ANNEX

1. IDENTIFICATION Title - Annual Action Programme 2012 on Accompanying Measures on ; CRIS reference nr. GY/DCI-SUCRE/2011/23480 Total cost EUR 23 355 000 Aid method / Sector Policy Support Programme: management mode - Sector budget support (centralised management) - project mode (centralised management) DAC-code 31162 Sector Industrial crops/export crops

2. RATIONALE AND COUNTRY CONTEXT

2.1. Country context and rationale for SPSP

2.1.1 Economic and social situation and poverty analysis

The sugar sector remains very important for the , 7-10% of gross domestic product (GDP), even though its share in the economy decreased after the rebasing of the GDP of Guyana. GDP per capita1 has increased consistently in recent years, from US$ 2 277 in 2007 to US$ 2 637 in 2009 (actuals), and is estimated to reach US$ 3 095 in 2011. The economic growth forecast for 2012 by IMF is 5.6 %.

Moderate and extreme poverty rates declined from 43% and 29% in 1992 to 36% and 18.6% in 2006, respectively2. The latest United Nations Development Programme (UNDP) Millennium Development Goal (MDG) report (2011) for Guyana, states that the country made reasonable progress towards attaining most of the goals.

2.1.2 National development policy

The Government has two complementary strategy documents, which form their strategic framework, namely the Poverty Reduction Strategy (PRSP) and the National Competitiveness Strategy (NCS). In 2001, the Government published the first PRSP with the aim of halving poverty in Guyana by 2015. A new PRSP covering 2011-2015 was finalised in July 2011 and shared with Parliament and international donors.

The key objective of the NCS is to enhance Guyana’s competitiveness by supporting the creation of an enabling environment to attract increased investments and promote exports. The National Action Plan for Sugar (GNAP) has been designed in this context. Both are complementary and mutually supportive. The Low Carbon Development Strategy (LCDS), launched in 2009 focuses on using funds received for forest protection to develop the economy emphasising infrastructure development and agricultural diversification. In the latter case, the focus is on facilitating investments (creating the framework) for the exports of fruit & vegetables and aquaculture products. As Guyana has substantial unused non-forested land that can be converted to productive use for cash export crops, the agro- economical potential is high.

1 In current prices – source = IMF 2 Country Assistance Strategy for Guyana for the period FY 2009-2012, The , April 15, 2009

1 2.2 Sector context: policies and challenges

Revenues from the sector totalled US$ 160 million in 2011, up from US$ 131 million in 2010. The sector continues to be a major employer in the country (around 16000 persons in full-time equivalents), mostly for low qualified people (cane cutters). However, the contribution of the sugar sector to the economy of Guyana declined from roughly 12 % of GDP in 2007 to 7 % of GDP in 2010. The Guyana Sugar Corporation Inc. (GuySuCo), is the only sugar-producing company in the country and is fully state-owned.

The Government of Guyana submitted to the European Union on 16 March 2006 its National Action Plan on Sugar (GNAP). The GNAP is a policy document that addresses three main issues. The first one is the adaptation of the sugar sector based on the strategy of the Guyana Sugar Corporation. The second one addresses the development of new agricultural sectors and the third one focuses on the development of infrastructure and human resources. The GNAP sugar component includes numerous investments to improve and diversify the industry. The government has provided partial funding to the sector in recent years. Therefore, the company had to count mainly on its own resources to implement the reforms. However, since the 2005 flooding, the company has not succeeded to reach previous production levels. This has had a detrimental effect on the cash position. Consequently, most GNAP objectives can be met over a far longer time span than initially foreseen and others may never be reached.

Due to the poor production performance and the weak cash position a Turnaround Plan (Strategic Blueprint) was developed in May 2009. The strategy is to focus back on the development of sugar production and sugar added value products. The general objectives remain more production, lower production costs and sugar products diversification. The turnaround is mainly situated at the level of organisational and managerial issues like production increase per Ha, more mechanisation of agricultural practices, expansion of cropped area, improving management and the sale of unproductive lands to generate cash for investments.

Although the plan seems ambitious even on a reduced scale, it is coherent and much depends, in the absence of predictable government funding, on the ability of the current management of GuySuCo to find funds to do the critical investments. As they are not able to generate enough cash through the production of sugar and the sales of land, management is faced with a difficult position to improve the performance of the industry.

