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Operations and enabling environment for Agro-industries
Contributor : FAO-AGS (2008-02-28 14:53:06)
Attracting Investment: agro-industry and agro-enterprise finance
The Proposition
To realize the economic potential and raise the social contribution of agro-industry, a new approach to attracting investment into the sector is required. 
Rationale and Recommended Response (click here to read)
Update on the debate
In following up on the recommendation for improved enabling environments for investment, a case was made that the government´s role also includes that of coordinating and to a certain extent regulating the operating environment to ensure coordination, such as with donors and investors and quality assurance. An example of poorly coordinated efforts on tractor pools by multiple donors and a lack spare parts.
It was noted that except for some larger agro-industries, there are a lack of financial services for many in the sector, especially the small agriculturalists and agribusinesses, who lack security. A related comment notes that non-traditional forms of finance and investment must be considered. Finally it is indicated that Africa must increase the amount of in-country processing and value added within a country, which requires investment, and without such investment, the overall levels of profit and attractiveness to investment will be low.
Current focus of the Debate
What works for attracting investment?
Should a government´s agricultural investment emphasis be on the demand (improving investment opportunities and returns on investment) or on the supply side (improving financial services, incentives for agricultural/agro-industrial investment, foreign direct investment and/or public investment)?
For summary of previous round of debate and questions click here
13 Comments
Brajesh Singh , (2008-04-15 13:30:19)
Opportunities Attracts Investments.
India is a leading producer of many agricultural commodities. Also it has above 1 billion population to feed on. But due to poor infrastructure, agricultural policies and many other such bottlenecks agricultural sector is in bad shape.
Many Indian and international companies recognised the opportunities. In last one year the sector has witnessed subsequent investment. Now the private companies has started organized retailing of agri-produce, they encountered problems in logistics and supply chain, so heavily investing in logistic and supply chain. Further, they found some descripancies in government rules and regulation so the industry body mooted reforms and government wholeheartedly accepted and implementing the reforms.
So, if their is really an opportunity, it will attract investment and the scale of investment will depend upon the scale of opportunities.
Opportunities Attracts Investments.
India is a leading producer of many agricultural commodities. Also it has above 1 billion population to feed on. But due to poor infrastructure, agricultural policies and many other such bottlenecks agricultural sector is in bad shape.
Many Indian and international companies recognised the opportunities. In last one year the sector has witnessed subsequent investment. Now the private companies has started organized retailing of agri-produce, they encountered problems in logistics and supply chain, so heavily investing in logistic and supply chain. Further, they found some descripancies in government rules and regulation so the industry body mooted reforms and government wholeheartedly accepted and implementing the reforms.
So, if their is really an opportunity, it will attract investment and the scale of investment will depend upon the scale of opportunities.
Fredrick Romani , (2008-04-04 07:05:24)
Constraints and obstacles to promote agro-processing and industrialization are many, some requiring long-term solutions while others need short to medium term measures. I think private sector is in better position to curb this problem by ensuring better handling, apply appropriate technologies, supply adequate supplies of raw material to processing units and avail packaging material at affordable prices then the sector could grow up to the required limits after the Government create conducive environment for agro-industries investors
Constraints and obstacles to promote agro-processing and industrialization are many, some requiring long-term solutions while others need short to medium term measures. I think private sector is in better position to curb this problem by ensuring better handling, apply appropriate technologies, supply adequate supplies of raw material to processing units and avail packaging material at affordable prices then the sector could grow up to the required limits after the Government create conducive environment for agro-industries investors
Ibrahima Ba , (2008-03-27 17:26:40)
L’Afrique est le premier producteur mondial de cacao, le deuxième exportateur de coton, et figure parmi les acteurs importants des marchés du café, du thé ou des fruits tropicaux. Malgré cela, les entreprises relevant du domaine de l’agro-industrie réalisent moins de 8 % du chiffre d’affaires.
La question des débouchés assombrit encore le tableau. Faute d’un marché local suffisamment développé, et alors que les normes se complexifient en Europe et aux Etats-Unis.
Le principal problème des industriels, c’est de financer cette mise à niveau. Les banques sont trop chères et les autres financements vont soit aux très grandes entreprises soit aux tout petits projets. Faute de production locale, il faut même que les industriels importent les bocaux dont ils ont besoin pour conditionner leurs produits.
