There are various challenges associated with successfully investing in Africa’s agribusiness sector, including, political instability, security of tenure, inadequate transport systems, few financial risk guarantee bodies and corruption, to name a few.
So says Omri van Zyl, associate director at Deloitte Africa Agribusiness, in a report titled, Prosper and grow.
However, according to Van Zyl, investors are becoming aware of the potential upside of investing in African agriculture. He highlights four key success factors for successful investment and management of African agriculture opportunities:
1. 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: This includes 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.
Market access: In most African countries data relating to markets and consumers are lacking. Many markets are informal and not secure in driving investment decisions. In more sophisticated markets such as Botswana and Namibia it is easier to make demand and supply forecasts. Detailed market investigations will be needed before investment decisions are taken.
According to Van Zyl, there is a disconnect between funders and agricultural opportunities in many 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.”
Prospective investors will need to do a feasibility study relating to the specific project as well as compile a business plan that covers the entire farm to fork process. Van Zyl says that environmental impact and social impact assessments are also key considerations 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,” notes Van Zyl.
Funders of African agriculture projects would often also require an above-average return on investment. “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.”
He adds that “ideally, the equity contribution from the agricultural opportunity owners should be as 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.”
Van Zyl says that many agribusiness projects in Africa have failed due to a lack of skills. “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.”
He adds that “finding upper to middle tier management is particularly challenging in Africa. Moreover, even more challenging is finding management that understand the commercial aspects of running an enterprise.”
Technology refers to the various types of equipment and systems 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,” notes Van Zyl.
It is essential to use technology that has been proven in the African environment. In many remote parts of the continent, support services is not necessarily available. Van Zyl says this risk must be mitigated through the stockpiling of critical parts and proper planning.