Fertilizer Toolkit: Promoting Efficient and Sustainable Fertilizer Use in Africa

Support for Fertilizer Market Development in Ethiopia

The goal of the project was to increase agricultural production and productivity with
an emphasis on fertilizer demand and supply, capacity building activities, soil fertility
management, and fertilizer policy reform. Key lessons include:

Involvement of agricultural extension agents in input distribution and credit

administration impeded development of the private sector and undermined the
longer term function of extension.
Financing fertilizer imports through separately administered mechanisms of
foreign exchange allocation introduces inefficiencies in the fertilizer industry.
Agricultural intensification and increased use of fertilizer on a sustainable basis
will require attention to management of risk and variability.

Name of project or program: Ethiopia National Fertilizer Sector Project

Initiation date: February 1996

Completion date: June 2002

1. Description of project, program, or approach

The underlying concept of this project was to use a bidding process to encourage
private sector development. The bidding process had two steps: (a) At the import
level, large import programs (about 3 or 4 per year) were tendered using the
allocation of foreign exchange as the benefit which bidders won; and (b) At the
wholesale and retail level, a second set of tenders were created and these applied to
the rights to distribute fertilizer in specific districts. Wholesale bidders were vying for
commercial credits which were provided to farmer cooperatives. The entire twotiered process was designed to encourage private sector development and
investment in both fixed assets: (a) market infrastructure (i.e., distribution
networks) and (b) working capital (i.e., stocks of fertilizer). This strategy entailed
competition for the market compared to competition in the market. A key issue is
which works better. The answer depends on the business environment and on the
willingness of the government to allow the private sector to flourish and grow. This
strategy was also complemented by capacity building activities, soil fertility
management and environmental conservation, and fertilizer policy reform.
The main lesson of this experiment is that bureaucratic management of fertilizer
markets through public procurements, regulation, and directed credits, are not
particularly efficient. Fertilizer markets require much more than credit to flourish.
2. Implementation details
The program was implemented by the National Fertilizer Industry Agency in
collaboration with the Ethiopia Quality and Standards Authority, National Soils
Laboratory, and the Environmental Protection Agency. These planned activities were
manageable by the implementing partners, which were beneficiaries of the capacity
building program to address their own managerial and institutional deficiencies
assessed during project preparation--including management information and
accounting systems.

Fertilizer Toolkit: Promoting Efficient and Sustainable Fertilizer Use in Africa

Project components were not formally revised during implementation, except for
slight modifications related to: (a) the small bio-gas promotion activity under
component three, which was dropped because the unit cost turned out to be beyond
the average farmers reach; (b) the planned promotional mini-kit activities under
component two were later subsumed into the Governments newly developed
massive extension intervention program, for which the project continued to provide
the planned support; and (c) the number of field/rural soil testing laboratories was
increased from 8 to 17 as the need for additional laboratories in different parts of the
country became evident.
Two developments that affected the growth of a network of private fertilizer retailers
were unforeseen. The first development was the emergence of party affiliated,
although technically private, regional trading houses engaged in fertilizer trade and
other sectors.
These entities have occasionally attracted allegations of privileged
market access and other uncompetitive behavior. The second development was the
launching of an extension intervention program through which public extension
officers or staff of cooperatives delivered seeds and fertilizers to participating
farmers. This brought the government into the business of input distribution,
contrary to its own national fertilizer policy. This program expanded greatly in later
stages of the project. At the same time, the number of private retailers declined
sharply.
3. Results/Impact
Although several interventions supported by the project contributed to agricultural
growth and improved management of the fertilizer sector, OEDs evaluation of the
project as a whole rated its outcome as unsatisfactory; sustainability as unlikely,
institutional development impact as modest, and bank and borrowers performance
as unsatisfactory. Judged purely on the stated objectives included in the project
documents and development credit agreement, the project did not achieve its
objectives because the institutional developments that would have underpinned
sustainable growth in more intensive agriculture, and specifically the creation of a
viable private fertilizer sector, cannot be judged to have taken place. Therefore, the
development objectives were judged to be unsatisfactory despite some of the
positive achievements.
Annual fertilizer use increased from 247,000 tons in 1995 to 298,000 in 2000.This
increase contributed to increased food production--particularly in moisture-reliable
areas of the country. According to government statistics, fertilized area increased by
1 million hectares between 1995 and 2000. The incremental yield estimate of 0.60
tons/ha on fertilized land was more than double the conservative 0.32 tons/ha
appraisal projection.
Consequently, cumulative incremental grain production
reached 3.0 million tons, over and above the appraisal projection of 2.6 million tons.
However, although the increment was positive and laudable, not all could have been
attributed to the interventions of the project, and the sustainability of this gain was
not yet assured. In fact, some of the conclusions from a recently completed Bank
report1 are that there has been very little productivity growth since the close of the
project despite significant increases in fertilizer use. This raises the question of
whether or not the performance in the 1990s can be attributed to fertilizer use. More
growth is related to area expansion and very little to productivity. Another factor,
according to the report, is that fertilizer use by farmers and area covered has
1

