Approaches to the privatization of fertilizer marketing in Africa

Agricultural marketing privatization has been a central feature of structural adjustment recommendations. This paper briefly analyses the main issues related to privatization in the fertilizer sector in Africa, reviews developments and examines possible reasons for the relatively slow progress to date. Con- straints to effective privatization are identified and policy changes and other reforms necessary if fertilizer marketing privatization is to succeed are proposed. Effective privatization will not be achieved without detailed planning and consideration of potential problems at an early stage.

Andrew Shepherd is a Marketing Econom- ist with the Marketing and Credit Service, Agricultural Services Division, Food and Agriculture Organization, Via delle Terme di Caracalla, 00100 Rome, Italy.

The views expressed here are the author’s and do not necessarily reflect those of the FAO.

‘See, for example, J. Habakkuk, ‘The en- trepreneur and economic development’, in Lectures on Economic Development, Uni- versity of Istanbul, 1985. ZE. Berg, ‘Obstacles to liberalizing agricultural markets in developing countries’, in D. Elz, ed, Agriculturaal Marketing Strategy and Pricing Policy, World Bank, 1987, pp 22-27. 3P. Daniel, ‘Structural adjustment and policy dialogue’, IDS Bulletin, Institute of De- velopment Studies, University of Sussex, Vol 17, No 2, 1986, pp 46-56.

Approaches to the privatization of fertilizer marketing in Africa

Andrew Shepherd

The liberalization of agricultural marketing forms a central plank of structural adjustment proposals which have been put before many African governments by the International Monetary Fund, the World Bank and leading donors. Such proposals embrace not only questions of pricing policy, subsidies and exchange rates but also call for a radical increase in the role of the private sector.

The belief that the encouragement of indigenous entrepreneurs can contribute to economic growth in developing countries is certainly not new.’ However, it is possible that successful implementation of privatization and other liberalization measures could now be jeopardized if attempts to persuade governments to undertake policy changes are not accompanied by detailed consideration of the numerous and complex issues involved.

Supporters of liberalization are expressing concern that it has spread rather slowly and, in some countries, appears to be losing momentum.2 This concern has led to a re-examination of the approach adopted and a realization that greater emphasis needs to be placed on the time needed to achieve structural adjustment and on the support that must be offered to market liberalization through a whole range of policy changes and institutional reforms. There is a growing understanding that there exist no universal presciptions, that policy reforms are more complex and time-consuming than originally expected and are unlikely to be effective unless governments participate in the process of policy review and formulation and that structural adjustment studies are unlikely to induce policy changes unless governments see the need and have the capacity to absorb and utilize their findings. As one commentator has observed, ‘comprehensiveness appears to be yielding to selectivity and “short, sharp shock” to a more sensitive approach to the sequencing of critical measures . .‘3

Against this background, this paper sets out to analyse the issues related to privatization in the area of fertilizer marketing. Privatization is defined as the process of development of sectoral activities by private individuals, companies and cooperatives acting on a competitive basis, to replace those formerly conducted by the state or by state-controlled bodies. While divestment of state-owned enterprises is one aspect of

0306-9192/89/020143-l 2$3.00 0 1989 Butterworth & Co (Publishers) Ltd 143

Approaches to the privatization of fertilizer marketing in Africu

“LandelI Mills Associates Ltd, Agricultural Marketing and Input Distribution Study: Final Report, July 1986. 5A study conducted by the International Fertilizer Development Center, 1986. ‘W. N’Diaye, ‘La levee des constraintes a la promotion de la competition dans le marche des enorais’, unoublished oaoer prepared for FAOIFIAC, i987. 7V.A. Kellv. Farmers’ Demand for Fertilizer in the Coriiext of Senegal’s New Agricultu- ral Policy, lnstitut Senegalais de Recher- ches Agricoles, 1986.

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privatization, the definition adopted here is much wider than that used in, for example, the UK or France where privatization commonly refers to the sale to private shareholders of state-owned assets. The paper reviews developments to date and examines possible reasons for the apparent lack of enthusiasm of many governments for fertilizer marketing privatization. Constraints to the effective implementation of privatization policies are identified and policy changes and institutional and other reforms necessary to enhance the chances of successful privatization are proposed.

