Reforming Regulatory Framework for Economic Growth: A Case Study of Agriculture Marketing

: Mr. Suleman Ghani, former Chairman Planning & Development Board, Punjab and currently Senior Policy Advisor on USAID FIRMS Project was invited by the CPPG to deliver a talk on “Reforming Regulatory Framework for Economic Growth: A Case Study of Agriculture Marketing” on March 10, 2011.

Suleman

 

Ghani began by making a case for the importance of regulatory reforms. He argued that economic growth was not possible without improving the ease of doing business index which required serious reforms. These reforms were essential for sustainable growth, to create internationally competitive enterprises and market, given the world was fast becoming a single market. Unless there was a competitive domestic market, we couldn’t compete with the world. Though various policies had been enunciated over the years and other policies had shifted gear, for example the existing trade policy framework talked about competitiveness at length at both the firm and market level. But the regulatory framework was still rooted in the past and not in sync with changed policies. We had yet to explore what kind of regulatory framework worked, what kind of compliance regimes it unleashed, what kind of business processes worked and how good was the environment for the private sector to step in.

Over the years, he had understood the State’s policy formulation process as an exercise in good intention. But while the State continued to provide a great number of services under various policies, it paid little attention to the reform process especially the associated regulatory framework. During his time at the Planning & Development Board, it was transformed from a money allocating department to a reform oriented institution which allocated money only after a certain reform matrix was agreed upon with the concerned department. However, it still never got down to exploring the regulatory frameworks which was the main concern of his current job with the USAID FIRMS program.

Further elaborating, he gave two examples of regulatory frameworks which were out of sync with the existing economic paradigm. Ginning was over regulated by 7 laws – the oldest promulgated in 1925 and the latest in 2004, some provincial, some federal and others ownerless. One functional law was the Cotton Transport Act of 1958 which made it a crime to transport a bale from point A to point B by Pakistan Railways without a particular stamp. It was promulgated probably to ensure area protection from varieties traveling across regions. But now, railways only transported 5% of the cotton as compared to 80% at the time while the nuisance value of the law still existed. Additionally, Ginneries were required to register with two different departments every year including Agriculture (originally to cross check cotton production with actually cotton reaching Ginning factories) and Excise & Taxation, which rather than improving regulation only ensured the continuation of renting behavior.

“…the fanciest of policies and work at the value chain level (firm competitiveness and technology improvement) was not going to achieve the full economic potential without reforming the regulatory regimes.”

The Boiler Regime, which required a yearly boiler inspection, was created for public safety reasons in the 1930s/40s. Comparing with today’s reality, the technology had improved leading to an increased safety of boilers; an exploding boiler would lead to stoppage of work and worker injury which was not in the factory owner’s own interest; and lastly the safety burden could be shifted to insurance companies by requiring boiler insurance. But in spite, a boiler inspector still visited the factory every year and could demand a fair amount of money because he had the power to close down the factory.

Ghani stressed that the argument was not that one bargained away public good by not regulating it. Instead, it was to define public good in the present economic climate and design regulatory and compliance regimes that promoted public good rather than hindering it. Regulatory regimes by their very nature were restrictive and generated their own compliance requirements designed to hinder business rather than to promote it. The real issue was that a paradigm shift in the economic environment had not been matched by reforms of the regulatory framework. Thus bad inspection and regulatory regimes had led to bad compliance and renting behavior hindering both competitiveness and the ease of doing business. For example, if a woman did not pick cotton in a certain way, she could still be jailed according to an existing law rather than giving her training as done in other parts of the world. The good news was the growing realization within the policy sector that the fanciest of policies and work at the value chain level (firm competitiveness and technology improvement) was not going to achieve the full economic potential without reforming the regulatory regimes. It was the one single intervention that could bring the greatest value in comparison.

Having provided the broad outline, Ghani then focused on the Agriculture Marketing Law of 1939 calling it the classic example of law creating market distortions. This law was a response to the 1930s famine when the colonial administration sought to make the agriculture market more predictable, thus working within the food security paradigm rather than of efficient markets. According to this restrictive legislative framework, trade in agriculture products was only allowed by licensed dealers in notified area. The country was divided into zones with a publicly appointed market committee and a notified list of produce that could or could not be traded. These market committees (of mandies) controlled trade in notified areas, levied charges without providing any services such as quality control, grading etc. Thus the whole system was controlled by the arthis and a subsidiary market could not be created because a farmer could not legally sign a contract with a buyer.

“We had yet to explore what kind of regulatory framework worked, what kind of compliance regimes it unleashed, what kind of business processes worked and how good was the environment for the private sector to step in.”

Currently only fruits and vegetables were within the purview of this law while grains and cash crops had over time dropped out because of vested interests. The problem with this framework was that there was a single market channel leaving no space for the private sector or of setting up a new market. Thus when Metro and Macro were allowed in Pakistan, the cabinet had to approve a special dispensation to allow them to act as a market with an understanding that it would lead to backward linkages, niche farming, corporate & cooperative farming and thus improve products. But two to three years down the road, nothing had changed as Metro also bought 99% of its goods from the public markets (mandies) and arthis while there was still no mechanism to get graded products by paying a premium.

