KNOWLEDGE NOTE - AUGUST 2017 Pull Mechanisms for Overcoming Market Failures in the Agriculture Sector INITIAL LESSONS LEARNED WITH CASE ILLUSTRATIONS FROM AGRESULTS’ KENYA ON-FARM STORAGE PILOT Denise Mainville and Tulika Narayan Through the AgResults initiative, donors are testing the use of pull mechanisms to engage the private The note suggests circumstances when pull mechanisms are most likely to be effective as a development tool sector in providing agriculture technology solutions to for the practitioner wanting to develop a market for smallholder farmers. Drawing on early lessons from the agricultural technologies that benefit smallholders. It AgResults experience to date and the AgResults Kenya also draws on AgResults’ experience to date to suggest On-Farm Storage pilot in particular, this Knowledge some initial lessons, several of which point to the value Note provides guidance for development practitioners of incorporating what economic theory can tell us about interested in incorporating pull mechanisms in their the behavior of economic agents in agricultural markets own work. It presents the key elements of pull and the underlying causes of market failure in the mechanisms, which include: provision of the technology. For example: • A starting premise is that pull mechanisms that aim • A development problem to be addressed to develop a sustainable market for a technology are • A technology solution (or a practice) to be marketed best designed for development problems that can be • “Solvers” or private sector actors whom the pull resolved by large scale adoption of a technology that mechanism incentivizes has already been proven in the field or requires only • An incentive structure that includes the predefined some tailoring. outcomes and prizes • The solvers should have a clear business case to • A verification protocol engage in the market for the technology. Also, the • A theory of change that ties together all the elements users of the technology – smallholders– should realize • Ongoing monitoring and evaluation an economic benefit from adopting the technology. • The outcomes that trigger payments should be easily Results to date also lead us to endorse the argument measurable, cost-effectively verifiable and in the that pull mechanisms are more likely to succeed when manageable interest of the solvers. there is only a single binding constraint limiting market • Finally, and very critically, a robust value chain analysis development, and not a multitude of constraints (unless should inform the theory of change.This theory other interventions are effectively and simultaneously of change must clearly articulate how the solvers, addressing those other constraints). Avoiding a motivated by the incentive structure, will address the multitude of constraints makes it more likely that the key constraints limiting the development of a market nudge provided by the incentives will induce the private for the technology. sector to engage and a functioning market to emerge. Synthesizing these lessons, the Knowledge Note presents the critical steps in designing the technical elements of a pull mechanism. INTRODUCTION A fter the food crises of 2007-2008 and the growing This Knowledge Note reflects the initial findings from the realization that donor resources were not sufficient external evaluator’s ongoing research to evaluate the pilots. to meet global agricultural development challenges, the It draws on the evaluators’ initial qualitative assessments AgResults initiative was launched at the June 2012 G20 and baseline assessments in each pilot country, which Summit in Los Cabos, Mexico as an innovation to boost involved interviews with diverse actors in the agricultural private sector engagement in meeting these challenges. With sector, key government representatives, and the pilot design funding and leadership of several donors – Australia, Canada, and implementation teams. The Knowledge Note also draws United Kingdom, United States, and the Gates Foundation from structured interviews conducted in June 2016 with – and the World Bank as its trustee, the AgResults initiative key AgResults stakeholders, aimed at synthesizing their uses results-based incentives or “pull mechanisms” to harness collective thoughts on lessons learned thus far. These 13 the resources and creativity of the private sector to drive interviewees included the in-country pilot managers in agricultural innovation, research, and delivery for smallholder Kenya and Zambia and representatives from the Secretariat farmers in developing countries. AgResults is now a $118 and the Steering Committee. million initiative comprised of seven pilot projects that The Knowledge Note uses the experience and lessons from incentivize the private sector to develop and deliver innovative AgResults to provide guidance to development practitioners products to smallholder farmers in settings where markets on the use of pull mechanisms to develop markets for for these products are otherwise underdeveloped. Each pilot technologies that can benefit smallholder farmers or poor provides financial incentives to the private sector actors to consumers. First, we begin by defining pull mechanisms, then encourage them to enter the market, but the incentives are explain how they can address market failures in agricultural paid only after they achieve predefined results. The ultimate value chains. We next discuss the key elements of a pull objective is that private sector will invest in overcoming mechanism and discuss initial lessons learned relating to market failures impeding the establishment of sustainable these key elements. We conclude by identifying the critical markets for developmentally beneficial agricultural steps involved in design of a pull mechanism. Throughout, we innovations serving smallholder farmers. draw on examples from the AgResults On-Farm Storage pilot in Kenya to illustrate our guidance. 