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Financial Viability of Authorized Retail Dealers in Kerala A Report Submitted to the Department of Civil Supplies, Government of KeralaNovember 2014

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Financial Viability of Authorized Retail Dealers in Kerala A Report Submitted to the Department of Civil Supplies, Government of Kerala

November 2014

1

Table of Contents

Preface 2

Acknowledgements 3

List of Acronyms 4

Executive Summary 5

1. TARGETED PUBLIC DISTRIBUTION SYSTEM REFORMS 8

1.1 TPDS Challenges and Opportunities 8

1.1.1. Viability of Ration Shops: A backbone of reforms 9

1.2 Viability Analysis in Kerala 9

1.3 Objectives of the Study 10

1.4 Methodology 10

1.4.1. Sampling 11

1.4.2. Data Collection 11

1.4.3. Quality Assurance 13

1.5 Consultations with Government of Kerala 14

2. UNPACKING THE FINANCIAL VIABILITY 15

2.1 ProfileofAuthorizedRetailDealers 15

2.1.1 Distribution of ARDs by Location & Type of Cards 15

2.1.2 ARDProfile:fromQualitativePerspective 16

2.1.3 Perceptions about TPDS Reforms 17

2.2 Financial Feasibility: Estimating Costs and Revenues 18

2.3 Profitability,ViabilityandViabilityThreshold 22

2.3.1 Profitability 22

2.3.2 Profitabilityvs.ViabilitywithDefinedThreshold 23

2.3.3 Strategies to improve ARD Viability 25

3. CREATING VIABILITY OPTIONS 26

3.1 Viability Scenarios 26

3.2 Summary and Conclusions 35

3.3 Results’ Discussions & Way Forward 37

Annexure-I 40

Annexure-II 44

2

The development scenario in India is undergoing a rapid change. Many pragmatic development oriented, right based and technology driven schemes are being implemented. The economic growth and the development focus also emanate from the greater realization of need to enhance implementation, results and sustainability.

Recent passage of National Food Security Act (NFSA) has further underlined this commitment by making the food entitlements a legal right. In a vast country like India which has continental dimensions and deep disparities, creating a success storyatscaleisextremelydifficult.Toensurethatbenefitsofthefoodsafety-netsreachtheintendedbeneficiaries,Government of India has initiated a large scale Targeted Public Distribution System (TPDS)reformsprojectthroughend-to-endcomputerization. It is important to have an efficient,clientorientedwelfareschemethatleverages on other technology platforms to contribute for the betterment.

Kerala is one of the high performing states with respect to many development indicators and Government of Kerala has a potential to lead the way in reforms. Steady increaseinthefooddeficitinKeralaoverlast few decades resulted in a substantial dependence on the Public Distribution System. While Kerala has been known for one of the well functional PDS, many recent reports have indicated the lacunae. Since the people of Kerala look up to TPDS with great expectations for their food security, it isallthemoreimportanttohaveanefficientand responsive system. Government of Kerala is planning to undertake TPDS reforms and WFP is proud to be part of the efforts.

Committed to eliminate hunger and malnutrition across the globe, the United Nations World Food Programme (WFP) has been in the forefront of efforts to enhance food and nutritional security. In India, WFP works with the Governments at central and state level to support the initiatives that have potential to contribute to the hunger and nutrition level, undertake the analysis and vulnerability mapping /assessment and advocate the best practices to guide the policy decisions with short and long term impact. The “Financial Viability of Authorized Dealers in Kerala”

Any reform initiative will be successful, only if people who implement it are able toprovideservicesandearnadignifiedliving.This,infactisapre-conditiontoimplementation of any policy or programme that is aimed at a sustainable impact. I would like to congratulate the State Government for commitment in undertaking an analytical and human approach to initiate the TPDS reforms process in Kerala. I hope that this report will be useful for the decision makers in Kerala Government to make their choices based on various dimensions and clear foresight of long term implications. I convey my best wishes to the Government of Kerala in the overall TPDS reformsprocess,thefirststepsofwhichhasbeenthefinancialviabilityofARDs.

Torben DueCountry Director a.i.

Preface

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The pleasure of successful completion of any study would be incomplete without the expression of gratitude to all those who have supported throughout the process. In the process of TPDS reforms, commitment of Government of Kerala, has been one of the highest. The rationale thinking and deep sense of responsibility is the driving force behind the overall reform process, which is much appreciated. This was a constant motivation throughout the study process. We would like to express our deepest gratitude to Government of Kerala for giving WFP an opportunity to conduct this study, which will guide the decisions thatultimatelywillbenefitthepeopleofKerala.

We take this opportunity to express our warmest thanks to Mr. Anoop Jacob, Hon. Minister for Food, Civil Supplies and Consumer Welfare, Government of Kerala and Mr. Suman Billa, Secretary, Food and Civil Supplies for their overall commitment and guidance. A profound gratitude to Mr. S. Jagannathan, Commissioner of Civil Supplies, Kerala, who deserves a special mention for his constant support, cooperation and encouragement. We would like to express our sincere thanks to Mr. A. T. James, Director of Kerala Civil Supplies Department and to Smt. P. G. Geetha, Controller of Rationing, Kerala for their suggestions and guidance. Mr. Binu of the Department of Food and Civil Supplies, along with the other team members deserve our appreciation for their wonderful support and valuable inputs, especially in sharing the secondary data.

The enthusiasm for the project, that was evident during discussions and meeting withtheofficialsofGovernmentofKerala,Department of Food and Civil Supplies at all levels, has been a source of inspiration forus.Wearegratefultoallthoseofficials

who gave their valuable inputs and contributed to shaping of the report. We express our heartfelt thanks all the staff of the department of civil supplies, Kerala for theirco-operation.

The smooth execution of this project would not have been feasible without constant support and inspiration from Mr. Torben Due, Country Director, WFP India. We wish to thank him for his cooperation, ideas and discussions held during the entire period of the study.

We are obliged to staff members of Kudumbashree, who played an instrumental role in the data collection activity, without which this study would be incomplete.

We wish to also acknowledge the individuals/representatives/members of ARD, TSO, AWD, Supplyco, and ARD/AWD associations’ who gave their valuable time for the interviews and discussions. We are thankful to them for providing us with valuable information on their respective fields.Withouttheirsustainedinterestandcooperation, this work could not have been possible to reach the state of completion.

We would like to put on record, the excellent co-ordinationandfacilitationsupportofMr. Sulfeekhar Mohammed, Project Advisor of WFP in Kerala throughout the analysis. The study could not have been completed without his support and inputs in the stipulated time.

Pradnya PaithankarBalparitosh Dash

Tushar TongaonkarDivya Tiwari

Acknowledgements

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AAY : Antyodaya Anna Yojana

ANP : Annapurna

APL : Above Poverty Line

APL SS : Above Poverty Line State Subsidy

ARD : Authorized Retail Dealers

AWD : Authorized Wholesale Dealers

BPL : Below Poverty Line

DFCS : Department of Food and Civil Supplies

DSD : Door Step Delivery

FCI : Food Corporation of India

FPS : Fair Price Shop(s)

GoI : Government of India

GoK : Government of Kerala

ICT : Information, Communication and Technology

kl : Kilolitre(s)

MPCE : Monthly Per Capita Consumer Expenditure

MT : Metric Ton(s)

NFSA : National Food Security Act

PDS : Public Distribution System

PoS : Point of Sale

SHG : Self Help Group

SupplyCo : Kerala State Civil Supplies Corporation

TPDS : Targeted Public Distribution System

TSO : Taluka/TehsilSupplyOffice

VT : Viability Threshold

WFP : World Food Programme

List of Acronyms

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National Food Security Act (NFSA) passed in 2013 ensures food and nutrition as a legal entitlement, and offers immense opportunity toimprovethetargeting,supply-chainandfood delivery mechanisms to ensure that themostneededgetthebenefitsunderTargeted Public Distribution System (TPDS). Toensurethisefficiency,theGovernmentofIndiapromotesend-to-endcomputerizationand the Government of Kerala is committed to implement this initiative. In the process, the Fair Price Shops (FPS) called Authorised Retail Dealers (ARDs) in Kerala, form an important step in the overall supply chain of TPDS. However, Planning Commission (2005) has estimated that only 38.9 percent shopsacrossIndiaearnprofitthroughcommission. Several other studies have highlightedtheissueoffinancialviabilityof FPS in conjunctions with the diversion and leakages. There is, however a gap in deep understanding of actual drivers of the revenues and costs, intensity of the problems and potential solutions. The ARD Viability Analysis in Kerala is an effort to use a nuanced understanding gained through thein-depthanalysistoinformTPDSreforms process in Kerala.

The study analysed information for all ARDs in the state and used primary data collected throughasurveytofilltheinformationgaps and validate the assumptions. The interactionsatthefieldlevelhelpedtounderstand the qualitative aspects and context to formulate the conclusions and recommendations. Breaking the existing patternsisdifficult,butthestudygaveanopportunity to look at various dimensions and possibilities of improving the ARD viability, which forms the backbone of the TPDS reforms process. While the report discussestheanalysisandfindingsindetails, the key conclusions from the report are as follows:

Only1.2percentofARDsearnprofiti. with the current commission structure.

Executive Summary

This calls for an urgent action to improve the revenue, especially in light of commitment to TPDS reforms. Hence, viability of the ARD operations shall be a necessary pre-condition for the sustainability of the TPDS computerisation, making the dealers important participant driving the reforms process.

Door-stepDeliveryismandatedbyii. NFSA and will be implemented. This willimprovetheprofitoftheARDastransport and related costs will be paid by the government. However, this improvementortheprofitwillnotbesufficienttoensurefinancialviabilityof the ARDs. Therefore, the following revenue models were analysed in order to determine how to achieve the financialviability:

Increase the Commission rates zz

(Double or triple of existing rates and assess the viability vs. cost to the state).

Maintain the existing commission zz

structure and add base payment.


structure and add incentives per transaction at various rates.

Combinations of above scenarios.zz

A best suited viability threshold iii. (monthlyminimumprofitearnedbyARDtomeetmonthlyfinancialneeds)isequivalenttothesemi-skillednon-agricultural daily wage rate that the ARD owner would have earned as opportunity cost, i.e. `600forurbanareas and `500 for rural areas. This translates into a monthly income of `12,500 and `15,000 for ARDs in rural and urban areas respectively.

Despite several options and models for iv. revenue, even at the best viability vs.

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cost scenario, ARDs operating with less than monthly 75 quintals of foodgrains (includingsugarandfortifiedwheatflour)arenotviable.Thisnecessitateda separate analysis for the “ARDs handling >75 quintal” category along side the analysis of all ARDs. It also therefore implies that the revenue models should be applied to ARDs handling monthly commodities more than 75 quintal and a separate strategy should be applied to the unviable ARDs. Detailed revenue options and comparative advantages are discussed in the report.

The scenarios can be many, such v. as increased commission, providing base-payment,incentiveslinkedtotransactions to a combination of these options. The most economic scenario wouldbethe“gapfillingapproach”ofabase payment of `11,000 and `15,000 for rural and urban ARDs respectively combined with the existing commission structure. However, this may serve as a disincentive to those who operate with large number of cards and larger volumes of commodities. Other scenarios that offer promise are the ones with double commission rate, base payment of 50 percent of viability and incentive of `1 per transaction; and with existing commission rate, base payment of 70 percent of viability threshold and `3 per transaction (incentive can be linked to desired behaviour to facilitate computerization).

While selecting from the best option of vi. viability for shops handling commodity lessthan75quintals,anin-depthassessment of the shops which are still unviable need to be undertaken. Small shops which are in urban location can be combined with bigger shops without impactingbeneficiaryconvenience.Small unviable shops that are remotely locatedorareinadifficulttoreacharea may be categorized as Special Dispensation Shops to ensure a

special consideration or manage these locations through mobile shops.

The analysis indicates that small shops are notprofitable.Itisadilemmabecausethesmall shops are often in the vicinity of the beneficiariesandaddtotheirconvenience.Thistrade-offbetweenthesizeofshopandconvenienceofbeneficiariesneedtoberesolved effectively to arrive at an optimum sustainable solution.

In order to make TPDS a client oriented efficientfooddeliverysystem,followingis the way forward towards long term sustainable goals of reforms:

Consider the re-distribution of a. beneficiariestotheshops: There are about 1000 ARDs handling commodities less than 50 quintals remaining perpetuallyunviableandother65ARDshandling commodities more than 250 quintalsearningmostoftheprofits.While equal distribution of cards to all ARDs may not be possible, a practical decision on permissible range (for example75-200quintalpermonth)withprovisionsforcase-by-casedeviation should offer better solution.

Alternative means of earnings/b. employment: If small shops are essentialforbeneficiaryconvenience,they clearly do not have a workload to justify wages for a month. In such cases, it is important to encourage otheroptionssuchassaleofnon-TPDS food items, linking with other employment generation schemes andgivingmoreflexibilitybyfixingdays and hours of operations. ARD owners will have a positive attitude towards this as indicated through a few interactions. This option can be further explored and developed as a strategy for unviable shops as well.

Alternate strategy for unviable c. shops: Rather than running unviable smallshopinadifficulttoreachareafor all days of month, it is much more

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economical to have mobile shops visiting with certain frequency. This possibility can further be explored as apartofimprovedefficiencyofsupplychain.

Contextualising the ARD viability d. to NFSA: The scheduled launch of NFSA provides an opportunity to realign the ARD remuneration structure within the framework of NFSA. Since the number of cards in various categories, and the entitlements thereof and the number of cards to be attached to ARDs shall change with the implementation of NFSA in the state, thefinaldecisionontherevampingof the commission/ revenue structure should be linked to the monthly allocation of ration to the ARDs. This is

important especially in the context that thenumberofbeneficiariescoveredby cards currently in circulation is higher than the total population of the state(Census-2011).Therefore,strictguidelines/criteriashouldbefixedforselectionofbeneficiariestobenefitfrom the NFSA.

