Modernising the agro-industrial sector in sub-Saharan Africa is a social, political and economic necessity
Modernising the agro-industrial sector in sub-Saharan Africa is a social, political and economic necessity requiring the introduction of effective agricultural policies, support for the formation of value-chain organisations and more robust coordination between unequal economic players.
Global food security depends upon the modernisation of sub-Saharan Africa agriculture. Africa’s booming population and economic growth are set to drive demand for food and consumer goods in the continent. At the same time sub-Saharan Africa is one of the world’s regions where new land can be cultivated and irrigated: its tropical position allows solar energy to be captured with optimum effectiveness. During the 21st century the continent will exert a growing influence on the demand and supply of agricultural and forestry products. Depending on the effectiveness of its agriculture and forestry policies, Africa will either aggravate tensions in the global markets by widening its deficit, or help to alleviate these tensions. Food price fluctuations, under-employment and population imbalances represent further causes of tension that agricultural and rural policies can mitigate.
The modernisation of sub-Saharan agricultural sectors is therefore a social, political and economic necessity. And Africa’s leaders are clearly committed to moving in this direction. Over the last five years many countries have formulated strategies to develop reform and modernise their agricultural sectors. Private investors, both national and international, also have a genuine interest in African agriculture. A primary sector of diminishing relative importance (12% of GDP in sub-Saharan Africa today, as compared with 43% in 1962), with yields that remain low (Box 1),
the agricultural and agro-industrial sector represents 65% of employment, 70% of internal trade, and 68% of manufacturing/processing. Its future importance is more easily understood: 1.5 billion African consumers in 2050, 1 billion of them living in urban areas, in addition to the 4.5 billion consumers in emerging markets. Growing urbanisation and purchasing power will drive growing urban food demand. Moreover, between 1990 and 2008 exports to China grew from USD 200 million to more than USD 2 billion while exports to India increased from USD 80 million to USD 1.3 billion.
The markets for the African sectors will therefore be primarily domestic and then Asian rather than European or American. Yet the economy of Africa’s rural areas is disadvantaged by isolation, energy poverty, inadequate education and healthcare provision, and ineffective land governance.
African agricultural yields need improving
Although Africa possesses 12% of the world’s arable land, its share of the global trade in agricultural products has fallen from 10% in 1960 to 2% today. Its agricultural trade balance, which was level until 1980, has deteriorated due to food imports (rice, oil, wheat). Yields have not improved here as they have in other regions of the world. The lion’s share (80%) of production growth has been achieved by expanding the surface area cultivated; this expansion has been accompanied by a steady decrease in the area cultivated per agricultural worker (less than 0.5 hectares). Furthermore agriculture has had barely any knock-on impact on upstream industries (fertiliser, machinery) or downstream industries (processing): 63% of the value in the sector is produced at farm level (as compared with just 10% in industrial countries). Yet behind these aggregate figures the real picture is a very mixed one. For crops like rubber and palm oil, Africa ranks among the top performers. And Africa has also sidestepped the downsides of unbridled agricultural intensification. In consequence, by choosing the best options – now available thanks to technological progress – for soil fertility, crop protection and water efficiency, Africa can triple its production over the timespan when its population doubles, with fewer negative impacts on its environment.
Modernising farms and services to agriculture
Whether the focus is on the land area cultivated, on the quantities produced and traded or on jobs, local farmers and processing SMEs are clearly the key players. Although their productivity offers room for improvement, their investment capacity is low. A scarcity of financing/investment is endangering the survival of some food-producing sectors in Africa. What is needed, therefore, is to increase the capitalisation of small family farms and processing facilities. The mobilisation of national and international capital can play a part here, via strengthened financial institutions. Traders in agricultural commodities have had to work directly with small producers, setting up technical or financial support programmes and certification schemes in order to improve yields and ensure a reliable supply of quali-
ty products. Today these programmes are financed via subsidies or directly by the traders, with a partial return in the sales premium enjoyed by certified products.
The rapid and large-scale adoption of new crops and techniques, the use of fertilisers or improved seeds, and the introduction of agricultural machinery to farms depend on many factors: farm gate prices, the availability of inputs, credit, and appropriate technical and economic advice. Different economic players are responsible for these various services: small services companies, upstream and downstream, producer groups, large corporations.
Although the role played by these three categories of private players is specific to each individual value-chain, the vital importance of their cooperation is proven in all cases. This means that the State’s primary role is to encourage the formation of value-chain specific organisations. Where they exist these institutions are powerful drivers of growth, regulating imbalances and amplifying government initiatives – Burkina Faso’s cotton industry provides an example here.1 Deficiencies – in terms of availability, quality and price – in the services crucial to agricultural modernisation (seeds, fertilisers, plant protection and veterinary products, agricultural machinery) also place serious constraints on the sector. The same is true of professional training and technical/economic advice. Although contract agriculture is the standard solution for overcoming these deficiencies, it is not possible to do everything on a contract basis. Some states are taking charge of these services themselves in order to meet these challenges – though their performance is generally sub-standard. These services should really be delivered by private companies or producer organisations, which should be supported. International groups (fertilisers, pesticides, medications) can make a contribution here, in partnership with governments.
Limiting risks through long-term investments and contract agriculture
In Africa more than elsewhere the various different types of risk (natural, economic, political) combine and mutually aggravate each other. Individual countries, products and risks require specific responses, involving the development of skills (marketing), of private services (insurance, veterinary services), public services (crop protection and animal health), public and private investments (irrigation), trade agreements (price smoothing) and public interventions (safeguarding mechanisms). Here again the relationships between different value-chain players can make a major contribution. AFD’s contribution to addressing these challenges involves supporting both private investments and public policies by facilitating negotiation and contracts between unequal economic players: small-scale farmers and SMEs, international groups and governments.
