Apr 02 2012

Public-Private Partnership in Agriculture

Led by changing consumer demand preferences on account of rising incomes and changes in the demand pattern of household food basket in both urban and rural India, the agriculture produce landscape is undergoing a significant and rapid change.

Concern for food safety, traceability and assured year-round availability of quality agri produce at reasonable prices are demands which have emerged at the top of the supply chain. Organized retail (though as yet only 3 per cent of the total retail market) is doubling its share every three years or so and is likely to play an increasingly important role in influencing the nature of agricultural markets in the coming decade.

A game changer on the horizon is the proposed national food security legislation, which will require the sourcing of huge volumes of food from domestic producers. Traditional production and supply arrangements are unlikely to prove adequate in meeting the challenges posed by these two major developments.

Agriculture GDP is heavily weighted in favour of high value produce (horticulture, animal husbandry, dairy, poultry and fish products); as much as 75 per cent of Agri GDP value today is contributed by these products. Moreover the growth rate of horticulture and allied sectors is significantly higher than the growth rate in the crops sector. Both the Planning Commission and the Ministry of Agriculture are convinced that the only way India can achieve a 4 per cent growth rate in agriculture is by laying greater emphasis on the allied sectors.

Recent evidence suggests that this segment is increasingly favoured by small and marginal producers as it is labour intensive, offers quicker returns and can engage a higher proportion of women (especially dairy activities). Thus there appears to be immense potential to leverage high returns from non-cereal sub sectors, especially for small producers. This fits  well  with the XII Plan’s vision for “faster and more inclusive growth” and creative and collaborative effort can result in this vision being translated into reality. However, several hurdles need to be overcome to reach these highly desirable goals. For one, 83 per cent of land holdings in the country are now marginal or small and unless there is urgent intervention in aggregating producers through farmers’ institutions, we are unlikely to achieve scale in production and leverage it to the advantage of all stakeholders, especially primary producers.

The fragmented agricultural marketing value chain together with the large number of intermediaries is another major constraint, leading to wastage, low returns to producers and volatility in availability and prices at the consumer end. Estimates of the wastage of perishable such as fruits and vegetables range from 18-40 per cent but they are undeniably too high and penalize both producers and consumers. This calls for intervention -both in the institutional and the technology domains. Thus while cold chain infrastructure and logistics is required to ensure that the produce does not lose its value, the larger question is: will the produce be aggregated by the farmers themselves, or by intermediaries. When both go together, the net outcome is an integrated value chain that ensures a virtuous cycle for all stakeholders. The example of AMUL in milk demonstrates the benefits of value chain integration in agricultural produce. Yet, an efficient supply chain for cereals, perishables and other high value agricultural produce is unlikely to materialize unless there is parallel investment in aggregating farmers and farm produce at the bottom end, and strong and direct linkages are created between producers and market players, both for retailing raw produce and processed food.

Finally, the growing demand for quality agricultural products creates an opportunity to reduce risk in agriculture through the integration of producers on the one hand and retailers and processors on the other. While production and price risks are the most obvious areas of attention, the potential to create partnerships between farmers’ groups and market players also opens up better links with input suppliers, financial institutions and research bodies.

This convergence can lead to better targeting of government expenditures on agricultural subsidies and achieve better outcomes for public policy. Overall, a collaborative effort between the government, farmers and corporates in agriculture is likely to raise the rate of agricultural GDP growth, thereby directly impacting rural poverty.

All this is fine, but how does one go about it. The DAC’s flagship programme offers a way out. In the above scenario, RKVY is likely to be a major window of funding during the XII Plan to support integrated agriculture and allied sector projects. However, there are challenges of limitation of technical, administrative and financial capacity at the state level to absorb the growing level of funding support under RKVY. Project monitoring and assessing project outcomes are also areas requiring strengthening. Lastly,the short term nature of most RKVY interventions in the XI Plan raises questions about the long term impact and sustainability of these investments.

The Public Private partnership in Agricultural Development (PPPIAD) has been conceived of as an additional channel of investments under RKVY, using the technical and managerial capabilities of the private sector in combination with public funding, to achieve integrated and sustainable outcomes. Together the state government and the corporate can identify a cluster, the produce and the farmers group engaged in the production of the commodity.

The corporate takes the responsibility of providing technical inputs and an assured market, and the government provides the infrastructure and the funds for the technical inputs for which the farmer was entitled in any case. In other words, the state agrees to utilize the services of the corporate for provisioning ‘inputs’, and securing an assured market for the producer. The response from both the corporate and the state governments has been positive – and once a few pilots have been successfully tried out, the model can be rolled out on a pan India basis.

