Reuters file photo of sugar
KARACHI: It is no secret that sugar, as a commodity, wields disproportionate influence on Pakistan’s politics.
A quick look at the ownership structure of the sugar industry endorses this claim. Approximately 40 out of 89 sugar mills are directly or indirectly owned by the politicians, controlling almost 50% of the sugar market.
We do not have to dig too deep to come across names of political stalwarts belonging to all major political parties who have their stakes in this sector. It is difficult to distinguish mill owners from the political elite.
The nexus between politics and sugar industry has made this sector one of the most profitable businesses in this country. Pakistan Sugar Mills Association is perhaps the only platform where the political elite works in complete harmony with each other.
What is there in this sweetener that attracts the political leadership but leaves a bitter taste in the mouth of general public, particularly the taxpayers?
Firstly, the consistent financial support to mill owners by successive governments, particularly in the form of export subsidies (all at the expense of taxpayers), has made this industry inherently inefficient.
The industry has little interest to bring its cost of production down by containing wastages and generating revenues through value addition of byproducts.
Secondly, the government has kept mill owners safe from international competition and provided them with a captive local market through high import duties.
This kind of intervention by the government is bound to make any sector uncompetitive and inefficient. Consequently, today the Pakistani consumer is paying a price well above the international market price for sugar.
Furthermore, the self-interest of mill owners under political patronage has also led to the unprecedented growth of sugar mills, particularly in south Punjab, where sugarcane production is at an ecological disadvantage. This has resulted in an approximately 26% decline in cotton production.
Sugarcane is a resource-intensive crop, requiring almost twice the amount of water than cotton, which is highly challenging for the already water-deficient country.
More and more land is being brought under sugarcane cultivation at the expense of other crops, to satisfy the increased appetite of sugar mills, jeopardising the overall agricultural production.
In short, this industry has become the biggest beneficiary at the expense of taxpayers, environment and economic efficiency of the country.
Uneven power
Sugar production has a complex structure. On the one hand are the small to medium growers with 50% of them having less than five hectares of land under cultivation, and on the other are the political heavyweights sitting in national and provincial assemblies with more than 50% of the sweetener’s market.
This uneven market power with the industry participants has created distortions, giving rise to rent-seeking behaviour of the political-cum-industry elite.
A lack of a definite policy framework in this industry has led to a continuous financial and economic turmoil and an ever-going tug of war between the mill owners and growers.
Judicial intervention is often required to bring the industry participants to some consensus every year. This causes unnecessary delays in the crushing process, leading to significant losses for the industry at large and farmers in particular.
Sugarcane is a bulky commodity that needs to be processed immediately after harvesting, otherwise it dries up and loses weight very rapidly.
Ideally, sugarcane should be into the mills for crushing within six hours of harvesting, to retrieve maximum sucrose from it. In Pakistan, on average, it takes around 24 to 48 hours for the sugarcane to reach the mills.
Unfortunately, the ground reality is even worse. Mill owners have low morals. Every year we see mills indulging in post-harvest negotiations over the minimum support price of sugarcane.
This leads to long delays, with sugarcane-laden trucks waiting outside the mill gates for days. These carefully timed post-harvest negotiations exploit the farmers when they are the most vulnerable.
Time is a double-edged sword for the poor farmers. On the one hand, their produce is losing weight (on which their payment is based) and on the other they are unable to prepare their land for the next crop until the entire sugarcane is picked up.
As the farmers’ livelihood is entirely dependent on their crop’s sale, such intentional delays force them to comply with the middlemen’s offerings, which are far below the procurement price set by the government.
It is often believed that these middlemen are hired workers of mill owners, who not only give them approbation but also commission for managing to get the crop at a price far below the minimum support price.
On the flip side, the mill owners often moan severe liquidity problems. They complain that the price of sugar is not increased in proportion to the increase in the support price of sugarcane. This erodes their profits, rendering them uncompetitive in the market.
They also blame farmers for growing inferior variety of sugarcane with emphasis on weight rather than sucrose content. However, interestingly none of these issues have dis-incentivised the expansion and setting up of new sugar mills.
In 2007, there were 78 mills and currently the number has gone up to 89, regardless of high government regulations against the establishment of new firms. All these new mills have strong political connections.
Policy note
The sugar industry needs a policy framework that eases obstacles to productivity through collaborative efforts.
Under the recent judicial activism, it might be worthwhile to reintroduce the concept of zones. Sugarcane fields were divided into zones till the early 1990s.
Zoning laws mandated that the mills purchase sugarcane only from the growers in their zone. Similarly, the growers were also bound by law to sell only to these mills. This policy proved to be efficient as well as cost-effective.
It reduced transportation costs and trimmed the lead time significantly between harvesting and crushing. Moreover, it was in the interest of mill owners to make timely payments to the growers and collaborate with them on better cane quality.
Zoning also stimulated inter-zone competition, leading to zonal efficiency and better yields. The government had to discontinue with this policy because of a handful of powerful mill owners, who were taking advantage of the growers by not giving them the minimum support price and making payments after long delays.
De-zoning, however, brought with itself more disarray in the industry, including the menace of middleman. It led to an unprecedented growth of mills even in areas that were at an ecological disadvantage for sugarcane production.
A high support price of sugarcane vis-a-vis other crops like cotton and wheat has led the farmers to grow sugarcane on their land instead of more viable options such as wheat and cotton.
To summarise, we can say that it is not easy to separate the deep-rooted political influence from the sugar industry. No one policy can help the industry break away from its current predicament. However, zoning can strengthen the links within the industry participants and push the industry to learn and survive on its own. It could be a step in the right direction.
The writer is a faculty member and ex-chairperson of the Economics and Finance Department at the Institute of Business Administration, Karachi
Published in The Express Tribune, March 16th, 2020.
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