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 January 2011

USAID commits to Tanzania Catalytic Fund for agriculture

As the world faces up to another food crisis, Tanzania is leading the fight back with a strategy to triple agricultural production and lift millions out of poverty.

A report launched in Davos on Friday by Tanzanian President Jakaya Kikwete shows how to achieve a green revolution in East Africa, by promoting “clusters” of profitable agribusinesses which incorporate small-scale farmers.

At the launch Rajiv Shah Administrator of USAID announced a $2 million investment into the Corridor’s $50 million catalytic fund. USAID is considering additional annual investments up to $10 million.

The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) is an area the size of Italy with rich farmland and good “backbone” infrastructure - roads, rail, power and an international port at Dar es Salaam. It could feed the East Africa region and become a major agricultural exporter, to rival the likes of Brazil.

SAGCOT is supported by a public-private partnership of global agriculture businesses, international development agencies, farmers’ groups and the Government of Tanzania. It promises a transformation in the fortunes of hundreds of thousands of Tanzanian farmers.

Small-scale farmers in Tanzania, as in many other parts of Africa, lack access to modern inputs, are at risk from climate change and remain locked out of international markets. SAGCOT will link farmers to modern supply chains and make agriculture a profitable activity, in a country where over 75% of the population is engaged in the sector.

The 63-page Investment Blueprint report was developed with support from AgDevCo, a social impact investor, and Prorustica, a consultancy. Global corporate partners are Unilever, Yara International, Dupont, Stanbic Bank, Monsanto, SAB Miller, Diageo, Syngenta and General Mills. Tanzanian businesses and farmer groups are also involved.

The main findings and recommendations are:
• $3.4 billion of public and private sector investment could triple agricultural output over a 20-year period, achieving food security for the region, creating 420,000 jobs and lifting two million people out of poverty
• Tens of thousands of subsistence farmers would have opportunities to become profitable, commercial farmers in their own right, with access to modern inputs, irrigation and international markets.
• To achieve these results, new financing facilities will be established, including a $50 million Catalytic Fund – backed by the Tanzanian government and international donors – to provide low-cost capital for start-up agriculture businesses.
• The report lists a number of “early wins” in the corridor – agricultural investments which could achieve rapid results in terms of increased output and benefits for small-scale farmers and local communities.
• A SAGCOT partnership organisation, with a professional Secretariat, will help coordinate and monitor public and private sector investments along the corridor.

Global fertilizer company Yara International announced one of the first major investment in the corridor in January 2011 with a USD 20 million investment into a new fertilizer terminal by the port in Dar es Salaam.

President Jakaya Kikwete said:
“Tanzania has immense opportunities for agricultural development . . . SAGCOT is an initiative which I believe personally is the best model to fast track the green revolution in Tanzania".

Prime Minister Mizengo Pinda said:
"SAGCOT will show the way by demonstrating that smallholder agriculture pays and can be a business. The Tanzanian government will commit resources to the Catalytic Fund".

Dr. Keith Palmer, Chairman of AgDevCo, a social impact investor, said:
“Profitable agriculture with strong links to markets is the best route out of poverty for the majority of Africa’s rural poor. SAGCOT can deliver transformational change within a generation”.

17 January 2011

Southern Agricultural Growth Corridor of Tanzania report available to download

Launched in Dar es Salaam, Tanzania, on 13th January by Prime Minister Pinda, the Southern Agricultural Growth Corridor of Tanzania (SAGCOT) Investment Blueprint is now available for download.
President Kikwete of Tanzania will present the Investment Blueprint at the World Economic Forum in Davos, Switzerland, on 28th January, 2011.

SAGCOT is highlighted in this month's Harvard Business Review as an example of a "new conception of capitalism which recognises that societal needs, not just conventional economic needs, define markets and long-term business success".

15 January 2011

Agricultural Growth Corridors: Going Beyond Corporate Social Responsibility

An article in this month's Harvard Business Review by Michael Porter and Mark Kramer identifies agricultural growth corridors in Mozambique and Tanzania as examples of the next major transformation in business strategy: "shared value".

"Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking."

According to the authors, shared value is about much more than corporate social responsibility. It is a new conception of capitalism which recognises that societal needs, not just conventional economic needs, define markets and long-term business success.

