Memorandum submitted by Professor
Keith Palmer[15]
Summary
Over the past 20 years per capita incomes
in Africa have fallen and poverty has increased substantially.
On current trends there is no prospect of the MDG poverty reduction
target being met. GDP growth rates sustained at about 6-7% per
annum until 2015 are needed if the poverty reduction target is
to be met. The national private sector must be the engine of growth.
Agriculture, agribusiness and agriculture-supporting
infrastructure are the key to achieving rapid growth with poverty
reduction in Africa. They are the sectors in which SSA has a dynamic
comparative advantage and in which rapid growth can be expected
to benefit the great majority of the population currently living
on very low incomes. Pessimism about agriculture in Africa is
misplaced. There is great under-exploited potential to grow incomes
rapidly in both agricultural production and in related industrial
and services businesses along the agricultural value chain.
Good government policies at the macro-economic
and sector level are essential but, on their own, not sufficient
to stimulate private investment. If the economies of the region
are to launch onto a higher growth trajectory and reverse the
trend of increasing poverty then - in addition to better macro-
and sector policies - new targeted initiatives are needed to overcome
market and government failures and to stimulate a major broad
based improvement in private incomes in the agricultural and agribusiness
sectors.
The PIDG initiatives to support infrastructure
investment in low income developing countries have demonstrated
the success of new and innovative approaches to addressing market
failures. In particular Infraco has shown how it is possible to
act 'on the ground' in partnership with the national private sector
and local and national governments to overcome coordination failures
and accelerate viable and sustainable infrastructure investment.
Guarantco has shown how a well designed credit enhancement initiative
can overcome failure in the domestic financial markets and thereby
mobilise national savings for productive and socially beneficial
investment.
Similar initiatives in the agriculture
and agri-business sectors hold the promise of major improvements
in growth and poverty reduction in Africa. A strategic programme
of linked and mutually supportive initiatives - drawing on the
successful experience of PIDG in infrastructure - is proposed.
The initiatives are: (i) expanded resources to support the transfer,
adaptation and uptake of new improved agricultural technologies
particularly by smallholders, building on such existing initiatives
as the AATF and GALV; (ii) creation of a partial credit guarantee
facility (similar to Guarantco) that would share in the front-end
risks of new investment in agriculture and agribusiness. It would
have a special 'window' to enable smallholders to access guarantees
on preferential (subsidised) terms; (iii) creation of an agricultural
development company, Agdevco, to help national private investors
to structure and finance complex agriculture/agri-business investment
packages, thereby reducing transactions costs and risks for private
investors. It would draw on the lessons learned from Infraco.
What can the private sector do to
alleviate poverty?
1. Per capita incomes in Sub-Saharan
Africa over the past 40 years have been static and over the past
20 years they have fallen. Average incomes in 2000 were about
10% lower than in 1980 (UNCTAD 2001). Poverty over the period
increased in absolute terms by about 60 million people and in
relative terms from about 48% of the population in 1974 to about
60% in 1995 (Artadi and Sala-i-Martin). In contrast in most of
Asia rapid economic growth has been accompanied by sharp reductions
in poverty (DFID 2005).
2. Without major sustained increases
in per capita GDP growth rates there is no prospect of reducing
poverty significantly. To achieve the Millennium Development Goal
(MDG) of halving extreme poverty by 2015, GDP growth will need
to average 6-7% per annum from now until 2015 (IMF 2004, Artadi
and Sala-i-Martin).There is nothing to suggest - on current trends
- that growth rates even close to these levels will be achieved
in SSA.
The national private sector must
be the engine of growth
3. The much higher rate of economic
growth necessary to achieve the MDGs can only be achieved if there
is a major increase in profitable investment by the private sector
(UNIDO 2004). This will generate jobs and higher wage income,
boost national savings and induce greater domestic demand, which
in turn will stimulate more private investment. It will also boost
the national tax base permitting higher public spending on social
services and thereby faster progress towards achieving the MDGs.
Further it will strengthen civil society and participation by
the public in national development.
4. Higher private investment and more
rapid growth will occur only if there are sufficient profitable
opportunities. Equally growth will tend to have more poverty reducing
impact when it is focussed in sectors where the poorest people
are currently engaged. In Sub-Saharan Africa that means a poverty
reduction strategy that focuses on profitable investment and growth
of agriculture and value adding agri-business.
5. The national private sector is the
key to growth and development. The national private sector in
agriculture in SSA is made up of three groups: established larger
businesses, small and medium size enterprises (SMEs) and smallholders
(family farmers). Growth and poverty reduction require that all
three groups contribute to, and benefit from, national development.
