Dr Paul Greener, explains the role of challenge funds in stimulating the market to provide solutions to social problems. By investing in innovative ideas of small and medium enterprises in Africa, AECF is promoting agricultural resilience and transformation.
What are the key challenges involved in establishing a new agribusiness in Africa and how can the public sector do more to support entrepreneurs?
The major challenges for entrepreneurs that negatively impact on investments in innovative businesses are access to affordable finance, and the lack of regulatory and physical infrastructure. Bank finance, when available, is usually prohibitively expensive as interest rates are about 30% per year, thus precluding investments by potential investors. In addition, regulatory authorities are under-resourced and take a long time to amend, for example, legislation frameworks to meet business needs.The public sector needs to have a greater understanding of how agriculture is developing. The different value chains require specific interventions, yet the public sector responsible for developing and implementing the legislation is usually behind the curve, and needs to learn what the private sector is doing before creating market legislation.
What is the role of a challenge fund in the overall financing mix required to promote agribusiness in Africa?
A challenge fund is a donor-funded mechanism that provides low or no-cost financing to private-sector actors to meet a social policy objective. It challenges the market to provide solutions to social problems and normally does not interfere in the operations of a business. The small and medium enterprises AECF invests in are small or nascent and thus, unattractive to private equity investors seeking financial as well as social gain from impact investors. The latter seek businesses in the development space with the intention of generating a measurable and beneficial social or environmental impact alongside a financial return.
Once a grantee completes the AECF 6-year funding period, some proceed to work with AECF Connect – a special initiative of AECF that prepares companies to attract additional support from impact investors. SolarNow in Uganda was assisted to raise US$6m in debt and equity for the development of solar electric systems to benefit the rural poor. Another company, Agflo in Ethiopia, was assisted to raise more than US$10 million for poultry development in rural communities.
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