The Brussels Development Briefing n.47 on the subject of “Regional Trade in Africa: Drivers, Trends and Opportunities” took place on 3rd February 2017 in Brussels at the ACP Secretariat (Avenue Georges Henri 451, 1200 Brussels) from 09:00 to 13:00. This Briefing was organised by the ACP-EU Technical Centre for Agricultural and Rural Cooperation (CTA), in collaboration with IFPRI, the European Commission / DEVCO, the ACP Secretariat, and CONCORD .
2. Presentation Outline
2
I. The AfDB High 5s
II. Why we need Africa-wide Agricultural
Transformation Strategy
III. AfDB’s Strategic Response
IV. Costs and Financing
V. Key AfDB Flagship Initiatives
3. 1. Power and Light Up Africa
2. Feed Africa
3. Industrialize Africa
4. Integrate Africa
5. Improve Quality of Life of Africans
AfDB’s ‘’High 5” Priorities
3
4. Strategy to implement each of these priorities have been prepared
(or are under preparation)
Feed Africa Strategy – named “Strategy for Agricultural
Transformation in Africa (2016-2025) has been prepared.
Already under implementation
4
5. II. Why we need Africa-wide Agricultural Transformation
Strategy
5
6. • Yet a large share of the population continue to experience
persistent poverty; and
• deteriorating food security despite huge untapped potential.
Major reason Very low crop yields.
compare:
Crop Africa Yield Best Practices
Results rapidly rising food imports and import bills.
AGRICULTURE REMAINS THE MAJOR SOURCES OF ECONOMIC DEVELOPMENT IN AFRICA
2.0mt/ha
9.4mt/ha
2.5mt/ha
0.5lt/ha
Maize
Cassava
Rice
Milk
19.2mt/ha
25.4mt/ha
8.3mt/ha
10.0lt/ha
7. Barriers crippling Africa’s agriculture sector
Due to limited research and development; low inputs use and limited
mechanization; Minimal Extension services; High post harvest loses
Limited value addition and market linkages
Under-performing
value chains
Insufficient
infrastructure
Hard infrastructure - transport, energy, water, waste management.
Soft Infrastructure – including aging farmers and lack of skills for
commercial agriculture and agro-allied industry
Limited access to
agricultural finance
Due to associated risk (perceived or real); High cost of service delivery; and
Unattractiveness due to low returns
Adverse agri-
business
environment
Unfavorable market access and incentives; Ineffective sector regulation;
Unsupportive business enabling environment
Limited inclusivity,
sustainability and
nutrition
Insufficient inclusivity of women and youth; unassured sustainability,
limited commodities with high nutrition
8. 8
Contribute to the
end of extreme
poverty
Eliminate hunger
and malnutrition
Become a net
exporter of
agricultural
commodities
Move to the top
of key agricultural
value chains
Targetby2025
Food security for
all Africans
Zero hunger and
malnutrition
Eliminate large
scale imports
Africa´s net trade
balance – $0
billion
Africa share of
market value for
processed
commodities
.~40%
StatusToday
~130m lifted out
of extreme
poverty
33% of African
children live in
chronic hunger;
40 million under
age 5 stunted
Goals
4
The imperatives for agricultural transformation: goals, status, targets
420 million
Africans live
under extreme
poverty $1.25/
day
will rise to 550
million by 2025
if we do nothing
net food import
bill of USD 35.4
to increase to
USD 111.0
billion/yr by
2025
if we do nothing
Low value
addition to
agricultural
commodities
11. Value Chain Approach to Development
Job Opportunities along the Agriculture Value Chain
12. Increased
Productivity
1
Increased
Investment in
Hard & Soft
Infrastructure
3
Feed Africa Enablers
Realized Value of
Increased
Production
2
7 Enablers to guide the value chain development approach:
TAAT: increase investment into agriculture research and technology
dissemination
Mechanization Program: establish facility for on-farm mechanization leasing
Develop agro-dealer supply systems, expand input finance and connect
farmers to buyers
Support wide-scale deployment of innovative farmer extension models
invest in infrastructure and training to reduce on-farm and post-harvest loss
scale Warehouse receipts systems (WRS)as 1st step for commodity exchanges
increase and link production and processing capacity along key corridors
Scale-up and replicate innovative models to organize and aggregate farmers
Establish agricultural commodity exchanges
Infrastructure Coordination: accelerate and coordinate development of enabling hard
infrastructure (energy, water, logistics)
Market infrastructure: build market centers and associated service infrastructure
Farmer e-registration: launch large scale farmer e-registration systems
AfDB Role
13. Expanded
Agricultural
Finance
4
catalyze bank lending to the ag sector through risk-sharing facility
provide funding and capacity-building to SME funds
Project Finance Facility to Increase long-term funding to agriculture SMEs
Trade Finance Facility to scale up existing Soft Commodity Facility
Scale up Africa Risk Capacity (ARC) initiative (sovereign insurance solution to agro-
ecological shocks)
Diaspora Bonds: create lending products to attract diaspora and institutional capital
Facilitate lower lending rates to agricultural players through Central Bank funds
Deepen and broaden agricultural insurance markets
Improved
Agribusiness
Environment
5
Coordinate establishment of an Africa-wide policy matrix detailing the key policy
changes required to enable transformation.
