Value chain finance enhances export competitiveness

Dr Gift Mugano

The term “value chain finance” refers to the flow of funds to and among the various links within a value chain. It relates to any or all of the financial services, products and support services flowing to and/or through a value chain to address the needs and constraints of those involved in that chain, be it to obtain financing, or to secure sales, procure products, reduce risk and/or improve efficiency within the chain. It refers to both internal and external forms of finance:Internal value chain finance is financing that takes place within the value chain, such as when a supplier provides credit to a farmer or when a lead firm advances funds to a market intermediary; and

External value chain finance is financing from outside the chain made possible by value chain relationships and mechanisms; for example, when a bank issues a loan to a farmer based on a contract with a trusted buyer or a warehouse receipt from a recognised storage facility.

Last week I looked at various models which can be used in financing value chains and how other countries in the region and beyond are using them. This week’s issue focuses on how value chain finance enhances export competitiveness.

In one of my articles, I indicated that since dollarisation, trade deficit has ballooned to a cumulative figure which is almost close to $30 billion which is enough to fund the Zimbabwe Agenda for Sustainable Socio-Economic Transformation (Zim-Asset). It is therefore imperative to have a discussion on how value chain finance enhances export competitiveness. For convenience, my discussion will be focussed on agricultural value chains.

According to Africa Development Bank, international agricultural trade has been growing very rapidly. Food trade alone has been growing so rapidly that its value has increased by 50 percent over the past 10 years. Although this has been partly due to inflation, the growth has much to do with overall growth in global business flows.

Within the global business, agri-business is becoming much stronger and more concentrated,and the agricultural sector is competing on a globalised market where there is more and more concentration(of processors and retailers/supermarkets) at the final end of the chain.

Naturally, domestic and international trade flows follow a chain process driven by the consumer, that is, consumers signal need for a commodity, the retailer notifies the wholesaler or importer, who in turn notifies the warehouses or aggregator in the exporting country about the need to buy a certain quantity of a commodity.

The warehouse contacts the producers and finances them. Moreover, the consumer who is driving the chain or the commodity market has become very demanding for high quality products, including ready availability, flavour, quality, freshness, convenience, environmental safety, traceability, and in addition to all that, low prices. Thus, if the supermarkets and processors in the domestic and importing countries cannot verify the source of the commodity or that it has met certain Sanitary and Phytosanitary Standards (SPS) and consumer preferences, they will not buy.

Therefore, the export value chains, by their nature, have additional requirements relating to quality, certification of different types, specialised storage and transport logistics. Thus, apart from the heavy infrastructure requirements, farmers need to be part of a chain in which everything can be identified, to have the right information and sometimes even capacity building training and technology.

Developing countries, like Zimbabwe, have cheap labour, and agriculture being labour intensive, accords them some advantage on this front. However, absence of structured value chain finance mechanisms would negate this advantage as farmers are not able to access seeds and fertilisers and other inputs and typically do not have the wherewithal to procure machines needed even for the most basic mechanisation.

This affects productivity and quality of the produce, and works against smallholders as they are neither able to tap export markets nor realise higher economic value from the sale of their produce.

Value chain finance enables smallholders to move up the value chain and increase productivity and quality of their produce. Aggregation of smallholders in a value chain initially enables to build critical mass which allows them to tap into the local markets with better quality and eventually with better feel and connectivity with the needs of the market, enables them to tap export markets.

Thus, structured value chains with need based financial inputs increase export competitiveness. As a matter of fact, it is very difficult for individual farmers to tap into export markets on their own in a decentralised manner; the only way to enhancing export competitiveness is through being organised in value chains and delivering products as per the needs of the market. Thus, value chain finance as an approach has tremendous scope of supporting the producers in the chain and enhancing export competitiveness. Value chain approach enables players and stakeholders to enhance the value within any chain through improvement in its performance by enabling core business strategy development including core competencies, comparative and competitive advantage, outsourcing, vertical and horizontal integration, and utilisation of acceptable standards or best practices.

Value chain approaches help to carry out product and process innovations to enhance value of produce, thus, benefiting the stakeholders of the chain. Continual nature of enhancements along the value chain results in improved productivity and profitability, thus, making a firm more competitive.

From producers to consumers, an integrated value chain, with reduced risks and increased access to markets and information, helps the value chain stakeholders to reduce costs and risks along the production chain, and thus,maximise the value of any given product, with the least possible cost to the producer, and become competitive in the global market.

This is the case of our tobacco sector. Our farmers have been able to produce significant amount of tobacco for the export market. Tobacco, by its nature, is an international crop, cash crop. Hence, because of the quality of our product and it being near organic in nature is on demand worldwide especially in China.

The value chain finance models such as contract farming are merely as a result of the comparative advantages we have. International buyers have limited scope to look elsewhere. In the case of other crops, as in the case of agricultural sector, as we work in operationalising value chain financing models in line with the recent monetary policy statement we need to ask ourselves the following questions:

What incentives we should put in place to encourage value chain financing?

What legal framework we must put in place to support value chain financing?

Which sectors, sub sectors or crops which have potential to be competitive if financed?

Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: [email protected]