Attachment_18-PROFIT_Zambia_Impact_Assessment.pdf

PROFIT ZAMBIA IMPACT

ASSESSMENT

FINAL REPORT

AUGUST 2010

This publication was produced for review by the United States Agency for International

Development. It was prepared by DAI.

PROFIT ZAMBIA IMPACT

ASSESSMENT

FINAL REPORT

Program Title: Zambia Production, Finance and Improved Technology

(PROFIT)

Sponsoring USAID Office: Office of Microenterprise Development

Contract Number: GEG-I-00-02-00014-00, Task Order No. 01

Contractor: DAI

Date of Publication: August 2010

Author: DAI

The authors‟ views expressed in this publication do not necessarily reflect the views of the United

States Agency for International Development or the United States Government.

PROFIT ZAMBIA IMPACT ASSESSMENT i

CONTENTS

EXECUTIVE SUMMARY

ZAMBIAN CONTEXT

THE PROFIT PROJECT

RESEARCH DESIGN AND PROCESS

FINDINGS

Retail Inputs and Services

Beef

Cotton

LESSONS LEARNED

BACKGROUND OF THE STUDY

NEW GENERATION ECONOMIC GROWTH PROGRAMS

ZAMBIAN CONTEXT

ABOUT PROFIT

Approach

Implementation Process

RESEARCH DESIGN AND PROCESS

EVALUABILITY ASSESSMENT

RESEARCH DESIGN

BASELINE SURVEY

ENDLINE SURVEY

QUALITATIVE RESEARCH

FINDINGS

RETAIL INPUTS AND SERVICES

Hypothesis 1

Hypothesis 2

Hypothesis 3

Hypothesis 4

Qualitative Study Results

BEEF

Background

Findings

Hypothesis 1

Hypothesis 2

Hypothesis 3

Hypothesis 4 ii FINAL REPORT

COTTON

Background

Findings

LESSONS LEARNED ACROSS THE THREE SECTORS

ANNEX 1: CAUSAL MODELS

CAUSAL MODEL PROCESS

ANNEX 2: SUMMARY OF CHALLENGES

RETAIL INPUTS AND SERVICES

BEEF

COTTON

ANNEX 3: SUMMARY OF GENDER ISSUES

RETAIL INPUTS AND SERVICES

BEEF

COTTON

PROFIT ZAMBIA IMPACT ASSESSMENT iii

TABLES AND FIGURES

TABLES

1 Average Amount OF MAIZE Harvested (kgs) and Sold (000 kwacha)

2 Types of analysis conducted for each sector

3 Retail Inputs and Services: Active and Inactive Farmers in the Treatment and Control Samples, 2007-2008 Season

4 Average Amount OF MAIZE Harvested (kgs) and Sold (000 kwacha)

5 Average Annual Consumption Expenditures („000 kwacha)

6 Beef: Active and Inactive Farmers in the Treatment and Control Samples, 2007-2008 Season

7 Profit Project Causal Chain: Cotton

8 Profit Project Causal Chain: Beef

9 Profit Project Causal Chain: Retail Input Distribution

FIGURES

1 Profit Approach and Learning Loops

2 Causal Model

3 An Industry Pathway

PROFIT ZAMBIA IMPACT ASSESSMENT 1

EXECUTIVE SUMMARY

Over the past decade, a new generation of private sector development programs has evolved. These programs emphasize sustainable and pro-poor economic growth while working through markets and private sector agents, reducing and eventually eliminating assistance provided to participating businesses.

These projects often involve promoting the competitiveness of selected industries or value chains in global and domestic markets while increasing the participation of, and benefits to, farmers and other micro and small enterprises (MSEs). Activities aim to strengthen inter-firm cooperation, improve access to product markets, promote firm upgrading and bolster supporting markets for inputs, finance and business services – all in a sustainable and market-friendly manner.

The Private Sector Development Impact Assessment Initiative (PSD-IAI), funded by USAID under the

Accelerated Microenterprise Advancement Project (AMAP), selected the Zambia Production, Finance and Improved Technology (PROFIT) project for a detailed impact assessment, because it exemplifies this new generation of economic growth projects and because it has the potential to generate information that could be used to inform decisions about the design of future projects.

ZAMBIAN CONTEXT

At independence in 1964, Zambia‘s per capita income was among the highest in Sub-Saharan Africa, owing largely to the development of copper mining. During the first three decades of independence, however, per capita income declined steadily as a result of falling copper prices, misguided public policies, poor resource management, periodic drought and heavy involvement in the freedom struggles of neighboring countries. According to World Bank figures, GDP per capita fell nearly 50% between 1965 and 1995, declining from $613 to $318 (expressed in 2000 USD).

In recent years, significant debt forgiveness, higher international copper prices and more favorable agricultural conditions have contributed to strong economic growth in Zambia. A poverty reduction and growth facility (PRGF) from the IMF in 2004-2007 and improved management of public finances helped to bring about this reversal. Zambia signed a follow-on agreement with the IMF in June 2008 to continue the PRGF, the primary objectives of which are to maintain macroeconomic stability and diversify the economy to reduce dependence on mining.