Experience with fertilizer marketing privatization

In several countries detailed consideration has been given to the idea of fertilizer marketing privatization but little successful progress has been achieved. In Zambia, for example, a consultancy study in 1986 recommended a revision of the pricing system for fertilizer in order to encourage private sector involvement.4 This was followed, in early 1988, by an FAO-sponsored workshop on Fertilizer Marketing Issues, which arrived at similar conclusions. Although the private sector is, in theory, now allowed to handle fertilizer, the continued payment of subsidies only through the parastatal organization and cooperatives, together with inadequate marketing margins, means that the private sector is not allowed to compete on equal terms.

In Ghana a consultancy study considered four options for privatization to replace the present costly situation under which fertilizer is distributed by the Ministry of Agriculture.’ A phased approach, starting with retail-level privatization, moving to the wholesale level and, finally, privatizing the whole import and distribution process was recommended. It was proposed that retail-level privatization be introduced on a pilot basis in one region followed, if successful, by retail privatization throughout the country one year later. After some delay, a World Bank-funded team is now due to commence work in the country to implement the consultant’s proposals.

In Malawi there has been resistance to proposals to promote private sector involvement in fertilizer marketing, both within the government and in the parastatal sector, but a team of World Bank consultants is shortly expected to visit the country to advise on the best approach. Steps have already been taken to privatize grain marketing.

Senegal privatized fertilizer marketing in 1985. This was accompanied by other liberalization measures, including a reduction in fertilizer subsidies. The consequent increase in the price of fertilizer has led to declining demand, creating an unsuitable environment for private sector companies wishing to enter the market. Despite activities to identify appropriate companies, few have been tempted to become involved.6 Organizations who have taken up input distribution to date are primarily cooperatives, which continue to suffer many of the problems associated with government agencies.’

In Burkina Faso the government is stressing the need for caution over privatization, arguing that few traders have any knowledge of agriculture and are thus unable to provide appropriate extension advice or even the correct products to farmers.

In Gambia fertilizer marketing privatization was announced in 1986. Unfortunately, private traders have been reluctant to become too involved as they fear that the government may reintroduce price

FOOD POLICY May 1989


controls. The situation is further complicated by the fact that all imports have been aid supplies and by smuggling into neighbouring Senegal. A previous pilot-scale attempt in 1979 to involve village traders in fertilizer retailing foundered due to the lack of appropriate government support, the absence of incentives for participating traders and an ill-planned marketing strategy.s

In other West African countries, such as Cameroon and Nigeria, governments have announced their intention to privatize fertilizer marketing but, to date, little progess has been made.

‘Ministry of Agriculture, Gambia, Fertilizer Sub-Sector Paper - Marketing and Price Policy Analysis, PPMU Paper No 11, Ban- jul, January 1987. The government’s lack of support stemmed from the idea that access of the private sector to fertilizer would increase the level of smuggling. Traders also found the handling commis- sion inadequate to meet their costs. ‘FAO, Report of the Feasibility Study on Expanding the Provision of Agricultural ln- puts as Aid-in-Kind, Annex III, FAO, Rome, November 1987.

Resistance to policy changes

A common view amongst politicians, government officials, academics and others is that farmers are generally exploited by middlemen. Politicians and officials often remain keen to ‘solve’ perceived agricultural marketing problems through government intervention in the physical handling of produce. That this does not happen more often, particularly with the marketing of perishable produce, is perhaps testimony to the difficulties involved with such intervention rather than to a lack of political motivation. At lower levels local officials and agricultural extension workers often advise farmers that traders are cheating them, rarely with evidence to justify their allegations. It is perhaps unreason- able to expect that countries where distrust of traders and middlemen is common can suddenly embrace enthusiastically the cause of privatiza-

tion. Hostility to the private sector often occurs when traders and entrep-

reneurs come from one or two ethnic or non-indigenous groups. The fear of economic dominance by one group is one reason why state involvement in marketing became so widespread in the past, particularly in Africa, and overcoming this constraint will not be easy. With fertilizer, one approach at the import level may be for governments to establish joint ventures, either with overseas suppliers of fertilizer or with the non-indigenous or tribal traders. An alternative for some countries would be for the trading houses, which are often left over from the colonial era, to become involved. In Ghana, for example, traders have expressed a willingness to take over fertilizer importing, subject to certain safeguards regarding the future level of government involvement and regarding the adequacy of margins for profitable operations.

