Dr Paul Greener, explains the role of challenge funds in stimulating the market to provide solutions to social problems. By investing in innovative ideas of small and medium enterprises in Africa, AECF is promoting agricultural resilience and transformation.
What are the key challenges involved in establishing a new agribusiness in Africa and how can the public sector do more to support entrepreneurs?
The major challenges for entrepreneurs that negatively impact on investments in innovative businesses are access to affordable finance, and the lack of regulatory and physical infrastructure. Bank finance, when available, is usually prohibitively expensive as interest rates are about 30% per year, thus precluding investments by potential investors. In addition, regulatory authorities are under-resourced and take a long time to amend, for example, legislation frameworks to meet business needs.The public sector needs to have a greater understanding of how agriculture is developing. The different value chains require specific interventions, yet the public sector responsible for developing and implementing the legislation is usually behind the curve, and needs to learn what the private sector is doing before creating market legislation.
What is the role of a challenge fund in the overall financing mix required to promote agribusiness in Africa?
A challenge fund is a donor-funded mechanism that provides low or no-cost financing to private-sector actors to meet a social policy objective. It challenges the market to provide solutions to social problems and normally does not interfere in the operations of a business. The small and medium enterprises AECF invests in are small or nascent and thus, unattractive to private equity investors seeking financial as well as social gain from impact investors. The latter seek businesses in the development space with the intention of generating a measurable and beneficial social or environmental impact alongside a financial return.
Once a grantee completes the AECF 6-year funding period, some proceed to work with AECF Connect – a special initiative of AECF that prepares companies to attract additional support from impact investors. SolarNow in Uganda was assisted to raise US $6M in debt and equity for the development of solar electric systems to benefit the rural poor. Another company, Agflo in Ethiopia, was assisted to raise more than US$10 million for poultry development in rural communities.
How has AECF’s focus on agribusiness and climate smart technology helped to promote agricultural productivity and resilience in sub-Saharan Africa?
The Fund has helped introduce new products to strengthen resilience at household and community level. For example, through AECF’s support, Bell Industries has introduced hermetic sealable bags for the post-harvest storage of maize. This enables farmers to store maize without using fungicides or pesticides, ensuring safe supplies of food and allowing storage throughout the post-harvest glut. In 2016, the project reached 62,000 households and generated benefits of on average US $50.
This year, AECF has launched a new household solar competition under its Renewable Energy and Climate Adaptation Technologies (REACT) programme. How will REACT Household Solar (REACT HS) benefit rural communities in Africa?
The Fund is in the process of selecting 10-12 private sector companies through the REACT HS programme to accelerate access to solar home systems, targeting 300,000 rural people in Malawi, Sierra Leone, Zambia and Zimbabwe. Solar home systems are a step up from a simple lantern, with additional features such as phone battery chargers, and are expected to fully replace the use of kerosene and firewood for lighting, as well as power small businesses in rural areas.
What lessons can be learned from AECF and challenge funds to enable the private sector to support Africa’s agricultural transformation?
Challenge funds seek to fund innovative ideas as part of the transformative process. We have clear and distinct roles but we are only part of the solution. Key lessons therefore include having an understanding of the issues throughout the value chains we are seeking to invest in, and the challenges of regulation and government policy. We can develop new ideas but they will never scale and survive if there is no supporting legal frame in which to operate. For instance, there is no point developing high quality inputs if there are no roads to bring them to farmers.
One of the most important lessons for private sector agribusinesses is that capital must be patient – it takes time for ideas to be tested and for results to be achieved. Investment phases are generally long and may be knocked back by unfavourable climatic conditions. The private sector and its needs vary considerably across the continent, therefore there are no one-size-fits-all criteria in terms of competitions and funding types.
The article was first published in Spore Magazine