The Commission of Inquiry (COI) into the sugar industry has said that the beleaguered Guyana Sugar Corporation should aim for full privatisation within three years while also noting that there have already been formal and informal expressions of interest in it.
In its conclusion, the Commission of Inquiry also deemed as “impractical” in the short term, the prospect of bringing the industry back to profitability. It therefore avoided the mandate given to it to develop a 15-year plan for the industry and limited its attention to privatisation.
After keeping the report under wraps for several months, the government last week said the parliamentary committee on economic services will be entrusted with it. This move however leaves the government with the immediate challenge of acting swiftly on the privatisation recommendation as urged in the report while at the same time assuring thousands of sugar workers that they won’t be out of jobs. Privatisation has been opposed by the main sugar union, GAWU.
The privatisation recommendation in the report commissioned by the David Granger administration brings the industry full circle after its nationalisation in the 1970s under the PNC government and the exit of previous long-time owners, Bookers Sugar Estates Limited and others. GuySuCo was founded in 1976.
The long-awaited report which was tabled in Parliament yesterday stated that:
The privatisation of the Guyana Sugar Corporation (GuySuCo) should start as early as practicable and be completed within a three-year period.
As a consequence of (I) above, the State would divest itself of all assets, activities and operations currently associated with GuySuCo.
In the interval, as the privatisation process is awaited the new management of GuySuCo must focus on basic essentials to rehabilitate the fields, factories and infrastructure of GuySuCo. There should be no accommodation for new projects which will demand the limited funds presently available.
This is aimed at making the estates more saleable and attractive to investors, both local and foreign. A few expressions of interest both formal and informal have been received.
While the ongoing process of amalgamating estates for obvious economies of scale may continue, the COI does not recommend the closure of any estate at this time.
Financial support in the short term will be needed and this should be provided by the government on a timely basis.
That there be the earliest possible implementation of the privatisation recommendations contained in the report of the commission. The management of GuySuCo must immediately direct its attention and focus on reducing operational costs, especially that of employment, returning to basic agronomic practice, rehabilitating its factories and strengthening supervision.
The commission’s report, compiled by the Chairman Vibert Parvatan and laid in the National Assembly yesterday by Minister of Agriculture Noel Holder states that, simultaneous with the government announcing in early 2016 that it will be removing itself from the production of bulk sugar, a holding company should be established and subsidiaries created. The holding company would operate through stock ownership.
According to the report, the holding company would “be entitled to enjoy all the legal rights, benefits and responsibilities to be derived from a parent company–subsidiaries relationship. Such an arrangement would, almost by definition immediately transform the present over-centralised structure and operation of GuySuCo into a decentralised and, hopefully more flexible and adaptable operating structure.”
The report disclosed a list of possible subsidiaries while noting that the list was not exhaustive. Among the subsidiaries proposed, which are based on potential profitability, are the cogeneration of electricity, supply of drainage and irrigation services to communities, supply of business services (IT, tourism and recreation etc.), prime real estate and property holdings (selected GuySuCo premium real estate), agriculture equipment pools including aircraft (for rental to farmers).
In terms of proposals that are focused on the current dynamics of the sugar company, the report stated that subsidiaries directly linked to sugar production were sugar refinery (plantation “whites” or refined sugar), molasses, alcohol, ethanol and the sale of special sugars.
The commission’s report proposed that the Government of Guyana consider the issuing of debentures, bonds, etc to raise new equity. The holding company’s capital structure would be facilitated through the restructuring of most of GuySuCo’s present indebtedness to the government into equity.
GuySuCo’s total debt at the time the report was compiled in October was $82B.
In respect of a land sales subsidiary, the report placed great weight on the sale of land at Ogle and La Bonne Intention. The report says that with 26 acres at Ogle and 2,284.503 acres at LBI the net profit estimated in 2016 is $11.621B and $10.99B in 2017 continuing until 2020.
“The price assumed for land sales is $25M per acre which can be considered very conservative”, the report states.
The report explores two other possible subsidiaries stating that in 2016 the co-generation plant at Skeldon could make a profit of $579M while the packaging plant at Enmore is projected to make a profit of $1.087B.
The report warns that “valuing a debt-laden, loss-making, state-owned Corporation is exceptionally hazardous” noting that “for this purpose any buyer is likely to bargain from the basis of valuations given.”
Highlighting that for 2016 GuySuCo will need at least $5B for projected capital needs with, at the time, $82B in debt, the report states that wages account for 65% of total expenditure.
“Profitability depends on a simple equation. Price – Cost of Production = Profit. Given the fact that GuySuCo is a price taker since it cannot influence the market price… by deduction, the focus must be on reducing costs if it is to make a profit. Obviously, the focus must be on production costs containment and reduction,” the report states.
For 2014, labour cost the corporation $20.8B while it operated at a loss of $17.3B. “Between 2010 to 2014 employment costs increased by $6.3B, the equivalent of 43%. This was done during a period when GuySuCo was running at a loss. The question of affordability seemed not to matter”, the report revealed. The report did not go easy on the main sugar union GAWU, arguing that anachronistic customs and practices have led to wage increases. The report noted that although the corporation has not been making a profit the sugar corporation has followed through on increases due to “unrelenting demands from GAWU”. It added that “Across the board wage increases which have no bearing on internationally recognised criteria for wage increases,” were approved.
The report speaks extensively about the cost of labour and advocated for a freeze on wage and salary increases for at least a year, but there is no mention of downsizing.
The report’s recommendations come at a time when there has been significant animosity between the sugar unions and GuySuCo over wage talks and the Annual Production Incentive that has been put on hold until 2016.
Additional cost reduction steps contained in the report suggest a change to collective bargaining agreements and outsourcing of services where practical.
