For Cyprus, Greece, Morocco, and Turkey, horticulture supplies about a fifth of export earnings. By the late 1970s, these countries' horticultural exports had stagnated and threatened to decline. Growing domestic demand for fruit and vegetables, low productivity, increasing competition among exporters, import restrictions in the European Community (EC), and inadequate marketing practices all contributed. OED reviewed Bank-assisted projects in the four countries to promote, or help integrate, horticultural production, processing, and marketing, with a view to boosting export performance.
The projects were approved in 1978-81 and closed in 1982-89. Their economic returns were satisfactory. On-farm development differed from expectations but generally succeeded; marketing activities generally did not succeed. Their attempt to modernize an export-oriented subsector through assistance to small producers and exporters--who were targeted through very restrictive conditions on subloans--proved unrealistic.
Although the projects partly missed their goal of increasing fruit and vegetable exports, they had a considerable indirect effect on horticulture and played a catalytic role in expanding and restructuring horticultural production and marketing.
The EC is these countries' most important export market, followed by the Middle East and Eastern Europe. All four countries were associate members of the EC, or became so during project implementation (Greece became a full member in 1981) and were exempted from EC import duties. Prospects seemed good for strengthening their positions in the fast-expanding EC market, and for some expansion in Eastern Europe.
The projects were to modernize horticulture by promoting new agricultural techniques, improving post-harvest facilities, and strengthening marketing systems (see Box 1). They were based on sound analysis of problems and their goals were clear. Difficulties arose, however, from the use of approaches unsuitable for pursuing these goals. In particular, implementation and results were affected by tensions associated with the use of a smallholder approach--out of concern for poverty orientation--in projects to modernize and expand exports to a complex, fast-changing market.
As first designed, the projects had no specific poverty alleviation goals. Fruit and vegetables were mainly grown on small farms, but by progressive farmers in irrigated areas, rather than by the poorest of the rural population. In response to criticisms from Bank staff and Board, a poverty alleviation element was introduced through placing conditions on subloans, so as to favor poor farmers and small companies and cooperatives.
Farm Credit: Projects in Greece and Morocco, for example, allowed subloans for greenhouse construction only on very small amounts of land per family. In Cyprus, there was a ceiling on the amount to be lent per family. In Turkey, small farmers had to contribute at least 10 percent (and large farmers, 30 percent) to their investments. In response, farmers tended to borrow elsewhere. Their use of less restrictive sources of production credit was widespread in Cyprus, Turkey, and to some extent in Morocco, and this led to shortfalls in annual physical targets and delays in project implementation. In Turkey, TCZB, the government agency administering farm credit under the project, went on providing loans for similar purposes from its own resources, with less rigorous technical requirements. Farmers in Cyprus could borrow--through other government programs and bilateral aid--larger amounts at lower interest rates, with lower transaction costs and less collateral.
Credit uptake was also poor for post-harvest facilities, as a result of lack of interest from potential borrowers and competition from other sources of credit.
Marketing: Projects in Greece and Turkey also used a smallholder approach for the design of regional marketing companies (RMCs) (see Box 2). The RMCs were to be set up mainly by individual farmers, groups of farmers, and cooperatives, yet fruit and vegetable export marketing was becoming a specialized business, best handled by large and powerful companies, often in partnership with importers.
Other problems with the RMC concept:
- Its attempt to associate producers and exporters, whose interests were not the same, proved impracticable.
- Export of fresh produce increasingly requires skill and experience yet, by limiting membership to producers and small exporters, the RMCs deprived themselves of the expertise of the large export companies. Use of consultants was no substitute for this expertise. Large export companies were belatedly asked to join, but chose not to because of the small size of their permitted share. (In Turkey, for example, no owner could hold more than 5 percent of the subscribed shares.)
- RMC participants had no obligation to their company. Producers could deliver their produce to RMC, or to other export companies, or sell it for local consumption. Thus the main goal of RMCs--timely and reliable delivery to the export market--could not be met.
- The new RMCs competed with existing exporters, increasing the number and the disorganization of exporters.
ERRs were satisfactory: 38 percent in Turkey, 29 percent in Greece, 21 percent in Cyprus, and 12 percent in Morocco. But the impact on exports was uneven and lower than expected. Domestic market structures and strategies changed, but not as projects expected. The planned market and product diversification were not generally achieved. Shortfalls in several components caused cost underruns in all projects and the cancellation of 17 percent of the Bank loan in Greece, 27 percent in Turkey, 36 percent in Morocco, and 80 percent in Cyprus. Delays in project completion ranged from 6 months in Turkey to 3 years in Cyprus; they were largely due to low uptake of credit and, in Morocco, to adverse weather conditions.
