Policy framework
Legal and regulatory framework
Institutional framework
Government strategies and policies
Many governments now have policies of privatization of public sector activities. However, some form of public intervention in markets is usually necessary to:
In addition, government policies in respect of decentralization, economic concentration (how much of any business sector is owned or controlled by one person or company) transport development, urban development or inner-city redevelopment will all have a bearing on how a market will function.
Functions and responsibility in food supply
National governments have a function and a responsibility to ensure adequate food supply for the population of the country. This responsibility is usually undertaken in market economies through governments putting in place the necessary infrastructure, and financial and legislative framework so that the private sector can operate. In the past many municipalities established markets and operated them. But since the 1960s most markets have either been run by public sector corporations or authorities, or by private companies. A critical factor is that sufficient power and authority to manage the market must be delegated or given by the government to the corporation or body. This is perhaps best done in terms of legislation which establishes the public sector market or which regulates the agricultural marketing sector. Such legislation must include the powers and authority to enforce decisions of the managing authority. This is usually done through market rules. The legislation, which establishes the agency to manage the market, must also clearly specify:
The extent to which these functions are delegated will determine the autonomy of the managing authority.
Public and private markets
In theory it can be expected that public sector markets have public sector investment and public sector management. Private markets are independently established by private enterprise with private sector investment and private sector commercial management.
In practice there are few markets which conform to one or other of these extremes. Many public sector markets are now managed by a managing authority controlled by a board of directors, which is often made up of representatives of private market users or businessmen. The markets are required to be self-funding and to operate with a commercial approach to accounting and financing. On the other hand, private company markets often require government assistance with land acquisition or with funding for the major capital investment required. Often the government sector then requires direct representation on the board of directors and compliance with some stated government objective (e.g. opportunities for small businessmen).
In nearly all markets, the marketing of agricultural products is dominated by the private sector. Wholesalers acting as merchants, commission agents or brokers carry out the buying and selling functions. However, in markets which use auctions the auction process is often carried out by the public authority or managing authority. In a very few countries the managing authority still carries out the wholesaling function. However, such arrangements are disappearing.
Social obligations
A number of issues relating to social obligations are briefly summarized in this section.
Security of food supply. Governments have a responsibility to ensure that basic food staples of sound quality are available in regular quantities. This role extends to providing the necessary infrastructure for production (e.g. roads, irrigation) and the necessary support services (e.g. fertilizer and seed distribution, research and extension services). It may also require the provision of any necessary collection centres, cold stores and market facilities where private enterprise is unwilling or unable to invest.
Market traders are in contact with buyers both in the country and sometimes in export markets. They, or their agents, are also in close contact with producers. Natural or man-made disasters or poor weather excepted, they are therefore in a position to ensure continuous, regular and diversified supply of agricultural products in response to demand. This role does not require any intervention by the managing authority. Where market managers have sought to become involved in trading the results have been unprofitable for all concerned in nearly every case.
Creation of effective pricing mechanisms. Wholesale markets and more particularly the newer food supply centres provide an environment, through the concentration of supply and demand, for effective price formation, with open competition and transparency. The simultaneous presence of available produce, buyers and sellers in a single place helps to ensure that prices paid and received are realistic and fair at all times. The newer wholesale markets with better facilities and more space for handling large volumes afford better scope for transparent market operations.
This concentration of supply and the concentration of demand represented through wholesalers by buyers, especially retail chain stores, is of considerable importance in developing countries. It is perhaps even more important in economies, which are in transition (i.e. countries which were previously under a centrally planned system). In these countries the pricing process was not developed as prices were established by administrative decisions. Concentration of supply was brought about by production from large state production units. The impact of the lack of wholesale market facilities became dramatically evident when state food production, storage and distribution systems disappeared. In developed market economies, the assembly of large volumes of food supplies is guaranteed through large farm enterprises or through smaller farmers acting together cooperatively.
Quality and hygiene control. Once food supply has been assured, there is a responsibility to ensure that food products are safe for human consumption, that they do not spread plant or animal diseases and that quality standards are maintained. This responsibility rests with provincial or local governments, which have the power and authority to establish necessary regulations. Compliance enforcement is therefore the responsibility of the appropriate government body (local or provincial). Usually the managing authority is not directly involved, except for providing office or laboratory facilities and access for inspection staff.
In view of large volumes of produce daily entering markets, the inspection services generally operate on the basis of:
Produce not meeting minimum hygiene standards, or which is seriously affected by pests and diseases, is usually confiscated and placed in isolation under security. Statistical records of confiscated produce and names of the producers and the traders involved are maintained. Extension staff follow up with traders/producers or transport operations to help prevent future losses. Standards and packaging requirements set in the principal wholesale market will effectively set these standards for the region or industry.
