Funding investment in land and water - S. Saigal

S. Saigal, Consultant
Land and Water Development Division, FAO, Rome

INTRODUCTION

This paper advocates enhanced financing support for sustainable agricultural and rural development (SARD). It examines the trend in resource flows to agriculture and explores issues in sustainable agricultural development. It also presents an overview of innovative financing mechanisms and the principles of a framework for the coherent and effective use of investment resources.

RESOURCE FLOWS TO AGRICULTURE: INTERNATIONAL FINANCIAL FLOWS

International financial flows are crucial to sustaining growth in developing countries. The financial crises in the second half of the 1990s adversely affected private financial flows and their recovery has continued to lag output and trade growth. Moreover, the cyclical slowdown of the global economy could well dampen these flows. However, this decline in private flows reflects some improvement in their quality as volatile short - term flows have fallen sharply. Foreign direct investment (FDI) is more stable. Countries experiencing rapid FDI growth have benefited from augmented domestic savings, financing for new investment opportunities, and exposure to international markets. The potential for productivity growth through private capital flows has probably increased because of the growing importance of knowledge as a production input. On average, private capital inflows raise domestic investment in a ratio of almost one to one. However, the effect is strongest for those countries that are least integrated with international financial markets. Thus, the association between foreign inflows and domestic investment is strong in Africa.

However, private flows favour high performing economies. The benefits are available mainly to countries that have a strong capacity to absorb them. This underscores the importance of a hospitable business climate in attracting and sustaining FDI flows. Short - term portfolio flows reinforce positive growth dynamics but decline in conditions of economic adversity. Moreover, their volatility can impose considerable costs. This calls for capacity building support to manage volatility and safeguard domestic financial stability.

Total net external flows to developing countries peaked in 1997 (Table 1). Net official flows have since declined to 63 percent of their level at the beginning of the decade. Net private flows (both capital and FDI) have also declined since 1997 but are still nearly 6.6 times higher than official flows. However, for many developing countries official flows provide important support to their economic growth momentum while their market - based reforms continue. To date, FDI flows have not been sufficiently responsive to these changes because of risk perceptions about the legal and regulatory frameworks and contract enforcement and dispute settlement mechanisms.

The share of FDI in net private flows increased from 58 percent in 1997 to 69 percent in 2000, about US$5 billion more than in 1997. FDI flows to low - income countries quadrupled between 1991 and 2000, but remained less than 2 percent of their GDP. The share of the low - income countries in all FDI flows to developing countries fell to 7 percent (13 percent in 1991). Sub - Saharan Africa has had particular difficulty in attracting FDI. This is due to insufficient market size, poor infrastructure, political uncertainty, corruption and restrictive policy regimes. The top ten developing country recipients of FDI (China, Brazil, Mexico, Argentina, Malaysia, Poland, Chile, the Republic of Korea, Thailand and Venezuela) accounted for 74 percent of total FDI flows to developing countries in 2000, amounting to 3.8 percent of their GDP.

Where net private capital flows and FDI decline, the need for official aid flows comes into sharper focus. Current levels of foreign aid, at some 0.24 percent of annual GDP, fall short of the 0.7 percent target set by developed countries. The actual aid falls short of that target by some US$100 billion a year. Overseas aid to Africa fell from US$32 per person in 1990 to US$18 per person in 1998.

International official resource transfers provide about US$5 billion a year, about 10 percent of official development assistance (ODA), to fund international public goods, e.g. health, agricultural research and environmental protection and an additional US$11 billion finances complementary domestic infrastructure.

TABLE 1

Net long - term resource flows to developing countries, 1991 - 2000 (US$ 000 million)

The proportion of sectorally allocable aid reaching agriculture, forestry and fisheries fell sharply from the mid - 1970s to about 20.2 percent in 1987 - 89 and then to 12.5 percent in 1996 - 98. The real value of net aid disbursed to agriculture in the late 1990s was 35 percent of its level in the late 1980s. The share of agricultural lending in the loan portfolio of the World Bank fell below 10 percent in 2000, compared to an average of 14 percent for the decade ending 2000. Thirty years ago the figure was 40 percent. In constant 1995 prices, total commitments for agriculture are 8 percent below the level in 1990. Contributions from bilateral donors, mainly countries in the Development Assistance Committee (DAC), were about US$4.3 billion in both 1997 and 1998. The increased levels of assistance in 1997 and 1998 over that of 1996 were due entirely to increased levels of multilateral assistance, particularly from the International Development Association (IDA), while bilateral assistance was actually lower than in 1996.