improve statistical systems across African countries by building capacity in ministries
and offering technical assistance
Facilitate land tenure reform through the Africa Land Policy Center
Strengthen capacity of private-sector actors’ (e.g. Chambers of Commerce) to
advocate for favorable policies
Support development of Agribusiness Environment indices
7 enablers (cont’d)
Feed Africa Enablers AfDB Role
14. Increased
Inclusivity,
Sustainability,
Nutrition
6
Coordination
7
AFAWA Facility: establish a facility to promote women-owned
MSMEs
Increase representation of women in agricultural research
establish facilities to increase youth employment and enhance
skills in agribusiness (e.g. ENABLE Youth)
provide funds to support climate adaptation and climate smart
agriculture practices
Encourage scale-up and replication of nutrition programs
Partnership among key actors from the public sector, private
sector and development institutions
Support pan-African agriculture leadership initiatives (e.g.
Leadership 4 Agriculture)
7 enablers (cont’d)
AfDB RoleFeed Africa Enablers
16. Achieving Feed Africa Goals requires Substantial Investment
and results in Substantial Revenues
We estimate that it will cost USD 315-400 billion over the
next decade, or an average of $32-40bn annually
could unlock USD 85 billion of revenue annually from 2025
18. $7bn
$3bn
Total
Required
~$32-40bn
Gap
~$25-33bn
Total
Investment
Commercial
Lending
<$1bn
Govt
Spending
$2-3bn
Other
ODA and
Donors
AfDB
<$1bn
Total govt spending is
~$12bn, although 70-80% is
on current expenditure
commitments leaving only
$2-3bn for investments
Current Funding for Agriculture Development in Africa
vs. Requirements for Transformation, $bn / year
Sources for filling the gap include:
• AfDB: Increase annual lending to USD
2.4bn/year
• Governments: co-investment in increased
AfDB lending (@10%) and raising budget
allocation from average 3% to 5%
• Commercial banks: currently lending $660m
annually (4.8% of ~$14bn); room to catalyze
more
• Sovereign wealth funds: AUM of ~$160bn
• Pension funds: AUM of $380bn
• Africa-weighted PE funds: AUM of $25-35bn
AfDB and public sector partners will crowd in
private and institutional funding by:
• Establishing enabling environments for
private investment
• Employing innovative de-risking tools and
blended financing
• Proving the potential for risk-adjusted
returns in agriculture projects and
agribusinesses
Currently, total investment finance is ~$7bn annually
Leaving a funding gap of ~$25-33bn
19. Funding African Agricultural Transformation
•We believe that there are sufficient resources globally to finance the
agricultural transformation:
• AfDB is proposing to Increase its annual lending to the sector to USD 2.4bn/year
• Governments: co-investment in increased AfDB lending (@10%) and raising budget
allocation from current average of 3% to 5%
• Commercial banks: currently lending $660m annually (4.8% of ~$14bn); room to catalyze
more
• Sovereign wealth funds: AUM (Assets Under Management) estimated at ~$160bn
• Pension funds: AUM $380bn
• Private Equity Funds: AUM of USD 25-35 Billion, with 900 million per year to Agriculture
AfDB and public sector partners will crowd in private and institutional funding by:
• Establishing enabling environments for private investment
• Employing innovative de-risking tools and blended financing
• Proving the potential for risk-adjusted returns in agriculture projects and agribusinesses
20. Financing Obstacles & Challenges at Micro Level
• High Cost of Serving Farmers
• Upfront investments in staff skills,
systems, back office processes
• Seasonality and uncertain timing of Cash
Flow/Challenges around liquidity
management
• Finding Agricultural Expertise to design
financial products that meet farmers’
needs
• Climate Risks ( absence of reinsurance
mechanisms
Farmers’
• Lack of organization
• Unreliable linkages to downstream
markets
• Lack of title deeds and other collateral
• Low yields
• High transportation costs
Small Medium Enterprises (MSMEs)
