UNCTAD/IISD Sustainability in the Coffee Sector: Exploring Opportunities for International Cooperation---Assessment

and ImplementationGeneva, Switzerland, December 8-9, 2003

Financing Sustainable Coffee

Panos Varangis, Renate Kloeppinger-Todd, Ulrich Hess and Bryan Lewin The World Bank

Credit or Grant?

• Credit appropriate for commercial activities (production, trade, etc.)

• Grant more appropriate for developmental purposes

• No financing to be provided on concessional terms (no interest rate subsidies or forgiveness of principle)

• A financing package, however, could consist of a grant component (equity) AND a loan on market terms, preferably from different sources

Objectives of Commercial Credit

• To facilitate sustainable access (and at better terms) to investment, pre-harvest and post-harvest financing

Objectives of Development Financing

• Institutional development (grants)

– Strengthening coops, producer organizations, sector institutes, etc.

• Promotion of sustainability through TA (grants)

– Technology improvements, quality enhancement, market intelligence, promotion, etc.

• Product diversification (mixture of grants/loans)

– Promote higher value coffee products, other non-coffee production

Coffee Sustainability and Finance: Possible Linkage

• Most small farmers have little to no access to finance particularly from formal sources

• However, farmers of sustainable coffee are often better able to access financing– Access to pre and post-harvest financing improves

when it comes to sustainable coffees (e.g. higher prices, assured buyers and buyer quality, improved trade linkages)

– Access to funds for institutional capacity building, technical/quality issues, etc. also improves when farmers commit to sustainable coffee practices

Rural Finance in Developing Countries

• Faces many challenges:• Local banks reluctant to lend to agricultural sector:

– Too risky (weak collateral, price and weather risks, etc), better opportunities elsewhere

– High transaction costs, particularly for small loans– Projects to be financed are not sufficiently profitable– Lack of know-how about agricultural lending– Bail-outs often create culture of non-repayment

• Highly selective lending (“cherry picking”)

Rural Finance in Developing Countries

• Some new models/approaches are evolving based on:– Rural microfinance– Improved legal framework and innovative

models regarding collateral– Potential for price/weather risk management– Supply chain financing

Production and Trade Finance for Sustainable Coffee

Coffee Financing

• Investment finance---very scarce in most producing countries

• Production finance (pre-harvest mainly for inputs)---available but limited to larger producers and some cooperatives

• Trade finance (post harvest)---available but on a limited basis

• Small producers are at a significant disadvantage

Sources of Finance

• Investment finance: local banks, some DFI

• Production and trade finance: local banks, international banks, socially conscious investors, foundations/NGOs, traders, input providers, informal sources

Challenges in Production and Trade Finance

• Is money availability the main problem?

• OR meeting the challenges of:– Developing systems/approaches to make coffee

producers “BANKABLE”?– Becoming the catalyst for the private sector to

increase financing?– Creating longer-term financial viability (making a

business case) for lending to farmers?

Ideas to Increase Credit and Improve Access

• Better collateral---e.g. sales contracts, long-term contracts, etc.

• Reduce risks---price, weather/yields, delivery---better risk management practices

• Performance/reduce contract defaults• Stronger linkages between producers and the

international trade/supply chain

Ideas to Increase Credit and Improve Access

• Support and training for financial institutions to set up appropriate systems (MIS, credit evaluation and monitoring) thus reducing transaction costs and portfolio risk

• Assist farmers to become better producers in order to present “bankable” projects

• Use of partial credit guarantees?

Development Finance for Sustainable Coffee

Developmental Grants and Loans• Various developmental grants or loans exist to

promote sustainable coffee production and marketing– WB/IFC (GEF, JSDF, BioCarbon Fund, but also regular

project finance)– Other multilaterals (CFC, FAO, IADB, UNCTAD, etc.)– Donor initiatives and projects– Private initiatives (e.g. ICP, and many others)– NGOs– Other sources

• Need for better coordination, explore synergies, and scale-up where successful models are found

Challenges in Development Finance

• Is money availability the main problem?

• OR– Creating and identifying projects– Improving coordination of various sources of

financing and amongst various initiatives and projects

– Scaling-up successful models– Ensuring longer-term sustainability and

continuity of projects– Leveraging resources

Role of a Partnership

• Should a partnership create and manage a central/global sustainable coffee fund?

• OR focus on creating an Information and Coordination Clearing House that would help:– Mobilize existing sources of funding– Identify projects– Improve coordination of various sources of financing and

amongst various initiatives and projects– Identify and scale-up successful models– Ensure longer-term sustainability and continuity of projects– Leverage resources– NOT distorting financial markets