In 2011, GuySuCo's production level was 7.5 % higher than in 2010 (236,500 tonnes), but much lower then the goal of the Business Plan (300,000 tonnes) and the revised target of 282,000 tonnes. Three years after the change in management and implementation of the 'Turnaround Plan' (Strategic Blueprint) some structural improvements can be seen. Significant investments in conversion of land lay-out to allow full mechanisation have taken place (6 884 ha), agricultural machinery has been acquired and a packaging plant is functioning.

The large projected land sales in the previous business plans never materialized. As this was the main projected source of funds for capital expenditure, most investments were cancelled or delayed. The injection of funds into the sector is crucial to do the necessary investments for preserving and upgrading of the factories and the estates. In this sense, a positive commitment on the part of government to the investment needs of GuySuCo is essential.

In relation with the second component of the GNAP, NCS and LCDS and the Ministry of Agriculture has developed and Agriculture Diversification policy with the objective to increase the exports of specific products (fruit & vegetables, aquaculture and livestock) in the future.

In order to strengthen the framework for agriculture exports an assessment on export procedures was undertaken in 2011 by an independent consultant contracted by the EU. This study identified

2 gaps/challenges/improvements/weaknesses in the procedures. To enhance the export process some crucial improvements were planned to take place and were addressed by a performance indicator in AAP 2011. Unfortunately the time table slipped and this indicator is reintroduced in AAP 2012

Monitoring and coordination

In March 2007 a GNAP Sugar Steering Committee was established. It is a regular meeting with all the stakeholders in the sugar sector and agricultural diversification team of the Ministry of Agriculture and the EU Delegation has the status of observer. GuySuCo provides updates to the Delegation on a regular basis on a number of indicators to facilitate follow up of performance in the sector.

In addition to the monitoring and reporting requirements on the implementation of the GNAP and the EU assistance, the Ministry of Finance is responsible for submitting the necessary information required to confirm Guyana’s eligibility for budget support as an aid delivery mechanism. Macro-economic situation Guyana has, according to the IMF, sustained solid economic performance in recent years, supported by a strengthened policy framework. In the budget for 2011 an expected growth for the year of 4.6% was presented. That Minister of Finance adjusted that figure to 5.1% in his mid-year review. In the first half of 2011 the economy grew by 5.9% in comparison with the corresponding period in 2010. For 2012 the IMF expects a growth of 5.6 % . However it is based on the presumption that the sugar sector performs well.

Key downside risks for the Guyanese economy include those linked to a weaker or delayed global recovery, higher-than-envisaged oil prices, and further delays in completing the modernization of GuySuCo. Significant improvements in the sugar sector performance were anticipated by the Government of Guyana in the 2011 Budget.

Gold and Bauxite are important for the Guyanese economy, where prices of those commodities are relatively volatile, but buoyant at present. Public investment projects should ensure a high value-for- money, and help enhance Guyana's growth and debt-repayment capacity. In the coming years the eventual exploitation of Guyana's oil reserves (foreseen for 2014) might be able to create upward potential. Private consumption is currently significantly affected by the decline in remittances, prompted by the global economic slowdown. Although reliable data are not available, remittances are estimated to have decreased by about 9 % in 2009, mostly on account of large migration presence in the US and Canada where employment has been severely affected by the global crisis. However, the IMF assumes that remittances have increased in 2010.

The inflation rate slightly increased in 2010 from 3.6% in 2009 to 4.5%. Inflation is highly influenced by the world fuel price, as Guyana has a significant fuel bill (16% of GDP is oil-related imports). For 2011 inflation is expected to be 4.8%. That is slightly higher than expected in early 2011, when the budget was presented (4.4%).

The Government of Guyana foresees an increase in debt in 2011, by roughly €56 million (G$15 billion or roughly 3% GDP). Net external borrowing increases by €77 million (G$20.5 billion), domestic borrowing is reduced by €21 million (G$5.5billion). The main external increasing loans are debts with the IDB, Venezuela and . Parliament adopted recently an amending budget, increasing expenditure. It is unclear whether that increase is covered by more debts or revenues.

Despite higher exports (bauxite, gold) and rising remittances, the current account deficit is estimated to have widened from 8.8 % of GDP in 2009 to 11.4 % in 2010, driven by lower sugar prices and higher fuel costs. In the capital account, private inflows moderated, but steady public external financing helped to keep gross reserves at the equivalent of about five months of imports at end 2010

3 Over recent years, the IMF Article IV consultation process as well as the Delegation's economic evaluation has been that the Government of Guyana implements prudent macro-economic policies that are oriented towards a more stable macro-economic environment. Guyana performed well economically in the last years and the Government improved macro-economic stability despite external shocks. Due to the latter, the economic outlook deteriorated but remains positive. The Government's economic, budgetary and monetary policies remain focused on the maintenance and improvement of the macro-economic situation.

