Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces A Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces Alexandra Horst and Steven Watkins © 2022 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 conclu- sions 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. 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Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces Alexandra Horst and Steven Watkins Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces ii Contents Foreword...................................................................................................................................................... iii Acknowledgments....................................................................................................................................... iv Abbreviations................................................................................................................................................ v Executive Summary...................................................................................................................................... 1 Introduction................................................................................................................................................... 6 Economic Transformation in Pakistan: A New Role for Agriculture........................................................ 9 The Agriculture Sector in Pakistan........................................................................................................... 13 Market Structures and Trends................................................................................................................... 16 Punjab’s Fruits and Vegetables......................................................................................................... 18 Sindh’s Livestock............................................................................................................................... 20 Sindh’s Aquaculture........................................................................................................................... 24 Service Providers............................................................................................................................... 26 Credit....................................................................................................................................... 26 Market Integration...................................................................................................................................... 27 Target Producers............................................................................................................................... 28 Contracting........................................................................................................................................ 28 Market Linkage Projects................................................................................................................... 29 Lessons Learned...................................................................................................................... 31 Proposed Approaches............................................................................................................................... 33 Produce Collection Centers.............................................................................................................. 33 Productive Alliances.......................................................................................................................... 35 Improving Efficiencies in Existing Systems...................................................................................... 40 Recommendations..................................................................................................................................... 47 Institutionalization............................................................................................................................. 51 Conclusions................................................................................................................................................ 53 Annex 1. International Experiences.......................................................................................................... 55 Annex 2. Risks of Elite Capture................................................................................................................. 69 Annex 3. Current Options for Registering Producer Groups in Pakistan.............................................. 70 References.................................................................................................................................................. 72 Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces iii Foreword Agriculture in Pakistan, while a shrinking fraction of the overall economy, remains by far the biggest employer par- ticularly in rural areas, and is an especially important sector from a rural livelihood and food security perspective. The sector contributes 19 percent of GDP and employs 38.5 percent of the labor force.1 Pakistan’s high population growth rate, at 2.4 percent annually, and urbanization rate are pressurizing the agriculture sector not only to increase production, but also to respond to a changing and diversifying food consumption pattern.2 A growing number of urban consumers in Pakistan prefer non-traditional high value products and convenience food more than rural consumers. Because of low overall yields and productivity, and a highly distorted agricultural market, the country has become a net importer of food items. Agriculture remains dominated by a few low value crops and there has been insufficient in- novation to boost the yields and productivity of inputs. Given the increasingly small farm size due to the fragmentation of land over generations, this transition away from low value crops to high value agriculture is necessary to increase the dynamism of the sector and the incomes of rural households engaged in agriculture. The future dynamics of Pakistan’s agriculture will strongly depend on the extent to which the sector can transform itself to become more productive and commercial. For agricultural producers to effectively access new markets, specific investments and strategies are required, and the country needs to develop targeted mechanisms to support market integration to generate important developmental gains. Since the agriculture sector employs the poorest segment of the population, it is important that these market integration efforts ensure their inclusion. This requires a policy environment that encourages markets and private actors to act in a way that is aligned with the objectives of agricultural development, food security, and poverty reduction. This report reviews and lays out options of mechanisms that can be considered for driving market integration of agri- cultural producers, in particular for the majority of smallholder farmers in Pakistan. The findings outlined in this report are based on a series of background studies undertaken in the provinces of Sindh and Punjab and the proposed recommendations reflect a deep understanding of past experiences and future opportunities. As such, we believe this report will make a useful contribution to the development strategy of the World Bank and other development partners in Pakistan, and we hope it will contribute to enhance agriculture dynamics to the benefit of Pakistan’s agricultural producers as well as to improve the diversity of the food supply in support of better nutrition outcomes. Martien van Nieuwkoop, Global Director, John Roome, Regional Director, Agriculture and Food Global Practice, The World Bank South Asia Sustainable Development, The World Bank 1 Pakistan Economic Survey 2020-21. 2 The proportion of the population living in urban areas increased from 35% in 2010 to 37% in 2019, compared to an increase from 31% to 34% in the same period in the South Asia region (Source: WDI). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces iv Acknowledgments This report was prepared by a team led by Alexandra Horst (Senior Economist, Agriculture and Food Global Practice, World Bank) and Steven Watkins (Lead Agribusiness Specialist, Food and Agriculture Organization), under the over- all guidance of Loraine Ronchi (Practice Manager, Agriculture and Food Global Practice, World Bank) and Willem Janssen (Lead Agriculture Economist, Agriculture and Food Global Practice, World Bank). The authors gratefully ac- knowledge the valuable series of background papers used in the report prepared by a team comprised of Heman Das Lohano (Professor of Economics at the Institute of Business Administration, Karachi), Mubarik Ali (Former Member of the Food, Agriculture and Climate Change Planning Commission of Pakistan), Khuram Nawaz Sadozai (Associate Professor, Department of Agricultural and Applied Economics at the University of Agriculture, Peshawar), Inshan Ali Kanji (Agriculture and Financial Inclusion Expert) and Zeeshan Mustafa (Agriculture Value Chain and Market Integration Expert). The team expresses its gratitude to David Tuchschneider, Azeb Fissha, and Amanullah Alamzai for provid- ing strategic guidance on the report as peer reviewers. The team also thanks Guo Li, Jean Saint-Geours, Myriam Chaudron, Rahat Jabeen, Sachiko Kondo, Namesh Nazar, Alban Bellinguez, Joel Hourticq, and Javed Memon for their thoughtful comments and feedback received at various stages of this study. This report is linked with and complements related analytical pieces developed within the Pakistan Agriculture Sector Review which seeks to explore the enhancement of agricultural development and the acceleration of a reform-based transformation of Pakistan’s agriculture and rural sector. These pieces include a study on the Urban Food System in Pakistan which aims to provide policy, institutional and investment recommendations to improve urban food systems for better nutritional and inclusiveness outcomes in cities. Another analytical piece will review the rural space of Pakistan to identify different pathways for rural development and recommend ways to make the rural space more productive. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces v Abbreviations AI Artificial Insemination CPF Country Partnership Framework EU European Union ha Hectare GAP Good Agricultural Practices GHP Good Handling Practices HVC High Value Crop ICT Information and Communications Technology LIVAQUA The Sindh Livestock and Aquaculture Project MCC Milk Collection Centre NGO Non-Government Organization NRSP National Rural Support Program PAMRA Punjab Agricultural Marketing Regulatory Authority PMU Project Management Unit PRIAT Punjab Resilient and Inclusive Agriculture Transformation Project Rs Pakistani Rupee (Rs 100 = US$0.56) SAR South Asia Region SCD Systematic Country Diagnostic Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 1 Executive Summary Introduction sector, several projects under preparation aim to increase green and inclusive private sector 1. Pakistan’s agriculture sector is lagging behind growth. The Punjab Resilient and Inclusive Agricultural its potential and needs to focus beyond productiv- Transformation (PRIAT) Project and the Sindh Livestock ity improvements towards transformation through and Aquaculture (LIVAQUA) Project under preparation high value production. Recent World Bank Group at the time of this report are aimed at: (i) overcoming low analytics have highlighted the need for Pakistan to over- productivity and unsustainable production practices; come low productivity in the agriculture sector and im- (ii) addressing information asymmetries and promoting prove its poor business environment and financial inclu- more inclusive market integration; (iii) improving the sion. They further underlined the need for interventions business enabling environment; and (iv) strengthening in agriculture to move beyond improving productivity to- supply chain resilience and ameliorate the risk of en- wards the environmental sustainability of the agriculture vironmental damage. To help inform the World Bank’s sector and an agricultural transformation through high approach to smallholders’ market integration in Sindh value production, water use efficiency and increased and Punjab, five background feasibility studies were competitiveness, and to address distortionary policies prepared to evaluate the current level and opportunities in the agriculture sector, inefficiencies in the wholesale for strengthening producer integration in key commodity markets for non-traditional products, poor physical in- markets: fruit and vegetables (Punjab); livestock (Sindh); frastructure, the limited knowhow of producers, and a and fisheries/aquaculture (Sindh). The main findings and lack of modern agricultural research. recommendations of the feasibility studies have been summarized in this synthesis report to identify and pro- 2. In support of the World Bank’s development pose market linkage approaches. priorities to increase competitiveness and pro- mote equity and inclusion in Pakistan’s agriculture Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 2 Pakistan’s Agriculture Sector area. The livestock subsector represents 60 percent of and Market Trends Pakistan’s agricultural GDP, but smallholders dominate the industry: 94 percent of farms own less than 10 cattle 3. Agriculture continues to be the main livelihood and buffalo, accounting for 67 percent of cattle and 71 in rural areas and the country’s urbanization percent of buffalo in Pakistan. bears great potential for inclusive sector growth. Agriculture represents about 20 percent of Pakistan’s 5. Pakistani agriculture is not realizing its full po- GDP and employs almost 40 percent of the workforce. tential. Although there is agricultural activity in all areas Relative rural migration trends are muted in Pakistan, of Pakistan, most crops are grown in the Indus River with 37 percent of the population living in urban areas. basin of Punjab and Sindh producing roughly 80 per- These trends are mainly due to the forces of high popu- cent of national output. The agriculture sector is operat- lation growth, particularly in rural areas, and the inability ing below the potential yields that the well-irrigated and of the services and industrial sectors to create enough fertile soils of the Indus irrigation system could produce jobs to keep pace with a rapidly expanding youth co- when compared to productivity levels in similar regional hort looking for off-farm work. As a result, thousands of and global farming systems. The food and beverage smallholder producers are encumbered with increasing- processing industry is the second largest industry in ly smaller parcels of land and meager livelihood pros- Pakistan after textiles, accounting for 27 percent of the pects. In absolute terms, however, urbanization is signif- value-added production and 16 percent of employment icant in Pakistan due to its ever-expanding population. in the manufacturing sector. Most of Pakistan’s food processing industries are located in Punjab (60 percent) 4. Pakistan’s farming sector is highly fragmented. and Sindh (30 percent). Small average plot sizes and livestock holdings domi- nate farming, which creates difficulties for linking to mar- 6. The vast bulk of fresh produce passes through kets. The latest agriculture census (2010) noted that, of traditional marketing systems onto consumers. the 8.3 million farms in Pakistan, 89 percent were less This carries substantial costs, especially for smallhold- than 5 ha, accounting for 48 percent of the national farm er producers, where supply chains contain multiple Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 3 intermediaries including village-level consolidators, Punjab’s Higher Value Crops transporters, wholesalers and commission agents in state-regulated government markets, and retailers. The 9. The increasing domestic demand for fruit and long chain of intermediaries inflates the prices paid by vegetables encouraged an expansion in produc- the end consumers. Farmers are often in unfavorable tion of higher value crops, including fruits and veg- bargaining positions as their holding capacity and mar- etables, in Punjab. Except for the potato industry, the ket information are low. They are unaware of quality increased production was driven by the expansion of standards, if any, and traders are more adept at judging cultivated area rather than any productivity improve- the in-field returns (e.g., dressing percentages, harvest ments. A significant recent reform in produce marketing returns from an orchard). Additionally, the lack of trans- is the Punjab Agriculture Marketing Regulatory Authority parent trading practices in the markets represented (PAMRA) Act which aims at increasing competition in by trader collusion and improper or no weighing pro- agriculture markets. PAMRA’s main task is to register cedures, the limited availability of market infrastructure and deregulate wholesale markets, collection centers, (e.g., pre-cooling facilities), and an inadequate transport warehouses, cold storage facilities, accreditation bod- and logistics infrastructure lead to wastage that can ies, and service providers (brokers, graders, assayers, amount to 20-30 percent through the supply chains. commission agents, etc.). 7. Pakistan, as a lower middle-income country with high Sindh’s Livestock and population growth, increasing incomes, improved com- munications and urbanization, has followed global food Aquaculture demand trends. Pakistan’s growing middle-class consumers now demand more dairy products, 10. Consumption trends in Sindh for animal-based meat, fresh fruit and vegetables, and processed foods have increased, although most consumers convenient foods, and less unprocessed grain still prefer raw, warm milk, live chickens and unpacked staples. These trends, plus the liberalization of mar- meat. The lack of modern infrastructure and services kets, attracted many large foreign and local companies along key commodity supply chains contributes to such as Eximp Agri Products (rice), PepsiCo (potatoes), these trends. Most milk supplies (80-90 percent) con- Rafhan (maize), Pakistan Tobacco Company (tobacco), tinue to be marketed through traditional channels as K&N (meat and poultry), and Nestle and Engro Foods unpasteurized milk which leads to high contamination (milk) to Pakistan’s food sector. levels due to poor hygienic practices, the absence of chilling, and adulteration by producers and traders. 8. Despite the significant transformation of the urban re- About 20 percent of the national ruminant livestock herd tail sector, and the moderate transformation of the fresh is located in Sindh. Meat is the main source of protein produce wholesale sector, little information is trans- in local diets and Sindh supplies about 30 percent of mitted back to producers because supermarkets and national production. Most of the increase in demand most agro-processors continue to source the bulk of for meat in Pakistan has been met by poultry, which is their requirements from wholesale markets. Farmers’ the cheapest meat. The production strategies, business capabilities are low as they are not well informed set-up and processing in the poultry industry are the of the standards required by supermarkets, pro- most advanced of any meat subsector in Pakistan. cessors, exporters, etc., and even more critically, they lack the capacity to achieve those standards. 11. The bulk of expected future demand for Absent are contractual relationships and the emergence aquaculture products will need to be met by fish of specialized wholesalers dedicated to modern supply farming. The volumes of marine captured fish have channels. This results in lost opportunities for local farm- remained steady at around 500,000 tonnes for the past ers to supply the higher quality produce increasingly decade and are unlikely to grow considering coastal demanded by the growing urban middle classes and, fishery stocks are over-exploited and cannot sustain consequently, to receive higher returns for their work. the current levels. Fishery exports, mainly to China and Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 4 Thailand, have risen steadily during the past decade would be the driver of the partnership by creating the and amounted to US$474 million in 2019. conditions for the development and exploitation of the identified market opportunity by focusing support on the Proposed Market Linkage weak links in the supply chain. Alternatively, smallhold- ers could be connected to a larger producer or trader Approaches with experience and longer-term downstream linkages. The limitations to sustainably link smallholders to higher 12. Efforts to form producer groups in Pakistan value markets include their lack of timely supply and have not proven sustainable once project or NGO the uneven quality of the produce delivered to buyers. support ends. The cluster approach has proven more Projects need to employ specialist intermediaries to help effective in developing market opportunities. Producers bridge the gap between producers and companies. The will not generally self-organize into groups but rather main barrier to these more formal supply transactions congregate around a mutually beneficial economic pur- is the lack of trust between all groups, both horizontally pose (e.g., selling to a common agro-processor) or a and vertically, within the supply chains. piece of infrastructure for collective action, such as ag- gregating their produce for certain buyers. Interventions 15. Tackling supply chain weaknesses in existing mar- to support smallholder commercialization, such as keting systems, such as food losses and waste (both market analyses, contract farming, certification, and on-farm and downstream) in an efficient, sustainable strategies to strengthen local business development and integrated way provides an opportunity to reduce and value chain investment have been deficient within costs and value erosion in a relatively cost-effective way the agriculture sector of Pakistan. that would potentially increase the incomes of all chain players. Chain integrators may be able to introduce new 13. Producer Collection Centers provide points of standards and technologies in the sector that support aggregation for growers to either individually or collec- smallholder farmers in improving their production quali- tively sell their produce. The availability of bigger quanti- ty and quantity. These more progressive intermediaries ties of fresh produce, sorted into quality grades, would often have a strong focus on service provision but with attract a wider range of buyers seeking larger volumes a commercial attitude. The major barrier to improving the for ease of transportation. These improved economies existing marketing system would likely be the strong vest- of scale promote more competition between buyers and ed interests among the various intermediaries to maintain- should propel higher returns for smallholders. Collection ing the status quo. Assistance with product pricing, the centers have delivered effective results for smallholders relationship between buyers and smallholders, timing of selling fresh milk daily that needs to be chilled, and this payments, quality issues, location of sales, production-re- model could be replicated for other perishable com- lated decisions, timing of selling, access to inputs, and modities (i.e., fish, fruit and vegetables). The ownership investment costs are all possible entry points for project and management of the collection center is possibly the interventions to improve existing food marketing systems. most important issue impacting the efficiency, profit- ability and sustainability of the center, and thus, a key Recommended Interventions challenge to the advancement of this approach among the target commodity subsectors. 16. The following recommended project activities are based on the lessons learned from previous market link- 14. The Productive Alliance approach aims to change age efforts highlighted in the feasibility reports for each the buying and selling culture from the occasional and commodity and project experiences that specifically aim opportunistic sales transactions of individual farmers to to improve marketing outcomes for smallholders. transient traders, to a more consistent sales approach that builds relationships between registered producers • Identify the market opportunities that will or groups of registered farmers selling to known trad- guide subsequent project interventions. ing partners. The public partner or the project’s team Support agencies undertake a series of stud- Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 5 ies to understand key issues such as market • Adapting innovative technologies and demand, local production conditions, the busi- practices. ness environment, interests of farmers, traders • Facilitating the provision of extension, and agribusinesses, and the farmers’ ability to financial, and business development access business support services including ex- services. tension advice. • Monitor outcomes that mantain a focus on • Define the exclusive benefits that cooper- desired smallholder producers results and sup- ation will generate for value chain players. ply chain improvements that could possibly be Collective action is most successful when farm- expanded and replicated in other project areas. ers perceive that the benefits from group activi- ties outweigh any additional costs. Project teams Institutionalization should clearly identify these potential benefits early and develop/increase the group’s perfor- 17. Establishing a permanent Project Management mance through production intensification and Unit (PMU) is the recommended option for institu- marketing improvement, while also working on tionalizing market integration work in the provincial the organizational aspects of group formation. governments. The PMU would be established within the Agriculture Marketing Secretariat under a Board of • Target external financial and technical sup- Directors chaired by the Secretary, with members from port to help small-scale producers and agri- the farm community, the private sector, NGOs, and the businesses access financial, managerial and government. The PMU would include units responsible business services. Provide technical assistance for: social mobilization; project implementation; market to help smallholders meet quality standards, im- integration; financing and administration; and capacity plement efficient agronomic techniques, under- building. Alternatively, the responsibility for managing stand markets, develop business proposals, etc. market linkage projects could be allocated to an exist- If projects disrupt traditional sources of credit ing government agency such as the Agriculture Delivery (e.g., trader advances), then alternatives need to Unit (Punjab), one of the various semi-autonomous be identified that provide long-term, sustainable companies or programs already developed in each funds for smallholders. province during previous donor-supported projects, or a combination of these organizations, particularly those • Prioritize producer collaboration over formal with certain expertise (e.g., financing). organizational structures as farmers should de- cide for themselves whether they wish to operate as a formal group or remain a loose alliance. The group development process should use a bot- tom-up, member-owned, democratically-oper- ated approach with transparency in operational rules and management decisions. • Assist farmers to improve their on-farm pro- ductivity and production decisions to be more aligned to market demands by: • Overcoming market information asymmetry. • Developing or improving smallholder- targeted infrastructure. • Facilitating production diversification. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 6 Introduction 18. Pakistan’s agriculture sector is lagging behind poverty reduction and shared prosperity. In line with its potential and needs to focus beyond produc- these priorities, the World Bank’s 2022-2026 Pakistan tivity improvements towards a transformation Country Partnership Framework (CPF) underlines the through high value production. The 2020 Pakistan need for interventions in agriculture to move beyond Systematic Country Diagnostic (SCD) highlighted that, improving productivity towards the environmental sus- while Pakistan has made progress on poverty reduction tainability of the agriculture sector and an agricultural since the early 2000s, the country has faced recurrent transformation through high value production, water macroeconomic crises and is stuck in a low middle-in- use efficiency, and competitiveness.4 These findings come development trap.3 For the agriculture sector, are aligned with the most recent Country Private Sector the SCD emphasized that direct state intervention has Diagnostic (CPSD) for Pakistan, which reiterated the “contributed to strengthening the monopsonist power inefficiency and low-value addition along agricultural of licensed traders/middlemen, and expanded the supply chains in the country given “the spillover effects scope of patronage by political and landed elites to the of distortionary policies in the agriculture sector, inef- detriment of small farmers, and of a competitive de- ficiencies in the wholesale markets for non-traditional velopment of marketing services and infrastructure.” It products, the absence of warehouse receipt systems identified overcoming low agriculture sector productiv- and storage capacity, poor physical infrastructure, ity and improving the poor business environment and non-tariff barriers, limited knowhow of producers, and financial inclusion as key activities to support the World a lack of modern seed research.” At the same time, the Bank’s priorities of increasing Pakistan’s competitive- CPSD identified agribusiness as a high-potential sector ness and promoting equity and inclusion for sustained that could unleash private sector growth and attract in- 3 World Bank Group (2019). Pakistan Systematic Country Diagnostic. 4 World Bank Group (2022). Country Partnership Framework for the Islamic Republic of Pakistan. Draft. