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Editor’s Note: This article is part of a series by the Financial Times’ This Is Africa publication on realizing Africa’s agricultural potential, in partnership with the Rockefeller Foundation . The Skoll World Forum is a proud media partner for the initiative, and you can find the whole series here . Adrienne Klasa is a journalist currently based in London, with a particular interest in the intersection between politics, business and international currents in sub-Saharan Africa. Adam Robert Green is a senior reporter at This is Africa, focusing on trade and investment, development policy, energy and social service delivery. After years of neglect, banks, private equity funds and microfinance institutions are bringing capital to African agriculture Africa’s agriculture sector has struggled to access the financing it needs for sustained growth. In part, a perceived combination of high risk and modest returns – as well as the costs of extending traditional banking infrastructures in rural areas – has deterred many banks and financial institutions. “There can be failures in critical infrastructure such as inadequate cold storage facilities, unexpected disruptions in commodities trading, lack of adequate feeder roads to production areas, inadequate dry storage facilities, and congested ports prohibiting the export or import of products on time,” says Chomba Sindazi, director of Standard Chartered’s solutions structuring team for Africa. “And there can also be delays in the supply of critical inputs such as fertilisers, seed and fuel because of difficulties in getting goods to market. This is a particular problem in landlocked countries where it can sometimes take as long as four months to get the inputs to the required areas.” Without tackling these constraints, and their knock-on effect on lending, talk of Africa’s green revolution is premature. But solutions are emerging at last, as banks, NGOs, micro-lenders, governments and investment funds make inroads into the continent, bringing much-needed capital to bear. For large banks, Africa’s rural sector was long seen as a problem. Just 10 percent of Africans with only primary-level education – which is the majority of those in rural agriculture – have a bank account, rising to 55 percent for those with a post-secondary qualification. But rather than writing off this population, forward-thinking banks have sought to find new vocabularies to speak to them. Togo-based Ecobank has proven popular for its simplified language and procedures, which are more accessible to a wider range of customers than global banks. Standard Bank, which has operations in nearly 70 countries worldwide, has also reviewed processes to suit the kinds of financial information more commonly found in the informal and small-scale sector. It has also broadened its range of services to include technical expertise for lendees. The combination of lending and advisory services is critical, helping the bank protect its portfolio, and helping customers gain credit and repayment track records. Standard Chartered shows the same trend. Instead of looking to traditional collateral, Standard Chartered uses the value of the commodity being financed as collateral for input financing – as opposed to conventional mechanisms where collateral is secured through physical assets and balance sheets. According to Mr Chomba: “Risks associated with the cultivation of a range of soft commodities are mitigated through a customised multi-peril insurance policy, and operational issues are addressed through physical inspection and regular reporting by a team of independent specialised contract managers and insurance companies.” The arrival of major banks bodes well for the efficiency of the sector overall. “Banks are interested in investing in businesses and entrepreneurs that are going to make money and are going to pay them back – either interest or return on some form of an equity. As businesses that are profitable come into the agricultural value chains, that is going to bring in the financing that will support those businesses,” says Gary Toenniessen, managing director at The Rockefeller Foundation. Taking equity Equity financing provides an interesting – and fast-growing – source of capital. According to the Emerging Markets Private Equity Association, total private equity capital raised for sub-Saharan Africa in 2012 was $1.4bn. Agribusiness is proving one of the primary draws. The Carlyle Group, one of the world’s largest private equity firms, made its first Africa play late last year, as part of a consortium that included Pembani Remgro Infrastructure Fund and Standard Chartered Private Equity. The fund invested $210m in the Export Trading Group (ETG), a Tanzanian agribusiness with interests in 29 African countries. ETG, which manages both intra-African and global supply chains and has more than 7,000 employees, says the investment will enhance its ability to connect African smallholder farmers with consumers around the world. The capital will expand the company’s geographical reach while adding to the quantity and variety of products – which currently includes commodities ranging from sesame seeds and cashews, to rice and fertiliser. Private equity can bring broader structural changes too. A part of the Carlyle consortium investment will go towards building infrastructure to allow processing to take place in east Africa. “Typically the margins in processing are much greater than they are in pure acquisition and distribution, so part of the capital will be used to put up processing facilities around the continent,” says Marlon Chigwende, managing director and co-head of the sub-Saharan Africa buyout advisory team at Carlyle Africa. Other PE funds and investment actors are also showing a strong interest in African agribusiness. Phatisa’s African Agriculture Fund, which focuses on small and medium-sized enterprises, signed its first deal in 2012, backing Cameroon’s West End Farms. The same year, Morgan Stanley Alternative Investment Partners and Capitalworks bought out South Africa’s Rhodes Food Group. But growing the base of PE capital available to the region will take time, according to Mr Chigwende. “FDI remains a very important component of the LP structure base in a lot of the funds, they are the majority of the capital. And so I think as an industry what we need to do is attract more non-DFI international capital to the region,” he says. “I think that is a process of education. There are a lot of LPs that are increasingly looking at the region.” Micro-lending So far so good for bigger players. There is always a scale bias in financial access, with lending models becoming less accessible as you move to smaller actors – in agriculture as well as other sectors. But the microfinance movement is playing a useful role at the base of the pyramid. Set up in 1999, The Hunger Project’s Microfinance Programme is a training, savings and credit scheme that focuses predominantly on the economic empowerment of women – a vital constituency, according to Lawson Lartego Late, director of the economic development unit at Care USA, a charity. “Agriculture has been quite gender-blinded. Women were not taken into account, they were invisible in the agricultural supply chain. But more and more, people are realising that women