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– Economist says not too late to scale down production, revert to the diversification plan
WITH billions of US dollars to flow from the more than 8 billion barrels of oil equivalent resources already discovered in the country’s Stabroek Block, Guyana could be tempted to invest large portions of its finances to resuscitate the ailing Sugar Industry, but such a move could land the country in a vicious economic cycle and set its developmental agenda back, according to Dr. Clive Thomas, a renowned Guyanese Economist.
“So one of the main dangers down the line, is that a lot of the funds generated from oil…will be pumped directly into the [Sugar] Sector; and instead of being used to develop and diversify Guyana, it becomes the means of sustaining an industry, which in turn is exporting a product and subsidizing rich countries because of the gap between [the production] cost and [selling] price,” Dr. Thomas told Village Voice Guyana during an exclusive interview. He warned that the country could find itself in a vicious economic cycle due to the existing state of the Sugar Industry, and in particular, the extremely high cost associated with the production of sugar.
Dr. Thomas’ warning comes at a time when the People’s Progressive Party/Civic (PPP/C) Administration has vowed to turn the fortunes of the industry around notwithstanding its inability to do so during its 23-years in Office pre-May, 2015.
Newly appointed acting Chief Executive Officer (CEO) of the Guyana Sugar Corporation (GuySuCo), Sasenarine Singh, during a recent visit to the Blairmont Estate on the West Bank of the Berbice River, told reporters that the corporation is working closely with the Agriculture Ministry to devise a ‘business turnaround plan’ that would provide more efficient ways of producing sugar. “We are going to win this battle by selling sugar at the right price level, and the other way we are going to win is by looking at the cost chain and ensure that we identify what are the value-added costs, and celebrate them and the ones that are not adding value; we are going to make them our enemy,” Singh said.
It was explained that at present, GuySuCo is producing packaged, bagged and bulk sugar, however, bulk sugar has proven not to be profitable, and the corporation, Singh said, intends to halt that production to focus on more value-added products. Blairmont Estate will focus exclusively on exporting packaged sugar while the Enmore Estate will supply the local market.
Since its return to Office on August 2, 2020, the PPP/C Administration has allocated $3B to revitalise the Sugar Industry. Of that amount, $2.2B is being used to reopen three estates – Rose Hall, Skeldon and Enmore – which were closed under the A Partnership for National Unity + Alliance For Change (APNU+AFC) Administration. The Wales Estate, located on the West Bank of Demerara, was also closed, however, the Government said, it cannot be reopened due to its poor state. In addition to the $2.2B, another $.8 billion has been budgeted for the recapitalization of the current estates – Albion, Blairmont and Uitvlugt.
HIGH COST OF SUGAR
But at the heart of the plethora of challenges facing the Sugar Industry is the high cost of producing sugar. While the PPP/C Administration is adamant that with the right investment, GuySuCo could return to profitability, Dr Thomas, who served as Chairman of GuySuCo’s Board of Directors (2015-2018), is not so optimistic. He told Village Voice Guyana, that GuySuCo will never be viable unless a number of structural limitations are addressed, noting that the decision to reopen the closed estates for the sole purpose of sugar production may not be in the best interest of the country.
“The gap between [the production] cost and [selling] price is so wide it can’t be just a simple issue of investing in this estate and that estate. It has to do with the scale of the industry, the structure of the industry,” he submitted.
The PPP/C Administration has been tight lipped on the current unit cost of production. Notwithstanding a series of questions posed by APNU+AFC Member of Parliament Jermaine Figueira, in the National Assembly, on the cost to produce one ton of sugar versus its selling price, the Agriculture Minister, Zulficar Mustapha fell short in providing the particulars in September.
However, according to the International Sugar Organisation (ISO), as of October 8, 2020, sugar was sold on the world market at cost of approximately 13 US cents a pound. Here in Guyana, sugar is produced at approximately 40 US cents a pound.
“Sugar production in Guyana is very, very costly, it took an average then of 40 US cents a pound to produce sugar; we could never sell it for more than 13 or 14 cents,” Dr. Thomas said as he reflected on his time at GuySuCo.
He continued: “So the gap between the selling price and the cost price is so vast that what we are doing in effect, without recognizing it, is subsidizing the consumers of the sugar in Europe and North America.”
Between 1959 and 2009, the sugar industry operated in a largely protected market with Guyana being among nine countries to have benefitted from the Commonwealth Sugar Agreement (CSA). Additionally, Guyana along with other African, Caribbean and Pacific (ACP) states benefitted subsequently from the Sugar Protocol under the ACP-EU preferential system. It also had access to the Canadian and US markets at preferential rates.
Preferential sales to the EU market accounted for 50 percent of GuySuCo’s sugar output and 70 percent of its revenues. However, in November 2005, the European Agriculture Council (EAC) opted to reduce the guaranteed price for sugar by 36 percent over a four year period, starting from 2006. And though a large quantity of sugar is still being sold to Europe, Guyana continues to reel from the effects of the significantly reduced price of sugar. Outside of the world market, Guyana sells sugar to its CARICOM and regional partners, however, Dr. Thomas estimates that only 10 per cent of the sugar produced is sold locally. He submitted that by pouring billions of dollars into the Sugar Industry, in the form of subventions, Guyana, in effect, has been subsidizing wealthy European and North American nations.
Between 1992 and 2015, the PPP/C Administrations pumped billions of taxpayers’ dollars into the Sugar Industry, and while GuySuCo continued to receive subventions when the APNU+AFC took Office in May, 2015, the amount was significantly reduced.
