implementation completion report republic of … · future operations, and key lessons learned 10....
TRANSCRIPT
Documnict ofThe World Bank
FOR OFFICIAL USE ONLY
Report No. 16652
IMPLEMENTATION COMPLETION REPORT
REPUBLIC OF GUYANA
SUGAR INDUSTRY RESTRUCTURING ANDPRIVATIZATION PROJECT
(CREDIT 2545-GUA)
June 6, 1997
Natural Resources Management and Rural Poverty DivisionCountry Department IIILatin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
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CURRENCY EQUIVALENTS(as of October 15, 1996)
Currency Unit = Dollar (G$)G$ 1.00 = US$0.008
US$1.00 = G$ 125.00
WEIGHTS AND MEASURES
Long Ton 2,240 lbs.Metric Ton = 2,204 lbs.
(The Guyanese sugar industry accounts for its production in long tons)
ABBREVIATIONS AND ACRONYMS
BT - Booker TateCAS - Country Assistance StrategyEU - European UnionGOG - Government of GuyanaGUYSUCO - Guyana Sugar CompanyIDA - International Development AssociationIMF - International Monetary Fund
FISCAL YEAR
January 1 - December 31
Vice President: Shahid Javed BurkiDirector: Paul IsenmanActing Division Chief Jonathan ParkerTask Team Manager: John Heath
Table of Contents FOR OFFICIAL USE ONLYPage
Preface ......................................................... i
Evaluation Summary .......................................................... i
PART I: PROJECT IMPLEMENTATION ASSESSMENT . ...........................1
A. PROJECT OBJECTIVES ......................................................... 1
B. ACHIEVEMENT OF PROJECT OBJECTIVES ......................................................... 2
C. MAJOR FACTORS AFFECTING THE PROJECT .......................................................... 4
D. PROJECT SUSTAINABILITY ......................................................... 5
E. IDA PERFORMANCE .......................................................... 6
F. BORROWER PERFORMANCE ......................................................... 7
G. ASSESSMENT OF OUTCOME ......................................................... 7
H. FUTURE OPERATIONS ......................................................... 8
I. KEY LESSONS LEARNED .......................................................... 8
PART H: STATISTICAL TABLES ................................................. 9
Table 1: Summary Of Assessments ........................................................ 10Table 2: Related IDA Loans/Credits ........................................................ 12
Table 3: Project Timetable .1............................3 13
Table 4: Loan/Credit Disbursements: Cumulative Estimated And Actual .................................. 14Table 5: Key Indicators For Project Implementation ........................................................ 15
Table 6: Key Indicators For Project Operation ........................................................ 16
Table 7: Studies Included In Project .............................................................................................. 17
Table 8a: Project Costs ............................... 18
Table 8b: Project Financing ............................... 19Table 9: Economic Costs And Benefits ............................... 20Table 10: Status Of Legal Covenants ............................... 21Table 11: Compliance With Operational Manual Statements .25Table 12: IDA Resources: Staff Inputs .26
Table 13: IDA Resources: Missions .27
ANNEXES
ANNEX A - ICR Mission Aide Memoire.29
ANNEX B - Final Letter to Government .39
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
IMPLEMENTATION COMPLETION REPORT
REPUBLIC OF GUYANA
SUGAR INDUSTRY RESTRUCTURING AND PRIVATIZATIONPROJECT
(CREDIT 2545-GUA)
PREFACE
This is the Implementation Completion Report (ICR) for. the Sugar IndustryRestructuring and Privatization Project in Guyana, for which Credit 2545-GUA in theamount of SDR 10.9 million (US$15.0 million equivalent) was approved on September29, 1993 and made effective on December 29, 1993.
The credit was closed on December 31, 1996, and the grace period granted for thesubmission of final application ended on April 30, 1997. The undisbursed balance, to bedetermined after the Bank receives a full accounting of the Special Account advance, willbe canceled.
The ICR was prepared by John R. Heath, Natural Resources Management andRural Poverty Division of the Latin America and Caribbean Region and reviewed byJonathan Parker (Acting Division Chief, LA3NR) and Robert Crown (Projects Advisor,LA3DR).
Preparation of this ICR was begun during IDA's final supervision/completionmission, November 11-15, 1996. It is based on material in the project file. The borrowercontributed to preparation of the ICR by providing inputs to the Aide Memoire drafted byIDA's completion mission, and has also prepared its own assessment of the project'sperformance. The Government did not provide a Completion Report.
IMPLEMENTATION COMPLETION REPORT
REPUBLIC OF GUYANA
SIUGAR INDUSTRY RESTRUCTURING AND PRIVATIZATION PROJECT(Credit Number 2545-GUA)
EVALUATION SUMMARY
Introduction
1. In 1990, the Bank's Country Assistance Strategy for Guyana emphasized the needfor reducing severe fiscal and external imbalances and encouraging private sectordevelopment. At that time the Guyana Sugar Company (GUYSUCO) accounted for40 percent of net foreign exchange earnings and 12 percent of fiscal revenues. It wasbelieved, therefore, that strengthening the industry would facilitate the attainment of CASobjectives.
Project Objectives
2. The project sought to maintain sugar production at its present level, with theunstated goal of restoring Guyana's ability to fill its export quota with the EuropeanUnion. It also sought to ensure the technical and financial viability of the industry throughrestructuring and privatization of Guysuco. The project's components consisted of(a) a two-year capital investment program and (b) technical assistance to prepareGUYSUCO for privatization.
3. The project's objectives were relevant and realistic at the phase of identification;but substantially less so by the time the project was presented to the Board. When theproject was identified in 1990 the GOG was strongly in favor of privatizing GUYSUCOand a prospective buyer had been identified. However, in October 1992, there was achange of administration. By board presentation (September 1993), sugar output hadrecovered to its former level and GUYSUCO's financial position had improved to a pointwhere it could finance the replacement of essential equipment without project funds.Nevertheless, both the GOG and the Bank believed this opportunity should be taken toprivatize GUYSUCO. Later, as time wore on, the new government's enthusiasm forprivatization waned.
Implementation Experience and Results
4. The objective of stabilizing the sugar industry's revenues was attained; but thisoutcome would have been achieved anyway--even without an IDA project. Privatizationof GUYSUCO was indefinitely deferred. GUYSUCO's revenues increased from 1993 to1996 owing to a 28 percent rise in sales and an increase in government's rebate of theSugar Levy from 58 percent to 84 percent. The overall improvement in cash flow after
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higher operating costs (particularly wages) was used to finance equipment replacement(see table in paragraph 8 of main report) originally assigned to the IDA credit.
5. GUYSUCO's financial position will only be sustained: (a) if the industry remainsunder private management (as opposed to private ownership); (b) if government supportsGUYSUCO's proposals for rationalization (closing factories and reducing acreage); and(c) if an appropriate regulatory framework is drawn up, allowing for transparent rulesabout the distribution of the rents from access to quota markets, and establishingperformance benchmarks by which the industry's progress toward greater competitivenessmay be monitored.
6. GUYSUCO's own funds were used to finance rehabilitation: none of theUS$14.0 million that the Association lent for equipment replacement was disbursed. Thetechnical assistance component of US$1.0 million was only partially disbursed. Thiscomponent funded two background studies intended to prepare the industry forprivatization: (a) an environmental audit of GUYSUCO (cost: US$100,000), that wasdelivered in June 1996, two years behind schedule; (b) a valuation of GUYSUCO (cost:US$475,000) that was delivered in September 1996, also two years behind schedule.Given the lack of government commitment to privatization, the final steps in the project--request for bids and evaluation of potential investment proposals--were never carried out.
7. A number of factors external to the project increased GUYSUCO's revenue.These included: favorable exchange rate movements; an increase in the EU quotaallocation; higher prices, both on world and quota markets; and good weather. Variousfactors--which government was responsible for--hindered project implementation. First,there was no effective interlocutor for the project: the Privatization Unit was set up lateand exercised little initiative, all key decisions being referred to the Finance Minister.Second, drafting of a regulatory framework for the sugar industry was postponed. Third,there were major delays in recruiting consultants for the privatization studies. Fourth, theprivatization objective was tacitly abandoned.
