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Getting agriculture moving: finance and credit

Getting the agricultural sector financed is a key challenge in Zimbabwe, and links concretely to land administration challenges discussed in previous blogs in this series. Making both places and people bankable is a priority, but responses have to be geared appropriately to different scales of farm operation (A2 and A1), as well as linking macro responses at the economy-wide level with regional, district and farm level responses. There are a number of dimensions to this context in Zimbabwe.

Political economy contexts

There are significant political dimensions to financing in Zimbabwe. Flows of finance and credit to the Zimbabwean economy have been heavily affected by the political relations between the Zimbabwean state and others over the last 17 years. The intermittent engagement with the International Finance Institutions due to outstanding debt arrears, and on-going restrictive measures around western donors working in ‘contested areas’, where compensation claims have not been settled, has influenced what amount and what types of finance are available. The Zimbabwe’s government’s own economic management decisions have often not helped either.

This macro-economic picture in Zimbabwe is dire – and has been for years. The formal economy went through an extreme collapse in the 2000s with the withdrawal of international finance, through a tentative recovery facilitated by currency stabilisation following 2009, and then a further crisis today, partly associated with the commodity price downturn, as well as economic mismanagement and corruption. The current cash crisis, a consequence of a combination of factors, and the strong regional demand for US dollars, has compounded things seriously, making business – including farming – very tough.

Furthermore, alternative finance from China and elsewhere has not been forthcoming. Acknowledging debts and liabilities generated by the land reform (see blog on compensation) is an essential precursor to moving forward; otherwise land reform areas will continue to be seen as high risk areas for financing. The current international re-engagements around fiscal management and other structural reforms, including the agreements around re-structuring the debt/arrears, offer opportunities if all sides of the bargain are kept. Addressing debt suggests a framework within which the compensation issue could be addressed.

Over the last 17 years there have also be indirect effects of the macro-economic situation on land investment. This is particular apparent as marketing and input supply intermediaries have been unable to get finance, as international risk ratings have remained high, and international loans for financing new operations have not been forthcoming. High interest rates, and so the high cost of money, have fed into this, resulting in illiquidity and a severe shortage of low risk cash for financing agriculture. The demand for financing in all sectors is so high that financiers prefer to lend into lower risk and high, immediate return areas (e.g. mining, and some retail operations, for example), with the result that there is little left over for financing agricultural investment. Re-engagement becomes critical to increase liquidity in the bank/finance sector, and so to shift interest rates and money supply.

A role for parastatals?

A particular feature of the macro-economic collapse has been the disappearance of a bond market. In the past the Agricultural Marketing Authority used to issue state guaranteed bonds that provided finance to the GMB, CSC, Cottco and other parastatals. The parastatals then took on an important role in market coordination and financing, including a variety of loan schemes for both small and large-scale farmers. Large-scale farmers, for example, were able to take out three month credit lines, with discounts on the volume of inputs procured. The Cold Storage Commission/Company used to finance local auctions and markets, and facilitate rural marketing. In the liberalisation era, parastatals went out of fashion, and their role declined. This was combined with a range of poor management and investment decisions, as well as growing corruption. The CSC focused efforts on the export market and large-scale beef production and invested in a series of costly white elephant abbatoirs. While Cottco was privatised, others such as Grain Marketing Board remained under public control, and became a key state agency for ‘command agriculture’ in the 2000s.

Today parastatals cannot raise meaningful funds on local bond markets, and certainly cannot rely on Treasury finance. Instead they must seek other partnership financing from the private sector. This is witnessed in the expansion of privately-run agribusiness operations on parastatal land, with over 20 new projects in train; some on a very large scale with significant capitalisation, and involving both local and foreign investors. This may help generate new forms of viable operation, but this removes parastatals from the wider social and market coordination role that used to be played, while the wider social benefits of such new investments have yet to be seen. A few banks (CBZ, Zimbank) and the AMA have raised limited money via agro-bill bonds, but the credit supplied remains on very high interest rate.

