Africa’s agriculture, food, and land use sector requires roughly USD 49 billion each year for climate adaptation, but actual flows fall far short of this figure, with the sector receiving less than a quarter of what African governments’ climate commitments require. This is despite the fact that many climate-smart agricultural investments generate strong returns.
This conundrum highlights a structural flaw. Viability gap funding (VGF), a one-off government capital grant that makes an economically sound but commercially marginal project investable, is increasingly proposed as a potential solution to the problem. This article examines why climate-smart agriculture struggles to attract commercial capital, how viability gap funding works in practice, the legitimate concerns around subsidy dependency, and the structural challenges that would need to be resolved before the mechanism could be deployed on the continent.
A bankability gap, not a shortage of viable projects
Firstly, it is important to note that there is a distinction between a financing gap and a bankability gap. A financing gap is simply a financial shortfall, whereas a bankability gap is more precise: it refers to an inability to satisfy commercial lenders’ requirements, such as predictable cash flows, adequate collateral, or acceptable payback periods. For a project to be deemed bankable, it must satisfy lenders on all of these counts so they can justify the risk, but in Africa, several reinforcing factors prevent agricultural projects from clearing that bar.
Payback periods are often long; weather and commodity price swings make projected cash flows uncertain, and a lack of formal land titles deprives lenders of the collateral they would ordinarily require. On top of that, upfront costs are high, because irrigation, soil restoration, and other climate-resilient systems all demand significant capital in advance of any returns. As a result, agricultural lending typically makes up less than 10% of banks’ total portfolios across the region. This is in spite of the fact that the agriculture sector is Africa’s largest employer, accounting for over 20% of the continent’s GDP.
The impact and scale of this problem are difficult to overstate. The Global Center on Adaptation estimates that climate inaction could cost African agrifood systems as much as USD 210 billion a year. That is roughly 12% of the continent’s GDP, while it is estimated that investing USD 15 billion annually in research, water management, infrastructure, and land restoration would return more than ten dollars of societal benefit for every dollar spent.
How viability gap funding works
The success of viability gap funding programmes rests on the rigour of their design and the transparency of their governance. They are typically structured as one-off, non-repayable capital grants which are tied to competitively bid concessions and disbursed based on performance. Each of these features serves a purpose. The grant is capital rather than revenue support, so it closes the upfront cost barrier without committing funders to open-ended payments. It is disbursed once, so there is no recurring subsidy liability that governments and officials need to carry through to future budgets. It is also competitively allocated, meaning qualified bidders win by requesting the lowest subsidy they need. This drives support towards the minimum required to make each project viable, and so a degree of efficiency is designed in.
India’s experience with viability gap funding shows how this model can work. Under their scheme, approved in 2005, the government provides up to 20% of the project cost, with a further 20% available from sponsoring authorities. To date approximately USD 925 million has been committed in viability gap grants against total project costs of around USD 5.5 billion, equating to more than five dollars of total investment mobilised for every dollar of public grant. Consequently, the scheme has succeeded in converting economically sound but commercially marginal projects into bankable propositions.
But the Indian example comes with an important caveat: it was not applied to agriculture, and so the proposal to deploy that mechanism in an African agricultural context would not simply involve replicating an existing practice but extending its proven logic into untested terrain. However, the case for extending the model to an African agricultural context may be stronger than it first appears. Several programmes have already demonstrated that blended finance can mobilise private investment in African agriculture and that a strong project pipeline already exists. For instance, the African Development Fund’s Climate Action Window drew 359 eligible proposals worth USD 4 billion in its first call, while the GAFSP’s Private Sector Window has approved USD 505 million across 93 projects.
The question, then, is not whether the model has merit but whether practical barriers to deploying it can be overcome, and indeed, several structural challenges would need to be resolved before an agricultural climate VGF could be deployed. Three stand out: defining what qualifies as climate-smart investment, assembling transactions large enough to attract institutional capital, and managing foreign exchange risk.
At present, numerous credible environmental and sustainability standards exist, but harmonising them with funding eligibility across Africa’s diverse farming systems and agroecological zones would demand significant technical work. And so defining climate-smart taxonomies, standards and policies requires careful attention. Without a clear, consistently applied standard, investors cannot price eligibility risk, governments cannot defend allocation decisions, and the competitive discipline at the heart of the VGF model begins to erode
Agricultural blended finance deals have a median value of just USD 38 million, far short of the USD 100 million tickets institutional investors typically require. Aggregation models exist, but few have achieved the scale or level of standardisation required to pool projects into institutional-grade vehicles. Without effective aggregation, an agricultural VGF may struggle to produce investments large enough to attract the sort of capital it is designed to mobilise.
Hedging African currencies can cost 5–15% a year, meaning even successful projects can be undermined by currency depreciation and exchange rate movements. One obvious remedy is to match hard-currency liabilities with hard-currency income, using export sales to offset external debt service and imported input costs. In practice, however, exporting food from markets where governments are anxious about domestic food security is rarely frictionless. Authorities routinely restrict shipments, reserve output for local buyers, cap prices, delay export permits, or oblige exporters to convert foreign earnings into local currency.
Building the architecture that agriculture lacks
No single instrument will close Africa’s agricultural climate finance gap on its own. The sector’s diversity of crops, terrain, market structures and climate means any workable solution is likely to require a multi-layered ecosystem consisting of advisory support, patient project equity, long-term blended debt, guarantees, and political assurances. Viability gap funding could become an essential component within that ecosystem by addressing the upfront cost barriers that other instruments cannot tackle. The practical priority for policymakers and development finance institutions will be to develop and pilot a wide variety of instruments while building a surrounding ecosystem that is conducive to sustained private investment.
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