MUSHTAQ GHUMMAN

ISLAMABAD: The Sugar Inquiry Commission has accused sugar mills of acting like a cartel and engaging in massive wrongdoings ranging from cane procurement, estimating in cost of production, tax evasion, price hike through manipulation, suspicious export to Afghanistan, Benani sale, illegal capacity enhancement, and illegal power production.

The report has recommended ‘serious’ action against over four dozen key middlemen, unregistered buyers, entities, and sugar mill owners who allegedly made billions illegally.

The much awaited 347-page report claims that a subsidy of Rs 29 billion was given during the last five years. Mills paid income tax of Rs 22 billion during this period, of which they got back Rs 12 billion as refunds which means only Rs 10 billion went to the national exchequer. The report was discussed for three hours and approved by the Cabinet with Prime Minister Imran Khan in the chair.

Headed by DG FIA, the committee members included DG anti-corruption Punjab and one member each from Intelligence Bureau (IB), Inter-Services Intelligence (ISI), Securities and Exchange Commission of Pakistan (SECP) and State Bank of Pakistan (SBP).

Wajid Zia, the head of Commission, presented the report before the Cabinet which then proceeded to hold a detailed discussion.

The Commission reportedly focused on the JWD Group’s mills owned by Jahangir Khan Tareen, Alliance Sugar Mills owned by Federal Minister Khusro Bakhtiar’s family and Ch. Moonis Elahi, Al-Arabia Sugar Mills, owned by Suleman Shahbaz Sharif, Hunza Sugar Mills owned by Ch. Idrees and Chaudhry Waheed, Almoiz Industries owned by Shamim Khan, a cousin of Jahangir Khan Tareen and his son Nauman Khan.

The Commission has recommended sending the report to NAB, FIA and Anti Corruption Departments of provinces for further action. The report has held regulatory bodies, including Competition Commission of Pakistan (CCP), responsible for this situation, claiming ‘it was an institutional capture.’

Addressing a press conference alongside information minister Shibli Faraz, Barrister Shahzad Akbar, Special Assistant to the Prime Minister on Accountability, said that today marks an important day [in the history of the country]. “No investigations have ever been conducted over matters such as these, nor has any government shown the courage to make such investigations public.”

He said, Sugar Inquiry Commission, interviewed Minister for Planning, Development and Special Initiatives, Asad Umar, Chief Minister, Punjab, Sardar Usman Buzdar, Prime Minister Advisor on Commerce and Investment, Abdul Razak Dawood and did not agree with their rationale with respect to allowing exports and extending subsidy. The Commission also interviewed former Prime Minister, Shahid Khaqan Abbasi, former Commerce Minister, Khurram Dastigir and the then Secretary Ministry of National Food Security and Research.

Akbar said that the report revealed that six major groups hold 51 per cent of the country’s production.

The Cabinet has directed Barrister Shehzad Akbar to present an action plan to the Prime Minister after Eid.

“The recommendations are supremely important since all issues in the industry have been highlighted,” he said.

Akbar said that he will go over the “basic points” of the report. Breaking off from what seemed like the start of a briefing on the findings, the aide paused to say: “The prime minister in his 22 year struggle has reiterated one thing over and over, which is that when a person doing business comes into politics, then they would still do business in politics as well. At the expense of the public.”

“You can see clearly in this report how a business group has captured this whole industry and that includes institutional capture, regulatory capture, and it has paralysed the entire system and put the ultimate burden on the people,” he added.

According to Shehzad Akbar, the report “has some very shocking findings”, from sugarcane procurement and sugar manufacturing to sale and exports.

“The first finding which is important in this report is that the farmer, the person who grows sugarcane, was consistently harmed and looted. Sugar mills paid extremely low prices, lower than the support price.

“Cane was purchased for less than Rs140 until 2019. In 2020, sugarcane was purchased at costlier rates and that raises questions.

“The support price was Rs190. However, after 2019, when the commission was formed in 2020, and the probe on sugar began, sugarcane all of a sudden became expensive,” Akbar said.

“But the impact of the cost of production does not apply to price [that was hiked by Rs17 or 33%],” explained the aide on accountability.

Akbar said that the report highlighted the injustice done to farmers.

He said almost all mills cut down sugarcane weight by 15-30%, which directly impacts the farmers, because by purposefully weighing it lower, the gain goes to the sugar mill owners.

The aide also said that it was found that some mills had a system whereby rough receipts were used.

“Instead of a CPR (computerised payment receipt), farmers are given unofficial receipts which are of lower than Rs140.”

