IGIDR-IFPRI -Opportunities for Private Sector in Grain Management, Sanjay Kaul, National Collateral...
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Transcript of IGIDR-IFPRI -Opportunities for Private Sector in Grain Management, Sanjay Kaul, National Collateral...
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Engagement of the Private Sector in Grain Procurement
IFPRI-IGIDR Workshop
25th July 2014
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The Context
Malnutrition Levels high. 47% of children malnourished
Percentage of Food Insecure households significant despite a large PDS
Nutritional outcomes not commensurate with food subsidy
Food subsidy Budget unmanageably high at Rs. 1,15,000 crore and mounting
Food Security legislation may lead to food subsidy outgo of additional Rs. 30,000 crore
The Context
Trade share Government has a near monopolistic share in trade in rice and
wheat
Private trade in food grains trade is limited and is declining
Surplus stocks Huge surplus with Government leading to unnecessary budget
outgo and wastage
wheat - 15 million MT
rice - 12 million MT
Annual cost of carry of these stocks an estimated Rs. 3500 crore
Old stocks vulnerable to damage and deterioration
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Role of Government: ProcurementHave the goals been met? To ensure farmers get a
remunerative price defined in terms of C2 cost of production
To ensure balance between government procurement and needs of the market
To ensure adequate availability of food grains both for the PDS as well as the market.
Distress sale common in seral States such as Eastern States of Bihar, East and Central UP and West Bengal
Excess government procurement in rice and wheat.
Major reason MSP fixed higher than C2 cost leading to distorted cropping patterns. Bonuses also lead to excess procurement
Role of Government: ProcurementHave the goals been met?
To ensure that the procurement policy
– does not distort market
– is cost effective and efficient
Excess procurement has virtually killed the private sector role in wheat and severely limited its role in rice for ordinary varieties.
– For wheat, bulk users increasingly rely on the government for their supplies – diversion from the PDS and/or open sale
Policy does not engage the private sector
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Role of Government: StorageHave the goals been met?
To ensure adequate scientific storage infrastructure and practices
To ensure Government stocks are properly stocked in the most cost effective manner
To facilitate private investment in warehousing and minimize post harvest losses
Several successful initiatives for augmenting infrastructure for dry warehouses.
An estimated 10 million MT wheat stocks continue to be in cap storage.
– Limited outsourcing to private sector
– Private sector expertise not being utilized effectively to cut down on storage costs
Post harvest handling and storage losses high
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Problems with Existing Storage System
Considerable stocks kept in open
Prone to storage losses
Labor issues; FCI has large organized unionized labor
Slow and inefficient handling of grains at several mandis
Losses due to poor infrastructure for loading/unloading
Majority of mandis lack facilities for drying and cleaning of grains
Large handling and transport losses
Limited shelf life
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The Reform Philosophy
The Policy should be based on the following principles
Ensure MSP across the country and procurement comensurate withFood Security requirements
Outsource activities to private sector across the value chain
In procurement, warehousing, preservation and distribution
Develop a modern scientific warehousing system
This should include initiatives in bulk handling
Develop a well functioning warehousing receipts system
This can reduce the need for Government to itself store foodgrains
Support cost efficiencies through engaging the private sector
Promote investment by the private sector in warehousing andsupply chain
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Role of Private Sector in Procurement
It is possible to engage the private sector especially in States wheredistress sales continue
West Bengal, Bihar, UP, Assam, and Maharashtra
In existing well organized States also, engagement of the
private sector can introduce several efficiencies
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Recommendations of Expert Bodies
RBI Working Group on Warehouse Receipts (2005) has recommended as under:
“A negotiable warehouse receipt system provides a way to reduce the
need of Government agencies to procure agri commodities. In order to support prices, government agencies can accept such receipts when prices drop top a support floor rather than take delivery of physical inventories”
McKinsey & Co., consultants to FCI, have recommendedoutsourcing of procurement and distribution to privatesector agencies
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Engaging the Private Sector: Past Experience
Two Private Sector agencies were engaged by the FCI in 2005-06, 2006-07 and 2007-08
Over 1 million MT procured in Orissa, Bihar and M.P.
Over 2000 procurement centers were opened and operated
Centers opened only in interior and remote locations
Farmers were given MSP only through bank cheques.
Centres supervised by the Collectors
Quantity and quality risk fully borne by the agencies
Payment made to agencies on deliveries of rice and wheat todesignated FCI depots
Payments made as per State costing sheets
In 2007-08 clause included, providing for 10% savings onadministrative charges and mandi labour
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Proposal for engaging the Private Sector: Private Sector Outsourcing (1)
The entire package of services, including procurement, storagepreservation and logistics can be
Private sector can be held accountable for both quantity and quality
Will generate huge cost efficiencies, especially critical in the context of theambitious Food Security legislation
If designed properly can lead to prevention of leakages
There is no reason for Government agencies alone to hold stocksrequired for PDS and as buffer.
Considerable private sector storage capacities already exist and areunder construction
Several private sector agencies are already experienced in supply chainmanagement
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Proposal for engaging the Private Sector: Private Sector Outsourcing (2)
Scope of Services
Procurement from farmers at MSP through account payeecheques at mandis or specially opened collection centers.
Stocks procured will be processed and stored by the agenciesundertaking quality and quantity risk
Stocks would be delivered directly to fair price shops from itsstorage centers
20% of MSP would be paid by FCI/GOI, immediately onprocurement
Balance payable including all incidentals would be paid beforedelivery to fair price shops
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Proposal for engaging the Private Sector: Private Sector Outsourcing (3)
Service charge
The agencies would be reimbursed based on the total provisionalcosting sheets applicable to state agencies
No vouchers would be required
No requirement for item wise costing of incidentals
10% savings in respect of all controllable costs
For storage services, CWC rates can serve as a benchmark
In other States such as in Bihar, WB and North East, private sectorwould have to be incentivized to invest in procurement and storageinfrastructure
In such States also there would be considerable savings due tolower tax structure and savings in transport
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Proposal for engaging the Private Sector: Private Sector Outsourcing (5)
What should be the criteria for selection of agencies?
Credibility and reputation of Agencies is critical
Pan India presence with experience in procurement and storage offood grains for at least three years
Should have negligible proprietary trading interest in food grains
Minimum net worth in excess of Rs.100 crore
Audited balance sheet for at least five years
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Proposal for engaging the Private Sector: Private Sector Outsourcing (6)
Suggested modalities for agency selection
Expression of Interest from eligible agencies
Expert committee to shortlist agencies which meet criteria
Allocation of geographies
Committee to allot geographies to shortlisted and eligibleagencies, for procurement and storage
Geographies to be allocated on exclusive basis to selectedagencies for a minimum period of 3-5 years
Enable investment by selected agencies in building uprequired infrastructure and manpower
Bulk storage of buffer stocks to be outsourced to selectedagencies, willing to invest
Benefits of Outsourcing
Will enable MSP and procurement in under-served States
Higher procurement in consuming States and thereby lead to savings in handling and transport
Improvement in the quality and shelf life of food grains
Will obviate the need to store food grains in the open
Will optimize utilization of existing storage capacity
Considerable savings in transportation of food grains to distant States, like North East and Bihar
Will enable transfer of quality and quantity risk to the private sector
Cost efficiencies across the value chain
Introduction of modern scientific storage practices, storage systems and in supply chain
Will obviate the need for FCI and State Agencies to borrow huge funds
for procurement and block capital
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Thank You
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