ReclassificationofARDs:e. As per the latest data from Census 2011, coverage areas of some ARDs would havebeenreclassifiedfromruraltourban.Giventhefindingsofthestudythat the operational costs of urban ARDs is higher as compared to rural ARDs.Thereclassificationwillthushave additional cost implications on the proposed viability scenarios and revenue models.

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1.1 TPDS CHALLENGES AND OPPORTUNITIES

Public Distribution System (PDS) in India was launched as a social welfare scheme for distribution of essential commodities at subsidized prices. This has been one of the flagshipschemesreachingtoaverylargenumberofbeneficiariesthroughanetworkof more than 500,000 ration shops in the country. It holds promise to address the food security issues of vulnerable population in India. PDS in Kerala was known for its universal coverage till the introduction of the Targeted Public Distribution System (TPDS)in1997.Keralaisafooddeficitstate with consumption needs higher than the domestic production in the state. Of the total requirements of food grains, only 15% is produced in the state, and remaining majority requirement comes from other states. As a result, shortages in supply of the food items, hoarding of food items, increase in the prices due to thesupplyshortages,widefluctuationsinprices are some of the common issues; which have implications on the households’ food security. In Kerala, currently, there are 81.51 lakh ration card holders who get ration from 14,352 ARDs.

The Planning Commission Evaluation (2005) highlighted overall gaps in the TPDS across the country. A further critique was undertaken by Wadhwa Committee1 thatstronglyrecommendedend-to-endcomputerizationtoincreaseefficiencyof TPDS and reduce corruption. Further, the Government of Kerala appointed a

commission2 to study and submit a report on possible impact of computerization of PDS on various stakeholders. The report haslistedthebenefitsofcomputerizationfor various stakeholders but has clearly highlighted that the current commissions arenotenoughforrunningARDsprofitably,which leads to use of illegal means to divert rationed articles and other wrong practices.

National Food Security Act (NFSA) passed in 2013 ensures food and nutrition as a legal entitlement, TPDS being the largest component that targets more than 800 million people. The provisions under the Act offers immense opportunity to improvethetargeting,supply-chainandfood delivery mechanisms to ensure that mostneededgetthebenefitsunderTPDS.Adecisiononend-to-endcomputerizationfurther provides prospects to reduce leakages and diversion of grains which can create savings3 in long run. The increased financialburdentoensureprovisionsthusmight be compensated in long run with a positiveoutcomeintheformofanefficientand well functional PDS.

The United Nations World Food Programme (WFP)hasbeeninIndiasince1963.Overa period, WFP’s role has transitioned from food aid to technical support to match the changing needs of the country. WFP in partnership with the Government of India and various State Governments provides capacity development support to strengthentheefficiencyandeffectivenessof food and nutrition based safety nets. WFP implemented a TPDS reforms project

1. Targeted Public Distribution System ReformsA NECESSITY AND AN OBLIGATION

1. Central Vigilance Committee on Public Distribution System, Report on the State of Kerala, Justice Wadhwa Committee, 21.08.2007, Pg. 8

2. AspertheG.O.(Ms)39/12/F&CSD,dated30-12-2012,Dr.NiveditaHaran,AdditionalChiefSecretaryoftheGovernment of Kerala, was appointed as the commission to study and submit a report on possible impact of computerisation of TPDS on the consumers and other stakeholders and the problems faced by the dealers.

3. TargetedPublicDistributionSystem:BestPracticeSolution,February2014,WFP,page33-35.

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4. Performance evaluation of Targeted Public Distribution System (TPDS), PEO, Planning Commission, Government ofIndia,NewDelhi,March-2005pg.45.

in Rayagada district of Odisha to reduce the errors in targeting and improve the supply chain management through use of Information and Communication Technology (ICT),andmorespecificallythebiometricration cards and bar coded coupons. The project provided immense learnings to guide the success of TPDS reforms. The assessment of best practices in TPDS reforms in partnership with Government of India and later the viability analysis for the state of Odisha undertaken by WFP further presented a unique opportunity to contribute to the efforts of improved TPDS that in turn can lead to increased food and nutrition security in the country.

In its effort to support the TPDS reforms initiativesandscale-upofbestpractices,WFP has partnered with the Government of Kerala, Department of Food and Civil Supplies (DFCS). The partnership aims to provide advice on translating the best practices into actionable implementation strategies, provide the analytical support and facilitate cross learning and sharing of information. WFP is of the opinion that any decision for TPDS reforms should be guidedbythebasicpremiseofbeneficiarysatisfaction, stakeholder convenience and leakage reduction. This will lead to sustainablepositivechangesintheefficiencyand effectiveness of the scheme.

1.1.1 Viability of Ration Shops: A Backbone of Reforms

As has been documented in various studies, a large number of ration shops fail to make anyprofits.ThePlanningCommission4 (2005) has estimated that only 38.9 percentshopsacrossIndiaearnprofit.Implications of low FPS viability on grain leakage and diversion, service level and overallbeneficiaryexperienceaswellasthepotential success of the TPDS reforms are significant.Anyreformsthateliminategraindiversion and leakage using technological solutions and stricter monitoring alone are unlikely to be sustainable; individuals will

findmeanstocircumventthechecksandbalances. ARD owners are a direct point ofcontactforbeneficiaries,itisessentialto reshape their attitudes and service behaviours through tangible rewards. ARD viability must be considered as an essential component that will contribute to the long-term success ofanyTPDSreforms,ratherthanan standalone exercise for the sole benefitofrationdealers.ViabilityofRation Shops is thus a back-bone for sustainability of TPDS reforms including computerization.

Determiningtheprofitabilityoftherationshops is a complex issue and a nuanced approach is required to understand the depth of it. The study undertaken highlights theanalyticalfindingsandpresentsvariousscenarios and decision options to address the issue of ARD viability as a part of Kerala TPDS reforms.

1.2 VIABILITY ANALYSIS IN KERALA

The “Report on the Impact of Computerization of PDS on the Consumers and Other Stakeholders and the Problems faced by the Dealers” by Dr. Nivedita P. Haran, IAS, Government of Kerala (2013) has highlighted many important observations on the economic viability of Private Stakeholders in Public Distribution Systems. Several other reports and studies havehighlightedtheissuesaroundnon-viability of the retailers. The viability analysis undertakenbyWFPbuildsonthefindingsand recommendations of these reports, to propose feasible and actionable options for improved viability for the consideration of GovernmentofKeralatoshape-upitsTPDSreforms effort on a solid rationale.

Overall, there is a greater recognition onthegapsinimplementationoffood-safety-netschemesingeneralandTPDSinparticular. The Planning Commission in its

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12th Plan document has highlighted that these schemes are unable to produce results due to weak implementation. Some of the recent developments however have created apositiveenvironmenttofillinthegapsinimplementation.

The three major changes in the TPDS space in recent times include:

National Food Security Act (2013) zz

while making the food as legal entitlement has laid down emphasis on TPDS reforms.

End-to-endcomputerizationschemezz

isfacilitatingimprovedefficiencyofsupply chain to ARD level transactions.

Possibilityofbeneficiaryidentificationzz

using Aadhar platform.

These changes have necessitated the

State Governments to undertake reforms

in the most sustainable way. WFP’s

experience of implementation of TPDS

reforms project in Rayagada has shown

that the computerization at ARD/FPS

level will be effectively functional over

a period of time, only if the retailer is

able to run the business honestly in a

profitablemanner.Dr.Haran’sreport

as well states –“an average amount of

`6000isthecommissionearnedbyARD

monthly which is not enough for running

theshopprofitably.HencetheARDstried

to earn more by illegal means to divert the

rationed articles selling PDS items in open

market,fudgingsalesfigureetc.”Financial

viability is a key strategy to ensure that

transparentandefficientPublicDistribution

Systemdeliversrightbenefitstothe

rightpeople.InKerala,beneficiariesget

their entitlements from ARDs. Monetary

profitsearnedbyARDsaredependenton

commissions received through the sale of

commodities and operational costs spent to

run the shop. It is important to understand

and analyse various factors that drive

theprofitsofARDownersattheground

level and analyse the extent of problem to

propose solutions.

1.3 OBjECTIVES OF THE STUDY

In collaboration with Department of Food and Civil Supplies, Government of Kerala, WFPinitiatedthefinancialviabilityanalysis.Overall purpose of the study was to carry out a detailed analysis of ARDs in the context of delivery of essential commodities within Kerala, study the factors that affect theprofits,understandtheextentsandpropose the feasible options to make ARDsfinanciallyviablesothattheStateGovernment can take an informed decision. The study also focused on understanding the role of government storage, AWDs and distribution players like Supplyco in the TPDS distribution network and the other keyfactorsintheirviability.Thespecificobjectives of the study are:

Developing Scenarios

zzTo develop various options on viability for GoK’s consideration

zzTo facilitate development of operational plans

DefiningViability

zzTo assess viability based on the availableinformation(as-is)

zzTostudytheprofitabilityanddefineviabilitythreshold

Existing TPDS

zzTo analyse existing costing structure of ARD

zzUndertake primary and secondary data analysis

1.4 METHODOLOGY

The study used both secondary and primary data in the analysis. The secondary data was provided by the Department of Food and Civil Supplies of the Government of Kerala, from 14,352 ARDs across 81 TSO’s in 14 districts. Data for 14,312 functional ARDs have been considered for the analysis. Primary data fromfieldsurveywascollectedfromtheAWDs and ARDs on a sample basis aiming to validate the information received from secondarysourcesandfilltheinformationgaps. This offered an opportunity to understand the various dimensions of viability in different situations such as location, distance from base depot, entitlements and allotments.

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Table 1: Summary of Methods & Tools used for the Study

Desk Review & Secondary Data Analysis

Secondary data on AWDs and ARDs was reviewed. Additional secondary data was collected using agreed data collection template; which was circulated across all TSOs.

Secondary data mainly covered information on the number of beneficiariesattachedtoARDs,entitlements,allocationsandzonecategory.

Structured tool for AWDs & ARDs

Primarydatawascollectedusingastructuredandsemi-structuredschedules covering various aspects of TPDS stakeholders – AWDs & ARDs in distribution network. This included quantitative and qualitative tools.

Structured schedule captured information on operational aspects, expenses head and unit cost, detailed transportation expenses including handling charges, transmission/transportation/storage/ damage losses, perspective of viability and portability, etc.

Key Stakeholder interviews/ consultation

Meetings/in-depthinterviewswithCivilSuppliesDepartment,KeralaState, at state, district and TSO level; interactions with the associations of ARDs and AWDs.

1.4.1 Sampling

From the sampling frame of the 14districts,6districtswereselectedusing purposive sampling method to represent the essential characteristics of the state. The key considerations for selection of the districts included – representation of all the three regions (2 districts from each region); South, Central, North/Malabar with a combination of major cities (Thiruvananthapuram & Ernakulum), one predominantly rural and less developed district (Wayanad), a district with special characteristic -highpercentageofNRI/migration(Malappuram), forest district (Idukki) and the smallest district with second highest population density (Census 2011) of the state (Alappuzha). These districts also cover the heterogeneity in the development index5 within the state.

A sample of 244 ARDs and 45 AWDs was selectedfromthesixdistrictsusingstratifiedrandom sampling method. The technique of

Probability Proportional to Size (PPS) was used to draw ARDs and AWDs from the total number of ARDs in each zone and location category. The same sampling methodology was followed for AWD selections in each of the six selected districts. (Refer to Table 2 for more information). Qualitative data was collectedfromasub-setoftheseARDsandAWDs and through interactions with TSO, AWD, Supplyco, ARD associations’ and other related stakeholders.

1.4.2. Data Collection

Study ToolsSpecificquantitativeandqualitativetoolswere designed for data collection. Team from WFP and respective TSO members carried out pilot testing of survey tools. Objectiveofthepilottestingwastofieldtest survey tools and adjust/modify to capture the right information based on thefieldsituations.Pilottestingexercisewas carried out in Ernakulum, Idukki and Thiruvananthapuram districts.

5. Kerala’s Development Matrix – Elphin Tom Joe, M.A. Centre for Development Studies – Kerala State Planning Board – (http://spb.kerala.gov.in/images/reports/studyreports/sr4.pdf).

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Translatedsurveytoolswerefinalisedand printed before conducting training. Translation of survey tools in Malyalam proved very effective for data collection team. The questionnaire covered information on ownership details, facilities and infrastructure, storage, transportation, human resources employed and operational modalities. Details of the revenue, costing and transactions were also collected.

Qualitative tool captured more details and the attitudes, aspirations and willingness for TPDS reforms.

Time-Line of Study

The survey was concluded in 3 phases: (i) Preparatory phase (ii) Data collection phase and (iii) Data Entry, Analysis and report writing phase The details of activities performed in each phase are shown infigure1.

Training of Survey Team

ATwo-DayTrainingProgramwasorganizedat Thiruvananthapuram to train 45 Kudumbashree team members. Purpose of

the training was to orient data collection team on viability analysis study design, various program concepts, roles of ARDs and AWDs in TPDS, to make survey team acquainted to different survey tools and gethands-onpracticethroughfieldwork.The training covered following elements:

Introduction to TPDS viability survey, zz

objectives and method.

Explaining the tools, guidelines and zz

definitions.

Mock practice sessions using the zz

questionnaire/role play.

Supervisors’sessiononfieldzz

supervisionandback-checktoensurequality data collection.

Hands-onpracticeatARDandAWDzz

level and feedback.

Preparationoffieldplan,roleszz

and responsibilities, data quality protocols.

