Drip Irrigation Technologies - Fintrac Inc.

Most of the 500 million smallholder farmers across the world face limited productivity due to unpredictable and inefficient irrigation of their crops. The use of drip irrigation technology has the potential to boost access to water, dramatically improve productivity, and increase incomes for smallholder farmers. Drip irrigation has been found to increase farmer yields by up to 300 percent compared to non-irrigated traditional production practices, save 30 to 70 percent on water usage, and reduce the cost of labor by up to 80 percent.1 This typically means that smallholders can more than double their net income within a year. Drip irrigation also has substantial environmental benefits, with less chemical fertilizer needed and less water wasted.

Drip irrigation helps farmers increase yields, save water, and reduce labor. But its use by smallholders remains limited for a variety of reasons.

Despite these benefits, smallholders’ use of drip irrigation remains limited. In India, for example, less than 2 percent of farmers have drip irrigation systems in place.2 Similarly, in Africa, use of drip irrigation is almost exclusively by large commercial farms. The limited adoption of drip irrigation by smallholder farmers is due to a variety of factors, including the high initial cost of investment, insufficient understanding of the use and functionality, and limited availability in rural markets. As such, there is significant untapped opportunity to expand the use of drip irrigation technologies. This briefing paper draws from Fintrac’s 25 years of experience working directly with smallholder farmers and private sector companies to commercialize drip irrigation technologies. Fintrac has assisted the development and marketing of drip irrigation kits in a number of countries, including Honduras, India, Kenya, Tanzania, Zambia, and Zimbabwe. The Feed the Future Partnering for Innovation (FTF-P4I)3 project has provided nearly $1.8 million in commercialization grants to support the introduction of drip irrigation technologies to smallholder farmers in Kenya (Netafim), Zambia (iDE and Toro), and India (Driptech). In Honduras, USAID-ACCESO4 helped more than 3,000 growers adopt drip irrigation plots on nearly 1,000 hectares of land and helped expand the number of drip irrigation providers. Fintrac has hosted a number of drip irrigation knowledge sharing workshops, including an AgBusiness Lab in Tanzania, to facilitate dialogue among regional private sector participants for best practices in design, installation, extension support, distribution, finance, and affordability. This brief examines this experience and provides lessons learned and recommendations for maximizing the provision of drip irrigation to smallholder farmers.

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the Future Partnering for Innovation, AgTechXChange Technology Profile: Drip Irrigation, 2015. Driptech, Partnering for Innovation Project Proposal, 7 March 2013. 3 Implemented by Fintrac Inc., 2012-2018. 4 Implemented by Fintrac Inc., 2011-2015. 2

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Drip Irrigation Technologies & Smallholder Farmers

LESSON LEARNED #1: DRIP IRRIGATION OFFERS SMALLHOLDER FARMERS HUGE POTENTIAL FOR INCOME GENERATION Well-designed and properly managed drip irrigation systems increase productivity, improve water efficiency, and allow for year-round production. FTF-P41 found that the cost versus benefit of drip irrigation technology is one of the highest of any agricultural technology they assessed. This gives smallholders enormous potential for increased income generation. In Tanzania, Fintrac found the expected profit for a smallholder farmer investing in a one-acre drip irrigation system ($1,000-$1,500 one-time cost) and rotating onion, tomato, and cabbage is nearly $6,000 (Table 1).5 Based on these figures, a farmer can be expected to easily pay back the cost of the drip irrigation kit within the first year. Similarly, the Kenya Agriculture Value Chain Enterprises (KAVES) project6 tested 500 square meter lots of onions under drip irrigation and found yield increases of 150 percent, and by enabling multiple cropping seasons a year, a 578 percent increase in annual income compared to traditional rain-fed cultivation.7 Table 1: Expected Returns for Smallholders Investing in One Acre Drip Irrigation System Production Cycle Total Operating Expenses Revenue Profit

Onions 5 months $1,529 $4,583 $3,054

Tomatoes 4 months $3,514 $5,357 $1,843

Cabbage 3 months $1,541 $2,500 $959

Total 12 months $6,584 $12,440 $5,856 Source: Fintrac University.