The share of agriculture in total government expenditure in developing countries ranges from 0.015 percent to 23 percent, with this share being lower than 10 percent in 90 percent of cases. Countries with high levels of undernourishment are also those with severe budgetary constraints. This points to the case for a larger flow of concessional development assistance to such countries to effectively face the challenge of food insecurity and undernutrition.

Investment needs

The total annual gross investment needs of agriculture in the developing countries (primary agriculture, storage, processing and support infrastructure) would be about US$180.4 billion for the period up to 2015. A continuation of current annual investment rates until 2015 would be insufficient to achieve the World Food Summit (WFS) target. The expected shortfall averages 12 percent for all developing regions and is 38 percent for sub - Saharan Africa.

Programmes such as the Soil Fertility Initiative, the Integrated Land and Water Management Action Programme for Africa, the International Programme of Land Quality Indicators, the Inter - American Water Resources Network, and the Critical Ecosystems Partnership need financial resources for implementation, up - scaling and replication. The sustainable development of land and water resources calls for increased resource flows from domestic and external sources, but also for a more effective use of such resources and improved frameworks of partnership and aid coordination among all stakeholders.

International development goals

The DAC guidelines on sustainable development strategies stress the need for deep structural changes in the economy, society and politics. Land and water issues are linked to the development goals of poverty reduction, food security and nutrition, and to the implementation of national strategies for sustainable development by 2005.

There is a trend towards the rural poor depending increasingly on non - farm sources of income generation. The share of non - farm employment in rural employment among the rural poor ranges from 30 to 50 percent. Despite this positive trend, the dependence of the poor on the natural resource base and on agriculture poses a challenge for the sustainable development of land and water resources. Addressing opportunities and constraints of smallholder agriculture requires both technical and institution - building support and financial resources for investment in rural infrastructure. Without such resource flows, the realization of the international development goals is not possible within the specified timeframe.

Improving support for international development

Governments can and must do more to encourage public awareness of assistance activities and support for international cooperation for development. This calls for: establishment of clear goals for development policy; reorientation of development education to portray issues objectively; an intensified effort to assure efficient and effective programme management; awareness that development cooperation deserves support because of the mutual interests that it serves and because of the moral imperative of helping others to help themselves and improving resource use.

The main measures to increase the effectiveness of ODA are: implementation of a holistic and cross - sectoral approach to sustainable development; developing a strategy for country leadership with mutual responsibility among partners for development outcomes and distinct accountabilities; emphasizing partnership and collaboration among governmental and non - governmental actors at national level; ensuring that aid coordination integrates external assistance with the development priorities of the recipient country. Donors and recipients should adhere to strategic objectives and investment programmes; placing responsibility for aid coordination primarily with the recipient country. Two elements of an enabling environment are policy performance and institutional quality; and introducing results - based frameworks for assessing aid coordination.

There is a need to provide considerable capacity - building support in order to help governments nurture policy reform, strengthen aid coordination capacity, and reach partnership agreements with donors. The agreements should delineate mutual responsibility for development outcomes and the distinct accountabilities of each partner. The Poverty Reduction Strategy Paper (PRSP) will serve as the main instrument for implementing these recommendations.

ISSUES IN LAND RESOURCES DEVELOPMENT

The deployment of resources through financing mechanisms and modalities involves three inter - related segments: (a) SARD; (b) land degradation; and (c) natural resource management (NRM). Water resources constitute a distinct cluster. The investment dimension of these segments encompasses key issues:

• economic and policy measures to increase sustainable productivity;
• the degradation of both marginal and high - productivity irrigated lands;
• sustained cultivation of sloping lands;
• deforestation and loss of biodiversity; and
• declining reserves and increasing competition for water resources.

The main planks of the integrated and participatory strategies to address these issues are:

• integrated systems approaches to sustainability issues;
• integrated research programmes to find least - cost, quick - return conservation methods;
• integrated approaches to pest, disease and weed management;
• improved information on declining productivity and natural resource degradation, and on the methods for their alleviation; and
• a search for solutions in the context of institutional, environmental and economic interfaces.

Sustainability

SARD implies jointly producing food and other goods for farm families and markets, and also contributing to frameworks to provide a range of public goods. However, SARD does involve difficult choices and trade - offs. It is also not easy to develop incentive frameworks that can ensure optimal solutions in terms of costs and benefits. An analysis of SARD issues requires a comprehensive framework that shows the interrelationship of all aspects of development.

Production gains from intensification

Agriculture is the key sector for generating incomes and employment in both farm and non - farm economies in most developing countries. Therefore, agricultural intensification holds great promise as an instrument to simultaneously alleviate poverty, meet food needs, and avoid exploitation of the natural resource base.

