Agricultural Input Supply - A New Approach for Donors

Agricultural Input Supply - A New Approach for Donors

The Agricultural Engineering Branch of FAO


Background

Inputs for agricultural production can be distinguished by their cost relevance and their infrastructural requirements. Some inputs like grain seeds or granular mineral fertilizer in bags have lower requirements and are fairly easy to handle, others like liquid chemical pesticides have higher requirements particularly in terms of handling and user knowledge in order to avoid environmental and safety hazards.

Agricultural equipment, implements and machinery are among the most demanding of agricultural inputs. Mechanization inputs usually represent a fairly high share of investment capital of a farm, their correct use can be complicated and requiring high level of knowledge and abilities and they usually need a complex infrastructure to be operated in a sustainable way. This infrastructure includes repair facilities, spare and wear part supply as well as a supply of other inputs for their operation like fuel and lubricants.

Experience in the past has shown that the traditional approach of a centralized procurement and supply of agricultural mechanization inputs has proven not to be sustainable. It often has led to undesirable side effects in social structures and is counter-productive for the development of independent sustainable supply structures. Economical losses for the countries and farmers were often a consequence and were counterbalancing the obvious savings achieved by tendering large quantities of similar items.

The Approach

In view of these well known problems AGSE has developed a different approach to donor supply of agricultural engineering inputs. Basic feature of this approach is that it is demand driven relying on commercial procedures and market forces.

The new approach really starts after the need for agricultural mechanization input supply in a country has been identified, in quantitative and qualitative terms assessed and a donor has agreed upon the amount of money. In the recipient country then persons or structures are identified that qualify as commercial distribution channels for the required inputs. Those could be actually existing implement or machinery dealers, workshops with scope for widening their business, actual or potential entrepreneurs. Important is that they have a long term interest and commitment as well as the infrastructural, economical, technical and personal characteristics to successfully initiate and run the operation of an agricultural machinery dealer including the after sales service. It is desirable that these dealers have already established contacts to actual or potential clients for the mechanization inputs.

Based on the information obtained during the project formulation regarding the most urgent needs, the project identifies with a small team of experts together with the dealers the most suitable countries of origin for the supplies. For the selection information on historic supply channels or traditional regions to which the country has trade relations are considered. A market survey in the form of requests for quotation is carried out on international level, however, special consideration will be given to the above mentioned traditional supply regions. Manufacturers are approached, informed about the scope of the operation and asked for prices and eventually the provision of sample equipment in commission.

Out of the different offers which could also include the same type of equipment from different manufacturers, representing different quality and price levels, a catalogue of "project equipment" is assembled. Selection criteria should not only be the price, but also an assessment of the long term interest of the supplier in the specific market, the suitability of this supplier to the market (avoiding exotic brands unless they really show commitment) and technical quality criteria. This market survey is offered to the dealers along with technical assistance and advice on the technical features of the equipment as part of the service the project provides.

On bases of this catalogue a fair in the country and some regional field days or equipment exhibitions are organized where the farmers can see the equipment and obtain information about features and prices. Potential local dealers will be involved actively in these activities. They might at that stage not be able to cover any of the costs from their side, but they should certainly not be paid for participating. The activity should be understood by them as investment into future business. Equipment used for demonstrations would later be sold for promotional prices or returned to the supplier (depending on the arrangements made).

The dealers make their choice and approach with their offer their clients. The clients can also come directly to the project to get information about available equipment. However, the project will never deal directly with a client (farmer) but always send him to the most suitable, normally the local, dealer for purchase.

Parallel to this the potential beneficiaries would have been informed by public media campaigns or similar approaches about the scheme, the conditions and selection criteria. Subsequently they would be asked to place orders for the equipment they want with the dealers. These orders will then be collected, the applicants screened for their eligibility. Some selection might be necessary in case the orders exceed the budget available.

According to the demand the dealers prepare their orders and hand them in to the project where they are consolidated into one list. The orders will then be placed in bulk to the specific suppliers. At this stage a tendering process is not recommended, because the client should, if ever possible, receive what he/she asked for. It would therefore be preferable to negotiate with the supplier the final conditions. In any case the initial offer of the first request for quotation is available as guideline but the numbers of each item might differ from the original request. Only in case that the supplier is abusing or withdrawing, alternative makes should be selected and the beneficiaries duly informed. This case should, however, not happen if the initial selection of potential suppliers was done thoroughly.

