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  1. 1. 1 INNOVATIVE FINANCING AND INVESTMENT IN AGRICULTURE: AFRICA’S EXPERIENCE Introduction Agriculture is a major factor in determining the state of development in most Africa’s economies. This because it contributes in no small measure to the continent’s GDP (between 30% and 40%), makes up about 60% total export earnings, employs over 65% the population and has been growing at about 3.3% each year since 2000 (Hazell and Diano, 2005, IFPRI, 2009). Nonetheless, the sector remains largely under-developed; with most farming operations still at subsistence level and small scale (less than 2ha of land), low level of technology, weather- dependent production, low farmers’ incomes, poor market access, weak infrastructure and limited ability to influence government policy (Quartey et al, 2012). Over 60% of Africa's agricultural population live in rural areas and over 600 million are youths under the age of 30 years who work in subsistence agriculture. Rural agricultural workers are among the poorest in Africa with poverty rate of about 50% in the continent (UN/ECA, 2010). Agriculture has the potential to serve as a strong driver of growth and poverty reduction in the continent (Nin-Pratt et al, 2011). Investing in agriculture is therefore the most important and effective strategy for reducing poverty and hunger in both rural and urban areas through multiple pathways (World Bank, 2008). Farmers’ productivity and incomes are enhanced, food availability is enhanced, demand for other rural goods and services are stimulated, employment is created and incomes for the landless rural poor enhanced (Alston et al., 2000). However, inadequate access to finance has been a key impediment to improving the efficiency of African farmers and adopting better technologies. The seasonal nature of agriculture which causes price fluctuations of inputs and products lowers farmers’ incomes and risk bearing ability, resulting in under-investment and inability to break out of poverty (Guirkinger and Boucher, 2008; Ackello- Ogutu et. al. 2013). The vulnerable groups i.e. women and youths, who make up the larger proportion of the agricultural labour force, are more disadvantaged by insufficient finance due to access to fewer assets and younger age respectively (Okpupara, 2010). This has implications for agricultural development and strategies for increased agricultural finance are pertinent for eradication of hunger and poverty.
  2. 2. 2 Allocation to agriculture by African governments is only about 5% (FAO, 2013) despite the 2003 Maputo declaration of 10% government allocation to the sector. Public funding is generally restricted and unpredictable even in times of crisis, indicating that new ways of financing (i.e. innovative financing) which are specifically tailored to suit agriculture’s peculiarities are required for agricultural development (Quartey et al, 2012). This keynote address therefore sets out to discuss the rational for innovative financing and investment in agriculture, share experiences of where these have occurred around the world, especially in Africa and lessons that can be learnt, while finally suggesting way by which innovative financing could be achieved in Africa. Innovative Financing in Agriculture: A Global Perspective Innovative financing in agriculture, refers to new ways of raising funds, often from extra-official sources, to foster development in the sector. Innovative financing can be a catalyst for private sources, which have been far below their potential in developing countries, to contribute to development through public, public-private and private innovations. It could be said to rely on new partnerships between a wide ranges of stakeholders (i.e. countries of diverse levels of development, local authorities and private sectors). However, it must be sustainable and based on a supportive policy environment. Innovative financing in agriculture must not only be innovative in source i.e., raising capital from new funders or existing funders in new ways, or leveraging private capital, and mobilizing public resources, but also innovative in use, i.e., changing the way in which existing capital is deployed or spent, and introducing financial solutions to increase efficiency, effectiveness and overall impact within both the public and private sector (IFM, 2012). Rational for Innovative Financing and Investment in Agriculture Figures from International Expert Report (2012) reveals global food supply is expected to increase dramatically in order to meet the world demand. By 2050 the world’s population will reach 9.1 billion, 34 percent higher than today, in particular in developing countries. This population growth, combined with increasing per capita meat consumption, will require a 60 percent increase in global food and feed production. Among developing countries of the world, Africa is said to the region where the challenge will require most efforts. This is because Africa
  3. 3. 3 lags behind in terms of productivity gains on major crops and food dependency. The region is facing severe threats in the maintenance of soil fertility, (already low to start with, because of the nature of the soil) because of a fragile environment, increasing land pressure and very low adoption of effective soil conservation practices. Fertilizer consumption is only 9 kg/ha/year (in nutrient content), against 140 kg in average in developed countries. Meanwhile, Sub-Saharan Africa is the region where population growth will be highest, where hunger index is alarming and which will be most likely the most affected by climate change. In addition, challenges from climate change represent major risks for long-term food security and nutrition especially for the continent where agricultural output up to 2080-2100 could be between 15 and 30 percent if required efforts to adapt agriculture to climate change are not made in due time. Meeting these challenges will require a considerable scaling-up of investment in Africa’s agriculture. Estimates emanating from the FAO’s report (How to feed the world by 2050) suggests developing countries will need to invest USD 83 billion per year (net of the renewal cost of existing equipment) or USD 209 billion including this cost, as compared to a current level of investment of