Picture: 123RF/BEAT1
Picture: 123RF/BEAT1

Sector master plans seem to be the practical steps the government is taking in pursuit of its Industrial Policy Action Plan (Ipap). The sugar master plan is one of about 14 such sector master plans that have emerged from stakeholder engagement and are being fine-tuned into blueprints through dialogue.

These master plans usually emerge in sectors that have experienced difficult operational circumstances and/or trading conditions in the upstream stages of their value chains. Upstream players are normally faced with predatory priced or dumped products from abroad that are sold in SA at prices that are lower than the cost of production in the countries of origin, with the result that local companies lose domestic market share.

Another related but far more nuanced factor stems from the lower world prices of these products, which SA retailers import as ready to use by consumers, or local downstream manufacturers import as inputs to their processed products. 

Trade policy and trade remedial interventions such as import duties or tariff hikes, which the government imposes to safeguard upstream producers, generally lead to downstream players facing challenges of cost competitiveness from rising domestic prices of inputs to their final products. By extension, these feed into retail price competitiveness problems compared with imported final products. 

The purpose of any sector master plan should be about the long-term sustainability of the entire value chain rather than just the survival of some stages, usually upstream industries, at the expense of others, mostly downstream stages. For meaningful engagement to succeed on value chain sustainability, input prices and pricing mechanisms, as well as attendant cost competitiveness or lack thereof, should become central features of the dialogue process.

While many of the master plans are initiated as a consequence of upstream industries being declared designated industries by the trade, industry & competition ministry and/or offered exemption by the Competition Commission in line with section 10 of the Competition Act, the dialogue concerning those sector master plans is expected to be conducted in line with whatever guidelines the commission may issue, as is the case with the Sugar Value Chain Master Plan when it comes to the promotion of and support for the procurement of local sugar.

However, in addition to the difficulty of discussing sector plans arising from industrial policy when stringent guidelines exist concerning prices and price mechanisms arising from competition law, the sugar industry is regulated by the Sugar Act of 1987. Despite the deregulation of most agricultural commodity industries more than 30 years ago, the sugar sector remains regulated, with the Sugar Act providing for the SA Sugar Association, representing cane growers and sugar millers, to establish what is called the “Sugar Industry Agreement”.

This agreement allows for revenue-sharing arrangements between cane growers and sugar millers without any “competitive pricing” both horizontally (among the growers on the one hand, and the millers on the other) and vertically (between growers and millers). It should be noted that 11 out of 14 millers are owned by the big three sugar companies — Tongaat Hulett, Illovo and TSB — while the other three are independently owned. That the sugar industry agreement may run contrary to the spirit and letter of the Competition Act is a topic for another day; suffice to say this may have a negative effect on industrial users and end-use consumers of sugar.

Another trade policy related intervention that was made was when the dollar-based reference price, in effect an import duty that is administered by the International Trade Administration Commission (Itac), was raised from $566/tonne to $688/tonne for imported sugar, thereby providing additional protection for domestic sugar producers from “deep-sea” sugar imports — other than those coming from Eswatini due to a binding SA Customs Union agreement — that are “dumped” in SA.

This Itac intervention coincided with the minister’s designation of the “sugar industry”, (presumably, but not definitely, the entire value chain) as facing challenges of economic stability in terms of section 10(3)(b)(iv) of the Competition Act. Because one of the sector master plan’s workstreams related to the promotion of local procurement of sugar, the Competition Commission issued policy guidelines in terms of the act.

These are not binding on the issuer, the commission, the Competition Tribunal or the Competition Appeal Court. Those interpreting or applying the act should take this into account, though being pursued and prosecuted for violation of the act remains binding and applicable. The guideline relates to collaboration by industrial users and retailers of sugar on local procurement and does not talk to other workstreams, which are outright prohibited from discussing prices on both the cost and trading sides.

The sector master plan and its guidelines fail to recognise that any master plan cannot elicit meaningful engagement if prices and pricing mechanisms are not part of such engagements, especially by downstream industrial users of sugar, a major ingredient that ranges between 30% and 70% of some manufactured products.

In the absence of meaningful engagement on prices, especially of the inputs to downstream manufacturing as supplied by upstream players, due to a competition law-related prohibition on discussions despite issued guidelines, there will not be progress in crafting a workable sector master plan. In the sugar industry case the dollar-based reference price/import duty (trade policy related steps) has led to domestic sugar prices reaching twice the world prices at some point.

This is a case of industrial strategy, trade policy and competition law being in conflict, preventing policy discussions and agreement for a value chain-wide sustainable dispensation. Until these conflicting policy objectives are addressed or managed, the Sugar Value Chain Master Plan dialogue process is unlikely to result in a win-win agreement for both upstream producers and downstream manufacturers.

 Rescuing the upstream industry should not come at the expense of downstream players.

• Masemola, a director and consultant at Semo Advisory & Consulting, is project consultant for the SA Sugar Converters Association.

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