CASE STUDY
Case Study: Financing Water for Productive Use CARE Per Av. General Santa Cruz N 659, Jess Mara Telfono: (511) 417 1100 Fax: (511) 433 4753 www.care.org,pe Lima - Per
Autors Alejandro Rojas Sarapura Sustainable Economic Development Program Coordinator. CARE Per Julio Nishikawa Menacho Regional Coordinator. CARE PERU Ayacucho Christian Pennotti Technical Advisor, Learning and Impact. Economic Development Unit. CARE USA Sybil Chidiac Learning and Impact Technical Advisor. Save Up Program. CARE USA This report was prepared by CARE with support from USAID and the AED FIELD Program. The report does not necessarily reflect the views of USAID or AED. Legal Deposit made in the National Library of Peru N 2010-03227 1st edition: March 2010 Printing: 500 copies Design and Printing: SINCO Editores S.A.C. Jr. Huaraz 449 - Brena Phone: 433-5974 sincoeditores@yahoo.com Printed in Peru, March 2010
Table of Contents
INTRODUCTION PROJECT DESCRIPTION THE OPPORTUNITY
7 9 10 10 11 12 12 14
18 22 28 35 36 38 39
Introduction
The need to pursue development strategies that simultaneously contribute to economic growth, the reduction of poverty and the restoration of the global environment has never been more critical. The Millennium Development Goals, signed in September 2000, established two targets for the year 2015: a 50 percent reduction in global poverty and a reversal of the loss of biodiversity.1 In addition to setting targets for the reduction of greenhouse gas emissions, the Kyoto Protocol raised global recognition of the need to rapidly improve environmental practices in order to sustain the planet.2 The continuing drought, influenced mainly by the effects of global climate change, to which can be added the inefficient use of irrigation water that is typical of the traditional (gravity) irrigation system, is generating losses of water during the processes of channeling and distribution, as well as soil loss by erosion, thus causing substantial declines in agricultural productivity, which is having a negative impact on the profitability and competitiveness of agriculture in the rural highlands of the country. Therefore, to improve the competitiveness of any agricultural production system, one of the viable alternatives becomes the use and implementation of technified irrigation systems in its different forms, such as drip, sprinkler, exudation, multi-gate tubes, micro-sprinklers, etc., and implementing simple and inexpensive techniques for gathering, distribution and application of water in the field. However, the acquisition of this equipment remains nearly impossible for rural producers in the highlands, especially for those living in poverty, due to the high costs and lack of financial products that facilitate access to them. In this context, CARE implemented the Financing Water for Productive Use pilot to test a partnership approach that brought together microfinance institutions,
1 2
irrigation technology companies, local government offices, small producers and traders in a series of relationships that improved water usage, increased farmer incomes and demonstrated opportunities for the local government to scale similar initiatives. At the end of the project, the families increased their sales per hectare from S/.2,251 to S/.7,966 and from S/.7,123 to S/.32,034 in peas and avocados, respectively. The productivity also increased by 160% and 79% for peas and avocados, respectively. Finally, the project demonstrated the need to evaluate the loans for technified irrigation not in isolation, but as part of a value chain articulated with the market. That is, evaluate a loan more for its cash flow, regardless of the social and economic status of the producing family. This case study provides an overview of the project experience and links to further information to guide other agencies pursuing similar initiatives.
CASE STUDY
PROJECT DESCRIPTION
At the beginning of the project, the first thing done was a field study. On the basis of this, a strategy was outlined that brought us success by placing value on those key factors collected from related experiences, such as irrigation and inclusive microfinance. Prior to the operation of the project, the most appropriate productive chains were identified and selected, then the stakeholders and partners were mapped and agreements signed with partners, loan products and then the process of disseminating information on the initiative to producers were developed and finally, new business persons and leaders with whom to start the project were identified. Initially, CARE Peru offered much support to the first producers who showed interest. When evidence of success was shown, not only the producers, but also the roles of the supporting players were becoming clarified and everyone was engaging more in the services they provide. Loan analysts fulfilled their roles better without CARE, the private firm (Tecsagro) added training activities in the process of installation, operation and maintenance, the DPA was more interested in strengthening the productive organizations and integrating them into more competitive dynamics, a growing interest of a larger number of producers was observed in taking loans to finance their irrigation systems. Finally, the team was concerned with leaving explicit evidence through the systematization as a prerequisite for political advocacy.
Inter-American Development Bank, IDB Country Strategy with Peru 2007-2011. See: https://www.cia.gov/library/publications/the-world-factbook/print/pe.html IDB, 2006. Nota Tcnica Sector Educacin, Nota Tcnica Sector Agua y Saneamiento; Notas Tcnicas Sector Salud. http://www.regionayacucho.gob.pe/portal
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Environmental context
Deforestation and rapid tropical glacial retreat two distinct but interrelated challenges threaten the future productivity of the Peruvian highlands. The glacier that provides much of Huanta and Ayacuchos water has retreated at a rate of 200 meters over the past 10 years, with experts predicting that all Peruvian glaciers below 5500 meters will disappear by 2015.7. For years, regional and municipal governments have worked with communities, NGOs, wateruser associations and international donors to build a series of canals to enable farmers to improve their productivity and maximize the limited water supply. These irrigation canals, however, serve only 30% of the arable land in the Sierra (approximately 400,000 hectares) and improved farm-level irrigation, such as drip systems and sprinklers, service less than 5 percent of this area,8 and 9The result is both low productivity in non-irrigated areas and massive water waste in areas with access (limited to four hours per month) to irrigation but low-tech approaches like flooding. In the Sierra, firewood is the principle cooking fuel. Consequently, rampant deforestation is a scourge of the region. This particular form of environmental degradation coupled with glacial retreat have marked the lands in the Peruvian Sierra with increased forest disturbance and clearance for the 2004-2005 year.10 In Ayacucho, deforestation is concentrated in the VRAE, the Ene and Aprurimac River valleys found in the northern jungle portion of the department. Deforestation is not as acute in the highlands where there have been strong reforestation programs. Ayacucho suffers from critically high levels of deforestation where trees are felled to make room for illegal coca crops and to pursue informal mining and logging.
