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From: Berhane Habtemariam (Berhane.Habtemariam@gmx.de)
Date: Fri Oct 29 2010 - 05:33:39 EDT
Private Sector Interest Grows in African Farming
By CAROLINE
<http://online.wsj.com/search/term.html?KEYWORDS=CAROLINE+HENSHAW&bylinesear
ch=true> HENSHAW
* OCTOBER 29, 2010
Mounting concern over security of food supplies is spurring a wave of
private-sector investment in Africa that many hope will put it at the center
of a green revolution.
"People are realizing the potential of agriculture," says Lucy Muchoki, head
of African business coalition PanAAC, which encourages investment in the
continent's agricultural sector.
To meet growing global food demand the United Nation's Food and Agriculture
Organization estimates an extra six million hectares need to be brought
under cultivation every year for the next 30 years. With sub-Saharan Africa
estimated to hold up to 60% of the world's remaining uncultivated land
suitable for farming, the region's agriculture is starting to look an
interesting investment.
"Africa has come of age," says David Mirrin, co-founder of U.K.-based
Emergent Asset Management, which has investments in 14 countries in
sub-Saharan Africa.
To be sure, hopes for Africa's agriculture sector have been dashed before.
Weak rule of law, political instability and prohibitive trade policies have
teamed up to keep productivity low and chase away investment. Today, yields
in sub-Saharan Africa are about a third of the world average at 1 ton per
hectare, highlighting the potential challenges-and opportunities-for
investors.
Already investors are waking up to Africa's potential. Forty-five private
equity firms plan to invest $2 billion in the region's agriculture in the
next three to five years, according to figures from Informa Agra, and
consultancy McKinsey estimates the continent's agricultural output could
treble from $280 billion a year today to $880 billion by 2030.
Mr. Mirrin says Emergent's African Agricultural Land Fund has seen a surge
of interest from institutional investors. Founded almost four years ago, the
fund claims to be one of the first to invest in the potential of Africa's
farmland and targets risk-adjusted returns of 25% per year from production
and land price appreciation.
Diversified across crops, biofuels, livestock, game farming and timber, the
fund aims to profit by increasing yields through using modern farming
techniques, investing in technology-only 2% of African farmland has any
irrigation system in place-and generating economies of scale by aggregating
smaller farms.
Foreign buyers have turned their eyes to Africa's farmland before. After the
commodity crisis of 2008, when record food prices caused widespread rioting
around the developing world, many importing countries bought up vast tracts
of land in poorer countries as a means of securing future supplies.
But while the so called "land grab" of previous years proved to be
politically divisive-in Madagascar contributing to the downfall of the
government after it leased an area the size of Connecticut to Korea's
Daewoo-very little has been grown.
Although investors expressed interest in 30 million hectares of farmland in
sub-Saharan Africa during 2009 alone, compared to an average of four million
hectares a year worldwide in the previous decade, only one fifth of these
projects have started production, according to a World Bank study and in the
countries where projects have begun, including Mozambique, Zambia, Sudan and
Madagascar, yields have been only a quarter what was expected, the study
found.
Sindiso Ngwenya, chairperson of the Common Market for East and Southern
Africa, an African trade bloc, says many projects failed because they were
based exploitation of a cheap labor force without addressing many of the
structural issues that hindered the development of the sector.
"You end up with an enclave economy, prosperous on cheap labor in the
countryside without integrating the locals, and this can lead to future
conflicts," he says.
But now private sector investors seek to change this. Instead of treating
Africa's land and people as a resource to be exploited, entrepreneurs from
the developed world are looking to work with the continent's 80 million
smallholder farmers to build mutually profitable partnerships.
Hugh Scott, director of the Africa Enterprise Challenge Fund, which receives
money from a number of development-oriented sources to use to encourage
private sector enterprise in Africa, says that, while governments play a key
role in providing a fertile investment climate-including transparent justice
systems, simpler bureaucracy and reliable infrastructure-only the private
sector can empower local farmers to boost output and ensure sustainable
markets.
"Business is for business-small farmers in Africa are small businessmen,"
says Mr. Scott
Created with money from the Rockefeller Foundation and the Bill & Melinda
Gates Foundation, as well as governments and the World Bank, the fund
provides for-profit private sector companies looking to work in Africa with
kick-start grants of between $150,000 and $2.5 million, which they must
match with their own money. So far, it has committed $32 million to 40
business deals, leveraging about $150 million from the private sector, and
it expects to commit funding to a further 10 projects by the end of
November.
"We're looking to create projects others will copy, that will change the way
market systems work," says Mr. Scott. "By doing this with for-profit
companies, hopefully they will be there in 10 years."
He points to one AECF-sponsored project with SAB Miller in southern Sudan as
an example of how business investment can create structural change. Although
the international drinks producer already had a brewery in the country, it
had relied solely on barley imports for its brewing. Working with $842,000
from AECF and $2.1 million of its own money, the company has now built up a
network of 5,500 smallholder farmers that will supply it with cassava-an
African root-as an alternative ingredient for making beer for years to come.
Mima Nedelcovych, a former US Executive Director of the African Development
Bank and board director of the Partnership to Cut Hunger and Poverty in
Africa, said if governments want to encourage a sea-change in investment,
they need to foster a productive environment themselves. "The
agro-industrial side can always be financed because it can handle
shorter-term loans," he said. "But developing infrastructure and putting in
irrigation requires longer term soft money."
As a partner in U.S.-based professional services firm Schaffer Global Group,
Dr. Nedelcovych has developed one of the largest public-private agricultural
investments in Africa, the Markala Sugar Project-a 20,000 hectare
public-private partnership between Mali's government and Africa's largest
sugar producer Illovo, a subsidiary of Associated British Foods.
Located on the Niger River, the project was jointly funded by Illovo Sugar,
Schaffer, Malian private investors and the government and will be managed
and operated by Illovo. The mill and sugar estates will produce around
200,000 tons of sugar a year, create 8,000 permanent jobs, thousands of
temporary seasonal jobs and will produce around 10% of oil-dependent Mali's
energy needs.
Key to the success of the project is the strength of Mali's sugar market,
which consumes around 160,000 tons of sugar a year, leaving 40,000 tons to
be exported into the West African regional market, said Dr. Nedelcovych. He
argues that for African agriculture to prosper, local markets need to be
strengthened to provide a home-grown impetus for development and support
more profitable processing industries.
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