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“FSC timebomb for Fiji taxpayers” (ed. in FT 5 Oct. 2019)


FSC timebomb for taxpayers (ed. in FT 5/10/2019)

It is a continuing national tragedy that a public which is besotted by passionate endless discussions of rugby, seem totally unaware of a massive financial timebomb ticking away in the publicly owned Fiji Sugar Corporation, with potential losses larger than that of the National Bank of Fiji disaster.

We might remember that ten years ago, the Bainimarama Government refused an EU $300 million offer of assistance for the sugar industry, because that would have required them to hold elections.

It is an ongoing national tragedy that the Bainimarama Government which has totally controlled the collapsing sugar industry for twelve years, even today totally rejects the constructive calls by the Opposition parties, and especially Professor Biman Prasad (Leader of NFP) for a bipartisan approach to the problems of the sugar industry which may hold real solutions instead of “pie in the sky” projections and “strategic plans”.

Which is probably just as well for the reputation of the Opposition Parties, as the last two Annual Reports show honestly that there was an abject failure of the FSC Board, and especially its former Chairman, to manage the FSC in the public interest, and positive changes under the current Chairman and Board may be too little, too late. Why dash your reputation on a what is almost certainly a “lost cause”?

It is an ongoing national tragedy that neither the leaders of Fiji’s accounting and auditing professions nor  the accounting academics at the three universities, who one expects to fully comprehend the complex FSC financial statements (or should we truthfully say the “accounting gobble de gook), are bothering to warn the Fiji taxpayers of the massive losses they face down the track, or indeed of the losses they have already suffered, as the late Professor Mick White used to cogently do).

“Not a going concern”: FSC technically bankrupt

Probably the most damaging statements are to be found in Note 22 to the Financial Statements of the 2019 Annual Report, and I quote directly:

“The Corporation has been incurring significant losses. During the year ended 31 May 2019, the Corporation has incurred loss from operations of $62.3 million…. total liabilities exceed total assets resulting in a net liability of $321million…

The Corporation has debt repayment commitments amounting to $134.6 million during the financial year ending 31 May 2020. Furthermore, the Corporation requires further funding to meet its working capital requirements, capital expenditure and fund the operating losses.

Given the financial position and the debt levels of the Corporation and recurring losses being incurred by the Corporation, these factors indicate that without Government support, the Corporation will not be able to continue as a going concern.”

These words are almost the same as in the 2018 Annual Report, except that the financial numbers have got worse.

To put it baldly, taxpayers stand to lose more than $300 million in the near future, if FSC does not miraculously recover.

The 2018 and 2019 Annual Reports baldly state that there has been an increase of Government guarantees to $322 million till May 2022 but taxpayers are already losing revenues because according to Note 21,

“The loans from the Government of Fiji aggregating to $173,816,930 have been converted into 30-year long term loan with 10-year grace period and optionally convertible loan in accordance with the Loan Repayment Agreement dated 15 July 2015. Furthermore, accrued interest up to 31 May 2014 was waived by the Government during the financial year 2016, and no interest has been charged on the Government loans since the year ended 31 May 2015.

The huge borrowings of FSC

FSC borrowings are shown in accounting jargon as “non-current” and “current” but for the layman, adding the two up gives a worrying picture of the total debt of FSC almost impossible to repay.

There is a massive non-current borrowing of $139 million from the Fiji Government.

FNPF has lent a total of $87million supposedly to meet FSC’s “working capital and capital expenditure requirements”.  How strange that FNPF should be providing “working capital” to a commercial company.  Is that the best return that FNPF management could get for its members’ funds in Fiji and abroad, even if it is a minor shareholder in FNPF (holding $8 million of shares)?

The Reserve Bank of Fiji, a statutory organization given the sacred duty of looking after Fiji’s monetary system, has strangely lent $12 million to a bankrupt FSC, supposedly for flood rehabilitation and natural disaster rehabilitations.

While these are important objectives for any society, they are not part of the core objectives of a Reserve Bank which is supposed to regulate all lending in Fiji (including its own lending?) Surely there is a fundamental conflict of interest here which the RBF Governor must avoid at all costs, regardless of the pressure on him by the Minister of Finance to be a member of the FSC Board or to lend to this bankrupt company.

Fiji Development Bank is owed some $15 million; and Sugar Cane Growers’ Fund some $6 million.

The purely commercial Exim Bank of India is now owed some $61 million, a disastrously used loan.

