Report of the Sugar Industry Enquiry Commission

2010

September 28, 2010

Sugar Industry Enquiry Commission 2010

September 28, 2010

His Excellency The Most Honourable Sir Patrick Linton Allen, O.N., G.C.M.G., C.D. Governor General of Jamaica Kings House

Your Excellency:

By Instrument under your hand dated April 22, 2010, under the Commission of Enquiry Law, you appointed us to enquire into and report on the relevance of the current regulatory, institutional, cane pricing and product marketing arrangements in the Sugar Industry and to make recommendations in respect of any changes, if any, to these current arrangements in the national interest; and to enquire into and assist in the effective implementation and development and maintenance of a sustainable private sector-led Sugar Industry. We, the Commissioners, now have the honour to report, in the attached document, the results of our Enquiry and the recommendations that we have made.

Alvin G. Wint .. (Chairman) Wilfred Baghaloo (Commissioner) Marjorie Henriques . (Commissioner)

Table of Contents
Summary of Main Recommendations Glossary of Terms and Acronyms 1. Introduction 1.1 Terms of Reference 1.2 Procedure 1.3 Background 1.3.1 Historical Precedent 1.3.2 Significant Changes in the Trading Environment 1.3.3 Full Privatisation of the Jamaican Sugar Industry 2. The Sustainability of a Private Sugar-Cane Industry 2.1 Costs of Sugar Production in Jamaica 2.2 Likely Scale of the Industry 2.3 Market Access and Sugar Prices 2.3.1 The EU Market 2.3.2 The US Market 2.3.3 The Domestic Market 2.3.4 World Sugar Prices 2.4 Private Sector Interest in the Industry 2.5 Diversification Prospects 2.6 Environmental Externalities 2.7 Social Externalities 2.8 Conclusions on the Sustainability of a Private Sugar Industry 3. SIA and the Sugar Industry Control Act 4. The Role of Other Key Institutional Actors 4.1 Research and the Role of SIRI 4.2 Marketing and the Role of JCPS 4.3 Organisations Representing Industry Sub-Groups 5. Cane Pricing Formulae and Payment Arrangements 6. Review of Any Other Arrangements 6.1 Importation of Sugar 6.2 Availability of Incentives to the Sugar Industry 6.3 Access of Industry to Accompanying Measures Funds 6.4 Issues of Sugar Cane Ownership 6.5 Access to Lands 6.6 An Industry-Linked Energy Policy 7. Conclusion Appendix 1: Presenters at the 2010 Sugar Industry Enquiry Commission Appendix 2: Providers of Written Submissions to the Enquiry 4 6 7 7 8 9 9 9 10 11 11 13 15 15 15 16 16 16 18 22 23 24 25 29 29 31 33 34 40 40 42 43 44 45 46 47 48 50

Summary of Main Recommendations

In recognition of the important changes taking place in the Jamaican Sugar Industry, particularly in relation to adjustments in the European Unions sugar importation policy and the full privatisation of the Industry, the Government of Jamaica appointed a Sugar Industry Enquiry Commission. This Commission was given the mandate to ascertain if modifications were required in the regulatory and institutional arrangements affecting the Industry in order to support a sustainable private-sector led Industry. The Commission of Enquiry heard from stakeholders within the Industry and a range of other institutions and individuals and arrives at the following broad set of recommendations. More specific recommendations, and the rationale for all recommendations, are elaborated upon in the body of this Report. 1. The Sugar Industry Authority (SIA), headed by a non-executive chair, should continue to function as regulator of the industry, subject to an operational audit to determine its optimal manning level and governance structure, including an assessment of the appropriateness of its movement to Executive Agency Status. The SIA should place a greater focus on using its statutory authority, where necessary, to adjudicate in disputes between farmers and processors. It should also engage in regular reviews of the cane payment formulae and implement a clear bilateral obligation framework for farmers and processors. With the SIA functioning effectively in this capacity, this Commission proposes that there will be no further need for commissions of enquiry into the Jamaican Sugar Industry. The Industry should continue to have a research function, operating through the Sugar Industry Research Institute (SIRI), subject to an operational audit to determine SIRIs optimal manning level. SIRI should operate separately from the SIA, and report to a board which should include individuals with research expertise; and Rural Agricultural Development Authority (RADA) representation, to encourage collaboration between these two agencies involved in the provision of agricultural extension services. SIRIs funding should continue to be sourced through the Sugar Industry. There is value in the continued pooling of sugar. The Jamaica Cane Product Sales Co. (JCPS) should continue to function as a marketing agent of the SIA, subject to an operational audit to determine optimal staffing levels. All marketing arrangements within the Industry should continue to be subject to the general oversight, but not necessarily involvement, of the SIA, in line with the provisions of the existing Sugar Industry Control Act. The cane payment formulae and process should be reviewed by the SIA, addressing in particular, the appropriate payment for sub-standard cane, incorporation of a value for bagasse used in electricity generation, continuous review of the (Factory Recovery Index (FRI) and Jamaica Recovery Cane 4

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Sugar (JRCS) benchmarks, payment structure, review of the appropriate level of mandatory testing of cane, independence of core samplers, and considerations of incorporating quality benchmarks into payments to contractors. 5. There should be no centralisation of the importation of refined sugar, but a continuation of the import licensing system. The Jamaica Customs Department and the Ministry of Industry, Investment & Commerce should improve their levels of surveillance to reduce revenue leakages. The Government of Jamaica should carefully balance the level of duties imposed on refined sugar with the benefits, including the social externalities, associated with an integrated domestic Sugar Industry, particularly in the event of forward vertical integration into sugar refining. All participants in the Export Sugar Industry should be eligible for incentives provided to exporters that allow them to compete on world markets on the basis of having access to inputs as close as possible to world market prices. Incentives to exporters of sugar should be industry-wide and not be determined in an ad-hoc, case-by-case basis. The Accompanying Measures Funds should be available, in grant form, for general purpose agricultural equipment, and in the form of loans, at commercial levels of collateralisation, for equipment that is highly industry or firm-specific. If idle government-owned agricultural lands are available, firms from whatever sector, including the sugar industry, willing to pay at commercial levels should be allowed to lease such lands. Assistance from the relevant government agencies should be made available to identify appropriate lands. The Commission supports the Office of Utility Regulation (OUR)s avoided cost principle for pricing co-generated electricity, with a premium for electricity generated using renewable resources. The Commission recommends that the OUR disseminate its methodology for arriving at avoided cost and continue to review the level of premium for renewable sources of energy that is appropriate in Jamaicas particular circumstances. The Commission also recommends that the GoJ develop a definitive policy on co-generation. The Commission further recommends that GoJ complete, with dispatch, the development of its biofuels policy, including a clear articulation of the role that ethanol produced from local feedstock is expected to play in the development of the local biofuels industry. The Commission further recommends that the GoJ provide policy support, where appropriate, to the Jamaican Rum Industry.

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Glossary of Terms and Acronyms

ACP: AIJFCA: BITU: CAP: CARICOM: CBERA: CBI: CBTPA: CMC: ESOP: ESSJ: EU: FRI: GoJ: JAST: JCPS: JPS: JRCS: MTBE: NEPA: NIC: NWU: OUR: PIOJ: PPA: PwC: SADP: SCJ: SDA: SDE: SIA: SICA: SIRI: SMCJ: SPA: SPFD: STU: RADA: UAWU: WTO: Africa-Caribbean-Pacific The All-Island Jamaica Cane Farmers Association Bustamante Industrial Trade Union Common Agricultural Policy Caribbean Community Caribbean Basin Economic Recovery Act Caribbean Basin Initiative Caribbean Basin Trade Partnership Act Caribbean Molasses Company. (Ja.) Limited Employee Shareholder Ownership Plan Economic and Social Survey of Jamaica European Union Factory Recovery Index Government of Jamaica Jamaica Association of Sugar Technologists Jamaica Cane Products Sales Limited Jamaica Public Service Company Limited Jamaica Recoverable Cane Sugar Methyl-Tertiary-Butyl-Ether National Environment and Planning Agency National Irrigation Commission National Workers Union Office of Utilities Regulation Planning Institute of Jamaica Power Purchase Agreement PricewaterhouseCoopers Sugar Area Development Programme Sugar Company of Jamaica Sugar Dependent Areas Sugar Divestment Enterprise Sugar Industry Authority Sugar Industry Control Act Sugar Industry Research Institute Sugar Manufacturing Corporation of Jamaica Limited. Spirits Pool Association Limited Sugar Producers Federation of Jamaica Sugar Transformation Unit Rural Development Agricultural Authority University and Allied Workers Union World Trade Organization

1.

Introduction

In recognition of the important changes in the Jamaican Sugar Industry, particularly reflected in the imminence of the return to an Industry wholly owned by the private sector and the significant adjustments in the trading environment for Jamaican Sugar, a Commission of Enquiry into the Industry was appointed. The Commission was appointed by the Governor General of Jamaica on April 22, 2010, under the provisions of the Commissions of Enquiry Act, with the following members:
Professor Alvin Wint, Pro Vice Chancellor & Professor of International Business, UWI (Chair) Mr. Wilfred Baghaloo, Consultant, PricewaterhouseCoopers (Commissioner) Mrs. Marjorie Henriques, CD, Former Director General, PIOJ (Commissioner) Mrs. Carol Jones, Former Deputy Financial Secretary, Ministry of Finance (Secretary)

1.1

Terms of Reference

The Commission was appointed with the following terms of reference, as stated in the Proclamation from the Governor General: 1. To enquire into and report on the relevance of the current regulatory, institutional, cane pricing and product marketing arrangements in the Sugar Industry and to make recommendations in respect of changes, if any, to these current arrangements in the national interest; 2. To enquire into and assist in the effective implementation of the development and maintenance of a sustainable private sector-led Sugar Industry by the Government of Jamaica through the Ministry of Agriculture and Fisheries. Specifically, the Commission was charged to: a) Invite and take into account the views of and consult with interested persons and key sugar industry groups/bodies; b) Review the Sugar Industry Control Act and the role of the Sugar Industry Authority; c) Review the role played by other key institutional actors including the SIRI, JCPS, AIJCFA, SMCJ, SPF and the trade unions; d) Review the current cane pricing formula and cane payment arrangements; e) Review the current product marketing arrangements; f) Review any other arrangements in the Sugar Industry of critical importance to the creation of an enabling environment for the

development of a sustainable private sector-led, multi-product Sugar Industry; and g) Make recommendations in respect of (a) and (f) inclusive consistent with the creation of an enabling environment for the development of a sustainable, private sector-led, multi-product Sugar Industry. The Commissioners appointed to serve on the Commission were further enjoined to hold the Enquiry in an open and independent manner for five months commencing on May 1, 2010 and ending by September 30, 2010.

1.2

Procedure

The Commission conducted public hearings on sixteen days between June 14 and July 16, 2010. Key stakeholders in the industry were advised of the timetable for hearings in a meeting chaired by the Minister of Agriculture and Fisheries on June 1, 2010. The General Public was also advised of the timetable for hearings through a press conference, also held on June 1, and through advertisements in the media. The Secretary to the Commission arranged for the establishment of a website on which was posted the schedule of public hearings and all presentations made to the Commission; and arranged for all administrative matters required by the Commission, with the assistance of Mrs. Carol Rodgers, Administrative Assistant, and the support of the Sugar Industry Authority (SIA) and Ministry of Agriculture and Fisheries. Sixty two oral and written submissions from individuals and organisations were made to the Commission. Notes of all presentations and the associated discussion were taken verbatim. Appendix 1 identifies those individuals and organisations heard by the Commission. Additionally, the Commissioners visited two sugar estates, Appleton and Frome, and toured the farms and factories and held meetings with farmers from adjoining communities. The Commission chose not to hold any private meetings with industry stakeholders bearing in mind its mandate to conduct proceedings in an open manner. Where it required additional information or clarification it requested that this information be provided in the form of written submissions. Further, at the outset, all individuals and organisations appearing before the Commission were invited to submit written briefs. The Commission also received written submissions from individuals who were not able to present in person at the Hearings and an institution that did not present, but had an interest in the Commissions deliberations (See Appendix 2); and from individuals who had presented at the Commission but who subsequently, unsolicited by the Commission, provided additional information or clarification on matters raised at the Hearings.