Coûts de fabrication importants, concurrence déloyale, problème de débouchés, financement de la mise à niveau… Sur le papier, les difficultés sont telles qu’ajouter à cela les subventions accordées par les grands pays à leurs agricultures devraient définitivement clore le chapitre « agro-industriel en Afrique ». « Veut-on arrêter l’agro-industrie en Afrique de l’Ouest ?
Les dés sont pipés, car les gros pays bradent leurs excédents subventionnés. » Les producteurs africains, et dans leur sillage les agro-industriels, ne disposent pas des mêmes armes. Et ceux qui tentent, comme le Sénégal avec l’arachide, de se prendre au jeu des subventions ou du protectionnisme doivent s’attendre à sentir la pression des institutions internationales, Banque mondiale ou Organisation mondiale du commerce en tête. Des organisations qui, pourtant, prêchent inlassablement en faveur du libre-échange ! Que resterait-il de l’agro-industrie en Afrique de l’Ouest une fois les frontières ouvertes à la libre concurrence.
L’Afrique est le premier producteur mondial de cacao, le deuxième exportateur de coton, et figure parmi les acteurs importants des marchés du café, du thé ou des fruits tropicaux. Malgré cela, les entreprises relevant du domaine de l’agro-industrie réalisent moins de 8 % du chiffre d’affaires.
La question des débouchés assombrit encore le tableau. Faute d’un marché local suffisamment développé, et alors que les normes se complexifient en Europe et aux Etats-Unis.
Le principal problème des industriels, c’est de financer cette mise à niveau. Les banques sont trop chères et les autres financements vont soit aux très grandes entreprises soit aux tout petits projets. Faute de production locale, il faut même que les industriels importent les bocaux dont ils ont besoin pour conditionner leurs produits.
Coûts de fabrication importants, concurrence déloyale, problème de débouchés, financement de la mise à niveau… Sur le papier, les difficultés sont telles qu’ajouter à cela les subventions accordées par les grands pays à leurs agricultures devraient définitivement clore le chapitre « agro-industriel en Afrique ». « Veut-on arrêter l’agro-industrie en Afrique de l’Ouest ?
Les dés sont pipés, car les gros pays bradent leurs excédents subventionnés. » Les producteurs africains, et dans leur sillage les agro-industriels, ne disposent pas des mêmes armes. Et ceux qui tentent, comme le Sénégal avec l’arachide, de se prendre au jeu des subventions ou du protectionnisme doivent s’attendre à sentir la pression des institutions internationales, Banque mondiale ou Organisation mondiale du commerce en tête. Des organisations qui, pourtant, prêchent inlassablement en faveur du libre-échange ! Que resterait-il de l’agro-industrie en Afrique de l’Ouest une fois les frontières ouvertes à la libre concurrence.
Calvin Miller , (2008-03-22 13:19:22)
Peter makes an important case that "Investments are attracted into ventures that show promise, and for this you need a whole package of security and other plus-factors that reflect on the local economy." From my experience, investment promotion is most effective through creating conditions whereby profitable, risk-adjusted investment opportunities are available. We can have more effectiveness on reducing downside risks which are the biggest concern of financing institutions and equity investors since in agriculture an individual or company can do relatively little on market prices and for cost efficiency improvements to improve margins we also need investment. This is where value chain finance can play an important role in reducing uncertainty and hedging risks to allow for increased financial access to the producers, processores, marketing companies, etc. within a value chain.
Peter makes an important case that "Investments are attracted into ventures that show promise, and for this you need a whole package of security and other plus-factors that reflect on the local economy." From my experience, investment promotion is most effective through creating conditions whereby profitable, risk-adjusted investment opportunities are available. We can have more effectiveness on reducing downside risks which are the biggest concern of financing institutions and equity investors since in agriculture an individual or company can do relatively little on market prices and for cost efficiency improvements to improve margins we also need investment. This is where value chain finance can play an important role in reducing uncertainty and hedging risks to allow for increased financial access to the producers, processores, marketing companies, etc. within a value chain.
