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.

7 June 2012

More thoughts on patient capital

Farming is a tough business. It is especially tough in Africa where infrastructure is often weak, there is a shortage of experienced (commercial) farm management and the wider agribusiness ecosystem – from the availability of inputs to spare parts for machinery – is underdeveloped or missing.

That makes the costs of doing agribusiness in many parts of Africa high. Combine that with the largely uncontrollable risks common to all farming – weather, pests, market price fluctuations – and it is not surprising that few banks will lend to the sector.

But one needs to put this in the context of long term trends which point towards a massive increase in the demand for food. Farming is likely to be a more profitable activity in the future as the world’s population increases towards nine billion. If African countries can clear the first hurdles and establish a competitive farming base the rewards – financial and social – are potentially very significant.

How to do this? There has to be a recognition that building a competitive agriculture sector takes time and requires a lot of investment in things like roads, power lines and irrigation systems which will not pay a commercial rate of return. That requires 'patient capital' ie long-term low cost finance which can only come from governments or development agencies.

Moreover, AgDevCo believes there is a case for providing patient capital (alongside private capital) to support start-up commercial farming operations as long as they commit to supporting smallholder farmers and local communities. We see enormous potential for public-private partnerships (PPPs) where irrigation infrastructure is shared between commercial and smallholder farmers.

The land grab debate has highlighted cases where investments have gone wrong. There have been situations, including here in Mozambique, where investors have leased large areas of land and made unrealistic promises to their financial backers and to local communities about what can be achieved and how quickly.

But it would be a disaster for Africa, as Professor Calestous Juma of Harvard has written, if concerns about land grabbing led to a moratorium on new investment in African agriculture. The sector badly needs more resources, human, financial and technical to help create jobs, address food insecurity and tackle malnutrition.

There are ways of doing investment right. There is such a thing as a win-win where both the investor and the community benefits. But you have to do things properly and be patient for the returns to come.