Using taxpayers’ money to subsidize global sugar consumption stifles the Guyana economy

No benefits

The Guyana Sugar Corporation (GuySuCo) has been the subject of many letters in recent weeks. These letters for the most part contain a common theme, and that is, GuySuCo is unprofitable and its management should rethink its business model. These many letters are in addition to the series of weekly discourses on the ailing public corporation that Dr Clive Thomas presented in the Stabroek News under the brand ‘Guyana and the wider world.’ From his writings, it is clear that as a business GuySuCo is not doing well and does not seem to know how to heal itself. For the past five years, not only has GuySuCo’s production sunk deeply but it has failed to turn a profit. Five years of inefficiency, declining productivity and unprofitability by the largest public corporation in Guyana does not seem to disturb too many in Guyana. The story about GuySuCo’s shrinking influence in the Guyana economy is not merely about economic and financial losses. It is also about the economic and social damage that it is doing to the economy. Too many Guyanese seem ready to tolerate one of the most colossal acts of mismanagement of public funds even though they are receiving no benefits from that corporation as this article intends to reveal.

Mediocre team

One of the restraints of a mediocre team is fear of losing its star batsman even though he has begun to fail more consistently than was the case in the past. The team prides itself on having this legend and finds it difficult to abandon this player who was treasured for a long time even though his performance is yielding no benefits for the team. Without realizing it, even failure becomes highly tolerable as the team clings to past glory to convince itself that it is still competitive. This is what it looks like with GuySuCo. As has been presented in the pages of Dr Thomas’ work, GuySuCo represented an important part of the Guyana economy. It has been producing for a very long time a product that no other economic agent in the country is producing. In its early days as a public corporation, as he noted, GuySuCo contributed as much as 27 per cent of GDP and 45 per cent of export earnings.   The enterprise has played major roles in tax revenues, drainage and irrigation, and land development. One of its major contributions too has been that of employment. The company has a reputation which must be respected and upheld. But when the tide turns against a legend, one must begin to think of its legacy rather than have it continue to embarrass itself. For the legend only makes fools of those who refuse to acknowledge the truth.

But the reluctance of the government to heed sensible advice that could help to preserve the legacy of GuySuCo is also hurting the people of Guyana. Based on information and analysis provided by Professor Clive Thomas that company has long passed its sell-by date, but it remains on the shelf as if it is providing a useful economic service. GuySuCo in its current dependent state is doing more harm than good to the Guyana economy and to Guyanese as a whole. This writer pointed out in a prior article that each household in Guyana has already had to reduce its standard of living by $140,000 to keep GuySuCo afloat. That amount will keep rising as long as GuySuCo remains in its current predicament.

Blows

The blows inflicted on Guyanese are not always obvious but are happening. There are several guides which Guyanese could use to objectively assess GuySuCo and reach important conclusions about its operations. Marginal concepts are very important variables in that regard. Marginal revenue which is essentially the price at which a product is sold is one of those variables. For example, if you sell a bundle of bora for $700 then the sale of another bundle should bring in an additional $700. So marginal revenue is the same as the price of the product. It is also known that a business maximizes profits when marginal revenue is equal to marginal cost. In the case of marginal cost, it refers to the additional amount that has to be paid to produce one extra unit of whatever is being sold. With GuySuCo suffering losses, profit maximization is out of the question.

There are two other decision points. One occurs when a business reaches the breakeven point and the other is when a business reaches the point of no return as expressed by Professor Thomas. A business knows that it reaches the breakeven point when marginal revenue is equal to the average cost of producing the product. The business is covering all its costs because it is producing and selling enough of its product at the correct price. This is not happening with GuySuCo. GuySuCo is making losses so it is not breaking even. Further, GuySuCo is not producing enough sugar to breakeven. According to the corporation, it would breakeven at a production and sale of 310,000 tonnes of sugar.

Using data from the last three years, GuySuCo is well over 100,000 tonnes behind that level of production. Here too, having GuySuCo around in its current business model makes no economic and social sense.

