Annual Review 1994
Altaf M. Saleem
Dear Members:
The period 1992-94 covering two seasons can be termed as 'Nightmare' period for the Sugar Industry. This period will go down in the annuals of the sugar industry as one of the most disastrous on record. Government policy towards the sugar industry over the past 5 years has been irrational. Cumulative affect of this policy is evident from the fact that this vital food industry has been brought to the verge of collapse. The sugar industry has been inflicted with multiple injuries. and rendered crippled as a result of defective government policy. .
- Haphazard increase in sugar production capacity financed by government controlled financial institutions. No consideration is given to raw material availability and domestic market for sugar.

- Cumulative increase of 49 percent in last 6 years in sugarcane support price without corresponding increase in sugar price. Government has been over sensitive about sugar price on one hand and generous while fixing support price of sugarcane.
- Liberal sugar import policy allowed world's major sugar producing countries to dump their sugar in Pakistan. When Pakistan industry wanted to export surplus sugar without any financial help from the government, sugar export was banned.

These are just a few examples of the defective sugar policy. This review deals in detail with the background of the industry and the problems it has been facing during the period under review. .

Sugar Industry of Pakistan
The Sugar Industry of Pakistan consisted of merely 2 Sugar Mills in 1947-48 with sugar production capacity of 10,000 Metric Tons. In the first twenty years after independence, the number of Mills increased to 17 and sugar production to 232,000 Metric tons. By 1988 we had 44 Mills and sugar production jumped to 1.78 million tons.

During the last 5 years the Sugar Industry has seen a period of phenomenal but unplanned growth. By 1993/94, 63 Mills were operational with capability to produce 4.5 million tons of sugar. Increase in raw material did not keep pace with haphazard growth of the sugar industry. Last five years (1988-93) saw the industry's drifting in a phase of under utilization of capacity.

Sugar Production Capacity and Consumption ¬

By 1993-94 Season 63 Sugar Mills were operational. Sugar production capacity stood at 4.5 million tons. Consumption of main sweeteners (Sugar and Gur) in Pakistan has remained between 26-34 kgs with an average of
30 kgs. per capita per year. The share of Gur in sweeteners consumption per capita has been falling. It fell from 60 Percent in ' 1982-83 to 31 percent in 1987-88. The future forecast of sugar demand on the basis of substitution of Gur with refined sugar is given in Table 1.

It can be seen that against a projected consumption of 3.14 million tons of refined sugar in 1999-2000, we already have a production capacity of 4:5 million tons in 1994.

National Loss
Uncontrolled growth of sugar industry during last 5 years has cost the nation heavily. This policy has permanently damaged the sugar industry and the country lost great opportunities for all times to come

The manner in which Pakistani sugar industry has grown, has nothing common with the present day trend all over the world. The world has opted for vertical expansion of the sugar industry, to achieve economies of scale. Compared to a standard capacity of 4000 tons in Pakistan the world sugar industry is moving towards 10000 to 20000 tons capacity by vertical expansion. Long term damage inflicted on the sugar industry as a result of defective government policy during the last 5 years is summarized below:

1) Instead of vertical expansion, sugar production capacity has been increased mainly through 3000 TCD to 4000 TCD Mills. Uneconomical projects have been, established against the principle of economies of scale. Due to over capacity, scope of expansion of established Sugar Mills has been permanently blocked. The country' is left with the legacy of several small uneconomical sugar projects. This policy has driven even the viable projects- into sickness. We can not make any major breakthrough for becoming cost effective in these circumstances.

2) Latest technology has been ignored in the new sugar projects. Traditional low pressure boilers have been installed. Opportunity to produce atIeast 300 MW extra electricity for the national grid without consuming extra fuel has been lost"

Importance of Sugar Industry for National Economy

Sugar Industry is Vital for national economy. It utilizes sugarcane which is a major cash crop grown in Pakistan. Sugar and sugar based products are essential ingredient of common man's food. Sugar is the cheapest source of energy in our diet.

