INTRODUCTION

Sugar Industry is an agro-based industry, which provides employment to the landless rural
population and has a great impact on the economy of the country. The three principal bye-
products of a sugar industry are bagasses, molasses and press cake which along constitute
about 40 per cent of the weight of the total cane crushed. Proper and economic utilization of
these bye-products can reduce the cost of production of sugar to some extent. Bagasse is a
source of energy fuel for sugar industry which is used to fire boilers for juice heating.
Bagasse is also being used for making Medium Density Fibre Board (MDFB) at some
industries which is a substitute for natural wood. In Pakistan, utilization of sugar bye-
products has not received much attention as compared to other countries of the world.

Average yield of sugarcane in the world is around 60 tons per hectare while in Pakistan, it
has been worked out to 43.86 tons per hectare. India with almost similar soil and climatic
conditions had achieved about 61% higher yield for the year 1996-97.
Within Pakistan even, there exists a large gap between yield obtained at the farmersí fields
and those obtained on experimental stations. There is, therefore, still a great scope to
achieve much higher yield at the common farm level in Pakistan. In Sudan a north African
country yield per hectare is 78 tons while it is 115 tons per hectare in South African country -
Zambia.

Two types of process are generally used in sugar factories. Defecation remelt carbonation
(DRC); (2) Defecation remelt carbonation and sulphitation (DRCs). These two are clarification
process.

Pakistan is producing high quality sugar of international standards but it is costlier due to
various factors. International prices of sugar had declined due to higher output over the
demand. It was $225 per ton at the start of 1998 while it had come down to $ 188 per ton
on 12.9.1999. World output of 136 million tons of sugar had been forecasted for the season
1999-2000.

Molasses may be utilized for production of power alcohol, industrial alcohol and portable
spirits. Press cake of sulphitation factories are used as manure and that of carbonation
factories are usually burnt. Sugar is commonly used as a sweetener. It is one of the worlds
valuable nutritious foods and is the main source of carbohydrates and provides inexpensive
calories for human body.

Sugarcane is the fourth largest cash crop grown in Pakistan which contributes to the
agriculture economy the crop value of Rs. 48,292 million. A 78 per cent of this sugarcane was
utilized and crushed by 73 sugar mills for the season 1998-99, producing 3.531 million tons
of refined sugar which was capable to contribute substantial amount to the federal
government revenue towards sales tax and road cess for Provincial government revenue.
The industry employs more than 100,000 labour force while more than 9 million people of
rural population are involved in the production of sugarcane. 5 The sugar industry, which is
the second largest in the country after textiles, has a potential of great economic significance
for the country
 Sugar commission report - 2020 (Possible
Conclusion)
Market reforms will bring transparency, remove some of system’s ills

The sugar commission report has implicated Pakistan’s sugar industry in what in many civilised
countries would be considered a crime worthy of severe penalties and jail terms.

The charges include double book-keeping, falsification of record, price-setting, cartelisation,

avoidance of taxes, Benami transactions, Satta (speculation), under-payment to farmers and fleecing
them on many counts, unauthorised capacity extension, its diversion into black market, etc.

People fed up with inflation have generally acclaimed the report and the electronic media has
launched a campaign. Farmer groups have welcomed the report, calling it a victory for them. The
opposition has rejected the report, while it has no business to do so.

Pakistan Sugar Mills Association (PSMA) has also rejected the report, calling it contradictory,
speculative and misleading.

It will be very difficult for PSMA and its members to prove that it is not a cartel engaged in anti-
competitive practices. The Competition Commission of Pakistan (CCP), although a sleeping
organisation, 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 courts, now for many years.

There are two issues that we would like to take up in detail – freeing up the sugar sector from over-
regulation and Satta. Freeing up the sector would mean doing away with price support and
restrictions on import and export of sugar and would include many other regulations.

Satta, forward contracts and spot market have acquired bad reputation in Pakistan, although in other
countries these are quite legitimate practices. The difference is that they are done there in an
organised system of commodity exchanges and here these are being done informally in WhatsApp
groups and Benami transactions.

Commodity exchanges
Even commodity exchanges are susceptible to abuse and anti-competitive conduct but due to strict
monitoring and rules, its scope and possibilities are severely controlled.

There is Cotton Exchange in Pakistan where cotton trade is done in an organised fashion under the
control of Securities and Exchange Commission of Pakistan (SECP).

There is another commodity exchange which is almost under-utilised where sugar trade can be
transferred and conducted safely. It would be highly desirable to shift 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 spot and
forward contracts, which should be readily available to work under a formal exchange system.

The exchange system would improve lives and businesses of this community as it is under perpetual
threat from the investigating agency and has to face 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 monopolised by a small coterie, hopefully, and ordinary
people can also participate in sugar trade as they do in shares buying and selling.

Risks

However, there are some risks in totally opening up the sector. Sugar is an essential item of human
consumption. Its availability has to be ensured at reasonably affordable and stable prices.

Exports may not be made free but imports can be made free under the Trading Corporation of
Pakistan (TCP). In fact, in order to ensure that competition takes place and prices are held at
reasonable levels, there has to be excess supply 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, wholesalers, 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, retail sugar prices in India and Pakistan are comparable, despite twice the support price of
sugarcane and highly subsidised fertiliser in India – INR44 in India and PKR85 in Pakistan.

Support price

The issue of doing away with support price for sugarcane is a difficult one. It is said the support price
system has been responsible for a rather undesirable expansion of sugarcane production capacity.

Pakistan is a water-stressed country and with the passage of time, it is said, water stress would
increase with the increase in population. It may be desirable to depend on a degree of imports in case
of water-consuming crops such as sugarcane, and may be rice.

Perhaps, in order to discourage further expansion of sugarcane production, support prices have not
been increased for the past many years. It may be quite possible that by lifting 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 cartelisation, is possible in quite competitive
situations as well, if bad and non-transparent practices, as are common in the business environment,
are not controlled.

Monopoly or a lack of competition, among other tools, is measured by the well-known Hirschman-
Herfindahl Index (HHI).

There are 89 sugar mills in Pakistan and the HHI comes out to be 692.

The US Department of Justice, while analysing the potential monopoly and antitrust cases, considers
any market with HHI lower than 1,500 to be in a state of healthy competition.

The Department of Justice also analyses corporate mergers for the change in HHI that the merger
would trigger – any merger that would result in a change in HHI of 200 points or more raises serious
antitrust concerns.

One would not be sure, if this would be applicable to the situation in Pakistan. Some research would
be required in this respect by organisations such as the SECP and CCP.

The proposed market reforms will bring transparency and may be able to remove, at least, some of
the ills of the system, although we can count on the creativity of businessmen to find new ways of
beating the system.