Debts, contract breaches rock Fisp

The Farm Input Subsidy Programme (Fisp) is crippled as billions in debts, contracts breaches and unaccounted for coupons suck its breath away.

Nation on Sunday

has established that as at February 11 2014, government owed nearly K33 billion to Fisp suppliers in the 2013/14 season, months after invoice submissions.

The total amount that should have been paid by now is K58 billion—meaning that only K25 billion was settled.

The unpaid bills are for fertiliser, maize seeds and legume vouchers, transport, wrong fertiliser rates and underpayments resulting from mistakes at the Ministry of Agriculture, according to documents we have seen.

The invoices have been outstanding for more than 30 days which, according to the documents, is a breach of Fisp contracts and may have serious consequences on the programme whose costs to the economy have ranged from six percent to 16 percent of gross domestic product (GDP) between 2006 and 2014.

As a percentage of the National Budget, Fisp also commands 16 percent—higher than the 12 percent allocated to health over the last three years.

According to the latest 2013/14 Fisp situation report number 25 dated February 2 2014 prepared by the Logistics Unit, although delivery of fertiliser to the Smallholder Farmers Fertiliser Revolving Fund of Malawi (SFFRFM) depots is now complete, “payment for fertiliser is seriously lagging”, with only 50 percent of the cost of delivered input having been paid.

The Logistics Unit—a body that government and donors have jointly sanctioned to monitor the programme’s performance—said in its report that outstanding fertiliser bills continue to be in excess of $52 million (K26.3 billion as at February 11).

This means that of the nearly K47.7 billion fertiliser invoices, only K21.4 billion was paid.

The payment delays mean that suppliers may also have skipped meeting their periodic financing obligations, forcing them to shoulder expensive bank charges.

It is these extra costs on the suppliers that may force them to sue government for breach of contract, which could see the taxpayer coughing the money as a result of inefficiencies at Capital Hill, especially the Ministry of Agriculture and Treasury.

The Logistics Unit report worries as much.

“Many of the fertiliser suppliers are now paying outrageously high interest rates on temporary loan/overdraft terms to cover outstanding letters of credit. Most invoices have now been with the Ministry [of Agriculture] for more than the 30-day period for payment stipulated in the contract, putting the Ministry on breach of contract. It is trusted that the above will serve to make all aware of the seriousness of the situation and remedial action can be taken,” said the report.

In an interview on Saturday, two fertiliser suppliers—speaking on condition of anonymity to avoid jeopardising future business interests with government—confirmed that the payment delays are affecting their operational capacity and have forced them to incur heavy finance penalties.

The companies, however, said they are analysing the situation to see what action they can take to push for faster payments and compesation.

“For now, we are playing a wait-and-see game. We are watching government moves on this one very closely. Otherwise, come next season, we could struggle to raise money for bringing in the inputs if there are further delays,” said one Lilongwe-based supplier.

On maize and legumes vouchers, government is yet to pay K5 billion against roughly K8 billion worth of invoices.

On the transport underpayments, the report said transporters who have been paid received their money at the wrong rate as measured by the agreed per kilometre per tonne charges.

“The underpayment appears to arise as a result of poor/no communication between the procurement section and the accounts department. An appeal was made to the principal secretary to intervene to avoid continuation of such underpayments, but to date, this has had no effect and invoices continue to be wrongly processed,” it said.

So far, 44 percent of the transport invoices (around K720 million) have not been paid, out of the K1.6 billion requested.

On the seed programme, the unit has described as desperate government’s failure to reimburse seed companies.

“The ministry is now responsible for the initial reimbursement to seed companies. In this respect, the situation is now as desperate as that of fertiliser. At present, some $11 million is required to clear outstanding invoices. Of this, $5 million has been awaiting payment for more than 30 days. The only movement in seed payment in the last week was that through Treasury using the balance of Irish Aid funds,” said the report.

A source from the donor community wondered last week why government is failing to pay suppliers when Fisp funds are always readily available and protected from any movements other than those it was intended for.

Ministry of Finance spokesperson Nations Msowoya referred Nation on Sunday to the Ministry of Agriculture.

“As Treasury, we are only involved in providing monthly funding for the programme,” said Msowoya.