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 7 vestment in the near- to medium-term, given the rapid prepared to evaluate the current level and opportunities increase in food demand of a growing population.5 for strengthening producers integration in key commodity markets: fruit and vegetables (Punjab); livestock (Sindh); 19. A key strategy to support sustainable and eq- and fisheries/aquaculture (Sindh); as well as the current uitable agricultural transformation in Pakistan is market context of such commodities in each province. to support smallholder producers, as they are often Based on literature reviews and field interviews with at a disadvantage compared to larger commercial farm- major players in each commodity’s supply chain and ers in higher value markets. Smallholders are disadvan- government officials, the feasibility studies assessed: taged in these markets due to: • Production: previous experiences of market • Their limited access to physical and financial linkage projects in Pakistan in each subsector resources which restricts their ability to expand and lessons learned; producer organization and and invest in technologies that increase efficien- development; commercialization of the subsec- cy and add value to their primary production. tors and producers; proposed approaches and • Their inadequate technical skills and poor ac- recommendations for projects to implement col- cess to information and training for improving lective actions within each commodity’s supply their production practices. chain. • Their small market surpluses which inflate mar- keting costs, increasing transaction costs and • Markets: current structure and key players in the per-unit costs of assembly, handling and each commodity’s market; trends in each prov- transportation. ince’s markets in recent years both at the macro • Their lack of basic knowledge of the marketing and local levels (e.g., prevalence of traditional system, current information on prices and mar- market systems through middlemen/traders; ket conditions, and of bargaining power. market distortions; key markets (export and local), etc.); previous market integration project 20. In support of the World Bank’s development approaches, successes/failures and lessons priorities to increase competitiveness and pro- learned; proposed approaches and recommen- mote equity and inclusion in Pakistan’s agriculture dations to better integrate buyers and producers sector, several projects under preparation aim within each commodity’s supply chain. to increase green and inclusive private sector growth. Specifically, the Punjab Resilient and Inclusive The background feasibility studies captured and as- Agricultural Transformation (PRIAT) Project and the sessed previous activities on collective actions in Sindh Livestock and Aquaculture (LIVAQUA) Project Pakistan’s agriculture sector to link smallholder produc- under preparation at the time of this report are aimed at: ers to (higher value) markets, and whether the approach- (i) overcoming low productivity and unsustainable pro- es were more successful when dealing with groups or duction practices; (ii) addressing information asymme- individuals. The emphasis was on field experiences on tries and promoting more inclusive market integration; production and marketing activities in the commodities’ (iii) improving the business enabling environment; and supply chains and not on value chain analyses. (iv) strengthening supply chain resilience and ameliorate the risk of environmental damage. 22. The key findings and recommendations of the feasibility studies have been summarized in this 21. To help inform the World Bank’s approach synthesis report to identify and propose market to smallholders market integration in Sindh and linkage approaches based on lessons learned from Punjab, five background feasibility studies were previous experiences in Pakistan of linking smallholders 5 World Bank Group (2022). Bolstering the Private Sector in Pakistan A Country Private Sector Diagnostic. See: https://www.ifc.org/wps/ wcm/connect/publications_ext_content/ifc_external_publication_site/publications_listing_page/cpsd-pakistan Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 8 to markets and recommend project entry points and interventions. These findings may also guide activities in other markets or provinces. The first section of this report reviews the economic transformation underway in Pakistan and its alignment with the development observed in other countries that have also undergone economic change from being primarily agrarian into in- dustrial and service-led economies. The second section provides an overview of Pakistan’s agriculture sector re- garding the target commodities and provinces (i.e., fruit and vegetables in Punjab, livestock, and aquaculture in Sindh) and significant trends within the markets of these commodities during the past few years. Past market integration efforts within Pakistan’s agriculture sector, particularly with regard to the target commodities, are also discussed in this section. The concluding section provides recommendations based on experiences and lessons learned from previous market linkage interven- tions. This last section also includes proposed entry points and activities for projects to implement such interventions. An overview of international experiences in collective actions, marketing, and value chain devel- opment as a means to promote rural development and increase incomes along agriculture’s supply chains is included in Annex 1. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 9 Economic Transformation in Pakistan: A New Role for Agriculture 23. Pakistan has experienced short spells of ac- Figure 1. Rural and urban population divide in celerated economic growth but has not been Pakistan (percentage) able to achieve sustained growth with repeated macroeconomic problems interrupting economic 100 progress. Private consumption, fueled by an increasing 90 population and remittances, accounts for about 90 per- 80 cent of growth with minimal contributions from invest- 70 ment and exports. As demand outstrips domestic pro- 60 ductive capacities, imports persistently exceed exports, 50 resulting in an unsustainable current account deficit. 40 The low rate of private investment in both physical and 30 human capital effectively constrains Pakistan’s growth potential to only a few percentage points per year. Many 20 rural workers remain employed in low productivity jobs 10 in the agriculture and informal services sectors due to 0 poor near poor middle affluent the slow pace of structural transformation which con- tributes to the persistent rural-urban divide in the coun- try (Figure 1).6 Urban Rural 24. An increase in farm labor productivity allows the Source: OECD, 2022.7 agriculture sector to release workers into emerging 6 World Bank Group (2020). Islamic Republic of Pakistan. Leveling the Playing Field: Systematic Country Diagnostic. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 10 industrial and services sectors and thus, the pro- 25. Pakistan’s agricultural development pathway portion of the population living in rural areas steadi- in the second half of the last century neatly fol- ly decreases. One of the central insights of classical lowed the structural transformation model. Driven development economics is that growth entails a structural by the Green Revolution in wheat and rice production, transformation of the economy (e.g., Lewis,7 Syrquin,8 labor productivity indeed grew quickly, and the sector Timmer9). The reduction in demand for largely unskilled was capable of shedding labor to manufacturing and rural workers is replaced by a higher demand for more services, while still satisfying the large and growing de- skilled workers in the industrial and services sectors. Rural mand for staple foods. The focus on four major crops workers migrating to higher paying jobs in the mostly (wheat, rice, cotton and sugar cane) served the country urban-based industry and services sectors, boosts na- well in those days. But, around the turn of the century, tional productivity and improvements in the lives and live- domestic wheat markets were already well supplied, rice lihoods of the population. This structural transformation production had reached a surplus and, with the possible in developing countries leads to a decline in agriculture’s exception of sugarcane, these crops could not pull agri- importance relative to the modern industrial and service cultural development much forward, except by exports. sectors, mainly in urban areas, that grow much faster. As shown in Figure 2, Pakistan’s transformation got stuck Figure 2. Structural change around agriculture in Asia: Pakistan is stagnant 80.0 NPL2001 70.0 NPL2018 LI2001 BGD2001 Agriculture’s Share of Employment (%) VNM2001 SSA2001 LI2018 60.0 IND2001 SSA2018 LMI2001 THA2001 50.0 CHN2001 IDN2001 WLD2001 IND2018 BGD2018 PAK2001 40.0 LMI2018 PAK2018 UMI2001 VNM2018 PHL2001 30.0 THA2018 IDN2018 CHN2018 PHL2018 WLD2018 UMI2018 20.0 10.0 0.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Agriculture’s Share of GDP (%) Source: Calculations based on World Development Indicators, as reported in: Ahmed, Md Mansur; Saint-Geours, Jean Edouard Albert; Gitau, Ciliaka Millicent Wanjiru. 2020. Bangladesh - Promoting Agri-Food Sector Transformation in Bangladesh: Policy and Investment Priorities. World Bank Group, Washington, D.C. Note: Bubble size represents GDP per capita. Bangladesh (BGD), China (CHN), Indonesia (IDN), Nepal (NPL), Pakistan (PAK), Philippines (PHL), Thailand (THA), Vietnam (VNM). Upper middle income (UMI), World (WLD), Sub-Saharan Africa (SSA), Lower middle income (LMI), and Low income (LI). 7 Lewis, A. (1954). Economic Development with Unlimited Supplies of Labour. The Manchester School of Economics and Social Studies (22). 8 Syrquin, M. (1988). Patterns of Structural Change. Handbook of Development Economics. 9 Timmer, C. P., de Vries, G. J., and de Vries, K. (2015). Patterns of Structural Change in Developing Countries. In J. Weiss, and M. Tribe (Eds.), Routledge Handbook of Industry and Development. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 11 in the 21st century. Whereas other countries grew quickly they want. By investing in animals, they add value to and were able to absorb employment in other sectors, crop residues or other feed. It maybe doesn’t come as a Pakistan remained in the same spot between 2001 and surprise that, in response to strong consumer demand, 2018. With agricultural development slowing down, the livestock production has grown much quicker than crop reduction of rural poverty and hunger also slows down. production. In such circumstances, rural poverty increases, and the country may remain mired in poverty.10 29. Agriculture needs to respond to the new specif- ic demands arising from the urban areas and, in this 26. With the basic food supply secured, and with process, transform from being the sector that enables overall income levels as well as the number of structural transformation to being more of a follower. To consumers increasing, certainly so in the urban do so, farmers or farmer groups need to discover which areas, the agriculture sector needs to focus on are their best market opportunities, according to their new and not yet satisfied demands. Especially in resource base, and the demands that they can pursue. the urban areas, the growing middle class started to Those opportunities will often be diverse, almost by express demand for high value products, namely an- definition: while numerous farmers may start growing or- imal protein (especially dairy, chicken, beef and fish), anges or tomatoes, some may find success in very small fruits, vegetables, quality oils and, occasionally, niche niches, like mushrooms or berries. But if they are able to products such as mushrooms or olives. Through these tune into these new demands, farmers will have the op- products, urban consumers pursue more diverse and portunity to increase their incomes not by growing more (possibly) more nutritious diets. of the same, but by growing products with higher value. This requires, however, that farmers can organize them- 27. Urbanization is even more significant in Pakistan selves to cater to these new demands. And this in turn due to its ever-expanding population (seventh largest points to an enabling environment that supports farmers population globally). In 1951, 18 percent of the popula- in pursuing their integration into higher value markets. tion was urban;11 in 1997, 32 percent; in 2020, 37 per- cent; and some authors predict that within 10 years 50 30. Although the contribution of agriculture to percent may be urban.12 Pakistan has eight cities of more Pakistan’s GDP has gradually fallen in the last 30 than 1 million inhabitants (Karachi: more than 14 million; years, the sector still represents around 20 percent Lahore: 6.3 million) and 56 cities of between 100,000 of the national economy13 and provides work to and 1 million inhabitants. The demand for high value and almost 40 percent of the workforce. The sector ab- more diversified products is large and booming. sorbs large amounts of an often unskilled labor force that would possibly be unemployable in other sectors (Figure 28. It is however difficult to cater to such a diversi- 3). As in many other countries, poverty becomes a rural fied demand in a sector that is heavily focused on phenomenon. The official national poverty rate is around producing a few crops. The water supply that is avail- 5 percent, although the COVID-induced lockdowns and able through Pakistan’s canal and watercourse irrigation high food inflation may mean that more people are below systems is mostly targeted toward these main crops, the poverty line than what the official statistics show. as are many of the existing policies and markets. Still, farmers are finding some ways forward. By using tube 31. The required modernization of the sector is not wells, they control their water supply and can grow what only about higher yields, but also about access to 10 Timmer, P. (2022). Ukraine Crisis Feeds Fears of Another Food Crisis. See: https://www.eastasiaforum.org/2022/03/13/ ukraine-crisis-feeds-fears-of-another-food-crisis/# 11 Bahrawar Jan, Mohammad Iqbal, Iftikharuddin (2008). Urbanization trend and urban population projections of Pakistan using weight- ed approach. Sarhad J. Agric. Vol.24, No.1. 12 Kugelman, M. (2014). Pakistan’s Runaway Urbanization: What Can Be Done? See: https://www.wilsoncenter.org/sites/default/files/ media/documents/publication/ASIA_140502_Pakistan%27s%20Runaway%20Urbanization%20rpt_0530.pdf 13 All statistics from the World Development Indicators. See: https://datatopics.worldbank.org/world-development-indicators/ Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 12 Figure 3. Employment distribution percentages by social class 100 90 80 70 60 50 40 30 20 10 0 poor near poor middle affluent Agriculture, fisheries Retail, wholesale, trade Mining Construction Manufacturing Other services Source: Bonet, A., et al. (2021). the growing high value markets and employment opportunities in food processing. Many smallholder producers will have meager livelihood prospects unless they are able to move to a more remunerative farm use. The agriculture sector not only needs to produce more food, but also new employment and enhanced income opportunities for what is still a large rural population. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 13 The Agriculture Sector in Pakistan 32. Although there is agricultural activity in all While the crop subsector seems stagnant, livestock areas of Pakistan, most crops are grown in the has been growing at 3 percent per year, with 8 million Indus River basin in Punjab and Sindh which households involved in the industry (Figure 5). The most produce roughly 80 percent of national output. important commodity of the subsector is milk (two- Considerable development and expansion of agricultur- thirds buffalo, one-third cows): Pakistan is the fourth al output has occurred in the past few decades; how- largest milk producer in the world. The poultry indus- ever, Pakistan’s agriculture is still far from realizing the try has grown at an average rate of 10-12 percent per potential yields that the well-irrigated and fertile soils of year during the past decade and private investors are the Indus irrigation system could produce when com- supporting a more modern, vertically-integrated indus- pared to productivity levels in similar regional and global try.14 Although the marine capture and inland fishery farming systems. Pakistan’s overall agricultural growth industries are relatively small contributors to the national rates are the lowest of the region (see Figure 4). economy, they do generate export income,15 with most processing occurring in Asian destination countries. 33. As a result of the growing demand for animal Overall, Pakistan has a positive trade balance in ani- products over the past decade, animal husbandry mal-based foods. has become the fastest growing subsector of the agriculture base in terms of income growth and 34. Government planning and policies are devised qualitative change. Livestock is a key industry and to ensure an uninterrupted supply of basic food contributes 60 percent of agricultural value addition. items at affordable prices throughout Pakistan, 14 https://pakistanpoultryassociation.com.pk/news/an-overview-of-pakistan-poultry-industry-year-2019-2020/ 15 https://www.finance.gov.pk/survey/chapters_21/02-Agriculture.pdf Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 14 Figure 4. Agricultural growth and change in employment share in SAR countries 10.00 10.00 3.89 3.61 3.30 5.00 3.25 2.83 2.50 2.33 2.03 3.89 3.61 3.30 3.25 5.00 2.83 2.50 2.33 0.00 2.03 Bangladesh Afghanistan India Nepal Sri Lanka Bhutan Pakistan Maldives 0.00 -5.00 Bangladesh Afghanistan India Nepal Sri Lanka Bhutan Pakistan Maldives -5.00 -6.14 -10.00 -8.25 -9.49 -6.14 -10.65 -10.00 -8.25 -15.00 -9.49 -10.65 -15.77 -15.00 -16.90 -20.00 -15.77 -16.90 -20.00 -25.00 -23.79 -23.56 -25.00 -23.79 -23.56 -30.00 Average Ag Growth: 2001-19 -30.00 Reduction Average Ag Employment inGrowth: Ag 2001-19 Share (Percentage Points) Linear (Average Ag Growth: Reduction in Ag Employment2001-19) Share (Percentage Points) Linear (Average Ag Growth: 2001-19) Source: WDI, 2021. Figure 5. Agricultural Value Added (Rs billion) 2,000 23% 23% 23% 25% 22% 22% 22% 21% 21% 21% 21% 20% 2,000 23% 23% 23% 19% 19% 19% 25% 22% 22% 22% 21% 21% 21% 19% 20% 1,500 21% 20% 19% 19% 19% 19% 20% 1,500 15% 1,000 15% 1,000 10% 500 10% 5% 500 5% 0 0% 2005-06 2006-07 2007-08 2008-09 2009-10 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2010-11 2011-12 0 0% 2005-06 2006-07 2007-08 2008-09 2009-10 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2010-11 2011-12 Crops Livestock Forestry Fishing Ag as % of GDP Crops Livestock Forestry Fishing Ag as % of GDP Source: Authors calculations based on the Pakistan Economic Survey, published by the Ministry of Finance, various years. leading to an agriculture sector that is heavily sub- and protection of urban consumers (subsidy to flour sidized and regulated.16 Key policy concerns behind millers). While these concerns are important, the design state interventions include: food security (wheat support and implementation of the policies has benefited certain prices to incentivize production; input subsidies such elites involved in four principal crops: rice, wheat, cotton as water, fertilizers, energy); protection of farmers from and sugarcane. State interventions have distorted mar- exploitative middlemen and traders (regulation of pro- kets and private investment in the physical and human duce markets, establishment of market committees); capacities of the agriculture sector. These distortions 16 World Bank (2020). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 15 reduce the number of competitive traders searching for tiles, accounting for 27 percent of the value-added marketing opportunities for new commodities or greater production and 16 percent of employment in the volumes, which adversely impacts small farmers and manufacturing sector. Most of the food processing the productivity of the sector. industry is located in Punjab (60 percent) and Sindh (30 percent), with more than 2,500 processing units esti- 35. Development practitioners acknowledge that mated in both the formal and informal sectors. Pakistan finding ways to link smallholder farmers to mar- was awarded the Generalized Scheme of Preferences kets is important for any development strategy Plus Status (Zero to Low Duty) by the European Union within the context of a modernizing food system in 2014, which provides added impetus to increase that threatens to leave many smallholders be- exports of processed food products to higher value hind.17 Overcoming the commercialization barrier re- markets in Europe.18 quires an upgrading process that includes investing in local infrastructure, strengthening business services, 37. Pakistan’s high value agricultural products, and improving farmer skills. But with a reduction in gov- such as fruits and vegetables, are of good quality ernment services during the past few decades, most but many supply obstacles obstruct the full reali- farmers in Pakistan are unable to access vital technol- zation of their market potential. The perishability of ogies and services to help them commercialize their fresh produce, their seasonal nature, unsophisticated farming systems. A lack of investment along agricultural handling, improper transportation, nominal grading, value chains constrains growth in the sector including: fluctuating prices and high post-harvest losses (20-30 percent) are some of the factors that reduce the returns • On-farm productivity is inhibited by many factors, and increase the risks for marketing operatives. Pakistan including inadequate certified seed coverage, has the potential to export more food products but the imbalanced use of agri-chemicals, insufficient stringent application of international standards such as farm mechanization, land tenure issues, credit the sanitary and phytosanitary measures of destination access, static cropping patterns, low invest- countries limits export opportunities. Generally, Pakistan ment in agricultural research, weak agricultural exports raw and semi-processed food products with extension services, land degradation and envi- most value addition occurring in importing countries. ronmental hazards such as soil salinity and water logging, and limited availability of irrigation water. • Poor post-harvest handling practices, lack of adequate infrastructure and other market inef- ficiencies add to post-harvest losses, wastage and weak competitiveness in both domestic and export markets for a range of fresh and pro- cessed food products. • A lack of vertical and horizontal linkages, af- fordable credit and business skills hamper the adoption of new technologies and know-how in downstream industries, and thus, more local value addition. 36. The food and beverage processing sector is the second largest industry in Pakistan after tex- 17 Ferris, S., Robbins, P., Best, R., Seville, D., Buxton, A., Shriver, J., and Wei, E. (2014). Linking Smallholder Farmers to Markets and the Implications for Extension and Advisory Services. MEAS Discussion Paper 4. USAID. 18 https://pakistan.um.dk/en/the-trade-council/sectors-in-focus/food-and-agriculture Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 16 Market Structures and Trends 38. Pakistan’s growing middle-class consumers 39. Research shows that, across the world, com- now demand more dairy products, meat, fresh panies with large shares in food retail sales are in- fruit and vegetables, and processed convenient creasingly influencing the organization of modern foods, and less unprocessed grain staples.19 food supply chains, the food processing sector, Pakistan, as a lower middle-income country20 with high and production as a whole.21 This reorganization of population growth, increasing incomes, and improved the supply chains aims to move away from fragment- communications and urbanization, has followed global ed, decentralized procurement to centralized supply food demand trends. With rising incomes, consumers systems with large, integrated procurement catchment typically spend more of their food budgets on higher areas and the use of specialized/dedicated wholesal- value foods, and increasingly demand quality over price ers and logistics firms instead of traditional wholesalers (Figure 6). Convenience is also valued, with middle-in- and spot markets. Often, it is also accompanied by come consumers prepared to pay more for foods that an increase in the use of preferred suppliers operating save time in preparation. These trends, plus the liberal- under de facto contracts. These modern food supply ization of markets, attracted many large foreign and local chains include stringent quality standards, in response companies such as Eximp Agri Products (rice), PepsiCo to consumer awareness, as a means to guarantee food (potatoes), Rafhan (maize), Pakistan Tobacco Company quality, safety, traceability and originality. Private stan- (tobacco), K&N (meat and poultry), Nestle and Engro dards also act as competitive barriers to the informal FrieslandCampania (milk) into Pakistan’s food sector. sector or competitor products, especially for small or 19 Estimated annual consumption growth rates incorporating population growth: 3.1 percent for red meat, 3.7 percent for poultry meat, 5.4 percent for eggs, and 3.1 percent for milk. Source: Bellinguez, A. and Memon, J. (2021). Sindh Livestock Sector Review. World Bank. 20 https://datahelpdesk.worldbank.org/knowledgebase/articles/906519 21 Trebbin, A. (2014). Linking Small Farmers to Modern Retail Through Producer Organizations – Experiences with Producer Companies in India. Food Policy:45. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 17 Figure 6. Percentage share of household food expenditure in Pakistan 40 35 33.8 30 30.8 30.1 29.1 25 27.9 25.6 24.9 25.4 24.9 20 22.5 21.9 20.8 20.3 19.6 15 17.8 15.1 15.0 10 13.4 12.8 11.8 10.7 12.2 11.7 11.8 9.9 5 0 Meat, Fish, Sea Milk & Milk Fruit & Vegetables Cereals Other food items Food & Eggs Products 2001-02 2005-06 2010-11 2015-16 2018-19 Source: Pakistan Bureau of Statistics. Household Integrated Expenditure Surveys. less capable producers. Thus, in modern food supply of fresh produce, they cannot influence the established chains, there is a reduction in the number of links, as fresh produce supply chains and improve the overall more vertically-integrated relations replace long chains quality standards of any subsector. Also, farmers’ capa- of intermediaries engaged in spot market deals. bilities as suppliers are low as they are not well informed of the standards required by supermarkets and, even 40. The typical trends of such modern food supply more critically, they lack the capacity to achieve such chains are less evident in Pakistan despite the sig- standards. nificant transformation of the urban retail sector and the moderate transformation of the fresh produce wholesale 42. The vast bulk of fresh produce sold in the target sector. Negligible information is transmitted back to pro- commodity sectors passes through traditional mar- ducers because supermarkets and most agro-proces- keting systems (Figure 7), which highlights the im- sors continue to source the bulk of their requirements portant role that informal markets play in ensuring from wholesale markets. The small volumes of local fresh that fresh food reaches the final consumer. These produce sold by supermarket chains is a major limiting marketing systems entail substantial costs, especially for factor to forming direct buying relationships between smallholder producers, where supply chains can include farmers and supermarkets. They have exhibited marginal multiple intermediaries, from village-level consolidators, interest in developing formal, dedicated supplier relation- transporters, wholesalers and commission agents in ships with a wider cross-section of Pakistani farmers. state-regulated government markets, to retailers. This long chain of intermediaries inflates the prices paid by 41. Pakistan’s agriculture sector lacks formal con- end consumers—often more than double or triple of tractual relationships or the emergence of spe- what is paid to producers. Farmers are often in unfavor- cialized wholesalers dedicated to modern supply able bargaining positions as their holding capacity and channels, such as supermarkets. The substantial market information are low. They are unaware of quality number of small wholesalers and brokers in wholesale standards, if any, and traders are more adept at judging markets source from spot markets via transactions with the in-field returns (e.g., dressing percentages, pre-har- thousands of small producers. Supermarket chains in vest returns). Additionally, the lack of transparent trading Pakistan face problems mainly related to product qual- practices in the markets, represented by trader collusion ity, but because they procure relatively small volumes and improper or no weighing procedures, the lack of Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 18 Figure 7. Traditional marketing channel (fruit and vegetables) Pre-harvest Commission Producers Contractors Agents Wholesalers Retailers Consumers Source: Ghafoor, A., Badar, H., and Maqbool, A. (2017). Marketing of Agricultural Products. Institute of Business Management Sciences, University of Agriculture, Faisalabad. market infrastructure such as pre-cooling facilities, and efit farmers and consumers. In 2020, the Punjab an inadequate transport and logistics infrastructure, lead Agriculture Marketing Regulatory Authority (PAMRA) Act to wastage that can amount to 20-30 percent throughout was passed to establish a new and more transparent legal the supply chains of the target commodities.22 regime to market agricultural produce, help safeguard the free flow of crops and stimulate food supplies. The 43. Public markets have failed to keep pace with PAMRA Act’s main task is to register and regulate whole- the growing volumes of fresh produce flowing sale markets, collection centers, warehouses, cold stor- into Pakistani urban centers. Pakistan’s market laws age facilities, accreditation bodies, and service providers restrict bulk sales and purchases to notified public mar- (brokers, graders, assayers, commission agents, etc.). kets and through licensed agents, generating an unfair It allows the emergence of non-traditional market chan- treatment of farmers, welfare losses to consumers, and nels such as supermarkets, online markets, and farmer leaving only minimal scope for farmers to explore private markets, changes the power structure of the market, and alternatives. Provincial and local institutions have been enhances financial efficiency and transparency.24 All new largely ineffective in performing their essential func- facilities and providers need to register with PAMRA, but tions, and consequently, public markets have become existing operatives can continue to function as before. over-crowded and disorganized, forcing farmers to en- Yet, the nomination of all but one of the PAMRA members gage several middlemen in order to sell their produce. by the Government undermines the provision of genuine These public institutions have mostly failed to upgrade external input into market regulation.25 While transitioning the infrastructure, provide the necessary facilities, and to a more competitive and diversified agriculture sector ensure that market transactions broadly adhere to the will take time, the PAMRA Act is a first step in the right legal limits. Public utility spaces have been encroached direction to enhance the agricultural markets’ dynamics by various market operatives; essential facilities like toi- and to ensure more income opportunities for farmers and lets, parking, clean drinking water, waste disposal, etc. better quality for consumers. have deteriorated to an extent that they are no longer usable; and the official rates for commission agents Punjab’s Fruits and Vegetables (Arthis), and market fees are openly violated.23 45. Increasing domestic demand for fruit and veg- 44. Since very recently, reforms are underway to etables encouraged an expansion in production modernize Pakistan’s agriculture sector to ben- of Higher Value Crops (HVC) in Punjab. With the 22 See consultant reports. 23 Ghafoor, A., Badar, H., and Maqbool, A. (2017). Marketing of Agricultural Products. Institute of Business Management Sciences, University of Agriculture, Faisalabad. 