Steve Harris Market Linkages Specialist Techno Serve Steve

Steve Harris - Market Linkages Specialist, Techno. Serve Steve Harris joined Techno. Serve in 1997 with technical support responsibilities in identifying high-value opportunities and profitable market linkages for Techno. Serve clients. Initially his responsibilities covered all Techno. Serve programmes in both Africa and Latin America, but these days his work is more focused on support to the Africa Division and he leads Techno. Serve’s Horticultural Team. His current focus is on providing expert support in banana production and marketing to Technoserve’s smallholder banana and matooke development programmes in East Africa. He is also leading Technoserve’s support programme for the launch of large-scale banana exports from Mozambique. He recently provided expert assistance to the East Africa Banana Strategy Design work Steve co-authored a detailed study in 2006, “Financing the Development of Small and Medium Agribusiness in Southern Africa”. Steve has almost 30 years experience working commercially and developmentally as a consultant on agricultural projects in over 60 countries.

Carl Cervone, Regional Coffee Advisor, Techno. Serve, Kenya Has been leading Techno. Serve’s entry into the Kenya coffee sector and providing strategic advice to the Tanzania coffee program since early 2006. He was the founding director of New Assets, Inc. , a non-profit that offers financial and advisory services to sociallyminded entrepreneurs in developing countries Worked in Tanzania as the managing director of MESO Microfinance. Mr. Cervone holds a BA in environmental science from Wesleyan University, and a certificate in microfinance management from the Boulder Institute.

Customised technical assistance and diminished financial risk Presentation at the 3 rd AFRACA Agribanks Forum “Africa Value Chain Financing” October 16 -18, 2007 Nairobi, Kenya

FINANCING THE DEVELOPMENT OF SMALL AND MEDIUM-SCALE AGRIBUSINESS IN SOUTHERN AFRICA A study prepared for the Rockefeller Foundation (December 2006) Objectives: Identify sources of finance available to small and medium scale enterprises (SME’s) in the agribusiness sector in Southern Africa; Investigate reasons for any financing gaps; Determine how best to fill these gaps, and stimulate creation and development of agribusinesses that improve the lives of the rural poor.

BUSINESS MODELS THAT ENHANCE SMALL FARMER INCOMES 1. Processing businesses: Providing a stable market for farmers and adding value in -country Small-scale farmers Agro-processing plant Regional and Export food products market 2. Supply businesses: Improved seed, access to fertiliser and pr oduction technology Seed, fertiliser, technology supplier Small-scale farmers Increased production efficiency and farmer income Cheaper food more readily available 3. Outgrower model: Small farmers and nucleus business are interdependent Nucleus Business Small-scale farmers Business usually contracts farmers as producers, supplying inputs, training, technical advice and point of sale Farmers are integrated into production, processing and marketing chain

INVESTING IN MALAWI’S SEED INDUSTRY VALUE CHAIN PUBLIC SECTOR PRIVATE SECTOR Investment Targets Indirect Investment Targets Impact from Investment Contract Growers OPV Breeding Release Multiplication F 1 Treatment Sales Cropping Clean Treat Pack FSE Seed Multiplier Businesses IMPACT Food Security Contract Growers Mo. A, CGIAR, NARI CONSUMER Input Suppliers IMPACT ON ALL FARMERS Increased Yield & Quality & Income

SOUTHERN AFRICA – SEVERE FINANCING GAPS IN AGRIBUSINESS Stage of Business Development START-UP EARLY-STAGE EXPANSION MATURE Example Business Net Assets NIL US$0. 5 to 1 m US$2 m US$10 m+ Asset Finance Needs Financing Gap ($50 -250 K) Financing Gap ($100 K-1 m) PE Funds Commercial Investors PE Funds, Banks/Ins, Stock Exchanges Working Capital Needs Financing Gap ($50 -100 K) Financing Gap (Some Receivables Financing) Vendor/ Receivables Financing, Banks

WHY CAN’T AGRIBUSINESS SMEs GET ACCESS TO FINANCE FOR START-UPS AND EARLY STAGE EXPANSIONS? Problem Shortage of risk capital Contributing factors • Banks are committed to short-term, highly collateralised debt for young companies; • Banks have trouble understanding agribusiness; • Made worse by lack of equity and quasi-equity risk capital; • Especially noticeable in the agribusiness sector. Poor business management capacity • Typical agribusiness SMEs lack know-how to manage their businesses efficiently; • They often lack appropriate governance, controls and discipline; • They often lack a detailed Business Plan; • All of which are potent barriers when looking to access finance.

CONCLUSIONS FROM THE STUDY 1. African economic development = agribusiness development; 2. Finance for large expansions and mature companies – plenty of supply but lack of investees; 3. If we don’t provide a solution for start-ups and early-stage expansions, there won’t be any graduates looking for large expansion and mature financing; 4. There needs to be more equity or quasi-equity financing made available; 5. Financing risk is greatly reduced when accompanied by customised technical assistance to improve business management capacity; 6. A new approach is needed that combines appropriate financing with customised technical assistance to improve business management capacity; 7. We recommend a new fund be created to provide such financing and be tightly coupled with grant-funded customised technical assistance.

EXAMPLE: TECHNOSERVE AND THE TANZANIAN COFFEE INDUSTRY Opportunity • Transition farmers from commodity to highly profitable speciality coffee • Requires investment in centralized processing facilities – “wet mills” • Processing infrastructure and farmer organisation virtually nonexistent in 2001

FIRST, NEW ORGANIZATIONAL STRUCTURES WERE DEVELOPED Techno. Serve’s Strategy • Support a service provider to provide marketing and financial linkages to farmer groups • Identify and organize farmer groups with potential to produce quality • Assist groups to invest in improving quality and production MARKETS Group FINANCE QUALITY PRODUCTION Farmers

THEN, A VARIETY OF UNCONVENTIAL FINANCING ARRANGEMENTS WERE USED TO IMPROVE QUALITY Product Long-term financing Short-term financing Securities • Fixed assets • Marketing agreements • Guarantee funds • Warehouse receipts • Marketing agreements • Price-risk management Outputs • Centralized processing infrastructure for improving coffee quality • Working capital to fund processing operations • Advance payments to attract farmers • Agro-input credit to help farmers increase production

CUSTOMISED TECHNICAL ASSISTANCE DIMINISHED FINANCIAL RISK Financier Local bank for working capital Challenge • Unconventional borrowing needs of client • Didn’t understand business model, market risks, etc. • Didn’t see coffee as full collateral Technical assistance requirement • Significant initial support to bank and client securing collateral, developing business plan, monitoring performance and financials • Minimal ongoing support once creditworthiness and strength of business model proven Soft loan provider for CAPEX • No presence on-the-ground • Looked to TNS for due diligence function • Cautious of local risks, little experience in Africa • Ongoing TNS operational assistance to ensure that loan is used properly until creditworthiness established Exporter for working capital and CAPEX • Commits client to future coffee deliveries (potentially restricting marketing options) • Saw TNS as honest broker • Ongoing TNS operational assistance to ensure that volume and quality commitments met

RESULTS: SALES HAVE INCREASED FROM $300, 000 TO OVER $3 MILLION IN 5 YEARS, IMPACTING MORE THAN 10, 000 SMALL FARMERS KILICAFE sales 2001 -2006 – Financial year May-April $US Millions Specialty sales