At the end of the training, general survey/ data collection guidelines were discussed along with do’s and don’ts during data collection.

zzzFinalization of Concept Note (March 2014)

zzzClearences & inputs from Govt.

zzzMoU with Kudumbashree (10 July 2014)

zzzToolsfinalization(May 2014) and translation

zzzDevelopment of guidelines and software (July 2014)

zzzSamplingfrom6districts (14 Jul 2014)

zzzTraining of investigators and supervisors (16-18July2014)

zzzField Data Collection (Completed by 12 August)

zzzField Supervision and monitoring visits(22July- 12 August)

zzzData Entry: Training for data entry (4 August)

zzzActual data entry and validations

zzzData validation and translation of qualitative data (16September)

zzzData Analysis and creation of scenarios(6Sept-30 October)

zzzReport writing (1-15November)

Pre

para

tory

Ph

ase

Data

Co

llect

ion

Data

En

try/

an

aly

sis

Figure 1: Time-Line and Phases of Study

Information

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1.4.3 Quality Assurance

Primary data was collected from sampled ARDs and AWDs between 18th July to 12th August, 2014. During this phase, data collection team from respective six selected districtsfollowedthefieldplanspreparedduring training. (For sample coverage refer Table 2)

Ensuring the quality of data collection is an essential component in any survey. Data collection team under the direction of trained supervisors carried out the responsibility ARD and AWD interviews. Supervisorscheckedeachfilled-informandcarriedout58back-checksduringtheirsupervisory visits to ensure quality of data collection, feedback to data collection team to rectify errors and ensure consistency in data.

Monitoring visits were carried out by WFP team along with the Government counterparts at TSO level. Purpose of monitoring visits was to review process of data collection and give feedback on quality of data collection, uniformity of understanding and recording and clarity onquestionsandflow.Interactionswithselected TSOs and other civil supplies staff atvariouslevels,godownsin-chargeswerealso undertaken. Several interactions, formal and informal were also held and their inputs were considered while creating the scenarios and ranking the feasibility on various dimensions.

Data Processing and Analysis

Allfilled-informswerecheckedinthefieldby the enumerators before leaving the interview place. Supervisors checked all filled-informsbeforesendingitfordataentry.Filled-informsfromsixdistrictswerecollectedatKudumbashreeOfficeatKochiand Ernakulum. Team from WFP along with KudumbashreeKochiOfficecarriedoutthoroughscrutinyoffilled-informsbeforedata entry.

MS Access based data entry software were designed to enter data collected for ARD andAWD.On-jobtrainingwasprovidedto data entry team at Kochi. The data entry software included features such as data integrity, coded and controlled data entry options, adherence to skip patterns, user friendly update facilities, and easy consolidation along with supervisor controls like edit and delete records / lists and outputfile(s)generation.

Table 2: Coverage of Sample for ARDs and AWDs

Districts ARDs AWDs

Number of

PlannedARDs

Sampled Surveyed

Pla

nn

ed

Sam

ple

d

Su

rveyed

Ru

ral

Urb

an

To

tal

Ru

ral

Urb

an

To

tal

Alappuzha 30 27 4 31 26 5 31 5 6 6Ernakulum 50 33 18 51 39 11 50 10 11 10Idukki 30 29 1 30 29 1 30 5 5 5Malappuram 50 48 3 51 47 3 50 10 10 10Thiruvananthapuram 50 34 17 51 33 18 51 10 10 9Wayanad 30 29 1 30 29 1 30 5 5 5Grand Total 240 200 44 244 203 39 242 45 47 45

Figure 2: Data Entry Software front end

14

Data entry was done on more than one computer.Exportfilesfromdifferentcomputers were consolidated. Data entry was cross checked with forms on random basis to check for any data entry errors. Consolidatedexcelfileswereusedfordataanalysis. Detailed analysis of primary data for both ARD and AWD was undertaken toarriveatexpensesfiguresfordifferentzones, categories of ARDs/AWDs based on quantities of commodities handled and rural/ urban location.

Translation of Qualitative Information

Qualitative information was recorded on semi-structuredformatsinMalayalamlanguage. For the ease of qualitative analysis, all 58 ARD qualitative formats were translated into English. Qualitative data was analysed after translation; which provided essential information while interpreting quantitative information.

Data Analysis

Data analysis was undertaken using various tools. An analysis framework was prepared to analyse the secondary data and the inputs from primary data collected were applied to the larger secondary data to arrive at realistic revenue and cost estimates for ARD. The qualitative data was used to understand and interpret the quantitativefindingsandcreatevariousscenarios. The perceptions and aspirations of ARD owners were taken into consideration while suggesting feasible options.

1.5 CONSULTATIONS WITH GOVERNMENT OF KERALA

Many interactions and meetings were undertakenforseekinginputs,clarificationsand guidance from the government of Kerala.Thepreliminaryfindingsincluding

the viability thresholds, scenarios and estimated cost to the government wassharedon16OctoberwithKeralagovernment. The inputs provided by the Governmentonthepreliminaryfindingsfurther guided the analysis and assumptions of this study. The inputs given by GoK include:

The Kerala State Government has a. decidedtoimplementtheDoor-Step-Delivery(DSD)coveringtransportation costs. Government is also planning to take measures such as civil infrastructure for storage space and for enabling the PoS capability, face-liftingofshops,loadingandunloading charges and packaging with standardisation. In view of the decision on DSD, the transport and related costs should not be considered while arriving at expenditures by ARDs in the viability analysis.

Wage-rateforsemi-skillednon-b. agricultural labourer was recommended to be used for viability threshold.

Rather than consolidation of unviable c. shops, a different strategy through morein-depthanalysiswassuggestedto be undertaken for shops handling commodities less than 75 quintal. This can be done at a later stage once data is made available by the State Government.

Thedraftanalysispresentedwasmodifiedto incorporate these suggestions on transportation and related expenses in the present report. Suggestions for separate analysis of shops handling less than 75 quintals of quantities will be taken up once data from the State Government is made available to guide the ground level implementation.

15

2.1 PROFILE OF AUTHORIzED RETAIL DEALERS

While the commodities distributed under TPDS travel a long path through supply chain, from farmers through various means of transports and storage facilities to the ARD shop and then to the people who need these the most, the face for them is the ARD owner. Ration shop owners thus have a responsibility to be at the forefront to provide a human touch to the services offered through TPDS. ProfileofARDsinKeralathusneedtobeunderstood, both at a state level in terms of characteristics and also at an individual level about the perceptions, aspirations and attitude towards TPDS and the proposed reforms. This strengthens the argument of sustainability, by looking at the factors such as viability, communication, awareness and capacity needs to inform the initiatives of reforms.

2.1.1 Distribution of ARDs by Location & Type of Cards

Current data provided by the State Government shows that 82 percent ARDs are located in rural area. This however need to undergo change in category based on recent Census data. The location of ARDs has a direct implications on viability analysis.UrbanARDshavelessprofitthan

2. Unpacking the Financial ViabilityTERMINOLOGIES AND BASIS

Table 3: District and type of card wide distribution of number of cards

DISTRICT No. of ARDs

AAY BPL APL APL SS ANP Total Cards

Alappuzha 1,271 42,954 1,31,033 1,03,918 2,91,400 6,70 5,69,975Ernakulam 1,341 39,546 1,01,550 2,45,262 4,24,372 2,157 8,12,887Idukki 699 32,075 60,728 60,336 1,39,054 8,43 2,93,036Kannur 858 36,006 89,731 1,42,795 3,05,624 2,194 5,76,350Kasaragod 388 20,615 47,870 72,019 1,36,392 2,139 2,79,035Kollam 1,418 51,233 1,52,681 1,38,609 3,59,957 1,635 7,04,115Kottayam 991 34,691 95,829 1,52,161 2,14,113 1,225 4,98,019Kozhikode 974 41,687 1,30,952 1,42,787 3,94,458 1,910 7,11,794Malappuram 1,233 53,946 1,42,448 1,87,319 4,49,727 2,400 8,35,840Palakkad 931 47,316 98,486 1,93,773 3,50,189 1,370 6,91,134Pathanamthitta 815 30,411 56,637 99,856 1,42,511 6,69 3,30,084Thiruvananthapuram 1,876 65,351 1,61,786 1,70,371 5,11,590 2,221 9,11,319Thrissur 1,203 56,638 1,72,209 2,02,769 3,62,891 1,276 7,95,783Wayanad 314 40,832 32,255 3,5,492 93,472 2,279 2,04,330Grand Total 14,312 5,93,301 14,74,195 19,47,467 41,75,750 22,988 82,13,701

% 7.2% 17.9% 23.7% 50.8% 0.3%

Figure 3: Distribution of ARDs by Location

Urban2554, 18%

Rural11758,82%

16

rural ARDs as expenses are higher. Any adjustments in future, which might be required to align with the latest Census data thus need to take cognizance of the impact on viability in future and the budget provisionsessentialtoachievefinancialviability.

The ARD data used for analysis shows different characteristics. There are total of more than 82 lakhs cards in circulation, half of which are APL SS (50.8%), followed by 23.7% APL cards. AAY and BPL combined accounts for 1/4th of the total cards.

Highest commodity quantities and thus the commission is tagged to the AAY and BPL card. Urban shops with very small number of cards are the most unviable shops.

Figure 4a: Distribution of ARDs by Location and Card Categories

Most of the ARDs fall under Z1 (72%) and Z2 (20%) zones amounting to 92% of ARDs.About89percentofurbanand69percent rural ARDs fall under zone 1.

2.1.2ARDProfile:fromQualitativePerspective

The qualitative interactions captured the current practices, storage space, general working hours, mode of communication and payment for receipt of the commodities, willingnessofARDownerstosellnon-TPDS products, keeping records, opinions on the current commission structures / expectations, opinions on how to improve TPDS, computerization and portability. More than 58 ARD owners were contacted to have detailed discussion on these issues acrossthesixdistrictswherefieldstudywasconducted. Though the shops differed on their infrastructure and storage practices, the perceptions and aspiration were quite similar and provided important insights.

ARD Operations

All ARD owners mentioned that they open the shop for 25 days a month for 8 hours per day. They take pride in their work and are aware that they are supposed toprovidefoodtobeneficiariesasaservice through TPDS. Most of the ARDs havesufficientspacetostorethecurrentTPDScommodities,howeverasignificantnumber highlight inadequate space to store quantities for a month, which might be a potentialrequirementifdoor-stepdeliveryis to be implemented. All records are kept manually, some have purchased the electronic weighing machine and many are still using the weighing balance. Availability of electricity varies across the districts. All

zone and Location Wise Distribution of ARDs

ARDZoneClassificationARD zones Distance from ARDZone-1 0-8kmZone-2 8-16kmZone-3 16-32kmZone-4 >32 km

Z1 Z2 Z3 Z4

81122570 854 222

2264 262 27 1

0%10%20%30%40%50%60%70%80%90%

100%

Rural Urban

5361 3575 1768 737 288 29

912 785 512 217 113 15

0%

A-

Less

than

500

B-B

et 5

01-7

00

C-B

et 7

01-9

00

D-

Bet

901-1

100

E-B

et 1

101-1

500

F- M

ore

than

1500

10%20%30%40%50%60%70%80%90%

100%

Rural Urban

Nuber

s an

d P

erce

nta

gs

of ARD

s

Nuber

s an

d P

erce

nta

gs

of ARD

s

Z1 Z2 Z3 Z4

81122570 854 222

2264 262 27 1

0%10%20%30%40%50%60%70%80%90%

100%

Rural Urban

5361 3575 1768 737 288 29

912 785 512 217 113 15

0%

A-

Less

than

500

B-B

et 5

01-7

00

C-B

et 7

01-9

00

D-

Bet

901-1

100

E-B

et 1

101-1

500

F- M

ore

than

1500

10%20%30%40%50%60%70%80%90%

100%

Rural Urban

Nuber

s an

d P

erce

nta

gs

of ARD

s

Nuber

s an

d P

erce

nta

gs

of ARD

s

Figure 4b: Distribution of ARDs by Location and zone

17

ARD owners maintain manual records and reportedly provide some kind of receipt of paymenttothebeneficiaries.

Considerablefollow-upsarerequiredtoget the quantities from AWD or Supplyco, though the futile visits are reduced due to useoftelephonestoconfirmavailabilityofration. For remote locations, the supply is notregularandattimesbeneficiarieshaveto go back without ration. The payment to Supplyco and AWDs is through challans most of the times, however some mention that it is also done through cash.

Opinion about Commission Structure

All ARD owners feel that the current commission structure is inadequate. Many have also expressed that this is one of the reasons of diversion, though not the only. An ARD owner in Idukki district mentions “Existing commission is not sufficient. ARD business can be run more profitably if the commission is enhanced to `200 per quintal.” Many have a similar expectation. Another one mentions “Existing commission is not sufficient. ARD employees should be considered as govt. servants, and salary paid accordingly. This will also eliminate malpractices.” A retailer in Wayanad has clearlymentionedhisdemand-“increase present commission to `100”. Diverse responses include implementation of salary scale, increasing commission to `100/200/300 per quintal and most believe that this increase alongwith door step delivery will help in reduction in malpractices.

Opinion about Sale of Non-TPDS items

All ARD owners mentioned that they are readytosellnon-TPDScommoditiesbutwithvariedlevelsofconfidenceandcaveats.Some clearly mentioned that there are Maveli stores nearby and thus the chances of sales are negligible, others were of the opinion that if they get these commodities as well at a subsidized price, and there is possibility ofsignificantprofittheyarewillingtosell.Theapprehensionsabouttheprofitmarginswas expressed by many, however a very small number of ARD shops said that they are already doing it on small scale. Concerns

about the expandable space for storage/sale ofNon-TPDSitemswasalsopointedout.Saleofnon-TPDSfooditemsclearlycameoutasone of the potential solutions to augment theprofitsofARDs.Thishoweverwillneedfurther inquiry and analysis.

