Hon. Qarase - Tabling of the Report of the Sugar Select Committee of the House of Representatives
Oct 6, 2004, 09:10

Hon. Laisenia Qarase
Prime Minister and Minister for Fijian Affairs,
Culture & Heritage and Minister for National Reconciliation & Unity; ALTA & Sugar Industry Reform

Mr. Speaker Sir, I beg to lay on the table the Report of the Sugar Select Committee of the House of Representative, standing in my name. And may I have your permission to make a statement on the report, given the crucial importance of the sugar industry both to Fiji and to the 200,000 of our people who are dependent on it, directly and indirectly, for their livelihood.

Mr. Speaker Sir, this is the first Report of the 15 member Ad hoc Select Committee on Sugar Reform approved by the House of Representatives on 27th April this year.

The Ad hoc Select Committee was required by the House to consider the Indian Technical and Finance Mission Reports made in March for the Reform of the Sugar Industry and associated issues. The Committee was then to undertake wide consultations with all stakeholders in the Industry on these Reports and their recommendations.

The Committee was to report back to the House as soon as possible, with recommendations, including proposed legislative changes to implement those recommendations.

Mr. Speaker Sir, the Select Committee met twelve times from 12th May to 20th September to consider in detail the Indian Technical Mission recommendations.

Following consultations with all industry stakeholders, the Select Committee has agreed with the position taken by Government that the Mission Report represents the best way forward for the reform of the Industry.

Problems with our sugar industry
Mr Speaker Sir, it would be useful for me, at this stage, to recap on why our sugar industry has experienced a decline in sugar production and efficiency in recent years.

We must remind ourselves also that if we had not taken action for reform, the announcement by the European Union of its intention to progressively reduce and remove its subsidies on prices for sugar imports from Fiji and other ACP producers, would have been the final nail in the industry's coffin. The warnings of what would happen were not new.

We had known for a number of years, that the era of subsidized prices would end. But we were slow to react and perhaps reluctant to face the inevitable.

According to scientific studies, Fiji’s cost of sugar production has increased substantially over the years. It is now ranked the seventh highest for the 20 ACP sugar-producing countries. The industry's main characteristics are high cost of production, low volume and poor quality of sugar.

And to make things worse, Fiji is quite far from its major sugar markets. We, therefore, have to pay high transportation costs.

Mr Speaker Sir, the challenges for the industry are multi-faceted and multi-dimensional. The high cost of sugar production is due to two main reasons. One is the high cost of cane farming and low productivity by the growers. The other is high milling costs and inefficiency at the mills.

The statistics show that the average cost of production in Fiji is quite high at around $40 per ton. At present, cane farmers get about $58 per ton of cane supplied to the mills, giving them a profit margin of $18 per ton of cane.

When the EU removes its subsidy on the intervention price it currently pays to ACP exporters, sugar cane farming in Fiji will become uneconomic if nothing is done to improve productivity.

Mill Inefficiency
At the mills, inefficiencies have led to very high production costs. The highest is at Penang Mill with $340 per ton, followed by Lautoka Mill at $320 per ton and Labasa at $230 per ton. The lowest is Rarawai Mill at $160 per ton. Previously, the average cost of production at the four mills was only around $66 per ton. That rate is close to most mills in India, at $70 per ton.

Poor Cane Productivity/Yield
Mr. Speaker Sir, cane varieties used by the 17,000 productive farmers are a contributing factor to low productivity. Most farmers are planting varieties like MANA, which has more weight and less sugar content. As a result these varieties have less POCS (Pure Obtainable Cane Sugar) in them, an indicator which measures the amount of sugar in the cane stalk.

Mr. Speaker Sir, most farmers plant varieties like MANA, because it is cheaper for them.

They can be ratooned for longer periods, say 10 to 20 years. Apart from contributing directly to the decline in cane yields and sugar content, this long ratooning process also attracts a borer disease that damages and causes infection to the matured, harvested cane stalk.

Mr. Speaker Sir, for these reasons, Fiji’s cane yield per harvested hectare has become the second worst for the 20 ACP sugar-producing countries. And, in terms of sugar yield per harvested hectare, Fiji is the worst performer.

Elisha Report
Mr. Speaker Sir, in 2001, Government commissioned a team led by well-known Ba businessman Daniel Elisha, to study the industry and to recommend ways to salvage it. The team's report recommended the creation of four stand-alone companies (SACs) to replace the four FSC mills. In addition, it recommended that the rail transport system be operated by an independently owned company and the Fiji Sugar Marketing (FSM) Company should be more independent of FSC.

The Report also recommended the setting up of co-generation as part of the core activities of the mills.

