Pds Concept Note-cal2cal

CONCEPT NOTE

OF

A SMART CARD BASED

PUBLIC DISTRIBUTION SYSTEM

FOR INDIA

P r e s e n t ed

B y

2 00 8

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Concept Note: Smart Card based PDS 15 July 2008 Page 2 of 13

Table of Contents

1.1 INTRODUCTION TO PDS.................................................................................................................................. 3

1.2 PROBLEMS WITH EXISTING PDS ....................................................................................................................... 3

1.3 TECHNOLOGY OPTIONS FOR BETTER GOVERNANCE AND ACCOUNTABILITY OF PDS .................................................... 4

1.4 ADVANTAGES OF SMART CARD BASED SYSTEM ................................................................................................... 5

1.5 IMPLEMENTATION OPTIONS AND SCENARIOS ...................................................................................................... 5

1.6 OPERATION OF SMART CARD BASED PDS .......................................................................................................... 6

1.7 THE PPP MODEL .......................................................................................................................................... 9

1.7.1 KEY FACTORS ........................................................................................................................................... 9

1.7.2 PPP MODEL – FUNCTIONAL OVERVIEW ..................................................................................................... 10

1.7.3 ADVANTAGES OF PPP MODEL .................................................................................................................. 11

1.7.4 DISADVANTAGES OF PPP MODEL .............................................................................................................. 11

1.8 IMPLEMENTATION COST AND TIMELINE ........................................................................................................... 12

1.9 RECOMMENDATIONS ................................................................................................................................... 13

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CONCEPT NOTE: SMART CARD FOR PDS

1.1 Introduction to PDS

The Public Distribution System (PDS) is a mature system of distribution network operative

in India, since the 1950s, through which the Government of India provides food (ration)

and non-food items at highly subsidized rates to the poor and vulnerable sections of the

population. A chain of shops called ration shops or fair price shops (FPS) are set up all

over the country to distribute rations to three category of households holding ration

cards; Above Poverty Line (APL), Below Poverty Line (BPL) and Antyodaya Anna Yojna

(AAY). With about 4.5 lakhs Fair-Price Shops (FPS) distributing food and non-food items to

about 16 crore families, the government spends about Rs 25,000 crore on subsidies.

The PDS is run jointly by central and state governments. While the responsibility of the

central government, through Food Corporation of India (FCI), is to procure, store and

transport grains from purchase points to central godowns (warehouses) across the

country, the responsibility of state governments is to transport these commodities from

central godowns and distribute them to consumers through the network of state owned

godowns to the fair-price shops.

Fair-price shops are owned privately or cooperatively and make profits from the

commission on sales. They are licensed by state governments and principally distribute

food items (wheat, rice, sugar, and edible oil) to customers at fixed prices. A shop covers

about 2000 people. Any eligible person with a designated residential address, rich or poor,

urban or rural, can draw supplies from these shops. The grains distributed in these shops

are of fair-to-average quality.

1.2 Problems with Existing PDS

Different studies have shown that the PDS and Targeted PDS (TPDS) schemes and the

whole supply chains are fraught with various problems and leakages. These include

diversion of commodities from ration shops to open markets, flawed list of BPL and AAY

consumers, and poor quality of items supplied etc. In addition, the difficulties associated

with poor purchasing power of the consumers who cannot afford bulk buying of rations

and have to fall back upon open markets for obtaining their required consumption basket

and are, therefore, forced to pay market prices, thus making them more pauperized. The

summarized issues are as follows:

(a) Decline in off take and Allotments: The off take of rationed articles has come down

considerably since the introduction of targeted PDS. Off take of food grains among

those in the APL category is almost nil because of the price parity with local

markets and availability of better quality food grains.

(b) Targeting and BPL/AAY Identification: The main flaw in the system is that families

who are not eligible are in the approved list of BPL/AAY families (targeted

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beneficiaries) whereas many eligible beneficiaries find themselves in the APL

category.