8. IDA's performance was mixed. From identification to appraisal there was anabove average commitment of resources. During this period project objectives becameless relevant; but the project proceeded to the Board on the GOG's assurance thatprivatization was itself a priority. Relatively few resources were committed to supervisionbecause, by that stage, there was a perception that the project's objectives stood littlechance of being attained. Nevertheless, IDA made serious efforts to keep implementationon track; and, at one point, headed off an attempt by the government to terminate theprivate management contract. On the borrower's side, excellent support was receivedfrom GUYSUCO staff, but follow-up by government was weak.
9. The project outcome was unsatisfactory owing to the lack of progress withimplementation and the failure to privatize GUYSUCO.
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Future Operations, and Key Lessons Learned
10. The government prefers to pursue restructuring options in lieu of privatization ofGUYSUCO in the near future. Also, it has not yet endorsed GUYSUCO's proposals forrationalization of the sugar industry. Establishment of a suitable regulatory framework isone of the conditions attached to an IMF adjustment loan: the Association will financethis work under its ongoing Financial Sector and Business Environment Project (CreditNo. 2669) and supervise the consultants hired to draft regulatory proposals.
11. There are four key lessons:
(a) use of IDA money to fund privatization schemes are not justified whensuch projects can be commercially financed and a prospective buyer hasbeen identified;
(b) IDA efforts to support privatization should more appropriately be part ofan Adjustment/Policy Reform Operation with TA instead of an investmentproject.
(c) bringing publicly-owned enterprises under private management may lead tolarge efficiency gains--particularly if the regulatory regime is adequate andthe management contract is performance based; but if ownership is notprivatized, the management may not have the freedom to make politicallyunpopular choices or to carry out the rationalization that may be neededfor long-term survival; and
(d) a privatization strategy needs to be properly sequenced: starting withenterprises that are not politically sensitive; and launching the effort at thebeginning, not the end, of an administration.
IMPLEMENTATION COMPLETION REPORT
REPUBLIC OF GUYANA
SUGAR INDUSTRY RESTRUCTURING AND PRIVATIZATION PROJECT(Credit Number 2545-GUA)
PART I: PROJECT IMPLEMENTATION ASSESSMENT
A. PROJECT OBJECTIVES
1. When the project was identified in late 1990, Guyana had failed to meet its sugarexport quota for three consecutive years and there was a concern that the European Unionmight reduce the volume of Guyana's sugar favored with preferential market access. Also,given that the industry was by far the largest net earner of foreign exchange (40 percent oftotal) and fiscal revenues (12 percent of total), it was feared that further decline wouldhamper the nation's ability to service its very substantial public external debt.
2. The main objective of the project was to maintain sugar production at presentlevels, and ensure the long-term technical and financial viability of the sugar industry. Toachieve this objective, the project sought, first, to restructure GUYSUCO: this involvedreplacing or rehabilitating equipment and machinery in urgent need of repair. Thisrestructuring was regarded as preparatory to a second phase, entailing the privatization ofGUYSUCO. Parallel to restructuring, steps would be taken to introduce a regulatoryframework that would enhance the industry's competitiveness while guaranteeing anadequate level of government revenue.
3. The project had two components:
(a) A two-year capital investment program sought to stabilize GUYSUCOoutput at the 1992 level of 240,000 tons by financing maintenance andreplacement of worn-out capital equipment at GUYSUCO's eight mills.This accounted for 93 percent of project funds.
(b) A technical assistance component, involving contracts for financialconsulting firms to help government restructure and privatize GUYSUCO,while allowing workers to participate in the ownership of the company.These consultants would also help establish a policy and regulatoryframework for the industry, with particular reference to fixing the level ofthe sugar export levy, eliminating foreign exchange retention, retaining acorporation tax of 35 percent, and eliminating GUYSUCO's monopoly ofsugar imports.
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4. The project's objectives were fully consistent with the Country Assistance Strategywhich emphasized the need for stabilizing fiscal and external balances and encouragingprivate sector development. The project's objectives were realistic at the identificationphase but had become substantially less so by Board presentation. At identification,government was seriously interested in privatizing GUYSUCO and there was a would-bebuyer in the shape of Booker Tate, which had privately managed the company since 1990.The project was scaled down from a US$216 million buy-out (to be jointly financed bygovernment, Booker, CDB, IDA, and IFC) to a US$15 million dollar operation whosepurpose was basic rehabilitation, deemed essential to "ready" the industry forprivatization. There was a change of government in October 1992. By board presentation(September 1993), GUYSUCO's financial position had improved to a point where it couldfinance the replacement of essential equipment without project funds. Nevertheless, boththe GOG and the Bank believed this opportunity should be taken to privatize GUYSUCO.However, GOG's enthusiasm for privatization substantially diminished thereafter.
5. Based on its final objectives, this project could have pursued privatization ofGUYSUCO more appropriately through a Structural Adjustment/Policy ReformOperation with TA, instead of an investment project. The two components were notmutually indispensable. Rehabilitation need not be a prerequisite for privatization. Thecost of rehabilitation could have been factored into the bid price offered by interestedprivate investors. Thus, it is doubtful that lending to finance costs that could have beenborne by the private sector was a good use of IDA resources. When the project wasidentified (end of 1990), it was argued that rehabilitation was needed immediately in orderto bring output back to a level (c. 240,000 tons) where the EU quota commitment couldbe met; it could not wait for divestiture to be completed. However, by the time of Boardpresentation (September 1993), sugar output had recovered to 243,000 tons: therefore,well before loan approval, there was no longer any risk that the EU would scale back theGuyana quota owing to non-compliance. The project's objective was then changed to"maintaining Guysuco's present level of production" and ensuring its sustainabilitythrough privatization.
B. ACHIEVEMENT OF PROJECT OBJECTIVES
6. Macroeconomic and sectoral objectives. Sugar generates about 40 percent oftotal foreign exchange and 12 percent of fiscal revenues. Sugar sales increased fromUS$127 million in 1993 to an estimated level of US$162 million in 1996. In spite of thisincrease, the subsector's fiscal contribution declined somewhat: although the sugar levyremained at 54 percent of total sales, the government rebated an increasingly largeproportion of this levy (rising from 58 percent in 1993 to 84 percent in 1996), in order tohelp GUYSUCO finance its growing operating and capital costs.
7. Physical objectives. The project provided for the "normal replacement" ofvehicles, machinery, equipment and field infrastructure machinery at GUYSUCO's eightestates and mills: the aim was not to finance expansion or modernization of the factories.In 1994-96, capital expenditures (field plus factory) actually exceeded the level projectedin the Staff Appraisal Report (see table below). Owing to favorable trends in the market
and policy environment, which boosted GUYSUCO's revenues, the industry was able tofinance capital expenditures entirely from its own resources, with no recourse to projectfunds:
Projected (US$ million) Actual (US$ million)
1994-96 1994-96
Expenditure items L
Field 13.7 19.6Factory 20.7 18.3Administration 5.1 10.1Total 39.5 48.0Sources of financeGUYSUCO 20.6 48.0IDA 14.0Other sources/I 4.9Total 39.5 48.0/1 Caribbean Development Bank, suppliers
8. Financial objectives. Without project assistance, GUYSUCO's financialperformance in 1993-96 actually exceeded the "best case" projections made at appraisal("best case" entailed modernization of the industry, including reduction in the number offactories from eight to five--a goal that has yet to be achieved):
1993 1994 1995 1996e
Sugar production ('000 t) .Projected/i 240 240 250 250Actual 243 253 250 276Net cash flow (US$m)Projected/l 4.2 10.6 22.5 24.2Actual 29.2 34.6 31.1 29.4Current ratio/2 _
Proiected/i 0.4 0.1 0.8 1.1Actual 1.2 1.3 1.3 1.0Debt ratio/3Projected/1 54% 70% 57% 50%Actual 48% 43% 39% 30%1/ "With project and modernization" scenario.2/ Current assets/current liabilities.3/ Total debt/total assets.
9. To what extent does the improvement in financial performance reflect higherproductivity? Sugar production rose from 160,000 tons in 1991 to an estimated 276,000tons in 1996 (compared to 250,000 tons projected at Appraisal). The productivity oflands in the sugar estates rose; sugar production per acre increasing from 1.7 tons in 1991to 2.4 in 1996. The factory yield ratio (a measure of the tons of cane needed to produceone cane of sugar) also improved, moving from 14.4 in 1991 to 11.5 in 1996. On theother hand between 1993 and 1996, GUYSUCO's operating costs rose by one-third(mainly attributable to wage rises for field and factory hands), while capital costs
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(attributable to equipment replacement) rose by one-half Therefore, net cash flow wasthe same in 1996 as in 1993.