Public Finance Management

The Government of Guyana agreed at the end of 2009 on a PFM Action Plan 2009-2012, based on a Public Expenditure and Financial Accountability (PEFA) assessment from 2007. The Action Plan was strengthened in May 2011, with clear baselines, objectives/activities, deadlines and means of verification for each activity. In its most recent assessment (September 2011), the Delegation concludes that overall progress in PFM reform is satisfactory.

In 2011 the Government of Guyana agreed with a timeline for a next PEFA Assessment. The exercise is being supported by IDB, CIDA and the EU Delegation and will be completed in 2012. It will form the basis for a new PFM Action Plan. In May 2012 a team of consultants visited Guyana to start the PEFA exercise. A first full draft of the PEFA assessment report is foreseen to be presented to all involved parties in August 2012.

Good progress is being made in the strengthening of the office of the Auditor General. The dialogue between donors is considered to be good. The government of Guyana has a sound budget policy (IMF Art IV). On the negative side, the dialogue on PFM reform between donors and Government is limited. The same counts for the progress in setting up an internal audit function and the strengthening of the National Procurement and Tender Administration Board.

2.3 Eligibility for budget support

The Government of Guyana remains eligible for budget support; as stability oriented macro-economic policies are in place, there is overall progress in PFM reform and the GNAP is being implemented, although only in part and with serious delays.

2.4 Lessons learnt

The dated GNAP strategy remains valid for its different components, with the scope of the first component reduced, focusing on realising fully the economies of scale in sugar production and increase of the proportion of sugar value added products. While the focus is still on the finalisation of the critical investments to complete the reform process in the sugar sector, funding sources for the investments have to be secured. The performance indicators of this AAP will be linked with inputs in to the sector, in order to improve the possibilities that crucial investments will be done, and the fixed/variable tranche repartition will be 20/80.

Since the start of the GNAP, one year after the flooding in 2005, the sugar sector continues to go through a production crisis. Although the factories work below capacity, progress is made nevertheless on structural elements like land conversion, preparation of new land, construction of the packaging plant and reduction of management costs. More specifically, the conversion of land to machine friendly lay out continues much as planned and mechanical harvesters are acquired.

To increase the supply of sugar cane to the factory GuySuCo encourages entrepreneurs in Skeldon to invest in the cultivation of sugar cane. GuySuCo provides the private cane farmers with technical

4 assistance and offers machinery to them for rental. This way GuySuCo saves on investment in the preparation and the cultivation of the land. The interest of the private farmers in sugar cane cultivation has been increasing substantially and results continue to be seen on the fields.

From 2008 onwards GuySuCo continues to make substantive losses which are now in the vicinity of US$25 million to $30 million annually. At this rate, it is quite possible that the company's cumulative losses for 2010 - 2014 will be close to or greater than US$100 million. The total debt of the industry rose to US$ 161.1 million at 31 December 2010. As the losses continued in 2011 the debt profile will also raise. The company has a modest net cash flow from operations but this is before investing activities and loan repayment obligations are taken into account. The net cash flow from operations is insufficient to allow the company to make most of its planned capital investments in production and factory equipment and improvements. Net cash flow after investing activities is now negative which means that the company risks being unable to honour its annual long term loan repayment commitments. Given that the company is cash-strapped, most planned investments are postponed each year. The factory capital investment in 2011 was only US$ 1 million or just below 10 % of its planned budget of US$ 11.45 million. The Government is unwilling to inject capital into GuySuCo to address the liquidity constraints, foreseen losses and essential investments to improve factory and field efficiencies. As such, unit production costs cannot be contained and are likely to continue to increase: excluding overhead and administrative costs, the unit cost of production is now greater than the average unit price received for sugar. Where production costs remain higher than revenue, the sector can never be profitable, nor internationally competitive.

Given that it is an absolute necessity to change this trend, this Action Fiche focuses on real progress in the sector, by introducing and reinforcing performance indicators which address crucial investments in factories and drainage works and support continuing agricultural operations such as replanting, conversion and mechanisation.

