The shocking state of FSC

  • 27th May 2015
  • Stories
  • // Display comment count + link

What is the true state of affairs in FSC? Acting Sugar Minister Aiyaz Khaiyum praises the “tremendous performance” of FSC and its executive chairman Abdul Khan. FSC’s Independent Auditors, however, paint a totally negative picture, even casting doubt on FSC as a going concern.

This is what Khaiyum says when announcing the $15 a tonne 4th cane payment for the 2014 season :

“We are able to do this only because of the tremendous performance of the Fiji Sugar Corporation under its present management and especially its executive chairman, Abdul Khan. We have taken politics out of the industry and given the FSC the guidance and support it needs to properly manage the industry.”
But the finally released annual reports of FSC for the years 2012-2014 depict an FSC that is insolvent, up to its teeth in debt, surviving only on borrowed money under government guarantees. No financial organization would lend a dime to the Corporation without government guarantee.

Independent Auditors, expressing serious concern at FSC’s ability to continue as a going concern, stated thus in the 2014 Report (P25):

“The Corporation incurred significant losses during recent years. During the year ended 31 May 2014, the Corporation incurred a loss (before reversal of impairment loss) of $28 million. The Corporation is also not generating enough cash flows to meet all its commitments and obligations as and when they fall due.

As at 31 May 2014, total liabilities of the Corporation exceed total assets resulting in net liabilities of $86.9 million. The current liabilities exceed the current assets by $225.4 million.

The Corporation has significant debt repayment commitments amounting to $213.2 million during the financial year ending 31 May 2015. Furthermore, the Corporation may require funding to meet its working capital and capital expenditure requirements.

The above conditions and other matters as disclosed in Note 23 of the financial statements indicate the existence of a material uncertainty that cause significant doubt about the Corporation’s and the Group’s ability to continue as a going concern.”     

 

rarawai

The true picture of FSC that emerges from the Reports:

The future viability of the Fiji Sugar Corporation (FSC) is in grave doubt. An informed analysis of the reports and audited accounts for the last 3 years (2012-2014) shows that the situation is worsening. Except for some improvements in its milling efficiency, the rest of the picture looks very grim.

The Independent Auditor’s Report 2014 Pp 25 and 26 under the heading: Continuation as a Going Concern makes it amply clear that FSC is insolvent, indeed bankrupt to the core, and is only able to continue operating on the back of massive borrowing under government guarantees.

It is true that without government guarantee no one would lend even a dime to FSC. All three (3) reports carry the same message by the Independent Auditors.

The Reports show that FSC’s financial performance has worsened significantly between 2012 and 2014.

It has not been able to contain its losses. The profits shown of around $7m in 2014 and $6m in 2013, have only been possible by reversal of impairment losses of $35m and $45.5m, respectively. Indeed, these are only paper profits arrived at by juggling the books.

The Independent Auditors have observed as follows on these profits:

2013: “The Corporation incurred significant losses during recent years. During the year ended 31 May 2013, the Corporation has incurred loss (before reversal of impairment loss) of $39 million (2012: $38.1m). As at 31 May 2013, total liabilities of the Corporation exceed total assets resulting in net liability of $93.9 million (2012: 100.2million).
The current liabilities exceed the current assets by $157.3 million, representing the ratio of 3.07:1 (2012: $127.9 million, representing the ratio of 3.16:1).

The Corporation has significant debt repayment commitments amounting to $197.1 million during the next 12 months, including $173.8 million repayable to the Government. The Corporation may require further funding to meet its working capital requirements, capital expenditure and fund the operating losses.”

2014: “The Corporation incurred significant losses during recent years. During the year ended 31 May 2014, the Corporation incurred a loss (before reversal of impairment loss) of $28 million. The Corporation is also not generating enough cash flows to meet all its commitments and obligations as and when they fall due.

As at 31 May 2014, total liabilities of the Corporation exceed total assets resulting in net liabilities of $86.9 million. The current liabilities exceed the current assets by $225.4 million.

The Corporation has significant debt repayment commitments amounting to $213.2 million during the financial year ending 31 May 2015. Furthermore, the Corporation may require funding to meet its working capital and capital expenditure requirements.

The above conditions and other matters as disclosed in Note 23 of the financial statements indicate the existence of a material uncertainty that cause significant doubt about the Corporation’s and the Group’s ability to continue as a going concern.

The appropriateness of the going concern on which the financial statements are prepared is critically dependent on the Government’s support to the Corporation and the sugarcane industry, the restructuring of the Corporation’s debt and additional equity to enable the Corporation to continue in operation for at least 12 months. The appropriateness of the going concern assumption is also dependent on improved quantity and quality of cane supply together with improvements in mill performance, and other factors as outlined in Note 23. ”

Figures extracted from the 2012-2014 Report show that:

(i) the Corporation made losses of $38.1m in 2012, $39m in 2013 and $28m n 2014

(ii) FSC’s liabilities exceeded its assets by $127.9m in 2012, $157.3m in 2013 and $225.4m in 2014

(iii) FSC’s debt repayment commitments have kept escalating from $150.9m in 2012 to $197.1m in 213 and $213.2 m in 2014.

