August 27, 2010 / 11:09 AM / 9 years ago

COLUMN-African agricultural finance under the spotlight

— Keith Mullin is Editor-at-Large, IFR, a Thomson Reuters service. The opinions expressed are his own —

For a Factbox on funds raising capital for African agriculture, click: [ID:nLDE67Q0XV]

By Keith Mullin

LONDON, Aug 27 (IFR) - Africa is turning into a fashionable post-crisis investment destination as investors regain their confidence and start to focus on the continent’s lack of direct involvement with the global market’s volatility drivers and trouble hotspots.

There has been a veritable wave of Africa-targeted private equity and hedge funds raising capital this year and last, and they are receiving healthy interest from public-sector and private sponsors.

Africa is benefiting not only from a resumption of international debt and equity flows; it is also a beneficiary of international efforts to maintain trade flows — 45 issuing banks from 27 countries in sub-Saharan Africa have joined the International Finance Corp’s trade finance guarantee programme.

At the same time, bilateral and multilateral development agencies are actively investing via an assortment of public and private-sector channels; and the international capital markets pipeline is building — with sovereign debt offerings on the docket or in discussion for Angola, Cote d’Ivoire, Kenya, Nigeria, Tanzania, Uganda and Zambia, and Libya is believed to be looking.

Investors are focusing broadly on Africa’s relative political stability, improving governance, a more conducive policy and regulatory environment, and more transparent foreign investment regimes.

At the macroeconomic level, above-average growth and low levels of government and corporate indebtedness add to the appeal. What’s key to much of the capital flowing into Africa is that it is supplemented by a support network of capacity building, advisory services, training, technology transfer, and infrastructure benefits.

From a sector diversification perspective, the emergence of new technologies such as mobile telephony and Internet broadband is creating interest beyond the traditional natural resource plays; the telecoms and services sector was the dominant Africa FDI recipient in 2009.

In its World Investment Report 2010, UNCTAD noted that Africa still trails at the bottom of future investment destinations relative to the rest of the world. But that could be about to change as foreign governments and private investors reset their investment horizons and start to look at Africa from a different perspective.

Africa has an abundance of one commodity that is becoming ever more fiercely fought over: cheap arable land. This has unleashed a surge of agricultural investment.

Talk that the African Agricultural Land Fund, established by London-based hedge fund Emergent Asset Management and South African agricultural traders Grainvest, is heading towards 3 billion euros sums up the bullish mood.

As well as dedicated private equity and hedge fund players, commodity traders are circling the market; Armajaro, one of the world’s biggest cocoa traders, is believed to be planning a private equity fund this year to acquire land, storage and transport infrastructure.

PRIVATE SECTOR FOCUS

The focus of much of the new inward investment into agriculture is rightly on the private sector and on small and medium-sized enterprises, which have previously had little access to external finance. This approach is supported by the African Union’s Comprehensive Africa Agriculture Development Program (CAADP), established under the AU’s New Partnership for Africa’s Development (NEPAD).

One of CAADP’s aims is to raise the capacity of private entrepreneurs in the quest to build dynamic agricultural markets. African leaders have set themselves a goal of turning the continent into a net exporter of agricultural products by 2015.

At the G20 Toronto summit in June, leaders committed to exploring “innovative, results-based mechanisms to harness the private sector for agricultural innovation”.

The Global Agriculture and Food Security Program (GAFSP), the multilateral financing mechanism, has a private-sector window to channel private investment into small and medium-sized agribusinesses and farmers in poor countries.

To get banks lending to the agriculture sector, the IFC, the World Bank Group’s private sector window, established the Africa Agriculture Finance Project (AAFP), an advisory and investment programme. AAFP kicked off last year in Zambia and plans are afoot to widen it with up to 15 projects in the Central African Republic, Democratic Republic of Congo, Ivory Coast, Malawi, and Nigeria, among others.

Nigeria is pushing ahead with its own scheme. In mid-August, the central bank (CBN) and Kofi Annan’s Alliance for a Green Revolution in Africa (AGRA) unveiled the Nigerian Incentive-based Risk Sharing System for Agricultural Lending (NIRSAL), a mechanism they say will help unlock billions of naira of financing to serve the needs of farmers, especially smallholders, agro-processors, agribusinesses and input suppliers in the agricultural value chain.

AGRA and CBN will work with commercial banks in Nigeria to develop financing mechanisms aimed at providing farmers with affordable financial products, while reducing the risk of loans to farmers under other financing programmes offered by financial institutions. NIRSAL will build capacities of banks to expand lending to agriculture, deploy risk-sharing instruments to reduce the risks of lending and develop a bank rating scheme to rate banks based on their lending to the agricultural sector. Agriculture accounts for 40 percent of Nigerian GDP, yet the sector receives only 1 percent of commercial bank loans.

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