2 WHAT ARE PULL MECHANISMS? P ull mechanisms are among the incentive-based development are designed to alter the risk-reward payoff to market players, approaches, such as prizes and advance market motivating investments that address the underlying market commitments (AMC), that pay only after predefined results failures that otherwise limit the development and provision of are achieved. Thus far, prize-based approaches have been used beneficial technologies. to encourage innovation, recognizing that socially beneficial As such, pull mechanisms, if successful, can leverage donor technologies are by nature a public good and underprovided funds by engaging the private sector to substantially increase (Masters 2003 and Masters and Delbecq 2008). These prizes their investment in food security and agricultural development. are usually structured as winner-take-all grand reward such as Without relinquishing resources up front, the sponsor has a the X Prize, first awarded in 2004, which sponsors high-profile chance to engage more than one innovator at a time, thereby competitions to encourage technological breakthroughs “for the theoretically increasing the chances of success, while removing benefit of humanity.” While the focus of these prizes has been to the risk of contracting with a sole innovator who may not develop technologies, more recently Michael Kremer has argued succeed—yet who could use up all the donor’s resources in for using AMC that not only spur innovative technology, but also the attempt. By directly engaging with the private sector, this include a market test to ensure that the technology is adopted. approach also avoids crowding out the private sector, which For example, the AMC for developing a pneumococcal vaccine often happens with grants that use subsidies or provide pays winners only after the vaccines are purchased by countries technologies for free. Pull mechanisms also offer the appealing where targeted beneficiaries live. However, the AMC does not advantage of Pull mechanisms in this context are seen as a specifically focus on developing a market for the vaccine or possible complement or even alternative to traditional donor- engaging the private sector. In 2008, William Masters proposed a funded development approaches that seek to “push” promising proportional prize to encourage private sector actors to develop technologies out to beneficiaries through grants or contracts technological innovations to address predefined agriculture that pay in advance for recipients’ efforts. In the next section, development challenges such as increasing yields (Masters we discuss how pull mechanisms can work to address market and Delbecq, 2008). This approach emphasizes innovation failures in the agriculture sector, which is how they are used in in breakthrough technologies and encourages private sector AgResults. engagement with some focus on adoption, but includes nearly no focus on developing a market for the innovations. Overall, these approaches that combine innovation and adoption do not Pull mechanisms, recognize that research and dissemination are typically domains if successful, can of different types of organizations. significantly In contrast, AgResults technology adoption pilots have the leverage donor explicit aim of not only encouraging adoption by smallholder funds by engaging farmers, but developing a functioning and sustainable market the private sector that will provide the technology to these farmers. Therefore, to substantially AgResults pull mechanisms focus on socially beneficial and sustainably technologies that are usually further along in their development. increase their AgResults provides payments (or incentives) to targeted market investment in players (or “solvers”) only after they achieve pre-specified food security outcomes associated with development of a market for the and agricultural agricultural products or services they promote. The payments development. 3 HOW CAN PULL MECHANISMS ADDRESS MARKET FAILURES IN DEVELOPING COUNTRIES’ AGRICULTURAL SECTOR? M any underlying constraints can lead to low demand and low supply of development solutions, whether a technology or a practice, particularly to smallholders or poor consumers. Pull mechanisms offer incentives to their solvers that temporarily offset these unfavorable demand and supply conditions. Through results-based prizes that reduce the risk Low demand for a technology may result from limited awareness of investment in these markets, pull mechanisms effectively about the technology, or difficulty in accessing, paying for, or increase the likelihood of the solver achieving a minimum implementing the technology, particularly by smallholder return on investment. Consequently, these prizes create farmers who are likely the final intended beneficiaries. Perceived incentives for private sector actors to develop systems for risk of using the technology can also limit demand. On the supply procurement, value addition, distribution, and promotion side, the costs and risks of investing in developing appropriate of innovative technologies, thus creating a functioning (and products or services for smallholder farmers may be too high. eventually sustainable) market for the technology. Even if the product is developed, low expressed demand, or high The AgResults Kenya On-Farm Storage pilot demonstrates distribution costs to reach smallholders may limit the supply. how this looks in practice (see Exhibit 2). In Kenya, as in many These problems are often accentuated by a weak enabling developing countries, as much as a quarter of smallholder environment. Overall, a reinforcing cycle of low demand and farmers’ production of staple grains is lost after harvest to low supply can lead to a “chicken and egg” problem that inhibits problems such as pests and mold. Improved storage devices the emergence of a viable and sustainable market for socially that could reduce post-harvest losses, such as hermetically beneficial technology. These conditions lead to a missing or sealed bags and metal or plastic silos, had been developed underdeveloped market for the technology or, in other words, a (see Exhibit 3). However, smallholder farmers’ low levels of market failure in the provision of the technology (see Exhibit 1). awareness of these storage products and the large investment required to raise awareness and set up distribution systems were barriers that kept suppliers from refining these products Exhibit 1. Missing Markets for for, and marketing them to, smallholders. Instead, suppliers Beneficial Technologies often relied on development agencies as their primary buyers because these agencies could be counted on to make large orders, conduct farmer awareness creation and trainings on how to use the products, and then distribute them at reduced or no cost to the farmer. Even though some development partners had been working on promoting smallholder adoption of improved on- farm storage solutions for more than a decade, at the start of the AgResults