Project assistance completion report (PACR) : fertilizer distribution improvement (FDI) II project no. 388-0060

The project has become a showpiece for USAID's investment in privatization, creating a highly competitive group of private wholesalers and dealers that has improved fertilizer distribution and provided a model that has been studied by countries as diverse as Albania, Nigeria, Kenya, and Egypt. The private sector is now responsible for virtually 100% of both fertilizer imports and domestic marketing, and fertilizer is available at competitive prices throughout the country. Supply has increased from 12.08 to 22.92 MT, and use has increased at a compound rate of 8% per year. Some 14,000 wholesalers now link sales to farmers through 108,000 retailers, and wholesalers and retailers employ about 60,000 additional persons. Fertilizer distribution margins have shrunk by over half, and real prices to farmers have declined. Achievements of individual components are noted below. The policy reform component had remarkable success, resulting in Government of Bangladesh (BDG) policies to: (1) permit direct procurement of urea by private distributors; (2) discontinue public sector fertilizer distribution; and (3) eliminate subsidies on Triple Super Phosphate and Murate of Potash as high as 60% of market value. However, urea fertilizer (manufactured in Bangladesh) is administratively priced, which can effectively subsidize urea and seriously distort the fertilizer balance. The BDG also allowed direct fertilizer imports by the private sector. By the end of 1992, the BADC, the monopoly parastatal, stopped importing fertilizers and had been supplanted by over 1,000 new private firms employing some 160,000 persons. The removal of subsidies and privatization has saved the BDG about $40 million per year. A Commercial Credit Program (CCP) benefitting fertilizer distributors, farmers, and eventually importers, was established in 6/89. A total of 13 private banks (about half of Bangladesh's commercial banks) were participating in the CCP by 1993 and by 1994 were largely using their own funds to make loans, demonstrating how viable and profitable they consider the fertilizer sector. Though the loan delinquency rate for the fertilizer sector is undesirable (24% as of mid-1994), it is much lower than in other sectors. The project also developed an Inland Letter of Credit enabling fertilizer distributors to pay fertilizer factories through banks, resulting in lower bank charges, reduced risks, and improved cash flow. The project developed the capacities of 9,122 fertilizer dealers and fostered technology transfer through demonstrations and 1-2 day training programs, promotional materials, direct TA, seminars and workshops, and study tours. Efforts focused on improving fertilizer use management, crop production technology, fertilizer import and marketing management, and human resource development. The project also identified infrastructure needs, especially approach roads to factories. Changes took place immediately, including the use of project funds to construct a 4-km road linking the Urea Fertilizer Factory Ltd., Ashugung to a highway and rail depot. A project-developed management information system (MIS) increased transparency in fertilizer marketing and provided policymakers and others with improved and timely information. Data were collected on a range of topics, including price and market data, the institutional and economic aspects of fertilizer distribution, the determinants of fertilizer use, current knowledge and practices concerning fertilizer use, and the profitability for fertilizer use under different circumstances. This information greatly restrained anti-competitive behavior and aided policy discussions. Two developments augur well for the sustainability of project achievements -- the planned creation of a Ministry of Agriculture (MOA) monitoring cell, and the recent formation, with project assistance, of the Bangladesh Fertilizer Association (BFA). The following lessons were learned. (1) Deregulation allows businesses to bypass the financial difficulties associated with privatization, such as finding a private enterprise willing to take over the excess staff and unadapted facilities of a state corporation. Even when competition increases overall employment, however, unemployment or inactivity among redundant personnel can remain a potent issue. (2) The long-term commitment of USAID and the contractor were essential to achieving the project's goal and purpose. Significant reforms began occurring in year 11 of the fertilizer program (year three of this project). (3) Factors contributing to the project's success included a sound project design, a capable and dedicated staff, adequate availability of resources, and, of particular note, the productive working relationship, animated by a common goal, among USAID, the MOA, and the project staff. (4) At the strategy level, the project inculcated the importance of policy reforms (and of continuously explaining their benefit), market competition, commercial credit, timely information flow, technology transfer, and the possibility of using these to develop a community of entrepreneurs. (5) The project's success is based on its two-pronged approach, which not only recommended to the BDG what it should stop doing, but managed to fill the impending void with trained entrepreneurs.