The newly constructed sugar factory Skeldon was commissioned in 2009 with a designed capacity to produce 100,000 tonnes yearly. Due to major technical problems and sugar cane supply problems, the factory produces far below its capacity. To address these technical faults substantial corrections and investments have to occur. This is expressly addressed by Indicator No 5 in the present Action Fiche.

To support the non-traditional agriculture component of the GNAP, the export procedures of agricultural products have to improve. In the previous AAP an indicator to set up a centralised system to simplify the export procedures (SWAPS) was introduced. The timetable for the necessary first steps, planned by Government, slipped. Nevertheless it is still the only significant action in the field of the promotion of agricultural exports and is therefore reintroduced as an indicator in this action fiche.

In recent years, heavy rains have impacted negatively on sugarcane production; agricultural operations (planting and harvesting) and crop development were affected due to waterlogging and surface ponding of the fields. It is estimated that the efficiency of the drainage system of the estates has to increase by 35 % to remove the excess water effectively. This will be addressed in this Action Fiche by a performance indicator to measure investment in drainage works in the estates.

The repartition between the fixed and variable tranche was 50/50 in the previous AAP's. As the activities linked directly with capital investments included in the MIP 2011-2013 will have to be implemented in the remaining years of the programme, more focus needs to be put on these crucial investments. Hence a split of 20/80 between the tranches is made.

5 2.5 Complementary actions

The GNAP is embedded in the wider policy of improving the competitiveness of the economy. The EU is the only donor supporting the reform of the sugar sector. In the agricultural diversification component, the IDB and the IFAD have specific projects ongoing. The IDB is funding the agricultural diversification programme that has 4 components with a loan of US$ 20.9 million. IFAD is financing "Rural Enterprise and Agricultural Development Project" (READ) for US$ 5.7 million.

EDF funds concentrate on General Budget Support with no direct links to the sugar sector.

2.6 Donor coordination A donor coordination structure is in place in Guyana. In addition to the quarterly donor meetings organised by Government and regular portfolio meetings between Government and the Delegation on the spot regarding overall program coordination, at the sector level coordination is carried out by line ministries through government/donor groups. Several of these groups are operational and are generally chaired by the respective sector Minister and supported by the joint donor community. As the donor community is very small in Guyana, exchange of information is good, which allows to achieve a maximum synergy and ensure complementarity in order to avoid overlaps.

In relation with the follow-up of the agricultural diversification programme ongoing-contacts, exchanges and ad-hoc meetings, etc with the programme managers of Inter-American Development Bank (IDB), USAID and the Trade Transactions Public Private Dialogue Body ensure effective exchange of information and coordination.

3 Description 3.1 Objectives

The objectives of the GNAP are to remain in the sugar sector and to improve its competitiveness through increase in production, increase in efficiency of production, and diversification within the sector. The objective of this AAP 2012 is to continue the support to reform of structural elements in the production process of sugar, being the conversion of fields to mechanically friendly layouts, expansion of private cane production at Skeldon, continuation of the replanting exercise, upgrading of the factories, increase of revenue by packaged sugar, and improvement of the agricultural operations to achieve cost reductions at the estates. All these initiatives are in line with the GNAP.

The objectives of MIP 2011-2013 are to improve the performance of the sugar sector and to strengthen the agricultural diversification. A number of input indicators have been designed which focus on the critical processes, such as, improvement of agricultural operations, and investments in improved production capacity, including drainage. In addition, the most important output indicator, namely sugar production, is re-introduced.

3.2 Expected results and main activities

The AAP 2012 will assist the Government and the national stakeholders to progress towards the realisation of the GNAP objectives for the sugar cane sector, as well as the latest MIP objectives related to improved performance of the industry: - Increased sugar production - Improving the efficiency and profitability of sugar cane and sugar production - Reinforcing private cane farming - Capital Investments Plan in the , including mechanisation - Rehabilitating the Skeldon factory and improving the supply to this facility - Improving the drainage capacity of the sugar estates.

6 3.3 Risks and assumptions

The main risks for the implementation of the GNAP are linked to the financial viability of its sugar component. The sector has come to a point where production increase and cost reduction are critical to reverse the measurable decline in the profitability of the industry. In this context, main risks are, (i) the capability of GuySuCo to source the necessary funding; (ii) the capability of GuySuCo to achieve the increased production and the production cost reductions as envisaged; (iii) favourable access and sales conditions to overseas sugar markets and development of exchange rate EUR/USD; (iv) the adverse impact of the climatic changes on the productivity of agriculture in Guyana.

