Why did the good-intentioned public intervention go wrong?

Plastic crates: Universally used in agri markets

In 2002, the writer had a chance of visiting a few farms in Czech Republic, some 200 kilometres away from its capital, Prague. They were all medium sized farms owned by private individuals producing such products as vegetables, fruits and honey.

At the time of the writer’s visit, the fresh vegetables – potatoes, turnips, cabbages, carrots, beetroots and beans – had been harvested, cleaned, sorted and packed in plastic crates ready to go out of the farm gate.

The farmers had also marked the crates with bar codes giving such details as the produce and its grade, farmer’s reference numbers for identification and the quantity packed in the crate, before transporting them to the pick-up stations on the main highway for truckers to do the job of delivering the same to numerous markets throughout the country.

The bar codes will help, it was claimed, the wholesalers to sort the produce without unloading them and supply different markets according to demand orders. The payment to farmers was also made according to the instructions given in the bar codes.

So, the plastic crates were an essential requirement of the whole supply chain of agricultural produce – that is, from farms to wholesale markets to retail markets to final consumers – and no one in the chain appeared to have any objection to them.

The Czech Republic is not alone in using plastic crates for transporting agricultural produce in this manner. All the developed country farmers and those in many developing countries too are in the practice of using them for that purpose.

The objective of doing so has been universal: to reduce the damage to produce whilst being transported which economists call ‘the post-harvest losses’ and preserve the farm freshness when the items are finally delivered to the consumers.

Sri Lanka’s ill-fated public intervention

In Sri Lanka, however, a mandatory requirement introduced by the Government recently for the use of plastic crates when transporting agricultural produce from wholesale markets to retail markets met with such angry protests by all those concerned – farmers, wholesalers, truck drivers, environmental and political activists – that the Government had to temporarily abandon the whole scheme.

The Government’s interference in the market mechanism in this manner is known as ‘public intervention’ in the wider public interest, a subject studied under a branch of economics known as public policy economics.

Such interventions are called ‘public choices’ made by a governmental authority on behalf of the people; in a market system, normally such choices are made by private individuals for personal gain and therefore, are called ‘private choices’.

The private choices take place in a market without anyone being seen in making the choice as if they are being guided by some ‘invisible hand’ as described by Adam Smith, the father of modern economics some 234 years ago.

When governments feel that private choices are not made adequately or rapidly or simply not to their satisfaction, they choose to intervene in the market by arrogating the right to make the choice to themselves in the name of satisfying a public interest.

The intention of the Sri Lankan authorities in this intervention has been very noble: to reduce the damage to agricultural produce which the Ministry of Agriculture has estimated to be around 30% in the case of vegetables and 40% in the case of fruits and thereby reduce the cost of these items to final consumers who now have to pay for these losses as well.

A Sri Lankan researcher, M.D. Fernando, in a country paper presented to the Asian Productivity Centre in Tokyo and Food and Agricultural Organisation in Rome in 2006 has claimed that in trial runs with plastic crates in Sri Lanka, the post harvest losses were reduced from 30% to 5% in the case of vegetables and from 30% to 6% in the case of mangoes and avocadoes.

With reduced physical damage to vegetables and fruits, it has also been claimed that the consumers would get better deal in the form of fresh vegetables and fruits. Surely this is not something which can be ignored by Sri Lanka.

In the case of Czech Republic and in many other countries, the use of plastic crates for transporting agricultural produce has taken place in the market automatically as if all those involved in the supply chain have been guided by an invisible hand.

But in Sri Lanka, the visible hand of the Government with all its good intentions could not satisfy those in the supply chain and therefore a good-intentioned public intervention has gone wrong. It is interesting to understand why it went wrong since it is the wish of the Government to reintroduce the scheme in a modified form on a later date.

Plastic crates under consideration in Sri Lanka for a long time

The use of plastic crates for transporting agricultural produce has been under consideration in Sri Lanka quite for some time. The writer recalls that the Central Bank too tried to introduce such a system to be adopted by wholesalers and transporters on a voluntary basis in late 1990s.

The bank found several bottlenecks in its implementation. One was the cost of the crate and whether it should be borne by the farmer or the wholesaler or simply passed onto the final consumer by adding its cost to the price of the agricultural produce under transportation.