Passed its useful life

But it is at the point of no return that Guyanese must take heed. It is the third and most critical of the decision points. The marginal revenue concept also enables us to understand why GuySuCo should be seen as having passed its useful life. When marginal revenue or the price of sugar is half of its unit cost, it is time to shut down the business.

From data provided by Professor Thomas in his articles, GuySuCo incurs a cost of US36 cents to produce a pound of sugar. GuySuCo then turns around and sells that sugar for US18 cents per pound. It is at this juncture that the situation in GuySuCo is deemed critical and irrational. The management of GuySuCo is not only mismanaging the assets under their control, it is also making a most bizarre decision.

At a cost of US36 cents per pound, GuySuCo is unable to compete with other sugar producers from around the world. In order to export its sugar, GuySuCo decided to discount its price to 50 per cent below its cost. That is the implication of exporting sugar at 18 cents per pound. No vendor with a tray by the roadside would do that.

No vendor on the pavement downtown would do that. No vendor in the municipal markets would do that. In fact, no private business in Guyana would do that. Yet, the government which controls GuySuCo is being allowed to do that by Guyanese who should know better.

Subsidizing the global

sugar consumer

Guyanese need to understand that under economic conditions as those described above they are actually subsidizing the global sugar consumer and Guyana gets no benefit for doing it. It is the reason many Guyanese are unable to see their way. One could trace the impact of that unnecessary subsidy and irrational decision directly to the concessions that public servants and teachers must make on their wages. The workers of Guyana must take note that GuySuCo received a 15 per cent increase in subsidies between 2012 and 2013 while public servants and teachers received a five per cent increase. Some of the unions to which these workers belong appear quite happy to see GuySuCo continue its irrational use of taxpayer dollars while their members are told to accept marginal wage increases. Waste is being given preference over value by the unions. These public servants are being reminded that sugar did not always taste sweet in the mouth of many Guyanese, especially during the days of slavery and indentureship. Then it began to taste sweet as it made positive contributions to the economy. But now sugar is not tasting so sweet again as it denies hardworking public servants a better income.

Stingy attitude

The economic damage does not stop with the stingy attitude of the government towards public sector workers. It is linked also to the lost opportunities to strengthen more competitive sectors like manufacturing and the human capital of the country. One cannot divorce the continuous maternal deaths from inadequate funding of the healthcare sector. The investment in education could be much greater if the government was not subsidizing the sugar consumption of foreigners. Surely, subsidizing the sugar consumption of people who are not asking for the help at the expense of the health and safety of the people of Guyana is not good economic or social behaviour.

The reluctance to fix GuySuCo which is in clear need of reform is mixed in with the political interests of the government. But many Guyanese have been clamouring for political change and change in the voting behaviour of Guyanese. That change will be slow in coming if GuySuCo, a central drag on the economy, is not changed. Guyanese cannot on the one hand be pushing for radical change in voting behaviour and on the other remain placid about radical change to GuySuCo. It is not good enough to argue that GuySuCo employs plenty people and we must keep it. The argument has been presented too that GuySuCo represents an important multifunctional mechanism in the Guyanese society and should not be dismantled. The difficulty with these arguments is that they suggest that every other suffering Guyanese must wait until the 12th of never for the resources tied up in this failing industry to be released. GuySuCo would not be the first public company to be divested or dissolved. Nor will it be the last.

New business model

A SWOT analysis would reveal that a part of GuySuCo’s strength is the substantial bundle of assets that it controls.   For a country that wants to grow and that has ambitions of becoming an efficiency-driven and not a factor-driven economy, then a radical restructuring of GuySuCo is required. Other activities in the economy provide opportunities for a reformed GuySuCo. Further, the broader issue surrounding the GuySuCo story is not what is good for GuySuCo, but rather what is good for Guyana. If GuySuCo has to be trimmed to make the Guyana economy healthier, then so be it. Programmes could be developed to aid the workers who would be affected by the closure of any of the estates. The changes required are unlikely to be made by this government. The demand for a new business model has to come from the people.