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Africa: appeal to DFIs and institutions will follow

Attracting investment into Africa is not straightforward and there is no clear solution. But appealing to DFIs is a good place to start; the institutions will follow eventually.

“Agriculture is the next economic frontier for Africa,” Ben Lonmin, chief executive of mining company Lonmin, told delegates at the London Business School’s recent African Business Summit.

The continent’s potential is enormous; it holds 60 percent of the world’s uncultivated arable land and agricultural output is expected to increase by 78 percent to $500 billion by 2020 and $880 billion by 2030, according to the African Development Bank (AfDB).

Louisa Burwood-Taylor, Editor, Agri Investor
Louisa Burwood-Taylor, Editor, Agri Investor

But investment into the sector, and the continent more widely, has been limited. Attendees at the LBS summit agreed that there is no straight answer to how to attract funding.

In fact attracting capital from different types of investors has often meant taking a different approach to appeal to all sides, but it doesn’t always need to.

Development finance institutions (DFIs) and non-governmental organisations are interested in the wider impact of investment to the industry as a whole, whereas the vast majority of institutional investors are predominantly interested in the economic returns they can get and the risks involved. One placement agent cynically went further to say that the inclusion of ESG principles in an African agriculture investment can even be off-putting.

“The immediate reaction is that this is money down the drain and that they are giving up something economic to achieve something laudable,” he said.

Paddy Docherty, chairman of Phoenix Africa Development Company, does not deny that his Sierra Leone rice farming project will have a positive impact on the local community, but he is quick to assure that this is not at the cost of the project’s 30 percent plus returns. “Phoenix Africa is committed to an enterprise development approach,” reads the website. “This is defined, at its simplest, as making development pay.”

But fund managers should not shy away from beefing up the wider positive impact that their funds can have to appeal to the DFIs and it doesn’t have to cost anything — one suggestion at Agri Investor’s Last Thursday drinks was to hire a certain number of women onto a project. Or for the AfDB, enhancing a project’s environmentally sustainable credentials could go a long way; the bank just released a 94 page report emphasising the importance of green growth. It’s about helping them to tick certain boxes.

While institutional investors may prefer fewer bells and whistles, the existence of a DFI in a fund is hugely encouraging and removes much of the risk in these types of investments. “You can’t play naughty if a DFI is in your fund,” said a placement agent.

And taking a sustainable and impactful approach to agriculture in Africa is just good business sense. Old Mutual African Agri Fund invests in the local community, building schools, housing and healthcare facilities for the farm workers. This will help to prevent worker absences; a big problem in parts of Africa is the frequent turnover in labourers because they require constant training.

Creating an infrastructure like this is by no means a wasted expense and institutional investors will soon realise this, not least to help avoid any negative headlines around issues such as land grabbing that have befallen institutions investing in Africa in the past. Investing alongside a DFI should do a lot to mitigate these claims.

As Lonmin said during his keynote address, it is essential to ensure that African people have a fair share in the action; that every stakeholder benefits because this will incentivise them. This will require leadership, he added, and there is no reason why investments firms cannot be seen as such leaders.