Finally, the Commissioners reviewed all applicable legislation, reports on the Jamaican sugar industry, and the reports from previous commissions of enquiry into the Jamaican Sugar Industry and solicited additional information that was required for it to complete the full, faithful and impartial enquiry mandated in the Governor Generals Proclamation. The Commission Hearings were well attended by key stakeholder groups, especially the Sugar Industry Authority (SIA) and its Sugar Industry Research Institute (SIRI), the AllIsland Jamaica Cane Farmers Association (AIJCFA), the Sugar Manufacturing Corporation of Jamaica (SMCJ) and the three trade unions representing Sugar workers, namely, the Bustamante Industrial Trade Union (BITU), the National Workers Union (NWU) and the University and Allied Workers Union (UAWU). The Commission was conducted at a cost of J$7.5m, inclusive of J$3m provided to facilitate the presentations of key industry sub-groups.

1.3

Background

At least three variables are associated with the appointment of a Commission of Enquiry into the Jamaican Sugar Industry in 2010. 1.3.1 Historical Precedent Previous Commissions of Enquiry Significant Changes in the Trading Environment for Jamaicas Sugar Full Privatisation and Expansion of the Jamaica Sugar Industry Historical Precedent Previous Commissions of Enquiry

Historically, investigations into the Jamaican Sugar Industry have been in the form of commissions of enquiry. The West Indies Royal Commission of 1896-97 began this process. A West Indian Sugar Commission was appointed again, in 1929. Commissions of enquiry were also appointed in 1944, 1959, 1962, 1964, 1966 and 1988. The 1966 Report suggests that the need for commissions of enquiry occurred because for decades conflicts within the Sugar Industry of Jamaica have caused deep public concern. 1.3.2 Significant Changes in the Trading Environment for Jamaicas Sugar

While conflict in the Jamaican Sugar Industry has not been eliminated, the procedures and institutions created in response to the 1966 and 1988 Commissions of Enquiry appear to have contributed significantly to a reduction in intra-industry friction. Consequently, the current investigation into the Jamaican Sugar Industry, though structured in part due to historical precedent, has been triggered less by history and more by fundamental international and local changes affecting the Jamaican Industry. As is well known, the most significant international change relates to Jamaicas access to the European market for sugar. For decades, Jamaican sugar benefited from preferential access to the UK and ultimately the European market through the Commonwealth Scheme of Preferences (1932-1974); the Commonwealth Sugar Agreement (1951-1974);

the African, Caribbean Pacific (ACP) European Community (EC) Lome Conventions (1975-2000), which adopted an European Union (EU)-ACP Sugar Protocol; and the ACP-EU Cotonou Partnership Agreement (2000-2008). Arising from World Trade Organization (WTO) declarations that the EUs agricultural policy was not compliant with WTO rules, the EU embarked upon changes in its Common Agricultural Policy (CAP), to which its preference regime for ACP sugar producers had been linked. These changes ultimately resulted in a 36% reduction in the guaranteed preferential price granted to ACP sugar producers over a four year period ending in 2009, and the abolishing in October 2009 of the ACP-EU Sugar Protocol that had been enshrined in Lome/Cotonou Agreements. Since Europe had long been the primary destination for Jamaicas sugar and the cost structure of the Jamaican Industry has made it uncompetitive by global standards, the loss of the European preferential market has potentially grave consequences for the viability of a Jamaican Sugar Industry that is reliant on export markets. Thus, the significant reduction in preferential access has also triggered a need for careful examination of the sustainability of the Jamaican Sugar Industry. The EU has provided funds to Jamaica and other ACP countries, under the Accompanying Measures for Sugar Programme, to assist in lessening the impact of the loss in trade preferences, and has linked a component of the 2010-2011 funds to be released through this Programme to the Government of Jamaica (GoJ)s review of the regulatory and other arrangements affecting the industry. 1.3.3 Full Privatisation and Expansion of the Jamaican Sugar Industry In 2005, against the background of the pending cuts in preferential prices that the EU had announced in 2003, the Planning Institute of Jamaica (PIOJ), following upon a 2004 request of the Prime Minister, undertook an assessment of the Jamaican Sugar Industry. This assessment led to the development of GoJs Adaptation Strategy for the Industry. The net result of this assessment was the studys conclusion that Jamaicas only chance of maintaining a viable industry in the face of the changed trading conditions was if there was an expansion of cane production, an improvement in yields, an increase in factory utilisation coupled with a factory modernisation programme. These changes would have to be coupled with a more aggressive movement to a sugar cane based industry with multiple end products, including sugar, molasses, bagasse translated into energy production with the potential for co-generation, and ethanol production. Furthermore, these developments relied both on capital injections and improvements in management that were only likely to be forthcoming if the Industry was returned, in its entirety, to the private sector. A key plank, therefore, of the GoJs adaptation strategy for the Sugar Industry was the privatisation of five of the seven sugar estates that were under government ownership in 2005, consequent upon an earlier failed attempt at privatisation.

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By August 2010, two of these five factories had been divested to Jamaican businesses, while the GoJ had signed an agreement with Complant International, a Company jointly owned by the Government of China and private interests in China, for it to purchase the remaining three sugar companies, coupled with an arrangement for long term leases of the adjoining lands. Another trigger, therefore, is the need to review the regulatory, institutional, pricing and marketing arrangements in order to create an enabling environment for the emerging private sector-led, multi-product based Industry, which lies at the core of the GoJs strategy for the development of the Sugar Industry.

2.

The Sustainability of a Private Sugar-Cane Industry

The specific terms of reference assigned to the Commission could be inferred to assume that a private Sugar Cane Industry is sustainable in Jamaica and, therefore, the Commissions principal charge is to assess how changes in existing arrangements can enhance this sustainability. At the same time, the Commissioners were seized of the importance of addressing, as a starting point for an examination of these specific terms of reference, the more general second term of reference, which mandated the Commission to enquire into and assist in the development and maintenance of a sustainable private sector-led Sugar Industry. The Commission did enquire into issues associated with the sustainability of the Industry and believes that it is important to try to capture the perspectives it garnered during hearings and its own perusal of documentation on this subject, particularly in terms of the following dimensions of sustainability: Present and Likely Future Costs of Sugar Production Likely Scale of the Industry Present and Likely Future Market Access and Sugar Prices Private Sector Interest Diversification Prospects Environmental Externalities Social Externalities

2.1

Costs of Sugar Production in Jamaica

Jamaica is a high cost sugar producer by global and regional standards. While an important element of Jamaicas high cost relates to the scale of its sugar operations and the high cost of energy, even more significant is the impact of operational and managerial efficiencies as demonstrated by the very significant intra-island cost variation. A key element of variation is the difference in cost and profitability between government owned and private factories, although there is also wide variation among government-owned

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factories. It is widely known that the Government-owned factories have incurred significant losses. The Commission was unable to obtain access to production costs and profit levels for private factories, but a number of these entities have a long history of continuous business operation. The Ministry of Agriculture, in its presentation to the Commission reported that islandwide costs per pound of sugar are about US$0.26. Mr. Aubyn Hill, who presented to the Commission on behalf of the Government-owned factories, reported costs in the region of US $0.44. per pound in the recent past with the intention of reducing costs to US$0.21 during the coming year. These represent the full cost of production which includes all farm and factory costs. The manager of the lowest cost government factory indicated to the Commissioners that this factory recently produced at a cost of US$0.15 per pound, before interest costs. The PIOJ, in its 2005 study, estimated the average production cost in Jamaica at US$ 0.37 per pound, while reporting information from the Sugar Company of Jamaica (SCJ) which indicated that the full cost of production in five government-owned factories ranged from a low of US$0.22 per pound in the most efficient government owned factory, Frome, to a high of US$0.75 per pound in the least efficient, Long Pond. In the SCJs 2006 Business Plan average production costs were listed as US$0.39 per pound, with Frome, Bernard Lodge and Monymusk, operating at pre-interest costs of US$0.178, US$0.199 and US$0.215 respectively; while Belize, Guyana, Barbados and Trinidad operated at costs of US$0.15, US$0.18, US$0.34 and US$0.55 respectively. Generally, in relation to costs of production, the Commission is sympathetic to the position stated by the PIOJ in its 2005 Report which is that the industry does not have a consensus on the actual cost of production of raw sugar in Jamaica. At the same time, there is clearly a significant gap between the cost of producing sugar in Jamaica relative to production costs in countries regarded as globally efficient. For example, in Australia and Brazil, which are two of the most globally efficient producers, sugar is produced at a cost of about US$ 0.08 per pound at the more efficient factories. Within the Caribbean region, Guyana produced sugar at about US$0.18 per pound in 2007. The Guyanese production cost structure is interesting to Jamaica, because, as reported to the Commission by Derek Little of SIRI, that Industry saw changing fortunes, declining from a production level of 300,000 tonnes annually in the 1980s to 130,000 by 1990, with a turnaround to a production level in excess of 300,000 tonnes by 1999 through a combination of improved agricultural management, proper factory maintenance, the professionalisation of management and the right institutional framework, with targeted government support. The joint presentation to the Commission from the Trade Unions also pointed to the potential of Jamaica learning from the revitalisation of the Guyanese Industry, as it identified the importance of participative management and a narrowing of the trust gap in the Industry as essential to a reduction in costs of production.

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In its 2005 report on recommendations for the sustainability of the Jamaican Sugar Industry, the PIOJ reported in its situational analysis, which drew on the results of its stakeholder dialogue, that the Jamaican Sugar Industry has been characterised as being among the highest cost producers in the world. This is attributed to low land productivity, inefficient field and factory operations, high labour and transportation costs and weaknesses in administration and management structures, among others. The PIOJ study went on to suggest, however, that the Industry could be sustainable in the medium term if a range of recommendations were adopted to effect an increase in yield in field operations of 25% (with average tonnes cane per hectare improving from 64 to 80) and in factory operations of 13% (with the tonnes cane per tonnes sugar (tc/ts) ratio changing from 12 to 10.4); the production of ethanol and co-generation from sugar cane produced resultant on increased productivity in field operations; and the possibility of an expansion into refined sugar production based upon the use of locally produced sugar as feedstock. The PIOJ study did not specify the future target for production costs that would be consistent with industry sustainability. Mr. Aubyn Hill, however, was of the view that the entire Industry needed to, and could with the correct levels of investment and appropriate management; reduce costs to the level of about US$0.12 per pound. This is similar to the level of cost that a 2004 feasibility study conducted by PricewaterhouseCoopers (PwC) on a Jamaican sugar refinery regarded as critical to the viability of such a refinery. The extent of the improvement in productivity, particularly in field operations, that is required to get to the target production costs indicated above is reflected in the current cost of field operations. Based upon information provided by SIRI, the current field costs for producing one tonne of sugar cane vary from J$2,348.43 for cane produced under rain-fed conditions, to J$2,503.42 for cane produced under irrigation. At the 2009 average tonnes cane per tonnes sugar (tc/ts) ratio (for 96 sugar) of 10.61 (Economic and Social Survey of Jamaica (ESSJ), 2009) and the 2009 average exchange rate of J$88.49 to US$1 (ESSJ, 2009), these field costs translate to production costs for sugar of about US$0.13. (Av. Production Cost (2,443.42) * Av. tc/ts (10.61) / pounds per tonne (2,240)/ J$/US Ex. Rate (88.49). Of course, the level of reduction required in production costs that is consistent with a sustainable industry is also linked to the size and scope of the industry, and tied to the likely prices for sugar, and overall revenues available to a Jamaican Sugar-Cane Industry.

2.2

Likely Scale of the Industry

Cane and sugar production are currently at historically low levels. Production levels over the last five years are shown below:

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Cane and Sugar Production in Jamaica: 2005 2009, (000 tonnes) Year Farm Cane Milled Estate Cane Milled Total Cane Sugar*

2005 572 797 1,369 120.3 2006 719 1,026 1,745 142.3 2007 784 1,184 1,968 159.4 2008 644 1,008 1,652 140.9 2009 577 758 1,335** 121.5 ________________________________________________________________________ *: Commercially produced sugar, per crop year (November to October). **: Cane reaped from 26,200 hectares. Source: ESSJ, 2009. There is a consensus within the Sugar Industry that the scale of the Industry has to be increased significantly in order for it to be sustainable. The 2005 PIOJ report on the strategic options for industry sustainability developed two scenarios. Scenario One involved the production of about 200,000 tonnes of raw sugar for domestic (60,000 tonnes); EU (126, 000); and US (11,500) markets. Scenario Two involved the production of about 300,000 tonnes of raw sugar for the above markets, and 83,000 to supply a refinery that would produce refined sugar for local and regional markets. Scenario Ones target of 200,000 tonnes became the Government of Jamaica (GoJ)s target under the Adaptation Strategy for Sugar for 2010, but following on the production levels of 2009, it was clear that this goal was not going to be achieved in the 2010 crop year. Nevertheless the Industry, in submissions from the AIJFCA, the SCMJ and the Ministry of Agriculture & Fisheries, continued to view a production target of between 200,000 and 300,000 tonnes of sugar as essential to its viability. These production targets compare with Jamaicas peak production of sugar of 514,825 tonnes in 1965, produced from cane reaped from 59,773 hectares. They also compare with a rated capacity of Jamaican sugar factories of 336,000 tonnes of cane. In sum, the production targets of 200,000 to 300,000 tonnes are not without historical precedent, nor do they lie outside of the existing capacity of the Jamaican Sugar Industry, but factories have been operating at levels significantly below rated capacity and cane production has been declining rather than expanding. Consequently, it is clear that the viability of the Industry is highly dependent on investment decisions that would increase acreages planted, the yield per hectare, and the scope of factory operations; and on the availability of markets for the sugar that is produced.