At the time of independence, 10,000 tons of sugar was produced in Pakistan. We achieved self sufficiency in our domestic sugar requirement by producing 2.4 million tons of sugar in 1992/93. In 1993/94 sugar production rose to 2.92 million tons and Pakistan became a sugar surplus country for the first time

Sugar Industry acts as an effective catalyst of rural uplift by providing a ready market for the produce of farmers in these areas. Sugar Industry along with the farmers contributes funds for provision of basic infrastructure like roads in rural areas. The industry contributed Rs.500 million under this head during the last two years. Our contribution to national exchequer in shape of Excise Duty and other state levies is even higher. Sugar Industry contributed Rs.5.1 billion towards Central Excise Duty in 1992-93 and Rs. 5.5 billion in 1993/94. This constituted 15 percent of total Central Excise Duty collected by the government.

High Input Cost and Low Sugar Price

For the last several years the sugar price has been kept at a level than the industry's average cost of production. It is a well known fact that cost increased manifold during the last few years. Increase in sugar price did not increase with the increase in cost .of inputs. Sugarcane support price is fixed by the government. Sugarcane constitutes 63 percent of the total cost of production (excluding excise duty). Cumulative increase in sugarcane price for 6 years works out to 49 percent. This translates into an average increase of 9.7 percent per annum.

Price of every food item has increased with inflation in the country. Sugar cannot be an exception to this phenomenon. For the last five years price of wheat, beef, milk, rice, tea and vegetable ghee has increased by 12-13 percent annually. Sugar price has increased by only 3.5 percent during the same period.
Every business in the world is entitled to make a decent profit. PSMA has always pleaded that our cost of production be worked out by the government and a suitable sugar price will be maintained to allow a reasonable profit to the industry. Many of our problems would fade into insignificance if we had a respectable price/cost relationship. The price we have received for our sugar for the last two years has been the same in real terms while inputs have risen significantly. Margins have eroded completely. In order to maintain a viable domestic sugar industry, we must receive a fair and reasonable price for our product.
The only beneficiaries of the depressed sugar price have been the retail merchants and industrial users of sugar who have not passed the savings to the consuming public.

Impact of Surplus Sugar Stocks and Low Sugar Price on Industry

Surplus sugar stocks and low sugar price are two key factors causing sickness of sugar industry. Sugar industry and sugarcane farmers are two most important partners of sugar production cycle. Unviable sugar industry automatically means problems for the farmers. '

As a direct result of inconsistent sugar export policy, the sugar industry had to suffer financial adversity both in terms of profitability and liquidity. In addition to this, the industry suffered by being labeled as unreliable sugar supplier.

Blockage of funds in surplus stocks resulted in either delayed payments or non-payments to the growers on part of some mills. Surplus sugar stock carried forward to 1994/95 increased to 309,000 tons. The value of this stock exceeds Rs.3 billion.

Our next door neighbour faced a similar situation two years ago. India had a sugar disaster in 1993/94 and consumers had to pay Rs.18.00 per kg. for sugar. If Indian authorities had taken timely corrective action, Indian consumers could have got steady supplies of sugar at Rs.15.00 per kg. The country could have saved huge amount on foreign exchange that had to be spent for import of sugar.

India became a sugar importer with a deficit of two million tons from a position of being a net exporter. It is still time that we learn from Indian experience. We cannot take this matter lightly. Urgent corrective action is long over due.

Indian Sugar Industry experienced a tremendous build up of sugar stocks during the last three years. Production increased 22 percent while off take went up by only 1Q percent. Deteriorating financial position of Mills resulted in delayed payments to the farmers. A brief note on the Indian Sugar Industry-published in November 1992 and June 1993 issues of 'World Sugar Situation and Outlook' is reproduced:

Oversupply in the Indian Sugar Industry:
The sugar industry in India today faces 'a tremendous problem of oversupply. Administered cane prices have encouraged fanners to grow more cane than the country's consumers can utilize. Mills hope that the government will assist them this year by agreeing to the establishment of a "buffer stock" which would relieve them of a portion of the cost of holding nearly 5 million tons of 1991192 sugar which will carry over into 1992/93.

