Towards a Green Revolution in Af

Document Sample
Towards a Green Revolution in Af Powered By Docstoc
					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

                                             • Farm productivity just 25% of global average

                                             • Only 4% of land is irrigated (over 30% in South

                                             • Low fertiliser use - severe mining of soil
Constraints on agribusiness development in Africa

 •   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

         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
                                                             • Large economies of scale in early
                                                               stage development
cost                       SRAC
                                                             • High average costs over initial
                                                              10- 15 years         sub-commercial
                                                               returns on investment

                                                             • But lower average costs over long
                                                               run        commercial return on

                             Volume/value of output

         • 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                                               • High greenfield unit costs reduce
                                                          expected ROI

                                                        • High greenfield and country risk

         rf                                              increase required risk premium

                                                        • High domestic risk free rate

               • High early stage unit costs reduce expected ROI
               • High early stage risks increase minimum required return on investment
    Three key market failures (III)

      3. Financing problem

Return on                                                    • Many early stage agricultural
                                                              investments have sub-commercial
                                                              expected ROI given perceived risks . . .

         rf                                                  • . . . 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
Understanding InfraCo

                              Donor Shareholders

                                     INFRACO                    Company limited
                                                                   by shares

                                  Private Sector
                                Management team

                                                                     Wholly owned locally
                                                                     Incorporated project

 – 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)
InfraCo’s project portfolio in SSA

                                     Ethiopia: wind

        Senegal: wind

                                                           Kenya: wholesale
                                                         fresh produce market

                                 Mozambique: Beira Agricultural
                                      Growth Corridor
What is AgDevCo?
• Agricultural development company operating in African agriculture and
  agribusiness sectors

• AgDevCo
    o 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

     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

              Model 1: Develop serviced farm blocks and         Model 2: Greenfield commercial farm hubs
              lease to commercial and small farmers             and associated small farmer outgrower


Bulk water                                       Finance


Electricity                                                                     farm hub
                                                 Input supply

                        Serviced farm blocks

                 Both models improve access to affordable infrastructure, inputs, markets
                 and finance of small farmers
How AgDevCo addresses constraints on sustainable agribusiness

                                      Invests to reduce front end costs and
  High front-end costs and            risks and overcome coordination
  risks/coordination problem          problem

                                      Invests „low coupon‟ patient capital to
  Economies of scale                  create infrastructure and leases it to
                                      farmers at LRAC

  Financing constraints               De-risks entry & patient capital &
                                      arranges debt/guarantees

  Entrepreneurship/knowledge          Recruits/develops local management
  deficits                            prior to exit & arranges grant funding to
                                      support knowledge transfer
AgDevCo financial strategy

Development capital invested      Recouped with premium when
pre-financial close               AgDevCo sells down/exits – reinvests

“Patient capital” invested at
financial close to create         Redeemed with 5-6% coupon over
infrastructure e.g. irrigation    20 years – proceeds reinvested

Grant funding for „public good‟
components incl. small farmer     Grant funding needed for e.g.
support programmes                extension services, training etc. for
                                  small farmers
AgDevCo social and economic impacts

   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
Chiansi irrigation venture, Zambia (I)

• 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
Chiansi irrigation venture, Zambia (II)

 • 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 (III)

InfraCo’s role

•   Agree commercial structure with local communities (took 18 months)
•   Create commercial farm company and support creation of small farmer
•   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
Chiansi irrigation venture, Zambia (IV)

•   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
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
Towards an African Green Revolution?

 • 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
For further information