House of Commons - International Development

Select Committee on International Development Written Evidence

Memorandum submitted by the Natural Resources Institute, University of Greenwich

In this submission, we address a selection of the key questions posed and draw attention to specific experiences and lessons learnt from our own and our developing country partners' practical experience at country level. The focus of our submission is, although not exclusively, on the renewable natural resources and agriculture sectors.

SUMMARY

Donors committed to poverty reduction and to equitable growth should place agriculture, agri-business and related services at the heart of PSD policy and practice and ensure that PSD addresses the needs of the different groups of private sector players in particular the small-scale farmer and enterprise (1-3). Rural economic and enterprise development needs a policy and institutional environment conducive to fostering investment and increased effectiveness of existing public and private sector institutions. Such approaches and strategies should be linked to the poverty reduction activities of donors and national and local governments (10-11).

Donors play a key role in supporting countries to secure a favourable business environment (4). Donors should increase funding to deepen the understanding of key factors within a business environment which act as barriers to broad-based private sector development in particular in key sectors relevant to the poor. Better practice is required to harmonise and standardise current business climate survey methods in order that findings can guide public policy and practice (5-6). Donors play a key role in guiding privatisation yet there remains an imperative for a deeper understanding of the implications of, and the country's readiness for, privatisation in terms of the regulatory and institutional environment and of the unintended consequences (7-9).

Donors can play a key role in helping developing countries put in place the necessary support services to enable the private sector overcome technical, regulatory, institutional and organisational barriers to accessing local, regional and international agri-food and input markets (12-16).

Donors can support developing countries in putting in place the legal, regulatory and institutional framework to support private sector driven risk management and mitigation initiatives and to foster private sector managed commodity market systems including commodity exchanges (17-20).

The current donor trend to move towards privatisation of agricultural services needs monitoring and for remedial action to be taken where necessary to ensure that private sector uptake is realised, that the appropriate regulatory and support institutions are in place, and that the services meet the needs of the poor and less advantaged. Pluralistic systems should be fostered (21-24). Donors can play a key role in helping to bridge the science and technology gap between the developed and the developing world and foster the environment within which the private sector as a key service provider can operate and meet the needs of the poor. There is a clear need to continue to use public resources to ensure that the needs of the poor are addressed (25-26). Lessons need to be drawn from sound working models of agricultural sector public-private partnerships to guide future public sector including donor intervention. Effective models can play a critical role in the development and uptake of technology (32).

Donors could explore new models of knowledge transfer partnerships between north-south and south-south building on models tested in the north (27-28). Private sector business associations can play a key role in support of the local business community and linking the public and private sectors. Donors can play a key role in the support to and the establishment of, such organisations and the services they provide (29-31).

The public sector and donors could become more engaged in the process of development and application of CSR codes of practice (33-35) and in support of more equitable access to fair trade opportunities (36).

Q1. What can the private sector do to alleviate poverty?

1. Agriculture is the most important private sector activity in developing countries and in many transition economies. Agriculture contributes to employment and significantly to national income and export earnings. It will remain a primary source of growth and means of poverty reduction for some time to come. The agriculture sector reduces poverty through harnessing poor people's key assets of land and labour, by lowering and stabilising food prices, by providing labour intensive employment for the poor, and by stimulating growth in the rural economy.

2. Widespread liberalisation of the agricultural sector over the past 15 years throughout most of the developing world and transition economies has changed dramatically the public sector's (including donor agencies) role and function and placed new demands and expectations on the private sector. The weak response by the private sector including small and medium size enterprise to take up the anticipated functions of input and output market provision following liberalisation of for example commodity marketing boards is a key factor hampering the growth of the agricultural sector in many countries. Trade liberalisation alone cannot ensure equity of opportunities and sustainability of livelihoods and new models which deepen the participation in the local, regional and national markets by the poor need to be developed.

