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Operations and enabling environment for Agro-industries
Contributor : FAO-AGS (2008-02-28 14:49:11)
Reducing Costs: infrastructure development
The Proposition
Failure by policy-makers to prioritize investment in the infrastructure services needed by agro-industry creates a self-fulfilling prophesy of limited economic growth in rural areas.
Given resource limitations, public policy in developing countries needs, therefore, to promote, and directly support, new business models for infrastructure development in rural areas that involve the direct participation of the private sector.
Rationale and Recommended Response (Click here to read)
Update on the debate
Several persons offered examples of private-public partnership for investing in infrastructural development. Yes, there are many examples, but Mr. Makunike also indicated another point of view and reality check -- "It is hard for me to imagine a private-public sector partnership for any appreciable rural infrastructure development in most developing countries. This will for the foreseeable future remain the primary responsibility of governments, with all the negatives that this may entail. The social, political and economic set-up of most countries is such that it would be difficult for the private sector to significantly fund basic infrastructure. When the main roads, the basic electricity grid and other such services are in place, it may then be much easier for the private sector to provide secondary types of infrastructure. Many countries are a long way from that stage." Everyone agrees on the importance of infrastructure but with or without incentives to the private sector, the role of the public sector will likely be the primary driver for at least common good infrastructural development. As noted by Mr. Chand, "The most successful intervention is where the Government, using its own finance or donor funds, can help the actors engaged in the private sector to increase efficiency, value and thus production."
Current focus of the Debate
What are the fundamentals of a good “market oriented” business model(s) for rural-based investment in infrastructure for agro-industries?
What are some key elements and what can governments and international agencies do to support these?
For summary of previous round of debate and questions click here
13 Comments
Kyaw Myint , (2008-03-27 11:55:22)
Promoting rural infrastructure development is an important issue in most developing countries. Due to lack of infrastructure, some farmers in rural area cannot directly link to a wholesale market or supermarkets or agro-processors. In addition, poor infrastructure such as unpaved roads, narrow roads and bad conditions of roads during the heavy rain season lead to deterioration of fresh produce quality during the transportation period and transport cost is high due to poor infrastructure.
For example, in Myanmar, highland produces of cabbage, cauliflower, carrot and tomato are supplied to wholesale markets in lowland areas during the moon season. Consumers and traders rely on the supplies of highland produces during the monsoon season period from May to October.
Thus, the investment of infrastructure is an important issue for the national government. However, the Government cannot support all economic and social sectors within its limited budget. In most cases, the government allocates its budget according to the priority and relies on donor funds to develop rural areas. In this context, the Public-Private Partnership plays an important role to invest in rural areas such as renovation of roads and building new roads, to find opportunities of new markets for farmers, small-scale agro-processors and electricity suppliers etc.
Regarding private sector’s investment, private sector needs to recover its investment and collect fees (toll gate) from every truck loaded and running vehicles for its investment of renovation of roads. It leads to increased marketing costs to farmers and traders. Finally, consumers have to pay this increased cost. On the economic side, farmers’ produces reach markets in time and shelf life is better for traders. Thus quality of fresh produce is better to attract consumers, supermarkets and agro-processors. Investments need to affect market participants along the supply chain. Thus public- private partnership program needs to consider cost and benefits along the supply chain for short term and long term.
In Myanmar, private sector invests in renovating highway roads to export agricultural commodities from Mandalay to Muse Town, 250 miles, which is located at the Myanmar-China border. Thus, orchid farmers and local exporters can deliver their produces quicker thanks to investment of infrastructure. (Please see Myanmar case study-page-54-occasional paper13, FAO-Approaches to linking producers to markets by Andrew W. Shepherd)
In Myanmar, most small and medium-scale enterprises are more interested in investing in their agribusiness such as setting up agro-processing plants, contract farming, and introduction of new variety demanded by exporters. Small-scale enterprise or medium enterprise cannot afford to invest in infrastructure in rural areas. Based on the priority, the national government and public –private partnership program need to invest in rural areas.
Promoting rural infrastructure development is an important issue in most developing countries. Due to lack of infrastructure, some farmers in rural area cannot directly link to a wholesale market or supermarkets or agro-processors. In addition, poor infrastructure such as unpaved roads, narrow roads and bad conditions of roads during the heavy rain season lead to deterioration of fresh produce quality during the transportation period and transport cost is high due to poor infrastructure.