In many countries, particularly those with a low demand for fertilizer, it is not always clear whether there is a cadre of local entrepreneurs ready and able to take over from the state sector. The marketing of fertilizer is characterized by its seasonality, the bulkiness of the product and attendant storage requirements, relatively slow stock turnover and hence high financing charges and the need either to offer credit or to work closely with credit agencies. It is more cumbersome than fruit and vegetable trading or running a village retail store, both of which benefit from relatively rapid turnover and low capital and credit requirements. Traders already involved in these activities may be reluctant to make infrastructural and financial provision for fertilizer marketing as an additional activity, particularly where small profit margins make it difficult to accommodate the risk of unsold stocks.”

Many people benefit from existing marketing systems and conse- quently wish to retain the status quo. Such beneficiaries can include employees of parastatals and government officials worried about their

FOOD POLICY May 1989 145

Approuches IO the privatization of fertilizer mcrrketiq in Africrr

“N’Diaye, op tit, Ref 6. The price per kg of groundnut fertilizer has, as a result of subsidy reduction, risen from 25 CFA Francs in 1982/83 to 60 CFA Francs in 1986/87. The new mice. which still reore- sents a significant subsidy, has resulted in a marked decline in demand and this, combined with the inability of traders to operate within permitted margins, has meant that the privatized marketing system has not succeeded in attracting sufficient private sector involvement.

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employment prospects, but of more concern are those politicians and government officials who see the opportunity of advantage from state- controlled systems. In some countries cooperatives involved in fertilizer and produce marketing are so bound up in the political process that to remove their trading monopolies would inevitably weaken the politicians.

Against this seemingly discouraging background, supporters of privatization need to come up with persuasive arguments to convince governments that changes are both necessary and possible. The potential for private traders to perform the fertilizer marketing function more efficiently than state-controlled organizations needs to be addressed and the probable greater efficiency of the private sector balanced against real or perceived social disbenefits. It would appear necessary that future country-level studies go deeper than those that have hitherto been used to propose policy changes.

Government evaluation of privatization potential

Of crucial importance is the need, prior to privatization, for governments to demonstrate to their own satisfaction and to that of the private sector that private fertilizer marketing will justify both long-term support and investment. Governments frequently lack knowledge of the private sector and decisions in favour of market deregulation in areas other than fertilizer have been made with an imperfect understanding of that sector’s needs and potential to take over from the public sector. If the private sector has suffered from years of neglect and over-regulation and lacks basic infrastructure and management strength, privatization may result either in a service to the farmer far worse than that provided by the parastatal sector or in market domination by a few. Either result would only serve to justify those opposed to changes and lead to moves to reintroduce the old system.

Governments need to assess the capacity of the private sector to take over fertilizer marketing at import, wholesale and retail levels. Once it is established that a potential exists, the needs of the private sector in terms of infrastructure, finance, training and government services must be fully evaluated and the costs of providing such services offset against the assumed benefits resulting from privatization. Close liaison with the existing private sector must be achieved before decisions to go ahead with fertilizer privatization are made. In particular, it is necessary to obtain the agreement of a sufficiently large number of companies to enter the market, in order to ensure competition.

