In December 2021, the Governing Council of the Common Fund for Commodities unanimously decided that the CFC shall proceed to establish the Commodity Impact Investment Facility (CIIF) as a new instrument to attract impact investors to finance the projects identified and managed by the CFC. The CFC will participate in CIIF with up to USD 20 million of its own investments and will arrange for the necessary management and administrative services to enable CIIF operations in complementarity with the core activities of the CFC.
The CFC expects that with the formulation of the CIIF, impact investors, both public and private sectors alike, will be able to participate to create bigger impacts globally. The Facility will focus on commodities which can be expected to, or currently make a significant contribution to the livelihoods of the vulnerable people, like smallholders and SMES, in commodity value chains, with a measurable impact in terms of sustainable development goals. Examples of such high-impact commodity sectors include coffee, cocoa, maize, dairy, tropical fruits and nuts, fertilizer, leather etc. where poverty remained entrapped in the commodity dependent developing countries (CDDCs).
The distinct advantage of CFC in managing a fund like this is its track record of last 32 years where CFC implemented projects that many of its peers find too risky to fund. Given the CFC’s culture of rigorous due diligence and highly participatory grassroot engagements and broader network of partnerships, CFC always worked to make the value chain shorter, greener and traceable so that more income and benefits could be imparted to the livelihood of smallholders and SMEs. The ultimate goal is to provide sustainable income and other welfare gains so that the beneficiaries could lift themselves up from the pit of poverty. Defying all odds, the CFC has always remained singularly focused towards stallholders and SMEs in the developing world to alleviate poverty.
This investment strategy has been developed over the years through a process of learning by doing, so that higher impacts could be created while preserving CFC’s capital as best as possible. In order to serve the smallholders and SMEs, who are otherwise a financially deprived segment of the community, CFC always tries to keep its ticket size smaller, which is prohibitively expensive otherwise. Nonetheless, CFC has always been working under a working condition where demand for CFC’s services are always on the rise. Now with the onslaught of COVID-19 pandemic, the demand for CFC services reached a height not anticipated before.
The business model of CFC’s investment always involves strategy of repeat business and culture of building long term trust with the investees. Relationship will typically start with shorter term trade or working capital financing, extending to longer term once track record and experience have been established. One of the major success factors is our strategy in building relationship with entrepreneurs in challenging conditions. CIIF will follow its risk mitigation strategy and will offer short term working capital financing, trade financing to new investees. Investees with a track record can further be considered for longer tenor financing, such as capex.
Since 2014, the CFC invested its capital and established such trust with a number of investees who may now be ready for larger ticket sizes. Due to its internal regulations, the CFC will not take up these opportunities but will open them up to outside impact investors by means of CIIF. Furthermore, the origination process at the CFC has been duly updated and can generate significant numbers of new qualifying deals. Since 2014, the CFC aimed at and achieved a net zero rate of risk adjusted return.
Given CFC’s mission of alleviation of poverty by strengthening the income-generating capacity of commodity producers and mitigating vulnerability to their economic wellbeing, it can invest in projects at any stage in the commodity value chain. Historically, almost half of qualifying projects focus on processing of commodities, with the remaining projects distributed evenly between primary production, market access and financial services.
With CIIF, the CFC is poised to scale up its innovative value chain based approach of adding value to what is being exported from developing countries. It goes without saying that one of the main reasons for developing world’s slow economic growth is that its producers have failed to add value to products before exporting. Whenever CDDCs export processed goods, they create jobs for the youth and women while adding value to local economies as opposed to spending it abroad. If the problem of commodity dependency to be addressed, the developing countries ought to figure out how to add value to what they produce. This is where CIIF and CFC converge to steer ahead the mission of sustainability to ease the trap of commodity dependency in the developing world.