Does private sector involvement improve the distribution efficiency of subsidized fertilizer? A natural experiment from Nepal

Abstract

Despite the government spending significant amounts on fertilizer subsidies, Nepal's average fertilizer application rate is lower than in other South Asian countries. The low application is attributed to poor access to fertilizer and an inefficient distribution system. The government of Nepal issued a “Fertilizer Distribution Directive (FDD) 2020” to improve the distribution system. We assessed the impacts of involving the private sector in selling fertilizer to farmers. We examined whether the market transaction cost proxied by farmers’ search cost (communication and travel cost), travel time to visit the stores, and the opportunity cost of time spent in purchasing fertilizer have been reduced by FDD 2020. A difference-in-difference approach refined with propensity score matching was used to estimate the fertilizer distribution efficiency using survey data from 619 households across six districts. Private sector involvement was found to reduce travel time to fertilizer retailers by about 10 min and transaction costs to purchase subsidized fertilizer by about 20 Nepalese Rupees (NPR) per season, compared to the conventional approach of sale by farmer cooperatives. Implementation of the directive has removed the bias of cooperatives selling fertilizer only to members, especially medium and large-scale farmers. The directive and private sector involvement have led to a more equitable and efficient distribution of subsidized fertilizer. However, the government should routinely monitor and regulate the fertilizer mainly targeted to the private fertilizer retailers.