Smart Subsidies – best practice alternatives to handouts

The LVCD project model is built around principles of strong market analysis, collective action through groups, facilitation, empowerment and long-term sustainability.  As a result, LVCD avoids the use of handouts.

If we think that there is need to provide a good or service to producers, first we should consider:

  • What gap, need or problem is a handout trying to address?
  • Can improved market facilitation (better links and negotiation) replace the ‘need’ for a handout?

Sometimes, even good market facilitation won’t overcome the barriers, in which case, it may be justified to us a well-designed subsidy (smart subsidy).  A subsidy can makes it possible for goods and services to be accessed by people who would otherwise be unable to pay the market price.

What is a subsidy?

  • A subsidy reduces the cost of a good or service for a poor producer, making it accessible
  • A subsidy is a co-investment between producers and another market actor or World Vision:
    • between producers and input suppliers
    • between producers and equipment suppliers
    • between producers and processors
    • between producers and World Vision

How to develop determine if a subsidy is required and make your subsidy ‘smart’

Step 1: Identify the market failure or gap. 

  • Can market facilitation be used to address the market failure, gap or problem?
    • Can we introduce and link producer groups with a quality input supplier?
    • Can we help producer groups to negotiate to purchase inputs in bulk at a discounted rate?
    • Can we help by facilitating and negotiating transport of the bulk inputs to producers at a cheaper price?

If you answer ‘YES’ to any of the questions above, the use facilitation, negotiation, trust-building or any other tools and techniques rather than a subsidy.

If you answer ‘NO’ to any of the questions: Go to Step 2

Step 2: Brainstorm possible long-term solutions for addressing the market failure, gap or problem.

For example:

  • If the gap is access to capital (savings): the long term solution could be introducing the Savings Group model
  • If the gap is access to capital (credit): the long term solution may be connecting producers to micro-finance institutions
  • If the gap is access to inputs: the long term solution will be to ensure producers and input providers have strong relationships over several seasons or years (trust) and producers have the access to capital to buy inputs at market value.

Step 3: Consider if a subsidised good or service is a short-term solution to the identified market failure.

  • What time frame would the subsidy need to be provided over to address the market failure:
    • For how long would the subsidy be required?
    • How will the subsidy decline over time?
  • How could the subsidy be provided to best address the market failure?
    • As cash?
    • As a coupon or voucher for use at a particular place?
    • As a discounts for bulk purchase at a particular store?
    • Inter-linked contracts between producers and processor/input provider: inputs provided on credit to producers with payment in product at harvest
  • What value would the subsidy need to have to address the market failure?
    • What are the poorest farmers willing to pay for the good or service?
    • What are poor and better-off farmers willing to pay for the good or service?
    • Can the good or service be purchased in bulk to lower its cost?
Year 1 Year 2 Year 3 Year 4
Producer contribution to purchasing good 40% of value of good/service 60% 80% 100%
Value of subsidy provided by  partner 60% 40% 20% 0%

Step 4: Ensure that everyone (producers, partners, service providers) know and understand the terms of the subsidy

  • The time over which the subsidy will be provided is understood and agreed by all: producers, other market actors, World Vision.
  • There is clear exit strategy: it is known to everybody as to who will take over the provision of the good or service as the subsidy is phased out.

 A BAD EXAMPLE –  this is NOT a smart subsidy: WV purchasing or subsidising seed purchases for farmers.

WHY is this not a smart subsidy?

  • This is not going to alter the relationship between farmers and seed suppliers
  • It is not going to alter the capability of farmers to access seeds beyond that season and it is not going to result in a change in the market.

SOME FINAL TIPS

  • A smart subsidy should strengthen the demand or supply in a market, into the future.
  • A subsidy program may include a mix of producers from different socio-economic backgrounds: for an unsubsidized good or service to be maintained, there will need to be consumers that are willing and able to pay commercial terms, after the subsidy ends.
  • A subsidy is never a handout or gift:Julius, a Market Facilitator from WV Uganda explains: “Handouts can simply be taken as gifts. We have all received gifts before and one thing for sure is that you never know what it is or when it is coming. That makes handouts very dangerous to rely on in one’s life.”

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