According to the Reports of the Independent Auditors, in all these three years, FSC failed to generate adequate cash flows to meet its commitments and obligations as and when they fell due.

Commenting on FSC continuing as a going concern the Independent Auditors have stated quite bluntly that it is critically dependent on:SugarCane-

• government’s on-going support
• the restructuring of its debt and
• the injection of additional equity to enable it to continue in operation.

The Auditors, however, warn that:

“Should the going concern assumption not be appropriate, adjustments would have to be made to reflect a situation where the assets may need to be realized other than in the normal course of business and at amounts which could differ significantly from the amounts stated in the statements of financial positions of the Corporation and of the Group.

In addition, the Corporation and the Group may have to provide for further liabilities which may arise, and to classify the noncurrent assets and non-current liabilities as current assets and current liabilities, respectively. No such adjustments have been made to these financial statements.

The borrowing record of FSC is quite ghastly to say the least. It has borrowed from a long list of lenders which include:

Exim Bank of india, FNPF, RBF, FDB, Sugar Cane Growers Fund, FSC Projects Ltd, FSC Services (Pty) Ltd, ANZ Banking Group, Government of Fiji.

FSC’s total outstanding debt as at 31 May 2014 stood at a staggering $304 million.

Cogeneration:
And it is to borrow even more for its cogeneration projects in the Rarawai and Labasa Mills. For the latter, it has secured a loan of $17m from FDB, repayments of which will commence 18 months after the drawdown whereas a line of credit of USD 75m is being awaited from the Government of India to commence the Rarawai project.

These are big projects which are 100% financed from borrowed money. FSC has not given any feasibility reports on these projects which are likely to push its debts by a further $180m.

The question is: Seeing the dwindling cane crop size, reduced from 3.3 million tonnes in 2006 to 1.7m tonnes last year, will there be enough bagasse to fire the boilers for cogeneration all the year round? We don’t think so

FSC will have to depend on diesel or hog fuel for 8 of the 12 months of the year. Will this cogeneration prove to be another misadventure?

In any event, how will the cane growers benefit from the cogeneration projects? FSC has for years been selling electricity to FEA from its Labasa, Lautoka and Rarawai Mills during the crushing season, but the revenue derived from it is not shared with the growers.

How will this impact on the cane growers when they don’t have a stake in it? Will it distract from FSC’s core business of manufacturing good quality sugar for export? There are ramifications here which need to be properly considered.

If the cogeneration project is to succeed then the growers must be involved fully in its implementation and a just revenue sharing agreement reached with them in order to avoid negative consequences in the future.

Field Operations

Asisde from the issues raised so far, there is the disturbing picture in so far as field operations are concerned. There is very little about this important component of the industry in the 2014 Annual Report.

The comparisons drawn with regard to cane produced and crop yield per hectare at page 15 of the Report have been deliberately distorted to show an improvement in the 2014 season compared to the 2012 season.

The truth is that both the cane produced and yield per hectare in 2014 were virtually the same as those achieved in 2013, demonstrating that there was no improvement in the field operations during 2014. According to our information all indications are that the 2015 season may well see a decline in both these areas as a result of the prolonged drought now gripping the cane belt areas of Fiji.

Cane production has declined by 51% since 2006 when 3.3 million tonnes of cane were harvested. Despite all efforts by FSC and other agencies, the steady decline in cane production has not been arrested let alone reversed. The crop size now is a mere 1.6 million tonnes.

Given this depressing picture, one does not have to be a genius to deduce that neither the farmers nor FSC can remain profitably engaged in the sugar industry in the years to come. FSC has been insolvent for a number of years and continues on the same path receiving the kiss of life from the government every now and then. It is sinking deeper into debt. The government will have to cut its umbilical cord some day as it will not be able to sustain feeding FSC’s ever increasing appetite for free money!

As for the farmers, they are already exiting the industry in good numbers because they have said time and again that they are finding it very difficult to survive under the existing conditions – price of cane vis a vis the ever escalating costs of cultivation, harvesting/transportation of cane to the mills, land rent and LTA fines.

The number of both registered and active cane growers has decreased by over 3000 since 2006.

The growers have had no voice in the running of the industry since the unlawful dismantling in 2009 of the industry institutions in which they had a voice. The consequences of such arbitrary action are now before us as we see the continuing decline of the industry.

The fact is that FSC cannot survive on 1.6 million tonnes of cane a year. To break even at all its four mills will require no less than 3 million tonnes of cane to be crushed efficiently. Can this be achieved on the back of the arbitrary manner in which the FSC and the industry are being currently managed?

The answer is self-evident.

FSC has not appointed a CEO since the last one was sent home in 2010. One must ask why?

Executive Chairman, Abdul Khan has been at its helm for the past 5 years with disappointing, if not disastrous consequences to the shareholders and the industry as a whole. We feel a change in FSC’s leadership is now imperative and indeed, has been for some time.

A CEO must be appointed who will steer the Corporation in a new direction. Board appointments we realise are a prerogative of the government as the major shareholder and we call on it to carefully consider its nominees to the incoming board.