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© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved
Economic impact of Heineken in Sierra Leone
Amsterdam, November 23 2006
Economic Impact Assessment model commissioned by NCDO and Heineken International
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 1
In March 2006 NCDO and Heineken commissioned a project to develop an Economic Impact Assessment model that is:
• User-friendly• Expandable• Data-friendly• Re-usable
The model was to be tested at the Heineken operating company in Sierra Leone
Triple Value Strategy Consulting and InReturn Consultancy have executed the project
Today the results of this project are presented
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 2
Introduction and summary
Some model results reflecting Heineken economic Impact• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
Multinational companies in developing markets:Earthworms or Eggplants
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 3
Earthworms take what they need from the soil, but put back in the
form of rich humus. Thus they enrich the soil and leave it better than they found it. In so doing they co-
operate with one another and work together
Eggplantstake all the goodness out of the soil and leave it totally
denuded. They put nothing of value back and each eggplant operates alone, with only its own interests at
heart and is dependent on the soil for sustenance
Analogy by Darlyne Bailey and Rose Bator
Foreign companies can contribute to development but some perceive their presence in emerging markets negatively
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 4
Companies can contribute to development … … but some perceive their presence negatively
Foreign company
Economic activity
Industrial production
Incomes and taxes
Jobs
Foreign company
Extraction of (hard) money
Low salaries and tax
advantages
Unfair labour
practices
Exploitation
Two views are two sides of the same coin
A better insight into economic impact of (foreign) companies may benefit many different parties in different ways
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 5
Companies:Enables management to tune decisions more towards enhancing the local economic impact and thereby achieving a better fit in society
Governments:Understand the wider impact that a company has on development and tune policies and legislation towards enhancing it’s economic impact
Non-Governmental Organizations:Maximize development impact in cooperation with companies
A model has been developed that enables analysis of the economic impact of companies in (emerging) markets
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 6
The model enables companies to develop an informed opinion about their economic and societal impacts
• Look at the company and its societal environment through a different set of glasses
The model enables management to analyse different scenarios regarding their local economic impact
• Develop a broader view when taking management decisions
The model has proven useful and reliable in a real life situation• The model has been tested for Sierra Leone Brewery Limited (SLBL) in which
Heineken has a controlling stake
The model focuses on the economic impact and does not regard environmental degradation etc
• Such topics can be added but are too specific to include in a general model
Model delivers production, incomes, taxes and jobs generated and includes direct and indirect economic impacts
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 7
Industrial production
Incomes and taxes
Jobs
Modeloutputs
Direct inputs Indirect effect(respending effects)
Total economicimpact
Effects included in model
Model can be tailored to other companies and to other regions
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 8
Mapping of theprofit & loss /
cash flowof the company or
operating unit
Model ResultsInputs
Table that summarizes the
financial interactions
between different sectors and
households within the economy
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 9
Introduction and summary
Some model results reflecting Heineken economic impact in Sierra Leone• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 12
Doing business in Africa is hard work. The World Bank study measures things like red tape and taxes. […] But of the 35 least business-friendly countries, 27
are in sub-Saharan Africa. Some are impossibly hard: if firms paid all taxes due in Sierra Leone, they would spend almost three times their total profits;
September 8, 2006
Sierra Leone Brewery is a case in point:it pays all its taxes and makes a loss
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 13
-20
0
20
40
60
80
100
2005 Grossrevenues
Sierra Leonesuppliers
Households(employees)
Imports Taxes Loss
Index(revenues = 100)
Indexed profit and Loss statement of Sierra Leone Brewery
Taxes represent 33% of gross revenues
and 50% of net revenues
Sierra Leone Brewery is of major direct importance to Sierra Leonean economy
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 14
Some indicators of the importance of SLBL for the Sierra Leonean economy(without considering the informal economy):
• SLBL product consumption as % of household final consumption: 2.0%
• SLBL value added as % of GDP: 0.5%
• Workforce as % of estimated people with formal jobs: 0.3%
• Total tax payments as % of Sierra Leone tax revenues: 3.7%
When facing Sierra Leone Brewery in a stand alone mode it appears to be an extractor of (hard) cash
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 15
-250
-200
-150
-100
-50
0
50
100
Cash into SLeconomy (loss
exported to foreignshareholders)
Cash extractedfrom SL economy
(imports)
Net cash extractedfrom SL economy
Index(“exported” loss = 100)
SLBL spends money in the Sierra Leonean economy which is subsequently re-spend causing indirect economic effects
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 16
Cash of SLBLto local suppliersand households
Cash of SLBL toimports
SLBL spending
Cash of local suppliersand households to
imports
Cash of localsuppliers and
households thatremains in
Sierra Leone
Re-spending 1
Cash of local suppliersand households to
imports
Cash of local suppliersand households that
remains inSierra Leone
Re-spending 2
Cash of local suppliers andhouseholds that remains in
Sierra Leone
Cash of local suppliers andhouseholds to imports
Re-spending 3
Direct effects Indirect effects
Overview of direct and indirect cash flows and leakage
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 17
SLBL
Households
Industry
Directcash flows
Leakageout of SL
Indirectcash flows
Every bottle of beer that SLBL produces requires productionfrom suppliers and labour from their workers.
