Step 8 Training Materials - Key Principles and Tips on Subsidies
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This document discusses principles and guidelines for using subsidies to facilitate agricultural knowledge and information services (AKIS). It provides: 1) Key principles for subsidy use such as avoiding subsidies when possible, using them to reduce risk for new adopters, and developing strategies for market actors to take ownership. 2) Tips for implementing subsidies like co-investing with market actors, setting timeframes, and ensuring market incentives rather than subsidies motivate actors. 3) Examples of justifiable subsidies like facilitation, capacity building, and market research and examples of difficult to justify subsidies like recurring operational costs. 4) Central questions around ensuring self-selection of market actors, managing expectations of subsidized services, and
Step 8 Training Materials - Key Principles and Tips on Subsidies
- 1. TRAINING MATERIALS: MODULE 8 An extract from… MaFI - The Market Facilitation Initiative Synthesis of the Online Discussion: Smart Subsidies in Market Facilitation Specifically for Agricultural Knowledge and Information Services Key Principles for Subsidy Use The purpose of a subsidy is to mitigate risk and build capacity to support innovation and change and no mechanism works in all situations. Practitioners must use good judgment, be prudent, ensure transparency and facilitate negotiations between actors when identifying the need for a subsidy and implementing an agreement. While there are no universally applicable rules for using subsidies, some general principles do apply: Avoid subsidies when possible-use them only with a clear vision for how they can achieve systemic change. The better the facilitation, the less need there is for subsidies - create conditions that allow market actors to recognize business opportunities and pursue them without subsidies. Consider the possible negative consequences of unnecessary subsidies and adopt a do-no harm approach-do not destroy private businesses and competitiveness, create dependency, block indigenous resources or diminish creativity. Use subsidies to reduce risk for market actors-particularly new technology / service adopters as long as they do not detract from sustainability or create dependency. Use subsidies to strengthen demand / supply markets, not to subsidize transactions - link marginalized producers to market actors who can provide services and inputs (facilitators should not provide these services). Develop / use strategies that promote ownership by market actors. Determine who will pay for and undertake services when subsidies end. Be as inconspicuous as possible; make your role as facilitator invisible. Base selection of the type of subsidy to use on the intended target group- development, production, promotion, provision, consumption. Use subsidies to improve market system structure and dynamics to benefit the most marginalized-for example, facilitate links between a credit provider and a local paravet to redress inequalities and exclusion and expand access to productive resources-financial, physical, human, etc. Recognize that those who need subsidies are not always the poorest. Encourage self-targeting strategies that help those who want to participate to step forward. 1
- 2. TRAINING MATERIALS: MODULE 8 Tips for Implementing Subsidies Identify public / private sector actors having an incentive to provide services / products and support development and testing of models. Always co-invest with market actors-they should match your investment. Find supporting market actors who can undertake specific educational activities. Identify and clearly communicate subsidy purpose and target. Set and communicate a timeframe for terminating a subsidy; transition it out over time. Identify and address systemic constraints, i.e., non-financial reasons value chain actors do not invest. Ensure market incentives, not subsidies motivate market actors. Subsidize as small a portion of the total cost as possible. Explore with market actors the possibility of embedding the cost of their services in an existing transaction. Encourage self-selection to make subsidy support contingent upon a demonstrated financial or other commitment and improve the chances of success and impact sustainability. This may exclude those who are more disadvantaged. Use subsidies for a limited time to get things going; this allows market actors to see and feel the impact of new ways of doing things and helps them build capacity and systems. Identify and plan a long-term solution for meeting costs before introducing a subsidy, e.g., a new MFI loan product. Have a clear exit strategy. Justifiable Subsidies Facilitation - a temporary, external intervention by a non-market actor Capacity-building activities that allow new players enter the market system and explore new business opportunities Training, demonstration and pilot activities-learning visits, trade fair attendance, etc.- that confirm the impact a new business model can have and provide opportunities to explore new ways of doing things-business / organizational models, technologies, techniques, etc. Ice-breaking activities that link the marginalized to new markets, opportunities, etc. Market research and feasibility studies to demonstrate that new ways of doing things can work. Technical assistance for R&D to confirm the efficacy of new business models, technologies, etc. Group formation. 2
- 3. TRAINING MATERIALS: MODULE 8 Difficult to Justify Subsidies Recurring operational and working capital costs, including personnel Physical assets, e.g., buildings or machines, except when subsidies can stimulate communal infrastructure like collection centers that can catalyze change for many. Operational knowledge needed to produce something or operate a business. All subsidies that do not have an exit strategy. Some Considerations When Subsidizing AKI Services Good sources of AKIS: input suppliers (retailers, sales reps), outgrowers with a contractual selling agreement and (sometimes) marketing cooperatives Ineffective government extension services: lack of performance incentives, information gaps between final users and extension agencies, researchers’ misconceptions about marginalized producers, farmers’ inability to influence government Radio extension messaging often not commercially viable; usually needs ongoing subsidy or commercial sponsorship, e.g., from an input supply company. Need for AKIS is continuous; not a one-time service. Projects must create a process that ensures ongoing communication, service delivery, access to and use of AKIS by orienting providers to help clients improve productivity and product quality over the long term, not just until the project ends. Central Questions and Challenges 1) Blanket provision of subsidized services or inputs can reduce their effectiveness-provide subsidies to those who need or can make the most effective use of the service / input. How can we ensure a high rate of self- selection amongst market actors and what is the role of subsidies in achieving this? 2) Should we disclose to stakeholders that we have funds to subsidize services or inputs? Or, should we withhold this information until all non-subsidized alternatives are explored? How does this affect the ideal of self-targeting? 3) Subsidized services can prevent recipients from telling us which services they want. How can we make sure their voices are heard before using subsidies? How can we manage their expectation or assumption that we want to hear from them because we want to provide subsidized / free services? 4) If the targeted group is very disadvantaged, how do you meet the cost of training, group formation or other services? Should the market cover these additional social costs? What strategies work well when facilitating access to AKIS in areas lacking a moderately strong private sector, e.g., input suppliers or purchasers? Is direct, short-term provision by a facilitator ever defensible? 3
- 4. TRAINING MATERIALS: MODULE 8 5) Are there effective ways to increase the quality of government-provided AKIS? Is there evidence that this could evolve into a viable option for smallholders in remote areas? 6) Where should we focus our subsidies? Governments tend to play a more interventionist, subsidizing role in AKIS than they do in other sectors and are likely to continue doing so. 7) In developing a market for AKIS, how do we coordinate, complement or mitigate conflicts between public / private AKIS providers that have different subsidy practices? 8) How can ineffective public extension services be improved, particularly where inadequate infrastructure and adverse incentives limit their usefulness and efficacy? The full paper this extract is taken from is available at: http://www.slideshare.net/marketfacil/smart-subsidies-in-akis-final-mar2011-7192114. 4