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Report of the Sugar Industry

Enquiry Commission

2010

September 28, 2010

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Sugar Industry Enquiry Commission2010

September 28, 2010

His ExcellencyThe Most HonourableSir Patrick Linton Allen, O.N., G.C.M.G., C.D.Governor General of JamaicaKings House

Your Excellency:

By Instrument under your hand dated April 22, 2010, under the Commission of EnquiryLaw, you appointed us to enquire into and report on the relevance of the currentregulatory, institutional, cane pricing and product marketing arrangements in the SugarIndustry and to make recommendations in respect of any changes, if any, to these currentarrangements in the national interest; and to enquire into and assist in the effectiveimplementation 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, theresults of our Enquiry and the recommendations that we have made.

Alvin G. Wint .. (Chairman)

Wilfred Baghaloo (Commissioner)

Marjorie Henriques . (Commissioner)

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Table of Contents

Summary of Main Recommendations 4

Glossary of Terms and Acronyms 6

1. Introduction 71.1 Terms of Reference 71.2 Procedure 81.3 Background 9

1.3.1 Historical Precedent 91.3.2 Significant Changes in the Trading Environment 91.3.3 Full Privatisation of the Jamaican Sugar Industry 10

2. The Sustainability of a Private Sugar-Cane Industry 112.1 Costs of Sugar Production in Jamaica 112.2 Likely Scale of the Industry 132.3 Market Access and Sugar Prices 15

2.3.1 The EU Market 152.3.2 The US Market 152.3.3 The Domestic Market 162.3.4 World Sugar Prices 16

2.4 Private Sector Interest in the Industry 162.5 Diversification Prospects 182.6 Environmental Externalities 222.7 Social Externalities 232.8 Conclusions on the Sustainability of a Private Sugar Industry 24

3. SIA and the Sugar Industry Control Act 25

4. The Role of Other Key Institutional Actors 294.1 Research and the Role of SIRI 294.2 Marketing and the Role of JCPS 314.3 Organisations Representing Industry Sub-Groups 33

5. Cane Pricing Formulae and Payment Arrangements 34

6. Review of Any Other Arrangements 406.1 Importation of Sugar 406.2 Availability of Incentives to the Sugar Industry 426.3 Access of Industry to Accompanying Measures Funds 436.4 Issues of Sugar Cane Ownership 446.5 Access to Lands 456.6 An Industry-Linked Energy Policy 46

7. Conclusion 47

Appendix 1: Presenters at the 2010 Sugar Industry Enquiry Commission 48

Appendix 2: Providers of Written Submissions to the Enquiry 50

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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 policyand the full privatisation of the Industry, the Government of Jamaica appointed a Sugar

Industry Enquiry Commission. This Commission was given the mandate to ascertain ifmodifications were required in the regulatory and institutional arrangements affecting theIndustry in order to support a sustainable private-sector led Industry.

The Commission of Enquiry heard from stakeholders within the Industry and a range ofother institutions and individuals and arrives at the following broad set ofrecommendations. More specific recommendations, and the rationale for allrecommendations, are elaborated upon in the body of this Report.

1. The Sugar Industry Authority (SIA), headed by a non-executive chair, shouldcontinue 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 ExecutiveAgency Status. The SIA should place a greater focus on using its statutoryauthority, where necessary, to adjudicate in disputes between farmers andprocessors. It should also engage in regular reviews of the cane paymentformulae and implement a clear bilateral obligation framework for farmersand processors. With the SIA functioning effectively in this capacity, thisCommission proposes that there will be no further need for commissions ofenquiry into the Jamaican Sugar Industry.

2. The Industry should continue to have a research function, operating throughthe Sugar Industry Research Institute (SIRI), subject to an operational audit todetermine SIRIs optimal manning level. SIRI should operate separately fromthe SIA, and report to a board which should include individuals with researchexpertise; and Rural Agricultural Development Authority (RADA)representation, to encourage collaboration between these two agenciesinvolved in the provision of agricultural extension services. SIRIs fundingshould continue to be sourced through the Sugar Industry.

3. There is value in the continued pooling of sugar. The Jamaica Cane ProductSales 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 tothe general oversight, but not necessarily involvement, of the SIA, in line withthe provisions of the existing Sugar Industry Control Act.

4. 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, continuousreview of the (Factory Recovery Index (FRI) and Jamaica Recovery Cane

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Sugar (JRCS) benchmarks, payment structure, review of the appropriate levelof mandatory testing of cane, independence of core samplers, andconsiderations of incorporating quality benchmarks into payments tocontractors.

5.

There should be no centralisation of the importation of refined sugar, but acontinuation of the import licensing system. The Jamaica CustomsDepartment and the Ministry of Industry, Investment & Commerce shouldimprove their levels of surveillance to reduce revenue leakages.

6. The Government of Jamaica should carefully balance the level of dutiesimposed on refined sugar with the benefits, including the social externalities,associated with an integrated domestic Sugar Industry, particularly in theevent of forward vertical integration into sugar refining.

7. All participants in the Export Sugar Industry should be eligible for incentivesprovided to exporters that allow them to compete on world markets on thebasis of having access to inputs as close as possible to world market prices.Incentives to exporters of sugar should be industry-wide and not bedetermined in an ad-hoc, case-by-case basis.

8. The Accompanying Measures Funds should be available, in grant form, forgeneral purpose agricultural equipment, and in the form of loans, atcommercial levels of collateralisation, for equipment that is highly industry orfirm-specific.

9. If idle government-owned agricultural lands are available, firms fromwhatever sector, including the sugar industry, willing to pay at commerciallevels should be allowed to lease such lands. Assistance from the relevantgovernment agencies should be made available to identify appropriate lands.

10. The Commission supports the Office of Utility Regulation (OUR)s avoidedcost principle for pricing co-generated electricity, with a premium forelectricity generated using renewable resources. The Commissionrecommends that the OUR disseminate its methodology for arriving atavoided cost and continue to review the level of premium for renewablesources of energy that is appropriate in Jamaicas particular circumstances.

11. The Commission also recommends that the GoJ develop a definitive policy onco-generation. The Commission further recommends that GoJ complete, withdispatch, the development of its biofuels policy, including a clear articulationof the role that ethanol produced from local feedstock is expected to play inthe development of the local biofuels industry.

