Wondwossen’s
Note: As
of this writing, this policy proposal hasn’t been accepted or rejected by the
government. Watch this space for any developments.
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ATA
and USAID AGP-AMDe Jointly Developed Policy Proposal to Strengthen Ministry of
Trade’s involvement in Regulating Ethiopia’s Warehouse Receipt System
March 2013
This proposal, developed by
the Ethiopian Agricultural Transformation Agency (ATA) and the Agricultural
Growth Program-Agribusiness and Market Development (AGP-AMDe) Project, is
intended to urge the Government of Ethiopia to reactivate the Ministry of
Trade’s mandate to regulate Ethiopia’s warehouse receipt system. The ATA and the
AGP-AMDe Project recommend that the government take immediate action on
developing and supporting a regulatory framework that 1) enables the
implementation of a community warehouse receipt system pilot (to better serve
smallholder farmers) and 2) strengthens broader nationwide warehouse receipt
initiatives under the WRS Proclamation No. 372/2003.
The
importance of a national warehouse receipt system
The Ethiopian agricultural
market faces a number of challenges including high transaction costs, volatile
markets prices and insufficient demand sinks for some coarse grains. The
absence of standardized grain trading, adequate storage facilities, a reliable market
information system, and access to finance create inefficiencies and difficulties
for players across the entire value chain. In particular, smallholder farmers
face higher cash needs at time of harvest, and due to lack of output marketing
finance, they often sell their produce at a lower price than they could get by
waiting longer after harvest time. As such, they are unable to capture the full
value of their output.
A warehouse receipt system has
significant potential to resolve these challenges in the output market. A
warehouse receipt system (WRS) is a system of financing and trading
agricultural outputs based on a warehouse receipt, a document guaranteeing the
existence and availability of a given quality and quantity of commodity in
storage for safekeeping. The system finances agricultural commodity owners by
using their commodity as collateral.
A well-designed warehouse
receipt system can provide many benefits to smallholder farmers, cooperatives,
traders and other players across the agricultural value chain. The first and
most immediate benefit to smallholder farmers is that it enables smallholder
farmers to access credit by using their output as collateral. This satisfies
farmers’ cash needs at harvest time and allows them to wait for a better offer
or price at which to sell their commodities, which as a result gives them
better bargaining power. The second benefit relates to reducing post-harvest
losses. A warehouse receipt system can enable standard storage service
provision on a credit basis (so farmers can pay for the service after their
product is sold), which can reduce the incidence of post-harvest losses.
Finally, the system allows farmers to create a financial identity. In a
warehouse receipt system, the opening of individual accounts is mandatory –
hence, the account records farmers’ financial history and can demonstrate their
creditworthiness to financial institutions should farmers require further
financial support in the future.
The system’s benefits also
extend beyond farmers: Cooperatives can
benefit by storing product in the system and by accessing finance using this
product as collateral. They can also rent or operate warehouses as part of the
system to generate additional revenue. Financial institutions, meanwhile, can
increase their provision of financial services to the agricultural sector with
minimum risk. Finally, processors and end-markets can reduce transaction costs by
having access to a continuous source of commodities with reliable standards.
In
sum, a robust warehouse receipt system is an important element in a
well-functioning agricultural output market and can improve outcomes for actors
across the value chain.
Assessment of Ethiopia’s enabling
environment for a national warehouse receipt system
For
a warehouse receipt system to be successful, past experience indicates that governments
must take an active role in creating an appropriate enabling environment.
