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Notes on Africa

For those with a hearty appetite for risk, the rewards of investing in African agri can be enormous, says consultant Emma Cowan of Cardy-Brown. But be careful where you tread and with whom.

For those with a hearty appetite for risk, the rewards of investing in African agri can be enormous, says consultant Emma Cowan of Cardy-Brown. But be careful where you tread and with whom.

Since my first project in East Africa in 2010, I have been repeatedly approached by banks, private equity funds and private investors all asking me to help them find projects to invest in.

Typically the desired project involves an investment minimum of $10 million into a business which already has at least 3 years of operation under its belt, plus a return on investment of above 15 percent! So it has been a steep learning curve for many of us.

Preferred locations tend to include Kenya, Ghana, Tanzania and even Nigeria. North Africa and South Africa are both almost viewed as separate continents from sub-Saharan Africa.

While working in various projects, I have discovered, often the hard way, the various pros and cons of investing in African agriculture.

The good news: Africa is growing incredibly fast

“Population growth is about to step up a gear: the population of sub-Saharan Africa is projected to reach more than 2 billion or 22 percent of the world total by 2050. By 2080, sub-Saharan Africa will be the only region in the world with a population that is still growing. All other regions are projected to experience a slowdown in population growth and eventually a shift towards negative growth, as is already seen in some European countries,” the United Nations Department of Economic and Social Affairs said in 2013.

Africa’s population is also very young in comparison to most other countries in the world. That young, rapidly growing population accompanied by some of the fastest GDP growth rates in the world. See chart 1 below, which also includes Germany as a comparison.

Chart 1

Screen Shot 2015-02-18 at 11.43.49

 

Source: World Bank (click to enlarge)

Surely this rapid growth and a population where nearly 50 percent are under 14 years old makes these countries some of the most exciting for investors? Where else in the world can you find dynamics of such scale?

And since the role of agriculture in Africa is huge – the sector is the single biggest employer of people in Africa (see chart 2 below) – surely African agriculture is where investors want to be?

Chart 2

Source: CIA World Factbook

The bad news: growth is big but so is the risk

According to the World Bank’s ‘Ease of Doing Business’ ranking, the selected African countries versus Germany look like this:

Ethiopia 132
Ghana 70
Kenya 136
Nigeria 170
Tanzania 131
Uganda 150
Germany 14

Source: World Bank

I have witnessed corruption in many locations from Ukraine to Brazil. But the most painful part of my education on arrival in Africa was the breathtaking level of corruption and the complete lack of any legal infrastructure.

Most of this corruptions begin at the very highest levels of government and trickles down into the countries’ elite and well-connected. It is fair to say that GDP growth is happening in spite of governments, not because of them. A growing middle class in all of the countries is ferociously chasing education and clawing its way out of poverty. For those unable to access education, many are trapped in poverty and their governments do little to help them; in most cases minimum wage growth is miniscule in comparison to inflation.

The potential for civil unrest is a major risk for investors. And it can be incredibly bloody as shown by the 1994’s genocide in Rwanda and Kenya’s 2007 election violence.

There are some tools to mitigate these risks, however, such as sovereign and political risk insurance from the Multilateral Investment Guarantee Agency (MIGA).

Bureaucratic risk

Bureaucracy is the next investment risk, although it is hard to separate this from corruption in these countries. Land is highly emotive in Africa and despite the enormous scale of these African countries, access to land is very tightly bound up in deeply bureaucratic processes. They are designed to the protect the countries’ natural resources from evil colonisation, but ultimately end up providing a source of “extra income” for the bureaucrats tasked with controlling land allocations.

Tanzania is one of the worst because its vast swathes of land with plentiful water and good soil are tied up in endless queues of cronies waiting for their ‘chi kidogo’ (Swahili for ‘under the table payments’) in return for ‘help’. I know of several investment funds that are looking to access large tracts of land that they will never get.

Cheap or free cash from the donor and non-profit industry has encouraged this level of corruption. Donors, measured by their benefactors in ‘impact’ terms, often pump money into businesses that appear to have the potential to impact the poor populations but in practices become addicted to these cash injections and fail to develop a commercially-viable business. Then the impact is lost.

It is difficult to estimate the total number of dollars entering Africa as ‘aid’ or ‘donor money’ (some estimated $30 billion in 2014) but as an example of the scale, aid money represents approximately 12 percent of Tanzania’s GDP.

Development finance institutions are looking for African agribusinesses and projects to back, but this is a challenge for some, like the International Finance Corporation that wants to maintain its AAA credit rating while at the same time being under pressure to lift millions of Africans out of poverty.

Many of the businesses that institutions like IFC might normally back are already on a diet of donor funding and others are so inherently corrupt that they would taint credit ratings and more. Furthermore, African agribusinesses that are developing and do have appropriate scale for investment funds are able to tap favourable financing from local banks, so there is little room left for private equity.

The physical risks of investing into African agriculture include the changing weather patterns. Rainfall patterns are shifting and the risk of drought and floods is constant. Irrigation is a must, crop insurance is in its infancy here. Disease pressure on both livestock and crop is heavy – there is something quite primal and aggressive about the incredible level of infection in these countries. Local breeds and varieties should not be entirely thrown out in favour of modern western ones which simply will not have the hardiness to survive. On the flip side, hardiness often comes with low productivity, so combining the two would present an appealing oppprtunity.

Models that work

Africa has an abundance of smallholder farmers all looking to move on from subsistence farming to cash crop production. The best examples of models that work include a central company facilitating smallholders to either access micro finance, routes to market via logistics and/or process smallholders’ crops to add value to their production from their plots. Other models which have had some levels of success are co-operatives.

For those with a hearty appetite for risk, the rewards can be enormous. Ultimately local knowledge and networks are extremely essential. This, combined with people you can trust, is a golden and rare combination, however entering these markets without this insight is suicidal for projects. There are specialties and sectors that Africa offers which are crying out for investment – Arabica coffee, nut processing, quality beef processing. There is also great opportunity in supplying the new consumers of Africa’s middle classes who desire everything. There is also untapped opportunity producing and exporting for the speciality Middle Eastern markets. But be careful where you tread and with whom.