This document discusses principles and guidelines for using subsidies to facilitate agricultural knowledge and information services (AKIS). It provides: 1) Key principles for subsidy use such as avoiding subsidies when possible, using them to reduce risk for new adopters, and developing strategies for market actors to take ownership. 2) Tips for implementing subsidies like co-investing with market actors, setting timeframes, and ensuring market incentives rather than subsidies motivate actors. 3) Examples of justifiable subsidies like facilitation, capacity building, and market research and examples of difficult to justify subsidies like recurring operational costs. 4) Central questions around ensuring self-selection of market actors, managing expectations of subsidized services, and

1. TRAINING MATERIALS: MODULE 8
An extract from…
MaFI - The Market Facilitation Initiative
Synthesis of the Online Discussion:
Smart Subsidies in Market Facilitation
Specifically for
Agricultural Knowledge and Information Services
Key Principles for Subsidy Use
The purpose of a subsidy is to mitigate risk and build capacity to support innovation
and change and no mechanism works in all situations. Practitioners must use good
judgment, be prudent, ensure transparency and facilitate negotiations between
actors when identifying the need for a subsidy and implementing an agreement.
While there are no universally applicable rules for using subsidies, some general
principles do apply:
Avoid subsidies when possible-use them only with a clear vision for how they
can achieve systemic change.
The better the facilitation, the less need there is for subsidies - create
conditions that allow market actors to recognize business opportunities and
pursue them without subsidies.
Consider the possible negative consequences of unnecessary subsidies and
adopt a do-no harm approach-do not destroy private businesses and
competitiveness, create dependency, block indigenous resources or diminish
creativity.
Use subsidies to reduce risk for market actors-particularly new technology /
service adopters as long as they do not detract from sustainability or create
dependency.
Use subsidies to strengthen demand / supply markets, not to subsidize
transactions - link marginalized producers to market actors who can provide
services and inputs (facilitators should not provide these services).
Develop / use strategies that promote ownership by market actors.
Determine who will pay for and undertake services when subsidies end.
Be as inconspicuous as possible; make your role as facilitator invisible.
Base selection of the type of subsidy to use on the intended target group-
development, production, promotion, provision, consumption.
Use subsidies to improve market system structure and dynamics to benefit
the most marginalized-for example, facilitate links between a credit provider
and a local paravet to redress inequalities and exclusion and expand access
to productive resources-financial, physical, human, etc.
Recognize that those who need subsidies are not always the poorest.
Encourage self-targeting strategies that help those who want to participate to
step forward.
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2. TRAINING MATERIALS: MODULE 8
Tips for Implementing Subsidies
Identify public / private sector actors having an incentive to provide services /
products and support development and testing of models.
Always co-invest with market actors-they should match your investment.
Find supporting market actors who can undertake specific educational
activities.
Identify and clearly communicate subsidy purpose and target.
Set and communicate a timeframe for terminating a subsidy; transition it out
over time.
Identify and address systemic constraints, i.e., non-financial reasons value
chain actors do not invest.
Ensure market incentives, not subsidies motivate market actors.
Subsidize as small a portion of the total cost as possible.
Explore with market actors the possibility of embedding the cost of their
services in an existing transaction.
Encourage self-selection to make subsidy support contingent upon a
demonstrated financial or other commitment and improve the chances of
success and impact sustainability. This may exclude those who are more
disadvantaged.
Use subsidies for a limited time to get things going; this allows market actors
to see and feel the impact of new ways of doing things and helps them build
capacity and systems.
Identify and plan a long-term solution for meeting costs before introducing a
subsidy, e.g., a new MFI loan product.
Have a clear exit strategy.
Justifiable Subsidies
Facilitation - a temporary, external intervention by a non-market actor
Capacity-building activities that allow new players enter the market system
and explore new business opportunities
Training, demonstration and pilot activities-learning visits, trade fair
attendance, etc.- that confirm the impact a new business model can have
and provide opportunities to explore new ways of doing things-business /
organizational models, technologies, techniques, etc.
Ice-breaking activities that link the marginalized to new markets,
opportunities, etc.
Market research and feasibility studies to demonstrate that new ways of
doing things can work.
Technical assistance for R&D to confirm the efficacy of new business
models, technologies, etc.
Group formation.
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3. TRAINING MATERIALS: MODULE 8
Difficult to Justify Subsidies
Recurring operational and working capital costs, including personnel
Physical assets, e.g., buildings or machines, except when subsidies can
stimulate communal infrastructure like collection centers that can catalyze
change for many.
Operational knowledge needed to produce something or operate a business.
All subsidies that do not have an exit strategy.
Some Considerations When Subsidizing AKI Services
Good sources of AKIS: input suppliers (retailers, sales reps), outgrowers with
a contractual selling agreement and (sometimes) marketing cooperatives
Ineffective government extension services: lack of performance incentives,
information gaps between final users and extension agencies, researchers’
misconceptions about marginalized producers, farmers’ inability to influence
government
Radio extension messaging often not commercially viable; usually needs
ongoing subsidy or commercial sponsorship, e.g., from an input supply
company.
Need for AKIS is continuous; not a one-time service. Projects must create a
process that ensures ongoing communication, service delivery, access to
and use of AKIS by orienting providers to help clients improve productivity
and product quality over the long term, not just until the project ends.
Central Questions and Challenges
1) Blanket provision of subsidized services or inputs can reduce their
effectiveness-provide subsidies to those who need or can make the most
effective use of the service / input. How can we ensure a high rate of self-
selection amongst market actors and what is the role of subsidies in achieving
this?
2) Should we disclose to stakeholders that we have funds to subsidize services
or inputs? Or, should we withhold this information until all non-subsidized
alternatives are explored? How does this affect the ideal of self-targeting?
3) Subsidized services can prevent recipients from telling us which services they
want. How can we make sure their voices are heard before using subsidies?
How can we manage their expectation or assumption that we want to hear
from them because we want to provide subsidized / free services?
4) If the targeted group is very disadvantaged, how do you meet the cost of
training, group formation or other services? Should the market cover these
additional social costs? What strategies work well when facilitating access to
AKIS in areas lacking a moderately strong private sector, e.g., input suppliers
or purchasers? Is direct, short-term provision by a facilitator ever defensible?
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4. TRAINING MATERIALS: MODULE 8
5) Are there effective ways to increase the quality of government-provided AKIS?
Is there evidence that this could evolve into a viable option for smallholders in
remote areas?
6) Where should we focus our subsidies? Governments tend to play a more
interventionist, subsidizing role in AKIS than they do in other sectors and are
likely to continue doing so.
7) In developing a market for AKIS, how do we coordinate, complement or
mitigate conflicts between public / private AKIS providers that have different
subsidy practices?
8) How can ineffective public extension services be improved, particularly where
inadequate infrastructure and adverse incentives limit their usefulness and
efficacy?
The full paper this extract is taken from is available at:
http://www.slideshare.net/marketfacil/smart-subsidies-in-akis-final-mar2011-7192114.
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