Policy Assistance Support Service, TCSP TC Knowledge-Sharing Session - - PowerPoint PPT Presentation

PROMOTING INVESTMENT IN AGRICULTURE FOR

FOOD SECURITY AND AGRICULTURE DEVELOPMENT

TC Knowledge-Sharing Session 7 July 2011

Policy Assistance Support Service, TCSP

TC Knowledge-Sharing Session 7 July 2011

Before we can plan to promote investment, the question that seeks an answer is: What is investment? It is not easy to give a clear definition of the frequently used word “investment”. We can repeat what Augustine Hippo said 1,500 years ago in reference to Time :

“What then is investment? If no one asks me, I know what it is. If I wish to explain it to him who asks, I do not know”

What is investment?

TC Knowledge-Sharing Session 7 July 2011

It can be defined (as done in Economics ) as a change in the stock of existing capital:

I = δK

Increase in capital is necessary for growth and development, but what kind of capital?

Defining Investment

TC Knowledge-Sharing Session 7 July 2011

Capital comes in many forms:

The different forms are not mutually exclusive Physical Physical Fixed Fixed Human Human Environmental Environmental Working/ Working/ financial financial Natural Natural Financial Financial

CAPITAL

TC Knowledge-Sharing Session 7 July 2011

Who invests and why?

There are different agents of investment and Factors/motivations influencing investment decisions of the different agents are often different :

Individuals/HH/ Farmers Entrepreneurs Public Sector Corporate private Mainly in fixed assets and human capital For Profit with Risks Public goods/ economic return Profit for share holders/ Financial return

TC Knowledge-Sharing Session 7 July 2011

• Investments by different agents are
• complementary. This is very well recognised.
• What is not well recognized is that they are

not easily substitutable. Public sector and/or

Private corporate can not substitute for investment that needs to be made by farmers themselves.

Investments by different agents

TC Knowledge-Sharing Session 7 July 2011

Given that reasons for investment by different agents are different and almost every one invests:

• There are no unique set of policies for promoting

investment.

• It needs enabling environment and cannot be

planned or promoted by decree

• Only public sector investment (a small proportion of total

investment) in any economy can be planned by the

government.

Policy Implications

TC Knowledge-Sharing Session 7 July 2011

For investments to have a positive impact on production and productivity, they must contribute to capital formation at the farm level.

Capital/land and/or capital/labour ratio must increase. What determines capital formation at farm level?

Capital formation at farm level

TC Knowledge-Sharing Session 7 July 2011

The main agent of investment for farm level capital formation is farmers and the main sources of financing farmers’ investments are:

• Own savings
• Credit: (Using fixed assets as collateral for Loans/credits)

Implications of the findings:

• The farmers who can not save (and/or without fixed assets)

can not invest.

• Public and Private corporate can not substitute farmer’s

investment (or compensate for lack of investment by the farmers).

Determinants of farm level capital formation/investment

TC Knowledge-Sharing Session 7 July 2011

sources for financing investment at farm level

Credit provides less than 25 percent of the investment in Agriculture as well as other sectors. Borrowing more than 40-50 percent of the total investment contributes to increased indebtedness. Without fixed assets, access to credit is almost impossible (exception: micro credit –but very little in agriculture production).

Role and limitation of credit

TC Knowledge-Sharing Session 7 July 2011

Sources for financing investment

WB survey for more than 32,000 firms from 100 developed, developing and transition economies

• Retained earnings are the main source of investment

finance in all the regions. About two thirds of firms’ investments.

• Bank loans account for another 16 to 23%.
• Equity financing accounts for only 3% of investment

financing, that is even smaller than financial support from family and friends.

TC Knowledge-Sharing Session 7 July 2011

• Increased domestic savings is essential for

sustainable development and poverty reduction.

• No country has succeeded in achieving high

growth, reduction of poverty and hunger, without increasing domestic savings [the Growth Report].

• Generation of fixed assets also depends on

savings.

Savings, growth and generation of fixed assets:

TC Knowledge-Sharing Session 7 July 2011

Sources of farm-level investment.

Evidence from India

• More than 98 per cent of investment is funded by

domestic savings.

• With about 90 per cent share, households dominate

the private investment activity.

• These investments enable farmers to grow existing

crops more productively and intensively and take up non-conventional/high value crops.

TC Knowledge-Sharing Session 7 July 2011

• The findings demonstrate that generation of

savings and creation of fixed assets are fundamental for promoting investment. Questions:

• Should investment policies shift in favor of

farmers with positive savings?

• How to generate fixed assets?

Policy Implications of the findings

TC Knowledge-Sharing Session 7 July 2011

• Most individuals invest their savings in

generation of assets, such as real-estate, and human capital [education].

• The assets subsequently contribute to

generation of financial markets.

• Among several other factors, opportunities to

generate assets and develop human capital encourage savings.

Savings and generation of assets

TC Knowledge-Sharing Session 7 July 2011

Factors that allow fixed capital formation are:

• Clearly defined property rights; and
• Rule of law to uphold those rights.

Unless these issues are addressed, attempts to increase farm level capital formation will be encumbered.

Policy Implications of the findings

TC Knowledge-Sharing Session 7 July 2011

• Available information/data show that in

agricultural production, they are negligible.

• They are important in the higher level of the

value chain and in high value cash crops.

• They may have significant impact at local level

and contribute to Non-farm income.

Foreign and Domestic Corporate Private Investment in Agriculture

TC Knowledge-Sharing Session 7 July 2011

TCSP Policy work investment is largely funded by the Japanese Trust Fund Project GCP/GLO/267/JPN and MDF. Major activities include conducting of analytical work, in collaboration with other divisions to: Clarify:

• the concepts and definition of investment and

contributing to the preparation of the SOFA Special Chapter on Investment

What is TCSP doing to promote investment?

TC Knowledge-Sharing Session 7 July 2011

Collect:

• information and data on level of investment and

capital formation by sources, such domestic, FDI and ODA

• Information on policies, rules and regulations

related to investment in agriculture in various countries.

What is TCSP doing to promote investment?

TC Knowledge-Sharing Session 7 July 2011

Identify:

• Who invests in agriculture and why
• What drives their motivation to invest
• Factors influencing their decisions
• Sources of investment financing

Prepare

• Policy configuration which will reinforce the

decisions/motivation to invest by farmers, domestic and foreign private corporate and public sectors.

What is TCSP doing to promote investment?

TC Knowledge-Sharing Session 7 July 2011

Assess:

• Countries capacity to formulate and

implement policies for promoting investment

• Training needs for formulation and

implementation of the policies

• TCSP’s capacity to provide the required

training to the countries

What is TCSP doing to promote investment?

TC Knowledge-Sharing Session 7 July 2011

Prepare:

• Handbook on policies for promoting investment
• Training materials for providing training to

countries as well as FAO policy officers at HQ and Decentralized offices

• A web-based information system on policies,

data, and others related to agricultural investment

What is TCSP doing to promote investment?

TC Knowledge-Sharing Session 7 July 2011

Investment Policy Support Website

http://www.fao.org/tc/policy-support/investment-policy/en

TC Knowledge-Sharing Session 7 July 2011

Thank you!