Subsidies and pricing policies

Many governments implement formal fertilizer subsidy schemes but often as important are the ‘hidden’ subsidies provided to parastatals and cooperatives when governments absorb trading losses. The removal or reduction of subsidies is usually central to market liberalization proposals. Unfortunately, such a move may reduce demand for fertilizer to levels at which the private sector finds little incentive to participate. Precisely this seems to have happened in Senegal.“’ In Ghana official subsidies presently represent 40% of the government’s selling price. It can be envisaged that if government plans to remove these subsidies by


Approaches to the privatization of fertilizer marketing itI A/rim

1990 were implemented, demand for fertilizer, already at low levels, would drop significantly, particularly amongst food crop producers. The situation here is further compounded by recent heavy devaluations of Ghana’s currency, an experience shared with others such as Tanzania and Sierra Leone. Where governments decide to retain subsidies they need to ask how these can be applied in the context of private sector market participation. If the prevailing belief is that private traders are exploiters, then payments of rebates to importers or wholesalers may lead to allegations of profiteering. If subsidies are to be provided then they must benefit all participants in the marketing system. As noted earlier, private traders are in theory allowed to market fertilizer in Zambia. However, subsidies for fertilizer wholesaling and retailing are made available only to Namboard and the Cooperative Unions, thus preventing the private sector from becoming involved. Where subsidies are retained under privatization, it is essential that they are paid promptly. The private sector cannot exist if it is dependent on rebates that are paid late or, indeed, not at all.

Together with subsidies, the aspect of fertilizer marketing pricing most criticized is that of pan-territorial pricing, which is seen as leading to an inefficient allocation of resources. A policy of uniform pricing throughout the country is probably incompatible with competitive marketing as it removes the incentive for traders to supply more remote areas. ” Governments wishing to pursue rural food security and other goals as well as privatization do, of course, have the option to subsidize traders supplying remote areas.

In theory, price and margin controls are unnecessary where there is a perfectly competitive marketing system. In practice, perfect competition may not be developed and governments, particularly those who are distrustful of the private sector, will wish to retain such controls. Where a system of pan-territorial prices is not followed, it is a complicated exercise to set prices. In Kenya, for example, maximum retail selling prices are calculated for 12 types of fertilizer at 42 different centres. There is also the problem of agreeing with the private sector on appropriate margins and realistic cost provisions. Recent reviews of costs and margins have noted that state marketing organizations are often unaware of the true costs associated with fertilizer marketing, having an imperfect knowledge of wastage levels and taking no account of the cost of capital. Losses that accrue from fertilizer trading are subsequently made good by government or are sometimes offset by profits in commodity trading.12 Thus a straight comparison of costs claimed by a parastatal organization or state-supported cooperative with

those required by the private sector under privatization may appear to put private traders in a bad light and reinforce government pre-

judices. The costs of operating capital and the need of private traders to

extend credit to farmers and other traders are often underestimated and not included in margin calculations. Where prices are controlled by governments, the margins accruing to the importer, wholesaler and retailer should take full account of their costs and provide necessary incentives to develop their businesses. At the retail level, in particular, flexibility must be permitted in view of the wide variations in distance of farmers and villages from regional centres. A possible approach is to control prices in regional capitals, leaving village traders free to fix retail prices. An alternative is to set maximum permitted prices that protect

“This appears to be the case in Nigeria where there has been a failure to encourage private sector participation beyond primary distribution points. Stockpiles of fertilizer have accumulated as state and local governments have been unable to mobilize transport to move fertilizer to rural areas. See F.S. Idachaba, ‘Marketing and pricing policy interventions in Nigeria’, paper presented at the FAO Expert Con- sultation on Agricultural Marketing In- terventions and Pricina Policies in Africa, Arusha, Tanzania, 1987. “A. Sheoherd and R. Coster. Fertilizer Marketins Costs and Margins in Develop- ing Countries, FAOIFIAC, Rome, 1987.


Approaches to the privatization of’ferlilirer markering in Africa

the farmer but are, at the same time, sufficiently high to permit competitive marketing in all areas.

Administered price changes should respond to world market price developments and changes in marketing costs. Unfortunately governments often hold fertilizer prices constant for a considerable period and then allow them to rise suddenly and sharply. In Zimbabwe, for example, no price rise was permitted to wholesalers/blenders between 1985 and 1987. Under such circumstances, when an increase is finally agreed it has to be a major one in order to compensate for losses in previous years. An even greater risk for the private sector is that governments may suddenly lose their commitment to price liberalization and order a drastic reduction in prices, leaving traders with large stocks to be sold at a loss.

