For a long time the consensus has been that investment by development finance institutions (DFIs) should be on 'commercial terms'. Low-cost loans risk propping up weak businesses and crowding-out private investment. There is a case for using public money to increase the supply of credit in developing countries, the argument goes, but not for reducing its cost.
When applied to African agriculture this argument is weak. Firstly, many agribusinesses operate in environments where there are market failures – such as underfunded research institutions, poor infrastructure and inexperienced farm management and labour – which makes it difficult to compete with farmers in other parts of the world. In these situations there is a sound economic rationale for public subsidy to help business get established and achieve the economies of scale which allow them to become competitive.
Secondly, the cost of commercial finance in rural Africa – often more than 25% interest for local currency loans – is prohibitive especially for primary agriculture which is generally a low margin business. For smallholder farmers the cost of credit is higher still – often 40-50% or more – which reflects the high transaction costs of making small loans to large numbers of disbursed clients. Insisting the DFIs lend on the same terms as commercial banks will not stimulate more investment in agriculture. Credit lines simply go undrawn.
Thirdly, there is no shortage of commercial capital looking for opportunities in the African agriculture sector. More than $2 billion of dedicated private equity has been raised since 2010. If there were investment opportunities that could give a reliable 25% + return then the private sector would already have taken them up. There is little benefit in increasing further the supply of credit when the problem is not a lack of capital but a lack of “investment-ready” opportunities (i.e. businesses with a solid business plan, quality management on the ground and some sort of track record).
Interestingly, the ideological opposition to subsidies seems to be on the wane. As Europe struggles to escape austerity more attention has been given to the role of the state in stimulating growth and encouraging entrepreneurship. Industrial policy is back in fashion.
A recent report by Demos titled The Entrepreneurial State points out that in many cases states have been the catalyst to develop and invest in new technologies. Many of the most innovative young companies in the USA were funded not by private venture capital but by public grants such as through the Small Business Innovation Research programme ($30 billion disbursed since the 1970s). The algorithm behind Google was funded by a public sector National Science Foundation grant.
AgDevCo’s view is that African agriculture will not develop with commercial finance alone. There are simply too many hurdles for start-up businesses. There is a strong economic rationale for subsidising agribusiness in its early-years, as long as there is an exit strategy. The DFIs should be doing more to catalyse private investment by increasing the supply and reducing the cost of credit for early stage agriculture businesses.
23 March 2012
1 March 2012
Why good project development matters in the land grabbing debate
It doesn’t make for exciting headlines, but good project development may be the best way of ensuring that private investment in African agriculture benefits local communities.
Project development is the set of activities required to take a project from the concept stage to the point at which investment has been secured and implementation can begin. Using the language of finance, project development is about making an investment opportunity “bankable”.
Project development is important because it reduces the upfront risks of greenfield agriculture projects. If done properly it demonstrates to potential investors that a project can deliver a stable financial return (e.g. by proving that good crop yields can be achieved and there is a reliable market).
Good project development should also involve structuring deals such that benefits are equitably shared between investors, the local community and the host country government. Failure to get this right will undermine a project's long-term sustainability. Managing environmental impact is also key.
There are no short-cuts. Project development is expensive – often 10% of the total project cost – and can take 2-3 years or more. It needs to be undertaken by a team with the right mix of agronomic, financial, legal and engineering skills. The unexpected often happens and project developers need to be prepared for a long haul.
Where investors have been accused of “land grabbing” it is often because of bad project development usually involving a failure to properly consult and gain the consent of the local community, who in some cases are sidelined when governments or local authorities allocate land directly to investors.
But in many situations projects do not even get out of the starting blocks. The project development process is seen as too risky and expensive given the complex technical, social and environmental challenges involved. The result is that many potentially viable projects never get beyond the concept stage and Africa’s agricultural potential remains unfulfilled.
AgDevCo believes there is a strong case for public subsidy of project development in the African agriculture sector. Firstly, this would allow more “bankable” projects to be developed in situations where private capital was unwilling to take the first step. Secondly, because public subsidy would come with strings attached, it could be used as a tool to ensure projects were designed to maximise smallholder farmer and community benefits.
The way to address "land grabbing" is not to put a moratorium on all foreign investment into African agriculture, as some campaigning groups have called for. Instead a way must be found of ensuring that project development is done properly and benefits are shared with local communities.
AgDevCo is a project development company operating in the African agriculture sector funded by donor agencies and philanthropic organisations. Acting as principal it invests its capital to develop greenfield and early-stage agriculture businesses. Success for AgDevCo involves attracting private capital into projects (at financial close) that are profitable and guarantee long-term sustainable benefits for smallholder farmers and local communities.