Privatization of the copper mines and high international copper prices also helped drive growth. Yet approximately half the population still lives in extreme poverty and wealth remains concentrated in a small segment of the population. HIV has had a devastating effect on Zambia, cutting population growth from 3.1% in the 1990s to 1.9% between 2002 and 2006. Youth is the fastest growing population segment; 45% of the population is under 15 years old.

Most Zambians work in agriculture, which is characterized by very low productivity and subsistence-oriented production. Less than half the potentially arable land is cultivated. Agriculture is dominated by maize, but in recent years production of cash crops such as cotton, tobacco, soya, vegetables and fresh flowers has increased. Transport costs are high because Zambia is landlocked and there are many structural weaknesses and inefficiencies in the transport network.

2 FINAL REPORT

THE PROFIT PROJECT

PROFIT began in 2005 with an initial funding level of $15 million, including $5 million for local grants.

The Cooperative League of the USA (CLUSA) implements the project on behalf of the United States

Agency for International Development (USAID). International Development Enterprises (IDE) and the

Emerging Markets Group (EMG) participated as sub-contractors.

The overarching goal of PROFIT is to increase multi-sector growth to ensure poverty reduction at the household level. PROFIT‘s activities aim to strengthen connections within selected value chains to increase the provision of inputs and services to farmers with the objective of improving productive output and quality, thereby increasing enterprise and household incomes. PROFIT works with lead firms and communities to develop agent networks to reach rural areas lacking sufficient supplies of inputs and services. This entails demonstrating the value of these inputs and services to rural consumers and helping lead firms shift from a high-margin, low-volume orientation to a structure that also supports low-margin, high-volume smallholder clients.

PROFIT uses an industry-based strategy. All facilitation activities that target individual enterprises are done with the aim of improving the overall functioning of the industry and aim to foster the development of commercial mechanisms to address critical production constraints. PROFIT uses minimal interventions and clear exit strategies to limit potential distortions, maximize leverage and increase the likelihood of sustainable impacts.

PROFIT sees itself as a facilitator of market system change—that is, an agent that stimulates change but does not become part of it. Economic pressures and cultural norms often result in conflicting economic and social incentives. It is the job of the market facilitator to help overcome these conflicting incentives by fostering new relationships, on-going innovation and enhanced benefits so that market actors behave in a way that makes the industry more competitive.

PROFIT aims to achieve changes in three systemic characteristics that are interrelated and crucial to an industry‘s ability to compete over time.

Benefits accrue in terms of increased incomes, reduced risks and improved social status. Benefits must be sufficient enough to provide incentives to change behaviors so that actors take on new risks, develop new relationships, change the nature of their commercial relationships and embrace learning and innovation as the basis for competition.

Relationships that are transparent, long-term and focused on industry-level goals are critical to an industry‘s ability to respond and adapt to changing demand. Incentives that foster win-win relationships enable industries to expand knowledge and skills.

Learning and innovation happen only when appropriate incentives are in place. When learning and innovation are an integral part of an industry‘s norms, that industry is more likely to be competitive over time.

An evaluability assessment of PROFIT was conducted in November 2005. The evaluation team met with various stakeholders, and together with project staff, selected the three areas of program activity to include in the impact assessment: retail inputs and services, beef and cotton. Input and service distribution at the retail level was seen as a novel activity with opportunities for learning that could be applied elsewhere. The livestock and cotton sectors were chosen for inclusion in the study because they are activities that involve large numbers of smallholders (200-300 thousand in each case).

PROFIT ZAMBIA IMPACT ASSESSMENT 3

Smallholders occupy an important place (in terms of numbers if not in terms of productivity or purchasing power) in all three of the selected sectors. They tend to be marginal producers working small plots of land or managing small herds with low levels of productivity (and in the case of cattle farmers, high rates of cattle morbidity and mortality). They have limited resources and lack access to formal financial services. They have few incentives to invest in commercial upgrading and use limited technology. They possess little market power and often sell outputs and purchased inputs under adverse market conditions and with limited market information.

RESEARCH DESIGN AND PROCESS

The impact assessment attempted to measure the results of project interventions using a mixed-method

(quantitative plus qualitative) approach. The quantitative part of the impact assessment included a baseline survey of 919 program clients and 620 non-clients conducted in August-September 2006 and a follow-up survey of the same clients and non-clients in November 2008. It also utilized a field assessment of farmer involvement with PROFIT undertaken in 2010 and related to the 2007-2008 growing season.

The quantitative data gathering and analysis was complemented by qualitative research that consisted of in-depth key informant interviews and focus group discussions with selected value chain actors as part of both the baseline and the follow-up research. The analysis sought to test a number of specific hypotheses about the outcomes and impacts of project activities. These hypotheses were derived from causal models formulated together with project personnel at an early stage of the study.