To help ensure global food security, the developed countries need to aim for sustained gains in productivity in order to provide stable food stocks to meet emergencies or to fight hunger and malnutrition in pockets of chronic poverty and vulnerability.

Agricultural intensification in developing countries

In the last 40 years, the doubling of cereal output has come from three sources: area expansion, intensification and yield increases. The area under irrigation more than doubled between 1950 and 1980. However, its rate of growth has since slowed substantially. In many areas, physical and technological constraints are likely to restrain large - scale conversion of potentially cultivable land. Increased cereal production has to come primarily from increased productivity or higher yields, but without compounding environmental problems such as erosion and salinization. In some countries annual losses in production potential attributable to soil depletion may reach 1.5 percent of GDP. Expanded production and employment in agriculture is usually feasible to the extent that:

• agriculture’s total productivity factor grows enough to outweigh any falls in net farm prices;
• farm resources, especially land, are redistributed towards small and family farms;
• technology changes in a labour - using way, or incentives change so that farmers use a larger proportion of land labour - intensively.

Agricultural intensification need not degrade the environment, but inappropriate and mismanaged intensification can lead to environmental degradation. Rural poverty causes a more serious environmental problem in developing countries through the forced exploitation and consequent degradation of environmentally fragile lands. On balance, the potential for increasing yields through intensification outweighs the alternative of expanding acreage.

Large pockets of rural poverty are concentrated in dryland areas (fewer than 120 growing days per year). Drylands extend over at least 20 million km² with a population approaching 500 million. A central precondition for their development is the assignment of a high priority to drylands improvement. Projects and programmes to combat land degradation need to be flexible and include:

• Strengthened information and monitoring systems, especially for drought preparedness.
• Integrated programmes and policies which balance conservation and production objectives.
• Improved dryland resource management through environmentally sustainable practices.
• Programmes to eradicate poverty and promote alternative livelihood systems.
• Support for indigenous technologies and local participation.
• Enhanced national capacity for rural development.
• Support for the control of population growth.

Intensification will have to meet the expected doubling in food requirements by 2050. Therefore, the sustainable use of land, whether in high potential or dry areas, becomes crucial. The FAO SOFA 2000 calls for a new green revolution, which involves resource - poor regions and farmers and so - called orphan species and varieties.

ISSUES IN SUSTAINABLE WATER RESOURCES DEVELOPMENT

Principles for effective water policy

The emerging principles for the efficient and sustainable use of water are:

• Undertake national water resources development and management in a holistic and sustained manner to meet national development goals and protect the environment.
• Decentralize the planning, development and management of specific water services to an appropriate level responding to basin boundaries.
• Delegate the delivery of specific water services to autonomous and accountable public, private or cooperative agencies providing measured water services in a defined geographical area to their customers and/or members for an appropriate fee.
• Allocate shared water resources efficiently for the mutual benefit of all riparian users.
• Enable participatory and consultative activities at each level.
• Ensure a commitment to sustained capacity building, monitoring, evaluation, research and learning at all levels.
• Ensure sustainable water use in society (with incentives, regulatory controls, and public education promoting economic efficiency, conservation of water resources, and protection of the environment) within a transparent policy framework.

An ideal institutional framework for rational water resource management would include:

• A decentralized, accountable structure that is coherent at each layer of administration.
• Self - management of independent bodies and self - financing at user and higher levels of activity, according to users’ ability to pay.
• Market mechanisms as an integral part of water allocation.
• An enabling role for government, with key responsibilities for capital investment, supporting legislation, data collection and processing, and support for basic technical R&D.
• A comprehensive and consistent legal code which clearly defines the water rights and responsibilities of individuals, groups, agencies and government bodies.
• A set of procedures for de jure and extra - legal arbitration of disputes and established enforceable penalties for misuse and degradation of water resources.

Irrigation, drainage and groundwater development

Investments to promote efficient systems of surface irrigation and drainage and groundwater abstraction assume crucial importance within the framework of integrated water resources management policy. About 17 percent of all cropland is irrigated, accounting for some 40 percent of food and fibre production. Irrigated agriculture is highly water intensive, claiming nearly 70 percent of world water abstraction (over 90 percent in agricultural economies in the arid and semi - arid tropics). Wasteful irrigation practices not only entail the loss of precious water but also cause waterlogging and salinization. More than 10 percent of the world’s irrigated land suffers from varying degrees of salinization, and the extent and severity of this phenomenon are growing. In addition, seawater intrusion can damage aquifers irreversibly. Despite large investments and subsidies, irrigation performance has not always fulfilled expectations in terms of yield increases and efficiency of water use. Agriculture is also a relatively low - value, low - efficiency and highly subsidized water user. This situation is not sustainable.