(c) Entitlement to Food Grains: Under the earlier policy, ration scales were in fixed

quantities per person or unit, whereas now, irrespective of size and need, each

household is entitled to 35 kg per month.

(d) Quality Issue: In the matter of quality, the grains released from FCI pass its quality

control test (which, among other things, limits moisture content and the

proportion of broken rice). Amongst the imported wheat, the red Canadian wheat

is perceived to be of lower quality compared to those imported from Australia.

(e) Monitoring by Civic/Local Bodies and Their Involvement: In areas where there is

healthy participation by local bodies and nongovernmental organizations, the

system has been extremely beneficial for the targeted population because it

makes its operations more transparent and accountable; thereby reducing

leakages and corruption.

(f) Cardholder Awareness: In many cases, the beneficiaries are not aware of their

entitlement or price. Because allotments come irregularly and are often

inadequate, and cardholders are misinformed about the sufficiency of allotments,

the ration dealers often dictate the price and the quantity dispensed.

(g) TPDS has unilaterally increased the price of food grains and other essential

commodities for the poor as well as the non-poor. Those who depend solely on

the system have been most seriously affected vis-à-vis those who are better off

economically.

1.3 Technology Options for Better Governance and Accountability of PDS

Feasibility of several technologies like food stamps, magnetic stripe cards and smart cards

were studied. The details of these alternatives are:

(a) Food Coupons/Vouchers: These are normally paper-based vouchers issued to the

targeted population to be redeemed at affiliated shops for authorised food and

non-food items. However, due to inherent perceived problems, associated stigma

and advances in technology these systems are slowly making way to smart cards

and magnetic stripe cards.

(b) Magnetic Stripe Card System: These are the credit card type swipe-cards with

information stored on the magnetic stripes on the card. Such systems have limited

storage (226 bytes) capacity and are not sufficient to store the required data for

the proposed system.

(c) Smart Card System: These cards are also the same size as a credit card, have a

memory and/or a processor chip, and can store up to 64 Kilo Bytes (KB) of

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information (data) or more. Biometric fingerprints require about 512 Bytes (half a

kilobyte) per fingerprint. A secure smart card with 16 KB memory would cost less

than Rs. 100/- per card. Out of the three, smart card provides the maximum

security and is tamper proof for ordinary users. They can store large amount of

transactional data and are the most suitable for implementation in the proposed

scenario.

1.4 Advantages of Smart Card Based System

The advantages of a smart card based TPDS are:

(a) All beneficiaries will be identified and authenticated as the smart cards will store

the beneficiaries fingerprint scan and the same will be matched at the Point of Sale

before issue of grains.

(b) All transactions at the FPS will be automatically stored as tamper proof records on

the FPS owners’ smart card.

(c) Automatic inventory management and stock balance calculation at the FPS. All

monthly reports can also be readily made available – therefore book-keeping time

and costs are saved.

(d) The card data will be used for reclamation process where-in the FPS owner will get

to buy/lift only the balance quantity of rations authorized depending on the

number of different types of beneficiaries attached to his ration shop. The FPS

owner will no longer be able to manipulate this data; leading to considerable

leakage savings.

(e) The smart cards can also store transaction data on the beneficiary smart card and

thereby all points of disputes can be eliminated.

(f) This system can work in the fully automated environment and in semi-automated

environment as well.

(g) Most appropriate in terms of utility, security, technology shift and obsolescence

proof as well.

1.5 Implementation Options and Scenarios

Given the diversity of infrastructure, state of development and governance parameters

across the two districts studied, it is not possible to apply a single homogeneous mode of

intervention to meet the requirements. In the present context, the choices for

implementation are whether to implement a smart card system in the existing FCI and

related supply chain system or in a PPP model or try out a combination. This

implementations could be either a fully automated and online system or an offline but

semi-automated system. The possible implementation options are:

(a) Implement the fully automated/semi automated system on the existing PDS chain.

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(b) Implement the fully/semi automated system on the existing PDS chain with

government intervention in a PPP model; in that the government provides all the

infrastructure and Private Operators operate and maintain the installed system.

