AFRICAN AGRICULTURE FUND (AAF)
- Reference: P-Z1-AAZ-007
- Approval date: 13/12/1901
- Start date: 01/01/2002
- Appraisal Date: 12/12/2009
- Status: OngoingOnGo
- Implementing Agency: --
- Location: Regional
African Agriculture Fund (AAF) is a private equity fund which makes equity and equity-related investments in agribusiness companies in Africa as well as financial institutions that extend financial services to farmers' organizations. The first closing of the Fund is expected to be concluded by January 2010. It will be followed by a second and final round of capital raising which is expected to be concluded in December 2010. The Fund will have a commitment period of 5 years and a term of up to 10 years from the first closing. The Fund term may be extended by the Manager for up to two successive, one year periods subject to the consent of the Advisory Board.
The investment proposal falls under category 4 (FI) as it pertains to operations relating to financial intermediaries. The Fund's investment policies provides for compliance with internationally acceptable environmental and social standards as well as host country requirements. The Fund has developed a Social and Environmental Management System (SEMS) which will be reviewed to ensure compliance with the AfDB requirements. The fund has also appointed an SEMS Coordinator to manage and administer this system
The Bank is considering an equity participation of USD 40 m. The presence of the Bank will help to boost the Fund Manager's marketing effort in Africa and allow AAF to draw on the Bank's regional network of contacts, potentially broadening the investee base and increasing outreach. ADB's participation in the Fund will give comfort to prospective institutional investors and play a catalytic role in attracting private investors including commercial banks.
As an investor and Advisory Board member, the Bank's presence will seek to align the Fund structure and terms with international best corporate practice. It will promote the adoption of international standards of corporate governance both at the Fund and at the investee company level. The Bank's presence on the Advisory Board will also help to ensure that other important cross-cutting objectives are mainstreamed into project selection and design. These relate to gender and equal opportunities in the workplace, sustainable development and poverty alleviation. The Bank is further assisting the Fund to establish environmental and social guidelines for its projects. As such, the Bank will offer direct support to the fund to set up a fully compliant Social and Environmental System (SEMS) and a Development Outcome Matrix based on the latest ADOA recommendations.
Economic Performance By investing in agribusiness enterprises in Africa, the Fund seeks to contribute to job creation, income generation, poverty reduction and food security. At the national level, AAF's intervention will enable investee companies to generate tax revenues for their respective countries and in some cases earn foreign exchange through export of agricultural produce. During the due diligence, AAF's maiden transaction in Zambia will be assessed as relates to socio-economic performance notably: job creation, gender, income generation, tax revenue and export proceeds.
Environmental Effects The investment proposal falls under category 4 (FI), as pertains to Bank's operations relating to financial intermediaries. The Fund's investment policies provides for compliance with internationally acceptable environmental and social standards as well as host country requirements. The Fund has developed a Social and Environmental Management System (SEMS) which will be reviewed to ensure compliance with the AfDB requirements. The fund has also appointed an SEMS Coordinator to manage and administer this system.
Gender and Social Effects The Fund will give special consideration to businesses owned and operated by women. Phatisa already has a good track record in promoting women entrepreneurship. In South Africa, Phatisa works closely with the Lidonga Group, a broad-based black empowerment group with over 100,000 women. It has created opportunities for Lidonga to take up ownership of companies. The Fund will commission the development of a Social and Environmental Impact Evaluation Framework which will incorporate the Bank's ADOA detailed categories of development outcomes as well as the Equator Principles. Under this Framework, the Fund will support investee companies in which women constitute at least 30% of the workforce.
Private Sector Development and Demonstration Effect: The agriculture sector is considered to be high risk and this has hampered development efforts. The project is therefore playing a catalytic role in opening up the region's vast agricultural potential for private sector development. It will further support local companies in raising adequate equity capital to attract debt financing from financial institutions.
Infrastructure: The Fund's support to agriculture investments will go hand-in-hand with infrastructure development. Investments relating to plantation development for instance will require development of road infrastructure in the project area. Similarly, the Fund's intervention in agricultural production and processing will have to be accompanied by the provision of water and electricity which will constitute part of the project components.
Effects on Governments The projects will generate tax revenue streams for Government and in some instances will earn foreign exchange improving the countries' balance of payment positions. Some of the agribusiness projects which will be financed by the Fund will also serve as import-substitution, allowing Government to preserve foreign exchange.
Effects on Macroeconomic ResilienceBy spreading investments in various agricultural sub-sectors across Africa, AAF will minimize its vulnerability to external shocks such as variation in commodity prices or in-country socio-political crisis. AAF's investments will overall contribute to GDP growth.
Analysis of Additionality and Complementarity
Incremental Commercial Viability When the Bank expressed interest to join the Fund, the target IRR was less than 10%, and considered unattractive for potential private investors. The Bank has successfully worked with the Fund Manager and AFD to structure and review the financial and operating assumptions to make the Fund more attractive to investors. By participating in the Fund, the Bank will bring in foreign capital and provide strategic guidance in making sound investments and enhance overall commercial returns. AAF views the Bank as a lead institution and its presence will help to lower the perceived political and financial risks. The participation of the Bank has helped attract private investors to close the capital raising. For this reason, the Bank's catalytic role, is considered crucial.
Incremental Development Outcomes: From a socio-economic perspective, the investments will contribute positively in job creation particularly in rural areas, enhancement of food security, income generation, poverty reduction and skills transfer. Actively involving SMEs, micro-operators and farmers' organization's, the Fund has the potential to have a substantial development impact in view of the effects on rural development, health, and the environment.
Complementarity:The concept is sound and in compliance with the IFIs' strategy to support private sector development. This justifies ADB and IFC collaboration together with national DFI's to support the proposal in order to help direct more investments towards agriculture. The proposal is a good opportunity to strengthen the partnership between IFIs and national DFIs.
RAKOTONDRAZAKA Hajavola - PISD2