Local and Regional Procurement (LRP) Issues

Local and regional procurement (LRP) of food aid refers to the purchase of commodities for emergency food aid by donors in countries with food needs or in another country within the region. LRP is used extensively by the United Nations World Food Program (WFP) and has been proposed as a cost-effective, time-saving tool that the United States could use to meet emergency food needs. Food aid budget submissions in FY2006 through FY2009 included a proposal with suggested legislative language to authorize the Administrator of the U.S. Agency for International Development (USAID) to allocate up to 25% of the funds available for U.S. food aid (Title II of P.L. 480, or the Food for Peace Act) to local or regional purchase. The budget justification for this authority was that it would increase the timeliness and effectiveness of the U.S. response to overseas food aid needs by eliminating the need to transport the commodities by ocean carriers. Further, savings achieved in transportation and distribution costs could be made available for additional commodity purchases, thereby increasing the overall level of the U.S. response. 
House and Senate agriculture appropriators did not include this proposal in the annual funding bills. Congressional and other critics of the local purchase proposal maintain that allowing non-U.S. commodities to be purchased would result in undermining the coalition of commodity producers, agribusinesses, private voluntary organizations (PVOs), and shippers that participate in the food aid program and in reducing U.S. food aid. The previous Administration's 2008 farm bill proposal for food aid also called for authorizing the use of P.L. 480 Title II funds for LRP. This proposal also was not adopted. Instead, the 2008 farm bill ( P.L. 110-246 ) included a pilot project for LRP (discussed below). The fiscal 2010 budget proposal for P.L. 480 Title II does not mention using Title II funding for LRP. However, the President's FY2010 foreign affairs budget proposed, among other food-security-related items, that $300 million of International Disaster Assistance (IDA) funds be used for LRP, cash transfers, and cash vouchers to meet emergency food needs.
Some of the issues that have been raised about LRP include the following:
Could the United States respond to emergency food needs at lower cost and in a more timely manner if commodities were purchased in locations closer to where they were needed? Are there risks that could be associated with LRP that would make it a less-effective response to emergency food needs than provision of U.S. commodities? Could LRP contribute to agricultural development (increased production, productivity, development of markets) of low-income farmers in developing countries? Could LRP adversely affect agricultural development and make poor consumers more food insecure?

	U.S. and Other Donor Food Aid Policy

Almost all U.S. food aid is provided in the form of U.S. commodity donations. P.L. 480, most recently amended by the 2008 farm bill and renamed the Food for Peace Act, authorizes the President, in Title II, to use U.S. agricultural commodities to meet emergency food needs and to provide nonemergency assistance. This statutory authority precludes the use of Title II funds for local and regional purchase in developing countries. In FY2008, the United States provided approximately $2.9 billion of U.S.-produced food aid to the WFP and to PVOs for emergency and non-emergency programs. Most recent analyses of U.S. commodity food aid acknowledge that U.S. commodities purchased and shipped from the United States as food aid have "assisted millions of hungry people over the past fifty years." At the same time critics of U.S. food aid policy argue that food aid could be provided more cost-effectively and in a more timely manner with LRP.
The United States has used LRP to a limited extent. Section 491 of the Foreign Assistance Act authorizes the provision of international disaster assistance (IDA). Most IDA funds have been used to supply non-food emergency assistance (tents, blankets, latrines, medicines, and the like), but some have been used for LRP of food. This statutory authority has been used by the U.S. Agency for International Development (USAID) to provide funds to WFP and to PVOs for the local and regional purchase of emergency food aid. The Government Accountability Office (GAO) reports that, since 2000, IDA funds were tapped for about $200 million worth of locally or regionally procured emergency food aid. USAID's Office of Disaster Assistance (OFDA) and the State Department's Bureau for Population, Refugees and Migration use IDA funding to provide emergency food aid. The President's Emergency Plan for AIDS Relief (PEPFAR) also has legislative authority to provide locally or regionally purchased foods to people living with HIV/AIDS.
While the United States is the world's largest food aid provider, other food aid donors, including the European Union (EU) and EU member countries, Canada, and Australia, among others, also provide food aid. The United States has continued to provide its food aid in the form of commodities, while other donors have moved to cash-based systems of providing food aid. The EU, the world's second-largest supplier of food aid, supplies almost all of its food aid in the form of cash. Most EU cash for food aid is allocated to the WFP. 
Individual EU member countries retain relatively small percentages of domestically procured food aid, but most of them also provide most of their food aid to the WFP (also some to PVOs) in the form of cash grants. In contrast to the United States, which has provided about a third of its commodity food aid for nonemergency or development projects, the EU has ceased to provide commodities to support development projects. Instead, the EU provides food security aid in the form of cash financing of food security projects.
Canada, which is an important bilateral donor of food aid, provides all of its aid on a cash basis. Most of its cash contributions go to the WFP, but Canadian PVOs get some as well.

