An Industry on Life Support

Despite the losses incurred since the 2014 crop, emergency bailouts as well increasing support from public funds have kept the industry on a tenuous lifeline. It is akin to flogging a dead horse

By Mrinal Roy

The December 2020 World Bank competitiveness analysis report on the sugarcane sector made public (more than a year later) recently basically confirms what has been patently evident to all but those who doggedly choose to be blind to crying commercial realities detailed in the report. Thus, ‘from crop years 2005 to 2019 the ex-Syndicate price of sugar declined by 30%. Based on 2019 estimates, the sugarcane sector therefore incurs losses of Rs1.35 billion annually. With over 90% of sugar production commercialized abroad, the Mauritian sugarcane sector is highly dependent on exports and vulnerable to changes in the highly competitive world sugar market.’

In order to fill the gap caused by the drop in sugar revenues, the sugar cane sector has been receiving annual financial support since 2014. Rs1.5 billion of public funds representing 1.12% of the total Government budget and double the budget allocation in 2017 were used to support sugar producers in 2018 and provide a lifeline to the sugarcane sector.

Billions galore

It should be recalled that some Euros 260 million (Rs 10.4 billion) obtained as Accompanying measures negotiated with the European Union were granted to Mauritius as general budget support to the government to inter alia implement the Multi-Annual Adaptation Strategy ten-year plan (MAAS) aimed at re-restructuring the sugar industry in the context of the EU sugar regime reform. The object was to streamline the industry, reap the economies of scale and develop additional poles of revenue from cane, bagasse used in power plants to produce electricity, molasses and distilleries, etc., in sugar cane clusters to shore up falling sugar revenue. In accordance with the MAAS grid of allocations, the lion’s share representing some 40% of the Accompanying Measures were disbursed to the corporate sector. It enabled the sector to significantly reduce their workforce by some 7000 workers through the various Voluntary Retirement Schemes (VRS), thus substantially pruning their operational costs.

In addition, the corporate sector has through the provisions of the various VRS schemes, measures contained in the Blue Print as well as the Illovo Deal, also obtained that a total of some 7500 acres (3035 hectares) of their land assets are exempt from the payment of the land conversion tax at the rate of Rs 3.5 million per hectare. This provides a tax-exempt land bank for diverse commercial, residential and other projects as well being an extremely valuable asset.

Government has since 2015 forfeited billions of Rupees of state revenue through extremely generous exemptions from the payment of various taxes including land transfer tax, morcellement tax and income tax for a period of eight years, VAT as well as registration duty and custom duties granted to smart city project promoters richly endowed with land assets in prime locations. The list of smart city promoters shows that many of them are property development subsidiaries of sugar companies.

Is the continued handouts to a loss-making sugarcane sector from scarce public funds acceptable against the backdrop of the above?

Iniquitous

It is patently iniquitous and particularly galling and ironic that an industry whose history has been tainted by the excesses of slavery and the systematic watering down of the terms of employment of indentured workers leading to protests and strikes is now dependent for its survival on the handouts provided from public funds principally financed by mainstream Mauritius through the lion share of government revenue collected from VAT.

The sugarcane sector is unable to survive without financial support from taxpayer funds to the sector. A commercial venture or sector can only be viable if the prices it sells its products are competitive and remunerative. There was no lifeline from public funds when major textile companies went under in the wake of the end of the Multi-Fibre Agreement in 1994 and the cut-price competition prevailing in the market place from new lower cost producers.

When an export commodity is uncompetitive and is incurring systematic losses, it is not rocket science to decide to stop its production forthwith. However, this elementary rule of commercial savviness is obviously not applicable to sugar. Despite the losses incurred since the 2014 crop, emergency bailouts from the reserves of the Sugar Industry Fund Board and other similar makeshift measures as well as increasing support from public funds have kept the industry on a tenuous lifeline. It is akin to flogging a dead horse. This cannot go on.

Seriously?

In its conclusion, the World Bank competitiveness analysis report states on the basis of simulations using their model ‘that the sugarcane sector has an 80% probability of sector profits over the coming 10 years if it manages to simultaneously (i) increase the price paid for electricity from bagasse (ii) reduce labour costs by 40% (iii) increase the share of speciality sugars sold to 50%, (iv) increase the share of high-tech farms to 95%, and (v) save at least Rs 200 million per year on sugar export costs. This means that, even after all these tall requirements, the sector still faces a 20% chance of producing a loss.

