1. Outsourcing the management of the PDS to the
private sector
Privatizing Welfare

2. Significance, problems and causes
Urban
50%
Rural
75%
Percentage of population the Food
Security Bill aims to cover, through PDS.
This works out to 81.3 crore people.
Problems:
I. 23% Fair Price Shops unviable in
themselves
II. 28 million tons of grain sold illegally in
2004-05
III. Rs. 30,000 crore was lost through illegal
selling in 2009-10
IV. Wastage of grains in godowns
V. 58% subsidised grain does not reach BPL
families
Causes:
1. Perverse incentives
2. No accountability or competition
3. Low salaries of Fair Price Shop (FPS)
salesmen
4. Inadequate grievance redressal
mechanism
5. Co-operatives are given preference for
FPS dealerships but FPSs run by co-
operatives are the most unviable (52%)
Sources: Planning Commission, 2005; Bhalla,
2012

3. FPS
dealership
Co-operative society
of educated
unemployed
Other registered co-
operative society
Educated
unemployed
Scheduled caste
Freedom fighter
Physically
handicapped
Other
Currentsystem Order of
preference
Outsourcing the management of Fair Price
Shops to the private sector.
*Through efficiency
in distribution and
sale of other items
through Fair Price
Shops (FPS).
Incentives for
performance
I. Competition
II. Profits*
III. More contracts
Disincentives for
corruption
I. Reputation
II. Revoking of
contracts
III. Legal action
Fewer leakages
I. Less bureaucracy
II. Simpler supply
chain
Why outsource and privatise?
Policy proposal
While noble in intention, the current policy of
FPS dealership harms more people than it helps,
through black marketing and unviability. We must
realize that the end goal of the PDS is food
security to the poor and not employment
security to a few at the cost of food security for
many.

4. Public sector outsourcing - examples
Indian
passport
services (TCS)
10 million passports
processed
2 data centres built
17 language call centre
built
Online applications
Biometric IDs
TCS has no access to data
once process is completed
UK National
Health Service
38% services outsourced
Shared financial,
procurement and payroll
services
Some companies criticised
for not maintaining
standards
Highlights importance of
transparency in operations
India ATM
outsourcing
Public sector banks
outsourced the
management of ATMs to
private companies
9 firms contracted include
industry leaders and start-
ups

5. Implementation
State
governments
Open
tender
invitation
Quality and
cost-based
selection, i.e.,
lowest bidder
considering (a)
(a)
-Indian
company
-Managerial
experience
-Minimum
turnover
-Personnel
capability
-Litigation
history
-Past
experiences
Contract
awarded
-Valid for 3
years
-Firm allowed
to sell non-
PDS items
through FPS
-Selling
subsidised
items at
prescribed
rates only
Food
Corporation
of India
Godowns
Selected firm
Fair Price
Shops
MaintenanceTransport
Management
Payment

6. Responsibilities of the selected firm
Personnel
• Recruitment, compensation and management of FPS salesmen.
• Recruitment and compensation of personnel involved in transportation and
management.
Maintenance and distribution
• Maintenance and upkeep of Fair Price Shops.
• Distribution of food to targeted public at prescribed rates through FPS.
• Ensuring the correct quantity of PDS goods is given to appropriate card-
holders only
Transport
• Developing a mechanism to transport food from godowns to FPS.
• Ensuring the mechanism functions and shops are well-stocked.

7. Outsourcing - possible methods
Advantages Disadvantages
Simple and quick
process
Monopolisation
may lead to
tendency for
corruption
Economies of scale No competition-
induced monitoring
Single transport
system
Only large
companies may
bid
Advantages Disadvantages
Competition-
induced efficiency
Difficult and time-
consuming process
of valuation
Automatic
monitoring through
competition
Lesser economies
of scale
Small companies
can bid for fewer
stores
Fewer takers for
remote and
unprofitable stores
Companies bid per state or district Companies bid per store
A process whereby the contract for a whole
state or district is awarded to one company.
Companies manage only those stores they
bid for. Several companies operate in a state.
Bidding per state will work in states where the primary issue is unviability of FPS. Bidding per store will
work where the primary issue is black marketing and other forms or corruption.

8. Cost estimates
The costs will vary from state to state since the cost of running an FPS is different in different
states. Following is a current-cost estimate for the state of Bihar:
44,480*
Rs. 1430**
Rs. 6.36
crore***
*Source: CVC on PDS – Report on the state of Bihar
**Source: Planning Commission report on TPDS, 2005, pp. 40. Includes transport, loading
and unloading, storage loss, maintenance, employee wages, rent and other costs.
***Bids will in all probability be lower than this figure due to competition and estimated
efficiency. This figure does not include monitoring costs.
Number of Fair Price Shops in Bihar – (I)
Cost/month of running an FPS in Bihar – (II)
Total cost/month = (I) * (II)

9. Monitoring and quality management
systems
Checks
• Random checks by government officials on functioning of stores and
reporting of malpractices.
• Internal monitoring mechanism by the firm.
Helpline and IT integration
• Phone helpline where complaints can be registered.
• Helpline to be managed by the state government.
• Possible IT integration of the entire system, central database of all card-
holders, linked to UID scheme.
Contract specifications
• Assurance of targeting card-holders by the firm and grain quality assurance
by the government
• Fines for malpractice
• Sustained malpractices – revoking contracts and legal action

10. Impact assessment, sustainability and
scalability
• Cost to government, before and after
• Level and quality of new bids indicating popularity of the policy among
companies
• Average cost of running an FPS
Cost analysis
• Difference between grains allotted and grains distributed
• Number of new FPS
• Number of complaints registered and addressed
Implementation
• Nutrition levels, compared before and after and across areas with and without
the policy – the ultimate test of the policy, not a performance indicator for the
firm
• Public satisfaction with the PDS
Other indicators
Following are ways to measure the impact of this policy:
The policy is sustainable due to the competitive bidding process and with appropriate
monitoring. It can be extended to the whole country.

11. Challenges and mitigation factors
• Frequent monitoring, revoking of contracts and maintenance of helpline.
• Making the PDS-related activities of the firm open to RTI queries.
Corruption continues
• Creating awareness about continuity of subsidised food and the fact that only
management is outsourced.
• Publicizing lower costs incurred.
• Giving states the option to continue with the public system.
Privatization is opposed on principle
• In case of state or district-wide contracts, dividing the country into zones and
limiting the number of zones one company can serve.
• Ensuring a minimum number of firms are given contracts in case of store-wise
bidding.
Monopolisation

12. References
 Planning Commission. 2005. "Performance Evaluation of Targeted Public
Distribution System (TPDS)." Planning Commission, Government of India. New
Delhi.
 Flinders, Karl. 2013. “TCS India passport project, an example for UK public sector
as IT becomes transformational rather than an input.” Computer Weekly, July 3.
 White, Alan. 2013. "The tail’s wagging the dog": How outsourcing is eroding NHS
services. New Statesman, April 15.
 2013. “Outsourcing: Time to realise the benefits.” Health Service Journal, July 9.
 Bhalla, Surjit S. 2012. “No Proof Required: Enhancing Corruption the NAC way.”
The India Express, January 7.
 Central Vigilance Commission on the Public Distribution System: Report on the
state of Bihar.
 Images courtesy: Livemint, Wikimedia Commons, sathiyam.tv, The Hindu, The
Times of India, American Society of Civil Engineers