Islands Business October Cover Story: Sugar

What�s Next in Sugar? The Inside Story on a Sticky Business

Dionisia Tabureguci
Islands Business is acknowledged as the source of this article and Dionisia Tabureguci is acknowledged as its author.


Quick facts on FSC:
Top five shareholders in FSC as at May 31, 2010
1. Government of Fiji - 30,239,160
2. Fiji National Provident Fund - 7,810,806
3. Fijian Holdings Ltd - 3,933,900
4. Reddys’ Enterprises Ltd - 643,019
5. Colonial Life Assurance Ltd - 250,080
(total issued shares as at May 31, 2010 - 44,399,998)

FSC’s borrowings in 2010
In 2010, FSC’s total borrowings stood at $180.919m.
This is broken down as:
Non-current:
Export Import Bank of India - $77.680m
Fiji National Provident Fund - $10m
Reserve Bank of Fiji - $22.5m
Advance from Sugar Cane Growers Fund - $8.4m

Current
Export Import Bank of India - $6.316m
Bank overdraft – Westpac Bank - $1.446m
Fiji National Provident Fund - $34.044m
Bank of Baroda - $19.094m
Bank of South Pacific - $1.436m

* The information is based on FSC 2010 annual report.


When Fiji gained independence from Great Britain 40 years ago, sugar production was a thriving industry that held enough promise to carry the country into the new era.
Not only had it sustained the economy since the late 1800s, historical accounts referred to it as the single largest industry that directly supported commercial activities and livelihood in Fiji’s cane growing areas.
Sugar was, as history showed, Fiji’s major foreign exchange earner for a long time. But whatever hope and vision the fathers of the nation had for this commodity, they could not have been prepared for the magnitude of political foot-balling that subsequent years would expose the industry to.
Now 40 years after independence, sugar is in disarray, its status as a major commodity and significant export earner eroded although no less important, while at its very heart lies a financial mess that now threatens to bring the Fiji Sugar Corporation (FSC), Fiji’s only sugar milling company, down to its very knees.
And along with it, the entire industry and livelihood of a quarter of Fiji’s population—some 200,000 people, directly and indirectly supported by the industry.

Disaster, disaster...
“Disaster, disaster, disaster, disaster,” was about all that economist and academic Dr Wadan Narsey would say when asked by FIJI BUSINESS to comment on the financial affairs of FSC as reflected by its latest financial accounts.
The company was obviously in a mess.
Clinging desperately to life support in the form of government assistance, FSC’s predicament, Narsey opined, was tantamount to a major economic crisis for the nation.
“[I] fear that the worst case scenario for FSC spells a major disaster for the Fiji taxpayers, Fiji National Provident Fund, the Reserve Bank of Fiji and the Fiji economy,” Narsey told FIJI BUSINESS.
“The Fiji Government has guaranteed FSC loans of more than $100 million, which FSC cannot repay; the taxpayers will have to inject more funds into FSC if the sugar industry is to be saved, including the livelihoods of more than a hundred thousand rural people.
“FNPF has also lent more than $55 million, the Reserve Bank has lent more than $22 million. None of these loans can be repaid in the immediate future. “If FSC does collapse, the total cost to Fiji taxpayers may be more than $300 million—a disaster equal to the National Bank of Fiji collapse.
“Coming on top of the $300 million losses for FNPF at Natadola and Momi, the already reeling Fiji economy is now about to nose-dive into disaster,” Narsey said.
FSC’s financial statements for the year ended May 31 2010 revealed it suffered a loss of $175.06 million, the worst, some say, in its consecutive loss making years.
Much of this loss was due to the write down in the value of property, plant and equipment as per the result of an impairment review of the corporation’s assets carried out by an independent consultant from New Zealand.
The write down may “not necessarily mean money going out,” as one source pointed out, “but it does reflect badly on the company’s balance sheet as financial companies would not be so willing to lend to it”.
As it was, the company was drowning in debts it could not pay and living well beyond its means, with a cash flow that could not support its day-to-day operations.

