Creating new institutional models in development finance and philanthropy: the potential of joint ventures with multinationals

August 26, 2024

The conventional wisdom is that projects that are deemed too risky for banks and investment funds should be first accompanied by a mix of development finance institutions (DFIs), grants and philanthropic donors.  A number of difficulties are associated with these approaches.

Without turning this into an essay about sovereign debt, lending to developing countries is, in the case of most heavily indebted African countries, a system that has created as many issues as it has solved, ranging from political misuse to illicit enrichment.  Suffice it to say that in many cases, many countries are burdened with interest payments that are disproportionate to GDP at best, handicapping at worst, and in most cases, have not been efficiently managed or resulted in any significant return on investment for the country in question. 

It is my view that the role of DFIs must move past the endless cycle of lending, restructuring and forgiveness of debt, and that indeed much outstanding debt must be looked at as unconscionable and inequitable, the result of an imperial, hegemonic approach to development finance that is outdated and causing more harm than good.  Furthermore, this traditional model of development finance often overlooks the needs and priorities of local communities and fails to address the root causes of poverty and underdevelopment.

There is now some recognition that much sovereign debt must be cut, cancelled or significantly restructured.  There is also some promising work in the area of debt-for-nature swaps, but investing in nature will not in and of itself create knock-on economic growth.  Only investing in skill development and entrepreneurship, in partnership with successful multinational businesses, can lead to sustained organic, local economic growth.  I believe that this is the natural evolution for DFIs: to support entrepreneurship, to support economic and industrial sovereignty for host countries and to assist state-owned companies in becoming operationally autonomous. 

Philanthropic donations also perpetuate an outdated, top-down approach to development, with donors and organizations in developed countries often dictating how funds should be used and what projects should be prioritized. This can result in a lack of ownership and sustainability of development initiatives, as well as a disconnect between the needs of local communities and the interventions being implemented.

To truly make a lasting impact on poverty reduction and sustainable development, there must be a shift towards more inclusive and community-led approaches. This includes involving local communities in decision-making processes, investing in education and skill-building programs tailored to the specific needs of each community, and creating partnerships with local businesses to foster economic growth from within.

Grant-writing in the development sector, in particular, must move away from a focus on short-term, project-based funding and towards longer-term investments that prioritize capacity building and sustainability. This requires a shift in mindset from donors and organizations to view development as a long-term process rather than a series of one-time projects.  In addition, there must be more transparency and accountability in the selection process and use of development funds, with clear reporting mechanisms in place to ensure that funds are being utilized effectively and ethically.

Paradoxically, the eligibility criteria for donations tends to result in intense concentration among recipients, such that once a small grant is received, the likelihood of repeat funding and funding by other institutions goes up exponentially.  The grant-writing process has also become so competitive and specialized that merely preparing and submitting an application for funding can be disproportionately time-consuming, while the chances of receiving funding remain quite low.

It is true that the role of microcredit has been promising in helping to generate moderate scaling solutions in rural agri economies.  Loans used to fund agri inputs, packaging and financing logistics, marketing and exporting services can help a business reach new customers and increase profitability in a transformative way. 

Microcredit cannot finance large-scale agri equipment or energy generation, however.  Indeed, microfinance and remittance-based payments can be terribly inefficient in this sense; unless funds are pooled among by many lenders together, it is impossible (and still yet unlikely) that microcredit will ever finance construction of infrastructure that supports the building of an economy (such as facilities for agri processing and storage or electricity generation).

So while microcredit can support small-scale, discrete scaling solutions for the agri sector, it is not used to finance equipment to support agri and energy value chains:  processing equipment, warehouses, generators. 

And there is an argument that it should not be used to do so:  purchasing and delivering new agri equipment to a rural, off-grid community would not situate well with the community’s existing working habits and practices. A crushing or shredding machine can be transformational, however, and, together with cooling and storage capacity, can be a massive step forward in creating steady income through sale of products such as cassava flour and peanut oil.

Instead, this is where larger loans and investments from the private sector are needed, including through partnerships between local businesses, international companies, and small-scale farmers in order to create more sustainable and inclusive value chains.  This type of investment can lead to job creation, increased income, and economic resilience for rural communities. 

There is a movement now to make such solutions available on a mobile basis.  Rather than replicating the heavy, grid-inspired, large-scale manufacturing models that we see in more developed economies, developing economies can benefit from lighter, mobile and mutualized solutions such as mobile processing units and hub-and-cluster energy solutions.  In doing so, the processing capability comes to the farmer, rather than the farmer having to manage processing capability. 