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2.3

Market Access and Sugar Prices

There are three prospective markets for Jamaicas raw sugar. 2.3.1 The EU Market

The average price Jamaica received for its sugar during 2009 was $0.28 per pound (calculated from ESSJ, 2009); with 99.98% of Jamaicas sugar exports in that year going to the European Union. The final price reduction of 18% from the EU did not take effect until October 2009, suggesting that future EU prices in the near term will be closer to about US$0.24 per pound. While future changes in EU prices are possible, the significant price reductions experienced by ACP sugar producers in the recent past are unlikely to be repeated in the near to medium term. Upon the abolition of the Lome/Cotonou Sugar Protocol in October 2009, CARIFORUM countries, including Jamaica, which had earlier signed a WTOcompliant Economic Partnership Agreement with the EU, entered into a six year transition arrangement. During this transition period, these countries will receive a guaranteed price for exports that can be no less than 90% of the EUs reference price. Between 2012 and 2015 prices will be based upon market forces within broad quota arrangements that will not be country-specific, with the CARIFORUM region having a quota of 530,000 tonnes. Beyond 2015, exports of sugar to the EU will be quota-free and duty-free under the CARIFORUM-EU EPA, with the implication that Jamaicas ability to take advantage of this market will depend upon the competitiveness of its Industry relative to all other producers with duty free and quota-free access. Even though EU sugar prices continue to be above world market price levels, sugar is an industry that is subject to significant levels of government intervention. Dr Haraksingh, a Caribbean sugar expert who appeared before the Commission, described it as the most volatile commodity in world trade. As a consequence most of the World price for sugar is a residual price, with Dr. Haraksingh estimating that only approximately 23% of the worlds sugar production trades at the world market price. 2.3.2 The US Market

As reported to the Commission by the Ministry of Foreign Affairs, in addition to its access to the EU market, Jamaica continues to enjoy preferential access to the US market under the terms of the Caribbean Basin Economic Recovery Act (CBERA) and the Caribbean Basin Trade Partnership Act (CBTPA). The CBERA and CBTPA provide duty-free access to the US market for a wide range of products, including sugar, from Caribbean Basin Initiative (CBI) countries. As a non-reciprocal arrangement the CBERA/CBTPA requires a waiver in the WTO from its Most-Favoured-Nation (MFN) provision and such a waiver has been granted to

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the US by the WTO through 2014. Jamaicas current quota under this programme is 11,500 metric tones, which it plans to fully supply in 2010, since with the changes in the EU regime the US market is now priced more attractively than the EU market. 2.3.3 The Domestic Market

There are two potential components of the domestic market. SIA reports that Jamaica imported about 53,000 tonnes of brown sugar per year between 2006 and 2008; and JCPS reports imports of 57,000 tonnes in 2009. This is a market that would be available to the local Industry in the event of a reduction in the demand of, or capacity to produce for, external markets. It is important, however, to note that the Industry already benefits from imports of brown sugar. Coupled with the trading profits on refined sugar imported by JCPS, the profits on imported brown sugar represent revenue to the Industry of about J$650m. The profits on the margins between import and domestic prices for all sugar, brown and refined, imported by JCPS, are included in the Industrys pooled revenue. Jamaica also has duty free access to the CARICOM market for any sugar that is refined in Jamaica. A study by PricewaterhouseCoopers estimated that the total regional demand for refined sugar was 230,000 tonnes, of which it was estimated that Jamaica could supply 65,000, which was close to the level of imported refined sugar to Jamaica, between 1999 and 2002. This study also estimated that a refinery in Jamaica would only be feasible if the refinery could gain access to raw sugar at a cost of about US$0.12 per pound. 2.3.4 World Sugar Prices.

Forecasting sugar prices is challenging. Recent increases in the world market price for sugar, for example, were unexpected in many quarters. Projections suggest that world prices could rise in the medium term as production of beet sugar declines in Europe with the continued reform of the European Common Agricultural Policy (CAP); as sugar cane is used for ethanol production; and as significant swathes of the Chinese and Indian populations experience increased standards of living which are translated into increased consumption of sugar-based products.

2.4 Private Sector Interest in the Industry

One of the key indicators of the level of sustainability of the Jamaican Sugar Industry as a private Industry is the level of interest from the local and international private sectors. In terms of the Jamaican private sector the Commission came to the view that, problems notwithstanding, there is sustained and significant interest. This interest has several antecedents and has manifested itself in private investment. The antecedents include Jamaicas long history of private involvement in the Sugar Industry. Two of Jamaicas most successful sugar estates and distilleries, Appleton and Worthy Park, have operated continuously for centuries. In its presentation to the Commission, for example, the current operators of Worthy Park pointed out that the

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Estate was patented in 1667; that raw sugar has been produced at the same location every year since 1720; that rum has been produced over the same period (less forty years) and that the current family of proprietors have operated the estate continuously since 1918. Similarly, Appleton has been in sugar and rum production since 1749. Local private sector interest in the growing of sugar cane is also linked to an on-going risk assessment process by farmers. In his presentation to the Commission, Professor Anthony Clayton pointed to the fact that the 1897 Royal Commission of Enquiry recommended that Jamaica diversify from sugar cane into the production of other tropical products. There has, indeed, been considerable diversification of the Jamaican economy since sugar production has declined continuously for centuries. While Jamaica was once the worlds largest exporter of sugar, for example, it currently has no impact on the global sugar market, with a consequent decline in the economic impact of the Industry within Jamaica. But the reduction in land under sugar cane cultivation has not translated into production of other agricultural crops. In its presentation to the Commission, for example, the National Irrigation Commission (NIC) indicated that the ruinate lands that had come out of cane production in the Clarendon and St. Catherine region represent as much as 60% of the lands that continued to be used for cane. There continues to be interest in the production of cane in Jamaica and other countries because, as Dr. Haraksingh pointed out to the Commission, sugar withstands normal agriculture risk better than other agricultural products. Dr. Patricia Northover, in papers presented to the Commission, describes the cane plant as an ecologically optimally adapted plant for the (Caribbean) region. In particular, sugar cane has tended to be more resistant to diseases than other tropical crops. Thus, Jamaicas diversification into orchard crops such as papaya, citrus and coconuts has advanced less rapidly because of disease challenges. The sugar cane is less vulnerable to hurricanes than crops such as bananas, coconuts and tropical flowers. And, particularly relevant in the Jamaican case, the sugar cane is less vulnerable than other agricultural crops to praedial larceny. The private sector interest has manifested itself in on-going investment in the two historically successful private estates. Paul Henriques, of Appleton Estates, pointed out to Commissioners that he was of the view that the biggest problem in the industry has been a lack of investment. Appleton has tried to rectify this problem with an on-going programme of capital investment in farms, factories and distilleries, estimated at US$3m per year over the last several years, with the new boiler that it recently acquired operating at Californias relatively stringent environmental standards. There has also been on-going investment in farming by the independent farmers who farm a significant proportion of the cane that is milled. Mr Roger Clarke, an independent farmer and former Minister of Agriculture, in his presentation to the Commission, spoke

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to investments made by independent farmers, while also indicating that the financing of the levels of investment required by the Industry is a significant challenge. The interest of the local private sector is also manifest in the recent acquisitions by two local entities of two of the five estates that had been owned by the GoJ since the mid1990s. These private firms have also invested in their facilities. In the case of Golden Grove, the Commission was advised that the investors had spent US$4.5m in recent capital investments, but these investors still bemoaned the fact that significant investments continue to be required as the boilers were built in 1924 and, despite refurbishment, the factory still looked as if it was built before the Second World War. The interest of the international investment community may be gauged by the fact that the GoJ received several expressions of interest in the acquisition of the three remaining estates and has signed an agreement for the acquisition of all three estates with one of the companies, Complant International Sugar Industry Co. Ltd. The interest of the private sector, however, is not without reservation. Local private firms involved in all aspects of the sugar industry: farming, processing, harvesting and hauling, indicate that they are challenged in their operations and require various forms of reform within the Industry, and in cases policy support from the GoJ, if their firms are to be sustainable in the context of the changes that have taken place in export markets.

2.5 Diversification Prospects

The GoJs strategy for the development of a sustainable Industry is predicated on the need for the Industry to make a transition from a sugar industry to a sugar cane industry. This corresponds to a global trend. Dr. Andrew Pearson, in a written submission to the Commission, advocates this trend for Jamaica.
The sugar cane plant is one of the most efficient converters of solar energy to chemical energy. The focus of the Jamaican Sugar Industry should be on an integrated sugar cane processing product mix, which includes rum and electrical power, with emphasis on value-added products rather than raw sugar. Sugar cane cultivation and processing technology has evolved to greater levels of efficiency which are dependent upon scale and good management. The area of cane required to optimally feed a modern sugar factory has constantly increased and currently stands at 12-13,000 hectares. The newest sugar factory in the Caribbean is at Skeldon, in Guyana and uses the more energy and labour-efficient diffusion technology, replacing the dated grinding by trains of massive steel roller mill crushers. It has capacity to produce 120,000 tonnes of sugar annually from 13,800 hectares of cane, and sells 10 MW surplus power generated by the bagassefed boilers to the national grid.

During the hearings of the Commission, while there was a clear recognition from local sugar owners of the need to improve efficiency and factory throughput levels, there was less of a focus on diversification into either ethanol production or co-generation in a form that would allow for sale of electricity to the national grid, even though it is already the norm within Jamaican sugar facilities for self-generation of electricity.

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Co-Generation During the Hearings, the Commissioners were informed that there are opportunities in the area of co-generation. In its presentation to the Commission, for example, the Office of Utilities Regulation (OUR) indicated that in Guadeloupe, the sugar industry supplied fifty percent of electricity to the national grid at a cost of US$0.07 per kwh. One of the issues raised to Commissioners with respect to the selling of electricity to the national grid was that in at least some of the sugar factories the electricity cycle differed from the cycle used by the national grid. For such factories, the sale of electricity to the national grid would not only require the production of surplus electricity but an investment into equipment that could allow for the requisite cycle conversion. In promoting Co-generation as an opportunity the Commission is of the view that the GoJ needs to implement a definitive policy framework addressing: 1) The price of co-generation. Currently, the OUR has an avoided cost price of US$0.104 for firm supply and US$0.0888 for non-firm supply plus a premium for renewable energy of up to 15%. However, much higher prices for co-generated electricity have been discussed in negotiations with prospective investors. This inconsistency has to be addressed. 2) A clear definition of co-generation in the context of a sugar factory. 3) The role of the OUR in constructing a Power Purchase Agreement (PPA) with the Jamaica Public Service Company Ltd, the only national distributor of electricity. 4) The policy with respect to the proportion of Biomass/renewable energy represented in the Countrys total energy demand. The OUR during its presentation to the Commission stated that the intention was to achieve a level of 15% by 2030, but it is not clear what plans are contemplated in order to achieve this target. Ethanol As presented to the Commission by Petrojam Ethanol Ltd, in terms of ethanol production, three sets of opportunities have been under discussion in Jamaica. (1) The export of anhydrous fuel grade ethanol to the United States of America under the CBERA and CBTPA based upon the conversion of imported hydrous ethanol. This process does not require any local feedstock, but conceivably, could be one of the options available to firms in the Sugar Industry which establish ethanol processing facilities. Although Jamaica has duty free access to the EU for anhydrous ethanol, under the EU rules of origin