12. 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: Africa-Caribbean-PacificAIJFCA: The All-Island Jamaica Cane Farmers AssociationBITU: Bustamante Industrial Trade Union

CAP: Common Agricultural PolicyCARICOM: Caribbean CommunityCBERA: Caribbean Basin Economic Recovery ActCBI: Caribbean Basin InitiativeCBTPA: Caribbean Basin Trade Partnership ActCMC: Caribbean Molasses Company. (Ja.) LimitedESOP: Employee Shareholder Ownership PlanESSJ: Economic and Social Survey of JamaicaEU: European UnionFRI: Factory Recovery IndexGoJ: Government of Jamaica

JAST: Jamaica Association of Sugar TechnologistsJCPS: Jamaica Cane Products Sales LimitedJPS: Jamaica Public Service Company LimitedJRCS: Jamaica Recoverable Cane SugarMTBE: Methyl-Tertiary-Butyl-EtherNEPA: National Environment and Planning AgencyNIC: National Irrigation CommissionNWU: National Workers UnionOUR: Office of Utilities RegulationPIOJ: Planning Institute of JamaicaPPA: Power Purchase Agreement

PwC: PricewaterhouseCoopersSADP: Sugar Area Development ProgrammeSCJ: Sugar Company of JamaicaSDA: Sugar Dependent AreasSDE: Sugar Divestment EnterpriseSIA: Sugar Industry AuthoritySICA: Sugar Industry Control ActSIRI: Sugar Industry Research InstituteSMCJ: Sugar Manufacturing Corporation of Jamaica Limited.SPA: Spirits Pool Association LimitedSPFD: Sugar Producers Federation of Jamaica

STU: Sugar Transformation UnitRADA: Rural Development Agricultural AuthorityUAWU: University and Allied Workers UnionWTO: World Trade Organization

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1. Introduction

In recognition of the important changes in the Jamaican Sugar Industry, particularlyreflected in the imminence of the return to an Industry wholly owned by the privatesector and the significant adjustments in the trading environment for Jamaican Sugar, a

Commission of Enquiry into the Industry was appointed. The Commission was appointedby the Governor General of Jamaica on April 22, 2010, under the provisions of theCommissions 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 theProclamation 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 tomake recommendations in respect of changes, if any, to these currentarrangements in the national interest;

2. To enquire into and assist in the effective implementation of the development andmaintenance of a sustainable private sector-led Sugar Industry by the Governmentof 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 interestedpersons and key sugar industry groups/bodies;

b) Review the Sugar Industry Control Act and the role of the Sugar IndustryAuthority;

c) Review the role played by other key institutional actors including theSIRI, 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

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development of a sustainable private sector-led, multi-product SugarIndustry; and

g) Make recommendations in respect of (a) and (f) inclusive consistent withthe 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 holdthe 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 July16, 2010. Key stakeholders in the industry were advised of the timetable for hearings in ameeting 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 whichwas posted the schedule of public hearings and all presentations made to theCommission; and arranged for all administrative matters required by the Commission,with the assistance of Mrs. Carol Rodgers, Administrative Assistant, and the support ofthe Sugar Industry Authority (SIA) and Ministry of Agriculture and Fisheries.

Sixty two oral and written submissions from individuals and organisations were made tothe Commission. Notes of all presentations and the associated discussion were taken

verbatim. Appendix 1 identifies those individuals and organisations heard by theCommission.

Additionally, the Commissioners visited two sugar estates, Appleton and Frome, andtoured the farms and factories and held meetings with farmers from adjoiningcommunities. The Commission chose not to hold any private meetings with industrystakeholders bearing in mind its mandate to conduct proceedings in an open manner.Where it required additional information or clarification it requested that this informationbe 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 submissionsfrom individuals who were not able to present in person at the Hearings and an institutionthat did not present, but had an interest in the Commissions deliberations (See Appendix2); and from individuals who had presented at the Commission but who subsequently,unsolicited by the Commission, provided additional information or clarification onmatters raised at the Hearings.

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Finally, the Commissioners reviewed all applicable legislation, reports on the Jamaicansugar industry, and the reports from previous commissions of enquiry into the JamaicanSugar Industry and solicited additional information that was required for it to completethe full, faithful and impartial enquiry mandated in the Governor Generals Proclamation.

The Commission Hearings were well attended by key stakeholder groups, especially theSugar Industry Authority (SIA) and its Sugar Industry Research Institute (SIRI), the All-Island Jamaica Cane Farmers Association (AIJCFA), the Sugar ManufacturingCorporation 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 tofacilitate the presentations of key industry sub-groups.

1.3 Background

At least three variables are associated with the appointment of a Commission of Enquiryinto the Jamaican Sugar Industry in 2010.

Historical Precedent Previous Commissions of Enquiry Significant Changes in the Trading Environment for Jamaicas Sugar Full Privatisation and Expansion of the Jamaica Sugar Industry

1.3.1 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 thisprocess. A West Indian Sugar Commission was appointed again, in 1929. Commissionsof enquiry were also appointed in 1944, 1959, 1962, 1964, 1966 and 1988. The 1966Report suggests that the need for commissions of enquiry occurred because for decadesconflicts within the Sugar Industry of Jamaica have caused deep public concern.

1.3.2

As is well known, the most significant international change relates to Jamaicas access tothe European market for sugar. For decades, Jamaican sugar benefited from preferentialaccess to the UK and ultimately the European market through the CommonwealthScheme of Preferences (1932-1974); the Commonwealth Sugar Agreement (1951-1974);

Significant Changes in the Trading Environment for Jamaicas Sugar

While conflict in the Jamaican Sugar Industry has not been eliminated, the proceduresand institutions created in response to the 1966 and 1988 Commissions of Enquiry appearto have contributed significantly to a reduction in intra-industry friction. Consequently,

the current investigation into the Jamaican Sugar Industry, though structured in part dueto historical precedent, has been triggered less by history and more by fundamentalinternational and local changes affecting the Jamaican Industry.

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the African, Caribbean Pacific (ACP) European Community (EC) Lome Conventions(1975-2000), which adopted an European Union (EU)-ACP Sugar Protocol; and theACP-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 itsCommon Agricultural Policy (CAP), to which its preference regime for ACP sugarproducers had been linked. These changes ultimately resulted in a 36% reduction in theguaranteed preferential price granted to ACP sugar producers over a four year periodending in 2009, and the abolishing in October 2009 of the ACP-EU Sugar Protocol thathad been enshrined in Lome/Cotonou Agreements.

Since Europe had long been the primary destination for Jamaicas sugar and the coststructure of the Jamaican Industry has made it uncompetitive by global standards, the lossof the European preferential market has potentially grave consequences for the viabilityof 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 thesustainability of the Jamaican Sugar Industry.