pilot, fewer than 12 percent of Kenya’s smallholder farmers in the main grain growing areas were aware of the existence of improved on-farm storage technologies, and less than 4 percent were actually using them. 4 Exhibit 2. Kenya AgResults Pilot at a Glance May 2015 - June 2019 5 Exhibit 3. Storage Products AgResults’ Kenya On-Farm Storage pilot energized commercial suppliers of on-farm storage products to compete with each other to develop and distribute these products to smallholders. The suppliers were motivated by an attractive incentive structure with prizes proportional to their performance in achieving predefined sales goals. At the end of Year 3 of the four-year project, in response to the incentives, there are now nine suppliers selling storage products to farmers under AgResults with sales of 704,776 storage units providing 146,436 MT of improved storage capacity for smallholders. At least 70 percent of these storage products are estimated to be in the hands of smallholders (verification of the proportion of total sales going to smallholders was ongoing at the time this Knowledge Note was written). Although the Metal Storage Silo – adapted for smaller final evaluation has not yet been conducted and there is more capacity for use by smallholder farmer to be learned, monitoring data imply that the pilot appears to be addressing a key market failure. Companies are using several strategies to market to smallholders, such as using sales and marketing staff in the region to connect with the smallholders and understand their needs, and nurturing connections with local cooperatives and farmers groups to increase exposure to farmers (Deloitte, 2017 ). There is evidence of competition among companies that is giving agrodealers and farmers many options for purchasing improved storage for the first time. There is also evidence of efforts by companies that go beyond what is rewarded by the pilot. For example, the companies are coming together informally in a working group to discuss standards for hermetic storage. Hermetic Storage Bag – Several companies are In the next section, we delve further into the necessary elements promoting different types of hermetic storage in Kenya, incentivized by the AgResults pilot incentives of a pull mechanism that enable it to address market failures in agriculture value chains. In Kenya, there is emerging evidence that competition among companies is giving farmers many new options for on-farm storage. Plastic Storage Silo – adapted for smaller capacity for use by smallholder farmer 6 WHAT ARE THE KEY ELEMENTS OF A PULL MECHANISM? A s we gain more experience with pull mechanisms through identified at the beginning of AgResults, but have come into AgResults, we are seeing that these mechanisms have a sharper focus over time. Below we discuss each of the major number of essential technical elements (see Mitchell et al, 2014 technical elements in turn, illustrated with details from the on designing broader prizes). Many of these elements were Kenya pilot. DEVELOPMENT TECHNOLOGICAL SOLVERS PROBLEM SOLUTION A development problem that A technological solution with “Solvers,” i.e., pre-identified is recognized as socially potential to have a significant private sector actors who will significant with a technological impact on the development be incentivized to invest in solution that has the potential to problem if adopted at scale developing a market for the address it technology Post-harvest losses of grains due Improved on-farm storage Manufacturers and distributors of KENYA KENYA KENYA to pests, particularly large grain solutions such as hermetically improved on-farm storage borer sealed bags, metal and plastic silos INCENTIVE THEORY OF STRUCTURE CHANGE An incentive structure including a targeted outcome, parameters to qualify A theory of change that reflects the outcome including a means of verification, and reward prize structure for the causal logic by which the achievement of the outcome incentive structure will motivate solvers to develop a sustainable and well-performing market for the technological solution, as well as how the pull mechanism’s Outcome: Sales of improved on-farm storage to smallholders KENYA outcomes will have a significant Parameters: Storage must be technically effective, there is a maximum capacity impact on the development for storage, retail prices must be at or above cost, credit must be resolved for problem sales to count, only sales in major grain growing areas count. In Eastern region, The pull mechanism incentive will storage must also be proven to protect against large grain borer. KENYA motivate firms to invest in devel- Prize structure: Geographically differentiated for solvers competing in Rift Valley opment of demand generation and region, threshold prize for first five companies reaching a specified level of sales, distribution systems for improved then end-of-pilot prize from fixed prize pool proportional to market share. In on-farm storage, increasing the Eastern region, end-of-pilot prize from fixed pool proportional to market share availability and uptake of storage by smallholders, thereby reducing post-harvest losses and improving food security VERIFICATION M&E PROTOCOL FRAMEWORK A verification protocol that is Monitoring and evaluation framework that provides continuous learning to adapt based on outcomes that can be pull mechanism and generates lessons on the design and implementation of pull measured cost-effectively, is not mechanisms. subject to manipulation, and does not place a burden that excludes certain types of solvers Large sample survey of The external evaluator is using an interrupted time series design to assess the KENYA KENYA smallholders to estimate adoption impact of the pilot on smallholder welfare, and is using qualitative analysis to understand the development of a market for on-farm storage solutions 7 Pull mechanisms must be grounded in a clear development development problem. One outcome that is commonly used in problem—a socially meaningful problem that the pull AgResults’ pilots is the level of sales of the targeted technological mechanism is intended to address and a solution that has solution by solvers. the potential to address the problem if it is brought to scale. Parameters against which outcomes are judged can help to The pull mechanism can then be designed to address the key ensure that the solvers’ investments lead to development of market failures that have limited the