Predictions of sugar’s demise premature and exaggerated

President Jagdeo can be extremely unpredictable if not irrational at times. He must be a speechwriter’s worst nightmare and make his PR people nervous, although he is a gift to newscasters and reporters. He does not like delivering set statements, and even when one has been prepared for him, his extemporaneous and ad lib comments are often the ones that attract more attention and draw more comments. How serious and dangerous that can be from a head of state was on full display with Jagdeo’s recent pronouncement about the prospects for sugar.

There was the President commissioning a water treatment plant in Corriverton, Berbice two Thursdays ago. Here was an opportunity for the President to rally his troops, mobilise his party’s supporters and strike at the opposition seemingly engaged in its own ‘goat-aint-bite them’ circus. It was an opportunity to tell the people, one and all, what the $1.4 billion water investment by the government would do for them, and that it was the keeping of another promise; and to reassure them that they can expect the same level of services as the people in far away Georgetown in terms of access to higher education, state of the art medical facilities, house lots and computers. That while Demerara has only one bridge, he Jagdeo had already delivered one over the Berbice River and that but for the short-sighted constitution, under his watch the country would see its first international bridge, this time linking with Suriname. It was an opportunity of which political dreams are made. He could have dazzled. After all, he was in the party’s home, its playground and base, where he could count on an even more adulatory welcome than that orchestrated for him in Buxton recently.

Sugar in trouble
Instead the President surrealistically misused the opportunity to lament that the Skeldon Factory was not delivering the expected results and as a result the “sugar industry is in trouble.” He did not stop there. Speaking about the US$200 million Chinese-built factory that has had more than its fair share of birth pains, the economist said somberly if it “doesn’t work well the sugar industry is dead.” In case anyone had missed the profound and grave pronouncement he repeated: “It’s dead. It’s as simple as that….”

Responding to the Stabroek News report on the pronouncement, bloggers’ explanations for the President’s outbursts were wide-ranging, not many of them particularly flattering. But perhaps the President might have been told something by one of his unofficial sources in the area, something which he felt he should deal with immediately and publicly. Or that he realises that the failure of the Skeldon factory, the centerpiece of the Skeldon Sugar Modernisation Project is his baby, for which he was prepared to defy the World Bank, informed local public opinion, stark realities and risk US$200 million.

When persons like Professor Clive Thomas, Tony Vieira and Ramon Gaskin were raising doubts about the project – rather than just the factory – and its potential consequences, the President lined up former Guysuco top brasses Messrs Vic Oditt, Ronald Alli and Dr Ian McDonald to sing its praises and the underlying vision. They could not accept that the British would shed their much vaunted decency and cut the Caribbean loose, exposing us to the vagaries and realities of the marketplace. The latter group of gentlemen ignored the clear signs that the preferential markets could not and would not survive a globalised world, that the younger leaders in Britain and France do not recognise or feel constrained by any historical bloodlines, that the Caribbean does not really matter. Most significantly, however, they completely ignored the elementary point that sugar comes from cane grown in the fields. Absent that element, the factory can do little. Fixing that will not serve the problem.

Even now the President seems to demonstrate some irrationality by referring to the 36% cut in the preferential price, something that was on the cards long before his government took the plunge and moved into the investment. It was the President who had a big hand in the choice of the Chinese as the preferred suppliers and contractors of the plant, over the more experienced Indians, for reasons that make fascinating speculation. We are learning to our great cost that while the Chinese are good at low-cost production, their mark-ups are huge and when they deliver shoddy or even dangerous products, their powerful and assertive government is ready to stoutly defend.

The President is also bringing fresh insights into the factors and influences that drove the Skeldon Project. He noted in his speech that the government had hoped that it would have produced sugar at a lower cost so that the average cost would have allowed them to “to break even at least at the world market level.” The careful reader would notice that when speaking of successes the President speaks of “my government” but in failures it is “the government.”

But it is his adventure into costs that I find astounding and misinformed and that sent me back to schooldays. Break-even analysis is indeed a necessary management tool used in investment appraisal to determine the minimum level of revenue or sales from production that would be required to cover all the fixed costs like rent, office salaries, insurance, property taxes, obsolescence, etc, and the variable costs like material input, production wages, etc.

Breaking the point of confusion
The relevance of break-even analysis in the sugar industry is to determine the minimum level of production of cane and sale of sugar at their expected costs and prices which would have to be met to avoid a loss. Using assumptions about costs and revenue, the management accountant would prepare a break-even chart to show the break-even point, ie the point at which total costs just equal total revenue. For the President, and no doubt his immediate Berbice audience, that appears to have been a point of confusion.