Aid shipments and competitive marketing

Much fertilizer used in Africa is supplied on aid. The way in which aid supplies are introduced into the marketing system could determine whether moves to privatize are possible. Donors who prefer the simplicity of dealing with parastatals rather than the private sector perhaps unwittingly reinforce the reluctance of some countries to privatize. Aid supplies can also disrupt private sector marketing systems. Evidence for this concern comes from Kenya where donated fertilizer is supplied to the marketing system by allocation. In 1986, 48 organizations were allocated aid fertilizer by a Fertilizer Committee consisting of representatives of various government departments. Dis- tribution of fertilizer through such a large number of organizations might be thought to encourage competition but, in fact, has resulted in a number of problems. In particular, many companies receiving allocations have no history of involvement in fertilizer marketing and appear primarily interested in making quick profits by on-selling to plantations and other bulk buyers. Little incentive is provided for established wholesaling organizations to invest in new facilities and to develop their dealer networks, as they have no guarantee of future supply. Also, many companies who receive allocations fail to raise the necessary bank guarantees to permit them to lift the fertilizer from the port of Mombasa, so further disrupting marketing arrangements.

External observers of this system are generally agreed that the practice of fertilizer allocation militates against the development of effective wholesaling organizations. One alternative proposal is for aid consignments to be sold by tender while en route for Kenya, thus replacing allocation by competition and facilitating clearance from Mombasa. A different approach would be for aid donors to lodge foreign exchange with the Central Bank to permit importers to make commercial purchases. If allocation is to be retained, some system of pre-screening of dealers would certainly appear necessary.

Donors and governments should also consider the effect of supply interruptions on the efficient functioning of private marketing systems. Experience in a number of countries has been that fertilizer pledged by donors has often not been delivered or that delivery has been delayed. Delays have occurred due to minor disagreements between donors and the government over conditions attached to the aid, while sometimes donors have disrupted markets by supplying types and quantities of fertilizer in addition to those pledged.

148 FOOD POLICY May 1989

Approaches IO the privatization of fertilizer marketing in Africa

Credit arrangements

Procedures for disbursing credit to farmers could have an important bearing on the success or failure of privatization. To avoid leakage, banks prefer to deal directly with input suppliers, reimbursing them for goods supplied to farmers rather than providing farmers with cash to make their purchases. Thus they have a considerable amount of power in determining which retailers will be successful market participants. In Zimbabwe changes in disbursement procedures by the Agricultural Finance Corporation to permit farmers to nominate their own suppliers resulted in the cooperative share of the smallholder fertilizer market declining significantly as private suppliers were enabled to compete on equal terms. An essential precondition for privatization should thus be a willingness on the part of rural financial institutions to permit all bona fide retailers to supply farmers under credit arrangements.

A major hindrance to the development of private sector marketing is lack of finance, both for capital items such as stores and vehicles and for trading purposes. While private traders and village storekeepers can buy and sell agricultural produce and consumer goods with fairly minimal financing requirements, given the quick turnaround between purchase and sale which can be achieved, those distributing fertilizer usually need to tie up large sums in seasonal stocks several months before the sales period, particularly at the import and wholesale levels. Studies have shown that average fertilizer storage durations in some countries can be up to one year.‘” While privatization may lead to a reduction in storage time, logistical and other difficulties mean that significant reductions may be difficult to achieve.

With manufacturers or foreign suppliers of fertilizer unlikely to offer deferred payment to cover the needs of traders to hold fertilizer stocks and extend credit to other traders and farmers, the private sector must resort to the banking system. Unfortunately, banks are frequently reluctant to finance the trading sector, which often has few bankable securities. Moreover, commercial banks in developing countries are rarely attuned to the requirements of traders, particularly in those countries which have hitherto been dominated by parastatal marketing operations. Experience gained with financing manufacturing organizations or farmers is not necessarily applicable to the trading sector and thus moves to privatization need to be accompanied by the development of appropriate credit arrangements for traders. These would be characterized by an acknowledgement that traders may be unable to offer collateral, that loan durations need to be significant to permit build-up of stocks and development of infrastructure and that small-scale entrepreneurs are rarely skilled in small business techniques and, consequent- ly, require assistance and loan supervision.

