ISLAMABAD: The Competition Commission of Pakistan (CCP) has issued a "Policy Note" recommending that instead of fixing the sugar price, the government should deregulate the sugar industry to promote free trade mechanisms where price signals can be effectively conveyed to all stakeholders to attract investment, increase competitiveness, and reduce distortions in local supply.
The Policy Note, a copy of which is available with Business Recorder, has been issued in the context of a circular issued by the government of Punjab for fixing of the maximum retail price of sugar at Rs85 per kilogramme.
The CCP compelled by its mandate, deemed it necessary to caution and explain the unintended consequences of putting a price ceiling.
The CCP observed that since Punjab is the only province to set a price ceiling, one immediate effect could be that sugar move to other provinces, where no price ceiling is in place and it can command a higher market price. The CCP cautioned that the "price controls could provide relief, though only temporarily, to the poor directly affected by high prices. More crucial is the fact that price of sugar may rise more rapidly once the controls are lifted to recoup the losses incurred during the period of price control, triggering high price inflation. Rapid inflation is always a concern for consumers whom the price controls intend to protect."
The commission stated that the price control could also encourage hoarding by suppliers or impulsive buying by consumers, especially ahead of Ramzan, both of which will likely result in shortage in the market and even higher prices for consumers.
In this regard, the promulgation of the Sugar (Supply-Chain Management) Order 2021 by the Punjab Government to prevent hoarding of sugar by the mills is a step in the right direction.
"In addition to the economic costs of price controls, there is also an administrative cost of a price fixing decision. The monitoring of such a decision to ensure that only those who are truly affected by rising prices might well require involvement of the entire bureaucracy with no guarantee of the proposed outcome," the CCP stated.
The Policy Note further said that due to various factors such as economies of scale, labour, equipment productivity and access to crop vary between various mills, it may not be possible for all the mills to produce sugar at the same cost and offer the same rate.
Imposing the maximum retail price could mean that some mills, which must purchase sugarcane at the minimum support price, may not be able to break even.
Moreover, the price of sugarcane is the major cost factor in production.
Mills may be hesitant to buy sugarcane at the government's minimum support price (MSP) and pressurise farmers to sell sugarcane below the MSP, which could force farmers to shift from cultivating sugarcane to other crops, thus, setting the stage for reduced domestic production and undesirable shortages in the market in future.
As a result of this, the government may have to import sugar and pay the price in the shape of rising import bill for a commodity for which there is sufficient land and infrastructure available in the country.
The Policy Note observes that the price fixing, particularly at the time of Ramzan, is also likely benefit the industrial consumers and perhaps, not the target poor population, because the industrial consumers make up for about 70 percent consumption.
For the end consumers, the prices may go up once such price fixing is lifted.
The CCP recommended that the free trade in sugar would make consumers better off by discouraging hoarding and over-pricing in the domestic market. These measures would definitely impact the development of the competitive sugar industry in Pakistan, leading to economic efficiency. "Price controls have a direct distortionary effect on the supply-demand equation," the CCP observed.
Most of the problems in the sugar sector stem from both over-regulation and lack of competition.
If the market is deregulated, with free entry and exit, regulations and repeated interventions would not be needed.
In an environment of open market competition, even mandatory crushing laws would not be required.
Pakistan's protection of the domestic sugar industry through tariffs and subsidies has not allowed it to develop the necessary capability to compete in the international market for sugar by-products (like ethanol), for which demand is stronger.
A more efficient agriculture policy may be considered, which would take all factors into consideration, including domestic exigencies as well as international reality and direction.
This will be in line with the federal government's desire to achieve effective deregulation.
The Policy Note said that better options for Pakistan than setting a price ceiling lie in deregulation, removing subsidies, and ensuring competition in the market. Competitive sugar pricing and removing restrictions on the imports and exports of sugar (without subsidies) would give sugar producers market-based incentives to enhance their productive, technical and allocative efficiencies as well as focus on the necessary research and development to improve the sector.
The Punjab Government may consider the viability of non-price interventions at the farm level such as introducing a revenue-sharing policy between the millers and the farmers - for instance, in some countries, there is direct payment to farmers' model.
The CCP recommends to focus on R&D in Yield and quality and to make technological improvements in the processes at the mills to make manufacturing process more efficient and cost productive.
While refereeing to other jurisdictions, the Policy Note says that price controls, whether at the farm level or further down the supply chain are common among the major sugar producing countries i.e., Brazil, India, and Thailand.
In Brazil, since 1997, the Government of Brazil announced that it would cease to, inter alia, set the price of sugarcane, set production quotas and to control exports. The Brazilian model is, therefore, one of higher domestic prices and a substantial surplus for ethanol production and exports.
The sugar and ethanol industries are particularly closely integrated and commercially interdependent.
This means that any support offered to one activity can benefit the other.
In Thailand, where price control mechanisms are in place, the retail ceiling exists to protect consumers from upwards price fluctuations.
The fact that Thailand's sugar industry is export-centric, they have to remain competitive.
In India, the concept of Minimum Selling Price (MSP) of sugar was introduced in 2018 for sale by sugar mills at the factory gate (ex-mill price) for domestic consumption so that the sugar industry could get the minimum cost of production of sugar to enable them to clear the payment to farmers for sugarcane.
Due to the surplus sugar, the government has dispensed with the requirement of obtaining an export release order and import duties have been set quite high to deter imports of sugar.
In the past also, the CCP through various policy notes and opinions has always supported full, free and fair interplay of market forces and making only the institutional intervention to correct any market malfunctioning as well as maintenance of appropriate strategic reserves to draw upon where needed.
The Policy Note concluded that free trade in sugar would make consumers better off by discouraging hoarding and over-pricing in the domestic market. These measures would definitely impact the development of the competitive sugar industry in Pakistan, leading to economic efficiency.
Copyright Business Recorder, 2021
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