Wheat is a staple of basic nutrition in India—from open-flame soft chapati to tandoor-fired crispy roti—and hence is a matter of national importance. The Food Corporation of India (FCI), an undertaking of the government of India, is responsible for distributing wheat from producing states to the rest of the country at subsidized prices to ensure the 330 million poorest individuals access to basic sustenance. Now, as a result of food-security policy reform, rising commodity prices, and bumper harvests in recent years, India is faced with a problem of plenty: how to store the surplus grain. IFC worked with multiple stakeholders to create a storage solution.
By the end of 2010, India had stockpiled more than 16 million tons of wheat—130 percent higher than its minimum buffer norm of 7 million tons. Between rice and wheat, the stockpile totaled nearly 61 million tons. With only 42 million metric tons of available storage in covered godowns (warehouses), the remainder is stored in makeshift covered area plinth (CAP), or platform, facilities.
Because rice has priority in covered godowns, wheat is largely stored in CAPs, which are susceptible to losses and rotting. With 25.4 million tons of wheat procured in India in FY10 at the then-minimum sale price of 10,800 Indian rupees (Rs) per ton, even a 2 percent loss costs the government nearly $110 million per year.
In Punjab, the breadbasket of India, agriculture contributes almost 40 percent to the state gross domestic product, compared with the national average of 26 percent. Roughly half of the 16 million ton stockpile is stored in Punjab, with 6.5 million tons stacked in CAPs. The government of Punjab and its Ministry of Food and Civil Supplies recognized the urgent need for improved storage of the 6.5 million tons.
Because of Punjab’s production capacity relative to the rest of India, FCI is required to procure and distribute wheat to less productive states through the Public Distribution System. FCI offtakes wheat from the government of Punjab’s grain procurement agencies and reimburses the agencies for storage costs. Thus, any initiative by the government of Punjab needs the blessing of FCI.
In 2009, the government of Punjab asked the World Bank Group to help resolve the storage gap. IFC was hired as lead transaction advisor to the Punjab State Grains Procurement Corporation (PUNGRAIN) Ltd.
FCI had previously contracted a grain storage silo public-private partnership (PPP) in Punjab through a business model that incorporated transport and logistics in addition to storage. However, the new, simpler silo business plan was a step in the right direction as the higher rental rate PUNGRAIN would pay, vis-a-vis conventional storage, would be offest by the opportunity cost of lost grain from the conventional storage system. Throughout the course of the concession, IFC learned lessons that can benefit other agricultural storage PPPs. These include:
When the subject does not admit that he has a weight problem, refocus the argument.
In December 2011, India’s food minister declared that, on FCI’s account, “no stock of wheat and rice got damaged due to insufficient storage space.” While IFC was anecdotally apprised of losses of grain of up to 20 percent due to poor storage, the team also encountered other statistics, in line with the food minister’s statement, that attempted to demonstrate zero losses—and even gains in volume due to moisture. Thus, in proving that the silos PPP represented value for money, IFC could not make an assumption about the actual loss. Instead, IFC illustrated the break-even point of losses where silos would make economic sense. This separated the argument from a debate on “what is the right loss figure?” to “the government of Punjab and FCI should think about reforms if they believe losses could be over 3 percent per year, either now or in the future.”
By multiplying the minimum sale price (MSP) for wheat (FY10 MSP Rs10,800 per ton) by 50,000-ton capacity and the estimated loss from not storing in silos, one can arrive at the estimated fiscal loss. For example, a 1 percent estimated loss would result in an Rs54 lakh ($108,000) opportunity cost gain for silos.
The rate at which FCI was reimbursing PUNGRAIN (Rs890 per metric ton per year) implies an additional cost of the silos PPP of Rs285 per metric ton per year, or Rs142.5 lakh ($285,000) for 50,000 metric tons of storage in Year One. Solving for the breakeven loss (L):
LESSON: With 2.6 percent wheat loss or more, the silos are more economical.
If the roti is not perfectly round, it is still worth eating.
IFC reviewed the entire value chain of the grain procurement and distribution system. In feasibility analysis, IFC debated the merits of a bulk-handling system compared with a bagged-grain system and presented the findings for a more efficient system to the governments of Punjab and India. IFC acknowledged the political bottlenecks in effecting any change to the system (namely concerning the bagged dispatch and distribution through commission agents), but held to the holistic view of a better system.
The client’s singularity of purpose helped focus and rethink phasing of reforms. The final project structure centers on introducing an efficient storage system while allowing for future reforms in transportation and handling.
Lesson: Although it is ideal to strive for holistic system reforms, project-level interventions that achieve some but not all goals can serve as an engine for broader changes.
High stakes for food security
Private sector solutions for grain storage carry high-stakes implications for food security. Since the start of the project in early 2009, there has been a significant increase in attention by the Indian government to the policies that make storage possible. Agricultural storage is now an eligible sector for Viability Gap Funding, an amendment for which IFC had lobbied to ensure economic feasibility of projects and alleviate the fiscal burden at the state level.
Although the Punjab Silos PPP project represents only a piece of the food distribution value chain, it demonstrates a transformation in policy thinking on how to more efficiently feed a nation. The government of India has now set out to develop a 2 million metric ton pilot of similarly modeled grain silo PPPs throughout India in consumption centers, addressing a gap in the ability of receiving states to store grain beyond the harvest season.
Sharing the wealth
Punjab’s storage experience has already begun to benefit other geographies. In neighboring Pakistan, where the topography and grain procurement system are broadly similar to India’s, IFC is supporting the governments of Sindh and Punjab (Pakistan) on silos projects representing 600,000 metric tons of wheat storage. By structuring elements like ancillary land development availability and wheat grading, IFC has further improved upon the PPP business model.
Officials from Sub-Saharan Africa and East Asia, where grain losses and rotting are also prevalent, have expressed interest in similar projects. As successes mount, governments and procurement agencies will continue to realize that they can defer large up-front payments on storage facilities and outsource the technical operations to private sector experts.
This article was originally submitted as a Smart-Lesson, a World Bank Group program which enables development practitioners to share lessons. For more information, e-mail firstname.lastname@example.org.