Innovative forms of financing and their relevance for the Pacific region An introduction

1. Innovative forms of financing and their relevance for the Pacific region An introduction Regional UNCTAD workshop Nadi, Fiji, 18-20 September 2001

2. Structure Relevance Structured commodity finance: general principles Applications: Pre- and post-export finance Import finance Bringing finance closer to the producers

3. Financing aspects in commodity exports actors Phases requiring finance Traditional providers of finance Deferred payment by buyer Local bank Transport (CIF) Exporter/bank Pre-export storage Bank/exporter Transport to port Exporter Exporters Storage of processed product Processor/bank/exporter Local processors Processing Processor Storage of raw material Trader/processor Local traders Transport Local trader Local storage Producer/trader Producers Production Producer

4. What improvements structured finance provide? Deferred payment by buyer Longer-term, lower-cost finance, in several ways Transport (CIF) Pre-export storage Transport to port Exporters Credit at international rates, for a longer-term and at lower rates, revolving and for a larger part of the value of the commodities. Storage of processed product Local processors Processing Storage of raw material Local traders Transport Farmers can obtain affordable pre- and post-harvest credit Local storage Producers Production

5. Import finance, and finance on the back of other foreign exchange earnings Structuring techniques can also improve - the financing of commodity imports (e.g., oil products, cereals, sugar, fertilizers), or commodity-like imports (e.g., spare parts), or imports of equipment to produce commodities. - the benefits drawn from regular and predictable hard-currency revenue streams (e.g., fishing rights, overfly rights, landing rights, oilfield royalties, migrant remittances, tourists’ credit card payments, telephone receivables). - the ability to invest in commodity-related activities … with a structured finance boost The Orogen model Assignment of part of export receivables or earnings streams Orogen Orogen SPV Capital market Capital market

6. An example of using revenue streams – migrant remittances-based finance Off-shore In-country International Bank (arranger) US$ 40 million Debt Service Reserve account Debt Service Reserve Account build-up (over first 6 months) Assignment of all receivables from migrants’ remittances Acknow-ledgement of assignment of receivables Debt service Collection account Sighting account US$ 3 mn/month Surplus over US$ 3 mn/month Development Bank Money Transfer Company Money Transfer Agency Agreement Orders for money transfer (hard currency) Country risk can be mitigated through structured finance arrangements Migrant workers

7. Using revenue streams Off-shore In-country International Bank (arranger) Financing Debt Service Reserve account Debt Service Reserve Account build-up Assignment of all receivables from credit card payments Acknow-ledgement of assignment of receivables Debt service Collection account Sighting account Debt service Surplus Development Bank Credit Card Company Agency Agreement Credit card payments Tourists

8. Using revenue streams Off-shore In-country International Bank (arranger) Financing Debt Service Reserve account Debt Service Reserve Account build-up Assignment of all receivables from airline companies Acknow-ledgement of assignment of receivables Debt service Collection account Sighting account Debt service Surplus Development Bank International Airline Companies Obligation to pay overfly rights

9. Using revenue streams Off-shore In-country International Bank (arranger) Financing Debt Service Reserve account Debt Service Reserve Account build-up Assignment of all receivables from fishing companies Acknow-ledgement of assignment of receivables Debt service Collection account Sighting account Debt service Surplus Development Bank International Fishing Companies Obligation to pay fishing rights

10. Using revenue streams Off-shore In-country International Bank (arranger) Financing Debt Service Reserve account Debt Service Reserve Account build-up Assignment of all receivables from postal companies Acknow-ledgement of assignment of receivables Debt service Collection account Sighting account Debt service Surplus Development Bank International Postal Companies Regular purchase of postage stamps …and so on…telephone receivables, landing rights, oilfield remittances, royalty payments...

11. Through use of structuring techniques, financiers can control their level of risk Without secured/ structured finance: With secured finance: With structured finance: financier financier financier Will he produce? Will the collateral disappear? Will he reimburse? $ Potential borrower Potential borrower Potential borrower goods

12. The relevance of structured finance (1): shifting the risk Credit risk on the borrowing company Risk on another party, e.g., warehousing company Structured finance converts credit risk into production risk, diversion risk and country risk. Secured finance

13. Example - how would structured finance for Tonga’s squash exports look like? Past scheme Advice on credit provision Exporters/input providers Development Bank Granting of credit for input provision Request for inputs on credit Input provision Disadvantages - Serious credit risk - Weakening of bargaining position of farmers vis-à-vis exporters Reimbursement Farmers

14. Example - how would structured finance for Tonga’s squash exports look like? Past scheme Current scheme Advice on credit provision Exporters/input providers Development Bank Exporters/input providers Development Bank Granting of credit for input provision Request for inputs on credit Payment for inputs Input provision Input provision Farmers Reimbursement Farmers Reimbursement Credit provision Disadvantages - Serious credit risk - Farmers without sufficient collateral do not have access to credit

15. Example - how would structured finance for Tonga’s squash exports look like? Past scheme How could it look like with structured finance? Advice on credit provision Exporters/in-put providers Development Bank Agreement providing credit lines for input supply, and exporters acting as collection agents of debt Granting of credit for input provision Request for inputs on credit Exporters/input providers Development Bank Input provision Farmers Reimbursement Sale of squash; payment reduced by debt service Request for inputs on credit Input provision Current scheme Exporters/in-put providers Development Bank Reimbursement obligation Farmers Payment for inputs Credit provision - 10% cash, 90% in the form of a ‘credit line’ for the purchase of inputs Input provision Reimbursement Farmers Credit provision

16. The relevance of structured finance (2): The asset conversion cycle More Money Commodities Structured finance “Paper” (e.g., warehouse receipts) To turn commodities into money, they need to pass through a financial transformation - they need to be replaced by “paper” which represents the commodities.

17. Example - revolving finance for fishermen and a fish processing plant more

18. Hedging often helps to improve financing Why manage price risk? Firstly, because it has a development impact. Pressure on the currency Pressure on the government budget Oil import bill increase Oil import rationing Crowding out of other imports Worsening of debt service capacity Oil price increases Pressure on energy-intensive industries The terms of trade of farmers producing export crops deteriorates Increase in energy and transport costs Public transport requires even larger part of the expenditure of the poor Social and political unrest

19. Can’t you anticipate commodity price movements? No. E.g., crude oil.

20. There are many ways to hedge price risk. The principal ones: - hedging on any of the established futures and options exchanges - entering into a risk management contract on the over-the-counter market - building hedging into physical contracting - building risk management into a lending programme. Lay off price risk With risk management Traditional E.g., subsidized credit scheme Risk management market Development Bank Development Bank Subsidized credit at 5% interest Subsidized credit at 10% interest, but if prices fall, debt is forgiven Farmers Farmers

21. Practical applications: • Post-export finance • Financing goods at the port • Import finance • Financing processors • Financing cooperatives and local traders • Financing farmers • Financing for the government For more info: Lamon.Rutten@unctad.org