There are many reasons behind the financing difficulties facing agricultural sectors – relating to both short-term finance (seasonal credit) and long-term finance (water management, motorisation, livestock, planting, processing equipment). Farmers are under-capitalised, local banks have neither the expertise nor the long-term funding, the projects are risky and borrowers cannot provide sufficient security. Nonetheless action is possible on three levels. Long-term funding can be made available to businesses through investment funds and banks. Retail banks can be encoura-ged to develop a judicious involvement in the sector by building internal expertise, by sharing the risk via guarantees and by offering new products (leasing, ware house receipt and insurance). Finally the bankability of clients and their projects can be enhanced by deploying management consultancy services aimed at groups of farmers, farming businesses and SMEs (Box 2).
The role of european financial development institutions
The intervention of European Financial Development Institutions (EFIS), including Proparco, is based on a main objective: supporting private investment at all stages within agro-industrial sectors – from seed production through to marketing. Beyond financial intermediation – which allows them to have an direct impact on growers and SMEs – EDFIs are finding it difficult to reach all the players in the sector. Nonetheless there are a number of pragmatic intervention strategies that might be prioritised. The aim is to preserve productive capability while optimising resources (water, soil), to develop agricultural production for trading, and to improve farms’ productivity and profitability in a sustainable way. The support of the major historic players in the agro-industrial sectors is essential to underpin this strategy – in the form of direct shareholdings or direct financing to local subsidiaries. In addition to supporting the productive sector, EDFIs’ intervention needs to encompass the whole of the Food Supply Chain. The creation and improvement of logistics infrastructures are very important drivers here, particularly with respect to warehousing, refrigerated facilities and irrigation systems. Another possibility is the direct financing of commodities traders or specialist operators investing in logistics assets and grower certification programmes. Finally it is important to promote diversification projects: production of biofuels, development of biomass-based cogeneration. Agricultural production exclusively based on expansion of the land area cultivated contributes to the degradation of biodiversity and sets a ceiling on yields. Diversification helps to alleviate inflationary pressure on the prices of agricultural commodities by providing a reliable source of supplementary income for producers.
At the same time contract agriculture has proved effective in sub-Saharan Africa, allowing agri-food businesses to secure a reliable supply in volume and quality terms without having to manage land- and labour-related issues. It connects hundreds of thousands of farmers to international markets, with access to technical services and the pre-financing of inputs. Delivery contracts between farmers and businesses provide security for local banks. Providing there is an appropriate balance in the apportionment of value and risks between these players – a matter worthy of public scrutiny – contract agriculture is definitely an option: as well as making further advances in export sectors (cocoa, coffee) it can also provide the key to unlocking rapid transformation across significant sections of subsistence agriculture in Africa.
The role of large industrial plantations, labels and quality standards
A new generation of large-scale farms is developing in the sparsely populated areas. Where substantial investments in water infrastructure are required, some governments see the need to call in private investors, conceding significant land areas to them on a long-term basis. Although there is little land free of any rights of use, long-term contracts can be concluded between the communities holding these rights, investors and governments. For obvious reasons of transparency these agreements need to be approved by all parties concerned and communicated in such a way that the details can be fully understood. Beyond the land itself they should include the companies’ commitments in terms of investment, value creation, employment, social services and environmental protection. They should also include commitments on the part of governments (social services, infrastructures, security). It is entirely in the interest of private investors to base their projects on contract agriculture models, incorporating family-run farms.
Whatever the size of the players involved, all Africa’s agricultural sectors need to address quality issues more effectively from this point forwards2 – these factors are increasingly important for their competitiveness, whether in national or international markets. Product standardisation can play a part here; it is, after all, crucial for manufacturers – the efficiency of their machinery depends upon it. It is also necessary for product pricing and to modernise transactions. Consumers in the north are driving an upgrade in health and safety standards. Finally, we are seeing an upsurge in labels certifying fairness (pay, child labour) and sustainability in agricultural sectors. In agriculture, the qualities of the finished product start in the field – making trade agreements and partnerships between governments and professionals vitally important.
The current context presents Africa with a historic opportunity for strong growth for more productive and competitive agricultural businesses. Yet there is no guarantee that these developments will conform to the principles of sustainable agriculture as they unfold. From here a very wide range of scenarios is conceivable. For Africa the time has come for coordinated, strategic decisions between political players (governments, civil society and value-chain organisations) which will facilitate partnerships in investment projects between various economic players (farmers, manufacturers and banks). Development finance institutions like AFD Group will support them with the full range of financial resources and expertise at their disposal.
¹ Burkina Faso has around 250,000 agricultural businesses, mainly small-scale and family-run, which encompass more than 350,000 cotton producers. They are organised in associations which oversee the distribution of inputs, the provision and repayment of short- and medium-term loans, the harvest collection and the marketing of cottonseed. Grouped together in federations, these associations form unions of cotton producers.
² Standards for gari, for example, have been drawn up both in the Codex Alimentarius (a resource created by the FAO and the WHO) and also at national level in Benin and Ghana. The standards apply to semi-industrial units with a quality control system. As a result we are seeing the emergence of traceability mechanisms, standardisation in organisational procedures, promotion of geographic origin, packaging in sachets, etc. These practices can help producers sell their gari more effectively.