FINDINGS

Shifts in approach, emphasis and location during the course of program complicated or invalidated parts of the research plan. Between the two survey rounds cotton activities moved out of the South, where the survey was undertaken, to the East, where there was no baseline survey. As a result, only qualitative evidence was generated on PROFIT‘s impact in the cotton sector. Beef sector activities also moved away from the areas surveyed to some extent, but a field inquiry undertaken in 2010 indicated that many survey respondents (but not necessarily those in the original treatment area) were active participants in PROFIT in the 2007/2008 season. This permitted some quantitative analysis to be carried out for beef on an active/inactive (as opposed to a treatment/control) basis. The best coverage was achieved for the retail inputs and services sector, where the treatment/control and active/inactive groups largely coincided.

A project‘s impact can only be proven when quantitative analysis can be performed on data from treatment and control groups, with the latter serving as a counterfactual representation of what would have happened in the absence of the project. Even then, failure to account fully for selection bias may invalidate the findings. Because of the specific limitations of this study and general shortcomings of quasi-experimental approaches, most of the findings cited in this report should be regarded as suggestive rather than definitively proven. Nonetheless, the combination of quantitative and qualitative evidence suggests positive outcomes and impacts for smallholder participants in the project's beef and retail activities. Moreover, these results, measured after only two years of project facilitation, may well continue to improve over time. Moreover, these results, measured after only two years of project facilitation, may well continue to improve over time; recent discussions with project personnel suggest that substantial increases in outcomes have occurred since the period of the endline survey.

RETAIL INPUTS AND SERVICES

Long distances, geographically dispersed rural communities and a poor road network have limited the provision of agricultural inputs in rural areas. The cost of farming inputs is high and the availability of

4 FINAL REPORT

quality inputs and related technical services has been low. Retailers have been hesitant to supply inventory to rural areas unless it is sold in advance and are generally unwilling to provide credit to smallholder farmers for input purchases.

PROFIT uses an agent network model to mobilize representatives at the community level who take prepaid orders from farmers for inputs (chemicals and seeds). Agents consolidate these orders and place them with input supplier representatives in towns. Agents are usually farmers themselves who come from a particular community and serve as intermediaries between farmers and a particular input supplier.

By 2009, 14 firms selling chemicals, fertilizer and veterinary drugs were cooperating with PROFIT to build the network for agricultural inputs and services. About 600 agents were active, serving more than 100,000 farmers and making a rapidly rising total of agent-mediated sales.

Increased access to commercial agricultural products and services has encouraged the evolution of smallholder practices from subsistence to emerging commercial agriculture. Both treatment and control group farmers increased their production and sales of primary crops. Production of maize, the most important crop for farmers in the survey, increased on average by 82% for farmers who were active in PROFIT compared to

68% for those who were inactive. Perhaps more importantly, the average amount of maize sales increased by 161% for farmers who were active in PROFIT, compared to 56 percent for those who were inactive. The production and sales of active farmers both increased faster than average total land planted, indicating that productivity improved.

TABLE 1: AVERAGE AMOUNT OF MAIZE HARVESTED (KGS) AND SOLD (000 KWACHA)

Baseline Endline % change

Active Group

Mean

Inactive Group

Mean

Total

Mean

Active Group

Mean

Inactive Group

Mean

Total

Mean

Active Group

Mean

Inactive Group

Mean

Total

Mean

Average production

(kg)

3,421 4,549 3,804 5,886 7,653 6,652 81.6 68.2 74.9

Average sales (000 kwacha)

1,347 2,224 1,729 3,510 3,469 3,492 160.6 56.0 102.0

The agent network model provides incentives for smallholder farmers to upgrade by improving access to quality inputs and providing knowledge on how to use them properly. Farmers and agents participating in

According to project personnel, there was little change in the price farmers received for maize sales between the two survey periods, nor did the price differ significantly between active and inactive farmers. The finding that sales in kwacha by members of the active group increased faster than their production thus appears to be attributable to a rise in the portion of their output that was marketed. Conversely, members of the inactive group appear to have marketed a decreasing share of their output.

“Agents bring products to the village in bulk and there are no transport costs to the farmers. Agents are demand-driven—they bring what farmers want and give them money for. Agents also bring product knowledge—they teach us how to use the product. If you buy in the shop, they don‟t teach you. Agents that sell chemicals live in the village and know the problems that we face. We know them. Agents also help in terms of sales of our crops; they bring information on prices. Agents are fair because we know them. If you are short on cash, they will give you a discount, or allow you to pay a few days later.”

—Male and female maize and groundnut farmers, Focus Groups Discussion (FGD), Chikupili area, Mkushi

PROFIT ZAMBIA IMPACT ASSESSMENT 5

the qualitative study have adopted new seed varieties and are using herbicides and chemicals to treat crop diseases. The agents, drawing on the training they receive from the input suppliers, have furnished farmers with accurate information on new products, technologies and practices. For example, farmers have learned more about crop diseases and how to treat them with the proper application of specific chemicals and herbicides at the right time. They have improved knowledge on which seeds to plant when.