7 8
See: http://news.bbc.co.uk/1/hi/world/americas/4720621.stm The phrase improved farm-level irrigation is used in this report to represent the Spanish term riego tecnificado. It refers to systems that enable producers to improve water usage and availability on their land by linking private irrigation solutions, consisting of small reservoirs, drip systems and sprinklers, into larger public irrigation canals. World Bank, Project Appraisal Document, Appraisal Stage, Report No. AB3809. 3/17/08. See: http://news.mongabay.com/2007/0809-peru.html
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things, coordinating and supporting value chain development. DPAMINAG currently works across 12 value chains and maintains an office in each of Ayacuchos 11 provinces. x The National Sub-sector Irrigation Program: A national program implemented with support from the World Bank and the Japanese Bank for International Cooperation and operated by MINAG, the Programa Subsectorial de Irrigaciones (PSI) leads national efforts to increase the profitability of agribusiness through improvements in the efficiency of water usage for productive purposes through improved irrigation systems. PSI established its first office in Ayacucho in 2007. Tecsagro: A private Peruvian company established in 2004, Tecsagro has a presence in 12 regions across the country and provides a range of adaptable products and services focused on improved the efficient use of water for both both consumption and irrigation. A smaller actor in the water technology sector, Tecsagro sees servicing the MSME market as a strategic niche opportunity as well as a means of incorporating social responsibility into its work. The company is currently in the process of opening a branch office in Ayacucho.
The projects innovation was its ability to engage all key stakeholders and outline a sustainable and mutually beneficial way forward. Though there is a long history of collaboration between small producers and the Ayacucho regional government on water issues, to this point no activity had successfully drawn the private sector into those efforts to enhance access to improved farm-level irrigation systems. The resulting trust and clarity among the regional government, community leaders, financial institutions and the private sector technology service provider have planted the seeds for a larger and more locally-driven process. Specific areas of innovation include: 1. 2. Creation of and improved access to term-finance products for small producers. Enhanced access to and use of improved farm-level irrigation systems for small producers.
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3. 4.
Increased interest among regional buyers in products produced on pilot farms. Development of clear roles for each stakeholder and a clearly articulated process for collaboration.
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Step 3
Activity Evaluate whether the primary infrastructure can support the project In the Tambillo community, a 2007 USAID project constructed a canal that provided 1,000 users across three different communities, access to productive water. This initiative implemented by the regional government is one of many that allowed improved irrigation systems to be used in farming communities, such as Tambillo. Indeed, this canal provided the basic infrastructure that enabled producers to irrigate their potato, purple corn, and snow pea crops. Producers successfully leveraged the existing infrastructure to improve their farm-level irrigation systems.
Lead PSI
Support CARE
Ensure there is adequate water in the area to support the DPA agriculture intervention Water supply is one of the key challenges facing the region. Learning how much water was available and recognizing its supply sources was a crucial first step conducted by the DPA and CARE.
CARE
Selection of participating producers Producers that participated in the initiative were all volunteers. The selection of the producers was vital to the success of the initiative. The basic selection criteria for the producers was the following: Existence of large-scale irrigation infrastructure and sufficient availability of water. Producers operating or able to operate as part of a profitable production chain. Clean credit history.
CARE
Organized productores
Verification the individual producers credit histories (Peru has a national credit agency) The financial institutions collected the producers national ID cards, which they scanned to conduct a credit check to ensure that the producers did not have any outstanding negative credit. Because Peru has a national credit agency, this was a streamlined process. The credit check did not serve or replace the guarantee but rather ensured institutional confidence in the project.
Financial Institutions
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Step 7
Activity
Lead
Development of studies outlining irrigation needs and most CARE efficient structure
In order to access a loan from any of the three participating financial institutions, the producers had to engage the CARE irrigation specialist and the DPA Mesa Technica to assess their lands irrigation needs and determine if a system would be feasible. To complete these technical studies, irrigation specialist for CARE Peru used tapes, a GPS, and AutoCAD, a computer technical drawing tool used to design the water system more efficiently. He is the specialist who assesses the irrigation requirements and determines if your system is viable. The technical group was no longer involved in the evaluation, but occasionally the DPA extension agent was. In order to carry out these technical studies, the specialists used tape measures, a GPS instrument, and AutoCAD, a software drawing device to design the most efficient water system. This software enables the producer to see a highly detailed plan for developing the actual irrigation system. However, both a technical service provider and an engineer are necessary to ensure that the systems are installed correctly. Tescagro is willing to support these study-related activities for land plots of four or more hectares. An important consideration for the sustainability of this system is identifying who has the resources and incentives to carry out the studies. In the case of CARE Perus work in Ayacucho, if a major irrigation canal is under consideration, the state will conduct this work. For smaller plots, the state may do it, particularly if farmers are organized. Alternatively, NGOs or the technology service provider may be willing to do it, although the latter only if producers guarantee they will purchase the technology in advance. Who could or will conduct the studies varies based on the actors involved. The regional and local governments can also undertake the studies, especially when it benefits the entire community or organized group. Who would conduct the studies varied, depending on the actors involved.