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Jamaica could only export ethanol that has been produced from local feedstock. (2) The production of anhydrous ethanol from local feedstock for sale on export markets, also under the provisions of the preferential arrangements for the marketing of such products that Jamaica has with the United States. Because Brazil is by far the worlds most efficient producer of ethanol, Jamaicas only ability to compete in this commodity market using local feedstock is through reliance on its access to preferential market arrangements. (3) The production of fuel grade ethanol for the Jamaican local market. In November 2008, the Government introduced 10.0% ethanol as a fuel blend enhancer for motor engines. In November 2009, the Government mandated the use of ethanol blended fuel for motor engines, phasing out the use of the environmentally harmful petroleum based Methyl-Tertiary-Butyl-Ether (MTBE), and immediately creating a market for ethanol in the transport sector estimated at 70m litres per annum. In an appendix to the presentation from Petrojam Ethanol, the Commission was reminded that Jamaica lacks the land mass to realise the economies of scale of other major ethanol producing countries such as Brazil, Australia and the USA. Ethanol production in Jamaica, therefore, is likely to suffer from a familiar litany of problems: low land productivity, low cane quality, high content of extraneous matter, inefficient field and factory operations, high transportation costs, weaknesses in administration and management structures, mechanical breakdown in factories et al. On the other hand, this Report points out that Jamaica is better suited to a cane ethanol industry than any other Caribbean island nation, with the exception of Cuba. It is fair to say that opportunities for diversification into ethanol production have been greeted with lukewarm enthusiasm by local investors in the Jamaican sugar industry although the Chairman of the Sugar Divestment Enterprise indicated that the internal rate of return from such investments could be as high as 188% assuming a price of US$1.50 per litre. One of the issues raised by local producers of sugar with integrated rum operations was that only 50% of the molasses used in the production of rum was obtained locally. For these entities, increases in the production of molasses for rum processing seemed to be a higher priority than diversification into ethanol production. At the same time, the Commission understands that Complant International Sugar Industry Co. Ltd. agreed to invest with an intention, captured in its Memorandum of Understanding with the GoJ, to engage in a process of diversification that includes ethanol production, particularly for the local market, linked to a GoJ commitment to propose legislation for an E25 ethanol/gasoline blend, co-generation, and the possibility of extending operations into the refining of sugar. The extension into sugar refining and ethanol production is captured in Complants Stage 2 Development Plan.

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In terms of the sustainability of sugar-cane based diversification, a cautionary note provided to the Commission in the presentation from Professor Clayton is the potentially short-lived nature of ethanol derived from sugar cane as a commercially viable source of energy. In his presentation to the Commission, Professor Clayton also pointed to examples of higher value-added products, such as nutraceuticals, which could form the basis of diversification efforts, but acknowledged that previous such presentations had elicited little interest from private investors across the Jamaican landscape. Rum Jamaica has had a long history of rum processing based on the supply of local molasses from local sugar manufacturers. Over a prolonged period the demand for local molasses has outstripped the supply resulting in the importation of molasses. In his presentation to the Commission, Mr. Evon Brown in his capacity as CEO of National Rums of Jamaica Limited stated that Jamaicas costs are approximately 25% higher than those of our regional competitors. and Jamaica runs the risk of being unable to compete in a liberalised, globalised market . He attributed this to the high shipping and handling costs associated with the importing of molasses, which, together with oil, account for 80% of the total cost of producing rum. Despite the challenges the local rum manufacturers face, the demand for Jamaican rum, locally and internationally remains strong and this creates an opportunity for existing rum manufacturers to expand their operations and for new entrants, particularly, those who recently acquired the Government factories. To encourage new investment in the rum industry, particularly in the context of the potential challenges faced by the Jamaican industry given recent developments with Diageo and its arrangements with the US Virgin islands, the Commission recommends that the GoJ: 1) Continue to allow Caribbean Molasses Association to import molasses at landed prices that are the equivalent of world market prices. The imposition of a duty on imported molasses, which the Commission heard is being considered, is not compatible with this principle. 2) Review the taxation structure to ensure a level playing field for rum manufacturers relative to importers of alcohol, with a focus on taxing all alcohol products on their alcohol content, rather than the taxation approach adopted under the current ad-valorem system. 3) Implement practical and reasonable environmental rules which are compatible with those that apply in other countries that approximate Jamaicas level of environmental vulnerability. 4) Vigorously protect the Jamaican rum brand in international markets.

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2.6 Environmental Externalities

There are a number of variables that make issues of the sustainability of industries controlled by private sector firms particularly important to national policy makers. One such variable, which is relevant to the assessment of the Jamaican Sugar Industry, exists in circumstances where firm level profitability cannot be readily equated with national interest because of the existence of distortions such as protection. Another is linked to the issue of externalities. In circumstances where private firms generate benefits or incur costs for the nation state that are not readily captured in their financial statements, there is a need to reconcile private and national costs and benefits. In his submission, Professor Clayton pointed out to the Commission that Sugar Cane production has had deleterious environmental consequences in countries all over the world because of the resulting impact on loss of wetlands and negative impacts on biodiversity. Indeed, a 2009 study Professor Clayton led for the United Nations Environment Programme notes, referencing a 2004 World Wildlife Fund Study on Sugar and the Environment stated that the production of sugarcane has probably caused a greater loss of biodiversity than any other single crop in the world due to the destruction of wetlands for plantations, intensive water use, heavy dependence on agrochemicals and high levels of wastewater discharged during the production process. Professor Clayton also noted, however, that many of these effects would have resulted from the initial entry into sugar cane production. Currently, the environmental impact associated with the Industry would be determined more by its operations caused, for example, by surges of cane mill effluents discharged directly into streams and ending up in coastal waters, and the run off of agricultural chemicals. This is also true of a number of other agricultural crops. The Commission heard from the National Environmental and Planning Agency (NEPA) on the environmental effects of the Sugar Industry. NEPA expressed concerns about the poor environmental record of the Sugar Industry and about the effects of practices, such as the harvesting of cane by burning which produces environmental toxins that are carcinogenic. It should be pointed out that the Commission heard that a number of farms, albeit representing only a small portion of the total cane crop, are currently harvesting cane green, in part as a response to these environmental concerns. It is expected that an increasing portion of the Industry will harvest cane green as it retools and modernises. NEPA also acknowledged the positive environmental elements of the industry in terms of absorption of carbon dioxide, and improvement in the aesthetic quality of the environment and indicated that it has collaborated with the Industry in developing environmental codes of practice for farms and factories.

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The Sugar Divestment Enterprise has worked with NEPA to develop a plan for environmental compliance in relation to the divestment process. The Commissioners were able to review the Industrys Environmental Code of Practice developed by a multiagency team, which included representatives from the Industry, and the Commission heard from Appleton Estates on the investments and procedural changes being made to increase compliance with national environmental standards. One other area of environmental externality was identified in the joint presentation of the Trade Unions. The Unions argued that workers in the Sugar Industry were exposed to poor safety and health conditions and practices, with the government-owned factories implementing fewer mitigation measures, through comprehensive occupational health and safety measures, to deal with this level of exposure than privately owned factories. Occupational health and safety issues that required addressing including adequate clothing and protection for workers, the availability of adequate volumes of potable drinking water for workers while working in the fields, availability of sanitary conveniences for field workers while in the fields, places for rest and eating facilities for field workers and analysis and prevention of occupational diseases such as bagassosis, which is a respiratory problem workers directly exposed to bagasse can develop. The position of the Trade Unions with respect to health and safety was reinforced by the presentation to the Commission from the Ministry of Labour and Social Security. While sugar factories were required to have planned safety programmes and designated safety officers, the Commission was informed that none of the Jamaican sugar factories were fully compliant with these requirements, although the Commission was advised that some facilities had improved significantly in the area of health and safety.

2.7 Social Externalities

The Sugar Industry has long past its apogee in terms of its economic contribution to Jamaica, and, indeed may well be at its nadir, but it continues to represent a large geographically dispersed continuous manufacturing operation, the largest agro-processing operation and one of the largest employers of labour. In 2009, employment in the Sugar Industry was 35,000, as estimated by trade unions (SMCJ uses the 38,000 estimated in the 2005 PIOJ study). The 35,000 workers represent 2.75% of the 2009 labour force; while indirect employment is estimated at 100,000 persons (Ministry of Agriculture & Fisheries). The revenues generated by the Industry represented about 0.75% of GDP. In addition, because the Sugar Industry is the most geographically dispersed goods producing sector of the Jamaican economy, one of the significant concerns linked to the sustainability of the industry is the social dislocation that could result from the closure of all or segments of the Jamaican Sugar Industry. Dr. Northover, in papers presented to the Commission, focused on the importance of the positive social externalities associated with the Industry with respect to supporting the rural social economy and ameliorating rural poverty and rural-urban drift. This concern is

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exacerbated because of the on-going process of rural-urban migration that has occurred, the visible unemployment and underemployment of individuals in Jamaicas urban centres and Jamaicas world-leading position with respect to urban-dominated, violent crime. Relatedly, the Sugar estates have long played a social role within their communities, providing electricity, housing, health services and supporting education and other community services. Notably, in areas where there have been closures of sugar operations, there has been limited development of alternative economic activities and the communities show the visible loss of economic and social support. The GoJ has already initiated a formal programme, the Sugar Area Development Programme (SADP) to mitigate the social and economic fallout from the decline in the Sugar Industry. The SADP is financed by a component of the Accompanying Measures Funds provided by the EU. The target areas are those communities surrounding the existing sugar estates (Frome, Appleton, Long Pond/Hampden, Monymusk, Worthy Park, Bernard Lodge and St. Thomas Sugar Company), collectively referred to as Sugar Dependent Areas (SDAs); and the target groups are workers who are or were employed by sugar estates and small cane farmers. One of the highest priorities of the SADP is to ensure that displaced sugar workers living in SDAs do not suffer from a lack of adequate social services during the period of sugar transformation. Another is to identify alternative economic activities for displaced workers. The SADP is being managed by the Sugar Transformation Unit (STU) of the Ministry of Agriculture and Fisheries.

2.8 Conclusions on the Sustainability of a Private Sugar Industry

This Commission offers no consensus position on the long term sustainability of a private Sugar Industry in Jamaica. There are too many imponderables and unknowables with respect to investment and managerial decisions to be taken by private sector operators, policies to be pursued by government and changes in global market conditions. It is clear that there are opportunities based upon Jamaicas history and infrastructure in this Industry, the interest of private sector groups from within and outside the Country, and the fact that, despite recent changes, this Industry is likely to face a more benign global trading environment for Jamaican producers than other agricultural or agro-processed products. There are also, however, significant risks associated with inertia. These risks are not insignificant given the gap between production costs in Jamaica and elsewhere. In this regard, there is also the risk that the Jamaican Government takes the position that the social externalities are so far reaching that the industry must be supported at any cost to the nation. If the industry is to be supported based upon social externalities, then, as far as possible, these should quantified, and the support levels aligned to those estimated costs.

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In Jamaicas recent history, privatisation efforts have floundered, in part, because the too important to be allowed to fail syndrome ensured that privatisation left the people of Jamaica absorbing a contingent liability and generating a moral hazard, and private operators in a position in which if they succeeded it was their success, but if they failed it was the Countrys failure. These efforts have also been negatively impacted by the failure of GoJ to implement obligations, particularly in the areas of finance and governance, on a timely basis and on a philosophy of privatisation that focused primarily on ridding the state of financial burdens, rather than on a clear balance between state and private skill sets and the complementary state and private actions required to generate economic growth. It is clear that the long term sustainability of the Industry is not possible in the context of the operation of a business as usual approach on the part of private operators or the GoJ. It is against this background that the remainder of this report focuses on changes in the institutional, regulatory and support arrangements within the Industry that can aid its sustainability within the framework of a national and not just an industry-specific interest, while addressing items b to g of the Commissions Terms of Reference.

3.

SIA and the Sugar Industry Control Act

The SIA, through the authority granted to it in the Sugar Industry Control Act (SICA), is the regulator of the Sugar Industry. The Commission was charged to review the Sugar Industry Control Act and the role of the Sugar Industry Authority (Terms of Reference B). The Commissions overall conclusion is that there continues to be a need for governmental regulation of the sugar industry, as is the case all over the world, including South Africa, India, Kenya, Mauritius, for example. The SIA was introduced in 1970, resulting from the recommendation of the 1966 Commission of Enquiry. The principal rationale for its creation was the need to have an independent authority with statutory powers to deal with the conflicts that arose between elements within the industry. It was these conflicts that led to the need to establish five commissions of enquiry in the two decades leading up to the 1966 Enquiry. One measure of the success of the SIA in resolving disputes between key groups within the Industry was that in the two decades after its formation only one commission of enquiry was established. The Sugar Industry in Jamaica, as in other sugar-producing countries, is unusual in requiring regulation based upon the need to resolve intra-industry disputes. Most industries are regulated to resolve conflicts between the particular industry and its consumers. The sugar industry differs because of the inter-connectedness of farmers and millers. Millers need a reliable source of freshly reaped cane and farmers need to get their cane to processing facilities quickly with a guarantee that the cane will be purchased.