In a business like Guysuco’s, where there are several estates with their own levels of fixed and variable costs, a break-even chart – even with the limitations inherent in projections and assumptions, both about costs and revenue – is an absolute necessity. Or rather charts, since one should be prepared for each estate to serve as the basis for decision-making in the corporation’s boardroom and the cabinet room of its sole shareholder. The problem is that Guysuco has more than its fair share of financial accountants who can tell you all about the latest IFRS but not since the highly regarded Sugrim Mohan left the corporation decades ago, has there been any management accountant of note to speak with knowledge and authority about costs, their behaviour and their consequences.

Even – or perhaps when – confronting dangers, the President can be rather daring, sometimes recklessly so. So he went on to assure his audience, that even if it meant personally, he would get involved to fix the problems created by a “few people,” to ensure that the factory delivers the kind of results that it should deliver. In 2009 when he announced the turnaround plan, the President also used the word “personally” to describe his actions. Yet, a final copy of the turnaround plan was hardly off the photocopier when it missed its projected targets for the first period and it is on track for doing so again this year. In darts, the chances of hitting the bull’s eye recede with distance from the board. It must be the same with sugar.

Choosing the whipping boys
The President could hardly tell the nation that the plan was an exercise in unguarded optimism, given the prominent role in its preparation played by directors handpicked by him such as Mr Keith Burrowes and Mrs Gita Singh-Knight. Nor could he blame the corporation’s longest serving director Mr Donald Ramotar, the ruling party’s General Secretary and the person who will likely decide on the role Mr Jagdeo will play in Guyana’s affairs post 2011. Nor the Chairman of the Board and the President’s Permanent Secretary Dr Nanda Gopaul, who is only one person away from Jagdeo’s personal involvement in the corporation.

Perennial whipping boys Booker Tate were given marching orders more than a year ago, while Mr Errol Hanoman, appointed CEO after Booker Tate’s departure, left not too long after. Usually, the corporation’s production problems and operational performance have been attributed to unfavourable weather conditions to which we can now add climate change. Conditions have been rather favourable recently so this must wait for another time. Corriverton in pre-election season would not have been a good time and place to blame the workers, whose role as voters is far more important now. And we are no longer hearing about legal action against the Chinese to enforce the clauses in the contract to compensate for poor and late performance. This time, according to President Jagdeo, it is a few people “messing up.” Of course he did not even entertain the possibility that some politicians, including himself, may have been the ones who have messed up. That would be expecting far too much.

Jagdeo’s message
From Georgetown, it did not seem good politics to have been as dramatic and careless as he was, but what is more troubling is the message that the President sent to the Demerara estates, that they cannot survive without Skeldon, their drip and lifeline; to the other stakeholders directly involved in sugar at Skeldon, that the future is far, far from certain; to the workers, that they need to rethink their occupational choices; and to the country, that a PPP/C would not allow Skeldon to fail, no matter what it costs the public purse.

This column was never convinced about the glowing claims about Skeldon but will not be included among those who are now tempted to say, “I told them so.” It has described Guysuco as too big to succeed but I am yet hopeful that the situation is not irretrievable, that we can yet be saved from President Jagdeo’s apocalyptic fears. But it would be if we fail to recognise and accept that the problem goes beyond the factory and its managers. Agriculture Minister Robert Persaud announced during a surprise visit to the factory last week that foreigners would be imported from India to work along with the Chinese in the factory.

That will solve part of the problem while adding significantly to the salaries bill of the corporation and creating more problems with the sugar unions.

It will not solve the problems in the fields which many think are as serious.

If the President does get involved as he has said he might, then he needs to do some housecleaning and would have to rethink his dream team of directors and their turnaround plan. He will need to see how the factory can be organised within the limitations and prospects for the filed operations in Skeldon. He will have to consider how much more money the country can afford to plow into the industry. He will need to ensure that he is advised by at least one competent management accountant and a sugar economist, relying less on spreadsheets done by his financial accountants.

One thing the management accountant will tell him is that there is in that field of accounting a sacred principle that says that sunk costs are irrelevant, that if future inflows and benefits do not exceed future outflows, then cut your losses, and put your money elsewhere. The economist will put it more intelligibly: do not throw good money after bad money.

But then neither of them would understand the overriding consideration of the p word – politics!

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