Acceptance of invitation from Agriculture Ministry and GuySuCo

I note in an article (Kaieteur News, Wednesday May 25, 2011) captioned “GuySuCo details US$12.5 expenditure on packaging plant”, statements emanating from Mr. Robert Persaud MBA, Minister of Agriculture and the Guyana Sugar Corporation. Both parties were reacting to a Kaieteur News article of the previous day, in which the newspaper raised questions about the cost of the plant.

I am sure that both the Minister and the Corporation are aware that my contribution to the discussion on the GuySuCo packaging plant was by way of a letter in the SN, of May 17, 2011.

In that letter I corrected President Jagdeo’s exaggerated pronouncement of sugar’s contribution to the GDP as 16% instead of approximately 6%. The focus of my letter was to caution that the packaging plant, welcome though it is, could not be a silver bullet for the serious financial problems of the Corporation.

In that connection I drew attention to the wave of packaging plants taking place across the world and specifically referred to a 300,000 tonnes capacity Plant by Mumias Sugar Company (MSC) with a daily capacity of 700 tonnes and a price tag of US$3M.

I challenge both GuySuCo and the Minister of Agriculture to show either in my letter or anywhere else where I referred to or questioned the cost of the Enmore Packaging Plant.

I note that Mr. Robert Persaud has challenged Kaieteur News and me “to conduct a forensic audit of GuySuCo and the Packaging Plant.” I herby accept this challenge to undertake a professional audit, the cost of which will be borne by Kaieteur News.

I hope this is not just bluff on Mr. Persaud’s part and that he has both the authority and the courage to carry through with his challenge. I now await word from him.

A packaging plant will not be a magic bullet to salvage Jagdeo’s sugar decision

In making his case for an increased financial contribution to the state-owned Guyana Sugar Corporation President Jagdeo is quoted as saying that “government’s commitment to sugar has nothing to do with the workers being ‘a party support base,’ but rather with the development of the sector which contributes some 16 per cent of the country’s Gross Domestic Product.” One is never sure whether the President’s loose use of facts and data is politically driven or is evidence of his unfamiliarity with up-to-date national income statistics. In normal circumstances, he can be dismissed but not when, as in the case of the building of the packaging plant, what he mistakenly thinks forms the basis of major spending decisions.

This is what the most recent official figures published by the government show in relation to sugar’s contribution to the economy measured by GDP:

It is perhaps not without some significance but with considerable irony that GuySuCo Director Keith Burrowes used the occasion to announce his assessment of Mr Jagdeo as Guyana’s best president ever, which obviously includes Cheddi Jagan who waged a life-long struggle for sugar workers. Mr Jagdeo of course, led GuySuCo into the inadequately conceived and poorly executed US$200 million Skeldon modernization project which drove the corporation to the brink of insolvency from which its survival requires a combination of:

1. sales of a depleting quantity of sugar lands. Before a substantial sale of lands at Diamond in 2009, only 28% of the lands used to derive economic benefits to the corporation were actually owned by it;

2. the indefinite continuation of subsidised peppercorn rent of G$1,000 per acre per year;

3. the assumption/payment by the government of the corporation’s debts; and

4. various other forms of subsidy including the deferral of taxes of $2.3 billion over a five-year period without penalties.

Director Donald Ramotar has sought to distance himself and fellow directors including Mr Burrowes and Ms Gita Singh-Knight from responsibility for the plight of the corporation. This is not only legally flawed, it is also totally unfair. The political and corporate directorate has practically imposed on the management not only an unbearable debt burden, but some $1,900 million of capitalised interest at December 2009. This is a huge non-productive cost to bear and the executive management deserves the nation’s sympathy.

The problem for the corporation and for the country as a whole which Mr David Granger’s “privatization” comment did not reflect is that in its present form and with its existing liabilities it would be impossible to find a buyer for GuySuCo. A buyer would almost certainly insist on an asset purchase in which the cost of the Skeldon factory would have to be heavily discounted. That would leave the country to meet the lion’s share of tens of billions of liabilities at December 31, 2009, the last year for which the corporation’s financial statements are available.

While Mr Jagdeo will soon be enjoying a gigantic retirement package which he signed into law and under which he pays no taxes, the debts he continues to amass for the corporation and the country will have to be paid by the workers in sugar and other sectors and the taxpayers and consumers of this country. Mr Burrowes may have cause to rejoice and exult, but not those groups.