3. Changes in trade policy, the dynamic and aggressive business concentration within agricultural input and output markets, and the globalisation of the agri-business sector means that donors and national governments need to keep abreast of these changes and their impact on public policy and strategy and on future development outcomes. Much private sector change is taking place out of sight of, and understanding by, the public sector including donors and International Financial Institutions (IFIs). A more open relationship between the public and private sector could be desirable to enable understanding of the implications of private sector change on development. This applies to the agri-business sectors in both the north and the south and includes their vertical and horizontal linkages.

Q2. What are the constraints on the private sector in developing countries and how can they be addressed?

4. These are multiple and complex. Some key points are noted in particular in relation to the business environment. Institutional aspects of the business environment in developing countries has shown that if the rule of law can be enhanced, regulation lightened but enforced more rigorously, tax revenue collection improved and corruption reduced, all within a favourable macroeconomic environment (low inflation and public deficits, openness to trade), new business entry and growth would be encouraged. Private sector investment levels and enterprise development can be either facilitated or hindered by the business environment, depending on how the latter impacts upon investment risks, entry barriers (including start-up costs) to economic activity, and/or production and marketing costs. Important dimensions of the business environment include the macro-economic situation, the degree of policy consistency and stability, direct and indirect taxation regimes, investment and licensing regulations, levels of bureaucracy, labour laws, corruption levels, security situation, and effectiveness of the judicial system, state of economic infrastructure, and availability and quality of enterprise support services. In some cases, public policy restricts enterprise activity by negatively affecting the business environment; examples include restrictions on artisanal fishing and shrimp capture, and regulations applying to the cooking and serving of food and drink.

5. There is a proliferation of different business environment surveys[110]. These apply different sets of indicators and models to reflect the institutional and pro-poor growth aspects of the business environment. The methods applied and use of the findings from such reviews raise questions that need to be further understood if felt "good practice" is to guide public investment. For example the index of economic freedom does not establish a strong correlation between economic freedom and growth eg three of the fastest-growing countries in the world are mostly "unfree" in terms of trade policies and regulations namely China, India and Vietnam.

6. There are very few estimates of the costs of compliance of business regulation in developing countries but a recent study[111] suggests that they may be substantively larger as a percentage of GDP than in industrial countries.

7. Literature on economics of generic business privatization is characterised by two approaches: normative and positive. The normative view, as postulated by the World Bank and most donor agencies, is that privatization is necessary to curb waste, raise economic efficiency and develop the activities of the private sector via increased domestic and foreign ownership. Many governments in developing countries are far from altruistic when abandoning a discretionary system for one where market forces determine performance; maximising aggregate welfare is usually a minor consideration. As the benefits of privatization take time to realise, the normative view provides a long-term rationale for private sector divestment.

8. The positive view of privatization, when placed in a developing country context, is a politically charged subject. Emphasis is placed on agency and credibility problems that are unleashed (in often weak states with poor institutional structures) and the income distribution implications of privatization. From the positive theory perspective, privatization only goes ahead when politicians see in it clear-cut economic and political benefits.

9. There is relatively little literature which directly sets out the ways in which privatization affects poverty in developing countries.

10. Most donor intervention to support the business sector including the understanding of the business environment and small and medium scale enterprise development, has given limited attention to the agriculture sector and enterprise development needs in rural areas. Business climate surveys for example have tended to focus on business activities in urban centres and given no or little attention to the particular characteristics and requirements of the rural entrepreneur.

11. Further, inadequate attention is given to the needs of the informal sector and the linkages between the informal and the formal enterprise sectors. Informal and micro-entrepreneurs represent the majority of economic actors (in both agriculture and non-farm enterprise) and their business activity represent the main source of livelihood in rural areas. There are clusters of success factors that can support rural enterprise and economic development which need to be understood including their linkages and interdependencies ie: the policy and institutional framework; infrastructure, markets and services; entrepreneurial competence; and stakeholder engagement. Such a framework is equally relevant to the agenda of making markets work for the poor.

