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                                            FINANCING OF FOOD AND 
                                        AGRICULTURAL PRODUCTION


                                            Dato' Mohd Rosli Abd. Aziz
                                                    Chief Executive
                                                Bank Pertanian Malaysia




1. INTRODUCTION

It is a great honour to me to be invited to deliver a paper entitled "Financing of Food and Agricultural Production." In recent years, the issue of food and agricultural production has become a hot topic. Price increases and shortage of supply on certain major food items such as vegetables, chicken, sugar, fish and rice have become a concern and have been widely discussed by the public, politicians and the NGOs. Since the middle of 1997, when the ringgit has depreciated by 40%-50% against the major currencies, prices of imported food have also increased tremendously. The shortage of food supply has been identified as one of the factors that causes the increase in prices. Measures have been taken by the Government to resolve the food issue and one of them is by providing attractive financing facilities to stimulate activities of food and agricultural production.


2. OBJECTIVE AND SCOPE OF THE PAPER

I understand there are speakers in this seminar who will discuss on the strategic issues on food and agricultural production, like national agricultural policy, productivity, opportunities and marketing. Therefore, I will focus my paper on the financing and general incentives that are related to food and agricultural production. The objective of this paper is mainly to elaborate the credit facilities offered by the banks specifically on the Fund for Food and the incentives available in the market.

I will divide this paper into 4 topics: 

(i) Financing of food and agricultural production under Fund for Food or 3F and Fund for Small and Medium Industries or FSMI (Tabung Industri Kecil dan Sederhana, TIKS),

(ii) Procedures for obtaining funding from 3F and FSMI,

(iii) Credit facilities that are offered by Bank Pertanian Malaysia (BPM), and 

(iv) Incentives that are offered by the Government.


3. FINANCING FACILITIES 

As mentioned earlier, this paper will discuss on Fund for Food, Fund for Small and Medium Industries (FSMI) and BPM credit facilities even though commercial banks and development financial institutions themselves have financing facilities for food and agricultural production.

3.1 Fund for Food (3F)

Fund for Food (3F) was launched by the Government in January 1993 with initial allocation of RM300 million. In August 1997, an additional of RM400 million was allocated, bringing the total fund to RM700 million. The objective of the fund is to support the Government's efforts to promote investment in the food production activities at the reasonable cost. This fund is offered by the Participating Financial Institutions (PFIs) which made up of all the commercial banks, tier-1 finance companies, Bank Pertanian Malaysia, Bank Industri Malaysia Bhd., and Bank Pembangunan Malaysia Bhd.


As at 30th June 1998, a sum of RM336.9 million has been approved to finance 1,187 projects under the 3F. About 51% of the amount approved or RM170.5 million was financed through Bank Pertanian Malaysia. The approved projects according to the sectors and states are shown in the Appendix 1 and Appendix 2. Scope of activities that can be financed under 3F are:

(i) primary food production (including sea-food, both fresh and sea water, animal husbandry, vegetables and fruits);

(ii) related to food products covering mainly processed food, provided, the raw food materials are from domestic sources, and

(iii) distribution of food and food products.

Eligible Sectors that can be Financed
The sectors that are eligible for this fund are livestock, crop and fishery. Details of the activities are as follows:

Livestock Sector
(i) cattle (vi) quail (puyuh) 
(ii) goat (vii) ostrich(burung unta)
(iii) buffalo (viii) sheep
(iv) poultry (including layer) (ix) deer
(v) duck (x) rabbit

Crop Sector
(i) vegetable
(ii) short term crop
(a) banana (f) mango
(b) guava (g) sugarcane
(c) watermelon (h) coffee
(d) papaya (i) cocoa
(e) pineapple (j) starfruit

(iii) Paddy

Fishery Sector
(a) inshore fishing
(b) rearing fish in cages
(c) aquaculture
(d) prawn

Lending Rate
The maximum lending rate is 4% per annum.

Tenure of Funding
A maximum of 8 years beginning from the first drawdown of the fund from Bank Negara. Financing of projects by the PFIs after the eighth year will be at the market rates.

Minimum Size of Funding
The minimum size of funding will be RM10,000 per project.

Maximum Funding of Project Cost
The fund will provide funds up to 90% of the project cost. The maximum loan is not exceeding RM3 million.

Eligibility
(i) Financing will be available to Malaysian-owned company (at least with 51% ownership) or to Malaysians.

(ii) The project costs include cost of land and working capital (i.e. feed for poultry farming, seeds and fertilizers) associated with food production and processing, storage and distribution, but excludes labour costs. The cost of land that can be financed should not exceed 20% of the total project cost.

(iii) The fund is mainly for the medium and small sized projects, as long as the investment is categorized in the eligible sectors.

(iv) The projects can be financed by direct lending, co-financing or syndication by the PFIs.

(v) For export oriented projects, at least half of the total production should be for the domestic market.
(vi) For project expansion.

(vii) Applications are subjected to normal vetting procedures and security requirements of the PFIs.

Ineligibility
(a) Borrowers who have received the maximum funding of RM3 million under the first fund introduced in 1993 are not eligible to apply. In the case of companies from the same group, the total funding should not exceed RM3 million.

(b) Labour costs, loans to finance and refinance the acquisition of shares, take over of existing business or existing assets.

