Of cartels and sugar barons

May 31, 2020

The sugar commission report alleges political string pulling behind subsidies, tax cuts

The forensic-audit report of the Sugar Inquiry Commission has charged the country’s sugar industry with cartelization. It also accuses several politicians, including parliamentarians, and senior bureaucrats of manipulating state policies to allow mill owners to pocket billions of rupees through unjustified subsidies.

The report names key politicians from both government and opposition parties whose mills benefited from the decisions taken by successive governments, including the incumbent one, to grant subsidies and tax rebates.

The report says the sugar mills have been making huge profits through essentially fraudulent means and have used political clout to expand their businesses.

The report says mill owners have been manipulating the accounting and reporting of the entire production and distribution cycle. This includes depriving farmers of their fair share by paying lower prices for their sugarcane than reported; fudging production figures; over invoicing; claiming subsidies against non-existing stocks; hoarding sugar for over pricing; manipulating sales tax and export figures; and using political influence to extort concessions from the government.

The report has named several members of the ruling elite in the Punjab and Sindh as beneficiaries of the racket. These include Jahangir Tareen, Makhdoom Khusro Bakhtiar, Chaudhry Moonis Elahi, Shehbaz Sahrif and the Omni Group, which is already accused of being a front for former president Asif Ali Zardari.

The report says that only about ten mills owned by politically important people accounted for more than 50 percent of the total domestic sugar production.

The government had set up the commission last year after sugar prices rose by 33 percent (Rs 17 per kg).

According to Shehzad Akbar, the special assistant to the PM on accountability, the report supports Prime Minister Imran Khan’s view that businesses owned by politicians profit at the expense of the public.

The report says six major groups of sugar mills - including the JDW, RYK, Al Moiz, Tanidiwala, Omni and Sharif - control about 51 percent of total production of sugar. This allows them to manipulate the market through cartelization. Akbar says that a Re 1 per kg price hike translates into Rs 4-5 billion for this cartel.

The Pakistan Sugar Mills’ Association (PSMA) has rejected the report, saying the commission distorted the facts and neglected the role of market forces.

According to the report, cartelization by sugar mills has a long history. It says the Competition Commission of Pakistan (CCP) has been a silent spectator in this regard for more than a decade.

The CCP prepared a report in 2009 to highlight cartelization behaviour in the sugar industry.

The 2009 report pointed out institutionalized collusive behaviour in the refined sugar industry. It said rather than competing in the open market, the mills preferred a closed and protected market, managed by the PSMA.

In that instant, the PSMA obtained relief from the Sindh High Court against legal proceedings initiated by the CCP. No action was taken by the CCP after the court issued a restraining order.

The 347-page inquiry report contends that a cartel could not have operated on the scale and for so long without the collusion of regulatory bodies. “The collusion starts right from cane commissioner who fails to get the farmer the right price…all the way to the top level where policy decisions are made,” it says.

Over the last five years, the sugar industry got Rs 29 billion in subsidy. Its export refunds amounted to another Rs 12 billion. This year so far, the federal government has given it no subsidy. However, the Punjab has provided a Rs 2.4 billion subsidy.

Ten years later, the PTI government decided to look into the matter of sugar hoarding and overpricing through market manipulation. The commission completed and released its report in March. Later, the prime minister ordered a forensic audit.

The report says sugar prices rose by more than 35 percent in 18 to 20 months.

Over the last five years, the sugar industry got Rs 29 billion in subsidy. It paid Rs 22 billion in income tax and its export refunds amounted to Rs12 billion. This year so far, the federal government has given it no subsidy. However, the Punjab government has provided it a Rs 2.4 billion subsidy.

Throughout these years, the report alleges, subsidies have been provided without an independent verification of the cost of production.

While the report has been made public, the government has yet to initiate legal proceedings against the mill owners named in the document.

Experts say there is a need to make the CCP independent and accountable. They also say a transparent mechanism for sugar pricing is the need of the day.

Several PTI leaders have said recently that the government is determined to hold have a thorough audit of the flour mills.

Another report on alleged cartelization by independent power producers (IPPs) is eagerly awaited. The inquiry report into suspected contract violations by the IPPs, that may have cost the national exchequer trillions of rupees, was scheduled to be made public in May. However, its release has been deferred for two months.

The 278-page report says that over the past 13 years, the national exchequer faced a loss of over Rs 4 trillion due to circular debt and subsidies given to power producers. A total of 16 IPPs, it says, invested around Rs 60 billion in the power sector and earned over Rs 400 billion within four years.

The inquiry committee, led by former Securities and Exchange Commission of Pakistan (SECP) chairman Mohammad Ali, investigated the power sector projects awarded since 1994.

This report too names some politicians from the ruling party and some of its allies, including Abdul Razak Dawood and Nadeem Baber.

The governmenthad initiated the inquiry against the IPPs in August 2019 by setting up a committee for auditing the power sector, eliminating the circular debt and developing a roadmap for the future.

The government might face international pressure in this regard since many power projects have been completed by foreign companies.

Recently, the federal government made certain changes to the committee looking into the matter. It remains to be seen whether the government can absorb the pressure and still make the report public.

The PTI-led government is on a tightrope as it risks alienating either its important political allies or the public.

Effective action against sugar, wheat and power cartels will be a milestone in the history of the country and give the government moral high ground.

The writer is a staff member and can be reached at [email protected]

Of cartels and sugar barons