Sugar mills reject FIA inquiry report

The Pakistan Sugar Mills Association (PSMA) has outrightly rejected the inquiry report of the Federal Investigation Agency (FIA) on sugar, while terming it "flawed" and "misconceived" and based on "presumptions", with no justification of conducting forensic audits of sugar mills.

Responding to the inquiry report of the prime minister's constituted committee, the Secretary General PSMA Anayat Khan has strongly responded to Wajid Zia, director general FIA Headquarters.

"The members of the PSMA are shocked and dismayed by the surprise issuance of the Report of the Inquiry Committee ("the Committee") constituted by the prime minister of Pakistan regarding increase in sugar prices, dated March 24, 2020, which is self-contradictory," it said.

About the allegations of tax evasion, the PSMA strongly reacted that the "unfounded" allegations of off-the-book sales and tax evasion attributed by the committee to unnamed sources are strongly refuted.

During the past many seasons, the Federal Board of Revenue (FBR) has been regularly deploying officers to observe audit throughout the crushing season at all mill premises.

On the issue of forensic audit, the PSMA stated that there is no basis or justification for carrying out a forensic audit of "legitimate" and "law-abiding" business entities, and that too on such a "discriminatory" and "arbitrary" basis.

According to the PSMA response, the report completely ignores that the policies of the incumbent government have now returned a modicum of stability to the sugar sector both in terms of available stocks and sugar prices.

This is, after many years of turmoil and devastation in the sugar sector that saw many mills shut down and many investors/businessmen exiting the sector.

It is unfortunate that rather than celebrating this success, the report has sought to "incorrectly" label it a failure.

"The committee fails to recognise that while the Finance Act, 2019 was promulgated with effect from July 1, 2019, in fact the Finance Bill 2019 was tabled in the National Assembly in June 2019, and

consequently the proposal to increase sales tax from eight percent to 17 percent started getting factored into the retail market.

"The committee has also failed to appreciate that forward contracts are a standard/normal business in respect of the trade of commodities throughout the world," according to PSMA.

The PSMA stated, "The report itself acknowledges the stiff competition between sugar mills. If there was cartelization between mills they would never need to sell sugar below cost or pay more than support price for sugar cane - since both things regularly happen, this shows beyond a doubt that there is neither a sellers' cartel nor a buyers' cartel within the sugar mills."

The Competition Act, 2010 defines "dominant position" of one undertaking or several undertakings in a relevant market shall be deemed to exist, if such undertaking or undertakings have the

ability to behave to an appreciable extent independently of competitor, customers, consumers and suppliers and the position of an undertaking shall be presumed to be dominant, if its share of the relevant market exceeds 40 percent.

As acknowledged by the report, no single sugar mill or group owns more than a 40 percent market share.

"In fact, as per the report the largest group has less than 20 percent share in the market.

"In view of the foregoing, it is established that the report is flawed and misconceived and is premised on irrelevant and extraneous considerations. Furthermore, the report is based on presumptions, conjectures and surmises and amounts to an indiscriminate roving and fishing inquiry. No plausible reason or justification whatsoever has been provided in the report in respect of conducting forensic audits of the respective sugar mills, which is strongly objected. It is tantamount to merely shooting in the dark and an afterthought to embark upon a fishing expedition and damage the reputation of the sugar mills," it said.

The PSMA stated that the Committee was formed only of criminal investigation officers from the FIA, the Intelligence Bureau and the ACE to conduct what was in essence an inquiry into economic and commercial matters, i.e. reasons for price increase of sugar and justification/necessity for export and subsidy.

Substantially all the data referred and reproduced in the report was publicly known and/or easily available (as acknowledged by the Committee itself) and in fact supports the stance of the PSMA and the sugar mills.

"Unfortunately, the committee lacked the requisite background and expertise to properly assess and appreciate the same, which has led to the completely incorrect analysis and conclusions discussed above.

"It would have been more appropriate, and certainly fairer, had competent professionals with backgrounds in commerce and economics and a firm understanding of commodity and export markets been associated with the inquiry and the PSMA, and the sugar mills had been given an opportunity to address the concerns/queries/confusions of the Committee prior to issuance of the report.

"The PSMA would urge that the said mistakes not be repeated again with the new sugar inquiry commission (which also, so far, lacks any representation).

"The PSMA has reiterated that in view of the unique fact that a minimum support price for the purchase of sugarcane is notified annually by the provincial governments, the crop is an extremely lucrative option for a farmer for the purposes of plantation.

"This is because the minimum support price fixes a guaranteed return on investment for a farmer irrespective of market realities.

"With a guaranteed return on his crop, a farmer is thereby encouraged to increase his sugarcane plantation, which in return results in larger yields and production of the crop or in other words, surplus in the field.

"Under the relevant provincial laws, the sugar mills are mandated to crush sugarcane and must commence their operations within the timeframe as specified by law, the failure to abide by which results in penal consequences.

"Thus, the mills have no option but to crush all sugarcane made available to them, regardless of whether there is a demand for the same, a surplus in the field or otherwise.

"With the continued trend of farmers being encouraged and incentivised to cultivate and harvest surplus cane, the mills have been compelled to purchase and crush the same, which has resulted in surplus sugar and/or a sugar glut being created with the supply of sugar greatly outweighing the demand.

"The entire burden of this seems to have been placed on the sugar mills, who in essence have been compelled to purchase sugar cane at a price beneficial to the grower and in quantities, which may exceed their requirement, resulting in surplus sugar, which leaves the mills compelled to sell and offload sugar stocks at unsustainable prices or in the alternative, unable to dispose of at all," the PSMA added.