• SMEs lack of access to finance limit
growth
• Lack of hedging mechanism
DemandSupply
21. • Smallholders
• Emerging Commercial Farmers
• Agro-processor SMEs
• Seed & Input Companies
• Agro-Dealer Networks
• Others (Logistics, Storage Providers
Unmet Financing Needs - DIVERSE Products
• Short-Term Capital
• Medium-term Financing
• Long-Term Debt
• Equity Investment
Working capital for SHFs &
SMEs, purchase of inputs
Equipment
purchase
Capital equipment &
Land
Off-taker’s expansion
Value Chain Players - Limited access
to formal financial services
22. Examples:
• Risk Sharing Facilities
• Loan portfolio guarantee
• New product design
• Catalytic SME Funds
• TA to Banks to improve
lending systems and
processes
• Mobile wallet and digital
payments platforms
• Commercial Banks
• State Owned Agricultural
Banks
• Private Equity and SME
Funds
• Microfinnace Institutions
• Insurance Providers
New Products
23. Key Flagships
Technologies for African Agricultural Transformation
Dissemination and scaling up of proven agricultural transformation technologies to raise farmer
productivity and
Agropoles, agro-industrial processing zones and corridors
• Create Agro-processing zones to concentrate resources and create an enabling environment within high
potential areas providing aggregation, processing, market information, market linkages and SME
linkages for farmers and agri-businesses
Agribusiness Support and ENABLE Youth
• A Program to increase youth participation in agriculture by providing business training, seed capital for
youth-led agribusiness enterprises, mentorship, and placement in agribusiness companies.
African Agriculture Risk-Sharing Facility
• The Africa Agricultural Risk-Sharing Facility will achieve increased bank lending to SMEs through de-
risking credit activities and attracting new capital to the sector.
24. Key Flagships :
Sovereign Insurance
• Africa Risk Insurance will improve country resilience to agro-climactic shocks by
building a continent-wide sovereign insurance solution.
Infrastructure Finance
• An Agricultural Project Finance Facility to provide co-funding and project development
assistance to value chain projects that will catalyze financing for the build-out of
agricultural infrastructure;
African Agriculture Trade Finance Facility
• To facilitate trade and improve global competitiveness of African agricultural exporters by
providing access to finance for banks and export aggregators.
Farmer E-Registration
• In support of an African E-Payments Platform for Input Distribution to raise farmer
productivity and incomes - countries to create databases of their farmers to enable input
distribution and provision of vital services through mobile.
25. Key Flagships:
Agro-Inputs Network Development / Input Finance
• To raise farmer productivity by increasing financing to large-scale domestic inputs
producers, expanding market access for smallholders, and supporting policy reform for
greater inputs access.
On-Farm Capex Hiring and Investment Support
• The African Mechanization Program will raise farmer incomes by allowing farmers to lease
mechanized equipment for more efficient production.
On-Farm and Post-Harvest Waste and Loss
• The Post-Harvest Loss Prevention Facility will raise farmer incomes by making post-
harvest loss (PHL) technologies more readily available through growth capital
investments in suppliers, and on-lending for farmer leasing.
Warehouse Receipt Models Replication
• Warehouse receipt systems allow farmers who store their produce in licensed
warehouses and issues them warehouse receipt which acts as an asset for sale or use
as collateral for loans
26. Key Flagships
Agricultural SME Finance Capacity-Building Initiative
• to build long-term sector capacity and support the development of innovative
SME financing vehicles by funding a variety of non-bank financial institutions
and ecosystem actors
Affirmative Financing Action for Women (AFAWA)
• To raise women’s incomes by increasing their access to credit to grow
agribusinesses.
