Private sector development and partnership strategy

PRIVATE SECTOR DEVELOPMENT AND PARTNERSHIP

STRATEGY

Enabling the rural poor to overcome poverty

POLICY

PRIVATE SECTOR DEVELOPMENT AND PARTNERSHIP

STRATEGY

POLICY


Summary iv

INTRODUCTION 1

DEFINING THE PRIVATE SECTOR 5

CONSTRAINTS THE PRIVATE SECTOR FACES IN RURAL ECONOMIES 9

THE EVOLUTION OF IFAD’S ENGAGEMENT WITH THE PRIVATE SECTOR 13

THE APPROACH OF OTHER DEVELOPMENT ORGANIZATIONS TO PRIVATE-SECTOR

DEVELOPMENT AND PARTNERSHIP 17

THE WAY FORWARD: A PRIVATE-SECTOR DEVELOPMENT

AND PARTNERSHIP STRATEGY FOR IFAD 21Goal, objective and guiding principles 22Operational strategy and underlying outputs and activities 23

IMPLEMENTATION REQUIREMENTS 37

1 The rising importance of supermarkets in Latin America 2

2 Solidarity gives women access to financial services and the market: the case of self-help groups in Chattisgarh, India 26

3 The experience of the Agricultural Cooperative Bank of Armenia 28

4 Agricultural marketing companies as sources of smallholder credit in eastern and southern Africa 30

5 Establishing a private-sector partnership for accessing knowledge and international commodity markets 34

TABLE OF CONTENTS

BOXES

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ABBREVIATIONS AND ACRONYMS

IFI international financial institution PBAS performance-based allocation system PSDP private-sector development and partnership RFI rural financial institutionSME small and medium enterpriseRIMS results and impact management systemIMI initiative for mainstreaming innovation

The economic environment in which rural poor peopleseek to earn a living has changed dramatically over the past 20 years. In most developing countries, theprivate sector is now responsible for the majority ofemployment and income-generating opportunities, andhas become the driving force for poverty reduction. Poor rural producers represent a large part of the privatesector in developing countries. Rural poor people alsointeract with other private operators on a daily basis.

This paper presents IFAD’s strategy on how best topromote private-sector development in rural areas. Thepaper also looks at how IFAD can forge local, national,regional and global partnerships with the private sectorthat will benefit IFAD’s target groups and enable them to overcome poverty.

The strategy is organized along three broad lines ofaction: � policy dialogue for local private-sector development;� investment operations to support local private-sector

development; and� partnership with the private sector to leverage additional

investments and bring knowledge to rural areas.

Summary

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INTRODUCTION

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The rising importance of supermarkets in Latin America

The rapid expansion of supermarkets in Latin America has resulted in a revolutionary change in the structureof the region’s agri-food industry. Supermarket chains now control about 60 per cent of the retail food marketin Latin America, up from 10-20 per cent in 1990. Supermarkets sell two to three times more fresh fruits and vegetables than the total amount exported by Latin America. There is also a high degree of marketconcentration: just five multinational supermarkets control two thirds or more of the food retail market incountries as diverse as Argentina, El Salvador, Honduras and Mexico. This market power has allowed them

Over the past ten to 20 years, the economicenvironment within which the rural poor seektheir livelihood has changed substantially inmany developing countries. In Africa,governments that used to play a key role in theorganization of economic relations have nowlargely withdrawn from productive activities.Similarly, in the transitional economies ofCentral and Eastern Europe, governmentshave changed the nature of their role in ruralareas, following the collapse of the SovietUnion and the dismantlement of commandeconomies. These once dominant actors inproduction and marketing are now largelyseeking to promote private-sector investment.In Asia, subsistence farmers are increasinglyable to produce a marketable surplus, and thebarter economy is giving way to a much higher level of monetization. And while state-ownedorganizations are still active in somedeveloping Asian countries, their contributionto rural economic growth has diminishedconsiderably. Equally, government services arebeing subjected to new market forces andcompetition from the private sector. In LatinAmerica as well, economic reforms over the last two decades have meant thatproductive economic activities – including theprovision of rural services, once dominated by state organizations – have been opened up to the market.

Other important trends, such as globalizationand the pursuant growing integration of local,

national and international economies; high rates of youth unemployment due to acurrent demographic bulge in the number of young people;1 the expanding roles ofremittances and microfinance in generatingincome; the changing market structure ofagri-food chains and the rapid expansion of supermarkets (especially in Latin America –see Box 1 below); and the revolution ininformation and communication technologyhave all contributed to the dramatic change inthe rural economies of the developing world.

In this new and dynamic global environment,the role of the private sector is becoming evermore important. The private sector providesmost income-generating activities and job-creation opportunities, and is increasinglybecoming the driving force for economicgrowth and poverty reduction.2 IFAD’s targetgroups (i.e. small farmers, herders, woman-headed households, rural wage-earners, ruralmicroentrepreneurs and small agriculturaltraders) represent a large part of the privatesector in developing countries; and rural poorpeople interact on a daily basis with otherprivate operators in order to access resources,buy inputs, use technology, receive services,obtain credit, or sell their services and products.

Rural market economies are fuelled by theeconomic relationships that exist among smallrural producers and with other actors inprivate-sector markets. Most of those markets

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1 In some developingcountries, especially inAfrica and the Near East, it is estimated that about 50 per cent of thepopulation is less than 20 years old.

2 Domestic privateinvestment averaged 10-12 per cent of grossdomestic product in the1990s, compared with 7 per cent for domesticpublic investment and 2-5 per cent for foreigndirect investment accordingto the report UnleashingEntrepreneurship: MakingBusiness Work for the Poor.Published by the UnitedNations DevelopmentProgramme, the report was prepared by theCommission on the PrivateSector and Development,and presented to theSecretary-General of theUnited Nations in 2004.

BOX 1

to impose their own private grades and standards on major food products, which in turn have a significantimpact on technological, organizational, managerial and financial aspects of the related food production andmarketing chain, changing the old ways in which food is grown, processed, traded, sold and bought. The hightransaction costs of dealing with numerous small farmers, added to the fact that small farmers often cannotmeet the required standards, mean that supermarkets frequently prefer to work with a few large-scale farmerswho are better able to deliver the quantity and quality standards set by the company. There is thus a growingthreat that, unless their capacity to comply with new procurement and quality standards is improved, smallfarmers will be driven out of major food markets in Latin America.

are evolving rapidly, and although in certainareas they are extremely vibrant, in others –often those of most importance for poor people– they remain weak and underdeveloped.Yet even where those markets do work, therural poor, because of the many constraintsthey face (material, institutional and policy-based), are not always able to capturethe opportunities available in this newenvironment. As a result, the general movetowards economies in which market forcesand the private sector play a central role doesnot always reflect the interests of the ruralpoor. IFAD has an essential part to play in equipping the rural poor to interact moreequitably with new market forces and inmaking market relationships work for them.

In September 2004, a comprehensivedocument representing IFAD’s strategy forprivate-sector development and partnershipwas submitted to the Executive Board. TheBoard approved the principles underlyingIFAD’s strategy, but requested a simplified and more operational document with a results framework, to be resubmitted to the eighty-fourth session of the Executive Board inApril 2005. This paper embodies this reviseddocument. Its main objective is to presentIFAD’s operational strategy on how to promotethe development of and partnership with theprivate sector – locally, nationally, regionallyand globally – in order to benefit the ruralpoor.3 It defines the specific objectives, outputs

and types of activities that IFAD will pursue inorder to engage the private sector in reducingrural poverty, and uses a results-basedapproach to measure achievements and monitorprogress. It also lays out what will change, or would need to be changed, in IFAD in orderto implement the strategy.

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3 The Consultation on theSixth Replenishment ofIFAD’s Resources, whosefinal report was approved bythe Governing Council in2003, focused on the issueof working in partnershipwith others as a strategy toenable IFAD to be moreeffective in implementing itsstrategic framework,ensuring programme impactand fulfilling its catalyticrole. It elaborated on theimportance of partneringwith the private sector(among others), andspecifically requested IFADmanagement to provide the Executive Board with a “strategy for achievinggreater involvement ofprivate-sector participants inIFAD programmes, throughcofinancing and other formsof partnership consistentwith IFAD’s mission”.

