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F O R A G R I -VA L U E C H A I N SK E N YA S C H O O L O F M O N E TA RY E C O N O M I C S

N A I R O B I , 1 6 J U LY 2 0 1 4

MOVING FORWARD WITH WAREHOUSING AND COLLATERAL

MANAGEMENT IN AFRICATECHNICAL PRESENTATION

J COULTER CONSULTING LTD

WRS & COLLATERAL MANAGEMENT STUDY

• Commissioned by: CTA, IFAD and AFD• to foster emergence of warehousing and collateral

management services, in favour of smallholder farmers

• Subject countries: Burkina Faso, Cameroon, Côte d’Ivoire, Ghana, Madagascar, Mozambique, Niger, Senegal and Uganda

• Study consortium: J Coulter Consulting + Sullivan & Worcester LLP• Plus local technical and legal consultants in Subject Countries

• Activities: • legal and institutional due diligence• identify obstacles and make recommendations for Subject

Countries and OHADA region

STUDY TYPOLOGY• Type A: Private warehouses, under control and

responsibility of a collateral manager (CMA)• includes field warehouse, i.e. goods held in borrower’s store

• Type B: Public warehouses• Type C: Community inventory credit• usually supported by MFIs, and • refinanced by commercial banks• double-padlock arrangement• bags marked in name of individual depositor

• Type D: Lending against the security of current or future production • documentary security, as with Brazilian Agricultural Bonds

(CPRs)• not practiced in Africa

• There is also lending against stored commodities, with surveillance by stock monitor (SMA) or lender

TYPE C: COMMUNITY INVENTORY CREDIT

MAIN TYPE C CASES

Country Commodity Volume stored per annum (tons)

Participating depositors (est.)

Madagascar GCVs

Mainly paddy (also cloves, coffee & others)

100,000-120,000

> 80,000

Niger Grains, oilseeds, pulses & dehydrated prods.

5,000(as of 2008/09)

12,500

Burkina Faso Grains, oilseeds and pulses

3,400 4,000

Commodities overwhelmingly stored in name of individual depositorsMadagascar mostly stores in homes; Niger & Burkina Faso in community storesRepayment reported close to 100%

HIGHLIGHTS OF MALAGASY “GCVS”

• Farmers storing mostly in their own homes• Current trend to centralised storage

• Wholehearted adoption by MFI networks• >40% of loan portfolio of CECAMS and TIAVO• 25% for OTIV-Tana, more urban-based network

• Strong impact on farmers and seasonal price stabilisation• Needs/opportunities for further development:• improve risk management• develop post-harvest handling + diversify commodities,

esp. maize• develop warehousing profession from bottom up

WARRANTAGE COMMUNAUTAIRE IN NIGER AND BURKINA FASO

• Mostly semi-subsistence approach, farmers selling individually• Some groups more market-oriented or federated

• Positive impacts on household resource management, livelihoods and food security

• Key elements of sustainability• Local appropriation, peer pressure, accountability• forced savings aspect• decentralised management with low operating costs• favourable public policy, but with contradictions

• Key elements detracting from sustainability• inflexibility of product (fixed calendar for depositing, borrowing and

reimbursement)• Rural MFIs less developed than in Madagascar • price movements difficult to foresee accurately• dependency on outside support to build warehouses

• Positive externalities may justify continued support

TYPE A: PRIVATE WAREHOUSES USING

COLLATERAL MANAGEMENT

AGREEMENTS (CMAS)

PRIVATE WAREHOUSING IN SUBJECT COUNTRIES

• All countries except Madagascar• Mostly in and around port, focused on imports and exports • Côte d’Ivoire pre-eminent: est. $2.6 billion for export CMAs• The only Subject Country to regulate collateral managers

• more patchy services in up-country areas and land-locked countries• sometimes in support of international buyers and cotton companies,

using both CMAs and SMAs• often in support of processors

• smallholders making very limited use of CMAs, with some exceptions (Burkina, Uganda)• high fixed costs (usually US$ 1,000 per site per month or more)• versus atomisation of production and trade• producer orgs. rarely enjoy confidence of financiers• limited success of Government & aid inspired initiatives with cocoa

in Côte d’Ivoire & Cameroon

CHICKEN-AND-EGG PROBLEM INHIBITS BANKS FROM LENDING UP-COUNTRY

• lack of experience in lending to producers• approach conditioned by financing international

trade• expecting structured financing + known off-takers • without which they often request other collateral

• multiple apprehensions about: performance of warehouse operators, producer orgs., pricing of commodities, need to foreclose• leading to: little lending activity, and• non-development of skills/procedures like price

monitoring, hair-cutting, marking-to-market

INNOVATING AT THE MARGIN

• Regional banks (e.g. Coris, BRS, Ecobank) investing in, or in partnership with, CMs in West Africa