Thanks to the rapid output growth of the last four years, both the public and private sugar milling sectors are experiencing considerable financial stress on the eve of the 1992/93 crushing season. The situation is particularly acute in North India, where state governments have regularly ignored the calculus by which the central government sets a national minimum purchase for sugarcane_ At the end of the crushing season in mid-July, - sugar mills in Uttar Pradesh owed fanners 3.25 billion rupees ($114 million) for cane delivered but not paid for. Such arrearages are not unusual in the Indian sugar business, but this was two and a half times what the mills owed fanners at the same time last year. Arrearage problems, although on a more limited scale, also have occurred in most other states. It has been expected that state government would provide debt relief for those public sector (cooperative and government-owned) mills which were in the red at the end of each production year. Last year the bill came to about one billion rupees ($40 million), but this year it could come to 2.5 billion rupees, at a time when state resources are tight and the central government is pushing the states to cut back their annual budget deficits.
A stronger world market could turn around the oversupply' problem fairly quickly; so would a weather-induced decline in sugarcane production. However, neither is expected within the coming year. The Government may agree with an industry suggestion to use part of the Sugar Development Fund (underwritten by the industry) to finance a sugar buffer stock. Nearly everyone acknowledges that this move can be little more than a palliative. Over the coming year, some means must be found reducing the stocks to a more manageable level.

A number of economists from Indian research institutions and multilateral lending agencies have been raising questions about the wisdom of encouraging further growth in the sugar sector when the end-product is in surplus, when exports are possible only with subsidies, and when the country appears to be ¬slipping into a deficit position in food grain production.

Financial Problems:

There has been a tremendous build-up in Indian sugar inventories over the last three years. Production has risen 22 percent and off take has increased only 10 percent. As a result, sugar stocks now stand at over 5 million tons. The government has allowed sugar to pile up at the mills, knowing that releasing stocks too rapidly would cause a collapse in open market prices I pushing weaker mills even closer to bankruptcy.

The government of India announced a number of sugar policy changes on February 16, 1993, designed to provide financial relief to the sugar milling industry and announced on April 29 its intention to decontrol molasses trade. The sugar milling industry has been squeezed for the last few years between central government policies designed to hold down consumer prices for sugar and state government policies designed to maximize income for sugar cane farmers as policies which maintain molasses prices well-below world market prices. Recent policy changes should provide a measure of relief to the Indian sugar industry.

>Late Payments and Declining Cane Supplies:
Hard-pressed mills have delayed and, in _ few cases, never fully compensated farmers for their cane. Renovation of obsolete mills and construction of new mills has fallen far behind projected levels because public financial institutions (virtually the sole source of credit for sugar mill construction and renovation) are turning down most projects because projected cash flows will not service new loans.

With the country suffering from a substantial oversupply o/sugar, and water scarce in several of the states where mills are planned, it could be argued that more mills are not needed. However, the construction of new sugar mills enjoys "enormous political support. Farmers like cane, especially at current prices, because it is easy to grow and provides relatively dependable cash income. Local politicians see mills both as engines of rural growth and it is alleged, as excellent sources of campaign finance as well.

> Outlook:

Higher sugar and molasses prices, a reduced sugar levy percentage, and subsidies for some of the mills' stock-holding expenses will give the mills a measure of financial relief. Although consumers will not be happy with higher retail prices, the Food Ministry can persuasively argue that had prices not been allowed to rise, the drop in cane area this year might turn into a collapse next, followed by tight supplies, skyrocketing prices, and emergency imports. The policy steps taken should allow for the continued expansion of sugar output in India.

