oversight

Utilization of AID-Financed Fertilizer To Increase Agricultural Production in India

Published by the Government Accountability Office on 1971-11-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                         UNITED STATES GENERAL ACCOUNTINGQFFKE
                                                       WASHINGTON,     B.C.       20548


INTERNATIONAL       DIVISION




                     B-161854




                     Dear         Dr.    Hannah:

                                  This     is our report      on the utilization      of AID-financed                “i7
                     fertilizer          to increase     agricultural      production     in India.

                              Copies   of this report     are being sent to the Director,
                     Office    of Management       and Budget,       and to the Foreign Op-
                     erations     and Government      Information        Subcommittee,  House                        z m-z!.Y I!
                I
                     Committee       on Government       Operations.

                                                                      Sincerely           yours,




                                                                      Director,           International   Division



                    The Honorable         John A. Hannah
                                                                                           --
                    Administrator                                                         -1 /
         I
                    Agency      for International   Development




                                                   50 TH ANNIVERSARY 1921- 3973
I
I          GENERALACCOUNTINGOFFICE                                              UTILIZATIONOF AID-FINANCED
I          REPORTTO THE ADMINISTRATOR,                                          FERTILIZERTO INCREASE
I
I          AGENCYFOR INTERNATIONALDEVELOPMENT                                   AGRICULTURAL           PRODUCTION IN
                                                                                INDIA
                                                                                Agency for       International
                                                                                 Development
I
                                                                                 Department      of      State   B-161854
I
I
I
I          DIGEST
           ------
i
I
1          WHYTHE REVIEW WASMADE
I
                      As of May 1970, the Agency for International             Development      (AID) had pro-
                      vided a total      of $429 million    in loans to India      to finance      fertilizer
                      imports.      AID also assisted    in fina~i%~fertilizer          production         facili-
                      ties    in various   parts  of India.
                      Since fertilizer          is vital    to India, if it is to become self-sufficient
                      in food-grain         production,     the General   Accounting    Office reviewed   the
                      fertilizer        import    program   to ascer%YKwhether       the commodity    was being
                      used-effectively.
                         ___----   -I-.             (See pp. 4 and 5.)


I
I
           FINDINGS AND CONCLUSIONS
I
I                     India’s distribution         and reporting        system was not adequate           for absorbing
I                     the significant       increase     of fertilizer        available   under the program         and
I                     thus hindered      its effectiveness.            Also procurement      specifications       for
I
    I                 one of the principal          types of fertilizer         were changed without          determin-
    I                 ing whether     the new product       would be acceptable         to its users.
    I
    I
    I                 As a result of these       problems,    together  with unfavorable     weather    condi-
    I                 tions    in some areas of India      that decreased    the demand for fertilizer,
    I
    I                 supplies    of ammonium sulfate      and diammonium    phosphate   valued    at about
                      $70 million    remained    unused as of January and April 1970.           The fertilizer
    I                 had been financed       by AID commodity loans during fi seal years 1967 through
    I                 1969. (See pp. 6 to 11.)
    I
    i
    I                 No one actually   knew the amount of ammonium sulfate                   on hand in India.
    I                 Estimates   of ammonium sulfate  on hand as of April                 1970 ranged  from
    I
    I                 500,000   to 1.1 million  tons.  (See p. 6.)
     I
     I
    I
                      Some types of ammonium sulfate did not move as fast as expected,                     because
    I                 market   preference   shifted    to urea-based     fertilizer      as it became more
    I
    I
                      readily   available.      In addition, according          to AID 9 some stocks of
    I                 ammonium sulfate,     purchased    under new specifications,          proved difficult
    I                 to sell.      No test of consumer     acceptance     of this    substitute product was
    I
    I
                      made in India prior       to its purchase.       (See pp. 6 and 7.)
    I
    I                                                                                    HO’d.        16,197         I
    I

    I    Tear Sheet                                                 1
    I
                                                                                                                           I

                                                                                                                           I



      About $15 million    worth of diammonium        phosphate     delivered      to four Sta'ces                     .
      had been on hand for 10 months or more as of January                   31, 1970.        The fer-
      tilizer  was shipped    to locations    where it already         was being produced           lo-
      cally.  Also unfavorable      weather   conditions      reduced      the demand for fer-
      tilizer  generally.     The limitations     of the marketing           and distribution
      system also may have contributed        to the reduced        consumption.

      The lack of an adequate          distribution      and reporting         system for fertilizer
      caused problems        of oversupply        in some States    of certain        types of fer-
      tilizer    which were readily          marketable    in other     locations.        It caused also
      an additional       financial    burden for distributors,            because added costs were
      incurred      for storage     and recondiiloning       of fertilizer         which had deterio-
      rated.     (See pp- 9 and 10.)

      Through      a 1961 agreemen t with the International                    Cooperation          Administra-
      tion    (predecessor       agency of AID),         United    States-owned           Indian     currency
      valued     at $19 million        had been made available             to assist         in constructing
      a storage      and distribution         system for food grain              in India.          No such simi-
      lar assistance         was provided,        however,     when large-volume             shipments       of fer-
      tilizer      were approved       for financing,         even though        the need for such a sys-
      tem was recognized.             Moreover,      an AID-financed         study team on fertilizer
      marketing       in India    reported      that   the Government          of India's         program      for
      providing       a storage     and distribution          system for fertilizer,                seed grains,           I
      and other      commodities       had no relation         to market       strategy        and that ware-
                                                                                                                           I
      house space had been constructed                 with no apparent            relation       to need.

      Concern     expressed      by the Aid to India     Consortium,1      as well as by the World
      Bank, about the marketing,           distribution,     and reporting     system for ferti-
      lizer    in India     indicated   that     there was a need for concurrent      planning   in
      this   area.      (See pp. 9 and 12.)

