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Saturday, 03 September 2011 21:01

How to Harvest Agricultural Opportunities in Africa

By Omri Van Zyl***

CAPE TOWN, South Africa, August 29, 2011 (Trade Invest)- Developing agribusinesses in Africa has many challenges including political instability, security of tenure, lack of transportation systems, few financial risk guarantee bodies, corruption and infrastructure challenges to name a few.

 

That said, globally stakeholders are increasingly seeing the high potential up-side of investing in agriculture in Africa - but many are unaware of the key success factors required for the successful conversion of Agriculture opportunities. The four key dominant success factors for successful investment and management of Agriculture opportunities are discussed below.

 

Contextual considerations

 

The following contextual considerations are critical in taking the first step towards an investment decision:

 

  • Country risk - This includes political risk, logistics, government sovereignty, financial systems and Government support.
  • Industry risk - There are many challenges relating to the industry development in specific countries - any investment strategy should be aligned to the local and regional industry potential.
  • Security of tenure is a very important component in securitising investments - This varies in Africa from leasehold to freehold land ownership, to lease agreements and sharing agreements of various kinds.
  • The legal system in each country has different corporate and acquisition requirements - The Rule of Law and the practical application thereof is a very important consideration. This also includes various financial and tax aspects such as the repatriation of funds, tax rates, corporate tax implications, etc.
  • Climatological factors also need in-depth consideration - These include rainfall patterns (past and future), soil types, availability and accessibility of land, water distribution and infrastructure to name a few.
  • The prevailing agricultural landscape is a very important consideration - The focus here should be on extension services, relief assistance, government support and market access.

 

Funding

We have found a general disconnect between funders and agricultural opportunities in various African countries. The basis of the disconnection centres on a general lack of information relating to prospective opportunities, as well as realistic data relating to these.

 

The general requirement will be to do feasibility studies relating to these opportunities as well as the compilation of business plans that covers the whole farm to fork process. Environmental Impact and Social Impact Assessments are a key consideration when establishing the viability of an opportunity.

 

Funding models should be geared towards medium to long term investment priorities with sound market access proven. Security can in many instances be provided through off-take agreements and other contractual guarantees.

 

The required Return on Investment would normally be at a premium when measured at normal market rates due to the additional risk, especially in greenfields operations. This reinforces the need for acute risk mitigation strategies that could include credit risk insurance, multi-peril insurance and bonded warehousing to name a few.

 

Ideally, the equity contribution from the agricultural opportunity owners should be high as possible as this decreases investor risk, which could attract additional investments. Ideal combinations should include a mix of donor, institutional and private equity funds to ensure sustainability.

 

Reputable institutions will be critical in establishing viable projects. Financial risks associated with fraud and corruption should be managed throughout the whole investment process. Transaction advisors will be recommended to ensure alignment of all priorities.

 

Experience

The most important aspect of operating an agriculture related business in Africa is to have the right management on the ground, with the right skills and expertise to manage and execute on the proposed strategy of the business.

 

Many agricultural projects have failed on the continent due to the lack of skills. Finding upper to middle tier management is particularly challenging in Africa. Moreover, even more challenging is finding management that understands the commercial aspects of running an enterprise.

 

From the onset it is important to understand that country specific cultural and other traditions shape society, and to a large extent determines the socio-labour context that have to be managed by the agribusiness owner and operator.

Technology.

 

Technology refers to various types of systems and equipment that are available in, e.g. animal husbandry, horticulture, cash cropping and aquaculture.

 

Imperative to production systems is the fit between the operating conditions and the selection of technology. This implies that the highest technology may not necessarily be the best choice for any specific operation.

 

Feasibility studies should focus specifically on all resources available, e.g. soil types, rainfall, nutrient status, topography, water and benchmarked technologies.

 

Proven technology is imperative in Agricultural development. The reliability of such technology as well as backup systems is critical. In many remote parts of Africa support services would not be available - this in turn must be mitigated by critical part stockpiling and proper planning.

 

Collaboration with, for example technologically advanced suppliers, is needed to ensure access to the best possible genetics, varieties of cultivars that are adapted to the specific region and climate.

 

This article is extracted from Omri van Zyl's recent article titled 'Four key success factors in harvesting agricultural opportunities in Africa'.

***Omri is an associate director at Deloitte and the head of the Deloitte Africa Agribusiness Unit. (END)

 

 

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