It is a pleasure and a privilege for me to present the 25th Annual Report of the Pakistan Sugar Mills Association. It is gratifying to note that the PSMA has come of age by completing a quarter century 9f its eventful existence. Its contribution may not be measured in mere quantitative terms. However, in emergence of the sugar industry as one of the major sub-sectors of Pakistan's manufacturing sector, PSMA's role has been material. From its platform, problems stemming growth and development of the sugar industry have always been properly agitated and often remedies found. Furtherance of its crucial role is imperative so as to impart strength to the sugar industry.

Over the recent past, sugar industry has shown fairly firm production trends. It is optimistically looking for achieving self-sufficiency in sugar. It has been a priority pursuit always. The sugar industry, at the same time, must organize itself for a diversified base of operations. Its present structural framework is not profound. Revised growth design encom¬passing diversification and strategy to advance on sound lines in this direction needs to be formulated, sooner the better. Joint efforts in this context are a pre-requisite.

The PSMA belongs to all of its members. It would be in fitness, therefore, to propose to all the members for more active participation in the PSMA affairs so as to promote its performance. It would help in creating more conducive environment for the sugar industry.

Overall sugar production at 1,855,961 metric tons for 1989-90 represents a token increase over the previous year's sugar output at 1,849,741 metric tons. Higher sugar production was achieved despite sugar production from beet was lower at 27,057 (31 ,806) metric tons.

Sugar production by the industry, from its principal activity of sugarcane crushing, recorded an increase to 1,828,904 metric tons as against 1,817,935 metric tons of the preceding year. Higher sugar production was achieved despite lower at 20,501,339 metric tons of sugarcane crushing, latter denoting a fall of 5.4% over 21 ,707,520 metric tons of 1988-89.

A happy tiding in overall sugar production could be maintained contrary to the curtailment in quantum of sugarcane availability for crushing operations. It was achieved by improvement to 8.92% in the rate of sugar recovery. For the previous year, it was 8.37%.

The latest recovery rate of 8.92% forms the highest of the past three years in which sugar production set the finest record of having it consistently over 1.8 million metric tons. Sucrose at 8.92% cannot be considered the best, not even by our own record.

Sugar production could not make a major thrust during the review year due primarily to reduced availability of sugarcane. Area under sugarcane crop for 1989-90 dropped to 854,300 (876,900) hectares. As a result, sugarcane production rolled down to 35,493,600 (36,975,700) metric tons. Unfavorable trend in area and production was compounded by sugarcane yield on average down to 41,547 (42,166) metric tons.

During the review year,-average sugarcane yield per hectare in farms retreated but average sugar recovery on sugarcane crushing in the factories advanced. As a result, sugar production increased. Substantive efforts are needed to increase area under sugarcane crop and yield factor per hectare. Improving yields and recoveries is a challenge which demands a befitting response.

Each of the three zones represented a different trend during the review year 1989-90.

The performance of the sugar industry in the Punjab attracts attention. Sugarcane crushing increased to 9,151,085 (8,288,070) metric tons, sugar production rose to 765,133 (666,983) metric tons and recovery improved to 8.36% (8.05%). Its contribution at 41.23% (36.06%) in national sugar production was commendable, which deserves con¬solidation for growth in future.

Sugar production in Sindh declined to 983,087 (1 ,013,600) metric tons due to lower at 10,457,782 (11,922,974) metric tons of sugarcane supplies. Sindh's reassuring feature was recovery rate improved to 9.4% (8.5%). Share of Sindh in overall sugar production declined to 52.97% (54.80%) this year.

Performance of the sugar industry in NWFP was weaker. Sugar production rolled down sharply to 80,684 (137,352) metric tons. Sugarcane supplies reduced sharply to 892,472 (1,496,476) metric tons. Short spell of operations eroded recovery rate to 9.04% (9.18%).

Almost identical trend prevailed in processing sugar from beet slicing. Beet sugar output declined to 27,057 (31,806) metric tons, due to lower at 7.90% (9.13%) recovery rate while higher quantity of 342,198 (341,377) metric tons of beet was sliced. Contribution of NWFP towards national sugar production fell to 5.80% (9.14%).