USD 142 billion in order to cope with the challenge. Considering the enormousity of the challenge and the existing budget constraints, it is of necessity to find innovative ways of sourcing funds to help meet the challenge confronting the continent. Private investment is key to agricultural development, but severely constrained. Though public investment is necessary to build up a favorable environment and required infrastructure, a large proportion of the required total investment should be made by private actors. Traditional Official Development Assistance (ODA) through public driven projects have however, shown their limits in their capacity to foster private investments, because their implementation is often too rigid, and because they are insufficiently market-driven and result-based. In order to enhance private investment in agriculture, it is widely recognized that building up an environment favorable to private investment and developing catalytic tools providing incentives and alleviating the constraints to private investment is essential. Recent innovations taking place around the world in the field of agricultural finance and investments have been in the areas of rural leasing a form of credit that provides farmers with a means to acquire productive assets (Mexico and Pakistan); providing financial education for
  4. 4. 4 farmers on loan products and debt capacity has led to positive changes in savings behaviors (China, Brazil, Paraguay); non-financial services such as soil testing and health monitoring of livestock, along with credit, to farmers in a way that maximizes returns to credit services (India), and market linkages, innovations in marketing, technology adoption and risk management such as index base issuance (scaled up in India and Mexico) which is an innovative measure to share climate risk among members of an issued population (Kloeppinger-Todd and Sharma, 2010; Ackello-Ogutu et. al. 2013). Experiences of Success of Innovative Financing and Investment in Africa Despite the myriad of problems facing agricultural financing in the continent concerted efforts are being put in place not only by the governments but also the private individuals in agriculture, local and foreign investors. The contribution of some governments in the provision of basic infrastructure and ensuring security of life and property is highly commendable but more still needs to be done in the area of electricity, security in the sub region so that more foreign and local investors can be encouraged. Many of the regional governments are also adopting market- friendly policies and committing more resources to the sector. Government’s role in the innovative financing and investment in the continent has however, been dual. For example, there has been direct government financing with examples in Nigeria, Kenya, Ghana and Uganda, Ethiopia etc and government partnership with private investor. In either case (public or public- private partnership), the aim of the governments remain the same: creation of employment opportunity, enhance revenue (which sustains economy of most countries in the continent) and ensuring food security. A strong indication that the rest of the world is appreciating current efforts and achievement is investors’ wake up to Africa’s potential. Figures from Info agra and McKinsey (2010) indicate forty-five private equity firms plan to invest $2 billion in the region’s agriculture in the next three to five years. Consequently the continent’s agricultural output could treble from the current $280 billion a year to $880 billion by 2030. On the farmers’ part, resources are also being pulled together through cooperatives to assist one another and great achievements have been recorded in terms of number of beneficiaries and loan repayment. Kenya, Ghana, Tanzania and Uganda are examples of countries where this is well established. Local and foreign investors in the continent are involved in production, processing,
  5. 5. 5 marketing and provision of improved farm inputs to farms. Examples are found in Ghana, Nigeria, Ethiopia, Uganda and Tanzania. Case studies of some successes as well as challenges of innovative financing and investment in Africa are briefly highlighted under the public, public- private and private innovative financing and investment in agriculture: Public Financing and Investment Nigeria: The YouWin! is a new youth empowerment government initiative in Nigeria. It involves equipping young aspiring entrepreneurs with necessary managerial skills and funds upon the completion of training for establishment of small scale enterprises with potential for growth and job creation. The programme is projected to generate 80,000 – 110,000 new jobs for currently unemployed Nigerian youths in the first three years of its existence. Ghana: Aside from being the monopolist marketer of cocoa in Ghana, Cocobod extends seasonal credit and provide a significant degree of organisation to the value chain. Cocobod also heavily subsidises long-term investment such as replantation and also has strategic arrangements with processors which has resulted in a significant local processing capacity. Kenya: The Kenya Tea Development Authority (KTDA) through institutional support and the government’s land redistribution policy bought land from large-scale settler farmers, subdivided it and re-allocated it to smallholders to grow tea. The farmers are provided with extension services and inputs and also receive assistance in collection, processing and marketing of the green leaf tea. Ethiopia: The Ethiopian Commodity Exchange (ECX) regulates trade of major agricultural commodities. Their networks of warehouses throughout the country stores, measures and grades farm produce which are bought off the farmers. Public-Private Financing and Investment The common ICT applications are the mobile phone short messages (SMS), web/internet-based resources and tele-centers. Examples of projects applying these innovations include, among others: MPESA (literal meaning: mobile money), Kenya Agricultural Commodity Exchange (KACE) and Drum-Net in Kenya; Busoga Rural Open Source and Development Initiative and