Sugar Industry Proposal
Unhappy with the Elisha Report, the industry stakeholders comprising the Sugar Commission of Fiji (SCOF), the Sugarcane Growers Council (SCGC) and the Fiji Sugar Corporation (FSC), agreed to commission another study of the sugar industry to determine the best way forward. This was known as the Sugar Industry Proposal.

This recommended the repeal of the FSC Act, so that the FSC could become a commercial entity operating only under the Companies Act. The report also recommended that the Sugar Industry Act be repealed, so that the Master Award could be amended.

It felt the FSC share of the sugar export proceeds ought to be increased from 30 percent to 40 percent. At present, the Master Award allocates sugar proceeds on the basis of (70:30) in favour of the growers.

The Report also found that the FSC needs to borrow $170 million to finance reform, including the upgrading of all mills.

Asian Development Bank Report
Mr. Speaker Sir, because of further mixed reactions from industry stakeholders, Government decided to commission a study through the Asian Development Bank (ADB) under its Technical Assistance, TA3888 program.

The ADB Report supported most of the recommendations of the Sugar Industry Proposal and rejected most of the recommendations of the Elisha Report. In particular, Mr. Speaker Sir, this ADB Report recommended the following measures:

The upgrading of the infrastructures of the four mills. The total cost was estimated at $170 million and this was to be borrowed from overseas;

2,000 employees of FSC were to be made redundant;

9,000 non-producing or low producing cane growers were to exit from the industry. It would be run by concentrating on improving productivity among the better farmers;

Availability of land for cane farming was not a problem. The challenge was to improve productivity in existing farms.

The FSC was to be replaced by four stand alone companies (SACs), with share holdings divided amongst cane growers, employees of FSC, landowners and Government;

Upgrading of the rail system would require $84 million;

Sugar cane annual production to be limited to 3.5 million tons;

FSC Act and the Sugar Industry Act to be repealed, to be replaced with new sugar legislation;

The Master Award was to be changed, so that the sugar proceeds distribution between the miller and the growers currently at 70:30 (Growers: Miller), was changed to 60:40; and

Sugar Commission of Fiji (SCOF) was to be abolished and its role taken up by the Sugar Industry Tribunal.

It was on the basis of these recommendations that I announced comprehensive reform proposals for the sugar industry in 2002.

Sugar Steering Committee
The Government then established a Steering Committee, chaired by former Minister for Agriculture, Mr. Charles Walker.

The Steering Committee included representatives of all sugar stakeholders; the Sugar Cane Growers Council, the FSC, the trade union representatives of workers, Fiji Sugar Marketing Company, NLTB and the Ministry of Agriculture.
After several consultations, it was clear that there was no consensus on the agreed way forward for reform. Because of this, I decided to ask the Government of India, through its High Commissioner in Suva, to undertake an independent study of the industry. This initiative resulted in the Government of India sending a team of experts to examine the industry and to map out a recommended direction for its long-term survival.

This Indian team, led by its leader, Mr J.J Bhagat, visited Fiji early this year and submitted its Report to me in March. Follow-up studies were then undertaken by a financial mission from the Government of India.

The Bhagat report was accepted in principle by Cabinet and Cabinet agreed that I refer it for political consultations, first with the Fiji Labour Party in the Talanoa Dialogue and then in the Select Committee.

Indian Technical Mission Report
Mr. Speaker Sir, let me now provide a summary of the main recommendations of the Indian Report:

v Planting of early maturing cane varieties such as AIWA and NAIDIRI instead of MANA;

v Increasing the new area planted with cane to 25 percent annually;

v Number of cane ratoons to be limited to four to six years only;

v Introduction of cane irrigation and intercropping to increase cane yield;

v Cane yields to increase to 4 – 5 million tons a year;

v Promote intercropping of cane with other crops such as potatoes, onions, wheat and tomatoes, to increase farmers’ yearly income.

v Increase Pure Obtainable Cane Sugar (POCS) in cane from 11.25 to 13.0;

v Introduction of a programmed harvesting scheduled for farmers, to ensure smooth operation of the mills, during crushing season;

v Burning of cane should be minimized;

v Mechanical harvesting to be adopted selectively in large, flat cane fields;

v Creation of a Benevolent Fund, to provide incentives to cane cutters;

v Establish effective communication system between the growers and the mills during the crushing season;

v Abolish the rail transport system;

v Extension services and Research services in the Fiji Sugar Corporation (FSC) to be reactivated with better qualified staff;

v Promotion of cogeneration at the mills, to supplement the income of the FSC;

v Cane crushing season, to be limited to 26 weeks only;

v Mill stoppage to be reduced to 14 – 16 hours per week;

v Rearrangement and readjustment of infrastructure at the mills, to improve efficiency;

v Introduction of a Cane Quality Assurance System to provide incentives for better quality cane to be delivered to the mills;

v Manpower at the mills to be retrained and up-skilled;

v Cost of sugar production at the four mills to be reduced to an acceptable level of around $70 per tonne.

v Fiji Sugar Corporation (FSC) to be restructured with its shareholding to be broad based and to include all interest groups;

v An investment totalling $86 million would be required to finance the upgrading of the infrastructures at the mills and other component’s of the reform; and

v The Entire reform program to be implemented over a 2 – 3 year period.


