Urban: - Sugar mills must get capitalfrom the outside
Earlier this month the government raised tariffs on sugar imports to 100% from 40%. However, the increase will have little real impact because under a World Trade Organization (WTO) agreement, 60,000 tons of sugar can be imported annually at the 40% tariff rate. Considering that in all of 1998 a mere 19,000 tons came into the country, the 100% rate isn't likely to kick in quickly. Still the move scored points with the country's beleaguered sugar factories and growers on the eve of the sector's privatization. Under a sell-off, which could occur within the next six months, the majority of the 76 sugar factories will end up in the hands of foreign companies that have long been knocking at the government's door. With cheap production costs, high domestic demand and large production potential, the industry is a sweet catch for Western producers. But such a handover would not be an easy pill for farmer groups to swallow. As a result, farmers' unions this summer proposed the creation of one large holding company, Polski Cukier, that would include them as major stakeholders of the sugar companies. While market watchers such as Roman Urban, an economist at the Institute of Agriculture and Food Economics (IERiGZ), said the acceptance of the proposal is unlikely, the push for support could delay even further the government's privatization plan. The biggest question the farmers unions have to answer is how their proposal will help attract capital and modernize the industry so that it can compete with higher quality imports and in the international arena. Since 1995, sugar factories have been grouped under four state-owned holding companies that have done little to improve either productivity or profit. Urban recently spoke with the WBJ's Juliet D. Golden about the challenges facing the sugar industry and the competing proposals for the industry's future. The following is a translated and edited version of their conversation.
Q: What is the key issue facing the sugar industry on the eve of privatization?
A: Before privatization, the basic issue is to restore the effectiveness of the system regulating the sugar industry. What's important here is that masses of sugar in excess of quota A limits (production for domestic consumption) don't get onto the market. That is the first problem. The thing is to get C quota levels up (export sugar without subsidies) so that the price fetched satisfies the sugar factories and growers.
Q: What about the industry's profitability. In the first half of last year, profitability fell 5.4%, while the average for the agricultural sector was an increase of 2%. Why the difference?
A: Of course, the main reason was the very large oversupply of sugar. Sugar which was designated for export tried to make its way onto the domestic market. The lack of tightness of the system caused low sugar prices, prices have fallen significantly over the last two years. At the same time, beets have had relatively high prices, and those prices have even risen. That, along with the increase in other production costs, led to a fall in profitability.
Q: Is the first half of this year better than the first half of 1998?
A: It's also very difficult (to say). Profitability in the first quarter was minus 5%. Equal with (last year), but the second quarter was worse.
Q: Why worse?
A: Because prices have fallen further. The price of sugar is very low, and that tendency has not been halted up to now.
Q: How does that compare with levels in the agriculture sector overall?
A: The agro-food sector had plus 1% profitability for the first half of the year. It was profitable. But that was lower largely due to lower exports to the eastern markets, which meant lower sales and lower profitability in the large majority of the sector.
Q: How can privatization address this low level of profitability?
A: Privatization can help on two levels. It can provide investment and modernization, an improvement of effectiveness in production technologies, better output in terms of better processing of beets. Secondly, as a rule, privatization means a more economic-minded approach to production. The owner forces a more economic employment of resources, something which the state is not able to enforce.
Q: Meaning basically that owners force through difficult decisions?
A: Owners usually watch over their own capital, and the state is not always able to do that.
Q: Farmers unions proposed creating a single holding called Polski Cukier, which apparently follows a British model. What did this model achieve and does it fit the industry in Poland?
A: From what I know, it's not completely a British model. There are two companies in Britain and they are different in the way they function. It's an old concept that is coming back. It was proposed six years ago, maybe five years ago. The answer to that proposal was the five, state-owned regional holding companies. The essential issue is that unions are under the illusion that with their own capital they will carry out far-reaching restructuring of the sugar industry. That's impossible. On the other hand, there is the necessity of a rapid inflow of capital, know-how to sugar companies so that a deep repair of the segment can be made. And Cukier Polski can't do that. In addition, there are also certain fait accompli in place. Sugar mills already have their investors: German, British, Dutch. Here there are facts already in place so you can't create one organization that is monopolistic.
