innovative approaches for oil palm smallholder finance in ... · • ispo certification •...
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InnovativeApproachesforOilPalmSmallholderFinanceinMalaysiaandIndonesia
EdoardoCavallo
October25th,2017
• StatusQuo
• CurrentChallengesinAccesstoFinanceforSmallholders
• CertificationasConditionforAccesstoFinance
• Long-TermFinanceandReplanting
• CaseStudies–PlantationCompanies
• CaseStudies–FinancialSector
• AnIntegratedApproach:6CoreElements
• Conclusions
Agenda
StatusQuo
DifferentsituationsinMalaysiaandIndonesia:.
0
2
4
6
8
1970
19
72
1974
1976
19
78
1980
19
82
1984
19
86
1988
19
90
1992
19
94
1996
19
98
2000
20
02
2004
20
06
2008
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10
2012
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14
2016
ARE
A(H
A)
MILLIONEN
Smallholder Government Private
41%
• Palm oil production is expected to rise in the comingdecades• Increasingworldpopulation• Increasinglivingstandardspercapita
• Smallholderfarmers(<2haofland)makeupalargeshareoftheproductioninIndonesiaandMalaysia
PalmOilExpansion:Indonesia
Malaysia Indonesia
• Largeinvolvementofthepublicsector• Financialsectorfocusesonlargeplantationcompanies&less
relianceonsupplychainfinancingschemes• Tomeetproductiontargets,largegovernment-sponsored
schemeshavebeenimplementedtosubsidyreplantingforsmallholdersandimproveyields(e.g.TSSPK)
• Gradualshiftfromstatefundingtomorecommerciallyorientedinvestmentmodels
• Involvementoftheprivatesectorledtoinnovativefinancingschemesbasedonsupplychainrelationships
• Thefinancialsectorstruggleswithfinancingsmallholdersandimplementationchallengesaresignificant
CurrentChallengesinAccesstoFinanceforSmallholders
Government-relatedChallenges:• Landlegalityandlandrightsformalization• Poorlymaintainedinfrastructure• Supportinstrengtheningcooperativesandfarmers’organizations
Financingneedsofsmallholders
• Inputfinancing
• Workingcapitalloans
• Long-termreplantingloans
FinancialSectorChallenges:• Strategyshiftfromlargeplantationcompaniesandmillstomicroenterprises• Highoperationalcostduetoremotelocationresultsinaperceivedunattractive
risk/rewardequation• Lackofqualityfinancialinfoandinconsistentdataleadstosubjective,biased
anduninformedcreditdecisions
OtherChallenges:• Hardrelianceonfixedassetsascollateralfromfinancialsectoras
dictatedbyOJKloan-to-valueregulations• Needforprovisionofguaranteesandinterestsubsidiesforlong-term
finance
CertificationStandardsasConditionforAccesstoFinance
Costs/BenefitsAnalysisSmallholdersfacehighstart-upcoststobecomecertified,includingmembership,training,certificationandmonitoring.Ontheotherhand,paybackperiodfromimprovedyieldsbecomesmuchshorterduetomarketpricepremiumontheirFFB
IncorporationofSustainabilityCriteriaintoInvestmentProcessInvestorsarestartingtoincorporatesustainabilitycriteriaandcertificationaspartoftheirinvestmentloanstoproducers.
SmallholdersrequireFinancialSupportforCertification• Smallholdersmayrequiresupporttoundertakecertificationandavoidexclusionfromsustainablesupplychains• Lenders,insteadofimposingcertificationasarequirementforcredit,couldofferdiscountsinexchangeof
commitmenttocertifiedproduction.ThisiscommoninMalaysiaandslowlygainingtractioninIndonesia• Certificationcostsmayberolledintoreplantingloansastheyonlyrepresentasmallpercentageoftotalloan
Costs(IDR/Ha) Benefits
Registration&Documentation 334k
CPOPricePremiumpertonne
25USD
PlantationMapping 370k
Equipment 2,470k
Training&Compliance 650k
Inspection&Audit 3,060k
Total 6,883k
Long-termFinanceandReplanting
Opportunitytoimprovesmallholders’livelihoodandsustainabilitypracticesFallingyieldsleadtodeforestation(‘slashandburn’).Replantinghigh-qualityseedscoupledwithbetteragronomicpracticesmeanshigheryieldsatexistingland(zerodeforestation)andimprovedfarmers’income
UrgencyInthenext25years(2017-2041)everyyeararound175,000hectaresofoilpalmareestimatedtorequirereplanting
InvestmentopportunityWithanestimatedreplantingcostperHaofUSD4000,theinvestmentopportunityforlong-termfinancingisofUSD700Millionperannum
CaseStudies–PalmOilPlantations
CaseStudies EssentialPoints Challenges
• GoldenAgriResources
• FacilitateA2F• GAP,high-qualityseedsleadtoimprovedyields• ISPOcertification• Subsidizedinterestratesandreplantinggraceperiod• FocusonRiau,GARsupplyshed• FullguaranteefromGARwithlong-termFFBdelivery
commitments
• Reliantoncorporateguaranteeandsubsidizedinterestrate
• Reliantongovernmentalcertificationprogramsforformalizationoflandtitles
• Reachesmainlytoorganized(plasma/ex-plasma)farmersinGAR’ssupplyshed
• MusimMas/IFC
• Mostlyadvisoryfocused• EnsuresGAPandBPM• EnvisagesRSPO,ISPOorISCCcertification• FocusbeyondMusimMassupplychain
• Conceptualapproachandadvisory-based• Lackofstandardizedapproachforscale-
up(long-term)financing
• PTPerkebunanNusantaraXIII
