Global Donor Platform for Rural Development

Platform Policy Brief

No. 6 // December 2011

The strategic private sector T in agriculturerole of thedevelopment and rural

Platform Policy Briefs are designed to inform and guide members in the delivery of assistance in agriculture and rural development. Global Donor Platform for Rural Development Tackling rural poverty, together

SUMMARY

his policy brief aims to improve the understanding of the strategic role of the private sector in agriculture and rural development and proposes practical and operational measures for donors to engage more effectively with the private sector. The study identified three trends, from which several key recommendations emerge: Market deregulation and trade liberalisation is not an ubiquitous and inexorable trend. In some cases continuing state activity discourages the private sector and, in others, government has withdrawn or not engaged with activities which are critical to support private sector investment. There has been a successful private sector response, however, to changes in external trade policy, macroeconomic management and the role of subsidisation. Rural economies are changing fundamentally. In a process of profound private sector transformation, value chains are becoming shorter with higher standards and stronger vertical integration and information flows. This is being driven principally by domestic private investment in the South, together with domestic government spending. Impact of agricultural development on the livelihoods of low incomes households is striking. Donor support to the private sector has moved from macro level interventions to direct assistance to business. More recently several donors have pioneered approaches based upon market development, and dialogue and partnership with business the impact of which is not yet clear. Many donors are however struggling to engage with this emerging business engagement agenda.

This brief takes a broad definition of the private sector to include large corporate interests such as food processors and input suppliers and also farmers themselves.
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T ANALYSIS
// Policy and private sector development
It is clear that the era of market deregulation and trade liberalisation has led to a diminishing role for the state and that public agricultural policies are much less focused than in the past upon managing prices, providing inputs and buying and storing farm produce. There are important differences with different categories of crops. Amongst staple food crops, government intervention remains significant and unpredictable. Prices and trade with neighbouring countries are often tightly controlled for political reasons. This created uncertainty which has constrained the ability of the private sector to invest in the production of many food crops. In staples markets, the policy objectives of both governments and donors are often focused more on food security and rural livelihoods than on supporting private sector development. By contrast, the extent of government intervention in commercial production for domestic markets (i.e. horticulture, milk and meat) has been minimal. There has been buoyant private sector activity and growth in production and processing of produce. In the traditional crop export sector, there has been significant government intervention but it has been largely benign. Governments have focused upon measures to enhance the quality of exports and on research to improve agronomy. This intervention has supported private sector engagement in the export sector.

Author: Jonathan Mitchell, Overseas Development Institute

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This evidence suggests that the role of government should not be simply to exit agriculture in order to stimulate a private sector response. There is often an important role for the state in providing public goods investments which facilitate rather than obstruct private sector investment. Arbitrary government intervention in agricultural markets is, however, generally damaging to the development of viable private sector markets. The most important aspects of deregulation, in terms of private sector response, have been overall policy changes towards external trade, macroeconomic management and the role of subsidisation in generating growth. The net effect of such changes in public policies has clearly elicited increases in agricultural production and productivity that would no have occurred otherwise. In the case of governments providing more direct support to the private sector in rural areas however, the picture is less clear. Foreign direct investment in agriculture, even when subject to specific incentives, has lagged behind other sectors. There have, however, been large numbers of small scale producers that have successfully responded to external support from business and donors as well as government designed to improve market access and participation in mainstream markets. Although policy change has been an important driver of liberalisation in rural areas, it is striking that the culture and perceptions of private sector development also have an impact on the development outcomes.

Liberalisation within a context where the private sector is still viewed with suspicion has been markedly less successful than in places where the de jure and de facto environment is supportive of enterprise. // The private sector response Agriculture is in a process of profound private sector transformation. Growth has been steady over the past 30 years but has been rapid and transformative for specific commodities in specific countries. There is evidence of agricultural value chains: Shortening, geographically and functionally Developing higher quality standards Creating longer term relationships between producers and buyers Becoming better informed and experiencing a strengthening of the power of producers in the last very few years