2.1.3 Perceptions about TPDS Reforms

Most of the ARD owners expressed need to reform TPDS. An owner who takes pride in running the shop in Ernakulum mentioned, “Ration should be given to only deserving consumers”. Many voiced concerns about “the weights, measures and quality of TPDS”. A shop owner from Thiruvananthapuram mentioned that commodities are getting accumulated as people from interior villages do not lift it. Some clearly highlighted the need to study the status of existing BPL card holders and assess how many of them are real BPL. Some even expressed that there should be dynamic updation of the cards. Many dealers could link reform to the increased commission rates and were oftheopinionthatdoor-step-deliveryandincreased commission rates will improve the performance of the TPDS to a great extent.

While there was clarity on commission rates anddoor-stepdelivery,understandingandawareness on NFSA, computerization and portability was limited. Most of the dealers had heard about NFSA and the changes in entitlements but very few could clearly spell-outwhatitisandtheimplications.Adealer in Malappuram mentions, “I have not heard about it”, while most mentioned that they have” heard about it and will think about it more once it comes”.

Most of the ration shop owners feel that computerization is good and it will ease out a lot of work for the Government. “I am not against introduction of computers. But portability is sure to affect the ration shops in villages adversely” says an owner in Allapuzha and another one said “Computerization should be introduced. Then only this business can be taken

18

forwardprofitably”,anotheroneinThiruvananthapuram said. “No problem in the computerization process if the monthly salary mode becomes active.” He further adds, “Computerization is better in ARD. It will allow to record all the things without making any adjustments.” One in Ernakulum said, “I have no interest in portability and I have interest in computerization.”

These opinions indicates more clarity and awareness on the reforms initiatives will be required to be provided. It appears from the interactions that if the genuine problems of commissions and transportation (and thus corruption) are takencareof,thedealerswillownthereforms and contribute to its success.

2.2 FINANCIAL FEASIBILITY: ESTIMATING COSTS AND REVENUES

The operations at ARD act as a critical step in the overall supply chain of the

TPDS food grains. For undertaking the operations of food grains distribution, the Department of Food and Civil Supplies of the Government of Kerala provides a remuneration to the ARD owners through kilogram based commission by the type of entitlements such as AAY, BPL, APL, APL-SSandAnnapurnaandbygeographiczonesclassifiedbasedontheirdistancefrom the wholesale location that is Authorised Wholesale Dealers (AWDs).

The per kilogram commission of commodities across the zones are similar for all the categories of cards in AAY, BPL and Annapurna but the same is slightly lower for the APL categories. However, within each category of cards, the commission rates increasemarginallyacrosszones1-3.Theincreasefromzone-1tozone3/4isbasedon the assumption of incremental costs of transportation being borne by the ARD owners for transporting the commodities. (Refer Table 4):

Table 4: commission Structure by Type of Card and zone

Type of card zone Commission in `Per kgRice Wheat Sugar FortifiedAtta

AAY Z1 0.5389 0.15Z2 0.5541 0.15Z3 0.5842 0.15Z4 0.5842 0.15

BPL Z1 0.5389 0.5337 0.15 0.75Z2 0.5541 0.5486 0.15 0.75Z3 0.5842 0.5785 0.15 0.75Z4 0.5842 0.5785 0.15 0.75

APL Z1 0.5537 0.5337 0.75Z2 0.569 0.5486 0.75Z3 0.6 0.5785 0.75Z4 0.6 0.5785 0.75

APL SS Z1 0.5537 0.5337 0.75Z2 0.569 0.5486 0.75Z3 0.6 0.5785 0.75Z4 0.6 0.5785 0.75

ANP Z1 0.5389Z2 0.5541Z3 0.5842Z4 0.5842

All 0.15 0.75

Source: Department of Civil Supplies, Kerala).

19

Electricity

It is important to note here that the revenue received by the ARD owners consists only of the commission and sale of empty gunny bags and there is no reimbursement for any other costs, which are borne by the ARD owners in the operation of food distribution. TPDS commodities, namely Rice, Wheat and Sugar, are provided to ARDs in 50 kg bags. Post commodity sale, empty bags are sold in open market.

Given the fact that there are differential rates of commissions by type of commodities handled by the ARD owners, the number of cards6 attached to the ARDs by types7 have a direct implication on the revenues earned by the ARDs.

Following factors decide the monthly revenue earned by ARD

Number and type of ration cards zz

(numberofbeneficiariesattachedtoARD)

TPDS entitlements per type of ration zz

cards

Commission structure based on type of zz

cards and zone of ARD

Quantity of TPDS commodities handled zz

(for calculations of empty bags)

In the study, revenues were calculated for the ARD owners on the basis of commission, number of cards in various categories and sale of empties, and it was found that an insignificantproportionoftheARDsweremakingprofit(revenuenetofcosts).Thisis especially because the commission rates currently are inadequate and token in nature though better as compared to some other states.

6. Monthlyentitlementofcommoditiesbycardtype

Type of Card Rice (kg) Wheat (kg) Sugar (kg) FortifiedAtta(kg)AAY 35 1.76BPL 25 5 1.76APL 10 3 2APL SS 9 2 2ANP 10

7. For the viability analysis study, it was assumed that each ARD receives monthly entitlements based on number andtypeofcards.However,inthefieldstudy,itwasnotedthatallocationmaybelessthanentitlement,whichis compensated in the subsequent month(s).

However, informal discussions with various stakeholders revealed that the ARDsearnsignificantlyhigherlevelsofincome by diverting and selling the TPDS products in the open market. With the understanding that the ARDs shall not be able to divert the TPDS foodgrains with the implementation of TPDS computerisation, the current rates of commission and proceeds from sales of empties shall not accrue a viable income to the ARD owners and therefore, they would act as a strong interest group against the TPDS reforms and computerisation thereof. Hence, viability of the ARD operations shall be a necessary pre-condition for the sustainability of the TPDS computerisation. Therefore, it would be important to ensure a viable income to the ARD owners.

Loading & unloading charges

Other-association membership,interestrate,

etc.

Human resource Cost

Capital asset recurring cost

Storage room maintenance

Transportation Cost

Travel ExpensesRentTelephone

Figure 5: Components of ARD Cost

Keeping this in view, WFP and the DFCS of the GoK explored and estimated various costs incurred by the ARD owners in the ARD operations so that a realistic per unit cost of ARD operations could be worked to estimate the gaps in incomes for the ARDs and expected level to be viable.

20

A detailed discussion with the ARD owners it was observed that the ARD owners incur significantamountsofcostsonanumberof heads shown in Figure 5. The primary survey conducted helped to understand the variety of heads of expenditure in ARD operation.

Whereas, the preliminary analysis of the secondary data received from the DFCS of the GoK provided some information on the estimated per unit cost on various heads such as electricity, rentals of the business premises, transportation costs, and wages

paid to the helpers, the primary survey discovered other invisible costs such as telephone bills, travel expenses incurred by the ARD owners to visit the wholesale depots such as AWD and SupplyCo, charges towards loading of commodities on trucks at the AWD and SupplyCo level and unloading the same at the ARD level as also the membership fee paid by the ARD owners to their associations. Following is a comparative estimation of the costs onvariousheadsbetweenthepre-surveyassumptions and primary survey results.

The primary survey revealed that most of

Table 5: Cost comparisons Between Primary Survey Feedback and Pre-Survey Assumptions

Component Rural Urban

Primary Pre-survey assumptions

Primary Pre-survey assumptions

Avg. (`)

Remarks Avg. (`)

Remarks Avg. (`)

Remarks Avg. (`)

Remarks

Monthly association membership

25 N.A. 25 N.A.

Electricity 200 300 200 300

Telephone 199 N.A. 199 N.A.

Rent 2,250 3,750 3,250 5,000

Travel Expenses

500 N.A. 500 N.A.

Transportation Cost

Z1: 5.3 Zone-wiserate per quintal per km

25 Rate per quintal per Km

Z1: 5.3 Zone-wiserate per quintal per km

25

Z2: 3.0 Z2: 3.0

Z3: 1.9 Z3: 1.9

Z4:1.6 Z4:1.6

Loading 1,034 `10 per quintal

N.A. 1,066 `10 per quintal

N.A.

Un-loading 1,034 N.A. Not Available

1,066 N.A. Was not taken into account

Storage room related

104 Re. 1 / quintal

N.A. 104 Re. 1/ quintal

N.A.

Capital asset recurring cost

103 N.A. 103 N.A.

Helper 185 Daily Wage

450 Daily Wage

220 Daily Wage 500 Daily Wage

Interest Rate on Working capital

12% Annual 12% Annual 12% Annual 12% Annual

21

the cost heads are similar between rural and urban ARDs except for the rent of the business premises and daily wage rates paid to the helper.

ThefindingsofthesurveyshowsthattheARDshavetospendasignificantamountof expenditure towards transportation costs. The ARD owners pay transportation costs to the transporter on a per load basis or on shared basis with other ARDs depending on the volume of operations. It was noted that as distance increases, the per quintal transportation costs decreases proportionately. It is important to note that the ARD owners lift the commodities from the AWDs or Suppylco with frequency upto four times a month.

Besides the transportation cost, the ARD owners/salesperson need to visit AWDs, SupplycoandTalukSupplyOfficetofollowup for lifting of their allocations, as also to make advance payments through cash, treasury challan or demand drafts. This isnotasignificantcostbutaddstothemonthly incremental costs incurred by the ARD owners.

Monthly rentals8 of the ARD shop space is a major additional head of expenditure, which is not reimbursed to ARD owners.

Expenses are also incurred towards maintenance of storage space, which is spent mainly on painting, provision of plastic sheets, pest control measures, etc. Such miscellaneous expenditures are not part of the current system of reimbursement and remuneration to the ARD owners. Furthermore, the ARD owners also invest on recurring capital assets such as electronic & manual weighing scales and the maintenance charges thereof.

Also, loading and unloading charges were identifiedasamajorincrementalcostfor the ARD owners as they have to bear

the cost both at the AWD point as also at the ARD point. Appointing the services of a helper is dependent on the number of cards attached to the ARDs (which translates into the quantity of commodity handled) and is not very common to havefull-timehelper.Thefollowingtableprovides an estimate of the number of days of helper support required by size class distribution of cards.

Table 6: Helper Cost Calculations

Number of Cards and Number of Man-Days by Helper(s)

No. of

days

Urban@ `220 /

day

Rural@

`185 / day

Less than 500 0 - -Bet501-700 4 880 739Bet701-900 6 1,320 1,109Bet901-1100 10 2,200 1,848Bet1101-1500 15 3,300 2,772More than 1500 25 5,500 4,620

The primary survey revealed that apart from the daily wages, ARDs have to pay annual bonus, medical expenses, provident fund contributions, etc. to the labour union towards utilization of helper services, which are additional incremental cost, not taken care of in the current commission structure.

Furthermore, there is a strong presence of trade unions among both organised and unorganised labour force in Kerala. The ARD owners hold membership in different ARD associations and pay a membership fee every month.

Overall, the revenue earned and the total cost expenses borne by the ARD owners are asymmetric, so much so that only 1.2% oftheARDsearnaprofit(RevenueminusCosts) and none of the ARDs earn a viable level of income.

8. For ARD shops who owned the shop space, question was asked on approximate rent that would have been paid in case of rented shop.

22

2.3PRoFiTAbiliTy,ViAbiliTyAND VIABILITY THRESHOLD

As indicated in section 2.1, multitude of factors impact the cost and revenue andconsequentlytheprofitoftheARDs.As a part of the TPDS reforms through end-to-endcomputerization,significantimprovements are expected in the functioning of ARDs that will lead to improved transparency through use of technology. This will lead to allocation of rations based on computerized transaction after deducting the balances of the previous months and ensuring all eligiblebeneficiariesreceiveservicesinthemostefficientmanner.Profitabilityand viability of FPS has been discussed in various reports. Wadhwa committee report has highlighted that only few shops are viable. It is important to highlight here thatconsideringonlytheprofitabilityisnot enough in the context viability of ARD shops.

Whilethetermfinancialviabilityisusedindifferent contexts, it is important to have the clarity of various concepts that has

beenusedforthecurrentfinancialviabilitystudy.

2.3.1Profitability

Profitisafinancialgain,especiallythedifference between the amount earned and the amount spent in buying and operating business to sale purchased products.

Profitabilityisthestateorcondition of yielding a financial profit or gain. Revenue andexpensesincludedinprofitcalculationsare explained in previous sections.

IfProfit>0,ietherevenueearnedthrough commission and sales of empties is greater than the expenditure incurred for running the business, then ARD is profitable,elseitisnon-profitable.

Tables7showstheas-isanalysisofprofitabilitywhereonly1.2%ARDsarecurrentlymakingprofits.ForalmostallARDcategories divided based on commodity handled,averageprofitsarenegative with very small number of ARDs earning profit(167).

Table7:ProfitandProfitabilityunderExistingCommissionStructure

ARD Categories (quintal quantities handled)

Total No. of ARDs

Existing Commission Structure and Expenses

AverageProfit No. of Profitable

ARDs

% of Profitable

ARDs

00-25Q 55 -3,103 0 0.0%

25-50Q 832 -2,447 0 0.0%

50-75Q 2,861 -1,881 0 0.0%

75-100Q 3,754 -1,662 0 0.0%

100-150Q 4,906 -1,806 1 0.0%

150-200Q 1,527 -1,803 98 6.4%

200-250Q 312 -2,036 47 15.1%

250-300Q 59 -1,868 19 32.2%

300-400Q 5 -4,476 1 20.0%

400-500Q 1 3,176 1 100.0%

Grand Total 14,312 -1,831 167 1.2%

23

Cost of transportation of commodity is oneofthemostsignificantcostscurrentlyborne by the ARD owners in absence of door-stepdelivery.AsperNFSA(2013),states are mandated to bear this cost, which will reduce expenses at ARD levelandwillincreaseprofitmarginsofthe retailers and will also improve the efficiencyofsupply-chain.ThepercentageofARDsearningaprofitincreasesfrom1.2percentto96.3percent(Table8)ifthetransportation cost is borne by the State Government.

