Value-Added Africa

Often restrained by weak local players and poor crop yields, how can African countries build a robust industrial base and boost their value-added credentials in the global market?

Last year, Tanzania’s President John Magafuli’s order to hike cashew prices so as to protect the country’s struggling farmers – backed up by a pledge to buy Tanzania’s entire 2018 crop when private buyers acting for processors in Vietnam and India refused to pay – underscored the enduring problem faced by so many of Africa’s commodity producers. In short, Tanzania’s cashew crisis highlighted the need for Africa’s commodity producers to add value at home.

African farmers currently grow around 45 per cent of the world’s cashew nuts, but 90 per cent of the continent’s crop is exported for processing overseas. Yet the Africa Cashew Alliance estimates that a 25-per-cent increase in raw cashew nut processing in Africa would generate more than US$100m in household incomes in the sector. As it is today, Tanzania’s farmers get rock-bottom prices and the country imports its own nuts back after processing to meet buoyant domestic demand. 

“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 of the African Export Import Bank (Afreximbank).

A vicious cycle

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 for Africa’s SMEs. Most are shut out by international banks, which have no appetite to lend to any projects below investment grade or to offer the small parcels of capital needed to empower local industry, while local banks lack liquidity and favour fixed deposits over SME lending anyway. Although the number of local and regional banks financing value-add amongst their domestic client base – often under Afreximbank’s lead – is growing, many projects, even then, fail to get off the ground.

Witness how Nigeria still loses 45 per cent of its abundant tomato harvest before it reaches domestic consumers because of a lack of finance to fund even the most basic value-add like cold chain storage. “Nigeria spends the same amount as it costs in lost tomato production on importing tomato paste into the country,” says Larry Umunna, Country Director for Nigeria at the non-profit Technoserve. The organisation is currently involved in a Rockefeller Foundation funded project to reduce post-harvest losses in the tomato value chain.

What emerges is a vicious circle, because adding value is a key way for firms to better access trade finance as it makes more sense from a lending point of view. Meanwhile, banks’ reluctance to finance value-add is matched by the apathy of investors who see longer-term capital in the continent as a risky prospect, regardless of a project’s attractiveness from a yield perspective.

The role of ECAS

Where more investor enthusiasm for ‘value-add’ funding exists is in thinking in terms of the environmental, social and governance (ESG) angle around local job creation and long-term sustainability – a theme that also aligns with the UN’s sustainable development goals. Indeed, investors increasingly seem to want to talk to the impact side of an opportunity, rather than just the financing and commercial side.

Export credit agencies (ECAs) also offer one way for Africa to access cheaper finance for big-ticket industrialisation, whilst benefiting their own domestic exporters. UK Export Finance (UKEF), for one, is working with the United Kingdom’s exporters on a range of opportunities in Africa’s agricultural sector, including the provision of machinery and vehicles, irrigation systems, post-harvest storage facilities and livestock welfare.

The mandate of ECAs to promote their own domestic exports doesn’t move the needle on developing Africa’s own manufacturing and local content base, yet that may soon change. Under OECD rules, ECAs can only finance 30 per cent of the content for an Africa-based project from domestic African suppliers and service providers, but pressure to change those rules is growing – and that could prove a boon for developing sustainable African business and industry. 

Backing a ‘Source Africa’ strategy

As it stands today, poor yields and feeble local production often struggle to support value-add in factories and processing plants, forcing those agri-processors that do exist in the local African market to import their raw materials.

Larry Umunna draws on yield data to illustrate this “questionable competitiveness”, advising that Nigeria produces 1.8 tonnes of corn per hectare, compared to Egypt’s 7.7 tonnes per ha. Rice yields in Nigeria vary from 1.3–2.2 tonnes per ha, compared to 9.5 tonnes per ha in Egypt. Such poor crop yields obviously hit the bottom line of agricultural processors, who always look to source commodities cheaply.

Encouragingly, FMCG giants like Olam, Nestlé and Unilever, which has invested US$30m in two tea processing sites in Rwanda, and Coca Cola, which opened a new value-add drinks factory in Nairobi last year, are starting to invest more in local production backed by ‘Source Africa’ strategies. Yet Mr Umunna would like to see them do a lot more. “The multinationals argue that their actions are influenced by consumer demand, but they also have the power to influence demand with ‘Made in Africa’ strategies. It’s like that Chinese proverb: ‘A journey of a thousand miles begins with a single step’.”