Towards a Green Revolution in Africa?

1. Towards a Green Revolution in Africa? Presentation by Keith Palmer Executive Chairman AgDevCo 4 December 2009 kpalmer@agdevco.com

2. Africa’s agricultural potential • There has been very little investment in profitable agriculture and agribusiness in Africa despite high potential. Smallholder farmer incomes remain extremely low • Large areas of Africa have suitable soils and climate for successful agriculture • Abundant land, much of it underutilised • Africa was net food exporter - now large net importer • Farm productivity just 25% of global average • Only 4% of land is irrigated (over 30% in South Asia) • Low fertiliser use - severe mining of soil nutrients

3. Constraints on agribusiness development in Africa • Access to suitable land • Agricultural supporting infrastructure – too little and high cost • Access to agricultural technologies? • Too few experienced agricultural entrepreneurs • Market access and oligopolistic supply chains • Poor access to credit • ‘Shadow’ of poor government policies in the past Key problem = lack of profitable opportunities that benefit the poor

4. Three key market failures (I) 1. Co-ordination problem • Interdependence of investments along value chain, with profitability of each link dependent on performance by other links . . . • high supply chain risks increase cost of capital and deter investment

5. Three key market failures (II) 2. Economies of scale problem • Large economies of scale in early • stage development • High average costs over initial • 10- 15 years sub-commercial • returns on investment • But lower average costs over long • run commercial return on • investment Unit cost SRAC LRAC Volume/value of output Time • Economies of scale create strong barriers to entry = little investment • Once barriers overcome sustainable businesses as unit costs fall

6. Three key market failures (III) 3. Financing problem • High greenfield unit costs reduce • expected ROI • High greenfield and country risk • increase required risk premium • High domestic risk free rate Return on investment r f Risk • High early stage unit costs reduce expected ROI • High early stage risks increase minimum required return on investment

7. Three key market failures (III) 3. Financing problem • Many early stage agricultural • investments have sub-commercial • expected ROI given perceived risks . . . • . . . but commercially viable once barriers to entry overcome Return on investment r f Risk • Additional financing constraints: • SMEs/small farmers lack track record/collateral • Weak corporate institutions (governance/contract enforcement/financial controls) • access to finance problematic even when robust business plan

8. Donor Shareholders INFRACO Private Sector Management team Wholly owned locally Incorporated project companies Understanding InfraCo Company limited by shares • Private sector operated, publicly funded infrastructure development company acting as principal (i.e. owner) • Invests in early stage development to create viable opportunities and sells them at financial close to national and foreign private sector • Pro-poor mandate addressed using targeted ‘smart’ subsidies (output based aid)

9. InfraCo’s project portfolio in SSA Ethiopia: wind power Senegal: wind power Kenya: wholesale fresh produce market Mozambique: Beira Agricultural Growth Corridor

10. What is AgDevCo? • Agricultural development company operating in African agriculture and agribusiness sectors • AgDevCo • invests to reduce high front-end costs and risks of early stage project development acting as principal (i.e. owner) • deploys “patient” capital to build and lease affordable agriculture-supporting infrastructure (e.g. irrigation) to commercial farmers and smallholders • mobilises investment from private sector and development finance institutions (DFIs) • develops small farmer development programmes for every investment opportunity that it develops AgDevCo has identified >25 opportunities in agriculture where this approach can deliver sustainable agriculture with major pro-poor benefits

11. Models of Small farmer Development Model 2: Greenfield commercial farm hubs and associated small farmer outgrower schemes Model 1: Develop serviced farm blocks and lease to commercial and small farmers Outgrowers (co-operatives) Bulk water supply Finance Commercial farm hub Electricity Input supply Serviced farm blocks Both models improve access to affordable infrastructure, inputs, markets and finance of small farmers

12. High front-end costs and risks/coordination problem Economies of scale Financing constraints Entrepreneurship/knowledge deficits Invests to reduce front end costs and risks and overcome coordination problem Invests ‘low coupon’ patient capital to create infrastructure and leases it to farmers at LRAC De-risks entry & patient capital & arranges debt/guarantees Recruits/develops local management prior to exit & arranges grant funding to support knowledge transfer How AgDevCo addresses constraints on sustainable agribusiness development

13. Development capital invested pre-financial close “Patient capital” invested at financial close to create infrastructure e.g. irrigation Grant funding for ‘public good’ components incl. small farmer support programmes Recouped with premium when AgDevCo sells down/exits – reinvests proceeds Redeemed with 5-6% coupon over 20 years – proceeds reinvested Grant funding needed for e.g. extension services, training etc. for small farmers AgDevCo financial strategy

14. AgDevCo social and economic impacts High leverage Every $1m of development capital induces not less than $10m of commercial/DFI investment Sustainable businesses. Patient capital is ‘one off’ leaving sustainable agribusinesses over medium term Full value chain. Development of entire value chain maximises farm-gate benefits for farmers Maximum small farmer benefits. Commercial farm/smallholder partnerships maximise benefits for small farmers

15. Chiansi irrigation venture, Zambia (I) Before • Smallholders farm only 20% of productive land, very low yields (e.g. maize 1t/ha) • Very low incomes (c $200pa = <$1/day and poor health outcomes • Crops regularly fail because rains too late…. water available but not accessible • Reliance on food aid in 5 of last 7 years • No electricity, running water, health services etc. in villages • The challenge • To raise massively agricultural productivity and incomes on sustainable basis • To empower local communities to continue to further develop their communities

16. Chiansi irrigation venture, Zambia (II) • The Chiansi Irrigation project is an innovative business partnership between InfraCo and smallholder farmers in the Kafue region, Zambia. • Involves new bulk water assets and infield irrigation systems on 2,600 ha of under-utilised land

17. Chiansi irrigation venture, Zambia (III) InfraCo’s role • Agree commercial structure with local communities (took 18 months) • Create commercial farm company and support creation of small farmer cooperatives • Design, costing, procurement and installation of equipment • Finance and implement ‘pilot’ project to prove the concept • Recruit and supervise commercial farm management • Arrange finance and implement full scale project • Collaborate with USAID to implement small farmer support on “market gardens”

18. Chiansi irrigation venture, Zambia (IV) After • Estimated c 400% increase in small farmer incomes, c 15,000 direct beneficiaries • Much improved food security and health outcomes (+ food aid savings) • Supply chain benefits – cheaper and more reliable access to seeds, fertiliser etc • Indirect benefits – boost for demand of local enterprises, improved housing, access to village electricity, clean water, health services etc • Financial returns over 15 year period are sub-commercial • Requires one-off investment of “patient capital” ($12m) to fund start-up costs • Thereafter sustainable with no further requirement for patient capital • Economic returns are much higher than financial returns

19. Clearing the land February 2009

20. Pump station installed April 2009

21. Irrigation of the first wheat crop June 2009

22. First wheat crop ready for harvest Oct 2009

23. Bagging of wheat harvest Oct 2009

24. AgDevCo - Replicating and scaling the model • Many other opportunities to replicate and scale the model have been identified • Currently rolling-out initial portfolio of projects – Mozambique, Tanzania and Zambia

25. Towards an African Green Revolution? • The G8 is calling for urgent action to address a looming global food crisis • Africa need not import food – it can be a major food exporter • Sustainable agriculture/agribusiness is best way to boost growth and reduce poverty • ‘Take-off’ will require significant amounts of ‘patient capital’ to overcome barriers to entry • AgDevCo interventions will be necessary to convert the potential into reality on the ground

26. For further information www.infraco.com www.pidg.org www.agdevco.com