Jean-Michel Severino: “Agribusiness - an opportunity for Africa”

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Interview with Jean-Michel Severino

Jean-Michel Severino, President of Investisseurs & Partenaires (I&P) impact fund, and former executive director of the French development agency, AFD, explains the emergence of a new category of agricultural players in Africa: agribusiness entrepreneurs, along with their successes and challenges.

In your book, Entreprenante Afrique (Enterprising Africa) published in 2016, you pay tribute to Africa. Are you as enthusiastic when it comes to agricultural entrepreneurship?

Yes because what we are seeing in this area, as in others, is a profound transformation of the protagonists involved. Until 10-15 years ago, the agricultural economy was made up of three types of players: a large farming population – which remains massive – large farms and state agricultural production companies, and private agri-processors belonging to large international groups. Since then, a new category of players has emerged in Africa: agribusiness entrepreneurs, who invest in agricultural production, but also in agricultural processing, from chocolate to soybean oil, from palm oil to cashew nuts, etc. It’s really modern entrepreneurship. These are not large agro-industrial groups, but individuals who, with a few million euros, sometimes less, set up industrial processing units and try to penetrate the market, in the vast majority of cases domestic markets, because it is clearly easier. Why? Because there is an urban population that is growing and that consumes. This population makes choices between imported production and local production.

Some facilitating factors have also developed very recently, such as the sudden emergence of modern distribution. The appearance of shopping centres is transforming the situation. They sometimes start off with 40% to 90% of imported products on their shelves, but they have a major commercial interest in linking up with local supply chains, especially for food. They therefore seek to structure the supply chains. However, they cannot, for example, reach the thousands of urban or suburban growers. So they’re going to look for intermediaries. Companies then step in to act as an interface between large-scale retailers and producers. We have, for example, in our I&P portfolio, a company called Eden Tree Ltd. in Ghana. Its role is to negotiate with thousands of growers, to contract production with them, to standardise quality, to train, to retain producers’ loyalty, and to process the production themselves in order to deliver products that are of calibrated quality to the supermarkets, that are clean, packaged, and even ready to eat. This is because the African middle class clientele is evolving, and they are buying their salad ready-wrapped. The idea is really to offer urban consumers in Accra – in the case of our example – an alternative on the food market to the imported products from England, Morocco, Nigeria or South Africa, and to offer a product with identical organoleptic qualities, but at a lower cost.

One of the most important characteristics of the nutrition market in Africa used to be that, broadly speaking, cities consumed imported goods, producers consumed their own crops, while major speculators existed around commodities such as cocoa, cotton, etc. What we see today, and which is really helped by these African entrepreneurs, is a reconnection of the city with the countryside around a virtuous circle of local production and consumption, which requires intermediaries, traders, producers or processors.

Do governments provide enough support for this type of entrepreneurship?

The speeches are always perfect. The reality, however, is much more nuanced, especially in the food sector. This is because governments are very anxious to feed the cities at low prices. But in the medium and long-term, it makes no sense to have cities that are fed on production brought from thousands of kilometres away, when there is major agricultural potential at hand. When there is no supply, there is no point in creating tax systems that penalise the urban consumer. On the other hand, when it is possible to have a local supply, it makes sense to encourage it.

Are you in favour of protecting the market?

Not of protection, but of a fiscal balance. You must always be careful about protection. As soon as high customs barriers are erected at African borders, they are defrauded. They are therefore often ineffective.

Your investing group, Investisseurs & Partenaires, supports African SMEs. In the agricultural sector in particular, how do you identify projects to promote and what kind of support do you provide them?

We are an impact fund whose characteristic is to be very involved with the contractors with which we work. We maintain a constant dialogue with managers on their company’s strategy and evolutions. In most cases, we have a fairly strong involvement in the financial and commercial side of the company. Entrepreneurs know their product, their profession, their process, but other issues can often be more complicated. We also try to bring them skills in marketing, human resources, and environmental, social, and governance management. This is the core of our expertise. In general, we are discovering the technical know-how that the entrepreneur knows perfectly. However, we have acquired skills over the years in the healthcare, distribution and microfinance sectors. Curiously, in the relationship with rural communities, we have also acquired a certain know-how. We are not specialists in any kind of production, be it tropical fruit, milk or whatever, but we have a strong agribusiness portfolio, whose common thread is the relationship with small farmers. Modestly, we are able to have a number of intuitions and our experience allows us to understand at least a number of obvious mistakes that entrepreneurs repeatedly make.

