Correction & Clarification
CORRECTION FROM SOURCE
In Aubyn Hill’s article, ‘Chinese investment improving sugar industry’, in the Financial Gleaner on Friday, the following sentence should have read, “PCS was advised that their first CEO was not the best choice to oversee the transition from GOJ to Chinese ownership.”
Aubyn Hill, Financial Gleaner Columnist
The sugar divestment team which I led from December 2005 to October 2011 concluded the divestment of the Government of Jamaica-owned (GOJ) sugar assets in two phases. The first set of asset transfer was achieved in July 2009 when Everglades and Seprod bought and leased the assets at Long Pond and Hampden, and at Golden Grove, respectively.
The second and much larger package of sugar assets, which include those at Frome, Monymusk, and Bernard Lodge estates in Westmoreland, Clarendon and St Catherine were sold and leased to the Chinese government-owned COMPLANT International Sugar Company which established the wholly-owned Jamaican company, Pan Caribbean Sugar Company Limited (PCS). The local company owns the assets and manage the affairs of the business. COMPLANT group operates sugar businesses in various African countries and in China, and has a large construction arm which built the GOJ-owned conference centre in Montego Bay.
The divestment team and its secretariat, housed at the Development Bank of Jamaica (DBJ), searched far and wide to finally settle on COMPLANT as the eventual investor. Our search invitations were carried in The Wall Street Journal, The Economist, the two local daily newspapers and two single-purpose websites. Prospective investors from Brazil, the United States, Canada, and Italy showed various levels of interest.
In the end, it was the Chinese which displayed the depth and consistency of interest, the necessary long-term view and financial capacity to take on the significant challenges that Frome, Monymusk, and Bernard Lodge estates and factories presented. The Chinese longer view on the opportunities of producing sugar in a world with an ever-increasing population gave them the right perspective to follow the Jamaican investors, who showed the same kind of economic and strategic vision a year earlier.
Large investments were contracted
The sugar assets divestment team was careful to codify in contract the amount that Pan Caribbean Sugar was obliged to spend to revitalise the assets it acquired in the divestment exercise. Both sides agreed that PCS would invest a minimum of US$156 million within four years of acquiring the assets. A large portion of the investment would be used to revitalise existing cane fields and bring land left in fallow for decades back into cultivation.
Substantial sums were earmarked to renovate operations in the factories and put in major new equipment such as boilers, centrifugal baskets and cane conveyor systems. Cane transport, sugar storage and bagging mechanical equipment were slated for improvement and investment in intensive upgrades.
I am reliably informed that Pan Caribbean Sugar has invested more than US$200 million in its estates and factories in the less than two and a half years since it took over management of the three properties. This investment is well above the amount in their contract with the GOJ. In July this year, PCS announced that it had already invested US$160 million in its estates and factories - a month before the halfway mark of the four-year deadline it was obliged to meet in the divestment contract.
The agreement signed by the parties limited the number of foreign nationals PCS could bring into Jamaica and even enumerated which categories of employees could be brought in to Jamaica. There were also relevant clauses dealing with the training of Jamaicans in various disciplines by PCS foreign experts.
Since taking over management of the Frome, Monymusk and Bernard Lodge estates, PCS's Chinese employees have shown an admirable work ethic from which Jamaicans can learn, and apparently the latter are learning. PCS was advised that their first CEO was not the best choice to oversee the transition from GOJ to Chinese ownership. That advice has proven to be sound and after many missteps, and a needlessly acrimonious relationship with the current minister of agriculture, he was removed from the post and from the COMPLANT Group.
Everyone who deals with PCS's new CEO, "Harry" Wu, speaks of his reasoned, calm professional approach to managing the affairs and people relationships of the company. Harry is a member of that new professional group of Chinese who are populating commercial and political positions around the world. Like his new Chinese ambassador to Jamaica, who was trained in China and at the Kennedy School of Government at Harvard University in the United States of America, Harry Wu was trained in China, Hong Kong, Britain and Canada and has managed much bigger businesses than PCS - inside and out of China.
He will need all that training and experience to convert the assets of his three estates and factories into a perennially profitable business enterprise. Luckily for him, he has the necessary resources and relationships to succeed.
Moral hazard avoided
I was acutely aware of what economists call 'moral hazard', because of my experience at Air Jamaica where I worked as an unpaid consultant (by choice) from December 2004 to about September 2005. In late 2004, the then majority owners of Air Jamaica handed back the company with its many tens of billions of dollars in losses to the GOJ, simply because the GOJ was a minority shareholder in what was seen to be a "national treasure".
The GOJ, in that Air Jamaica episode, was burdened with moral hazard - acting as insurer of last resort for the company's debts - even though it was a minority shareholder. The sugar divestment team members and I made a commitment, in line with government objectives and policies, that we would make every effort to ensure that the sugar divestment was done in such a way that the GOJ would not own a single share and, as much as was possible, avoid selling all the assets to one party. Those two objectives were achieved and moral hazard avoided.
Also, by splitting the assets among three new owners, the divestment team ensured that a single owner would not be able to bring inordinate political or commercial pressure on the GOJ. This kind of pressure would surface especially just before a general election, as was done in the past. Pressure is timed in order to extract special benefits, or to burden the Government with a kind of non-ownership moral hazard in order to get fearful, weak or opportunistic politicians to cave into a powerful owner's demands.
In removing all ownership from the GOJ, the divestment team also defused significantly the power of unions to put unreasonable pressure - similar to that on an unreasonable single owner - on a government that respond so delicately when it is threatened with a loss or workers' job or votes. Owners with clear commercial objectives can and do respond more robustly to union power.
These new ownership changes which exclude the GOJ, and with the very substantial investments being put in by the privately owned Jamaican companies and the Chinese government-owned Pan Caribbean Sugar Company, the Jamaican sugar industry is finally getting the managerial skills and investment dollars to make it prosper into the long term. This revitalised sugar industry can now provide sustainable jobs and profits.
Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years Email: email@example.com Twitter: @HillAubynFacebook: Facebook.com/Corporate.Strategies