By Yana Kakar, Global Managing Partner of Dalberg Advisors. As head of the firm, Yana oversees activities across Dalberg’s 20 offices worldwide. With 8 offices across Africa, Dalberg is the continent’s leading top-tier strategy advisory and policy firm. Dalberg’s core expertise is developing inclusive business models, economic development and investment strategies. Dalberg has dedicated practice areas across sectors including agriculture, infrastructure, financial services, health, and energy, among others.
The competitiveness of african agriculture hinges on finding new and innovative ways to finance different segments of the value chain. Much is at stake. Africa’s negative net trade is steadily increasing, with an expected food import bill of USD$ 100 billions per year by 2024.
After public funding is accounted for, the current financing gap for agricultural transformation in Africa stands at around USD$32bn in annual investment till 2025. The risk-adjusted returns to investments in agriculture are simply not compelling enough to drive the level of investment that is needed.
Figure : The current financing gap for agricultural transformation in Africa stands at around USD$32bn
To address this, an increasing number of blended financing facilities have been launched in the past few years. Blended finance uses sub-commercial or philanthropic capital to mobilize private capital flows. It brings diverse types of financial providers together with different risk return appetites. Blended finance is not new – it’s just a new framing around a dynamic that has been around for a while – and has generated large, multi-million dollar partnerships with companies and funds big and small.
Blended finance is a de-risking tool
Blended finance’s value proposition to private sector is clear and straightforward – it reduces risk and can sometimes increase returns for private investors. Blended finance redistributes risk to those who can bear it. It assigns risks in innovative ways to different parties, with the public or philanthropic sector often absorbing more risk to usher in private investment. This is particularly relevant in agriculture, an inherently risky sector.
Figure : the African food import bill could surpass USD$ 100 billions per year in 2024
In Dalberg’s experience there are three key steps to structuring successful blended finance deals: identifying the right partners, engaging them early and setting up a governance structure to align incentives. For example, FAFIN – a $65 million mezzanine fund for agriculture in Nigeria which Dalberg helped design – brought together the Nigerian government, the German Development Bank, and Nigeria’s Sovereign Investment Authority. Each brought something unique to the table: the Nigerian government had the strategic vision for agricultural transformation and the clout to see it through, the German Development Bank had prior experience setting up these types of funds, and the Sovereign Wealth Fund had the capital and know-how. Since its launch FAFIN has created over 500 new jobs and improved the lives of over 1,000 smallholder farmers and their families by supporting innovative business incentives and out‐grower schemes. There are indications that the fund could create an additional 4,000 direct and indirect jobs over the next two years.
Another example of blended finance in action is the USD$146 million Africa Agriculture and Trade Investment Fund. The fund invests across the entire agricultural value chain in Africa and uses a first-loss layer and mezzanine layer to encourage private investments. Direct investments target commercial farms, processing companies, and cooperatives. The fund sources opportunities through networks, counterparts, and prospective investee companies can apply via its website.
The fund’s investees include a Ghanaian conglomerate providing fertilizer to smallholder farmers on credit and financial institutions like Chase Bank in Kenya. The Chase Bank funding provides debt financing to small and medium-sized agricultural enterprises to expand Chase Bank’s lending in the sector. This is a key use for blended finance in agriculture – to incentive commercial banks to lend to an agricultural market segment that can be highly profitable if banks can tap into it. The German government created the fund in 2008 to use risk capital to attract additional investment toward achieving the government’s agricultural development priorities. Ultimately the fund wants to improve food security, create employment, and boost local incomes.
What’s next ?
Blended finance is not a panacea. Key risks include distorting markets and supporting private sector activity that is not self-sustaining in the long term. More basic operational challenges include a lack of a common lexicon and shared understanding about when and how to use blended finance. Another inhibitor is that the transactions are often small (USD$1M – 500,000) and therefore expensive, which acts on a drag on the deals. Lastly, blended finance opportunities particularly need more local partners on the ground to achieve real scale.
Still, blended finance has the potential to be a win-win tool when applied correctly. And in a sector that desperately needs investment, it is a welcome blueprint for models that could be scaled and adapted.