Supplementary memorandum submitted by
Mr Jonathan Coulter, Enterprise, Trade and Finance Group, Natural
Resources Institute, University of Greenwich
A PRACTICAL SOLUTION FOR AFRICAN AGRICULTURE
WAREHOUSE RECEIPT SYSTEMS
We see warehouse receipt (WR) systems as part
of a strategy to address one of Africa's most intractable policy
challenges: how to establish efficient agricultural marketing
systems which serve the mass of smallholder producers well, and
enhance food security at low cost. Given this opportunity, we
propose DFID takes a leading role in establishing an African Warehouse
Receipts Initiative.
After more than two decades of liberalisation,
Africa's agriculture continues to be hampered by inefficient markets,
with low transparency, high transactions costs and price volatility,
limited means by which farmers and other players can manage their
trading risks, and weak systems of input supply. Supply of finance
to the sector is low and has been declining as formal financial
institutions perceive the sector as high risk and the under-resourced
small farmers, who dominate the sector, lack assets which can
be used as collateral for loans.
Since the early 1990s, we at the Natural Resources
Institute (NRI) have been researching these problems, and developing
and piloting solutions in collaboration with local partners in
Africa and in Asia (India). We have in particular promoted the
establishment of a regulated system of transferable warehouse
receipts (WRs). A briefing note is below.
This is a system which can simultaneously lead
to a variety of benefits, notably easing access to finance, reducing
transaction costs (through the use of standardised grades and
trading by description), facilitating the development of exchange
trading and shortening the commodity chain linking farmers to
end-users.
We have progressed from research to practical
implementation, with the support of a range of funding organisations,
and collaborating with many local stakeholders, ie farmers, millers,
bankers, insurers, Governments and others, in the countries concerned.
Implementation has advanced furthest in Zambia where the essential
elements of the system are in place, including:
— an arms-length, private-sector-controlled
warehouse certification and inspection agency (a notable departure
from the common state-centred approach);
— the support of the banking sector;
— suitable private warehouses and warehouse
operators certified;
— a secure receipt system adopted;
— warehouse personnel and bankers trained;
and
— legal loopholes identified, and the
process initiated to enact supportive legislation.
In the first year, 2003, farmers deposited 6,600
tonnes of grain with the system and made a profit of $35 per tonne.
In the 2004 harvest, 60,000 tonnes of storage capacity are expected
to be licensed, and the volumes handled will increase sharply
towards a target of 200,000 tonnes about three years hence.
We have a particular reason for bringing this
instrument to the attention of the International Development Committee.
Many Africans are enthusiastic about WR systems because they are
seen as addressing one of the main critiques of the approach to
market liberalisation adopted by the international community:
that of simply "rolling back the state" with little
consideration for the institutional framework needed to ensure
that liberalised markets work efficiently. However WR systems
are about long term development and transparency, and this runs
counter to some of the short-term politics which affects the African
grain trade. For this reason, the long-term presence and support
of key players from within the donor community can help steer
the initiative towards a successful conclusion. One also needs
the support of ethical players who will eschew quick fixes and
insist on high standards; like banking, warehousing is about managing
other peoples' assets.
In the light of this situation we propose DFID
takes a leading role in establishing an African Warehouse Receipts
Initiative. This should be a long-term multi-donor initiative,
also involving a few key private sector players, notably in the
banking sphere. It should work on a continent-wide basis but focus
on countries that are interested and can meet preconditions for
success. The aim will be to produce a demonstration effect in
favour of the improved system that will eventually get the support
of most countries in the continent.
The main activities to be undertaken are as
follows:
— To bring about a broad consensus
re appropriate strategies, among interested governments and donors,
as well as key private stakeholders.
— To identify countries for implementation
of WR systems, and help draw up implementation plans and MOUs,
as appropriate, with governments and local players.
— To commission studies to confirm
feasibility and to fill gaps in information.
— To support implementation in selected
countries, including developing bankable programmes.
— To monitor and evaluate implementation.
We are ready to discuss how this initiative
might be organised, and to suggest partner organisations with
which DFID might try to work.
BRIEFING NOTE
ON WAREHOUSE
RECEIPT SYSTEMS
What is a warehouse receipt?
