As the strategic grain reserve is owned by the government, it must ultimately be the government which finances the cost of establishing and maintaining the reserve. From the outset it should be recognised, and accepted by government, that the reserve is likely to be a continuing cost burden, and should not be expected to generate sufficient funds from the sales of grain to cover either its replenishment or its full operating costs. The scale of the costs involved will be related to the size of the reserve and the obligations for social programmes. For those countries where the majority of releases will be for meeting shortfalls in market availabilities, e.g. Zambia, the cost to government is likely to be proportionately lower than for countries which have a high rural vulnerability to food insecurity combined with low purchasing power, thereby necessitating increased use of relief programmes, e.g. Malawi. The management and operational structure of the reserve will also have a bearing on its costs.
Costs attributable to the reserve are likely to increase when:
- the reserve agency is responsible for maintaining and operating the storage facilities used for holding the reserve, e.g. recurrent staffing and building costs will be incurred irrespective of the quantity of grain held in the reserve;- the reserve agency is responsible for maintaining the physical stocks held in the reserve;
- the reserve comprises several different types of grain, i.e. some grains will be more expensive than others, and higher administrative, handling and transport costs are incurred, e.g. various grain types have to be allocated to different locations where they will be required;
- purchases for and sales from the reserve are made directly by the reserve agency, as the reserve agency will need to establish and maintain the capacity for undertaking such actions, which are only required intermittently;
- the reserve agency is required to undertake price stabilisation activities, particularly when the price band is narrower than that formed by import and export parity prices, as it cannot take full advantage of the low market prices when it is buying grain and the high market prices when it is selling;
- the reserve agency is also responsible for monitoring market conditions and providing market intelligence activities.
whereas costs are likely to decrease when:
- other government agencies are responsible for monitoring market conditions, e.g. Early Warning Unit and Market Information, and/or Market Intelligence, Systems.- the storage and maintenance of the reserve is contracted out either to public or to private sector companies, as the agency would only be required to pay for the storage and maintenance of the grain actually held. The private sector company could use the "spare" capacity for storing other commodities either on its own account or under contract for other traders;
- the reserve comprises a single, locally available grain
- purchases and sales are made using the facilities and resources of the private sector, i.e. buying and selling by public open tender or through appointed private sector agents or using commodity exchange;
- reserve respects import and export parity prices, i.e. it does not attempt to maintain producer and consumer prices within a band narrower than the import/export parity price band.
Finance will be required to fund the purchase of grain and to cover operational costs, i.e. administrative costs of the agency responsible for the reserve, storage, handling, transport and maintenance costs of the grain. While the funds used for purchasing grain will be regenerated, either in total or partially1, when the grain is marketed, operational costs are a non-recoverable expenditure and therefore need to be strictly controlled. In the interests of greater transparency and acceptability there are advantages to be gained if a separation is made between the funds use for grain purchase, i.e. the grain account, from those used for paying for operational activities, i.e. the operational account. Such a separation would also reduce the opportunity, and temptation, to pay for administrative costs from the revenues generated from grain sales.
1 In those countries which have a large difference between import and export parity prices, i.e. landlocked countries such as Malawi and Zambia, the funds generated from the sale of the reserve could, if advantageously made, yield a profit.
To enable the reserve agency to function efficiently it would be preferable if all financial resources attributable to the reserve, i.e. those from the grain and operational accounts, were held and managed directly by the reserve agency. This would enable the reserve to enter the market, domestic or international, for grain purchase without having to go through the time-consuming bureaucratic machinery of requesting funds, or permission to spend funds held, from the Treasury. As a safeguard the funds trusted to the agency should be subject to an annual audit and the reserve management be held accountable for the correctness of their use. To allay fears that the reserve is in some way benefiting from preferential treatment, such audits could be made available for inspection by interested parties, e.g. a grain traders' association.
Options available for the establishing, and maintaining the grain and operational accounts are:
- a direct allocation of funds from the Treasury to the grain account to meet the initial estimated cost for the establishment of the reserve. This could be a single lump sum or tranches over a period of say 3-4 years. Tranch payments would enable government to verify that an acceptable level of propriety in the use of the funds was being maintained before committing the full funding requirements. Disadvantages of tranch payments are: the size of the reserve will be constrained by the availability of financial resources during the build-up period, and government may lose its initial enthusiasm for making subsequent tranch payments into the reserve, particularly if the likelihood of a food emergency is low;- access to loan funds from a commercial bank which would be charged at the prevailing interest rate for the purchase of grain stocks. This presupposes that the reserve will be able to recover the interest charges and storage costs from the revenues generated when the grain is sold. However, in many countries the process of structural adjustment has led to exceptionally high commercial rates of interest, which could result in the reserve agency being unable to service the loan in full from funds generated by the sale of grain. Under these circumstances the government will need to cover the difference through annual cash injections based on the audited accounts;
- it would be advantageous if the non-recoverable operational costs, e.g. salaries and overhead costs of the reserve agency, were to be covered separately through an annual payment from government to the reserve agency;
- sales of grain, either from transfers of stock already held by government, as was the case for the establishment of the Zambian food security reserve, or from food aid donations.
Based on an estimate of its funding requirements and the resources it already commands, the agency should be required to prepare annually a detailed set of accounts for the reserve for independent auditing. It should also submit, according to established procedures, a budget request to government for any additional funding requirements for both the grain and the operational accounts. These requests would then be considered by government along with the demands of other departments on the Treasury. The activities of the reserve would then have to be constrained to the total resources available.
If funds are to be held by the Treasury, rather than by the reserve agency, procedures will need to be developed to enable the reserve to gain ready access to the needed resources as and when required. The cost of delaying transactions, or prevaricating over the release of funds, as treasuries in many countries are wont to do, can result in additional costs and/or penalties for the reserve as opportunities to take advantage of particular market circumstances are lost.
While the reserve is likely to be used for the most part to cope with market shortfalls, there will be occasions when it has to be used for relief programmes for those groups who do not have the necessary resources to purchase their requirements in the market. In these instances grain will usually be released for distribution through a food for work or a special feeding programme. Unlike releases from the reserve for sale in the market, which can be triggered by predetermined factors, releases for relief programmes need to be decided on a case-by-case basis. As such programmes are of a social nature, and therefore have to be supported financially, they will need to be authorised by government, and charged to the appropriate government department. To maintain the integrity of the reserve, government must therefore be prepared to make the funds available to cover the cost of the grain to be withdrawn from the reserve. Ideally the price paid for the grain should reflect its market value at the time of its withdrawal. However, this may lead to accusations from political sources that the reserve is exploiting a situation involving human suffering. As a possible lower cost alternative, consideration could be given to charging the total costs incurred to date for the purchase, handling and storage of the grain to be released. This would enable the reserve agency to recoup the direct costs it has incurred. It should be recognised, however, that these incurred costs for the reserve could be higher than the prevailing market price for grain.