	Experience with LRP

The WFP and PVOs have been using donor funding to procure commodities in developing countries for more than 30 years.

		World Food Program (WFP)

The WFP has had extensive experience with LRP. WFP's procurement policy is "to procure food in a manner that is cost-effective, timely and appropriate to beneficiary needs, encouraging procurement from developing countries to the extent possible." In 2008, WFP purchased more than $1 billion worth of commodities (2.1 million metric tons) worldwide, more than half of which were purchased in developing countries. WFP also depends heavily on U.S. commodity donations. In 2008, the United States donated $2.1 billion in U.S. commodities to the emergency operations of WFP.

		Private Voluntary Organizations (PVOs)

While WFP's procurements are generally large scale, the PVO's LRP activities are smaller in scale. One PVO, Catholic Relief Services (CRS), has provided some information about its LRP activities. CRS carried out LRP purchases during 2000-2008 in 20 developing countries. CRS purchased over $9.8 million worth of commodities (22,400 metric tons) in over 114 transactions. Purchases by CRS were financed with funds from private donations, the President's Emergency Fund for Aids Relief (PEPFAR), the Office of Foreign Disaster Assistance (OFDA), the McGovern-Dole International Food for Education and Child Nutrition Program, the Millennium Challenge Corporation, the Governments of Ireland and Germany, the World Bank, the Church of Jesus Christ of Latter Day Saints, and other PVOs, such as Caritas and Concern Universal.

	Evaluation of LRP Experience

Evaluations of LRP have focused on the cost-effectiveness of LRP versus U.S. commodity donations and the timeliness of delivery of LRP versus overseas donations. The impact of LRP on development has been much less researched. Three recent reports—by the Government Accountability Office (GAO), Michigan State University (MSU), and the Organization for Economic Cooperation and Development (OECD)—examine issues with respect to LRP.

		Cost-Effectiveness and Timeliness of LRP

The GAO report found that, for the most part, LRP was more cost-effective and arrived more quickly than U.S. in-kind donations. According to GAO, about 95% of WFP's local procurement in Sub-Saharan Africa cost about 34% less than the cost of similar food aid that USAID purchased and shipped from the United States to the same countries between 2001 and 2008. For Latin America, however, GAO found that the cost of LRP was comparable to the cost of U.S. in-kind food aid. GAO also found that delivery of WFP locally procured commodities was more timely than for U.S. in-kind donations. For example, in the case of Sub-Saharan Africa, delivery time for U.S. food aid was 147 days compared to 35 and 41 days, respectively, for locally and regionally procured food. Prepositioning of U.S. in-kind food aid in overseas locations, which the United States does to a limited extent, can also reduce delivery time.
The MSU report found that there were cost savings when LRP was used instead of in-kind food aid. Using LRP rather than in-kind donations of maize (corn) in three Sub-Saharan African countries (Kenya, Uganda, and Zambia) over a five-year period saved nearly $68 million and allowed 75% more food aid to be provided to beneficiaries, according to the MSU report.
The OECD study found that the cost savings of LRP relative to in-kind food aid are greatest for the two main commodities shipped to Sub-Saharan Africa (maize and corn/soy blend). The cost of locally procured maize and corn/soy blend (CSB) was 61% and 52%, respectively, that of in-kind food aid. Overall, the OECD study determined that the cost of in-kind food aid averaged 50% more than local food procurement and 33% more than regional food aid procurement.

