P Mether/Biodiversity International (2010)

This paper establishes a call-for-action for the Australian Government to expand its leadership in promoting economic development in the Asia-Pacific region through the facilitation of agricultural trade. Agriculture is an unequivocally powerful tool that can be used to alleviate poverty, due to its potential to create jobs and increase income levels. With the continued liberalisation of agricultural trade, there is an inherent need to ensure that the agricultural sectors of Least-Developed Countries (LDCs) are able to capture the benefits of international trade. Australia is well positioned to be a global leader in facilitating agricultural trade, focusing specifically on the Asia-Pacific region with which the country shares geographic proximity and national interests. Australia has a successful history in coordinating agricultural programs in the Asia-Pacific region, which has been supported by the nation’s strength in agriculture in both the public and private sectors.

With Australia’s recent changes to its foreign policy approach in the areas of trade and aid, an environment has been created in which the Australian Government is able to further expand one of its existing foreign aid funding models: the Seed Fund. Seed Funding, when implemented using a co-investment model – involving collaboration between the Government and a private sector partner – allows for a 21^st-century approach to leveraging the powerful relationship between trade and aid. The model not only reduces the financial risk to all parties involved, but it creates a sustainable model that aims to generate a financial return on interest (ROI) for all partners, in addition to a social return on interest (SROI) for the partner in the developing country.

Agriculture: The root of economic development

“Most of the people in the world are poor, so if we knew the economics of being poor we would know much of the economics that really matters. Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture we would know much of the economics of being poor.” – Theodore W. Schultz, winner of the 1979 Nobel Prize in Economic Sciences

Agriculture has a critical role in the economy of many developing economies. Over seventy per cent of the population of Least-Developed Countries (LDCs) is concentrated in rural areas, compared to 55 per cent for all developing countries. The large rural population is a driving force behind the agriculture sector, with agriculture representing more than twenty per cent of GDP in over half of all LDCs. When countries are segmented by region, the highest concentration of the world’s rural populations is found in three key regions: South Asia (68%), Pacific Islands (63%), and Sub-Saharan Africa (63%). As such, these geographic regions represent a high priority for facilitating trade in agriculture.

The agricultural sectors of many LDCs represent a significant portion of total employment, and as such achieving growth in agricultural production and trade can promote higher income levels to assist with poverty alleviation. The agricultural sector is often highly fragmented with small farms that are poorly serviced with infrastructure, and are facing limited access to knowledge of sustainable farming techniques. Depletion of land and water is placing increased pressure on developing countries to be able to achieve growth in food production commensurate to population growth. With this understanding, there is a clear business case for the importance of global action to facilitate agricultural production and trade. There is a need for policies that not only promote growth in domestic production, but that also facilitate trade to allow LDCs – and developing countries more broadly – to realise the benefits of global trade.

Trade Facilitation: Achieving a global solution to a global problem?

The World Trade Organization (WTO)’s 9^th Ministerial Conference concluded with the Bali Package – a trade agreement that aims to not only reduce bureaucracy in trade, but that also addresses the need to lower import taxes and further reduce subsidies for agricultural trade. The negotiations regarding agriculture built upon the progress from the 2003 meeting in Cancun in addition to the subsequent 2004 meeting, which formalised the inclusion of Trade Facilitation as a key point of negotiation for the WTO.

qThe main benefits of Trade Facilitation in general are that it allows for greater simplification of trade, which in turn allows for efficiency gains and lower costs. The benefits are driven by six key factors: (1) simplified trade documents; (2) streamlined border procedures; (3) automated customs processes; (4) greater access to trade-related information; (5) advanced rulings on customs matters; and (6) greater transit co-operation for landlocked countries. Calculations made by the Organization for Economic Cooperation and Development (OECD) claim that Trade Facilitation reforms could secure cost savings (for importing/exporting) of approximately 15 per cent for Low Income Countries.

