Legal Control Over The Sugar Industry

INTRODUCTION

This article is part one of two and has been written in the wake of the Sugar Inquiry Report 2020 and the report by Sugar Forensic Commission (SFC). The inquiry report was compiled by the Inquiry Committee constituted by the Prime Minister of Pakistan, vide letter no. 755/A/M/SPM/2020, on 20.02.2020. The Committee had been commissioned to probe into the sugar crisis in Pakistan. In this article, in light of the inquiry report, we discuss how and where the legal control over the sugar industry lies. Sugar being an essential commodity, owing to its importance in the everyday life of every person, is legally insulated from open market pressures and influences.

Our article finds that legal control over the sugar industry is spread out, distributed and not centralised. There are at least four agents exerting such control, often complementary and seldom contrasting, altogether controlling various aspects of the sugar industry. These four agents include the provincial governments, the federal government, the courts and the Competition Commission of Pakistan (CCP). In our article, we look at how these four agents exercise control over sugar.

IMPORTANCE OF SUGAR

Sugarcane is an important industrial and cash crop in Pakistan. The average production of sugarcane in Pakistan is 450-500 maunds per acre which is very low compared to cane production in other countries. Cultivation of the sugarcane crop involves crushing to obtain sugar, panela (jaggery, gur) and various other useful products. By-products of crane-crushing, such as alcohol, are used in the pharmaceutical industry, ethanol is used as a fuel, bagasse is used for paper-making and chipboard manufacturing, and pressed mud is a rich source of organic matter which enhances soil fertility. Pakistan occupies an important position among cane-producing countries of the world. It ranks fifth in cane acreage and production and almost 15th in sugar production. For the year 2017-2018, the sugar sector stood as the third largest export sector of Pakistan. USD 900 million in export revenue had been earned by the country from sugar and ethanol, right behind textile and rice exports.

It is also important to recognize the contribution of sugar mills in generating employment, income and taxes. A typical sugar mill employs up to a thousand employees. On average, a sugar mill sources cane from about 5000 farmers. Therefore, one can assume that the livelihood of no less than 50,000 people (assuming average family size of 5 persons) depends on the functioning of one sugar mill, on average. All of these aspects should have been adequately dealt with in the report.

I. PROVINCIAL GOVERNMENTS: CONTROL OVER MANUFACTURING AND SALE

Sugar is–under law–an essential commodity. The provincial governments control its supply, distribution and prices (s.3, Sugarcane Act 1934). The provincial governments also regulate the sugar mills. Under the Sugar Factories Control Rules 1950, the Cane Commissioner has the power to restrict a sugar factory to only purchase sugarcane from the notified reserve area and even fix the quantity to be bought by a factory. The provincial governments also set sugarcane support price, which is the price at which sugarcane is to be bought from the farmers by the sugar mills.

The following major Acts and Ordinances control the manufacture and price of sugar:

  1. The Sugarcane Act 1934 – an enactment for the purpose of assuring to sugar­cane growers a fair price for their produce, to regulate the price at which sugar­cane intended to be used in the manufacture of sugar may be purchased by or for factories and ancillary matters.
  2. Sugar Factories Control Act 1950 – an enactment for regulating the supply of sugarcane intended for use in sugar factories and the price at which it may be purchased and for other such matters as may be incidental thereto.
  3. The Punjab Sugarcane Control Order 1972 – a regulation regulating and prohibiting the movement, transport, supply, distribution and use or consumption of sugarcane and trade and commerce therein.
  4. Punjab Foodstuff (Control) Act 1958 – an enactment made in public interest to provide for the continuance of powers to control the supply, distribution and movement of, and trade and commerce in, foodstuffs in Punjab.
  5. Sindh Foodstuff (Control) Act 1958 – an enactment made in public interest to provide for the continuance of powers to control the supply, distribution and movement of, and trade and commerce in, foodstuffs in Sindh.
  6. Price Control and Prevention of Profiteering and Hoarding Act 1977 – an enactment to provide for price control and prevention of profiteering and hoarding.
  7. Punjab Registration of Godowns Act 2014 – an enactment to register godowns, provide for a comprehensive system regarding stable supply and availability of essential articles, and deal with ancillary matters.