Project development is the set of activities required to take a project from the concept stage to the point at which investment has been secured and implementation can begin. Using the language of finance, project development is about making an investment opportunity “bankable”.
Project development is important because it reduces the upfront risks of greenfield agriculture projects. If done properly it demonstrates to potential investors that a project can deliver a stable financial return (e.g. by proving that good crop yields can be achieved and there is a reliable market).
Good project development should also involve structuring deals such that benefits are equitably shared between investors, the local community and the host country government. Failure to get this right will undermine a project's long-term sustainability. Managing environmental impact is also key.
There are no short-cuts. Project development is expensive – often 10% of the total project cost – and can take 2-3 years or more. It needs to be undertaken by a team with the right mix of agronomic, financial, legal and engineering skills. The unexpected often happens and project developers need to be prepared for a long haul.
Where investors have been accused of “land grabbing” it is often because of bad project development usually involving a failure to properly consult and gain the consent of the local community, who in some cases are sidelined when governments or local authorities allocate land directly to investors.
But in many situations projects do not even get out of the starting blocks. The project development process is seen as too risky and expensive given the complex technical, social and environmental challenges involved. The result is that many potentially viable projects never get beyond the concept stage and Africa’s agricultural potential remains unfulfilled.
AgDevCo believes there is a strong case for public subsidy of project development in the African agriculture sector. Firstly, this would allow more “bankable” projects to be developed in situations where private capital was unwilling to take the first step. Secondly, because public subsidy would come with strings attached, it could be used as a tool to ensure projects were designed to maximise smallholder farmer and community benefits.
The way to address "land grabbing" is not to put a moratorium on all foreign investment into African agriculture, as some campaigning groups have called for. Instead a way must be found of ensuring that project development is done properly and benefits are shared with local communities.
AgDevCo is a project development company operating in the African agriculture sector funded by donor agencies and philanthropic organisations. Acting as principal it invests its capital to develop greenfield and early-stage agriculture businesses. Success for AgDevCo involves attracting private capital into projects (at financial close) that are profitable and guarantee long-term sustainable benefits for smallholder farmers and local communities.
4 February 2012
AgDevCo highlighted in World Economic Forum report on food security
The World Economic Forum has released its latest report on how to meet the global food security challenge. Titled Putting the New Vision for Agriculture into Action: A Transformation Is Happening (11MB file) the report:
“Effective financing and risk management requires a broad set of innovative catalytic and patient capital financing mechanisms as required by the long-term horizon of agricultural development – from patient capital, donor grants and commercial equity to working capital and concessionary loans.”
The report gives a number of examples of AgDevCo’s work in Ghana, Mozambique, Tanzania and Zambia to develop viable farming enterprises.
- explains that investment in agriculture in developing countries will have to increase by at least 50%
- describes an approach which has the potential to deliver increased employment, expanded access to nutritious and affordable food, and sustainable resource use
- gives examples where agricultural transformation is already happening
“Effective financing and risk management requires a broad set of innovative catalytic and patient capital financing mechanisms as required by the long-term horizon of agricultural development – from patient capital, donor grants and commercial equity to working capital and concessionary loans.”
The report gives a number of examples of AgDevCo’s work in Ghana, Mozambique, Tanzania and Zambia to develop viable farming enterprises.
31 January 2012
The myths and realities of land grabbing in Mozambique
There has been a lot of misinformation, and some hysteria, in the press coverage of “land grabbing” in Africa. It is refreshing to read a well-researched study, published by the Oakland Institute and written by long-time Mozambique expert Joseph Hanlon, which gives a more balanced account of the realities on the ground.
The 58-page report titled Understanding Land Investment Deals in Africa: Mozambique a Country Study points out that much commentary on land grabbing is wildly exaggerated (e.g. headlines such as “20 million hectares granted to the Heaven on Earth Development Corporation”). And it recognises that rural poverty in countries like Mozambique will not fall unless there is increased public and private investment in the agriculture sector.
The report gives an insightful account of the debates within the Mozambican government about how best to promote agricultural development, in particular how to modernise the agriculutre sector and attract private investment while protecting the interests of small farmers and local communities.
Hanlon describes some recent high profile agribusiness failures in Mozambique and identifies others where the promised employment benefits never materialised. But he does not go so far as to say that all land deals are bad (indeed there is the suggestion, not fully developed, that “medium scale” commercial farming may be part of the answer). Rather, the evidence Hanlon presents gives lie to the myth that African agriculture is a one way bet for investors.