An important component of the WTO agreement is the universal acknowledgement that additional support is required to assist LDCs to engage more fairly in global trade. This includes working directly with LDCs to improve processes and procedures across both the public and private sectors. There is a call for innovative approaches to funding Trade Facilitation reforms and infrastructure support, such as through the use of Public-Private Partnerships (PPP). The African Development Bank (ADB) outlines a key concern, however, in that the Bali Package did not provide binding agreements for how best to support LDCs. Similar criticisms are made about other agreements with “special and differential” trade provisions for developing countries, such as with Part IV of the General Agreement on Tariffs and Trade (GATT). The lack of binding provisions has led to a view by some that the agreement offers little practical value. The same type of concern is therefore likely to be an ongoing issue with the current agreement on Trade Facilitation due to the reliance on the good faith of member nations to ratify and implement. WTO members failed to meet the 31 July 2014 deadline to adopt the necessary Protocol of Amendment, which would allow for the WTO Agreement on Trade Facilitation. As such, a full framework for Trade Facilitation has yet to be formalised. While a truly multilateral agreement has yet to be implemented, there is the possibility for countries to act on a plurilateral basis. Regional blocs, such as ASEAN, are firmly committed to implementing Trade Facilitation processes in the agricultural sector. The following excerpt from ASEAN illustrates the capacity for plurilateral action:

“In order to respond to trade globalisation, ASEAN cooperation in food, agriculture and forestry is now more focused on the enhancement of food, agricultural and forestry products’ competitiveness in international markets, while sustaining agricultural production. Harmonisation of quality and standards, assurance of food safety, and standardisation of trade certification are amongst the priorities being addressed, building upon the experience of some Member States and existing international standards.”

A statement made by Australia’s Minister for Trade and Investment, The Honourable Andrew Robb AO MP, affirms Australia’s commitment to the Trade Facilitation principles espoused in the WTO’s Bali Package. The comments also reflect the above excerpt from ASEAN, which illustrates the shared interest between Australia and some of its regional neighbours on this issue. Australia’s ratification of the agreement is complemented by other recent policy announcements, such as the Economic Diplomacy and Aid for Trade platforms.

Australia’s new policy platform: Economic Diplomacy and Aid for Trade

Australia is well positioned to engage in Trade Facilitation support for LDCs. Two new policy agendas, Economic Diplomacy and Aid for Trade increase the Government’s focus on achieving more liberalised trade in addition to further integration of the country’s foreign aid and trade programs. These policies have been implemented in addition to an increased focus on achieving cost savings in foreign aid delivery.

In an address given to the Sydney Institute in July 2014, Australia’s Foreign Minister, The Honourable Julie Bishop MP, stated that “if the goal of traditional diplomacy is peace, then the goal of economic diplomacy is prosperity.” The central tenant of Economic Diplomacy is the assumption that trade delivers economic benefits such as increased income levels, which can assist to alleviate issues such as poverty. The Government’s agenda is based on four key pillars: (1) promoting trade; (2) encouraging growth; (3) attracting investment; and (4) supporting Australian business. As such, Economic Diplomacy is a powerful platform upon which to integrate the Australian Government’s support for private sector involvement in business ventures overseas – leading to better outcomes not only for Australia, but also for the country’s trading partners.

The Economic Diplomacy agenda is closely linked to the Aid for Trade policy. Aid for Trade is a WTO-led initiative that encourages developing countries to have easier access to trade through arrangements tied to the aid policies of donor countries. The policy recognises the various supply-side and trade-side issues that developing countries face, which constrain their ability to engage in trade. Australia’s expenditure on Aid for Trade in 2013-2014 was $630 million, which represents almost 13 per cent of the country’s Official Development Assistance (ODA) budget. There is a strong focus on East Asia and the Pacific, representing 48 per cent of all expenditure. 42 percent of the Aid for Trade program is focused on infrastructure development, with 54 per cent directed at improving the recipient’s productive capacity (for example agriculture). A case study of Australia’s bilateral Aid for Trade platform in relation to agricultural development is the Solomon Islands Biosecurity Development Program. In this program, Australia is supporting the Solomon Islands to improve the country’s agriculture and quarantine services, while strengthening the country’s market access and trade opportunities. This exemplifies Australia’s commitment to supporting developing economies through Trade Facilitation techniques that target the agricultural sector.

