Solution Cluster 1.2.4
Provide catalytic financing for high impact agri-food SMEs in Africa
A multi-donor funded facility and digital deployment platform that will provide catalytic capital to a range of actors and institutions investing in agri-food SMEsSmall and Medium Enterprises (SME) acting along the agri-food value chain, from production to retail. or supporting their capacity to develop viable business models that contribute to positive impact in food systems. The Facility’s capital will be used to scale and mobilise SME financing in accordance with impact criteria developed and tracked by the Facility. The Facility will consist of three main components:
- Catalytic capital to channel finance to agri-food SMEs. The capital provided will take the form of blended finance, de-risking instruments, first loss capital, guarantees, and financial incentives to financial service providers. It will not seek to generate commercial returns but rather maximise financial leverage and achieve impact at scale.
- Catalytic grant funding via technical assistance to agri-food SMEs and digital business development and learning platform to de-risk investments and enhance their investment readiness and bankability by improving the visibility of agri-SME support initiatives, tools, and resources. The Facility will connect directly with the proposed Agri-SME Business Development Platform (BDP) that aims to improve the visibility of agri-SME support initiatives tools and resources.
- Catalytic grant funding for alignment on impact criteria and standard agri-SME investor performance metrics, due diligence, and impact tracking and reporting to transform food systems along with the impact areas of nutrition, sustainability, resilience, and equity.
Providers of funds: The Facility will mobilise capital from governments, DFIs, multilateral organisations, impact investors, grantors, and others willing to take on a high risk.
Regional operation: The Facility will operate on a regional level, primarily in Africa, while some components like the digital platform could be more global. The solutions will reflect the regional context and priorities (e.g., food systems goals, national adaptation plans, nutrition strategies).
Direct recipients: The direct recipients will be the actors and institutions delivering the three above-described components of the fund. These will be Finance Service Providers (FSPs) and private impact investment funds, as well as enterprise support organisations or innovation networks, business development services (BDS), and/or Technical Assistance (TA) providers.
Final recipients of capital and services: The capital and services will be channelled to SMEs that operate across the food value chain (from farm to fork) provided that their business models meet a series of impact criteria.
Source of the Solution: The solution emerged by clustering three solutions suggested during the FSS process, all centering around the key barriers Agri-food SME envisage around financing, capacity building and access to innovation (see annexes 2 and 3). A small core group consisting of AfDB, GAIN, SAFIN Secretariat, WBCSD, Nourishing Africa, and FAO worked on merging the four solutions. The group then enlarged to organisations like GAFSP and responsibility and was informed by an Independent Food Systems Dialogue held by SAFIN. It builds on a set of related pre-existing initiatives that include:
- Investment initiatives: i.e. IFC’s GAFSP, GCF, 2X Challenge, ABC Fund, Aceli Africa,
- Metrics: for nutrition (GAIN N3F), sustainability and resilience (ResponsAbility’s climate metrics, CDC, or GIIN’s sustainability metrics or Nourishing Africa’s Agrifood SME-Resilience Diagnostic Tool), or equity (Incofin’s fund or 2X Challenge’s metrics).
- Global/regional networks, partnerships, BDS and TA providers or forums: SAFIN, Gavi, AGRA, WBCSD, WEF, CFI, Agripreneurship Alliance, Nourishing Africa, and SCOPEinsight’s Local Expert Network, etc
- Research: : WB: finance gap; The Lancet: impact of unhealthy diet; Nature: agrifood transformation
About this Solution Cluster
Agri-food SMEs in emerging economies usually mention finance as their top challenge, but also access to BDS and TA including agri-food innovation are key barriers for their ability to grow sustainable business models. Therefore, making the financial ecosystem more supportive of SMEs is critical for a sustainable food system transformation. This is particularly important given the role of agri-food SMEs in food systems. SMEs represent 90% of businesses and >50% of jobs. In low-income countries, 70-90% of all food consumed is produced, processed, transported, and sold by SMEs. Even in Africa, 80% of all processed food consumed in the region comes from SMEs (Reardon, et al.).