As shown by recent experience in Mozambique, agriculture is a tough business, prone to failure, and investors should be careful not to make unrealistic promises to governments, local communties or, indeed, to their own financial backers. But it would be disastrous for Africa, as commentators such as Professor Calestous Juma have noted, if governments and policy makers drew the conclusion that all foreign private investment in agriculture should be discouraged.
Hanlon does not go down that path and, while he does not exactly endorse large farm investments, he at least opens a window for a rational discussion about how to attract and regulate responsible foreign investment in the Mozambican agriculture sector.
Investors are unlikely to agree with everything in the report. For example, the statement “investors are not interested in the poor quality land, which puts them in direct conflict with food production” is hardly justified when large areas of land in Mozmabique are idle (mainly because of missing infrastructure, as reported by the Economist Intelligence Unit). But it is worth reading to get a better understanding of how some of the myths and the realities about farming investments in Africa play out in the public sector.
There is enough common ground in this report for both sides of the polarised "smallholder farmer versus large-scale commercial farming" debate to come together and work out ways of promoting investment models which can genuinely deliver both social and financial returns.
The 58-page report titled Understanding Land Investment Deals in Africa: Mozambique a Country Study points out that much commentary on land grabbing is wildly exaggerated (e.g. headlines such as “20 million hectares granted to the Heaven on Earth Development Corporation”). And it recognises that rural poverty in countries like Mozambique will not fall unless there is increased public and private investment in the agriculture sector.
The report gives an insightful account of the debates within the Mozambican government about how best to promote agricultural development, in particular how to modernise the agriculutre sector and attract private investment while protecting the interests of small farmers and local communities.
Hanlon describes some recent high profile agribusiness failures in Mozambique and identifies others where the promised employment benefits never materialised. But he does not go so far as to say that all land deals are bad (indeed there is the suggestion, not fully developed, that “medium scale” commercial farming may be part of the answer). Rather, the evidence Hanlon presents gives lie to the myth that African agriculture is a one way bet for investors.
As shown by recent experience in Mozambique, agriculture is a tough business, prone to failure, and investors should be careful not to make unrealistic promises to governments, local communties or, indeed, to their own financial backers. But it would be disastrous for Africa, as commentators such as Professor Calestous Juma have noted, if governments and policy makers drew the conclusion that all foreign private investment in agriculture should be discouraged.
Hanlon does not go down that path and, while he does not exactly endorse large farm investments, he at least opens a window for a rational discussion about how to attract and regulate responsible foreign investment in the Mozambican agriculture sector.
Investors are unlikely to agree with everything in the report. For example, the statement “investors are not interested in the poor quality land, which puts them in direct conflict with food production” is hardly justified when large areas of land in Mozmabique are idle (mainly because of missing infrastructure, as reported by the Economist Intelligence Unit). But it is worth reading to get a better understanding of how some of the myths and the realities about farming investments in Africa play out in the public sector.
There is enough common ground in this report for both sides of the polarised "smallholder farmer versus large-scale commercial farming" debate to come together and work out ways of promoting investment models which can genuinely deliver both social and financial returns.
15 December 2011
Seven trends likely to shape African agriculture in the coming years
In a recent report titled African Agriculture: This other Eden (available on subscription) Renaissance Capital has identified a number of factors that are likely to influence African agriculture in the years ahead. Femi Adewumni posted this helpful sumary on the How We Made it in Africa blog:
1. Increasing demand from China and other emerging markets
China’s annual per capita meat consumption has increased significantly, from 43kg in 2001 to 54kg by 2011. More meat consumption has led to a rising demand for soya beans – a popular source of feed for livestock. Domestic consumption of soyabean has skyrocketed from 28.3 million tonnes in 2001 to 71.6 million tonnes in 2011. This higher demand has been met through imports.
In addition to soya beans, China’s ability to be self-sufficient in the production of other crops is also likely to be reversed in a dramatic fashion over the next few years. Renaissance says that the same situation as what happened with soya beans could play itself out in other grains, such as maize, wheat and rice.
It is not only China that will import more grains. Similar dietary changes are underway in a number of other emerging economies. Renaissance says this is a good opportunity for Africa, which has significant farming potential, to increase its exports of agricultural commodities such as maize, palm oil and other crops.
