It is a matter of pleasure and honour for me to present the 26th Annual Report of the Pakistan Sugar Mills Association. The present Executive Committee has completed the first year of its two year tenure with a mixed feeling of satisfaction and anxiety. Satisfaction emanating from having tackled challenging and intricate situations and anxiety on backlog and emerging challenges with increasing frequency and speed. In my reckoning, which is generally shared by my colleagues in the Executive Committee, the situation on the sugar front is getting confounded largely due to irrational policies being dished out without proper assessment and perception of the malaise or the underlying causes. One thing comes out clearly that no one concerned with framing policies in relation to sugar, has a clue about what is going on and what to do. Commitments are made to the Sugar Industry by one segment of the Government machinery and in the same breath they are revoked by the other authority. Resultantly, we are pushed back to the square one or even beyond. A case in point is the commitment by the Food and Agriculture Minister that hence-forth import of sugar would be discouraged firmly at the start or during the crushing season. This was reneged by the ECC at its 24th September, 1991 meeting on grounds of stabilizing sugar prices in the domestic market. To facilitate larger and cheaper import of sugar, 10% customs duty was taken off at the peril of the domestic sugar industry.

The report reverts to the subject of the perils and problems confronting the sugar industry in subsequent paragraphs but before that let me on behalf of PSMA, its members and on my own behalf welcome our new member M/s. MATIARI SUGAR MILLS LTD. who came into the fold of the Association during the year. PSMA heartily welcomes their entry into the fraternity of the Association and is confident that other sugar mills who are still outside would hasten to join PSMA.

REVIEW 1990-91

It is not only gratifying but a matter of pride that healthy trend of sugar production was maintained during 1990-91, for the fourth year in succession. It broke cyclical shackles featuring strong in the past and set new record of sugar production and ushered in new trends closing on to the goal of autarky in sugar. No sector of the economy including industry can remain immune from the onslaught of economic and political events on the domestic and international levels. The economic outlook, which otherwise looked promising at the start of the fiscal year 1990-91, turned subdued. A variety of factors such as the Gulf crisis with its deleterious consequences to trade, investment and technology flows, precipitately slowed down growth all over the world. Inevitably international demand had considerably shrunk. In Pakistan, although the agricultural sector achieved a higher rate of growth at 5.1 percent, bulk of the industrial sector was caught in the web of flattened demand. Consequently manufacturing sector lagged behind its targeted rate of growth barring sugar which maintained its march to higher production levels than the previous years.

It was in this backdrop of events that the year 1990-91 began on an inauspicious note for the sugar industry mainly due to:

(i) higher carryover of sugar stocks; and
(ii) continuity of credit restrictions, which were lifted early November as a result of the vigorous efforts and representations made by PSMA.

The year 1990-91 witnessed a record production of 1,932,150 metric tons of sugar including 23,312 metric tons from beet as against overall sugar production at 1,855,961 metric tons in 1989-90. This shows an improvement of over four percent. However, the enhanced production was obtained by crushing higher quantity of sugarcane of 2,26,03,693 metric tons as against 20,438,128 metric tons in 1989-90. There are two matters of primary concern in this area. One is that higher production of sugar was not due to any improvement in the rate of sugar recovery. On the contrary it went down to 8.47 percent from the previous year's recovery rate of 8.92 percent. Secondly in 1990-91 sugarcane was cultivated on 884.2 thousand hectares as compared to last years 854.3 thousand hectares. This represents an increase of 3.5 percent. The production of sugarcane was 35,989 million metric tons as against 35.5 million metric tons last year. Despite increase in the area sugarcane production remained sluggish and a matter of disappointment was excessive cultivation of late maturing varieties like COJ1148 and L 118 in Punjab in particular. The longer crushing season acts negatively on the performance of the sugar industry as sucrose recovery is low at the start as well as at the end of the crushing season. This is to the detriment of the sugar industry, growers who lose the benefit of quality premium and culminates in the loss of revenues to the Government. It is estimated that 68000 tons of sugar could have been additionally produced if the crushing season had commenced from November.

