Backed up by a pledge to buy Tanzania’s entire 2018 crop private buyers acting for processors in Vietnam and India refused to pay underscore the enduring problem for so many of Africa.s commodity producers.
African farmers grow around 45percent of the world’s cashew nut, yet 90percent of the continent’s crop is exported for processing overseas, denying the industry the opportunity to add value at home and increase Africa’s share of global trade. The Africa cashew alliance estimated that a 25percent increase in raw cashew nut processing in Africa would generate more than $100 million household income in the sector.
As it is Tanzania’s farmers get rock bottom prices and the country imports its own nuts back after processing to meet buoyant domestic demands. It’s easy to sympathize with the Tanzanian government, but crop seizures and price hikes aren’t a long-term solution. This lies in developing a local processing industry to add value at home, rather than giving the cashew away to Vietnam and Indian.
“It’s like Africa is a donkey working for everybody. We produce what creates wealth, but we get next-to-nothing for it because we do not add value. If we continue to trade In commodities we will continue being marginal players rather than serious players in the global market, “says Benedict Oramah, president and chairman of the Africa Export-Import Bank (Frixembank).
Accessing the finance to add value at home is one of the biggest challenges for Africa =’s agri-processors and mirrors the scarcity of trade finance Africa SMEs. Most are shut out by international banks which have no appetite to lend to and projects below investment grade or offer the small parcels of capital needed to empower local industry.
They also face a prohibitive cost of funds from local banks, which lack liquidity and favor fixed deposit over SME lending anyway. Although the number of local and regional banks financing value-add amongst their domestic clients base- often under Afrixemnak’s lead – is growing, many projects fail to get off the ground.
Witness how Nigeria still loses 45percent of its abundant tomato harvest before ir reaches domestic consumers because of a lack of finance to fund the most basic value-add like cold chain styorage.
“Nigeria spends the same amount as it costs in lost tomato production on importing tomato paste into the country, “says Larry Umunna, country director Nigeria at non-profit organization techserve, currently involved in a YieldWise project funded by Rockefeller foundation to reduce post-harvest losses in the tomato value chain.
It’s vicisious circle, because addingvalue is a key way for firms to better access trade fiancé as it ,makes more sernse from a lending point view, explains Giles Hedley, , investor relation manager at Barak Fund management, whose funds include the Mikopo structucred credit fund providing longer-term credit to processing plants in metals and agriculture.
“We had a borrower who had landed a very good tender and needed financing to expand. They approached every bank in South Africa and were turned away. They had been accessing short-term trade finance with us and eventually came to us for the longer-term loan too, “he says.
Bank’s reluctance to finance value-add is matched by investors apathy too, say Hedley. Despite growing demand for finance from Barak’s existing borrowers as they graduate from straight-forward trade finance and working capital solution to longer- term finance for capex projects, investors aren’t keen.
“The mikopo fund is up and running and has a good track record, but investors inflows are slow. From a yield perspective,e it is attractive, but risk and unrest in Africa means trying uo longer-terms captal in the continent is risky. It involves financing out to five years, but the sweet spot is about three years.”
Where Hedley does see more investors enthusiasm for value-add, however, is the environmental, social and governance )ESG) andgle around local job creation and long-term sustainability. It’s a theme that also aligns with the UN’s sustainabily development goals, another metric institutional investors increasingly try to intrgrate into their portfolios. “investors wants to talk to the impact side of an opport arunity rather than just the financing and commercial side,” Hedley says.
The enduring problem of access to capital has prompted some experts to look at the value-add conundrum through a different lens. African factories and processors should exploit their comparative advantage of labour and recognize their comparative disadivantage of capital, says Afrixembank’s Oramah.
Adding value to buecite to produce alumumium requires heavy capital investment, he explains. Instead, Africa could contyinue to export bauxite and import aluminimium ingots to press into sheets, a last mile of value-add requiring intensive labour.
Cotton is anpother example. Rather than gining cotton into tarn, producers should invest in the end of the value chain and make garments.
“You can import the cotton raw, import fabric andmake garmets. If you spend $10 million garmets, you will probably employ 1,000 workers, grow your exports and build more factories. In a capital-scarce economy, it may make sense toerxport the raw materials, import something back that requires labour-0intensive activity to produce, then re-export,” Oramah explains.
The roles of ECAS
Export credit agencies (ECAS) offer one way for Africa to access cheaper finance for big ticket industrialization, whlst benefitting their own domestic exporters. Africa’s richest man, Aliko Dangote- also behind the continent’t value-adding pasta and flour factories – recently arranged $4.5 billion in debt financing, which include backing from commercial and development banks and ECAs, for a giant Niogerian oil refinery to reduce nigeria’s dependence on imported petroleum.
In other examples, mkining gropus lokks to take elements of their African projects off their balance shhet and push project development are contracting out to suppliers of heavy equipment and power generation particularily. It’s providing export opportunities backed by ECA finsnce, notes Mark Norris, a partner at Sullivan and Worcester.
