Outsourcing the management of the PDS to the

private sector

Privatizing Welfare

Significance, problems and causes

Urban

50%

Rural

75%

Percentage of population the Food

Security Bill aims to cover, through PDS.

This works out to 81.3 crore people.

Problems:

I. 23% Fair Price Shops unviable in themselves

II. 28 million tons of grain sold illegally in 2004-05

III. Rs. 30,000 crore was lost through illegal selling in 2009-10

IV. Wastage of grains in godowns V. 58% subsidised grain does not reach BPL

families

Causes:

1. Perverse incentives 2. No accountability or competition 3. Low salaries of Fair Price Shop (FPS)

salesmen 4. Inadequate grievance redressal

mechanism

5. Co-operatives are given preference for FPS dealerships but FPSs run by co-operatives are the most unviable (52%)

Sources: Planning Commission, 2005; Bhalla,

2012

FPS dealership

Co-operative society of educated unemployed

Other registered co-operative society

Educated unemployed

Scheduled caste

Freedom fighter

Physically handicapped

Other

Cur

rent

syst

em

Order of

preference

Outsourcing the management of Fair Price Shops to the private sector.

*Through efficiency in distribution and sale of other items through Fair Price Shops (FPS).

Incentives for performance

I. Competition II. Profits* III. More contracts

Disincentives for corruption

I. Reputation II. Revoking of

contracts III. Legal action

Fewer leakages

I. Less bureaucracy II. Simpler supply

chain

Why outsource and privatise?

Policy proposal

While noble in intention, the current policy of FPS dealership harms more people than it helps, through black marketing and unviability. We must realize that the end goal of the PDS is food security to the poor and not employment security to a few at the cost of food security for many.

Public sector outsourcing - examples

Indian passport

services (TCS)

10 million passports processed

2 data centres built

17 language call centre built

Online applications

Biometric IDs

TCS has no access to data once process is completed

UK National Health Service

38% services outsourced

Shared financial, procurement and payroll

services

Some companies criticised for not maintaining

standards

Highlights importance of transparency in operations

India ATM outsourcing

Public sector banks outsourced the

management of ATMs to private companies

9 firms contracted include industry leaders and start-

ups

Implementation

State

governments

Open

tender

invitation

Quality and

cost-based

selection, i.e.,

lowest bidder

considering (a)

(a)

-Indian

company

-Managerial

experience

-Minimum

turnover

-Personnel

capability

-Litigation

history

-Past

experiences

Contract

awarded

-Valid for 3

years

-Firm allowed

to sell non-

PDS items

through FPS

-Selling

subsidised

items at

prescribed

rates only

Food

Corporation

of India

Godowns

Selected firm

Fair Price

Shops

Ma

intena

nce

Transp

ort

Ma

na

gem

ent

Payment

Responsibilities of the selected firm

Personnel

• Recruitment, compensation and management of FPS salesmen.

• Recruitment and compensation of personnel involved in transportation and management.

Maintenance and distribution

• Maintenance and upkeep of Fair Price Shops.

• Distribution of food to targeted public at prescribed rates through FPS.

• Ensuring the correct quantity of PDS goods is given to appropriate card-holders only

Transport

• Developing a mechanism to transport food from godowns to FPS.

• Ensuring the mechanism functions and shops are well-stocked.

Outsourcing - possible methods

Advantages Disadvantages

Simple and quick

process

Monopolisation

may lead to

tendency for

corruption

Economies of scale No competition-

induced monitoring

Single transport

system

Only large

companies may

bid

Advantages Disadvantages

Competition-

induced efficiency

Difficult and time-

consuming process

of valuation

Automatic

monitoring through

competition

Lesser economies

of scale

Small companies

can bid for fewer

stores

Fewer takers for

remote and

unprofitable stores

Companies bid per state or district Companies bid per store

A process whereby the contract for a whole state or district is awarded to one company.

Companies manage only those stores they bid for. Several companies operate in a state.

Bidding per state will work in states where the primary issue is unviability of FPS. Bidding per store will work where the primary issue is black marketing and other forms or corruption.

Cost estimates

The costs will vary from state to state since the cost of running an FPS is different in different

states. Following is a current-cost estimate for the state of Bihar:

44,480*

Rs. 1430**

Rs. 6.36

crore***

*Source: CVC on PDS – Report on the state of Bihar

**Source: Planning Commission report on TPDS, 2005, pp. 40. Includes transport, loading

and unloading, storage loss, maintenance, employee wages, rent and other costs.

***Bids will in all probability be lower than this figure due to competition and estimated

efficiency. This figure does not include monitoring costs.

Number of Fair Price Shops in Bihar – (I)

Cost/month of running an FPS in Bihar – (II)

Total cost/month = (I) * (II)

Monitoring and quality management

systems

Checks

• Random checks by government officials on functioning of stores and reporting of malpractices.

• Internal monitoring mechanism by the firm.

Helpline and IT integration

• Phone helpline where complaints can be registered.

• Helpline to be managed by the state government.

• Possible IT integration of the entire system, central database of all card-holders, linked to UID scheme.

Contract specifications

• Assurance of targeting card-holders by the firm and grain quality assurance by the government

• Fines for malpractice

• Sustained malpractices – revoking contracts and legal action

Impact assessment, sustainability and

scalability

• Cost to government, before and after

• Level and quality of new bids indicating popularity of the policy among companies

• Average cost of running an FPS

Cost analysis

• Difference between grains allotted and grains distributed

• Number of new FPS

• Number of complaints registered and addressed

Implementation

• Nutrition levels, compared before and after and across areas with and without the policy – the ultimate test of the policy, not a performance indicator for the firm

• Public satisfaction with the PDS

Other indicators

Following are ways to measure the impact of this policy:

The policy is sustainable due to the competitive bidding process and with appropriate monitoring. It can be extended to the whole country.

Challenges and mitigation factors

• Frequent monitoring, revoking of contracts and maintenance of helpline.

• Making the PDS-related activities of the firm open to RTI queries.

Corruption continues

• Creating awareness about continuity of subsidised food and the fact that only management is outsourced.

• Publicizing lower costs incurred.

• Giving states the option to continue with the public system.

Privatization is opposed on principle

• In case of state or district-wide contracts, dividing the country into zones and limiting the number of zones one company can serve.

• Ensuring a minimum number of firms are given contracts in case of store-wise bidding.

Monopolisation

References

Planning Commission. 2005. "Performance Evaluation of Targeted Public Distribution System (TPDS)." Planning Commission, Government of India. New Delhi.

Flinders, Karl. 2013. “TCS India passport project, an example for UK public sector as IT becomes transformational rather than an input.” Computer Weekly, July 3.

White, Alan. 2013. "The tail’s wagging the dog": How outsourcing is eroding NHS services. New Statesman, April 15.

2013. “Outsourcing: Time to realise the benefits.” Health Service Journal, July 9.

Bhalla, Surjit S. 2012. “No Proof Required: Enhancing Corruption the NAC way.” The India Express, January 7.

Central Vigilance Commission on the Public Distribution System: Report on the state of Bihar.

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