FTF_Commercial_Horticulture_Value_Chain_RFI.docx

Request for Comment

Reference: Cambodia Commercial Horticulture Value Chain Promotion Program USAID/Cambodia is seeking public comments on the draft Statement of Objectives of an anticipated Request for Proposal (RFP) for the implementation of the Cambodia Commercial Horticulture Value Chain Promotion Program. Responses to this request for comment are not binding on the U.S. Government and do not obligate USAID to issue a solicitation, nor do they commit USAID to pay for any costs incurred in the preparation and submission of comments. These comments will be taken into consideration in preparing the final version of the Statement of Objectives and solicitation. This is not a Request for Proposal, and comments should not include any proprietary information. USAID/Cambodia will not provide responses to the comments. Comments must be submitted to phnompenhoaa@usaid.gov no later than 1:00 PM Cambodia time on January 19, 2015. The subject line must read, “RFI No. RFI-442-16-00001, Cambodia Commercial Horticulture Value Chain Promotion Program.”

Brief Project Description The purpose of the Cambodia Commercial Horticulture Value Chain Promotion Program (herein referred to as “the Program”) is to acquire technical services that will increase sustainable economic opportunities within a market-based and inclusive horticulture value chain. Development and strengthening of a horticultural value chain is anticipated to be accomplished through: (1) Enhancing the capacity for market participation among producers, agribusinesses, and other value chain actors, that leads to sustainable increased productivity and income generation of smallholder and commercial farmers, including women and youth; (2) Improving the commercial horticulture market system by building linkages among value chain actors, facilitating market information flow, and creating market incentives for private sector engagement and investment; (3) Improving inclusive governance and enabling environment for market-driven agriculture growth by strengthening the capacity of and engagement between and among public, private, and civil society stakeholders.

STATEMENT OF OBJECTIVES

CAMBODIA COMMERCIAL HORTICULTURE VALUE CHAIN

PROMOTION PROGRAM

I. Introduction In 2009, the U.S. government launched the Presidential Initiative “Feed the Future” (FtF) as its flagship global hunger and food security initiative. Globally, FtF works from farms to markets to tables to improve incomes and nutrition. The FtF Initiative’s goal is to sustainably reduce global poverty and hunger by decreasing the prevalence of poverty and underweight children. The FtF initiative focuses on a specific geographic area called the Zone of Influence (ZOI) to demonstrate the impact of the Initiative’s programs. Cambodia is one of the 19 focus countries of the FtF Initiative and here, the ZOI includes the four provinces of Battambang, Pursat, Siem Reap and Kampong Thom.

USAID/Cambodia intends to solicit and award a five-year contract using full and open competition. This Program to be implemented to support USAID/Cambodia FtF objectives and is expected to focus on strengthening the commercial horticulture value chains in the ZOI. USAID/Cambodia wants to emphasize the importance of considering the successes and lessons learned of the current FtF flagship program, Helping Address Rural Vulnerability and Ecosystem Stability (HARVEST), other donor funded projects, and the Royal Government of Cambodia’s (RGC) strategies and policies in support of value chain development, market systems improvement, and extension services. Key lessons learned in the agricultural development sector are expected to be incorporated into the Program interventions with a focus on key bottlenecks in the agricultural value chain, from the farm to the table.

The Project will be the primary mechanism to support smallholder and commercial producers and market systems development under USAID/Cambodia’s FtF strategy, with the broader goal of strengthening sustainable and resilient pathways out of poverty. More specifically, the Project is intended to achieve the following: (1) Enhance the capacity for market participation among producers, agribusinesses and other value chain actors, that leads to sustainable increased productivity and incomes of smallholder and commercial farmers, including women and youth; (2) Improve the commercial horticulture market system by building linkages among value chain actors, facilitating market information flow, and creating market incentives for private sector engagement; and (3) Improve inclusive governance and enabling environment for market-driven agricultural growth by strengthening capacity of and engagement among and between public, private, and civil society stakeholders. The Project is expected to accelerate economic growth, reduce poverty, and increase the resilience at both the household and systems levels.