The packaging plant will certainly add value but will not be a magic bullet to salvage Jagdeo’s and the board’s stand-out sugar decision. Packaging plants are the wave of the sugar industry as several countries in Africa, Australia and here in South America expand into sugar packaging in a bid to remain competitive. Kenya’s largest sugar miller, Mumias Sugar Company (MSC) recently built, at a cost of US$3 million, a new eleven-machine, state-of-the-art packaging plant with a daily capacity of 700t, enabling the company’s packaging production capacity to increase to 300,000t per annum. Incidentally, the packaging machines for MSC were supplied by Brazilian companies Brazafric and Raumak while we trekked to India to source our plant!

With the continuing trend towards more and sophisticated packaging by the industry internationally, GuySuCo’s only hope of survival without further and more costly and unaffordable state support is to drastically cut its cost of production in line with the rest of the world. That imperative was conveniently ignored at the launch of the packaging plant.

Predictions of sugar’s demise premature and exaggerated

Introduction
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.

Irrational
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.

Conclusion
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!

Guysuco needs drastic surgery to ensure survival – conclusion

Introduction
Today’s column is my conclusion of GuySuCo’s Strategic Blueprint prepared by a special taskforce appointed by the President following the disastrous performance of the state-owned entity in 2008, recording its lowest sugar production since 1992 and the highest financial losses ever. Following the presentation of the blueprint, the government terminated its contract with Booker Tate but then recruited its top Caribbean executive and one of Booker Tate’s nominees to the board as its CEO – a decision that baffles observers and insiders alike.

To recap, parts one and two which appeared on March 14 and March 21, dealt mainly with a review of the 2008 audited financial statements, drew attention to the huge loans which were soon to mature but which would require significant help from the government for the corporation to repay. In part three, I sought to reduce to reality the economic contribution of sugar to the country which had for years been placed in the high teens. In fact, measured in terms of constant prices, in 2008 sugar contributed 5.9% of GDP, placing it seventh in ranking, while in terms of export earnings it earned the country considerably less than the earnings from gold. In 2009, sugar’s contribution to GDP was unchanged, but in terms of export earnings, sugar earned less than half that of gold. Even in rural Guyana, sugar is an old and ailing king, gradually giving way to commerce, other economic activities, or simply waiting on Western Union.

With respect to taxes, sugar makes a negative contribution, receiving from the treasury a host of subsidies, exemptions and concessions. In 2010 direct cash injections to the corporation are likely to exceed $10 billion on top of the $4 billion paid to GuySuCo to help it meet its debts. Ostensibly the $4 billion was to purchase a yet to be determined area of land, for a yet to be determined price per acre, and fully under cultivation. Part four dealt with issues of corporate governance as well as the corporate governors many of whom were brought in, like Horace’s dei ex machina, and given the task of turning around the corporation under the chairmanship of sugar unionist turned politician turned public servant, Dr Nanda Gopaul. In part five we began a review of the plan itself, and in this final part we look at some of the most important elements of that plan.

The production target
The plan revolves around a production target of 400,000 tonnes of sugar by 2013, including 110,000 tonnes from Skeldon. Optimistically the architects of the plan indicated that “initiatives were in place to bring this forward.” They also expect direct consumption sales from 10,000 tonnes of sugar in 2009 to 60,000 tonnes in 2013 with the major increase.

I say optimistically because even under the new direction, the corporation has found it almost impossible to achieve its targets, despite being in possession of constant data about the acreage under standing cane. For example, in May 2009, production for 2009 was projected at 250,000 tonnes, still short of the 290,000 January latest estimate, but described as secure. Production for the year turned out at 233,000 tonnes. 2010 production in the plan was stated at 321,000 tonnes, but a few months later the Minister of Finance announced a target for the year at 280,000 tonnes. For their optimism the Minister will sink close to G$10 billion in 2010, in addition to the G$4 billion in the land deal referred to above. It is hard to avoid the conclusion that targets are the result of circular guesswork than of any serious cooperative efforts by the field managers and the army of accountants now in control of the corporation.

Hercules or Don Quixote
Indeed it seems that the turnaround artists were themselves confused because Table 17 of both the April and May versions of the plan project production to rise to 439,000 tonnes in 2014. This will require not merely a Herculean effort but a miracle on the scale of the Second Coming.

Equally optimistically, the plan assumes no problem in disposing of all the sugar produced, whether in domestic, value-added, refined or bulk form. Caricom sales are expected to increase between 2009 and 2015 from 5,700 tonnes to 200,000 tonnes. Of this refined sugar sales are projected at 120,000 tonnes by 2016. This will have to be achieved even as the corporation lost its marketing director in a bizarre incident in which she was allegedly excluded from a meeting for being no more than a couple of minutes late. If that action was intended to teach the incumbent a lesson, it backfired damagingly for the corporation is now without this most important resource.

