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26 June 2014

Tony Elumelu: Vision for Africa

Middle East & Africa
Senior Reporter
Tony Elumelu is chairman of Nigeria-based investment company Heirs Holdings and conglomerate Transcorp. He is also founder of the Tony Elumelu Foundation, a philanthropic organisation that supports entrepeneurship across Africa.

Can the private sector take the lead in agriculture or are subsidies and development agency support essential? What should governments do to support agriculture?

The private sector must take the lead, as we have done with African Exchange Holdings (AFEX) and the East Africa Exchange (EAX). The government has a role to play, no doubt, in establishing a supportive environment for business. There is much to be done, for example, in streamlining the process of starting a business, reducing the burden of taxes, duties and fees, expediting permits, and rationalising trade rules.

African governments have a history of interventions in the agriculture sector that inhibit competition and the efficient functioning of markets. Instead, they need to make much faster progress toward open, competitive markets by reversing these policies (eg export bans and import restrictions). And, as much as possible, governments must refrain from fixing prices and distorting markets with subsidies, and generally creating red tape that prevents the private sector from managing supply and demand gaps. Such reforms in agriculture policy could go a long way toward attracting investment, and increasing the productivity of this critical economic sector.

That said, business cannot just stand idly by and wait for things to be perfect, or we will be waiting forever. We must forge ahead regardless and be catalysts for change. The premise of Africapitalism is that the private sector holds the power of economic transformation, through its ability to create social wealth for the long term. That entrepreneurial power is only partially dependent upon government action and development support. Both are extremely helpful, but Africa must move toward greater self-sufficiency and fill the void with private investment and strategic partnerships, as we have done at EAX with our partnership with NASDAQ.

We cannot rely on ‘development capital’ forever. And to some extent, even in developed economies, governments are always playing catch-up with the private sector. Africa must embrace a new agenda, with business taking the lead on economic development regardless of the obstacles, particularly in agribusiness. As the private sector grows, and creates both jobs and wealth - and presses our respective governments for progress on urgent issues - we can become the change we seek. 

How are the institutions you work with helping to increase the competitiveness and involvement of African banks in agricultural trade finance, including for intra-African and South-South trade flows?

Banks must absolutely increase lending and finance for Africa’s agricultural sector, which offers the opportunity not just to earn a significant financial return, but also to reduce unemployment and create social wealth. Africa is blessed with tremendous agricultural resources. African agribusiness offers some of the world’s best investment opportunities. That is true whether you are a large company looking for long-term revenue and margin growth, a small socially conscious investor looking to make an impact, or anything in between.

Opportunities exist up and down the entire value chain, from production to processing, to distribution and sales. Currently, Africa faces a deep supply-demand imbalance: consumer demand is growing rapidly, but the agriculture sector suffers from low productivity, as well as a near total lack of domestic processing and distribution capacity. Filling these gaps through domestic private sector investment presents an enormous opportunity for those with a long-term outlook.

The other key ingredient to faster, more inclusive economic growth for Africa is greater intra-African trade. Historically, most of our trade is focused on exporting raw materials off the continent. By contrast, regional trade within Africa includes a higher proportion of manufactured and value-added goods. More regional trade within Africa can help increase employment and local purchasing power. And when we process our own resources here - rather than exporting raw materials and importing finished goods - it helps Africa retain wealth rather than export it.

The institutions we are developing can play a central role in strengthening both of these drivers of growth. They increase confidence in the agribusiness sector, and increase regional trade, by building local markets, increasing farmers’ incomes, and increasing the amount and diversity of available product. We fully expect that as confidence in the sector increases, and as it demonstrates an ability for sustainable growth, banks will step in and provide the necessary financing.

In specific terms, stronger contract laws, as well as adequate guarantees and insurance covers, have helped us secure financing for AFEX’s warehouse receipts from United Bank of Africa, which had operations in 19 countries across Africa. We are also working with Equity Bank and KCB for the same purposes. In practice, such banks rely on the balance sheet strength of the securing and guaranteeing company, as obligor risk can be quite high when financing farmers and traders. A strong counterparty, such as AFEX, can provide peace of mind for financial institutions, that inventory in secure warehouses can be ‘collateralised’ or ‘securitised’ by banks, thereby giving them confidence to release credit into the agribusiness sector.

What is your vision for the exchange initiatives in Africa? Do you foresee many national exchanges, a few regional hubs or even a pan-African structure, and how long will it take to get there?

