various studies including those published in our very own agriculture finance year book have demonstrated that these tax incentives did not result in any significant gains to farmers in the form of either reduced input prices, or an increase in lending to the agriculture sector. instead they benefited mostly the banks and importers while denying government revenues ; and as a result, government embarked on eliminating many of these tax incentives in the financial year 2014 / 15. what lessons can we learn from these experiences? agriculture in uganda is dominated by small holder farmers, of whom two thirds are engaged in subsistence agriculture, according to the 2014 uganda national population and housing census. therefore the agriculture development strategy must focus on the small holder farmer. any risk - sharing model for financing must be based on a clear understanding of the profile and origins of the risk. in this case, we must resolve what continually constrains the modernization of agriculture and what makes small holder farming very risky for financing. smallholder farmers face a raft of constraints to modernising their farming, of which lack of financing is not necessarily the most important. most smallholders produce very little surplus, beyond their own needs for consumption, which can be marketed. furthermore, the vulnerability of agriculture to the weather, pests and other hazards means that surpluses cannot be produced with any degree of reliability. in these circumstances, agriculture assumes a very high risk premium, and borrowing money to purchase agricultural inputs is very risky for farmers, and they will unavoidably struggle to repay loans. modernising smallholder agriculture in uganda requires a holistic set of interventions. the first priority should be to assist farmers to increase their output without exposing them to greater risks. there is evidence from agricultural projects that if smallholder farmers are given advice on the adoption of good agricultural practices, such as better seeds, optimal crop spacing, weeding, post - harvest handling etc, substantial increases in yields per acre can be achieved, even without the application of purchased inputs such as fertilisers. this would allow farmers to produce more marketable surplus and thereby generate cash incomes. the next step would then be to start applying modest amounts of purchased inputs such as fertilisers, to increase yields further. luckily, we are not short of demonstrable projects in the uganda and elsewhere that have markedly improved yields per acre and income of the farmers by providing this sort of comprehensive support. the 2015 agriculture finance year book for uganda provided an assessment of one such pilot by the one acre - fund in kamuli district.

the main challenge facing agricultural policy is how to scale up the successes of individual projects to smallholders throughout the country. the key to delivering the interventions needed to modernize agriculture are effective, nationwide agricultural extension services. we also need to strengthen the rural infrastructure, especially the rural feeder roads, and provide the necessary support for private sector - led contract farming. once the above interventions are effected and farmers are able to earn cash incomes from selling their produce, the risk profile of agriculture will reduce and it will become possible to extend credit to them on a sustainable basis, although it is unlikely that commercial banks, given their cost structures, will be the most suitable financial institutions to do this. instead financial institutions which specialize in small savings and loan facilities, and which have strong local roots, are better suited to delivering rural finance on a sustainable basis. mobile banking and leveraging technology may also be able to contribute to solving market information deficiencies and delivering financial services in a more cost effective manner. a key question is whether rural finance can be provided on a purely commercial basis, or requires some degree of subsidy to offset the undoubtedly higher risks involved. we don ’ t yet have a definitive answer to this question. i am of the view that, in implementing a holistic set of interventions highlighted above, government resources should prioritize what it can do best and what the market cannot provide : the provision of public goods that benefit the majority of the small holder farmers such as policy, strengthening land rights, rural feeder road infrastructure, research and extension services, and supporting the strengthening of the ware house receipt system. tax incentives and subsidies as we have evidently seen are the least optimal way of utilizing public resources. i am aware that in a bid to lower the risk profile of agriculture and incentivize agricultural financing, government is introducing an agriculture insurance scheme. my advice is that any such publically funded insurance scheme should mainly cover systemic risk faced by the majority of farmers such as a general epidemic or extreme weather conditions. finally, the historical evidence with state - run agriculture financing mechanisms – risk sharing schemes or development banks on the african continent, is instructive that if any such financing institution or scheme is to efficiently support the development process, it must be managed on commercial principles. i thank you for listening to me.