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Final Report - BASAN
Final Report - Downloads
Final Report (complett), 2004-01-12 (Datei size: 874 kB)

List of content


9. Regional development- why do some regions
perform better than others?
10. Agri-production versus Agri-culture
11. New production opportunities in the Baltic Sea
regions
12. The Virtual factory concepts
13. Creation of ago-industrial activities in rural area
14. Final conference
15. Basan members

List of content --> detailed version
Appendix

    1. The virtual factories
    1.1 Vita Wheat
    1.2. Lupine protein

    2. EU projects of potential interest
    for the Baltic Sea area

    3. Country reports
    3.1. Denmark
    3.2. Sweden
    3.3. Finland
    3.4. Estonia
    3.5. Latvia
    3.6. Lithuania
    3.7. Germany
    3.8. Poland

    4. Minutes of regional meetings
    4.1. Kick off meeting – Copenhagen
    4.2. Warsaw
    4.3. Helsinki
    4.4. Wroclaw
    4.5. Riga
    4.6. Umeå
    4.7. Wismar

    5. Minutes from steering group meetings

    6. Proceedings from Final conference

1. Preamble

1.1. Background
1.2. Objectives
2. Executive summary

The Baltic Sea area cowers 2,3 million square kilometres with a population of some 103 million. 50 % of the land is afforested and 20 % is being used as arable land. The climate varies from an arctic climate in the north to temperate climate in the south.

The area includes 9 countries, of which 4 currently are members of the European Union, and 4 will join within a few months.

In addition to huge forests the area has abundant of abandoned land and permanent pasture that potentially might be used for production of biomass and to some extend agricultural crops (both food and non-food).

The yield of crops is low in some of the regions compared other parts of Europe, mainly due to the use of extensive farming methods. Better farm management, introduction of higher yielding seeds, optimal use of fertilisers and better pest control could increase the output from these regions considerably.

A large proportion of the locally produced crops is exported from the regions unprocessed. The value added is thus created elsewhere.

The number of new companies created in the regions has (with a few exceptions) been modest, and the entrepreneurial spirit is generally low.

Many of the Baltic Sea regions are far from big cities and markets, research centres and universities. The income in those regions is below the country average, and the age distribution is in imbalance with a relative high proportion of elderly people. The unemployment rate is high, and the young people leave the regions to find jobs elsewhere.

Some regions rely heavily on tourism, and the risk exists that such regions develop a “monostructure” where a major part of the workforce is relying on only one trade. Such regions will naturally become very vulnerable towards international economic fluctuations.

The Baltic Sea regions thus represent a number of challenges that have to be met, if the (remote) communities shall not only survive but also survive as viable and attractive areas to live in also for future generations.

However the Baltic areas do also have many assets that may attract new business activities:
  • Many areas have abundant of land at low cost
  • Some have access to cheap labour and energy
  • A few have access to universities and/or research centres
  • The cost of living is low compared to the mother countries average
  • The surroundings are often very beautiful with good hunting and fishing
  • The remoteness of some areas – e.g. the Baltic Sea islands- makes them attractive for some high-added-value productions such as molecular farming.
  • The occurrence of plant and animal diseases and pathogens in the northern part of the Baltic Sea is low due to the climatic conditions.
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3. The complex of challenges
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4. Recommendations for a strategy

A major challenge is to identify potential business opportunities and to attract investors to these regions.

In the effort to attract new business activities it might be advisable to focus on a few technology areas with particularly good potentials under the conditions prevailing in the Baltic Sea region.

Such areas are:
  • High volume productions like bio-energy (solid and liquid)
  • Low volume high-profit-per-unit productions like functional foods and food ingredients and speciality non-food products.
  • Biorefining – combined production of high volume products and high profit products
  • High-tech farming – molecular farming, precision farming etc.

Each of these production groups represents considerable potentials under the conditions prevailing in the Baltic Sea areas, as is argued in this report.
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4.1. Joint activities
4.1.1. Virtual Baltic Sea agro-industrial campus


A first step in a strategy to attract investors to the Baltic Sea regions would be to make their advantages known to the outer world. The potential investors must be convinced that the regions have important advantages compared to other regions. Such advantages might be (in addition to the advantages mentioned above) lower input costs, transport costs, access to raw-materials in acceptable amounts and quality, access to specialised labour or research facilities etc. Also fiscal incentives, the local business climate etc. could play important roles.

The strategy should include a promotion scheme for the entire Baltic Sea area managed by a centralised secretariat that should be established as part of a “virtual Baltic Sea agro-industrial campus”. (Page x)

The campus shall address the obstacles revealed in the Basan survey:
  • Low entrepreneurial spirit
  • Limited language skills
  • Limited awareness of new technologies
  • Limited access to R&D institutions
  • Little experience in innovation activities and know how transfer
  • Little experience in business management and market evaluation

The campus shall also actively participate in creation of clusters especially suited for the Baltic Sea area. More specifically it should:
  • Encourage the development of (e.g. geographical dispersed) clusters of small scale local agri-culture oriented value added productions and services based on the introduction of new speciality crops (page x)
    • Food and feed crops (page x)
    • Energy crops (page x)
    • Medicinal plants, spices, plants for cosmetics, dyes etc.(page x)

  • Encourage the establishment of agro(bio)-industrial companies with a positive impact on an entire region.(agro-industrial locomotives- biorefineries).
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4.1.2. Baltic Sea Bioenergy Network

According to the EU Commission the EU must in future rely much more on renewable energy resources such as biomass than is the case today (Page x). The World’s oil reserves, and especially the European reserves in the North Sea and Baltic Sea, are finite, photosynthesis is not.

The Baltic Sea area with its vast amounts of forests and unused or extensively used agricultural land would be an obvious candidate to become the “biofuel region of Europe”.
The biomass production potential is enormous and, due to low-cost land and in some areas low cost labour, the production costs are moderate compared to other parts of Europe.

Biomass fuel clusters have already been created in Baltic Sea regions (page xx).
It is however central for success that co-operation between the various clusters -production clusters, advisory clusters and research clusters- is established.

This can be achieved in the Baltic Sea area by co-operation between existing local/regional/national clusters already formed. In the pellet sector the already started co-operation between local authorities, pellet industry and research organisations in Sweden (in the project SLUP) can be widened to include actors in all Baltic Sea countries.

The existing pilot plants in the Baltic Sea area should be available for all actors in the area. Examples of such plants are:
  • A biodiesel plant in Poland
  • Bioethanol plants in Ornskoldsvik in Sweden, Mecklenburg-Vorpommern, Germany and Fyn,Denmark
  • A solid biofuel plant - BCT- in Umeå Sweden

Networking
Networks involving regional authorities, companies, advisory institutions and research organisations must be established in the Baltic Sea area. Local networks in the region as e.g. “Biofuel region” (network in northern Sweden) can be enlarged to cower the whole Baltic Sea area.
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4.2. Regional activities

The strategy should also include activities performed at regional level:
Such activities might be to:
  • Create a vision for the future development of the region
  • Develop an entrepreneur package to attract foreign entrepreneurs/investors (agro-industry orientation).
  • Develop an incentive package for local entrepreneurs (agri-culture orientation).
  • Organise regional producer groups
  • Stimulate the creation of clusters and networks

Finally the national authorities may consider introducing fiscal incentives for the remote regions such as:
  • Tax incentives
    • Tax incentives on technology transfer (including tax credits on acquisition of patents)
    • Tax incentives on patent application and protection
    • Tax credit schemes to support training of personnel and immigration of specialists
    • Tax exemption on specific products of particular interest for the Baltic Sea area such as bio-fuels, biodegradable packaging materials etc.

  • Financial incentives
    • Easier access to venture capital for agro(bio)-industrial activities

  • Define enterprise zones in the least favoured regions

The incentives suggested above are discussed in more details in chapter xx.
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5. The Baltic Sea area

Baltic Sea area

The Baltic Sea area is a vast area, covering 2,3 million square kilometres with a population of some 103 million. Most of the population is concentrated in the south and in the coastal areas. The land use of the area is unique, with 50 % afforested and 20 % being used as arable land. Approximately 30 % of the Baltic population live in the countryside.
The area includes 9 countries, of which 4 currently are members of the European Union, and 4 will join within a few months. The difference between the present EU members and the other countries is considerable in many ways and it emphasises the fact that the region is not yet a homogenous entity.

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5.1. Agriculture and agro-industries in the Baltic Sea area

Although the importance of agriculture in the national economies of the Baltic Sea countries has been reduced during the last decades, agriculture is considered to remain a key sector, and sustainable and stable food and non-food production is still of considerable Importance.
As is seen from figure 1, the percentage of gross value added by agriculture varies from 2 % in Finland to 10 % in Lithuana. Especially in Finland, Sweden Estonia and Latvia forestry plays an important role and many farms are mixed agricultural/forestry farms. There are 3,5 million ha forests in Finland, 2 million ha in Estonia and 2,9 million ha in Latvia.


Source: Economic Rural Development – project description, 3rd revision april 9 2002. IIASA and Basan members. 2003.
Figure 1. Value of agricultural production in percentage of gross value

Also the number of employed in agriculture varies considerably between the Baltic Sea countries, from 29 % in Poland to 3,3 % in Sweden, therefore a decline in job opportunities in rural areas will hit harder in some countries than in others. However, in spite of these differences all the Baltic Sea countries have in common a stagnation in the rural areas with loss of jobs and social desertification.


Source:Economic Rural Development – project description, 3rd revision april 9 2002. IIASA and Basan members. 2003.
Figure 2: Percent of workforce employed in agriculture.

Today farmers and the existing agro-businesses in the rural areas around the Baltic Sea are mainly producing bulk products to commodity markets, where price often is determined by political decisions and not always related to the actual costs of production. The farmers’ influence on their own situation is therefore rather limited. This situation has prevailed for many years and is not leading to any dynamic development of the rural societies..

There are however many differences in characteristics and trends between the present EU countries and the accession countries in the Baltic Sea area. These differences cover geographical and climatic conditions as well as social, environmental and economic aspects. For example the relationship between agricultural land and total area varies from 7 % to 62 %, and the relationship between agricultural population and the total population varies between 3 and 30 % in the individual countries.

Also farming structure and average farm size differ considerably from country to country.

The above figures clearly demonstrate the need for new activities in the rural areas around the Baltic Sea, especially activities that can create new jobs and improve income in the rural areas.

In the following a number of tables and graphs to illustrate the considerable differences in production patterns, yield etc. are shown. The differences indicate the large potentials for production improvements and increases in some of the Baltic Sea countries. However, any substantial increase in production of primary products like cereals and rape-seed (the most common crops in the area), which already are produced in surplus in Europe, does not make sense, unless new markets can be found. Fortunately there are alternatives to the traditional crops, as mentioned on page xx in this document, and also promising alternative applications for cereals and rape-seed are available.
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5.2. Primary production, yields of the most common crops and milk in the Baltic Sea states.
5.2.1. Permanent pasture


Source: FAO statistics and Basan members. 2003.
Figure 3. Permanent pasture in % of total agricultural land

As is seen from figure 3 the ratio of permanent pasture to arable land varies considerably. In Germany for example more than 40 % of agricultural land is meadows and pasture whereas in Finland less only 12 % is pasture (10,6 % meadows and fallow). The huge pasture areas constitute a large potential for future production of e.g. biomass for bio-energy production.

Considerable amounts of abandoned land exist in the Baltic states:
    537.000 ha in Latvia
    360.000 ha in Lithuania
    341.000 ha in Estonia

In the present EU countries the crop yield pr ha is currently still higher than in the accession countries which is seen from figures x –x. However the yield pr ha is increasing in those countries. This indicates a large potential for production increase in the accession countries.
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5.2.2. Cereals

Cereals are the most widespread crop in the Baltic Sea countries as in Europe as a whole. Cereals are thus grown even in the northern part of Sweden and Finland.

In figure 4 the average yield of cereals is shown. It varies from 6,5 tons/ha in Denmark to 2 tons/ha in Estonia.


Source: FAO statistics and Basan members. 2003.
Figure 4: Yield of cereals in tons/ha 1998.

There are thus considerable variations in crop yield not only from country to country, but also within the individual countries presumably due to a number of factors such as; crop variety, soil quality, and input of fertilisers and pesticides. The relatively extensive production on rather large areas of land gives an indication of a very large potential for production increase in the Baltic Sea area.

In figure 5 the production figures for cereals for food and feed from the individual countries are shown.


Source:FAO statistics, Basan members 2003 and AGENDA .
Figure 5: Production of cereals in the Baltic Sea countries

The cereals are mainly used for food production, and the two biggest countries, Germany and Poland, are by far the largest producers. The total production of cereals amounts to more than 85 million tons.

The major part is used for food.The production of feed grain is more modest, however the amount is still considerable compared to the other parts of Europe. The total production of cereals for feed and industry is approximately 32 million tons. Both Poland and Germany have wheat starch factories, and in Finland starch is produced from barley, which is rather extraordinary.
5.2.3. Vegetable oils


Source: FAO statistics, AGENDA 21 and Basan members. 2003.
Figure 6: Yield of rape seed in the Baltic Sea countries

Rape-seed is the second most important crop in the Baltic Sea area. Especially Poland and Germany are important rape-seed producers. Together they produce 3,7 million tons of rapeseed, which is almost 30 % of the total World production of rapeseed. However the rapeseed production has been reduced during recent years especially in the EU countries due to a change in the CAP.


Source: FAO statistics,AGENDA 21 and Basan members.
Figure 7: Production of rape seed

Limited amounts of linseed are grown especially in Germany and Poland
Figure 7 shows the production of rapeseed. It is obvious that Germany is far the largest producer. In Mecklenburg-Vorpommern alone the production is 850.000 tons/year (Gienap,2003).

Most of the rape seed oil is used for food, however up to 40 % is used for non food applications such as motor fuels, lubricants, varnishes and paints, solvents, printing inks etc.
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5.2.4. Potatoes

Source: FAO statistics 1997, AGENDA 21 and Basan members 2003.
Figure 8: Potato yield

Potatoes are an important crop in the Baltic States, Poland and Denmark. Poland is not only the largest producer in the region, but also number 2 in Europe and number 3 in the World. Again there are differences in crop yield pr ha. Potatoes are used as food or for industrial purposes. Potato starch is produced in all Baltic Sea countries . Also the starch production is regulated by an EU quota system, leaving little room for expansion.
In figure 8 and 9 yield and production are given. Again there are large differences in crop yield from country to country.


Source: FAO statistics,AGENDA 21 and Basan members 2003.
Figure 9: Production of potatoes
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5.2.5. Sugar beet

The major part of the sugar production is used for human consumption, and quotas regulate the production size in the 4 EU countries.

The potential non-food markets are large, provided the right price.
Sugar (sucrose) is an excellent feedstock for fermentation, which is of special interest for the Baltic Sea area with its high concentration of fermentation industries, including pharmaceutical companies.


Source: Basan members.
Figure 10: Yield of sugar beet

In figure 10 the average yield of sugar beet in the individual countries is shown: As for the other main crops there are major differences in yield from country to country.

Sugar beet is the most efficient carbohydrate producer measured in tons pr. ha, the main carbohydrate competitor, starch from either cereals or potatoes, has however the advantage that the long chain polymeric nature of starch imparts properties that are not matched by sucrose leading to substantial higher usage of starch in the pharmaceutical and chemical industries.


Source: Basan members.
Figure 11: Yearly production of sugar beet

Germany and Poland are by far the largest producers. The figures for the other Baltic countries have not been found.
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5.2.6. Milk production

Germany and Poland are also the largest milk producers. The milk production has been relatively constant during recent years in the EU countries, mainly due to the milk quota system, while production has declined in the Baltic countries.


Source:Basan members 2003 and FAO statistics.
Figure 12: Milk productivity – kg milk per cow per year

The productivity varies, as is seen from figure 12, considerably; from 3000 l/cow in Lithuania to more than 6000 l/cow in the Nordic countries. There is thus a considerable potential for expansion of milk production i some of the Baltic Sea countries. On the other hand, the EU milk quota system will effectively hinder any large scale expansion of the milk production.
In figure 13 the total milk production is shown.


Source: FAO statistics and Basan members.
Figure 13: Total milk production
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5.3. Introduction to the Baltic Sea regions represented in Basan

In the individual country reports an extensive description of each of the 9 countries represented in the Basan network is given.

In the following very short summaries of these reports are given.
5.3.1. Denmark

Denmark is an important food producer with a large export of processed food to the whole World, but Denmark is no longer as dependent on agriculture and agro-industries as it was only 50 years ago, and Danish farmers do not have the same political influence as they used to have. However, Danish agricultural and food research is still considerable with an agricultural university with international standard and large research centres.

Denmark has 2,7 million ha of agricultural land. The structural changes have been considerable in recent years. In 1995 there were 29.000 full time farmers. This figure is today 21.000, and the forecast is that the number of full time farmers will be further reduced to approximately 13.000 by the year 2015. The average size of the “full time farms” has on the other hand increased from 87 ha in 2001 to approximately 100 ha in 2003, and it is predicted that the size will have increased to 161 ha by 2015. (Source: Jordbrugsøkonomisk Institut, 2003).

The main crops in Denmark are cereals, rapeseed and sugar beet making up for more than 80 % of total plant production (excl. Grass). The cereal grain production accounts for 79 % of the total production. However the value added through processing is limited to a few product groups such as dairy products, meat, poultry and pork, the price of which is determined by the World market.

This specialisation and a high export level make Danish agriculture vulnerable to factors outside the control of Denmark. On the other hand the specialisation on a few product groups have made the Danish farmers efficient and competitive.

Denmark has 5 potato starch factories and 4 vegetable oil mills.
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5.3.2. Germany

Mecklenburg-Vorpommern
Mecklenburg-Vorpommern is part of the Baltic Sea regions.
Agriculture is important for Mecklenburg-Vorpommern. It constitutes 3,8 % of GDP, and the food exports constitutes almost 40 % of the total export from the area.

Mecklenburg-Vorpommern has approximately 1 million ha of agricultural land, of which 4,5 % is used for non-food production, mainly oilseed for biodiesel production. It is the largest rapeseed producer in Germany with a production in 2001 of 850.000 tons. However, there is no central oil-mill in the region, but a number of small farm scale units and one larger decentralised plant with a crushing capacity of 5 tons seed per day.


In Mecklenburg-Vorpommern only 20 % of the farmers own their own land. The majority, 80 %, of the farmers, live on rented land. Average farm size is rather large – 320 ha.

When local authorities expropriate privately owned farmland for public purposes, city expansion, airports etc., they give in exchange the involved farmers new land from the pool of agricultural land rented to other farmers. This practise is naturally disturbing any long term planning by the farmers on rented land, and therefore there is a tendency amongst those farmers only to plan on a very short-term basis.

Most farmers have for the above reasons no incentives to invest in e.g. production plants or any other activities that are not directly related to their core business. To this comes that banks only take land assets into consideration, when farmers apply for loans.

The farmers in Mecklenburg-Vorpommern have little interest in investments in non-core activities, and they seem also to be very reluctant to be involved in contract farming.

A considerable amount of land is so-called environmentally sensitive areas, for example 200.000 ha of wetland is only used for grassing. These areas are heavily subsidised.
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5.3.3. Latvia

The agricultural sector is traditionally the backbone of Latvia. However, the share of agriculture of the total GDP is declining. It 1995 it was 8,9 % of DP, while i the year 2001 it has been reduced to only 2,7 %, and the tendency is towards further reduction. The average size of agricultural farms (101.000) is approximately 24 ha, while the household plots (151.000) have a size of 8 ha. The income level in agriculture is low – 75 % of country average. A major part of the agricultural production is fragmented and the size of farms too small for an efficient production.

Latvia has one main advantage namely the geographic location. Latvia is close to large markets. The infrastructure is good, and there is easy access to railroads, airports and ports. However the Latvian food producers have many unsolved problems of which most are historically based, and there are many barriers for potential new companies.

The domestic market is not yet sufficiently well organised and regulated. Furthermore the domestic food industry is up against import of cheap- subsidised – food from western countries.

The crisis in the Russian market for fish and meat in 1998 resulted in problems for many Latvian producers, who had Russia as their main market.

Latvian agro-food industry is gradually developing, as well as the whole country. Latvian farmers have been very successful in applying for EU SAPARD programme money, which has improved the general situation in the agro-food sector. The positive results – almost complete utilised SAPARD money for the period 2000-2003 – have proved the good will and high working capability of the representatives of Latvian agro-food sector. The SAPARD case was a good school for the opportunities of the coming Structural Funds, and it is clear that the Latvian agro-food sector is ready for the competition on the European market in the future.
However, currently there are many problems that have to be overcome.
A part of Latvian food companies have old-fashioned machinery, and it is generally realised that a modernisation is badly needed. It is however not easy for most companies to find the necessary investment money. Some improvements are expected such as increased governmental support. Currently there are few national funds, however in the autumn of this year the Latvian Venture Capital association was founded.

