Ethiopia: commercial farming, investment and policy
Incentivising investment
In contrast to previous government initiatives, Ethiopia’s Growth and Transformation Plan II (GTP II: 2015–2020) clearly promotes the commercialisation of the agricultural sector. In so doing, policymakers have officially recognised the potential for commercial farming to increase agricultural production and create rural employment opportunities. The initiative also aims to promote the development of the sector through close engagement with smallholder farmers, particularly through contract farming and outgrower schemes. Government support for commercial farming in Ethiopia therefore displays three primary objectives: (i) to boost productivity, (ii) to link smallholder farmers with new technologies and markets, and (iii) to create of job opportunities for rural youth.
Various regulatory and investment-oriented policy measures, in the form of both fiscal (tax holidays, tax exemption, etc.) and non-fiscal (land allocation, one-stop-shop services, etc.) support have been put in place, in order to bolster the government’s capacity to support to medium and large commercial farms. This blog presents the deliberations of a workshop that was held in Addis Ababa on 4 August 2018. The workshop was convened to discuss the status of existing policies promoting commercial farming in particular(including, though not limited to, the GTP II Plan), and agricultural business investment in Ethiopia in general.
The workshop
Participants included agricultural investors, researchers, representatives of agriculture sector associations, policymakers from the Ministry of Agriculture and Livestock Resources and the Ministry of Industry, and experts from donor-funded agricultural development projects.
Though policies in place are very encouraging – with investment interest expressed by both domestic and foreign investors – the contribution of commercial farms in agricultural production, in linking smallholder farmers to technologies and market, and in creating rural employment, is still limited. This is particularly true for the newly emerging large commercial investors operating in vertically integrated value chains. The majority of investors obtain a license to become commercial farmers, which gives them access to loans; however, these loans are often used for non-agriculture-based ventures – building hotels is a common example. The government has not as yet instituted a mechanism to effectively monitor and regulate the use of loans dispersed for farm investment.
So far, large scale farms and investors have been the primary beneficiaries of the policy-driven investment incentives, both fiscal and non-fiscal. Current attempts on the government’s part to crack down on loan misuse has created large bureaucratic obstacles that have mainly affected medium-scale investors.
Challenges
The key challenges identified during the workshop’s discussion can be split into two main areas: those related to public support, and those related to the investors themselves.
Public support-related issues:
- A distinct lack of coordination among diverse actors, though primarily among the federal and regional governments, financial institutions, investment promotion agencies, and implementing agencies. In this regard, the then Ministry of Agriculture and Natural Resources’ aim to meet every three months with investors – to discuss major challenges facing investors – was commendable, though was ultimately not sustained.
- A lack of monitoring and evaluation mechanisms following the provision of investment licenses. This means there is no database compiling agricultural investments in the country, which creates an information gap in the status of licensed investments and their implementation.
- Considerable bureaucracy in the provision of investment incentives. In general, approved investment incentives are often improperly implemented. For instance, processing tax-free imports of machinery may take more than a year, which discourages investors to begin operations.
- Limited availability of required infrastructure – mainly road and electricity – which are often promised during the licensing process. This hinders the operationalisation of investments.
- The existence of diverse public institutions engaged in promoting agricultural investment and frequent reorganisation, both at regional and federal level. Some of these institutions include: Agricultural Investment Promotion Agency, Horticulture Sector Investment Agency, Land Administration Authority, Ethiopian Investment Agency, Export Promotion Agency, etc, which may or may not have parallel institutions at regional level.
- Lack of a clear national agricultural trade policy. The country is yet to develop a clear trade policy that will serve as a guiding framework for trade-related issues that are pertinent to agricultural investment.
- Land policy challenges, primarily related to the lease period, which can be from 25 to 40 years. In addition, lack of information about the quality of land and its use potential during licensing is a serious disincentive to investors.
Investor-related issues
- In general, very few investors have the knowledge, skill and capacity to establish commercial farms. In many instances, the required staff composition is sufficient to obtain the license – better qualified and therefore higher paid staff are then immediately fired to reduce expenditures. It is reported that most of Ethiopia’s commercial farms do not have qualified farm managers and technicians for operating and maintaining farm machinery; as a result, it is common to see farm machinery out of operation shortly after farming operations are established.
- Most of Ethiopia’s commercial farms still operate in a traditional way, limiting their expected contributions to (i) productivity, (ii) linking smallholder farmers with technologies and markets, and (iii) creation of job opportunities for rural youth;
- The existence of opportunistic investors who snap up the available finance, without putting the land allocated to effective us, has crowded out genuine investors. This makes access to land and finance more difficult.
Opportunities
Despite numerous challenges, trends in agricultural investment and commercial farming in Ethiopia shows steady growth. Recent policies also indicate that the role of commercial farming in transforming the agriculture sector is well-recognised by those with the influence to enact change, especially in relation to the promotion of agro-industries.
The upcoming study, entitled Policy approaches to business investment in agricultural commercialisation in Ethiopia, will present the details of the challenges identified, along with potential policy and development intervention options that aim to improve the contribution of commercial farming to the broader commercialisation of agriculture in Ethiopia.
Written by Dawit Alemu and Gezahegn Ayele
Image credit: Synergos (CC BY-NC-ND 2.0)