8 January 2013

Africa: Accelerating Value Addition

Africa has great potential to climb many value chains and create thousands of new jobs. It is time to test a new approach to realising this potential.

Why is it that Tanzania exports raw cashew nuts and imports processed cashew nuts, the ones they actually sell in stores? And why does Senegal's largest juice processor imports mango pulp, when mangos are rotting by the tonne a few miles down the road? Processing raw materials into market-ready products would create more jobs, capture more value locally, and reduce the tremendous post-harvest losses affecting farmers and traders.

Many attempts at converting raw materials that are in abundant supply into consumer products have gone wrong. Africa has many examples of so-called 'White Elephants' - expensive factories that have never been fully operational because the business concept was flawed.

A recent study by the World Bank reports that 60 percent of 87 failed agribusiness projects reviewed were brought down due to a flawed business case. The fact that you have a tomato surplus does not mean you can enter the ketchup market.

So we have learned that we need to start with the market. In the Tanzania and Senegal cases, the market is there and the customer requirements are clear.

As an aside, it is notable that 'the market' in these cases means Tanzania and Senegal and their surrounding regions rather than Europe and the US, where the barriers to entry are higher. Projections show that most increases in food demand will come from urban markets in developing countries. Perhaps it is time to devote more attention to growing in these markets first.

Leaving the product destination aside, from a development perspective, advancing the processing segment of the value chain is an excellent investment in jobs and incomes. If a company processes fruit pulp, jobs are created, farmers get income from produce that would otherwise be lost, suppliers of packaging material and trucks experience increased demand, and so forth. The multiplier effect is significant.

How do we unlock market opportunities? Policymakers must invest in infrastructure - roads, electricity and irrigation - and regulators must at least remove disincentives for entrepreneurs, industry and financiers to invest. We also need to ensure productivity and consistent quantity and quality at the farm level.

Market intelligence, business capacity and technology access are also key. Say a country produces excellent quality papaya as evidenced by growing exports to 'picky' markets. Now, it turns out that demand is increasing for papaya enzymes in the cosmetics industry. How do the papaya farmers and entrepreneurs learn about the opportunity and requirements to enter this market? And do they have the business capacity to be the cosmetology company's counterpart?

Or take something a little less advanced; demand for healthy cooking oil is increasing in a country with excellent oilseeds production. How do farmers and entrepreneurs know, and how can they get the knowledge, resources and networks to produce, package and distribute oil in line with consumer preferences?

Our thinking is this: let's accelerate innovation and growth at the processing segment of the value chain, by creating role models that other entrepreneurs can follow. We do this by identifying high growth potential value chains and high growth potential local enterprises, and helping them to test products and build market linkages vis-à-vis suppliers (farmers) and buyers (industry, wholesalers and retailers).

Beyond facilitating market linkages, what infoDev has termed Agribusiness Innovation Centres (AICs) are unique from the perspective of providing growth-oriented entrepreneurs with a holistic service offering. This includes financing - or 'patient' capital - to enable pioneers to prove their business model and build a financial track record that makes the enterprise less risky and more attractive to commercial financiers.

It also includes assistance with tricky issues for small growing firms such as technology identification, business management, and navigation of standards. Finally, it leverages the fact that it works with many processors to achieve economies of scale with regard to procurement of raw materials, packaging, and transportation services.

Implementation of an AIC necessitates dialogue between entrepreneurs, farmers, financiers, government, academia and industry to resolve business bottlenecks. This may initiate systemic change bottom-up while other endeavors start from the top-down. Africa has great potential to climb many value chains and create thousands of new jobs. It is time to test a new approach to realising this potential.

 - Ellen Olafsen is a programme coordinator with infoDev, a global entrepreneurship and innovation programme in the World Bank

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