As Latvia for more than a generation has been oriented towards Eastern European countries, where Russian is the dominating language, the limited international language skills (English, German) are an obstacle for international co-operation for the middle and older generation of businessmen, especially those coming from the rural areas. However this fact depends on the management of the companies. The big food enterprises, located in Riga and its surroundings, have all the necessary skills and preconditions and experience for international co-operation.

There are a number of entrepreneurs among the Latvian farmers, and those are willing to take high risks. Some have started alternative businesses such as ostrich production, onion growing, strawberries etc.

Latvia has a few private owned agro-industries, e.g. a potato starch factory and 3 sugar factories.
A new concept for R&D has been developed: It implies a strengthening of research in universities, a renewal and upgrading of research staff and better financing and development of international collaboration.
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5.3.4. Estonia

Like Latvia, Estonia has an ideal location for creation of transportation links and distribution chains for goods and services for companies in Europe and the Eastern part of the World. And the infrastructure is well developed.

One third of the population lives in rural areas. The importance of agriculture, measured as percentage of gross national product, is however declining, and is today as low as 3,4 % of GDP. In 2001 there were 61.000 private farms in Estonia with an average size of 21 ha.
The domestic market for agricultural products is relatively small, and the largest foreign market, the Russian market, is very unstable. The market situation may change drastically, when Estonia joins the EU. This will however require certain quality standards that might not be met by all Estonian food companies.

Investment funds for value added productions do exist; these funds have however not yet considered investment in high added value agro-industries. One problem is that the low cost of land makes it difficult for agro-industrial entrepreneurs to give enough security for loans.

The entrepreneurial spirit is in general low. Financial support schemes for entrepreneurial farmers and agro-industries do exist. It is however rather time consuming and complicated to make an application and to fill in the forms. The applicant most often needs help for that, but as there is no public support, he has to rely on consultants, who expect to be paid for their work. And as the entrepreneur seldom has got money for that, this is often one of the main barriers for new activities.

The production of rape-seed has increased during recent years, and a new oilseed processing plant has been erected. It has a capacity of 60.000 tonnes per year (of seed).

Traditionally Estonia is a flax producing country growing flax on more than 40 000 ha at the beginning of the 20th century. Today this area has dropped to 80 ha. One of the largest flax factories in Europe (Parnu Linen Factory) is situated in Estonia. It produces linen yarn and fabric mainly from imported flax fibres. A new flax factory is under construction.
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5.3.5. Poland

Poland has over 38 million inhabitants of which 38% live in rural areas and 29% work in the agricultural sector. There are 1.96 million individual farms in Poland with the average of 8,3 ha. Total acreage of agricultural land reaches 16,9 million ha but only 11,5% of this amount have soils classified as very good and good, 54,4 % have soils of medium class and as much as 34,1% -poor and very poor.
Poland is the only country in which the private sector withstand during the communist era. At that time 80% of agricultural land was in private hands. According to Agricultural Census 2002 the private sector now constitutes 93,1% of agricultural land. The problem is still the structure of polish agriculture. We have 26,5% of farms with 1-2 ha a acreage, 32,2 % of farms 2-5 ha, 21,9% in group of 5-10 ha, 9,3% in group of 10-15 ha and only 10,1% bigger than 15ha.

Most small farms use traditional methods of production, with low level of fertiliser and pesticide application rates. About 60% of farms produce only for self-supplying, giving nothing to the market. But there is also large number of high- productive farms, using modern methods of production, well equipped and able to withstand the competition with EU agriculture.

Polish agriculture is an important producer of several products of plant, orchard and animal origin. In such products as raspberries, currants, onions, cabbages, cauliflower, strawberries and apples Poland has a leading position among European countries. Because of the domination of light soils polish agriculture is one of the biggest producers of potato and rye in the world.

Pretty strong is also the milk production sector in which there is important share of big European companies. During the last decade there have been important progress of milk quality and milk yield per cow in specialised farms, however statistics for all country are not so optimistic because of large amount of small farms with 1-2 cows.

To stimulate changes and modernisation of agriculture there are several programs of preferential crediting of our farmers as well as financial programs of EU. The problem is lack of free money in farms, which causes difficulties to fully accommodate these possibilities.

The most urgent is to invest in local industry processing agricultural goods, to stimulate local initiatives, improve the level of education of farmers and their families and to create new jobs for people getting out of farming and agricultural production.
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5.3.6. Sweden

Sweden covers a large area of land. With its only 10 million inhabitants, of which a considerable number is concentrated in large urban areas like the Stockholm area and the Øresund region, there are many thinly populated regions. Some of the regions have natural resources like minerals and timber, and in these regions large industries have been established on the basis of the local raw-materials. However the majority of remote regions have to base their income on agriculture and forestry, and Sweden has for some years experienced an exodus of people from remote regions to the growth centres.
These regions constitute a huge challenge. Sweden has therefore for many years put much emphasis on the development of all Swedish regions, and a number of growth centres throughout Sweden have been created. Many of the growth centres are centred around universities and, in recent years, science parks. This seems to have been a successful endeavour, as the regions with universities and science parks, even in remote parts, seem to flourish and be able to attract new companies in technological growth areas such as IT and biotechnology. But the development in the agro-industrial sector is much more modest.

In Sweden private shareholders will normally not invest in any agro-industrial projects, if the raw material supply is dependent on subventions. It is too risky to rely on politically determined raw-material prices. The subvention may be changed at any time.

The Swedish agro-industry and agro-industrial knowledge and financing capacity have been very much centralised in the Stockholm region, which may create problems for more remote farmer groups and agro-industries.
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5.3.7. Finland

Like Sweden Finland has a long coastline, and a major part of the rural regions in Finland are situated close to the Baltic Sea and the Bothnia Bay
Finland is a model country in European research policy benchmarking. It is in international studies ranked as the top country in the World for technological co-operation between companies and universities, and in the development and application of technology. The volume of R&D has doubled every ten years.

Most of the money is spent on industrial research, mainly biotechnology and information technology. The public funding of food and agro-industrial research is modest compared with the IT and biotech industries. However, a few large food companies spend a considerable amount of money in functional food research, and Finland is a leading country and in the World concerning functional foods.

The Finnish farmers are in general well educated, they have good international contacts, many speak English and they have access to the Internet. But they are seldom aware of the new possibilities constantly arising from new research and development.

Large companies dominate Finland, and often they are sceptical towards projects and new productions that have not been developed in their own R&D unit.

Many SME’s, however, are very open to new ideas, they may however not always have the right expertise to develop these ideas. It is thus seldom to find agro-industrial companies with both entrepreneurial spirit and the expertise to explore new ideas.

The incubators and science parks around the universities are very useful in transferring know-how from science to practise.

76.000 farms were registered in 2002, of which half has more than 2o ha of land. The most common crops are cereals and grass (83 % of cultivated land). Oilseeds are produced on approximately 74.000 ha, and about 70.000 tons of seeds are processed for food oils.

Barley, potatoes and wheat are used for production of starch. In 2002 about 34.000 tons of barley, 113.000 tons of potatoes and 80.000 tons of wheat were processed into starch. The major part of the starch is used in the paper industry.

The interest for alternative crops is increasing. Especially the production of caraway has been successful, and caraway is now grown on 7.000 ha. Caraway is used as a spice, and most is exported. Some Finnish farmers have created co-operatives and set up small production plants for production of commodities from berries, herbs, vegetables etc.

In general Finland is a forest country and many Finnish farmers rely on forest production.
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5.3.8. Lithuania

Lithuania has a favourable geographic location. Two transport corridors of European importance run through Lithuania. North-South railways and roads connecting Scandinavia with Central Europe, and East-West routes linking the huge Eastern markets wit the rest of Europe.

Agriculture is important. The agricultural sector contributes to the GDP with a share of 10 %, and the number of jobs in the agricultural sector constitutes 21 % of total employment (1998). The rural population in total constitutes 32 % of the total population. Until a few years ago there was, as in the other Baltic Sea regions, a migration of people from rural to urban areas. This tendency has however now changed, so that the population in the rural areas is actually increasing.

Lithuania has a considerable amount of abandoned land (360 000 ha) that might be used for afforestation.

Currently three different types of farms characterise Lithuania’s farming structure:
  • Agricultural companies
  • Family farms
  • Household plots

Agricultural companies are large-scale corporate type enterprises created as a result of the transformation of state and collective farms. In addition to primary production they are involved in agro-processing and trading activities. By 1998, there were almost 1500 agricultural companies with an average of 340 ha.

There are approximately 200 000 family farms with an average size of about 7 ha.
The household plots have an average size of 2,2 ha. They are often operated by shareholders of agricultural companies or by rural inhabitants with additional income sources (e.g. job in a factory).
All in all there are 327 000 household plots, and they account for a significant share of the income generated in rural areas.

In general the productivity of Lithuanian agriculture is low compared with the neighbouring countries, the quality is often not satisfactory, and the production is rather fragmented. Modernisation of farming equipment is badly needed.

Also the Lithuanian food industry needs modernisation, and the quality must be improved in order to be able to meet the quality standards of the EU Commission.

The milk and meat sectors are dominating the food production. Currently Lithuania is a net importer of meat.
The grain production area constitutes about 46 % of the total arable land. There are 47 grain processing companies. Rape-seed is grown on 84 000 ha.. There are two oil processing plants with a total capacity of 30 000 tonnes of oil pr year.

Flax is an old domestic crop in Lithuania. Production can not satisfy demand. There are 9 flax treatment enterprises with a total capacity of 50 000 tonnes.

Lithuania produces potato starch in limited amounts. The starch processing capacity is 10.000 tons/year, but the actual production is only 2.400 tons of dried starch/year.

The interest in producing speciality crops is growing. Caraway is produced on 4.800 ha (2002), while valerian, camomile and calendula occupy 25-350 ha. They are used in the pharmaceutical and cosmetic industries.
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5.3.9. The Baltic Sea Islands

There are 7 relatively large islands in the Baltic Sea that share many common problems such as: Remote location and thus far from larger markets, high transport costs for people and goods, social desertification, lack of commercial activities, limited public service etc. etc. Each of these factors is in itself a barrier for new commercial activities, and when combined they really present a serious obstacle.

The 9 islands are: Lolland/Falster and Bornholm (Denmark), Gotland and Øland (Sweden), Aalandsøerne (Finland), Hiuumaa and Saaremaa (Estonia) and Rügen (Germany)

Lolland/Falster and Bornholm, Denmark
Geographically three Danish islands are part of the Baltic Sea area. Lolland and Falster are connected to each other via a tunnel, and also connected to Sealand by bridges, while Bornholm is situated in the middle of the Baltic Sea, with ferry connections to the Danish mainland, Sweden and Poland.

870 farmers with 34.000 ha of agricultural land are situated on Bornholm. The average farm size is 45 ha. The number of farmers is declining (appr. 3 % per year). 95 % of the agricultural products are sold unprocessed from the region.

Lolland-Falster has some of the most fertile agricultural land in Denmark, and the farmers are generally well off.

Elsewhere in this report is discussed the importance of access to knowledge for the development of a region. Both Danish regions have local agro-industrial research centres – Green centre on Lolland/Falster and Bioraf Denmark Foundation, but no universities or university level education.

Green Centre and the Lolland/Falster counties a few years ago established an alliance with a university -Roskilde Universitetscenter. The idea was to offer young students from the islands to carry out their first year study on the premises of Green centre. Classrooms
were established and a study plan was made, but there was no interest among the local students. They found it more attractive to study in a big city with an academic environment.

Green centre has had some success in the creation of local micro-clusters of farmers and small processing industries. (cherry and honey production etc.). However the creation of new jobs has been modest.

A large number of innovation tools and incentives for entrepreneurs are available on Bornholm and Lolland/falster . Thus the Danish state and local authorities have established a good public environment for a dynamic business climate, although so far with little success concerning establishment of new companies and new jobs. Both regions have an unemployment rate higher than the country average.

A number of SME’s producing high quality food are situated on Bornholm. For example a cheese factory that is renounced for the quality of its blue cheese and other companies exporting to countries all over the World.

Gotland, Sweden
Gotland is the largest island in the Baltic Sea. The number of inhabitants is 58.000 .The structure of the commercial activities vary from the rest of Sweden. Foremost the number of employees in the forest and agricultural sector is more than twice as large as in the rest of Sweden. Between 80 and 90 % of the agricultural and forestry production is exported, most of it in a non-processed from.

Until recently a large sugar mill was situated on Gotland. This mill closed a few years ago and created considerable problems for the then 650 sugar-beet growers.

The industry is dominated by a number of small food industries and one large high tech (electronics) factory (L.M.Ericsson, Visby). The factory was placed on the island as a result of regional policy considerations.

Gotland has never been through an industrialisation process as other parts of Sweden ,and apart from a few large industries established with considerable public financial support, the industries are very small. 68 % of the private employees on Gotland are employed in companies with less than 19 workers. The average figure for Sweden as a whole is 43 %. All in all, the majority of the workforce, almost 40 %, are employed in the public sector. A few governmental institutions (e.g. Svensk Tipstjeneste) have been placed on Gotland as part of a political strategy to place part of the governmental institutions in the Swedish regions.

The county of Gotland has recently published a report with forecasts for the future development of Gotland based on the following two assumptions.
Scenario 1. The last ten years development will continue
Scenario 2. The trend from the last two year will prevail

In the first scenario the population will slowly increase to 61 000 inhabitants in the year 2010, and the number of employed will be reduced from 25.000 today to under 20.000 in year 2010. In the second scenario are the figures 60.000 and 29.000 respectively. In other words the future development seems not to change the situation in any positive direction. It will presumably be difficult to attract highly skilled workers to the island as the available income pr inhabitant is considerably lower than in the rest of Sweden.

In 1987 a university (Högskolan på Gotland) was established. To begin with, the students were recruited mainly from the island itself, today, however, they come from all over Sweden. The university is small with 1200 students, however it is independent and it has proved that it can compete on equal terms with other universities in Sweden. There are four study lines: Humaniora, IT/economy, engineering and ecology. The university is of significant importance for Gotland. It is the largest single working place on the island, and the university teachers have become an integrated part of the society attracting more academics to the island. In the long run it could become a catalyst for a dynamic development of the region. In its marketing activities Högskolan uses its remote position as an asset. It stresses the advantages of a small intimate student environment and the many recreation facilities on Gotland. (Tage Petersen, rapport 20, Bornholms Forskningscenter, juni 2000.)

Öland,Sweden
Öland is the second largest Swedish island. It has 21.000 inhabitants, and the main activities are agriculture, fisheries and tourism as on the other islands.

Like the other islands Öland has problems with lack of industrial activities and depopulation. The island has however one advantage over the other islands. It is connected with the Swedish mainland via a bridge to Kalmar, which reduces transport costs.

Aalandsøerne, Finland
Aalandsøerne consists of 6100 islands, and the number of inhabitants is 25.000. The Åland islands are part of Finland, but they have an autonomous status and for example their own government and parliament. Also Åland has its own representative in the Nordic Council.

The main activities are in the transport sector and public services. Income from agriculture, fisheries and forestry makes up for approximately 4 % of the gross domestic product. One of the major productions is onions that cover almost 25 % of the total market in Finland. Other agricultural and horticultural products are potatoes, sugar beets, apples and cucumbers.

As for the other islands one of the barriers for new productions are the high transportation costs that often hinders new activities. On the islands is put very much emphasis on activities to help establishing companies that can process the raw-materials produced on the islands in order to retain the added value and to create working places that are crucial for the economical growth.

The islands have one outstanding success story, namely A/B Chips that is the biggest industry on the islands with an annual turnover of 130 million €. It produces potato products – mainly potato chips, and A/B Chips has now subsidiaries in the other Nordic countries, and the products are exported all over Europe. The success is mainly due to one very engaged person. An entrepreneur, who could see the prospects of a potato factory on the island, but who had no knowledge about potato processing and chip production. However, he succeeded in finding and persuading a partner, who had the necessary technical knowledge, to participate in the project, and not least important, he found the investors, he needed. Also the government of the Åland islands is a shareholder.
The Åland islands have its own environmental and investment programmes and an agricultural research institute that does research on primary production and storage.

Rügen, Germany
Rügen is with an area of 973 km 2 the largest island in Germany.It is connected to the mainland via a dam and a bridge. The island has problems similar to the problems on the other Baltic Sea islands. The population has thus declined from 85.000 in 1990 to 75.000 in year 2001. The unemployment rate is high – 19 % in 2000.

Main commercial activities are tourism, agriculture and fisheries. Tourism is of increasing importance, which raises some concern. 40 % of all jobs are today in the tourist business, which might lead to an unwanted “monostructure”.

There are 236 farms on Rugen with a total agricultural area of 60.000 ha.The soil is fertile, and the main crops are sugar beets, oat, rye and potatoes. Private farmers own half of the land, while the other half is owned by state and rented by the farmers. Most of the agricultural products are “exported” and processed elsewhere. The average farm size is large – almost 300 ha, which facilitates the introduction of new farm technologies like large harvest machines, early warning systems, precision farming etc.

The authorities on Rügen have recently together with the population established a regional development concept (or strategy) with a time horizon of 10 years. (Regionales Entwicklungskonzept, Rugen). The work has resulted in many suggestions on concrete activities to help solving the many problems of economic, socio-economic and environmental character.

Saaremaa, Estonia
Saarema is a relatively large island with an area of 2.922 km2, , however the population is only 40.000, and the average age is lower than in Estonia as a whole. Saaremaa has an airport and good ferry connections to the mainland.
About 40 % of the area is covered with forests, and agriculture plays an important role for the overall economy. 75 % of agricultural land is still state owned.

Tourism plays an important role is on the other Baltic Sea islands.
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6. Factors of significance for the dynamics of rural

Although the rural regions in the Baltic Sea area have much in common they differ very much in economic and social development, which presumably is due to the fact that the development of a given region is determined by a multitude of parameters (factors). Some of these are nature given and static, some are regulated by the EU Commission and some by the national state.

In reality, local authorities only have influence on few of the determining factors, and the key to success for a given region is to make optimal use of the positive non-changeable (by the local authorities) factors and to eliminate or reduce the effect of the negative factors through introduction of carefully selected region-specific incentives.

Parameters of significance
Nature given factors
  • Climate
  • Geographic location
  • Soil fertility
  • Natural water resources
  • Landscape

Institutional framework
  • Common agricultural Policy and environmental policy
  • Infrastructure
  • Incentives
    • Fiscal incentives
    • Financial incentives
    • Innovation incentives

Variable factors (parameters)
  • R&D and technological development
  • Farm structures
  • Consumer preferences – market structure
  • Change in relative prices
  • Availability and cost of capital
  • Availability and cost of labour
  • Entrepreneurship

Intangible factors
  • Business climate
  • Quality of life
  • Access to medical care
  • School system
  • Cost of living
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6.1. Nature given factors
6.1.1. Climate

The Baltic Sea regions cover a vast area, and some of the regions are very remote. The climate varies considerably; from arctic climate in the north to temperate climate in the south. As illustration: The growth period (number of days with an average temperature above +5 C) varies within Sweden alone from 160 days in Ôvre Norrlands coast areas to 230 days in Skåne in the south of Sweden. The climate puts natural limitations on the variety of crops that can be grown.
(Energiskog, Statens Energiverk, 1985.9)

The circumpolar areas hold about 50 % of the land in Sweden and Finland, but only approximately 15 % of the population and a very limited area of agricultural land. The climate in these areas is severe and the weather unpredictable making farming difficult.

On the other hand agriculture in the Northern part of the Baltic Sea/Botnia Bay has a few advantages such as good light conditions and an extremely long ”daylight” during the summer period. Furthermore, plant diseases and pests are rare, and thus the need for pesticides is modest.

Farmers in Vesterbotten in Sweden have taken advantage of the fact that the occurrence of plant diseases is low to produce pathogen free seed potatoes, and farmers in Osterbotten in Finland have found that the cool climate is exceptionally well suited for fur production (page xx) .

The slow growth might favour the formation of secondary plant metabolites indicating that this climate might be suited for production of speciality crops containing biological active materials (e.g. molecular farming page xx). It is well known that e.g. the aromatic quality of fruits and berries from these areas is superior to those from warmer climates.

