16 January - Blended Finance for Agriculture - presentation

1. Blended finance for agriculture
Smallholder and Agri-SME Finance and Investment Network (SAFIN)
Short presentation draft 09 Jan. 2019
Tanja Havemann, Clarmondial

2. Introduction
Purpose of this report
• Propose a taxonomy for blended finance in
agriculture
• Review the evidence for blended finance
approaches in agriculture
• Identify challenges and areas for additional
investment
• Build on previous work (OECD, Dalberg, AGRA,
AfDB, DFID)
Applied definitions
Blended finance: The strategic use of development
finance for the mobilization of additional finance
towards sustainable development in developing
countries. (OECD)
Development finance: National & international
capital focused on generating development
outcomes, with or without returns.

3. Guiding questions
• Main players and respective roles? What is the role of national and local DFIs?
• Size of development finance flows through blending vs. broader use of development finance to support
agricultural investment in developing countries, and geographical distribution, underlying level of risk and
maturity of ecosystems?
• Intended development rationale for the use of blended finance in agriculture? Are there clear market
failures in the contexts to be addressed and how does blended finance address them?
• Who are the main clients and intended beneficiaries of blended finance initiatives and vehicles in the
sector? Are blended finance solutions targeting the primary sources of commercial finance for agri-SMEs?
• Evidence for the use of blended finance for investment in loose value chains and in markets or value
chains oriented towards local (national) markets?
• Evidence of direct leveraging and/or indirect mobilization impact of development finance on commercial
finance for agri-SME-oriented investments?
• Cases in which blended finance is subsidizing commercially viable transactions, and if so, how prevalent is
the misuses of blended finance understood as a subsidy in markets that already operate well?
• Exemplary operations enabling the governments concerned to take ownership of the methods of
intervention in order to build sustainable instruments for the development of the sector (sustainability of
tools for long term impacts)?

4. Stakeholders & finance roles
Farmers
Govm’t
DFI
(local &
int’l)
Donors
Investors
(owners)
Investors
(AM)
Banks
&NBFCs
Agri-
SMEs
Value chain
partners
NGOs
R&D
Impact-first
capital
Insurance

5. Challenges in tracking blended finance for agriculture
There are several aspects to tracking the financial aspects of blended finance in agriculture. These include:
• Amounts committed vs. disbursed
• Double-counting within donor funded capital
pools (e.g. agriculture & financial inclusion
allocations)
• Valuing guarantees and insurance mechanisms
• Categorizing transactions, especially where
multiple instruments are used by multiple donors
• Data is not collected consistently across groups
and time
• M&E is not always done consistently, made
public and of a comparable quality, and there is
not always follow up
• Assessing additionality and leverage, especially
for open-ended / evergreen structures, and where
development funders are in an equal position to
private investors
• Assessing additionality for public policy
interventions, in particular those that leverage
local capital
• Assessing financial additionality when certain
parts of transactions may be confidential, i.e.
tracking private capital flows may be challenging
• Agriculture investments can be covered under
multiple SDGs and categories (food security,
climate, biodiversity, health, etc.).

6. Data sources for blended finance in agriculture
International sources include: National sources include:
• OECD
• Convergence
• UN organizations, in particular FAO (agricultural
statistics), UNCTAD (investment statistics)
• World Bank Group
• EDFI
• Stand-alone surveys, e.g. by WEF
• International Aid Transparency Initiative (IATI)
• National databases on FDI
• National databases on credit provision
• National databases on agricultural production
(trade)
Regional sources include: Industry sources include:
• Regional multilateral development institutions
(EBRD, ADB, AfDB, IADB) & DFI associations
• Regional initiatives (notably ReSAKKS)
• Regional surveys
• MIX Market
• Global Impact Investing Network (GIIN)
• CSAF

7. Volumes of national development finance to agriculture
The proportion of blended finance in official national government development flows to agriculture is unclear.
0
1
2
3
4
5
6
7
8
9
10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Agricultureshareofgovernmentexpenditures(%)
Year
World Developing regions
Northern Africa Sub-Saharan Africa
Latin America & the Caribbean Eastern Asia
Eastern Asia excluding China Southern Asia
Southern Asia excluding India South-Eastern Asia
Western Asia Oceania
Data source: FAO ESS

