Bitter sweet facts

Published December 27, 2021

The prices of sugar have been making rolling records over the last three years. In a highly toxic political economy, the entire supply chain thus remained under debate and perpetual scrutiny without any productive outcome.

Even after a series of inquiries, investigations, committees and commissions to reform the sugar sector, the government has not been able to introduce systematic changes to the supply chain. The market continues to operate at its own distorted mechanism with added fuel from lopsided policy and administrative interventions amid household and commercial consumption patterns of 30:70pc.

Interestingly, major reform measures suggested by a Sugar Sector Reform Committee (SSRC) comprising ministers and other stakeholders after 18 months of consultations have come to zilch at the federal cabinet when the secretary cabinet questioned its legal position.

The SSRC led by energy minister Hammad Azhar was constituted by the federal cabinet in June 2020 (when he was the minister for industries) following a massive price hike in November 2019. The crisis had shaken the PTI’s government at the centre and Punjab, leading to a parting of ways between Prime Minister Imran Khan and his longtime friend Jehangir Khan Tarin.

After a series of inquiries, investigations, committees and commissions to reform the sugar sector, the government has not been able to introduce systematic changes to the supply chain

The cabinet appointed a sugar inquiry committee under the Federal Investigation Agency in February 2020 and converted it into an inquiry commission in July 2020. On the sidelines, the SSRC was constituted in July 2020 which held seven meetings in nine months — between July 13, 2020 and March 17, 2021. It comprised two ministers, two advisers and about 10 grade-22 officers. The SSRC took another nine months to compile its final recommendations for sugar sector reforms including deregulation.

As these recommendations came up for approval in the federal cabinet on December 14, at the very outset “the deregulation of the sugar sector was questioned, especially given the cartelisation by the sugar industry,” according to minutes of the cabinet meeting. Mr Hammad explained that the minimum support price (MSP) announced by the government was only indicative and the sugar mills usually purchased sugarcane from the farmers at a price higher than MSP, and hence of no use.

He argued that regulation of the sector caused distortions and the government should let the market forces determine the prices of sugarcane and sugar. The removal of duty on import of sugar would guard against manipulation of domestic sugar prices by the mills.

The Cabinet Secretary said the abolition of zoning of crops, recommended by SSRC, was in contravention to an earlier decision of the Cabinet which directed the National Food Security and Research Division to carry out a scientific study on zoning requirements, focusing on crop patterns to be adopted in various zones to boost agriculture productivity.

Also, the free choice of area to set up sugar mills by the private sector through the abolition of Sugar Factories Establishment and Enlargement Act, 1966, as suggested by SSRC would lead to the unregulated proliferation of sugar mills and negatively impact the areas under cultivation for cotton and wheat crops. This aspect needed to be seen in the light of Pakistan’s textile exports to the tune of $6 billion this year and substantial wheat imports over the last two years.

Therefore, the cabinet decided that the recommendations of the SSRC should be further deliberated among the key stakeholders, released to the public for debate for three weeks and brought back to the federal cabinet given serious deficiencies highlighted.

Among the reform suggestions, the SSRC wanted a shift in sugarcane pricing based on sucrose content without any government role instead of existing politicised MSP system, freedom of sugar imports but controlled export in case of surplus and heavy penalties and punishments for delayed sugarcane crushing and cartelisation by the mills.

The proposed reforms also included a series of amendments in a number of federal and provincial laws, new roles to Pakistan Commodities Exchange Control (PMEX), Pakistan Space and Upper Atmosphere Research Commission and electronic warehousing and track & trace systems to streamline the entire supply chain. Reforms also included an increase in the fine for late crushing by mills to Rs5 million and one-year imprisonment besides Rs75m worth of penalty for cartelisation.

The SSRC conceded that the sugar advisory board based in the Mnistry of industries and production had erred in believing that price hike in November 2019 was not because of market forces and asked provinces to invoke price control and profiteering act to counter unfair market practices but later felt that ‘there was a real shortage of sugar’, exerting pressure on prices. The board also required a ban on the export of sugar and advocated imports.

The committee recommended strong media campaigns against the use of sugar by the people because of its health hazards as it noted 30pc of total sugar production was consumed by households while the remaining 70pc involved commercial use like confectionaries and sweets. It said the major reason for price volatility and speculation was the result of an unregistered supply chain at undisclosed locations.

The SSRC is of the view that commodity should be deposited at accredited warehouses regulated by a Collateral Management Company after customer due diligence through electronic warehouse receipts while its trading and settlement records should be maintained by PMEX to provide a level playing field to market participants for efficient price discovery. This was felt important to replace forward contracts and “Satta” which manipulated market forces amid unregistered transactions and yet these transacted commodities were shown as stocks, providing space to millers to manipulate both demand and supply.

The committee recommended the abolition of legislation by provincial governments regarding zoning of crops and leaving the choice of what to grow to farmers and market forces. On the issue of delayed crushing, the committee observed that the Sugar Factories Control Act 1950 that provided for the crushing starting between 1st of October and the 30th of November of each year, which was a considerably long period, should be curtailed.

The SSRC also called for adequate pricing of water on a volumetric basis to avert market failures and remove externalities, leading to the incorporation of the actual cost of production of sugarcane. The provinces would be required under new legislation for the supply of water to the cropping areas. It also suggested a cost-benefit analysis of cultivation of different crops to review the relative importance of crops for Pakistan viz-a-viz area under cultivation to enable the government to devise required interventions.

Published in Dawn, The Business and Finance Weekly, December 27th, 2021

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