      Adequate      amounts of local currency   were               available     for financing       projects
      of this     type and had been used in prior                  years     to provide   facilities       for
      storage     and distribution   of food grains.                  (See pp. 12 and 13.)

      In placing    primary       emphasl 's on financing    of fertilizer      to assist     India
      in achieving     self-sufficiency        in food grains,     AID shou7d have tested           the
      marketability     of new products        being financed     and should      have established
      a system to be used to rapidly             identify  changes      in consumer   preferences.


RECOI@lENDATIONS
               OR SUGGESTIONS

      None.



'A group of      13 nations  headed by the International       Bank                 for Reconstruction     and
  Development     (World Bank),   joined together    to assist   in                 developing    the economy
 of India.
                                                                                                                               I
I
I
I
I
I
I
I                AGENCY ACTIONS AND UNRESOLVED ISSUES
I
 I
 I                     AID generally        agreed with our findings          pertaining        to the large      accumula-
 I                     tions   of fertilizer        but suggested       that the circumstances           surrounding      the
 I
 I                     accumulation       of the fertilizer        be viewed against          the background        of a very
 I                     rapid   market     expansion     in India.      AID also attributed accumulations                of
 I                     diammonium     phosphate      to prevailing       weather     conditions       and the accumula-
I
I                      tion of ammonium sulfate            to competition        from urea.        (See app. I.)
I
 I
 I                     AID pointed        out that      the storage           and distribution        system for fertilizer
 I                     in India      had not developed             sufficiently         so that    it could quickly         adjust
 I                     to changing        market    situations.             AID questioned        whether     financial     assis-
 I
 I                     tance from the United              States      was needed to improve             the situation.         Addi-
 I                     tionally,      private      marketing        organizations,           given greater        scope by the
 I
  I                    Indian     Government,       were improving              the marketing      of fertilizer         and the
  I                    quality     of storage       facilities.             AID said that further           development      in that
  I                    direction      should     lead to a satisfactory                 marketing     mechanism       but that some
  I
  I                    investment       in new storage           facilities        would be needed.
  I
   I
   I                   At the suggestion          and with the assistance             of AID, in 1968 the Government
   I                   of India  developed         a new reporting   system           to   forecast     its   import    require-
     I
     I
                       ment, which it is          now installing.
     I
     I
     I
                       The World       Bank and others         believe    that    India will require     fertilizer        im-
     I                 ports    for    the next few years;           however,     the system of distribution           and mar-
     I                 keting     is   a limiting      factor     in increasing        fertilizer  consumption.         The
     I
     I                 World Bank        believes    that the development            of a more efficient       marketing      or-
     I                 ganization        may require      financial      assistance.
      I
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      I
      I
      I
      I
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             I
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             I    Tear Sheet
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                            Contents
                                                                   Page

DIGEST                                                               1

CHAPTER

       1   INTRODUCTION                                              4

       2   PROCUREMENTOF FERTILIZER UNACCEPTABLETO
           CONSUMERS                                                 6
              Conclusion                                             7

       3   WEAKNESSES  IN DISTRIBUTION AND REPORTING
           SYSTEMFOR FERTILIZER IN INDIA                            9
               Conclusion                                          12

       4   MISSION SURVEILLANCE OVER USE OF AID-
           FINANCED FERTILIZER                                     14

APPENDIX

       I   Letter    dated March 18, 1971, from Agency for
              International      Development to the General
             Accounting     Office                                 19

  II       Principal      officials     of the Agency for Inter-
              national     Development having management re-
              sponsibilities        for the matters  discussed
              in this report                                       27
GENERALACCOUNTINGOFFICE                                           UTILIZATIONOF AID-FINANCED
REPORTTO THE ADMINISTRATOR,                                       FERTILIZER TO INCREASE
AGENCYFOR INTERNATIONAL DEVELOPMENT                               AGRICULTURAL PRODUCTION  IN
                                                                  INDIA
                                                                  Agency for       International
                                                                  Development
                                                                  Department      of   State         B-161854


DIGEST
------


WHYTHE REVIEW WASMADE

     As of May 1970, the Agency for International             Development   (AID) had pro-
     vided a total      of $429 million    in loans to India to finance        fertilizer
     imports.      AID also assisted    in financing  fertilizer       production facili-
     ties    in various   parts of India.

     Since fertilizer        is vital    to India, if it is to become self-sufficient
     in food-grain       production,     the General  Accounting    Office reviewed   the
     fertilizer      import    program   to ascertain  whether   the commodity    was being
     used effectively.           (See pp. 4 and 5.)


FINDINGS AND CONCLUSIONS

     India's    distribution         and reporting       system was not adequate          for absorbing
     the significant          increase    of fertilizer        available   under the program          and
     thus hindered         its effectiveness.           Also procurement     specifications         for
     one of the principal            types of fertilizer         were changed without         determin-
     ing whether       the new product        would be acceptable        to its users.

     As a result     of these problems,      together    with unfavorable        weather    condi-
     tions    in some areas of India     that decreased       the demand for fertilizer,
     supplies     of ammonium sulfate    and diammonium       phosphate     valued     at about
     $70 million     remained    unused as of January and April           1970.     The fertilizer
     had been financed        by AID commodity     loans during    fiscal     years    1967 through
     1969.      (See pp. 6 to 11.)

     No one actually   knew the amount of ammonium sulfate                     on hand       in India.
     Estimates   of ammonium sulfate  on hand as of April                    1970 ranged           from
     500,000   to 1.1 million  tons.  (See p* 6.)

     Some types     of  ammonium sulfate       did not move as fast            as expected,       because
     market preference      shifted     to urea-based        fertilizer       as it became more
     readily  available.        In addition,      according         to AID, some stocks       of
     ammonium sulfate,      purchased      under new specifications,               proved difficult
     to sell.    No test of consumer          acceptance       of this     substitute     product     was
     made in India prior        to its purchase.          (See pp. 6 and 7.)



