Diversion and fraud

Diversion of subsidized inputs away from intended benefi ciaries is an issue that has been raised in Chapters 2, 3, and 4. Diversion takes several forms, from inclusion errors in targeting (whereby inputs go to smallholder farmers who were not supposed to get them) through leakages (for example, as a result of sales of vouchers or subsidized inputs at low prices) to outright fraud and corruption, where people capture subsidized inputs as a result of direct crimi-nal activity or as a result of political infl uence (and of course illegal political capture is itself criminal). We make a distinction here between mis-targeting within the smallholder sector and diversion outside the smallholder sector.

Table 5.8. Reported extra payments for coupon redemption (MK/bag fertilizer) Year Retailers %

coupons paid tips

Median price

Mean price

Mean extra payment

Median extra payment if paid 2006/7 Private 27% 950 1,223 273 n/a 2006/7 Parastatal 18% 950 983 33 n/a 2008/9 Parastatal 14% 800 827 27 200 2010/11 Parastatal 9% 500 536 36 250–500

8 This divergence between perceived frequency and reported experience is interesting and may inform interpretation of FGD information—perhaps suggesting that the incidence of these prob-lems is overstated in FGDs.

Targeting is the subject of Chapter 10. We consider here evidence regarding the extent of leakage or diversion outside the smallholder sector. ⁹

Illegal activities are inevitably clandestine and diffi cult to trace. There have been numerous media reports of cases of theft and fraud regarding FISP cou-pons and inputs (Tambulasi, 2009), successful prosecutions, and on-going police, audit, and Anti-Corruption Bureau investigations. There are also fre-quent allegations of fraud by village offi cials and extension agents in focus group discussions and key informant interviews. It is, however, very diffi cult to obtain objective and comprehensive estimates of the extent of these activities.

The lack of transparency in coupon allocation when combined with excess demand for coupons leads to perceptions of and complaints about corruption and diversion of coupons, and this may occur even in situations where these perceptions and complaints may not be warranted. In addition, while there may be many cases that are not discovered, acute interest in those cases that are discovered may lead to over-estimates of their occurrence and scale.

Fraud may arise in a number of ways: through voucher allocation to non-existent (‘ghost’) benefi ciaries (or villages), with theft of the allocated vouch-ers by Ministry of Agriculture staff and/or Traditional Authorities, divvouch-ersion of vouchers to people with power (government staff, traditional leaders, or politicians) or to criminals for sale, direct allocation to non-benefi ciaries, and printing of extra or counterfeit vouchers within or outside the system.

There may also be thefts of inputs. Another type of corruption is operated by some who act as gatekeepers, with village headmen or sales clerks demand-ing bribes (extra payments or services) in exchange for coupons or coupon redemption which benefi ciaries are entitled to without such bribes. This last form of corruption was discussed in Sections 5.4.3 and 5.5.3.

Although there should be control systems that prevent or at least moni-tor these different types and sources of fraud, the existence and operation of these systems have not always been clear, or, as with some audits, their imple-mentation has been slow and a full picture has still to emerge. The extent and investigation of diversion has also been affected by changing political condi-tions, as discussed in Chapter 4.

The divergence in estimated number of households between the NSO cen-sus and the MoAFS farm registry (discussed in Section 5.4.2) poses diffi culties in using household surveys to investigate this issue. For example, with the NSO farm family estimate it appears that 2.7 million fertilizer coupons were received by smallholder farmers in 2010/11 against a recorded allocation of 3.2 million, leading to an estimate of 0.5 million ‘missing’ coupons (15% of those issued, compared to 28% in 2008/9). However, with the MoAFS farm

9 It should be noted that some apparent targeting errors within the smallholder sector also involve the abuse of power and infl uence by people who are smallholder farmers.

family estimate it appears that 4.4 million fertilizer coupons were received by smallholder farmers in 2010/11 against a recorded allocation of 3.2 million, leading to receipts exceeding issues by 38% (compared to 5% in 2008/9).

These diffi culties are compounded by the lack of a nationally representative sample for the 2010/11 FISP survey. However, they do suggest that if the NSO fi gures are taken as being closer to the to the true population with the NSO (as opposed to MoAFS) household defi nition (as suggested by earlier examina-tion of the differences in regional changes in MoAFS fi gures and by the survey using NSO households for sampling and the NSO household defi nition) then high losses in 2008/9 have been substantially reduced in 2010/11.

We can, however, go further than this to make some very broad estimates of leakage and diversion of subsidy vouchers and inputs outside the small-holder sector. The basis of these is the diagram of possible voucher and subsi-dized input fl ows in Figure 5.9 . The diagram shows on the left hand side the legitimate fl ows of vouchers and inputs within the smallholder sector, and on the right the illegitimate fl ows of vouchers and inputs outside the small-holder sector. Boxes in bold represent variables for which we have estimates from household surveys or administrative records (although estimates for smallholders’ cheap purchases are not available for 2006/7). This then allows some estimation of the scale of diversion fi rst of vouchers (by comparison of estimates of voucher receipts and use by smallholders against programme voucher redemptions) and then of subsidized seed and fertilizers (by com-parison of estimated input acquisition and use by smallholders against total programme supply). These estimations are prone to error, fi rst as a result of uncertainty regarding the total number of farm households (as discussed ear-lier) and second as a result of making estimates by subtraction, which tends to magnify percentage errors. Nevertheless, these estimates may be taken to provide some broad indications of the changes in the scale of diversion in the programme. These are set out in Table 5.9 for the 2006/7, 2008/9, and 2010/11 years when survey data were available. As in Section 5.4.2, we take the NSO-based estimates of the number of rural households to be most reli-able and consistent with the sample surveys.

