1
Engagement of the Private Sector in Grain
Procurement
IFPRI-IGIDR Workshop
25th July 2014
2
The Context
 Malnutrition
 Levels high. 47% of children malnourished
 Percentage of Food Insecure households signific...
The Context
 Trade share
 Government has a near monopolistic share in trade in rice and
wheat
 Private trade in food gr...
4
Role of Government: Procurement
Have the goals been met?
 To ensure farmers get a
remunerative price defined in
terms o...
Role of Government: Procurement
Have the goals been met?
 To ensure that the procurement
policy
– does not distort market...
Role of Government: Storage
Have the goals been met?
 To ensure adequate scientific
storage infrastructure and
practices
...
7
Problems with Existing Storage System
Considerable stocks kept in open
Prone to storage losses
Labor issues; FCI has ...
8
The Reform Philosophy
 The Policy should be based on the following principles
 Ensure MSP across the country and procu...
9
Role of Private Sector in Procurement
 It is possible to engage the private sector especially in States where
distress ...
10
Recommendations of Expert Bodies
 RBI Working Group on Warehouse Receipts (2005) has
recommended as under:
“A negotiab...
11
Engaging the Private Sector: Past Experience
 Two Private Sector agencies were engaged by the FCI in 2005-06, 2006-
07...
12
Proposal for engaging the Private Sector:
Private Sector Outsourcing (1)
 The entire package of services, including pr...
13
Proposal for engaging the Private Sector:
Private Sector Outsourcing (2)
 Scope of Services
 Procurement from farmers...
14
Proposal for engaging the Private Sector:
Private Sector Outsourcing (3)
 Service charge
 The agencies would be reimb...
15
Proposal for engaging the Private Sector:
Private Sector Outsourcing (5)
 What should be the criteria for selection of...
16
Proposal for engaging the Private Sector:
Private Sector Outsourcing (6)
 Suggested modalities for agency selection
 ...
Benefits of Outsourcing
 Will enable MSP and procurement in under-served States
 Higher procurement in consuming States ...
Thank You
18
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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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IGIDR-IFPRI -Opportunities for Private Sector in Grain Management, Sanjay Kaul, National Collateral Management Services

  1. 1. 1 Engagement of the Private Sector in Grain Procurement IFPRI-IGIDR Workshop 25th July 2014
  2. 2. 2 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
  3. 3. 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
  4. 4. 4 Role of Government: Procurement Have 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
  5. 5. Role of Government: Procurement Have 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 5
  6. 6. Role of Government: Storage Have 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 6
  7. 7. 7 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
  8. 8. 8 The Reform Philosophy  The Policy should be based on the following principles  Ensure MSP across the country and procurement comensurate with Food 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 food grains  Support cost efficiencies through engaging the private sector  Promote investment by the private sector in warehousing and supply chain
  9. 9. 9 Role of Private Sector in Procurement  It is possible to engage the private sector especially in States where distress sales continue  West Bengal, Bihar, UP, Assam, and Maharashtra  In existing well organized States also, engagement of the  private sector can introduce several efficiencies
  10. 10. 10 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 recommended outsourcing of procurement and distribution to private sector agencies
  11. 11. 11 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 to designated FCI depots  Payments made as per State costing sheets  In 2007-08 clause included, providing for 10% savings on administrative charges and mandi labour
  12. 12. 12 Proposal for engaging the Private Sector: Private Sector Outsourcing (1)  The entire package of services, including procurement, storage preservation 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 the ambitious Food Security legislation  If designed properly can lead to prevention of leakages  There is no reason for Government agencies alone to hold stocks required for PDS and as buffer.  Considerable private sector storage capacities already exist and are under construction  Several private sector agencies are already experienced in supply chain management
  13. 13. 13 Proposal for engaging the Private Sector: Private Sector Outsourcing (2)  Scope of Services  Procurement from farmers at MSP through account payee cheques at mandis or specially opened collection centers.  Stocks procured will be processed and stored by the agencies undertaking quality and quantity risk  Stocks would be delivered directly to fair price shops from its storage centers  20% of MSP would be paid by FCI/GOI, immediately on procurement  Balance payable including all incidentals would be paid before delivery to fair price shops
  14. 14. 14 Proposal for engaging the Private Sector: Private Sector Outsourcing (3)  Service charge  The agencies would be reimbursed based on the total provisional costing 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 sector would have to be incentivized to invest in procurement and storage infrastructure  In such States also there would be considerable savings due to lower tax structure and savings in transport
  15. 15. 15 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 of food 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
  16. 16. 16 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 eligible agencies, for procurement and storage  Geographies to be allocated on exclusive basis to selected agencies for a minimum period of 3-5 years  Enable investment by selected agencies in building up required infrastructure and manpower  Bulk storage of buffer stocks to be outsourced to selected agencies, willing to invest
  17. 17. 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 17
  18. 18. Thank You 18

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