PSMA's Sugar Export Proposal 1993/94

, Pakistan Sugar Industry produced exportable surplus in 1993/94. The industry deserved encouragement for, achieving a cherished goal of making Pakistan. a sugar exporting country. Unfortunately this achievement turned into major problem for the sugar industry. Pakistan Sugar Mills Association and other international sugar experts were projecting well in advance that Pakistan will have a surplus in 1993/94. A brief comment, about the sugar scenario in Pakistan published in a 'F.O.Licht's International Sugar and Sweetener Report' is reproduced below:
“Another country that could become a burden for the world market is Pakistan'. That country has apparently embarked on an uncontrolled expansion process which could soon lead to unmanageable, surpluses of mill sugar. To eliminate imports quite a number of new sugar mills have been put into ¬operation in the past few years and the country's 54th sugar mill commenced grinding in 1992/93. However this is not the end of the expansion process and about 15 new mills in the Punjab and in Sindh may be put into operation within the next few years. According to informed sources this could lead to the accumulation of surpluses and eventually to a collapse of the industry and already in 1992193 the country will have a surplus even though no sugar will be officially exported. But unofficial exports to neighboring countries such as Afghanistan and Iran are estimated to reach more than 100,000 tons each year. If production does develop as expected official exports can be foreseen especially if the country continues to import sugar for internal political reasons. But as in the case of, India this could require export subsidies which could prove to be a burden for the milling industry. "

Pakistan Sugar Mills Association approached the Government in September 1993 and proposed that export of sugar may' be allowed in view of foreseeable surplus. A comprehensive proposal was again put up to the government' on 22nd November 1993 suggesting as follows:

• Sugar production during 1992-93 was 2.4 _on tons and Pakistan Sugar Mills Association estimates minimum production of 2.8 million tons during 1993-94. Production figure may touch 3 million tons given favourable harvesting conditions.

• The Sugar Industry has seen a rapid expansion during the last few years and its installed capacity is in the vicinity of 4.5 million tons. Sugar consumption in Pakistan during 1993-94 will not exceed 2.6¬ million tons at a per capita consumption of 20 kgs. After accounting for carry over stock and assuming sugar production in 1993-94 at a conservative level of2.8 million tons, a surplus of 500.000 tons of sugar will be available.

• Pakistan has an opportunity to enter into the sugar export market at this stage. If we can find a market for our production we will be able to fully utilize the present installed capacity. You will appreciate that domestic sugar consumption is likely to @main at a level much below: the installed production capacity. 'If we are unable to sell surplus sugar in the international market the country will have to live with massive unutilized production capacity.

• Pakistan Sugar Mills Association suggests that a cautious approach may be taken in the initial stage in exporting sugar to avoid a situation of shortage in the domestic market. It is suggested that an export quota may be fixed by the Government, and be reviewed from time to time keeping' in view the production and consumption trend in the country. Export quota may be managed through PSMA to ensure that export of sugar remains within predetermined limit. Although we are confident that a quantity of 300.000 tons can be safely exported, however we suggest that a beginning may be made with 50,000 tons.

Instead of responding to our proposal for allowing controlled sugar exports, the government decided not to fix any export quota.

Sugar Industry sold 300,000 tons in the international market with extraordinary marketing effort. The industry was able to achieve the country's cherished goal of increasing its non-traditional exports.

It may be noted that the sugar industry managed to gain entry into the highly competitive world export market without any subsidy from the government. Contracts for 300,000 tons were signed by various sugar mills for exports. The government, however, imposed a ban on sugar exports on 4th May 1994. This was done without any warning or discussion with PSMA. By the time the ban was imposed, the industry had shipped less than half of the contracted quantity. The mills were unable to honour their commitments to
major international buyers resulting in considerable loss of reputation for Pakistan as buying source of sugar.