In addition, on the agricultural side GuySuCo needs to make progress urgently. Reference is made to the need to increase the degree of replanting and to extend the conversion of land to a lay-out for mechanical operations. The macro-economic situation in the country remains positive despite the external shocks due to the global economic downturn. Regarding the PFM reform, it is assumed that the agreed updated public finance reform plan will be implemented as foreseen.

3.4 Stakeholders

The GNAP was developed by a coordination group which included representatives of Government ministries and agencies in charge, including the Environmental Protection Agency, Trade Unions, GuySuCo and an expert drafting team. The GNAP was submitted to national consultation and finally to the Parliament for a resolution. The Association of the private cane farmers in Skeldon works in close collaboration with GuySuCo.

3.5 Crosscutting Issues Environmental impact: GuySuCo has complied with the environmental requirements set by the World Bank for the entire Skeldon project (factory and estate). Furthermore, the company committed itself to ecological compensation for the new land brought into cultivation by ensuring long term conservation of an area of equivalent biodiversity richness. Additionally, no pesticides are used, since an integrated pest management control is being practised using biological control mechanisms.

Good governance: The two major labour unions have participated in the elaboration process of the GNAP.

Gender: Women's role in field operations in the sugar industry is limited, due to the heavy manual nature of work. In the administrative sector of GuySuCo women play a considerable role, occupying more than 50% of administrative positions. Several senior management positions are occupied by women.

4. IMPLEMENTATION ISSUES

4.1 Method of implementation

Direct centralised management on the basis of Article 54(2)(c) of the Financial Regulation

4.2 Procurement and grant award procedures (For complementary support) All contracts implementing the action must be awarded and implemented in accordance with the procedures and standard documents laid down and published by the Commission for the implementation of external operations, in force at the time of the launch of the procedure in question. Participation in the award of contracts for the present action shall be open to all natural and legal persons covered by the Financial Regulation applicable to the General Budget of the European Communities. Further extensions of this participation to other natural 7 or legal persons by the concerned authorising officer shall be subject to the conditions provided for in articles 31(7) and (8) DCI.

4.3 Budget and calendar Activities EDF Contribution (EUR) Budget support 23 200 000 Technical Assistance 100 000 Audit and Evaluation 50 000 Visibility 5 000 TOTAL 23 355 000

Indicative schedule June 2013 November 2013 Fixed tranche EUR 4 640 000 Variable tranche EUR 18 560 000

The period of execution of the Financing agreement will be 48 months. This period of execution shall comprise two phases: an operational implementation phase, which shall commence on the entry into force of the financing agreement and will have a duration of 24 months. As from this date shall commence the closure phase, with a duration of 24 months.

Technical assistance will be centrally managed as well and commitments will start March 2013. The release of the fixed tranche is foreseen in the first semester of 2013, the release of the variable tranche in the second semester of 2013.

4.4 Performance monitoring and criteria for disbursement

The 2012 assistance will be delivered through direct untargeted sector budget support.

EUR 23 200 000 will be disbursed in two tranches, a fixed tranche and a variable tranche. The fixed tranche will be payable upon signature of the Financing Agreement and subject to compliance of the Government with the General Conditions. The variable tranche will be payable upon fulfilment of the indicators and subject to continued fulfilment of the General Conditions.

General conditions (1) Stability oriented macro-economic policies are being implemented (2) Satisfactory progress in the implementation of a credible and pertinent reform plan to improve public finance management (3) Satisfactory progress in the implementation of the Guyana National Action Plan

Specific conditions to release the variable tranches

Performance indicators for the AAP 2012 will be in line with the GNAP, the GuySuCo Business Plan and improving export procedures as planned. The Ministry of Finance will update the EU on the progress in implementation of the indicators on a regular basis, and a representative of the Delegation will attend the Sugar Steering Committee meetings as an observer.

4.5 Evaluation and audit

An ex-post evaluation of performance of the AAP may be conducted at the end of the operational period of the assistance. Audits, in particular concerning validation of the data underlying the indicators and technical assistance, may be organised.

8 4.6 Communication and visibility

As practised for the previous annual action plans the Delegation will organise together with Government a press conference on the occasion of the signing of the AAP 2012, publish a press release on the Commission Decision of the 2012 funding and at each release of the tranches.

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