development of a market a sustainable market whose structure and performance are for this socially beneficial solution.1 The solution can be a in line with the resolution of the development problem and specific technology solution that is already tested and proven, other objectives that sponsors may have. For example, the or it can be a technology or practice that requires further pull mechanism could specify technical parameters on the tailoring to be adapted to smallholder needs and the specific technology to ensure its suitability to smallholder farmers, and/ development problem. In the latter case the pull mechanism can or specify market terms under which sales would qualify for incentivize investment in the refinement of the technology itself. reward to promote investments that lead to sustainable market Development problems that do not yet have viable technological systems. solutions are best addressed through innovation-oriented pull The prize structure includes the size, type, and frequency mechanisms or other non-pull approaches. of payments that are triggered once the verified outcomes are A key element of a pull mechanism is the solvers or private achieved. Prize structures differ in the types of competition they sector actors or a role in the value chain that can be filled by induce between solvers, the degree of risk they place on solvers, private sector actors—who are incentivized to achieve the and the types of market structure that they promote. Prize predefined outcomes. Because the solvers are the main agents structures range from winner-takes-all to payment per unit of of change in a pull mechanism who invest with their creativity outcome achieved (see Exhibit 4). AgResults prize structures and capital to address the development problem, they must have typically eschew winner-take-all awards that are not suitable an underlying interest in the market for the solution. Therefore, for developing markets with multiple actors; instead they tend the choice of solvers is intrinsically tied to the choice of the to rely on prize structures featuring multiple awards such development problem and its solution, which are underpinned as proportional prizes, milestone prizes, and per-unit prizes by a clear theory of change that demonstrates the solvers’ (similar to AMCs). path to scale up the solution to address the problem and the The next important element of the pull mechanism is a underlying market failures (as discussed below). Furthermore, clear theory of change that articulates the expected causal it is important to ensure that there is a sufficient pool of such linkages between the pull mechanism incentive structure and solvers with the capacity to invest at the scale needed to develop the realization of a meaningful impact. The theory of change a competitive market with adequate critical mass. should articulate how the solvers’ expected investments and The incentive structure includes the predefined outcomes activities in response to the incentive structure are likely to that will trigger payout, the parameters against which those lead to the development of a market for the target technological outcomes are judged, and the prize structure. It is critical to solution and how the development of this market will address the pull mechanism that the outcomes are clear, measurable, and the development problem. , The theory of change should verifiable without vulnerability to tampering by solvers, while also recognize the external factors that might impact the also being in the manageable interest of the solvers. Furthermore, causal linkages, positively or negatively, necessitating a clear the outcomes need to be such that the solvers’ efforts undertake understanding of the current enabling environment, such as to achieve those outcomes advance the resolution of the policies and regulations, and any expected changes to it in the future. 1 Masters (2005) has argued for pull mechanisms that are more solution agnostic and focused on development problems with the specific intent to spur Although technically part of the administrative structure, innovations that lead to new solutions. In contrast, the focus of this Knowledge the verification protocol has important implications for Note is scaling up the adoption of socially beneficial solutions that exist by technical aspects of the pilot and a verification protocol must using pull mechanisms to remove the barriers to adoption. be incorporated into the pull mechanism design process. 8 Verification typically involves a third-party verifier, to external evaluator from the start enabled the design of rigorous transparently and defensibly verify that the solvers achieved the impact evaluations for the initiative. The evaluator’s initial outcomes as laid out in the initial requirements. qualitative assessments and the ongoing review of pilots’ A final and important element of a pull mechanism is a robust progress have informed pilot adaptations and ongoing learning monitoring and evaluation framework (see Conrad et from implementation. The next section presents the initial al, 2017 for an evaluation framework for prizes). Engaging an lessons that draw on, in part, the external evaluator’s ongoing learning. Exhibit 4. Prize Structures Used in Pull Mechanisms Type of prize Suitability Advantages Disadvantages Winner-takes-all: End-of- Suitable when solvers are Limits the total amount of prize May not be suitable if solvers contest award with just one willing and able to take risks payout. do not have resources ahead of winner and invest, as they are placed in time to invest with returns much intense competition to achieve later or if solvers are risk-averse. outcomes, with high uncertainty about receiving payment, and when the focus is on developing an innovation rather than developing a market, as just one award can leave a single solver at the end. Proportional: Payments are Suitable when outcomes can be Increases likelihood of engaging A large payment can be made shared proportional to the measured in units attributable multiple solvers for a longer even if total quantity of outcome relative performance of solvers to individual solvers and the period of time; solvers may face is low (which can be mitigated by intent is to place solvers in less competition and reduced setting parameters that establish competition, but not as intense investment risk—as all successful a minimum threshold before the as winner-takes-all. Solvers solvers earn some