By Kathleen Kirui
The potential for agriculture to reshape Africa’s development cannot be overstated. It remains crucial for socio-economic growth in all Sub Saharan African countries. However it still faces a number of constraints, and key among them is insufficient investment in a sector that is currently struggling with addressing climate change impacts. Public and private investments in agriculture are well below minimum thresholds for development targets, due to high transaction costs and the risks associated with the sector.
Smallholder farmers and agribusinesses across Africa mostly informally funded, either from the farmers’ or entrepreneurs’ own pockets or through loans from friends and family. This greatly affects their productivity thereby exacerbating Africa’s vulnerability to food insecurity. It also greatly decelerates its socio-economic growth as the continent’s food import bills keep increasing.
The need to increase investment in agriculture is evident. With declining donor aid and government funds in SSA, it is clear that traditional approaches to investment are not sustainable. The competitiveness of African agriculture pivots on finding new and innovative ways to finance the different segments of the value chain. The sector will not achieve desired growth if it continues to rely on public sector support and grants.
The need for private investment and expertise to help unlock the potential of agriculture is widely recognized. Impact investment funds are fast becoming the vehicle of choice for governments and donors looking to invest in African agriculture. This way, governments play a catalytic role in reducing poverty by attracting and leveraging the private capital. This is known as blended finance.
Blended finance is a mix of public, philanthropic and private capital to achieve a specific social or environmental impact, as well as a financial return. The importance of this combination is to have the non-commercial capital/funds mainly from the public and philanthropic partners shoulder more of the risk for no or low returns. The purpose is to encourage and leverage larger volumes of private funds into markets where risks are high and financial returns uncertain. However, these markets have the possibility of major positive social impact.
In a sector that desperately needs investment, it is a welcome blueprint for models that could be scaled and adapted. With agriculture investment in Sub-Saharan Africa estimated as being 11 times more effective in reducing poverty than investment in any other sector, a blended finance fund focused on smallholder farmers and Micro Small and Medium-sized Enterprises (MSMEs) agribusinesses could make a major contribution to food security, economic growth and poverty reduction, while demonstrating that agriculture can be a profitable business. The Africa Sustainability Centre (ASCENT) is doing its part by helping national governments create valuable alliances with investment partners through project design. Tapping into their area of focus, may it be agriculture, biodiversity, climate change or other sustainability objective, helps to limit the burden on the project developer. The expertise accrued in their domain translates into better risk management, limiting the extent of risk exposures in the intervention area.