Africa, new business opportunities

The demographic growth of the African continent is a driving force for the development of the agro-industrial sector. The growth of the primary sector is the premise for a consolidation of technical cooperation with agricultural machinery manufacturers. The role of the Mattei Plan

Africa has always been of great interest to the Italian agricultural machinery industry. Today, the “Young Continent”, as the Economist has called it, is of even more strategic importance given the many initiatives that might have a disruptive effect on African agriculture in the near future. We refer, in particular, to the Mattei Plan and the African Free Trade Area. The Mattei Plan entered into an operational phase with the Prime Ministerial Decree of October 7, 2024, which defined the instruments and methods for action, and identified 5 key sectors that include agriculture and food security. The African Free Trade Area – an agreement signed in May 2019 and presently ratified by 47 out of 54 states – is also in a new phase, in which free trade in goods on the African continent is increasingly being brought closer, with methods that promote a fair distribution of benefits among the various countries. And here too, agriculture and food security constitute a powerful driver of the initiative, which is part of the broader framework of the “Agenda 2063 The Africa We Want” promoted by the African Union.

If we shift our point of view away from Italy we can see how important the topic is currently at an international level. In the recent Africa Summit organized in London by the Financial Times, a section was dedicated to the development of the so-called Afri-food in Africa. On this occasion, it was described how a continent that holds 60% of the world's arable land and is experiencing strong demographic growth will, in the near future, be the engine to ensure food security for itself, and in the medium term, even be a potential exporter of foodstuffs. Finally, with the contribution of the primary sector (agricultural commodities), Africa plays a significant role on two related issues: sustainable agriculture and the fight against climate change. African agriculture was also discussed at EIMA International during the conference entitled “African Free Trade Area and the Mattei Plan”, which took stock of the potential for growth and development of the continent's primary economy and the technical cooperation of African countries with Italy. 

International Trade and Characteristics of the African Market. The framework outlined certainly depicts an important opportunity for Italian companies in the agro-industrial sector that want to work with the markets of the “young” continent or enter them for the first time. However, this should not lead companies to overlook the typical points of consideration when exporting to non-EU markets, especially with regard to payment methods, the peculiarities relating to specific forms of financing and risk management (commercial and political). These are issues that impact and are often common in trade relations with countries outside the EU as the interaction is with markets - such as African ones - that have a multifarious legal context, specific payment and financing systems, risk components associated with a plurality of factors that go beyond the solvency and reliability of one's commercial counterpart. In the case of Africa, then, these considerations should be applied to at least three different market areas: North Africa (not surprisingly often associated with the MENA, Middle East North Africa region), sub-Saharan Africa and South Africa.

Financial Regulation of Exports. Payment methods in Africa can be very different from those in the European Union. This is often true not only due to commercial practices, but mainly on account of local and currency regulations. In fact, exports are regulated in convertible currency (EUR, and, first and foremost, USD) and this involves more or less extensive forms of controls and constraints by local monetary authorities. In essence, the payment system must ensure currency control by local authorities with respect to the availability of hard currency (EUR or USD) in the country. This explains, for example – regardless of the will or reliability of the local counterpart (importer) – the difficulty with obtaining advance or deferred payments via international bank transfers. In particular, in the machinery sector, the frequency of documentary payment methods (letters of credit/documentary credit/CADs or similar forms) is pointed out, in which payment is subject to formal control, carried out by the intermediary banks (of the importer and/or exporter), on the verified reliability of the requisite underlying documentation. The documentary credit mechanism allows for the management of both sight payments and forms of deferral and advance payment guaranteed by the Bank. These instruments presuppose that the local importer has a line of credit from the local banking system and, therefore, represent a further element in the assessment of the trade partner. The management of documentary credit requires the exporter to have in-depth knowledge of the commercial and transport documentation and certifications that constitute the package necessary for both the importation of the goods and the proper and orderly use of the Letter of Credit. This is an activity that must be performed in full collaboration with the exporter's carrier and bank. In this last regard, another detail to consider is the choice of the banking partner, which has to ensure its effective presence in the foreign country either directly or through a network of corresponding local top-tier banks.

International Organizations and Multilateral Development Banks. Another important player present in Africa, with a particular focus on the agricultural and agro-industrial sector, is represented by international organizations such as the World Bank (and the various branches of the WB Group), the African Development Bank, the EIB for the European Union and other institutions such as the Eastern and Southern African Trade & Development Bank TBD, particularly active in south-eastern Africa. In Africa, financial organizations and funds from Asian or the Gulf region are also very active, given the economic and commercial connections between the shores of the Indian Ocean. The Mattei Plan sets out an important role for Italy's collaboration – also in terms of bilateral and multilateral co-financing – with the African Development Bank. These organizations also allocate funds and finance initiatives in the agricultural sector, precisely because of the strategic impact that agro-industry has in promoting some of the continent's targets: improvement of agricultural production also in relation to the increase in population and expansion of cultivable agricultural surfaces, progressive development of the capacity to transform products and a reduction of the export of agricultural raw materials. This is therefore a further opportunity for our exporters, who will also have to be aware of some differences in terms of export regulation.

