Report on sugar industry cartelisation: ECC defers CCP presentation for second time

The Economic Co-ordination Committee (ECC) of the Cabinet has deferred, for the second time, the presentation by the Competition Commission of Pakistan (CCP) seeking government's political support to proceed against alleged cartelisation by the sugar industry. Sources told Business Recorder on Wednesday that the CCP had compiled a comprehensive report on sugar cartelisation for the ECC.
However, the CCP presentation was deferred, for the second time, during ECC meeting held on August 18, 2009. At present, there are serious issues relating to the sugar crisis in the country. However, the CCP has not been provided any opportunity to explain the phenomenon of cartelisation in the sugar sector. The ECC should seriously consider the CCP report on sugar cartelisation to obtain political backing of the government. In current circumstances, the viewpoint of the CCP needs to be analysed by the economic managers for consideration, sources said.
The CCP's recommendation is that the government should support and assist the CCP in carrying out a detailed competition assessment of the sugar sector so that abuses, if any, can be identified, and then addressed. According to the report, CCP has observed that the sugar mills represent a powerful political lobby in the country, and proceeding against any alleged wrongdoing would require the full support of the government.
The said report on sugar industry has sought the government's support and assistance for the CCP in carrying out a detailed competition assessment of the sugar sector so that abuses, if any, can be identified and then addressed. None of the mills has substantially diversified its output to produce other by-products, either from sugar itself or from sugarcane residues, thereby to increase revenues and profitability as is the case in other sugar-producing countries.
The industry remains almost exclusively focused on the production of white sugar. In 2008/09, demand for refined sugar was estimated to be over 4.2 million tons while production declined from 4.75 MMT in 2007/08 to about 3.5 MMT in 2008/09 on account of a decrease in both acreage under sugarcane cultivation and somewhat lower yields. By the end of May, 2009, the sugar stock was about 2 MMT (held by TCP and the mills). As for 2009/10, sugar production is forecast at 3.65 MMT, about 3 percent higher than the preceding year.
Regarding consumption and demand, there are divergent views: According to PSMA, demand fell to about 0.3 MMT per month between October, 2008 and May, 2009 compared with average consumption of 0.36 MMT per month last year. Annual demand thus came out to be 3.6 MMT.
On the other hand, some independent industry sources worked out the demand for 2009/10 to be 4.35 MMT. The estimate adopted by the government for determining imports, and its accuracy or otherwise, would crucially impact the demand/supply situation and consequently sugar price.
The ECC had earlier requested the CCP to examine the issue of cartelisation by manufacturers of sugar. The CCP, keeping in view the guidelines of the ECC, prepared a detailed analysis of the performance of the sugar industry in terms of fixation of sugar price as well as views on the existing situation in the industry from a competition perspective for further action by CCP in sugar industry case.
The CCP had not been able in the past to prove a cartel in the sugar industry despite the fact that the activities of the Pakistan Sugar Mills Association (PSMA) have always aroused suspicions. Moreover, sugar pricing has been a contentious public policy issue for many years. How competition and competition policy impact in this sector will depend significantly on how government policy shapes up in the future, especially with regard to the procurement price of sugarcane.
The sugar sector constitutes 4.2 percent of manufacturing in the country producing around 3.542 million tons (MMT) of sugar in 2008/09. Although about the same size as cement its many backward (sugarcane growers) and forward (food processing) linkages in the economy indicate that its indirect socio-economic impact in overall terms is significantly larger than its direct contribution to GDP. In terms of concentration it is deemed to be competitive. There are 77 sugar mills in the country (41 in Punjab, 29 in Sindh and 7 in NWFP), of which 61 are in the private sector.
Sugarcane is grown over a five-month period. Likewise, the mills manufacture sugar for five months but have to release their stocks uniformly over the year. Stockpiling thus becomes an issue. Restrictive practices are endemic. There are also frequent reports regarding the failure of sugar mills to make timely payments to growers. The commodity-like nature of the product encourages an oligopolistic consensus and discourages price competition, the CCP report added.