Further analyzing the problem, he stated that about 97% of the fruits and vegetables grown in the country went through the mandies where the infrastructure and access was bad, and there was no quality based pricing. These inefficiencies were passed on to the retailer and consumer as hidden costs or higher transaction costs due to purchasing time and variations in quality causing shelf life uncertainty. The analysis showed that there was a 25-35% margin at the market level and 50% at the retail (rehri) level all at the expense of consumers and growers. About $2 billion worth of crop passed through mandies while the economic loss through inefficiency was about $500million which could be gained given the value chain and regulatory framework issues were corrected. Specifically focusing on mangoes, he stated that while Pakistan was the 5th largest producer of mangoes, it exported only 5% ($29 million) because of a lack of infrastructure, grading & packaging, and post harvest losses leading to little value for the farmer. Along with farm management issues, at the sector level, economic distortions created by the s ingle market channel also hampered mango growth.

Ghani shared that a goal of the USAID FIRMS project was to provide technical assistance to the Governments of Punjab and Sindh to draft a policy framework and a draft law backed by detailed analysis. The project had provided a detailed three pillar matrix of reforms along with a roadmap to the two provinces. In terms of the status of reforms, all provinces with the recent exception of Sindh had variations of the 1939 Act’s restrictive framework. Sindh had instituted reforms which did away with a single market channel through corporatization of mandies so that private sector mandies could become independent and financially self sustaining. But as a compromise, it had retained the employees and workers of the market committee. It was now in the process of carrying these reforms further through a subsidiary legislation. Back in 2005, the Punjab Government had also taken a serious look at market reforms and drafted a law but it was half baked as it involved no empirical evidence. Additionally it included comprises with the assumption that market committees were politically powerful which they were not. He appreciated the Punjab Government’s Star Farm initiative but had reservations of its long term success till the law and regime were right. He thought that the political climate was now right for reforms as there was a buy in for these reforms in all provincial Agriculture Departments while the Punjab Government had in effect suspended the market committees two year ago.

Concluding his talk, he re-articulated the three pillars of reforms: one, system reform; two, corporatization of existing mandies and creating the right regulatory regimes and institutional setup; and three, creation of an even playing field for all mandies whether public or private. The essence of proposed reforms was to redefine the role of the public sector, do away with arbitrary management system, create space for private sector to enter on its own or through partnership with government and lastly to lay down a criteria for transparent, accountable, professionally managed and demand driven market operations. This required that the government instead of running mandies concentrated on promoting best practices, standardization, quality control, transparency, information provision and pubic private partnership through incentive and hand holding regimes. His took a position that there should be no notified area to sell the product, no market committee or district based market committee. For example if a market in Bahawalpur worked better, then the produce from Multan or anywhere else should be allowed to go there. While one could not do away with mandies immediately, he suggested a three year transition period hoping that this time was sufficient for private sector markets to compete with the existing inefficient markets.

“Sindh had instituted reforms which did away with a single market channel through corporatization of mandies so that private sector mandies could become independent and financially self sustaining.”

The expected gains of these reforms would be earned by the farmer and the consumer. However the middle man, the Arthi may not lose either because according to the analysis and normal corporate behavior, a 1-2% charge of the total volume of business was enough to operate a fully functional sustainable market. The reforms would allow alternative markets to come up leading to greater linkages in the value chain (Eg. farmers & niche markets), proper grading, packaging, adherence to sanitary regulations and thus differential prices for higher-value produce. A next step would be niche markets such as organic food which required full tracing, certification system and insurance which was not possible without an institutional regime, followed by enterprises for high value products, and futures and options trading.

The talk was followed by a vibrant Question & Answers session. Answering a question of why only 5% of the mangoes were exported and if this had any relationship with infrastructure and market constraints, or with non-competitive domestic market, Ghani suggested that there were huge supply side constraints as Pakistan could not meet the international supermarket standards. These included how the mangoes were grown, plucked and packaged. To make Pakistani mangoes competitive in the international market, they had to be shipped by sea thus requiring a longer shelf life which entailed hot water treatment, chilling treatment and the right packaging. He stated that it was only after one whole year of labor that they had gotten 15 farms globally certified for exports and last year a trial shipment of 20 tons by sea had reached the stores with the right shelf life. From the demand perspective, he argued that it would rise only when Pakistani mangoes would cross over and get shelf space in regular rather than ethnic stores in the West.

Suleman

Answering a question regarding why the state had a multitude of institutions with little or no service to the sector, Ghani pointed to the self perception of state machinery. He suggested that the government perceiving itself to have a monopoly on public good and the option of last resort tried doing too much while its institutions developed their own territoriality leading to competing cross purposes. Instead, the government needed to develop linkages with the private sector to provide demand driven services while corporatizing and restructuring research. He stated that his own approach would be to let the market work, bring in the private sector instead of the Agriculture Extension for services provision, remove distorting subsidies (other than irrigation) amounting to Rs. 62 Billion and instead support the farmer through direct R&D cash grants which were also WTO friendly (green block subsidy)

Answering a question comparing the importance of value chain improvements with regulatory framework for maximum gains, he while accepting the importance of value chain improvements including the serious deficiencies in farm practices, harvesting, grading, packaging and a lack of information for farmers, argued that only with improvement of markets and regulatory framework can the full potential be attained. Additionally, he argued that markets that provided a premium for value would instead lead to improvements in the value chain (rather than vice versa) as farmers would invest with an eye on market gains.

Lastly, answering a question regarding the scale of research effort required to properly assess the regulatory regime and institutional frameworks, Ghani suggested that a lot of work had already been done. For example, the Agriculture Support Program I & II of the Asian Development Bank and Ferguson had done work on agriculture markets. Similarly data was available for a number of sectors but analysis was scanty. However, he submitted that very little work had been done on regulatory frameworks and while an assessment of existing laws was possible, but to design a new law, extensive research and analysis were required.

“To make Pakistani mangoes competitive in the international market, they had to be shipped by sea thus requiring a longer shelf life which entailed hot water treatment, chilling treatment and the right packaging”