An Action Plan for Developing Agricultural Input Markets in Uganda
Uganda is a predominantly agricultural economy. The agricultural sector contributes 43% to the gross domestic product (GDP), provides employment to over 80% of the workforce in rural areas, and is a main source of foreign exchange earnings (85% of export earnings). Yet, land and labor productivity is low and the incidence of poverty, especially in rural areas, is high. Nearly one-half of the population lives below the poverty level and faces food insecurity. The challenges of food insecurity and poverty are compounded by the health crisis and environmental degradation that Uganda is facing. In confronting these socioeconomic challenges, the agricultural sector has a lead role to play. However, with its current low productivity status, the agricultural sector can do little to improve the socioeconomic situation. The agricultural sector itself requires a significant transformation such that crop yields and incomes are greatly increased. Such transformation cannot be achieved without the sound application of modern technologies embodied in improved seeds, mineral fertilizers, CPPs, water management, and better agronomic practices. To transform its agriculture, the Government of Uganda (GOU) has introduced several programs. Notable among them are macroeconomic reforms of the mid-1980s, export diversification of the 1990s, and the Poverty Eradication Action Plan (PEAP) and the PMA of 2000. The PMA has become the blueprint to guide GOU’s efforts toward agricultural development and transformation. Under the PMA, the GOU has identified seven pillars for focused efforts. The pillars are national agricultural advisory services (NAADS), research and technology development, agricultural education, rural financial services, marketing and agroprocessing, physical infrastructure, and natural resource management and utilization. To strengthen the demand-driven extension activities, the GOU has already launched NAADS on a pilot basis in six districts—Mukono, Kibale, Arua, Kabale, Tororo, and Soroti. Under this pilot effort, extension services are decentralized, and local governments are allocated funds to provide farmer-demanded extension support. All these governmental efforts are important and praiseworthy. However, as the input supply systems have been privatized and liberalized, the input sub-sectors seem to have suffered from a benign neglect on the part of both policymakers and donors. As a result, farmers in rural areas do not have easy access to inputs (improved seeds, fertilizers, and CPPs), and even where these inputs are available, their prices are very high. This situation forces farmers to rely on low-productivity subsistence farming methods and thereby live in a vicious cycle of poverty and low productivity. Goal, Scope, and Objectives of the Action Plan Well-functioning agricultural input markets (AIMs) are the backbone of agricultural transformation in Africa. Only such markets can ensure inputs of good quality, easy accessibility, and lower prices to farmers. Hence, the goal of the action plan is to suggest appropriate measures to create well-functioning AIMs in Uganda. This was achieved by conducting an assessment of input markets in Uganda and then preparing an action plan for their orderly development. The assessment focused on the following themes: 1. Assessment of the structure, functioning, and performance of AIMs—fertilizer, seed, and CPP markets. 2. Identification of constraints affecting the performance of AIMs. 3. Evaluation of the potential of the private sector in supplying inputs. 4. Development of an action plan incorporating measures needed to make AIMs more effective and efficient. 5. Institutional arrangements for implementing the action plan. The action plan mainly focuses on issues related to the supply-side of the market equation for two reasons: First, the input supply system changed from a public sector monopoly to a private sector-based competitive market, and therefore there is a need to assess the potential and efficacy of the private sector in supplying inputs. Second, while input demand has been studied extensively, few studies have paid attention to the issues related to input supply and transaction costs, whereas a reduction in transaction costs is essential to lower input prices for small farmers. The action plan also focuses on technology transfer, output market development, and regional integration of markets that affect input demand directly and significantly. Because of its emphasis on improving the supply of modern inputs for agricultural transformation, the action plan complements and strengthens Uganda’s plans for agricultural development in general and its priorities identified in the PMA in particular. II. An Assessment of Agricultural Inputs Markets in Uganda The Policy Environment Due to successful implementation of economic reforms, there are few policy distortions in the input markets. Specifically, no parastatals are involved in distributing inputs, no control or regulation of prices is enforced, and no subsidies are given on inputs. However, there are concerns that should be addressed so that no impediments are created for the private sector participation. These include recent intention of the government for free distribution of seed, seedlings, and planting materials for selected crops; distribution of inputs through NGOs that do not recover full costs of inputs; and free or subsidized supply of breeder seed from NARO to the Uganda Seed Project (USP). Likewise, poor