Rabobank gathered a group of experts in the East African agribusiness industry to its new office in Kenya to talk logistics, infrastructure and investment options in the sector.
- Jan de Laat, chief commercial officer, Africa & India, Rabobank International (chair)
- Justin Archer, regional origin director, East Africa, Ecom Group
- David Kabeberi, managing director, PKF
- Melle Leenstra, first secretary food security, Netherlands embassy, Nairobi
- Arvind Mittal, CEO, Mount Meru Group
- Joss Taylor, managing director, Czarnikow Sugar (East Africa) Limited
De Laat: Let’s begin with the challenges to the agribusiness sector: what is needed to improve logistics and warehousing capacity in East Africa?
Archer: I am more concerned about logistics in terms of transportation routes and access to ports, etc, as opposed to warehousing. I am not saying that it is not important, but the biggest challenge that we have in the agribusiness sector here is the cost of moving goods from Mombasa to destination markets, which is pretty obscene. The internal logistics that we have to deal with on a day-to-day basis are a major concern. The cost of doing business in East Africa remains very high, even if we have certain advantages in terms of raw materials.
Mittal: I can talk from my experience as a processor of sunflower seeds in Tanzania. It costs us 100 shillings to move 1 kg of sunflower from the buying point to the warehouse 50 km away. This is not only transport but also involves a lot of bagging, loading and offloading. From Africa to China or India, it costs us the same amount or slightly less. I would agree that it is not only warehousing but the entire local chain of moving the goods from the farmer to the processor. For me, that is a cost which is unacceptable for the farmers. That is for a product like sunflower, where we have spent 15 years trying to bring the cost down. In the last 15 years, we have been working on keeping the cost at 100 shillings. For other commodities, I believe it might even cost three times as much to transport from the farmer to a place like Dar es Salaam or Mombasa.
De Laat: The bottleneck is obvious in transportation, which is inefficient and costly. This is holding back the growth of the agricultural sector in Africa. What could be possible solutions to this problem?
Mittal: The first step is the aggregators or the collection systems – the infrastructure. We do not do bulk-buying: we do it in bags. You have to put the product into a bag, you have to stitch it and you have to load it, and then it goes to the destination. There is a lot of movement instead of just putting the product on a small conveyor, loading it onto a truck and tipping it into silos.
We should have private warehousing at local level as step one in my opinion, before moving on to more practical ways of collecting the goods in those warehouses. Our collection systems are ancient at best and inefficient.
The solution is complete, private warehousing in the sense that you must have a dryer and a seed cleaner, so that you are able to buy the commodity and store and handle it properly. We do not have enough warehouses and we do not have enough money to fund those warehouses or even the people to manage them.
I would like to give two examples on the transport side. Our primary area of growth is Singida, where we have sunflower, and Arusha is where we bring it for crushing. It used to take a truck one week to travel this route before the tarmac road was completed, and the cost was three times what it is now. Fortunately, the Tanzanian government gave the contract to China and, within a year, the road was done. Maybe the quality was not brilliant but, for us, it was brilliant because it was done within a year. Our cost of transport came down from 100 shillings to 30 shillings. That is the first example.
In terms of the second example, it is 700 km from Singida to Dar es Salaam, and we pay 30 shillings per kg for transport. From Singida to Nairobi it is 650 km, and we pay 100 shillings for transport – three times more – the reason being just the border. The only reason is that border, where a truck can be stuck for four days. For a transporter who has to pay high interest rates to banks, those four days mess up everything and, therefore, the costs become so high.
Taylor: You have to pay a very high price to move goods around, which is what kills the competitiveness or the opportunity for the country.
In our business, we are looking at the movement of sugar, mainly, from western Kenya into the rest of the country, or imported sugar from Mombasa. The tariff protection that we have here in sugar is completely immaterial in terms of the trading arrangements that we have. The only protection that we have is this geographical security and the costs of getting sugar in or out of the country, because the rest of it is free trade. It has allowed the agricultural sector to be pretty inefficient, because it is protected by an inordinate cost of movement of goods into the country.
