FUTURE of FOOD Maximizing Finance for Development in Agricultural Value Chains Foreword by Dr. Jim Yong Kim © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Authors Robert Townsend (Agriculture Global Practice), Loraine Ronchi (Finance, Competitiveness, and Innovation Global Practice), Chris Brett (Agriculture Global Practice), and Gene Moses (International Finance Corporation), with inputs from members of the Agriculture Global Practice: Diego Arias, Michael Morris, Madhur Gautam, Julian Lampietti, Lou Scura, Sergiy Zorya, Sandra Broka, Chakib Jenane, Steven Jaffee, David Nielson, Parmesh Shah, Adama Toure, Manivannan Pathy, Jonathan Wadsworth, Dorte Verner, William Sutton, Lystra Antoine, Nichola Dyer, and Flore de Preneuf; the Finance, Competitiveness, and Innovation Global Practice: Panos Varangis, Selma Rasavac, Steve Utterwulghe, Jean Saint-Geours, Maria Miller, Roy Parizat; the Macroeconomics, Trade, and Investment Global Practice: Martha Licetti, Roberto Echandi, William Gain, Willem Douw, Ankur Huria, Ian Gillson, Paul Brenton, John Keyser; the International Finance Corporation: Niraj Shah; and the Multilateral Investment Guarantee Agency: Nkemjika Onwuamaegbu. Overall guidance was provided by Juergen Voegele, Martien van Nieuwkoop, Simeon Ehui (Agriculture Global Practice), Alfonso Garcia Mora, Najy Benhassine (Finance, Competitiveness, and Innovation Global Practice), Tatiana Bogatyreva (the International Finance Corporation), and Laurence Carter (Infrastructure, PPPs, and Guarantees Group). Images Front cover: Dominic Chavez/World Bank Title page: Dominic Chavez/World Bank Interior: 2, Tatsiana Dounar/International Finance Corporation 5, Flore de Preneuf/World Bank 9, Flore de Preneuf/World Bank 14, Arne Hoel/World Bank 15, Chau Doan/World Bank 30, Sarine Arslanian/Shutterstock.com 31, Almin Zrno/World 34, Chhor Sokunthea/World Bank 40, Simone D. McCourtie/World Bank FUTURE of FOOD Maximizing Finance for Development in Agricultural Value Chains April 2018 FOREWORD By some estimates it could cost as much as farmers, input suppliers, processors, traders, $4.5 trillion a year to meet the Sustainable distributors, and marketers. Development Goals (SDGs). Today, total of- ficial development assistance is about $140 This report provides important details on billion a year worldwide. Philanthropists pro- maximizing finance for development in agri- vide another $4 billion. To achieve the SDGs, cultural value chains. It highlights financing we need to move from billions in develop- gaps, identifies a range of potential funding ment assistance to trillions in investment of sources, and suggests possible actions to help all kinds: public and private, national and crowd-in more private investment, while global. To make that possible, it will be crit- optimizing the use of public resources. The ical to put our efforts into attracting private recommended actions are aligned with the sector investment and making sure it works aim to address the market failures that lead for developing countries and poor people. to inadequate levels of privately provided goods and services to achieve global devel- As we plan to maximize financing for opment goals. development (MFD), we ask a very straight- forward question: How can we increase Implementation of MFD in agricultur- resources for developing countries to pro- al value chains will require an approach to vide the goods and services their people diagnostics that is more oriented to the pri- need, while minimizing the burden of pub- vate sector, as well as structured, inclusive lic debt? Within the World Bank Group, we public-private dialogue to help inform the are asking this question across every proj- design of a robust reform and investment ect and every sector, including in agriculture. program. Improving the performance and transfor- mation of agricultural value chains will be The World Bank Group is strongly com- crucial to end poverty and hunger, boost mitted to this agenda and to working with shared prosperity, and steward the world’s partners to maximize finance in agricultur- natural resources. al value chains, without which many of the SDGs cannot be achieved. Globally, over 80 percent of the poor live in rural areas and the majority rely on agri- culture for their livelihoods. While some of these poor people will migrate to urban areas by 2030, most will not. Their income gains will, therefore, need to come from activities in rural areas, and most of those activities Jim Yong Kim are in agricultural value chains comprised of President, The World Bank Group MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 3 Key messages: • Current levels of investment in agricultural value chains are insufficient to achieve key de- velopment goals including ending poverty and hunger, boosting shared prosperity through more and better jobs, and better stewarding the world’s natural resources by 2030. • Crowding-in private investment to help achieve these goals and optimizing the use of scarce public resources will be needed, as will the continued promotion of good gover- nance and environmental and social sustainability. • Sources of finance for private sector investments in agricultural value chains are expanding. Sources include own-savings, local and international banks, value chains actors, impact investors, development financing institutions, private sector foundations, and agricultural investment funds. Increasing private sector investment and associated financing will re- quire identifying and understanding market failures currently leading to the sub-optimal private provision of goods and services needed to achieve key development goals. • Market failures are often exacerbated by a poor enabling environment for the private sector that will need to be improved for all private sector actors in agricultural value chains—farmers, who are by far the largest current investors; input suppliers, traders, pro- cessors, distributors, and marketers—including financial services providers. • Where the private sector is already investing in agricultural value chains, promoting re- sponsible investment can help increase development impacts. Crowding-in more private investment requires increasing the space for private sector activity, improving the pol- icy and regulatory environment, and considering options for using public financing to improve private incentives and to reduce transaction costs and risks, including blended finance solutions. While these actions can help induce more private investment, there is still a critical need for public resources to finance essential public goods and services such as human capital, agricultural research, and complementary public infrastructure. • Prioritizing country level actions can be informed by private-sector-oriented diagnostics as well as by active and effective public-private dialogue mechanisms to define a reform and investment agenda that ensures impact. And as the performance of agricultural value chains are also dependent on other sectors such as water, energy, and infrastructure, en- gagement and co-ordination across multiple ministries and agencies will be needed. The four sections of the paper focus on the development outcomes sought; why financing is important, including financing needs, the financing landscape, and constraints; actions to maximize finance for development; and implementation. 4 FUTURE OF FOOD Development outcomes to be achieved The starting point of Maximizing • Feeding every person, every day, ev- Finance for Development (MFD) in erywhere with safe food and adequate agricultural value chains is to clari- nutrition. Globally, 815 million people fy the development outcomes sought. are still not getting the minimum dietary The world has set ambitious Global energy needs. This number has increased Sustainable Development Goals (SDGs) to in recent years due to conflict, droughts, be achieved by 2030.1 Reflecting these, an and floods.3 More than 2 billion people earlier World Bank Group (WBG) pub- are deficient in key vitamins and min- lication on Ending Poverty and Hunger by erals4 that are necessary for growth, de- 2030: An Agenda for the Global Food System velopment, and disease prevention. At indicated that “the world needs a food sys- the same time 2 billion people are over- tem that can feed every person, every day, weight and obese. Two-thirds of obese everywhere; that can raise real incomes of and overweight people live in developing the poorest people; that can provide safe countries—a number that is increasing food and adequate nutrition; and that can over time.5 By 2050 there will be al- better steward the world’s natural resourc- most 90 percent more people to feed in es. Urgently, we need a food system that is low-income countries than in 2015 and more resilient and that shifts from being 30 percent more people globally.6 a major contributor to climate change to being part of the solution.”2 Significantly • Ending poverty. Globally, 767 million more progress will be needed to achieve people live on less than $1.90 per day, 80 these development outcomes. percent live in rural areas and 64 percent MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 5 work in agriculture.7 By 2030, some will for global temperature increases at only migrate to urban areas, but most will not, 2OC.10 Growing food today uses 70 per- and the rural population in less developed cent of the global freshwater, a resource regions will increase slightly. Most of the that is becoming increasingly stressed. income gains needed to end poverty by A third of the world’s largest aquifers 2030 therefore will need to come from are already being rapidly depleted.11 The activities in rural areas. About half the annual cost of land degradation due to global poor live in Sub-Saharan Africa, land use/cover change and the use of land while one-third live in South Asia. degrading practices on crops and grazing Lifting these people out of extreme pov- land is estimated at about $300 billion erty will require average income gains of per year.12 Shifting to a more sustainable at least 60 percent in Sub-Saharan Africa production system will be needed to end and at least 30 percent in Asia.8 poverty and hunger. • Providing more and better jobs, and boosting shared prosperity. Over the Opportunities next 15 years, about 1.6 billion peo- Urbanization and the shifting composition ple will reach working age in low and of diets opens new market opportunities middle-income countries.9 Automation for private sector actors all along the val- and the digital revolution are driving ue chain. By 2030, the number of people productivity and income growth, but also living in urban areas is projected to increase threaten significant job losses, especially by 68 percent in low income countries, and in developing countries. Sustaining and by 31 percent in middle income countries.13 improving the quality of self and wage Both represent about a 7.5 percentage point employment of the billions of people al- increase in the urban share of the popula- ready working, and creating new jobs to tion.14 At the same time, rising incomes are absorb those reaching working age will be driving a “dietary transition” in many low a significant challenge. The food system and middle-income countries. The transi- currently contributes a significant share of tion often features a shift in diet composition jobs in all countries with the potential to with a reduced caloric share of staple cereals create new jobs in growing value chains. and increased consumption of animal prod- • Better stewarding the worlds natural re- ucts, vegetable oils, fruits and vegetables. sources. Current global food production This transition also includes increased con- practices are unsustainable. Agriculture sumption of processed foods and increased and land-use changes