LDN Fund and LDN TAF Case Study
Profit-sharing loan of US $9 million to further scale up operations
Agriculture, forestry, tourism, and the sale of hydroelectric power to India form a significant share of Bhutan’s economy. 70% of its population lives in rural areas and the majority of people are dependent on subsistence agriculture. Constraints faced by smallholder farmers include the small size of their landholdings, limited access to technologies and inputs (including on-farm labor), changing weather patterns due to climate change, and limited access to markets in part due to poorly developed infrastructure. The typical rural household in Bhutan earns relatively low cash incomes, and with an increased flux of migrants from rural to urban areas, it is increasingly difficult to find farm labor due to competing livelihood opportunities in cities.
Bhutan has a wide range of ecosystems—from alpine zones of the Himalayas to subtropical floodplains at the Indian border—and presents one of the world’s major biodiversity hotspots. However, because of this geography – in particular steep slopes with cold climates – less than 3% of its land is arable and a large part of it is fragmented due to degradation.
Rural-urban migration in Bhutan
The rural population grew at an annual rate of only 0.6% from 1985-2005, compared to an urban population growth rate of 6.1% (population census, 2005). In a study of rural- urban migration in 2004, almost half of rural households (47%) reported that one or more family members had migrated. That trend has accelerated in the subsequent 15 years. Due to this demographic shift, there are indications that the rural workforce is aging faster than that in urban areas, further restricting labor supply. In addition, it appears that access to labor is constrained on the demand side by the inability of farmers to pay the wage rates required to compete with urban employment (FAO, 2012).
Partly in response to these challenges, Mountain Hazelnuts was founded in 2009 as Bhutan’s first 100% foreign direct investment. Its mission was and is to create a profitable business that provides long-term income for vulnerable rural communities by planting 10 million hazelnut trees that restore degraded mountain slopes. The company works with Himalayan smallholder families and community groups (e.g. nunneries and cooperatives) to provide additional income-generating opportunities that also help restore the nation’s fallow and degraded land. In line with a Memorandum of Understanding signed with the government of Bhutan, Mountain Hazelnuts buys all harvested nuts according to a guaranteed price structure that removes market risk for the growers and ensures a profitable crop.
Growers interested in participating apply to Mountain Hazelnuts to plant hazelnuts on their fallow or degraded land. The company inspects every site to consider the ecological impact before an orchard is designed and planted. Approval is only given for those sites that meet the agreed principles. At national level, links between Mountain Harvest’s activities and the country’s LDN target-setting program have been established.
Flow of capital and services
Mountain Hazelnuts currently works with more than 12,000 smallholder families and community groups across the country to produce and harvest hazelnuts. Growers are provided with hazelnut trees and inputs, plus training on good agricultural practices, followed by bi-monthly visits from local Mountain Hazelnuts staff from its 200-person Field Extension team. Mountain Hazelnuts buys all harvested nuts of acceptable quality, transports the nuts to its processing plant for further drying, size sorting, and various value-adding processes, in preparation for export to international markets. To date, more than 7 million hazelnuts trees have been planted exclusively on fallow or degraded land, and hazelnut trees are perfectly suited to Bhutan’s mountainous conditions and climate. At full maturity, the company expects an average yield of more than 4 kg per tree.
This model is a good fit for Bhutan’s social economic conditions. Compared to other potential cash crops, hazelnuts do not require heavy upfront investments from farmers. The model is inclusive: women or the elderly, who tend to enjoy less financial security, can tend the low maintenance crop. Incremental earnings are also significant: an average orchard is expected to double a typical rural household income.
By tracking key performance indicators (KPIs), including environmental and social KPIs, on a quarterly basis, the organization tracks whether (and how fast) it is achieving its impact and business objectives. Quarterly reviews of the resulting data allow management to adapt operational plans as necessary, ensuring key impact targets are achieved.
Purpose: Further scale up the operations of Mountain Hazelnuts.
Type and amount: Profit-sharing loan to a total of US $9 million. The financing will be released in several tranches based on operational milestones.