II. Development Hypothesis The development hypothesis is that the social and economic resilience growth potentials of agriculture, including smallholder agriculture, will be enhanced in the ZOI, if USAID/Cambodia makes investments that establish and support the necessary conditions for private sector-led expansion and market access. The Program is intended to help ensure that the millions of Cambodians who have recently risen from poverty, but remain just above the poverty line, do not fall back into poverty, and that conditions are established for further poverty reduction. The Program is anticipated to engage key actors throughout the value chain (e.g. input suppliers, wholesalers, processors, producer associations, and retailers). The Program is also anticipated to work with relevant stakeholders that can best strengthen the farmer’s ability to provide a reliable and consistent supply of vegetables, as well as promote postharvest handling and marketing so that the Cambodian commercial horticultural sector has sufficient capacity to meet both quality and quantity demand factors of the market. USAID/Cambodia anticipates that interventions under the Program will help incentivize a private sector-led, demand-driven economy with clear economic benefits of market participation. At the same time, USAID/Cambodia also anticipates that innovative pathways for delivering technical assistance, such as technology and private sector partnerships, will be incorporated to address the cross-cutting issues of gender equality and female empowerment, youth empowerment, and economic governance.

III. Background Over the past decade, Cambodia’s agriculture sector has become one of the world’s fastest growing. That the broadest level, the country is self-sufficient in staple foods with production increasing at roughly three times the rate of population growth. Cambodia experienced similar growth in its fishery sector. However, much of this growth involved environmentally damaging expansions in croplands, excessive water use, overfishing, and improper applications of agriculture inputs. Growth in food production has yielded relatively few real gains for the 80 percent of Cambodians who live and work in rural areas. For most crops, profitability has barely increased, with declines for some, notably rice. One of the most troubling manifestations of these low returns to agriculture is the persistence and high incidences of stunting and other indicators of insufficient diets, particularly among children.

Cambodia’s agricultural development path thus far has been to expand areas under cultivation. This approach, whether intentional or consequential, has contributed to environmental degradation and is ultimately both economically and environmentally unsustainable. A limiting legal and regulatory framework and the poor implementation and enforcement of existing laws adversely effects the costs of production and stymies the agricultural marketing system. These factors, among others, lead to high costs, inconsistent input supplies, high losses, low quality raw products, and limited opportunities for value addition. There is a dearth of processing capacity and other value adding activities in the agriculture sector. With a few exceptions, Cambodia’s agricultural exports are in raw form and the large majority of processed food products are imported. An estimated 70 percent of the produce consumed comes from neighboring Vietnam and Thailand. In short, the agricultural expansion of the past decade achieved overall self-sufficiency, but through an approach which is environmentally unsustainable, yields few real economic benefits for farmers, and realizes only a fraction of the value added and employment potential in the off-farm parts of the value chain.

The value of the missed opportunities for income and job generation in the off-farm portions of the value chain could contribute significantly to increasing incomes of stakeholders all along the agricultural value chain. In addition, a more technologically advanced, climate-smart, and market-driven approach to agricultural production could realize similar production gains, with much higher profitability for farms, and at greatly reduced environmental cost. The primary focus of USAID/Cambodia’s work over the next five years is anticipated to assist Cambodia’s necessary shift to such a system. An important component of this approach is anticipated to be fostering conditions by which individuals employed in enterprises along the agricultural value chain (including smallholder farming) have adequate access to information and the skills needed to effectively participate in a market-driven economy. Finally, Cambodia’s demographics requires attention to its growing young population, especially as it relates to helping them pursue livelihoods in or outside of the agriculture sector, so that they can make better-informed decisions regarding the costs and benefits of migration.

IV. Development Challenges Cambodia faces a number of development challenges that impact agricultural value chain development. The following is a short summary of the findings from USAID/Cambodia’s analyses that potentially impact the development of a private sector-led agricultural economy.

Governance and Infrastructure In Cambodia’s agriculture sector, laws, regulations, and implementation procedures are often problematic. For example, testing and enforcement of quality standards for agricultural inputs is inadequate or entirely absent. In addition, licensing and registration requirements, procedures are unnecessarily burdensome. As a result, many business activities, including significant amounts of international trade in agricultural inputs and commodities, are outside of the formal sector. The cost of doing business in the agriculture sector is high and the enabling policy environment for agricultural development from seed to markets remains a challenge. Contributing to the suppression of agricultural development, road transportation costs are 25 percent higher than in Vietnam, and twice the cost of transportation in Thailand. In addition, Cambodia’s only deep-water port, Sihanoukville, is reputed to be the most costly in Asia. Electricity costs are high and the grid does not reach large areas of the country.

