There is no doubt that Africa has great potential to become an agricultural superpower. Sixty-five percent of its workforce is employed in agriculture and the continent is home to nearly two-thirds of the world’s uncultivated arable land.
Demand is high: African countries run a $35 billion food deficit, while many countries are looking to Africa to feed their growing populations. The biggest private equity investment in East Africa – KKR’s $200 million investment in Afriflora, the Ethiopian rose farmer – is in agriculture. Another Ethiopian success story is Saudi Star, a rice farm aimed at exporting to Saudi Arabia which has received $200 million in financing from its owner since 2009.
However, investments of this size are rare. Delegates at the 2015 Global African Investment Summit in London last December said it was easier for African businesses to raise $100 million in funds than $10 million, as there is enough investment appetite but not enough large opportunities for traditional PE firms. This is visible across Africa, and in the past two years private equity houses raised about double the amount that they actually invested.
The fragmented market means that it is the investors with more specialised agriculture know-how who can facilitate partnerships between larger farms and smallholders. The current landscape favours investments with a 10- to 20-year planning horizon of about $10 million-$50 million.
To realise the continent’s potential and attract finance on a larger scale, countries need regulation and policy improvements that help local farms improve efficiency and co-operate with larger agribusinesses.
Regulatory and policy change is happening, but progress has been slow. A recent PwC report compared Africa’s agricultural potential to Brazil’s 40 years ago. Difficulties facing investors include lack of infrastructure, limited fertiliser use and poor seed quality in addition to problems like corrupt bureaucracy and uneducated labour.
Low quality infrastructure, including storage facilities, causes a loss of up to $4 billion in grain each year. Governments including Ivory Coast and Zambia have committed to improve agriculture infrastructure, but these won’t materialise until the mid to long term, KPMG says.
Average fertiliser use is 8 kg a hectare, compared with the international average of 107 kg. Limited fertiliser use is due mainly to the lack of resources and know-how. But Kenya, Ghana, Zambia and Ivory Coast are having some success in incentivising fertiliser use through faster and cheaper importer registration procedures as an alternative to using subsidies, the World Bank says.
Improved seeds account for about 30 to 50 percent of productivity increases for farmers. Seed registration allows access to new seed varieties, and incentivises private sector involvement by protecting breeders’ intellectual rights. Kenya and Tanzania are examples of best practice; along with South Africa, they are the only two sub-Saharan Africa members of the International Union for the Protection of New Varieties of Plants.
However, faced with commodity price falls, governments are set to move agribusiness up their agenda; regulatory improvements should follow. Investors might want to get their foot in the door early to take advantage.
Juraj Neuwirth is an associate with law firm Norton Rose Fulbright in London. A version of this article appeared on our sister website Agri Investor