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Blended finance can unlock agriculture potential in Africa

Blended finance can unlock agriculture potential in Africa

Blended finance can unlock agriculture potential in Africa

Africa is growing faster than any other continent. It has a middle class which is set to triple in size by 2030. Private equity investment deals reached $8.1 billion last year, with investors betting on financial services, consumer goods and property. Diversification of investment activity from extractives holds promise for higher job creation and broader based growth.

But the agriculture sector lags behind, despite its enormous potential. Food imports are already running at $35 billion annually and could double over the next decade. African farmers’ yields fall well below global averages. Per the latest UN statistics, the number of undernourished people continues to rise (from 175 million in 1992 to over 220 million today).

The need for private investment and expertise to help unlock the potential of agriculture is widely recognised. Farming is a business that requires an entrepreneurial approach and plenty of risk capital, whether at the smallholder level or for large mechanized farms. The sector will not achieve take-off if reliant on public sector support and hand-outs, which has been a tendency in the past.

The problem is that private capital is not reaching the agriculture sector, for three principal reasons. Firstly, logistics costs are high, mainly because of weak infrastructure. Secondly, agriculture is inherently risky and requires specialist and locally-adapted knowledge. Thirdly, most agribusiness investment opportunities are small and early-stage, which makes due diligence and transaction costs prohibitive.

So what is to be done? One approach is to wait. The policy environment is improving; roads, telecommunications and power networks are reaching the most remote areas; a highly skilled African diaspora is returning home; capital markets are becoming more sophisticated. The best opportunities should rise to the top and private investors should be able to find them.

However, in AgDevCo’s view, it may take ten years or more before the agriculture sector matures to the point where it can attract sufficient volumes of commercial investment. In that time 122 million young people will have entered the workforce, according to a recent McKinsey study. Without investment in agriculture it is unclear whether Africa can create enough jobs to take advantage of its“demographic dividend”.

Blended finance funds are a possible solution. These hybrid fund structures combine public, philanthropic and private capital. The non-commercial capital acts as a first loss cushion, with the objective of leveraging larger volumes of private finance into markets where risks are high and financial returns uncertain, but there is the possibility of major positive social impact.

These types of funds have an ability to invest with new entrepreneurs and early-stage businesses, allowing them to build a track record, which should help them access later rounds of commercial capital. By making smart investments, blended finance funds aim to demonstrate that the cost and risks of operating in certain markets are not as high as some investors might think.

With agriculture investment in Sub-Saharan Africa estimated as being 11 times more effective in reducing poverty than investment in any other sector, a blended finance fund focused on SME agribusinesses could make a major contribution to food security, economic growth and poverty reduction, while demonstrating that agriculture can be a profitable business.

WATCH THIS SPACE: with international partners AgDevCo will be announcing a new blended financing facility for African agriculture at the World Economic Forum Africa meetings in Cape Town on 3 June 2015. More details will follow soon . . .