ResearchMarket-based contractsprotect against pricerises in MalawiSummary of research 1Commodity options contracts are typically usedto hedge against price volatility. They operate ina similar way to insurance. Payment of a premiumis exchanged for the right, but not the obligation,to either buy or sell a commodity at apredetermined price for a particular period oftime into the future. The premium cost is determinedby the difference between the currentmarket price and the price protected, the lengthof time that the price protection is needed andthe volatility of the market. There are two typesof options contracts. ‘Put’ options are options tosell at a specified price in the future, and aretypically used by producers or exporters to protectagainst falling prices. ‘Call’ options areoptions to buy at a specified price in the futureand are typically used by importers to protectagainst rising prices. According to a recent articlein Humanitarian <strong>Exchange</strong>, when combinedwith a physical delivery contract, options contractscan help importers manage costs, andmitigate the risk that prices will increase dramaticallywhen there is a shortage in the market.In September 2005, the Malawian governmentsigned an options contract with StandardBank of South Africa. The contract allowed forthe purchase of a maximum of 60,000 tonnes ofmaize at a cost of approximately $18m – enoughto meet the food gap if donor and private sectorcommercial imports did not reach anticipatedlevels. The Department for InternationalDevelopment-UK (DFID) provided the financeto pay the options premium up front and theWorld Bank provided technical support. Theoptions contract provided the government witha mechanism to trigger additional imports atshort notice, put a price cap on the cost of maizefrom South Africa and provided protectionagainst the risk that prices would move higher.Agreeing an ‘over the counter’ contract meantthat the cost, included delivery to Malawi,reduced uncertainty over transport prices.In response to continued evidence of shortagesin the market and concern about risinglocal prices, the government exercised the firsttranche of the options contract on 7th ofOctober, buying 30,000 tonnes of maize. It exercisedthe second tranche on 15th of November,when it bought the remaining 30,000 tonnes.Malawi’s early experience with options contractswas largely positive. The majority of thepurchased maize was used to meet humanitarianneeds and did not reach the commercial market.The maize helped to avoid severe shortfallsin the humanitarian pipeline. Additionally, bythe time of delivery in December 2005/January2006, prices had risen by between $50-$90 atonne above the ceiling price of the contractwhile transport costs had also increased.Getting water in thedrought affectedlandscape in MalawiOne of the key challenges that the private sectorfaces in Malawi is uncertainty about whenthe government will intervene in the maize market.To address this problem, the options agreementwas made public via a government pressrelease. Private sector traders in Malawi and inthe region are supportive of this approach, andlook forward to an opportunity to be involvedcommercially.In the future, the government (or donors)could resell maize purchased through theoptions contract to local traders, who wouldthen manage distribution and commercial sales.In this way, the government or donor role is limitedto risk management (a critical need inMalawi, where local traders capacity to manageimports is weak). Over time, and as the capacityof local traders and the commercial marketstrengthens, this risk management functionwould naturally fall back to the private sector.Implications for humanitarian agenciesOptions contracts have the potential to enable aproactive, risk-management approach to the procurementof food by humanitarian agencies.They offer potential cost savings by allowingagencies to buy protection at lower market priceswhen these are available. They potentially speedup response mechanisms since triggering prearrangedoption contracts can be quicker thantendering for supply contracts. Local and regionaltrade are also supported through options contracts.Enabling agencies, like the World FoodProgramme, to work with option contracts will,however, require some significant transformationsin the way that funds are accessed andbudgets managed. These contracts require longtermprocurement plans if they are to be costeffective.For those agencies that have significantcore funding, this may not be a problem.However, where the procurement of fooddepends on contributions by donors to emergencyappeals, the opportunities to agree at anearly stage what food requirements will be in thefuture, and to ensure an early response, havebeen limited. Option contracts are a solution tothis problem since they allow for contingentimport contracting. As an example, donor agenciescan begin purchasing options contracts atthe first sign of a problem, then