Subsequently, after a gap of four months, export permits for 90,000 tons of sugar were issued at the discretion of the government, to sugar mills and traders. No set criterion was followed. Due to lack of transparent policy and critical delay in grant of export permits, a significant portion of this quantity could not be exported to-date. Allocation of export permits by the government did not pass the "Smell Test".

This explains how the exportable surplus of sugar became a liability for the industry and the sugar industry was pitched in such a critical situation.

Domestic Sugar Scenario 1994/95
Sugar crop for 1994/95 is much better compared to 1993/94 when a record sugar production of 2.92 million tons was achieved. In 1994/95, production of 3.4 million tons can. be achieved considering the size and quality of crop.

Domestic demand for sugar as per government estimates will not exceed 2.6 million tons. Demand and supply position of sugar for 1994/95 is tabulated in Table 6.

After keeping a buffer stock of 200,000 tons, sugar industry will have a surplus of 900,000 tons. In other words the industry is facing a surplus which is twice the size of surplus of 1993/94. The situation is further compounded by the fact that the government has increased the price of sugarcane by
14 percent. This has greatly, enhanced the sugar production cost. Additional burden on account of increase in raw, material cost alone works
out to Rs.2.5 billion.

World Sugar Scenario

World sugar production for 1994/95 is forecast at 116.30 million metric tons up 3.6 percent from the revised estimate for 1993/94. Of total production, cane sugar production .is expected to account for 77.67 million tons,
6.7 percent higher than 1993/94, reflecting a record 13.0 million hectares of cane harvested for sugar, higher cane ' yields, and improved sucrose recovery rates. .

Among the world's leading cane sugar producers, improved outturns are expected in India, South Africa, Thailand, Brazil and Australia. India's sugar production is 'forecast to increase 16.6 percent to 14.4 million tons due to increased sugarcane prices that will allow sugarcane to be diverted from the production of gur (non-centrificaI sugar) to the mills.

South Africa's sugar production, after two drought seasons, is forecast
to increase 36.7 percent to 1.7 million tons. Thailand's sugar production is forecast to increase10.0 percent to 4.4, million tons, as the industry recovers from the past 2 years of drought-reduced crops. Brazil's 1994/95 sugar production is forecast to increase 5.1 percent to 10.4 million tons, due to continued good growing conditions in the south and, in the northeast, recovery from the 1993 drought., Australia's production is projected, to expand to a record 4.56 million tons, up 2.2 percent from 1993/94, reflecting continued expansion in the harvested area.

In contrast to cane sugar, global beet" sugar production is projected to be down 2.1 percent in 1994/95 to 38.63 million tons. While total sugar beet harvested area is expected to be relatively unchanged at 8.0 million hectares, somewhat lower recovery rates are likely to reduce production from this season's record. European Union (EU) beet sugar output accounting for more than two-fifths of the world total is expected to fall 5.6 percent to 16.45 million tons. The expected downturn is largely due to reduced sugar beet area in several key producing countries such as France, Germany and the
United Kingdom, that more than offsets improved crops expected in Italy and the Netherlands. The countries of Central Europe are expected to experience improved production, up 3.1 percent to 3.78 million tons, due to higher outturns expected in Hungary, Romania, and the former Yugoslavia. For Poland, normal yields and no change in beet area after the record 1993/94
crop, translate into a 16.3 percent lower outturn in 1994/95 of 1.9 million tons. For the former Soviet Union, Russia's sugar production is forecast down 6.9 percent to.2.3 million tons, due to decreased area and yields. Ukraine's production is projected at 4.0 million tons, down 3.6 percent from 1993/94, largely due to a fall-off in area harvested that more than offsets an expected improvement in yields. Despite the downturn in area harvested, with 1.4 million hectares in sugar beets, Ukraine has the largest land area in sugar beets of any country and accounts for nearly 20 percent of the world total.

Global sugar consumption for 1994/95 is projected at a record 116.09 million tons, up 1.0 percent from the revised estimate for 1993/94. Consumption exceeded production in both 1992/93 and 1993/94, causing significant stock drawdown. However, for 1994/95, global production is forecast to once again exceed global consumption.