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DEFINING THE PRIVATE SECTOR

In order to have a focused and IFAD-specificprivate-sector development and partnershipstrategy, it is important to have a clearunderstanding of what constitutes the privatesector in rural areas. The rural private sectorincludes a whole continuum of economicagents, ranging from subsistence orsmallholder farmers, rural wage-earners,livestock herders, small-scale traders andmicroentrepreneurs; to medium-sized, localprivate operators such as input suppliers,microfinance institutions, transporters, agro-processors, commodity brokers and traders; to other, bigger market players that may ormay not reside in rural areas, including localor international commodity buyers and sellers,multinational seed or fertilizer companies,commercial banks, agribusiness firms andsupermarkets. Associations of farmers,herders, water users or traders also constitutean important part of the private sector.

IFAD’s direct target group is the rural poor,who tend to be concentrated at the smaller endof the private-sector continuum. This group isconsidered part of the private sector because,in essence, it comprises agro- or rural-basedmicroentrepreneurs who make their owneconomic decisions regarding what to produceand how to produce it, what to buy and sell,who to buy from and sell to, how much to buyor sell, and when. IFAD will concentrate itsefforts on supporting the development of thisprivate-sector target group. However, since the livelihoods of IFAD’s target group are oftendependent on other private-sector operators,IFAD will also support or partner with thoseprivate-sector operators that can provideimproved income-generating opportunities forIFAD’s target group.

The types of private-sector operators thatexist, and their relative size and degree ofdevelopment, vary of course from region toregion and country to country. While in someregions (e.g. in Asia), private microfinanceinstitutions are more developed and functionrelatively better, in others (e.g. in the NearEast and North Africa region) there is a direneed to develop private financial serviceproviders that can serve the rural poor.Similarly, some regions have a much morevibrant and developed agribusiness sector,while in others (e.g. in Africa), this subsector is a limiting factor in the development ofmarkets for smallholder agriculture. For thisreason, IFAD will work in different ways withdifferent types of private-sector actors,depending on their importance for the ruralpoor in the various regions. IFAD will alsopromote relationships among the variousprivate-sector actors, because mutuallyreinforcing commercial relationships are theonly ones that are viable and sustainable in the long run. In order to support theserelationships and the groups behind them, it is important to identify the constraints facingeach group and their financial interests, aswell as means to address those constraints.

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CONSTRAINTS THE PRIVATE SECTORFACES IN RURAL ECONOMIES

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In rural economies, different private agentsface different types of economic constraintsthat limit their potential for growth. Some ofthese constraints are intrinsic and include lackof access to knowledge and skills, while othersare due to the external environment in whichthey operate (for example, an inappropriatepolicy and institutional framework, orinadequate rural transport infrastructure). In either case, the constraints are such thatrural economies are often perceived by manyprivate-sector players as too costly and riskyan option for investment.

Typically, small farmers (to varying degreesand depending on the country) face constraintssuch as lack of technical, business ormarketing skills; poor access to technology,financial services, and social and physicalinfrastructure (e.g. schools, training centres,health clinics, roads and markets); and lowcapacity to influence government policies. As aresult, they are often unable to increase theirproductivity or produce a market surplus withwhich they can improve their cash income. Or if they are able to produce a surplus, theyoften lack the necessary information or skillsto market it effectively and profitably.

While the number of workers in agriculture,including the self-employed, has stagnated inlarge parts of the world, the number of ruralresidents becoming non-farm rural employeescontinues to increase.4 Non-farm ruralemployment and self-employment are ofparticular significance to rural women andyouth. However, potential employers such asagro-processors or other rural entrepreneurs

may find it difficult to open a business orexpand their operations because they cannotobtain credit or do not have access to non-financial business services.5 As a result,further job opportunities for unemployed ruralwomen and youth are not available. Thisexacerbates rural-urban migration and theloss of productive segments of the populationin rural areas.

At the same time, private traders or serviceproviders may lack the business or financialskills to make their businesses profitable.According to the report UnleashingEntrepreneurship: Making Business Work forthe Poor, there are three main constraints on entrepreneurship and private-sector growth in developing countries: lack of access tofinance; lack of access to skills and knowledge;and lack of a level playing field for firmscompeting in the domestic market.

Agribusiness companies, too, may have aninadequate understanding of the ruralpopulation as a market for their services or as potential suppliers of produce. Where they do have rural clients, they may face hightransaction costs. These include not only thosecosts associated with large numbers ofdispersed small producers, but also thosederived from a poor institutional, regulatory andpolicy environment. For example, legislation on market conduct is often lacking, contracts are not enforced, and information about thetrustworthiness of small clients is not available.This means that investing in rural areas, and in particular contracting with small farmers orother rural dwellers, is often seen as too risky.

4 In Latin America, forexample, it is estimated thatabout half of the totalincome of rural householdsis derived from non-agricultural employment.Similarly, the non-farmeconomy in Asiacontributes 20-50 per centof total rural employment.

5 See IFAD RuralEnterprise Policy.

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What is therefore needed in order to stimulateprivate-sector-based rural economies to thebenefit of the poor is not only a lessening ofthe obstacles that each group faces on its own terms, but the creation of conditions thatcan facilitate fair market relations among thevarious players. In partnership with the publicsector, other donors, non-governmentalorganizations (NGOs) and relevant privateorganizations, there is an important role forIFAD to play in helping both the rural poor and other private operators overcome thevarious market constraints, and in makingtheir market-based relationships moreprofitable and appealing, resulting in win-winsituations for both groups.

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THE EVOLUTION OF IFAD'S ENGAGEMENT WITH THE PRIVATE SECTOR

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Since its foundation 28 years ago, IFAD hasbeen supporting the private sector asrepresented by smallholder farmers and otherrural poor residents. In the early days,however, the rural poor were looked uponmainly as local producers with few linkages tothe rest of the economy. Indeed, early IFAD-supported projects focused mainly on boostingfood production and improving the foodsecurity of rural households (within a largely‘subsistence economy’ model). This called forfinancing the delivery of non-market-based,public rural services (such as extension, creditand infrastructure) and the capacity-buildingof public institutions.

As noted earlier, the environment in whichIFAD’s target groups produce, work and obtainservices has changed substantially over the past ten to 20 years. The withdrawal orreduction of the state’s role in providingservices and purchasing output means that theprivate sector is increasingly fulfilling this role,or is at least expected to do so. Therefore,smallholders and other rural entrepreneursare now private-sector actors operating in amuch wider and dynamic context. New,private-sector-driven economies have createdreal opportunities for many rural poor residents,but there are also major challenges. Left tothemselves, markets for goods and services inpoor rural areas are not automatically moreefficient than the state-led or mixed systemsthey have replaced, and even where they are,they certainly do not guarantee benefits to poorand unorganized rural producers.

Today, IFAD recognizes that it is not enough tofocus narrowly on increasing crop production.Instead, a broader approach that also supportsthe establishment of viable backward andforward linkages between rural producers andsurrounding private markets is essential in

order to enhance the income and livelihoods ofrural people. Supporting private-sector entities(e.g. input suppliers or agro-processors) that can provide commercially viable servicesand markets for the rural poor is becoming an increasingly important component ofsustainable rural development programmes.The off-farm sector may also represent animportant source of income, especially for the poorest segments of the rural population, e.g. rural women, youth and the landless.

Establishing market linkages and supportingprivate rural enterprises require a new set of policies, instruments and means ofengagement between the public and privatesectors, with appropriate support fromexternal donors. Although IFAD works mainlythrough the public sector, the resources that itbrings to bear can be used to help establish an enabling policy and institutional frameworkfor rural private-sector development. Theseresources can also finance critical publicgoods and services so that private-sectormarkets can be made to work more efficientlyand on terms more favourable for the ruralpoor. IFAD can also leverage additionalresources from the private sector through its catalytic role in mobilizing funds, itswillingness to partner with others, and itsefforts to explore new and innovative ways to enhance the impact of its operations.

