Sugar inquiry: Fix the illness not the symptoms

The sugar inquiry report did not focus on the structural problems creating the 'economic rents'. Rather the energies are expended on chasing the rentiers. And the media eyes are on personalities. The study dealt with the tactical issues - nothing on fixing the sector dynamics. There is little or no talk on rules, regulations and legislations that are creating such problems. Swaying away from personalities, such irregularities and rents are common in many other industries. As someone aptly said that rent seeking in Pakistan is seriously sophisticated. The question is how many goose will you chase. IPPs, sugar and many more to come.
Whenever there is rent, entrepreneurs compete on milking it. Efficient ones to get higher share of the pie. These are held accountable when inquiries are conducted on the basis of 'existing rules of business'. In IPPs, those who ran plants more efficiently than stated efficiency levels are in the limelight. Same is the case of sugar where better run mills made more money. Grabbing the smart businesspersons is like taking away efficiencies from the system. It's better to focus on correcting the system to let them compete in deregulated rules of business.
Sugar is a highly regulated industry. Provincial governments issue mills licenses. Political bigwigs get licenses. Or those who have licenses sneak their way to political power corridors. The sugarcane market is tightly regulated too. The growers can only sell to mills in their respective geographies. Provincial government sets price on cane. Then, the government attempts to regulate consumer price. Not to mention, excess has to be exported by providing subsidy. There are so many potential leakages in the process. There is an extent to which any government can guard those seepages.
At every level, government or regulator has to fix factors, which are best for the market to decide. Government does not have the capacity to evaluate the right support price of cane or the subsidy level and the quantity to export. Government's human and capital resources are deployed in fixing those variables. Forget about poor governance and incapacity of public sector; even with best systems, only markets can determine the equilibrium. These cannot be done ex-ante. It defies basic economic principles.
The outcomes are of course suboptimal. The catch is to move away from cost plus formulae. The inquiry commission talks about mills showing higher cost of production. The commission's forensic audit findings are on over-invoicing of sugarcane procurement and under-invoicing of sugarcane byproducts (bagasse and molasses). From pure economic lens its good. This implies that in Pakistan sugar mills are more efficient than what published numbers are stating. Had the market been deregulated, wider economic benefit would have been accrued. however, currently it is probably making a few pockets heavy.
The commission demanded cost audit. The report claims manipulation of sucrose recovery ratio, and inflated and irrelevant admin and financial expenses. Some of these mills are audited by big 4. If these claims are true, then the report also raises questions on the credibility and competence of the auditors.
There is a charge sheet on regulators as well. ECC did not do cost analysis for subsidy calculation. SECP is not doing cost audit. FBR is not monitoring documentation of sugar sale. SBP failed to monitor bona fide TTs. Then there is CCP's inaction on artificial supply shortage. Had the industry been deregulated most of these issues would not have been faced. The artificial supply shortages can be dealt with by removing 40 percent duty on sugar import.
Then there are externalities. For example, the debate on fixing cotton support price. The argument advanced by cotton growers is that since sugarcane has support price, the growers are discouraged to opt for cotton. Thus, demanding cotton support price to have a level playing field. Two wrongs do not make a right. Best is to do away with sugarcane support price for providing cotton a level playing field.
If cotton support price is set, then buyers have to be subsidized. Cotton value-added products (textile) are country's prime exports. Competing internationally, they have all the rights to ask for international cotton price. Else, they may demand currency depreciation or a subsidy for being competitive. If that's done, a few years down the road, some inquiry commission on cotton might also be formed on the real or perceived misuse of subsidy.