On-farm development was quite successful (see Box 3). Although fruit planting in Cyprus and Turkey and vegetable growing in open fields in Morocco fell short of targets, construction of greenhouses met or exceeded targets in all four countries, contributing 27, 37, and 85 percent of the area under greenhouse in Greece, Cyprus, and Morocco, respectively (3 percent in Turkey). Targets for the use of farm credit did not foresee (indeed, could not have foreseen) farmers' shifting preferences, away from fruit production toward vegetable production under greenhouses in Turkey and Cyprus.
Post-harvest activities were only partly implemented. In Turkey, uptake of credit for packing houses was only 37 percent of what was expected. In Cyprus, the central grading and packing facilities were not constructed because the trade partnerships that were envisaged were not formed. The large number of inefficient packing and grading stations remains a problem in Morocco and Turkey.
Marketing strategies failed in all four countries. In Turkey four regional marketing companies were established but went bankrupt two years later. In Greece, two marketing companies were created but never became operational. In Morocco the marketing board resisted changes in the marketing system, resulting in the government decision, a year after project completion, to abolish its monopoly. In Cyprus, a multi-agency coordinating committee for export was established but eventually stopped working; the expected merger of small exporters into trade partnerships did not occur.
The projects nonetheless had an important catalytic role in the restructuring and modernizing marketing systems in Cyprus, Morocco, and Turkey. In each country, it is now recognized that fruit and vegetables are better marketed by the private sector with minimal government intervention.
Agricultural services were successfully reinforced during project execution but this did not last after project completion.
Export peformance was uneven and poorer than expected. This was partly because tourism--and, with it, domestic demand competing with exports--grew faster than expected, partly because supplies were unreliable or did not meet importers' standards, and partly because of growing competition and concentration in the EC market. EC requirements as to quality and standardization of products, packaging, timeliness, and reliability of delivery have been increasingly difficult to meet. Meanwhile, competition in the EC market has kept on rising.
In all four countries the successful introduction or expansion of greenhouses has helped change the composition of horticultural exports away from summer field-grown crops toward winter greenhouse-grown crops, whose unit value is higher. Although the projects fell short of their export targets, both production and exports would probably have fallen dramatically without the greenhouse investments that they financed.
Design of credit terms: Though the projects set out to modernize production and post-harvest facilities, credit terms in fact often discouraged potential borrowers. The experience shows it is futile for the Bank to impose rigorous terms and conditions on subloans where other more lenient sources of credit are available. In Morocco, conditions on subloans were not fully respected by the credit institution, so as to boost the sublending for greenhouses.
Marketing approach: In none of the four projects did the planned marketing structure survive project execution. A few powerful purchasing companies now handle the great majority of products. The Bank and the governments were not prepared, nor adequately staffed, to confront the developments that were taking place in the EC market. Though marketing specialists helped with project design, project supervisors were economists, financial analysts, technicians, and bureaucrats, poorly trained for commercial activities.
The recent emergence of large specialized companies in Turkey and Morocco, a new development imposed by changes in the main export market, was not contemplated at project appraisal but was encouraged by the governments during and after project execution. The only, though important, benefit of the projects' approach was that it favored private initiative, allowing such developments to take place spontaneously.
Product diversification: Diversification of products, sought by Greece away from cucumbers and by Morocco away from tomatoes, was not achieved under the projects. Reasons include insufficient research to identify suitable varieties for export, inefficient marketing practices, and the unexpected size of local demand. Obviously this emphasizes the need for good research and good demand forecasting in export projects. It is also worth noting that export diversification plans must bear in mind comparative advantage, and build around the strong position in one product, rather than trying to develop substitutes for it. Morocco has started diversifying its products since its market arrangements were liberalized.
Market diversification: Market diversification proved more difficult than expected; at project completion the four countries' dependence on their traditional customers had not decreased. Project experience confirmed the disadvantages of depending on one market. The flow of Greek and Turkish products to Munich, for example, resulted in oversupply, mutual competition, and low prices.
Market share: EC agreements with most Mediterranean countries give preferential treatment to off-season fruit and vegetables. These countries' future share of the EC market will depend on how low they can keep their production costs. But it will also depend on how well they can adapt to EC needs--for suitable varieties; large quantities of homogeneous high-quality products; reliable timely deliveries; standardized, modern grading, packing, and transport facilities; efficient marketing systems; and market intelligence. All these needs favor the emergence of large exporting companies and the disappearance of small operators. Exporters will also need to cultivate market niches, through special arrangements with importers. Some partnership arrangements with large EC and international firms have been successfully developed by Morocco and Turkey.
