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Update on defaults of food deliveries under P4P

WFP warehouse in Malawi.

Copyright: WFP/Charlie Hatch-Barnwell.

Of the 260,000 tons contracted under P4P modalities since inception in late 2008 through June 2012, 52,000 tons have been confirmed defaulted, while 160,000 tons have been delivered (62%) and 48,000 are pending delivery (18%). Since the beginning of P4P in late 2008, defaults have remained relatively stable at between 20 and 25%.

For WFP, a default on a food procurement contract occurs when a contract is not delivered, specifically regarding quantity and/or quality. Defaults are a concern for WFP, as the agency has to find alternative vendors to avoid pipeline breaks for the beneficiaries of food assistance programmes - and this is not always easy. For P4P, a default provides a chance to learn. As a pilot, P4P learns valuable lessons from defaults as well as from successful contracts with farmers’ organisations or other vendors.
From the beginning of the pilot, it was already anticipated that defaults would be higher with smaller actors less familiar with formal markets than from regular WFP suppliers. But as P4P purchases are usually a relatively small percentage of the overall local purchases in a pilot country, this has not been a major challenge for WFP’s food assistance. Since the start of the pilot, 15 percent of overall local purchases in the 20 countries were made under P4P modalities.

In absolute terms, the P4P pilots in Kenya (11,500 tons), Guatemala (6,900 tons), Mozambique (6,000 tons), Uganda and Ethiopia (both around 5,500 tons) have had the highest volume of defaults. In these countries, WFP traditionally buys substantial amounts of food locally, and these countries account for significant contracting under P4P of all 20 pilot countries. In relative terms, in four of these five countries between 30 and 50 percent of the contracted quantity under P4P is defaulted, while in Ethiopia 9 percent has been defaulted. In Ghana, Liberia, Mali, Nicaragua and Zambia, defaults are below 10 percent, but these countries have not contracted substantial quantities.

Defaults are highest for contracts signed with low-capacity farmers’ organisations, while high capacity organisations such as Afrique Verte or Faso Jigi from Mali have been able to supply large contracts with little to no defaults. Faso Jigi has even been able to supply WFP’s emergency operations in West Africa.

Main reasons for defaults

Interestingly, more than half of all defaults under P4P have been attributed to the supplier’s organisational capacity (57.6%), followed by reasons related to quality (20.7%) and reasons related to the local environment such as droughts and floods (19.6%), with the remaining 2.1% of defaults being attributed to WFP’s procurement and/or logistics processes. This emphasizes the continued need for institutional capacity development for farmers’ organisations and other P4P suppliers.

The most commonly cited reason for defaults is side-selling by the supplier during aggregation (responsible for 35 percent of total defaults, contributing to the 57% categorised under supplier’s capacity above). Side selling mainly occurs when prices are rising between contract signature and delivery. While side-selling has the potential to put more money into the pockets of smallholders, WFP aims to discourage such practices as honouring contracts is an important part of continuous competitive engagement in markets. Another substantial portion of defaults is attributed to lack of access to finance, affecting either the production or the aggregation of crops for marketing (10%).

Surprisingly, WFP’s procurement and logistics processes are cited as the primary cause of only 2 percent of defaults, although it had been expected that WFP’s relatively heavy processes would cause more defaults. However, it seems plausible that the length of WFP payment processes does contribute to other default reasons, such as when farmers decide to sell to other buyers or not to aggregate through their organization because they need cash more quickly than they expect WFP to pay.

Strategies to minimize defaults

P4P and its partner organizations are experimenting with various initiatives to minimize defaults:

  • To counter the volatility of market prices, a number of country offices are experimenting with forward delivery contracts. This is expected to nurture confidence in the farmers’ organisations, help organisations access financial services and potentially minimize side-selling by the membership.
  • To build their capacity to fulfil contracts, WFP and its partners will continue to focus on the institutional capacity development of farmers’ organisations.
  • To reduce the size of the contracts (to as little as 25 tons in Sierra Leone) after the lessons learned from their first purchasing season in many pilot countries. The philosophy is “buying what you see”, which means contracting only what has already been bulked.
  • A requirement that 50% of commodities need to be already bulked prior to signing a contract in an effort to reduce bulking time and hence reduce the likelihood of default.

Delays on deliveries

Apart from defaults, delays have also affected WFP’s procurement under P4P. In general, P4P contracts have an average delivery delay of 34 days. This delay does not endanger WFP’s food pipeline, as P4P purchases at present represent a relatively small percentage of local procurement (cumulatively, 15 percent between late 2008 and June 2012). Yet WFP country offices and partners are putting considerable effort into addressing the delays, as farmers’ organisations need to build the capacity to deliver contracts on time if they want to sustainably sell on markets beyond WFP. Reasons for delays are largely connected to a lack of experience in fulfilling contracts, lack of experience with bagging and fumigating, a shortage of storage space and quality problems (moisture content, live insects).

Additional information on defaults under P4P can be found in the latest P4P Procurement Report, available under: http://www.wfp.org/content/reports-p4p-implementation