Development of credit application After completing their technical files, the producers had to submit other documents that supported their credit application to the financial institution: a land title and an attestation that demonstrated the lands productivity which required a signature by a community leader. Approximately, 70% of the producers did not have titles for their land. To circumvent this hurdle, the village elders would sign a declaration, affirming that the producer had worked the land for many years. Caja Rural and EDYFICAR adjusted their criteria in order develop loan products for these producers lacking a title. Agrobanco could not extend loans without titles.
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Step 9
Activity
Lead
Support
MFI credit officer conducts field visit to check income, as- Financial CARE sets, land and market potential. Institutions An analyst from the financial institutions visited the producers to verify all the data on their credit application. CARE Peru supported both the financial institutions and the farmers by helping to verify the producers creditworthiness, supporting market linkages, providing training in negotiation skills and helping to finalize loan applications. In the exiting phase of the project, CARE is working with the financial institutions to identify an approach that would not rely as heavily on NGO assistance to farmers and FIs in order to execute these agreements.
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Approval/ Release of Credit by the microfinance institu- Financial Tecsation Institugro tions Once the credit was approved, the producer was allowed to visit the agriculture input supplier to purchase the necessary equipment and begin installation. Producers engage the irrigation-system-supply company Producers Tecsagro, In this pilot, the producers never received the loan amounts CARE cash equivalent. Rather, producers purchased their irrigation systems, and Tescagro received the first 50% of the equipment cost. Within five days, Tescagro employees arrived to install the system, along with the CARE irrigation specialist to verify their work. Tescagro received the remaining half of the equipment cost from the financial institution once it was deemed to be installed correctly and working well. Initially Tescagro was to receive half of the money directly, and the producer was to receive the other half. However, the financial institutions decided against this approach because prior evidence had pointed to delays. In past experiences, evidence showed that producers convinced of the projects benefits took out loans and moved forward with the installation of the irrigation equipment. Those that were unconvinced did not take out a loan and moved slowly on steps 6 -9. Training on sustainable use and management of the irriga- CARE tion systems After the irrigation system had been installed by Tescagro, the input supplier, CARE Peru and the PSI provided ongoing technical assistance in the use and maintenance of the systems. Tecsagro
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Step 13
Activity Building the producers business skills for market access During the project implementation, CARE also worked to further develop the business skills of the producers. The avocado producers in Huanta that are linked to the Mesa Tecnica had the opportunity to learn about seeking better markets and prices, as well as learning how to better organize as producers. The pea producers from Uchuypampa received training in how to improve their marketing practices, and some have even signed contracts with buyers.
Lead CARE
Support DPA
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Financial ProducInstituers CARE believes that developing a healthy credit culture is a protions cess, and this project contributed to this process. The producers involved in this pilot attended financial-institution sponsored workshops on the meaning of credit. Due in large part to these talks, the producers repaid their loans on time. The credit culture established through this project for agricultural purposes is sustainable if following conditions are in place: When there is an existing business or productive activity with an assured market When producers are willing to invest and access the funding they need to improve their economic situation When financial institutions have more confidence in small producers and develop appropriate loan products When there is no corruption in the financial system
THE RESULTS
After some initial false starts, the project worked for 18 months to refine and operationalize the process above yielding the following results:
1.
Economic gains
Due to improved crop growth and quality, producers involved in the project enjoyed immediate economic benefits and increased their outputs for both domestic and international markets. After the installation of the irrigation systems, producers sold Hass avocados for 2.80 soles/ kilo and Huerte avocados for 2.40 soles/ kilo. The prices for these two varieties of avocado prior to the projects implementation were 2.60 soles/kilo and 2.20 soles/kilo respectively. Due to 18
increased productivity and quality, sales values have been extraordinary, with increments of 253.79 and 349.74% for the pea and avocado crops, respectively. Moreover, producers sold their avocado on the national market for 5 soles/ kilo as compared to 4.80 soles/ kilo the year before. Using the new irrigation systems, producers increased their incomes by an average of 20 soles or 6 percent.
Figure 1 Evolution of the sales of peas (Soles/ha) Figure 2 Evolution of the sales of avocados (Soles/ha)
4% 7,965.91
Incremento: 350%
2,251.61 Sales volume (base line) (soles/ha) Sales volume (final evaluation) (soles/ha)
7,122.89 Sales volume (base line) (soles/ha) Sales volume (final evaluation) (soles/ha)
10,000 5,000 0
Volu (evaluaci
The rapid and abundant growth of their fields prompted many producers to hire help in the cultivation of their crops. Each hectare of productive land required 15 people to the help with the cultivation. Not only did the producers increase their own incomes, they also provided employment opportunities to members of their community.
2.
Due to regular access to water, the crop yield for the 37 producers involved in the project significantly increased. With the installation of the irrigation systems, the producers were able to irrigate all portions of their fields, and set timers to efficiently manage water usage. In both the avocado and pea value chains, this led to more than 100 percent production increases. As illustrated by Figures 3 and 4 below, in peas, farmers realized yields of 7,906.05 Kg/Ha on irrigated land versus 3,044.90 Kg/Ha on non-irrigated land. Similarly, avocado farmers realized yields of 13,135.44 Kg/Ha on irrigated land versus 7,305 Kg/Ha on non-irrigated land. These increases provided farmers with significant income gains while also establishing a dramatic example of the opportunity represented by improving on-farm irrigation. 19
3,044.90
7,350.00
3.
