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Value Chain Development

Value Chain Development is designed to formalize agribusiness agreements with small holder farmers, ensure increased and systematic access to and use of short and long term financing for agribusinesses and mainstream climate change resilience across selected agricultural value chains through a broad promotion of technologies.

Three (3) sub-components are:

1.1. Agribusiness Linkages and Development

1.2. Rural Financial Services

1.3. Climate Change Resilience

Sub-component 1.1: Agribusiness Linkages Development

The aim of this Subcomponent is to formalize commercial linkages to factor and output markets. Other participants would be public and private service providers, FBOs, Participating Financial Institutions (PFIs) and input suppliers. Continued support for FBOs and VCCs will in particular include the development of enforceable contractual arrangements and means for enforcement.

This Sub-component will support the selection process of value chains, as well as detailed analysis to select opportunities and collect the required quantitative and qualitative information. The scheme below illustrates how GASIP will choose new value chains for support, following a two -step process.

The first step is to identify candidate value chains.

  1. On a regular basis, GASIP will invite Expressions of Interest (EOIs) which any party can submit to explain an opportunity to further develop an existing agricultural value chain. Those EOIs which are consistent with GASIP’s goal and objective will be considered for support, and will be taken through an agreed process for GASIP support. Those that are not, will be returned to their authors with an explanation.
  2. For EOIs that merit further review, GASIP will support them with Technical Assistance for them to develop their ideas into a full-fledged proposal for submission to GASIP.  The proposal will among others, focus on understanding the buyer-seller relationships along the chain; clarify which value chain segments can be expanded or made more efficient to bring the greatest impact to smallholders; and estimate the cumulative impact of the proposed project using Benefit-Cost (B/C) analysis to prioritize which project GASIP will support.

Once a project is chosen for support, GASIP will develop the technical approach to supporting the expansion of that value chain. GASIP will then apply its full suite of support to a chosen value chain.

Value Chain Facilitators.
Once a value chain is selected, smallholders’ participation in the agribusiness linkages will be assisted by Value Chain Facilitators (VCFs), who will be recruited to support value chain development at each zone. The VCF will be either specialized NGOs or Private Companies with appropriate skills and experience. The VCF will work in close collaboration with the value chain committees (VCC) and MOFA / District Department of Agriculture staff to facilitate the negotiation of agreements between all parties involved and to provide the implementation support. They will ensure the equitable participation of women and young people. The Sub-component will be flexible and make allowance for specialized facilitation services, so that further needs for support can be identified, funded and implemented as opportunities arise in each chain.

Establishing and strengthening Value Chain Committees.
Value Chain Committees (VCCs) will be established in order to enable FBOs, PFIs, Farm Service Providers, Inputs Suppliers, Produce Off-takers and Government to effectively cooperate within a locality for the efficient production and marketing of profitable farm commodities. They will participate in planning longer-term public investments as well as in organizing their constituents for seasonal production and marketing in all targeted districts.

The GASIP will support the emergence and development of VCCs at any level where there is sufficient interest and potential activity. It is likely that this would mean that several VCCs would be formed in a district, and that some of them would provide services in more than one value chain. At least 160 VCCs should be functional in PY3 and 180 VCCs in PY6.

Sub-component 1.2: Rural Financial Services

The outcome of this Sub-component is increased and systematic access to and use of short and long-term financing for value chain actors. As the availability of sustainable financial services is a key success factor in the GASIP concept, the aim is to cover all intervention districts in specific tandem with improvements of overall value chain function rendered by Sub-component 1.1.

Identifying financing opportunities.
Throughout the Programme, new value chain development opportunities will emerge through the bi-annual call. In all cases, value chains chosen for promotion must first demonstrate a clear business case and a clear benefit to smallholders. Driven by the opportunities identified by Subcomponent 1.1, this sub-component will research financing needs and opportunities for these value chains. Outputs of these exercises will include strictly and statistically formulated analysis of the size and scope of financing opportunities, for equity investors, universal banks and RCBs with the strategies and products clearly defined. This analysis will define specific products and strategies that will be the basis of the programme’s support to PFIs.

