RE-EQUILIBRATING BANGLADESH'S PUBLIC FOOD DISTRIBUTION SYSTEM (PFDS) Steven Haggblade

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1 RE-EQUILIBRATING BANGLADESH'S PUBLIC FOOD DISTRIBUTION SYSTEM (PFDS) by Steven Haggblade International Food Policy Research Institute (IFPRI) Bangladesh Food Policy Project Funded by USAID under Contract No C November 1992

2 RE-EQUILIBRATING BANGLADESH'S PUBLIC FOOD DISTRIBUTION SYSTEM (PFDS) by Steven Haggblade International Food Policy Research Institute (IFPRI) Bangladesh Food Policy Project Funded by USAID under Contract No C November 1992 The author accepts full responsibility for the views expressed In this report as well as for any errors or omissions. The contents do not necessarily reflect the position of USAID or the Ministry of Food, Government of Bangladesh. I

3 RE-EQUILIBRATING BANGLADESH'S PUBLIC FOOD DISTRIBUTION SYSTEM (PFDS) I. Recer,: Reforms The Public Food Distribution System (PFDS) is a complex organism. Adjustments in one part of the system knock another out of alignment. So any major change requires subsequent adjustment elsewhere in the system. Recently, two important government decisions have knocked the PFDS out of balance. First, for very sound reasons, they abolished Rural Rationing, a leaky channel operated at high cost with minimal impact on its intended poor beneficiaries. Second, the extraordinarily high procurement of 245 taka per maund of paddy led heavy procurement through miligate contracts. Since Rural Rationing provided the outlet for half of all government rice scks, it's abolition during a year of heavy procurement provoked a heavy buildup of scks with no obvious outlet. So abolition of Rural Rationing requiies two subsequent acti.ns. In the short run, government must find an alternate outlet for 400,000 ns of rapidly deteriorating rice. In the medium term, they must re-equilibrate the system. Either they must lower procurement quantities, therefore procurement, or they must increase offtake through other channels. This brief review smmarizes issues options for structural adjustment over the medium term. I. Key Medium-Run Issues in Food Policy Public food management centers around the Public Food Distribution System (PFDS). Conceptually, it is easiest think of the PFDS as a large box in which government sres its foodgrain scks (Figure 1). The key issues in public food policy boil down how the box should be filled, how big it should be, how empty the box. 1. Procurement. Government fills its PFDS godown. from two principal sources: imports, piimarily of wheat, local procurement, primarily of rice. In international procurement, key current issues in iive the private secr how much of foodgrain imports can simply be devolved flour millers, large employers other large traders. Government has recently moved strongly encourage private import. If this succeeds, the millers, large employers others will be able import directly on their own bypassing the PFDS making the box smaller. For domestic procurement, key issues include procurement method. The current move open tendering addresses both at a single stroke. In doing so, it avoids the complex annual debate about where set the procurement s. Under tendering, government simply procures the quantities it needs at the market. The they pay floats up during the season as markel rises. Tendering offers enormous cost savings as well as obviating the need for complex, imprecise forecasts of future s.

4 2. Optimal Public Sck Levels. How big should the box be? This is in many ways the central question in food policy. In part, the size of the box depends on the effectiveness of private traders in marketing sring grain. It also depends on whal objectives the PFDS commonly is meant cited: address. a) provide Three security are scks; relief b) the support; poor. Future c) targeted adjustment will require decisions on which objectives of these hold priority. a. Security sck levels. Few observers of this objective doubt the given critical Bangladesh's importance vulnerability a security cyclones sck floods. is required, If how big should depends public in scks part on be? the size Clearly of privately this held scks. that Recent private evidence scks, indicates mostly on-farm scks, have decades. tripled This over very the rapid past increase few in privately held required on-farm scks public suggests sck levels that may be lass now than merits before. more Although careful scrutiny, this question tl~a numbers commonly advanced for scks public range security from 5 6 lakh ns of foodgrains. b. Price stabilization. Does stabilization change in matter? seasonality Given rapid greatly dampened fluctuations it will be important (Figure 2), review the stabilization Doing objective. so requires recognition that contradicry stabilization components. has One two focuses on dampening the lean consumer season. The rises other during aimes artificially prop up farm s immediately after harvest. For consumers, the case for interventiop much dampen weaker lean day season than s it was is 20 years ago. increases Seasonal trough--peak have dropped in half with the appearance crop ol (Figure a major 2). boro IFPRI's season rice ongoing consumption six studies months, will, allow over us the next clearly four measure the nutritional diminished impact of the seasonality. current It will also allow benefits a comparison of of the stabilization costs as opposed income targeting as addressing a means of the needs of vulnerable groups. For farmers, steadily lnwer costs of production profitability continued of rice production high (see IFPRI/BIDS D'versification forthcoming study) Agricultural suggest that input availability, pricing, rather may carry than much output of the burden of maintaining the case for farmer incentives. stabilization In sum, is much weaker than it was 20 years ago now requires careful review. If government does persist in pursuing scks this are objective, required how much manage public a continued dual Recent stabilization work by IFPRI effort? suggests that scks in the range of 7.5 lakh ns would suffice, if managed properly. c. Targeted relief. How much targeted This relief is purely can government a political afford? budgeting question. the As recent an order years of magnitude, relief channels in have absorbed primarily 7 10 financed lakh ns by per food year, aid. In light of declining aid levels fiscal continued stress, this level is subject review. _3

