Sugar Commission Report: What to do?

ARTICLE: Sugar Commission Report (SCR) has implicated the sugar industry of what in many civilized countries would be considered a crime worthy of severe penalties and jail terms; double bookkeeping, falsification of records, price setting, cartelization, avoidance of taxes, benami transactions, satta, under-payment to farmers and fleecing them on many counts, unauthorized capacity extension and its diversion into black market, etc. People have generally acclaimed the report while electronic media has launched a campaign. PSMA, the mill owners' body, has, however, rejected the report, describing it as contradictory, speculative and misleading. Jahangir Khan Tareen(JKT) has rejected the report as well and has proposed freeing up the sector. We will take up his proposal and explore its implications.

It would be very difficult for PSMA and its members to prove that it is not a cartel engaged in anti-competition practices. Competition Commission of Pakistan (CCP), although a sleeping organization, had earlier raided their offices and tried to correct the situation. They moved the court and got a stay order. The matter is lying with the courts, now for many years.

There are two issues that we would like to take up in detail; freeing up of the sugar sector from over-regulation and the satta. Freeing up of the sector would mean doing away with price support and restrictions on imports and export of sugar including many other regulations.

Satta, forward contracts and spot market have acquired a bad reputation in Pakistan, although, in other countries, these are quite legitimate practices. The difference is that it is done there in organised systems of commodity market exchanges while here it is being done informally in WhatsApp groups and benami transactions. Even, commodity exchanges are susceptible to abuse and anti-competition conduct but due to strict monitoring and rules, its scope and possibilities are strictly controlled. There is Cotton Exchange in Pakistan where cotton trade is done in an organised manner under the control of SECP (Securities and Exchange Commission of Pakistan). There is another commodity exchange which is lying almost underutilized where sugar trade can be transferred and conducted safely. It would be highly desirable to shift sugar Spot trade to the commodity exchange. Even sugar futures and forward contracts can be introduced. Sugar mills may be obligated to sell almost all of their production through the exchange. As revealed by the Report, there is a thriving community of brokers which is well-versed in spotting and forward contracts which should be readily available to work under a formal exchange system. The exchange system would improve the lives and businesses of this community as it is under perpetual threat of FIA and have to afford many risks such as confiscation of advances in case of not lifting the contracted sugar. Exchanges, through transparency, reduce risks and thus prices; higher the risks, higher the margins and profits. Additionally, market is not monopolized by a small coterie, hopefully, and ordinary people can also participate in sugar trade as they do in shares buying and selling.

It would be worthwhile considering the JKT proposal which one would believe that his fellow sugar mills members would be willing to do. However, there are some risks in totally opening up the sector. Sugar is an essential item of human consumption. Its availability has to be assured at reasonably affordable and stable prices. Exports may not be made free but imports can be made free under the system of TCP (Trading Corporation of Pakistan). In fact, in order that competition takes place and prices are held at reasonable levels, there has to be an excess in the market. The reason prices soar whenever exports are allowed is that the excess goes away. There is no way of accurately assessing demand and inventory levels. Imports would allow the government to intervene in the market whenever there are shortages and prices go up.

Sugar prices are seasonal. There is a heavy working capital requirement in the sugar industry. Sugar reaches retail market through a cobweb of brokers, wholesalers, transporters and dealers of sorts. Also, there is a peculiarity of sugar; it is produced in only three months and is sold in nine months out of inventories. This costs money in terms of financial and storage management costs. Such costs are financed out of hidden money or forward contracts or both. Informal money is expensive and money coming out of formal channels is cheap and reduces cost and prices. Amazingly, sugar retail prices in India and Pakistan are comparable, despite twice the support price of sugarcane and highly subsidized fertilizer in India; 44 IRs in India and 85 PKRs in Pakistan. In India, there is a minimum support price (MSP) for sugar at IRs 31 per kg.

The issue of doing away with price support for sugarcane is a difficult one. It is said that price support system has been responsible for, what many consider, to be a rather undesirable expansion of sugar production capacity. Pakistan is a water stressed country and with the passage of time, it is said that water stress would increase with increase in population. It may be desirable to depend on a degree of imports in case of water consuming crops such as sugarcane and may be rice. Perhaps, it is to discourage further expansion of sugarcane as support prices have not been increased for the last many years. It may be quite possible that by doing away with movement restrictions on sugarcane, farmers may be able to get fair prices and better treatment. It has been observed that higher prices have been obtained by farmers in some instances.

While market manipulation or price conspiracy, if not cartelization, is possible in quite competitive situations as well if bad and nontransparent practices, as are common in our business environment, are not controlled. We would like to analyze here, for understanding purposes, a quantitative measure of competition and monopoly of the sugar market in question. Monopoly or lack of competition, among other tools, is measured by a well-known Hirschman - Herfindahl Index (HHI). There are 89 sugar mills with following market share distribution; JDW (JKT) - 19.97%; RYK - 10.67%; Al-Moiz - 10.26%; Tandlianwala - 9.43%; Omni - 10.50%; Sharif Family - 9.64% and all others; 10.39%. HHI in this case comes out to be 692.

The US Department of Justice (DOJ), in analyzing potential monopoly and antitrust cases, considers any market with an HHI lower than 1,500 to be in a state of healthy competition. The US DOJ also analyzes corporate mergers for the change in the HI that the merger would trigger; any merger that would result in a change in the HI of 200 points or more raises serious antitrust concerns. One would not be sure if this would be applicable in our situation. Some research would be required in this respect by organizations such as SECP and CCP.

It may be a long fruitless battle to try to punish this powerful group for its wrongdoings which it denies that it has done it. 70% Benami sales is too much to be accepted. The proposed Market reforms will bring about transparency and may be able to do away, at-least, with some of the ills of the system, although we can count on the creativity of our businessmen to find new ways for beating the system. Let us do business as it is done elsewhere in civilized societies. The volume of sugar business in Pakistan is large enough to warrant an organised market system.

(The writer has been a former member of Planning Commission)