Achieving the Sustainable Development Goals to end extreme poverty by 2030 will require about $4.5 trillion annually, far more than multilateral development banks or donors can provide by themselves. To face this challenge, the World Bank Group adopted the Maximizing Finance for Development (MFD) approach, which entails working with governments to crowd in the private sector while optimizing the use of scarce public resources. This approach is guided by the Hamburg Principles adopted by the G20 in 2017 and builds on the substantial experience across the institution.
Vietnam’s emergence as a leading exporter of agro-food commodities—for aquatic products, rice, coffee, tea, cashews, black pepper, rubber, and cassava—contributes to its food security and poverty reduction. The World Bank Group is providing strategic and investment support to strengthen farmers’ access to markets, boost income, enhance value chains, create jobs, promote climate-smart farming, and encourage private finance and innovation. The efforts aim to directly benefit 200,000 coffee and rice farmers by 2020.
Constraints faced by private investors in agribusiness in Vietnam include high transaction costs caused by a fragmented farming sector with limited collective action at the farm level, and policies restricting international companies from sourcing products directly from farmers. In recent years, concerns about the sustainability of agricultural growth, increasing public debt, and global competitiveness have prompted government action that targets in particular the coffee and rice sub-sectors, which employ 6 million farmers and generate about $4 billion in exports. Coffee and rice suffer from unreliable quality and product safety, lack of brand recognition, and declining productivity from aging coffee trees and the effects of climate change.
The MFD Approach
With support from the World Bank Group, the government seeks to increase the quality and value of agriculture through three strategies: using natural resources more sustainably; reducing transaction costs to crowd in private investments in value chains; and providing commercial finance to farmers and agribusinesses. Higher profitability and jobs—both for farmers and agribusiness—are the targets of this strategy to maximize finance for development.
Setting Up the Regulatory and Institutional Framework
In 2013, World Bank support to the Ministry of Agriculture and Rural Development in its preparation of the Agricultural Restructuring Plan (ARP) led to a strategic framework that aims for more market-oriented production, a shift to value chain development, a realigning of public spending to crowd in private capital, and increasing the returns and sustainability of private investments.
Further analytical work followed in 2014 and 2015. Prepared in consultation with the private sector, the work outlined the constraints and options for implementing ARP reforms in coffee and rice value chains. In addition to the structural constraints, regulatory barriers and negative environmental impact from the overuse of fertilizers, chemicals, and water also made transaction costs high, and there were weak incentives for farmers to produce higher-quality raw materials or adopt climate-smart production practices.
Investments ensued in 2015, with $238 million in IDA financing for an initiative focused on strengthening the competitiveness and sustainability of these value chains in the Central Highlands and Mekong River Delta. The Vietnam Sustainable Agriculture Transformation Project supports “small farm-large field” production management models, which promote the collective actions of smallholders to reduce production costs, improve product quality, and reduce transaction costs for contracts with rice mills. The project also encourages contract farming, and offers a package of trainings, services, and matching grants conditional on farmers’ efforts to reduce the use of seeds, fertilizers, agro-chemicals, water, and post-harvest losses.
To attract and retain private investment in the provinces where the IDA-financed project operates, the World Bank Group’s Finance, Competitiveness and Innovations Global Practice is providing advisory assistance for capacity building and institutional reforms to promote private investments. Activities include preparation of marketing materials, investor one-stop-shops, an investor relations management system, and investor after-care services.
Efforts to strengthen the enabling environment continue. Recently, as the government removed regulatory constraints to encourage rice mills to produce higher-value rice products, IFC has directly invested in companies that produce seeds and process and export coffee and rice. It has also provided advisory services to leading firms on supply chain management, post-harvest and warehouse management, sustainable rice platforms, and product marketing. In addition, the IFC Global Trade Supplier Finance program helps reduce risks for international traders to expand their operations in Vietnam by providing their local commodity suppliers with better access to financing at competitive rates. To complement the various initiatives to maximize finance for development, IFC is also partnering with local banks to provide commodity traders with structured financing solutions backed by warehouse commodities as security for the loans.
Making a Difference
By 2020, efforts to maximize finance for development are expected to provide 200,000 coffee and rice farmers with higher incomes, as profits are projected to increase by 20 percent. Additional benefits are considerable, including lower-carbon, climate-smart farming for 40,000 hectares for coffee production and 75,000 hectares of rice fields; 17,000 hectares of renewed coffee trees; and increased exports thanks to better quality raw materials. Contract farming will link farmers and agribusinesses to reduce transaction costs, maintain competitiveness, and ultimately increase farmers’ revenues. Farmers will also be better organized and attuned to the product requirements of agribusinesses. Going forward, better regulations will incentivize more private capital to invest in coffee and rice value chains.