Policy Assistance Support Service, TCSP · Microsoft PowerPoint - TC-Knowledge sharing -Investment...

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?


It can be defined (as done in Economics ) as a

change in the stock of existing capital:

I = δKIncrease in capital is necessary for growth and

development, but what kind of capital?

Defining Investment


Capital comes in many forms:The different forms are not mutually exclusive

PhysicalPhysical

Fixed Fixed

HumanHuman

EnvironmentalEnvironmental Working/Working/

financial financial

NaturalNatural

FinancialFinancial

CAPITAL


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


• 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


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


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


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


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


Sources for financing investmentWB 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.


• 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:


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.


• 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


• 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


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


• 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


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?


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.



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.



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



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



Investment Policy Support Website

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


Thank you!

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