An Action Plan for Developing Agricultural Input Markets in Tanzania

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I. Introduction Tanzania is a naturally rich country, but the realization of its rich potential is progressing slowly. As a result the incidence of poverty and hunger is high, food production has not been keeping pace with population growth, and nutrient depletion is excessive (more than 60 kg/ha). Several factors may have contributed to these trends, but the declining fertilizer use and limited use of other modern inputs seem to have played a key role. In confronting the twin challenges of food security and environmental protection, accelerated growth in the agricultural sector is essential and such acceleration cannot occur without adequate and timely supply of modern agricultural inputs (improved seed, fertilizers, and CPPs) at cost-effective prices to farmers in rural areas. In spite of market liberalization and private sector participation, farmers continue to face difficulty in accessing quality inputs at reasonable prices. To identify the factors responsible for inefficient input supply systems, IFDC, in collaboration with MAFS and SG 2000, conducted an assessment of agricultural input markets (AIMs) in Tanzania with a focus on the following objectives: • Assess the functioning and performance of AIMs—seed, fertilizer, and CPPs. • Identify the constraints affecting the performance of AIMs, with a special focus on policy, human capital, finance, market information, and regulatory systems. • Evaluate the potential of the private sector in supplying inputs. • Suggest actionable measures to improve the functioning and performance of AIMs. This activity is a part of the six country assessments that IFDC has conducted in collaboration with other institutions. Other countries include Ghana and Nigeria in West Africa, Malawi and Zambia in Southern Africa, and Uganda in Eastern Africa. USAID/Washington provided the seed money; whereas, other donors provided country-specific partial support for these assessments. These assessments have led to market development projects in Ghana, Nigeria, Uganda, and Malawi; project preparation work is underway for Zambia and Tanzania. II. An Assessment of AIMs in Tanzania In spite of market liberalization and private sector participation, AIMs remain underdeveloped and fragmented in Tanzania. As a result, farmers face high prices, limited accessibility, and poor quality products. It is easier to find “Coca-Cola” than seed and fertilizers in rural areas. The constraints affecting the performance of AIMs are divided into three broad groups, namely, macropolicy, market development, and technical. Macropolicy Constraints Macropolicy constraints include exchange rate depreciation, high interest rate, and poor rural infrastructures. The depreciating exchange rate of the 1990s created risk and uncertainty for suppliers and high prices for farmers and thereby discouraged development of well-functioning markets. This situation also led to high interest rates, which made input business development costly and risky. Poor conditions of rural infrastructure increase transaction cost and reduce incentive for suppliers to reach out to rural areas. Market Development Constraints Market development constraints relate to policy, human capital, access to finance and market information, and regulatory frameworks. An assessment of these factors revealed that the policy environment is non-conducive, human capital is inadequate, access to finance and market information is limited, and enforcement of regulation is ineffective, as elaborated below. These five constraints refer to the five pillars of market development. Non-Conducive Policy Environment—The policy environment confronting the private sector remains non-conducive. Actions by both government and donors (including NGOs) send wrong signals. First, there is a “mindset” problem. Some policymakers do not have faith in the efficacy of the private sector and, therefore, call for a return to distribution of subsidized inputs. Such an announcement during the 2003/04 season created uncertainty in the market and forced traders to postpone their imports and supply of inputs in rural areas. Second, the delay in the auction of KR II fertilizers and sale of inputs at below the market price by NGOs disrupt the sale of inputs by small dealers. Although the government and donor interventions are well-intentioned, they create distortions in the marketplace and thereby prevent the realization of the full potential of the private sector. Inadequate Human Capital—There is a paucity of dealers in rural areas. Most wholesalers and dealers are concentrated in cities and big towns. The four Ps of marketing (price, product, place, and promotion) imply that the product should be sold closer to the farmer. However, in Tanzania farmers must travel 20-30 kilometers to buy inputs. The unavailability of inputs near the farmgate creates disincentives for farmers. Furthermore, technical and business training of traders involved in the input business is limited. To be a successful entrepreneur, the dealer must have sound knowledge of different aspects of products and business acumen. Technical knowledge of extension workers and quality control inspectors is also limited. Thus, both quality and quantity of human resources involved in the input business are inadequate. Limited Access to Finance—Due to high interest rates and stringent collateral requirements, it is not easy to borrow funds from commercial banks to develop input business. Although the