Timely and reliable transportation of cash crops from smallholders and small commercial farmers to local agroprocessing facilities is a key constraint on agricultural growth. It may well be in the commercial interests of agroprocessing owners (public or private) to contribute to the development of this infrastructure, as well as in the interests of the producers themselves. 4.2.1 Kakira Outgrowers Rural Development Fund (KORD), Uganda
The relationship between the donor-supported KORD, sugar cane outgrowers and the Kakira Sugar Works (KSW) in Uganda is one example where interests have aligned to support an innovative PPP arrangement for rural road maintenance.
The KSW processes sugar cane grown locally and exports throughout East Africa. Two hundred thousand people live within 25 km of KSW, including a group of 3 600 outgrowers who supply sugar cane on a contract basis to the milling company103. Main roads in the region are generally provided for and maintained by Government. The Government has allowed the KSW (presumably through a concession arrangement, although this is not verified) to construct 200 km of “murram” feeder roads (non-tarmacked mud road) to enable the delivery of sugar cane from outgrowers to its mill. With the number of growers anticipated to rise to 6 000 in the next few years, there is a need both for capital investment in new feeder roads and funds to maintain the existing network, which KSW can no longer afford to maintain alone.
The KORD has been established as a not-for-profit infrastructure financing and maintenance services management company. Initial capital has been provided in the form of a grant from the KSW, and maintenance work is supported by contributions from outgrowers and the employee farmers of the KSW on a unit price of sugar cane sold or delivered to the processing mill. The KORD is not a conventional PPP, but acts as a manager of infrastructure
financing and maintenance services. It is also not an infrastructure development company, in that it has no capital of its own to invest and carries no equity.
The KORD undertakes two levels of road infrastructure maintenance: (i) full maintenance – upgrading of roads currently impassable by sugar cane truck; and (ii) partial maintenance – prolonging the life of the existing passable roads, e.g. though respreading of existing surface material and “spot“ remediation. Total annual maintenance costs for the 200 km of existing road network in the 25 km zone are anticipated at US$175 000. The KORD procures contractors to undertake the maintenance work on a competitive basis and leases heavy equipment. An anticipated US$260 000 capital is needed to construct 100 km of new feeder road, which the KORD will need to raise as debt or grants.
The KORD also supports other strategic infrastructure and rural development needs. Priority infrastructure projects identified for funding in 2007 and 2008 included microfinance for outgrowers, upgrading of ten farm roads, seven classrooms and a vehicle fuel station. 4.2.2 Outgrowers Road Financing and Services Management Fund: model components
The KORD arrangement has been used below to develop a model of a road infrastructure financing and services management fund in the context of an agroprocessor’s outgrowers’ programme (Table 4.2).
Table 4.2 Outgrowers’ Road Financing and Services Management Fund: model components104
PPP component Characteristics
Strategic purpose Overcome the infrastructure constraints for outgrowers to supply cash crops to
a local processing facility in a timely manner with improved certainty of supply; and improve access for farmers direct to local market towns and various public services, e.g. education and healthcare.
Infrastructure coordination
In addition to road construction and maintenance, other infrastructure projects critical to improving the competitiveness of the value chain are facilitated by the Fund, e.g. health care, strategic location of a fuel station, classroom construction.
Organization As part of improving the competitiveness of the value chain for the cash
crops, an infrastructure financing and maintenance service fund is established, mandated to facilitate investment in new rural roads and to rehabilitate the existing network.
• The Fund is incorporated as a not-for-profit company limited by guarantee. • The Fund has board members comprising farmer representatives and
representatives from the processing facility.
• The functions of the Fund are to (i) identify road maintenance and construction priorities; (ii) manage the financing thereof; (iii) provide project management of maintenance and construction activities, including procurement through competitive bidding.
• The Fund is supported by the local growers’ association, which provides nominal financial contributions.
• Prospect of local government using the Fund to channel public investment into new roads and contributing to maintenance.
PPP component Characteristics
Resourcing Initial financing of the Fund is from debt and grants raised from, inter alia: the
processing facility (e.g. the KSW contributed a 25 percent grant), interest on microfinance or other indirect financing (e.g. the KORD anticipates 10 percent interest repayments from microfinance to outgrower farmers), commercial financial institutions or development finance institutions (as debt), donors or local government (e.g. KORD requires around 50 percent grant funding if it is to develop “new’“ road infrastructure).
Cost recovery Debt service repayments, top-up capital for new road construction and purchase
of equipment for leasing (i.e. beyond the above grants), and operating costs (administration and maintenance) – recovered by annual contributions from (i) outgrowers at a unit price per tonne sold to processing facility; and (ii)
processing facility’s employee farmers produce sold to processing facility at a unit price per tonne delivered to facility.
Contractual arrangements
Presumed concession arrangement between the government and the KSW to construct and maintain 200 km of road.
Fund leases road maintenance vehicles (bulldozers, wheel loaders, motor graders, tipper lorries, compactors, water bouzers) to carry out road maintenance. Local building companies tender on a competitive basis.
Risks • Payment risk – outgrowers fail to pay their ongoing contributions.
• Administrative costs of Fund become prohibitive (trying to do too much). • Fund undermines statutory duties of local authorities.
Regulatory framework
Legal framework allowing not-for-profit private entity to maintain Government roads, and fulfil related statutory obligations. Not-for-profit status of Fund also means eligibility of certain tax breaks. Government continues to own all roads and carry ultimate responsibility for maintenance.
4.2.3 Lessons
One limitation of this model is that it relies on funding for road infrastructure from the relatively rare combination of (i) private agroprocessing businesses in the cash crop sectors (sugar, tea, coffee, etc.) willing to contribute both an initial grant to establish the Fund and make annual contributions; and (ii) outgrowers to the processing facility willing to contribute to the Fund on a unit price sold basis. The revenues raised in this way are sufficient to support the maintenance and rehabilitation of the feeder road network, but not to finance debt servicing to construct new roads. For this, dedicated donor grant funding or subsidies from local government would be needed.
The experience of the KORD to date suggests a number of success factors for such a fund:
•
a strong commercial incentive for the agroprocessing business to provide upfront grant capital to establish the Fund;•
outgrowers willing to contribute to road infrastructure maintenance;•
a Fund that facilitates other strategic infrastructure considered a priority by the outgrowers (e.g. in the KORD case: fuel station and classrooms) thus providing additional incentive for outgrowers to contribute to the Fund on an ongoing basis;•
a means for the Fund to raise additional funds for recurrent expenditure through other services, such as microcredit.On this latter point, it is notable that, because the KORD has no concession agreement with government, it is thus not able to commercially develop land adjacent to the rehabilitated roads and realize an additional return this way.
Looking to the future, the intention is that the Fund becomes a vehicle for channelling local government subsidies into infrastructure projects and managing not only public but also privately raised capital in order to develop new infrastructure projects of a more conventional PPP nature, e.g. under a BOT contract. It is not easy to comprehend how such a transformation would work in practice, because the former would presumably mimic an efficiently run local government public works department, and the latter run up against a lack of outgrower financial contributions sufficient to support the servicing of debt in a BOT project.