Proposal

An Open Data Solution to Value Chain Finance

Support Systems
Matthew McNaughton
mamcnaughton@gmail.com

December 17, 2010

Abstract
The aim of this project is to demonstrate the benefits of open data and open
ICTs to knowledge-based decision support systems (DSS) that promote value-chain
financing and strengthening of market linkages. Specifically, the project will include
the creation of a agro-financing DSS prototype built upon open access primary
agriculture production data. Furthermore, the project will include a case study in
which the proposed DSS will be implemented within the predominantly agro-based
economy of St Thomas, Jamaica.

Keywords: Open data, value chain, value chain financing, microfinance, decision support sys-
tems
 INTRODUCTION

Introduction
Access to information and access to finance are two of the most powerful drivers of
development(Mansell, 1998). Accurate, timely, and inexpensive information is increas-
ingly becoming a necessary requirement for efficient market operation and sustained eco-
nomic growth. The modern economy is composed of a plurality of participants, a volume
of transaction, and a rate of information exchange that has fundamentally changed the
way in which governments, businesses and individuals operate. Not withstanding, the
impact of globalization in producing scales of production not previously seen, and dis-
tributed production environments that combine resources from all across the globe.
On the other hand, access to adequate and timely financing is a necessary component
of sustainable production. Implicit in the aforementioned factors is the need for financial
instruments and considerations that target micro enterprises to large corporations. Un-
fortunately, a study published by the FAI showed that 2.5 billion adults, or just over half
the world’s population, do not use traditional (banks) or non-traditional(such as microfi-
nance institutions) financial institutions(FAI, 2009). Furthermore, more than 90% of the
world’s financially underserved live in the developing world(FAI, 2009).
Value chain development is a growing approach to supporting small producers and
the economically active poor(KIT & IIRR, 2010). It involves identifying and empow-
ering the different stakeholders along the value chain by strengthening market linkages
to encourage value-added production. Value chain finance, a sub-process of value chain
development, means “linking financial institutions to the value chain, offering services to
support the product flow, and build on the established relationships in the chain”(KIT
& IIRR, 2010). The value chain financing model is both a unique and a powerful facil-
itator of financial inclusion because it spreads risk–usually associated SMEs and rural
clients–across multiple financial institutions and chain actors, and provides alternatives
to traditional collateral requirements. Despite its benefits, value chain lending is usually
constrained by lack of access to information about those financially excluded SMEs and
rural clients which it was designed to benefit.
Indicative of the importance of information access, developing country spending on
information infrastructure since 2008 has been estimated to reach and exceed US$100
billion annually(Khalil & Kenny, 2008). However, the effectiveness of this investments is
constraint by those policy decisions that improve the accessibility of information(Mittal &
Tripathi, 2009; Jensen, 2009). Here, accessibility refers to those factors which constrain
or facilitate information access, and therefore more equitable development necessarily
equates to more equatable access to information(Smith & Elder, 2010).
The degree to which an Information, Communication and Technology (ICT)1 ecosys-
tem emphasizes universal access, participation, and collaboration is referred to as the
‘openness’ of that ICT(Smith & Elder, 2010; Kaplan, 2009). ICTs built on open tech-
nologies generally benefit from greater efficiency, higher levels of innovation, and increased
1
“An ICT ecosystem encompasses the policies, strategies, processes, information, technologies, appli-
cations and stakeholders that together make up a technology environment for a country, government or
an enterprise.”

1
 RESEARCH QUESTION AND RATIONALE

growth rates(Kaplan, 2009; Jensen, 2009).

