Daily Times

Market regulations are exercised to ensure efficiency in production, streamline standard-setting, and provide protection to consumers by ensuring quality products at competitive prices. Alternatively, regulations are aimed at providing a legal framework to create a business environment based on healthy competition for improving economic efficiency, developing competitiveness, and protecting consumers from anti-competitive practices. Though regulations in the market are often justified, they do not always achieve their social objectives or live up to public expectations. The success or effectiveness of regulations is complementary to well-functioning, transparent, and accountable institutional environment. Any friction either at legislation stage or at enforcement stage may result in regulatory failure. Similar might be the effect of an ineffective dispute settlement mechanism. Sugar industry in Pakistan is a case of regulatory failure where we have observed frequent instances of hoarding/over-pricing, rents seizing, and political capture, all having significant costs to the society.

Sugar market in Pakistan is regulated through subsidies, export quotas, import restrictions, and regulations on prices. These regulations notwithstanding, the sugar industry has not been able to ensure competitive prices in the domestic market. Recently, the Punjab Government has exercised two more such regulations. First, it promulgated the Sugar Supply-Chain Management Order 2021 to prevent hoarding of sugar by mills as well as any other entity involved in the supply of sugar. Under the Order, all the concerned people, like businesses, sugar mills, brokers, dealers, and wholesalers are required to register themselves and their godowns with the government and declare their stock at any given time. Second, it fixed the maximum retail price of sugar at Rs. 85 per kilogram, with a purpose to protect consumers from exorbitant prices, particularly in Ramadan. They first one can be effective in reducing hoardings or artificial shortages in the market but subject to significant monitoring costs; however, the second one might be costly in terms of direct and indirect negative ramifications.

If the market were deregulated, competition in the sugarcane market would enable the growers to work out their alternative choices. Likewise, competitive sugar pricing would incentivise the sugar producers to enhance their productive, technical and allocative efficiencies

According to Sugar Supply-Chain Management Order 2021, sugar mills are restricted to sell sugar only to registered brokers, dealers, wholesalers or bulk consumers. Also, brokers are confined to purchase or sell sugar only if they are registered with the cane commissioner. Further, sugar dealers or wholesalers are required to get themselves registered with the deputy commissioner of the concerned districts. With respect to godowns, all sugar-dealing entities are required to register their godowns again with the deputy commissioner. Similarly, other restrictions like upper limits on quantity in a storage, sharing timely information with the concerned authorities etc. are included in the Order. Despite good intensions, the Order involve significant administrative costs as the monitoring will require engagement of the entire bureaucracy. Likewise, by giving excessive powers to cane commissioner and deputy commissioners with respect to registration and monitoring, the order may result in excessive red tape, corruption, rent-seeking, cronyism, and elite capture which would further deteriorate the sugar market in the country.

With regard to the price controls by the Punjab government, serious concerns are raised by different stakeholders, including a detailed policy note on the implications by the Competition Commission of Pakistan in April 2021. Perhaps, the announcement is driven by the concerns of the political fallout of the current government due to higher prices, instigated by price inflation and shortages. However, price control is risky on a variety of fronts. First, price controls cause inter-provincial or cross-country commodity arbitrage if the controls are not across the board. For instance, in the late 2000s, wheat was transported to Afghanistan when the government tried to keep domestic prices lower than global prices and, resultantly, the government has to import wheat at a higher price to cover the shortages in the domestic market. Since Punjab is the only province to set the recent price ceiling, sugar can move to other provinces where no price ceiling is in place and it can command a higher market price. Second, with regard to production, sugar mills usually do not operate at equivalent level of efficiency due to differences in economies of scale, input productivities, and access to crop. Consequently, it may not be possible for all the mills to produce sugar at the same cost or charge the same price which, in turn, may cause disruption in production. In 2009, when the government fixed the price of sugar at Rs 40 per kilogram due to the superior court’s decision despite the mills’ insistence on Rs 48 for them to be at break-even levels, some mills stopped operations, resulting in shortage. As a result, within months, the price rose to Rs 100 per kilogram and, thus, a measure whose objective was to supply sugar to consumers at affordable prices ended up in a different outcome. Third, government also fixes Minimum Support Price (MSP) for sugarcane which is usually increasing over years. So, rising Minimum Support Price (MSP) for sugarcane and fixing the retail price of sugar may cause output cuts. Punjab is producing 60 percent of sugarcane of the country’s requirement, so, these measures could have spill-over effects in other provinces. Fourth, since 70 percent of the sugar is consumed by industrial consumers, so the price ceiling may result in capture by the industrial sector. Also, hoarding by suppliers or impulsive buying by consumers may cause shortages which may render the price ceiling ineffective. An informal news is that most of the supermarkets in Islamabad are already short of sugar supply amid the coming Eid holidays. This implies that the hoarders have started their activities and it might have serious repercussions for sugar prices after Eid-ul-Fitr.

Given structural inefficiencies in the sugar market, these regulations are not deemed to deliver much as has been the case with the earlier regulations. In other words, being the 7th largest producer in sugar production and 5th largest producer in terms of sugar produced from sugarcane, Pakistan has not been able to be competitive in the global market for sugar and sugarcane. Instead, regulations have imposed excessive cost on the domestic economy. Then, what is the solution to the disarray in sugar industry? I would like to posit that deregulate the market, with free entry and exit, and no subsidies, quotas or restrictions on exports and imports. Competition in the sugarcane market would enable the growers to work out their alternative choices. Likewise, competitive sugar pricing or relaxing restrictions on the imports and exports of sugar would incentivise the sugar producers to enhance their productive, technical and allocative efficiencies. For instance, in the past, the government used to impose 40 percent import tariff on private sugar importers. Likewise, in 2018-2019, sugar exports stood at 600,000 tons mainly due to a subsidy of Rs10.7 per kilogram which in the end caused a sudden rise in the price of sugar by around 33 percent in March 2020. Relaxing such a protection would allow the domestic industry to develop the necessary capability in the international market. Further, the savings from easing excessive monitoring and removal of the subsidies would enable the government to focus on the growers and consumers instead of the mill-owners. Finally, free trade in sugar would make consumers better off by discouraging hoarding and over-pricing in the domestic market. These measures, if taken, would have an impact on the development of competitive sugar industry in Pakistan.

The writer is Associate Professor, Pakistan Institute of Development Economics (PIDE), Islamabad