While the Pakistan Sugar Mills Association (PSMA) is an important stakeholder, it is not the only one. There are, as pointed out above, a number of competing interests that have a bearing on how sugarcane is procured and how the sugar is sold. Through the legislative enactments enlisted above, the government has laid down a comprehensive net of controls over each stage of sugar production. The laws control the sugarcane growers, the sugar producers (factory owners), the retailers and the stockists. The provincial governments can thus control more than just the price of sugar. However, the prime factors that the provincial governments control are the price and supply of sugar. Determining price alone is not sufficient if its supply at that price cannot be ensured. Under s.16 of the Sugar Factories Act, provincial governments are empowered to determine in respect of any area the minimum price to be paid by occupiers of factories or purchasing agents for cane purchased in that area either generally or related to the sugar contents of the cane, or direct that such minimum price shall be calculated in the manner prescribed. Any violation or deduction in price is a criminal offence under s.21 of the said Act. The minimum price for purchase of sugarcane is determined by the provincial governments after taking input from both farmers and millers, in addition to non-binding suggestions from the Agriculture Policy Institute (API). This demonstrates that fixing the price of of sugar is a multifaceted decision which factors in various stages of sugar production and supply to the consumers.

The API is an attached department of the Ministry of National Food Security and Research, a federal ministry responsible for policy formulation in respect of food grain and agriculture. Although the API’s recommendations on sugarcane pricing are not binding, the purpose of the API is to propose uniformity in the matter of sugarcane pricing policy in provincial governments. Such central coordination has been necessitated by the devolution of agriculture and its related areas to the provinces pursuant to the Eighteenth Amendment to the Constitution of Pakistan. This is one of the ways the federal government imposes influence over the provincial governments’ prerogative of announcing sugarcane prices.

It merits mentioning here that sugarcane and wheat are the only two crops with a minimum support price (MSP) fixed by the provincial governments. While part of the wheat produced is also bought by the Food Departments of the provinces, no purchase of sugarcane is done (and for obvious reasons as sugarcane cannot be stored after harvesting and has to be crushed). Both federal and provincial governments also do not hold any strategic reserves of sugar, even though the Trading Corporation of Pakistan is mandated to do so but remains unutilized.

At a second level, the provincial governments also have the power to determine the ‘ex-mill’ price and the price at which sugar may be bought and sold. It appears that in Punjab, the provincial government has been vested with this power under the Punjab Act 1958. In Khyber Pakhtunkhwa, on the other hand, the power of controlling sale and purchase prices of sugar vests in the provincial government under the Price Control and Prevention of Profiteering and Hoarding Act 1977. The inquiry report was specifically concerned with the mechanism employed by the provincial governments in arriving at the ‘ex-mill’ price. As per the Committee’s finding,  confusion engulfs the mechanism of determining the ‘ex-mill’ price and a standard pricing mechanism needs to be devised. Upon reading the inquiry report, it appears that the provincial governments rely heavily on the ‘ex-mill’ price guide issued by the PSMA. On one hand it is important for provincial governments to seek input from important stakeholders, but on the other hand, this input is not to be allowed to dictate the ‘ex-mill’ prices; the provincial governments must exercise independent discretion.

As mentioned above, while it is very important to control the prices of sugarcane and sugar,, it is equally important to control the supply of sugar. Fixation of price will be meaningless if ‘equitable supply’ is not ensured and hoarding is allowed. The classification of sugar as ‘foodstuff’ empowers the government to order anyone holding a stock of it to sell it as a whole or in part to persons or such classes of persons as maybe specified by the government (ss.3, Punjab and Sindh Acts 1958). Despite this power, the inquiry report, in paragraph 48, states that the provincial governments ‘seem to be unaware’ of their powers and the relevant legislation.

The provincial governments, as illustrated here, exert control, inter alia, through determining prices and ensuring supply. Additionally, the laws mentioned above give them vast powers to regulate sugar factories as well. For this purpose, a sugarcane control board has been established. Cane Commissioners are appointed by the provincial governments to go over the process of purchase and crushing within reserved areas. The powers of the provincial government in this regard are quite intrusive, for example, the Sugar Factories Act vests the following power in the Cane Commissioner:

Appointment and removal of factory staff.— The occupier of a factory shall have to employ a Cane Superintendent and such staff as may be prescribed by the Provincial Government, on the recommendations of the Cane Commissioner to regulate, arrange and supervise the purchase of cane for the factory.  The appointment and the award of punishment including removal from service of Cane Superintendent and other staff shall be subject to the approval of the Cane Commissioner.

Provincial governments are the primary controllers of the sugar industry. The bulk of responsibility for the sugar crisis, pursuant to which the Committee was formed, falls upon the provincial governments.

