ZAMBIA CASE STUDY. Derrick Sikombe. Agricultural Economist. Ministry of Agriculture and Cooperatives, Lusaka, Zambia

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1 FINAL AFTER SIKOMBE CHECKS 27/08/12: COMPARATIVE EXPERIENCES IN AGRICULTURAL FUNDING FOR INVESTMENT INTO CAPITAL FORMATION AND FOR OTHER INTERVENTIONS TO ENHANCE AGRICULTURAL PRODUCTION AND PRODUCTIVITY ZAMBIA CASE STUDY by Derrick Sikombe Agricultural Economist Ministry of Agriculture and Cooperatives, Lusaka, Zambia Southern African Confederation of Agricultural Unions Pretoria August 2012 SET OF DOCUMENTS FROM THE SACAU-FAO STUDY ON AGRICULTURAL INVESTMENT SACAU and FAO have jointly sponsored a review of agricultural investment

2 approaches in Malawi, South Africa and Zambia. The documentation of this study comprises of four documents, as follows: 1. REGIONAL SYNTHESIS REPORT - Agricultural Investment - Approaches and Country Experiences of Malawi, South Africa and Zambia. By Mafa E. Chipeta (Study Coordinator), P.O. Box 51610, Limbe, Malawi. emchipeta@gmail.com Three country case studies prepared by economists in Malawi, South Africa and Zambia respectively; these are also being published individually: 2. MALAWI CASE STUDY - Comparative Experiences in Agricultural Funding for Investment to Enhance Agricultural Production and Productivity. By Ian Kumwenda, ANAMARC Consortium, Private Bag 107, Lilongwe, Malawi iankumwenda2003@gmail.com, anarmac@yahoo.com 3. SOUTH AFRICA CASE STUDY - Comparative Experiences in Agricultural Funding for Investment to Enhance Agricultural Production and Productivity. By ZimbiniMdlulwa, AgriculturalResearchCouncil, 1134 Park Road, Hatfield, Pretoria, 0001 South Africamdlulwaz@arc.agric.za 4. ZAMBIA CASE STUDY - Comparative Experiences in Agricultural Funding for Investment to Enhance Agricultural Production and Productivity. By Derrick Sikombe, Ministry of Agriculture and Cooperatives, Lusaka, Zambia. d_sikombe@yahoo.com The contributions of the authors and of any contacts and partners they had in their work is gratefully acknowledged. 2

3 3 FOREWORD Southern Africa has a diversity of economies ranging from several that depend largely on minerals, one (South Africa) -depending on a combination of mining, manufacturing and services, to the majority which rely on farming as the mainstay of their peoples livelihoods. Even where most value-added comes from outside agriculture, however, many people rely on this sector for their direct food security and for employment; enclaves of mining or manufacturing are yet to offer the opportunities which the fast-growing populations can readily rely upon for mass employment and income. It is thus important for this sector to succeed and it is for this reason that adequate and effective investment is considered important to study and act upon. The Southern African Confederation of Agricultural Unions (SACAU) and the Food and Agriculture Organization of the United Nations (FAO) saw the need to seek some baseline information on how investment is going in Southern Africa. They wished to start with a few countries in an exploratory fashion, with decisions on expansion to other countries to be informed by the initial findings. Thus towards the end of 2011, they selected Malawi, South Africa and Zambia for first attention and commissioned case studies on them. The three countries have contrasting policies and approaches in funding agriculture; they also differ in levels of development. The choice of countries was partly influenced by the fact that the three countries have all achieved at least self-sufficiency and even surpluses for staple maize due to their agro-expenditure. One - South Africa, has sustained its agricultural success for a long time; Malawi and Zambia have succeeded more recently, based mostly on government subsidies for fertilisers and seeds and (in the case of Zambia) on setting favourable farm gate prices for smallholders. I wish to draw the attention of all readers to the regional synthesis report for Southern Africa which carries the findings of all three country case studies: SACAU welcomes any criticism, additional insights, information and partnerships. In that document, particular attention may be given to the sections on Key Messages and on Conclusions and Recommendations with Potential for Follow-Up. For this country report on Zambia, there have been challenges in availability of investment information for both large and small-scale agricultural investment. For the latter category of farming, the author has resorted to general household and livelihood surveys from which he has extracted useful but incomplete information. This has, however, allowed a glimpse of the encouraging interest of even small farmers to invest in capital assets, with the unexpected message that they do not just focus on agricultural investment but often more at other fixed assets needed for their livelihoods including housing and multipurpose equipment that is only partly used for agricultural production. The survey information also allows a glimpse of the relative emphasis on on-farm as opposed to processing investment in the agricultural value chain. Naturally, given its high profile, Zambia s subsidy programme for inputs (mainly for maize) has received great attention, including its apparent effects on balance in policy support to large-scale and small-scale agriculture and its likely implications. I take the opportunity to thank all those in Zambia who shared their time, information and views. I acknowledge with thanks the dedicated efforts of Derrick Sikombe who carried out the Zambia case study. I also thank the Ministry of Agriculture and Cooperatives for releasing Mr.Sikombe to carry out this work. Ishmael Sunga Chief Executive Officer

