UK-Africa investment must not overlook African entrepreneurs

On 20 January, the UK-Africa Investment Summit takes place in London. According to DFID, the focus is on “investment opportunities”, “lasting partnerships”, “jobs, growth and sustainability”.  A forthcoming paper I have been working on with colleagues from Ethiopia, Ghana, Kenya, Malawi and the UK deals with the issue of business investment in African agriculture. Produced as part of the Agricultural Policy Research in Africa (APRA) programme, it asks how agri-business investors see investment opportunities and how successful policy-makers have been at incentivising new investments.

In doing the research, we heard from 18 business leaders from 14 agri-business companies investing in Africa, both domestic and foreign investors. Here are two examples.

ABJ Farms, Ghana

ABJ Farms (not their real name) in Ghana, produces, processes and markets rice, palm oil, cassava and fruit, primarily for domestic but also some export markets. The CEO says she was motivated by her passion for farming, investing her own savings to start the farm in 2005. Bank loans weren’t an option due to high interest rates and the fact that repayments have to start even before crops are harvested.

The turning point for her business came five years later when, supported through a UKAID project, she received a grant and mentorship to commence processing of her produce and that of the outgrowers (contracted small-scale farmers) the firm works with. Further funding came from business profits, family and other government agencies, and now the business is worth GHS 3.5 million (nearly £500,000), employs over 200 workers and works with 3,000 outgrower farmers. The CEO says they received five years tax exemption available for new agro-processing firms, but this benefit did not motivate her to invest in the way that the financial support did, nor did it compensate for the poor infrastructure in some regions of the country that prevents expansion.

BCA Pulses, Ethiopia

BCA Pulses in Ethiopia (also not their real name) processes and exports pulses from Ethiopia to Europe. Motivated by export market opportunities and suitable land availability, the company was also launched in 2005, with foreign and domestic investment. With capital in 2018 of 30 million Birr (roughly £800,000), their modern plant is located near Addis Ababa. Operating in line with international standards for the food industry, there are 170 permanent and 50 casual employees working there.

However, the plant is often operating at only half its maximum capacity, due to market fluctuations and supply issues. Farmers under contract often fail to deliver products of sufficient quality and uniformity. Although BCA Pulses are aware of tax holidays for investors, they say these incentives do not motivate them since, due to bureaucratic delays, the grace period typically expires before companies can take them up. However, exemptions from taxes levied on imported inputs do help. Domestic costs are high due to logistics and other input costs, affecting the competitiveness of exports. The company says that the lack of finance from banks is another critical challenge, coupled with conflicts over land access.

These are only two of the many stories we heard, but they are fairly typical and illustrate some key lessons which policy-makers at the Investment Summit should bear in mind.

There is no shortage of African and foreign investors

First and foremost, there is already no shortage of companies – both African and foreign – keen to invest in Africa, and in the African food and agriculture sector in particular, because they recognise significant opportunities. However, they often face constraints.

Ineffective tax incentives should be redirected to improve infrastructure

Government support can help overcome constraints, and so influence the pace, scale and socio-economic impacts of investment. However, we heard loud and clear that fiscal (i.e. tax) incentives are not material factors in investment decisions. They rarely compensate for problems in the investment environment, such as lack of infrastructure or political instability, which can be difficult to obtain and often arrive too late. Ineffective fiscal incentives should be scrapped, with resulting tax revenue better redirected, e.g. to address infrastructure gaps in transport, electricity, and irrigation.

Help to navigate regulation should be available to all

Second, investors face a range of disabling factors (bureaucracy and land conflicts were two that surfaced frequently). Regulatory facilitation, such as one-stop shop services, can help but even if theoretically available to all, they often mostly reach foreigners and fail to support the growth of domestic industry, particularly of SMEs.

Don’t underestimate African entrepreneurs

Foreign knowledge and technology transfer have a role to play, but the contribution of foreign investment shouldn’t be overestimated, nor the potential of domestic agri-businesses under-rated, including the role of small and medium-sized African entrepreneurs.

Provide loans for agribusiness SMEs

Domestic SMEs are particularly disadvantaged by a lack of access to finance when compared to large domestic or foreign counterparts, who have deeper pockets and can often also access foreign funds. Development partners and financial institutions can boost the scale and pace of investment by providing loans to agribusinesses at appropriate interest rates and terms that allow farmers to start servicing such loans only when they start harvesting crops. The example from Ghana demonstrates what can happen when entrepreneurial farmers and SME agribusiness gain better access to finance.  However, public finance will never be enough on its own, so attention needs also to be paid to building more sustainable sources of agricultural finance over the long term.

Skills training and knowledge transfer is vital

Finally, while businesses investing in agro-processing, such as ABJ Farms and BCA Pulses, create vital jobs and offer markets for smallholder produce, skills-upgrading and knowledge transfer for workers and smallholders is also needed or productivity is likely to remain sub-optimal. High worker turnover or the difficulty for smallholder farmers to meet international standards are common challenges.

Better skilled workers and farmers offer both private (for the companies and individuals involved) and public (for society) benefits, but there are substantial costs.  Companies are unlikely to bear these costs without clear incentives. So, government or donor support or subsidies for training and organising farmers to achieve quality and scale in production, and for linking them to processors can help.  On the other hand, offering large blocks of land at excessively low prices tend to incentivise investment in vertically integrated farms with few local linkages.

The UK-Africa Investment Summit is right to highlight that Africa offers investment opportunities that contribute also to jobs and growth.  African governments and their supporters can play a role in backing this investment (both foreign and domestic), but only if these efforts are appropriately designed, well-directed and do not overlook domestic entrepreneurs.

This blog was written by Jodie Thorpe and first appeared on the Institute for Development Studies website.

Cover photo credit: © UN Women/Ryan Brown on Flickr