already contrib- out-of-home consumption. The growing ur- ute about 25 percent of greenhouse gas ban population and changing composition of emissions. Projecting past trends forward, diets bring significant new opportunities for agriculture and other land use changes farmers, processors, and distributors. For ex- alone will comprise 70 percent of to- ample, urban food and beverage consumption tal allowable emissions across all sec- is projected to grow by about $400 billion by tors by 2050 to achieve the target limit 2030 in Sub-Saharan Africa alone.15 6 FUTURE OF FOOD New technology is shaping how agricultur- marketers in a set of interlinked activities al value chains are organized, offering new that work to deliver higher quality and high- opportunities and some risks. Technology er value products to meet consumer demand. and innovations are creating new opportu- There are several characteristics of agricul- nities to lower costs, to raise incomes, and ture and broader agribusiness that differ to support entrepreneurship in agricul- from other sectors such as infrastructure, ed- tural value chains. Emerging technologies ucation or health that have implications for driven by the Fourth Industrial Revolution maximizing finance to achieve the develop- include: digital building blocks such as big ment goals. Agricultural value chains: data, artificial intelligence, and blockchain; • Are driven by small and large-scale new physical systems such as automa- private actors. Agricultural production tion, robotics, and additive manufacturing; is a private sector activity comprised of and advances in science such as new ener- about 450 million private smallholder gy technologies and genomics that all offer farmers and many large-scale producers. significant opportunities for the food sys- In low- and lower-middle-income coun- tem.16 While some value chains are getting tries, 95 percent of all farms are smaller longer with more geographical distance be- than 5 hectares. These small farms oc- tween producers and consumers, some are cupy almost three-quarters of land in also getting shorter with fewer intermedi- low-income countries and two-thirds aries via digital e-commerce platforms that of land in the lower-middle-income link small entrepreneurs in rural areas with group.17 While smallholders include national and global markets. These digital subsistence farmers, they also include platforms are helping create ‘matching mar- commercial producers who sell in un- kets’ which may become a more prominent structured local markets, and those feature in agricultural value chains. This has who sell in more organized markets implications for the public sector to make often under contract with buyers.18 In information/data more available to enable high-income and upper-middle-income the emergence of these matching markets. countries larger farmers dominate. Rapid technological change also introduces Many productive off-farm activities in risks that some public and private invest- agricultural value chains in developing ments may become redundant, or ‘stranded countries are undertaken by small and assets’, as new technologies provide alterna- medium scale enterprises (SMEs), as tive solutions. Collection, use, and control of well as by (fewer) large firms. data on private individuals also raises priva- cy issues. • Need an entire value chain ecosystem to thrive. Producers and consumers are Characteristics connected through a value chain, which is often long, import dependent, and can Agricultural value chains, in a broad sense, be potentially inefficient. These chains in- are comprised of farmers, input suppli- clude many different stakeholders (figure ers, traders, processors, distributors and 1) and the performance of one segment is MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 7 FIGURE 1: Agricultural value chain ecosystem Business climate (including policies, regulations, and market structure) Input suppliers Producers Processors Distributors & marketers Support services (including nance, information, technology, water, power, and infrastructure) dependent on the performance of other products; and political sensitivity of basic segments. While each segment of the food staples makes agricultural markets value chain can have unique constraints, prone to high transaction costs and sig- there is a set of enabling conditions such nificant production, market, climate, and as the business climate (including poli- enabling environment risks.19 cies, regulations, and market structure) Developing an effective approach to and support services (including finance, maximizing finance for development in ag- information, technology, water, power, ricultural value chains therefore requires: and infrastructure) that are common to (i) ensuring that financing benefits small- all segments and all value chains in the holder producers as a key pathway to ending sector. Addressing the entire ecosystem is poverty and hunger, and that financing sup- therefore indispensable to creating mar- ports SMEs and job creation along the value kets and to improving the performance chain; (ii) addressing the entire ecosystem and transformation of value chains. including the business environment and • Have high transaction costs and risks. support services needed to make agricul- The spatial dispersion of producers and tural value chains thrive; and (iii) managing consumers; lags between input applica- transaction costs and risks. These require an tion and harvest; sensitivity to weather understanding of the nature and extent of extremes, pests and disease; variable per- market failures and the associated roles of ishability and storability of agricultural the government in addressing them. 8 FUTURE OF FOOD Financing Needs, Sources, and Constraints There are significant financing needs. cited as key impediments for the growth and While estimates vary on the extent of ad- transformation of agriculture in emerging ditional financing needed in agriculture and markets. food security to achieve some SDGs, all estimates indicate that current levels of in- While there are substantial additional pub- vestments are inadequate.20 The food and lic financing needs, significant gains can agriculture-related UN agencies estimate be made in improving the quality of pub- that ending poverty and hunger requires lic spending. Development impacts from additional financing in agriculture and ru- improving the composition of agricultur- ral development of $140 billion per year. al public spending can be larger than from Of this $140 billion, $50 billion per year is increasing public spending with no change needed from the private sector, primarily in in composition under certain conditions. on-farm and agro-processing investments For example, earlier analysis on rural Latin and $90 billion per year is needed from the America showed that reducing the share of public sector for public goods such as agri- private good subsidies, with an increased cultural research and rural infrastructure of a share of spending on public goods, has sig- public nature that is economically justified.21 nificant positive effects on rural per capita Achieving development goals beyond end- income growth, the environment, and pover- ing poverty and hunger would require even ty reduction.22 Similarly, more recent analysis more additional financing. Access to finance in Sub-Saharan Africa indicates that rebal- by farmers, particularly smallholders and to ancing the composition of agricultural public some extent by agribusiness SMEs, is often spending to higher return public goods could MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 9 yield significant payoffs.23 Recent analysis of further enhance these attributes. ODA for agricultural support in the European Union agriculture declined sharply from the 1980s (EU) found that farmer support that is to mid-2000s from 18 percent to less than 4 decoupled from production of specific com- percent of total ODA and more than halved modities, and support for rural development in real absolute terms. However, since the are associated with higher agricultural labor mid-2000s, with increasing concern about productivity and employment as well as with the neglect of agriculture28 and the sub- lower poverty rates than coupled farmer sup- sequent world food price spikes, ODA to port that has conditions on the production of agricultural almost doubled from 2005 in specific commodities.24 Shifting away from both its share and absolute amount to about coupled farmer support in the EU since the $13 billion in annual commitments.29 The mid-2000s also had a positive environmental increase still falls short of the needs. impact. Fertilizer use declined together with agricultural greenhouse gas emissions while Despite large amounts of climate finance average cereals yields increased.25 There is mobilized globally, allocations for agricul- significant scope for improving the composi- ture, forestry, and other land-uses have so tion of public spending. For example, across far been disproportionately small. As well 50 developed and developing countries, $210 as being a significant contributor to climate billion per year was provided in direct bud- change through its high share of greenhouse getary payments to producers across various gas emissions, agriculture itself is highly vul- criteria such as the type of outputs pro- nerable to climate change. Despite the high duced and inputs used. In addition, market need for climate adaptation and mitigation price supports in the form of regulated prices in the sector, agriculture, forestry, and other that keep domestic agricultural prices above land use changes have been allocated a small world prices equated to a producer support share of climate finance mobilized globally. equivalent of $375 billion per year for the However, the recent COP23 agreement to 2013–15 period.26 initiate a workstream on agriculture offers prospects for larger future allocations of cli- Overseas development assistance (ODA) mate finance for agriculture.30 for agriculture remains essential, particu- larly in the poorest countries. ODA plays There is a broad range of private investors an essential role in development financing, in agricultural value chains that can help especially in countries with less access to al- fill the financing gap. Crowding-in pri- ternative sources of financing. ODA has vate investment is needed to help accelerate several characteristics including concession- progress towards ending poverty and hunger, ality, stability and predictability, availability improving jobs and shared prosperity, and for core public expenditures, and linkages ensuring more environmentally sustainable with knowledge and experience of projects agricultural value chains. There are a range of and programs that have been effective else- domestic and foreign private investors that where that make it the best source of external often invest in different segments of the val- capital for development.27 There is scope to ue chain. 