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
|
|