4 4 SACAU, Unit 11. Centurion Office Park 257 Jean Avenue, 0157 Centurion [P. O Box Centurion 0046, South Africa] TABLE OF CONTENTS EXECUTIVE SUMMARY INTRODUCTION Study Objectives Study Approach, Data Sources and Analysis...7 2ECONOMIC ENVIRONMENT Gross Domestic Product (GDP) Inflation Exchange Rates...9 3AGRICULTURE IN PROFILE Structure of the Agriculture Sector Livestock Production Agricultural Sector Policies and Priorities Role of the NEPAD-CAADP Process in Coordinating Donor Inputs Large-Scale Land Leases (Land Grabs) AGRICULTURAL INVESTMENT AND OTHER FUNDING Subsidies Selected Impacts of FISP Subsidy Programme Gross Fixed Capital Formation in Agriculture Public Budget Allocation and Expenditure Trends in Public Sector Agricultural Funding Motivations/Driving Forces for Public Funding Large Private Agriculture Investment Fixed Capital Formation by Small-Scale Famers Number of Households Owning Agricultural Assets Number of Agricultural Assets Owned by Households Value of Agricultural Assets Owned by Households Fixed Capital Formation by the Commercial Famers Capital Formation by Rural Households CONCLUSIONS REFERENCES...26

5 5 7ANNEXES...27

6 6 List of Tables

7 7 List of Figures

8 8 Abbreviations AfDB AUC BOZ CAADP CFS CSO FDI FISP FRA GDP GRZ Ha IAPRI JASZ MACO MLFD MoFP MT NAP NEPAD NPCA ODA SEA SNDP SS ZDA African Development Bank African Union Commission Bank of Zambia Comprehensive Africa Agricultural Development Programme Crop Forecasting Survey Central Statistical Office Foreign Direct Investments Farmer Input Support Programme Food Reserve Agency Growth Domestic Product Government of the Republic of Zambia Hectares Indaba Agricultural Policy Research Institute Joint Assistance Strategy for Zambia Ministry of Agriculture and Cooperatives Ministry of Livestock and Fisheries Development Ministry of Finance and National Planning Metric Tonnes National Agricultural Policy New Partnership for Africa's Development NEPAD Planning and Coordinating Agency Overseas Development Assistance Standard Enumeration Area Sixth National Development Plan Supplemental Survey Zambia Development Agency

9 9 EXECUTIVE SUMMARY Zambia has vast resource endowment including in land, labour and water (GRZ 2007). The abundant natural resources and human labour, including the prevailing satisfactory socio-economic environment, offers good prospects for increased investment in the agricultural sector. The overall goal of the study was to collect country information for assessing agricultural investment especially fixed capital formation in and for agriculture by the different economic agents, i.e. the public sector, the private sector (domestic and external) and farm households in Zambia. Focus was to provide an overview on the trends of the country s agricultural investment, especially on primary on-farm production with a view of understanding how Zambia can improve such investment. The study period was from 2005 to 2010 and the agriculture sector was defined to include only crops and livestock. Data for this survey was obtained from various national data sources, key of which include the Central Statistical Office (CSO) of Zambia, the Bank of Zambia (BOZ), Ministry of Agriculture and Cooperatives (MACO), Ministry of Livestock and Fisheries development (MLFD), Ministry of Finance and National Planning (MoFP), Indaba Agricultural Policy Research Institute (IAPRI)and the Zambia Development Agency (ZDA). Public budget flows into fixed capital formation has remained relatively insignificant during the period. On the contrary, public investments in consumable inputs such as goods and services as well as subsidies and social benefits account for a large proportion of public expenditure in agriculture. Foreign Direct Investment (FDI) has generally been increasing over the period in contrast to local investment, which has been both low and erratic. The two major likely factors contributing to the current structure of public funding, allocations and disbursement to the agriculture sector are i) the limited financial resources and ii) the desire by Government to continue playing a role in agricultural production and marketing. There is strong evidence of capital formation by small-scale farm households in Zambia. The rise in the number of several agricultural assets owned by agricultural households across the country (such as trucks and lorries, hammer mills, rippers, shellers, sprayers, pickups, vans and cars, bicycles, motorcycles and hand driven tractors) suggests that the small and medium scale farmers have been increasing their investment in these implements over the years survey data are summarized for 2004 and Zambia has a huge potential for growth and competiveness in the livestock sub-sector but faces high input costs especially of feed and drugs. Also, animal diseases such as Contagious Bovine Pleuro-Pneumonia (CBPP), Foot and mouth disease (FMD) and African swine fever have continued to threaten the growth of the livestock sub-sector. As such, the government of Zambia has embarked on an ambitious programme of setting up disease-free zones for livestock in the country.