Food security is closely linked to success in water control. Moisture control at root level allows for the maximization and stabilization of production. Success will not come from expansion alone (more dams and canals, larger tracts of land levelled and watered). Increasingly, it must come from improved management and rehabilitation of inefficient systems, and the substitution of traditional systems by systems based on accurate technology. Achieving this will require funds and qualified, capable farmers and managers.

From the perspective of sustainable water resource management, Table 2 summarizes some examples of actions to be encouraged/discouraged in the irrigation and drainage subsectors.

Table 2

Issues in irrigation and drainage

OTHER PRIORITY ISSUES IN SUSTAINABLE AGRICULTURAL DEVELOPMENT SYNERGIES

To exploit the synergies between the Rio Conventions on desertification (UNCCD), biodiversity (CBD), and climate change (UNFCC), it is necessary to operate concurrently at four levels:

• awareness building and information dissemination;
• programming to build complementarities in respective country - driven projects and programmes, or subregional/regional initiatives;
• implementation of programme elements requiring joint or mutually reinforcing complementary actions;
• building databases and information exchange.

Climate change, global warming and water resources

The impacts of climate change on water users and the water environment will depend on the nature of the institutions managing water and the physical infrastructure. Among the factors that influence the ability of a water system to respond to change are financial resources and technical expertise. The focus of water management is turning towards flexible, integrated systems, incorporating both supply and demand management. Such systems are inherently better able to cope with climate change, and are easier to adjust as more information appears.

The inclusion of soil carbon sequestration into future arrangements for carbon sequestration is an important development for the role of land - based activities within the framework of the Clean Development Mechanism (CDM). This issue calls for a more integrated approach to land productivity, soil fertility, forestation and biodiversity. The potential for soil carbon sequestration may be as high as 40 percent of the total amount of annual atmospheric increase in CO₂ concentration. Moreover, the appropriate choice of crops coupled with appropriate land management will lead to increased carbon retention. The Global Mechanism (GM) is associated with innovative ways of activating the flow of new funds for CCD implementation. However, many operational and measurement issues remain before activating the CDM as a source of fund raising.

FAO and IFAD have agreed to implement a programme to strengthen regional and national capacities to define strategies focused on greenhouse gas emissions for the benefit of the sustainable management of natural resources of the region. Forestry and agroforestry can compensate for greenhouse gas emissions by creating new sinks for carbon dioxide, and by protecting existing forests that are carbon stores.

Valuation of environmental effects

The reasons for unsustainable practices and environmental damage lie in policy and market failures to value environmental resources and to incorporate environmental costs in prices. Part of the cause lies in unclear or non - existent property rights.

Valuing in situ natural resources solely as raw materials ignores their role in the earth’s life support systems. This requires attaching non - monetary weights for forests, biodiversity, non - renewable resources, and global commons. Such a valuation system would establish linkages between the economic goals of profit maximization and environmental sustainability. Such systems of green accounts seek to prevent the overuse of natural resources. However, translating this concept into practice raises many technical issues. The precise economic value of ecological assets is difficult to assess. This is due partly to the lack of information on the market value of ecological goods and services and partly to uncertainty about the dynamics of ecosystems, as well as problems of quantifying certain non - market values. Many of the environmental effects are manifest either at distant locations (downstream effects) or in the future (the gradual depletion of soil nutrients). The effects may be in situ or off - site. However, quantifying such effects on ecological assets would require monitoring systems to collect and analyze data for economists to use in attaching values to ecological damage in relation to losses in productivity and sustainable development. One analytical tool is the social rate of discount. Apart from various technical issues involved in its application, there is also some apprehension that the use of such discounting may work against the interests of the natural environment. The higher the discount rate, the less long - term environmental damage will appear to matter, and the less attractive will investments to conserve the environment appear. However, the answer lies in incorporating a criterion of sustainability into certain aspects of decision making. Table 3 summarizes existing economic principles and their extensions at project, sectoral and macroeconomic levels.

One method of project appraisal combines the concepts of economic feasibility, acceptability, and sustainability. In its application to a watershed development project, feasibility is measured by the change in sustainable income for the successive generations of project households as seen from today; acceptability by the average annual income which the current generation of project households derives from the project; and sustainability by the tax or subsidy equal to the difference between sustainable and average annual income for the current generation of project households. Internalizing external costs and negative welfare impacts in the project and forcing a sustainability constraint on the project do restrict the scope of feasible projects. However, potential gainers outside the project, either in space (externalities) or in time (sustainability), can be taxed on the basis of part of the gains which rural development projects may create for them. This approach can help identify win - win investment options.

