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By Jeremy Shoham, ENN
The ENN recently interviewed Steve Collins and Paul Murphy from Valid Nutrition (VN) at a Central London Hotel. VN was set up in 2005 in the UK and then transferred to Ireland where it is now a registered charity with special dispensation to trade. Steve chairs a board of trustees, which include a number of individuals with long term interest and commitment to humanitarianism. VN's executive is drawn from the commercial sector. Paul Murphy is currently the VN chief operating officer having had a long and distinguished career at chief executive level in various Unilever subsidiaries.
Paul explained how VN is run as a business in that it aims to earn revenue and profit although these profits are re-invested in the business in pursuit of its social mission. The principal aim of VN is to ensure that Ready to Use Therapeutic Foods (RUTFs) and other specialised foods that are used in the prevention and treatment of malnutrition, are made much more available and affordable. He also explained that while VN is currently dependent upon donor support, its vision is that within two to three years it will become a self-financing business. Before this can happen, however, there is the small matter of paying off start up costs. A key donor is Irish Aid, although VN has also received loan capital and some small private donations. Valid International, which effectively spawned VN, put £200,000 of its own money into starting up VN.
Steve and Paul both outlined how VN effectively uses a social business model combining the effectiveness of business with the goals of a humanitarian agency. As investors will not be able to get their money out, evolution of VN will inevitably be slow without enlightened support. "Getting the working capital for establishing and scaling up production capacity for specialised foods is going to be a challenge as customers won't pay for produce in a hurry but suppliers will want their money up front". Although the market for RUTF is very promising, VN is still having to "fight like hell" to get production up and running. The good news is that purchase orders are already in the system.
VN's modus operandi is to manufacture RUTF and other specialised foods in Africa (and possibly other continents as global demand increases). While in many respects it would be easier to manufacture foods in Europe, this does not fit with the VN vision of local production using local ingredients which positively impacts on local farmers and food security. Prices of RUTF made using local produce will also be lower as transport costs are reduced. In Malawi, for example, VN are beginning to buy groundnuts for RUTF from the national association of smallholder farmers.
A significant challenge for VN is that other producers of RUTF who are not based in Africa may get subsidies from non-African governments. These subsidies can operate in different ways and confer an unfair advantage. Even so, VN are aspiring to produce foods at as low a cost as possible so that their competitors are forced to lower prices too, thereby making RUTF even more affordable.
Steve confirmed that VN has to pay Nutriset a small licence fee to be able to manufacture peanut-based RUTF (Nutriset produced the first RUTF - Plumpy'nut and have a patent on it). The fee is a set percentage of production. The first production plant established by VN was in Malawi. This factory, which has been certified by UNICEF, is owned by VN and currently has a production capacity of 2000 MT per year. The validation process for produce from this factory has not been easy and the Malawi factory has still not been validated for international sales in the region - which will be critical for its long term viability. There appears to be little incentive for UNICEF to grant this international certificate as they are not concerned about increasing production capacity of RUTF in Malawi (they currently have suppliers in South Africa and Mozambique).
Sachet machine in
operation in Malawi
The second factory established by VN is in Kenya, set up in collaboration with a local company called INSTA. This factory began production in February 2010 and had international as well as national validation from both UNICEF and Medecins sans Frontieres (MSF). INSTA produces RUTF under licence from VN and pays a straightforward royalty for doing so. INSTA are required by agreement to be transparent with VN as regard cost structures. There are also limitations on profit margins. The royalties provide VN with a revenue stream so that they can be proactive in extending availability of Ready to Use Foods (RUFs) and develop new products as well as conduct research. The Kenya model has worked well as it allows VN to quickly establish production capacity in a country. The company takes on the responsibility for the working capital so it is far more cost-effective for VN. VN control the brand but INSTA are responsible for the marketing.
VN's third factory is in Ethiopia - 'Valsek'. This plant is awaiting validation, hopefully in September 2010 and with the arrival of a packaging machine, it is hoped that RUTF production will then begin. The Ethiopia plant should be allowed to sell in the region, i.e. have international certification. It took a long time to find an appropriate factory in Ethiopia with initial efforts focusing on producers that were too small.