In short, are basically all and sundry to be press ganged to bend over backwards to provide a lifeline to a patently uncompetitive and loss-making sugar industry. Seriously?

The report adds: ‘If no policy action is taken in the short term, with the current level of losses, the sector will continue to decline and could disappear in the next 10 to 20 years (under a pessimistic scenario).”

What about addressing a host of operational inefficiencies of the sector such as the plummeting efficiency of factories, the frequency of factory breakdowns etc. upfront?

It should however be flagged that planters who have been receiving a pittance for their bagasse since 1985 have been clamouring for a fairer price for their bagasse used to produce electricity in lucrative power plants. However, it is only in June 2021 that government significantly raised the price paid for bagasse to Rs 3,300 per tonne of sugar. In parallel, government also amended the MCIA Act in July to include all producers (i.e., both planters and millers) as beneficiaries of this higher bagasse price. Following this government amendment, the Rs 3,300 per tonne is now also paid on 22% of the sugar milled accruing to millers for crushing planters’ canes. These payments are again made from public funds by a special provision in the 2021/22 Budget.

Why on earth is compensation for the value of bagasse (which belongs to the planter) used to produce electricity in lucrative power plants being funded from strapped public funds instead being paid by power producers?

In contrast, planters producing up to 60 tons of sugar receive a capped support price of Rs 25,000 per tonne which now includes the Rs3300 received on bagasse. This reduces the price subsidy element provided from public funds.

The World Bank report paints a grim picture. The sugarcane sector is annually running at a substantial loss and is surviving on the lifeline of annual support of some Rs 1.5-2 billion from public (taxpayer) funds. Production, which stood at some 520,000 in 2005, has been more than halved in 2021 with a crop estimated at 250,000 tonnes. The factories are running under capacity and higher cost. Sugar revenue represent less than 1% of GDP.

Statistics in the report covering the crop years 2012-2019 show that the exports of non-refined (special) sugars sold in EU countries and the US which presumably are still remunerative have declined. The share of bagasse and cane biomass in the production of electricity which is dependent on a declining sugar cane production has fallen to 11% in 2020. This means an increasing dependence on highly polluting coal in power plants for electricity production in the teeth of COP26 commitments.

Cut the dead wood

This disconcerting situation begs so many burning questions. Why should public funds be used to annually keep the sugar sector which comprises both planters and the corporate sugar sector on life support? Should there not be a transparent costing exercise to identify all the sugars which are remunerative and those that are being sold at a loss? We should clearly distinguish between the range of highly valued unrefined special sugars because of our know-how and well-established quality standards sold in prime markets such as the EU, the US and other markets and other sugars sold overseas. Is it not simple commercial horse sense for the sugar sector to cut the dead wood and focus solely on the sale of remunerative products?

The bottom line is that the country cannot continue to throw good public money to sustain a loss-making sector. In the strapped context of public finances, these funds could be better used for the development and diversification of the economy towards new sectors of growth to provide jobs for the qualified young as well as give support to the planting community to diversify their activities into sheltered food crop production, other agricultural production or other economic activities of their choice or simply to realize their land assets. Appropriate incentives must be provided accordingly.

The World Bank report is quite explicit: ‘If any of the recommended policy and sector changes is not possible, particularly the availability of direct taxpayer support, the downsizing of the sector is the only viable option. This means a “managed” downscaling of the sector to ensure its focus on speciality sugar production while ensuring appropriate support levels for the transition of farmers and workers to other activities.’

Saving what matters

Sugar is in our DNA. Yet difficult decisions have to be taken. We need to salvage the special sugar segment of the sugar industry and the precious and highly valued know-how which goes with it in an appropriate production set-up which includes a packaging plant preferably in the free port equipped to offer the wide range of our special sugars in consumer-packaged form to our wide portfolio of buyers in countries across the world. This will further boost value addition and enhance quality assurance and norms. If we do not protect and nurture this prime asset, as has happened in the past with Lonrho through cross border investments in the sugar sector, the know-how will be blithely delocalised to our detriment.

This will also enable the country to reform and plan the intelligent use of the vast acreage of land in the country freed from the overbearing weight and shackles of sugar in national decision making. It can only open game-changing new opportunities for the common good.


* Published in print edition on 18 February 2022

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