Guiding principles.
Underpinning this Subcomponent are several guiding principles based on lessons learned by Ghana’s value chain finance initiatives and from international best practices in rural finance.  These include:

(i) Risk mitigation embedded in the PFI financing strategy;
(ii) Specific liquidity risk management embedded in the PFI financing strategy,
(iii) Financing against appropriate contracts that bind buyers and sellers as well as having clear and enforceable penalties for non-performance;
(iv) Client saving for reinvestment, self-insurance and household opportunities;
(v) Anchoring finance to the strongest market makers with links to established and reliable retail or export markets; and
(vi) Scaling up proven strategies.

Financial instruments, strategies and products
Value chain financing refers to what is generally called structured trade finance. Structured trade finance covers multiple strategies for lending and recovery but generally involves either using inventory or using contractual obligations with well-established buyers to perfect loan security. Three well understood structured financing strategies are envisaged for promotion under GASIP for supporting both Universal Banks and RCBs. These are:

(i) Forward contract finance,
(ii) Invoice discounting, and
(iii) Warehouse receipts.

Development and rollout of other financial products, beyond structured trade finance strategies, will also be supported by GASIP. These will include both traditional banking and equity type products. Traditional banking products include: term loans, fixed deposits, loans and current deposits. Term loans refer to loans for over one year and generally are used for fixed asset investments. Fixed deposits are longer term savings deposits that attract higher interest in return for the depositor’s agreement not to withdraw the monies for predetermined tenure. Fixed deposits enable lenders to make longer term loans. Loans and current deposits are self-explanatory.

GASIP will promote equity type products including: (i) equity, (ii) mezzanine debt, and (iii) finance leases.

RCB capacity building
RCBs have begun financing outgrowers, members of FBOs affiliated to VCCs, and SME processors in project areas supported by GIZ/MOAP, NRGP, RTIMP and
USAID/ADVANCE. Much of the financing is delivered through structured trade financing mechanisms (called cashless credit by some projects). This arrangement effectively enables the RCB to control default risk by basing recovery on the strength of an organized, well capitalized buyer rather than lending to widely dispersed, financially unsophisticated, small borrowers in cash and recovering in cash4. Hence, their limited abilities to manage risk, in a market where others are managing risk well, causes interest rates to be very high and unattractive to would-be borrowers. Notionally, these poorly performing RCBs, and those that don’t lend to agriculture under any circumstances, know that they must perfect their security and manage their liquidity but they lack the fundamental skills to do that. Because without financing for producers, producers cannot increase output, support to these RCBs that service the production end of the value chain is critical for GASIP.

The support to RCBs will include:

(i) training for bankers to understand the value proposition of financing production,
(ii) training for bankers to understand the construction of risk matrices to identify and strategize effective means to perfect loan security;
(iii) technical assistance from contract specialists to develop and use enforceable means to cement terms between value chain buyers and sellers and to cement terms between the same buyers and sellers and RCBs;
(iv) coordination between financiers engaged in a particular value chain to collaborate so that all segments of the chain (large and small) have adequate liquidity to underpin timely payments to eliminate loan arrears; and
(v) development of short term and fixed deposit savings products to lower liquidity risk to the RCB, provide security to smallholder households and lower costs of lending.

Engaging Universal Banks
Universal banks have expressed qualified interest in structured trade finance for value chains with a clear, reliable and organized export or retail market. Currently, universal banks are not meaningfully engaged in structured trade financing apart from cocoa and non-agricultural products and this is mostly the preserve of very large banks. Conceptually, to assist universal banks to move safely into structured trade financing, these banks will be assisted in developing and rolling out policies and procedures for application, appraisal, approval, disbursement and recovery against contractual buyer and seller documents.