Messy business
Plagued by “cash flow constraints” and milling problems, FSC’s continuation as a going concern was clearly in doubt, and depended very much on government’s financial assistance, noted accounting firm G Lal & Co., the independent auditors for FSC’s books.
“As at 31 May 2010, total liabilities of the corporation exceed total assets, resulting in net liability of $65.5 million.
The current liabilities exceed the current assets by $52.7 million, representing the ratio of 2.71:1,” G Lal noted.
“The corporation has significant debt repayment commitments amounting to over $60 million during the next twelve months. The corporation will require significant funding to meet its working capital requirements, capital expenditure and fund the operating losses.
“Total funding requirements for the financial year ending 2011 and 2012 is projected to be around $170 million.”
Things were so bad that not even government-backed papers could persuade investors to put money into the company.
“The corporation has faced difficulties to raise funds for working capital requirements, with increase in cost of borrowings during the year and subsequent to balance date.
“Subsequent to the balance date, the corporation floated government-guaranteed promissory notes to raise funding for working capital, however, the corporation was not successful in raising the required funds,” G Lal further noted.
When this publication went to press, this situation had worsened and had forced the suspension of trading in FSC shares on the South Pacific Stock Exchange, where the company is listed.
And as if this was not enough, a Mill Upgrade Programme initially intended to modernise and rescue the company from infrastructure exhaustion and low efficiency only served to further derail its operation.
“The Mill Upgrade Programme has been substantially completed during the year ended 31 May 2010. The mill upgrade was undertaken to improve plant reliability, sugar extraction, sugar quality, energy efficiency and environmental controls.
“However, during the financial year ended 31 May 2010, mill efficiency was severely affected by incompatibility between the existing and new machinery,” G Lal said.
This portends a poor 2010 crushing season characterised by “frequent mill interruptions resulting in a low level of mill uptime, poor TCTS (tonne cane crush to tonne sugar) ratio and higher operating costs”.
“An independent engineering audit of the mill upgrade was carried out during December 2009 by independent consultants from India, and the report identified significant problems with the Mill Upgrade Programme and recommended several urgent modifications, which are being attended to,” G Lal further revealed.
“Given the financial position and the debt levels of the corporation and recurring losses being incurred by the corporation, the business operations are not sustainable and will require restructuring of debt and additional equity or funding.
“Subsequent to balance date, the corporation continues to incur significant operating losses due to decrease in cane supply and the increase in the TCTS ratio. The corporation is not likely to meet its budgeted results for the year ending 31 May 2011. The above factors indicate that the corporation may not be able to continue as a going concern,” G Lal observed.

Back to basics
The complexity of issues that surround FSC and indeed the entire sugar industry is rooted far deeper and extends further beyond the fields of the dwindling farming communities in Fiji’s cane belt areas.
Sugar has famously become a tool for political power struggle but when narrowed down to what can save it as a commercial entity, much of the answer lies in the very crop that it crushes.
“When the sugar reforms were planned in 2004, the focus was on the restructure of FSC, which was the upgrading of three sugar mills,” former FSC chairman, Ross McDonald told FIJI BUSINESS.
“These were all done on the advice of the Sugar Technical Mission of India, on a government-to-government basis between Fiji and India as an aid package to assist Fiji’s sugar industry.
“The main focus was to upgrade the mills and one of the key areas it seems has failed is that no leadership or direction has been given to growers to increase the cane crop, which should have increased to about 4.5 million tonnes of cane by now.
“Had this cane been available, FSC would have been in a much stronger financial position and not suffering.”
McDonald, who chaired the FSC board in 2004 when the sugar restructure began, was and still is the managing director of finance firm Credit Corporation.
According to him, FSC had, over the years, “always found a way to mill all the available cane despite its problems”.
“There is no doubt that if cane supply can be quickly increased back to previous levels of a few years ago of above three million tonnes annually, and then to the 4.5 million tonnes as required under the restructure, then FSC will mill it and so increases sugar production, its revenue as well as the  farmers and the industry alike.
“Increased cane production will enable FSC to earn the funds it needs to survive. All farmers need to accept that FSC is no longer a cash cow, and needs increased cane production to survive economically, as the farmers do also. Both are mutually dependent.
“The real problem in the industry is the lack of sufficient volumes of cane, and not so much the problems of FSC mills,” said McDonald.
“The Sugar Technical Mission advised on the need to increase crop production but it seemed their advice was not followed through by government or the Sugar Cane Growers Council or the relevant ministry, who should have given growers leadership in this.
“This would have required significant funding and it seemed this aspect of the restructure of the sugar industry has been ignored.
“Another thing that didn’t happen is whilst the restructure of the mills was in progress, FSC was to proceed with the co-generation project at Lautoka, Rarawai and Labasa, which would have given it the extra revenue to remain viable.
“So the mill upgrade, the increase in crop and the co-generation project, were all mutually dependent and necessary to enable the industry to continue and for FSC to remain viable. The question now is where do they go from here?”
It may have been the urgency in finding the answer to that question that has led the government—as major shareholder in FSC—to execute a series of telling changes in days leading up to the publication of this magazine.

