Achieving leverage in unlocking private funding for smallholder agriculture through public resources

Blended finance is all about achieving leverage. The experience in the infrastructure and energy sectors shows that it can work. But achieving leverage in the financing of smallholder agriculture brings its unique challenges. The financing structure needs to efficiently reach a large number of smallholders, for example through large value chain companies, such as processors, or with the help of mobile applications (including for loan disbursements and repayments). Reimbursement is most likely if the project is profitable – which in the case of blending4ag means that a large number of smallholders, often in a precarious situation, have to be assisted in increasing their productivity and returns (which implies input firms, extension agents and the like should be part of blending4ag structures). There is normally a need for both short-term working capital and long-term investment funds, which implies a combination of financing techniques. Agri-finance has its particular risks which ideally are covered by specialised partners in blended finance structures.

All this means that blending4ag structures can be difficult to put together, and that given the dearth of bankers, donor officials and others proficient in blending techniques, agriculture may lose out to “easier” sectors. The conference will discuss common “framework” structures and mechanisms that can be rolled out for agriculture, and how by linking different public and private partners together risks and other barriers can be overcome.

Partnership for effective financing of climate change adaptation and resilience

There is a strong public interest in financing climate change adaptation and resilience – hundreds of billions of Euros have been pledged, not only by the public sector but also by large investors (such as pension funds) and other financiers. In the energy sector, there has been a significant use of blending techniques to crowd in private funding for sustainable energy projects. But in agriculture there remains a large gap between the funding that is in principle available for climate-smart projects, and that which effectively reaches smallholder farmers.

Smallholders will have to act to make farming more sustainable and resilient, for example, by investing in climate resilient seeds, greenhouses or small-scale irrigation projects, but need the means for this. The conference will discuss what structures can link such smallholders to the international capital market, and what roles international and national agencies can play to reinforce this link (by supporting the upfront development costs of such structures, engineering them so that returns meet private sector benchmarks, absorbing excess risks and meeting gaps in available financing like the shortage of longer-term funds).

Facilities for local currency financing in blended finance for agriculture

Most farming in developing countries generates local currency revenue. As much as 90% of the unmet financing needs in agriculture is among these producers (in contrast, producers of cash crops receive much of the finance they need from buyers, and also have relatively favourable access to commercial credit). These producers normally need loans in local currency. But even if banks and others were more willing to finance them, local capital markets are often weak, with (compared with international markets) a dearth of longer-term loans and high interest rates. Using hard currency to make loans that are then reimbursed is risky, not just because of exchange rate risk, but also because governments may make it difficult to exchange local currency back into hard currency and send it abroad.

There are solutions to both problems – for example, currency hedging and political risk insurance. But these solutions cannot immediately be applied to agricultural loans – some further structuring is necessary. The conference will discuss how blending techniques can make it possible to make hard currency funding available to farmers who sell in local markets.

Risk management and other support structures in blended finance for agriculture

Blending aims to help private financiers achieve an acceptable return given the risk of financing (a loan, bond or investment). That can be done by simply mixing capital (if an investment has a return of 12%, and the public financier is willing to accept a return of only 6% on its half of the investment, then the private financier can have a return of 18% on its half). But more often, it also involves the absorption of selected risks by the public financiers and other service providers (such as insurers).

Furthermore, public financiers justify their involvement by their impact – which needs to be assessed, often independently (e.g., to determine that a project indeed alleviated poverty or improved climate change resilience). And in the particular case of agriculture, because it is so important for the success of the financing that farmers are profitable, the support of NGOs and others who can help build farmers’ productivity and revenues is often critical. The conference will discuss these various support structures, where there are still gaps that can be addressed through public and private sector action, and what the international community, governments and the private sector can do to fill the gaps.