Lessons Learned Article 3: The Pay-for-Results Challenge in Nigeria: Incentivizing New Technology Use for Sustainable Markets and Development Impact

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Lessons Learned Article 3: The Pay-for-Results Challenge in Nigeria: Incentivizing New Technology Use for Sustainable Markets and Development Impact

Background

In Nigeria, smallholder farmers produce over 70% of the maize crop, of which an estimated 60% is contaminated by high levels of aflatoxin varying throughout the country.1 In order to combat this threat, the International Institute of Tropical Agriculture (IITA) developed a biocontrol product, Aflasafe™, which displaces aflatoxins by crowding out their growth. Despite the product’s proven efficacy,2 various market barriers including consumer awareness, access, affordability, and a lack of accepted contamination limits have prevented widespread adoption.

     
The AgResults Nigeria Aflasafe™ Pilot (“Pilot”) was the first pay-for-results prize (“pull”) program developed under AgResults, and its design focuses on incentivizing private sector actors to overcome the market limitations outlined above. However, since the Pilot’s goals are to not only build a sustained market but also to deliver development impact to smallholder farmers, the Pilot’s design inhibited the growth of the grain traders and aggregators it was hoping to incentivize through the pay-for-results mechanism. While the Pilot has achieved significant results, growth has been slower and the overall scaling of results has been less than initially anticipated.

     

The pilot design focused on three objectives aligned to AgResults’ overall goals:

    

    1. Deliver development impact in terms of health and economic benefits to smallholder farmers. 
    2. Help to build a sustained market for AflasafeTM.
    3. Learn about pull mechanisms to determine their efficacy at incentivizing smallholder adoption of agriculture technologies.3

      

Farmers in Nigeria learn about aflatoxins and their negative impactPilot Design and Initial Selection of Implementers

To meet these objectives, the pilot designers found that existing grain traders, input suppliers, large farmer cooperative societies, and maize processors (“aggregators”) in Nigeria would be best suited as targets for the incentive. Measuring sales of the product as well as the proper use of the product was needed to verify the development benefits to smallholder farmers. Therefore, AgResults designed the incentive based on the amount of maize bought (“aggregated”) from smallholder farmers that met a high-Aflasafe-prevalence threshold of over 70%. The premium prize per ton paid to qualifying aggregators was set at an attractive rate ($18.75/ metric ton) that would eventually be complemented, and then replaced, by a premium for aflatoxin-reduced maize once the market developed.

      

To make the use of Aflasafe™ economically viable for smallholders in the long-run, participating aggregators had to be capable of supporting the enhancement of smallholder productivity through access to yield-enhancing inputs and provision of technical assistance. Many actors along the maize value chain were considered during the design phase, from upstream agro-dealers to downstream maize processors, but few of these actors completely met the criteria. Commercial farms had strong market linkages and potentially powerful economic motives to produce aflatoxin reduced maize for a premium, but their participation would not have satisfied the need to achieve health and income benefits for smallholder farmers. To offset this, AgResults chose aggregators who already had or were capable of developing input sales and output purchasing relationships with farmers. As the program progressed, it was envisaged that other organizations would develop aggregator relationships and join the Pilot.

    

To improve initial targeting and set ground rules for future participation, AgResults developed a set of criteria for selection of aggregators (that, once selected were the Pilot’s “implementers”):

  • Ability to facilitate farmers’ access to AflasafeTM and yield-enhancing inputs 
  • Strong marketing capability to access premium downstream markets for maize 
  • Demonstrated ability to meet verification procedures, including delivery of high-AflasafeTM maize to designated collection points and in the minimum quantities
  • Involvement at least 500 contract farmers, primarily smallholders 
  • Evidence of high potential for rapid growth in number of contract farmers 
  • Willingness to maximize transparency, disclose records, and show transfer of a premium payment for high-AflasafeTM maize to the farmer 
  • Positive reputation among farmers in terms of technical support received and fair market price offered for their output4

The AgResults team conducts field visits

The Smallholder Verification Paradox

As explained above, AgResults needed to verify not just that implementers promoted Aflasafe™, but that smallholder farmers applied Aflasafe™ appropriately to show the development impact. The verification system would ascertain the total amount of treated maize aggregated, as well as the levels of Aflasafe™ and aflatoxins in the maize. At agreed-upon aggregation points, maize was sampled and these samples were sent for testing in AgResults-approved facilities. 

    

To be successful, aggregators had to provide Aflasafe™ to farmers and train them on its proper use. In addition to Aflasafe™, aggregators were expected to provide smallholders with other inputs on credit and negotiate a better price for Aflasafe™-treated maize by marketing the benefits to big buyers. This would allow them to take advantage of the Pilot’s verification of maize, and then act as a marketing bridge between the smallholder farmers and buyers to create a sustainable, lucrative market benefiting both the smallholder farmer as well as the aggregator. 

