towards a green revolution in africa? presentation by keith palmer executive chairman agdevco 4...
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Towards a Green Revolution in Africa?
Presentation by Keith Palmer
Executive Chairman AgDevCo
4 December 2009
Africa’s agricultural potential
• There has been very little investment in profitable agriculture and agribusiness in Africa despite high potential. Smallholder farmer incomes remain extremely low
• Large areas of Africa have suitable soils and climate for successful agriculture
• Abundant land, much of it underutilised
• Africa was net food exporter - now large net importer
• Farm productivity just 25% of global average
• Only 4% of land is irrigated (over 30% in South Asia)
• Low fertiliser use - severe mining of soil nutrients
• Access to suitable land
• Agricultural supporting infrastructure – too little and high cost
• Access to agricultural technologies?
• Too few experienced agricultural entrepreneurs
• Market access and oligopolistic supply chains
• Poor access to credit
• ‘Shadow’ of poor government policies in the past
Constraints on agribusiness development in Africa
Key problem = lack of profitable opportunities that benefit the poor
Three key market failures (I)
1. Co-ordination problem
• Interdependence of investments along value chain, with profitability of each link dependent on performance by other links . . .
high supply chain risks increase cost of capital and deter investment
Three key market failures (II)
2. Economies of scale problem
Volume/value of output
Time
Unit cost SRAC
LRAC
• Large economies of scale in early
stage development
• High average costs over initial
10- 15 years sub-commercial
returns on investment
• But lower average costs over long
run commercial return on
investment
• Economies of scale create strong barriers to entry = little investment
• Once barriers overcome sustainable businesses as unit costs fall
Three key market failures (III)
3. Financing problem
Return on investment
r f
• High greenfield unit costs reduce
expected ROI
• High greenfield and country risk
increase required risk premium
• High domestic risk free rate
Risk
• High early stage unit costs reduce expected ROI
• High early stage risks increase minimum required return on investment
Three key market failures (III)
Return on investment
r f
• Many early stage agricultural
investments have sub-commercial
expected ROI given perceived risks . . .
• . . . but commercially viable once barriers to entry overcome
Additional financing constraints:
• SMEs/small farmers lack track record/collateral
• Weak corporate institutions (governance/contract enforcement/financial controls)
access to finance problematic even when robust business plan
Risk
3. Financing problem
– Private sector operated, publicly funded infrastructure development company acting as principal (i.e. owner)
– Invests in early stage development to create viable opportunities and sells them at financial close to national and foreign private sector
– Pro-poor mandate addressed using targeted ‘smart’ subsidies (output based aid)
Understanding InfraCo
Company limitedby shares
Wholly owned locally
Incorporated project
companies
Donor Shareholders
Private SectorManagement team
INFRACO
InfraCo’s project portfolio in SSA
Ethiopia: wind power
Senegal: wind power
Kenya: wholesale fresh produce market
Mozambique: Beira Agricultural Growth Corridor
What is AgDevCo? • Agricultural development company operating in African agriculture and
agribusiness sectors
• AgDevCoo invests to reduce high front-end costs and risks of early stage project
development acting as principal (i.e. owner)
o deploys “patient” capital to build and lease affordable agriculture-supporting infrastructure (e.g. irrigation) to commercial farmers and smallholders
o mobilises investment from private sector and development finance institutions (DFIs)
o develops small farmer development programmes for every investment opportunity that it develops
AgDevCo has identified >25 opportunities in agriculture where this approach can deliver sustainable agriculture with major pro-poor benefits
Models of Small farmer Development
Commercial
farm hub
Outgrowers
(co-operatives)
Model 1: Develop serviced farm blocks and lease to commercial and small farmers
Model 2: Greenfield commercial farm hubs and associated small farmer outgrower schemes
Both models improve access to affordable infrastructure, inputs, markets and finance of small farmers