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Most countries that operate sugar cane industries have determined that the most effective way of meeting both of these requirements is through the registration of farmers to geographically proximate processing facilities. The oversight of such a registration process, however, is best done via an independent authority, which also has to be involved in developing systems to mitigate the monopsonistic risks that farmers face when they are registered to supply cane to particular factories. All of the key institutional players within the Industry acknowledge the continued importance of regulation, but there is a widely-held concern, best articulated by the Sugar Manufacturing Corporation of Jamaica (SMCJ) about the need to reduce the regulatory and other central administrative costs associated with the operations of the Industry. The Commission agrees with this concern, but is not in a position to support the recommendations of the SMCJ that the SIA staff be reduced from 24 to 4 (inclusive of no executive function). The Commission does recommend that the Ministry of Agriculture & Fisheries initiate an operational audit of the SIA to determine the appropriate manning levels, and particular governance structure, in relation to the regulatory roles that need to be performed. While the Commission does not support the position of the SMCJ that SIA staff should perform no executive function it is of the view that the Chairmanship of the SIA should be non-executive. The Commission is also of the view that, given the importance of the SIA operating with alacrity in the execution of its duties, an assessment should be made as to the appropriateness of its moving to Executive Agency status. The Commission further proposes that the SIAs regulatory role should focus on mitigating issues of potential conflict between key groups within the Industry, in areas such as: Dispute Settlement; Registration of cane farmers to factories; development and monitoring of a bilateral obligation framework between farmers and factories; arbitration of issues related to registration; Quality Control of Sugar from production to shipping Monitoring and oversight of factory/field operations via harvesting committees Administration of the Core Sampling Process Pooling Arrangements facilitating Industry-wide revenue sharing Extension of Loans, under particular circumstances

The Commission is not of the view that the SIA should be responsible for activities, as recommended by the AIJCFA, which it believes are properly the preserve of other units of Government. These include:

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leading in diplomatic initiatives; ensuring that divested entities fulfil the terms and conditions of their agreements.

Farmer Registration. While the Commission is in support of the continuation of a process of farmer registration to factories, it agrees with the concern expressed by the AIJCFA that the current procedures are imbalanced. It is in this regard, that it advocates that the SIA develop a bilateral obligation framework. As farmers are obliged to deliver sugar cane only to a specific factory, factories must be obliged to receive this cane or pay appropriate penalties if, for example, the factory closes without sufficient warning or is otherwise unable to accept cane from registered farmers, during the official period of operations as agreed between SIA and the factory, in circumstances where the factory is not able to rely on force majeure clauses that are contractually standard. The penalty imposed by the SIA could, for example, represent the cost of transferring the farmers cane to the closest available factory. Revision of Cane Payment Formula. The Commissions suggestions for revision of the cane payment formula, as captured in section 5 of this report, would form part of this bilateral obligation framework, since a key obligation of factories is to pay farmers based upon the cane payment formula, but so, too, would be the matter of the treatment of substandard cane, and the farmers reasonable expectation that the sucrose content of their cane would be tested immediately upon delivery to the factory. In this regard, SIA, the industry regulator with responsibility for testing for the sucrose content of cane, also has a key role to play in balancing the bilateral obligations between farmers and factories. Board Structure One of the areas brought to the attention of the Commission by both the SMCJ and the AIJCFA was the need to revisit the structure of the board of the SIA. The Commission agrees with this need. The Board of most regulators is completely independent of the industry that is being regulated, and, as such, members of the industry are not allowed to serve on the board. This is true, for example, of financial regulators, utility regulators, broadcasting regulators. As is common in most industry regulators, however, these regulators are regulating the interaction between the industry and its consumers. Since the SIA is primarily regulating intra-industry relations, there is a justification for industry representation on its board. The Commissioners do agree, however, with both the SMCJ and the AIJCFA about the need to broaden the membership of the SIA board to include individuals who are not representing industry groups. The Chairman of the SIA Board should continue to be independent of the industry, but also, as stated above, in line with general GoJ policy and accepted corporate governance principles, be non-executive. Both the AIJCFA and the SMCJ have made proposals about the specific organisations and areas of expertise to be represented on the Board. The Commission is not of the view that it is appropriate for it to specify board composition in such detail, but

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agrees with the general principle of creating a Board with an appropriate mix of expertise and non-industry representation. SIA Funding Currently the SIA is funded by the industry. This is not unusual for regulatory bodies. Funding by the industry seems particularly appropriate for a regulatory body whose principal function is to mediate among groups that operate within the industry. The Commission proposes a continuation of the current formula for funding the SIA. Marketing Oversight As it now stands, the SIA, under Section 6 of SICA is required to make arrangements for the marketing of sugar and molasses for local consumption and for export and for these purposes has the power to review all existing policies in relation to the marketing of sugar and molasses. The Commission is of the view that SIA should continue to have oversight over marketing arrangements because of the highly integrated nature of the industry, as discussed further in the Section 4.1.2, but that its oversight powers be very broadly defined. The Commission is in agreement with a submission from the AIJCFA which interprets this section of SICA as specifying that the law does not require SIA to act as either principal or agent with respect to marketing activities. Although, for example, the marketing of molasses is conducted principally through the Spirits Pool Association Limited (SPA), and its subsidiary, Caribbean Molasses Company (Ja) Limited (CMC), the SIA has statutory oversight of these arrangements. The Commission is not of the view that its proposals require any significant changes to the SICA. One suggested change is a modification in the fines that can be imposed by the SIA. The maximum fine of J$100 for failing to provide, or providing false, information to the SIA in 11 (2) (c) seems particularly anachronistic. The bilateral framework the Commission proposes can, the Commissioners believe, be accommodated in Part VIII of the Act which gives the SIA the authority, with ministerial approval, to make regulations for the carrying out of the provisions of the Act, including provisions with respect to the registration of cane farmers and the conditions with respect to the delivery, measurement, examination and testing of canes. It is these regulations that are currently used to operationalise the relationship between millers and farmers in areas such as establishment of harvesting committees, conditions under which factories can classify cane as sub-standard, determination of efficiency levels and other elements of the cane pricing formula, and so forth.

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4. The Role of Other Key Institutional Actors

The role of other key institutional actors is divided into two groupings: actors operating under the authority granted to the SIA under the Sugar Industry Control Act; and institutions that represent industry sub-groups. The Sugar Industry Research Institute (SIRI) operates as a subsidiary of SIA under Section 5 of the SICA Act which stipulates that It shall be lawful for the Authority to undertake, foster and coordinate scientific research in relation to the industry, and encourage the application of the results of such research to the development of the Industry Jamaica Cane Product Sales Ltd. (JCPS) is a private company that has been contracted to market sugar on behalf of the SIA under Section 6 of the SICA which stipulates that the Authority shall make arrangements for the marketing of sugar and molasses for local consumption and for export.

4.1

Research and the Role of SIRI

SIRI was formed in 1973 as a department of the recently formed SIA. Its forerunner was the research department of the Sugar Manufacturers Association, established in 1942. At the time of the 1966 Commission of Enquiry the research department of the SMA coexisted with a less well developed research undertaking operated by the Cane Farmers, and that Commission recommended the consolidation of these research operations into an entity that would conduct research on behalf of the entire industry. Currently, SIRI, which since 2000 has had all of its operations centralised in Mandeville, comprises three departments: agricultural services, which include its extension operation; factory services; and central services. SIRI has a current staff complement of 72 persons. The SMCJ stated its cost as J$204m. In documentation provided to the Commission by SIRI, the total cost of SIRI in 20092010 was J$177.5m. Industry groups did express concerns during the Commission hearings at the cost of SIRIs operations while the Commission heard mixed reports about the value of the research support provided. One of the reasons that the costs of SIRI, and SIA, featured so prominently in the deliberations of the Commission is the fact that the operations of SIA and SIRI are funded directly by the Industry through a cess on revenues derived from the sale of sugar. Against this background, the SMCJ proposed that SIRI be replaced by a Research and Development Committee, appointed by the SIA with balanced representation from growers and manufacturers as well as independents and a chairperson. This Committee would be much leaner than the current SIRI. It would have fifteen staff members, a cost of J$108m and no involvement in extension activity.

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This R& D Committee would be funded in the same manner in which SIRI is currently funded, through the cess that funds the SIA. The AIJCFA, on the other hand, proposed that SIRI should continue the provision of extension services but be removed from the SIA, be independently managed by the SMCJ and the AIJCFA, and be financed, not by the domestic sugar industry, but by sugar users through a cess on imported and refined sugar. The Commission concurs with the view that SIRI is relatively costly in relation to the size of the Industry it supports, especially if it is viewed primarily as a research institute. It is not able to agree with the SMCJ that the appropriate manning level of the Institute is fifteen persons, but recommends that an operational audit be conducted to establish the appropriate manning level in the context of the current and likely future scope of the Industry. It is important to note that SIRI performs several different roles. SIRI in submissions to the Commission indicate that 11.4% of costs are spent on laboratory services to establish the purity of sugar; 15% for the core sampling activity; and close to 26% on extension services. The Commission is of the view that extension services in cane farming continue to be required. In fact the Commission is of the view that the extension services provided to farmers, especially small farmers, may need to be expanded. Currently, SIRI operates with a total of twelve extension officers, twelve of whom are field officers, in an Industry with some 6,000 independent farmers. In deliberations at the Commission, the Rural Agricultural Development Authority (RADA) indicated that it is not opposed to an involvement in extension services for cane farming alongside its existing extension services. Indeed, in its presentation to the Commission, RADA pointed out that it has recently been asked to provide extension services for some growers of commodity products. It is currently in the process of assessing the role of commodity boards and seeking to determine whether or not it is in a position to provide extension services to a broader range of these groups of farmers. The Commission does have concerns, which are shared by farmers in the Industry, about RADAs capacity in this area, and the potential loss of focus if extension services for cane were to be fully transferred to RADA, but believes that where there are possibilities for collaboration and consolidation these should be explored. In terms of funding, there is an argument for funding research and extension services for this Industry from public funds, in a similar manner to the way in which research and extension services are funded for the agricultural sector as a whole, with the exception of commodities managed through commodity boards. At the same time, there is a level of accountability and responsiveness that is achieved by direct industry funding that ought not to be overlooked. Also, there are aspects of SIRIs current operations which are directly related to SIAs regulatory role and represent technical services, and not research. These services should be funded by the Industry. They should be paid for by SIA and contracted out to SIRI, given SIRIs existing technical capacity in these areas.

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The Industry benefits from subsidy, because, as noted in Section 2.3.3 profits from the importation of raw and refined sugar, estimated by the JCPS to amount to as much as J$700m, are included in total industry revenue. Consequently, there is already a level of public funding for activities within the Industry, a component of which should be dedicated to the funding of the research and extension services of SIRI. The Commission recommends that SIRI be separated from the SIA, and report to an independent board to give greater focus to its mandate to provide research and extension services. The Commission believes that the funding of SIRI by the Industry should continue, while recognising that there is a level of public subsidy from which the industry benefits, a component of which should be dedicated to funding the research and extension operations of SIRI. The Commissions proposal should not involve any new costs in governance or administration. SIRI should report to a board, comprising industry representatives and independent individuals with experience in research and extension services and including representation from RADA to facilitate greater collaboration between these two agencies involved in agricultural extension activities.

