Policy Workshop on Strengthening Regional Trade in Agricultural Inputs in Africa: Issues and Options and Private Sector Roundtable Meeting on Expanding Fertilizer Markets in Africa: Issues and Options
IFDC, in collaboration with the Common Market for Eastern and Southern Africa (COMESA), convened a policy workshop entitled "Strengthening Trade in Agricultural Inputs in Africa: Issues and Options," held July 1-4, 2008, in Lusaka, Zambia. The workshop was organized as part of the Hewlett Foundation-funded Strengthening Trade at the Regional Level in Agricultural Inputs in Africa (STAR) project. The workshop aimed to identify public policy, private market, and trade action areas that will improve agricultural input market and trade development. The workshop was attended by more than 70 participants representing regional and national policymakers; private sector entities involved in fertilizer importation, wholesale, and retail trade and logistics; farmer organizations; development partners; and non-governmental organizations (NGOs). Key Issues in Agricultural Input Market Development Recent Initiatives and Progress Enhancing international and regional trade has been recognized as a significant opportunity to improve agricultural input markets' performance. The Abuja Declaration on Fertilizer for an African Green Revolution calls for appropriate measures to reduce the cost of fertilizer procurement at national and regional levels. The New Partnership for Africa's Development (NEPAD) reported progress on several initiatives that address key resolutions of the Abuja Declaration. The Regional Joint Fertilizer Procurement Initiative, led by the African Development Bank (AfDB), aims to address Resolution 8 of the Abuja Declaration by encouraging and facilitating governments and private firms to place large orders on the international market. A regional meeting was convened in August 2007, which resulted in establishment of a Regional Joint Procurement Working Committee for Fertilizers to spearhead the initiative. As mandated in Resolution 9 of the Abuja Declaration, the promotion of fertilizer production is being pursued by COMESA, the Southern African Development Community (SADC) and numerous development agencies, including IFDC. SADC will commission a series of studies to establish the current production status of fertilizer in the region and recommend ways to increase production. The Abuja Declaration also calls for harmonization of policies to ensure duty- and tax-free movement of fertilizer across regions and the development of capacity for quality control. When the respective COMESA and East African Community (EAC) customs unions are in place, the Common External Tariff (CET) for all imported fertilizers has been proposed at 0 percent. This sets a good example for other Regional Economic Communities (RECs) to promote duty- and tax-free movement of fertilizer across borders. Six Economic Community of West African States (ECOWAS) member states are in the process of developing fertilizer legislation and supporting regulations. A Private Sector Perspective Before the workshop, a private sector roundtable meeting was convened to discuss issues and identify options for expanding fertilizer markets in Africa. The key issue facing the private sector is Local fertilizer production: High international fertilizer prices suggest that local and regional fertilizer production may be financially and economically viable. However, for urea and ammonium nitrate, it takes four to 6 to five years before a new plant is fully operational, so adding new nitrogen (N) manufacturing capacity is a long-term solution. In the short term, utilization of existing capacity should be improved and re-invested. Several fertilizer plants (e.g., Malawi, Zambia and Zimbabwe) are operating below capacity or have completely ceased production. While SADC and COMESA are committed to exploring the potential for rehabilitation of these facilities, the private sector encourages policymakers to create commercial investment opportunities. Finance: Sufficient cash flow is a prerequisite for successful fertilizer trade and distribution. Yet, procurement and marketing of fertilizers are constrained by a lack of finance, limiting transaction sizes, inventories and final consumption levels. It stifles total volumes traded and marketed and inhibits the achievement of economies of scale. This reflects a generally risk-averse approach of commercial banks toward agricultural lending. Capacity building among commercial bank loan officers and introducing risk management instruments and other risk-reducing mechanisms may help overcome this key constraint. Policy: First, regarding the role of government in input markets and its relationship with the private sector requires more realistic planning. When the private sector is invited to tender for supplying government programs, tender rules and procedures often require physical stocks to be positioned in-country before tendering. This requirement poses too high a risk for firms and should be addressed. Second, where government programs exist, subsidies were considered to distort markets and inhibit private sector participation in market development. Moreover, fertilizer sales through subsidy programs tend to discourage and displace commercial sales. There is a need to improve subsidy programs and include clear modalities for phasing out government market interventions. Third, COMESA's approach to regional procurement was met with skepticism because it appears to revolve around pooling public procurement among various countries. It was believed that true marketing efficiency gains could be made only by improving the private sector supply chain at various levels and encouraging economies of scale, not by facilitating procurement for government programs or placing large orders by donors. Encouraging economies of scale can include facilitating private stockholding and wholesaling at strategic ports. Resolving finance and other marketing efficiency-enhancing measures can then focus on downstream regional marketing and distribution. Partnerships are needed for this. The private sector should be more involved in COMESA's regional procurement planning process to ensure that workable solutions are developed. While regional procurement by COMESA or public sector agencies was discouraged, establishing a regional holding fertilizer warehouse in port cities like Beira, Dar es Salaam and Accra to benefit from economies of scale in procurement was endorsed. Policy analysis and capacity building among policymakers are required to overcome the current policy constraints in support of the above. Shipping and handling: Investments in infrastructure are required to allow efficient shipping, handling and transport. Without such investments, capacity limitations and other inefficiencies will continue to prevent the fertilizer sector from developing. Beira