How Trade Finance Boosts Access to Credit for Smaller Businesses and Food Security
Most of the world’s commerce depends on trade finance. However, the global trade finance gap surged to an estimated $2.5 trillion in 2022, widened by the pandemic and ongoing economic and geopolitical uncertainty. Narrowing this gap can have a positive impact on two pressing challenges facing the region: limited access to finance for SMEs and mounting food insecurity.
The irruption of new players in the global commodities trade, greater consolidation of the multinationals, and the effects of climate change are forcing agricultural producers in Latin America and the Caribbean to rethink their strategies for minimizing risks and maximizing results on a sustainable basis.
Realities and opportunities
Although the research and development (R&D) investments of the “Big Four” (Bayer-Monsanto, ChemChina-Syngenta, Dow-Dupont, and BASF) achieved scientific advances that transformed global agriculture, expanded the agricultural frontier, and increased yields, producers face a dependence on technology and prices that is difficult to mitigate. Although in grains, companies like China’s COFCO or Japan’s Marubeni challenge the power of the ABCD (ADM, Bunge, Cargill, and Dreyfus), and demonstrate the strategic importance of ensuring the supply of commodities for some countries. In this fight, it is likely that corporate acquisitions will continue, or that new commodities platforms will be developed, creating opportunities for groups of producers, cooperatives, or business associations. Finally, the effects of climate change (rains, droughts, frosts, floods, cyclones, reduced aquifer flows, and new diseases) are affecting the producers’ profits, particularly in Central America where the narrow strip of land between two oceans makes climatic distortions even worse.
Various ways to partner
It is an historic reality that agricultural producers take the greatest risks but capture the smallest piece of the pie because of their fragmentation, difficulties in accessing financing, and minimum added value.
However, producer partners in cooperatives that adapted to the dynamics of the market, through internal transformations (including advances in the management of corporate governance), were able not only to improve their incomes, but also to become part of a sustainable business, like Copersucar in Brazil, Conaprole in Uruguay, ACA in Argentina, FNC in Colombia, Colonias Unidas in Paraguay, or Dos Pinos in Costa Rica.
In the case of independent larger-scale producers, although they will be able to maintain a certain individualistic profile internally to obtain efficiency and productivity, improving the external profitability is a must. They could take their inspiration from the spirit of cooperatives to create partnerships leveraging their combined volume (with increasing strategic value) and obtaining better conditions, or even process it for greater added value. For example, in Argentina, the 30 partnered producers of Bio4 transform their own and third-party corn to produce ethanol, and the “L” Group partners to sell milk. Similarly, in Mexico, the partnered producers of Proaoass and Gradesa export bread wheat or durum wheat.
Although the greatest challenge for farmers under this model was to remain united, and in some cases to delegate the management of the new business to third-party professionals, they were also focused on obtaining better economic results, and also to develop a platform to start new businesses and obtain market intelligence.
It is likely that differences in results among producers of a similar scale are due to: (1) more collective than individual actions; (2) a more business-like profile for sustainable production; and (3) the management of individuals or teams that applied the best technology packages.
Considering that quasi-state companies, and sovereign funds from Asia-Pacific and Middle East countries are seeking alternatives to ensure the food supply, soon it would not be utopic to think that networks of partnered producers or cooperatives may develop strategic alliances to have their own ports, freezers, or powdered milk plants. Moreover, since these investments require long-term financing, it would not be unrealistic to think that development banking will be financing these projects.
As Seneca said: “It is not because things are difficult that we do not dare, it is because we do not dare that things are difficult.”
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Hydropower presents many advantages as a source of energy, even though it is often complex from the environmental and social perspective. It is based on relatively simple and robust technology, easy to adapt to different conditions. Hydropower projects have a long-term life span, often benefiting several generations. Due to its long operational life and low operation and maintenance cost, hydropower generation continues to be highly competitive.
Experiences around the world provide ample evidence that proactively addressing the potential impacts of projects early in the pre-feasibility phase is a sound investment decision by developers and contractors alike. The anticipation of potential risks and the identification of opportunities to benefit communities and ecosystems beyond the mitigation of impacts can significantly reduce implementation and operation and maintenance costs.
A recent study by Harvard University on the cost of social conflicts in the extractive industry shows that companies usually do not understand and capture the full range of costs of conflicts with local communities. Costs arising from lost productivity due to temporary shutdowns or delays can escalate to millions of dollars.
This is not different from what takes place with large infrastructure projects such as hydropower. Responsible development can benefit companies in at least four dimensions:
1. Social acceptance
Projects that are developed considering the concerns and expectations of communities and that obtain a “social license to operate” are less prone to face social unrests, protests, or labor related challenges, such as strikes, invasions and vandalism to job sites and equipment. This, in turn, translates into lower costs and opportunities to build win-win alternatives in which both the private sector and communities benefit from the implementation of projects.
2. Reduction of administrative and legal processes
Adequate treatment of social and environmental issues significantly reduces administrative and judicial processes that often hinder the implementation of projects and account for significant cost increases. Disputes over compensation, land expropriation, involuntary resettlement, or general mitigation of social impacts can drag on for years, generating direct costs as well as reputational impacts to companies and projects.
3. Financing alternatives
Adequate identification of management of environmental and social risks can be directly linked to a wider range of alternatives, incentives, and better terms for financing projects. This can bring substantial upsides, like lower cost of capital to support the implementation of hydropower projects.