The project initially outlined the involvement of 50 producers; yet, only 37 accessed credit to purchase irrigation equipment. This unexpectedly low level of involvement stemmed from producers indecision and risk averion; they feared the impact loan repayment might have on their respective incomes. However, after seeing their neighbors improved crop yields and increased incomes, these formerly reluctant producers are now seeking opportunities to access credit to purchase irrigation systems. Additionally, avocado producers in the in the Secellas community of Huanta District, who took out loans to finance a large reservoir, are now exploring options to charge their originally hesitant neighbors access to the reliable water source.
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4.
Since the inception of the project, 50 clients have received support in the completion of irrigation technical studies thanks to CARE and its irrigations specialist. Of these 50 clients, 37 have currently accessed loans (4 from Los Libertadores 31 from Edyficar and 2 from Agrobanco), and nine more producers have had their files approved and are awaiting loans from Edyficar. All 37 of the producers who obtained loans participated in a series of training workshops on the installation, operation and maintenance of the irrigation systems. Five workshops focused on the sprinkler-irrigation systems installation process, followed by eight workshops about the systems operation, maintenance, and future management. Aimed primarily at credit users, these workshops were conducted openly and were free to any community member interested in learning about the benefits of sprinkler irrigation. To date, the systems purchased and installed have worked flawlessly. Tecsagro has proved adept in modifying product design to the needs of target small producers, and has been very willing and able to work on plots as little as four acres. Often these small plots are divided among multiple producers.
5.
The project initiated four training and information events on loan management and credit culture aimed at avocado producers from the district of Luricocha and pea producers from the District of Tambillo. A total of 69 people participated in these events, and the three financial institutions involved in the project-- Edyficar, Agrobanco and Los Libertadores Rural Savings and Loan-- presented their microfinance products, credit terms and management approaches. The 100 % loan repayment from the 37 producers was undoubtedly the most significant achievement of this initiative. None of the payments arrived late, and the producers assumed total responsibility for the loans. Indeed, the producers never felt as though the government would ultimately forgive the debt or heal any responsibility for loan repayment.
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6.
To scale up the project, two teaching guides were prepared for use by PSI and municipal governments. One guide illustrated the benefits of sprinkler irrigation, as well as the main components of the system. The second guide concerned the operation and maintenance of the pressurized irrigation system.
LESSONS LEARNED
As with any new initiative, there are many lessons to take away in order to ensure future scale up and replication. In addition, lessons learned point to weaknesses that need strengthening or paths for advocacy efforts. Lessons from the Productive Water pilot are outlined below and divided into five sections.
Financial institutions:
1. Barriers to agriculture lending are high and likely to remain
Though three financial institutions participated the pilot initiative, they were- and still remain-- very hesitant to continue with the agriculture loan program. It is important to note that the pilot included several risk-reducing initiatives, including the establishment of a guarantee fund with Edyficar, the preparation of business plans, and the completion of technical studies on the land proposed for the irrigation systems. Despite these seeming guarantors, risk aversion on the part of the financial institutions was and continues to be a major hurdle. Thus from a sustainability perspective, overcoming financial-institution risk aversion is the most challenging aspect of this project. In order to access credit producers had to complete a technical study of their land, had to be organized into a producer association, and had to present their past history devotion to improving their specific value chain through increased crop production. In addition, the financial institutions required land titles and a demonstrated credit history. Without these two key documents, financing was much more difficult for a small producer to obtain. The following criteria were obligatory for a small farmer to access credit: a. b. Organized association Land Title 22
c. d. e. f. g. h.
Demonstrated Household income Participation in viable VC Demonstrated past productivity National ID card for each HH member Documentation that you work as a farmer Business plan demonstrated opportunity Larger individual plots or linked plots
Financial institutions are more willing to provide small producers with financial services if there is a guarantee fund. The existence of a guarantee fund, however, does not automatically translate to loan approval. Indeed, the financial institutions that were interviewed repeated that the farmers increased credit worthiness was due to a combination of factors: a guarantee fund (in the case of Edyficar), CAREs capacity-building work with the small producers, and business plans articulating the viability of increasing crop output using irrigation systems.
2.
Social mission and operational structure are likely to affect a productive partnership with a financial institution
If financial institutions are highly decentralized and if they are guided by a prominent social mission, they are more willing to develop and pilot an appropriate loan product. For example, EDYFICAR, a large but decentralized MFI with a clearly articulated social mission, extended 31 loans to a variety of small producers. In contrast, Agrobanco, a centralized and national agricultural bank, was not as flexible to extend what it deemed to be risky loans to small producers.
3.
Financial institutions decided to reduce operational costs and risk by transferring funds directly into the irrigation-technology supplier accounts. This decision not only benefited the financial institutions but was advantageous for the small producers, as well. Indeed, it significantly reduced externalities, such as transportation costs, and therefore, increased the possibility for small-producer participation.
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4.
Government has a strong role to play and has incentives for supporting similar initiatives
The task of the government in an initiative like Financing Water is crucial because it defines the actors roles and responsibilities. Once government is involved, other actors feel obligated to commit to their mandate. A key aspect of cultivating a credit culture is educating loan recipients and the general community about loan products and the responsibilities of their repayment. This message is especially important because the Peruvian government has forgiven loans, undermining true understanding of the meaning of credit.
NGOs:
1. An NGOs role is to serve as mediator and convener
NGOs are powerful convening actors for new initiatives. Additionally, they serve as mediators, effectively mitigating constraints that might otherwise prevent project implementation. An NGO, however, should not completely remove the risk of participation for any party. Acting in the capacity of convener and mediator, the NGO should assist in clarifying the implementing actors roles from the beginning. Defining these roles initially and continually reviewing them through a participatory process can ensure sustainability. Having key actors articulate and internalize their agreed upon roles will only allow for further sustainable actions.