This shift towards mobile solutions can be transformative, as it aligns closely with the unique challenges faced in rural settings. By providing mobile processing units, farmers can significantly reduce transportation costs and time, leading to fresher products and higher quality goods for local markets. Moreover, this approach fosters collaboration among small-scale farmers, allowing them to share resources, skills, and knowledge while preserving their traditional methods of production.

Furthermore, integrating technology into these mobile solutions can enhance efficiency and transparency. For instance, mobile applications can facilitate tracking of produce from farm to market, ensuring fair pricing and reducing the likelihood of market exploitation. Training farmers to use these technologies can empower them, not only improving their personal economic situations but also fostering a culture of innovation and resilience within communities.

It is often assumed that access to an electricity grid is a pre-condition to industrial activities, although this is not the case.  In the case of agri transformation, well-organized, occasional access to generators can provide a basis for operating equipment on a short-term basis.  In the case that no energy of any sort can be made available on an affordable and consistent basis, project development must focus on using traditional methods until equipment may be made available, either through donation, lease or purchase. 

Multinational companies have a tremendous role to play in helping fledgling agri projects get off the ground.  Making equipment such as generators, tractors, crushers, forklifts and other agricultural equipment – either on a temporary or donation basis – can have the transformative effect of building an economic ecosystem, i.e., helping the local population transform natural resources, such as cassava, banana, peanut, into products that produce revenue. This collaborative approach emphasizes the importance of building local capacity while leveraging external resources to foster sustainable development.

Purchasing any of these items with microcredit is not only ill-suited to the size of most micro projects but also inefficient.  Why should one small-scale entrepreneur bear the burden of financing and maintaining such an important piece of equipment?  Indeed, we see the logic in forming agri cooperatives and groups.  And there is no reason that an agri coop cannot be run with the same principles of efficiency and governance as a corporation, assuming that cooperative members agree on the allocation of profit reinvestment and profit distribution.

The formation of agricultural cooperatives can greatly enhance the bargaining power of small-scale farmers when it comes to purchasing inputs and selling products. By banding together, members can benefit from bulk purchasing discounts, collectively negotiate better prices for their produce, and even gain access to shared resources such as machinery and storage facilities. This cooperative model not only fosters a sense of community and shared responsibility but also encourages knowledge exchange among farmers, which can lead to better agricultural practices and improved yields.

Furthermore, cooperatives can facilitate access to markets that would otherwise be unreachable for individual farmers. Through collective marketing efforts, they can attract buyers who are looking for consistent quality and supply, thereby establishing long-term relationships with wholesalers, retailers, and exporters. This not only helps stabilize income for members but also contributes to the broader economic development of rural areas.

Unfortunately, in many countries, trade, inspection and export rules prevent small-scale farmers from accessing larger markets, leaving them essential "price-takers" as opposed to the "price-maker" multinationals. Working together through cooperatives can certainly increase the chance of success, but cannot replace the value of a truly liberalized marketplace.  Many agri dealers today lack the influence and capital to be competitive on an international scale, and the role of the state in centralizing and controlling sale conditions, particularly for coffee and cacao, means that in many cases, the playing field is not level. Policies and regulations need to be reevaluated and reformed to create a fair and open market for small-scale farmers to thrive.

In addition, there needs to be a shift towards more sustainable agricultural practices that prioritize long-term environmental health over short-term profits. This includes promoting agroecology, regenerative agriculture, and other techniques that work with nature rather than against it. Governments can play a crucial role in incentivizing these practices through subsidies, tax breaks, and other policies that support environmentally-friendly farming methods. At the same time, public education campaigns are necessary to raise awareness about the importance of sustainable agriculture and how consumer choices can drive change in the industry.

Indeed, the key to development in the agri sector lies in organizing, reinforcing and mastering traditional methods until larger scale solutions can be made available. And working with industrial actors, such as manufacturers and managers of local factories and petrol stations, to benefit from some of their energy, logistics, storage and technology solutions.

My next question is:  why do companies not see the potential they play in jump-starting these economies?  How many tractors are currently sitting idle in Africa, in Asia?  How many experienced engineers, lawyers, marketers and technicians in the world’s biggest multinationals have the expertise to use these resources efficiently for the realization of the SDGs? Microcredit is only a drop in the bucket compared to the value that could be created if multinationals truly committed to devote a portion of their time and energy to SDG project development. 

This is what true sustainability looks like.  It is not counting carbon tons or credits; it is putting the time, energy and resources of people and industrial companies into the realization of sustainable development projects that strengthen and create economic ecosystems that give rise to additional value creation.

How can we make this argument to multinationals?  The first way would be to pilot a series of joint ventures between energy and agri multinationals, joined together with institutions that have expertise in development finance, microcredit and philanthrophy. There are many projects in Africa and Asia that are indeed ripe for such an approach to development.

CPM