4. Reputational gains
Positive image and corporate credibility resulting from responsible implementation of a project goes far beyond regional or sector specific benefits. Companies that are recognized as sustainability leaders are able to attract and retain talent, establish long term partnerships with privates, communities and NGOs, and expand involvement in different sectors, amongst others.
The current scenario with increasing pressure for water, energy and food supplies, and the uncertainties associated with climate change, make the tangible benefits of hydropower greater than ever before. This represents challenges as well as opportunities for the development of sustainable hydropower projects.
Accessing the full range of benefits that can be derived from hydropower requires responsible development of projects. At IDB Invest (formerly known as Inter-American Investment Corporation) we are supporting the implementation of hydropower projects such as Chaglla in Peru and Reventazon in Costa Rica that have been listed in a recent study as examples of best international practices. We will continue to partner with institutions and support projects that provide lessons and contribute to the sustainable development of countries in Latin America.
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Three best practices for energy companies investing in women
Three years ago, Marie-José Nadeau took the helm as the first woman to chair the World Energy Congress in its 90-year-history. She cautioned that the energy business was at a critical stage, suffering from underperformance and facing disruptive change. In her view, the industry would not have the ability to innovate and tackle these challenges without gender diversity.
At the time, only 4% of executive board members at the top 100 utilities companies were women. Today, this number has inched up by only 1%, according to EY’s 2016 Women in Power and Utilities Index. At this rate, it would take the power industry four decades to reach 30% of women participation in boards.
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At the employee level, a handful of energy companies in Latin America and the Caribbean are starting to invest in recruiting and training female personnel in non-traditional roles, for example, installing solar panels in remote areas and changing LED public lighting in cities.
As renewable energy scales up across the region, technical jobs in solar and wind will be in high demand. Energy companies will have to widen their talent pool to meet this need. Here are three ways energy companies are already investing in opportunities that benefit men and women:
1. Investing in gender certifications
Gender certifications today are what LEED certifications were a decade ago —a third-party seal of approval for sustainability— and some companies in Latin America are already investing in them. Based in Switzerland, global certifier EDGE (Economic Dividends for Gender Equality) is increasing its presence in Latin America and the Caribbean. Another option is seeking certification at the country level. These type of gender certifications allows companies to map and benchmark their efforts to create, support and advance gender equality throughout the workplace.
In Mexico, this was the route that an energy service company took to start transforming its corporate culture. Based in Monterrey, Óptima Energía works with cities to replace incandescent street lights with energy-efficient LED street lamps. Two years ago, Óptima Energía embarked on a gender certification program through the Mexican Standards for Labor Equality and Non-Discrimination. Investing in a gender certification is just one of many steps this company is taking to ensure an equitable and inclusive workplace that attracts the best employees.
2. Partnering with technical universities to train new talent
The solar industry is growing exponentially in Latin America and the Caribbean, and demand for experienced solar technicians is outstripping supply of qualified people. The same is true for the wind sector. With nearly two million people employed in renewable energy jobs, the need for a steady pipeline of qualified talent is opening doors for women.
In the last five years, Uruguay has become a powerhouse wind producer, steadily moving away from relying on fossil fuels and hydropower. Solar is now ramping up. In 2015, the energy companies Technova and Sky Solar started installing solar panels in Paysandú, a small city in Western Uruguay on the Argentinian border. The companies wanted to hire locally, and partnered with Universidad del Trabajo (UTU) and Instituto Nacional de Empleos y Formación Profesional (INEFOP) to train local personnel in the assembly of solar photovoltaic projects. They set a target of 40% female participation in their programs and met their goal.
3. Recruiting women in STEM fields
In Latin America, 45% of scientific researchers are women, surpassing even the global average; yet, women are vastly under-represented in science, technology, engineering and mathematics (STEM) fields. Cultural and socioeconomic barriers often lead young women to drop out of school to meet traditional obligations like care giving.
In Panama, Grupo Ecos invested in an internship program targeting female students on STEM and finance tracks for the Divisa Solar project, the first utility-scale solar park in the country. Financed by IDB Invest (formerly known as Inter-American Investment Corporation) and the Canadian Climate Fund for the Private Sector in the Americas (C2F), Divisa Solar is changing the conversation around traditional gender roles while benefitting local women professionals.
Empowering women makes business sense
The evidence is clear —greater gender diversity drives business success. As the renewable energy boom in Latin America leaps ahead, investing in opportunities for women professionals will be critical for energy companies to stay ahead of the curve. Alison Kay, EY global vice-chair of industry, put it in these terms: “In these times of disruptive change, as the sector undergoes fundamental transformation, diverse leadership teams make good business sense.”
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Local investors jumpstart capital markets and green energy matrix
Last night’s Latin Finance Deal of the Year Awards dinner in New York City highlighted some non-traditional deals. The Best Renewable Energy Financing Award went to Colonia Arias – a Uruguayan wind farm project with a unique structure to both tap local capital markets and mitigate the effects of climate change.
Towards a new generation of public-private partnerships for Infrastructure
Latin America and the Caribbean is crying out for infrastructure improvements. An investment estimated at 5 percent of the region’s GDP—or $250 billion per year—is required to develop projects that are fundamental for economic development, not only by improving highways and bridges, but also by building hospitals and creating mobility solutions for smarter cities. Every other business sees a lack of infrastructure as a serious problem for the region.