Australia: One of the global thought-leaders on agricultural trade

Australia has the potential to promote best practice in Trade Facilitation assistance for LDCs through the expanded provision of agricultural trade support. Australia is one of the leading members of the Cairns Group, which is an international coalition of 19 agricultural exporting countries that are committed to reforming agricultural trade. The group’s agenda is structured around three key areas: (1) improving market access for developing countries; (2) providing domestic support; and (3) reducing export subsidies. With the first two agenda items closely linked to Trade Facilitation, Australia is in a powerful position to lead by example. This involves not only learning from the country’s previous experience, but also incorporating this experience to create new examples of how facilitating agricultural trade can benefit LDCs. It should be noted that with funding being reduced in Australia’s aid budget, there is a reluctance to implement policies or programs that would require significant increases to expenditure against appropriation. This is highlighted by Australia’s annulment of its membership in the African Development Bank (ADB), which also reflects a reduced focus on Africa in favour of a more regional approach focused on the Asia-Pacific.

As part of the country’s Economic Diplomacy platform, the Australian Centre for International Agricultural Research (ACIAR) is being used as a tool to promote economic development through agriculture. ACIAR engages with researchers in developing countries, focusing primarily on forty countries in the Asia-Pacific region and across Africa. The research assistance enables gains in productivity, sustainability, and food security more broadly. ACIAR’s work in Cambodia provides an example of a multi-pronged approach to agricultural trade facilitation. At a strategic level, ACIAR is working with the Royal Government of Cambodia (RGC) to support their development priorities, outlined in the country’s Millennium Development Goal targets in addition to the priorities detailed in its national poverty-reduction campaign. There are three core tenants of ACIAR’s work in Cambodia. Firstly, ACIAR is supporting research that aims to improve the productivity of rice farming. This is important for the country’s food security and for regional food production. Secondly, there is a focus on applied R&D to investigate methods of agricultural diversification. This approach aims to enable farmers in Cambodia to explore alternative crops, which could provide more lucrative trade opportunities. Thirdly, ACIAR is assisting with sustainability research, which will focus on responses to climate change. ACIAR’s work in Cambodia illustrates the ability for Australia to engage with developing countries to promote improved agricultural practices.

The Australian private sector is also well positioned to engage in international agricultural trade facilitation programs. Through the Economic Diplomacy platform, there is an environment that will actively support Australian business ventures operating abroad. This is further supported by the Aid for Trade platform, which will provide additional opportunities for the Australian private sector to have a role in providing agricultural developmental assistance. At the export level, Australia currently produces and trades the produce required to feed approximately forty million people. While Australia may not grow to become one of the leading net exporters in agricultural goods, the country’s competitive advantage may lie in its ability to export agriculture as a service. This combines not only Australia’s strength in agricultural research, but also the experiences gained from operating in a challenging environment – where there is a need to respond to difficult environmental conditions that include droughts, floods, fires, and other natural phenomena.

Alternative models: How best to provide Trade Facilitation assistance in agriculture

There are numerous models that governments of developed economies can use to meet their Trade Facilitation assistance requirements. The alternative models however need to be bound by key criteria, which allows for the circumscription of alternatives to a select few models to be considered in greater detail. For this research, there are three factors that must be considered. Firstly, it must be an effective model for achieving positive SROI in agriculture. This must be at the core of the decision criteria, as it ensures that the recipient of the Trade Facilitation assistance receives an effective solution. Secondly, due to the budgetary constraints currently observed within Australia’s foreign aid program, the delivery model must be financially sustainable. This allows for a model that can be delivered as an efficient solution. Thirdly, the delivery model must be implementable. As such, it is important to ensure that Australia either has existing capability in delivering aid through such a model, or alternatively that the capabilities can be easily built – providing for a practical solution.