II. COURTS: CONTROL THROUGH CONSTITUTIONAL JURISDICTION AND SUO MOTU NOTICE

The courts have often played a role that has artificially affected the price of sugar. Historically, this review of prices is done as a judicial review of the actions of the government but also as a suo motu exercise of constitutional jurisdiction. Since provincial governments have the discretion to fix and enforce the prices of essential commodities (including sugarcane), the courts have taken it upon themselves to “review” the exercise of that discretion.

In a constitution petition, titled as Abdul Qaddus Mughal vs Federal Government and others (2010 YLR 360), the Lahore High Court whilst declaring the ex-mill price unlawful held that the federal and provincial governments had failed to fix the ex-mill price in a lawful and justified manner. The ex-mill price fixed by the Government of Punjab was PKR 45 per kg, however, the Lahore High Court ordered the Government of Punjab to ensure the sale of sugar at an arbitrary rate of PKR 40 per kg at the local market. Furthermore, the court ordered the Government of Punjab to take strict action against the stockists and recover the stocked sugar from all sugar mills also at an arbitrary rate of PKR 36 per kg. The court also directed the Government of Punjab to use its powers conferred under the Food Stuff Act 1958 and the Punjab Sugar Licensing (Control) Order 1972 to take coercive action against stockists and lift sugar stocks from their godowns. However, analysis is required to see how, a short time after the said order had been passed, the price of sugar crossed PKR 50. There is a case to be made that these artificial (and usually temporary) orders distort the demand-supply dynamics.

In the case stated above, it was the Lahore High Court that took suo motu notice and, additionally, under the power of judicial review determined the price of sugar. It remains to be seen if the Supreme Court will take any suo motu action (and/or action under the powers of judicial review/constitutional jurisdiction) against the present hike, especially after the latest inquiry report. The Supreme Court in Re: Enormous Increase in the Price of Flour (2014 SCMR 329), a matter pertaining to the supply and fixation of price of wheat, pursuant to its constitutional jurisdiction, instructed the federal government through the Ministry of National Food Security and Research Division, and the provincial governments through their Chief Secretaries, to take necessary measures to ensure the availability of the wheat/flour and other foodstuffs to the public at a controlled rate. Although the case does not specifically mention sugar,sugar just like wheat flour is an essential commodity and falls within the category of ‘foodstuff’. Therefore, it can be inferred that the courts of Pakistan will not hesitate to pass a similar price control order for sugar.

III. FEDERAL GOVERNMENT: CONTROL OVER THE SCHEME OF EXPORT AND THE “SUBSIDY”

While the price and manufacturing of sugar is controlled by provincial governments, the export of products falls in the federal government’s domain. The federal government has introduced the export arrangement through the Export Policy Order, 2016 under which the general export of sugar is restricted. Again, this aspect has been conveniently omitted in the report.

However, as per Section 5 of the Order, the federal government can allow import/export of any product prohibited/restricted under the Order by giving its reasons in writing. In December 2018, on the recommendation of the Sugar Advisory Board (SAB), the Economic Coordination Committee of the Federal Cabinet allowed a total of 1.1 million metric tons of sugar to be exported. According to SAB, such decision had been taken as there was excess sugar available. Since the support price of sugarcane is decided by provincial governments and affects the ‘ex-mill price, the ECC has left it to the discretion of the provincial governments to provide export subsidy for exporting sugar.

At this stage, it is important to look at the word ‘subsidy’. It should be noted that Pakistan, under the World Trade Organization (WTO), may not be able to provide subsidy in order to promote exports. There are limited actions that are available to governments and one of those actions is support in the form of compensation for freight.

The province of Punjab, in its meeting on 29.12.2018, decided to allow this so-called subsidy, which was in the nature of freight-support (permitted under the WTO). The Government of Punjab allowed freight support at PKR 5.35 per kg on a sliding scale of USD 383.80/MMT to 435/MMT, to a maximum limit of PKR 3 billion for all sugar mills operating in Punjab. The export permission was not made time-bound. The inquiry report suggests that the export was the sole reason for the increase in the price of sugar in the local market, from around PKR 55 to PKR 71 in the first 6 months of 2019. The fact remains, though, that the decision to allow the export of sugar was solely that of the federal government.

This is a good illustration of how the federal government controls an aspect of the sugar industry. Although the decision to export is that of the federal government,the decision to allow subsidies vests with the provincial governments. So, to the extent of the local sugar market, the federal government does not have much role and/or control over the sugar industry.