The second was the setting up of an appropriate mechanism to recycle the plastic crates: the trucks that delivered the crates full of agricultural produce made the return journey laden with other goods and not empty crates.

A third bottleneck was the identification of a suitable crate to meet Sri Lanka’s humidity requirements. A fourth one was the need for educating the parties concerned about the benefits of using plastic crates and getting their agreement to use them on a voluntary basis.

Since all these bottlenecks were of paramount significance, the Central Bank could not proceed in the matter any further. But the Ministry of Agriculture has been pursuing the matter continuously, according to its website.

The Ministry is reported to have distributed about 150,000 crates among the farmers and conducted some 844 awareness sessions among the key stakeholders up to the end of 2010 (available at: http://www.mimrd.gov.lk/pages.php?page=30).

Public choice through the Consumer Affairs Authority

Since allowing the concerned parties to make a private choice regarding the use of plastic crates did not work, it appears that the Government has made a public choice regarding the matter and made it compulsory for wholesalers and truckers to use plastic crates when they transported agricultural produce and used the powers available in the Consumers’ Affairs Authority Act to enforce the mandatory requirement.

It was when the rules framed under the Act were enforced to the letter by the country’s police authorities that all the hell broke out in major vegetable producing areas and key wholesale markets with violent protests that swelled their ranks day by day making all the wholesale markets virtually non-operative.

The threats made by key Government figures that alternative Government mechanisms such as the trucks belonging to the Cooperative Wholesale Establishment and the military personnel would be used to keep the market activities going if protestors did not return to the markets were to no avail.

In fact, day by day, the protests continued to swell to threatening proportions choking the city of Colombo and its suburbs of essential vegetable supplies thereby causing their prices to skyrocket in the markets. Since this was extremely bad news for the forthcoming festive season, the Government chose to move one step backward in order to make peace with warring parties.

CAA: The wrong choice for implementing a public choice

It appears that the mistake made by the Government was that it tried to implement the programme in a hurry purely from a consumer-protection point of view by using the alien Consumer Affairs Authority as the implementation agency.

This Authority set up in 2003 has the following as its main objectives in terms of the preamble to the Act: protecting consumers by regulating trade and prices, preventing traders from engaging in unfair and restrictive trade practices and promoting competitive pricing and healthy competition in the market.

Given these objectives and the overriding interest it has in protecting consumers against unfair trade practices relying basically on rules and regulations, it is an authority which is least equipped with resources and facilities to promote the efficiency in agricultural markets.

Its mandate to promote competition is irrelevant to Sri Lanka’s vegetable and fruits markets because there is sufficient competition already in these markets with thousands of small farmers and traders in action at the production, wholesale and retail levels.

Hence, it is not unusual for the Consumer Affairs Authority to try to enforce its rules and regulations to the letter without regard for the requirements of promoting market efficiency. It is in fact like the old maths teacher with a cane in hand trying to teach mathematics to fear stricken students in the class.

Follow FAO guidelines

The management of reusable plastic crates in the supply chains of agricultural markets is not a simple task. In view of the implications involved in managing such a system without hindering market efficiency, the Food and Agricultural Organisation has issued a comprehensive Technical Guide for use by interested governmental authorities when managing a plastic crate system (available at: ftp://ftp.fao.org/docrep/fao/012/i0930e/i0930e00.pdf).

The Sri Lankan authorities would have benefitted immensely had they followed these guides before they implemented the abortive scheme in question.

Sri Lanka’s supply chain is different    

Sri Lanka’s supply chain of fresh agricultural produce has the following segments.

The first leg consists of a large number of small farmers who produce vegetables and fruits and supply them direct to wholesale markets or through collectors of these products. At the farm level, they are packed in polypropylene sacks and transported to the markets in bicycles, carts, tractors or lorries. The sacks are not returned to the farmers and therefore, their costs are normally added to the prices.

The second leg consists of transporting these sacks from one wholesale market to another wholesale market in lorries or trucks. Several factors contribute in unison to damage the fresh produce packed in those polypropylene sacks: The length of travel usually exceeding 100 kilometres, poor road conditions with frequent road bumps and craters, old trucks that cannot take a load safely and bad driving characterised by frequent braking on the way.

