The Significance of MLETR on Transport and Finance · Reducinginformation asymmetry –Traders have...

The Significance of MLETRon Transport and Finance

Abhinayan Basu BalAssistant Professor

[email protected]

SCHOOL OF BUSINESS, ECONOMICS AND LAW

The author acknowledges the inputs from other members of the Supply Chain Finance Group at the School in preparing this presentation.

Cyberspace Conference, Brno25 November 2017

Paperless trade as part of trade facilitation

• Trade facilitation initiatives create standards and guidelines for exchange of goods and services across borders.

• Various definitions emphasize on the flow of information connected with the physical movement of goods.

• WTO Trade Facilitation Agreement mandates all member states to establish and maintain single windows to enable traders to submit documentation for export, import and transit related regulatory functions. (B2G exchange of information)

• Single window interoperability at regional and international level will lead to an information exchange channel in the near future. (G2G exchange of information)

• UNCITRAL is active in the B2B domain. It has been instrumental in establishing rules for the use of electronic means in conjunction with the needs of commerce.

• In addressing electronic transferable records UNCITRAL has created provisions for functional equivalence of notions based on physical control of documents such as possession and delivery which are relevant for the use of transferable documents or instruments.


Use of electronic means in conjunction with the needs of commerce


Source: UNCEFACT

c

Trade Facilitation

FSCM

SCF

RF

Pre-shipment Post-shipment

Integration of cash flows into the physical and informational supply chain

Focus on working capital and liquidity optimization

Selling accounts receivables to a third party based on the buyer’s credit rating

In-transit

Conceptual model of SCF

Overview of FSCM research streams. See Liebl et al., 2016, p. 395.



Supply chain phaseSCF solution

Pre-shipment In-transit Post-shipment

Equipment financing x

Raw materials financing x

Purchase order financing x

Pay on production x

Vendor leasing x

Supplier subsidies x

Vendor-managed inventory x x

Consignment stock x

Inventory financing x

Reverse factoring x

Dynamic discounting x

Seller-based invoice auction x

Captive factoring x

SCF solutions in different supply chain phases

Logistics and SCF– Hypothesis - LSPs monitor the flow of goods and possess information about location and condition. They can

offer information to SCF providers, or consider providing SCF services directly to the shippers based on the access to information.

– SCF offering by LSP is dependent on -§ Level of integration: LSPs may be –

• vaguely integrated into supply chains that ship small items in multi-user consolidation networks, or • very intimate and long-term relationship for full-load transport, 3PL and other contract logistics

services.§ Transport time:

• road and rail transport - generally short hauls; rail wagon loads over long distances can take longer time, e.g., Wuhan to Melnik and Pardubice takes approximately 15 days.

• air transport – long distance in short time; mainly ties up capital in the transport equipment.• maritime transport - long distance over longer time, e.g., China to Sweden in 6-8 weeks; mainly ties up

capital in the goods carried; at any given point in 2017 approximately 10 trillion USD worth of goods floating on board container vessels.

– In case of insolvency LSP can withhold goods until they receive payment.


Reducing information asymmetry– Traders have used intermediated trade finance such as “letters of credit” offered

by banks to finance their trade and reduce information asymmetry.

– In the need for speed inter-firm trade credit where payments are transferred directly between two trading firms either after delivery (“open account”) or before delivery (“cash in advance”) has frequently been used in the past three decades.

– In the past few years SCF has emerged as a new intermediated trade finance solution and currently reverse factoring is the most common SCF product.

– The interest rate is reflective of (among other things) the information asymmetry; therefore products that either helps to manage information asymmetry or shift risk to less opaque actors can benefit the entire supply chain.


Reducing information asymetery: The risk profile of a shipment


Source: Euro Banking Association, Supply Chain Finance, European market guide, p. 80

Reducing information assymetery: The risk profile of a shipment



SCF at the confluence of logistics, finance and law


Logistics service perspective

Legal perspective

Financial perspective

Information asymmetry,Visibility, Critical link,

Working capital,Sustainability,

Roles

Selected private law issues• Dematerialization of trade documents – electronic records replacing documents of title such as

bills of lading, warehouse receipts, bills of exchange, etc.– Replace the legal notion of possession in the physical world with the notion of control for the electronic world -

UNCITRAL Model Law on Electronic Transferable Records (2017).

• Secured transaction laws –– To provide SCF solutions does a LSP need to assume ownership?

§ Swiss Post case shows the diversity in approaches from one jurisdiction to another. § Need for a harmonized approach across jurisdictions – UNCITRAL Model Law on Secured Transactions

(2016).

• Identity Management and Trust Services – Laws are necessary to support verifiability and other regulatory requirements such as AML and KYC; work initiated in 2017.

• Increase visibility of SMEs to reduce information asymmetry – simplification of incorporation and good practices in business registration; work ongoing at UNCITRAL WG I since 2014.


Concluding Remarks– The lack of an international information exchange channel has put SMEs at a competitive

disadvantage.

– Multilateral regulatory framework is necessary to allow for improved bidirectional information exchange between commercial entities and regulatory agencies participating in international trade.

– Necessary to closely coordinate with trading partners – the Belt and Road Initiative.

– International institutions should provide private standard setting entities with guidance to engage in a transparent standard development process.

– Laws promoting visibility and sustainability is key for securing supply chains.


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