De Laat: The solution is to do something about the infrastructure but is that happening? Is there the appetite or awareness?
Kabeberi: 20 years ago, we transported 70-80% of our freight by rail. Today, only about 15% travels by rail. The differential cost between road and rail is significant. If Kenya’s standard-gauge railway is built in the time that it should be built, it would benefit significantly in terms of the cost issue.
Taylor: I do not think it is going to make much of a difference if we have the standard-gauge railway. Possibly, the transportation time will come down but rail costs are going up.
Leenstra: The new standard-gauge railway is not the wisest infrastructure to deal with bottlenecks. It is parallel to an existing railway; upgrading the existing railway would be a much more cost-efficient approach, if I believe the expertise of a Dutch logistics engineer on that. Upgrading the Mombasa Road would also be more efficient. It is good that the issue of transport is being addressed but it is a very far-sighted approach, with little attention to detail and little attention to cost-effectiveness.
From my perspective, the primary bottleneck in agricultural development in Africa is agricultural entrepreneurship. It starts with the farmer. The African agricultural setup is characterised by peasants and plantations. Between peasants and plantations, there is a missing middle. What’s more, farming is seen as something that you are in because you have no choice: they are farming to earn an income, and whatever income they earn in farming they invest in farming. It is wonderful for poverty alleviation but it is not good for farming as a business.
As an embassy, we are trying to change that mindset that a lot of donors have around smallholder farming in terms of looking at that missing middle and looking at SME farming. We have a programme called Equity Group Foundation to provide business development skills and technical advice to medium-sized farmers, in order to change the perspective of farming as a poor man’s pursuit.
Until we change that mindset, however, of farming being a vocation or an income-generating opportunity of last resort, the agricultural-growth potential will be at risk.
De Laat: Would an improvement in logistics benefit a smallholder farmer?
Mittal: I believe we need more processing capacity locally for non-valued-added products that we export – and I am speaking solely about Tanzania. Tanzania is a bigger exporter than Kenya of raw materials. We export our pigeon peas, our coffee and our cashew nuts. One example is sesame, which is exported from Tanzania to the Netherlands. In the Netherlands, €120 is paid just for clearing the sesame seed, which could easily be done in Tanzania at US$10 per tonne, but it does not happen because nobody has put a processor in. If five or six processors were there, farmers would definitely get a few percent more.
Archer: There is a huge cost of doing business in this part of the world, which means we cannot unleash the potential for agribusiness. There is a massive opportunity here in agribusiness but it is a hugely inefficient sector.
I would say that warehouses for local products or export products would be built if we did not have that interference from local government. If my vehicles were secure on the roads, if the roads were good enough to carry the big trucks that can take the big loads – but these conditions do not exist today, so those investments do not happen. You have to take a long, hard look at why it is that governments in this part of the world are not able to unleash the private sector. Despite these opportunities, why are we not leveraging the massive smallholder basis that we have to produce more tomatoes, potatoes and coffee?
On the topic of smallholder farming, in East Africa we have farmers who are prepared to work hard and who have great ideas, so why are they not successful? We have entrepreneurs, raw materials and resources, but we do not have a connection to the market – that is missing.
The conditions do not exist for investors to come here and build a massive warehouse outside Singida or buy a new fleet of trucks. In the coffee sector, we have managed to become quite an integrated company here, but the reality is that we need three companies to integrate from export all the way back to the farm, because licensing does not allow us to be an integrated company in the public sector here – it is too political. We are able to do quite a bit with coffee farmers, but it is far removed from what it could be if this were a totally liberalised and open sector, where we could just come in as an investor, go to Nyeri County, put up a factory and start trading. The conditions to do it do not exist today. Coffee farmers in this country feel cut off from the market. The market is not there.
