Written evidence submitted by Antony Ellman
Summary:
1. This submission to the IDC, from an agronomist/socio-economist
who worked for over ten years with CDC from 1985 to 1996, makes
practical proposals for an area of development activity in which
CDC once had a major comparative advantage over other institutions
- the creation of sustainable income and employment-generating
opportunities for small farmers in Africa and Asia.
2. The writer suggests that, despite the global demographic,
economic, environmental and political changes of the last 25 years,
there is still a major gap in the field of small farmer development
initiatives which CDC, reformed along the lines suggested in the
Secretary of State's statement to Parliament on 12.10.10, could
play a significant role in filling. Proposals are made for the
changes needed to enable CDC to undertake this important developmental
role with a greater emphasis on poverty alleviation.
Writer Profile:
3. I am an agronomist and socio-economist with more
than 40 years' experience of planning, management, consultancy,
research, training and evaluation of small farmer development
programmes in many countries of Africa, Asia, Caribbean, Central
America and South Pacific. I have worked with development organisations
in all sectors - public, private and voluntary from 1962 to present.
4. In 1985 I was hired by CDC to undertake a global
review of the small farmer programme for which the Corporation
was responsible, with the aim of identifying the programme's strengths
and weaknesses and suggesting how the strengths could be built
upon and the weaknesses overcome. On completion of the review
in 1987 I was asked to stay with CDC to assist in implementing
the recommendations, which I did until 1996 when it became clear
that CDC's profit-maximising objectives were inconsistent with
major investments in smallholder agricultural production.
5. Since 1996 I have worked as a freelance agricultural
consultant and associate of the Natural Resources Institute, University
of Greenwich. I have focused particularly on improving small farmers'
access to markets and to technologies through which raw material
yields and prices can be raised and value added through efficient
processing and marketing.
BACKGROUND TO
THE PROPOSAL:
6. From the 1950s onwards CDC pioneered innovative
approaches to smallholder agriculture and rural development, primarily
by enabling small-scale family farmers to grow export crops such
as coffee, tea, rubber, oil palm, bananas and sugarcane and to
secure markets and enhanced prices for their products. The core
component of the strategy was the construction and management
by CDC, often with co-investment by other financing institutions,
of servicing centres and processing facilities which supported
smallholder production, purchased and processed their raw materials,
added value by processing and storage, and marketed the end products.
7. Notable examples of the strategy were the Kenya
Tea Development Authority and Mumias Sugar Company (both in Kenya),
Smallholder Tea and Coffee Authorities in Malawi, and a co-operatively-owned
oil palm factory in Costa Rica. In cases where the main crop was
new to farmers and doubts existed as to whether they would take
up the production opportunity in sufficient numbers, CDC also
established nucleus plantations around the factories to demonstrate
and develop the new technologies, guarantee a minimum supply of
raw materials, and thus ensure the viability of the enterprise
while smallholder production was building up (eg several oil palm
projects in Papua New Guinea, rubber in Ivory Coast, etc).
8. The most successful of these projects owed their
success to a number of features:
- (a) a marriage between private sector investment
and commercial management principles on the one hand, and public
sector investment in infrastructure, rural services and poverty
alleviating initiatives on the other hand;
- (b) a combination of CDC's commercial finance
(often with co-investors) in the factory and (where needed) in
the core plantation, and of soft loans or grants from DFID or
other aid organisations in social components of the programme;
and
- (c) a confluence of financial investment
for development with an in-house management capacity for productive
use of these resources, including in the best cases a local capacity-building
programme to ensure sustainable management by local teams when
CDC management was withdrawn.
9. Shortcomings were noted, particularly in the 1970s
and 1980s when CDC was slow to adapt its original strategy for
natural resource development to the changing economic and political
realities of the day. The most notable weaknesses identified in
the smallholder review conducted by the writer were:
- (a) primary emphasis on cash crop production
to the exclusion of food crops, with consequent negative impact
in some cases on local food security;
- (b) promotion of inappropriate capital-intensive
production technologies which made insufficient use of the strengths
of smallholder farming systems;
- (c) adoption of unsuitable management systems
borrowed from the plantation sector, which allowed for limited
farmer participation in decision making;
- (d) insufficient attention to key links in
supply chain management, notably the supply of production inputs
and control of product quality; and
- (e) lack of stability in product prices and
insufficient proportion of the end market price returning to the
growers.
10. Many of these weaknesses were being addressed
when, from the mid-1990s, CDC raised dramatically its target for
return on capital employed from an average of 8% to over 20%,
a strategic change which played a major part in generating the
current inquiry into the Corporation's future. This change effectively
debarred natural resource management as a priority sector for
CDC investment because of the long maturation period, high risks
and low returns involved. In particular it ruled out investment
in smallholder production because of a perception, mistaken in
the view of the writer and of much empirical evidence, that without
direct control of raw material production not even the potential
returns on capital employed would be achieved.
CURRENT CONTEXT
AND NEEDS:
11. The constraints and opportunities facing natural
resource development in African and Asian regions today differ
in many respects from those that applied in the 1970s:
- (a) population growth has greatly reduced
the availability of under-utilised land and water resources with
potential for commercial development;
- (b) rural-urban migration, industrial expansion
and demographic changes have reduced the amount of under-utilised
rural labour available for agriculture;
- (c) onset of climate change and environmental
degradation have added to the risks and uncertainties that were
always inherent in natural resource development;
- (d) urbanisation, globalisation and greatly
improved communications have opened new markets for rural producers;
- (e) indigenous management capabilities have
been significantly improved.