World Bank. 2005 <<AQ: Provide name of Report here>>

Fertilizer Toolkit: Promoting Efficient and Sustainable Fertilizer Use in Africa

increased, but fertilizer intensity has not changed. In addition, it appears that the
fertilize use is not efficient. In part, this has to do with extension services, marketbased incentives: ineffective output market signals, inefficient input markets, which
result in high costs and untimely availability.
Government figures suggest that the proportion of the population experiencing food
poverty declined from 47 percent in 1995/1996 to 42 percent in 1999/2000. This
situation most likely worsened in subsequent difficult years. The reevaluated net
current value of the project was positive and substantial, and the policy reforms and
institutional development carried out under the project were, and continue to be,
important elements in the country assistance and poverty reduction strategies.
However, although all agreed market reforms were fully implemented, a new set of
market distorting phenomena emerged and prevailed throughout project
implementation. These hindered the establishment and growth of a competitive
fertilizer market, and countered the measures supported under the project. These
included the manner in which the rapidly growing input credit and agricultural
extension programs were implemented and uncompetitive tendencies in the input
distribution market. Consequently, the sustainability of the projects outcome was
not assured.
Other positive outcomes included improved industry coordination and monitoring;
increased environmental protection awareness; improved consumer protection
awareness; enhanced foundation for efficient nutrient management; and farmer
empowerment.
4. Lessons learned
(i)

Involvement of agricultural extension agents in input distribution and credit

administration impeded development of the private sector and undermined
the longer term function of extension. With 50-70 percent of their time spent
on input and credit administration, the agricultural extension agents seem to
have had little time to focus on advisory services. Moreover, the need for
close rapport and trust between agent and farmer could have been
undermined by the occasional adversarial encounters that characterized some
of the loan recovery exercises. They need to have let go of these functions
which could be addressed by the cooperative groups and private retailers.

(ii)

Financing fertilizer imports through separately administered mechanisms of

foreign exchange allocation introduces inefficiencies in the fertilizer industry.
The rigid, project-financed lengthy public tender-based foreign exchange
system denies the importer any latitude regarding making judicious decisions
on optimal timing of entering the market as well as on the quantity and
product mix to procure. There are also high-risk premia occasioned by
lengthy bid processes. There is a need to move away from project-based
fertilizer imports in favor of general foreign exchange management. In
addition, there does not seem to be a sufficient reason(s) why importers
should not be encouraged to directly purchase foreign exchange at the time
and in the amounts of their choosing for the purposes of importing the
quantities and product mix of their choosing.

(iii)

Agricultural intensification and increased use of fertilizer on a sustainable

basis will require attention to management of risk and variability. In a country
like Ethiopia that is highly susceptible to drought, use of fertilizer can

Fertilizer Toolkit: Promoting Efficient and Sustainable Fertilizer Use in Africa

accentuate the hardship caused by insufficient precipitation, putting in peril

large numbers of farmers and financial institutions that serve them. This calls
for more work on weather-based and other forms of insurance.
(iv)

It is important to adopt a holistic approach to agricultural input market

development. It is important to adopt a holistic approach to input market
development and seek convergence in the availability of seeds and fertilizers,
as one without the other cannot give optimal returns. This has been the
experience of running two separate projects on seeds and fertilizers. Most of
the issues to be addressed for these two inputs are common. For example,
ensuring timely and adequate availability, their quality, marketing practices,
input credit, and problems of remote locations and semi-arid areas are all
common to both.

(v)

It is equally important to treat both input and output markets holistically. The
grain market crash of 2001 and the resulting hardship in credit repayments
and precipitous drop in fertilizer consumption in 2002, clearly illustrate the
importance of focusing as much on agricultural input markets an on output
markets.

Despite fertilizer market reforms and the initial positive response by the private
sector, the recently completed World Bank report indicates that the last nine years,
have witnessed the private sector (other than party-affiliated trading houses) exit
the fertilizer market. In addition, the report concludes that the future of fertilizer
markets in Ethiopia is uncertain. Although the Governments recent Agricultural
Marketing and Input Strategy indicates an overall commitment to private sector
involvement, the particular directives in the Strategy suggest that the public sector
will continue to play an active and dominant role in the import, wholesale, and retail
of fertilizers. Recommendations provided by the Bank report include: promotion of
competition and private sector participation in the sector, and elimination of state
involvement in credit guarantees, debt recovery, and seed production.
Prepared from World Bank project documents by Jeanette Sutherland.