Bridging Funding Gaps in Agricultural Development with Blended Capital
By Richard Lackey, World Food Bank CEO
Last fall, I attended a summit at UNIDO (United Nations International Development Organization), where I listened to several presenters speak on the need for more development support in African agriculture. Many of these speakers referenced the claim that more than $1 trillion USD is needed to bring market-based efficiencies to sub-Saharan African, and most seemed to agree that this funding gap can only be solved with participation of the private sector, as the aggregated funding available from governments, development banks, and Non-Governmental Organizations (NGOs) falls far short of the need.
As a member of the private sector, who has long been advocating on behalf of market-driven solutions for global hunger, I noted that the room was very much lacking in representation from other members of the private sector and capital markets – the very people who were being named as the linchpins for success.
If the solution for global hunger requires hundreds of billions in private capital, all parties need to be brought to the table. Until now, these much-needed institutional dollars have been sitting on the sidelines while governments and development banks have largely focused on project-based finance without significant consideration of the entire agricultural value chain – meaning they have been focused on fixing parts of the system without looking at the whole.
A quick ‘gap analysis’ by institutional investors reveals excess or unaddressed risk that cloud the otherwise highly attractive emerging markets of the world. To garner broad-based institutional investment, and to achieve development goals (SDGs and otherwise) in the shortest period of time, the answer may very well be found in the collaborative funding mechanism called ‘Blended Finance.’
Defined as “the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets, resulting in positive benefits for both investors and communities,” blended finance requires the collaboration of private, for-profit enterprises and non-profit agencies. This is a collaboration that has not been done to any great extent in the past. But that is changing, as NGOs, and even development banks, recognize that the challenges we see in creating an efficient agricultural value chain in emerging markets are just too grand in scale (between $800 Billion and $1.2 Trillion USD annually in emerging market agriculture alone) to be resolved without the active participation of private enterprise.
Conversely, the ability for private enterprise to have access to low-risk projects and systems that already have established relationships, lines of aggregation and distribution, and government participation, should be quite appealing, even to US investors who have been behind Europe and others in recognizing the exponential return on investment in places like sub-Saharan Africa from both a capital and social perspective.
At its core, blended finance seeks financial returns (often market rate), where the investment risk is moderated and the returns are enhanced by the leverage gained from the collaboration of philanthropy and private finance. While the types of returns seen in the old days of venture capital are possible, exponential returns appear more accessible, but within the context of patiently deployed capital. Through the support of development funds, granting foundations, and even governments, private enterprise can build investment products, programs, and funds that have reduced risk, improved access to advanced technologies, and improved risk-return profiles. Support can come in many forms, including loan guarantees that reduce the risk of lending by regional banks, and, consequently, the rates charged to investors. Governments may provide grants of land, buildings, or funds, but their greatest contribution is typically in the creation of development-, banking- and trade-friendly policy. Through these highly customizable investment pathways, development funds, government agencies, and nonprofits alike can direct outcomes far greater and more sustainable than in the past. Sub-Saharan Africa may be the perfect testing ground.
By 2030, crop yields are estimated to decrease across the globe by over 7 percent. In East Africa, staples such as maize and beans are predicted to drop by a combined 5.5 percent. These decreases will primarily affect smallholder farmers who will be forced to adapt to challenges that arise from climate volatility and unstable markets. Smallholder farmers will not only need support by way of agricultural technological advances, disaster relief, and farm insurance, but they will also need financial support from both the public and the private sectors to survive, let alone thrive. Undeniably, organizations like the World Bank, African Development Bank, the World Food Bank, and several others are taking steps toward ensuring these decreases do not have detrimental effects. However, instead of combating these obstacles separately, the leading edge organizations in public and private sectors have begun to develop solutions that create larger and more sustainable capital structures. Blended capital is the key to funding global food security and promises to benefit both farming communities and investors across the globe.
Problems with food shortages in much of Africa could be mitigated by technological advancements in agriculture and education about tolerant crop varieties, optimal irrigation systems, and soil management. While this technology and knowledge is available, it is not widely used or circulated across African nations. Still, advancements in agricultural technology are on the rise worldwide. The World Food Bank has leveraged technology that provides a way to extend the shelf-life of common commodities to more than 20 years. Our partners like eProd have produced digital technology that makes managing agribusiness affordable and easy through mobile and flexible monitoring. And our partners like aWhere’s have developed unique weather and soil data that allows user groups to monitor and distribute agricultural weather conditions directly to smallholder farmers. These are just a few examples of revolutionary thinking in the agricultural sector; however, supplementing these technological systems with wide-ranging financial support in the form of blended capital will provide more effective and long-lasting solutions.
Blended capital enhances public and private support, ultimately impacting smallholder farmers in multiple areas. Public and private finance can improve agricultural education, develop skills, expand access to critical resources including inputs, and create necessary business relationships among farmers and through the entirety of the value chain. Overall, the benefits of blended capital outweigh any disadvantages. In fact, on the road to ending worldwide hunger, blended capital provides opportunities for farmers to access a stable income and de-risks the investments private and public investors make.
Geneva Global is one example of an organization that proves capital in the form of grants, investments, loans, and donations can directly enhance global food security. Their focus is on creating strong and well-rounded collaboration through various donors from several public and private institutions. They use blended capital in a way that resembles traditional investment banking standards with a focus on results. Their solution to global issues highlights the value in the blended capital approach and has reaped the philanthropic benefits.
The issue of hunger is broad, and therefore, requires broad and diverse approaches. Blended capital fills funding gaps which are unavoidable and allows for a sense of security among smallholder farmers and financiers. What is more, while resources become scarce, the opportunity to collaborate and create sustainable solutions propels all of us toward a more stable agricultural future.
Blended capital is a viable solution to guarantee food security – not only in developing nations, but also in other parts of the world. Smallholder farmers produce 80 percent of food consumed globally, so the most logical reciprocal investment model is one that can be used as a commonly accepted global solution.