AgResults' Uganda Improved Legume Seed Pilot incentivizes increased private sector production and sales of quality legume seeds to Ugandan smallholder farmers. Increased access to verified, quality legume seed has many benefits, including increased smallholder farmer household income, nutritional outcomes, and better soil health. However, AgResults faced issues related to design assumptions and shifting policies that necessitated changes to the original design. The experience provided valuable insights into the importance of a comprehensive and iterative design process.
In 2008, the World Bank released a report showing that improvements in agricultural yields in Sub-Saharan Africa lagged behind that of other regions, growing an average of 1.2 percent annually. One of the major factors hindering growth in Sub-Saharan Africa is the adoption of improved inputs, such as improved seed varieties. The use of improved seed varieties with high yield potential remains relatively low among smallholder farmers. Unlike hybrid seeds, which farmers must repurchase each year, the availability and use of improved open-pollinated variety legume seed grew slowly due to traditional smallholder farmer seed saving practices and thus lower potential for seed company profit.
Key Lessons Learned and
In 2014, AgResults designed the Uganda Legume Seed Pilot to address this market failure and promote the production and sales of quality legume seeds. AgResults selected Uganda because of the importance of legumes to the agricultural economy, the ability of local seed companies to produce and market legume seeds, and the existing donor activities that laid the foundation for the legume seed sector. In Uganda, legumes contribute roughly 25 percent of protein intake, yet legume seeds comprise less than 10 percent of the formal seed market. Legumes amount to an estimated 57 percent of informal seed sales, creating a lucrative potential market opportunity for a well-designed pull mechanism to incentivize formal private sector legume seed production and sales to smallholder farmers.
AgResults initially designed a prize structure that would incentivize increased quality seed supply while taking into consideration existing financial constraints that seed companies face:
Legumes are nutritious crops, high in protein, fiber, and other nutrients. Additionally, they improve soil health through nitrogen fixation and provide opportunities for increased income and yields for smallholder farmers across the world. Due to demand uncertainty, barriers to working capital, and opportunity costs, seed companies often do not diversify to produce legume seeds and ultimately limit nutrition, soil health, and income potential.
Implementation began in 2015. However, prior to launching full activities, AgResults’ pilot manager in Uganda and participating seed companies identified challenges that called into question the incentive structure and potential success of the pull mechanism.
During the first year of implementation, AgResults quickly found that some of the initial design assumptions did not hold true. Some assumptions and related challenges included:
Policies and Politics: One big assumption in the initial design was that farmers would trust the quality of seed on the market. Prior to the 2016 elections, the Ugandan government distributed agriculture inputs through the “seed for votes” campaign to increase support for government-promoted candidates. The resulting government demand for legume seeds exceeded the available supply, driving up prices and motivating the private sector to mix non-seed legume grain into the seed packs to meet this artificial demand. With no sufficient seed certification system in place to verify and distinguish between quality and counterfeit seed, buyers had no choice but to buy the offered seed, leading to what is known as a lemons market. Seeing the poor results of the distributed seed in their fields, farmers lost faith in the quality of legume seed on the market. This reduced the overall demand for legume seed purchases and demotivated seed companies from investing in legume seed production despite the contest incentive.
Incipient Legume Seed Sector: Related to the assumption that farmers would buy legume seed was an assumption that verification and anti-counterfeiting would be more mature due to ongoing donor-funded programs. In Uganda, the Bill & Melinda Gates Foundation and the U.S. Government’s Feed the Future Initiative, in particular, have invested in improving the legume seed sector through numerous push initiatives. For example, Feed the Future funded private seed verification and worked with the Government of Uganda to harmonize its seed laws with regional standards, while the Gates Foundation has worked on anti-counterfeit seed initiatives to address the weak certification system. These crucial investments are nevertheless new and have not yet transformed the legumes market to the point at which the initially designed pilot would have been able to make an impact.
Market Distortions from the Volume Guarantee: AgResults designed the incentive structure with the expectation that the sector was mature and seed companies would be responsive to the pull mechanism. As soon as implementation began, AgResults learned from seed companies that the prize structure was no longer a viable incentive to motivate their participation. The volume guarantee offered companies a sense of security by covering the cost of production of any unsold seeds. Unfortunately, the design team did not look into how the volume guarantee distorted the legume seed market by buying unsold seed. Additionally, they did not consider the reputational risk to AgResults by destroying such high-demand seed. Further hurting the incentive, the price of commercial legumes surpassed the price for the volume guarantee due to low production resulting from bad quality seed. As a result, seed companies sold their unsold seed as commercial legumes, making any volume guarantee obsolete.