Such valuation/appraisal exercises require interdisciplinary team efforts within a framework for monitoring the costs of neglecting, and the benefits of, conserving such ecological assets. This needs funding support, as does capacity building of related expertise and institutional frameworks. Synergies between knowledge, environmental protection and investments include:

• Improved collection, transfer and use of agricultural and environmental information;
• Capacity building in approaches/methodologies to identify win - win outcomes;
• Improved environmental standards through incentive frameworks;
• New opportunities for profitable and sustainable environmental investments.

TABLE 3

Techniques for valuing the environment

Definitions: Defensive costs: Ex - post costs of mitigating damage. Replacement cost: Future cost of replacing an impaired environmental resource by an equivalent asset, assuming that original resource was at least as valuable as the replacement expense. Shadow project: cost of special project designed to offset environmental damage caused by another project. Proxy goods: Market value of a substitute for an environmental asset that itself is not marketed. Artificial market: Willingness to pay for an environmental asset determined on an experimental market. Contingent valuation: Willingness to pay for an environmental asset or willingness to accept compensation for its loss, determined by direct questions.

Market failures are the result of institutional failures the failure to establish the regulatory framework to: secure property rights, check open access to common resources, enforce contracts, impose and collect taxes, recover costs, and provide transparent rules governing incentives and disincentives, responsibilities and accountability. The key environmental principles are: proportionality; the polluter pays; prevention; and common but differentiated responsibility.

Technology and institutional modernization

A major weakness of agricultural research and technology generation and diffusion is that the national agricultural research systems (NARS) are underfunded and poorly equipped. Their research priorities do not fully incorporate the problems of dryland agriculture and resource - poor and low - potential areas. The linkages with extension services and farmers, and with international and regional agricultural research centres, leave much scope for improvement. It is necessary: (i) for farmers to adapt their traditional systems to a more competitive market environment; and (ii) to look for less costly, more responsive and more pluralistic transfer systems that can reach a wider clientele of small producers.

Another issue is the decline in public - sector agricultural support services, particularly in remote areas. There is a case for promoting efficient private - sector services, such as expanding NGO extension systems, provision of group - based financial services by intermediaries, and other forms of participatory credit delivery. There is a need for institutional decentralization and representative local structures to motivate and supervise grassroots rural development initiatives.

New techniques aimed at promoting sustainable intensive farming systems need to be developed and disseminated. Such techniques relate to soil and moisture conservation, soil fertility, crop protection, the management of new crop varieties, and water harvesting.

There is a strong case for strengthening programmes and funding to accelerate the implementation of CGIAR research programmes through collaboration with other agencies. CGIAR recommends earmarking an increasing proportion of funding for sustainability - related research and providing it in the form of incentives or seed money to foster consortia and networks.

Other institutional issues

Institutions affect development outcomes in economic and social fields. For example, uncertainty of tenure is usually a deterrent to long - term sustainable land use. Ambiguities relating to usufruct rights of land, water and trees tend to contribute to environmental degradation. Other institutional aspects include the absence of clear community mechanisms for the upkeep of public assets and infrastructure, a lack of financial services, and the marginalization of women. The absence of micro - credit institutions discourages investment in soil and water conservation measures, particularly if payback periods are relatively long.

A priority area is the need to strengthen national and local environmental management capacities. Addressing global environmental problems requires: (a) integration of these concerns into national policy making; and (b) improved use of scarce resources through financial leverage and market - based approaches. Institutional frameworks need to be developed to promote and implement interventions to address cross - border concerns.

FINANCING SUSTAINABLE DEVELOPMENT

International development cooperation

The rationale for development assistance has changed. Good governance is now an important component of the broad framework of policy dialogue. There is an emerging consensus that poverty reduction and growth must be at the heart of the agenda for sustainable development. Its basic principles are:

• Development is a process of societal transformation that takes place over time;
• A comprehensive approach to development and a multidimensional view of poverty;
• Faster growth is essential for sustained poverty reduction, and greater participation of the poor enhances growth potential;
• Country ownership of the goals, strategy and direction of development and poverty reduction (shared ownership by representative segments of society) is critical;
• The development community as a whole must work closely together;
• A clear focus on measurable development outcomes.

The main instruments to translate the above principles into action are:

• Country - owned poverty reduction strategies to provide the basis for donor concessional assistance (particularly World Bank and IMF lending), and guide the use of resources freed by debt relief under the enhanced Highly Indebted Poor Countries (HIPC) initiative;
• The World Bank’s Comprehensive Development Framework (CDF) or its equivalent the UN Development Assistance Framework (UNDAF) at country level as a basis for coordination of programmes and action plans based on the country’s PRSP. The CDF represents an approach to policymaking based on a greater balance between the economic, human and structural elements of development, and on new partnerships that support countries in achieving this balance.

