During his first State of the Nation Address last month, President Benigno Aquino III spent almost five minutes talking about the National Food Authority (NFA), the state-owned grains agency.
How, Aquino wondered, could the NFA have incurred billions in debts and in effect wasted taxpayers’ money?
Furthermore, Aquino asked why the NFA had to import so much rice or way beyond the country’s needs?
The answer is not so simple. The problem stems from poor economics and corruption in the system.
New Finance Secretary Cesar Purisima, in an interview with the Philippine Public Transparency Reporting Project, recognizes this and believes that such practices should not continue because it will only bleed state coffers dry.
“There is a problem with the policy (surrounding NFA). There’s no reason why we should allow that to continue happening,” Purisima said.
To understand the problem, one needs to look into the mandate and the structure of NFA, the government agency tasked to ensure the food security of the country and the stability of supply and price of the staple grain-rice or palay.
In terms of food security, NFA needs to be able to respond within 48 hours to meet rice requirements in the event of a natural calamity or emergency that impacts rice growing or distribution.
It should also be able to restore or maintain supply at prices immediately prior to the calamity or emergency within two weeks.
In the area(s) affected, the NFA should be able to keep retail prices at reasonable levels for consumers as well as farm-gate prices to enable farmers get a reasonable return on their crop.
Because of these two mandates of the agency, it has been incurring billions of debts. It also leaves it open to abuse or corruption.
The NFA started as the National Grains Authority, created through President Decree No. 4 dated September 26, 1972 with the mission of promoting the integrated growth and development of the grains industry covering rice, corn, feed grains and other grains.
In 1981, the government reconstituted the NGA into what is now the NFA, in effect widening the agency’s social responsibilities and commodity coverage to include food. Presidential Decree (PD) No. 1770 was issued which reconstituted the NGA into what is now the NFA.
Today, NFA performs the functions of ensuring food security of the country and the stability of supply and price of the staple grain-rice through various activities and strategies, which include procurement of rice paddy from individual farmers, buffer stocking, dispersal of paddy and milled rice to strategic locations and distribution of the staple grain to various marketing outlets at appropriate times of the year.
These initiatives are meant to stabilize prices of rice in the local market and ensure steady supply during times of calamity or emergencies. However, to be able to keep doing this, the NFA has had to keep selling rice at reasonable prices even if it was bought at a high price.
Essentially, because of the problem of rice in the world market, NFA ends up buying high and selling low to make it affordable to Filipinos. In 2009, for instance, the government shelled out a whopping PhP 40.8 billion (USD 907 million) to import 1.5 million metric tons of rice from Vietnam, according to the 2009 annual report of the NFA.
So while consumers get affordable rice, it comes at a very high cost for the government. It pushes the country’s fiscal position to a tipping point, according to Purisima.
It is this heavy importation of rice by NFA that Aquino highlighted during his speech. He claimed it was a crime for the Arroyo government to buy 900,000 metric tons of rice in 2004 even though just 117,000 metric tons were needed.
He alleged this was repeated in 2007 when 1.827 million metric tons of rice were imported to fill up a supply gap of just 589,000 tons.
"Hindi ba krimen ito?" (Isn't this a crime?) Aquino asked.
Aside from receiving money from the government to import rice, the NFA also relies heavily on state coffers for guarantee for its loans as well as tax subsidies.
In 2009, according its annual report, NFA secured PhP 20 billion (USD 444.4 million) in guarantee from the national government for its short-term loans. This guarantee allowed the grains’ agency to secure additional credit lines from various banks.
These loans are necessary for the agency to continue fulfilling its mandate to buy rice high and sell low. In 2008, for instance, when there was a shortage of rice in the market, the NFA was selling rice at PhP 18.25 (less than a dollar) per kilo when the cost of rice was already at PhP 32 to PhP 35 per kilo.
At present, NFA is selling rice at PhP 25 per kilo which is still well below the real cost of rice which is PhP 32 to PhP 35 per kilo.
Outstanding obligations ;
As of end-May 2010, NFA has total outstanding obligations of PhP 171 billion (USD 3.8 billion), comprising of short-term and long-term loans as well as the debt papers it issued to refinance existing debts and to fund operations.
Last year, the NFA successfully raised PhP 9 billion (USD 200 million) from the sale of 10-year bonds --proceeds of which would be used for its refinancing requirements and operations for 2010.
