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.

19 April 2012

Catalytic Capital: Realising Africa’s Agricultural Potential

Chris Isaac talks about the role of clusters and catalytic capital in making Africa’s agricultural potential a reality. Article reproduced from IFC's quarterly journal on public private partnerships, Handshake: Food and PPPs.

Zacharia Elises’ maize stands tall on his 1.5 hectare plot in Catandica, central Mozambique. He expects to harvest over five tonnes this season, which is more than three times the average yield in the area. He is linked to the innovative extension and marketing company, Empresa de Comercialização Agricola (ECA) which provided him with seeds, fertiliser and planting advice. One third of ECA is owned by local farmers so Elises will share in any profits generated from processing maize and other products for sale to the World Food Programme and a local brewery.

ECA sits at the middle of an economic ‘cluster’ of related agricultural businesses. The seeds were sourced from Phoenix Seeds, a company established in 2011, which aims to provide reliable and locally-adapted seeds at an affordable price. ECA’s milling operations produce maize meal for food consumption, starch for a local brewery, and nutritious bran that is highly sought after by local livestock farmers such as Guita Poultry and Tsetsera Pigs which, in turn, are expanding rapidly to take advantage of growing local demand for high-quality meat products.

All these agricultural businesses have received investment from the Catalytic Fund, the financing arm of a pubic private partnership launched in 2010 called the Beira Agricultural Growth Corridor (BAGC). Supporters of the BAGC include the Mozambican government, local and international agriculture businesses, the United Kingdom’s Department for International Development and the Norwegian and Dutch governments.

The Catalytic Fund, managed by AgDevCo, aims to kick-start clusters of profitable agricultural businesses in central Mozambique, in an area with reasonable infrastructure and rapidly developing new markets (the Tete area nearby has some of the largest coal deposits in the world which have attracted the likes of Rio Tinto and Brazilian mining gain Vale). Other investments made by the fund to date involve bananas, avocadoes, mangoes, sesame, sunflower and honey. AgDevCo is also developing irrigated farm blocks for use by local farmers, taking advantage of Central Mozambique’s ample water resources.

Banks will rarely lend money to start-up or early-stage agriculture businesses. Agriculture accounts for 30% of Africa’s economy but less than 5% of bank lending goes into the sector. The Catalytic Fund steps into the gap, providing ‘social venture capital’ on attractive terms to local entrepreneurs who have a solid business plan and the capacity to execute it effectively. The level of subsidy depends on the extent to which the business guarantees direct benefits for smallholder farmers and local communities. As well as capital, the US$20 million fund provides hands-on management and business support. Where necessary, it can also help mobilise targeted grant funds for small farmer development programmes.

By taking out many of the front-end costs and risks of getting new agriculture business started, the Catalytic Fund aims to unlock large volumes of new private investment. Numerous private equity and debt funds are being raised for African agriculture but there remains a severe shortage of ‘investment ready’ opportunities. Catalytic capital helps create a pipeline of interlinked and highly scalable investments that are ready to take on commercial debt and equity. When the fund sells its stakes in project any profits are recycled into developing new local businesses.

The Catalytic Fund is proving to be catalytic in more than one sense. Frustrated by the slow pace of investment in agriculture, and influenced by what is happening in Mozambique, a number of African countries including Ethiopia, Ghana, Rwanda and Tanzania are now setting up cluster initiatives and launching catalytic funds. The major donor agencies – the World Bank, USAID, DFID and others – have backed calls by African governments to do more to develop the local private sector, which is the backbone of any agricultural economy. A promising new pan-African initiative called ‘Grow Africa’, endorsed by the Africa Union and the World Economic Forum, is supporting the agenda.

For a long time people have talked about Africa’s agricultural potential; too often expectations of a take-off have failed to materialise. Perhaps this time the stars are aligned more favourably. The availability of catalytic capital, the focus on developing profitable clusters of firms in areas with reasonable infrastructure, the renewed investor interest in agriculture – all are necessary conditions for profitable and sustainable agriculture growth. Replicating these types of approaches across Africa will provide more opportunities to entrepreneurs like Elises to become successful commercial farmers.