Policy Briefing Series [PB/18/2016] Agri-food cluster in Kharkiv: Feasibility and recommendations David Saha, Björn Vogler German Advisory Group in cooperation with IER Kyiv Berlin/Kyiv, November 2016
An agri-food cluster in Kharkiv Clusters: Internationally tested instrument for promoting the local economy German Advisory Group Ukraine has recommended cluster approach for Ukrainian economy Business-driven approach Strengthens local economic agglomerations and attracts FDI Approach already works in Ukraine (successful IT Cluster Lviv) An agri-food cluster in Kharkiv? Agri-food not the main sector in Kharkiv, but strong, based on SMEs Idea driven by local initiative group, proposed by German Industry Delegation (AHK) Contribution of German Advisory Group in this Briefing: I. Local conditions: The agri-food sector in Kharkiv II. III. Feasibility of an agri-food cluster in Kharkiv Recommendations for establishing a cluster, next steps 2
I. Local conditions: The agri-food sector in Kharkiv Agri-food consists of two key sectors: Agriculture ~ 33k fixed jobs UAH 11.7 bn sales (2014) Ca. 1900 companies Main products: Wheat, sunflowers corn/maize, vegetables Food processing ~ 25k fixed jobs UAH 26.4 bn sales (2014) Ca. 400 companies Examples: Flour mills, bakeries Gross value added (GVA) of agri-food sector, 2014 Total Agriculture Food processing Agri-food UAH bn UAH bn % of total UAH bn % of total UAH bn % of total Kharkiv oblast 84.9 10.1 11.9% 6.2 7.4% 16.4 19.3% Ukraine 1,382.7 161.1 11.7% 57.0 4.1% 218.1 15.8% Kharkiv, share of Ukraine 6.1% 6.3% - 10.9% - 7.5% - Source: Ukrstat, regional statistical yearbook Agriculture and food production is a significant sector in Kharkiv oblast 3
I. Local conditions: Importance of goods Animal production 6,1% Growing of crops 24,6% Sales, Kharkiv oblast, 2014 Other agrifood 0,2% Food processing 69,1% Sales Includes domestic and international sales Food processing sales 3x larger than agriculture sales Small share of animal products in agricultural sales Source: Regional statistical yearbook Exports Large share of cereals, cereal products Animal products share lower than in sales High share of commoditytype goods Cereals 31% Animals/animal products 1% Other vegetables/fruits 4% Oil seeds 5% Milling products 6% 4 Exports, Kharkiv oblast, 2014 Source: Ukrstat Other prepared foodstuffs 9% Tobacco and manufactured tobacco 20% Animal or vegetable fats and oils 15% Preparations of cereals, flour, starch or milk 9%
I. Local conditions: Strengths, weaknesses and challenges Strenghts Structure is good, large plots in agriculture Quite modern production methods Full cycle present suppliers of seeding material, certification companies, processing companies Kharkiv is an academic centre of Ukraine, many relevant universities (e.g. Univ. for Public Nutrition, Agrarian University) Weaknesses Large share of commodities and primary products in sales Export share quite low Education structure is outdated Challenges Loss of Russian market Competition and product standards (approximation of EU standards) will increase Management capacity always a constraint especially for (smaller) agricultural companies 5
II. Feasibility: Prerequisites and potentials of clusters Prerequisites Critical mass Local concentration of companies in related value chains Local research and education institutions relevant for the cluster Interaction, potential for cooperation Existing business linkages Links with research & education Willingness & ability to cooperate Shared interests Interest in exploiting potential benefits (potentials on RHS) Potentials Internationalisation Increasing and diversifying exports Attracting investment from abroad Innovation and upgrading Extending value chains Upgrading existing activities (e.g. raise quality standards, brand development) Improve framework conditions Better mutual understanding between companies and (local) government Improve link with local research and education institutions A successful cluster generates value-added for the participating businesses Existence and understanding of shared interest is crucial 6
II. Feasibility of an agri-food cluster in Kharkiv oblast Critical mass Large sector, many companies, significant regional GVA share Research and education institutions exist Decentralisation will further empower local self-government Sufficient critical mass Focus on some value chains necessary to ensure cohesiveness Interaction & Potential for coperation Shared interests Local production cycles, supplier-buyer relationships exist Probably room for intensified local interaction Small and medium-sized companies need & want cooperation Companies understand that cooperation will benefit them 3 key topics emerge from discussions with companies Internationalisation/promotion of export activity Improvement of professional education Upgrading & extending value chains Shared interests in suitable areas of work for a cluster Flexible composition of working groups will accomodate different interest coalitions 7