10. Institutional development. Given the failure to privatize GUYSUCO, privatesector development goals were not met. This is a missed opportunity because there is noguarantee that state-owned enterprises will, over the long-run, remain subject to themarket discipline incumbent on private companies.
11. Economic Rate of Return. At appraisal, no attempt was made to calculate anERR because the project was not intended to raise sugar output in the short-term but tostabilize the industry preparatory to privatization.
C. MAJOR FACTORS AFFECTING THE PROJECT
Factors Not Generally Subject to Government Control
12. A number of factors led to a recovery in the fortunes of GUYSUCO after 1990.First, favorable movements in the exchange rate increased the revenue, in local currencyterms, from sugar exports. Second, quota sales to the European Union rose from 167,000tons in 1993 to 218,000 tons in 1996, partly owing to a new agreement with Portugal.Third, price trends were favorable--both for the world market and for the quota markets.In 1996, the price under the European Union protocol was US$653/t compared to theUS$527/t forecast at appraisal. Fourth, the weather was propitious. Finally, the improvedperformance of the industry was enhanced by the sound management that Booker Tateprovided.
Factors Generally Subject to Government Control
13. For reasons explained in the next paragraph, no distinction is drawn betweenfactors "subject to Government control" and those factors "subject to control by theimplementing agency".
14. Implementation was impeded by the absence of a clearly defined interlocutor forthe project. In principle, the implementing agency was the Privatization Unit. Althoughthis Unit was established by the agreed deadline (December 1993) it did not become fullyoperational until early 1995. The Unit never assumed an active role in projectmanagement, key decisions remaining in the hands of the Finance Ministry. There werechanges in the personnel of the Privatization Unit, the loss of continuity contributing to theweakness of project implementation. The Finance Minister who had vigorously supportedGUYSUCO's privatization during the phase of project preparation was replaced with thechange of government, leaving this objective without a strong advocate. In the event, itproved possible to boost sugar revenues without privatization, and this further weakenedgovernment commitment to the project.
15. Agreement on a regulatory framework for the sugar industry should have beenachieved early on (by July 31, 1994). However, the framework had still not been agreed
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on when the project closed, requiring a follow-up study to be financed under the auspicesof the Financial Sector and Business Environment (FSBEC) Project (Credit No. 2669).Policy reform took place in only one of the eight areas on the regulatory agenda: foreignexchange retention. Major steps were taken to liberalize the foreign exchange rate regime.When the project closed GUYSUCO was allowed to retain 100 percent of its foreignexchange earnings. Among the outstanding issues on the regulatory agenda, the followingare the most problematic: (a) more transparent rules for determining the level of transferfrom industry to the government; (b) ownership rights of the land in sugar estates;(c) labor relations; and (d) sugar importation policy and local sugar prices.
16. Preparation of the background studies for privatization was substantially delayed.The consulting firm should have been hired by December 31, 1993; they were notcontracted until February 1995. The report was not finalized until September 1996, twoyears behind schedule. Overall, this study was deemed to be satisfactory by IDA.However, the valuation of GUYSUCO was incomplete owing to data constraints that theconsultants cannot be held responsible for. Although it was possible to establish a valuefor GUYSUCO in its present shape and form, it proved impossible to estimate the valuethat the company would generate if its assets were either broken up or put to analternative use--partly because, given the incompleteness of the land market, it wasimpossible to place a value on the estate's leased by the government to GUYSUCO.
17. An environmental assessment was commissioned so that private investors wouldhave the data needed to cost the various mitigatory measures required by the project. Themost pressing environmental problems identified were: poor effluent treatment, owing tobroken down equipment and the absence of suitable treatment norms; and excessive useof fuel oil, owing to the lack of bagasse. Owing to delays in recruiting consultants, thefinal version of the report was not delivered until June 1996, two years behind schedule.
18. Given the lack of government commitment to privatization, the final steps in theproject--request for bids and evaluation of potential investment proposals--were nevercarried out.
D. PROJECT SUSTAINABILITY
19. In view of the limited progress with implementation, it makes little sense to talkabout project sustainability. The larger issue is the survival of the sugar industry inGuyana. The only sure way to achieve this is to increase competitiveness. GUYSUCOcurrently aims to reduce production costs from the present level of US$0. 19/lb. toUS$0.13-0.15Ab.--which would be competitive in terms of current world prices. There isa strong possibility that the premium that the European Union pays Lome countries will beprogressively reduced when the present agreement expires in 2002. This will increase thepressure on Guyana to be competitive at world market prices.
20. For the sugar industry to be more competitive, two conditions must be met. First,measures to rationalize the industry must be undertaken, in line with proposals thatGUYSUCO has made to government: these include reducing the number of factories
from eight to six and cutting the area harvested on the sugar estates by 17 percent. Thiswill inevitably entail some shedding of labor. Second, the quality of GUYSUCO'smanagerial and technical staff must be maintained. These conditions will be met only if thegovernment ensures: (a) that GUYSUCO remains under private management, giving itthe support to take the necessary steps towards rationalization, steps which may bepolitically sensitive; and (b) that the policy and regulatory environment allows the industryto balance the needs of the Government for revenue and generate sufficient returns tocover GUYSUCO investment needs.
21. Booker Tate has a one-year, rolling contract that arguably fails to provide the rightincentives. It is impossible for management to execute an effective business plan when thetime horizon is so short. The contract provides inadequate benchmarks for thegovernment to evaluate progress toward increasing the industry's efficiency. Theseconsiderations become all the more critical if the industry is not privatized, because, aslong as the industry remains in public ownership, market discipline cannot be relied uponto ensure that efficiency goals are met.
E. IDA PERFORMANCE
22. Identification. The project made sense at the time it was identified (late 1990)because there was a genuine concern that Guyana's failure to fill its sugar quota wouldresult in a loss of preferential access to the European market. Also, there was substantialgovernment support for privatization. However, given that Booker Tate had alreadyexpressed an interest in buying GUYSUCO it is not clear why it was necessary to use IDAmoney to "prepare" the industry for privatization.
23. Preparation and Appraisal. The high level of IDA (and government)commitment to the project was reflected in an above average use of IDA resources:112 staff weeks, or US$270,000. However both preparation assistance and IDA'sappraisal were rated deficient, because there was no attempt to reframe objectives in thelight of the altered price and production environment, or to change the project design frominvestment to policy reform and TA.
24. Supervision. In the period from Approval until Completion the supervision inputwas only 45 staff weeks (US$60,000): substantially lower than IDA norms. IDA staffperceived that the government was no longer strongly committed to privatize GUYSUCOand a lower priority was given to the supervision activities which were still rated assatisfactory. There was also a loss of continuity because, from preparation to completion,the project had no fewer than five task managers. However, IDA did intervene decisivelyto stop the government from using project funds to finance equipment replacement atGUYSUCO, making it clear that such investments would not be eligible for disbursementuntil progress was made with the privatization study.
25. Notwithstanding the shortfall in supervision time, IDA made serious efforts tokeep project implementation on track. These efforts included: (a) frequentcommunication with government and with GUYSUCO management, through formal and
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informal channels; (b) extensive negotiation with, and supervision of, the consultants hiredto carry out the privatization and environmental studies; (c) substantial assistance toGUYSUCO staff in devising an investment plan for factory rehabilitation and in preparingrelated bid documents; (d) advice to government on the auditing of project andGUYSUCO accounts; and (e) in-depth assistance to government on privatizationstrategies and the regulatory framework for the industry.
26. IDA made every effort to ensure that GUYSUCO remained under a privatemanagement contract, as this was also a government obligation in its IMF Program.However, because it proved possible to stabilize the industry under state-ownership--andwithout recourse to project funds--IDA had little leverage when it came to pressing thecase for privatization. This objective could have been pursued under the FSBEC Project,which became effective in April 1995, in which case this credit could have been canceled.
F. BORROWER PERFORMANCE
27. GUYSUCO's performance was very sound; but the government's record has beendeficient in implementation and covenant compliance. Although the revival of the sugarindustry's fortunes owes much to an improvement in the price and exchange rateenvironment, it is undeniable that GUYSUCO's management--with strong leadership byBooker Tate--played a critical role in ensuring that the industry reaped maximum benefitfrom the improved environment. The management has stabilized the industry and has laidthe foundations for continuing growth, but costs must be lowered further (para 19). It hasalso made a major contribution to improving labor relations and upgrading health, safetyand environmental conditions. GUYSUCO staff were very responsive to IDA,cooperating fully with the procurement, financial management and reporting requirementsof the Project.
