Melanie Machingawuta

Agricultural Value Chain (AVC) Component Portfolio Manager at the Technical Assistance Facility of the Africa Agriculture Fund

Blending commercial and social objectives – it’s hard but not mutually exclusive!

Zambia
Sub-Saharan Africa
6. Jun 2017

“What makes TAF a valuable and unusual mechanism is its ability to straddle commercial and social objectives. It is a hybrid construct: a facility that speaks business and breathes development impact… brought to life by a team that speaks the different technical languages of its public and private sector partners…”

Ashley Insight, 2016 TAF Impact Report

Blended development finance is a powerful tool that can achieve both business growth and development impact. The establishment of the African Agriculture Fund’s (AAF) Technical Assistance Facility (TAF) in 2011 was an early example of this approach, whereas ‘blending’ has only recently become a buzz word and hot on donor agendas. Five years of TAF implementation has proved that dual returns can be achieved, but the journey has not been easy. As a member of the TAF team, my day job involves brokering relationships between four diverse sets of players: development practitioners with very different philosophies; fund managers who are focused on growing companies rapidly to make quick returns; private companies who are struggling to operationalise growth strategies with limited resources; and participant bottom-of-the-pyramid (BoP) actors who live the harsh reality of poverty every day. This means wearing (and swapping) different hats, continuous efforts to be Swiss-neutral, and, most importantly, an unwavering belief that TAF’s projects with the private sector will translate into real, inclusive and sustainable growth.  

TAF projects with Goldenlay – a leading table egg producer in Zambia – are a striking example of how TAF has challenged businesses to think more ‘inclusively’ and experiment in innovative ways that will impact their bottom line whilst generating development impact for the BoP.

TAF funded three projects in support of two challenges faced by the AAF portfolio company:

  • shortage of raw materials supply (maize and soya) for feed (75% of the costs of producing an egg); and
  • the need to sell more eggs.  

Goldenlay requires ~8,000 tons of maize and ~6,500 tons of soya each year; producing ~35% of soya on-farm. TAF saw the opportunity to engage smallholders to secure raw materials for the company as Goldenlay expanded, and, simultaneously, deliver BoP benefits through a profitable crop and a guaranteed market. Secondly, TAF identified an opportunity to extend reach to BoP consumers through a cost-effective egg distribution scheme. This scheme would increase Goldenlay egg sales; increase incomes for micro-entrepreneurs along the distribution chain; and get a cheaper source of protein to poor households in peri-urban areas. The manner in which the company engages in backward and forward integration (along with the multi-level impact) is shown below:

      taf

Goldenlay was sceptical about both interventions, noting the high transaction costs of engaging smallholders with uncertain returns. The company did not see the direct BoP market sales as commercially relevant to its business model either.

TAF was convinced of the smallholder farmer returns that could be made from Goldenlay’s backward integration but the scale was too small (and price too high) to convince Goldenlay to procure directly from smallholders. After several attempts to gain direct company support, it was clear this was not commercially attractive or possible. Instead, TAF leveraged a joint venture between Goldenlay and NWK – a grain trader – where NWK had a direct business incentive to procure soya on behalf of Goldenlay. NWK now benefits from a service fee for storing and aggregating the grain; and Goldenlay benefits from collecting supply in bulk from one buying point. At the same time, farmers have been connected to a guaranteed market and a service provider (NWK) who can provide improved inputs on loan, technical assistance and aggregation services. This has resulted in a profitable NGHL business[1]; average 40% smallholder farmer yield increases to date and mobilisation of over $200,000 in smallholder soya sales in the first season.

After some research by TAF, Goldenlay was persuaded of the opportunity to reach more local consumers through an improved egg distribution scheme, based on a network of depots and bicycle peddlers. The pilot was extremely successful and has led to the company transforming its entire sales strategy to concentrate more on BoP direct sales. Over 60,000 eggs are now available per day for BoP consumers, 50 jobs have been created along the value chain and over 1,800 micro-entrepreneurs are integrated into Goldenlay’s supply chain with $960,000 in additional revenues mobilised in the first year.

Twenty months after the start of these projects, we have the seen the rewards but also experienced hard lessons along the way. Many people ask us what it practically takes to build win-win public-private partnerships. Below, I’ve shared a few simple tips based on our experience that have made a difference.

Tips

Translation

1.       Show private partners you understand the importance of commercial returns.  

We understand and acknowledge you need to make money and will not do this otherwise.

2.       Do concrete analysis to identify and prove the business case.

Beat the players at their game which practically means:

a) TAF team business modelling; crunching the numbers to convince the company of the commercial value and donors of the additional development impact.

b) Proving it works – often with public funds. Once (and if) the business case is proven, companies will invest alone.

3.       Be flexible and pragmatic; adapting to real issues and operational constraints.

Company will likely adopt a third or less of the Rolls-Royce you proposed …and that’s already a win! (Also see here)

4.       Work through permanent, local market actors to promote sustainability from Day One.

Identify, co-fund and mentor permanent entity staff, with implementation led by participants not TAF teams.

5.       Treat BoP actors as commercial entities not ‘poor farmers’.

Providing free food and/or transport for attending trainings will not help anyone in the long term!

6.       Secure company ‘skin in the game’ (e.g. via cost-share) to ensure buy-in from the onset (Also see here).

Sitting with the partner company for at least half a day to go through operational budgets line by line, negotiating what said partner is willing to ‘give away’. Following this, drafting a tight contract to hold partner accountable and then reminding them of contract terms when cases of amnesia re-occur throughout project timeline.

 

Based on my experience with Goldenlay and other TAF projects, I believe that commercial and social impact is not conflicting but, more often than not, intricately related and interdependent.  For the next wave of blended financiers, TAF’s story shows that it is possible to “leverage funds that would not normally be associated with commercial investment and deploy this capital in a way that can make huge social impacts” (Phatisa, AAF Fund Manager). It also provides some practical pointers for how one can build trust-based partnerships amongst diverse minded partners to achieve mutual returns, sustainability and scale far beyond initial objectives.

[1] NWK Grain Handlers Limited (NGHL) is a grain handling (storage depot, logistics, procurement agent) business in the Copperbelt. The business is a joint venture between GLL and NWK Agri-Services Zambia Limited (NWK), a cotton and grain procurement and trading company; with AgDevCo UK holding a small minority share. GLL’s interest is to outsource the grain handling and procurement function for its annual maize and soya requirements.

This blog is a part of the June 2017 series on advisory support for inclusive businesses in partnership with USAID and the African Agricultural Fund’s Technical Assistance Facility, both of which deliver advisory support and have new analysis of it just launched (AAF’s TAF) and forthcoming (USAID).

Read the full series for more lessons from seven different providers of advisory support and stories of success from entrepreneurs.