LESSON LEARNED #2: DRIP IRRIGATION MAY BE BETTER SUITED FOR SMALLHOLDER FARMERS ALREADY ENGAGING IN ADVANCED FARMING PRACTICES There are a number of multinational agricultural corporations (e.g. Jain Irrigation, Netafim, and Toro) that have developed high-quality drip irrigation kits for the smallholder market. In each of their FTF-P4I grant proposals, these companies calculated market demand by estimating the number of smallholders operating without access to irrigated water in each market. With less than 2 percent of African land under irrigation, the potential market is huge and the irrigation companies plan to expand into new smallholder markets based off these demand estimates. However, during the implementation of the FTF-P41 grants, realized market demand was substantially lower than originally estimated. In Kenya, for example, Netafim’s product cost $1,580 for a half-acre kit. Even though this price included a suite of extension services, the cost represented a significant upfront investment for a vast majority of smallholder farmers. This suggests that market demand may be overstated. Price is a large determination of market demand. The success of the Tanzania Agriculture Productivity Program (TAPP)8 in boosting smallholder adoption by lowering the price of drip irrigation systems is outlined in the text box below. However, price is not the only determinant. Even Toro, which retailed its half-acre kit for $335 in Zambia, experienced significant challenges in meeting sales targets. One possible explanation is that drip irrigation systems are too far up the technology trail for a majority of smallholders. There is a sequence of maturity for farmer practices. Smallholders solely involved in the production of staple crops are not immediately suitable candidates for drip irrigation technology. These smallholders first need to move into the production of cash crops and begin basic irrigation techniques and other good agricultural practices before they start using drip irrigation technology. This process takes time and often requires ongoing technical assistance and extension support. Even so, there is a market for selling drip irrigation technologies to smallholders; it just needs to be well targeted. Driptech, for example, which provides 0.5 hectare drip irrigation kits for $250, targets smallholders who are already irrigating their land. Despite limiting their potential customer base, Driptech met their sales targets and sold substantially more drip kits than Netafim and Toro during the life of the FTF-P4I grants. Accordingly, greater analysis and background research is required in each country to calculate potential market demand.

Fintrac, 2016, Drip Irrigation: Potential Returns for Small Growers, Fintrac University. Implemented by Fintrac Inc., 2013-2018. 7 Feed the Future Partnering for Innovation, AgTechXChange Technology Profile: Drip Irrigation, 2015. 8 Implemented by Fintrac Inc., 2010-2015. 5 6



Tanzania: Lowering the Cost of Drip Irrigation In Tanzania, TAPP achieved success in working with a number of companies to lower the prices of one-acre drip systems through the use of cheaper filters and thinner drip lines. Systems that were initially sold for $2,000 per acre in 2011 were being sold for less than $1,000 per acre in 2015. TAPP also provided demonstrations and farmer training on the use of drip kits, as well as issuing grant subsidies to early adopters. TAPP experienced good adoption rates with these one-acre drip kits and positive results stimulated the expansion of these systems – farmers starting with a one-acre drip kit expanded to between two to five acres within two or three cropping cycles.

LESSON LEARNED #3: SMALLHOLDER ADOPTION OF DRIP IRRIGATION TECHNOLOGY MUST BE TIED TO LONGER-TERM TECHNICAL SUPPORT Drip irrigation systems should be viewed as a tool toward increased productivity, not as a stand-alone solution. Effective utilization of drip irrigation needs to be tied to technical assistance to ensure farmers are maximizing the benefits of the system and applying other required and complementary good agricultural practices. In the cases of Netafim in Kenya and iDE/Toro in Zambia, technical assistance was provided on how to install and use the system, but no long-term technical assistance was provided on how to better grow crops within this new system. Driptech did not provide technical assistance for installation or production. As one stakeholder noted, it is akin to providing someone with an airplane but no pilots or fuel. Without long-term technical assistance, there is minimal guarantee that the early adopters will reap the full benefits of the technology. As with the introduction of any new technology, the satisfaction of early adopters is critical to scaling up and building future demand. One challenge is that the margins made on the provision of drip systems do not necessary enable long-term support. Driptech, for example, only makes $30 per kit. This is an area where technical assistance can be effectively provided in partnership with a development partner, non-profit, or government agency. One example of a successful partnership in Honduras is outlined in the text box below. Honduras: Long-Term Technical Assistance for Drip Irrigation Systems Fintrac’s USAID-ACCESO project supported smallholder adoption of drip irrigation through direct technical assistance and market linkages to export buyers. ACCESO helped to install 141 irrigation districts that used water filtration at source with gravity conduction to irrigate plots. ACCESO started smallholders with 0.33-hectare subsidized irrigation plots, of which 30 percent of the cost was required upfront (approximately $70 in capital). Farmers received ongoing support and training to ensure productivity gains were maximized. ACCESO extension agents visited between 300 and 350 producers each week to provide irrigation management, crop production, agronomic training and advice, and market access support. After two years, the smallholder farmers were required to increase their investment to one hectare, with continued ACCESO support. Throughout the life of the project, ACCESO supported 3,073 growers with 933 hectares of drip irrigation plots.