Chairman Vishnu Mohan honestly points out in the 2019 Annual Report that the FSC Board was “actively addressing the impact of past legacy issues especially the Indian EXIM Bank loan ad how the loan proceeds were grossly mismanaged. The value destruction to the business has been significant while servicing of the loan remains a drain on FSC’s cash flow”.

So who exactly should be held responsible for the “gross mis-management” of the EXIM Bank loan which was clearly squandered given that in 2018 the FSC Board had to approve another $30 million attempt to improve the three mills which are still stuttering along.

With ANZ astutely reducing its loans to FSC from $63 million in 2017 to nothing by now, the bigger question to be asked is: which of these FSC loans by FNPF, RBF, HFC and even FDB have been made only because of government pressure and the government incentive of government guarantee?

The FSC has collapsed

The public can be easily lulled into a false sense of security by short-term improvements in FSC and cane farming performance, while ignoring the long term collapse under the Bainimarama Government.

Of course, there were losses by FSC under previous governments, as between 2000 and 2003.

But the losses since the 2006 coup have been much greater and cumulatively totally destroyed the value of shareholders equity (net assets) in FSC because of the massive increase in liabilities (or borrowings) which have not had the desired impact on sugar outputs or sugar cane production which has collapsed.

To put it simply, between the two periods before and after the Bainimarama Government took over, average cane crushed declined from 3098 thousand tonnes in the period (1997 to 2006) to 1873 thousand tonnes in the period (2007 to 2018), a decline of 40%.

Between these two period, average sugar produced declined from an average of 315 thousand tonnes pet year to 181 thousand tonnes per year a decline of 42 percent.

Mill performance also deteriorated.  Average Crushing Rate of the mills declined from 989 tonnes per hour to 791 tonnes per hour (a decline of 20%) while the Average Crushing Time as a percentage of available time declined from 75% to 63%, a decline of 16%.

Most importantly, Net Assets or Shareholders’ Equity (or what the business is worth today) has been negative since 2010, and now stands at -$322 million (see the graph).


While some of the recent setbacks may be attributed to cyclone damage to mill and sugar cane farms, the overall decline has been so large and systemic that it is difficult to see how this industry can ever revert to its heights of 1999 when sugar cane production was 3958 thousand tonnes.

Let  me remind that the win by the FLP  in the 1999 Elections, also brought on massive non-renewals of sugar cane leases, and disenchantment of sugar cane farmers, many of whom today have no passion to be the hardworking agriculturalists they were before, as in the CSR days. The graph shows that cane production began its downward slide soon after 2000.

Mechanical harvesters now harvest 29% of the sugar cane produced, a rise from only 5% in 2015.

Note also that staff costs which used to average around 50% of FSC revenues before, have now risen to a massive 87% of FSC revenues for 2019 while FSC continues to lose skilled and experienced staff to emigration.

There is a strange Note 5 (b) in the 2019 Annual Report, which while stating that FSC profitability is related to cane supply risk, also shows that while cane supply increased from 2018 to 2019, the FSC Gross Profit declined from $0.84 million to a loss of $23.12 million; and while cane supply is projected to increase to 1850 million tons in 2020, it is expected that will still be a loss of $7.6 million.  What on earth is going on?

FSC’s future plans?

There are all kinds of optimistic projections about sugar cane and sugar production in the future not born out by recent history.

For instance, Note 6 (b) the Financial Statements say that an “impairment review” of FSC assets by an independent NZ consultant was based on a scenario which assumed that sugar cane production would increase to 3.5 million tonnes by 2024 and 4.0 million tonnes by 2027. Wow, these are levels never achieved over the previous twenty years.

But far more important is that the FSC Annual Reports all promise that the Fiji Government loans of $173 million to FSC will be converted to new “equity”.

In a normal business world when “new equity” is magically created for one shareholder, other shareholders like FNPF (which has about $8 million) and Fijian Holdings Limited (which has about $4millions) might have been expected to protest that their shares were being forcibly “diluted”.

But what if the new “equity” is in a company which is already bankrupt to the tune of minus $322 million.

Is it simply to pretend that the FSC never borrowed these loans?

Is it to remove all debt from FSC so that some private buyer may be encouraged to purchase an FSC at a knock down price, with no debt hanging over it?