IV. THE COMPETITION COMMISSION: CONTROL OVER MARKET COMPETITION

The Competition Commission of Pakistan (CCP) in the days to come will perhaps have a significant say in the way the legal proceedings take place. According to the inquiry report, the following aspects may fall within the domain of the CCP:

  • the sugar factories/mills collectively observing strike during the current crushing season may have affected the price-hike;
  • (ii) the Inquiry Committee considers the existence of cartelization in the sugar industry, albeit without any substantial evidence.

The question is whether the CCP can monitor the sugar industry for competitiveness when nearly every marker used to gauge competition is being controlled or fixed by the provincial governments (or at least whether the provincial governments have the theoretical power to do so). The inquiry report is making a false linkage between the export of sugar and the subsequent price hike of sugar in the domestic market. This linkage utterly fails to account for the fact that such exports have been expressly approved by the federal government through written regulatory sanction. Not only is there no breach of law on the part of sugar manufacturers but the conduct is also excluded under the immunity or defence of ‘regulated conduct’.

As a matter of historical practice, the sugar industry has often been in the limelight. The Monopoly Control Authority (MCA), predecessor of CCP, issued and ordered sugar mills to release a specific percentage of their sugar stock each month. Upon failing to abide by the MCA’s order, 28 sugar mills had been penalized by the MCA for restrictive trade practices. When the CCP was established in 2007, it issued a strongly worded Policy Note against a price fixing agreement between the PSMA and the Government of Pakistan, censuring the Government of Pakistan for giving patronage to prohibited agreements. Around the same time, the CCP initiated an inquiry against the PSMA for collusive behaviour. However, no CCP Order is available on its website in this matter. In 2018, the CCP conducted an open hearing on the issue of competition concerns in the sugar sector of Pakistan, as a result of which the CCP recommended, amongst other recommendations, that support price be abolished and the Trade Corporation of Pakistan maintain its stocks to control price escalation. So, as a matter of practice, the CCP has continuously monitored the state of competitiveness in the sugar industry.

Further, the CCP is of the considered opinion that the root problem of price hikes in sugar ‘remains the government fixing a price floor that encourages production of sugarcane, while seemingly ignoring a limited domestic demand and export potential of the country in respect of sugar; which is a phenomenon that disturbs the free market dynamics in favour of an arrangement that may turn out to be harmful in protecting the interests of the very stakeholders that constitute that particular economic cycle’. With respect to ineffective and incompetent export-related decisions of the federal government, the CCP points out the inopportune decision-making on its part, particularly with respect to the untimely, ineffective and delay-prone export strategy of the federal government.

As a matter of law as well, it seems that the CCP, unlike its predecessor the MCA, has the power to monitor agreements and decisions by governmental bodies and regulatory authorities because the word ‘undertaking’ has been defined in the Competition Act 2010 to include them. This means that regardless of whether the sugar industry is heavily regulated by the provincial governments, it is still susceptible to being monitored by the CCP. Not only can the sugar mills and other private parties be looked at by the CCP, governmental bodies, such as the Sugarcane Control Board, can also be monitored.

As mentioned above, the scheme of law for controlling the manufacture and price of sugar appears to include the courts monitoring and checking the discretion exercised by the government, and the CCP monitoring the actions of the sugar mills.

CONCLUSION

In this article, we have explored legal control over the sugar industry in Pakistan.  This control is spread over four areas mentioned above. This exploration, in light of the latest inquiry report, raises concerns over the spread-out control approach as to whether or not it is it efficient. Although the detailed answer is not within the scope of this article, we would say that the spread-out control is inefficient and ineffective. How did neither of the four agents realize the building sugar crisis and why did they not take steps within their capacities to address it? Should this spread-out control approach be abolished? More importantly, can this spread-out approach be abolished? The primary control rests with the provincial governments, but residual control vests with the courts and the CCP.

In furtherance of the inquiry report, a subsequent report has been published by the Sugar Forensic Commission (SFC) under the Pakistan Commissions of Inquiry Act 2017. The second part of the analysis will look at the legal aspects of the SFC’s report.


The views expressed in this article are those of the authors and do not necessarily represent the views of CourtingTheLaw.com or any organization with which they might be associated.

Ahmed Uzair

Author: Ahmed Uzair

The writer is a Partner at AUC Law, a firm that specializes in corporate law. He can be reached at [email protected]

Author: Syed Bulent Sohail

The writer is a Partner at AUC Law, a firm that specializes in corporate law. He can be reached at [email protected]

Author: Daraab Wali Furqan

The writer is a Senior Associate at AUC Law, a firm that specializes in corporate law. He can be reached at [email protected]