They have also learned the value of planning ahead—in preparing their land, buying seeds earlier, projecting their yields and anticipating their cash flow needs over the course of a year. They are aware of the high risks of using fake chemicals that destroy their crops and of the importance of using certified products. They have increased awareness of the risks of using uncertified seeds and have increased their purchases of certified seeds. With this knowledge, combined with improved access to quality inputs, farmers have gained confidence to upgrade their crops. The upgrading, in turn, has resulted in higher quality crops and higher yields.

Input suppliers interviewed indicated that the agent model brings them closer to farmers. In particular, seed companies said that it allowed them to identify and diagnose problems early and to get better information on farmer demand. According to one input supplier, this closer relationship helps them to understand the mentality of farmers and their needs. This information serves as a driver for them in innovating new products to meet farmer needs better, such as new seed varieties.

Both men and women farmers are engaged in farming and in decisions around the purchase and use of inputs and upgrading. Both genders interact with agents in purchasing inputs and receiving advice, and both have a favorable view of the agent network model. Men and women alike said they had good relationships with the agents and trusted them with the money they give them in advance for their input purchases.

Research found that while progress is evident, women continue to face constraints in terms of mobility, access to information, control over income and, in some cases, gender-biased attitudes. The number of women agents is still limited—one input supplier said two out of 24 agents were women and five sub-agents were women; another said that out of 139 hubs , 4-5 are women. Although there are only a few women agents, and few or no women input suppliers or representatives in the large input supply companies, actors all along the value chain had a very positive view of women agents, which suggests good potential to expand their involvement.

The input supplier approach is evolving from merely selling products toward a more solutions-driven marketing strategy, in which information, knowledge and solutions become integral parts of the product distribution strategy. Firms are realizing that labor and equipment shortages in rural communities provide an opportunity to deliver services to smallholders, which in turn results in the sale of even more of their products.

The success of the agent network model is reflected in its self-replication: agents are starting their own sub-agent networks. Through a cascade effect, the sub-agents are able to cover a larger geographic area and reach into more remote areas.

One input supplier that PROFIT worked with uses a two-tier agent system in which a managing agent, called a “hub,” coordinates the work of several agents directly engaged with farmers.

6 FINAL REPORT

BEEF

The beef sector in Zambia is disjointed, with weak and ineffective linkages. As a result, the sector has limited ability to respond to industry threats such as low productivity, drought, disease and competition from imports. High rates of cattle morbidity and mortality are especially challenging constraints to upgrading the sector. Despite the danger of frequent disease outbreaks, few smallholders vaccinate their cattle or test regularly for infection. When cows fall sick, they usually die – medical assistance is rarely available and even when it is, farmers often do not trust it to work.

In this sector, PROFIT tried to improve animal health by encouraging the development of private services and the creation of herd health plans (HHP), which provided one-year of preventive care for a fixed fee. It also hoped to improve the marketing of smallholder beef. With regard to the latter objective, however, the study found that relatively few smallholders (11-16%) sold cattle in a given year and most of those cattle were sold on a one-time basis to meet a specific financial need, rather than as a continuing commercial enterprise. The importance of cattle as a source of prestige and a vehicle for savings continues to outweigh herding as a regular source of income.

The herd health plan did promote the formation of commercially viable relationships in some communities. Some veterinarians became more entrepreneurial and the use of community agents to expand the reach of veterinary services into rural areas was introduced, but scaling up this success was impeded by a shortage of private vets. Although most agents reported satisfaction with their relationship with the vets, the level of trust on the side of vets toward agents was not as strong as expected. A private vet in Chongwe explained that in order to ensure quality control, he trained his agents, but also limited most service provision to qualified vets. The research indicated that farmers have a high level of trust in agents and that this trust is strengthened by the fact that agents come from the same community and were selected by the community.

Over the study period, surveyed farmers reported a very large increase in the use of private veterinary services. Only 5% of the sample (just 19 farmers) used them at the time of the baseline survey, but 43%

(167 farmers) did so at the time of the endline survey. Accordingly, morbidity and mortality declined over the course of the evaluation period. The average number of cattle deaths in the year preceding the endline survey dropped by 81 percent for active farmers. versus a drop of 29 percent for inactive farmers.

The number of sick cattle dropped by 69 percent for active farmers, versus a drop of 16 percent for inactive farmers.

Male and female farmers interviewed during the qualitative study report that access to information between men and women is the same because information is shared during meetings attended by both men and women. Men are still making most of the decisions in cattle rearing, especially where and how much to sell, but a few men do discuss these issues with their wives. Although men are at the forefront of

Although both declines are strikingly greater for active than for inactive farmers, the differences are not statistically significant because of large variations within both samples.

Before farmers had a perception that vet services should be provided for free.

PROFIT helped change this mindset. Now people are starting to realize the value of HHP. Farmers value this service so much that if they are not in the scheme they feel left out. Now they understand the concept of prevention.

—Public vet, Mazabuka

Under the vet [program], cattle are no longer dying and they are having calves.