The EU has provided funds to Jamaica and other ACP countries, under theAccompanying Measures for Sugar Programme, to assist in lessening the impact of theloss in trade preferences, and has linked a component of the 2010-2011 funds to bereleased through this Programme to the Government of Jamaica (GoJ)s review of theregulatory 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 hadannounced in 2003, the Planning Institute of Jamaica (PIOJ), following upon a 2004request 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 chanceof maintaining a viable industry in the face of the changed trading conditions was if therewas an expansion of cane production, an improvement in yields, an increase in factoryutilisation coupled with a factory modernisation programme. These changes would haveto be coupled with a more aggressive movement to a sugar cane based industry withmultiple end products, including sugar, molasses, bagasse translated into energyproduction with the potential for co-generation, and ethanol production.

Furthermore, these developments relied both on capital injections and improvements inmanagement that were only likely to be forthcoming if the Industry was returned, in itsentirety, to the private sector. A key plank, therefore, of the GoJs adaptation strategy forthe Sugar Industry was the privatisation of five of the seven sugar estates that were undergovernment 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 jointlyowned by the Government of China and private interests in China, for it to purchase theremaining three sugar companies, coupled with an arrangement for long term leases ofthe adjoining lands.

Another trigger, therefore, is the need to review the regulatory, institutional, pricing andmarketing arrangements in order to create an enabling environment for the emergingprivate sector-led, multi-product based Industry, which lies at the core of the GoJsstrategy 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 assumethat a private Sugar Cane Industry is sustainable in Jamaica and, therefore, the

Commissions principal charge is to assess how changes in existing arrangements canenhance this sustainability.

At the same time, the Commissioners were seized of the importance of addressing, as astarting point for an examination of these specific terms of reference, the more generalsecond term of reference, which mandated the Commission to enquire into and assist inthe development and maintenance of a sustainable private sector-led Sugar Industry.

The Commission did enquire into issues associated with the sustainability of the Industryand believes that it is important to try to capture the perspectives it garnered duringhearings 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 JamaicaJamaica is a high cost sugar producer by global and regional standards. While animportant element of Jamaicas high cost relates to the scale of its sugar operations andthe high cost of energy, even more significant is the impact of operational and managerialefficiencies as demonstrated by the very significant intra-island cost variation. A keyelement of variation is the difference in cost and profitability between government ownedand 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 incurredsignificant losses. The Commission was unable to obtain access to production costs andprofit levels for private factories, but a number of these entities have a long history ofcontinuous business operation.

The Ministry of Agriculture, in its presentation to the Commission reported that island-wide costs per pound of sugar are about US$0.26. Mr. Aubyn Hill, who presented to theCommission on behalf of the Government-owned factories, reported costs in the regionof US $0.44. per pound in the recent past with the intention of reducing costs to US$0.21during the coming year. These represent the full cost of production which includes allfarm and factory costs. The manager of the lowest cost government factory indicated tothe 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 factoriesranged from a low of US$0.22 per pound in the most efficient government ownedfactory, 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 perpound, with Frome, Bernard Lodge and Monymusk, operating at pre-interest costs ofUS$0.178, US$0.199 and US$0.215 respectively; while Belize, Guyana, Barbados andTrinidad 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 theposition stated by the PIOJ in its 2005 Report which is that the industry does not have aconsensus 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 relativeto production costs in countries regarded as globally efficient. For example, in Australiaand Brazil, which are two of the most globally efficient producers, sugar is produced at acost 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 in2007. The Guyanese production cost structure is interesting to Jamaica, because, asreported 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 by1990, with a turnaround to a production level in excess of 300,000 tonnes by 1999through a combination of improved agricultural management, proper factorymaintenance, the professionalisation of management and the right institutionalframework, with targeted government support.

The joint presentation to the Commission from the Trade Unions also pointed to thepotential of Jamaica learning from the revitalisation of the Guyanese Industry, as itidentified the importance of participative management and a narrowing of the trust gap inthe 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 SugarIndustry, the PIOJ reported in its situational analysis, which drew on the results of itsstakeholder dialogue, that the Jamaican Sugar Industry has been characterised as beingamong the highest cost producers in the world. This is attributed to low land productivity,

inefficient field and factory operations, high labour and transportation costs andweaknesses in administration and management structures, among others.

The PIOJ study went on to suggest, however, that the Industry could be sustainable in themedium term if a range of recommendations were adopted to effect an increase in yieldin field operations of 25% (with average tonnes cane per hectare improving from 64 to80) and in factory operations of 13% (with the tonnes cane per tonnes sugar (tc/ts) ratiochanging from 12 to 10.4); the production of ethanol and co-generation from sugar caneproduced resultant on increased productivity in field operations; and the possibility of anexpansion into refined sugar production based upon the use of locally produced sugar asfeedstock.

The PIOJ study did not specify the future target for production costs that would beconsistent with industry sustainability. Mr. Aubyn Hill, however, was of the view that theentire Industry needed to, and could with the correct levels of investment and appropriatemanagement; reduce costs to the level of about US$0.12 per pound. This is similar to thelevel 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 isrequired to get to the target production costs indicated above is reflected in the currentcost of field operations. Based upon information provided by SIRI, the current field costsfor producing one tonne of sugar cane vary from J$2,348.43 for cane produced underrain-fed conditions, to J$2,503.42 for cane produced under irrigation. At the 2009average tonnes cane per tonnes sugar (tc/ts) ratio (for 96 sugar) of 10.61 (Economic andSocial Survey of Jamaica (ESSJ), 2009) and the 2009 average exchange rate of J$88.49to US$1 (ESSJ, 2009), these field costs translate to production costs for sugar of aboutUS$0.13. (Av. Production Cost (2,443.42) * Av. tc/ts (10.61) / pounds per tonne (2,240)/J$/US Ex. Rate (88.49).

Of course, the level of reduction required in production costs that is consistent with asustainable industry is also linked to the size and scope of the industry, and tied to thelikely prices for sugar, and overall revenues available to a Jamaican Sugar-Cane Industry.

2.2 Likely Scale of the IndustryCane and sugar production are currently at historically low levels. Production levels overthe 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 1,369 120.32006 719 1,026 1,745 142.32007 784 1,184 1,968 159.42008 644 1,008 1,652 140.92009 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 beincreased significantly in order for it to be sustainable. The 2005 PIOJ report on thestrategic options for industry sustainability developed two scenarios. Scenario Oneinvolved the production of about 200,000 tonnes of raw sugar for domestic (60,000tonnes); EU (126, 000); and US (11,500) markets.