Generally there will be a need to stimulate modern intensive agriculture
and competitively scaled agribusiness ventures around support
for larger national farmers and SMEs. Extending the benefits of
growth to the many tens of millions of smallholders is often best
achieved by using modern agribusinesses as hubs around which smallholder
outgrower operations can be further developed.
6. Foreign corporate investors also
have an important role to play alongside the national private
sector in agriculture and even more so in agri-business. Companies
based in the OECD countries and in Asia and South America have
important expertise to contribute to SSA in agriculture and agri-business
as well as access to, and knowledge of, foreign markets. Companies
based in Asia and South America in particular have recent experience
of successfully developing profitable tropical and sub-tropical
agri-enterprises. Some of them are already engaged in African
agri-enterprise although, as yet, on a limited scale.
7. The challenge in SSA is to support
all three groups of the national private sector and to create
effective and mutually beneficial partnerships between national
and foreign private investors and with the international development
community.
Agriculture, agribusiness and related
infrastructure are key
8. It is increasingly well understood
that agriculture and value adding agri-business[16]
are key to achieving rapid growth of incomes and poverty reduction
in SSA (eg UNIDO 2004). Agriculture and agribusiness are sectors
in which SSA has a dynamic comparative advantage in a globalising
world (Wood and Mayer (2001), Wood (2002))[17].
They are also the sectors in which the great majority of the population
are engaged, and will continue to be engaged for at least the
next 25 years. Agriculture is the sector in which almost all the
extremely poor are engaged. Without rapid growth in agricultural
and agri-business incomes, the MDG poverty reduction target cannot
be met (Fafchamps, Teal and Toye).
9. Pessimism about the prospects for
agricultural productivity in Africa are not justified (Sanchez
2001). Soil and climate conditions in many areas of SSA are no
worse, and in some cases better, than the conditions encountered
in other tropical and sub-tropical regions of the developing world,
where yield per hectare and yield per capita are much higher and
where growth in incomes of farmers has been sustained at a high
rate and poverty has fallen sharply (Conway 1997, IFPRI 2001).
It is true that in current circumstances there are few profitable
agricultural opportunities to be exploited. However with the adoption
of improved agricultural technologies and modern intensive agricultural
techniques, access to agricultural inputs at lower cost and investment
in improved cost -effective infrastructure, rapid growth in agricultural
incomes is achievable (CEPA 2002-1).
10. Nor is pessimism about access to
agricultural markets justified. Most primary agricultural output
in SSA is supply constrained, not demand constrained. SSA already
has preferential access to OECD markets but this access is not
being sufficiently exploited (Page 2004)[18].
Demand for agricultural products, notably cereals and meat, is
growing rapidly in Asia but SSA is not meeting that growing demand.
In SSA itself dependence on food imports has increased as the
supply of food products from within the region has stagnated.
If output from the region can be increased and transport costs
reduced then regional and international markets can easily absorb
sustained rapid growth in output from the region for the foreseeable
future.[19]
Moreover even producers of demand constrained products such as
coffee and cocoa can enjoy very large increases in on-farm incomes
if production, transport and marketing costs can be reduced.
11. The argument about whether agriculture
or industry is the key source of economic growth in Africa is
a false dichotomy. There are many opportunities to grow output
from both agriculture and value-adding agribusiness (UNIDO 2004).
Often, to be profitable, agribusiness opportunities require simultaneous
growth in agricultural output and complementary investments in
infrastructure. The demand for agricultural inputs such as fertiliser
and pesticides is a function of the volume of agricultural production
and agricultural incomes. Agricultural processing businesses such
as canning and milling need reasonable certainty about the quantity,
quality and cost of
agricultural inputs that will be available.
This is a function of the volume and quality of local agricultural
production which itself depends in part on the use made of agricultural
inputs eg fertiliser and pesticides. Investments in input and
output storage, packaging, distribution and marketing can improve
access to, and reduce the cost of, agricultural services for farmers
and thereby boost on-farm productivity and incomes. These investments
not only increase on-farm incomes but also generate growth in
employment and incomes in off-farm agriculture-related activities.
12. Numerous unexploited potentially-profitable
opportunities for investment in agri-business exist in East, West
and Southern Africa along the entire value chain. Some of these
opportunities are being exploited (Technoserve 2004) but many
are not. Often the reason these investments are not undertaken,
or are unprofitable when undertaken, is a failure of coordination
of investments along the value chain, each of which is dependent
for success on complementary actions by others. In West Africa
potentially viable fertiliser production capacity is currently
mothballed while locally produced natural gas (the feedstock for
the plant) is being flared and local farmers pay high prices for
imported fertiliser. In several countries in the region product
processing facilities have been built and then closed for want
of reliable supplies of agricultural inputs of adequate quality
and because of the poor reliability and high cost of intermediate
inputs such as electricity and water. In East Africa in recent
years increased food production by smallholders rotted in the
fields for want of adequate modern post-harvest facilities such
as bulk storage, transport and marketing services, while urban
consumers ate expensive imported food.