10 10 The Government in Zambia has been implementing a subsidy programme known as the Fertilizer Input Support Programme (FISP) which is meant to improve crop productivity and household food security among targeted vulnerable and viable households and thereby contribute to poverty reduction. However, the performance of the subsidy programme has been less than expected. Some believe that the FISP has only gone as far as creating an inefficient and difficult-to-sustain production and marketing system that is leading to reduced participation by the large scale farmers and the commercial private sector in the maize sub-sector. In Zambia, NEPAD and its CAADP, being aligned to the country s strategies with national development priorities, targets and country systems, are playing an important role in ensuring donor support and input (including resource allocation). 1. INTRODUCTION 1.1 Study Objectives The overall goal of the study was to collect country information for assessing fixed capital formation in and for agriculture by the different economic agents, i.e. the public sector, the private sector (domestic and external) and farm households in Zambia. Focus was to provide an overview on the trends of the country s agricultural investment, especially on primary on-farm production with a view of understanding how Zambia can improve such investment. While the standard definition of agriculture includes crops, livestock, fisheries and forestry, for the purposes of this study attention focused on crops and livestock only. The reference period for the study was from 2005 to 2010, with no reference to earlier years than The data obtained through this study was used for drawing cross-country lessons from Zambia, Malawi and South Africa of possible value beyond their borders. 1.2 Study Approach, Data Sources and Analysis The process for achieving this research objective involved a desk study as well as obtaining appropriate data from various national data sources, key of which include the Central Statistical Office (CSO) of Zambia, the Bank of Zambia (BOZ), Ministry of Agriculture and Cooperatives (MACO), Ministry of Livestock and Fisheries development (MLFD), Ministry of Finance and National Planning (MoFP), the Indaba Agricultural Policy Research Institute (IAPRI),Zambia Development Agency (ZDA) and selected other sources. Data for this study was collected largely for a period from 2005 to 2010 on a number of variables and analysis of such data involved coming up with annual trends for most variables. In some cases, however, data analysis involved measuring the relationship that may exist between variables. There have been clear shortcomings in the present attempt to study agricultural investment; most relate to information gaps. There is no doubt that the level of investment and capital formation in agriculture, especially for the private sector (including the small holder farmers) would have been better investigated if sufficient data was available that would support corporate and household level analysis. In the case of estimating capital formation for primary on-farm production by the small holders, data from of IAPRI s Supplemental Survey results and the Living Conditions Monitoring Survey Results of CSO provided useful insights into capital formation in agriculture.

11 11 In addition, the resources allocated to collect relevant data for the study was not sufficient. For instance, for a number of data sources, the data for this study was not in the exact format required. Elaborate and time-consuming data manipulation had to be carried out in order to get what was relevant for this study.

12 12 2 ECONOMIC ENVIRONMENT Real GDP and other measures of the economy such as inflation and the exchange rate of a national currency reflect how well the economy is performing. The presentation below describes the performance of Zambia s economy using these measures. 2.1 Gross Domestic Product (GDP) During the period from , Zambia registered improved economic growth as measured by the real gross domestic product. Real GDP increased annually at 5.3percent in 2005 to 7.6percent in 2010 as shown in figure 1 below. In 2008, however, the economy contracted slightly most likely due to the effects of the global financial crisis. Notwithstanding the slowdown of the economy experienced in 2008, the economy in Zambia saw a rebound on a path to recovery in 2009 and The satisfactory performance of the economy during the review period was largely driven by growth in the mining, agriculture, manufacturing and construction sectors that grew by 58percent, 30percent, 18percent and 77percent respectively from 2005 to 2010 in real GDP. However, poor performance in other sub-sectors such as fishing, as well as the slowdown in the textile and leather industries sub- sectors in the same period contracted overall growth. Figure : Trends in Real Gross Domestic Product ( ) RealGDPGrowthRate Inflation Sustained low inflation rates imply stability in prices. Zambia s Government policy as articulated under the Sixth National Development Plan (SNDP) is to achieve and sustain single digit inflation rates. A review of the inflation rates during the period 2005 to 2010show it having been highest at 18.3percent in 2005 and later falling to 9.0percent in While Zambia again recorded an upward trend in inflation rates, reaching double digits for the years 2007 and 2008, inflation dropped to a single digit in 2010 as depicted in Figure 2.

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14 Exchange Rates When examined on a year to year relationship, the exchange rate of the Zambian Kwacha remained stable against major international currencies during the period , gaining by an average of 1percent per annum. However, when compared between 2005 and 2010, the Kwacha depreciated by 7percent, falling from K4, 464against the U.S dollar in 2005 to K4, 797 in Figure : Trends in Inflation Rates ( ) InflationRate(%) Source: CSO 3 AGRICULTURE IN PROFILE Crop and livestock production continue to be important economic activities supporting the livelihoods of a large number of households in Zambia, especially rural ones. It is estimated that about 80 percent of the people in Zambia are directly dependent on agricultural production for their livelihood (GRZ, 2010). Thus expansion of area under cultivation of major crops such as maize, sorghum and wheat as well as increased production of these food crops and livestock will directly lead to enhanced food security and improved livelihood of the Zambian people. Whilst productivity has remained low for most crops, with average yields in these crops being low, overall, agriculture production and output has been performing well since Production of maize, the main staple food for Zambia, has been increasing over the years, reaching a record high of 2.7 million metric tonnes in 2010 (see Table 1). The area under cultivation for major crops such as maize, cassava, sorghum, wheat, and rice has been increasing during the same period. The increase in production has inevitably pushed down the price of most food crops especially maize, thereby improving access to the staple food for most households and communities. While livestock numbers have been increasing, animal disease has continued to threaten the growth of the livestock sub-sector. Major diseases affecting livestock in