The UK’s ECA, UK Export finance (UKEF), for one, is working with the country’s exporters on a range of opportunites in africa’s agriculturial sector, including the privision of machinery and vechicles, irrigation systems post-harvest storage facilities and livestock welfare, say Adam Harris, its head of civil, infrastructural and energy.
ECAs may provide the machinery and service to develop Afric’s mines and farms, but their mandate to promote their own domestic expors doesn’t move the needle on developing africa’s own manufacturing and local content base. However, this may soon change. Under OECD rules, ECAs can only finance 30percent of the content for an Africbased projrct from domestic Africa suppliers ans service providers.
Now the pressure to change these rilus is growing, says Chris Mitman, founder and head of agency finance at investec Bank, who attended the OECD stakeholder meetings in paris in November. “local companies that might get involved in contacts can’t access significant ECA-backed funding. If the OECD rules can be changed and ECAs can support more local content for projects where they can source locally, it will be great for developing local sustain able business and industry.”
ECAs are also becoming more open to working with africa’s local and regional banks, which are beginning to develop export finance exper ise and an ability to tap ECA finance, says Mitman.
Historically, some ECAs has punished back from working with African banks because of concerns around their credits rating and t heir proximity to borrowers. “ECA see local and reginal banks as valuable partners. The question now is whether local banks are well resourced enough to develop the opportunity.” Mitman adds that ECAs’ strict controls over the use and application ofbfunds ensures a visibility that will also encourage international lenders into African projects.
Local content woes
But putting new manufacturing equipment into African factories requires exporoters to drill down on where they can sell their wares and loca content providers to decure ECA support in a complicated process.
In the oil, gas and mining sector, where content refers local com[panies taking ownership stakes in mies and oil fields as well as the value-add of refineries or petrochmecial industries, the number of viable local companies able to supply local equipment or services is an issue. Asuccessful local procurement environment nedds knowledge, tools and capital to grow, says Mukaund Dhar,a= a partner at law whit and case.
“Without an enabling environment, the risk is local players are unable to fully participate in projects, or are only able to supply at uncompetitive prices because they have to import service and goods to be able to resupply procures,” he says. Local contents participating also depends on local firms accessing capital in the constrained local bank market. “it gets challenging when the local partner needs to fund their oarticipation in the development of the project or of the resources, and can’t access the finance to do so.”
It means international investors may end up financing carrying local participants; worse still, a local participant’s share of the expenses gets funded by the interbnational partivipant on the back of the costly loan that leaves the local player bereft of any dividen unless commodity prices double or expenses collapse. “it can result in meaningless or illusionary participation,” says Dhar, who also noted the importance of local currency funding for local participants.
International banks tend in dollars or euros with significant forign exchange exposure for the borrower. “loans may carry low interest rate but soft costs in terms of currency exposure and minimium sizes of debt necessary can be crippling. More exposure to local currency could be a game changer, “Dha explains.
Yet take-up UKEF’s local currency financing for Africa buyers of uk exports has been slow, says Harris. In 2016, UKEF expanded the number of local currencies in which it could support buyer credit financing to include 15 african currencies. “like all local currency borrwoers, African borrowers have to weight up managing forex risk on the one hand versus the interest rates to weigh they pay on the other. We are yet to close our first African currency transaction but we hope that with greater awearness of UKEF’s offer more borrowers will want to expore this route, “he says.
Another worry for UK companies sourcing local co ntent is the bribery ACT.”UK companies need adequate procedures to ensure that the person in the local country isn’t engaging in bribery and corruption because that becomes a strict liability offnce, “says Norris, adding that the requirements of the Act are increasingly being imposed on contracting parties even if they are not a UK business.
It’s a similar story in the agricultural sector, where poor yield and feeble local production often struggle to support value-add in factories and processing plants, forcing the agri-processors that do exist to import their raw materials. “we still find in many of our countries that the competietiveness of the average farmer is questionable, “says Umunna.
He draws on yield data to illustrate his point. Nigeria produces 1.8 tonnes of corn per hectare, compare to Egypt, which produces 7.7 tonnes per ha. Rice yields in Nigeria vary from between 1.3 tonnes per ha to 2.2 tonnes per ha, comparet to egypt’s yield of 9.5 tonnes per ha. Such poor crop yield hit agricultural processors’ bottom line, who always look to source commodities cheaply, he explains. “nigeria’s agricultural sector needs to improve production if it wants to be the major supplier to the processors.”
Encouragingly, companies such as Olam, Nestle and Unilever, which has invested $30 million in two tea processing sites in Rwanda, and Coca Cola, which opened a new value-add drinks factory in Nairobi in 2018, are starting ti invest more in local production backed by ‘Build Africa and ‘Source africa’ strategies.
But Umunna would like to see them do a lot more. The multinations argue that their actions are influenced by consumer demand, but they also have the power to influence de man with Made in Africa stratrgies. It’s like that chinese proverb a journey of a thousand miole begins with a single step’.”