4.2

Marketing and the Role of JCPS

JCPS is a private company, jointly owned by the SMCJ and the AIJCFA. The Board of the JCPS includes representation from these two Organisations, the Trade Unions and the SIA. It was created to market sugar for the Industry on behalf of the SIA, under the SIAs authority to market sugar provided by section 5 of SICA. Prior to the creation of the JCPS, this function resided within SIA, but it was felt that a more focused entity, operating as a private company, would function more effectively in pursuing this marketing role and ensuring that the funds thus obtained remained within the exclusive domain of the industry. JCPS operates under a specific agreement with the SIA that allows it to function as a marketing agent. During the Commission hearings, the performance of JCPS came in for mixed reviews. The SMCJ is of the view that, driven in part by concerns about the need to reduce the administrative costs of the industry, the marketing of sugar should be returned to the SIA, operating through a Sugar Marketing Committee and that this process would reduce the required personnel from 13 to 6, and the costs from J$60m to J$20m annually. The AIJCFA is of the view that the JCPS has performed its marketing role well, is the appropriate structure for the marketing of sugar, and should continue to perform this role. The Commission is not in a position to opine on the feasibility of reducing the cost of marketing by two-thirds while providing the same functions, but proposes that the JCPS also needs to be the subject of an operational audit to determine the appropriate manning level. Manning levels aside, the Commission is of the view that

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an entity to engage in pooled marketing activity for the industry, jointly administered by processors and growers, continues to be necessary. The Commission, in its response to its term of reference e (Review the current product marketing arrangements) is of the view that the pooled marketing of centrifugal sugar has generally served the Industry well, and is essential to the system of industry-wide payment for cane that it believes should continue. This does not mean that the marketing entity has to market sugar on behalf of all producers in the industry. It is entirely possible that some firms will be interested in conducting their own arrangements for the marketing of sugar as is currently the case with the marketing of molasses by the Spirits Pool Association Limited. Firms involved in the production of branded sugar, and refined sugar, if the Industry moves in this direction, are likely to be particularly interested in developing their own marketing arrangements. Consistent with Section 3 of this Report, the key issue is that SIA, through its marketing agent, must be aware of any marketing arrangements proposed by individual companies, particularly in relation to centrifugal sugar, and ensure that they correspond to a minimum level of pricing, including the costs of handling (shipping and insurance) if the manufacturer chooses to ship independently. This information is required to give integrity to the system of pooled revenue, as this determines the payments made to farmers and processors. Such a process of information exchange is particularly important in an environment where international players can engage in transfer pricing to non-Jamaican affiliates in a manner that serves the interests of the international corporation, more than it does the Jamaican sugar industry. The Commission is aware that the Purchase and Sale Agreement between Complant International Sugar Company Ltd. and the Government of Jamaica does not require that Complant International operate within the framework of the JCPS. The Commission, nevertheless, suggests that in the interests of harmony within a highly integrated industry, Complant International should be required to make the SIA aware of its marketing arrangements, in accordance with SIAs statutory authority as captured in SICA, Section 6 (a), and as elaborated upon in the discussion of SICA in Section 3 of this Report. Trucking and Shipping of Sugar In relation to the trucking and shipping of sugar, the Commission was informed about the uncertainties with respect to a suitable shipping facility. Currently, the only facility for shipping sugar is a port owned by Jamaica Bauxite Mining Co. Ltd. This port has served as a location for shipping bauxite, and is the only cruise ship pier in Ocho Rios. The future of this location as a port for shipping sugar is uncertain. The Commission is of the view that the GoJ should very quickly make a clear decision on a suitable location for the shipping of sugar.

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4.3

Organisations Representing Industry Sub-Groups

Apart from the SIA, SIRI and JCPS, which all operate under the SICA; there are various organisations within the Sugar Industry which represent sub-groupings within the Industry. These include the AIJCFA, which represents independent cane farmers; the SMCJ, which represents sugar processors; the BITU, NWU and UAWU, which represent workers employed to the sugar estates; the Sugar Producers Federation of Jamaica (SPFD), which is a registered trade union representing sugar manufacturers and those estates that have ceased to manufacture sugar but continue to grow cane; and the Jamaica Association of Sugar Technologists (JAST), which is professional association of sugar technologists and allied workers. These are all private organisations, funded, currently, through membership dues received from their constituents. They have all played an important role in the Sugar Industry and the Commissions only injunction is that they continue to represent their constituencies, bearing in mind the challenging position of the overall Industry and the need, while representing individual sub-groups to collaborate in the interests of improving the prospects of sustainability of the Industry as a whole. In their submission to the Commission, the SMCJ proposed the creation of a new organisation, the Jamaica Estate Cane Growers Association, which would serve to represent the interests of estates and allow for the sharing of best agronomic practice across estates. The Commission encourages such an Association, if it is formed, to collaborate also with independent cane farmers, including through AIJFCA and with SIRI. The Commission does not, however, agree with the SMCJ that a representative from such an organisation should be included in the governance structure of key industry bodies, without equivalent increased representation from the AIJCFA and Trade Unions. The Commission agrees that the interests of sugar estates will have an independent voice in internal group discussion involving estates and processing facilities, but also believes that the integrated ownership structures of estates and processing facilities would not allow for such independent voices to be aired at an industry-wide level. In its meeting with farmers, the Commission heard concerns about recent increases in the membership fees charged by the AIJCFA to farmers, and also heard that the AIJCFA was in the process of changing its approach to financing its operations to fees for service rather than a membership cess. The Commission views this as an initiative that is laudable in terms of improving the responsiveness and accountability of the Organisation, but suspects, based upon its knowledge of other advocacy organisations, that the most appropriate funding formula would rely on a combination of low membership fees and funding from services rendered.

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The other point to be made with respect to the AIJFCA and its financing is that this is the only industry sub-group whose creation and operation is supported by specific legislation, The Sugar Cane Farmers (Incorporation and Cess) Act. This 1941 Act made the AIJCFA a body corporate, gave it the right to charge a cess to all farmers, and to provide from its reserves, pensions for farmers, research funding, and loans to farmers for farm rehabilitation after acts of god or worker strikes. While the Commission is of the view that the AIJCFA has served as an effective lobby group for farmers, it was not provided with the information that could allow it to assess the Associations effectiveness in its pension, research and lending roles. As stated above, it is of the view that AIJFCA could extend its leadership role by coordinating, on behalf of independent cane farmers, collaboration with Estates in the areas of shared agronomic practices. The privatisation of the AIJFCA that is contemplated should be considered by the SIA and the Ministry of Agriculture against the backdrop of the range of activities and services of the Association in relation to the cess that has been charged. Any changes in the direction under consideration would, of course, require changes in law. It may well be that the Industry no longer requires an Association that is mandated by law, allowing for the repeal of the Sugar Cane Farmers (Incorporation and Cess) Act, but the Commission is of the view that an Association of independent cane farmers continues to be required.

5.

Cane Pricing Formulae and Payment Arrangements

The formula for the pricing of cane and the associated cane payment arrangements have dominated previous commissions of enquiry because this is the area that creates the greatest potential for conflict and distrust between farmers and processors. The formula for the pricing of cane is also likely to affect the investment decisions of farmers and processors, as the Commission was reminded at the hearings. The most popular cane payment systems are revenue based. As pointed out in a 2006 paper prepared by the SIA, revenue-sharing payment systems also operate in Australia, Brazil, Columbia, Fiji, India, Mexico, the Philippines, South Africa, Thailand and the USA. Jamaicas cane payment system is a variable revenue sharing system. These systems are the most sophisticated type of revenue sharing arrangements. In such systems, the cane payment formulae ensure that beyond a benchmark level of cane quality and factory efficiency, incremental improvements in cane quality redound to the benefit of cane farmers, while incremental improvements in factory efficiency redound to the benefits of factories. In Jamaica, these benchmarks are captured in the JRCS (Jamaica Recoverable Cane Sugar) and the FRI (Factory Recovery Index). Jamaicas cane payment system has stood up well since its modification based on the recommendations of the 1988 Commission of Enquiry and has been identified in the

34

sugar literature, and by local presenters to the current Commission, as a system that is reasonably equitable between manufacturers and farmers. The changes to the system advocated in the 1988 Commission of Enquiry included, inter alia: establishment of a cane prices committee to examine costs and review revenue allocation; specification of the minimum acceptable quality of cane with a commitment from all sectors to ensure that cane is delivered and milled as soon as practicable after harvesting; a minimum acceptable factory recovery index (FRI), set at the outset at 91; a continuation of the system of calculating boiling house efficiency using the standard Winter-Carp formula; the introduction of a factory-gate evaluation, by SIA, of the sucrose content in cane using the core sampling analysis system, with payments to farmers adjusted based upon the JRCS; a split of 62-38 between cane growers/farmers and sugar manufacturers in the division of net returns from sugar cane; a recommendation that when bagasse attracts a value as a fuel for power generation for the national grid, the revenues so derived be included in the industry revenues for division between cane farmers and factory owners on the same basis as the revenues from sugar.

Although the Cane payment system has performed quite well, the Commission was advised, particularly by farmers, of concerns they were experiencing with the system. Interestingly, several of these concerns reflected the lack of implementation of some of the recommendations of the 1988 Commission. Issues raised to the Commission included: farmers indicating that they supplied cane they perceived to be of the same quality to different factories but received significantly different payments for their cane; disputes about the amount that should be paid for cane that factories determined to be sub-standard (because they had passed the seventy-two hour timeline between harvesting and delivery); concerns that farmers were penalised for delivering cane with a high fibre content, even though such cane generated more bagasse that factories used in their electricity generation, with no benefits to farmers derived from such use;

35

concerns that the relative factor is unfair to farmers in different geographical regions as good farmers are penalised if the general pool of cane supply is relatively poor. concerns that though the 1988 Commission specified that the FRI should begin at 91 but be increased over time via continuous review of the cane payment formulae, there had been no subsequent review and no change in the FRI; concerns that the core samples collected are not sufficient to adequately reflect the sugar content of their cane. In addition the samplers who are employed by the estates could be biased; concerns that although farmers and millers are paid based on cane quality, harvesters and haulage contractors are paid only based on tonnage of cane, creating no incentives for contractors to be sensitive to preserving the quality of cane that is reaped and hauled; and concerns that information about projected cane prices was not provided in a timely manner and that the amount received by farmers as first payment (70% of estimated final payment), was inadequate to cover the farmers operational costs and requirements for land preparation for the upcoming crop.

The Commission is of the view that although the Jamaicas payment system has generally performed well, the concerns identified are legitimate and require thoughtful consideration. Bagasse as a By-Product This Commission does believe, as did the 1988 and 1966 Commissions, that in the Jamaican case it is worthwhile to consider bagasse as a by-product that should be included in the cane payment formulae. This is the case, for example, in Mauritius, where electricity sold to the national grid from bagasse production results in planters being paid approximately US$3 per tonne of bagasse produced. But this Commission goes further, and suggests that even where bagasse is used only for self-generation of electricity, there is a case for some of the cost savings thus derived to be included in the payment received by farmers. Determination of the appropriate payment will require an assessment of the costs avoided through the use of bagasse as a fuel source. This is a matter that should be considered with urgency. Ethanol as a By-Product In a number of countries factories switch from sugar production to the production of ethanol or vice- versa depending on market conditions. As pointed out in Section 2.5, one potential strategy for the diversification of the Sugar Industry is the production of ethanol. If one assumes that production of ethanol will be at the expense of the

36

production of sugar this raises the issue of the pricing of ethanol in lieu of sugar or whether ethanol production should be included in the sugar pool. Based on data provided to the Commission, Brazil, with the worlds largest sugar-cane based ethanol industry, is the only country where ethanol is added to the sugar price that is paid to the farmer. The Commission makes no recommendation on this matter, other than pointing out that this issue needs to be addressed very quickly, in order to facilitate the requisite investment. Definition and Testing of Sub-Standard Cane Under the current SIA regulations, any cane delivered to the factory 72 hours after a Burn Order has been issued is deemed sub-standard. Currently, the factories can exercise two options: (1) accept the cane as sub-standard but at a negotiated price, and then proceed to process the cane, or (2) reject the cane entirely. The factories that practice the former create a level of distrust in the mind of the farmers as they are of the opinion that the cane is good and that the factory has converted the cane to sugar without adequately paying the farmer for the sucrose content of the cane. The Commission is of the view that the issues of the definition and payment for substandard cane need additional consideration. Further, as stated by the 1988 Commission, given that the sucrose content of cane decreases over time, farmers have a case for expecting their cane to be tested for its sucrose content immediately upon its delivery at the factory. This has been an issue in Thailand, where it is advocated that cane must be processed as quickly as possible because of the rapid loss of sugar content. Farmers, especially those the Commissioners spoke with at Frome, expressed distrust about the integrity of the core testing system. These issues should be addressed, at least in part, with the Industrys introduction of the Near Infra-Red (NIR) Polarimeter. The SIA, the Commission was advised, has recently acquired eight such machines to complement the polarimeters currently in use to test the sucrose content, or pol level of sugar cane. The NIR polarimeters are widely viewed to be more effective in determining sucrose content than conventional polarimeters. But the effectiveness of these machines will still be reliant upon the overall integrity of the testing system. The current testing regulations defined in the Sugar Industry Control (Amendment) Regulations, 2006 of the SICA require that a minimum of fifty percent of the canes delivered by a supplier or group of suppliers during a week be tested at random. In fact, the Commission was advised by the SIA that the current level of sampling at the core samplers averaged 92.14% in 2008/2009. The Commission is of the view that the Regulations should be amended to increase significantly the required level of testing. At the same time, the Commission is of the view that there needs to be clarity about the employment relations of individuals who are involved in the testing of the core. The Commission was advised by the SIA that the current situation is that the core