		Risks or Challenges of LRP

GAO identified factors that limit the efficiency of LRP. These include a lack of reliable suppliers, poor infrastructure and logistical capacity, weak legal systems, timing and restrictions on donor funding, and quality considerations. According to GAO, WFP has encountered problems in identifying reliable suppliers of food aid commodities; limited infrastructure (ports and transport) can delay delivery; weak legal systems could limit buyers' ability to enforce contracts and impose penalties; and late or inadequate donor funding can limit the ability of WFP to purchase food when and where needed. Some of these factors would apply as well to in-kind food aid donations. GAO also notes that food quality could be a problem and provided some examples. According to GAO, however, WFP has not analyzed whether quality issues are more severe for food procured locally or regionally versus food procured internationally.
GAO also notes that LRP has potential for adversely affecting markets. This would be the case when LRP increases demand for food and drives up prices for consumers. Examples from 2003 are price hikes that occurred in Ethiopia and Uganda when WFP purchased local commodities for food aid. The antidote to adverse market impacts, GAO says, is improved intelligence on market prices, production levels and trade patterns.
The MSU report also notes that any food aid operation entails risks. Risks associated with in-kind food aid are that it may reduce production and trade incentives and create dependency in receiving countries. For LRP, the MSU report distinguishes between first-order risks, which can be defined with precision and are relevant to managers of food aid transactions, and second-order risks, which are less precisely defined, are not specific to a particular transaction, and have consequences that are likely to be less serious or less easily established than those of first-order risks.
The MSU report lists first-order risks as (1) LRP will push local prices above import parity or historical levels, (2) traders will default on tenders, and (3) locally or regionally procured food will fail to meet minimum safety standards. According to MSU, its analysis of WFP's LRP activities in Africa suggests that WFP has effectively managed default and food safety risks though pre-qualification of traders and by using contract conditions that penalize traders for default. In its study, published in 2006, unlike the 2009 GAO report, MSU found no instances of food safety breaches in WFP's procured food. MSU reports some evidence that LRP may have contributed to price surges in Uganda in 2003 and in Niger and Ethiopia in 2005/2006. This kind of market risk, MSU says, deserves more analysis.
For second-order risks, MSU notes that these relate to medium- to long-term developmental effects of LRP, such as creating price instability or an unsustainable market, or artificially strengthening some traders at the expense of others. MSU's conclusion is that second-order risks can be effectively managed through careful selection of traders, competitive tenders, and proper contract specification. However, second-order risks will increase with the share of LRP in the market. With larger market shares for LRP, tendering and contracting procedures must be especially well designed and executed, according to the MSU report.
The OECD study deals only with the cost-effectiveness of LRP. It does not address risks identified and discussed in the GAO and MSU reports. However, the OECD study points out that, based on its food aid study, "in most circumstances, financial aid rather than food aid in-kind is the preferable option.... (but) In many food deficit situations, local procurement is not always a feasible option.... [c]ontext-specific rationale is always required for relying on food aid in kind in preference to financial aid."

		U.S. Cargo Preference Requirements and LRP

GAO identifies U.S. cargo preference requirements as a possible constraint to U.S. implementation of LRP activities. Cargo preference legislation requires that up to 75% of the gross tonnage of agricultural foreign assistance cargo be transported on U.S. flag vessels. Cargo preference is strongly supported by the U.S. maritime industry and the Maritime Administration as needed to maintain and encourage a privately owned and operated U.S.-flag merchant marine that provides a ship base needed in wartime or other national emergencies and a cadre of skilled seafarers available in time of national emergencies. Various GAO reports have found that cargo preference can add to the cost of shipping U.S. food aid and that it may not be effective in meeting its aims with respect to the U.S. merchant marine.
According to GAO's LRP study, there are differences of opinion about the extent of applicability of cargo preference requirements to LRP activities that might be funded by the U.S. government. According to GAO, cargo preference requirements could adversely affect potential cost savings and timeliness of food aid deliveries of LRP if locally or regionally procured commodities had to be shipped on U.S. flag vessels. GAO recommends that the agencies involved in implementing cargo preference—the Department of Transportation, USDA, and USAID—address the cargo preference issue through a renegotiation of the 1985 memorandum of understanding that delineates agency responsibility for implementing cargo preference requirements.