2.
Identify and target early adopters to avoid lost opportunities and investments
Understanding the reasons why some producers are likely to be early adopters of the irrigation technology while others are prone to be late adopters should be examined further and better understood. Designing a tiered-engagement intervention, one which recognizes the early/late adopter phenomenon, would lead to improved outcomes. Under the Financing Water pilot, early efforts to work with 20 small avocado producers overlooked this issue, conducting a technical study on the producers behalf based on their apparent commitment to working with the project. When the costs of building the reservoir were subsequently revealed, however, 13 of the producers backed out. The remaining 7 forged ahead but took on additional financial risks to do so and the project had expended precious resources on a group that was not ready to 24
invest in the systems. By requiring a higher level of initial investment on the part of farmers or using other qualitative techniques to ensure commitment to the process, projects can improve results and reduce unproductive investments. If the intervention is successful, late adopters will certainly come on board. In the Peru example, the 13 farmers that exited before investing are now paying the other 7 to access their reservoir and also exploring credit opportunities to build their own.
3.
Taking a broad lens to the questions, who is a stakeholder and who has an incentive to support or thwart this effort from the projects onset is likely to lead to more sustainable project approaches and systems. By establishing a larger pool of potential partnerships, projects have increased opportunities to match the needs of target beneficiaries with those of others or, in other words, finding win-win opportunities. They are also able to identify opportunities to go beyond one-off deals and catalyze systemic changes. By analyzing the opportunities, activities and incentives of various stakeholders, NGOs are better positioned to facilitated changes or improvements in the system. In CAREs experience in Peru, the project worked to understand the motivations of a range of actors and pursued partnerships where they found the most interest in working together and investing. A number of these proved to be unsustainable but, by taking a broad lens from the start, the project had approached enough actors to be able to adapt over time.
Government actors:
1. Use of a Technical Coordinator
The Mesa Tecnica-- under the direction of the regional governments DPA-can play a crucial role in the understanding and dissemination of key information around existing and potential markets; different input suppliers; and government initiatives. Additionally, it can help in value-chain coordination and technical support specific to the producers value chain. The Mesa Tecnicas support in the areas of market development and the cultivation of business skills is especially important because not all producers have innate business acumen.
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2.
In the Financing Water Initiative case, the various actors roles were nebulous from the onset. However, a collective understanding of the respective mandates of government institutions or agencies can improve their ability to engage in aligned opportunities that surface through NGOs or other stakeholders. It is also important to note that government agencies with specific mandates can play a supporting or lead role. For example, including PSI as an actor provided the CARE technical-irrigation specialist support in implementing the technical studies. Moreover, PSIs national experience with improved irrigation systems and its specific technical capabilities added expertise to the studies and augmented regional knowledge.
3.
Composed of 12 agencies located throughout Ayacucho, the DPAs decentralized structure allows for focused attention to specific crops or products in distinct areas. Each agency works with a value chain specific to a geographic area. These value chains include: tara, quinoa, native potatoes, milk products, avocado, livestock, citrus fruit, bananas, cacao, and coffee. This decentralized structure provides the opportunity to gain highly specialized knowledge in and an in-depth understanding of a variety of value chain systems.
Producers:
1. Producers are just as risk adverse as a financial institution and confidence must be instilled for small producer credit acquisition
Even when provided with technical support and the opportunity to improve their irrigation methods through an appropriate loan product, producers remain hesitant to access credit. Experience from the Water Financing Initiative demonstrated that it was beneficial to identify a producer-leader. As an early adopter of the irrigation technology, the producer-leader would serve a role model for his fellow producers. His improved crop yields and subsequent increases in profit would instill greater confidence and encourage more producer participation, as well. As the experience of a producer-leader illustrates, many producers must see [something] to believe it. Because they lacked evidence that sprinklers and 26
reservoirs would increase their crop yield, the producers were reluctant to take out a loan in order to invest in the unfamiliar technologies. However, the involvement of an agronomist and a technical irrigation specialist in the development of personalized business plans assuaged the producers fears. Indeed, these experts presence confirmed the validity and the profitability of the new irrigation systems, which engendered the producers confidence. Additionally, the personalized business plans gave the producers a sense ownership in their loans and pride in their investments.
2.
This pilot highlighted the advantages of integrating existing infrastructure. The regional government had already constructed water channels and was in the process of building more. The producers and other stakeholders were able to surmount the challenge of water access by taking advantage of the infrastructure provided by another stakeholder. Involving multiple stakeholdersin this case the regional governmenthelped to overcome the potentially significant challenge of a main water connection and ultimately allowed the producers to successfully irrigate their crops.
3.
The extreme poor are unlikely to directly participate in an initiative like Financing Water because they lack the assets required to access credit. However, their participation in productive value chains should not be discounted. Producers able to invest in improved irrigation can provide employment for the extreme poor. With the extra income generating from improved crop yields, these producers can hire the extreme poor to help in the fields and collect the harvest. As described, the extreme poor are included in productive value chains. However, their rather indirect role raises important questions: 1.) How can the extreme poor be better included in an initiative like Productive Water given its focused on productive and profitable value chains? 2.) How does credit, a critical component of the Productive Water Initiative, apply to the extreme poor? 3.) How is it possible to prove to financial institutions that individuals (those not poor, poor, and extremely poor) are engaged in a profitable value chain? What kind of approach is needed? 27
An answer to Question 3 will engender more trust in the producers repayment ability and thus make the financial institutions more willing to invest in them with appropriate loan products.
2.