One further comment on the refined sugar sales: the plan assumes the invoking of the CET at the rate of 20% and the continuation of the sugar refinery in Trinidad for the duration of the plan period. Basic research would have alerted the plan’s architects that the Trinidad refinery was coming to the end of its extended life. That refinery was shut down completely at the end of April 2010. With this information, perhaps we will see another version of the plan and worse for taxpayers, a request for still more billions of taxpayers’ dollars.

The place of the people
Human resource is as important to production as marketing capability is to sales. The plan seeks to reduce departmental labour cost as a percentage of total departmental costs from 54.4% to 41.0%. It is expected that this will be achieved as a result of increased mechanisation, the restriction of costs of cultivation of one hectare from approximately $640,000 to $490,000, and an accompanying decline in labour numbers from 18,541 in 2009 to 15,660 in 2010, falling eventually to a precise 12,599 in 2015. While the plan recognises the corporation’s labour force as critical to its objectives, it seems particularly weak on human resource management. There is little or no understanding, as is evident in the document, of people being the most important resource in the industry. This is probably because there is no relevant human resource interest or competence to be found amongst the authors. While production and its related activities are only possible through people, only grudging references to employer/union relations have been made and interestingly enough, the management and supervisory ranks are not identified as stakeholders.

Such a perception can hardly motivate these groups of employees to buy into a plan hinged on production, rather than productivity and people. There is a deafening silence about the rate of voluntary departures of critically skilled personnel, while incidental reference is made to training – not necessarily based on any needs analysis or identified in a normal training and development plan.

The intention to off-load health centres and community centres respectively to the government and the Sugar Industry Labour Welfare Fund (of all places – an indication that not many of the plan’s authors know what the fund does), is clearly symptomatic of the corporation’s apathy towards the communities amongst whom it operates and who supplies its workers and its managers.

The trees from the forest
At times the plan seems to think that operational decisions of a routine nature are a substitute for real strategy. How else does upgrading the curricula at the Port Mourant Training Centre, revising training programmes for management trainees, and filling the position of Drainage and Irrigation Engineer get elevated from routine management activity to strategy?

The plan makes some strange decisions about the authority of the HR and IR functions which is now to be concentrated at the head office. This, according to the authors, is to allow estate managers to concentrate on yields and field and factory production. As if labour takes a back seat in all of this. One can only assume there is a superior collective intellect for the high-flight decision to remove HR from under estate managers, and for placing in a grey area the accountability for the state of industrial relations on the respective estates.

Political choices and moral hazard
The plan restructures the eight estates into two regions and Skeldon. The regions are headed by a regional director who reports to the deputy CEO, Mr Rajendra Singh, a hurried appointment in 2009 of someone with no experience or expertise in sugar or high-level management, other than having been a non-executive director of the corporation earlier. Given his resumé, Mr Singh is unlikely to display the skills indicative of a capability of moving up, and the government may find itself in the uncomfortable and reluctant position that it will have to prolong the services of Mr Hanoman. When the story of GuySuCo is told, the cost of political decisions will rank far higher than the cost of labour.

Underlying the thinking behind the plan is the assurance that the government will be there providing the financial brace and shielding the authors from any scrutiny of their quixotic assumptions and follies. The authors could confidently assume that the government will convert more than G$27 billion into equity, funded by the workers of the country to whom the government refuse to give more than US$175 per month as a tax-free allowance to cover their mortgage interest relief, children, dependents and educational allowances, and of course their cost-of-living basket.

That assumption comes from the assurance by Agriculture Minister Robert Persaud that Guysuco is too big to fail. I take a very different view: Guysuco is too big to save. As long as Guysuco retains its existing configuration, it will continue to remain in intensive political and financial care – courtesy of mind-boggling ineptitude indecision by the President who had ignored the readings of the tea leaves by Booker Tate, and the irresistible and pathological tendency of the political administration to interfere in everything.

Conclusion
This is not the first turnaround plan done within the past few years. Many of the same recommendations had been made by Booker Tate over the past couple of years, but the difference is that the new and not improved one comes with a demand and an expectation of such huge billions to keep afloat some estates and activities that should have been terminated years ago. The plan is an act of cowardice – no bold independent decisions but strictly following political instructions to the letter. With this high-powered board, one would have expected something with more courage, substance and vision. None of these is present. No wonder that GuySuCo would not share the plan with stakeholders or subject it to any independent scrutiny.

The 2010 first crop will soon come to an end and it is likely that production will again be off-target. We should prepare ourselves for the excuses, to be followed by another turnaround plan. And possibly more taxpayers’ money.

Guysuco needs drastic surgery to ensure survival – part 5

Introduction
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.

Irrationalities
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.