At the recent European Development Days in Brussels, there was a general consensus on the need to engage the private sector in development efforts — but the “how” still divides the international aid community, especially when it comes to supporting agriculture.
In its public-private partnerships’ strategy, the European Union is keen on equity funds, one of the EDD buzzwords.
The EU is close to setting up an equity fund in Uganda to boost agribusiness, most likely in partnership with the International Fund for Agricultural Development. Sources consulted by Devex said negotiations are still underway, but at an advanced stage, so the fund should become operational within the first half of 2014.
Equity funds are becoming increasingly popular, although they represent only one aspect of the broader discussion on PPPs.
Can official development assistance leverage private sector investment? What are the best financial instruments for PPPs? What are the risks of those instruments and should they be addressed?
“There are quite different ideas. There are some who believe that ODA used to leverage more private investment in agriculture [will] bring more money to development and would benefit everybody in the long term,” Federica Cerulli Irelli, funds officer at IFAD’s mobilization and partnership unit, told Devex. “[But] there are others who are concerned, especially civil society, that using ODA to support private sector to decrease the risks of private investment … could bring a departure [of resources].”
An equity fund to boost small and medium enterprises’ development in Uganda was conceived in 2011, when EU Commissioner for Development Andris Piebalgs visited the African country.
However, the push for the project’s finalization is quite recent.
Devex learned that the fund is likely to become a reality, even if IFAD hasn’t signed the partnership yet and the EU is still discussing internally some sensitive details, like how public investors that are not allowed to make a profit can invest in equity funds and how to manage those profits.
The aim is to leverage public and private resources to support the development of small and medium enterprises in commercial farming and agribusinesses along the value chain without any land acquisition, and facilitating SMEs’ access to long-term finance. It is expected to have a $30 million portfolio of 25-35 firms, with strong growth potential and whose names have not yet been disclosed by Brussels. In addition, the fund will include a technical assistance capacity-building facility implemented by IFAD.
Why equity funds?
Equity funds are not new — the issue now is what role they will play in PPPs for agricultural development.
According to a 2012 study by the U.S. Agency for International Development on private equity in agribusiness in Southern Africa, since 2009 about 15 private equity funds focusing on agriculture have been or are being established in Africa, with about $2 billion planned in investment.
Development organizations believe equity funds are a good tool to correct some deficiencies of the financial markets, by helping farmers access long-term credit and creating opportunities for small holders, U.N. sources told Devex.
Equity funds are also increasingly being seen as alternative to traditional development programs due to their capacity of responding quickly to new investment opportunities, while aid projects tend to require longer and more complex implementation processes. Furthermore, ODA channeled into equity funds is expected to leverage more private resources than when funneled into other instruments.
The idea of equity funds for development is simple. Public and private actors invest in companies selected according to specific criteria. Each fund has its own set of goals, but in general the investment must be profitable and have positive social or environmental impacts, as well as benefits for small-holder farmers. Investors share the entrepreneurial risk with the funded companies, while public sector resources, which are also devoted to technical assistance, are seen as a way to minimize risks for the investors.
However, EDD participants told Devex they still have some doubts.
What is the risk of investing ODA in equity funds versus in traditional development programs? To what extent can aid be used to minimize the private sector’s entrepreneurial risk? Will equity funds really be able to attract private investors? What is the role of small-holder farmers? Will equity funds really serve small-holder farmers or just corporate interests? How can small holders contribute to picking the investments?
In search of alternative financial instruments to fund agricultural development, international organizations are also increasingly looking at “blending” solutions, where loans come with a grant component devoted to technical assistance. The aim is, again, to leverage private sector investment.
“Blending might become a more important element of the strategy within the context of [EU] financing, but it is still used for infrastructure, energy and other areas, not in agriculture,” IFAD program officer Willem Wefers Bettink told Devex.
According to Bettink, agriculture’s high-risk factors and the difficulty in finding investment proposals that are durable and feasible represent the major constraints to the adoption of “blending.”
While the EU seems to be still reluctant to use its blending facility for agricultural development, Devex learned that the European Investment Bank is paying increasing attention to the sector.
“Recently we have been starting contacts with the EIB and with the ECOFIN to see whether there was an opportunity for replicating [in agriculture] the blending facilities that are [established] at regional level mainly for infrastructure and energy … We are trying to see if there is any possibility,” Cerulli said.
She added that IFAD is exploring other innovative funding strategies in which private sector could play a relevant role, like remittances, and studying if the model of advanced market commitments used for vaccines can be adopted in agriculture.
Read more development aid news online, and subscribe to The Development Newswire to receive top international development headlines from the world’s leading donors, news sources and opinion leaders — emailed to you FREE every business day.