10 FUTURE OF FOOD • Farmers are by far the largest private in- fairly limited. The majority of FDI flows vestors in agriculture with on-farm in- to agriculture have gone to upper-middle vestments being more than three times income and high-income countries.33 as large as all other sources of public and The landscape of private sector inves- private investment (public, ODA, and tor financing in developing countries has foreign direct investment) in low- and expanded providing a range of working cap- middle-income countries.31 In addition, ital, and longer-term finance options. New increases in on-farm capital investments technologies are also reducing transaction are associated with reductions in hun- costs and making loans less costly. Formal fi- ger.32 Farmers must therefore be central nancial institutions including microfinance to efforts to increase private investment institutions, commercial banks, and social/ in the sector with a view to accelerating impact investors account for about 25 per- progress towards development outcomes. cent of the supply of finance to smallholders. Provision of public goods such as re- Informal and community-based financial in- search and extension, rural infrastructure, stitutions account for 45 percent and value and secure land tenure is often essential chain actors account for 30 percent.34 Value to stimulate more on-farm investments. chain actors such as input suppliers, traders, • Input suppliers, traders, processors, dis- processors, distributors and marketers also tributors, and marketers take the form of access finance from various sources, which both domestic and foreign private inves- together with producers, reflects an expand- tors. Unfortunately, information on the ing landscape of financing sources (figure 2). extent of domestic private investments in these aspects of the value chain is less • Own savings. Household savings are available than information on foreign currently the main source of financing direct investment (FDI) which itself is for farmers in low income countries. For FIGURE 2: Landscape of financing sources for private sector actors in agricultural value chains Illustrative expected market return and targeted enterprise maturity by source of financing High Venture Capital Investment Funds/ Local/International Micro nance Private Equity Commercial Banks Market returns Development Finance Institutions/ Debt & Equity nancing Pension Own savings Funds (on-farm) Impact Investors Value chain actors State banks Blended Finance Development Private partnerships Sector Public Sector grants foundations Low Non- Early Farm/enterprise commercial maturity Late Commercial MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 11 example, a study of four African coun- provide credit to commercial smallholder tries (Malawi, Nigeria, Tanzania, and farmers from whom they purchase need- Uganda) shows crops sales and cash from ed products. Similarly, input providers non-farm activities to be the dominant provide credit to smallholder farmers to sources of financing for purchasing agri- use their products and off-takers provide cultural inputs as an average of only 3–11 financing to intermediate SMEs. The percent of farmers use formal or informal financing arrangements range from in- credit for these purchases.35 Fewer than formal to formal purchasing agreements. 15 percent of smallholders have access Value chain actors account for about 30 to formal savings accounts.36 On average, percent of the supply of finance to small- farmer use of credit in the poorest coun- holder farmers (table 1) tries is very low. • State banks. State, agriculture, and devel- • Informal and community based financial opment banks still account for about two institutions. These are often groups that thirds of lending through financial insti- are collectively owned and managed by tutions to smallholder farmers, predomi- members. They mobilize savings from in- nantly in Asia (table 1). dividuals and provide short-term loans to • Microfinance institutions. Microfinance members. They operate at the community provides access to insurance or cred- and village levels and include savings and it without formal collateral and has credit cooperatives, rotating savings and opened access to loans for millions of credit associations, and village savings poor people, especially women. However, and loan associations. microfinance has not reached most agri- • Value chain actors. Different segments of cultural activities except for high turn- the value chain also provide financing to over activities such as small livestock and other segments. For example, processors horticulture. TABLE 1: Source of Smallholder Farmer Lending in Sub-Saharan Africa, South and South-East Asia and Latin America Source of lending by formal Source of Smallholder Lending Share (%) financial institution Share (%) Formal financial institutions 25 State Banks 67 Value chain actors 30 MFIs 22 Informal & community based 45 Commercial banks 7 financial institutions Social lenders 3 NGOs <1 Source: Dalberg, Inflection Point: Unlocking growth in the era of farmer finance. 2016. 12 FUTURE OF FOOD • Local and international commercial banks. that pool investor resources (that could Overall domestic credit to the private sec- potentially include resources from pen- tor provided by the banking sector varies sions funds) into a financial portfolio for significantly ranging from 112 percent of investments in agricultural value chains. GDP in upper middle-income countries These funds include private equity, ven- to 21 percent in low-income countries ture capital and pension funds. The fi- in 2016.37 Agriculture comprises only a nancial instruments commonly used by small share of banking sector loan port- these funds include private equity, debt, folios in developing countries and loans and guarantees. A recent analysis of 30 are predominantly short-term. investment funds specialized in agricul- ture indicated they had approximate- • Impact investors. Impact investors seek ly $2.6 billion under management.39 a combination of market returns and so- Venture capital for agricultural technolo- cial impacts. They generally accept lower gy start-ups is becoming a bigger part of than market financial returns in exchange financing the innovation ecosystem. for higher than market social returns. Equivalent to about $8 billion, about 7 • Blended finance. Provided by various ac- percent of impact investments global- tors, blended finance refers to a pack- ly are in the food and agriculture sector age comprised of concessional funding with an annual flow of investments of provided by development partners and about $1.5 billion per year.38 While less commercial funding provided by a fi- than half of these investments are cur- nancier. Blended finance can provide rently in developing countries, this share financial support to high-impact proj- is projected to increase. ects that would not attract financing on strictly commercial terms because their • Development finance institutions. Many risks are high and their returns are ei- development finance institutions provide fi- ther unproven or not commensurate nancing for public sector investments as well with the level of risk. Blended finance as matching grants to smallholder produc- solutions can be structured as debt, equi- ers (such as IDA/IBRD, the International ty, risk sharing, guarantee products, and Fund for Agricultural Development, and performance-based incentive structures regional development banks). Several such with differences in rate, tenor, security, or as the International Finance Corporation rank to mitigate risks and support proj- (IFC) provide direct loan and equity fi- ects that address some kind of market nancing to the private sector. failure or unfavorable market conditions. • Private sector foundations. Philanthropic If more private sector investment is need- investments from private sector compa- ed to end poverty and hunger why is it not nies and individuals have increased sig- already happening on a larger scale? High nificantly over the past decade. levels of direct public participation in mar- • Agricultural investment funds. There is kets can leave little space for private sector a range of agricultural investment funds activity. While withdrawal of public sector MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 13 dominance in markets is a necessary condi- to investment climate reform.41 Widening tion for private sector investment, it is not the space for private sector activity, increas- a sufficient condition, as reflected by the ing private sector (farmers, input suppliers, often slow subsequent private sector re- processors, and distributors/retailers) in- sponse.40 The earlier World Development centives to invest, and reducing transaction Report 2005 A Better Investment Climate costs and risks can all help increase private for Everyone documented the significant sector activity and investment in agricultur- impact of a better investment climate on al value chains. In addition to improved risk/ private sector investment. Improving mar- return profiles of investments, increasing ket infrastructure, security of property rights, private finance in agricultural value chains approaches to policy and regulatory reforms, from the various sources highlighted above including their consistent and effective en- can be facilitated by improved risk man- forcement, and the efficient functioning of agement mechanisms, tools, and financial finance and labor markets lies at the heart of infrastructure. More detail on these aspects documented investment growth in response are provided in the next section. 14 FUTURE OF FOOD Maximizing finance for development Maximizing finance for development MFD approach being applied systematical- (MFD) requires crowding-in private re- ly throughout the WBG. The sequence of sources to help achieve development goals, questions include: optimizing the use of scarce public resources, promoting good governance, and ensuring • Is the private sector investing in agri- environmental and social sustainability.42 cultural value chains? If yes, then try to With significant financing gaps to achieve ensure responsible investment to improve development goals, increased attention is development outcomes. needed on these aspects. Without private • If no, is it because of limited space for sector investment or improvements in the private sector activity created by re- quality of public spending, development strictions to competition or public sector goals will not be achieved. A key consid- dominance in input and output markets? eration is whether there is a sustainable If yes, then try to increase the space for private sector solution that can substitute private sector activity. for public expenditure and contingent liabil- • If no, is it because of policy and regu- ities, and whether there is an enabling role latory gaps or weaknesses? If yes, then for the public sector. In the context of ag- address policy and regulatory gaps to im- ricultural value chains, it may be helpful to prove private incentives and reduce trans- determine this through a sequence of ques- action costs and risks. tions that also help to systematically lead to those actions that are more clearly and ap- • If no, can public investment help crowd- propriately public. These embody the overall in private investment? If yes, then MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 15 identify the set of public financing/in- questions and potential actions reflected in vestments that improve private incentives this Cascade Approach (figure 3). and reduce transaction costs and risk. Understand the underlying cause of market • If no, then fully fund with public re- failure. The private sector will only invest if sources (for public goods and services). it is profitable to do so. Ex-ante analyses and Each stage in this cascade of questions clar- assessments are needed to answer the ques- ifies roles of the public and private sectors tions in figure 3. A key basis is to identify the in a sequencing intended to systematize cause of market failures that result in a social- the design and thinking around activities ly sub-optimal private sector supply of goods to maximize finance for development, re- and services i.e. the extent to which the cur- gardless of whether these activities address rent pricing mechanism and associated supply broad sectoral transformation, development account for all costs and benefits. Mispricing of specific value chains, or project-specific can lead to inefficiency in the allocation of objectives. There will be as different a set resources. A justification for public policy of answers and associated actions as there and investments is to address these market are of starting points around the precise ‘it’ failures. However, if the underlying cause is in the question: ‘Is the private sector doing not well understood, government responses it?” (figure 3). That is, one does not expect often target the symptoms rather than iden- the same answers to the questions in figure tifying and addressing the underlying causes. 