Specifically, the government must:
(a) Develop policies / legislations favorable to the
emergence of warehouse receipting systems and related market institutions;
(b) Develop regulatory systems where conditions are
favorable, i.e. where the regulatory service can be highly focused and
professional, and the economics are favorable. (Coulter, 2009)
In
2003, before the inauguration of Ethiopian Commodity Exchange (ECX), the
Government of Ethiopia enacted a proclamation that supports a warehouse receipt
system (Proclamation No. 372/2003). This proclamation was enacted with a view
to increase access to finance, protect producers from price shocks, and promote
efficient marketing of standardized agricultural products. Following the
enactment, the Ministry of Trade (MoT), which is mandated to regulate
warehouses and grading under that law, was preparing to launch a
functioning warehouse receipt system. The Ministry had built up in-house
expertise on warehouse receipt system, collaborated with the Ministry of
Agriculture and Rural Development and the Commercial Bank of Ethiopia,
purchased laboratory equipment and even printed warehouse receipts. However, in
2008, before the pilot could be implemented, the ECX was established; the
government’s focus shifted from MoT to ECX, and the pilot project was
abandoned. The establishment of ECX has also brought about parallel
regulatory regimes for warehouse receipts. As a result, employees at the MoT who were responsible for regulating
the warehouse receipt system slowly began engaging in other roles.
While
there is currently a Proclamation supporting warehouse receipt system, Ethiopia
lacks an effective regulatory system. There is no one in the MoT who regulates
warehouse receipt system initiatives. Furthermore, while Proclamation No.
372/2003 was envisioned to cover a large variety of commodities and different
types of warehouse operators, the more recent ECX warehouse receipt system is
currently restricted to coffee, sesame and white pea beans deposited in ECX’s
operated warehouses. We therefore see a worrisome gap in the current enabling
environment for warehouse receipt system.
Assessment of the ECX warehouse receipt system
As mentioned above,
Ethiopia has a warehouse receipt system housed at the ECX. However, though it
is a valuable intervention, the system does not currently realize the full
potential of a warehouse receipt system in Ethiopia. The ECX announced its plan
to roll out a warehouse receipt financing system in 2010 and launched the
system in February 2011. The scheme was intended to allow producers and traders
of agricultural commodities to access bank loans by pledging warehouse receipts
issued by the ECX for commodities held in its stores.
In the system,
commodities are deposited in warehouses operated by ECX in major surplus
regions of the country (totaling 17 warehouses). All ECX-traded commodities
except coffee are eligible for the warehouse receipt financing, i.e., maize,
pea beans, sesame and wheat. The system offers a maximum storage and loan
period of 60 days for sesame and pea beans, 90 days for maize, and 120 days for
wheat.
Though the WRS
product is intended to increase the income of the commodity producers, the
system has not been able to reach smallholder farmers. To date, according to
the 2012 ECX WRS operational review report, there have been only 42 borrowers;
these were ECX clients, not members, and the majority of these were traders. In
addition, thus far there has not been any pledging for maize and wheat, which
are the main commodities produced by the majority of smallholder farmers.
Smallholders have not
participated due to two primary reasons, according to ECX. First, the physical
distance and cost of transport to the warehouse locations were too great for
smallholders. Second, smallholders were unable to meet the minimum deposit
requirement of a lot size of 50 bags. The current system also falls short on a
few other dimensions. The short loan duration offered by the system restricts
the benefits that could have been generated through a longer period of storage.
In particular, grains like maize and wheat require a longer storage period for
a steady price increase. Hence, the short loan duration for these two commodities
limits the incentives for participation.
The path forward for Ethiopia’s warehouse receipt system
Two new approaches can
increase the impact of warehouse receipt system initiatives in Ethiopia. The
first is a systemic effort to strengthen the regulatory environment that
supports warehouse receipt system interventions across the nation, while the
second is a targeted intervention to increase the on-the-ground presence of
warehouse receipt system initiatives by piloting simplified models in several
woredas.
First, it is
essential to reactivate the Ministry of Trade’s mandate to regulate warehouse operation
and grading. This will help to broaden the geographical spread and diversity of
commodities traded within the warehouse receipt system. It will also send a
strong signal to the private sector and financial institutions that they can
and should participate in and benefit from a warehouse receipt system.
Moreover, the ECX has signaled its plan to eventually phase out its involvement
in warehouse operation and regulation. Hence a regulatory system for licensing
and inspecting third party owned/managed warehouses and grading must be in
place before ECX’s involvement ceases.