2. Achieving global food security requires investment in Africa
The UN Food and Agriculture Organisation (FAO) believes that 70 million hectares of additional farmland is required to feed the world’s 9 billion people by 2050. The Americas could most likely fulfil this need alone with Canada, the US, Brazil and Argentina providing the bulk of additional supply. However, in common with the oil & gas industry, there comes a point where an over-reliance on too few suppliers for a country’s energy needs makes it hunt out alternative sources of energy. A similar need to diversify supply will likely arise in agriculture, and this represents a major opportunity for Africa to provide the world with food security.
3. Resource nationalism in agriculutre
Although resource nationalism is often associated with the extractive industries, Renaissance expects the issue to also come to the fore in African agriculture. Resource nationalism is not always entirely driven by anti-foreign sentiment. High prices help, too. The electoral success of Evo Morales in Bolivia, Hugo Chávez in Venezuela and the recently elected Sata government in Zambia might never have materialised had it not been for the prevailing high prices of oil, gas and copper over the past decade.
High prices for agricultural goods, the need to secure alternative food supplies and the sensitivities of access to and ownership of land, all suggest resource nationalism in agriculture is likely to become a more prominent theme in the years ahead.
4. Will urbanisation lead to farm mechanisation?
It estimated that 60% (currently 40%) of the continent’s population will live in cities by 2050. As more and more workers flood into urban environments and readily available pool of cheap workers disappear from the countryside, farmers are forced into a straightforward labour-capital shift. In short, farms must mechanise if they are to maintain their competitive position.
Smallholder farmers, too, must make a decision: if they dedicate their supply of labour to generating urban-derived income, what do they do with their land? Another way to look at this conundrum takes the form of a question: is the rise of the superfarm inevitable?
5. Superfarms
The rise of the superfarm is a relatively modern phenomenon. There are possibly fewer than 100 industrial groups that own, lease or operate farms of over 100,000 ha.
Do economies of scale exist in agriculture? The purchasing power on inputs or selling power on output that comes with a 100,000 ha farm is likely to be no greater than a 1,000 ha farm. This is accentuated by two factors: first, managing 100,000 ha under a single corporate umbrella is more likely to result in managerial dis-economies of scale; and second: 100 farmers managing 1,000 ha plots each can easily form a co-operative, which will provide them with all the purchasing benefits of the superfarm and none of the dis-economies of scale. However, many superfarms exist because they act as channels for investment capital. In short, while managerial or operating economies of scale might not exist, financial economies do.
How does one create a conduit for capital for investment in agriculture? Can smallholders provide that conduit? If so, it would be reasonable to assume they had a future in this most strategic of industries. However, the volatility of food prices, the rapid urbanisation that characterises large parts of our planet, the relative undercapitalisation of the sector and the sheer variability of the agricultural labour force in its current form, all suggest that in creating those conduits for capital, superfarms are likely to play a hugely important role in attracting investment to the sector.
6. Sustainability
One of the overriding issues for humanity is that every civilisation with an urban heartland has been built upon the availability of food and water. In fact, it is the existence of those food and water resources, which has allowed urban societies to flourish. However, over time, every single one of those civilisations, societies and states has collapsed because its depleted and exhausted hinterlands could not supply its cities with their food and water needs.
The collapse of food-supply systems that support urban societies has been a permanent issue since urban centres were founded. Renaissance anticipates a great deal of new thinking on sustainability in agriculture, and expects Africa to lead much of that new thinking.
7. The future of aid
African food aid will likely be transformed, too. Renaissance says that many aid agencies operating on the continent are setting agendas that hamper commercial development. The idea that some aid agencies are seeking to transform themselves into commercial enterprises highlights the new thinking that abounds in Africa. Traditional methods of delivering aid are likely to become redundant in the decades ahead
1. Increasing demand from China and other emerging markets
China’s annual per capita meat consumption has increased significantly, from 43kg in 2001 to 54kg by 2011. More meat consumption has led to a rising demand for soya beans – a popular source of feed for livestock. Domestic consumption of soyabean has skyrocketed from 28.3 million tonnes in 2001 to 71.6 million tonnes in 2011. This higher demand has been met through imports.
In addition to soya beans, China’s ability to be self-sufficient in the production of other crops is also likely to be reversed in a dramatic fashion over the next few years. Renaissance says that the same situation as what happened with soya beans could play itself out in other grains, such as maize, wheat and rice.
It is not only China that will import more grains. Similar dietary changes are underway in a number of other emerging economies. Renaissance says this is a good opportunity for Africa, which has significant farming potential, to increase its exports of agricultural commodities such as maize, palm oil and other crops.
