News from the starting block: Changeover

Sub-Saharan Africa is on the verge of a development boost in farming: it could skip entire generations of technological development. But how?  About possible roles and potentials of digital services.

Ich bin ein Alternativtext
Benin: microfinancing in the agricultural sector; funding plays a particularly important role. Photo: Michael Brüntrup/DIE

Michael Brüntrup

Dr Michael Brüntrup is a senior researcher at the German Development Institute (DIE) in the field of Agricultural and Food Security with focus on sub-Saharan Africa

Deutsches Institut für Entwicklungspolitik (DIE)

Deutsches Institut für Entwicklungspolitik

The mechanisation of the Sub-Saharan agricultural sector is one of the most extensive and difficult transformations the continent intends—and needs—to undergo. This may be hard to comprehend from the perspective of Europe, where agriculture has been reduced to a relatively marginal part of the economy and its far-reaching mechanisation has long been taken for granted. In Africa, however, mechanisation is a mammoth task which most countries have yet to tackle with satisfactory results. The success or failure of the endeavour will have very significant consequences for most residents of the region.

 

Agriculture is the main source of livelihood for two thirds of Sub-Saharan Africans, most of whom are smallholders. Between 50% and 85% of soil cultivation work is carried out manually. Africa only produces 20–30% of the yield it could achieve with good agricultural practices, and the continent is home to around 50% of the world’s non-cultivated arable land. Most young people do not consider agriculture as a feasible career path, as it involves hard manual labour and a low income. Due to ineffective storage, processing and marketing methods in micro, small and medium-sized enterprises (MSMEs), 30% of agricultural produce is lost between the field and the consumers.

 

Mechanisation: potential along the whole value chain

Mechanisation can improve yields, reduce losses, increase incomes, lessen physical exertion and make agriculture more attractive to young people. It affects more than just the work in the field itself: irrigation, milking and feeding systems, transportation, processing, drying, storage and preparation can be mechanised, too.

 

Most businesses tend to focus on areas whose mechanisation will achieve the greatest possible progress. This primarily depends on the type of production and the size of the farm. Other factors include the non-agricultural alternatives available to the members of a family-run operation: the more workers quit, the greater the need for mechanisation becomes. The roles of men and women within and outside of agriculture play an important role, too.

 

Funding: a major obstacle 

Aside from internal circumstances, there are many external factors that impact mechanisation: political support, neglect of the agricultural industry, low levels of education in rural regions, high tariffs on machines and spare parts, a lack of private business in rural regions, major fluctuations of crop yields and agricultural prices, and volatile business relationships between farmers and other companies.

 

Funding plays a particularly important role. Many machines, even the smallest, are prohibitively expensive for smallholders. Very few people have access to loans, and the larger, long-term loans required for machines (unlike farm inputs) are especially hard to come by. While small and medium-sized enterprises (SME), which organise most of the value chain down to the consumer level, tend to have a somewhat better state of mechanisation, many of them cannot afford sensible investments and lack creditworthiness. Without improving the available funding options, the sweeping mechanisation of the agricultural sector in Sub-Saharan Africa will remain out of reach.

 

A research project carried out by the German Development Institute (DIE) with funding from the special initiative Eine Welt ohne Hunger (SEWOH) has investigated experiences and possibilities of funding mechanisation in Sub-Saharan Africa. The researchers first evaluated the available literature on the effect of mechanisation on food security, as many fear that technological process could exacerbate the existing problems by squeezing out unskilled workers and smallholders. Their analysis found that most businesses (can) only mechanise their operations gradually and, in doing so, aim for the greatest additional benefit. This does not constitute a risk to food security. Rather, greater production volumes and better incomes for smallholders improve the situation. While excessive mechanisation and the resulting clustering of agricultural business without alternatives for smallholders can have the opposite effect, this rarely happens in Sub-Saharan Africa.