II. Feasibility: What focus for the cluster? Agri-food sector is very wide (from flour production to meat paté) Production methods, technologies and market challenges vary considerably For a cluster to work, participants need to work on related supply chains To start, few value chains with the most regional activity should be focused Recommended initial value chains encompassed by cluster (primary goods and illustrations of processing stages) Cereals flour, bread, pasta Oilseeds oil, dried seeds Fruit & vegetables pastes, preserves These are the most important value chains in the region at present Advantages: Critical mass, most cooperation potential in cluster Disadvantages: Due to commodity nature e.g. of wheat, upgrading potential is limited (large share of wheat will always be used with little processing, e.g. as flour). Adding further value chains such as animal products can be considered once cluster is successfully established 8
II. Feasibility: What prospectives members of the cluster? Membership of the cluster should encompass the full locally present scope of the focus value chain & affiliated institutions Companies Research/education, Government Suppliers (e.g. seeding material, pesticides) Primary producers Processing companies Service providers (logistics, packaging, certification, finance) Characteristics: Professional management Local decision authority Existing local business interaction Mid-sized companies will form a core group Represented in cluster at C level Education/research institutions, e.g.: Univ. for Public Nutrition Agrarian University Vocational schools Should be represented in cluster by decision-makers (e.g. faculty deans) Government, other agencies, e.g.: Oblast self-government Economic development agency Chamber of commerce Should also be represented by highranking decision-makers 9
III. Next steps: 1) Determining the organisational model Typically, cluster structures are organised in the form of an association. It could be an option, that the cluster management is hosted by an existing organisation. The legal form of the cluster structure should reflect the strategic focus, considering e.g. the role of commercial activities and the openness for new members. In most cases, the form of an association is selected (e.g. Lviv IT Cluster, foodregio, Food Processing Initiative) which is flexible regarding the integration of new members. Private limited companies are used as an alternative in particular when commercial activities play a strong role and the membership is rather fixed. Some clusters in particular larger structures - use hybrid models combining private limited companies and associations. An association or club seem to be appropriate legal forms for the Kharkiv cluster, depending on issues such as interaction with anti-monopoly regulations It could be an option, that an existing organization is hosting the cluster management to utilize synergies, e.g. with respect to the office infrastructure. 10
III. Next steps: 2) Funding model, voting rights The initial funding volume, which should be mainly financed by membership fees and paid cluster services is estimated at about 30-40,000 p.a. A sustainable financing model should be strongly based on membership fees and income generated from cluster services (e.g. trade fair visits). Typically, membership fees are graded according to the type and size of members. In the Lviv IT Cluster, fees range from US$ 900 p.a. for companies with less than 10 employees to up to US 10,500 for companies with more than 2,000 employees. In the foodregio Cluster, fees range from 400 to 2,500 p.a. It is also an option to grade the number of votes according to the size/fees as practiced in the Lviv IT cluster (companies have between 1 and 10 votes). Considering salaries (cluster manager, assistant) and costs for a basic set of activities (e.g. networking events, trainings, trade fair visits), the initial funding volume for a cluster in the Kharkiv Region is estimated at about 30-40,000 p.a. With around 40 founding members, membership fees between 400 and 1, 000 p.a. as well as voting rights graded by company size seem reasonable for the start 11
III. Next steps: 3) External funding and support for the cluster The cluster should also be open to external support/cooperations: Capacity building Cooperate e.g. with cluster programme at Kyiv Mohyla academy (continuing education/coaching for the cluster manager) Develop ties e.g. with European Secretariat for Cluster Analysis (ESCA) Network and learn from other clusters: International clusters in agri-food, meet and brainstorm with Lviv IT cluster as a successful Ukrainian cluster Generate further income: Carry out projects for donor organisations, provided these are also beneficial in terms of their content for cluster members Design and execute commercial projects, also enable non-members to use cluster services (for higher fees, e.g. training courses, workshops, trade fairs) Income from such activities should not be required for core financing of the cluster, but be used to expand the cluster s size and activity 12
III. Next steps: 4) Founding the cluster A delegation visit by prospective members to an existing cluster in agri-food could be a helpful final step to gather information before foundation Also prepares members to contribute actively to cluster life Active membership necessary A group of around 40 founding members should commit to: Finance the cluster for a two year initial period Proactively participate in cluster activities Two year horizon necessary to set up and start delivering real value-added Envisaged that the cluster becomes a permanent institution! Aim of the cluster: Cooperation on selected issues where cooperation brings about benefits for all involved actors Extent of cooperation depends on willingness of each member in each project, no specific formal commitments required or feasible 13