                                                      1
     About $15 million       worth    of diammonium      phosphate     delivered      to four States
     had been on hand for 10 months or more as of January                       31, 1970.        The fer-
     tilizer was shipped         to locations    where it already         was being produced            lo-
     cally.  Also     unfavorable      weather   conditions      reduced      the  demand      for  fer-
     tilizer  generally.         The limitations     of the marketing           and distribution
     system also may have contributed            to the reduced        consumption.

      The lack of an adequate           distribution        and reporting           system for fertilizer
      caused problems         of oversupply        in some States       of certain         types of fer-
      tilizer    which were readily           marketable       in other      locations.        It caused also
      an additional       financial     burden       for distributors,          because added costs were
      incurred      for storage     and reconditioning            of fertilizer         which had deterio-
      rated.      (See pp. 9 and 10.)

      Through     a 1961 agreement         with the International             Cooperation           Administra-
      tion    (predecessor      agency of AID),          United    States-owned          Indian      currency
      valued     at $19 million        had been made available             to assist        in constructing
      a storage      and distribution          system for food grain            in India.           No such simi-
      lar assistance        was provided,          however,    when large-volume            shipments        of fer-
      tilizer     were approved        for financing,         even   though     the    need     for    such    a sys-
      tem was recognized.             Moreover,      an AID-financed         study team on fertilizer
      marketing      in India     reported       that the Government          of India's          program      for
      providing      a storage      and distribution          system for fertilizer,                seed grains,
      and other      commodities       had no relation          to market     strategy        and that ware-
      house space had been constructed                  with no apparent          relation        to need.

      Concern expressed          by the Aid to India     Consortium,1      as well   as by the World
      Bank, about      the marketing,      distribution,     and reporting     system for ferti-
      lizer    in India     indicated   that there was a need for concurrent            planning in
      this   area.      (See pp. 9 and 12.)

      Adequate      amounts of local   currency were               available     for financing           projects
      of this     type and had been used in prior                  years     to provide   facilities           for
      storage     and distribution   of food grains.                  (See pp. 12 and 13.)

      In placing    primary       emphasis on financing   of fertilizer      to assist      India
      in achieving     self-sufficiency      in food grains,     AID should     have tested       the
      marketability     of new products      being financed     and should     have established
      a system to be used to rapidly           identify  changes     in consumer    preferences.


RECOMMENDATIONS
              OR SUGGESTIONS

      None.



'A group of      13 nations   headed by the International       Bank                 for Reconstruction     and
  Development      (World Bank),   joined together    to assist   in                 developing    the economy
  of India.




                                                           2
AGENCYACTIONS AND UNIZSOLVEDISSUES

    AID generally agreed          with our findings         pertaining        to the large      accumula-
    tions   of fertilizer        but suggested       that the circumstances            surrounding      the
    accumulation       of the fertilizer        be viewed against           the background        of a very
    rapid market       expansion      in India.     AID also attributed            accumulations      of
    diammonium    phosphate       to prevailing        weather     conditions      and the accumula-
    tion of ammonium sulfate            to competition         from urea.        (See app. I.)

    AID pointed out that the storage           and distribution      system for fertilizer
    in India had not developed      sufficiently         so that  it could quickly      adjust
    to changing market  situations.         AID questioned       whether   financial    assis-
    tance from the United           States      was needed to improve        the situation.          Addi-
    tionally,      private   marketing       organizations,         given greater       scope by the
    Indian     Government,    were improving           the marketing      of fertilizer        and the
    quality     of storage    facilities.            AID said that further         development     in that
    direction      should  lead to a satisfactory               marketing   mechanism       but that some
    investment      in new storage        facilities        would be needed.

    At the suggestion          and with     the   assistance     of AID, in      1968   the Government
    of India  developed         a new reporting         system   to forecast      its   import  require-
    ment, which it is          now installing.

    The World       Bank and others          believe    that    India will require     fertilizer        im-
    ports    for    the next few years;            however,     the system of distribution           and mar-
    keting     is   a limiting      factor      in increasing        fertilizer  consumption.         The
    World Bank        believes    that     the development         of a more efficient       marketing     or-
    ganization        may require       financial      assistance.
                                CHAPTER1

                              INTRODUCTION

        AID provides loans for the purchase of fertilizer          and
other agricultural     and industrial      commodities needed to help
India in its effort     to achieve self-sufficiency       in food-
grain production.      All fertilizer      imported by India is con-
trolled    by various central      and State government departments.
(India is a federation     of 17 States and 10 territories.)

       The fertilizer     is procured by the Indian Department of
Supply, Ministry       of Foreign Trade and Supply, and is shipped
to three major ports,        as well as several minor ports,          in
India.    The Ministry      of Food, Agriculture,      Community Devel-
opment and Cooperation        is responsible    for distributing        im-
ported fertilizer,       which it does by quarterly        allotments      to
the States.       Prior to 1969 the latter      Ministry    was respon-
sible also for distribution         of 30 percent of the domesti-
cally produced fertilizer.          The domestic manufacturers          are
now free to sell their entire production            in the open market.

       Each State is responsible        for the distribution    of im-
ported fertilizer       within   its borders.     Generally  two distri-
bution channels are used, State and local government subdi-
visions     and cooperatives.       Requests from the States to the
Ministry      for imported fertilizer      are the basis for the quar-
terly    allotments    by the Ministry.

      Primary responsibility      for establishing     adequate pro-
cedures and controls     for procurement,     receipt,    distribution,
and utilization    of commodities financed by AID rests with
the Government of India.        AID is responsible     for ascertain-
ing the effectiveness      with which the Government of India is
meeting this responsibility.

