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Statement to the House of Representatives re signing of Heads of agreement between the Government and Infinity Bioenergy Limited

Release Date: 
Tuesday, July 1, 2008 - 13:15

Mr. Speaker, this Honourable House will recall that precipitated by the reform of the EU’s Sugar Regime, translated into a 36% cut in sugar prices between 2005/6 and 2009/10, as well as the huge debt burden of The Sugar Company of Jamaica, the previous Government articulated in this House in October 2005, a new Strategy for the transformation of the Sugar Industry. The essential feature of that strategy entailed the transformation of the sugar industry to a sugar cane Industry based on the production of multiple products, that is, sugar, molasses, rum, ethanol and cogeneration. Mr. Speaker, the idea is that this transformation be driven essentially by private investment. Hence, the Government embarked on a privatization exercise to divest its interest in the 5 state-owned sugar estates. As a consequence, a Sugar Enterprise Team was formed headed by Mr. Aubyn Hill.

Mr. Speaker,
The Enterprise Team invited investors to submit prequalification bids in May 2006, and after 2 subsequent extensions, this exercise was closed in June 2007, after which 8 prequalified investors were selected to submit formal proposals. Mr. Speaker, in October 2007, the current Government approved the 8 prequalified bids and also appointed a Sugar Negotiating Team (SNT) to carry out negotiations with the companies which were expected to submit bids. Of the 8 prequalified companies, only 4 purchased the Information Memorandum, which was available as at December 14, 2007. Following the official invitation to bid, due diligence was conducted by a number of the shortlisted companies. One bid was submitted, from Infinity Bio Energy Limited from Brazil. The Negotiating Team commenced negotiations with Infinity Bio Energy Limited on Monday, 11 March 2008, an exercise which has culminated in the signing of a Heads of Agreement last Friday, 27 June 2008.

Infinity BioEnergy Limited

Mr. Speaker,
Having regard to our objective of developing a sustainable sugar cane industry based on multiple products, we were encouraged by the interest and proposal from a Brazilian company, given the extensive and undisputed experience of Brazil in the sugar cane business. Mr. Speaker, Brazil produced twenty percent of world sugar output or 30M tonnes in 2006, one third of world ethanol production or 16 billion litres in that same year, with mandatory blend of gasoline with ethanol at twenty five percent, with up to E 100 achieved for individual motor vehicles.

Mr. Speaker, Infinity Bio Energy Limited is essentially a bio-fuels company. The company, incorporated on March 15, 2006 under the Bermudian Companies Act, under the name Infinity Bio-Energy Ltd, has as its main goal to become a global leader in the production and distribution of ethanol and other biofuels. Listed on the London Stock Exchange, this company owns some eight (8) facilities in Brazil involved with sugar and ethanol production. Jamaica represents its first major acquisition in the Caribbean.

Heads of Agreement

The Heads of Agreement outlines the essential terms of the transaction and the terms and conditions on which the Parties shall jointly seek to implement the modernization and diversification of the sugar cane industry. The Heads of Agreement also identifies the actions to be taken by the Government of Jamaica and Infinity Bio Energy to give effect to Infinity’s plan for improvements to the Industry.

Mr. Speaker,
I wish to emphasize that the signing of the Heads of Agreement represents only the beginning of a process of transition of ownership from the Government to Infinity Bio Energy Limited. During this transitional period, the Sugar Company of Jamaica will retain management control of the 5 estates and the employment status of all categories of workers remains unchanged. The Government expects that at the end of September, we would be in a position to formally hand over the assets to the new company, and it is at this point that redundancy payments will become relevant. I also want to hasten to assure all workers that all the necessary redundancy payments will be made on time, consistent with our labour laws and the contracts signed between the Unions and SCJ.

Mr. Speaker,
As I have already stated, during the transition period, the Sugar Company of Jamaica will continue to manage the sugar entities to ensure out-of-crop repairs and maintenance are carried out. Representatives from Infinity will however arrive in Jamaica immediately to be a part of the transition team. Mr. Speaker, it is essential to involve Infinity in the operations of the sugar industry at this time to ensure that the transition of ownership is smooth and that preparations for the next crop are done in a timely and orderly manner.

The key elements of the Heads of Agreement with Infinity are as follows:

    GOJ and Infinity shall effectively enter into a joint venture to carry on the Businesses through a company to be established (“Newco”). Government’s equity in NEWCO will be 25%. This equity represents the value of the SCJ’S assets and Petrojam Ethanol. GOJ and Infinity shall have representation on the Board of Directors of NEWCO proportionate to their equity in the company.
    The GOJ shall lease to Newco the sugar cane lands for a term of no less than fifty (50) years, with an option to renew for a further term of no less than twenty five (25) years;
    The Factory Lands will be sold to Infinity. These lands comprise the factory compound including the sugar factories and an additional area of land of not more than 100 acres immediately surrounding the sugar factories;
    The GOJ shall enter into an Implementation Agreement with Infinity within thirty (30) days of the Transition Date confirming its commitment to support and ensure the smooth implementation of the Transaction, in particular by:
        passing such regulations or orders or otherwise as may be required to ensure that Newco shall receive tax and other incentives;
        passing such regulations or orders or otherwise as may be required to ensure that a new sugar cane payment formula is instituted which reflects the diversification of the Industry to ethanol and to energy production while preserving the general principles of fairness and competitiveness of the relationship between the sugar factories and the sugar cane suppliers;
        signing a five (5) year Off-Take Agreement with Newco, by which the GOJ agrees to accept from Newco, one hundred per cent (100%) of the fuel ethanol required to fulfil the mandatory mix set out below at a price of 65% of the gasoline price sold ex-refinery;
        passing such laws mandating a requirement in Jamaica for a cleaner fuel matrix starting at a mandatory E10 to commence by October 1, 2008 and phased in by April 1, 2009, and providing that E25 use will be required of all vehicles that are E25-compatible on July 1,2009 and the balance of vehicles phased in over a period of time mutually agreed by the parties;
        passing such laws as are required to ensure that Newco may satisfy its molasses quota determined in the existing supply contracts with imported molasses if needed;
        using its best efforts to invest in and support necessary improvements in logistical infrastructure such as Cane Roads, ports, tanking and other facilities.

