Taxation

ADB recommends cess fund to prop up rice exports

The Asian Development Bank (ADB) has recommended setting up of a cess (levy) fund based on contributions from rice exporters, as Pakistan’s production as well as export of basmati shows a downward trend due to absence of a strong research and development institutional structure, making it difficult for the sector to prepare for new challenges.

The ADB in its report “Investment in Research and Development for Basmati Rice in Pakistan” stated that the Ministry of Finance (MoF) is not transferring all proceeds of the Export Development Fund (EDF) to the Ministry of Commerce (MOC), which is responsible for disbursing the proceeds. As a result, a large sum is due from the MoF. The cess collected in 2017 from rice exporters is equal to half of all expenditure occurred on rice research and development during the last 20 years.

The report stated that insufficient investment in agriculture research and development (R&D) in Pakistan has resulted in suboptimal yields and a lower-than-potential productivity growth curve of its basmati rice varieties. Pakistan is the globe’s fourth largest rice exporter in terms of quantity, and rice is the country’s second largest export earner after cotton.

Without a policy commitment to elevate basmati rice as a strategic product, it will continue to be impacted by changing economic and environmental conditions. Extra funding for basmati can be easily channelled from the levy that is being collected from its export or through government development funds. The bigger challenge is changing the embedded mindset that fails to connect research and development with the production and commercialisation of basmati.

The report further stated that having established that the current funding levels for basmati R&D are woefully inadequate and that Pakistan’s basmati export could be increased by additional funding for basmati R&D, the question arises as to the best remedy.

Two important aspects need attention: first, the source of funding, and second, the oversight and transmission mechanism of the funding. Modern models of R&D funding rely on a combination of public grants, industry contributions, and fees and levies. However, a substantial increase from Pakistan’s public exchequer is unlikely. One option is to institute a cess (levy) fund based on contributions from farmers.

An expanded version could involve all participants of value chain, so that all participants’ resources can be pooled for mutual benefit, given that rice R&D is advantageous to all stakeholders in the value chain. However, the expectation that Pakistan’s farmers will willingly agree to an R&D levy is unrealistic, as their ability to pay is uncertain and they frequently complain about input costs and lack of subsidies. Alternately, the other end of the chain might be more conducive to such an initiative.

The processing and export stages involve the greatest value addition for rice. Such stages of the value chain are also better documented, better organised, and more cognizant of the need for better R&D to be able to compete in international markets. The burden of a cess at the export end is less onerous than at the farm end, and the amount that can be collected will be greater. Given that the exporters gain the most in the rice value chain, it is only fair that R&D contributions should come from them.

The Rice Exporters Association of Pakistan has, on many occasions, requested the release of funds from the EDF for basmati development. Thus, while the industry has contributed for many years to a cess fund designed exactly for improving the export product, the government apparatus has made the scheme ineffectual.

The inability to view the whole value chain means that the billions of rupees that have been collected from rice exporters in the last 20 years have not been used for basic R&D. The vision of the Export Development Fund or the exporters is not broad enough to realise that all R&D across the value chain will contribute to increased export revenues. The current narrow focus on marketing and international road shows exemplifies the misunderstanding about commercialisation of R&D.

Funds are available in the government’s annual development budget. The ongoing ADB Punjab Basmati Rice Value Chain Technical Assistance Project has found a dearth of good project proposals and project management capabilities. The current project has highlighted the problem that scientists find it difficult to spend even small grant amounts within project duration. Any effort to modernise and streamline agriculture R&D must involve a holistic approach that includes the use of government development funds and the application of the Export Development Fund. Policymakers and treasury officials need to be convinced that the amount of R&D funding required is small compared to the contribution made by the cess on rice exporters.

The important point is to commit continuing funding every year for the whole value chain, which should be under the administration of a single entity. Recent emphasis on public-private partnership (PPP) models of development offers a new avenue for changing the private sector’s current rent-seeking approach and aligning it with the public sector policy revival. A PPP approach can considerably lower the funding burden on the public sector while at the same time creating an environment to align private sector goals with government policy. While implementing PPP interventions can be technically challenging, their potential benefits can be gained by resolving current bottlenecks.

While overall revenues from rice are stable, the lack of growth of basmati revenues should be a red flag for policymakers. A reform programme is urgently needed because years of underinvestment have weakened the system; however, some practical measures can reverse the trend, said the report.

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