Highlights:
1. Sugar crisis started last year, continues
2. Why was sugar exported when local prices were up?
3. Three groups got more than half the govt subsidy
4. Big PTI, PMLN, PMLQ names on list
5. Six groups control more than half of production
6. Pakistan Sugar Mill Association explanations prove lies
7. Prices went up before sugar was produced
In a well-vaunted act of transparency, the Prime Minister’s Inquiry Committee, which has been probing the sugar crisis, made its findings public on Saturday. It identified some of the key members of the ruling Pakistan Tehreek-e-Insaf party as the main beneficiaries of a scheme that benefits a select few who game the system in their own favour.
These people made big bucks in a short period of time at the expense of taxpayers who had to buy sugar at prices that are more than 50% of last year’s prices.
In case you missed the news, the PM’s Inquiry Committee concluded in its supplementary report on March 31 that the sugar crisis, which started last year and continues to date, was primarily caused by the untimely export of sugar. As prices rose locally, exports of this essential commodity were not justified, it said. The committee identified three groups that benefited the most as they took advantage of more than half of the total subsidy and sold their produce in the local market after prices soared.
The committee noted that these beneficiaries have political clout and influence in economic decision making, and a glance at some of these names is telling:
On the top of the list is PTI stalwart Jahangir Khan Tareen, a close aide of PM Imran Khan. Tareen’s sugar mills availed more than a fifth or Rs561 million of this pie. Similarly, Makhdum Omer Sheryar’s Rahim Yar Khan Group availed Rs452 million in a subsidy. He is a relative of Khusro Bakhtiar, federal minister for National Food Security and Research.
Other names that surfaced on the list include Moonis Elahi, a member of the National Assembly from Gujrat and the son of Punjab’s former chief. He belongs to the PMLQ, the coalition partner in the current set-up. Chaudhry Munir, a relative of Maryam Nawaz of the main opposition party, the PMLN, is also among the beneficiaries.
The investigation is still underway and the committee has asked for more time to do a complete forensic audit of a sample of 10 sugar mills that belong to these influential people. Initial findings indicate, however, that Pakistan’s most powerful lobby exploits the loopholes in the system and gets away with it untouched.
Sugar industry
Pakistan produces enough sugar to meet demand at home and if there is a bumper crop, the extra or surplus sugar is exported. The decision to export sugar is taken by the Economic Coordination Committee of the cabinet, a top-level government body on such decision making, of which Bakhtiar is also a member. After the ECC allowed the export of sugar, prices rose sharply in the local market. The ECC received warnings that this could turn into a full-blown crisis, but exports were not stopped and neither nor were subsidies.
The Pakistan Sugar Mills Association, the body of the sugar industry, blamed the price hike in the local markets on factors such as low sugarcane production, an increase in the general sales tax (GST), “exorbitant” prices demanded by farmers, which raised the cost of production, hoarding of stocks, and delayed harvesting by farmers.
Testing the PSMA’s explanations
The PM’s Committee, therefore, decided to test the claims of the sugar industry.
The committee noted that the major price increases had come between January and June 2019, well before the production cycle of the current fiscal year started. Secondly, the production of sugarcane increased by 1% in the current financial year compared to that of the previous year. The production of sugar (the final product) may be marginally lower than what was produced the previous year, but along with carryover stocks, supplies were more than enough to meet local demand, thus prices remained low.
Similarly, GST was raised in July 2019 and by that time retail prices had already increased by Rs16. It ruled out any significant impact of GST on the retail or shop price, stating that the impact was of Rs3.6 per kg only.
While collecting data to determine if the production was low, the committee noted discrepancies in the amount of sugarcane produced and the amount of sugarcane crushed. It suspects mills buy sugarcane off the books and produce and sell sugar off the books, which could be a case of tax evasion. Since all data is provided by sugar mills and is not verifiable, the committee recommended the Federal Board of Revenue ensure all data is recorded. It proposed a forensic audit to verify the data.
The committee also investigated the PSMA’s claims that they paid exorbitant prices to farmers, which were higher than the support price. It found the prices were 15% higher but that was due to speculation around low production. However, there could be another reason why farmers demanded high prices, the report said, noting it could be mill owners who may be large growers of sugarcane on their own land or leased land. This needs a proper forensic audit, it said.
They noted how the sugar lobby could cartelise and use pressure tactics. For example, to bring the prices down, the PSMA gave a strike call to pressure farmers. It noted that there is no law to invoke on them if they shut operations.
Stating its finding into the high prices of sugarcane, the committee said, it hardly had any impact on the cost of production for sugar mills but it expected mill owners would incorporate that into their costs. In fact, there was no mechanism for the federal or provincial governments to verify how sugar mills calculate their costs.
Cost comparison
The government sought help from the Competition Commission of Pakistan to calculate the cost of production at sugar mills. When the CCP’s costs were compared with the PSMA’s costs, there was a notable difference in profit margins. The gross ex-mill price—the price of refined sugar at the mill excluding logistics, packaging and distribution charges—was also higher by Rs10 in the PSMA’s case. The total cost of raw materials calculated by the PSMA was nearly Rs6 higher than the CCP’s calculation. Sugar mills include taxes in the profit margin, which is unfair, the report said.
Recovery ratio is another important component of cost for sugar mills. This is a ratio of the raw sugar extracted per ton of sugarcane. Its significance can be judged by the fact that a 1% change in recovery ratio means a 10% change in the amount of sugar produced. This number is obtained through lab tests by sugar mills and reported. However, there is no independent way to check its accuracy. The committee suspects sugar mills lower the recovery ratio to underestimate production and evade taxes. Mills situated in the same regions crushing the same variety of sugarcane report different recovery ratios.
The major increase in ex-mill prices surfaced between December 2018 and June 2019, the report said. During this period there was no increase in taxes or sugar cane prices, the only factor that stands out is the export of sugar, which coincides with this period, it concluded.
It noted that only the Punjab government gave a subsidy on sugar exports. It had Rs3 billion and spent Rs2.4 billion before the subsidy was withdrawn.
Cartels and godowns
Six groups control more than half of local production. These groups have the capacity to manipulate the market by joining hands to become a cartel and manipulate. Mills provided different data for sugar sold and sugar dispatched. Many of them have large godowns and could hoard supplies. The law says that godowns that stock essential commodities should register with the government but no such data is available. This area needs an audit.
“The control of so few, mostly with political background, of the sugar industry shows the strong influence they can exercise on policy and administration,” the committee said. The committee has identified 10 sugar mills for a forensic audit for a deeper assessment of reasons why Punjab’s government was giving subsidies at a time when local prices were increasing.
Nine teams composed of officers from the Federal Board of Revenue, Securities and Exchange Commission of Pakistan, State Bank of Pakistan, Federal Investigation Agency, Anti-Corruption Establishment (Punjab), Auditor General of Pakistan (DG Commercial Audit), Intelligence Bureau, and ISI will conduct forensic audits of these mills. It has 40 days to submit a final report, which according to the PM’s tweet, is due on April 25.
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