        In AID's view, the purpose of program assistance       is to
achieve (1) changes in allocation         of resources by the recip-
ient country,      (2) an increased rate of developmental     savings
and investment,       (3) continued growth of the economy, (4) ini-
tiation    of self-help     measures, and (5) consent to other U.S.
policy purposes.         Special progress reports evaluating   pro-
gram assistance      are not required,    but proposals for renewed
program assistance        covering subsequent periods are to

                                      4
outline the facts regarding  the results achieved and there-
fore should contain the opinion of the Mission director   as
to the effectiveness  of the assistance.

       As of May 1970, AID had financed about $429 million
worth of fertilizer   under 13 commodity loans made to India.
This amount was about 26 percent of the total    amount of the
13 loans.    Commodity loans cover about 90 percent of the
assistance   being provided to India.

      The significanceof     the fertilizer  program in India was
brought out in the figures      showing that in 1 recent year AID
had financed worldwide purchases of fertilizer       valued at
$152 million,     70 percent of which was destined for India.

         Cur review consisted   of an examination       of AID files    and
discussions      with United States Government officials          in India.
We also visited       the port and fertilizer     storage facilities
in India, as well as selected local fertilizer              production
facilities,      and held discussions     with Government of India
officials     responsible   for production     and distribution      of
fertilizer.
                             CHAPTER 2

    PROCUREMENT
              OF FERTILIZER UNACCEPTABLETO CONSUMERS

      All AID-financed    fertilizer     is procured by the Govern-
ment of India through formal advertised-bid          procedures.    No-
tices requesting     bids on proposed purchases of fertilizer
are issued by the India Supply Mission in Washington,            D.C.
Once fertilizer    is shipped from the United States,         it is
under the complete control         of the recipient  country.

        We were advised that supplies of ammonium sulfate         pur-
chased by India generally        were obtained from European sources
prior    to 1967. The fertilizer      obtained from these sources
was a white-crystal      type which was in short supply in the
United States,       Because of the large quantities      of this fer-
tilizer     needed by India,    AID was concerned  that   purchases
of the volume required would cause serious price increases
for the white-crystal       type of ammonium.sulfate     in the United
States.      AID personnel decided to write procurement specifi-
cations that would allow a brown-flake         type of ammonium sul-
fate to be procured because it was available          in larger quan-
tities     and at a lower price,     No test of the marketability
of this substitute      product was made in India,      and subsequent
events revealed a low consumer acceptance of the product.

       During fiscal    years 1967 through 1969, about 2.3 mil-
lion metric tons of AID-financed        ammonium sulfate,    valued
at about $117 million,       were procured by India.      About
300,000 tons were purchased under the changed specifications.
AID estimates      of the amount of ammonium sulfate      on hand as
of April 1970 varied from 500,000 to 1.1 million           metric tons.
The fertilizer      was valued at a delivered   price of $50 a met-
ric ton, or a total value of as much as $55 million.             The
lower figure for the amount of ammonium sulfate           on hand
apparently     did not include stocks on hand at the State co-
operatives.       We were advised that no one knew the actual
amount of ammonium sulfate       in India.

        In commenting on this matter,   AID said that about
300,000 tons of ammonium sulfate      were purchased under speci-
fications    which permitted  purchase of the brown-flake   prod-
uct and agreed that this type of fertilizer       had proved to


                                   6
be difficult   to sell.    AID said also that,    in its opinion,
all types of ammonium sulfate       stocks did not move as fast
as expected,   because  of  a shift    of market preference  to
urea in India.

        As stated previously,         no test of marketability   of the
brown-flake      type of ammonium sulfate        was made in India.    AID
officials      agreed that test marketing of new products was
perfectly      sensible.     They commented that the brown-flake
ammonium sulfate         had not been considered,     perhaps wrongly,
to be a new product because its chemical contents were iden-
tical     to those of the white-crystal         type.  Also they said
that introduction         of three new fertilizer     materials   into
India in the past year had been made with a thorough sales
effort,     well-planned     distribution,     and massive farmer educa-
tion.

        AID reported    in September 1970, and also stated in its
comments on our report,        that arrangements had been made to
redistribute      these unused stocks to the areas of demand.
AID said that the stock level of ammonium sulfate               was about
200,000 tons in October 1970.             It was found that,    although
most of the fertilizer        was stored in the north,       there was a
large demand for it in the south for use on plantations                 and
in fertilizer-mixing       plants.       Arrangements were being made
also to recondition       the fertilizer       that had deteriorated     in
storage.

CONCLUSION

      We believe that AID should have taken steps to ensure
that the type of fertilizer             financed would be acceptable           to
the consumer.     Since      AID    was   financing    purchases     of  two
types of nitrogen       fertilizer,         we believe    that some action
should have been taken by AID to ascertain                   the effectiveness
of the Government of India in distributing                   and utilizing
these similar   fertilizers.

        We believe  that, when additional       commodity loans for
the purchase of fertilizer       in large quantities      are negotiated
with the Government of India and particularly            when a superior
product may be involved,      AID should closely monitor the dis-
tribution     and use of AID-financed    fertilizer,     to ascertain
whether changes in consumer preference            may cause unwanted


                                          7
stocks to accumulate.       Such close monitoring        is particularly
needed in view of the reported       difficulties      in the Indian
fertilizer    distribution   and reporting       system discussed in
the following      chapter.




                                     8
                                      CHAPTER3

                WEAKNESSESIN DISTRIBUTION AND REPORTING

                     SYSTEMFOR FERTILIZER IN INDIA

       The Fertilizer Association    of India, a group dealing
with the promotion and marketing        of fertilizer,         issued a
report in 1967 on the fertilizer       warehousing and distribu-
tion system in India.    The report recommended that improve-
ments be made in the existing     fertilizer        distribution     and
reporting   system.