This solution will address three barriers SMEs currently face to growing and prospering in a sustainable way. First, high risk and cost of financing has led to a shortage of finance for agri-food SMEs. In Africa alone, there is an annual financing gap of about USD 100 billion for agri-food enterprises with needs between USD 25,000 and 5 million (Aceli Africa). In many contexts, agri-food SMEs find it particularly difficult to access finance in local currency. Second, financial institutions and investors with interest or capacity to reach agri-food SMEs often face high transaction costs and risks when serving this market. Access to innovation around food solutions, BDS, and TA for capacity building is a major barrier. Third, FSPs, investors, donors, and government are not aligned around clear and practically measurable impact standards for agri-food SME finance, which limits learning across the ecosystem and hinders a transparent and competitive process of allocation of concessional funds to maximise impact. In particular, we lack generally accepted metrics for nutrition as an impact investment area.
The Facility will provide three main inputs: i) catalytic high-risk tolerance capital, ii) provision of TA best practices and a network of regional TA providers and support to BDS and access to innovation with the capacity to provide TA and investment-readiness assistance to SMEs, and iii) a set of standardised metrics that assess different actors and organisations across impact areas including nutrition, sustainability, resilience, and equity. As outputs of this, we expect that USD 10 billion of catalytic capital will help mobilise an additional USD 100 billion of investment capital. This will lead to three main outcomes: greater financial flows towards agri-food SMEs; greater and more robust BDS and TA offerings to agri-food SMEs; and growth of a global pipeline of SMEs across the value chain and at various stages of development. In terms of impact, an increased supply of nutritious foods will help improve diets, leading to a healthier society; other impacts could include reduced food loss and greenhouse gas emissions.
This solution aligns to the Summit’s ‘game changing and systemic solution’ criteria:
Impact potential at scale – The Facility’s main innovation lies in the things it combines and the scale that it can achieve – it is really a ‘systems approach’ to tackling the SME financing and capacity development gap. The Facility will catalyse impact and scale by de-risking and mobilising capital that previously did not flow towards agri-business SMEs. The solution will incentivise both investors and investees alike to align their operations along the Facility’s impact criteria. Scale of impact is expected to take place at the three following levels:
- Scale of financial mobilisation via leverage of de-risking capital and guarantees. No existing facility mobilises purely this type of high-risk and cost-covering capital.
- Scale of capacity development and metrics alignment impact across the FSP, investor, and TA space, well beyond specific financial flows associated with the Facility. These set of metrics do not currently exist, and this facility would not just create the metrics but also incentivise investors and investees to use them in order to access its capital. The Facility will use existing metrics and consolidate them to a set of metrics that cut across the main impact areas (see examples above)
- Scale of development of new business models in agri-food SMEs that address food system transformation challenges. To achieve this, the Facility will leverage existing BDS providers, who offer tailored workshops and training, data, and knowledge resources (capacity building) to enhance agri-food SMEs’ skills and financial knowledge, and also potential support on pre-screening investees to enabling investment readiness at will to accelerate and scale utilising tools geared towards transforming these businesses to be more ‘green’ and incorporating nutritious foods as well as gender equity and youth leadership into their business model and strategies.
Actionability: The Facility is actionable because while it will accelerate scale by supporting and working with existing facilities and stakeholders across the existing landscape, such as multinational investment facilities or private funds, it will be different from any organisation or facility currently in existence. It will invest in domestic and regional markets, be entirely focused on enabling business models that are food system-transforming at the SME level, combine catalytic capital, BSD and TA, and work on alignment through standardised metrics.
Although the initiative is still nascent, there are indications of likely support. The growing coalition of institutions co-creating this solution is just a subset of the many agencies with commitments and programmes committed to advancing agri-food SME financing. A complementary mapping undertaken by the group suggests a wide range of support to leverage catalytic capital to transform food systems through agri-food SMEs. Government acceptance of the Facility as a solution to transform food systems will be vital, given government funding is the key to mobilise the high-risk and high-cost capital that is needed.