prize— proportional payouts are made). face less uncertainty about without eliminating incentives receiving payments, which are to “win” since more successful less dependent on the efforts of solvers earn larger prizes. other solvers. Milestone: Payments are made Suitable when the steps to Allows periodic payment to Results in payment even if the as a pre-defined milestone is achieving the final outcome solvers if they have a cash flow final outcome is not achieved. reached are known. The level of problem, and therefore increases competition among solvers is the likelihood of engaging more low, as all solvers who reach the solvers in the process. milestone can get an award (the competition can be intensified by requiring that only the first few to reach the milestone receive the prize), implying much less uncertainty about receiving payments. Prize per unit of outcome Suitable when the intent is to If the per-unit price can be Results in payment even if the achieved: Payment is made per keep the level of competition crafted to mimic the final price final outcome is not achieved unit of outcome achieved (e.g., for the prize among solvers low of the technology or the price at the desired scale (which can AMC is a payment per unit of to encourage multiple solvers premiums, then it can create be mitigated to some extent by sales) to achieve the outcomes and to the exact conditions for value providing minimum thresholds reduce the degree of risk they chain actors to move toward a before per-unit payments are face in receiving payment. sustainable market (e.g., AMCs made). can be set at marginal cost of production for the vaccine). 9 INITIAL LESSONS ABOUT PULL MECHANISMS FROM AGRESULTS In this section, we offer initial lessons that can guide development agencies in deciding whether pull mechanisms are an appropriate tool for their agriculture development Early results from AgResults’ Kenya pilot indicate that it tackles a development problem that is highly amenable to the influence of a pull mechanism. Although potential programs. These lessons draw from our AgResults experience technology solutions exist, private sector actors have not and are illustrated with examples from the AgResults Kenya made large-scale investments in developing smallholder pilot. The lessons are focused on the technical aspects and markets for their on-farm storage solutions. The do not include lessons on the management structures and constraints that have inhibited greater investment by coordination required at the country level, which are the focus the private sector include that the technologies needed of the AgResults Secretariat’s lessons learned series. tailoring to smallholders’ technical and economic realities, smallholders were not aware of the technology’s benefit, and large-scale distribution networks were costly to Lessons about the choice of develop. The private sector actors needed a nudge to propel development problem, its technology their entry into the market and did not face a multitude solutions, and the solvers of constraints that would have limited their engagement despite incentives proposed under the pull mechanism. The development problem should have a clear binding constraint that the private sector or targeted solvers can address. The applicability of a pull mechanism to a development problem is heavily dependent on the reasons underlying the persistence of the problem over time. Specifically, there must be clearly identifiable causes of market failure that can be overcome if the private sector invests in the market. If the market failure results from multiple constraints, the pull mechanism may not be able to address all of them, at least not without making the pull mechanism difficult to understand and complex. AgResults experience indicates that pull mechanisms bring about a better early response when there is only one major binding constraint impeding development of a market. The emerging lesson is that there should be an overriding constraint that, if addressed, can unleash the market potential. Related to this is the consideration of other “push” approaches that support the pull mechanism (or potentially interfere with it). The pull mechanisms may consider including push mechanisms to address other underlying constraints. If the level of push funding becomes Storage structures for improved on-farm storage in Kenya substantial, the project would become a push-pull hybrid. 10 The implementation context—including incentives to invest in developing smallholder markets both the enabling environment and market for on-farm storage. This factor concerned some solvers, environment—should be conducive to a pull who felt that they were not playing on a level field, as mechanism. Other programs should not be other solvers had previously benefitted, or were currently targeting the same development problem and benefitting, from donor funds to develop the storage promoting the solution in a way that interferes solutions, or benefit from subsidized distribution. Such with market development. funding, for example, was behind the development of PICS bags and metal silos, and had supported subsidized The enabling environment—the government policies distribution of some storage solutions giving solvers initial and rules—should be neutral or supportive. In particular, inroads in the market that other solvers lack. Furthermore, the enabling environment should not create distortions donor funding could be argued to alter solvers’ overhead that undermine the development of the market. Such costs allowing for implicit cross-subsidization of the distortions include policies that favor competing or storage solutions they sold under AgResults and a substitute products, and onerous regulations that inhibit consequently unfair competitive advantage. Ultimately, private sector investment. It is also important that there however, the decision was made to not alter the design to not be other donor or government-funded activities address these concerns; indeed there was no clear way addressing the same problem in way that can complicate to do so without significantly complicating the incentive the private sector’s efforts and present additional structure. In this case, the decision to maintain the original constraints. For example, subsidized distribution of the design does not appear to have hampered the entry of target technology can undermine smallholders’ willingness diverse solvers to the pilot. to pay for