enforcement of quality control regulations poses a serious threat to an orderly development of well-functioning input markets. While there are no pricing distortions in the market, the macroeconomic environment remains rather market unfriendly. Continuous depreciation of the Ugandan shilling (USh), high interest rates, and limited access to finance are serious constraints that discourage private sector involvement in agricultural marketing. Interest rates vary from 20% to 30% in the urban areas and from 30% to 48% in the rural areas. The unwillingness of commercial banks to lend for agriculture and agribusiness operations makes it difficult for emerging entrepreneurs to start new business ventures. In addition to the aforementioned constraints, there are numerous market development-related challenges affecting private sector involvement in agri-input marketing. These include the lack of market information, inadequate access to finance, limited marketing and business skills (human capital), and poor enforcement of regulatory frameworks. Confronting these challenges will require significant xi resources and commitments. Although the GOU is not involved in direct distribution of inputs, some donors and NGOs promote the free distribution of inputs for relief or safety net purposes. It is recommended that such well-intentioned efforts should be implemented in a market-friendly way. Farmers or other intended beneficiaries should be empowered with purchasing power in the form of vouchers to buy the required quantity of inputs from the marketplace. Although there are no direct tariffs or taxes on inputs imported or used, there is a concern that taxes on packaging materials and fuel add to the cost of seed and fertilizer to the farmer. Since these items are also used in other sectors of the economy and therefore carry a uniform value-added tax (VAT) of 17%, exempting these items for agriculture may open avenues for misuse. For this reason, the International Monetary Fund (IMF) and the Ministry of Finance are reluctant to make an exception. Therefore, it was decided by the workshop delegates that a study should be commissioned to explore the possibility of exempting packaging material from VAT. Perceptions About Fertilizer Use The action plan’s main focus was on the issues related to input supply. However, some issues related to demand also warrant discussion. One critical issue is that of perception. Many small farmers feel or have been made to believe that mineral fertilizers are not needed because the Ugandan soils are rich, or simply fertilizers are harmful to the soil. Such misperceptions should be alleviated by proper education and dissemination of information. Here the MAAIF has a significant responsibility to educate farmers about proper use of both organic and inorganic inputs. The Fertilizer Market Historical misperceptions and political disruptions of the 1971-85 period have left the fertilizer market underdeveloped and fragmented but slowly evolving. Even today, many in Uganda wrongly perceive that inorganic fertilizers are not required. Consequently, the size of the market is estimated to be approximately 16,000-20,000 product tons2 (4,000-5,000 nutrient tons) consisting mainly of urea, diammonium phosphate (DAP), and nitrogen-phosphate-potassium fertilizer (NPK). Fertilizer use levels are low even by African standards and more so from the environmental angle, because 1 kg/ha nutrient application is grossly inadequate to replenish the nutrient depletion of more than 80 kg/ha that Ugandan soils are experiencing. xii Lacking domestic production of fertilizers, Uganda depends on imports to meet its domestic fertilizer requirements. Estate crops (sugarcane, tea, and tobacco) dominate fertilizer use (account for about 80%- 90% of total use) and imports. There are five to seven importers who mostly import large quantities after winning a tender from estates and small quantities for the smallholder sector. The fragmented and small size of shipments forces importers to pay relatively higher prices. Recent business linkages with importers in Kenya have helped the local importers to achieve 20%-30% lower import procurement prices. Until the size of the market becomes large (over 100,000 product tons per year), it is advisable to continue to pursue regional trade linkages (e.g., with Kenyan importers) to reduce fertilizer prices in Uganda. Dealer networks are evolving. Training efforts by SG 2000 and the IDEA Project have created a small cadre of stockists (250-300) and distributors (10-15). Although these efforts are laudable, there is a need to strengthen them both qualitatively and quantitatively. As indicated in Matrix A, human capital (business and technical skills) development at all levels is a main constraint to the functioning of markets. Stockists and distributors have limited technical and marketing skills and little access to information and finance. High interest rates and stringent collateral requirements have prevented the development of dealers in rural areas. As a result, farmers have to travel 20-30 km to buy fertilizers. Such long distances naturally discourage the use of modern inputs including fertilizers. No donors are directly involved in the distribution or procurement of fertilizers. However, there are some fears that Kennedy Round II (KR-II) fertilizers may come back to the market at below market price. It is essential that if KR-II input comes to Uganda, the GOU should put in place mechanisms to dispose of such inputs in a market-friendly manner. Fertilizer