What are these frequent mistakes made by agri-food companies?

These errors are of course not deliberate. What is really important for a company that is relying on a supply model in a rural environment is the regularity and consistency of supply. This means investing in the structuring of suppliers, providing technical advice and having an impeccable financial relationship. It is important to retain farmers’ loyalty by buying the promised quantity on the promised date at the promised price, paid for at the promised moment. It sounds simple, but in reality, SMEs face enormous cash-flow problems and de facto have great difficulty in meeting their commitments. Failure to comply with these commitments can be a fundamental cause of the breakdown in confidence and thus the breakdown of the supply chain, resulting in small farmers being tempted to work with others or to do something else. Yet often, when companies are short of money for reasons intrinsically linked to their business cycle, but also because of their inability to anticipate hard times – companies are often undercapitalised and underfunded because entrepreneurs do not want to lose majority control of their company or minimise financial burdens – they do not, for example, anticipate the difficulty of financing seasonal loans. So the whole mechanics of financing relationships with farmers is something that agribusiness entrepreneurs often underestimate with very serious consequences, both on the financial framework of the company and sometimes even on its whole strategy.

The financing of seasonal credits, but more generally the financing of agriculture or agribusiness, seems insufficient and riskier than in other sectors. What are the possible solutions for finance in this sector, where banks are largely absent, apart from the major export sectors?

Two things are specific to the financing of agricultural activities compared to other SMEs. The first is the financing of the farming cycle, which is very specific since, in many cases, we are dealing with annual crop cycles that require specific funding. And, when you are outside the majority of production areas to which the banking system is accustomed, it can be very difficult to finance these seasonal loans. There are alternative options on the international market, such as crowdfunding or specialised funds, but they are very weak. The second issue is related to the fact that these activities are dependent on climate and natural hazards. This has several consequences. These companies need more equity, more financial buffers than others, and a much more flexible and much more shrewd financial conduct. They are more delicate than the others. We mustn’t have any illusions. But this does not mean we cannot succeed.

We also need state interventions in every country. Developed countries have always had state interventions in the agricultural sector. This is what enabled Europe, for example, to build its agriculture. I believe governments have to build agricultural policies that now include these new players. Take the case of Burkina Faso, which is almost a counter-example because there is state intervention in the soya sector: but when you think agricultural sector in Burkina Faso, you think cotton and that all the farming policy revolves around cotton. When someone says, ‘I’m coming to plant soya’, it is alien to them. Governments need to build agricultural policies that are more open, more diversified. It’s not very complicated. This might mean extending initiatives, such as input subsidies or guarantees for seasonal loans to other sectors, which were traditionally reserved for the main traditional sectors.

The financing of seasonal loans requires the emergence of new instruments. One could imagine new financial instruments that could be pan-African, regional or national, and specialised in this activity, either by granting guarantees or by providing short-term financing. We could also imagine that an important impact fund could be created with the aim of financing short-term seasonal loans on minority farming activities.

Do agricultural banks make sense to you?

There is room for specialised agricultural banks. The fundamental aim of these banks is not so much the economic model or the market, it is governance. If African states are able to put in place governance systems that are totally independent of political power, capable of judging a company’s economic fundamentals, then this can work.

Could you give us one or more examples of an agricultural sector or value chain that stands out for its development and success?

There are many examples. Take poultry farming; this is a typical example of a crucial nutritional quality chain, through the supply of protein – meat and eggs – that is very cheap for the population. Africa has seen a flourishing of initiatives in this field, and this can only be the product of entrepreneurial dynamism, both in terms of quality and formal structure. If we want to build up production and deliver sufficient quantity to feed a growing urban population, we must have production and distribution chains that are irreproachable in terms of sanitary standards. This requires organised, structured entrepreneurs who enter the formal world. These companies also have downstream implications across the entire poultry product chain.

What are the current or possible links between these local SMEs and the major international groups that are increasingly interested in Africa?

That is a big issue. The multinationals that are going to invest in Africa are going to need local suppliers. They have an interest in developing them rather than importing products from the other end of the world.