By Athanasius Lupatu
Agriculture is Tanzania’s main economic activity employing nearly70 per cent of the population and contributing more than 30 per cent of the national GDP. The country’s main cash crops include tobacco, cashew nuts, coffee, cloves, cotton and sisal. According to World Bank crop production index, Tanzania’s crop production rose by 44 per cent between 2008 to 2013, outpacing sub-Saharan Africa’s average crop production growth rate of 18 per cent during the same period. This provides an excellent opportunity that piques the interest of investors, especially those who don’t necessarily want to get both feet wet in the country.
The growth of private equity in East Africa is mainly seen germinating from Kenya, yet the likes of international firms such as Carlyle Group or Catalyst Principal Partners have seen the attractive qualities Tanzania has had to offer. The data is evident, as many see agriculture as a slow but risky arena to invest in. Yet that hasn’t been the case.
Most recently, there has been a shift in investment in the country. Agriculture is being seen as a very promising area to enter. Private Equity firms are looking for ‘unicorn Deals’, the one which gives the best return in the shortest time possible. However, investors are also being cautious that “Ag” is not the sexiest of sectors, but one that requires patience. The typical exit is not 5 to 6 years, but more like a decade, as much of it is dependent upon the price of commodities.
Having said that, companies such as Pearl Capital, AfricInvest and Fanisi Capital, just to name a few, are in the game for the long haul. Each of these companies has sought to invest in an arena that either deals in Agriculture or deals in Agribusiness. The likes of which would not have been so a few years ago. The promising nature of Ag in Tanzania is that the country is highly endowed. Yet investors are faced with challenges especially from over regulation.
Compared to other African countries, Tanzania’s infrastructure is not investor friendly, yet. An investor wanting to pour money in agriculture would need to be guaranteed good accessible roads from the interior farmland to the marketplace in town area. Though the government has been working hard to improve infrastructures, much more is to be done to attract the likes of more PE shops. The country’s road networks and power problems are two factors that dampen many investors to enter the market; nevertheless, the attractive off-take of the business is one that can create manifold returns, if the lack of infrastructuredoes not affects current profit margins.
Currency risk is another issue affecting investor appetite. Tanzania’s Central Bank, the Bank of Tanzania is keen to maintain stability and ensure fluctuations remain constant. With the shilling devaluing against the dollar, it becomes less profitable to export finished agri-produce the initial investment depended much on higher imported cost of resources. The Bank of Tanzania has a duty to ensure it manages the currency fluctuation so that it encourages investors to come in.
Another outcry has been the recent changes in government taxes. For many investors, the Tanzanian authorities have imposed various taxes on agriculture. To date, there are approximately 73different agricultural taxes, of which many are obsolete, but others do pop up at a whim. Regulation in the region is loosely described for fast moving consumer goods and this becomes a hurdle for companies. Some businesses have experienced losses due to their cargo being held for not paying transport fees that aren’t properly stipulated. The legal framework in place doesn’t clearly describe the boundaries in which one operates. There is a lot of hassle one has to go through in conducting business in Tanzania.
If the government can look into these few areas of concern, it can position itself in a manner that can attract the likes of various Private Equity and Venture Capital entities, proving that the country is a hotbed for foreign investment.
How can private investors be successful in Tanzania?
Most Private Equity investors look into investing 5 to 25 million dollars worth of funds into businesses here in Africa. According to the East Africa Venture Capitalist Association, in 2016 East Africa managed to attain 13% per cent of all PE funds directed towards Africa. The region recorded 44 deals, the largest number compared to any other region in Africa. Many of the deals targeted extractive industries, energy, agribusiness and manufacturing, of which most of the companies that absorbed the funds were small and medium enterprises.
Though the region has experienced much funding, there has been an issue on private equity investment in Tanzania. The amount of deal flow in the country is less compared to its neighbor Kenya. To promote more deal flow PE firms must set up offices in the Tanzania and have a foothold presence or use ventures partners with more knowledge of the market. It becomes easy for these partners to engage with local business groups and expand the respective enterprise.
PE may also engage with local businesses by offering them a larger deal than the usual funds, by providing new ideas on expansion, talent management and growth and technological utilization. A good example has been the capacity upliftment of Tanga Fresh by the Dutch Investment house DOB Equity who entered the market and transformed the company by bringing foreign expertise training. Today, Tanga Fresh is considered as Tanzania’s top dairy producer.