Q: Who are the major players at this moment?
A: At the moment the largest players are Zud Zucker, British Sugar, Rolimpex and Danisco also Pfieffer and Langer, a
German company. Tate and Lye, a British company, and other French companies are also expressing interest right now.
Q: What is the fate then of the proposal?
A: That's more a political issue than an economic issue. The economic issue is that right now in Poland, sugar mills must get capital from the outside and there must be very deep restructuring. Poland should produce 2 million tons of sugar. It produces cheaper sugar than the EU, but the number of mills should be lower than right now. There should be larger mills, more effective technically and economically, and strong companies that manage them.
Q: Do Polish sugar mills then have a chance to compete on the international markets?
A: Production costs in Poland are lower than in the European Union (EU). In Poland, production costs are about $500 per ton. In the (European) Union, according to my information, production costs approach $800-$1,000. Prices are low, though, but that is a different issue.
Q: What's been lost by the attempt to create five, state-owned holding companies and protect the sugar industry from getting into foreign hands?
A: It's difficult to evaluate. That was a period of stagnation as far as transformation is concerned. Without a doubt that was a result of the emergence of those state-owned holdings. At the beginning, there was some improvement in profitability, at the same time there was the new sugar law. Later, those benefits were lost.
Q: So is it just a lack of capital that is missing, or is a lack of management as a whole really the critical issue?
A: Of course capital is missing. But also there is a lack of privatization and lack of a privatization concept on the government level and on the level of the holdings. That led to feigned actions and because of that delays the privatization process.
Q: So at what stage is the privatization process right now?
A: From a formal point of view, maybe not this year, but for sure next year, groups of sugar mills will be privatized. Each holding was divided into two to three groups and those packages will be privatized. They will be offered to foreign and domestic investors. However, if the political debate over Cukier Polski doesn't slow the process, maybe the privatization decisions will be implemented in the near future. The situation is urgent because the economic condition of the mills is very bad.
Q: Are there signals that the Polski Cukier proposal is delaying privatization?
A: Any political initiative that differs from the one that is being implemented triggers off discussion and delays decisions that are scheduled.
Q: At one point the privatization concept was that groups of sugar factories in the worst condition were to be first in line for privatization. Is that still the idea?
A: I think that that was a case of political wishful thinking rather than realistic actions. However, lately such things have occurred. Before that it was different. I mean, at the time the Leszno factory was privatized and other ones that Pfeiffer and Langer purchased, those were rather good mills. Recently a few mills were privatized that were in very difficult financial situation although two of them are very big even for the Polish market.
Q: Is the idea to ensure the worst cases don't remain for the state to deal with?
A: Of course such fears exist. Politicians are afraid foreign (companies) will buy the best mills and what's left will have to collapse, otherwise they won't have a chance.
Q: Even though it is an attractive proposal for the government, is it realistic?
A: One way out is if packages are sold off. In the package there are good factories and factories that are in worse shape. The role of the investor is to carry out restructuring of the factories taken over, and develop one of them and change the profile of the others.
Q: How many sugar factories are there in Poland?
A: There are 76 factories that exist, but there are fewer companies.
Q: Of the 76, how many are profitable?
A: In 1999, there isn't one profitable factory. Last year, not a high percentage of factories were profitable.
Q: Does the present condition of the sugar sector create problems for Poland's aspiration to enter the European Union (EU)?
A: There aren't situations like in the meat industry or the dairy industry where there are requirements to adapt to European standards. However, obviously to improve the competitiveness of Poland's sugar industry, like I said, changes such as restructuring, modernization and certain austerity measures are necessary.
Q: Are Polish EU negotiators ready to fight for domesticsugar?
A: I think they are ready. Poland can produce 2 million tons of sugar annually. About 1.5 million tons will be consumed domestically and about half a million can be exported.