This means that the number of cattle per farmer has drastically increased—the herd has grown in size. The use of new vet services and technologies has led to this increase in the number of cattle per farmer.

—Livestock farmers, FGD, Chongwe

PROFIT ZAMBIA IMPACT ASSESSMENT 7

cattle-raising activities, some interviewees said women play an active role in the adoption of veterinary services and in some cases are more adaptive to change than men. Male and female veterinarians reported working well with all farmers regardless of their gender. Although there are female vets, the vet agents are mostly men because it is difficult for women to take on such public roles with regard to cattle, which is traditionally a male business.

PROFIT‘s endeavors in the beef cattle industry show that improvements in animal health were registered, but neither cattle sales nor herd size increased, leaving traditional patterns of livestock reading pretty much intact. It seems likely that more time is needed for the demonstrated improvements in herd health -which can only be regarded as a strongly positive outcome - to become reflected in larger herd sizes and, eventually, increased commercial sales of cattle.

COTTON

The cotton industry in Zambia operates on a contract basis. Cotton farmers are locked into supplying product to a particular cotton firm through the provision of inputs on credit. Farmers receive input packs

(that contain seeds and chemicals) from cotton firms, the cost of which is deducted when the crop is sold.

This practice draws farmers in Zambia to growing cotton because it is the only commercial crop for which inputs are available and the end-market is secure. However, since the transaction costs of switching from cotton to other crops such as maize are very low, when the price of cotton goes down, farmers switch to other crops on a seasonal basis. This tendency reduces sector productivity and the wide availability of inputs on credit to all those planting cotton means that there are no incentives to attract high-performing farmers or to improve productivity. PROFIT planned activities to alter this market structure in a way that would be beneficial for both farmers and lead firms.

The cotton industry was deemed promising at the time the study was conceived but had a very difficult experience during the study period. The appreciation of the kwacha in the era of high copper prices greatly undermined the industry‘s international competitiveness. The industry did particularly badly in the

South, where the baseline study was conducted, because the ill effects of kwacha over-valuation were compounded by problems with weather, predatory competition and weaknesses of the lead firm. Project activity therefore shifted to the East, where most of Zambia‘s cotton is now grown.

Despite the challenges of observing and attributing impact of

PROFIT‘s activities in the cotton sector, two important shifts that are taking place in the industry thanks to PROFIT‘s facilitation can be noted.

First, there has been a move away from using credit to ―lock-in‖ farmers to increasing loyalty through incentives and building relationships. In anticipation of a price increase and industry rebound, Dunavant, a lead firm, is investing in better-performing farmers through its Preferred Supplier Program (PSP). The PSP enables

Dunavant to manage its farmers better and select high performing farmers for input packs. This approach suggests an important shift in the lead firm management model. Although it is too early to tell what the impact will be, an important indication of potential change in value chain relationships is the lead firm‘s recognition of the importance of providing training to farmers and building stronger relationships.

Second, third-party input providers are integrating into the cotton sector as spray service providers enter the market and linkages are built between cotton firms and input suppliers.

Capacity utilization of our gins has been below breakeven and the only way we can move back into profitability is to increase individual farmer yields and establish more mutually trusting relationships.

—Dunavant representative

8 FINAL REPORT

LESSONS LEARNED

No one model offers a complete solution to complex problems. For example, PROFIT learned that vet services needed to be delivered in multiple ways through multiple mechanisms. This makes the ability to adapt to changing market environments important. Understanding and maintaining a system-wide perspective is critical for the project implementer to see where momentum is happening and when resources shifts have to take place. The herd health plan provided a catalyst to the vet services market but may never become the predominant offering in the marketplace, even though it appears to have created strong improvements in cattle morbidity and mortality among smallholders

Trust and relationship building takes time but can be strengthened through community involvement in selecting agents and through active input supplier engagement with their agents and their communities. Trust and satisfaction on the farmer and agent side are strongest where suppliers are more involved in promotion and training.

Understanding farmers as consumers as well as producers can be effective for fostering behavior change. Smallholders have proven to be a viable market. After seeing field demonstrations and the benefits of adopting new products and technologies, farmers were willing to invest in upgrading.

Focusing on behavior change and not individual transactions has proven effective for understanding why growth is or is not happening and can help broaden a project‘s understanding of how change can be catalyzed.

A commercial input industry is a key driver of innovation both on the farmer and input supplier side and critical for longer-term upgrading. Learning about the smallholder market and farmer needs through closer contacts with farmer communities helps drive product innovation on the input supplier side, such as developing new seed varieties or packaging of chemical products in smaller quantities to meet farmer needs.

The shift to targeting smallholders is not just a process of promoting products to smallholders. It requires changing the business model to a volume-based business model that has systems to manage large numbers of customer relationships. Critical elements of such a management system include managing agents, better order tracking processes, staff training, staff performance compensation systems and better inventory management systems.

Building the internal management capacity of input suppliers is critical to the effectiveness and expansion of agent networks. Critical factors are a) the input suppliers‘ capacity to manage their agents and view them as a core part of their business and not as outsiders; b) input suppliers‘ ability to forecast smallholder demand and manage inventory; and c) input supplier engagement at the community level through promotional activities and training to maintain quality control of agents, learn about farmer needs and build agent credibility within the communities.