7] Partly compiled from Investing in Women as Drivers of Agricultural Growth (J. Ashby, M. Hartl, Y. Lambrou, G. Larson, A. Lubbock, E. Pehu, C. Ragasa) and IFAD (2010) Special Session Report The Farmers Forum in Conjunction with the ThirtyThird Session of IFADs Governing Council. Special Session: Promoting womens leadership in farmers and rural producers organizations. Held at IFAD Headquarters, Rome, on 13 February 2010. 8] These are the Gender in Agriculture Sourcebook http://worldbank.org/genderinag, The World Development Report: Agriculture for DevelopmentAgriculture for Development. The 2008 World Development Report. The World Bank. Washington, DC. 2007. and the International Assessment of Agricultural Science and Technology for Development [www.agassessment.org ]. 9] Farnworth, C.R. (2010) Gender aware approaches in agricultural programmes: a study of Sida-supported agricultural programmes. Sida Evaluation 2010: 3 10] Lastarria-Cornhiel, S. (2008) The Feminization of agriculture: trends and driving forces. Background paper for the World Development Report. http://siteresources.worldbank.org/I NTWDR2008/Resources/27950871191427986785/LastarriaCornhiel_F eminizationOfAgri.pdf 11] IAASTD (2008) Executive Summary of the Synthesis Report. 12] G. Rebosio, S. Gammage, and C. Manfre, A Pro-Poor Analysis of the Artichoke Value Chain in Peru,www.microlinks.org/file_down load.php/Artichoke_Peru_Research_ Brief.pdf?URL_ID=18386&filename=1 1861594421Artichoke_Peru_Researc h_Brief.pdf&filetype=application%2F pdf&filesize=299504&name=Artichok e_Peru_ Research_Brief.pdf&location=user-S. 13] Barrientos, S., C. Dolan, A. Tallontire. "A Gendered Value Chain Approach to Codes of Conduct in AFrican Horticlture." World Development 31 (9) (2003): 1511-1526. 14] Action Aid Securing womens right to land and livelihoods: a key to ending hunger and fighting AIDS http://www.actionaid.org/micrositeAs sets/eu/assets/women's%20right%2 0to%20land%20hiv%20and%20hunge donorplatform.org r%20jun08final.pdf

In addition to the impact of technology eroding the friction of distance and information gaps, there is evidence of a fundamental change in the balance of supply and demand in agricultural markets. Buoyant urban demand is generating a natural resource scarcity for food that is impacting upon the returns to agriculture. Available data suggests that total investment in agriculture in developing countries has risen to about USD 200bn per year in recent years.

Figure 1: Components of agriculture investment in the sample of developing countries, 19812007, constant 2005 USD billion
200 180 160 140 USD billion 120 100 80 60 40 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1981 1982 1983 1984 1985 2007

Domestic private sector investment

FDI

Public expenditure

ODA

Source: FAOStats (2011), UNCTAD (2011b), IFPRI (2011), World Bank (2011), ODI (2011)

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Working with freshly-ground coffee in Peru / chris74, Fotolia.com

The overall trend of domestic private sector participation in agriculture has been very significant fluctuating between 61 per cent and 74 percent of total agricultural investment in our sample of developing countries. Striking also is the increase in public investment in agriculture since the mid-1990s. The very limited contribution to total agricultural investment of aid, where the long-term trend is one of relative decline, and FDI, where the trends is of rapid increase from a very low base, is also clear from figure 1. Foreign inflows are simply not very significant at an aggregate scale. Although domestic private sector investment is overwhelmingly large, it has increased slowly over time. When more recent figures become available, it will be interesting to see whether this trend has changed. In particular, the food price spike of 2008, rapid economic growth in the South post-global financial crisis and environmental policies have, anecdotally, significantly improved the viability of private sector investment in agriculture in recent times. These figures abovesuggest a strong case for donor organisations to work more closely with stakeholders in recipient countries to leverage domestic private and public funding to improve the impact of aid spending.

// Impact of private sector development

Low income countries Rapid growth of the agricultural sector and non-farm rural economy has been associated with dramatic reductions in extreme income poverty. In low income countries about 60 per cent of the income in rural areas is directly related to farming. Having taken account of transfers typically in the form of remittances from family members working in urban areas much of the remaining income in rural areas is off-farm, but dependent upon having a viable agricultural sector. In these countries, developing agriculture is an effective policy tool to reduce extreme rural poverty. There are many examples where, through contract farming or other vertical linkages in the chain, lead buyers have been able to support smallholders to access increasingly demanding market standards. Governments can support development through providing economic infrastructure and a regulatory environment which does not exacerbate the inherent risks of investing in agriculture. Countries moving to middle income levels As countries make the transition to middle income levels of prosperity, the influence of agriculture remains important but not overwhelmingly so. There is also some evidence that non-agricultural sectors are more effective at reducing poverty at the USD 2 per day poverty line. In this context, in addition to supporting smallholders to access viable markets, governments need to support broad-based urban development to absorb labour as it urbanises and encourage non-farm enterprises in rural areas. Agriculture tends to benefit from policies aimed at improving the general business environment in rural areas.

