Whether for profit or social motives - and often both - an increasing number of investors are targeting opportunities in African agriculture. At the same time innovative approaches for deploying aid to support farming businesses linked to smallholders are emerging. This blog provides a snapshot of who is doing what, where and how.

28 August 2010

Agricultural alchemy? How to attract more private investment for agriculture and turn it into aid

An article by Chris Isaac, Director of AgDevCo

With a global population expected to reach 9 billion by 2050, the FAO estimates that $83 billion of investment in agriculture is required every year in developing countries to assure global food security. Where is the money going to come from? Not from official development assistance (i.e. aid) which according to the OECD provided less than $2 billion to support agricultural production in 2008/09. In fact aid to agriculture has been declining for more than 20 years. So the hope must be that private investors will rush in to fill the gap. But is that going to happen in Africa where investment is most needed? If it does, will the benefits be widely shared with local communities?

Based on AgDevCo’s experience of developing agriculture projects across Africa, the answers to these questions are that investment in agriculture is unlikely to happen at anywhere near the scale required; and the benefits will reach local communities only if aid is used strategically to make that happen.

Why? Firstly, agriculture in Africa is essentially an infant industry and the business case for early-stage investment is often weak. A lack of infrastructure, uncertainty over land tenure, missing support services, and low levels of managerial skills make early stage investment costly and risky. Secondly, investors are often reluctant to incur the additional upfront costs of building links to smallholder farmers – for example by sharing irrigation infrastructure and developing outgrower schemes – even though experience shows these arrangements can be profitable in the long-term.

To assure global food security and reduce poverty, a way needs to be found to stimulate more investment in African agriculture in a manner that benefits local communities, by creating jobs in rural areas and allowing a new class of skilled farmers to emerge. In other words there needs to be a way of attracting more private investment and turning it into something resembling aid – a sort of agricultural alchemy.

There is a way. “Patient capital” is low-cost, long-term finance invested alongside African entrepreneurs and agribusinesses. It is used to part-finance the costs of agricultural infrastructure such as feeder roads, rural electrification and bulk water supply. It stimulates increased investment by overcoming barriers to entry which otherwise would have deterred investors. It comes with conditions attached which require the recipient to build strong and direct links to smallholder farmers and local communities.

The concept of patient capital is not new. It has been used in isolated cases over the past 40 years. There are commercial agriculture projects in Africa – for example in sugar, rice and cotton – which receive ad hoc grant funds from donor agencies and governments to build stronger links with smallholder farmers. AgDevCo has recently launched a fund in Mozambique to support early-stage farming businesses. But the amount of patient capital available is nowhere near high enough to induce the step change required to respond to the food crisis and reduce poverty in the poorest countries.

If the international community is serious about addressing global food security and reducing rural poverty in the world’s poorest countries, it needs to encourage the private sector to do more and to do it better in agriculture. It should commit to making patient capital available at a scale that will catalyse significantly increased investment into socially-responsible agriculture projects. Patient capital can help turn billions of private dollars into aid, providing jobs and income generation opportunities for large numbers of people in rural areas.

AgDevCo is actively involved in promoting agircultural growth corridors in Mozambique and Tanzania. Chris Isaac, Director of AgDevCo, will be speaking about patient capital at the African Green Revolution Forum in Accra, Ghana, on 2-4 September, 2010.