Using investment to integrate farmers into value chains: Tanzania’s successes and challenges

22 November 2016

How is investment via government policies, donor initiatives, and public-private partnerships being harnessed to foster growth in Tanzania’s agricultural sector and integrate smallholder farmers into larger value chains?

 

Tanzania has become a darling of Western donors in recent years, building on an image of political stability and economic transformation. Tanzania has an annual growth rate of 7 percent, making it the fastest growing country in East Africa. However, Tanzanian farmers have been unable to sufficiently exploit the comparative agricultural advantage offered by the country’s favourable landscape, geographical location, and access to a major port city – Dar es Salaam. Agricultural productivity has also fallen short of the government’s 6 percent target derived from the African Union’s Comprehensive Africa Agricultural Development Programme (CAADP). Consequently, in recent years the Tanzanian government has implemented various policies and practices to enhance investment and stimulate growth in the country’s agricultural sector, with a view to ensuring the socio-economic development of smallholder farmers.

There is a plethora of government and donor initiatives and public-private partnerships (PPPs) currently underway in Tanzania. This article provides a description of how investment is being used as a tool to further farmers’ integration into larger value chains. In identifying successful initiatives and current challenges, the article also provides potential policy recommendations that could be implemented in order to better harness investment towards that objective.

Tanzania’s farmers: facing an uphill battle to enhance agricultural production

Tanzania’s farmers are traditionally smallholders, farming less than two hectares of land. Many are located in extremely remote areas of Tanzania. One of the largest structural challenges facing smallholder farmers is the lack of infrastructure (roads, railways, irrigation, and power) that would enable their access to larger markets, improve the quality of their produce, and facilitate moving up the value chain into agro-processing activities. These problems are not endemic to Tanzania and many other developing country producers face similar problems. However, the fact that Tanzania’s farmers face hurdles from the farm gate itself remains an existing cause for concern that donor and government interventions have not managed to completely address.

Investment as a tool for value chain inclusion: successes and challenges

Investment targeted specifically at the agricultural sector has been sporadic, which has made implementing long-term initiatives harder. While sectors such as energy and transportation have found it easier to attract private investors, agriculture has not shown similar results. Increasingly aware of the challenges facing smallholder farmers, the Tanzanian government has, over the years, worked towards improving investors’ perceptions of Tanzania as a traditionally socialist state that is not business friendly. It has thus focused on implementing a variety of policies aimed at cultivating an investor-friendly environment that is also development focused with regard to its farmers. As a result, the Tanzania Investment Centre (TIC), the primary government agency tasked with facilitating and encouraging foreign and local investment in Tanzania, has utilised important measures to cultivate investors’ interest in the country’s agricultural sector. These measures include tax-friendly provisions for foreign and local investors for minimum investment amounts of US$500,000 in capital for foreign investors and US$100,000 in capital for local investors. Tax-free periods for the first five years of business operations allow businesses to grow during their inception period, with the long-term goal of generating profits and thereafter expanding their operations.

However, measures are not only geared towards ensuring gains for investors alone. The TIC has created safeguards to ensure that farmers also benefit from investment gains in the agricultural sector. These measures include mandatory corporate social responsibility (CSR) conditions for both local and foreign investors that have been incorporated into investment agreements on a sector-by-sector basis. As part of these CSR provisions in the agricultural sector, investors are required to contribute towards the land tenure security of smallholder farmers, improve local community infrastructure through their projects, and encourage joint ventures between themselves and local communities. Through its Business Linkages Programme with UNCTAD, the TIC also provides training on quality issues to more than 200 small and medium enterprises and encourages links between smallholder cooperatives and international companies. In 2011, the government partnered with AirTel to facilitate the transmission of market-related information to farmers. For farmers located in rural areas with little access to larger markets, receiving market prices through their mobile phones is an effective way to ensure they are well informed, minimise their reliance on middlemen, and ultimately empower them to be active participants when selling their produce.