1. Sugar production at 1,828,904 metric tons on crushing of sugarcane was higher than 1,817,935 metric tons of the preceding year.
2. It was achieved against lower to 20,501,340 (21,707,520) metric tons of sugarcane available for crushing.
3. Sugarcane supplies to the sugar industry declined as a result of sugarcane production lower at 35,493,600 (36,975,700) metric tons.
4. Sugarcane availability reduced due to:
   1. area under the sugarcane crop shrank to 854,300 (876,900) hectares.
   2. the national average yield of sugarcane per hectare came down to 41.547 (43.005) metric tons.
5. Adverse influence on sugar production to arise from reduction in area and yield of sugarcane crop was overcome by average recovery of sugar improving to 8.92% (8.37%).

a) increase area under the sugarcane crop,
b) improve crop yield per hectare and
c) further improve sugar recoveries.

All out efforts in complete coordination by the growers, the industry and the Govern¬ment agencies, particularly Agricultural Ministries at Federal and Provincial level are required. Despite several constraints, some listed above, the sugar industry performed satisfactorily during the review year. Resilience capability of the sugar industry emerges as a promising feature. Given a better environment to operate, the sugar industry can produce better results.

Inventory pile up with the sugar industry at 172,515 metric tons at the year ending September 1989 was an unusual phenomena. This happened, besides the reason listed above, partly due to earlier Federal Budget 1989 announced during June 1989. By the said budget, exemptions of central excise duty to sugar produced in excess of an average of the preceding two years and to 50% on sugar produced for the first two years (by the new mills) were withdrawn with a retrospective effect. This iniquitous fiscal measure aggrieved the industry and it was adequately agitated. No relief administered by the authorities, the aggrieved units of the sugar industry had to seek a legal remedy. For about six intervening weeks sugar supplies remained suspended. After furnishing guarantees acceptable to the Central Board of Revenues, release of sugar stocks by the sugar mills could be resumed. Resumed flow of sugar was soon disrupted in Sindh by the Provincial Government's restriction on inter-district movement of sugar.

i) 15% tax credit on BMR investments withdrawal and
ii) inflation rate ruling above 11 % in the economy.

While the cost of sugar production represented a considerable increase, by factors not within the sugar industry's reach to rectify, on the marketing side problems accentuated. About 16% increase made in petroleum and its products prices during April 1990 entailed increased transportation and distribution costs. .

Financial expenses went up for reasons being

a) sugar inventories in hand,
b) higher costs of production and other operating expenses and
c) funds flow disruption by abolition of CEO and 15% tax credit, etc.

All these factors were instrumental to higher cost of sugar production and sales during 1989-90.

Another disruptive factor was liberalized sugar imports. Private sector has been allowed to import sugar without a quantitative restriction and sugar imports rendered free of the custom duty, surcharges, etc. During the fiscal year ending June 30, 1990,210,954 metric tons of sugar at a cost of Rs.1,920 million was imported. It represented five-fold increase in sugar import volume of 43,380 metric tons during 1988-89.

The flurry of sugar imports continued during the current fiscal year 1990-91, as can be gauged from imports during the first four months, July thru October 1990 being 208,335 metric tons, almost equivalent to annual imports of the preceding year. Import bill on this amount stood equivalent to .Rs. 1814 'million, substantial indeed by any yardstick. This liberalized sugar imports is bound to have a backlash on the performance of the national sugar industry.

Coming at a time when the sugar industry was holding stocks at 162,158 metric tons (as at September 30, 1990) and new sugar manufacturing season was already on, the PSMA represented against the liberalized sugar imports and urged the Federal Government to re-impose ban on sugar imports to protect the national sugar industry from perils. As of October 18, 1990, the Federal Government re-imposed 10% import surcharge and 5% Iqra surcharge on import of sugar "in order to safeguard the interest of local sugar industry in face of fall in international prices of sugar." The exemption of custom duty of sugar imports persists. The PSMA does not consider it an adequate protection and wants ban on sugar imports. Sugar imports must be for a minimum quantity of deficit and not to be liberalized to make a glut of it as obtained this year.

The spirit of deregulated market system for sugar is not being meticulously observed to find an equilibrium by inter-action of relevant forces. Cost of sugar production is being rigidly administered up while end-price of sugar is being deliberately influenced down through liberalized sugar imports. This cannot impart desirable strength to the sugar industry. All this has been adversely influencing the sugar industry's economies.