In the case of transactions involving these entities and almost always a local public counterpart (e.g. Ministry) as financiers, our exporters should increasingly expect transactions to be managed via international bank transfer. The framework of international organizations often provides for the assignment of supplies through an international tender. In this case, therefore, Italian exporters will have to take into account the foreseeable request for a Bid Bond (to guarantee the execution of the order, if awarded) and a Performance Bond to guarantee the proper execution of the supply. These are first-demand international bank guarantees with amounts ranging between 1-5% of the contractual amount for the Bid and from 10 to 20% for the Performance. In reality, even in private negotiations, without the intervention of international organizations, this practice is very widespread, and presupposes that the Italian exporter has a dedicated line of credit with the banking system. During the negotiation phase it will also be possible to try to obtain an advance payment (15-20% of the contractual value), again supported by the issue of a guarantee of the type indicated above in favor of the importer (Advance Payment Bond).

The choice of markets. the identification of the African markets most interested in the development of their agriculture starts, as always, from macroeconomic data gleaned from time-tested steady and reliable sources (these, too, are often linked to international organizations, development banks or public bodies such as the Italian Trade Agency (ICE)). According to the report by the magazine Africa & Affari entitled “African Free Trade Area and the Mattei Plan”, prepared in conjunction with the EIMA International conference, Nigeria, Ethiopia and the Democratic Republic of Congo represent – according to analysts – potentially the largest African markets for the agro-industrial sector. In fact, these are countries with a population of over 100 million and with extremely high population growth rates. The issue of increasing agricultural production and cultivable surfaces is therefore inextricably linked to that of food security.

The other key to better target market selection is the study of current flows. The same Africa & Affari report points out that imports of agricultural machinery is essentially concentrated in twenty African countries, for a total value (2023 data) of just over EUR 3 billion. Of these, EUR 1.2 billion comes from imports to South Africa alone, while a dozen other countries have an import volume of agricultural machinery in excess of EUR 100 million, with Nigeria, Algeria and Zimbabwe in the top positions as buyers. Italy is the main supplier of agricultural machinery in Tunisia, and the second in Algeria, Angola and Morocco. Thus there is room both to strengthen the Italian presence in market where it is already well positioned, and to expand its market share in countries that have significant current or potential demand for agricultural machinery, such as South Africa, Nigeria, Egypt and Ethiopia.

The “country risk” variable. In addition to commercial considerations (demand for products, market competition, etc.) that can be better explored by the foreign offices and Export Managers of each manufacturer, it is appropriate to draw attention to further variables that are often essential to the positive finalization of the export operation. This perspective necessitates above all considering the variables stemming from country risk. In fact, while agro-industry opportunities are certainly present in Africa, we should not underestimate the risks associated with the political and economic instability of some countries, which can compromise the propert and punctual supply, or the finalization of payments in currency. Issues that exporting companies must consider also include those related to the export control system and the international sanctions that Italy adheres to and that can have a decisive impact on the choice of markets.

In the initiative to export to non-EU markets, companies must therefore move in synergy with other actors, such as banks, chambers of commerce, the Italian Institute for Foreign Trade Insurance Services (SACE), Simest, and the Italian Trade Agency (ICE). In particular, SACE provides an updated Country Risk rating for each country both from a political perspective (e.g. risks of war, disorder, expropriation, convertibility and currency transfer) and a commercial perspective (risk that the counterparty will not comply with contractual obligations). Finally, the presence of a system of financial sanctions is an issue that concerns all actors, in particular companies, financial intermediaries (banks), and freight forwarders. It is thus always appropriate for companys to get the green light from these partners before proceeding with any transaction. The substantial risk is that once a commercial negotiation has been started or concluded, it is realized that the transaction, for reasons related to the country, the product (or its components), the subjects involved, or any final destination other than that of the importer, is prohibited by sanctioning provisions issued or in any case recognized by the European Union, or that it is subject to specific ministerial export authorizations.

Finally, trying to translate the framework here described into business actions, it is possible to envisage a double level of intervention: carefully follow and monitor the developments of the initiatives set out by the Mattei Plan and in parallel launch - if not already in progress - a commercial operation towards African counterparts in order to identify projects potentially of interest.