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Platform Policy Brief I No. 6 DONOR APPROACHES TO TDEVELOPMENT IN RURALPRIVATE SECTOR AREAS
Donor approaches to market and private sector development have been evolving which has been reflected to some extent in approaches to ARD. The progression is illustrated below, revealing a recurring pattern whereby approaches started with macro level policy prescriptions promoting liberalisation, moved on to direct provision to fill gaps when liberalisation failed to generate the expected market response, and then more recently shifted again towards an approach which emphasises the facilitation of market solutions through market development programmes. There is now a growing emphasis on ensuring that such programmes promote substantial engagement with, and are ideally led by, private sector players often downstream buyers with the capacity and resource to develop and implement sustainable solutions. Although related, there is an important distinction between market development programmes which often work only indirectly with the private sector often focusing more on providing the public goods which markets require to function efficiently and grow and private sector development initiatives which involve working directly with entrepreneurs. Under each heading are listed some of the main types of donor interventions, although in practice some of them fit under more than one heading. Indeed many of the interventions themselves have evolved in line with new thinking, and have been adapted to fit in with new frameworks and development paradigms. Many of the interventions, including the earlier forms, remain valid and important, and are still being implemented. A wide range of different types of intervention can be used to promote private sector solutions in agricultural and rural development, depending on areas of competence and comparative advantage. But there are also emerging lessons from experience and evaluation, essential for effective spending (table 1). This experience has increased the desire of many donors to engage more systematically and directly with the private sector to achieve development goals. It reflects political trends which are now beginning to re-emphasise the advantages of promoting national businesses abroad, as well as reduced public resource availability in difficult economic conditions. But the overarching objective is to improve aid effectiveness. However, while some donors have made considerable progress on this agenda, others are finding it hard to make the transition. Donors are currently at different points in terms of the extent to which they see the role of market and private sector development in ARD. The different professional and ideological background of rural and private sector development specialists have made it challenging for the former to adopt the approaches of the latter. Donor agencies are also concerned with the risks associated with providing direct financial support to the private sector. Importantly, in a context where many agencies need to demonstrate unequivocal results from each dollar of aid spending, the outcomes of market and private sector development initiatives are also often more difficult to identify and attribute than with, say, a traditional public good project such as a hospital.

18] IFPRI, 2009 19] IFPRI, 2009 20] See compilation of studies in Farnworth, C.R. (2008) Module 5: Gender and Agricultural Markets. In Gender in Agriculture Sourcebook. World Bank. http://worldbank.org/genderinag 21] Kitinoja, Lisa. 2002. Identifying Scale-Appropriate Postharvest Technology. In Postharvest Technology of Horticultural Crops, 3rd ed., ed. Adel A. Kader, 48190. Oakland,CA: Division of Agriculture and Natural Resources and University of California. 22] Gurung, C., 2006. The role of women in the fruit and vegetable supply chain in Maharashtra and Tamil Nadu India: the new and expanded social and economic opportunities for vulnerable groups task order under the Women in Development IQC. Washington, DC: USAID. 23] USAID, Gender and Economic Value Chains: Two Case Studies from the GATE Project, www.usaid.gov/our_work/cross-cutting_programs/wid/eg/gate_valuechai n.html.24] Food and Agriculture Organization, 2009. The state of food insecurity in the World 2009. Rome. http://www.fao.org/docrep/012/i0876e /i0876e00.htm 25] DFID/DEFRA (March 2010) DFID/Defra Policy Narrative on Global Food Security and Sustainable Agriculture. 26] Farnworth, C.R. (2010) Zambia Country Report: Sida UTV Working donorplatform.org Paper 2010:8

Figure 2: The progression of private sector development approaches

MACRO LEVEL INTERVENTIONS Structural adjustment and regulatory reform DIRECT ASSISTANCE TO BUSINESS Social & patient venture capital MARKET DEVELOPMENT DIALOGUE AND PARTNERSHIP WITH BUSINESS

Overcome barriers to market entry

Partnership in strategic initiatives

Infrastructure Business development services

Challenge funds & equity/loan financing Credit enhancement

Supporting producer groups achieve viability Incentivising commercial sector to engage smallholder sector

M
Policy engagement Core corporate strategy

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Table: Summary of overall findings on impact and lessons learnt
Intervention Main lessons

Macro-level interventions to improve enabling environment

Structural adjustment programmes and associated conditionality Infrastructure development