Aside from this, NFA also availed of PhP 17.703 billion (USD 393.4 million) in tax subsidy for its importation of rice and corn. The subsidy comes in the form of the so-called Tax Expenditure Fund (TEF), which is essentially non-cash.
The TEF is a subsidy released by the Department of Budget and Management (DBM) to government-owned and controlled corporations and state-run companies such as the NFA mainly to settle customs duties and other taxes arising from the importation of goods.
While there is no actual cash involved here, it still does mean revenue losses for the government. If state-owned agencies were able to pay in cash for their duties, the national government would have earned more.
The huge amount of money that NFA gets from the national government illustrates the poor economics of NFA.
Prone to corruption
Finance Undersecretary for Privatization John Philip Sevilla said that the mandates of some government-owned and controlled corporations including the NFA are really problematic.
“Some state-owned agencies such as the NFA are created in such a way that they are effectively bound to lose money,” Sevilla lamented.
The poor structure and system have also made the NFA prone to corruption.
Critics of the government’s rice procurement program have been vocal about the need to overhaul NFA’s operations. Just last March, then opposition Rep. Teofisto Guingona III of Bukidnon claimed that so-called “crocodiles” or corrupt government officials are raking in millions of dollars in commissions on rice importations.
Guingona, now a newly-elected senator, questioned why the government had to increase rice imports even before experts could ascertain the extent of damage to farming caused by the El Niño dry spell.
He was referring to the 2.45 million metric tons of rice that NFA had planned to import for this year.
The lawmaker claimed that corruption happens when government officials rake in money from commissions given by rice sellers.
Rice traders interviewed for this article declined to be identified because of the sensitivity of the matter confirmed this.
For example, said one rice trader, if a foreign rice supplier sells rice to the Philippines, they can connive with NFA officials by shipping, say, lower quality rice or different from what was declared on paper.
On paper, the supplier can declare that it has exported 1 million metric tons of rice that includes broken grain of 10 percent. In rice shipments, broken grain is usually included but is considered of inferior quality compared to the whole grain.
In reality, however, the shipment of 1 million metric tons may include broken grain of up to 40 per cent.
The seller will then give officials of the NFA “commissions” for the “savings” earned from such an arrangement, the rice trader told PPTRP.
Corruption is allegedly so rampant and innate in the system that even officials of the Bureau of Customs – who are supposed to inspect the goods – agree to the arrangement for a share in the commission.
“There is a huge budget for importation so they (NFA officials) take advantage of this,” said the rice trader.
Transparency in NFA
In an interview with this writer, NFA spokesperson Rex Estoperez denied the allegations and stressed that procedures on rice procurement have always been fair and done in the most transparent manner.
“We go through the process,” he said.
He said that the Philippines continues to import because it does not want a repeat of the rice crisis in 2008.
“We need to import more because we don’t want a repeat of 2008. Why do we need more, because it is better to have more. Our preparation is always forward-looking,” he said.
He also said that any decision to import -- when to import and how much to import -- is done by the Interagency Committee on Cereals. Aside from the NFA, members of this committee are the Department of Agriculture, the National Irrigation Administration, the Department of Trade and Industry (DTI) and the National Economic and Development Authority (NEDA).
The Department of Science and Technology-Philippine Atmospheric, Geophysical Astronomical Services Administration (DOST-PAGASA) is also a member of this committee because of the need to assess the weather conditions.
“The decision to import is based on statistical data and surveys provided by the Bureau of agricultural Statistics (BAS) related to palay production for the year, the projected beginning rice inventory for the following year, and daily and historical annual rice consumption requirement,” Estoperez said.
He said that for the 2010 rice importation, the damage on the country’s palay production by the successive typhoons during the 2009 main harvest and the projected El Niño effect on agricultural crops this year were given consideration. The role of the NFA is solely to facilitate the importation.
Furthermore, Estoperez maintained the agency abides by the provisions of Republic Act 9184 or the Government Procurement Act.
“In keeping with RA 9184 provisions, the volumes of rice to be imported are being published ahead of time along with the scheduled pre-bidding and bidding proper,” he said, adding that the group also invites observers to the bidding.
These observers include representatives from the Commission on Audit, the Procurement Transparency Board that includes members from the Catholic Bishops’ Conference of the Philippines (CBCP), the civil society, farmers and non-government organizations.
“The media also covers the scheduled pre-bidding and bidding proper,” he said.