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5THE APPROACH OF OTHERDEVELOPMENT ORGANIZATIONS TO PRIVATE-SECTOR DEVELOPMENT AND PARTNERSHIP

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During preparation of this strategy paper, andin order to learn from the experiences of similaragencies, the private-sector development andpartnership strategies of several bilateral and multilateral development organizationswere reviewed.6 The review showed that therespective approaches to working with theprivate sector relate to the specific mandateand underlying policy orientation of eachorganization. It also revealed that mostorganizations emphasize the importance of balancing the role of the state with that ofprivate initiative. Other strategic issues thatwere deemed important by these organizationsincluded: enhancing the policy and regulatoryenvironment for private-sector development;supporting the development of well-functioninglocal and national markets and extending thereach of markets to all people; capacity-strengthening and technical assistance to buildhuman capital and improve professional skills;and promoting good governance and differentforms of public-private partnerships. In general,the trend was towards flexible policies thatallowed partnerships to be forged on a case-by-case basis, with attention to due diligence as an important factor in the choice of partners.There are lessons to be learned from theexperiences of these organizations, as well asopportunities to establish operationalpartnerships with them.

Within the development community, there are anumber of organizations and internationalfinancial institutions (IFIs) that provide supportdirectly to the private sector in developingcountries (often with the endorsement of thegovernment). These include the InternationalFinance Corporation and the European Bank forReconstruction and Development. Theseorganizations usually provide loans, equity andquasi-equity financing for private-sectorprojects. They also help private-sector

companies in developing countries to mobilizeresources from international capital markets.IFAD will take advantage of the existinginvolvement of these IFIs with the private sectorand try to establish partnerships with them insupport of the rural sector in areas such as thepromotion of small and medium enterprises(SMEs) and microfinance and the establishmentof an appropriate agribusiness environment.Similarly, public funds (e.g. the CanadaInvestment Fund for Africa) and the privatefunds of large corporations (e.g. the Bill &Melinda Gates Foundation, the Ford Foundation,the Deutsche Bank Microcredit DevelopmentFund) also finance private-sector investments indeveloping countries. There are opportunities to link with these organizations as well, in orderto attract additional resources to rural areas.

A number of important donor initiatives havesought to tap the corporate social responsibilityof private-sector companies in support of localand international development. In this regard,the Global Compact was launched in July 2000in response to a call by Kofi Annan, theSecretary-General of the United Nations (UN)at the time, for business leaders to work withthe UN to “initiate a global compact of sharedvalues and principles, which will give a humanface to the global market”.7 The GlobalCompact has already established partnershipswith over 1,400 private-sector companies toadopt appropriate corporate policies in termsof human rights, labour standards andenvironmental sustainability. Given the verybroad reach of this initiative and IFAD’sparticular niche within the UN, there is limitedscope for IFAD to contribute substantially to it.

The report Unleashing Entrepreneurship:Making Business Work for the Poorspecifically states: “the savings, investmentand innovation that lead to development are

6 The followingorganizations were studied:the World Bank, AsianDevelopment Bank, AfricanDevelopment Bank, Inter-American DevelopmentBank, Islamic DevelopmentBank, the CanadianInternational DevelopmentAgency, the Department forInternational Development(United Kingdom), theGerman Agency forTechnical Cooperation, theSwedish InternationalDevelopment CooperationAgency, the United NationsDevelopment Programmeand the United StatesAgency for InternationalDevelopment.

7 Excerpt from the reportAssessing the GlobalCompact’s Impact preparedby McKinsey & Companyin preparation for theGlobal Compact LeadersSummit, which convenedon 24 June 2004 at UNHeadquarters.

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undertaken largely by private individuals,corporations and communities”. The reportmakes a series of recommendations on therole of the public and private sectors (includingmultilateral development institutions and civil society organizations) in unleashing andfostering the private sector in developingcountries. For multilateral institutions, thereport calls for the application of the Monterreyrecommendation on specialization andpartnership to private-sector developmentactivities; such recommendations are followedthrough in this specific strategy for IFAD. 5

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THE WAY FORWARD: A PRIVATE-SECTOR DEVELOPMENT ANDPARTNERSHIP STRATEGY FOR IFAD

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Goal, objective and guiding principles

The goal of the private-sector developmentand partnership (PSDP) strategy is to engagethe private sector to bring more benefits andresources to IFAD’s target group, the ruralpoor. The more immediate objective of thestrategy is to increase pro-poor private-sectoroperations and investment in rural areas.Before describing the activities that IFAD willundertake in order to achieve this, it isimportant to highlight that IFAD’s strategy forPSDP will be based on the following keyguiding principles.

Focus on IFAD’s comparative advantage andmandate. IFAD’s comparative advantage lies mainly in its experience in working withthe rural poor through its projects andprogrammes, its participatory and bottom-upapproaches to development, and its willingnessto take risks and explore innovative means tohelp the rural poor lift themselves out ofpoverty. IFAD’s strategy for the private sectorwill capitalize on this comparative advantageand will apply a bottom-up approach inworking with this sector. In essence, IFAD –through its projects and programmes – willsupport or partner with the private sector onlyif and when this is to the benefit of its targetgroup, the rural poor.

Base the strategy on IFAD’s strategicframework. IFAD’s Strategic Framework2002-2006 expresses how IFAD believes it can best contribute to the achievement of theMillennium Development Goals. As defined in the strategic framework, IFAD’s mission, or overall institutional goal, is “to enable the rural poor to overcome poverty”. Theframework identifies and prioritizes a number of broad but key areas in which IFADwill work in order to fulfil its mission. Thestrategic framework is thus central toeverything that IFAD does: it provides therationale and goal for all of IFAD’s operationsand activities, and it guides all of IFAD’s

internal and external business processes. For this reason, it is appropriate that anIFAD-specific PSDP strategy be built aroundthe strategic framework. And as stated in the strategic framework, partnerships with other players are needed, including with the private sector.

Build on IFAD’s experience and catalytic role.IFAD’s PSDP strategy will build on theorganization’s experience in policy dialogue,investment operations and work with theprivate sector, as it involves and affects therural poor. Through its projects andprogrammes, IFAD plays a catalytic role indeveloping a solid foundation for policydialogue and change; establishing a platformfor partnerships with different stakeholders,such as governments, NGOs and the privatesector; and creating more favourableconditions for attracting additional resourcesto rural areas. The value added of IFADinterventions can therefore be much largerthan the sum of its investments: by acting as a catalyst, IFAD resources can leverage amuch higher level of investments from theprivate sector and other partners in ruralareas. It is important to note that IFAD willcontinue to work through its Member Statesand that the public sector has an essential role to play in establishing the appropriateframework and conditions for the developmentof a vibrant private sector and for buildingsustainable partnerships with it.

Operate within its resource capacity. IFAD’sPSDP strategy will operate within the size andcapacity of the organization’s resources (bothfinancial and administrative). Accordingly, themost likely scenario is that partnerships with the private sector will start with initiativesthat can be undertaken with IFAD’s currentstaff and financial capacity. These initiatives,and the approaches associated with them,would then be replicated or scaled upgradually as IFAD’s experience and knowledgein this area grow and as momentum picks up following more intensive involvement withthe private sector.

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Learn from the experiences of otherdevelopment organizations. As mentioned inSection V above, IFIs, the UN system andbilateral development agencies are all workingwith the private sector. As part of thepreparation of this strategy, IFAD organized aworkshop in 2003 and invited severalorganizations to present their current strategyand experiences of working with the privatesector. Networking, sharing of experiences andthe development of partnerships with otherinstitutions working on these issues willcontinue to enhance IFAD’s strategy andprovide new information and tools that couldbe used to expand and improve upon it.