The results of this analysis are presented in Table  5.9 (capital letters in each row refer to the framework in Figure 5.9 ). This suggests that there were very high leakages or diversions outside the smallholder sector in 2006/7 and 2008/9, with smallholders receiving only 63 and 68% respectively of recorded coupon issues. Despite their smaller share of disbursed coupons in 2006/7, it appears that smallholders redeemed a higher percentage of their coupons as compared with others, and as a result bought a greater share of the subsidized fertilizers than in 2008/9. Of the fertilizers bought by oth-ers under the subsidy in 2008/9, however, a large proportion (about 50%) appears to have been sold to smallholders at lower than unsubsidized prices,

so that the smallholder sector ended up using about 80% of the subsidized supplies—though a little over 25% of this was not purchased with the full subsidy. This is broadly comparable with Holden and Lunduka (2010b) who estimate that in 2008/9 21% of total household fertilizer use was obtained through cheap purchases of fertilizer (and 25% through purchased cou-pons). In 2010/11, however, smallholder farmers received a higher, but still not high enough, proportion of voucher issues (85%) and it is also estimated that in addition almost all the diverted subsidy fertilizer sales were then resold to smallholders (again at prices between full and zero subsidy). If smallholders are assumed to have received around 50% of the subsidy when buying originally subsidized fertilizers from other sellers then the propor-tion of fertilizer subsidy captured by others fell from a little under 30% of the subsidy in 2008/9 to a little over 10% in 2010/12. Since the subsidy volume was approximately 25% higher in 2008/9, and the price of fertilizers was approximately 65% higher, the estimated loss through diversion fell by just under 80% from 2008/9 to 2010/11. ¹⁰

redeemed input use (N) Smallholder cheap input purchase (O)

10 A similar analysis for maize seeds in 2010/11 (Dorward and Chirwa, 2011) and administrative records suggests substantial numbers of counterfeit maize seed coupons that year. These have less national and political signifi cance and less individual and aggregate value than fertilizer coupons, but nevertheless offer substantial income opportunities for criminal activities.

Despite the apparently precise estimates presented here, these should be taken as illustrative—sampling error will affect survey estimates and, as dis-cussed earlier, there is uncertainty regarding the number of farm families and the subtractions in the calculations may magnify errors. Nevertheless, the broad conclusion that there were substantial reductions in the extent and value of diversion of subsidized fertilizer from 2008/9 to 2010/11 is likely to be robust.

While it appears that there is still substantial diversion of fertilizer subsidy ben-efi ts away from smallholders, it is instructive to compare this with, for example, the UK Income Support Allowance, which in 2009/10 suffered from estimates of over-payments (estimates which are unlikely to be complete) of a little over 5% as a result of fraud and error (Department for Work and Pensions, 2012).

These conclusions regarding levels and changes in diversion and fraud are compatible with the continued reports of variable but widespread diversion of fertilizer coupons in rural areas (by government staff, TAs, headmen, and VDC members). The apparent reduction in diversion of coupons and ferti-lizers that never reach rural areas (‘Others’ low price/redemption use—P+Q’

Table  5.9. Estimated shares of coupon and subsidized fertilizer receipts by smallholders and others ¹

2006/7 2008/9 2010/11 Coupons % recorded issues

Recorded issues (from MoAFS and Logistics Unit)—A 100% 100% 100%

Received by smallholders, exc. purchases—B 63% 68% 85%

Received by others (by subtraction)—A-B = C-X 37% 32% 15%

Redemptions Total (from Logistics Unit)—I + J 87% 102% 100%

Smallholders—I 63% 69% 78%

Others (by subtraction)—J 25% 34% 22%

Counterfeits/extras redeemed (min.) -13% 2% 0%

Fertilizers % subsidy sales

Total subsidy sales (from Logistics Unit)—I + J 100% 100% 100%

Smallholder redemption & use—N 72% 58% 78%

Others’ redemption—J by subtraction 28% 42% 22%

Smallholder low price purchases—O n/a 21% 21%

Total smallholder use—N + O n/a 79% 99%

Others’ low price/redemption use—P + Q n/a 21% 1%

1 Smallholder low price purchases (O) are estimated as all purchases below a cut-off price. In 2008/9, there was a much greater range of fertilizer prices reported by respondents, and the cut-off point for ‘low price’ purchases was set at 150MK/kg, around 70% of the standard commercial price. For 2010/11 examination of the data suggested a cut-off point of 85MK/kg, around 85% of the standard commercial price. However some of the higher price purchases could be for stock from the subsidy if some traders bought subsidized fertilizers and sold it as if it were commercial, particularly when selling in smaller quantities. Allowance for this might suggest somewhat higher reselling of sub-sidized purchases than estimated above, in which case estimates of ‘others low price redemption and use (P + Q)’

would fall. However, the broader conclusions of this section would not be signifi cantly changed—indeed some would be strengthened.

Source : Author calculations from survey data.

in Table  5.9 is dramatically reduced in 2010/11) is also compatible with a reduced and changed political signifi cance and role of the programme after the 2008/9 election, as mentioned earlier in Chapter 4. Further information on these matters may become available in the future as ongoing audit inves-tigations continue (but these tend to be slow with, for example, media reports in 2012 regarding audit investigations of the 2007/8 and 2008/9 programmes) and with the change in government in 2012 opening up the political space for investigations of prior fraud.