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Sugar mills lied to govt, cheated farmers, swallowed subsidies: inquiry

Re1 cost manipulation earned barons Rs5.2b in profit

SAMAA | - Posted: May 21, 2020 | Last Updated: 2 years ago
Posted: May 21, 2020 | Last Updated: 2 years ago

Art: SAMAA Digital

An inquiry commission made stunning revelations on Thursday about the way sugar barons had cheated farmers, benefited from subsidies and created conditions so that the price of sugar could be higher.

Shahzad Akbar, special assistant to the prime minister on accountability, held a press conference to unveil the findings. Sugar consumption in the country is 5.2 million metric tonnes.

The biggest revelation is that they have been manipulating the cost of production (showing higher cost than actual cost). The sugar industry manipulated the cost of production to maximize its gains and claim a subsidy. A one rupee manipulation in cost of production translates into a windfall gain of Rs5.2 billion. In the last five years, the industry has been manipulating the cost by Rs10, Rs12 and Rs15 each year.

They show that they have procured less sugar than they have. And they conceal production. They concealed Rs93 crore in year 2019-20, and Rs1.7b was concealed in 2017-18.

In last five years, the sugar industry got Rs29 billion in a subsidy but paid Rs22 billion in income tax as a whole and the refunds they claim were Rs12 billion. 

So there are 88 sugar mills which got Rs29 billion in subsidies during the last five years, but the net income tax paid by them was Rs10 billion. So this industry is running in taxpayers money.

In 2015, a Rs6.5 billion subsidy was given.
In 2016, a Rs6.5 billion subsidy was given.
In 2017, no subsidy was given.
In 2018, the Center gave a Rs15.5 billion subsidy while Sindh gave a Rs4.1 billion additional subsidy.
In 2019, the Center gave Rs15.5 billion in a subsidy (in this the Center and Punjab were together) while Sindh gave a Rs9.3 billion subsidy.

Referring to 2019, he said these subsidies were given without independently assessing the cost of production of sugar, which is the very basis for awarding a subsidy, the commission said.

The commission mentioned Murad Ali Shah, stating that the subsidy in Sindh was tailored to benefit the Omni Group, which has the largest share in the market. That year they were given Rs11 per kg as a subsidy by the Center and Sindh gave them another Rs9.3 per kg on top of that.

In 2020, no subsidy was given by the Center, but Punjab gave a 2.4 billion subsidy.

All subsidies were giving without independently verifying the cost of production.

Six major groups control 51% of production.
A representative sample was taken based on production volume: The biggest share is of JDW which is 20% of total production.
RYK Group’s share in production is 12%
Al Moiz Group has 6.8%
Tandlianwalla has 5%
Sharif Group has 4.5%

The inquiry found that 68% of total exports go to Afghanistan. But data gathered by the two countries doesn’t match and the difference runs into the billions of rupees.

Pakistan’s data of how much we export is different from Afghanistan’s data of how much they import. A single truck can carry a load of 15 to 20 tons. But when documents were checked, it turned out that the receipts carried by those truck drivers showed each truck was carrying a load of 70 to 80 tons. This is a big joke, said Akbar.

Experts say, whatever method you apply, you can’t increase the axle load by more than 5 tons on a truck. Nobody checked this or assessed this loophole.

Another shocking revelation was that until 2015, the entire exports were done through over-the-counter cash transactions as opposed to a proper standard system of LC (letter of credit, which involves banking channels).

Anybody could buy dollars from the market and make payments, the biggest loophole in the system. They changed the system in 2015, but guess what, they still didn’t shift it to the Letter of Credit system but chose to do TT (telegraphic transfer).

So the exports to Afghanistan is very doubtful and has to be thoroughly investigated as it is a criminal act, the inquiry found.

The sugar commission concluded that there is caretlisation in the industry and this is a failure of the Competition Commission of Pakistan that it could not stop it.

The first report of cartelisation was made public by the CCP in 2009, but the sugar mills association acquired a stay order against it and the CCP could not pursue it further.

The commission has used examples to demonstrate how this cartel works, including blackmailing the government by calling strikes and stopping supplies to utility stores.

Sugar mills exploit farmers by as much as 30% by underweighing the produce.

Many mills operate on ‘katchi parchis’ instead of giving farmers proper receipts. They do this to justify an inflated cost of production. Common techniques include over-invoicing of procurement.

All irregularities were noted along with the laws these mills have violated so relevant departments can take it forward from here.

Alliance (RYK Group)
Moonis Elahi has 34% shareholding in this while Omer Shehryar has 20%. The mill was found to be running double books. There is strong evidence against it for benami or off-the-book sales.

One particular incident to be highlighted is an unexplained payment of Rs6 billion by the mill to a broker. It is usually brokers who pay mills to buy sugar and not the other way round. So when asked to explain the payment to broker, the mill did not have any answer.

Jehangrir Khan Tareen has 21% shareholding, Ali Khan Tareen has 13%, and the general public has 24% shareholding. This is the only listed company.

They were also found to be running double books. The mill was underreporting. The commission found cash purchases of cane through agent, Akbar. This is general practice but they gathered evidence specific to each mill. Like other mills they were also found to be involved in satta (forward sale and benami or off-the-book sales).