Draw on the Initiative for MainstreamingInnovation. Working with the private sector willrequire IFAD to develop new approaches andinnovative ways of doing business with itspartners, or to enhance and modify its existingmode of working with others. Mainstreaminginnovation into IFAD’s core activities includesidentifying new or improved ways of partneringwith the private sector in order to increase theeffectiveness of achieving IFAD’s strategicobjectives. IFAD will thus draw on the Initiativefor Mainstreaming Innovation (IMI) to supportand strengthen its core activities with the privatesector. In fact, in 2004, IFAD used IMI funds toprepare an operational manual that will guideIFAD staff in their engagement with the privatesector (see the Guidelines, staff training andstaff realignment section on page 38). Anotherrelated IMI preparatory phase project hasproduced a report on Partnering for MarketAccess and Market Development, as well asmanuals and tool kits to help guide interestedIFAD target groups in accessing markets.

Operational strategy and underlying outputs and activities

The PSDP strategy proposed below is based onall the aforementioned interlinked elements,but it is organized along three broad lines ofaction: (i) policy dialogue for local private-sector development; (ii) investment operationsto support local private-sector development;and (iii) partnerships with the private sector in order to leverage additional investments andknowledge for rural areas. The main outputs to be achieved and activities to be undertakenunder each line of action are presented below.The annex contains a results frameworksummarizing the operational strategy of thePSDP in terms of the underlying objectives and outputs, performance indicators,monitoring and evaluation mechanisms, andthe assumptions or risks involved.

(i) IFAD will engage in policy dialogue inorder to provide an enabling policy and institutional environment for localprivate-sector development

In addition to an appropriate macro-levelinstitutional and policy framework, attractingprivate investment to rural areas in support of the rural poor and their productive activitiesrequires enabling policies and institutions inthe rural sector. The strategic frameworkhighlights IFAD’s catalytic role in promotingpro-poor growth and bringing about policy and institutional development in this sector.Based on its operational experience, IFAD willstrive to engage in dialogue with governmentsand other relevant partners to effect policy and institutional change in favour of the ruralpoor and those segments of the private sectorthat support them.

As elaborated in IFAD’s performance-basedallocation system (PBAS), strong sectoralperformance is often related to the state’sability or willingness to create an appropriatepolicy, legal and regulatory framework that is

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supportive of market-based relations amongthe rural poor and with the private sector. The PBAS includes, for example, indicatorsrelated to the ability of farmers to organizeinto groups, the investment climate for ruralbusinesses, the enabling conditions for ruralfinancial services and agricultural markets.Thus, the PBAS will help identify areas offocus for IFAD in its policy and institutionaldialogue with governments and other keystakeholders in support of private-sectordevelopment and the market-based activitiesof poor rural producers.

In operational terms, this means that all newIFAD country strategic opportunities papers(COSOPs) will include a review of theappropriate policy and institutional environmentfor local private-sector development (includinga review of the PBAS indicators on this issue).The new COSOPs will also incorporate theFund’s strategy to engage in policy dialoguewith various stakeholders, including thecountry’s government, in order to promotelocal private-sector development. Furthermore,all COSOP consultation processes will involve the relevant representatives from theprivate sector (e.g. farmers’ associations,agribusiness firms, private microfinanceinstitutions or commercial banks working inrural areas). In a few targeted countries where there is willingness on the part of thegovernment, policy dialogue to support thelocal private sector will be included as aspecific country-programme activity. Thiscould take the form of dialogue on appropriatepolicies for private microfinance institutions,SMEs, agricultural input and output markets,and other measures to improve the businessenvironment. Policy dialogue for local private-sector development will be especiallyemphasized in countries where IFAD has a strong field presence.

IFAD will also intervene at the global level to promote equitable commercial linkages forthe rural poor. Developing countries are stillcoping with the persistence of non-tariffbarriers and agricultural subsidies in member

countries of the Organisation for Economic Co-operation and Development, therebylimiting the access of their small producers to international markets. IFAD will thereforecontinue to use global policy forums tohighlight the concerns of developing countryproducers and reinforce the call for levellingthe playing field in international trade.8

(ii) IFAD investment operations will support local private-sectordevelopment in rural areas

IFAD’s investment operations will supportdevelopment of the private sector as it relatesto improving the livelihoods of the rural poor.More specifically, there are a number of key areas where the Fund will play a role:

Strengthening the business capacity of therural poor and their organizations. This will be one of IFAD’s most critical areas ofintervention, and it will be a crucial element in equipping the rural poor to face new marketforces and to partner with the surroundingprivate sector on a more equitable basis. Many rural poor people lack the skills andknowledge to become better farmers, workers,entrepreneurs or traders, and thereby toincrease their incomes and contribute to thedevelopment of the rural private sector ingeneral. Furthermore, the costs of interactingwith the surrounding private sector (e.g. inorder to access services, obtain information,buy or sell products, or manage resources) areoften prohibitive for rural poor people whenacting individually. The private sector, in turn, isoften reluctant to invest in rural areas becauseof the high transaction costs and the risksinvolved in dealing with dispersed, unorganizedand poor rural dwellers. In certain situations,private operators take undue advantage of theirmarket power and the social and economicweakness of the rural poor, deliveringsubstandard services or charging (and/oroffering) unfair prices. In some cases, they may try to restrict the market access of newentrants, especially of weak socio-economicgroups such as poor women and minorities.

8 See the IFAD discussionpaper on Trade and RuralDevelopment: Opportunitiesand Challenges for theRural Poor (GC 27/L.10) foran in-depth discussion onthe role of markets and tradein reducing rural poverty.

Solidarity gives women access to financial services and the market: the case of self-helpgroups in Chattisgarh, India

The most vulnerable groups in India, especially women, often lack access to financial services and face rigidsocietal barriers that prevent them from participating in economic activities outside their immediateneighbourhood. Accordingly, in 1987 IFAD started assisting the formation of women’s self-help groups (SHGs)in India. So far, around 22,000 SHGs with some 370,000 women have been formed under various IFAD-supported projects. This approach has proved effective not only in granting women access to microfinance andmarkets, but has been responsible for important changes in social patterns and norms, which have led to theempowerment of women.

A review of an initiative in Chattisgarh shows that women’s SHGs in India have evolved and are now introducingeconomies of scale in their own operations. Although the SHGs initially borrowed mainly for consumptionreasons, for example to cover expenses generated by marriages, sickness of a family member or children’seducation, they are now using loans for productive group activities. Three of the SHGs are using their savings to

BOX 2

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Of particular importance in the emergingprivate-sector markets are farmers’organizations or producers’ cooperatives builtaround a common economic purpose. Not onlydo they promote market exchange by reducingthe costs of market transactions for both small-scale producers and private-sector marketintermediaries (a win-win situation for bothparties), but they also help protect the rights of their members and make these exchangesmore equitable for them. They enhance thebargaining power of their members, allowingthem to receive higher and fairer prices for theirproducts, pay lower costs for inputs, claim their rights to access assets such as land andwater, and demand accountability from localservice providers. In many instances, farmers’organizations also form savings and loanassociations, thereby improving the access oftheir members to financial services. Therefore,IFAD will promote the formation of farmer-owned organizations: it will work with existingorganizations where possible, but it will also assist farmers in establishing their ownorganizations where none exist. Workingthrough experienced trainers/mentors, IFADwill foster the development of cohesive,sustainable, business-focused producer groupsin the projects and programmes it supports.

IFAD will also invest in strengthening thebusiness capacity of rural individuals as well as their organizations through training,technical assistance and the use ofparticipative approaches to rural development.Strengthening rural organizations (such asvillage associations, self-help groups, farmers’associations or producers’ cooperatives, waterusers’ associations, women’s groups, andsavings and credit associations) empowers therural poor to enter into more equitable andinformed relationships with private marketagents (see Box 2). Village-based savingsclubs can represent the first step towardsentry into financial markets for the rural poor.Water users’ associations can strengthen thecapacity of poor rural water users to managewater resources more efficiently, whiledemanding better water services from publicor private suppliers.

Improving the access of the rural poor toprivate technical/advisory services. Sometechnological innovations that hold potential for rural communities now come from theprivate sector. These include the treadle pump(a low-cost irrigation technology), water-savingtechnologies (such as drip irrigation), cropproduction and protection technologies

buy Mahua flowers, which they will store and resell once the price has risen. Another SHG has begun to growvegetables on land belonging to one of its members. The vegetables produced are considered as belonging to the SHG and are thus sold either to SHG members or at the market. The profit made remains with the SHG,with a portion shared out equally among the members.

