Disastrous mill upgrade project

Cane cutters in Balata Tavua. Picture: REINAL CHAND

The Fiji Sugar Industry suffered a loss of $550 million through its disastrous mill upgrade program of its four mills since its commencement in 2006.

And the losses continue to accumulate even today through interests on the borrowed money.

This project was financed through an initial loan of $102 million from the EXIM Bank of India. It was contracted to the New Delhi-based Indian firm Sugar Technology Mission and dubbed the STM project.

The present value of the accumulated loss of this seriously mismanaged investment misadventure and its real opportunity cost is almost double that amount now of $900 million plus.

Yet despite these huge losses, FSC is still carrying an EXIM debt of nearly $75 million among its total debts and guarantees of nearly $500 million.

For some years now, FSC has been under extreme liquidity stress and has been forced to operate through government guarantees. Nobody wants to lend to FSC.

Not even its main bankers unless it is fully secured by first ranking guarantees. The calculation of these of $550 million losses is supported by three independent external consultants and also confirmed by reliable sources within the industry itself.

These consequential losses are summarised in the Final Impact report of the corporation and attributed directly to the technical failures and lack of delivery of the STM Ugrade project. No culpability is implied against EXIM.

The fault lay entirely in the poor planning, execution and management of the project, compounded by serious conflicts of interests, absence of basic internal controls, insufficient and inappropriate procedures for certification of work completed, authorisation of progress payments and general negligence surrounding oversight.

These are in addition to the already spent initial loan of nearly $100 million.

Consequential losses to date ($FJ in millions ) = $556 million.

  • 1. Additional Civil Works $43.1 million.
  • 2. Additional Remediation of STM equipments to improve performance $4.4 million.
  • 3. Sugar Losses during the STM project implementation 2008-2012 $360 million.
  • 4. Increase in Mill Operating costs due to STM non-performance $119 million.
  • 5. Exchange Losses $19.2 million
  • 6. Cost of 40 Indian staff to rectify problems $9.2 million
  • 7. Unrecovered Contractors debts $.9 million.

To date FSC has paid nearly $24 million in interest alone on the EXIM loan. And all these figures continue to mount each year. Every aspect of this deal was a colossal disaster.

From a most naive and amateurish negotiation of the contract to its utterly reckless and irresponsible oversight of the project, this was a calamitous journey of breathtaking incompetence and mismanagement.

Thus can only happen if one is not conscientious about others’ money. The country has not been told the full story about this saga.

Those who are complaining about the Coalition Government not doing enough or not moving fast enough to restore the indus- try should reflect about this deep malaise and brazen lack of accountability that had infiltrated the industry under the previous government.

The litany of Failures In 2003/2004 FSC submitted a proposal to upgrade its four mills at a projected cost $220 million. It was later revised, following the choice of an alternative supplier, (STM) of New Delhi at less than half the cost of $102 million.

How the cost could be halved by ($118 million) shows either gross budgetary incompetence on the part of those preparing the estimates or sheer recklessness in the use of public resources.

On 18/8/2005, FSC chairman entered into an agreement with the head of STM’s Mr JJB, authorising him to call, receive, evaluate and approve tenders on FSC’s behalf. EXIM was selected to provide finance.

JJB formed another company STMPL Ltd to facilitate that and was appointed the engineering consultant and project manager, resulting in one person having total control over the project without the required separation of key controls and functions.

The report refers to the project management being a dismal failure, ineffective, lacking basic transparency and without adequate checks and balances. It also points out the absence of co-ordination between the project manager in India, his team on site in Fiji, the vendors, their sub contractors and most importantly the FSC team in Fiji.

There were many grey areas, variations and scope of work disagreements causing delays and uncertainties. These issues and potential conflicts should have been diligently anticipated and addressed in the initial contract negotiations and a proper resolution framework should have been agreed to.

Surprisingly even after the emergence of these matters, FSC management took no action. But the most serious act of negligence on FSC’s part was its failure to appoint a technically qualified engineer to supervise the project that would ensure delivery of all the agreed KPIs, quality controls, standards, equipment performance and efficiencies, meeting of all deadlines, warranties and underlying contractual obligations.

FSC had outsourced all its rights and interests to an unknown person and company some 12,000 km away, virtually handing him $100 million to spend, the way he wanted and largely without caveats or controls.

This is inexcusable negligence and far below the acceptable standards of prudent corporate risk management. Because of the recurrent issues, FSC was forced to hire 40 additional Indian technical staff for three years at an average annual salary of nearly $77,000.

This was almost five times the average earning for the nearly 2000 local FSC workforce.

Everybody involved in the oversight and delivery of the investment outcomes failed the industry. Collectively they inflicted at least a billion dollar long term damage to what was a prosperous part of our economy.

From the sugar ministers down to permanent secretaries, multiple chairmen and directors of the FSC board to a long succession of highly paid CEOs of FSC, they are all guilty of serious abandonment of their fiduciary duties.

Who were these people running the projects from its commencement in 2006 ? They shall remain unnamed for the time being, but we know who they are. Has any one of them been asked to account for their failures ?

No. No entity can deliver unless those in positions of authority are held fully accountable for their actions or lack of.

The nation must demand answers and those responsible should take ownership of the crisis and carnage they have left for this government to clean. They must also declare if they have in any way benefitted from this saga.

• CHARAN JEATH SINGH is the Sugar and Multi Ethnic Affairs Minister. The views expressed here are not necessarily the views of this newspaper.

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