3, and the associated public/private divide, Misdirected government policy, regulations, when the ‘it’ is ‘investing in value added pro- and spending can often exacerbate a mar- cessing plants’ as when the ‘it’ is ‘integrating ket failure and further reduce private sector smallholders’. After clarifying the precise supply of underprovided goods and services. objective of the MFD inquiry, answering Addressing only the symptoms tends to lead each question helps to identify gaps and as- to unsustainable government responses, such sociated public and private roles and is not as through inefficient subsidy programs. intended to be explicitly binary in nature. A ‘yes’ may only identify a part of the private While not exhaustive, underlying causes of sector potential at that level and movement market failure include: (i) environmental and to the subsequent levels is needed to en- social concerns (linked to the first block of sure a complete assessment of all questions potential actions in figure 3 on “responsible around MFD and the roles of the public and agricultural investments”); (ii) concentrated private sectors. Once these roles are under- market power, and the reduced competition stood, actual implementation of resultant effects of direct government participation in public policy and regulatory changes and markets (linked to the second block of po- public investments need not be sequential. tential actions on “increasing space” through Indeed, they are likely to be simultaneous increased competition that often involves or may be multi-staged, but the treatment reduced government participation in mar- of the question at its origin can be well kets); (iii) public policies and regulations served by a sequenced consideration of the that exacerbate market failures rather than 16 FUTURE OF FOOD FIGURE 3: Maximizing finance for development in agricultural value chains Spectrum of potential actions to promote responsible food & agriculture investments ¾¾ Strengthen country capacity to assess and mitigate/regulate environmental and social risks Is the private sector Yes ¾¾ Promote private sector alignment with the principles of responsible investment doing it? ¾¾ Support inclusive business models to improve linkages among smallholders and firms of all sizes No Spectrum of potential actions to increase space for private sector investments Yes ¾¾ Support competition and associated policy reform, including of state owned enterprises Is this because of ¾¾ Strengthen investment policy and dialogue to open space for global investment limited space for ¾¾ Reduce government intervention in agricultural financial markets to open space for private financial service providers private sector activity? No Spectrum of potential actions to improve the policy and regulatory environment for private sector investments and to reduce the distortionary effects of public spending ¾¾ Reduce distortionary effects of public spending policies Improve incentives and reduce transaction costs Reduce private sector investment risk Is this because of policy Yes ¾¾ Lower trade costs ¾¾ Ensure macroeconomic and political stability and regulatory gaps or ¾¾ Improve policies and regulatory regimes of input ¾¾ Improve the stability and predictability of policies weaknesses? markets ¾¾ Improve land tenure security and access to land ¾¾ Improve policy and regulatory environment for ¾¾ Shift public policies from farm production support towards agri-finance improving access for farms and agribusiness to risk ¾¾ Strengthen food safety systems management instruments that can increase lending No Spectrum of potential public investments to reduce private sector transaction costs and risk Improve incentives and reduce transaction costs Reduce private sector investment risk Yes ¾¾ Invest in public infrastructure based on clear private ¾¾ Support political risk insurance for financial institutions and Can public investment sector needs private investors help crowd-in private ¾¾ Invest in public inspections and quality assurance ¾¾ Consider use of market pull incentive mechanisms investment? ¾¾ Improve co-ordination to reduce transaction costs ¾¾ Provide direct financing to value chain actors ¾¾ Consider public-private partnerships No Use public resources to invest in public or quasi-public goods and services MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS Where there is no viable private sector return: Pursue purely public ¾¾ Invest agricultural public spending in public goods and services (e.g. human capital, agricultural research) financing 17 ¾¾ Support complementary public investment in other sectors (such as rural roads, energy43) to enable the commercialization and competitiveness of national agricultural production, processing, and marketing resulting in a more optimal private provi- analysis indicated demand for agricultural sion of goods and services (linked to the land is growing, particularly in Africa, Latin third block on the “policy and regulatory America, and Southeast Asia.44 The rising environment”); (iv) high transaction costs interest provides significant opportunities and risks (linked to the fourth block on “us- but also poses considerable risks. The gover- ing public investments to reduce private nance environment in which land acquisition sector transaction costs and risk); and lack is happening is often weak. Traditional users’ of public goods and services (linked to the rights are often overlooked or abused with fifth block on “invest in public goods and little or no consultation with communities quasi-public goods and services”). While the affected and with little transparency. This fifth block on public investments is at the calls for increased support to improve the lo- end of the sequence of questions in figure cal capacity of land tenure governance; apply 3 it may be no less important for stimulat- appropriate safeguards to protect the rights ing private investment particularly in low of the poor, especially women; to increase the income countries. The relative importance transparency of land transactions; and to im- should emerge from ex-ante analyses and prove the capacity for assessing the technical, assessments. economic, environmental, and social merits of potential agricultural investments involv- Actions to promote ing large tracts of land. There are several recognized standards established for pro- responsible food and moting responsible agricultural investments agriculture investments such as the Voluntary Guidelines on the Responsible Governance of Tenure of Land, Strengthen country capacity to assess and Fisheries, and Forests and the Committee on mitigate/regulate environmental and so- World Food Security (CFS) Principles for cial risks. There has been rising interest in Responsible Investment in Agriculture and larger-scale investments in agricultural value Food Systems (box 1). chains including in agricultural land that led to global concerns about forced land acquisi- Promote private sector alignment with tions and “land grabs”. Findings from earlier the principles of responsible investment. BOX 1: CFS Principles for Responsible Investment in Agriculture and Food Systems Responsible investment: (i) contributes to food security and nutrition, particularly for the most vulnerable; (ii) contributes to sustainable and inclusive economic development and poverty eradication; (iii) fosters gender equality and women’s empowerment; (iv) engages and empowers youth; (v) respects tenure of land, fisheries, and forests, and access to water; (vi) conserves and sustainably manages natural resources, increases resilience, and reduces disaster risks; (vii) respects cultural heritage and traditional knowledge, and supports diversity and innovation; (viii) promotes safe and healthy agriculture and food systems; (ix) incorporates inclusive and transparent governance structures, processes, and grievance mechanisms; and (x) assesses and addresses impacts, and promotes accountability. Source: CFS Principles for Responsible Investment in Agriculture and Food Systems. 18 FUTURE OF FOOD The CFS Principles for Responsible In- countries in Latin America shows it is vestments in Agriculture and Food Sys- possible to increase productivity, market tems and other principles based standards integration, and incomes of smallhold- have been developed to mitigate the envi- er farmers through inclusive approaches.45 ronmental and social risks associated with These schemes have gained prominence as large-scale, agriculture-based investments. a business model that can benefit both the Many multi-nationals have also developed producers and off-takers, which include pro- their own internal policies/standards to curement companies and direct processors. avoid reputational risks. Development part- Such schemes can (i) improve producers’ ners including the WBG and other stake- access to markets, finance, infrastructure, holders have a key role to play in supporting and improved growing techniques and implementation of the Principles. This in- technologies; (ii) enhance the off-takers ac- cludes supporting efforts to strengthen the cess to land, labor, and quality produce; and business case for public and private sector (iii) have positive direct community based actors, to facilitate cross-agency collabora- social and environmental development tion on research, advocacy and monitoring impacts.46 Similarly, there are significant and evaluation, and to foster policy dialogue gains that can be made from supporting at the national/regional levels.  In addition, linkages between agro-processing SMEs with the rising triple burden of malnutrition and larger enterprises. Meta-analysis of a including energy deficiency (hunger), micro- large cohort of linkage programs demon- nutrient deficiency (hidden hunger), and ex- strated that such projects often result in cessive net energy intake and unhealthy diets significant revenue growth for participat- (overweight/obesity), nutrition-sensitive ing SMEs, new SME job creation, and the product development and food markets be- creation of lasting commercial relationships comes an increasingly important principle that outlive the project period.47 There can for responsible investment. Educating con- be associated risks in inclusion efforts that sumers to make sound food choices related include: overdependency, exploitation of to nutrition, sustainable production, and la- power differences, entrenchment of inequal- bor practices can help reward companies re- ities, lower than expected production, and specting these aspects. side-selling. The risks need to be mitigated through careful design and implementation Support inclusive business models to to ensure producers and off-takers max- improve linkages among smallholders imize mutual gains through this inclusive and firms of all sizes. Linking smallhold- approach. Although this contracting model er farmers via outgrower schemes through is clearly driven by the private sector, there contract farming operations has shown is a role for the public sector to ensure con- impressive results. Designing support for tracts and agreements between parties are producer organizations that are based on fair, transparent and market driven as well end market realities has been equally suc- as to support the capacity of smaller actors cessful. The 15-years of experience with to engage gainfully and pragmatically