12. Despite (in some respects because of) these changes
there is still an urgent need and opportunity for investment in
viable rural and agro-industrial enterprise, in which CDC with
its long experience in this sector can play an important role:
- (a) the bulk of the world's poor still live
in smallholder households (1.5-2 billion people according to the
World Development Report 2008) and have no other sources of income
or employment other than agriculture;
- (b) the low opportunity cost of smallholder
family labour, and the ability of small-scale farmers to manage
labour-intensive crops, gives them a comparative advantage over
other categories of producer;
- (c) under-utilised agricultural land is still
available for development in many African countries, as demonstrated
by the current wave of "land grabs" under which large
tracts of agricultural land are being offered to investors most
of whom are less experienced and certainly less scrupulous than
CDC;
- (d) commodity prices for both food and many
industrial crops are soaring, presenting opportunities for responsible
investors to gain acceptable returns on capital employed while
contributing to rural development, stabilisation of commodity
prices and world food security.
PROPOSAL FOR
CDC INVESTMENT IN
SMALLHOLDER SUPPLY
CHAINS:
13. A CDC reformed along the lines proposed in the
Secretary of State's statement to the House would be well positioned
to make direct investments, of both equity and loan finance, in
the following elements of agro-industrial development involving
small farmers in Africa and Asia:
- (a) supply of high quality production inputs
needed by small farmers (seeds, fertilisers, agrochemicals, machinery)
by well managed trading companies;
- (b) state of the art processing facilities
which engage directly with small scale producers through buyer-seller
agreements. Processing should cover both traditional agricultural
exports and food crops for local and regional markets;
- (c) crop storage, packaging and marketing
companies which maximise addition of value to locally produced
raw materials and processed products.
14. Target rates of return on such investments should
be comparable to those adopted by other DFIs and social enterprise
investors, enabling CDC to obtain acceptable returns on its investments
while creating sustainable agricultural businesses and contributing
more broadly to long-term rural development.
15. Analysis of these investment opportunities should
cover social and environmental costs and benefits as well as financial
and economic. CDC's Investment Code already addresses ESG (Environment,
Social and Governance) practices, but because recent investments
have been through fund managers rather than directly into productive
enterprises it has not always been easy to ensure that the code
is fully applied.
16. Relations between raw material producers and
the servicing/processing/marketing companies should be based on
the following broad principles and practices:
- (a) transparent financing and accounting
procedures;
- (b) equitable sharing of risks and benefits
between producers and processors, codified in raw material price
formulae and buyer-seller contracts;
- (c) encouragement to producers to acquire
progressively an ownership stake in the servicing companies;
- (d) regular consultation and participation
of producers in decision-making through representative farmers'
organisations;
- (e) focus on the producers' total land use
system including food crops, cash crops, livestock, and sustainable
utilisation of soil, water and forest resources.
An independent intermediary organisation, perhaps
a local NGO, would often be needed to facilitate and build such
relationships between producers and companies.
17. CDC should rarely be the sole investor in such
enterprises but should collaborate with:
- (a) other commercial financing institutions
including regional and international banks or DFIs;
- (b) end product purchasing companies interested
in securing reliable and ethically sourced supplies (many such
companies are already incorporating small-scale producers into
their supply chains - eg Unilever, Tetley, Kraft, Bodyshop etc);
- (c) national government institutions for
investment in infrastructure development and training;
- (d) public sector funding institutions and
donors (including DFID and regional funders such as NEPAD's Comprehensive
African Agriculture Development Programme), where soft money is
required in the short term for achieving long term goals;
- (e) local microfinance institutions for supplying
short and medium term credit to smallholder producers;
- (f) international and national agricultural
research institutions for ensuring that optimal production technologies
are developed and applied;
- (g) national and international NGOs with
expertise in rural enterprise management, capacity building for
farmer organisations, and monitoring the social and environmental
impacts of development.
18. It is vitally important that such financial investments
are developed with their manageability in mind, and are linked
closely to measures for strengthening management capacity on the
ground. Though CDC itself now has very limited field management
capability (nor would it be generally appropriate in the 21st
century for many such skills, other than in specialised fields,
to be centrally sourced), it is important that the focus of CDC
and its partners on management skills as an integral part of the
investment package be rebuilt.
19. To give effect to such investment/management
linkages a number of measures are suggested:
- (a) CDC itself needs to employ or have ready
access to specialists with hands-on technical and managerial experience,
to allow realistic appraisal, monitoring and support for innovative
agricultural and agro-industrial proposals;
- (b) investors as much as producers need to
have confidence that the most efficient and cost-effective field
management teams are employed;
- (c) apprenticeship and young professional
training schemes need to be re-established, and strong support
given to agricultural management training institutions and programmes
in the countries of operation, to build up local management capacity
as quickly as possible.
CONCLUSION:
20. The proposals made in this note would enable
CDC, as a public sector institution with a firm commercial foundation,
to continue its mission of generating financially viable and sustainable
agricultural development while contributing to wider goals of
poverty alleviation and food security. More detailed analysis
and elaboration of the proposals will clearly be needed. The writer
hopes that IDC members will find the suggestions made helpful
to their inquiry.
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