About this issue

This is the second edition of our monthly business supplement edited by William Walker. The articles are written by Mr Walker unless otherwise stated.

We will be inviting selected business leaders to make their comments in each issue on a subject of their choice. That series starts today below with a piece by Mr Clifford Reis, the Executive Chairman of Banks DIH Limited.

We welcome comments or letters from readers on the contents and ideas for topics for future issues.

The realities of the world of business
by Clifford Reis,
Executive Chairman of Banks DIH Ltd

In terms of how we consider world history and the activities of human kind, a new dimension has been added to the way in which we now consider our world, our planet. We now speak of the pre-September 11th ev-ents and the post September 11th events as these relate to global life and activities. The instant and invasive na-ture of television brought the pain and reality of "Ground Zero" into our living rooms and with them came the reality of how interconnected and interdependent we are, whether we may want to admit this or not. Pre September 11th life displayed unhealthy tendencies towards insularity and greed. Post September 11th life injected an element of "perhaps there is something other than our own selfish concerns". The global world of business was not spared this reality and business life in Guyana will now have to face up to this reality. Our attitudes towards the concept of service; competitiveness in manufacturing; management of finances and understanding the crucial nature of human resources in the success of any business, will, in the post September 11th world, de-cide whether our businesses succeed or fail.

On 3rd March 2001 at the 45th Annual General Meet-ing of Banks DIH Ltd, the concept of "the New Customer Reality'' was intro-duced to the shareholders. This reality asserted that for a business to survive and to thrive, it needed to adapt to the continuously changing landscape of the customer satisfying process. The focus of that process was the creation of happy and satisfied customers.

An example from post September 11th world for Guyanese businesses to examine and study will be the worldwide Airline In-dustry. Almost overnight, the bottom fell out of an industry which employed hundreds of thousands of individuals. The reason be-ing that the customer no longer felt safe and satisfied. The service offered by the Airline Industry, for many people, was no longer acceptable. The reality is that the Airline Industry is now forced to re-examine the nature of its security, product and services offered and find ways of restoring that confidence lost. Within Banks DIH Limited, it is no different as we shift our focus away from products to people and services. We are conscious of the need to set standards not only within our factories and offices, but also within the marketplace. We do this by the development of partnerships to strengthen and secure the circle of life within the world of business. The finished product and continuing quality service, springs from the efforts of our suppliers and our employees utilising the latest in technology to produce the best we can offer.

Banks DIH Limited, as a long time player in the manufacturing sector since 1957 understands the realities of the competitive nature of manufacturing within Guyana. The comparison to a minefield would not be excessive. Manufacturing in Guyana does battle on two fronts with the playing field not as level as some might believe. High production costs are fuelled by the ever-increasing cost of the U.S. dollar, unduly high electricity costs, Bank interest rates, Consumption Taxes and post-election (Guyana) and September 11th (New York) fires, causing an increase in overseas Insurance premium rates from US$1.90 to US $2.75 per thousand, a 45% increase.

Companies which had retooled at high cost with burdensome capital investment, now find themselves dealing with the discomfort of reduced volumes and finance charges for bank loans and overdraft facilities. Recent examples published in the Press indicate just how many local manufacturers are grappling with the reality of receivership and the closure of businesses. In addition to this, local manufacturers have to learn how to compete with imports sold at a fraction of the cost of locally manufactured items. Our sister Caricom countries are in a position to benefit from incentive regimes,.low energy costs and production volumes produced on equipment which represents the cutting edge of technology. The minimal, almost non-existent fluctuation of their currency against the U.S. dollar offers greater stability and fewer budgetary constraints. There are those also who contend that in Guyana, labour is inexpensive. The question which needs to be asked is, "Inexpensive relative to what?" Some Guy-anese industries are plagued with burdensome overhead costs. The Guysuco experience relative to labour cost is a case in point and their need to be competitive in the light of the world price for sugar tells a sad story of an industry caught between a rock and a hard place. The Rice industry, which can produce more than enough product to satisfy the nation's requirements, is now caught up in deep financial difficulties and the likelihood of competing against price sensitive competition from Asian/Pacific countries. Our economy continues to be too dependent on the commodities; Rice, Sugar, Bauxite and to a lesser extent Gold and Diamonds. Diversification into other areas of endeavours such as Organic (farming)/Agriculture, Aquacul-ture and sustainable Forestry Management of our timber resources will all help in the important business of investment and job creation to stimulate consumer confidence and spending.