prices are market-determined and competitive. Urea prices varied between USh 29,000/bag in Mbale to USh 30,000/bag in Masaka, USh 32,000/bag in Masindi, and USh 30,000-32,000/bag in Kampala. Marketing margins are small, and given the border prices for small shipments and market risks, the prevailing prices of primary products seem reasonable. Increasing the market size, improving access to finance, and procuring in large quantities may result in further reductions in prices to farmers. Technical knowledge of farmers and dealers about fertilizer products and nutrient requirements is weak. There are few fertilizer demonstrations organized by dealers or government (SG 2000 and IDEA project are exceptions) to educate farmers about the proper use of nutrients. Fertilizer recommendations are based on the work done in the 1960s and therefore need updating. In some cases, farmers are not using appropriate fertilizer products (e.g., use of tea grade 25-5-5+5S as a basal fertilizer in maize production likely yields lower farmer profits than the use of DAP when properly applied as a basal fertilizer). The Seed Market Uganda’s seed market is in transition—moving from a public sector monopoly to a private sector-based competitive market. Before the liberalization in the early 1990s, seed production and distribution was a public sector monopoly largely operated by USP. The liberalization of the seed market in 1993 opened the market to private companies, but the lack of statutes and institutional and regulatory mechanisms needed for governing the seed operations prevented the active participation of the private sector. However, after 1998 when various institutions, such as the National Seed Board (NSB), the Variety Release Committee (VRC), and the National Seed Certification Service (NSCS), were established and the statutes governing the seed operations were promulgated, the private sector enthusiastically participated. In addition to the USP, there are several private seed companies such as Nalweyo Seed Company (NASECO), Farm Inputs Care Centre (FICA), Harvest Farm Seeds (HFS), East African Seed Company (EASCo), and others. Seed Company Ltd. of Zimbabwe and PANNAR Seed from South Africa also have an active presence in the market. The USP is in the process of privatization. Uganda’s seed market consists of both informal and formal sectors, and the formal sector includes organizations from both public and private sectors. The informal sector caters to seed and planting material requirements for banana, cassava, and other root crops. It also includes seed production by communitybased organizations and farmer-to-farmer sales. No quality control mechanisms operate in this sector. In the formal sector, public sector research institutions, such as Kawanda Agricultural Research Institute (KARI) and Serere Agriculture and Animal Production Research Institute (SAARI), have the responsibility for research and the NARO has the responsibility for breeder and foundation seed production. Because of financial constraints, NARO is not able to supply an adequate quantity of breeder seeds for various crops. Since private companies, such as NASECO, can effectively produce foundation seed, it is unproductive for NARO to spread its limited manpower and financial resources thinly on foundation seed production. Commercial or certified seed is produced by private companies and USP. Through the efforts of the Association for Strengthening Agricultural Research in Eastern and Central Africa (ASARECA)/Eastern and Central Africa Programme for Agricultural Policy Analysis (ECAPAPA), seed policies have been harmonized among Kenya, Tanzania, and Uganda. Such harmonization has helped the development of imports and seed trade between Uganda and Kenya. Vegetable seeds are imported from Europe, Asia, and South Africa. Such opening up of the market has made seed supply easily accessible in many parts of the country. Seeds are sold in 1- and 5-kg bags. Prices are fairly competitive; 1 kg of maize seed (Longe 1) was sold for USh 1,000/kg in Kampala and USh 1,200/kg in Masindi. Domestic research capacity, though financially strained, has produced several varieties of seed for various crops. Both open-pollinated varieties (OPVs) and hybrids have been developed, although OPVs dominate the market. To maintain a steady flow of genetic material, research institutions and NARO need financial strengthening. The main constraints affecting the performance of the seed market are lack of a national seed policy clearly defining the role of various stakeholders and intellectual property rights (breeders’ rights), limited supply of breeder seed, lack of pricing policy, limited access to finance for developing dealer networks, and underdeveloped output market. The CPP Market In terms of market competition, the CPP market is relatively more competitive. There are many retailers in urban and semiurban areas, but in rural areas few dealers supply products. Annual imports averaged about $8.2 million during the 1997-2001 period. Lacking domestic production or formulation capacity, all CPPs are imported from Kenya, South Africa, United Kingdom, India, China, and other countries. Insecticides dominate the CPP market, and large farms and estates account for over 80% of the CPP used in the country. There are 8 to 10 large importers who generally receive products on a supplier-credit basis. There are wholesalers and retailers in the marketing chain, but the distinction between a wholesaler and an importer or between a retailer and a wholesaler is