How can donors mobilize private sector investments that support development? What are the minimal policy changes required to spur investment in a sector? Are non-financial incentives (e.g., market information, stakeholder buy-in) sufficient to attract private investors? What is the potential impact of an inclusive industrialization initiative? Recently, through Feed the Future, the USAID Investment Support Program undertook an investment study to tackle these questions in the edible oils value chain in Tanzania. This blog summarizes the approach as well as the potential impact of this study.
Cultivating a domestic industry competing with inexpensive imports from more developed Asian markets is a major policy challenge. Though the political will may be there, the task carries several incentive-based challenges that deter key private sector decision-makers, including developing a new sector unknown to investors; difficulties gathering information robust enough to get players on board; and having viable, ready-to-go business plans in place for when the moment strikes.
In order to address these obstacles and seize on the recent momentum for sunflower oil production, Feed the Future, through USAID, in conjunction with the Government of Tanzania, through deep collaboration with multiple domestic companies and industry experts created a working group to conduct an in-depth market analysis.
The working group identified concrete policy steps to work with the Government of Tanzania to increase the quality and competitiveness of domestic sunflower products vis-a-vis cheap palm oil imports. To address competitive pricing issues rooted in production and processing costs, the working group recommended the Government of Tanzania pursue the following policy interventions:
- Establish a new and temporary (three-year) Value-added tax (VAT) exemption of sunflower seed cake and domestically sourced sunflower oil
- Approve a three-year extension of the 2017 VAT exemption on agricultural processing equipment (solvent extraction and refining equipment)
- Approve a three-year extension of Tanzania’s 10 percent import tariff on crude palm oil
These policy interventions craft the right incentives to jump-start a nascent industry that has the potential to achieve:
- Over $10 million of private sector investment in new solvent extraction refining plants and technologies
- A reduction in Tanzania’s $200+ million annual forex bill for imported palm oil
- An increase in corporate tax revenue as the domestic industry begins to grow
- Better access to markets and improved livelihoods for approximately 1 million existing sunflower farmers
- Higher productivity and improved market linkages for approximately 2,000 existing micro, small, and medium-sized enterprises in the sector
- Access to edible oil that has 80 percent less saturated fat content for millions of consumers in the long term
Policy solutions like these critically shift incentives, redirecting behavior to support the development of a domestic industry in its early stages. Though initially difficult, big gains stand to be made, such as improved livelihoods, enhanced small and medium enterprise productivity, loans to stimulate growth, capital investments, improved consumer choice, and increased country self-reliance.
Impact and Lessons for the Future
USAID/Tanzania’s investment in this effort has netted promising results. The policy reform roadmap is anticipated for adoption by the Government of Tanzania in June, already raising confidence to spur private sector buy-in. For example, at least one anchor investor expressed interest in investing over $10 million to build two sunflower oil solvent extraction plants, working closely with USAID South Africa’s Africa Private Capital Group to develop a business plan slated for a 2019 launch.
More broadly, USAID’s two-pronged approach of providing a market analysis and concrete policy steps as well as facilitating relationship and coalition-building amongst relevant actors can serve as a model for catalyzing priority investment areas. Bearing the large cost of investing time and resources to conduct an in-depth assessment is a role donors can play. Aligning the goals of the private sector, donor agencies, and host-country government cements buy-in strong enough to get local firms off the ground and stimulate domestic industry.
Interested in reading more about Tanzania, sunflowers, and investment:
To learn more about the broader enabling environment in agriculture in Tanzania check out the Policy Data Snapshot for Tanzania.
The USAID Investment Support Program is a market-driven approach to identify investment opportunities, mobilize private capital and deepen financial sector engagement — all with the aim of catalyzing development impact. The USAID Investment Support Program, managed by the Bureau for Food Security, provides a suite of advisory services to USAID Missions and host country governments related to promoting and facilitating investment in agriculture and other key sectors, provided by Dalberg Global Development Advisors. For more information on USAID's Investment Support Program contact Aviva Kutnick Hal Carey is a Foreign Service Officer in the USAID/Tanzania Mission's Private Sector Unit and is sharing details on their approach to policy and investment promotion in the sunflower sector.