Contract farming

There are particular financing problems in agriculture, and these often vary according to the type of commodity. Even at the height of the economic crisis in the 2000s, export crops were able to take off, as external finance, often from China, India and other non-western countries, became available Thus the investment via Tian Ze (and China Tobacco, a State Owned Company) was vital for the growth of tobacco contracting in the early 2000s, including on land reform areas. This was facilitated by the Zimbabwean state, through foreign currency retention incentives, permits to purchase tobacco outside auctions, subsidised seed multiplication through the Tobacco Research Board, and significantly via the Tobacco Industry Marketing Board, as new regulations were put in place that facilitated contracting arrangements. Investment in cotton contracting in smallholder areas, including A1 farms, continued from the successful take-off in the 1990s following liberalisation, with even more players entering the ginning and contracting buying market in the 2000s and following land reform, although cotton companies have faced major challenges through a combination of side-selling and the decline in international cotton prices in recent times.

These export cash crop operations were able to continue because of the appropriateness of the crop to smallholder conditions (unlike tea and coffee, for example), and the ability of companies to shift to contract farming arrangements and the ability to sell products in hard currency externally. This form of cash crop contracting has become a vital form of financing in land reform areas in general, with the tobacco boom being the most celebrated example. As the economy stabilised, other contractors/buyers (including western companies) have returned, but now in a much more competitive setting, and heavily constrained by the economic environment, not least the lack of cash.

Some crops that were formerly grown on contract on large-scale commercial farms were not so easily transformed under the post-land reform setting. Large-scale export horticulture/floriculture is a case in point, where in the past very high-tech, just-in-time operations were linked to supermarket/broker purchase in Europe, usually under stringent standards (as in GlobalGap), and these could not be replicated by new farm owners. The operations were equally tied into complex financing and insurance arrangements that the large buying companies (in Holland for example for flowers and vegetables) were unwilling to reinstate due to potential risks, and increased costs due to the withdrawal of direct air freight routes to Europe.

Today, however such value chains are being reinvented for the new situation, with new models for outgrowing, contract purchase and financing being defined through a variety of business arrangements. Thus for smaller farmers operating on contract and producing certain crops, financing via contract arrangements rather than direct loans from banks has become an important route to land investment – although as discussed in other blogs not without challenges. Many such farmers mix contracting with direct sales and self-financing, as the terms of contract financing are not always favourable.

However, this does not apply to all crops, and contract eligibility restricts access for some. In addition to tobacco and cotton, that are now well-established contract crops, there are some other crops where contracting is developing, usually associated with a particular buyer. This includes paprika, potatoes (for chips/restaurants), and barley and sometimes sorghum (for brewing). Some attempts have been made to finance maize production under contracts, but this has been limited, as millers have been able to source cheaper product from outside the country.

Contracting arrangements in livestock systems are less developed, but may involve the financing of livestock owners by abbatoir owners for example to fatten and deliver animals to particular outlets. This is more prevalent in poultry production, where ‘outgrowers’ are linked to the supply of day-old chicks, feed and veterinary supplies. However, while contract farming with small-scale producers has been important, it has also had problems, notably through side-selling and the assurance of contracts. This has undermined the business viability of some operations, requiring government regulation in contract markets.

Financing for small-scale farmers outside contracting is highly restricted. Few small, $1000 dollar loan options are available. There are some examples of collective arrangements for raising funds and savings, including credits cooperatives and savings clubs, and some of these are supported by NGOs and churches in communal areas, but they have had little impact in the resettlement areas. Asset loans, such as chickens, may not hit the mark. Since the group lending approaches of the 1980s, there has been little experimentation with credit, and the collapse of such schemes through the demise of the Agricultural Finance Corporation in the late 1980s. The failure post structural adjustment in the 1990s to replace this system means that there is remarkably little accumulated experience of small-scale credit arrangements in Zimbabwe, in contrast to other countries in the region, and certainly Asia.

Partnership finance: joint ventures

Partnership based finance through joint ventures is another route through which funds can be raised. A joint venture is distinct from a share-cropping arrangement and is permitted under proposed new legislation. This includes where external financiers and former farmers who go into business with larger farmers, and the farm operation becomes a joint venture company. This is occurring in production, as well as processing and marketing, and is an important route to refinancing, where risks are spread as part of the joint venture agreement.