The agreed main development objectives of Infinity Bio Energy Limited in Jamaica are as follows:

     that the leased premises will remain engaged in the production of sugar cane, sugar and ethanol related or energy products;
    to use its best efforts to identify alternatives which will promote the reduction of the price of fertilizers and maintaining such prices at no greater level than world market standards.
    introduce methods aimed at improving agricultural productivity and developing the local sugar cane industry, including, but not limited to:
        Assisting farmers, through a farmers development programme; providing them with associated services such as cane cultivation, harvesting, loading and transportation;
        Developing new varieties of sugarcane, either through a research and development programme of local varieties or with the importation of suitable varieties developed by Infinity and Infinity’s partners;
        Increasing mechanization and irrigation when appropriate to levels that maximize financial returns.
    invest in the modernization and expansion of the industrial facilities, including but not limited to substituting obsolete equipment; improving cane unload and preparation; improving efficiency of steam and energy consumption; automation systems;
    transfer technical management skills and best practices learned within the Brazilian sugar industry in order to apply its expertise in the Industry to develop Jamaican technical and managerial skills. Infinity, whether through Newco or otherwise, will keep an experienced team locally and will provide training and incentives for the Jamaican professionals.
    supply the local market with the products and volumes of sugar and sugar related by-products and will develop new projects, diversifying its range of products, including but not limited to sugar, ethanol, molasses, cogeneration of energy from bagasse and bagasse pellets;
    promote and support the following social programmes in the communities surrounding the Estates:
        Provision and maintenance of clinics, housing and sports facilities;
        Provision of financial support to schools and churches;
        Provision of medical and dental assistance.

Mr. Speaker,
As I have indicated before, Infinity BioEnergy is essentially a biofuels company; hence their production plans will be heavily biased towards ethanol production. As a consequence, beginning 2010, approximately 80,000 kilolitres of ethanol will be produced increasing to up to 135,000Kilolotres in 2013. Conversely, sugar production is projected to be 125,693 tonnes in 2009, decreasing to 62,000 tonnes in 2010, and will be maintained at this level up to 2013. Molasses production is projected at 63,800 tonnes in 2009, decreasing to 27,638 tonnes in 2010, and maintained at around 27,200 tonnes.

Significantly, Mr. Speaker, the company will produce some 138 Giga Watt hour of electricity in 2011, and this will be increased to 158 in 2012 and 168 in 2013. These figures represent net production to be sold to the national grid, after having satisfied their internal energy demand.

Mr. Speaker,
I want to point out that the production of the mix of products I have indicated above over the next five years, will require significant increases in the production of sugar cane from 1.4M Tonnes of cane in 2009 to 2.5M Tonnes in 2013. Importantly, Mr. Speaker, the new company only proposes to produce half of this amount, hence there is a significant opportunity for existing cane farmers to be engaged in the production of the other 50%.

Transitional Arrangements

Mr. Speaker, from the salient points in the Heads of Agreement that I outlined above, it is clear that the next three months are going to be critical in putting in place a number of arrangements to allow for full takeover on the 30th of September. These arrangements include: legislative amendments, surveys and transfers of lands, other arrangements involving the Ministries of Finance and the Public Service, Energy and Transport and Works. Given the intensity and wide scope of activities envisioned, the Cabinet only yesterday approved the appointment of Mr. Aubyn Hill to head the implementation team, comprising the Ministry of Agriculture’s Sugar Transformation Unit, the Sugar Industry Authority, representatives of the DBJ, the Attorney Generals Department and the SCJ.

I wish to assure this Honourable House that the Ministry’s Sugar Transformation Unit will now intensify its work with the various stakeholders, particularly the workers, to put in place appropriate programmes to deal with the social implications of this privatization.

During the transitional period, it will become clear, the numbers of existing employees that the new company is minded to engage post September 30th. Our commitment is to work with those who will be displaced to address such matters as counseling, retraining, assistance with Housing, as well as helping to channel them into alternative livelihoods. We have also designed programmes for existing cane farmers to take advantage of increased cane production.

Conclusion

Mr. Speaker,
It is clear that the Government could not continue to be a major operator in the sugar production business, given the huge losses (up to $20B) racked up by the SCJ. Our move to privatize Government’s assets in the sector was however not motivated solely by these fiscal considerations. Our primary objective was to create a sustainable sugar cane industry based on multiple products, and one in which workers, cane farmers, manufactures and all other stakeholders can flourish. We believe we have found a good partner in Infinity BioEnergy. We believe that although there will be dislocation of some workers, there are sufficient opportunities for them to be channeled into alternative economic activities. Our cane farmers will have the opportunity to produce more sugar cane and we are working actively with the 2 existing private manufacturers to assist them in improving their productivity and viability.

Mr. Speaker, the Government has undertaken extensive consultations with all stakeholders within the last three months, updating and advising on the status of privatization process. It is our view that all stakeholders have bought into the need for the transformation of the Industry. The government therefore, remains committed to a vibrant sugar Industry and will, through its regulation of the industry and as a minority partner in this new company, ensure that the objectives outlined here today are realized.

Thank You.

 

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