Building the Ethiopia Commodity Exchange Published in ARSP, October 2012

Published by: 7th Annual Review of Social Partnerships, 2012

When our driver dropped us off in front of an unassuming office building in the centre of Addis Ababa I felt disappointed: this should be the Ethiopia Commodity Exchange (ECX), one of the hottest success stories in East Africa‘s fastest growing frontier economy? Founded in 2008, the public-private partnership is credited for no less than revolutionizing Ethiopia‘s commodity market: 80% of the country‘s coffee are currently traded on the exchange that aims to make commodity trading more transparent, efficient, and reliable.

The impact of the platform on farmers and traders is impressive: today, coffee farmers receive 70% of the final price – up from 38% before – and contract default rates have fallen from 67% to zero.

At the entrance our delegation was greeted by Eleni Gabre Madhin, the CEO, who prior to funding the ECX held senior positions in the World Bank and the Geneva based International Food Policy Research Institute. After an obligatory coffee break, the energetic woman led us to the trading floor where the shouting and gesticulating of exporters and producers in front of a large digital board rapidly turned my disappointment into disbelief: how did Eleni and her team build up this powerful platform in less than four years? Of course there is no simple answer to that; yet still, I would argue that a rarely discussed triad of factors constituted an important driving force: complementarities, scale economies and leadership.

Complementarities: in 2008, the Ethiopian government passed two laws to establish the exchange and its regulator; in return, the private actors developed amongst others a quality control system, warehouse operations, a financial clearinghouse, and an electronic market data system. Less than two years after the launch, the government replaced an outdated 1960 legislation and thus transferred the entire coffee trading to the ECX; in return, the private stakeholders quadrupled warehouse capacities, hired staff, added partner banks, added 400 limited members, developed software, and so on. My recent book ‘Building Successful Partnerships’ refers to such complementary arrangements as Expedient Alliance Partnerships arguing that these are more likely to succeed than simple More is Better Partnerships.

Economies of scale: today, the ECX has more than 7800 clients represented by 243 members. To become a member, a lump sum payment is required: in February 2008, the first 100 member seats were sold at USD 5,000; in the first auction of membership seats at the end of 2009, the average membership price already had increased fourfold; the highest bid was USD 310,000, 62 times the initial seat price offered 18 months before. The rationale behind this exponential increase must be attributed to network and scale effects: the more members are on the exchange and the higher the trading volume, the more valuable the membership. Positive economies of scale are everything but common in cross-sector partnerships: many partnerships I came across in my research start off with high ambitions but then fail with scale.

Leadership: no doubt, the spike of the membership price is an impressive demonstration of scale effects; however, these effects were not there from the beginning but had to be initiated through deliberate acts of leadership: the decision to sell membership at a discount to attract a critical mass of traders is such an act. Another example is the USD 9.2m start-up loan by five international donors which later got topped up to almost USD 30m by the World Food Programme and the EU. The donor money was used for the hiring of international and local staff and to make some of the initial investments mentioned above.

Back in the car to continue our journey to the offices of UNDP – one of the ‘seed investors‘ of the ECX – something became clear to me: none of the three factors above would have been sufficient all by itself; complementarity paired with diseconomies of scale (e.g. due to poor technology) would have limited growth perspectives significantly, economies of scale with supplementary contributions would have made the partnership vulnerable to ‘beggar thy partner’ behavior, and leaders who invest into partnerships that don’t benefit from scale risk throwing their funds into a bottomless pit.

About Sebastian Buckup