Not all producers need the same irrigation system to improve their crops. A smaller firmespecially on pursuing a growth strategy is more likely to be willing and able to design a specific product. CAREs experience with Tescagro is illustrative: The Company had not previously operated in Ayacucho, but took advantage of the project to expand operations into the region.
3.
It is important to work with a private sector actor who is willing and able to undertake some responsibility in educating target clients about the products value and use. This type of participation, coupled with post-installation technical support, created a winning client-outreach/marketing plan for Tescagro (the input supplier), the producers, and CARE (the coordinating partner).
RECOMMENDATIONS
The following represent both general recommendations for similar initiatives aiming to go to scale and project-specific recommendations which were developed during the research phase of this case study. They are presented here to illustrate general points. 28
1.
Ensure your project has an effective understanding of the value chains in which you are working. This understanding should begin at the level of the input and support-services suppliers, and continue through to the final consumer. This understanding is critical not only for the success of the project at hand, but also to ensure that the intervention uses scarce resources as strategically as possible. In the CARE Productive Water pilot, the team sought to achieve this market understanding through an initial market assessment and subsequently through close coordination with the DPA, which consistently tracks value chain opportunities across the region and serves as a market-information hub. This approach ensured the intervention was closely aligned with prevailing market needs and allowed the project team to focus on its areas of expertise working with producers, stakeholder engagement and irrigation system design. Looking forward, however, concerns loom about the ability of the target beneficiaries to understand and adapt to emerging and future changes in end-market demands and trends. Similarly, there are concerns about a transition to scale. Indeed two questions arise: one about which actors will drive the projects momentum and a second about the potential consequences of doubling regional production without a greater depth of engagement with other actors in the value chain and an understanding of end-market demands and trends. Recognizing this, CARE Peru should consider pursuing the following activities: x Conduct-- or facilitate an alternative partners management-- of a series of meetings with buyers operating in the region. This would enable the project to better understand the perspective and motivations of these actors, as well as their perception of market trends. It may also illuminate opportunities to facilitate buyer participation in improving producer access to improved farm-level irrigation systems.11 Engage other organizations that provide information and other services to value-chain actors in order to improve competitiveness and the overall market understanding of the producers. (I.e. Industry associations and initiatives such as AgriNegcios Peru - www.agrinegciosperu.org,)
For instance by providing producer groups with credit guarantees, value chain finance or by developing some form of mutually-beneficial agreement with producers and other key stakeholders.
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2.
For an exit strategy to succeed, all stakeholders must recognize and prepare for the facilitators exit as well as take ownership in roles they have, both incentive and the capacity to fulfill. Having demonstrated that producers are willing and able to repay and that, through improved on-farm irrigation, they are able to double their yields, CARE Perus focus has switched to ensuring these demonstrations translate into sustainable access to finance and irrigation systems equipment for producers. Achieving this will require a bit of rapid adjustment on the part of CARE Peru. Though the project team has long envisioned their exit strategy, its vision has not necessarily been shared equally with all stakeholders at this point. The rationale for this has been that it was unclear exactly which roles various actors would and could take on given the limited experience of all stakeholders in working on this challenge. Presenting potential stakeholders with typecast roles at the outset of the project was likely to deepen their sense of insecurity rather entice them to participate. Having overcome this issue, the established roles must now be validated, and the stakeholders must recognize and move to fill the service gaps that will remain when CARE retreats. As an initial step toward achieving its exit strategy, CARE should: Facilitate or convene a stakeholders meeting at which CARE Peru and the other actors can collectively map their current roles and responsibilities in order to continue with the pilot. They should identify and develop plans to address gaps that will emerge with CAREs exit, as well. The meeting may also provide opportunities to further fortify existing relationships and roles of these stakeholders, demonstrating the strength of what has been achieved to date. Support DPA in establishing an irrigation mesa technica. DPA has already voiced a plan to create such an office, but as of yet, is unclear on what that officer would do. CARE Peru should guide DPA as it makes this decision. As the self-identified information hub in this system, DPA could play a strong and ongoing role in drawing together relevant actors around issues of improved on-farm irrigation, taking on many of CAREs current responsibilities. 30
3.
As a relatively small effort to go the last mile in connecting a public resource to private resources, the Productive Water pilot team has consistently worked with larger-scale national and regional initiatives, including the national investment plan and the regional irrigation systems development project. This has planted the seeds for further scaling the project, while also improving CAREs ability to affect future policy to ensure that benefits reach down to the extreme poor and other highly marginalized groups-- a core element of the organizations mission. In the coming nine months, recommendations in line with this principle include: x Identify the benchmarks set in the forthcoming PSI Sierra Project and ensure that the individuals CARE has supported are prepared to participate at that level. Here it is important to recognize that the new initiative gives preferential treatment to larger groups of water users in order to the lower the cost per beneficiary.
4.
Though initially conceived as an 18-month initiative, the CARE Peru Productive Water pilot took nearly three years to execute. A general recommendation is that projects should be realistic about how long a pilot of this degree of complexity will take. Though it was possible to accurately predict the amount of time required to complete many of the technical aspects of the project (land surveys, systems installation, etc) at its root, this pilot-and other enterprise development projects using a facilitation approachwas about behavior change across a diverse range of stakeholders, almost all of whom were beyond CARE Perus authority. Though behavior change can be stimulated in various ways, setting realistic timelines for a projects ability to affect long-entrenched behaviors and ways of operating is vital for accurate timing, and ultimately, project success. While of the project activities were predictable behavior change, regardless of scale, is not a quick process. Projects and donors should recognize this and ensure project timelines include enough space experiment, validate and integrate.
