Proposed new funding model for tobacco

Martin Kadzere

THE tobacco industry has proposed a dual commercial funding model for the cash crop, at least in the medium term, while the country gradually transitions to higher domestic funding for its production to maximise the value retained in the country from its exportation.

At the tobacco conference hosted by Business Weekly recently, stakeholders acknowledged the limitations of the current offshore financing model and endorsed the exploration of “complementary” financing mechanisms.

The conference was attended by a diverse group of tobacco stakeholders, including tobacco merchants, banks, farmers, insurance companies, inputs suppliers and Government representatives.

Despite acknowledging that local financing could maximise the value Zimbabwe retains from tobacco exports, the current lack of capacity within the domestic financial sector hinders implementation of such an arrangement.

“Offshore financing is not a bad thing, unless it is emanating from proceeds of illicit financial flows,” said Dr Kingstone Mujeyi, an agricultural business development expert with the University of Zimbabwe.

Currently, around 95 percent of Zimbabwean tobacco production relies on offshore loans. This is partly due to their lower cost compared to domestic loans.

Large multinational corporations dominate tobacco financing in Zimbabwe and often partner or sub-contract local companies to contract the farmers.

However, a key factor is that the multinational corporations control access to global tobacco leaf markets. The market linkages allow them to leverage on their international presence to secure cheaper financing from global sources.

Unfortunately, high interest rates in Zimbabwe create a significant barrier for local financial institutions to participate in tobacco financing. This restricts access to these potentially cheaper funds and limits Zimbabwe’s control of the industry.

Despite these challenges, the stakeholder discussions identified potential solutions.

One proposal involves encouraging the participation of domestic institutions such as pension funds. This could be achieved by developing investment instruments specifically tailored for the tobacco sector, making it more attractive for the funds to invest.

The Permanent Secretary in the Ministry of Lands, Agriculture, Fisheries, Water and Rural Development, Professor Obert Jiri, encouraged pension funds to explore investment diversification beyond their “primary focus on buildings”, including potential opportunities in tobacco funding.

Beyond tailored investment instruments, other options were explored to incentivise local financial institutions.

These include utilisation of agro-bills designed specifically to support agricultural production, potentially offering a lower risk and more attractive option for local lenders.

The Government could consider offering guarantees to mitigate some of the risks associated with financing the tobacco sector, as well as providing further assurance to local financial institutions and encouraging their participation.

The discussions also highlighted the need for a more innovative approach from institutional investors.

Such entities hold significant funds that could be deployed to support local tobacco financing. However, new investment strategies are required to make this a viable option. Collaboration among the Government, financial institutions and institutional investors will be crucial to develop these innovative solutions.

The conference also considered the possibility of increased Government involvement in the tobacco industry.

A State-owned entity could be established to produce tobacco, potentially ensuring a consistent supply of high-quality leaf.

The Government’s investment in processing facilities, such as cigarette manufacturing plants, could increase the value of Zimbabwe’s tobacco before export.

In addition, a State-owned export agency could be created to manage the marketing and sale of Zimbabwean tobacco products internationally, potentially boosting foreign exchange earnings.

Proponents of increased Government participation argue it could offer several advantages. A State-owned entity could generate significant foreign currency earnings, potentially funding infrastructure development and investments across the tobacco value chain.

Government oversight could lead to stricter quality control measures, improving the reputation of Zimbabwean tobacco products in the global market.

Direct Government involvement could minimise revenue losses and ensure profits are reinvested into the industry for its betterment while the State-owned farms, processing facilities and export agencies could create new employment opportunities.

The meeting explored the example of the China National Tobacco Corporation (CNTC), a state-owned entity that dominates the Asian country’s tobacco industry and generates significant revenue for the government.

CNTC’s success is attributed to its integrated approach, encompassing production, processing and export.

While not a direct blueprint, “Zimbabwe can learn from China’s experience in developing a successful state-owned tobacco corporation, adapting the model to suit its own needs and context”, said Chevron Tobacco managing director Mr Tapiwa Masedza.

The domestic market consumes only 2 percent of production and to address this, a multi-faceted approach is needed.

Engaging “friendly nations” to open their cigarette markets to Zimbabwean products is crucial to diversify export destinations and reduce reliance on a limited domestic market.

The rise of reduced risk products presents an exciting opportunity as Zimbabwe can leverage on its high-quality tobacco to develop and export innovative products like nicotine extracts, catering for this growing global market trend.

Aggressive investment promotion and incentives are needed to stimulate local cigarette production and this will not only create jobs but also capture greater value addition within Zimbabwe’s economy.

“The beneficiation model is problematic,” said Dr Mujeyi.

“There is need to gradually increase the share of value added retained locally through structured Government funding, increased value addition and diversification, which currently stand at less than 5 percent of the total national output of the leaf.”