Scenario Two involved the production of about 300,000 tonnes of raw sugar for theabove markets, and 83,000 to supply a refinery that would produce refined sugar for localand regional markets. Scenario Ones target of 200,000 tonnes became the Governmentof Jamaica (GoJ)s target under the Adaptation Strategy for Sugar for 2010, but followingon the production levels of 2009, it was clear that this goal was not going to be achievedin the 2010 crop year. Nevertheless the Industry, in submissions from the AIJFCA, theSCMJ and the Ministry of Agriculture & Fisheries, continued to view a production targetof 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 514,825tonnes in 1965, produced from cane reaped from 59,773 hectares. They also comparewith 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 historicalprecedent, 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 caneproduction has been declining rather than expanding.

Consequently, it is clear that the viability of the Industry is highly dependent oninvestment decisions that would increase acreages planted, the yield per hectare, and thescope of factory operations; and on the availability of markets for the sugar that isproduced.

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2.3 Market Access and Sugar PricesThere 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 goingto the European Union. The final price reduction of 18% from the EU did not take effectuntil October 2009, suggesting that future EU prices in the near term will be closer toabout US$0.24 per pound.

While future changes in EU prices are possible, the significant price reductionsexperienced by ACP sugar producers in the recent past are unlikely to be repeated in thenear to medium term. Upon the abolition of the Lome/Cotonou Sugar Protocol in October2009, CARIFORUM countries, including Jamaica, which had earlier signed a WTO-

compliant Economic Partnership Agreement with the EU, entered into a six yeartransition arrangement. During this transition period, these countries will receive aguaranteed 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 quotaarrangements that will not be country-specific, with the CARIFORUM region having aquota of 530,000 tonnes.

Beyond 2015, exports of sugar to the EU will be quota-free and duty-free under theCARIFORUM-EU EPA, with the implication that Jamaicas ability to take advantage ofthis market will depend upon the competitiveness of its Industry relative to all otherproducers with duty free and quota-free access.

Even though EU sugar prices continue to be above world market price levels, sugar is anindustry that is subject to significant levels of government intervention. Dr Haraksingh, aCaribbean sugar expert who appeared before the Commission, described it as the mostvolatile commodity in world trade. As a consequence most of the World price for sugaris a residual price, with Dr. Haraksingh estimating that only approximately 23% of theworlds 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 marketunder the terms of the Caribbean Basin Economic Recovery Act (CBERA) and theCaribbean Basin Trade Partnership Act (CBTPA). The CBERA and CBTPA provideduty-free access to the US market for a wide range of products, including sugar, fromCaribbean Basin Initiative (CBI) countries.

As a non-reciprocal arrangement the CBERA/CBTPA requires a waiver in the WTOfrom 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 is11,500 metric tones, which it plans to fully supply in 2010, since with the changes in theEU regime the US market is now priced more attractively than the EU market.

2.3.3 The Domestic MarketThere are two potential components of the domestic market. SIA reports that Jamaicaimported about 53,000 tonnes of brown sugar per year between 2006 and 2008; and JCPSreports imports of 57,000 tonnes in 2009. This is a market that would be available to thelocal 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 fromimports of brown sugar. Coupled with the trading profits on refined sugar imported byJCPS, the profits on imported brown sugar represent revenue to the Industry of aboutJ$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 refinedin Jamaica. A study by PricewaterhouseCoopers estimated that the total regional demandfor refined sugar was 230,000 tonnes, of which it was estimated that Jamaica couldsupply 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 onlybe feasible if the refinery could gain access to raw sugar at a cost of about US$0.12 perpound.

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

2.4 Private Sector Interest in the IndustryOne of the key indicators of the level of sustainability of the Jamaican Sugar Industry as aprivate 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, problemsnotwithstanding, there is sustained and significant interest. This interest has severalantecedents and has manifested itself in private investment.

The antecedents include Jamaicas long history of private involvement in the SugarIndustry. Two of Jamaicas most successful sugar estates and distilleries, Appleton andWorthy Park, have operated continuously for centuries. In its presentation to theCommission, 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 everyyear since 1720; that rum has been produced over the same period (less forty years) andthat 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-goingrisk assessment process by farmers. In his presentation to the Commission, ProfessorAnthony Clayton pointed to the fact that the 1897 Royal Commission of Enquiryrecommended that Jamaica diversify from sugar cane into the production of other tropicalproducts.

There has, indeed, been considerable diversification of the Jamaican economy since sugarproduction has declined continuously for centuries. While Jamaica was once the worldslargest exporter of sugar, for example, it currently has no impact on the global sugarmarket, 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 productionof other agricultural crops. In its presentation to the Commission, for example, theNational Irrigation Commission (NIC) indicated that the ruinate lands that had come outof 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 countriesbecause, as Dr. Haraksingh pointed out to the Commission, sugar withstands normalagriculture risk better than other agricultural products. Dr. Patricia Northover, in paperspresented to the Commission, describes the cane plant as an ecologically optimallyadapted plant for the (Caribbean) region.

In particular, sugar cane has tended to be more resistant to diseases than other tropicalcrops. Thus, Jamaicas diversification into orchard crops such as papaya, citrus andcoconuts has advanced less rapidly because of disease challenges. The sugar cane is lessvulnerable 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 otheragricultural crops to praedial larceny.

The private sector interest has manifested itself in on-going investment in the twohistorically successful private estates. Paul Henriques, of Appleton Estates, pointed out toCommissioners that he was of the view that the biggest problem in the industry has beena lack of investment. Appleton has tried to rectify this problem with an on-goingprogramme of capital investment in farms, factories and distilleries, estimated at US$3mper year over the last several years, with the new boiler that it recently acquired operatingat Californias relatively stringent environmental standards.

There has also been on-going investment in farming by the independent farmers whofarm a significant proportion of the cane that is milled. Mr Roger Clarke, an independentfarmer 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 ofthe 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 twolocal entities of two of the five estates that had been owned by the GoJ since the mid-

1990s. These private firms have also invested in their facilities. In the case of GoldenGrove, the Commission was advised that the investors had spent US$4.5m in recentcapital investments, but these investors still bemoaned the fact that significantinvestments continue to be required as the boilers were built in 1924 and, despiterefurbishment, 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 thatthe GoJ received several expressions of interest in the acquisition of the three remainingestates and has signed an agreement for the acquisition of all three estates with one of thecompanies, Complant International Sugar Industry Co. Ltd.

The interest of the private sector, however, is not without reservation. Local private firmsinvolved 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 reformwithin the Industry, and in cases policy support from the GoJ, if their firms are to besustainable in the context of the changes that have taken place in export markets.