This framework would ensure coherent strategies which reflect ownership by a broad spectrum of domestic stakeholders. It would also improve donor coordination and serve as a platform to focus the analytical, advisory and financial resources of the international community on achieving monitorable results. However, implementation is a complex process involving many country - level trade - offs and tensions. Apart from capacity constraints in fully articulating strategies and action plans, the process involves conflict resolution between sectors, implementing agencies and public interest lobbies. The World Bank recommends:

• more deliberate use of lending and non - lending tools to foster consensus through increased local involvement and more widespread dissemination of analytic work;
• more use of pilot projects to test new approaches;
• greater use of advisory services and flexible lending instruments to nurture policy change.

The framework implies a greater selectivity among donors in allocating ODA resources. The case for increased financing for development rests not just on the principle of universality, but on policy orientation and performance. Developing countries need to demonstrate their commitment to, and progress in, undertaking market - based reforms. Moreover, their development strategies should be in tune with the objectives of good governance, poverty reduction, basic health, sanitation, and education. Another element of selectivity lies in the policy of individual bilateral donors in terms of the focus of their development assistance on a narrow set of priority areas and countries.

Developed countries channel a part of ODA as contributions to the core funds of multilateral institutions, or as trust funds. Through their support to a developing country, major institutions, e.g. the World Bank Group and the IMF, also trigger private capital flows by lowering private sector risk perceptions or more directly as part of a financing package. Furthermore, multilateral organizations of the UN system mediate with developed member countries to leverage financial resources to provide critical technical and advisory services to the developing countries. For example, FAO has promoted agricultural production and food security in developing countries and has helped raise resources in the fight against hunger and undernutrition through its Special Programme for Food Security (SPFS) in low - income food deficit countries (LIFDCs).

While ODA is the most dependable source of concessional assistance for the low - income developing countries, there is a need to explore other diversified funding channels to enhance financial flows for sustainable development. These include non - traditional sources, such as Arab funds, private endowments, and private financial flows. Private flows comprise foreign direct investment, portfolio investments in marketable securities by foreign financial institutions, foreign bank loans, and export credits. However, such capital flows favour a limited number of better performing developing countries with absorptive capacity and infrastructure to attract private capital. All foreign investments augment the domestic rate of investment. However, private financial flows pursue profit and not social or development objectives. There are some corporate social investment avenues, but their contribution to resource flows for development is still limited.

Raising resources to finance development

In countries where food insecurity is prevalent, external assistance to agriculture accounts for up to 86 percent of gross domestic investment and 51 percent of government expenditures. The external assistance in such countries has to come primarily from ODA.

FAO estimates that the SPFS requires an annual financing of about US$1.4 billion (US$17 million per country). The projected sources of funding are: the FAO SPFS Trust Fund (US$500 million), recipient countries (US$67 million), bilateral donors (US$137 million), and multilateral financing institutions (US$670 million). The actual mobilization over five years by FAO has been US$230 million, an indication of the scale of underfinancing that has constrained the implementation of the SPFS. To meet this challenge of persistent resource constraints, it is necessary to develop innovative ways to finance the sustainable development of land and water resources on a predictable and long - term basis.

Innovative financing mechanisms

The investments for the agriculture sector and food security form three broad categories: primary production, post - harvest system, and public support. Financing may come from domestic/external private and public channels. More generally, financing may be for: programme or project investments; policy and institutional reforms; capacity - building support; provision of support services; or supervision, monitoring and evaluation. Financing may be in the form of loans or grants provided by donor agencies, or through funds raised in the capital markets (Table 4).

Innovations in financing mechanisms are unlikely to take the form of creating new funding channels. This became apparent during the negotiating process for the UNCCD, which incorporates the Global Mechanism (GM). The GM is a catalyst and facilitator for mobilizing resources for the implementation of the UNCCD in the developing member parties. It should work with all member countries to: (a) improve the efficiency of allocation and use of financial flows at both the supply and demand ends of the resource mobilization equation; (b) to add value through the reorientation of such flows towards the realization of the goals to combat land degradation; and (c) to do so through multi - channel partnerships and by acting as an honest broker between donors and recipients. The main lesson is that the international community is averse to creating new funds or financial mechanisms, and wishes to place greater reliance on the more effective use of existing channels. Thus, the search for innovation must focus on:

• effective coordination among various development partners,
• attention to diverse local conditions,
• adaptations and flexibility in reshaping existing instruments of lending or grant assistance,
• creating a monitorable track record of effective implementation by developing countries.
• using NGOs and civil society in funding arrangements at the grassroots level to prevent leakages or transmission loss in fund flows.