    

In Nigeria, there was a lack of sufficient traders with the resources to grow within this scheme.  From the start of the pilot, many initially targeted “aggregators” were actually just input suppliers who had no experience trading maize. Providing inputs as well as technical assistance combined with buying maize back from smallholders was a new business model for some aggregators, and this precluded the participation of many companies in early years. For example, in the second year of the pilot, AgResults approved four companies to join the pilot that ultimately decided not to participate that year. In subsequent years, these companies all joined after they had time to understand and prepare for the Pilot’s requirements. However, as we have seen in later years, some of these and other aggregators were still not able to achieve the growth and scale anticipated due to difficulties in accessing the capital needed to function under this model.

     

As implementers joined in the first year, we found that the Nigeria Pilot’s business plan did not take into account the significant challenges that the access to capital requirement would have on the scalability of the pilot. Buying back maize requires significant financial resources that implementers usually do not have. Accessing loans in Nigeria, especially in the agriculture sector, is difficult if not impossible for many businesses because risk-averse financial institutions charge high interest rates and require high collateral of small and medium enterprises. Some of the aggregators did not have enough size and credit history to be eligible for loans with local banks and most banks in Nigeria would not provide agricultural loans without a loan guarantee. These financial constraints forced some of the aggregators who joined the pilot to drop out during the aggregation season or after just one year or participation. To date, we have seen 14 companies drop from the pilot due to financial constraints.

       

The AgResults team demonstrates the proper application of AflasafeAttempts to Respond to the Challenges

In the pilot’s second year, AgResults attempted steps to address the challenges caused by access to finance. First, AgResults tried to work with financial institutions to motivate them to provide the implementers with short-term loans. The Pilot management team contacted banks with experience working alongside donor-funded agricultural projects, including First Bank, EcoBank Nigeria, Fidelity Bank, Wema Bank, Sterling Bank, Stanbic IBTC, and Diamond Bank, to gauge their interest in working with AgResults implementers. However, without a loan guarantee none of the financial institutions would provide loans.  The Secretariat then approached the World Bank, which also functions as the AgResults Trustee, to explore the creation of a loan guarantee facility and letter of credit for AgResults. Ultimately, we found this idea untenable, due primarily to high costs associated with establishing and maintaining a new loan guarantee facility of this scale. Finally, the Secretariat met with the USAID Development Credit Authority to discuss a potential loan guarantee program with the Central Bank of Nigeria’s agricultural loan program. This idea did not work because the USAID DCA loan guarantee program addressed only the collateral requirements, while participating banks were not willing to lower interest rates, which at the time ranged from 23 to 36%. It was eventually determined that solving the access to credit issue in agriculture was beyond the scope and resources of the pilot.

     

This allowed some previously excluded implementers to join the Pilot and to grow the number of farmers they serviced through reinvestments of incentive prizes. For example, after the rule adjustment Agbelere Integrated Farms joined the Pilot with 120 farmers and grew to 1145 farmers by the fourth year.

    

While not a direct challenge, we found that several of the larger implementers did not face financial constraints because they had access to other sources of funding and were able to grow quickly and even exceed growth expectations. Often, these other sources of funding come from donor initiatives, showing the potential for traditional funding to work alongside “pull” programs like AgResults to amplify results.

     

Aggregators label AflasafeTM treated maize to be verifiedBuilding on AgResults: Achievement of Outcomes and the "Second Mover" Advantage

After four years of implementation, AgResults has seen that the private sector is motivated to serve smallholder farmers not only because of the incentive per metric ton of aggregated Aflasafe™-treated maize, but also due to the market premium received from larger buyers that require higher-quality, aflatoxin-reduced maize. Despite the financial challenges faced by aggregators, over the past two years some implementers have scaled their number of participating farmers significantly. This indicates that the AgResults prize has incentivized implementers to change business models to increase maize aggregation. This growth is in part due to significant price premiums of 17% to 50% that implementers have realized by selling the Aflasafe™-treated maize. The premiums are an indication that the Pilot has not only created a general awareness but also emerging into a sustainable market for the product. As the Pilot enters its final year, we are attempting to understand the price sensitivity and sustainability of the Aflasafe treated market by reducing the prize incentive by 50%. Given the increased demand for Aflasafe maize and if the market premium is as high as we have found, then we should see no drop in aggregation. 