Second, ATA has
devised a simplified intervention, called a Community Warehouse Receipt System
(CWRS), to increase the on-the-ground presence of a warehouse receipt system. The
main objective of the CWRS is similar to the ECX WRS: to increase the income of
smallholder farmers by allowing them to store their commodities and take
advantage of seasonal price variation. It also aims to enable smallholders to
access bank loans through pledging warehouse receipts for commodities held in
storage facilities. But in order to ensure this product reaches smallholders,
the CWRS adopts a different model than the ECX WRS.
The CWRS is a
simplified version of warehouse receipt system at a community level that
provides loan products only to smallholder farmers. The CWRS uses simplified
facilities that are already available at a community level. For example, the
system uses community storage facilities (e.g., at primary cooperatives) to
aggregate farmers’ product. Because these community storage facilities are
located relatively close to smallholder farmer, they are easier to access. The
system would not impose minimum deposit restrictions at the aggregation points,
which would enable farmers to deposit based on their ability. In addition, a longer
loan duration (6-8 months) would be offered by financial institutions to allow farmers
to benefit more from price increases.
In addition, all
components of the system would be based in the community. The system would be
regulated, certified, and inspected by community officials, composed of the
woreda level bureau of agriculture and cooperative promotion agency. This would
be more convenient for the farmers since they would not have to travel to
resolve any issues that arise. Participating bodies and organization would be
from the community itself, which would enable farmers to better understand the
system. Financial institutions would either be microfinance institutions or
SACCOs located within the communities of smallholder farmers depending on their
capacity. Farmers are already familiar with these institutions, making it
easier to introduce the new product.
We suggest piloting
this intervention in four woredas, one each from the four major regions, this
year. The purpose of this pilot is to test whether the model is applicable in
Ethiopia, as well as to evaluate whether the anticipated impacts of the system
can be achieved. After evaluating the results of the pilot, this intervention
would be scaled in the following years to cover a larger number of woredas and
commodities. However, an effective regulatory system must be in place in order
for the pilot to take place this year.
Recommendations
In
order to create a more positive enabling environment for a warehouse receipt
system and to enable the CWRS pilot to launch, we urge the Government of
Ethiopia to take the following actions:
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Action
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Rationale
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Systemic
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· Request
that the Ministry of Trade put in place the necessary organizational structure
and staff that will be responsible for regulating third party warehouse
receipt system initiatives, including inspection, certification, and grading.
The MoT could also delegate in part or in whole its regulatory authority to a
third party as per Article 44 of Proclamation No.372/2003.
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· Establishing
a dedicated organizational structure will reactivate the MoT’s role in
regulating WRS. This would mean fewer disputes and risks for actors
participating in a warehouse receipt system.
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· Request
that the Ministry of Trade develop competence requirements for licensing third party warehouse operators and graders (outside
the current ECX system).
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· Given
that ECX will phase out its role in warehouse operation and also that there
are some private sectors players who are interested in setting up recognized
warehouse facilities, there is a need to license third party operators and
graders. This will also facilitate the growth of a national WRS.
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Targeted
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· Request
that the Ministry of Trade delegate regulatory powers to the regional bureaus
of trade and industry or agriculture to regulate the functions of the
Community Warehouse Receipt System pilot as provided under Article 44 of
Proclamation No. 372/2003.
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· In
order for the CWRS pilot to proceed, the system must be regulated according
to the WRS Proclamation. The actors best positioned to execute this mandate
are at the regional level.
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· Request
that the Ministry of Trade issue directives that set criteria for
cooperatives to be warehouse operators and determine the governance structure
for the community warehouse receipt system as per Article 26(3) of
Proclamation No.372/2003.
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· In
order for the CWRS pilot to proceed, the system must be regulated according
to the WRS Proclamation. The actors best positioned to operate warehouses in
this system may in many cases be cooperatives.
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