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Brussels Briefing 47: Josephine Mwangi "Innovative finance for agriculture transformation"


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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 .

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Brussels Briefing 47: Josephine Mwangi "Innovative finance for agriculture transformation"

  1. 1. Financing African Transformation and Agro- Industry MRS. JOSEPHINE MWANGI African Development Bank Brussels 3 February 2017
  2. 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. 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. 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. 5. II. Why we need Africa-wide Agricultural Transformation Strategy 5
  6. 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. 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. 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
  9. 9. III. AfDB’s Strategic Response
  10. 10. A focused approach on integrated commodity value chains
  11. 11. Value Chain Approach to Development Job Opportunities along the Agriculture Value Chain
  12. 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. 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. 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
  15. 15. FEED Africa: Agricultural Transformation in Africa IV. Costs and Financing
  16. 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
  17. 17. V. Financing Agricultural Transformation
  18. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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