2.5 Diversification ProspectsThe GoJs strategy for the development of a sustainable Industry is predicated on theneed 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 chemicalenergy. The focus of the Jamaican Sugar Industry should be on an integrated sugar caneprocessing product mix, which includes rum and electrical power, with emphasis onvalue-added products rather than raw sugar. Sugar cane cultivation and processingtechnology has evolved to greater levels of efficiency which are dependent upon scaleand good management. The area of cane required to optimally feed a modern sugarfactory has constantly increased and currently stands at 12-13,000 hectares. The newestsugar factory in the Caribbean is at Skeldon, in Guyana and uses the more energy andlabour-efficient diffusion technology, replacing the dated grinding by trains of massivesteel 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 bagasse-fed boilers to the national grid.

During the hearings of the Commission, while there was a clear recognition from localsugar owners of the need to improve efficiency and factory throughput levels, there wasless of a focus on diversification into either ethanol production or co-generation in a formthat would allow for sale of electricity to the national grid, even though it is already thenorm 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 thearea 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 fiftypercent 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 thenational grid was that in at least some of the sugar factories the electricity cycle differedfrom the cycle used by the national grid. For such factories, the sale of electricity to thenational grid would not only require the production of surplus electricity but aninvestment into equipment that could allow for the requisite cycle conversion.

In promoting Co-generation as an opportunity the Commission is of the view that theGoJ needs to implement a definitive policy framework addressing:

1) The price of co-generation. Currently, the OUR has an avoided cost priceof US$0.104 for firm supply and US$0.0888 for non-firm supply plus apremium for renewable energy of up to 15%. However, much higher pricesfor co-generated electricity have been discussed in negotiations withprospective 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 distributorof electricity.

4) The policy with respect to the proportion of Biomass/renewable energyrepresented in the Countrys total energy demand. The OUR during itspresentation to the Commission stated that the intention was to achieve alevel of 15% by 2030, but it is not clear what plans are contemplated in orderto 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 Americaunder the CBERA and CBTPA based upon the conversion of importedhydrous ethanol. This process does not require any local feedstock, butconceivably, could be one of the options available to firms in the SugarIndustry which establish ethanol processing facilities. Although Jamaica hasduty 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 localfeedstock.

(2)The production of anhydrous ethanol from local feedstock for sale on exportmarkets, also under the provisions of the preferential arrangements for the

marketing of such products that Jamaica has with the United States. BecauseBrazil is by far the worlds most efficient producer of ethanol, Jamaicas onlyability to compete in this commodity market using local feedstock is throughreliance on its access to preferential market arrangements.

(3)The production of fuel grade ethanol for the Jamaican local market. InNovember 2008, the Government introduced 10.0% ethanol as a fuel blendenhancer for motor engines. In November 2009, the Government mandatedthe use of ethanol blended fuel for motor engines, phasing out the use of theenvironmentally 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 remindedthat Jamaica lacks the land mass to realise the economies of scale of other major ethanolproducing countries such as Brazil, Australia and the USA. Ethanol production inJamaica, therefore, is likely to suffer from a familiar litany of problems: low landproductivity, low cane quality, high content of extraneous matter, inefficient field andfactory operations, high transportation costs, weaknesses in administration andmanagement structures, mechanical breakdown in factories et al. On the other hand, thisReport points out that Jamaica is better suited to a cane ethanol industry than any otherCaribbean island nation, with the exception of Cuba.

It is fair to say that opportunities for diversification into ethanol production have beengreeted with lukewarm enthusiasm by local investors in the Jamaican sugar industryalthough the Chairman of the Sugar Divestment Enterprise indicated that the internal rateof return from such investments could be as high as 188% assuming a price of US$1.50per litre. One of the issues raised by local producers of sugar with integrated rumoperations was that only 50% of the molasses used in the production of rum was obtainedlocally. For these entities, increases in the production of molasses for rum processingseemed to be a higher priority than diversification into ethanol production.

At the same time, the Commission understands that Complant International SugarIndustry Co. Ltd. agreed to invest with an intention, captured in its Memorandum ofUnderstanding with the GoJ, to engage in a process of diversification that includesethanol production, particularly for the local market, linked to a GoJ commitment topropose legislation for an E25 ethanol/gasoline blend, co-generation, and the possibilityof extending operations into the refining of sugar. The extension into sugar refining andethanol 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 noteprovided to the Commission in the presentation from Professor Clayton is the potentiallyshort-lived nature of ethanol derived from sugar cane as a commercially viable source ofenergy. In his presentation to the Commission, Professor Clayton also pointed toexamples of higher value-added products, such as nutraceuticals, which could form the

basis of diversification efforts, but acknowledged that previous such presentations hadelicited 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 molassesfrom local sugar manufacturers. Over a prolonged period the demand for local molasseshas outstripped the supply resulting in the importation of molasses. In his presentation tothe Commission, Mr. Evon Brown in his capacity as CEO of National Rums of JamaicaLimited stated that Jamaicas costs are approximately 25% higher than those of ourregional 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 costsassociated with the importing of molasses, which, together with oil, account for 80% ofthe 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 rummanufacturers to expand their operations and for new entrants, particularly, those whorecently acquired the Government factories. To encourage new investment in the rumindustry, particularly in the context of the potential challenges faced by the Jamaicanindustry given recent developments with Diageo and its arrangements with the US Virginislands, the Commission recommends that the GoJ:

1) Continue to allow Caribbean Molasses Association to import molasses atlanded prices that are the equivalent of world market prices. The impositionof a duty on imported molasses, which the Commission heard is beingconsidered, is not compatible with this principle.

2) Review the taxation structure to ensure a level playing field for rummanufacturers relative to importers of alcohol, with a focus on taxing allalcohol products on their alcohol content, rather than the taxation approachadopted under the current ad-valorem system.

3) Implement practical and reasonable environmental rules which arecompatible with those that apply in other countries that approximateJamaicas level of environmental vulnerability.

4) Vigorously protect the Jamaican rum brand in international markets.

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2.6 Environmental ExternalitiesThere are a number of variables that make issues of the sustainability of industriescontrolled by private sector firms particularly important to national policy makers. Onesuch variable, which is relevant to the assessment of the Jamaican Sugar Industry, exists

in circumstances where firm level profitability cannot be readily equated with nationalinterest because of the existence of distortions such as protection.

Another is linked to the issue of externalities. In circumstances where private firmsgenerate benefits or incur costs for the nation state that are not readily captured in theirfinancial 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 Caneproduction has had deleterious environmental consequences in countries all over theworld because of the resulting impact on loss of wetlands and negative impacts onbiodiversity. Indeed, a 2009 study Professor Clayton led for the United Nations

Environment Programme notes, referencing a 2004 World Wildlife Fund Study onSugar and the Environment stated that the production of sugarcane has probablycaused a greater loss of biodiversity than any other single crop in the world due to thedestruction of wetlands for plantations, intensive water use, heavy dependence onagrochemicals and high levels of wastewater discharged during the production process.