“Ibid.


Foreign exchange provision

Promotion of competition in fertilizer importing is complicated by the fact that most countries now undergoing structural adjustment suffer chronic foreign exchange shortages. A few countries have introduced currency auctions but, in most, foreign exchange is allocated administra- tively. Administrative allocation does not encourage effective development of competitive marketing. An alternative to having several private sector importers, dependent on allocated foreign exchange, may be for

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Approaches lo the privatization oJJertilizer marketing itI AJrica

‘?bid. “‘An FAO study found the following complicated system operating in Zambia in 1985. ‘NAMBOARD floated tenders in May/June and bids were submitted in July/ August to the Central Supply and Tender Board. This Board then scrutinized bids before passing them on to the NAM- BOARD Purchasing Committee. This Committee selected suppliers and re- turned the selections to the Central Supply and Tender Board for approval. NAM- BOARD then placed orders after receiving the necessary foreign exchange allocation from the Bank of Zambia against import licences issued by the Ministry of Com- merce and Foreign Trade. This was a time-consuming system which delayed order placing by NAMBOARD until November/December, one year ahead of the time the fertilizer would be used’ (FAO/ FIAC, Fertilizer Marketing in Zambia, Rome, 1986). 15H. Ogola, ‘Promotion of private sector participation in fertilizer marketing in Afri- ca’, in Promoting Compefifion in Ferfilizer Marketing in Africa, FAO/FIAC, Rome, 1987.

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a government agency to retain responsibility for procurement, auction- ing the fertilizer when it is still at sea. This would have the added advantage for smaller countries of facilitating economies of scale in procurement.

If the private sector has the option of applying for foreign exchange to import fertilizer direct then it must not be hampered by the slow and excessively bureaucratic procedures which can exacerbate liquidity problems. Such procedures presently cause difficulties for state- controlled importers.14 Private sector importers would be as powerless to overcome delays in ministries and central banks as are parastatals. However, parastatals, subsidized by governments, can absorb the resulting costs associated with importing stocks too late for the season; for the private sector such a practice would lead at best to a reluctance to import fertilizer in following years and, at worst, to bankruptcy.

Support from government during and after privatization

For the private sector to be prepared to invest and assume long-term risk it has to be convinced that it enjoys full government support and that there will be policy continuity. Such a conviction is unlikely to be developed easily in countries with a history of hostility to the private sector and governments will thus need to work to improve communica- tion between public and private sectors. One approach to achieve this aim is for the private sector to form a Fertilizer Dealers’ Association. It is perhaps unrealistic to expect small retailers to become members but wholesalers and importers could certainly benefit from a pressure group able both to represent their views to government and to act as a channel for government communications with the private sector. Formal liaison with other relevant organizations could be achieved through a national Fertilizer Committee with membership drawn from government, private sector, banks and transport agencies. Such a committee could be charged with coordinating imports, particularly in relation to aid supplies, agreeing on demand forecasts, advising on manpower training and financial requirements and ensuring that sufficient transport is available. ‘s

To develop the confidence of the private sector, governments need to demonstrate full commitment to privatization. Half-hearted policy reforms which permit the retention of unnecessary controls (eg dealer licensing), the continuation of price controls that do not allow the private sector to make reasonable profits, the operation of competing and subsidized government enterprises, and the failure to divest parastatal infrastructure are unlikely to fill the private sector with enthusiasm for long-term investment.

Entrepreneurs cannot be fully trained in institutions. Nevertheless, the fact that the majority of smaller traders know relatively little of small business techniques and how they can be acquired and applied is a potential handicap to effective privatization. Here again training facilities, where available, are normally orientated more to small-scale industries than to traders. The problem is to organize appropriate training. Governments are not best equipped to provide it, given the residual fear in the private sector that close contact with government may lead to falling foul of various rules and regulations and of the tax authorities. Additionally, training by civil servants who are often poorly paid and who may not themselves have had first-hand experience of


Approaches IO the privatization of fertilizer marketing itI Africa

entrepreneurial activities may be counter-productive. A preferred approach would be for such services to be provided by independent, national, non-governmental organizations. International and bilateral aid agencies seeking to encourage privatization should consider the merits of assisting the development of such organizations.

