Shashidhara Kolavalli Marcella Vigneri

1. Producer Price Determination, Quality Control and Service Provision in Ghana’s Partially Liberalized Cocoa Sector Shashidhara Kolavalli Marcella Vigneri

2. Key messages • Ghana cocoa sector is only partially liberalized, but passes on significant share of export prices to producers • Considered a success: production, productivity, quality, support to local businesses • Producer prices are set through administered process on the basis of recommendations of a stakeholder committee. • The spirit of sharing FOB in this administered process lacks any pressures on various marketing agents to seek efficiency. • Producer shares have increased largely because of reduced taxes • Surpluses above budgeted revenues are left with Cocobod this has encouraged expansion of service provision that the board argues necessary to sustain the sector Page 2

3. “FOB Sharing” Method • Producer Price Recommendation Committee (finance ministry, farmers, LBCs, haulers, etc.) recommends producer and other shares: • Projects prices, exchange rates and crop size • Makes deductions for provision of public goods or “industry costs” • Then balance “net FOB” available for sharing (producers - marketing functionaries – government)

4. FOB sharing in 2009-2010 Page 4

5. FOB Sharing in 2009-10 – contd.. Page 5

6. The Shares to Producers, Other Agents and Cocoa Revenues Page 6

7. Summary • After peaking in 2003, the producer share is declining and is less than 60 percent of FOB • The reduction in duty or transfers to government has contributed largely to increased producer shares • The shares of other marketing agents are not declining despite dramatic increases in revenues: there are no market mechanisms in the system to seek efficiency improvements. Page 7

8. What Accounts for Significant Producer Share? • A number of programs set targets for producer share, taxes, and Cocobod expenses to be achieved over time • Cocoa pricing as political issue: two parties push each other although cocoa producers are not an organized group • PPRC takes into consideration prices in neighboring countries two parties (NPP and NDC) also hold each other accountable for smuggling • Growing revenues have enabled the board to pass on growing shares to producers without making marketing more efficient • If not for increasing “Industry costs” producer shares would have exceeded the target of 70 percent of FOB

9. Budgeted and Actual Revenues in Cocoa Sector Page 9

10. Transfers to Government • Transfers to the government (duties) have come down from nearly 30 per cent of the revenues in 1996/97 to about 6 per cent in 2009/10 • What might account for lowered tax rates? • More stable macro-economic situation • Growing tax revenues • Reduced dependence on export taxes

11. Services • Reduced service provision following liberalization • Substantial increase in service provision particularly with increases in revenues • Welfare oriented • Scholarship; social security; housing; child labor • Production sustainability • Short term: High tech; CODAPEC; extension • Long term: CSSVD, replanting; seeds;

12. Incentives to expand service provision Industry costs or expenditures on provision of services have grown along with the surpluses Actual ICs are nearly double those recommended by PPRC The process that leaves surpluses in the hands of Cocobod perhaps encourages the expansion of its roles

13. The Cost of cocoa quality control Page 13

14. Costs and Benefits • The benefits appear to exceed the regulation costs • Control over exports combined with quality offer • Ability to sell in advance • Financing of local companies • Opportunities for rent seeking • Limited incentives to seek efficiency • Considerable potential to privatize operations