Agriculture Reference
In-Depth Information
Costs of Public Intervention
PFDs and PASSCO procure a substantial quantum of wheat in the season at a
support price determined by the government. The cost of procurement opera-
tions has been on the increase and is a matter of concern, as it affects the via-
bility of the whole system and the price at which wheat is sold. The incidental
costs add to the total costs, and ultimately to consumer prices, which have
been subsidized. The high incidental costs also make the exports of wheat un-
competitive in the international market, other things being equal. Conse-
quently, this subsidy mechanism became a serious policy issue, and a high-level
committee was assigned in 2001 to study various implications. In this section,
we examine overall trends in subsidy bills, compare operational costs of PFDs
and PASSCO to those of the private sector, and discuss the financial health of
PASSCO.
General Trends in Subsidy Bills
The principal reason for incurring subsidies has been the government's quest
for providing cheap food to its citizens, particularly the vocal consumers in ur-
ban centers. Another objective of having low issue price for wheat (the price at
which government releases wheat) has been to keep the inflationary pressure
under control, as wheat, the staple food, is an important item of the average
household's budget as well as a constituent of the basket of goods used to mon-
itor price movements in the economy. This consideration has also heavily
weighed on the government's decision when fixing support prices.
For these reasons, the government has had to subsidize distribution of both
domestically procured and imported wheat. The ration price (distribution price)
has been historically fixed at below domestic procurement costs or import costs.
In addition, there have also been subsidies on exported wheat in a few years
(Table 4.4). Until 1999/2000, Pakistan had been regularly importing wheat with
annual imports of about 2 million tons. Wheat imports in the public sector have
been handled by the Directorate General of Food in the Ministry of Food, Agri-
culture and Livestock. The public-sector agencies normally handled 6 million
tons of domestic and imported wheat until 1999/2000. Obviously, the costs of
imported and domestically procured wheat were different. The cost of imported
wheat has been much more than that of domestically procured wheat.
But in its quest to provide cheap food to consumers, the government could
not supply the imported wheat at a price that would recover its total costs. Thus,
the issue price of wheat never covered the total cost of the commodity entailed
in its procurement, storage, and marketing. Hence the government's price
policy discouraged private sector investment in wheat marketing and process-
ing, such as building storage and setting up flour mills. The annual subsidies
involved in wheat operations have ranged from Rs 2.339 billion to Rs 10.934
billion (Table 4.4). To put the numbers in perspective, the provincial food