Multilateral and bilateral technical assistance agencies, together with national associations such as the Fertilizer Association of India, have for many years offered international training in fertilizer marketing and logistics. The results of such training have in some cases been relatively limited, in part at least because the parastatal working environment has not given those trained the scope to implement what they have learned. If privatization of the fertilizer sector does take off, organizations offering training will have to re-examine their methods. No longer will it be simply possible to hold regional and sub-regional seminars and invite the marketing manager of each fertilizer parastatal. With privatization, the number of potential trainees will grow and training activities will have to be focused at the national level. More long-term activities, such as fertilizer retailer training projects, may be necessary.

In countries with parastatal marketing systems, sales promotion and advice to consumers are relatively rare. Neither the retail sector nor the extension service is geared to provide the farmer with necessary guidance. Privatization of fertilizer marketing would, however, offer scope for traders to become actively involved in advising farmers on appropriate types of fertilizer for their needs, on methods of application and on fertilizer economics. Such an evolution can be fostered through the provision of technical training facilities for marketing operators and through the development of a competitive environment which provides traders with the necessary incentives to develop their activities. Training material for traders is made available by the FAO and others. At the retail level, however, the use of such material is often inhibited by a lack of funds for translation into the vernacular.

Under privatization it would remain necessary for the government to continue to monitor the marketing system. One approach is for an Inputs Unit to be established within the Ministry of Agriculture to coordinate all aspects of fertilizer and other inputs. However, a unit of this type can only be truly effective in promoting competitive marketing when there is close liaison between all relevant ministries and institutions. Where linkages with the Central Bank, the Ministry of Commerce and the Ministry of Cooperatives are poor, such as unit would be largely

impotent. Marketing activities to be undertaken by an Inputs Unit could

include:

0 the monitoring of supply, demand and stocks and preparation of demand forecasts;

0 the monitoring of the privatization process to identify delays in implementation and planning errors, so that remedial measures can be applied;

0 supervision and monitoring of staff and capital divestment by the former parastatals;

0 advising the government on necessary legislative changes to further promote competition;

0 carefully examining marketing systems to ensure privatization does not result in the establishment of new, private sector monopolies;

0 promoting ways of maximizing competition in all sectors.


Approuches 10 the privutization of fertilizer rnarkeling in Africa

16E. Reusse, ‘Liberalization and agricultural marketing - recent causes and effects in Third World economies’, food Policy, Vol 12, No 4, November 1987, pp 299- 317.

Planning for effective privatization

In identifying the difficulties that may occur if countries decide to change their fertilizer marketing policies, note should be taken of privatization experience in other sectors, such as export marketing and grain marketing. Changes in these areas in Africa have proceeded more rapidly than in the fertilizer sector but, overall, the impact of privatization has not been extensive. This is, in part, due to overhasty attempts at implementation and a lack of coordination between the government and the private sector. Often, changes have been introduced without their precise legal nature being clarified and developments have been further hindered by resistance from various departments and institutions and a lack of a well-thought-through implementation programme.‘” Some- times government commitment to the new policy has not been wholehearted and the private sector has delayed becoming involved as a consequence. Where parastatal organizations have been abolished this may have occurred in theory rather than in practice, as management invents a new mandate to justify continued existence. Divestment of state-owned infrastructure has been slow, leaving governments the option of returning to the parastatal form of marketing with limited capital investment.

Governments who wish to privatize the fertilizer sector are therefore presented with many potential problems. Not only do they have to be aware of the social implications inherent in privatization but they must also consider how to overcome the vested interests which benefit from the existing system. Not only do they have to avoid the many pitfalls which have been experienced with privatization in other sectors but they also have to overcome the specific problems associated with fertilizer.

Effective implementation of privatization will not be achieved through overnight decisions; detailed planning, consideration of potential problems at an early stage and close liaison with the private sector from the start are essential.

