultural Crops Production

Industry

other

Department

Gbl Ind, Manufact, Agribus & Services

Project Description

Olam International Limited (Olam or the company) is an international integrated supplier of both raw and processed agricultural commodities headquartered in Singapore with over 2,300 employees worldwide. Olam operates in 35 countries (primarily in sub-Saharan Africa and Asia) and in nine major agricultural products: cocoa, rice, cashew, cotton, coffee, timber, sugar, sesame and shea nut. The company is involved in varying degrees across the total product supply chain, which can include procurement, primary processing, inland transport, warehousing, marine transport, and distribution -- using a network of local buying agents, primary processing facilities and logistics. The proposed IFC investment will help strengthen Olam’s balance sheet and support its operations. IFC''s financing is therefore expected to help enhance and expand Olam''s activities in frontier countries including Ghana, Cameroon, Gabon, Nigeria, Indonesia, Viet Nam and Uzbekistan.

Environmental and Social

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.

Given the company’s geographical and commodity trading spread, a defined list of specific mitigation measures is inappropriate. The priority is to ensure that Olam formalizes and implements a specific EHSS management system which addresses the diverse range of issues they face and does so in a manner appropriate to the country and commodity context. In addition, there appear to be significant opportunities to enhance sustainability outcomes. These issues are described below.
- Formalization of environmental and social management systems. While Olam subscribes to a core set of business values and has developed a sophisticated approach to operational control, its policy statements and systems to manage environment, social (community) and health and safety are considerably less mature. A more formalized approach to these issues is required, particularly for the timber sector, operational/processing aspects (including toll manufacture) and farmer outreach initiatives (e.g. advice on pest control). During appraisal, no situations were observed where Olam appeared exposed to a major compliance or reputation risk on these issues, but nor is the company benefiting from the assurance that a effective EHSS management system could deliver. IFC will work with Olam to structure an appropriate management framework to address, manage, monitor and continually improve EHSS performance.
- Forest Policy and Certification Issues. In its dealings with small processors and communities, Olam’s operations are materially compliant with current policy requirements. Olam is committed to ensuring sustainable forest management in all of its operations and this is specified in its corporate policies. However, independent sustainable forest management certification and chain-of-custody certifications to the standards specified by the revised World Bank Forest Policy are not currently available in the countries in which Olam is working. If Olam obtains long-term concessions in the future, it will need to ensure that:
- these are managed in the spirit of the Forestry Stewardship Council (FSC) principles and criteria;
- it applies for appropriate independent certification of the sustainable management of forest concessions as such schemes are developed and implemented for the countries in which they work.
In the meantime, Olam has committed to working through trade associations or national working groups to support the development of certification systems. IFC will work with Olam to assist in defining appropriate ways for the company to assist local communities and smallholders in promoting sustainable forest management.
- ‘Fair Trade’ Opportunities. At present, ‘fair trade’ certification is available only to producers, typically small farmers who form a cooperative and sell direct into markets or through fair trade buyers who pay a specific ‘fair trade’ premium. Coffee has been at the forefront of ‘fair trade’ schemes to date, although they extend several other agricultural commodities (e.g. tea, cocoa). IFC and Olam will collaborate to see if ‘fair trade’ principles could be extended to cover their trading activities and establish what criteria would need to be met. ‘Fair trade’ requirements for crops such as cashew, sesame and peanut (and an assessment of market demand for them) may also be investigated.
- Shea nuts. These are a natural (i.e. uncultivated) West Africa crop, pressed for shea butter which is used in chocolate (cocoa butter equivalent) and cosmetics. Ghana is Olam’s largest origin for shea nuts, where it has rapidly grown and consolidated its market share. In doing so, it has brought many new villages into the shea nut ‘value chain’, but its full potential is currently restricted by:
- logistical issues – the problems of evacuating collected shea nuts from rugged ‘bush’ areas which are remote from roads and
- the lack of refining capacity results in the processing component of the value chain not being retained in country.
To this end Olam is consulting with a NGO partner on potential ‘appropriate technology’ solutions on the evacuation issue and is considering an investment in refining capacity in association with an existing partner (who operates a palm and shea nut oil mill). Due to the strong developmental benefit associated with the shea nut value chain, IFC would be willing to assist on these initiatives where appropriate.

Conclusion & Monitoring

IFC will evaluate the project’s compliance with the applicable environmental and social requirements during the lifetime of the project through supervision visits and by reviewing the annual monitoring reports (AMRs) prepared for the project. Due to the nature of the company’s operations, these will be structured to capture key performance indicators – such as the % FOB price farmers are receiving for specific crops in specific countries. The company will be required to demonstrate that its EHSS management system is driving continuous improvement at the corporate, country and local level and that any deficiencies are being promptly addressed. In the case of forestry operations, the company will need to demonstrate that all operations strictly comply with national regulations, that sustainable forest management is being promoted in an appropriate fashion in all cases and that the company is progressing toward achievement of certification for forest concessions over which it has long-term management control. Given the alignment of its business model with corporate citizenship principles, Olam has a commercial as well as reputational incentive to perform to the highest level on EHSS issues.

This Environmental Review Summary (ERS) is prepared and distributed in advance of the IFC Board of Directors' consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board of Director’s decision. Any documentation that is attached to this ERS has been prepared by the project sponsor or in conjunction with the project sponsor and authorization has been given for public release. IFC has reviewed this documentation and considers that it is of adequate quality to be released to the public but does not endorse the content. The following ERS is disclosed in accordance with IFC's Disclosure of Information Policy that went into effect September 1998.

The map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank, concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Country borders or names do not necessarily reflect the World Bank Group's official position. In some cases, available project location information is limited to the country of the project's activities. Locations are approximate.

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