ZONAL REVIEW

Like in the preceding year different and peculiar trends were discernible in each of the three zones.

The Punjab Zone attained a record 929,511 metric tons of sugar production in 1990-91 against 762,972 last year by crushing a total quantity of 1,20,94,629 metric tons of sugarcane by 24 mills compared to 9,117.410 metric tons crushed by 22 mills a year before. However, the decline in recovery rate from 8.36 in 1989-90 to 7.71 percent has been alarming. This is attributable to proliferation of late maturing sugarcane varieties COJ1148 and L-118, higher rainfall during the growing period and longer crushing period of 179 days. Recovery rate at 7.71 percent in 1990-91 in Punjab has been the lowest over the last seven years.

Obviously, the solution lies in:

(i) allocating more area to sugarcane production;
(ii) making efforts to increase per acre yield by taking recourse to better varieties and abandoning COJ 1148 and L - 118.

It may well be remembered that in Pakistan in general and in the Punjab in particular, the sugar mills have reached a saturation point due to no sizeable expansion in the area under sugarcane cultivation. More and more sugar mills are coming up to vie with each o1her on the existing/stagnant sugarcane resources.

Sugar production in Sindh went down to 902,310 metric tons in 1990-91 from 983,087 metric tons in 1989-90 despite increase in number of operating sugar mills from 19 to 20. This has been the second successive year of decline of sugar production in Sindh from the record at 1,013,600 metric tons in 1988-89. What is rather consoling is the fact that recovery rate at 9.40 percent remained at par with that of the last year and this quantum of production was achieved by crushing lower quantity of sugarcane amounting to 9,597,884 as against 10,457,782 metric tons in 1989-90 and operating for 172 days instead of 194 a year earlier.

To obtain better operating results, it appears that commencement of crushing not only in Sindh but throughout Pakistan be from November every year barring vagaries of nature over which humans have no control. Start of sugarcane crushing from November would be considerably beneficial to all interests associated with the sugar industry.

1. 1. This can result in improvement of sugar yield by about two percent for the first month and the aggregate sugar production would proportionally increase.
2. 2. Better recovery would confer more benefits of quality premium to the growers.
3. 3. Higher sugar production would yield more central excise duty revenue to the government.
4. 4. It could help the sugar industry in cost economy.
5. Turning to performance of sugar industry in NWFP, the emerging picture is not pleasing as both production and recovery have gone down steeply. Sugar production tumbled down to a mere 72,806 metric tons from 80,684 in 1989-90. Out of the five units, one sugar mills turned out only a nominal production. The other unit were largely handicapped by dearth of sugarcane.

Similar trends were discernable in processing sugar from beet slicing.

The following is indicative of the total sugar production in 1990-91:­

An unprecedented decline in sugar recovery in both Punjab and lower Sindh sugar production witnessed during 1990-91 is mainly due to propagation of such varieties.

Pending installation of Gore-samplers in each mill, which is a costly exercise, fixation of sugarcane price on varieties basis offers a solution.

Utility costs, transport charges, cost of stores, spares and maintenance (due to erosion in exchange value of rupee), wages and benefits and financial costs by higher mark up have all been increasing in almost double digit.

SUGAR INDUSTRY'S DILEMMA:

As stated in the opening paragraphs of this Report, the year 1990-91 threw up more challenges than ever before to the sugar industry. As the backlog of problems was tackled, new and more intricate situations developed. Not to talk of bouquets for attaining new heights in production with chained hands, more brickbats were hurled at in the flurry of political gamesmanship. The industry received a shabby treatment from all and sundry and few sympathetic ears were lent to its predicaments and tribulations. The industry producing an essential consumer item, sensitive in nature, was more often than not made an object of ridicule. It continues to receive a discriminatory treatment distinct from other essential consumer items. Its case for providing cushion against cost push inflation and cost increases due to phenomenal increase in the prices of utilities, wages etc. has been summarily dealt with.