The collective identity of the women belonging to SHGs has also helped them to tear down illegal barriersagainst entry into the market. Members of the SHGs and two nearby villages reported that one of thetraditional Mahua buyers at the market had told them that: (i) they were not entitled to buy Mahua flowers, and (ii) if they persisted, he would send them to jail for three years. Instead of being intimidated, the womenlodged a complaint against the trader at the police station (42 women from the three villages signed the letterof complaint). The project staff reported that this is the second time that the women had gone to the policestation to defend their rights against injustices. Prior to the formation of the SHGs, the women would not havedared to compete with established market traders to buy produce and, when threatened, they would have beenintimidated into leaving the market. Thanks to the SHGs, not only have the women diversified their economicactivities, but also they feel sufficiently empowered to defend their right to access the market.

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(including seeds, fertilizers and pesticides),information and communication technologies,and post-harvest and agro-processingtechnologies. IFAD will work together withsmall farmers and rural entrepreneurs toimprove their access to these technologies, andtest and adapt them through capacity-building,demonstrations, and farmer exchangeactivities. It will provide support to farmers to access the technology more cost-effectivelyby organizing them into groups and byestablishing relationships between them andthe providers of these technologies (includingthrough contract farming mechanisms).

In the area of advisory services, both thefinancing and the delivery of these services areincreasingly seen as spheres in which theprivate sector should be engaged, and fromwhich governments can disengage. Advisoryservices – generally commodity-specific – areincreasingly being financed by producers’associations, input suppliers or marketing/processing companies. Even in some countrieswhere the state is still engaged in providingthese services, delivery has been opened up,on a contractual and competitive basis, tospecialized private-sector suppliers. In thosecountries, IFAD will play a catalytic role in

helping to launch these innovative public-private partnerships, which will benefit boththe recipients and the providers of advisoryservices. In countries where the move towardsprivatized advisory services is more advanced(such as in Latin America, Asia, and Westernand Central Africa), IFAD projects andprogrammes will rely on the private sector todeliver advisory services to its beneficiaries.

Supporting the development of private ruralfinancial institutions. Rural finance, as acommercial activity, has been provided mostlyby the private sector.9 Since its beginnings in the1970s, microfinance has grown dramatically,and whereas access to rural microfinanceservices was initially promoted by NGOs andfinancial cooperatives, the evolution over thepast ten years has shown growing involvementby commercial banks and non-bank financialinstitutions. In many countries, commercialbanks are realizing that providing financialservices to the poor, either directly or indirectly(through NGOs), is a promising endeavour, notonly in terms of image and social accountabilitybut also in terms of business propositions. ManyNGOs have also transformed themselves intolicensed commercial institutions upon becomingfinancially sustainable, in order to diversify their

9 The private sector in ruralfinance may be broadlydefined as a sector wherestate control and ownershipare absent. It wouldtypically include NGOsspecialized in ruralmicrofinance, financialcooperatives, non-bankfinancial institutions andfull-fledged privatecommercial banks. The last two categories are often referred to as the‘commercial’ private sector.

6

The experience of the Agricultural Cooperative Bank of Armenia

Following implementation of the land reform programme in Armenia, it became clear that existing, formerstate banks, despite their extensive network, were unable or unwilling to meet the demand for financialservices from the country’s many small farms: they shied away from the perceived risks and lacked therequired know-how. Therefore, with support from donor funding, a feasibility study was conducted on the establishment of a rural bank. The study recommended the gradual establishment of an agriculturalcooperative bank, applying a bottom-up approach to define the governance structure. On this basis, theAgricultural Cooperative Bank of Armenia (ACBA), a private bank, was born. ACBA is widely acknowledgedtoday as a model financial institution for transitional economies.

ACBA owes much of its success to the support received from leading international agencies and donors. Thesupport provided by IFAD, in particular, has played a pivotal role in the bank’s growth. The experience withACBA illustrates innovative ways of using IFAD’s concessional loans to foster private-sector development infavour of the rural poor. In ACBA’s case, this innovation was embodied in the manner in which support wasprovided to the development of the institution.

BOX 3

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services as well as their funding sources(borrowing from banks or raising equity). Inmany countries, the frontiers between ruralmicrofinance and the national financial sectorhave started to overlap, with the private sectorleading the industry’s expansion.

As with any private-sector entity, ruralmicrofinance institutions need to becomesustainable in order to expand and diversifytheir services independently of donor support.Beyond savings and simple insurance services, the past few years have witnessedgrowing interest among donors and financialinstitutions in transfers and remittances,which in some regions far exceed the volumeof official development assistance.10 Thegrowing involvement of the private sector hasbeen paralleled by a declining engagement ofthe state in the provision of financial services.Microfinance was originally born as a way to overcome the inability of state-controlleddevelopment banks to reach the poorsuccessfully and sustainably. IFAD’s policyreflects this shift, as it is moving away fromextending credit lines through state-ownedfinancial institutions and towards promotingaccess to varied financial services through

a wide array of rural finance institutionsbelonging to the private-sector sphere.11

The burgeoning development of the ruralmicrofinance sector represents an opportunityfor IFAD as it strives to strengthen its approachand instruments in this evolving field. IFAD’sprimary institutional partners are (and willremain) its Member States. IFAD lends togovernments, which pass loan proceeds on toselected rural financial institutions (RFIs),either as loan principal or grants for capacity-building and institutional strengthening. IFADalso has access to grant instruments, althoughto a lesser extent, which it can use for directsupport to RFIs in the field.

To respond to the evolving needs of this sector,IFAD will adapt the use of its loan instruments.For example, it has helped RFIs to leveragequasi-equity in their borrowing from localbanks. In Armenia, an IFAD loan wastransferred as subordinated debt/quasi-equityin favour of the local institution, the AgriculturalCooperative Bank of Armenia, which becamethe country’s first cooperative bank and one ofits most successful financial institutions (seeBox 3). Quasi-equity can also be useful when

10 The total volume ofremittances around theworld is believed to amount to more than US$100 billion.

11 It should be noted that a few state-controlledfinancial institutions havesucceeded in developinginnovative approaches toproviding financial servicesto the poor (e.g. loans,savings and remittances),namely in China, India and Indonesia, and havebenefited from donorengagement and support(see the IFAD publicationDecision Tools for RuralFinance, Part I, Chapter 2).

In the late 1990s, the Armenian Ministry of Finance, ACBA management and IFAD agreed that IFAD resourcescould be accessed by ACBA both as a grant and as a loan. IFAD financed support to ACBA in the amount of US$4.55 million, split into two parts: a grant in the amount of US$2.35 million and a loan for US$2.2 million.The Ministry of Finance also agreed that any loan funds made available to ACBA could be provided on IFADconditions, in terms of grace period and maturity.

This arrangement of using the concessional element of IFAD’s support in an innovative manner had severaladvantages. The increase in the capital base of the bank, through the resources provided by IFAD, contributedto sustainability and potential growth in a direct and immediate manner, something that could not have beenachieved by an ordinary credit line. Apart from positioning it to respond to tighter National Bank requirements,the increased capital base enabled ACBA to enhance its outreach in rural areas much more quickly than wouldhave otherwise been possible.

In the period from March 1998 to November 2003, the resources provided by IFAD to ACBA served to disburse a total of 21,580 loans to farmers for a total value of US$14.8 million, indicating that, on average, funds hadalready revolved three times. Average annual growth in loan disbursements was 51 per cent, with an averageloan size of about US$700.

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provided to second-tier institutions thatrefinance local RFIs. One such example is the direct lending to the Small IndustriesDevelopment Bank of India under the sovereignguarantee of the Government of India. Thisallowed the bank to obtain the full term of anIFAD loan (40-year repayment) and thus treat it as quasi-equity. It has used the loan toleverage other loan funds on the local market. A stronger focus on technical assistance needs, a prudent approach to lending and innovativeways to help RFIs access quasi-equity all reflecta shift in the way RFIs are supported. IFAD’saim is to support and scale-up private RFIs thatcan promote access to financial services for a large number of poor people in rural areas.