Approaches to developing equity
Leasing as a low risk option for lender term financing and/or as an equity development strategy has been a very effective tool for developing agribusiness throughout the world. Leasing can be used to support small, medium and large agribusinesses and can be offered both by RCBs and universal banks. Effective leasing relies on qualified asset vendors, clear strategies for asset maintenance and development of secondary markets for used assets. The programme will support lenders/investors to put in place clear policies and procedures for issues including: treasury management, asset ownership, tax treatment, asset insurance, depreciation and amortization.

The persistent problem of under-capitalization of RCBs encumbers these institutions from increasing finance to the lower end of the value chain. RAFIP has undertaken, with ARB Apex Bank and DANIDA/SPSD-II, to study and, hopefully address this issue. GASIP will collaborate with this initiative and support equity development to RCBs through equity investments and mezzanine debt.  There are a growing number of private equity funds interested in investing in agricultural value chains, some with support from the government’s Venture Capital Fund, which the Programme will engage with respect to larger investments higher up the value chains being supported. The Venture Capital Fund’s affiliated fund managers offer both equity and mezzanine debt investments. GASIP will identify investment opportunities for such investments and offer investors prospectuses to both equity fund managers and universal banks to broaden competition and awareness of financing opportunities.

Matching Grants and Credit
Programme clients, whether, individuals, groups, members of groups, or enterprises (including PFIs) will be eligible for Matching Grants (MGs) to leverage their equity contribution in order to obtain a medium-to-long-term loan of at least 12 months for investment in machinery, equipment and/or buildings in accordance with the programme’s eligibility criteria.  MGs will be contingent upon the programme client raising 10% of the total investment cost in cash. The MG as a share of the total investment cost, to be reviewed periodically in light of performance, shall be up to 30% of the total investment cost of the equipment.

The MG offer will be approved for clients and equipment conforming to the GASIP eligibility criteria. The MG will only be disbursed if and only if a PFI agrees to offer the client a loan for the 60% balance of the investment cost as well as the initial operating cost as necessary.

Credit lines
To the extent that there may be some demand for lines of credit by some RCBs, at present there appears to be sufficient funds already available, managed either by ARB Apex Bank or BOG. This includes about US$ 18 million of funds from the SPEED Finance Facility plus new funds from DANIDA’s second Support to Private Sector Development project (SPSDII), which are unrestricted as to use by RCBs and others meeting the eligibility and performance criteria.

About US$ 2 million in revolving funds from previous IFAD projects (CBRDP,
LACOSREP, UWADEP) is in principle available for agriculture, if the requisite official permission can be granted to continue recycling these funds. In addition, nearly US$ 5 million will be available for micro and small enterprises (MSEs), including processors in agricultural VCs, from REP. Universal banks are perfectly liquid and don’t require additional or concessional funds. Thus, the design team concluded that additional liquidity in the form of credit lines is unnecessary for the foreseeable future.

Sub-component 1.3: Climate Change Resilience

The aim of Subcomponent 1.3 is to mainstream climate change adaptation and resilience of smallholders across the selected value chains.

Conservation agriculture for Rain-fed Farming Systems
Commercially valid adaptive trials and demonstrations of modern conservation agriculture techniques under rain-fed conditions will be undertaken from PY1 onwards. The first demonstrations would focus on a rotation based on maize-sorghum-cowpea/soybean. These interventions will be hosted by leading nucleus farmers and specialist farm services providers, in line with the value chain approach of the Programme. They will provide location specific adaptation of technology for conservation agriculture which is already a mature technique in other countries.

Such technology would include zero-tillage cropping, soil moisture conservation, crop residue retention, appropriate crop rotations and proper crop nutrition. As means to overcome the normal farmer practise of using crop residues for livestock feeding, forage/fodder crops suited to the environment would be included in the rotation. The trials and demonstrations will specifically demonstrate a technically viable approach which provides enhanced yields, yield security, profitability and thus enhanced climate change resilience. A total of about 25 sites will be established, with one in each of the more vulnerable northern Districts (75 sites in total of which 45 sites in cycle 1 and 30 in cycle 2).