     

Another piece of evidence that the Pilot was able to increase awareness of the negative effects of aflatoxins and raise awareness of the benefits of Aflasafe™ is through the implementation and growth of a new Aflasafe project. The USAID and the Gates Foundation-funded Aflasafe™ Technology Transfer Commercialization (ATTC) project launched in 2016 to identify companies and work with them to commercialize Aflasafe™ throughout Nigeria. In its first year, the company that is selling Aflasafe in Nigeria achieved huge growth in sales. The numbers point to an existing market awareness and demand for Aflasafe that was in large part created by AgResults. 

      

An important consideration that underlines the ability of implementers to slowly scale up their results as well as the early success of ATTC is the relatively foolproof nature of the product. There is compelling early evidence from data collection done with participating smallholder farmers to indicate that, while many participating smallholders may not apply AflasafeTM according to IITA’s specifications, the product still works extremely well in reducing aflatoxin prevalence to acceptable levels. 

    

A farmer shows off his newly acquired AflasafeLessons Learned and Recommendations

Conflicting development objectives could hinder a pay-for-results project's ability to achieve intended scale: The Nigeria Pilot has shown that selecting the right private sector actors to address a market failure is not as straightforward as it seems. In the case of Nigeria, requiring both sustainable market growth and smallholder farmer development outcome led to stringent verification requirements, forcing implementers to aggregate instead of simply marketing a product. The participating companies were unable to reach the scale originally projected in the pilot’s business plan due to constraints in accessing needed capital to fund the inputs and technical assistance and verification challenges that were required to provide effective aggregation services. Despite these constraints, over four years of the pilot we have seen implementers gain traction and prepare the market for a push initiative to take Aflasafe™ to scale.

  • Recommendation: Design teams should think carefully about the tradeoffs between incenting the creation of a sustainable market and the need to measure direct economic benefits for smallholder farmers. Was the reduced scale worth it to know the direct economic and health benefits for a smaller number of farmers? Alternatively, should we have focused on achieving a greater scale in the market through focus on sales of the product and let smallholder outcomes be an indirect result? Could this approach have offset high verification costs? These are questions we will continue to discuss along with the AgResults External Evaluator.

     

Pay-for-Results projects may not achieve the full market penetration but can act as a “first mover” to spur future sustainability: The slower-than-anticipated growth of the pilot was initially disappointing. However, over the past two years we have seen a strong growth curve in aggregation totals as they reinvest earnings and find new ways to link smallholder farmers to premium markets for Aflasafe-treated maize. The activity has increased market awareness and set the stage for other actors to find channels outside of AgResults to take Aflasafe™ to scale. 

  • Recommendation: Pull mechanisms are a way to bring in private sector actors to invest and develop a market where there aversion to initial risk. Both mechanisms work hand in hand and the donor community must identify when one mechanism is needed to help achieve the goals once the other has laid the groundwork.

     

The technology has to work: Aflasafe is backed by extensive research that shows its efficacy in lab and field tests. However, AgResults was its biggest test to date. The results have been impressive: in the cases where the product has been correctly applied, the prevalence of aflatoxins in aggregated maize is extremely low.

  • Recommendation: Pay-for-results projects have the best chance of success when the technology works and can be implemented by smallholder farmers with minimal guidance. Farmers are notoriously risk-averse, and a product that does not work reliably or easily will have little chance for scale – and reduce a private sector actor’s appetite to work to promote it.

1. International Institute of Tropical Agriculture, “Aflasafe Offers Win-Win Formula for Farmers, Investors” press release (June 23, 2010). 

2. Bandyopadhyay, Ranajit, Cotty, Peter, et al. “Between Aflatoxin and Aflasafe.” Presentation to National Export Promotion Council of Nigeria, 28 July 2010. 

3. AgResults Nigeria AflasafeTM Pilot Business Plan, pp. 14-15.

4. AgResults Nigeria AflasafeTM Pilot Business Plan, p. 16.

More Resources on the Nigeria Pilot

Download the Nigeria Aflasafe Pilot One Pager Here

AgResults to extend the Nigeria Aflasafe Pilot for another year

Notes from the Evaluator: Initial Findings from AgResults Nigeria Pilot

External Evaluator Update: Looking Back on the Randomized Control Trial (RCT) in Nigeria

African Leaders from the East African Community Visit AgResults’ Nigeria Aflasafe Pilot and Endorse Aflasafe™

Despite Violence, Nigeria Pilot Continues to Serve Smallholders

Creating stronger business: business capacity development for smallholder farmers in Nigeria

AgResults AflasafeTM Lab to Create More Wealth for Nigerian Farmers

    

About AgResults

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. 

About AgResults Lessons Learned Series

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.

The AgResults initiative is a partnership between:
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