Public and Private Sector Roles in Financing Investment into Agribusiness

This blog post was written by Emilio Hernandez and Calvin Miller of the Food and Agriculture Organization who attended the recent After Hours Seminar Attracting Private Investment into Agribusiness.

The After Hours Seminar, “Attracting Private Investment into Agribusiness,” led by Anita Campion of AZMJ and Eduardo Tugendhat of CARANA Corporation and moderated by Anicca Jansen of USAID, concentrated on five themes for attracting private investment in agribusiness:

1. Expanding to new markets
2. Tapping new sources of supply
3. Creating effective partnerships
4. Making finance work
5. Leveraging governmental support

One of the key messages of the event was the importance of a market to exist for any product. Development used to be focused solely on increased production, but that approached failed. Another takeaway message was the need for coordination between private and public interventions to attract investment into agribusinesses while achieving social inclusiveness. To do so, there is a need to look at the problem from “all possible angles,” as mentioned by one of the presenters. This includes addressing the change drivers in the food industry, such as food safety and quality standards, timeliness, and aggregation to achieve economies of scale—all of which increasingly limit small farmer inclusion. When developing agribusiness partnerships, one must understand and address the vulnerabilities of these small-scale farmers.

Much of the discussion during the event was from the perspective of the public sector, illustrating the many ways it can promote the poor in existing agribusiness opportunities led by the private sector. The examples and arguments presented were very relevant, touching on key barriers for inclusiveness, such as complying with strict market requirements, and mobilizing knowledge and finance to build the capacity of the poor to meet these requirements so they can insert themselves in higher-rent markets. The discussion was very much from a buyer-driven business model without recognition that, where the capacity exists, producer-owned models that are market oriented can also work.

One missing component of the discussion was the perspective of private investors interested in materializing new agribusiness opportunities. It was assumed that the private sector will respond to market demand, thereby “pulling the thread.” But this does not come automatically with a growing market demand. Private investors face great difficulties in being able to assess and manage the risks involved in agribusiness ventures, even though they are increasingly drawn to them due to the growing market potential of agricultural products. The risk of volatile weather and diseases affecting production influences the outcome of their investments regardless of which segment in the supply chain they operate. Agriculture in general is a politically sensitive sector that has historically drawn a lot of government interventions, sometimes having negative distorting effects for private agro-enterprises. Access to key inputs like land and water is very volatile in many parts of the world, and weak regulatory frameworks sometimes lead to abuses from both the private and public sector. The ability to mobilize debt and equity capital tailored to the seasonal and long-term financing needs of large agribusiness operations is very limited given the difficulties in managing inherent risks. For all of these reasons, there are potentially profitable agribusiness opportunities that are constantly overlooked in many parts of the world. This is especially true in the poorest countries.

There is a big role that the public sector can play to facilitate not only a more pro-poor distribution of the “pie,” but also to increase the size of the pie. There is ample evidence that agribusiness investments are below optimal given the existing market demand. Interventions that address both growth and distribution challenges are needed and can only be effective if public organizations and private sector actors understand each others’ constraints and advantages to promote inclusive agribusiness growth. Much more work is needed to analyze the experience of the relatively few industry leaders that have been able to handle these investment risks, and their perspectives should be considered.

In order to make finance work, various approaches from microfinance to venture capital were discussed, as well as the role of government in improving the conditions, facilitating guarantees, and putting into place adequate policies. Yet, the donor-driven or government initiatives are mostly pilots, and the bulk of the improvement for financing must come in having local and national financiers know how to assess value chains and partners to structure financing accordingly so as to reduce risk and costs.

Many aspects of value chain linkages, value chain finance and the relationships of the different actors were discussed. There was a consensus that there is a need to “put the pieces together.” There are many pieces and they can fit in different ways, but much can be learned from each other. There is a need to take many cues from the private sector. Finally, the importance of the exchange of information and data was made with a suggestion about collaboration on a website. Yet, rather than creating new sites it may be best to achieve through the existing ones, such as Microlinks and the Rural Finance Learning Centre.