In 2004, Kofi Annan, the UN secretary-general, issued a call to action to bring about a Green Revolution for Africa. In the 1960s the original Green Revolution tripled food productivity in Asia, Latin America and the Middle East and helped lift millions of people out of hunger. But nothing of that scale took place in Africa.
While poverty and hunger have been reducing around the world, there are still 415 million people in sub-Saharan Africa who live on less than $1.25 a day. More than 70 per cent of the continent’s poor live in rural areas and the majority depend on smallholdings for their livelihoods. Traditional development financing, which carries the risk of distorting the market, cannot be the sole solution, particularly with populations rising fast in Africa.
In recent years a development mechanism known as an enterprise challenge fund has been successfully deployed around the world. The key word is ‘challenge’. The fund takes on a challenge by supporting a business venture that is unable to access financing from commercial sources. The goal is to support the expansion of innovative private sector companies as a way to boost the incomes of poor people, in a sustainable manner.
If companies are innovative, then why can they not access commercial funding? In a developing or frontier economy, capital for any small or medium-sized venture seen as risky is prohibitively expensive. In rural areas, commercial financing for smallholders is essentially unobtainable.
Yet rural business development cannot be neglected. Most smallholder farmers live on less than $2 a day and they lack basic skills that would enable them to make a living in urban areas. For these people, rural development is the way in which they can be lifted out of extreme poverty. A challenge fund fills a funding gap. It is a vital element of financial inclusion.
A challenge fund is guided by several rules: it should lower the risk for an innovative business by providing affordable capital where no one else would; it must not distort the market by providing financing to companies that could access it from banks or other investors; the business must be committed to working with low-income communities; and it should not develop a mentality of reliance on readily available development funds at concessionary rates.
One of the reasons why millions of smallholder farmers remain desperately poor is that markets do not work properly in rural areas of the developing world. Farmers cannot obtain the inputs they need – such as fertilizer, improved seeds or strains of stock – nor can they easily get produce to market. Mekelle Farms in Ethiopia, the country’s largest hatchery, is an example of how these problems can be overcome.
American business partners established Mekelle Farms after buying shares from a state-owned hatchery that was breeding disease-prone chickens in very low quantities. The average survival rate of locally bred chickens in Ethiopia does not exceed 50 per cent, and these breeds hatch relatively few eggs.
The Africa Enterprise Challenge Fund (ACEF), hosted by the Alliance for a Green Revolution in Africa, of which Kofi Annan is the founding chairman, has enabled the company to expand and improve. Mekelle Farms now breed and hatch an improved variety of chicken that is less prone to disease and more productive. It then sells 40-day-old chicks to smallholder farmers in northern Ethiopia.
As the survival rate of Mekelle Farms chickens is much higher than that of the popular local variety, smallholders earn a higher profit and suffer fewer losses. Smallholders gain access to a premium quality input which transforms them from subsistence farmers into producers with a marketable output. This arrangement is beneficial for all parties involved: the company makes a profit on selling chicks, the smallholder farmer’s income rises and the cost of protein falls, helping to combat malnutrition.
To ensure that the chickens receive proper feed, Mekelle Farms has set up its own soya bean farm. This serves two purposes: to ensure a reliable supply of chicken feed of consistent quality; and to avoid the food price inflation that would result from buying high volumes of soya beans in a relatively small area of rural Ethiopia. It is estimated that Mekelle Farms benefited more than 100,000 smallholder farmers in 2014 alone, increasing their income, on average, by approximately $100 a year.
Another AECF-supported initiative is Mobisol, which sells high-quality home solar systems, enabling people in rural areas to use clean renewable energy where previously there was no electricity or they had to rely on expensive diesel generators. The largest of these household systems can power a small business. By 2019, Mobisol expects to have sold 18,000 solar systems that would generate 4,000 MW hours a year and offset 18 tons of CO2 per year.
The logic of an enterprise challenge fund is for more commercially oriented investors to carry the baton forward and provide commercial financing to successful innovative companies that have received concessionary investment. Mekelle Farms, for example, now relies for future expansion on commercial sources of funding. By 2018, the company is hoping to be producing three million day-old chicks a year for sale to smallholders.
After financing from a challenge fund, typically the business’s next source of finance is either an impact investor – one who while looking for a financial return is also intent on social impact – or a bank. However, most of the funding that is channeled by impact investment funds does not originate from the frontier economy itself. For the moment, it usually comes from the developed world.