KfW's agricultural financing in Africa

To minimise ecological and social risks, the fund sets comprehensive social and environmental standards. Adherence to these standards is checked by an independent compliance advisor from the International Labour Organisation (ILO), who cooperates with UNEP to this end. Complaints filed against the Chobe Farm in Zambia, for example, were followed up, but proved to be unfounded. To consult the respective status reached in the implementation of environmental and social standards, please see the detailed AATIF Annual Reports on individual instruments.

Many players are beginning to recognise the opportunities offered by investing in agricultural investments in Africa. The African Development Bank recently numbered 25 funds that want to invest equity in agricultural companies in Africa that promise high returns.

AATIF, however, is currently the only fund that offers long-term external financing. This covers a central gap for many companies, since the local African financial markets often only offer financing for a year, if that.

AATIF was founded in August 2011. The commitment volume of investors total almost USD 181 million. Federal Ministry for Economic Cooperation and Development fiduciary funds accounted for almost USD 74 million of this amount, while C-Shares from the Common Fund for Commodities (CFC) accounted for USD 2 million. KfW and Deutsche Bank pledged USD 26 million respectively. In October 2015 a contract worth over USD 25 million was also signed with the Austrian development bank. Private investors (mainly institutions related to the Church and private fortunes) account for USD 28 million. The volume of resources is to be further increased in the medium term. New investors will only be allowed to participate if approved by AATIF's directors. The project will be supported by a technical complementary measure worth EUR 6 million. The outstanding credit portfolio totals around USD 170 million.

Luxembourg has been selected as the headquarters for the AATIF fund. The following reasons were decisive during the selection process:

Good financial infrastructure plus legal security and protection for investors: the knowledge of funds already present in Luxembourg among parties such as lawyers, auditors and financial service providers ensures a good basis for implementing and managing the fund. Furthermore, the location is renowned for its high level of legal security and a large number of investment protection agreements, even with smaller developing countries.

Suitability and performance capacity of the national regulatory system: Luxembourg's regulatory system is fundamentally suitable for funds, and Luxembourg alone possesses the expertise needed for the special form of funds known as "structured funds" (funds with varying risk categories for investors, e.g. the EFSE), meaning that all of our structured funds (12) are based there.

The reasons listed have led to over 70% of the world's micro-financing funds now being based in Luxembourg. Issues relating to tax did not play any role in the selection of a location for the fund. This is because, in the case of investment funds that issue loans, it is the shareholder/investor who is taxed, not the company. In this case, tax is charged according to the rules in place in the investor's place of residence.

This therefore also applies for FC funds (Financial Cooperation with developing countries and emerging economies that KfW deals with on behalf of the German Ministry for Economic Cooperation and Development). No special agreements are in place. Investors in the fund are subject to regular tax regulations in the country in which they are based.

The fund has an unlimited duration, was founded under Luxemburg law and is subject to its financial supervision. The background here is that only Luxemburg's law enables the fund to be structured according to the so-called waterfall principle (cf. below), whereby certain investors sustain heavier losses than others. This is required to mobilise capital from private investors, who would otherwise seek to avoid the higher risks of investing in our partner countries in the agricultural sector. This legal form has proven successful for several of the funds set up by KfW.

The fund's capital is subdivided into three risk categories; according to their appetite for risk, investors can invest in C- (or junior), B- (or mezzanine) or A- (or senior) shares.

The waterfall nature of accepting losses means that

• C-shares (deposits by bi- and multilateral donors of an unlimited duration) sustain the first losses,
• while any further losses are sustained by B-shares (term of 5-15 years, targeted investors are private banks and philanthropic investors,
• and finally the remaining losses - insofar as C- and B-shares have been used up - are borne by A-shares (term of 5-15 years and likely to be private banks and philanthropic investors)
• Scaling of returns
• • The target returns for C-shares correspond to the inflation rate in the euro area and are capitalised; C-shares also receive the bulk share of any additional revenues that exceed target returns. In other words, those who bear the highest risks benefit from the upside potential.
  • The target yield on B-shares is currently Euribor +300 bp.
  • The target yield on A-shares is currently Euribor +200 bp; A-shares are senior to all others in terms of dividends and entitlements.

The Kenyan company Kevian Kenya Ltd is an established, medium-sized producer of fruit juices. In 2012 the DEG provided Kevian with a loan worth a total of USD 7.5 million for investments in expansion. Since then Kevian has also become able to self-produce the fruit juice concentrates that it needs to make juices, which were previously largely imported. The company buys its fruits - mainly mangos, tomatoes, carrots, pineapples and passion fruit - from small farmers. This means that around 40,000 small farmers have an opportunity to earn income for themselves and their families. A large share of fruit juice concentrate is exported by Kevian to Germany. It is purchased by the Heidelberg-based company Rudolf Wild GmbH & Co. KG, one of the world's leading producers of natural ingredients for the food and beverages industry. The filling line for the fruit juices came from Germany: Krones supplied Kevian with the high-tech filling line and offered on-site training for local staff.

In 2011 a total of eight European and African development institutions participated in financing the investment project related to Addax Bioenergy S.A. in Sierra Leone; the external financing amounted to EUR 142 million.

The investment project covered the development of a sugar cane plantation, as well as the set up of a fermentation and distillation plant for bioethanol and of a biomass power plant, that uses sugar cane waste to generate energy. It also covered measures to promote secure foods supplies and socioeconomic development in one of the poorest regions of the country.

In this project area infrastructure was significantly developed and valorised thanks to the commitment of Addax. Up to 3,500 permanent and seasonal local workers were able to earn income and improve their living conditions by buying or extending dwellings, for example.

In cooperation with the Food and Agriculture Organisation (FAO) and Sierra Leone's Ministry for Agriculture, Forestry and Food Security set up a Farmer Development Programme that gave over 2,000 small farmers extensive agricultural training. The land leased by Addax was - partly for the first time - reclaimed for agricultural use and thus valorised. According to DEG information, the Farmer Development Programme is currently being continued; and 11 communities are presently participating in it.

The investment project faced very challenging business conditions in Sierra Leone, a post-conflict country, from the very outset, especially given a lack of, or poorly-developed, infrastructure. The severe outbreak of Ebola in West Africa in 2014 heavily impacted the activities of Addax, which was still in the start-up phase at that point. The company showed an exemplary approach to fighting the Ebola epidemic and to supporting its employees and their families. During this crisis DEG supported the company via a complementary measure.

In 2015 Addax officially announced that it would downscale its activities in Sierra Leone and that the Makeni project would be subject to a review process. DEG is legally obliged as a credit institution not to make any remarks about the companies that it co-finances and their projects, subject to the customer's approval. In this case Addax gave DEG permission to announce that the company had repaid its DEG loan.

DEG takes the concerns of small farmers that are involved in the ongoing review process seriously. It will continue to monitor progress with the project and to sound out whether and how the local population can be supported.