13. Figure 1 sets out the requirements
for profitable investment along the agricultural value chain.
The development challenge is to find effective mechanisms for
coordinating essential complementary investments and for reducing
the risks of coordination failure.
Fig 1: Requirements for increasing agricultural
and agribusiness incomes
Simultaneously to:
Access improved agricultural technologies
Access reliable and less expensive agricultural
inputs eg fertiliser, pesticides
Access improved reasonably priced post-harvest
services eg bulk storage, marketing services
Access improved reasonably priced infrastructure
services eg power, irrigation, electricity etc
Increase national value added by investment
in profitable processing eg milling, canning etc
14. Currently smallholders in SSA have
particularly poor access to agricultural inputs and their on-farm
costs are very high. Improving their access to modern farming
technologies and reducing their costs of production can make a
direct and significant impact on poverty.
15. Investment in agriculture supporting
infrastructure is also crucial. If investors in agriculture and
agribusiness have to absorb the full front-end costs of providing
improved infrastructure then many investments will become unprofitable.
Yet their investment will only be profitable if improved infrastructure
(eg irrigation, electricity, port and road transport) is available
as and when needed - and at a cost that allows the investment
in agriculture and/or agribusiness to be profitable. The challenge
is to find ways to provide and finance this infrastructure and
make it available to farmers at reasonable cost, thereby making
profitable investments in agriculture and agribusiness possible.
16. The challenge of providing cost-effective
infrastructure services for smallholders is particularly acute.
The unit cost of infrastructure supplied to small rural communities
is high. Smallholders have low purchasing power. User charges
set to recover the full cost of the services will usually be unaffordable.
However, if the services are not provided to smallholders then
they will not be able to benefit significantly from growth in
national agricultural production. The challenge is to find ways
to efficiently deliver and finance affordable infrastructure services
for smallholders.
17. An agriculture and agribusiness
focussed strategy for poverty reduction must be based around investment
in commercial farming and processing by larger national businesses
and by SMEs. This is necessary because of the strong links between
scale of production, productivity and competitiveness. Many of
the production, infrastructure and marketing costs in agriculture
and agri-business are highly scale dependent. If production is
to be competitive in world markets (and in competition with imports
into local markets) then fixed costs must be spread across a sizeable
volume and value of production.
18. One proven way to ensure that SMEs
and smallholders benefit from investment in modern commercial
agriculture is to create strong links between commercial farmers
and rural smallholders and SMEs through development of outgrower
schemes. Around the modern farm 'hub', smallholder support services
and rural infrastructure services can be built. Technoserve (2004)
highlights the potential of this approach and identifies a number
of interesting success stories in Africa.
Good government policies are essential
but not sufficient
19. It is now widely accepted that without
appropriate government policies there can be no growth in private
investment or in poverty reduction:
- There must be law and order, reasonably
robust institutions of government and respected rules of business.
- There must be sound macro-economic
management. In the past, poor macro-management has often resulted
in maintenance of an uncompetitive exchange rate, in high domestic
inflation and high domestic real interest rates. These policies
have inevitably deterred private investment.
- There must be appropriate micro-economic
policies that encourage and facilitate private investment. Over
the past 40 years, bad government policies in agriculture in SSA
have been the prime cause of poor performance in many countries
(Fafchamps et al). State marketing boards were often used to excessively
tax agricultural producers, destroying incentives to invest. Excessive
regulation has bred corruption, increased costs and further harmed
incentives to invest. Although many improvements have been made
in many countries in recent years, there remain many unduly burdensome
sector policies that continue to deter investment in modern agriculture
(Tripp 2002).
20. Although good government policies
are necessary, they are not sufficient. As UNIDO observes, 'The
incipient [national] private sector can hardly be expected to
engage in productivity catch-up with international competition
[if] the policy environment does not go beyond good macroeconomic
management, improved governance and a healthy investment climate'
(UNIDO 2004).
21. There are three reasons for arguing
that good policies alone are not sufficient:
- The immature nature of the agriculture
and agribusiness sectors in SSA is such that they require sustained
public good investment. In the OECD countries it has long been
universally recognised that the agricultural sector in its early
stage of development required heavy taxpayer-funded investment
in such areas as extension and information services, credit support
for farmers and anticipatory development of agriculture-supporting
infrastructure eg irrigation, roads, electricity. In SSA comparable
support for agriculture and agribusiness is needed over the short
and medium term if strong competitive businesses are to emerge.