exercise or ‘call’for deliveries only if needs become apparent.Budgeting process within agencies may alsohave implications for the use of option contracts.In many agencies, significantly lessmoney is budgeted for disaster preparednessand prevention than is allocated to disasterresponse. Spending money on options contractsmay mean that there is less money to spendlater on emergency aid, if the option does notenable a crisis to be averted. Most importantly,humanitarian agencies receive much less creditfor their roles in preventing emergencies thanthey do for responding effectively when anemergency arises.1Slater R and Dana J (2006). Tackling vulnerability tohunger in Malawi through market-based options contracts:implications for humanitarian agencies. Humanitarian<strong>Exchange</strong>, no 33, pp 13-17, March 2006J Dana, Malawi/Critical gapsin droughtresponse inGreater Hornof AfricaSummary of published research 1The drought currently affecting an estimated11 million people in the Greater Horn ofAfrica is said to be the worst in more than adecade, with the impact being most severe inpastoral areas on the Ethiopia-Kenya-Somaliaborder. Many humanitarian actors haveexpressed frustration that in spite of excellentearly warning, most agencies, donors andnational governments proved unable toaddress the crisis effectively in its earlystages. A recent HPG briefing paper reviewsthe extent of emergency livelihoods responsesin the region, drawing on secondary data andinterviews with national and internationalactors in affected areas.The review argues that the quality andcredibility of early warning systems have notbeen called into question in this case. The progressivedeterioration of pastoral livelihoodsin the region was well documented. However,while aid actors with a long-term presence indrought-affected areas moved quickly tomodify and scale up their interventions inresponse to the crisis, it was not until the situationwas extremely acute that it attractedmeaningful attention.National and international actors withinfrastructure and programmes in affectedareas were flexible in rapidly adapting andexpanding pre-existing livelihoods interventionsin response to the crisis, e.g. waterdevelopment and rehabilitation activities,herd survival actions, human and animalhealth assistance and cash interventions werepossible right from the start of the emergency.Opportunities were not, however, taken tobuild on longer-term work by heavily frontloadingthe emergency response with livelihoodsinterventions. Food requirements constituted85% of total needs identified underthe Kenyan Flash appeal while 83% of therevised Somali Consolidated appeal processwas for food assistance.The review asks why was there such a disconnectbetween long-term programmingand the emergency response. Three mainareas are identified as problematic: inadequatepreparedness, capacity imbalancesbetween food and livelihoods programmingand funding constraints.Inadequate preparednessDespite the cyclical pattern of droughts in thisarea, there are no national preparedness plansin Somalia or Ethiopia. Kenya is moreadvanced and has community and districtlevel drought preparedness plans. The mainconstraint appears to have been the absence7
Researchof national and sufficiently large local contingencyfunds to implement these plans rapidlyon a large scale. The lack of effective coordinationbetween district and national levelsmeant that these contingency plans did notform the basis of wider national and internationalresponses. As a result, internationalactors largely bypassed national structures ineach country. Since international actors alsolacked pre-existing emergency plans for collectivework, there was little consensus onthe balance to be struck in the emergencyresponse between preventive livelihoodsinterventions and food assistance.Capacity imbalances between foodand livelihoods programmingA key weakness was the lack of capacity forassessing, designing and implementing livelihoodsinterventions. Assessments were generallylacking the hard data that food assessmentswere able to provide to demonstratepotential life-saving impact. In addition, thereappear to have been significant delays inplanning for large-scale livestock relatedlivelihoods interventions. Many donors, especiallyin Kenya, felt that plans for de-stockingwere being submitted at a time when it wasno longer appropriate to intervene to acceleratelivestock off-take. Some agencies, particularlyinternational relief organisations, alsomentioned a lack of capacity to implementthese programmes. Both implementing agenciesand donors reported a dearth of innovativeapproaches: many claimed that the crisiswas so severe that less established programming,such as cash transfers, were too risky.However, well-designed and timely livelihoodsinterventions were possible whereagencies had longer-term programmes andan intimate understanding of the local context.Funding constraintsFunding for livelihoods