(c) Projects repackaging without any addition to existing production capacity.

(d) Refinancing of existing loans.


3.2 Fund for Small and Medium Scale Industries (FSMI)

The second fund that is related to food and agricultural production is FSMI. This fund was launched in January 1998 and has an allocation of RM1.5 billion. The objective of the fund is to promote production of both existing and new capacity in the sectors of manufacturing, agro-based and supporting services industries. As at 30th June 1998, a sum of RM29.6 million has been approved to finance agro-based projects, and all were approved by Bank Pertanian. 

Currently, there are 17 PFIs offering this fund in the market. Among them are Bank Pertanian Malaysia, Malayan Banking, Bank Bumiputra and Bank Pembangunan. A list of PFIs is given in the appendix 3.

Eligibility
All small and medium industries operating in the selected sectors and fulfilling the conditions below are eligible to apply for this fund:

(i) Shareholder's fund is not exceeding RM10 million;

(ii) Malaysian-owned companies (at least with 51% ownership) registered under the Companies Act 1965, the Co-operatives Act 1993, the Societies Act 1996 and the entrepreneurs registered under the Registrar of Business; and

(iii) All projects which are viable under the following sectors:
(a) Manufacturing
(b) Agro-based industry
(c) Services

Ineligibility
Loans are not eligible for:
(i) Refinancing of existing credit facilities,
(ii) Purchase of shares,
(iii) Taking over existing business,
(iv) Rehabilitation,
(v) Overdraft

Channeling of Fund
Fund will be channelled to the PFIs through BNM.

Lending Rate
The maximum lending rate is 10% per annum.

Type of Facility
All types of facilities except overdraft.

Minimum and Maximum Size of Funding
The minimum fund for the scheme is RM50,000 and the maximum is RM5 million per customer for the following purposes:

(i) expansion in productive capacity
(ii) working capital
(iii) both (i) and (ii)

Maturity
Until expiry of the fund, i.e 31 December 2005 


3.3 Procedures for Obtaining Funding from 3F and FSMI

Procedures for obtaining funding are the same for both 3F and FSMI. Potential customers interested in getting this facility should approach any PFIs for advice. Customers should make formal application to the PFIs to apply for the fund. Under certain circumstances, the customers may submit the loan application to Bank Negara for onward submission to the PFIs. All applications will be subject to the normal loan procedures and security requirements of the PFIs. The PFIs will process and make decision on the applications. 

If a loan is approved by PFIs, the PFIs will submit the application to Bank Negara Malaysia for endorsement on the eligibility of the project for financing under the fund. PFIs will notify BNM when drawdown is made. Customers would get the loan after Bank Negara has channelled the fund to the PFIs account.


3.4 Bank Pertanian Malaysia (BPM) Credit Facilities

Besides 3F and FSMI facilities, BPM offers credit facilities that are related to agricultural development. There are term loans, revolving credits, trade financing, agricultural equipment financing, interest free loans and other credit facilities. Malaysian companies, cooperative bodies and individuals are eligible to get loans from BPM. 

The scope of financing ranges from production activities, processing and marketing of agricultural products. Among the terms and conditions of BPM credit facilities are as follows:

Amount of Financing
Financing is up to 80% of the project cost.

Funding Cost
2%-4% above the current BPM base lending rate.

Type of Facilities
Term loan, revolving credit, equipment financing, and trade financing.

Tenure of Funding
Maximum of 10 years.

Scope of financing
Production, processing and marketing of agricultural products.

Eligibility
Individuals, cooperatives and Malaysian companies.


4. INCENTIVES FOR THE AGRICULTURAL SECTOR

There are incentives offered by the Government to promote the development of agricultural sector. These incentives are to reduce income tax expenditure incurred by entrepreneurs in the agricultural activities. The provision of incentives for agricultural activities and agro-based industries is governed by the Promotion of Investment Act 1986 and the Income Tax Act 1967. The promotion of Investments Act 1986 comes under the purview of the Ministry of International Trade and Industry, and the Malaysian Industrial Development Authority (MIDA). The Federal Treasury and the Inland Revenue Department are responsible for the Income Tax Act 1967.

Basically incentives under the Promotion of Investment Act 1986 that are related to food and agricultural production are Pioneer Status and Investment Tax Allowance. Under the Income Tax 1967 the incentives are Agricultural Allowance, Deduction for Capital Expenditure on Approved Project, and Reinvestment Allowance. I would not discuss these incentives in detail because a speaker from MIDA in one of the papers will explain these incentives.


5. CONCLUSION

Cheaper cost of credit and tax incentives are the factors that could stimulate the growth of the food production industry. However, other factors such as marketing, price, availability of land and basic infrastructure would determine the effectiveness of overall food production solution. In the case of marketing, it is important for an entrepreneur to find his market directly rather than be dependent on the "middle man." Although the "middle man" is important for efficient product distribution, unnecessary marketing margin imposed by them would lead to the increase in marketing cost, and higher prices to the consumers. Entrepreneurs should find ways to reduce cost of production and market their products at lower prices. This would stimulate domestic demand and production of food products such as vegetables, fish, beef and fruits. Marketing outlets in hypermarkets such as such "Makro" and "Carrefour" are examples where producers can market their products.

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