Historic institution
GuySuCo is now the subject of inquiry, which inquiry, among other things, aims to determine if the company could be saved. This is an important objective given the many people who rely on the enterprise for their livelihood. Guyanese looking on would be wondering what is going through the minds of the persons who were chosen to decide the fate of this historic institution. It will take some soul-searching on their part to make the right decision. It will also take some time before the curious taxpayers will receive the final verdict on this terminally-ill public behemoth. The final outcome will be the product of a synthesis of qualitative and quantitative factors that will be before the commissioners. What they will realize, whether they like it or not, is that they will have to bury GuySuCo. This article seeks to provide Guyanese with some of the variables and insights of the company that commissioners will encounter and to express why some taxpayers’ firmly believe that the company should be wound up. One could choose any year to begin the analysis of the performance of GuySuCo, but this article will examine the workings of the company from 2008 to 2013. This period was chosen simply because that was the period for which this writer could obtain reliable financial reports with which to analyze the performance of the company.
Self-financing
GuySuCo is a public enterprise that is supposed to be self-financing. It finds itself of course in the very unique position of having a split economic personality. In its home market, GuySuCo is a monopolist and the issue of its production has been commented on extensively by Professor Clive Thomas and others. It can dictate the price of sugar in the domestic economy. In 2008 GuySuCo received 81 per cent of its sugar revenues from the European market. At that time, it was shielded from global competition by European sugar quotas. By 2013, GuySuCo was receiving 69 per cent of its sugar revenues in that overseas market. A key factor here would be the lower price support that GuySuCo received for selling sugar in the European market and the lower output that was coming from its operations. The key for GuySuCo was to prepare itself to compete in the competitive international market. This is one aspect of GuySuCo’s business operations that generates interest and is expected to be a major focus of the inquiry. An analysis of the financial performance of the company will enable Guyanese to determine if the business strategy of the organization was aimed at taking on competition in the foreign market or if it was aimed at responding to the political dictates of the PPP/C government.
Responsibility of management
It must be kept in mind that every business seeks to ensure that its major source of financing is that of customers. This means that a company must be growing its revenues through the control of prices, through the growth of its customer base or both. As a public enterprise, this is what GuySuCo is supposed to do. This is a responsibility that falls on management which was given control over a certain set of assets. The control that management wielded enabled it to enter into a compact not only with customers, but also with creditors, regulators and shareholders. In the case of GuySuCo, the latter two stakeholders are one and the same ‒ the government ‒ and the responsibility of management to them was clearly subsumed in an incestuous relationship between party and board leadership. The PPP/C behaved as if GuySuCo was its private property. Taxpayers want it understood that GuySuCo belongs to them and not to any political party. Those examining this issue must keep that in mind all the time for the greater share of taxpayers has been hurt as would be evident from the assessment of its management that follows.
Every business that is serious about its future seeks to ensure that financing provided by customers is the major way it stays in business. A key factor is the asset turnover, the prism through which management’s attempt to work with customers is examined. This variable gives an idea of how well management handled the relationship with customers. It also gives an idea of the business strategy employed by management through the manner in which it used the various asset groups in trying to increase revenues. The data being used here to provide the snapshot of management’s performance is taken from the audited annual reports of GuySuCo from 2008 to 2013. The data shows that GuySuCo’s revenues declined by two per cent per annum from 2008 to 2013. Under such conditions, asset management becomes critical. GuySuCo, however, was losing six cents on every dollar of asset employed during this period. This is a very interesting observation since two strategic assets were added to the productive capacity of the company during that period. One was the Skeldon Sugar Modernization factory and the other was the Enmore Packaging Plant. Whether wholly attributable to it or not, ever since the modern Skeldon Sugar Factory was commissioned GuySuCo has lost $22 billion in sales revenue from 2009 to 2013.
Sign of trouble
The first sign of trouble was the emerging relationship between the productive assets and the expanding asset base. The productive assets are the resources that GuySuCo used to keep the business as a going concern. These assets would include the Skeldon Sugar Factory and the Enmore Packaging Plant. The growth in the asset base implies that the enterprise is supposed to survive long term, and reflects as well the readiness to meet existing production commitments. After growing 4.4 per cent per annum from 2008 to 2010, the productive asset base of GuySuCo started to decline by two per cent per annum.
