Tapping into the agribusiness potential for Africa’s prosperity
The significance of agribusiness for wealth creation in Africa has been widely recognised in recent years. GDP growth alone, based chiefly on exports of oil, minerals and agricultural commodities with little or no processing involved, has not led to sustained poverty reduction. In order to accelerate sustainable growth and development, a rural transformation process is needed to raise the economic value of agricultural commodities and create off-farm employment opportunities for is areas such as post-harvest processing, logistics, finance, marketing or quality management. Farming should be seen as a modern industry with distinctive scientific, technological and management inputs: the focus of development assistance must move beyond agriculture, towards agribusiness.
A changing global economic space
Robust economic progress since the turn of the millennium resulted from high commodity prices in resource-based economies, and is poised to continue over the foreseeable future. Across sub-Saharan Africa incomes per capita increased by a factor of 2.5 in the eight years to 2010, life expectancy at birth rose by four years, while 12 percent more children completed primary education.
Yet the region remains mired in poverty: home to 33 of the world’s 48 least-developed countries, it highlights the limits of a commodity-driven growth path. Investment geared predominantly to oil and minerals brings about the ‘resource curse’ of currency overvaluation, weak linkages to the domestic economy, and the societal stresses associated with a skewed distribution of growth dividends. Meanwhile less than 40 percent of agricultural output is processed, although agro-processing makes for 70 percent of manufacturing value added and nearly half of all exports in most LDCs.
Today’s shortfalls are tomorrow’s opportunities. Adding value to agro-commodities can create jobs and raise rural incomes, as well as reduce post-harvest losses and price volatility, trigger growth in other sectors, and expand domestic markets and foreign trade. Together, these factors will contribute to improved food security.
Agribusiness for Africa’s prosperity
The path to reap these benefits goes through a profound transformation of Africa’s rural hinterland from a subsistence household economy to modern industry, and a shift of resources and functions from farm to firm.
In its 2011 publication Agribusiness for Africa’s Prosperity, the UN Industrial Development Organization (UNIDO) argues for a holistic approach that effectively mobilises a country’s productive potential and addresses preconditions for agribusiness growth by identifying the weakest links of the value chain from farm to market and the binding constraints for policy and investment.
The strategy rests on seven pillars: enhancing agricultural productivity; upgrading value chains; exploiting local, regional and international demand; strengthening technological efforts and innovation capabilities; promoting effective and innovative financing; stimulating private-sector participation; and improving infrastructure and access to energy.
Eight case-studies of African agribusiness value chains revealed that strategies are product-specific, while value chains are typically driven by buyers, concentrated around lead firms. No African company currently occupies a lead position, although some appear as second-tier suppliers in global chains. Local firms across the continent depend on global retailers and branded manufactures. Integrating value chains creates opportunities for smallholder farmers and increases their incomes by 10 to 100 percent across the research sample.
High commodity prices since 2007 brought along windfall profits to exporters, but caused havoc for consumers in food-importing countries. In this context, regional markets represent opportunities for local agribusinesses provided that tariff and non-tariff barriers are reduced. African countries must pursue their participation in preferential trade agreements and Economic Partnership Agreements: with South-North trade hampered by tariff escalation for semi-processed and processed goods in the OECD region, commerce with emerging countries can grow rapidly on the back of tariff reductions and dovetail China’s resource priority with Africa’s processing priority.
However, cross-border trade is impeded by weak physical infrastructure. The internal handling of goods in Africa takes 45 days on average compared to 29 days for Latin America and 13 days for OECD countries. Better air, rail, sea traffic and transportation corridors are required, as are improvements in road transport, border restrictions and information technology.
An enabling business climate is a prerequisite for nurturing private participation in agribusiness through a mix of created competitiveness and inherited comparative advantage; the promotion of private sector development through investment supported by public goods; increasing the efficiency and productivity of local enterprises; and encouraging entrepreneurship by removing legal, financial and structural constraints.
Finally, strong leadership and public governance are more than ever necessary to implement policies that promote openness, macroeconomic stability, high savings and investment rates, and market allocation of resources. Agribusiness policies in particular must encourage the liberalisation of trade and investment, research and extension services, market orientation, social inclusion and environmental sustainability. Such policies will address market failures, promote aid for trade, support public-private sector dialogue and cooperation, as well as coordination amongst actors in value chains, regional integration, exchanges of best practices and South-South cooperation.
