IFAD and client-financed agricultural advisory services Enabling poor rural people to overcome poverty
Acknowledgements This brochure is based on an assessment undertaken by IFAD's Near East and North Africa Division of the experience of the IFAD-financed Agricultural Financial Services Project (AFSP) in the Republic of Macedonia concerning the establishment of private agricultural advisory services accessible to poorer farmers. The assessment was carried out by a team consisting of the former head of AFSP s Agricultural Investment Centre, Aleksandar Uzunov; the AFSP Monitoring and Evaluation Officer, Lazo Dimitrov; and sociologist and rural development specialist, Ian Jones. It included a two-week period of field trips to ascertain how the private agricultural advisory companies established through AFSP support were performing independently some 14 months after the project had closed. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the International Fund for Agricultural Development of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The designations developed and developing economies are intended for statistical convenience and do not necessarily express a judgement about the stage reached by a particular country or area in the development process. Cover photo: Lazo Dimitrov
Agricultural advisory services: who pays the bill? For many years there has been debate on whether agricultural advisory services are best provided through a private-sector, market-oriented approach or through extension services fully financed by the state as a public good. The state-financed approach has often been criticized for being supply-driven ( top-down ), technically ineffective and, in practice, not benefiting the poor. The private-sector approach has been promoted as demand-driven, serving as an incentive to provide services that are relevant and of good quality. On the other hand, a question often arises regarding the ability of poorer smallholders to afford private agricultural services. IFAD takes the private-sector path in the Republic of Macedonia The Agricultural Financial Services Project, financed by IFAD in the Republic of Macedonia, 1 took the private-sector path in its effort to upgrade technical and managerial skills among the project s population to assure the viability of their agricultural enterprises in the context of emerging domestic and export markets. The project created a private agricultural advisory service accessible to poorer farmers and offering a number of innovations: Securing effective interaction of financial and non-financial services through the same set of advisors; Expecting borrowers to pay advisors for their services in order to assure service quality, sustainability and client satisfaction; and Using the borrowers actual financial and economic opportunities within agricultural commodity value chains to determine the investment and the technical advice to be provided. 1 Apart from AFSP, this initiative was supported by IFAD s Initiative for Mainstreaming Innovation (IMI), financed by the United Kingdom s Department for International Development (DFID). The undertaking also benefited from grant funds from the Facility for Farmers Access to Markets (FFAM) in the Balkans, financed by the Italian Government and administered by IFAD. 1
AFSP s refinancing facility to reach the unbankable In 2003 IFAD introduced a refinancing facility through AFSP the Agricultural Credit Discount Fund (ACDF) established under the Ministry of Finance. A true innovation in rural finance development, refinancing has proved highly effective in injecting longer-term investment capital from concessional lending into national financial systems. This aims to speed up rural economic growth and, in conjunction with appropriate targeting criteria, reduce rural poverty. 2 The ACDF was financed from the IFAD loan and designed as a competitively accessible refinancing facility available to eligible commercial banks and microfinance institutions the participating financial institutions (PFIs). PFIs applied to the ACDF Loan Committee to refinance loan applications received from people hoping to benefit from the project s refinancing facility. If the PFIs satisfied policy and regulatory requirements and the applications met project eligibility criteria, the refinancing would be approved in the form of a loan. Financial resources to PFIs were provided under IFAD s highly concessional lending terms as an incentive to operate in a market often perceived as too risky. This had three positive features: (i) it attracted PFIs to engage with poorer and otherwise unbankable clients; (ii) it allowed PFIs to gain experience with poorer rural clients and consequently build the knowledge, skills and confidence to continue serving them as a profitable customer segment after project closing; and (iii) it did not distort local financial markets. Supporting project clients across the spectrum To assure the viability of borrowers agricultural enterprises, including those of smallholders within emerging domestic and export markets, an Agricultural Investment Centre (AIC) was set up with project support to facilitate access to financial services and upgrade borrowers managerial and technical skills. 2 A fuller account of IFAD-supported refinancing facilities in the Republic of Macedonia, the Republic of Armenia and the Republic of Moldova can be found in IFAD s December 2008 publication Refinancing facilities: IFAD introduces an innovation in rural finance development. These services were provided through trained advisors, whom the AIC had contracted to provide support to interested project clients. Initially, the advisory services were based on a cost-sharing arrangement between the client and the AIC. For project clients, this approach increased the likelihood of their obtaining a loan and also gave them access to advisors who could deliver the necessary technical support to enable them to more profitably manage their investment financing. For PFIs, this approach reduced the risk of lending, as evidenced by the repayment rates of advised as opposed to non-advised borrowers. With a clear strategy of establishing sustainable private consulting services, the cost-sharing arrangement was gradually phased out during project implementation. 2