They have sugar mills units in Sindh and Punjab. JDW raised its crushing capacity by 64,500 pcd, but the provincial industrial departments didn’t know about this expansion. A small mill has the capacity to crush 7,000 to 8,000 pcd so this expansion is equal to 8 to 9 new mills. 

They also did under invoicing of their begas molasses to themselves, which inflates cost. An under-invoicing of 25% was found in this case.

There other irregularities including corporate fraud whereby the money of the public listed company was siphoned off to their private company and losses were booked in the public limited company.

Al Arabia Sugar Mills
Suleman Shehbaz has 25% shareholding, Hamza Shahbaz has 25%. Ramzan Sugar Mills (which is owned by the Sharifs) has 47% shareholding. So this is 100% owned by the Sharif family.

It was also found to be running double books. In fact, they were doing it openly with two registers marked as R and NR. R means reported (data given to the government), NR means not reported (actual data).

In 2017, they procured 45% cane off the book, which translates to Rs1.3 billion. In 2019-2020, they underreported cane procurement by Rs780 million. Since procurement was concealed, the production was also under reported.

In 2019-2020, they concealed production of Rs930 million and in 2017-2018, they concealed production of Rs1.7 billion. Their mill is also found to be using a katchi parchi system the most whereby farmers are underpaid. In this head, they saved Rs400 million. They manipulated sugar ratios (sugar extracted per ton of sugar cane) and there was evidence against the CEO and CFO giving instructions to the management to manipulate ratios.

Al Moiz, unit 1 and unit 2
Six mills in total, 96% owned by Shamim Khan and Noman Khan. They were involved in double books, under reporting, satta, hoarding and under-invoicing.
Saved Rs610 million by underpaying farmers in 2018-2019.
Saved Rs430 million by underpaying farmers in 2017-2018.
Gave loans to farmers at 35% and earned Rs130 million.

Hamza Mills
This is owned by Mian Muhammad Tayyab Group of Industries. They underpaid farmers and saved Rs820 million and made off-the-book sales of Rs1 billion, thus evading taxes, such as GST.

The regulator’s failure: it is not possible for a cartel to work like this without collusion of regulatory bodies. Every sugar mill has an FBR inspector present, how could this happen?

The collusion starts right from cane commissioner who fails to get the farmer the right price all the way to the top level where policy and decision-making takes place.

It is recommended these regulatory bodies get their act together and work transparently.

The PM has said the government will make this report public immediately and bring accountability in the regulatory overhaul, and strengthen the role of the FBR.

The PM said he wants a forensic audit of the remaining mills. He said the stolen money should be recovered. We will take it up after Eid and decide which institution will recover this, he said.

Other details
Sucrose content is stated to be between 9.5% to 10.5% but this is below international standards and there has never been an evaluation to see if this is true.

Prime Minister Imran Khan met his cabinet meeting at 1pm today (Thursday) in which an  inquiry committee gave a briefing on the outcome of their sugar report and its forensic audit.

The Prime Minister’s Inquiry Committee, which has been probing last year’s sugar crisis, made its findings public on April 4, noting that the crisis was primarily caused by the untimely export of sugar. 

Read: How Pakistan’s sugar lobby games the system in its favour

As prices rose locally, exports of this essential commodity were not justified, it said. The committee identified three groups that benefited the most as they took advantage of more than half of the total subsidy and sold their produce in the local market after prices soared. These include some of key members of the ruling Pakistan Tehreek-e-Insaf party as the main beneficiaries of a scheme that benefits a select few who game the system in their own favour.

On the top of the list is PTI stalwart Jahangir Khan Tareen, a close aide of PM Imran Khan. Tareen’s sugar mills availed more than a fifth or Rs561 million of this pie

Inquiry commission on the sugar crisis
A woman walks past bundles of sugar cane at a market in Lahore on February 10, 2014. Photo: AFP

The committee completed its supplementary report on March 31 and was given 40 days to submit a final report after completing a forensic audit of selected sugar mills.
Nine teams composed of officers from the Federal Board of Revenue, Securities and Exchange Commission of Pakistan, State Bank of Pakistan, Federal Investigation Agency, Anti-Corruption Establishment (Punjab), Auditor General of Pakistan (DG Commercial Audit), Intelligence Bureau, and ISI had to conduct forensic audits of these mills.
They have completed the audit and the cabinet will be briefed on it today.
The PM’s Inquiry Committee had noted in its supplementary report that the beneficiaries of sugar crisis have political clout and influence in economic decision-making, and a glance at some of these names is telling:
On the top of the list is PTI stalwart Jahangir Khan Tareen, a close aide of PM Imran Khan. Tareen’s sugar mills availed more than a fifth or Rs561 million of this pie. Similarly, Makhdum Omer Sheryar’s Rahim Yar Khan Group availed Rs452 million in a subsidy. He is a relative of Khusro Bakhtiar, federal minister for National Food Security and Research.
Other names that surfaced on the list include Moonis Elahi, a member of the National Assembly from Gujrat and the son of Punjab’s former chief. He belongs to the PMLQ, the coalition partner in the current set-up. Chaudhry Munir, a relative of Maryam Nawaz of the main opposition party, the PMLN, is also among the beneficiaries.
To complete the investigation, the committee had sought more time so it could do a forensic audit of 10 sugar mills that belong to these influential people. 

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