While, as the saying goes, there is very little to be gained from crying over spilt milk, the fact of the matter is that the large income transfers made by the EU to Guyana (averaging over 8 per cent of Guyana’s GDP at its peak in the 1990s) when the Sugar Protocol was in force until 2006, have left few positive economic legacies. This will always remain, however, a stark reminder of how crucial and costly has been the disaster which has unfolded at GuySuCo over the past two decades.
In last Sunday’s column I had put forward the thesis that the tactic of watering-down GuySuCo’s targets (which has been pursued by both management and the shareholder (Government of Guyana) has done the industry an immense disservice. At the very least it has encouraged, simultaneously, a flight of professionalism from the industry and the distressing embrace of blatant politicking. Over the years GuySuCo has become a willing instrument of the ruling PPP/C administration. This can be seen both in little things (like the open abuse of its vehicles and facilities for political purposes) to larger considerations (like its persistent failure to pursue the goals of its mission statement). As a consequence GuySuCo is today, regrettably, a creature of the government’s political whims and fancies. It is now so daily suffocated by the outside leadership of the government that an industry which was once a beacon for developing countries that produced raw sugar has now become an example of how not to involve government in sugar production.
Readers may recall the high commercial ideals expressed in GuySuCo’s original mission statement. Its declared objectives are: “To be a world class sugar industry producing high quality sugar and added value by-products, while ensuring customers satisfaction, employee development, environmental protection, and safe working practices. In so doing we will achieve growth and sustained profitability in order to contribute to the economic and social development of Guyana.”
Economic illogic
For readers benefit, I would posit the argument that there is a fundamental economic illogic, which Guysuco has faced over the past decades and has never been truly confronted. This centres on four basic considerations. First, there is the sobering fact that its unit cost of producing sugar will always be too high, particularly when compared to other global producers (its competitors). Second, unto today the industry remains basically organized as an export one.
Because of this export orientation, its global competiveness cannot be avoided at any stage of its appraisal. Third, at present the corporation’s best projected level of output (after completion of the Skeldon Sugar Modernization Project (SSMP) is in full effect) is over 450,000 tonnes of sugar annually.
GuySuCo wrongly claims that at this output level it could secure significant economies of scale thereby substantially lowering its unit cost of production. Fourth the misplaced expectation of GuySuCo is that the average price of sugar which it could earn on the world market for its exports would either 1) approximate that which had obtained under the Sugar Protocol; or 2) if it is less than that, this can be fully compensated for by savings in its unit cost of production based on the intended expansion in the scale of the industry to over 450,000 tonnes of sugar per annum.
It expects that from this expansion there will be a marked improvement in productivity (based on new investments to be injected in the industry). If all of the above held true, GuySuCo’s expectation over the long run is that it would become not only self-sustainable, but be in a position to pay off in full its outstanding indebtedness.
Regrettably, the situation at GuySuCo does not provide a firm basis of support for these expectations. If anything, the reality is in stark contrast.
At this stage therefore, let us examine the basis for my holding this point of view.
For one, GuySuCo’s unit cost of producing sugar is not only high, as stated above, but it is on a rising trajectory. Originally, the SSMP had targeted reducing GuySuCo’s unit cost of producing sugar to US$265 per tonne, or US12 cents per lb. At the time this cost figure was put out by GuySuCo it had explicitly excluded depreciation costs from its calculations, even though it still misleadingly claimed that this “should enable GuySuCo to remain profitable given the projected market revenue mix.”
Readers should note that the figure of 21 cents per lb for producing sugar in GuySuCo during the mid-1990s (which I had cited in a previous column as put out by GuySuCo) did not only exclude depreciation cost, but it also excluded a large segment of administrative costs, as well as the financing cost of GuySuCo’s indebtedness (including investment in new plant and machinery).
More fundamentally, readers should also bear in mind that, given GuySuCo’s export orientation, it had to be competitive on a global scale. Here, however, we find that the leading global producers of sugar are producing at output levels several times greater than that targeted by GuySuCo.
Therefore, if significant competitive scale economies are to be gained by GuySuCo these would have to be aimed at levels of output several times that it has projected for. In making this observation I do not intend to deny that if GuySuCo does manage to displace its output curve upwards of 450,000 tonnes of raw sugar per annum, it would reap some economies of scale. It certainly should.
My argument, however, is that these would pale in comparison to the scale economies already being obtained by other larger global producers of sugar. Apropos of this observation, readers may wish to note that certain sections of Brazil’s cane sugar industry have already claimed that they can maintain very profitable production of raw sugar at a world market price in the range of 5-7 US cents per lb!
In next week’s column I shall begin with the wrap-up of the basic economic illogic that entraps GuySuCo.
