Promoting the Development of SMEs in Times of Crisis: Trade facilitation and trade finance

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Esmond Sparks
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1 Promoting the Development of SMEs in Times of Crisis: Trade facilitation and trade finance Hamid Alavi East Asia and Pacific Region, World Bank Regional Policy Forum on Trade Facilitation and SMEs in Times of Crisis May 2009 Beijing, China

2 Why policies dedicated to SMEs? Growth and diversification is about investment and productivity growth of firms. Most firms in most economies are SMEs. Most employment is in SMEs. SMEs often suffer more than large firms from weaknesses in the investment climate: Perceived as higher risk and higher transaction costs for banks. No leverage in relations with public administrations. Harder for them to attract scare skills.

3 What do SMEs from around the world think? Tax rates Macroeconomic uncertainty Regulatory policy uncertainty Competition issues Tax administration Corruption Labor Finance Electricity and water Land Legal system/conflict resolution Business licensing Customs & trade regulations Percentage of firms rating each constraint as major or severe to their growth. Telecom & transportation

4 Crisis and SMEs Financial and economic crisis has affected demand for exports from the Region It has also made financial institutions risk averse in lending for trade finance, and lending for working capital in general Caused shortage of foreign exchange These issues are affecting SMEs disproportionally Indonesia survey Even in normal times, SMEs face difficulties: Access to trade finance Weak balance sheet Lack of useful collateral Insufficient credit information Lack of a track record Administrative barriers High transactions costs, relative to larger firms, imposed by trade processes Access to information on buyers and supply chain intermediaries, etc. Crisis as an opportunity for reforms to promote SMEs

5 Export Chain Exporting activity involves three phase. Pre-Production Production Post-Production Find buyer Manufacture Deliver Reduced transport costs Quality standards and lowering technical barriers Proactive export promotion Market Access Trade Finance and insurance Trade Logistics Improved ports facilities and procedures Efficient and transparent customs procedures Transparent and harmonized regulations Improved communication/information technologies

6 Helping SMEs Access Markets 6 Traditional export development not very effective in creating a sustainable increase in exports and strengthening local technical capacity to support exporters needs Market-driven instruments much more effective One such instrument is matching grants short term results, long term local market development Matching grants as opposed to other instruments Demand-based, private sector pays for part of TA and eventually full market price Temporary instruments aimed to tackles information imperfections and market failures for export services Success conditions Additionality Semi-autonomous, private management Measurable results Focus on export sales as measurable indicator

7 Guiding Principles for MGS The support must deal with a market failure. This can be a lack of knowledge of markets, access to technology, etc. The support should serve as a catalyst to develop local markets and capacity for commercial service providers The support must produce an additional behavior. There is no point providing the intervention if all you are doing is substituting public money for private money. The results must be measurable and measured. The support must represent value for money. Need to be able to defend this support to the Ministry of Finance. Someone has to be accountable. Private sector involvement in the administration and delivery of services is essential. The support must be consistent with strategic direction of the government. 7

8 Helping SMEs Access Markets Firm level export marketing assistance through matching grants Export Promotion Agency fully funded grant facility to cover a portion of marketing expenses in execution of approved export plans EMAF - New exporters - New markets - New products FIRMS Cooperatives & Associations FIRMS FIRMS FIRMS 8

9 An Example: Tunisia Matching Grant (EMAF) Firm level export marketing assistance through matching grants Amount of World Bank lending $10.9 million Exports generated: $418 million Direct jobs created: 4,000 cost per job $2,650 Direct and indirect jobs created: 20,000 cost per job $430 Increased tax receipts to the Government: $39 million 370% return on Government intervention. 9

10 Landscape of Trade Finance ECA/EXIM PRE-PRODUCTION (performance risk) PRE-SHIPMENT POST-SHIPMENT (payment risk) EXPORTER BUYER Credit enhancing Marketing Funds Export promotion LOCAL BANKS - confirming - financing BUYERS BANKS -L/C issuing -Acceptance -L/G issuing 10

11 Landscape of Trade Finance Non-performance risk Non-payment risk Other risks Buyer issues export order, and his bank could issue L/C Exporter obtains working capital financing to fulfill the export order (i.e., produce) From own resources From financial institutions From logistics providers Exporter arranges for logistics and takes the merchandise to the port of exit The product is shipped to the port of entry of buyer who will arrange for pick-up Buyer pays exporter (through their banks)

12 Helping SMEs Access Trade Finance Non-performance risk Non-payment risk Other risks Make quality finance available to SMEs Cover part of their risk of nonperformance Cover non-payment risks

13 How can the World Bank Group Help? IBRD Lending to/through EXIM Preshipment export finance guarantees Capacity building of export credit and guarantee agencies Long term development impact through economic diversification IFC GTFP Guarantee issuing banks $3 billion Mostly LDCs GTLP Funded up to $5 billion Partner with 10+ global or regional banks to channel liquidity to i) the bank s global or regional correspondent trade network, or ii) the bank s client network in a specific sector Up to 270 days.