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A related issue that affected the overall length of the pilot was the timing of activity introduction. CARE began operating shortly after the rainy season. Inducing producers to invest in irrigation systems during a period of abundant water, somewhat unsurprisingly, led to more limited interest than would be likely in the lead up to or during the dry season. As with all agricultural initiatives, getting the timing in sync with the seasons can have a substantial impact on the projects potential for success.
5.
Focus on quick wins but do not lose sight the ultimate target
A core element of CARE USA and consequently CARE Perus strategy is to improve the lives of women and the disadvantaged. Yet women represented only 20 percent of project participants, and the extreme poor were not represented at all. These statistics reflect the projects strategic necessity to focus on influencers and those who could act quickly and successfully on the opportunity to work with CARE on the pilot. Traditional roles meant this strategy pushed CARE toward working with slightly better off, largely male producers that held positions of respect and influence in their communities. Doing otherwise would likely have led to lower initial numbers of successful participants and would have reduced the demand the pilot created among producers that had not yet acquired an improved on-farm irrigation system. Despite the general absence of women and the extreme poor, the project has provided an opportunity to continually reinforce that the notion that improving the lives of women and the high disadvantaged are the ultimate goals of CAREs actions and that until these are met, the participating stakeholders have not truly succeeded. Similarly, for other initiatives working on behalf of the extreme poor or other highly disadvantaged groups, introducing a new technology may often require that initial efforts target beneficiaries that are better off and more capable of affecting their peers. However, this does not preclude the implementer from constantly reinforcing the ultimate objective and from building ownership of this concept among other stakeholders.
6.
Partner selection is one of the most critical aspects of a development activity, and attempts to improve access to term finance for producers are no different. In identifying partners for the Productive Water pilot, the CARE Peru team 32
was challenged to ensure secure and dedicated partners without committing to take on larger shares of projects responsibilities and thus undermine the sustainability of the model. It was apparent during this process that some financial institutions and some producer groups were moderately interested but had substantial reservations. The CARE Peru team decided to work with these actors anyway, and in more than one instance, invested substantial time and resources into partnerships that were unlikely to succeed from the outset, and ultimately, did not. The recommendation that emerges from this experience is that partner selection criteria be further developed and rigorously adhered to. For financial institutions, this might include assurances that the branch engaged in the activity is willing and able to design a new product and offer it on a pilot basis. For producers, it may include a minor co-investment in each step of the intervention process in order to clearly demonstrate commitment. These criteria should also incorporate parameters for walking away from a potential partnership. Developing, refining, and using such criteria will ensure that cost effectiveness and sustainability remain cornerstones of any intervention.
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CARE Per
CARE Peru, an affiliate of CARE USA, has been working in the country since 1970 and in the target region, Ayacucho, since 1995. CARE Peru interventions focus on economic development, maternal health and climate change. Given the relatively limited amount of official development assistance directed to Peru and due to the countrys own increasing resources and capacity, the CARE Peru strategy is to leverage its experiences across the country to affect local, regional and national policy. This action to advocacy approach includes engagement at all levels of government. Within Ayacucho, CARE Peru has an existing portfolio of five distinct economic development initiatives, of which the Productive Water pilot is one (see text box). The project builds off earlier experiences in Ayacucho, enhancing the highly profitable guinea pig production chain, collaborating with Frito Lay to develop a contract-farming scheme and partnering with a range of stakeholders to increase access to potable water in the region. Financing Water Project Role: CARE was the initiator of the Productive Water pilot project. In this role, the organization worked to engage and support all other partners and, through a combination of facilitation and direct technical assistance, develop the model and move the project forward. The ability to effectively balance the risks and concerns of this diverse array of partners was a key element to the projects overall achievements. Link: www.care.org.pe.
Financial institutions
EDYFICAR
Financiera
EDYFICAR
With a focus on micro-entrepreneurs and small businesses, the EDYFICAR mission is to provide financial services to people with few economic resources and thus contribute to improvements in their quality of life. The institution was established as an EDPYME (Entidad de Desarrollo y de la Pequea y Micro Empresa)12 with support from CARE Peru in 1997, and transformed into Financiera EDYFICAR, a publicly traded, non-bank financial institution in 2008. It has been operating in Ayacucho since 2002. The Product Water pilot represented one of a number of EDYFICARs initial forays into rural and agricultural lending. EDYFICARs mission, combined with the latitude provided to the branch manager to test this product and the flexibility demonstrated from the outset, solidified the institutions place as a partner from the start. Link: www.EDYFICAR.com.pe. Financing Water Project Role: Financiera EDYFICAR designed and piloted a new agricultural loan product that enabled farmers to access the credit necessary to purchase and install irrigation systems for their farms. The product EDYFICAR developed offers eight- to nine- month loans of up to $1500 with a three-month grace period after which payments are required on a monthly basis. With the support of a guarantee fund from CARE, the loan was offered at a 2.5% monthly interest rate. The rate will be raised to 3% as the guarantee fund is phased out. EDYFICARs willingness to place trust in the process and its flexibility in adapting its traditional loan products to the needs of the initiative were vital to the projects success and served as a demonstration for partners added later in the process.
Los Libertadores
CAJA
Established in 1994 by a group of agricultural producers, merchants, and small enterprises, Caja Rural Los Liberatordes is a private, financial company. The enter12
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prise has five operating branches in Aycucho and offers a range of savings and credit products that are focused on meeting the needs of low-income clients in both rural and urban areas. Caja Rural Los Libertadores presence in the region and its mandate to meet the needs of the rural poor fit well with the projects objectives. Its subsequent willingness to work collaboratively with the project to develop a new financial product made it a strong partner, as did its ability to offer this product without the necessity of a guarantee fund establishing a separate model for financing productive water use. Financing Water Project Role: Caja Rural Los Libertadores designed and piloted a new agricultural loan product that enabled farmers to access the credit necessary to purchase and install irrigation systems for their farms. The product developed offers loans of up to $670 at a 2.7% monthly interest rate and a six-month grace period. Loans are repaid in full at the end of the six-month period. Los Libertadores willingness to place trust in the process and its flexibility in adapting their traditional loan products to the needs of the initiative were vital to the projects success. Link: www.libercaja.com.