Since 1980/81, global sugar consumption has grown steadily, reflecting population growth, the stability of the human diet, and sugar's role as a staple in most of the world the lack of substantial growth in recent years is due to a drop in sugar use in the countries of the former Soviet Union and Central Europe, as well as generally slow consumption growth in the rest of the world, apart from Asia, due to global recession.

Despite rapid growth in sugar consumption, Asia continues to have the lowest per capita sugar consumption of any region. For the world's two most populous nations, India and China, sugar consumption is forecast at 14.31 and 8.00 million tons, respectively. With a combined population in 1994/95 estimated at 2.2 billion, India and China are expected to account for 58 percent of Asia's total sugar use and nearly 20 percent of the world total. A decade earlier, India's sugar use was estimated at 9.1 million and China's at 2.2 million tons together only 11.5 percent of the world total.


World sugar trade is forecast to remain between 29 and 30 million tons. Global exports for 1994/95 are forecast at 29.48 million tons, or about,
one-quarter of world production. The world's seven largest sugar exports the EU, Cuba, Australia, Thailand, Brazil, Ukraine and China-are expected to account for 72 percent of global exports. With higher production and relatively low internal demand relative to production, 'Australian and Thai sugar 'exports are expected to total 3.55 and 3.00 million tons respectively. Brazil's exports are expect to be up 12 percent to 2.58 million tones.
For 1994/95, South Africa and Zimbabwe, traditional sugar exporting
countries, are forecast to make impressive comebacks as their sugarcane crops recover from Southern Africa's devastating drought. South Africa is forecast to export 240,000 tons after importing an estimated 118,000 tons in 1993/94. Zimbabwe is forecast to export 263,000 tons after importing 185,000 tons.

Imports for 1994/95 are expected to be in balance with exports. Sugar imports are expected to be up in the EU, the Russian Federation, and Canada. Mexico's imports are forecast to grow from 100,000 tons in 1993/94 10600,000 tons in 1994/95 after this year's large stock draw downs.

Stocks and Prices

Beginning world sugar stocks for 1994/95 are forecast at 18.21 million tons, down 2.72 million from a year ago and the lowest since the beginning of the 1981/82 season. With global sugar production for 1994/95 expected to slightly outpace consumption growth, there is likely to be a replenishment of stocks, after 2 years of drawdown, and some dampening of prices.

Activities of PSMA in 1992-94
Pakistan Sugar Mills Association started the year with a long agenda. Several problems being faced by the industry were to be taken up with the Government. Since November 1992 we have seen 4 Governments. Fifth Government took office on 19 October, 1993. We took up the following major issues with 5 different governments in the last two years

1) Unplanned expansion' of Sugar Industry
2) Subsidized sugar imports in the country
3) Rebate of Central Excise Duty
4) Export of Surplus Sugar
5) Problems of new Sugar Mills

In addition to these issues Zonal arms of PSMA 'took up numerous issues at provincial level.

Unplanned Expansion of Sugar Industry

PSMA worked closely with the Government and Financial institutions on this matter. Prime Minister established a Technical Assistance, Evaluation and Review Committee (TAERC) for study on Sugar Industry. This task: was assigned to Planning and Development Division and PSMA was represented. A comprehensive report was prepared and presented to the government.

PSMA also drew attention of Financial Institutions regarding over expansion and high cost of new sugar projects. National Development Finance Corporation was the first to respond. NDFC organized a Seminar in Karachi where all aspects of Sugar Industry were discussed threadbare. As a result of the efforts of your Association, DFIs quickly realized the gravity of the situation and slowed down the process of providing financial assistance to any new sugar projects. A standard cost of project was worked out and adopted by all DFIs to curb the incidence of over invoicing.
Rebate on Central. Excise Duty.