15 15 Zambia during the period include Contagious Bovine Pleuro-Pneumonia (CBPP), Foot and mouth disease (FMD) and African Swine Fever. 3.1 Structure of the Agriculture Sector Agriculture in Zambia is practiced by a diversity of farmers, but with two main categories: small-and-medium scale farmers (largely subsistent farmers) and the large-scale farmers (considered as commercial). According to the 2009/2010 agricultural season s Ministry of Agriculture and Cooperatives/Central Statistical Office (CSO) Crop Forecasting Survey (CFS)results, there are about 1.4 million small- scale farmers in Zambia and around 1, 500 large-scale famers. Much of the large-scale agriculture is close to the line of rail and the Great North Road Corridor while the small-scale farmers are spread across the country. For maize, the major stable food in Zambia, the small-scale farmers have from 2005 to 2010 been contributing 70-90percent to total production annually with the large-scale farmers accounting for a corresponding percent during the same period. The contribution of the large scale farmers to maize production has been reducing, registering a sharp dropof62percent from 2005 to 2010, largely on account of Government s intervention in the maize value chain being greatly in favour of the small scale farmers. The provision of inputs to only the small scale farmers at the production stage is the most visible favour; but at the marketing stage, a single floor price is set for all maize producers which means that those who had subsidized production costs have the upper hand. Table 1 shows the maize production by category of farmers and the contribution of the large scale farmers in percentage terms to the production from 2005 to Table : Maize Production by Category of Farmer (MT) Year Total Production Production by Large scale Farmers Production by Small & Medium Scale Farmers Large Scale Contribution (%) 2004/05 866, , , /06 1,424, ,519 1,110, /07 1,366, ,089 1,079, /08 1,211, , , /09 1,887, ,893 1,657, /10 2,795, ,540 2,488, Source: CFS, MACO For area planted to maize, the trend during the review period remained unchanged with the large scale farmers contributing between 4 7percent of the total area planted to maize, as shown in Table 2.

16 16 Table : Area Planted to Maize by Category of Farmer in Hectares (Ha) ` Year Total Area Planted Area planted by Large scale farmers Area Planted by Small & Medium Farmers Large Scale Contribution (%) 2004/05 831,869 59, , /06 784,532 51, , /07 870,975 54, , /08 916,740 37, , /09 1,125,465 47,506 1,077, /10 1,242,271 59,723 1,182,548 5 Source: CFS, MACO Production of other cash crops such as soya bean is, however, dominated by the large scale famers: in 2010 approximately 77 percent of the soya-beans produced were grown by the large-scale sector. A significant proportion of the soya-bean production from the large-scale sector is processed and sold to the formal oil-and-stock-feed processing sector, which has created a ready market for the crop. Government intervention is also low on the soya bean sub-sector. From the foregoing, it is evident that the large-scale sector tends to do better in enterprises where Government has little or no involvement or control. 3.2 Livestock Production Many households in Zambia continue to depend on livestock production as their major source of livelihood. However, data on livestock numbers is only available for five years from 2000 to The available data, shown as trends in Figure 3, reveal that while cattle population is considerably higher than that of other animals (goats, pigs and sheep) it has been declining while the goat population has been increasing slowly and the populations of pigs and sheep have been stable at below 500,000 each over the same period. Disease is a major challenge for livestock rearing and the actions of government to overcome it are given in Box 1. Table 3 shows the estimated amount of money in Zambia Kwacha that has gone into the creation of livestock disease free zones since the initiative started in 2007.

17 Figure : Trends in livestock numbers ( ) 3,000, ,500,000 NumberofAnimals 2,000,000 1,500,000 1,000, ,000 Cattle Goat Pig Sheep Box 1: Disease-Free Zones For Animals Despite some of the constraints that characterize livestock production such as high input costs of feed and drugs, Zambia has a huge potential for growth and competiveness in the livestock sub-sector. Healthy livestock makes it easier for involved households to positively participate in their local as well as the national economy. Disease-free livestock, which allow increased sales of animals and products at home and abroad, has the potential to generate increased wealth and incomes and hence contribute to greater economic gains for Zambia. For this reason, the government of Zambia has embarked on an ambitious programme of setting up diseases free zones to control diseases affecting much of the livestock in the country. These livestock disease free zones so far target the provinces which are among the highest producers of livestock in the country - Southern, Western and Central provinces - where livestock check-points, breeding and livestock service centres are being constructed. The Government of Zambia has committed much money in setting up these disease free Zones: some K80 billion has been used during to start up work in a number of districts (Table 3).

