Business Page   Numbering the days  of sugar is premature

Sunday, June 26th, 2005

                       

                                  

High-level picket: From left, Dr Ian McDonald, Mr Ronald Alli and Mr Michael Boast

Introduction:

President Jagdeo has described as a life and death matter the announcement of drastic cuts in the price of sugar in the European Union. Europe sees the announcement as a major reform of the sugar subsidy system, Guyana and the rest of the African, Caribbean and Pacific countries (ACP) see it as a price cut. The system, in place since 1968 protects EU sugar producers through a costly system of export subsidies, quotas and tariffs put up to block imports and guarantee prices to EU farmers and processors. The ACP benefit from these arrangements through agreements which allow them access to the artificially lucrative market at the preferential prices which European farmers receive. That price carries a premium of roughly 200% above the world market price and the cut will represent a price reduction of just under 40 per cent.

Emphasising reforms rather than the price cuts European Commission Agriculture Commissioner Marianne Fischer Boel noted that changes were necessary to modernise the system which had defied every effort at reform since its establishment. The changes were probably accelerated by the successful challenge to the World Trade Organisation brought by Brazil, Australia and Thailand against the EU. Those countries argued that the subsidies and quotas were illegal under the WTO's rules, encouraged over-production and distorted international trade in two respects: restricting access to the EU markets to the more competitive producers and allowing the EU producers to sell their surplus production in overseas markets. In an era of free trade such a system was clearly indefensible and in the context of the recent budget row in the EU highly unsustainable. The former made the decision by the WTO inevitable and the latter reduced the room for the phasing-in of the reforms which was the best countries like Guyana could hope for.

Mixed reaction:

The reaction in Guyana has been a mixture of resignation, threat, comedy and pleading, with President Jagdeo writing to British Prime Minister, whose turn it is to hold the Presidency of the EU, for help in resolving the problem and reminding him of the UK government's strong commitment to assist development and to the Millennium Development Goals. Careful not to offend Tony Blair, President Jagdeo places responsibility for the action at the feet of the EU accusing it of being less than honest and of unilateral action and betrayal.

Dr Ian McDonald who it appears never accepted that the British would let 'this' happen now detects irony in the British being instrumental in giving with one hand (huge debt relief) and taking with the other (reforming trade arrangements). He has expressed dismay at the outcome of the decision by the EU seeing it as a breach of "written and moral obligations" owed to the governments and people of the ACP countries. Quite what these moral grounds are is not clear, and whether this goes so far as the call for reparations for slavery and indentureship would be very interesting to know.

The tide of reform:

President Jagdeo it seems now accepts that the tide of reform is unstoppable, and at best he hopes that Blair can swing the commission into allowing a longer period for implementing the cuts. Guysuco, which has been very slow in engaging the public, has decided on a campaign to enlist national support against the price cuts, and has even engaged in an incongruous picketing exercise in Georgetown. President of the Georgetown Chamber of Commerce, Mr Gerry Gouveia has committed the total support of the 'private sector' in the light of the threat to the industry that accounts for 17% of the country's GDP.

This column does not share the view that the days of sugar are over, even though it is clear that we are not sufficiently prepared for dealing with the incoming tide bringing with it changes that are inevitable. Speaking just before the announcement Chairman of the Guysuco Board, Mr Ronald Alli had indicated that it would set the stage for serious work to begin "if the proposals" materialised. No doubt much work had already begun and the corporation and the government had decided on an expensive restructuring of the industry including the Skeldon expansion project costing approximately US$125M.

Restructuring plan:

The writing was clearly on the wall for some time but it is not obvious whether the corporation recognised its imminence since a discernible strategy has been missing or clouded in uncertainty. Over six years ago Ravi Dev alerted the nation of the danger clouds on the horizon, while Ramon Gaskin has regularly criticised the management and direction of the industry. It appears that such warnings were seen as malevolent or mischievous, perhaps because of their source and were either ignored or not taken seriously. Cost reduction is not a strategy but an operational imperative for any business, whether or not it is facing a major threat in its most lucrative market. Nor is the promise by the President to be the first to tell the nation about the closure of any estate a strategy - that is pure politics.