Two weeks ago, I at-tended the 35th Graduation Exercise of the University of Guyana. One could not help but observe that the largest graduating class was within the Social Sciences Faculty. The Law Programme added to the long list of graduands on that day. The point is taken that perhaps there needs to be a closer working relationship between Industry and the University to encourage and support areas of study which are relevant to the changing needs of the Guyana situation. From the Banks DIH perspective it is almost impossible to purchase equipment and/or machinery which is not PLC controlled or computer controlled. The Internet and the e-mail facility have opened new vistas and ways of doing business and ways of communication. E-Commer-ce is now a way of life in the world of business outside of Guyana. Will we play catch-up or be part of this global change taking place before our very eyes? Three years ago, our company had made a High School Education mandatory as part of our employment processes. Even this requirement has now proved to be inadequate as even the Secondary School system appears to be badly equipped to prepare and present our young people to enter the world of work. The reality is that any functioning education system should prepare the school population to fill vacancies which will become available within the work force. The reality which businesses face in Guyana is the increasing difficulty to find suitably qualified persons to fill vacancies which may arise. This lack of suitability can show itself in a variety of ways: Poor communication skills, poor reading and writing skills, unreasonably high expectations of remuneration without a corresponding desire to prove one's worth to a prospective employer, a desire for rapid promotion within the system feeling that the Secondary or even Tertiary qualification is enough to see one through and a worrying lack of ethical and moral standards. This last concern is particularly worrying as can be seen in a large segment of an organization's finances be-ing allocated to Security issues, and an equally disproportionate segment of the workday being set aside to resolve issues which can only have their genesis in little or no home and family life and the absence of that basic grounding which previously was almost taken for granted. These human re-sources concerns are amplified when con-joined with the continuing spectre of the migration of what's left of our best and brightest. Banks DIH Limited has, over the past years, invested heavily in Scholarships as part of our succession plan to place graduate staff in the key areas of Production, Finance and Engineering. At the Craft level, we have on going training programmes for our mechanics and other artisans. Our Service Personnel are exposed to frequent training programmes in an effort to upgrade their skills and communication. We encourage staff members to pursue professional qualifications with the reassurance of recouping the greater part of the costs incurred. All this in tandem with remuneration packages are insufficient to stifle the call of promise and a better life elsewhere.

I believe if a poll were to be taken of businesses in Guyana, the greatest worry would be the reality of dealing with eroding financial security.

The management of fin-ances to ensure continued viability is almost a daily pre-occupation as the market dwindles and competition for the shrinking dollar intensifies on a daily basis. A compromised cash flow with the concomitant failure to service loans and overdrafts has seen too many Guyanese businesses go to the wall. The apparent ease with which these failures are recorded by the media highlights a concern shared by many that our business sector; manufacturing, banking and agriculture is a prime target for acquisition by business interests in sister Caricom states. Of all the Caricom states, Guyana is the only one which has recorded a negative population growth as recent census figures indicate. The need to garner ever increasing market share within Caricom, makes Guyana a target for manufacturers and conglomerates from as close as Trinidad and further afield. The Guyanese manufacturing sector is, as was previously mentioned, virtually on a war footing. Prepared-ness, a strategy and plan in so far as long-term planning is feasible and a conviction that we are resilient and will succeed, keeps manufacturers going.

The reality of business in this age dictates a clear understanding of the concepts of service and the consuming public's expectations; being competitive by the rigid managing one's finances understanding one of the control of all expenses and overheads; managing one's finances almost with a consuming passion, fundamentals of business - demand and supply, better infrastructure, reliable electricity, crime and drug prevention programmes, an Investment Cede/Guide to attract new investments, and last but not least, staffing one's business with the best and brightest available recognizing that little of value will be achieved if you are unable to put the right human resource component in place.