Although the regulatory environment has improved over the years, problems surrounding “doing business” conditions, land ownership, and existing tax regimes continue to exist, thereby limiting the prospects for greater investment and private sector participation.[1] Tanzania currently ranks 120th out of 140 economies in the 2015 World Economic Forum’s Global Competitiveness Report. For foreign investors, high interest rates ranging from 14 to 24 percent act as a deterrent to borrowing from local banks.[2] Currently, Tanzania has the rather dated National Investment Act of 1997 as its overarching investment strategy, which does not comprehensively address land tenure and investor incentives. Foreign investment regulations are also scattered across numerous laws, which makes navigating the Tanzanian investment legal landscape more challenging for foreign investors.

Infrastructure remains severely underdeveloped across the country, and many producers are reliant on Kenya’s more attractive airport tariff rates, simpler bureaucratic procedures, and cold room storage facilities in order to export their produce.[3] Consequently, Tanzania continues to be surpassed by Kenya and South Africa in output levels, as both countries have far more sophisticated value chains and, in Kenya’s case, greater success at mobilising their smallholder farmers for mass production of agricultural produce.

There are, however, small changes being implemented to address some of these problems. An ongoing initiative that attempts to bridge the gap between investors’ demands and the socio-economic development of Tanzanian farmers is the World Bank’s Southern Agricultural Growth Corridor of Tanzania (SAGCOT) initiative, which involves a wide range of partners and is characterised by its “mega-PPP” status.[4]

The Tanzanian government appears to understand the importance of striking the right balance between attracting investors and protecting the rights of farmers. In the SAGCOT project, land allocations of between 3,000 and 50,000 hectares have been reserved for leasing to investors, with the land surrounding these parcels reserved for smallholder farmers.[5] Investors will bring with them services, infrastructure, and inputs as they undertake agri-processing initiatives and agricultural production under the SAGCOT project. As a result, smallholder farmers are expected to benefit from better access to larger markets, and improved inputs, extension services, and irrigation, helping them to improve their farming methods and boost their outputs, with the hope of ultimately increasing their profits, improving their living standards, and generating movement beyond their current income brackets.

On paper, SAGCOT sounds like an ideal bridge between private needs, public concerns, and the government’s efforts to ensure that farmers’ socio-economic conditions improve as a result of their involvement in larger value chains. However, SAGCOT was only launched in 2010 and remains in an early stage of development. Consequently, its success as a mega-PPP using investment as a tool for value chain inclusion and development remains to be tested.
 

Financial woes continue for Tanzanian farmers

Moreover, farmers are not always able to access much-needed financing to grow their operations. The Tanzanian government and the Agricultural Council of Tanzania have created the Agricultural Development Bank (ADB) as a specialised financing instrument for these farmers. Having only come into operation in 2015, there are concerns that the ADB already lacks the capital to cater for all smallholder farmers and remains inaccessible to individual farmers. This raises the possibility that the main beneficiaries of the ADB will be medium-scale farmers already possessing collateral, instead of smallholder farmers. The far-flung distribution of banks within the rural sector does little to address farming communities’ needs to access financing on a regular basis. There is also a dire need to provide some form of mobile or accessible financing to smallholder farmers in order to facilitate their movement into different sectors of the value chain, or even for crop diversification. Consequently, many smallholder farmers are still only able to access funding through farmer cooperatives, without the support of which they cannot manage their finances.

Another way in which farmers are prevented from upskilling is through the value added tax (VAT) and tariff charges on agro-inputs such as seeds and plant materials. Although tax rebates exist for larger export producers, small-scale exporters that fall below the VAT registration threshold are disadvantaged through their lack of access to reimbursements. High-quality inputs are critical if farmers wish to cultivate produce for regional and international export. However, smallholder producers can face up to 25 percent tariff and 18 percent VAT charges for agro-inputs. Combined with unfair administration levies, tax levels prevent farmers from reinvesting their savings or some of their profits in purchasing new seed, hampering their ability to make substantial investments in the future growth of their businesses. In general, the tax regime appears to be largely problematic for many actors throughout agricultural value chains and requires an overhaul.