I n the other parts of the Baltic Sea area the weather is more ideal for agricultural production, and most of the common crops in Europe can be grown in these regions. (see pagexx)
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6.1.2. Geographic location

Many of the regions in the Baltic Sea area are far from big cities and markets, which often is one of the major barriers for economic performance in a given region (see page xx).There thus seems to be a fairly straightforward relationship between economic performance and accessibility to transport infrastructure – motorways, railways and airports.

However the new information and communication technologies can make a decisive contribution to reducing the relative disadvantage arising from the physical distance from the important markets and more populated areas. ( examples: The Baltic States, Bornholm,page x.x and x).

Both Sweden and Finland have shown that the establishment of research centres and universities in remote regions can have a considerable positive effect on the economic development of these regions (Gotland page. x, Umeå, page y and Oulu page z) .
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6.2. Institutional Framework
6.2.1. EU Framework

Half of the countries represented in Basan are members of The European Union, and the other half will most likely join the EU within a short period of time. It is therefore relevant to analyse the potential impact of the EU policies on the rural development in the Baltic Sea area.

The Common Agricultural Policy
The Agricultural Council is currently in the process of a revision of the Common Agricultural Policy. The new priority given to rural policy (the second pillar of CAP) means giving higher priority to the demands of citizens and society for market orientation with specific focus on food safety and quality.

The orientation of the agricultural production towards higher quality standards as demanded by consumers that are more and more concerned with animal welfare, environmental standards etc. will force farmers and rural based industries in the Baltic Sea area to adapt their activities. This may include new products of increased value added (page xx), more efficient techniques and also diversification of activities. This adaptation may lead to a further specialisation of rural economies. In certain “marginal regions” in the Baltic Sea region it might entail the risk of abandoning economic activities if no action is taken. On page 20 recommendations for actions to be initiated in such regions are given.

The actual non-food set-aside system allowing for growing of non-food crops on the set- aside land is an important incentive for non-food companies and could become a decisive element in the future establishment of new productions based on energy crops and other non-food crops in the Baltic Sea regions. As mentioned, a considerable amount of abandoned land is available. However the set aside scheme may be revised. A 10 % rate of long-term environmental set-aside in which e.g. energy crops can not be grown has been proposed. This would be a serious drawback for the prospects for new activities.

Innovation activities
With its initiative “Innovation in a knowledge driven economy” the Commission laid down the framework for a series of actions and put forward recommendations to Member States. These initiatives are general and no distinction is made between the individual sectors of industry. These general conditions for innovation are naturally also of significance for the agricultural and food sectors.

EU Structural Funds
It is expected that major changes of the Structural Funds will come into effect after 2006. The impact on the rural regions in the Baltic Sea area will be important for the development of the area.

The European Social Fund(one of the three Structural Funds) supports and complements the efforts of member states to combat unemployment, develop labour markets and human resources. The Fund offers educational opportunities to the unemployed.

These Funds are of great significance for regional development. They are, however, complementary and require co-operation with governments and regional authorities.

R&D policy
On the research level the new 6th Framework Programme on Research, Technological Development and Demonstration 2000-2006 will give higher priority to cross-sectoral issues such as food safety research. Importance is also given to networking and formation of a European research area.

EU directives
The Council regulative 2309/ on Deliberate release to environment of genetically modified organisms could have great influence on the future of molecular farming.

Impact of global environmental agreements.
The EU is part to the United Nations Framework Convention on Climate Change and it ratified the Kyoto Protocol on 31 may 2002. The EU committed itself to reduce emission of greenhouse gases by 8 % in the period of 2008-2012 relative to that of 1990.

One major contribution to the achievement of this goal would be to increase the use of both solid and liquid biofuels as substitutes for fossil fuels. In the Baltic Sea area an enormous reserve of land that might be used to produce large amounts of biomass for energy production. (see pages x and y) is available.

The EU is also contracting party to the United Nations convention on Biological diversity (CBD) and adopted in 1998 a EU biodiversity strategy with a specific action plan on agriculture with the objective of halting biodiversity decline by 2010.

This strategy involves a.o. a shift towards production of non-traditional crops (food and non-food), which also is one of the recommendations set up for the establishment of new activities in the Baltic Sea areas (page xx)
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6.2.2. Infrastructure
When investors are considering suitable sites for establishment of new productions, they will naturally take the infrastructure in a given region into consideration. Access to railroads, motorways, and airports are important, but also access to cheap energy (electricity and heat) and process water may play an important role. (see page x).
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6.2.3. Innovation incentives- best practise

The experience from our work in the Basan network have revealed that although incentives may share similar aims and target similar activities, comparing separate measures, which are introduced in line with regional priorities has turned out to be an extremely difficult task.

Identifying one “best practise” scheme, applicable for all Baltic Sea regions, seems to be hard to achieve. The differences between the Baltic Sea regions are simply too large. An incentive that works well in one region may prove impossible or difficult to implement in another. It is possible, however, to identify some incentives applicable to all regions., especially fiscal and financial incentives. (page xx)

Tax incentives may be used to stimulate increased expenditure across a wide range of innovation activities – allowing companies to decide their priorities, whilst financial incentives are more likely to be concentrated on specific government identified priorities.

Tax incentives
It is common praxis in most of the Baltic Countries to allow for a tax reduction on R&D expenditure. R&D is however only one link in the innovation chain, and tax incentive schemes for establishing of new activities would presumably be much more effective, if all links in the innovation chain are included.

Especially for less favoured regions with no local access to know how (no local research centres or universities) a tax incentive on technology transfer (including tax credits on acquisition of patents) and acquisition of new technology (e.g. information technology) could be a very valuable incentive.

Equally important for those regions may be tax incentives on co-operation between companies and universities and research centres. Expenditures that arise in projects due to collaboration with research centres outside the region should be partially or totally reducible, including grants for university students.

Providing tax incentives for patent applications and protection may seem relatively insignificant compared to the total development cost for a given new process or product. On the other hand it is important that small companies have incentives to protect their ideas.

One main barrier for technological development in many of the regions seems to be the lack of skilled personnel. Therefore training of key personnel can be vital for the survival of new companies. Tax credit schemes that support both the training of personnel and allow for income tax reduction for foreign specialists with research experience are therefore important. Such schemes already exist in e.g. Sweden and Denmark.

A tax incentive tool used in some countries (e.g. USA; Illinois Institute for Rural Affairs, Rural Research Report vol.8, issue 9, 1997) is the designation of specific areas as enterprise or empowerment zones. Such zones can specifically encourage investment and create jobs in less favoured areas. The most frequently offered incentives in enterprise zones are income tax credits, property tax rebates and sales tax rebates. In the enterprise zones the community should also play a role in helping to improve the social and community services within the area.

Establishment of enterprise zones in the Baltic Sea area may be the incentive needed for growth also in the most remote and less favoured regions.

A tax exemption or –reduction on biofuels could be very important instrument in boosting the activities in the remote Baltic Sea regions (see page xx). Most of these regions produce considerable quantities of biomass ( lignocellulosic) and they have the capacity to increase production of cereals and oilcrops.

Such raw-materials may be used for production of liquid biofuels such as bioethanol and biodiesel. With the current fossil oil prices and a tax reduction on biofuels, these could become highly competitive, and the potential market is very large. Biofuel production units could thus become the “locomotives” that can trigger a dynamic development in rural areas lagging behind.

Likewise a tax reduction for biodegradable packaging materials that most often are made from biological raw materials (page xx), could be a decisive incentive for establishment of productions in rural areas with easy access to good-quality raw materials.

Financial incentives
Financial incentives concerning new business activities are available in most countries in the form of grants, subsidies, low interest loans etc.

Financial innovation incentives may be more popular than tax incentives by governments and regional authorities, as they are easier to control – in term of expenditure – and may be focused on sectors the authorities consider to be priority sectors.

It seems, however, that the authorities and venture companies in the Baltic Sea region do not put agriculture and food and agro-industrial innovation projects high on their priority list. It seems much easier to achieve funds for the biotech and the information technology area (and in some regions tourism), as these in all Baltic countries are perceived as high growth areas.

Denmark may be used as an example: The Danish public venture capital fund – Vækstfonden – has recently (June 2003) published a forecast for the necessary venture capital investment in Denmark until the year 2008. It is predicted that while e.g. the investment in new activities concerning biotechnology and health could constitute approximately 4 billion Dkr. (600 million €) the investment in biotech/food might amount to only 0,5 billion Dkr. ( 70 million €). The investment in IT will according to the report constitute 3 billion Dkr.

Only one Venture Company in Denmark invests in food- and agro-industries, namely DANISCO venture.

The modest interest for investing in agro-industries is not only a Danish problem The discussions at the regional meetings have indicated that a general lack of access to finance is a major constraint for the establishment of agro-industrial SME’s (both food and non-food). Especially seed capital and start up capital are needed.

Direct equity investment, as is used in the USA with great success (page xx) would also be very valuable.

Furthermore indirect financial support such as loans and equity guarantees have proved to be useful instruments, however again it seems difficult to obtain such support in the agro-industrial area. (page xx).
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6.3. Variable factors
6.3.1. R&D and technological development

The technological development is running fast World-wide, also in the agricultural and agro-industrial world, and it is becoming more and more important to be up to date with the newest developments.

How do the Baltic Sea entrepreneurs, farmers and agro-industries get access to the Worlds flow of new agricultural technology?

Know how transfer via private companies
Often discussion about technical change in agriculture and agro-industries is focused on public research and extension services. However a number of studies have shown that private input companies (both local companies and equipment suppliers) can also be important channels for the introduction of technology in the agricultural sector.(page xx).

Research centres and universities
The major supply of knowledge on new technologies will come from local research centres and universities, and numerous studies have shown that access to knowledge centres is of considerable importance for the dynamics of a region ( page xx). The knowledge centres do not only create new knowledge, they also have the capacity to absorb new knowledge from other parts of the World and in co-operation with local entrepreneurs make use of this knowledge to create new business opportunities.

Networking
Unfortunately many of the remote regions of the Baltic Sea area are situated far from knowledge centres, and lack of access to new knowledge is one of the major obstacles for a dynamic development.

Networks – also involving investors, professional intermediates and others – are needed to establish the complex connections by which knowledge is efficiently transferred from the rest of the World to the Baltic Sea area and from research to industry.

It might thus be feasible to establish a Baltic Sea scout unit (page xx) and a Baltic Sea virtual R& D Centre (page xx) eventually with a joint secretariat.

The scout unit idea has already been tested with some success within the Basan network, as we succeeded in establishing business connection between organisations in other parts of Europe and in the Baltic Sea area. (page xx)
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6.3.2. Farm structure

The prevailing farm structure in a given region has impact on the potentials for new activities. Farms in the Baltic Sea area vary considerably both in size and in the level of technological development. In the Baltic Sea area both highly mechanised farms and farms with no access to modern equipment exist. And some farms, e.g. in Germany and Poland are very large while other farms, e.g. in the Baltic countries and in Poland, are extremely small.(see country reports and chapter 5). Thus the farm size varies from up to 1000 ha to less than 2 ha. (Country reports) in the Baltic Sea regions.

It is thus obvious that it is not possible to establish one common innovation policy for all rural areas. We have come to the conclusion that it is necessary to distinguish between at least two dimensions in future rural innovation and development activities: (chapter 10).
  • Agri-production: A rational and sustainable agri-production and agro-industrial production that is viable with a minimum of subvention.
  • Agri-culture: A multifaceted very diversified small-scale production of region- specific products.<(ul>

    The two dimensions are different in nature and they have different incentive requirements and innovation demands.(page x)
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6.3.3. Market structures- consumer preferences

Many of the Baltic Sea farmers have for many years been relying on local markets, and their survival has been dependant on these markets. However the ongoing globalisation of the food supply system may affect these markets considerably with increasing competition from imported food products.(see country reports)

While the more prosperous agricultural areas are likely to respond positively to increasing market orientation and international competition, peripheral rural areas (like many of the Baltic Sea areas) continue to face problems like unfavourable farm structures, low income, an ageing population, out-migration and relative isolation from major centres of economic activity, unless proper actions are taken. High levels of subsidy and traditional rural development programmes will presumably not be enough to change the stagnation or even negative development (see page x). New actions made to measure the problems in the individual regions must be taken.

It is our suggestion that such actions should follow two directions:
  • Encourage the development of geographical dispersed clusters of small- scale local “agri-culture” oriented value added productions and services based on local traditions.(page x). Central know how accumulation and marketing of the products internationally
  • Encourage the establishment of large “agri-production” oriented “agro-industrial “locomotives with a positive impact on the entire region.(page x)

Agri-culture oriented quality products and services.
Local value added production is normally associated with local input, local labour and local distributors. The size of the local market determines the production size, which may be a serious constraint to a dynamic development. Therefore the small-scale producers could benefit from the development of close synergy with each other; groups of producers would then be better able to develop their own networks, thus helping to bypass expensive intermediary and retain more of the economic benefit in the local community. The networks might set up a centralised marketing function, and, not least important, establish its own quality control unit or establish co-operation with an established and renowned quality control institute. The quality control part is becoming increasingly important considering the many food quality problems that Europe has been faced with during recent years. The EU Commission is constantly issuing new food quality regulations and standards, and it is becoming more and more difficult and costly for small SME’s to remain up to date and to respond to the new standards.

Agri-production
The local “locomotives” will obviously have to compete on an international market. In section x suggestions for potential “locomotive” productions particularly suited for the Baltic Sea area are given, while section x gives an overview over the many potentials for large scale food and non-food productions.

Consumer preferences
Roughly there might in the future be three main types of consumers (page x).
  • Naturalness oriented consumers – the agri-culture scenario
  • Health oriented consumers – the agro-industry scenario
  • “Tight spending” consumers – the agro-industry scenario
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6.3.4. Change in relative prices

The globalisation of the food supply system and the still larger and more dominating international retail chains will make competition very tough especially on standard food products.

However, there will also in the future be room for higher priced speciality foods. Some consumers regard factors such as naturalness and freshness or health promoting abilities to be so important that they are willing to pay a premium price for such products.

Non-food bio-based products will often have to compete with- sometimes cheaper - petro-derived products. However also in this sector a segment of customers are willing to pay a premium price for environmentally friendly products. (page x)
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6.3.5. Availability and cost of capital

The questionnaires and discussions with local stakeholders have clearly shown that one of the main bottlenecks in most regions is the lack of risk capital. A wide gulf seems to exist between the concerns of local entrepreneurs in the agro-industrial area and those of both public funding authorities and bank officials. (chapter 9).

Banks and investment companies seem to be very reluctant to invest in start-up of new agro-industrial companies, especially SME’s, as they perceive the area as a low-profit area with few chances for success.

Public funding schemes also for agro-industries do exist, however regional policy and schemes still appear to be oriented largely to the concern and needs of already existing (often large scale) companies. The establishment of new agro-based SME’s will therefore require the set-up of local public funding schemes specifically geared to invest in such companies
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6.3.6. Availability and cost of labour

Labour costs vary considerably between the Baltic Sea regions. Some regions have very cheap labour, which of course is an important incentive for establishing of new activities in those regions. On the other hand low labour costs are often accompanied by lack of expertise. Skill (and language) shortage constitutes a real barrier. Specifically there is often a lack of persons with expertise in communication, project management and basic business skills, however also lack of more general administrative and technological skills are often a problem..

Therefore not only workforce availability and cost of labour are of importance for new businesses, also the availability of facilities for workforce training is of great significance. In this context it is very important that the local authorities are aware of changes in labour demands by industrial firms and of specific demands from firms planning to establish new business activities.
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6.3.7. Entrepreneurship

A supportive infrastructure and economic incentives to provide the motivation to initiate new ventures are important factors, but certainly not enough to secure the creation of new activities and new jobs (page xx and page yy). An adequate pool of entrepreneurial oriented individuals must also be available.

Unfortunately, as the country reports unanimously show, the entrepreneurial spirit is very low in the rural regions in the Baltic Sea area. The lack of entrepreneurial spirit is perhaps the most severe barrier in the less dynamic regions.

There might be at least two ways to solve this serious problem.
    1) Establishment of regional training centres e.g. in connection with a “Baltic Sea virtual campus” (page xx) and
    2) Encourage entrepreneurs from other areas to set up activities in the regions.

According to Mueller and Thomas (Culture and entrepreneurial potential. Journal of Business Venturing: 16, 1, 51-75, January 2001) entrepreneurship might be taught. But some persons are predisposed for entrepreneurship, and their chances for success as entrepreneurs are considerably higher than persons without entrepreneurial values.

It is generally presumed to be relatively easier to find potential entrepreneurs and to set up training programmes in regions with access to universities and research centres than in regions lagging access to higher education centres. There are however exceptions, like the Finnish Fur producers and greenhouse producers in Osterbottnia (page xx) , who have built up the necessary expertise through study tours to other parts of Europe.
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6.4. Intangible factors

Often the remote regions can offer a number of intangible advantages such as: untouched nature, quality of life, low cost of living, low crime rate etc. etc., that might persuade entrepreneurs to establish new businesses in their region.

The valorisation of these rural amenities and the related employment opportunities has, according to Terluin (Rural regions in the EU, Exploring Differences in Economic Development, Netherlands Geographical Studies, NGS 289,2001) no clear effect on the economy of rural areas.
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7.Initiatives that will contribute to a more dynamic development in the Baltic Sea regions

The strategy suggested in chapter IV may constitute the basis for the following actions that in our view all will have a positive impact on the development of the rural regions around the Baltic Sea:
7.1. Joint activities

  • Establish a “Virtual Baltic Sea agro-industrial Campus”
  • Create “ Baltic Sea Bio-fuel region”
  • 7.1.1. Baltic Sea agro-industrial campus

    It would probably be of great benefit for the entrepreneurs in the Baltic Sea regions to have access to one entity, where they can have their ideas tested (both technology and market) and business plans controlled by experts, before they contact investment funds and banks.

    It is therefore suggested to establish a virtual agro-industrial campus“ including:
    • A technology observatory (scout function, chapter 8)
    • The “Baltic Sea Agro(bio)-industrial Research network”. Network of existing local Research and Development institutions (page 34),
    • A training centre for entrepreneurs (language skills, IT, “entrepreneurial spirit thinking” etc.),
    • A business and market study unit and

    the Baltic Campus will function as a focal point for the establishment of new SME’s in the Baltic Sea regions. Instead of spreading the activities in many different directions the Campus should have a visible profile and clear priorities and focus on specific directions of development. Potential Baltic Sea focus points might be: Bio-energy regions, C02 neutral regions, agro-food technology nuclei, biorefineries etc.

    The campus will through the technology observatory (page xx) ensure that all relevant know how compiled throughout the years and currently generated in EU and national research programmes will be available for the Baltic Sea entrepreneurs.

    The R&D centre network will be involved in the necessary know how transfer and if necessary adapt the production process or product to the conditions prevailing in the Baltic Sea area. The pilot plant facilities, available at the institutions that form part of the centre, will be used to optimise the process and to produce samples for market studies.

    The centre networks will together with the technology observatory follow the international scientific development closely and constantly look for new business opportunities for the SME’s in the Baltic Sea area. The network should seek to establish alliances with international institutions involved in development of new products or productions of interest for the Baltic Sea area

    The training centre will help ensure that local entrepreneurs have the necessary skills (including language skills) required for the start-up of new innovative companies. The centre might be established as a virtual centre involving a number of institutions that together have the necessary teaching facilities and experience in organising courses for entrepreneurs, and, not least important, also facilities for distant learning. The latter is of significance for the, hopefully many, potential entrepreneurs situated in remote regions.

    The business and market study unit will help select the best business opportunities and be involved in generating the necessary funds for the preparatory work and at a later stage start up of the company.
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    7.1.2. The Baltic Sea bio-fuel region

    According to the EU Commission the EU must in future rely much more on renewable energy resources, such as biomass, than is the case today (Page x). The World’s oil reserves, and especially the European reserves in the North Sea and Baltic Sea, are finite, photosynthesis is not.

    The Baltic Sea area with its vast amounts of forests and unused or extensively used agricultural land would be an obvious candidate to become the “biofuel region of Europe”.
    The biomass production potential is enormous and, due to low-cost land and in some areas low cost labour, the production costs are moderate compared to other parts of Europe.

    Biomass fuel clusters have already been created in Baltic Sea regions (page xx).
    It is however central for success that co-operation between the various clusters -production clusters, advisory clusters and research clusters- is established.

    This can be achieved in the Baltic Sea area by co-operation between existing local/regional/national clusters already formed. In the pellet sector the already started co-operation between local authorities, pellet industry and research organisations in Sweden (in the project SLUP) can be widened to include actors in all Baltic Sea countries.

