Guysuco needs drastic surgery to ensure survival – part 5

In today’s column I will begin a review of GuySuCo’s Strategic Blueprint announced by President Jagdeo on January 8, 2009, following the installation of an interim board he appointed to steer the local sugar industry out of its field of inefficiencies, tonnes of red ink, and punt-loads of government subsidies. Dubbed by President Jagdeo a “turnaround plan,” and by the plan itself as a blueprint for success, the plan and the interim board were a reaction to the low-point of production by the corporation in almost two decades, and to the danger that the corporation was staring down the barrel of insolvency. Unlike previous studies on the corporation and the industry, the strategic plan is a hidden document, accorded the utmost secrecy, not available to economists and analysts, politicians or taxpayers who, by virtue of having to pump billions of dollars to keep the corporation afloat, must be considered the corporation’s current major stakeholders.

There are several versions of the Strategic Blueprint, but the one on which this column is based is dated May 2009. The first point to note is that the architects of this multi-billion dollar blueprint acted partly on oral instructions for the terms of reference for their work. They proudly refer readers to the website of the Office of the President which sets out the mandate given to them by President Jagdeo, and also make reference to a press report quoting Minister of Agriculture Robert Persaud. They promptly complied with instructions from Minister Persaud, who directed them that it was “an appropriate time to make changes to the organisational structure of the corporation, starting at the management level.” No thought about starting at the activity level, such as separating agricultural, factory and value-added activities, since presumably that was not the instruction.

Strategic deficiencies
The product is an unfortunately limited document that did not seek first to ascertain why and how GuySuCo got there, where the politicians wanted to take it, and most importantly whether what the politicians wanted made any business sense. The government presented to the team a political, if unwritten plan. At the most acquiescent level, a professional team would have developed a business plan, which this document is clearly not. It considers only those matters on which instructions, or more accurately directives, were given. The team is a mainly public sector group, the members of which with the notable exception of Ms Geeta Singh of Clico, have very little commercial experience. Not surprisingly then, excluded from the plan is any reference to consideration of such sensible possibilities as estate closure, and more daringly, private sector participation in the corporation, by sale or joint venture. They were unprepared to confront the reality of an inevitable failure of the corporation if it retained all 8 estates, factories and 20,000 workers.

It was clear too that they could not deal with the poorly considered idea by President Jagdeo to invest hundreds of millions in the Skeldon Sugar Modernisation Project, compounded by the calamitous decision by him, against the better advice and judgment of the experts, to bring in inexperienced Chinese as the contractors.

Chinese power
The President ignored the reality that the factory was in a mess, and rejected advice that the contract be cancelled. The money outstanding could then be paid to a competent contractor to finish the job. But politically, it was easier to persist with the Chinese while blaming Booker Tate. The trouble is that that course has had serious financial costs, including thousands of tonnes of sugar lost, and a similar number of hours of senior GuySuCo time spent on increasingly difficult negotiations with the contractors. A meeting locally with a Chinese government representative and visits to China proved equally difficult, if not unproductive. It was a display of Chinese power versus Guyanese amateurism, experiences which could be useful as we negotiate an even bigger contract for the construction of the Amaila Falls hydropower project. The indications are that we are about to repeat that political adventurism, only this time on a bigger scale.

The writing had long appeared on the wall that the selection of CNTIC as the preferred contractor was heading for disaster. They could not get their team together, their project management capability was less than what the project required and as early as 2005, the project itself was already behind schedule.

The plan did not examine the fundamental problems of the industry, and similarly, glossed over in one page what it called the state of the industry, incredibly under three headings: current cash position, production history and projected 2009 production. It could not bring itself to admit that the Skeldon Project contract price had escalated, demanding a disproportionate amount of time, draining the cash resources of GuySuCo of billions, and starving the other estates of critical capital and operating expenditure. What little was left had to be spread among all the estates, good and bad alike.

The President had always signalled his unwillingness to accept these unpalatable facts and that the corporation was unlikely to show any profits for several years to come. He and the board concealed such vital information behind a mask of financial and political propaganda, saved temporarily by the weakening of the US$ against the euro, and the increase in complementary quantity that gave the corporation some breathing space until 2008.

