Understanding $1,5bn FinComEco deal

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Hirander Misra (left) deputy chairman and Rt. Honourable Mark Simmonds chairman of Fin-ComEco

Opportunities abound for various stakeholders

Chris Chenga
Just before the Easter holidays, the Office of the President and Cabinet sent out a press release to announce a $1,5 billion agriculture focused deal with a British based entity called the Financial and Commodities Ecosystem (FinComEco).

While details of the agreement portray very broad expectations between the two counter-parties, there is room for inquiry into the relevance, prag-matism, and potential stakeholder impact of the deal.

Amongst other contemporary deals of President Mnangagwa’s new administration, there is particular intrigue in this one as it is the first of such magnitude to openly involve a British affiliate, though FinComEco is domiciled in Mauri-tius.

Leading FinComEco’s management team is Retired Honourable Mark Simmonds, who was until very recently the Foreign & Commonwealth office Minister in the UK.

The Financial and Commodities Ecosystem (FinComEco) is proposing to facilitate a commodity exchange in Zimbabwe. The company hopes that the commodity exchange will create value for diverse stakeholders in agriculture commodities, who can benefit from a centralized trading mar-ket of commodities.

Though recent trends in Zimbabwe indicate upward output volumes for commodities such as grains, the broad under-performance of cotton, nuts, soy, wheat, citrus, meat, milk and other commodity output volumes show a market glut that requires an overdue resolution.

The low commodity output in agriculture has been the cause of the three main macro-economic ailments in Zimbabwe; raw material shortages for industry, price sensitivity in the typical consumer basket of goods, and unsustainable import dependence.

At a micro-economic level, low commodity out-puts tell a story of lost potential of incomes on direct farming households which make up over 70 percent of the nation’s population, and similarly, loss in potential employment in affected down-stream processing activity that represent a significant share of industry.

Indeed then, a commodity focused proposition such as the FinComEco deal is very relevant to the country at the moment.

Whether or not the FinComEco deal is pragmatic it will largely be determined by the receptiveness of local stakeholders to actively support a commodities ecosystem. FinComEco’s core com-petence is to create an overarching structure for a vibrant trading market.

The MoU with the Government of Zimbabwe does not go beyond that commitment.

Trading markets have progressively become technology driven over time. Investors are enticed by the ability of technology to enable execution, monitoring, and evaluation of investments in real time with up to date, reliable information.

FinComEco is offering to invest in this technology infrastructure to create a commodity exchange here. They hope to stimulate the sector by $1,5 billion over the next five years in direct technology infrastructure development, and the capacitation of various stakeholders on which the commodity exchange would be anchored around; stake-holders such as farmers, farming equipment service providers, agro-processors, agro-insurance providers, and other entities with the agriculture value chain to enhance confidence to a com-modity exchange.

The man behind FinComEco’s technology infrastructure is Hirander Misra, also the co-founder and CEO at Global Markets Exchange Group International.

Misra’s focus is to deliver high speed trading solutions and infrastructure on which markets function on. Think of the recently automated Zimbabwe Stock Exchange, or newly licensed alternative trading platforms.

They are all driven by technology which enables execution, monitoring, and evaluation by traders. Misra’s expertise is to create appropriate strategic master plans for exchanges, clearing houses, depositories, registries, and warehouse receipt platforms.

These are all potential participants in a commodity exchange as proposed by FinComEco. FinComEco has already ventured into the region.

Zimbabwe is its next frontier, supposedly being the company’s preferred central hub for its sub-Saharan strategy.

In Malawi, FinComEco has partnered with stakeholders in the Agricultural Commodity Exchange for Africa (ACE).

The same week upon signing the MoU with the Government of Zimbabwe, FinComEco completed a joint venture with commodity trader, Block Commodities Limited, which will provide $10 million in token loans to approximately 50 000 smallholder farmers to purchase fertilizer in Uganda, Malawi, Zambia, and Republic of Congo.

The farmers will use a block chain financial platform with registered users to clear their transactions with input retailers.

Indeed the technology propo-sition of a commodity exchange may sound abstract, but with real verifiable cases on the ground perhaps FinComEco commands some attention.

Again, whether or not their proposition to the Zimbabwean commodity ecosystem is pragmatic will be determined by the uptake and volunteering of stakeholders. FinComEco’s man on the ground in Zimbabwe, Ben Ngombe, is fairly confident of stakeholder buy-in and says that appetite is already evident in his interactions.

Agro-processors in the local food industry have difficulty procuring locally sourced commodities to make their ingredients.

Farmers, both small scale and large scale, have difficulty finding reliable markets that not only offer competitive prices but are liquid to pay on delivery.

These are market failures that are conceivably solved by stakeholders entering a functional trading market.