Exports of fruits and vegetables take off

Every Tuesday night cases of pineapples, pumpkins and plantains leave Timehri airport destined for Trinidad and Barbados. At the same time mangoes and bora are flying through the night sky on their way to To-ronto. Rice and sugar might be hard to sell but exports of Guyana's fruits and vege-tables are literally taking off.

Shipments to Guyana's main market Barbados re-sumed on January 1999 after a two year self imposed embargo caused by the pink mealy bug infestation. At first sales were slow to pick up but for this year the monthly amount of goods being flown out to Barbados and Trinidad has grown from 13 metric tonnes in February to 103MT last month. For the first nine months of this year exports by air to the four main markets, Canada (176,836kg) Barbados (184,617kg), the United States (95,102kg) and Trinidad (80,479kg) have totaled 537,034kgs. More than the total exports by air for all of 2000 (512,765kg). It is worth mentioning however that the largest non traditional exports, excluding seafood, are copra (1.56m kg in 2000) and the unlikely Heart of Palm which with shipments totalling 1.2m kg in 2000 made France Guyana's main export market.

However total exports of non-traditional crops are minuscule compared to the established rice and sugar exports. This is because of the number of limitations faced by cash crop farmers not the least being the nature and size of the local market which is not sufficient to build a reliable platform from which more riskier export ventures could be launched. It is not only the small population but the low income level that is so discouraging. Fruits especially are income elastic in that a family will consume much more as their income increases and when struggling financially will start to see fruits as a luxury. In addition produce is price sensitive as any increase in staple items such as ground provisions causes the customer to substitute their dietary needs with something else such as bread.

What this ultimately conveys to the small farmer is that his market is unreliable as regards price. That is why many of them plant many different crops at one time to spread the risks. If pineapple prices are low then they might be able to get a good price for eddoes. The specialization into one crop is also discouraged by disease that can wipe out a whole year's venture.

For Guyanese farmers there are three main markets outside of the local one. First the Canadian and U.S. expatriate markets which are already being served to some extent. Then there is the Caribbean which is limited in population and by competition from other islands. Trinidad for example is a large producer of fruits and vegetables and can generally raise these at a lower cost than Guyanese farmers. Expanding into other islands outside of Barbados would increase exports but not to a great extent and the further exports have to travel the higher the shipping cost. Finally there are the traditional North American and European markets. These are extremely hard to break into and realistically Guyana cannot compete there. In the case of North America, Mexican and Chilean farmers are producing at an extremely low cost with highly mechanized operations and on a large scale. The requirements of the buyers for uniformity are stringent .Any attempt to sell produce in these markets would require a level of cooperation amongst farmers not yet apparent where they would pool their crops and sell to one buyer .It would ultimately require a joint venture with overseas buyers who would provide capital equipment to cool produce for shipments.

Meanwhile trade with Barbados resumed following the signing of a protocol which put in place measures to ensure pink mealy bugs, which by that time were now under control, did not end up in any shipments. The protocol set up a mechanism which could trace shipments to their source and stipulated that produce only be harvested from pest free zones and shipped by certified exporters. Barbadian quarantine officers originally had to visit each separate exporter and inspect the produce prior to shipment but with the operational establishment of the Central Packing Facility at Sophia in February 2001 their job was made much easier. Now all shipments to Barbados must pass through the CPF which has facilities for cleaning and packaging produce. However the cost of US$600 to fly an official from Barbados every week is being borne by the exporters.

Still the protocol came as a great relief to exporters after a number of years when the pink mealy bug had interrupted what had been a flourishing trade. Prior to 1997 exports to the Caribbean were averaging 2274MT per annum. In 1997 this withered to 883MT with only Trinidad propping up the market. Antigua also stopped importing produce on account of the bug and to date has yet to resume shipments.