For example, in Myanmar, highland produces of cabbage, cauliflower, carrot and tomato are supplied to wholesale markets in lowland areas during the moon season. Consumers and traders rely on the supplies of highland produces during the monsoon season period from May to October.
Thus, the investment of infrastructure is an important issue for the national government. However, the Government cannot support all economic and social sectors within its limited budget. In most cases, the government allocates its budget according to the priority and relies on donor funds to develop rural areas. In this context, the Public-Private Partnership plays an important role to invest in rural areas such as renovation of roads and building new roads, to find opportunities of new markets for farmers, small-scale agro-processors and electricity suppliers etc.
Regarding private sector’s investment, private sector needs to recover its investment and collect fees (toll gate) from every truck loaded and running vehicles for its investment of renovation of roads. It leads to increased marketing costs to farmers and traders. Finally, consumers have to pay this increased cost. On the economic side, farmers’ produces reach markets in time and shelf life is better for traders. Thus quality of fresh produce is better to attract consumers, supermarkets and agro-processors. Investments need to affect market participants along the supply chain. Thus public- private partnership program needs to consider cost and benefits along the supply chain for short term and long term.
In Myanmar, private sector invests in renovating highway roads to export agricultural commodities from Mandalay to Muse Town, 250 miles, which is located at the Myanmar-China border. Thus, orchid farmers and local exporters can deliver their produces quicker thanks to investment of infrastructure. (Please see Myanmar case study-page-54-occasional paper13, FAO-Approaches to linking producers to markets by Andrew W. Shepherd)
In Myanmar, most small and medium-scale enterprises are more interested in investing in their agribusiness such as setting up agro-processing plants, contract farming, and introduction of new variety demanded by exporters. Small-scale enterprise or medium enterprise cannot afford to invest in infrastructure in rural areas. Based on the priority, the national government and public –private partnership program need to invest in rural areas.
Vinay Chand , (2008-03-19 19:46:12)
As Chido observes, in Asia we have a very densely populated Region. Indian Agriculture has one of the largest private sectors that has ever organised production, freight and distribution in agriculture in the world. The system is intricate, a marvel of social evolution, and organises timely production and delivery of food to over a billion people. However, the system works on mimimal investment and sophistication and is inefficient in delivering quality produce to consumers.It has been tolerated in the past because consumers did not mind as,long as it was cheap.
The most successful intervention is where the Government, using its own finance or donor funds, can help the actors engaged in the private sector to increase efficiency, value and thus production. This usually means directing subsidies or soft loans to structures within the system able to make best use of them. There is one qualification and that is equity. There is a need to ensure that they system is delivering equitable returns to the various actors and especially the poor.
Where it fails is when regional or national Governments start substituting themselves for the private sector and developing infrastructure that has not evolved from market needs but rather been imposed through planning decisions based on inadequate understanding or study of the admittedly intricate system.
As Chido observes, in Asia we have a very densely populated Region. Indian Agriculture has one of the largest private sectors that has ever organised production, freight and distribution in agriculture in the world. The system is intricate, a marvel of social evolution, and organises timely production and delivery of food to over a billion people. However, the system works on mimimal investment and sophistication and is inefficient in delivering quality produce to consumers.It has been tolerated in the past because consumers did not mind as,long as it was cheap.
The most successful intervention is where the Government, using its own finance or donor funds, can help the actors engaged in the private sector to increase efficiency, value and thus production. This usually means directing subsidies or soft loans to structures within the system able to make best use of them. There is one qualification and that is equity. There is a need to ensure that they system is delivering equitable returns to the various actors and especially the poor.
Where it fails is when regional or national Governments start substituting themselves for the private sector and developing infrastructure that has not evolved from market needs but rather been imposed through planning decisions based on inadequate understanding or study of the admittedly intricate system.
Chido Makunike , (2008-03-18 00:47:05)
Except in a few specific cases, it is difficult to envision any significant private sector participation in infrastructure development in the rural areas of most countries.
In Africa, perhaps unlike in Asia, the rural areas tend to be very sparsely populated. This alone makes it very difficult for governments to build infrastructure, let alone the private sector. Even for the most socially responsible and innovative private enterprises, cost recovery or profitability presents a huge challenge, even with subsidies.
A unique, interesting example that perhaps we should study more for its lessons is that of cell phone infrastructure. Here is that product/service that is so clearly useful and widely in demand , affordable and profitable that the private sector has seen it fit to extend base stations to even remote rural areas with little or no government assistance.
