With good land and a favourable climate, Uganda has the potential to become a major agricultural power and grain basket in East Africa.
By Joyce Nyakato
With good land and a favourable climate, Uganda has the potential to become a major agricultural power and grain basket in East Africa. Realising this potential would offer huge benefits, both for Uganda and for the region: growth in agriculture is the surest way to reduce poverty in the country. Boosting agriculture production is the surest way to prevent recurrent food crises that have plagued the region and lead to a surge in the prices.
Though Uganda is said to be a predominantly agricultural country, recent performance in the sector has been disappointing. All this has been attributed to lack of financing in the sector.
In the Maputo Declaration, Uganda, along with other African states, committed to allocate 10 % of its budget to agriculture, in order to achieve an annual agriculture growth of 6 %.
Experts have analysed that investing in Small and Medium Enterprises (SMEs) benefits the farmers. It is also critical to improve the quality of public spending in agriculture. Clear policies and regulations, strong institutions and good governance are needed.
“The European Union, along with other development partners, is committed to continue supporting the efforts of the Government of Uganda in these areas and to contribute to the funding of the sector,” says Ambassador Roberto Ridolfi, head of the European Delegation. The European Union and other partners are working with the Government to explore the possibilities of setting-up an equity fund for SMEs agribusinesses in Uganda.
The proposed equity fund would blend resources from development partners, Uganda’s institutional investors and private investors. It would invest in small and medium enterprises in need of capital to develop new agribusinesses. The objective of the initiative would be to contribute to the development of Uganda’s agriculture and agribusiness sector and to improve rural livelihoods, incomes and food security.
A public private equity fund would support the development SMEs engaged in agribusiness by providing both access to “patient capital” and business development services to address capacity constraints.
Incorporated in Uganda, the fund would be able to work very closely with Uganda’s SMEs. It would also allow Uganda’s investors to invest their money in the development of Ugandan agriculture, rather than on international markets. Producing crops and livestock is not the task of public institutions. SMEs, including the millions of Uganda’s smallholder producers are the driving force in agriculture.
Public institutions are simply there to establish the policy and principles and regulations and to create an enabling environment for the private sector. SMEs too have a critical role to play in creating employment, supplying agro-inputs and farm equipment, storage, transport, and agro-processing. They exert an important effect in opening markets and generating cash flow and value addition to agricultural produce. The development of SMEs would in turn benefit the millions of smallholder agriculture producers.
Access to finance is one of the key factors in the transition from subsistence to commercial agriculture. It is currently a main constraint for farmers and agribusinesses, because of the perceived high risks by the formal banking and micro-finance sectors. The problem is particularly acute for small and medium enterprises in need of long-term finance for business development.
A significant gap exists in the offer of long-term finance between microfinance institutions, at the lower end of the spectrum, that concentrate on loans of less than $1,000 and the relatively large-scale commercial banks at the other end that are reluctant to lend to SMEs in the agriculture sector.
When long term finance is available, it is often in the form of bank loans. Current interest rates easily exceed 20 %: a cost that is often prohibitive to finance long-term investments in agriculture. Equity funds, by providing long-term equity finance, contribute to address this funding gap. Equity funds are mutual investment funds that invest in private companies, becoming shareholders of these companies.
A feasibility study in August 2011 has concluded that the “equity fund initiative is relevant to support the mid-size agribusiness in Uganda” and would deliver impact on the sector.
Capacity constraints also affect small and medium agribusinesses. There is a high need and demand for business development services to reinforce many of the key aspects of their business.
These include financial management, corporate governance, access to - and management of information, production management and marketing. The European Union Commissioner for Development Cooperation, Andris Piebalgs, will visit Uganda on the November 8-9. One of the main events of his mission will be a high level roundtable on public private partnerships to boost investments in agriculture.
EU to boost agriculture in Uganda