Institutional development: In the four countries, horticultural production and marketing are now fully privatized, but efforts are still needed to strengthen the necessary supporting institutions. Strong professional organizations, at three levels, have been key to success in competitor countries such as the Netherlands and Spain:
- Production level: cooperatives or cooperative unions to develop new cropping systems, integrate production and processing, and enter marketing arrangements or contract farming with exporters. Cooperatives are often poor at marketing. But producers must be properly organized if they are to defend their bargaining power with the international traders.
- Commercial: a national exporter association to administer rules and standards for products and packaging, and respect of an export calendar.
- Subsector: a national federation of producer and exporter organizations (supported through an export tax) to discuss matters of common interest and exercise quality control, market intelligence, and promotion.
Need for better research, extension: To keep up with the continual change--and increasing complexity--in fruit and vegetable production technologies calls for specific types of research and extension methods and personnel, as well as strong links with international research and, if possible, the private sector. Roles of government, Bank: Experience suggests that future support for horticultural exports should put less stress on investments and more on "software", to encourage private initiative and international relationships and defend the position of exporting countries vis a vis the EC and GATT. Lending for large-scale processing and marketing facilities will perhaps be better funded by IFC than by the Bank. If the Bank is to support horticultural exports through traditional-style credit projects, it will need to take a more business-oriented attitude and to use specialists with marketing skills.
Box 1: Project features
Total project costs, to be disbursed over 4-5 years: $130 million in Morocco, $107 million in Turkey, $84 million in Greece, and $33 million in Cyprus. More than two thirds of project investments were to be financed through agricultural credit.
- farm credit for production of off-season vegetables under greenhouses in all four countries, fruit orchards in Cyprus and Turkey, and vine replanting in Cyprus;
- credit to construct or rehabilitate packing and grading stations, wine-making facilities in Cyprus, and purchase of tractor trailers in Cyprus and Greece;
- equipment and technical assistance to reinforce export services to agriculture; and
- establishing new marketing corporations in Cyprus, Greece, and Turkey; strengthening the existing marketing board in Morocco.
Box 2: Marketing strategies
In Greece and Turkey when the projects began, many small and disorganized exporters supplied small shipments with no fixed delivery schedules and competed in the same markets, mainly in Germany. Project goals were to pool small producers and exporters together into a few large regional marketing companies, with limited (30 percent) government participation in capital. These companies, when established, were to form a central marketing organization for export coordination, promotion, quality control, and marketing.
In Cyprus, fruit and vegetable exports were handled by several independent private firms, two marketing boards, and a few cooperatives, with the UK as the main market. The project's marketing strategy was to regroup private exporters into large trading companies, establish a coordinating agency for transport and storage of products, and diversify markets away from the UK.
In Morocco a government board, OCE, established in 1963 had a monopoly for export of fruit and vegetables. Part of the reason for the fall in exports was the failure of OCE to adapt its marketing practices to changes in the EC's distribution system and to diversify away from France, its main market. OCE's monopoly was not disputed at project appraisal, but through the project the Bank promoted changes to improve OCE's efficiency. After the project the monopoly was abolished.
Box 3: Results Country by Country
Turkey: project too small for major impact on production or export development. Fruit production growth less than projected; vegetable production growth 7 times higher than projected. Some export growth. Main goal--integration of production and marketing, generally not achieved. Marketing system evolved during and after project completion: large firms and cooperatives now handle 85 percent of fruit and vegetable exports; some do contract farming with producers. Little market diversification away from Germany.
Greece: project contributed big increase in export of cucumbers. Other assisted crops mostly sold domestically. Despite advantages of full membership of EC, exports to EC decreased, due to rising domestic demand, poor marketing. Marketing system changed little: many small exporters still compete, with poor planning and coordination of supplies. Little market diversification away from Germany.
Morocco: greenhouse area expanded tenfold with the project. Greenhouse vegetables now supply 33 percent of horticultural exports (3 percent before the project). Much of new production of high-value crops such as melons and strawberries was absorbed domestically. Horticultural exports stagnated during project implementation but then grew by 47 percent in one year (1988/89). Since abolition of government board's monopoly, a few large private companies have been established; some have made contracts with producers and partnerships with European importers. Little market diversification away from France.
Cyprus: project significantly increased off-season vegetable production. Most of new production sold at home. Vegetable exports fell, partly because of shortages of farm labor and of air freight capacity. Fruit exports were stable. Project helped improve wine production. Exporters improved their performance. Contract farming with producers and partnerships with importers are progressing. Little market diversification away from UK; market share declined in Middle East; improved slightly in EC.