Doing business for Social Good: A new approach to African development
Last month, ThirdWay Africa (TWA) CEO Gonçalo Neves-Correia was invited to the Concordia Africa Initiative in London. He participated in a conversation with Lord Malloch-Brown, Senior Advisor to Eurasia Group and former Deputy Secretary‐General and Chief of Staff of the UN during a session on ‘Business for Social Good: Community Development on a Macro Level’. The highlights of this conversation are included below.
About the Concordia Africa Initiative: an African-oriented platform for social impact
The Concordia Africa Initiative provides a platform for leaders to share strategies and priorities for African economic growth. Its goal is to build sustainable and scalable alliances among the government, private sector and civil society. It aims to provide ‘an international platform through which to elevate African voices and priorities on a global scale, bringing African voices to global discussions.’
A new paradigm for investment
According to Gonçalo, the universally accepted economic rules of the past 150 years are changing. Sustainable development is replacing old financial models that focused only on investing financial capital to generate economic returns for a limited group of investors and at the potential detriment of social and environmental impact. This new paradigm is not only welcome, it is critical for the sake of the world. This is because the older paradigm “is effectively mortgaging our future.”
The end of the zero-sum game
In the past, economic models focused exclusively on financial capital. They were under-pinned by the concept of economic competition being a zero- sum game. People didn’t grasp the fact that natural resources, like clean water and hydrocarbons, were limited. Traditional economic theory lumped all environmental effects into the category of “externalities.” Those were considered cases were free competition failed to allocate goods and resources optimally, but nothing more was ever said about the matter.
Blended finance: a sustainable game changer
Blended finance can be defined "as the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets", resulting in positive results for both investors and communities. It means putting the public and private finance to work on a practical level.
Bridging the cultural gap
When being asked by Lord Malloch-Brown on the main challenges of making blended finance initiatives a reality in Africa, Gonçalo highlighted the difference in cultural backgrounds between the different stakeholders. In a practical example, the business world treats repeat business as a sign of endorsement is contrasted with public sector perceptions pairing repeat business with cronyism.
The question is asked – how can cultural gaps be bridged, or mentalities changed? Gonçalo believes that a new system needs to be created and fostered, one without leakage. In the past, leakages occurred as many development funds did not necessarily targeted having a multiplier effect – leading to private capital never following. However, this needs to be achieved without creating perverse incentives. A system with massive subsidies is neither optimal nor financially sustainable from both an investment and a behavioural perspectives.
In its role as a financial intermediator, TWA works to bring capital and resources to areas considered to be business models of the new sustainability paradigm.
Africa could lead the way
During the discussion, Mr. Lord Malloch-Brown pointed out that Africa may be on a very different growth path than that experienced by countries that initially participated in the industrial revolution, namely the UK, US and Europe. These countries developed largely due to heavy industry and cheap work forces. According to Gonçalo, this shifting economic landscape has given the world an opportunity to “re-imagine how we transact and do business.” In this vein, TWA believes there is a significant opportunity for Africa to not just follow – but lead.
Unlocking the potential of rural Africa
The conversation also explored the theme of development in rural Africa. Mass immigration across the world has led to “poverty belts” in global cities – this is not limited to any single geography and is a universal phenomenon, whereby people end up becoming even poorer in relative terms following migration. The conception of Rural Africa, especially if the average person outside the African continent is consulted, is primarily associated with the notion of a “stranded liability”. As per Gonçalo’s view, the challenge - and opportunity - is to convert this “stranded liability” into an “investable asset”. The opportunity in question clearly exists, and is anchored around real assets (land, good agronomic conditions) and the emerging infrastructure buildout led by resources to unlock the potentiality of natural capital.
Shifting from subsistence to economic sustainability
This can keep communities in rural areas – and even transition communities from being at subsistence towards operating sustainability. From a strategic standpoint, the goal is to support and develop farms that can become nucleus farms, bringing growth capital in and leveraging its local presence.
What is a nucleus farm?
A nucleus farm is a large farm, or plantation, that contracts to provide a set amount of product (for example we will use corn) to a processing plant. Part of this corn is provided by the nucleus farm itself, and part of it is provided by small farms that work with the nucleus farm.
The nucleus farm thus takes care of all the commercial aspects of selling the corn. It also aids in post-harvest processing, planning and in general, teaching small farmers best agronomic practices.
If they work with a nucleus farms, smallholder farmers not only gain valuable knowledge. They also benefit from economies of scale that are often only achieved by large farms.
Targeting the synergies
The ultimate goal is to integrate smallholder farmers into value chains by providing them with inputs, know-how and access to infrastructure. It all fosters the supply of growth capital and leverages the farm’s local presence to attract more smallholder farmers.
This investment philosophy is radically different than that implemented in the past 10-20 years, which was dominated by an obsession with collateral. There has been a fundamental reconsideration of what is required, from an ownership and facilitation perspective, to providing a platform that gives small operators access to synergies.