Pertinent to recall that an independent study conducted by USAIO in May last concludes that prices of various commodities in Pakistan had risen by 40 percent during the preceding six months. This was before the announcement of the Federal Budget 1991-92. Subsequent
_ measures have led to unprecedented commotion in the prices of various inputs. Already the sugar industry has no control over 90% of its cost of production which comprise cost of sugarcane and CEO (73%) utilities (11%) leaving very little for managerial ingenuity to make adjustments. Yet sugar's costing and pricing are treated in isolation from the other consumer items. Cost surge is ignored in the measure of price for sugar. Arbitrary fixation by rule of thumb seems to be the order of the day.

FEDERAL BUDGETS FOR 1990-91 & 1991-92 VIS-A-VIS SUGAR INDUSTRY

The Federal Budget for 1991-92 brought no relief to the sugar industry except partial restoration of CEO exemption reduced to 50% applicable to sugar production in excess of the preceding year's output. It conferred small advantage to the sugar industry. Instead some of the fiscal measures announced in the Federal Budget 1991-92 are destined to beat the sugar industry a further retreat. Some of the major fiscal measures stretching their disastrous influence on the income of the industry are listed below:

1. Income tax at 0.5% on turnover, i.e. "turnover tax".
2. Surcharge of custom duty at one additional percent on imports.
3. Central excise duty at one percent on the amount of bank borrowings.
4. Corporate assets tax at one percent on gross assets value of over RS.250 5. million. Withdrawal of 15% tax credit on balancing, modernization and replacement (BMR).
6. Withdrawal of initial depreciation facility which was available at 25% of the fresh fixed capital outlay for the first year of operations of the relevant assets.

All told, the estimated aggregate effect of it would be over RS.1 0 million to a factory. This would be a sizeable burden to bear, more so in the obtaining un-supportive conditions of surging costs-cum-sliding revenues. The sugar industry's fate seems pointed uncertain. The industry producing an essential food item sugar, which serves also as key input for several other important food and health related industries products, is proverbially being crushed by wheels of raising costs and falling revenues, resulting in faltering incomes. The industry has been brought to a disturbing pass. The essential element of ensuring economic returns to the domestic industry seems to have gone by default under compelling conditions of overcoming the recurring and widening budgetary deficit.

It would be wise counsel to tender here that measures like those listed above, taken under some sort of expediency, sternly denying genuine flourish to the industrial sector, could not be worthwhile in serving the long term national objectives of industrial growth and development. Sharing in prosperity is a prudent prognosis which deserves a strong pursuit.

IMPORT POLICY 1990-91:

Regrettably the Import Policy for 1990-91 proved suffocating to the sugar industry by placing sugar on the Free List. The policy tempted un-limited imports to the private sector since TCP was not in a position to arrange sugar imports. The following changes indicate the position of incentive for import:-

- Zero surcharges and zero duty on imports - July to October, 1990
- 5% Iqra and 10% Import Surcharge - October 18, 1990 to January 28,1991.
- + 5% Custom Duty - January 29,1991 to May 6,1991.
- + 5% Custom Duty - May 7, 1991 to September 23, 1991.
- 10% Customs Duty abolished on Imports - September 24, 1991.

The 1991-92 Import Policy announced on June 30, 1991 brought no relief for the sugar industry. The sugar industry had pinned hig_ hopes as a comprehensive and convincing case was made out and submitted to the National Tariff Commission. This was done after meeting the Federal Commerce Minister in the PSMA Headquarter at Islamabad on May 22, 1991. The Association has tendered complete information on the cost structure of sugar production over the past three years, based on audited accounts of representative mills. We have projected cost for 1991-92 based on the then known cost elements. The case is being pursued vigorously but contrary to the industry's contentions and understanding given, entire 10% customs duty on sugar import was withdrawn from September 24, 1991.