        The Aid to India Consortium had expressed concern at
its annual meetings about the need for improvements in this
system.     A World Bank report on the fertilizer    program in
India, prepared in April 1969, also identified       the develop-
ment of a more effective     system of marketing and distribu-
tion as one of the main problems facing the program.         The
World Bank and others believe that India will require         fer-
tilizer    imports for the next few years.     The Bank believes
also that the development of a more efficient       marketing or-
ganization    may require financial  assistance.

       We found no evidence that AID had provided financial
assistance    to India for the establishment      of a fertilizer
distribution    and reporting   system,    We did note that, throug 5
a 1961 agreement, 1 United States-owned       Indian currency
valued at $19 million      had been made available    for the con-
struction    of a storage and distribution      system for food
grain in India.

       Stocks of AID-financed   diammonium phosphate, which to-
taled about 140,000 metric tons and which were valued at
abuut $15 million,    had been on hand for 10 months or more as
of January 31, 1970. These stocks were on hand in four
States, and in these States less than half the 255,000 metric
tons of fertilizer     received during the 3-year period 1967-69
had been used. We noted that supplies of diammonium phos-
phate shipped to two other States during the same period had


1
    Involving     the International      Cooperation   Administration.

                                          9
been readily  marketed                    and that         relatively            small   amounts
were on hand.

      The receipts and utilization of diammonium phosphate
                                                   --
in these six States are shown in the following  table.
                                 Receipts    (note    a>                Total      On hand     Total
      State             1967      1968--     1969           1970      receipts     l-31-70     used

                                                      (metric        tons-

Kerala                           12,293       5,929           -         18,222      17,ooob      1,222
Tamil Nadu             21,695    52,209      38,653           -        112,557      59,196b     53,361
F&sore                  3,487    38,792      28,081         1,862       72,222      35,755b     36,467
Andhra Pradesh          2,080    50,093          -            -         52,173      27 ,596b    24,577
Uttar  Pradesh         43,969    91,641     116,770        39,047      291,427      26,000     265,427
Maharashtra            20,634    71,054      54,639             20     146,347      31,532     114,815

aBy Indian    fiscal     year,   which    ends March 31.
b According to AID, these stocks had been sharply       reduced                   by January 31, 1971,
 See page 23 for on-hand quantities     at January 31, 1971.                        A significant   part
 of the reductions  was due to redistribution     rather    than                  to increased    use
 within  the States shown.

        Reasons given for the lack of movement of diammonium
phosphate in the first           four States were (1) there was no
marketing     and distribution        system, (2) the local production
of a similar-type       fertilizer        was sufficient    to meet local
needs, and (3) the weather conditions                were unfavorable.
Because the fertilizer          had remained in storage for some
time, some had deteriorated             to the point where added costs
were incurred     for crushing and rebagging it before it could
be offered for sale.           Additional     costs were incurred also
by the marketing       cooperatives        for storage and interest
charges.      One of the stated purposes of program assistance--
an increased rate of developmental               savings and continued
growth of the economy-- had not been achieved in full measure.
Moreover, an AID-financed            study team on fertilizer       marketing
in India reported in September 1968 that the Government of
India's    program for providing           a storage and distribution       sys-
tem for fertilizer,        seed grains,       and other commodities had
no relation     to market strategy          and that warehouse space had
been constructed      with no apparent relation           to need.

        In June 1969 AID entered into a contract    with the Fer-
tilizer    Association   of India to perform a study, at a cost
of $200,000, of the demand and marketing      of fertilizer   in
India.     This contract   was financed with U.S.-owned local
currency.      Mission employees advised us that the reason for
                                                     10
the additional  study on this subject was to obtain more
comprehensive information.    This study is to be completed
by October 1971.

       In presenting    its 1971 program to the Congress, AID
reported   that India's     consumption of fertilizer      must con-
tinue to rise sharply if the new agricultural           policies   are
to succeed.     It was reported    that fertilizer     consumption
had slowed, however, because of marketing           and other problems.




                                  11
CONCLUSION

       We believe that, because concern was expressed by the
Aid to India Consortium,          as well as the World Bank, about the
marketing,    distribution,       and reporting    system for fertilizer
in India,   good management practices           would have dictated        a
need for concurrent         planning and development of these sys-
tems. Moreover, the recognition            by the Government of India's
operating   group and by the AID-financed            study teams thae sig-
nificant   problems existed in the fertilizer               distribution     sys-
tem should have alerted          management to the need for action.
This was especially         true since large amounts of U.S.-owned
local currency would be available            for financing        projects   of
this type, as evidenced by its use in prior years fcr provid-
ing food-grain       storage and distribution        facilities,

       AID, in commenting on a draft of this report in March
1971 (see app. I), said that,         in its opinion,    financial   as-
sistance was not required to improve the distribution              and use
of fertilizer.        What was required-- technical    assistance,
training      of Indian personnel,    and active participation      by AID
in focusing attention       on marketing problems in India--was
provided.       This, they said, was reflected      in actual sales of
greatly     increased quantities    of fertilizer.

        AID agreed that the storage and distribution      system for
fertilizer     in India had not developed to the point where it
could quickly adjust to changing market situations.           AID
said, however, that there was no indication        that the lack of
acceptance of diammonium phosphate by the farmers had caused
accumulation     of stocks of this fertilizer   in south India.
AID attributed     the accumulations  to unfavorable    weather con-
ditions.

      It should be noted that a World Bank report issued in
April 1969 stated that a limiting    factor on fertilizer      con-
sumption in India in 1968-69 was the system used for distri-
buting and marketing,   as well as the unfavorable     weather.