Swim or sink
Of all the options on the table, shutting down FSC was not going to be one of them, despite its obviously insolvent state.
The industry, being an integral part of the economy that directly and indirectly supports the livelihood of some 200,000 people and earns around $200 million a year in export proceeds, is crippled without FSC and its four mills.
“If you close FSC, then you will find 16,000 cane farmers without any income, all of the towns in the North and West: Labasa, Nadi, Lautoka, Ba, Tavua and Rakiraki—would all be in serious problem without sugar income, and a huge number of casual workers that are employed during cutting season, would be without work,” McDonald pointed out.
“It’s in government’s interest to keep FSC viable, even if there are some costs to this, rather than have Fiji’s economy ruined without a sugar industry.  Depending on the numbers, it may be cheaper for government to keep FSC going than to have the industry collapse. 
“But this would be dependent on significantly increased cane production that would need a huge change in attitude and effort from growers, as their confidence in the industry, given the massive decline in cane in recent years, seems to be sadly lacking,” McDonald added.
The immediate urgency at FSC however was obviously damage control.
In a span of a month, FSC had seen the resignation of its top three executives and board chairman, followed by the quick installation of former Permanent Secretary for Finance John Prasad as CEO.
This all had to do with an assessment of FSC reportedly put out by international financial consultancy firm Deloitte, a report that was the subject of much public curiosity although it had not made its way into the public domain.
Prasad’s appointment as CEO is “for three months with the responsibility of implementing the Deloitte Report,” according to FSC’s market announcement on the appointment.
While recommendations in the Deloitte report were not released to the market, FIJI BUSINESS was reliably told that one of the options recommended by Deloitte was for government to consider assuming total ownership of FSC.
When this edition went to press, FSC had announced its 37th Annual General Meeting, with the de-listing of the company being an item on the agenda, possibly making way for a major capital restructuring at FSC.
FIJI BUSINESS had sought comments from government on this issue but had not received any response when this edition went to press.
However, G Lal, as the independent auditor of FSC and also the Fiji-based Independent Correspondent Firm to Deloitte New Zealand, had made its own observations when it audited FSC’s 2010 financial accounts. That in order for FSC to continue as a going concern, “the following assistance will be required from the government and certain critical reforms and improvements need to be achieved:
•    In the short and medium-term, the government continues to provide financial and other support to the corporation and the sugar industry, the corporation’s debt is restructured and additional equity and/or funding provided by the government to enable the corporation to meet its commitments and obligations on a timely basis;
•    Improvements are achieved in cane supply volumes and quality together with significant improvements in mill efficiency and performance with improved TCTS ratio and reduced mill operating cost;
•    Sugar industry reforms are achieved and funding for the sugar industry at large is made available for a long-term sustainability and survival of the sugar industry and the corporation.”
    G Lal also recognised government’s commitment to continue to support FSC and the sugar industry, given its importance to Fiji’s economy.
    Furthermore:
•    During the year, the government guarantee was increased to $120 million, and was extended until 31 May 2012 to enable the corporation to borrow from commercial banks and short-term money markets;    
•    The government has set a Sugar Taskforce for Financial Restructuring of the corporation and reforming of the Fiji Sugar industry;
•    The Sugar Taskforce has recently engaged the consulting firm from New Zealand to undertake an independent review of the corporation’s performance and capital structure to help the government identify the level of financial support required by the corporation in the short-term and an appropriate capital structure for the corporation in the medium term together with review of wider industry structure and necessary industry reforms;
•    Management is making all efforts in consultation with the project engineers and contractors to bring about efficiency within the upgraded mill plants and machinery at the three larger mills. Training of operators in critical areas of operations is continuing under the guidance of technical experts. It is expected with continuous improvement in this manner, the performance of the upgraded plants will fully integrate with older plant and machinery and it is expected the milling efficiencies will improve to an acceptable level of performance.
•    Management is undertaking a number of initiatives with government and the sugar buyers Tate & Lyle of UK to increase cane production.
•    A number of strategies and initiatives have been put in place to reduce costs through rationalisation of manpower levels, streamlining of business operations, centralisation of corporate functions and outsourcing of non-core activities.