    The existing pilot plants in the Baltic Sea area should be available for all actors in the area. Examples of such plants are:
    • A biodiesel plant in Poland
    • A bioethanol plant in Ornskoldsvik in Sweden
    • A solid biofuel plant - BCT- in Umeå Sweden

      Networking
      Networks involving regional authorities, companies, advisory institutions and research organisations must be established in the Baltic Sea area. Local networks in the region as e.g. “Biofuel region” (network in northern Sweden) can be enlarged to cower the whole Baltic Sea area.
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    7.2. Activities on regional level

    In chapter IV it was suggested that a regional strategy might include the following activities:
    • Create a vision for the future development of the region
    • Develop an entrepreneur package to attract foreign entrepreneurs/investors (agro-industry orientation).
    • Develop an incentive package for local entrepreneurs (agri-culture orientation).
    • Organise regional producer groups
    • Establish “Enterprise zones”

    In the following the “operational” content of each of these activities is discussed.
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    7.2.1. Vision

    It is vital that the regional population and local authorities have confidence in their own abilities to perform and to make use of those resources available, be they tangible or human. It is not so much the tangible resources themselves that matter for economic performance, but the way the region is able to exploit them.(page 39 and page 42 ).

    In this respect it is important for the local authorities to have a vision (and in a next step a strategy) for the future development of the region and for the local population to agree on this vision.(Examples: The regional development concept for Rugen (page x) and the “The agricultural Community Action Process” from Illinois, USA (page x )

    This vision/strategy will determine, which of the above-mentioned activities would be most appropriate. For example: If the vision is that the region should mainly focus on sustainability, landscape preservation, tourism etc. then perhaps it would not be a good idea to create an enterprise zone or to try to attract foreign “agro-industrial locomotives”.
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    7.2.2. Entrepreneur package

    In the effort to attract new companies (e.g. agro-industrial locomotives) or entrepreneurs to a given region an efficient instrument would be to offer individual “entrepreneur packages” or “relocation packages” including e.g. land at low cost, worker retraining, tax incentives, infrastructure improvement, low interest loans etc.

    However public incentives are not the main deciding factor, when a company considers establishing new production facilities. Also factors such as business climate, transportation, infrastructure, utilities, cost of labour, proximity to suppliers and customers, access to research and higher education facilities, quality of life etc. play a decisive role. Therefore also such information should also be included in the package.

    An entrepreneur package might offer:
    1. General practical information on issues such as
    • cost of labour
    • access to skilled and unskilled labour
    • cost of capital and access to venture capital
    • access to public funding (EU, governmental, regional)
    • cost of living (housing, food, medical care etc.etc.)

    2. Customised incentives concerning:
    • Loans, credits and subsidies for job creation
    • Tax abatements and tax credits for start up companies
    • Land at reduced cost
    • Access to customised workforce training

    The amenities offered by a specific rural area, such as : Landscapes of outstanding scenic beauty , settlements with a rich architectural history, regional national parks etc. should also be mentioned in the entrepreneur package.
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    7.2.3. Incentive package for local entrepreneurs

    Support to local enterprises and business initiatives in rural areas might be given as:
    • Incentives to investors (e.g. fiscal incentives)
    • Guaranties and securities for loans
    • Promotion of the countryside as an attractive place to invest in
    • Financial support and economic advise for business start ups (management, accountancy)
    • Loans, credits and subsidies for job creating business projects
    • Support for “self employment” in the form of very small loans and micro-loans.
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    7.2.4. Workforce training – access to research and higher education

    Not only workforce availability and cost of labour are of importance for new businesses, also the availability of facilities for workforce training is of great significance.
    7.2.5. Regional producer groups (micro-clusters; page xx)

    A regional producer group is aimed at offering local farmers a regional market for their produce as well as a regional identity and a source of individual stories of human interest to tell the consumer- one from each of the producers.

    The aim is to meet modern consumers expectations concerning quality and traceability (page xx). The marketing should be as transparent as possible and the demand for traceability should be met by labelling each package of meat, honey, jam, etc. with a label identifying the producer and describing the farm

    The products may be sold not only through retailers, but also via a mail order service as well as from an internet shop.

    The producer group should be affiliated to a regional research centre, and the group members should be offered training courses, cheap inputs of fertilisers, feed etc., access to new technology and so on. The regional research centre could be part of the “ Baltic Sea Campus” described below.

    (examples: Green Centre, page xx, Graig Farm Organics, page yy and The Orkney Marketing Scheme, page vv, Prophyta, Zostera Dämm ).
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    8. Technology observatory/scout function
    8.1. Projects financed by EU research programmes

    During the last ten – fifteen years the EU Commission has spent billions of EURO’s on research and development projects in the agro-industrial area, including both food and non-food projects.

    The Commission has come up with a number of useful initiatives to disseminate the results from these projects. Individual project catalogues have been issued, reports on individual problems and press releases have been published and project impact studies have been carried out. Also specific concerted actions on dissemination of results such as the BIOMAT, IENICA and FLAIR FLOW are very useful for those, who seek information in new research findings and business opportunities in the agro-food/non food area.

    In spite of all these efforts it is a fact that the actual commercial exploitation of the results is still limited. (see e.g. the BioMat net report: “Assessment of the Commercial Success of the AIR Programme”, 2000) One obvious reason could be that the commercial World – industrialists, entrepreneurs, investors etc. – do not seek their information from the above sources. Another reason might be that the information from the above activities is more addressed to scientists than to industrialists and the business world.


    As is shown elsewhere in this report, a number of the EU financed projects, and naturally also national projects, might be of great interest for the rural areas around the Baltic Sea. It is therefore suggested to establish a permanent scout function that can seek out the best business opportunities (for the BalticSea regions) and prepare these for commercialisation.
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    8.2. Survey over EU research projects

    All projects related to agriculture, food an non-food production in the EU Research and Development programmes from 1988 till now have been scrutinised, and the project co-ordinators of those of potential relevance to the Baltic Sea area were contacted.

    The projects were part of the following Framework Programmes:

  • Second FP, 1988- 1992 :ÉCLAIR and FLAIR
  • Third FP, 1991- 1994: AAIR
  • Fourth FP,1994- 1998: FAIR
  • Fifth FP, 1998- 2002: LIFE SCIENCES

    In total 61 projects were selected and the co-ordinators contacted. 40 of the projects were production and/or product oriented and thus potential business opportunities. The remaining 21 projects were network projects and studies. A list of the selected projects can be found in appendix x.
    The result of the survey is shown in table xx.

    Table 1: Results of survey
  • Project type	Number          Number               Number of 
                    of projects     of answers    %      projects            %
                    contacted                            interested in
      		                                     co-operation
    Product/
    process 	   40	          19	     47	        8	         20
    oriented 
    
    Networks and 
    studies	           21   	  12	     60	       12            	 60
    

    As is seen only approximately 50 % of the product/process oriented project partners, who responded, were interested in co-operation (know how transfer, joint venture etc.). The reasons for the lack of interest in co-operation from the remaining projects were mainly that:
      1. Exploitation rights were given to one of the (industrial partners), who had no interest in sharing its knowledge, or :
      2. The outcome of the projects had not led to the expected results, or:
      3. The process was not yet ready for industrial exploitation.

    A few simply responded that they were not interested in co-operation with organisations in the Baltic Sea area.

    The rate of response is low (47 %) for the technology-oriented projects (those who did not respond within a few months, were sent a reminder).

    The response rate was better for the networks and studies, and the interest in co-operation was high. These projects, however, do not include elements of productions and business opportunities. Most of the project leaders were most generous in sending reports and articles, and the material thus collected has been very useful for our work.

    A short description of the production/process oriented projects with a positive attitude towards co-operation was sent to all BASAN members, who forwarded them to potential stakeholders in the respective regions.

    Business contacts
    We have no certain knowledge of the total number of contacts that have been created due to the Basan scouting activities, we are however aware of the following activities, in which we have been actively involved:
    • Basan has initiated contacts between a British and a Polish company concerning establishment of a production unit for biopesticides in Poland.(based on a FAIR project)

    • Another Polish firm has decided to carry out a feasibility study concerning the establishment of a biorefinery in Poland, and they have established a co-operation with the Bioraf Denmark Foundation. The work is a.o. based on findings from an ÉCLAIR project.

    • A Lithuanian company has, after evaluating the business plans, expressed interest in the two virtual factory concepts; and discussions with Danish, Swedish and German partners on how to proceed is currently undergoing.

    • Another company from Lithuania have asked for additional information about one of the virtual factory projects, namely the Lupin protein factory. The virtual factories are based on knowledge generated in Life Science projects.

    • Basan has helped establishing contact between a Swedish innovation company and a polish rye and oat mill.

    • Furthermore the Basan scout function has initiated a contact between a Swedish SME , situated in the IDEON science park in Lund and a German flour mill, and negotiations on establishment of a joint company in Mecklenburg-Vorpommern has taken place.

    Other business contacts
    BASAN has been contacted by a number of organisations (universities, research centres and industries), which were interested in co-operation with organisations in the Baltic Sea area. All these contacts have been passed on the local stakeholders via Basan members, and a few contacts have already been established.

    A Hungarian university has asked for contacts with Baltic Sea companies interested in water purification. The Hungarian university has developed a new flocculant, based on starch, for purification of drinking water, and they would like to co-operate with a Batic company for joint exploitation of their invention.

    A Latvian technical research centre has asked for co-operation on growing of Galega for commercial purposes. Galega grows well also on poor soils, and it can be used for fodder,
    soil improvement and energy.

    Another Latvian research institute offers know how on production of ethanol from deciduous wood and agricultural waste.

    A research centre in Romania offers a patented process for manufacturing of a “natural” medicine against a cow disease that is common in the Baltic Sea area – mastitis.

    Basan has been invited to participate in a number of EU Framework 6 projects
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    8.3. Scout function – working procedure

    The results of the Basan scout activities give a clear indication of the needs for such an
    Activity.


    Fig 14. Death Valley syndrome

    The impression so far is that it is not difficult to identify commercially interesting projects. It is much more difficult to interest potential local businessmen and investors in exploring the commercial opportunities, and to establish contacts between the researchers and the investors. When an entrepreneur seeks funding of a project at the pilot stage, he typically has not yet formed a company. When he seeks money for a scale-up of the process and marketing tests, the investors (industries, banks etc.) will ask him about the market for the technology and the products, and they will want to see a realistic business plan. The entrepreneur is not able to tell where the customers will be, because the pilot stage of the technology must be successfully tested, before the public realises that the technology can work on industrial scale, and a reliable business plan not be made before a scale up has taken place. This is the “Death Valley syndrome”. The “Death Valley” must be bridged, if technology development is to be fully realised.

    The experience with the two virtual factories (pagex) and the responses to the questionnaires (page y) thus indicate that it is not enough to describe a given project in technical terms. It seems to be even more important that it is described in such a way that the commercial potential is clearly seen.

    The following four-step procedure is suggested.

    Four action steps
    Phase 1. Selection
    Phase 2: Preparation for commercialisation
    Phase 3: Business plan
    Phase 4: Options for commercialising

    Phase 1. Selection
    A description of the new business opportunity is distributed to the involved innovation centres for consideration. If interest is expressed from stakeholders in one or more of the regions, the project manager is contacted, and the project is transferred to phase 2.

    Phase 2. Preparation for commercialisation
    The technological level of the new concept is evaluated. Has the process been finally developed, or are additional laboratory and/pilot plan experiments still needed?

    A preliminary feasibility study, including market estimates and production costs, is carried out. And the technology potential is stipulated.

    The intellectual property rights are discussed with the project manager. If not already done, a (European) patent application is filed.

    A development service contract between the project manager, one or more regional research centre(s) with the appropriate pilot plant facilities and expertise, and the local stakeholder(s) is prepared. The contract details the work to be done leading to start up. It covers items such as due diligence, test marketing, engineering, financing. The work performed during the due diligence phase helps define the risks and solutions to problems.

    Finally a comprehensive commercialisation report is prepared. The report should include:
  • A review of the technical feasibility of the technology
  • An assessment of the level of competition in the intended market
  • An objective estimate of the market need for the technology
  • A review of industry trends that affect the commercial viability of the technology

    Phase 3. Business plan
    It will be considered how best to commercialise the new venture: Either to licence the technology to an existing company, initiate a joint venture, or start a new company to commercialise the new technology in the target market. The business plan should be tailored to the most appropriate approach.

    The business plan is set up in accordance with the recommendations given by the Commission (LIFT, Preparing a technology Business Plan, 2000)
  • Executive summary
  • The market
  • The product
  • The business and its trading position
  • Marketing strategy
  • Manufacturing
  • Forecast of sales, cash flow and break even
  • Management and control of the business
  • The required financing package

    Phase 4. Options for commercialising
    The options available are licensing to an existing company, arranging a joint venture or strategic alliance with a major corporation in the field or creating a new start-up company to commercialise the technology.

    A license agreement will generally include an income-producing license, which usually provides for an up-front pay ment and on-going royalties based on sale. License negotiations do not always result in an agreement, and even in the case of a positive outcome of the negotiations, the period of time between the start of negotiations and the realisation of the first royalty income can be long, rarely under two years

    Joint ventures and strategic alliances will often offer a small company the best route to commercialise the technology in the target market. Such alliances are as varied in form as are the technologies themselves and must be negotiated based upon both the technical and marketing expertise of the two partners.

    The last option, to create a start-up company, may be the most complicated and effort consuming, but presumably also the most profitable on a longer term.
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    9. Regional development- why do some regions perform better than others?

    The Basan activities has, as already mentioned confirmed that there are considerable differences in the development of the regions around the Baltic Sea. Many regions have a very high unemployment rate that seems to have become permanent. And often the situation is worsened by the fact that the number of people living on social pensions has increased. There are, however, also examples of dynamic regions with strong growth. (Gnosjö and Umeå in Sweden, Oulu in Finland, Wismar in Germany.). These examples even represent regions that theoretically have severe “handicaps” compared to other regions. Gnosjö is far from big cities and universities, and Umeå and Oulu are situated far north in the Bothnia Bay. However in all three cases their strong position has been built up during several years.
    Gnosjö is a paradox in Sweden, mentally and geographically far from research centres and universities, and with poor communication possibilities and infrastructure. The formal education is the lowest in Sweden. The development and expansion potential is low.

    In spite of these conditions the Gnosjö region has performed better than any other region including large cities and regions with universities. Gnosjö has 85.000 inhabitants and several thousands of SME’s clustered around metalworking, plastic production and furniture factories.

    The reasons for the successful development may be that the region has a flexible workforce and a good ability to adapt to changing market conditions. Furthermore there is a strong local network and the willingness to co-operate is outstanding. The companies participate actively in the local social and political life.(NUTEK, B 2002:2)
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    Rolf Olsson from the Swedish University of Agriculture, Henrik Ingo, Osterbottens Svenska lantbrukssallskap and Sven Lingegår, Lansstyrelsen i Vesterbottens Lan have made the following comparison of two regions: Vesterbotten in Sweden and Osterbotten in Finland that have the same climate and soil conditions. Also culture and language(Swedish) are similar, but the development of the regions has been very different. (The complete report can be found in appendix). While Osterbotten can be characterised as a dynamic region with a number of successful agro-industrial SME’s, the development of Vesterbotten is slow or even stagnating.

    Their conclusion is that preconditions for dynamic regional development are:

  • Access to well functioning extension services and research organisations
  • A public environment that encourages entrepreneurship
  • Existence of efficiently working production clusters
  • Existence of networks for exchange of experience and know how.

    Differences in development in Osterbotten and Vesterbotten
    • The farmland has been reduced since the fiftieths in both regions, but the tendency is much more pronounced in Vesterbotten.

    • The average land rent is low in Vesterbotten, 10 – 20 €/ha/year, and high in Osterbotten, 100 – 500 €/ha/year. This difference in land rent may partly be explained by a higher level of farm subsidies in Osterbotten.

    • The extension services for farmers are being reduced in Vesterbotten, while the extension services are expanding in Osterbotten. The extension services in Finland are well integrated and cover the whole chain from water drainage, crop production, farm house building and husbandry.

    • Production clusters have been established in both regions, however the clusters are limited to organic farming and husbandry in Vesterbotten, while in Osterbotten clusters exist in all areas of agricultural activities. Clusters in the fur production and greenhouse areas have been particularly successful in Osterbotten. The clusters are closely linked to extension services and research centres.

    • Agricultural universities are situated in both regions. While in Sweden the public funding of research is focused on basic research, public funding of applied research is increasing in Finland. As public funded applied research is important for the development of SME’s the Finnish strategy focusing on applied research might be one of the reasons for the more dynamic development of Osterbotten.

    • The former structures of farms in Vesterbotten (and in Sweden), where the farms were situated close together in villages, has been changed, and today the farms are spread out in the agricultural landscape, which has resulted in a reduction in interaction between farmers. In Osterbotten the original “village structure” has been maintained.

    The above cases illustrate how complex the issue of regional development is.
    In the context of the Basan objectives it would thus be of relevance to analyse in some more detail, why certain regions show radical changes in their development patterns and others not, and also to discuss, how a positive change can be initiated.
    • Can the creation of clusters help regional development? What is needed to establish expansive clusters in a region? (cluster perspective page x).
    • How important is the access to knowledge (universities, research centres), the presence of dynamic companies and an efficient public innovation strategy ?(Triple helix perspective, page 8).
    • How important is the geographic location?
    • What are the other important factors?

    Internationally there are many positive examples of changes in the development patterns of individual regions. The most famous is perhaps the transition of Silicon Valley from a farming region, specialised in fruit and vegetables, to a World leading IT cluster. The change of Massachusetts from an industrial region dominated by textile industries to a knowledge-based region with IT industries is another example. The Massachusetts state in the USA puts much emphasis on the creation of clusters as a means of regional development. They stress that a cluster in order be become successful should include not only industry, but also a network of supporting organisations that help create a climate for successful business competition: Universities and research institutions, banks and specialised financial institutions, consulting services and so on.
    (The triple Helix model)
  • In the Baltic Sea area the Uppsala Biotech Valley case is a good example of cluster dynamics:
    The Uppsala cluster, “Uppsala Biotech Valley”, was originally centred around the large pharmaceutical company Pharmacia and Uppsala University. In 1993 Pharmacia was fusioned with an American company – Upjohn. The whole management and R&D were moved to the USA. However, the cluster survived, and it has now become more diversified with many new small research-dependant companies, of which some have been set up by former Pharmacia employees.

    The closedown of the old innovation-system forced scientist, entrepreneurs and investment funds to build new relations within the cluster and towards the World market. The local munic ipality has together with the university supported the creation of new companies through creation of local network and infrastructure. And it has been possible to attract international companies within biotech and IT.
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    9.1. Innovative clusters as a regional development tool?

    The cluster model derives from the works of the Harvard professor Michael E. Porter (M.E. Porter,1990, The competitive advantage of nations. London and Basingstoke: Mac Millan). According to the report “Innovative Clusters in Sweden” (Daniel Hallencreutz and Per Lundequist, NUTEK,2001) a cluster can be defined as “a system of players, who, working together, create added value – a system in which 1+1=3. In other words, it is a system in which different synergy effects create an added value greater than what the two separate entities would create on their own”.

    Strong regional clusters can be found in the whole industrial scale from low technology to high technology.

    There are many examples of successful regional clusters in Europe, of which some are situated in Baltic Sea countries. However only very few are based on food/agro-industrial activities.

    Examples of successful Baltic Sea clusters in the Life science area are:
  • The biotech cluster in Umeå, Sweden
  • Västerbottens Woodworking cluster in Sweden
  • Medicon valley, Øresund Science Region: Sweden/Denmark (4 clusters including a food network)
  • The biotech cluster in Oulu, Finland

    One of Europe’s largest wood clusters is situated in Wismar in Mecklenburg-Vorpommern.(see minutes from 6th regional meeting). The cluster includes a sawmill, a pulp factory, a chipboard factory, a glue factory and a power station. All the production units have been built between 1995 and 2000, and together they utilise all the indivudual components from trees, nothing is wasted. There are all in all more than 1000 employees, and the investment costs are more than 500 million €.

    Two of the few examples of large regional food clusters are the ham producing cluster in the Parma region in Italy including more than 200 small and large companies, and the “Øresund Food Network”. The latter is not really a production cluster, and it may better be characterised as a network of centres of excellence (see page x)

    In Finland examples of (loosely structured) agro-industrial “mini-clusters” can be found in two regions – South Ostrobothnia and Northern Savo. They have different climatic and geographic conditions, but share similar socio-economic structures and peripheral locations.
  • South Ostrobothnia is known for its large number of rural SME’s and independent minded entrepre eurs. Over the years more or less informal production clusters have been formed in order to adapt to changing market situations.