Joint ventures and partnership finance is increasingly seen as a route for rehabilitating and investing in state farms. A number of examples exist, including the now famous Chisumbanje sugar mill and plantation on an ARDA estate. Indeed around half of ARDA farms are now run with a private sector partners, and similarly investors into CSC farms are unfolding, reminiscent of the notable DMB operations (financed through CDC) during the 1980s. This may in time be linked to outgrower arrangements (as envisaged for Chisumbanje) as a core estate operation is developed through external finance, but remains under state control. With the lack of financing for parastatals (see above), these partnership arrangements have become vital for parastatal operations of many sorts.

Bank finance

For larger scale farmers, joint ventures and contracting however may not be the route they want to follow, and financing has been a major constraint, especially since 2000. Surveys show repeatedly that many A2 farms are undercapitalised with low levels of production, and sometimes significant land underutilisation. This has been a direct consequences of the macro-economic situation feeding through to financing options, despite various government schemes to support loans for farm equipment etc. Some are able to fund farm operations from other work (for example A2 farmers who have jobs as civil servants or in businesses) or through remittances (particularly from abroad), as well as through vertical integration of business (linking an A2 farm with abbatoirs, supermarkets and so on).

However such financing is relatively small, and not sufficient for major take-off especially in farm operations that require rehabilitation and recapitalisation. Significant but quite inadequate and irregular amounts of credit for irrigation equipment and farm mechanisation have been raised through lower cost external tied loans (e.g. US$98 million from Brazil through the More Food International programme, based on low interest payment over 15 years) using Agribank as one key conduit.

For most A2 farmers, bank finance is essential. This has been largely unavailable. It has also been restricted by the delayed issuance of leases, and their wording. Although land can be mortgaged, the phrasing of the first version of the lease contract presented the lease as state property that could not be sold or sub-let. It is therefore not clear how the land could be foreclosed to recover unpaid loans, and this undermined transaction possibilities for lenders. Procedures for bringing in an alternative lessee were also not clear. As many have argued, a revision of the lease wording is a crucial policy revision to balance the ability for the lease to form collateral in loan arrangements with banks, while allowing the state regulatory oversight to address its fears of the re-concentration of landholdings. The balance in safeguarding the security of loans and investment has been achieved in many other leasehold based property systems, although these experiences do not seek to regulate land concentration.

Zimbabwe could replicate the tested lease regulations that safeguard bank mortgage finance, and find innovative but competitive ways of auctioning foreclosed lands in a way that safeguards against multiple farm ownership. Moreover, the state is ultimately the guarantor as owner of the land, and can take back the land and compensate for improvements (paying any debts in the process), but this procedure would have to be specified. With this finance institutions, assuming improved liquidity, will be able to enter the land/agriculture financing market with lowered risk. There are a diversity of views on such proposals within the banking sector. Facilitating an effective discussion with government on rural financing is a high priority, given the banking sector’s potentially important contribution to agricultural and rural development.

For all farmers, there are of course forms of collateral beyond land. New approaches to financing has been encouraged through the Moveable Property Security Interest Bill. While ridiculed in the international press as banks accepting cows or goats as payment, it makes a lot of sense. But many banks have often reacted in a typically conservative fashion, basing assumptions on past practice rather than wider experience of a more flexible approach to collateral. Again the obsession with freehold title discussed in last week’s blog rears its ugly head. In terms of alternative collateral systems, mortgageable properties may be important as can moveable assets such as farm equipment, vehicles and livestock as specified in the Bill. Mortgages can be issued with hire purchase arrangements embedded – for example for the purchase of equipment – and warehoused commodities can be offered as commodity-based collateral, for example. As international experience shows (see below), private banks and finance houses can make use of rather more diverse ways of gaining security around loans than is currently being offered.