28. Follow up by Borrower has not been as effective as it might have been, and itsimplementation and covenant compliance are rated deficient. For example, once it becameclear that privatization would not be achieved during the span of the Project, IDAproposed a revised action plan (April 1995); but the government failed to respond. Therewere numerous instances when official IDA correspondence went unanswered. DuringIDA missions to Guyana--or visits by the government to Washington--it was often difficultfor IDA to arrange meetings with key officials. The government made little contributionto the preparation of consultant terms of reference and the feedback it provided onconsultant reports was limited.
G. ASSESSMENT OF OUTCOME
29. At its closing date the project's overall rating was Unsatisfactory owing to the lackof progress with implementation and the failure to privatize GUYSUCO.
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H. FUTURE OPERATIONS
30. The government has no plans to privatize GUYSUCO in the foreseeable future.However, its broader privatization program is still proceeding, so the issue may beretabled at a later date. The long-term viability of GUYSUCO is contingent onrationalization, including mill closures and reduced sugar acreage. Recommendations tothis effect are made in GUYSUCO's Business Plan for 1995-99. Government has so farmade no commitment to implement GUYSUCO's proposals.
31. Establishment of a suitable regulatory framework for the sugar industry is one ofthe conditions attached to an IMF adjustment loan that is now being implemented.Consultants will be financed under the ongoing FSBEC Project (Credit No. 2669) to makeproposals for the regulatory framework and their work will be supervised by theAssociation. IDA and the IMF have agreed with government that the final content of theregulations will be decided by July 1997. The consultant assignment will includespecification of the benchmarks to be used for monitoring GUYSUCO's competitivenessin relation to other world producers.
1. KEY LESSONS LEARNED
32. The key lessons to be learned from the project are as follows:
(a) the justification for committing scarce IDA resources to privatizationprojects needs to be examined closely: particularly when, as in the casehere, such projects could be commercially financed and an investor hasalready expressed interest in making a bid;
(b) IDA efforts to support privatization should more appropriately be part ofan Adjustment/Policy Reform Operation with TA instead of an investmentproject.
(c) bringing publicly-owned enterprises under private management may lead tolarge efficiency gains--particularly if the regulatory regime is adequate andthe management contract is performance based; but if ownership is notprivatized, the management may not have the freedom to make politicallyunpopular choices or to carry out the rationalization that may be neededfor long-term survival; and
(d) a privatization strategy needs to be properly sequenced. Whengovernments launch a privatization drive, they should start with enterprisesthat are less politically sensitive and are relatively easy to privatize; theseearly "success stories" are critical for building know-how and broadersupport for more difficult operations (such as GUYSUCO) wheresubstantial rents are involved and there are powerful lobbies--both withingovernment and the labor unions. It is risky to develop (but notimplement) a privatization project at the end of an administration, a carefulassessment of the new government's commitment should be made.
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PART 11: STATISTICAL TABLES
Table 1: Summary of AssessmentTable 2: Related IDA Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: IDA Resources: Staff InputsTable 13: IDA Resources: Missions
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Table 1: Summary Of Assessments
A. Achievement of Obiectives Substantial Partial Negligible Not applicable
Macro Policies E E 0 ESector Policies Q Q 0 0Financial Objectives E3 I EJInstitutional Development 0 E3 EJPhysical Objectives IE E E lPoverty Reduction 5 5 E 0Gender Issues I i I (A
Other Social Objectives El El O 0Environmental Objectives l 0 E EPublic Sector Management 1 0 E EPrivate Sector Development Ia E 0 Other (specify) El El El El
(Continued)
B. Project Sustainability Likely Unlikely Uncertain(/) (/) (9')
HighlyC. IDA Performance satisfactory Satisfactorv Deficient
(v') (9') (9')
Identification E 0 E
Preparation Assistance O E 0
Appraisal E E 0
Supervision E 0 E
Himhlvsatisfactory Satisfactorv Deficient
D. Borrower Performance
Preparation a
Implementation (GOG) D]
Implementation (GUYSUCO) 0 0
Covenant Compliance (GOG) [ 5
Covenant Compliance 5 5(GUYSUCO)
Operation (if applicable) i a:i
Highly HighlvE. Assessment of Outcome satisfactory Satisfactorv Unsatisfactory unsatisfactorv
5 0 0 El
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Table 2: Related Ida Loans/Credits
Loan/credit title Purpose Year of approval Status
Preceding operations"
Following operations
Financial Sector and Privatization ofBusiness Environment State EnterprisesProject Credit 2669
None in the agriculture sector during the past ten years.
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Table 3: Project Timetable
Steps in Project Cycle Date Planned " Date Actual!Latest Estimate
Identification (Executive Project Summary) February 1991 February 15, 1991
Preparation April 1991 April-September 1991
Appraisal February 1992 October 1991
Negotiations April/July 1993 April/July 1993
Letter of Development Policy (if applicable) n/a n/a
Board Presentation September 1993 September 16, 1993
Signing September 1993 September 29, 1993
Effectiveness November 1993 November 30, 1993
First Tranche Release (if applicable) n/a n/a
Midterm review (if applicable) n/a n/a
Second (and Third) Tranche Release (if n/a n/aapplicable) l
Project Completion June 30, 1996 June 30, 1996
Loan Closing Dec. 31, 1996 Dec. 31, 1996
As provided, for example, in the Staff Appraisal Report
- 14 -
Table 4: Loan/Credit Disbursements: Cumulative Estimated And Actual
(US$ thousands)
FY94 FY95 FY96
Appraisal Estimate 6,000 12,000 15,000Actual * - 751 781Actual as % of Estimate - 6 5
Date of Final Disbursement: August 28, 1995
* To be modified (refund from Special Account in process)
- 15 -
Table 5: Key Indicators For Project Implementation'
I. Key ImplementationIndicators in SAR/ Estimated ActualPresident's Report
II. Modified Indicators (ifapplicable)
|II. Other Indicators (ifapplicable)
No indicators were specified in SAR or subsequently.
- 16 -
Table 6: Key Indicators For Project Operation'1
1. Key Operating Indicators Estimated Actualin SAR/President's Report
" No indicators were specified in SAR or subsequently.
- 17 -
Table 7: Studies Included In Project
Std Purpose as Defined Sau mato tdStudy ~at AppraisaURedefined Sau mato td
Financial Advisory Services: To assist the Govenunent in Complete Negligible as far asPhase I restructuring GUYSUCO. Project objective to
Phase I to iinclude: (a) privatize GUTYSUCO,provision of recommendations opportune if theand development of a strategy Government carries outto privatize in full or by the privatization of thebreaking GUYSUCO into sugar factories.several packages; (b) carry outassets valuation; (c) preparationof an Employee StockOwnership Plan; (d) review andrecommend a regulatoryframework for the sugarindustry.
Financial Advisory Services: To assist the Govenunent in Incomplete Phase II was not executed.Phase II privatizing GUYSUCO. Phase Government did not move
II to include: (a) assistance in forward with privatization.implementing the Employee Credit proceeds cancelled.Stock Ownership Plan; (b)preparation of materials for thestrategy adopted for theindustry; (c) development ofcriteria for the assessment ofproposals from privateplacement otlerings; (d) preparea promotional strategy andcampaign for public offerings;and (e) assistance duringnegotiations with prospectiveinvestors.
Environmental Audit To examine existing conditions Completed Minimum as far asof factory/estate under identifying environmentaloperation to identify liabilities to be financedenviromnental hazards, by investor(s) undersolutions and related costs. privatization; neverthelessStudy to include evaluation of opportune in identifyingappropriateuess of the facilities key environmental actionsdesign and occupational to be carried out byhazards, health and safety GUYSUCO, some ofissues, anid relationis between which are already beingGUYSUCO, Government and implemented.the communiity regardingenvironmental matters.