All exports are packed at the Central Packaging Facil-ity in Sophia which is under the management of the Guy-ana Marketing Corporation. The produce has to undergo various treatments. This includes for pineapples washing in soap solution, trimming the crown and basal leaves and brushing off excess dirt. Plantains are plunged in slightly warm flowing bleach water which carries away the latex milk which comes from being cut from the stem. Citrus is lightly washed and air dried to take off a black fungus. All produce is weighed and examined by both the Barbadian and Guyanese of-ficers before being stamped and taken directly to the airport.

The Guyana Marketing Corporation in addition to managing the centre also looks to match buyers to exporters. It runs its own website and advertises in various trade publications. This recently resulted in a container of sweet potatoes being shipped to the United Kingdom. GMC also en-courages good farming practices so as to bring produce up to international standards.

Barbados

Guyanese farmers have been supplying produce to Barbados since 1985. The pioneers were Ramkripaul Singh and his brother Doodnauth Singh of Canal No 1 and they remain the main exporters to this day. At one point in pre- pink mealy bug days Guyanese pineapples had cornered 90% of the Barbadian market. Now they are estimated to have 50% of the market with competition coming from the multination fruit company Dole and a number of Trinidad exporters who are able to ship their goods in refrigerated containers thereby saving on transportation costs. Still the demand for Guyanese pine-apples is strong and with each one selling for Bdn $4-6 the markup from a local wholesale price of $1400 per dozen is comfortable even with the costs of the visiting quarantine officer and air freight. Since January Singh has expanded his selection of produce from pineapples and limes to include eddo, plantains, watermelons, grapefruits, oranges and papaya. Ship-ments have increased from 6605kg per month in February to 41,466 kg in August. These shipments included monthly totals of watermelon amounting to 12,926 kg, plantain 19,941 kg and lime 22,773kg. In-terestingly lime is most popular from January to May when flying fish is in season. Singh says the packaging of the goods is a drawback for Guyana's exporters and he expressed concern for the quality and price of locally manufactured boxes which tend to get misshapen when fully packed. He noted that better quality boxes could be imported at an equivalent price from Trinidad.

With exports averaging over 15,000 kg per week there is limited space on the freight plane operated by Amerijet which charges US25 cents per kilo. The weekly flight with a capacity of 22,000 kg takes approximately 3 hours stopping briefly in Trinidad.

Singh says Amerijet and BWIA which carries some freight on its passenger flights tend to be reliable although not always punctual- a key factor with a highly perishable product. Pine-apples start to deteriorate only 72 hours after being picked in the most ideal conditions and that does not include sitting on a hot airport tarmac waiting for a plane.

Trinidad

Trinidad does not buy much in the way of fruits or vegetables as it has its own producers. But lately Singh has managed to find a buyer for plantain and the quantities are impressive. In Sept-ember he shipped 64,325kgs and he estimates that this amount could be sustainable for months to come with the plantains reportedly supplying a chip factory. The effect on the local market has resulted in a sharp increase in the wholesale cost from $6 per lb in August to $15-17 per lb in the last few weeks. Singh estimates that 50% of all plantains are now being sold overseas. Many local consumers trying to stretch their shopping dollar might now switch to cheaper food supplies such as bread.

Canada

In the first three quarters of this year some 176,836 kgs of produce was exported to Canada to meet the needs of the ever growing est Indian population living in Toronto and its environs . Mangoes and pumpkins made up a large part of that tota. Trade was not affected by the pink mealy bug and exports do not have to pass through the CPF before shipment. The main importer is Kiskadee Ventures which has its own retail store and distributes to twelve other retailers. Kiskadee also imports frozen fish by refrigerated container. Their main supplier for produce is family member Deodat Doodnauth of Alexander Village .His primary exports which average 5000kg every week include spice mangoes, bora, saeme and pepper and to a lesser extent sapodilla, pineapple, thyme, squash, noni fruit, breadfruit, limes, tangerines and dunks. Dood-nauth also ships chowmein, curry powder and newspapers. He says the spice mangoes are particularly popular and he could export 9,000 kg per week if he could just get the quantities. He buys vegetables from a network of 11 farmers from Mahaica to Wakenam and tries to lock in prices for a certain period. He sees the market in To-ronto and also other communities in Canada growing with perhaps 1500kg of saeme per week and 500kg of pepper.