However over the past 40 years direct government involvement in
agriculture in SSA has done far more harm than good. Most governments
in the region have now withdrawn or de-emphasised involvement
in agriculture. Yet the need for support to these important sectors
remains. The challenge is to find new ways of providing effective
support to build a competitive private sector in agriculture and
agribusiness.
- In SSA there are pervasive market
failures. Unless they are addressed effectively they will deter
private investment. There are four important failures: (i) coordination
failures which arise when complementary investments in related
activities along the value chain do not take place as and when
expected, with adverse implications for the return on investment
at other points along the value chain; (ii) increasing returns
to scale and barriers to entry which are widespread at various
points along the agricultural value chain. As is well known, the
consequence is capture of monopoly rents by intermediaries and
large buyers at the expense of small farmers that lack bargaining
power; (iii) failures in risk markets. Even when governments have
taken appropriate action to reverse the poor policies of the past,
there is a legacy of high perceived country risk for national
and foreign private investors. This reduces the availability and
increases the cost of finance, which in turn reduces the amount
of profitable investment. Many potentially profitable investments
are rendered uneconomic and do not proceed because of these market
failures (CEPA 2002-1)[20].
- Several governments in SSA in recent
years have revamped their macro- and micro-policy environments
to stimulate private investment. The response by private investors
has generally been disappointing. The evidence indicates that
in addition to continuing efforts to improve the macro- and micro-
policy environment, host governments supported by donors need
in addition to develop new effective interventions targeted to
overcome these market failures.
22. Even if rapid growth in agricultural
and agribusiness incomes can be achieved there remains the question
of whether the very poor will participate sufficiently in the
benefits of growth. History suggests that the low purchasing power
and risk aversion of smallholders combined with their limited
access to credit and information about new technologies and limited
access to infrastructure at a reasonable cost may well act to
limit the benefits that accrue to them as large and medium size
enterprises grow.
23. Significant expenditures on agricultural
extension and information services, access to infrastructure on
affordable (subsidised) terms, expanded access to credit and possibly
'introductory' price discounts on key agricultural inputs eg new
seed varieties and farmer credit are likely to be needed if risk
averse smallholders are to be persuaded to adopt new technologies
and approaches that will benefit them in the longer term.
Constraints on investment in agriculture
and agri-business in Africa
24. The key constraint on investment
in agriculture and agri-business is not availability of finance.
In fact the commercial banks in Africa are opportunity constrained
and the DFIs are very liquid. The key constraint is absence of
sufficient profitable investment opportunities, itself caused
by three things: (i) absence of the complementary infrastructure
that is needed to deliver inputs and market outputs, cost effectively.
A particularly critical 'gap' in southern Africa is the almost
total absence of irrigation - this is a major contributory factor
to the problems of famine in large parts of Africa at the present
time; (ii) absence of parties able and willing to take the coordination
risks, ie the risk that required complementary investments along
the value chain are not made and therefore that all investments
are rendered unprofitable; and (iii) scarcity of experienced commercial
farmers which raises costs and causes providers of finance to
limit exposure to the sector. Small farmers are particularly badly
affected by their inability to finance agricultural inputs such
as improved seeds and fertiliser. Moreover they have no access
to irrigation (therefore are very exposed to drought), usually
have very poor post-harvest storage facilities and receive poor
prices for their output, which reduces on-farm incomes drastically(CEPA
2004)[21].
PIDG Initiatives to stimulate infrastructure
investment in low income developing countries
25. It is a far from a simple matter
to design and implement effective interventions to overcome market
failure in low income developing countries. There are some interesting
and relevant lessons to be learned from the successful and innovative
initiatives supported by the Private Infrastructure Development
Group (PIDG). PIDG is a grouping of four European donors (Holland,
Sweden, Switzerland and UK) which has provided support for a range
of new approaches to stimulate infrastructure investment in low
income developing countries. The initiatives described here are:
- Infraco
is a donor-funded, privately managed infrastructure development
company whose mandate is to work with the national private sector
and governments in low income developing countries to create profitable
infrastructure investment opportunities. Once Infraco has created
a profitable opportunity it seeks to attract private investors
and debt providers to invest in the opportunity. Infraco has proven
to be highly effective in identifying infrastructure opportunities
in Africa with high poverty reduction potential. It is working
in partnership with governments and the national private sector
to overcome market failures in the infrastructure sector. Infraco
achieves very high leverage (a small Infraco investment stimulates
a large investment by the private sector and DFIs), it is catalytic
(stimulating private investment that otherwise would not take
place) and it never substitutes for the private sector (because
it is not allowed to remain a majority partner once the investment
is up and running). Moreover, although Infraco is grant funded
it expects to be able to recover its costs from incoming investors
and will re-invest its capital to fund further development activities.