Supporting the development of privateagricultural markets and small and mediumenterprises, and their effective linkage torural poor people. The strategic frameworkexplicitly recognizes that in a world wheremarkets for agricultural and agriculturallyderived products are now almost entirelyprivate-sector-based, efforts to increaseagricultural productivity can be effective only ifthey are linked to an appreciation of marketpotential and to effective engagement by poor

producers in those markets. It thus calls forintegrated approaches along the full continuumof production, processing and marketing.

The recognized importance of market linkagesfor the rural poor implies the need forcapacity-building and investment in activitiesthat are commercially viable on the market.12

Once the market becomes the organizingprinciple for livelihood development for poor people, particularly for smallholderproducers, IFAD interventions will have to adopt a multistakeholder, holistic approachthat involves all actors operating in markets. In practice, IFAD-supported projects andprogrammes in market-linkage developmentwill work in one of two ways.

The first will be to focus on the supply chainfor a particular commodity. A number ofprojects will undertake a thorough analysis ofspecific commodities or products of economicimportance to the poor, examining the wholechain from producer to consumer, and thenaddress the weak, or even missing, links in the chain. Depending on the product involved,the weak links may relate to the organizationof farmers or the availability of finance and

12 See the IFAD discussionpaper on Promoting MarketAccess for the Rural Poorin Order to Achieve theMillennium DevelopmentGoals (February 2003).

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appropriate technology at the primary producerlevel; to finance technology and businessplanning skills at the processing level; or toappropriate tax regimes, export regulations orquality control at the wholesale level.

The second area for project intervention willbe to focus on creating linkages betweensmall farmers and private markets orintermediaries. To achieve this, a significantnumber of IFAD projects will directly assistsmallholder producers in understandingbetter how markets work, how to gear theirproduction to the demands of potentialbuyers, how to access markets, and how tonegotiate better with private-sector marketintermediaries. In this effort, it will be criticalto provide support for the establishment ofcommercially oriented organizations (groups,associations, cooperatives) and training for these organizations so they can developthe understanding and skills required tointeract effectively with markets. Support for improved techniques for production,storage, packaging and processing will be an essential element in enabling producersto respond to market requirements.

IFAD-supported projects and programmes will also help bring producers and marketintermediaries together. The kind of supportthis requires varies considerably. It will coveressential physical infrastructure – primarilyroads – enabling buyers and sellers totransport their products. It will also promotemarket/price information and communication,by such means as mobile telephones, Internet-based systems and the setting up oftrade fairs or market days, which provide an opportunity for buyers and sellers to meet.Contract farming between agriculturalmarketing companies and small farmers isanother mechanism that will be supported byIFAD. For farmers, this arrangement ensuresaccess to inputs on credit and access to outputmarkets. For private traders, it guarantees a certain quantity and quality of supply on atimely basis (see Box 4). Despite theestablishment of mutually beneficial marketlinkages however, there are some risksassociated with contract farming, includingexploitative behaviour on the part of traders, or side-selling by farmers. IFAD’s support to contract farming will therefore attempt tofind solutions to such potential problems.

Agricultural marketing companies as sources of smallholder credit in eastern and southern Africa

In eastern and southern Africa, commercial relations between smallholder producers and agro-processing/marketing companies have developed rapidly over the past decade, and they are now an importantfeature of the rural economic landscape. A key element of these relations is the companies’ provision of inputcredit to their contracted producers. To learn more about this, in 2003 IFAD carried out a review of theagricultural credit operations of marketing and processing companies in Kenya, Mozambique and Zambia. The aim was to gather information that would be useful in developing interventions for promoting private, non-financial rural credit provision and farmer-to-market linkages.

Input credit provided by companies through interlocking arrangements to buy the borrowing smallholders’crops under farming contracts was found to be an important modus operandi in all three countries. In Kenya,the largest company-financed smallholder credit operation is in the tea sector, the country’s main export crop,where the Kenya Tea Development Agency Limited provides all the fertilizer required to cultivate high-qualitytea to 406,000 smallholders. Contract farming is also prevalent in the fast-growing horticultural sector, in the sugar industry and in the tobacco subsector. In Mozambique, both the contracting of smallholders and theprovision of company input credit are principally associated with cotton and tobacco companies operating on government-allocated concessions. In Zambia, the largest company credit schemes operate in the cottonsubsector, but other, much smaller company-financed input credit schemes exist for paprika, tobacco,

BOX 4

Another important initiative for private-sectordevelopment in IFAD will be based onsupporting local SMEs to deliver services andprovide jobs or markets to the rural poor. IFADbelieves that SMEs have a crucial role ingenerating rural employment and stemmingrural-urban migration, attracting knowledgeand skills to the rural areas, providing essential backward and forward linkagesbetween primary producers and other marketintermediaries, and stimulating ruraleconomies in general. Supporting SMEs is alsoan essential component of the supply-chainapproach that IFAD will adopt (as described on page 29) in addressing the agriculturalproduction and marketing bottlenecks facingsmall farmers. For this reason, a number ofinterventions will support rural SMEs so thatthey can provide more competitive and efficientservices to smallholders, particularly for input supplies, agro-processing and produce-marketing. The sort of support envisagedincludes basic training in business andfinancial-flow analysis, training in newtechnologies, credit provision, or the linking ofrural entrepreneurs to producers or othermarket intermediaries along the market chain.

(iii) IFAD will partner with the private sectorto leverage additional investment andknowledge in rural areas

This paper has so far focused on various waysand means for IFAD to promote development ofthe local private sector in order to improve thelivelihoods of the rural poor. As mentionedearlier, developing the local private sector,including helping the rural poor to reduce theirpoverty, could also benefit from partnershipswith the national and international private sectoras a source of funds, skills and innovativemodels. The role of the state will of courseremain essential in providing the appropriatepolicy, legal and institutional environment forrural poverty reduction; ensuring the necessaryregulatory framework to engage the privatesector; and investing in public goods that servethe economic and social needs of its people. The intention is for the private sector tocomplement the public sector by acting as asource of investment and knowledge for ruralpoverty reduction and economic growth.

Thus, working with its partner governments,IFAD will actively seek to leverage investmentsfrom the private business sector and from

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vegetables and maize. In all cases, the processor or marketing company supplies inputs to farmers on credit inorder to help secure produce of sufficient quantity and quality; the credit enables farmers to purchasenecessary inputs to which they would not otherwise have access.

The review concluded that most contract farming schemes have the potential to benefit both the company andthe farmer. Such arrangements can provide solutions that enable small producers to access improvedtechnologies, financial services and agricultural produce markets, even in difficult operational environments.They can also serve as an important element in improving the chances of smallholders to participate in theproduction of high-value crops. In some countries, such farming schemes provide a unique link between small-scale farmers and international markets.

The review also showed that such credit operations can be profitable for marketing companies – even with hightransaction costs and a relatively high default rate, provided they secure an adequate supply of quality produce.The major problems they face relate to their ability to procure the expected qualities and volumes of crops fromcontracted smallholders; these problems are sometimes exacerbated by contracted farmers’ side-selling toopportunistic competitors, and by problems of law enforcement in contract farming and the lack of anappropriate code of conduct for both companies and farmers.

The review suggests that IFAD could play an important role in supporting further development of this kind ofcommercial relationship, and it makes a number of concrete recommendations as to how this could be achieved.

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private donation funds13 in support of thedevelopment projects and programmes itfinances. Engagement by this sector willinclude project cofinancing or new parallelinvestments, made attractive through projectrisk-sharing or through projects that reducethe investment or transaction costs of private-sector partners.