Professor Clayton also noted, however, that many of these effects would have resultedfrom the initial entry into sugar cane production. Currently, the environmental impactassociated with the Industry would be determined more by its operations caused, forexample, by surges of cane mill effluents discharged directly into streams and ending upin 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 thepoor environmental record of the Sugar Industry and about the effects of practices, suchas the harvesting of cane by burning which produces environmental toxins that arecarcinogenic.

It should be pointed out that the Commission heard that a number of farms, albeitrepresenting only a small portion of the total cane crop, are currently harvesting canegreen, 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 ofabsorption of carbon dioxide, and improvement in the aesthetic quality of theenvironment and indicated that it has collaborated with the Industry in developingenvironmental codes of practice for farms and factories.

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The Sugar Divestment Enterprise has worked with NEPA to develop a plan forenvironmental compliance in relation to the divestment process. The Commissionerswere able to review the Industrys Environmental Code of Practice developed by a multi-agency team, which included representatives from the Industry, and the Commissionheard 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 theTrade Unions. The Unions argued that workers in the Sugar Industry were exposed topoor safety and health conditions and practices, with the government-owned factoriesimplementing fewer mitigation measures, through comprehensive occupational healthand safety measures, to deal with this level of exposure than privately owned factories.

Occupational health and safety issues that required addressing including adequateclothing and protection for workers, the availability of adequate volumes of potabledrinking 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 forfield 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 thepresentation to the Commission from the Ministry of Labour and Social Security. Whilesugar factories were required to have planned safety programmes and designated safetyofficers, the Commission was informed that none of the Jamaican sugar factories werefully compliant with these requirements, although the Commission was advised that somefacilities had improved significantly in the area of health and safety.

2.7Social Externalities

The Sugar Industry has long past its apogee in terms of its economic contribution toJamaica, and, indeed may well be at its nadir, but it continues to represent a largegeographically dispersed continuous manufacturing operation, the largest agro-processingoperation and one of the largest employers of labour. In 2009, employment in the SugarIndustry was 35,000, as estimated by trade unions (SMCJ uses the 38,000 estimated inthe 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 goodsproducing sector of the Jamaican economy, one of the significant concerns linked to thesustainability of the industry is the social dislocation that could result from the closure ofall or segments of the Jamaican Sugar Industry.

Dr. Northover, in papers presented to the Commission, focused on the importance of thepositive social externalities associated with the Industry with respect to supporting therural 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 urbancentres and Jamaicas world-leading position with respect to urban-dominated, violentcrime.

Relatedly, the Sugar estates have long played a social role within their communities,providing electricity, housing, health services and supporting education and othercommunity services. Notably, in areas where there have been closures of sugaroperations, there has been limited development of alternative economic activities and thecommunities show the visible loss of economic and social support.

The GoJ has already initiated a formal programme, the Sugar Area DevelopmentProgramme (SADP) to mitigate the social and economic fallout from the decline in theSugar Industry. The SADP is financed by a component of the Accompanying MeasuresFunds provided by the EU. The target areas are those communities surrounding theexisting sugar estates (Frome, Appleton, Long Pond/Hampden, Monymusk, Worthy Park,

Bernard Lodge and St. Thomas Sugar Company), collectively referred to as SugarDependent Areas (SDAs); and the target groups are workers who are or were employedby sugar estates and small cane farmers.

One of the highest priorities of the SADP is to ensure that displaced sugar workers livingin SDAs do not suffer from a lack of adequate social services during the period of sugartransformation. Another is to identify alternative economic activities for displacedworkers. The SADP is being managed by the Sugar Transformation Unit (STU) of theMinistry of Agriculture and Fisheries.

2.8Conclusions on the Sustainability of a Private Sugar Industry

This Commission offers no consensus position on the long term sustainability of aprivate Sugar Industry in Jamaica. There are too many imponderables andunknowables with respect to investment and managerial decisions to be taken byprivate sector operators, policies to be pursued by government and changes in globalmarket conditions. It is clear that there are opportunities based upon Jamaicas historyand infrastructure in this Industry, the interest of private sector groups from within andoutside the Country, and the fact that, despite recent changes, this Industry is likely toface a more benign global trading environment for Jamaican producers than otheragricultural or agro-processed products.

There are also, however, significant risks associated with inertia. These risks are notinsignificant given the gap between production costs in Jamaica and elsewhere. In thisregard, there is also the risk that the Jamaican Government takes the position that thesocial externalities are so far reaching that the industry must be supported at any cost tothe nation. If the industry is to be supported based upon social externalities, then, as far aspossible, 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 thetoo important to be allowed to fail syndrome ensured that privatisation left the peopleof Jamaica absorbing a contingent liability and generating a moral hazard, and privateoperators in a position in which if they succeeded it was their success, but if they failed itwas the Countrys failure.

These efforts have also been negatively impacted by the failure of GoJ to implementobligations, particularly in the areas of finance and governance, on a timely basis and ona philosophy of privatisation that focused primarily on ridding the state of financialburdens, rather than on a clear balance between state and private skill sets and thecomplementary 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 ofthe operation of a business as usual approach on the part of private operators or theGoJ. It is against this background that the remainder of this report focuses on changes inthe institutional, regulatory and support arrangements within the Industry that can aid its

sustainability within the framework of a national and not just an industry-specificinterest, 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), isthe regulator of the Sugar Industry. The Commission was charged to review the SugarIndustry Control Act and the role of the Sugar Industry Authority (Terms of ReferenceB).

The Commissions overall conclusion is that there continues to be a need forgovernmental 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 1966Commission of Enquiry. The principal rationale for its creation was the need to have anindependent authority with statutory powers to deal with the conflicts that arose betweenelements within the industry. It was these conflicts that led to the need to establish fivecommissions of enquiry in the two decades leading up to the 1966 Enquiry. One measureof the success of the SIA in resolving disputes between key groups within the Industrywas 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 inrequiring regulation based upon the need to resolve intra-industry disputes. Mostindustries are regulated to resolve conflicts between the particular industry and itsconsumers. The sugar industry differs because of the inter-connectedness of farmers andmillers. Millers need a reliable source of freshly reaped cane and farmers need to get theircane to processing facilities quickly with a guarantee that the cane will be purchased.

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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 AIJCFAthat the current procedures are imbalanced. It is in this regard, that it advocates thatthe SIA develop a bilateral obligation framework.