Further information about Infraco is set out in Annex 1 and on
the website www.infracolimited.com .
- Guarantco is a credit guarantee
company whose mission is to stimulate greater local currency lending
to infrastructure investments. It does this by providing partial
credit guarantees to local currency lenders (eg pension funds)
making loans to infrastructure investments in low income developing
countries. It may provide 'credit enhancement' to investments
by the public and private sectors. Guarantco was set up to provide
a targeted intervention to overcome failure in the local currency
financial markets. It will reduce risks of national savers and
thereby increase the flow of national savings into national infrastructure
investment and improve the quality of the institutions' portfolios.
It will also stimulate greater investment in infrastructure by
reducing the exchange rate risks inherent in financing domestic
infrastructure with foreign currency denominated debt.
- The Emerging Africa Infrastructure
Fund (EAIF) is a public private partnership debt fund that lends
to support infrastructure investment in Sub-Saharan Africa. An
equity investment in the fund by the PIDG donors enabled a multiple
of the value of the equity to be raised from commercial banks
and Development Finance Institutions (DFIs) for on-lending to
investors in Africa on terms much more advantageous than would
otherwise have been possible.
Targeted interventions in agriculture
and agribusiness
26. Errors in the design of interventions
designed to address market failures in agriculture in some developing
countries in the past have made matters worse, not better! A key
question is whether it is possible to design and implement new
initiatives that can be expected to be effective. The success
of the PIDG initiatives in addressing market failures in infrastructure
suggests that similar approaches in agriculture and agri-business
- where the challenges are similar - are worthy of detailed consideration.
27. Certain key principles should inform
the design of interventions in markets:
- They should correct market failures,
not distort markets
- They should lever-in private sector
risk capital, not crowd it out. Private sector parties should
always share in the business risks
- They should focus on investments
that are expected to be viable and sustainable without ongoing
support over the medium term and that will build national capacity
and wealth
- Charges for services provided to
large and SME beneficiaries should be set such that initiatives
can be expected to be self-financing over the long term
- Grant-funded 'subsidies' to stimulate
smallholder participation in the modern agricultural and agribusiness
economy should be targeted on those that are poorest and limited
in amount per person or household.
Proposed initiatives to support agriculture
and agribusiness in Africa
28. There are three initiatives proposed
here - each of which would address specific constraints on investment
in agriculture and agri-business. The ideas draw directly on the
experience of the PIDG initiatives in the infrastructure sector
described above and on work undertaken on agricultural development
for DFID (CEPA 2002-1, CEPA 2002-2, Tripp 2002).
29. Adaptation and Uptake of Improved
Agricultural Technologies
There are already a number of valuable initiatives to support
access by African farmers to agricultural technologies from the
OECD and to support their adaptation, consenting and use in SSA.
One such initiative is the Africa-led Africa Agricultural Technology
Foundation (AATF), a Rockefeller Foundation initiative supported
by DFID. AATF is a PPP between private sector companies in the
OECD, private sector agribusinesses and farmers in SSA and governments.
It provides royalty free access to technologies owned by OECD
companies for adaptation and use in SSA[22].
Another is the Global Alliance for Livestock Vaccines (GALV),
a partnership between OECD-based private sector animal health
companies and local animal health stakeholders including livestock
keepers in low income developing countries. The distinctive feature
of these initiatives is that they provide African farmers and
livestock keepers with access on favourable terms to existing
agricultural technologies held by the private and public sector
in OECD countries that can be adapted for use in African conditions;
and a mechanism for reducing the cost and speeding the process
of adaptation and uptake by African farmers. An expansion in the
resources available to these sorts of initiatives focused in particular
on uptake by smallholders would address one key area of market
failure and contribute directly to poverty reduction.
30. Partial Credit Guarantees A major
constraint on agricultural investment in low income countries
is failure in the market for risk capital. Despite the fact that
commercial banks and DFIs have plenty of finance available in
principle for agriculture and agribusiness, in practice there
are very few investments taking place. One key reason for this
is that there are no parties able and willing to take the coordination
risks referred to above. An efficient and effective way to address
this failure is through the provision to agricultural producers
- and providers of credit to the agricultural and agribusiness
industries - of partial credit guarantees. For a guarantee scheme
to be effective it must be well designed. One or more private
sector intermediaries should be appointed to administer the scheme
and fees to the intermediary would be performance related[23].
Partial credit guarantees would be granted only when they would
lever in private sector equity and/or debt - not crowd it out.
The guarantor would only ever assume a portion of the investment
risks. Guarantee fees would be set, for large and medium size
beneficiaries, at a level that broadly reflected the cost of risk
transfer. By sharing front-end risks such a scheme would stimulate
private investment by national companies that otherwise would
not take place. This concept draws directly on the PIDG experience
with Guarantco.