LESSON LEARNED #4: BANKS REMAIN RELUCTANT TO LEND FOR DRIP IRRIGATION Access to finance is vital to smallholder adoption of drip irrigation technology, but challenges remain in getting financial institutions to lend. In Zambia, for example, a lack of access to credit is cited by 85 percent of smallholder farmers as the primary constraint to adoption.9 Beyond the general constraints in getting banks to lend to agriculture, they are reluctant to accept the drip irrigation systems themselves as collateral due to their poor resale value once installed (some of the components, such as the drip tape, may depreciate up to 30 percent within one or two crop cycles).10 In Kenya, a buyback guarantee for 70 percent of the loan value was still not enough of a collateral guarantee to convince commercial banks to lend for purchase of the kit. The loan amounts are also Partnering for Innovation, 2013, Standard Milestone Obligation Grant (iDE/Toro, PI-SMOG-01-07]. In Kenya, for example, banks lend less than 3 percent of their portfolio to agriculture despite the fact that it is the biggest contributor to gross domestic product. 9

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too large for many microfinance institutions. In addition, most microfinance institutions only offer loan terms of one year or less, while drip irrigation loans need to be for at least 18 to 24 months. One solution may be the use of subsidies or vouchers. Netafim pointed to the use of government-subsidized vouchers as a contributing factor to the successful rollout of drip irrigation kits in India. Similarly, TAPP found a strong farmer response to pilot projects that used vouchers to stimulate co-investments in drip irrigation systems. TAPP provided farmers with vouchers that covered 50 percent of the system cost. Farmers paid 50 percent in cash (roughly $347) and provided the voucher to an input supplier who would then redeem the voucher directly with TAPP. LESSON LEARNED #5: DESPITE DRIP KITS BEING GENERALLY EXEMPT FROM VAT PAYMENTS, DRIP LINES ARE SUBJECT TO VAT In a number of African countries, including Kenya, Tanzania, and Zambia, governments have exempted drip kits in a bid to encourage imports and lower the cost of the technology for smallholder farmers. However, despite this exemption, in practice drip lines are still subject to VAT. In Tanzania, drip systems are in reality taxed because key components include PVC pipe, which is also used extensively as a construction material. As governments cannot discern one use from the other during the import process, VAT is charged on the PVC pipes for drip systems by default.11 In Kenya and Zambia, the import of complete irrigation systems is exempt, but spare parts are subject to 16 percent VAT.12 The VAT schedules in each of these countries need to be updated to ensure all components of drip irrigation are exempt. CONCLUSION Drip irrigation systems specifically designed for smallholder farming have clear benefits. The technology can more than double incomes within the first year of use. Yet, despite these benefits, smallholder adoption of drip irrigation remains limited. From the above lessons learned, we can deduce that drip irrigation systems are likely to be better suited for smallholders with access to more consistent cash flows, such as those producing for high-value or export supply chains over those producing staple crops. Drip irrigation also needs to be tied with ongoing technical assistance to ensure early adopters are successfully maximizing the benefits of the technology and producing food using the entire suite of good agricultural practices.

Drip irrigation is only one component of a suite of good agricultural practices needed to improve incomes and food security for smallholder farmers.

About Fintrac Food Analytics Department In addition to our extensive on-the-ground presence and our robust home office support system, Fintrac has an in-house team of market analysts, business strategists, food security experts, dedicated researchers, and legal, regulatory, and policy reform specialists that comprise our Food Analytics department. The team has both deep experience in implementing short-term assignments for private-sector clients and practical hands-on experience with agribusinesses and farmers in emerging markets. Food Analytics provides adaptable, top-notch analytical resources to external clients and donors and customized analytical tools and methodologies to address specific client needs. Fintrac teams are deployable within short turnaround of initial request and the logistics and scheduling are independently managed and do not require significant client involvement. Contact: [email protected].

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This issue has been raised by Fintrac partners in other countries, including Mozambique. FAO, 2014, Kenya Irrigation Market Brief and Zambia Irrigation Market Brief. Fintrac • Food Analytics • 4