As farmers are obliged to deliver sugar cane only to a specific factory, factories must beobliged to receive this cane or pay appropriate penalties if, for example, the factory closeswithout 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, incircumstances where the factory is not able to rely on force majeure clauses that arecontractually standard. The penalty imposed by the SIA could, for example, represent thecost of transferring the farmers cane to the closest available factory.

Revision of Cane Payment Formula. The Commissions suggestions for revision of thecane payment formula, as captured in section 5 of this report, would form part of thisbilateral obligation framework, since a key obligation of factories is to pay farmers basedupon the cane payment formula, but so, too, would be the matter of the treatment of sub-standard cane, and the farmers reasonable expectation that the sucrose content of theircane would be tested immediately upon delivery to the factory. In this regard, SIA, theindustry regulator with responsibility for testing for the sucrose content of cane, also hasa 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. TheCommission agrees with this need. The Board of most regulators is completelyindependent of the industry that is being regulated, and, as such, members of the industryare 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 itsconsumers. Since the SIA is primarily regulating intra-industry relations, there is ajustification for industry representation on its board.

The Commissioners do agree, however, with both the SMCJ and the AIJCFA aboutthe need to broaden the membership of the SIA board to include individuals who

are not representing industry groups. The Chairman of the SIA Board shouldcontinue to be independent of the industry, but also, as stated above, in line withgeneral GoJ policy and accepted corporate governance principles, be non-executive.

Both the AIJCFA and the SMCJ have made proposals about the specific organisationsand areas of expertise to be represented on the Board. The Commission is not of theview 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 ofexpertise and non-industry representation.

SIA Funding Currently the SIA is funded by the industry. This is not unusual forregulatory bodies. Funding by the industry seems particularly appropriate for a regulatory

body whose principal function is to mediate among groups that operate within theindustry. The Commission proposes a continuation of the current formula forfunding the SIA.

Marketing Oversight As it now stands, the SIA, under Section 6 of SICA is required tomake arrangements for the marketing of sugar and molasses for local consumption andfor export and for these purposes has the power to review all existing policies in relationto the marketing of sugar and molasses.

The Commission is of the view that SIA should continue to have oversight overmarketing 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 broadlydefined.

The Commission is in agreement with a submission from the AIJCFA whichinterprets this section of SICA as specifying that the law does not require SIA to actas either principal or agent with respect to marketing activities. Although, forexample, the marketing of molasses is conducted principally through the Spirits PoolAssociation 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 changesto the SICA. One suggested change is a modification in the fines that can be imposedby 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, withministerial approval, to make regulations for the carrying out of the provisions ofthe Act, including provisions with respect to the registration of cane farmers and theconditions with respect to the delivery, measurement, examination and testing ofcanes.

It is these regulations that are currently used to operationalise the relationship betweenmillers and farmers in areas such as establishment of harvesting committees, conditionsunder which factories can classify cane as sub-standard, determination of efficiencylevels 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 operatingunder the authority granted to the SIA under the Sugar Industry Control Act; andinstitutions that represent industry sub-groups.

The Sugar Industry Research Institute (SIRI) operates as a subsidiary of SIA underSection 5 of the SICA Act which stipulates that It shall be lawful for the Authority toundertake, foster and coordinate scientific research in relation to the industry, andencourage the application of the results of such research to the development of theIndustry

Jamaica Cane Product Sales Ltd. (JCPS) is a private company that has been contracted tomarket sugar on behalf of the SIA under Section 6 of the SICA which stipulates that theAuthority shall make arrangements for the marketing of sugar and molasses for localconsumption 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 wasthe research department of the Sugar Manufacturers Association, established in 1942. Atthe time of the 1966 Commission of Enquiry the research department of the SMA co-existed with a less well developed research undertaking operated by the Cane Farmers,and that Commission recommended the consolidation of these research operations into anentity 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 2009-2010 was J$177.5m. Industry groups did express concerns during the Commissionhearings at the cost of SIRIs operations while the Commission heard mixed reportsabout the value of the research support provided. One of the reasons that the costs ofSIRI, and SIA, featured so prominently in the deliberations of the Commission is the factthat the operations of SIA and SIRI are funded directly by the Industry through a cess onrevenues derived from the sale of sugar.

Against this background, the SMCJ proposed that SIRI be replaced by a Research andDevelopment Committee, appointed by the SIA with balanced representation fromgrowers and manufacturers as well as independents and a chairperson. This Committeewould be much leaner than the current SIRI. It would have fifteen staff members, a costof 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 currentlyfunded, through the cess that funds the SIA.

The AIJCFA, on the other hand, proposed that SIRI should continue the provision ofextension 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 usersthrough a cess on imported and refined sugar.

The Commission concurs with the view that SIRI is relatively costly in relation tothe size of the Industry it supports, especially if it is viewed primarily as a researchinstitute. It is not able to agree with the SMCJ that the appropriate manning level ofthe Institute is fifteen persons, but recommends that an operational audit beconducted to establish the appropriate manning level in the context of the currentand likely future scope of the Industry. It is important to note that SIRI performsseveral different roles. SIRI in submissions to the Commission indicate that 11.4% ofcosts 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 berequired.In fact the Commission is of the view that the extension services providedto farmers, especially small farmers, may need to be expanded. Currently, SIRIoperates with a total of twelve extension officers, twelve of whom are field officers, in anIndustry 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 canefarming alongside its existing extension services. Indeed, in its presentation to theCommission, RADA pointed out that it has recently been asked to provide extensionservices for some growers of commodity products. It is currently in the process ofassessing the role of commodity boards and seeking to determine whether or not it is in aposition 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, aboutRADAs capacity in this area, and the potential loss of focus if extension services forcane were to be fully transferred to RADA, but believes that where there are possibilitiesfor collaboration and consolidation these should be explored.

In terms of funding, there is an argument for funding research and extension services forthis Industry from public funds, in a similar manner to the way in which research andextension services are funded for the agricultural sector as a whole, with the exception ofcommodities managed through commodity boards. At the same time, there is a level ofaccountability and responsiveness that is achieved by direct industry funding that oughtnot to be overlooked. Also, there are aspects of SIRIs current operations which aredirectly related to SIAs regulatory role and represent technical services, and notresearch. These services should be funded by the Industry. They should be paid for bySIA 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 theimportation of raw and refined sugar, estimated by the JCPS to amount to as much asJ$700m, are included in total industry revenue. Consequently, there is already a level ofpublic 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 toan independent board to give greater focus to its mandate to provide research andextension services. The Commission believes that the funding of SIRI by theIndustry should continue, while recognising that there is a level of public subsidyfrom which the industry benefits, a component of which should be dedicated tofunding the research and extension operations of SIRI.

