The Swaziland Experience in the Changing EU Environment

Nick Jackson, Managing Director Royal Swaziland Sugar Corporation

RSSC in Swaziland

Sugar to Swaziland (2006)

• Contributed 18% of national output

• Employs 35% of the agricultural workers

• Produces 650,000+ tonnes from 50,000ha of irrigated land

• Consistently ranked in the Top 10 lowest cost producers in the world

• Poised for major expansions in both the North and South

Issues facing Swaziland (2006)

• Appreciation of local currency

• High levels of unemployment and poverty

• Low economic growth

• HIV/AIDS reaching alarming proportions estimated at 42.6% of adult population is HIV positive

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

1996 1998 2000 2002 2004

HIV Prevalence

Pacific Exchange Rate Service

Sugar in Swaziland

• Annual rainfall around 600mm (Nov-Mar)

• All cane grown under irrigation – Flood, sprinkler, pivot and drip

• Harvesting over 33 weeks

• Average replant is 9 years

• Varieties mainly from SA

• 3 sugar factories (5.1m tc) – Simunye (1.9), Mhlume (1.3m)

and Ubombo (1.9)

• VHP raws, DC VHP, refined sugar and Molasses

SWOT Analysis

STRENGTHS

• Efficient cane production

• Technically efficient sugar mills

• Premium markets for sugar

• Member of SACU

• Single desk selling of sugar and molasses

• Support of small holder growers by Government

WEAKNESSES

• Increasing costs of production of cane and sugar

• Weak smallholder growers

• High cost of transportation

• Rising electricity costs

SWOT Analysis

OPPORTUNITIES

• Additional market access to the EU

• Increasing world market prices

• Productivity and efficiency improvements

• Potential for co-generation into the national grid

• Increasing oil price and bio-fuels

THREATS

• Falling prices in EU and SACU markets

• Small holder growers exiting the industry

• Strong local currency

• Trade liberalization and preference erosion

Expected Socio-Economic Impact

• 36% cut in price from 2005-2009

– Estimate €39.8m loss of revenue

• EU sugar revenue accounts for 30% of total industry revenue

• Due to dilution from other markets, expected revenue loss is 20%

• Gross margin/ha to drop from about US$337 to approx. US$80 for small scale growers

• Fear that small growers cannot service debt

Expected Socio-Economic Impact

-

1,000

2,000

3,000

4,000

RSSC Ubombo

Employment Reduction

Previous Current

• More than 3,000 workers retrenched

• Reduced revenues impact social funding

• Scaling back health care services and facilities

• Reduced funding in education

Sugar Industry Adaptation Strategy

Sugar Industry Adaptation Strategy was produced.

Key areas for support:

• Institutional support for implementation

• Support for social services

• Support to improving productivity of small growers

• Infrastructure improvements (farm to mill)

• Diversification into alternative products

• Cross-cutting issues (gender, HIV, environment)

National Adaptation Strategy

Key areas of support distilled into a Multi-annual Indicative Programme (MIP) 2007-10 which acted as a guide for EC support. Total allocated to Swaziland was €74.9m (project support)

Strategic objectives: • Improvements for viability of small growers • Bring alternative model for the provision of social services

provided by Sugar Industry • Reduced transport costs through infrastructure • Diversification into other crops/activities

National Adaptation Strategy

The MIP was operationalized and financing planned

Project Funding

Support to small growers in irrigation equipment, land prep & business management

€25.0m

Improvement of transport infrastructure (farm to mill) €21.0m

Restructure social services delivery and provide transition services €11.0m

Support for economic activities for retrenched employees/growers €6.0m

Establish trials and pilot projects to test alternative agriculture €5.0m

Establish Restructuring & Diversification Management Unit (RDMU) €4.7m

Ensure continued coordination of accompanying measures after RDMU

€1.0m

Issues with implementation

• First three years the EU committed to funding only one programme per year, due to:-

– HR constraints on the part of the EU delegation

– More difficult operating from Lesotho

– Caused extended timeframe for routine transactions

– Resulted in the loss of €11.1m from 2009 and 2010 allocations

Issues with implementation

Deployment of MIP funding not consistent with urgent priorities set by the industry

A few examples:

• Focused on improving roads and bridges benefiting new growers, not existing growers

• Support for restructuring social services was front loaded by the industry, back loaded by the EU

• Creating of RDMU supposed to speed up implementation but RDMU took long to set up

Issues with implementation

A few more examples:

• Industry wanted targeted upgrading of rural roads, EU favoured larger road and bridge infrastructure that was administratively easier

• Resulted in roads with a lower direct cost saving being implemented with minimal sugar traffic

• Industry wanted existing industry structures to be used for implementation (Mills), rejected by the EU

• Many rules around implementation of projects which exclude many of the better contractors/suppliers

Achievements

• 2,423ha of land developed

• 39.3km of strategic road network under tarmac, 6km rehab of gravel roads and 3 high level bridges completed

• Grant to SCGA operationalized

• Rehabilitation of bulk water infrastructure of Malkerns canal and Mhlume siphon 4

• Capacity building for small growers in governance and business skills

• EU mission in Swaziland

• MIP2 grants able to be implemented by Mills

Implemented Projects

Siphon 4 at Mhlume

Haulage road – Mananga to Sihhoye

RSSC Overview

• Royal Swaziland Sugar Corp. was formed in 1979

• Merged with Mhlume Sugar Company in 2001

• Employs 1,700 permanent and 2,500 seasonal and casual employees

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

Profit After Tax

RCL Foods 27%

Tibiyo Taka Ngwane 53%

Gov of Swaziland 6%

Coca Cola 2%

Other 2%

Gov of Nigeria 10%

RSSC History

Mhlume Mill Simunye Mill Mhlume Refinery Simunye Distillery

RSSC & MSC Merge RSSC

Est

MSC Est

Mhlume Refinery Est

Simunye DistilleryEst

Mananga Sugar Packers Est

Royal Swaziland Sugar Corporation

RSSC Adaptation

• Cane yields & sugar production increased

• McKinsey brought in to review strategy

• Cost reduction projects initiated

90

95

100

105

110

115

Cane Yields (tcha)

• Integrated Growth Plan developed

• Office of Strategy Management implemented

• Balanced score card to track new strategy

Future for RSSC

• Expand through Integrated Growth Plan, once drought abates

• Continuously improve operational efficiencies

• Install power plants at Simunye and Mhlume

• Lobby for more strategic water storage

• Expand further, once dams constructed

• Lobby for restructured sugar industry

• Continuous drive to reduce unit costs along with sensible diversification

Strategic Map

Summary

• EU regime change has brought risk, as well as opportunities for Swaziland and RSSC

• All stakeholders pulled together, EU came on board

• Project support was more punitive than budget support

• Sugar Milling companies have adapted and implemented initiatives

• Growers are much slower to accept change

• Future is uncertain

Inspiration

It is not the strongest of the species that survive, nor the most intelligent, but the one most

responsive to change

Charles Darwin

THANK YOU