Like the President, the interim board seemed equally unwilling to accept the fact that the corporation would not survive if it retained Uitvlugt, Wales and LBI, and if it did not reduce its workforce by several thousands. Like the President, the politically-minded interim board could not understand that good-paying jobs do not come from bailouts, but rather from new and dynamic businesses. Robert Litan, who directs research at the US Kauffman Foundation which specialises in promoting innovation in America reports that between 1980 and 2005, virtually all net new jobs created in the US were created by firms that were 5 years old or less. GAWU might lose some members, and the ineptitude of many of the politicians would be exposed, but I am not sure that would be such a bad thing. Sugar workers are hard-working and resourceful and will not sit idly by. They will go out there and find better jobs, jobs which are less demanding and offer greater security.

An industry, not a company
The other fundamental flaw of the plan is its total concentration on the corporation – again because that is what the team was told to do – rather than addressing the problems of the industry. GuySuCo is not an island, but is at the centre of an industry. Its success depends on the success of the industry, and if the industry does not have a future, neither does GuySuCo. Because it was told to come up with a plan in the “shortest possible time,” the team never did any analysis of the industry, including the private cane farmers, or of the dwindling labour and talent pool from which it would be required to draw exceptionally committed employees if the plan is to half-succeed.

The Skeldon project anticipates the participation of private operators, yet no attention is paid to this group with which the corporation would have to compete for labour. Unlike the corporation which can count on state subsidies and which the Minister of Agriculture says is too big to fail, these private operators will make hard decisions on economic and financial grounds. GuySuCo has guaranteed hundreds of millions of dollars of bank loans to those operators. The private operators will be concerned about having to share the costs of the inefficiencies of the Skeldon Factory, the uncertainty of the market and the unpredictability of the weather.

Absent too is any indication that the turnaround team did any work on a market analysis so necessary in the light of the new trading arrangements in the once highly subsidised and profitable EU markets, and the developments within this region. One of the first rules in business planning is that you start with the market and build around that. Instead this plan starts with an obsessive commitment to production of 400,000 tonnes annually from 2013, with 110,000 tonnes from Skeldon. One has to wonder too, whether the team knows that the corporation is almost always too optimistic in its projections and production. In its secret deal with the government, the corporation is disposing of choice land currently under cultivation at Diamond, accounting for 18,000 tonnes of sugar annually,which it claims will be made up by ‘recommended’ strategic measures at Blairmont. It must be a sign of extreme desperation that a professionally prepared plan would sell land under cultivation just when it seeks to expand production and then incur additional heavy capital expenditure of G$3 billion on which it admits that returns will not be very large in the early years. The only thing that I can think of as more ridiculous than the sale is the purchase of the land by the government, which will now have to convert agricultural land to housing development.

But it is easy for the plan to engage in such irrationalities. Its authors do not state what they consider a reasonable return on capital or acceptable measure of profitability and success. Most of the corporation’s land is held on peppercorn lease rental from the government – $1,000 per acre per year – and it would add to the absurdities for the corporation to pretend to sell land it does not own and for the government to buy its own land. The plan is premised on continued subsidies of all sorts, most of which are not, however, disclosed. The industry’s contribution to GDP is now about 7% and it is the major beneficiary of government subsidies, of which the land sale is just another example.

False economies, accounting
The plan is also based on some false economies such as the imposition of a fixed average cost for cultivation of $490,000 per hectare. If this is an arbitrary determination by the accountants who predominate in decision-making in the corporation, then the impact will be felt in production and productivity, negating the gains so excitedly touted to the Economic Services Committee of the National Assembly.

I will close by noting two points about costs and their behaviour which the plan does not address. It does not appear that sufficient or any attention was paid to the question of costing and management accounting. It is wrong for the corporation to make decisions only on the basis of the field cost per tonne. To return a profit requires the entity to sell at a price that covers total cost. On that basis, cost per pound was approximately US forty cents in 2008, and not much less in 2009.

The second is that in any project analysis, if the marginal cost exceeds the marginal revenue, each additional unit produced increases the entity’s losses. It does not appear that this point was considered in the plan. I should add that it does not matter whether the sugar produced is then used for value-added, such as the Packaging Plant. For what that means is that that plant will be using over-priced raw material. Better to buy from third parties and do the packaging – assuming that it would make sense to do so.

Next week, I will wrap up this series and move on to deal with other fast-moving developments taking place.

Leave a Reply