The Commissions proposal should not involve any new costs in governance oradministration. SIRI should report to a board, comprising industry representatives and

independent individuals with experience in research and extension services and includingrepresentation from RADA to facilitate greater collaboration between these two agenciesinvolved 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 ofthe JCPS includes representation from these two Organisations, the Trade Unions and theSIA. It was created to market sugar for the Industry on behalf of the SIA, under the SIAsauthority 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 amore focused entity, operating as a private company, would function more effectively inpursuing this marketing role and ensuring that the funds thus obtained remained withinthe exclusive domain of the industry. JCPS operates under a specific agreement with theSIA 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 theadministrative 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 therequired 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 theappropriate 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 ofmarketing by two-thirds while providing the same functions, but proposes that theJCPS also needs to be the subject of an operational audit to determine theappropriate 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, jointlyadministered by processors and growers, continues to be necessary.

The Commission, in its response to its term of reference e (Review the currentproduct marketing arrangements) is of the view that the pooled marketing of

centrifugal sugar has generally served the Industry well, and is essential to thesystem 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 allproducers in the industry. It is entirely possible that some firms will be interested inconducting their own arrangements for the marketing of sugar as is currently the casewith the marketing of molasses by the Spirits Pool Association Limited. Firms involvedin the production of branded sugar, and refined sugar, if the Industry moves in thisdirection, are likely to be particularly interested in developing their own marketingarrangements.

Consistent with Section 3 of this Report, the key issue is that SIA, through its marketingagent, must be aware of any marketing arrangements proposed by individual companies,particularly in relation to centrifugal sugar, and ensure that they correspond to aminimum level of pricing, including the costs of handling (shipping and insurance) if themanufacturer chooses to ship independently.

This information is required to give integrity to the system of pooled revenue, as thisdetermines the payments made to farmers and processors. Such a process of informationexchange is particularly important in an environment where international players canengage in transfer pricing to non-Jamaican affiliates in a manner that serves the interestsof the international corporation, more than it does the Jamaican sugar industry.

The Commission is aware that the Purchase and Sale Agreement between ComplantInternational Sugar Company Ltd. and the Government of Jamaica does not require thatComplant International operate within the framework of the JCPS. The Commission,nevertheless, suggests that in the interests of harmony within a highly integratedindustry, Complant International should be required to make the SIA aware of itsmarketing arrangements, in accordance with SIAs statutory authority as capturedin SICA, Section 6 (a), and as elaborated upon in the discussion of SICA in Section 3of this Report.

Trucking and Shipping of Sugar

In relation to the trucking and shipping of sugar, the Commission was informed about theuncertainties with respect to a suitable shipping facility. Currently, the only facility forshipping sugar is a port owned by Jamaica Bauxite Mining Co. Ltd. This port has servedas a location for shipping bauxite, and is the only cruise ship pier in Ocho Rios. Thefuture of this location as a port for shipping sugar is uncertain. The Commission is of theview that the GoJ should very quickly make a clear decision on a suitable location for theshipping 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 variousorganisations within the Sugar Industry which represent sub-groupings within the

Industry. These include the AIJCFA, which represents independent cane farmers; theSMCJ, which represents sugar processors; the BITU, NWU and UAWU, which representworkers employed to the sugar estates; the Sugar Producers Federation of Jamaica(SPFD), which is a registered trade union representing sugar manufacturers and thoseestates that have ceased to manufacture sugar but continue to grow cane; and the JamaicaAssociation of Sugar Technologists (JAST), which is professional association of sugartechnologists and allied workers.

These are all private organisations, funded, currently, through membership dues receivedfrom their constituents. They have all played an important role in the Sugar Industry andthe Commissions only injunction is that they continue to represent their constituencies,

bearing in mind the challenging position of the overall Industry and the need, whilerepresenting individual sub-groups to collaborate in the interests of improving theprospects of sustainability of the Industry as a whole.

In their submission to the Commission, the SMCJ proposed the creation of a neworganisation, the Jamaica Estate Cane Growers Association, which would serve torepresent the interests of estates and allow for the sharing of best agronomic practiceacross estates.

The Commission encourages such an Association, if it is formed, to collaborate alsowith independent cane farmers, including through AIJFCA and with SIRI. The

Commission does not, however, agree with the SMCJ that a representative fromsuch an organisation should be included in the governance structure of key industrybodies, without equivalent increased representation from the AIJCFA and TradeUnions.

The Commission agrees that the interests of sugar estates will have an independent voicein internal group discussion involving estates and processing facilities, but also believesthat the integrated ownership structures of estates and processing facilities would notallow 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 wasin the process of changing its approach to financing its operations to fees for servicerather than a membership cess. The Commission views this as an initiative that islaudable in terms of improving the responsiveness and accountability of the Organisation,but suspects, based upon its knowledge of other advocacy organisations, that the mostappropriate funding formula would rely on a combination of low membership fees andfunding 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 theonly 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 AIJCFAa body corporate, gave it the right to charge a cess to all farmers, and to provide from itsreserves, 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 lobbygroup for farmers, it was not provided with the information that could allow it to assessthe Associations effectiveness in its pension, research and lending roles. As statedabove, it is of the view that AIJFCA could extend its leadership role by coordinating, onbehalf of independent cane farmers, collaboration with Estates in the areas of sharedagronomic practices.

The privatisation of the AIJFCA that is contemplated should be considered by the SIAand 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 inthe direction under consideration would, of course, require changes in law. It may well bethat the Industry no longer requires an Association that is mandated by law, allowing forthe repeal of the Sugar Cane Farmers (Incorporation and Cess) Act, but the Commissionis 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 havedominated previous commissions of enquiry because this is the area that creates the

greatest potential for conflict and distrust between farmers and processors. The formulafor the pricing of cane is also likely to affect the investment decisions of farmers andprocessors, as the Commission was reminded at the hearings.

The most popular cane payment systems are revenue based. As pointed out in a 2006paper prepared by the SIA, revenue-sharing payment systems also operate in Australia,Brazil, Columbia, Fiji, India, Mexico, the Philippines, South Africa, Thailand and theUSA.

Jamaicas cane payment system is a variable revenue sharing system. These systems arethe most sophisticated type of revenue sharing arrangements. In such systems, the cane

payment formulae ensure that beyond a benchmark level of cane quality and factoryefficiency, incremental improvements in cane quality redound to the benefit of canefarmers, while incremental improvements in factory efficiency redound to t