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

1. Financing Sustainable Coffee Panos Varangis, Renate Kloeppinger-Todd, Ulrich Hess and Bryan Lewin The World Bank UNCTAD/IISD Sustainability in the Coffee Sector: Exploring Opportunities for International Cooperation---Assessment and Implementation Geneva, Switzerland, December 8-9, 2003

2. 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

3. Objectives of Commercial Credit • To facilitate sustainable access (and at better terms) to investment, pre-harvest and post-harvest financing

4. 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

5. 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

6. 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”)

7. 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

8. Production and Trade Finance for Sustainable Coffee

9. 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

10. 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

11. 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?

12. 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

13. 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?

14. Development Finance for Sustainable Coffee

15. 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

16. 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

17. 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