Coffee Renovation and Rejuvenation in Ethiopia

Action Agenda for a

National Funding Facility
Executive Summary

February 22nd, 2024

Background
This document has been drafted by Stori,1 a Geneva-based advisory firm specializing in
impact investing and development finance, for the Worled Resources Institute (WRI).
WRI is an independent, non-profit global research organization working to address seven
critical challenges that the world must overcome this decade to secure a sustainable
future for people and the planet: climate change, energy, food, forests, water, sustainable
cities, and the ocean. In Africa, WRI established a Regional Office based in Addis Ababa
in December 2017 and also hosts the secretariat for the Food and Land Use Coalition in
Ethiopia (FOLU).
At the beginning of 2020, FOLU Ethiopia, in collaboration with the Ministry of Agriculture,
the Agricultural Transformation Agency, as well as other key stakeholders in the finance
sector, launched an initiative aimed at introducing innovative ideas to mobilize new
capital for a sustainable food and land use system in Ethiopia. In accomplishing this goal,
consensus has been reached to start mobilizing an innovative financing mechanism for
the coffee sector that includes establishing a National Funding Facility (NFF) for coffee
renovation and rehabilitation.
FOLU, in collaboration with the Ethiopian Coffee and Tea Authority, hired Stori to assist
in the creation of this NFF. The project also entails designing a pilot program to test,
validate, and potentially scale the proposed financing mechanism.
This is a working paper intended for discussion with key stakeholders. This document is
for internal use only and should not be distributed to external parties or colleagues. It is
not meant to represent the position or opinions of the WRI, the Food and Land Use
Coalition (FOLU) or its members.

1
www.stori.ch
Introduction
Smallholder coffee farmers (SHCF), crucial to Ethiopia’s coffee industry and thus to the
country's economy, are facing a challenge often overlooked: old and deteriorated coffee
trees producing lower yields than could be achieved through coffee rejuvenation and
rehabilitation (R&R). However, embarking on R&R a is a complex task, requiring financial
resources, labor, inputs such as tools and seedlings, as well as technical assistance.
Under the current market conditions, SHCFs lack the means and knowledge to initiate
R&R on their own. To make the investments and increase their income, they require
support from public and private actors. Although some public funding has been provided
and R&R-targeted programs are in place, these initiatives have not been comprehensive
enough, and of a large enough scale, to significantly impact the sector. In Ethiopia,
existing programs typically provide grants and tools, but none have focused primarily on
giving farmers access to long-term finance for these investments.
This document proposes a National Funding Facility (NFF), designed to systematically
direct resources to smallholder coffee farmers for the renewal and rejuvenation of their
coffee trees. The NFF will help pull resources from different sources in a mostly market
based and sustainable manner to provide financing and incentivize farmers to boost
productivity, improve livelihoods, and enhance the ecological balance of the coffee
sector. It will support farmers through technical assistance, and it will build the capacity
of Ethiopia’s coffee sector and financial ecosystem towards the R&R of coffee farms.
This proposal is the result of over 30 meetings with key stakeholders, including
smallholder coffee farmers, cooperatives, government institutions, coffee roasters and
exporters, coffee associations, development agencies, and financial institutions. It
examines the current state of coffee production in Ethiopia and advocates for the creation
of an NFF as a foundation for dialogue and enhancement. It also presents the NFF main
features. The NFF's specifics are outlined in the full version of the action agenda, which
also lists actions, a timeline, and the stakeholders responsible for implementing each
task.
Ethiopia's Coffee Sector: A Keystone of the Economy.
Ethiopia is widely considered to be the birthplace of coffee. The country is Africa’s largest
coffee producer, ranks third globally in Arabica coffee production, and stands as the fifth-
largest exporter of Arabica coffee worldwide, with annual export revenues of around $1.4
billion.2 Coffee plays a pivotal role in Ethiopia's economy, significantly impacting GDP
and serving as a vital source and as much as 30-35% of foreign exchange revenue. Over
six million SHCFs are estimated to cultivate Arabica coffee in Ethiopia. Their farms
produce 95% of Ethiopia's coffee, directly or indirectly supporting the livelihoods of 25%
of the country’s population. Beyond its economic significance, coffee cultivation has also
been linked to improved food security in Ethiopia.3
The aging coffee trees and the productivity challenge: a call for renovation and
rejuvenation.
Despite its importance, Ethiopian coffee production faces significant productivity
challenges, with yields per hectare lagging considerably behind other leading coffee-
producing nations. One of the main reasons is the old age the coffee trees in Ethiopia,
some of which reach 50-70 years of age.4 These aging trees significantly diminish coffee
bean quality and yield and are prone to diseases, posing a threat to the livelihoods of
farmers and the economy. This situation is also likely to have environmental implications,
with forest and semi-forest coffee areas liable to be cut down to plant cash crops.