Way forward and policy recommendations

The government, donors, and the private sector have implemented several measures that, in the long term, should work towards growing Tanzania’s agricultural sector and cater for the involvement of smallholder farmers. It is important to realise that successful initiatives in the agricultural sector, such as Kilombero Plantations Ltd (which is also involved in the SAGCOT project and will reap benefits from this involvement) and Tanga Fresh, have benefited from foreign investment from larger multinational companies and long-term investors, as well as from training and support for producers. However, these initiatives are not without their challenges, and some face obstacles in their efforts to tap into the domestic market. SAGCOT and Kilombero have strong PPP components to them, and provide useful examples of how PPPs can be utilised for the long-term sustenance of projects and the incorporation of farmers into larger value chains through training, upskilling, and agro-processing initiatives.

Nevertheless, changes to Tanzania’s agricultural sector can be implemented through a number of measures:

  • Existing input measures must be further developed and farmers need to become familiar with them. The government has implemented an initiative whereby smallholder farmers’ associations/cooperatives are linked to large-scale agricultural input suppliers. This involves all levels of government, from central to local government, and all input suppliers have to be registered in each farming district, and distribute supplies according to these channels, down to the village level. Similarly, the Agricultural Council of Tanzania’s “Farmers Platform” project builds a contact base of farmers with the end-goal of matching them with input suppliers’ contacts and ensuring that farmers are subsidised through economies of scale. This engagement allows farmers to interact with input suppliers, thereby allowing them to purchase farming inputs at cheaper rates. Should such initiatives continue and include private sector players that can supply equipment and machinery at affordable prices, they would contribute to ensuring regular and cheaper access to agricultural inputs, which would in turn help address the quality restrictions faced by farmers in the long term.
  • Encouraging the implementation of better farming methods through research and innovation and disseminating this knowledge among smallholder producers is also important. This should be undertaken regularly through workshops based in rural areas or locations most convenient to farmers.
  • Cross-sectoral relations must be improved: better communication between researchers, policymakers, and government is essential for understanding farmers’ needs. The government needs to adopt a more consultative approach, particularly because mega-PPPs have been met with outcry from some civil society actors with respect to asymmetrical relations and power dynamics between multinational agri-businesses and smaller producers.
  • Implementing non-protectionist policies that harness the producing potential of smallholder farmers through inclusion in domestic value chains can also help facilitate their entry into regional markets. Such measures could include enhancing farmers’ competitiveness, improving their labour productivity, and upgrading their technical knowledge. Promoting linkages to regional markets would help smallholder producers to understand the importance of producing high-quality produce for export that would derive higher profits for them. Developing infrastructure and addressing quality and quantity restrictions is also essential to meet this objective.
  • Together with the TIC, farmers’ associations and the ministry of agriculture need to create and implement comprehensive monitoring and evaluation processes that include consultations with farmers. This would encourage local communities’ continuous learning from past experiences, promote skills transfer and upskilling, and support farmers in their efforts to move up the value chain. Ultimately, investment in Tanzania’s agricultural sector must be used for the benefit, inclusion, and uplifting of smallholder rural farmers.


Author
Asmita Parshotam, Researcher, Economic Diplomacy Programme, South African Institute of International Affairs.


[1] OECD.  Investment Policy Reviews: Tanzania 2013. Chapter 1: Overview of progress and policy challenges in Tanzania. 2013.

[2] Pedro Arias et al.  “Tanzania: Analysis of Private Investments in the Agricultural Sector of the United Republic of Tanzania” in Trends and Impact of Foreign Investment in Developing Country Agriculture –Evidence from Case Studies. Rome: Food and Agricultural Organisation (FAO), 2012.

[3] Oswald Mashindano et al. Taping Export Opportunities for Horticulture Products in Tanzania: Do We Have Supporting Policies and Institutional Frameworks? Investment Climate and Business Environment Research Fund, ICBE-RF Research Report No. 65/13. Dakar: TrustAfrica and IDRC, 2013.

[4] For more details, see SAGCOT’s website.

[5] Robin Willoughby.  Moral Hazard? ”Mega” Public-Private Partnerships in African Agriculture. Oxfam Briefing Paper 188. Oxford: Oxfam, 2014.

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