Accounting for govt's rice scheme losses

Accounting for govt's rice scheme losses

After former deputy prime minister MR Pridiyathorn Devakula presented his figures which showed that the government's rice-pledging scheme has incurred at least 200 billion baht in losses each year, or more than 425 billion baht in total, various government ministers came out to deny the claims.

Commerce Minister Niwatthamrong Bunsongphaisan said the losses by any reasonable forecast stand at around 100 billion baht per year, while his deputy, Yanyong Puangraj, says they won't reach 200 billion baht.

In addition, Mr Yanyong also argued the accusation that money has leaked out of the scheme and that only 210 billion baht reached the farmers is not true and that all payments were made directly to farmers' bank accounts.

Moreover, Finance Minister Kittiratt Na-Ranong said in an interview last week: "Saying that we made 425 billion baht in losses in total is a misunderstanding of MR Pridiyathorn.

"One has to accept that many economists did not study accountancy, so their understanding about accounting losses and actual losses of the scheme would be incorrect. This would lead to public misunderstanding."

This article wants to make clear to the public the actual losses of the rice-pledging scheme and the "additional" benefits which the farmers received from selling their rice stock to the government.

We will address these by answering three questions:

First, why do the government's loss figures differ from those presented by MR Pridiyathorn?

We should understand that both sets of losses are the "accounting losses" of the scheme, but the difference derives from the fact that the government values its rice stock at the purchase price paid for the rice at 15,000 baht for rice paddy and 24,000 baht for milled rice.

MR Pridiyathorn, however, values the rice stock at the market price, as also used by the rice-pledging scheme's accounting sub-committee.

The second question is how we should actually calculate the scheme's accounting losses?

According to generally accepted accounting practices, inventory valuation methods are divided into two approaches: first, calculating at cost value and second, calculating at fair value _ the price which we can buy in an arm's length transaction (aka market value).

The government, in particular the Commerce Ministry, chose the first valuation method (cost value), by valuing the existing rice stock at the purchase price.

But MR Pridiyathorn _ as well as the accounting sub-committee _ uses market value to calculate the losses, which results in higher loss figures.

So who is right?

This depends on the nature of the goods. A professional accountant would argue that fair value (the second method) should be used if there is high volatility in the prices of goods. This would apply in cases where the market price of goods falls well below the purchase price as soon as the goods were purchased.

If one uses the cost price to value the goods, such a method will not comprehensively reflect the actual value.

The government buys the rice stock at a much higher price than the market price. Effectively speaking, as soon as the government pays for the rice stock, the market value of the stock will fall.

The government admits it is making losses but it chooses the accounting method which only shows the scheme's partial losses. In fact, given the nature of the rice industry, it should really be using fair value to calculate the losses.

This constitutes "inappropriate accounting" by the ministry which acts as the regulator for accounting practices for businesses and, therefore, should have a thorough understanding of accounting standards.

Practically, it allowed the rice-pledging scheme to use a different set of accounting rules to serve its own political purposes.

And finally, what will be the actual losses of the rice-pledging scheme?

Although the government has disclosed the income generated by reselling the rice, it has not disclosed information about the quantity of rice stock which has been sold.

That information would reveal that the government has made much greater losses than it initially told the public.

The non-disclosure of such information is illegal, as government agencies are obligated to disclose useful information to the public.

However, from the figures which Deputy Agriculture Minister Varathep Rattanakorn presented to the National Rice Policy Committee, one can see that the government's selling price for the 2011/12 crop at an average of 14,435.71 baht per tonne is much lower than the wholesale price in Bangkok of 19,635 baht per tonne.

The total costs of buying rice from farmers and operating costs come to 29,605.52 baht per tonne.

Effectively, this means the government incurs losses of 15,169.31 per tonne. For the off-season crops, the selling price is averaged at 12,839.45 baht per tonne, compared with the market price of 17,266 baht per tonne.Thus, the combined quantity of the two seasons would amount to 3.62 million tonnes of rice, and as of Jan 31, 2013, the actual losses would stand at 495.61 billion baht.

All the above can reveal why the government does not want us, the public and taxpayers, to know the real losses incurred from this scheme.

We hope that what we have set out above will help the public better understand Thailand's rice saga and continue to pressure the government to disclose the truth.


Nipon Poapongsakorn, PhD, is the TDRI's distinguished scholar. Kamphol Pantakua is a TDRI researcher. Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

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