2. Achieving global food security requires investment in Africa
The UN Food and Agriculture Organisation (FAO) believes that 70 million hectares of additional farmland is required to feed the world’s 9 billion people by 2050. The Americas could most likely fulfil this need alone with Canada, the US, Brazil and Argentina providing the bulk of additional supply. However, in common with the oil & gas industry, there comes a point where an over-reliance on too few suppliers for a country’s energy needs makes it hunt out alternative sources of energy. A similar need to diversify supply will likely arise in agriculture, and this represents a major opportunity for Africa to provide the world with food security.
3. Resource nationalism in agriculutre
Although resource nationalism is often associated with the extractive industries, Renaissance expects the issue to also come to the fore in African agriculture. Resource nationalism is not always entirely driven by anti-foreign sentiment. High prices help, too. The electoral success of Evo Morales in Bolivia, Hugo Chávez in Venezuela and the recently elected Sata government in Zambia might never have materialised had it not been for the prevailing high prices of oil, gas and copper over the past decade.
High prices for agricultural goods, the need to secure alternative food supplies and the sensitivities of access to and ownership of land, all suggest resource nationalism in agriculture is likely to become a more prominent theme in the years ahead.
4. Will urbanisation lead to farm mechanisation?
It estimated that 60% (currently 40%) of the continent’s population will live in cities by 2050. As more and more workers flood into urban environments and readily available pool of cheap workers disappear from the countryside, farmers are forced into a straightforward labour-capital shift. In short, farms must mechanise if they are to maintain their competitive position.
Smallholder farmers, too, must make a decision: if they dedicate their supply of labour to generating urban-derived income, what do they do with their land? Another way to look at this conundrum takes the form of a question: is the rise of the superfarm inevitable?
5. Superfarms
The rise of the superfarm is a relatively modern phenomenon. There are possibly fewer than 100 industrial groups that own, lease or operate farms of over 100,000 ha.
Do economies of scale exist in agriculture? The purchasing power on inputs or selling power on output that comes with a 100,000 ha farm is likely to be no greater than a 1,000 ha farm. This is accentuated by two factors: first, managing 100,000 ha under a single corporate umbrella is more likely to result in managerial dis-economies of scale; and second: 100 farmers managing 1,000 ha plots each can easily form a co-operative, which will provide them with all the purchasing benefits of the superfarm and none of the dis-economies of scale. However, many superfarms exist because they act as channels for investment capital. In short, while managerial or operating economies of scale might not exist, financial economies do.
How does one create a conduit for capital for investment in agriculture? Can smallholders provide that conduit? If so, it would be reasonable to assume they had a future in this most strategic of industries. However, the volatility of food prices, the rapid urbanisation that characterises large parts of our planet, the relative undercapitalisation of the sector and the sheer variability of the agricultural labour force in its current form, all suggest that in creating those conduits for capital, superfarms are likely to play a hugely important role in attracting investment to the sector.
6. Sustainability
One of the overriding issues for humanity is that every civilisation with an urban heartland has been built upon the availability of food and water. In fact, it is the existence of those food and water resources, which has allowed urban societies to flourish. However, over time, every single one of those civilisations, societies and states has collapsed because its depleted and exhausted hinterlands could not supply its cities with their food and water needs.
The collapse of food-supply systems that support urban societies has been a permanent issue since urban centres were founded. Renaissance anticipates a great deal of new thinking on sustainability in agriculture, and expects Africa to lead much of that new thinking.
7. The future of aid
African food aid will likely be transformed, too. Renaissance says that many aid agencies operating on the continent are setting agendas that hamper commercial development. The idea that some aid agencies are seeking to transform themselves into commercial enterprises highlights the new thinking that abounds in Africa. Traditional methods of delivering aid are likely to become redundant in the decades ahead
23 October 2011
The need for catalytic finance for African agriculture
The EMRC Agribusiness Forum in Johannesburg last week brought together private companies, investors and development agencies who all share a vision of a profitable African agriculture sector which delivers wide benefits to rural populations. I spoke about the role of public private partnerships (PPPs) in making this happen.
In AgDevCo’s view PPPs in the agriculture sector are most likely to be successful if they are backed up by public private finance – we call it “catalytic finance”. So what is catalytic finance and how can it be most effectively delivered?
It is concessional funding made available by governments, donor agencies and philanthropic organisations that can be invested in early-stage agriculture businesses to reduce the costs and risks of future entry by commercial investors. It is catalytic because each dollar of public capital can expect to leverage at least 5 dollars of commercial capital into agriculture businesses which would not otherwise have been able to tap the private capital markets.
