Ghana is the latest African country to start developing a national commodities exchange and will adopt the help of a private commodity exchange promoter, Nairobi-based eleni LLC.
The Ghana Commodities Exchange will start with spot trading and phase in futures and other derivatives contracts within a five-year timeframe, and will primarily trade agricultural commodities, including maize, soybeans, paddy rice, palm oil and groundnuts.
Other key agricultural and non-agricultural commodities will be introduced as the exchange develops.
However, as opposed to the Ethiopia Commodities Exchange (ECX) – a successful government-backed model in Africa – its Ghanaian equivalent will be owned by a group of public and private partners from inception, says Eleni Gabre-Madhin, eleni’s CEO.
“Recent global best practices show that a commodities exchange is best served by a consortium where no single investor has a majority or controlling stake,” she says. “This type of structure is important to the governance of the exchange in that it makes it a lot more transparent and credible.
“A balanced ownership structure is the right way to put up an exchange, and will bring integrity to the market place.”
 |
| Eleni Gabre-Madhin, eleni’s CEO |
The change is an interesting step for Gabre-Madhin, founder and ex-manager of the ECX between 2008 and 2012, who left to start eleni LLC. Some experts say she is due to become the industry leader in designing, building and supporting the complete development of commodity exchanges in frontier markets. In that regard, in January, Morgan Stanley and the World Bank’s International Finance Corporation invested $5 million in eleni.
Investment partners for the local exchange include local financial institutions, such as Databank Agrifund Manager, Ecobank Ghana and UT Bank Ghana. The government of Ghana will also have a minority stake in the exchange.
The aim of the consortium is to complete the investment process by April. The exchange will take around 12 months to develop, plans to launch in early 2015 and is expected to turn a profit by its third year of trading.
As Gabre-Madhin explains, Ghana’s exchange will be designed to be inclusive of all the current actors in the commodity market – from individual farmers and farmer associations to domestic traders, brokers, processors and exporters.
Trading is expected to be driven by proprietary agents – those directly involved in the day-to-day selling or buying commodities – and, possibly to a greater extent, financial players.
“We don’t see the need for any particular policy reforms for this to happen,” says Gabre-Madhin. “However, we will spend considerable effort on training and certification of broking members to ensure that the intermediation happens according to the rules of the exchange.”
Indeed, for eleni, Ghana offers the ideal setting to start a commodities exchange: a sophisticated policy environment; developed private sector; well-functioning legislature and regulatory environment; and overall supportive infrastructure.
“Ghana already has a regulator and a clearing system for the existing stock exchange, so we may merge into that instead of building from scratch,” says Gabre-Madhin. “This wasn’t possible in Ethiopia.”
In the case of Ethiopia, the exchange took 18 months to complete from inception in 2006, six months faster than the allocated two years, despite the fact nearly all infrastructure to support the exchange – including warehouses, clearing houses, quality-control measures and more – needed to be built from scratch.
“We thought that as the exchange [in Ethiopia] started moving, private companies would start to follow the industry’s needs and build these things themselves,” says Gabre-Madhin. “It just wasn’t the case.”
Some 100% government support and the accelerated implementation of rules and regulations sped up the process somewhat.
“With the Ethiopian example, the government made the decision early on to have full ownership, because when we started the project, there were no models in Africa of a financially secure and sustainable exchange to indicate that achieving commercial returns for private investors would be possible.
“In 2006, there simply were no private investors willing to invest in a commodity exchange in Ethiopia,” says Gabre-Madhin. “Without the government kick-starting the process, as an enabler, the exchange wouldn’t have gotten off the ground.”
The ECX has proven to be a successful model. In over five years of operation, and hundreds of thousands of transactions, there have been no payment defaults, trading order errors, or system failures, while 15 million coffee farmers have increased their share of the final price from 38% to 65%.
Off the back of the ECX’s success, governments from around the continent have approached Gabre-Madhin and her team to help set up shop elsewhere. Cameroon and Mozambique are in talks with eleni to create a commodities exchange, and the Abuja Securities and Commodities Exchange in Nigeria has turned to eleni for advice to clean up and privatize their failing bourse.
“We have the capacity to implement two projects at a time,” says Gabre-Madhin. “Each project is on a 12- to 18-month turnkey basis.”
The Ethiopian model has provided extremely valuable lessons, she says, adding: “First, and most important, it taught us that a commodities exchange in Africa can be built and become commercially viable. This is key to attracting private investors in other contexts.
“Other lessons are the importance of tailoring the exchange model, such as the gradual approach in starting with spot trading.”
And with the presence of an exchange, a farmer goes to market knowing about quality and quantity of the product they are planning to sell, explains Gabre-Madhin.
“A commodity exchange gives access to the national market, and even the global market, rather than just the local market where, typically, local merchants are likely to take advantage of farmers with limited information and bargaining power and who routinely don’t get paid on time and bear all the risks of price volatility,” she says.
“With an exchange, farmers begin to see their local transactions in reference to the wider market. Even if they don’t trade directly in the exchange, they are more aware of national and global prices and fluctuations, as they have access via mobile phones to the latest commodity prices.”
The ECX has traded more than 250,000 tons of coffee every year, which is three times the export of coffee from Kenya, Tanzania and Rwanda. Ethiopia has surpassed the size of a regional exchange.
While the establishment of national commodity exchanges could be a stepping stone to creating a regional exchange, this is unlikely in the near- to medium-term, says Gabre-Madhin.
“In both stock and commodities exchanges, there are opportunities for them to exploit cross-listing or other types of alliances, but aligning the policy and regulatory conditions to make this possible is not that simple,” she says.
“The lack of liquidity is not only a function of the economy’s size, but also due to the potential barriers to participating in some of these markets.”
From the ECX’s inception, there was an understanding that when the Ethiopian exchange became financially sustainable, the government would start to devolve its ownership interest. This, however, has not yet been the case.
“The lesson on the ground is that it is always very difficult to undo something, as we are seeing now in Ethiopia,” says Gabre-Madhin. “Although I hope the process of privatization will start soon.”