37

samplers are drawn from the staff of the factory and are paid by the SIA for the period during which they work at the core laboratories. The Commission is of the view that under these circumstances it is difficult for such individuals to be independent and to be seen as independent. Indeed, individuals who are having their sugar cane tested by these factory employees are unlikely to have any information about the payment arrangements of core samplers known by them to work for the factories. This issue of the independence of core samplers is of particular concern under circumstances in which there is differential treatment of estate cane and farmers cane that was harvested at approximately the same time. The Commission believes that the SIA should seek to develop a system in which the core samplers are clearly independent, and are seen as, independent of the sugar factories. Payments to Haulage Contractors The Commission is also of the view that there is a case for considering how harvesters and haulage contractors might be given incentives for preserving cane quality, drawing on the experiences of other countries in this respect. Cane Payment Structure Currently JCPS makes payments to farmers as follows:a) first payment of 70% of the expected sale price of the sugar on a weekly basis until crop is completed; b) A further payment of 27.5 % four weeks after the completion of crop; and c) A final payment of 2.5% in November of each crop year. The farmers in several presentations have complained that the first payment is not sufficient to cover their costs of harvesting and preparing the fields for the next crop and, as such, are requesting an increase in the first payment. In his presentation to the Commission, Mr. Lancelot White, SIRI, advised that the 1st payment is definitely below the possible cost of harvesting of J$1200 per tonne. This may be a matter of concern to suppliers with a JRCS of 10 and below, even at the higher price of J$43,973 per tonne. The Commissioners recommend that the SIA review the structure of the payment system in time for the 2010/2011 Sugar Crop. Summary Position on Cane Payment Formula Indeed, while the Commission makes the suggestions indicated above, it is of the view that these matters of refining the formulae for payment of cane within an

38

Industry that is likely to continue to be buffeted by changed circumstances are not properly matters to be handled by a Commission of Enquiry. This Commission agrees with the 1966 and 1988 Commissions that the cane payment formulae, and matters such as the appropriate benchmarks for factory efficiency, and indeed sucrose content, need to be under continuous review. It also agrees with the AIJCPA that this process of review should be entrenched in the Industrys operations and that no further commission of enquiry is required. This Commission is of the view that such an integrated Industry cannot function effectively if it has to wait for a commission of enquiry to deal with key elements of industry governance. The Commission believes that the SIA, as regulator, with the charge of mediating relations between farmers and processors, ought properly to be spearheading the process of continuous review of the cane payment formulae. The AIJFCA has proposed the creation of an independent Cane Prices Board or Commission to make on-going determination of the appropriate formulae to be used within the industry, arguing that the Cane Prices Committee of the SIA is ineffectual. This Commission understands that the Cane Prices Committee has not recently met, but believes that the solution is not the creation of another structure. The Board of the SIA has the statutory authority as regulator to make a determination about the appropriate formulae and the payment split between processors and farmers. The fact that this Authority has not been used is not, in the view of this Commission, a reason to create another regulator. The Sugar Industry, in Jamaica and elsewhere, is unusual in having a regulator dealing, primarily, with the resolution of intra-industry conflicts. It is, in the view of the Commission, extreme to have two such regulators. To elaborate on the current laws that empower the SIA, note that SICA gives the SIA the authority to demand from any manufacturer or cane farmer such returns as it may require {SICA 11(1)(a)}; and summon to a meeting any sugar manufacturer and question him for the purpose of obtaining information relative to the manufacture of sugar {11(1)(j)}; both under penalty of a fine (which the Commission believes needs to be increased in value) or a jail term {SICA 11(2)(c)}. Further, Part VIII 36(1) of SICA gives SIA the exclusive responsibility for settling disputes between cane farmers and manufacturers arising out of any sale, purchase, delivery, acceptance or non-acceptance of cane; while SICA 38(1) gives SIA the power to award compensation in adjudicating such disputes, with its orders having the force of judgment of a Resident Magistrates Court. It is unclear to this Commission what additional powers would be available to, or required by, a separate Cane Prices Commission. This Commission recommends

39

that the SIA use its regulatory authority to adjudicate on cane pricing matters on an on-going basis, whether through a rejuvenated Cane Prices Committee or other appropriate structure determined by the Authority.

6.

Review of Any Other Arrangements

During the hearings of the Commission a number of other issues were placed before the Commissioners that, it was felt, were important to enhancing the viability of the sugar industry. The most prominent of these issues were: Importation of Refined Sugar Availability of Incentives to the Sugar Industry Access of the Industry to Accompanying Measures Funds Title Transfer Issues Access to Lands An Industry-Linked Energy Policy

6.1

Importation of Sugar

Prior to 1994, the importation and distribution of refined sugar were the responsibility of the SIA. Based upon appeals to the Government reflecting concerns about the logistical challenges associated with a single importer of refined sugar, the importation of refined sugar (but not raw sugar which continues to be imported only under the authority of the SIA) was liberalised in that year. Under the new arrangements, developed over several years after the 1994 liberalisation, refined sugar could be imported duty free by manufacturers, while refined sugar imported for the retail trade was subject to a cumulative duty of 128.2%. All representatives of the Sugar Industry who presented to the Commission, with the exception of Mr. Aubyn Hill, Chairman of the Sugar Divestment Enterprise, argued that the current system was being abused with duty free refined sugar finding its way to retail shelves, and that there should be a return to the pre-1994 system in which the SIA remains the exclusive importer of refined sugar. The Commission heard from the Commissioner of Customs, the Ministry of Industry, Investments and Commerce and a representative from a company that is involved in the importation of refined sugar on this matter. All individuals acknowledged that there was some leakage of duty-free sugar to the retail market, but the Commission had difficulty in establishing the extent of the leakage. The Commissioner of Customs made the point before the Commission that with such high duty rates, the likelihood of leakage was also high, although Customs was not of the view that the amount of lost revenue was significant in the context of the operations of that Department.

40

Information supplied to the Commission by the Customs Department does indicate that there has been an increase in duty waivers granted to sugar importers over the last four years, with duties waived amounting to J$1.043b in 2006/2007; J$1.084b in 2007/2008; J$1.338b in 2008/2009; and J$1.77b in 2009/2010, representing a compound annual increase over the period of 19.2%, or 8.17% when adjusted by the change in the US/J exchange rate over the period. This rate of growth is higher than the rate of inflation in Jamaica or the rate of growth of imports generally and does suggest that a closer surveillance of the duty waiver regime is required. These trends are also corroborated by data supplied by JCPS as tabled below.
Tonnes

Year

Imported Refined Sugar 84,015 64,333

JCPS Raw Sugar Sales to Domestic Market. 56,903 52,941

2009 2008
Source: JCPS

These data show that there has been a significant increase in the importation of refined sugar that has not been matched commensurately by sales of raw sugar. It is against this background and other anecdotal information that JCPS is of the view that refined sugar is being imported for manufacturing purposes but is actually being sold to the retail trade. The Commission is aware that if refined sugar is being sold at prices similar to brown sugar then the margins obtained by JCPS from the sale of imported brown sugar are lowered, negatively impacting on the final price of sugar to manufacturers and cane farmers. While the Commission notes that there is evidence of revenue leakage, it is not persuaded that it is in the national interest of Jamaica for there to be a single entity responsible for the importation of all refined sugar. It does accept the position of the JCPS that, if it so chooses, it should be allowed to operate a bonded warehouse in its arrangements for the importation and sale of refined sugar, as, the Commission was informed, is already the case for at least one importer of refined sugar. The Commission is, however of the view that Customs and the Ministry of Investments and Commerce should tighten controls, increase their levels of surveillance and harmonise their activities in order to reduce the levels of leakage. The Commission, for example, did find it somewhat incongruous that 415 licences were granted to manufacturers in 2009. The Commission, also, however, believes that the level of duties imposed on refined sugar needs to be periodically reviewed. The degree of protection afforded the industry through duties on refined sugar needs to be carefully balanced against the 41

overall value, including social externalities, of an integrated private domestic sugar industry, particularly where that industry engages in forward vertical integration into sugar refining. The Commission arrived at its conclusion in relation to the importation of refined sugar prior to receiving a late submission from the Jamaican Manufacturers Association (JMA). The JMA is of the view that the liberalisation of the regime for the importation of sugar has contributed to far more efficient operations of beverage manufacturers, and strongly supports the continuation of the current system, while recognising that policy reform continues to be required in order to streamline the import licensing bureaucracy and reduce revenue leakages.

6.2

Availability of Incentives to the Sugar Industry

Both the AIJCFA and the SMCJ in their presentations to the Commission argued that the Sugar Industry should receive incentives similar to those available to other exportoriented industries such as bauxite and alumina and tourism. Of particular concern was the need for the Industry to have duty concessions with respect to capital equipment and relief from GCT on equipment and key operating components, such as fuel and parts for tractors and harvesters. The industry players, in presenting this position, advocated for the Sugar Industry to be declared a Sensitive Industry. The Commission is not persuaded of the need for, or value of, such a declaration, but does agree with the general principle that an Industry expected to compete on global markets should as far as is possible, have access to raw material inputs that are close to global prices and so endorses the position of the Industry of the need for export-related incentives, particularly to the extent that it is oriented towards export markets. The Commission is also of the view that there should be no distinction in incentive policy in relation to incentives granted to new investors in the Sugar Industry, whether local or foreign, and existing investors who are prepared to undertake new capital investments. In this regard, the Commission does have concerns about the incentive (and privatisation) policy of the GoJ. It notes, for example, that there appears to be a certain ad-hoc nature to the granting of incentives, with a focus on case-by-case negotiations rather than on an industry-wide policy. The Commission is aware, for example, that fiscal incentives, such as relief on GCT for equipment, have been granted within the Sugar Industry, but are not common to all players within the Industry that import equipment; neither is the process for obtaining approved farmer status, or the terms of that status. It appears that small farmers, in particular, face difficulty in gaining approved farmer status designation.

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An examination of the incentives offered to export and agricultural industries in Jamaica suggests that agriculture has access to as wide an incentive pool as firms in the Bauxite sector, but less than Tourism, with the Tourism Industry being exempt from GCT. Comparative Incentive Provisions Incentive Act Length of Tax Holiday (Years) 10-15 Renewable Indefinite 10-15 Renewable Exempt GCT Import Duty Dividend Taxes Exempt

Hotel Incentive Bauxite Approved Farmer Export Industry Encouragement

Exempt

Exempt Exempt Exempt Exempt

Exempt

Source Tax Reform Report 2004

It appears that industry concerns about incentives are also linked to the issue of certification of Approved Farmer status by the Ministry of Finance, on timely basis. 1) The Commission is of the view that Approved Farmer Status could be granted to harvesting contractors, so designated by the SIA. 2) The Commission proposes that the SIA liaise with the Ministry of Finance to ensure that all farmers who are eligible for Approved Farmer Status, irrespective of size, be approved by the Ministry of Finance and that certificates be issued on a timely basis. The farmers eligible for certification should be supported, where necessary, by SIRI.

6.3

Access of Industry to Accompanying Measures Funds

The Industry has argued that it should have access to the funds disbursed to Jamaica by the European Union for assisting in addressing the loss of preference to EU markets. The Commission does not agree with the industry that it has an entitlement right to such funds. Although the Commission agrees that these funds accompanied the EUs decision to reform its own Sugar Industry and would not be available to Jamaica if Jamaica had no Sugar Industry, the legacy and history of Jamaicas Sugar Industry, in both its positive and negative dimensions, is a legacy applicable to the entire Jamaican people. Currently the Accompanying Measures Funds, which came to Jamaica for budget support rather than project support because of the transparency of Jamaicas budgeting process, is

43

being managed by the Ministries of Finance and Agriculture, and is funding the Sugar Transformation Unit. Generally speaking, the Commission believes that the Government of Jamaica has adopted the right approach to the management of Accompanying Measures Funding, and does believe that there is a case for Accompanying Measures funds to continue to be made available to the Sugar Industry. The Commission advocates that these funds be made available in grants only for infrastructural and social development that has the potential for broader benefits than the Sugar Industry (for example, roads, community development, general purpose agricultural equipment, machinery for drain cleaning in flood prone areas) and in the form of loans (at concessionary interest rates, but with commercial levels of collateralisation) for activities specific to the Industry. The Unions stated in their presentation that the creation of decent jobs is necessary condition to build a modern efficient, viable and fair sugar cane sector, which will be both profitable and will provide a critical contribution to the success of any Poverty Eradication Programme. In this context they made a series of meaningful recommendations some of which the Commission believes are candidates for grant funding from the Accompanying Measures Funds. These include worker certification and training of field workers; support for development of a productivity centre focused on enhancing farmer productivity, support for development of an ESOP Scheme, and a review of the pension arrangements for workers in the Sugar Industry, which the Unions claim has one of the lowest pension levels in the Country. Also, the agricultural machinery pool project to assist small farmers in conjunction with RADA, presented to the Commission by Dr. Richard Jones, represents an example of the type of broad based assistance to the agricultural sector that seems an appropriate candidate for Accompanying Measures Funding.