 Agricultural financing for land investment: a complex challenge

In many respects the often obsessive focus on land as collateral in the Zimbabwe debate is only a small part of a bigger and more complex story of agricultural financing for land investment, one that has barely been explored in post-land reform setting. The largest amount of funding for land reform farmers comes from contracting, with an increasing array of joint ventures emerging on A2 farms. As discussed last week, all of this must be seen in the context of wider, incomplete efforts at macro-economic reform and support for the revitalisation of the economy. Restrictions on financial flows, resulting in liquidity problems, high interests, the collapse of bond markets, and lack of international finance opportunities, as well as the flow of credit and finance away from agriculture, have severely restricted agricultural recovery. Resolving land issues – including accepting liabilities for compensation, revising lease terms, and developing regulatory frameworks for financing – is a core part of the macro-economic agenda, and central to finding a way forward for Zimbabwe.

This post was prepared by Ian Scoones and appeared on Zimbabweland.  It is part of an occasional Zimbabweland blog series on priorities for the new Zimbabwe Land Commission.

 

 

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Can joint ventures revive large-scale commercial agriculture in Zimbabwe?

Ndodana Sibanda shows how the center pivot works to water the wheat in Arda Jotsholo recently. (picture by Nkosizile Ndlovu)

The Agricultural and Rural Development Authority (ARDA) has a substantial land holding across the country, including 21 estates of varying sizes, with a total of 98,000 ha of arable land, 19,000 ha of which is irrigable. In the last decade most of these fell into disrepair, with production plummeting. Financing of parastatal operations became increasingly challenging, as government issued bonds via the Agricultural Marketing Authority were no longer available. In the last few years, as part of a reform programme focused on parastatals, the government has encouraged ARDA to go into public-private partnerships with private companies in an attempt to revive their fortunes, seeking new finance and investment from the private sector. 40 companies bid for such partnerships in 2014, involving a mix of local and foreign capital.

Currently there are 12 estates with such joint ventures: Chisumbanje, Middle Sabi, Katiyo, Mkwasine, Sisi, Nandi, Faire Acres, Jotsholo, Antelope, Ngwezi, Sedgewik and Doreen’s Pride (see a profile of each here, including details on the production focus and contract length). Those that remain wholly managed by Government include; Balu, Sanyati, Muzarabani, Mushumbi Pools, Nijo, Katiyo Main Estate, Rusitu, Magudu and Kairezi.

The most (in)famous is the Chisumbanje estate, where tycoon Billy Rautenbach took over operations, and built a mill for processing sugar cane. Land disputes and controversies over ethanol pricing and markets have plagued the operation for some years. Others have established operations in the last few years, and have been widely hailed as seeing a dramatic turn-around in ARDA’s fortunes.

A variety of private enterprises have seen the availability of high quality land and good infrastucture (although much of it in urgent need of renewal) as a good business opportunity. Both local and international investment has flooded in.

We must ask though, whether this sort of large-scale, capitalised farming is the most appropriate use of this land, and whether these operations genuinely contribute to employment, food security and local economic development, as well as boosting government revenues.

The Trek Petroleum-ARDA partnership in Matobo

Trek Petroleum has invested in several estates, including the Antelope estate near Maphisa mentioned last week and Doreen’s Pride near Kadoma, where beef ranching with imported Namibian animals is underway. It also has contracts with the Cold Storage Company, and with ARDA Ngwezi, and works with Northern Farming on a contract with ARDA Mashonaland. For foreign investors, particularly from South Africa, the US dollar environment in Zimbabwe is very attractive.

Trek has imported state-of-the-art equipment, including several 350 HP Casey tractors which can pull 24 disc harrows each. Huge seed and fertiliser planters are drawn by these tractors, which are fitted with sensors that analyse soil fertility status and automatically adjust application rates. 12 centre pivots are in place and irrigate 520 hectares of winter wheat and summer maize. Hi-tech driers are in place to ensure timely harvesting of grain and drying to 12.5 % moisture. It has been a substantial investment that has resulted in massive boosts in production from the estate.

The level of mechanization has a downside too, as discussed with the estate manger during a visit earlier this year. For example, only 12 workers are employed to run the centre pivots. In the past, 250 workers were needed to irrigate the 230 hectares that were then cultivated. Equally, there is only one section manager compared to three in the past. There are now just 48 permanent workers in place of around 90 in the past, while now 162 temporary workers are required to detassle maize for a 7 day contract, compared to hundreds in the past for a season (although these figures are disputed by ARDA, who claim over 200 jobs have been created, although mostly in the land clearance and establishment phase).