Inputs are a key component of agricultural value chains and should not be treated as public goods.

Handouts and government-controlled subsidy programs lower the probability of upgrading by limiting access, increasing longer-term costs and reducing innovation by crowding out private sector investment in the input industry.

Downturns can open up important opportunities for fostering systemic shifts in an industry and leveraging competitive pressure. This, in turn, can promote industry-wide upgrading. Dunavant‘s

PROFIT ZAMBIA IMPACT ASSESSMENT 9

strategy is an important example of a situation in which a crisis and increased competition can lead to dynamic shifts in the firm‘s operating model and the industry overall.

The capacity and management of the lead firm should be understood. It is often more important to assist a lead firm at the initial stages of project implementation, rather than focusing solely on the smallholder. However, understanding the full range of incentives for smallholders to produce (or not) is a critical part of building capacity of the lead firms, as demonstrated by Dunavant‘s Preferred

Supplier Program.

Systemic shifts in an industry ultimately define the impact on participants in the value chain. These shifts are not time-bound, and do not always fit into the timeframe of donor-supported projects. This poses a challenge to understanding impacts. All industries experience ups and downs, and projects should be assessed in the context of the industry overall.

Understanding the smallholder perspective and incentives is critical, as demonstrated by the limitations that social capital issues put on commercial relationships in cattle.

PROFIT ZAMBIA IMPACT ASSESSMENT 11

BACKGROUND OF THE STUDY

NEW GENERATION ECONOMIC GROWTH PROGRAMS

Over the past decade, a new generation of private sector development programs has evolved. These programs emphasize sustainable and pro-poor economic growth while working through markets and private sector agents, reducing and eventually eliminating assistance provided to participating businesses.

These projects often involve promoting the competitiveness of selected industries or value chains in global and domestic markets while increasing the participation of, and benefits to, farmers and other micro and small enterprises (MSEs). Activities aim to strengthen inter-firm cooperation, improve access to product markets, promote firm upgrading and bolster supporting markets for inputs, finance and business services – all in a sustainable and market-friendly manner.

Despite the significant investment in these programs, there have been surprisingly few high-quality impact assessments to provide guidance on designing and implementing future projects. The Private

Sector Development Impact Assessment Initiative (PSD-IAI), funded by USAID under the Accelerated

Microenterprise Advancement Project (AMAP), has the objective of filling this knowledge gap by conducting impact assessments and identifying specific impacts that the projects have on the private sector and poverty reduction.

The PSD-IAI team selected the Zambia Production, Finance and Improved Technology (PROFIT) project because it exemplifies the new generation of economic growth projects that USAID and other donors are currently undertaking and because it has the potential to generate information that could be used by

USAID/Zambia, other African USAID missions, USAID generally and other donors to inform decisions about the design of future projects.

ZAMBIAN CONTEXT

At independence in 1964, Zambia‘s per capita income was among the highest in Sub-Saharan Africa, owing largely to the development of copper mining. During the first three decades of independence, however, per capita income declined steadily as a result of falling copper prices, misguided public policies, poor resource management, periodic drought and heavy involvement in the freedom struggles of neighboring countries. According to World Bank figures, GDP per capita fell nearly 50% between 1965 and 1995, declining from $613 to $318 (expressed in 2000 USD).

In recent years, significant debt forgiveness, higher international copper prices and more favorable agricultural conditions have contributed to strong economic growth in Zambia. A poverty reduction and growth facility (PRGF) from the IMF in 2004-2007 and improved management of public finances helped to bring about this reversal. Zambia signed a follow-on agreement with the IMF in June 2008 to continue the PRGF, the primary objectives of which are to maintain macroeconomic stability and diversify the economy to reduce dependence on mining.

This evaluation of the PROFIT project is one of four major impact assessments that PSD-IAI has undertaken. These assessments have sought both to learn about the effectiveness of private sector development models and to improve understanding of how best to undertake impact assessments of economic growth projects. Publications summarizing lessons learned and providing guidance about future evaluations are available at microlinks.org.

12 FINAL REPORT

Privatization of the copper mines and high international copper prices also helped drive growth. Yet approximately half the population still lives in extreme poverty and wealth remains concentrated in a small segment of the population. HIV has had a devastating effect on Zambia, cutting population growth from 3.1% in the 1990s to 1.9% between 2002 and 2006. Youth is the fastest growing population segment; 45% of the population is under 15 years old.

Most Zambians work in agriculture, which is characterized by very low productivity and subsistence-oriented production. Less than half the potentially arable land is cultivated. Agriculture is dominated by maize, but in recent years production of cash crops such as cotton, tobacco, soya, vegetables and fresh flowers has increased. Transport costs are high because Zambia is landlocked and there are many structural weaknesses and inefficiencies in the transport network.

