THE SUGAR INDUSTRY

Time for a clear defined policy

By SHABBIR H. KAZMI
Mar 05 - 11, 2001

Believe it or not, sugar industry in Pakistan operates without any definite policy framework. The industry, which is the second largest after textile industry and has a direct bearing on life of millions of farm workers and rural population, is at the mercy of those who hardly understand industry mechanics. They (the decision makers) are very sensitive to any increase in sugar price but are least bothered about spending millions of dollars on ill-timed import of sugar. Another lobby wishes to protect sugarcane growers by simply increasing its (sugarcane) support price but resist any increase in sale price of finished product. It seems disgusting if one compares the increase in flour and sugar price during last five years. The hike in support price of wheat has translated into a huge increase in retail price of flour the basic food item for millions of people. Whereas, efforts were made to resist increase in sugar price despite the fact that the component of sugar in total house expenditure is very small rather insignificant. Therefore, there should not be this over-sensitivity towards sugar price.

The result of lack of policy framework has been responsible for financial turmoil and economic distress for sugar industry during the past six years in succession. The millers faced problems whether there was a shortfall in sugarcane supply or surplus production of sugar. The dilemma of sugar industry is a very high component of raw material (sugarcane) cost. In addition to this, other costs, i.e. taxes, operating expenses, depreciation and financial cost do not allow any scope for economies of scale. Low level of capacity utilization (around 45%) and cost/price disequilibrium in domestic and export markets are other impediments. However, persistent increase in sugarcane support price can be termed the root cause for the current malady.

Out of last six years, four witnessed shortfall in production of sugar mainly due to shortfall in supply of sugarcane. Output ranged from 2.379 million tonnes to 2.450 million tonnes as against an estimated demand ranging from 2.7 million tonnes to 3 million tonnes per annum. In the other two years, sugar production exceeded demand and the country saw a surplus of around half a million tonnes. During the period of surplus, the situation was even worse as the mills carried huge inventory and were not able to make timely payment to sugarcane growers. Despite entirely opposite scenarios, problems faced by sugarcane growers, millers and consumers remained the same. The GoP made some adhoc measures but was not been able to address the key issue ensuring sugarcane supply at affordable price. The old mills are a little better-off but the mills established after late eighties are not even able to meet their debt servicing obligations.

Therefore, there is an urgent need to examine the deteriorating economics of sugar industry (sugaronomics). While there is an urgent need to increase production of sugarcane, it is also evident that some of the units are not economically viable. They have been just adding losses to their balance sheet. Therefore, an option to explore is the liquidation of such units without further delay. It is suggested that financial institutions should take the hit by liquidating these units. They should write-off those amounts which are not recoverable and transfer management of persistently sick sugar mills to new sponsors. The purpose of such write-offs is to make debt servicing sustainable. Such decisions are difficult and need political will. Creation of CIRC has paved the way and the ultimate decision should not be delayed.

INDUSTRY SCENARIO

Sugar industry is mostly located in the rural areas of Punjab and Sindh. A small percentage of total production is produced in the NWFP province. Previously, Punjab was partly dependent on supply of sugar from Sindh, but lately the establishment of some large-scale units in Punjab has made the province self-sufficient in the commodity. Sindh still has surplus production. At present the installed capacity for sugar production is estimated above 5.5 million tonnes, whereas the demand is estimated around 3 million tonnes. The large-scale capacity was added in the nineties and was the outcome of entry of politicians in sugar industry both in Punjab and Sindh. Since this expansion was mainly financed by state-owned financial institutions, often the basic criteria for extending credit economic viability was ignored. Whatever has happened is history now which one cannot change but at least efforts should have been made to increase sugarcane supply. It is feared that politicians, who enjoy power as sugarcane growers, are resisting efforts to increase sugarcane output in the country. They fear if the output is increased there would be a reduction in sugarcane price. The result is, over the last many years millers were forced to pay a much higher price for sugarcane as compared to the official support price.

A key factor, which has the potential to increase sugar production is clear cut sugar export policy, has been missing. Whenever, there was sugar production above domestic consumption, millers found it difficult to export the surplus. Export of sugar is not solely aimed at earning foreign exchange but more importantly to optimize cost through higher capacity utilization. It is worth noting that during 1999-2000 crushing season eight mills did not operate and another three could not be commissioned. Had all of them were fully operational the level of chaos would have been beyond any one's expectation.

