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Economic impact of Heineken in Sierra Leone

1. Economic Impact Assessment model commissioned by NCDO and Heineken International. In March 2006 NCDO and Heineken commissioned a project to develop an Economic Impact Assessment model that is:User-friendlyExpandableData-friendlyRe-usableThe model was to be tested at the Heineken operating

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Economic impact of Heineken in Sierra Leone

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    1. Amsterdam, November 23 2006 Economic impact of Heineken in Sierra Leone

    2. 1 Economic Impact Assessment model commissioned by NCDO and Heineken International 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

    3. 2 Agenda 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

    4. 3 Multinational companies in developing markets: Earthworms or Eggplants

    5. 4 Foreign companies can contribute to development but some perceive their presence in emerging markets negatively

    6. 5 A better insight into economic impact of (foreign) companies may benefit many different parties in different ways 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

    7. 6 A model has been developed that enables analysis of the economic impact of companies in (emerging) markets 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

    8. 7 Model delivers production, incomes, taxes and jobs generated and includes direct and indirect economic impacts

    9. 8 Model can be tailored to other companies and to other regions

    10. 9 Agenda 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

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    13. 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

    14. 13 Sierra Leone Brewery is a case in point: it pays all its taxes and makes a loss

    15. 14 Sierra Leone Brewery is a case in point: it pays all its taxes and makes a loss

    16. 15 Sierra Leone Brewery is of major direct importance to Sierra Leonean economy Some indicators of the importance of SLBL for the Sierra Leonean 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%

    17. 16 When facing Sierra Leone Brewery in a stand alone mode it appears to be an extractor of (hard) cash

    18. 17 When facing Sierra Leone Brewery in a stand alone mode it appears to be an extractor of (hard) cash

    19. 18 SLBL spends money in the Sierra Leonean economy which is subsequently re-spend causing indirect economic effects

    20. 19 Overview of direct and indirect cash flows and leakage

    21. 20 Impression of how the SLBL cash is being re-spend in the (model of the) Sierra Leonean economy

    22. 21 Indirect impacts make the importance of SLBL for the economy more pronounced

    23. 22 And despite the cash spent on beer the direct and indirect cash flows to households and taxes is positive

    24. 23 Because of the labour-intensive nature of beer distribution SLBL indirectly supports a large number of jobs 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

    25. 24 A customer officer is permanently on site to assure tax revenues

    26. 25 Agenda 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

    27. 26 With the EIA model the effect of SLBL on inequality can be quantified

    28. 27 Although non-poor benefit the most from SLBL’s presence it is also beneficial for the food poor and the poor

    29. 28 Agenda 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

    30. 29 SLBL increases the “local content” of its beers by substituting imported Barley with locally grown Sorghum

    31. 30 Sierra Leone is one of the countries where Heineken has programs to increase the “local content” of its beer 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

    32. 31 The economic effect of substituting Sorghum is positive for the local economy 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

    33. 32 Buying Sorghum locally benefits the poor relatively the most

    34. 33 Agenda 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

    35. 34 A scenario has been constructed to compare SLBL economic impact to its non-producing importing competitors SLBL is the only local beer producer in Sierra Leone The competitors (like Carlsberg and Inbev) 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

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    37. 36 A situation in which SLBL would not produce but only import and wholesale beer would be detrimental for Sierra Leone 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)

    38. 37 An import scenario would reduce SLBL cash flows to industry by 64%

    39. 38 In the import scenario SLBL would be a cash extractor from the point of view of households

    40. 39 Perversely the tax income of the government would increase by 66% due to higher excise duties

    41. 40 Heineken behaves more like a Bee than as a Locust

    42. 41 Agenda 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

    43. 42 What to do when you are a different company and/or you operate in a different region

    44. 43 The cost of tailoring the model to your needs are modest and may be reduced when companies join forces 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

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