18 Table : Funds Allocated to Disease Free Zones ( ) Year 18 Allocation (ZMK billion) Total Agricultural Sector Policies and Priorities Good agricultural policies will ensure growth in the sector. Zambia has developed a National Agricultural Policy (NAP )which focuses on increased production, sector liberalization, commercialization, promotion of public and private sector partnerships and provision of effective services that will ensure sustainable agricultural growth. According to the NAP, Zambia is committed to developing and regulating an efficient, effective, demand driven and sustainable credit and rural finance system that will enhance access to financing by farmers for investments. To drive agricultural growth in the sector, Zambia has undertaken to promote the development of a competitive, efficient and transparent public and private sector driven marketing system for agricultural commodities and inputs. Zambia is also currently implementing the Sixth National Development Plan (SNDP) which aims to attain the long-term vision for the country which is to become a prosperous middle income nation by According to the SNDP, some of the major development targets include promoting economic growth, reducing poverty and creating employment as well as increasing and diversifying agriculture production and productivity so as to raise the share of its contribution to the GDP.In addition, Zambia is implementing the Comprehensive Africa Agriculture Development Programme (CAADP) which is an initiative of the African Union Commission (AUC) and its New Partnership for Africa's Development(NEPAD) Planning and Coordinating Agency (NPCA) which aims at achieving and sustaining a higher path of economic growth through agriculture-led development (Zambia CAADP Compact, 2010). In Zambia, CAADP implementation seeks to build on national development plans (e.g. National Agricultural Policy, Vision 2030 and the Sixth National Development Plan). Box 2: Agricultural Policy Environment Due to its immense potential for development, agriculture is always seen in Zambia as the engine for economic growth. The policy environment that seems

19 to motivate the status quo for public agricultural funding in Zambia is that of ensuring a positive contribution to rural livelihoods, food security and poverty reduction. To support the policy, government has liberalized the sector where both domestic and foreign investment is being encouraged to invest and create employment, produce more affordable foods and generate stable agricultural output. 19 However, a well meant policy if wrongly implemented can incur high social and economic costs. In Zambia, the liberalization policy in agriculture does not seem to work well. Government s significant interference in both the production and marketing of major agricultural commodities has continued to hurt the growth in the sector. Investments targeted at capital formation for the small holders in Zambia are unlikely to reach full potential as long as government continues to provide handouts to the famers. 3.4 Role of the NEPAD-CAADP Process in Coordinating Donor Inputs An improved and effective aid delivery system by the development partners is key in ensuring that financial and other resources are targeted at agreed development priorities for economic growth of a country such as Zambia. To this end, Zambia working together with development partners is implementing the Joint Assistance Strategy framework for donor assistance. The Joint Assistance Strategy for Zambia (JASZ) is a national medium-term framework which Zambia has been developing in collaboration with its development partners to manage their development cooperation with the Government of the Republic of Zambia (GRZ) in alignment with the national development plans. At the same time, one of NEPAD s thrusts is also to increase Official Development Assistance (ODA) flows, through reforms of the ODA delivery system, that ensure that flows are more effectively utilised by recipient African countries. As a member of the African Union (AU), Zambia is pursuing NEPAD's objective of enhancing Africa's economic growth by adopting the Aid Harmonization agenda. As a result of the foregoing, much of the donor support in Zambia is now being implemented in accordance with the JASZ framework for coordinating donor inputs. Strategic alignment and a well-coordinated donor support to the agreed national development agenda is one of the strongest elements of the CAADP process in Zambia. It can therefore be said (with some level of certainty) that NEPAD and CAADP are playing an important role in ensuring that donor support and input (including resource allocations) is aligned to the country s strategies with national development priorities, targets and country systems. 3.5 Large-Scale Land Leases (Land Grabs)

20 20 Initial findings suggested that the phenomenon of land grab is not very prominent or does not exist in Zambia. It appears that the responsible ministry (Ministry of Lands) has no records of such incidences in Zambia. However, the Ministry of Lands acknowledges the existence of a practice in Zambia where political cadres illegally allocate land for residential development. This practice, however, does not have direct implications on agricultural production and development. At the same time, the African Development Bank Representative in Zambia presented a Zambian case 1 at the High Level Forum on Foreign Direct Investment in Land in Africa (Nairobi 4-5 October 2011), selected highlights from which are in Box 3. Box 3: Foreign Direct Investment in Land in Zambia For the period , agriculture occupied fourth place in FDI pledges in Zambia (top being mining, manufacturing and energy in descending order); Initial interest of FDI was to get foreign partners for privatised state enterprises; next was arrival of Zimbabwean and South African farmers seeking land tenure security; third wave is by Europeans, Asians for agro fuels and food crops. ZDA records 1.18 million ha of land for biofuel investments alone; From ZDA data, AfDB estimates of pledged foreign land investments worth over US$500,000 total US$514.2 million in value and 398,200 ha in area; Zambia offers investors a range of incentives related to taxation, work permit easing, capital allowances, and special incentives this applies to land investments; None of the investors traced had registered their interests with the Ministry of Lands although they had ZDA investment certificates. 1Case Study on Foreign Direct Investment (FDI) in Zambia. Paper by African Development Bank Zambia for High Level Forum on Foreign Direct Investment in Land in Africa (Nairobi 4-5 October 2011). Organised by the Coalition for Dialogue on Africa (co-sponsored by the African Union, AfDB, UN-ECA).