In order to provide incentive to the Sugar Industry to increase sugar production by transporting sugarcane from inaccessible areas a CED rebate is given. Sugar production in excess of last years production is subjected to 50 percent of normal CED. Some changes were made in this policy, which were against the very spirit in which it was introduced in the first place. PSMA took up this matter at the level of Finance Minister, Chairman Central Board of Revenue and Member Excise. We are happy to report that the Policy has been amended. Problem of new mills still remains unresolved. PSMA will continue to represent to the government for solving the genuine problems faced by the new mills.

Relationship with International Institutions
Pakistan Sugar Mills Association made further progress in its relationship with international agencies like UNIDO and USAID. Two important projects were undertaken during the period under review.

.UNlDO-Techno-Economic survey

A Workshop on Asian, Sugarcane Industry was held in May 1991 at Islamabad in which about a dozen, countries from South-East Asia participated.

As a consequence of this workshop a series of meetings took place between UNIDO Government Pakistan and PSMA representing sugar industry. As a result of these discussions, it was recommended to widen the scope of co-operation between UNIDO and Associations of sugar producers and sugar technologists in Asia. It was also felt during these discussions .that over-all efficiency' of sugar mills in Pakistan could be substantially improved with the help of expert advice from UNIDO.

UNIDO obtained an assistance of US$ 146, 000 towards providing technical assistance to Pakistan Sugar Industry. A team of experts was sent in February 1993 with experts in the following areas:

• Sugar Industry
• Ethanol Manufacturing
• Sugar Economy .
• Energy Management
• Environment

A project was, therefore, finalized which was implemented by UNIDO in close co-operation with PSMA. This project aimed at the transfer of latest technology through diagnostic visits to nine sugar mills in Pakistan which had offered to co-ordinate with this study. The following six international experts comprised this mission:

1) Mr. Sabater De Sabates
2) Mr. Alan McfigganS
3) Mr. Didier Chaux
4) Mr. Jean Pierre Romer
5) Mr. Lefebure,
6) Mr. Lindsay Lincoln

A full day seminar was' held at Faisalabad. Each expert explained to the representatives of the participating mills, the purpose of his study and the methodology that the technical mission would adopt. The general
up to date information on the various disciplines to which each expert belonged were also explained at the seminar.

Later the team visited all the participating mills and held detailed discussions with the technical staff of each mill and then left for headquarters in Paris to finalize the report. The report was finalized within two months and the Mission came back to present the individual reports to the management of the individual mills. A general report was also prepared which was presented to the Government of Pakistan and PSMA.
UNIDO provided for air travel of the expert team. They also provided the daily allowances for all the specialists. The total amount which was spent by UNIDO is estimated at $159,330/-. The participating mills only had to provide for internal travel and had to make arrangements for their stay when visiting their plants.

Positive feedback was received from participating mills, and UNIDO was found to be very useful. Some mills have actually made modifications in their processes and plants , to take full advantage of the recommendations.

Production Highlights 1992/94

As stated earlier the period under review was 'Nightmare' for the industry in general and the mills located in NWFP in particular. A badly wounded sugar industry produced 2.4 million tons of sugar in 1992/93 and 2.92 million tons in 1993/94. Highlights for the last 5 seasons are produced in Table 8.

Future Outlook
Outlook for 1994-95 will remain bleak unless a concrete sugar export policy is announced by the Government. The industry can produce 3.4 million tons sugar against the ¬domestic demand of 2.6 million tons during the year. This level of production can only be achieved if the industry is able to sell the surplus sugar in the international market. Timely announcement in this respect by the Government will determine the fate of this vital food industry. The international market is very competitive and Pakistan is relatively a new entrant in this market. We are also carrying the stigma of being an unreliable supplier due to our inability to ship sugar against valid contracts due to sudden Government ban on sugar exports. In view of this we will have to make extra ordinary efforts to be able to sell in the international market.