  6. 6. 6 FoodNet in Uganda; Malawi Agricultural Commodity Exchange (MACE) in Malawi; Manobi in Senegal; TradeNet/E-Soko in Ghana; Kilosa Rural Services and Electronic Communication in Tanzania and the most recent e-Wallet under the Growth Enhancement Scheme (GES) of the Nigerian government. In the last ten years, the ICT-based applications have gained a lot of popularity in SSA, thanks to donor support from, multilateral institutions, non-government organizations, telecom service providers among others and government which played their part; absorbing initial risks and funding the lumpy infrastructure (such as satellites) and legislations attracting international investors and service providers and, where necessary, allocating land for businesses. The resuscitation of Nigeria Fertilizer Industry through government partnership with Mitsubishi- Notore is another example of a public-private partnership investment which has not only conserved the foreign exchange expended on importation of fertilizer but also the input is made available to farmers at reasonable price. Private sector sells fertilizer to farmers at market price less the fertilizer voucher discount provided by government while the States and Federal Governments ensure the distribution of fertilizer vouchers to targeted farmers. Private Financing and Investment Maendeleo Agricultural Enterprise Fund (MAEF) Farm Africa's Maendeleo Agricultural Enterprise Fund (MAEF) is a grant-making fund that aims to sustainably improve the livelihoods of smallholder farmers in East Africa by investing in innovative agri-business enterprises that seek to either create or adapt technologies for improving agricultural productivity, increasing profitability and linking smallholder farmers to viable, profitable and sustainable markets. The fund has particularly been helpful to women farmers in eastern Africa trying new ways of working, setting up businesses and finding profitable new markets. Since 2002 more than 150,000 households across Kenya, Uganda (e.g. sorghum for and Tanzania ESOP The programme is promoted by two NGO’s (CICR and ETD) in Togo, Burkina Faso and Benin with the aim of linking processing agribusiness for urban supply (mainly for rice, and at time soya beans) to farmers’ organizations. The enterprises are run as joint ventures between private
  7. 7. 7 individual operators and farmers groups through a contract, which provides them with improved seeds and other inputs on credit financed by local banks under specific credit lines. Farmers are paid upon delivery of the produce to the agribusiness warehouse through a system of warehouse receipts at a selling price set in advance. Repayment of the input supply loan takes place upon delivery of the produce to the warehouse. Savannah Integrated Export Processing Farms (SIEPF) and OLAM SIEPF, a tomato processing plant, and OLAM, a rice processing mill, provides inputs such as seeds, fertilizers, extension services and even land to farmers in northern Nigeria on loan in return for procurement of high quality produce from the farmers. It provides a guarantee to farmers to buy the products of a certain quality at a fixed price thereby increasing output for the companies. Weinco Maize Project and Blue Skies ‘Weinco’ an input supply company, and ‘Blue Skies’, a major processor and exporter of fresh cut fruit supply small farmer-groups in Ghana with quality seeds which guarantee increased yield, fertilizer and technical support. After harvest, the companies buy the products from the farmers at a minimum price set in the contract, thus reducing postharvest loss of farmers due to lack of storage facilities. The repayment of the input credit is done by reduction on the proceeds of the sales paid on the farmers’ bank account. Gatsby Gatsby (African Agricultural Capital) provides access to markets for smallholder farmers by stimulating new value chains, adding value to agricultural products and connecting smallholders with buyers and customers. About 1.4m smallholder farmers have benefitted across Kenya, Tanzania and Uganda. The major challenge of Gatsby is low return to capital invested. Conclusion The Way forward for Africa The continent still has a lot to do in order to make agriculture play its statutory roles effectively. We should not be carried away by the moderate successes recorded by few countries in the continent through innovative financing and investment in agriculture. Many farmers are still poor
  8. 8. 8 and agriculture is still regarded as harbinger of poverty in the continent. The gravest risks to sustainable agricultural financing often come not from inherent business risks or the inability of financial institutions to design profitable financial products for the rural population, but rather from misguided government interventions such as lack of or non-enforcement of appropriate rules and regulations. Innovative financing, whatever the form it takes, must be sustainable and based on a supportive policy environment. The success of innovative financing and investment in agriculture rests on private investment, public-private partnership ventures and free market economy where the forces of demand and supply dictate the prices of tradable commodities. Using these successful countries as models, the following are suggested for the African countries in order to surpass the present achievement from innovative financing and investment in agriculture:  Promote and encourage voluntary contribution from consumers, firms and employees and/or by food and nutrition correlated industries. Lotteries can also be considered  Promote the use of migrant remittance which can be considered both as new and renewable sources of financing as well as existing private capital that may be channeled into agriculture.  Seek ways of accessing funds generated by carbon emission allowances auctions in the European Union Emission Trading Systems (EU ETS)  Enhance private investment in agriculture, by building up a favorable environment and developing catalytic tools providing incentives and alleviating the constraints to investment.  Encourage private participation on insurance programmes which are specifically tailored to suit the peculiarities of African farmers particularly the vagaries of weather. ACKNOWLEDGEMENT - I wish to acknowledge my PhD students, Fatai A. Sowunmi, Cecilia Nwigwe and Ogheneruemu Obi-Egbedi; in the Department of Agricultural Economics, University of Ibadan for their contributions to this paper.