Climate Resilience Fund for Agriculture
• Raise resources to invest projects that have already displayed success in
improving farmer resilience to climate shocks and land degradation.
African Nutrition Trust Fund
• To support community-led nutrition programs in high-need countries in order to improve
food security and prevent malnutrition.
27. Achieving agricultural transformation in Africa will require
strong partnerships and collaboration
Increased
Productivity
Hard and Soft
Infrastructure
Agri Finance
Inclusivity,
Sustainability,
Nutrition
Key Potential Actors and Partners to Deliver on Feed Africa
Enabling
Agribusiness
Environment
Realized
Productivity
Multilateral, Bilateral Donors, Foundations,
Government Organizations
Small and Large Scale Agribusiness; Farmers
Organizations; Food Companies
+
Regional Member Countries
PartnershipCo-financing
Co-development
Non-Exhaustive
On the supply side of the market for finance, there are a range of deterrents to increased participation in agriculture.
There are high costs associated with banks serving smallholder farmers or farmer groups
Reaching out in rural areas upfront investments in staff skills, systems and back-office processes that cannot be recouped without reaching scale.
Seasonality and uncertain timing of cash flows inherent in agriculture lead to unique liquidity management issues for banks; banks must reach significant scale to smooth anticipated cash flows and reduce the co-variance of risk across their agricultural portfolio.
Banks also need specific agricultural expertise to properly assess credit risk among both farmers and agro-enterprises, as well as to design appropriate financial products that meet farmers’ needs.
Further, the risk distribution is skewed towards occasional catastrophic negative “spikes” (e.g., during droughts) with risk that cannot be easily hedged or distributed to others through reinsurance mechanisms. Compounding the problem, agriculture poses particular challenges for risk management, as the higher likelihood of co-variant risks and thus large, concentrated payouts against losses requires holding large financial reserves against losses unless significant scale and risk diversification can be achieved (e.g., at a regional or continental level).
On the demand side of the market for finance, there are several well-known constraints.
- Most smallholders are not organized into effective producer organizations that enhance banks’ ability to provide financing for working capital and equipment,
- Farmers do not have reliable linkages to downstream markets that improve the consistency of their cash flows.
Farmers also often lack clear title deeds and other forms of collateral which help reduce risk for banks.
Irrigated agriculture in much of Africa is a small proportion of overall production, and yet consistent access to water is one of the fundamental drivers of increasing yields. High transport costs are a significant constraint to growth in African agriculture, where production is dispersed in relatively under-connected rural communities and inadequate rural road infrastructure creates fragmented markets and increases post-harvest losses.
Small- and mid-sized agro-enterprises also face significant barriers to accessing the financing they need to grow, and tend to finance their operating and investment needs through a mix of retained earnings, other household income, and a variety of finance providers including commercial banks and informal money lenders.
Some agro-enterprises can mitigate risk by operating flexibly across multiple crop value chains or regions of a country, but the co-variant risks in agriculture—and limited availability of insurance mechanisms to offset this risk—lead banks to reduce exposure to these businesses.
Initiative for Smallholder Finance, Briefing 1, “Local Bank Financing for Smallholder Farmers: A $9 Billion Drop in the Ocean,” October 2013.
Demand for finance across the value chains. Demand for finance includes smallholder and emerging commercial farmers, agro-processor SMEs, seed and input companies, agro-dealer networks, and others enterprises such as logistics and storage providers. All players in the agricultural space face limited access to formal financial services, including a dearth of savings and risk management products tailored to their unique circumstances.
Demand for finance in agriculture spans a range of different types of capital, from short-term finance to long-term debt and equity investment. Farmers and agro-enterprises require an assortment of capital to thrive. This includes:
Short-term working capital that farmers use to purchase seeds and farm inputs on a seasonal basis, or that SMEs use to purchase offtake from farmers or operate an agro-processing facility.
Medium-term financing for farm or agro-processing equipment.
Long-term debt and equity investments in capital equipment and land.