do most of the work. More than 70 percent of the labour is done by women.” When it comes to finance, we need to apply a gender lens, says Mr Late. “When you look at how people get access to financial services, especially here in Africa, agriculture is underserved. But for people who get access, they tend to be mostly male. When it comes to property rights, many women do not have these kinds of assets.” NGOs are not the only ones interested in providing micro-loans. Olam, for example, is providing zero interest loans to farmers as part of the commitments laid out in the Singapore-based company’s Livelihood Charter. According to Chris Brett, global head of corporate responsibility and sustainability at Olam, the company has provided $118.6m in micro-financing and advances for crop purchases as well as longer-term asset investments. In addition, Olam’s position on the ground is an advantage, according to Mr Brett: “We can provide the cash, either through the cooperative or directly to the farmer. And because we are there, we know when it is needed and where it is going.” Local presence has also given Olam insights into the psychology of small-scale farmers. “Farmers see the value of a continued relationship rather than the short-term temptation of a one time default by selling elsewhere,” he says. Still, Mr Brett concedes that defaulting may simply be a question of needing cash fast in resource-deprived areas. Clustering into cooperatives, however, helps mitigate these risks, not only by making farmers dependent on each other and therefore less likely to default on a group, but also giving them greater negotiating strength. “[Farmers] are also less likely to go against their peers and initiate transactions elsewhere or default on a payment, particularly if the microfinance has been channelled through the co-op itself,” he says. Public-private finance partnerships are also leveraging funds to the continent’s agricultural sector. Grow Africa, launched in 2011 by the African Union Commission, the New Partnership for Africa’s Development (Nepad) and the World Economic Forum, is a coordinating body for public-private initiatives backing agricultural growth. According to the initiative, 2012 witnessed a historic shift in the quality and quantity of private sector engagement, with companies announcing more than $3.5bn of planned investment in agriculture across countries supported by the platform. A business mindset Whether it is traditional bank lending or private equity, and from major agribusiness to microfinance, one theme stands out – a change in mindset is needed, in which African agriculture is seen as a business opportunity, not a charity sector. “What we have seen is a shift towards agricultural development as an engine of economic growth so that agriculture can provide the resources for other sectors as well – for education, for health, for overall advancement,” says Mr Toenniessen at The Rockefeller Foundation. “And that requires private sector involvement to a much greater degree. If all you are trying to do is provide food relief, then that goes through governments and UN agencies. But if you really want economic growth then you need a private sector that is working across the agricultural value chain.” Wiebe Boer, chief executive officer of the Tony Elumelu Foundation, concurs. “My first engagement with agricultural development was in 2007, when I was part of a team at McKinsey working on developing the national strategy of Kenya. Agriculture was one of the six sectors we chose to focus on. Nobody else on the team wanted to touch agriculture, because they thought it was not interesting, it was not sexy. So I took on the sector.” Back then, he recalls, the assumption was that agriculture was a development sector drawing in government and donor money. Fast forward six years and all that has changed. “If you were doing an agricultural strategy now, the primary focus would be getting investors in, domestic or foreign, whether for large or small-scale agriculture, and then the government role is more unlocking, providing incentives etcetera. Completely different.” The tools to finance agriculture in Africa have expanded and multiplied in recent years. Still, despite this progress, the sector’s fundamental insecurity remains an obstacle that will require more than funding mechanisms to overcome, according to Mr Sindazi of Standard Bank. “The risks in the sector are so high that it is difficult to predict which investments will fail and which ones will succeed,” he says. But as focus on agricultural development in Africa continues to grow, so does the expertise and the range of risk taken on across project portfolios. Despite his caution, Mr Sindazi concludes that concrete steps can be taken to mitigate risks to lenders and keep funds flowing to where they are needed in the sector. Such steps include “the use of innovative funding structures that hinge on: securing a solid off take before we fund; using a team of specialist contract managers to manage the farmers and crop growing; using appropriate insurance policies that help to offset most of the perils associated with farming; and rigorous due diligence. The monitoring and control provided by a team of back-office experts provides the comfort required to continue the provision of funding to the agricultural sector.” Enabling environment Governance looms large in all this. Agricultural and finance ministries are critical to creating the enabling conditions for agribusiness to grow. In 2003, African governments pledged to spend 10 percent of national budgets on agriculture under the terms of the Comprehensive Africa Agriculture Development Programme. But for finance ministries, the challenge is one of prioritisation. With so many demands on the public purse, each ministry – be it health, education or agriculture – must pitch for funds. Robert Sichinga, agricultural minister for Zambia, says: “Personalities and relationships between individual [ministers] are important in how the two ministers work together. But I need to convince the minister beyond my personal relationship. I need to know he will understand where I am coming from.” But Maria Kiwanuka, minister of finance for Uganda, points out that the agriculture sector not only benefits from direct funding but also from other areas of public spending which improve the public goods environment. Strictly speaking, only 3 percent of Uganda’s budget goes to agriculture. But, she says, when factoring in additional funding on rural infrastructure, it is more like 12 percent. “About 30 percent of our budget goes into infrastructure, which is energy and roads. But a lot of that is directed towards rural areas, rural roads and rural electrification which helps agriculture,” says Ms Kiwanuka. “That is the reason why we are doing our feeder roads, so that inputs can go in easier, and crops and other outputs can come out easier. And by rolling electrification up-country, it means that agro-processing plants can be set up around the country and not just concentrated in the capital city and the other main towns.” With a stable policy environment and the growth of a diverse range of financial actors, Africa’s agriculture sector could provide a shot in the arm for the continent’s growth trajectory. Taylor Scott International
Taylor Scott International, Taylor Scott