The agricultural growth corridors in Tanzania and Mozambique, developed by social investor AgDevCo, are cited as an example of a shared value approach with the potential to kick-start a virtuous cycle of social and economic improvement.

Porter and Kramer write: "A shared value perspective [in the agriculture sector] focuses on improving growing techniques and strengthening the local cluster of supporting suppliers and other institutions in order to increase farmers’ efficiency, yields, product quality, and sustainability."

They continue: "Early studies of cocoa farmers in the Côte d’Ivoire, for instance, suggest that while fair trade can increase farmers’ incomes by 10% to 20%, shared value investments can raise their incomes by more than 300%."

The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) and the Beira Agricultural Growth Corridor (BAGC) in Mozambique are innovative partnerships between businesses, governments and development agencies. For more information see http://www.africacorridors.com/

13 January 2011

Tanzania to become a global player in agriculture: Investment Blueprint launched

Today in Dar es Salaam, Prime Minister Pinda of Tanzania launched the Southern Agricultural Growth Corridor of Tanzania (SAGCOT) Investment Blueprint (see Executive Summary). It promises to make Tanzania internationally competitive in agriculture within a generation, to compete with global players like Brazil.

Later, at the ground-breaking ceremony for a $20 million investment by Yara International in a fertiliser terminal at Dar es Salaam port, President Kikwete said:
"SAGCOT is an initiative which I believe personally is the best model to fast track the green revolution in Tanzania".

Initiated at the World Economic Forum on Africa in May 2010, SAGCOT is an international partnership of global agriculture businesses (e.g. Unilever , Yara International, Diageo, Syngenta, Dupont, Monsanto), development agencies (e.g. USAID, the Alliance for a Green Revolution in Africa, Food and Agriculture Organisation), Tanzanian businessess and the Tanzanian government.

In a foreword to the Blueprint, President Kikwete of Tanzania said:
“Tanzania has immense opportunities for agricultural development….The southern agricultural corridor can be the breadbasket of Tanzania and beyond.”

By catalysing $3.4 billion of socially responsible private investment, the SAGCOT initiative will deliver rapid and sustainable agricultural growth in Tanzania – with major benefits for small-scale farmers and rural communities.

Keith Palmer, Executive Chairman of AgDevCo, a social impact investment company which prepared the report, said:
“Profitable agriculture with strong links to markets is the best route out of poverty for the majority of Africa’s rural poor. As a business-driven initiative with the full backing of the Tanzanian government, SAGCOT can deliver transformational change within a generation”.

The result will be a tripling of the area’s agricultural output, with anticipated benefits including:
• approximately 350,000 hectares brought into profitable production,
• tens of thousands of smallholders becoming commercial farmers, with access to irrigation and weather insurance,
• at least 420,000 new employment opportunities created in the agricultural value chain,
• more than two million people permanently lifted out of poverty, and
• annual farming revenues of $1.2 billion

To achieve these results, new financing facilities will be established including a $50 million catalytic fund, backed by the Tanzanian government and international donors, to provide start-up capital for new agriculture businesses. There will also be a SAGCOT partnership organisation to coordinate public and private sector investments.

At the launch event Prime Minister Pinda said:
"SAGCOT will show the way by demonstrating that smallholder agriculture pays and can be a business...The Tanzanian government will commit resources to the Catalytic Fund".

Pinda urged the country's development partners to incorporate SAGCOT in their country assistance strategies and support the fund.

AgDevCo is a not-for-profit agricultural development company operating in sub-Saharan Africa. AgDevCo is managing a catalytic fund for the Beira Agricultural Growth Corridor in Mozambique, where it has made investments in a number of early-stage agriculture businesses including seed production, mangoes, bananas, honey and livestock.

For media enquiries please contact Keith Palmer, Executive Chairman of AgDevCo, or Chris Isaac, Director for Business Development. Tel: +44 (0)20 7841 2821

12 January 2011

Agriculture leads poverty reduction

Investment of patient capital can stimulate rapid growth of agriculture in Africa, writes Keith Palmer of AgDevCo.