Sometimes back, the column had discussed PPPs in Agriculture and the steps taken by the Government of India to ensure the practical roll-out during the next financial year. The response from the corporates and the state governments has been positive, and it is interesting to see the different set of factors that are propelling this concept.

As markets evolve and become more differentiated, what is being sold to the consumer is not a ‘commodity’, but a ‘Brand Value’, and quality of the produce is not just one of the parameters, but the most critical factor. The only way in which a ‘firm’ can have control over quality is by being part of the production process – and in many cases, even the pre-production process, because quality cannot be added as a ‘preservative’ or a ‘coloring agent’. Thus the corporate which deals cannot build and sustain a brand by going to the market, or even to the farm gate , or even from an aggregator – because their stakes are nowhere close to those of the Brand. Often, several commodities are sold under the corporate logo, and therefore even if one of the precuts sold under this brand receive flak or criticism from the consumer, the negative spiral may get out of control. Thus the corporate would like to exercise a degree of control over the production process. This control over production is easier when corporates can enter into the production process directly, or when they deal with large farms where production is usually mechanized. However in India, where both land, labour and energy costs are very high, the production model has to be based on the ‘marginal and small farmer’, and ensuring an integration with his production system. Thus one finds that corporates ranging from Nestle to ITC are keen to join this bandwagon – for this gives them the credibility and access to funnel ‘public goods’ towards a production which has an assured market, and therefore assured incomes for farmers.

An elaboration is in order. State governments usually support the farmer by providing him technical inputs, including quality seeds, fertilizers, nutrients and assistance for plant protection, besides facilitating credit through the Kisan Credit cards. These support services come at a cost, including the cost of delivery. Usually, there are limits and or norms: thus usually 50 per cent of the cost of seed, or fertilizer or micro irrigation equipment is provided. Under the proposed partnership, the delivery of these services, as per established norms, and verifiable parameters will be the responsibility of the corporate.

The corporate will also have to equal the support being given by the government through additional benefits, including delivery costs and an assured market. The farmer gains for s/he does not have to hold the land in mortgage to the corporate, or any other institution, and is also not ‘dependent’ on the corporates goodwill – for the farmer is getting his/her entitlement, which was earlier being delivered by the Agriculture Department. The farmer’s gains in the following ways: s/he will not have to run around to get the mini-kits - these should hopefully be delivered at the farm gate, and more importantly, on time. The corporate will have greater flexibility with regard to purchase of inputs as payments to input suppliers could be made in cash/advance, thereby avoiding the time lag which currently afflicts most government supplies. The extension worker will also be able to establish a more realistic interaction regime with the farmer, as s/he would not be called out for census/election/ enumeration duties.

Does this sound like a silver bullet? Aren’t there any challenges? Do we not need independent third party inspections to ensure that the system is not perverted? Can this be upscaled, especially in regions (North East, tribal blocks) and for commodities (other than Basmati rice, potatoes, gherkins and baby corn) and for farmers with marginal land holdings? These are the questions that crop up, and which need to be addressed.

Yes, there are many challenges – from the government system itself. This means an end, or at least a decline in the exercise of patronage at the grassroots level. All farmers engaged in that ‘commodity’ in that ‘area’ will be covered irrespective of what the Panchayat functionary or the local official thinks. This cuts out discretion, as also the ability to favour one group against another.

As decision making does get centralized, the bank manager also loses his discretion with regard to crop loans. Therefore this intervention has to be made in a non-confrontationist manner, and by engaging with these functionaries. Third party inspection and monitoring, especially by an agency like NABCONS (Nabard Consultancy Services) or the Agriculture Finance Corporation becomes important to ensure that norms are bang followed. Yes, the pilot can be up scaled because once production clusters see value in this partnership; the demand will come from the farmers themselves.

Last but not the least, the state governments have to be on board for the scheme to be successful. This is sought to be achieved by anchoring this under the Rashtriya Krishi Vikas Yojana (RKVY) National Agricultural Development Programme). Corporates will submit their proposals to the state agriculture departments which will examine them and forward then to the State Level Sanctioning Committee under the Chief Secretary of the state. Once these have been approved by this Committee in which the Government of India is also represented, taking it forward should not be difficult.

How do corporates get their ‘comfort’? Do they have to run around after state governments? No. At the apex level, the Small Farmers Agribusiness Consortium will act as the nodal agency to receive the proposals, examine them and forward them to the state governments after preliminary examination with regard to the viability of the project. The SFAC has already done the hand holding for the National Horticulture Mission in the Vegetable Initiative Clusters… this is the next logical step!