    There are within this rather small region 30 furniture manufacturers, 24 carpet producers and 5 cheese producers. The production clusters seem to have been driven, in part by local social relations of inspiration. Typically, when production innovations were made and markets found by someone, this inspired others to try something similar or even copy directly.

    The furniture industries have a formed a producer network in order to reach export markets, and they co-operate concerning innovation, quality management and export promotion. The regional industry has some reputation for good craftsmanship.

    The carpet manufacturer sector also has a strong subregional concentration, but is smaller in terms of production capacity and size of businesses. It has developed mainly in form of seasonal and additional income for farmers, and marketing structures are not very sophisticated. Carpets are to some extend sold direct to consumers at fairs and markets and through wholesalers.

    The cheese cluster consists of 5 professional producers, who have 70 –80 % of the market share, plus 40-50 family SME’s. Finlands three largest retailers absorb about 95 % of the production, and thus determine the marketing opportunities for most of the local producers. Co-operation between the cheese producers is not as strong as is the case in the two other clusters.(Ilbery,B et al: Quality, imagery and marketing, Geografiska Annaler, 27-40:83B (2001)
    _______________________________________________________________________

    In the Savo region berry production is particularly well known for the high quality of its products. The region is home to the largest spatial concentration of berry production in Finland, and the annual strawberry festival has strengthened public perception of the links between the region and berry products. A large processor buys approximately one third of all berries produced in the region.The rest is marketed through wholesalers, retailers and directly on the farm. The producers have created network of co-operation between themselves and the processors.(Ilbery,B. et al)
    Examples of “micro-clusters” can be found on the Danish island, Falster (proceedings from final conference). For example, 25 owners of cherry plantations have created a “production cluster” delivering cherries to a local juice producer. There are also micro-clusters of:

  • Sheep farmers,
  • Producers of medicinal plants and spices,
  • Bees and honey farmers etc.

    These clusters are mainly info- clusters, where the farmers are sharing experiences on practical matters such as growing and harvesting conditions, diseases etc. They are closely linked to a regional development centre (Grønt Center), which keeps them informed about the latest developments concerning technology and research, new business opportunities etc.

    In general clusters are geographically concentrated; there are however examples of successful geographically dispersed clusters. In those cases regional micro-clusters are linked together in national or international clusters. (example: the automobile testing cluster in Sweden).

    An example of a dispersed agro-industrial cluster is the lavender cluster in the Valbonne region in France. This cluster is totally dominating the European lavender oil market, and it includes both primary producers and processing companies. Another example is the marketing cluster of German Hemp producers.

    The advantages of being part of a cluster are not only the common access to knowledge and the possibility of sharing experience. They may also include joint marketing efforts and joint research activities. The Medicon Valley board is thus marketing the “Medicon Valley” concept in the Øresund region internationally, and the the “Medicon Valley” brand has now become a competitive edge in itself.
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    9.2. Potential agro-industrial clusters in the Baltic Sea region

    As mentioned there are very few examples of food/agro-industral cluster in Europe and in the Baltic Sea region. Besides the agro-food clusters seem to be less “formal” and structured than e.g. the biotech clusters.

    There are however some obvious candidate sectors, where formal “biotech type” cluster creations might be beneficial for the Baltic Sea regions. Potential clusters are:

  • Green energy
  • Solid fuels
  • Liquid fuels
  • Functional foods
  • Regional specialities

    All three clusters might be geographically dispersed clusters, and they may be based on regional micro-clusters as mentioned above.

    The green energy cluster might be divided into two clusters, as the knowledge, skills and equipment for production of solid fuels is very much different from what is required for the liquid fuel production.

    As mentioned in section x the potentials for fuel production are considerable, and there are also large potential markets both locally and in the neighbouring countries. Solid fuels (e.g. pellets) are often produced in small units, the production may be labour and energy demanding and poor logistics increase the production costs (page xx).

    A solid fuel cluster might focus on logistics, exchange of knowledge and skills on wood waste utilisation, growing and harvesting of energy crops (page x), and joint marketing and distribution.

    Liquid fuels, bio-diesel, may also be produced in small units (page x), even on farm level, and the product will most often be sold locally. However large bio-diesel plants do exist in the Baltic Sea area , and new are under planning (page x). Bio-ethanol plants must for economic reasons be rather large. A bio-ethanol plant might function as a locomotive around which a local (geographically concentrated) cluster can evolve.

    A functional food cluster should be linked to university departments or research centres dealing with not only food technology, but also clinical tests and food analysis.

    A regional speciality cluster may concentrate its joint activities on marketing, branding and product distribution.
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    9.3. Research clusters - networks of excellence in the Baltic Sea area

    One of the modalities in the EU’s Sixth Framework programme for Research and Development (2002 –2006) is the establishment of networks (clusters) of excellence.

    The network of excellence should be designed to strengthen excellence on a particular research topic by networking together the critical mass of resources and expertise needed to provide European leadership. This expertise will be networked around a joint programme of activity aimed primarily at creating a durable integration of the research capacities of the network partners.

    In the Øresund region, close to the Baltic Sea area, a food network of excellence called “Øresund Food Network” has recently been created.
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    “Øresund Food network” is founded by the Øresund University (a virtual university including universities from Sweden and Denmark). The objective of the network is to make the Øresund region one of the most dynamic regions within the field of agriculture and food. The network co-operates with several large Swedish and Danish food and packaging industries and it includes Danish and Swedish universities and food research centres (in total 300 senior researchers). Thus the entire centre is one of the largest in the World. Furthermore the knowledge within the network on biotechnology is strong, which can be utilised in co-operation with the traditional food disciplines. The cluster is through the “Øresund Science Region” affiliated to the “Øresund Environment” (environmental cluster), “Øresund IT Academy” and “Medicon Valley Academy”. The Danish Ministry of Science, The Foundation of Technology Transfer in Lund and Interreg IIIA funds ”Øresund Science Region”.
    The Swedish Agricultural University has created a research cluster together with local agro-industrial companies in northern Sweden. The cluster consists of SLU, 2 dairies, one meat company and one supplier of fertilisers, feed, pesticides etc.

    Also in northern Sweden a co-operation (KLAC) between Sweden and Finland with the objective to set up production clusters, advisory clusters and research clusters in the regions has recently been established. Currently research areas are being formulated, a plant for upgrading of hemp fibres is under consideration, and a scale-up of the current production of reed canary grass from 500 ha to 4 000 ha is being organised.

    The NOVA_BOVA virtual university (“a university without boundaries”) is an example of university networking in the Baltic Sea area. NOVA-BOVA includes agricultural universities in the Nordic and Baltic countries.
    9.3.1. Baltic Sea Agro-industrial Research Network?

    The principle of networking research institutions may be used for the Baltic food and bio-industrial research centres as well.

    There are only few of such centres in the Baltic Sea region. Alone they are scientifically relatively weak, and they have limited international influence (below the critical mass of resources). But together they would form a strong scientific and technical basis for support to the regions.(Above the critical mass of resources)

    The pool of new ideas created in these institutions is valuable and should be fully explored. It is modest however compared to the vast amount of knowledge generated via the EU research projects.

    It is vital for the development of new successful bio-industrial productions in the regions to be able to draw upon this knowledge and the many discoveries and ideas developed through EU and national programmes.

    Also here the local bio-industrial institutes have an important role to play. They have jointly the capability to transfer the internationally generated know-how into practical applications in the Baltic Sea area.

    It is often so that innovations processes, including research and development, are inspired by international impulses and should have an international market orientation. (Example: EU research programmes). It is however on the local level that the research and development results are transformed into commercial productions, often by individual entrepreneurs (examples: Bioraf and Camolina, pages x and x).

    Global R&D projects like most EU projects, where institutions and companies in a number of countries work together requires a constant competition between national units and hidden agendas, where participants from one organisation is more interested in the benefits for their own organisation than in contributing to the overall research goal. Real quantum leaps are often created in small close groups with a dynamic leadership closely linked to local partnerships.
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    9.4. How is a cluster created?

    According to Hallencreutz and Lundequist there are two types of strategies for supporting potential cluster formations:

    First and foremost, potential cluster formations have to be identified and supported in a region’s existing business community. This sort of undertaking can, for example, involve supporting networks for raising levels of expertise and specialised skills or investments in infrastructure aimed at strengthening the local employment market.(see chapter 7)

    Secondly, regions have to attract the type of companies that are needed to create the regional cluster formations. Building attractive environments that attract new companies, venture capital and specialised skills is an important dimension of this strategy.(see chapter 7)
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    9.5. Regional impact of research. University – industry co-operation
    9.5.1. The importance of regional universities

    “In spite of the continuing globalisation and internationalisation of science, the research evidence available indicates that there is a close national and local association between research and its exploitation. It seems that the transfer of knowledge, technology and know how works best when the geographical distance between the producers and end users of research is shorter. Studies have shown that scientific papers published in international journals often have only limited regional technical and economic impact, whereas the transfer of tacit knowledge that requires geographical proximity and personal contacts, researcher transfer and research collaboration tends to have much greater significance. In spite of the trends of internationalisation the regional impact of universities is not decreasing. In fact that impact may even increase and assume more diverse forms”.( Kai Husso et al. The State and Quality of Scientific Research in Finland, The Academy of Finland , Helsinki 2000).
    Good examples of regional impact of universities are provided by the regions of Oulu in Finland and Luleå in Sweden (see page xxxx). The regional universities not only offer education, but also new business opportunities and better opportunities for people to remain in the area, after they have graduated. That in turn strengthens the region’s local economy and its cultural life.

    The above examples of successful regions (Luleå and Oulu) build their success on high tech sectors such as biotechnology and information technology. These emerging sectors are crucial as engines of economy-wide innovation, and for these regions. They may also play a role in the development of rural areas in general, as spin-offs from these disciplines no doubt could lead to new business opportunities even in the agro-industrial sector (see page x). It is however hard to imagine that these high tech disciplines will ever become an important part of the solution to problems in rural areas in general.
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    9.5.2. The regional food industries and bio-based non-food industries

    Regional innovation policy, which focuses too much on high technology, risks missing the much larger opportunities for improved competitiveness and new products and processes in the more traditional bio-based industries such as the food industry and the non-food industry. The food industry is a traditional industry, where scientific quantum leaps are seldom. The development is evolutionary, not revolutionary. However, the biotech and information technology revolutions will also have an impact on this sector, and new findings in food safety, diet/health relationships, convenience foods, functional foods, nutriceuticals etc. have made food science more innovative than ever. And we will presumably see a more dynamic food sector in the future. The novel foods will probably have a must larger scope as locomotives for development of rural areas in general than high tech areas like information technology and biotechnology..

    The bio-based non food industry is more complex including traditional industries such as textile industries, paper industries, cosmetics industries, and new industries such as solid fuel industries and biodiesel and bioethanol producers, producers of plant extracts for dyes, flavours, pharmaceutical etc. To this may be added emerging areas such as molecular farming (page x).
    Some of these areas are high tech areas including both biotechnology and information technology.
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    9.5.3. Access to knowledge in rural areas

    Whether the local innovation policy shall focus on high tech company development or development of new food and bio-based non-food enterprises, access to knowledge is crucial. Universities and research centres dealing with research on food and bio-based non-food development are however scarce in the regions around the Baltic Sea.

    Unfortunately the population basis in most of the remote regions in the Baltic Sea area is too small for a regional university to be established. However, as proximity is an important feature, resources should be devoted to attempts to create self-sustaining local and regional innovative clusters. A natural “home” for such clusters would normally be a science park. However, science parks are normally affiliated to universities, and as very few universities exist in the rural areas, science parks are not the solution. Part of a solution might be that the few existing regional food and non-food research centres in the Baltic Sea area are given a more outstanding role and that these centres create strong networks between themselves and with agricultural and technical universities. Also the interaction with local stakeholders should be improved and formalised.(see page 4).

    A few examples of university – industry co-operation and of university co-operation across borders in the agro-industrial area can be found in the Baltic Sea area, as mentioned on page x. (KLAC and NOVA-BOVA)
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    9.5.4. Capacity to absorb new knowledge

    The supply of new knowledge from universities and research institutions is thus probably necessary, but certainly not sufficient for a dynamic development of rural economies. The regions must have the capacity to absorb and make use of this knowledge to create new business opportunities. Networks – also involving investors, professional intermediates and others – are needed to establish the complex connections by which knowledge is efficiently transferred from research to industry. (see page xxx).

    Innovation is a very complex process involving interactions between many players. As already mentioned, scientific advances have opened wider opportunities for innovation than ever before, also in the agro-industrial area, where new discoveries and developing of new biotechnological tools have increased the potentials enormously. But, increasingly, the real innovation bottleneck is not the supply of new knowledge, but external factors surrounding the process of technology transfer. Managing information overload, achieving social acceptance of new technologies, environmental concerns, and the basic logistics of introducing change may pose a far greater challenge to businesses than the underlying technologies themselves.
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    9.6. The public environment

    Finally there must be a legislative and fiscal environment, which places no unnecessary obstacles in the way of entrepreneurial activities. (see page xxx).
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    9.7. The importance of geographic location

    The EU collaborative research project – DORA(FAIR6-CT98-4162)- co-ordinated by professor John Bryden at the Arkleton Centre for Development Research, has looked into the importance of “geographical peripherality”. They studied the performance of 9 rural regions in Scotland, Greece, Germany and Sweden. It was found that geographical remoteness or peripherality, either real or as perception, does matter for economic performance. There is a fairly straightforward relationship between economic performance and accessibility to transport infrastructure – motorways, railways and airports with regular services.

    Those areas with good institutional performance were able to access public finance for infrastructure such as roads, railways and airports through both national sources and EU programmes, and thus reduce the impact and perception of peripherality..

    An important negative factor is lack of access to the new information and communication technologies in many remote rural areas. It is precisely in the more peripheral areas that ICT can make a decisive contribution to reducing the relative disadvantage arising from the physical distance from centres of information, culture and political institutions. John Bryden thus found that attention to IT related education, training and infrastructure as a means of addressing peripherality was often greatest in the most successful peripheral areas. There are clear implications for public policy in this theme
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    9.8. Other important factors

    The above mentioned study – DORA – concludes that successful regions seem to be “doing it for themselves”, meaning that they have confidence in their own abilities to perform and to make use of those resources that are already in place, be they tangible or human in nature. It is not so much the tangible resources themselves that matter for economic performance, but the way the local people are able to exploit those available to them and sometimes to ensure a favourable flow of transfers in their direction.(see chapter 7-8)

    The report has made a list of policy recommendations. It emphasises the need for a general rural small business extension service to supplement the traditional agricultural extension service in order to cope with the new economic demands.(see also page x)

    The need remains for public resource transfers the report argues, but then again these should be adapted to the small scale and diverse nature of the receiving parties, ensuring that such fiscal transfers reach local entrepreneurs and do not simply end up in the coffers of big firms.

    The report cannot point to any case where centrally inspired initiatives or heavy external investment have led to the enduring success of local economies, even if these may have once seemed to come to the rescue of depressed economies. Less successful areas are frequently typified by heavy reliance on external public sector initiatives and investment, and a perception among their leaders that this is where the solution lies.
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    10. Agri- production versus Agri-culture

    In the past 50 years political, technological and economic developments have favoured intensification in European agriculture. The support mechanism provided by the EU Common Agricultural policy, the advance of mechanisation and the need to reduce costs have favoured specialisation in a few cash crops in European agriculture. As is seen from chapter 5 and the country reports (appendix), this is certainly also the case for the Baltic Sea areas, where cereals and oil crops and potatoes are totally dominating. In future, with reduced subvention to agriculture, the big, efficient and rational mechanised, farms will have the best chances for making a profit from these crops, while the smaller farms, of which there are many in the Baltic Sea area, might see their opportunities in diversification and multifunctional farming. Also traditional animal production – dairy farms, pig production, chicken – will in future presumably be concentrated on large, specialised farms.

    In the Baltic Sea area many successful regional examples of small-scale speciality productions of region specific foods, medicinal plants, herbs, spices, fruits, berries, wool, handicrafts etc. etc. can be found. Such productions can be very important for the individual farmers and also add positively to development of the local rural society. On the other hand, small productions of speciality products cannot alone meet all the current and future challenges that the rural areas around the Baltic Sea are faced with. For such productions the suffix – culture- in the word agriculture really means culture in the original sense, implying that we must take care of the regional heritage, the high quality speciality foods, the crafts, the countryside and its recreational qualities.

    The average farmer, however, will have to produce bulk products (agri-production) often with fixed prices and for some commodities also with quota regulations. As EU production subsidies presumably will be more restricted in the future, rationalising and reduction of production costs seems to be the obvious way to survive as traditional farmer.

    Diversification on farms and new agricultural raw-material based industries may however also help to improve the situation. What may be needed is the establishment of large-scale high-added-value production units in the rural areas. Preferably productions that require special raw-material qualities, either untraditional crops( e.g. lupins) or special varieties of traditional crops (e.g. waxy barley). The farmer may receive a premium price for his product, and also the rural area as a whole will benefit. Apart from the new employment possibilities, there will be positive “spin off” effects on local retailers, maintenance firms, transport firms etc.

    Such local “locomotives” should have a scale large enough to be able to compete also on an international market and efficiently contribute to the development of the whole rural society.

    There could thus be two main dimensions in future rural development:
    • Agri-production: A rational and sustainable agri-production and agro-industrial production that is viable with a minimum of subvention.
    • Agri – culture : A multifaceted, very diversified small scale production of region specific products.



    The two dimensions are different in nature and presumably they have different incentive requirements and innovation demands. It might therefore be useful to deal with them separately.

    While the small scale productions – agri-culture based industries– often will be established by one or a few individuals, the “locomotives” most often will require a group of entrepreneurs or one or more already established company(ies).
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    10.1. Agri-culture
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    Most regions in the Baltic Sea area have their own traditions and their own region-specific products – both food and non-food – that are sold on local markets. They are part of the local heritage and part of the regional identity, and measures to preserve these products should be ensured. Examples can be found in the country reports and in the minutes from the regional meetings. Some are particularly successful due to an outstanding product and/or specific advantages such as the proximity of an urban market, good road and rail connections, favourable regional development policies etc. There are however also (a few) examples of successful productions in remote places with few regional attributes.
      Such an example is the biotech company “PROPHYTA” situated in a small village in the Northern part of Mecklenburg-Vorpommern. The reason for this rather remote choice is that the founders base their production on know how generated at a local research centre not far away from the company. The founders are former employees from this research centre. PROPHYTA produces biopesticides (BioAct-WG) in a solid state fermentation process, developed by the company, and the product is sold on markets in Europe and USA.

      PROPHYTA offers its facilities and staff to develop and scale-up solid state fermentation processes to customers, who want to improve their production or start up new solid state fermentation processes.

    Many of the locally sold products will presumably be of interest also outside the local market. However, normally small producers do not have the skill and financial means to expand their market. The establishment of a centralised marketing function, serving a cluster of SME’s and including quality control and a labelling system might be the incentive needed for expanding local activities. Thus the disadvantage of having to sell to small local markets may be turned into an advantage of selling “authentic” and exclusive products to new markets.

    Such trends could favour a development of the remote rural areas around the Baltic Sea, provided the required incentives are present. Authenticity will become a very important issue. An increasing number of consumers wish to know, where the products they buy, come from, and how they are made. This demand might be met by the establishment of a network of small production units with centralised marketing and quality control as mentioned above. The famous “appelation controllee’” system that has been applied for French wine for many years, might be used as inspiration for a “Baltic Sea control and labelling system”.
      The Orkney marketing scheme is an example of a successful centralised marketing function. It started as an informal bottom-up network formed by a group of local firms. A network -“Orkney Quality Food and Drink”- was established in 1993 to bring together local companies (today it includes 18 local SME’s ) under one umbrella for marketing purposes. In order to provide assistance to this network and other local enterprises the “Orkney Marketing Scheme” was set up.It is funded by the involved companies and the EU Commission. The scheme includes promotion activities – “Taste of Orkney Promotion” – on trade shows and towards restaurants and local retailers. (John M. Bryden: Dynamics of Rural Areas in the EU, Arkleton Centre for Rural Development Research, University of Aberdeen, 2002).

    In addition there might be local conditions – climate, soil type, local skills, financial incentives etc.- that are beneficial for added value speciality productions that often will find their markets outside the region. New technologies – e.g. generated through EU research programmes – provide new opportunities for flexible specialisation and thus for niche strategies. To take advantage from this it is, however, necessary that the regions themselves are actively involved, react in time and have a clear vision of their stronger points and build possible innovation strategies upon these.
      An example of regional involvement in the establishment of a small scale production based on a project from EU research programmes is the “sea-grass project”. A municipality – Amt Klützer Winkel – and an industrial company – Metall und Anlagenbau GmbH, Schwerin - are together in the process of establishing a small production unit for the production of insulation boards – “ZOSTERA DÄMM” – in the village of Klütz in Mecklenburg Vorpommern.The boards are made from sea-grass harvested on the nearby beaches at the Baltic Sea coast.

