Trade finance in action: DFID/grain millers import facility

Zimbabwe is grappling with its worst drought in decades, which has left nearly half the population in need of food aid.

Financial sector spotlight with Omen Muza

At the same time, due to depletion of banks’ nostro accounts, importers — among them grain traders — are facing challenges in importing grain to complement the humanitarian efforts of development partners such as the Department for International Development (DFID) aimed at averting starvation.

Against this background, the United Kingdom (UK) early in November 2016 announced that, through DFID, it had partnered Zimbabwe’s commercial grain traders through an import facility for 55 000 metric tonnes of white maize to be sold on the open market to avert the food crisis.

Assuming a landed price of $320 to S$350 per tonne, $17,6 million to $19,25m worth of grain, excluding other costs, will be imported under this initiative.

DFID head in charge of Zimbabwe, Annabel Gerry, explained the nature of the facility: “Given the cash crisis in Zimbabwe, the private sector is struggling to pay for grain imports and the key constraint is their inability to transfer the United States dollar out of Zimbabwe.”

Therefore, the UK has designed an innovative solution to help ensure that commercial grain traders are able to purchase grain on international markets”.

It said DFID was not providing a grant or subsidy and is not purchasing or distributing the food.

“Commercial grain traders will import 55 000 metric tonnes of maize to sell on the open market. The facility allows commercial grain traders to deposit funds with Crown Agents in Zimbabwe. The UK credits equivalent funds to Crown Agents to settle approved international grain import contracts on behalf of importers. It is a facility only unique to Zimbabwe as we are trying out because of the cash shortages,” Gerry said.

This “innovative solution” is a good example of structured trade finance in action.

According to the Africa Export and Import Bank, structured finance is “the art of transferring risk in financing transactions from parties less able to bear those risks to those more equipped to bear them in a manner that ensures automatic reimbursement of advances from the underlying transaction assets”.

Before discussing how this grain import facility is a structured finance transaction, let’s first identify the key parties to the transaction: these are the grain importers/traders (represented by Grain Millers’ Association of Zimbabwe), the grain suppliers, Crown Agents, the United Kingdom government and DFID.

Crown Agents is an international development company that partners with governments, aid agencies, non-governmental organisations and companies in nearly 100 countries.

It seeks to help them grow their economies, strengthen health systems and improve financial management.

Now, applying the definition of structured trade finance, the grain importers are clearly the ones not able to bear the risk of securing foreign currency from their local bankers to effect payment to their international suppliers of grain (let’s call it transfer or conversion risk).

Crown Agents in Zimbabwe, through its links to the UK government, is better placed to bear this risk, which it has duly assumed in this transaction by accepting deposits from local grain traders.

The UK government then provides the equivalent foreign currency of these deposits to enable Crown Agents to make payments to grain suppliers on behalf of the importers.

At its own risk and cost, Crown Agents will eventually attempt to get such money out of Zimbabwe to reimburse the UK government.

However, it is likely that the money will remain in Zimbabwe for local use instead of the UK government transferring new funds for its development work and other expenditure needs in Zimbabwe.

From the information available to Financial Sector Spotlight, it is not clear whether Crown Agents will assume the full array of risks (delivery risk, supply risk etc.) of the transaction or these and other contractual risks will fall upon the grain importers.

Either way, to ensure that Crown Agents and the importers are not conned by the suppliers of grain, relevant instruments such as letters of credit and advance payment guarantees, would still have to be deployed to manage some of the attendant risks.

One might wonder why DFID is taking all this trouble to assist the grain traders.

Well, part of the reason is that it already assists vulnerable rural people with funds through electronic mobile transfers and these can also purchase the maize imported by commercial importers under this arrangement at existing depots, including the drought affected areas.

So, in a way, grain traders’ market risk is already taken care of since a captive market is already in existence in the form of DFID’s beneficiaries of remittances.

This also means that the grain traders probably had to commit to sell the maize imported under this facility at agreed, affordable prices.

DFID’s overall objective is to get grain to the vulnerable people within the shortest possible time and at an affordable cost to achieve the desired impact.

So how did it deal with performance risk, which could result from grain traders failing to mobilise the required domestic funding and failing to deliver grain to the drought-prone areas?

Crown Agents had to run a competitive selection process to identify reputable commercial grain traders, who can supply grain to remote rural markets in Zimbabwe, including those where DFID’s humanitarian effort is concentrated.

All suppliers were subjected to a rigorous due diligence process that applies international standards.

“Once due diligence had been met, the selection was done on commercial criteria, including price, track record and capacity to supply rural markets. To ensure transparency, Crown Agents consulted with relevant private sector associations, the Grain Millers’ Association of Zimbabwe and Oilseed Traders’ Association of Zimbabwe to ensure that all relevant commercial entities were invited to apply. The facility was designed to work with existing market and minimise disruption,” Gerry said.

Omen N Muza edits the MFSB. You can view his LinkedIn profile at zw.linkedin.com/pub/omen-n-muza/30/641/3b8 or initiate contact on [email protected]