No case for an increase in domestic price of sugar: FLP tells FCCC

  • 13th August 2021
  • 2021
  • // Display comment count + link

Fiji Labour Party  submission to the Fijian Competition and Commerce Commission on FSC’s application for 100% increase in the price of sugar sold on the domestic market:

Sugar is a basic food item used in every household. It has been under price control for many years now along with a number of other essential commodities.

Price control was introduced in Fiji in 1973 under the provisions of the Counter Inflation Act (Cap 73).

It is basically a mechanism to protect consumer interests – to ensure that essential items are available to the people at a fair price.

The Fiji Sugar Corporation occupies a monopolistic position with regard to the manufacture and sale of sugar in Fiji. This fact has to be kept in mind when dealing with its application for a price review.

FSC Submission

We have carefully studied the FSC submission and found most of it not to be of direct relevance to the issue at hand. It is largely a historical narrative outlining the advent of the sugar industry in Fiji under the CSR Company Ltd of Australia, and its post-independence transition to the Fiji Sugar Corporation in 1973.

FSC blames a number of factors for the challenges it faces today, among them the phasing out of the preferential quota and the guaranteed price arrangements it enjoyed for almost four decades under the EU Sugar Protocol.

The other factors it identifies are:

  • Non renewal of agricultural leases
  • Natural disasters by way of cyclones, droughts and flooding
  • Low cane yield per hectare
  • Ageing sugar mills
  • High TCTS
  • Lack of capital investment in farms
  • High debt levels etc

In short, the Corporation argues that all these factors have reduced it to a state of “extreme financial stress” causing ‘immense cash flow constraints’.

It fails, however, to make any mention of its own lapses  in the overall management of the Corporation which contributed to its virtual bankruptcy and total dependence on government support for its survival.

Over the years, successive FSC Boards and the Sugar ministry failed to take remedial action to arrest the malfeasance that was rampant in the affairs of the Corporation.

Both the Board and the Ministry failed to act when corrupt practices costing millions and the lack of accountability and transparency in the affairs of FSC were publicly exposed in the media and before the Parliamentary Standing Committee consulting on Reform of the Sugar Industry Bill No.19/2016.

The submission then goes on to lay down FSC’s plans to ‘rectify the ailing situation’. It talks of the importance of the sugar industry to the national economy and sets out its rescue plan which has cost implications running into hundreds of millions.

The estimated cost of implementing the rescue plan or how it is to be actually financed, have not been mentioned.

There is also some doubt whether the plan outlined in the submission has been endorsed by the government as some of its proposals have not found mention in the Sugar Ministry’s Strategic Plan for the industry.  The proposal to have just one mill for whole of Viti Levu, for example, has shocked many, including the officials of the Ministry.

There are many other proposals in the submission which do not reconcile with the overall direction the industry should take if it is to survive in the long term.

But the issue before us is not about the recovery or rehabilitation of the industry or the Fiji Sugar Corporation for that matter.

Granted though, that it is a matter of grave socio-economic importance to the nation and should be referred to an all-industry (inclusive) forum specifically appointed for the purpose, to arrive at a consensual approach to addressing it.

Determining a Fair Price?

The issue before us, in layman’s terms, is: What is a fair price a house wife should pay for her sugar?

Note the emphasis is on fair price – fair to both the consumer and the manufacturer.

Normally, a fair price is what is perceived by the consumer as fair for the product he or she is purchasing.

The current price of sugar and the increases sought as stated in para 9.2, Page 12 of the FSC submission are:

  1kg  SKU 2kg 4kg 25kg
Current 1.40 2.81 5.61 34.17
Proposed 2.89 5.78 11.56 72.73
Actual Increase 1.49 2.97 5.95 38.56
% increase 106 105 106 113
Prices quoted are VAT exclusive and Ex-warehouse

The retail price to the consumer is much higher after adding VAT and the wholesale/retail margin – see below.

Ex warehouse
VEP
      SKU Wholesale VEP Wholesale VIP Retail
 

1.40

 

1kg

 

1.46

 

1.59

 

1.75

2.81 2kg 2.92 3.18 3.50
5.61 4kg 5.84 6.37 7.00
34.17 25kg 35.54 38.74 42.61

The present regulatory prices are determined by the Fijian Competition and Consumer Commission on a cost plus approach. FSC wants this to be replaced by what it calls ‘returns approach’ – returns on investment and capital employed, it says.

However, the submission does not provide details or justification for taking this rather peculiar approach.

In any event, the proposition itself is not only questionable but rather inane and should be dismissed.

The consumer must not be made to pay more than what is a fair price for the product, certainly not to make up for the financial woes of the Corporation which are of its own making.

As a manufacturer of a basic food item (sugar), it is entitled to receive a fair price based on its cost of production and no more.

The Regional Benchmarking Sugar prices quoted at Page 11 of the submission are unverified but even so, they are not relevant because we are concerned about what the price should be in Fiji based on its cost of production and a fair margin allowed to wholesalers and retailers.

The Corporation’s latest audited Financial Report for the year ended 31 May 2020 puts the cost of production of 1kg sugar at $1.03 – see Statement of Profit or Loss at P29 of FSC annual Report for 2020.

Cost of sales is shown as $164.7m for 160,000 tonnes of sugar manufactured. This works out at $1.03 per kg. The ex-factory sale price is $1.40 per kg VEP giving a margin of 37c per kg which is 26.42% of the manufacture cost.

The current prices allowed FSC are more than reasonable and the consumer must not be burdened with any unjustified increase.

It is to be noted that by the time the product is put on the supermarket shelf its cost increases to $1.75 per kg – allowing for VAT and the wholesale and retail  margins.

As for FSC’s call for the industry and Corporation to be supported by a price increase because of its importance to the national economy, we say that it has received hundreds of millions over the years from the tax payers, including the conversion of $174m in government loans to equity last year.

We submit, for the reasons stated above, that FSC’s application for price increases be declined and that the current prices remain in force.

Mahendra P. Chaudhry
Leader
Fiji Labour Party