(c) Implement these systems/models in the PPP model without any government

intervention. These systems will be either a fully or semi automated smart card

based system(s).

(d) Implement the pilots in mixed mode way where in some areas it is implemented in

the existing system, in some areas in PPP model where the private operators just

operate and maintain the government installed system and in some areas the PPP

model without government intervention or investment is implemented.

1.6 Operation of Smart Card Based PDS

A smart card based system is possible to implement whether the IT network is well

established or not. GSM connectivity may be used to connect all the POS terminals at the

FPS to the network. In such a scenario all the Talukas, concerned banks and the godowns

may or may not be connected to the network as well. The data flow will take place over

the network or can be sent offline through smart cards. The summary of the proposed

solution is:

(a) All FPS are issued with POS terminals with inbuilt biometric scanner and sales

receipt printer. All Talukas, godowns and concerned banks are provided with a

computer terminal duly interconnected and with necessary software and smart

card reader and finger print scanner. (Refer figure 1)

Figure 1: POS terminal

Disclaimer: CAL2CAL has no particular preference for any type of hardware or hardware manufacturer or any service provider

(b) All transactions at the FPS should be only smart card based from a cut-off date as

decided by the authorities.

(c) All sales are carried out only after the beneficiary smart cards are presented by the

beneficiaries and duly authenticated with their fingerprints for each transaction at

the POS terminal. (Refer figure 2)

(d) All sales, sales summary, stock balance are uploaded to the Taluka Server at the

day end or at regular intervals from the FPS owner smart cards along with the

necessary unique identifier of the FPS.

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(e) At the Taluka, all records are kept based on the data received from the FPS under

their jurisdiction. The Taluka office calculates the entitlement of food grains for

each of the FPS and intimates the FPS owners of the amount of money required to

be deposited at the bank for the allotted rations. The allotment of rations is based

on the stock details received from the FPS, either online or from their smart cards.

This automatically will stop manipulation of stock demand that FPS owners could

have otherwise indulged in.

Figure 2: Smart Card Process flow Depicting Ration Drawing Process

(f) From the Taluka the intimation regarding money amount to be deposited by each

FPS is given to the bank, and the stock entitlements to the concerned godown. The

FPS owner carries his smart card to the bank, identifies and authenticates

himself/herself by presenting the card to the bank and deposits the money in the

bank. The bank, in turn, will intimate the Taluka and the godown of the money

receipt with particulars of FPS and other relevant details. (Refer figure 3)

(g) The FPS owner goes to the godown directly, identifies himself and lifts the allotted

stock. (Refer figure 3)

(h) Once the stock is lifted, the stock detail is written on the FPS owner’s smart card

and the Taluka office is duly intimated. (Refer figure 3)

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Figure 3: Reclamation Process of Rations for FPS

(i) For Regular Operation there area citizens kiosks may be made available at every

cluster of 3 villages along with an operator who helps citizens with the following:

i. All ration card related activities like application for new ration card, change of

demographics, change of address, cancellation of ration cards etc.

ii. The beneficiaries are intimated of the time and place where they go and give the

electronic data about the family’s thumb print, photograph etc

iii. The beneficiaries are intimated the date on which they can collect the smart card

from the Taluka office.

iv. Once the individual collects the smart card, the affiliate FPS updates its database

through the “First Use” information embedded either in the smart card or by

going online when the smart card is first presented.

v. Thereafter, the beneficiaries get their entitled rations with effect from the next

month when the FPS owner draws their quota of allotted rations for additions to

their FPS.

(j) Hardware requirements at a FPS is a FPS owner smart card and an integrated POS

terminal (shown in Figure 1) having the following:

i. An integrated POS terminal with Biometric reader

ii. Beneficiary smart card reader

iii. SAM smart card slot

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iv. Communication ports

v. GSM/GPRS facility

vi. Inbuilt battery with charger with up to 300 hrs standby.