But the factors that make this possible with cell phone technology do not easily apply to more basic, more expensive and often non-commercially viable infrastructure such as roads, electricity and so forth.
Another problem is that while governments may welcome private participation in rural infrastructure provision, in many countries the private sector will then not be allowed to charge rates that make cost-recovery possible. The rural areas are politically sensitive, particularly at election time. The private sector´s need to at least cover costs will often clash with the public sector´s need to be seen to be providing a relatively inexpensive "people´s service."
It is hard for me to imagine a private-public sector partnership for any appreciable rural infrastructure development in most developing countries. This will for the foreseeable future remain the primary responsibility of governments, with all the negatives that this may entail. The social, political and economic set-up of most countries is such that it would be difficult for the private sector to significantly fund basic infrastructure.
When the main roads, the basic electricity grid and other such services are in place, it may then be much easier for the private sector to provide secondary types of infrastructure. Many countries are a long way from that stage.
Except in a few specific cases, it is difficult to envision any significant private sector participation in infrastructure development in the rural areas of most countries.
In Africa, perhaps unlike in Asia, the rural areas tend to be very sparsely populated. This alone makes it very difficult for governments to build infrastructure, let alone the private sector. Even for the most socially responsible and innovative private enterprises, cost recovery or profitability presents a huge challenge, even with subsidies.
A unique, interesting example that perhaps we should study more for its lessons is that of cell phone infrastructure. Here is that product/service that is so clearly useful and widely in demand , affordable and profitable that the private sector has seen it fit to extend base stations to even remote rural areas with little or no government assistance.
But the factors that make this possible with cell phone technology do not easily apply to more basic, more expensive and often non-commercially viable infrastructure such as roads, electricity and so forth.
Another problem is that while governments may welcome private participation in rural infrastructure provision, in many countries the private sector will then not be allowed to charge rates that make cost-recovery possible. The rural areas are politically sensitive, particularly at election time. The private sector´s need to at least cover costs will often clash with the public sector´s need to be seen to be providing a relatively inexpensive "people´s service."
It is hard for me to imagine a private-public sector partnership for any appreciable rural infrastructure development in most developing countries. This will for the foreseeable future remain the primary responsibility of governments, with all the negatives that this may entail. The social, political and economic set-up of most countries is such that it would be difficult for the private sector to significantly fund basic infrastructure.
When the main roads, the basic electricity grid and other such services are in place, it may then be much easier for the private sector to provide secondary types of infrastructure. Many countries are a long way from that stage.
Cláudio Maia, Ph. D student at UFRGS (Brazil) , (2008-03-12 05:59:41)
Considering the potential of endogenous development of a region, we have a case study represented by the county of Crissiumal, in the northwest region of the state of Rio Grande do Sul in Brazil, which adopted a new strategy of development using its potential endogenous development. The dynamic is characterized through the relationship between public and private actors, the county government and the society together with the local productive system of family farming. The private actors sign agreement with priority to business trade products of the region. The case contribute for understanding the recent social changes of the state’s society and the peculiar form of relation between the labor and productions strategies between family farmers and the social transformations that occurred in Crissiumal society.
Considering the potential of endogenous development of a region, we have a case study represented by the county of Crissiumal, in the northwest region of the state of Rio Grande do Sul in Brazil, which adopted a new strategy of development using its potential endogenous development. The dynamic is characterized through the relationship between public and private actors, the county government and the society together with the local productive system of family farming. The private actors sign agreement with priority to business trade products of the region. The case contribute for understanding the recent social changes of the state’s society and the peculiar form of relation between the labor and productions strategies between family farmers and the social transformations that occurred in Crissiumal society.
David Kahan , (2008-03-11 17:51:02)
The failure of the public and private sectors to fill the ´infrastructure gap´has led towards the design of business models based on public-private sector collaboration/ partnership to promote infrastructure investment (in both its soft and hard forms) in developing countries. The challenge, however, is to know when and where private sector involvement in rural areas adds value and how best to formulate the financial and institutional arrangements for collaboration with the public sector. Innovative mechanisms are needed to attract the private sector to achieve commercial viability. For inverstment in rural areas, projects that are dependent on agricultural production to generate income streams are not likely to be ´bankable´unless subsidies and incentives are provided. The question is how ´smart´the subsidies need to be; how they should be designed and financed; and for how long to be supported? The ultimate objective of these subsidies is to to mitigate some of the risks to the private sector.