Bulk water supply
Electricity
Finance
Input supply
Serviced farm blocks
How AgDevCo addresses constraints on sustainable agribusiness development
High front-end costs and risks/coordination problem
Economies of scale
Financing constraints
Entrepreneurship/knowledge deficits
Invests to reduce front end costs and risks and overcome coordination problem
Invests ‘low coupon’ patient capital to create infrastructure and leases it to farmers at LRAC
De-risks entry & patient capital & arranges debt/guarantees
Recruits/develops local management prior to exit & arranges grant funding to support knowledge transfer
AgDevCo financial strategy
Development capital investedpre-financial close
“Patient capital” invested at financial close to createinfrastructure e.g. irrigation
Grant funding for ‘public good’components incl. small farmer support programmes
Recouped with premium when AgDevCo sells down/exits – reinvests proceeds
Redeemed with 5-6% coupon over 20 years – proceeds reinvested
Grant funding needed for e.g. extension services, training etc. for small farmers
High leverage Every $1m of development capital induces not less than $10m of commercial/DFI investment
Sustainable businesses. Patient capital is ‘one off’ leaving sustainable agribusinesses over medium term
Full value chain. Development of entire value chain maximises farm-gate benefits for farmers
Maximum small farmer benefits. Commercial farm/smallholder partnerships maximise benefits for small farmers
AgDevCo social and economic impacts
Chiansi irrigation venture, Zambia (I)
Before• Smallholders farm only 20% of productive
land, very low yields (e.g. maize 1t/ha)
• Very low incomes (c $200pa = <$1/day and poor health outcomes
• Crops regularly fail because rains too late…. water available but not accessible
• Reliance on food aid in 5 of last 7 years
• No electricity, running water, health services etc. in villages
The challenge
•To raise massively agricultural productivity and incomes on sustainable basis
•To empower local communities to continue to further develop their communities
• The Chiansi Irrigation project is an innovative business partnership between InfraCo and smallholder farmers in the Kafue region, Zambia.
• Involves new bulk water assets and infield irrigation systems on 2,600 ha of under-utilised land
Chiansi irrigation venture, Zambia (II)
InfraCo’s role
• Agree commercial structure with local communities (took 18 months)
• Create commercial farm company and support creation of small farmer cooperatives
• Design, costing, procurement and installation of equipment
• Finance and implement ‘pilot’ project to prove the concept
• Recruit and supervise commercial farm management
• Arrange finance and implement full scale project
• Collaborate with USAID to implement small farmer support on “market gardens”
Chiansi irrigation venture, Zambia (III)
After• Estimated c 400% increase in small farmer incomes, c 15,000 direct beneficiaries
• Much improved food security and health outcomes (+ food aid savings)
• Supply chain benefits – cheaper and more reliable access to seeds, fertiliser etc
• Indirect benefits – boost for demand of local enterprises, improved housing, access to village electricity, clean water, health services etc
• Financial returns over 15 year period are sub-commercial
• Requires one-off investment of “patient capital” ($12m) to fund start-up costs
• Thereafter sustainable with no further requirement for patient capital
• Economic returns are much higher than financial returns
Chiansi irrigation venture, Zambia (IV)
Clearing the land February 2009
Pump station installed April 2009
Irrigation of the first wheat crop June 2009
First wheat crop ready for harvest Oct 2009
Bagging of wheat harvest Oct 2009
AgDevCo - Replicating and scaling the model
• Many other opportunities to replicate and scale the model have been identified
• Currently rolling-out initial portfolio of projects – Mozambique, Tanzania and Zambia
• The G8 is calling for urgent action to address a looming global food crisis
• Africa need not import food – it can be a major food exporter
• Sustainable agriculture/agribusiness is best way to boost growth and reduce poverty
• ‘Take-off’ will require significant amounts of ‘patient capital’ to overcome barriers to entry
• AgDevCo interventions will be necessary to convert the potential into reality on the ground
Towards an African Green Revolution?
For further information
www.infraco.com
www.pidg.org
www.agdevco.com