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1 Engagement of the Private Sector in Grain Procurement IFPRI-IGIDR Workshop 25 th July 2014

IGIDR-IFPRI -Opportunities for Private Sector in Grain Management, Sanjay Kaul, National Collateral Management Services

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Indira Gandhi Institute for Development Studies(IGIDR), and the International Food Policy Research Institute (IFPRI) on ‘Harnessing Opportunities to Improve Agri-Food Systems’ on July 24-25 , 2014 in New Delhi. The two day conference aims to discuss the agricultural priority of the government and develop a road map to realise these priorities for improved agri food systems.

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Page 1: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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Engagement of the Private Sector in Grain Procurement

IFPRI-IGIDR Workshop

25th July 2014

Page 2: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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

Page 3: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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Page 4: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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

Page 5: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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Page 6: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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Page 7: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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

Page 8: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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

Page 9: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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

Page 17: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

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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Page 18: IGIDR-IFPRI -Opportunities for Private Sector in Grain Management,  Sanjay Kaul, National Collateral Management Services

Thank You

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