The third leg is from the wholesale market at the destination to the retail markets and retail shops. In some cases at the wholesale market, the produce is repacked in polypropylene sacks and transported to the retail shops, but in most cases, it is the same old sacks that are redirected to the retail shops.

The fourth leg is from the retail shop to consumers’ residence in small polythene bags. The use of plastic crates has been made mandatory in the case of these second and third legs in Sri Lanka. But as is being done in other countries, it should start from the first leg itself and end with the third leg till the produce is bought by the final consumers.

Fine guidelines which CAA appears to have ignored

In managing a system with plastic crates, there are a few matters which authorities should take into consideration as recommended by FAO.

The first is the durability of the material used for manufacturing plastic crates. Since plastic crates are expensive, they should be reused at least 150 times to make them economically efficient.

Though some manufacturers use polypropylene for manufacturing crates, from the point of view of strength against impact and degradation, the use of high density polyethylene or HDPE has been recommended by FAO.

It is essential that Government authorities that implement a crate system should ensure that the crate manufacturers meet with these quality requirements.

The second is the shape of the crates which depends on the purpose of using them. If it is only for stacking purposes, rectangular boxes with sufficient ventilation holes are in order. But when it comes to returning the empty crates for reuse, these boxes are inconvenient to transport back to the original centres.

In that case, the crates may be either nesting crates like the shopping baskets which one finds in supermarkets where empty baskets are inserted into each other or collapsible crates where the walls of the crates are fixed together through hinges or easily removable clips. In either case, it takes lesser space in trucks when returning the empty crates to the original centres for reuse.

A third factor to be considered is the ownership of the crates. If they are owned by farmers, it becomes costly for them to collect the empty crates from the retailers who are located hundreds of kilometres away from their farms. For them, it is more convenient to add the cost of the crate to the produce they sell and forget about the crates which they have already issued.

If the crates are owned by wholesalers, the cost of recollecting them from retailers is less than that of farmers, but they have to supply them at an enormous cost to the farmers for repacking of produce.

In this background, there is a third alternative available: that is, getting a private sector supplier to own the crates and allow him to rent them to farmers and wholesalers. The value of the rent should cover the depreciated cost of the crate, the re-collection and maintenance costs and his profit margins.

Like the soft drink manufacturers who re-collect the empty bottles, the private sector owner of the crates too could re-collect them from the retailers and recycle the same until the crates have exhausted their usable life.

The need for maintaining proper hygienic conditions

A fourth factor is the maintenance of the required hygienic conditions in the plastic crates. FAO has noted that the reused plastic crates are subject to a number of hazards unless they are maintained in proper conditions: microbiological contamination of the food items packed in them by micro – organisms such as bacteria, viruses, fungi and parasites that cause illness in humans; post harvest diseases caused by bacteria or fungi that spread to new produce and exposure to physical hazards, chemical hazards and insect infestations.  The fresh produce packed in crates could be damaged if the crates are broken; the excessive use of chemicals and pesticides in agriculture could leave some fragments in the crates which can be transferred to new produce packed in them and insects in the previously packed produce can infest the new produce being packed in crates.

To bring these risks to zero levels, it is necessary that the crates are properly washed with disinfectants before reuse and the authorities have to set these standards too in place before introducing a crate system for transporting agricultural produce.

There is no evidence that the Consumers Affairs Authority has looked into these risk factors before it introduced its mandatory requirement of using plastic crates for transporting vegetables and fruits.

Make it voluntary and not mandatory

Now the question is whether the use of plastic crates in transporting fresh agricultural produce should be made a public choice or a private choice. In other words, the question is whether it should be made mandatory or voluntary.

Many, including a regular reader of My Views in Daily FT, favour the idea that the choice should be given to those who are involved in the trade with appropriate Government support for changing to the new practice. This is how agricultural markets have developed in many countries.

Sri Lanka’s aim should also be to attain the same efficient development in agriculture given the advantage of reducing the so-called post harvest losses through a proper system of using reusable plastic crates for transporting fresh agricultural produce.

(W.A. Wijewardena can be reached at [email protected].)