In the cofinancing approach, the private-sectorpartner enters the project as it is beingdeveloped, risking its own funds in order togain access to new markets. Cofinancingmodalities, however, are likely to remainlimited in scope since, for the potentialprivate-sector partner, they entail substantialcosts (the tying-up of funds over a long period)and high risk (delays or project non-performance). Only a few private-sectorcompanies are likely to be willing to assumethese. A more promising approach for IFADwill be to use already operational projects as abasis for catalysing private-sector investment.IFAD can use its concessional lendinginstruments in an innovative manner toleverage additional investments from theprivate sector. In this case, the infrastructureor activities financed by the project will make itmore attractive for the private-sector player tomake new investments in the expectation ofdeveloping new markets for its services orproducts.14 The investments or activitiessupported by IFAD would thus serve to reducethe investment costs the investor has toassume in order to develop a new marketand/or lower, for the potential investor, thetransaction costs of doing business with theproject target group.

IFAD will also look to attract investments fromagribusiness firms in developing commoditymarkets that are of importance to small ruralproducers. What private agribusiness

companies would specifically seek from IFADis its capacity to organize farmers into groups and broker their relationships withagribusiness firms. These companiesemphasize that it is mainly local, field-basedpartnerships, working directly with the targetgroups, that will have the most impact and will be the most sustainable. These types ofmarket linkages and partnerships will becomemore and more frequent as companies look to expand and diversify their supply sources.IFAD’s strategy will be to tap into and look for partnerships that can be equitable for therural poor and can help them accessresources, services, and input or outputmarkets. A number of pilot ongoingexperiences provide lessons that can informthe development of a strategic approach in this area. For example, IFAD’s partnership withKaoka, a French chocolate producer anddistributor, is not only bringing in Kaoka’sknowledge of the cocoa market to help smallfarmers in Sao Tome and Principe, but willalso lay the groundwork for a contract farmingscheme to be established between Kaoka andthe farmers (see Box 5).

Another area that IFAD will explore isleveraging migrant workers’ remittances toattract knowledge and resources to ruralareas. In Latin America, transnational ruralcommunities are a new element in thelandscape of rural poverty. Latin Americanmigrants in the United States and Europe (themajority of them from rural communities) sentUS$38 billion back to their families in 2003.This means that the poor themselves are notonly remitting much more than the sum of all financial contributions coming from IFIs,but have even surpassed the financial flow to some countries in the region from foreigndirect investment and official developmentassistance. Through IFAD’s catalytic role,

13 While private foundations– such as the Bill &Melinda Gates Foundationor the Ford Foundation –are becoming increasinglyimportant developmentpartners, they are not dealtwith in detail in thisdocument. Thesefoundations are non-profit,philanthropic organizationsthat act mainly as donors;therefore, partnerships withthem would be includedunder IFAD’s generalresource-mobilizationstrategy. The types ofprivate-sector partners thatIFAD is seeking under thisstrategy are those that are driven by their ownfinancial and commercialgoals in partnerships withthe rural poor through IFAD.

14 IFAD projects often hireprivate-sector serviceproviders to deliver projectservices to theirbeneficiaries. This willcontinue to happen but isnot considered a componentof IFAD’s strategicpartnership with the privatesector. The latter focusesmore on establishing asustainable and long-termrelationship between IFADbeneficiaries and the privatesector, even after IFADinvolvement is terminated.

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Establishing a private-sector partnership for accessing knowledge and internationalcommodity markets

Towards the end of the 1990s, it became increasingly clear that in order to raise small farmers’ incomes in Sao Tome and Principe, IFAD needed a better understanding of the cocoa supply chain.* Since IFAD had nospecific knowledge of the market-side aspects of this chain, it decided to establish a partnership with Kaoka(the organic branch of the CEMOI group, a major French chocolate producer and distributor) in order to:

– tap the private sector’s knowledge to obtain a better understanding of the market; – tap the private sector’s experience in terms of the tools and skills required for accessing the market; and– use the private sector as a channel for accessing markets.

BOX 5

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migrant workers’ remittances could have ahigher multiplicative effect on investments inrural communities. Improving the capacity oflocal RFIs to serve migrants and their familieswith respect to remittances could help financenot only consumption but also income- andemployment-generation activities (e.g. creationof microenterprises and small businesses) orcollective investments (e.g. improvements tovillage infrastructure, including roads,healthcare services and schools). Migrants arealso an important source of entrepreneurialskills and knowledge, which could be tappedwhen designing projects in their communitiesof origin. IFAD is currently piloting aninnovative initiative in El Salvador wheremigrants are being incorporated as partners indesign and project implementation.

IFAD will also seek partnerships with otherUN organizations (including the UnitedNations Development Programme and UnitedNations Foundation), IFIs and regionaldevelopment banks (e.g. the World Bank andthe European Bank for Reconstruction andDevelopment), as well as private developmentfunds (such as the Deutsche Bank MicrocreditDevelopment Fund and the RabobankDevelopment Programme), in support of localprivate-sector development. For example, theDeutsche Bank Fund’s strategy is toencourage and establish relationships

between local commercial financialinstitutions and microfinance institutions byproviding funds as collateral for leveragedloans from commercial financial institutions.A partnership between IFAD and the DeutscheBank Microcredit Development Fund couldallow the latter to provide a loan for leverageof funds from national private banks to localRFIs, which can then focus on the delivery offinancial services to poor rural entrepreneurs.More of these types of partnerships will beexplored, specifically looking at how to helpthe local private sector reach out to the poorin their communities.

In operational terms, this means that at theCOSOP stage, IFAD will explore possibilities topartner with either national (including migrantcommunities) or international private-sectorcompanies in support of IFAD programmes. Atthe project design stage, specific opportunitiesfor cofinancing or complementary investmentsfrom private-sector entities will be thoroughlyexamined. IFAD will also identify otherdevelopment partners (as described in theprevious paragraph) willing to enter into thesestrategic partnerships, and define commonareas of intervention. For example, a tripartitepartnership between IFAD, an IFI, and a privatepartner could be developed to provide financialand technical support to local SMEs intargeted countries.

Kaoka undertook a market analysis of the cocoa supply chain, which showed that Sao Tome and Principe waswell positioned for the production of aromatic organic cocoa. Based on the study findings, a three-year pilot waslaunched for aromatic cocoa production, with Kaoka providing technical assistance and guidance on how toimprove cocoa production and strengthen the aromatic organic cocoa supply chain. The pilot phase has nowended, and Kaoka is ready to contract directly with smallholder farmers, who have recently created an aromaticorganic cocoa exporters’ cooperative. The contract would fulfil the profit objectives of both the small farmers andKaoka: the small farmers would obtain a stable and higher income, building on the aromatic and organicqualities of their cocoa,** while Kaoka would be guaranteed a stable quantity of organic cocoa of superior quality.

In developing partnerships with the privatesector, there are two points of criticalimportance that need to be borne in mind.First, while such partnerships represent newmodalities for stimulating rural economicgrowth, as per its mandate,15 IFAD willcontinue working mainly through the publicsector. Catalysing private-sector investment isa complement to, and is supported by, publicsector expenditure; it does not replace it.Second, in all its forms, partnership with theprivate sector should be based on the principleof due diligence, whereby the assessment ofrisks and opportunities associated withengaging in a given private-sector partnershipencompasses, on the one hand, partnerselection based on an understanding of itsgovernance and social accountability and, onthe other, analysis of the product and/orservice market to be developed. The basicprinciple for partnership with the privatesector is that it should be fully consistent withIFAD’s mandate and role and fulfil IFAD’smission of enabling the rural poor to overcometheir poverty, while also enabling the private-sector partner to achieve its own corporategoals. Potential for partnership with theprivate sector in programme-related activitiesshould be reviewed and assessed on a case-by-case basis, as is done in otherorganizations. This requires flexible policiesand an open mind for innovation.

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15 As per the AgreementEstablishing IFAD, theFund can only lend tosovereign governments.This means that: IFADcannot legally provideloan-funds to private-sector entities directly, andsovereign governmentsmust be willing to on-lendloan funds to private-sector partners.

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* Cocoa is the major product on smallholder lands and represents 90 per cent of the country’s exports.** At the current international cocoa price, small farmers could earn 2.4 times more by selling to Kaoka than by selling fresh cocoa on the local market.