1.7 The PPP Model

Public Private Partnership (PPP) is a long-term partnering relationship between the public

and private sectors to deliver services. Through PPP, the public sector seeks to bring

together the expertise and resources of the public and private sectors to provide services

to the public at the best value for money. There are many possible PPP models, including

joint-ventures, strategic partnerships to make better uses of government assets, Design-

Build-Operate and Design-Build-Finance-Operate. The solutions provided in the sections

above are implementation of technology within the ambit of same distribution network

with the aim of enhancing efficiency, decreasing targeting errors, removing duplicity, and

reducing leakages by increasing accounting accuracies. However, in the quest for reducing

overheads in terms of maintaining separate bodies like FCI and state food corporations,

other distributions method/channels have been explored. This will, of-course, mean a

paradigm shift from the present distribution methodology and the implementation

decision will not be technological feasibility. There are inherent advantages and

disadvantages of such a system. The biggest advantage will be allowing market forces to

take its natural course, as will be doing away with dual pricing system. Also better quality

of grain availability; wider choice with consumers; enhancing self-esteem of the targeted

population are the other major benefits that are likely to accrue from the proposed

system.

1.7.1 Key Factors

The key factors for the scenario described above which need careful consideration and

planning and defining the processes are:

(a) Individual identification

(b) Remote interaction processing

(c) The institutional impact of any proposed changes

(d) The level of technology must be appropriate to the environment in which any

system will operate

(e) ‘Market’ acceptance of the system by Fair Price Shops will need to be earned; the

system can also be used to help in managing the viability of FPS shops

(f) Any system must be able to support change with minimal incremental investment

(g) Institution of regulatory mechanism/bodies.

(h) Institution of processes for such a body

(i) Economic considerations:

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i. It can be argued that the most efficient social welfare policy to reduce poverty

is a direct transfer of subsidy to the poor. (in a conditional cash transfer basis)

However, the downside is in this cited example: for example, rice available in

FPS shops may be of a specific quality (and therefore price) that is not available

locally elsewhere to potential beneficiaries and so a direct cash transfer would

not give a similar purchasing power to that which he has with access to a

specified quantity of rice.

ii. However, in time, it is anticipated the market mechanism can be used to

ensure a more efficient transfer of subsidy on a conditional basis to those in

need.

1.7.2 PPP Model – Functional Overview

Figure 4: The PPP Model

This model works on the assumption that the system of FCI and state food corporations

are not servicing the TPDS. Therefore the management of grain and subsidy distribution is

vested with some service provider, contracted by the government. The way this system

will work is described below:

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(a) A service provider is identified and given the responsibility of providing the

necessary services. The pre-calculated subsidy amount is transferred to the service

provider’s bank.

(b) The service provider enrols affiliates (shops) and/or the existing FPS, who purchase

food grains from the open market (duly controlled and monitored by some

designated monitoring agency). The quality of grains for the beneficiaries is pre-

defined and monitored by this monitoring agency, the role and functions of which

is defined later in this document).

(c) The beneficiaries purchase the food grains and other authorised essentials using

the smart card issued to them. This smart card is used for this purpose and only in

the affiliated shops/FPS shop. Their purchase price is fixed as per the existing

government norms/rates.

(d) The beneficiaries can buy other quality grains but the price differential is paid by

them.

(e) The affiliates/FPS shops can also sell to non-beneficiaries (at the market price).

They do not get any benefits for this.

(f) The transaction details related to authorised beneficiaries are captured in the POS

terminal for “end-of-day” transmission to the service providers back office.

(g) The service provider’s back-office checks the validity of all such transactions and

requests release of valid payment to affiliate’s/FPS bankers.

(h) The affiliates/FPS are reimbursed only the value of subsidy based on the

transactions that have occurred on cards (purchase price – subsidised sell price +

subsidy amount + agreed margin); margin rate could vary and can be used to

encourage currently non-viable FPS (see report of planning commission audit of

TPDS).

(i) The payment to the affiliates takes place through the service provider’s bankers

who are requested to release payment to the affiliate’s/FPS’s bankers.