One sector in which the benefits of increased information access are easily observable
is that of agriculture. Studies have shown ICT infrastructure improvements, such as a
increased mobile coverage, and information services, such as real-time pricing and weather
data, to directly result in improvements in the income of farmers and also to lower market
prices(Mittal & Tripathi, 2009; Leonard Waverman & Fuss, 2005). There are number of
factors that make the agriculture sector heavily dependent on the flow of information
among market participants(Jensen, 2009). First, agriculture is primarily a rural-area
production activity. Therefore, the deployment costs for ICT infrastructure and financial
and social services in rural areas is considerably higher than urban areas due to lower
population densities. This lowers incentives for private and public investment in rural
areas.
Second, the transient and spatial nature of most agriculture produce and livestock
means that information about market demand and supply are particularly important. In
many cases, market demand and market delivery plays a key role in the cultivation of
the goods. Failure to properly account for market delivery, market demand or even the
production of other farmers may have adverse effects on market pricing or even result in
the expiration of produce.
Third, information, specifically price plays an important role in the efficient function-
ing of markets. Markets operate on the principle that participants act in self interest.
Therefore, “price differentials across markets in excess of transportation costs...serve as
signals to profit seeking agents to re-allocate goods towards the higher priced markets
(Jensen, 2009)”. However, optimal arbitrage requires market participants to have com-
plete information on prices.
This is of particular relevance in developing country markets, particularly rural areas,
as imperfect information flow and weak market linkages are common. Imperfect infor-
mation flows greatly increase the search costs associated associated with efficient market
operation. As a result, farmers have difficulty accessing the best price for their goods,
and in some cases are subject to various forms of price exploitation(KIT & IIRR, 2010;
Jensen, 2009).
Therefore, the aim of this project is to evaluate the impact of open data access between
value chain stakeholders will have on value chain financing. Specifically, this project will
build on current agriculture open data initiatives to produce an agro-financing decision
support system (AFDSS) that assists in identifying value chain partners and assessing
the risk of loan applicants. The project will include a case study in which the proposed
AFDSS will be implemented and validated against current risk assessment methods uti-
lized by financial institutions in the predominantly agro-based economy of St Thomas,
Jamaica.

Research Question and Rationale

The central research question this project seeks to address is:

2
Background RESEARCH QUESTION AND RATIONALE

Can open data concepts be applied to the value chain financing to

reduce risk and improve loan approval efficacy?

Background
Open ICTs
It has been found that the application of more open standards on an industry level,
results in increased efficiency, innovation and growth for the whole economy (Kaplan,
2009; Varian & Shapiro, 2003; Daffara, 2009; Kshetri, 2004). Here, ‘open’ refers to the
emphasis2 on operability, ease of access, platform independence, royalty free or minimal
cost, openly published specifications of technology, flexibility and community consensus.
Specifically, an emphasis on operability, ease of access, and openly published specifi-
cations lower the barriers of entry for firms. This increases competition which generally
results in higher levels of innovation in the market as firms find new ways to differen-
tiate their product. Platform independence refers to a standard that is vendor neutral
or can be implemented in a variety of ways. This coupled with community consensus
on standards ensure that no single firm can monopolize access to data or manipulate it
for exclusive gain. Openly published specifications reduce technology uncertainties for
participants firms and allows them to more easily keep pace with industry wide develop-
ments. Therefore, there is less time and money spent on non value-added activities, such
as knowledge creation through new research(Daffara, 2009). Furthermore, open speci-
fications and flexibility ensure that data is future proof. An emphasis on flexibility in
standards allows for data frameworks that are more likely to grow with new market and
research demands.
Open data frameworks or repositories are collections of information that emphasize
free, usually on-demand, data access. Open data initiatives are commonplace among
a number of developing and developed nations(OECD, 2005, 2007). In the case of the
OECD group of countries, they have ratified non-binding open data guidelines for research
sponsored by public funds, which each country has agreed to implement(OECD, 2007).
Within the context of this proposal, the exposing the agriculture data via an open API
will provide increased access and utility that is applicable to a number stakeholders on
various levels across the island.

Why Agriculture?
In 2007 more than 3.3 billion(51% persons lived in rural areas, with 2 billion engaged in
subsistence farming, and a quarter living in extreme poverty(Todaro & Smith, 2009). As
it relates to Jamaica, agriculture comprises 7% of national GDP. Contrary to its small
contribution to GDP, the agriculture sector employs 21% of the nation’s labor force, and
accounts for just over 20% of exports (valued at US$276 million) in 2004. However,
2
“Note that openness is not one end of a binary dichotomy (close or open); rather, openness is a range,
from less to more” which is based a particular set of common characteristics(Smith & Elder, 2010)

3
Context RESEARCH QUESTION AND RATIONALE

despite Jamaica’s rich abundance of national resources and arable land Jamaica imports
“80% of its cereal and cereal product needs, 12% of meat and fish needs and a rising
proportion of fruits and vegetables”(Caricom, 2006).
The significant under-performance of Jamaica’s agriculture sector presents a signif-
icant development opportunity for the island. Jamaica’s unemployment rate of 14.4%
in 2009, with figures higher in rural areas indicates a high population underutilization.
Moreover, the significant levels of imports, which are costly given the consistent devalu-
ation of the currency, indicate market opportunity for expansion of local production. On
the other hand, Jamaica enjoys a highly developed telecoms sector, with mobile penetra-
tion exceeding 100%. This infrastructure can provides an efficient and inexpensive basis
for delivering various information services to improve market efficiency.