Ironically a "comprehensive restructuring plan" referred to in an IMF document dated July 7, 2004 and containing what appeared to be a sensible strategy has been the subject of a public exchange involving this columnist and the government. That document is instructive. It predicted that Guysuco would "face price erosion in preferential EU markets [expected to begin in 2006-08]... and will have to increasingly rely on sales to the lower-priced Caribbean markets."

The restructuring plan prepared by Guysuco in conjunction with the World Bank, had as one of its aims "bringing down production costs from US$0.18 in 2003 to US$0.11 cents over the longer term, following the reallocation of production to the lower cost estates." Among the components of the plan specifically referred to in the report are a) to link wages to profitability targets and downsize employment, and b) to shift "production to the high yield areas, in particular the Berbice area. Close loss-making factories and estates in 2008."

The industry needs the support of the whole society but the corporation must be transparent with the public and confirm or deny the comprehensive restructuring plan referred to. There is no time for dithering and obfuscation - lives and livelihoods are at stake and the whole development of Berbice and the rest of the country will be severely affected by the price cuts if we do not have a timely and sensible response.

Exaggerating the news of demise:

Unlike some of the prophets of doom, I am not as pessimistic as some are that there is no future for sugar - I believe that there is but that we have to be prepared for a complete revamping of the industry if it is to succeed. Unwilling to recognise the scale of the challenge, the country and the corporation are dangerously late in dealing with it. The sugar levy which should have been applied to restructuring the industry has been consumed in annual operating expenses, while an intolerable cost structure has inhibited the room for manoeuvre.

Change is not unknown in the industry, and over the past century dozens of factories have been closed right here in Guyana while in other countries the entire industry has been shut down. Dr Eric Williams devotes a whole chapter in his work From Columbus to Castro on King Sugar, showing how it replaced cotton and indigo which had replaced tobacco in the early days of Caribbean colonisation. Sugar played the major role in the economic development of Barbados and the rest of the Caribbean making fortunes for the planters, and was described by one writer as a "silver-mine." Yet those countries have made or adapted to the imperatives of change. Change has come slowly to Guyana and the industry has not kept pace with developments in Guyana. It never ceases to surprise me that cane fields along the East Bank Demerara road have had better access to electricity, telephones, water, etc, than thousands of Guyanese, while the industry has remained the same.

Skeldon project:

Even if the price cuts are deferred that would give us no more than a couple of years. Substantial changes need to be made for the industry to succeed, but as with all change management there has to be a total commitment and consideration for those who are likely to be displaced. The bare fact is that Guysuco produces sugar at way above the world market price and it will require more than a miracle to realise the "vision of becoming a world-class competitive and sustainable sugar industry." The Skeldon project is not a sliver bullet that will magically halve the cost of production. Indeed, new plant will incur substantially more finance and depreciation costs adding to the overall cost of producing and selling the product.

With the labour generally referred to as back-breaking, and cane-harvesting not regarded as a vocation of choice when there is an alternative, the corporation urgently needs to decide what it will do about the loss-making estates. Wages do indeed take up a large chunk of the corporation's income, but that is true of all labour-intensive industries. Mechanisation is a costly and possibly impracticable option given what would be involved. Even if some locations and estates are closed, fixed costs such as those incurred in general management do not go away but stay with the surviving activities.

As recently as three nights ago Ramon Gaskin called for a review of the Skeldon project, but the decision-makers are certain to ignore the call. It is not the first time and Gaskin is not the first person to call for such a review. Quite possibly the project is still the most feasible course of action for the survival of the industry in Guyana, and the termination of any contractual obligations at this stage would incur considerable penalties.

That does not, however, dispense with the compelling logic or urgent need for a critical, comprehensive review of the operations of the corporation and how it prepares itself for a future that will be neither benign nor forgiving.