Application of Value Chain Finance to Agribusinesses:

Perspectives and Experiences from Africa

Prof. Kinandu Muragu

and

Dr. Lydia Ndirangu

Kenya School of Monetary Studies

Workshop on Enhancing Export Competitiveness through Promotion of Value Chain Finance, Johannesburg, November 15-16, 2012

Outline

Introduction Business model for AVCF Case studies Conclusions

Introduction

VC development: a means towards achievement of integrated sustainable development and poverty reduction

A critical ingredient — Access to adequate and timely finance. However, Huge financing gap => estimated demand at US$

450B largely unmet

e.g. In Kenya agric finance demand ≈ US$ 1.5B (KSh 130B), and only 35% of this is being met

Business Models

Successful models of VC involving SSP have evolved around two factors: cooperation and coordination Cooperation concerned with:

Dispersion of SSP, diseconomies of scale, poor access to information, inconsistent volume and quality

Deals with development of organisation and equity

Coordination: Efficiency

Institutions and regulation i.e. Rules

Harmonizing both enhances inclusive growth

Trajectories of Increasing Cooperation and Coordination

Relational VC & power symmetry

Trust building & social capita

Efficiency & complexity of specification

Commodity markets

Chain Coordination

Cha

in C

oope

rati

on

Repeated trade relations & alliances

Spot market

Increasing value chain management

Captive VC & power asymmetry

Corporate/ Buyer Driven

Producer Driven

FacilitatorDriven

Value chain partnerships

Case Study: 1

Monopsony –Ghana Cocoa Board (Cocobod)

Considered as a high value chain (Coates et al. 2011) Factors that have contributed to success

Organised finance

Extensive network of private sector buyers; Local Buying Companies (LBCs)

Favourable price regime

Cocoa Value Chain in Ghana: CNFA linking farmers to banks and markets

1. Cocoa Value Chain in Ghana Cont.

Downside:

• Excessive market power exercised by the Cocobod • Fix the floor price for product, transportation and marketing

margins Limits the entrepreneurial capacity of the LBCs

Regional differences in factor prices, capital market imperfections => Constraints on input use

Low Yields

Intervention: Linking farmers to inputs, credit and output markets External chain actor –CNFA-helps break the cycle of

under investment Improving farmers’ access to both the training and the

credit

CNFA linking farmers to banks and markets

• CNFA: Strengthens the business management profile of the farmer organisation and agro-dealers and links them to agricultural input suppliers

Trust building &

social capital

Efficiency & complexity of specification

Commodity markets

Coordination

Cha

in C

oope

rati

on

Repeated trade relations & alliances

Spot market

Increasing value chain management

Facilitator- Cocobod

Driven

Value chain partnerships

CNFA

Case Study: 2

Factoring and Trade Receivables Finance: Tea Value Chain in Kenya

Organization set-up before intervention

Farmer → Co-op → KTDA → Processor → MTA

Trader

Ksh 30/kg, after 3Mths

KSh

10/kg

Imm

edia

te

Case Study: 2 Cont

Invoice factoring

Trust building & social capita

Efficiency & complexity of specification

Commodity markets

Coordination

Cha

in C

oope

rati

on

Repeated trade relations & alliances

Spot market

Increasing value chain management

Producer Driven: Co-op/ KTDA

Facilitator (Gatsby-

Biashara)

Value chain partnerships

+

Case Study: 2 Cont.

Reflections on the business model

Smooth flow of information, product and money

Maintains strong relationships between business partners

Full participation in VC ownership by the smallholder tea producers

Benefits from both Cooperation and Coordination

Remarkable governance outcome given the dominance of KTDA small scale tea VC

Biashara risk is with the more financially able lead firm — the Mombasa auction — while the main beneficially remains the SSF

Full cost recovery →  Incorporation of support costs in overall pricing structure for Biashara ensures sustainability

Case Study: 3

Improving Chain Liquidity: Rice Value Chain Finance in Rwanda

Driven from the grassroots with farmers moving from a spot market along the cooperation axis

Empowers members and minimises costs

Lessons: Demonstrates that access to finance is a necessity for

chain development

VCF better when embedded in holistic process of market, organisational and institutional development

Required strong partnerships to do so

VC development can work with little outside support when farmers are empowered

Case Study 4

Catalysing Investments in Value Chains: the Kenya Dairy Hubs

Much more difficult to access investment capital

Most limiting in dairy is cold chain investment

EADD reorganizes the dairy VC in Kenya (Rwanda, Uganda) Services are clustered around the chilling plant

Case Study 4 Cont.

Cluster Dairy Model

EADD assistance aggregates dairy farmers into co-op

Grants &TA

Reflections of the Model: Case Study 4

The farmer organization largely induced by the external agent− the EADD

Since the existing market linkages were not effective, both in terms of efficiency and equity

Intervention focuses on building ‘business ecosystems’ –the dairy hubs

Potentially reducing the transaction costs and improving competitiveness

The hub considered as the value chain anchor

Resultant is a profitable engagement of SSF and the wider effects of improvement in rural livelihoods

Generation of credit history for the hub geared towards enhancing credibility

Case Study 5

WRS in Tanzania: Cashew Nut

Intermediation is a delicate balance Government tries to stimulate the credit market by

adoption of a WRS, but;

Sets minimum price

This reduces the capacity of the innovation to add value to the chain, and

Increases the risk for the government

E.g. USD 18.3M set aside in April 2012 to purchase 85,000 T of cashew nuts “stranded” in co-op warehouses

Need for balance between the act of enhancing cooperation while not losing sight of efficiency

Case Study 6

Contract Farming: Partnership between CRDB and Sugar factory in Tanzania

A captive value chain - chain anchor being the sugar factory

CRDB, itself a cooperative Bank, plays a critical role in facilitating the chain Mitigating the risk of non-inclusion of SSF through

capacity building and facilitating access to other financial services

The VCF is built not only upon physical linkages but also through knowledge integration- Key to success in finance is to “know the business” Both CRDB and the Sugar factory are active players

Conclusions

VCF can serve as both as Empowerment tool for the SSF and MSMEs -

through increase in cooperation; and A profitable opportunity for businesses - through

enhancement of efficiency Interventions must balance between cooperation

and vertical coordination Policy makers need to identify and put in place

i. incentives to reconcile the tension that exists between the two key features of VC governance

ii. Activities which improve the capacities of chain actors to respond to sustainability-oriented incentives

Thank you

Kinandu MuraguEmail: Muraguk@ksms.or.ke

Lydia NdiranguEmail: lndirangu@ksms.or.ke