31. It is unlikely that smallholders
would be able to afford charges for credit guarantees that were
reflective of the cost of risk transfer. It is therefore proposed
that the partial credit guarantee facility should have lower than
fully cost reflective (subsidised) charges for smallholders at
least for a period of time.
32. Agricultural Development Company
(Agdevco) Agdevco would be
a donor funded agri-business development company. It would work
with the national private sector, national and local governments,
the foreign private sector and development finance institutions
to structure a coordinated financeable agri-business investment
package. Like Infraco, it would act as 'principal' to structure
commercial agreements with the aim of reducing transactions costs
and risks. It would seek commitments in principle to provide finance
to these investments from private sector and development finance
institutions. Agdevco would be donor funded but managed by experienced
private sector professionals. The management would be remunerated
by reference to achievement of pre-agreed measures of success
in stimulating new agricultural and agri-business investment.
The concept of - and rationale for - Agdevco is described in detail
in CEPA (2002-1) and in CEPA (2003)[24].
The concept is very similar in most respects to Infraco, the successful
PIDG- funded infrastructure development company.
Conclusions and Recommendations
33. The conclusions and recommendations
of this memorandum are:
- Over the past 20 years per capita
incomes in SSA have fallen and poverty has increased substantially.
On current trends there is no prospect of the MDG poverty reduction
target being met. GDP growth rates sustained at about 6-7% per
annum until 2015 are needed if the poverty reduction target is
to be met.
- The national private sector must
be the engine of growth. Established larger national private sector
companies, SMEs and smallholders must all contribute to national
development if both rapid growth and poverty reduction are to
be achieved. The national private sector must create effective,
mutually beneficial partnerships with foreign private sector companies.
Considerable relevant experience and expertise can be found in
Asia and South America as well as in the OECD countries.
- Agriculture, agribusiness and agriculture-supporting
infrastructure are key to achieving rapid growth with poverty
reduction in SSA. Agriculture and agribusiness are the sectors
in which SSA has a dynamic comparative advantage and in which
rapid growth can be expected to benefit the great majority of
the population currently living on very low incomes. Pessimism
about agriculture in SSA and about demand side constraints are
misplaced. The argument about 'either agriculture or industry'
is misconceived. There is great under-exploited potential to grow
incomes rapidly in both agricultural production and in related
industrial and services businesses along the agricultural value
chain.
- Good government policies at the
macro-economic and sector level are essential but, on their own,
not sufficient to stimulate private investment either on the scale
required or in a way that sufficiently benefits the majority of
smallholders. Sustained investment in infrastructure to support
agriculture and agri-business is needed. Important market failures
affecting all producers increase transactions costs and risks
and therefore deter private investment. Smallholders face special
problems that need to be addressed if they are to participate
fully in the benefits of economic growth. If the economies of
the region are to launch onto a higher growth trajectory and reverse
the trend of increasing poverty then - in addition to better macro-
and sector policies - new targeted initiatives are needed to overcome
the market failures and stimulate a major broad based increase
in private investment in the agricultural and agribusiness sectors.
- It is no easy matter to intervene
in markets and end up making them better, rather than worse. Certain
key principles must be complied with: (i) interventions should
lever-in private sector risk capital, not crowd it out; (ii) interventions
should focus on creating viable and sustainable businesses without
the need for ongoing support in the medium term; (iii) charges
for services provided to large and SME beneficiaries should be
set such that they can be expected to be self-financing over the
medium term; and (iv) donor-funded grants to stimulate smallholder
participation in the modern agricultural and agri-business economy
should be temporary subsidies deployed where sustainable businesses
are expected to result once technologies and farming practices
have changed.
- The PIDG initiatives to support
infrastructure investment in low income developing countries have
demonstrated the success of new and innovative approaches to addressing
market failures. In particular Infraco has shown how it is possible
to act 'on the ground' in partnership with the national private
sector and local and national governments to overcome coordination
failures and accelerate viable and sustainable infrastructure
investment. Guarantco has shown how a well designed credit enhancement
initiative can overcome failure in the domestic financial markets
and thereby mobilise national savings for productive investment
and improve the quality of the investment portfolio of local financial
institutions eg pension funds.
- Similar initiatives in the agriculture
and agri-business sectors hold the promise of major improvements
in growth and poverty reduction in Africa. A strategic programme
of linked and mutually supportive initiatives - drawing on the
successful experience of PIDG in infrastructure - is proposed.