Uncertainties in Agricultural Input Markets Over the past decade, the use of hybrid seed, chemical fertilizers, herbicides, insecticides and, for aquaculture, improved fingerlings and processed feed have increased significantly. However, these markets are hampered by uncertainties regarding input quality, including widespread mislabeling, high prices, and poor access to technical assistance regarding the appropriate types and levels of inputs. These problems are particularly difficult to address since much of the inputs are imported through informal channels. As such, there is limited government oversight, if at all, and often Cambodian farmers are sold inputs which are ineffective, damaging to the environment, and/or compromise food safety. Because of these uncertainties about input quality and appropriate application protocols, farmers are understandably cautious regarding their input acquisitions and application.

Poor Coordination and Little Value Added in Value Chains Arguably, the worst failure in the agricultural system and the greatest potential for effecting improvements are in the segment of the value chains beyond the farm gate. Due to imperfect information about market prices and small numbers of collectors serving individual farm communities, farmers may be disadvantaged in these negotiations. In terms of the numbers of intermediaries, coordination across all or significant segments of these value chains is rare and monopolistic or oligarchic symptoms prevail. In the absence of such coordinating mechanisms or consistent government establishment and/or enforcement of quality standards, product quality tends to be highly variable. In addition, postharvest handling is very underdeveloped. This leads to many economic disadvantages, including but not limited to, high losses due to food spoilage and damage and a low net profit margin. To compound the challenges in value addition, there is little agroindustry at all levels from simple packaging to more sophisticated processing facilities. Lastly, there is little to no coordination between actors beyond the farm gate, such as processors, retailers, and exporters. Nor are there significant incentives for (potential) market actors to ensure that products with the characteristics and volumes demanded by end users are moving through Cambodia’s value chain system.

Insecure Land Tenure Lack of secure land tenure, slow and opaque land titling procedures, landlessness, and the impact of economic land concessions, and resettlement are key concerns. Under the Land Law of 2001, any person who had uncontested possession of land – excluding state public land – for at least five years prior to the law‘s promulgation has the right to request a definitive title of ownership. Registered land rights are considered the most secure. Having such rights increases incentives for farmers and business to invest in the land. It also increases the ability to make investments since nearly all banks will only consider registered land as collateral.[footnoteRef:2] Lack of land tenure places increased constraints in financing and private sector investment into Cambodia’s agriculture sector. USAID/Cambodia recognizes that it is not within the manageable interest of the Program to change Cambodia’s land tenure conditions and constraints. However, they need to be taken into consideration and the risks posed need to be mitigated given the private sector-driven approach. [2: Some MFIs and informal lenders will accept land with traditional or ‘soft titles’ for collateral.]

Access to Finance Despite positive developments in the financial sector over the past decade demonstrated by the rapid with growth in the number of financial institutions, including microfinance institutions, there still are significant constraints. Agricultural lending represents only about 10 percent of the portfolios of commercial banks for reasons seen worldwide, i.e. that commercial banks in developing nations tend to be concentrated in the largest cities where agriculture is less present, and the agriculture sector is riskier and vulnerable to both economic and environmental shocks. In general, banks are only accessible to larger agricultural producers and other firms in the value chain. Many of the rural poor face considerable constraints to accessing credit for a number of reasons. First, interest rates can be quite high, typically 2.9 percent per month from monetary financial institutions (MFIs) and two to three times that rate from informal lenders. Input dealers or rice mills that provide goods on credit charge effective interest rates of about five percent per month.[footnoteRef:3] High interest rates compounded by fast pay back periods for the smallholder farmer makes this type of borrowing economically irrational. Second, many MFIs offer only credit. Other financing products such as savings are not provided through the formal financing sector. Lastly, other specialized financial packages such as crop insurance and leasing that mitigate the risk of investment in the agriculture sector are rarely available from Cambodia’s financial institutions. [3: Ovesen et al 2012, Fintrac 2013]

V. Program Objectives

The Program will consolidate the work that USAID/Cambodia, other donor projects, and the RGC have recently undertaken in food security and agriculture to focus on off-farm market actors with clear incentives to provide coordination, investment, and private sector engagement (including technical assistance) along the targeted value chain. The Program is anticipated to concentrate on removing obstacles to market access for commercial horticulture crops in order to create job opportunities and increase rural on- and off-farm incomes. This new Program is expected to strengthen Cambodia’s commercial horticulture value chain so that farmers and other entrepreneurs are better equipped, not only to increase production, but to effectively compete in the market.

