Dynamic considerations that should drive sugar reform

Mature industry
Framing the reform of GuySuCo and the sugar industry must necessarily start with an identification of the major dynamics driving both. This week’s column identifies the five most important of these. It takes for granted that, after this series of columns, readers would already appreciate the transcending roles of sugar and GuySuCo in the wider Guyanese economy, society and polity.

The most obvious dynamic is that GuySuCo manifests all the frailties facing a firm in a mature industry that is in a terminal phase. This dries up its attractiveness to investors and new talent, while saddling it with the burden of entrenched historic costs.

Second, if we make two heroic assumptions, namely 1) this terminal phase can be reversed and 2) the basis for this reversal is achievement of the targeted production level of 450,000 tonnes of sugar annually – on average, then the data I have represented earlier, shows clearly, this targeted level cannot be attained in the foreseeable future, that is, by 2020.

Over the past decade the trend has been for less sugar to be produced annually, while the cost of production continually rises. GuySuCo’s continued production of less sugar annually at a higher unit price has depended on its being able to mobilize bailout funding from the state and the international community. The latter has come mainly as financial support under the European Union’s (EU) Sugar Accompanying Measures, designed to compensate for its unilateral denunciation of the Sugar Protocol (SP).

Third, traditionally, sugar has been produced for export outside of Caricom markets. At a target level of 450,000 tonnes annually this is expected to continue. Of note, 1) there is little value added to our export of “raw sugar”. 2) most sugar export sales take place in the “managed” portion of the world sugar market. The latter cannot continue indefinitely. The case for the continued treatment of sugar as a “sensitive commodity” in the World Trade Organisation (WTO) is under growing pressure from countries wanting to literalize the world market for sugar.

Unfortunately, despite the present behaviour of the world sugar market, typical commodity cycles are likely to continue. These are driven by the dynamics of world market demand and supply. The world demand for sugar has been favoured by 1) starting from a low base in poor countries; 2) population growth; 3) increases in income; and 4) taste.

At the same time world supply is dependent on 1) improved global production and productivity; 2) growing technological improvements and their application; 3) bringing new areas into production; 4) weather; and 5) governmental interventions.

While world commodity prices have been favourable recently, I can assure readers that the historical evidence shows conclusively this is only a phase within the long term commodity market cycle. In other words today we are witnessing a sugar price bubble, which should not be confused as a long term trend of rising sugar prices. With this sobering outlook it is hard to justify the one-dimensional support for producing more raw sugar – a simple transformed primary commodity, for export.

The fourth dynamic to bear in mind is the earlier Booker-Tate episode. Contrary to popular belief this does not conclusively prove private management (foreign) could not contribute to major improvements in the industry. This is because 1) the termination of the Booker-Tate management contract was so contentious; 2) it is difficult for an observer to form a judgement of the industry and the corporation that runs it, when it is so secretive; and 3) the choice of Booker-Tate for the management contract was ill-advised.

It appears that because Bookers was the main owner of the Guyana sugar industry before nationalisation, together with the fact that it is located within the EU may have been seen as a masterful blend of local experience and ‘inside’ contacts in Europe. These two apparent virtues, were to mind, actually its main weakness. Booker-Take’s colonial, and later nationalization experiences, compromised its outlook, loyalties, and behaviour. Furthermore, ‘insider contacts’ could well turn out to be a two-edged sword, in delicate diplomatic situations, as with the case of the SP.

Local management
The fifth dynamic is that, if truth be told, our experience with local management has been far from stellar. All the board members and top executives of the corporation fall in the category of safe choices. By this I mean, not only persons whom the ruling party could safely rely on to do its bidding, but persons who would distinguish themselves by being pliant to the party’s every wish and therefore avoid rocking the boat.

If local management had indeed performed industry-wise, these faults could be discounted, if not forgiven. However, it has not performed and instead has presided over a worsening disaster, since Booker-Tate’s departure. As a proud nationalist this is hard to swallow. It becomes palatable only because, like the vast majority of Guyanese, I am aware the choices of managers were strictly confined to ones who are safe.

Moral hazard
What has been particularly aggravating however, are the grouses and complaints reportedly emanating from behind closed doors or the back of the government. These directors/executives’ stringent avoidance of self-criticism of either their own management or the owners (government), has not helped in avoiding moral hazard and encouraging excessive outside leadership in the day-to-day running of the corporation. As in the days of private plantation ownership where the private owners held sway over every single matter, state-ownership has given rise to the same plantation behaviours by the government. The corporation is not run on trust from the government, on behalf of the industry’s stakeholders and the wider Guyanese public.

There are, of course, several such other dynamic considerations which should guide the reform process for sugar. Enough, however, has been given here to indicate the several deep-rooted drawbacks, which stultify GuySuCo and the sugar industry.

Next week I shall wrap up the discussion on sugar reform.

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