Market Information. The prices paid and received for produce traded in the market and the quantities of produce traded (by production area and commodity item) is important information for the community. Farmers can base planting and selling decisions on this market information, and government support services can plan extension and research programmes. Minimum, maximum, and most-frequent sales prices are often gathered and quoted. Market reports, to be effective, should be widely distributed to producers, wholesalers, retailers, consumers, government agencies and the general public. Publication of price and quantity information in newspapers, on radio, television, e-mail and market notice boards are all essential to ensure timely and effective distribution to interested market users[1].
Legal competency - Delegation of power and authority
In order to have legally defined roles there is a need to clearly define the role of every market. This has to be accepted by national, provincial and municipal governments as well as market participants (e.g. growers, wholesalers, buyers), service providers (e.g. transport operators, banks) and the market management itself.
State or municipal governments that have the legal competency need to enact legislation or regulations which establish the market, the managing authority and its role, powers and authority. They should also provide powers for the management authority to develop and enforce market rules, and to provide for the rules relating to the operations of wholesalers.
In some situations governments may see the need to provide legislation which regulates the establishment of further market facilities in an area for a fixed period of time. Exclusivity, which restricts wholesaling to a particular market, has applied in several Australian markets, for example. This is now seen as a difficult policy to introduce or sustain in many developed economies, given changes towards greater private-sector involvement. However, it is an issue, which must be addressed if huge public investments in major markets are to be protected.
Failure of a government to adequately delegate its legal competency to the authority charged with the responsibility to manage a market can lead to the creation of a legal vacuum. In some circumstances it may lead to activities against the interests of the market. Such legal vacuums tend to be exploited by those who wield the greatest economic power, to the detriment of producers and consumers. In other cases when no competency is allocated to a specific authority, management functions may be assumed de facto by any authority which feels strong enough to assume them. This can lead to split and ineffective management, resulting in confusion and inefficient market operations. In addition, there can be total lack of coordination, for example, between the managing authority of the market and the department or agency that feels it has the ultimate authority. Poorly delegated competency can result in confusion and lack of direction when more than one local government or municipality is involved. This has happened in emerging economies where insufficient attention is given to the legal and regulatory powers, and the authority required by the managing authority for a market.
There can also be a legal mismatch in situations where the legislative or regulatory framework, which provided for the establishment of the market, has not been reviewed to reflect changes in the administrative, legal and social environment.
Regulation of market operations
The broad regulatory structure for a market is best established by legislation or regulation. Sometimes it is established by some legal instrument or delegation from the responsible government body. As mentioned, this should provide the role and functions of the managing authority and any limits on its powers and authority, such as the necessity to obtain approval of the annual budget, fees and charges, leases, loans and annual accounts.
The legal framework should also provide market rules for regulation of market operations. These may be incorporated in the enabling legal instrument or provide that the managing authority may develop rules. In the latter case this may require approval of the overseeing (government) agency. These regulations or by-laws are of great importance for the correct functioning of the market. Careful drafting will avoid conflicts between parties involved in marketing operations.
Market rules themselves often establish the right of the managing authority to make decisions on specific issues and provide for the penalties and fines to enforce the particular rule. For example, the managing authority may be empowered by market rules to determine opening and closing hours with which users must comply.
This subsidiary legislative approach usually requires that the managing authority publish in a predetermined manner the decisions taken. For example, market hours should be printed in the government gazette and/or local newspapers, and given in writing to tenants. In any event it is prudent and administratively effective for any such administrative decisions to be given to market users in an understandable form.
Annex I (by-laws of the Barcelona Central Market for fruits and vegetables) provides a translation of the Reglamento de Prestacin del Servicio de Mercados y Matadero de la Unidad Alimentaria de Barcelona (Mercabarna). A major legal instrument used in most markets to ensure compliance with market rules and to maintain order is that of an agreement in the form of contracts with traders and other market users. This is discussed in detail in Chapter 3.
It is important that no part of the market rules or any administrative decision or any agreement be contrary to or not provided for by the enabling legislation. Additionally, all rules must be in accordance with other laws, especially commercial law. In Spain, for example, laws provide that markets and slaughterhouses are of the public domain and dedicated to public use and services. This can mean that no charge or authorization is required to enter the market. In markets in other countries (e.g. the United Sates or Australia) the market rules allow for charges to be made for entry by the general public and can put strict conditions on entry times.
Organization and structure
There are several different models used for the structure and composition of the managing authority established to manage a market.
For private markets, company law usually requires a board of directors and their election by the shareholders of the company. Where government concessions (e.g. for land) or assistance (e.g. for low interest loan finance) have been given, the government may require direct representation on the board of management. Private companies usually have a chief executive officer (CEO) responsible for the day-to-day management, subject to policy direction and oversight by the board of management. The CEO may be an executive chairman, a managing director, or a manager/general manager. The CEO attends board meetings but may not have the right to vote.