Mr. Speaker Sir, overall, these recommendations by the Indian Team are much more realistic, reasonable and achievable as compared to the Industry Proposal prepared by the stakeholders in 2001.

Seventh Talanoa Dialogue
The Seventh Talanoa Dialogue Session reached a broad agreement to accept the Report of the Indian team.

Part of that agreement was the establishment of an ad hoc Parliamentary Select Committee to oversee the reform of the industry, including consultations with all industry stakeholders.

Consultation with Sugar Stakeholders
Mr. Speaker Sir, the Select Committee gave consideration to all the recommendations of the Indian Government Mission. It also held consultations with all the relevant stakeholders. These stakeholders included the Sugarcane Growers Council and its Board of Directors; the Fiji Sugar Corporation under the chairmanship of Mr. Ross MacDonald; the Sugar Commission of Fiji under its chairman, Mr. Gerald Barrack; the Sugar Industry Tribunal; the Fiji Sugar Marketing Company Limited; South Pacific Fertilizers Limited; the Sugarcane Growers Fund Authority; the Trade Unions; Cane Districts, as well as landowners and Fijian cane farmers in the provinces of Ra, Ba, Nadroga, Macuata and Cakaudrove.

Mr. Speaker Sir, all these industry stakeholders have supported the proposal for reform, as recommended in the Indian Mission Report.

The Select Committee has agreed to the implementation of most of its recommendations. The main exception is the recommendation to abolish the rail transport system. In addition, there were also some reservations on the recommendation for the setting up of a national irrigation scheme.

Mr. Speaker Sir, during its consultation process, the Select Committee considered nine Technical Papers, prepared by the relevant Government agencies, and numerous technical reports by various consultants and experts.

These papers and reports covered issues relating to a Cane Quality Payment System, rail transportation, cogeneration capability at the mills, environmental concerns and strengthening of the extension and research services of the FSC. All of them were considered important by the Select Committee in firming up its Report and recommendations on the Indian Report.

In addition, the Select Committee also invited university scholars in the field of sugar research, including Dr Padma Lal of ANU and Dr Santa Kroes, of Australia, (where) to hear their views on their proposals for the reform of the industry.

Indian Government Loan
Mr. Speaker Sir, the added attraction of the Indian Technical Mission recommended approach is that the Indian Government is willing to provide the necessary finance to upgrade the infrastructures of the mills.

The Indian team has also agreed to provide the senior management team, to manage all our sugar mills for the next three years. To facilitate this process, the Fiji Government has signed a three-year management contract with the Indian team, so that they can manage the mills and be able to deliver on all their recommendations as covered in their Report, by July 2007.

Mr. Speaker Sir, the Indian Mission had indicated in their Report, that to finance the reform of the Sugar Industry would require around $58 million. However, if other costs were to be included, like insurance, freight and installation costs, this amount increases to $86 million.

Mr. Speaker Sir, Government has, therefore, approached the Indian Government for a loan of $86 million. The loan is to be provided to the Fiji Sugar Corporation (FSC) by the Indian Government under favourable terms and conditions.
These conditions include an interest rate of 1.7percent, for a term of 15 years, including a 3-year grace period.

Memorandum of Understanding (MOU)
Mr. Speaker Sir, to facilitate the implementation of the recommendations of the Indian Mission Report, a Memorandum of Understanding (MOU) has been signed by the Fiji Government and the Indian Mission, for the Indian Team to manage the four (4) mills for the three (3) years, starting this year (2004) so that the Team can implement fully, their recommendations.

Recommendations agreed to by the Select Committee
Specifically, the Select Committee has agreed to the following recommendations to be adopted, to reform the Sugar Industry:

v A three (3) year management contract be issued to the Indian Team, to manage all the four mills in Fiji, effective from July 2004 up to June 2007;

v The Fiji Sugar Corporation (FSC) is to apply for a loan of $86 million from the Indian Government, to finance the upgrading of the infrastructures at the mills and other components of the reform;

v The work of the Select Committee will continue until the completion of the sugar restructuring program;

v The Fiji Sugar Corporation (FSC) Board is to provide regular Reports to the Select Committee, to ensure the implementation program, by the Indian Team, is on target;

v The Research and Extension Services to be restructured as an independent authority; and

v The introduction of a Cane Quality Payment System at the mills.