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7

IMPLEMENTATION REQUIREMENTS

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In order to effectively implement the PSDPstrategy as laid-out above, IFAD will have torevise its operating model and internalprocesses. This will include the following:

Mainstreaming the strategy into IFADoperations. Once the strategy is approved, itwill need to be mainstreamed into IFAD’soperations and internalized by its staff. On thebasis of the measurable objectives and outputsprovided in the results framework, each IFADunit or division will have to identify theactivities that will be undertaken to achieve thecommon objectives, and include theseactivities in their annual workplan and budget.The divisional planned activities will then beaggregated at the departmental level, for aconsolidated workplan and budget that isconsistent with the overall objectives andoutputs of the PSDP strategy.

As discussed above, IFAD reports, such asCOSOPs and project design documents(when appropriate), will include anassessment of private-sector development in rural areas and will reflect partnershipsand engagement possibilities with the privatesector. Legal and financial proceduresrelated to partnering with the private sectorwill also be developed and internalized withinIFAD. Similarly, IFAD’s portfolio review andits results and impact management system(RIMS) indicators will include reporting onIFAD’s engagement with the private sector(see Measuring results and impact).

Guidelines, staff training and staffrealignment. IFAD will develop guidelines (or atool kit) for IFAD operations staff, to assistthem in operationalizing the strategy. In fact, adraft operational manual entitled Private-Sector Development and Partnership Manualis in the process of being finalized with thesupport of IMI funds. The manual states that it: “currently consists of guidelines onpartnerships with the private sector at thecorporate level, in conformity with UNstandards, and guidelines and tools forcountry-level private-sector engagement”.

It is also important for IFAD staff to have acommon understanding of how the PSDPstrategy ties in with IFAD’s mission and how tomanage it in their programmes. Therefore, IFADwill provide training to its staff on how to partnerwith or engage the private sector in theiroperational work. This would include guidancein areas such as: approaches and processes forconsulting with private-sector players (nationaland local) in order to identify the need for andbarriers to further private-sector growth;techniques for the analysis of potential private-sector partners; procedures for the developmentof concrete partnerships (both financial andnon-financial); and means to measure theresults and impacts of these initiatives.

An IFAD staff member in the ProgrammeManagement Department will be appointed asthe focal point for the private sector. The staffmember will be responsible for providingsupport to his/her colleagues on issues relatedto linking to the private sector, following up onthe operational implementation of the strategy,preparing progress reports, and monitoringand evaluating performance.16

Measuring results and impact. The proposedmedium-term time frame for achieving theobjectives and outputs of the PSDP strategy,as outlined in the annex, is from 2005 to 2008.Therefore, a gradual implementation will beundertaken, with a view to reaching all targetsby the end of 2008. Given that the extent ofprivate-sector development may vary amongsubsectors and among regions, and that theinterest of private-sector partners may bestronger for certain countries or subsectors,each individual division will not be asked toachieve all targets in all areas. Instead, and atleast in this initial phase of the strategy, IFADwill measure its performance at the aggregatelevel, with a view to gradually redressingsubsectoral and regional imbalances.

An important part of implementing andoperationalizing the strategy will be thedevelopment of ways and means to measureits results and impact. IFAD’s RIMS and

16 Another focal point,located in the ResourceMobilization Unit, will beresponsible for mobilizingresources from the privatesector for IFAD corporateactivities. However, asnoted in footnote 13, thisresource mobilizationfunction will require aresource mobilizationstrategy, which is separatefrom the one beingdiscussed in this paper.

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related monitoring and reporting tools will beexpanded or revised to capture key indicatorsrelated to PSDP. IFAD presently has six impactdomains within the existing evaluationframework: physical and financial assets;human assets; social capital and people’sempowerment; food security (production,income and consumption); environment andcommon resources; and institutions, policiesand regulatory framework. Most of thesedomains contain aspects that relate to thesuccessful development of the private sector. It should therefore be possible to attributespecific and tangible benefits to smallholdersor entrepreneurs that derive from efforts topartner with private-sector actors within aproject. The PSDP strategy will be monitoredthrough the RIMS and through the ProgressReport on the Project Portfolio, presentedannually to the Executive Board.

Capturing, reporting and sharing lessonslearned. As an issue related to measuringresults and impact, it is crucial to analyse anddocument what works and what does not inIFAD’s approach to PSDP. IFAD will need tolearn from its successes and mistakes. Thisincludes identifying the factors behindsuccessful or unsuccessful PSDP initiatives.Drawing lessons from ongoing experiencesand sharing these within IFAD and with otherdevelopment partners will allow IFAD toimprove its way of working with the privatesector and enhance the impact of itsoperations on the rural poor. Capturing thelessons learned should be a continuousactivity, with stocktaking conducted every fewyears to assess whether IFAD is moving in the right direction or whether there is a needto change direction or fine-tune the strategyand/or its operational guidelines. It isproposed that an evaluation of the PSDPstrategy be undertaken by the Office ofEvaluation at the end of 2008.

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PRIVATE-SECTOR DEVELOPMENT AND PARTNERSHIP STRATEGY RESULTS FRAMEWORK 2005-2008

Key (performance) indicators

- Households with improvement in household assetownership index

- Number of private-sector jobs generated in rural areas

- Flow of local private-sector investment in rural areas - Number of rural enterprises established/strengthened - Percentage of farmers using private advisory services- Percentage of rural poor accessing private financial services- Number of functioning marketing, storage and/or

processing facilities

- COSOPs include strategy to engage in policy dialogue forlocal private-sector development

- Stakeholders in COSOP consultations include private-sector representatives

- Where appropriate, policy dialogue to support the localprivate sector is included as a country programme activity

- 20-25 per cent of all new IFAD projects strengthen thebusiness capacities and skills of targeted rural poor or theirorganizations (e.g. farmers' associations, savings and creditassociations, and water users' associations)

- In new projects with a component for agricultural productionand related advisory services, 25-50 per cent of such serviceswould be delivered by private-sector providers

- In new projects with a rural financial service component, 50-75 per cent of the RFIs supported, strengthened or scaledup will be private-sector institutions

- 20-25 per cent of all projects will link small farmers withprivate markets or intermediaries (including contract farminginitiatives) or will support the development of SMEs

- All new COSOPs include partnership possibilities with theprivate sector

- At least 15 per cent of IFAD projects will cofinance with or willgenerate complementary investments from the private sector

Narrative summary

Goal: Increase growth and reducepoverty in rural areas through increasedprivate-sector activities

Objective: Increased pro-poor private-sector operations and investment inrural areas

Outputs: 1. Enabling policy and institutionalenvironment for local private-sectordevelopment provided

2. Local private-sector developmentsupported through IFADinvestment operations:

- Strengthened business capacity of therural poor and their organizations

- Private technical/advisory servicesprovided to the rural poor

- Private RFIs strengthened to reachout to the rural poor

- Private agricultural markets andSMEs supported and linked to therural poor

3. Partnerships with the private sectorestablished within the context ofprojects and programmes

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7Monitoring and evaluation mechanisms

- Revised RIMS indicators

- Statistics on private investments and flow of funds (International Monetary Fund, World Bank, UN databases)

- Revised RIMS indicators

- COSOP documents- Project design documents- Revised RIMS indicators- Portfolio reviews- Evaluation reports- Project completion reports

- COSOP documents- Project design documents- Revised RIMS indicators- Portfolio reviews- Evaluation reports- Project completion reports

- COSOP documents- Project design documents- Evaluation reports- Project completion reports- Resource mobilization unit reports on resource mobilization

All photos IFAD by:S. Beccio, R. Chalasani, P. Coral Vega, M. Millinga, Q. Shen, L. Slezic

Printed by: Palombi, Rome (Italy)February 2007

International Fund for Agricultural DevelopmentVia del Serafico, 10700142 Rome, ItalyTelephone: +39 06 54591Facsimile: +39 06 5043463E-mail: [email protected]


Private sector development and partnership strategy

Government & Nonprofit

Transcript of Private sector development and partnership strategy