The application of the above criteria suggests that there are three predominant alternative delivery models to be considered: (1) equipment and commodity transfers; (2) sharing of training and expertise; and (3) small grants. Each of the three alternatives can be highly effective in improving agricultural outcomes, can be delivered at relatively low cost, and are models in which Australia has existing capabilities. There are, however, limitations to each of the models. The first option requires assurance of the recipient’s ability to effectively benefit from the donation; the second option is only successful if the knowledge is supported by a sufficient infrastructure framework to allow for its integration into business as usual; and the third option is often implemented in a highly ad hoc manner, which creates complexity. The recommended approach would create a hybrid model, whereby there is a combination of certain features of each of the three models. The model, however, most closely aligns to the third alternative considered: small grants.

Recommendation: Co-investment Seed Fund model

Seed Funds are a small-scale version of venture capital financing, whereby the donor provides “finance, managerial oversight, and strategic expertise to enterprises with novel, commercially-viable ideas”. Seed Funding models have been used in a wide variety of industries and contexts, such as in the medical industry to support the development of innovative intellectual property, as well as in small business to encourage entrepreneurship while mitigating risk. The model is currently used in foreign aid primarily as a means of supporting small business initiatives. Seed funds require an appropriate governance structure to ensure that the expenditure matches the criteria established during appropriation. The use of criteria is important in assessing both the recipient and the investor (if a co-investment strategy is to be selected).

Global best practice: Australia’s expertise

Australia currently operates numerous Seed Funds and small grants programs. One of the largest examples is the Australian Government’s Direct Aid Program (DAP), which operates across 66 countries with an annual budget of over twenty million dollars. A secondary example is the Australia-India Council (AIC) Grants Program. The grants “provide Seed Funds for innovative proposals relevant to the mission and goals of the Council”. On a domestic level, the Victorian Government has entered into a joint venture with Rural Finance to create the Great State of Ag Seed Fund. The program’s mission is “to encourage people to share ideas that would benefit rural and regional Australia.” While no Seed Funds are currently running in the program, previous funds have included the Rural Finance Seed Fund and the Coles Seed Fund, both designed to foster the development of innovative ideas in agriculture. These case studies illustrate the Australian Government’s experience and ability – at the Federal and State level – to manage Seed Funds, in addition to illustrating the Government’s recognition of the benefits of co-creating value through collaboration with the private sector.

A sustainable framework: The creation of the Australian International Development Seed Fund

The recommended Seed Fund targets the expansion of the DAP, while ensuring greater integration of the Australian private sector to co-fund the expanded program. As evidenced in the examples above, there are two main classifications of Seed Funds: (1) those that target business development; and (2) those that target community development. The proposed Australian International Development Seed Fund (AIDSF) would combine the two, by requiring two partners in each successful application – one partner from Australia, and the other from a developing country. An initial approach is to use two measures: SROI and financial ROI. As such, it will be important to select ventures to fund based on whether or not there is sufficient potential to create an ROI for each partner (the Australian Government, the Australian private sector partner, and the LDC partner), in addition to achieving an SROI for the associated partner in the LDC.

There are three Critical Success Factors (CSFs) that have been identified. These are the key considerations that must be addressed for the successful expansion of the DAP to include the AIDSF. The CSFs identified are as follows: (1) there is a need to work in harmony with the existing DAP model; (2) there is a need for sufficient buy-in from the private sector to allow for co-investment of funding and delivery; and (3) there is a need for clearly defined criteria for selecting co-investors and funding recipients.