2
USDA (2023) Coffee Annual Report Ethiopia
3
Abate et al. (2021) Improving Coffee Productivity in Ethiopia: The Impact of a Coffee Tree
Rejuvenation Training Program on Stumping, IFPRI Discussion Paper 02023, May.
4
USAID (2017a) Country Data Sheets for Coffee Renovation and Rehabilitation.
The most direct solution to tackle this issue is the implementation of coffee trees R&R
techniques, consisting of either stumping existing trees or replacing them with new ones.
As much as 80% of the current Ethiopian coffee stock would benefit from R&R, the
highest ratio of all the top 10 coffee-producing countries in the world.5
R&R coupled with good agricultural practices (GAP) can drastically improve yields over
a typical coffee tree’s lifecycle. During a peak production period that lasts a minimum of
6 years over the lifecycle of the tree, stumping trees stands to multiply each harvest’s
production by at least a factor of 2.5, and replanting trees by at least a factor of 3.
Benefits and costs for R&R in Ethiopia.
The financial benefits for farmers and for the country to undertake R&R are clear. By
performing R&R on just 25% of their plots, a figure chosen to mitigate risks for all parties
involved, farmers can expect each harvest to earn them up to 46% more than they were
earning before. After repaying their loans, this allows them to secure higher earnings and
improve their livelihoods. The return on investment within the farm gates is estimated to
be above 88% over the life cycle of the tree.
At the national level, assuming that R&R is performed on each farm in the proportions
described above, and that 25% of all SHCFs in the country make the investments
needed, then as many as 34,000 Ha of the country’s currently harvested land stands to
be renovated. Country-wide, this represents an investment in the farms of a total of $494
million resulting in more than $1.1 billion in additional revenue for the sector, or a more
than 114% return on investment.
The figure below shows the income generated and costs incurred at farm-gate,
comparing a scenario where investments are made versus a status quo baseline.

Source: own calculations

Access to finance and technical knowledge.
While the benefits of performing R&R far outweigh the costs, SHCFs face substantial
financial and non-financial barriers to make these investments. The high upfront cost for
labor, tools, and inputs and the income gap during the non-productive years post-
renovation imply that farmers need to have capital available. However, with many

