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         Second sugar rehabilitation project

The Jamaica Second Sugar Rehabilitation project, supported by Loan 2850-JM for US$34 million, was approved in FY87. US$4.15 million of the loan was canceled in 1992 when the project was redesigned. The loan was closed on September 30, 1995 after a two-year extension, with cancellation of an undisbursed balance of US$0.7 million. The Latin America and the Caribbean Regional Office prepared the ICR. The borrower’s contribution is summarized in an annex to the report.

The original objectives of the project were to raise sugar production, to satisfy both domestic demand and export market quotas, and to improve the overall efficiency and financial viability of the industry. This project followed the First Sugar Rehabilitation project, which had an unsatisfactory outcome because it financed only factories at a time when sugar cane production was declining sharply. The main components of the second project aimed to modernize two sugar factories and their estates, improve management of their public sector holding company, rehabilitate irrigation facilities for sugar cane cultivation, upgrade the sugar research institute, and strengthen the project implementation unit. A high proportion of expenditure (US$9 million, about one-fifth of total costs) was for consulting services to provide technical and management assistance.

Project quality at entry was low. The original project could not be implemented because it was not financially viable and the government was not committed to supporting the industry. However, in compliance with a condition of the concurrent Private Sector Development Adjustment Loan (Loan 3622-JM), the project was informally revised in its fifth year to concentrate on privatizing the two project-supported sugar companies and rehabilitating irrigation facilities for sugar cane production.

Company profits projected at appraisal were largely spurious due to an error by the preparation consultants that neither the Bank nor the government detected. This problem was compounded by overambitious projections of sugar production growth (68 percent over five years), exchange losses on foreign debt and heavy damage from hurricane Gilbert in 1988. The holding company did not make a profit and could not self-finance its share of counterpart funds. The company’s projected accumulated net profits of US$18 million, as estimated at appraisal, became financial losses of US$70 million. Furthermore, the government failed to arrange, as agreed, a substantial subsidy to the sugar industry (from consumers) when setting domestic sugar prices. Nor did the government provide this subsidy directly or contribute its agreed share of counterpart funds.

The two sugar companies were privatized according to the revised plan, but the project was only marginally instrumental in achieving that result. The irrigation of sugar cane proved uneconomic, the output of the two project factories did not increase and national sugar production declined further, despite the US$20 million spent on consulting services and equipment. The ICR notes that the project did safeguard the jobs of up to 22,500 workers and strengthen the Sugar Industry Research Institute.

Procurement issues arose over the involvement of the same corporate group in preparing the project, providing the implementation consultants, supplying equipment and eventually winning bids to purchase the newly privatized sugar companies. The ICR notes that the Bank did not consider the award of the consulting contract to the firm a serious issue and does not discuss equipment procurement or privatization arrangements beyond recording that the two factories were sold for US$54 million, compared with a fixed assets valuation of US$76 million in 1988.

The economic rate of return (ERR) reestimated in the ICR is strongly negative compared with an ERR of 30 percent at appraisal. But the appraisal ERR was inflated by the preparation error, a severe “without project” assumption that the factories would close immediately, and the unrealistic production projections. ICR data indicate that the direct costs of producing sugar in the two schemes now exceeds total revenue from sugar sales.

Despite meeting its revised objectives, the Operations Evaluation Department (OED) rates project outcome as unsatisfactory in agreement with the ICR. It rates institutional development as modest (substantial in the ICR), giving less weight to the strengthening of institutions in a loss-making industry. OED agrees with the ICR’s rating of sustainability as unlikely. OED rates Bank performance as highly unsatisfactory, whereas the ICR rated Bank performance early on as deficient, but supervision as satisfactory. OED notes that the error in the company income projections should have been detected and acted on earlier, that the project was never formally revised and that earlier and more drastic action should have been taken to reduce the losses from this unprofitable investment. Performance ratings were generally inflated during seven years of supervision.

The main lessons learned are that careful analysis and review of financial projections are essential at appraisal and during implementation, that government commitment must be assured, that project designs must be based on realistic production projections, and that prompt and effective action is necessary to reformulate or cancel bad investments.

The ICR is satisfactory but does not adequately address the issue of the implementation consultants’ role with respect to their interest in supplying equipment and acquiring the companies. Also, Bank guidelines require that consultants criticized in an ICR (in this case, for the preparation error) be given the opportunity to respond. This was not done.

No audit is planned.

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