The Renewable Energy for Agriculture Project (RE4A) started in May 2021 and will finish in June 2023. The project has supported Modern Farming Technologies, a local social enterprise in Malawi, to establish a business that enables solar powered pumping and chilling.
- Solar pumps. Future Pumps (SF1 model) are used to irrigate poly tunnels in which tomatoes, and potentially other horticultural produce, are grown. The pumps, along with irrigation equipment and polytunnels are purchased by a group of 135 women farmers, through an interest-free Rent to Own scheme with MFT.
- Solar chilling. A solar powered chill plant, a 40 foot bespoke, insulated shipping container with a 12kWp solar array, owned and managed by MFT, is used to store and preserve produce.
The business uses a contract farming approach with MFT providing an end-to-end solution. They provide the equipment, other inputs and extension services to farmers, store the produce in the chill plant, buy the produce from the farmers and secure onward buyers. All Grade 1 produce is sold to MFT by the farmers, with Rent to Own payments, set at 25% of the value of sales, being deducted at source. Other produce is sold independently by the farmers.
A high proportion of the costs of the business were covered by a grant of approximately 300,000 Euro, in anticipation that this will be a sufficient period of time to break even and demonstrate the conditions for viability. The project has now been running for 19 months and the data collected to date indicates that the model is working well for farmers and that alternative funding arrangements, including a combination of grants and commercial funding, are feasible.
Securing access to energy and incomes for poor farmers
The analysis of the model demonstrates that a contract farming model like this is a viable strategy for securing access to energy assets for women farmers whilst at the same time, providing them with an attractive income. If current levels of production can be sustained, women will earn a net annual income, from an average of 15 hours a week, of 624 Euro. This will increase once rent to own payments are completed and if productivity increases further. These figures make up 57% of the Living Income figure for an entire household. At this level of production, women will complete the Rent to Own payments after 4.5 years.
Return on grant investment
One of the benefits of grant investment is that it allows funding to be re-cycled. The current data suggests that, over a period of 4 years, the rent to own repayments and produce sales, will have been sufficient to support a doubling of the number of farmers in the scheme (through an expansion in the rent to own scheme). This would result, over this period, in over 470,000 Euro being brought into the local economy through increases in farmer incomes – a return on the original grant investment of 163%.
Alternative financing models
Alternative funding for farmers
The level of income obtained by farmers suggests that commercial funding could also be an option. A loan value of 784 Euro per farmer would cover the pumps, irrigation equipment and greenhouses. If this was provided as a four year loan with an APR of 17.3 % (current rate in Malawi), women could make the payments and still make an annual income of 518 Euro. This option is now being explored with financial institutions by MFT.
Alternative ways to finance the chill plant
The evidence so far indicates that the chill plant is over-sized for the current scale of the business – both in practical and financial terms.
- Project design was based on an assumption that a chill plant would be a critical factor in securing access to lucrative markets (e.g. supermarket chains). In practise, despite the fact that formal marketing relationships were successfully developed, informal market traders have come to dominate the purchase of produce. Informal traders visit on a regular, daily basis to buy produce and as a result, produce does not need to stay in the chill plant for very long. The end result of this, is that the chill plant is only being used at about 25% capacity.
- The viability of commercial funding for a chill plant of this size for this business, is very doubtful. If a five-year loan for the full 91,000 Euro cost is provided, with an APR of 17.3%, the business will still have a net 67,000 Euro loss at the end of five years. Even if the APR is reduced to 5% (very unrealistic) there is a net loss of over 37,000 Euro at the end of 5 years.
A smaller chill plant may well be more practical and more investment worthy. To illustrate this, if reductions in the size of the chill plant led to a cost reduction of 50%, under the same loan conditions described above, a net profit could be made from Quarter 5 (assuming the chill plant was sufficiently large to store the level of output produced).
Minimum grant size
Assuming grant funding was still provided for the chill plant (either the original size or a smaller version) and alternative financing arrangements were in place for the pumps and greenhouses, the business could be kick started with working capital of just under 24,000 Euro. The business would break even in Quarter 8 when production reached 15,000 kg of tomatoes. It is anticipated that higher production could be achieved more quickly in the future and so it is feasible that this performance can be improved.
The model demonstrates the critical inter-relationships between three variables: access to renewable energy assets; agricultural productivity; and access to markets. All support each other and the absence of one will make the others difficult to achieve. In this particular example, in the slim markets found in northern Malawi, the one stop model provided by MFT enables all three to be achieved. In other contexts where markets are more vibrant and there are more market actors, different models, not so dependent on one actor, will be more viable.
Different financing arrangements for farmers are possible but it is likely that, in the absence of other off-takers, a contract relationship with MFT, that includes production support and market access, is likely to be necessary to give the finance institution confidence.
The experience of the chill plant illustrates two market intelligence needs which influence design, especially chill plant specifications:
- Data on the likely frequency of produce collection, not just on anticipated total production and anticipated total demand
- Data on the potential of informal markets to absorb production rather than a total reliance on formal markets
Lastly the experience of RE4A illustrates the advantages and disadvantages of grant verses non-grant funding. For a traditional grant funder, a business like this, provides opportunities for the recycling of finance within a commercially viable business, allowing scale up and a significant contribution to the local economy to be developed. The use of less grant money per business, as described, would allow more businesses to be supported, albeit with less recycling of finance (i.e. each business would scale up at a slower pace). The data also suggests that businesses, with a small pot of working capital, could establish a viable business without grant funding, if alternative financing of the energy infrastructure could be secured.
Renewable Energy for Agriculture (RE4A) is a project supported by grants from GIZ and the Powering Renewable Energy Opportunities programme (Ikea Foundation and UK aid funded). It is a 2 year project, in which Practical Action are working with a social business in Malawi, Modern Farming Technologies (MFT), to test a contract farming model that supports access to renewable energy for small scale farmers. The experience so far:
- demonstrates the mutual dependence between the provision of productive use energy assets, support to agricultural production and access to agricultural markets.
- provides learning on how grants and commercial funding can be used to trigger the development of a business like this.
 Living Income figures are only available for southern Malawi – this figure is assumed to be relevant in the northern part of the country. As a further comparison, the official poverty line in Malawi is $ 150 a year.