There is enormous agricultural potential in many parts of Africa. All the necessary natural conditions – good soils and climate, plenty of land and water – are present in many countries. There is no reason why Africa cannot be a major producer of agricultural products on a scale equal to that of South America. But it will take heavy investment by the private sector to realise this potential, and the reality is that there has not been nearly enough of it. As a result the potential remains largely unrealised.

Rapid growth of agriculture is the most effective means of reducing poverty in Africa. According to the World Bank the poverty reduction impact of growth in agriculture is three times greater than comparable growth in any other sector. But since there has not been rapid growth in agriculture the opportunity to reduce poverty has not been grasped. Rural Africa remains extremely poor.

Why has there been so little private investment in agriculture? It is certainly not a lack of finance per se. There is more international interest in investing in Africa now than ever before. New private equity funds focused on agriculture in Africa are searching for viable investment opportunities. The development finance institutions have under-utilised their capital allocations for agriculture in Africa for many years.

The real problem is not lack of finance – it is lack of sufficient profitable opportunities in which to invest. The reason is straightforward: agriculture in Africa is an infant industry. It lacks the infrastructure required for commercial agriculture – such as water supply for irrigation, electricity supply to the farm gate and feeder roads to access markets. It has to incur start-up costs such as land clearing and trial planting, costs which do not have to be borne by its competitors. It lacks experienced managers and a trained workforce resulting in lower productivity and higher labour costs.

Above all infant industry by its very nature operates on a small scale and therefore does not benefit from the economies of scale available to international competitors. As a result in many cases unit costs are high and expected returns are low. Furthermore early stage agriculture is very risky. This raises the minimum return required by private investors. With low expected returns and a high risk-adjusted cost of capital it is not surprising that many early stage opportunities are not attractive to private investors.

But if the infant industry can ‘grow up’ there is no reason why it cannot be internationally competitive. As the infrastructure platform is strengthened and the benefits of scale economies and ‘learning by doing’ drive down costs, as the industry grows in size and matures over time, the returns on new investment will be attractive to private investors.

The challenge for the international community is how to get things started: how to deploy development assistance resources in ways that will overcome the barriers to entry, resulting in rapid growth of profitable commercial agriculture and thereby a rapid reduction in poverty.

Successful interventions should: be targeted at the market failures which create the barriers to entry; be catalytic, levering-into African agriculture new private investment in amounts many times greater than the amount of donor funding; and be time limited so that over the medium term public funds can be withdrawn, replaced with private capital and the proceeds re-invested in new early stage ventures.

The key to success is patient capital. Patient capital is long-term, low-cost, subordinated capital provided by donors and invested in the early stages of private sector agricultural ventures. It would be used to finance start-up costs, to part-fund the cost of infrastructure (such as irrigation assets) and to part-fund working capital required by small and medium-size enterprises (SMEs) and smallholder farmer organisations (SFOs), these being sponsors who would not otherwise be able to secure sufficient working capital from banks.

The long tenor and low cost of patient capital reduce unit production and delivery costs in the early years. This increases the incremental return on private investment in the venture. Subordination of patient capital reduces the risks faced by private investors. The result is to shift the opportunity ‘above’ the line in figure 1 making it attractive to private investors.

Patient capital should have ‘upside’ sharing to ensure that funders share in any unanticipated upside; and should be secured on the assets in the business to ensure that there are consequences for sponsors if they fail to comply with the conditions on which the funding was made. Conditions should always include undertakings to help integrate smallholder farmers into agricultural value chains and provide them with access to infrastructure on affordable terms.

Patient capital deployed in this way would be catalytic, levering-in large amounts of new private investment, and it would also bring transformational benefits for smallholder farmers, taking them out of poverty ‘at a stroke’.

How can patient capital best be deployed? The best approach is to create a public/private equity fund in which public sector donors (and private sector foundations and social impact investors) fund a tranche of patient capital and private investors fund a tranche of private equity expected to generate commercial returns. The low cost of the patient capital would lever-up private equity returns and the subordination would reduce the risks. The fund would invest both patient capital and private equity into a portfolio of early-stage agricultural ventures.