If Government does not announce a policy on sugar exports well in time the sugar industry will have to restrict production to the level of domestic consumption. As sugar is a perishable commodity, it is not possible to produce surplus sugar and store if for long period. PSMA fears that in such situation atleast 30 percent of sugarcane crop will remain unutilized and bring extreme hardship to one million sugarcane farming families. Lower sugar production will also decrease government revenues in shape of Central Excise Duty ¬and other government levies. If the Sugar Mills are unable to utilize the sugarcane crop the country will get into vicious cycle as the farmers will not sow enough sugarcane in 1995-96. This may result in our becoming a net importer of sugar from a sugar surplus economy.

It is well known fact that country's sugar industry could not start operation for 1994/95 at the normal timing. The season was delayed by over 6 weeks causing production loss to the manufacturers and complications for the sugarcane farmers.

Sugar Industry is a seasonal industry and operates from October to March. Entire sugar is produced in six months but consumed in 12 months. Normally 40 percent sugar is consumed in first six months i.e. the winter months the rest is consumed from April to September. As the entire production takes place from October to March, 83 percent of costs are incurred during this period. Sales on the other hand are only 40 percent in this period. In 1994/95 the production estimate is 3.4 million tons. Domestic consumption as projected by the government is 2.6 million tons. Consumption during October to-March will be 1.1 million tons or about 30 percent of total production. This means that unless policy on disposal of surplus sugar is announced the industry will have incurred 83 percent costs. Sales will not exceed 30 percent of production and huge funds. will be blocked in 70 percent - stuck up stocks. This has serious ramifications on the liquidity position of the mills and their ability to pay to the farmers. A simplified version of cash flow will look as follows:


Total cost of production 3.5 million - tons sugar Rs. 36.40 billion
Raw material cost Rs. 22.75 billion

Conversion Cost incurred in first six months Rs. 7.28 billion

Total cost incurred from October 1994 to March 1995 Rs. 30.03 billion


Sale proceeds from 1.1 million tons sugar
(October-March) Rs.11.44 billion.

Deficit in Revenues Rs.18.59 billion

It is obvious from the above that if the industry is made to hold the exportable surplus as stuck up stock, it is impossible to pay the farmers. Raw material cost alone is 22.75 billion against a revenue of 11.44 billion in the first six months. This leaves a gap Rs.11.31 billion on sugarcane payments alone. It will be unfair to assume that 100 percent sales revenues can be diverted to sugarcane payment. Essential conversion costs have to be ¬incurred for payment of salary and wages, chemicals, packing materials and other incidentals. It can be see that the value of sugarcane crop is 24.18 billion and even by diverting entire sales revenues towards payments of raw material, farmers will not be paid to the extent of over 50 percent.

A meeting was held with two Federal Ministers 'to solve the sugar crisis in the country. We are happy to report that the government has agreed in principle to allow export of surplus sugar from the country. It has also been agreed that the export quota will be managed by Pakistan Sugar Mills Association to ensure that sufficient sugar in domestic requirement remains available in the country at all time. The industry started operation after sugarcane from the government and it is expected that formal notification in this regard will be made shortly.

We are entering the next year with new challenges and a totally new. domestic scenario for the sugar industry . We will be facing the problems of surplus for a change. We will be looking for international market in addition to our .traditional domestic market. PSMA will have new roles added to its responsibilities. In addition to acting as representative of sugar industry in our relationship with the government, PSMA will handle is tribution of sugar export quotas to its members and issue sugar quality certificates.
I am confident that" with your support we will face the new challenges with confidence and to your satisfaction.


I would like to acknowledge the support and guidance provided to me during the year by the members of Central as well as Zonal Executive Committees. I would also like to place on record my appreciation for the staff at the Central Secretariat in Islamabad and Zonal Offices in Karachi and Lahore for their hard work and dedication. I would like to place on record my appreciation for the support given to PSMA by UNIDO and USAID.

Altaf M. Saleem
Pakistan Sugar Mills Association (Centre)
November 24, 1994