8. Volumes of national development finance to agriculture vs. GDP (AOI)
0
0.5
1
1.5
2
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
AOIforcentralgovernmentexpenditures
Year
WORLD Developing regions Northern Africa
Sub-Saharan Africa Latin America & the Caribbean Eastern Asia
Eastern Asia excluding China Southern Asia Southern Asia excluding India
South-Eastern Asia Western Asia Oceania
Caucasus and Central Asia Developed regions LDC
Data source: FAO ESS

9. Volumes of domestic credit to agriculture
Data source: FAO ESS
The countries with the largest domestic credit contributions to agriculture include Malawi, Kyrgyzstan,
Zambia, Sudan, Uruguay, Nicaragua, India, Tajikstan and Belize

10. Overseas Development Assistance (ODA)
Sources: Graph from FAO – additional information on flows from OECD
GDP contributions from agriculture vs. ODA to agriculture, fisheries & forestry share (FAO)
DFA:
Development
Flow to
Agriculture

11. Funding from International Development Finance Institutions (DFIs)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CDC DEG FMO OPIC Proparco IFC
DFI commitments by sector, 2012-2016 (% of portfolio) - for 6 DFIs
Finance & insurance Utilities Manufacturing Transportation Agriculture Other
68% 42% 47%
1% 1% 2% 2% 3% 6%
The chart above is based on data compiled by CGD (2018)
The largest volumes committed by instrument are senior debt (44%) and equity (33%). For agriculture,
the largest direct mobilizations through blended finance were by direct investments in companies and
syndicated loans.

12. Gross FDI flows per sector - Africa
Source:
World Bank

13. Foreign Direct Investments (FDI) flows to agriculture
FAO FDI flows to agriculture, forestry and fisheries, 1997-2011 (2005 constant prices USD Bn.)

14. Blended finance: market summary
Convergence: Over USD 100 billion mobilized - likely an underestimate, with year on year growth. Funds are
the most common deal type (55%), companies and projects the second most common, concessional capital
and TA are the most common concessionary instruments, with OECD DAC DFIs & MDBs most active. Sub-
Saharan Africa is the most popular target (42%), followed by Latin America & Caribbean.
Note this likely excludes many blended finance transactions!
Convergence, 2018, The State of Blended Finance 2018.

15. Funding the agricultural value chain
Inputs Production
Storage &
distribution Processing
Marketing,
distribution
Who needs
funding?
Input producers,
importers, agro
dealers, farmers
Primary
producers /
farmers
Primary
producers /
farmers, buyers
Local buyers Brands /
retailers
What is the
funding for?
Inputs, export &
import, TA,
transport,
marketing, R&D
Access to land,
equipment,
transport, labor
Inputs, R&D
Transport, labor,
equipment,
inputs, R&D
Transport, labor,
equipment,
inputs, export &
import, R&D
Inputs, labor,
marketing,
equipment &
transport, R&D
Main funding
challenges
include…
Time critical,
technical
expertise,
currency, tied to
production &
market risk
Time critical,
technical
expertise,
production &
market risks,
lack collateral
Quality of local
infrastructure,
time critical
Technical
expertise,
quality of local
inputs, reliability
of demand,
market risks
Market
reliability, local &
trade policies,
reliability of
supply &
demand

16. Demand for agriculture investments
Improving primary
agriculture & natural
resources, 25.15
Improving
agroprocessing
operations, 19.49
Improving
infrastructure, 49.62
Improving
institutional
framework, 20.28
Improving R&D and
extension, 24.35
• According to FAO, circa 50% of the demand should be met by the private sector.
• The majority of the investment need is in Sub Saharan Africa and South Asia, in infrastructure, primary
production and processing

17. Development rationale of blended finance in agriculture
Role Example funding Example additionality
Identify and create new
structures
Grants, concessional
loans
Research to identify opportunities (e.g. market
research, testing with investors)
Seed new structures –
“first capital”
Equity, debt
Scale financial instruments, transaction lead, reference
source to other investors
Financial de-risking
Guarantees, first loss,
subordinated, risk
absorbing equity,
derivatives, provisions
Change the risk-return for private investors (perceived
and actual), reduce the intermediation cost of capital,
improving risk-return to investors
Technical de-risking
Technical assistance
funding (grants)
Provide grant funding alongside an investment to help
increase chances of success
Remunerate
development impact
Grants, rebates Payment for additional pre-agreed impact outcomes
Build the market
Grants (market studies,
learning)
Research on the success of different interventions (e.g.
benchmarking performance), Investor engagement