Table 8a: Project Costs
Appraisal Estimate (US$M) Actual/Latest Estimate(US$M)'l
Item Local Foreign Total Local Foreign
Costs Costs ° Costs Costs Total
1. Agriculture&FieldInfrastruct. 6.0 7.7 13.7 14.6 4.5 19.1
2. Factory & Related Services Dev. 2.3 18.4 20.7 4.9 13.4 18.2
3. Administration 3.7 1.4 5.1 7.4 2.7 10.1
4. Financial Advisors - 1.0 1.0 - -00
TOTAL 12.0 28.5 40.5 26.9 21.1 48.0
" Financing from Credit largely unutilized
Table 8b: Project Financing
Appraisal Estimate (US$M) Actual/Latest Estimate(US$M)
Source Local Foreign T Local Foreign
Costs Costs Total Costs Costs Total
IDA 15.0 15.0 *
CDB - 3.0 3.0
Suppliers - 1.9 1.9 - -
GUYSUCO 12.0 8.6 20.6 26.9 21.2 48.1
TOTAL 12.0 28.5 40.5 26.9 21.2 48.1
* To be confirmed after refund from Special Account is processed.
- 20 -
Table 9: Economic Costs And Benefits
(Not Applicable)
For all projects, this table identifies the major costs and/or benefits that enter intothe calculation of a re-estimated net present value (or economic rate of return) or, wherethe net present value (or economic rate of return) was not estimated, of cost-effectivenessin achieving project objectives.
- 21 -
Table 10: Status Of Legal Covenants
GuyanaSugar Industry Restructuring and Privatization Project
Agreement Section Covenant Presenit Original Revised Description of Commentstype status fulfillment fulfillment covenant
date date
Credit 2.02(b) 3 CD n/a n/a To open and maintain indollars a special depositaccount in Bank of Guyanain accordance withSchedule 4 of Agreement.
3.01(b) 10 CD ii/a n/a Government to causeGUYSUCO to carry outPart A of project, pursuantto the Subsidiary LoanAgreement.
3.02(a) 3 C n/a n/a Government to transfer toGUYSUCO the proceedsof the Credit allocated toCategory I under asubsidiary loan agreementin terms and conditionssatisfactory to theAssociation.
3.02(a) 5 C 10/31/93 n/a To enter into a(iii) management services
contract with a firmacceptable to theAssociation and underterms and conditionssatisfactory to theAssociation.
3.02(a) 9 CP n/a n/a During execution of Part A(ii) (b) to furnish the Association
quarterly progress reports,including GUYSUCO'soperating results andfinancial position.
3.05(a) 5 CD n/a n/a To maintain a Board, withcomposition, functions andresponsibilities satisfactoryto the Association.
3.05(b) 5 C 11/30/93 in/a The Borrower to establishand maintain a unit withqualified staff, satisfactoryto the Association, to assistthe Privatization Board incarrying out its functions.
- 22 -
3.06 9 C nJa n/a With regard to Part A, theBorrower jointly withGUYSUCO to submit tothe Association forreview and approval, nolater than Dec. 31 eachyear, an annual capitalbudget and an annualoperation budget forGUYSUCO.
3.07 10 C 12/31/93 2/28/95 WithregardtoPartB,theBorrower shall contractand retain the consultantsrequired to assist incarrying out such Part B,as provided by Section IIof Schedule 3.
3.07(b) 10 NC 7/31/94 n/a To complete activities(i) with respect of
restructuring andprivatizing process ofGUYSUCO, by no laterthan July 31, 1994, ofParts B.l, B.2(a), B.2(b),B.2(c) and B.2(d).
3.07(b) 10 NC 10/31/94 n/a To complete activities(ii) with respect of
restructuring andprivatizing process ofGUYSUCO, by no laterthan October 31, 1994, ofParts B.2(e), B.2(f) andB.2(g).
3.07(b) 10 NC 3/31/95 n/a To complete activities(iii) with respect of
restructuring andprivatizing process ofGUYSUCO, by no laterthan March 31, 1995, ofParts B.2(h) and B.2(i).
3.08(a) 10 NC 7/31/94 n/a Furnish to theAssociation for reviewand approval a draftregulatory framework forthe sugar industry.
3.08(b) 10 NC 9/15/94 n/a To (i) put into effect theregulatory framework, tothe extent that noenactment of legislationis required; and (ii)submit to Parliament alegislative proposalconcerning components ofsuch regulatoryframework that requireenactment.
- 23 -
3.09 10 NC 9/15/94 n/a Borrower to determinethe capital share ofGUYSUCO with respectto proposals under PartB.2 (e), in accordancewith action plans inSection 3.07(a), asapproved by theAssociation.
3.10 10 NC 3/31/95 n/a Take all action necessaryto complete execution ofPart B.2 pursuant toSection 3.07 (a) of theAgreement, as approvedby the Association.
3.11(a) 6 CD 12/31/93 n/a Furnish the Association,for review and approval,terms of reference for anenvironmentalassessment of the sugarindustry.
3.11(b) 6 CD 5/31/94 n/a To carry outtheenvironmentalassessment, including thereview of contingentliabilities of GUYSUCOfor possibleenvironmental problems.
3.12 10 C 10/31/93 2/15/94 To complete and furnishto the Association, forreview and approval, areport on policy andprogram in respect of thehealth services in thesugar industry; upon theAssociation's approval, toimplement the findingsand reconmmendations ofsuch report.
3.13 9 CP n/a n/a The Borrower, throughthe Privatization Board,to furnish by October 31,January 31, April 31 andJuly 31 of each year,progress reports onachievements in carryingout Part B of the Project.
4.01(a) I C ii/a n/a Borrower to maintain, orcause to be maintained,separate records andaccounts in accordancewith sound accountingpractices, in respect ofPart B of the Project.
- 24 -
4.01(b) I NC* n/a n/a Borrower to have recordsand accounts, includingthe Special Account foreach fiscal year auditedby independent auditorsacceptable to theAssociation.
4.02(a) I C n/a n/a Borrower to causeGUYSUCO to maintainrecords and accounts inaccordance with soundpractices, includingseparate records inrespect of Part A of theProject.
4.02(b) I C ni/a n/a Borrower shall causeGUYSUCO to have itsaccounts and financialstatements (balancesheets, statements ofincome and expenses andrelated statements), andthe records and accountsfor the Special Accountfor each fiscal yearaudited by independentauditors acceptable to theAssociation.
Covenant types:
1. = Accounts/audits 8. = Indigenous people2. = Financial performance/revenue generation fi-om 9. = Monitoring, review, and reporting
beneficiaries 10. = Project implementation not covered by categories 1-93. = Flow and utilization of project funds 11. = Sectoral or cross-sectoral budgetary or other resource4. = Counterpart funding allocation5. = Management aspects of the project or executing 12. = Sectoral or cross-sectoral policy/ regulatory/institutional
agency action6. = Environmental covenants 13. = Other7. = Involuntary resettlement
8. Present Status:
C = covenant complied withCD = complied with after delayCP = complied with partiallyNC = not complied with
* Currently under preparation
- 25 -
Table 11: Compliance With Operational Manual Statements
Statement Number and Title Describe and comment on lack of compliance
1. OD 4.00 Environmental Policies Performance of an Environmental Audit ofGUYSUCO. Delayed compliance.
2. OP 5.10 Public Enterprise Reform and Not complied. Preparation for divestiture done
Divestiture however Government has not gone throughwith privatization of GUYSUCO.
- 26 -
Table 12: Ida Resources: Staff Inputs
Planned Revised Actual
Stage of Project Cycle Weeks US$ Weeks US$ Week (U0S$)
- - -R -= n..
Preparation to Appraisal n/a n/a n/a n/a 55.4 160.3
Appraisal n/a n/a n/a n/a 26.0 77.7
Negotiations through Board Approval n/a n/a n/a n/a 30.2 32.1
Supervision n/a n/a n/a n/a 43.4 56.2
Completion 8.0 19.3 7.0 19.0 7.0 9.1
TOTAL L _ 162.01 335.4
- 27 -
Table 13: Ida Resources: Missions
Performance Rating
Stage of Month/ Number Days in Specialized Implemen- Develop- Types ofProject Cycle Year of Field Staff Skills tation ment Problems
Persons Represented Status Objectives
Through Appraisal 9/90 3 5 E,LO _ -_
11/90 2 4 E, F _ _ _
4/91 3 5 E, F, O - - -
10/91 3 5 E, F, L - - -
10/91 5 10 E, F, A - - -
Appraisal through 5/92 2 3 E,L L _Board Approval
11/92 4 2 E, F
6/93 2 4 E--
8/93 1 2 E---
Supervision 4/95 2 5 F U S P
12/95 1 3 F U S P
Completion 11/96 2 3 E, F U U P
Staff Skills: Problems:
E = Economist P = PolicylGovemnmenta]
L = Lawyer
F = Financial Analyst
A = Agronomist
0 = Division Chief
John R. HeathM:\GUY-SUCO\ICR\FINALICR.DOCMarch 25, 1997 3:26 PM
ANNEX A
GUYANA: Sugar Industry Restructuring and Privatization ProjectImplementation Completion Report MissionAide-Memoire
A World Bank mission' visited Guyana from November II to 14, 1996 to prepare theImplementation Comoletion Report for the above project. The Mission held discussionswith the Senior Mvi\nister of Finance and with relevant officials from the sucar industry(GUYSlUCO), the Privatization Unit and the Auditor General's Office. A wrap-upmeeting was held on November 13 at GUYSUCO.
