Beats | June 25, 2020

Building a better post-COVID food system with investments in small businesses in developing economies

Sofia Condes, Gabriel Quiros and David Dewez
Guest Author

Sofia Condes

Guest Author

Gabriel Quiros

Guest Author

David Dewez

COVID-19 is – and will continue to have – a huge impact on global food and nutrition security. On the supply side, restrictions on movement is leading to crops rotting in fields and farmers losing their livelihoods. Storage facilities cannot move their food stocks, whilst food processors obtain fewer raw materials. Food retailers have less food to sell which means not enough nutritious food is reaching people, particularly the most vulnerable. As food shortages increase, prices are rocketing – up by 20% in some African countries. On the demand side, lock downs and their economic impacts have meant many households have reduced their food quality and quantity.

However, the effect of these disruptions is not the same everywhere, nor across value chains. In high-income countries this might translate into fewer meat cut options or less avocado toast. But in low-income settings and frontier markets, it might mean children losing their only meal of the day. Even though Africa is behind the curve with regards to the pandemic’s impact in terms of reported cases, it is already significantly affecting its food system and cases are on the rise. In a recent survey of agribusinesses across seven African countries, about 70% of respondents reported decreased sales and difficulty with distribution, 50% reported challenges sourcing raw materials, and about 20% had laid off workers. 

Food systems are vital to the underlying health conditions of society. Without nutritious food there can be no healthy diets and lifestyles. There is ample evidence showing how under-nutrition and micronutrient deficiencies result in compromised immune systems. This means, in the near-term, populations will be less able to fight off the virus. Moreover, early evidence from COVID-19 patients in New York shows that the most important risk factors influencing mortality are diet related. The facts are clear, nutrition is the most basic input for health and a key factor in the fight against COVID-19. 

Small business investment 

To confront these challenges and disruptions across food systems, going back to the ‘normal’ way of investing in food and agriculture is not going to be enough. The global health crisis has exposed the fragility and inequality of the global food system and highlighted the need to invest in rebuilding a more resilient, safe and nutritious food system as the world recovers. A better food system will reduce the risks of such outbreaks happening again (COVID-19’s origins lie most likely in unsafe food handling practices) and will improve diets, creating healthier populations that are better equipped to resist health threats such as infectious disease.

So, what would a better food system look like? It would be one with significantly reduced food loss, with food production and distribution more localised, sustainable and resilient to shocks, and which ensures that safe, nutritious food is more readily available and affordable to local populations. None of this can happen without more investment in and support for small- and medium-sized enterprises (SMEs), the backbone of food systems and economies in many developing countries. GAIN estimates that SMEs deliver 70% of food consumed in Africa, especially fresh foods such as fruits and vegetables. They are also a major source of innovation in food production, storage, distribution and retailing.

In the short-term, COVID-19 has made an already challenging environment far worse for these businesses in the absence of the type of economic stimulus we are seeing in developed economies. In the longer-term, without proper financing options, businesses that do weather the storm will not be able to invest in activities that are key to building a better food system, for example, improving food safety and hygiene standards, purchasing new manufacturing and cold chain equipment, and developing last mile distribution models for nutritious products. 

Food financing facility

As global investors retreat towards safe-haven economies and lower their risk exposure in the face of uncertainty, governments, Development Finance Institutions, impact investors and some large companies have stepped up to provide short-term emergency financing to SMEs facing liquidity challenges. This combination of institutional capital has highlighted the need and the opportunity to combine multiple resources to overcome global challenges. An important mechanism to achieve this is blended capital, which enables a greater pool of investors to invest towards socially beneficial projects by lowering the risk to commercial capital. 

To help overcome gaps in financing for SMEs operating along nutritious food value chains, GAIN has partnered with Incofin Investment Management, a global impact investment fund manager, to create the Nutritious Food Financing Facility (N3F). Through a blended-capital fund structure, N3F aims to provide tailored funding and technical assistance to SMEs operating along local nutritious value chains and help them to scale their businesses and impact. By doing so, N3F seeks to demonstrate the potential of investments in nutritious food SMEs to generate social and nutrition impact in a financially sustainable manner. It will be the first fund explicitly focused on the nutritional quality of the crops and foods invested in and the first to measure the link of such investments to nutrition outcomes.

The N3F will be funded through a combination of public and private funding. Funding from bilateral and philanthropic donors will be used for technical assistance and as catalytic capital. We anticipate that this initial funding will attract additional sources of capital, including capital from Development Finance Institutions and private investment, to address the financial needs of SMEs supplying nutritious foods. The Fund, developed with the support of the Netherlands Ministry of Foreign Affairs, has also secured commitments from The Rockefeller Foundation and Irish Aid. The N3F is expected to be launched in late 2020. 

Better food system 

COVID-19 has reminded us that in times of uncertainty and economic contraction, some industries are dispensable, but having food to eat is not. It also serves to remind investors of the non-cyclical nature of the agricultural and food sector. There is now a unique opportunity for patient investors to look afresh at the food and agriculture sector, the world’s largest industry and employer, and reconsider its importance to the global economy, to health and to livelihoods. In particular, it represents an opportunity to invest in local SMEs that are going to be central to the development of a sustainable and equitable food system. 

In summary, we cannot go back to ‘normal’. We can only build a better food system if we put SMEs at the heart of our rebuilding efforts. Patient capital investments into SMEs will make the difference between a total collapse of the local food systems in low- or middle-income countries or the re-building of better, stronger ones. We have a unique opportunity to drive a new investment approach for a better food system, let’s take it. 

Sofia Condes is the programme Lead and Gabriel Quiros is an associate of nutritious Foods Financing at Global Alliance for Improved Nutrition. David Dewez is the managing partner of Incofin Investment Management.