      Another example of a network of farmers with a centralised marketing function is the “Craig Farm Producer Group” (Bob Kennard, speech to The Soil Association Conference, Cardiff, sept. 14. 2001. In; Relocalising the Food Chain, 2002; Keving Morgan and Adrian Morley. The Regeneration Institute, Cardiff University)

      Craig Farm Organics started in 1988. It has as objective to process and market organic meat. Since the beginning the company worked very closely with a group of organic farmers, who came to be known as the Craig Farm producer Group. There are today 200 members of the group, across Wales and the borders.

      The labelled products are sold from the Craig Farm shop, through around 100 retail outlets across the UK and via a national mail order service as well as from an internet shop.


      The members are offered training courses, cheap inputs, meetings, demonstrations, sharing of technology, and the ability to sell all products from the farm, provided that the quality is correct.

      The aim is to be as transparent as possible and to explain how the food is produced. There are open days for customers. Each pack of meat has a label identifying the producer, describing his farm, and offering an internet address, where more information can be found.

    The sophisticated consumer in Europe (and to a larger extend in USA and Japan) is amply supplied with staple commodity foods, and food safety and consumer price seem to be the main issues, when the consumer makes her/his choice. As a matter of fact consumption of most commodity foods is stagnating, competition is tough, and price is becoming the most important sales parameter.

    On the other hand there is as already mentioned also a growing demand for diversity, improved quality (taste and functionality, “health factors) and multiple choices year round. In addition there is a general trend towards authenticity, “natural” food and food including factors beneficial to human health, putting pressure on suppliers to set up their own control systems.

    In conclusion: It will be difficult for new companies in remote rural areas with logistic problems to take up competition with more centralised large food factories producing traditional food products in high volumes. Instead focus should be on production of region specific products and low volume innovative products in high quality and with “built-in” health factors.

    It might be advantageous for small companies to have short supply chains. However this requires good management of custom relations and the establishment of prices at levels that customer are willing to pay. Innovative marketing such as franchise systems and box schemes might be considered.
      An example of a company that has introduced novel marketing systems is the home delivery service “GROWING WITH NATURE” situated in North West Lancashire in the North West of England. It as established in 1992 by a farming family looking for a suitable and economically viable way to sell their organic vegetables directly to the consumer. Initially they sold their products through farmers markets and supermarkets, but dissatisfaction with the limitations and restrictions of both of these marketing options led to them in search of other marketing opportunities for small scale producers. They decided that box schemes reflected the type of marketing strategies (local, fresh, organic) that they wished to establish.

      As demand has grown. Five other organic farmers have become involved in the scheme. Bags of organic vegetables, supplemented by a small amount of externally-sourced organic fruit, are delivered directly to a fluctuation base of approximately 700 customers with an average of 500 bags delivered per week. 85 % of sales are within a 25 km radius of the production unit, and on average one bag travels 4 km. In comparison a UK grown cabbage in a city supermarket has travelled approximately 600 km. (Professor Peter Midmore, OMIaRD Newsletter, September 2002).


    In 1995 the “Culinary Heritage concept” was introduced in South-eastern Skåne in Sweden and on the island of Bornholm, Denmark. Both regional authorities and local businesses felt the need to jointly promote and develop the regional culinary identity within Europe: Other regions have successively joined the network. The concept has the objective to promote and enhance regional foods and regional identities throughout Europe. It was launched to make it easier for consumers including tourists to enjoy local and regional foods. A log has been designed to show restaurants and shops selling local and regional specialities in high quality. (reference 1)
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    10.2. Agri-production

    “Agri-production” means efficient production and processing of bio-materials for food- and non-food applications.

    The liberalisation of the agricultural markets under Agenda 2000 (and the revision) will give farmers more options concerning the ways they use their land giving a potential outlet for e.g. more intensive non-food crop production. It might be agreed to set aside a certain percentage of land in the candidate countries in order to reduce overproduction of certain agricultural commodities. If the same rules shall apply as in the current set aside scheme in the EU, then this could open up for a large production of non-food crops that can be grown on set aside land without loss of subsidies.


    The bio-based non food industry is more complex than the food industry. It includes traditional industries such as textile industries, paper industries, cosmetics industries, and new industries such as solid fuel industries and biodiesel and bioethanol producers, producers of plant extracts for dyes, flavours, pharmaceutical etc. To this may be added emerging areas such as molecular farming (page x).

    In the past agricultural groups fought one another over stable markets. The vast majority of R&D funds have gone into this kind of competition. Advances in making high fructose corn sirup undermine markets for sugar. Wheat starch competes with maize starch and potato starch etc. Competition is healthy, but overall such competition does not increase the total demand for agricultural products.

    It would be much more rational seen from a global perspective to focus on substituting fossil derived products with commodities produced from biological materials. We should in our part of the World increasingly base our economy on resources from photosynthesis (biomass) and energy from the sun and be prepared to rely less on cheap fossil reserves. We must accept that these reserves are finite, while photosynthesis is not. We should not squander our resources and energy derived from the sun, but go for complete resource utilisation.

    A trend towards a more bio-based economy than today - an industrial sector mainly based on biological raw-materials – would certainly be of great relevance for the Baltic Sea area with its huge amounts of forests and (surplus) agricultural land. The area could not only become supplier of bio-energy, as suggested on page x, but also many other commodities as explained in chapter xx.

    The potential market for biobased non food products is (apart from the bioenergy market)not as big as the food market, but still quite considerable. Many of the non-food production potentials are attractive for rural areas for several reasons.
  • They tend to be environmentally benign.
  • They use a renewable feed-stock produced locally, and
  • They often rely on biological processes that operate at low temperatures and at ordinary pressures.
  • Furthermore they may be competitive even in relatively small scale.

    An ethanol refinery, for example, is about a third to a tenth as large as a petroleum refinery. A plant making bio-chemicals can be as little as a hundredth the size of commodity biochemical plants. A bio-mass gasification plant may compete with a coal gasification plant five times in size.
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    10.2.1. Biorefineries

    The relative modest scale of biorefineries means that they can proliferate in rural areas, It also means these new types of manufacturing enterprises lend themselves to co-operative ownership (page x).

    Co-operative bio-refineries (food or non-food) can be the vehicle for linking the bio-based economy to rural economic development. They may maximise the income that remains in the local economy. A biorefinery is a link between agriculture and industry, which is useful to support the future bio- based industries with homogenous raw materials of good quality. It is also a tool to secure farmers a decent and stable income.

    A biorefinery resembles an oil refinery. Like most agricultural crops crude oil contains a number of chemical constituents. It is characteristic for an oil refinery that all constituents are utilised as optimal as possible. Nothing is wasted. It is also characteristic that the refinery possesses a great deal of flexibility both technically and economically. The proportion between the different product streams can easily be changed according to actual demands and price relationships on the market.

    The same flexibility is included in a biorefinery. The refinery should be able to collect all constituents (including the stem) of a given crop (whole crop harvesting) separate the crop into its botanical constituents and pre-treat these according to their final application. A concept, where all parts are utilised in different market segments will help to “spread the risk” and make the integrated agricultural/industrial sector less vulnerable towards fluctuations in harvest yield, prices, market demand s etc.

    This possibility to separate a given crop into individual components, is illustrated in the Vita-wheat project (page x), where wheat is separated into 7 product groups with added value as functional food and nutriceuticals.

    Bio-refining of rape-seed is another example. (page x).In figure x (below) is thus shown the added value effect from an optimal utilisation of all botanical components in rape-seed.


    Income from refinery products as a percentage of total income from traditional refining: (From Assessment of the commercial success of the ÉCLAIR programme: EUR 19338. EU 2000)

    A third example is the concept developed by professor Hubert Kolodziej and Dr. Andrzei Vogt from the Biofuel Energy Centre in Wroslaw, Poland (minutes from the fourth regional meeting).

    Their concept includes the combined production of solid fuel (straw), liquid fuel (rapeseed oil ethyl ester) biogas and electricity). The project is still at the pilot plant stage, however plans for building a small production unit is under way. The optimal size for one plant is 30.000 tons of ester pr. Year. 40 plants of this size could directly and indirectly employ 450.000 people and lead to the substitution of 1,2 million tons. (reduced import of crude oil, CO2 reduction).

    Example from Mecklenburg Vorpommern – potato waste –Conference proceedings
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    10.3. The food industry in the future (2010)

    The Danish MAPP Centre for Research on Customer Relations in the Food Sector has together with the Technical University of Denmark (Dept. of Engineering and Management) set up three scenarios for a possible future development in the food sector. ( Scenario Research – The Food Industry in 2010:MAPP – Annual Report 2001).

    The aim was to identify the demands the food industry can expect in the future plus which research areas the public research should prioritise in order to support the development of competence within the food industry.

    Although the scenarios are isolated developments, in practise the future is likely to be a combination of the different tendencies within the scenarios. The work is based on Danish conditions, however as food production and consumption is international, the results will probably be valid for the other countries in the Baltic Sea as well.

    Naturalness
    The first scenario “naturalness” has focus on consumers that put emphasis on sustainability from farm to fork and they consider organic foods to be more wholesome. These consumers feel a growing need for protecting the nature and living a healthy life and they reject genetically modified foods.

    This consumer group will no doubt be attracted towards the “Agri- Culture” scenario, and they will become major customers to the small agri-culture producers.

    Technology driven health
    In the second scenario the consumers have a quite different perception of food. These consumers have accepted both functional foods and genetically modified foods. They have confidence in modern food production and believe they are well informed and have a realistic picture of how to produce modern food.

    The challenge in this scenario is the accumulation of knowledge that has to take place in order to develop and produce “high tech” foods. The scenario calls for research and development, and it is questionable, whether individual companies will be able to finance and organise this.

    The “technology driven health” scenario is linked to the “Agro-Industry” scenario. The two virtual factory examples are good representatives for the food/health sector, and the stage/gate principle (page x) would in many cases be the best way to perform the necessary R&D.

    Tight spending
    The last scenario, “tight spending” is based on a lower disposable income and extensive internationalisation. Prices are the main criterion of choice with the result that quality foods and organic foods are niches for this consumer group. The focus on value for money is the central driving force in this scenario.

    Central retail chains are dominating the distribution of these food products, and the retailers more or less dictate price and quality. The large retailers often want their own labels on the products.

    Also this scenario is linked to the Agro-Industry scenario.

    Most large companies have foreseen a development like the above, and they are making a number of strategic responses, which involves a mixture of cost minimisation and product differentiation.

    Medium-large companies are well suited to meeting the growing demands of retailers for private label products. They are able to take advantage of economies of scale in production, can be flexible and rapid in response to retailers needs, and, not least important, they avoid the costs of creating and maintaining brands.

    Small companies can survive by lowering costs or producing highly specialised products for niche markets or by developing products in new areas of the market and through larger flexibility. ( (10) Structural change in the European food industries, final report. EU contract no: AIR 1216, 2000)
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    11. New production opportunities in the Baltic Sea regions

    Traditional food production will remain the main income sources for most Baltic Sea farmers. We will however see a much more diversified agriculture, including forestry, tourism, landscape maintenance etc. We may also see a more pronounced division of farmers in those who deal with agri-culture (in the original meaning of the word) and those who are dealing with agri-production (page xx).
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    11.1. New production opportunities

    A broad spectrum of potential new industrial applications for agricultural products both in the food and in the non food area is available, including products that can be produced in small scale production units placed in rural areas.

    The economic feasibility of most of these applications depends strongly on the price and quality (homogeneity) of the agricultural raw-material. It has been predicted (Wondu Holdings, 2000) that by 2010-2015 raw material costs of e.g. biopolymers produced from plants will become competitive with those made from oil. A new ligno-cellulosic economy, based on wood and agricultural wastes, is merging to complement the petrochemical economy. The potential size of the market, even with a small share is significant in terms of supplying just a small part of the materials used in automobiles, building and construction materials. Starch and sugar and vegetable oils have already for some years been able to compete with petrochemical products in production of speciality lubricants, cosmetics, pharmaceuticals etc.

    As was illustrated in chapter 5 a few main crops dominate agriculture in the Baltic Sea countries. The main raw-materials in the Baltic Sea regions are, as already indicated, biomass (wood-waste, straws etc.), cereal grains, potatoes, sugar beets and oil crops, and new activities would naturally mainly be focused around processes that are based on these raw-materials. However in some regions it will presumably be advantageous also to grow speciality crops for use in the food, cosmetic and pharmaceutical industries.

    The BASAN scout function has carried out a survey over the new production potentials that have been derived from the EU research and development programmes during the last 15 years. Those potentials of most interest for the Baltic Sea area are listed in the appendix.

    Bioenergy
    Although bioenergy is a low cost and low profit commodity, the prospects of establishing small scale energy units on the basis of biomass are good. Such units will create new activities and secure additional income to rural area. The products may be biofuel – logs, pellets, briquettes- for export out of the regions or heat and electricity for consumption in the region.

    Food
    There are numerous possibilities for production of profitable new food products in the Baltic Sea regions. The most obvious product-areas are presumably region specific food and high added value functional foods and food ingredients.

    Non-food
    In the non-food area focus should not only be on the use of the main plant components such as starch, sugar and vegetable oils but also on the extraction and use of minor constituents with high potential value, from the agricultural crops. It is often here the highest added values and profits can be found. Such products can be used for many purposes in the cosmetic, pharmaceutical, chemical, paint and varnish e.g. industries.
      As also shown elsewhere in this report there is no lack of new business opportunities for the rural areas in the Baltic Sea region. In the following a number of new untraditional production possibilities that might be of special interest for various rural areas in the Baltic Sea region will be discussed. A distinction is made between productions based on traditional crops, new crops and on by-products from established industries.
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    11.2. Bioenergy


    With the upward trend in energy-prices and the increasing concern about the C02 emissions ,the interest in the use of biomass for energy is considerable in all the markets around the Baltic Se as well as in the rest of Europe.

    The World Energy Council Committee estimates that by the year 2020 the share of renewable energy will grow to 21 – 30 % of the total energy consumption. In a shorter term the EU assumes that the share of renewable energy in the fuel and energy balance will rise from 6 % in 1998 to 12 % by 2010.(EU White Paper on Renewable Energy,1997).

    This forecast may have to be changed, if fast developing countries like China are expanding their demand for energy at a faster rate than today. It has been calculated (Berlingske Tidende,27 october 2003) that China by the year 2015 may have the same consumption of fossil energy per inhabitant as South Korea today. This means that China in 2015 could have a demand equal to 83 % of the total oil production in the World today.
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    11.2.1. Solid biofuels
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    Solid biofuels are residues from forestry, industry and agriculture and – still to a very limited extent – energy crops grown especially for energy purposes. At the second BASAN regional meeting in Helsinki Rolf Olsson from Sweden gave an overview over the potentials for new fibre crops such as reed canary grass and new fibre hemp varieties.(page xx).

    The production of biomass is considerable in all Baltic Sea regions and a large part of it, cereal straws, wood waste etc. is still considered to be waste products. Therefore considerable potentials for an increased biofuel production exist.

    According to an EU report –Increased Production and use of Biomass and Other Renewable Energy (Baltic 21, Energy, Joint Action 1, phase 1,april 2001) - the use and potentials of biomass as energy in the Baltic Sea states are as shown in table x.

    Table x. Biomass (wood and straw) for energy. Potentials and current utilisation
    GWh/year         Techn. Potential     Utilisation           Use in % 
                                                                of potential
    Denmark	                  34.000	      9.546	         28 %
    Estonia	                   9.730              7.196              74 %
    Finland	                 117.200             67.300              57 %
    
    Germany 
    (Schleswig-Holstein/      10.125	        601	          6 %
    Mecklenburg-Vorpommern)
    
    Latvia	                  41.139             12.576              31 %
    Lithuania                  8.815              3.999              45 %
    Poland                   187.777	     15.285               8 % 
    
    Russia 
    (St. Petersburg            2.000                346              17 %
    and Kaliningrad)
    
    Sweden                  165.000              78.200              47 %
    

    It is seen from the table that especially, Sweden, Finland and Poland have large production potentials.

    An extensive export from the Baltic states to a.o. Scandinavian countries has already been established.

    Energy prices of biofuels vary from country to country indicating a market for international trade. It might be feasible to establish small-scale briquetting or pelleting plants for wood and straw in the rural areas especially in the three Baltic States, where bio-fuel prices are very low compared to e.g. Denmark, Finland and Sweden. There seems to be good prospects in exporting such pellets or briquettes to the other Baltic Sea Countries, especially if a quality control system is established. This control system should be centralised in order to reduce costs and secure a homogenous product.

    At the first regional BASAN meeting in Warsaw a description of a small Polish briquetting plant was given.(page xx). As raw-material is used sawdust, wood waste and shavings. The process is labour intensive and the logistics can be complicated.( for further information see minutes from first regional meeting in appendix xx)

    In all countries around the Baltic Sea the use of solid biofuel has increased during the last years. The potential for further increase is however still very large, and the countries have very ambitious plans for the future.
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    11.2.2. Liquid biofuels

    Another option is the production of liquid bio-fuels such as bio-ethanol and bio-diesel.

    With the technology of today it would be rather costly to produce bio-ethanol in small units, while it has been shown e.g. in Germany that it is possible to establish competitive productions of rape-seed oil for energy, combined with a production of fodder cakes, in small plants placed in rural areas. A prerequisite for the competitiveness of bio-diesel is however energy tax exemption.

    The European gasoil market amounts to approximately 200 million tonnes pr year. Bio-diesel has been produced on an industrial scale in the EU since 1992, largely in response to positive signals from the EU institutions, Current production runs at 1,100.000 tonnes, mainly in Austria, France, Germany and Italy. The total bio-fuels (bio-diesel and bio-ethanol) production is about 1,500.000 tons. This is less than 1 % of the market for conventional fuels.

    By 2005 bio-fuel production should rise to more than 6 million tons in order to meet the 2 % target set by the EU member states. This means that an additional 4 million hectares of non-food and energy crop surfaces are needed in order to fulfil the first 2 % target.

    This could represent a very important absorbing potential for additional acreage coming into the enlarged European Union from new East-European member countries.
    The European Union is committed to an 8% reduction of greenhouse gases emissions by 2010. The continuous strong growth in C02 emissions is not consistent with this commitment. The transport sector's overwhelming dependence on oil is a strong factor in the increase of oil imports, expected to reach 90% by 2030. The transport sector alone is thus responsible for many of the challenges that the Union has to face in terms of meeting its greenhouse gases emissions targets and of securing alternative energy supply.
    The European Commission has therefore adopted an action plan and two proposals for Directives to foster the use of alternative fuels for transport, starting with the regulatory and fiscal promotion of biofuels. The Commission considers that the use of fuels (such as ethanol) derived from agricultural sources (i.e. biofuels) is the technology with the greatest potential in the short to medium term. The action plan outlines a strategy to achieve a 20% substitution of diesel and gasoline fuels by alternative fuels in the road transport sector by 2020. It concludes that only three options would have the potential to achieve individually more than 5% of total transport fuel consumption over the next 20 years: biofuels which are already available, natural gas in the medium term and hydrogen and fuel cells in the long term. One proposed Directive would establish a minimum level of biofuels as a proportion of fuels sold from 2005, starting with 2% and reaching 5.75% of fuels sold in 2010. The second proposed Directive would give Member States the option of applying a reduced rate of excise duty to pure or blended biofuels, when used either as heating or motor fuel.
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    11.2.2.1. Biodiesel
    Modern conventional oil-mills, producing products for food and non-food purposes are normally very large. For instance in Germany the central oil-mills have a capacity of up to 4000 tons of seed pr. day, and 14 oil-mills are together processing 7 million tons of oilseed. However in Germany there are also 80 small oil-mills, mainly situated in the Southern part of Germany with a capacity of up to 25 tons of seed pr day. The area from which these small mills are supplied is normally less than 50 km away from the plant.(F.Tack, University of Rostock, in: Landes Technologie Anzeiger, dec. 1999).In Denmark has in recent years been established micro (on farm) oil mills for production of rape-seed oil for food consumption and linseed oil for technical use.

    In the Slubsk region in Poland a rapeseed processing plant with a yearly capacity of 150 000 tons rapeseed is under consideration. The plant shall produce biodiesel (RME). (minutes from first regional meeting).