18. Taxonomy of blended finance for agriculture
Grants
Guarantees &
insurance
Debt
Equity
It is possible to categorize blended finance in different ways, including by type of general type of instrument
and the challenge addressed. Note that the following slides focus on blended instruments rather than
standard debt and equity structures, and “private investors” refers to all types of purely commercial capital.
By instrument type: By agricultural risk (Dalberg):
External shocks
Market
risk
Currency
Interest
Political
Credit Agronomic
Market
dynamics
Currency
Commodity
Political
Supply chain
Business model

19. Blended finance sources, instruments, intermediaries & beneficiaries
MDBs, DFIs,
Governments
Donors & governments:
Banks, asset owners,
asset managers,
NBFCs
Private investors:
Foundations, NGOs,
operating companies
Others:
Grants
Concessional
debt
Guarantees &
insurance
Risk-
absorbing
equity
Traditional
instruments –
debt, equity,
mezzanine
Capitalproviders
Instruments
Recipient/intermediary
Clients&intendedbeneficiaries
Fund (CIV)
Bank
MFI
Company
Project /
Syndication /
Securitization
DFI / MDB
Farmers
Agri-SMEs
Women
Youth
Vulnerable
groups
Environment

20. Questions on blended finance for agriculture
1. What are the boundaries to blended finance in agriculture?
2. Risk & maturity: how do we continue to ensure capital mobilization while moving to greater
additionality?
3. How do we support the development of an evidence base for direct leveraging at international,
regional and national levels?
4. How do we balance the challenges of capital demand and supply, and non-financial impacts, by
different stakeholders in agricultural value chains?
5. Investor focus on tight value chains: how can blended finance improve value chain connectivity?
6. What is the role of governments and how can there be greater government ownership on blended
finance for agriculture?

21. Annex
blended finance instruments

22. Technical Assistance
Design grant funding
Performance-based grants
Challenges & prizes
Grants
Typically funded by:
• Governments
• Private investors (companies)
• Donors
• NGOs, foundations
• Donors
• NGOs, foundations
Example applications:
TA to farmers, TA to investment
fund, TA to NBFC
Local operating SMEs,
investment intermediaries
Local companies, governments
Local companies

23. Guarantees & insurance
Typically funded by: Example applications:
Credit guarantees
• Governments
• Donors & DFIs
• NGOs, foundations
• Private investors
Loan portfolio guarantee,
single transaction guarantee
Market & price insurance
• Governments
• Donors & DFIs
• Private investors
Subsidized currency swap,
commodity price hedge
Production-related insurance
• Governments
• Donors
• Private investors
Weather insurance
Payment & performance &
surety bonds
• Governments
• Donors & DFIs
• Private investors
Advance payment obligations,
letters of credit (LCs)

24. Debt / loans / credit
Typically funded by: Example applications:
Repayable grants
• Donors & DFIs
• NGOs, foundations
Repayable grant to a local
NBFC financing smallholders
Impact bonds
• NGOs, foundations
• Donors & DFIs
• Private investors
Impact bond financing coffee
rejuvenation
Rebates • Governments
Rebates to local banks lending
to the agri-SME sector
Subordinated loans
• Donors & DFIs
• Foundations
Subordinated loans to an ag
investment fund
Note: excludes “mainstream” debt instruments such as senior debt, mezzanine debt, bonds, notes,
syndicated loans, credit lines.

25. First loss tranche
Junior equity
Equity derivatives
Equity
Typically funded by:
• Donors & DFIs
• NGOs, foundations
Example applications:
First loss capital into a fund to
support sustainable agriculture
• NGOs, foundations
• Donors & DFIs
Higher risk equity into a
company
• Private investors
Put option on a local
agricultural company / fund
Note: excludes “mainstream” debt instruments such as equity, preferred equity, etc.