New financing approaches to make an African green revolution a reality

[Business Action for Africa]

Keith Palmer
Chairman of InfraCo and AgDevCo

Africa’s agricultural potential is enormous. But agricultural productivity and farmers’ incomes are low. On paper improving productivity is simple – better seeds, more fertiliser and irrigation, better crop protection and lower-cost delivery systems between farms, suppliers and end-customers. But in practice higher productivity has proven very difficult to achieve. Pervasive constraints include under-investment in infrastructure, especially irrigation, limited access to finance and a shortage of experienced farm management. Consequently investment in agriculture has been low, productivity improvement disappointing and the potential of agriculture has remained largely unrealised.

There are several major constraints which must be addressed if a major increase in commercial investment in agriculture is to be achieved. First, the high front-end costs and risks of ‘greenfield’ agricultural ventures raise production costs, reduce profitability and therefore deter private investment. Second, very limited access to long term ‘patient’ capital to fund development of early-stage agriculture-supporting infrastructure creates a strong barrier to entry by commercial investors.

Innovative financing approaches like AgDevCo directly address these constraints. It invests development capital to mitigate front-end costs and risks, bringing ventures to the point where they can attract private capital from domestic, regional and international investors. It deploys ‘patient’ capital to develop, and lease to farmers, new infrastructure services, especially irrigation, thereby stimulating greater commercial investment into irrigated farming. It ensures that the benefits accrue to small farmers as well as commercial farmers, thereby achieving direct as well as indirect poverty reduction goals. It achieves high ‘leverage’ mobilising at least 10 dollars of private capital for every dollar of public money that it invests.

AgDevCo is a spin-off from InfraCo, a similar PPP operating in ‘hard’ infrastructure sectors. InfraCo has already begun development of agriculture-supporting infrastructure in Kenya, Mozambique, Uganda and Zambia. It has shown that the approach works. Chanyanya is a good example. Irrigation services are already being provided to small farmers and annual crop yields are expected to increase by 3-4 times. This would not have been possible without investment of $2.5 million of development capital invested by InfraCo. The venture is a commercial business in which the small farmers have a substantial stake. They are not receiving a hand-out, they are participating in profitable business enterprise. Now that this small initial venture has proven the concept, there is enormous scope to scale-up across a much larger area in Zambia.

The promise of the AgDevCo approach has been demonstrated, in Chanyanya and elsewhere, by InfraCo. But to make a real impact AgDevCo needs to operate at much greater scale. A commitment of development capital and patient capital of about $120 million over 5 years will mobilise in excess of $3 billion of commercial investment into agriculture in Africa over the long term. It will also directly benefit millions of small farmers.

AgDevCo is a practical response to the global food crisis and particularly to Africa’s growing dependence on imported food. It will create a platform on which Africa’s Green Revolution can become a reality. It already has the strong support of African leadership including NEPAD/CAADP and AGRA. Now is the time for it to take off at scale!