	Development Impact of LRP

The potential to involve smallholders and low-income producers in developing countries in LRP has not been extensively explored in the reports examined in this report (GAO, MSU, OECD). Those reports focused primarily on issues relating to the cost-effectiveness of LRP and the timeliness of deliveries. However, USAID LRP initiatives and the WFP's Purchase for Progress program have begun explorations of how low-income farmers in developing countries could participate in LRP efforts carried out by WFP or USAID. (USAID and P4P programs are discussed in the next section.)

	Current LRP Initiatives

		USDA Farm Bill Pilot Project for LRP

The 2008 farm bill ( P.L. 110-246 ) authorized the Secretary of Agriculture to implement a five-year local and regional food aid procurement pilot project in developing countries from FY2009 through FY2012 (Section 3206 of P.L. 110-246 , 7 U.S.C. 1726c). Funding of $60 million from the Commodity Credit Corporation (CCC) is being made available to carry out the program during FY2009-FY2012. The main objective of the USDA pilot program is to use LRP to quickly help meet food needs due to food crises and disasters. The first phase of the pilot was completed with a study of prior local and regional procurement. Subsequent phases of the project are to develop guidelines (FY2009), implement field-based projects (FY2009-FY2011), and conduct an independent evaluation (FY2011). All of the pilot program projects are to be completed by the end of FY2011, at which point USDA will contract for an independent evaluation.
USDA published Interim Guidelines for the Local and Regional Food Aid Procurement Pilot Project in September 2009. The public comment period for the preliminary guidelines ended October 19, 2009. Information sessions for interested participants in the field-based pilot programs were held in October. The next step in implementing the LRP pilot program will be to publish a final version of guidelines and announce requests for proposals for field-based LRP projects. 

		USAID-Funded LRP

Separate from USDA's pilot LRP program, the FY2008 Supplemental Appropriations Act ( P.L. 110-252 ) provided USAID with $125 million—$75 million of international disaster assistance (IDA) and $50 million of development assistance (DA)—to implement LRP in developing countries. The funds will be available until expended. Disaster assistance funds are being devoted to meeting emergency food needs, while DA funds are being devoted to meeting urgent food security needs and strengthening staple food markets to support local and regional procurement. Disaster assistance-funded LRP will be evaluated in terms of general procurement information, timelines, impact on procurement market, and beneficiaries. DA-funded LRP will be evaluated as to how farmer organizations are enabled to participate in LRP; whether costs of moving goods from farm to market are reduced; how financial markets serve staple food value-chains; how commodity exchanges are strengthened; and how warehousing, communications, and finance systems are improved.
The FY2010 Foreign Operations appropriations measure ( P.L. 111-117 ) calls for USAID to report on its implementation of LRP by September 2010.

		WFP Purchase for Progress (P4P)