Two types of catalytic finance are: i) "Social Venture Capital" for start-up businesses, expecting a return of 5% - 15%; and ii) "Patient Capital" to invest in agriculture-supporting infrastructure including irrigation, with a coupon of c. 5% over 15-20 years. Here are specific examples:
• A new seeds company in central Mozambique needs $300,000 as “social venture capital” to cover the costs of registering new germ plasm, introduce irrigation and buy seed cleaning and packaging machinery. Local bank debt is unavailable at less than 25% interest or for more than 12 months tenor. Once operational the company can supply improved, locally-adapted and lower costs seeds to over 100,000 smallholder farmers.
• An irrigated soya and barley farm which plans to incorporate large and small farmers on 2,500 hectares needs $5 million of “patient capital” to invest in feeder roads, small dams and electricity connections. The remaining finance requirement of $20 million - for land preparation, farm machineryand buildings and working capital - will come from private debt and equity providers.
The rationale for catalytic finance is the existence of mulitple market failures in early-stage African agriculture which in most situations is still at an infant industry stage of development. The lack of economies of scale and cluster effects, under-developed capital markets, weak infrastructure, and a shortage of trained and experienced management and workforce (“learning by doing”) means that pioneer investors in African agriculture – and indeed subsistence smallholder farmers themselves – face high costs in doing business which competitors in other parts of the world do not. High inputs costs, high transport costs, high personnel and training costs and high infrastructure costs typically far outweigh the benefits of relatively inexpensive land.
Catalytic finance needs to be carefully targeted. The challenge is to identify genuine situations where there is good potential for profitability once the initial market failures/ barriers to entry have been overcome. This calls for management by professional investment teams within a strict set of operating policies and procedures designed to protect the public interest.
What are the benefits of catalytic finance? If properly deployed it can be the key to unlock large volumes of new private investment in African agriculture. Numerous private equity and debt funds are being raised for African agriculture but there remains a severe shortage of “investment ready” opportunities. As argued elsewhere on this blog, the risk is that much of this money does not get deployed, or the price of the few bankable projects gets bid up to unsustainable levels. Catalytic finance helps avoid this situation by supplying a pipeline of investments that are ready to take commercial debt and equity and can offer reasonable financial returns.
Another major benefit of catalytic finance is that it can be used as a tool to influence private investor behaviour. It comes with strings attached which ensure that agriculture businesses operate in a socially responsible way and build meaningful links to smallholder and emergent farmers. Again, professional management of catalytic finance is important to ensure disciplined monitoring of private sector behaviour and the design of robust contractual arrangements which can lock in development benefits for the long-term.
There is very limited catalytic finance available in the international aid system today. For a long time the aid mindset has been: provide grants directly to governments and charities; or invest on commercial terms through the development finance institutions such as the International Finance Corporation. But increasingly it is being recognised that the development of the agriculture sector does not lend itself to this model. There simply are not many opportunities to make commercial returns given the early-stage of most African agriculture. Catalytic finance is a vital bridge to long-term viability.
It is encouraging to see the traditional mindset is beginning to change. The likes of DFID, USAID and the World Bank Group are now talking the language of catalytic finance in the agriculture sector. There is broad support, for example, for the agricultural growth corridors approach. There seems to be a recognition that for private public partnerships to deliver on their potential they need to be backed up by innovative financing mechanisms. AgDevCo will continue making the case for catalytic finance for African agriculture.
Postscript: The EMRC Agribusiness Forum Johannesburg Declaration calls for "increased public investment in agriculture-supporting infrastructure" and for development partners to "increase support for catalytic financing mechanisms and matching grant facilities to promote inclusive business models".
In AgDevCo’s view PPPs in the agriculture sector are most likely to be successful if they are backed up by public private finance – we call it “catalytic finance”. So what is catalytic finance and how can it be most effectively delivered?
It is concessional funding made available by governments, donor agencies and philanthropic organisations that can be invested in early-stage agriculture businesses to reduce the costs and risks of future entry by commercial investors. It is catalytic because each dollar of public capital can expect to leverage at least 5 dollars of commercial capital into agriculture businesses which would not otherwise have been able to tap the private capital markets.
