Closure of Wales Sugar Estate

There has been a series of opinions for and against the closure of the Wales Sugar Estate. The PPP led a visceral opposition to the closure, but subsequently after some public enquiry to show an alternative vision, Mr Jagdeo proposed an accounting framework that involves converting debt into equity. It was noted in previous columns that the industry faces economic challenges that accounting will not solve.

The forces of globalization present a threat to the existence of bulk sugar processing in Guyana. For about 300 years sugar production survived through slave labour, wage suppression under indentureship, estate amalgamation, the lobbying power of the planters that enabled preferential access to the British market, technological innovation and later after independence the Lome Convention that provided preferential prices. Much of these historical events have continued to shape contemporary Guyanese politics and inter-ethnic rivalry. Now that preferential prices have been taken away the Guyanese political establishment is in a hurry to make changes that should have gradually occurred over 10 years.

DevWatch LOGOWales Sugar Estate produces sugar at around 45 cents per pound (US cents). The long-term world price is around 12 cents per pound. This means the estate will continue to make a loss and if history is a guide it can never bring cost down to the world price in a sustained manner. Slavery and indentureship are no longer options. Microeconomics 101 – a class taken by 18 year old first year university students – says if the market price falls below average variable cost of production then the firm is better off shutting down. We don’t know whether the 12 cents/pound is the average variable or total average cost, but the same Microeconomics 101 course says the firm is making a loss and is not doing as well as it could do elsewhere if it were to redeploy its capital into the next best alternative production.

For the estate to stay in operation it has to be subsidized by taxpayers of Guyana. To be fair, GuySuCo paid a sugar levy to the Treasury from 1974 to 2002. But this does not mean that a poor country like Guyana can afford to indefinitely subsidize a loss making state-owned corporation. This takes away scarce financial resources that could be spent on retraining sugar workers, improving the University of Guyana, improving health systems and offering technical advice to private cane farmers at Wales. Incidentally, the University of Guyana also has PPP supporters who are not all sugar workers. I am sure Freedom House is aware of this fact. Furthermore, in light of the race-baiting editorials of the Guyana Chronicle under the PPP government and the colourful speeches at Babu Jaan, the PPP ought to be careful when it says its supporters alone are being penalized by the present government.

The closure of the Wales Sugar Estate will have adverse implications for the locals at Wales and beyond, regardless of party affiliation. The APNU+AFC government has decided to go against the GuySuCo Commission of Inquiry (CoI) and close the estate sooner. It is obvious the government did not have a plan in place to cushion the impact on workers and importantly the network of small private cane farmers. It will not be financially viable to transfer the bulky cane load by road to Uitvlugt. This means the private sugar farming in that area is pretty much dead in about 3 years. The inland water system does not connect Wales and Uitvlugt and the infrastructure does not exist for the Demerara River and Atlantic coast waterway.

The big question facing the government is what alternative use there is for the land in Region 3. The Minister of Agriculture makes an important point that apportioning the land for housing construction will not solve the foreign exchange constraint that always hangs over an economy such as Guyana.

Region 3 could have been the testing ground of private cane farming cooperatives providing the sugarcane feedstock for factory-produced molasses, ethanol and bagasse-driven electricity. These factories could eventually be privatized in part or fully. Shares could be floated on the local moribund stock exchange.

The government may also want to maintain a share in the industry since GuySuCo provides an important public good – drainage and irrigation of the coastal polder agriculture system. The government has to make sure that a privatized GuySuCo does not perform detrimental acts to non-sugar farmers and housing areas.

The GuySuCo CoI dismisses ethanol as one of the potential alternatives. The CoI reasoned that the low oil price acts against ethanol as a final product that could be produced. There are a few arguments against this viewpoint. First, the lower crude oil price does not pass-through to gasoline price in Guyana. Already in place is an implicit tax by government that could be used for industrial development instead of funding current budget expenditure and wages. Second, even when Guyana starts to obtain royalties on the extracted crude oil the country will still be importing gasoline as the plan is a pump-sell-royalties model. Third, as a gasoline additive and extender, ethanol production for home blending saves foreign exchange, thus being consistent with the perspective of the Minister of Agriculture. Fourth, it promotes industrial development and the building of production capacity. Fifth, a national mandate like the one in United States provides a certain demand, perhaps making it more appealing for private-public cooperation in setting up the factory. Sixth, the country has to avoid falling into a Dutch disease scenario and become overly reliant on oil royalties.

Sugar cane feedstock plus the cost of processing comes in at around 81 cents per gallon ethanol production in Brazil. One feasibility study for the United States notes that sugarcane as a feedstock will cost US$2.41 per gallon. The study recommends that molasses would be a more feasible feedstock for producing ethanol in America, coming in at a cost around $1.27 per gallon. Ethanol can also be produced from raw sugar, but it is much more expensive to do so (although it should be studied for the Guyana context).

The challenge, however, could be the capital investment required to set up the factory. The US Department of Agriculture estimates that a 20 million gallon molasses-based ethanol plant in that country could cost approximately US$27 million. The same capacity plant using cane juice could cost around US$32 million. The yield and the amount of sugarcane that could possibly be produced in Region 3 would have to be studied carefully. The plant also has to be located as close as possible to the feedstock.

In general, an add-on ethanol plant to an existing sugar factory is much cheaper, as one study indicates. The price of crude oil – which will not be US$30/barrel forever – should not be the deterrent for a national ethanol mandate. The deterrent should be whether Region 3, East Demerara and Berbice have the capacity to produce enough sugarcane to meet the demand for an ethanol plant, while still producing enough molasses to support the making of legendary Guyanese rums. Perhaps it is time to call in a company like PRAJ Industries of India and not one of the fly-by-nights Guyanese have had to put up with over the past 15 years to get precise estimates.

Comments: tkhemraj@ncf.edu

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