The News on Sunday: How do you see the current crisis in Pakistan’s sugar sector?

Adeel Malik: The imminent cause of the current crisis is the price differential -- between what the millers are willing to pay and the support price announced by the government. The problem is particularly acute in Sindh where millers have rejected the official support price. Both parties -- farmers and millers -- cite escalating costs as the prime reason. I do not have a way of verifying this but would simply like to point out that the delay in the crushing season is a routine occurrence. It is a norm rather than an exception.

In fact, the crises in Pakistan’s sugar industry are of a structural nature rooted in subversion of markets that shields our sugar industry from domestic and global competition. The losers are farmers and consumers. The beneficiaries are a set of politically connected actors who overwhelmingly control the industry.

TNS: Why do sugar crises recur with such frequency, and what is the nature of underlying market distortions?

AM: It is true that there is a sugar crises every second year. We sometimes have surplus production. At other times, there is a severe shortage. In the last decade, there have both been import bans as well as export subsidies for sugar. Rather than allowing the industry to function according to market principles, the sugar sector is run through administrative orders.

While the policy regime for the other three major agricultural commodities: rice, cotton and wheat, has been considerably liberalised since the 1980s the effective rates of protection for sugar continue to be very high. There is often a disjunction between sugar prices prevailing in domestic and global markets. Sugar has always remained one of the most protected sectors. But this protection defies the common logic of economic welfare.

The sugar sector is not a major employer. Nor is Pakistan particularly suitable for the cultivation of a water-intensive crop, such as sugarcane. The area used for sugarcane cultivation competes with cotton, which is a key cash crop and a major revenue earner for the country. The country, thus, faces a high opportunity cost for its protectionist policies on sugar.

We would probably be better off if we were to simply import sugar from abroad rather than producing it at home. In terms of opportunity cost, the society foregoes a lot more than what it gains from maintaining an uncompetitive industry.

The instability in the sugar sector is, therefore, of a structural nature, and is built into its very design. The industry has political origins. The sugar sector, as it exists today, is largely an artefact of the policy interventions in 1980s when licences for sugar mills and their financing was used as a tool of political appeasement. Later, the industry also benefited from loan write-offs.

As research by a young Cambridge researcher, Tayyab Safdar, suggests, many mills were set up in regions that were highly unsuitable for sugarcane cultivation, to begin with. The industry presents an excellent example of rent-seeking by political insiders. While the political origins of the sugar industry can be traced to Ziaul Haq’s regime, the protection of political insiders continued thereafter.

Today, more than 80 per cent of the sugar industry is owned by politicians who sit on all sides of the political divide. They have survived under both military and civilian regimes. And, they are also part of Imran Khan’s caravan for change. In fact, one can predict with perfect certainty that if Imran Khan were to come to power the sugar policy will remain unchanged. As far as the sugar interests are concerned, all major political parties are on the same page.

Essentially, when it comes to sugar, the boundaries between the public and the private are blurred. The rulers are also businessmen which explains why the industry suffers from a defective regulatory environment. The Competition Commission of Pakistan (CCP), which was fairly active under the chairmanship of Khalid Mirza, has been defanged by the previous government. Some of the earlier enquiry reports had expressed concerns of alleged cartelisation in the sector, but no action could be undertaken.

The parliament changed the CCP law, allowing sugar mills to appeal against the CCP’s decisions in the High Court (instead of the Supreme Court as was previously the case). By cleverly building in legal delays, the CCP actions have been made effectively redundant.

TNS: You argued in one of your articles that in terms of its links with political power sugar elite in Pakistan is similar to the coffee elite in Central America. Would you elaborate your point?

AM: When I wrote about this parallel, I was reminded of Jeffrey Paige’s book, Coffee and Power. In describing Central America’s coffee elite, Jeffrey Paige explained how they survived in periods of both regression and reform, democracy and dictatorship. The coffee elite has been a common denominator of their power structure. I find parallels of this in Pakistan’s entrenched sugar lobby.

Our public policy on sugar is designed to facilitate a negative transfer of surplus from the society to mill owners. From delayed payments for farmers to higher consumer prices, from government sanction of mills to their financing, and from import bans to export subsidies, it’s a regime that works to the advantage of political insiders.

TNS: There are also concerns that the sugar sector is not very efficient. What do you have to say on this?

AM: This is correct. Relative to other comparators, crop yields for sugar are lower in Pakistan. There are also frequent concerns about low sucrose content. Sugar farmers usually operate on a small to medium scale. Our farmers have to continuously struggle with weak investment incentives. For farmers it is a regime of survival, not growth. They face the classic threat, what economists describe as, the "hold-up" problem. Once they have bought inputs, invested their time and effort into sugar cultivation, they are still faced with unpredictable prices. They cannot even predict when the mills will make the payments. Sometimes the farmers have to wait for their payments for over a year. It is the only crop where timely payments are a rare exception. In a milieu where farmers are often stuck with their investments for months at end how can they invest in future growth?

Barring a few exceptions, the productivity of sugar mills is also questionable. Our sugar industry as a whole is less competitive than India, Brazil, and Thailand. While some mills are now producing other by-products of sugar to diversify their production, most sugar mills are operating below capacity. In fact, if the market was left to its own devices, many sugar mills would die their natural death. The entry is controlled: new mills can only be set up through a government license. A ban is in place on the opening of new mills in Punjab. While entry is limited, few existing firms have died. With limited entry and exit of firms, the industry is not faced with the kind of dynamic competition that will force them to be efficient. The survival of firms in this milieu depends on the elite capture of public policy.

TNS: Where do we go from here?

AM: One extreme solution is the nationalisation of the industry. This is not a very viable option in the present policy climate. Instead, efforts should be made to promote competition in the sector by proactively breaking the alleged cartelisation of the sector. Strengthening the hands of CCP is a basic pre-requisite. There is no going forward without that. The Planning Commission of Pakistan also needs to undertake a larger assessment of the cost and benefit of the prevailing policy regime and institutional structure governing the sugar sector.

If we have liberalised the policy regime that governs other commodities, such as rice, cotton and wheat, why should sugar stand out? And what does the country gain through such large-scale protection of the sugar sector?

The ownership structure is another important area for reform. It is noteworthy that while our neighbour India has many cooperatives operating in the industry, there is hardly any cooperative sugar mill in Pakistan. This is important for challenging politically entrenched players in the market. The farmer community also needs greater support for collective action, since millers have a greater bargaining power vis-à-vis the farmers.

While the PSMA is one of the strongest business associations in Pakistan the interests of sugar farmers are not articulated through any formal body. This is a clear area for intervention for foreign donors who pay unending lip service to promoting participatory modes of governance.