Sugar under greater focus

While the poor and the vulnerable continue to grapple with the serious implications of the Coronavirus that has compromised their ability to feed their families prompting the government to disburse cash to meet their daily needs the media and peoples' representatives in the federal and provincial assemblies are focused on the sugar inquiry report.

And within the report the focus is on JDW Sugar Mills, owned by Jehangir Tareen, a man credited with providing a critical prop to the Imran Khan government time and again whenever the danger of not having the requisite numbers in the federal or provincial assemblies surfaced. JDW as per the report exported 17.24 percent of its total output and availed 22.7 percent of the total export subsidy (561 million rupees) followed by Makhdoom Omer Sheryar (brother of Makhdoom Khusro Bakhtiar) who received 452.3 million rupees as export subsidy (in partnership with Moonis Elahi and Chaudhary Munir - Maryam Nawaz's samdhi) followed by Shamim Ahmed who received 406.5 million rupees as export subsidy. These three groups alone availed around 57.5 percent of the total subsidy extended by the Buzdar government of 2.47 billion rupees and together account for nearly 40 percent of total national sugar production - statistics that more than justify their selection for a forensic audit. The axe must fall on those found guilty, or such is the clamour today; be that as it may the question is whether "off with their heads" would ensure that the sugar high experienced time and again in this country (high prices, high profits and high export subsidies) would become a thing of the past?

Four facts, some highlighted in the findings of the Wajid Zia-led report, are not in question. First, the total sugar output in the country today is in excess of domestic demand with consumption at 5.4 million tons and output at 6.5 million tons as per a risk analysis carried out by PACRA dated April 2019. And this imbalance is in spite of a steady rise in domestic sugar consumption due to its rising demand by clip board, paper and ethanol industries as well as processed food sector - from 4.096 million metric tons in 2010-11 to 4.385 million metric tons in 2011-12.

Economic Survey 2007-08 reveals that sugar, identified as a minor crop that year, registered a significant increase in output while major crops (cotton, wheat, rice) registered a decline due to various reasons including inclement weather, a rise that has continued to this day. The reasons, often cited by Jehangir Tareen as being more applicable to his innovative farming methods, include good management and a balanced dosage of inputs. Be that as it may, a glut of sugar has been supported by a pro-sugar deliberate, albeit patently flawed policy, of the government that, over a period, has accounted for lower area under cotton cultivation necessitating cotton imports.

Sugar's share in value added in agriculture and GDP was 3.6 and 0.8 in 2011-12 and by 2019 the contribution had risen to 7 percent of GDP. Sugar exports were witnessed in 1997-98, 1989-99, each year from 2002-03 till 2008-09. The government allowed 200,000 tons of sugar exports in 2011-12 with an inland freight subsidy of 1.75 rupee per kg (18 dollars per ton). In 2015, Ishaq Dar as the Finance Minister approved 500,000 tons of sugar exports, in a phased manner, with a total subsidy of 7 billion rupees and in April 2018 the Shahid Khaqan Abbasi-led government announced a one billion export subsidy for 650,000 metric tons. The logic provided for the export subsidy was as follows: a sugar surplus that, so it was argued disabled the mill owners from purchasing cane from farmers till their existing stocks were depleted (data provided by individual mill owners which has been queried in the inquiry report necessitating recommendation to raid) while exports would generate the needed foreign exchange. With domestic cost of the commodity in excess of its international price exports without a subsidy would not be possible for the mill owners.

Secondly, the question is who can influence the price of sugar? The list is exhaustive. Nawaz Sharif family owns Channar Sugar Mills, Chaudhry Sugar Mills, Haseeb Waqas Sugar Mills, Ittefaq Sugar Mills, Kashmir Sugar Mills, Ramzan Sugar Mills and Yousaf Sugar Mills. Kamalia Sugar Mills and Layyah Sugar Mills are also owned by PML-N leaders; Asif Ali Zardari and PPP leaders reportedly own Ansari Sugar Mills, Mirza Sugar Mills, Pangrio Sugar Mills, Sakrand Sugar Mills and Kiran Sugar Mills. Ashraf Sugar Mills is owned by Chaudhry Zaka Ashraf. Haroon Akhtar Khan owns the Tandlianwala Sugar Mills (4.9 percent share in national output) while Pattoki Sugar Mills is owned by Mian Mohammad Azhar, Hammad Azhar's father. PML-F leader Makhdoom Ahmad Mehmood owns Jamaldin Wali Sugar Mills. Are these mill owners colluding or are they safeguarding their own financial interests reaching decisions that benefit all? This would require a proactive investigation which should include members of the Competition Commission of Pakistan (CCP). The CPP has singularly been ineffective in reversing existing collusion in many industries (including sugar which operates under perfect market conditions in other countries) due to proliferation of stay orders. The solution: the government will have to strengthen the CCP, change the laws and withdraw industry-specific incentives.

Thirdly, on the other end of the spectrum are the big farmers' many of whom are key players in the provincial and federal assemblies and who have an input into the support price of cane. Sugar retail price varies from mill to mill as does the support price announced by the three provincial governments where sugarcane is sown based on the sucrose content, transport costs (the Sharif family recently lost the case for relocating their sugar mills in Southern Punjab), available stocks as well as other associated input costs. The implementation of the support price was delayed, the inquiry report contends, with the last increase in 2015-16 that led to farmers not being able to take an informed decision.

Mill owners are known to defer crushing of sugarcane and therefore purchase of sugarcane to drive down the price with cane losing sucrose content as tractors are backed up for miles outside mills. This implies that the identification of the date of crushing (different for different regions/provinces) is relevant for determining the support price and whether to allow exports. The inquiry report maintains that in October 2018 the Economic Coordination Committee (ECC) under the chairmanship of Asad Umer decided to allow exports subject to the commencement of crushing on 15 November but by 5 December inexplicably ECC allowed export of 1.1 million tons of sugar without finalizing the date of crushing.

Support price of sugar, not always implemented with implementation delayed last year as per the report, is set by the sugarcane control board including representatives from the federal and provincial governments and farmers which fuels the distinct possibility of the exercise of political influence including by the general public with respect to its retail price. Input from Agriculture Pricing Institute (API) is also sought which determines the cost of sugar production based on export and import parity price, domestic and world demand, supply and stock position at the beginning of crop year, its effect on the raising of other competing crops, especially those which compete for water and land. API takes account of any delay in date of crushing, non-payment of sugarcane price fixed by the provincial governments, receipts being obtained showing payments as per notified prices, though factually lower prices are being paid (in some cases CPRs are not being issued and being substituted by unprinted receipts; and non- payment of "premium" on the basis of sucrose content.

So what is the short-term solution to resolving the sugar crisis in the country? Three major actions are required: (i) to ensure that infrastructure related input costs (transport, electricity etc) are comparable to the regional average the government will have to turn its focus on improving governance/management of the utility sectors (already pledged in the ongoing International Monetary Fund programme) as well as rationalize its tax structure that relies heavily on taxing petroleum and products; (ii) in the short to medium term utilize PASSCO to pick up sugar surplus and export it through Trade Corporation of Pakistan (TCP) so that subsidy given to one government entity can be retrieved by another; due diligence is of course required as both PASCO and TCP have been embroiled in major corruption scandals in the past; and (iii) influence peddling and collusion will remain relevant factors unless the government's fiscal (taxes) and monetary incentives (subsidies as well as reduced rate of borrowing) become non-anomalous and fair.