it, inhibiting development of a market. In terms of market environment, there should be some The technology solution for which the market is existing market infrastructure that the solvers can being developed must be economically beneficial leverage in developing their own markets. Such market to the key value chain actors. The private sector infrastructure includes the presence of distribution players that the pull mechanism incentivizes – networks for similar products that can be extended the solvers – must see a long-term business case to include the technology and the availability of other and the ultimate consumers of the technology complementary services such as credit to enable the should see an economic benefit. solvers to invest productively. The private sector actors should have an underlying In Kenya, the enabling environment has proven to be interest in the technology, with a clear solver who can be largely to supportive of the pull mechanism. Specifically, incentivized to participate to address the market failure. there is adequate rule of law coupled with a meaningful but The business case for each value chain actor’s engagement not burdensome regulatory environment to support private in the technology should be clearly articulated, particularly sector investment. Likewise, the market environment is the solver who is incentivized and the smallholder also conducive to private sector investment in the market farmers who are expected to have an inherent interest in for on-farm storage—for example, many of the pilot’s adoption. This is critical to ensuring that the market for the solvers are leveraging the distribution networks that they technology and any of its derivative products sustains after have developed for other products. Although there has the pilot. Early results have shown that pilots that promote been, and continues to be, a significant degree of donor and technologies that do not offer a clear economic benefit government-funded activity to promote storage solutions struggle to take off because solvers are reluctant to engage. for smallholder farmers, these efforts have had limited success and are not considered to directly undermine 11 This might imply choosing solvers that have adequate financial standing and access to credit (particularly because pull mechanisms pay only after results are achieved). Furthermore, the pool of such solvers should be large enough to spur competition in the market and bring the market to a sustainable scale, with individual solvers having adequate technical, managerial, and financial capacity to successfully invest in the market and reach an efficient scale of operations. The Kenya AgResults pilot encouraged participation from entities that could produce technically responsive storage Agriculture inputs distributors who sell storage solutions in solutions and articulate a plan to develop a market for Kenya them. The solver pool was relevant to the development impact as technology solutions needed tailoring, distribution networks needed to be developed, and adequate In Kenya, an array of smallholder-suitable storage devices resources were needed to raise awareness among farmers. are available which have the potential, if used in combination Manufacturers and distributors of the technologies could with appropriate post-harvest practices to ensure adequate meet these needs directly or through partnerships with drying and cleanliness of grain, to significantly reduce organizations that work with smallholders. The solver pool post-harvest losses of food staples such as grains and was also robust: A broad array of firms expressed interest in pulses. These storage solutions present a clear economic the pilot, including national and international firms active in benefit to smallholders for whom reduced post-harvest markets for agricultural inputs, pesticide-treated mosquito loss will offset their need to purchase grain for their own nets, agricultural produce (grains and pulses), and storage consumption during the lean season. These technologies solutions specifically. The number of firms showing interest include hermetically sealed metal or plastic silos and in the pilot, as well as the number that eventually applied to hermetically sealed plastic bags. The technology producers participate (9 by 2017), demonstrated the potential to reach and distributors, many of whom became solvers, were a scale of operations that could reach the pilot’s objectives enthusiastic about the market potential of on-farm storage of 172,000 MT of storage solutions being distributed to solutions because of the large potential demand, and saw a 480,000 smallholders by the pilot’s end. clear business case to support their investment in the market. Lessons about defining the incentive The solvers must be adequate in number and have capacity to address the constraints limiting structure – the outcomes, qualifying market development. parameters, and prize The choice of technology, the nature of market failures, and the intended final outcome of the pull mechanism all help The outcome should be measurable and cost- the program sponsor identify the ideal private sector actor to effectively verifiable with adequate qualifying incentivize as the solver. In choosing the solver, it is important parameters to link the outcome to the to ensure that the solver’s engagement in the value chain is development objective. central to achieving the development impact. In other words, In defining the parameters on a measurable and verifiable the solver must be well-placed to address the key constraints predefined outcome, it is critical to strike a balance between in the value chain of the technology or its derivative products. a highly prescriptive approach that can inhibit private 12 sector innovation and introduce burdensome costs, and distributor’s cost, and any credit under which the storage an excessively laissez-faire approach that may lead solvers was provided had to be resolved before the sale could be to develop the market in ways that undermine realization counted). At the same time, the parameters also specified of the pull mechanism’s development objectives. One way that the storage had to be sold to smallholders, which to do this is to set parameters on outcomes that mimic required costly verification involving large-sample surveys the characteristics of the market and product that the of households. Currently, there is discussion about whether pull mechanism intends