While the government has been putting a lot of energy into tackling import parity pricing as part of its broad-based attack on excessive pricing, there is one major industry in the country — sugar — that continues to use import parity as one of its cornerstones.
More amazingly, though, given that we have had more than a decade of economic reform, this industry continues to act as a cartel with its own powers and regulations, price-fixing and price-sharing arrangements.
Contrary to a report at the weekend, major reforms of the industry are not at present on the table, although a discussion paper, completed by the government in July 2003, has proposed minor reforms to Big Sugar’s protected, cartelised structure.
The industry is strategically important, turning over R6-billion annually and being an important contributor to the country’s food supplies.
But while South Africa is a low-cost sugar producer, consumers do not benefit from this as the industry, which has it own Act, uses import parity pricing plus a division-of-proceeds formula to ensure that domestic competition is at best limited.
This means the industry benefits from the country’s competitive advantages, but not consumers nor the downstream food processors that cannot export competitively because of the relatively high price of their feedstock.
There are even cases where food importers undercut local food manufacturers because they have access to cheap, exported South African sugar.
“The industry asked for time to be able to introduce empowerment. This has caused delays [in implementing reforms],” one government source says, because the sugar industry asked to be allowed to introduce empowerment before reforms are introduced.
This means that consumers rather than shareholders will pick up empowerment costs. The Competition Tribunal has noted in its ruling against the proposed Sasol and Engen merger that competition and empowerment are separate issues and should be treated as such. Consumers should not be made to pay for meeting the empowerment obligations of businesses or industries.
There are good reasons now, though, for Big Sugar to finally start feeling the winds of change.
One is that the sugar industry is undergoing changes worldwide as the European Union has committed to stop subsidising its sugar producers.
A second is that the potential widespread use of sugar cane as a feedstock for ethanol has seen international ethanol and sugar prices skyrocket to record levels.
A third major change, arising from the EU reforms, has seen leading players in the sugar market, Associated British Foods and the French-headquartered Tereos, begin a bidding war for the continent’s largest sugar manufacturer, Illovo.
The country’s second-largest sugar producer, Tongaat-Hulett, is also for sale as part of a wider restructuring by Anglo American of its interests.
Fourth, government is keen for the country to join the movement to use ethanol as fuel to reduce the oil import bill, contribute to a cleaner environment and develop the rural economy.
The Minister of Finance, Trevor Manuel, increased the fuel rebate on renewable fuels to 58 cents a litre in the Budget, but a government source says that the sugar industry is arguing it needs a R2-a-litre subsidy to supply ethanol to the fuel market.
The sugar industry will not discuss ethanol as an industry, saying no more than the issue is for government to decide what it wants to do so it is not possible to know how it has arrived at the R2-a-litre estimate.
The economics of sugar and ethanol production are markedly different, one leading source saying that sugar cane for ethanol production has a much shorter growing cycle, about half of that of sugar, meaning that two crops can be harvested in a single growing season, rather than just one.
The government and the sugar industry appear wide apart on the issue of using a portion of sugar cane production for ethanol production. “We may by-pass the sugar industry completely, develop new sugar cane production to supply ethanol mills,” says one policymaker.
The Makatini Flats near Jozini Dam can be turned to small-scale sugar cane production, with numerous job-creation and economic benefits for the region.
While the sugar industry has control of its own destiny in that it has its own Act and punitive powers, sugar cane production for ethanol use would not be covered by the Sugar Act as this only covers sugar consumption for human use, the policy-maker told the Mail & Guardian.
The government sees biofuels as a key job creator. Sugar cane has the best energy properties of any crop used to produce ethanol, a fuel which requires little or no retrofitting of motoring infrastructure, at least with an ethanol content of less than 10%.
The government’s 2003 discussion document says the volume of supply for local market requirements is determined by the sugar industry itself, with no intervention from government or downstream industry role players.
“This level of direct control over the supply of sugar to the domestic market could be exploited by the industry to the extent that artificial shortages are created, thus enabling the industry to maintain abnormally high domestic pricing arrangements.”
“Sugar exported by South Africa in many instances ends up, at extremely favourable prices, in the hands of foreign downstream value-adders that export their value-added products to South Africa.
“A more flexible access to ‘export’ sugar to domestic downstream industries would contribute favourably to export earnings and employment.”
The sugar industry is protected by a tariff that is based on the world price of sugar, which historically has been artificially low due to subsidies and dumping. The tariff at present is zero.
Domestic sales in excess of production share are penalised by redistribution payments in favour of the under-selling miller. This means the over-performing miller has to pay over to under-performing entities.
The sugar market internationally is one of the most distorted and regulated with many countries setting up regimes similar to that in South Africa to protect the market from subsidised prices.
In the South African case the idea is that the pain of low international prices is equally shared, excess capacity is being equally exported.
It could be said, though, that there is no equal mechanism for an additional distribution of proceeds, say to the fiscus, during periods of buoyant prices such as at present.
It is understood that in recent weeks the Minister of Trade and Industry, Mandisi Mpahlwa, has tired of the snail’s pace of reform and has said that proposed amendments should take place ahead of the industry completing its empowerment obligations.
Reforms that now might take place include introducing efficiency into determining market quotas, “enabling milling companies to grow based on efficiencies rather than size”.
It is envisaged that the redistribution of proceeds by over-performing millers be maintained, but that redistribution of proceeds only be undertaken at the end of each season rather than quarterly.
“This will enable over-performing mills to benefit from cash flow advantages arising from increased market share.”
The government also wants to see provision for newcomers as well as industry rebates for value-addition for export purposes to be based on world market prices.
Attempts to discuss reform issues with the sugar industry were not successful. The South African Sugar Association industry employs any number of media specialists, who happily play pass-the-journalist from one to another.
After speaking to three or four of these specialists, who appear to be employed not to answer any question under any circumstance, one conferred with a high authority and came back with the response that the industry could not respond to issues which at present government was deliberating.
Responding to questions, the trade and industry department (sugar is considered to be an agro-processing industry, which falls under trade and industry, not agriculture) said the current review of the Sugar Act (as contained in the discussion document) is “inter alia, to increase competition between local sugar companies based on efficiency considerations”.
It says in countries such as Brazil, where ethanol is produced from sugar, the government has made interventions in terms of tax rebates as well as mandatory blending requirements.
“Although full feasibility studies have not yet been conducted, it is doubtful if ethanol production from sugar will be viable without similar additional interventions.”