Context
In Jamaica, the Rural Area Development Agency (RADA), an arm of the Ministry of
Agriculture, has an extensive program geared towards agriculture and farmer support.
RADA employs over 1,000 extension officers who are charged with providing farmer sup-
port services and data collection for over 150,000 farmers throughout the island. As
a result, RADA has developed a large database of supply side agriculture production
primary data.
This data potentially proves rich insights into the macro production environment
and can be used to support various knowledge-based decision making at a number of
stakeholder levels. Currently, this data is exposed through RADA’s ABIS system, which
provides static querying functionality on a subset of the dataset. Unfortunately, the
design of the system limits the utility, accessibility, and scale and as a result, the wide-
scale adoption has been slow.
Subsequently, the Center of Excellence, a department of the Mona School of Business,
University of the West Indies Mona Campus, has undertaken an open data initiative to
develop an application programming interface (API)3 to greatly expand the functionality
and accessibility of RADA’s data. The project is scheduled to conclude mid-February.

Problem
Imperfect information flows lead to market failures, such as reduced productivity of farm-
ers, and ineffective value chain linkages. While the obstacles pertaining to rural area and
agriculture development are well documented in the literature, there are a number of
specific value chain financing difficulties that this project will seek to address. These
issues can be classified under the categories of risk assessment and decision support.
3
“An Application Programming Interface (API) is a particular set of rules and specifications that a
software program can follow to access and make use of the services and resources provided by another
particular software program that implements that API. It serves as an interface between different software
programs and facilitates their interaction, similar to the way the user interface facilitates interaction
between humans and computers.” See http://en.wikipedia.org/wiki/Api

4
Problem RESEARCH QUESTION AND RATIONALE

Risk Assessment
Risk assessment is a crucial activity in sustainable financing. Although value chain finance
aims to provide adequate financing to the poor, and targeted financial instruments–
such as microfinance–have proven to be effective support systems, pro-poor financing–
particularly agro-based loans–remains a risky service. Inherent in agriculture production
and agro-finance are a number of endogenous and exogenous that increase client risk.
Endogenous factors include those obstacles related to the nature of farming, and the
unpredictability of nature. For example, it is not unusual for farmers to require capital
disbursement before farming season begins, and then not receive returns until after the
goods have been sold(KIT & IIRR, 2010). This process can take several months. As a
result, natural shocks that affect crop turnover or significant drops in market prices can
severely limit the ability of a farmer to repay his loan. Exogenous factors are primarily
related to market supply (e.g. other farmers) or market search costs (e.g. finding adequate
buyers).
However, exogenous factors can be greatly mitigated through greater information flow,
driven by increased data access. Supply side variables are fairly inflexible. Not only is
their little variation in cultivation life cycles (e.g how long it takes to plan a tomato),
but within the context of the project information about when farmers plant produce, and
expected maturation dates is already encapsulated within the RADA dataset.
The AFDSS will assist in containing the issues related to risk assessment through
the calculation of a agro-credit score and an interface to information from a number of
stakeholders. The agro-credit score will be implemented through combination of present
and historic statistics on agriculture production, market pricing, and demand-side data.
This provides financial institutions with a proxy to asses client risk as a function of
the loan amount requested, previous farmer production history, and expected market
reception.

Decision Support
Endemic to the process of providing financial services to MSMEs or small farmers is the
provision of technical and business support to clients4 . These include consultations and
workshops around accounts, business management or business registration, etc. These
services are vital to the success of startup mSMEs and also provide financial institutions
with client performance indicators.
Unique to the agro-value chain and small farmer finance are also technical consulta-
tions that include exogenous market factors that impact the probability of success and
that need to be accounted for ahead of crop planing. Factors such as when to plan
product, when to bring to market, actual and expected demand need to be considered in
advanced, as their is limited flexibility to respond to opportunities or obstacles once crop
rotation or planting begins.
4
The most effective MFIs, such as Grameen Bank in Bangladesh or SKS Microfinance in India provide
a myriad of business support and consultation services to their clients.