In 2008, WFP established its Purchase for Progress program (P4P). The P4P program aims to build on WFP's extensive experience with worldwide local and regional procurement to enable smallholders and low-income farmers in developing countries to supply food to WFP's global operations. While WFP's global LRP procurement activities stress cost saving and timeliness of delivery, the P4P program explicitly aims at enabling small farmers to be competitive players in the agricultural marketplace. P4P links farmers to WFP procurement operations and at the same time helps farmers to connect to other local and regional markets. The main approach is to purchase food aid commodities directly from farmers' associations using forward contracting and ensuring farmers get a fair payment for their produce. According to WFP, P4P will create incentives for farmers to develop their crop management skills; create an incentive for farmers to produce quality foods; create a market for the surplus crops of smallholders and low-income farmers; promote local processing of foods; and realign the way WFP buys food to better address the root causes of hunger.
P4P is a five-year program with pilot projects in 21 countries. In the first year of activity (2008), P4P bought 40,000 metric tons of food. Over the five years of the program, 350,000 farmers are expected to benefit. The funding total is $76 million. Major funding sources are the Bill and Melinda Gates Foundation and the Howard Buffett Foundation. The United States has contributed $20 million to WFP for the P4P program.
The P4P Technical Review Panel met at WFP headquarters in Rome in December 2009 to discuss challenges and implementation mechanisms from work done in 21 P4P countries during the first year. Among implementation challenges identified were defining commodity prices paid to smallholders in cases of forward contracting (where WFP commits to procure a certain amount of commodities at planting time). The challenge of forward contracting is to ensure a fair price without distorting or disrupting markets. Other implementation challenges discussed were risk mitigation mechanisms to prevent contract defaults and ensure that quality standards are met and ways to ensure that female farmers also benefit from the P4P project. Further work of the Technical Review Panel will be on measuring impacts of P4P on smallholder farmers, involvement of traders in P4P, and the replication of successful P4P experiences in ongoing local and regional procurement efforts undertaken by WFP. 

	LRP in the 111th Congress

In the 111 th Congress, LRP was dealt with in appropriations bills and in proposed authorizing legislation in both the House and Senate. Bills under consideration would give the U.S. government the flexibility to use LRP in response to food emergencies without reducing the funds available for P.L. 480 Title II commodity donations. 

		FY2010 Appropriations Bills

The President's FY2010 foreign affairs budget called for $300 million to be allocated to USAID's International Disaster Assistance (IDA) program to be used for LRP and the financing of cash transfers and cash vouchers to meet food security objectives. The House-passed Foreign Operations appropriations bill ( H.R. 3081 ) provided $200 million of IDA funding for these purposes. The Senate committee-reported bill ( S. 1434 ) directed that $1.5 billion of USAID development assistance be allocated to agricultural development and food security efforts, "including for local and regional purchase and distribution of food." 
The final Foreign Operations appropriations bill, folded into a consolidated measure ( H.R. 3288 , P.L. 111-117 ) discussed local and regional purchase of food aid commodities under the heading of International Disaster Assistance. The conference report ( H.Rept. 111-366 ) stipulates that "a significant portion of the funds available under this heading ($845 million) will support food assistance in fiscal 2010 and will be in addition to the $1.169 billion designated in this Act for food security and agricultural development." 
In separate House and Senate-passed agriculture appropriations bills ( H.R. 2997 ), funds for P.L. 480 Title II commodity donations increase from $1.2 billion in FY2009 to $1.7 billion in FY2010. 

		S. 384 and H.R. 3077, the Global Food Security Act of 2009

S. 384 , the Global Food Security Act of 2009 (Lugar), was introduced in the Senate on February 5, 2009, and reported by the Senate Foreign Relations Committee on May 13, 2009 ( S.Rept. 111-19 ). H.R. 3077 (McCollum), the House companion bill to S. 384 , was introduced on June 26, 2009. Among other provisions, S. 384 and H.R. 3077 would authorize the President to provide assistance for unexpected urgent food needs and establish a Rapid Response to Food Crises Fund to carry out such a program.
The proposed Food Crisis Fund is in addition, and complementary, to food aid provided under 2008 farm bill legislative authorities. The Rapid Response Fund would allow USAID to quickly engage at the onset of a crisis with the objective of preempting its escalation. The fund can be used for food and non-food assistance of an emergency nature; it is not for long-term support or development. Funds may be used for the local and regional purchase and distribution of food. Other food-security-related assistance, in the form of vouchers, cash transfers, safety net programs, or other appropriate assistance of an emergency nature, may also be provided.
S. 384 and H.R. 3077 would authorize $500 million for the Emergency Rapid Response to Food Crises Fund that would remain available until expended. Disbursements from the account must be reported to the appropriate congressional committees not later than five days prior to providing the assistance. 

