Demerara estates must lower costs or face closure
$2.3B subsidy could be used to fight poverty, says World Bank
By Gitanjali Singh
April 13, 2003
Guysuco's Demerara Estates have to be made profitable or be closed once the new Skeldon Factory is in operation, should market conditions remain unchanged or decline, says the World Bank.
The loss-making factories in the Demerara Region, based on marginal cost analysis (the cost of producing an additional unit of sugar), are estimated to receive about US$12M or G$2.3B - an equivalent of two per cent of Gross Domestic Product (GDP) - as an implicit cross subsidy within the industry each year. This, the bank says, diverts resources from expanded public spending for health, education and other public and social services.
If this sum were reallocated to pro-poor spending in Guyana, it would make a significant contribution to poverty reduction, the Poverty and Social Impact Analysis (PSIA) of reforming the sector has found.
The government last year took a policy position to keep the factories open. It is depending on an Agricultural Improvement Programme (AIP) to restore cane yields to levels previously achieved by the industry in the 1950's and 1960's and to improve the cost effectiveness of the Demerara estates by other measures as well. There is consideration for greater private-sector involvement in the industry via private cane production and possible private sector led co-generation, refining and distilling of alcohol at the Demerara Estates.
However, if this strategy fails to improve their efficiency, the continuing cross subsidies will limit the gains from reforms in the sugar industry severely, PSIA said.
The PSIA is appended to the World Bank programme document for its US$12M Poverty Reduction Strategy Credit to Guyana, which was approved last September. The document was made public earlier this year and as the first phase, the PSIA attempts to analyse the impact of major policy changes in the sugar, water and bauxite sectors on employment, the poor and social conditions.
The government has committed itself to reforms in sugar to secure its profitability and sustainability including construction of the new sugar mill, the reduction of redundant labour in the sector, institution of a new wages policy based on inflation and profitability for sugar workers (as against production levels) and revision of the private management contract which shifts performance indicators to profitability targets. These are commitments contained in a letter from Finance Minister, Sainarine Kowlessar, to the World Bank to secure the US$12M Poverty Reduction Strategy Credit.
The government has agreed to reduce labour costs in Guysuco from 54% of total recurrent costs to 43% by the end of 2006 through a programme of natural attrition and managed staff reductions. Attrition is expected to continue each year at a rate of 2-3 per cent.
None of the sugar unions are aware of these commitments. Komal Chand of the Guyana General and Agricultural Workers Union (GAWU) said on Friday that the two sugar unions had been requesting meetings via Guysuco with the World Bank officials to be briefed on their outlook for the industry, but have not been successful to date.
The PSIA, which Chand says he has not seen, sees two major policy options confronting the government in restructuring the industry. Option one is for the construction of the new factory at Skeldon, increasing cane production on associated land in Berbice to take advantage of economies of scale in the field and factory levels while closing the non-profitable mills in the Demerara region to increase industry revenues.
The second option is to expand the efficient mills and associated lands in Berbice while attempting to improve the cost effectiveness of Demerara Estates through the Agricultural Improvement Programme (AIP) and other actions. This is the strategy being pursued by the government currently.
"Unless the latter strategy is successful, the current situation of cross subsidies from profitable mills will limit severely any gains from the government reform efforts," the PSIA said.
In a simulation model of four different scenarios open to the government, the PSIA shows that with reforms (including layoffs), accompanied by safety net programmes for both the sugar and bauxite sectors, the economy can enjoy higher and faster growth levels as well as reducing poverty faster and creating more jobs. The new sugar factory in itself would be less labour intensive and as such, no major job creation is expected there.
The economic impact of reforming the sugar industry is seen in the provision of more jobs with that job market eventually shrinking; dividends for the government and capital available for the firm for reinvestment with the removal of the sugar levy; a net welfare loss for the poor with an increase in the domestic sugar prices which is expected to impact on the level of inflation; and increased cane purchases from private cane growers.
Guysuco now has a staff level of 18,500 permanent workers from 28,000 in 1991, but reforms are expecting employment creation as secondary effects on businesses and service providers to Guysuco.
The PSIA says if the Demerara estates are not made profitable and have to be closed, it would result in a release of funds for redirection to social and infrastructure projects. On the negative side, it would mean gross unemployment of about 8,000 workers putting 33,000 persons at direct risk. It is expected that for every job lost in the mills or on the estates, further jobs would be lost along the sugar belt. There would be impacts on suppliers including small-scale artisans.
In the short-run, the PSIA says the shocks may be eased by redundancy payments but the medium to long run would see considerable economic impact as a result of such closures.
It recommends the crafting of a comprehensive social mitigation plan before the Skeldon Factory is completed by the first quarter of 2004 to address these impacts and to develop adequate social safety nets.
The PSIA says several other areas of reform in the sugar sector could generate potentially negative impacts on the poor especially if the Demerara estates do not become profitable despite government efforts.
The social mitigation plan would have to be prepared to define options for dealing with worker displacement, transition strategies for services currently provided to communities and to set out a process of consultations to inform policy choices such as support to affected small businesses and small landholders who could continue or become cane suppliers to Guysuco. There would also be a need for a stakeholder analysis to inform the process as well as need for the government to implement the recommendations to encourage small and medium landholders to become cane suppliers to Guysuco.
Sugar accounts for 16% of Guyana's GDP and is the largest net earner (23%) of foreign exchange. It is also the biggest corporate contributor to public revenue. The industry employs 26,500 persons directly and indirectly and affects the lives of 75,000 persons directly or indirectly.
The industry in Guyana has a regional competitive advantage but its cost of production is US 18 cents per pound against a world market price projected to be 9 cents by 2015.