FEATURE: Promote enabling environment for Agribusiness: World Bank
THIMPHU (Kuensel/ANN) - A strong agribusiness sector is a crucial catalyst in transforming the economy from primarily agrarian to an industrial society.
To do so, Bhutanese agriculture must be pulled into global value chains and attract private investment, according to a recent policy note titled “harnessing spatial opportunities in agriculture for economic transformation.”
Agribusiness, it states can drive improvements in agriculture by creating and harnessing the demand for products of commercial agriculture.
However, the sector is facing low level of sales growth, labour productivity, innovation and financing. The report points out several key deficiencies in creating an enabling environment and access to market.
While agribusinesses generally receives good amount of government support for trade-related procedures like export permits and phytosanitary certification, the sector’s perceive biggest obstacles from access to finance, tax rates and informal competitors.
It was stated that current loan products from the Bhutan Development Bank (BDB) are biased toward cooperative ownership, which hinders access for many agribusinesses that are owned by private individuals.
The World Bank also found that agribusinesses in Bhutan make much less use of information and communication technologies (ICTs) than businesses in other sectors and are half as likely to innovate as firms in other sectors.
However. It was also highlighted that agribusinesses are mostly rural-based and depend less on imported inputs compared to other non-agricultural sectors. These characteristics, according to the World Bank imply that developing the agribusiness sector has potentially much larger impact on inclusive growth compared to other sectors.
“Bhutan has a legacy of public investments in state-owned enterprises (SOEs) in priority sectors where the private sector is perceived as lagging,” the policy note stated. In fact the government has already invested in areas such as processing, marketing, and export of agricultural products.
For instance, state enterprises like the Food Corporation of Bhutan Ltd, Bhutan Agro Industries Ltd, Bhutan Livestock Development Corporation Ltd. and Bhutan Development Bank have both public and private mandates. Farm Machinery Corporation Ltd. (FMCL) which is mostly engaged providing in farm machinery services also engages in trading and contract farming, the Druk Seed Corporation provides for seeds, and Druk Holding and Investments owns Kofuku International Limited, a dairy processing plant.
Against this backdrop, the World Bank’s policy note pointed out that subsidies to farmers are biased toward production, while public spending is diverted to these SOEs, which crowd out private agribusiness.
Spending on agricultural development has declined overall, falling from 9 percent of total expenditures in 1981– 1986 to 5.5 percent in 2008–2013.
The report also pointed out that many activities in the national budget focus on supporting upstream production rather than on adding value downstream in value chains. For example, in 2014, the Ministry of Agriculture and Forests (MoAF) allocated 65 percent of its main activity budget to road and irrigation construction, while only 2 percent was allocated to market sheds and collection centers.
Public subsidies also usually tend to be crop-specific and compromise the drive to diversify. They further deter private investment in agricultural support services such as seed companies, fertilizer importers, and distributors.
“Some well-intended government programs may have had unintended consequences. For example, Farm Shops are discouraging the development of rural enterprises, and FMCL may displace private sector providers of farm machinery,” the policy note stated.
Development of integrated value chains is limited by factors such as poor storage and transport infrastructure and weak services markets. The lack of storage and processing facilities results in high post-harvest losses.
It was pointed out that Bhutan has one of the highest costs in the world for export freight forwarding at USD 2,577 per container. In addition it takes considerable time to haul goods along mountainous routes and to clear customs, increasing cost of delivering to the market.
“The development of closer links between agribusiness and the export trade is limited by high transport costs, difficulty in accessing markets, and the lack of foreign investment,” it stated.
The report also mentioned that a small number of high-value crops dominate agricultural exports. Further, most of these high-value exports are grown in a small number of locations around Thimphu and Paro and the southern border districts.
However, there are opportunities for Bhutan since it is in a free trade area with India, providing duty-free access to imports from and exports to India. Although domestic producers are exposed to competition from Indian producers, the policy note stated that application of ICT and other innovations in agribusiness would give an advantage to Bhutan.
The World Bank also stated that the recent change in India’s tax regime affects the relative and overall competitiveness of Bhutan’s agriculture sector. This impact, the report states could be negated by the adoption of Bhutan’s own GST-equivalent.
The policy note recommends that to maximise opportunities, the government should adopt a “hub” or “cluster” approach to support the transforming commercially oriented agriculture sector.
To unleash the growth of private agribusinesses, the World Bank recommends enacting several policy reforms that cut-across hub-specific investments. For example, the efficiency of the Bhutan Agriculture and Food Regulatory Authority could be increased. BDB, according to the World Bank must develop a loan product to increase farm mechanization, and to crowd-in private sector finance. Establishment of an investment promotion agency, is expected to encourage innovation and investment.
However, prior to setting up an investment promotion agency and conducting outreach activities, the FDI division is encouraged to work closely with other ministries to identify high-potential sectors and to craft an investment promotion strategy.
“An important element of this strategy must be aimed at reorienting SOEs toward a focus on core public roles, liberate their commercial potential, and create space for competition,” the report stated.