The MLission would like to exzress their appreciation for the cordial assistance oven by theoff'icials of Government and zhe private management of GUJYSUCO.
Mlain Agreements
The Mvlission reminded the Government of its obligation to return Special Account fundsto the Bank, in accordance with the Bank's February 2, 1996 letter to the Mlinister ofFinance. The mission also provided the Government with the full advice and supportneeded for it to complete outstanding audit reports and the "Borrower's Final EvaluationReport". The mission also lert with the Auditor General's Office a copy of the Bank'sguidelines for preparing audit reports and aTreed to send the Office a copy of the Bank'sFinancial Reporting MIanual by November 23, 1996. It was agreed that theGovernment would: (a) comply immediately with the February 2, 1996 letterregarding the Special Account, (b) submit the outstanding audits by December 15,1996, and (c) deliver the Evaluation Report to the Bank by February 28, 1997.
The mission discussed with GUYSUCO its fuiture investment plan. The 1995 Five-YearBusiness Strategy document remains the current investment plan. However, GUYSUCOis in the process of setting up a Task Force to refine this Strategy. GLUYSUCO agreed tosend to the Bank: (a) no later than November 23, 1996 data on key performanceindicators as requested in the Bank's fax of October 29, 1996; (b) copies of theProject Management Proposal and Task Force Investment Plan (expected to becompleted by Mlarch, 1997), pending Booker Tate clearance; and (c) the 1996 auditof GUYSUCO's financial statements (expected by iMvarch, 1997).
The Mlission overlapped in Guyana with a mission from the International Monetary Fund2 .The Bank and the Fund coordinated closely on the issue of sugar industry regulation andjointly discussed with the Senior Finance Minister the components of an adequateregulatory framework and the technical assistance that Government would need to put this
The mission comprised John Heath (Economist/Mission Leader) and iMusa Asad (Financial Analyst).
2 The t'E Mission was led bv MIr. Samuel Itam.
-30 ANNEX A
in place. It was agreed that the Bank would send a consultant to work withGovernment and GUYSUJCO on drawing up an appropriate regulatory framework.The Government gave its 'no objection" to the consultant terms of referenceproposed by the Bank and 1MF; a copy of these is attached at Annex L TheGovernment agreed that the consultant could visit Guyana in the first half ofFebruary 1997 and would, before March 31, 1997, reach agreement with the Bankabout the substance of the recommendations to be implemented.
The following sections of the aide-memoire summarize the key issues to be covered in theBank's part of the Implementation Completion Report, based on a review of availabledocuments and discussions during the mission with GUYSUCO and Government.
Project Objectives
The project aimed to: (a) stabilize sugar production and revenues at acceptable levels, bvreplacing or rehabilitating equipment and machinerv in urgent need of repair; (b)restructure and privatize GlUYSUCO; and (c) introduce a regulatory framework thatwould enhance the industry's competitiveness while guaranteeing an adequate level ofgovernmrent revenue.
Project Description
Components. (a) A two-year capital investment program sought to stabilize GIUYSUCOoutput at the 1992 level of 240,000 tons by financing maintenance and replacement ofworn-out capital equipment at GUYSUCO's eight mills. This accounted for 93 percent ofproject funds. (b) A technical assistance component, involving contracts for financialconsulting firms to help government restructure and privatize GUYSUCO, while allowingworkers to participate in the ownership of the company. These consultants would alsohelp establish a policy and regulatory framework for the industry, with particular referenceto fixing the level of the sugar export levy, eliminating foreign exchange retention,retaining a corporation tax of35 percent, and eliminating GlUYSUCO's monopoly ofsugar imports.
In addition, when the project was negotiated, it was agreed that management of theindustry would remain in the hands of a private company; this contract would be financedby GUjYSUCO, not by the project, but government would need to secure the Bank's "noobjection" to the terms of this contract.
Background. When the project was identified in late 1990, Guyana had failed to meet itssugar export quota for three consecutive years and there was a real concem that theEuropean Union might reduce the volume of Guyana's sugar favored with preferentialmarket access. Also, given that the industry was by far the largest net earner of foreignexchange (40 percent of total) and fiscal revenues (12 percent of total), it was feared thatfurther decline would hamper the nation's ability to service its very substantial publicexternal debt.
-31- ANNEX A
At that time, government was seriously interested in privatizng GUYSUCO and there wasa would-be buyer in the shape of Booker Tate, which had privately managed the companysince 1990, and had already put money on the table. With the change of govemrnment inOctober 1992, the enthusiasm for privatization substantialy diminished and the projectwas scaled down from a USS216 million buy-out (to be jointly financed by government,Booker, CDB, DA, and EC) to a USSI5 million dollar operation whose purpose was"restructurina, with a view to eventual privatization". By the time the project wasapproved, restoring GUYSUCO's ability to generate revenue for the governrment hadbecome the main issue; privatization was a secondary concern from government's point ofview--the priority was rehabilitation.
In principle, rehabilitation need not be a prerequisite for privatization. The cost ofrehabilitation could have been factored into the bid price offered by interested privateinvestors. Thus, it is doubtful that lending to finance costs that could have been borne bythe private sector was a good use of MDA resources. When the project was identified (endof 1990), it was argued that rehabilitation was needed immediately in order to bringoutput back to a level (c. 240,000 tons) where the EU quota comrnitment could be met; itcould not wait for divestirure to be completed. However, by the time of appraisal in 1993,sugar output had recovered to 243,000 tons: therefore, well before Board approval, therewas no longer any risk that the EU would scale back the Guyana quota owing to non-compliance.
Achievement of Project Objectives
On the eve of closing the project's overall, rating is Unsatisfactory owing to failure to meetthe privatization objective; however, the rehabilitation objective was fully met during thelife of the project.
The objective of rehabilitating some factory equipment in order to stabilize production andrevenue was realized. Although procurement of the relevant equipment was not financedfrom project resources, the project did provide the framework and the discipline forrehabilitation to take place. Also, the project conditionality that GUJYSUCO remain underprivate management was complied with; if this conditionality had not existed,Government may have failed to renew the management contract.However, contrary to the stated objectives of the Project, the government took no steps toprivatize the sugar industry. Proposals for a stronger regulatory framework were made,but not implemented during the life of the project.
Implementation Experience and Results
A number of factors outside the project led to a recovery in the fortunes of GUYSUCOafter 1990: depreciation of the exchange rate increased the revenue, in local currencyterms, from sugar exports; the world price of sugar increased; Guyana's export quotaincreased by 27,000 tons (by special agreement with Portugal), and weather conditionswere favorable. Major steps were taken to liberalize the foreign exchange rate regime so
-32 - ANNEX A
that, when the project closed, foreign exchange retention was no longer an issue.GUYSUCO is now allowed to retain 80 percent of its foreign exchange earnings, a sharethat is scheduled to increase to 100 percent by the end of 1996. The industry alsobenefited from sound management by Booker Tate. While it was a requirement of theproject that the industry remain under private management, the project was notinstrumental in influencing the terms of the contract-which was awarded to Booker in1990, well before project effectiveness.
As a result of this favorable environment, sugar output rose from 160,000 tons in 1991 toan estimated 275,000 tons in 1996 (compared to 240,000 tons projected at Appraisal).There was a substantial improvement in yields, revenues and profitability. The TC/TSyield measure improved from 14.36 in 1991 to 11.56 in 1995; the output per acre rosefrom 1.71 tons in 1991 to 2.41 in 1995. After payment of the export levy, GLUYSUCO'sfree cash flow is expected to be about USS20 million in 1996. The company has thereforebeen available to finance investments in new equipment from its own resources, withoutrecourse to project funds. In addition to the increase in profitability, the ratio of currentassets to current liabilities was 1.3 in 1995, a solid improvement over the late 1980s.Finally, the ratio of total debt to total assets is down to levels better than those projectedat appraisal.