The trials and demonstrations will seek to provide practical information for farmers, contractors, buyers, financial institutions for improved productivity within a more erratic climatic regime. The activity will adapt already mature technology which has been developed in other countries to the local climatic, soil and environmental conditions in each district. The result will be that a model relevant for rapid application and uptake in each locality will become available.

The trials and demonstrations would be closely monitored. Some of the pertinent indicators would be: (a) yield per hectare; (b) yield per millimetre of rainfall; (c) B/C ratio; (d) net revenue per hectare; (e) return to family labour; (f) yield variability over successive seasons.  It will generally take about three seasons for the full impact of the new system to become evident in each locality. This is because it takes time for the nuances of each locality to be correctly diagnosed and treated, for soil characteristics to be positively changed, and for associated organic systems to become mature. However, there will be immediate benefits from the first season if the technology is properly applied. It is expected that widespread application of such a system would result in higher yields and farm incomes, lower yield variability, lower run-off and much higher levels of soil carbon.

The support to the hosts of the trials will include:

(i) cost of incremental capital equipment for a “unit” of equipment;
(ii) cash operating costs;
(iii) specialised supporting technical assistance;
(iv) specialized services such as soil nutrient analysis and moisture holding capacity.

It is expected that such support would be initially limited to three years for each participant, after which time the operator would be encouraged to continue fully commercial operations. The average size of each unit of operation would be about 390 hectares of cropping at maturity. Individual smallholders will be allocated three hectares within this, but over time, such areas will be subject to change to properly reflect the capacity of individuals.  Farmers, service providers and nucleus estate operators will be encouraged to invest in the technology in commercial operations as the demonstrations provide viable results. Programme support would be provided through matching grant funds (Subcomponent 1.2) as well as extension and mentoring support.


Improved Water-Use Efficiency in Irrigation
Although investment in irrigation systems has often been proposed as a means of providing resilience to climate change, these same investments often fail to deliver in terms of reliability of water supply, good yields and most importantly value for money in terms of water-availability per unit of investment cost. A central reason for this is that existing irrigation systems rely on wasteful and inefficient water delivery and application methods. Typically, semi-controlled flood irrigation systems have water-use efficiency of less than 40%, which means that more than 60% of available water is wasted.

The Programme would therefore support trials and demonstrations of improved water-use efficiency techniques within existing irrigation systems and from available water sources. These would include:

a) application of drip and micro-jet systems;
b) other water-efficient means of delivery;
c) soil moisture monitoring as a means of advanced irrigation scheduling and management;
d) better drainage, and use of water “recycling” from drainage as a means of enhancing efficiency.

These demonstrations will be provided within existing irrigation systems and/or from existing water sources. They will be commercial in nature. It is proposed that some 20 such demonstrations be established (3 per annum), each with a commercially valid command area (at least 5 hectares). Programme support for these demonstrations would include:

(a) the capital cost of equipment provided;
(b) the incremental operating costs;
(c) specialist technical assistance and training.

The indicators that would be monitored would include:

(a) water-use efficiency, that is, the amount of plant available water available as a percentage of the volume of water applied;
(b) water-use per hectare per crop;
(c) value of produce per MT of water applied;
(d cost of application per MT of water applied.

The application of such technology will provide greater crop and income security for smallholders by improving the capacity of their crops to withstand water stress. These improved and low cost water harvesting and management technologies will be promoted extensively. Farmers, especially FBOs linked through VCCs, would be encouraged to make investments in these systems. They could be supported both through the matching grant system (Subcomponent 1.2) and through provision of irrigation infrastructure support (Subcomponent 2.1).


Capacity Building and Awareness in the field of Climate Change Resilience.
The Programme will provide support for capacity building and enhanced public awareness in the field of climate change resilience. Specific capacity building will also include support to DADUs, FBOs, Water User Associations (WUA) and other members of the VCCs. The activities which will be supported include:
Development and dissemination of climate change adaptation toolkits in conjunction with training courses focused on resilience of key rain-fed production systems in the northern regions. A total of 770 toolkits will be disseminated. These will provide farmers with technical training regarding practical activities that promote climate resilient production systems. The toolkits will focus on the resilience of rain-fed production systems in the northern regions and will include simplified and easy information in local language.