• Government-ownedplantationcompany• GAP,high-qualityinputsandlong-termfinancing
• Reliantoncorporateguaranteeandsubsidizedinterestrate
CaseStudies–FinancialSector
CaseStudies EssentialPoints Challenges
• CommercialBanks(CIMBNiaga,Mandiri,BRIAgro)
• Developmentofad-hocloanproductsforreplanting• Step-upintereststructurewithgovernment-
subsidizedratesduringtheproductiongap
• Stronglyreliantonhardcollateral,plantationbusinesslicenses,corporateguaranteesandgovernmentsupport
• ImpactInvestors(TropicalLandscapesFinanceFacility)
• Public-PrivatePartnership• Investmentsacrosspalmoil,windandsolarenergy
withblendedfinanceprovidedbyBNPandDFIs• Whenprojectsreachacertainsizeandeconomic
returns,loansarepooledtogetherandconvertedinto(green)bondssoldtoDFIsandinstitutionalinvestors
• CurrentlyusedbyGARinRiau
• Largeticketsizeofinvestmentrequiresfarmerstobestructuredinportfolios
• Independentsmallholdersareexcludedastheycannot/donotwanttocommittolong-termFFBdeliverycommitments
• DevelopmentFinanceInstitutions(FMO/IDH–SmallholderFinanceFacility)
• Co-financingsmallholderswithsupplychainactorsincoffee,cocoaandpalmoil
• GAP,high-qualityinputsandlong-termfinancing
• Stillatinceptionphaseforlong-termfinance
SelectionofAppropriateJurisdiction-LandscapeSitingTool
SupplyChainAnalysisandContracting–MappingandDueDiligence
CreditScoringTool–DataCollection,CashFlowForecastingandScoring
PortfolioApproach–StructuredFinance
TechnicalAssistance-SmallholderGraduation
Technology-enabledScale-up–Fintech
andMonitoring
AnIntegratedApproach:6CoreElements
ANINTEGRATED,SCALABLEANDCOST-EFFECTIVEFINANCEANDSUPPORTSCHEMEFORSMALLHOLDERS
ReplantingFinancingScheme
Farmer
Interest&principalpaymentondisbursed
amount(possiblycorporateguarantee)
Investors
KUD
Oilpalmmill
Farmer SmallholdersFarmer Farmer
Replantationcompany
Deliveryofreplantationservices
Farmer
Oilpalmmill
Farmer SmallholdersFarmer Farmer
Long-termloan
Paymentofreplantationservices
FFBsPayment(minusinterest
&othercharges)
FFBsPayment(minusinterest&
othercharges)
Off-taker
CPOPayment
Technicalassistance
MoneyflowsTradeflows`Servicesflows
Legend
Reporting onreplantationactivities
Creditservices:-Farmerselection- Creditscoring- Loanorigination- Loanmonitoringandreporting
BridgingtheInformationGap-UnderstandSmallholdersRiskProfiles
FinancialCashFlowModelCollectionof:palmoilresearchandmarketdata,existingfinancialdatafromsmallholderhouseholds,expertjudgementsandtestdatafromfieldvisits1. Analyzefarmingcashflows,sideincome,farmingexpensesandpersonal
expenses2. Developforecastingmodelstoanalzeimpact3. Loanproductdevelopmentthatfitspalmoiltreeslifecyle,productiongapand
smallholders’spendingbehavior4. Scenarioanalysis5. SelectionofKeyFactorsthatimpactRepaymentCapacity
CreditRiskScoringTool
4categoriesofcreditscoring:• Farmerprofile• Agronomicpractices• Collateral&ownership(Fixedassetsbutalsomovableassets)• Household-levelcashflowrepaymentcapacity
TheoryofChange
FROM TO WHILEALSO
• Highvslowrisksmallholdersnoteasilyidentifiable
• Unattractivetolenders• Prohibitiveloanorigination
costexcludefarmersfromfinance
• Organizedfarmers(coopsorother)arescoredusingcombineddata
• Pre-selectedsmallholdersare
groupedinportfoliosandpresentedtolendersforfinancing
• Supportfarmerswithtoolsandtrainingtoimprovecreditworthinessand‘upgrade’
• Developapipelineof
‘bankable’farmers
• ChallengesforA2F:highoperationalcosts,landtenuresecurityandcollateralrequirements,lackofreliabledata
• Replantingfinancerepresentanopportunitytoimprovesmallholders’livelihoodsandsustainabilitypracticeswhilereducingrisksofdeforestation
• Privatesectorinitiativesbasedonimprovedsupplychainrelationshipsarehelpfultounlocklong-termfinancealthoughlarge-scalesupportfromthegovernmentremainscritical(loanguarantees,interestsubsidies,landrightformalizationandstrengtheningofsmallholderorganizations)
• Supporttofinancialservicesproviderstounderstand,assessandmanagesmallholder-relatedrisks
• Continuedsmallholders’technicalassistanceandgraduation
Conclusions
RecentPublications&ContactDetails
“CurrentpracticesandinnovationsinsmallholderpalmoilfinanceinIndonesiaandMalaysia:Long-termfinancingsolutionstopromotesustainablesupplychains”
• Infobrief:https://www.cifor.org/library/6585/current-practices-and-innovations-in-smallholder-palm-oil-finance-in-indonesia-and-malaysia-long-term-financing-solutions-to-promote-sustainable-supply-chains
• FullResearchPaper:https://www.cifor.org/library/6612/current-practices-and-innovations-in-smallholder-palm-oil-finance-in-indonesia-and-malaysia-long-term-financing-solutions-to-promote-sustainable-supply-chains-2/
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FinancialAccessJakartaJl.KemangtimurRayaNo.66JakartaSelatan12730IndonesiaEdoardoCavalloE:[email protected]:+628119938883/+628128752718