TACKLING WAREHOUSE RECEIPT SYSTEM CHALLENGES:

ANUMBER of African countries, Zimbabwe included, have met challenges which have led to slow or limited progress in establishing warehouse receipt system (WRS). Most common challenges include lack of suitable storage infrastructure, legal and regulatory issues, lack of requisite skills, missing or weak complementary market institutions, difficulties in attracting key stakeholders especially bankers, problems encountered in ensuring smallholder participation and disabling elements in the policy environment.

Lack of suitable storage infrastructure

A network of secure, well-run warehouses which are accessible to various depositors is an essential pre-requisite for a successful WRS. Most African countries have physically adequate grain storage capacity in excess of 1 million tonnes. However, the exceptions are Mozambique, Rwanda and Uganda which need additional investment in expanding grain storage capacity. The available grain storage facilities in the grain-surplus producing areas in most African countries are, however, owned by grain marketing parastatals. With declining government investment and financial support, their role in the grain market has been diminishing in the post-liberalisation era, often leading to operational and financial difficulties which undermine investors’ confidence in them as credible counter-parties.

To make matters worse, private storage infrastructure tends to be concentrated in the urban markets. Hence, while there may be excess storage capacity in grain-surplus producing areas in some ESA countries, credible private warehouse operators may not have access to the facilities, thereby limiting uptake of WRS by smallholder farmers groups and medium-scale rural grain traders - most large-scale farmers have suitable on-farm storage.

In some cases, lack of political will appears to hamper outright sale of stateowned storage facilities to private warehouse operators as a means of attracting private investment in improving the physical conditions of under-utilised facilities in rural grain producing areas.

The option of setting up autonomous warehousing companies to take over stateowned storage facilities in strategic locations and offer third-party warehousing services - which offers a means to mitigate the credibility problems faced by the parastatals - has not been adopted by a number of African Governments. T

he Governments which have tried to so like Malawi, Zambia and Mozambique have given a lease tenure that is short-term and therefore does not encourage significant investment in improving the physical infrastructure.

Legal and regulatory issues

Specific warehouse legislation and formal regulatory structures followed, rather than, led to the development of the successful receipt systems in the region. For instance, South Africa’s silo receipt system is not backed by specific warehouse legislation. Neither was the successful WRS for grains in Zambia backed by law. Even where specific legislation has been enacted to back WRS, as is the case in Tanzania and Uganda, the law came in after the systems had evolved.

However, this does not detract from the need to resolve legal issues which can potentially diminish the holder’s title to the underlying goods and/or security interest in them. It tends to be particularly important to bankers who are usually keen to avoid lengthy litigation and/ or costly searches to establish the absence of previous charges on underlying commodities they intend to finance. Other issues which can be resolved by legislation is recognition of warehouse receipts as documents of title which may be transferable and negotiable instruments – in South Africa transferability of the receipts emerged as a result of custom and practice but statutory intervention can short circuit the process and encourage acceptance by the banking community and third party buyers. In the case of grains it is also important that legislation ensures that the security interests of holders of warehouse receipts can be assured in commingled goods.

One of the issues specific warehouse legislation can resolve is a regulatory framework which is instituted to maintain the integrity of the WRS. It should be stressed that - as has been demonstrated in the case of South Africa - a strong market institution such as a commodity exchange can self-regulate its supporting receipt system on the basis of existing contract law. This may be feasible where the existing exchange promotes the WRS.

However, where this is not the case, legislation may vest regulatory powers in a public, private or arms-length public-private institution for the licensing and overseeing the operations of participating warehouse operators. The law then has to be clear on licensing requirements and sanctions for breach of those requirements as well as other relevant regulations. Since the region is pursuing a policy of open borders for the grain trade, it is important that national legislations are harmonized across the region. It is particularly important to insulate the regulatory authority from political control as well as the potential to compromise in enforcing the laws and regulations as a result of control by any dominant interests. This is important in assuring the integrity of the WRS.

Lack of requisite skills

The quality of warehouse and storage management skills tends to be highly variable in most African countries. Improving professional skills in the warehousing industry is necessary if storage losses are to be kept at a minimum. Similar training and capacity building is required to enable traders and processing companies to utilise the WRS in cost-effectively managing their inventories. Smallholder groups, which have to bulk and market collectively in order to meet quantity and quality requirements under the WRS, will experience considerable difficulty unless adequately trained. Bankers as well need training to enable them shift from the “traditional” balance sheet-based financing to inventory-backed structured financing.

Most WRS projects have training and capacity building components but it is important to develop institutional capacity to deliver the required training on a sustained basis at national and regional levels.

Challenges in attracting key stakeholders

Attracting participation by bankers in WRS projects has proved very challenging in most African countries. Financial sector reforms undertaken in Africa in the 1990s focused on liberalisation of interest rates and tightening of prudential regulation.

The consequence was a deepening of risk aversion in the banking industry. At the same time yields on domestic government debt instruments rose significantly, making investment in such comparatively low-risk instruments very attractive. Therefore, banks had little or no incentives to innovate beyond traditional balance sheet lending, with the most common form of security for domestic enterprises being real estate. Increased competition in the banking industry in most African countries, especially in West Africa, appears to be encouraging banks to adopt innovative financing mechanisms which are also relatively low risk. Inventory-backed structured financing represents an option which will therefore be attractive to bankers.

However, an important lesson learnt in Zambia in promoting uptake of receiptbased financing, is to avoid “hard selling” of the system but rather engage the bankers in a process where they contribute to identifying business and process risks associated with the WRS as well as in instituting appropriate mitigation mechanisms.

Furthermore, the pilot in Tanzania showed that it pays to focus in the beginning on a few willing banks, usually local banks which enjoy greater scope in innovating. Other banks tend to respond by free riding on the positive experiences of the early up-takers.

Ensuring effective participation by smallholder farmers

There are major political pressures to either exclusively target or fast-track direct smallholder participation in WRS projects. This emanates not only from Governments but also from donors. With the smallholder sector dominant in agricultural production in most African countries, the underlying concerns over their welfare are legitimate.

Together we make Zimbabwe great!

Dr Mugano is an Author and Expert in Trade and Development. He is a Research Associate at Nelson Mandela Metropolitan University and a Senior Lecturer at the Zimbabwe Ezekiel Guti University. Feedback: Email: gmugano@gmail.com , Cell: +263 772 541 209.