blurred. Each entity performs some or all of the functions in the marketing chain. Although importers do not face a credit constraint, wholesalers and retailers do and therefore have not been able to develop integrated dealer networks and penetrate into rural areas. At the retail level, dealers sell all inputs and consumer goods. Marketing margins (10%-30%) are generally higher on CPP sales than on seed and fertilizer sales. Regulatory functions are performed by the Agricultural Chemical Board (ACB) and related agencies. But due to financial and staffing limitations, enforcement of regulation is weak. Technical skills of the dealers are also limited. The existence of outdated pesticides is a serious threat to both human health and the environment. The Potential of the Private Sector Although the private sector is in its infancy, it has a good potential to supply inputs in an efficient way. This potential results from the fact that there are already a few private companies involved in import and distribution of seed, fertilizer, and pesticides. These companies are supported by 250-300 stockists selling inputs. Also these companies have developed important linkages with suppliers in Kenya, South Africa, and other parts of the world. On the output market side, Uganda is increasingly becoming integrated into the global and regional markets— maize, flowers, tea, coffee, cotton, sugarcane, tobacco, and horticultural products. Recent emphasis on strengthening the export of selected commodities will further open opportunities for the private sector. More importantly, the GOU has shown an unwavering commitment to develop market-based agriculture in Uganda and is implementing programs and projects to strengthen the private sector capacity. However, the potential of the private sector will be realized only when the constraints identified in Matrix A and other market-specific constraints are removed by implementing the measures proposed in the action plan. III. An Action Plan for Developing AIMs The assessment of all three input markets in Uganda has clearly demonstrated that “deregulation and liberalization” is necessary but not sufficient to encourage private sector participation. Many factors, such as lack of human capital, limited access to finance and information, and weak enforcement of regulatory frameworks, have constrained the effective and full participation of the private sector. The removal of these constraints will help the private sector in realizing its full potential and in reducing prices and improving access to inputs. Consequently, the proposed action plan is heavily geared toward improving the supply side of the market equation in Uganda. Nevertheless, the issues related to technology transfer and output market development are also highlights. These components affect the demand side by improving agronomic (nutrient use) efficiency and economic incentives (better crop prices) and help farmers in the realization of higher yields and more incomes. The following actions constitute the action plan. The first five activities deal with supply-side issues, whereas the next two activities affect the demand side. The last activity, namely, regional integration of markets, has implications for both supply side and demand side of input markets. 1. Creating a supportive policy environment. 2. Developing human capital. 3. Improving access to finance. 4. Promoting market transparency. 5. Strengthening regulatory systems. 6. Promoting technology transfer. 7. Developing output markets. 8. Integrating regional markets. Creating a Supportive Policy Environment An enabling policy environment is essential for promoting the development of input markets in Uganda. On the macropolicy front, stabilization of the exchange rate is critical. A depreciating exchange rate not only leads to increased prices of imported inputs but also discourages business development by introducing risks and uncertainties in the investment climate. Efforts are also needed to reduce interest rates to an affordable level. Interest rates vary between 20% and 30% in urban areas and 30% and 48% in rural areas. Such high interest rates are detrimental to market development. Interest rates could be reduced significantly by stabilizing the exchange rate, controlling inflation, and developing financial infrastructures. Unless farmers and dealers can borrow funds at a reasonable rate for purchasing improved inputs, the modernization of agriculture will not be attainable. The development of roads and other infrastructures in rural areas should receive priority in development efforts because such infrastructures facilitate the integration of rural economies into national economies and help in reducing transaction costs. Ensuring physical security in rural areas also supports the development of well-functioning markets. On the market development side, well-functioning input markets require a distortion-free policy environment, adequate human capital, access to finance, market transparency and information, and effective enforcement of sound regulatory systems. Because the GOU has removed most of the distortions in pricing and marketing of inputs, the policy environment is generally conducive for input markets. However, in the case of seed production and marketing, there is a need for removing the remaining policy obstacles to private sector participation in the seed market. In particular, because USP has not been privatized, it receives hidden subsidies and public support for its operations and thereby creates distortion in the