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LEVERAGING OFFSHORE FINANCING to EXPAND AFRICAN NON-TRADITIONAL EXPORTS: the CASE of the HORTICULTURAL SECTOR (New Case Studies)

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LEVERAGING OFFSHORE FINANCING to EXPAND AFRICAN NON-TRADITIONAL EXPORTS: the CASE of the HORTICULTURAL SECTOR (New Case Studies) UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT UNCTAD Series on Innovative Financing in the Commodity Sector and Dynamic Industries LEVERAGING OFFSHORE FINANCING TO EXPAND AFRICAN NON-TRADITIONAL EXPORTS: THE CASE OF THE HORTICULTURAL SECTOR (new case studies) Prepared by the UNCTAD secretariat UNITED NATIONS New York and Geneva, 2007 UNCTAD/DITC/COM/2006/13 UNITED NATIONS PUBLICATION ISSN 1817-4515 Copyright © United Nations, 2007 All rights reserved ii TABLE OF CONTENTS Chapter Page Foreword....................................................................................................................... v Introduction.................................................................................................................. vii I. Risks and constraints in financing Africa’s horticultural trade.......................... 1 II. How can various parties play a role in structured finance for horticultural trade in Africa? ........................................................................................................ 7 A. The role of Governments...................................................................................... 9 B. The role of producers, exporters and associations ............................................... 12 C. The role of local banks......................................................................................... 13 D. The role of international banks............................................................................. 14 E. The role of offshore buyers and auction floors .................................................... 15 F. The role of supermarkets...................................................................................... 18 G. The role of insurance............................................................................................ 19 H. The role of rating agencies................................................................................... 20 III. Successful financing transactions........................................................................... 23 A. Case study I: Pre-shipment financing in Zimbabwe (1997)................................. 23 B. Case study II: Post-shipment financing in Zimbabwe (1999).............................. 26 C. Case study III: Forfaiting – Tesco/Fox Fresh Exports, Zimbabwe...................... 28 D. Case study IV: Pre-financing facility for exports of bananas from Côte d'Ivoire 30 E. Case study V: With recourse invoice discounting, Agriflora Zambia ................. 34 F. Case study VI: Financing of "indirect exporters" in Zimbabwe .......................... 36 G. Case study VII: Infrastructure financing – The Contango Project in Zambia (2004)................................................................................................................... 37 Conclusion ................................................................................................................ 43 Annexes I. The impact of supermarkets in the supply chain on small growers in Africa: Financing challenges and options .............................................................................. 45 II. The role of multilateral financial institution in financing horticultures: Facilities from and deals structured by Afreximbank................................................ 49 III. Term sheet.................................................................................................................. 59 IV. The Contango project: Marketing opportunities and risk evaluation ........................ 63 iii Page Boxes 1. The marketing and supply chain in African horticulture .................................................... 3 2. Cut flower production in Africa .......................................................................................... 4 3. The horticulture and fishing sectors in Tunisia: Export incentives, financing instruments and marketing support structures................................................................... 10 4. Sources of credit ............................................................................................................... 14 5. How can affordable credit best be provided?.................................................................... 16 6. A tropical export finance facility of US$ 20 million......................................................... 18 7. Characteristics of the integrated supply chain .................................................................. 45 8. Mechanisms for reducing contract farmer default ........................................................... 46 Charts 1. General Horticultural Supply Chain.................................................................................... 2 2. Agriculture Supply Chain Financing................................................................................... 9 3. Pre-shipment finance......................................................................................................... 24 4. Post-shipment finance ....................................................................................................... 27 5. Forfaiting........................................................................................................................... 29 6. With recourse invoice discounting.................................................................................... 34 7. Financing indirect exporters: freight, logistics & post-harvest handling services ............ 37 8. Infrastructure Financing ....................................................................................................40 9. The Afreximbank Country Risk Guarantee Facility ......................................................... 55 Tables 1. Institutions providing horticultural credit............................................................................ 8 2. Zimbabwe's horticultural export performance from 2002–2003....................................... 63 3. Contango's operational risks.............................................................................................. 65 4. Contango's financial risks..................................................................................................66 5. Historic currency fluctuations ........................................................................................... 66 6. Political risk in Zambia ..................................................................................................... 66 7. Political stability index by Kaufmann et al. (2002)........................................................... 66 iv FOREWORD Access to finance is considered to be a critical Drawing on knowledge acquired from its catalyst of trade expansion and economic technical assistance activities and research on development, particularly in developing cutting-edge pro-development financing countries. Many participants in the techniques, UNCTAD is publishing a new commodity sector and in such dynamic research series, entitled Innovative industries as fisheries, renewable energy and Financing in the Commodity Sector and electronics depend on credit to upgrade their Dynamic Industries. operations and achieve sustainable livelihoods. Where credit is constrained or With contributions from international experts very dear, producers and other actors in the and practitioners, the series promotes best value chain are unable to meet market demand practices in this area of financing based on and integrate effectively into local, regional concrete case studies. Such practices include and international supply chains. This means encouraging financiers such as local banks to missed opportunities for growth and chronic adopt innovative approaches as they strive to incapacity to increase participation in global expand their outreach to producers, providers trade. of auxiliary services and exporters in developing countries. The series should thus Where, however, sustainable sources of prove useful to producers, enterprises and financing are made available at reasonable market support institutions engaged in the cost, participants can move up the value chain commodity and dynamic sectors. into higher value-added production processes. They can also diversify their activities and explore opportunities offered by new, high- growth dynamic industries. This virtuous circle of higher investment and higher return further stimulates economic development and poverty reduction. Supachai Panitchpakdi Secretary-General of UNCTAD January 2007 v INTRODUCTION One of the consequences of globalization, and In such deals, banks usually find it difficult to to some extent the civil strife and economic mitigate the unfamiliar risks, ranging from difficulties that Africa suffered especially in performance, weather, quality, perishability/ the 1980s to the 1990s was a large outflow of rejection to pricing. Lessening these risks in a migrants from Africa to Europe, the Americas market with new and untested entrants is a and, to a limited extent, some parts of Asia. daunting task. In recent years, however, skill Globalization had also meant freer flow of and experience have been brought to bear on information and goods across borders than this constraint, and interesting deals are being hitherto. As a result, there has been a steady made with low risk. Receivable financing increase in demand for ethnic foods as well as whereby flower exporters are granted tropical fruits and vegetables globally. evergreen overdraft facilities tied to borrowing Available data show that on an annual
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