The budget 1990-91 did not bring happy tidings for the manufacturing sector. Proposals of the sugar industry received some recognition. The incentive of central excise duty exemption on additional production has been partly restored. It is made available at 50% to the production in excess of the preceding year's output. Nothing more material accrued to the sugar industry and for that matter to none of the other industries either.

It would be in concert to observe that profits from exports have been allowed income tax exemptions up to 75%; the import substitution is being discriminated from similar treatment. Saving of foreign exchange is equally, if not exceedingly, important in improving the balance of payment position, a need of the country.

The sugar industry is being ignored from income tax relief on more than one account. Its key role in import substitution is being consistently ignored. Its crucial role as catalyst of the rural development is not being recognized. Even its molasses production which is predominantly an export item does not meet an appropriate fiscal treat. Of the molasses production now about one million tons, over 80% is surplus for exports. Domestic utilization is estimated at about 200 thousand tons a year. Molasses exports are in the most price conscious industrialized economies of Europe. Its market is keenly competitive. All these factors governing the market for molasses have been overlooked by the Federal Govern¬ment in imposing sales tax at 121/2% on molasses. While the sugar industry has been agitating since long against the excessive 25% ad-valorem export duty levied on molasses, fresh impost of 121/2% sales tax becomes a bitter additional burden. Complicated proce¬dure involved in claiming sales tax exemption on exports, as most of the molasses happens to be, sales tax levied simply tantamount to creating difficulties and extra paper work for the sugar industry. It is bound to adversely affect revenues to the sugar industry on sale of molasses. By logic and pursuing economic norms, need was to remove the long persisting 25% ad valorem export duty rather than impose an additional 12'/2% sales tax.

By imposing additional levy in the form of sales tax at 121/2%' favourable conditions could not be created for a more meaningful and fairly diversified value-added utilization of molasses within. If this has been an objective it needed a better planning, associating the sugar industry in an appropriate policy formulation for the purpose. Sales tax imposition at 121/2% seems an attempt to fetch more revenues.

a) Rs. 15.50 (13.75), up 11.09% in the Punjab,
b) Rs.15.75 (14.00), up 11.25% in Sindh, and
c) Rs. 15.25 (13.50), up 11.30% in NWFP

2) Central excise duty exemption at 50% admissible to sugar production in excess of 1989-90.

3) Sales tax at 121/2% chargeable on molasses.

4) Central excise duty exemption on sugar production by slicing of sugar-beet in NWFP.

5) Sugar imports to be 300,000 metric tons based on current sugar
consumption estimate at 2.3 million metric tons.

The sugarcane support prices relate to recovery benchmark of 8.5% for the Punjab, 8.7% for Sindh and 8.3% for NWFP. Recovery higher than the given benchmark is to attract quality premium at 19 paisas per 0.1% additional recovery.

Working of the sugar industry during the 1990-91 season has come under rising costs pressure. This becomes evident by some of the reasons listed below:

1 ) Sugarcane support price raised by 11 .3% per 40 kgs.

2) Minimum wages increased to Rs. 1,100.00 per month.

3) Power tariffs already raised by 11 % and further likely increase in time.

4) Transport cost increased by 15% with 16% increase in petroleum price
made during April 1990 and likely further increase in it.

5) Sales tax levied at 121/2% on molasses to adversely affect revenues to the
sugar industry on its sales.

6) Inflation rate prevailing over 11 % in the economy.

A substantial surge in the cost of sugar production is to take place by the above factors. On the other hand Government is found over-sensitive to sugar prices and has been using imports as a lever to depress domestic prices. Ironically, sugar prices are seen in isolation by the authorities, taking a detached view from the general trend of prices of other commodities in the country and more particularly increase in cost of sugar production and reduction in revenues by various reasons. Production cost of sugar during the year 1990¬91 will be considerably more for several reasons responsible for it and none of them in the ambit of the sugar industry to amend.

General inflationary trend in the economy has a bearing on the cost of inputs. While price increases of main food items such as wheat, rice, maize, coarse grains, pulses, edible oil, tea, milk, go up usually without much notice taken, though these bear heavily on the overall cost of living, sugar price increase is being taken unduly a serious notice. This is not valid, more so as socio-economic benefits of the sugar industry have been immense and excellent. In fact, the sugar industry receives a peanut from the total revenues it generates. It will be in fitness to see sugar prices in context with cost of sugar production.

