16 September 2017

Ethiopia: Everything Must Change - a View of Ecx From Within, Without


George Benson's classic 1977 hit song said it all.

"Everything must change. Nothing stays the same. The young become the old. And mysteries do unfold, cause that's the way of Time. Nothing, and no one, goes unchanged."

Well, there we have it. Change is the only constant. Change will come, unbidden, mysterious, unknown, but it will come, of that we can be sure. Yet change always somehow makes us a bit nervous, a bit uncomfortable, as if something has gone wrong. But that need not be so. If change is inevitable, then let's embrace it, and seek it as a positive force of energy sweeping in with the times. And so it is with the nearly decade-old Ethiopia Commodity Exchange (ECX), still the first and only one of its kind in all of Africa, my beloved ECX. Change. Inevitable. Sparing nothing and no one.

So what has changed? And what are we to make of it?

For the past few years, change has been knocking on the door of ECX. To begin, in nearly ten years from April 2008, three changes of leadership, starting with my own in 2012, then in 2014, then again just days ago, in 2017. That hardly seems dramatic in and of itself, with the average CEO tenure now becoming shorter and shorter, as a global phenomenon. Similarly, the board composition has changed and staff have come and gone. And all of this is more or less to be expected. But more fundamentally, there have been significant changes in the model itself.

So what are these significant changes? How far have they gone?

A few years ago, it was a great joy to see that the project started early on in 2010, to create an online trading capability, was completed and launched in 2015, somewhat behind schedule but timely all the same, heralding ECX's entry into the global trend of electronic exchange platforms. But the intention of transitioning all trading to electronic trading has yet to occur and online trading is still on-site in the ECX premises and for only a single commodity, domestic coffee.

Second, the much needed devolvement of warehouse operations to a third party specialized warehouse operator, envisaged from the very inception of ECX, also began to take shape a few years ago with a newly formed state warehouse enterprise that would work closely with ECX as a separate entity. This could have been a welcome change in solving the continuous headache of inefficient warehouse sampling, grading, handling, storage, and logistics, which has long been the Achilles heel of ECX and an operation outside of the core competence of any exchange.

But it seems that implementation problems led to retraction of this effort and a re-integration of warehouse operations back into the hands of ECX. The reality is that both of these initiatives in the past 3 years have led to little actual change on the ground.

Beyond these above changes, it can be said that 2017 has seen a significant overhaul of the ECX model. It has been a period of stakeholder consultations at high level, involving primarily the coffee sector, in the early part of the year, and the recent enactment of the Amendment to the 2007 ECX proclamation, just one month ago in early August.

The 2017 Amendment contains, to my understanding, five major substantive changes. The first is the idea that commodities that are traded in ECX can remain on track within the confines of what is known as a "bonded yard," defined as a fenced secured yard for trucks to be parked until the consignment is sold on truck and picked up by the buyer. The second is the explicit recognition of the possible trading of futures and forward contracts in agricultural commodities. The third is that ECX may trade in other contracts outside agricultural commodities. The fourth is the possibility that non-members may trade on their own. And finally, the ECX may establish an identity-preserved trading system that ensures traceability of the commodity and the owner/supplier.

Taken together, these five amendments signal a massive change to the ECX of the past, with potential for great improvement and a new era of vibrancy and growth for the ECX of the future, with some cause for concern in one case. To begin, the introduction of forward contracts (defined as simple contracts for delivery of commodity at any future date agreed between seller and buyer) and the more complex and risky futures contracts (defined as contracts for either delivery or cash settlement at pre-specified future dates set by the exchange with a margin deposit requirement that is adjusted or "marked-to-market" daily) is an exciting prospect.

It enables the long-envisaged possibility of hedging market positions and price risk management, a core objective in establishing any exchange. This is a long overdue initiative and, to my mind, a timely one, although it will require careful design and stakeholder sensitization. Second, the notion that ECX will consider going beyond agricultural commodities to possible trading of bonds, shares, or non-agricultural commodities, such as minerals and metals, is another exciting proposition that can have important benefits to other sectors where transparency, efficiency, and integrity of contract enforcement and payment systems are greatly needed.

Third, the opening of trading to non-members can be a means of amplifying the reach of the market and may, alongside the introduction of electronic trading, reduce the need for exclusive access through members only. At the same time, it is better to open up membership, making it cheaper and more accessible but still rule-bound, rather than introducing the idea of a "non-member" who trades, which would appear to imply the existence of actors that engage without fully undertaking to comply with the rules of the trading system and who may thus overburden the regulatory system.