in the productive alliances model across 10 commercial agricultural value chains. MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 19 Actions to increase smallholders. Removing incumbents’ pow- ers to veto the licensing of new tea factories space for private sector in Kenya enabled the entry of new competi- investments tors and facilitated investment in the sector, allowing farmers to receive 70 percent high- Support competition and associated policy er farm-gate prices.52,53 Finally, reforms that reform, including of state owned enter- strengthen competitive neutrality can spur prises. Promoting effective competition productivity and competitiveness for even in agricultural markets is key to unlocking the smallest of actors. In Honduras, a reform private sector investments with develop- to level the playing field among fertilizer ment impact. Government interventions can suppliers led to an increase of 340 percent in unintentionally stifle competition in agri- the number of registered fertilizers and up to cultural value chains by restricting entry, 8 percent lower prices, which ultimately ben- facilitating collusion, creating an unlevel efited 35,000 farmers.54 playing field, or crowding-out private sector activity altogether with state owned enter- Strengthen investment policy and dialogue prises (SOEs). Besides noted inefficiencies to open space for global investment. FDI and fiscal burdening, SOEs—like most can have a significant impact on develop- protected firms—lack incentives for produc- ment objectives, but reaping these potential tivity enhancement and can raise prices that benefits is not automatic. Sound investment affect competitiveness and investment along policy is needed. Sound policies entail actions the value chain.48 Furthermore, it is often covering the whole investment cycle includ- the poorest households that are hit the hard- ing: (i) a clear and targeted FDI strategy est by the resulting increases in food prices focusing not only on investment attraction, from poor competition. Indeed, tackling but also on facilitating the entry and estab- such anti-competitive market rules can lead lishment of investors; (ii) generating investor to significant reductions in poverty rates.49 confidence to stay and expand their opera- Agricultural producers and small enterprises tions; and (iii) supporting the development can also benefit from opportunities created by of  linkages between anchor foreign invest- more competitive value chains and agribusi- ments and the local private sector. Leveraging ness inputs.50 To achieve this, governments FDI in agri-processing sectors such as fruits must strengthen antitrust rules and enforce- and vegetables has enabled many develop- ment. In Colombia, such reforms allowed ing economies in Latin America and Africa the Colombian Competition Authority to to link into global supply chains and build break up a cartel of 14 firms which had col- backward linkages to local firms and work- luded to block sugar imports and had led to ers in host economies.55 Survey data from price overcharges of 45 percent for proces- Kenya, Ghana, and Mozambique show that sors.51 It is also important to support market both foreign investors and foreign agricul- and sector regulation that is pro-competitive tural suppliers provided assistance such as to spur private sector investment in a sec- worker training, access to farm inputs, and tor that has such important linkages with advanced payments on contracts to firms in 20 FUTURE OF FOOD their local supplier networks. FDI in flori- partial credit guarantee schemes, subsidized culture in both Ethiopia and Kenya has led crop insurance, and grants. Despite good to impressive job creation with strong gender intentions, some of these measures do not dimensions.56 In these examples, trade and achieve intended outcomes, hinder the sus- investment policies were found to have large tainable supply of financial services for effects. Governments can address investment agriculture, and result in an offering that is policy and related regulatory barriers or gaps in many countries well below the contribu- that deter the private sector from investing tion of the agricultural sector to GDP. There and decrease investors’ confidence to engage. is a need to reposition state financial sup- Introducing a national investment law based port towards risk management instruments on good practice and implementing regula- to increase private sector lending and bring tions is key for a country’s ability to attract commercial discipline to approving and col- private investors. FDI entry in key sectors lecting credit. can create local linkages and fill gaps where governments and local firms do not have the capital or the ‘know-how’ necessary to deliv- Actions to improve the er efficient or high-quality services in global policy and regulatory value chain development. Finally, strength- environment for private ening the institutional frameworks and sector investment and to capacities of governments is key to dealing with investor problems and to implementing reduce the distortionary sound investment policy that safeguards so- effects of public spending cietal and environmental interests. This also includes institutional governance and imple- Reduce the distortionary effects of pub- mentation support of investment promotion lic spending policies. While often well agencies to allow for effective facilitation of intentioned, public support programs to private sector investment in key sectors of agriculture can be financially costly and the economy. Targeted investment promo- hamper sustainability and growth. Price sup- tion has been most effective in increasing ports, input policies, production subsidies FDI flows to developing countries where the requiring production of specific commod- largest investment climate issues prevail.57 ities (e.g. coupled subsidies), or restricting land to the production of certain crops can Reduce government intervention in ag- limit crop diversification, induce econom- ricultural financial markets to open space ic inefficiency, compromise productivity for private financial service providers. State and resilience through water and land deg- banks account for about two-thirds of lend- radation, and lead to high greenhouse gas ing through formal financial institutions to emissions. Support programs have typical- smallholder farmers. Government interven- ly been directed to support staple grains. tions to promote credit to agriculture often Consequently, farmers engage less in prod- include mandatory lending quotas, directed ucts that do not benefit from large support lines of credit, interest rate caps and subsidies, levels, which include fish, fruits, vegetables, MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 21 and pulses, even when consumer demand has also be fundamental to the profitability and increased. A more crop/commodity neutral attractiveness for investment in agricultural or decoupled approach that crowds-in, rath- value chains with benefits felt by rural farm er than crowds-out, private sector activities and non-farm actors alike. It is well docu- in input and output markets is needed. mented that these benefits are felt most acutely by smaller firms and so these reforms Improve incentives and reduce can help foster inclusion.62 transaction costs Lower trade costs. Developing countries Understanding the profit and operational have a multi-trillion dollar agribusiness op- bases of private sector motivations is crit- portunity.63 However, the private sector ical to the development effort. MFD, by investment that is needed to realize this po- definition, is concerned with the leveraging tential will not happen as long as markets of private sector investment for broader so- remain segmented by tariffs, import and ex- cietal and development gains. Improving the port restrictions, non-tariff barriers, and a enabling environment for private sector in- lack of trade facilitation. It is widely recog- vestment has been closely associated with nized that trade policy is a key determinant growth and massive poverty reduction in of FDI64 partly through its role in stabiliz- China, India and Uganda.58 The channels are ing the trading environment and thereby well-known: farmers are private sector ac- impacting investor confidence.65 Gainful tors; SMEs are found to be the dominant backward linkages with domestic firms are employer in off-farm sectors in develop- also more probable when barriers to trade ing countries; and the private sector overall are removed.66 Even if the magnitude of an accounts for the greatest share of jobs in de- individual policy instrument such as a tariff veloping countries. Furthermore, reforms is small, its impact can be magnified along that are friendly to the private sector reduce the entire value chain.67 The cost and time transaction costs for private firms and have to get key imported inputs, to deliver prod- served to lower food prices for poor consum- ucts to market, or to deliver products to the ers.59,60 The public sector, with support from next node in the value chain are important development partners, has a strong role in im- determinants of competitiveness. Generally, proving incentives and reducing transaction crossing borders can be costly and multiple costs for all sizes and types of firms.61 Key crossings can entail multiple trade barriers. among these for agricultural value chains in- Reducing the direct costs associated with cludes lowering trade costs, enabling policy trade restrictions, streamlining regulato- frameworks for access to finance, improv- ry compliance,68 and reducing delays at the ing regulatory regimes for input and output border can significantly help reduce costs markets, and providing public goods that and risks for private sector investment. Trade help with market access such as food safety logistics to and from borders are equally frameworks and national quality infrastruc- important. It is estimated that every 10 per- ture. Reducing costs through infrastructure cent increase in transport costs reduces trade investment and reforms to trade logistics can by 20 percent.69 These challenges are most 22 FUTURE OF FOOD acutely felt in agriculture as transport costs vast areas. Numerous studies have docu- are relatively higher for many farm products mented how logistics costs often compose and weak storage and distribution infrastruc- a sizeable component of the final price paid ture is especially costly for perishable goods. by farmers for fertilizer. Costly logistics An additional one-day delay due to trans- can reduce the attractiveness of fertilizer port and customs issues can cause exports of for many farmers and restrict market op- time sensitive agricultural goods to decrease portunities for inputs suppliers. Similarly, by 7 percent. Trade logistics practices also regulations can pose significant barriers to impact the cost of agribusiness. For instance, entry into the market, even though they scanning fees in some African countries con- may have been intended to prevent abuses tinue to be higher than global levels70 and as in the case of regulations governing the are levied even on bulk food products such composition and/or safety of plant varieties, as sugar, making exports more expensive and seeds, fertilizers, and crop chemicals. The penalizing traders. Streamlining trade reg- high costs associated with compliance of- ulations and procedures can therefore go a ten mean, however, that the very regulations long way in improving the investment cli- that are designed to protect purchasers can mate for the agricultural sector. end up discouraging private suppliers there- by restricting availability of inputs in the Improve policies and regulatory regimes market resulting in higher prices for users. for input markets. In countries where