Sheena's article

Agribusiness in East Africa: Innovative Social Enterprises

Social entrepreneurs are improving rural employment, empowering communities, and tackling various constraints in the food value chain

The concept of social entrepreneurship, the idea of using business to solve major social and environmental problems, is gaining traction in East Africa and particularly in agriculture. Poor farming practices, inefficient processing, storage and supply chain infrastructure leads to wastage, distorts pricing and supply. For the social entrepreneur such challenges in the food value chain provide business opportunities.

Intellecap analysed over 400 social enterprises across East Africa, of which many are working in agriculture. The findings have been captured in the Game Changers Report (2016) Technology was identified in the report as a key enabler for social entrepreneurs in agriculture; lowering transaction costs and enabling scale through provision of information, finance, collectivising smallholders and providing market linkages. The report classifies social enterprises across three levels based on their interaction with the bottom of the pyramid (BoP): access, ability, and knowledge.

Access / Ability / Knowledge Framework (Source: Intellecap 2006)

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Business opportunities

Social entrepreneurship has the opportunity to improve rural employment, to empower communities, and to tackle various constraints in the food value chain. While private sector actors (e.g. short-termism), public sector actors (e.g. budget constraints), and civil society (e.g. entrepreneurial limitations) leave many options open for improvements, it is social entrepreneurs’ mission to fill this gap by combining social and entrepreneurial values.
For example, the majority of small-scale farmers are excluded from formal financial institutions and borrow at high interest rates from informal sources. Most lack information and awareness of the benefits of improved inputs such as hybrid seed, concentrate feeds, fertilisers and pesticides, or machinery. Most smallholder farmers rely solely on rainwater for their crops, while basic irrigation systems could double a field’s productivity. Social enterprises play an increasing part in using innovative business models and technology to solve such challenges. Esoko, for example, is a social enterprise that has developed apps that train and support farmers in monitoring production, increasing yield and marketing. Esoko tracks data generated from the apps for analytics and uses it to improved farm yields.

One way to strengthen the efficiency of lending to smallholder farmers is through mining the credit history of potential customers for financial institutions. FarmDrive, for instance, conducts credit assessment of smallholder farmers using a digital book-keeping platform. The enterprise’s technology enables farmers to track their productivity, expenses and revenues which are analysed to reveal performance patterns. The information helps financiers to make lending decisions based on the credit profiles of the borrowers.
Small vendors lack money and time to travel distances to remote rural markets to purchase fruits and vegetables. Therefore, social enterprise Twiga Foods has developed a tool that vendors can use to order stocks. It procures the produce directly from farmers at a guaranteed price and delivers it to the vendors. The vendors are allowed to make flexible payments using mobile money depending on what they sell during the day.

Challenges for social enterprises

Social entrepreneurs that serve poor and remote rural communities face many obstacles. Although for social entrepreneurs the social mission is important, earning an income from their activities is also vital. A key challenge, however, is the limited purchasing power of a low-income rural population. Intellecap noticed a shift in the way social enterprises in Eastern Africa react to the challenges of affordability. Creating affordable products was synonymous to creating low-cost products with basic features. However, social enterprises now focus on designing innovative pricing and payment solutions for full-feature products and services. They use sliding fee scales or special discounts for people of lesser means or introduce new payment models.

For example, there is the pay-as-you-go model that is also referred to as a progressive ownership model or rent-to-own model. Social enterprises use this model to provide rural asset financing for the low-income population. In this model, a consumer pays an initial deposit for an asset and pays instalments on a regular basis. Once the instalments are paid to cover the balance cost, the consumer owns the product and can stop paying instalments.
Another challenge for social enterprises is that they often have to build markets, create demand for their offerings and educate customers. Poor infrastructure and uneven geographic distribution make it cost-prohibitive for small companies with limited scale to reach a network of thousands of disparate farms while larger companies encounter a host of logistical issues. Transportation bottlenecks can also run up costs. The price to ship a storage bag from Asia to a warehouse in Nairobi is negligible compared to transporting the same bag from Nairobi to a farm in the Kenyan countryside making it costly for social enterprises to scale.

Way forward
Intellecap’s analysis has shown that East Africa has seen a proliferation of entrepreneurship and innovative business models with two factors emerging as key for success. Firstly, the importance of providing end-to-end support across all stages of the value chain. Those enterprises that provide quality inputs and processing facilities, support capacity building of farmers, and ensure market linkages were the most successful. This model locks in revenue stream and collectivises smallholder farmers to reap economies of scale whilst ensuring that farmers receive fair pricing for their products on a regular basis. Secondly, enterprises should consider leveraging technology. Enterprises with access to customer data can collect, analyse and predict future trends and highlight business opportunities. In the absence of such data, customer insights remain locked within individuals and enterprises and responses to challenges remain reactive.

Despite numerous examples of social enterprises in e-agriculture, social entrepreneurship is still nascent in East Africa and more than 60% of enterprises interviewed for the report were younger than five years old. Around half of the enterprises have not achieved break-even and 67% earn revenues of less than US$100.000. Investments of US$100.000 to US$500.000 are critical for the growth of these enterprises, but currently demand for such investments outstrips supply. As such, impact investors focusing in East Africa need to design innovative financing mechanisms such as multi-year financing plans, result-based financing, and other forms of blended finance in order to cater to the growing demand. With financing and support the enterprises will be able to scale simultaneously creating profit and much needed impact.

Ultimately social entrepreneurs need a lot support not only financially but in capacity building and networking. This can come from governments, NGOs, donors, private sector actors (e.g. angel investors or impact investors), and increasingly specialised support organisations for the social enterprise. The support should not only target the individual social entrepreneur, but must seek to create the perfect ecosystem for social entrepreneurship to succeed in their social mission. Because such ecosystems are less advanced in rural areas, support should take into account the special measures to succeed social enterprises in rural circumstances.

Article first published: ICT Update Magazine, http://ictupdate.cta.int/2016/10/08/balancing-entrepreneurial-values-with-social-impact/

About the author:
Sheena Raikundalia (sheena.r@intellecap.net) is a senior advisor with Intellecap’s consulting team in Kenya providing strategic advisory services to corporates, start-ups, development agencies and NGOs across the East Africa market.

Sheena Raikundalia

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