The toolkits will describe:

(a) the project effects of climate change and climate-related hazards in Ghana, with specific reference to the impact on agriculture; and
(b) adaptation interventions that will build resilience to these impacts, including – but not limited to – interventions described in this ASAP project such as agro-forestry, conservation agriculture, weather-index based insurance.

Awareness raising on climate change to sensitise farmers and their organizations on the process of climate change and the effects of climate-related risks5; general awareness on climate change and climate-related risks will be presented at 180 sensitisation sessions. More specific information relating to climate will be presented at 254 Farmer Field Days, while VCCs will receive training courses on climate change and climate resilient production systems. In addition, 110 climate change adaptation courses will provide technical training on adapted agricultural calendars, better collection and use of weather data, improved productions techniques (incorporating agro-forestry, diversification, conservation agriculture etc.) and other adaptation strategies.

International and national exchange visit: Farmers will be taken on visits to neighbouring countries (i.e. Nigeria, Togo, Burkina Faso and Senegal (6) and other districts/regions within Ghana (target: 280 participants) where they will be able to observe first-hand appropriate climate change adaptation techniques. This will enable them to implement these techniques in their own agricultural production, serving as “adaptation champions” to other members of their communities. These farmers will be supported to implement the know-how gained on these exchange visits through ASAP activities.

Production of technical briefs and notes, dissemination of good practices and training on the use of weather information and the adjustment of cropping systems and calendars, and other appropriate interventions that increase climate resilience.  Technical assistance for feasibility and design studies and planning including the development of environmental and climate change management plans for these interventions.


Institutional Support for Climate Change Resilience
EPA and the Environmental Unit of MOFA will receive institutional support, mainly in the form of equipment, training and support to organized workshops and events.

GASIP will use the following methodology to launch and manage this key activity:
A technical working group will be formed to guide implementation of the trials and demonstrations. This will consist of:

  1. Each Zonal Value Chain Specialist;
  2. The Climate Change Adaptation Manager;
  3. A Senior representative of SARI;
  4. A Senior representative of MoFA;
  5. A farmer representative (preferably a nucleus estate farmer); and,
  6. A VCF representative involved in development of the main crops selected for support under the trials and demonstrations.

Specialist Technical Assistance, likely to be an international appointment from a country where the technology is already mature, would be identified and appointed. The TA would provide guidance to the working group and to the selected demonstration sites; The CCAM will, in consultation with each DA, propose and validate the selected sites.  Approximately half of the sites will be hosted through smallholder service providers, and half by nucleus estates.

The programme would finance:

  1. All incremental equipment needs for each site;
  2. Initially, all of incremental operating/inputs costs, with the proportion of this provided dropping as benefits are realised;
  3. All training costs;
  4. All costs of public demonstrations to potential adopters.

As it is expected to take about three seasons for the full impact of the new system to become evident in each locality, support will be provided for this period in each locality. The trials and demonstrations will be closely monitored. Some of the pertinent indicators would be:

  1. Yield per hectare;
  2. Yield per millimetre of rainfall;
  3. Cost of sales (yield) as a proportion of revenue;
  4. Overall profitability of the system;
  5. Labour requirement as a proportion of revenue;
  6. Yield variability over successive seasons; and,
  7. Yield and cost comparisons with conventional farming systems.
  8. This information will be collated and widely publicised in an effort to engender rapid adoption of the new techniques.

Speeches at the Launch of GASIP

GASIP

The Ghana Agricultural Sector Investment Programme (GASIP) aims at providing a framework and institutional basis for a long-term engagement and supplementary financing for scaling up investments in private sector-led pro-poor agricultural value chain development. Read more...

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