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.

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

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. 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
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. 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
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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
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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
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
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
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
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
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
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
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
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
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. 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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18. Thank You
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