Agribusiness needs to ‘go beyond borders’
In a close partnership with the UN Food and Agriculture Organization and the International Fund for Agricultural Development, UNIDO has held a series of international consultations on agribusiness as a means of addressing food security and sustainable poverty reduction in low-income countries. The African Agribusiness and Agro-industries Development Initiative, or 3ADI, reckons that the expansion of the sector requires a convergence of independent initiatives from smallholder farmers to larger agribusinesses through processors, traders, providers of logistics, quality assurance, finance and insurance services, and the like. It also calls for more foreign investment and external trade.
Joint operations are now under way in a first batch of 12 countries – Afghanistan, Comoros, the Democratic Republic of Congo, Ghana, Haiti, Liberia, Madagascar, Nigeria, Rwanda, Sierra Leone, Sudan and Tanzania – where one or two key agricultural products are selected by the local authorities in line with national strategies. Each product forms the basis of a detailed value chain analysis that maps out all steps of economic activity, from resource to market.
Reviving the fortunes of white gold in Ghana
Launched in 1968 with the creation of the Cotton Board, the production of cotton in Ghana had declined steadily since the turn of the millennium. By 2010, output had virtually ground to a halt under the combined influence of unfavourable world prices and structural weaknesses. National authorities now consider that the revival of the cotton industry is key to poverty reduction in the poorer, northern region of the country. Attracted by international prices then at a historical peak, and inspired by the success of nearby Burkina Faso’s cotton sector, they divided the production region into three zones and enlisted the support of large agribusiness companies to raise the surface under cultivation from a low 5,000 hectares to a first target of 50,000 hectares.
A joint World Bank-IFC-UNIDO mission visited the country in early 2011 and recommended a comprehensive array of interventions to expand the value chain, from soil preparation through irrigation and mechanisation; organisation of farmers’ communities and the delivery of extension services; reform of the public role in the industry; regulations and a price-setting mechanism acceptable to all stakeholders; quality management and the grading of seed cotton and lint.
The revival of the cotton sector will create jobs and rural incomes; it will also strengthen the country’s position in foreign trade in two distinct ways: on the input side, Ghana will save considerable time and costs by building on neighbouring Burkina Faso’s advances in seed improvement and management. On the output side, the production increase will feed into the growing demand of processors in China, South Asia, Turkey or Egypt.
Linking smallholder farmers to larger agribusiness
In a typical agribusiness value chain, raw materials and other inputs flow from pre-production to processing and on to end markets. A coordinated mobilisation of resources is required to improve the productivity of resource endowments and production factors – land, labour and technology. This involves enhancing skills and know-how in areas such as management and marketing; capital through finance and investment; knowledge and adoption of quality control and food safety measures, new and adapted technologies such as processing machinery, land preparation equipment, irrigation technology, and inputs adapted to changing environments (e.g. drought-resistant seeds, fertilisers).
Most of these resources are now held by the private sector. Private investment flows (both domestic and foreign) in sub-Saharan Africa have been on a steady rise over the past decade; in 2008, private fixed investment represented more than three times the volume of official development assistance.
Several funds have been established in response to a fast-growing interest of private investors in the potential of agribusiness in the developing world and in low-income countries across Africa in particular. They offer a range of structured products from debt to equity, catering to varying risk appetite of investors, as well as a diverse market from smallholder farming enterprises to large agribusinesses.
Services to agribusiness investors at pre-investment stage include developing pipelines for private finance; sharing basic information on agriculture, agribusiness and value chains; organising workshops for SMEs on innovative sources of finance; promoting linkages between private finance and development projects in general and, most importantly, exploring synergies between private finance and public investment projects by introducing private investment projects to government officials or donors, and documenting the potential impact of a public investment on the expansion of a value chain.
At post-investment stage, development assistance will reduce transactions costs for agribusiness investors while supporting smallholder farmers by organising the supply side in rural communities; developing wherever warranted out-grower schemes; building processing capabilities in rural SMEs; improving the productivity, quality and consistency of their output; or facilitating the management of supply chains through the introduction of traceability mechanisms.
Substantial and well-coordinated financing, as well as other resources, will be necessary to steer African agriculture to a more productive and efficient path. Among the main actors in this transformation are farmers and traders; suppliers of fertilisers, pesticides and seeds; rural energy service companies; transporters and processors; and providers of technology or rural finance. At the end of the chain, domestic and foreign buyers must be guided by strong and coordinated signals in the form of clear and predictable public policies, as well as adequate physical and institutional infrastructure. This is where national governments, development finance institutions and public aid agencies can best target their efforts.
In Cameroon, Ethiopia, Kenya, Mali, Nigeria, Senegal, South Africa and Zambia. Reference: Karl Wohlmuth, Patrick M. Kormawa and Jean Devlin: Agribusiness for Africa’s Prosperity: Country Case-Studies, Working Paper, UNIDO, September 2011