Income Growth, Safety Nets and Public Food Distribution

INCOME GROWTH, SAFETY NETS, AND PUBLIC FOOD DISTRIBUTION

Akhter U. Ahmed, IFPRI

Paul Dorosh, IFPRI

Quazi Shahabuddin, BIDS

Ruhul Amin Talukder, MoF & DM

26-27 May 2010

BANGLADESH FOOD SECURITY INVESTMENT FORUM 2010

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I. Background

• The remarkable changes in agriculture and food

economy since independence, specially over the last

two decades have lessened the need for government

intervention in the market to stabilize prices.

• Nevertheless, the government must provide emergency

relief during periods of natural disasters, alleviate

chronic food insecurity through targeted food

distribution to the poor households, and take steps,

when necessary, to stabilize prices.

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I. Background (Contd.)

• The size and composition of PFDS have changed

significantly over the last three decades. Not only the annual

volume of foodgrain distributed under PFDS significantly

declined, but there has been a perceptible shift (in favour of

non-sales channels, specially targeted programmes) in the

composition as well.

• Most evidence suggests that the shifts from sales to targeted

programmes significantly improved the overall efficiency of

PFDS (Dorosh, Shahabuddin and Farid, 2004).

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II. The Context

• The Public Food Distribution System (PFDS) supply foodgrains to various food-based Safety-Net programmes, accounting for about 75 per cent of its total distribution.

• The PFDS also plays other key roles:

a) provides price incentive to farmers for increased production through domestic procurement of rice and wheat.

b) maintain security stock of foodgrains to meet emergencies.

c) prevent excessive rise in prices to stabilize market prices

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II. The Context (Contd.)

• Critical aspects of the PFDS include:

– foodgrain procurement modalities

– size of buffer stock

– storage facilities

– stock rotation

– transit and storage losses

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III. Key Issues and Major ChallengesDomestic Procurement Programme

• An alternative option to the export of rice, following bumper harvests, is for the government to procure surpluses as a way of supporting domestic prices and providing adequate incentives to farmers.

• However, setting a procurement price that sends adequate production signals to the farmers, while minimizing costs to the public exchequer is a real challenge.

• Research indicates that it is easier to forecast the size of irrigated boro rice harvest and future prices than aman, which is grown during the monsoon season.

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III. Key Issues and Major Challenges (Contd.)Domestic Procurement Programme

• During 2000-2009 period, procurement of boro exceeded 80 per cent of the target in 8 out of 10 years and failed to reach at least 60 per cent of the target in only one year, 2007. Aman procurement, on the other hand, exceeded 80 per cent of the target in only 2 out of 10 years.

• The procurement price set for the boro harvest was excessively high in 3 out of 4 years during the late 1990s, resulting in extra costs to the government and windfall profits to those fortunate enough to sell at the procurement centres.

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III. Key Issues and Major Challenges (Contd.)

Public Stock Management

• The costs of processing, storing, managing, and distributing large stocks are high. So it is important that the government does not hold more stock than it needs for an “adequate” national food reserve.

• The National Food Policy, 2006 recommended to maintain a public stock of 1.0 million ton of foodgrains. However, the official government target in late 2008 was to hold a stock of 1.5 million tons of rice and wheat.

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III. Key Issues and Major Challenges (Contd.)

Public Stock Management

• Grain reserves are costly to maintain and divert public expenditure away from other productive investments aimed at increased agricultural production (e.g. rural infrastructure and/or improved technology). Determining the minimum level of grain reserve is, therefore, very important (World Bank, 2008).

• Although public warehouses have capacity to store 1.7 million tons, some of this is unusable so that effective government storage capacity is 1.5 million tons. This is adequate for minimum national security stock but not for additional stock to stabilize prices and if the government continues with the food-based safety net programmes.

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III. Key Issues and Major Challenges (Contd.) Public Stock Management

• Reducing Storage and Transit Losses: Suggested Approach

• Technological approach

• Management approach

• Institutional approach

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IV. Areas of Interventions and Investment Options

• The National Food Policy, 2006 (NFP) Plan of Action (2008-2015) may serve as a basis for identifying and prioritizing the options for investment and interventions for achieving food security in Bangladesh.

• Enhancing effectiveness of public procurement programme which is an integral part of public food management system has become imperative. The food crisis experienced in 2007/08 have strengthened the case of improved effectiveness of domestic procurement programme.

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IV. Areas of Interventions and Investment Options (Contd.)

• Further areas of public intervention include, among others, (a)

proper fixing and appropriate timing of announcement of

procurement prices so that these send correct signals to producers

while minimizing budgetary costs to the government, and (b)

identifying suitable institutional mechanism for procurement of

paddy directly from farmers.

• Proper management of public stock is essential for improved

effectiveness of the PFDS. The government has to maintain rolling

stocks to cater to the “routine” needs of the PFDS including Safety

Net Programmes and Open Market Sale (OMS), as well as

minimum buffer stocks for emergency distribution in times of

natural disasters.

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• While estimating the minimum buffer stocks for emergency

distribution, due considerations should be given to climate

change-induced greater intensity and frequency of natural

disaster as well as growth in population which pose a major

challenge for Bangladesh.

• This calls for careful planning and management of the amount

of grains to stock and distribute, and for storage facilities to be

established as well as for improved monitoring of existing

storage quality.

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• No attempt has been made in this paper to come

up with an estimate of “optimal stock”. This

would involve a rigorous analysis of costs and

benefits of PFDS and alternative PFDS stock

options. However, because the government

currently has no mechanism to rotate stocks

apart from PFDS distribution, the level of stocks

is closely related to the size of PFDS.

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• Higher levels of stock without a mechanism to rotate the stocks may result in serious quality deterioration, as the average age of stocks increases. Closer attention, therefore, should be paid to the quality of foodgrain in storage and the link between the size of stock and the amount of distribution needed to rotate stocks (Dorosh, Shahabuddin and Farid, 2004).

• According to a recent government decision, an additional storage of 0.58 million ton of foodgrains will be constructed by 201. In fact, from medium and long-term perspective, the government has undertaken projects to enhance the public storage capacity from 1.5 million tons to 2.2 million tons over the next 3-5 years and is planning to increase the storage capacity to about 3.0 million tons by 2020.

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• Among various interventions and investment options suggested, the following areas require special/priority attention:

(a) Speeding up the computerization of food stock/storage monitoring system.

(b) Careful management of public storage expansion and exploration of opportunities for public-private partnership in food storage capacity expansion.

(c) Research in public stock management.

(d) Continued support to the development of effective Early Warning Information System.

(e) Sustained capacity development of PFDS Officials through local and foreign training.

Business

Income Growth, Safety Nets and Public Food Distribution