His main air carrier is BWIA following the demise of GA2000 earlier in the year which used to offer a convenient direct flight to Toronto. BWIA provides a freight only service every Wednes-day stopping in Trinidad with a charge of US$1.01 per kilo.

The U.S.A.

Exports to the United States continue to languish despite a large expatriate community. Shipments for this year to date reached only 95,102kg, half of that for Barbados, although there have been some large shipments of eddo and peppers.

The new but as yet unsigned agreement for the "Barbados /Guyana Guidelines for Trade in Agricultural Produce" allows for Guyana to be in charge of all inspections and to enforce a number of guidelines for harvesting ,cleaning and packaging produce . These stipulate that "all produce should only be taken from farmers which operate within the pest free areas." Pest free areas are identified after inspection by the Ministry of Agriculture. Training for persons cleaning and packing produce should be provided by the Guyana Marketing Corporation. The CPF must be cleaned and disinfected prior to every shipment. The new protocol also allows for independent packing centres to be set up and certified following the same regulations as the CPF.

The produce should be: "Clean -free from soil, foreign material and odours; Damage- no harvest bruises or punctures which would lead to quick deterioration and cause rejection by consumers; firm not soft /without soft spots; Disease free -no sign of fungal/bacterial growth; pest free- no live or dead insects or other anthropods at any stage of development present in or on produce or package. All exporters and importers must be registered here and in Barbados and each box will display a code which identifies the exporter and importer and the farm from which the produce was harvested.

The produce will be inspected in Barbados and any breaches in the guidelines will result in confiscation and destruction of the consignment or return of the consignment at importer /exporter's expense.

Barbados officials reserve the right to make two scheduled visits per year with the option of additional visits should the need arise to ensure the terms of the agreement are being followed. The cost will be borne by the Government of Guyana.

It is hoped that with the signing of this agreement Antigua would now be able to accept exports from Guyana, suspended in the wake of the pink mealy bug infestation.

The squeeze is on business

Banking used to be easy in Guyana. Take the depositors' money and sock it into Treasury bills. The difference was your profit and there was no risk of the debtor defaulting on you. In 1994 the spread between the 90 day T bill and the small savings rate was a healthy 7.44%. With their own lending rates close to 20% bank managers were smiling all the way to their vaults.

What a difference a few years make. The downturn in the economy caused by the slide in key commodity prices in particular rice, has left the banks holding portfolios riddled with bad loans. This would be alright if they could still invest in high yielding treasury bills but that rate has fallen steadily from a high of 18.64% in 1994 to only 8.45% in June of this year and this month dipping to a miserly 6.22%. The reliable spread between depositor rates and T bills has therefore vanished to the point where in June a 12 month time deposit account (8.64%) actually accrued more annual interest than a 90 day T bill. And the government continues to issue more and more treasury bills,(18.8% more from June 2000 to 2001) to mop up excess liquidity in the financial system. Demand from non banking institutions has increased thus helping to drive the rates lower and conveniently saving the government $253m in interest payments compared to last year. Banks, who currently hold 45.5% of the outstanding bills, have nowhere else to turn but buy the securities. The demand for loans has stagnated since early in 1999 at just over $52bn while private sector deposits continue to grow. Banks are now scrutinizing applications with a diligence lacking in the heady 1990's when they were clambering over each other to lend money. Asset based lending has given way to a project based approach where banks first look at what cash flows an investment can generate and then they closely monitor their customers. Even now many banks prefer to send earnings outside .In 2000 three commercial banks invested a total of $2.9bn overseas. These included: NBIC-$1.2bn; Citizens Bank $977m; and Scotia Bank which bought $641m in Canadian Trea-sury Bills.