Steve and Paul reflected that in many respects this is just the start for VN. They are certainly 'thinking big'. The VN culture is to be open about everything. If a major private sector entity want to invest in this project and providing they play by a set of ethical rules, then VN see no problem in working with them. VN have the luxury of being efficient when it comes to pricing because there are no shareholders and dividends to pay out. They can offer a market alternative with competitors having to beat them on price and quality. Globally, there may be as many as 20 million children at any one time with severe acute malnutrition (SAM). At 10 kg RUTF a treatment, this translates into a need for 200,000 MT of RUTF or 0.8 billion dollars for the therapeutic feed market. If you start to add in products for treatment of moderate acute malnutrition (MAM) and the infant feeding market, then you can begin to see the scale of production that may be necessary and the potential for another model of production and marketing with ethical engagement at its centre. VN are already looking at West Africa (Nigeria) as another potential production location.
VN are also looking at less expensive RUTF formulations. Randomised controlled trials of new formulations without peanuts and/or milk powder are in progress in Lusaka. Other new product development includes complementary foods for young child feeding with trials taking place in the Democratic Republic of the Congo (DRC). There is also VN interest in developing foods for supplementary feeding and for feeding of HIV infected children although there are currently very little data on impact and efficacy of these foods.
VN are also interested in new and imaginative business models and delivery systems. Globally, almost 300 million, one third of the developing world's children, suffer from chronic malnutrition. The sheer scale means that this problem is far too great to be left to non-governmental organisations (NGOs) or the public sector alone.
Given the scale of need, VN believe that we need to be considering mass retail distribution mechanisms in a way not conceived of before. Steve and Paul argue that up until now, private companies have had too short-term a vision and have therefore ignored the lower end of the market pyramid, i.e. the poor. They believe that VN could help catalyse development of these markets but cannot do it on their own. They therefore need to engage with the private sector. VN can provide the knowledge and also provide a social brand. It would be a kind of 'enlightened humanitarianism' which takes the private sector beyond CSR (corporate social responsibility). Paul argues that CSR funding is significant but, more often than not, a kind of dead-end money with no real strategic underpinning. Too frequently, it is used as a way of buying off the consciences of the private sector and all who work within it. CSR has no vision of long-term sustainability. What VN are proposing is more of a strategic partnership where money can be made, at the same time as having a sustainable humanitarian impact. Paul commented that the INCAP study in Guatemala, involving a 30-year follow-up of the impact of improved early childhood nutrition, has demonstrated major economic and health benefits from the provision of nutritional supplements to children aged 6 to 24 months, including a 42% increase in adult male earning power. This significant 'return on investment' and the vast potential markets across the developing world have convinced the VN team that it is imperative and economically viable, for both governments and industry to invest in early child nutrition. Steve added that "although there will be lower profit margins, there will be massive long-term benefits. This will make community therapeutic care (CTC)look tiny. Businesses will be able to use their excess capacity without diluting profit margins on major brands. This should be very attractive to the private sector. If VN can lead by example and show how this might work it could so easily take off. We are convinced that the potential reward, albeit long term, is massive at all levels: humanitarian, socioeconomic and commercial. There needs to be an evidence base, i.e. examples of how well it could work. Corporations need to invest in the long-term markets but this needs people with vision and passion". For their part, the humanitarian community need to proactively come together to develop and agree a framework setting out the terms on which they would support this ethical engagement with industry.
As Steve says, although the idea of making profit out of the poor is repellent to some people in the humanitarian sector, unless we start to consider this as an option then it is just going to be business as usual. Steve and Paul posed the question, "why can't we have a system where we use the abundant experience and resources of the private sector to fulfil and deliver to a market that is usually left out of the equation and only catered for by the public sector in a way which is ultimately completely disempowering?" As I took the last sip of my slightly over-priced coffee, I had to admit that this was an incredibly powerful and seductive vision.
Taken from Field Exchange Issue 39, September 2010