large Regulatory reform aligned with risk-based numbers of poor people continue to practice best practices can maintain the protective subsistence agriculture, inputs have of- intent, and employing consumer protection ten been provided via subsidy programs for law instead of overregulating input markets social purposes such as safeguarding house- can help streamline compliance. Finally, re- hold food security and increasing incomes. gional harmonization of seed trade policies Due to the political sensitivities associated can enable distribution of seed across na- with the distribution of subsidized inputs, tional borders, increase the size of potential it is usually difficult for the public sector to markets, and boost the incentives for private find an exit strategy. As a result, the largest sector investment. barrier to private entry is often the presence of subsidized public competition, which Improve the policy and regulatory en- crowds the private sector out of the market. vironment for agri-finance to promote In cases where private input suppliers have financing through private sector institu- not been crowded-out, the cost and time to tions. A conducive enabling environment deliver products to users are important de- for the development of agri-finance mar- terminants of competitiveness and private kets should consist of regulations and sector viability. Infrastructure plays a crit- policies that either leverage private ical role in determining the cost and time sector lending while reducing direct gov- of supplying inputs to users, especially as ernment funding or maintain a level of the users of agricultural inputs tend to be government funding but increasing cov- large numbers of farmers distributed over erage. Public policies and legal/regulatory MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 23 reforms include those that: (i) enable the Chile.72 Because of the upstream linkages to private sector to better manage risks (e.g. smallholders and the dominant role of the regulations on warehouse receipts, agri- food and beverage industry in job creation cultural insurance, commodity exchanges, globally, credible national quality assur- price derivatives, etc.); (ii) allow for the ance infrastructure and food safety regimes establishment of financial infrastructure are critical to the development agenda. in rural areas (e.g. regulations on credit Reliable food safety systems not only re- bureaus, collateral registries, etc.); (iii) sup- lieve a large burden on public health, but port the convergence towards market-rates they can also impact farm productivity, in- and phase out interest subsidies and credit comes,73 trade,74 consumer confidence, and caps; (iv) avoid loan forgiveness and lend- ultimately investment and growth in agri- ing quotas; (v) facilitate the integration of cultural value chains. Years of limited policy different public and private agro-climatic attention and underinvestment have stunt- information systems for financial risk anal- ed the development of national food safety ysis of agriculture and agribusinesses; and systems and left many systems with weak (vi) reform state-owned banks to operate foundations. These foundations need to with market criteria and level the playing be strengthened through sound science, field for the private sector. Considerations trained human resources, and risk-based in improving the policy and regulatory and enforceable regulatory regimes. A food framework for agri-finance should include safety culture that shares public-private ac- “do no harm” policies and review distortive countability among governments, food policies or policy weaknesses such as those business operators, and consumers is need- mentioned above that can prevent private ed. Strengthening food safety systems investments and financing to the sector. includes, but is not limited to, changes in laws, regulations, and the approaches taken Strengthen food safety systems to both to ensure compliance with, and enforce- reduce foodborne diseases, and improve ment of, those requirements. Particularly market access and trade. Food safety stan- important in this regard is reform towards a dards shape access to markets and therefore preventative and risk based approach as the impact the ability of private sector agents basis for regulatory reform, decision mak- of all descriptions—from farmers to ex- ing, control, and accountability for food porters—to invest in and grow their food safety. It also reduces significant compli- and beverage businesses. Technical assis- ance costs and enhances the attractiveness tance, particularly to smaller firms and of agri-food value chain investments. The actors, is critical for this growth to be in- cost-effectiveness of risk based inspections clusive. For example, public technical is explained by the ability of inspection assistance to lychee farmers in Madagascar agencies and value chain operators to design enabled certified producers to have bet- any inspection scheme based on probability ter access to markets and higher prices.71 and assessment of negative effects of spe- Similar assistance was critical to smallhold- cific activities or products on public health, er participation in horticulture markets in animal health, and welfare. 24 FUTURE OF FOOD Reduce private sector investment risk rural people, especially the poor, in low- and middle-income countries. Secure land rights Ensure macroeconomic and political sta- can stimulate greater investment, contrib- bility. At a general level, macroeconomic ute to higher productivity, and improve the stability and peace are key conditions for pri- functioning of land and financial markets. vate enterprise development. In Sub-Saharan Land rights are also essential for poverty re- Africa, agricultural growth increased as mac- duction and gender equity. Inadequate legal roeconomic conditions such as fiscal policy, frameworks and weak institutional capac- monetary policy, and exchange rates im- ity can compromise achievement of these proved in the 1990s.75 Reductions in both outcomes. Improving capacity and perfor- high direct taxation of agriculture and indi- mance of land institutions, clarifying land rect taxation through overvalued exchange policies, and streamlining processes to rates improved farmer incentives to produce make them more customer friendly are of- and invest.76 Political changes and instabil- ten needed. In Sub-Saharan Africa, only ity can disrupt local enterprises as they did about 10 percent of occupied rural land is for about 90 percent of firms in Nepal.77 registered.83 In some settings, indigenous or Conflict reduces human mobility, curbs ac- customary land tenure systems provide se- cess to agricultural inputs and market, cure tenure rights. In other settings with increases theft of assets, and increases pric- real and perceived tenure insecurity formal es.78 In the decade following the civil war in registration and certification can strengthen Mozambique, per capita incomes increased tenure security. Improving the functioning 70 percent compared with 4 percent in the of land sales and rental markets can help previous decade. Agricultural value-added improve access to land and increase alloc- increased 60 percent.79 ative efficiency. Improve the stability and predictability of Shift public policies from direct agricul- policies. The reliability of policies (stability tural support towards improving private and uncertainty surrounding their imple- sector access to risk management instru- mentation) has long been recognized as a ments for agriculture that can facilitate factor affecting investment and growth. An lending. Agricultural finance is consid- environment characterized by unclear prop- ered risky by financial institutions for two erty rights, constant policy changes and broad reasons. First, a lack of information policy reversals, uncertain contract enforce- and financial data makes it hard to eval- ment, and high corruption translates into uate the credit risk (probability of loan lower investment and growth.80 Reducing default) of farmers and small agribusiness- uncertainty over land and water rights can es. Weak collateral makes it hard to recover increase on-farm investment.81,82 losses when defaults happen. Second, in ad- dition to the challenge of evaluating credit Improve land tenure security and ac- risk, agriculture finance faces systemic risks cess to land. Land is a key productive that can impact many farmers at the same asset and a source of livelihood for most time. Examples of such systemic risks are MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 25 production risks due to weather, pests, dis- chain stakeholders such as lead buyers, input eases, price risks, and market access risks. suppliers, banks, and farmers to spread risks Furthermore, given that agricultural finance and make transactions attractive. Agriculture is considered risky, financial institutions only and livestock insurance transfers production lend to those that have few risks or have the risks while price risk management instru- ability to effectively manage risks, resulting ments are used to reduce commodity price at times in their agricultural portfolio per- uncertainty. Warehouse receipts and other forming better, in terms of non-performing types of moveable collateral make collateral loans, compared to their non-agricultural easier to liquidate when things go bad com- portfolio. Effective risk management is based pared to reliance on land/rural real estate on the ability to assess risks and manage collateral (box 2). them. On the credit side, financial institu- tions increasingly use data and information Public investment to reduce from value chain players. Digitization of payments and transaction data (i.e. big data) private sector transaction along value chains provides information to costs and risk assess credit risks that did not exist before. Credit bureaus are expanding their cover- Improve incentives and reduce transaction costs age to rural areas. Partial credit guarantee schemes that provide enough cushion and a Invest in public infrastructure based on collateral substitute for financial institutions clear private sector needs. Public invest- by governments can increase lending to ag- ment can help crowd-in private investment. riculture. There are an increasing number of For example, public investment in large ir- risk-sharing arrangements amongst value rigation infrastructure such as dams and BOX 2: Legal and regulatory frameworks for a warehouse receipts system Commodity-backed finance using agricultural inventories is an important component to making agricultural credit and professional storage more accessible. More accessible credit and storage can contribute to food security by: (i) increasing local food processing capacity; (ii) reducing post-harvest losses; (iii) improving the quality of the goods stored under better conditions; and (iv) potentially improving incomes for farmers through a combination of lower post-harvest losses and better prices from delayed marketing. Warehouse receipts systems (WRS) enable warehouse operators to issue receipts as evidence that specified commodities of stated quality and quantity have been deposited at a particular location by named depositors. The warehouse operator holds the stored commodity in safe custody, and the depositor can use the receipt as collateral to borrow from banks. In most emerging economies, in addition to working with private sector financial service providers, ensuring the success of a WRS requires a dedicated legal and regulatory framework and a warehouse licensing and inspection authority. WBG support to government legal and regulatory reforms in Cote d’Ivoire, Ethiopia, Ghana, Kenya, Malawi and Senegal to introduce WRS have helped improve the integration of producers, traders, and processors into value chains by improving their access to professional storage and credit. Efforts in Kenya and Malawi have already resulted in approximately $49 million of loans against receipts and have reached hundreds of thousands of farmers. There is additionally evidence of sharp decreases in post-harvest losses in Kenya. Source: M&E results measurement of WBG warehouse receipts systems projects, and J. Coulter, and G. Onumah, “The Role of Warehouse Receipt Systems in Enhanced Commodity Marketing and Rural Livelihoods in Africa.” Food Policy, 27:319–37. 