Peter Steele , (2008-03-19 12:10:29)
Limited debate thus far, but some fair opportunities for sharing ideas. Investments are attracted into ventures that show promise, and for this you need a whole package of security and other plus-factors that reflect on the local economy and, importantly, on those less tangible factors that show the industry, community or country in good light. Unfortunately, this kind of reputation takes years to construct and can be lost almost overnight with the many complex socio-economic issues that sometimes blowup in the focus countries. Note East & Central Africa of recent times. I used to farm in East Africa, using a mix of modern agro-tech equipment and skilled/manual labour to plant and harvest a range of industrial and food crops (but mostly cotton and millet). Key inputs were the mechanization routines typical of the industrial countries, but rare in the country where I farmed. With >25 tractors and plant I serviced the farm and the surrounding country with a tractor-hire service. Looking back - it worked; and has continued to work in sector-specific areas most of which are linked to commercial agricproduction. These, of course, are the ´tractor zoos´ to which one correspondent refers (´tractor graveyards´ is a better term). Sure, agrofixes have limited potential, but they provide demonstration to an ill-informed population. How do you introduce the first cell phone - usually with some kind of subsidy that links to ´market exploration´. Agriculture is no different. Uptake of new ideas and tech can be really difficult - but you need the pilot-schemes, models, risks and venture capital required; and we are indebted to the NGOs and others for their demo-investments in mills, wind/hydro-power, bicycle trailers and similar - all of which have filtered into commercial viability and provided improved living standards for local people. Agrotech is no panacia for change, but it helps and it always comes from those pioneer investors and their packages. AgTractors have yet to succeed everywhere, but they are coming; meantime the diesel truck and bus *has* revolutionized road transport everywhere and (more than the IT industry) helped keep people in touch with people in the low-income countries. Great investments then (and in support of agproduction).
Limited debate thus far, but some fair opportunities for sharing ideas. Investments are attracted into ventures that show promise, and for this you need a whole package of security and other plus-factors that reflect on the local economy and, importantly, on those less tangible factors that show the industry, community or country in good light. Unfortunately, this kind of reputation takes years to construct and can be lost almost overnight with the many complex socio-economic issues that sometimes blowup in the focus countries. Note East & Central Africa of recent times. I used to farm in East Africa, using a mix of modern agro-tech equipment and skilled/manual labour to plant and harvest a range of industrial and food crops (but mostly cotton and millet). Key inputs were the mechanization routines typical of the industrial countries, but rare in the country where I farmed. With >25 tractors and plant I serviced the farm and the surrounding country with a tractor-hire service. Looking back - it worked; and has continued to work in sector-specific areas most of which are linked to commercial agricproduction. These, of course, are the ´tractor zoos´ to which one correspondent refers (´tractor graveyards´ is a better term). Sure, agrofixes have limited potential, but they provide demonstration to an ill-informed population. How do you introduce the first cell phone - usually with some kind of subsidy that links to ´market exploration´. Agriculture is no different. Uptake of new ideas and tech can be really difficult - but you need the pilot-schemes, models, risks and venture capital required; and we are indebted to the NGOs and others for their demo-investments in mills, wind/hydro-power, bicycle trailers and similar - all of which have filtered into commercial viability and provided improved living standards for local people. Agrotech is no panacia for change, but it helps and it always comes from those pioneer investors and their packages. AgTractors have yet to succeed everywhere, but they are coming; meantime the diesel truck and bus *has* revolutionized road transport everywhere and (more than the IT industry) helped keep people in touch with people in the low-income countries. Great investments then (and in support of agproduction).
Alexandra Roettger , (2008-03-19 05:37:20)
Dr Ihedioha,
Thanks for your contributions to the debate. The financial services sector does fund large scale, long term AND highly collateralized investments into plantations and commercial agriculture under the condition that the business entity has access to assets (land or capital or other secure at least semi liquid sources of collateral).
The problem is not that there is no financial service provider, there is. However the service is only rendered to business entities which have huge tangible assets.
The issue is who can provide such securities to the small scale agricultural sector?
Small scale does not have to be bad but it is often connected to the following: the farmers does not have a land title, the land market is not developed, the farmer does not have access to eduction which makes collaboration with the finance sector more or less impossible, the farmers has to think short term to pay for expenses such as health, school, but also other farming inputs etcpp
There are many examples of successful co-operatives in the agricultural and processing sector (Raffeisen-Germany, Italian agricultural cooperatives for example, Saving and Credit unions in Eastern Africa, the Gramean Bank in India). These schemes cannot exist without Government support AND a culture in which cooperation and collaboration is paramount.