Already there was glut of sugar in the country on account of excessive import of sugar at about 4,33,320 metric tons up to July 1991, enhanced production, last year's carryover etc.

The world sugar market is poised to remain bearish, it would result in dumping of sugar in ­Pakistan. Import cost is estimated about 18% lower at present than the domestic cost of sugar production. It may be reiterated that several sugar mills have been in the red in 1990-91 and are unlikely to
reverse it unless the industry was provided legitimate safeguards. Strong representations have been made to the concerned Ministries. It has been emphasized that subsidizing imports amounts to sacrificing the revenues and strikening blows to the national sugar industry .

CAPACITY TAXATION:

An issue hanging heavy on the mind of the industry with well founded apprehensions concerned ,the proposed return to capacity taxation - an experiment which had failed miserably during 1966-1978 and had to be abandoned.

The Association allowed no let up in this direction with powerful representations ­emanating chiefly from the Sindh Zone, made to the authorities.

As early as March and even prior to that PSMA's viewpoint on the issue was communicated to the authorities vehemently opposing its re-introduction. A letter addressed to Senator Syed Mazhar Ali, Chairman Commission on Resource Mobilization and Tax Reforms contained powerful arguments supported by solid data against the proposal. As a result, the Commission in its Report submitted to the Government is reported to have opposed any re­introduction of Capacity Taxation on the Sugar Industry.

Nevertheless consequent upon the announcement of the Federal Budget the Government formed a Capacity Committee on Sugar under the chairmanship of Mr. A.G.N. Kazi Dy. Chairman Planning Commission to examine the proposal in consultation with the Pakistan Sugar Mills Association (PSMA).

­
The Committee met in Islamabad on August 11, 1991. PSMA's delegation was led by its Chairman and included Chairmen Sindh Zone, NWFP Zone and a nominee of Punjab Zone Chairman. Although CBR had prepared a Working Paper in support of the proposal but it was kept aside when PSMA deputation presented its "STUDY ON CAPACITY TAXATION - ITS EQUITABLE APPLICATION NOT FEASIBLE TO THE SUGAR INDUSTRY" prepared under the supervision of the Chairman Sindh Zone. The study was so rational in its approach and methodically convincing in its argument against the proposal and in favour of the existing system, that barring CBR, whose dissent was of technical nature, all members agreed that so long as revenue target is met, the status quo be maintained. The Committee has reportedly made its recommendation accordingly.

A gist of the study submitted by PSMA forms part of this Report
as Annexure - "A".

ROLE OF SUGAR INDUSTRY IN NATIONAL DEVELOPMENT:

The sugar industry bears a testimony to its being an engine of development, especially of the rural landmass. Without rural sector's economic upsurge, the structure of national economy would stay vulnerable. Sugar industry deserves a better deal by virtue of its special characteristics, some of them listed hereunder:­

a) It is a food industry.

b) It is an agro-based industry.

c) It is a seasonal industry, also vulnerable to climatic uncertainties.

d) It is a process industry.

e) It is an industry rooted in rural landmass.

f) It is an engine of development of the rural sector.

g) It is a labour-oriented industry.

h) It generates more revenues to the State than others of similar scale.

i) It is an important import substitution industry, saving foreign exchange spending.

j) It is also a foreign exchange earning industry through exports of its byproducts molasses and industrial alcohol.

GROWTH STRATEGY:

In order to keep growth pursuit of the sugar industry in good stead, the PSMA of its own and at times on asking spelt out its views in categorical term in this context. The best strategy, the PSMA observed, would be pursuit for vertical expansion, dispensing with horizontal growth route. This has become all the more important and basic element of the sugar industry's viability in the obtaining limitations of:

1. bringing fresh land tracts under sugarcane crop, and/or replacing other crops
2. capital/financial resource constraints with alternate demand for it,
3. cost economies emerging urgent and above all,
4. it has been endorsed by the experience gained over the years in this regard.