5 4 3. Outflows question balancing c!osely the tied box, How the choice empty the box is a complex pursi)e. of food policy Security objectives scks require government chooses stabilization requires an outlet an offtake for rotating channel scks. in that Price the system at critical simply introdtccs times. Targeted extra Supply the relief poor, requires or monetization di:ect delivery delivery of cash. The most difficult question match of all inflows is how outflows. balance the overa-l system, predictable The key will how rules be that will find a rotate mechanism government with clear, outflows, without sck disrupting baitnce signals inflows private traders. Consider four. potential Exports allow balancing an important mechanisms. private scks safety in valve years for offloading both public domestic of surplus production. s are high. Imports Recent augyent liberalization supplies of when crucially im-oortan. ol fnordrain trade offer a Domestic auctions for flexible public of food government management. interesting optior foodgrains for disposal offer of public another scks. potentially mechanisms w; II need require But timing careful review. operational open market operation will be essential This or some other sort of flexible dampening seasonal for rotating spikes, security scks outlet if that objective allows government is operate retained. as An a large open market at the same time moderating trader even fluctuations make ihoney in domestic while Relief channels offer advantageous food markets. that they may not oultlets depress for market government foodgrains But s as much as open given iheses outlets are much market costlier auctions than exports or sales. domestic sales, since the relief channels involve Livesck large public iniustries fi.iancial subsidy. economies. offer a When stard grain shock-absorber s in wealthy fall, foodgrain lift slumping livesck grain production s. increases, thus helping more When expensive, grain s livesck rise, production livesck feed falls becomes grain s. Although this not eases upward pressure livesck widespread in Bangladesh, on industry will offer future important development suppleness of the Bangladesh's foodgrain flexibility economy. III. Broad Options for the Future A. A Minimalist Plan The least cost, least interventionist strategy for public intervention would involve adopting only Objective I, the security sck cbjective, rotating the scks through export or domestic open market sales. Government would act as a trader could even make money while maintaining rotating security scks. B. More AmbitiousPrograms of blic Intervention If government wishes add on a stabilization objective, Objective 2, it will raise public sck requirements about 7.5 lakh ns increase costs commensurately. To rotate scks balance the system, they could use exports or domestic market sales.

6 The still costlier version of this approach would involve adding Objective 3, that of providing target relief. This may or may not raise sck requirements, depending on the level of relief offtake desired. It would lessen interference in the market but raise costs because of the 100% cost in the relief channels. C. Long-term investments in a Safety Valves Built-in Balancing Mechanisms. In the long run, Bangladesh should promote development of market-operated balancing mechanisms. First is trade liberalization. Free mport export of foodgrains is an essential ol allowing access world markets as a release outlet as a supply source for supplementing production shortfalls. World s, likewise, serve as buffers. Free trade furnishes a b, between import export parity s, within which domestic s will range, without any government intervention. Thus open trade offers stabilization at essentia!ly zero cost. Second is investment in a domestic livesck industry. This proves be a remarkably supple shock--absorber in wealthy foodgrain economies. In setting investment inventives, government should consider the important food support afforded bya modern livesck indus;try. In the long run, this o would provide stabilization without costly government intervcntion. With these two additional private secr supports, it will be possible for government monir food markets maintain fundamental food policy objectives with a greatly reduced government presence cost. IFPRI NOVE BER 10, 1992

7 Figure 1. FOOD POLICY IN BANGLADESH iflows ISSUES GOVT. DECISIONS IFPRI INPUT I Food Procurement 0,Var 1.ote' 1s 00 Zi' it aa method Procurement Private vs. Govt. import Exp tender.ing Suspend mllgate w a Allow wer procurement private import -Tendering a reviews (PBI-2. M12.21 US) Procurement pricing paper (WP6}, training (T2,TT) briefings Scts Public Food Distribution System (PFDS) m Optimal sck level ->-Security sck Price support -Targeted relief Mgt. procedure & cost a Optimal sck model (WP4) Studies of prvatc foodgrain markets, private scks & Implications forpublic sckholdin~g (M22.M37.M39,M40,M44) Mv EP OP VGO FR Distribution CONSUMERS " Effectiveness of existing channels, Balancing the system a Abolish rural rationing a Review statury rationing a Introduce Food for Education anutritional impact of PFDS (M36.M43.M45) a Rural rati,-ig study (WP5) a Statury rationing study (M42) m Working group on Targeted Food Intervention (M286) Notes: WP= Working Paper; P8=Policy Brief; M=Ma;luscript; see Table 6 for references.

8 130 Figure2 -Index of CoarseRice Price(Detrended) x _ January June December 7