During this process the dealers are involved in the procedures and receive so an on the job training in international procurement. They further get into direct contact with the suppliers and eventually create direct links which can end up in formal representations.

The equipment is then delivered to the project and immediately distributed to the different local dealers according to the specific orders they placed. Assembly and distribution is carried out by these dealers and their workshops, training to them provided by the supplier. The dealers would thus be involved in the operation and carry out also a major part of the distribution work. Decentralized specific project implementation structures might only be required where the bank, handling the credit contracts, does not have these structures themselves. This should, however, not be the normal case as the bank will later need decentralized structures to follow up on the payment of the credit.

While the supplier will be paid directly by the donor, the farmer will pay back his/her loan to the local bank. The dealer will receive from the project a mark-up corresponding to the equipment he has handled. This mark-up should be sufficiently large to give the dealer an incentive and allow, also from his side, investment into his business and own initiative. It should be avoided that the project equipment is very much cheaper than equipment available on the free market. The benefit for the beneficiaries, the "social component" would be the favorable credit conditions. It should under any circumstances be avoided to introduce heavily subsidized equipment into a market even if it is for a "good reason". The effects of subsidized agricultural equipment on the sustainability of farming, employment and market development are well known.

Dealers with their connections to suppliers and their experience would then decide to supply on their own more equipment under market conditions for other clients not qualifying under the project scheme. They would in this way consolidate their operation.

Eventually dealers might specialize on specific brands or product lines providing after sales service and spare part supplies for these specific products. The project encourages the dealers in that case to cooperate with other dealers and supply clients that prefer other brands through the respective specialized dealer. With this approach a diversified offer with good after sales services can be established even in fairly small countries with a limited market.

Due to the flexibility of this approach and the commercial procedures applied it is not necessarily slower than a traditional centrally planned and often bureaucratic tendering and procurement procedure and also the cost of the equipment is not necessarily higher. However, the initial start may appear slower until a suitable group of dealers is identified. But very soon the procurement activities increase exponentially. The project gives technical assistance to the dealers in all required aspects from business administration to mechanics' training and supports public relations activities like fairs, commercials, field days. Financing of the equipment is promoted preferably through commercially available channels at normal market conditions but this approach allows operation either under credit schemes as under cash payment. However, the details will have to be adjusted from country to country and from case to case.

The input supply project in the AGSE approach is more a catalytic unit using the funds available for machinery input supply not only for the procurement and supply of the inputs but for the establishment of sustainable commercially oriented and self supporting supply structures. A technical assistance component of the project might assist this development and provide also advice to the government on how to set the right environment for the project to have a longer lasting sustainable impact. The question of feasibility of farming and costs for equipment as affected by possible tax regulations will probably the most important issue in that aspect.

The concept could first be applied successfully in an Italian Trust Fund project in Albania. In that case the equipment was not distributed through a credit scheme but mainly against cash payment. After the first phase of that project the money for the procurement of the equipment had been recovered by the project and remained in Albania for other capacity building and rural development tasks. The dealers received from the project a manufacturers credit which means the dealers paid in cash at delivery or at the latest 1 to 3 months later. Some of the dealers provided a dealers credit to their clients, others sold in cash.

The Benefits

With this concept the farmers receive the equipment they really want and benefit through the technical supervision function of the project guaranteeing that "project-dealers" follow a certain codex and have quality equipment for a fair price. If farmers lack capital for the purchase, the social component of the project could be a soft loan. However, the equipment as such and its price should not be subsidized and should represent a feasible investment in the farming operation.

The dealers benefit from the technical advice of the project and the cheaper prices due to bulk orders and transports.

The country finally benefits as there are no such things like unrecoverable credits, abandoned machines, premature breakdowns or warehouses full of unsuitable and not salable implements or spare parts.

While AGSE believes that this approach is in general the preferable one for all sort of agricultural input supply projects, it is for agricultural engineering inputs absolutely essential to obtain a sustainable long term impact in a country through input supplies.