There are also global initiatives to leverage the potential of international financial flows, particularly on the issue of reforming international financial architecture. Although not borne out by trends in financial flows, the process of globalization has raised expectations that private capital flows and trade may gradually displace aid as the dominant financing source for developing countries as a consequence of: greater integration of the global economy; ongoing technological change; increased risk - management ability in developing countries; an accentuated dualism between the modern and the subsistence sectors of the economy and in the agricultural sector.

TABLE 4

A schematic typology of financing

The estimates of funds needed for this purpose must be brought within the global framework of financing sustainable development.

Instruments and mechanisms

Flexible lending framework

The Country Poverty Reduction Strategy (CPRS) formulation exercises emphasize improving public resource allocation and raising the productivity and cost - efficiency of public investment. Once there is a consensus on the strategy among the main stakeholders, the World Bank and other donors are prepared to finance the resulting investments through a flexible framework. For example, the World Bank may take the lead in providing broad - based Poverty Reduction Support Credit (PRSC) linked to key objectives, reform areas and priority action areas. Governments will receive the credit on IDA terms in tranches geared to performance. The funding is integrated with the government budgetary cycle and augments the capacity to allocate resources on a cross - sectoral basis. FAO has a role in assisting governments in articulating their agriculture sector strategy and in the formulation of programmes within the CPRS framework. Interested bilateral donors could enter into partnership with FAO to support such programmes.

Improved aid effectiveness needs to complement flexible lending through: improved absorptive capacity in the developing countries: recourse by them to sound and pro - poor policies; and improved aid resource flows to such better performing countries. A logical extension of this process is the common pool approach to assistance. This implies that a single development strategy for each country would guide all donors (each receiving the same monitoring report) with the common pool of resources supplementing the recipient's budgetary resources.

Debt relief

Debt relief covered by the Heavily Indebted Poor Countries (HIPC) initiative can increase resource flows to developing countries. Such relief is tied to appropriate policy reforms. Under the enhanced initiative of 1999, interim debt relief begins immediately at the decision point for most countries. The enhanced initiative has quickened the pace of debt relief. It has the consequence of effectively increasing the resources available to developing countries for agreed priority programmes.

Overall, 41 countries with US$170 billion in external debt are eligible for consideration. Debt owed to multilateral institutions accounted for about 40 percent of their total debt obligations in 1997. From the perspective of such countries, debt relief has a significant impact on their economic prospects. The debt of the average HIPC is more than four times its annual export earnings and well in excess of its GNP. The enhanced initiative seeks to establish a stronger link between debt relief and sustainable poverty reduction programmes in recipient countries. This framework must include support for FAO WFS goals and the SPFS. Of the 23 LIFDCs with the highest prevalence of undernourishment, 17 are in the HIPC group of eligible countries.

Debt relief helps countries access external financial resources by reducing their debt burden and servicing commitments. This should release budgetary resources to meet priority development expenditures. Moreover, debt relief would reduce the preoccupation with negotiating debt service modalities. Instead, it would allow relations with donors to focus on a long - term policy dialogue.

For countries not covered by the HIPC initiative, debt exchange operations could link debt relief to targeted sectoral programmes. The IFAD has some experience in assisting developing countries in negotiating debt transfers linked to Club of Paris debt relief operations. Similar debt transfer arrangements have also been negotiated in the context of debt restructuring or buybacks financed by the IDA and other donors.

Private sector participation in public goods and services

International public goods make an important contribution in sustaining the development process in the developing countries. Specialized technical agencies of the UN system provide public goods in the form of technical assistance, advisory services and international standards. However, as conventional ODA ordinarily flows on a government - to - government basis, the financing of international public goods has tended to occur on an ad hoc basis. Structured funding mechanisms could provide systemic support for international public goods. This would require innovative mechanisms aimed at:

• integrating country - based financing with global and regional programmes;
• leveraging public resources with additional private money;
• a framework to align the incentives of countries with the global public interest through standards, treaties and regulatory mechanisms.

Market distortions, imperfect access to information and uncertainty about cost - benefit relationships have discouraged private sector participation. This area requires capacity building in entrepreneurial skills and facilities for financial services and working capital support. The private sector does not find sufficient incentive to operate in remote rural areas with poor infrastructure. Decentralized financing mechanisms are needed to facilitate service provision, such as extension and micro - credit.