The Finance MLinister who most vigorously supported GUYSUCO's privatization wasreplaced, leaving this objective without a strong advocate. In the event, it proved possibleto meet output targets without privatization, and this may have led to a further weakeningof government resolve.
Owing to government delay, it took 18 months for the Privatization Unit to become fullyoperational. The Unit remained under the control of the Ministry of Finance and neveracquired the autonomy needed to assume full responsibility for day-to-day projectmanagement, decisions often resting with the Miinister of Finance. There was a change ofMinister midway through the Project and there were also changes in the personnel of thePrivatization Unit: this loss of continuity substantially weakened project implementation.
Phase I of the privatization component--the design phase--was carried out; although,owing to government's delay in recruiting the consulting firm and the firm's slowness todeliver, the final report was not received until September 1996. The firm was hired to:(a) recommend whether or not the industry should be broken up before sale; (b) carry outa valuation of the industry's assets; (c) design an Employee Stock Ownership Plan; and(d) draft a regulatory framework for the industry. Overall, this study was deemed to besatisfactory by the Bank. However, the valuation component was incomplete owing todata constraints that the consultants cannot be held responsible for. Thus, it was possibleto establish a value for GUTYSUCO in its present shape and form, but impossible toestimate the value that the company would generate if its assets were either broken up orput to an alternative use--mainly because, given the incompleteness of the land market, itwas impossible to place a value on the estate's leased by the Government to GUYSUCO.
- 33 - ANNEX A
Goverinment's slowness to implement Phase I was a clear sign of lack of enthusiasm forprivatization. The Bank's decision to hold up disbursement until the work had beencommissioned was a good way to signal the importance of the privatization component.However, the Bank had limited leverage because GUYSUCO was able to finance most ofthe equipment needs from its own funds.
An environmental assessment was comrnissioned in order to identify liabilities that privateinvestors would need to factor into their bid. The most pressing environmental problemsidentified were: poor effluent treatment, owing to broken down equipment and theabsence of suitable treatment norms; and excessive use of fuel oil, owing to the lack ofbagasse. The environmental assessment report was due by the end of May 1994 but thefinal version was not delivered until June 1996, largely owing to the delay in setting up thePrivatization Unit (which was responsible for supervising consultant contracts).
The Bank made every effort to ensure that GLJYSUCO remained under privatemanagement, at one point heading off an attempt by government to terminate the contractwith Booker Tate. However, contrary to agreements reached during negotiations, theBank did little to vet the terms of the management contract; indeed, the contract was notreviewed until shortly before project closin--at which time the Bank had little leverage indetermining the length of the contract period, or the specification of performancebenchmarks to which the Board of GUYSUCO and Booker Tate could jointly comrmit.
Booker Tate has a one-year, rolling contract that arg-uably fails to provide the rightincentives. It is impossible for management to execute an effective business plan when thetime horizon is so short. The contract provides inadequate benchmarks for the governmentto evaluate progress toward increasing the industry's efficiency. These considerationsbecome all the more critical if the industry is not privatized, because, as long as theindustry remains in public ownership, market discipline cannot be relied upon to ensurethat efficiency goals are met.
Project Sustainability
For a number of reasons, essentially unrelated to the project, the performance of the sugarindustry has improved substantially since 1990. Field and factory productivities have risenand are expected to improve still further over the next five years. Labor supply is secureand relations between the company and the workforce have improved. Old fieldequipment has been replaced and wom out factory installations are being rehabilitated.New stores and computer systems have been set up. Measures to improve health, safetyand environmental protection are being implemented.
The solid progress in each of these areas makes it highly likely that the recentimprovements in the industry's performance will be sustained. GUYSUCO currently aimsto reduce production costs from the present level of US$0.19/lb to USSO.13-0.15/lb--which would be competitive in terms of current world prices. However, if this target is tobe realized, two conditions must be met. First, the rehabilitation of capital equipment
ANNEX A
must continue, presupposing that the company generates enough internal financing tocover these investments. Second, the quality of GITYSUCO's managerial and technicalstaff must be maintained. These conditions will be met only if the government ensures:(a) that GUYSUCO remains under private management, giving it the support to take thenecessary steps towards rationalization, steps which may be politically sensitive; and (b)that the policy and regulatory environment allows the industry to balance the needs of theGovernment for revenue and generate sufficient retums to cover GUJYSUCO investmentneeds.
Bank Performance
Ulp to and immediately following project appraisal the Bank and the Govemrnent werehighly committed to achieving the Project's objectives. This was reflected in the Bank'scom.mitment of resources which, throuah Board Approval, totaled 112 staff weeks orUSS270,000--an average-to-high resource input by Bank standards. However, in theperiod from Approval to one month before Completion the supervision input was only 43staff weeks (USS56,000)-which is substantially less than Bank norms. The falloff in Bankinput reflects this institution's reaction to a perceived weakening of Government'scommitment to the privatization objection; and, to a lesser extent, it was a consequenceof staff rotation in the Bank. From preparation to completion the project had no fewerthan five task managers, resulting in a loss of follow up and continuity.
Notwithstanding the supervision shortfall, the Bank made serious efforts to keep projectimplementation on track. These efforts included: (a) firequent communication withGovernnment and with GUYSUCO management, through formal and informal channels;(b) extensive negotiation with, and supervision of, the consultants hired to carry out theprivatization and environmental studies; (c) substantial assistance to GUjYSUCO staffindevisin, an investment plan for factory rehabilitation and in preparing related biddocuments; (d) fully adequate advice to Government on the auditinc of project andGTIYSUCO accounts; and (e) in-depth assistance to Government on privatizationstrategies and the regulatory framework for the industry.
Borrower Performance
GUYSUCO's performance was very sound; but the Government's record has beensomewhat less satisfactory. Although the revival of the sugar industry's fortunes owesmuch to an improvement in the price and exchange rate environment, it is undeniable thatGUYSUCO's management--with excellent leadership by Booker Tate--played a criticalrole in ensuring that the industry reaped maximum benefit from the improved environment.The management has stabilized the industry and has laid the foundations for continuinggrowth. It has also made a major contribution to improving labor relations and upgradinghealth, safety and environmental conditions. GUYSUCO staff were very responsive to theBank, cooperating fully with the procurement, financial management and reportingrequirements of the Project.
-35- ANNEX A
Follow up by Government has not been as effective as it might have been. For example,once it became clear that privatization would not be achieved during the span of theProject, the Bank proposed a revised action plan (April 1995); but the Government failedto respond. There were numerous instances when official Bank correspondence wentunanswered. During Bank rnissions to Guyana-or visits by the Goverrnment toWashington--it was often di5icult for the Bank to arrange meetings with key officials.The Government made little contribution to the preparation of consultant terms ofreference and the feedback it provided on consultant reports was limited.
Lessons Learned
(a) The justification for committing scarce DA resources to privatization projectsneeds to be examined closely: particularly when, as in the case here, such projects couldbe commerciallv financed and an investor has already expressed interest in making a bid;
(b) In each case, the arguments for and against privatization need to be examinedvery careully. There may be a large efficiency gain to be made by bringing publicly-owned enterprises under private management--providing that the regulatorv regime isadequate and the management contract is performance-based; once this has beenachieved, the added gain from sellinc off all or part of the enterprise to private investorsmay be small--too small to offset the often substantial political cost of negotiating thepassage from public to private ownership. On the other hand, it must be conceded that, inthe absence of full privatization, the industry may be less able to make politicallyunpopular choices (e.g. regarding layoffs), and less successflut in its attempt to secure boththe investment needed to ensure long-term sustainability and the key technical personnelneeded to carry out the program of upgrading; and
(c) A privatization strategy needs to be properly sequenced. When governnentslaunch a privatization drive, they should start with enterprises that are not politicallysensitive and are relatively easv to privatize; these early "success stories" are critical forbuilding know-how and broader support for more difficult operations (such asGUYSUCO) where substantial rents are involved and there are powerful lobbies--bothwithin government and the labor unions. It mnakes little sense to develop (but notimplement) a privatization project at the end of an administration, given that there is noguarantee that the next government will follow up.