Pakistan has now 48 factories in operation and some more in the making. These hold potential of achieving sugar autarky, sufficient supply of sugarcane was at hand. Most of the factories, by official reckoning, have capacity of crushing 3,000 metric tons of sugarcane a day. This scale of operations is fast becoming uneconomic due to capital cost of Rs. 500 million now involved in installation of a new unit. The viable capacity rates at 5,000 metric tons of sugarcane crushing a day with inherent scope to gear it steadily up. By international reckoning, a modern sugar manufacturing unit needs to possess sugarcane crushing capacity of 10,000 metric tons and above. This prescription needs administration in our milieu. Vertical expansion and not a horizontal growth is an answer to the challenge relating to the sugar industry's progress on proper lines. This strategy would minimize fresh fixed capital outlay and enable the sugar industry re-establish its economic equilibrium from time to time in environment fuelled with escalating cost structure. Vertical development design could assert in augmenting Government revenues and saving scarce 'resources for application in other demanding areas. Horizontal expansion, on the contrary, overcrowds and exacerbates disadvantages to the national economy. It needs to empha¬size that the sugar industry is caught in cobweb of rising costs and it has to cope with the vicious phenomenon. Most of the units, having by now lived up to two decades, deserve administering strong regular doses for balancing, modernization and replacement. In addition to this, some of the units warrant switch-over to the new process of inherent economies, Expansion has emerged as a compulsion in the obtaining situation in order to protect viability. The factors listed in brief exert so much of the force that undertaking expansion has become inevitable by all plausible means. This being the economic compulsion, it makes the vertical expansion a must. Towards this end, the PSMA has often drawn attention of the relevant authorities. The matter now needs expeditious policy decision for vigorous follow-up.

At this juncture, it is time to look for more fruitful journey ahead, towards a promising future. An assessment of the sugar industry's role in countries where it is in the forefront of the industrial structure and instrumental in growth dynamics of the economy, sugar industry's dynamism has been demonstrated by embracing diversification to the extent that sugar stands transformed into a byproduct. A suitable model from the world sugar industry scene should be selected for adoption in Pakistan.

However, in pursuit for diversification, the most promotional role could be played by improved sharing in revenues being generated by the sugar industry through sales of sugar. In the milieu of Pakistan, a progressive decline in the share of sugar industry from the overall revenue generation has been noticed. Of the 21 % share in revenues the industry had in 1986, it has been cascading over the recent past. Factors responsible for a progressive decline could be identified as:

a) denial of CEO exemption on additional production,
b) increase in sugarcane support prices,
c) raises in wages, inputs costs, utilities tariffs, transport charges, etc.
d) sales tax imposed at 121/2% on molasses,
e) general inflationary trend above 11 %, and
f) steps influencing bearish trend in sugar prices.

The prevalent situation demands a passionate re-evaluation of the sugar industry's cost structure and measures for improving its share in the revenues. A minimum return at 30% from revenues be assured for the sugar industry so as to enable it an efficient performance, to embrace dynamism of expansion and diversification and serve as a catalyst of rural socio-economic prosperity and agent of infrastructural development in rural Pakistan.

The sugar industry in Pakistan is at a threshold of evolving an integrated approach for a long term growth, to be planned on proper lines and sound footing. All its operational segments demand a well-knit momentum. Enough experience has already been gained over the 25 years working of the sugar industry. That treasure needs to be refined, redefined so as to put it to usage in enlightened order for up liftment of the sugar industry. In order to translate concept into action, a strong, viable institutional structure is pre-requisite.

The idea was deliberated often, at times actively at the meetings of the PSMA. It would be in fitness to recall that the PSMA in its recent meetings agreed in principle to set up Pakistan Sugar Institute. The mechanics of converting the concept into a reality need to be evolved in earnest. The PSMA members are requested to get ready for implementation of this decision. The challenges emerging for the sugar industry can be appropriately responded by creating and promptly activating the proposed Pakistan Sugar Institute.

I take this opportunity to express my sincere thanks to all the members of the PSMA for extending their cooperation throughout the term and look forward to their support in future. The Chairmen of the PSMA Punjab, Sindh and NWFP Zones have helped me a lot during the year which has been eventful and to them we owe our thanks.