Why private procurement of oilseeds may not be commercially viable

15% service charge as compensation too little if losses mount, say experts

The government has decided to allow the entry of private players into oilseeds procurement on a pilot basis, but experts have raised concerns about its commercial viability. According to the decision taken by the Union Cabinet on Wednesday, private companies can procure oilseeds at the state-mandated minimum support price (MSP), for which they would be paid a ‘service charge’ not exceeding 15 per cent of the notified MSP. The pilot project will be launched in select places after state governments agree to it. Based on feedback, the scheme could be expanded.

Though the Food Corporation of India (FCI) has already engaged private players for procurement of wheat and rice for the last few years, the initiative got a fresh impetus after NITI Aayog Vice Chairman Rajiv Kumar backed it as an idea to ensure the MSP to farmers. According to experts and officials, the experience of engaging private players in procurement operations has been mixed so far despite best efforts, and the biggest challenge is commercial viability of the entire operation.

“To me, the biggest consideration and challenge of involving private players in oilseeds procurement is whether it will be commercially viable. And if the offer isn’t viable, I doubt private companies will be interested,” Sanjay Kaul, managing director, National Collateral Management Services (NCML), told Business Standard.

The NCML, which has been one of biggest private players engaged in procurement of paddy and wheat on behalf of the FCI, said in the case of paddy, the organisation set up procurement centres, purchased paddy from farmers at MSP, stored the produce, milled it and then sold it back to the corporation for which they were compensated at a price determined through an open bidding process. “However, here we don’t know whether the 15 per cent service fee which the government has fixed includes the losses incurred in procurement and disposal,” Kaul said.

He said if 15 per cent of the MSP as service tax included the losses suffered by private players in procurement and sale, then it wasn’t a very attractive proposition because the government’s own agency Nafed incurred 40-50 per cent of MSP as operational expenditure. 

“Agreed, the private sector is expected to be more efficient than the public sector, but then this difference seems big,” Kaul said. He said the second big challenge is getting funds from the government on time. “In the case of paddy, funds are locked up for more than six months, sometimes,” he added.

In the recent past, the first attempt to involve the private sector was made in 2008, when the FCI engaged the NCMSL (now known as the NCML) and the NBHC for procurement of paddy in Odisha and some other states.

Thereafter, in 2016-17, the Centre, along with the FCI, again roped in the private sector for procurement of paddy in eastern India, where the procurement process was weak. This time, it was slightly more structured, and modalities were worked out in more detail.

Three private firms, including the NCML, were roped in for rice procurement on a cluster basis in Uttar Pradesh, Jharkhand, and West Bengal. 

The other two firms were Veerprabhu Marketing and Farmers Fortune (India). Food Minister Ram Vilas Paswan had then said, in a written reply to the Rajya Sabha, that private firms were bound to furnish daily procurement reports to the FCI, which has the right to inspect purchase centres, storages and miller premises. 

The FCI would do the quality check of rice at the time of acceptance at its depots. 

Moreover, these firms have to mandatorily make the MSP payment electronically to farmers within 48 hours of procurement. The FCI would evaluate the performance of private players and impose a commensurate penalty on them for their acts of omissions and commissions.

In UP, the NCML was given a cluster to procure rice from four districts -- Ballia, Mau, Ghazipur and Chandauli. Veerprabhu Marketing was awarded an area covering Allahabad, Kausambhi, Pratapgarh and Sultanpur. Similarly, Farmers Fortune (India) was given a cluster covering Ambedkarnagar, Basti Sant Kabirnagar and Siddarthnagar. In Jharkhand, the NCML was given two clusters -- South Chottanagpur and Kolhan. In West Bengal, Veerprabhu Marketing was awarded four clusters, covering Bankura, Burdwan, Dinajpur and Siliguri districts.

The success or failure of these experiments are still being evaluated.

“If the central government does not bear the losses suffered by private players, who will be interested to come for 15 per cent charge when the market price of some oilseeds is 20-30 per cent less than the MSP,” said Shiraz Hussain, former agriculture secretary. Shortage of storage space is another problem, which private players might encounter before entering the procurement space.