However,earningprofitisnotanindicatorto sustain the business, if it does not adequately cover the opportunity cost of running an ARD. It is therefore important to consideran“appropriate”levelofprofitthatevery retail dealer should earn.

2.3.2ProfitabilityVs. Viability with DefinedThreshold

The viability of a business is measured byitslong-termabilitytohavesustainableprofitsoveraperiod.Ifthereforms under TPDS are to be sustained over a period of time, ARDs should be abletoearnminimumprofit/remunerationthat enables them to run the business

Table8:Profitandprofitabilityunderexistingcommissionstructurewithout transportation component

ARD Categories (quintal quantities handled)

Total No. of ARDs

Existing Commission Structure and Expenses Both Without Transportation Related Costs

AverageProfit No. of ProfitableARDs

%ofProfitableARDs

00-25Q 55 -1,766 0 0.0%25-50Q 832 -131 431 51.8%50-75Q 2,861 1,394 2784 97.3%75-100Q 3,754 2,646 3754 100.0%100-150Q 4,906 4,139 4906 100.0%150-200Q 1,527 6,589 1527 100.0%200-250Q 312 8,887 312 100.0%250-300Q 59 11,003 59 100.0%300-400Q 5 14,960 5 100.0%400-500Q 1 19,863 1 100.0%Grand Total 14,312 3,326 13779 96.3%

honestlyandefficientlyoveralongperiodof time. The situation in Kerala highlights the need to consider the viability and nottheprofitabilitysincemorethan36percentshopswhichareprofitableafter removing the transportation cost earnprofitslessthan`2500 and only 4 percent earn more than `7,500.The96.3percentprofitabilitythusshouldnotbethe consideration as this will in no case be adequate to run ARD, even more so with implementationofNFSAandend-to-endcomputerization.

It is important for the State Government to consider what the appropriate level ofprofit (called viability threshold) should be for an ARD owner to improve thefinancialviabilityandnotjusttheprofitability.Severalconsiderationscanbetakenintoaccountwhiledefiningtheviability threshold. Programme Evaluation OfficeunderPlanningCommissioninitsevaluationreportonTPDSdefined viability of FPS to mean an annual return of 12 percent or more on the working capital this however is inadequate rate.

Based on the cost of living and monthly per capita expenditure of Kerala an approximate viability threshold of `9500

24

can be considered to analyse the need. These detailed scenarios can be developed, howeverwithas-issituation,thenumberof shops that are viable in Kerala with this viability threshold are only 1.02 percent.

The most effective method to set the viability threshold9 (VT) is to consider what the dealer would be earning in alternate profession given their current profile/natureofworkdescribedin section 2.1. The daily wage rates for a non-agriculturalsemi-skilled10 worker can be considered as a suitable option for the ARDjob-profile.Asperthesecondarydataprovided by the State Government and furthervalidationinthefieldinteraction,the rates and number of days of work (25 days per month, 8 hours per week) provide an approximate viability threshold for Kerala ARD (Table 9).

Figure 6: Components of ARD Cost

Table 9: Viability Threshold Calculations

Viability threshold for an ARD – (calculated for 25 working days per month)

`/Day `/Month

Semi-skillednon-agricultural daily wage rate (Urban)

`600/- `15,000/-

Semi-skillednon-agricultural daily wage rate (Rural)

`500/- `12,500/-

Thegraphbelow(Figure.6)clearlyshowsthat the more is the quantity of commodity handledbytheARDhigheristheprofitability.It also shows that with the viability threshold definedabove,noneoftheARDsinurbanarea and only a few dealers handling commoditybetween300-500quintalinruralarea are viable. With this viability threshold negligible ARDs (~0.1%) are viable in Kerala.

9. Viability ThresholdistheminimumprofitearnedbyARDtobeabletoremainfinanciallyviablewhileinthebusiness.SuchminimumprofitismeanttotakecareoffinancialneedsofARDownerorsalesperson.

10. Semi-skilled worker:Asemiskilledworkerisonewhodoesworkgenerallyofdefinedroutinenaturewhereinthe major requirement is not so much of the judgment, skill and but for proper discharge of duties assigned to him or relatively narrow job and where important decisions made by others. His work is thus limited to the performance of routine operations of limited scope.

Ave

rage

Profit

Via

bili

ty T

hre

shold

20,000

Rural ARD-Viability Threshold ` 12,500

Urban ARD-Viability Threshold ` 15,000

Semi-Skilled Labour (` 600 × 25 days)

Fixed Viability Threshold`9,500

Semi-Skilled Labour(` 500×25 days)

15,000

10,000

5,000

-1,4

90

51 1

,559 2,8

56 4,3

78 6

,915

9,2

05

11,5

29

14,9

60

19,8

63

-2,3

81

-1,0

45

547 1,5

79 3,1

30 5

,305

8,7

04

0

-5,000

ARD Categories (Quintal Quality Handled)

Rural

Rural Urban

00-2

5Q

25-5

0Q

50-7

5Q

75-1

00Q

100-1

50Q

150-2

00Q

200-2

50Q

250-3

00Q

25-5

0Q

50-7

5Q

75-1

00Q

100-1

50Q

150-2

00Q

200-2

50Q

250-3

00Q

300-4

00Q

400-5

00Q

00-2

5Q

20,000

15,000

10,000

5,000

0

-5,000

Average of Profit WT Average of Viability Threshold Average of VT2 Graph

7,4

64

25

The other possibility that can be explored is to consider a variable viability threshold. Government of Kerala’s directive to open all ARD’s for all 25 days and 8 hours a day practically means that very small shops which are either loss making or earn extremelyminisculeamountofprofitwillhave to be open through the month and willnotbeabletotake-upanyotherwork.A pragmatic option in such case would be to calculate viability threshold based on the proportional workload and the dealers are allowed to run other business in the remaining time. However this is not analysed in detail due to current directive and mandate of the State Government.

Though, average revenue earned by rural and urban ARDs remain same as commission ratesaresame;averageprofitislessincaseofurbanARDsthanaverageprofitearnedbyrural ARDs as expenses incurred by urban ARDs are more than rural ARDs.

2.3.3 Strategies to Improve ARD Viability

While improving the ARD viability the basic objectives of the TPDS reforms/computerization should be the guiding principle.Theobjectivesofthereforms-accurate subsidy targeting, leakage reductionandstakeholderconvenience-should be given highest consideration and be achieved in all possible scenarios. An ideal way of achieving ARD viability is to pay every dealer approximate gap between the current earnings and the viability threshold under consideration. However, this will be extremely complex to implement and has a disadvantage for those dealers who handle higher commodity.

It is pertinent from the discussions so far that the earnings of ARDs need to improve if the State Government is committed to implementation of NFSA/TPDS reforms in a sustainable manner. The investment in these reforms including improved ARD viability can be compensated by likely savings through reduction in leakages and pilferages. The

increaseintheARDprofitsleadingtoviabilitythus should be done in a manner to ensure:

Facilitationoftheend-to-endzz

computerization.

Achievement of the reforms objectives – zz

improved targeting, reduced leakages and enhanced stakeholder convenience.

The decision on increase in commission thus should be guided by its impact on overall financialviability,easeofimplementation,link to reforms and the investment by the StateGovernment.Havingafixedsalary(and not commission rates) though provides an assured income may not be cost effective. It has further disincentive of treating differing performances at the same level. An important consideration for adopting anoptionforincreasedfinancialviabilityshould be to incentivise desired behaviour (in this case the automated transactions) to compensate the leakage reduction. Between the two viability thresholds depicted in the Figure6,thelowerthethresholddefined,more shops will be viable, however this may not be in best interest of the state. The decision of the state government should be based on the real need of ARDs, the cost-effectivenessofthesolution,easeofimplementation and its long term impact on overall functioning of the TPDS.

Various scenarios that are created using the above considerations for improved revenues of ARDs include:

Increase the Commission rates (Double zz

or triple of existing rates and assess the viability vs. cost to the state).






A detailed analysis and description of these scenarios is presented in next chapter for theviabilityscenariodefinedaboveas `12,500 and `15,000 per month for rural and urban areas respectively.

26

Once NFSA is implemented, it will have an impact on revenue and costs of an ARD. At present, ARDs have to spend significantamountofexpendituretowardstransportation. As per NFSA, the state has to bear the cost of transportation. Hence, all viability scenarios have been worked out based on the assumption that ARDs don’t incur transportation and related costs. As per NFSA current categorization ofbeneficiaries(APL/BPL/AAY)willchangeto priority (include AAY) and general. The entitlements will also change based on family size. Viability analysis based on current number of cards thus will be obsolete post NFSA implementation. Keeping this in view, scenarios are created based on commodity quantity handled as basis rather than number of cards tagged to ARD. This approach is more futuristic since it will hold good even in post NFSA implementation state.

Following considerations are used for the presentation of various viability scenarios:

The analysis is synchronized with post zz

NFSA implementation scenario by using the base as quantity of commodity handled by ARD rather than the number of cards attached, which is likely to be changed.

The post NFSA card allocation zz

per district/ARD and estimated beneficiaries/districtpovertycapswerenot available at the time of analysis of this study. Thus the scenarios for variousbeneficiarycategoriesandcommodities were not completely known. However the analysis can quickly be adjusted to any situation, since the consideration is the quantity of commodity and not the cards.

3. CREATING VIABILITY OPTIONSA WAY FORWARD TOWARDS DECISIONS

Kerosene is not part of NFSA. zz

Government of Kerala’s stand on kerosene post NFSA is not known. Kerosene thus is kept out of the current analysis.

Door step delivery will be undertaken zz

as a part of NFSA implementation. All viability scenarios thus do not consider transportation and related costs.

3.1 VIABILITY SCENARIOS

Inthesection2.3.2,theas-isanalysisshowed the extremely low level of viable shops(referFigure6).Thescenariosaredeveloped to see the effect of changes in the earnings of ARD owners by increasing the commission rates, and combinations of commission rates, base payments and incentivized transactions, analyzing its effect on viability of each ARD and estimating the cost for the Government.

It is pertinent to create the most suitable revenue model for the ARDs. The current revenuemodelforARDscanbedefinedbythe equation:

R1 = a*[k*C] + e*S

where R1 is the revenue earned by the ARD owners, a is a multiplier that is currently 1, k is the quantity of commodity handled in Kilograms, C is the current commission rate per kg of quantity, e is the number of empty bags and S is the rate of sale per empty bag.

This model can be written as R1 = R + R’; where R= a*[k*C] will contribute to the state cost and R’=e*S is sale of empties, which has no bearing on the state cost.

Themodelisfixedanddoesnottakethe cognizance of changes in the

27

wagerates(linkedtoinflation)orperformance incentives. WFP thus proposes model which makes the revenueafunctionofcommission,base-payment and incentives. The revenue model ‘R’ that contributes to thestatecostcanthusbedefinedas:

R= a*[k*C] + b*V + I

where b is the percentage multiplier and V is the viability threshold depending on the wage rate and I is the incentive per transaction, which may be linked to some conditionality:

This equation now can be used to create as many revenue scenarios for different values of these variables to arrive at an optimum result.

For the analysis, various ARDs were grouped as per the quantity of commodity they are handlingindifferentsub-groupssuchasthose handling quantities less than 25quintal,25-50quintalandsoon.Basedon such combinations, more than 40 scenarios are developed for two viability thresholdsdefinedinthepreviouschapter(basedonsemi-skilleddailywagelabourerandafixedthresholdof`9,500 per month based on MPCE.) Details including percentage of shops that are viable for a given combination and the estimated costs forallthesescenariosareinAnnex-I.

Key6scenariosthathavepotentialtobe considered looking at their feasibility are presented below for consideration. A discussion on each of the scenario will give clearer understanding of the situation:

Increasing Commission Rates:i. With thefixedcostsexcludingtransportationand related cost and keeping the current commission structure intact, the viability does not increase. Only about 15 shops will become viable. This clearly indicates the need for increasing the commission rates or the revenue of the retailers. The current revenue modelcanbemodifiedtoincrease

value of ‘a’ without considering other component as follows:

R = a*[k*C]

Scenario1to3definedinthefollowingsection shows that doubling the commission rate makes only 18% of ARDs viable at double the cost and tripling the commission makes only around 57% shops viable at triple the cost.

A Combination of base-payment and ii. increased commission: Addition of abase-paymentalongwithincreaseincommission gives opportunity to have anassuredfixedpaymentinadditionto the commission proportional to the commodity handled. With a viability threshold of `15,000 per month for urban shops and `12,500 per month forruralshops,abase-payment,whichis a percent of the threshold with the commission will be a good option to consider. The per month revenue to the ARDownersinthiscasewillbedefinedby following equation:

R= a*[k*C] + b*V;

Scenarios4-6explainthiswithaoptimumcombinationforbase-paymentof 50% of viability threshold (b = 0.5 and commission rate changing at a = 1,2,3). However one can notice that as more shops become viable, cost as well increasedmuti-fold.

iii. A combination of constant commission rate and changing base payment: Another scenario, having a fixedcommissionstructureandchanging thebase-paymentareexplainedinscenarios7-9.Ifthebase-paymentiscloser to the viability threshold, more number of shops will naturally become viable.