The Lucas Stock Index (LSI) declined 0.15 per cent in trading during the first period of July 2015. The stocks of five companies were traded with 267,605 shares changing hands. There were no Climbers but there were two Tumblers. The stocks of Banks DIH (DIH) declined 0.5 per cent on the sale of 134,657 shares while that of Demerara Tobacco Company (DTC) fell 0.49 per cent on the sale of 2,775 shares. In the meanwhile, the stocks of Demerara Distillers Limited (DDL), Guyana Bank for Trade and Industry (BTI) and Republic Bank Limited (RBL) remained unchanged on the sale of 46,668; 544 and 82,961 shares respectively.
Another sign of management’s inability to deal with the challenges ahead of it appeared in 2010 when its working capital plummeted 90 per cent from $6 billion in 2008 to $564 million in 2010. Instead of coming clean to the taxpayers and taking a hard look at this deteriorating situation, the company buried its head in the sand like the proverbial ostrich. Management continued to lose control of operations as it seemed unable to control the downward spiral of its working capital, losing an annual average of $9 billion from 2010 to the end of 2013.
The decline in the productive assets coupled with the protracted decline in working capital must raise in the mind of the inquisitors the viability of the industry as a going concern. Further concerns are raised by GuySuCo’s inefficient management of three critical assets, namely cash, receivables and inventory, particularly cane inventory.
An examination of these three variables should guide any decision on the future of the company. In 2008, GuySuCo had 32 days of customer financing tied up in cash. In 2013, that figure had more than doubled to 69 days of customer financing tied up in cash. The company was already losing money and failed to manage its cash properly. That increase of 37 days of holding cash translates into a decline in efficiency of $3 billion. The situation with the accounts receivable is no different. The increase in days net customer financing that is tied up in receivables also has resulted in a decline in inefficiency of $3.2 billion. The worst is the inventory in standing cane. That inventory increased from 91 days in 2008 to 148 days in 2013, the result of which was a decline in efficiency in 2013 of $5 billion.
Going bankrupt
Altogether in one year, GuySuCo lost over $11 billion through mismanagement of some key assets when compared to better days in 2008. Further, GuySuCo has not been able to cover its direct production costs from using customer financing since 2010. This is a reflection that the average unit price that it gets for its sugar is below unit variable cost. When this begins to happen in the private sector, companies begin to consider the idea of shutting down operations. Recent news media reports show that this is a situation that engaged Jerries for the past two years. GuySuCo must confront the same reality, especially since the Altman bankruptcy predictive model indicates that the company was unlikely to avoid going bankrupt if it were a private company.
This inability to convert current assets into liquid cash fast enough raises questions of how GuySuCo is financing its operations. The largest component of its financing comes from the internal equity of the company. A breakdown of that source of financing shows that the money that GuySuCo used to finance its operations came from the workers, unpaid taxes to the government and mythical money or unrealized equity. A fourth source is the money set aside to replace productive assets. By spending money meant to replace long-term assets on short-term needs means that GuySuCo does not have the capacity either to recover or survive on its own. To get sufficient money on its own to run the business, the only choice available to GuySuCo is to sell off its assets. The previous administration attempted recently to do that by selling lands to the Central Housing and Planning Authority.
Not acceptable
Given that it is a government entity, the bankruptcy model leads to the realization that GuySuCo will have to depend perennially on subsidies to survive if it is not eliminated or modified. The rational decision would be to close the company and release its remaining assets for alternative use. That decision has to be weighed against the desire of continuing to use taxpayers’ money to subsidize the operations of the company or making it a financially independent entity and giving the government alternative ways to use tax dollars. Selling sugar at a price below its cost and using tax dollars to subsidize operations is not an acceptable position for taxpayers nor for its workers. They too must enjoy some measure of certainty about their future free from the continuous economic tug-of-war of rationality or irrationality. Sustaining the industry without better prices also means subsidizing foreign consumers, and no Guyanese should be willing to accept such a situation when tax dollars are needed badly at home.