It is a document issued against a deposit of
merchandise in a warehouse or silo. It may be in paper form or
electronic. See attached examples of paper documents from the
United States and South Africa.[1]
Some warehouse receipts are non-transferable
and non-negotiable, but the ones we are proposing are transferable
and negotiable (sometimes known as warehouse warrants). They may
be transferred to a buyer, as a means of selling the merchandise,
or to a lender, as collateral for a loan.
The warehouse operator (otherwise known as collateral
manager) holds the merchandise in safe custody for the depositor
and the lender who has a "security interest" in it.
What are the pre-requisites for establishing a
warehouse receipts system?
One needs a legal framework which establishes
the rights and obligations of the parties involved. In some cases
one can start under the existing legal framework.
Warehouse receipts systems may be regulated
or unregulated. The purpose of regulation is to establish and
enforce minimum standards, and protect depositors and lenders
against fraud and negligence. In most of Africa one needs regulated
systems, because it is the only way of gaining the confidence
of the banks, and making the service widely available to the public.
The system of regulation needs to be very strict—which
in many countries means the regulator should be a non-Governmental
entity controlled by parties with a direct stake in its success,
notably banks, farmers, traders and food processors, or a commodity
exchange which brings together these same parties.
One needs a grading system, so that commodities
deposited in the warehouse can be stored in a space-efficient
manner, by grade.
One needs a stable policy environment—particularly
the absence of unpredictable forms of Government intervention,
eg sudden bans on exports and duty exemptions.
One needs significant private sector leadership
to institute such a system.
Food aid operators should help "kick start"
the system—as part of a long-term exit strategy. They can
procure food locally and "recycle" it by buying and
selling warehouse receipts.
Who may operate a warehouse?
Any party meeting agreed licensing criteria,
who signs up to governing regulations, and who can provide certain
financial guarantees against non-performance.
In some countries, typically the case in South
America, only non-trading service-providers can be licensed. In
other cases, eg USA and Canada, regular trading entities (eg grain
elevator companies) are licensed.
Parties failing to perform according to the
regulations are suspended or have their licenses revoked. In some
cases the regulator may take over the warehouse in order to protect
the interest of depositors.
A warehouse operator must pay user fees, typically
based on his licensed storage capacity, and this forms the regulator's
source of revenue. The regulator may start operation with a public
subsidy, but the aim is to make it self-financing, and free from
the recourse to the public purse and political patronage (an aspect
brought to our attention by American officials, based on their
88 year regulatory experience).
What are the benefits of a WR system?
It is a system which will contribute to the
solution of a series of problems affecting agricultural marketing
systems in Africa, ie:
— The lack of product standardisation.
— The lack of market transparency;
— it can put the small farmer on
an equal footing to larger farmers;
— he can sell further down the
marketing chain; and
— the system can be linked with
provision of market information.
— The need for grain to be traded by
sample. A WR system can lead to trade by specification.
— Lack of mechanisms for contract enforcement.
— Inadequate and high cost trade finance.
— Lack of intensification and productivity
enhancement among small farmers.
— Can help make the whole system more
price-competitive.
It can be used for food crops, cash crops and
non-food items, providing liquidity for trade to take place
Where does the system work?
The World's oldest profession, bar one? Warehouse
receipts have been dug up in Mesapotamia and Ostia Antica.
North and South America is home to some of longest
established regulated WR systems. Used for grains, oilseeds coffee,
cotton etc.
WR systems are being set up in Eastern Europe,
under EBRD auspices.
South Africa has a strong system of "silo
certificates" established shortly after the accession of
the ANC Government.
The Zimbabwe Agricultural Commodity Exchange
established a system in 2000, but Government closed down the exchange.
In Zambia, a system has been set up with technical
assistance of the Natural Resources Institute (NRI), and with
financial support of Common Fund for Commodities and other donors
including DFID. The results are as follows:
— The system is regulated by a stakeholder-controlled
body: ZACA Ltd.
— The system enjoys the support of
banks, and key members of the trade.
— In the 2003 harvest: there was one
operator, with certified capacity of 8,000 tonnes, and 6,600 tonnes
of maize were stored.
— In the 2004 harvest, there will prospectively
be 3 operators, with certified capacity 60,000 tonnes of maize.
— The target is 200,000 tonnes of maize
or equivalent value of other grain per annum.
May 2004
1 Mr Jonathan Coulter also submitted specimen warehouse
receipts for the attention of the Committee. Photocopies of these
receipts have been placed in the House of Commons Library. Back
| 