Two types of catalytic finance are: i) "Social Venture Capital" for start-up businesses, expecting a return of 5% - 15%; and ii) "Patient Capital" to invest in agriculture-supporting infrastructure including irrigation, with a coupon of c. 5% over 15-20 years. Here are specific examples:
• A new seeds company in central Mozambique needs $300,000 as “social venture capital” to cover the costs of registering new germ plasm, introduce irrigation and buy seed cleaning and packaging machinery. Local bank debt is unavailable at less than 25% interest or for more than 12 months tenor. Once operational the company can supply improved, locally-adapted and lower costs seeds to over 100,000 smallholder farmers.
• An irrigated soya and barley farm which plans to incorporate large and small farmers on 2,500 hectares needs $5 million of “patient capital” to invest in feeder roads, small dams and electricity connections. The remaining finance requirement of $20 million - for land preparation, farm machineryand buildings and working capital - will come from private debt and equity providers.
The rationale for catalytic finance is the existence of mulitple market failures in early-stage African agriculture which in most situations is still at an infant industry stage of development. The lack of economies of scale and cluster effects, under-developed capital markets, weak infrastructure, and a shortage of trained and experienced management and workforce (“learning by doing”) means that pioneer investors in African agriculture – and indeed subsistence smallholder farmers themselves – face high costs in doing business which competitors in other parts of the world do not. High inputs costs, high transport costs, high personnel and training costs and high infrastructure costs typically far outweigh the benefits of relatively inexpensive land.
Catalytic finance needs to be carefully targeted. The challenge is to identify genuine situations where there is good potential for profitability once the initial market failures/ barriers to entry have been overcome. This calls for management by professional investment teams within a strict set of operating policies and procedures designed to protect the public interest.
What are the benefits of catalytic finance? If properly deployed it can be the key to unlock large volumes of new private investment in African agriculture. Numerous private equity and debt funds are being raised for African agriculture but there remains a severe shortage of “investment ready” opportunities. As argued elsewhere on this blog, the risk is that much of this money does not get deployed, or the price of the few bankable projects gets bid up to unsustainable levels. Catalytic finance helps avoid this situation by supplying a pipeline of investments that are ready to take commercial debt and equity and can offer reasonable financial returns.
Another major benefit of catalytic finance is that it can be used as a tool to influence private investor behaviour. It comes with strings attached which ensure that agriculture businesses operate in a socially responsible way and build meaningful links to smallholder and emergent farmers. Again, professional management of catalytic finance is important to ensure disciplined monitoring of private sector behaviour and the design of robust contractual arrangements which can lock in development benefits for the long-term.
There is very limited catalytic finance available in the international aid system today. For a long time the aid mindset has been: provide grants directly to governments and charities; or invest on commercial terms through the development finance institutions such as the International Finance Corporation. But increasingly it is being recognised that the development of the agriculture sector does not lend itself to this model. There simply are not many opportunities to make commercial returns given the early-stage of most African agriculture. Catalytic finance is a vital bridge to long-term viability.
It is encouraging to see the traditional mindset is beginning to change. The likes of DFID, USAID and the World Bank Group are now talking the language of catalytic finance in the agriculture sector. There is broad support, for example, for the agricultural growth corridors approach. There seems to be a recognition that for private public partnerships to deliver on their potential they need to be backed up by innovative financing mechanisms. AgDevCo will continue making the case for catalytic finance for African agriculture.
Postscript: The EMRC Agribusiness Forum Johannesburg Declaration calls for "increased public investment in agriculture-supporting infrastructure" and for development partners to "increase support for catalytic financing mechanisms and matching grant facilities to promote inclusive business models".
15 September 2011
AgDevCo and Small Foundation agree strategic collaboration to reduce poverty in rural Africa
AgDevCo has been awarded a grant of Euro 2.5 million by Small Foundation to promote socially responsible investment in the African agriculture sector. The funding will help AgDevCo expand its capacity to create a portfolio of investments in early-stage agricultural enterprises in Africa, with the aim of relieving rural poverty and promoting economic growth.
The private sector is the engine of long-term, sustainable development in Africa”, said Dr. Keith Palmer, AgDevCo’s Chairman. “AgDevCo believes that profitable agriculture with strong links to markets is the best route out of poverty for the majority of Africa’s rural poor. This grant from Small Foundation will enable us to reach many more African farmers”.
To date AgDevCo has raised more than Euro 15 million to invest in African agriculture. It is rolling out pioneering investments in farming and agri-processing businesses in Mozambique, Tanzania, Ghana and Zambia. “Our distinctive approach focuses on creation of profitable farm enterprises which also generate substantial benefits for smallholder farmers and local communities” said Chris Isaac, who heads AgDevCo’s office in Mozambique.