The initiatives are: (i) expanded resources to support the transfer,
adaptation and uptake of new improved agricultural technologies
particularly by smallholders, building on such existing initiatives
as the AATF and GALV; (ii) creation of a partial credit guarantee
facility that would share in the front-end risks of new investment
in agriculture and agribusiness. It would have a special 'window'
to enable smallholders to access guarantees on preferential (subsidised)
terms; (iii) creation of an agricultural development company,
Agdevco, to help national private investors to structure and finance
complex agriculture/agri-business investment packages, thereby
reducing transactions costs and risks for private investors.
- Adopting these strategic initiatives
does not necessarily require creation of any new institutions.
They can be delivered using existing development institutions
and/or by contracting-out services provision to the private sector
with service providers paid on a performance-linked risk-sharing
basis.
- The required additional donor funding
would not be great. There would be very significant financial
leverage - Infraco expects its funding to leverage new investment
as much as 50 times. Total new investment and finance from the
private sector would be a very large multiple of donors' contributions.
References
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Annex 1 Further Information about
Infraco
Rationale, Objectives and Business
Plan
The rationale for Infraco is that there
are few international private investors willing to invest in early
stage infrastructure project development activity in low income
developing countries; and few national private investors with
the requisite expertise and resources. Infraco has been created
to act as principal - ie co-owner - with the objective of developing
projects to the point where private sector expertise and funding
can be secured to take the projects forward. Projects will be
sold on to the 'true' private sector at or prior to financial
close with Infraco as appropriate remaining as a minority partner
in the ventures. In this way Infraco will be truly catalytic -
with a small but high risk investment leveraging in large amounts
of private sector capital into projects which either would not
have proceeded at all, or not as quickly had Infraco not been
involved.
Infraco has clear guidelines for prioritising
its activities set out in the approved Operating Policies. These
prescribe the countries where it may operate (low income developing
countries), the priority that must be given to pro-poor activities
and establishing the requirement that priority be given to projects
where the national government is supportive and where Infraco's
involvement is likely to catalyse new investment.
Infraco Strategy
Infraco's strategy has been formulated
to conform to the objectives and Operating Policies agreed by
PIDG. A number of innovative features of the strategy have been
identified, each designed to enhance the poverty reducing impact
of Infraco. They include: (i) innovative mechanisms for accessing
private sector expertise and finance for publicly-owned water
and sanitation developments; (ii) leveraging existing infrastructure
assets currently used solely by mining companies for the benefit
of poor people living in the region; (iii) new approaches to stimulating
infrastructure investment to support agribusiness investment -
centred on creation of infrastructure service companies that would
own and lease infrastructure eg small dams for irrigation by small
farmers; and (iv) the creation of renewable energy services companies.
Several of these ideas have already been progressed by Infraco.
Progress to Date
The many discussions that have taken
place in-country with national governments, local governments,
State-owned infrastructure enterprises (SOIEs) and national private
sector companies have strongly confirmed the need for Infraco.
In almost all visits there has been great enthusiasm for what
Infraco intends to do and a definite view that it will address
an urgent currently-unmet need. This is particularly the case
in countries such as Ghana, Uganda, Mozambique etc where there
is a strong commitment by national governments to expanding the
role of the private sector in infrastructure combined with a real
sense of frustration about the very limited private investment
currently taking place. As a result, for example, the Privatization
Unit of the Ministry of Finance of Uganda has already invited
InfraCo to assist in the development of two additional infrastructure
projects (in addition to the Bidco agricultural infrastructure
project), namely the expansion of the Kampala Sanitation System
and the rehabilitation of the rail line from Kampala to Kasese
(at the border of the DRC) which ceased operations in 1998. An
MOU for the development of the Kampala Water System has been concluded
with the National Water & Sewerage Corporation of Uganda and
is currently being reviewed by the Ministry of Justice (Solicitor
General's Office). InfraCo is currently investigating the viability
of reopening the Kasese line before concluding an MOU with the
Government of Uganda. Similarly a visit to Zambia led to an urgent
request from the Minister of Finance for Infraco to shortlist
for development three projects - one in the power sector and two
in agribusiness. This positive response has not been limited to
Africa eg in Vietnam there is strong interest in Infraco involvement
in a hydro-power project and in other infrastructure development
activities.
There has been an equally strong positive
response from many of the DFIs with whom Infraco has been engaged.
The IFC and ADB in particular are very enthusiastic about the
potential for Infraco to get things moving on the ground and as
a result the IFC has signed a cooperation agreement and the ADB
is expected to do so as well in the near future.The EIB is also
enthusiastic about the contribution Infraco can make to accelerating
financial close of infrastructure projects.
Discussions have also taken place with
ECOWAS and NEPAD about a possible role for Infraco in helping
accelerate development of their major infrastructure investment
plans, a large part of which are intended to be PPPs. Infraco
has indicated a willingness in principle to become involved, subject
to the availability of additional resources.