Agrobanco
Agrobanco is a national, public agriculture bank with a branch in Ayacucho. The institution offers both direct and indirect credit designed to improve access to credit among micro, small, and medium enterprises. Direct credit, along with technical support is provided to producer groups able to demonstrate profitable integration within an agriculture, livestock or other-agribusiness value chain. To reach microenterprises, Agrobanco commonly provides lines of credit to other financial intermediaries (banks, cajas rurales and municipal governments and EDPYMES), which are then lent to microenterprises engaged in agricultural value chains. Financing Water Project Role: Although initially seen as a strong potential partner.due to a high degree of risk aversion and centralized decision making process, during the pilot it became apparent that Agrobanco was unable to adapt its traditional lending methodology to the majority of the producers the intervention aimied to
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serve. As a result, Agrobancos role was limited to providing two loans to clients with larger plots of land and resources, both of whom had already met Agrobancos lending criteria. Link: www.agrobanco.com.pe. Public sector
The Directorate of Agrarian Promotion in the Ministry of Agriculture (DPAMINAG) is a regional-government office responsible for, among other things, coordinating and supporting value chain development. DPA-MINAG currently works across 12 value chains and has offices in each of Ayacuchos 11 provinces. The office fields proposals from local, municipal government to conduct agriculture-related studies, which if approved, are funded through the national public investment fund (Sistema National de Inversiones Publicas or SNIP). This process allows DPA to establish and maintain a regional understanding of both the opportunities and the constraints inherent in improving agriculture productivity and value chain development in the region. As the leading governmental institution mandated to improve agricultural production and competitiveness in the region, engaging DPA was never in question on the part of the project team. The question was one of developing the most appropriate role through mutual consultation. DPAs eagerness to be engaged in the process particularly once it had begun to show some resultswas and is critical to scaling the initiative. Financing Water Project Role: DPA-MINAGs principle contribution to the projects success was its role in convening Mesas Technicas. These stakeholder roundtables (convened by regional governments throughout Peru) helped to identify and develop approaches to overcoming constraints in high-potential value chains. In addition to bringing actors together, the Mesa Technicas serve as a key avenue through which market information is shared with actors up and down the vaule chain. Link: www.regionayacucho.gob.pe.
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A national program implemented with support from the World Bank and the Japanese Bank for International Cooperation and operated by MINAG, the Programa Subsectorial de Irrigaciones (PSI) leads national efforts to increase the profitability of agribusiness through improvements in efficient water usage for productive purposes through improved irrigation systems. PSI was established in 2005, at least in part to address past failures in irrigation schemes, which were traditionally developed and executed at the regional level, without the benefit of nation-wide experiences upon which to draw. The initial focus of PSI was limited to the coastal areas of the country, though it has since expanded, establishing an office in Ayacucho in 2007. A scaled up presence, titled PSI Sierra, is currently being planned in collaboration with the World Bank. Link: www.psi.gob.pe. PSI entered the region in 2007 after the project had been initiated. However, their presence provided the opportunity to engage a national-level entity in developing and further financing local infrastructure. Thus, the decision to reach out to the program was instinctive. The resulting partnership has been mutually fruitful, as PSI will play a key role in the pilots further development, and has already begun doing so by reviewing the proposals of regional governments. Financing Water Project Role: PSIs principle role in this pilot was to review farmer business and irrigation plans and subsequently approve the conduct of technical studies. In addition, the pilot served as an opportunity for the regional PSI representative to identify modalities through which it could effectively work with the farmers in the Sierra. Private sector Tecsagro Tecsagro is a private, Peruvian company established in 2004. The enterprise has a presence in 12 regions across Peru and promotes innovative technology use, principally focused on improved access to potable water and irrigation systems. A smaller actor in the water technology sector, Tecsagro sees servicing the MSME market as a strategic-niche opportunity, as well as a means of incorporating social responsibil-
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ity into its work. The company is currently in the process of opening a branch office in Ayacucho. Tecsagros alignment with the objectives of the project, demonstrated past experience trying to serve this population, and vast array of highly adaptable solutions made them the most appropriate irrigation technology with which to partner. Financing Water Project Role: Following a competitive bidding process run by CARE Peru, Tecsagro was selected as the projects irrigation-systems supply partner. Under the Productive Water pilot, Tecsagro worked closely with the CARE Peru, various financial institutions, and farmers associations to develop memoranda of understandings, tailor mutually-beneficial financial products, provide some technical training to farmers and procure and install working irrigation systems based on studies developed by CARE Peru agricultural engineers. Link: www.tecsagro.com.
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Acronyms
x x x x x x x x x x x x x x
GDP: NGO: VRAE: DPA: MINAG: PSI: MIPYME: USAID: DNI: GPS: MFI: VC: COFIDE:
Gross Domestic Product Non-Governmental Organization Apurmac and Ene River Valley Directorate of Agrarian Promotion Peruvian Ministry of Agriculture Subsectoral Irrigation Program Micro, Small and Medium-sized Enterprise The United States Agency for International Development National Identity Document Global Positioning System Microfinance Institutions Value Chain Development Finance Corporation S.A.