 

(c) Grafik DIE

Stakeholders require multiple funding options

The study also found that the various stakeholders—smallholders, expanding farms, medium-sized cooperatives and large companies—have very different requirements that cannot be met by a single type of funding provider. In many cases, a single stakeholder can have a range of financial needs: a leasing company, for instance, is likely to fund specific machines but not the farm inputs that are required for good agricultural practices and that make the machines profitable in the first place. Credit providers often cannot (and are not authorised to) sell insurance policies. Larger loans, e.g. for a tractor or a cooperative investment, exceed the capacities of microfinance institutions (MFI), while single-farm loans for inputs or manual tools are too small for banks. Effective funding for mechanisation, then, requires a variety of funding instruments and institutions.

 

The research project also systematised the problems inherent to the provision of funding in terms of demand, supply and financial transactions. Recipients of funding, i.e. farmers and SME in rural areas, frequently lack sufficient education and formal knowledge of business and economy. Many of them are scattered throughout the region; they are disorganised and have few material loan guarantees. The loans required for mechanisation projects are often too high for group guarantees, which are accepted by many MFI. Smallholders also tend to have poor repayment habits—especially if they believe that their funding comes from government sources, if there have been repeated governmental debt relief initiatives, or if they are not interested in lasting business relationships. In theory, cooperatives and other formal agricultural associations could overcome the disadvantages that smallholders face, but they come with their own challenges. Their establishment and advancement, for instance, are socially sensitive issues that require a lot of time. Private mechanisation service providers, such as larger agricultural businesses, are often a more realistic alternative in the region.

 

Pure financial institutions, such as MFI, commercial banks, credit providers, insurance funds and leading companies, tend to lack experience in the agricultural sector. They are heavily underrepresented in rural areas and fear the sector’s dependence on weather conditions and similar inherent risks. In addition, larger machines are generally too expensive for MFI. More and more buyers of agricultural products wish to secure their supply volumes and product quality, however. In return for contractual farming agreements, they provide the producers with farm inputs and/or other services on credit. Once the farmers supply the ordered goods, the buyers offset their value against the outstanding debt (value chain financing). This settlement can also be carried out by a financial service provider who has been contractually approved by both parties (triangular financing). In many cases, such buyers only finance farm inputs and machines required to grow the produce they personally wish to buy. Larger, longer-term investments are rarely funded through value chain financing in cases, such as the sugar cane, where there are close, lasting business relationships that are difficult to dissolve in the long term.

 

Transaction fees tend to be very high in rural regions due to large distances and rough terrain, a lack of affordable transport and communication tools, and language barriers. The physical safety of money transports is a common problem in many remote areas, too. All these factors make financial and other services, the exchange of goods, conclusion of agreements, and implementation of controls expensive and high-risk endeavours in the Sub-Saharan countryside. This has a negative impact on the financing of mechanisation projects.

 

Ich bin ein Alternativtext
Benin: A farmer with a single-axle tractor ploughing his field. Photo: Michael Brüntrup/DIE

Digital services as a new funding opportunity 

Digital services can lower the high transaction costs in rural regions. Their role in the funding of mechanisation is multifaceted. The digitisation of financial services such as savings, transfers and leasing contracts can reduce long, expensive overland journeys and increase security. Settling transactions through digital bank accounts makes it easier to determine creditworthiness, and non-financial digital services often improve the creditworthiness of rural stakeholders. A digital identification system can prevent excessive indebtedness and serial installment loans for farmers, who often lack official documents. Digital land registers can facilitate the use of land ownership as a credit guarantee. Overall, digital services can improve and stabilise the production and sales efforts of smallholders in many ways, e.g. through cultivation consultancy, the provision of weather/price/market information or the improvement/price reduction of certifications that will make their production more durable and profitable. All these factors are highly valuable tools for financial service providers wishing to assess individual creditworthiness, especially if they have doubts about the production, supply and repayment abilities of their clients. With digital services, higher-quality information about the sector and individual products is accessible faster and easier to process. They reduce the actual and perceived volatility of the sector.