Fiji’s smart accountants and auditors should be asked to explain in simple English to Fiji taxpayers what it means for their long term welfare if “their government” converts $173 millions of government loans into shares of a bankrupt company which is unlikely to ever give back dividends, while that same government has guaranteed $322 millions of loans to this same bankrupt company by FNPF, FDB, RBF etc. who are also all guaranteed by the same Government of Fiji.

Whatever the explanation the ultimate result is that Fiji’s Public Debt is going to be increased by more than $300 million, just as it did when the National Bank of Fiji collapsed.

This is the reality which Fiji taxpayers will have to face anyway, because of the sheer importance of the hundreds of thousands of livelihoods associated with this historically important industry. It cannot be allowed to totally collapse.

What Board Accountability?

Boards of public enterprises have the sacred duty of supervising and demanding accountability from the management of the public enterprises, in the interests of the shareholders- the taxpayers, whose assets amount to billions of dollars.

The FSC is a prime example where Board Members have never been held to account despite all the evidence of questionable actions resulting in virtual financial collapse of the enterprise.

While the current Board Chairman (Vishnu Mohan) and his other Board Members appear to be making valiant and commendable efforts to save this bankrupt organization, there are serious questions to be addressed to the previous Board Chairman (Abdul Khan) and in turn, whoever was responsible for appointing him as “Executive Chairman”.

Abdul Khan, described by the Annual Reports as a “businessman and engineer” was appointed to the FSC Board in 2009 but amazingly became Executive Chairman or FSC CEO from 1 January 2011, in effect as Board Chairman, holding himself as CEO to account.

The FSC Annual Reports indicate that from 2012 to 2017 some $4,569,000 was paid out as “Directors Remuneration” (for 2012 to 2015) and for 2016 and 2017, paid out as “Executive Director’s remuneration”, or annually more than $700 thousands, while the company Khan was supposedly managing was making massive losses.

Vishnu Mohan was appointed Chairman on the 8 August 2016 and Abdul Khan resigned as CEO soon after.

Surely the taxpayers of Fiji ought to be asking the Bainimarama Government: who authorized the appointment of the Board Chairman Abdul Khan  as Executive Chairman and why?

They might similarly ask why the Bainimarama Government also destroyed the other critical institutions of the sugar industry, namely the Sugar Cane Growers’ Councils and the Fiji Sugar Marketing Authority.

Post-script 1: the marketing spin continues

Accounting and economics students might wish to read the following which is in FSC’s 2019 Annual Report in the section on “Corporate Governance” (p. 5):

“FSC views corporate governance in widest sense, almost like a trusteeship; it is a philosophy to be professed a value to be imbibed and an ideology to be ingrained in our corporate culture. Corporate Governance goes beyond mere compliance; it is not a simple matter of creating checks and balances. It is in fact a continuous process of realizing the Corporation’s objectives with a view to make of every opportunity. It involves leveraging its resources and aligning its activities to consumer need, shareholder benefit and employee growth. Thereby the Corporation succeeds in delighting its shareholders while minimizing risks… thereby creating an outstanding organization”.

Wow. “Delighting shareholders” of an organization which has been bankrupt for more than five years and if wound up today, would cost the shareholders more than $300 million.

Why does the pragmatic FSC Chairman Vishnu Mohan, former CEO of ANZ South Pacific, allow this bulls**t in his Annual Reports?

Post-script 2   Yet more PhDs for economics students

When the NBF collapsed more than twenty years ago, some of us called in total futility for a proper investigation so that Fiji could learn from the terrible mistakes made in that national bank, destroyed after Rabuka’s coup which led to the NBF management being taken over by government hacks. With one former Minister of Finance airily dismissing it all as “water under the bridge” and one former Chairman (recently a very prominent supporter of the Bainimarama Government) alleging that the losses of the NBF were exaggerated, there never has been any inquiry into that disaster which cost Fiji taxpayers more than $200 million  (in 1996 money and probably double that in today’s money). You can be sure that the Bainimarama Government will never have an inquiry into how FSC went from a Shareholder’s Equity of around $200 million) to Negative $300 million (wow), you will also never know why a certain FSC Executive Chairman used to publicly and often attribute the great health of FSC to the brilliant visionary leadership of the Prime Minister (apparently a sure shot path to stardom for any mediocre performer in the Fiji of today).