to promote. For example, the this requirement is redundant given the afore-mentioned parameters can be set to reflect the geographic scope of the parameters on the sales which encouraged their sale to target market, the technical parameters of the technology, targeted smallholder populations, particularly considering and the market conditions which are deemed to most that the storage distributors did not have the capacity to likely to lead to establishment of sustainable production track or document the identity of the final buyer of the and distribution systems for the intended beneficiary. storage, nor did they consider it to be in their business A related lesson is that the seemingly simple option of interest to develop that capacity. mandating the desired outcome (e.g. the technology must be sold to smallholders) can impose excessive monitoring The prize structures should take into account and verification requirements on either the solver or solver constraints and encourage participation pilot management. This also highlights the fact that a and investment by diverse solvers. pull mechanism may not be an optimal means to reach The size of the payment should adequately reduce private stakeholders who are not well integrated into agricultural sector risks and attract a large pool of solvers, while input and product markets—these typically include the accounting for the trade-off with cost-effectiveness of the poorest and most vulnerable smallholders including pull mechanism. Tepid interest among potential solvers in women. Nonetheless, it is worth considering the likelihood the early stages is an indication that the size of the prize is of whether this population would eventually benefit once not adequate or that underlying assumptions in the theory the market is more fully developed, as well as the possibility of change must be revisited and redesign considered. At of freeing up resources to target to these populations as the same time, cost-effectiveness is a consideration, so the more market-integrated smallholders gain access to them incentive has to balance the two elements. Phasing out of through the market. the incentives can address this issue, while also promoting The AgResults Kenya pilot used sales of on-farm storage sustainability and scale-up over the duration of the pull technology to smallholder farmers as its predefined mechanism. outcome. The pilot aimed to promote the development Solvers prefer and benefit from more frequent prize of a sustainable market for on-farm storage technologies payments, as they have the option of re-investing those for smallholder farm families to store staples for home payments to enable more rapid growth (an important consumption. Therefore, the parameters for storage consideration given the prevalence of capital constraints and sales that counted towards the achievement of the in developing country economies), and also because they predefined outcomes included the geography of the sales are more in line with private sector solvers’ business cycles (grain producing areas were targeted so that storage which typically operate on a seasonal or annual basis. wouldn’t be sold to farmers to use for cash crops), the technical attributes of the storage (specifically a maximum The duration of the prize—the number of years over which capacity of 540 kg, which approximates the annual it is paid—should be as short as possible to offset the risk consumption requirements of a typical smallholder of solvers’ becoming dependent on the prizes to enable farming family), and the market conditions under which ongoing participation in the market. Shorter duration the storage was sold (storage must be sold at or above the prizes also have the benefit of leaving the pull mechanism 13 less vulnerable to changes in the implementation technology solution will address market constraints and context (for example as a result of policy changes or lead to the final intended outcome. A value chain analysis market developments) that might affect the viability or underpins the development of this theory of change and effectiveness of the prize, and which are more likely to occur is essential for all aspects of the pull mechanism design as prize duration extends. Phasing out of the incentives can process—the identification of the development problem, address this issue, while also promoting sustainability and its technological solution, the solvers, and design of the scale-up over the duration of the pull mechanism. incentive structure. The value chain analysis must identify The Kenya pilot presents an example of a relatively complex the major players in the value chain and their activities, prize. Two separate prize structures were defined based on motivations, and constraints as they relate to the provision the geographic location of sales, with the Eastern Region of the technology or its derivative products. It must also prize requiring that the storage technologies be proven to describe the related flow of inputs, services, and products be large-grain-borer proof. The incentive structure also along the value chain, and major features of value chain’s rewarded a limited number of solvers (five) for reaching organization and governance. The objective is to identify an initial threshold of sales in the Rift Valley Region, with the key constraints to development of a market for the another large prize to be shared proportionally among target technology (particularly as faced by the targeted solvers based on their volume of sales at the end of the pilot. solvers), to assess the potential profit (or “business case”) In terms of timing of the payouts, there is an early lesson for solvers, and identify the potential economic returns of allowing periodic payout after which the solvers start from smallholders’ engaging with the technology. The value afresh in achieving their outcomes, rather than an end-of- chain analysis requires interviews with key informants pilot prize. This could have encouraged more entrants in the along the entire value chain including the potential market, and reduced the first-mover advantage, in addition solvers, smallholder farmers, and policy makers and other to addressing any cash-flow constraints. There is also some government officials who can shed light on the enabling speculation that the Kenya pilot could have still achieved environment. An agricultural economist or agribusiness desired results with a smaller prize, although, the large prize