Mozambique : Is impact investment the answer for agribusiness?
Mozambique is attracting increased interest and both traditional and impact investment as the government improves its track record. The Mozambique Investment Forum took place in October 2012 and advertised the country as Africa’s Emerging Economic Power.
Foreign investments in Mozambique, however, face a challenging business environment. For example, the steps to register a fund in Mozambique and the process a Mozambican company must undertake to receive funds from a non-resident investor are often unduly complicated. In addition, recent international reports may contribute to the reluctance of investors to consider Mozambique. The United Nations Human Development Index 2011 ranks Mozambique 184th, placing the country higher only than Burundi, Niger, and the Democratic Republic of Congo. Although Mozambique has demonstrated consistent economic growth in recent periods, 60 percent of the population remains below the income poverty line (US$1.25 per day). The Transparency International 2012 Corruption Perception Index ranks Mozambique 123th out of 176 countries. Moreover, according to 2013 update of the World Bank’s Doing Business Report, Mozambique was ranked 146th in the global ranking.
Investor protection in Mozambique also remains weak, and it unnecessarily difficult to start or close a business and access financing. The Mozambican government should continue to focus on improving the lives of Mozambicans, including by providing them with increased economic opportunities and a more reliable business environment.
Still, one of the sectors with the highest growth potential is agribusiness. Mozambique is the 35th largest country in the world. According to the National Institute of Statistics of Mozambique, 45 percent of the country’s territory is comprised of arable land, but only 10 percent of it is currently utilized. Out of a population of almost 24 million, approximately 80 percent is employed by or dependent on an agricultural sector that is mainly traditional with low yields. An increase in agricultural production could, as a consequence, significantly reduce poverty in Mozambique.
The government’s policies for the 2012-2013 agricultural year plan for an overall growth of 9.1 percent in agricultural production. This seems possible given the fact that, during 2012, inflation in Mozambique has been negative, the country’s metical remained stable against the U.S. dollar and the South African rand, and GDP is estimated to have increased in the second quarter of 2012 by 8 percent as compared to the equivalent period in 2011. Specifically, Mozambique’s agriculture sector is estimated to have grown by 6.8 percent in the second quarter of 2012 as compared to the equivalent period in 2011 and, in addition, the Mozambican government has just approved the National Agriculture Sector Investment Plan for the next five years budgeted at about four billion US dollars.
These circumstances are attracting greater interest from impact investors. Many are filling in the capital gap that exists in developing countries such as Mozambique by providing early and mid-stage growth capital to companies with a good track record, often without need for collateral and at risk-adjusted rates compared to those available on the local market.
In Mozambique, the irregular rain cycles, low use of yield enhancing technologies, poor transport infrastructure, high volatility in commodity prices, limited access to markets, and few investments in small and medium agribusiness are some of the causes of low agricultural productivity. Impact investors such as Grassroots Business Fund (GBF) are working with entrepreneurs to address these challenges; allowing them to scale their businesses while staying true to their original objectives.
GBF, for example, provides companies in Africa, Asia and Latin America both long-term investment capital and business advisory services. The investments can be equity or debt and range in amounts from US$500,000 to US$2,000,000. What sets GBF apart from other investors, we believe, is that GBF works directly with the entrepreneurs, providing them training in several core business areas, such as financial management, operations and supply chain, strategic planning, governance, and environmental and social aspects.
Presently, GBF’s regional office in Nairobi, Kenya, works with six businesses to which it has committed an aggregate of US$6.5 million in capital. Of these investments, two thirds are in agribusiness and the others in mobile services, small and medium enterprise financing, artisanal production, and solar energy. Earlier this year GBF made its first investment in Mozambique; supporting a company that was established with a vision of linking small scale farmers in Africa to local, regional and international markets. The company aims to add value in the agricultural supply chain by linking approximately 1,500 small-scale farmers to better inputs, credit, logistics, and markets.
Although foreign investments, especially in agribusiness, face continuing challenges, these challenges are outweighed by the significant potential for social and economic growth that Mozambican businesses have increasingly demonstrated. As a consequence, investors such as GBF are starting to explore impact investing opportunities in Mozambique. This creates a positive trend for other investors and for the government and helps creating an enabling business environment for the development of the agricultural sector in Mozambique.
Iulia Sandu is a legal fellow with Grassroots Business Fund.