With emerging crunch of capacity scale lower than economically warranted more if measured by international standard of the countries having sugar industry in forefront, it would dawn soon that economically viable capacity level would be 10,000 tons of sugarcane crushing a day. This analogy proves that the present numerical strength of sugar units is adequate and in , order to retain their economic operations, strategical stress would be preferable on vertical period, crushing and production have assumed a sliding trend and more units joining in the milieu would make the conditions not supporting the key industry's growth on sound track.. 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 emphasize that the sugar industry is caught in cobweb of rising costs and it has to cope with this vicious phenomenon. Most of the units, having by now lived up to two decades, deserve administering strong regular doses for balancing, modernization and replacement. Expansion has emerged as a compulsion in the obtaining situation so as 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.

DIVERSIFICATION DESIGN:

The sugar industry has come of age by completing over a quarter century of its dynamic existence. Sugar production over the past 10 years fared well above a million tons mark. Over the past three years, it vied for reaching the coveted goal of two million tons. Had sugarcane supplies and recovery features during 1990-91 been at par with the best attained in the past, the two million mark of sugar production would have been happily surpassed. .

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 fruitful diversification to the extent that sugar production activity receives profitable support from value-added byproducts. 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 scenario 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:­

1. absence of adequate CED exemption as incentive for additional production,
2. consistent increase in sugarcane support prices,
3. quality premium formula leaving no gain to the sugar industry in higher recoveries
4. continuous raises in wages, inputs costs, utilities tariffs, transport charges, etc.,
5. sales tax imposed at 12-1/2% on molasses,
6. general inflationary trend at galloping 16% in 1990-91 and
7. unprecedented sugar imports 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 of 30% on equity structure be assured for the sugar industry so as to enable it an efficient performance, to embrace dynamic of expansion and diversification and serve as a catalyst of rural socio-economic prosperity and agent of infrastructure development in rural Pakistan.

OTHER MATTERS:

i. PSMA - UN/DO Workshop on the Asian Sugarcane / industry with Emphasis on Sugarcane Diversification:

Despite severe handicaps of personnel, PSMA not only fulfilled its commitment with UNIDO and the Government of France made last year by the out-going Chairman of the Association, but excelled in its organization. The Workshop was held in Islamabad from May 5 to 9, 1991. It was attended by 39 participants from 7 countries. It was inaugurated by the Federal Minister for Food & Agriculture Lt. Gen. (Retd.) Abdul Majid Malik.

Beside presentation of UNIDO Activities papers were presented and discussion held on. The following propositions: ­

a) Techno-economic Aspects of Sugarcane Processing in Asia.
b) Diversification as a Strategy of the Sugarcane Sector.
c) Utilization of Sugarcane By-Products in Animal Feeding.

During the Workshop French experts in sugar technology outlined their experience and made offers of technical and industrial cooperation. Pakistan's participants made notable contribution to the deliberations.

Findings and conclusions of the Workshop are included in the Report as Appendix "B".

Collaboration with WAPDA - Production of Energy through Bagasse:

A three member team of WAPDA's Foreign Consultants led by Robert E. Grim Shaw, Resident Adviser WAPDA on Private Power Project Organization called on Chairman PSMA to discuss the possibility and prospects of Pakistan's Sugar Industry supplementing country's energy needs to the extent of 200 Megawatts generated by non-petroleum renewable resources especially by bagasse. On suggestion by PSMA Chairman a Questionnaire was prepared by the WAPDA Consultants which was sent to PSMA member Mills. It evoked positive response and WAPDA held a two-day seminar on the subject at Lahore on October 27-28 in collaboration with PSMA/USAID.

ii. Compulsory Membership of PSMA by Sugar Mills:

In compliance with the Executive Committee decision, the Secretariat addressed a letter to the Joint Secretary (Director of Trade Organizations) Ministry of Commerce for issue of a notification to this effect so that only member mills could qualify for licence to import sugar machinery and components not available locally. The Secretariat obtained a list of such machinery components from HMC-Taxila and PSST and the Chairman handed it over to the Commerce Minister when he visited PSMA Headquarters on May 22, 1991.