USAID/Cambodia has identified three primary areas of intervention that are expected to contribute to achieving the USAID/Cambodia’s broader Development Objective of strengthening the resilient pathways out of poverty. This Program will contribute to the Development Objective by strengthening a private sector-led, demand-driven commercial horticultural value chain sector. USAID/Cambodia is seeking feedback from the public to determine if there are critical gaps in the suggested three primary areas of intervention briefly described below. USAID/Cambodia is open to different implementation approaches and project interventions to meet these three objectives.

Objective 1: Improved Capacities for Market Participation USAID/Cambodia has concluded through our analyses that improved market participation is and will be critical in strengthening the commercial horticulture value chain. USAID/Cambodia has initially identified three sub-objectives: 1) improved financial and business skills; 2) increased access to and use of market information; and 3) increased capacity and participation of women and youth.

USAID/Cambodia is seeking feedback from the public on the appropriateness of the three sub-objectives. In addition, USAID/Cambodia is open to replacing the identified objective and sub-objectives, if it can be demonstrated that they would not significantly contribute to improving the capacity of the target population for market participation.

Objective2: Improved Market Linkages Globally, USAID’s general approach to building market linkages in the agriculture sector has been to build partnerships with the private sector to mitigate identified market constraints and exploit opportunities to ultimately benefit smallholder farmers. This approach in other countries has been successful in building and strengthening sustainable market linkages. USAID/Cambodia’s value chain assessment indicated that there is very little innovation across the various domestic agricultural value chains and a lot of opportunity for growth in this area. This observation was also echoed in USAID/Cambodia’s partnerships assessment, where many private sector impact investors or social entrepreneurs are looking to gain first-mover advantage in the Cambodian agriculture sector through the use of innovative approaches to capitalize on areas of Cambodia’s comparative advantage. USAID/Cambodia is seeking to unleash this potential by removing the bottlenecks for such investment into the sector. Additionally, farmer associations and networks exist in Cambodia and there are related regulations and policies to support them. However, there are historical and current challenges of developing and/or effectively working with associations in Cambodia. Organizing farmers is one of the ways that Cambodia’s commercial horticulture sector can expand and achieve economies of scale to compete against its neighbors.

USAID/Cambodia has identified three preliminary sub-objectives to improve market linkages: 1) producer association development; 2) strengthening/creating agribusiness associations; and 3) market chain coordination. USAID has made assumptions that the identified key intervention areas are where USAID/Cambodia resources could have the greatest impact on improving market linkages. However, USAID/Cambodia is open to feedback and alternative suggestions from the public on the sub-objectives outlined in this section.

Objective 3: Improved Governance and Enabling Environment USAID/Cambodia has identified the importance of improving the governance and enabling environment as one of the key areas of intervention to realistically and sustainably achieve the first two objectives. Shortfalls in the governance and enabling environment space can seriously compromise the performance of virtually all aspects of agricultural value chain activities, from natural resource management, input markets, on- and off-farm activities, postharvest handling, processing, warehousing, and marketing. In addition, poor implementation and interpretation of existing policies poses a different challenge to agricultural development. USAID/Cambodia anticipates that the Program will place as much emphasis on identifying and developing opportunities as it does on constraints analysis and policy enhancement. Logically, enabling environment constraints would be identified to determine where the opportunities are and how to capitalize on them and which will then lead to an assessment of policy and enabling environment constraints.

USAID/Cambodia’s Questions to the Public

1. How can USAID better meet the project goal of strengthening and expanding the commercial horticulture value chain in the Feed the Future Zone of Influence provinces outside of the preliminarily identified three project objectives? Have the objectives and sub-objectives been properly identified? If not, what other sub-objectives would you include?

2. What are other areas/points of intervention that have not been identified here that could strengthen the commercial horticulture value chain to directly or indirectly benefit smallholder farmers and facilitate private sector-led economic growth?

3. Many donors have invested in the agriculture sector, including USAID. Are there lessons learned from on-going and previously implemented projects that do not seem to be reflected in this document?

4. In your opinion, what are the biggest risks in implementing this Program, and how should they be mitigated?