Banks have been forced to cut savings rates to as low as 5.5% while maintaining their lending rates at well over 15%. If they can't get the spread with T-bills they are certainly trying to make it somewhere else. Calls for them to lower their lending rates ignore their present predicament and assume banks to be something other than simply businesses responding to market conditions. Some have also increased or added charges for simple customer transactions. But what has been most apparent are their attempts to tackle bad debts evidenced by a spate of foreclosures and receiverships in the last few years. Most analysts agree this is just the beginning of a big sell off which will result in much lower real estate prices as numerous properties go up for auction. Concerns over this hard nosed approach by the banks have been raised as it might well be that some of the businesses going into receivership were still viable and could have been restructured. Job losses hurt the economy and can make conditions worse for other companies. However the banks as private businesses themselves are not normally beholden to patriotic persuasion. They have waited long to get their money back and in some cases there is no doubt that the loans have already been lost or the affected companies were never or are no longer viable. The misuse of funds and capital flight have been widespread. So banks would rather have 50% of a bad loan in their hands now than the faint hope of a full repayment in the future. The time to collect has come.

One way, in the case of the agricultural sector, would be to negotiate with the borrower to extend the terms of the loans and try to write off some of the unpaid interest. But banks are loath to forgo what is their income and run the risk in the long run of still not being able to get their money back. So the preferred option is simply to take control of the entity in order to prevent dissipation of the assets. They then have an option to either appoint a receiver or a receiver/ manager. The crucial difference being that a manager actually runs the business on behalf of the bank while a receiver/liquidator just sells off as much of the business as quickly as possible so the bank can turn around and lend that money to a good customer. However banks are recovering only a fraction of the principal given that real estate prices, often inflated for the purposes of collaterizing of assets, have declined since the loan was negotiated. Specialized capital equipment has little value except to the former owner. A plant making chowmein for example could not attract a premium price as it would have very few buyers. After liquidation fees which skim off 5-10% a bank would be lucky to retrieve 50% of the loan. And that is if the receiver can actually find a buyer. Who in the country is interested in purchasing a rice mill at the present time? Many properties which were foreclosed in the last two years are still on the market and in the meantime are deteriorating physically and thus losing their value.

But much of this might have been avoided if on seeing the looming crisis in the rice sector banks had started following the Bank of Guyana guidelines stipulating provisions for bad loans, instead of rewarding shareholders with dividends as late as last year. The price of rice dropped fromUS$410 per MT in 1996 to $322 in 1997 and under $300 in 1999. The writing has been on the wall for a number of years.

Under the Bank of Guy-ana's Supervision Guideline 5 Section 11 there are de-fined categories of loans and minimum levels of provisioning which banks must set aside in contra asset accounts. The classifications are as follows:

1. Pass: which means the financial condition of the loan is up to date in requirements. This requires 0 % provisions.

Next down the list is:

2. Special Mention: (po-tential problem credits) -"an account which is currently up to date but evidence suggest that certain factors could in the future affect the borrowers ability to service the account properly..." No provision required.

3. Substandard: any one or more of the following ... "There are well defined credit weaknesses such as shortfalls in the borrower's cash flow, several renewals with capitalization of interest ... the financial institution will have to look at secondary sources such as collateral or refinancing for repayment ...principal or interest is due and unpaid for three months to less than six months...." This attracts a provision of 20% unless the loan is secured by cash, cash substitutes government se-curities or guarantees .

4. Doubtful: "The collection of the debt in full is highly questionable or improbable .... the unsecured portion of a loan or an account with fixed repayment dates when principal or interest is due and unpaid for six months to less than twelve months. Provision requirement 50%

5. Loss: an account considered uncollectable... an account which may have some recovery value but it is not considered practical nor desirable to defer write off... an account classified as doubtful with little or no improvement over the twelve month period it has been classified as such ... when principal or interest is due and unpaid for twelve months or more." Provision 100%.

The definitions are left up to the commercial banks but they are "not precluded from requiring a more severe classification for an account if such is warranted ... and when an account has more than one deficiency, the deficiency which attracts the lower category shall be considered. Banks are required to apply these classifications in twice yearly reviews on 70% of their total loan portfolio. The unreviewed portion (30%) only requires a loan loss provision of 1% .The reviewed portion must include "all past due accounts (fixed payments) meaning principal or interest is due and unpaid for one month to less than three months"; all non performing " principal or interest is due and unpaid for three months or more." In addition to the twice yearly review a bank must also submit monthly statements which include the outstanding balance of its portfolio considered to be past due or non performing. Below are figures from the 2000 annual reports of five banks which detail their non accrual loans and the provisions they made.