But that is no reason why some bright student at one of our three universities should not do a PhD on FSC, especially if analysis of its performance went back not just to the use of non-renewal of sugar cane leases as a political weapon by Fijian ethno-nationalists (remember them?) but also to the CSR days when both the cane farming and sugar milling were at their respective heights of efficiency). What has changed since then? The research students would find any number of fascinating factors to investigate including expiry or non-renewal of of sugar cane leases, work ethic and refusal of families to cultivate or cut cane, loss of skills due to emigration instigated by the coups of 1987, 2000 and 2006, the remittances sent back to farming families, use of sugar cane farmers as political tools in national politics, government interference in the institutions of the sugar industry (including not  just FSC but also Cane Growers’ Council and Sugar Marketing Authority), the U turn of dependence on foreign managers, government interference in the FSC Board, how $60 millions borrowed from the EXIM Bank of India to improve FSC mills could be totally wasted, not forgetting of course, the decline in the international price of sugar and the break-down of EU preferences.

The list of key factors to discuss (each of which could be a chapter in the PhD thesis) is endless. Indeed, there could be  more than one PhD, possibly supervised by Professor Biman Prasad as a more productive academic than he is as a politician.

Post-script 3              Another PhD for Accounting Students

While the “leaders” of the accounting and auditing professions may be reticent about their social responsibilities to the financially ignorant public, a good accounting student could do a PhD on how public enterprises present “audited accounts” to the public, especially the magic involved in showing a “profit” when the enterprise has been making an incredible loss in reality, or how the format of accounts change from one year to another making it difficult for the layman to understand what the hell is going on (pretty much the same as how some governments change their budget  presentations to ensure that the public can never easily compare where their money goes from one year to the next). Including in this discussion will be the strange accounting beast called “impairment loss” (which appears to be a loss in the value of real assets) and its “reversal” which apparently then becomes a “gain” or a plus in the accounts enabling FSC to ensure that a financial loss for one year appears to become a “profit”. Magic indeed.

Keep in mind of course, that every auditor alleges that the accounts they approve (for a fee) show a “true and fair” picture of the enterprise concerned- if only the average person in the street could only understand them.

There are even humorous vignettes in the English language to be investigated.  Students might wish to ask themselves: what is the financial significance of Financial Statements stating in one line that “Directors Remuneration” [sic: plural] was $846,000 (as for 2013 when Abdul Khan was Executive Chairman) and $671,000 for “Executive Director’s Remuneration” [sic: singular] as for instance in the 2017 Annual Report when Vishnu Mohan was Chairman and probably responsible for the financial reporting.

Or how one (possibly insecure) independent auditor will even slip into their statement (as has recently happened with FSC) that yet another  independent auditor also held the same opinion as themselves about the parlous state of FSC. Oh dear.

There is also an interesting development that FSC is selling off its “non-core” assets and $30 million may already be in the process of realization. No doubt the FSC accounts will show a “financial improvement” in due course. The problem is that even if all the FSC assets could be sold off to some private buyers, the accounts would still show a loss.

But of course, the “Government” could “buy” the FSC assets for a huge inflated price and show a “profit”. Ha ha ha.  Don’t laugh. That is what is basically being dones now, with the Fiji Government loan of $173 million (i.e. the cash that taxpayers are supposed to receive back from FSC) being “converted” (i.e. foregone- i.e. taxpayer are not going to get this money back) into $173 million of “equity”.

But sorry, the equity is in a bankrupt company which also owes money to EXIM bank of India (which must be paid as they are not stupid enough to write it off), and also to FNPF, RBF, FDB, etc. Remember, that ANZ hastily ran with their money.

Or how “Institutes of Accountants” which have joyful annual parties at 5 star resorts never ever raise for public awareness any hint of the national financial scandals and disasters for taxpayers, hidden by the accounts that they professionally verify as showing a “true and fair” picture of the enterprise.

Postscript 4        More PhDs available in a Banana Republic

Banana republics are indeed fertile grounds for PhD students, and I have not even broached the number of PhDs in law that could be written about constitutions of banana republics which promise immunity, to the very writers of the constitution, for totally unspecified crimes for ever and a day, never to be ever changed by any future elected parliament. Wow, such is the power of a piece of paper.

Of course, Fiji also annually keeps seeing parades of penguin judges and lawyers who never ever raise these fundamental constitutional  issues at the annual parties of the Fiji Law Society either, even though they swear black and blue that they will faithfully uphold the laws of Fiji and apply them equally to all under the sun, as presumably embodied in the 2013 Constitution (oops, which promises immunity for some).

Where is that definitive novel of Fiji’s Animal Farm?

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