Comments

dazed and confused said…
I fear the FSC and any prospects of a sustainable sugar industry in fiji are lost causes. Without extreme and appropriate government intervention, the FSC will collapse on itself leaving the farmers with nothing - no land, no market to sell to.
First of all, the government needs to do something to assume the market risks of the farmers. Provide subsidies that ensure farmers get a fair price and be more reliant when providing credit for farming inputs.
Secondly, a complete reform of the FSC.
Thirdly, invest in infrastructure and research for ethanol development based on sugar cane.
Integrate ethanol production into the curriculum of USP or FNU so that we can start to train people to develop, manage and enhance an ethanol producing industry. We need technicians and mechanics who can adapt car engines, fix generators that run on ethanol, research the capacity of sugar cane to produce ethanol etc.
The state could also work with FEA to develop this ethanol industry for possible rural electrification projects. This would provide another support system ensuring a steady market for ethanol.
Education and adaptation are key.
We can't compete on global markets without preferential treatment. But we can sell carbon credits for producing 'greener' forms of energy.
But with all the funding and potential grants flying around, lets ensure the state keeps any sort of tinkering with the FSC and fiji's sugar industry transparent.
Happy Diwali.
The souring of sugar said…
A good piece from Islands Business that makes for pretty alarming and depressing reading. And some good points here from "Dazed and Confused" that deserve wider discussion. Successive leaders in Fiji have been trying to paper over the cracks in the sugar industry for decades. It's sad that some of these, like Mahen Chaudhry, have seemed more interested in using sugar as a personal political football than embark on the restructuring that's so badly needed. Things are now so desperate that one can only hope the personal intervention of the current PM makes a difference. Fiji without sugar is unthinkable while so many ordinary people depend on it for a living. Let's hope the Europeans and others think about their plight rather than continue to use the industry as a blunt instrument to bludgeon the regime into submission. It's not just crude but unconscionable to make poor tenant farmers pay for the alleged shortcomings of a government over which they have no say and certainly no control. One thing that strikes me. Why aren't stories like this staple fare in the Fiji Times? I learned more about sugar from this one piece than several years of reading the bloody paper. Makes you wonder if the industry would be in the mess it's in if the country had become more aware about its problems much earlier. Let's face it. For all the awards that are handed out for journalism in Fiji, our media just doesn't seem to be up to the task of alerting us to some of the things we need to know. They harp on about censorship but it's about time they acknowledged and began to address their own shortcomings.
Shot itself in the foot said…
The sugar industry has shot itself in the foot. Supporting a military coup doomed the industry. Tell the collapsing industry to go and speak to chaudhary and the FLP, and then the military 'leaders' who promised everything and have delivered nothing.
The collapse of the industry has nothing to do with fijian landowners, the media, Australia, NZ or EU! It is the result of total incompetence in the industry.
The industry will collapse under Bainmarama's coup - that is how history will record it and remeber it. He wants to call himself 'PM' and sugar minister - so fix it Frank...or get out of the kitchen and let the real elected going forward government back in to clean up your mess - before it is too late!
Sugar overload said…
Another nutter, Croz, using the sugar crisis as a boot to kick the regime. "Fix it Frank, or get out of the kitchen and let the real elected going forward government back to clean up your mess". Are you for real? What, the SDL? That miserable bunch of racist, taxpayer-fleecing, ignorant goons! This propaganda wave of recent days is becoming very tedious. These guys are like kids flailing around after a birthday party because they've had an overdose of sugar. Listen up you SDL apologists. The party's over. No more Coke for you. Now wash your grubby faces and get into bed!
Why wring hands now? said…
@ sugar overload.......