		H.R. 2817, the Roadmap Act of 2009

H.R. 2817 , introduced on June 11, 2009, includes an endorsement of a coordinated approach to addressing food security concerns—the Roadmap to End Global Hunger—that was developed by a group of 42 U.S. PVOs. The Roadmap proposal calls for allocating more than $50 billion to global food security initiatives over a five-year period. Included in the Roadmap proposals is an allocation of $7.4 billion for local and regional purchase of food aid commodities and other food security-related activities. In addition, the Roadmap proposal calls for $9.8 billion in food commodity donations over five years through P.L. 480 Title II.

Summary:
Using federally appropriated funds to procure commodities for international food aid in countries with emergency needs or in nearby countries is a controversial issue. In budget submissions for FY2006-FY2009, the Bush Administration proposed allocating up to 25% of the funds available for U.S. food aid (Title II of P.L. 480, or the Food for Peace Act) to local or regional procurement (LRP) of food aid commodities. Each time Congress rejected the proposal. The Administration argued that LRP would increase the timeliness and effectiveness of the U.S. response to overseas food emergencies by eliminating the need to transport commodities by ocean carriers. Congressional and other critics of the local procurement proposal maintain that allowing non-U.S. commodities to be purchased would undermine the coalition of commodity groups, agribusinesses, private voluntary organizations, and shippers that participate in and support the U.S. food aid program and would reduce the volume of U.S. commodities provided as aid.
The United States is alone in providing practically all of its international food aid in the form of its own commodities. U.S. food aid legislation precludes the provision of any but U.S. commodities to meet international food aid needs. The Foreign Assistance Act (P.L. 87-195), however, permits the use of some U.S. funds for LRP as part of the U.S. response to international disasters. The European Union provides almost all of its food aid via the United Nations World Food Program (WFP) in the form of cash; Canada's food aid also is cash-based. The WFP has been using donor funding to procure commodities locally or regionally in developing countries for more than 30 years.
Several recent studies have evaluated the timeliness and cost-effectiveness of LRP versus commodity donations and conclude that LRP in Sub-Saharan Africa (SSA) costs substantially less than shipping food aid from the United States to Africa and that food aid delivery times are substantially shorter. The studies point to risks associated with LRP, including lack of reliable suppliers, poor infrastructure, weak legal systems, donor funding delays, and quality (i.e., food safety or nutrition) considerations, that could impede the efficiency of LRP. On the other hand, the studies suggest that risks associated with LRP are no greater than risks associated with in-kind donations and that they could likely be countered with better market intelligence and effective management of LRP activities. One study suggests that in many food deficit situations, LRP may not be a feasible option. Inadequate local supplies or adverse market effects on producers or consumers in a country or region could rule out using LRP.
The U.S. Department of Agriculture has begun implementation of the pilot LRP program established in the 2008 farm bill (P.L. 110-246). Separately, the U.S. Agency for International Development is implementing LRP activities with funds appropriated in an FY2008 supplemental appropriations act (P.L. 110-252). In addition, the WFP has initiated a Purchase for Progress (P4P) program that will evaluate how small farmers in developing countries can participate in WFP procurement.
The FY2010 Foreign Operations appropriation (P.L. 111-117) includes funds in international disaster assistance appropriations that could be used to fund LRP and food-security-related activities such as cash vouchers or cash transfers for purchasing food. In addition, P.L. 111-117 directs that $1.17 billion of development assistance be allocated to agricultural development and food security efforts. Proposed legislation, S. 384 and H.R. 3077, would authorize a $500 million appropriation, separate from P.L. 480 food aid, for responding rapidly to emergency food needs, including with LRP. The FY2010 Agriculture appropriations bill (P.L. 111-80) provides $1.7 billion to finance provision of U.S. commodities under P.L. 480.