Q3. What type of donor interventions have strong leverage in changing the business climate (in partner countries) towards PSD and pro-poor growth?

Creating an enabling environment by providing technical assistance on:

PRIVATE SECTOR AND TRADE REGULATIONS IN AGRI-BUSINESS

12. International trade in high-value food products has expanded enormously over the last two decades, fuelled by changing consumer tastes and advances in production, transport, and other supply-chain technologies. For a number of poorest countries, the potential for export development from agriculture is seen as the best impetus for stimulating economic growth. However, while the trade in these agricultural products continues to expand, producer countries are faced with increasingly complex requirements for food safety, quality assurance and traceability set by major markets, particularly in the EU and North America, which represent a threat to existing exporters and a "barrier" to new entrants. Increasingly, these stringent regulations create a bias in favour of countries with a highly developed infrastructure and large, well-resourced suppliers.

13. In high-value markets, there has been an increased emphasis on legislation and regulations, standards, codes of practice, traceability and differentiation by product quality. Statutory regulatory bodies are increasing their requirements in food safety and quality standards and for greater inspection of produce by recognised competent authorities at points of entry or exit to ensure compliance with quality and sanitary and phytosanitary regulations. Industry has also responded to consumer and governments concerns by the development and implementation of their own voluntary quality control, management, and assurance schemes.

14. In order to enter these highly regulated export markets, the private sector in the producing countries require the public sector to have comprehensive food control, inspection and certification systems to manage quality and food safety. However, many countries have poorly developed national food control systems which are characterised by outdated legislation and regulation, under-resourced competent authorities and surveillance and inspection services, and lack of competent staff and facilities in contaminant monitoring laboratories. This means that conformity assessments are either not undertaken and market opportunities are lost or are completed by external international companies with resultant high costs. Only well organised and resourced private sector players, invariably those relatively larger producers and exporters vertically integrated into the supply chain, are able to fully understand and meet regulatory demands. Therefore, the lack of effective public sector regulatory bodies and infrastructure inhibits the participation of small and medium enterprises in regional and international markets.

15. Whilst most developing countries have basic public and private institutional structures necessary to undertake food control and certification, they lack the resources and up-to-date knowledge to fully perform the tasks for which they are mandated. Donor support to develop a more co-ordinated approach, often through a rationalisation of services, is required in the following areas to deliver more effective support to the private sector: institutional and legal reform to develop and implement standards and technical regulations; capacity building of national competent authorities in conformity assessment, inspection and certification systems; support for public and private sector representation in the international fora for standards setting, trade negotiations and dispute settlement; and strengthen the monitoring and research capacity of key national and regional organisations responsible for risk analysis and pest surveillance.

THE REGULATORY ENVIRONMENT

16. The following presents a case study of the role of donor funding in supporting change in the regulatory environment to allow the adoption of poverty-reducing agricultural technologies.

REDUCING RISK AND VULNERABILITY FOR PRIVATE SECTOR DEVELOPMENT FINANCING

17. Managing risk and reducing vulnerabilities are essential elements in sustainable pro-poor growth through agriculture. In the industrialized countries, farmers benefit from an array of arrangements to isolate or cushion them from various shocks. There are two broad approaches, namely: Market-management solutions ie policies to better organize markets so that supply and demand is kept in balance; and Market-compensation solutions ie policies to compensate for the effects of market instability and unremunerative prices

18. "Market-management measures" collapsed in the late 1980s under the costly burden of managing surplus stocks and the liberalisation process started. At the national level, prior to the 1980s, supply management systems at national level were used by many countries. These were undertaken through price stabilisation mechanisms put in place in order to protect farmers from world market fluctuations and ensure stable, remunerative price for farmers eg case of EU Common Agricultural Policy with the market intervention price. These systems aimed to move the market risk from farmers to national governments. Owing to the costs of administering these systems, and to the difficulties of managing national supply in a context of WTO trade liberalisation, many have been dismantled. One notable exception is in Canada where national supply management systems are managed by producers themselves.