14 Helping SMEs Access Trade Finance An example from Indonesia MoF EXIMBANK of INDONESIA funding guarantee IBRD funded facility Funding, Guarantees, Insurance COMMERCIAL BANKS Export Credit Customer assignment of receivables PEFG/ECG ECI credit enhancement Pool of Collateral 14

15 Why have facilitation instruments? Port of Entry Rail Transit Multimodal Transfer Road Transit Border Crossing National Transit Clearance Destination checkpoint Trade occurs in physical space and moving goods requires time. Trade logistics costs are as important as tariffs Each day saved is equivalent to 0.5% tariff (Hummels) 7% of value of world trade is cost of administration of trade logistics (UNCTAD) Time becomes even more important in multi-stage production (global supply chain) % of vertical specialization in trade (use of imported inputs for exports) has grown 30% in the past 20 yrs and accts for half of overall trade growth. Willingness to pay to save time: Share of airfreight in US grew from 7% in 65 to 30% in 98 Airfreight 7 times as expensive as ocean shipping. 15

16 Exports to Los Angeles: logistics costs of transport containers $/container Note : Export rate is for 40-foot container. Source: ABD et al.. (2005) 16

17 60 Number of Days to Export/ Import Export 50 Import OECD Avg: Export (10.7) Import (11.4) 0

Efficiency gains from streamlining and simplifying trade processes Imagine if the contents of a ship can be processed in half a day instead of a day Infrastructure capacity effectively doubled Twice

18 Efficiency gains from streamlining and simplifying trade processes Imagine if the contents of a ship can be processed in half a day instead of a day Infrastructure capacity effectively doubled Twice the cargo Twice the # of ships Twice the number of containers Increased harbor duties, excise and revenue Considerably lower cost to traders even more benefits: These efficiencies offer wider attraction to trading partners Efficiency in vessel turnaround attracts new trading, market center, distribution business. 18

19 Trade transaction is a complex process Many documents Many players A typical trade transaction can take as many as 150 different documents to complete Raw material and component supplier Manufacturer/assembler Customs agents/brokers Customs authorities Government authorities- export promotion/approval/stat. Local transport and warehousing companies Container handlers Port and harbor authorities Shippers (sea, air, road, rail, canal, ) Bank and insurance companies Each have own set of paper forms and interactions with other organizations (incl. counterparts in importing countries. 19

20 Pay Taxes/Dues Clear Customs Release Goods Air, Sea, Land International Transport Customs Port Ship s Documents Manifest Bills of Lading Sea/AW Bill Container Plans Foreign Chambers Commerce Overseas Embassies Post/ Courier IMPORT Certificates Of Origin Legal Invoices Informal Processes Invoice Packing List Declaration Delivery Note Licenses Certificates Government Approvals Storage IMPORTER P.O. Contract Terms Delivery Instructions L.O.C. Bank MANUFACTURING/ VALUE ADD DOMESTIC SUPPLY CHAIN Raw Materials Packaging Transport Storage Quotations P.O.s Delivery Notes Con. Notes Invoices Statements Chamber of FinanceCommerce Ministry Pay Payments Remittance Advice MANUFACTURER EXPORTER Government Departments Pay Taxes /Dues Clear Customs Release to Port Customs Port Processes Internal Transport Storage Container Handling Loading Book/Confirm Transport Invoice Packing List Declaration Delivery Note Certificates Of Origin Form A EUR.1 Licenses Certificates Government Approvals Port Informal Processes EXPORT Port Shipping Documents Receive Goods Customs FOREIGN BUYER Bank L.O.C. Packing List Invoice LOC Approval LOC Courier 20

Design Approach It is more than simply applying information technology to trade processes.

Window Reengineer back-offices Simplify trade documents and eliminate duplication SAD

among many Phased approach/demonstration effect Supporting and implementing Steering

21 Design Approach It is more than simply applying information technology to trade processes. It requires a comprehensive approach and commitment at all levels 21 Automate/ Single Window Reengineer back-offices Simplify trade documents and eliminate duplication SAD Streamline and simplify trade transaction processes Codes and standards Customs only one among many Phased approach/demonstration effect Supporting and implementing Steering structure committees and working groups (cross agency) to design components and draw up action plans

22 Different ways to use ICT for TF Systems built around different agencies Ports Customs long term difficulties in technology areas such as flexibility, interoperability, international standards, volume, ongoing support and support costs. Single windows Shipping Agents Traders Customs EDI Server Freight Forwarders Ministry of Commerce A facility providing standardized information and documents with a single body to fulfill requirements for import, export and transit regulations and clearance 22 Customs Brokers Figure B Cargo Handling Port Authority Banks Expedite and simplify information flows between trading community and the government

23 Paperless Trade reduces Time and Increases Efficiency and Security- Examples Port efficiency improvements (from 75 th to 25 th percentile) could reduce transport costs for a country as much as shortening it distance from its trading partners by 9,000 km (IDB 2000) $100 million could be saved each year through the application of ICT (UNCTAD) Mauritius Trade Net has reduced average clearance times of goods from 4 hours to 15 minutes Tunisie Trade Net (TTN) has reduced processing times of trade documents from max of 18 to 7 (3.5 days in cases not requiring technical controls). Time savings in Singapore (STN) translate into 1% of GDP per year. Advanced information sharing in all cases has contributed to security requirements 23

24 Processing of TCE 2-3 D Validation, Amendments, Data Capture of Manifest 2 D Goods discharged from vessel Prior to Trade Facilitation Initiative Shiping Agent reconciles discrepancies regarding cargo unloaded Importer / Broker Payment of prepares customs duty, customs declaration.and storage charges delivers to Customs and port dues Deliver Manifest hardcopy to Customs and STAM 2-4D STAM submits hardcopy report of unloaded cargo discrepancies to ship agent 2-5 D Shipping Agent delivers final manifest to Customs and STAM 0-2 D Confirmation of goods landed byshipping Agent and issue of delivery note 2-3 D 1 D Importer / Broker picks up processed declaration. Goods removed from port area After Trade Facilitation Initiative 1 D 1/4 D 1-2 D 1/2 D Figure C 15 1/4 D mins Goods Arrival Days

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