Smallholders occupy an important place (in terms of numbers if not in terms of productivity or purchasing power) in all three of the sectors selected for this study. They tend to be marginal producers working small plots of land or managing small herds with low levels of productivity (and in the case of cattle farmers, high rates of cattle morbidity and mortality). They have limited resources and lack access to formal financial services. They have few incentives to invest in commercial upgrading and use limited technology. They possess little market power and often sell outputs and purchased inputs under adverse market conditions and with limited market information.

ABOUT PROFIT

PROFIT began in 2005 with an initial funding level of $15 million, including $5 million for local grants.

The Cooperative League of the USA (CLUSA) implements the project on behalf of the United States

Agency for International Development (USAID). International Development Enterprises (IDE) and the

Emerging Markets Group (EMG) participate as sub-contractors.

The overarching goal of PROFIT is to increase multi-sector growth to ensure poverty reduction at the household level. PROFIT‘s activities aim to strengthen connections within selected value chains to increase the provision of inputs and services to farmers with the objective of improving productive output and quality, thereby increasing enterprise and household incomes. PROFIT works with lead firms and communities to develop agent networks to reach rural areas lacking sufficient supplies of inputs and services. This entails demonstrating the value of these inputs and services to rural consumers and helping lead firms shift from a high-margin, low-volume orientation to a structure that supports a low-margin, high-volume business model.

APPROACH

PROFIT uses an industry-based strategy. All facilitation activities that target individual enterprises are done with the aim of improving the overall functioning of the industry and aim to foster the development of commercial mechanisms to address critical production constraints. PROFIT uses minimal interventions and clear exit strategies to limit potential distortions, maximize leverage and increase the likelihood of sustainable impacts.

PROFIT‘s implementation activities are based on three tactical goals:

Improve inter-firm cooperation within the selected value chains.

Develop support markets of critically important services and products for the selected value chains.

PROFIT ZAMBIA IMPACT ASSESSMENT 13

Foster improvements in the non-policy environment that build credibility and confidence in market mechanisms.

PROFIT has taken a systemic approach to promoting pro-poor agricultural competitiveness. Its initial analysis of an industry‘s constraints to future competitiveness considered a broad range of market functions (core transactions, support functions and rules), market players (private, public, civil society) and the incentives and relationships that drive and sustain an industry upgrading strategy.

PROFIT sees itself as a facilitator of market system change – that is, an agent that stimulates change but does not become part of it. Economic pressures and cultural norms often result in conflicting economic and social incentives. It is the job of the market facilitator to help overcome these conflicting incentives by fostering new relationships, on-going innovation and enhanced benefits so that market actors behave in a way that makes the industry more competitive.

PROFIT aims to achieve changes in three systemic characteristics that are interrelated and crucial to an industry‘s ability to compete over time.

Benefits accrue in terms of incomes, social status and reduced risks. Benefits must be sufficient enough to provide incentives to change behaviors so that actors take on new risks, develop new relationships, change the nature of their commercial relationships and embrace learning and innovation as the basis for competition.

Relationships that are transparent, long-term and focused on industry-level goals are critical to an industry‘s ability to respond and adapt to changing demand. Incentives that foster win-win relationships enable industries to expand knowledge and skills.

Learning and innovation happen only when sufficient incentives are in place. When learning and innovation are an integral part of an industry‘s norms, that industry is more likely to be competitive over time.

IMPLEMENTATION PROCESS

The PROFIT implementation process focuses on achieving sustainable results. Sustainability requires behavioral change at multiple levels within an industry, including key supporting markets. In order to closely track progress toward these objectives, PROFIT developed a systematic activity cycle as a management tool, which improves their ability to target high-return investments and manage programmatic learning loops. This process has allowed PROFIT to determine where resources are needed to overcome obstacles or increase momentum. Below is a graphic summarizing the process flow, including the major learning loops:

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FIGURE 1: PROFIT APPROACH AND LEARNING LOOPS

Implementation Process Details

Phase I -- Sub-sector Selection

Stage I - Value Chain Potential and Constraints: The initial analysis of industry potential was based on assessing three criteria:

Growth potential – the ability to turn competitive advantage into competitiveness in the near, medium, and/or long term

Scale of results/impact –income gains, asset development, and sustainability at both the firm and industry levels

Industry leadership – interested and committed leadership that understands the key role that MSEs play and is willing to work together to address industry-wide constraints

PROFIT also used pilot projects to assess the potential of industries that do not have sufficient on-the-ground operations to effectively determine growth, scale and/or leadership potential.

Based on the initial analysis of potential or pilot, PROFIT determined whether the criteria indicated low, medium or high potential. If an industry showed a high degree of potential, PROFIT performed a more

Value Chain Potential and

Constraints Analysis Leveraging Analysis

Awareness Building and

Commercial Relationship

Targeting

Relationship Building and

Negotiation

Agreements/Contracts

Finalized and Signed

Transactions Initiated and

Monitored Expansion and Exit

Sub-selector Selection Phase

Exit Phase

F a c ilita tio n

P h a s e

Profit Learning Loops

PROFIT ZAMBIA IMPACT ASSESSMENT 15

detailed analysis that examined end market requirements, inter-firm cooperation and support markets to identify the critical industry- and enterprise-level constraints to becoming more competitive. This detailed analysis formed the basis of PROFIT‘s upgrading strategy for a selected industry.