market by creating an unlevel playing field. USP should be privatized without further delay. Similarly, if inputs are imported through Japanese KR-II grants, mechanisms to integrate such imports with commercial imports should be instituted. Other pillars of market development are elaborated below. Developing Human Capital Marketing skills, business acumen, financial management, and technical know-how that are needed to make input markets function properly are severely limited. Business linkages and knowledge of global and regional markets are also constrained. To create a cadre of entrepreneurs at all levels—upstream (linking with global and regional markets for efficient imports) and downstream (wholesale and retail levels reaching rural areas)—human capital formation efforts will be needed. Human capital should be created and/or strengthened by providing training for dealers at all levels—import, wholesale, and retail. Training courses should focus on business planning and development, financial management, and technical knowledge and advice about various aspects of nutrients, products, chemicals, and seed. Training programs will also be needed for seed producers. Another area that requires efforts in human capital formation is the public sector. MAAIF’s capacity to enforce quality control regulations for seed and CPP is limited. Also, MAAIF has few resources to develop and operate market information networks. Adequate resources should be allocated to train manpower for xvi enforcing regulations and operating market information systems. Analytical capability for processing information and formulating policies and regulations is weak. Overseas training and study tours should be arranged to strengthen analytical capacity as well. Improving Access to Finance Limited access to funds for business development is another area that requires improvements. High interest rates and stringent collateral requirements make it difficult to borrow funds from commercial banks. Although some banks have started pilot efforts in lending funds to importers and dealers, such efforts have limited outreach. To encourage risk-averse commercial banks to lend to agriculture, two funds should be created. These are Agricultural Input Import Fund (AIIF) and Small Input Business Development Fund (SIBDF). Under the first fund, input importers should be able to obtain a letter of credit through commercial banks and the Bank of Uganda by putting 30% as a down payment for the needed foreign exchange. The commercial bank dealing with the importer should bear 40% risk and the Bank of Uganda, managing the credit guarantee fund, should bear 30% risk. Experience from other countries indicates that well-trained and viable importers will have little risk of default. Gradually, as business expands, commercial banks may bear a full 70% risk in financing imports. Likewise, a local currency fund should be created to support the development of small input businesses. The same risk-sharing arrangement can be created for this fund. The dealer interested in starting a business should provide 30% of the capital needed to start the business, and the commercial bank should provide a commercial loan for 70% of the required funds. However, to minimize the risk for the commercial bank, the SIBDF should provide a guarantee for 30% of the needed funds, thereby reducing the commercial bank’s exposure to 40% of the needed funds. The purpose of this guarantee fund is to encourage commercial banks to lend for business development in the short run and to develop a good clientele for their operations in the long run. Also, the fund will help to reduce collateral requirements because stringent collateral requirement makes it nearly impossible for small dealers to borrow funds for business development. To strengthen the linkage between bankers and dealers, training and consultation should be promoted. Market Transparency Through the Creation and Operation of a Market Information System (MIS) Information is crucial for the proper functioning of agricultural inputs and product markets. Dealers, importers, and other participants in the marketing chain need information about local, regional, and global market conditions for inputs and products to identify marketing opportunities and to strengthen their bargaining power to secure lower prices and quality products. The more accurate, detailed, and timely the information, the easier it is to develop market plans and make decisions. With the rapid progress in electronic data processing, it has become very easy now to collect, collate, analyze, and store data. There is also an urgent need to improve market transparency—a key to market efficiency. This can best be accomplished through creating and operating an MIS within the Ministry of Agriculture and strengthening the market information activities presently in place to include information on input markets (e.g., input and output prices, supply availability, import arrivals). The objective of this activity would be to provide accurate and timely information to all distributors and dealers on fertilizer and other market conditions. In the long term, such activities should be handled by the private sector through dealer associations. Strengthening the Regulatory System Although complaints of adulteration of seed or fertilizer products were not frequently reported, there is a need to strengthen the regulatory systems to promote “truth-in-labeling” for input sale and to prevent the adulteration and sale of outdated CPPs. The ACB Secretariat needs