• CMs in Burkina Faso (SEGAS-BF, Expertis and Auxigages) innovating with farmers and small-scale processors:• structuring the value chain• a source of both opportunity and risk

• Ugandan CM (Coronet) active in CMAs involving smallholder farmers

• We need to leverage this, through capacity building support, focusing on banks, CMs and clients

RECENT SENEGAL INITIATIVES ILLUSTRATE BOTH OPPORTUNITIES AND

CHALLENGES

TYPE B: PUBLIC WAREHOUSING

KEY CONSIDERATIONS WITH PUBLIC WAREHOUSING

• Stronger case for regulation than with other Types of warehousing• large number of depositors’ goods at risk

• Scale is key to viability:• At level of warehouse capacity: units < 1,500 tons maize

likely to be uneconomic (Onumah et al., 2013)• When warehouse also trades, breakeven threshold may

be lower• At regulatory level: throughput < 100,000 tons maize pa

may be uneconomic

APPROACHES TO PUBLIC WAREHOUSING

Country Commodity Warehouses and capacity

Tons deposited or financed

Legislative approach

Tanzania (Act 2005) Mainly cashews & coffee

60 licensed w/h, 260 Kt

Deposits > 170 Kt pa

Uganda (Act 2006) Mainly maize 5 licensed w/h, about 22 Kt

Deposits 22.6 Kt in 5 years to 2013

Voluntary, contractual approach

South Africa (since 1995)

Maize, wheat, sunflower, s/beans

Over 200 SAFEX reg. sites, >10 Mt

Several million tons financed pa

Ghana Grains Council (since 12/2012)

Maize 7 certified w/h,36 Kt

Deposits 29.5 Kt Repo financed 6.9 Kt

ECX “big bang” approach

Ethiopia Commodity Exchange

Coffee, sesame, pea-beans

Circa 17 large w/h sites

Deposits > 500 Kt pa

PROS & CONS, SELF-REGULATORY APPROACH

• likely to be responsive to stakeholder concerns • can react quicker to changes in the industry and

market, but• Requires high stakeholder cohesion• Need to self-finance through voluntary levies• Transparency may prove challenging• Difficult to protect depositors against w/h failure;

need to restrict entry• Legal risks: good title; claim over commingled goods;

protection re third party claimants, and; enforcement of rights re defaulting debtors

PROS & CONS WITH LEGISLATED APPROACH

• It can: • render WRs negotiable documents of title, and overcome

legal risks• facilitate intervention in failing warehouses, and • increase number of eligible storage facilities, but

• Legislative process is often long and has uncertain outcome

• Will not work without a coherent & widely shared national vision for WRS

• Risks of underfunding and understaffing of regulatory agency, + weak public sector management

PROS & CONS OF ECX BIG BANG APPROACH

• Can build critical mass, in political & financial terms• Overcome regulatory and institutional obstacles,

and reach break-even, but• Ethiopian case very difficult to replicate:• lower enforcement capacity• “mandating” food crops creates massive parallel trade

• Risks appealing to short term dirigiste politics• Large prestige projects may inhibit open debate

about pros and cons

WE CONCLUDE

• There is no magic bullet!• In general we prefer:• a stakeholder-driven approach• leading to • a well-informed legislated approach

KEY SUCCESS FACTORS WITH WAREHOUSING INNOVATIONS

• Objective factors:• The underlying demand for the innovation• Scale economies in Type A and B operations • Scope to massively scale-up Type C operations

• Process factors:• Vision and leadership of promoters• Private sector involvement and initiative• Scope to modify approach in the light of experience• The role of Government, the degree to which supportive or

otherwise

• Implications for international promoters:• Vital to address objective factors up front• Addressing process factors calls for patient long-term

programme

SUGGESTED PROGRAMME CONTENT

• Independent analyses and backstopping for the Funding Agencies

• Building capacity of players (banks, MFIs, CMs and POs)• a challenge fund for training initiatives• certification of CMs working in up-country locations

• Develop and test a robust PPP model for funding warehouse construction

• Coordinate with international companies and other development programmes

• Support specific country initiatives• Capitalise experiences and feed them back into public

domain

SUMMARY POINTS

• We have identified three main financing Types A, B & C, each with its merits and constraints

• Success with Type C (community inventory credit) can be a springboard for types A and B, particularly in Madagascar

• The main priorities are:• to build capacity of collateral managers and bankers willing

to innovate• National WRS initiatives require: (a) close examination of

demand and economics; (b) strong stakeholder institutions, and; (c) coherent & shared vision

• International partners require long-term programmes, more than projects, to push the envelope