Adding Incentivized Transactions:iv. The scenario of commission rates and base payment, it is possible to

28

add per transaction incentive with a conditionthatmaybefinalizedbythestategovernment(forex-numberoftransactions which are PoS based). The costs at different rates of incentives assuming all transactions become eventuallyPoSbasedaredefinedinscenarios10-12.Thiscanbedefinedbyan equation:

R= a*[k*C] + b*V + I

Scenario13-15considerdoublev. transaction,base-paymentof50percentof viability threshold and per transaction incentive of `1, 3 and 5.

Scenario16-18considerexistingvi. commissionstructure,base-paymentof 70 percent of viability threshold with incentives as above.

A different approach of arriving at the best possibleviabilitypercentageatafixedcost this approach, may be used to arrive at best combination of base payment and commission note the details of the scheme aregiveninAnnexre-II

It is clear from the discussions above that numerous scenarios can possibly be developed using different values of the variablesdefined.Thecostrangesareproportional to the achievement of viability, and the ones that can be considered range from around `22 Crore to `38 crore per month. It can be clearly seen that any additional increase in the earnings of ARD owners will make some more ARDs viablebutalsoaddtotheprofitsofalreadyviable shops. It was observed that shops handling quantities less than 75 quintalweremostunviable,andthusneed to be analysed separately. The scenarios’ presented below accordingly shows the viability percentages for all shops and then excluding the shops handling quantities less than 75 quintal. A separate strategy may need to be discussed to ensure viability of the shops handling lesser commodity to make it most cost-effective.Aseparatestrategyfortheseshops then can be arrived at which will be discussed in more details in the next section.

29

Viability Scenario

Commission Base Payment

Incentivized Transaction

Data All ARDs (14312)

>75 Q ARDs (10564)

Scenario-1 Existing Commission Structure

– – % ARDs Viable

0.10% 0.13%

State Cost(`)

8,49,88,844 7,25,65,329

Scenario-2 Double Commission Rate


18.05% 24.45%

State Cost(`)

16,69,22,720 14,24,86,604

Scenario-3 Triple Commission Rate


56.83% 76.99%

State Cost(`)

24,88,56,595 21,24,07,879

A: Increasing the Commission Rates – Viability Scenario (1-3)

Interpretations

(Viability Scenarios 1-3):

0.10% of ARDs are viable zz

under existing commission structure.

Upto 18% and 57% ARD’s zz

become viable by increased commission rate by double and triple respectively.

In the case of ARDs zz

handling more than 75 quintal quantities; increase in viability percentages can be reached up to 77% if commission rate is tripled.

About 8158 shops will zz

become viable an estimated cost of `24.9 Crore per month to the state government.

Providing triple

commission rate

(Approx. `180/quintal)

will increase viability up

to 57% and state cost

will get increased up to

25 crores per month.

57%

100%

100%

100%

100%

100%

95%

42%

0%

0%

0%

18%

100%

100%

100%

100%

88%

18%

0%

0%

0%

0%

0%

100%

100%

14%

0%

0%

0%

0%

0%

0%

0%

0% 20% 40% 60% 80% 100%

Total (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

Total (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

-75 100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

Total (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TRIP

LE C

OM

MIS

SIO

N R

ATE

DO

UBLE

CO

MM

ISSIO

N R

ATE

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE

% VIABILITY

30

B: Increasing Commission and Additional Base-Payment - Viability Scenarios (4-6)

Viability Scenario




>75 Q ARDs (10564)


50% of Viability Threshold

– % ARDs Viable

9.54% 12.93%

State Cost (`)

17,76,31,344 14,10,05,329



– % ARDs Viable

70.74% 94.13%

State Cost (`)

25,95,65,220 21,09,26,604

Scenario-6 Triple Commission Rate


– % ARDs Viable

92.08% 100.00%

State Cost (`)

34,14,99,095 28,08,47,879

Interpretations Viability Scenarios (4-6)

zz Providing base payment of 50% of viability threshold (`15,000 for urban and `12,500 for rural) along with current commission rates has very little impact on increasing viability (9.5%).

Base payment of 50% of zz

viability threshold along with triple commission rates could increase the viability up to 92% at an estimated cost of `34 Crores.

Further, all 100% of zz

ARDs handling more than 75 quintal quantities can be viable by providing base payment of 50% of viability threshold and triple commission rates.

92%

100%

100%

100%

100%

100%

100%

100%

91%

0%

0%

71%

100%

100%

100%

100%

100%

100%

84%

6%

0%

0%

10%

100%

100%

98%

89%

66%

0%

0%

0%

0%

0%

0% 20% 40% 60% 80% 100%

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TRIP

LE C

OM

MIS

SIO

N R

ATE +

BP

50%

VT

DO

UBLE

CO

MM

ISSIO

N R

ATE +

BP

50%

VT

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE +

BP

50%

VT

% VIABILITY

With state cost of up to 28 crores per month, 100% of ARDs with more than 75 quintal quantities can be made viable.

31

C: Addition of Base Payment to the Existing Commission - Viability Scenarios (7-9)

Viability Scenario




>75 Q ARDs (10564)


`11k Rural`15k Urban

– % ARDs Viable

85.91% 99.99%

State Cost (`)

25,26,36,844 19,64,97,329


`8,000 – % ARDs Viable

22.97% 31.12%

State Cost (`)

19,94,84,844 15,70,77,329


`10,000 – % ARDs Viable

57.92% 78.47%

State Cost (`)

22,81,08,844 17,82,05,329


zz Base payments of `11,000 for Rural ARDs and `15,000 for Urban ARDs was arrived at based on viability gap analysis.

Providing zz `11,000 and `15,000 for rural and urban ARDs can increase viability percentagesupto86%andin case of ARDs handling more than 75 quintal quantities, almost all ARDs (75+Q) will be viable.

Base payments of zz

`8,000 / `10,000 won’t besufficienttoincreaseviability percentages up to acceptable levels.

With19.6crorespermonth, almost all ARDs handling more than 75 quintal quantities (10,564)canbecomeviable with addition of variable base payments of `11k for rural and `15k for urban ARDs to the existing commission structure.

58%

100%

100%

100%

100%

93%

81%

67%

0%

0%

0%

23%

100%

100%

100%

93%

80%

35%

0%

0%

0%

0%

86%

100%

100%

100%

100%

100%

100%

100%

61%

0%

0%

0% 20% 40% 60% 80% 100%

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE +

BP

10,0

00

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE +

BP

8,0

00

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE +

BP

R11K U

15K

% VIABILITY

32

D:ExistingCommissionStructure,basePayment and Incentivized Transactions - Viability Scenarios (10-12)

Viability Scenario




>75 Q ARDs (10564)



`1 % ARDs Viable

26.54% 35.96%

State Cost (`)

20,16,33,170 16,15,04,496



`3 % ARDs Viable

65.69% 88.83%

State Cost (`)

24,96,36,822 20,25,02,830



`5 % ARDs Viable

84.25% 99.74%

State Cost (`)

29,76,40,474 24,35,01,164


zz Increase in percentage viability can be seen with reference to increase in incentivized transaction rates.

Adding base payment of 50% zz

of viability threshold along with incentivized transaction of `1 will make 27% ARDs viable, and viability can reach up to 84% with `5 as incentivised transaction.

Up to 99% of ARDs handling zz

more than 75 quintal quantities will become viable at `5 as incentivised transaction along with the addition of the base payment of 50% of viability threshold.

Up to 99% of ARDs handling

more than 75 quintal

quantities will become

viable after addition of base

payment of 50% of viability

threshold and incentivised

transaction of `5 with overall

estimated cost of `24.4 crore.

84%

100%

100%

100%

100%

100%

100%

99%

53%

0%

0%

66%

100%

100%

100%

100%

100%

98%

71%

1%

0%

0%

27%

100%

100%

100%

100%

96%

40%

0%

0%

0%

0%

0% 20% 40% 60% 80% 100%

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE

+ B

P 50%

VT +

IT5

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE

+ B

P 50%

VT +

IT3

EXIS

TIN

G C

OM

MIS

SIO

N R

ATE

+ B

P 50%

VT +

IT1

% VIABILITY

33

E: Double Commission Rates Added with Base-Payment and Incentivized Transaction-Viability Scenarios (13-15)

Viability Scenario




>75 Q ARDs (10564)



`1 % ARDs Viable

80.32 98.19

State Cost (`)

28,35,67,046 23,14,25,771



`3 % ARDs Viable

90.76 100.00%

State Cost (`)

33,15,70,698 27,24,24,105



`5 % ARDs Viable

95.40 100.00%

State Cost (`)

37,95,74,350 31,34,22,439

Combinations of

increase in commission

rates, provision of

base payments and

incentivised transaction

suggests that at `23

crores per month

almost 100% of ARDs

handling more than 75

quintal quantities can

become viable.

95%

100%

100%

100%

100%

100%

100%

100%

98%

34%

0%

91%

100%

100%

100%

100%

100%

100%

100%

85%

0%

0%

80%

100%

100%

100%

100%

100%

100%

95%

39%

0%

0%

0% 20% 40% 60% 80% 100%

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50 -75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

TOTAL (14312)

400-500Q (1)

300-400Q (5)

250-300Q (59)

200-250Q (312)

150-200Q (1527)

100-150Q (4906)

75-100Q (3754)

50-75Q (2861)

25-50Q (832)

00-25Q (55)

DO

UBLE

CO

MM

ISSIO

N R

ATE

+ B

P 50%

VT +

IT R

S. 5

DO

UBLE

CO

MM

ISSIO

N R

ATE

+ B

P 50%

VT +

IT R

S. 3

DO

UBLE

CO

MM

ISSIO

N R

ATE

+ B

P 50%

VT +

IT R

S. 1

% VIABLE


At budgetary provision of zz

28 crores per month, more than 80% of ARDs can become viable with double commission rate, addition of the base payment of 50% of viability threshold and incentivised transaction of `1.

34

F:ExistingCommission,base-Paymentand Incentivized Transaction-Viability Scenarios (16-18) Without Transportation Component: Existing Commission Structure + Base Payment of 70% of Viability Threshold + Incentivized Transaction of `1 / 3 / 5

Viability Scenario




>75 Q ARDs (10564)



`1 % ARDs Viable

64.44% 87.30%

State Cost (`)

23,86,90,170 18,88,80,496



`3 % ARDs Viable

87.96% 99.98%

State Cost (`)

28,66,93,822 22,98,78,830



`5 % ARDs Viable

95.54% 100.00%

State Cost (`)

33,46,97,474 27,08,77,164

Interpretations Viability Scenarios (16-18):

With state cost of 33.5 zz

crores per month, and revenue structure of existing commission structure, addition of base payment of 70% of viability threshold and incentivized transaction of `5, 95% of ARDs will become viable and all ARDs handling more than 75 quintal quantities will become viable.

With 23 crores per month and revenue structure of existing commission structure, base payment of 70% of viability threshold and incentivised transaction of `3; almost all ARDs handling more than 75 quintal quantities will become viable.

95%

100%

100%

100%

100%

100%

100%

100%

98%

35%

0%

88%

100%

100%

100%

100%

100%

100%

100%

71%

0%

0%

64%

100%

100%

100%

100%

100%

95%

71%

0%

0%

0%

0% 20% 40% 60% 80% 100%

TOTAL (14312)

300-400Q (5)

200-250Q (312)

100-150Q (4906)

50-75Q (2861)

00-25Q (55)

400-500Q (1)

250-300Q (59)

150-200Q (1527)

75-100Q (3754)

25-50Q (832)

TOTAL (14312)

300-400Q (5)

200-250Q (312)

100-150Q (4906)

50-75Q (2861)

00-25Q (55)

EXIS

TIN

G C

OM

MIS

SIO

N

RATE +

BP

70%

VT +

IT5

EXIS

TIN

G C

OM

MIS

SIO

N

RATE +

BP

70%

VT +

IT3

EXIS

TIN

G C

OM

MIS

SIO

N

RATE +

BP

70%

VT +

IT1

% VIABLE

35

3.2 SUMMARY AND CONCLUSIONS

Based on the analysis and discussions so far, it is evident that there is huge asymmetry in the revenue earned and the costs incurred by the ARD owners in its routine operations. A number of cost heads being spent by the ARD owners on a monthly basis are not fully compensated either as part of the commission nor through any reimbursement.ARDsearnsignificantlyhigher levels of income by diverting and selling the TPDS products in the open market. Following six conclusions can be derived from this analysis:

Only1.2percentofARDsearnprofitati. the current commission structure. This calls for an urgent action to improve the revenue, especially in light of commitment to TPDS reforms. Hence, viability of the ARD operations shall be a necessary pre-condition for the sustainability of the TPDS computerisation, making the dealers important participant driving the reforms process.

Door-stepDeliveryismandatedbyii. NFSA and will be implemented. This willimprovetheprofitoftheARDastransport and related costs will be paid by the government. However, this improvementortheprofitwillnotbesufficienttoensurefinancialviabilityof the ARDs. Therefore, the following revenue models were analysed in order to determine how to achieve the financialviability:

Increase the Commission rates zz

(Double or triple of existing rates and assess the viability vs. cost to the state).






A best suited viability threshold iii. (monthlyminimumprofitearnedbyARDtomeetmonthlyfinancialneeds)isequivalenttothesemi-skillednon-agricultural daily wage rate that the ARD owner would have earned as opportunity cost, i.e. `600forurbanareas and `500 for rural areas. This translates into a monthly income threshold of `12,500 and `15,000 for ARDs in rural and urban areas respectively.