III. Next steps: 5) : Hiring a cluster manager Organises and structures the cluster in cooperation with cluster board Leads working groups, drives networking with and between members Should be a very good manager and networker from the local sector Expat with experience in cluster management also possible, but very expensive and lacking network and trust in local sector Key qualifications Networking productively with companies and institutions Structuring needs, interests and capabilities of cluster members Initiating, organising and driving the cluster s projects Knowledge of cluster approach Fluent English & international experience (internationalisation is a focus area of the cluster) It is vital to find the right person for this job Should use cooperations, support to further train the cluster manager 14
III. Next steps: 6) Commencement of cluster activities Structure of work for the cluster is determined between the cluster board and the cluster manager Working groups should be set up for the focus value chains of the cluster and the concrete areas of work Composition and meetings schedule should be carefully designed to permit effective and smooth operation of the working groups Should strike a balance between sufficient breadth and focus of working groups The Cluster should be the business card of the sector generate visibility for companies, institutions, products: 15
Annex: Examples of clusters 16
Example: foodregio Cluster (North Germany) Founded as a local initiative in 2005, foodregio has grown into a regional cluster with 70 members from five German Federal States and strong international linkages. Activities are strongly driven by working groups focusing on the following topics: Procurement, e.g. joint procurement models, trend research on commodities Logistics, e.g. joint projects to optimize distribution logistics and intralogistics Human Resources, e.g. campaign to attract talents to the food industry Markets & Communication, e.g. organizing annual foodregio Marketing Day Quality & Certification, e.g. training of internal auditors Products & Innovation, e.g. innovation projects in the area of functional food Processes and Innovation, e.g. foodregio Energy Management Project Packaging, e.g. intelligent packaging and recycling projects. Working groups meet 2-3 times p.a. usually in combination with company visits. 17
Example: foodregio Cluster (North Germany) International relations and projects form a strategic focus of foodregio that also helps to generate third party funding (e.g. from the EU). Amongst others, foodregio is coordinating the baltfood initiative comprising food clusters from Denmark, Finland, Germany, Latvia, Lithuania, Poland, Russia and Sweden. In addition, foodregio is organizing a wide range of training programmes (with discounts for members) and major events such as the foodregio Trend Day. The cluster is organized in the legal form of an association and is financed by membership fees, State and EU funding. The cluster management which is hosted by the regional development agency has six employees. 18
Example: Food Processing Initiative e.v. (West Germany) The Food Processing Initiative e.v. with 120 members offers long-standing experience in the areas of regional products and value chains, innovation and internationalisation. In the cluster initiative that has been established in 1996, 120 members from the business community, academia and government cooperate in the areas: Regional products, e.g. registration as protected products (Westfälischer Knochenschinken, Rheinisches Rüben- und Apfelkraut etc.) Regional value chains, e.g. optimizing dairy value chains with respect to energy and water consumption Cooperation and innovation projects, e.g. competition Ideenfeuer in the food and agricultural industry Internationalisation, e.g. Food2Market initiative assisting companies in exploring markets in neighboring countries. The initiative which is organized as an association has four employees and is financed by membership fees, paid services and third-party funding (e.g. State & EU schemes). 19
Example: Lviv IT Cluster The Lviv IT Cluster which has been established in 2011 shows that clusters can be successfully developed in the Ukrainian context. The membership comprises about 45 companies (8,000 employees) as well as local universities and government institutions which cooperate in the following areas: Promotion, e.g. Lviv IT Arena Conference with 1,000 participants and 100 speakers Loyalty programme, e.g. 200 partners of Lviv IT Club offering discounts Education, e.g. IT competition in schools, new master programme at Lviv Business School, modernizing curricula of programmes, recruitment database Infrastructure, e.g. IT House offering apartments for IT specialists Business development, e.g. EU representative office in Poland, law committee. The cluster is organized in the legal form of an association and is financed by membership fees and paid services. The cluster secretariat has currently eight employees. 20