Addressing food supply challenges can create commercial investment opportunities, but context is important. These investments will be viable where they build resilience into medium-term food systems to prevent future emergencies, rather than addressing short-term, urgent financing needs for acute food insecurity crisis. So says a new CASA policy brief examining the potential of private sector financing to alleviate acute food insecurity through a targeted review of key mechanisms for mobilizing this kind of investment.
The brief also states identified two factors which are important because of the long time frames and high risks for most agricultural investments. The first factor is significant de-risking through blended finance, and this is coupled with demonstrable government commitments to domestic and regional food and agriculture strategies.
Pressure to find innovation financing solutions, involving the private sector, comes as a result of repeated shocks to food systems in low- and middle-income countries coupled with decreasing funding availability from traditional donor countries. This has created a spike in food insecurity. In 2022, over 258 million individuals across 58 countries and territories, primarily in Africa, required immediate humanitarian assistance due to food insecurity.
The mounting crises include the Russia-Ukraine conflict and its knock-on impact on global food prices and fertilizer supply, COVID-19, soaring inflation rates and central bank interest rate hikes which have precipitated cost-of-living crises and climate change. Additional challenges from conflicts in Afghanistan, Burkina Faso, DR Congo, Ethiopia, South Sudan, and Yemen have resulted in reduced livelihoods and agricultural production, and growing displaced populations. All have contributed to acute food insecurity crises, predominantly in Sub-Saharan African countries that are least able to respond.
In short, substantial additional donor and public sector intervention is needed to catalyse private sector investment and direct it towards investments that can strengthen food systems into the longer term. Three mechanisms for investment were identified.
- Donor-private sector partnerships: Donors de-risk private sector engagement by providing various forms of concessional capital, first loss and guarantee schemes for companies moving into this space.
- Private sector industry initiatives to increase investment in sustainable food, but in reality most also receive public support.
- Standalone investors and institutions mobilizing private investment into food and agriculture. Multinational corporations and some regional corporations invest in other regional or national corporates that have reached a certain level of scale and can absorb over $5M capital. Impact investors and local financial institutions (FIs) may also invest in local SMEs, which are perceived as higher risk and require smaller amounts of capital.
The brief concludes that the private sector is not equipped to finance the extensive humanitarian aid required in most acutely affected locations.
The report makes a series of recommendations.
Recommendations for donors: To encourage mobilization of private sector investment for food security agendas, donors should:
- Redesign initiatives to catalyse private investment for acute food insecurity that focus on smallholder farmer support
- Focus efforts on catalysing private investment into local agricultural processing and value addition.
- Leverage blended financing to mobilize local financial institutional lending to processing and value addition SMEs.
Recommendations for governments: To encourage mobilization of private sector investment for food security agendas, governments should deploy mechanisms to:
- Ensure trade and agricultural policy frameworks and sector developments provide financing and incentives where the pure commercial return are unlikely [given the evidence of loss-making in many large-scale, smallholder sourcing models]
- Ensure any increased concessional financing is used appropriately for maximum impact and additionality without being overly burdensome to implement for private investors
Recommendations for capital providers: Investment for food security agendas, private sector investors [capital providers] should:
- Explore opportunities to build medium-term food systems resilience to prevent future emergencies. Donors and national governments/ government agencies offer blended finance and de-risking or other incentives that make the investments as appealing as the opportunities from high-value export crops
For further insights into the latest Policy Brief: Private sector and food security, Visit the link.
Feature image credit: ©Evans Ahorsu (TreyzKapture) 2017