Food Basket Monetization

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Monetization of Food Basket 21st November, 2004
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Contents

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Current System

• In September 1990 Iraq established a food
  rationing system in response to the introduction
  of sanctions.  The size of the monthly ration
  or food basket increased in 1997, when the UN
  Oil-for-Food programme came on stream.
• All Iraqi citizens are eligible to receive ration
  cards so long as they have lived in the same
  place for at least six months, curbing population
  mobility.
• Each Iraqi is entitled to a monthly ration
  consisting of flour, rice, sugar, powdered milk,
  tea, salt, soap and a few other items infants
  receive formula, cereal and detergent,

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Current System

• The ration system is controlled by two key
  offices in the Ministry of Trade - the Computer
  Center and the Office of Planning and Follow-Up.
• The Computer Center manages the ration card
  computer database and provides computer systems
  and services to the Ministry and its companies.
• The Office of Planning and Follow-Up is
  responsible for implementation of, and
  transactions related to, the ration card
  distribution system. 
• Three state companies are closely linked to the
  ration system
• The Grain Board of Iraq imports, stores, and
  purifies grain purchased through the program
• The General Company for Grain Processing produces
  and distributes wheat flour and bread
• The State Company for Food Stuff and Trading is
  involved in warehousing, insurance, and
  transportation of sugar, infant formula, beans,
  and detergent etc.

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Current System

• Ration cards are good for one calendar year and
  are renewed annually the current cards are valid
  until December 2004.
• Each year, the Ministry of Trade sets up 50,000
  stands across the country to expedite ration card
  renewal,
• Ration cardholders pick up their rations once a
  month, on the same predetermined day each month.
• Under the public distribution system, each Iraqi
  is entitled to a monthly food basket, for a
  nominal fee of 250 Iraqi dinar (0.171) in
  Central and Southern Iraq and similar amount in
  the North. 

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Current System

• The standard food basket includes a range of
  staple items, including wheat, rice, sugar and
  powdered milk.  For infants the food basket is
  limited to infant formula, weaning cereal, soap
  and detergent,
• The food basket is distributed, and fees
  collected, through around 50,000 food and flour
  agents throughout Iraq.  Food agents are
  typically local grocery shops.
• Fourteen to sixteen million people or two
  thirds of the population are actually dependent
  on these rations for survival.

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Market Value of Food basket

• The current Iraqi market value of the standard
  and infant food baskets relative to the price
  of food basket items on local Iraqi markets is
  around 7,500 Iraqi dinar (5).
• Actually the food basket is worth around 20,000
  Iraqi dinar or 13 per person per month, or an
  annual cost of around 4.3 billion. 

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The negative impacts of Food Basket on the Economy

• Business opportunately is reduced for small
  businesses. It is not rewarding to investment in
  food processing,
• Orders primarily go to foreign suppliers because
  they can supply in bulk bulk buying
  discriminates against smaller operations of Iraqi
  farmers, food processors,

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The negative impacts of Food Basket on the Economy

• The current arrangement have resulted in declines
  in farm incomes and agricultural productivity
• Oilseed production discouraged because cooking
  oil rations have been imported
• PDS limits dietary choice, potential expenditures
  on fruits and vegetables
• Iraqi farmers concentrate on cereal crops because
  of government price
• Poor households have to sell food for cash,
  receiving very little money in exchange
• Sale of foods by poor households hurts local
  markets for farmers
• Foodstuffs are low quality
• Consumers lack choice
• System is wasteful, expensive, subject to
  corruption, fraud and smuggling

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Recommendations

• Current system should be replaced by monthly cash
  payment sufficient to
• buy items currently provided through ration
  system and
• encourage individuals to take risk of replacing
  the old system.

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Advantages of Monetary Payment

• Cash payments will provide a major boost to the
  Iraqi economy (5 bil. per year)
• Most of the money will stay in Iraq, stimulating
  the economy,
• Iraqis will buy from local farmers,
• Iraqi factories will be able to manufacture food
  products for the domestic market,
• Iraqi businesses and truckers will distribute and
  transport food,
• Distribution and flows of cash will contribute to
  developing financial sector.

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Advantages of Monetary Payment

• Poor households will have money to buy other
  necessities such as clothes, shoes, private
  health care,
• Households, will have better choice of food and
  their social life could improve

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How Much Compensation Should Be Provided?

• A monthly payment per person of 15 per person
  (405 million per month
• or 4.9 billion per annum, based on a population
  of 27 million). 
• The amount between 10 and 13 per person would
  represent the amount
• needed to purchase the food basket items post
  monetisation, leaving
• between 5 and 2 per person as compensation for
  change.