        On the   basis of its foregoing     statement,    AID expressed
the opinion      that the stock accumulations      did not point to
identifiable       failures in the distribution      system and said
that it saw      no reason to conclude that additional        storage
space would      have prevented the stock accumulations.          AID did


                                       12
agree that there was considerable    scope for improvement in
the marketing of fertilizer   and in the quality  of storage fa-
cilities.    It pointed out, however, that progress in both of
these areas had been and was being made primarily     because the
Indian Government had given private    marketing organizations
greater scope.

      In our opinion,  an adequate distribution       and reporting
system would have allowed earlier     redistribution      of fertil-
izer stocks.    This would have reduced storage and interest
costs and, if better quality    storage facilities      were avail-
able, it might have avoided some of the additional          costs that
were attributed   to repackaging stocks of deteriorated         fertil-
izer.   This, in turn, would have resulted        in a larger measure
of achievement of the stated purposes of program assistance.

       In future AID financing       of large quantities     of fertil-
izer, we believe that AID should take action to ascertain
what is needed to establish         an adequate distribution      and re-
porting   system for fertilizer.        Although progress may result
from the greater latitude        given to private    marketing organi-
zations in India,     it is our opinion that this additional            ac-
tion will    be necessary if AID is to meet its responsibility
of monitoring    the fertilizer      program and is to ensure that
greater effectiveness        is achieved in the assistance      program.




                                     13
                                 CHARTER4
                                 --

                      MISSION SURVEILLANCE OVER
                      -IO
                  USE OF AID-FINANCED FERTILIZER
                  -----r.-
         Mission surveillance         over utilization       of AID-financed
fertilizer      was accomplished through end-use checks performed
by Mission auditors.          These checks identified           the problems
of overstocking       and maldistribution          of certain     types of
fertilizer,      as shown by audit reports             issued in 1969. The
audit reports recommended that improvements be made in the
fertilizer      storage,   distribution,         and reporting      system and
that information        on fertilizer      utilization       be provided by
the Government of India.              The only action taken as a result
of these recommendations had been to commission additional
studies in the area.

      In commenting on a draft of this reports AID concurred
that studies were not action but stated that the studies
should precede action.   It also pointed out that it was
hoped the studies would show whether steps taken or planned
by private  firms and cooperatives  would be adequate or
whether it would be necessary for governmental units to
step in.

       Our draft report noted that,        insofar      as we were able
to determine,     the lack of consumer acceptance was not men-
tioned in the AID internal        auditreportsand          that end-use
checks, although they provided for surveillance                  over commod-
ity utiliiation,      were ineffective     when consumer acceptance
problems were encountered.          We therefore       expressed the view
that additional      surveillance    was needed so that consumer
acceptance problems could be identified              at an early date
to avoid possible deterioration          of fertilizer        stocks and to
eliminate     unnecessary inventory      costs associated with long
periods of storage.

       AID replied     that it appeared somewhat doubtful      that
additional    surveillance     could be a substitute    for market
surveys and that it believed that a test market of new prod-
ucts was the only practicable         way to introduce     new prod-
ucts.    We agree with AID that surveillance         cannot be a


                                     14
substitute     for market surveys in the introduction      of new
products.     We believe,      however, that only through the use
of additional      surveillance    over the acceptability  of new
products can early identification          of problems, such as oc-
curred with ammonium sulfate upon the introduction          of urea-
based fertilizer       into India, be achieved.




                                 15
                                                                                APPENDIX I


                              DEPARTMENT            OF STATE
                     AGENCY   FOR   INTERNATIONAL        DEVELOPMENT
                                WASHINGTON.     D.C.   20523




        Mr. Oye V. Stovall
        Director,  International Division
        U.S. General Accounting Office
        441 G Street, N.W.
*   I   Washington, D. C. 20548


        Dear Mr. Stovall:

        I am pleased to transmit herewith a memorandum dated March 17,
        1971, from Mr. Donald G. MacDonald, Assistant Administrator         for
        the Bureau for Near East and South Asia, which constitutes        the
        Agency's consolidated response to the U.S. General Accounting
        Office's  draft report entitled, "Poor Utilization    of Fertilizer
        Financed by AID to Increase Agricultural    Production in India."

                                                          Sincerely    yours,




                                                          Edward F, Tennant        J
                                                          Auditor General



        Enclosure:      a/s


        GAOnote:      Page references in this appendix have been changed
                      to correspond to the pages of this report.    However,
                      because of changes to the draft report, the agency
                      comments in some instances are not now entirely   re-
                      latable to this report.
APPENDIX I




                                                                     DA*’ . MAIt 17 1971




SUBJECT:   GAO Draft Report on llPoor Utilization      of Fertilizer  Financed
           by AID to Increase Agricultural     Production   in India"


           We appreciate       having been given an opportunity      to review the draft
           report of the GAO discussing          a number of problems in the distribution
           of fertilizer       in India.     Our comments on the report are summarized
           in the following        paragraphs;   a more detailed  discussion   of the          #   'I
           findings      and recommendations     will be found in the Attachment.

           The GAO found that "imported     fertilizer financed       by AID has not been
           used to the fullest   extent because the fertilizer.                 distribution
           and reporting   system in India was inadequate*
                                         [See GAO note 1.1


           We agree that the storage and distribution            system for fertilizer      in
           India has not yet developed to the point where it. can quickly adjust
           to changing market situations.         Nevertheless,      the market has more than
           doubled in a period of five years, from 555,000 nutrient               tons of
           nitrogen     in 1965 to over 1.3 million     nutrient     tons in 1970.     The sale
           of other types of fertilizers        has increased     correspondingly     and this
           growth of the fertilizer       market was, of course, one of the principal
           factors    in the increase in food grain production.           The instances of
           fertilizer     stock accumulations    discussed by the GAO should be viewed
           against this background of a very rapid market expansion.