In terms of infrastructure and railways, we have a real problem in these countries in terms of thinking big. This new railway system is going to stretch from Mombasa all the way through to Uganda, probably, but how are we going to connect the rest of the country? In terms of the roads that we have, it has taken us five years to renew the road from Nairobi to Mombasa; today, it is already congested. It takes about a day and a half for a truck to travel that route of only 500 km.
The population of Kenya is going to double in 30 years. There is a massive opportunity for this country to replicate what has been done in places like China, but you have to think on the same scale. You have to be prepared to put billions of dollars into significant infrastructure projects to unleash the potential. Building a new railway is going to take a long time, it will probably not solve all the problems, and it will definitely not be enough. Thinking big as a government needs to be a priority. You have to be able to invest significant amounts of money to transform the infrastructure of this country. You have to deregulate all the licensing systems that we have at the moment to allow companies to come in and exploit the opportunity to get close to farmers. Until that happens, I think it is going to be more of the same.
The coffee sector is a classic example. I think it used to be the number-one foreign exchange earner for this country for a time back in the 1980s. It certainly used to be three times the crop size that it is today. Coffee is in crisis. I tell my team every year that the challenge this year as a business is having more from less, because there is just less of the trade. Why is that? Why do farmers feel that they are not getting better prices? The cost of production is too high but there are holes in the marketing. We have to look at it holistically and change the approach here. We have to get away from this licensing control market environment that we work in here and look at deregulation as a solution to opening up potential.
There is too much government and too much interference in agriculture, which, to me, should be a private sector-driven area.
Mittal: I also believe we should look at experiences in similar countries. One that has done fairly well in agriculture is Zambia, which has seen soya, maize and wheat production go up tremendously, and which has become self-sufficient in these three basic commodities. I am not really sure, when I look at the Zambian model, whether optimising smallholders would be that easy in the next 10 to 15 years. Maybe moving commercial funds and allowing them to prosper would be an easier prospect for immediate food security. By no means am I saying that they should be left behind, but commercial farming has to come in if we want to feed the doubling population. If we want the country to be prosperous, farm sizes have to be slightly bigger. People will leave farming. There are still way too many people employed in farming and perhaps, therefore, are still very inefficient.
But let us not look only at the negatives. There are a lot of positives in East Africa as a whole. Soya production and sunflower production in Tanzania, Zambia, Rwanda and Uganda is growing tremendously, because the private sector is involved there. The key is that the private sector should be given the wings to do what it has to do.
De Laat: Keeping all of this in mind, imagine you are the MD of a private equity fund. What will be your investment policy when it comes to the East African agricultural sector? If you’re not experienced in this sector you would say: ‘I would never go into East African agriculture’.
However, I keep in mind what you said that it is not all bad; there is some light at the end of the tunnel and some very positive things. Having said that, if this is your own money, where would you put it in East Africa?
Kabeberi: If you look at a number of equity interests in agriculture issues, some of it has been supported by agencies like DFIB. We are looking to set up an investment plan in Uganda but the target is existing processes. The finance for new ventures is very, very big.
Leenstra: There are a lot of private equity funds hanging over the cane market; the big problem is investible businesses that fit the criteria of these funds. A lot of businesses do not want an investor looking into the kitchen and telling them what to do. That is also difficult for private equity investment.
So where is the business development opportunity for agribusiness? Definitely in processing. Primary production is very difficult, unless you want to go the plantation route.
I think through your local banks dealing with lending and capital – that is a better financing proposition than private equity.
Mittal: When we go to a bank with a project, in spite of the experience we have in eastern and central Africa, they refuse. Even after we have put our projects to them, even when they have heard us, to get banking financiers to look east is difficult.
There are enough projects out there; the problem is getting values of the PE fund or of the bank and the partner who wants to do the project. The right partners do not accept high interest rates or the higher returns that the PE fund wants. Therefore I think the PE fund at times gets involved in deals in which they feel there is a good return. Let us see what happens on the exit because I know there are some funds that are now at the exit stage but I feel that the returns are way lower on those projects than what they talked about.