Tim Brosnan, Chairman of Small Foundation said “AgDevCo has a highly innovative approach to building socially responsible farming businesses at scale. We look forward to working with them to achieve our mutual goal of sharply reducing poverty in rural Africa.”
About AgDevCo
AgDevCo’s mission is to relieve poverty directly and indirectly by raising agricultural productivity and incomes for the benefit of rural communities as a whole in low and low-middle income developing countries. It aims to develop commercially viable agriculture and agribusiness ventures along entire value chains (including farm operations, infrastructure leasing businesses, storage and processing) and attract private sector capital to invest in them. It aims to ensure that substantial benefits accrue to the local communities including directly raising productivity and incomes of smallholder farmers. By taking a hands-on project development role and investing in early-stage agribusinesses, AgDevCo helps remove barriers to entry by private investors and structures ventures to achieve permanent benefits for smallholder farmers. AgDevCo’s goal is to demonstrate a scalable and sustainable approach to elimination of rural poverty by leveraging-in significant amounts of private capital in ways which generate transformational benefits for rural communities.
AgDevCo was established as a UK-headquartered not-for-profit-distribution company in 2009. Its funders including the UK government, the Norwegian Government, The Hewlett Foundation and the Rockefeller Foundation.
About Small Foundation
The vision of Small Foundation is an Africa free from the threat of famine within one generation. Its mission is to help provide opportunities to food-insecure rural African families that enable them to gain economic independence through income generation. Its goal is to support scaling up processes for opening up access to knowledge, finance, technology and markets to food-insecure rural African families and communities. Small Foundation aims to do this by, inter alia, helping to encourage the emergence of business-based systems for spreading the opportunity-creating process.
Small Foundation (www.smallfoundation.ie) was incorporated in Ireland in 2007 as a company limited by guarantee and a registered charity.
Further details contact: Rosanne Whalley rwhalley@agdevco.com Tel: +44 (0)20 7841 2821
The private sector is the engine of long-term, sustainable development in Africa”, said Dr. Keith Palmer, AgDevCo’s Chairman. “AgDevCo believes that profitable agriculture with strong links to markets is the best route out of poverty for the majority of Africa’s rural poor. This grant from Small Foundation will enable us to reach many more African farmers”.
To date AgDevCo has raised more than Euro 15 million to invest in African agriculture. It is rolling out pioneering investments in farming and agri-processing businesses in Mozambique, Tanzania, Ghana and Zambia. “Our distinctive approach focuses on creation of profitable farm enterprises which also generate substantial benefits for smallholder farmers and local communities” said Chris Isaac, who heads AgDevCo’s office in Mozambique.
Tim Brosnan, Chairman of Small Foundation said “AgDevCo has a highly innovative approach to building socially responsible farming businesses at scale. We look forward to working with them to achieve our mutual goal of sharply reducing poverty in rural Africa.”
About AgDevCo
AgDevCo’s mission is to relieve poverty directly and indirectly by raising agricultural productivity and incomes for the benefit of rural communities as a whole in low and low-middle income developing countries. It aims to develop commercially viable agriculture and agribusiness ventures along entire value chains (including farm operations, infrastructure leasing businesses, storage and processing) and attract private sector capital to invest in them. It aims to ensure that substantial benefits accrue to the local communities including directly raising productivity and incomes of smallholder farmers. By taking a hands-on project development role and investing in early-stage agribusinesses, AgDevCo helps remove barriers to entry by private investors and structures ventures to achieve permanent benefits for smallholder farmers. AgDevCo’s goal is to demonstrate a scalable and sustainable approach to elimination of rural poverty by leveraging-in significant amounts of private capital in ways which generate transformational benefits for rural communities.
AgDevCo was established as a UK-headquartered not-for-profit-distribution company in 2009. Its funders including the UK government, the Norwegian Government, The Hewlett Foundation and the Rockefeller Foundation.
About Small Foundation
The vision of Small Foundation is an Africa free from the threat of famine within one generation. Its mission is to help provide opportunities to food-insecure rural African families that enable them to gain economic independence through income generation. Its goal is to support scaling up processes for opening up access to knowledge, finance, technology and markets to food-insecure rural African families and communities. Small Foundation aims to do this by, inter alia, helping to encourage the emergence of business-based systems for spreading the opportunity-creating process.
Small Foundation (www.smallfoundation.ie) was incorporated in Ireland in 2007 as a company limited by guarantee and a registered charity.
Further details contact: Rosanne Whalley rwhalley@agdevco.com Tel: +44 (0)20 7841 2821
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