5
Ibid.
farmers currently earning just what they need to sustain themselves, there is no choice
but for them to have access to long-term loans.
Beyond funds, there’s also a pressing need to raise awareness among SHCFs about the
necessity and advantages of R&R, as well as to share with them the technical knowledge
involved and support them in the implementation of good agricultural practices. In this
context, technical assistance is crucial, as it will not only provide the tangible tools and
knowledge needed for R&R but also help in managing the risks associated with making
these agricultural investments.
Without affordable financial lending mechanisms and support with good agricultural
practices, R&R will not be made, and Ethiopia’s renowned coffee sector will not be able
to sustainably grow. However, a careful coupling of financing and complementary
services can help the farmers, and the sector as a whole, engage in and fully benefit
from R&R.
The need for a comprehensive approach towards R&R
R&R investments are currently not being made on a significant scale in Ethiopia.
Coffee producers lack the resources to invest in their farms on their own. This is
exacerbated by the fact that they encounter challenges in predicting financial returns due
to price volatility and the existence of a complex coffee value chain, compounded by
Ethiopia’s macroeconomic challenges.
Financial institutions also currently do not offer loan products that match the needs of
SHCFs for long-term R&R investments. This gap in finance services on R&R stems from
three main issues: (1) the preference of local financial institutions for short-term lending
rather than the 6-7 year horizon required for R&R; (2) the risk-averse nature of for-profit
investors, deterred by the complex and fragmented value chains in rural areas; and (3)
the dual requirement of R&R investments to address both social impacts and economic
returns, which local investors often cannot accommodate simultaneously.
International capital could potentially support a national initiative to improve the yields of
coffee producers in Ethiopia, yet significant barriers such as high financial risk
perception, fragmented value chains, and the absence of a structured linkage between
investors and beneficiaries prevent these initiatives from meaningfully materializing.
While there have been grant-based R&R initiatives offering tools and some technical
support for R&R, Ethiopia currently lacks a comprehensive and scalable lending program
that could allow and help convince farmers to make these investments on the area they
harvest.
This proposal advocates for the establishment of a National Funding Facility (NFF) to
overcome these challenges. The NFF is designed to provide comprehensive and
sustainable solutions, including financing and technical support. By leveraging innovative
financing and strategic partnerships, both in Ethiopia and internationally, the NFF aims
to systematically channel resources into the coffee sector, targeting both supply and
demand-side barriers, and ultimately enhancing the sustainability and productivity of
Ethiopia’s coffee production.
Tackling the issue through blended finance: towards a National Funding Facility
The NFF proposed for Ethiopia represents a transformative approach: to empower
SHCFs by offering a market-based and sustainable model for financing the R&R of
coffee trees.
Commercial
The NFF distinguishes itself by proposing a dual- Grants investments
funding mechanism that incorporates both for-profit
commercial investments as well as grants, to create a
sustainable financing ecosystem. It is envisioned as a
centrally managed facility that encompasses not just NFF
the financial aspects but also the overall project
implementation, including coordination among
partners, technical support alignment, as well as
comprehensive risk, performance, and impact Technical Finance to
monitoring. support SHCFs
The funding structure is envisaged as a 'basket of funds' that synergizes the benefits of
commercial investments with the non-repayable support from development and
philanthropic institutions. This dual approach is designed to attract a variety of investors.
On one hand, commercial investments will be made in the form of interest-bearing loans
with an anticipated annual net return of around 4%. These investments are expected to
be denominated preferably in USD or EUR to appeal to international investors. The
duration for these loans is expected to be 6 years or more, matching at least one cycle
of the R&R investment timeframe. On the other hand, non-repayable grants from
development organizations and philanthropic investors will be allocated towards
incentives to program participants, technical assistance, and the facility’s operations.
These grants will be critical in securing commercial investments, while also ensuring the
NFF offers attractive terms to SHCFs.
To assuage the concerns of investors, especially considering the perceived high risks in
Ethiopia’s coffee sector, the NFF will incorporate a layered-guarantee system. This
includes (1) a capital guarantee from grant-making organizations, proposed to cover 50%
of the invested capital, serving as a first-loss guarantee for commercial investors; (2)
offtake contracts with international coffee traders, ensuring a predetermined price and
quantity for coffee beans, providing a hedge against market price volatility; (3) collateral
requirements from financial intermediaries, ranging from 25% to 100% of the principals
of the loans, to align the interests of these institutions with the success of the loans they
administer.
The NFF’s governance structure is carefully designed to involve multistakeholder
engagement forums and a dedicated management team, ensuring decisions build upon
complementary expertise. A secretariat composed of 3-7 individuals will manage the
NFF. A host financial institution with a strong local presence and relevant expertise will
help establish the NFF as a legal entity and manage its fiduciary duties. Moreover, a
series of governance bodies will be established, including a Board of Directors, an
Investment Committee, and a Strategic Partner’s Forum, ensuring a balance between
accountability and operational efficiency.
 guarantee
Commercial Grant-making
investors institutions

International
coffee buyers
NFF (Governance
bodies, Secretariat and
Host institution)

Incentive
payments

Local
Suppliers of inputs representatives of
Microfinance MoA and ECTA
and technical
institutions
assistance

SHCFs

: Financial flow (equity, debt, grant, interest, incentive, other payment)

: Technical assistance and in-kind resources6

The NFF is set to manage a significant number of loans ranging from $100,000 to
$20,000,000, catering to various sizes of microfinance institutions (MFIs) or cooperative
organizations with microfinance lending capabilities. Through these institutions, loans
will be extended to SHCFs as well as to support organizations: business developers,
input suppliers, cooperatives, and other organizations will be eligible for loans. The
projected reach of the NFF spans 20 to 35 loans made to different MFIs. The loans to
MFIs will carry an interest rate of 1-5% annually, with the outstanding amount being
adjusted monthly based on official inflation figures. Furthermore, the NFF will incentivize
MFIs through a performance-based debt forgiveness model, potentially paying them an
extra income of approximately $40 per loan.
In turn, MFIs will extend micro-loans to SHCFs and to small and medium sized
enterprises of the coffee value chain. The loan terms will include sizes ranging from $250
to $10,000 with an average investment of $2,010 expected for one hectare. A 3-year
grace period on the principal will be made available, and the outstanding amount will
also be adjusted on inflation. Loans will carry a maximum of 10% annual interest rate
over a 5- to 7-year term. Additional incentive payments will be extended to SHCFs who
meet certain performance criteria, effectively lowering the interest burden on their loans.
The NFF will also engage in rigorous progress and performance monitoring, examining
Key Performance Indicators (KPIs) to ensure the effectiveness of investments and to
provide transparency to stakeholders. These KPIs will cover various aspects, such as
portfolio information, farm-level metrics, and loan standings.

