The Competition Commission of Pakistan (CCP) is optimistic that the federal/provincial governments would review their legislative framework, including Sugar Act, to design appropriate government interventions, improve sugarcane quality, enhance and diversify production processes, and improve export competitiveness.
Sources told Business Recorder here on Friday that the CCP had issued an opinion on the competition concerns in sugar sector. The CCP is now effectively coordinating with the provincial authorities to ensure implementation of the policy recommendations issued by the commission.
The CCP had recommended that the Sugar Act is severely outdated and does not serve any purpose in the contemporary times. All provincial governments should review legislation to limit government intervention and bring it in line with the recommendations given above. Any revised or new legislation should encourage principles of free market.
The basic legal framework that governs the sugar sector is encapsulated in the provincial Sugar Factories Control Act, 1950 (the 'Sugar Act') which is in force in all provinces with minor differences. This Act, among other things, defines the crushing period, and permits the provincial governments to fix minimum price of sugarcane to be paid by millers and reserve areas of sugarcane for particular mills.
The provincial governments should ideally not fix price floor of sugarcane and let the market determine price based on supply and demand. Price floors should only be imposed for limited periods in situations where food security is gravely threatened.
In situations where the government does impose a price floor, careful consideration must go into its determination.
The Commission has time and again seen when the government makes purchases through public organizations such as TCP, it imposes a price ceiling beyond which it would not purchase. In a general sense, often the imposition of such price ceilings has a detrimental effect on competition in the market to the extent that it facilitates cartelization amongst the bidders. When price ceilings are imposed, bidders tend to offer prices around it creating a lack of competition and choice for the government. Similarly, when tenders are designed to 'spread' purchase from more than one bidder, collusion in form of market division is facilitated. Such practices must be avoided as they harm competition in the market and allow players to collude, the CCP observed.
While calculating the cost that it takes to produce sugarcane, the federal and provincial departments responsible must ensure detailed field visits and rely on firsthand knowledge duly acknowledging the divergent conditions and factors prevalent in different areas, in the interest of accuracy.
More importantly, the pertinent government departments at the federal and provincial levels must ensure that they have an independent way of forecasting the production of sugarcane in any proceeding season and its impact on the total supply of sugar in the country vis-à-vis its demand, so that this consideration is built into estimation of any potential price floor for sugarcane. The cost of a commodity is very important in determining its price, but that is not the only factor. An equally important consideration is the value of the commodity held by the buyer in light of the laws of supply and demand. When such consideration is built into any suggestive price, it will ensure that the seller or the farmer gets his price.
CCP also agree with the view of One Man Commission report that suggested that while fixing the price of sugarcane, price floors or any applicable support price of other crops must also be considered so as not to discourage the farmers of those crops to grow them. For example when pricing the sugarcane crop, the price of cotton crop that 26 feeds an important industry of textile and that requires a lot less water than sugarcane and any such other crops must be kept in consideration so as not to convert the farmer from one crop to the other, while not even insuring the security of being paid.
Whenever after duly deliberating on all the foregoing factors, the provincial government arrives at a price floor, it must then take it to its logical conclusion, in that regardless of circumstances, the government must ensure that it pays the farmer its due as fixed by the government as if it were an underwriter.
Any policy regarding determination of price floor for sugarcane must take the emphasis away from weight and shift it to quality, so that farmers have an incentive to shift toward more efficient methods and be rewarded accordingly. Farmers producing higher quality sugarcane must be paid a premium against farmers who grow relatively inferior product. This will also help in reducing the overall production cost for sugar, CCP recommended.
The Commission is further of the view that research and development ('R&D') is the cornerstone of any efficient industry. It appears that lack of R&D has prevented the sugar industry from realizing its potential (both export and local) particularly at the farm end where there appears to be no efforts to introduce more effective seed varieties and indigenize them to produce superior quality sugarcane for long term benefit. As previously noted in the One Man Commission Report, despite being ranked 6th in terms of harvested area, Pakistan stood at number 15 among the 16 major sugarcane producing countries, with regard to yield and quality of sugarcane. Yield and quality are therefore important areas where the R&D should be focused. Similarly and as importantly, R&D activities must also be carried out to make the processes at the mills end more efficient.
Such activities should range from making the manufacturing process more efficient and cost productive to making the most efficient use of the by-products. The government should offer incentives in this regard.
With regard to the role of Government with respect to exports, CCP are of the view that, in addition to the R&D measures suggested above to reach our export potential, the concerned government departments must also be very vigilant regarding the existing stocks of sugar in the country. In addition, there is need for active forecasting with regard to the quantities of sugar that will be produced in any upcoming season vis-à-vis its demand and up to date knowledge of prevailing prices of sugar internationally so that a timely and effective export strategy can be adopted, based on actual facts on ground.
Regarding any artificial shortage of sugar supplies on the retail/wholesale or mills' end, the Commission is of the view that the government through TCP may maintain certain amount of reserves of sugar as a check/deterrent for any such market manipulation. Ideally market forces must be allowed to operate freely, and so this must be done very sparingly if at all needed, as the scenario thus described is less likely to sustain in current circumstances where owing to excess supplies and lack of export channels, the market is very likely to correct itself within a short period of time. However any such reserve, apart for being a deterrent may also be considered for export at an opportune time in the event of international prices of sugar rising at any point in time.
It is also recommended that the Federal Government reduces the time required to make import/export decisions and give permissions. International trade shows no mercy on nations that cannot utilize the best times to carry out trade, particularly when dealing with commodities. When excess stocks are expected, the government must facilitate timely export. This requires proactive monitoring and management by the Federal Government.
Lastly it is recommended that the Government may consider setting up a committee comprising all the pertinent Government departments dealing with the Sugar Sector at federal and provincial level (such as provincial food departments, research departments whether attached or independent, provincial cane commissioners, Agriculture Policy Institute, Ministry of National Food Security and Research, Ministry of Commerce and Trade Corporation of Pakistan) in addition to representatives of farmers and mill owners to be able to coordinate effectively in aligning their objectives and be able to deliberate over a workable long term plan based on the recommendations provided above and/or any new ideas or issues that may emerge overtime for making the sugar sector internationally and locally competitive and thereby an economically efficient sector catering to the welfare of its stakeholders as well as consumers in the longer term, CCP added.
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