6.4

Issues of Sugar Cane Ownership

One of the issues that arose during the Commission Hearings was that of the point when title for sugar cane is transferred from farmer to processor. There are at least two perspectives that were presented to the Commission. One is that the farmer loses title to the sugar cane once it is tested at the core and the payment process is initiated. The processing activities consequent to this event are the liability of the processor, since irrespective of the risks and investment associated with the processing of sugar cane; the factory has to pay the farmer based upon the sucrose content of the cane. Another perspective is that the Industry is highly integrated. Both farmers and growers retain an interest in the operations of the Industry right through to the point of eventual sale of sugar, since the ultimate and final return to each farmer is based on the overall

44

productivity of the Industry, including the efficiency of the factories operations, because of the pooled nature of payments for sugar cane. In presentations to the Commission, Mr. Allan Rickards the Chairman of All-Island Jamaica Cane Farmers Association stated It should not matter to cane farmers who owns the 96 ex-centrifugal sugar. It only becomes important when the degree of trust is not present; when there is the fear that there is an attempt to produce high value products out of low cost cane. He further stated that when the systems and procedures which provide the security and comfort are in place then there will be the required trust. One such system is the Pooling System another is an independent Sugar Cane Prices Board., and Regulations of the SIA which contain a genuine, equitable contract between farmers and factory for registration and delivery of cane He concludes on the issue of title transfer that if all of these conditions are in place, then it will not matter to farmers who owns the ex-centrifugal 96 sugar.. The germane issue the Commission believes is critical is not the legal ownership of the final product(s) (sugar, ethanol, bagasse, or molasses), or the raw material, the sugar cane, but rather how to treat with the revenue from the by-products or final products of the sugar cane in an equitable manner. The Commission suggests that this is another issue that will require on-going deliberation by, and be dealt with through, the regulatory and dispute settlement roles of the SIA. The Commission is of the view that farmers should share in the proceeds of the Industry where products are processed directly from the sugar cane; sugar, molasses and electricity generated through cane-derived bagasse are three such products. Two of these, sugar and molasses, are already included in the industry payment pool. The third, payment for bagasse that is used for electricity generation, has already been proposed by this Commission as a matter that should be considered in the revision of the Cane Payment formula. At the same time, the Commission is clear that investors in processing facilities incur expenses and assume liabilities that are not shared by farmers of sugar cane and these investors must be placed in a position in which they are able to reap the returns for investment in downstream processing activity.

6.5

Access to Lands

One of the concerns raised by the successful, long-standing private sugar processors, as well as independent sugar cane farmers, was that they had inadequate lands on which to engage in the required expansion of cane production. Currently both estates are operating below their capacity: Appleton is said to be rated for 50,000 tonnes of sugar (currently

45

producing an average of 25,000), and Worthy Park Estates 25,000 tonnes (currently producing an average of 19,000). In a presentation to the Commission, Derek Little of SIRI stated that 35,814 hectares of land were harvested in 2000; whereas the figure for 2009 was 26,296 hectares. That difference amounts to some 9,500 hectares. The Commission has been led to believe that these lands are still available for cane production and that most are Government owned through SCJ Holdings, the Commissioner of Lands, and SIA. Further, in many instances these lands have been leased by these entities to farmers for the purposes of planting cane and, or, other agricultural crops, but in many instances these lands are idle. The Commission recommends:1) That a list of all unutilised/underutilised agricultural lands be prepared and be made known to the public including the identification of lands suitable for the growing of sugar cane. 2) That the GoJ rescind any lease where the lessee is not in compliance with the terms of the lease and make such land available for other economic activities, including the growing of sugar cane.

6.6 An Industry-Linked Energy Policy

One of the elements of the GoJs adaptation strategy for the Industry is the sale of electricity from sugar factories to the national grid. The Commission is of the view that the policies surrounding such transactions need to be clearly articulated. The Commission did hear from the Office of Utilities Regulation (OUR) on this matter. The OUR indicated that the price at which electricity would be purchased by the Jamaica Public Service Company Ltd. (JPS) from sugar factories would be the avoided cost of JPS developing comparable generating capacity, plus up to a 15% renewable energy premium for electricity generated using renewable sources. Jamaicas current avoided cost for electricity produced from renewable sources is US$0.12 per kwh. The Commission supports the avoided cost principle for pricing co-generated electricity. Indeed, Commissioners noted that this principle already exists within the Sugar Industry. In at least one factory, the internal price at which the distillery purchases electricity from the sugar factory is the distillerys avoided cost of electricity, benchmarked to the price of bunker C fuel oil. Similarly, throughout the Industry, the price the industry-wide molasses agent, Caribbean Molasses Company (Ja.) Ltd., purchases molasses from factories, is benchmarked to the avoided cost of importing molasses, calculated based upon an internationally traded reference price (New Orleans/Houston) for molasses.

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At the same time, the Commission proposes that the OUR should make clear, and disseminate, the basis upon which it arrives at avoided cost. The Commission is not able to opine on the appropriateness of 15% as a premium for renewable energy sources, but recommends that the OUR continue to review carefully the appropriate level of premium in the context of Jamaicas particular circumstances. Apart from the pricing of co-generated electricity, other elements of a broad industrylinked energy policy require articulation. These include a comprehensive biofuels policy that would support diversification into ethanol. In its presentation to the Commission, the Ministry of Energy and Mining indicated that biofuels provide a tremendous opportunity for renewable energy and the prospect of significantly reducing Jamaicas carbon footprint, but pointed out that a comprehensive biofuels policy was required, which was in the process of being developed. It is interesting to note that in seeking to develop its biofuels policy, the Philippines went as far as forming a bioethanol consultative board, with significant representation from within the sugar cane industry, to act as a consultative body in the development and implementation of policies in support of the national biofuels programme.

7.

Conclusion

The Sugar Industry continues to play an important role in the Jamaican economy and social landscape, in particular, through its direct and indirect employment. This role is accentuated because Jamaica has experienced difficulty in making a transition to other crops, as evidenced by the proportion of former sugar cane lands that lie in ruinate. In its deliberations, the Commission found two statements made by individuals representing two key organisations operating within the Industry to be quite instructive:
1)

This Commission must craft the parameters within which a fully privatised Sugar Cane Industry will operate, and provide the context in which it will thrive for itself, its shareholders, the attendant communities, and the Country as a whole
Allan Rickards, Chairman of the AIJFCA, July 7, 2010.

2)

Predictability is the key word

Hon. Billy McConnell, Chairman of SMCJ, July 8, 2010.

The Commissions deliberations point both to the opportunities and the challenges confronting the Jamaican Sugar Industry. It is of the view that implementation of the policy recommendations that have emanated from these deliberations, coupled with the appropriate investment and operational decisions of private firms operating within the Industry provide the greatest opportunity for the sustainability of a private Sugar Industry in Jamaica that operates within the parameters of the national interest.

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Appendix 1 Presenters at the 2010 Sugar Commission of Enquiry

DATE Mon. 14/6 Tues. 15/6 ORGANISATION Sugar Industry Authority Jamaica Cane Products Sales Limited Sugar Manufacturing Corporation of Jamaica Limited (SMCJ) SMCJ Mr Roger Clarke Sugar Industry Research Institute UWI, St. Augustine Ministry of Agriculture & Fisheries Ministry of Industry, Investment & Commerce Trade Board Planning Institute of Jamaica Dr Earle Roberts Dr Kusha Haraksingh Mr George Callaghan Cane Farmer Director of Research Consultant Head, Sugar Transformation Unit Director, Monitoring & Regulation Assistant Trade Administrator Director External Cooperation Management Division Manager EU Unit Director Legal Enforcement Senior Manager Managing Director National Peoples Co-op Bank Transformation Agricultural Specialist Co-owner Owner/Manager PRESENTER(S) Ambassador Derick Heaven POSITION Executive Chairman

Mr Karl James

General Manager

Mr William McConnell

Chairman

Wed. 16/6 Thurs. 17/6

Mr Joshua Jaddoo

Consultant

Fri. 18/6

Mon. 21/6

Miss Margaritta Sherwood Mr Michael Laing Miss Barbara Scott

Tues. 22/6

National Environmental Planning Agency Development Bank of Jamaica Limited.

Miss Diane Davis Mr Gilroy English Mrs. Paulette Kolbusch Mr Milverton Reynolds Mr Paul Miller Mr Neville Lindo

Golden Grove Sugar Company, St. Thomas Cambria Farms

Dr Richard Jones Mr Kenneth Newman

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DATE Wed. 23/6

Tues. 6/7

Wed. 7/7

Thurs. 8/7

ORGANISATION UWI, Institute of Sustainable Development Worthy Park Estate Limited. Ministry of Labour & Social Security (Factory Inspectorate Division) Petrojam Ethanol Limited Sugar Producers Federation of Jamaica All-Island Jamaica Cane Farmers Association National Rums of Jamaica Limited National Irrigation Commission SMCJ Spirits Pool Association Limited

PRESENTER(S) Professor Anthony Clayton Mr. Peter McConnell

POSITION ALCAN Professor of Sustainable Development Chairman/Managing Director Director, Industrial Safety General Manager Executive Chairman Director, Industrial Relations & Training Chairman Chief Executive Officer Chief Executive Officer Chairman Chairman General Manager Environmental Consultant Chairman

Mr Robert Chung

Mr Ricardo Neins Mr Deryck Brown Mr Michael Martin

Mr Allan Rickards Mr Evon Brown Mr Stanley Rampair Mr William McConnell Mr Robert Henriques Mr Lloyd Forbes

Mon. 12/7

Ms Ianthe Smith Caribbean Molasses Mr Evon Brown Company (Ja.) Limited. Ministry of Labour & Mr Karl Wedderburn Social Security (Industrial Relations) Joint Trade Unions Mr Vincent Morrison -NWU Mr Clifton Grant- UAWU Mr Hanif Brown BITU Sugar Industry Research Institute Sugar Divestment Enterprise Mr Derek Little Mr Aubyn Hill Mr John Gayle Mr Cleveland Keddoe Mr. Anthony Masters

Tues. 13/7

Director of Industrial Relations & Allied Services President 1st Vice President Assistant Island Supervisor Head, Extension Department Chief Executive Officer Chief Operating Officer Harvesting Contractor Haulage Contractor

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DATE Wed. 14/7

ORGANISATION Rural Agricultural Development Authority (Public Session) Everglades Farms

PRESENTER(S) Mr Al Powell

POSITION Executive Director

Mr Ralph Chen Mr Outram Hussey Co-owner

Thurs. 15/7

Office of Utilities Regulation The Jamaica Customs Department Coldfield Manufacturing Company Limited (Big Jo Fruit Drinks) Appleton Estates/J. Wray & Nephew

Mr Hopeton Heron Mr Maurice Charvis Mr George Wilson Mr Danville Walker Mr Orane Thompson Mr Ian Wong

Deputy Director General Deputy Director General General Counsel Commissioner Incentive Supervisor Owner/Manager

Fri. 16/7

Mr Paul Henriques Mr Robert Henriques Ms Joy Spence

Ministry of Foreign Affairs & Foreign Trade Ministry of Energy & Mining AIJCFA

Ambassador Evadne Coye Miss Marcia Thomas Mrs. Hillary Alexander Dr. Cecil Goodridge Mr. Emile Findlay

Managing Director, Production Division Chairman, Spirits Pool Association Limited General Manager, Technical Services Permanent Secretary Under Secretary, Foreign Trade Permanent Secretary Consultant Consultant

Appendix 2 Providers of Written Submissions to the 2010 Sugar Commission of Enquiry

Jamaica Manufacturers Association Ltd. Dr. Patricia Northover, University of the West Indies, Mona. Dr. Andrew Pearson, University of the West Indies, Mona.

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