1.7.3 Advantages of PPP Model

Some of the advantages of the system described above are:

(a) The incentive to defraud by the affiliates/FPS stores disappears because they are

buying and selling food at the market price.

(b) A huge savings in operational costs of the state level corporations and the FCI

(c) Dual pricing system will be abolished.

(d) Incentives for leakages at all other points of leakages are eliminated.

1.7.4 Disadvantages of PPP Model

(a) Strong regulatory mechanism required to hold the service provider accountable.

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(b) The buffer stocking for national emergencies would be dismantled – however, a

policy update mandating necessary organisations to carry out such tasks can help

overcome this problem.

(c) May result in unemployment of current workforce. This could mitigate through

necessary regulatory mechanism and by asking the service provider to provide

employment to such affected persons.

1.8 Illustrative Implementation Cost and Timeline

A hypothetical but realistic scenario(s) of two districts are considered here for arriving at a

cost and a timeline for implementation of a pilot. Say, a district “A” (an advanced district

in terms of existing IT and other infrastructure), having 414824 cardholders with 695 FPS,

4 godowns and 8 Taluka offices and is comparatively compact is considered. Another

district “B” which is large, consisting of different geographical, and population

composition is considered. This district is not so advanced as compared to district “A”. Say

this district “B” is administratively divided into two zones for ration distribution, “B1 –

Zone” and “B2 – Zone”. “B1 – Zone” is comparatively densely populated and locate in a

semi-cosmopolitan area, where as “B2 – Zone” is a mix of rural and tribal area. To provide

a realistic scenario the data of the beneficiaries, FPS, Talukas etc are as given at table 1

below:

Table 1: Requirement of Smart Cards

District No of Taluka

Offices

No of

Godowns

No of

FPS

No of Card

Holders

No of Other

offices/ Banks

Total Cards

District “A” 8 4 695 414,824 5 415536

District “B”

(B1- Zone)

4 3 1231 1092271

19 1093528

District “B”

(B2- Zone)

14 14 1602 645855

15 647500

Total 26 21 3528 2152950 39 2156564

District “B”’ for the purposes of ration administration and distribution is divided into two

areas as already explained above. The indicative costs of the various implementation

models discussed above areas given at table 2:

Table 2: Cost Implications of Different Scenarios

Srl

No

Area/District Capex by Govt

(Crore Rupees)

Capex by Govt and

Operations by

Private Party

(Crore Rupees)

Capex and Operations

By Private Parties

(Crore Rupees)

1 District “A” Rs 9.06 1.82 7.47

2 District “B” (B1- Zone) Rs 13.88 3.88 11.63

3 District “B” (B2- Zone) Rs 17.99 6.55 19.66

4 All areas together Rs 41 9.80 26

5 Annual Recurring cost @ 22 % of above -

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The total subsidy in these two districts is approximately Rs 841 crore annually. It is

projected that the proposed system will be able to achieve 30% - 35% savings in subsidy

i.e. Rs 252 crore – Rs 294 crore. Therefore, even a 5% savings in subsidy pays for the

capital expenditure in the first year itself.

The benefit – cost ratio of the introduction of the Smart Card Based PDS in District “A” and

District “B” would be:

(a) 6.15 for 30% subsidy savings and 7.07 for 35% subsidy savings.

(b) 9.69 for 30% subsidy savings and 11.31 for 35% subsidy savings.

The implementation times for these model/areas are:

(a) District “A” – 22 months

(b) District “B” (B1- Zone) – 23 months

(c) District “B” (B2- Zone) – 25 months

(d) PPP Model in the two districts – 29 months.

1.9 Recommendations

CAL2CAL recommends a pilot for all scenarios for evaluation of success of various

implementation scenarios. Further roll out may be decided on the success of such pilots.

The Hon’ble Finance Minister, Government of India, has already announced two pilots for

Haryana and Chandigarh. Please refer to the following link for details

http://indiabudget.nic.in/ub2008-09/bs/speecha.htm

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