19. With the phasing out of producer price support schemes, and marketing boards, governments are now giving more attention to "market-compensation solutions" or income safety net programmes. They are looking at schemes that are cost-effective and do not distort trade.

20. Many different approaches exist in agriculture to manage risk, and each has its own context. For example, the World Bank's International Task Force on Commodity Risk Management[112] is focusing on market-based instruments to manage risk. In particular, it seeks to bring "price insurance" to farmers in developing countries through hedging schemes. The "insurance" is delivered through rural banks however it is doubtful if small-scale farmers will derive significant benefit. This Task Force is also looking at "yield insurance" by using weather derivatives. Opportunities to broaden the reach of such work requires to be explored further.

Warehouse receipts systems: setting the institutional context for effective risk management systems[113]

Warehouse receipts systems allow producers to manage better the marketing of durable crops for both domestic and export markets, by facilitating more remunerative trade with parties further down the marketing chain (eg processors and exporters) as well as making it possible for them to delay sale when prices bottom out during the immediate post-harvest period. In the case of sub-Saharan Africa, a broad consensus is emerging that in many contexts a strong warehouse receipts system is a vital precondition to the establishment of commodity exchanges and other price risk management systems.

THE PRIVATE SECTOR AS A SERVICE PROVIDER OF AGRICULTURAL ADVISORY SERVICES

21. Research, extension and training in agriculture receive a low percentage of public funds in lower income countries. 85% of resources on research worldwide are invested in high-income countries, 10% in India, China and East Asia, leaving only 4-5% for the rest of the world—and most of this through northern agencies undertaking research in the south[114].

22. There is a current trend of development agencies and countries alike to seek to privatise or semi-privatise the provision of these services. Whilst privatisation or semi-privatisation can bring in additional funding (through client cost recovery) and be a more client driven agenda, it may also bring disadvantages, including problems of ensuring provision of adequate services to the poor, cherry picking of topics yielding the best returns to investment, and the need for effective quality control and regulation of products (eg the supply of veterinary drugs) and services.

23. There is increasing division of funding between private and public goods in the developed and developing worlds; eg in the UK public funding for research and extension focuses on topics of policy concern (eg animal welfare, conversion to organic farming, global warming and the social impacts of rural policies), while farmers have to seek advice on crop and livestock production and marketing from private sources at full economic rates. In the developing world, some aspects of farming are seen as private goods—eg veterinary care in Tanzania, where the government stopped providing funding of public services to individual farmers. However, the private sector has proved too weak, and the returns in remote areas too unattractive for the vacuum to be filled by private providers, leaving farmers without cover—except in those areas where NGOs are promoting Community-Based Animal Health Workers (eg Babati Rural Development Project, run by FARM-Africa). This demonstrates the need for support for local private sector organisations (farmer-based or external) in developing countries to start up and establish good working practices. It cannot be assumed however that capacity (human, financial, infrastructural) is present.

24. There are four main models of extension/advisory service provision:

— Public funded, public provision, epitomised by the centralised Training and Visit extension system and the monolithic national research institutes that were often "welfare" organisations with very high fixed costs and few running costs. While there have been strong moves away from this model, often with encouragement from the IMF/WB, there are good reasons for the retention of public funding and provision for public goods research and extension (eg major epizootic diseases of livestock, locusts and armyworms beyond the control of individual farmers, aspects of rural livelihoods that particularly affect the poor, such as subsistence crops, and public goods such as soil and water conservation that have implications beyond individual farms).

— Public money, private delivery, such as in Chile or Uganda where funds are channelled to sub-county level, and farmer groups define their priorities and (together with local government) and contract private providers for extension services. In this model there is supposed to be increasing contribution from farmer groups. This model still requires public coordination and regulation. Problems include equitable provision of services, ensuring competition between private service providers (especially in remote or difficult areas), ensuring quality of service provision, and the need for dependable and relevant funding flows.

