Professionalizing Ag: Is BDS the Critical Ingredient to Sustainable Entrepreneurship in the Agriculture Sector?
Across the developing world, there are more than 300 million small and medium enterprises (SMEs). In Rwanda alone, 72,000 agricultural SMEs present a major opportunity to effect change in the sector and spur broad-based economic growth inclusive of smallholder farmers. At the same time, a long history of sub-optimal business practices and enabling environment challenges inhibit agri-SMEs’ ability to raise financing. One reason for this is that Rwanda’s small agribusinesses often lack the financial skills, scale and domestic market potential that would make them attractive to impact investors and funds such as AgDevCo or GroFin. Here are a few ways we’re working to help Rwandan businesses identify and break through some of their most difficult barriers to success.
A Phased Approach
The Feed the Future-funded USAID/Rwanda Private Sector-Driven Agricultural Growth (PSDAG) project is charged with increasing smallholder incomes by supporting the Government of Rwanda to achieve its Vision 2020 aim of “transforming agriculture into a market-oriented, competitive and high-value sector.” To help do this, the project has engaged with the range of value chain actors — particularly aggregators, processors and exporters — to significantly upgrade targeted value chains including potato, maize, dairy and various horticultural crops.
Over the past three years, the project has leveraged a $5 million Value Chain Competitiveness Fund (VCCF) to identify SME partners and provide co-investment grants that allow them to invest in technology upgrades and strengthen relationships between themselves, producers, investors and financial institutions. The project currently has more than 40 agri-SME partners who have demonstrated how these value-enhancing innovations and upgrades will reduce risk and increase their market opportunities.
As an example, in 2016 PSDAG entered into a co-investment partnership with Rwanda’s Masaka Creamery, which allowed the company to make more than $450,000 in new capital investments to upgrade milk processing — a critical constraint to economic growth in the value chain — leading to increased milk sourced from local smallholder farmers, dairy cooperatives and milk collection centers.
For agricultural enterprises looking to invest in scaling their own upgrading or expansion with private capital, this initial phase can be critical to proving their capacity and business model.
Throughout this process, PSDAG plays a key role in facilitating partners’ access to capital and markets and reducing risk, but the project is committed to not taking on the direct role of any individual actor within the market system or distorting the market for finance. Instead, we let the private sector drive these investments and solutions.
Shifting Focus to Business Development Services (BDS)
Through our experience and analyses it’s become clear that the co-investments that help SMEs buy down risk in investing in new technologies through the VCCF was only one critical piece of the puzzle. The larger opportunity — and the one that we believe can be a game-changer for these businesses — arises by facilitating agri-SMEs to build off these investments to attract private financing. While PSDAG does not offer multiple co-investment grants to any of its SME partners, we do continue to support them to achieve longer-term investment goals through a package of Business Development Services (BDS) that includes capacity building in financial accounting and reporting, investment readiness and access to finance, sales process and forecasting, human resources and marketing, as well as support on developing policies for inclusion of women, youth and persons with disabilities.
As the PSDAG project has grown, its strategy has focused on building demand for BDS and technical services, which are still nascent in Rwanda’s agribusiness sector. To start the process, PSDAG completed needs assessments for BDS among its VCCF partners and hired Rwandan service providers to help build BDS capacity for a subset of agribusiness grantees. This approach — as opposed to providing BDS directly through project staff or bringing in overseas consultants — has the additional benefit of building local capacity and opportunities for the BDS providers themselves as well as generating demand and interest from agribusinesses.
To further build sustainability into the process, BDS service providers are encouraged to market their services to the SMEs in a way that is affordable and provides built-in performance incentives, such as fees collected based on increased sales or debt/equity investment.
While PSDAG’s BDS support has been targeted to our existing partners, the goal of this process is to prove the business value of these services in order to increase uptake over the long term. We expect that increased profitability and capacity to attract investment as a result of high-quality BDS within PSDAG’s pool of private sector partners will drive demand for the BDS providers as word of its success spreads.
Tracking success will be critical; VCCF partners continue to work with and share business performance information and metrics with PSDAG for a period of 12 months after their grant is made. We’ll measure the BDS effort’s success by tracking the portion of our private sector partners that are choosing to procure BDS using entirely their own funds after the conclusion of PSDAG’s support.
We’re excited about the success our agri-SME partners have had with their USAID/PSDAG-facilitated investments. Agri-SME growth potential has increased, and the lives of farmers within their supply chains have been transformed as a result of stronger private sector linkages in agriculture. As we continue to implement BDS and technical services activities, we expect to see our already-improving agribusiness partners see a significant bump in interest from investors and, as a result, more investment at farmer level in production, support services and post-harvest handing to meet growing needs.
In fact, these impacts are already coming to fruition; while an initial co-investment by PSDAG through the VCCF could leverage anywhere from $50,000 to $750,000 in private financing, after receiving BDS support, some stronger SMEs are negotiating deals worth much larger sums in order to reach scale. Even smaller agri-SMEs are able to leverage the capital investments needed to borrow working capital to sustain and grow their businesses. For example, after completing the PSDAG BDS program, Sarura Commodities, a crop storage and trading enterprise, was able to secure over $1 million in investment from a European impact investment firm.
We know that not every agribusiness will excel. Taking risks, and even failing, is part of the private sector life cycle. But through USAID’s support and PSDAG’s careful facilitation, we’re excited to provide Rwandan agribusinesses the best opportunities to be the protagonists of their own success stories, and ultimately, to be the engine behind Rwanda’s sustainable economic growth.
Share some of your lessons learned in facilitating agribusiness investment through BDS in the related discussion.