In Spanish markets municipalities have established the markets and maintain control by appointing a management company. Decisions on leases, market value, fees and charges are made by the municipality on the recommendation of the management company.
In North America, Australia, and some Asian and European countries public markets are usually managed by a managing authority (a public corporation, committee or board of management). These are mainly of two types:
1. Representative: With representatives of the main market-user groups (wholesalers, farmers) and usually with government representation. The chairperson may be an independent person with commercial or business skills.Minimizing political and financial entanglements2. Executive style: Boards may have persons skilled in commodity marketing or production, but the emphasis in selection is on business, commercial, accounting or other specified skills and experience.
Because public markets are dealing with substantial cash transactions they can be seen as opportunities for political appointments and for cash “kickbacks”. This risk can usually be eliminated or, at least, minimized with carefully framed enabling legislation and market rules and regulations, and clearly defined powers and authority. In public markets staff appointments, financial accounting, tenders and contracts must all follow transparent procedures, as provided for in public service regulations or in rules based on the same accountability procedures. Checks and balances which may also be imposed include prior approval by government of: the purchase or sale/transfer of land or other assets, borrowings, the annual budget, the accounting system to be followed, penalties to apply for breach of market rules, appointment of the manager and other key staff. However, a balance is required between those provisions necessary to ensure effective accountability and those which allow autonomous decision-making. There is little point in the government appointing a public corporation to manage a market if the corporation is prevented from performing its roles by unnecessary restrictions.
Responsibility for maintenance and management of physical assets
It should be very clearly established who has the ownership or effective control of market facilities. Whether ownership remains with the local government/municipality establishing the market or whether it is transferred to the managing organization depends on several factors. These include the size of the investment, the regional or national impact of the market and the type of management structure to be put in place.
Since the 1960s ownership of physical assets of public markets has increasingly been transferred to public entities or corporations. The “day- to-day” management in some countries may be subsequently granted under contract or other arrangement with an ad hoc management company. Direct transfer or long-term lease may transfer the assets to the managing authority. This will usually be conditional in that the assets may not be mortgaged, sold or otherwise transferred without the prior approval of the establishing government body.
Who owns the assets is also important to determine which body is responsible for short and long-term maintenance and capital replacement. As a general rule this responsibility is transferred to the managing authority. Rental charges to wholesalers should be so calculated as to provide funds for long-term maintenance and capital replacement (e.g. new buildings).
Where an ad hoc company structure is used to physically manage day-to-day operations, careful attention is needed to ensure that it will operate in the public interest. This may need a strict requirement in the legal instrument or agreement to ensure that the company will comply with specific public-service procedures in relation to accounting, loans, staff appointments and salaries, and reporting. Responsibilities must be clearly defined for providing funds for long-term maintenance, staff-benefit reserves (e.g. long-service leave, redundancy payments) and capital replacement needs. These ad hoc companies can be established through subscription of capital by the public, by government (public sector) or through a mixture of both.
Whether the managing authority for a market is a company or a public corporation, it is important to have close cooperation with local or provincial government bodies. Serious problems can arise where recommendations on fees and charges or on the budget (income and expenditure) are made by the managing authority, but rejected by the government authority concerned. What has to be avoided is that proposals made by the market are rejected or modified by the government authority for political reasons. This can mean that the market ceases to be financially viable with expenditure exceeding income or with no provision for reserves for maintenance and capital replacement. There will always be strong pressure by market users against any fee increases, but the guiding principles should be that the market must be self-sustaining and that the user should pay - not the public purse.
Another potential source of serious conflict can arise where the government body (e.g. municipality) fails to enforce compliance with exclusivity provisions by tolerating wholesale trading outside the precincts of the market. The Colombian cities of Barranquilla and Cali are examples of the types of problems which can emerge when, following the establishment of new wholesale markets, trading was tolerated in other parts of these cities. Several approaches can be followed to minimize these potential conflicts:
1. Representation of the approving government/department body in the managing authority - to insure an understanding of, and a commitment to, the proposed financial arrangement (e.g. fees, loans).Networking of markets2. Regular coordination meetings of the involved departments/body with the managing authority.
3. Making financial autonomy, and the need for self-sustainability, a part of the regulation or agreement which establishes the managing authority.
Sometimes the organization set up to manage a central wholesale market has also been given the responsibility to develop and manage local regional market facilities. The intention is to link these regional markets with the central market. Often this approach has mixed success compared with that of having local regional representatives manage the local markets and having either representation from the central market or regular, programmed coordination meetings. Linking market centres with telephone, fax, and e-mail services and the development of a time-effective market reporting service covering all markets can be an effective means of helping to ensure that the desired level of linkage occurs.