2002. 26 FUTURE OF FOOD canals can make it profitable for farmers to and if so, how to design and implement them make small on-farm investments in water successfully and responsibly. management and a wider range of produc- tion technologies. Rural roads can link Invest in public inspections and quality as- production areas to markets. Agri-spatial surance. Farmers increase investments in solutions (e.g., agri-parks, agri-clusters, and better seed, fertilizers, and other inputs when agri-zones), can offer enhanced coordina- they trust the quality of these inputs. Public tion and agglomeration effects to reduce investment in inspection services for inputs logistical and transaction costs, to improve agro-dealers and in labeling programs can quality and food safety management, and increase farmers’ trust and crowd-in more to spur agribusiness development includ- private investments. Quality assurance pro- ing the spread of agribusiness innovation. grams can increase demand for and trust in Agri-spatial approaches can support clients seeds produced by farm groups or local agri- in meeting development objectives in job businesses. Strengthened capacity of public creation, farmer linkages, investment and laboratories to test farm soils, or food safety, growth, but only if these public investments can increase effectiveness of farmer invest- are based on the carefully documented needs ment and returns to agricultural extension of the market in terms of location, services, and can address emerging issues as they arise. and pricing. Together, these improvements deliver important development impacts that Improve co-ordination to reduce transac- can support poverty reduction and foster tions costs. Smallholder farmer inclusion in shared prosperity. The horticulture cluster in value chains is doubly constrained by scale: the Senegal River Delta presents one such high production costs reduce farm compet- example. Through targeted policy interven- itiveness, while small production volumes tions, infrastructure investments, and the combined with high geographic dispersion attraction of a large private sector anchor in- increase purchaser transaction costs. As a vestor, the government facilitated relocation result, smallholders tend to be underrepre- of a failing horticulture cluster that was con- sented in higher-value supply chains with strained by land and water scarcity and high negative effects on their income and growth logistics costs to a more conductive location potential. Agri-food firms have tried to se- that optimized logistics, capitalized on wa- cure product aggregation and supply through ter and land resources, and fostered increased a variety of means including vertical integra- investment including for SMEs. As a result, tion and contract farming. A new generation the sector saw exports to Europe jump by of World Bank-financed projects, which 66,000 metric tons between 2007 and 2016 are aimed at helping small-scale producers and attracted investment by more than a to reach product specifications required by dozen new exporters. Agri-spatial solutions markets on the basis of agreements between are not a panacea, however.  Guidelines de- producers and private sector buyers, can help veloped by the WBG support clients in solve this scale and coordination failure. assessing when and under what conditions Productive alliance projects help organized agri-spatial solutions might be appropriate farmers to produce and aggregate agri-food MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 27 products under the quality, quantity, and de- including (i) currency inconvertibility and livery specifications agreed with purchasers. transfer restrictions (preventing earnings By supporting this process, governments can repatriation), (ii) expropriation (govern- leverage private sector participation upstream ment takeover of assets, such as land, farm (input and technical assistance providers) machinery, or food processing plants), and downstream (off-takers, agro-industries, (iii) war and civil disturbances (causing di- wholesalers, and exporters) often attracting rect destruction of assets), and (iv) breach of companies to places where markets are thin contract (by governments and the contrac- or non-existent. Impacts on farm household tual partners). These risks also significantly productivity and income has been registered increase the cost of capital for investment throughout productive alliance projects.84 in agriculture and related sectors, and some lenders are unwilling to extend credit in the Consider public-private partnerships: absence of insurance for political risk. As a Public-private partnerships (PPPs) can help risk-mitigation tool, political risk insurance bring private sector technology, expertise, helps provide a more stable environment for and innovation in providing public services. investments into developing countries and The underlying principle behind PPPs is that helps unlock better access to finance. For through collaboration, public and private part- example, in Zambia political risk insurance ners can achieve objectives that each could not provided to multiple agribusiness enterpris- achieve alone. A recent review of agricultural es has contributed to a significant increase in PPPs categorized four common types of part- private investment.86 nerships, depending on whether their aim is: (i) to develop agricultural value chains, (ii) to Consider the use of ‘market pull incen- conduct joint agricultural research, innova- tive mechanisms’ to encourage the private tion, and technology transfer, (iii) to build and sector to invest in supplying inputs and ser- upgrade agricultural market infrastructure, or vices to smallholder farmers and SMEs. (iv) to deliver business development services Pull mechanisms are innovative finance to farmers and small enterprises.85 Potential mechanisms that have been applied to inter- PPPs should demonstrate benefits above al- national development projects in recent years. ternative modes of support such as direct Pull mechanisms encourage innovation and public provision or privatization including any the adoption of new technologies through additional costs of building procurement and results-based payments such as prizes that management capacity at appropriate levels to are typically paid out when certain objectives administer these partnerships. or milestones have been met. Such financing mechanisms have seen success in generating Reduce private sector investment risk innovation and market-oriented solutions in other domains such as health care. Ex- Support political risk insurance for fi- amples in agriculture include incentivizing nancial institutions and private investors. the development and adoption of on-farm Private investment in developing coun- storage technologies for smallholder farm- tries is sometimes deterred by political risks ers, encouraging innovative distribution of a 28 FUTURE OF FOOD breakthrough technology to reduce aflatox- and services. Market failures occur when the in contamination, and building a market for market supplies a socially sub-optimal lev- new varieties of maize enhanced with vitamin el of goods and service as market prices do A. Private sector partners are crucial to foster not reflect all social costs and benefits. This innovation and to create and expand new mar- mispricing can lead to inefficiency in the al- kets. Pull mechanisms can mitigate private location of resources. An example is the sector risks in frontier markets to unlock new under-provision by the market of public goods investment and foster private-sector-driven and services. These have two characteristics: innovation to tackle complex development (i) the consumption of the good or service challenges. These mechanisms differ from by one person does not reduce availability of traditional agricultural push mechanisms by consumption by another person (nonrival) which development partners address market and (ii) it is not possible, or very difficult, to failures through the financing of direct or in- exclude anyone from consuming the good or direct interventions. service (non-excludable). Goods and services with these characteristics create a divergence Direct finance to private sector value chain between social and private returns and lead to actors. Direct private sector financing from under-provision by the private sector. Public public budgets includes matching grants, financing can also help induce more equitable subsidizing start-up costs to open branch- and often pro-poor development. es in rural areas, supporting credit lines for long-term funding, providing subsidies to Invest agriculture public spending in pub- agricultural insurance premiums, subsidizing lic goods and services. Investments meeting technical assistance to financial institutions the two characteristics of public goods and or agriculture cooperatives, etc. Careful anal- services (nonrival and nonexcludable) in- ysis needs to be undertaken to ensure that clude (i) improved knowledge of agronomic no improvement in the policy and regulatory practices that can be used over-and-over environment or the risk management frame- again, (ii) applied research developing bi- work can overcome the problems that these ological technology such as improved open direct financing instruments intend to tackle. pollenated seeds as these seeds multiply and farmers may use their own seeds in future without repaying for them. Even though hy- Use public resources to brid seeds allow private seed companies to invest in public goods and recoup research and development costs from services the farmer, the level and nature of private in- vestment would be less than socially optimal Not all needed investment in agricultural as it would not consider broader benefits be- value chains can be provided by the pri- yond farmers, such as lower consumer prices, vate sector. The rationale for public financing and often has little relevance for smallhold- includes avoiding economic inefficiencies er farmers,87 (iii) basic research underpinning resulting from market failure and reduc- applied research and (iv) livestock disease ing inequality in the distribution of goods surveillance and veterinary services as large MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 29 outbreaks of zoonotic diseases such as avi- information (data) help to better link con- an influenza can have huge human public sumer demand with rural producers. The health impacts and result in massive loss of public sector has a role to play in making in- accumulated private capital held in livestock formation/data available to facilitate digital with severe impacts on livelihoods. Empirical matching markets that can help improve al- evidence indicates that there is significant un- locative efficiency. Electrification can help derinvestment in public agricultural research facilitate rural-based food processing and in developing countries88 with Sub-Saharan value addition while port infrastructure can Africa accounting for only about 5 percent facilitate exports. For example, in Vietnam of global public spending on agricultural re- road rehabilitation increased the variety of search and development.89 In addition, public goods that households sold to market—pri- investment in education and skills can help marily fruits, vegetables, and meat—and small-scale farmers and SMEs increase pro- encouraged greater participation in trade and ductivity and incomes and help them become services. In Georgia, the construction and more effective demanders of financial capital. rehabilitation of roads increased the opportu- nities for off-farm and female employment.90 Support complementary public invest- While some of these sectors may be able to ment in other sectors. Investments in rural crowd-in private investment, for example for roads, energy and land markets and by other power generation and port infrastructure, non-agricultural ministries can help enable they are subject to their own ‘cascade’ consid- the commercialization and competitiveness erations of public and private investment that of agricultural value chains. Rural roads and are beyond the scope of this paper. 