 

The DIE project has compiled a list of examples of innovative mechanisation funding initiatives:

  • MyAgro in Mali and Senegal helps farmers save money in installments by means of prepaid cards. The cards can be used to buy farm inputs and small machines at a discount.
  • AccessBank in Madagascar and other East African countries offers highly flexible repayment conditions that can be adapted individually to seasonal cash flows and the changeable nature of agriculture.
  • Fundacion Capital, which was founded with a focus on Bangladesh and Latin America and is currently expanding to Africa, specialises in long-term graduation strategies for smallholders to enable them eventually to purchase their own machines. Information platforms and apps make it possible to monitor individual businesses, even if they work with multiple other companies and governmental authorities.
  • CumaBenin is working on a local adaptation of a French system of machinery rings, in which groups of farmers jointly buy and operate machines, but the company is currently struggling with organisational and maintenance issues.
  • NWK Agriservices in Zambia attempted to combine the financing of a mechanisation package with a sophisticated contract farming concept. Unfortunately, the economic crisis in the country has caused the investor to withdraw.
  • The most high-profile example for digital mechanisation services in Sub-Saharan Africa is probably HelloTractor, a start-up originally launched in Nigeria. It provides businesses (often larger farms) with tractors and loans and operates an app through which it organises the tractor rental system, which improves utilisation rates and economic efficiency, as well as the invoicing process. The developers have also begun to manage other machine services through the app, too.
  • After all, direct digital services also include crowd funding from individual farmers and companies. While this is very rare in Sub-Saharan Africa, it is not unheard of: BaySeddo in Senegal is a good example.

 

Ich bin ein Alternativtext
Morocco: A farmer during the field work. Foto: Michael Brüntrup/DIE

Optimising digital service bundles

Many current digital funding models are pilot projects that are yet to be fully established or made into secure business models. There are still major obstacles that hinder the comprehensive roll-out of digital services in the field of financing mechanism and, at a more general level, agriculture. Electricity is but a minor problem: today, every rural market offers solar panels and mobile charging services. But language barriers and a lack of education prevent many smallholders from understanding written contracts and the conditions of digital services. Digital services may lessen the physical obstacles inherent to rural regions and the abundance of risks in production and distribution, but they cannot eliminate them completely. Many enthusiastic app developers working on market information systems, for instance, have had to learn that good information has very little effect on sales prices unless it also improves the market power of farmers. In some cases, the profit margins are simply too low and sales pressure is too high to allow for any changes in behaviour and distribution methods. The field of mechanisation, in particular, is fraught with barriers unrelated to the flow of information. The risks and costs are so high that individual digital services can barely make a dent in them.

 

It may be sensible and necessary, then, to bundle multiple services and offer them as a package. Digital services will need to be combined with conventional, non-digital services to provide that decisive value that will pave the way for greater mechanisation and the corresponding funding. That is the secret behind the success of contract farming. But that system, too, struggles with the limitations of mechanisation: it rarely provides lasting support for all operations of a business. Local, paid companies that derive a sustainable income from aggregation services might become an important business model. Digitisation also makes it easier to combine multiple services. But this requires clarification of data ownership rights and the transferability of data—not just to protect privacy rights but to facilitate competition and the development and establishment of new products.

 

For now, the digitisation of services in the Sub-Saharan agricultural sector is still in its infancy, at least for the vast amount of smallholders on the continent. But the economy of digital platforms has taught us that successful concepts spread rapidly and have a tendency towards monopolisation. The mechanisation of the agricultural sector may well advance very fast over the next years. And it well may escalate other issues of structural change in rural regions.

Über den Autoren

Michael Brüntrup

Dr Michael Brüntrup is a senior researcher at the German Development Institute (DIE) in the field of Agricultural and Food Security with focus on sub-Saharan Africa

Deutsches Institut für Entwicklungspolitik (DIE)

Deutsches Institut für Entwicklungspolitik
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