— Private funding, private delivery, such as tobacco, coffee, cocoa, tea and some other commodities in some countries—where research, extension and training can be provided out of a trade cess/levy. Also for input products such as seeds and agrochemicals. Distribution of these services is a problem, with access often being confined to peri-urban and other areas with a high density of purchasers.

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PRIVATE SECTOR INVESTMENT IN AGRICULTURAL RESEARCH

25. There are considerable differences between the patterns of agricultural research investment in the developed and developing world. In OECD countries, investment by the private sector grew at around 5% each year from 1981-93. By the mid-1990s, just over half of the research (51%) was privately funded, and totalled US$10 billion. In stark contrast, the share of private funding for agricultural research, development and technology transfer (ARDTT) in developing countries averaged 5.5% during this period—this was equivalent to about US$0.6 billion. It should be recognised that almost half of the developing country investment can be attributed to large multinationals operating through associated national companies. Similarly in the OECD countries, these same multinationals spend almost US$7 billion. The companies are Monsanto, Syngenta, Bayer/Aventis, Dow Agro and Du Pont, and collectively they own the intellectual property rights (IPR) on most of the world's agricultural innovations in the so-called post-genomics era.

26. Key determinants of the level of private investment include: (a) significant demand for agricultural inputs and outputs; that is, market size; (b) good domestic and/or export markets; (c) sufficient opportunities to appropriate returns on investments made or to retain IPR; and (d) conducive environment for conducting business in terms of regulations, taxes etc—low transaction /market entry costs. There is ample evidence in many developing countries to show that relatively few of these incentives are in place. This is accentuated where there is also a need to support pro-poor ARDTT, and as a consequence the poorer regions of the developing world fail to capture the investments of the private sector. There is thus a clear need to continue to use the public sector to ensure that the ARDTT needs of these regions are addressed.

BUILD NEW KNOWLEDGE TRANSFER PARTNERSHIPS

27. Government support to the private sector is often through cross-sector assistance in areas such as business goods and services, research, appropriate regulatory and inspection services. These normally are seen as areas of pre-competitive support. However, lack of direct company-level support can often prove a major barrier to company development.

28. The UK Knowledge Transfer Partnership scheme helps UK companies access the knowledge and skills within the UK's "Knowledge Base" (universities, colleges, independent research and technology organisations, and Government-funded research institutions). In the scheme graduates work on projects central to the needs of participating companies. Knowledge Transfer Partnerships are supported by funding from DTI covering up to 60% of costs to small and medium sized enterprises. Donor support to a similar type of scheme could be used to foster north-south and south-south public-private sector partnerships in order to:

— facilitate the transfer of technology and the spread of technical and management skills;

— provide industry-based training; and

— enhance the levels of research and training relevant to business by stimulating collaborative projects that forge partnerships between the science and business.

Q4. How is the private sector engaging in development?

BUILDING VOICE AND CAPACITY THROUGH BUSINESS AND TRADE ASSOCIATIONS

29. The formation of organisations, such as farmer or exporter associations, has proved to be an effective approach to facilitating private sector development, especially in the export sector. Thus private sector led and managed organisations (eg UFEA—Ugandan Flower Exporters Association; EHPEA—Ethiopian Horticulture Producers and Exporters Association; FPEAK—Fresh Product Export Association of Kenya) have greatly assisted in the creation of an effective enabling environment for their respective sector's development. Successful organisations have become widely recognised by governments, donors and other sector stakeholders as the representative voice of their sectors. Besides their advocacy role, they have undertaken a range of sector supporting activities including developing a sector strategy, organising study tours, training, facilitating standards certification, trade fair participation, promotion activities, freight coordination, the provision of data on markets, and inputs services.

