For WFP, a default on a food purchase contract occurs when a contract is not met, specifically regarding quantity and/or quality of the food to be delivered. Defaults are a concern for WFP, as the agency has to quickly replace it with food bought through alternative channels 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 just as much as from successful contracts with farmers’ organisations.
From the beginning of the P4P pilot, it was anticipated that defaults would be higher with smaller actors less familiar with formal markets then with traditional WFP suppliers. But as P4P purchases are usually a relatively small percentage of the overall local purchases in a pilot country, this has so far proven to be no major challenge for WFP’s food assistance.
Of the 150,000 metric tons of food contracted under P4P between September 2008 and December 2010, 59% has been delivered, 14% was confirmed defaulted and the remaining 28% is to be delivered. Between the years, the percentage of defaults has reduced from 19% in 2009 to 12% in 2010. In general terms, the incidence of defaults with P4P contracts has been lower than anticipated.
Given that six P4P pilot countries began purchasing only in 2010 (Afghanistan, DRC, Ethiopia, Ghana, Rwanda and Southern Sudan), it may be too early to conclude that defaults are reducing. Additional time is needed to ensure all contracts have been closed. Yet is has become obvious that contract performance tends to improve over subsequent contracts, particularly regarding the ability of smallholder farmers’ organisations to meet WFP quality standards.
Another lesson is that the reasons for defaults tend to be similar across pilot countries, and are attributable either to WFP’s own internal business processes, which are still adapting to be more smallholder friendly, or to weaknesses of the vendor. Weak aggregation capacity, financial weakness, a lack of key post-harvest handling infrastructure and storage facilities and weak governance structures of farmers organisations are the main reasons for defaults on the vendor side.
What are the main reasons for defaults?
Quality related reasons explain 34% of defaults; price related reasons (such as price fluctuations over the contract lifetime, leading farmers to sell ultimately to other buyers who offer a higher price) explain 21% of defaults; problems with aggregation capacity explain 21% of defaults; delays on the side of WFP (such as payments) explain 9% of defaults.
The inability of farmers’ organisations and other P4P vendors to meet quality requirements has several causes:
Little knowledge of WFP quality requirements – however, over the past two years, smallholder farmers receiving training and equipment have responded well to WFP quality requirements.
Absence of village level storage facilities close enough to producers, to allow bulking and avoid spoilage.
At times, the long procurement process on the part of WFP may have led to commodity deterioration.
Contract cancellations due to quality related issues have occurred in Kenya and Guatemala (aflatoxin and moisture content above WFP standards); and in Malawi (weevil infestations due to repeated extensions in delivery terms that resulted in infestation). In Guatemala, most defaults were due to side selling to less stringent buyers once the field quality tests revealed that the commodity would probably not meet WFP quality standards.
Inability to meet quantity requirements can be due to:
- Climatic shocks affecting the harvest and hence limited marketable surpluses.
- Insufficient storage facilities to facilitate aggregation of commodities at a reasonable cost.
- Long procurement process, coupled with the financial weakness of most of the targeted FOs. The length of WFP’s procurement process involving many consecutive steps is not attractive to cash poor farmers, who will prefer to sell individually. In addition, the lag time from contract signature to delivery and payment after delivery increases the likelihood of price fluctuation during the contract lifetime, leading to side-selling if the market price increases above the negotiated price;
- Miscommunication between the FO leadership and members has resulted in members not being aware that their FO signed a contract with WFP.