Some national public goods affect the creation of international public goods. For example, planting forests helps reduce gas emissions. However, there is a distinction between the financing of core activities to create public goods and support for complementary activities for their diffusion and use. Both types of activities may involve different types of financing mechanisms and cost recovery or revenue generation modalities. Moreover, there is a real need for innovation to facilitate direct financing of regional cooperation programmes.

The Clean Development Mechanism

Under the CDM, industrial countries could purchase rights to emit greenhouse gases from activities in developing countries. Emission rights trading is intended to ensure that emission reductions occur where they are cheapest to implement. The purpose of the CDM is, in part, to assist developing countries in achieving sustainable development. However, its functioning has raised a number of technical and institutional issues.

The Prototype Carbon Fund

The Prototype Carbon Fund is a private - public partnership (sponsored by the World Bank) to facilitate emission rights transactions between private investors and host countries. Through the monitoring, verification and certification of emission reduction, the fund could build trust between parties and so promote sound development of the market. The fund expects to attract additional public and private resources and promote the transfer of environmentally safe technologies.

Climate change

The first session of the Conference of the Parties (COP 1) of the UNFCC identified three stages in the adaptation process:

• Stage I. Impact studies to identify particularly vulnerable countries or regions. Assessments of policy options for adaptation, and appropriate capacity building.
• Stage II. Measures, including further capacity building, to prepare for adaptation.
• Stage III. Measures to facilitate adaptation, including insurance.

COP 1 decided to fund the full cost of Stage I measures where these are part of the formulation of national communications (extended to Stage II measures in 1998). The Global Environment Facility (GEF) has been financing climate change enabling activities. The UNFCC applies to activities to adapt to climate change. However, the financing mechanisms for these measures are not yet clear.

Joint implementation as a flexible financing framework

Joint implementation originally referred to a generic family of institutional mechanisms that would allow parties to engage in cooperative (bilateral and multilateral) implementation of their commitments. Such assistance could have three components:

• Assist with the implementation of sustainable agricultural development strategies, policies and activities which would also have a positive impact on adaptation to climate change.
• Finance activities which specifically implement adaptation concerns.
• Enable the sale of emission reductions by developing countries.

The Global Environment Facility and the Global Mechanism

The role of the GEF is largely catalytic, providing funding in the form of guarantees, concessional loans and grants. The key features of GEF financing are:

• Financing of incremental costs linked to interventions that address global environmental concerns which otherwise would remain unattended in the national projects. Thus, the GEF helps mobilize substantial cofinancing of resources relating to local/national investments.
• Pursuing global and local linkages with an emphasis on global benefits.
• Promoting market - oriented policies in cooperation with both private and government partners, with an increasing focus on programmatic funding.

The focal areas of the GEF are: biological diversity; climate change; international waters; and ozone layer depletion. The GEF Council has decided in principle that land degradation should become a focal area. It has also made the IFAD one of its executing agencies. This provides an opportunity for closer collaboration between the Global Mechanism (GM), the IFAD and FAO to leverage GEF financing for the design and implementation of investment programmes linked to CCD. The GM is a facilitator for resource mobilization from multiple financing channels, seeking to promote partnerships for financing CCD implementation. In this context, the GM has sought to forge close collaboration with the GEF in:

• facilitating and generating a pipeline of projects and activities for potential GEF financing;
• forging partnerships based on CCD’s cross - sectoral and participatory approach to land degradation as an integral part of development strategies;
• facilitating the mobilization of financial resources to cofinance GEF assistance.

The development of a grant facility

Given the debt management problems of many developing countries, a grant facility can provide appropriate financing for many areas of investment, such as capacity building, institutional and policy development, and other public goods and social capital. Many of these countries need extensive capacity building support to implement their poverty reduction and agricultural development strategies. In this context, the establishment of trust funds in the multilateral institutions (funded by bilateral donors) has become an important source of grants (Table 5).

TABLE 5

Donor contributions to trust funds administered by selected international organizations

CONCLUSION

For many developing countries, investment in land and water resources is crucial to their efforts to achieve food security and sustainable development. Such countries need to attract significantly increased funding. This calls for a fully integrated framework and innovative approaches to facilitate financial flows throughout the developing world, with greater private - sector involvement and an enabling role for governments.

Developing countries, international institutions and donors need to channel investment resources to where they will be most effective in terms of achieving development goals. However, with the limited amount of public and private funding available, the emphasis has to be on a more rigorous prioritization of aid allocations and on the more effective use of aid resources. There is a strong case for including land and water resources as priority areas for ODA allocations within the framework of poverty reduction strategies.