[Business Recorder 24 November 2019] ISLAMABAD: The Com-petition Commission of Pakistan (CCP) has calculated the average manufacturing cost of one kilogramme of sugar at Rs 51.93, based on actual data received from sugar mills of Punjab and Sindh for 2016-17.

This has been stated by the CCP in the cost validation report recently prepared by the Commission on sugar on the directions of the Economic Coordination Committee (ECC). The ECC had through case # ECC-125/23/2017 dated November 28, 2017 allowed exports of an additional 1,500,000 metric tons of sugar. An export quota of 500,000 metric tons was announced earlier on September 14, 2017. The exercise to validate the cost of sugar production is necessary to pay the subsidy amount to the millers for exporting the surplus stocks.

According to the CCP report, the total manufacturing cost of sugar has been calculated at Rs 51.74 per kg (Sindh), Rs 52.12 (Punjab) and average Rs 51.93 per kg.

The report said that the CCP played the role of third party and validated cost calculations for the crushing year 2016-17 as calculated by the Ministry of Industries & Production (MOI&P) in compliance with the ECC decision.

The CCP’s past actions in the sugar sector also point to the competition distortions as a result of the government policies and anti-competitive practices by the millers. A CCP’s inquiry of 2009 had found that the Pakistan Sugar Mills Association was involved in cartelization and the CCP had proposed maximum penalty on the association. However, the CCP could not make the order public due to stay orders granted to the PSMA by the courts.

Later on, in its policy note issued in 2018, the CCP had strongly recommended that provincial governments to review the legislative framework under which the sugar sector operates. The sugar act is severely outdated and does not serve any purpose in the contemporary times. All provincial governments should review legislation to limit the government intervention and bring it in line with the recommendations given above. Any revised or new legislation should encourage principles of free market.

The CCP had recommended that the provincial governments should ideally not fix price floor of sugarcane and let the market determine price based on supply and demand. Price floors should only be imposed for limited periods in the situations where food security is gravely threatened.

The CCP’s policy note further recommended that the government may set up a committee comprising all the pertinent government departments dealing with the sugar sector at the federal and provincial level (such as provincial food departments, research departments whether attached or independent, provincial cane commissioners, Agriculture Policy Institute, Ministry of National Food Security and Research, Ministry of Commerce and Trade Corporation of Pakistan) in addition to representatives of farmers and mill owners to be able to coordinate effectively in aligning their objectives and be able to deliberate upon a workable long-term plan based on the recommendations provided above and/or any new ideas or issues that may emerge overtime for making the sugar sector internationally and locally competitive and thereby an economically efficient sector catering to the welfare of its stakeholders as well as consumers in the longer term, it added.

According to the cost validation report of the CCP on sugar, the Commission had constituted a committee to validate the calculations of cost of production of sugar for the crushing year 2016-17 as calculated by the Ministry of Industries and Production (MOI&P). The committee comprises three CCP officials i.e. Director General (Finance & Admin) Shahzad Hussain, Assistant Director (C&TA) Aqsa Suleman and Management Executive (OFT) Amin Akbar.

Accordingly, the committee initiated its work and held several meetings. The committee agreed that in order to validate the cost figures, it is necessary to have cost audit reports, for crushing year 2016-17, of all sugar mills. For this purpose the letters were written to the Pakistan Sugar Mills Association (PSMA) and Securities and Exchange Commission of Pakistan (SECP).        

The PSMA and SECP in their replies informed the committee that the requirement of cost audit is subject to the recommendation of regulatory authority supervising the business. As there is no such requirement in place; therefore, no such report has been prepared. 

To proceed further in the matter, the CCP committee agreed to issue General Order under the Section 36 of the Competition Act, requiring all the sugar mills to submit audited financial statements for the FY 2016-17, cost audit reports for the FY 2016-17 and the information detailed therein for the crushing season 2016-17.

Based on the information provided by the sugar mills, the committee has calculated manufacturing cost per kg of sugar for each province, ie, Punjab, Sindh and Khyber Pakhtunkhwa (KPK).

Therefore, the committee has also calculated the average cost per kg of sugar based on actual data received from sugar mills of Punjab and Sindh, in order to bring conformity with the calculations performed by the MOI&P.

The committee also held a meeting with the MOI&P to discuss the assumptions taken by the Ministry for calculating the average cost of production of sugar. Both the committee and the MOI&P have taken following assumptions to calculate the average cost of production: The sale price of molasses is Rs 12 per kg. Although there is a disagreement between the mills and the MOI&P on this sale price; however, Rs 12per kg price is based on the export price of the molasses for last five years as reported by the PSMA.

The miscellaneous charges, ie, Road Development Cess, marketing fee and freight have been taken as per the calculations of MOIP based on the notifications.

The calculations are based on notified ex-mill price of 40 kg sugarcane, ie, Rs 182 for Sindh and Rs180 for Punjab with an average price of Rs 181. The sugar recovery percentage and molasses recovery percentage are based on average of actual recovery percentages for Punjab and Sindh. The sugar mills of KPK have not been included in order to bring conformity with the calculations of MOIP.

All the calculations performed by the committee are based on actual data received from the sugar mills of Punjab and Sindh, whereas the calculation of MOI&P are based on data available in the annual report of PSMA for the year 2016-2017.

The calculations shows that the average cost calculated by the MOI&P is Rs 52.46 per kg, whereas, the average cost calculated by the committee comes to Rs 51.93 per kg.  The overall average cost is almost the same with a minor difference of Rs 0.53 per kg. The difference in average cost calculated by the MOI&P and the committee is due to the different recovery percentages of sugar and molasses and the sample taken. The calculations done by the committee are based on actual data received from the mills, while the figures taken by the MOI&P are based on the annual report of PSMA for the year 2016-17 and average of the figures provided by the cane commissioner.

The average support price of sugar cane for Punjab and Sindh comes to Rs 181/kg. The difference in the sale of molasses is due to the difference in the recovery percentages of molasses. Net cost of raw material is same in both the cases. Road Development Cess, Marketing fee and Freight cost are as notified by government for Punjab province. The differences between the total cost of raw material, sugar obtained from 40 kg of sugarcane, cost of raw material per kg of sugar and processing & other overheads arises because of the difference between actual data gathered from mill and data available on the PSMA’s website used by the MOIP for calculation purpose, the CCP added.