Selecting and training the advisors Potential advisors were initially selected by the AIC through a competitive process based on the applicants relevant expertise, professional experience and qualifications. Those selected operated under performance-based contracts. Advisors would initially prepare business plans in order to secure loans from PFIs for clients, who could then request more specific agricultural advisory services. A capacity-building programme was set up to broaden advisors knowledge and expertise in areas relevant to the emerging development needs of their clients. Programme activities comprised: (i) developing advisors ability to more effectively manage their own businesses as agricultural consultants; (ii) increasing their ability to attract new clients by offering a wider range of saleable service products; and (iii) improving their skills in delivering advisory services to clients. Overall, specific training topics included: Agricultural business, budgeting and production planning; Basic crop and livestock production beyond the advisors original field of specialization; Farm accounting, including with respect to the European Union s Farm Accountancy Data Network (FADN); Agribusiness and agrifood industry marketing; Agricultural supply/value chain organization and management; EurepGAP standards and certification, 3 including produce traceability and food safety; and Marketing and financial management for consulting firms. The trainee advisors also became actively involved in preparing and implementing investment programmes to support the development of agricultural supply/value chains. This improved their understanding of market dynamics, value-chain investment opportunities, risks and risk mitigation strategies. With a better understanding of market trends in supply chain performance and their relevance to clients businesses, the advisors were able to develop more attractive credit applications and provide more informed advice. Trainee advisors were also involved in AFSP monitoring and impact assessment. As advisors acquired experience and expertise, the cost-sharing arrangement was gradually phased out, obliging them to work towards being fully independent businesses. The project assisted them in establishing their advisory firms, although advisors were required to finance the physical establishment of their business premises themselves. 3 In September 2007, EurepGAP changed its name to GLOBALGAP. 3
Client profile Forty-eight per cent of all AFSP borrowers (over 1,300) received support from AIC-trained advisors, and 45 per cent of the value of all loans was disbursed to these advised borrowers. Most advised borrowers were semi-commercial farmers with annual gross margins of EUR 1,200-3,600/year (37 per cent), followed by commercial farmers with gross margins of more than EUR 3,600/year (35 per cent) and traditional poor farmers with gross margins of less than EUR 1,200/year (27 per cent). Traditional poor farmers had the greatest need for advisory services, as they lacked knowledge and information and had negligible managerial and technical skills. Most non-advised borrowers were commercial farmers (57 per cent), who did not request advisory support. They approached financial institutions directly and eventually obtained a loan. Figure 1 Economic profile of advised and non-advised borrowers Non-advised borrowers Advised borrowers 10% 35% 27% 57% 33% 37% Traditional Semi-commercial Commercial Advised enterprises (traders and processors) were small-scale firms with an average annual value of production of EUR 375,000, some 1.6 times lower than non-advised enterprises. They often had inadequate and obsolete technologies and low-value adding capacity, making production labour-intensive and profitability highly dependent on processing large volumes of raw materials. On-the-ground impact Farms At the farm level, advised borrowers showed substantially higher levels of benefits than nonadvised borrowers. And benefits were not limited to access to finance. Other advisory service benefits included more efficient land use, increased area of cultivated land and improved managerial and production capacities. These all contributed towards improving access to markets and increased incomes. 4
AIC data indicate that an average primary-production family business income of EUR 5,166 rose to EUR 8,050 within two years after the family took out a loan; the amount of the increase was close to the 2007 average annual income in the country. Overall, advised primary producers generated an average incremental gross margin of EUR 8,557 in the two years after obtaining the loan, compared with EUR 5,000 for non-advised borrowers. The trend was clearly that loans coupled with advisory services enabled smaller, asset-poor family businesses to graduate to progressively higher asset and income groups faster than non-advised borrowers. Traders and processors At the trader/processor level, advised borrowers showed average increases in the value of final production of approximately EUR 144,000. However, the highest impact was on backward value-chain linkages. On average, advised enterprises purchased additional agricultural raw materials valued in excess of EUR 100,000, generated the equivalent of 15 full-time jobs (compared with an average of the equivalent of 7 full-time jobs among non-advised borrowers), and provided market access through contract farming to an additional 62 farmers. Advisory companies as independent operators In June 2008, at the end of the project, eight independent, private-sector, client-financed consulting companies had been established. Initially, trainee advisors found the overhead related to building up their client bases dauntingly expensive. As the volume and numbers of ACDF/PFI lending increased, advisors were increasingly in demand and able not only to reduce their overhead and transaction costs, but also to establish a broader reputation in communities as providers of useful services. Since becoming fully independent, the established companies had to find their own markets and, in the absence of cost-sharing arrangements, generate a business volume sufficient for business development and earn an acceptable standard of living. For most companies, the main point of entry has continued to be in providing business planning advice relative to accessing agricultural/rural finance. Some have focused on a small but highly remunerative number of clients, and others on a broader client base. During the AFSP s lifetime, the total number of advised borrowers was 1,323, accounting for a total disbursed loan amount of EUR 7,438,998. In an average year, within the AFSP framework, advisors supported 331 borrowers for an average loan amount of EUR 5,600 per borrower. After the project had closed, for example, from May 2008 to June 2009, the private companies supported 333 borrowers, reaching a total of EUR 1,098,000. The main investment sectors remained vegetable production, vineyards and cattle. Table 1 summarizes the activities of the independent company advisors in supporting clients loan applications in this period. 5