We envision the AFEX network of exchanges to include both regional and local hubs. EAX Rwanda was the first node of a regional commodity exchange. We are currently operational in Kenya and Uganda, and have businesses registered across all East African Countries. Tanzania also promises a productive agricultural sector that accounts for 85% of Tanzanian exports. We have already submitted an initial proposal to the government of Tanzania and are very keen on partnering with them.

In each market, AFEX exchanges will leverage NASDAQ OMX's world-class technology and invest in warehousing and collateral management services to establish an automated trading platform and electronic warehouse receipt system, creating new trading opportunities in the region and internationally.

In Nigeria, for example, the government is completing the construction of several silo complexes across the country, with a goal to reach 1.4 million metric tonnes of total storage capacity this year. This will create food buffers in the country and combat unsustainable food imports. AFEX has identified opportunities to create value within the agricultural value chain by leveraging the Ministry of Agriculture’s existing facilities, as well as additional facilities from the private sector. AFEX is also developing best practices for the storage and handling of commodities, and will manage and operate warehouses located in major commodity markets and production sites across Nigeria. AFEX is implementing the electronic warehouse receipt system in its warehouses as a building block to creating a vibrant commodity exchange in Nigeria.

How important are warehousing systems in efforts to boost agricultural finance and physical trading? How much can be achieved without large-scale reform in warehouse receipt laws and regulations?

Warehousing and collateral management systems are critical to the success of commodities exchanges. The warehouse receipt itself is the security instrument traded on the exchange, representing the underlying commodities stored in exchange-accredited warehouses. Receipts are issued by a collateral manager, who guarantees delivery of the quality and quantity of product on the issued receipt, and provides value-added services such as cleaning, fumigation, bagging, and ultimately preparing the product for trade.

The basic function of an exchange is to ensure settlement by acting as a counterparty to buyers and sellers. Without secure storage and warehouse receipts with integrity, this will never happen. These capabilities are also central to financing because they not only enable efficient transfer of the receipt but also use of that receipt for collateral - to secure lending from banks. Banks will only lend against that collateral if it can be proven to be secure and not vulnerable to side-selling, theft, forgery, etc. Thus, the entire warehousing and collateral management system must be secure and reliable if the exchange is to function not just as a hub of physical trading, but also as a platform for commodity finance.

Current warehouse receipt legislation combines several elements of contract and financial instrument laws into one piece of legislation, aiming to legitimise the warehouse receipt as a document acceptable by the court for adjudication or dispute resolution. At AFEX, we tend to follow the South African model - currently the only model for a commercially viable exchange in Africa - where there is a third-party providing quality and quantity guarantees, as well as liability protection should the stored product deteriorate or be unavailable for settlement.

Business cannot wait for everything to be perfect before we act. It is not feasible to wait for warehouse legislation to be enacted that would cover all warehouses in a given country - warehouses of various sizes, types and ‘state of repair’. We recommend a pilot project to demonstrate the advantages of ‘secure’ and well-managed warehouses, and using that experience as an incentive for warehousing to be improved. We believe that this will pave the way for the introduction of national, and possibly even regional, legislation. 

On the road to implementing your exchanges vision, how do you see the interplay between national interests and regional strategies, cooperation and competition between private initiatives, government interests and donor-driven efforts?

We absolutely see an increased need for all players across the value chain to work together to get the exchanges running, and create an efficient market system that adds value to all its stakeholders, inclusive of farmers/producers. An efficient agriculture sector - which produces value-added goods for domestic consumption - is a critical component of African growth and serves the interests of the entire continent. It should not be seen as the sole responsibility of any group, whether that is businesses, governments, market participants, or development partners. As I have said before: if Africa fails, we all fail. We cannot afford to let the agriculture sector languish, given its potential to create jobs and address high unemployment, fill the supply-demand gaps that exist across the continent, and create social wealth that can help us solve so many persistent health and welfare challenges.

Economies of scale are particularly relevant in the exchange environment, and we believe regional exchanges will benefit each individual country far more than a series of smaller, less liquid national exchanges. Regional exchanges can accommodate higher volumes of product, a higher number of market participants, and greater scale in financing, given the larger scale of regional operations. The broader regional view will not only uplift the individual economies of each country, but through inter-regional trade will also serve the food security objectives of the region by facilitating the flow of agricultural products from surplus areas to deficit areas.

Governments in particular need to create enabling environments for private capital and skill to set up or revamp exchanges across Africa, and run them in the most equitable manner. And government has a regulatory function to play to manage the interest of the larger society and the parties to transactions. But business must be an equal partner in driving reform, leading the way by creating opportunity, jobs, and wealth, which will demonstrate the potential rewards of policy reform and pressure governments to act for the benefit of all Africans.

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