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22 22 4 AGRICULTURAL INVESTMENT AND OTHER FUNDING Meaningful development in agriculture is assured to take place in countries where agricultural investment is allowed to develop and drive the growth of the sector. However, Zambia, like many countries in the region, is characterized by extended periods of under-investment in the agricultural sector. Zambia s SNDP recognizes that low investment in the sector and low production and productivity especially among small-holder farmers are some of the serious challenges currently affecting the agricultural sector. In terms of the opportunities for investment, Zambia has vast resource endowment including in land, labour and water (GRZ 2007). The abundant natural resources and human labour, including the current socio-economic environment, sets the ground for increased investment in the agricultural sector with positive implications on poverty reduction and agricultural growth. An important approach to raising production and productivity is the government s subsidy of farm inputs, specifically for maize. A profile of this activity, which takes place under the Farmer Input Support Programme (FISP) is presented first below. 4.1 Subsidies A Profile of the Subsidy Programme A well-implemented agro subsidy programme targeting the small scale farmers can undoubtedly improve such farmers access to agricultural inputs (i.e. fertilizers and improved crop seeds, etc) and thereby enhancing their potential to increase production and productivity for the supported crops. The Government s FISP is meant to improve crop productivity and household food security among targeted vulnerable and viable households and thereby contribute to poverty reduction. However, the performance of the subsidy programme in Zambia has been less than expected in many aspects. It has led to a number of concerns about its implementation, especially with regard to the targeting of beneficiaries, impact on household and national food security (value for money), effect on private sector investment and participation in agricultural inputs supply markets, and the programme s long-term sustainability, given the ever increasing competition for national resources by various sectors. Government is therefore concerned that the input support programme has had only limited impact on agricultural productivity and therefore intends to comprehensively review the programme in order to increase its efficiency and effectiveness. As agriculture has remained a key sector in economic growth, Government intends to continue supporting increased agricultural production with focus on improved extension services, increased funding to rural infrastructure and livestock development as well as increased support to livestock disease control and irrigation projects. Table 4 shows the performance of FISP since inception.

23 23 Table : Performance of FISPSince Inception Agricultural Season Quantity of Fertlizer Distributed (MT) Amount Spent (ZMK Billion) Number of Beneficiary Farmers 2002/03 48, , /04 60, , /05 50, , /06 50, , /07 84, , /08 50, , /09 80, , /10 100, ,000 TOTAL 522,000 1,734 1,555,000 Source: GRZ 4.2 Selected Impacts of FISP Subsidy Programme Impact on Large-Scale Commercial Farming The FISP is largely perceived as disadvantaging the large scale farmers in Zambia whose contribution to total maize production has been decreasing over the last few years. The cropping patterns by this category of famers are shifting to other crops where Government is not interfering in production as well as marketing. Much of the concern of the large scale framers has been about the Government s failure to address the perceived two-tier system of production and marketing especially as it relates to maize which can be categorized as follows: a. Production of maize at full cost by the large scale farmers; and b. Production of maize at high subsidy levels by the small scale farmers. The Zambian agricultural crop marketing is also considered to be a two tier system for maize where: a. Maize marketing for the large scales farmers is left to market forces, while b. Maize marketing for the small scales farmers is supported by Government. In terms of production, the large scale farmers are more efficient with production of maize per unit area being higher than that for the small scale farmers. However, Government has continued to support the small scale farmers in terms of providing subsidy to support production for this category of farmers whose production per unit area has remained low over a long period. The subsidy support to the small scale farmers is such that Government delivers at a nearest point to the farmers and provides inputs such as fertilizers and seed at reduced cost while the large scales farmers have continued to produce the same maize at a full market cost of inputs including transport and other related production costs. This type of heavily skewed

24 24 support to only one type of farmers (the small-scale farmers) for the same crop is what is widely considered to disadvantage the large scale famers in Zambia. There are also uneven approaches with regard to markets and marketing. In a liberalized market (which Zambia aspires to), one expects the main role of government to be putting in place an enabling environment which will encourage the private sector to fully participate in agricultural marketing including that of maize. This should include providing a policy and legal environment that is conducive to such private sector engagement. Government should also invest in public goods such as access road and storage infrastructure, especially in rural areas. If incentives are offered at all, then they should also be offered to the commercial private sector to encourage it to participate in crop marketing, particularly in outlying areas. Instead, crop marketing in Zambia, especially for maize, is also favoring the small scale farmers. Government through the Food Reserve Agency has been heavily involved in maize marketing. The FRA has largely remained the main player in the Zambia s agricultural marketing with other market players being involved in a less significant way. When the crop/maize marketing starts, FRA heavily enters the market by buying maize from the small scale farmers across the country at a set floor price which is usually higher than the market price for the commodity. The large scale farmers, who do not qualify to sell to FRA, are expected to find their own market for the crop and hence do not benefit from the available market offered by FRA. Due to limitations for the other players in the maize marketing to reach the economically disadvantaged remote areas, FRA also sells the maize to the processors such as the millers. The large scale farmers are also expected to sell their produce to the same local market by selling at competitive prices; however they cannot easily compete when FRA enters the same market at lower than their cost price and at prices lower than what FRA bought from the small scale farmers. For instance, during the 2011/2012 marketing season, FRA bought maize at a farmgate price from the small scale farmers at US $ 260 per metric ton but was selling the same maize to the millers at prices as low as US $ per metric ton. As far as the large scale farmers are concerned, the latter prices are below the economic level for the commodity. This distortion in the market heavily disadvantages the large scale farmers and as a result they are reducing their involvement in the production of maize as evident their reduced output and area planted to maize over the last few years Impact on the National Economy The subsidy programme under FISP is aimed and improving rural livelihoods and reducing poverty among households. More than 90percent of GRZ funding for Poverty Reduction Programmes is devoted to the FRA and FISP, yet there has been no major reduction in rural poverty rates in Zambia since 2004 (Nicole M. Mason et al. 2011). The fact that rural poverty levels are still high indicates that there are, at best, poor returns on the investment for such programmes. Finances for such investment can be channeled to programmes with high returns for growth and poverty reduction such as in research, irrigation and feeder road development as well as health and educational programmes. One weakness must arise from government appearing to discourage private sector participation in maize marketing it has tended to crowd out such private sector participation by getting fully involved in the market, thereby reducing the opportunity for job and wealth creation. Another weakness is that targeting of only one crop for