He said that while purchasing cane commission agents are used (as middlemen) which allows sugarcane to be purchased from farmers at an even lower price.

“This ultimately impacts the farmer, who is already facing a lot of difficulties/challenges,” Akbar said.

He explained that sugarcane is bought from farmers at lower prices and the cost is shown as higher while estimating cost of production.

“Mill owners show cost of production as higher than support price when, in reality, the commission has obtained evidence through a forensic audit which shows sugarcane is purchased by mills at lower prices and farmers are paid lower prices while the cost is cut further.”

He said it was also observed that mill owners engage in unofficial banking with farmers wherein they (mill owners) give advance money to farmers under the category of fertiliser, and since it is not regulated banking, profits soar to as high as 35%.

Akbar said the public is also swindled through these scams.

“The major thing is manipulation in cost. Ex mill cost, which is the cost of production was a major point determined by the commission,” he said.

“According to the report, there has never been an independent assessment of cost of production of 1 kilograms of sugar before today,” he said.

He said it was determined that the government institutions have to-date relied on the estimates given by the Pakistan Sugar Mills Association, whereas it is the responsibility of the government institutions and regulators to determine how much it costs to produce one kilogram of sugar.

Akbar said a clear difference has been observed in what the commission counted as cost of production and what figures the PSMA association provided. He said the scope of inquiry can be extended to other 80 mills as well.

Akbar said that the sugar inquiry commission was set up because there was a cycle of sugar price increase of 33 percent from December 2018 to August 2019, which, in rupee terms, translates into Rs17 per kilogramme.

He said that the report is “very detailed” and acknowledged there will be many questions. He, however, promised to answer them all.

“The recommendations are supremely important since all issues in the industry have been highlighted,” he said.

The Commission has submitted the following recommendations; (i) the calculation of production cost of sugar is overstated as the reported cost includes expenses on activities that have not been incurred on the production of sugar and are based on principles contrary to the principles of International Financial Reporting Standards (IFRS); (ii) major discrepancies in the calculation of production cost result in substantial overstatement of costs to the tune of Rs 53.187 billion (only 6 sugar manufacturing companies used in sample) thereby resulting in an overstatement of margins and eventually the ex-mill prices;(iii) the current practice as adopted by the PSMA in calculating the ex-mill price initially loads the ‘sales tax’ to ‘cost of production’ followed by margins, resulting in allowing excess margins (over the same tax value) embedded in the resultant ex-mill price; (iv) lower payments to farmers along with deductions on the weight of sugarcane results in “off the books” purchase of sugarcane which eventually results in “off the books” production and sale. The proceeds of the extra production remain untaxed as well as the unaccounted for sugar production, alters the production cost; (v) deviations in reporting of “recovery ratio” in the same region as well as non-existence of an independent way to determine the recovery ratio results prime facie in misreporting of it. This eventually corresponds to excess “off the books” sugar production followed by “off the books” sugar sale; (vi) the existing sales tax regime on the sugar tax is imposed on cost of production of Rs 60/kg and above. Resultantly, the regime is a counterproductive measure for controlling the rising price of sugar; (vii) the manipulated cost of production has resulted in calculation of excess margins. The calculation of actual cost of production by companies in comparison to the ex-mill price in certain cases has almost clocked the margins of up to 60 per cent, clearly beyond the declared/admitted margin threshold and; (viii) the amendment in the corporate laws (the Companies Act, 2017) again facilities companies to misreport the cost of production as a result of the dispensation of the requirement for the companies on cost of accounts and its audit. The change in the law has a detrimental effect on the reporting practice on cost of production of sugar presently existing in the market and constitutes a question on pricing integrity.

The Commission submitted the following recommendations; (i) adoption of the template for purpose of calculating the cost of production of sugar by the government authorities in future;(ii) amendment of section 250 of the Companies Act 2017 for maintaining cost accounts by sugar industry; (iii) declaration of ex-mill price and retail price after production period ends and standardization of brokerage commission and wholesale/ retail margins to counter fluctuations during the year; (iv) a revision of the sale tax policy of taxing production of sugar @ Rs 60/kg and; (v) sugar recovery ratio should be made the basis of the value of sugarcane procured from the growers. A mechanism be devised to accurately ascertain sugar recovery ratio through establishment of sugar testing labs situated near sugarcane centres which are independent of sugar mills.

The Commission maintained that the sugar mills have been charging margins after the sales tax which resulted in extra charging of Rs 1.02 per kg. “This is daylight robbery on the pockets of the general public to the tune of Rs 5.2 billion every year. The government may direct the FBR to recover the hefty amount by ascertaining the additional profits thus made by each mill in the past”.