Looking only at Government support in the light of good governance, which country in the world which needs support by intergovernmental institutions such as FAO and UNIDO has shown long term, transparent and unbiased commitment to its people?
Dr Ihedioha,
Thanks for your contributions to the debate. The financial services sector does fund large scale, long term AND highly collateralized investments into plantations and commercial agriculture under the condition that the business entity has access to assets (land or capital or other secure at least semi liquid sources of collateral).
The problem is not that there is no financial service provider, there is. However the service is only rendered to business entities which have huge tangible assets.
The issue is who can provide such securities to the small scale agricultural sector?
Small scale does not have to be bad but it is often connected to the following: the farmers does not have a land title, the land market is not developed, the farmer does not have access to eduction which makes collaboration with the finance sector more or less impossible, the farmers has to think short term to pay for expenses such as health, school, but also other farming inputs etcpp
There are many examples of successful co-operatives in the agricultural and processing sector (Raffeisen-Germany, Italian agricultural cooperatives for example, Saving and Credit unions in Eastern Africa, the Gramean Bank in India). These schemes cannot exist without Government support AND a culture in which cooperation and collaboration is paramount.
Looking only at Government support in the light of good governance, which country in the world which needs support by intergovernmental institutions such as FAO and UNIDO has shown long term, transparent and unbiased commitment to its people?
Chido Makunike , (2008-03-18 01:08:52)
For all sorts of reasons, reasonable and not so reasonable, traditional financial institutions will probably continue to be leery of agricultural investment. This is a great pity given the needs, but it is also understandable that there are many less risky areas for banks to invest in than agriculture. Banks are far more risk-averse than most entrepreneurs, and I sometimes wonder if it is not a misconception to think of banks as their natural allies.
But in their defence, much more training needs to be done of potential loan receipients on business and general money management to reduce default rates.
Entrepreneurs need to be informed of non-traditional finance sources such as venture capitalists. In many cases these may be actually better suited for agricultural lending than banks because they would be equity as well as managerial partners. The entrepreneur may not like to have someone looking over his shoulder at his or her operations, but at the end of the day this works to everybody´s benefit. And most venture capitalists only want to keep the equity long enough to recover their investment and make a profit, after which time the hopefully now profitable and knowledgeable entrepreneur can then run his or her own show.
For all sorts of reasons, reasonable and not so reasonable, traditional financial institutions will probably continue to be leery of agricultural investment. This is a great pity given the needs, but it is also understandable that there are many less risky areas for banks to invest in than agriculture. Banks are far more risk-averse than most entrepreneurs, and I sometimes wonder if it is not a misconception to think of banks as their natural allies.
But in their defence, much more training needs to be done of potential loan receipients on business and general money management to reduce default rates.
Entrepreneurs need to be informed of non-traditional finance sources such as venture capitalists. In many cases these may be actually better suited for agricultural lending than banks because they would be equity as well as managerial partners. The entrepreneur may not like to have someone looking over his shoulder at his or her operations, but at the end of the day this works to everybody´s benefit. And most venture capitalists only want to keep the equity long enough to recover their investment and make a profit, after which time the hopefully now profitable and knowledgeable entrepreneur can then run his or her own show.
Kevin Gallagher , (2008-03-17 11:30:35)
I feel that to get investment going the cellphone industry provides a good example of public and private inputs. For equipment, this means:
1. Equipment companies should be ensured of clear business practices. The World Bank ranks and helps governments improve the ease of doing business. Making business easier and non-corrupt is first government responsibility.
2. Government should establish clear laws/regulations on responsibilities of companies such as spare part warrenty (3-5 years for any equipment sold) to protect consumers, 20% minimum for parts assembled in country so that the company shows clear interest (over time increasing % of assembly and part manufacture to nurture local industry) and provision of after-service mechanics within a warrenty period for the equipment.
3. On the government side, they should limit companies to 3 for each type of equipment to ensure that there are not too many companies and that each company will have chance to earn money. The Government can also provide mechanic training. Lower taxes for a period would help companies off set investment costs for assembly and branch offices.