The failure of the public and private sectors to fill the ´infrastructure gap´has led towards the design of business models based on public-private sector collaboration/ partnership to promote infrastructure investment (in both its soft and hard forms) in developing countries. The challenge, however, is to know when and where private sector involvement in rural areas adds value and how best to formulate the financial and institutional arrangements for collaboration with the public sector. Innovative mechanisms are needed to attract the private sector to achieve commercial viability. For inverstment in rural areas, projects that are dependent on agricultural production to generate income streams are not likely to be ´bankable´unless subsidies and incentives are provided. The question is how ´smart´the subsidies need to be; how they should be designed and financed; and for how long to be supported? The ultimate objective of these subsidies is to to mitigate some of the risks to the private sector.
Francesco Baltazar , (2008-03-10 18:01:43)
As always I´m very surprise to read the different intervention without any definition of "rural infrastructure" it seems that there is no commune definition. In our case RI is supporting the post harvest chain from the field to the consumers providing for the transportation and the conservation of the crops.
A global approach is needed in order ot avoid that they will stand alone
As always I´m very surprise to read the different intervention without any definition of "rural infrastructure" it seems that there is no commune definition. In our case RI is supporting the post harvest chain from the field to the consumers providing for the transportation and the conservation of the crops.
A global approach is needed in order ot avoid that they will stand alone
Vinay Chand , (2008-03-10 17:03:32)
Calvin, in response to your comment,
There are a number of components that have to come together to produce the growth we all want. There needs to be a mechanism for giving farmers information as to what the market demands and how they could best meet it. To do this affectively you also need demo plots, nuseries and other support.
No one likes to lend to the poor and very little finance reaches small farmers, The banks like to lend to rich farmers or to traders.
The farmer then needs to be confident that what he produces will be bought. In the former Soviet Union this meant a guaranteed market.
Then you need the infrastructure to protect crops at harvest to the market.
For all this to come together and the best motive is market demand for higher quality and value produce. The extension services have largely perished. The poor get no finance. Having stand alone infrastructure satisfies bureaucratic targets but little else.
We have to help provide a catalyst for the private sector to take up very profitable service roles. Sometimes the development cannot come through natural evolution and their needs to be intervention. It is no use as one Development did recently in Krygystan to insist instead on merely providing credit lines. This catalyst role is what in my opinion this debate should focus on.
Calvin, in response to your comment,
There are a number of components that have to come together to produce the growth we all want. There needs to be a mechanism for giving farmers information as to what the market demands and how they could best meet it. To do this affectively you also need demo plots, nuseries and other support.
No one likes to lend to the poor and very little finance reaches small farmers, The banks like to lend to rich farmers or to traders.
The farmer then needs to be confident that what he produces will be bought. In the former Soviet Union this meant a guaranteed market.
Then you need the infrastructure to protect crops at harvest to the market.
For all this to come together and the best motive is market demand for higher quality and value produce. The extension services have largely perished. The poor get no finance. Having stand alone infrastructure satisfies bureaucratic targets but little else.
We have to help provide a catalyst for the private sector to take up very profitable service roles. Sometimes the development cannot come through natural evolution and their needs to be intervention. It is no use as one Development did recently in Krygystan to insist instead on merely providing credit lines. This catalyst role is what in my opinion this debate should focus on.
Edward Smythe , (2008-03-08 22:25:17)
The proposition is correct and requires Governments to adopt a value chain/holistic approach in sub sector development planning ensuring that infrastructure provision is sufficient along the whole chain. I believe their is a hierarchy in infrastructure with provision of basic infrastructure ( power,main highways) being public goods and needing to be initiated by the Central Government ( perhaps with public -private partnerships- BOO, BOT etc) and other more local infrastructure being provided by local governments and the private sector. Building a cold store by an individual enterprise can only really be feasible if public power supplies are in place.Private enterprise can build a local road connecting to a main highway only if the main highway exists.Adequate water and power supplies are necessary if industries are to be located in an area... the individual plant will not estabish these but will rightfuly expect that the Government will.