Note Ministry of trade, should ensure stability
of prices, by keeping enough food stock. It is
necessary to stand by to any threat to
competition.
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The Problems of a Cash Payment Mechanism

• Although cash payments would be preferred, the
  retail bank system is in its infancy, the number
  of household accounts is small and the ability of
  the commercial banks to handle large numbers of
  accounts and account transactions is very
  limited. It is doubtful that a physical cash
  distribution approach would be easy to implement.
  The following are few of the reasons
• The vast majority of Iraqis dont have a Bank
  account,
• Many population centers do not have bank
  branches,
• The banking system is still entirely reliant on
  the physical movement of cash,
• Huge amounts of cash will have to be moved around
  the country with associated logistical and
  transportation constrains and high handling
  costs,
• Security issues are a threat (payment sites have
  to be highly secured),
• The Banking system network (300 sites)
  throughout the country would have to serve ab.
  3.8 mil. households. The post office network (300
  site) is not equipped and trained for the purpose
• Because of physical, technological, management,
  and employee constraints, attempting to make cash
  distributions through the existing banking system
  and post offices is almost certain to result in
  long waiting lines in many locations, with the
  accompanying security problems.

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A Better Choice Electronic Payment Mechanism

• In order for the monetization process to be
  successful it will be necessary to introduce
  robust solutions complemented with a sturdy
  communication system that banks and post office
  locations eventually have adequate facilities and
  capacity to handle the above mentioned cash
  payments.
• The elimination of cash transactions and the
  expansion of access points beyond bank branches
  and post offices to supermarkets, stores and
  former food distribution agents will bring
  efficiency to the monetization program.
• The technology to achieve this objective already
  exists in various types of SMART CARDS and their
  accompanying data gathering and accounting
  software which can be used through either land
  lines, mobile lines or via satellite.
• Distributing cash through Smart Cards provides a
  safer distribution channel that is also less
  susceptible to fraud.

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A Better ChoiceElectronic Payment Mechanism

• Money allowance is loaded on the individuals
  card and then it can be used (debited) to
  purchase food or other goods and services. Only
  after is withdrawn or payment transaction is made
  amount spend/withdrawn is cleared with central
  account.  Minor childrens monthly payments will
  be credited to the account of a parent or
  guardian.  Smart cards are permanent, can be
  refilled often and can be used for other purposes
  such as identification, medical records, etc. 
  They last two to five years before requiring
  replacement.
• Electronic benefit cards (Smart Cards)
  successfully used worldwide (e.g. South Africa,
  Russia, Saudi Arabia, Brazil, Emirates)
• Cards provide
• Security Unlike cash, stolen cards cannot be
  used
• Fraud reduced because easier to monitor
• Payments cheaper because electronic
• Smart Card Systems function without fixed
  telecommunications link
• 16

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Ministry of Trade Privet Sector

• An important element in the short run of the
  development of efficient goods markets in Iraq
  will be ensuring reasonable private sector access
  to government owned distribution networks.  This
  encompasses warehouses, trucks, grain silos and
  the other apparatus that support the public
  distribution system. To this extent
• Stores will have to be able to purchase rice,
  lentils and other goods from Ministry of Trade
  warehouses
• Warehouses will have to be equipped to purchase
  and sell commodities
• Put in place accounting systems
• Hire employees to handle billing, purchasing
• State Company for Foodstuff Trading and the Grain
  Board of Iraq will also have to be able to buy
  and sell food

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Program Administration

• Administration of the new system should be to tax
  commission (or to any other body).
• Building on the current national organization and
  structure of the Tax Commission would permit
• Re-registration of current beneficiaries and
  expansion of registration to cover proposed new
  beneficiaries
• Conducting enforcement and monitoring activities
  and in a more efficient way
• Better control of the cash distribution system
• Building the base for a coordinated and
  integrated tax/benefit system over the coming
  years
• Minimize the duplication of government
  administration

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Potential Problems

• Prices of food may rise, payment will have to be
  adjusted to cover changes in costs,
• Some people will try to obtain additional
  payments by falsifying identities,
• Head of household is likely to control funds in
  some cases, money may be used to purchase goods
  other than necessities,
• Some households may be left out.

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Other Issues

• New system does not need to be introduced
  everywhere at one time both systems can work
  concurrently
• Program should be introduced neighborhood-by-neigh
  borhood
• People assigned to selected food agents will be
  assigned to banks or post offices or their agent
  to get cash,
• Changes in consumption patterns will be surveyed,
• Trials will help determine how much money is
  necessary to cover costs of food rations

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• TRANSITION FROM HANDOUTS TO MARKETS
• The Pilot Concept and Planning

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The Pilot Concept and Planning

• The move from food rations to cash payments
  should be carefully planned
• It should proceed incrementally, with certain
  areas of the population transitioning to
  receiving cash payments while other areas remain
  receiving food,
• The phase in should, however, be as simple as
  possible to ensure that the recipients and the
  other participants in the system can understand
  it and are transitioned as smoothly as possible

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The Pilot concept and Planning

• To run a trial, the following steps will have to
  be taken
• Choose appropriate sites and logistics
• Identification of some districts where there is
  mix of classes with the majority of working class
  and poor population
• The district contains a Registration Center or a
  sub regional office
• The district should contain Public
  Distribution/Food Distribution Locations and food
  supplies retail shops
• Control sites in similar area also need to be
  selected
• Survey instruments need to be drawn up and given
  in both the experimental and control sites before
  the program begins.
• After the surveys are taken, the population in
  the selected sites needs to be well informed
  about the program Owners and employees of food
  distribution points need to be interviewed before
  the program to understand their role in the
  former system and to benchmark changes
• After the first month, monthly surveys should
  continue to be taken in both the control and test
  areas for several months, possibly for a year, to
  evaluate what has happened