    Also in Poland a “Biofuel Energy Centre” is been planned. It will be located in Skoszyce. The centre shall produce biodiesel (ethyl ester) and electricity. (appendix, virtual factories)

    11.2.2.2. Bio-ethanol
    Although the cost of making ethanol from biomass has dropped significantly over the last several decades, biomass-derived ethanol is still too expensive to compete with fossil fuels without subsidies. Therefore the key challenge is to reduce the major operating costs: Primarily pre-treatment and enzymes.

    All over Europe , also in the Baltic Sea countries ,projects in semi-industrial scale are currently running with the objective to reduce production costs. The pilot plant experiments in Wroclaw in Poland are mentioned on page, and in the Northern part of Sweden is being established a pilot plant with a feed stock input capacity of 2 tons/day. The plant will be open for co-operation with partners all over Europe. It will be located in Ornskoldsvik, close to Umeå.

    The plant is affiliated to the three universities in the region : The university of Umeå, Mid Sweden university and the Technical University of Luleå. A commercial company – Etek Ethanoltechnik AB – will be responsible for the technology development.

    Wismar University in Mecklenburg-Vorpommern has set up a small pilot plant for production of ethanol from wood waste and cereals including straw and grain.
    11.3. Combined fuel and feed production. Animal protein feed as a co-product

    It might be feasible to establish small scale bio-diesel/protein-feed plants in the regions around the Baltic Sea, especially in the view of the current high price of mineral oils and a growing demand for “safe” protein feed. An increasing percentage of consumers are concerned about the new biotechnology, and they do not want to eat genetically engineered food products. This has made farmers reluctant to use gene-modified soy-cakes from the USA in their animal feed, and the demand for protein concentrates free from genetically manipulated components , such as European grown rape-seed cakes, is increasing. Also, the ban on the use of meat and bone meal in animal feed, due to the BSE crisis, has boosted the demand for vegetable protein. To this can be added that organic farmers find it still more difficult to find organically produced protein feed for their animals. All in all there might be scope for a number of units with a combined production of protein feed and rape-seed oil /bio-diesel for energy purposes. Experiments in Denmark and elsewhere have e.g. shown that rape-seed oil is excellent for application in oil heated furnaces and in micro heat and power plants.

    The economy could be further considerably improved, if the by-products are used for production of high added value products such as bio-pesticides and pharmaceuticals (page xx).
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    11.4. Food and non-food products
    11.4.1. The food sector

    There are major differences between regions in the Baltic Sea area in the nature of their food processing and distribution and in the attitude to traditional versus “modern” food processing. Finland is for example in the forefront in Europe concerning functional foods, and several products have already been marketed (page xx), while functional foods are almost non-existent on the market in Denmark due to a very restrictive legislation. New business opportunities in the food sector therefore very much depend on local conditions. Another crucial factor is the risk of competition from existing food industries. The Scandinavian countries are thus dominated by a few very large, mostly multinational, food companies (meat, dairy, cereals) and food retailers, who to a large extend control the food market.

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    Country           Market share %
    
    Finland	               95
    Sweden	               79
    Germany	               52     
    Denmark	               46
    Norway	               25
    


    Table x: Grocery market share of top five food retailers in Europe.( CAFÉ network-final report, September 2003).

    The large retailers are able to dominate the food production in a given area. However, as the survey performed by BASAN has indicated, there will always be room for small, region specific, high quality food products, and it even seems that the consumers more and more prefer that kind of products. In addition there will be room for industrial groups engaged in the supply of specialist food ingredients, such as amino acids, vitamins, flavours, thickeners and emulsifiers.

    Preparation convenience is a key feature of foods purchased by busy modern consumers. Six significant growth trends in consumer demands have, according to Connor et al(Conner J, W.Schiek,J. Uhl, and Hiemstra, 1997: “Consumer Demand for Food” in: Food System 21. Gearing Up to the New Millenium, Purdue University), been identified:
      1. More convenience
      2. Ethnic-identified foods and regional specialities
      3. Age related foods (speciality food for elderly people, weaning foods etc.)
      4. Low-calorie foods
      5. Healthy foods
      6. Natural foods

    Value added producers should focus on products that fill these consumers desires or market niches. By utilising value- added precepts for business development producers can identify the wishes of consumers and target markets rather than taking the commodity to the market and hope that consumers will like it and use it.

    In other words, it is important that new food industries from the very beginning are attuned to the needs of the marketplace, instead of concentrating only on production and ignoring the final marketed product.

    The frozen or “bake-off” dough products are examples of convenience commodities that meet the above criteria. The current trends in most European countries indicate a substantial increase in consumption, particularly in large urban areas.

    Already today many examples of successful small scale productions of regional specialities can be found (e.g. page xx). Such businesses are important for the owner and his family. The impact on the dynamics and development of the local society is however modest. Examples are given in the country reports e.g. the reports from Bornholm and Lolland Falster.

    The commodities from the two virtual factories address the issues in points 3-6. The two examples (page xx) are also typical representatives of production units that seek to utilise all components in a given (traditional) crop as optimal as possible for production of both specialist food ingredients and non-food components. Such factories are often called bio-refineries. Other bio-refinery examples are mentioned on page x. They include traditional production units such as potato starch factories and oil extraction plants.
    11.4.2. The non-food sector

    The bio-based non food industry is more complex than the food industry including traditional industries such as textile industries, paper industries, cosmetics industries, and new industries such as producers of plant extracts for dyes, flavours, pharmaceutical etc. To this may be added emerging areas such as molecular farming (page x).

    As is seen from table xx the market for non-food products from renewable raw materials is still modest in Europe. The potential, however, is large.

    
    Application   Total current   Current      Current    Approximate     Approximate
                  EU market       proximate    market     total poten-    total market
                                  market for   penetra-   tial market     penetration
                                  RRM          tion       for RRM   
                  1000 tons       1000 tons       %        1000 tons         % 
    
    Polymers      33.000 (1998)     50 (1997)     0,15         300            1
    Lubricants     5.000 (1999)    100 (1999)     2,00       1.000           20
    
    Solvents       4.000 (1999)     60            1,5          235           12,5
    Surfactants    2.300 (1998)    460           20          2.300          100
    
    Fibres and 
    composites        Na            90             Na           Na            Na
    
    EU Commission, Chiaran Mangan, IENICA, Melwyn Askew, 2003. 
    International South Europe Symposium, “Non food Crops: 
    From Agriculture to Industry” Bologna, 2003.
    RRM=renewable raw materials
    
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    11.5. New crops - Speciality crops

    Small scale productions, catering goods to a very limited market may become a very important source of income for individual farmers with the necessary skills to produce a given speciality item, though niche productions will never be able to solve the problems in rural areas in general.

    Examples of such niche productions are:
      1. Mint: for pharmaceutical and food and cosmetic industries
      2. Mustard: For the food industry
      3. Buckwheat; For food industry
      4. Hops: As flavour for mainly the brewery industries.
      5. Camelina for food ingredients

    The aspects of production and processing of Cameline in Fin land is discussed in the minutes from the second regional BASAN meting in Helsinki.

    Table x shows examples of more untraditional speciality plants that currently are being tested in Denmark, Finland, Germany and Sweden either on a commercial scale (C), in pilot scale (P) or experimentally in lab. scale(E).

    The table indicates that the number of potential plants is large. One may however not forget that these crops address very specialised markets. An overall market estimation is not available for the full range of speciality crops and products there off.

    French estimates suggest annual World tonnages of 45.000 tons of essential oils and 50.000 tones of aromatic plants. It is crucial to note, however, that market demands and prices are highly variable and react quickly to market supply, magnitude of potential harvests and quality.

    Table x derives from the IENICA report to the EU Commission (2000)

    Crop	        Denmark   Finland   Germany    Sweden
    
    Allium	                     C         C          E
    Amaranthus        E          E                    P
    Angelica                     P         C          E
    
    Artemisiaa                   E                    P
    Anethium                     P         C	
    Basil                        C         C	
    
    Black currant                C         C          C
    Caraway                      C         C          C
    Chamomila                    C         C          C
    
    Quinoa                       P                    E
    Chrysanthemum                E         E	
    Digitalis                    E         C	
    
    Dill              C          C         C          C
    Echinacea         C          C         C          E
    Fennel                       C         C	
    
    Hypericum         C          P         C          P
    Lovage                       E         C          E
    Madder            E          E         E	
    
    Marjoram                     C         C          C
    Melissa                      C         C          C
    Parsley           C          C         C	
    
    Peppermint                   P         C          E
    Sage                         C         C          E
    Sambucus                     E         C          E
    
    Sea buckthorn     E          C         C          P
    Taraxacum                    E         C	
    Tagetes           E          E		
    
    Taxus                        E         E	
    Thymus                       E         C          C
    
    Valerian          E          P         C          E
    Woad                         P         C                	
    

    Table x: Untraditional crops of interest for the Baltic Sea area
    Source:IENICA, 2001

    Europe plays an important role in the international trade of medicinal and aromatic plants with an average of 120.000 tons imported annually from more than 120 countries. Germany, Poland and Bulgaria are among the Worlds top exporters. Between 1.200 and 1.300 species native to Europe are commercially traded, and though some species are cultivated, collections from wild still play a major role. The source of these wild plants is mainly Albania, Turkey, Bulgaria, Greece and Spain. The overall volume of wild plants collected in Europe is estimated as 20.000 – 30.000 tons annually. According to “Europes Medicinal and Aromatic Plants; their use, Trade and Conservation” at least 150 species are threatened as a result of over-collection, destructive harvesting techniques and habitat loss and change. To this may be added that the pharmaceutical companies, who are processing the wild plants have increasing problems with large variations in qualities and a limited supply security.

    The above indicates a potential for development of new markets from potential new crops and cultivation of wild species.

    The natural colorant and dyes markets is much larger than the medicinal plant market. The value of the food colorant market was in 1989 320 million $, of which approximately 50 % was natural products. The market for natural products is growing by 10 % pro annum. The World’s dye market value as 2.5 billion $ pro annum (1997), and the consumption of dyes to color textiles on a World scale is 700.000 tons pro annum. (IENICA final report, 2000)
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    11.5.1. Molecular farming

    There is an emerging interest in molecular farming, especially in Denmark and Sweden. However still primarily amongst scientists and biotech industries. Workshops have been organised to measure the interest and discuss the benefits and problems. The outcome of these workshops have been positive, and it is now discussed how to proceed.

    If molecular farming ever becomes political acceptable and technical feasible, the Baltic Sea islands may be well suited for the establishment of future molecular farming activities. On the islands it would be possible to contain the speciality plants within an enclosed area. The farmers are skilled and they have a well functioning extension service, and it would be possible to set up efficient control systems. It should however be stressed that such productions will not be established in the next many years mainly due to the current public scepticism towards the new biotechnological tools.

    Plants have a highly advanced and unique metabolic capacity for synthesising specific high value bio-molecules like sugars, proteins, oils, fatty acids, fibres, flavours, fragrances and health-promoting compounds such as flavonoids. Using novel biotechnological techniques plants can be genetically triggered to produce bio-molecules with a desired functionality or be creation/transfer of other genes be triggered to produce entirely new molecules with novel properties.

    Efficient methods have recently been developed for introducing genetic information into plants. Procedures are now also available for expressing transgenes in highly specific organs and tissues. Introduction of genes from other plant species or from animals, fungi or bacteria results in the production of specific components such as fine chemicals, high-value protein, vaccines and other medicines. With the current understanding of the genetic regulation of plant metabolic pathways we are now in a position to modify these biosynthetic routes genetically in a predictable manner. The new technologies have also opened up the possibilities to produce antibodies, interferon, vaccines and industrial enzymes.

    Host plants for production of specialty products might be rapeseed, linseed and potatoes.
    (report from workshop on molecular farming, february 1998, Copenhagen)
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    11.6. By-products from agro-industrial productions

    The main crops grown in the Baltic Sea area typically contain one main component, such as starch or vegetable oil or protein together with a number of by-products that often are considered as waste, e.g. potato pulp, wheat bran and hulls and oil-cakes. In some cases such by-products are used as animal feed or for energy and sold at very low prices. These by-products contain, however, potentially valuable components that can be sold at high prices, if they can be extracted in a pure form and eventually further processed.

    Examples are:
    • Alkaloids from lupins
    • Beta carotin (vitamin A precursor) and alkaloids from alfalfa
    • Beta glucan (thickener for use in the food industry) from barley and oats
    • Polar lipids (emulgators and antioxidants) from oat germ and wheat gluten
    • Dietary fibres from cereal brans and husks
    • Dietary fibres from potato waste
    • Oligosaccharides from cereal brans and potato waste.
    • Glucosinolates from from brassicae
    • Glycoalcaloids from potatoes
    • Phenyl propanoids from many fruits.
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    11.6.1. By-products from agro-industries

    Commercial exploitation of by-products from milling, brewery, potato and starch industries for production of new classes of functional food ingredients and “high added value” products for the pharmaceutical and cosmetic industries is a very promising area for all regions around the Baltic Sea. Large milling, brewing, starch and potato industries are situated in all the Baltic Sea countries, and the by-products are normally available at low prices. Small-scale units could be established in the Baltic Sea regions for extracting and further processing valuable components from these by-products.

    11.6.1.1. Cereals
    As wheat is the main crop in the Baltic Sea countries, wheat bran would be an obvious potential raw-material. Most of the bran is today poorly utilised in animal feed or simply disposed of. The commercial potentials in utilisation of bran is described in details on page xx.

    11.6.1.2. Oil crops
    As previously mentioned also rape-seed and linseed are grown in the Baltic Sea regions in relatively large amounts. The vegetable oil is used in the food industry and in the non-food industry for production of lubricants, hydraulic oils, printing inks, solvents etc. Most of the oilcrops are processed in large oilmills, and it would presumably be very difficult for small village size oilmills to compete with the large mills on the traditional markets.

    As mentioned on page 16, small scale oil mills do exist, and they survive because they produce speciality products and/or serve a limited local market. New technological developments have increased the number of speciality products that can be extracted from an oil crop leading to an almost total utilisation of all the valuable components in the crop. The market for these speciality products are so limited that the interest from the large vegetable oil companies is modest. This might be the chance for small units to take up such productions. These niche products are high added value products and they can add significantly to the overall economy in a small oil-mill.

    An oil-crop is a very versatile crops with a number of very useful minor components. As it with todays technology is possible to extract and separate all the minor components it is also possible to utilise these components in an optimal way. These separations and extractions can be performed also in a small scale opening up for an economical feasible small scale production of speciality components.

    A new processing/extraction principle that allows the isolation of undamaged glucosinolates has been developed by an international research team consisting of: Bioraf Denmark Foundation and The Agricultural University from Denmark, INRA,France, Scottish Agricultural University, GB, Institute Sperimentale per le Colture, Italy and The Frauenhofer institute, Germany. Their work opens up for application of these important molecules for production of e.g. bio-pesticides and pharmaceuticals. An additional benefit is an increased nutritive value of the oil- and protein fractions.

    It was mentioned on page xx that a combination of biodiesel production and production of protein feed for the organic farmers might be a possibility. Other small-scale production possibilities are:
    • anti-cancerogenic compounds
    • insecticides
    • fungicides
    • bactericides
    • nematocides
    • herbicides
    • phospholipids
    • lipoproteins

    Vegetable phospholipids in the form of lecithins are very efficient emulsifiers, stabilizers, wetting enhancers and baking improvers. Phospholipids are also used in drugs both as active ingredients and as non-active excipient in vitamins, laxatives, antibiotics etc. In cosmetics phospholipids especially lecithin are widely used as carrier , disperser and emulsifier. Lecithin reduces the surface tension, improves the resorption, absorption and penetration of cosmetic ingredients through the skin.

    Lipoproteins are important parts of the membranes in oil rich plant seeds. Some play an important role in some of the most lethal and common diseases in the Western World such as heart diseases, stroke, diabetes etc. They are of special technological interest with respect to applications as surfactants and emulsifiers. They are water soluble and can be separated into protein and lipid moieties by appropriate extraction procedures. With the new techniques developed during recent years, they will be of special interest both from a technological and nutritional point of view.
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    12. The Virtual factory concepts

    The idea behind the two virtual factory concepts is to create a realistic basis for development of a “best practise” for bio-industrial technology transfer. The factories are designed on the basis of results from two EU research projects including pilot plant research.

    Business plans have been developed and preliminary market studies have been carried out. The business plans have been presented for stakeholders in Denmark, Latvia, Estonia, Lithuania and Sweden, and the two concepts have been presented at two international conferences : 1)The Basan final conference September 2003 on Bornholm and 2) at “Green Tech”, 3rd International Congress and Trade Show, Amsterdam, Holland, 24-26 April 2002, and at a workshop; “Innovationen Gehen in den Markt”, 28-28 November 2002 in Schwerin, Germany.

    The general conclusion from the feed-back from the stakeholders in the Baltic Sea area is that the format is excellent to present new concepts for potential investors already before the development activities have been finalised. However more evidence is needed, if the business plans shall be used for decisions concerning establishment of full-scale production units. To that end test productions and more elaborate market studies will be needed. (The stakeholder reports are presented in the appendix)
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    12.1. The Vita Wheat Company


    The Vita Wheat Company is an ambitious project with very high profit potentials, but also high investments and high risks. It is still classified as an SME according to the EU Commission definition, but the total concept is so large that only a few regions will be able to accommodate it. The concept is however a good example of a “locomotive” project that presumably would have considerable impacts on a given region. Apart from creation of new jobs it would improve the dynamics and constitute the foundation for further initiatives and developments. (see page x).

    It is clearly stated in the business plan that more R&D work is needed. Furthermore, although the market analysis gives an impression of very profitable emerging markets (based on current selling prices of comparable products) it is very difficult to predict the future market sizes and prices.

    A sensible approach towards a full commercialisation would be to start up( in small scale) with those productions that have been tested in pilot plant or semi-industrial scale, and then, step by step, continue with other productions, when they have become ready for production. ( a so-called stage/gate system, page xx)

    In this way it would become possible to test the functionality and markets for the individual products and thus reduce risks before decision on final investment is made.
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    12.1.1. The concept

    The production lay-out and the economic viability calculations are based on experience and results from several years of research work, partly in laboratory scale and partly pilot scale. The pilot scale development work has not completely finished, and additional pilot scale research is needed before a decision about commercial production can be made. In addition, market tests, and product quality and functionality evaluations should be made before the final decision

    The present business plan should therefore primarily be seen as a tool for organisations, which might wish to consider financing the development work that is still needed, before a final decision on commercial production can be made.

    As the Vita wheat products are intended for emerging markets, and as some of the products are not well known to potential customers, emphasis has been put on market survey and evaluations.
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    12.1.2. The company

    The company is called “The Vita Wheat Company” (VWC).
    An optimal production capacity is approximately 7 tons/hour, and the labour requirement is 72 full time workers. Raw-material demand is 50.000 tons soft wheat pro annum.

    12.1.3. The economy
    The economic calculations are based on results from pilot and laboratory scale experiments and they are therefore encumbered with uncertainty.

  • Annual turnover: 64 million €
  • Net profit before tax: 38 million €
  • Investment costs: 53,5 million €, and working capital requirements: x million €
  • Pay back time for the full investment is less than 3 years
  • The break even capacity is 19 % of total capacity
  • Return on capital employed (ROCE): 40 % after 30 % tax deduction
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    12.1.4. The products

    The Vita Wheat Company shall produce high added value commodities for the food ingredient and health food markets. The Vita wheat process opens up for a number of product opportunities, however the strategy is to focus on seven products with good chances of success on the European market.A second generation plant may include further components and products with higher degrees of purity. The seven products are:

    Product      Production    Effect                 Use
                 capacity 
                 Tons/year	
    	
    A starch     24.000        Traditional wheat      Food and non-food 
                               starch	          industries
    
    Resistant     8.500        Prevention of          Bakery products, 
    starch                     colon cancer and       breakfast cereals, 
                               diabetes, improves     health bars, 
                               gut function           meat products
    
    Gluten        4.000        Traditional            Bakery products, 
                               vital gluten	          non-food industry
    
    Aleuron       3.000        Reduces risk of        Bakery products, 
    protein high               spiral tube defects    dairy products
    in folates		   in babies, cardio-
                               vascular diseases 
                               and perhaps cancer. 
                               Age related diseases 
                               (e.g.Alzheimer)	
    
    Xylo-         1.750        Improves gut          Bakery products, 
    oligosaccharides           function, bone        Dairy products, 
                               health and probably   soft drinks, 
                               reduces risk of       meat products
                               cancer and cholesterol	
    
    Dietary       1.000        Fat mimetics          Low caloric foods
    fibres	
    
    Tocol and       225        E-vitamin and         In speciality foods
    sterol rich                antioxidant 
    germ oil                   activity  
    
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    12.1.5. The market

    The products are meant for the profitable diet and health market. Projections indicate that this market will continue to increase in importance. This includes prebiotica, calorie controlled foods( low fat diets) and tailored nutritional foods (use of natural vitamins, anti-oxidants and minerals etc).