24 World Bank blog (2020): Modernizing Punjab’s farming to benefit farmers and consumers. See: https://blogs.worldbank.org/ endpovertyinsouthasia/modernizing-punjabs-farming-benefit-farmers-and-consumers 25 Rana, M.A. (2018). Commissions and Omissions: Agricultural Produce Markets in Pakistan. Policy and Institutional Reforms to Improve Horticultural Markets in Pakistan. Working Paper 01/18. Lahore University of Management Science. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 19 exception of the potato industry, such increased pro- his social capital, have been built over many years of duction was due to the expansion of the cultivated area business interactions. The recent PARMA Act is an op- rather than to any productivity improvements.26 Potato portunity to change this traditional market system and production in Punjab has expanded significantly over to offer farmers more selling options and higher profits. the past two decades, mainly due to a more structured, vertically-coordinated industry, where growers have 47. Farmers and middlemen also try to exploit closer relationships with buyers, and receive some im- this marketing system to their advantage. They will proved inputs and technical support from processors. carefully pack crates and boxes at the farm gate so that the best quality produce is on the top layer and each 46. Traditionally, commission agents have been lower layer progressively declines in quality. However, abusing the system by developing a successful buyers are aware of this practice and place their bids high-risk, high-profit business whereby they ex- accordingly. Nevertheless, Pakistani farmers and mid- tensively advance credit to a set of actors in the dlemen assess that the lower average price received for marketing chain to develop a loyal client base. mixed quality produce is still higher than the average For decades, commission agents have run shops in price received for selling different grades separately.27 the markets where farmers and middlemen bring their produce to sell. Each agent auctions the produce, col- 48. Wholesale traders (Pharias) also emerge as lects payment from the buyer, deducts his commission important market operatives. They buy large quanti- (and other dues, if any), and pays the remainder to the ties through auctions, divide/grade produce into smaller farmers/middlemen. The agent’s success has lied in lots and sell to retailers. The process of unpacking, attracting more farmers, pre-harvest agents/middlemen sorting, grading, and re-packing takes place wherever (Beoparis) and buyers/wholesalers to his auction plat- the wholesale trader can find space in the market. This form, mainly through his credit linkages, rather than the entire process must be completed within the time slot provision of facilities or discounts. These linkages, and allocated to the corresponding commodity group, be- BOX 1. Citrus marketing margins Pre-harvest contractors add the highest cash margins (89 percent) to the retail cost of kinnow fruits be- cause they bear the highest costs and most risks among all marketing intermediaries. Contractors pur- chase an orchard at flowering and need to consider risks such as product variations, Market Price addition* Percent of final bad weather, insect attacks, incidence of dis- intermediary Rs. price ease, high transport costs, and spoilage that Producer 3.94 35.3 reduce their margins. Retailers also earn high Contractor 3.52 (89.30) 31.5 margins. They try to buy sufficient volumes to sell in one day, which may not eventuate Commission 0.55 (7.37) 4.9 and could result in wasted fruit. Also, before Agent buying they have no opportunity to properly Wholesaler 0.91 (11.36) 8.2 evaluate the quality, quantity, size and color Retailer 2.24 (25.11) 20.1 of the layers of fruit packed into crates by wholesalers that could further detract from Consumer 11.15 100.0 their sale volumes, so they add higher mar- * Figures in parenthesis are absolute cash margins expressed as gins to compensate.28 percentages. 26 Ali, M. (2022). Market Integration of Small Scale Agriculture Producers in Punjab. Feasibility report for the World Bank. 27 Source: Sharif, M., et al. (2005). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 20 cause afterwards, the same space is used for the next Sindh’s Livestock commodity. All these activities are conducted manually and quickly. Wholesalers then set-up their stalls and 50. The market trends in Sindh for animal-based sell to retailers and households. They have no formal foods have followed the national trends during standing, operate on encroached public utility spac- the past couple of decades. In Pakistan’s largest es and need to pay ‘rent’ to the commission agents. city, Karachi, consumers maintain their conventional Lahore and Rawalpindi are terminal markets for fruits food consumption patterns (Figure 8); they still most- and vegetables; distributors (Ladanya) also purchase ly prefer raw, warm milk, live chickens and unpacked bulk produce at auction through commission agents meat, despite a growing middle class and the increasing and on-sell this produce to commission agents in sec- availability of processed foods.29 The lack of modern in- ondary markets. frastructure and services along key commodity supply chains contributes to these continuing consumption 49. Pakistan exported approximately US$3 billion trends. Feed is the limiting factor to improving produc- worth of fresh fruit and vegetables in 2019, mostly tivity in the livestock industry and represents the major to Gulf countries and Afghanistan. Punjab provides cost for producers. Intensive livestock industries—dairy- the majority of these exports, but the export growth ing and poultry—compete with each other for access to trend has flattened in recent years. The fruit and vegeta- the most affordable and highest quality feed in order to ble industry continues to struggle with quality issues that exploit the genetic potential of their stock. limit the possibility of exporting to higher value markets in Europe and North America. Only three commodities, 51. Smallholders keep livestock as a bankable asset garlic, coriander, and gourds return higher than average and sell when they need cash rather than when world export prices. The cost of these quality issues and livestock prices are high. Weekly livestock markets are missed export opportunities to higher value markets is regulated by local authorities but managed by private con- estimated at US$6 billion per year in foregone export tractors. There are 84 registered livestock marketplaces value.28 throughout Sindh. Village collectors (Beoparis), small and Figure 8. Percentage share of household food expenditure in Sindh 40 35 34.6 30 31.8 29.4 29.6 28.5 25 27.0 24.9 23.9 23.5 20 22.5 21.6 20.6 20.3 19.4 18.4 15 14.2 13.8 13.3 10 13.3 13.0 12.9 13.0 12.2 11.6 11.3 5 0 Meat, Fish, Sea Milk & Milk Fruit & Vegetables Cereals Other food items Food & Eggs Products 2001-02 2005-06 2010-11 2015-16 2018-19 Source: Pakistan Bureau of Statistics: Household Integrated Expenditure Surveys. 28 Ali, M. (2022). 29 Mustafa, Z. (2022). Overview of Potential Market Integration Approaches for Smallholders in Sindh. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 21 mid-sized traders and commission agents are the main contributing 13.4 percent of all traded animals (mainly stakeholders in livestock marketing. Commission agents cattle and buffaloes) nationally.31 A unique feature of provide most of the marketing services. Prices paid to the livestock industry is the presence of cattle colonies producers are determined by the weight of live animals, within major cities: the Landhi colony in Karachi, with breed, color, physical appearance and current wholesale 350,000 head, is one of the largest in Pakistan. Once prices. Village collectors and traders purchase livestock the cows and buffalo in these colonies are dried off each directly from producers and sell them in local markets or year, rather than carrying unproductive animals, they are transport animals to regional markets. Farmers can also sold, slaughtered and replaced. These colonies provide sell their livestock in these open markets; however, all a ready source of milk and meat to city inhabitants. All unsold stock needs to return to the farm, which can be calves from these cattle colonies are also sold for either an expensive exercise. Traders purchasing directly from fattening or slaughter. However, rural areas in Sindh are producers will on-sell to other traders specializing in sup- increasingly struggling to supply the annual demand for plying livestock to larger regional and terminal markets, young cows of these cattle colonies. meat processors, and cattle colonies outside the local catchment area. Meat exporters may develop a network 54. About 20 percent of the national ruminant live- of 10-20 local traders spread through different areas of stock herd is located in Sindh. Meat is the main Pakistan for a more efficient supply of animals that meet source of protein in local diets and Sindh supplies their required specifications. about 30 percent of national production. The main sources of meat in Pakistan are cattle, buffaloes, goats, 52. Pakistan has a rich traditional culture and de- sheep and poultry (Table 1). Most of the increase in the mand for livestock rises significantly during the demand for meat in Pakistan has been met by poultry, festive season. Many smallholders and pastoralists which is the cheapest and often most preferred meat, will prepare and sell their livestock for specific festive as the price of red meat has roughly doubled in Sindh occasions, when prices will increase significantly de- during the past two decades. Meat comprises around pendent on the supply of animals. But accurate weigh- 13 percent of household expenditure in Sindh.32 While ing using scales is only done during sales between growth in meat demand during the past decade was wholesalers and butchers, and butchers to consumers. minimal, there was a shift in demand from fresh meat Animals may be sold several times before they are finally to frozen meat products or ready-to-eat foods due to processed. Consequently, transportation and livestock evolving lifestyles, socioeconomic changes in the pop- handling practices detract from the final quality of the ulation and nutritional awareness. The Pakistani meat meat, as animals lose weight, are stressed and often industry responded by producing different meat prod- injured during transit. Meat Table 1. Meat consumption in Pakistan of main livestock groups 53. Despite Pakistan’s increasing urbanization, (000 tons) 2018-19 2019-20 2019-20 economic growth, and industrialization, per cap- Beef (cattle/buffalo) 2,227 2,303 2,380 ita meat consumption has seen minimal growth Mutton (sheep/goats) 732 748 765 during the past decade. But due to an ever-ex- panding population, livestock growth rates need to Poultry 1,518 1,657 1,809 reach an estimated 5-7 percent per year in order to Total consumption 4,478 4,708 4,955 meet the increasing domestic demand.30 Currently, Source: Finance Division (2021). Pakistan: Economic Survey, Pakistan is self-sufficient in meat production, with Sindh 2020-2021. Government of Pakistan, Islamabad. 30 Bellinguez, A., et al. (2021). 31 Mustafa, Z. (2022). 32 Lohano, H. (2022). Market Structures of Livestock, Aquaculture and Fisheries in Sindh. Feasibility report for the World Bank. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 22 ucts such as ready-to-eat convenience foods (kababs, landless pastoralists. In slaughterhouses, the lack patties, sausages, nuggets, drumsticks, etc.). The of proper sanitation systems and untrained staff using demand and purchase of processed meat products is unhygienic practices has the potential to cause health comparatively higher in urban areas than in rural areas hazards. Additionally, old slaughterhouses have improper mainly due to the different socioeconomic status, busy provision for waste discharge. Other weaknesses include lifestyles, and higher purchasing power of consumers the absence of cold supply chain management systems, living in the cities.33 proper meat inspection, and government legislation that fixes the prices of meat and meat products, thus disin- 55. There are few modern retail outlets that pro- centivizing investment in the industry. vide value added meat products in attractive packaging and refrigerated form. The two main 57. Pakistan has the potential to become a major market intermediaries are wholesalers and retailers player in the international halal meat industry and (mainly butchers). Animals are mostly slaughtered in exports have grown significantly in the past de- notified slaughterhouses operated by municipalities, cade.36 Some meat processors in Pakistan are exporting companies or the armed forces, and in backyards. In frozen goods from their modern, well-equipped facilities larger cities, wholesalers supply animals to slaughter- and meeting the export quality standards of the main houses on a regular basis. In smaller towns, retailers/ halal markets in destination countries of the Gulf, Central, butchers purchase their own animals. In larger cities, and Southeast Asia (e.g., Malaysia, Indonesia). Currently, municipal facilities are usually regulated as the sole they process less than 1 percent of total meat production. meat processing outlets for each city’s meat supply and There are 35 export-accredited meat processing facilities they process between 30 to 40 percent of all meat sold in Pakistan, of which 10 are in Sindh.37 While the export locally. However, these regulations are not adequately figures are impressive, Pakistan is mainly exporting whole policed, and more animals (60 to 70 percent) are pro- carcasses, with little or no value addition. cessed in unhygienic, backyard facilities than in public slaughterhouses.34 After slaughtering, carcasses are Milk bought by wholesalers, who distribute them to retailers. There is minimal refrigeration along the supply chain. In 58. Pakistan consumers continue their de- local stores, retailers sell beef and mutton in fresh form, cades-long trend of increasing demand for fresh adjusting their supplies to daily demand. Some meat milk and milk products (Table 2). Pakistan is the processing companies sell frozen, fresh and processed fourth largest milk producer in the world, with per capita meat products in their own cabinets in big stores and consumption well above the global average.38 Sindh’s supermarkets. There is growing demand for meat sold dairy farmers produce about one quarter of the total milk under these more hygienic conditions in large cities volume in Pakistan mainly from buffaloes (two thirds) across Pakistan.35 and cows (one third). Although Sindh has a vibrant dairy industry, the price of raw milk has remained flat for the 56. A key issue affecting the meat subsector is past decade. the lack of modern processing facilities as the beef industry is considered a subsegment of the 59. Almost all milk produced in Pakistan is sold dairy industry. Small ruminants are usually grown through extensive and traditional market net- peripherally to the farmer’s main livelihood or by works. Milk collectors (Katcha Dodhi) are the main mar- 33 Sohaib M. and Jamil F. (2017). An Insight of Meat Industry in Pakistan with Special Reference to Halal Meat: A Comprehensive Review. Korean Journal of Food Science of Animal Resources. 37(3). 34 Lohano, H. (2022). 35 Lohano, H. (2022). 36 Meat exports 2009: US$ 81 million; 2019: US$ 295 million (Source: UN Comtrade). 37 Bellinguez, A., et al. (2021). 38 Pakistan: 113.6 kg/person/year vs. Global: 70.8 kg/person/year (Source: FAOSTAT, 2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 23 Table 2. Growth trends of milk supply and domestic demand in Pakistan 2018-19 2019-20 2020-21 (000 tons) Supply Consumption Supply Consumption Supply Consumption Milk 59,759 48,185 61,690 49,737 63,684 51,340 Cow 21,691 17,353 22,508 18,007 23,357 18,686 Buffalo 36,180 28,944 37,256 29,805 38,363 30,691 Source: Finance Division (2021). Pakistan: Economic Survey, 2020-2021. Government of Pakistan, Islamabad. ket intermediaries in informal markets. They purchase no milk chilling in these traditional supply chains, an es- milk directly from farmers and sell directly to consum- timated 20 percent of milk is wasted.39 Contamination ers and retail shops in urban areas. They usually also is also a problem due to poor hygienic practices and provide credit services to producers. Larger operators adulteration by producers and traders. However, most (Pakka Dodhi) purchase milk from various milk collectors Pakistani consumers still prefer to buy fresh, unpas- in bigger quantities and sell to larger customers includ- teurized, warm milk each day for their household needs ing milk and other food processors (e.g., bakeries). With supplied through these traditional networks.40 BOX 2. Dairy farming: Production characteristics and costs for smallholders vs. mid- sized farmers Dairy smallholders and mid-size farmers in Pakistan differ on their production characteristics and related distribution of production costs. A value chain analysis on dairy production in Pakistan, which found a higher yield per animal of mid-sized farmers, suggests that better farm management skills, both in terms of diet as well as animal health, can produce substantial benefits in terms of yields (FIAS, 2006). Production characteristics of mid-sized Production cost Production cost distribution farmers: One quarter of land devoted to distribution for a typical for a typical smallholder fodder crops and pasture, irrigated for 8 mid-sized dairy farmer farmer (3-10 buffaloes/ months including during the dry period, (30 cows, yield of 4,000 cows, yield of 1,300-2,400 ensures a constant supply of high-quality kg/animal/year): kg/animal/year): nutrition. Feed: 80 percent is green fodder, • Animal Husbandry: • Animal Husbandry: 15 percent hay and 5 percent concentrate. 89.7% (of total costs) 87.0% (of total costs) Labor productivity: 5.8 kg/hr. Farmers have • Labor: 19.7% • Labor: 43.9% high value assets, including generators and • Feed: 73.9% • Feed: 55.1% wells for irrigation. Better feeding, constant • Veterinary: 4.1% • Veterinary: 1.0% supply of water for irrigation, farm hygiene, • Water/fuel: 2.3% and productive crossbreed cows result in • Milking: 4.4% • Milking: 9.5% high productivity. • Depreciation: 5.9% • Depreciation: 3.5% Production characteristics smallholder farmers: Feed: 65 percent is wheat straw, bran, 25 percent fodder (maize, millet), 10 percent cotton seed cake, no concentrates. Labor productivity: 2.8 kg/hr (al- though labor is cheap, low milk yields and lack of scale means productivity is low). Dual purpose cattle and buffaloes.41 39 Bellinguez, A., et al. (2021). 40 FIAS (2006). Pakistan Value Chain Analysis. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 24 60. Milk processors usually establish their own ly-integrated subsector, often in collaboration with for- milk collection centers in production areas in order eign companies, with over one billion broilers processed to ensure quality and secure timely milk supplies. annually. Chickens are readily available either as broilers These collection points are equipped with chilling equip- (live or processed), layers or village birds. There are over ment, managed by the processors’ employees, and 5,000 commercial poultry farms in Sindh with 152 million cooling containers are utilized during transportation. birds. The capacity of commercial farms ranges from Rural milk collectors and dairy producers sell milk to 5,000 to 500,000 broilers.43 The poultry subsector con- these collection points and they usually receive prompt tributed 30 percent of total meat production and around payments. Only 5 to 10 percent of milk is processed in 40 percent of total meat consumption, and grows at formal, modern dairies that produce hygienic packaged around 10 percent per year, reflecting the rising demand products for more discerning customers prepared to for chicken meat and eggs.44 pay higher prices in supermarkets, dairy stores, etc. But these companies continue to expand and invest in their 63. Marketing still mostly follows traditional chan- processing plants in response to the rising demand for nels with only 5 to 6 percent of chickens processed convenience and hygienic dairy products. Pasteurized in poultry slaughterhouses to produce specialized and Ultra High Temperature-treated milk in tetra pack products. In villages, poultry meat and eggs are mostly are the main products. Most modern dairy processing produced for self-consumption, but surpluses are sold plants are located in Punjab, with only three located in to collectors and marketed through traders and whole- Sindh. salers in urban areas. Producers sometimes sell directly to retailers in live form, but most birds are sold through 61. There is a growing trend towards intensive wholesalers. Retailers slaughter and dress live chickens urban and peri-urban dairy farming using mostly in markets and shops according to demand. Many su- imported exotic and cross-bred cows for higher permarkets now provide refrigerated storage and sell milk yields.41 Larger milk processors import increasing frozen chicken to consumers. Eggs are mostly collected volumes of milk powder each year, and sell imported by village traders and sold through wholesalers and re- milk through their own market outlets, particularly during tailers in urban areas to consumers. There is no grading the summer lean period when local supplies drop, and system, so there are no price differentials for different companies need to maintain their quality standards. qualities and sizes of eggs.45 Thus, milk powder imports by Pakistan during the past decade have steadily increased, reflecting the growth Sindh’s Aquaculture in demand for processed dairy products.42 Dairy shops in urban areas also produce cream and butter and sell 64. Sindh produces over half of the national fishery them at retail outlets. output each year. Pakistan’s inland fishery production has consistently increased at low rates during the past Poultry decade and now supplies 35 percent of total aquaculture production. Sindh has experienced a rapid increase in 62. Production strategies, business set-up and fishponds and the efficient re-stocking of water bodies processing in the poultry industry are the most by provincial authorities has maintained a steady inland advanced of any meat subsector in Pakistan. The fishery capture. Pakistani consumers have a relatively industry has developed into a well-organized, vertical- low intake of fish products compared to other middle-in- 41 Mustafa, Z. (2022). 42 Imports of milk and milk products totaled US$52.76 million in 2009; US$113 million in 2019; and peaked at US$204 million in 2015 (Source: UN Comtrade). 43 Mustafa, Z. (2022). 44 https://pakistanpoultryassociation.com.pk/news/an-overview-of-pakistan-poultry-industry-year-2019-2020/ 45 https://pakistanpoultryassociation.com.pk/news/an-overview-of-pakistan-poultry-industry-year-2019-2020/ Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 25 small amounts to local markets. Aquaculture exports have risen steadily during the past decade and amount- ed to US$474 million in 2019. The main destination countries are China and Thailand, which have significant export-oriented aquaculture processing industries.47 66. Fish is the main livelihood for inhabitants of coastal areas with about two-thirds of total pro- duction coming from marine capture fishing.48 Fishery agents obtain leases from the Government to fish in public waters. Inland captured fish are sold via fishery agents to wholesalers, who then on-sell to re- tailers. The marketing channel for marine capture fish is also dependent on fishery agents who partner with fishermen to supply processing companies. The agents receive credit advances from the fish processors. They then contact their fishermen partners to supply the required quantity of fish and seafood. The fishery agent provides credit to the fishermen at the start of the season to replenish supplies, repair boats, etc. The fishermen supply their catch to the agents, who onward the supplies to the processing companies. The com- panies sort the catch: high-quality fish is exported and lower-quality fish is sold on local markets. Hygiene and quality issues prevent local fish processing companies from exporting to higher value markets in Europe.49 come Asian countries.46 However, the overall demand 67. Farmed fish in iced packing is mostly sold either for fish products is expected to increase significantly, as at the farm gate or through middlemen working on alternative protein sources become more expensive and behalf of dealers in nearby markets. Most farmers are Pakistan’s population continues to grow. dependent on credit from these market intermediaries to purchase feed and other low-cost inputs. They sell their 65. The bulk of expected future demand for aqua- harvested produce to the dealers who advanced them culture products will need to be met by the fish the credit. All fish is auctioned and sold on a daily basis. farming subsector. The volume of fish from marine Farmers are paid mostly in cash within a week of the sale. capture has remained steady at around 500,000 tonnes Inadequate facilities, lack of storage, poor hygiene and for the past decade. These volumes are unlikely to grow communication links are the main issues affecting fish significantly considering that coastal fishery stocks are marketing. Consumers mostly prefer inland and farmed over-exploited and cannot sustain the current levels of fish over marine fish due to taste and freshness issues, as output. Besides, most companies in the marine capture demonstrated by the higher prices at wholesale and retail fishery industry focus on export markets and provide only markets for inland fish.50 46 Kanji, I. A. (2022). Aquaculture in Sindh. Feasibility report for the World Bank. 47 Kanji, I. A. (2022). 48 Lohano, H. (2022). 49 Kanji, I. A. (2022). 50 Kanji, I. A. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 26 Service Providers tems that are prevalent in Pakistan, informal credit mech- anisms are prevalent for smallholder producers. Traders 68. Governments in Pakistan support agriculture advance credit to farmers so that they can purchase through the provision of essential agricultural sup- inputs, plant their crops, seed their ponds and harvest, port services necessary to the growth and produc- provided that the grower repays in cash or kind once the tivity of smallholder agriculture (irrigation, agricultural crop is harvested. Banks and other financial institutions credit, input subsidies, agricultural extension, mechani- are hesitant to provide credit to smallholder farmers be- zation, etc.). Private service providers provide key inputs cause of poor client information systems, the high cost of such as fertilizers, seed, fingerlings, agrochemicals, and credit due diligence and loan recovery, the lack of cash services (e.g., milk collection centers). Credit is probably flow financing products adapted to agriculture, the lack of the least accessible service for smallholders, which has weather insurance products and commodity price hedg- a direct bearing on their farms’ output through its impact ing instruments, and the absence of land tenure titles to on input acquisition and farm investment, and indirectly be used as collateral. Poor confidence in the legal system through its influence on risk behavior. to uphold contract rights is an additional concern. 69. It is challenging for smallholders to access 71. Even if smallholders can access the formal fi- improved services. The most common challenges for nancial sector, most available lending products are smallholders to access private service providers, includ- not suitable for their investment needs. Access to ing access to low-risk finance mechanisms, are: credit is normally linked to farm size, as land titles are the main collateral required by financial institutions. Larger • The lack of economies of scale for delivery of farmers have infrastructure and machinery, which adds to services to producers with small farm sizes, even their collateral. They are also mostly operating in the for- though smallholders produce the bulk of all the mal sector and have financial records to submit to banks food consumed in Pakistan. when applying for loans. Banks can thus, more easily • The cost of service, as many farmers cannot af- assess the viability of a larger farmer’s enterprise com- ford to purchase improved equipment, inputs or pared to smallholders operating informally. Most banks access formal financial sources due to a lack of also do not have experienced loan officers able to assess eligible collateral and the perception of high risk the profitability or capacities of small farmers’ enterprises. involved in small-scale agriculture. • Attempts to introduce improved services or 72. A smallholder group approach (5 to 15 mem- modern production practices without addressing bers) was introduced in Pakistan to help address farmers’ capacity, and/or the lack of skilled peo- the lack of collateral. Individual farmers borrow, and ple able to provide such services (e.g., machine through peer pressure, all group members guarantee the owners are not able to operate, maintain, and repayment of each member’s loan. The group is either repair their equipment). organized by the partner bank or through an NGO (e.g., • Insufficient technical support to supply, distribu- Rural Support Program Network). The bank provides a tion, and after-sales servicing. loan not exceeding Rs 200,000 (about US$2,500) for production activities and a term loan for farm improve- Credit ments.51 Although NGOs may help establish the groups, they do not provide technical support to formulate or 70. The limited access to affordable finance is a monitor each farmer’s investments. The loans are still major problem for smallholders that affects their risky for the banks because they lack experienced staff ability to exploit market-oriented production oppor- able to monitor and evaluate the on-farm results of the tunities. In the traditional fresh produce marketing sys- loan investment.52 51 State Bank of Pakistan. Financing Scheme for Small Farmers. www.sbp.org.pk › acd › FinancingSchemeSmallFarmers 52 Ali, M. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 27 Market Integration 73. Producer groups in Pakistan have not proven subsector, and it is the approach promoted by the to be sustainable once the project or NGO support Government.54 Clusters are grouped geographically, ends. For example, the National Agricultural Research and include inter-connected producers, agribusiness- Centre developed several farmer groups during 2004- es and institutions engaged in the same agricultural 2009: the Kissan Welfare Association (Bahawalpur or agro-industrial subsector in order to build value District), the Farmers Integrated Development Association networks when addressing common challenges and (FIDA) in the Vehari District, the Kissan Foundation pursuing common opportunities.55 The Government has (Rahim Yar Khan District), and the Women’s Agricultural identified 25 HVC products that have the potential for Development Organization (Sindh). They were registered adding more value locally through clusters.56 Producers as societies under the Voluntary Social Welfare Act 1961. will not generally self-organize into groups but rather These organizations were active for several years but congregate around a mutually beneficial economic pur- once project support ceased, the farmer organizations pose (e.g., selling to a common buyer) or a piece of also ended. Only FIDA still exists in the Vehari District.53 infrastructure for collective action such as aggregating their fresh produce for certain buyers or developing links 74. The cluster approach has proven more effec- to specific markets. HVC market linkages examples in tive in developing market opportunities in the HVC Punjab include: 53 Sadozai, K. N. (2022). Value Chain Development and Producer Market Integration Approaches in Punjab-Pakistan. Feasibility report for the World Bank. 54 This report does not elaborate on the cluster approach, which has been extensively analyzed for the Pakistani context and for which related studies on 33 agriculture commodities can be found at the following website: https://www.pc.gov.pk/web/agriculture. 