The Future of CDC

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;

(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;

(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.