Sources of Funding and Support System for Value Chain Finance: Lessons from KfW Experiences

1. Johannesburg, 15.11.2012 Dr. Thomas Duve, Director Africa supra-regional Sources of Funding and Support System for Value Chain Finance: Lessons from KfW Experiences

2. Content Sources of Funding and Support System for Value Chain Finance

3. In brief: KfW and KfW Development Bank

4. More than 60 years of KfWFinancing with a public mission • Promotional bank of the Federal Republic of Germany • Founded in 1948 asKreditanstalt für Wiederaufbau • Shareholders: 80% Federal Republic,20% federal states • Headquarters: Frankfurt am MainBranches: Berlin, Bonn and Cologne • Representative offices: around 70 offices and representations worldwide • Balance sheet total at end 2011: EUR 494.8 billion • Financing volume 2011: EUR 70.4 billion • Around 4,763 employees (2011) • Best rating: AAA/Aaa/AAA Sources of Funding and Support System for Value Chain Finance

5. KfW BankengruppeA bank with a wide array of functions International business Domestic promotion We promote development We ensure internationalisation We promote Germany Business Area Promotion of Developing and Transition Countries Promotion SMEs, business founders, start-ups Promotion construction of new housing and modernisation as well as education Financing municipal infrastructure projects and global loans International project and export finance Promotion of developing and transition countries Business Area Mittelstandsbank Business Area Privatkundenbank Business Area Kommunalbank Business AreaExport and Project Finance Promotion of environmental and climate protection KfW Development Bank Financing Volume 2011: 4.5 bn EUR KfW Ipex Bank Financing Volume 2011: 50.9 bn EUR Financing Volume 2011: 13.4 bn EUR Financing Volume 2011: 1.2 bn EUR KfW DEG Sources of Funding and Support System for Value Chain Finance

6. KfW employees Worldwide presenceOver 70 representative offices Sources of Funding and Support System for Value Chain Finance

7. KfW BankengruppeA large promotional bank worldwide Balance sheet total vs commercial banksin EURbillions (2011) Balance sheet total vs promotional banksin EUR billions (2011) Sources of Funding and Support System for Value Chain Finance

8. International business: we promote developmentKfW Development Bank Task As development bank of the German Federal Government, we provide support and advice for reform processes and investments in developing and transition countries. Objectives • Climate and environmental protection • Promotion of the financial sector • Sustainably improvement of economic and social conditions Partners Governments, other governmental and non-governmental institutions in developing and transition countries, and bilateral and multilateral donors Portfolio EUR 28.5 billion, 1,884 projects in over 100 countries Financing volume2011 EUR 4.5 billion Sources of Funding and Support System for Value Chain Finance

9. KfW Development BankHow we finance our programs and projects Financial Cooperation (FC) Budget funds (2011: EUR 1,614 million) KfW funds (2011: EUR 2,575 million) Concessionary Financing 1. 100% budget funds 1.1 Grants: EUR 1,336 million 1.2 Loans at IDA conditions: EUR 133 million 1.3 Loans at FC standard conditions: EUR 12 million 2. FC development loans 2.1 Mixed financing 2.2. Composite financing 2.3. Reduced-interest loans Budget funds: EUR 134 million KfW funds: EUR 1,579 million 3. FC promotional loans EUR996 million Mandates 2011: EUR 343 mn Sources of Funding and Support System for Value Chain Finance

10. Support for national poverty reduction strategies Strengthening and developing democratic institutions at provincial level KfW Development BankBilateral and regional cooperation Agreements with Countries Funding of regional institutions • Encouraging regional integration is a focal area of Germany's development cooperation • Consultations in strategic dialogue with the partner organizations to provide joint support and finance for specific programmes and projects Sources of Funding and Support System for Value Chain Finance

11. KfW Development BankFinancing volume by region and by sector Financing volume by regionin EURmillions (2011) Financing volume by sectorin % (2011) 501 400 Socialinfrastructure 31% Financialsector 25% Economicinfrastructure 23% 535 812 874 1,411 Sources of Funding and Support System for Value Chain Finance

12. Financial Sector DevelopmentProjects in more than 87 developing and transition countries Direct investment Indirect investment* Direct AND indirect investment *Selected investments by: ProCredit, Access, Finca, Advans, EFSE, Regmifa, MEF, ICF Sources of Funding and Support System for Value Chain Finance

13. Financial Sector DevelopmentOur financing products • Basic products • Credit lines • Guarantees • Equity • Technical Assistance Elaborate products (in order to mobilize private resources) • Structured finance, e.g. • Microfinance Investment Funds • Issuance of local bonds • TCX, local currency exchange fund • Deposit insurance schemes Sources of Funding and Support System for Value Chain Finance