strengthening in terms of manpower and funding. Likewise, NSCS should also be strengthened by providing more resources. As explained earlier, the regulatory agency needs resources for building human capital. To encourage the development of breeder seed production in the country, appropriate rules and regulations should be formulated for intellectual property rights. Attention should also be given to an environmentally friendly disposal of outdated pesticides and insecticides. The educational and enforcement functions of the ACB staff should be separated. Promoting Technology Transfer Technology transfer activities should be undertaken to strengthen farmers’ knowledge about products, nutrient requirements, application rates, and timing. The principle of “seeing is believing” has a powerful influence on farmers. Demonstrations, short training courses, pamphlets, brochures in local languages, and a monthly Farmers’ News bulletin should be used extensively to promote the use of modern technologies. The action plan recommends that over time, private sector dealers should become technology transfer agents while MAAIF should focus on upstream research problems and prepare subject matter specialists to pass on new technologies to dealers who will in turn pass on to farmers thereby creating an effective public-private partnership. While NAADS is focusing on the demand side of technology transfer, the action plan will create a cadre of dealers who will be prepared to supply both inputs and knowledge about technologies on demand. In addition to promoting conventional technologies, efforts should also be made to adapt and adopt biotechnology for various crop operations such as pest control, drought resistance, and quality improvements. Developing Output Markets Like input markets, output markets are also underdeveloped and fragmented. Unless output markets are developed and integrated, increased crop output resulting from the adoption of technology could easily depress crop prices, as happened in 2001 for maize. Efforts are needed to integrate different markets nationally and regionally. Dissemination of market information, improved access to finance and storage, and development of agro-processing facilities to add value to farm produce should be promoted. In this context, efforts under the Uganda Grain Trading Limited are laudable, and the emphasis on marketing and agro-processing under PMA is desirable. Integrating Regional Markets The size of each input and output market is small in Uganda. Such small size offers little economies of scale in procurement and production. By integrating markets in Uganda with those in Kenya, Tanzania, and other east African countries, significant cost savings could be achieved. To integrate markets, harmonization of policies, standards, and practices should be pursued. By linking Ugandan markets with Kenyan markets in seed and fertilizers, dealers have already realized significant reduction in prices. More efforts are needed to promote the flow of trade under World Trade Organization (WTO) rules among these countries. Market information and training, human capacity building, and formulation of uniform standards and regulations should be encouraged. Expected Benefits of the Action Plan The implementation of the action plan will contribute to Uganda’s socioeconomic goals of food security, poverty reduction, and environmental protection by reducing input prices (20%-30%), improving access to inputs, and promoting the adoption of modern technologies for both crop production and resource manage- xviii ment. Also, it will aid in foreign exchange earnings by reducing food imports and increasing agricultural exports. IV. Institutional Arrangements To derive the benefits of synergy resulting from the implementation of different activities, various components should be implemented in a holistic manner and through public-private partnership arrangements. A strong and sustained commitment from both policymakers and donors is essential to realize full benefits of the action plan. Since the action plan covers activities handled by different entities and departments, it is recommended that the PMA Secretariat should coordinate the implementation of the action plan. The implementation of the action plan will require a 5-year program costing approximately US $11 million in project operating costs, US $7 million in the AIIF, and US $1.6 million (in local currency) for the SIBDF. V. Linkages With Donor and National Programs The proposed action plan will contribute directly to the achievement of USAID/Uganda’s Strategic Objective (SO 7) of creating “expanded sustainable economic opportunities for rural sector growth” by promoting food security and agricultural growth through policy improvement, technology adoption, publicprivate partnerships, and market development. Various components of the action plan will support the realization of “Intermediate Results” of increased food security and agricultural productivity, greater competitiveness, and stronger enabling environment. The action plan will also complement the main pillars of PMA. Although PMA has identified marketing and agroprocessing as one of the pillars for modernizing agriculture, it provided little specific guidelines about developing input markets. Hence the action plan fills that void by providing actionable programs for AIMs development. Besides, the action plan will contribute to other pillars including extension, education, technology development, and rural finance.
Public-Private Partnerships, Agricultural Inputs