expert paired with a value chain expert from the country may be the key reason that large private sector actors with with keen knowledge about the implementation the ability to solve the problem have entered the market. environment is essential to this process. There may be an early lesson in conducting a prospective The Kenya pilot offers an example where a strong theory cost-effectiveness analysis to determine the size of the of change was based on a thorough value chain analysis, prize, and also the qualifying parameters in terms of the conducted in advance of the pilot and updated as pilot minimum sales to qualify for the prize. implementation approached and in response to emerging issues. The pilot’s theory of change was based on a clear Lesson about the theory of change identification of the major factors contributing to post- harvest losses of grains, as well as those inhibiting the It is critical to carefully develop a theory of emergence of a market for improved post-harvest storage change based on a robust analysis of the value solutions. The analysis also examined the business case for chain and implementation environment. This the solvers to engage in the pilot, and the economic returns analysis must be updated as implementation to smallholders. The critical junctures, or leverage points, nears. where the pull mechanism could catalyze investments to resolve the critical market failures were identified based on The theory of change needs to be mapped out on the basis of that analysis. a detailed description of the current market condition and enabling environment. It should articulate how the solver’s 14 CRITICAL STEPS IN THE DEVELOPMENT OF PULL MECHANISMS D esign and implementation of pull mechanisms is a knowledge-intensive and management-intensive process that requires ongoing and collaborative interactions among 8 Evaluate against the theory of change by integrating monitoring results and qualitative inquiries to identify and address unexpected developments and results. program sponsors and stakeholders. Drawing from the early lessons about the design process, the critical steps in 7 Monitor implementer performance and outcomes and make payments based on performance. developing pull mechanisms are shown at right. 6 will address the constraints underlying the market failure and achieve the Develop a theory of change by which solver efforts motivated by the prize, socially desired outcome both during the pilot and after the incentives end. 5 Identify an appropriate incentive structure and means of verification (i.e., an incentive related to the desired outcome subject to parameters and verification). 4 Identify the outcome of interest on the basis of which payment will be triggered. 3 Identify appropriate “solvers” that the pilot will incentivize to invest in the provision of the technology. 2 Develop a specific vision of the strengthened market that the pilot will facilitate (e.g., numbers and characteristics of value chain actors, scale of sales). 1 Identify and clarify the development problem. This will involve identifying a target population that is not able to obtain a socially beneficial technology. Conduct a comprehensive value chain analysis to understand value chain actors’ motivations and constraints that have led to market failure in the provision of the technology solution, clearly articulate the economic benefit each value chain actor can receive by engaging in the technology and understand the enabling environment (government policies and rules). References Conrad, Abigail, Tulika Narayan, Judy Geyer, Stephen Bell, Masters, W.A., “ Research Prizes: A Mechanism to Reward and Luciano Kay. 2017. A Framework for Evaluating Agricultural Innovation in Low-Income Regions, “ Innovation Challenges. Bethesda, MD: Abt Associates AgBioForum, 6(1&@): 71-74, 2003 Deloitte, Steering Committee Presentation, Rosslyn Virginia, Masters, W.A. and Benoit Delbecq, “Accelerating Innovation with March 2017 Prize Rewards, History of Typology of Technology Prizes and a New Contest Design for Innovation in African Agriculture,” Elliott, K.A., “Pulling Agricultural Innovation and the Market International Food Policy Research Institute Paper 00835, Together, “ Center for Global Development, Working Paper December 2008. 215, June 2010 Mitchell, K., A. Parker, S.Joshi, J. Goldhammer and B. Anderson, “The Craft of Incentive Prize Design”, June 18, 2014 Deloitte Consulting 15 AgResults is a $118 million multi-donor, multi-lateral initiative incentivizing and rewarding high-impact agricultural innovations that promote global food security, health, and nutrition through the design and implementation of pull mechanism pilots. The objectives of AgResults are to: • Overcome market failures impeding agricultural innovations by offering results-based economic incentives (known as “pull” mechanisms) to competing private actors for the adoption of new agricultural technologies. • Test the effectiveness and efficiency of pull financing in comparison with traditional approaches to the promotion and adoption of innovative agricultural technologies. The external evaluator uses a framework grounded in economic theory regarding the behavior of economic agents in agricultural markets, coupled with rigorous quantitative and qualitative evaluation methods, to identify lessons learned and best practices based on evaluation of the pilot’s impact on: • Private sector engagement and market development • Smallholder income and adoption of the technology and its derivative product • Scale, cost-effectiveness, and sustainability This Knowledge Note has been funded by the World Bank, which serves as the trustee of AgResults. Recommended Citation Mainville, Denise and Tulika Narayan, June 2017. Pull Mechanisms for Overcoming Market Failures in the Agriculture Sector. Bethesda, MD: Abt Associates and Denise Mainville Consulting. Acknowledgments This Knowledge Note benefited greatly from the keen insights of the broader AgResults community, including the Steering Committee, the Secretariat and the Pilot Manager of the Kenya and Zambia pilots. Authors would also like to thank members of the AgResults evaluation team who team provided important comments and research inputs. Contact We welcome questions or comments on this Knowledge Note. Please send them to Tulika Narayan, the Research Director for the AgResults evaluation, at Tulika_Narayan@abtassoc.com. For more information about AgResults, visit: www.agresults.org