This indirectly generates economic activity and wages
Impression of how the SLBL cash is being re-spend in the (model of the) Sierra Leonean economy
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 18
This does notindicate a timeeffect since themodel is static
Indirect impacts make the importance of SLBL for the economy more pronounced
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 19
0
5
10
15
20
25
30
35
40
45
50
Cash fromindustry
Direct cash toindustry
Indirect cash toindustry
Total cash toindustry
USD (mln)
Direct and Indirect cash flows from Sierra Leone Brewery to industry
Indirect cash due to
households
Indirect cash due to
industry Very conservative
estimate
Maximum total impact
Most likely value closer to
maximum impact
And despite the cash spent on beer the direct and indirect cash flows to households and taxes is positive
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 20
-25
-20
-15
-10
-5
0
5
10
15
20
25
Cash fromhouseholds
spent on beer
Direct cash tosalaries and
taxes
Indirect cash tosalaries and
taxes
Total cash tohouseholdssalaries and
taxes
USD (mln)
Direct and Indirect cash flows from Sierra Leone Brewery to households and taxes
Unrealistically conservative
estimate
Indirect cash due to
households
Indirect cash due to
industry
Maximum total impactConservative
since they would buy beer
anyway
(1)
(1) Household spending on beer is larger than SLBL revenues
Because of the labour-intensive nature of beer distribution SLBL indirectly supports a large number of jobs
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 21
Direct jobs provided (for employees and casual workers): 175
Jobs provided by distributors: 180
Jobs provided by retailers that can be attributed to SLBL: ~5.400
Jobs provided by suppliers attributable to SLBL: ~1.200
Total employments due to presence of SLBL: ~6.900
Each job at Sierra Leone Brewery generatesapproximately 40 jobs in indirect employment
• 32 in distribution and retail• 8 in Sorghum agriculture
A customer officer is permanently on site to assure tax revenues
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 22
SLBL carries almost the entire tax burden (90%) of its entire supply chain due to narrow tax base of Sierra Leone
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 23
Introduction and summary
Some model results reflecting Heineken economic impact in Sierra Leone• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
With the EIA model the effect of SLBL on inequality can be quantified
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 24
24% of the people in Sierra Leone
Have too little to feed themselves sufficiently
Because they live on less than $0.35 per day
Therefore they typically do not consume SLBL products
Food Poor Poor
46% of the people in Sierra Leone
Have too little to meet their broader daily needs
Because they live on less than $0.75 per day
They typically consume only locally brewed Star and Guinness
Non Poor
30% of the people in Sierra Leone
Are not considered poor
Because they live on more than $0.75 per day
They consume imported Heineken and Star/Guinness
SLBL impact on inequality can be quantified using EIA model
Information about salaries provided by SLBL and the average dependency rate in Sierra Leone
SLBL specific information
Information about how the three income groups earn and spend money in Sierra Leone economy
Household economic information
Although non-poor benefit the most from SLBL’s presence it is also beneficial for the food poor and the poor
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 25
0 5 10 15 20
Cash inflow – SLBL consumptionfor the three income groups
Which makes them net beneficiaries of
SLBL’s presence
$ mln0 5 10 15 20
(In)direct SLBL-related cash inflow to the three income groups
But SLBL’s presence generates indirect cash flows for the food
poor (in the supply chain)
$ mln
Direct cash
Indirect cash
Beer is only consumed by the poor and especially non poor but not by
the food poor
SLBL consumption SLBL by the three income groups
0 5 10 15 20$ mln
Non poor
Poor
Foodpoor
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 26
Introduction and summary
Some model results reflecting Heineken economic impact in Sierra Leone• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
SLBL increases the “local content” of its beers by substituting imported Barley with locally grown Sorghum
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 27
Barley Sorghum
Sierra Leone is one of the countries where Heineken has programs to increase the “local content” of its beer
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 28
Barley is an essential ingredient of beer but it does not grow in the tropics
However, Barley can be (partly) substituted by other cereals like Sorghum which is grown locally
• Reduce cost for SLBL and reduce dependence on foreign currency• Increase local development impact• Increase local embedding of company
Heineken currently runs substitution projects in several countries in Africa among others in Sierra Leone
• Co-operation with NGOs and farmers to efficiently grow Sorghum• Training of farmers who have never been involved in commercial farming• Involvement of women in farming• Construction of facilities (drying floors, warehouse, schools etc)• Stimulation of co-operatives and credit groups
The model enables analysis of the economic impact of these import substitution projects
The economic effect of substituting Sorghum is positive for the local economy
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 29
In 2005, Heineken spent USD 210.000 on the substitution project• Approximately 3.000 farmers participate
The indirect impact of keeping this money in the Sierra Leonean economy was approximately USD 790.000 which brings the impact on Sierra Leonean production close to USD 1.000.000
This increase of production generates USD 630.000 in household income
Buying Sorghum locally benefits the poor relatively the most
