Blog: CASA associate Jon Burns from the Springfield Centre explores how risks associated with investment in agriculture can be reduced whilst acknowledging the challenge of investment readiness, drawing on evidence from Malawi, Nepal and Uganda…
To answer this question CASA has been reviewing what is happening now, and exploring what we need to do to stimulate investors to consider the agribusinesses we are partnering with as being ‘investment ready’. This will inform how CASA will engage with national domestic commercial investor networks.
CASA is engaging with in-country investors in our focus countries of Malawi, Uganda and Nepal.
This enables us to link investors to the business plans of agribusinesses, acting as intermediaries and brokers.
So, what are the challenges?
The challenge of investment readiness
Commercial investors think that investment in agriculture is very high risk. But what we can do to reduce the risk and change the thinking? At the top of the list of investment flow constraints is the lack of ‘investment readiness’.
For us, ‘investment unreadiness’ is a lack of management or marketing experience, limited or no financial skills, limited or no product differentiation, inconsistent output quality or volumes, limited processing opportunities and skills, and an inability or unwillingness to pivot from lifestyle to growth business models.
The level of investment required is very often less than commercial investors are willing to lend. In some instances, national governments have incentivised (or obligated) investors to focus on the agriculture sector. Where this is happening, the tendency is to invest in established growth models towards the top of the value chain, often where the most value addition occurs.
Lack of management competencies and grant reliance are constraining investment in Malawi
In Malawi, market players are not oriented towards commercial funds. This is partially due to many years relying on grant funding. Loans do not appeal, and most agri-businesses opt to borrow from family and friends.
Among medium-sized players, there are signs of increasing demand for commercial domestic funding. Feedback suggests that risks could be lowered to an investment level if the lenders could be assured of potential investees’ capability to manage, and repay, loans. In other words, that they are ‘investment ready’.
Our initial assessment concludes the top four constraints to investment readiness in Malawi are:
- lack of management competencies
- inappropriate attitude – still expecting free money
- low level of financial reporting
- and very limited business planning skills and experience.
Local challenge funds are attempting to de-risk the standard lending model. The latter is characterised by high use of collateral and guarantee requirements, resulting in a ‘crowding out’ of most players, in an already thin market. It is possible to find money locally, but the challenge remains: accessing it, through investment ready businesses.
Need to better align Uganda agribusinesses with commercial money
In Uganda, the challenge is addressing the increasing demand, from investors, for investment ready players. The focus in on getting businesses ready to qualify for loans. The main constraints are a lack of management and financial capacity, and very limited equity.
Non-traditional lenders, such as social impact investors and social lenders, are active. Many businesses are still seeking grants. Our focus is on business scalability, management structure and process and product innovation.
Agriculture is not a traditional lending market. Some credit finance is available, but turnaround times require a level of readiness which does not currently exist. The main local commercial investors are providing trade and debt finance. Equity is significantly less well established. Collateral is nearly always required, and this is a constraint. There is substantial demand for warehouse investment. Many of our partners are targeting warehouse and machinery investments. Markets and businesses are growing and now is the time to align growing business with local commercial money.
Viable business models are critical to changing behaviour in Nepal
In Nepal, there is only a very small agriculture-processing industry, so there is little or no investment in agriculture value chains. The main investment constraints are the small size of loan required and meeting lender requirements (particularly collateral). Debt finance is not focused on the SME agriculture market, although some investors are now ‘ring fencing’ up to 10% of available funding for the sector.
Agriculture is protected in Nepal. Foreign investment is prohibited in the dairy sector and investment in the vegetable sector is limited to processing. Collateral requirements and personal guarantees are barriers for most players.
The constraints to investment include limited management and leadership competency and product quality and consistency. Large market players are limited in number and output aggregation does not happen. The supply side is thin and there are few appropriate financial instruments on offer. Local commercial money is not targeted at our sectors, so demonstration of viable business models, to change behaviours, is critical to success.
CASA will engage with investors and advocate for reforms to benefit agribusinesses
We are developing engagement plans in Malawi, Nepal and Uganda, to target the key influencers. From this, engagement and advocacy mechanisms and tools will be established. For example, the expansion of existing country advisory groups, to comprise a wider set of sector influencers, including Foreign, Commonwealth & Development Office country officers.
We will engage in national strategic communication exercises. This will enable us to share examples of value creation and evidence with a broad range of investors, including government and donors, increasing investor awareness of opportunities. It will ensure networks, linkages and initiatives are shared and will aggregate towards events for lesson sharing, via demonstrated case studies. The exercise will result in a national landscape map of relevant investors.
For each country we will list prioritised target investors for engagement activities which will help broker investment deals. We will support prioritised target investors to develop engagement strategies that provide profiles of investment ready agribusinesses. We will leverage these networks to advocate for reforms that benefit agricultural SMEs.
Creating a pipeline for investment opportunities
We recognise the need to deliver sustainability at scale. We will target local investment promotion agencies, via business-enabling environment initiatives that create a quality pipeline for local investors, promote sector specific information to drive investment opportunities, create opportunity guides for agriculture sector opportunities, and inform investors on SME opportunities. We will actively participate in smallholder investment summits.
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For further information download: Bridging demand and supply of private investment capital: for small and medium agribusinesses
About the author
The CASA programme is a flagship programme of the UK Foreign, Commonwealth & Development Office (FCDO) and is intended to increase global investment in agribusinesses which trade with smallholders in equitable commercial relationships, increasing smallholders’ incomes and climate resilience. The programme aims to help agribusinesses to scale up and trade in larger commercial markets. As part of its work CASA generates new evidence and analysis that supports a stronger, fairer and greener agribusiness sector.