VZCZCXRO8265
RR RUEHLH RUEHPW
DE RUEHLH #0087/01 1270630
ZNR UUUUU ZZH
R 070630Z MAY 09
FM AMCONSUL LAHORE
TO RUEHC/SECSTATE WASHDC 4015
INFO RUEHIL/AMEMBASSY ISLAMABAD 4755
RUEHKP/AMCONSUL KARACHI 2052
RUEHPW/AMCONSUL PESHAWAR 1733
RUEHBUL/AMEMBASSY KABUL 0405
RUEHNE/AMEMBASSY NEW DELHI 0781
RUEHLO/AMEMBASSY LONDON 0136
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/USAID WASHDC
RUEHLH/AMCONSUL LAHORE 5162

UNCLAS SECTION 01 OF 03 LAHORE 000087 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EAGR EAID ECIN ETRD PGOV PREL PK
SUBJECT: PUNJAB WHEAT HARVEST JEOPARDIZED BY CORRUPTION AND LACK OF 
CAPACITY 
 
REF: A. LAHORE 77 
 
¶1. (SBU) SUMMARY: Corruption and inadequate storage facilities 
have hindered the Punjab government's ability to take full 
advantage of a bumper crop of wheat.  Many farmers, faced with 
transportation and bureaucratic hurdles, have chosen to sell 
their wheat to middlemen, who have pocketed the difference 
between their rate and the government support price.  Punjab 
Chief Minister Shahbaz Sharif has traveled throughout the 
province in an attempt to enforce procurement policy, and he 
told Principal Officer that he expected to fire more civil 
servants.  Shahbaz's political adversaries have warned that a 
wheat crisis may follow.  Government purchasing in Punjab this 
wheat season amounts to a billion dollar misguided intervention 
into agricultural markets.  END SUMMARY. 
 
- - - 
THE CURRENT CHALLENGE 
- - - 
 
¶2. (U) Thanks to an abundant harvest, the Punjab provincial 
government increased its expected wheat purchase from 3 million 
metric tons (MMT) to as much as 6 MMT April 25.  The federal 
government will acquire an additional 1.5 MMT from Punjab's 
crop.  This season's harvest in Punjab is currently estimated at 
18 MMT out of a national total of approximately 23 MMT according 
to the latest press reports (Note: USDA/FAS estimates 24 MMT. 
End Note).  High government procurement prices may be 
encouraging farmers to bring more of their crop than usual to 
purchasing centers.  Chief Minister Sharif has been widely 
quoted as promising to buy "every grain of wheat" that comes to 
market, and ensuring that farmers receive the official price of 
PKR 950 (USD 11.82) per 40 kg. 
 
¶3. (U) Newspaper accounts have expressed outrage over a critical 
shortage of gunny sacks in some Punjab districts this season, in 
spite of GOP efforts to ensure ample supply.  They assert that 
middlemen are bribing food center workers to gain control over 
the supply of sacks, then extracting commissions from farmers 
for providing the sacks and transporting wheat to a procurement 
facility.  Punjab authorities have responded to complaints, 
taking well-publicized disciplinary action against government 
agents in Dera Ghazi Khan, Sheikhupura, Sahiwal, and Multan.  In 
Multan, purchasing center workers reacted to the arrest of their 
colleagues by going on strike, closing down a dozen procurement 
locations for more than a day, prompting still more complaints 
from growers.  In a mirror image of last year's political 
squabble over responsibility for insufficient wheat stocks, 
Chaudhry Pervaiz Elahi, Pakistan Muslim League-Quaid-e-Azam 
(PML-Q) Punjab President and a political opponent of the 
Pakistan Muslim League-Nawaz (PML-N) Sharif brothers, alleged 
last week that the mismanagement of the current PML-N Punjab 
government would lead to a wheat crisis in the coming months. 
 
- - - 
CHIEF MINISTER CONSUMED BY WHEAT 
- - - 
 
¶4. (SBU) Punjab Chief Minister Shahbaz Sharif told Principal 
Officer May 2 that he has traveled throughout the province in an 
attempt to ensure that farmers receive the "full benefits" of 
the government procurement policy.  He related that surprise 
visits to purchasing centers in Multan, Sheikhupura and Sahiwal 
have resulted in arrests, including a Food Inspector in Sahiwal 
who had enjoyed the protection of a sitting Member of the 
National Assembly.  "These are mafia," he claimed, and said that 
he expected to fire more civil servants as he continues his 
inspections.  "The Food Department is part of the problem, but 
also part of the solution," he explained.  He added that he has 
directed the conversion of several outdoor areas to house the 
surplus wheat, and denied that Punjab faced a shortage of 
storage (Note: According to the Associated Press of Pakistan, on 
May 5 the Punjab Food Department announced its intention to rent 
private, covered storage facilities to hold wheat during the 
ongoing procurement season.  End Note). 
 
- - - 
GOVERNMENT TRIES TO CONTROL THE WHEAT MARKET... 
- - - 
 
¶5. (U) Pakistan's national and provincial governments control 
wheat markets by setting prices, regulating shipments, and 
 
LAHORE 00000087  002 OF 003 
 
 
operating a monopoly procurement system.  The federal 
acquisition agency and import and export manager is the Pakistan 
Agricultural Storage and Services Corporation (PASSCO), and the 
Punjab buying authority is the Food Department.  The Punjab Food 
Department claims to have 389 purchasing centers, in order to be 
accessible to growers and minimize the need for middlemen 
services.  PASSCO has a much smaller presence because of its 
limited buying, and it is based almost entirely in Punjab. 
 