    Some of the Vita Wheat products are today well known to the market( dietary fibres, gluten protein) and already produced in large quantities, while the others currently are produced in limited quantities, however for an increasingly larger market.
    12.1.6. The raw material

    Soft wheat that is produced in all regions around the Baltic Sea will be used as raw-material. This crop is well known to the farmers. They know how to grow it under the local conditions, and they have the necessary equipment to harvest and store it. Besides soft wheat is grown in surplus in the EU, and it is a relatively cheap raw-material.

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    12.2. The LUPRO PROJECT

    Fig. X: Lupine seeds

    The LUPRO project supports the commercialisation of a technology to produce made-to-measure adhesives and specialty proteins for use in baby-food and as meat extender. Raw materials are lupins that can be grown in most areas of Europe.

    The project is proposed by an innovation company – Bioraf Denmark Foundation- which already has researched and developed the basic technology up to pilot plant scale on its own initiative, with the support and collaboration of an adhesive manufacturer (Frede Andersens Fabrikker, Denmark), who has researched and developed specific adhesive formulations from the lupin products. Also involved in the project is an agricultural research centre with expertise in the agronomics involved with production and harvesting of lupins (IBMER, Poland)

    The concept, which includes the development of small-scale production units, has the capability to be applied in most regions of Europe.

    The consortium has at its core the organisations that have already worked on the technology, but it is intended that new partners with market oriented skills and competencies join the project. These competencies include knowledge in intellectual property right issues, innovation finance and early stage marketing.
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    12.2.1. The company

    The company is called: “The Baltic Protein & Prebiotic Products (PPP).
    An optimal production capacity is approximately 3 tons/hour, and the labour requirement is approximately 20 full time workers. Raw material demand is approximately 20.000 tons of lupine seeds pr year.

    The production lay out and the economic viability calculations are based on results from almost 10 years of research work and pilot plant experiments, partly financed by EU research programmes. The protein products have been tested commercially in large scale by an adhesive manufacturer.
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    12.2.2. The economy

    The economic calculations are based on Danish conditions. The figures will naturally vary somewhat from one location to another.
    • Annual turnover: 24 million €
    • Net profit before tax: 9,5 million €
    • Investment costs: 14 million €, and working capital requirement: 2 million €
    • Pay back time for the full investment is less than two years
    • Pay back time for machinery and equipment is less than one year of full operation even with a 30 % reduction in capacity.
    • The break even capacity is 12 %
    • Return on capital employed (ROCE) is 49 % after 30 % tax
    • Internal rate of return (IRR) is 84 %
    • Net present value (NPV) based on a 10 years cash flow schedule is 41 million €
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    12.2.3. The products

    The factory is designed to produce two product types from lupines:
    • Protein concentrates and isolates. 7.000 tons/year
    • Prebiotica and fat replacers – dietary fibres (5.000 tons/year) and oligosaccharides (2.000 tons/year.)
    • As by-product is produced 5.000 tons of hulls that are sold to local feed mills.
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    12.2.4. The markets

    The two product types are meant for existing markets. The protein markets are reasonable stable, but product prices can fluctuate. The prebiotic and fat replacer markets are relatively new, and demand is increasing. Common for both product types is that the economy is so strong that it might be feasible to compete on price at least during an introduction period.
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    12.3. Summary of reactions to the virtual factories

    (the full text can be found in appendix)

    Denmark:
    Two investment funds were in principle willing to co-finance the two projects provided that other investors with the necessary technical knowledge would recommend the projects and invest themselves.

    However also the management set-up and the skills of the management staff must be both professional and dynamic.

    Latvia:
    The Vita wheat concept might be of interest for Latvia, however any serious considerations from Latvian side would require the involvement of foreign expertise and foreign investments.

    Latvian researchers consider the Latvian climate and soil conditions to be very favourable for lupine growing. There is plenty of unused land, which can easily be adapted to lupine growing. A recent prognosis foresees an increase from 150 ha in 2001 to 10.000 ha in 2005. The Latvian plant breeders suggest research on lupine growing in Latvia, and provided a positive outcome of this research they see no problem in implementing the lupine project in Latvia

    Lithuania:
    Two Lithuanian companies have expressed interest in exploring possibilities for establishment of productions in Lithuania. They have concluded that the information in the two business plans is sufficient for a preliminary evaluation, however more information must be given, before decisions can be made. Contacts have been made with western companies, meetings have been held, and currently funds are being raised for carrying out a more detailed feasibility study based on the conditions in Lithuania.

    Estonia:
    1) the protein factory: The business plan needs to be more detailed and realistic before a proper evaluation can be made. Lupins may not be available in sufficient quantities and qualities in Estonia. Doubts are expressed about market. The local market is presumably too small for the intended production size, and therefore export will be necessary.

    2) The vita wheat factory: The project is better elaborated and especially the market study is good. The project scale is large making it difficult to realise it in Estonia. The market must necessary be found outside Estonia, which could be problematic.

    Sweden:
    1)The Vita wheat factory: As concept the business plan has merit and is interesting. As business plan further evidence is needed to show with more certainty that potential customers are ready to buy such products at the postulated prices. The processes need to be worked out in more detail, before final decisions on investments can be made.

    2) The Protein factory: To market a Baltic “soy product” is interesting and has merit. Before investment considerations can be made it must be assured that there are customers to such a products. Trial applications and detailed market analysis are needed.
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    12.4. Questionnaires


    Figure x: The most important incentives
    A= most important: B= important: C= less important

    Questionnaires have been distributed to agro-industrial SME’s in the participating countries. 20 SME’s in the food and non-food sector have filled in the questionnaires. Responses have been received from Finland, Latvia, Estonia, Poland and Denmark.

    The companies were asked to indicate what they perceive as the most important incentives and barriers. The results are shown in the two diagrams below.

    The figure shows that access to risk capital is considered to be the most important incentive, while only a few of the companies find that access to financial advice and knowledge centres is most important.


    Figure x: Important barriers
    A= most important: B= important: C= less important

    Lack of risk capital and rules and regulations are by far the most serious barriers, while lack of access to technical and business advice seems to be of less importance.

    When analysing the above results one should bear in mind that a majority of the companies questioned are small and operating on domestic markets only. Besides not all of the companies are technologically advanced, and furthermore they may not have any wishes for technological changes.
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    13. Creation of ago-industrial activities in rural area Experience from USA

    It is often claimed that the Americans have a much higher developed entrepreneurial spirit than Europeans. For example almost half of all new jobs created in USA are created through the establishment of new companies. Even in the agro-industrial sector the establishment of new activities is more frequent than in Europe as a whole. It might therefore be worthwhile to study the American way of innovation in the agro-industrial sector. In the following a number of schemes that have been successful in establishing new enterprises are analysed.

    Agro-industrial venture organisations in the USA

                   Funding       Target group      Service offered      Achieved
    
    21.st Century  Private       Farmers and       Own entrepreneur     8 new companies 
    Alliance       Members fee   Co-ops.           Scouting             in three years
                   Service fee  (1000 members)     Financing
                                                   establishing	
    
    Kansas Value   Public        Small             Technical and        Commercial 
    Added Centre                 businesses        commercialisation    holding company 
                                                   support Pilot        established
                                                   plant facilities	
    
    New Uses       Private and  Companies,         Establishes          ?
    Council	       public	    farmers org.       strategies
                                universities       Info. service
                                State agencies		
    
    AARCC          Public       Farmers and        Create private/      After 3 years:
                   (revolving   SME’s              public partnership   60 projects
                   fund)                           (pre-commercial)	    3000 jobs
    
    VADG           Public       Farmers and        Financial support    ?
                                SME’s              Feasibility studies
                                                   Working capital	
    
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    13.1. 21st Century Alliance

    (New generation co-operatives: 21st Century Alliance – building value added Agri-business, by Roger Brown, Illinois Institute for rural affairs, September 2001)

    The 21st Century Alliance has its headquarters in Manhattan, Kansas – a location that is roughly at the center of America’s “breadbasket”. The Alliance was established in 1995.

    The Alliance helps farmers, mainly in Kansas to increase their scale of operation through value-added agribusiness. In just three years of operation, the Alliance has led to the formation of eight new companies. The Alliance at its core is made up of a relatively small number of dedicated people working diligently to extend the value chain for farmers, and to improve rural economies. It is best described as an entrepreneurial agri-business organisation that is both focused and flexible in its business start-up activity.

    The Alliance has approximately 1000 members, who each have paid 500 $ for the membership. The recruitment of members was not limited to Kansas, but included neighbouring states as well. The new enterprises include 2 dairies, a flour mill, a edible dry bean factory and a fiberboard factory. The factories are financed by stock sale. For example , when the mill was established, the producers could participate by investing 5.000 $ in a share that included an obligation to deliver a specific amount of wheat to the mill.
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    13.1.1. The Alliance organisation

    The Alliance organisation includes the members, a governing board, professional management and staff, and consultants as needed. The number of members is currently approximately 1.000. Members have an opportunity to invest in each of the new businesses as it develops.

    The organisations agenda includes four key elements:
      1. An aggressive pursuit of new business opportunities
      2. A reduction of risks by carrying out a thorough analysis before entering into any new business.
      3. The monitoring and refining of business plans of ongoing businesses (business metrics, market and competition).
      4. A spirit of co-operation to enhance business opportunities and promote a new approach to agri-business- The Alliance seeks business relationships across state and country borders to improve profitability.

    Members pay 100 $ a year creating an annual pool to run the secretariat. The Alliance also creates revenue through a 6 % service fee generated from the sale of stock in each new venture. These funds allow the Alliance to carry out its role as an entrepreneur,which specialises in the creation of value-added agricultural business, specifically by providing venture capital and business start-up expertise.
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    13.1.2. The process

    The process begins with an idea about a new business venture. These ideas can be top down or bottom up. The Alliance stresses strongly that the key point is to ensure that the right leadership is in place prior to any idea being investigated by the organisation. This usually requires five or six committed persons, e.g. primary producers, who can eventually be the core of a board or a (ad hoc) committee in a value added business.
    The process includes the following:
    • Business concepts that receive a positive recommendation at the first representation to the board are then investigated in further detail. A governing board is created that usually includes the ad hoc committee as its core.
    • A development service contract is prepared. The contract details the work to be done leading to start-up, and the relationship with the Alliance. The agreement covers items such as: due diligence, marketing, engineering, financing. Consultants are used. The work performed during the due diligence phase helps define the risks and solution to problems. Many projects do not pass this stage.
    • A feasibility study is conducted. If positive the next step is to initiate the creation of a formal organisation and to raise the necessary capital.
    • A contract is prepared that outlines the financial arrangement, including the type of financing and the terms of reimbursement to the Alliance.

    The Alliance has a strong position as it includes farmers that own land for production of the raw-material for the factories. The large corporations can not duplicate the farmer system, so competitive opportunities exist for the local producers to capture niche markets.
    13.2. Kansas Value Added Centre

    The Centre has as objective to “enhance the Kansas economy by providing assistance to agriculturally related value added endeavours”.

    It was set up in 1988 as a non-profit organisation. In 1994 a “for profit organisation” KVAC Holdings Inc. was created, which allowed the organisation to receive royalties from successful technology developments. In addition it has revolving loan capacities to reallocate return on investments from successful ventures.

    KVAC is mainly funded by proceeds from the Kansas Lottery and Racing Commission through the Economic Development fund, and it is governed by a 16 member Leadership Council.

    Its goals are:
    • To create and/or expand business and rural opportunities related to agriculture
      • Stimulate new options/uses for Kansas agricultural products
      • Identify/assess technology suitable for Kansas.

    • Implement a commercialisation and financing system to assist KVAC clients at each stage of development.
      • Implement a commercialisation charter for KVAC Holding Inc.
      • Implement an effective technology transfer system

    • Improve and enhance strategic alliances

    KVAC offers both technical support and commercialisation support (financing, technology transfer) and it issues newsletters, arrange workshops and seminars and help building strategic alliances. It has access to 9 pilot plant facilities and contact with a number of technical experts.
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    13.3. New Uses Council

    The New Uses Council Inc. is a non-profit organisation located in St. Louis Missouri. The Council was founded in 1990 and is dedicated to expanding new non-food markets – industrial, energy and fuel – for American agriculture.

    It has a membership of approximately 250 members, including individuals, companies, agricultural organisations, universities and state and federal agencies.

    Activities include regional meetings, development of a new uses policy and strategies. The Council has also set up an information service, and it currently publishes a quarterly newspaper.

    The New Uses Council has established a partnership programme for individuals and organisations that do not choose to become members of the Council, but wish to provide designated or un-designated support. Organisations can support the Council at several Partnership levels from 500 $ to +10.000 $.
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    13.4. Alternative Agricultural Research and Commercialisation Corporation (AARCC)

    AARCC was a federal agency, operating within the US Department of Agriculture. It was closed in 1999 in connection with a change in US agricultural policy.

    It was,( according to Robert Armstrong, US Department of Agriculture, 1996), created in 1992 as a response to a very ambitious government goal (“the New Farm and Forest Task Force report” to secretary of Agriculture Block, 1987) to generate 750.000 jobs ,increase farm income by 30 billion $ and add 100 billion $ in national economic activity within a time-frame of 25 years.

    In the spring of 1993 the AARCC Board conducted a series of hearings around the country to get advice from the public as to how they felt the Center could best accomplish its mission.

    The AARCC Centre had as objective to facilitate commercialisation by forming private/public pre-commercial partnerships. This helps to initiate market penetration strategies early in their product/process development. It also places the private sector in the lead; the guiding philosophy being that the private sector has much more knowledge of the marketplace than a government run organisation. Moreover the centre concentrated on the critical pre-commercialisation stage because that is the most difficult stage for a company to secure funding. Most estimates cite the pre-commercial expenses as being 100 times that of the expenses of basic laboratory research.

    An important aspect of the AARC Centre was its re-investment strategy. The Centre was funded via a revolving fund and not on an annual “use it or loose it” appropriation. Money provided to a firm for commercialisation a product is repaid.

    Only three years after its start the Centre was financing nearly 60 projects – mostly SME’s – with some 21 million $. About 73 million $ from the private sector was also invested in the projects. The projects not only generated demand for agricultural raw-materials, they also generated new jobs in the rural areas; approximately 3.000 new jobs were created during the years.

    Among the products developed were:
    • Ethanol and other chemicals from lignocellulosics
    • Straw pulp
    • Kenaf newsprint paper
    • Molded furniture parts
    • Insulation boards
    • Oil absorbant
    • Panels
    • Slow release bio-pesticides
    • Cosmetics
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    13.5. The Agricultural Community Action Process (ACAP)

    (Report: “Beyond the Farm Gate, Agriculture in the 21st Century. Illinois Department of Commerce and Community Affairs, November 2000)

    The ACAP programme has as objective to engage small rural communities actively in economic development efforts in agro-industries. It assists in building relationships between primary producers, agri-business leaders, economic development professionals and the scientific community to create new economic development through value-added agri-business opportunities.

    ACAP has developed a manual to help rural communities get organised, create a vision for the area and initiate an action plan. It stresses the importance that the rural community itself takes the initiative. However Illinois Institute for Rural Affairs and Illinois Department of Commerce offers to assist and create contacts with experts, consultants, investment funds etc.

    The following strategy is suggested:
    • Entry-level. Value added agricultural opportunities are explored. Partners, assets and resources have been identified. Economic development organisations are encouraged to target value-added agricultural business development.
    • Mid-level. Two or three value-added agricultural projects have been identified, and the pre-feasibility phase has been completed. Additional staff time is needed at the economic development office for co-ordination, further education, research, and resource identification to take projects to the capitalisation point.
    • Project development. Two or tree projects have been evaluated; and the pre-feasibility study is completed. Further research and development investments are needed for capitalisation.
    • Project implementation. Feasibility phases are completed and organisational structures are identified. Assistance is needed to complete business plans and financial packaging.
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    13.6. Value added Agricultural Products Development Grants (VADG)

    VADG was established under the “Year 2002 Farm Security and Rural Investment Act” better known as the “Farm Bill”. The Farm Bill establishes 4 related, but different programmes from the 40 million $ of funds pr. Year. The programs are:
    • VADG producer grants
    • A resource centre
    • A series of agro-industrial innovation centres
    • University research on the impact of value added activities

    For the VADG programme is available 33 million $ annually. The objective is to help farmers, farmers co-operatives and producer based business ventures establish new value added productions based on farm products.

    Financial support may be given to two types of activities:
    • Developing feasibility studies or business plans needed to establish a viable value-added marketing opportunity for an agricultural product
    • Acquiring working capital to operate a value-added business venture or an alliance that will allow the producers to better compete in domestic and international markets.

    The maximum award pr. Grant is 500.000 $/year, and applicants must provide matching funds at least equal to the grant.
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    13.7. Rural development policy

    The American rural development mission co-ordinates programmes that are related to rural economic and community development. Led by an under secretary of Agriculture for Rural Development the following programmes and services are provided through Rural Developments network of National, State and local offices:
    • Rural housing service – help finance, repair or relocate housing for low income families
    • Rural utilities Service – loans and grants for electricity, energy, telecommunication, and water and waste disposal projects.
    • Rural Business co-operative Service – provides technical and financial assistance and business management services to rural areas.
    • Office of Community development – Through innovative programmes it develops strategic plans to forge alliances among private, public and non-profit entities.

    Besides a number of programmes to help rural businesses have been created.
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    14. BASAN Final Conference - Bornholm, 18-19 September 2003
    Summary

    The following is a short summary of the papers from the conference. The proceedings including the conference papers are presented in the appendix.

    Approximately 60 participants from all countries around the Baltic Sea, except Russia attended the conference that was held on Bornholm – a small Danish island situated in the middle of the Baltic Sea. The participants were national and EU parliamentarians, scientists, industrialists, businessmen and farmers. Thus the audience was “mixed” which presumably was one of the reasons for a very lively and engaged discussion during the two days. The first day’s presentation gave an impression of the current situation in the Baltic Sea region, while day 2 was focused on the potentials for development.
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    14.1. Needs for changes

    It was very clear from the discussion and papers presented that the conditions prevailing in the regions around the Baltic Sea area not only have many similarities but also many differences. It is also obvious that all regions are facing many challenges, although these challenges may not necessarily be the same in all regions.

    On the other hand the Baltic Sea area with plenty of natural resources, surplus of agricultural land and relatively easy access to large markets due to a well developed infrastructure has also got the potentials to become a very dynamic and prosperous area.

    It was mentioned that the Baltic Sea region might become one of Europe’s new growth areas, where we will see trade develop faster than in the rest of Europe. However people with visions and entrepreneurial spirit are needed.

    Biotechnology and information technology will become key elements in this development. Diversification in agriculture and new uses of products from agriculture are needed. The challenge is to learn how good ideas are effectively developed and transformed into profitable and sustainable productions.

    Standing alone the regions are too small, but together they could form a strong link between old and new Europe.
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    14.2. Success stories
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    An exhibition of successful regional products was established to illustrate that also in remote regions it is possible to produce high quality products although often in a small scale. Most products are sold on local markets, but some are also exported.

    In addition 3 papers dealt with success stories from Latvia ,(marmalade and juices), and Germany , (insulation material from seaweed and building boards from straw), were presented.
    14.3. New business opportunities
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    Several speakers referred to the recent WTO summit in Cancun, and it was a general perception that the competition, especially from Third World countries, on traditional agricultural and agro-industrial commodities will become stronger in the future. Therefore Baltic agriculture and agro-industries should put more focus on production of speciality crop and products.

    An overview over the trends in the international food sector was given, and the great potentials for functional foods and food ingredients were illustrated.

    Another area with great potential for the Baltic Sea regions is the production of bio-fuels , both solid and liquid. 50 % of the land is covered with forests and 20 % is arable land. Some of the agricultural land is today abandoned and some is cultivated extensively indicating a very large potential for a production of energy crops, fuel pellets liquid fuels (bio-ethanol and biodiesel).

    It was also illustrated that the potentials for a future production of pharmaceuticals, cosmetics, paints, fine chemicals etc. from agricultural raw-materials are considerable.

    The strategy for initiating new activities, based on the discussions at the regional Basan meetings and referred to in chapter x, was presented. The participants very positively received it.
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