Port, which serves several countries in southern Africa, is limited to smaller vessels due to silt buildup at the port entrance. The meeting was advised that plans to dredge the port entrance are underway, and dredging is expected to occur within the next few years. There is also a lack of bulk storage capacity. Increased bulk storage capacity will allow more efficient discharge, thus reducing demurrage and more efficient bagging and handling. Port rehabilitation activities and resources should concentrate on Beira Port at this stage. Although Nacala Port can accommodate larger vessels (25,000 mt), the port's handling capacity is low, in poor condition, and will require substantial investment. In addition, the railway line and road access are in poor condition. Establishing bulk-holding fertilizer warehouses will be beneficial. Beira was identified as a priority port for such a warehouse. IFDC's pre-feasibility study on establishing a regional fertilizer-holding warehouse at the port of Beira was discussed and endorsed for further action. 7 Performance of Regional Input Markets Policy: The Kenyan fertilizer market is one of the few African success stories demonstrating how input markets can function under fully liberalized conditions. Competition, vertical integration within the fertilizer supply chain, economies of scale and overall growth in the sector have resulted in significant efficiency gains and cost reductions. During 1990–2006, marketing costs and margins have declined by about 40 percent. The success of the Kenyan fertilizer industry has been attributed primarily to a stable policy environment since 1990. For example, import licensing quotas and foreign exchange and retail price controls were eliminated. Importantly, no large subsidy programs have been implemented, and market distortions caused by artificially low fertilizer prices offered by donors or the government have been kept to a minimum. This has undoubtedly boosted the confidence in the market by the private sector. Regrettably, in 2008, the Kenyan government engaged directly in the market by importing fertilizers. Reducing marketing costs: Besides market-friendly policies and competition among market participants, other measures are required to reduce costs along the agricultural input supply chain. Marketing costs in Sub-Saharan Africa (SSA) are extremely high compared to countries in Asia. Ocean freight and land transport costs are two to three times higher than those incurred in Asia, caused by smaller vessel sizes due to port capacity constraints and the poor quality of inland road and rail infrastructure. Tariff and non-tariff barriers for imports and goods in transit add to the marketing costs. In addition, the relatively small market and the use of many specialized NPK compounds prevent economies of scale from being achieved through bulk procurement. Establishing a bulk warehousing facility at Beira Port can potentially reduce the cost of fertilizer imports by $30–$60/mt. Stimulating local fertilizer production is high on the regional and national policy agendas. The company Minjingu Mines and Fertilizer, based in Tanzania, represents a good example of how a former state-owned company was successfully privatized. Regulatory issues: Regulatory frameworks governing intra-regional trade in fertilizer, seed and crop protection products (CPPs) are either absent or not implemented. Regarding seed and CPPs, regulatory frameworks have been developed at the regional level (SADC, ECOWAS), and the challenge now is to ensure implementation and enforcement. The absence of a regulatory framework for fertilizer constitutes a significant non-tariff barrier that impedes trade and hinders investment and market development. In international trade, non-tariff measures are dealt with under specific World Trade Organization (WTO) agreements, such as the Agreement on Agriculture and the Agreement on Technical Barriers to Trade (TBT). WTO defines technical trade barriers as regulations, standards, testing and certification procedures which could obstruct trade. If regulations are set arbitrarily, they can be used as an excuse for protectionism or disadvantage market participants. The WTO's TBT Agreement seeks to minimize technical barriers to trade by encouraging members to adhere to several basic principles and recognizes that members must ensure quality control; protect human, animal and plant life or health; protect the environment; and prevent malpractice. However, it also states that technical regulations should not create unnecessary obstacles to trade. Under this principle, fertilizer regulations should refrain from prescribing specific nutrient compositions or granule sizes. Private Sector Development Developing agricultural input markets cannot be achieved without stimulating private sector activity. In countries where government programs are responsible for distributing subsidized fertilizer and seed, the private sector cannot compete and remains underdeveloped. Therefore, market support mechanisms that add to, not displace, commercial activity are required. Rather than reducing the product's price, farmers' purchasing power can be boosted among targeted farmers, creating effective demand and generating market activity. However, long-term sustainability must be taken into account. Voucher programs have been developed to transfer purchasing power support to targeted beneficiaries. To ensure that farmers will eventually be able to use fertilizer profitably under normal, non-subsidized market conditions, any subsidy or income transfer program should be complemented by programs that, among other things, aim to reduce marketing costs and enhance commercial credit availability. 8 An important dimension of increasing fertilizer use in SSA is the need for improving acidic soils that prevent efficient nutrient uptake. Improving acidic soils by adding lime or reactive phosphate rock can be seen as a public responsibility for which public investments must be made. Identification of Actions on Key Themes The outcomes of the presentations and subsequent discussions resulted in an action agenda that addresses short-term and longer-term agricultural input development issues. The following eight action areas have been identified: 1. Improve the policy environment by strengthening the policy-making process. 2. Remove trade barriers. 3. Improve access to finance. 4. Increase African fertilizer production capacity. 5. Enhance the performance of fertilizer procurement from international markets. 6. Facilitate identification of private sector business opportunities. 7. Promote market development. 8. Promote fertilizer technology development and transfer. For each action area, one or more actions have been identified that will guide ongoing market development efforts at COMESA, EAC, SADC and other RECs, mostly requiring public-private partnerships.
Fertilizer technology, Agricultural Inputs