- - - 
...AND SOWS THE SEEDS OF CORRUPTION 
- - - 
 
¶6. (SBU) Farmers who bring their crop to a government purchasing 
center have long complained of being forced to sell their crop 
below the government price, as indicated by press coverage each 
season.  Government agents take advantage of the farmers' urgent 
need to sell and allegedly pocket the difference between the 
official wheat price and the amount actually paid to the farmer. 
 Wheat growers also accuse officials of colluding with 
middlemen, most often by selling them the gunny sacks intended 
for farmers to bring their crop to a purchasing center.  The 
middlemen then charge farmers a commission of five to fifteen 
percent for providing the sacks and transporting the wheat to 
market.  Several provincial agriculture officials and academics 
corroborated these criticisms in recent interviews with Econoff 
(REF A).  However, Muhammad Ashfaq, Professor of Agricultural 
Economics at the University of Agriculture, Faisalabad, 
acknowledged to Econoff April 17 that middlemen also satisfy a 
legitimate need in cases where farmers genuinely lack access to 
credit, storage facilities, and transportation. 
 
- - - 
PUNJAB CHIEF MINISTER IS TRYING TO IMPROVE EMPLOYEE CONDUCT 
- - - 
 
¶7. (U) The Punjab government has established complaint centers 
this season to address any alleged improprieties in the 
procurement process.  Press reports say that Chief Minister 
Sharif and Punjab Food Secretary Irfan Elahi have disciplined 
"dozens" of Punjab Food Department agents for failure to follow 
procedures and for colluding with middlemen.  In the latest 
enforcement action, announced at a surprise inspection of a 
district Food Department purchasing center on May 2, the Chief 
Minister suspended the District Food Controller and the entire 
staff of two procurement facilities in Dera Ghazi Khan.  After a 
similar surprise inspection in Sheikhupura April 27, he ordered 
the arrest of the local Food Department staff and suspended the 
District Food Controller for negligence.  On April 25, the 
Punjab government directed employees from other departments to 
take over several purchasing centers in Multan district after 
workers there went on strike to protest the arrest of two 
Assistant Food Controllers on charges of corruption.  A dozen 
locations were shut down for more than a day by the strike, and 
press accounts said that middlemen stepped in to purchase wheat 
at PKR 900 (USD 11.20) per 40 kg (five percent below the 
government price), as farmers were uncertain how long the 
procurement centers would be closed. 
 
- - - 
FACILITIES AND FUNDING IN A DREADFUL STATE 
- - - 
 
¶8. (SBU) In addition to corruption, the government procurement 
agencies in Punjab suffer from inadequate facilities and 
insufficient funding.  In an interview with Econoff on April 16, 
Major General Anwar Saeed Khan, Managing Director of PASSCO, 
maintained that his agency had only 430,000 metric tons of 
storage capacity, and that 80 percent of this was outdoors. 
USAID built PASSCO's concrete and block silos 25 years ago; 
PASSCO has no modern steel silos at all.  Khan said the lack of 
storage made it difficult to handle federal wheat purchases each 
season, and impossible for PASSCO to maintain the strategic 
wheat reserve mandated in its charter.  Elahi described the 
Punjab Food Department infrastructure in nearly identical terms 
in an interview with Econoff on April 1.  Both men complained 
about "decades of neglecting to invest" in facilities for bulk 
storage and handling of wheat. 
 
¶9. (U) A lack of operating capital also hinders the government's 
capacity during wheat buying season.  The Nation newspaper 
 
LAHORE 00000087  003 OF 003 
 
 
estimated that PASSCO and the provincial food departments would 
need a PKR 60 billion (USD 746 million) credit facility to cover 
the cost of wheat purchases this season, assuming Punjab would 
only buy 3.5 MMT, which the article claimed would be financed by 
commercial banks.  Punjab's ability to buy as much as 6 MMT 
depends on additional funding from the federal government. 
 
- - - 
A BILLION DOLLARS MISSPENT 
- - - 
 
¶10. (SBU) COMMENT: Government efforts to manage wheat markets 
are driven by politics not sound economics.  This is especially 
true in Punjab, Pakistan's most critical wheat growing region. 
As Anwar Saeed Khan put it, wheat policy consists of more than 
agriculture or even national food security; it is an "emotive" 
issue in Pakistan.  It is also very expensive. At PKR 950 per 
40kg, Punjab's original target of 3.5 MMT would cost more than 
PKR 83 billion (USD 1.04 billion).  PASSCO's target of 1.5 MMT 
purchased from the Punjab harvest is worth an additional PKR 
35.6 billion (USD 443 million).  The high support price has also 
driven an increase in the cost of flour mill subsidies.  Little 
or no distinction is made between businessmen who provide a 
legitimate service at a fair price, and those "entrepreneurs" 
who engage in profiteering or who simply steal.  The 
exploitation (licit or illicit) of the system's inherent 
weaknesses further erodes the effectiveness of already dubious 
public policy, and in particular undermines the effort to boost 
farm household incomes through wheat price supports.  Punjab's 
steps to hold Food Department officials accountable for abusing 
their positions is welcome, but does not get to the heart of the 
problem: the flawed system of set prices and subsidies that 
encourage corruption in the first place.  Punjab desperately 
needs massive investments in bulk handling and storage 
facilities to get the most out of its wheat harvest, but PASSCO 
and the Food Departments procurement monopolies are the wrong 
platform for rural development.  END COMMENT. 
HUNT