In 2015, GuySuCo received $12B in subvention. That year, it had raked in $19.6B in revenues but its labour cost stood at $21.4B.
In addition to labour, $2B was used to purchase fertilizers, another $2B for fuel while transportation expenses totaled $1.4B. Also in 2015, the sugar corporation was required to repay the National Commercial Bank of Jamaica $2B.
In 2016, GuySuCo received a reduced subvention of $11B, and though its labour cost that year – $18.3B – did not surpass the revenues garnered – $20.9B, the corporation still had to clear expenses relating to fuel, transportation and fertilizer among other things. In 2017, the corporation received $9B in subvention to cushion its labour cost of $18.5B. It had received approximately $17.4B in revenue that year.
It was 2017, that the APNU+AFC Government, unveiled its plan to “right-size” the Sugar Industry by limiting the production of sugar to just three estates – Blairmont, Albion, and Uitvlugt, while the other four were earmarked for diversification and privatization.
APNU+AFC DROPPED THE BALL
It was while Dr. Thomas served as Chairman of GuySuCo that the White Paper on the Future of the Sugar Industry was laid in the National Assembly in mid-2017 by then Agriculture Minister Noel Holder.
Holder, at the time, said the future of the country’s Sugar Industry, rested in a smaller sector. He told the House that such a move was necessary to reduce losses and cash deficits so as to allow the industry to return to a state of profitability.
“So basically the subsidies that we were giving away trying to fill this gap between receiving 14 cents per pound and producing at 40 cents per pound, was put in by state monies, taxation from you and I and we could not continue to do that because the people who you were subsidizing are far wealthier than us,” Dr. Thomas said as he justified the decision by the then APNU+AFC Government.
He emphasized that because the gap between the cost of production and the selling price is wide, the Government with the backing of GuySuCo, thought it necessary to diversify the industry, while downsizing the production of sugar. At the time, Government had anticipated that with just three estates in operation, GuySuCo would have been in a position by this year (2020) to meet the demands in the local markets (25,000 tons pa), CARICOM and regional (50,000 – 60,000 tons pa) USA (13,000 tons pa) and the World Market (50,000 tons pa).
However, while Dr. Thomas backed the APNU+AFC’s plan to scale down the Sugar Industry to allow for diversification, he believes that within the first year of that plan 2017-2018, the David Granger Administration panic following criticisms from the then Opposition – the PPP/C that thousands of sugar workers were placed on the breadline.
“They called it retrenchment…but the retrenchment of workers did not operate in a vacuum; the retrenchment occurred with two precise conditions in mind – one was we were diversifying, as we would have identified alternatives to sugar, which would have absorbed most of the labour that we were retrenching; things that we never hear about, things that I have never heard about again, things like fish farming,” the former GuySuCo chair explained.
He said while the Board, under his leadership, had set the diversification programme in train, the plan fell apart when the APNU+AFC Government took a decision to establish a Special Purpose Unit (SPU) within the National Industrial and Commercial Investments Limited (NICIL) to manage the divestment of the closed estates in particular Rose Hall, Enmore and Skeldon.
According to the former Chairman, the Board and Management of GuySuCo were more than capable of achieving what the SPU had set out to do. “We had hoped to diversify it. We would have used the sugar lands, because the sugar lands represent a strategic real estate on the coast, we were going to use that, sell that to finance the expansion of the GuySuCo, and the reconstitution of the industry,” Dr. Thomas said.
While in June 2019, the then Head of NICIL’s SPU, Colvin Heath-London, had informed the press that an Indian-Ghanaian-Guyanese consortium was in line to purchase the Rose Hall Estate, Dr. Thomas said there was no real evidence to suggest that the SPU and its consultancy firm, PricewaterhouseCoopers, had managed to secure the investors.
“There was really no genuine bids to do a private takeover of the industry,” Dr. Thomas contended. But in a separate interview with Village Voice Guyana, Heath-London brushed aside the contentions of the former GuySuCo Chair. “I would say in part, there are a lot of interest in the estates but because of the political impasse from in 2019 – a lot of the investors did not want to go forward until the political situation was regularized,” Heath-London explained.
The Economist said the situation was further compounded, when the SPU, under the stewardship of Heath-London, placed the country in further debt by securing a $30B syndicated bond in 2018. Contending that move made no economic sense, Dr. Thomas told Village Voice that thankfully, he was no longer at the corporation when the bond was finalized.
But while Dr. Thomas is of the view that the bond was secured to aid in the then Government’s diversification plan, Heath-London clarified that the money was intended for the revitalization of the Sugar Industry, and as such, ought to have been directed towards the recapitalization of the three sugar estates in operations.
“The bond was not taken to fix the estates for diversification, the bond was taken to give to GuySuCo to rehabilitate the estates under its control. So this bond was not for the SPU’s use at all. GuySuCo kept three estates, and this bond was supposed to be used by GuySuCo to enhance the estates that they kept,” he explained.
According to Heath-London, between 2018 and August, 2020, GuySuCo received approximately $10B from the $30B Bond, however, there is little to show. “They used it for several things; they used it for rudimentary things, general maintenance, paying wages and salaries, paying suppliers, etc. They didn’t use it for any capital item,” Heath-London told this publication.
DIVERSIFICATION THE ONLY ANSWER
But while the APNU+AFC Administration fell short in its diversification and revitalisation plans for the industry, Dr. Thomas believes that there is still hope. He submitted that there are investment opportunities in the areas of fish farming and green energy that can be explored, even as he renewed his position that the Sugar Industry ought to be scaled down. However, he acknowledged that the industry cannot be turned around in a short period of time because it is far too big, far too complex with far too many stakeholders.