The African Development Bank (AfDB) estimates that Africa needs approximately $45 billion annually to transform its agriculture sector. This estimate includes investments in infrastructure, technology, research and development, and capacity building. Cumulatively, the amount of investment needed to finance food systems in Africa by 2030 is in the north of USD 315 billion. This huge investment opportunity in agribusiness is backed by a growing demand for food locally; which results from the 2.5% annual population growth rate in Africa. It is estimated that the population in Africa will grow from the current 1.3 billion to about 1.7 billion people by 2030.
Recognizing this financing gap, the Comprehensive Africa Agriculture Development Programme (CAADP) in the 2003 Maputo Declaration set a target for African countries to allocate at least 10% of their national budgets to agriculture. This was later reemphasized in the 2014 Malabo Declaration under commitment 1 on “Enhanced Investment in Agriculture”. While this percentage serves as a benchmark, the actual financial commitment needed varies from one country to another based on its economic circumstances, development goals, and the size of its agricultural sector. The country specific commitments notwithstanding, the average budgetary allocation to agriculture across Africa has remained below 5%.
With public sector financing for the agricultural sector remaining way below the desired levels, interventions by development partners have been trying to fill in the gap over the past several decades. However, the funding from development partners is also negligible compared to the USD 45 billion investment needed annually across the continent. This then leaves the private sector as the ultimate source of financing for food systems in Africa; with an estimated minimum contribution requirement of at least 75% to the annual investment needed.
Unlike the public and development sector actors who are more focused on the overall economic development agenda for a given country, private sector players prioritize returns on their investments. Therefore, to attract significant investments into the food systems from the private sector investors, Africa has to build a business case for the agricultural sector. The highest limitation to private sector financing for agriculture is the real and perceived high-risk associated with the sector; especially in primary production. We posit that the implementation of solutions geared towards mitigating the risk factor in food systems with lead to an increase in private sector investor appetite for agribusiness across the continent.
The annual food import bill for Africa is expected to grow to about USD 110 billion by 2025; from USD 35 billion in 2015. As the population continues to grow across the continent, the upward trend on food imports bill is expected to persist; unless private sector investors inject their capital into the agriculture sector in Africa. An import substitution strategy through large scale farming provides a low-lying fruit for investors who would like to venture into the agribusiness sector. However, the public sector has a responsibility to create a conducive business environment locally for the investors. This cuts across various factors including developing supportive regulations, strong judicial systems that uphold the rule of law, peace and security guarantees as well as installation of core infrastructure in the transport and energy sectors.
While large scale farming projects could accelerate the path towards food security in Africa; estimates show that about 80% of the food consumed in Africa is produced by smallholder farmers. Therefore, an investment thesis for the agriculture sector in Africa has to take into consideration this reality of local farmers with small parcels of land who farm different products; and in most cases for subsistence consumption.
A value chain approach becomes a viable strategy to solve this challenge; whereby the smallholder farmers are aggregated into farmer groups and then linked to specific value chains depending on the products they are farming. Through a hub and spoke model, farmer groups are linked to aggregators who supply them with inputs and provide agronomy support as well as post-harvest management solutions. The aggregators could be large off-takers who do value addition for raw materials from the farms, large distributors to local markets or exporters targeting markets abroad. Under this strategy, the investment case is anchored on the aggregator who then builds a sustainable supply chain downstream; hence ensuring that the smallholder farmers are benefitting from the capital injections into the agriculture sector.
It is important to note that financing food systems in Africa requires a collaborative effort involving governments, the private sector, development partners, and civil society organizations. It is a long-term endeavor that requires sustained commitment to achieving food security, reducing poverty, and promoting sustainable development on the continent.
Author: Jeremy Riro