Appendix Checklist for fertilizer marketing privatization

Policy area

1. Economic and social

Possible problems

Inadequate government knowledge of private sector

Insufficient private traders to take

over fertilizer marketing

Potential traders from ethnic or non- indigenous groups

Vested interests who benefit from status quo

Action required

Detailed pre-privatization studies and

improved liaison with the private sec-

tor

Potential traders identified prior to

privatization; plans for policy changes prepared on basis of private sector strengths; training programmes

Establishment of joint ventures; use of trading houses; training in entrep- reneurship for all sectors of popula- tion

Detailed planning of implementation; monitoring of parastatal divestment; appropriate legislation



Policy area

2. Subsidy and pricing policy

3. Aid fertilizer

4. Phasing-in of changes

5. Credit

6. Foreign exchange


Possible problems

Political desire for ‘equality’ deemed incompatible with privatization

Removal of subsidies reduces demand for fertilizer and makes private sector reluctant to become involved

Subsidies disrupt privatization process if applied selectively

Pan-territorial pricing offers no incentive for traders to supply remote areas

Government-controlled prices and margins may offer insufficient incentives to private sector

Governments may seek to use price control for political reasons, thus jeopardizing private sector

Aid shipments may disrupt privatized marketing system

Subsidized parastatals may operate in competition with unsubsidized private traders

Overnight changes from state to private system difficult to achieve

Inadequate credit arrangements for traders

Farmer credit procedures work against effective privatization

Delays in allocating foreign exchange affect profitability of private traders

Action required

Promotion of effective competition to ensure few companies do not exploit monopoly position; appropriate pricing policies

Phased reduction of subsidies; detailed studies of profitability of fertilizer marketing with various demand assumptions

Ensure that all participants in the marketing system have access to subsidized fertilizer

If price controls are deemed necessary they should be applied only to regional centres, leaving village traders free to charge economic prices

Detailed examination of marketing costs necessary, paying particular attention to financing charges and cost of extending credit

Where prices are controlled they should be revised at least annually; close liaison to be maintained between governments and private sector

Aid consignments to be supplied to private traders by auction rather than allocation; aid donors to lodge foreign exchange with Central Bank as alternative to aid-in-kind; close liaison between government, private sector and donors to avoid market dis- ruption

Avoid parallel marketing systems; if continued parastatal operation is necessary ensure that no actitivies are subsidized if subsidies are not also available to private sector

Consider sector-by-sector approach starting, if possible, with retail sector. Alternatively, where effective cooperative retailers exist encourage competitive wholesalers to supply cooperatives while at the same time developing private retail networks

Encourage banks to develop appropriate credit facilities for traders with appropriate loan durations and collateral arrangements

Ensure banks prepared to permit ~11 retailers to supply farmers with fertilizer under credit arrangements

Reduce bureaucratic procedures to a minimum; if possible, reject allocation in favour of competitive bidding

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Approaches lo the privatization us fertilizer marketing in Africcr

Policy area Possible problems

7. Government support for privatiza- Lack of trust between the private sec-

tion tor and government with no guarantee of policy continuity

Potential fertilizer traders poorly trained in business techniques, fertilizer logistics and fertilizer promotion

Lack of monitoring of privatization process. Lack of information on fertilizer demand, supply and stocks

Poor infrastructure inhibits efficient functioning of private sector

Action required

Establish formal liaison through a Fer- tilizer Committee to discuss problems; encourage private sector to form Fer- tilizer Dealers’ Association or to work through Chamber of Commerce; remove all unnecessary controls on private sector to encourage confidence

Introduce appropriate business training, preferably by NGOs; encourage aid donors to support such training; redesign fertilizer marketing training to take account of needs of private sector: encourage private wholesalers and retailers to take an active role in fertilizer promotion

Establish Inputs Unit in Ministry of Agriculture with linkages with other appropriate agencies to monitor marketing system, advise government on necessary legislative revision and promote competition

Greater attention to road mainte- nance; government promotion of private sector investment; divestment of parastatal assets to private sector


Documents

Approaches to the privatization of fertilizer marketing in Africa