Despite several options and models for iv. revenue, even at the best viability vs. cost scenario, ARDs operating with less than monthly 75 quintals of foodgrains (includingsugarandfortifiedwheatflour)arenotviableandtherefore,thisnecessitated a separate analysis for the “ARDs handling >75 quintal” category along side the analysis of all ARDs. It also therefore implies that the revenue models should be applied to ARDs handling monthly commodities more than 75 quintal and a separate strategy should be applied to the unviable ARDs. Various options of the revenue models are discussed below:

Continuation of commission zz

structures scenarios: The analysis reveals that clearly, about one percent of the ARDs are viable with the continuation of current rate of commission, notwithstanding the volume of commodities handled by the ARDs. A doubling of the current rate of commission also leads to a marginal improvement in the percentage of households that are viable. Only 18% of all ARDs and 24% of the ARDs handling a monthly volume of more than 75 quintal are viable. A tripling of the current rate of commission leads to 57% of the ARDs being viable and 77% of those handling quantities of more than 75 quintals. However the tripling of commission applied across theboardwouldhaveafinancial

36

implication of `24.9 Crores111 per month to the Government of Kerala. If triple commission is provided to ARDs handling more than 75 quintal commodities, 78% of these will become viable at a cost of `21.09 crores.

Commission Structure combined zz

with a Base payment @ 50% of the viability threshold: Under the scenario of combining the remuneration with a mix of commission and base payment, three scenarios were analysed. An additional base payment of 50% of the threshold income of `15,000 for urban areas and `12,500 for rural areas combined with the existing commission structure also does not leadtoasignificantincreaseinthepercentage of ARDs that are viable. However, the 50% base payment with the double of the current commission structure would make 71% of the ARDs and 94% of the ARDs operating at more than 75 quintal as viable. However, these would have a cost implication of about `26croresand`21 crores respectively to the Government of Kerala. A combination of triple the rate of current levels of commission and 50% of the viability threshold would make 92% of all the ARDs and 100% ARDs handling more than 75 quintal foodgrains per month as viable and the respective cost implications are `34.1 and `28.1 crores.

Commission Structure combined zz

with a Base payment @ `11,000to rural ARDs and `15,000urbanARDs: The study also calculated

11 This is exclusive of the transportation cost to be borne by the GoK while implementing the doorstep delivery. As of now, the commission rate assumes that it is inclusive of the transportation cost but it is dismal. All the cost projections on other viability scenarios also are exclusive of transportation and related cost.

the exact gap between the current levels of income and the viability thresholdsatsemi-skilledwagelabourers discussed above for those who operate with a volume of 75 quintal or more which was `11,000 in the rural areas and `15,000 in urbanareas.Imputingthesefiguresas base payment and combining those with the existing rates of commission, it was found that 100% of the ARDs operating with more than 75 quintal are viable and86%ofallARDsareviable.The corresponding cost implications to the Government of Kerala are `19.6croresand`25.3 crores respectively.

zz Commission Structure combined

with a Base payment @ 50%

of the viability threshold and

Incentivised transactions:

Keepingthebasepaymentasfixed

at 50% of the viability threshold

alongwith the current rate of

commission and its structure, if an

incentive of `5 is provided to the

ARDs for each transaction that they

make, the monthly cost implication

to the Government of Kerala would

be `29.8 crores for all ARDs and

`24.4 crores for ARDs operating

with more than 75 quintal per

month at respective viability level

of 84% and 99.7%. However, if the

current commission rate is doubled

and combined with a base payment

of 50% of the viability threshold,

an additional incentive of `1 per

transaction would enable 80% of

the ARDs as viable and 98% of

the ARDs handling more than 75

quintal as viable. The respective cost

implications to the Government of

Kerala are `28.4 crores and `23.1

crores.

The most economic scenario would be v. the“gapfillingapproach”ofabasepayment of `11,000 and `15,000

37

for rural and urban respectively combined with the existing commission structure. However, this may serve as a disincentive to those who operate with large number of cards and larger volumes of commodities. Other scenarios that offer promise are the one with double commission rate, base payment of 50 percent of viability and incentive of `1 per transaction, and another with existing commission rate, base payment of 70 percent of viability threshold and `3 per transaction (incentive can be linked to desired behaviour to facilitate computerization). Reference to Table 10 below will give a clearer picture.

While selecting from the best option of vi. viability for shops handling commodity lessthan75quintals,anin-depthassessment of the shops which are still unviable need to be undertaken. Small shops which are in urban location and can be combined with bigger shopswithoutimpactingbeneficiaryconvenience. Small unviable shops that areremotelylocatedorareinadifficultto reach area may be categorized as Special Dispensation Shops to ensure a

special consideration or manage these locations through mobile shops.

3.3 RESULTS DISCUSSIONS & WAY FORWARD

It has been clear from the discussion so far that some inherent problems will stay in the system irrespective of the model, or their combinations are applied. For a system as complex and as varied, a solution of nature “one-size-fit-all”willnotwork.

TheFigure7showsaverageprofitsearnedby the ARD owners and the number of ARDs in each class of quantity of commodity handled. This clearly indicates that while most of the ARD’s (91%) are in the category handling commodity between 50quintalto200quintal,thehighestprofitisearnedbythosewhoarehandling commodities more than 250 quintal per month. The shops handling quantities less than 25 quintal permonthearnnegativeprofits. It is also clear from this analysis that for increase in revenue through adoption of any model, will help some shops to reach the threshold butwilladdtotheprofitsofalreadyviableshops.

Figure7:AverageProfitEarned(WithoutTransportationRelatedCost)andthe Number of ARDs by Categories of ARD Based on Quantities Handled

# o

f ARD

s

Pro

fit

in `

- 1,7

66

1,3

94

2,6

46

4,1

39

8,8

87

11,0

03 14,9

60 1

9,8

63

-5,000

0

5,000

10,000

15,000

20,000

25,000

ARDs

00-2

5Q

25-5

0Q

50-7

5Q

75-1

00Q

100-1

50Q

150-2

00Q

200-2

50Q

250-3

00Q

300-4

00Q

400-5

00Q

-1,000

0

1,000

2,000

3,000

4,000

5,000

Average of Profit Without Transportation No. of ARDs

6,5

89

-131

38

Tab

le 1

0:

Mo

st F

easi

ble

Via

bilit

y S

cen

ari

os

at

a G

lan

ce (

Ran

kin

g o

f V

iab

ilit

y P

erc

en

tag

e a

nd

Co

st t

o G

uid

e D

eci

sio

n)

Via

bilit

y

Sce

nari

oC

om

mis

sio

nB

ase

P

aym

en

tIT

>7

5Q

(%

V

iab

ilit

y)

Co

st >

75

Q

AR

Ds

Via

bil

ity

Ran

kC

ost

R

an

kTo

tal

Ran

kC

om

men

tA

ll A

RD

s (%

V

iab

ilit

y)

Co

st A

ll

AR

Ds

Scenario-01

Exi

stin

g C

om

mis

sion

Str

uct

ure

––

0.1

3%

7,25,65,329

15

6N

R0.1

0%

8,4

9,8

8,8

44

Scenario-02

Double

Com

mis

sion

Rat

e–

–24.4

5%

14,24,86,604

15

6N

R18.0

5%16,69,22,720

Scenario-03

Trip

le C

om

mis

sion

Rat

e–

–76.99%

21,2

4,0

7,8

79

33

6Lo

w

Via

bili

ty%

56.83%24,88,56,595

Scenario-04

Exi

stin

g C

om

mis

sion

Str

uct

ure

50%

of Via

bili

ty

Thre

shold

–12.9

3%

14,1

0,0

5,3

29

15

6Lo

w

Via

bili

ty%

9.5

4%17,76,31,344

Scenario-05

Double

Com

mis

sion

Rat

e50%

of Via

bili

ty

Thre

shold

–94.1

3%

21,09,26,604

43

7In

adeq

uat

e Via

bili

ty%

70.7

4%25,95,65,220

Scenario-06

Trip

le C

om

mis

sion

Rat

e50%

of Via

bili

ty

Thre

shold

–100.0

0%

28,0

8,4

7,8

79

52

7H

igh C

ost

92.0

8%

34,1

4,9

9,0

95

Scenario-07

Exi

stin

g C

om

mis

sion

Str

uct

ure

`11k

R &

15k

U–

99.9

9%

19,64,97,329

54

9Po

tential

Solu

tion

85.9

1%25,26,36,844

Scenario-08

Exi

stin

g C

om

mis

sion

Str

uct

ure

`8,0

00

–31.1

2%

15,7

0,7

7,3

29

24

6N

R22.9

7%

19,9

4,8

4,8

44

Scenario-09

Exi

stin

g C

om

mis

sion

Str

uct

ure

`10,0

00

–78.4

7%

17,8

2,0

5,3

29

34

7Lo

w

Via

bili

ty%

57.9

2%

22,8

1,0

8,8

44

Scenario-10

Exi

stin

g C

om

mis

sion

Str

uct

ure

50%

of Via

bili

ty

Thre

shold

`135.96%

16,15,04,496

24

6N

R26.54%20,16,33,170

Scenario-11

Exi

stin

g C

om

mis

sion

Str

uct

ure

50%

of Via

bili

ty

Thre

shold

`388.8

3%

20,2

5,0

2,8

30

43

7Lo

w

Via

bili

ty%

65.69%24,96,36,822

Scenario-12

Exi

stin

g C

om

mis

sion

Str

uct

ure

50%

of Via

bili

ty

Thre

shold

`599.7

4%

24,35,01,164

53

8H

igh C

ost

84.2

5%29,76,40,474

Scenario-13

Double

Com

mis

sion

Rat

e50%

of Via

bili

ty

Thre

shold

`198.1

9%

23,1

4,2

5,7

71

53.5

8.5

Pote

ntial

Solu

tion

80.3

2%28,35,67,046

Scenario-14

Double

Com

mis

sion

Rat

e50%

of Via

bili

ty

Thre

shold

`3100.0

0%

27,2

4,2

4,1

05

52

7H

igh C

ost

90.76%33,15,70,698

Scenario-15

Double

Com

mis

sion

Rat

e50%

of Via

bili

ty

Thre

shold

`5100.0

0%

31,3

4,2

2,4

39

51

6H

igh C

ost

95.4

0%

37,9

5,7

4,3

50

Scenario-16

Exi

stin

g C

om

mis

sion

Str

uct

ure

70%

of Via

bili

ty

Thre

shold

`187.3

0%

18,88,80,496

3.5

47.5

Low

Via

bili

ty%

64.44%23,86,90,170

Scenario-17

Exi

stin

g C

om

mis

sion

Str

uct

ure

70%

of Via

bili

ty

Thre

shold

`399.9

8%

22,9

8,7

8,8

30

53.5

8.5

Pote

ntial

Solu

tion

87.96%28,66,93,822

Scenario-18

Exi

stin

g C

om

mis

sion

Str

uct

ure

70%

of Via

bili

ty

Thre

shold

`5100.0

0%

27,08,77,164

52

7H

igh C

ost

95.4

4%33,46,97,474

39

This also indicates that small shops are notprofitable.Itisadilemmabecausethesmall shops are often in the vicinity of the beneficiariesandaddtotheirconvenience.Thistrade-offbetweenthesizeofshopandconvenienceofbeneficiariesneedtoberesolved effectively to arrive at an optimum sustainable solution.

In order to make TPDS a client oriented efficientfooddeliverysystem,followingis the way forward towards long term sustainable goals of reforms.

Consider the re-distribution of i. beneficiariestotheshops. There are about 1000 ARDs handling commodities less than 50 quintals remaining perpetuallyunviableandother65ARDshandling commodities more than 250quintalsearningmostoftheprofits.While equal distribution of cards to all ARDs is not possible, a practical decision onpermissiblerange(forexample75-200 quintal per month) with provisions forcase-by-casedeviationshouldbepossible.

Alternative means of earnings/ii. employment: If small shops are essentialforbeneficiaryconvenience,they clearly do not have a workload to justify wages for a month. In such cases, it is important to encourage other optionssuchassaleofnon-TPDSfooditems, linking with other employment generation schemes and giving more flexibilitybyfixingdaysandhoursof operations. ARD owners will have a positive attitude towards this as indicated through a few interactions. This option can be further explored and developed as a strategy for unviable shops as well.

iii. Alternate strategy for unviable shops: Rather than running unviable smallshopinadifficulttoreachareafor all days of month, it is much more economical to have mobile shops visiting with certain frequency. This possibility can further be explored as apartofimprovedefficiencyofsupplychain.

iv. Contextualising the ARD viability to NFSA: The scheduled launch of NFSA provides an opportunity to realign the ARD remuneration structure within the framework of NFSA. Since the number of cards in various categories, and the entitlements thereof and the number of cards to be attached to ARDs shall change with the implementation of NFSAinthestate,thefinaldecisionon the revamping of the commission/ revenue structure should be linked to the monthly allocation of ration to the ARDs. This is important especially in the context that the number of beneficiariescoveredbycards currently in circulation is higher than the total population of the state (Census-2011).Therefore,strictguidelines/criteriashouldbefixedforselectionofbeneficiariestobenefitfromthe NFSA.

v. ReclassificationofARDs: As per the latest data from Census 2011, coverage areas of some ARDs would havebeenreclassifiedfromruraltourban.Giventhefindingsofthestudythat the operational costs of urban ARDs is higher as compared to rural ARDs.Thereclassificationwillthushave additional cost implications on the proposed viability scenarios and revenue models.

