Halting payments to the Chinese builders of the problematic Skeldon sugar factory until its many problems are fixed as well as the lease of the Guyana Sugar Corporation’s (GuySuCo) West Demerara estates are among the solutions proffered by Accountant Christopher Ram to the crisis facing the sugar industry.
In a submission to the Commission of Inquiry (CoI) into the sugar industry, which he posted on his blog ChrisRam.net, Ram made a number of recommendations even as he noted that unless each estate is producing at the same level of efficiency and cost, then there is cross-subsidisation and the stronger estates are forced to carry the weaker ones.
“The poor performers not only use up scarce financial resources: they also take up a disproportionate amount of managerial time that could be better spent on the Estates and activities with better prospects. There should be disaggregation and their problems addressed separately,” he said.
Ram recommended that Skeldon be treated as a separate case. Not only is it bringing down the rest of the Corporation with it but it is also bringing down several private cane farmers in the area, he asserted. “My first prescription is to stop paying the Chinese Contractor (CNTIC) until they fix the problem. I accept that GuySuCo took over the Plant and the legal case may be tenuous, but China values its relationship with Guyana and in the interest of maintaining that relationship, that most wealthy country in the world should accept responsibility for fixing the problem,” he said.
He noted that some adjustment will have to be made for handling the cane from the fields now processed at Skeldon. That may add some short term cost but once the problem is fixed, the benefit would be considerable, the accountant asserted.
West Demerara
In terms of the Demerara Estates, he said that the East and West Demerara should be treated separately. For West Demerara, Ram said that private cane farming accounts for a significant share of production. This, he declared, offers two major possibilities. He recommended an outright sale of the GuySuCo operations to those operators or the sale or lease of the lands to them, with GuySuCo maintaining its interest in the factories.
“In both of these possibilities, it is assumed that the private cane farmers have some interest in carving out a future for their limb of the industry,” he said while stating that payment can come with some upfront money to be used to modernise the factories and meet termination obligations to employees and the balance by way of a future stream of income. “If the private cane farmers are unwilling to enter into such arrangements and if GuySuCo is unable to reduce its cost of production to an acceptable level, the remaining options are privatisation and closure,” he said.
For the East Demerara estates, the accountant said that the ownership characteristics of these estates are different from those of West Demerara. “If GuySuCo is unable to reduce its cost of production to an acceptable level, the remaining options are privatisation to other investors and closure with the lands being used for other purposes,” he asserted.
In terms of the Berbice estates, he said that with some cash released by privatisation and/or closure, these estates should be focused on to make them efficient and profitable. “In my view, closure of these estates would cause serious dislocation to communities with social and political implications,” he said.
“Once these operations can be shown to be profitable, they will be able to attract private investment and funding. Stakeholders with the resources to do so must be willing to invest in the company and industry. And I believe we do not have to look abroad as our first effort: DDL has a major interest in the company’s by-product molasses while GAWU, the major sugar union is a cash rich operation. And the workers themselves can have a greater stake under an Employee Share Option Plan while the option should also be available to members of the business community and the public,” Ram told the CoI.
He said that the best interest of the worker is better served by a streamlined profitable industry than one always hovering at the precipice. GuySuCo has significant funds invested in the pensions and for the welfare of the workers, Ram said.
He said that while there is no doubt that the financial consequences of termination would be substantial; assuming that in a single year GuySuCo terminates roughly half its employees or 8000 persons, and assuming that each is entitled to one year’s pay at an average of $30,000 per week, the total cost of termination will be $12,480 million, considerably less than the subsidy of G$16 billion for 2016.
“On this assumption workers would receive more than $1.5 million plus their savings which are not insubstantial. If this is topped up with some land for workers as a group in the form of a co-operative or company it would seem preferable to the state of perpetual uncertainty and insecurity which is the lot of the sugar worker,” Ram declared.
Diversification
In terms of diversification, he said that if the company or the sector can diversify profitably then they should, bearing in mind the cost of doing so, the different skills sets required, and the profitability therefrom. “But we also have to be cautious. If GuySuCo experiences such grave difficulties managing an industry in which it has centuries of experience then it cannot be assumed that it will move seamlessly into non-sugar production. Of course, diversification can be horizontal or vertical and careful studies would need to be undertaken to examine the use of the by-products of the main operation,” Ram warned.
He said that at the national or sector level, these considerations apply whether the industry remains mainly in state control or otherwise. In other words, diversification as a strategy must be considered by all: entity, industry and country, he asserted.
He said that from days gone by, the estates have functioned as more than an economy activity. “The estates were also part of a social net and network. Every organisation has what may be considered core and non-core activities. This CoI has to assist in identifying what those are. The other activities and assets should be divested, thus allowing management to concentrate on what really matters,” Ram proclaimed.
As it relates to cost management, the accountant said that it is important that labour must become more productive. “But management must also improve to cut losses and misdirected decisions. If the company does not have one, its system of accounting must go well beyond financial accounting. It must apply the strictest system of standard costing and each manager of resources must explain variances,” he said.
The accountant added that the stories of pilferage and corruption in the Corporation may be just anecdotal but they may be very true. “Clearly the procurement process, inventory management and the internal audit process all need to be strengthened. This Commission must impress on the new Board the need for zero waste, zero corruption and zero-based budgeting,” he declared.
In his presentation, Ram also highlighted that GuySuCo is one of the largest employers in the country and in some areas, such as the Corentyne, it is the single most important economic activity and source of employment. He pointed to the sectors that the industry supports as well as the services it provides.
For the country, it is also a major foreign exchange earner although it is also a significant user of foreign exchange, he said. He pointed out that for the past few years, it has been the single largest beneficiary of government subsidies in Guyana. It is estimated that in the five years to December 31, 2015, the company would have received approximately G$50 billion in transfers from the Government. In 2015, 10% of current revenues of the Government proper will be going to GuySuCo, amounting in total to approximately one-third of the total employment cost in the 2015 Estimates of Expenditure, he pointed out.
Mistakes
He also said that there are two serious mistakes sometimes made in addressing the problems facing the Corporation and the industry and inevitably, these lead to erroneous prescriptions. The first relates to the analysis of the performance of the Corporation and he explained that if it is correct that one is addressing not a single entity but an industry and economic sector, then one has to apply two separate tools: namely the financial rate of return (FRR) which measures the profitability of the entity as an accounting unit and the economic rate of return (ERR) to the industry which considers not only financial performance but the wider cost and contribution to the economy.
“Such a contribution would have to include for example, any benefits derived or received by the country because of the existence and operation of the industry. An example that comes to mind is any relevant EU support granted to the country,” he said.
According to Ram, the second mistake is to compare and equate the cost of production of sugar in Guyana with the world market price for the commodity. He stated that cost and price are not the same and it would be dangerous to assume that the scores of countries offering sugar on the international market actually produce the commodity below that price and therefore make a profit.
He said that the cost of production of GuySuCo should be compared with other producers in the local industry and, in so far as differences exist, the CoI will have to consider the causes of the differences and the steps needed for improvement.