25 25 subsidy is leading farmers to use unsustainable agricultural practices (such as mono cropping) that do not help in preserving and conserving the natural resources but cause damage to the environment and land. At the same time, the small scale farmers do not see the value in growing high-value crops, thanks to the FISP which seems to support this by paying the farmers premium prices for their maize produce. The FISP has also created a dependency syndrome by the small scale farmers on government support with no innovation for improved production in other crops. The FISP initiative seems to be benefiting the inefficient producers (the small scale famers) while the large scale farmers are not rewarded for their efficiency. Overall, the FISP has only gone as far as creating an inefficient production and marketing system that is leading to reduced participation by the large scale farmers and the private sector in the maize sub-sector. 4.3 Gross Fixed Capital Formation in Agriculture Fixed capital formation is an important measure for investment that can be used to gauge economic development for any country. Estimating capital formation for Zambia is, as with other countries, almost impossible to do accurately. Disaggregating capital fixed formation between economic sectors of a country such as agriculture, mining, etc, is an even more daunting task. According to the Central Statistical Office, Zambia s gross fixed capital formation is not disaggregated by any economic sector but is estimated at national level using indicators such as imports of machinery and the level of construction (using cement sales as an output indicator). Therefore, data on gross fixed capital formation is only available in aggregate values without being disaggregated at sector level such as agriculture. Table 5 is an extract from the national accounts indicating the level of fixed capital formation in Zambia in billions of Kwacha from 2003 to What follows is the estimation capital formation by the different economic agents in the agricultural sector including the small scale farmers. 4.4 Public Budget Allocation and Expenditure The amounts of public resources allocated and approved for spending to the agricultural sector compared to the national totals each year since 2005 are shown in Table 6 below. Public funding in Zambia includes Government funds as well as funds from the Development Partners which come in form of direct budget support to Government. The amounts cover all allocations to the Ministry of Agriculture and agricultural sector programmes implemented through other ministries and departments. A review of the findings indicates that Zambia has performed well in the allocation of the public resources to the agricultural sector. Trends in both real and nominal values reveal that the size of the budget allocated to the agricultural sector has been increasing between 2005 and In real terms, the public allocation to the sector has increased by70 percent from 2005 to 2009 while the increase has been by 173 percent in nominal terms during the same period.

26 26 Table : Fixed Capital Formation in Zambia (ZMK billions) Year Gross Capital Formation Gross Fixed Capital Formation Machinery and equipment Construction Changes in inventories , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,165.2 Table : Budget Allocation at National Level Compared to the Agriculture Sector Year Total National Budget (Nominal) Allocation to Agriculture (Nominal) Total National Budget (Real) Allocation to Agriculture (Real) Share of Agriculture Allocation (Real) % (.billion kwacha) (.billion kwacha) , , , , ,042 1,086 14,984 1, ,761 1,475 15,474 1, ,279 1,266 15,279 1, Values are normalized using the 2009 inflation rate (i.e =100)

27 Figure : Nominal Allocation to Agriculture Compared to Real Allocation 27 ZMK'Bilion 1,800 1,600 1,400 1,200 1, Nominal Allocation to Agriculture Real Allocation to Agriculture 4.5 Trends in Public Sector Agricultural Funding Trends in the share of public resources allocated to agriculture rose in real terms from 5.0percent in 2005 to 7.65percent in Inasmuch as the share of agriculture funding has been rising during the period, it has remained below the 10percent CAADP target. Public expenditure in agriculture has remained skewed towards non-core agriculture programmes such as the Fertilizer Support Programme and the Food Reserve Agency, which together account for between 50-70percent of the total agriculture allocation during the period. Important investment areas in agriculture such as research and development, extension services, rural infrastructure, and food safety and quality have remained poorly funded. Public budget flows into fixed capital formation have remained relatively insignificant during the period. On the contrary, public investments in consumable inputs such as goods and service as well as subsidies and social benefits account for a large proportion of the share of public expenditure in agriculture, see Table 7. This pattern in funding suggests that there is poor quality delivery of public funds to the agricultural sector. Figure 5 shows the average share of public capital investment in to the crops sub-sector in relation to other input costs from 2005 to On average, only about 1percent of the total public funding to the crops sub-sector is spent on capital investment during the review period.

