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How can matching grants in agriculture facilitate access to finance?

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Matching grants are an instrument aimed at promoting private sector development which has been used extensively over the past years, in particular for agriculture development. A matching grant is defined as “a one-off, non-reimbursable transfer to project beneficiaries, for a specific purpose, based on the condition that the recipient makes a contribution for the same purpose”. These grants can be used for a variety of activities including technical assistance, investment in assets or financing of working capital. A recent review showed that the WBG had supported 106 private-sector development matching grant projects over the past decades, including 21 in the agriculture sector. While agriculture projects account for a small portion of the total number projects, total grant financing dedicated to agriculture reaches 650 million USD or almost twice the volume of those outside of agriculture. In addition, the proportion of matching grants projects supporting agriculture has significantly increased in the 2000s. Recent interest for this instrument to support agriculture might be due to growing concerns about forms of support which distort financial markets such as interest rate subsidies, as well to the compatibility of such agricultural subsidies with World Trade Organization requirements.

However, there is very limited rigorous evidence on the effectiveness of matching grants, both on additionality and sustainability. The issue of additionality can be summarized as :“do matching grants crowd out private investment by subsidizing investment that would have been made anyway?”. On the other hand, the issue of sustainability asks: “Can supported projects be self-sufficient after the matching grants project closes”? The conclusion from the recent WBG review indicates that “experience has shown that matching grants rarely yield the type of broad and durable economic benefits that would justify the subsidization of private enterprises with public funds.”

While matching grants are often used as substitutes for well-functioning financial markets, literature suggests that matching grants do not sufficiently work as enablers of financial markets. Indeed, while the primary objective of matching grants is often to increase the income of beneficiaries in the absence of well-functioning financial markets, matching grants should also be designed in a way that help beneficiaries build relationships with financial institutions so that their future expenses and investments can be undertaken without the need for grants. However, a recent report on matching grants for productive alliances in Latin America and the Caribbean indicates that “In their design, almost all Productive Alliance projects mention the goal of enhancing producers’ access to commercial financial services to

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