The fund would differ from a standard private equity fund in several respects. First the governance: the fund would have dual objectives. To invest in early-stage agricultural ventures that are expected to be socially and environmentally sustainable and generate commercial returns on the private equity tranche; and to deliver explicit poverty reduction objectives framed in terms that are quantifiable and can be monitored. The investment committee, made up of nominees of the funders of patient capital and private equity, would be responsible for ensuring that both of the fund’s objectives were met. Second, the incentives: the fund manager would be remunerated for achieving success which in this case means delivering the outcomes sought by both the patient capital and private equity funders. Remuneration should be linked to both the financial performance of the fund and the delivery of specific targets relating to development impact and poverty reduction.

As well as patient capital there is a need for two additional development assistance instruments. The first is social venture capital (sometimes called catalytic funding). This is concessional funding from donors used to co-invest alongside SME and SFO sponsors to make a greater number of very early stage opportunities ‘investment ready.’ The experience of InfraCo and AgDevCo shows that small amounts of social venture capital invested pre-financial close can not only be highly effective in catalysing additional private investment but also in structuring investments so that they achieve high development impact and strongly pro-poor outcomes.

The second is partial risk loan guarantees. Sponsors must have access to committed credit lines to fund working capital as well as equity if they are to grow their businesses rapidly. Debt providers are extremely nervous about extending credit to early-stage agricultural ventures when the sponsor has limited track record and collateral. The solution is partial risk loan guarantees which are instruments that transfer some of the credit risks from the lender to the guarantor for a fee. There are a number of credit guarantee facilities operated by donor agencies which perform this role including the USAID DCA programme and Guarantco, a public private partnership facility funded by European governments. However, if credit to support rapid growth of early stage agriculture is to be sufficient there is a need for more loan guarantee capacity, greater willingness to take risk positions on early-stage agricultural ventures with SME/SFO sponsors and pricing that recognises the need to keep the cost of capital as low as possible in the early years.

Social venture capital invested in the very earliest stages creates a larger number of investment ready opportunities. It is withdrawn as soon as possible after financial close and reinvested to create more investment ready opportunities elsewhere. The patient capital fund invests a blend of patient capital and private equity at financial close. Over time the patient capital is withdrawn and replaced with private equity. Loans made at financial close benefit from partial risk loan guarantees but over time as the guarantees lapse and lenders become more comfortable with the sponsors they extend new credit lines without loan guarantees. Once the infant industry has grown into a mature, profitable industry, all the finance required to continue to grow will come from the private sector.

In conclusion, there is a real opportunity for the international community to catalyse large-scale private investment and realise the great agricultural potential of Africa. In doing so, it will meet its primary objective of reducing poverty. It will also contribute to addressing the global food security agenda and to increasing the resilience of Africa to the consequences of climate change. That really would be effective aid!

7 January 2011

Africa set to grow faster than Asia

By Chris Isaac, AgDevCo

Latest projections from The Economist suggest Africa will grow faster than Asia over the next five years. What is especially impressive is that, of the ten fastest growing economies in the world, seven are expected to be in Africa.

The challenge is to ensure that growth brings poverty reduction. Countries like Mozambique and Tanzania have experienced strong growth in recent years, but only limited reductions in rural poverty, mainly because of low agricultural productivity.

There is an increasing body of economic evidence based on the experience of Asian countries such as Vietnam (e.g. see here), which shows that growth in agriculture is the most effective way of boosting the incomes of the poorest.

Without more investment in agricultural productivity, the African growth story of the next few years is likely to disappoint those hoping to see sharp falls in poverty.

5 January 2011

World food prices at fresh high, says UN

Global food prices rose to a fresh high in December, according to the UN's Food and Agricultural Organisation (FAO). Its Food Price Index went above the previous record of 2008 that saw prices spark riots in several countries.

Soaring sugar, cereal and oil prices had driven the rise, the report said.The index, which measures monthly price changes for a food basket composed of dairy, meat and sugar, cereals and oilseeds, averaged 214.7 points last month, up from 206 points in November.

It stood at 213.5 points at the high of June 2008 - sparking violent protests in countries including Cameroon, Haiti and Egypt.There were further riots over food prices in Mozambique in September last year.

However, despite high prices, FAO economist Abdolreza Abbassian said that many of the factors that triggered food riots in 2007 and 2008 - such as weak production in poor countries - were not currently present, reducing the risk of more turmoil.

But he added that "unpredictable weather" meant that grain prices could go much higher, which was "a concern".

See full artcile on BBC website here