/ Qo nohnHeath Bharrat JagdeoWorld Bank Sr. Minister of Finance
G.N. HilaryWorld Bank Chief Executive Officer, GLTYSUCO
November 13, 1996, Georgetown, Guyana
ANNEX AAttachment 1
GUYANADEVELOP,NETNT OF A DRAFT REGULATORY FRAMIEWORK FOR THE
SUGAR INDUSTRY
Terms of Reference for Consultant Study
Overall bbjectives
The ultimate aim is to create a renulatory framework that is conducive to the efEcientmanagement of resources at an economywide level; the sphere of reference thus extendsbeyond GLYSUCO. The framzework will be based on the assumption that this state-owned enterprise will .emain under a private management contract for the immediatefuture, pending eventual privatization. In drawing up the framework, the followingprinciples should be observed:
* the regulations must be enforceable, and not costly to administer-,* the rationale for the rezulations needs to be transparent;* regalatior.s should create incentives for resources to be managed efficiently:
providing a framework within which the survival of GUYlSUCO willultimately be contingent on its competitivenes;
* revulations must be consistent with the international protocols binding uponGuyana.
Specific Tasks
(I) Assess the rationaZe for retaining a levy on sugar export revenues.
The aim is to consider: (a) whether the Levy should be retained in its present forrn; (b)whether it should be modified; or (c) whether the 1974 Act on which it is founded shouldbe repealed, allowing other instruments (Corporation Tax, lease payments etc.) togenerate the necessary transfers to Government. It wi.l be important to ensure that therecommendation satisfactorily balances the Government's need to earn fiscal revenue fromthe sugar industry with the need of the industry to retain profits in order to make thecritical investments needed for more efficient operation. Whatever instrument isrecornmended should be transparently formulated and easy to administer, giving themanagement of GTIYSUCO advance information about the size of the transfer entailed.
(2) Review the tariff regime governing inputs imported by the sugar industry.
The aim is to consider whether the existing tariffs applied to the industry-including tariffspreads between imported agricultural and factory inputs--are consistent with thoseapplied to other enterprises in Guyana; and consistent with intemational protocols towhich Guyana is siznatory (e.g. CARICOM). The justification for any discrepanciesshould be carefilly exarmined. It will also be irnportant to identify any ad hoc exemptionsto the tariff regime which may lend themselves to arbitrary and inconsistent enforcement.
. .~
-37 - ANNEX AAttachment 1
(3) Checkfor consistency in the application of Corporation Tam
The rationale for the level of taxation on corporate profits should be examined. Also, thecase for rnaintaining any discrepancies between the tax rate on GUYSUCO and that onother enterprises should be reviewed. This issue should be placed in the context of allother charges on the industry (Levy, Profit Sharing Formula, land leases, etc.) since thereis potentially a trade-off between these charges.
(4) Review the rationale for domestic pricing of sugar.
The aim is to consider the arguments for and against introducing full liberalization of theimport regime for sugar, balancing governnent needs for revenue with protection of theinterests of the industry and those of consumers. In particular, the case for maintaining avariable import levy should be reviewed, with due consideration of any protocols bindingupon Guyana.
(5) Review progress in removing restrictions on foreign exchange retention.
It will be necessary to check that GUYSUCO is free to retain as much of its foreignexchange earnings as it deems necessary, consistent with the broader move to liberalizethe exchange rate regime.
(6) Review the formula for sharing revenue between GUYSUCO estates andfarmers.
The aim is to consider whether or not measures should be taken to ensure that farmers aremade subject to the Sugar Levy--whose burden is now borne entirely by GTJYSUCO.Any other factors bearing on revenue sharing should be fully considered.
(7) Ensure that the cane paymentformula is efficiency enhancing, reviewing the NationalCane Farmers Act and norms regulating estate cane cutting.
It will be necessary to determine that there are adequate incentives for farmers and cuttersto deliver a good product in a timely fashion: the efficacy of the sampling methods andperformance-related pay mechanisms will need to be reviewed.
(8) Investigate the regulations bearing on lease of land by GUYSUCO.
The aim is to examine the case for altering the basis on which the Government leases landto GUYSUCO, with a view to enhancing the efficiency of landuse. This would include thepossibility of bringing the lease rate into line with market prices; and varying lease rates toreflect variations in land quality and market access. One option may be to auction off theleases, allowing alternative users to bid alongside GUYSUCO. Consideration must begiven to the arguments for GUYSUCO to divest some of the land that it currently leases
r -38 - ANNEX AAttachment 1
(or owns). The case for substituting market-driven lease rates for the Sugar Levy shouldbe reviewed.
(9) Review the balance of incentives in the private management contract.
A key concern is whether the contract period is long enough for the private manager toimplement a strategic plan: various options in terrns of contract length will be explored.In addition, the existing contract will be reviewed to see whether it contains adequateindicators against which the performance of management can be assessed. It willnecessary to develop a set of benchmarks that will allow for full comparison ofGUYSUCO with intemnational competitors; one of these benchmarks will be the unit costof sugar production--the consultant will need to examine the feasibility of introducing intothe management contract a strategic plan for reducing unit costs. The evaluation ofmanagement performance will needto be tied closely to a reciprocal commitnent bygovernment to allow the industry to retain the profits needed to finance the investments onwhich increased efficiency is predicated.
(IO,) Revieiv the contracts between management and sugar industry employees.
The consultant will review the collective bargaining agreements with each of the two laborunions operating in GUYSUCO. The hirina and firing rules, severance packages andoverall conditions of employment need to be examined to ensure that, on the one hand,they provide adequate protection to workers and, on the other, do not unduly hamper theenterprise's capacity to restructure in line with the objective of reducing unit costs.
The World Bank 181s8 H Sb N.W. (I, 477-134 ANNEX BINTRUMTKL BANK FOR R9CcNsTRUcMON ANO O!VLOPMENT Washk%glto O.C. 2433 Cable AddM= INTBAFRADWTNATT 4AL. OUV.OPENT ASSOCATTCN U.S.A. Cable Addr. INOEVAS
January 13, 1997
Hon. Bharrat JagdeoSenior Nvunister of FinancehfLnistry of FinanceMain and Urquhart StreetsGeorgetown GuyanaFAX 592-261X84
Sugar Industry Restructuring and Privatization Project (Credit 2545-GUA)Fina] Supervision Report
Dear Mvfinister Jagdeo
Thank you for the kindness and cooperation afforded Messrs. Heath and Asadduring their rission of November 11-14. I am pleased to note that the mission achievedits two primary objectives: first, to make arrangements for Governmnent's contnbution tothe project's Implementation Completion Report; and second, to agree on the terms ofreference for a study on the regulatory framework of the sugar industry.
I am attaching a copy of the mission's aide-memoire summarizng the mainagreements reached. With respect to the first objective, it was agreed with Mr.Brassington that the Privatization Unit would assume responsibility for preparing the"Borrower's Final Evaluation Report"; and that this would be delivered to the Bank byFebruary 28, 1997.
With respect to the regulatory study, I note that when you met with the Bank andEMT rmissions on November 12, it was agreed that the Government had "no objection" tothe proposed terms of reference; a copy of these is appended to the aide-memoire. I alsounderstand that you expect the consultant to conduct the study in the first half of February1997.
As you will recall, the completion date for new funding commitments from thisloan was June 30, 1996 and its closing date was December 31, 1996. However, webelieve that the consulting work for the regulatory study would qualif for financing underthe Financial Sector and Business Environment Credit (No. 2669-GUA), which coversactivities within the remit of the Privatization Unit.
RCA 248421. C WUI 64145 Cl FAX (2=2) 47741J9
Hon. Bharrat agdeo -2- January 13, 1997 ANNEXB
I suggest that the Privatization Unit initate the consultant search and recruitmentprocess. We have already identified a possible candidate for this assignment, and we areforwarding his resume to the Unit
Because of their interest in these matters, I am sending copies of this letter to Mr.Brassington and Mr. Itam.
Sincerely,
Jonathan ParkerActing Division Chief
Natural Resources Management and Rural PovertyCountry Operations Department mLatin America and the Caribbean
cc. Mr. Winston BrassingtonPrivatization Unit126 Barrack StreetGeorgetown, Guyana(FAX 592-266426)
MIr. Samuel ItamInternational Monetary FundWashington, D.C., U.S.A
IMAGING
Report No.: 16652Type: ICR