Most of such mills are located in Sindh. Three mills owned by Sindh Sugar Corporation: Dadu, Larkana and Thatta have been non-operational for years. The units in private sector which are not operating are: Bachani, Tharparkar, Thar and Kiran. In the Punjab Pasrur and Qand Ghar did not operate during 1999-2000 season and Mian Mohammad Sugar Mills of AJK has not commenced operations as yet. Saleem (Charsadda) in the NWFP also did not operate during last season.

Non-operating mills and those which could not commence sugarcane crushing are a burden on economy in general and financial sector in particular. According to some industry analysts, the delay is more due to political reasons rather than economic factors. The mills owned by Sindh Sugar Corporation are not operating because federal and provincial governments have not been able to follow their privatization. For this delay no one except federal/provincial governments are responsible. These analysts say that the apathy of government is unpardonable. Most of these mills are located in Sindh where the conditions are better suited for cultivation of sugarcane. Besides, yield and average recovery are higher, as compared to Punjab. Therefore, the efforts should be to make all the units functional at the earliest. Shortage of sugarcane should not be used as escape goat.

ZONING

According to some industry experts the main reason for the shortfall in sugarcane production is abolishing of zones. The concept of zones had worked satisfactorily in the past barring a few political and government interventions. The system was most suited for the millers as well as all other stakeholders, i.e. sugarcane growers, financial institutions, tractors and other inputs manufacturers. By following the system of zones, mills were able to ensure availability of sugarcane in required quantity. Financial institutions also benefited from this practice as their credits to farmers were secure against payment for sugarcane supply. However, at some stage it was realized that the system was being exploited by the millers. According to industry analysts the discontinuation of zoning has caused more damage rather than solving the problems of growers. They also say, "If some millers were exploiting the situation they should have been made to behave properly rather than abandoning the system. It is still not too late. If the government is serious in ensuring adequate supply of sugarcane in the country, it must implement the zoning system without delay."

SUGAR IMPORT

Every one agrees that sugarcane is an agricultural commodity and there are various factors, affecting output, beyond human control. Therefore, import of sugar is a makeshift arrangement to overcome a temporary short supply. However, history shows that sugar import has caused damage to industry rather than containing price of commodity in the open market. It has been mainly due to two reasons: ill-timed imports and quantity imported being much higher than desired. An ill-timed import, that too in large quantities, affects lifting of sugar from mills.

Sugar production is a seasonal activity. The mills, at an average operate for 150 days, and supplies are made throughout the year. As the industry now has large daily crushing capacity there are efforts to even further reduce the number of crushing dates. This practice has helped in improving average recovery but not fully appreciated by growers who are under the impression that their payments are delayed. In fact growers get better price when average recovery is higher. This issue was highly politicized last year and the same was witnessed before crushing was started by the mills.

Recently the policy planners have made a totally absurd decision about import of sugar. It is estimated that over 750,000 tonnes has already landed Pakistan when the crushing was in full swing. The rationale for this was said to be, "to contain price hike." However, an industry expert has a very strange explanation for this. He said, "The aim of large scale import was not to contain sugar price in local market, the objective was to raise extra revenue import duty on sugar to satisfy the IMF about revenue collection target. The central bank has supported this, may be unknowingly, by buying dollars from kerb market to finance sugar import." What a novel idea to meet shortfall in revenue collection!

TAXES AND LEVIES

The policy planners accept and plead that sugar is a basic commodity and its demand must be met even through expensive imports. However, they do not accept another fact that the industry is also over-taxed. The component of tax in sale price of sugar is around 17 per cent. If the government is really serious in keeping sugar price at modest level, it should cut down level of tax. At present the industry pays 11 different taxes five federal and six provincial which comes to about Rs 3,500 per tonne. The two levies, i.e market committee fee and sugarcane/Road cess are highly undesirable. The very purpose of collecting these taxes has been defeated over the years. The amounts collected in the past were spent on 'unknown' heads of expenditure.