30. Invariably donor support has played a vital role in supporting the rapid development of such associations, especially in the early stages. However, donor support is often short term and inadequate to support sustained outcomes and impact. For example, DFID support for the EHPEA played a vital role in assisting the horticulture sector's development but DFID shown reluctance to continue. In contrast, the Dutch Government has shown keen interest and now provides most support to the sector and to Dutch companies directly involved in the flower sector.

31. Meanwhile, the private sector calls for continued donor support in the following areas—training: establishment of in-country training capacity; research: eg support for collaborative trials between private companies and research organisations to help evaluate new varieties; market development, investment promotion and diversification: resources needed for a range of activities relating to support market analysis and development; input supply: develop the capacity to advise and support easy access and registration of various inputs (especially agrochemicals); quality and technical standards: vital to increase in-country private and government capacity to comply with various standards; smallholder production: eg compliance and marketing issues.

Q5. What aid instruments can be used by donors to encourage PSD? Private benefits versus benefits to society (public goods)—how much is this an issue?

ROLE OF PUBLIC-PRIVATE PARTNERSHIPS IN THE DEVELOPMENT AND UPTAKE OF TECHNICAL INNOVATION FOR POOR FARMERS IN ASIA AND AFRICA

32. Small-scale farmers in developing countries represent a limited or difficult market opportunity for the multinational private sector to develop and deliver the new technologies. Private companies in developing country may be better placed to deliver new products to poor farmers but lack the technical expertise to develop, produce, register or market new technologies. Developing viable public-private partnerships can be a key to making the benefits of research and new technology accessible to the poor.

CORPORATE SOCIAL RESPONSIBILITY

33. Corporate social responsibility (CSR) is not an aid instrument per se though CSR is sometimes promoted for social benefits rather than because assurance that good social and environmental practice or standards will lead to increased competitiveness and therefore investment. In some business cultures an important part of CSR is philanthropy (ranging from the United States to India). Some commentators dismiss this as "self-interested giving" and it should be noted that some projects fostered by well-meaning business often become "white elephants" and implementation does not always follow best practice, eg with respect to participation, as built up within the international development profession.

34. The business case for adopting CSR standards can vary according to the size of the firm, its location, the industry sector and importantly the nature of the links buyers have with suppliers. There are a wide range of CSR codes of practice operating in agricultural value chains. However, even in chains where codes, which draw increasingly from ILO labour standards, are actively implemented they do not always reach upstream to small-scale producers. Implementation of CSR by the private sector could be improved by the public sector ensuring that standards and legislation are mutually reinforcing. This would increase incentives for business to comply and contribute to development for example through improved working conditions and proper remuneration.[116]

35. Ethical sourcing and use of CSR codes of practice can contribute to development where they are effectively implemented, ie according to the spirit of the texts rather than just ensuring successful passage through an audit. Engagement in locally-owned processes to develop and audit codes and share experience of best practice to ensure that worker rights are improved is increasingly recognised as a significant part of the way forward.

FAIR TRADE

36. Fair trade is an approach to trade that has commercial as well as development objectives. Fair trade labels and standards have a distinctive focus on economic as well as social and environmental criteria. Empowering disadvantaged producers through better terms of trade, including a fair price is a central tenet. However there is a constant, but potentially creative, tension between development and trade objectives. This is likely to increase as attempts to mainstream fair trade continue. By and large, fair trade as practised by mainstream companies, including the main supermarket chains, however this tends not to effect their core business operations and is often used as a marketing tool to attract consumers willing to pay more for a product.[117] The danger of an exclusively mainstream approach is that only those producers that have reached a certain level of organisation, export capability and quality will be able to enter a fair trade market. Fair trade could become a path for only an elite set of producers. It is important that the trade development, market access, advocacy and lobbying elements of fair trade are not lost.[118] Donors could support these aims by encouraging mainstream companies to be more engaged in the developmental process including assistance to would-be fair trade supplier groups and to fund impact studies of benefits to existing groups.