Enabling Small- and Medium-Sized Enterprises Access to Private Sector Financing
Small- and medium-sized enterprises (SMEs) are the backbone of the global economy and could significantly contribute to increasing sustainability and productivity in the agricultural sector. However, as Water and Energy for Food (WE4F) has learned through its investment landscape mapping activities, SMEs lack access to financing due to a variety of factors. In the Middle East and North Africa (MENA) most firms find debt unappealing and banks are not seen as growth partners. In Southern and Central Africa (S/CA), risk-averse banks’ prohibitive interest rates and collateral requirements are barriers of access for innovators. Enterprises in South and Southeast Asia (S/SEA) face similar challenges to those in MENA and S/CA, with the additional burden of having difficulty identifying investors who share their vision.
To combat these challenges and enable more SMEs to access financing, the WE4F Grand Challenge leverages multiple solutions: technical assistance, pipeline and partnership development, investment facilitation and a guarantee mechanism.
Improving SMEs’ operations through technical assistance
To support innovative water-food, energy-food, and water-energy-food companies, WE4F uses five regional innovation hubs (RIHs) based in East Africa, MENA, S/CA, S/SEA, and West Africa. Each RIH supports SMEs whose solutions can sustainably improve food security, gender equality, climate resilience while protecting the environment and biodiversity.
To help scale SMEs’ innovations and reach more smallholder farmers, the RIHs work with the innovators to provide grants and develop customized acceleration work plans that focus on technical assistance and investment facilitation. For those who are not yet prepared to pursue external financing, the plans cover a range of technical assistance categories that improve innovator operations and prepare them for private sector investment. For example, RDO Trust is receiving monitoring and evaluation technical assistance that will improve its ability to monitor data and show impact to potential investors.
Once innovators reach the investment facilitation stage, the WE4F RIHs use brokering units led by experienced local organizations to provide the needed, barrier-reducing support. Examples of potential support include investor matchmaking, deal brokering and structuring and company valuation.
Building pipelines and partnerships for investor matchmaking and SME financing
While all the RIHs have a similar design, they do use different methods to build pipelines and partnerships for SME financing. The MENA, S/CA and S/SEA RIHs use expressions of interest (EOIs) from Investors to build investment pipelines, while the East Africa and West Africa RIHs pursue a partnership model.
Through the EOIs, investors can directly join WE4F and connect with relevant innovators. These EOIs remove risks from the investors, as WE4F conducts due diligence and continuously monitors environmental, social and governance compliance. Innovators benefit from this approach because they no longer have to go out and search for investors and they now understand how to present themselves when discussing investment opportunities.
The partnerships being developed by the East Africa and West Africa RIHs also focus on directly connecting innovators with investors. In 2021, East Africa RIH signed a new partnership with the AlphaMundi Foundation that will provide technical assistance and results-based climate financing to East African innovators. In West Africa, through the RIH’s partnership with the ECOWAS Centre for Renewable Energy and Energy Efficiency, the hub organized a virtual business-to-business networking event that fostered dialogue between enterprises and banking and financial institutions.
A guarantee mechanism for SMEs
The final method through which WE4F innovators can potentially access financing is a newly signed guarantee mechanism issued by the U.S. International Development Finance Corporation and the Swedish International Development Cooperation Agency. This $15 million loan portfolio guarantee supports a private equity fund established by Bamboo Capital Partners and the United Nations Capital Development Fund. It enables SMEs to be eligible to receive loans of up to $1.5 million — a financing gap that SMEs are looking to have fulfilled.
Current results and looking forward
So far, through WE4F’s investment facilitation work with SMEs, more than $6 million in private sector investment has been mobilized — $4.1 million in the MENA region and $2.1 million in S/SEA region. Additionally, in the 2021 Quality of Service Survey, 79 percent of MENA innovators reported that the MENA brokering unit’s interventions led to an increase in knowledge about investment opportunities.
In order to further improve agricultural financing and help scale resilient and inclusive SMEs, WE4F is pursuing research that focuses on end user financing models prevalent throughout the regions in which WE4F operates. Our goal is to present the landscape of end user financing in the water-energy-food nexus and explore future trends and models that could help SMEs improve financing offerings to smallholder farmers.
In the coming months, WE4F will onboard more innovators and continue to work on increasing agricultural financing investment. For those interested in learning more about WE4F’s programming or lessons learned from investment facilitation and technical assistance, please contact WE4F.