Now the concerns.

On the surface, the creation of an identity-preserved traceability trading system appears to be a daunting prospect for a commodity exchange that was established on the premise of precisely the opposite: non-identity preserved and highly liquid trading of relatively homogenous and interchangeable commodities. However, it is also a sign of the changing times that consumers and markets increasingly demand and place premium value on the move away from commodification of goods and toward the unique or distinctive tracing back of the product to its origin and the producer. This is particularly so for specialty coffee, which could now arguably have a bigger share of Ethiopian coffee and not the 3pc we estimated it to be when we started out in 2008.

Even then, we sought to address this market trend with the Direct Specialty Trade (DST) online auction system linking coffee farmers with international coffee buyers in a dollar-denominated trading system that was introduced in 2009 but that failed to illicit sustained interest by international buyers for quite a few operational reasons.

In the same vein, we launched a project a year later to geo-certify bags of coffee with a radio frequency ID (RFID) tag on each bag for traceability to the bag and geographic origin though not to the original producer. This too proved to be operationally difficult to scale up, costly, and did not quite meet the needs of the market. Nonetheless, despite operational challenges, addressing the market need for traceability remains an important objective and an interesting problem to solve, though with likely limited scope beyond a niche market.

The major concern, however, is the notion of implementing a system of selling on truck with bonded yards for trucks to be parked while trading is happening. Viewed from the outside, this is an idea that seems to be born out of the need to somehow address the current concerns and inefficiencies in the ECX warehouse receipting system.

In my view, this notion risks injecting even more inefficiency and risk, with trucks that cannot remain immobile beyond a few days without creating transport market constraints. It hardly resolves the issues around delays and fraud from manual sampling of commodities on truck, as well as grading and weighing of commodity.

The solution to the ECX warehouse operations problem is not to get into on-truck transactions. But rather to open up the warehouse operation to highly specialized global and domestic warehouse operators-investors who would invest in global standard modern warehouse infrastructure including mechanized handling equipment; automated sampling off-truck; high-speed technical quality assessment; and digitized inventory tracking technology including laser beam stock measurement to ensure speed and accuracy of daily stock positions down to the kilogram, avoiding the current leakages of stock.

These modern technology-based inventory management systems are not remote and inaccessible. They are readily available and operable at low cost with high volume by private companies, even on the African continent as well as elsewhere not too far away, and can be attracted with the right investment incentives. Like all global exchanges, ECX is best served by getting out of the warehouse operations business altogether and focusing its efforts on what it does superbly. That is to operate an airtight trading system seamlessly integrated with its central depository, payments clearing and settlement, market data and continuously refining and expanding these systems.

Change. Nothing stays the same. ECX is a dynamic, living, organization. It has legacy, culture, and roots, but like anything living, it must grow, adapt, and move with the times. The resilience of its system that, day in and day out, continues to deliver a zero-default market that trades on an orderly and standardized basis, settles hundreds of millions of birr daily and transmits price data within seconds to all. It impacts the livelihoods of millions of farmers, processors, and exporters, is testament to the strength of its core, that preserves ECX as a jewel in Ethiopia's crown, and as Africa's shining model of a modern technology-powered spot market that other countries still aspire to emulate.

But times are changing, cause that's the way of Time.

ECX today has new opportunities it has yet to embrace. One such opportunity is the mobile revolution that is sweeping across Ethiopia, a very different picture today than twelve years ago when ECX was initially designed, and there was less than 6pc mobile penetration. Today, with mobile penetration of above 50pc of the Ethiopian population, and smart phones now reaching 9 to 15 million users, online trading should not be on computer or, rather, computers should not be conceived as on top of a table in a room in a building, but anywhere and everywhere in the hands of tens of millions of mobile users.

Linked to this is the dramatic rise of mobile payment systems in Ethiopia that should be adapted and harnessed into the ECX clearing and settlement system that was a fantastic solution to the problems of yesterday, not of today. Finally, perhaps the biggest opportunity of all is to embrace the idea that it may now be time to devolve ECX ownership and inject new vision, new approaches, and new energy.

This could be through partial or total ownership by private owners, such as key investors, the public at large, its own employees or a combination of the above, just as it was originally conceived after an initial proof of concept period of some five years.

Everything must change. Nothing stays the same. Maybe the real challenge is that ECX must change more, not less.

Eleni Z. Gabre-Madhin (Phd), Founder and Former Chief Executive Officer of Ecx, and Currently Chief Happiness Officer of Bluemoon, Ethiopia's First Youth Agribusiness Incubator and Seed Investor


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