It goes back much further than the SDL governments: it goes back to the Chaudhry Government and to the SVT governments: not one of these impoverished outfits (intellectually and politically)made it their business to tap into the Real World around them. They were blinded by ideology. In the Chaudhry one year muddle, it was by a Socialist anti-business, 'let's get even' manifesto. Let the nation "Go hang". Well, the nation did. 2000 arrived with mayhem and bloody chaos. Who cared a damn about the Fiji Sugar industry? Certainly not the most misguided MBA in recent history - George Speight. Out of this chaos, Australia chose to steer Fiji into "democratic" elections. In the aftermath of terrorism? Of hostage-taking and of death? Australian policy was profoundly mistaken and misguided. A complete failure of political judgement.....but the WILL played on. Then May 2006 arrived. More of the same. In all of this - who cared about the Fiji Sugar Industry? An utter demonstration of Tuchman's "March of Folly" - why wring hands now? We saw it coming and refused the view.
Right on wringing said…
"Why wring hands now?", A lucid, concise and utterly plausible argument. You're absolutely right in saying that Fiji was forced back to democracy far too quickly after 2000. Having had three coups ( two in 1987 and Speight's in 2000 ) that truncated elected governments, there should have been a period of much greater reflection about the system of government we had. It was clear then that the racially based electoral system wasn't delivering stable government. I think we'd have been a lot better off had Bainimarama taken over then. He would have had much more authority, having saved the nation by tricking George Speight into surrendering his hostages. And we would have been spared Lai Qarase and a government that was essentially delivering Speight's agenda with some of the 2000 coup makers by his side. Hindsight is a wonderful thing, of course, and in the trauma of 2000, many people weren't thinking straight. But to launch into fresh elections when so many issues hadn't been resolved was, I agree, a lost opportunity. The Aussies and Kiwis send relatively low- level diplomats to squawk "democracy" into peoples' ears with no real understanding of local conditions. Fijian society has always been authoritarian and none of what's happened in the past four years is any different in historical terms to what's always happened, whether it's Tui Cakobau. Ratu Sukuna, Ratu Mara, Sitiveni Rabuka or Frank Bainimarama. What ordinary people want is stability, security, food on the table and a future for their kids. Whether they go to the polls or not comes after those conditions have been achieved. Westminster democracy can't be imposed, merely adapted for local conditions if and when it's appropriate. After the trauma of 2000, what was required was a firm hand. What we got was a bunch of self-serving politicians who, in many instances, owed their positions to precisely the same forces that produced the trauma in the first place. And who then set about to entrench racism for all time. The Aussies and Kiwis still don't get that, and why for much of the country, it was totally unacceptable and Frank is a saviour. Even someone like the Australian former Fiji police chief, Andrew Hughes, didn't get it. 007 predicted a public uprising after the 2006 coup. We're still waiting.
snoopy said…
As the article says the only thing that can save the industry is if sugar cane production is increased. Instead of looking back and blaming Qarase (under his Govt many farmers lost faith in the industry due to non-renewal of leases) or Banimarama lets look forward.

The remaining farmers in Fiji will not increase production as they many of the next generation have moved to urban areas or migrated.

The one hope is for large scale farming by FSC itself by utilising the land that has been left idle after non renewal of leases.
Anonymous said…
@ snoopy on 'large scale farming' of sugar in Fiji:

An interesting comment, Snoopy. In post-Franco Spain under the former communist-turned-socialist first PM Felipe Gonzalez (1976) it was the compulsory acquisition of unused land of over a certain number of hectares that transformed Andalucia into a California-style Province. Even the large estate owned by the Wellesleys (Duke of Wellington's family) was under threat in areas that were not intensively cultivated. This holding had been given to the Duke post-the Peninsular War in Iberia. So, land was ruthlessly acquired by the State and transformed by private enterprise and State/Private entities. Great infrastructure projects: roads, dams, solar and wind farms have made Andalucia, formerly impoverished, a now flourishing Southern Province. There was the political will to achieve this. The Spanish King Juan Carlos did not stand in the way. He was and is a constitutional monarch and thus follows the conventions of the Spanish Parliament as Head of State. He is a direct descendant of Queen Victoria.

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