55 Gálvez-Nogales, E. (2010). Agro-based Clusters in Developing Countries: Staying Competitive in a Globalized Economy. Agricultural Management, Marketing and Finance Occasional Paper 25. FAO Rome. 56 https://www.pc.gov.pk/web/agriculture Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 28 • The ten main citrus processors based around necessary production investments (e.g., storage, har- Sargodha have strong informal links with citrus vest equipment), complying to novel food quality stan- farmers (mainly growing the kinnow variety), dards and adopting improved post-harvest practices. in central northern Punjab. While processors Agribusinesses are wary about disrupting their existing are still mostly procuring their resources from supply networks and venturing into new partnerships wholesale markets, some are developing more with inexperienced farmers. They are more confident direct links with producers. There are also some in working with producers who have demonstrated ca- producer collection points where growers are pacity to produce the commercial quantities of known dealing directly with processors and exporters. quality that meet their delivery requirements. The processors grade, wash, and polish the fruit: grade A is mostly exported, grade B is usually Characteristics that may be considered for identifying supplied to local markets, and grade C is sold to target farmers include: juice processing companies such as Nestle. • Farmers growing carrots in central Punjab utilize (i) Land size: 1.2-10 hectares. Farmers with plots of collection centers, established by lead farmers, less than 1.2 ha are not economically viable and to wash and grade their carrots at a small cost do not have the necessary resources to invest in before selling to market agents or sending them their farm to improve productivity and regularly to wholesale markets. About 50 percent of total produce marketable surpluses. Farmers with carrot production passes through these centers. more than 10 ha are likely already integrated with Farmers receive higher returns when selling bet- (higher value) markets or have sufficient means ter quality carrots. to link to such markets. • Some farmers in northern Punjab procured high (ii) Farmers that have the capacity to regularly pro- quality garlic seed from the National Agriculture duce marketable surpluses at the desired quality Research Center and established Seed and quantity of the target commodities in which Production Groups. The lead farmers provided they want to engage for value addition. members with seed and production technolo- (iii) Farmers that are willing and capable of learning gies, and ensured a market price at harvest. This and adapting new and improved production venture is risky, requiring substantial investment. practices that would support them to connect to Few farmers were willing to engage in garlic seed (higher value) markets.58 production.57 76. Access to more stable markets and improved Target Producers technologies will provide the impetus to small- holder producers to expand production and pro- 75. Not all smallholders will be suited to mar- ductivity. With effective targeted technical assistance, ket-driven interventions as a means to increase they can increase their marketable surpluses and im- their incomes. Many smallholders are risk averse or prove their livelihoods. lack sufficient land and resources to align their produc- tion with commercial realities. Linking to higher-return Contracting market opportunities is risky and will likely require de- cisions that disregard some equity concerns in order 77. There have been a few basic attempts at con- to be sustainable. Even with thorough selection criteria tract farming in Pakistan. The market survey of citrus that effectively target more market-oriented, sufficiently exporters and processors around Sarghoda found that endowed farmers, they will still face difficulties trying to exporters negotiated pre-harvest ‘contracts’ with grow- enter higher value markets such as financial support for ers. They provided some technical and financial support 57 Ali, M. (2022). 58 Ali, M. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 29 trol measures have led to the development of a vibrant and prosperous potato industry in Punjab during the last decade that is expanding into other areas. 78. Engro Foods (now FrieslandCampina Engro Pakistan Limited) is the second largest milk proces- sor in Pakistan and provides an example of a more vertically-coordinated supplier network. Engro has processing plants in Sukkur (Sindh) and Sahiwal (Punjab). To ensure quality and the timely supply of milk, the com- pany owns and manages more than 1,300 milk collec- tion centers. Engro has trained over 500,000 farmers in improved production practices that meet the company’s food quality and animal welfare standards. Incentives to supply to Engro include prompt digital payments once the milk is accepted by the center manager, and tech- nical support provided by the company’s veterinarians, nutritionists, artificial insemination (AI) technicians, etc. The company also sells cows of improved breeds from the company’s farm to its suppliers. Large dairy farmers who are reliable suppliers, are contracted to Engro. In the case of smaller producers, quality control systems and, at times, peer pressure, help ensure that smallholders provide unadulterated milk to the local collection center. Haleeb Foods Ltd. is also a significant local food and beverage company that operates one of the largest milk collection networks in Pakistan for its two milk process- ing plants in Punjab. Haleeb also targets larger, more commercialized dairy farmers as contractors to ensure a continuous milk supply to its factories. Market Linkage Projects 79. There have been a number of efforts in Pakistan to promote the commercialization of smallholder to their growers for better managing their orchards.59 farming systems and to assist them in shifting to a PepsiCo and potato growers provide the most preva- more market-based production by strengthening lent example of contract farming in Punjab’s agriculture. local business development and supporting criti- PepsiCo provides improved potato seed to growers cal supply chain investments. These methods have under predetermined quality and price contracts. Each complemented production-based systems to facilitate farmer is trained in growing and handling practices to market access. Examples in the target commodity produce high-quality potatoes. PepsiCo field inspectors groups include: only select the potatoes that meet their quality stan- dards at harvest, and farmers sell the rejected potatoes • The Model Farms Linked with Improved in local markets. PepsiCo’s strictly enforced quality con- Supply Chains and Value Addition Project 59 Sadozi, K. N. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 30 (2018-2021, CABI, Government of Punjab) equipment, infrastructure and training focused which formed producer groups and built ca- on the development of olive nurseries, olive oil pacity on good agricultural practices; developed extraction units and mobile milk pasteurization. linkages between the groups and local and The scheme also supported a youth entrepre- international markets; supported HVC produc- neurship program. Project results included the tion with export-quality standards; organized creation of more than 16,000 jobs and private international and domestic produce exhibitions; investment of over US$250 million in the target- and trained middlemen, transporters, etc. on ed agricultural subsectors. better post-harvest handling practices. Grants were provided to producer groups and individu- • The Market and Employment for Peace als for improved infrastructure such as storage, and Stability Project (2018-2022, Helvetas, machinery, pack-houses, etc. The independent Government of the Netherlands) worked in project evaluators criticized the presence of ‘elite post-conflict areas of Khyber Pakhtunkhwa to capture’ whereby a farmer organized a group but improve productivity in high value commodities: kept all the benefits for himself. Between 3,000- like strawberries, tomatoes and dairy. The project 5,000 citrus growers were more closely linked to demonstrated new technologies and production 10 local processors. practices. It partnered with large companies (Ghazi Brothers, ICI, Reef Agro, Syngenta) to • The Sindh Agricultural Growth Project (2014- build the capacity of local providers for more ef- 2021, Government of Sindh, World Bank) cre- ficient service delivery, costing, and productivity ated producer groups and trained members on through a matching grants scheme. Results: (i) improved production and management practic- Strawberries: an estimated 47 percent of farmers es in dairying and crops; built 149 Milk Collection can now access higher quality inputs and services Centers (MCCs) for the groups; trained govern- leading to increases in strawberry-growing area ment AI providers; rehabilitated public veterinary (10-fold), production (35 percent), gross margins and reproduction units; and established an AI (51 percent per acre) and incomes (30 percent); training center. Milk production increased by (ii) Dairy: higher use of improved breeds through 28.4 percent; farmers received higher prices AI led to 5-13 percent productivity increases; by selling milk through their MCC to dairy pro- input suppliers increased their sales due to high- cessors under contract, dairy shops, other pro- er demand for quality inputs and services (e.g., cessors (confectionery, bakeries) or middlemen. vaccinations); and (iii) Tomatoes: due to changed The hub model—stores selling improved inputs, cropping patterns with new varieties and technol- services (feed, fodder, seeds, AI) and credit at ogies, farmer incomes increased 75 percent, pro- the MCCs—was successfully trialled. Some lead ductivity quadrupled (growing off-peak varieties farmers received grants for fodder machinery lengthened the sales window), and the number of and were required to deliver subsidized services farmers growing tomatoes increased 10-fold. to smallholder farmers. • The Agribusiness Project (2011-2015, CNFA/ • The Punjab Enabling Environment Project ASF, USAID) created Farmer Enterprise Groups (2014-2021, Chemonics, USAID) partnered aimed at increasing smallholder competitiveness with Punjab’s government, the private sector, and productivity in the horticulture and livestock academia, and civil society to create a more subsectors. The project identified potential cluster conducive business enabling environment to areas that included producers, processors, mar- promote private investment in the horticulture, ket agents, and service providers. Cost-sharing livestock, dairy and food processing subsec- grants targeted value addition, processing and tors. A matching grants scheme encouraged marketing through improvements in farming small and mid-sized agribusinesses to invest in practices, strengthening producer organizations, Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 31 and enhancing linkages between producers, potential buyers and facilitating agreements be- suppliers and processors. The project results tween the producers and such buyers. For larger included: support to 19,000 enterprises; training projects targeting multiple commodities and sec- for 20,000 beneficiaries; creation of 14,500 jobs; tors, the most successful collective marketing increased sales revenue of US$41.84 million interventions were facilitated by business service including exports of US$34.6 million; and lever- providers. They initiated activities by studying aging of an estimated US$10 million through the local supply chains, fostering discussions with grants program. industry players, and identifying market oppor- tunities. They organized groups, identified pri- Lessons Learned vate partners, negotiated agreements, provided information and technical support, and built the 80. A number of experiences and lessons learned capacity of producers and downstream play- from the institutions that implemented the above projects ers to exploit the identified market opportunity. in Pakistan were influential in selecting the proposed ap- Business service providers were sourced from proaches for linking smallholders to more remunerative both the private sector and NGOs. They also markets, and the corresponding recommendations for developed mutually-agreed business proposals future market-linking project interventions. for project funding. • Market access can be improved through • The use of (cost-sharing) grants and equip- quality improvement and producer groups. ment purchases (e.g., threshers, milk chillers, The formation of producer groups to access dryers) helped deflect some of the inherent risk an identified market that offers an attractive in a new business venture for all parties. Projects and transparent quality-driven commodity price invested in equipment and skills development for increased incomes for the members of such pro- the beneficiaries. Building the capacities of gov- ducer groups (e.g., milk, strawberries, tomatoes) ernment and non-government service providers selling small quantities during their production (e.g., animal health, food quality standards, fi- season. For dairy farmers, this alternative mar- nance provision) was an important collaboration ket outlet with more transparent pricing shifted in both the public and private domains. sales away from local milk collectors. The col- lection points provided economies of scale and • Build trust early in the partnership. Project enabled direct linkages with larger private buyers teams need to help develop trust between the that have more exacting quality standards and various parties: horizontally between produc- demand a timely delivery of supplies. Collective ers working together in groups; and vertically action helped smallholders to build marketing between producers and downstream players. awareness, address market information asym- Trying to develop new market linkages between metries, improve their production practices, and parties who have had little or no prior contact is utilize equipment to improve the quality of their a risky venture when compared to the underlying produce and sale it to more discerning buyers trust of traditional systems. All parties need to be seeking reliable supplies that meet their require- flexible, and projects can enable the process by ments. However, without a common economic building producer capacities to meet the timing, purpose (e.g., ownership of a milk collection quality and quantity expectations of buyers. The center), the producer groups were no longer op- strategic use of grants to the different parties of erational after the project’s support ended. the partnership helps reduce costs and invest- ment risks. Buyer’s investment into the business • Facilitation plays a key role. Project teams venture provides confidence to the producers actively promoted the development of linkag- that the buyer is committed to the partnership. es to higher value market actors by identifying For targeting marginalized groups (e.g., women, Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 32 youth), the matching requirements for project grants were reduced or removed in order to encourage their involvement in new business ventures. • Work within existing market systems. The existing social capital between producers and traders, often developed over decades, is often difficult to replace and is a reason to strengthen these relationships. Many traders, input suppliers, commission agents, etc. wish to reinforce their existing supplier networks as they recognize that competition and alternative marketing channels may develop (e.g., e-commerce). More progres- sive intermediaries have the capacity and willing- ness to learn new skills in order to collaborate with producers to improve marketing outcomes. Technical advisors supported these interme- diaries to improve their post-harvest practices, adopt more efficient supply and service meth- ods and find ways to reduce transaction costs. These activities led to many smallholders gaining access to improved services (e.g., seed, fertil- izers, supplies) and reduced post-harvest food losses. An assessment of the target commodity markets provided an understanding of the mar- ket operatives and helped to identify those more progressive market intermediaries willing to work in improving the existing marketing systems. • Alternative credit channels may be necessary. Producers willing to link to new market outlets usually had sufficient funds to support their pro- duction decisions and any related costs involved in the new venture. Projects funded larger capital investments (e.g., threshers, dryers, storage) to help improve the quality of the produce supplied to buyers. But to include more smallholders in the group in a new partnership arrangement, and without credit from the traditional trader-supplied seasonal funding, many smallholders will need alternative credit sources. In most instances, proj- ects worked with microfinance providers to help support smallholders and agribusinesses. Projects also introduced producer groups to banks in an effort to develop lending facilities and products more suited to smallholders’ requirements. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 33 Proposed Approaches 81. Experiences and approaches demonstrating a produce can be conveniently aggregated. Produce successful shifting of smallholders from produc- collection centers would be effective for the target tion- to market-based investments and linking commodities as these need prompt processing once them to more remunerative outlets for their pro- harvested and lack cold chain infrastructure throughout duce are limited. Interventions to support smallholder the supply network. These centers of aggregation allow commercialization, such as market analyses, contract growers to either sell individually (and allow buyers to farming, certification, and strategies to strengthen local aggregate the produce) or collectively. The availability business development and value chain investments of larger volumes of fresh produce, perhaps sorted by have been deficient within Pakistan’s agriculture sector. quality grades, would attract a wider range of buyers The following market linking proposals for smallhold- (wholesalers, retailers, processors, etc.) seeking bigger ers operating in the target commodity subsectors are volumes to save on transportation costs. based on the current production and market contexts, previous project experiences, and recommendations 83. Collection centers have delivered effective re- from the background feasibility studies. sults for smallholders, for example in: (i) selling fresh milk daily that needs to be chilled on delivery as demon- Produce Collection Centers strated by the Sindh Agricultural Growth Project; (ii) cit- rus collection points where some growers deal directly 82. The aim of the produce collection center ap- with exporters and processors (Figure 9); and (iii) carrot proach is to improve producers’ economies of collection centers in central Punjab. This model could scale, promote more competition between buy- be replicated for other perishable commodities (i.e., fish, ers, and generate higher returns for smallholders. fruit and vegetables). Collection centers may operate as Producer organizations and main buyers may set up spot collection platforms, arrangements for farmers to collection centers close to clusters of growers where deliver directly to designated buyers, or aggregation Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 34 Figure 9. Citrus marketing chain Washing Waxing Importers/ Processors Grading Exporters Retailers Wholesalers Packing Cooling/ Storage Transportation Picking Orchards Grading Packaging Transportation Wholesalers Secondary Retailers Consumers Wholesalers Pre-harvest Commission Contractors Agents Source: Ghafoor, A., et al. (2017). points where smaller producers can assemble their pro- Ownership and Management duce before grading and transportation. The collection center would function as a key piece of infrastructure 85. The ownership and management of the col- that helps shorten supply chains and links producers lection center represent a potential barrier to the more closely to buyers. This shortening reduces the advancement of this approach among the target amount of handling of produce and thus, the amount commodity subsectors. Ownership and manage- of mechanical damage and wastage suffered during ment impact the efficiency, profitability and sustainability marketing. of the center. All parties entering into the partnership arrangement need to be fully aware of their responsi- 84. Collection centers are most effective when bilities and the potential costs and returns from their other post-harvest handling activities are available involvement in the venture. These would need to be to ensure that product quality and quantity meet clearly stated in a formal agreement between all rele- the buyers’ requirements. The availability of post-har- vant parties for their respective benefit. Ownership and vest facilities such as storage and trading structures management options may include: prevents food loss and waste and are instrumental in addressing price fluctuations. In the case of the carrot (i) Producer groups could build, own, and man- collection centers in Punjab, growers are able to wash age the collection center. The availability of and sort their produce before selling to buyers. Ideally, such market infrastructure allows the collective growers selling through collection centers should be marketing of smallholders’ produce, with the po- able to receive price premiums for their higher quality tential to significantly reduce transaction costs, produce. They can then more readily understand the thereby increasing incomes for smallholder farm- buyers’ quality standards and know what production ers. To sustain the operation, the group has to and post-harvest practices will deliver them the highest efficiently manage the center, both financially and returns. Such marketing information is currently unavail- technically. Depending on the complexity of the able to most smallholders in Pakistan and is important collection center, the producer group may need, when assisting farmers in developing linkages to more at least in the short term, to employ a capable remunerative market outlets. manager to operate a facility with multiple func- tions (e.g., sorting, cleaning, packaging, cold Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 35 storage). For a basic packhouse, a hired man- For instance, a processing company owns the ager would likely not be necessary. The group or MCCs and the dairy equipment but transfers selected members from the group would need to the management of the collection centers to the be trained on the proper operation of the facility, farmers. Another possible scenario is that where as well as on financial and group management the processing company is responsible for the skills. maintenance of the equipment owned by the producer groups, supplies fuel for generators, or The advantage of this operational model is the pays the utility costs. Regardless of the format, group’s improved bargaining position during price smallholders need to establish a group and sign negotiations. Usually, producers selling through an agreement describing the ownership and traditional marketing channels receive lower pric- operational arrangements of the partnership, es than when selling directly to larger wholesalers including the sales agreements for each sea- or retailers attracted by the economies of scale son. This hybrid option weakens the bargaining offered by a collection center. The disadvantage power of farmers. However, it provides more of this ownership model is that the responsibility flexibility to both parties, especially for collection for managing the center—maintenance costs and centers located in more remote areas that are far accompanying utility infrastructure (e.g., water, away from the final end user or the company’s electricity)—may become a burden for the group. processing facilities. (ii) The second option is a collection center 86. This collective marketing approach provides owned and managed by a company (processor, incentives for farmers to increase their productivity wholesaler, etc.) as illustrated by several milk pro- and product quality, and for traders to add value by cessors’ extensive networks of MCCs throughout engaging in primary processing and storage, taking Sindh and Punjab that deliver produce according advantage of the volumes assembled and the facil- to each company’s exacting quality standards. ities and services provided. The collection center can Similarly, the collection center could be owned be used as a platform for implementing the food quality and managed by a lead farmer or group of larger and safety standards required for access to the buyers’ farmers that charge a fee to producers wishing to markets. These facilities can be easily integrated into use the services available at the collection center. related business development services for smallholders: This is the model used in the carrot collection cen- the dairy hub model was successfully piloted in the Sindh ters of Central Punjab. In this management model, Agricultural Growth Project. Service providers and inputs smallholders deliver their produce directly to the suppliers have the opportunity to open shops around the collection center and they do not need to estab- collection center to attract business from the stream of lish a producer group, even though such a group producers regularly using the center. The hub becomes would help for advocacy purposes during the mar- a one-stop commercial service platform for producers to keting process. The sustainability of the model de- access quality inputs, machines, markets, finance, and pends on the trust between the company and the knowledge. Overall, this collective marketing approach farmers. The availability of other services, such as not only relates to improving and guaranteeing quality, but seeds, fertilizers, supplemental feeds, medicines, also improving logistics efficiency, reinforcing information veterinary services, etc. can increase that trust. exchange and strengthening innovation, i.e., value cre- But the owners of the company have the power to ation at the farm level and along the entire supply chain. set prices, which weakens the bargaining power of the farmers or their producer group. Productive Alliances (iii) A third option is a hybrid ownership and 87. Productive Alliances have shown to strength- management model between producers and en the linkages between producers, buyers and buyers. This model may take different formats. the public sector within agriculture value chains. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 36 The Productive Alliance approach has been adopted benefits the target producers by proactively creat- in several World Bank projects across Latin America, ing linkages with business partners preferably in higher Africa and Asia and provides holistic solutions to ad- value sectors (wholesalers, processors, exporters, su- dress market imperfections that inhibit smallholder permarkets), financial institutions and other intermediary producers’ socioeconomic progress. A Productive service providers. There are situations where small- Alliance involves three core agents: a group of small- holder producers are unable to adjust to the evolving holder producers, one or more buyers, and the public food market system and exploit an available market sector. These three agents are connected through opportunity in a modern food system. Concurrently, the a business proposition, or “business plan”, which existing market system rigidly maintains the status quo describes the capital and services needs of the pro- that limits the potential opportunities for smallholders to ducers and proposes improvements that would allow form alternative downstream partnerships which could them to upgrade their production capacities and skills be more beneficial for them. Intentional efforts to close to strengthen their linkage with the market, i.e., the the gap through private sector engagement alone are buyer(s). The implementation of such a business plan sometimes not enough. The alliance reduces the num- is typically supported through three core inputs and/ ber of intermediaries, reduces costs and value erosion. or activities directed towards the producers’ needs: Alternatively, smallholders could be connected to a productive investments, technical assistance, and larger producer or trader with experience and existing business development. These core inputs are financed longer-term higher value market linkages. through public grants provided by the project, which are matched by the beneficiary producers and, in 89. The Productive Alliance changes the buy- some cases, also by the buyer(s) (Figure 10). ing and selling culture from the occasional and opportunistic sales transactions of individual 88. The aim of the Productive Alliance approach farmers to transient traders, to a more consistent is to stimulate a change in the market system that sales approach that builds relationships between Figure 10. Core elements of a Productive Alliance Public Sector Business Plan Productive Technical Business Investments Assistance Development Production inputs Extension services Management Small infrastructure Technology transfer Accounting Commercial agreement Producers (Vertical Alliance) Buyer(s) Collective Action Product specifications (Horizontal Alliance) Quantity of product Quality requirements Common goods Price arrangements Shared capacity-building Delivery specifications Financial accountability Duration of alliance Support goods and services Source: World Bank Group (2016). Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 37 registered producers or groups of registered farm- producer. Larger producers and traders with supply ers selling to known trading partners. The market agreements to higher value markets may already work process could be led by a company, an extension agent, with groups of smaller producers and trade in tradition- a farmer organization or a chain facilitator. Therefore, al markets in order to fulfill their orders. They deliver intentional outreach by project-sponsored service pro- directly to buyers in urban areas. But such mutually viders to different value chain groups is required through beneficial relationships are not widespread in Pakistan; direct facilitation over and above market systems inter- collective actions are often undermined by a lack of trust ventions. The type of commercial agreement between and unproductive rivalry, dishonest dealings and lack of buyers and producers would depend on a number of compliance with the terms of the agreements from both conditions including: the product, the end market con- sides. Development partners have actively worked to sumer, quality standards, the farming system, etc. Most support smallholder aggregation through commercial producers in the target commodity subsectors are op- agents as a market linking intervention (e.g., Sindh erating in unorganized informal supply chains. They lack Agricultural Growth Project). access to affordable credit and suitable extension advice, and are reluctant to invest in risky undertakings without 92. Within a Productive Alliance, the public partner some assurances of decent returns. More modern sup- would function as the facilitator of the partnership ply chains are based on contractual-type relationships by creating the conditions necessary for the de- and specialization amongst buyers and growers. Large velopment and exploitation of the identified mar- agro-processors (e.g., Engro, citrus exporters, PepsiCo) ket opportunity and by focusing support on the have demonstrated what is possible in Pakistan with weak links in the supply chain. The feasibility studies more vertically-coordinated supply chains. Producers across all the target subsectors identified, from the buy- operating under agreements with buyers offer opportu- ers’ perspective, the current limitations for smallholders nities to overcome many of the current market dysfunc- to sustainably link to higher value markets. Citrus and tions, for example, the timely supply of livestock to meat mango exporters, fish traders, meat processors, etc. processors so that they can meet their export orders.60 complained about the lack of timely supply and quality of delivered produce which meant they could not ob- 90. High value markets are shaping value chains tain their desired volumes, or that they needed to seek through the introduction of private standards and out alternative, more expensive supply channels (e.g., food quality requirements. Supermarkets, food spe- imported milk powder). The number of intermediaries cialty shops, and hotels are spreading from large cities involved in existing food supply chains has created dis- to smaller towns in Pakistan, and they are increasingly jointed chains with little market information transmitted sourcing their fresh produce needs via contractu- back to producers. al-type agreements with larger producers or wholesale traders. As their share of retail in Pakistan increases, 93. Private sector players recognize that market they will demand larger volumes of high-quality fresh opportunities and potential for growth depend on produce. Among these requirements, preferred produc- the consistent supply of raw materials that meet ers and traders are working with standards similar to specific quality standards. However, these actors Good Agricultural Practices (GAP) and Good Handling may lack the necessary technical skills, local knowledge Practices (GHP). The Productive Alliance approach and trust-based networks to organize suppliers, en- seeks to incorporate more smallholder producers into gage them in production agreements and connect them these evolving marketing systems. to support services such as finance. Therefore, projects would need to employ specialist intermediaries, either 91. Rather than trying to deliver ‘solutions,’ the non-governmental organizations or commercial compa- project partner can help facilitate changes that nies experienced in linking smallholders to markets, to improve market operations for the smallholder help bridge the gap between producers and companies 60 Lohano, H. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 38 to address some of these issues, while promoting in- • providing business administrative services (e.g., clusiveness agendas. They invest in ways that enable record-keeping) for farmers, private partners, specific types of farmers and communities of farmers banks and other government and regulatory to access markets that match their capacities, produc- bodies. tion, investment and risk profiles. It is then that training, technical support and facilitation can be identified and 94. The main barrier to these more formal, verti- delivered directly to the target producers. This type of cally-integrated supply transactions in the target- investment promotes the inclusiveness of smallholder ed agricultural subsectors is the lack of trust be- farmers, stimulates broad-based industry development tween all groups, both horizontally and vertically and encourages an equitable sharing of the value cre- within the supply chains. While farmers may be aware ated along the chain. In these cases, investment by the of the potential benefits of collective action under such private sector is usually channeled to farmers through Productive Alliance arrangements, this understanding contract farming-type agreements, which could include may not be enough to overcome the suspicions about inputs, low-cost loans and technical support. working together. The important factor is to incentivize farmers with identified market opportunities within the Potential interventions by the agribusiness partner and/ sector and support their efforts to meet the quality and or business facilitator could include: volume standards required to exploit such opportunities. Many smallholder producers already know where more • developing business proposals including finan- remunerative markets are located, but lack the impetus, cial and market analyses; skills and resources to collaboratively work together to • providing funding or in-kind resources as agreed; shorten their supply chain and exploit these opportuni- • leading the implementation of partnership activi- ties (e.g., fish farmers in southern Sindh consider that ties and delivering results; their higher value markets are the increasing number of • providing professional management; middle-class consumers in large cities such as Karachi • securing markets and ensuring that producers and Lahore, as well as crab exports to China).61 supply raw materials through supply agreements; • providing technical assistance and business 95. To help overcome suspicions amongst produc- management training; ers, the group needs to have clear rules and norms • disseminating inputs and technology; of association and enforcement mechanisms that • linking farmers to business services such as fi- ensure an even distribution of the benefits among nancing and third-party certification; all members. This will create incentive systems for • supporting the monitoring of partnership regulating and shaping the behavior and expectations activities. of individual members and provide assurance to other market actors. The rules would need to define the roles, Producer group roles may involve: rights, obligations and entitlements of individual mem- bers and the group itself and, as such, would contribute • acting as a central intermediary among farmers, to build trust and solidarity amongst members. private partners and local governments; • helping farmers to understand and negotiate 96. This market linkage approach requires active supply agreements; input from downstream players from the onset of • coordinating raw material supply for delivery to the sub-project and agreement on the missing key private partners; components within the chain that would provide • supporting members in the implementation of benefits for all players. The vertical linkages involved quality standards; with higher value markets are risky for all the alliance partners, as they require transactions between entities 61 Kanji, I. A. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 39 who have had little or no prior contact. The lack of social 99. The key entry points for projects would involve obligations that inherent to the trust-based foundations building capacities and support in the following areas: of traditional systems, often means neither party has a strong social incentive to honor an agreement despite • Information management - farmers need to compelling mutual economic benefits. For producers improve their access to, and management of, with limited income-earning opportunities and usual- information in order to improve their position in ly in need of cash, side-selling makes sense despite the chain; keep records of the labor and inputs damaging the possibility a long-term arrangement with used in order to improve their understanding of a reliable buyer. For producers it creates mistrust and costs and build their ability to negotiate prices. often leads to companies losing interest in developing • Traceability - record-keeping to guarantee the sustainable relationships. source of the product and of the inputs used. • Financial support - targeted at key quality in- 97. To help build trust between the alliance part- puts, infrastructure, and equipment. ners, projects can facilitate meetings between • Market information - knowledge of prices and buyers and producers, support companies to trends so that farmers can better negotiate with provide prompt payments to their suppliers, and potential buyers. strengthen the partners’ commitment to the • Quality management - make sure that the product business (e.g., assist companies to invest in key infra- and production process satisfy market demands. structure such as milk collection centers, warehouses, This increases the attractiveness of farmers as busi- cool storage units, etc.). Project teams need to devote ness partners and thus, their negotiating position. considerable effort to developing trust between the var- • Grading of produce into known quality grades ious parties. Higher value buyers (e.g., supermarkets, that result in different prices; implementation of exporters) will not abruptly disrupt their existing supply quality control systems and certification schemes chains and switch to a smallholder group supplier. The as demanded by different markets. linking process would likely be an iterative, gradual • Marketing management to ensure products progression of building a viable relationship between all are produced and packaged to meet customer parties in the alliance before the realization of the full preferences. benefits of such alliance. There could be mistakes along • Innovation management - farmers share their the way, and therefore, patience and tolerance will be experiences, identify best practices and start required among all partners. The business development experimenting to find what works best for them- facilitators hired by the project will prove to be a critical selves. Study trips to large-scale farmers, re- element during the process. search institutes, model farms, etc. would assist the uptake of better practices. 98. If projects pursue the Productive Alliance • Developing cooperation - recognition that option as a means to link farmers to high value chain actors depend on each other. Take farmers markets, then the agreements should allow for and other chain actors on excursions to down- renegotiation if prices or costs change exces- stream companies to expose them to the reality sively and perhaps, allow farmers to sell a percentage of other parts of the supply chain. of their produce on the open market. PepsiCo’s ‘con- • Identifying expectations - chain actors decide tractual arrangement’ with potato growers in Punjab on the goals they wish to obtain through collec- demonstrates a successful approach whereby farmers tive actions (e.g., improve quality, develop a new are able to sell in local markets the portion of their pro- product) or identify problems they want to tackle duce that does not meet PepsiCo’s quality standards. (e.g., wastage during transportation). They draft Prices in local markets are usually higher; however, a business proposal together that details the ac- producers need to deal with more intermediaries which tions and responsibilities of each partner, and the reduces their returns and delays their payments for transaction conditions (price, quality standards, several weeks or even months. payment procedures, etc.). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 40 100. Partnering with companies in a Productive Generally, smallholders do not have the resources or Alliance can be an effective way of creating market skills to target higher value markets. They are mainly linkages. This approach would support the develop- selling into existing local supply chains through spot ment of business models with policies and practices that markets (either directly or through small-scale traders). meet the needs of smallholders while also complement- Therefore, improving efficiencies within the existing ing investments to upgrade their skills To be successful, it supply chains of the target commodities could add is necessary to ensure that companies have the patience significant value and improve returns to the producers needed to invest in the process and that farmers have the and other chain players. For example, due to manage- commitment and ability to meet the requirements. rial and technical limitations, such as a lack of proper storage facilities, cold chains, proper food handling Improving Efficiencies in practices, infrastructure, packaging, or efficient market- ing systems, an estimated 20 to 45 percent of food and Existing Systems resources are wasted in Pakistan’s food supply chains, in line with the region’s average (Figure 11).62 101. More formal and sophisticated forms of mar- keting should be promoted where they deliver 102. Tackling supply chain weaknesses, such as benefits, but such interventions may not always food losses and waste (both on-farm and down- be appropriate for smallholders in the targeted stream) in an efficient, sustainable and integrated areas and may instead confer benefits to better way provides an opportunity to reduce costs and endowed farmers to the detriment of other pro- value erosion in a relatively cost-effective way ducers. Despite the changing nature of food market- that can potentially increase incomes for all chain ing, informal channels still handle the bulk of produce players. Yet, the transaction costs and coordination ef- in Pakistan. As markets grow and differentiate, with forts required to organize many smallholder farmers are varying demands from intermediaries and end con- discouraging buyers from directly sourcing their needs sumers, some informal channels continue to prosper. from smallholders. Private partners can play an import- Larger growers are usually more focused on higher end ant and unique role in improving distribution efficiencies markets, and smallholders predominantly sell into local by optimizing food processing procedures, streamlining markets where quality standards are mostly absent. supply chains, linking farmers to markets, etc. 62 Ghafoor, A., et al. (2017). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 41 Figure 11. Percentage of the initial production of fruit and vegetables lost or wasted 60% 50% 40% 30% 20% 10% 0% Europe North Industrialized Sub-Saharan North Africa, South and Latin America and Asia Africa West and South East America Oceania Central Asia Asia Consumption Distribution Processing Post-harvest Production Source: Nutfruit, July 2017. 103. Producers usually sell their products to trad- ers, small or large, at their farm gate, which involves BOX 3. bargaining over prices and/or the division of labor relat- Smallholder mango growers in Pakistan are ed to the harvesting of the commodity on the produc- required by middlemen to pack 12–14 kg of er’s land. Thus, traders play a pivotal role in ensuring mangoes into wooden boxes designed to hold compliance and product differentiation. Small traders 10 kg of fruit. Over-filling boxes until their usually deliver the product to larger traders or wholesale sides and top are bulging means that boxes markets. Farmers who own a truck can bypass these stacked on top of each other during trans- small traders and take their produce directly to whole- port, sometimes 18 boxes high, create sig- sale markets.63 nificant damage to fruit. Unbeknown to most farmers, up to 25 percent of fruit can be lost 104. Chain integrators (e.g., commission agents, through this practice; losses that are factored middlemen, exporters, processors) with relevant into the prices paid to farmers.64 expertise have been able to play an important role in strengthening the capabilities of supply networks. In some instances, they have introduced price. Intermediaries can also reduce transaction costs new standards and technologies in the sector that with better logistics, handling of agricultural produce have supported smallholder farmers in improving their and interactions through informal channels such as with production’s quality and quantity (e.g., citrus, mango middlemen. subsectors). These intermediaries often have a strong focus on service provision but with a commercial atti- 105. Project teams may need to initially focus tude. Their focus on increasing the competitiveness of their resources on the more progressive and en- the chain and their market orientation can make them trepreneurial farmers to lead changes in existing effective and efficient facilitators. Intermediaries hired marketing systems. Risk perceptions among small- by a project can be used to reduce transaction costs holders, self-efficacy and social networks, affect the by introducing production and quality standards: for motivations and learning processes regarding changes buyers they guarantee quality inputs; for producers they to their production and marketing operations. Highly increase sales opportunities that could earn a premium motivated smallholders with confidence in their abilities 63 Collins, R., Dent, B. and Bonney, L. (2016). A Guide to Value Chain Analysis and Development for Overseas Development Assistance Projects. ACIAR. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 42 might be more inclined to participate in altered systems • Assistance with product pricing when buyers and work with project partners to try new production remunerate smallholders. Options may include, and marketing techniques.64 on one hand, a fixed pricing mechanism with a specific ex ante minimum price agreed between 106. The major barrier to improving the existing the buyer and smallholders. This option gives marketing system would likely be the strong vest- certainty to smallholders against price risks but ed interests among the various intermediaries can be disadvantageous if the fixed price is lower (middlemen, traders, commission agents, wholesalers, than the prices offered in spot markets. On the etc.) in maintaining the status quo. Market information other hand, variable pricing is based on product on prices, as well as grades and standards from pro- quality or yield/product quantity and is an incen- duce markets, are not issued and thus, producers can tive-based pricing regime to produce high-qual- only negotiate prices based on a visual assessment ity products. Also, it most be noted that govern- of the quality of the goods they are selling. A lack of ments fixing retail prices for some commodities recognized and accepted yield and quality standards (e.g., meat) disincentivizes investment, reduces means producers cannot respond to changing market competition, and hinders the progression toward conditions. Traders are advantaged by this system as more modern food supply systems. they can more easily estimate the potential dressing percentages, harvest returns or price gains in their mar- • The form of relationship between buyers and kets. Traders are well connected to each other through smallholders affects the allocation of risks, the mobile telephone networks and can readily check ability of farmers to switch from one buyer to wholesale prices in different markets throughout the another and their decisions to invest in the nec- country. essary assets to maintain production of (higher quality) outputs. Spot relationships are flexible, 107. There are multiple potential entry points based on transaction-to-transaction between where a project could improve the existing mar- smallholders and buyers. Long-term, informal keting system of the target commodities, help relationships between producers and buyers are alleviate pressure on smallholders and generate trust the most prevalent in Pakistan. Trust is essential between the various actors within the supply chains. in this type of relationship since the absence of a Some project entry points include: formal controlling mechanism might encourage opportunistic behavior by both actors. Long- term, formal relationships between producers BOX 4. and buyers, more common in modern, food supply chains, are codified in written contracts, In the Market and Employment for Peace and complete with quality monitoring measures and Stability Project in Khyber Pakhtunkhwa, the penalties for contravening contract terms. project team worked with more progressive commission agents in local HVC markets to develop support packages for participating • The timing of payments could be after harvest, farmers. These commission agents recognized and similar to the payment conditions in tradi- the threat to their business from increasing tional spot markets. Delayed payments after competition in key fresh commodity supply harvest mean that farmers receive payments at chains and they wanted to strengthen their specified dates after the delivery of the goods. existing supplier networks through the provi- Partial payments before harvest are another sion of improved services and support for input option, meaning smallholders are paid a certain provisions.65 percentage of their total payment upfront and re- ceive the remainder upon delivery of the goods. 64 Based on discussions with Helvetas Country Manager and Project Team Leader, March 23, 2022. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 43 • The quality of the products could be fixed at a higher prices but also increases their post-har- certain quality standard. In this case, producers vest costs (these are time-intensive, labor-de- incur more risk because meeting a fixed standard manding activities). The option to store products is costly and buyers will reject products that fall to avoid selling off-peak could be attractive but below such standard, and then are likely to be requires the purchase of costly storage space sold for lower prices. Variable quality standards and processing equipment. are more flexible, and buyers pay an appropriate price for different quality levels. But this option also • Poor access to inputs is a constraint to smallhold- exposes smallholders to risks, e.g., vague qual- ers’ participation in markets. Buyers may supply ity criteria or receiving low prices for high-quality inputs in order to guarantee the quality or yields, products. Proper incentives (e.g., payment scales) but usually producers purchase inputs from local based on known quality standards are important suppliers. This can expose farmers to low-quality in linking farmers to markets, so that all buyers and inputs or to predatory suppliers and service pro- sellers know the quality control procedures before viders. Project teams should work directly with they become involved in an alliance. This implies input suppliers (fertilizers, seeds, fingerlings, nurs- that effective quality control systems are devel- eries, veterinary services, etc.) to improve service oped, while providing information and capacity provision to smallholders in the project’s areas.65 building to all players to meet the requirements. • Familiarity between smallholders and buyers • The sales location could be at the farm gate, captures the social dynamics such as trust, social farmers delivering their products to nearby mar- networks, reputation, and loyalty that are inher- kets, or farmers delivering to a buyer collection ent in traditional markets and one of their main center. Farm gate sales shift all transportation-re- strengths. Market actors deploy these concepts lated risks and costs to the buyers while with the as a response to information asymmetry (e.g., other options, the farmers incur all risks and costs. smallholders learn from their neighbors’ experi- ences to help alleviate their entry costs and risks • Production-related decisions are a key entry to a new market or trader). Smallholders may point and will mostly determine the timing of de- personally know the buyer from previous business livery, quality standards, and returns to smallhold- transactions; they could know the buyer through ers. Projects and government partners should their shared social networks; or the buyer may be develop GAP- and GHP-based industry stan- a stranger (e.g., a supermarket that is expanding dards, with smallholders and downstream players its business and seeking suppliers in a new lo- trained to match their produce and operations to cation; transactions with strangers in traditional these standards. Also, timing the seasonality of markets). Project teams can help strengthen the production to get the highest returns within the identified relationships in the targeted areas and existing markets (e.g., off-season production in work to resolve quality issues from both the pro- green houses and tunnels; parturition and fodder ducer and buyer perspectives to strengthen these reserves to match dairy’s lean season). commercial relationships. • Currently, most smallholders sell their produce • Investment costs directly determine the extent immediately after harvest and therefore do not to which smallholders are willing to invest in the incur post-harvest costs. Alternatively, small- assets necessary to participate in new marketing holders may clean and sort their products before systems. Projects can help offset these invest- selling which raises the probability of receiving ment costs and risks through targeted financial 65 This was a successful approach to strengthening market linkages for smallholders in the Market and Employment for Peace and Stability Project (see above). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 44 support. These investments may be minimal, in the marine capture and inland fishery industries. Other such as those in new farming equipment or possible entry points into the industry include: irrigation facilities; or the market could require • Financial support to farmers to purchase higher significant investments in assets such as storage quality seed and feed. facilities, transportation, and processing equip- • Training fishermen and local vendors on the ment that are commonly required in higher value proper handling and storage of fish. markets. • Improved infrastructure such as cold storage con- tainers and modern handling facilities at ports. 108. Although there are significant opportunities to • Better coordination among different fishery con- improve productivity, expand the industry, and re- trol departments at the federal, provincial and duce wastage, the aquaculture subsector in Sindh local government levels in Sindh. has been largely neglected by governments and • Proper registration and monitoring of fishermen, development partners. Industry groups consider that boats and their activities. the lack of interaction with governments, particularly to • Provision of short-term credit to processing com- upgrade the existing infrastructure, has hindered growth panies to counter late payments from buyers.66 Table 3. Summary of responsibilities and activities for each group of stakeholders in each proposed approach Producer/group Private sector Public partner/project • Full or partial ownership • Full or partial ownership • Conduct or commission market • Allocation or purchase of assessments (local, regional, • Develop the business land national, export) proposal • Identify market opportunities, • Allocation or purchase of • Develop the business buyers, and producers land proposal • Develop the business proposal • Agree on the amounts of • Off-take agreements (contracts?) • Allocation of land (government) products to be supplied with • Facilitate partnership development known quality standards • Notify the required product and supply agreements (contracts?) quality standards • Develop industry standards based • Transportation of fresh • Develop industry standards on Good Agricultural Practices produce to the centers based on Good Agricultural and Good Handling Practices with Collection Center Practices and Good Handling partners • Wash, grade, package Practices with partners produce • Financial support for: • Provision of packing • Business proposal • Utility costs or usage fees materials (boxes, crates, etc.) development • Repairs and maintenance • Provision of credit, inputs, • Construction TA, market information • Inputs, technical support • Annual reporting and • Equipment and tools compliance with relevant • Transportation to own • Mentoring of producer group regulatory authorities facilities members and managers • Organize regular meetings • Repairs and maintenance • Coordination between buyers and of all stakeholders (including • Annual reporting and sellers government partners) compliance with the relevant • Publicize the centers and services regulatory authorities provided to buyers and producers • Hub model: provision of • Assist licensing and reporting to inputs (e.g. fodder, seed, the relevant regulatory authorities fertilizer, ice) and services • Perform regular reviews to (e.g. veterinary, AI, reaping, improve operations storage) 66 Lohano, H. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 45 Table 3. Summary of responsibilities and activities for each group of stakeholders in each proposed approach Producer/group Private sector Public partner/project • Act as central intermediary • Co-finance technical • Conduct or commission market among farmers, private and assistance and on-farm assessments (local, regional, public partners processing infrastructure as national, export) agreed • Assist farmers to understand • Identify market opportunities, and negotiate supply • Assist the development of alliance buyers, producers, agreements the business proposal service providers, etc. and provide incentives for private • Coordinate produce supply • Notify the required quality partners to collaborate for delivery to private standards partners • Coordinate and facilitate • Lead the implementation of negotiations and final supply • Support members to partnership activities agreements (contracts) produce to the required • Provide quality standards quality standards • Grants for the provision of and train/mentor producers technical services, business • Assist the development of on achieving higher levels proposition, and co-financing of industry standards based on • Secure markets for the end infrastructure Good Agricultural Practices products and procuring and Good Handling Practices • Facilitate the formation of raw materials from farmers producer groups • Assist implementation of through supply agreements better production and post- or contracts • Provide technical and managerial harvest handling activities assistance: promote new crops or • Provide technical assistance improved varieties for production, • Provide business and business management provide production training administrative services (e.g. training to farmers/groups, Productive Alliance ranging from basic agronomic record-keeping) for farmers, including on quality skills to improved practices in private partners, banks assurance and due diligence preparation for certification and other government and procedures regulatory bodies • Capacity building of private • Disseminate inputs and partners including business • Support the monitoring of technologies development service providers the alliance activities and • Assist the development of results • Assist the development of industry standards based on industry standards based on Good Agricultural Practices Good Agricultural Practices and and Good Handling Practices Good Handling Practices • Link farmers to required • Supervise the partnerships business development between producer groups and services (e.g. financing, companies certification bodies) • Facilitate an improved business • Support the monitoring of enabling environment (e.g. partnership activities contract farming legalities) • Provide after-sales technical including regulatory frameworks support services to improve • Ensure regulatory compliance producers’ deliveries among alliance partners • Assist the implementation of • Coordinate multi-stakeholder better production and post- meetings and consultations harvest handling activities • Project management and timely flow of funds • Monitoring and evaluation of key partnership indicators, including farm gate prices Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 46 Table 3. Summary of responsibilities and activities for each group of stakeholders in each proposed approach Producer/group Private sector Public partner/project • Act as the central • Provide improved storage, • Identify progressive food market intermediary between handling and management chain intermediaries (e.g., farmers, private and public technology and methods middlemen, commission agents, partners wholesalers) willing to work with • Provide improved inspection, development partners to improve • Assist farmers to understand quality control, sorting and efficiencies and incomes for all and negotiate supply grading according to quality groups along the supply chains agreements • Negotiate supply agreements • Coordinate and facilitate • Coordinate produce supply • Provide the necessary negotiations and final supply for delivery to private packing materials, labor, agreements (contracts) partners technical support, crates, • Grants for the provision of • Support members to etc. to producers technical services, business implement quality standards • Notify quality standards and proposition, and co-financing of and related production related pricing levels (as infrastructure decisions required) and include them in • Facilitate the formation of • Assist the development of the supply agreements producer groups industry standards based on • Provide technical assistance Good Agricultural Practices • Provide technical and managerial Existing marketing channels and business management and Good Handling Practices assistance: promote new or training for farmers/ improved varieties for production, • Assist producers to use groups, including on quality provide production training for better production and post- assurance and due diligence improved production and post- harvest handling practices procedures harvest handling practices • Provide business • Disseminate inputs and • Capacity building of private administrative services (e.g. technologies partners including training on record-keeping) for farmers, • Assist the development of business development for service private partners, banks industry standards based on providers and other government and Good Agricultural Practices regulatory bodies • Assist the development of and Good Handling Practices industry standards based on • Support the monitoring of Good Agricultural Practices and activities and results Good Handling Practices • Supervise the partnerships between producer groups and companies • Ensure regulatory compliance among beneficiary partners • Coordinate multi-stakeholder meetings and consultations • Project management and timely flow of funds • Monitoring and evaluation of key partnership indicators, including farm gate prices Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 47 Recommendations 109. The lessons that emerge from the background to supply the identified markets makes it mutually feasibility studies for each province and targeted com- beneficial for the private sector and producers to modity indicate the following actionable practices establish strategic partnerships. for either linking smallholder producers to higher value markets or improving the existing marketing A realistic assessment of potential market op- systems. portunities must start with looking at farmers’ priorities, resources (skills, land, finance) and 1. Identify market opportunities. This is a funda- attitudes regarding change and cooperation. mental first step that should guide subsequent To avoid investigating unsuitable opportunities, it is project interventions to connect small producers important to start by listing farmers’ strengths and with processors, exporters and retail chains. All limitations, and then deciding which market op- the proposed marketing approaches require that portunities should be considered in more detail for support agencies undertake a series of studies to potential support. Farmers should consider which understand key issues such as market demand, market options and trading partners offer them bet- local production conditions, the business environ- ter returns now, and in the future, and would be best ment, the interests of farmers and traders, and the suited to their strengths and limitations farmers’ ability to access business support services. Analysts should identify market opportunities in a Review secondary sources, including reports on few tangible commodities of high comparative ad- consumer trends and opportunities for import sub- vantage for smallholders, and then tackle the mar- stitution. Narrow down the opportunities by: keting problems associated with delivering the de- sired produce. The potential for collective action to • Talking to industry experts and NGOs who have aggregate standardized and high-quality products direct experience in supplying and selling the Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 48 target products, such as: supermarkets, hotel 3. Target external financial and technical support operators, processing companies and kitchen to help small-scale producers and agribusinesses managers at schools, hospitals, or the military. access financial, managerial and business services. • Discussing opportunities with entrepreneurial This support needs to promote private sector in- traders and wholesalers, i.e., those with a pos- vestment in the value chain, and not try to under- itive attitude toward collaborating with farmers mine such investments. The role of business devel- to supply new markets, rather than those who opment facilitators is critical for establishing viable prefer to protect the current situation and focus market linkages within the identified value chains on high volumes at low prices. with clear business plans. 2. Define exclusive benefits to members. The main Technical assistance should be provided to help incentive for collective action originates from the smallholders meet quality standards, efficient economic benefits that cooperation will generate for agronomic techniques, understand markets, de- value chain players. If costs are too high or similar velop business proposals, etc. Depending on the benefits can be accessed from other providers at complexity of the proposed partnership, the service comparable costs, the incentive for cooperation provider could be an individual or a larger company. will be low. The key to success lies in the ability to A key determining factor of the type of service pro- provide competitive, continued, valued and/or in- vider needed to assist producers to connect with come-generating services to participants. buyers are the proposed project interventions to help form these linkages. The project could: Producers often favor collaborating with their neighbors (e.g., fish farmers in Sindh’s coastal • actively match buyers and producers into alli- belt)67 as this may help disperse individual risk ances in the identified markets; when trying to exploit a new economic opportu- • advertise and market the project assistance nity. A key challenge is to facilitate communication scheme (e.g., matching grants) throughout and collaboration among potential group members. major agricultural areas in Pakistan and assess Transaction costs stemming from collective action the level of response to calls for expressions of (e.g., the costs of identifying relevant participants, interest from buyers and producers; or negotiating agreements, etc.) can hinder such ac- • a combination of both approaches. tion, especially if these costs occur at an early stage. In order to make collective action work, members’ There are many companies, consultants, NGOs, benefits from collective action need to cover the academics, and public entities in Pakistan capa- costs they might incur as a result of the action. It is ble of providing technical and business support important to study how to reduce the costs asso- for collective marketing approaches based on ciated with collective action. Certain skeptical atti- their experience with previous market-linking proj- tudes (e.g., individualism, inertia, awareness) can be ects. These include private organizations, semi-au- barriers to collective action. It is important to raise tonomous and government institutions such as: awareness of the importance of such action and provide solid evidence demonstrating the potential • Star Farms, the Pakistan Microfinance value of collective action to producers. Uncertainty Investment Company, the Pakistan Agricultural related to the policy environment can also negatively Coalition, the Agribusiness Support Fund, the affect farmers’ willingness to take part in collective National Rural Support Program, the Rural action. It creates apprehension amongst farmers as Development Foundation of Pakistan, the Sindh to the future direction of government support and Enterprise Development Fund, the Management choice of policy instruments. and Development Foundation, and the Pakistan 67 Kanji, I. A. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 49 Poverty Alleviation Fund, all of which have expe- partners and implemented in order to provide rience in dealing with small-scale growers and long-term, sustainable funds to the smallholders. businesses in previous programs and in provid- Limited access to affordable finance is a major prob- ing technical support to target groups. lem for smallholders that affects their ability to exploit • Larger institutions such as PwC, Ernst and market-oriented production opportunities and locks Young, and KPMG, have extensive business them into the existing marketing systems. In tradi- development capacities including the assess- tional systems, traders may advance credit to farm- ment of a project’s financial viability, and expe- ers provided the grower repays in cash or kind after rience in issues related to the environmental, harvest. Access to finance is particularly significant at social and governance aspects of investments. the initial stage of an activity because that is usually • Local firms such as seed and input dealers the time when the higher transaction and investment can assist farmers to enhance their crop yields costs for exploiting a new market opportunity occur. by using improved seed varieties and other Projects could assist smallholders in linking them to improved production inputs. Agribusinesses financial institutions, including microfinance institu- such as Engro Fertilizers and other large input tions. But smallholders are considered a high risk by companies can assist stakeholders develop the formal financial sector due to their lack of suitable their business proposals. collateral, which prevents most of them from gaining • Provincial Agriculture Extension departments, the access to the necessary credit. Pakistan Agriculture Research Council, and other public sector organizations could play a role. Access to credit is normally linked to farm size, as • Academics from universities such as the Lahore the land title is the main collateral required by finan- University of Management Sciences or Sukkar cial institutions operating in the agriculture sector. IBA University could be suitable; the University Most banks also do not have experienced loan offi- of Agriculture, Peshawar and the University of cers able to assess the profitability or capacities of Agriculture, Faisalabad both have agribusiness small farmers’ enterprises, or the agriculture sector departments. in general. There is a lack of understanding between • NGOs, such as CNFA, the Aga Khan Foundation, producers and financial institutions about each oth- the Pakistan Rural Support Program, the Sindh er’s requirements. Thus, even if smallholders can Rural Support Organization, and Helvetas have access the formal financial sector, most avail- suitable local experience and could be em- able lending products are not suitable for their ployed to provide technical assistance. investment needs. Business proposals should clearly state the re- Options for providing credit to smallholders and quired levels of technical and business support agribusinesses include: over a proposed period of time. The project team would need to critically assess these requirements • Channeling funds through financial institu- and may need to augment the proposed inputs. For tions such as the Pakistan Credit Guarantee provision of equipment, machinery, infrastructure, etc., Company or the Pakistan Microfinance project teams would need to manage a competitive Investment Company that were established with procurement process and pay directly to the success- donor assistance for the specific purpose of pro- ful tenderers. Alternatively, the project could shortlist viding affordable credit to smaller agribusiness- firms for the supply of goods. Contracted companies es, including producers and investors. Funding should include training support to the alliance stake- from market linkage projects could be provided holders for operating and maintaining the equipment. for credit guarantee programs and/or funding to microfinance institutions for on-lending to If projects disrupt existing sources of credit, target beneficiaries. These umbrella companies then alternatives need to be identified by project share the loan risks with financial institutions en- Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 50 couraging lending and the development of new (e.g., fertilizers) or services (e.g., research and products geared towards collateral-deficient extension) either in the form of vouchers that rep- borrowers. These organizations have expe- resent a certain monetary value or through the rience in dealing with the type of beneficiaries reimbursement of costs once proof is provided of targeted by market linkage projects, and their the transaction. The advantages of vouchers are existing governance arrangements help ensure that users can try a new good or service without sound lending procedures within the participat- the associated investment risk, create access for ing financial institutions. people who do not have sufficient purchasing power, and facilitate a relationship of account- • Projects usually disburse grants to specific ben- ability between the service provider and the eficiary groups operating at any point along the client. For voucher systems to function properly, supply chains. Agricultural innovation grants smallholders must learn to identify and articulate could be used to stimulate private sector and their needs, negotiate with service providers, farmers engagement in activities related to tech- and judge and control the quality of the services. nology generation, technology dissemination and Service providers must have the right skills and overall innovation in a subsector. The process knowledge to deliver the required services. of obtaining and using the grants stimulates smallholders to be more pro-active and critical 4. Prioritize collaboration among producers over towards research and extension providers in- the development of formal organizational struc- stead of being passive recipients of top-down tures. Farmers should decide for themselves wheth- technological recipes. Even more specific are the er they wish to operate together as a formal group farmer-driven agricultural innovation funds that or remain a loose alliance based around a common allow farmers to influence the whole process of economic interest. Projects can assist those farm- research agenda setting (i.e., query generation, ers who may wish to formalize their group struc- prioritization and fund decision-making) and re- ture in response to a market opportunity. Group search execution. Smallholder representatives development is a bottom-up, member-owned, and participate in the governance of the grant fund, democratically operated process (not imposed from giving them the possibility to include the interests outside by governments, projects or NGOs), with of smallholders in the interactions with research transparency in operational rules and management providers and to determine the type of research decisions. Buyers interviewed during research for required for their particular farming needs. the feasibility studies in Punjab and Sindh report- ed that they would be interested in dealing with • Business development matching grants are project-supported producer groups provided they more commonly used by projects and involve can deliver to the buyer’s requirements. Producers business proposals designed to coordinate aggregating their produce helps reduce the buyer’s input provisioning, marketing or added-value transaction costs, and hence larger buyers connect- production. Intermediary organizations need to ed to higher value markets are more interested in help local groups of smallholders and/or agri- dealing with groups of smallholders rather than large businesses to generate feasible business pro- numbers of small suppliers. posals eligible for funding. These grant systems do not focus on a predefined menu of techno- • Social structures, community hierarchies, gen- logical options, and therefore are more flexible der roles and wealth gaps are important factors and functional to promote smallholder and to be considered in producer collective actions. agribusiness specialization in specific markets. • Group size, location, proximity to markets, trust among members, access to finance, • Vouchers are grants provided directly to end technological requirements, access to suitable users to enable them to procure specific goods extension advice, and the capacity of farmers Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 51 to adapt to new systems can be barriers to ects is to maintain a focus on smallholder producers, achieve effective operations and sustainability. while managing an increasingly complex group of • Projects should also focus on building man- actors and facilitating behavioral change within or- agement capacity and group mentoring for as ganizations and in the farms. The market linkage ap- long as possible in order to build competent proach to be expanded should be based on evidence leadership. regarding an assessment of its scalability, efficiency, • Group formation is most successful when effectiveness, financial sustainability, and applicability. farmers perceive that the benefits from collab- This assessment should be documented, accompa- oration outweigh the additional costs of com- nied by lessons learned and articulated in knowledge plying with collective rules and norms. products and possibly operational toolkits that could guide the design and/or implementation work. The 5. Assist farmers to improve their on-farm pro- design of the evaluation should focus on answering: ductivity and production decisions to be more aligned to market demands by: 1. Does the market linkage approach work? Find evidence that demonstrates the ap- • Overcoming the current market information proach is itself contributing to the positive asymmetry by supporting affordable mecha- outcomes gained by the project beneficiaries. nisms for smallholders to access useful, timely 2. How does the intervention work? Understand and transparent market and price information the specific processes and mechanisms through mobile phones that would enable them through which the market linkage interven- to make informed decisions on what, when and tions delivered impact. where to produce and sell. 3. Will the market linkage intervention work in • Developing or improving smallholder-targeted other areas or commodities? Use innova- infrastructure, such as irrigation, small-scale tive and pragmatic approaches to examine centers for processing and packaging, storage whether the intervention can be replicated equipment and facilities to enhance availability, in other locations. For example, identify the food safety, and reduce food losses and waste. market demand, opportunities and con- • Facilitating production diversification to in- straints (e.g., in terms of infrastructure, com- crease resilience to climate change, natural munication technology, prices, etc.), or the disasters, and price shocks, and reduce their interest of the private sector to invest in the seasonal income fluctuations. commodity as a business opportunity. • Capacity building and training of smallholders to adopt innovative technologies and practices Institutionalization (e.g., GAP, GHP) to promote value addition, and the diversification of production and in- 110. Establishing a permanent Project Management come sources. Unit (PMU) is the recommended option for institu- • Facilitating the provision of extension, financial, tionalizing market integration work in the provin- and business development services. cial governments.68 The PMU would be established within the relevant Agriculture Marketing Secretariat of 6. Monitor outcomes from the chosen project inter- each province under a Board of Directors chaired by vention to determine the effectiveness of different the corresponding Secretary of Agriculture Marketing market linkage approaches for a given operational with members from the private sector, NGOs, and the context so that it can be expanded or possibly government. The PMU would be expected to become replicated in other project locations or with other an independent directorate within the Secretariat. The commodities. The challenge for market linkage proj- PMU would consist of the following units: 68 Ali, M. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 52 • Social Mobilization: Collaborates with the National Rural Support Program, the Sindh Rural Support Organization and other NGOs to form producer groups and register them (if applicable); record membership, financial accounts, etc.; and support groups during project implementation. • Implementation: Responsible for daily project operations; identifying technological, value addi- tion, and processing activities for project funding; preparing feasibility studies and implementation plans including investments in equipment, ma- chinery, infrastructure, human resources, capac- ity building and technical support; monitoring investment progress and resolving technical issues. • Market Integration: In charge of identifying op- portunities to link producers with downstream buyers (e.g., processing companies, super- markets, exporters/importers, wholesalers) serving both national and export markets. The unit would establish links with potential buyers, and arrange international trips for capacity build- collect information on market prices, quality and ing of different stakeholders. The training mod- demand trends, find potential new buyers, and ules would be aimed at covering all the relevant communicate with producers. The unit would aspects required for the design and implementa- also be responsible for market promotion and tion of market linkage projects. for linking various commodity stakeholders through national expositions and participation 111. Alternatively, the responsibility for managing in international trade fairs, etc. market linkage projects could be assigned to an already existing government agency such as the • Financing and Administration: Tasked with as- Agriculture Delivery Unit (Punjab), one of the various sisting producers and agribusinesses to obtain semi-autonomous companies or programs already loans from banks, micro-finance institutions, etc. developed in each province during previous donor-sup- so that they can invest in the necessary technol- ported projects, or a combination of these organizations, ogies to exploit an identified market opportunity. particularly those with certain expertise (e.g., financing). The unit would manage any available project For example the Sindh Rural Support Organization, funding (e.g., matching grant schemes) and the Pakistan Microfinance Investment Company, solicit expressions of interest from target bene- the Pakistan Agricultural Coalition, the Agribusiness ficiaries, shortlist applicants, assist the drafting Support Fund, the National Rural Support Program, the of business proposals, monitor investment prog- Rural Development Foundation of Pakistan, the Sindh ress, etc. Enterprise Development Fund, the Management and Development Foundation, and the Pakistan Poverty • Capacity Building: Responsible for training Alleviation Fund all have experience in dealing with producers and agribusinesses according to the small-scale growers, business development, and man- needs identified by the Implementation Unit. It agement of market linkage projects. would also hold workshops and training courses Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 53 Conclusions 112. Present agricultural marketing systems in ment in the local agriculture sector. The current market- Pakistan involve numerous actors performing ing systems in Pakistan have not been able to provide different functions along extended supply chains the consumer with a more diverse food supply, leading that add costs and inefficiencies before reaching to suboptimal nutrition results, and depriving farmers the final consumer. Pakistan’s agricultural marketing from additional income opportunities. In turn, this inhib- is wasteful due to a number of constraints such as poor its agricultural growth. Pakistan needs innovation in its infrastructure, high market margins, poor post-harvest agricultural marketing in order to insert more dynamics management and non-implementation of grades and into the sector. standards. There is a need to modernize and upgrade fresh produce marketing systems by removing these 114. This report has recommended some ap- constraints, adopting market-oriented practices and im- proaches and potential interventions that proj- proved business skills among all stakeholders. Equally, ect partners could utilize to assist the creation/ the ability of producers to supply new markets and meet enhancement of links between farmers and the the commercial realities of modern supply chains needs private sector. Previous public and private initiatives to be critically assessed to determine whether the target in this field have successfully demonstrated the mar- farmers can fulfill the requirements in terms of quality, ket possibilities available to small farmers in Pakistan. quantity, timing of delivery, etc. Promoting formal and complex marketing schemes may not always work for smallholders, particularly when 113. Mechanisms are needed to strengthen the trying to link them to higher value markets. Traditional linkages among government agencies responsible marketing channels certainly have to become more for agribusiness development. The reinforcement of sophisticated if they are to compete with modern food such inter-agency linkages would improve the business supply chains. But they continue to offer considerable enabling environment to encourage more private invest- market opportunities for smallholders, and donors and Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 54 governments can facilitate their improved operation. Even within the more vertically-connected supply sys- tems that have created dynamic industries in Pakistan (e.g., citrus exports, milk and potato processing), these supply systems are still intertwined with traditional mar- keting channels. 115. Market-oriented collective action is most suc- cessful when it overcomes the high transaction costs of farmers acting individually. While farmers may be aware of the potential benefits of such collective action, this awareness may not be enough to overcome their suspicions about working together. Most of the successful direct linkages between the private sector and farmers noted in this report were initiated by the private sector without the formation of producer groups. Therefore, project partners need to be flexible regarding group formation for marketing purposes. The challenge is to determine an effective group size that is big enough to exploit economies of scale and market opportunities without causing conflicts among members or between groups and buyers. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 55 Annex 1. International Experiences Overview of international approaches (e.g., income increases, urbanization), policy changes and best practices in producer (e.g., market liberalization, privatizations), liberalization organization development/ of foreign direct investment, and increased domestic strengthening, value chain investment induced the transformation. The private sec- development and market integration tor led new developments that included an increased concentration in agro-industrial sectors, larger process- of (smallholder) producers ing and retail companies that delivered a ”supermarket Development practitioners aligned their approaches to revolution”, and the spread of fast-food chains. rural development with two major transformations of the agri-food industry. The first transformation began in the Many countries (e.g., Kenya, Malaysia) redefined their food 1950s and involved public sector-driven food system de- security priorities and moved away from their previous velopments with the goal of national food self-sufficiency. strong commitments to food self-sufficiency. The mar- There was a focus mainly on: basic grains and commodity ket-oriented economic reforms, (e.g., structural adjustment markets; wholesalers; public policies (standards, para- programs, multilateral trade liberalization agreements) re- statal marketing boards, extension services, buffer stocks duced cross-border distribution costs and barriers. Foreign and stabilization schemes, subsidies, etc.); spot markets firms often filled supply gaps, which manifested in an in- and fragmented supplier networks; and small shops, wet crease in the share of foreign control, often by multinational markets and central markets. Goods traded were undiffer- companies, in local agri-food sectors. This trend fostered entiated, unprocessed commodities. Later, as the “Green an increasing integration of goods and capital markets Revolution” emerged, input markets became important as around the world, linking farmers in the developing world to the means to provide key support for increased on-farm higher value markets (e.g., North America, Europe). production using improved technologies (e.g., seeds, fer- tilizers, machinery). Development entities focused on es- But rapid economic changes challenge the ability of small- tablishing producer organizations as an efficient means to holder farmers to supply their products to the market and distribute new technologies, technical support and training many have seen their incomes fall relative to manufactur- (e.g., farmer field schools) in order to increase on-farm ing jobs. Tightly coordinated supply chains that are unfa- productivity and production of key staples crops. miliar to most producers have emerged, where a buyer may negotiate a contract with a grower for a specialized The second stage was the liberalization and globaliza- product, grown to strict specifications and packaged in a tion of the agri-food industry that started in the early particular way. This new organization of the supply chains 1980s and continues today. Socioeconomic factors is different to conventional marketing systems that involve Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 56 many intermediaries, and the buyer does not know the market demand and considered within the context of producer. the whole commodity supply chain. Linking producers to (higher value) markets and understanding the busi- Population, income growth and urbanization have in- ness relations in the chain, necessitates private sector duced global changes in consumer demand patterns, involvement from the onset of any project intervention. with a disproportionate growth in demand for dairy, meat, horticultural and processed grain products, as compared Models to the demand for unprocessed staple foods. These changes triggered the rise of vertical coordination in the The relationship between buyers and sellers can be de- food industry via contracts and other market linkage ar- scribed through five types of market linkages: rangements; private grades and standards for food qual- 1) Instant or spot market, where producers come ity and safety; and rapid technological and managerial to sell their commodities, including auctions at change in downstream industries. Rapid technological wholesale market centers change continues to enhance productivity, enabling cus- 2) Contract farming tomized production and marketing processes, all with 3) Long-term, usually informal relationships, char- lower transaction costs. Population aging is also accel- acterized by trust or inter-dependency erating and becoming more pronounced in rural areas. 