28 28 Table : Public Allocations to the Crops Sub-Sector in Zambian Kwacha ( ) Year Personnel Emolument Goods and Services Capital Allocation Subsisidies Grants and Social Other Total Source: GRZ Figure : Average Apportionment of Public Investment in Crops Sub-Sector, Other 2% Personnel Emolument 6% Subsisidies Grants and Social Benefits 45% Goods and Services 46% Capital Allocation 1% 4.6 Motivations/Driving Forces for Public Funding The two major likely factors contributing to the current structure of public funding, allocations and disbursement to the agriculture sector are i) the limited financial resources which could be used to support capital formation in agriculture and ii) the desire by Government to continue playing a role in agricultural production and marketing. Government has continued to support and finance competing needs in different sectors of the economy, exerting pressure on the national treasury. Government

29 29 resources will not be sufficient as the sole source of investment in agriculture. If Government has to tackle the growing need of alleviating poverty and reducing hunger, it has to be prudent in its allocation of public resources that are aimed at economic growth and should prioritize those investments that will bring about higher returns. Government s continued involved in the sector is largely motivated by the desire to support the rural poor in meeting their rising need for food and other requirements and to reduce poverty and hunger among the rural population. 4.7 Large Private Agriculture Investment The definition of the large scale players in the sector could include private sector companies engaged in agriculture as well as the large scale farmers. Pledged domestic private sector spending on agriculture as well as inward foreign direct investment (FDI) flowing to the agriculture sector is shown in Table 8. The figures show that FDI has on average been increasing over the period in contrast to local investment, which has been both low and erratic during the same period. According to the Zambia Development Agency (ZDA), information on local investors in agriculture is obtained from the established and large agro-businesses who are able to provide the required information to the agency. The blanks in Table 8, therefore, mean that the large agrobusinesses either did not invest in the sector in the respective years or information is not available. A review of the type of ventures in the sector between 2005 and 2010shows that most of the investment (by both the international and local investors in agriculture) concentrates on in the area of crop production. Poultry rearing is also gaining some significance as an important area of investment in agriculture. A proxy for estimating large-scale farmers investment was derived from the values of local investment in Table 8. However, as can be seen from the table, estimating this was difficult due to poor availability of the data. Table : Investment Pledges in Agriculture (US $' Million), Year FDIs Domestic ,455, , ,908, ,301, ,027,671 10,000, ,626,470 2,900, ,000,000 - Source: ZDA 4.8 Fixed Capital Formation by Small-Scale Famers Fixed capital formation in agriculture is necessary to generate sustained growth and reduce poverty especially for the rural poor. Capital formation in agriculture is increasingly becoming important in supporting and improving rural livelihoods in Zambia as it provides a strong base for growth in the sector.

30 30 To estimate fixed capital formation by the small-scale famers in Zambia, this study made use of the Supplemental Surveys (SSs) for the years 2004 and 2008 which are conducted by the Indaba Agricultural Policy Research Institute (IAPRI), a research institute in Zambia. The SS is based on the Post Harvest Survey (PHS) of 1999/2000 agricultural season. The PHS collects nationally representative household-level data and is conducted annually by the Central Statistical Office (CSO) in conjunction with the Ministry of Agriculture and Cooperatives (MACO) in Zambia. This survey is one of the most important sources of data in Zambia for estimating annual production outputs for crops and livestock as well as providing statistics on socio-economic characteristics of agricultural households. The PHS of 1999/2000 surveyed about7,500 households countrywide. The SS was first conducted in 2001 and covered the same reference period as the PHS of 1999/2000, targeting the same households but collected additional information on non-farm income, and basic socio-economic information as well as information on assets owned by the households. According to IAPRI, because of missing information on some households, the valid sample in 2001 was reduced to 6,922 households. The 6,922 households surveyed in SS 2001 were revisited in 2004 and 5,420households were successfully re-interviewed. In 2008, the same households were revisited and 4,284 households were successfully re-interviewed. Sampling considerations are explained in Box 4. Box 4: Sampling Considerations in Surveys It may be necessary to understand how the PHS data is obtained and the methodology used for data collection. Sikombe (2009) describes some elements of the methodology of the PHS as follows: To select a household in the PHS, a sample of Standard Enumeration Areas (SEAs) is drawn using a probability proportional to the size sampling scheme. The number of households located within each SEA determines the size of the SEAs. The area-sampling frame employed is as per the 1990 Census of Population, Housing and Agriculture. Each sampled SEA has a list of households from which farming holdings are selected. There about households in a SEA. The selection of farming holdings takes consideration of the categories of farmers based on land area and livestock. For example, a household cultivating less than two hectares of land will be in a different category from a household that is cultivating two hectares and above but less than twenty hectares. Those cultivating above twenty hectares will be yet in another category. The number of livestock owned by the households also determines which category a farmer belongs to. For detailed sampling procedures of the PHS, see Megill, The use of the SS Survey data was preferred to a self-designed-and-administered survey because it has the advantage that it is large and is nationally representative and collects panel data for the years 2001, 2004 and The sampled data is weighted up to national level, meaning that the estimates represent all the small and medium scale farmers in Zambia that were engaged in agricultural in 2001, 2004 and