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The Pilot Concept and Planning

• Food Distribution Issues
• It is necessary to take measures to ensure
  combination of private and public food
  distribution. The warehouses and distribution
  routes that supply current food rations to
  recipients in trial areas will need to be
  commercialized or privatized so that current food
  agents and retailers can purchase goods to be
  sold to consumers
• Money Distribution Issues
• Because the retail bank system is in its infancy,
  the number of household accounts is small and the
  ability of the commercial banks to handle large
  numbers of accounts and account transactions is
  very limited. It is important that have the
  fololowing options Bank, Post Office, and Agents
• The first order of business will be to collect
  computerized lists of individuals receiving food
  through the current PDS system in the trial
  neighborhoods. The list will then be used to
  determine cash payments. Bank and Post Office
  facilities will need to be assessed and
  equipped/refurbished to handle the additional
  customer flow. A service fee will need to be
  determined to cover expenses incurred by banks
  and post offices for providing this service.
  Tellers will need to be trained and provided
  appropriate incentives to give cash to authorized
  recipients only. Means of confirming receipt
  also need to be devised. A thumb print and
  signature or mark would appear to be good options

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The Pilot Concept and Planning

• Social Issues
• Those that Fall through the Cracks. In all
  payment programs, people fall through the cracks.
  Registration cards are lost, payments stolen,
  people are not registered, etc. Although the
  system needs to be as foolproof as possible, it
  will still not be 100 percent successful.
• Some institutions that will need to be taken into
  consideration are orphanages, hospitals and
  prisons. A policy will need to be devised in a
  way that provides payment to these organizations
  so that resources will be available to feed those
  individuals in an institutions care.
• The program will need to have regional ombudsmen
  to whom people will be able to complain if they
  are unsuccessful solving their problems through
  official channels. Ombudsmen need to be selected
  for the trial locations.
• It would also make sense to launch an outreach
  program to local mosques and charitable
  organizations in the trial districts, asking them
  to be prepared to help individuals that may not
  get their money on time.
• Gender Problems
• It is important to minimize the risk of
  patriarchal domination of these new financial
  flows in the transition period. In other
  societies, this is done by tying payments to the
  mother in a two-parent household. Ideally, it
  might make sense at this time to make payments to
  all individuals over 18 years old, but this would
  require revising the current ration card dataset.
  If the system moves to electronic payments and
  accounts, this move would provide some defense
  for women to keep some of the money rather than
  all of it go to the head of household. It also
  might make sense to assign childrens transfers
  to the mother rather than to the head of
  household.

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The Pilot Concept and Planning

• Organizational Issues
• Arranging trials will take a substantial amount
  of coordination. Some institution needs to be
  designated to obtain and arrange for the
  distribution of cash. The Ministry of Finance
  needs to be involved in the determination of this
  institution and cash transfers. The Ministry of
  Trade needs to halt provision of food to local
  food distribution points. Contracts need to be
  issued to conduct and collate survey data. And a
  team needs to be set up to modify the program to
  solve problems identified during implementation
  and from the surveys. This team also needs to be
  tasked with expanding the program to other
  neighborhoods so that a large enough group of
  people are operating on the cash system to have
  an impact on the distribution system
• Timing and Phase In
• It is recommended starting the program in the
  middle of the month for the trials. The
  logistical problems of building in expectations
  that cash will become available every month on
  the first are so large that it would be good to
  start the program on a rolling basis. Later,
  when the Smart Card system is up and running,
  we could gravitate back towards a single day upon
  which money is made available. The mid-month
  start also provides leeway to delay the
  introduction as operational hitches are worked
  out. To provide a safety net, all recipients
  would continue to enjoy the use of ration cards
  during the month. In essence, they would receive
  a bonus for participating in the program.
  However, this means that follow up questionnaires
  should be delayed until after the second payment
  when recipients will be operating solely on the
  cash program. These first trial groups should
  also be the first to transition to the Smart
  Card. They will provide a better test group for
  the Smart Card as they will already be
  accustomed to purchasing their food rather than
  operating on the ration card system. The use of
  these groups will help us to better determine
  specific problems with the Smart Card rather
  than problems involved in shifting from coupons
  to purchasing food. The trial groups will also
  be used to being Guinea pigs. Researchers
  often find people enjoy being involved in
  surveys. Continued involvement reduces the costs
  of identifying participants, educating them, and
  doing follow up.

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Practical Steps

• Set up a high level committee to initiate the new
  system and to subsequently monitor the
  development. The committee should make the
  following decisions
• Request ministry of finance to set up a budget
  for the project
• Assign the new system to an organization or
  Ministry of Trade to administrate it. The
  organization should be empowered to take all
  necessary actions.
• Set a media committee