On May 3, 2013, the Global Financial Markets Group (Wendy J. Teleki) hosted an event with senior staff from across the World Bank, presenting the final outcomes of the SMEs & Value Chains Committee and engaging in frank and nuanced discussions with attendees about next steps.Eva Csaky opened with an overview of the complex relationship between SMEs, value chains (VCs), and job creation. Trade has been exponentially growing since the 1980s, but close to 80% of all global trade is being channeled through global value chains. These value chains, she shared, are increasingly active in emerging markets – and not simply to source raw materials.The committee concluded that for IFC’s efforts to be successful, we need to understand the nuance between country and sector variables in our selection of projects, since the dynamics of global value chains vary significantly between these two factors. Careful partner selection is key – if we partner well, we can achieve significant reach and impact. SMEs in the value chain have difficulty engaging with transnational corporations, which is an area that IFC partnership can add significant additionality. The 200 largest transnational corporations are associated with half of all global economic activity. Furthermore, of the 100 top global economic players, 48 are countries, while 52 are corporations.There are a number of forces working both for and against SME inclusion in global value chains. For example, stringent agricultural specification requirements (like the color of produce) often lead to major quantities of production getting refused by buyers. To meet such requirements, SMEs need to invest in greater capacity and improved technology. Companies are increasingly facing reputational and operational risk, as evidenced by the recent tragic events in Bangladesh. IFC can positively impact this space by working with the entire ecosystem – in addition to financial assistance, working with corporations on the enabling environment, with intermediaries and aggregators, partners.GTSF & GWFP Leading the WayAccording to Susan Starnes and the SMEs and Value Chains committee, we have the capacity to address each challenge in house, at all stages of the value chain; we just need to make focus. Two examples of successful engagement from Trade & Supply Chain (TSC) stand out: the Global Trade Supplier Finance Program (GTSF) and the Global Warehouse Finance Program (GWFP).Emerging market SMEs have limited access to finance and those with access struggle because they are paying local rates (usually over 15%), do not have much working capital, and have no knowledge of reverse factoring. Global buyers, on the other hand, have decent risk ratings and lower interest rates, and are faced with the challenge of finding a supplier that will provide goods consistently. IFC’s solution with GTSF is to take the buyer’s payment risk, buying the receivables from the suppliers. The buyer then pays receivable to IFC on the due date, with a lower interest rate. Prices factoring is based on buyer’s risk, getting low-cost financing to the SME supplier view IFC. The program has achieved tremendous success thus far: in the last year alone, GTSF supplied more than $900m to suppliers in Mexico, Indonesia, Vietnam, India and China. They are looking at Africa next, and for partnerships with supply chain payment logistics companies. GWFP partners with banks in a region to provide commodity-backed financing to farmers, so they can sell crops at an appropriate time (and do not have to pay as soon as product leaves the ground). “We can be more powerful when we innovate how we work together, not what we do – what we do is already very, very powerful.” Susan K. StarnesThe SMEs and Value Chains Committee believes that focusing on an integrated, focused approach utilizing all capabilities across the World Bank Group at each stage of the value chain is a way to achieve this, and determined these 6 steps:
- Short list value chains for IFC engagement (country and global VCs as entry points)
- Apply filters and determine sequencing
- Identify pain points along the value chain: as goods move “from farm to fork”, who are the players, where is their growth delayed/blocked, what are the daily struggles faced by the farmer, trader, and prioritize these points against IFC strategic priorities.
- Match IFC products and services to the pain points
- Assemble the right people with the right execution plan, with deliverables and follow-up
- Use the pain point map to drive innovation for future solutions and map progress – integrated with the World Bank
In order to achieve these, the Committee proffered these approaches:
- Pick a few pain points, value chains and countries
- Focus on access to finance and access to markets
- Make sure solutions are scalable
- Be selective with partners, choosing the ones that care about SMEs in their value chains
- Marry expertise to what we can solve, making sure we have it in house or we can get it
- Speak the language of our partners: we care about SMEs, but also have to understand their pain points.
Georgina Baker (Director, Trade & Supply Chain), Usha Rao-Monari (Director, Sustainable Business Advisory), Jim Emery (Head, Manufacturing, Agriculture and Services), and Frank Sader (Head, Competitive Industries Unit in FPD) continued the discussion on the topic, sharing honest open opinions about departmental objectives and next steps. Georgina agreed with the imperative to leverage joint capabilities across TSC, SBA, and MAS to provide alternatives to the challenges these SMEs face, particularly when it comes to standards that are too strong for issues like the color of produce, and not strong enough / well-enforced when it comes to production company building standards.While TSC facilitates access to markets through finance, shared Usha, SBA is trying to create access to markets for SMEs by creation a “loop” – SMEs on one end, aggregator on the other end. The aggregator can play a vital facilitator role, similar to the “offtaker” in infrastructure, getting the chain to work, improve, and strengthen.In Jim’s opinion, IFC is not yet at the stage where we are organized enough to engage in the holistic, cross-silo approach at every stage of the value chain. As an institution, we are reluctant to engage on big issues, like labor standards and child labor. As we start to explore the more systemic issues for VCs, IFC and the World Bank need to work more closely.Frank shared that they are talking about the same issues – making more sense of the “World Bank Group machine”, to be more practical and focused. Their program is a trust fund program, and one of their first criteria is evaluation criteria, asking how much the project opens up opportunities on the IFC side – and they expect those collaborate conversations to happen early on.Just Do It When asked about priorities for country and sector engagement, a common theme emerged – just do it. TSC and MAS do everything jointly, and look for areas where they can gain traction. From Usha’s perspective, the way to get initiatives started at IFC is to just get it going: see where IFC can help, start a project, and if it works – replicate it. According to Jim, opportunities exist down-market for VC creation in areas like the chemicals and automotive industries that are complex, largely decentralized, where policy is a priority and we are already involved in the sector, can bring expertise, have connections to major firms and a stake. In the future, Frank shared, Africa will be a significant priority, and his team is looking into light manufacturing and agri-products. His advice? Pick a country, see where the opportunity is, and go for it.