Stage II – Analysis of Opportunities for Leverage: Once the critical systemic and enterprise-level constraints had been identified, PROFIT assessed specific actors, product/service markets and lead firms to identify where industry structure, social incentives and market forces provided an opportunity for project leverage. Lusaka and field staff worked together to appraise potential targets of intervention and to ground-truth initial findings. This analysis included determining the capacity of the MSEs, smallholders and lead firms to benefit from and effectively engage with PROFIT as well as market research to better understand the incentives, needs and commercial viability of key service and product relationships.

Phase II – Facilitation

Stage I - Awareness Building and Commercial Relationship Targeting: Following the identification of intervention targets, PROFIT began to engage in awareness building, self-selection mechanisms and initial introductions among key players. Awareness-building activities included meetings and events that allowed PROFIT staff to interact with commercial actors to inform and discuss opportunities and already available mechanisms to address constraints. Self-selection mechanisms included a range of specific actions that assessed interest and commitment to upgrading. PROFIT also facilitated initial meetings and discussions among key commercial players such as farmers, retailers, services providers and lead firms.

Stage II – Relationship Building and Negotiation: PROFIT facilitated more direct and intensive interactions among key actors in various relationships such as out-grower relationships, retailer-consumer, retailer-service provider and service provider-consumer. PROFIT assisted in moving these relationships from initial meetings to more formal structures such as agreements, transaction mechanisms and contracts.

Stage III – Agreements/ Contracts Finalized and Signed: Once specific actors agreed to move into a formal structure, PROFIT assisted in designing and mediating final negotiations. Formalization included contracts for veterinary services, buying mechanisms and contract farming.

Phase III -- Exit Phase

Stage I -- Transactions Initiated and Monitored: During this stage, PROFIT works to facilitate increasing volumes of transactions, effective resolution of disputes, increasing confidence in market mechanisms and new entrants, services and products. Activities include direct mediation, linking to third party mediation, training and upgrading services.

Stage II -- Expansion and Exit: As transactions increase in volume, PROFIT facilitates new entrants, organizing out-grower schemes, providing services and offering products. PROFIT exits specific relationships as soon as transactions become stable and re-occur on a regular basis. Broader involvement in a market or industry requires shifting to new relationships and focusing on higher-level constraints such as entry barriers.

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RESEARCH DESIGN AND

PROCESS

This impact assessment attempted to measure the results of project interventions in three sectors that involve large numbers of smallholders: retail distribution of agricultural inputs and services, beef and cotton. It used a longitudinal, quasi-experimental design implemented through a mixed-method

(quantitative plus qualitative) approach.

The quantitative part of the impact assessment included a baseline survey of 919 program clients and 620 non-clients conducted in August-September 2006 and a follow-up survey of the same clients and non-clients in November 2008. It also utilized a field assessment of farmer involvement with PROFIT undertaken in 2010 and related to the 2007-2008 growing season. The quantitative data gathering and analysis was complemented by qualitative research that consisted of in-depth key informant interviews and focus group discussions with selected value chain actors as part of both the baseline and the follow-up research.

EVALUABILITY ASSESSMENT

An evaluability assessment of PROFIT was conducted in November 2005. During this process, the evaluation team met with PROFIT staff members, representatives of organizations involved in the implementation of the project, survey research firms and USAID/Zambia staff in order to better understand the PROFIT project and the setting in which it is being implemented. Together with project staff, they selected the three areas of program activity to include in the impact assessment, constructed and verified causal models for each of these three areas and discussed the planning, design and uses of the impact assessment.

Input and service distribution at the retail level was seen as a novel activity with opportunities for learning that could be applied elsewhere. PROFIT planned to work with input dealers to facilitate the expansion and improvement of the input distribution network at the retail level. The project planned to promote the appointment of independent marketing agents and facilitate retailer training to help build their capacity to conduct business profitably with smallholders.

The beef and cotton sectors were chosen for inclusion in the study because they are activities that involve large numbers of smallholders (200-300 thousand in each case) and also because the casual models for

PROFIT‘s interventions were relatively well defined at the time.

Beef production had weak market linkages, was severely hampered by disease and needed substantial upgrading. Most small farmers used cattle more as a store of value than as a commercial product.

PROFIT‘s activity plan emphasized strengthening veterinary services, improving distribution of veterinary drugs and increasing market transparency.

For more information on the design of the impact assessment and baseline research findings, see DAI, “Assessing the Impact of

PROFIT Zambia in the Cotton, Beef Cattle and Retail Input Services Value Chains: Baseline Research Report.” May 2007.

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At the time of the evaluability assessment, cotton was seen as having good export potential and existing market linkages that could be further strengthened. PROFIT planned to work with lead firms, the

Conservation Farming…