interventions wasmuch lower than for food assistance. The difficultyof attracting donor funding for livelihoodsprojects was widely reported byhumanitarian agencies, with donors in returnindicating a lack of receptivity at headquartersto such interventions. This was reportedlydue to an overload of requests for non-foodresources globally, as well as a lack of contingencyfunding. Although the ConsolidatedAppeal for the Horn of Africa focused primarilyon non-food interventions, it was notlaunched until April 2006 and was, in anycase, critically under-funded.ConclusionEffective early warning does not ensure anadequate and timely response in slow onsetdisasters. Where agencies had a long-termpresence and were flexible in redeployingfunds earmarked for long-term activities,livelihoods interventions were implementedin a timely manner. It is essential that relevantnational preparedness plans are in place incontexts where vulnerability is chronic andwhere acute crises are likely to develop. Inorder for these plans to be effectively put intooperation, there must be investment innational capacity to implement emergencylivelihoods programming on a large scale.USAID in publicprivateallianceinitiativeSummary of published research 1The United States Agency for InternationalDevelopment (USAID) established the publicprivatealliance initiative - the GlobalDevelopment Alliance (GDA) - approximatelyfour years ago. The initiative reflected the factthat over the past 30 years, resource flows fromthe United States (US) to the developing worldhad shifted from being predominantly government-led,to a situation where now 85% ofresources come from fixed capital investment,remittances and various forms of private funding.According to a recent article in OECDObserver, there are many examples of how theGDA has successfully forged partnershipsbetween the public and private sector.Under the GDA in Malawi, a non-governmentalorganisation (NGO) called ProjectPeanut Butter (PPB) teamed up with Nutriset toestablish a production facility for Ready to UseTherapeutic Food (RUTF). Nutriset donatedfinancing and shared its intellectual property,i.e. the recipe. USAID gave $130,000 to PPB tofinance the production facility and training ofMalawian staff. PPB and Nutriset providedcumulative funding and in-kind resourcesworth $450,000. Nutriset did not make a profit.The production facility uses local raw materialsand will soon have its capacity expanded. Otherexamples of successful partnership cited in thearticle include work with the Dutch company‘Royal Ahold’, which is one of the largest buyersof food in the world. As well as bringing itsknowledge of agricultural quality to the table,Royal Ahold co-funds projects with NGOs onthe ground in Ghana. The company has foundopportunities to encourage new businesses,such as cosmetic product lines from shea butter.USAID has contributed more than $2 million tothe alliance, which Royal Ahold has more thanmatched through cash contributions and technicalexpertise.There is also the Sustainable Forest ProductsGlobal Alliance with the Swedish firm Ikea,Home Depot and other large buyers of forestproducts to which USAID has contributed over$7.5 million since 2002. Alliance partners haveA malnourished childhelps herself to locallyprodued RUTF in Malawimore than matched this amount to the tune ofover $27.5 million in funding.GDA is, however, not the only governmentagency building alliances. In recent years, otherOECD countries have also become involved,e.g. GTZ, DFID and CIDA. In spite of the manysuccesses, the article highlights the fact thatthere are important lessons to learn from thisway of working.First, grant mechanisms rather than budgetsupport work best. Typically, USAID and privatepartners fund the implementing organisation,usually NGOs. Second, partnerships canboost aid effectiveness in some sectors. In agriculture,productivity appears to have beenenhanced by bringing market disciplines andexpertise about cultivation and quality standardsto bear.There are also lessons of warning. Partnersshare risk but do not make that risk disappear.Good projects have been known to comeunstuck late in the process because of suddenshortage of business funds. Also, there are lobbiesagainst partnerships seeing them as effortsto standardise global markets thereby creatinglosers, e.g. local farmers that do not make thecut. Partners, therefore, need to think abouthow farmers who do not meet productivityrequirements in particular markets can diversifyinto other agribusinesses, such as food processingand packaging, or even switch to otherareas such as tourism.1Runde. D (2006). How to make development partnershipswork. OECD Observer, No 255, May 2006, pp 35-37Mothers feeding theirchildren local RUTF,produced throughProject Peanut ButterM Manary, Malawi, 2003M Manary, Malawi, 20031Saving lives through livelihoods: critical gaps in theresponse to the drought in the Greater Horn of Africa. HPGbriefing note. May 20068