With the revived irrigated area, ARDA Antelope has entered into seed multiplication contracts with Seed Co, Pannar and ICRISAT.   ARDA provides land, labour and electricity, as well as agronomists. Pannar’s contract is for 60 hectares with Pan 473 and G90 varieties bulk produced, while Seed Co has a 40 hectare stake producing SC 513 and SC 621. The balance of the 520 ha is planted with commercial maize in summer and wheat in winter sold to National Foods Company. Trek also has a joint venture with the Cold Storage Company, and currently feeds 700 cattle brought from Namibia, with a further 1300 to come. There has been a massive expansion of both area and intensity of production. There are plans for another 800 ha of irrigation, harnessing water from the Shashane dam, as well as expansion of grazing land. An investment in processing plants, including for livestock feed, is planned.

Land disputes

Despite investments in ‘social responsibility’ programmes, involving support for local educational institutions, the new arrangement has run into trouble, as the land area has been expanded, apparently without consultation and ‘free prior informed consent’.

For years the ARDA estate only operated on a small extent of its area, and villagers regarded the land as theirs. With many parallels with the disputes that arose in Chisumbanje, wrangles over land have emerged around the estate. In September, villagers organised protests in Maphisa, stopping traffic. Graffiti linking the estate investment to the notorious Gukurahundi massacres in Matabeleland were seen. A visit by VP Mnangagwa was abandoned, and villagers were arrested, although later freed. Villagers claimed their land was being taken and that they were not benefiting from the new scheme.

Protesting villagers’ views are in sharp contrast to the narratives of government officials. A queue of high-profile visitors have come to praise the operations, from the First Lady onwards. Recently, Deputy Minister of Agriculture, Paddy Zhanda, has congratulated ARDA for its operations in Maphisa. The resurrection of large-scale farming on state land, is central to the envisaged approach of ‘command agriculture’, where production priorities are set by the state. Joint ventures with ARDA supporting (mostly) A2 farmers with irrigation infrastructure, but under-production, have also been hailed as key to the future success of agriculture.

What role should parastatals play?

But we have to ask what roles should parastatals play in the revival of Zimbabwean agriculture? The PPP model is certainly attractive. New infrastructure and finance allows for the revival of moribund operations. With a ‘command agriculture’ perspective these revitalized farms could, ministers hope, provide just the sort of backbone to the agricultural economy needed. But as we have seen conflicts can arise, as people are removed from land that they thought was theirs. Highly capitalized operations may not provide the employment once offered. As the land reform has shown, with the right support small scale farmers can produce often produce significant quantities of maize and other crops, but at far lower costs, and generating more employment. Maybe it would make more sense to redistribute the land instead?

The parastatal assets of ARDA however should not be seen just as a cheap, underutilized source of land and water, either to be redistributed to the masses or to be handed over to well-connected corporates as part of partnerships benefiting elites. We should recall the role ARDA used to play in providing an important development coordination function. In the ‘roll back the state’ zeal of the 1990s, combined with the obvious corruption and poor management of many parastatals, we sometimes forget the importance of such organisations, notably ARDA, but also the CSC, in offering credit, markets and a brokering facility for smaller operators.

Unlike the new enclaves being created in a desperate attempt to raise revenues, the effective parastatal operations of the past were more integrated into the wider agricultural economy landscape. In thinking about the future, the alternatives need to be carefully balanced. Further land reform – particularly to A1 farmers – is certainly an option in some areas, as small farmers may be best able to make use of existing irrigation facilities. But in other cases new investment is clearly needed, but the obsession with large, command-oriented agriculture or divesting state assets to the private sector through PPPs must be tempered.

Lots of big, shiny centre pivots look impressive, but they may not be economic or generate employment. This was often the lesson of large-scale commercial agriculture before. Having large farms as part of a wider landscape of agriculture may be important for some crops and in some places, but making sure these operations are integrated not isolated enclaves, are employment generating not just mechanized, and have a coordination function to support wider development is essential.

This post was written by Ian Scoones and appeared on Zimbabweland

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