4) A capital investment by one of the buyers for the Urbanization and aging have important repercussions on benefit of producers, characterized by high lev- the agricultural labor force and the socioeconomic fabric els of producer credibility and dependence (e.g., of rural communities. Most smallholder farmers in devel- out-grower schemes) oping countries have struggled to adapt and reap any 5) A peak company driving vertical coordination available economies of scale. along supply chains The agri-food sector thus became more focused on de- Smallholder farmers are more viable contributors to mod- mand rather than producer-defined agricultural goods, ern agricultural systems when they participate in organi- a global, liberalized and fragmented marketplace with zational models that promote economies of scale and re- high product diversity, stricter food safety and traceabil- duce risks for lenders and buyers. Typical organizational ity requirements, and higher quality standards in con- models of smallholder production and marketing include: junction with the enforcement of basic environmental producer-driven associations (producer groups, cooper- and societal regulations. Meeting the challenges of con- atives); buyer-driven (traders, wholesalers, processors, sumer demand for more processed foods requires in- etc.); facilitator-driven (NGOs, projects, government); and creased investment in equipment, working capital, skills integrated (lead firms, supermarkets, multinationals). and knowledge. Such investments are not only costly for individual businesses, but they also need assuranc- Producer-driven models es from elsewhere in the chain for supplies, produce or markets. Therefore, the need emerges to strengthen the These market linkages include initiatives such as coopera- links and commitments amongst value chain players. tives and farmer-owned businesses that have had a mixed record in providing members access to dynamic markets. Due to the food system transformations, development These producer organizations engage in a wide variety practitioners recognized that traditional approaches of supporting activities, but rarely focus on providing an that concentrated on strengthening farmer production effective marketing channel and often have problems capabilities alone were no longer sufficient to ensure cooperating with agribusinesses. These farmer organiza- sustainable income growth. There is an increasing un- tions are important for enhancing competitiveness and are derstanding that production support must be linked to better able to build on informal linkages in the market.69 69 Negassa, G. J. (2015). Assessment of Market Linkages for Smallholder Farmers of Coffee Producers in the Gihmbi Zone, Ethiopia. International Journal of Scientific and Research Publications, 5:3. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 57 Producer-driven models are mostly present in supply (i) all interventions should be firmly based on mar- chains focused mainly on production over quality such as ket demand and sound market analysis; calorically dense (e.g., rice, potatoes, wheat, and corn) or (ii) marketing skills should be considered as import- high in protein (e.g., meat and poultry) food staples. When ant as technology; producers are organized in groups, associations or coop- (iii) a lead farmer was responsible for analyzing mar- eratives, they can be key players in some value chains. In ket options, making marketing decisions and certain contexts, the group is the driver of development building business relationships: empowering cer- by providing technical assistance, marketing, inputs and tain group members in marketing was critical to linkages to finance thereby earning a higher share of value achieve market responsiveness and overcoming addition along the chain. Through project support, these emerging challenges; groups become strong enough to network, search for (iv) to invest in its business plan, the group first buyers and negotiate contracts. These models are partic- borrowed from a local money lender before es- ularly viable when farmers sell specialized products (e.g., tablishing a savings and loan group that fostered organic rice). resiliency among more men and women to finan- cial shocks; and But it is rare for farmers to self-organize on a formal (v) farmers need to learn the skills that enable them basis, and generally, they need support to build their to strengthen or replicate their new market op- capacity to establish and sustain often complex mar- tions and products, and thus, the extent of skills ket-oriented networks. In India, the government pro- transfer to farmers should be considered as motes ‘Producer Companies’ with supportive legisla- equally important to other traditional indicators tion, but these have been slow to establish, and mainly of project effectiveness based on income and/or concentrate on production and farming inputs, although the number of farmers accessing a new market.71 some have started to organize links to large retailers.70 Producer-driven models face many difficulties: (i) pro- Buyer-driven models ducers may not understand the market needs as well as the post-farm gate players who are closer to the end The modernization of food systems and the emergence user; (ii) unless the groups have strong partners or are of a private sector-led transformation meant agri-food assisted, producers often struggle to get financing and companies needed to control their costs, the flow of pro- establish viable market linkages; (iii) mistrust among duce, and increase quality to strategically position their members; and (iv) lack of business skills. companies in more competitive markets. This entailed a shift from public to private food standards, the vertical Kangazi et al. provide an example of a potato producer coordination of supply chains using contracts and mar- group in Uganda identifying and successfully sustaining ket linkages, and a shift from local sourcing to national, sales of high-quality potatoes under contract to a fast- regional, and global sourcing. Buyers may supply inputs, food outlet (Nandos) in Kampala. Farmers, supported arrange credit, mechanization services, and technological by an NGO service provider, needed to learn new skills or extension advice. By linking with buyers in advance of and integrate multiple technical, organizational, financial production, farmers can have a more assured market and and marketing innovations. Their collective action, com- often an agreed price. This model is particularly appealing bined with strong leadership and an iterative market-led when a private company can be identified and selected learning process, enabled them to meet the stringent at project design to become part of the project from the quality parameters of a modern food outlet. Some mar- start and/or when the identified intervention needs a pri- ket linking lessons included: vate partner willing to invest significantly in processing.72 70 Wiggins, S., and Compton, J. (2016). Factors leading to Agricultural Production Aggregation and Facilitation of the Linkage of Farmers to Remunerative Markets. 71 Kaganzi, E., Ferris, S., Barham, J., Abenakyo, A., Sanginga, P. and Njuki, J. (2009). Sustaining linkages to high value markets through collective action in Uganda. Food Policy 34. 72 IFAD (2015). Sustainable Inclusion of Smallholders in Agricultural Value Chains. Scaling up note. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 58 Contract Farming BOX 5. Agri-food companies place a degree of control over qual- Northern Foods Corporation is a food proces- ity and delivery, proxied by the use of simple contracts sor based in the Philippines which contracts (specifying price and quantity) versus more complete small farmers to produce tomatoes for paste contracts that specify input types, delivery schedules, that the company then sells to end users such quality standards and provision of inputs. The latter help as fish canners, sauce manufacturers and address small farmers’ constraints regarding access to fast-food chains. To ensure the quality of the credit, farm inputs, extension, and output procurement. produce, the company provides inputs and These ‘full service’ contracts are most useful for down- technical support to farmers. The benefits for stream operators in high value, fresh produce markets each partner include: (i) shortened supply (fruit, vegetables, dairy, aquaculture); where there are chains and reduced costs of production; (ii) no large farmers; or where they wish to broaden their technical assistance for farmers, improved supply base beyond the limited large-farm base into input supplies and protected prices; (iii) re- the masses of small farmers, while meeting increasingly duced post-harvest spoilage as tomatoes are strict private standards for quality and safety. immediately forwarded to the processor fol- lowing harvest; (iv) assured supply of raw materials for processing; and (v) minimized The types of contracts are also dependent on the de- dependency on imported tomato paste.74 mand for the product, locally or internationally. Where farmers have a choice between downstream partners, they have scope for bargaining the contract attributes (e.g., farmers negotiate to buy and use their own inputs • Access to appropriate input supplies in a timely rather than the inputs provided by the buyer). Where fashion. there is less demand, contracts are more inflexible, and • Increased access and reliability in the procure- the buyer determines the type of contract. ment of raw produce of desired quality for buyers. • Opportunity for lower input costs due to im- Mitigating risk is one of the most important reasons for proved planning and economies of scale. contracting. Companies seeking to develop contract • Enhanced access to credit despite a lack of farming arrangements with farmers, need to address collateral. how those farmers can fund their start-up and ongo- • Support in the development and achievement of ing costs. Contracting companies often provide inputs quality standards and certification. and mechanization services on credit, particularly when • Provision of market-focused technical training they are confident that farmers will deliver their harvest and assistance. to them. In unforeseen circumstances, flexible contract • Potential advancement of positive relationships arrangements with the potential for renegotiation are and increase in trust. desirable. Ideally, contracts should be viewed as tangi- ble proof of business rules that are based primarily on Challenges and risks: trust and information transparency.73 • Reliance on a single buyer who could fail or lose interest (market changes, bankruptcy, etc.). Some of the benefits and challenges of contract farming • Side-selling by farmers. include: • Cost to the buyer of contract management. • Enforcement of contractual obligations by either Benefits: party. • Access to secure markets and prices for • Regulatory environment for contracts and their producers. enforcement. 73 Miller, C. and Jones, L. (2010). Agricultural Value Chain Finance. Tools and Lessons Learned. Practical Action Publishing. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 59 • Tendency to favor larger farmers due to lower (demand side) out-grower schemes. Complying with transaction costs and their stronger asset base. GlobalG.A.P. is a major challenge as growers need to • Lack of technical capacity to develop viable reach the standards demanded by high value markets value chains, especially involving small farmers. (e.g., European Union). While start-up costs are a bar- rier to adoption, recurrent costs can also threaten sus- Critical factors for effective contract farming include: tainability. The analysis showed that: • Mutual benefits for both parties – synergy, mutu- • support by donors and exporters in training, al trust and reciprocal dependency. financing and managerial support was critical • Creation of an enabling environment. to enable growers to meet the requirements of • Minimizing transaction costs and bottlenecks international food quality standards, when dealing with multiple contracting parties • while farmers in donor-managed groups were 40 (e.g., collaboration with producer groups, busi- percent more likely to adopt GlobalG.A.P., they ness service providers/facilitators). were also likely to drop out of certification after • Appropriate consideration of production and donor support was discontinued, marketing risks in the design of contracts. • out-grower partnerships with exporters were • Careful selection of the enterprise (high value more likely to remain viable because exporters commodities, processed goods and export-ori- had a vested interest in the GlobalG.A.P. certif- ented enterprises have demonstrated most suc- icate, and most exporter-managed out-growers cess). The scheme has to generate acceptable were supported to renew their certificate each returns to growers and contracting firms, and year.75 therefore, it helps when the contracting firm has access to a market that pays premium prices. Lead Farmer • Credit provisions, as necessary, to small produc- ers for initial investments and ongoing costs. One variation of an out-grower scheme is the lead farm- • The provision of technical assistance implies that er model where high-performing farmers in a communi- the contracting firm has a long-term commitment ty influence the decisions of other farmers. In plantation to making the scheme work, has invested in the crops, a company may operate its own plantation ad- processing plant and in relations with its custom- jacent to the processing plant and supplement its pro- ers in distant places, versus traders with minimal duction by contracting out-grower suppliers. A compa- investments looking for short-term gains. ny or facilitator usually identifies and builds the capacity • Clear quality standards are understood at all of those farmers most capable of consistently meeting levels.74 the targeted product quality requirements. Once they demonstrate such capacity, lead farmers receive new Out-grower Schemes or larger product orders and are encouraged to work with neighboring farmers to meet this demand. The lead Out-grower schemes are a form of contract farming farmer thus serves as a node in providing technology, without growers tightly integrated into a value chain technical assistance and market access. through a relationship with a large-scale, often ex- port-oriented company. Kersting and Wollni (2012) ana- Ba et al. (2019) analyzed rice markets in several Asian lyzed the different institutional arrangements that could countries where supply chains are fragmented with be implemented in the Thai fruit and vegetable subsec- arm’s length transactions, numerous middlemen, and tor to obtain the GlobalG.A.P. certification: farmer- or little coordination. They concluded that horizontal co- donor-managed (supply side) versus exporter-managed ordination of smallholders either through government or 74 Miller, C., et al. (2010). 75 Kersting, S. and Wollni, M. (2012). New Institutional Arrangements and Standard Adoption: Evidence from Small-Scale Fruit and Vegetable Farmers in Thailand. Food Policy:37. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 60 project interventions under increasing levels of vertical Traditional coordination, can potentially reverse contract bias to- wards larger producers. Projects may invest in strength- Traders directly interact with farmers, either buying from ening farmer organizations more efficiently through them at local markets or at the farm gate. In these sys- selected lead farmers that promote farmer-to-farmer tems, traders connect low-resource endowed farmers learning. Some of their observations were: to markets, while providing them with funds for harvest- ing, inputs or other needs, such as family emergencies. • Farmer-to-farmer extension offers an option for Traders endeavor to buy sufficient quantities to achieve technology dissemination, firstly from the trained economies of scale, with transport being their greatest lead farmers to those farmers who have social cost. Alternately, purchases at the village level can often ties with them, and then to other farmers through be inefficient, add extra layers to the supply chain and plot proximity. contribute to high marketing costs and retail prices. • Ensuring selection of quality lead farmers: while Such costs can be reduced if farmers work together to a community-based participatory selection pro- bulk their produce at one location for purchase by one cess helps choose a representative of the av- or more traders. erage farmer in the community, the lead farmer also needs to be progressive and willing to try Traders often set prices without knowing the market new practices. price or the quality of the produce at the time of deliv- • Maintaining and incentivizing lead farmers: lead ery. The prices offered tend to be low to mitigate the farmers need continuous support in order to risk to the trader (who may have advanced credit to have sufficient mobility and incentives to keep many farmers) and therefore are often disadvantageous promoting the technology supported by the to farmers. This strategy contributes to the perception project. that traders are dishonest and exploit information-poor • Regular training: lead farmers need training and smallholders and consumers through monopolistic pric- retraining on value chain concepts, communica- ing and usury. Such a belief is often used as a justifica- tion, and agricultural management; farm demon- tion for strengthening government interventions in the strations need to be continuously supported so markets. However, middlemen are often tied to credit that new technology can be absorbed.76 and social welfare support in communities that could be geographically isolated, and/or politically and eco- A vegetable farming group of 72 members in Chiang nomically marginalized. Also, they are often prominent Mai, Thailand, supplies a variety of fresh vegetables to community members, growing the same products as two supermarkets and a university shop. The group’s their suppliers. Thus, market linkages through traders chairman acts as the buyer and has supplied the super- provide a type of cooperation among farmers that could market chain for more than 15 years without a contract. be a basis for a more formal structure. The chairman must carefully determine the right quanti- ty to deliver each day to avoid losses. Fruit is inspected Bailey, et al. (2016) assessed the existing value chain piece by piece for quality and freshness, leading to high relations centered around the role of middlemen in rejection rates that are returned to growers. Each mem- fishing communities of the Moluccas, Indonesia and ber’s code is included on bag labels for traceability. The the efforts to bypass them by introducing Fair Trade case provides an example of a leading farmer, trusted certification. Middlemen play a key role in aggregating by the others, acting as a trader, to the benefit of all fish to sell to downstream actors, and often control local group members.77 financial systems but are stigmatized as rent-seeking actors who keep fisherfolk poor by limiting their ability 76 Ba, H., de Mey, Y., Thoron, S. and Demont, M. (2019). Inclusiveness of Contract Farming Along the Vertical Coordination Continuum: Evidence from the Vietnamese Rice Sector. Land Use Policy: 87. 77 Shepherd, A. (2007). Approaches to Linking Producers to Markets: A Review of Experiences to Date. Agricultural Marketing, Management and Finance Occasional Paper 13. FAO. Rome. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 61 to venture into new (value chain) functions. Middlemen at commencement with specific conditions on quality, provide credit at the start of each season and through- quantity and timing of delivery. Some lessons learned out the fishing season to cover unforeseen costs, often from Productive Alliance projects include: as interest-free loans thus, mitigating much of the risk for local fisherfolk. Collective actions that bypass mid- • Farmers from a community with a background of dlemen would allow fisherfolk to control their sales and strong collective work and social cohesion per- potentially obtain higher margins on their produce. Yet, form better than groups with weaker links among the assessment concluded that: members. • Identifying and analyzing promising value chains • Balancing the facilitative and exploitative role of based on technical criteria, aligned with project middlemen in traditional value chains is com- objectives and market potential, is important plicated but pretending that middlemen are ex- to ensure effectiveness and sustainability. High pendable is a necessary first step. value products such as fruits (including cocoa • Increasing the value that the producer gets for its and coffee), dairy, and horticulture delivered the produce by shortening supply chains may come most effective results. at a higher overall risk and vulnerability to the • It is preferable to focus on farmers who have community, as it was unclear whether produc- potential to engage in modern and dynamic er groups can replicate the same risk reduction markets rather than a welfare-oriented approach functions provided by middlemen. targeting subsistence-level producers. • Upgrading skills and functions should not be • Establishing a competitive and transparent grant understood only in economic terms but should selection process based on clearly defined eval- also include the often complex social and cultural uation criteria is crucial for establishing credibility interactions between industry actors.78 among stakeholders, avoiding political interfer- ence, and safeguarding the technical quality of Productive Alliance successful applications. • Grants aimed at linking smallholders to higher A Productive Alliance is any form of collaborative arrange- value markets have had limited success in lever- ment between small producer groups and an agribusi- aging funding from the finance sector to support ness firm, aimed at reducing the technical, commercial, business plans.80 financial and/or social risks associated with the pursuit of potential income gains. The promotion and funding The establishment of any alliance between producers of such alliances in World Bank projects started in the and a single or limited number of buyers is risky. If the early 2000s primarily in Latin American and Caribbean buyer has difficulties or is forced to close his operations, countries,79 but the approach has since expanded to this will create a cascading impact throughout the net- other regions. Working in groups can help producers work of suppliers in the Productive Alliance. For example: link to higher value markets, benefit from economies of scale and share technical knowledge, production • IFC invested in Pearl Dairy, a major dairy pro- and marketing practices thus, enhancing productivity cessor in Uganda, to increase the company’s and reducing transaction costs. Producers develop a processing capacity with an accompanying business plan in collaboration with private partners and expanded milk collection system. A network of the project funds eligible applicants chosen through a supplying farmers was established by the dairy thorough selection process. A contract is usually signed firm. But due to COVID and a trade dispute 78 Bailey, M., Bush, S., Oosterveer, P. and Larastiti, L. (2016). Fishers, Fair Trade, and Finding Middle Ground. Fisheries Research 182. 79 World Bank (2016). Linking Farmers to Markets through Productive Alliances: An Assessment of the World Bank Experience in Latin America. Washington. 80 De Salvo, C. (2014). Productive Alliances in Latin America and the Caribbean. A Review. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 62 between Uganda and Kenya, the destination of most of the company’s produce exports, the BOX 6. factory was forced to close down. The affiliated Engro Foods operates the largest UHT Milk milk suppliers had no other similar outlet and supply chain in Pakistan through a network sold onto local markets, leading to a 30 percent of 43,000 farmers and 1,500 Milk Collection drop in milk prices. Centers (MCC), although it still depends on • IFC financed a beef slaughtering and export fa- middlemen to deliver about 35 percent of the cility in Madagascar. Farmer organizations were daily requirements of its milk processing plant established to promote increased production in Sahiwal, Punjab. Engro employs specialists and to supply cattle to the facility. However, in (veterinarians, livestock nutritionists, etc.) and the four years since the IFC investment, there affiliated input suppliers to support farmers have been no exports, and farmers who invested so that they can meet the company’s require- in production intensification have been unable to ments regarding animal housing, feeding, recoup their funds. breeding, health and welfare. The company owns and manages all MCCs in order to ensure The main implication is that to facilitate productive the quality standards of the milk delivered to its processing factories. Farmers are immedi- alliances, partners need to be carefully selected, with ately paid via electronic transfers once their emphasis on including operational and experienced milk is accepted by the MCC manager. Engro business partners.81 provides concentrated support to its small- holder suppliers for one year before their op- Vertical Integration erations staff take over the extension duties. Vertically-integrated companies control large portions, if not all, of the supply chain. Examples of some of the requirements. Smallholders unable to adapt to this new larger agri-food companies in Asia vertically coordinat- reality are marginalized and confined to local markets. ing their supply chains include: CP (Thailand, chicken), PepsiCo (Pakistan, potato), Mars (Indonesia, cocoa) and The agro-processing company contracts describe in Nestle (Pakistan, dairy). Many mid-sized agribusinesses advance the amounts and quality of inputs, volumes and larger local supermarket chains are also working to to be harvested, quality and grading standards, prices, fully integrate their local suppliers, particularly for fresh and expected delivery schedules. The company sup- produce, into their procurement networks. ports its producers to varying degrees with specialized extension services, input service provision (e.g., nutri- Increasing urbanization, changing consumer preferences tion, veterinary, agronomy, cold storage) and some- and eating habits, increased infrastructure development, times financing, in order for growers to implement the and low margins have led to the consolidation of food correct production practices. Trifkovic (2016) observed supply chains and to quality-based competition amongst that integrated farmers had higher yields and revenue a smaller number of buyers. The competitive advantage per hectare than independent farmers in the Vietnamese increasingly lies in more specialized products that allow catfish export industry. Processing companies could market leaders to distinguish themselves from competi- better manage the production process with integrated tors and cater to premium-paying consumers with more growers by providing: better production advice, credit demanding preferences. To facilitate traceability and en- and key inputs (such as feed), access to timely services sure food safety and quality, lead companies deal with (such as veterinary care to manage disease outbreaks), a small group of preferred, generally large-scale suppli- and better infrastructure (such as dams that do not ers capable of meeting the firms’ stringent (and costly) overflow in the rainy season).82 81 Bellinguez, A. et al. (2021). 82 Trifkovic, N. (2016). Vertical Coordination and Farm Performance: Evidence from the Catfish Sector in Vietnam. Agricultural Economics 47. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 63 What is the international experience Group formation is most successful when farmers per- with different value chain development/ ceive that the economic benefits from group activities producer market integration outweigh any additional costs. Project teams should approaches in the respective sectors clearly identify these potential benefits early in any project analyzed (livestock, fisheries/ area and target commodity before beginning the group aquaculture, fruits/vegetables/crops)? formation process. Too often, projects focus undue amounts of time and resources establishing groups Smallholder farmers usually operate in unorganized and and their legal status while paying scant regard to the informal supply chains characterized by: economic imperative. Therefore, project teams need to • dispersed production with small volumes; develop and enhance the economic performance of a • poor product handling and post-harvest practices; group, both through production intensification and mar- • need for transport, storage, processing and keting improvement, while at the same time working on packaging; the institutional and organizational aspects of the group • informality of markets, without price and market formation process. These economic benefits must be information; sustainable and not derived from membership entitling • price distortions; farmers to subsidized assistance. • need for financing at all levels. Group development should be a bottom-up, mem- These supply chains need to be organized, shortened, ber-owned and democratically operated process (not and modernized in order to increase incomes. To achieve imposed from outside by governments, projects, or these objectives, development agencies generally con- NGOs). Therefore, formal groups will require a set of sider that producer groups are the most efficient means rules and regulations, or by-laws, to govern their op- to support farmers to transition from a production-led to erations. Farmers’ commitment to a group is also likely a more market-oriented farming system. Through group to be directly related to whether they perceive that the membership: benefits of compliance outweigh the costs. Similarly, group members should decide whether they wish to • Farmers can access extension and inputs more formally register their group or if they want it to remain easily, improve the quality of their produce, increase a loose formation. Without sufficient leadership and their productivity, achieve economies of scale, and management skills, producer groups are bound to fail. increase their bargaining power with buyers. Likewise, a group needs to have a business orientation • For projects, government agencies and compa- from the onset. Providing project support and mentor- nies, the provision of credit, technical support, ing for as long as possible is critical but cannot guar- and inputs is easier when done through produc- antee sustainability. Where there are doubts about the er groups, which can reinforce peer pressure ability of farmers, even with training, to manage their to discourage non-compliance with any of the business-oriented groups, then alternative approaches group’s obligations. should be considered for linking farmers to markets. While farmers may be aware of the potential benefits of Social structures are important for the effectiveness collective action, this awareness may not be sufficient of producer groups. Community hierarchies, gender to overcome their suspicions about working together. roles in local agriculture and wealth gaps are important Therefore, a group’s marketing success is often easier considerations when developing groups. Larger groups when farmers normally collaborate (e.g., neighbor har- (more than 30 members) seem to require more external vest assistance), or where they have participated in pre- support than groups of around 20-30 members.83 The vious collaborations (e.g., savings and loans groups). challenge for projects is to determine an effective group 83 Coulter, J. (2006). Farmer Group Enterprises and the Marketing of Staple Food Commodities. Paper presented to CAPRI Research Workshop on Collective Action and Market Access for Smallholders. Colombia. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 64 size where: (i) economies of scale can be exploited and Therefore, it is important to confirm from the onset that market opportunities identified without causing con- farmers will be able to meet the requirements of the flicts; (ii) the benefits for individual members are greater identified buyers. than their costs of compliance with collective rules and norms; and (iii) benefits are evenly distributed amongst Farmers tend to be risk averse. But supplying to pro- all members without elite groups capturing the bulk of cessors or retailers in higher value markets probably the benefits. requires a willingness to make risky investments in production and post-harvest equipment, to plant new Key Lessons of Success and crops or varieties, to follow approved crop rotation practices and to concentrate on fewer crops. In many Failure of These Approaches cases, farmers need considerable trust to make as- set-specific investments or to accept the required debt. The choice of product to promote must be based on Therefore, any improved technologies promoted by the market demand. But demand alone is not always suffi- projects need to be viable for the targeted farmer group cient to make the product suitable for all target farmers. and should not excessively increase the vulnerability of The choice of produce must also consider the farmers’ farmers to external shocks. location, assets, education level and social structure, the available infrastructure, the farm size, the agronomic Work within existing marketing suitability of the land, the likelihood of pests and disease, systems the farmers’ capacity to establish new enterprises, their access to finance and the capacity to use that finance Many project stakeholders remain hostile towards the profitably, technological requirements, access to suit- private sector and suspicious of the motivations of mid- able extension advice, and the capacity of farmers to dlemen, wholesalers, etc. To shorten supply chains and adapt to new systems (e.g., adopting a novel grading provide higher returns to farmers, stakeholders often system in order to receive premium payments). try to establish parallel, farmer-controlled marketing organizations to compete with the private sector. But Change producer perspectives it may be unrealistic to expect farmers to become in- volved in a range of value-adding activities, including From the farmers’ perspective, the lack of, or inade- produce preparation and processing, storage, transport quate access to, production or post-harvest technol- and sometimes, retail sales. Therefore, it is question- ogy, market information, and alternative buyers, limits able whether vertical integration of this type should be their negotiating or bargaining skills and is a consider- promoted as most farmers are unlikely to ever have the able constraint to initiating market linkages. Therefore, capacity to manage the entire supply chain; and even business models need to be kept as simple as possible if they could manage all tasks, would such a move be and worst-case scenarios reviewed from the onset. profitable for them? Producing for the market requires a completely different Additionally, farmers often have informal credit linkages approach to the occasional sale of subsistence surplus- with traders and bypassing them could mean that proj- es. Farmers need to supply on a consistent and reliable ect stakeholders would not only have to develop new basis. Processing factories require a reliable supply of marketing channels but also identify new credit sources. raw materials and supermarkets need to have a full The existing social capital between farmers and trad- range of produce available for their customers at all ers provides a powerful incentive to strengthen these times. Small-scale farmers face difficulties in providing a relationships. Many traders have the capacities and will- consistent supply, even before meeting stringent safety ingness to learn new skills in order to collaborate with standards and good commercial practices. Farmers farmers in a low-cost and culturally appropriate manner. must accept that a percentage of their produce will be They can advise on improved post-harvest techniques rejected, and they will need alternative selling outlets. (e.g., quality issues) and on methods to increase supply Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 65 and/or reduce transactions costs. Therefore, develop- funds. Most cases of successful collective marketing ment practitioners should improve their communication highlight the crucial role of business service providers with the private sector in order to better understand who facilitate collective action, provide information and how private companies operate in the targeted value technical assistance, and build the capacity of a group chain, their constraints and costs, and where a project to effectively engage in marketing activities.84 intervention could have the greatest impact for the ben- efit of all chain players. Farmer groups or outside facilitators (e.g., NGOs) can often develop the linkages with a local retailer, restaurant Producer organizations supported by the private sector or processor. But more sophisticated linkages (e.g., su- usually deliver more effective and sustainable results. permarkets) may require support from several facilitators. But this often means that the participating company will For example, donors provide technical inputs; NGOs have to go beyond commerce and enter into develop- may work with farmers in different production areas; an- ment. This may entail the establishment of a research other agency may complete market studies and/or work department, extension services, field trials and farmer with processors; government agencies will play a role; training—areas where a market linkage project could and a financial institution may be involved. The weakest support chain development. links determine the vulnerability of the supply chain and the related financial outcomes. While agency specializa- Facilitation tion can be advantageous, there are risks associated with the continued involvement of all parties, such as the While most development stakeholders acknowledge a potential for conflict or a lack of focus. key role for the private sector in rural development, a major weakness remains the lack of commercial skills For example, numerous public and private stakehold- at the local level to advise farmers on new business ap- ers collaborated in a complex partnership to improve proaches for their enterprises. This is another potential aquaculture practices in the shrimp industry in Southern project entry point: training local governments, farmers Thailand. The value chain involved: and civil society on business skills such as enterprise management, contract negotiation, market research, • The Ta Chin Shrimp Farmers’ Cooperative which conflict resolution, supply chain analysis, use of basic manages contract farming, prepares shrimp business skills (e.g., book-keeping), and farm enterprise farm plans, trains farmers, coordinates financing, decision tools, such as crop budgets. and manages traceability. • The Bank for Agriculture and Agricultural Common intermediaries facilitating market linkages are Cooperatives which provides credit services. NGOs and private service providers who bring value • The provincial fisheries offices which manage the chain players together, provide services (e.g., capacity food safety standards and certification system. building of farmers, information and sourcing to private • The Coastal Fisheries Research and Development companies, networking between the parties), broker Center which monitors food safety and certifies and monitor linkages. Farmer groups need assistance exports. to make decisions about whether to accept any risk • The Coastal Aquaculture Station which transfers associated with linking to higher value markets. Project technology and diagnoses disease. resources, therefore, could facilitate the process of busi- • The Ministry of Agriculture and Cooperatives ness development. Grants to enable groups to assess which provides capacity building to cooper- local markets, prepare business plans, trial particular ative members in business management and products, and strengthen their skills in areas such as technology. group management, book-keeping and post-harvest • The provincial commerce offices which support handling are usually effective uses of development marketing. 84 Markelova, H., Meinzen-Dick, R., Hellin, J. and Dohrn, S. (2009). Collective Action for Smallholder Market Access. Food Policy 34. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 66 • The agricultural marketing cooperatives which the crop/fish. But to replace these traditional models provide inputs and shrimp feed. is difficult because in most rural areas there are few, if • Pac Foods and Union Frozen Products which any, specialized financial institutions prepared to lend to purchase shrimp for processing. farmers/fishers. As most development organizations no • Farmers who produce shrimp according to regu- longer provide direct credit to producers, market linking lations and requirements.85 projects need to partner with microfinance organiza- tions, banks, inputs suppliers or agribusinesses that can Build trust act as credit intermediaries and thus, carry some of the risk involved in dealing with primary producers. Linkages with higher value markets usually involve trans- actions between remote parties who have had little or Some of the critical challenges for providing agricultural no prior contact. The lack of social obligations or the finance include: a) disconnected value chains, b) the underlying trust of traditional systems, often means that banking sector’s lack of understanding of agriculture, neither party has a strong social incentive to honor an c) the perceived high risks, d) an absence of collater- agreement despite compelling economic reasons. To al, e) complex loan assessment processes, and f) high help build trust, projects can facilitate meetings between transaction costs for both the lender and the borrower. buyers and farmers, support companies to provide The gap between the financing needs of value chain prompt payments to their suppliers, and strengthen the groups and financial institutions may not be due to a partners’ commitment to the business (e.g., by assisting lack of funds by the financiers, but rather a lack of: companies to invest in key infrastructure such as milk collection centers, warehouses, cool storage units, etc.). • understanding by financial service providers of how to provide appropriate financing products to Side-selling by farmers creates mistrust and often leads the chain players; and to companies losing interest in developing sustainable • well-developed value chains and strong, relationships. For farmers with limited income-earning op- connected value chain partners with invest- portunities and usually in need of cash, side-selling makes ment-ready plans for financing. sense despite damaging the possibility a long-term arrangement with a reliable buyer, if that buyer appears Development practitioners and governments can make to be paying lower prices. Project teams need to devote a difference. Value chain projects are increasing the use considerable effort to develop trust between the various of insurance, guarantee schemes, price hedging and parties. If projects pursue the contract farming option storage (e.g., warehouse receipt schemes), and ICT to as a means to link farmers to high value markets, then lower transaction costs. Collaboration between value contracts should allow for renegotiation if prices or costs chain partners helps reduce the risks associated with change excessively and, perhaps, allow farmers to sell a production, and contributes to develop the marketing, small percentage of their produce on the open market. technical, organizational and management capacities that can entice financial institutions to be more active in Finance this type of financing. From the onset, project designers and team members must consider the availability of Limited access to affordable finance is a major prob- suitable financial arrangements for smallholders to meet lem for producers that affects their ability to exploit start-up costs, infrastructure investments, etc. market-oriented production opportunities. In traditional systems, traders may advance credit to farmers so that Enabling environment they can purchase inputs, plant their crops, or stock their ponds or fish during the season. The trader expects Governments often move beyond business facilitation repayment in cash or kind once the producer harvests towards decisions about agribusiness investment, fre- 85 Miller, et al. (2010). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 67 quently based on political rather than economic criteria, • Risk sharing support. Incentive-based, risk-shar- which can distort markets. The government’s provision ing systems through loan guarantee support, in- for key inputs can also undermine commercial service surance, technical assistance, loan appraisal im- providers (e.g., finance, input suppliers). However, when provements, promotion of inclusive value chains markets fail to deliver, governments can play a key development and market access activities. service provision role (e.g., affordable finance to small agribusinesses). Have such approaches worked primarily with individual or organized producers? Some examples of areas where governments can play Is there conclusive evidence on the an active role to promote a more business-oriented ag- benefits of either way to operate? riculture sector include: International evidence is imperfect and inconclusive re- • Contract farming agreements. Businesses need garding the effectiveness of working with individuals or certainty that they are dealing with legally recog- with producer groups. Smallholders can benefit from ag- nized groups and that the laws are enforceable. gregation through collective action and contracting, either Conversely, farmer groups will never be able to by gaining access to markets where premium prices are bear the legal costs of contesting large compa- paid, through economies of scale in the supply chain, or nies. Therefore, governments can play an arbi- from having more bargaining power with buyers. Under tration role by establishing independent bodies, contracts, they may gain from more predictable prices e.g., academics to resolve issues. (although this can be disadvantageous when the price • Traditional land tenure systems may provide little at harvest time is less than the spot market price). Most incentive for farmers to invest in the necessary im- projects involving smallholder aggregation schemes provements to exploit market opportunities (e.g., include additional services to marketing, aimed at ben- irrigation, infrastructure) and comply with quality efiting farmers such as access to inputs on credit or standards. Lack of secure tenure also precludes technical assistance that allows them to grow crops of a small farmers from accessing collateralized higher standard, new higher value crops, or deploy more loans, obtaining water rights, etc. Governments productive technologies. These gains may outweigh can work, for example, on a more robust legal any consideration regarding prices or market access. regime for land tenure or an improved/expanded Therefore, the question is not whether marketing through land property registry. farmer organizations or through individuals is more effec- • Quality control. Effective regulations relating to tive, but under what conditions this happens. pesticide use, food standards, seed quality, food quality, etc. help direct all value chain players to A standard means of replicating successful approaches abide by industry standards. for linking farmers to markets at low cost, for the benefit • Rural infrastructure and support services. of a large number of farmers does not yet exist. Whether Provision of reliable power and water supplies, market linking interventions were more successful when promotion of competition among private phone dealing with organized producer groups or individuals is networks, investment in rural market infrastruc- dependent on multiple factors. Some lessons learned ture including feeder roads and fresh produce include: assembly points, extension support (public or private, remote sensing support, etc.), improve- (i) Replicating or expanding a project intervention ment of rural stakeholders’ marketing skills, should proceed from some initial point of success coordination of research and development with when an enterprise cycle has proven profitable. industry and academia, etc. (ii) But what is successful in one location will not • Research innovation support. necessarily be successful elsewhere, even in • Banking regulations that permit the application of neighboring areas—it is not enough to simply new financial products and technologies. duplicate an activity. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 68 (iii) Project teams need to understand the dynamics seem to improve with closer proximity to markets (e.g., of the target community and value chain players, peri-urban zones).87 Businesses are likely to be more and activities should be adapted accordingly. confident about linking with farmers if some have a demonstrated capacity to produce commercially. Thus, National and export markets may offer higher returns, project interventions may be more effective by initially but they also present greater challenges in terms of targeting better-endowed farmers before moving into quality control, transport and market risks. Producer other project areas. groups were thus, more successful when targeting sales of perishable and potentially high value products (fruit, vegetables, dairy and aquaculture) to higher value markets compared to grain staples which farmers can easily sell locally and thus, do not offer sufficient returns to offset the organizational costs.86 Smallholders face many problems when dealing with the commercial realities of modern food supply chains. Development partners need to be cognizant and de- cisive regarding linkages if farmers or fisherfolk cannot meet the identified market demand. Project teams should start with detailed assessments of the buyers’ requirements among target commodities in terms of quality, quantity, timing of delivery, etc. They need to critically assess the capacity of the target producers to meet those requirements and/or the time required to develop such capacity to ensure sustainable operations. Where farmer skills, resources and societal norms within the targeted community fail to meet those commercial requirements, either alternative products for those farm- ers need to be identified or, other more capable farmers have to be supported to supply the market demand. The bottom line is to avoid increasing the risk burden of smallholders. A “pro-poor” project approach may not align with commercial realities. Business development is not syn- onymous with social policy; commercial requirements will likely override some equity concerns in order to be sustainable. Market-oriented farmers face difficulties to successfully enter more sophisticated but higher value markets (although the task for smallholder farmers in remote areas, with limited skills and finance, may be al- most impossible). A number of studies has demonstrat- ed that both marketing success and group performance 86 Shiferaw, B., Hellin, J. and Muricho, G. (2011). Improving Market Access and Agricultural Productivity Growth in Africa: What Role for Producer Organizations and Collective Action Institutions? Food Security 3. 87 Santacoloma, P., Suárez, R. and Riveros, H. (2005). Strengthening Agribusiness Linkages with Small-Scale Farmers – Case Studies in Latin America and the Caribbean. Occasional Paper 4. FAO, Rome. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 69 Annex 2. Risks of Elite Capture There is a possibility that collective action approaches to ment employment (full-time farmer), no political affiliation, marketing will be subverted and deflected from its intend- etc. to avoid conflicts of interest. ed purpose due to the risk of creating and reinforcing an opportunistic rent-seeking elite (e.g., allocation of fishing The assessment process should include a verifica- licenses in public waters in Sindh and exploitation of tion visit by a project team member to the applicant’s smaller fisherfolk in coastal and inland waterways).88 The premises to check the validity of the proposal and that risk of misappropriation of aid resources by unscrupulous it meets the project’s eligibility criteria. If the applicant leaders is aggravated when educated and well-connect- meets all the criteria and presents a sound business ed persons usually with an urban background succeed case for investment, then an independent committee in gaining access to leadership positions in village-level of public and private officials can be the final arbiter in groups eligible for project support. These persons, acting the selection and allocation process of financial support. as ‘development brokers’, have been quick to under- The successful applicant would sign a contract with a stand that the implementation of collective action has be- government partner to formalize the funding allocation. come one of the best means of procuring funds from the international community, negatively impacting non-elites If a project utilizes a producer group or lead farmer ap- or the project target beneficiaries. proach for linking smallholders to markets, then promi- nent community members may be democratically elected Projects need to have competitive and transparent eval- to leadership roles by group members or project benefi- uation processes when assessing business proposals to ciaries. This raises the potential for the aforementioned mitigate outside interference and provide confidence to all elites to subvert project largess for their own purposes, to grant applicants that their proposals are being evaluated the detriment of other group members or project benefi- fairly. The management of funds for project beneficiaries, ciaries. Therefore, it is essential that the negotiation of the while being the responsibility of the government, should contract for financial support between the government be at arms-length of government agencies (i.e., through and the group includes performance targets and results a non-government entity acting as the managing partner indicators for the release of funds. Equally important is to and which follows agreed governance procedures for monitor key performance indicators and the allocation of assessing business proposals). The project can specify project funds to the group or beneficiaries to determine criteria limitations based on farmers’ wealth, farm size, whether the project’s support is delivering equal benefits group size, cultivation level of certain crops, non-govern- to all group members and target beneficiaries as agreed.  88 Kanji, I. A. (2022). Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 70 Annex 3. Current Options for Registering Producer Groups in Pakistan Producer organizations would owned and managed provisions, health safety and environmental issues, by their members, who would primarily be smallholder and transactions with connected persons. Companies farmers (cultivating less than 10 ha). While producer or- registered under Section 42 are not allowed to pay divi- ganizations would be expected to generate financial sur- dends to its promoters. All other requirements of a pub- pluses (excess revenue over expenses) each year, profit lic limited (unlisted) company regarding audited financial maximization is not their motive: these organizations are statements shall apply to Section 42 companies.89 non-commercial. In Pakistan, the options for registering producer organizations as legal entities are available Cooperative Societies Act 2020: Cooperative societ- under the Securities and Exchange Commission of ies are supervised by the Registrar of Cooperatives with- Pakistan (SECP), as well as through provincial legal and in the Cooperatives Department of each province. The regulatory frameworks. purpose for the formation of a cooperative society should be the economic interest of its members in accordance SECP: Under the SECP, the most suitable option for with cooperative principles. A cooperative society can producer organizations is to register as a public limit- be registered with or without limited liability. A producer’s ed, but not-for-profit, company. At least three promot- society would need to have a minimum of 50 members. ers need to contribute a minimum of Rs 200,000 and The types of societies permissible under the Act are: apply for a license of ‘Associations with Charitable and (i) Resource (credit, goods and services), (ii) Producer Not-for-Profit Objects’. After receipt of this license, the (producing and disposing goods as a collective proper- promoters register the association as a public limited ty), (iii) Consumer, (iv) Housing, and (v) General. Societies company under Section 42 of the Company Act 2017. are allowed to pay dividends to their shareholders at a Among other requirements, the rules and regulations rate not exceeding 10 percent of revenue. For Resource for this legal entity require compliance with good gov- and Producer Cooperatives, 25 percent of their net prof- ernance aspects including fit and proper criteria for it must be deposited into a reserve fund of the society.90 the selection of the promoters and the Chief Executive Officer, policies for governance and compliance, human Voluntary Social Welfare Agencies Ordinance 1961: resource management, capital expenditure, procure- Each province has similar Social Welfare Agencies ordi- ment, investment of funds, borrowing, determination nances. A social welfare agency is registered with the and delegation of financial powers, whistle-blower Social Welfare Officers of the Social Welfare Directorate. 89 https://www.secp.gov.pk 90 http://www.pas.gov.pk/uploads/acts/Sindh%20Act%20No.XXVIII%20of%202020%20.pdf Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 71 Each agency needs to maintain financial records and publish an Annual Report. The report includes infor- mation about the general management of the agency, details of the nature and extent of the services rendered and, if possible, supported by figures, the program for the next year, and audited accounts. A copy of the Annual Report is submitted to the Registration Authority immediately on publication. From the 3 current options described above for regis- tering agricultural producer groups, registration with the SECP is recommended because: 1. It adheres to a stringent regulatory framework which is applied to all public limited companies. 2. It requires a high level of transparency and disclo- sure, therefore reducing the likelihood of financial fraud and misconduct. 3. It has effective capacities to regulate all private and public limited companies. Water User Association (WUA): A WUA may be established under the On-Farm Water Management and Water User Associations Ordinance 1981 of the Government of Punjab if the majority of irrigators along a watercourse agree to associate in the reconstruction, maintenance or improvement of such watercourse. The irrigators will complete and submit an application to the Field Officer91 in the prescribed manner. An association may be formed if 51 percent of irrigators of the water- course are WUA members and the WUA maintains a bank account in a scheduled bank. The WUA will be registered as a corporate body in the name under which it is registered with perpetual succession and a common seal, with power to hold property, enter into contracts, institute and defend suits and other legal proceedings and to do all acts necessary for the purpose of conduct- ing its functions. 91 “Field Officer” means and includes the Director of the On-Farm Water Management and Development Project, Department of Agriculture, Government of Punjab or any other officer declared as such by the government. Enhancing Smallholder Incomes by Linking to High Value Markets in Pakistan’s Punjab and Sindh Provinces 72 References Background studies to this report Ali, M. (2022). Market Integration of Small-scale Agriculture Producers in Punjab. Feasibility report for the World Bank. Kanji, I. A. (2022). Aquaculture in Sindh. Feasibility report for the World Bank. Lohano, H. (2022). Market Structures of Livestock, Aquaculture and Fisheries in Sindh. 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