In the same context, a representation has been made to the Commerce Minister to authorize PSMA instead of HMC to issue No Objection Certificate (NOC) if a certain sugar machinery was not manufactured in the country and hence its import be permitted.

Both these subjects are being pursued with the concerned authorities.

iii. Seminar on Sugarcane Quality

Chairman PSMA inaugurated a one-day Seminar on Sugarcane Quality on June 15, 1991 at Lahore. The Seminar was largely attended by sugar mill representatives as well as cane growers. It formulated several concrete recommendations. The Seminar was organized by PSST.

iv. Pakistan Sugar Institute:

In order to pursue an integrated approach for a long term growth the sugar industry in Pakistan has to ensure a well-knit momentum of all its operational segments. Having come of age over the last 26 years of its existence the sugar industry can rightly claim to be a repository of rich experience. The need of channelize this experience for the up liftment and acceleration of growth process cannot be over-emphasized. PSMA has already agreed to establish Pakistan Sugar Institute to translate the concept into deed. The proposed Pakistan Sugar Institute will, in principle, become a source of technology imparting institute both in theory and practice, for growth, development and progress of the sugar industry in Pakistan. In fact, the Institute would have taken some concrete shape by now had the sugar industry not been subjected to the challenge it was made to face over the last couple of years.

Necessary steps are underway to give PSI a concrete shape with the assistance and cooperation of PSMA constituents.

v. Press and Public Relationing:

In keeping with its resolve to create a sympathetic lobby for the Sugar Industry, PSMA has launched a phased programme to achieve the objective. The Chairman invited some selected members of the Senate and the National Assembly along with Senior Government Officials on June 19, 1991 at Dinner and apprised them of the current position, problems and prospects of the Industry. Representatives of the Press were also present on the occasion. The briefing was widely appreciated.

Again on September 9, 1991 the Chairman invited a select gathering of legislators and senior officials numbering about 25 at Dinner and meticulously explained to them the point of view and problems of the Sugar Industry.

The gathering included Chairman of the Senate, Speaker of the National Assembly, Minister for Finance, Secretary Finance, Chairman CBR, Member (Taxes) CBR, Chairman National Tariff Commission and others. Also present were about a dozen Senators and senior representatives of the media.
Through Press Releases at regular intervals, the consumer and Government are kept posted with the point of view and activities of PSMA. Such releases normally receive wide coverage in the media.

EPILOGUE:

The Annual General Meeting of the Pakistan Sugar Mills Association offers a fine opportunity to review the developments in the past year, evaluate our performance through these happenings and extract a conclusions
vis-à-vis our stand to future growth.

The Executive Committee made every endeavour to focus the Association's attention, as in the past, on strengthening its role in the context of the short term and long-term issues confronting the sugar industry. The Association is making every effort to further improve its service to the member units, provide more feedback on domestic and international sugar situation and create a climate conducive for a more planned expansion in sugar producing capacity and enhance productivity through its theme of vertical expansion. A process of consultation and seeking guidance and fresh ideas from the Association's constituents was the hallmark of our performance. It is gratifying that the response has been enthusiastic and positive and thought provoking comments have poured in.

The location of PSMA Headquarters in Islamabad is proving a distinct advantage as a rapport is building up between the Industry and the policy makers at the highest level. Unremitting efforts were made to overcome problems cropping up through instant personal contacts with the concerned Federal Ministers and high-level functionaries and immediate written representations were lodged and followed up.

It must, however, be realized that anyone area is but a part in a chain and one cannot expect the desired results immediately. The activities of the Association should, therefore, sub serve both the immediate and long-term goals. This is what has been precisely attempted.