5
 METHODOLOGY

Currently various imperfect information flows and broken market linkages, which are
common in developing country economies, limit the availability of these services. It is the
aim of this project to demonstrate how increased data access, specifically through open
data APIs can greatly improve the flow of information among relevat stakeholders, and
increase efficiency within the market.
A perceivable application of AFSS is that a MFI will be able to access information on
current farmer crop rotations, expected future supply, and therefore make the suggestion
to a small farmer on whether it is advisable to plant a particular product, when to plant,
or which agro-processor (potentially also a client of the MFI) will need a product and in
what quantity.

Objectives
The proposed project seeks to support value chain production and market linkages by
building on the current MSB open data initiative. The project will include an expan-
sion of the API to include interfaces and support for demand-side data on agro-based
value-chain partners. Furthermore, it will combine both demand and supply-side data
sources to create a agriculture value chain finance decision support system (AFDSS).
This system will provide a proxy for loan risk assessment and feasibility for use within
the loan application process. Finally, it will also provide additional data visualization
and mobile-enabled data access and functionality for use by partners.

Methodology
The project seeks to produce a software artifact that solves a real world business problem,
specifically, the aforementioned challenges associated with value chain financing in agri-
culture. In that regard, it is consistent with the design science paradigm and therefore
the methodology will closely adhere to that recommended by (Hever, March, & Park,
2004) as follows:

6
Project Components METHODOLOGY

Guidelines
Design as an artifact
Problem Relevance
Design Evaluation
Research Contributions
Research Rigor
Design as a search process
Communication Process
Description
The project will result in an open data API that incor-
porates value chain partners and the AFDSS
Rural area development and financial inclusion are sig-
nificant factors for economic progress within developing
countries
The artifacts will be evaluated against current financial
institution risk evaluation and decision support systems
and processes
Agriculture and small farmer risk assessment method-
ologies present significant opportunities for improving
small farmer efficiency and expanding financial inclusion
The construction of AFDSS and the API will employ an
incremental software development paradigm.
The research process will include a survey current agri-
culture credit processes and utilize an incremental soft-
ware development process
The success of the project necessarily includes commu-
nication to a variety of stakeholders with different levels
of expertise, and therefore will have to account for com-
munication difficulties.
5

Project Components
Prerequisites
0. Complete farmer production open data API

• Complete web services specification documentation that outlines how to inter-

act with API
• Complete farmer supply-side API

Project Activities
1. Model and document agro-value chain

• Model agro-value chain, inclusive of partners, goods/services and information

flows
• Identify information requirements for value-chain partners and agro-loan pro-
cess
5
Adapted from (Hever et al., 2004)

7
 SCHEDULE

• Develop requirements specification of relevant variables within agro-loan eval-

uation process

2. Develop value-chain open data API

• Complete web services specification documentation, including requirements,

functionality and design specification
• Expand API to include identified value-chain partners (e.g Agro-producers,
Retails, supermarkets, hotels etc)
• Develop, integrate and test API, inclusive of data visualization services, report
generation, and external data entry
• Develop mobile interface to facilitate remote data entry and access

3. Design and develop agriculture finance value-chain decision support system (AFDSS)

• Complete system design specification of AFDSS

• Develop, test and integrate AFDSS prototype with both open data APIs

4. Validate AFDSS against current risk assessment methodologies and DSS within
target value-chain partners

• Pilot test AFDSS in target value-chain partners parallel to current systems

• Comparative asses AFDSS project experience and findings from pilot efforts
• Complete case study on pilot and project experience

Budget

Schedule
The project implementation schedule is defined as follow:

8
References References

Component Date Prerequisides

0 Complete farmer production open data API Present-Jan 31 None
1 Model and document agro-value chain Jan 15 - Feb 15 None
2 Develop value-chain open data API February 0
3 Develop and design AFSS February 0
4 Validate AFSS March 1,2,3

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