6
MoA stands for Ethiopia’s Ministry of Agriculture and ECTA for the Ethiopia Coffee and Tea
Authority.
Beyond financial resources, a central aspect of the NFF is also the technical support it
will provide SHCFs and actors of the coffee value chain, fortifying the farmers and the
ecosystem through complementary services crucial for the success of R&R initiatives. It
will offer extensive agronomic support to optimize tree varieties and farming practices,
and financial training to improve the actors’ economic understanding of investments and
of the financial package. Additionally, the NFF will equip farmers and financial
intermediaries with tools and software for monitoring R&R activities, ensuring both the
impact and the sustainability of the investments are maximized. This comprehensive
technical assistance ensures that financial support is effectively utilized, leading to
improved crop yields and long-term viability of coffee farms.
In managing risks, the NFF employs a multifaceted strategy to safeguard the interests of
both investors and SHCFs. Recognizing the complexity of pioneering such a facility, it
leverages local expertise and establishes a network of partnerships to overcome
administrative hurdles. To ensure SHCFs are motivated to participate, the NFF supports
outreach efforts through microfinance institutions and showcases successful R&R
through demonstration plots. The facility is proactive in fundraising, emphasizing the
synergies and flexibility of its model. It will begin by implementing a scalable pilot to
mitigate risks associated with securing the required investment capital and
implementation of services. These various measures aim to secure the NFF’s objectives
and sustain its impact on Ethiopia’s coffee sector.
The NFF is a visionary initiative poised to significantly scale R&R investments in
Ethiopia's coffee sector. It combines strategic financial structuring with comprehensive
risk mitigation to provide a sustainable platform for enhancing the livelihoods of SHCFs
and bolstering Ethiopia’s position in the global coffee market.
Next steps: An Action Plan for National Funding Facility (NFF) Implementation
For the final design and implementation of the NFF, this document presents an action
plan outlining eight critical building blocks, each comprising specific actions, timeframes,
and responsible actors, ranging from immediate to long-term tasks. The plan sets a clear
course for the NFF's establishment, operationalization, and expansion with the goal of
empowering Ethiopian SHCFs through strategic R&R investments. The building blocks
are structured as follow:
1. Strategic Foundations and Partnership Development: The immediate focus
is on establishing strategic partnerships and aligning with the Ethiopian
government. Key actions include selecting financial institutions to host the fund,
identifying cooperatives and micro-financial institutions to disburse funds, and
formalizing these partnerships.
2. Legal Establishment and Framework: Simultaneously, the legal and
operational frameworks are being laid out. This involves determining the legal
form of the NFF, establishing governance structures, and ensuring regulatory
compliance—all within the immediate to short-term timeframe.
3. Financial Modeling and Capitalization: The financial foundation of the NFF
hinges on attracting investors and developing robust financial models. This
includes prospecting for funding, planning initial capitalization, and opening
fundraising rounds, with an immediate focus on the pilot and a long-term view of
national scaling.
4. Pilot Testing and Improvement: Pilot testing is crucial for refining the NFF’s
approach. It involves developing a pilot plan, executing it, and collecting data to
iteratively improve the NFF design.
5. Human Resources and Capacity Building: Building a competent team is
essential for the NFF’s success. This involves recruiting experienced personnel
for the secretariat and governance officials, with a short-term goal of enhancing
institutional capacity through targeted training programs.
 6. Risk Management and Sustainability: In the short to medium term, the NFF
will undertake detailed risk mapping and integrate sustainability principles,
ensuring that environmental, social, and governance standards are met.
7. Monitoring, Evaluation, and Learning: An essential component of the NFF’s
strategy is to establish a robust system for ongoing assessment and promote a
culture of learning through defined KPIs and data analysis technologies.
8. Scalability and Expansion: The long-term vision for the NFF includes scaling
the model for broader application within Ethiopia’s coffee sector and potentially
other sectors, ensuring the NFF’s growth and wider impact.
This action plan serves as a comprehensive guide for all stakeholders involved, detailing
the collaborative effort required to revitalize and sustain the nation’s coffee industry. Both
the NFF proposal and action plan are expected to be discussed and consolidated in the
stakeholder workshop to be held in March 2024.