Guysuco aims for greater productivity

The so called price of 6 cents per lb for raw sugar on the world market is a distortion caused by government subsidies and complex trade agreements which allow surpluses to be dumped below the production price. GUY-SUCO's strategy is to avoid this free market at all costs while in the long term working to produce sugar more efficiently.

Only 20% of the total world output of sugar is actually traded outside of well established bilateral agreements and domestic consumption .The phenomenon is very much like that for rice where a surplus or deficient crop from one large producer translates into an exaggerated movement in price. During the nineties world production has consistently exceeded demand, and stocks have remained high. The level of stocks is, in the long term, a reliable indicator of price. Thus in 1999 when the stocks- to-consumption ratio rose to a new high of 63%, world sugar prices dropped to an average of 6.25cents per lb., their lowest level in 13 years and probably lowest ever in real terms. Many analysts argue that in the short term price tends to be based more on export availability and import demands than stock levels.



These stockpiles which have averaged between 40% to 63% of consumption since 1986 were caused in part by increased production of beet sugar by European farmers who export some 5m tonnes per annum, encouraged by generous subsidies from the European Union. Brazil, producing 16.5mMT in 2000, has also improved its farming techniques and can with little difficulty switch cane processing from production of ethanol to raw sugar depending on which is more profitable. In addition following a 60% devaluation two years ago the country has also recently undergone a further 30% devaluation thus making its costs in US cents much lower and its exports cheaper in the short term.

A significant dampener on the world price is the ever increasing speculation on sugar futures on the world mercantile exchanges much of which has nothing to do with sugar and more to do with very short term financial gambling. This activity tends to exert a downward pressure on prices.

A much longer term in-fluence is the general stagnation in demand from more developed countries and increases in demand from the developing nations who-se ability to import sugar is more sensitive to price in-creases. While worldwide growth is around 2-3% most of this increase is coming from the developing world. China for example still has an average consumption of only 6kg per capita compared to 40kg in the industrialized nations.

Guyana's exports have been determined since the early fifties by the original Commonwealth Sugar Agreement whose guiding philosophy was that the United Kingdom should pay a price that would be a reasonable remuneration for an efficient producer. The price was also fixed to the equivalent paid for beet sugar produced by European farmers. When Britain joined the then European Common Market in 1975 the agreement was altered to include the other ACP countries which were once colonies of France. Thus Guyana became part of the Sugar Protocol which meant an annual quota of 167,000 tonnes per annum. With the EU taking in two new members in 1995 -Finland and Portugal, Guyana was granted an additional quota of 28,000MT under the Special Preferential Sugar (SPS) allocation- the price being 85% of the Sugar Protocol price. More recently in June 2001 the size of this quota was reduced to allow for the Least Developed Countries (LDC's) to export 75,000 MT under the Everything But Arms Deal. European beet farmers suffered no such reduction. Guyana wh-ile now exporting less under the SPS receives an in-creased percentage (95%) to the Sugar Protocol price. Over the next seven years the SPS will be gradually eliminated to accommodate annual 15% increases in the LDC imports. By that time only the original Sugar Protocol quota will remain. With the WTO mandating the end of preferential trade agreements the protocol could be eliminated but many analysts have observed that the European sugar regime with its generous price supports for beet producers would be hard to dismantle. The Sugar Protocol so entwined in that regime might be preserved albeit in an altered and less lucrative arrangement. Meanwhile the SP price has not risen for a number of years and is currently at 523 euros per tonne. This price periodically negotiated between the ACP and EU was feasible for GUYSUCO when the euro was pegged at EU1.17 to the US dollar but since its launch in 2000 the currency has slid to as low as .84 and seems to be stuck in the .90 euro range. Ironically the relative stability of the Guyana dollar in the last 18 months has hurt the company as a weakened local currency would have made EU shipments more profitable. This has sq-ueezed GUYSUCO since its production costs are based on the US dollar.