Infraco Projects
Table 1 summarises the projects that
Infraco has been asked to consider working on after the first
nine months of activity. Key features are:
- There are 18 projects of which 15
are in Africa (6 in West Africa, 5 in East Africa, 4 in Central/Southern
Africa) and 3 in Asia.
- The sector breakdown is: 4 in power,
5 in agribusiness infrastructure, 4 in water and sanitation, 2
in housing development, 2 in transport and 1 in gas distribution.
- At least 8 of them clearly fall
within Infraco's definition of particularly High Development Value
projects.
- 3 of the water and sanitation projects
are in DAC 3 countries.
- If all projects were to proceed
the total additional investment would be in excess of $1000 million,
a very high leverage of the small investment in Infraco.
- Most of the projects create new
potential for lending, inter alia, by EAIF and DFIs and the private
sector and several offer new opportunities for Guarantco to mobilise
additional domestic savings for investment in national infrastructure.
Table 1 Summary of Shortlisted
Projects
Region
East/South Africa
Bidco, Uganda
Manica,
Mozambique
Maputo,
Mozambique
Kampala,
Uganda
Kampala,
Uganda
West Africa
Volta Lake,
Ghana
Kumasi-Sunyani,
Ghana
Kumasi,
Ghana
Cenpower,
Ghana
Aba,
Nigeria
Gas project,
Nigeria
Asia
Vinh Son,
Vietnam
Malubog,
Philippines
Pathum Thani
Thailand
Central/
Southern Africa
Zambia
Zambia rail
Zambia/
Mkushi
Zambia/sugar
| Sector
Agribusiness
infrastructure
Agribusiness
infrastructure
Agribusiness
infrastructure
Water &
sewerage
Housing &
related infrastructure
Lake transport
Electricity
transmission/
distribution
Housing &
related infrastructure
Power
Generation
Power
Generation
Gas distribution
Hydro power
Water supply
Regional water supply
Lusaka water/
Sewerage
Lusaka low income light railway
Infrastructure/
Farm block
Infrastructure
Irrigation/other infrastructure
| Description
Essential infrastructure to support major palm oil outgrowers scheme
Irrigation dams to support
growth of agriculture
Citrus fruit terminal expansion
Construction of wastewater treatment plant in Kampala.
Partnership with NWSC.
Affordable housing in Kampala
Strengthens transport infrastructure internally + from Ghana to
Burkina Faso, Niger and Mali
Extension of electricity supplies to poorer communities currently not served
Low cost housing + related community services
300MW gas fired power generation project using gas from Trans-W Africa pipeline
Independent power project in Delta region
Gathering and liquids extraction of flared gas
120 MW hydro power development
100mld water supply to Malubog leveraging assets developed for copper mine
1st private sector water concession in Thailand
Development of improved clean water supplies to Lusaka
Adaptation of existing freight rail line to provide improved access to low cost housing projects
Irrrigation and related infrastructure development in Mkushi
Improvement of sugar irrigation scheme to benefit commercial and small farmers
| Development Impact
Substantial beneficial impact on livelihoods of poor farmers
5000 hectares of irrigated land in very poor part of country, major poverty reduction impact
Expansion of agricultural export capacity in Maputo will allow rapid growth in export incomes
Strong environmental benefits,
Improved access
Helps address crisis in affordable accommodation
Major direct benefits for poorer communities in Ghana and indirect benefits (reduced transport costs) in landlocked countries
Low cost access to electricity supply leveraging use of existing assets for mine
Low marginal cost access for local people leveraging mine infrastructure
Exploiting arrival of gas will reduce costs of energy for all consumers with direct and indirect benefits (stimulating new productive investment)
Improving supply and reducing cost of power will stimulate more rapid growth
Prevention of flaring of gas and provision of LPG to local market
Improving supply and reducing cost of power will support sustained rapid growth
Improving access to water supply for City of Cebu at low marginal cost
Facilitate funding of major expansion of water services
Request from government to consider arranging build, operate and financing of the investment
Request from government to consider developing this project that will benefit low income people primarily
Infrastructure services company providing irrigation/other infrastructure to commercial and small farmers
Request to consider project development role working with small farmers groups and commercial farmers
| Value of Investment
Total investment
>$100m, Infra-
structure >$20m
Infraco project
c $10 million
c $20 million
c $30 million
c $6 million
c $10 million
c $27 million
c $7 million (phase 1 only)
$200 - 300 million
c $100 million
tbd
c $50 million
c $60 million
c $20 million (phase 1)
$50-70 million
tbd
tbd
tbd
|
February 2006
| 