Firstly, it is important to recognise the success of the DAP model and as such the proposed AIDSF should be regarded as a means of complementing the existing framework. The AIDSF can be seen as a potential subsidiary component of the DAP, which would allow for a unified resource. This preserves the ability for the DAP to serve as a ‘one-stop-shop’ for those seeking various types of funding, rather than further fragmenting the delivery. With much of the Australian aid budget being re-directed to the Asia-Pacific region, there is a strong business case to focus on this geography. This also ensures greater alignment to Australian national interests, by facilitating a greater likelihood of receiving sufficient interest from the private sector co-investment partners, due to strong existing trade connections in the region.

Co-investment and co-delivery from the private sector is an important component of the proposed AIDSF, which is a factor that distinguishes the AIDSF from other Seed Funds. Seeking co-investment has two key benefits: firstly, it provides an avenue in which additional funds can be collected that exceeds Government appropriation – meaning there is greater capacity to deliver programs that drive development. Secondly, it allows for expertise in the delivery phase. This means that private sector knowledge can be integrated into achieving the success of funded programs. Buy-in can be achieved by prioritising agriculture as the key lever for the successful launch of the AIDSF. This not only helps to focus the program domestically, but it also ensures that programs are relevant to the context of developing country’s needs. For Australia, agriculture remains an important pillar of the economy, and it is an area in which we have an international competitive advantage. As such, Australia is well positioned to use private sector expertise in agricultural services to achieve the developmental outcomes that can be delivered by funding small-scale agricultural projects in LDCs in the Asia-Pacific region.

The third CSF is that there needs to be clearly defined criteria. These criteria will form the core of a program that can be implemented across borders, but it is critical that there is nonetheless the ability to customise the criteria to ensure relevance to the specific project. The criteria for selecting the Australian co-investment partner should involve baseline criteria relating to: (1) demonstrated experience; (2) financial capacity; and (3) capability to co-deliver. The criteria for selecting the funding recipients should include: (1) demonstrated experience; (2) clearly defined ROI and SROI; and (3) a clear understanding of how the Australian partner can be used to add value.

Conclusion

There is an indisputable need to ensure that LDCs are able to fully unlock the development potential of agricultural trade. With increased trade comes jobs; with jobs come higher incomes; with higher incomes come poverty alleviation. The positive cycle that is created from agricultural trade represents a powerful policy tool that should be given greater consideration in the foreign aid strategies of developed countries, such as Australia.

Facilitating agricultural trade can be achieved by using smart funding tools, such as co-investment Seed Funds. Such a Seed Fund will allow for the Australian Government to not only meet its Trade Facilitation requirements, but it will also allow these requirements to be achieved in a manner that is underpinned by a sustainable funding design. Australia is well positioned to implement Seed Funds for agricultural development. This assumption is based on Australia’s experience in leading Seed Funds, in addition to the country’s new trade and foreign aid policy agendas. This supportive context is furthered by Australia’s global leadership in agricultural production and trade, encompassing both strength in the public sector through Federal and State-level programs, in addition to the innovative and resilient private sector.

The integration of the private sector into the Seed Fund also brings with it greater capital inflows, to complement the contribution made by the Government. The Government therefore benefits from sharing the financial risk of the investment with a private sector partner. The private sector partner benefits from receiving government support in their international trade endeavours and similarly is able to share the risk of the capital outlay. The main outcome, however, is that the LDC partner is able to achieve an SROI from the funding. The various projects that could be funded represent significant potential for Australia to engage in agricultural Trade Facilitation in the Asia-Pacific region, through the use of a co-investment Seed Fund model.

Matthew Sinclair, 21, is a Bachelor of Commerce (Marketing/Management) student at The University of Melbourne’s Faculty of Business and Economics. He has a strong interest in public policy and international affairs and has participated in multiple Model United Nations conferences. He is also actively involved in the university and wider community and volunteers his time as a Regional Committee Member of the Pinnacle Foundation, a not-for-profit that provides scholarships and mentors for LGBTIQ youth. He attended the World Trade Organization Public Forum in Geneva as part of the Global Voices youth delegation.

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