           In appraising     the efficiency  of the Indian distribution  system, one
           also needs to consider that (a) normally about ten months elapse between
           the time the Indian Government establishes      its import program and the
           arrival    of product in an Indian port; and (b) that sufficient     tonnage
           of fertilizer     must be in storage in India to ensure a continuous     flow
           to dealers and consumers.

           Diammonium phosphate (DAP) was introduced       into India first   in 1967 and
           quickly accepted by the Indian farmers who recognized the advantages of
           a high-analysis  material  which, combining nitrogen      and phosphate,   offered
           advantages both in application    and in price.     Consumption in the four                  1
           southern states of Kerala, Tamil Nadu, Mysore and Andhra Pradesh suffered
           setbacks in 1968 and 1969 because of a widespread failure        of the monsoon
           in that region.   Four successive crop seasons were affected        by these                 .




                   BUY U.S. Savings Bonds Regularly on the Payroll Savings Plan


                                            20
                                                                                 APPENDIX I



unfavorable    weather   conditions.    As a result,       stocks   in those    states
accumulated.                       [See GAO note 1.1
                    The conclusion     that weather conditions      rather than lack
of product acceptance caused the drop in DAP sales is supported by
the fact that sales in South India of locally             prodllced and well
established    fertilizers     of different    analysis suffered      similarly during
that period.      Early this year, the combined stock of DAP in the four
states had been reduced to a total           of about 52,000 tons, a level
ccnsidered necessary to assure continuing            supply to the farmers.      The
 stock reductions      are detailed    in the Attachment.

The GAO also noted stock accumulations             of Ammonium Sulfate         (AS). The
flaked product which proved troublesome,              although    chemically     identical
to AS in crystalline        form, was purchased by India only in 1969. About
310,000 tons were purchased in that year and none before or after.
("Off-white"    crystalline       AS had been purchased earlier          but we are not
aware that it encountered marketing problems.)                 Stock accumulations
of the magnitude mentioned in the report (estimates                  ranging from
500,000 to 1.1 million         tons),  therefore,     must have included AS in
crystalline    form.     While we agree that the flaked product proved
diffi.?iLt   to sell, we believe that the primary reason for the slowdown
in sales of AS in any form was the increasing                competition     from urea
which, with about twice the nutrient             value of AS, won quick and
enthusiastic    acceptance.        The stock level of AS in October 1970,
according to figures        of the Indian Ministry         of Agriculture,      amounted
to about 200,000 tons held by the Centrai Fertilizer                   Pool which is in
the process of redistributing          them to areas of demand. It is expected
that these, as well as stocks held by the States, will be consumed by
the end of this calendar year.



                                   [See GAO note 1.1


On the basis of the foregoing,          we do not believe that the stock
accumulations      point to identifiable        failures     of the Indian distribution
system.      In particular,     we see no reason to conclude that additional
storage space would have helped to prevent the stock accumulations
discussed in the Report.          Nevertheless,        we see considerable     scope for
improvement in the marketing          of fertilizer       and in the quality     of storage
facilities.       Progress in both these areas has been and is being made
primarily     because the Indian Government has given private                marketing
organizations      greater    scope.   Further development in that direction            would,
we believe,     lead to a satisfactory        marketing mechanism and to investment
in storage facilities         as and where they are needed.            Occasional market
dislocations      would, however, be likely          to occur from time to time,
whether as a result         of weather conditions,        introduction    of superior
products     or other factors.




                                               21
APPEBDIX I


    The stock reporting     system used by the Indian Government to forecast
    its import requirement      has been the subject of numerous discussions
    with the Ministries     of Agriculture    and Finance during the last few
    years.    In 1968, the former, at the suggestion      of AID, commissioned
    a study by the Indian Institute        of Management which designed a new
    reporting   system that is now being installed.       We expect that it will
    result in very substantial      improvements in reporting    stocks and sales
    and in forecasting    requirements.




    Attachment:   a/s




                                          22
                                                                       APPENDIX I

                                                                ATTACHMENT'A'


         Comments on 'Poor Utilization          of Fertilizer     Financed by
           AID to Increase Agricultural          Production     in India".


1.   On page 9, the Report states       that:
         "AID-personnel advised us that AID has provided ,no
         assistance to India for establishment  of a fertilizer
         storage, distribution  and reporting system".

     If "assistance"     is to be read as "financial        assistance" that
     statement is correct.       We do not believe that financial          assistance,
     which would presumably have taken the form of US-owned rupees, was
     needed. What was needed was an appreciation             of the problems
     which the marketing of vastly increased quantities              of fertilizer
     w0ilia present,   and   AID has  done a considerable       amount  of work in
     focusing attention      on these problems.      Frequent discussions with
     high-ranking    Government officials,    technical      assistance to the
     Fertilizer    Association   of India, training       of Indian personnel in
     the United States and active participation            in meetings and seminars
     in India are examples. The results of these activities                are
     beginning to show, as, e.g. in an improved reporting              system, more
     intensive    and more frequent contacts between government and private
     manufacturers on marketing problems; and, above all, actual sales
     of greatly increased quantities       of fertilizer.

2.Pages 9, lo--DAP Stocks. As mentioned in the covering memorandum, the
    slowdown in sales of DAP in the four southern states was, in our
    opinion, due to weather conditions     (which affect fertilizer    sales
    everywhere).              [See GAO note 1.1
                               1 The Coromandel Fertilizer    Plant in Vizag,
    Andhra Pradesh, managed by an executive of the Chevron Chemical Co.
    and producing a nitrogen-phosphate     fertilizer   of a different
    formulation   (20-20-o and, in the past, 28-28-o), ran into similar
    sales problems during the same period although its product was
    well established.     As of January 31, 1971, the stocks of DAP in
    Southern India had been reduced as follows:


     Kerala                          +-iii       M/T                 %&M,T
     Tamil Nadu                       &96                            24:1g6
     Mysore                            35,755                        19,755
     Andhra Pradesh                                                   7,596
                                     i$%         M/T                 52,547 M/T




                                           23
     APPENDIX I


      The new stock level is considered necessary for satisfaction of
      current demand; new supplies will arrive in India later this year,
      but we do not know at this time what part of the 120,000 tons being
      purchased (90,000 of which financed by AID) will be routed to the
      southern States.