Still the price of 523 euros per tonne is significantly higher than the world price, working out to 21-24 cents per lb. At present no country is consistently producing at a cost anywhere near the world price of US6-US8 cents save perhaps Bra-zil in the short term thanks to the currency devaluation. However more expensive capital inputs will soon result in higher costs even though the country is largely self sufficient. Aus-tralia considered highly efficient is probably producing at 8 to 10 cents. Most analysts agree that a more realistic price for world sugar would be in the 11-12 cents range, at which level producers would be able to reinvest capital and new entrants might be attracted to the market. The very low price is not considered in any way to be reflective of average costs which are around 18 cents .The price is artificially low because countries can dump excess stock onto the world market outside of their more lucrative bilateral and domestic price agreements.

GUYSUCO also exports 12,000MT to the U.S. which the country does not actually need given its own heavily subsidized domestic producers. It is estimated that America's "Big Sugar" en-joys government supports of US$800m to US$1.9bn per year. But the US is obliged to continue its imports as part of its agreements under the WTO. Guyana's quota fetches 18 cents per lb. 25,000MT is sold domestically at 11 cents per lb direct from the factory. GUYSUCO recently negotiated a duty free concession of 10000MT with Brazil which will depend on the establishment of a viable road from Georgetown to Boa Vista. CARICOM with its 40% Common External Tariff has an annual demand for 270,000 MT but only buys 45,000 tonnes from Guyana partly because dom-estic production supplies some of these countries own needs and partly because half of this requirement (160, 000MT) is for white sugar for use in soft drinks and other commercial uses. GUYSUCO is considering opening a refinery to process refined sugar although analysts have noted that Trinidad with its existing plant already producing 50,000MT annually might be more viable for expansion given the country's low energy costs.

Technology has not re-cently made much impact in efficiencies simply because sugar production is so developed after 400 to 500 years of cultivation. Production is still determined in large part by nature and the best way to use the soil, water and sun available. Mechanization has had benefits along with improved varieties of cane and ripening techniques but some of these are not applicable to every country .For example mechanisation long established in Australia which cuts labour costs dramatically has not been implemented in Guyana. There has over the years been a general move towards larger factories to take advantage of econ-omies of scale. Factories have fixed costs of 80% to 90% of the cost of production so it behooves companies to run bigger units that can process higher volumes. The actual cultivation of the crops does not necessarily benefit from economies of scale as fixed and variable costs are roughly equal since more crops always require more land and subsequent expenses to prepare and maintain it . As it is a factory is still dependent on weather patterns despite the obvious desire to have the unit running every day of the year. In Guyana grinding can only go on for eight months and in some European beet factories the harvest only lasts for 90 days. Kenya on the other hand enjoys a production window of over 10 months. However this can take its toll on the labour force and undermine yields through overly intensive farming.

GUYSUCO's much discussed restructuring strategy envisages a rapid expansion to decrease the company's high fixed costs per unit. This greater productivity is seen as the key to lowering costs to a level where the company can compete outside of the existing but threatened bilateral arrangements. At the moment Guyana is not selling any sugar at the world price and intends to avoid such a scenario in the future.

The emphasis on modernizing Berbice, centred around a new factory at Skeldon , is seen as a move to concentrate on the most stable, high yield areas first . This does not mean however that the De-merara estates would be neg-lected, only that with limited capital and management, the area would have to follow the Berbice consolidation. The World Bank has ex-pressed some concerns about the viability of the expansion programme and even suggested at one point that the Demerara estates should be closed. However the management at GUYSUCO does not believe such a move would make sense for the company or a country whose main employer and foreign ex-change earner is sugar . The economic and social dislocations of wide scale retrenchments would likely be catastrophic and counterproductive to the country's progress. Discussions between the government and the World Bank over concessionary funding are ongoing and there are some indications that there may well be a meeting of minds between the two parties.

Barry Newton
former Managing Director of Booker Tate