Divestment brings taxpayer relief

Aubyn Hill, GUEST COLUMNIST

On August 31, 2011, the large perennial losses, totalling billions of dollars, of the government-owned sugar factories and estates came to a final stop. That was the day when the three biggest factories and estates were formally handed over by former Prime Minister Bruce Golding to Pan Caribbean Sugar Company Ltd, a wholly owned subsidiary of COMPLANT International Sugar Company, which is in turn owned by the government of China. A year earlier, the estates at Duckenfield in St Thomas, and Hampden and Long Pond in Trelawny, were fully divested to the Seprod Group and Everglades Farms, respectively.

The long and complex divestment process started in early December 2005 when then finance minister and the minister in charge of the sugar industry, Dr Omar Davies, appointed a group of us to form the Sugar Enterprise Team (SET). The SET had various member changes over the years. Members moved on as the demands of their full-time jobs increased or as new ministers made changes. Only two or three of the original appointees stayed until the end when SCJ Holdings Ltd, trading as Sugar Divestment Enterprise (SDE), negotiated the final sale and lease agreements for the five factories and six estates that were offered to prospective investors in the official Information Memorandum.

Costly Ownership

It is reported that in 2005 former Prime Minister P.J. Patterson recognised that it was "clear that given the level of debt of the Sugar Company of Jamaica (SCJ) at the time, the lack of investment and the decrepit infrastructure (factories, cane fields, roads and drains, and equipment), the best option was to privatise the government sugar estates".

When the SCJ handed over the government-owned assets in August 2009 to SCJ Holdings Ltd - the divesting entity - the "level of debt" incurred since 2000 and mentioned by Prime Minister Patterson was approximately J$31.38 billion. In one of the last years of operation by SCJ, the losses were reported to be in excess of J$5 billion. The Government of Jamaica (GOJ) was completely unable to provide the hundreds of millions of US dollars to meet the investment needs of these GOJ-owned sugar assets.

The year-after-year losses recorded by the government-owned and -managed SCJ meant that the divestment exercise would be a costly one. Persons who are familiar with mergers and acquisitions know that the valuation of a company's assets tends to have little or no relationship to the sale price of a business as a "going concern". What really matters is the profitability of the business. The selling price is usually calculated as a multiple of the constant earnings before interest, taxes, depreciation and amortisation, or a multiple of net profit after tax (NPAT).

When the company is making profits, one could expect a selling price that may exceed the book or even market value of the assets. When the company makes perennial losses, a willing seller selling to a willing buyer - the definition of an arm's-length, no-duress transaction - will have to take a significant discount in order to complete the sale. In effect, the buyer will be providing 'loss relief' to the owner-seller for which the latter has to pay. The payment is the substantial discount and a sale price which often bears no relationship to the valuation figure.

It is a costly exercise to prepare, keep running and package 'decrepit' sugar assets. Indeed, a former very senior government official is said to have remarked that the GOJ sugar assets should best be given away for one Jamaican dollar in order to provide debt relief.

Worldwide Invitation

The members of the divestment team used the Economist, the Wall Street Journal, The Gleaner and the Observer and two exclusive websites to advertise the assets in Jamaica and around the world. In the first round, no Jamaican business entity or person sought to bid for the assets. After all that activity, only one bidder submitted an offer in early 2008. The local and international market of investors made it very clear that they were not interested in our 'decrepit', GOJ-owned sugar assets.

Later that year, the collapse of Lehman Brothers investment bank on September 14, 2008, which precipitated the worldwide recession, ensured that that our only bidder was unable to complete the financing arrangement to buy the assets. In spite of the facts concerning the unattractive sugar assets and the economic meltdown, critics levelled the charge of "bungling and failure" at the divestment process. However, those criticisms did not deter the members of the team.

Avoiding Moral Hazard

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 and to serve) 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 with 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 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.

Patriotism And Pay

The recent and not-so-recent kerfuffle over my contracted and now publicised payment as the full-time consultant and lead negotiator has caused some in the public to raise the issue of patriotism. Members at various times of the divestment team included Sharon Weber, Stephanie Muir, Ian Parsard, Ambassador Derrick Heaven, Dr Cezley Sampson, Dr Richard Harrison, Archibald Campbell, Elizabeth 'Betty Ann' Jones, Dr Christine Clarke, Dr Wesley Hughes, Wentworth Charles, Erwin Burton, Patrick McIntosh and John Gayle. The divestment secretariat at the Development Bank of Jamaica, led by Denise Arana and ably supported by Douglas Levermore and others, gave the team great help and research assistance. The special dedication and tenacity of Stephanie Muir ensured that we secured more than 200 titles on time.

We all had a patriotic commitment to divest these sugar assets to prospective investors who could rid the Jamaican taxpayers of the burden of billions of dollars of losses which this business incurred annually. We had excellent support from, and access to, our political bosses of both political parties, especially Ministers Omar Davies, Roger Clarke, Chris Tufton and former Prime Minister Bruce Golding.

On the issue of my compensation, I have recommended publicly on various occasions in the past, and I do again here: A body such as The Statistical Institute of Jamaica should be given the statutory responsibility to create a website accessible to all and publish all government-awarded contracts so that anyone can access this information and judge how the GOJ spends this part of its Budget. As taxpayers, we all have the right to know which business houses, consultancies or persons receive government contracts, at what price, and their connections to the GOJ or its officials. I want this transparency, and I am sure the country will benefit from it.

A lot has been said about how much Corporate Strategies, my consultancy, and I have been paid to lead the divestment exercise. Many critics forget that a consultancy has to pay its staff, its rent, utilities and taxes. Also, the headline figure is paid over a period of time, in this instance between August 2008 and October 2011.

When taxpayers' money is involved, people do have a right to know how it is spent and make their comments. Some comments have prompted the query, how to take a difficult but successful divestment of GOJ assets and turn it into something negative? It is simple. Start with a negative bias, be ignorant of many of the facts, and mix the rest with politics.

Finally, many who raise the issue are fully aware that Corporate Strategies and I worked for free on the sugar-divestment effort between December 2005 and August 2008. No one questioned our patriotism then. Bottom line: I did the job I was hired to do and the GOJ paid a fraction of what other comparable consultancies would charge.

Value For Money

Value for money can best be judged by the statement quoted above and attributed to former Prime Minister Patterson.

"The best option was to privatise the government sugar estates." As a result of the work of the SDE team, of which I was the lead negotiator, the five sugar factories and six estates have been successfully privatised.

The Government does not own one share in the privatised entities. Three independent and financially strong firms now own the assets. Moral hazard is history.

Regular annual losses in billions of dollars have been removed from the financially overloaded backs of Jamaican taxpayers.

The negotiated divestment commitment we negotiated included a combined new investment figure of US$165.9 million.

The country's former GOJ-owned sugar assets are (from published reports and private conversations) performing very well this year and could have the best sugar manufacturing results for decades. The investments made by the three owning companies to prepare for the current sugar crop have given the divestment exercise significant positive results.

Some have commented that the sugar-divestment process that ended in such a successful outcome should be a model for future divestment of GOJ-owned assets. Future lead negotiators must be careful to raise their patience and frustration thresholds, be tenacious drivers, and replace any parts of their character that may be thin-skinned with the tough skin of a pachyderm.

Aubyn Hill is the CEO of Corporate Strategies and chairman of NationGrowth MicroFinance. He also sits on boards of other companies. Email feedback to columns@gleanerjm.com.