Duration: 10 years.
Key risks are managed as follows:
The LDN TAF further strengthens the environmental and social impacts of the hazelnut production and land restoration company, thereby also reducing investment risk. It does so by providing the following areas of support:
- Orchard and yield optimization, supported by third-party expert advice, soil and leaf analyses, and drones for orchard mapping and maintenance.
- Non-locally available materials for the implementation of rainwater irrigation technologies.
- Development of a cost-sharing model for small equipment needed for pre-harvest mechanization, as well as expert advice to optimize the drying process for post-harvest processing and purchase of materials for additional dryer units.
- Partnership with the Loden Foundation (leading Bhutanese civil society organization) to provide zero-interest loans to (young and female) entrepreneurs to encourage establishment of businesses along the hazelnut value chain.
- Acceleration of the Rainforest Alliance certification process.
- Setting an LDN baseline and monitoring progress to drive adaptative management and maximize restoration returns in Bhutan.
© 2018 Bryan Watt
The LDN baseline confirmed:
- 7.8% of the investment landscape identified as degraded compared to 5.9% within the wider region;
- 72.2% of the investment area classified as grassland or cropland;
- Soil organic carbon content within the first 30 cm of the soil of 73.9 tons carbon per hectare in fallow sites, compared to 85.9 tons C/ha in hazelnut orchards at least 6 years old.
10 million hazelnuts trees planted on fallow or degraded land, contributing to LDN. The project interventions are expected to contribute to LDN on all hazelnut orchards in scope. While land productivity is not expected to significantly change (although this may differ once trees have reached maturity), an increase in woody coverage in areas managed by Mountain Hazelnuts is anticipated, as well as a significant increase in soil organic carbon stocks, thereby achieving overall LDN.
An earlier study confirmed that 65% of household heads in the supply chain had no formal education, but that 62% now sent all of their children to school. Around 90% of hazelnut growers now have access to a healthcare facility within a walking distance of five hours. While overall financial literacy among rural farming communities tends to be low, 67% of beneficiaries have a bank account, representing a first step towards greater financial empowerment.
A doubling of the income of participating farmer households is expected; at full scale, this will include up to 15% of Bhutan’s population through orchard cultivation and the hazelnut value-chain, including processing and the provision of goods and services.
Over 5,000 women-led farming households are part of the project’s value chain. In addition, more than 260 Bhutanese women from rural communities are currently directly employed by Mountain Hazelnuts, providing training and support for their health and personal finance.
At scale, at least half of the 15,000 growers involved in the hazelnut cultivation will be women-led.
in 2019, Mountain Hazelnuts reduced 48,000 MT of carbon emissions.
An estimated 1.5 MtCO2eq will be sequestered by the orchards.
The investment landscape is dominated by tree-covered areas (81.2%) compared to only 25.3 % within the region. As such, by promoting yield optimization and benefits on the land in scope, restoration of degraded areas is prioritized, and degradation of forests avoided.
Theory of change
Key lessons for stakeholders
The model of a public-private-community partnership closely links the company with the government and its people, creating synergies and boosting local economic development.
When initially measuring impact, Mountain Hazelnuts conflated impact on female employees with impact on female growers, blurring the lines between access to career opportunities and better livelihoods for women. Through working with Business Call to Action on the Impact Champions Programme, the company has been better able to clarify the impact of Mountain Hazelnuts’ operations on different groups of stakeholders, including separating impact on female employees from impact on female growers. This has helped the company improve its operational decision-making as well as driving value for the business and its stakeholders.
The use of data and rigorous monitoring can help drive business ambitions while leveraging impact creation. For example, from a baseline survey conducted in 2018, Mountain Hazelnuts found that cultivating hazelnuts is most growers’ first exposure to caring for tree crops. As such, this led to an increased operational focus on field staff teaching growers good orchard- management practices, including planting, fencing, weeding, irrigation, mulching, pruning, and harvesting.
© 2017 Bryan Watt