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Download 47.5 KB ASIAN DEVELOPMENT BANK TAR:FIJ 36151 TECHNICAL ASSISTANCE TO THE REPUBLIC OF THE FIJI ISLANDS FOR INTERMEDIATION OF SUGAR SECTOR RESTRUCTURING June 2002 CURRENCY EQUIVALENTS (as of 10 May 2002) Currency Unit – Fiji dollar (F$) F$1.00 = US$2.2247 US$1.00 = F$0.4495 ABBREVIATIONS ADB – Asian Development Bank FSC – Fiji Sugar Corporation GDP – gross domestic product MASLS – Ministry of Agriculture, Sugar and Land Settlement SCF – Sugar Commission of Fiji TA – technical assistance I. INTRODUCTION 1. In March 2002, an Asian Development Bank (ADB) Fact-Finding Mission visited the Fiji Islands to review the possible role of ADB in assisting the rehabilitation of the sugar industry. The Mission held in-depth discussions with relevant agencies including the Sugar Commission of Fiji (SCF);1 the offices of the Sugar Tribunal; the Fiji Sugar Corporation (FSC); and the Ministry of Agriculture, Sugar and Land Settlement (MASLS). Extensive discussions were also held with workers, farmers, and representatives of indigenous Fijian groups. Field visits were made to sugar-growing areas. 2. The Mission found that the sugar sector is on the verge of a profound transformation. The industry is facing a major restructuring and a possible significant reduction in size as it adapts to a pending loss of preferential tariffs within 6 years. At the same time, significant changes are taking place in landholding patterns as longstanding smallholder leases expire, landowners reclaim their lands, and former sugarcane growers are forced to find other sources of income. In addition, the processing infrastructure of FSC––the mainly Government-owned processing corporation––is seriously degraded, and the company is in poor financial straits. Proposals have been floated for the restructuring of the industry but have, so far, failed to gain support among all stakeholders. Indeed, it became clear to the Mission that there is considerable lack of unanimity among stakeholders in the sugar industry, particularly regarding potential solutions to imminent challenges. 3. Given the sugar industry’s major contribution to the country’s gross domestic product (GDP), foreign exchange earnings, and employment, its sudden collapse would have serious economic and social consequences. Yet under current conditions, such a collapse is entirely possible. To help resolve one of the major challenges facing the sector, the Government has requested technical assistance (TA) to prepare a project that would support both alternative livelihoods for displaced sugar cultivators, and also provide assistance to indigenous landowning groups wishing to make productive use of their newly reclaimed land.2 There is also a need to assist the Government in resolving the problems of the sugar industry as a whole so that a viable industry can emerge. Even if a large number of former sugar cultivators eventually find alternative activities, a revitalized, smaller, more efficient sugar industry would still have the potential to provide employment and contribute significantly to the country’s economic well- being. 4. However, a viable sugar industry is unlikely to rise from the current chaos unless all stakeholders agree on what needs to be done. To aid the Government in bringing all parties together to resolve the multitude of complex, interrelated issues facing the sector and to ensure the continued existence of the industry, the Government has requested support from ADB through advisory TA designed to help the Government and all stakeholders prepare an action plan for the rational and measured restructuring of the industry. 5. To initiate this support, the Mission and government representatives cooperated in designing a TA for Intermediation of Sugar Sector Restructuring.3 The proposal was discussed at a wrap-up meeting in Suva on 21 March 2002 and received the support of all stakeholders. As a result, the Government requested support from ADB for the implementation of the TA. The 1 A neutral oversight body whose role is to provide a forum for all stakeholders. 2 PPTA for Alternative Livelihoods is under preparation. 3 The TA first appeared in ADB Business Opportunities in March 2002. 2 TA framework is shown in Appendix 1. A summary initial poverty and social analysis is shown in Appendix 2. II. ISSUES 6. Sugar production is a key sector of the Fiji Islands' economy. Sugar production covers 50% of the country’s agricultural land, directly employs 13% of the workforce, indirectly provides employment for a similar percentage, accounts for about 35% of agricultural GDP and 8% of total national GDP, is the country’s second biggest earner of foreign exchange (around US$125 million per annum compared with tourism at US$250 million per annum), and generates some 30% of total exports.4 In addition, unlike other export-oriented industries in the country, the domestic value of production is high. Almost all factors of production are indigenous, unlike the garment sector, for example, which depends heavily upon imported raw materials, as does the tourism industry to a lesser extent. 