Government of Tanzania (GOT) has created an Input Trust Fund to help small input dealers, the Fund’s outreach has been limited. Consequently, most small dealers continue to depend on their own limited funds and incur high transaction costs because they cannot buy large quantities. Their frequent trips to the town to get inputs increase transaction costs and reduce the scale of their business. One dealer in Kigoma travels twice a week to the town to get 5-10 bags of fertilizers. Another has to travel frequently to Dar es Salaam to purchase a few tons2 of fertilizers. If these dealers had access to finance, they could easily purchase large quantities in one trip (rather than making several trips), save on transportation charges, and thereby sell inputs at a lower price. Insufficient Market Information—Well-functioning markets require that the actors involved in the market are fully informed about prices, quantities, stocks, and transactions in various market segments. Although MAFS collects information about prices and input use, due to funding constraints, coverage is inadequate and dissemination is limited. Many dealers and farmers are not fully informed about prices and quantities in various parts of the country. The lack of market information prevents farmers and dealers from procuring inputs from the cheapest source and thereby forces them to pay higher prices. Ineffective Enforcement of Regulations—Regulations on quality control and truth-in-labeling for seed, fertilizer, and CPPs are inadequate and not effectively enforced; as a result, farmers resort to using outdated CPPs and poor quality seeds. Enforcement of regulation at retail (point of sale) is weak, partly due to limited human and financial capital with regulatory agencies. Technical Constraints Technical constraints encompass inadequate research and extension support, limited work on soil testing for developing sound fertilizer recommendations, and insufficient knowledge with farmers and dealers about proper use and sale of modern inputs. III. Potential of the Private Sector Given the mindset problem and a general distrust of the private sector, the team paid special attention to the potential of the private sector to supply inputs and concluded that the potential of the private sector is “good but constrained.” There are many importers and retailers who could be strengthened to create well-functioning input markets. However, macropolicy, market development, and technical constraints mentioned earlier have constrained the private sector to realize its full potential. Unless a “proactive” approach is followed to build the capacity of the private sector and to create an enabling environment, the private sector may not realize its full potential and Tanzania may not develop well-functioning input markets. IV. Measures Needed to Strengthen the Functioning and Performance of AIMs in Tanzania Macropolicy and market development measures needed to strengthen the functioning and performance of AIMs in Tanzania are summarized in Matrix A. Measures related to market development are divided into two broad groups: • The Five Pillars of Market Development. • Other Supporting Measures. These measures are based on the concept of “shifting the supply curve to the right” (SCCR). A shift in the supply curve (of inputs) to the right increases supply of inputs to farmers at a lower price by reducing transaction costs. The Five Pillars of Market Development Well-functioning markets need an enabling policy environment, adequate human capital, improved access to finance, market transparency, and effective enforcement of regulatory frameworks. The following actions are proposed in each area. Policy Environment—An enabling policy environment should be created. Policymakers and donors should refrain from sending the “wrong signal” and creating distortions in the market, have confidence in the potential of the private sector, and devote resources to strengthen its capacity to perform efficiently in a competitive environment. If socially desirable interventions are needed, they should be implemented in a market-friendly manner. Rather than distributing inputs, the concerned entity should distribute “purchasing power,” so that one can “kill two birds with one stone,” namely, market development and poverty alleviation. Human Capital—The lack of independent dealers in rural areas is the single most critical constraint depriving farmers of obtaining quality inputs on time and at cost-effective prices. Human capital should be developed by focusing efforts on both quantity and quality of input dealers. Through training and technical assistance, a large cadre of independent dealers should be created. These dealers should be trained in both technical and business skills and linked to commercial banks and wholesalers for procuring inputs for farmers in the village. Training and technical assistance should also be provided to wholesalers and importers so that they can develop business linkages with global and regional partners. An association of input dealers called Tanzania Agri-input Dealers Association (TADA) should be created to help small dealers in acquiring marketing skills and information. Access to Finance—Finance is the lifeblood of business development. Although commercial banks are endowed with liquid funds, they are risk-averse and afraid to lend to small agri-business entrepreneurs. To improve access to finance by importers and dealers and to encourage commercial and development banks to lend funds for agri-input import and business development, two risk-sharing