14. Support for Value Chain Finance

15. Specific Challenges for Financing Agriculture remain high Finance Quality • Frequently poor quality of value added products, • low quality of local suppliers due to lack of management capacities • High cost to build knowledge on crop cultivation in Africa to identify viable market opportunities • High costs of necessary tailor-made financing solutions; Standardization of financial products beyond microfinance difficult due to specificities of each crop and substantial differences across Africa • High costs to reach into rural areas (distances and infrastructure) • High risks in complex market structures • High risk exposure to weather hazards and disease • Lack of collaterals • Manage country/currency risks Value Chains • Frequently no link to public markets • Lack of on-time delivery based on market demand • Complexity and product-specific Variety of trade patterns Sources of Funding and Support System for Value Chain Finance

16. Agricultural Financing within the value chainThe different layers Financing within the Value Chain Financing through Savings Family work Other income Producers Producer Organizations Local Traders + Processors Exporters Intern. Traders + Processors Input Credit Input Credit / Contract farming Warehouse Receipt financing pre-export trade financing Short/medium term Finance Microfinance Medium term Finance Medium/Long term Finance Equipment Finance Export Finance Equipment Finance Financing from Financial Institutions Value-Chain Financing – linking more actors in the Value Chain Sources of Funding and Support System for Value Chain Finance

17. Promotion of agriculture / food security through banks A new approach for German Financial Cooperation Key trends in African countries Implications for agri-finance Over 70% of agricultural output is produced on farms of 1 to 5 ha Input suppliers, producer organizations, processors and offtakers are engaged in value chains (pre-financing of production) = > potential aggregators A new generation of younger, more educated agro-entrepreneurs is emerging Financial institutions need to understand product-specific characteristics of value chains Financial institutions need to know how to build collaborations with small progressive farmers and aggregators in value chains FIs need to finance small and medium farmers • Support Financial Institutions with regard to: • Identify progressive farmers in specific value chains • Learn on farmer’s investment needs to improve value addition (equipment, processing, irrigation) • mid- and long-term loans and accompanying technical assistance to structure adequate financing products Sources of Funding and Support System for Value Chain Finance

18. ImplicationsHow to combine the best in agri- and rural finance Sources of Funding and Support System for Value Chain Finance

19. Lessons from leadingcountries Analyze the value chains, strategies, business models, key players and trends among the global leaders in each commodity group with particular attention to emerging markets. For each, identify the extent to which these countries, and the key private sector players, have been successful in adding value to the basic commodities, and the strategies deployed. Provide comparisons in production, productivity, exports and value chains with leading emerging market exporters and where relevant, other African countries. Derive conclusions for the commodity value chain in the targeted country. Sources of Funding and Support System for Value Chain Finance

20. KfW’s perspective and leading questions

21. A debt investment fund focussing on investments into the agricultural sector for the benefit of the poor. Target: agricultural farms as well as agricultural businesses along the entire agricultural value chain which will be financed indirectly (financial institutions) or directly. A dedicated effort is to support contract farming arrangements A public-private-partnership working on market-oriented terms Bilateral level: Nigeria and Uganda KfW‘ PerspectiveCurrent approaches Regional level: Africa Agriculture and Trade Investment Fund (AATIF) • Interventions still in the planning phase • Focus on agricultural value chains with the potential to reach out to small farmers • Support to the agricultural sector through the cooperation with financial institutions Increase small farmers’ productivity, incomes and capacity to repay Help financial institutions mitigate risks in agri-finance Provide financing for small farmers and value chain companies Sources of Funding and Support System for Value Chain Finance

22. Leading Questions for Agrifinance Interventions Additionality: • Avoid crowding-out of private sector - subsidized lending does not bring additionality • Address specifically smallholder farmers and SMEs – but not exclusively Adress Social and Environmental Issues: • Clear line on Land issues: involve people on the ground • Ensure proper guidelines • Monitor compliance to guidelines Manage Financial risks: • Cooperation with “aggregators” within the value chain • Needed: ability to structure more complicated financing contracts Sources of Funding and Support System for Value Chain Finance

23. Thank you for your attention!

24. Contact information Africa Regional ProgrammesDr. Thomas DuveDirector KfW BankengruppePalmengartenstrasse 5–960325 Frankfurt am Main Fon +49 69 7431-3449Fax +49 69 7431-4723thomas.duve@kfw.de Sources of Funding and Support System for Value Chain Finance

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