30 FUTURE OF FOOD Implementation A more private-sector-oriented ap- information generated by ex-ante assess- proach: The Cascade Approach (figure 3) ments and data—like agricultural public not only yields the large spectrum of poten- expenditure reviews, business climate indi- tial actions reflected in the previous section, cators, trade data, competition assessments, but acts as an organizing framework for a or ‘value chain studies’—on constraints and more private-sector-oriented approach to opportunities needs to be prioritized by a diagnostics of both the sector as a whole, broad set of consultations with the private as well as of specific value chains. This is sector. This calls for structured and inclusive a question of diagnostic perspective, not public-private dialogue. Ex-ante assessments necessarily a new diagnostic product: How and government strategies alike can gener- would the private sector prioritize the long ate a long list of agribusiness opportunities list of constraints and opportunities that which need to be vetted for practicality with data sources and analytics might point to? the private sector. Private sector views on Which of the constraints represent appro- the most promising value chains can differ, priate business risks and costs? Which lie sometimes significantly, from those of aca- in the public sector’s domain to resolve? demics, donors, and even governments. A Ultimately, does their resolution help max- private-sector-oriented approach to diag- imize finance for development according to nostics puts the private sector perspective the logic of figure 3? together with the wide range of ex-ante as- sessments and analytics to establish what In practical terms, a private-sector-oriented is currently competitive and what could approach to diagnostics implies that the be competitive through appropriate public MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 31 reforms and investments over a given time options in agribusiness while paying spe- frame. This approach can help to more ef- cial attention to linkages with SMEs and fectively leverage private investment for the farmers by mapping out the constraints and short, medium, and long terms. The latter is opportunities for private sector investment. particularly relevant in those cases where no This requires not just ‘value chain studies’, immediate opportunity presents itself as in but also gaining a better understanding of some contexts of fragility, conflict, and vio- cross cutting constraints from the private lence.91 Implementation of MFD therefore sector’s perspective to unlock investment starts with this perspective and these tools. opportunities. These assessments are by no means exhaustive. The dialogue with the Ex-ante assessments. There are a very private sector will prioritize and frame the wide array of assessments that can help information in hand and will help to design answer the questions in figure 3. These as- impactful reform and investments to maxi- sessments range from macro level analyses mize finance for development. to studies of very specific segments of in- dividual value chains. While this might Public-Private Dialogue. Sustainable seem a daunting amount of information, adoption of an MFD approach needs to not all the desired ex-ante assessments ex- recognize that policy and regulatory re- ist for a given country and a desk review of forms that are meaningful should involve what is known can also flag what yet re- dialogue and input from both public and mains to be understood in order to answer private stakeholders. Understanding the the questions in figure 3. Analysis on the underlying causes of market failure that quality of public spending, its current im- are constraining greater private provi- plementation performance, and the level sion of goods and services is a critical first of direct public activity in markets is im- step. Government policy and regulation portant. Agricultural public expenditure can exacerbate market failure and suppress reviews can help to enhance focus, quality, private investment. By engaging private and the appropriate scaling of public invest- value chains actors, policy makers can ments in the sector. Much can be learned more accurately understand their binding about the long list of constraints from constraints and formulate the right pol- multi- and sector-wide reviews as well as icies to address them. Likewise, private from thematic reviews undertaken on spe- sector stakeholders may need governments cific issues such as competition, transport, to help solve systemic issues they face.92 or food safety. Sector strategy documents, Setting up a safe, structured, and trusted trade data, demographic and food market environment through public and private analyses, and value chain studies can yield dialogue is critical to offering stakehold- a list of potential opportunities that can ers the opportunity to identify problems be used in consultation and vetting by the and suggest solutions that aim to reduce private sector. Governments can invest in unjustified transaction costs and risks of sector-level diagnostics to understand their doing business in the agribusiness sector. competitive positions and inclusive growth Public-Private Dialogue also provides a 32 FUTURE OF FOOD platform for social and environmental as- the resultant agenda could unlock multiple pects to be integrated as well as provides sub-sector investment opportunities at once. a forum for innovation and knowledge ex- At the value chain level the approach can change.93 In countries around the world, point to immediate or medium-term invest- deliberate public-private dialogue in mul- ment opportunities for the private sector tiple agricultural value chains has led to at large. Development partners, as one op- the design of relevant and innovative policy tion, can directly support private investment and regulatory frameworks helping priori- through blended finance packages (box 4). tize the most binding constraint to private Governments, supported by development sector investment. Public-Private Dialogue partners, can make public investments that has also provided a platform for engage- are well identified by the MFD process ment across ministries and agencies, each through either stand-alone investment proj- with their different mandate, around com- ect loans or loans that are accompanied with mon objectives for the value chain (box 3). relevant policy and regulatory reforms as ap- propriate. Global best practices and models Reforms and investments. It is important to for linking smallholders and SMEs to com- note that an MFD approach to diagnostics, mercial value chains can be made available and public-private dialogue more broad- and governments can access very specif- ly, does not imply that the private sector ic technical assistance in areas identified as has a carte blanche on defining the public priority constraints to crowding-in private sector’s reform agenda, but rather such an sector investment for the achievement of de- approach calls for an integration of the pri- velopment objectives. At a more granular vate sector perspective. Once the questions level, governments can invest in their capac- in the Cascade Approach (figure 3) have ities for strategic market segmentation and been answered based on solid analysis and analysis to keep up with shifting market op- public-private dialogue, an impactful re- portunities in a constant dialogue with the form and investment agenda emerges. If the private sector around maximizing finance for cascade was applied to the sector broadly, development. BOX 3: The Impact of Public-Private Dialogue In Côte d’Ivoire, the WBG has been supporting inter-professional bodies (associations inter-professionelles) and other actors in a public-private dialogue in the cashew sector since 2014. This dialogue in the sector permitted the joint identification of key constraints and reforms namely the need for stronger supply chain linkages to cashew producers in the post-harvest phase and the lack of access to finance by cashew processors of all sizes, particularly SMEs, potentially important for rural employment in these cashews growing areas. The solutions defined jointly by the public and private sector identified the need for a warehouse receipts system. The process, led by the Ministry of Industry and Mines, allowed cashew value chain actors, financial institutions, collateral management companies, and a number of key ministries to interact on a regular basis and put in place an innovative reform that allows agricultural commodities to be used as collaterals in order to access credit. Since then, Côte d’Ivoire has developed and adopted a legal and regulatory framework for warehouse receipt financing and has adopted the first warehouse receipts law in francophone Africa. Some $16 million of loans have been facilitated for cashew value chain actors through this effective WBG collaboration. MAXIMIZING FINANCE FOR DEVELOPMENT IN AGRICULTURAL VALUE CHAINS 33 BOX 4: Blended finance Large amounts of capital that could be deployed for projects in emerging markets are sitting on the sidelines because they require risk mitigation, facilitation, or partnerships with other capital providers along the risk-capital spectrum. Blended finance—a package comprised of concessional funding provided by development partners and commercial funding provided by a financier—can help mitigate real or perceived risks which often lead to higher costs or delay or prevent a transaction from happening. Concessional funds help bridge gaps and address market barriers that prevent private sector investment in areas of strategic importance for the development community such as smallholder and SME inclusion, climate-smart agriculture, and access to finance. An example of blended finance is the current Global Agriculture and Food Security Program (GAFSP) Private Sector Window where the International Finance Corporation uses concessional funds from the GAFSP Private Sector Window alongside its own commercial funding. Since inception, the GAFSP Private Sector Window has supported 51 agribusiness and agrifinance projects in 25 countries, deploying approximately $260 million of donor funds, leveraging an additional 1.7 times this funding on average from IFC and 3.5 times this funding from other development finance institutions and/or private investment. In parallel, the GAFSP Private Sector Window has supported 47 IFC Advisory Services projects across 27 countries for an amount of over US$13 million. 34 FUTURE OF FOOD Endnotes 1. United Nations, Transforming Our World: the 2030 GRACE.” Water Resources Research, 51, 5217–5238. Agenda for Sustainable Development. Resolution 2015. Adopted by the United Nations General Assembly 12. E. Nkonya, A. Mirzabaev, and J, von Braun (eds), (New York: United Nations, 2015). Economics of Land Degradation and Improvement 2. 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