Mr. Speaker Sir, the introduction of a Cane Quality Payment system at the mills is a crucial element of change.

The Select Committee is supportive of this recommendation and is requesting the Fiji Sugar Corporation (FSC) to put in place steps to achieve this as soon as practicable.

Recommendations still outstanding
Mr. Speaker Sir, there are a number of issues in the Indian Team Report that the Select Committee has yet to agree upon.

They include:

v The abolishment of the rail transportation system;

v The implementation of a national irrigation scheme to increase productivity in the cane belt;

v The adoption of a Cane Quality Payment Formula to be used for the Cane Quality Payment System; and

v A decision on who will administer this system when it is finally introduced at the mills.

Mr. Speaker, Sir, the Select Committee has decided that further review and study is needed on these issues before a decision is made on them by the Select Committee.

Proposed Legislative Changes
In terms of legislative changes, Mr Speaker Sir, the Select Committee has agreed that the FSC Act is to be repealed, so that the company can operate fully as a commercial entity under the Companies Act. As for changes to the Sugar Industry Act, the Select Committee has decided that a more in-depth review is needed to determine the best structure for the industry to ensure its long-term viability and survival.

In this respect, a number of sugar stakeholders are requesting for an amendment to the Master Award under the Sugar Industry Act, so that changes to the cane payment system can be accommodated in the new structure of the industry.

The Select Committee is favouring the retention of the FSC as a single entity, with the four mills to be treated as separate cost centers. There are also calls for the Fiji Sugar Marketing Company and the Research/Extension Services to be made independent of FSC.

On other bodies created under the Sugar Industry Act, the Select Committee still needs to further deliberate on these issues before firm decisions are taken. There are calls for the Sugar Commission of Fiji to be abolished and for it to be replaced by the Sugar Tribunal. There have also been calls for streamlining the Sugar Cane Growers Council and for the Sugar Cane Growers Fund Authority, to be converted into a Farmers Bank.

Mr. Speaker Sir, the Select Committee is still to finalize its agreed views on these institutions before it submits its recommendations to this House for consideration.

Reduction in Sugar Protocol Prices
Mr. Speaker Sir, the speedy and full implementation of the recommendations in the Indian Report is critical to the survival of the industry. As I have said, this is because the European Union has announced recently that it is going ahead with a reduction in the ACP Sugar Protocol prices.

Given the gravity of this development, Government, the Fiji Sugar Corporation (FSC) and other stakeholders in the industry, are now actively lobbying the European Union on this issue.
The aim is to persuade the European Union to phase-out these price reductions over a longer period of time than the current schedule of 2 years.

Government is also actively seeking from the European Union details of its announced transitional measures, including a compensatory mechanism, to assist ACP cane producers in the transition to selling their sugar to Europe on literally free market terms.

I announce to the House that I have this week received from the European Commission a letter of assurance. It is signed by Mr Pascal Lamy, the EU Commissioner for Trade, and Mr Poul Nielson, the EU Commissioner for Aid.

This is what they say in their letter and I quote
"… the Commission is very much alive to the potential implications for ACP sugar exporters of the EU reform of its sugar regime. This is why we are committed to providing appropriate accompanying measures that cover development and trade aspects, both of which will be the subject of an Action Plan issued later this year and the subject of close consultation with you.

“The Commission is ready to cushion the social and economic effects of restructuring by providing a financial support package.

This is a firm commitment set out in both Communications on sugar reform and on Financial Perspectives and that these funds are additional to general development support (successor to 9th EDF).

”We are aware that financial support is not a substitute for a viable industry and so the Commission will continue to provide a preferential trade policy for ACP sugar exports, offering duty free access to ACP sugar imports within the limits of the Sugar Protocol.

We are committed to maintain and to build on these benefits in the Economic Partnership Agreements. As you know, the Sugar Protocol will be reviewed in the context of EPA negotiations and we have proposed in our Communication that the Sugar Protocol be integrated into EPAs in a way that does not prejudge EBA access and ensures full compatibility with WTO rules.

“Your concerns are important. We share the goal of helping to eradicate poverty in your countries and so we stand ready to open a meaningful dialogue on this important matter.” Unquote.

Acknowledgement
Mr. Speaker Sir, on behalf of the Government, I wish to thank all the stakeholders for their participation in the consultation process on the Sugar Reform through the Ad hoc Select Committee. Their views have been incorporated in the Report I have tabled today. Together with the report of the Select Committee, I am also laying on the table, the Indian Mission Report titled, “Revival of the Fiji Sugar Industry, March 2004, for the information of this House.

Thank you.

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