Risks of an End-of-Prize Incentive: The initial design assumed that seed companies would be willing and able to increase production and sales over a five-year period to win a final prize. Ugandan seed companies make most of their money on hybrid maize seed sales, with only 10 percent of all seeds sold being legumes. Therefore, the end-of-prize incentive structure would require seed companies to reduce the amount of money invested in maize and reallocate it to legumes. When the pilot was designed, seed companies expressed interest in the proposed prize structure. However, once launched the incentive was no longer enough motivation for seed companies, who now faced extreme and highly variable market distortions, to participate. After numerous meetings with seed companies, it became clear to AgResults that no company was willing to tie up funds in legume-focused seed production for five years for a potential legume seed prize instead of investing in already profitable seeds.
Due to the above challenges, the pilot was unable to launch. No private sector seed company was interested in the incentive structure, causing AgResults to reevaluate the entire legume seed market and modify the incentive structure to provide the private sector with a prize that would motivate them to join the pilot. AgResults redesigned the seed companies’ prize payment structure and removed the volume guarantee option. The revised prize payment structure provides seed companies with an annualized prize payment giving them the opportunity to reinvest their prize money to help them increase legume seed production and sales. Finally, AgResults removed the volume guarantee and replaced it with an option to access a cold storage facility that allows seed companies to store carryover seed instead of selling it as grain, keeping high-quality seeds on the market (see Cold Storage Option Graphic below).
The lemons market proved to be the biggest obstacle the pilot faced. Regardless of how attractive the incentives for the seed companies may be, farmer demand for legume seeds was low and it was evident that quality assurance was essential to rebuild market trust. To address the broken seed certification system, AgResults determined it would need to partner with ongoing quality verification initiatives to certify that legume seed was of high quality. One potential partner was AgVerify, a private sector seed quality verification scheme supported by the USAID/Uganda Feed the Future Agricultural Inputs Activity. AgVerify created a private-sector run seed quality verification service using internationally recognized quality standards (International Seed Trade Association, and the Common Market for Eastern and Southern Africa). AgVerify and AgResults entered into a formal partnership in December 2016 to create a legume seed certification scheme to which all seed companies joining the pilot must adhere.
AgResults redesigned the Uganda Improved Legume Seed Pilot and formally relaunched it in February 2017. The new design was well-received by government officials, seed companies, and other key stakeholders. To date, seven seed companies have joined the pilot and have responded positively to the addition of AgVerify and the new incentive structure. The pilot is still in the first sales period and has yet to receive any official sales results but early signals indicate that the changes made should lead to a higher response rate and better outcomes.
The Uganda Pilot’s original design took into account flawed or outdated assumptions about the state of the legume seed value chain and government policies. The expected impact of the push projects had not transformed the value chain to the extent that the design team had projected: shifting government interventions exacerbated the challenges. The Uganda Pilot provides a variety of lessons, many of which AgResults has already incorporated into the pilot redesign. As the lessons presented in the box below show, a more thorough initial design process, coupled with the ongoing flexibility to monitor and adjust based on updated assumptions, are essential to give a similar agricultural pull mechanism every chance to succeed.It is difficult to successfully launch a pull mechanism when the market is not ready:
Recommendation: When designing a pull mechanism, it is imperative that an agriculture expert conducts a value chain analysis to determine the readiness of the value chain for a pull initiative. It is not in the private sector’s best interest to invest and take on risks in a sector where there is demand uncertainty caused by external factors. It is imperative for the success of pull initiatives that uninflated results from donor funded push initiatives are incorporated in the design to determine if the market and the private sector will respond. Donors should feel comfortable adjusting or even delaying a pilot if the market has not fully matured.Government policies and interventions affect the potential outcomes of a pull mechanism: A common campaign strategy by an incumbent government is to provide agricultural inputs during election years. By artificially increasing demand for legume seeds, the Ugandan government created an easy opportunity for seed companies to increase incomes by taking advantage of artificially high prices. Challenges to the Pilot because of government interventions and weak verification systems created a lemons markets and a loss of faith in the quality of legume seeds.
Recommendation: If a pull mechanism focuses on a commodity, donors should understand that key assumptions can quickly change with the changing political economy. Donors should also regularly update those assumptions during implementation to be able to adjust the mechanism based on unforeseen political developments, or position the pilot outside the sphere of influence of these developments where possible.
AgResults is a $122 million collaborative initiative between the governments of Australia, Canada, the United Kingdom, the United States, and the Bill & Melinda Gates Foundation to incentivize the private sector to overcome market barriers and develop solutions to food security and agricultural challenges that disproportionately affect people living in poverty. The initiative designs and implements prize competitions, also referred to as pay-for-success or pull mechanisms, which are innovative development finance mechanisms that incentivize the private sector to work towards a defined goal. AgResults has two primary objectives: 1) to overcome market failures in agriculture through provision of results-based economic incentives; and 2) to test the effectiveness and efficiency of pull financing.
One of the primary objectives of AgResults is to better understand how well pull mechanisms work to solve market failures in agricultural development. The lessons learned series explores AgResults’ experiences in designing and implementing pull mechanisms, with the goal of providing key lessons and recommendations that development practitioners should consider before designing agricultural-focused pull mechanisms.