Nonetheless, the fact remains that because of excessive importation, the Philippines is “swimming in rice” and that some are currently rotting in warehouses, according to current NFA administration Angelito Banayo.
The Commission on Audit (COA), in its 2009 audit report on the NFA, has recommended a major re-examination of NFA’s operations.
“We recommended that management re-examine the practice in the light of the issue of conversion which diverts NFA rice to be sold as commercial rice. It gives opportunities for rice traders to purchase large volume of low priced NFA rice and to sell them later as commercial rice at a much higher price,” the COA said.
With all these problems in importation and NFA’s money-losing operations, the government concedes that a long-term solution to the problem is necessary.
NFA’s Estoperez said it is high time for Congress to overhaul the NFA and revisit its mandate.
“We have to amend. Our mandate is buy high and sell low. Ideally, we should just be for buffer stocking and as a regulator of traders. We shouldn’t be importing anymore. We will import but only for buffer stocking,” he said.
As such, he said, the long-term solution is to revisit, revise and amend the mandate of the NFA.
“Let’s leave it to the private sector to import,” Estoperez said.
In a separate interview, Finance Undersecretary Jeremias Paul Jr., who is tasked to oversee the operations of state-owned agencies such as the NFA said the agency’s functions should be separated.
“The regulatory and proprietary functions should be separated,” Paul said. He added that importation should be left to the private sector.
While this could raise the prices of rice in the market, Paul said this wouldn’t necessarily be the case because when there is competition, prices would go down.
Nonetheless, he said the government should opt to have a “targeted cash transfer system for the poor” to subsidize their costs in buying rice. This would be similar to the conditional cash transfer system put in place by the Department of Social Welfare and Development (DSWD).
Amendments to the NFA charter however remain pending in Congress to this day.
Government sources said lawmakers, especially populist ones, are afraid to touch on the issue of the NFA because rice is a “political issue with social costs.”
The pending bills aim to strengthen the NFA by transforming it into two separate entities: the National Food Corporation (NFC) and the Food Development and Regulatory Administration (FDRA).
According to the proposals submitted to the Committees on Government Reorganization, on Government Enterprises and Privatization and on Agriculture and Food, “the NFC shall be primarily responsible for managing the government rice buffer stock, while the FDRA shall discharge the regulatory and research and development functions in relation to national food security objectives.”
Quirino Rep. Junie Cua who authored one of the pending measures said that the NFA is experiencing financial difficulties which necessitate its restructuring to make it more viable.
The lawmaker also stressed the need to rationalize the function of the NFA as it is undertaking activities which are better performed by other government bodies citing as an example the agency’s activity of selling rice at prices below market level.
Finance department’s Paul said the government is stepping up measures to overhaul NFA but needs the help of Congress for the charter amendments.
And Budget Secretary Florencio Abad said there is now an interagency committee which includes members from the Department of Agriculture, Department of Budget and Management and the Department of Finance that is now studying how best to overhaul the NFA.
Initial proposals, Abad said, include separating the different functions of the NFA and limiting these to warehousing and regulatory functions.
This would enable the government to reduce the budget given to NFA.
The role to import would then be left with the private sector but this would be regulated by the NFA. All these plans are now being thoroughly studied by the interagency committee. Abad said that what can be done is to re-channel the subsidy provided by the NFA to the public.
“What we want is a more targeted subsidy because right now, under the present set-up, it’s a general subsidy. We want to direct these subsidies to indigents. Right now, only 27 per cent of the poor benefit from the present set-up,” Abad said. He said the plan is to give rice subsidies under the government Conditional Cash Transfer Program directly to the poor.
This way, the NFA no longer has to sell rice in the domestic market at prices lower than the cost of importing it.
“Definitely because of the tight fiscal position of the government, we cannot allow the present situation to continue,” Abad said.
The Aquino administration has inherited a budget gap of PhP 196.7 billion (USD 4.3 billion) in the first six months of the year, 28.2 percent more than the PhP 153.4 billion (USD 3.4 billion) budget deficit recorded in the same period last year. The six-month figure is PhP 51.6 billion (USD 1.1 billion) higher than the programmed ceiling of PhP 145.2 billion (USD 3.2 billion) for the period.
In the meantime, as the government continues to subsidize the money-losing operations of the NFA, the grains agency would continue to put pressure on the country’s already fragile fiscal position. Philippine Public Transparency Reporting Project