                                [See GAOnote 1.1

4.    Page 6 -- Ammonium Sulfate (AS). Following is a list of Indian AID
      financed purchases of AS from 1966 to 1969 showing the form in which
      it was specified:

      Date of Invitation                                           Quantity
          for Bids                      Specification              Purchased

       8/17/66                          Crystalline                  194,000
      12/23/66                          Crystalline                  300 ) 000
       5/10/67                          Crystalline                  498, ooo
      10/12/67                          Crystalline                  338,500
      Retender l/18/68                  Crystalline                  144,200
       5/10/68                          Crystalline                  198,000
        7/5/68                          Crystalline                  131,800
        8/l/68                          Crystalline                  221,100
       10/l/68                          Crystalline
                     Subtotal                                      7Jzg$E

       2/14/69                          Crystalline,                 229,800
                                         compacted flakes,
                                         prilled     or granular
        5/8/69                          Crystalline,                  80,500
                                         compacted flakes,
                                         prilled     or granular
                     Subtotal
                     Grand Total




                                           24
                                                                  APPENDIXI


     As the foregoing tabulation    shows, only 310,300 tons of AS were
     purchased under specifications     which permitted the supply of AS in
     the form of flakes.    Even assuming that the entire quantity was
     purchased in that form, this is the maximum quantity of product
     which might have suffered from sales resistance to flaked AS.
     All of it was purchased in 1969; none of it has been purchased
     since.   There is no doubt, however, that stocks of AS in all forms
     did not move as fast as expected. AS sales generally slowed down
     as urea became more readily available     in India.      This would be
     a problem of shifting   market preferences rather than sales resistance
     to an unknown product.     The situation  in the U.S. is similar;      (U.S.
     producers of by-product AS are, therefore,       practically   unable to
     sell it at any price and no other AS is being manufactured in the
     U.S. at this time.)    By October 1970, the Indian Government reported
     the total Central Pool Stocks at 200,000 tons and that quantity,
     together with whatever stocks the States still        hold, should be sold
     by the end of this year.




                         [See GAOnote 1.1




6.   Pages 7,8 -- Recommendation.

           "We recommend that, in future financing of commodity assistance
           to countries where the commodity to be provided is not in common
          use tests be performed to determine the marketability        of the
           commodity financed prior to procurement in large quantities."
                                                                        [See note 2.1
     The recommendation to test-market       new products is, of course,
     perfectly    sensible.   The flaked type AS was, however, not        -
     considered--perhaps     wrongly--as a "new" product since its chemical
     characteristics     were identical  to the "old" product.    Within the
     last year, three new fertilizer       materials have been introduced into
     India, with all the precautions one could reasonably expect:           a
     thorough sales effort,     well planned distribution    and massive farmer
     education.      We are, therefore,  already,follpwing   this recommendation.




                                        25
  APPENDIX         I


  7.    Page 14
             "The only action taken as a result of these recommendations
            fin AID audit reports which recommend that improvements be
            made in fertilizer   distribution,     storage and reportin   has
            been to commission adcitional      studies in the area." - [See note 2.1

       Admittedly,    studies are not "action".      But they should precede action.
                                  [See GAO note 1.1
       In addition to steps which private firms and the cooperatives have
       taken and are taking, it may br: necessary for governmental units
       to step in. Whether this is so, we hope the studies will show.

  8.    Page 14 -- Recommendation.

               "We recommend that in the absence of a market survey additional
               surveillance   be provided for commodities that are not in common
               use in the recipient     country. If identified early enough,
               fertilizer   unacceptable to the consumer can be redistributed
               to other locations thereby avoiding possible deterioration       and
               added costs associated with long periods of storage."          [See note 2.1
        The redistribution    of DAP and,AS stocks that, inferentially,       is
        recommended is taking place.     Whether "additional   surveillance...for
        commodities that are not in common use in the recipient         country"
        can be a substitute    for market surveys, market preparation and other
        operational    measures appears somewhat doubtful.   We believe that the
        GAO's recommendation to test-market     new products (discussed under 6,
        above) is the only practical    way to tackle the introduction      of new
        products.

GAO notes:
  1. Deleted       comments relate to matters       discussed      in the draft         report      but
     omitted       from this report.
  2.   These    recommendations   were   included    in   the   draft   report    but     omitted
       from this       report.




                                               26
                                                                                     _   -
                                                               ,.         .     -.
                                                               APPENDIXII


                            PRINCIPAL OFFICIALS OF THE

                        AGENCYFOR INTERNATIONAL DEVELOPMENT

                        HAVING MANAGEMENTRESPONSIBILITIES

                                  FOR THE MATTERS

                             DISCUSSED IN THIS REPORT


                                                    Tenure of office
                                                    From           To
  ADMINISTRATOR:
     John A. Hannah                            Mar.     1969        Present
     William S. Gaud                           Aug.     1966        Jan. 1969
 DIRECTOR, MISSION TO INDIA:
         Howard E. Houston                     %Y       1971        Present
         Paul L. Oechsli (acting)              Dec.     1970        May 1971
         Leonard J. Saccio                     Oct.     1969        Dec. 1970
         John P. Lewis                         Sept.    1964        Oct. 1969




U.S. GAO, Wash.. D.C.                   27
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