Ngombe says structuring markets sometimes takes a deliberate effort and Zimbabwe has the organisational capacity, both governmental and private to do so.

The success of Government’s Command Agriculture, surpassing a million metric tons of maize, gives confidence that volumes can be boosted when farmers are coordinated towards a visible value chain.

This was a persuading factor for FinComEco to sign a joint venture MoU with the Government and is initially pursuing grains produced under the program.

Organisations such as the Zimbabwe Farmers’ Union have the capacity to align volume production of other commodities. Traders on any market look for diversity, thus, there is an imperative for boosting more than just grains.

As entities such as ZFU assimilate groups of farmers committed to growing diverse commodities, there is a greater appeal for the commodity exchange.

Ngombe is excited by the proactive intellectual effort already existent in points along the agriculture value chain. This only enhances the credibility of FinComEco’s commodity exchange.

For instance, a number of entrepreneurs have already piloted — some more successful than others — technology platforms for various farmer needs. Software developers have created inter-phases for price discovery telling farmers the current price of commodities at market.

Some entrepreneurs have organised warehouse ticketing systems whereby small holder farmers can account for volume deliveries in orderly communally shared storage that aggregates costs amongst them.

Even large corporates such as First Mutual and Old Mutual, both launching weather insurance products in the last year, are pursuing innovations that bolster a credible commodity exchange.

All these innovations are part of risk mitigation variables that weigh heavily into traders’ confidence in a commodity exchange. Even though FinComEco has its own patents, it also has a trace-ably partnership model across the region. The intellectual property and deliberate structural planning already in Zimbabwe present FinComEco with a less laborious penetration strategy.

The stakeholders within the commodities ecosystem simply require to be incorporated into a bigger strategic plan as envisioned by FinComEco, and where need be, capacitated by FinComEco to put together a commodity exchange.

Perhaps then, there is potentially huge impact on agricultural commodity stakeholders if this deal is successful.

Comment — Will stakeholders buy in?

There are numerous commodity exchanges around the world, but many are still in developed economies with mature regulatory and technology infrastructure.

The largest is the Chicago Mercantile Exchange where trading is conducted in two methods; an open outcry format and the CME Globex electronic trading platform.

Perhaps it is time to try to reach such heights, but we must learn and see what we can leverage to emulate such success.

What successful commodity exchanges have revealed over time is that markets settle on competi-tive equilibrium pricing points, and ensure that demand and supply sustain one another.

This is exactly what is lacking in Zimbabwe’s commodity ecosystem which retains a traditional format of Mbare musika and other informal quarters. Maybe this is an old fashioned means of market.

In terms of pricing, farmers are disadvantaged and left vulnerable to middlemen “makoronyera” that exploit geography and poor price discovery to exploit farmers.

This arbitrage that exploits market inefficiencies has to be weighed into the price sensitivity of commodities. A commodity exchange enables true interaction of demand and supply and creates a much more competitive pricing regime of commodities for our economy.

With the promise of more competitive market prices, there is greater incentive to invest in risk mitigation in production. This has been lacking in Zimbabwe as uncertainty to commodity off take hinder such investment.

Competitive pricing helps spread farmer interest amongst many commodities averting the typical situation where farmers tend to grow the same crop because the prior season the market price was high.

This habit has been cause for many local sourced shortages for commodities by agro-processors meaning that consumers face higher prices due to imports or exhaustive search for ingredients in processing. .

Since dollarisation, banking interest rates in Zimbabwe have not made commercial agricultural sense. At 13 percent annually very few commodities are viable at such cost of capital simply due to the cost of production and seasonal time frame of crops. A commodity exchange creates multiple financing alternatives that are competitively pushing the cost of capital downwards.

Many Zimbabweans today perceive deals from a perspective of who is involved, unfortunately downplaying the daring innovative nature of relatively new entrants into respective ventures. We are no longer in a world of track record. Great things can happen in an openly competitive global economy.

FinComEco seems to have the spirit needed, to dare to leap forward and create a commodity exchange not yet present on the continent. It may not even be as daring as the intellectual and organizational capacity already exists in Zimbabwe, though unrealized.

Just as much as we emphasise the counter-party in governmental deals, it is important to under-stand that some of these deals can only work with stakeholder buy in. There is no direct investment outside of the technology infrastructure of a commodity exchange by FinComEco in this deal.

FinComEco is entering the country with a blank check to be signed for any entity that adds value to the creation of a vibrant commodity market.

The FinComEco deal is a test of Government’s competence to ensure erudite regulation. There is no debt being taken on, or any obligations that are incumbent on the taxpayer this is strictly a deal that demands the regulatory enforcement of government in managing a commodity exchange that incorporates many stakeholders in what is a key sector to the economy.

It is a unique deal, and we will be watching the new administration’s regulatory competence over the tenure of this project. Let’s give this deal a chance.

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