40

Annexure-I

VIABILITY SCENARIOS AND PERCENTAGES OF VIABLE ARDsViability Threshold of `12,500 for Rural ARDs and `15,000 for Urban ARDs

Viability Scenario Description Data VT-U15k,R12.5k

All ARDs 75Q + ARDs

A1 - Commission structure and expenses - "As Is" Situation

% ARDs Viable 0.00% 0.00%

State Cost 849,88,844 725,65,329

Total No. of ARDs 14,312 10,564

A2 - Double Commission Rate % ARDs Viable 0.51% 0.69%

State Cost 1699,77,688 14,51,30,658


A3 - Triple Commission Rate % ARDs Viable 24.83% 33.63%

State Cost 2549,66,532 21,76,95,988


B1 - Commission and Expenses - Without Transportation Component


State Cost 849,88,844 725,65,329


B2 - Double Commission Rate and Expenses - Without Transportation Component

% ARDs Viable 18.05% 24.45%

State Cost 1669,22,720 14,24,86,604


B3 - Triple Commission Rate and Expenses - Without Transportation Component

% ARDs Viable 56.83% 76.99%

State Cost 2488,56,595 21,24,07,879


C1 - Commission and Expenses - Without Transportation Component + Base Payment (50% of VT)

% ARDs Viable 9.54% 12.93%

State Cost 1776,31,344 14,10,05,329


C2 - Double Commission Rate and Expenses - Without Transportation Component + Base Payment (50% of VT)

% ARDs Viable 70.74% 94.13%

State Cost 2595,65,220 21,09,26,604


C3 - Triple Commission Rate and Expenses - Without Transportation Component + Base Payment (50% of VT)

% ARDs Viable 92.08% 100.00%

State Cost 3414,99,095 28,08,47,879

Total No of ARDs 14,312 10,564

D1 - Commission and Expenses Without Transportation Component + Base Payment of `11k for Rural and 15k for Urban

% ARDs Viable 85.91% 99.99%

State Cost 2526,36,844 19,64,97,329


D2 - Commission and Expenses Without Transportation Component + Base Payment of `8k

% ARDs Viable 22.97% 31.12%

State Cost 1994,84,844 15,70,77,329


D3 - Commission and Expenses Without Transportation Component + Base Payment of `10k

% ARDs Viable 57.92% 78.47%

State Cost 2281,08,844 17,82,05,329


41


All ARDs 75Q + ARDs

E1 - Commission and Expenses

Without Transportation Component

+ Incentivized Transaction of `1 per

transaction


State Cost 10,89,90,670 9,30,64,496





transaction


State Cost 13,29,92,496 11,35,63,663





transaction

% ARDs Viable 14.11% 19.12%

State Cost 15,69,94,322 13,40,62,830





transaction

% ARDs Viable 24.59% 33.31%

State Cost 18,09,96,148 15,45,61,997





transaction

% ARDs Viable 35.10% 47.55%

State Cost 20,49,97,974 17,50,61,164


F1 - Commission and Expenses



transaction + Base Payment of 50%

of VT

% ARDs Viable 26.54% 35.96%

State Cost 20,16,33,170 16,15,04,496






of VT

% ARDs Viable 65.69% 88.83%

State Cost 24,96,36,822 20,25,02,830






of VT

% ARDs Viable 84.25% 99.74%

State Cost 29,76,40,474 24,35,01,164


G1 - Double Commission Rate and

Expenses Without Transportation

Component + Incentivized

Transaction of `1 per transaction +

Base Payment of 50% of VT

% ARDs Viable 80.32% 98.19%

State Cost 28,35,67,046 23,14,25,771


G2 - Double Commission Rate and

Expenses Without Transportation

Component + Incentivized

Transaction of `3 per transaction +

Base Payment of 50% of VT

% ARDs Viable 90.76% 100.00%

State Cost 33,15,70,698 27,24,24,105


42


All ARDs 75Q + ARDs

G3 - Double Commission Rate and Expenses Without Transportation Component + Incentivized Transaction of `5 per transaction + Base Payment of 50% of VT

% ARDs Viable 95.40% 100.00%

State Cost 37,95,74,350 31,34,22,439


H1 - Commission and Expenses Without Transportation Component + Base Payment of 60% of VT

% ARDs Viable 18.52% 25.09%

State Cost 19,61,59,844 15,46,93,329


H2 - Commission and Expenses Without Transportation Component + Base Payment of 60% of VT + Incentivized Transaction of `1 per transaction

% ARDs Viable 40.78% 55.24%

State Cost 22,01,61,670 17,51,92,496



% ARDs Viable 65.24% 88.33%

State Cost 24,41,63,496 19,56,91,663



% ARDs Viable 77.73% 97.28%

State Cost 26,81,65,322 21,61,90,830



% ARDs Viable 86.00% 99.92%

State Cost 29,21,67,148 23,66,89,997



% ARDs Viable 90.80% 99.99%

State Cost 31,61,68,974 25,71,89,164


I1 - Commission and Expenses Without Transportation Component + Base Payment of 70% of VT

% ARDs Viable 33.82% 45.83%

State Cost 21,46,88,344 16,83,81,329


I2 - Commission and Expenses Without Transportation Component + Base Payment of 70% of VT + Incentivized Transaction of `1 per transaction

% ARDs Viable 64.44% 87.30%

State Cost 23,86,90,170 18,88,80,496



% ARDs Viable 79.30% 97.52%

State Cost 26,26,91,996 20,93,79,663


43


All ARDs 75Q + ARDs


% ARDs Viable 87.96% 99.98%

State Cost 28,66,93,822 22,98,78,830



% ARDs Viable 92.70% 100.00%

State Cost 31,06,95,648 25,03,77,997



% ARDs Viable 95.44% 100.00%

State Cost 33,46,97,474 27,08,77,164


zA - Commission structure and expenses - "As Is" situation - 12 % Annualized Returns as VT


State Cost 8,49,88,844 7,25,65,329


zB - Double Commission Rate - 12% Annualized Returns as VT

% ARDs Viable 95.30% 99.96%

State Cost 16,99,77,688 14,51,30,658


zC - Triple Commission Rate - 12% Annualized Returns as VT

% ARDs Viable 99.46% 100.00%

State Cost 25,49,66,532 21,76,95,988


zD - Commission structure and expenses - "As Is" situation - 12 % Annualized Returns as VT - Without Transportation Component

% ARDs Viable 94.91% 99.81%

State Cost 8,49,88,844 7,25,65,329


zE - Double Commission Rate - 12% Annualized Returns as VT - Without Transportation Component

% ARDs Viable 99.48% 100.00%

State Cost 16,69,22,720 14,24,86,604


zF - Triple Commission Rate - 12% Annualized Returns as VT - Without Transportation Component

% ARDs Viable 99.87% 100.00%

State Cost 24,88,56,595 21,24,07,879


zG - Commission and Expenses - Without Transportation + Base Payment (50% VT) - 12% Annualized Returns as VT WT

% ARDs Viable 100.00% 100.00%

State Cost 17,76,31,344 14,10,05,329


44

Annexure-II

WORKING VIABILITY MODELS AT FIxED COSTS

Theremightbeadifferentapproachtolookingattheviabilityanalysis.AtafixedStateCost, the different combinations of the base payment and commission structures can be calculated to achieve the maximum possible (optimum) viability. A model is developed to actuallybuildsuchscenariosforagivencost.Incasethestateshavefixedconsiderationof expenditure, one can actually understand what is the best percentage viability that canbeobtainedatthatcost.Table11illustratesthedetailsforafixedstatecostof `25 Crores.

Table11:ExampleofViabilityModellingbasedonfixedstatecost,variablebase payments and resulting commission rates (% of present)

Base Payment (in `)

Resulting Commission Rates

(% of present)

State cost of `25 Crores

0 294% Present monthly commission cost born by state is around 8.5 cores. With the state budget of 25 Crores, commission rate will be 294% of present commission cost.

As the base payment increases, resulting commission rates (% of present) decreases.

At base payment of `11,500 (approx.), commission rate will be 100% of present commission rates.

State Cost = (Base Payment x # of ARDs) + (Resulting Commission Rates x quantities handled by ARDs)

Viability is calculated only when resulting commission rates are more than 0%.

1000 277%

2000 260%

3000 243%4000 227%5000 210%6000 193%7000 176%8000 159%9000 142%10000 125%

11000 108%12000 91%13000 75%14000 58%15000 41%16000 24%17000 7%18000 -10% Wherevercalculatedstatecostcrossfixeddefined

cost, commission rates will become negative. In other words, for base payments of `18,000 or more, state budget will cross 25 crores, and such combinations are impractical.

Viability modelling has thus excluded such combinations.

19000 -27%

20000 -44%

TheFigures8-11illustrateshowthesemodelsworkatfixedstatecostsof`15 Crores, `20 Crores, `25 Crores and `30 Crores. Based on the state budget any scenario can thus be constructed. Table 12 gives details of various scenarios based on this model

45

Resulting Commission Percentages (% of Present):

Cost\ BP

0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 16000 17000 18000 19000 20000

15 Cr 176% 160% 143% 126% 109% 92% 75% 59% 42% 25% 8% -9% -26% -42% -59% -76% -93% -110% -127% -143% -160%20 Cr 235% 218% 202% 185% 168% 151% 134% 117% 101% 84% 67% 50% 33% 16% 0% -17% -34% -51% -68% -85% -101%

Figure 8

Figure 10

Figure 9

Figure 11

0

2000

20000

4000

6000

8000

1000

0

1200

0

1400

0

1800

0

1600

0

2000

0

4000

6000

8000

10000

12000

14000

16000

No o

f Via

ble

ARD

s

Base Payment in `

Viable ARDs for a 15 Crore budget and resulting Commission rates (% of present) and base payments

>200Q

150-200Q

100-150Q

75-100Q

50-75Q

00-50Q

20000

4000

6000

8000

1000

0

1200

0

1400

0

1800

0

1600

0

2000

00

2000

4000

6000

8000

10000

12000

14000

16000

No. of

Via

ble

ARD

sBase Payment in `


>200Q

150-200Q

100-150Q

75-100Q

50-75Q

00-50Q

Resulting Commission Percentages (% of Present):

Cost\ BP

0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 16000 17000 18000 19000 20000

25 Cr 294% 277% 260% 244% 227% 210% 193% 176% 159% 143% 126% 109% 92% 75% 58% 42% 25% 8% -9% -26% -43%30 Cr 353% 336% 319% 302% 286% 269% 252% 235% 218% 201% 185% 168% 151% 134% 117% 100% 84% 67% 50% 33% 16%

0

2000

4000

6000

8000

10000

12000

14000

16000

01000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

No. of

Via

ble

ARD

s

Base Payment in `


>200Q

150-200Q

100-150Q

75-100Q

50-75Q

00-50Q

0

2000

4000

6000

8000

10000

12000

14000

16000

No.

of Via

ble

ARD

s

Base Payment in `


>200Q

150-200Q

100-150Q

75-100Q

50-75Q

00-50Q

20000

4000

6000

8000

1000

0

1200

0

1400

0

1800

0

1600

0

2000

0

Tab

le 4

: S

um

mary

of

vari

ou

s st

ate

co

st a

nd

base

paym

en

t co

mb

inati

on

s an

d t

here

of

Sta

te C

ost

Bas

e Pa

ymen

t (

`)50 C

r40 C

r37.5

Cr

35 C

r32.5

Cr

30 C

r27.5

Cr

25 C

r22.5

Cr

20 C

r17.5

Cr

15 C

r12.5

Cr

10 C

r7.5

Cr

013688

12846

12471

11970

11356

10574

9588

8332

6565

4908

3312

1829

702

143

6

1000

13780

13003

12663

12176

11568

10759

9759

8482

6601

4806

3133

1587

477

65

2

2000

13861

13156

12835

12370

11784

10969

9956

8644

6651

4725

2913

1328

301

15

3000

13912

13304

12999

12581

12005

11210

10179

8842

6717

4616

2649

1041

164

4

4000

13986

13468

13172

12790

12246

11479

10408

9026

6813

4482

2387

746

64

1

5000

14048

13595

13343

13015

12484

11737

10644

9256

6931

4340

2057

428

11

6000

14093

13729

13530

13189

12716

12031

10929

9523

7073

4143

1761

207

3

7000

14140

13833

13668

13402

12973

12318

11266

9805

7285

3959

1344

72

8000

14185

13951

13798

13579

13223

12617

11584

10099

7510

3751

877

10

9000

14217

14031

13920

13740

13454

12913

11950

10447

7830

3473

384

10000

14248

14108

14023

13880

13636

13215

12311

10871

8215

3109

97

11000

14262

14166

14107

13998

13826

13453

12695

11325

8745

2572

10

12000

14277

14216

14172

14102

13959

13681

13003

11769

9419

1680

13000

14290

14243

14211

14171

14073

13847

13246

12082

10378

430

14000

14302

14269

14248

14212

14152

13991

13451

12163

11366

Wh

ere

ver

base

paym

en

t co

st e

xce

ed

s st

ate

cost,resultingcommissionratewillbein

neg

ati

ves.

Su

ch r

even

ue m

od

els

are

no

t possible,andhenceviabilityisn’tcalculated

for

such

reven

ue c

om

bin

ati

on

s.

15000

14307

14291

14276

14255

14206

14099

13607

11990

11738

16000

14310

14304

14295

14281

14258

14190

13803

11804

17000

14312

14310

14308

14305

14292

14262

14048

11761

18000

14312

14312

14312

14312

14310

14307

14195

19000

14312

14312

14312

14312

14312

14312

14137

20000

14312

14312

14312

14312

14312

14312

Max

no.

of v

iabl

e ARD

s14312

14312

14312

14312

14312

14312

14195

12163

11738

4908

3312

1829

702

143

6

Max

% V

iabili

ty10

0.0%

100.

0%10

0.0%

100.

0%10

0.0%

100.

0%99.2

%85.0

%82.0

%34.3

%23.1

%12.8

%4.9

%1.0

%0.0

%

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ack Cover: W

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