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 30
Distribution of household income increase over the three income groups
(100% = USD 630 k)Household income increase per group
0% 2% 4% 6% 8% 10% 12%
Food poor
Poor
Non poor
Non poor (301k)
Poor (257k)
Food poor (77k)
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 31
Introduction and summary
Some model results reflecting Heineken economic impact in Sierra Leone• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
A scenario has been constructed to compare SLBL economic impact to its non-producing importing competitors
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 32
SLBL is the only local beer producer in Sierra Leone
The competitors only export beer to Sierra Leone that are subsequently distributed by different channels
It would be useful to know how SLBL’s economic impact compares to that of competitors
Therefore a scenario has been constructed to analyse (using the EIA model) what would happen if SLBL ceased local beer production and reverted to importing beer
• Discontinuing Star and Guinness production• Assuming that the total beer consumption does not change in money terms and in
origin from the three income groups• The imported (Heineken) beer carries the tax rates and margins as currently
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 33
If you want local beer youhave to brew it yourself
A situation in which SLBL would not produce but only import and wholesale beer would be detrimental for Sierra Leone
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 34
In case SLBL would focus entirely on importing and wholesaling Heineken beer it would have a greatly reduced economic impact:
• A 64% smaller total impact on industrial production• A 60% smaller total impact on household income
However, perversely, it would pay 66% more taxes due to fact that imported (Heineken) beer is taxed more heavily
• Because of the narrow tax base, the reduction of industrial production would not induce a large decrease in taxes (SLBL pays almost all the taxes of the entire supply chain)
An import scenario would reduce SLBL cash flows to industry by 64%
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 35
0
5
10
15
20
25
30
35
40
45
50
Cashfrom
industry
Directcash toindustry
Indirectcash toindustry
Totalcash toindustry
Reductionof direct
cash
Reductionof indirect
cash
Scenariototal cash
toindustry
USD (mln)
Direct and Indirect cash flows from Sierra Leone Brewery to industry
Current situation Import scenario
-64%
In the import scenario SLBL would be a cash extractor from the point of view of households
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 36
Cash flow(USD mln)
-6 -3 0 3 6
Food poor
Poor
Non poor
Current cash flows to different income groups
Cash flows to different income groups in import scenario
-6 -3 0 3 6
Food poor
Poor
Non poor
Cash flow(USD mln)
Perversely the tax income of the government would increase by 66% due to higher excise duties
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 37
0123456789
10
CurrentSLBLtaxes
Currentindirecttaxes
generated
Currenttotal taxes
paid inSLBLsupplychain
Extra taxpaid inimport
scenario
Impact onindirecttaxesimport
scenario
Total taxesin supply
chainimport
scenario
USD (mln)
Direct and Indirect taxes resulting from presence of Sierra Leone Brewery
+66%
Current situation Import scenario
Heineken behaves more like a Bee than as a Locust
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 38
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 39
Introduction and summary
Some model results reflecting Heineken economic Impact• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
What to do when you are a different company and/or you operate in a different region
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 40
Different company in same (or economically similar) region
Map company P&L on stakeholders
Direct economic impact Direct and indirect
economic impact
Economic impact of a different company in
same regionDetermination of coefficients ofInput-output matrix of regional economy
Different company in different region
Map company P&L on stakeholders
Direct economic impact Direct and indirect
economic impact
Economic impact of a different company in a
different regionDetermination of coefficients ofInput-output matrix of regional economy
Coefficients and parameters change but the model does not
The cost of tailoring the model to your needs are modest and may be reduced when companies join forces
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 41
Use the model for a company in a region for which the economic infrastructure has been modeled already
• Starting from EUR 10.000
Use the model for a company in a region for which the economic infrastructure has not been modeled yet
• Starting from EUR 25.000
In order to minimize costs the plan is to create a set of “generic” regional-economic kernels for a group of companies with geographic overlaps
• Sub Saharan Africa• Latin America• China• South East Asia• Etc
Through this set one can cost effectively combine company data with the generic kernels to obtain answers that may have some inaccuracy but are directionally correct
Agenda
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 42
Introduction and summary
Some model results reflecting Heineken economic Impact• Current economic impact• Effect on inequality• Increase of local raw materials• Scenario planning facilitated by model
What is needed to adjust the model for other companies and regions
Information about participating NCDO, Heineken, Triple Value and InReturn
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 43
The Dutch National Committee for International Cooperation and Sustainable Development’s (NCDO) core goal is to strengthen and highlight public support for international cooperation and sustainable development and achievement of the Millennium Development Goals.