The proposition is correct and requires Governments to adopt a value chain/holistic approach in sub sector development planning ensuring that infrastructure provision is sufficient along the whole chain. I believe their is a hierarchy in infrastructure with provision of basic infrastructure ( power,main highways) being public goods and needing to be initiated by the Central Government ( perhaps with public -private partnerships- BOO, BOT etc) and other more local infrastructure being provided by local governments and the private sector. Building a cold store by an individual enterprise can only really be feasible if public power supplies are in place.Private enterprise can build a local road connecting to a main highway only if the main highway exists.Adequate water and power supplies are necessary if industries are to be located in an area... the individual plant will not estabish these but will rightfuly expect that the Government will.
alfredo haquin , (2008-03-07 14:33:23)
Creo que las agroindustrias son el arma principal para que los sampesinos y trabajadores excluídos se integren en un sector que genere riqueza, y sobre todo puestos de trabajos, dentro de la política de promoción de las cadena de valor. Las multinacionales requieren materias primas que los países subdesarrollados producen y exportan sin tasas aduaneras, sólo si los productores organizados en redes de producción primaria - transformación secndaria de sus productos podrán integrarse con los trabajadores, generalmente parados, poseedores de la tecnología, para desarrollar riqueza que mejore los precios de los productos primarios, aunque sea a nivel local, con créditos del Bancos como BID o BIRF a los mismos productores y no a los gobiernos, que los destinan a la burocracia o tapar sus´déficits fiscales.
Creo que las agroindustrias son el arma principal para que los sampesinos y trabajadores excluídos se integren en un sector que genere riqueza, y sobre todo puestos de trabajos, dentro de la política de promoción de las cadena de valor. Las multinacionales requieren materias primas que los países subdesarrollados producen y exportan sin tasas aduaneras, sólo si los productores organizados en redes de producción primaria - transformación secndaria de sus productos podrán integrarse con los trabajadores, generalmente parados, poseedores de la tecnología, para desarrollar riqueza que mejore los precios de los productos primarios, aunque sea a nivel local, con créditos del Bancos como BID o BIRF a los mismos productores y no a los gobiernos, que los destinan a la burocracia o tapar sus´déficits fiscales.
Calvin Miller , (2008-03-06 09:32:38)
Vinay,
You make a good point. Often because of an integrated solution with enough supporting infrastructure and services, the infrastructure that is developed is not optimal, such as in your example. Using your example, cold stores may be at the urban market rather than closer to the farm gate because of reliable and cheaper electricity, better schools for the owners family, better access to source from multiple regions, etc. because of unreliable local supply, etc.
I would also like your thoughts on how to better state the rationale and recommended response from your point of view.
Vinay,
You make a good point. Often because of an integrated solution with enough supporting infrastructure and services, the infrastructure that is developed is not optimal, such as in your example. Using your example, cold stores may be at the urban market rather than closer to the farm gate because of reliable and cheaper electricity, better schools for the owners family, better access to source from multiple regions, etc. because of unreliable local supply, etc.
I would also like your thoughts on how to better state the rationale and recommended response from your point of view.
Vinay Chand , (2008-03-05 18:22:45)
I agree with the proposition, but the rationale and recommended response miss the point. There are too may examples in India of infrastructure that is supported but is stand alone, i.e. not part of an integrated solution, just a cold store at a market for example rather than a cold chain from farm gate to market.
I agree with the proposition, but the rationale and recommended response miss the point. There are too may examples in India of infrastructure that is supported but is stand alone, i.e. not part of an integrated solution, just a cold store at a market for example rather than a cold chain from farm gate to market.
tariq , (2008-03-04 17:40:17)
Infrastructure in any growing industry has invariably become mandatory, owing to the WTO requirements for agri sector industry.To have value addition,branding,packing and qurentine requirements complete in all aspects is the answer to have better returns for our farmers,As the requirment of super store retailers have increased manifold.
Infrastructure in any growing industry has invariably become mandatory, owing to the WTO requirements for agri sector industry.To have value addition,branding,packing and qurentine requirements complete in all aspects is the answer to have better returns for our farmers,As the requirment of super store retailers have increased manifold.
Calvin Miller , (2008-03-03 14:48:36)
What are the roles of the public and private sectors for developing infrastructure and how do these vary between different types of infrastructure? Yes the private sector needs to participate and I feel that it will do more if the conditions are right. Agro-industries are largely private sector industries so I would caution on the notion of direct support as noted above.
What are the roles of the public and private sectors for developing infrastructure and how do these vary between different types of infrastructure? Yes the private sector needs to participate and I feel that it will do more if the conditions are right. Agro-industries are largely private sector industries so I would caution on the notion of direct support as noted above.
