Ramesh S Arunachalam
Rural Finance Practitioner
Value chain finance has become a buzzword and you hear it everywhere today in the development field and especially, in the agriculture sector – which has long been the primary economic activity in many countries in Sub-Saharan Africa as well as Asia. However, ensuring financial access for SUCCESSFUL agriculture production and rural enterprises development has always proved difficult. Often cited constraints are: (1) high transaction costs for both (borrower) producers/enterprises and lenders; (2) high risks faced by both of them and especially covariance risk for agriculture; (3) lack of reliable production/financial data and other information with regard to rural households engaged in agriculture and rural enterprises; and (4) financial products ill suited to the cash flows and livelihoods of the borrowers.
In fact, given the above, the last decade has seen value chain finance being promoted as “THE” approach to promoting access to finance for agriculture and rural enterprises. It is certainly not new and has had many previous avatars. And often times, value chain finance is introduced in a very narrow sense, without a broader understanding of the specific sector and this leads to minimal impact and ultimately, value chain finance is seen as a fringe activity. There have been numerous attempts in Asia and Africa, where a naïve introduction of a “special” value chain finance effort has been lost and never to be tried again…I try to capture some salient issues and lessons from value chain failures (I believe that failures teach us more than successes), without naming the specific projects/attempts…Read on
Let us first get a working definition of value chain finance (VCF) – VCF is typically defined as flow of financing within a sub-sector, among various value chain stakeholders, for the specific purpose of getting product (s) to market (s). Such a definition mandates relationships and commensurate exchanges between value chain stakeholders through vertical and horizontal linkages as well as coordination/cooperation and competitive mechanisms. This is very different from the mere provision of conventional financing, where one of the chain stakeholders (for example, a specific firm/entity and often primary producers) gains access to financial services independent of other stakeholders.
Given the above broader perspective, experience suggests that the first necessary aspect while getting into value chain finance is to ask what is really expected of it? That is very critical. And accordingly, the most practical step would be to identify constraints and gaps that could potentially limit the sector’s capacity to generate the desired objectives, which, among others things, could include: a) vulnerability reduction for primary producers; b) better and stable returns to various chain actors; c) productivity increases in the chain; d) higher employment generation across the chain and the like. This can be done by asking questions such as the following:
- In general, what can be said about the input supply system in the entire chain?
- Do the small, marginal and other primary producers and/or other chain actors have adequate access to quality inputs at reasonable prices?
- If not, what are the gaps in input systems and how can value chain finance help in redressing any these? If so, how and what must it specifically do to redress the constraints? Can the intervention be practically scaled up after the pilot?
Data and Information Systems:
- What can be said with regard to timely availability of reliable and valid production data and market/other information throughout the entire chain, for the various stakeholders?
- What are the gaps in information across the chain that needs to be addressed? Can value chain finance help in improving availability and flow of quality (reliable and valid) information? If so, what must it specifically do to facilitate this? Can the intervention be practically scaled up after the pilot?
- How is primary production organised in the chain?
- What can be said about the producers? What about their characteristics in terms of being marginal, small, medium and large producers and which of them dominates the chain in terms of various criteria - absolute number, production quality, relative power etc?
- How and where is produce aggregated?
- What about access to finance and BDS for primary producers and others in the chain?
- What can be said about product quality, good practices and access to innovative technology, standards and certification in production for primary producers and others? How is new and innovative technology transferred from lab to land?
- What is the level of (horizontal) cooperation, coordination and competition between primary producers and with other actors in the chain?
- What is their relative (individual and collective) power of primary producers, in comparison to other stakeholders in the chain?
- How efficient and fair are the price and terms setting mechanisms across the chain and especially from a perspective of the primary producers?
- What about access to various markets (local, national, regional, and global) and market opportunities for the primary producers and others?
- What about access to governmental procurement for various stakeholders including primary producers?
- What are the gaps in production systems in the chain and can value chain finance help in redressing any these? If so, how and what must it specifically do to redress the constraints? Can the intervention be practically scaled up after the pilot?
Post Production Systems:
- What systems and arrangements exist for bulking and post-harvest handling?
- What is the level of (vertical) coordination, cooperation and competition across stakeholders in the value chain? How efficient and fair are these, especially for the primary producers?
- Who controls the post production infrastructure and what are the consequences for the primary producers and other stakeholders in the chain?
- What can be said about product quality, good practices and access to innovative technology, standards and certification in post production activities in the chain?
- How is new and innovative technology transferred from lab to factory?
- What about access to finance and BDS for post production activities in the chain?
- What about access to various markets (local, national, regional, and global) and market opportunities for the various stakeholders?
- What about access to governmental procurement for various stakeholders involved in post production?
- What are the gaps in post production systems in the chain and can value chain finance help in redressing any these? If so, how and what must it specifically do to redress the constraints? Can the intervention be practically scaled up after the pilot?
This apart, the regulatory environment at the local, national, regional and international levels need to be factored and analysed while looking at gaps and constraints in the value chain.
Thus, value chain finance should not be merely viewed as enhancing access to finance for primary producers in a chain but rather, it must be seen as a broader intervention that can: (a) help create better and enabling infrastructure in the chain; (b) enhance competition among various stakeholders and increase choice within the chain; (c) reduce vulnerability of producers (marginal, small and primary producers) and increase their staying/bargaining/negotiating power vis-à-vis other actors in the chain; (d) act as a catalyst and stimulate access to productivity enhancing technology and practices; (e) facilitate small/marginal and other primary producers to get better returns/rewards through better access to BDS including markets; (f) enable product, process, functional and channel improvement/upgrading in the chain, which is very critical and taken up later as an exclusive post; and/or (f) address other constraints and the like. In practice, such a broader outlook with regard to VCF is likely to enable achievement of the larger development objectives such as ensuring inclusive growth in a more effective manner…
Have A Nice Day!