NCDO does this through campaigns, documentaries, subsidies for projects and events. It also initiates its own programmes and projects if feels other organisations are not devoting enough attention to important themes. One of these themes is the role of business in development. For this purpose NCDO has run a ‘Business in Development programmesince September 2003.
The Business in Development programme aims to engage Dutch companies and its employees in market-oriented approaches to poverty reduction. This programme stimulates cooperation between companies in the Netherlands anddeveloping countries. The Business in Development programme has initiated:
• BiD Challenge www.bidchallenge.org• Dutch Design in Development www.ddid.nl• BiD Network www.bidnetwork.org• MDG measurement framework www.bidnetwork.org/mdgscan• Economic impact assessment tool www.bidnetwork.org/eiaheineken• BiD Seminars www.bidnetwork.org/bidseminars• Small Business Guide www.bidnetwork.org/smallbusinessguide
Visit www.ncdo.nl
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 44
The story of Heineken® began in 1864 when Gerard Adriaan Heineken bought a brewery in the heart of Amsterdam. Over 140 years, four generations of the Heineken family have strengthened and expanded our brands and company in Europe and around the rest of the globe.
The business of Heineken is about building great brands. The Heineken brand is sold in almost every country in the world. In addition to the Heineken brand, the company brews and sells more than 170 international premium, regional, local and specialty beers. TheAmstel® brand of the Heineken group is Europe’s third-largest brand. Other famous brands in its portfolio include Cruzcampo®, Tiger®, Zywiec®, Birra Moretti®, Ochota®, Murphy’s® and Star®. Heineken has the widest presence of all international brewers, thanks to its global network of distributors and 115 breweries in more than 65 countries. The popularity of the beers of the Heineken group is growing daily in rapidly-expanding beer markets, such as Russia and China.
In the beer markets of Western Europe, Heineken is the largest brewer and beverage distributor and the region accounts for more than half of its global sales. Heineken wholesalers also distribute wine, spirits and soft drinks to the on-trade channel. The company has now extended that leadership to Central and Eastern Europe. Heineken also has an international export operation, shipping beer to major profitable markets such as the US. In some markets, the company also produces soft drinks.
Heineken is committed to growth and has embraced innovation as a key component of its strategy. The company works to continuallyanticipate and meet the changing needs of consumers. Innovations of Heineken are in the areas of production, marketing, communication, packaging and, in particular, draught beer systems, where the company is an acknowledged leader.
Heineken takes seriously its commitment to conduct business responsibly and sustainably. The company continuously expands its initiatives to combat alcohol abuse and misuse and works to set and exceed ever-higher standards in the social and environmental areas of our business.
In 2005, the Heineken group employed an average number of employees of 64,305 worldwide.
See also www.heinekeninternational.com and www.enjoyheinekenresponsibly.com
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 45
Triple Value helps its clients to connect Access, Allocation and Agility
Triple Value’s clients are mostlyleading multinationals
Agility
Access
Allocation
Access tokey markets
Effective andefficient
organisation
Connected tosocietal trends
Value-based managementNon-financial value drivers
Operational efficiencyManagement information
Transparency &reporting
StakeholderengagementReputation
management
Trend analysisEconomic impact
assessment
Base-of-the-pyramidstrategies
Eco-efficiencyCustomer analysisInvestor analysis
Visit www.triple-value.com
© 2006 Triple Value Strategy Consulting and InReturn Consultancy all rights reserved 46
Mission:Generate commercial finance strategies in developing countries that stimulate sustainable entrepreneurship in developing countries and benefit investors
Products:– Initiate and managing commercial funds investing in SMEs and MFIs in developing
countries– Provide strategic and financial advisory services regarding investments in SMEs and MFIs
in developing countries
Advisory services:– Investing in SMEs and MFIs– Desk research and due diligence on SMEs and MFIs– Economic impact analysis of SMEs in developing countries– Public Private Partnerships– International development and development finance
Partners:The economic impact study for Heineken/NCDO was performed together with Econovision
Visit www.inreturncapital.com