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May 29, 2020

Sugar report: what to do?


May 29, 2020

The 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 fed up with inflation have generally received the report well. Farmers groups have welcomed the report calling it a victory for farmers. The opposition has rejected the report, while it had no business to do so. The PSMA has rejected the report calling it 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 the PSMA and its members to prove that it is not a cartel engaged in anti-competition practices. The Competition Commission of Pakistan (CCP), although a sleeping organization, had earlier taken them to task, raided their offices and tried to correct the situation. They went to court and got a stay order. The matter is lying with the courts now for many years. In passing, one would like to express his disappointment of our judicial system.

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 the 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 the organized system of commodity market exchanges and 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 severely controlled. There is the Cotton Exchange in Pakistan where cotton trade is done in an organized fashion under the control of the SECP (Security Exchange Commission of Pakistan). There is another commodity exchange which is lying almost under-utilized where the sugar trade can be transferred and conducted safely.

It would be highly desirable to shift the 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 the FIA and has 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, the 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 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 the TCP (Trading Corporation of Pakistan). In fact, in order that competition takes place and prices are held at a reasonable level, there has to be an excess in the market. The reason prices go up 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 the retail market through a cobweb of brokers, whole-sellers, 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 cheaper 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; IRS44 in India and Rs85 in Pakistan. In India, there is a minimum support price (MSP) for sugar at IRs31 per kg.

The issue of doing away with price support for sugarcane is a difficult one. It is said that the 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 maybe rice. Perhaps, it is to discourage further expansion of sugarcane that support prices have not been increased for the last many years. It may be quite possible that with 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 the farmers in some instances.

While market manipulation and price conspiracy, if not cartelization, is possible in quite competitive situations as well if bad and non-transparent practices, as are common in our business environment, are not controlled. We would like to analyze here 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 the following market share distribution; JDW (JKT) 19.97 percent; RYK 10.67 percent; Al-Moiz 10.26 percent; Tandlianwala 9.43 percent; Omni 10.50 percent; Sharif family 9.64 percent and all others 10.39 percent. The HHI in this case comes out to be 692.

The US Department of Justice, in analyzing potential monopoly and antitrust cases, considers any market with a 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 HI of 200 points or more raises serious antitrust concerns. One is not sure if this would be applicable in our situation. Some research would be required in this respect by organizations such as the SECP and the 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. Seventy percent benami sales is too much to be accepted. The proposed market reforms will bring transparency and may be able to do away with, at least, some of the ills of the system – although we can count on the creativity of our businessmen to find new ways to beat the system.

Let us do business as is done elsewhere in civilized societies. The volume of the sugar business in Pakistan is large enough to warrant an organized market system.

Email: [email protected]

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.