Pakistan embarks upon Warehouse Receipt Financing plan

Pakistan is among the top producers of cotton, sugarcane and food grains, i.e. wheat, rice and maize. However, significantly large quantities of food grains and even larger percentage of fruits produced goes stale before reaching the market. This on one hand deprives growers of their rightful return and on the other hand does not allow the country to earn foreign exchange, needed most desperately for the economic growth.

In an attempt to help the farmers boost production and yield, State Bank of Pakistan (SBP) has embarked upon an ambitious lending program for farmers. Now the annual disbursement to farmers is inching close to Rs400 billion (US$ four billion). The endeavor is fully supported by insurance companies operating in the country.

This initiative has helped Pakistan in joining the club of wheat exporting countries. At the close of the current sugarcane crushing season, refined sugar output is likely to exceed 4.7 million tons with an exportable surplus of over half a million tons. The country is also likely to get nearly 13.5 million bales of cotton. Pakistan is already exporting huge quantity of rice, especially ‘Basmati’.

To further facilitate the growers, SBP has embarked upon Warehouse Receipt Financing (WRF). In this regard a framework has been prepared and various meetings of the stakeholders have been held. The central bank considers that development of WRF is inevitable for achieving food security, improving return to farmers, and above all saving the output that goes stale before reaching the market. This requires millions of dollars investment for the construction of well organized warehousing infrastructure, imposition of stringent grading standards and ensuring proper collateral management.

In this venture, apart from the central bank and commercial banks (both conventional and Islamic), the other key stakeholders include Securities and Exchange Commission of Pakistan (SECP), federal and provincial governments, Pakistan Mercantile Exchange (PMEX), insurance companies, warehouse operators, collateral managers and farmers’ association. However, it remains a fact that unless modern warehouses are constructed in the country, this dream is not likely to become a reality.

While some of the ambitious planners believe that the entire infrastructure can be created within short span of time, others still have serious reservations, from availability of funds to construction of warehouses. It also requires  building confidence of all the stakeholders, particularly farmers, banks and insurance companies. The most encouraging point is that multilateral lenders have expressed their fullest support for the initiative. Therefore, it is necessary to understand the rationale and the proposed steps to be followed.

To begin with, one must have the correct information about production numbers and storage facilities. Pakistan produces nearly 40 million tons of different cereals annually, out of this wheat alone account for more than 25 million tons. As against this, there exists warehousing capacity of around 5 million tons. Storing grains in ‘technically unsuitable warehouses’ is the single largest reason for substantial quantities going stale or not being suitable for human consumption. As per various conservative estimates the losses to grains are between 15-20 percent and for horticulture (fruit and vegetables) is more than 25 percent. The province wise losses for grains at harvesting and in the supply chain were estimated in a study conducted by University of Faisalabad which elaborates as under:

Grain losses in storage

Province	Aggregate Loss	Threshing	Farm level	Market level	Public Sector	Consumer level
Punjab	13.8%	1.9%	1.5%	7.3%	5.5%	6.5%
Sind	15.7%	1.7%	1.3%	6.9%	6.2%	8.6%
NWFP	14.7%	1.5%	2.7%	3.4%	3.6%	8.5%
Balochistan	15.6%	1.5%	1.7%	4.6%	5.2%	7.1%
Pakistan	15.3%	1.6%	1.5%	7.8%	6.5%	8.0%

Source : Iqrar A. Khan. 2007. Vice-Chancellor, University of Agriculture, Faisalabad

There is potential for loss throughout the grain harvesting and agricultural marketing chains. For example:

• During stripping of maize grain from the cob, known as shelling, losses can occur when mechanical shelling is not followed up by hand-stripping of the grains that are missed. Improper shelling damages the grain and make insect penetration easier.
• For crops other than maize, threshing losses occur as a result of spillage, incomplete removal of the grain or by damage to grain during the threshing.
• Losses also occur after threshing due to poor separation of grain from the chaff during cleaning or winnowing.
• A wet season's paddy harvest may clog the screens and grain will be lost.
• Wind, either natural or from passing vehicles in the case of road drying, can blow grain away. With high moisture content, grain is susceptible to mould, heating, discoloration and a variety of chemical changes.
• Losses in stored grain are determined by the interaction between the grain, the storage environment and a variety of organisms.
• In general, grain is not infested by insects below 17 °C whereas mite infestations can occur between 3 and 30 °C and above 12% moisture content. The metabolic activity of insects and mites causes an increase in both the moisture content and temperature of infested grain.

There might be various reasons like high cost of infrastructure, running expenses of storage facilities, adoption of technical know how. However, the major reason is the involvement of a number of players that include farmers, warehouse operators, federal and provincial governments, regulators, commodity exchange, banks, collateral managers and lack of a common platform. Therefore, to fill the gap, SBP has initiated to make available the common platform for all the stakeholders.

Despite the fact the SBP launched a subsidized financing scheme for construction of warehouses, silos and cold storages for storing agricultural produce couple of years ago, efforts have  remained focused on cold storages. This shows that the cost of financing is not an issue, but the main reason is putting in place a mechanism, from production to consumption to adopt the system.

The central bank wants to involve business community and financial institutions, including Islamic banks to realize the business viability and an opportunity to participate in a profitable business and at the same time contribute to a crucial sector in food security. Establishment of the system will enable the business community to unlock its assets to the investment, thorough Warehouse Receipts that provide the convenience of trade, endorse/exchange, finance and sell in local and international markets. This will also save the huge losses, if controlled can feed 10 million people.  In addition, this will facilitate in addressing the issue of access to finance for the farmers through warehouse receipts.

In line with international best practices like Brazil, USA, South Africa and Bulgaria, a centralized collateral manager can be made responsible for accreditation, inspection and monitoring of warehouses. The central bank intends to start a pilot scheme through one of the renowned international collateral managers  ACE Global Depository involved in this business for a very long time. Reportedly, ACE has established its office in Pakistan and also agreed to bring in its expertise and international storage standards to Pakistan. It has also a global Professional Indemnity Assurance.

Besides Professional Indemnity Assurance, SBP is also facilitating linkages between local insurance companies and collateral management companies to develop insurance products to deal with situations not covered under the Professional Indemnity Assurance. This will provide comfort to the depositor that they are secured from losses in storage. Once the WHR system is expanded, other collateral and warehouse managers will be interested to play an active role in Pakistan. Experts envisage a healthy competition in this area after the idea takes off on a full fledged basis.

Recently, Saeed Ahmad, Deputy Governor SBP chaired a meeting on the formulation of the group. Talking to the representatives of different stakeholders, he said “Adoption of a warehouse receipt financing system would facilitate development of efficient and accessible rural financial system. Development of physical trade and marketing system of commodities would improve performance of the agricultural sector. Financial institutions would find it profitable to lend money for the construction of new warehouses”.

This initiative offers tremendous opportunities to the companies involved in this trade around the globe. These entities can form joint ventures with Pakistani entrepreneurs by involving IFC; mobilize funds globally or by listing the companies at the local stock exchanges. Central bank already has a plan for extending soft-term loans for the construction of warehouses. Those interested in the construction of warehouses can also approach Pakistani banks enjoying a significantly large share in lending to farmers for inputs and developmental work.