Policy prescriptions are still largely supported, now with recognition that they are not always enough to generate private sector-led market development by themselves Potential sustainability needs to be considered when implementing infrastructure development projects, such as arrangements, capacity and funding for on going maintenance should be identified. Evidence from Peru and Thailand indicates the importance of rural road infrastructure in encouraging market access from peripheral rural areas. The impact of mobile telephones in sub-Saharan Africa illustrates the impact of ICT on rural areas Many different approaches with varying success. Beyond standard measures to promote financial sector development, market-friendly policies to encourage the provision by the financial sector of wider access to financial services specifically are needed Availability is limited, and there is significant unmet demand, though potential investment returns are unclear. However, overall project failure rates may be higher than donors are willing to accept Clear rationale and demand, and some success stories, but also raising questions as to the failure rate donors should be/are willing to accept Investment performance has often obscured other challenges associated with creating viable markets raising questions as to whether access to finance is the binding constraint. Concerns with extent of additionality and distributional effects of equity investments

Promoting access to business development services

Direct financial assistance to business

Social venture capital and patient capital Challenge funds and loan and equity investment through DFIs

Credit enhancement

Mixed evidence on the effectiveness of credit enhancement mechanisms in terms of their additionality and sustainability Some significant successes, such as the pineapple sub-sector in Ghana. Much work has been done in the case study countries with using technology improvements to upgrade the output of farmers Important advance to not regard supporting farmer groups as an end in itself but as a means to allow farmers to access viable value chains on a sustainable basis. Some examples of important successes Where this has been successful, donors have achieved significant impact at relatively low cost. To achieve this donors need to adjust to a more facilitative role which is based on good quality sub sector and microeconomic analysis Requires donors to allow private sector to play a leading role and for private sector to be willing to take on that role. However, partnerships raise the prospect of limited donor funds leveraging private sources of funding to increase development impact and the sustainability of initiatives Consultation mechanisms for private sector stakeholders in the design of policies to promote market development are an important area for donor assistance to maximise success rates and sustainability

Overcome barriers to market entry Market development Dialogue & partnership with business
27] DFID/DEFRA (March 2010) DFID/Defra Policy Narrative on Global Food Security and Sustainable Agriculture. 28] Farnworth, C.R. (2010) Gender aware approaches in agricultural programmes: a study of Sida-supported agridonorplatform.org cultural programmes. Sida Evaluation 2010: 3

Supporting producer groups to achieve viability Incentivising commercial sector to engage smallholder sector Partnerships and strategic initiatives

Policy dialogue

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TRECOMMENDATIONS
// For donor organisations
The key recommendation is that the case for working more closely with the private sector in ARD is compelling. Most investment in rural areas in developing countries is from the domestic private sector donors should aim to support rather than replace market solutions. An assessment of the potential market impact of all donor interventions would help avoid donors unwittingly damaging rural markets through their interventions. Donors should develop diagnostic approaches which identify the key binding constraints in specific situations to help prioritise market development interventions. This would require donors working more systematically with the private sector to identify and design programmes to promote private sector development in ARD. In addition, donors should explore ways they can support private sector led initiatives that can promote development such as the New Vision for Agriculture or the Corridor Initiatives, or by supporting company or sector specific initiatives such as the Sustainable Agriculture Initiative. Donors are coming to this issue from very different starting points and are constrained in terms of the funding instruments which they have available and their internal capacity to work effectively with the private sector. To support private sector development, there is a need to provide public good investments in the enabling environment, i.e. hard and soft infrastructure, as well as engaging more directly in value chains. There is scope, therefore, for donors to support the private sector with a portfolio of interventions which match their comparative advantage as donor organisations from more traditional public goods investments to more innovative approaches.

// For the Global Donor Platform for Rural Development

There is a clear need to strengthen knowledge sharing on approaches to working with the private sector in rural areas. A number of donors are experimenting with innovative approaches but the level of impact assessment and the sharing of credible evaluation material are poor. The Platform should partner with organisations such as the Donor Committee on Enterprise Development to develop better methodologies for, and undertake more systematic impact assessment of both market development interventions and business engagement strategies, both to facilitate lesson learning and to provide comparison of aid effectiveness and value for money. The provision of guidelines for assessing impact, and collection and synthesis of such evidence is one role the Global Donor Platform could potentially play. Donors should identify ways to work with each other to develop coordinated approaches to promoting market development in particular countries or sector value chains, to avoid conflicting or duplicative interventions. They should also learn from each others experience in order to inform the development of good practice on this agenda, and how challenges associated with business engagement have been overcome such as through the development of knowledge sharing networks. Several donor organisations are considering adopting more market-orientated approaches to supporting rural areas, but are constrained by their lack of knowledge or how to transform their approach; their institutional capacity and the instruments available. The Platform should provide support to the institutional innovation required to allow agencies that wish to engage more effectively with the private sector to do so.

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