The Ministry of Agriculture said they can only respond tomorrow.

Meanwhile, Fisp is also being swallowed up by logistical inefficiencies, with 49 percent of fertiliser coupons issued in 2013/14 unaccounted for.

At the national level, said the Logistics Unit, only 51 percent of the vouchers have been returned from Admarc and SFFRFM, raising questions of what happened to the rest of the coupons.

“This [return rate] is well below the corresponding figures for maize and legume vouchers sent in by the seed companies. Only when the vouchers are returned can the success or otherwise of the inputs exercise be accurately gauged,” reads the report.

In terms of coupon return performance, the Northern Region was the best, with a return rate of nearly 90 percent.

It was followed by the Central Region at about 55 percent and the South at 33 percent.

Nationwide, the best performing districts on coupon return rate were Karonga and Likoma, each scoring 94 percent. The worst was Mwanza at 12 percent.

The gross Fisp inefficiencies will not help to quell a growing chorus of voices in Malawi now saying the programme is a wasteful drain on the budget, swallowing consistently higher funding at the expense of other critical social sectors such as health.

In May last year, a group of civil society organisations (CSOs) working in the public health, HIV and Aids management sector—angry at the dwindling budget allocation to the health sector—petitioned Parliament to cut allocations to Fisp and re-direct the money to top up the health budget.

“We believe that other resources to health should come from Fisp, which is increasingly becoming inefficient, nepotistic and a fertile ground for corruption as well as a gravy train for political bootlickers, ruling party financiers and a campaign tool masquerading as a pro-poor welfare initiative that is bankrupting the country and which has failed to pull its targeted beneficiaries out of the poverty trap as envisioned in 2005/06 when it started,” the CSOs said in a statement.

Fisp may also have contributed to higher budget deficits over the years, according to a study by Chancellor College economics professor Ephraim Chirwa and others titled The Role of the Farm Input Subsidy Programme in Malawi: Any Prospects of Graduation?.

For example, Chirwa and others note, the budget deficit rose from -1.5 percent in 2006 to -8.2 percent in 2009 as government spending on Fisp rose sharply.

More worrying, explains Chirwa and others, is the increase in the indebtedness of the country from 8.2 percent of GDP in 2006 to 15.7 percent in 2010—a development the researchers appear to link to Fisp spending.

“The peak in domestic debt appears in 2008/2009, which also witnessed high fiscal deficit/GDP ratio and this was also the year the subsidy cost was 6.6 percent of GDP and the subsidy budget was over-spent by about 87 percent, partly due to higher fertiliser prices and partly due to expansion of the programme,” note the scholars.

Dr Thomas Chataghalala Munthali, country director of Innovations for Poverty Action (IPA) in Malawi, a research think-tank, says the programme has become inefficient in meeting its goals.

“The current objectives of the Malawi Fisp are to increase maize production, promote food security and enhance rural incomes by targeting subsidised input coupons to the productive poor. If these were being met, then the large Fisp budgetary allocation would have been justified. Unfortunately, the country has imported maize during many of the Fisp years, which raises questions on the programme’s ability to promote food security,” said Munthali, former president of the Economics Association of Malawi (Ecama).

A World Bank study released last month validates Munthali’s position, which found that the majority of Fisp’s intended beneficiaries do not profit from the initiative.

The study, which assessed the system used in choosing Fisp beneficiaries, reveals that up to 57 percent of people who receive fertiliser coupons are not eligible to benefit because they are not poor, but are connected to authorities.

More disturbing perhaps are research reports by experts Rodney Lunduka and others on Fisp that reveal widespread diversion largely at the hands of politicians and government officials.

The diversion of the inputs is one of the most crippling problems facing Fisp. Diversion refers to both coupons and subsidised fertiliser that is taken by government officials and resold as commercial fertiliser, whereas leakage refers to coupons and subsidised fertiliser that is resold by recipient households on the secondary market.

Government budgeted K60.1 billion for Fisp, including buying 150 000 tonnes of fertiliser in the 2013/14 National Budget to distribute to 1.5 million farming families at a subsidised price of K500 against a commercial value of roughly K13 000.