There is evidence that these consulting companies are moving towards supporting larger enterprises: during the project, 97 per cent of advised borrowers were farmers and 2.9 per cent were agricultural processing and trading companies; after the project, 21 per cent of all clients were processors and traders. Advisors are beginning to differentiate their client base. Some do not simply offer business planning and/or technical advice for their specialist commodity, but are also becoming involved as entrepreneurs in input supply and marketing for that commodity. One company is working with the local government to promote agritourism, while others are linking up with self-employment schemes promoted by the government and donors. Such self-employment does not necessarily need to be agro-related. The vehicle for company involvement is the relatively generic character of business plan preparation across different types of enterprises. One company is expanding its client base by encouraging clients to subscribe to farmers associations. In return, farmers receive updates on agro-related topics such as policy, technical, marketing and institutional news for the period of their subscription. Similarly some companies have developed links with the Federation of Farmers, providing organization and management services to its local offices. The eight AFSP/AIC-trained companies are in the process of becoming shareholders in a common consortium company to facilitate informational, operational and contractual collaboration. This will open up business opportunities requiring a wider range and volume of services. Table 1 Company-facilitated finance: May 2008-June 2009 Advisory company No. of loans Loan amount (EUR) Average loan size (EUR) Main sector Client group NEDA 122 550 000 4 508 Viticulture Medium size TIM 120 120 000 1 000 Livestock Small size KOCEV 40 160 000 4 000 Viticulture Medium size PRO 28 110 000 3 929 Bee-keeping Small size PLUS 12 55 000 4 583 Early vegetable Medium size VIVA 8 33 000 4 125 Livestock Medium size MC 3 70 000 23 333 Early vegetable Large size PASKOV Data not available 6
Measuring efficiency of the advisory services The total cost of establishing and using the advisory services during AFSP, including clients share, was EUR 667,000, of which EUR 240,000 supported capacity building of advisors, EUR 284,000 loan application and business plan preparation, and EUR 143,000 provision of services to borrowers in the period of investment realization. The efficiency of the AFSP advisory services concept can be measured in several ways: Efficiency of the AFSP lending programme: Every euro paid to advisors mobilized EUR 26 in loan funds for investments and a cost/loan ratio of 3.82 per cent. After project closing, the efficiency of the lending programme decreased and the cost/loan ratio increased to 4.7 per cent. This was mainly due to higher fees charged for loans of less than EUR 5,000. Efficiency of the advisory services: Every euro invested in advisory services for loan application, business plan preparation and investment support generated increases in incremental gross margins of EUR 38.64. In addition, advised borrowing businesses generated the equivalent of 910 additional full-time jobs. Economic benefits: Investment in advisory services created value in the agriculture and food sectors that resulted in additional government revenues from 2003 to 2010 of EUR 1.7 million, through taxes levied on the incremental profits of advised borrowers businesses. This provides for the full recovery of advisory costs. Even if only the difference between the performance of advised and non-advised borrowers in terms of gross margin and job creation is accounted for, the estimated benefits would offset the investments undertaken for setting up and supporting advisory services. 7
Lessons learned The dynamism of market-oriented private-sector advisory services is compatible with equitable, poverty-reducing economic development in which smallholders and small-scale entrepreneurs can invest successfully through commercial borrowing and markedly improve their incomes. Removal of the constraints that typically prevent smallholders from obtaining and benefiting from appropriate advisory and financial services was made possible through: (a) an initial cost-sharing arrangement, which made services accessible to smallholders and ensured that end-users were committed to receiving the service; (b) the demand-driven and pluralistic nature of the services; (c) the accountability of advisors, which provided incentives to deliver effective and practical solutions to clients problems; (d) the immediate financial gain of clients who obtained a loan through the advisory system, which enabled accessibility even for resource-poor farmers; and (e) the concurrent provision of technical training for advisors and technology transfers to clients. The success of AFSP in developing client-financed advisory services is related to the commercial viability of both clients and advisors. Support is required for the development of pluralistic private-sector advisory services that are not exclusively focused on poor rural people, but also encompass services to other clients to ensure longer-term sustainable development. 8
Building a poverty-free world The International Fund for Agricultural Development (IFAD) works with poor rural people to enable them to grow and sell more food, increase their incomes and determine the direction of their own lives. Since 1978, IFAD has invested over US$12 billion in grants and low-interest loans to developing countries, empowering more than 360 million people to break out of poverty. IFAD is an international financial institution and a specialized UN agency based in Rome the UN s food and agricultural hub. It is a unique partnership of 165 members from the Organization of the Petroleum Exporting Countries (OPEC), other developing countries and the Organisation for Economic Co-operation and Development (OECD). International Fund for Agricultural Development Via Paolo di Dono, 44 00142 Rome, Italy Telephone: +39 06 54591 Facsimile: +39 06 5043463 E-mail: ifad@ifad.org www.ifad.org www.ruralpovertyportal.org Contacts: Henning Pedersen Country Programme Manager IFAD Lorenzo Coppola Country Programme Manager IFAD November 2010