Today, we see proliferation of "tractor zoos" in Africa with each donor providing equipment, each Minister happy to get one or two from each country while farmers are crying for spare parts and long term investors.
I feel that to get investment going the cellphone industry provides a good example of public and private inputs. For equipment, this means:
1. Equipment companies should be ensured of clear business practices. The World Bank ranks and helps governments improve the ease of doing business. Making business easier and non-corrupt is first government responsibility.
2. Government should establish clear laws/regulations on responsibilities of companies such as spare part warrenty (3-5 years for any equipment sold) to protect consumers, 20% minimum for parts assembled in country so that the company shows clear interest (over time increasing % of assembly and part manufacture to nurture local industry) and provision of after-service mechanics within a warrenty period for the equipment.
3. On the government side, they should limit companies to 3 for each type of equipment to ensure that there are not too many companies and that each company will have chance to earn money. The Government can also provide mechanic training. Lower taxes for a period would help companies off set investment costs for assembly and branch offices.
Today, we see proliferation of "tractor zoos" in Africa with each donor providing equipment, each Minister happy to get one or two from each country while farmers are crying for spare parts and long term investors.
Dr. Damian Ihedioha , (2008-03-07 16:42:01)
Calvin,
The paradigm shift is in two folds, namely: production agriculture can not lead to food security, rather demand driven and market-led value chain development are key to achieving food security. In this case, demand/markets drives production, and this gives assurance that farmers would sale what they produce. ´Produce what you can sale, and not sell what you produce´, is the way forward. Second, employment generation and better nutrition do not necessarily come from on-farm activities, rather development of agro-industry and allied service markets grantee more sustainable employment and nutrition. These are the shifts we need to move forward
Calvin,
The paradigm shift is in two folds, namely: production agriculture can not lead to food security, rather demand driven and market-led value chain development are key to achieving food security. In this case, demand/markets drives production, and this gives assurance that farmers would sale what they produce. ´Produce what you can sale, and not sell what you produce´, is the way forward. Second, employment generation and better nutrition do not necessarily come from on-farm activities, rather development of agro-industry and allied service markets grantee more sustainable employment and nutrition. These are the shifts we need to move forward
Calvin Miller , (2008-03-07 14:28:06)
Damian, please elaborate on the paradigm shift that you indicate is needed? Regarding the role of financial institutions, I agree that the role of financial institutions is paramount. They are critical to facilitating investment. No one single financial mechanism is proposed but rather various mechanisms are needed to increase the amount and effectiveness of finance and investment to agro-industry and the whole agricultural chain.
Damian, please elaborate on the paradigm shift that you indicate is needed? Regarding the role of financial institutions, I agree that the role of financial institutions is paramount. They are critical to facilitating investment. No one single financial mechanism is proposed but rather various mechanisms are needed to increase the amount and effectiveness of finance and investment to agro-industry and the whole agricultural chain.
Dr. Damian Ihedioha , (2008-03-07 10:21:36)
In the discussion topic, not much was mentioned on "the role of financial institutions in promoting agro-industry, or in fact what financial mechanism is being proposed to achieve a robust agro-industry
In the discussion topic, not much was mentioned on "the role of financial institutions in promoting agro-industry, or in fact what financial mechanism is being proposed to achieve a robust agro-industry
Dr. Damian Ihedioha , (2008-03-06 14:43:52)
I agree, but with little addition, thus: "To achieve the economic potentials and realize the social contributions of agro-industry towards meeting the MDGs, a paradigm shift is needed in attracting investment into the sector".
I agree, but with little addition, thus: "To achieve the economic potentials and realize the social contributions of agro-industry towards meeting the MDGs, a paradigm shift is needed in attracting investment into the sector".
Calvin Miller , (2008-03-03 14:24:42)
What does a new approach to attracting investment look like? Is it really a new approach or is it rather applying some of the foundational building blocks, such as a favorable investment and finance environment? I think investment follows opportunitity and favorable conditions.
What does a new approach to attracting investment look like? Is it really a new approach or is it rather applying some of the foundational building blocks, such as a favorable investment and finance environment? I think investment follows opportunitity and favorable conditions.