SUGAR PRICING

Sugar industry deserves a fair market price keeping in view its production cost plus economic return on equity. Since sugar production cost is entirely dependent to the extent of about 85 per cent by the government policy framework only the government should resolve the outstanding issues. The government has discontinued the practice of fixing support price of cotton, why can't the same be followed in case of sugarcane? Let the market forces determine the price of sugarcane as well as sugar. The government can still play the role of intervener by not allowing the prices move beyond a specified bandwidth.

OUTLOOK

Debt servicing has become a serious issue in sugar industry. There is a suggestion that the government should allow one year moratorium, at least, to all the mills. In the past payments of only defaulting units were rescheduled which was not justified. While the defaulters were given concessions, those making timely payment had no incentives.

It is also suggested that financial institutions must also write-off those amounts which are not collectable. However, names of such borrowers and amounts should be made public and there should also be an embargo on their future borrowings.

Zoning system should be introduced once again without further delay. The country needs to double sugarcane output. This increase can be achieved by improving yield and without increasing land under sugarcane cultivation. It will help all the stakeholders, i.e. growers, millers, lenders and consumers. However, the post of 'Cane Commissioner' should be filled by hiring competent people from the private sector.

Last but not the least, the government must announce sugar export policy valid for three years. The industry does not need to export sugar for earning foreign exchange but to optimize cost.

SUGARCANE CRUSHING AND SUGAR  PRODUCTION

Year

Cane Crushing Tonnes

Sugar Production Tonnes

1990-91

22,603,696

1,908,838

1991-92

24,795,816

2,296,698

1992-93

27,276,186

2,375,396

1993-94

34,181,899

2,900,524

1994-95

34,193,290

2,983,082

1995-96

28,151,434

2,449,598

1996-97

27,352,918

2,378,752

1997-98

41,062,473

3,548,960

1998-99

42,994,911

3,530,932

1999-2000

28,982,711

2,414,746

 


 

SUGARCANE CRUSHING
Sindh

Year

Million tonnes

90-91

9.598

91-92

11.956

92-93

12.725

93-94

13.032

94-95

12.038

95-96

10.341

96-97

10.314

97-98

13.853

98-99

15.095

99-2000

10.856

 


 

SUGAR PRODUCTION
Sindh

Year

Million tonnes

90-91

0.902

91-92

1.187

92-93

1.175

93-94

1.172

94-95

1.107

95-96

1.008

96-97

1.028

97-98

1.374

98-99

1.353

99-2000

0.996

 


 

SUGARCANE CRUSHING
Punjab

Year

Million tonnes

90-91

12.095

91-92

11.745

92-93

13.433

93-94

20.066

94-95

20.975

95-96

16.993

96-97

16.293

97-98

25.905

98-99

26.081

99-2000

16.830

 


 

SUGAR PRODUCTION
Punjab

Year

Million tonnes

90-91

0.934

91-92

1.012

92-93

1.104

93-94

1.634

94-95

1.771

95-96

1.376

96-97

1.293

97-98

2.066

98-99

2.033

99-2000

1.316

 


 

SUGAR CANE SUPPORT PRICE
MILL-GATE DELIVERY

(Amount in Rupees)

Year

Sindh

Punjab

NWFP

Quality Premium

1990-91

15.75

15.25

15.25

0.19

1991-92

17.00

16.75

16.75

0.22

1992-93

17.75

17.50

17.50

0.22

1993-94

18.25

18.00

18.00

0.22

1994-95

20.75

20.50

20.50

0.27

1995-96

21.75

21.50

21.50

0.27

1996-97

24.50

24.25

24.25

0.27

1997-98

36.00

35.00

35.00

0.32

1998-99

36.00

35.00

35.00

0.50

1999-2000

36.00

35.00

35.00

0.50

 


 

SUGAR RECOVERY
Percentage

 

Sindh

Punjab

90-91

9.40

7.72

91-92

9.93

8.62

92-93

9.24

8.22

93-94

9.00

8.14

94-95

9.20

8.44

95-96

9.75

8.10

96-97

9.97

7.94

97-98

9.92

7.97

98-99

8.96

7.80

99-2000

9.18

7.82

Source: PSMA, annual report 2000