funds should be established: Agri-input Import Development Fund (AIDF) and Agri-input Business Development Fund (ABDF). Under each fund, interested importers or dealers will be required to contribute 30% of the required capital; whereas, commercial banks will provide the remaining 70% funds, but 30% of this 70% will be “guaranteed” by the AIDF or ABDF. These funds will be managed by reputable banks in the country but allow the commercial banks to venture into advancing funds to input dealers. Warehouse collateral in inputs should also be encouraged. Market Intelligence and Transparency—To promote competition and improve efficiency, MAFS’s capabilities in market information and dissemination should be strengthened by creating and operating a Market Intelligence and Transparency System (MITS). Under this system, not only will the information about prices and available quantities be collected and disseminated but also this will serve as a tool for MAFS to monitor the situation in every district so that any shortage or price hike can be corrected. Also, MAFS could monitor the arrival of imports to avert potential shortages. Enforcement of Regulation—Ensuring quality inputs to farmers is a public sector responsibility in a free market situation. Not only does capacity for enforcing regulation dealing with seed and CPPs need strengthening at the point of sale but also fertilizer legislation needs to be drafted and enacted and then capacity should be built to enforce it. Other Supporting Conditions In addition to strengthening the five pillars of market development, additional work is needed on the supporting conditions dealing with technology transfer, integration of multi-country markets, infrastructure and output market development, and market-friendly safety nets for hunger and poverty alleviation. Technology Transfer—Although strengthening input supply is essential, helping farmers to use inputs efficiently is also critical. To improve the farmers’ knowledge base, research and extension must be strengthened and soil testing should be conducted to improve fertilizer recommendations, especially for grain-legume rotations. To help poor farmers financially, grain-legume rotations should be encouraged because such rotations reduce nitrogen requirements for grain crops and give farmers a source of cash income (groundnuts, beans, and peas). Capacity for breeder and foundation seed production needs strengthening. Integration of Multi-Country Markets—Tanzania has borders with several countries, and with its port in Dar es Salaam, it is a global gateway to various landlocked countries. Such a privileged position should be used to generate economies of scale in procurement of inputs, especially fertilizers, by developing cross-border trade. For example, a wholesaler in Mbeya should plan to sell fertilizers not only in Mbeya but also in Kasama in Zambia (on TAZARA route) and Karonga in Malawi. Such regional integration of markets could create a win-win situation for all—economies of scale in procurement and reduced prices for farmers. Such cross-border trade synergies should also be harnessed in other border areas. Improved Infrastructure—Although roads in rural areas need to be improved, improvement in railway wagon capacity is urgently needed to reduce transportation costs for Southern Highland districts. The supply of covered wagons should be increased so that fertilizers can be shipped in bulk from the port to the consuming areas without hiring a security guard to protect fertilizer bags in open wagons. Also, existing storage capacity should be used to store inputs for areas far away from Dar es Salaam. Output Market Development—The demand for inputs is a derived demand; therefore, output, especially grain, markets should be developed by promoting storage, grading, standards, market information, and warehouse collaterals. Market-Friendly Safety Nets—Although resources should be devoted to make input markets function more efficiently and effectively, the needs of the resource-poor farmers who would remain excluded even from well-functioning AIMs should be addressed. For such people, the GOT should design market-friendly safety nets and empower the farmers to participate in the market process. V. Institutional Arrangements Holistic Approach—As various measures are implemented, proper sequencing and phasing should be observed. However, to realize synergy in implementation, the five pillars of market development should be implemented in a holistic manner through public-private partnerships. Linkages—The action plan has linkages with several on-going or proposed programs such as PADEP, Agricultural Sector Development Program (ASDP), and other donor programs. Improved input supply will also support producer organizations proposed by USAID/Tanzania for various commodity groups. The ASDP Secretariat should take the lead in liaising with action plan implementation. Commitment—The implementation of the action plan requires strong commitment by both GOT and donors. Resource Requirements—The implementation of the action plan will require $11.3 million in operating costs, $3 million (in local currency) for ABDF and $15 million for Agricultural Input Import Fund (AIIF) in capital funds over a 5-year period. VI. Conclusion • The development of input markets is the beginning, not the end. Well-functioning AIMs will lay the foundation for a productive and prosperous agriculture in Tanzania. • With strong government commitment and long-term donor support, well-functioning AIMS can be established
Agricultural Inputs, Private sector