Capital- and Market-access constraints in post-settlement land reform Projects

1. Capital- and Market-access constraints in post-settlement land reform Projects Reflections from a study in Mpumalanga Province Chris Williams 31 October, 2008

2. Background and Introduction • The Rural Action Committee Mpumalanga (TRAC-MP) • Mpumalanga Management and Mentorship Pilot Programme (MMMPP) (2003) • Mentorship Lead Programme (since 2006) • Agreement with Mpu Dept of Agriculture • TRAC+TIPS research for MLP into two key constraints identified through MMMPP experience • Access to markets • Access to capital

3. Research Purpose • To gain an overview of capital facilities and marketing services/facilities available to land reform projects in Mpumalanga • To understand the challenges faced by land reform beneficiaries in accessing both finance and markets • To offer strategic recommendations to land reform projects, key role players, the Mpumalanga Department of Agriculture, etc.

4. Approach • Review of literature • Three in-dept case studies • Interviews with role-players, stakeholders

5. Income generation cycle Market Production Capital Farm Invest / Repay

6. Market Location Market Types On farm sales Local staff, residence, neighbours, hawkers, local distributors Sales in Local Municipal Areas Taxi ranks, Grant payout points, local retailers, co-operatives, restaurants and hotels. Regional sales centres Regional Markets, processing/ manufacturing, distributors, commodity groups, Tourism sector, National Distribution: National Markets and distributors, processing and value added, commodity groups. International Distribution: International markets, producers, distributors. Market Opportunities

7. Findings: Market Access(1) • Deregulation of markets and disbanding of marketing boards has had a negative impact on emerging farmers and has reduced the state’s ability to provide support emerging farmers secure a market. • “The Rules of the Game” favour established commercial farmers. • Land Reform Projects studied had greatest opportunities in the local markets (on farm and in their local municipal areas). • Limmmitted de facto state support i.t.o. market development and information (market prices, conditions, opportunities, trends, scoping etc.) • Land Reform projects only secured markets after land transfers. Markets held by previous farmer were lost at the time of transfer. • Projects garner information from • neighbouring farmers • local co-operatives • the media • local wholesalers and markets

8. Findings: Market Access • Challenges faced by beneficiaries • Had to establish a market after transfer • Very little planning on market access occurred during planning phase. • Information sources on market prices, trends, opportunities and conditions • Lack of secure contracts • Transportation costs • Quality controls • Economies of scale • Consistency of production • Packaging costs • General logistics • Lack of local market infrastructure

9. Type of Capital Source Own Equity: Beneficiary Family Capital Beneficiary Households Group Capital CPA, TRUSTS, CC Project Income Production on land Grant Funding DLA, NDA, DALA State Lending Institutions Land Bank Parastatals MADC Private Lending Institutions SBSA, FNB. ABSA, NEDCOR Sources of Capital

10. Findings: Access to Capital (1) • There are available facilities to access capital but these are not co-ordinated. • Own equity, household equity • Income generated from the project • Co-operatives and commodity groups • Informal Sources: Amashonisa • Grant funding sunk into land purchase not equity • Loan funding from the State or Parastatal body • Loan funding from accredited private lending institutions

11. Findings: Access to Capital (2) • Challenges faced by beneficiaries • Access to information on facilities • Length of time from application to disbursement • Quality of original business plans • Group Surety • No tailor made products for emerging farmers (MAFISA ?).

12. Conclusions: Market Access Developing market linkages during preplanning is critical for income generation and hence project success. • This may necessitate up front commitments from commodity groups, strategic partner, management and or mentors on the projects. • Markets that are sourced close to the project minimizes cost and risk. • More research needed to understand market opportunities available to land reform projects (conditions, volumes, pricing and terms). • State has limmitted capacity to provide market support. Extension services are not geared for this aspect of agri-business. • Need greater involvement of other role players; co-operatives, commodity groups, national retailers. • Specific support is necessary to ensure that marketing agreements are fair, profitable and conditions set are achievable for emerging farmers. • Co-operation between projects, to secure a market, is possible but ambitious given capacity, particularly in terms of production scheduling (DALA Strategy of marketing hubs).

13. Conclusions: Capital • Access to Capital is not being prioritized during project planning. This causes a halt in production after transfer. • Sources of capital on projects are not co-ordinated (own, grants and loan finance). • Poor quality of business plans- not good enough to leverage loan finance. • Suretyship, high admin and transaction costs are a disincentive for private lending institutions. • Limmitted products from financial institutions suitable for capacity and needs of land reform project holders. • Further work is needed to ensure legal entities are sound and acceptable to Financial Institutions. • Organizational development on projects should ensure good governance, democracy, sound decision making around finances and accountability.

14. Recommendations: Market Access • Markets should be sourced as close to the project as possible to minimize cost and risk. • Dedicated capacity to market development for land reform projects is urgently needed. • Information dissemenation on demand and supply side is crucial for informed decision making. • Further investment in local marketing infrastructure is necessary. • Policy Recommendations: Further state intervention in marketing would benefit emerging farmers. • Greater emphasis on market development during pre-planning phase of projects. Shift away from unrealistic targets of land delivery. • Baseline on markets in all local areas is necessary.

15. Recommendations: Access to Capital • Need further dialogue between DLA/ NDA and Financial Lending Institutions around appropriate legal entitities, sureties and interest rates. • Strategic partners, Co-operatives, Commodity Group Organisations, External Management and Mentorships are possible strategies to secure production capital. • Greater Emphasis on good governance needed ito finances of projects. • Better co-ordination of sources of capital to prevent halts in production and market loss. • Develop creative ways for state and private sector to interact to secure capital access for land reform (e.g defferred payments, underwriting of loans) • Streamline state financial lending institutions (Do away with them?) • Investment in skills of both beneficiaries and DLA/NDA staff involved in projects (too late?)