7. The sugar sector is currently facing a crisis, a situation that could have a major negative effect on both macroeconomic and social stability and the poverty status of the entire country. FSC, the mainly Government-owned entity that owns the country’s four sugar mills, is insolvent and requires an immediate injection of more than US$100 million simply to continue operating. The country is facing the prospect of selling sugar at world market prices within 6 years and has made no serious effort towards reducing production costs to a level that would allow the industry to survive the predicted drop in prices to one third of present levels. To the contrary, lacking appropriate incentives, field production efficiency has been dropping consistently, with increasingly negative consequences on the quality of both the sugarcane and the sugar produced. Foreign buyers have warned that they will find alternative supplies unless sugar quality from the Fiji Islands improves. Many sugarcane farms are too small and fragmented to produce anything but a subsistence level income. Finally, as a result of the expiration of leases of indigenous land, large numbers of experienced farmers are leaving the sugar areas, while indigenous Fijian landowners, some of whom are keen to grow sugar, are taking over leases but lack the capital and the appropriate skills for effective and efficient production. 8. Efforts have been made in the past to improve the efficiency of the industry and instill both productive practices and a measure of rationalization. For example, a Sugar Industry Strategic Plan produced in 1997 sets out a valid road map for reform that appeared to be agreeable to all parties.5 However, so far, partly because of the lack of alternative livelihoods for small farmers who might be displaced during the restructuring, most recommendations of FSC have not been implemented. These matter will now be addressed in the alternative livelihood project preparatory TA. More recently, FSC has worked with industry stakeholders to produce a document entitled The Fiji Sugar Industry—A Way Forward recommending a different (and more radical) approach to sector restructuring.6 The document has received a measure of acceptance within the industry, but it requires refinement, as it has not been embraced 4 Reserve Bank of Fiji Quarterly Review. December 2001. Suva. 5 Groups, entities, and organizations concerned with the sugar sector in Fiji include, inter alia, the 23,000 families of sugarcane growers themselves, the landowning individuals and clans who lease land to the growers, the Sugar Cane Growers Council, FSC (responsible for sugarcane transport and processing), the 3,000 workers at FSC, the Fiji Sugar Marketing Corporation, a variety of unions and political parties representing groups involved in the sugar sector in one way or another (including the two main political parties) and a range of government agencies including MASLS, the Native Land Trust Board, the Ministry of Commerce, and the Ministry of Foreign Affairs. 6 This would involve splitting up FSC into four independent companies operating under separate accounts, pooling all the sugarcane land under one master lease to each company, and subleasing to farmers. There are major concerns with this proposal. 3 unanimously. Some stakeholders remain hesitant. Clearly, assistance is required to help finalize a proposal based on the best of the 1997 and 2001 plans that can become the basis for a restructuring action plan. In the meantime, with the changes in land tenure currently taking place, the problems of the industry seem to be multiplying. 9. The challenges facing the country under these circumstances are manifold and appear to be beyond the capacity of national decision makers to resolve alone, as evidenced by the failure of the two most recent plans for the industry to achieve widespread acceptance. III. THE TECHNICAL ASSISTANCE A. Purpose and Output 10. The sugar industry in the Fiji Islands is embroiled in a complex web of problems ranging from land tenure issues to poor quality of the end product to an impending collapse in prices. Moreover, there seems to be no consensus among the stakeholders and parties involved regarding the means (or even the desirability) of restructuring the industry to ensure its survival. Nonetheless, the survival of the industry, or a controlled and measured withdrawal from it, is crucial to the economic well-being of at least one quarter of the population, and indirectly to the entire economy. The social and economic consequences of a sudden collapse (which is a real possibility if nothing is done) could be disastrous. 11. All parties agree that there is a need for outside intermediation to assist in advising stakeholders on the situation within the industry, bringing them together for constructive discussions on possible remedies, and assisting in finalizing an agreement on the ultimate form that restructuring should take. In view of ADB’s close development partnership with the Fiji Islands, the Government has requested its assistance in this intermediation process.
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