Brazilian COSAN: How Giants May Indeed Have Feet of Clay

The first month and a half of this New Year 2010 has seen a short and intense sugar happening in Brazil. An instance of those cases for which the Spanish word “coyuntura” is an adequate definition: an event that combines several important and relevant factors in a specific economic, political or social area; in this case, the global cane, sugar and ethanol complex.

On 7 January, a Thursday, Internet sugar sites were quite lively with news that COSAN S.A. had been listed on the so-called the “list of the dirty ones,” issued on 31 December 2009 by an agency of the Brazilian Ministry of Labour. COSAN is one of the world’s largest sugar and ethanol producers. From that day until 12 February, a Friday, when COSAN announced a mega project with Royal Dutch Shell, COSAN might have shown that the old biblical adage is true: giants can indeed walk on, and also be harmed because of, their feet of clay.

The Secretariat of Labour Inspection of the Brazilian Ministry of Labour included COSAN in the list of employers who keep their workers in conditions akin to slavery. In Brazil this is known as the “lista suja” (literally the “dirty list” or the “list of the dirty ones”). The list is updated every six months, after some specific actions taken by labour officials, and a company whose name appears on it gets an automatic two-year suspension in accessing government financing for rural development. COSAN, through its subsidiary Barra Bonita, had a 715 million reais (USD 411 million) financing from the Banco Nacional de Desenvolvimento Econômico (BNDES), a state agency which immediately announced a revision on the financial agreements with the company.

How COSAN S.A. got itself in the list of the “dirty ones” is an interesting process. According to the Secretariat of Labour Inspections, the process started in 2007 when an inspection was completed at the Usina Junquera, located in Igarapava, Sao Paulo. COSAN had acquired the usina, a factory plus lands, in 2002, and hired a contractor to provide workers to cut the cane, as many of the big and small fat cats do everywhere.

In June 2007, a labour inspection was requested on issues related to 42 workers employed in the usina. The list of such issues is, as well, interesting to show the scope of the regulations that companies, big or small, have to comply with, and the poor level that some of these operations can reach without accountability. The labour inspection was about: (1) workers without formal labour registration; (2) workers younger than 18 years being engaged in heavy work; (3) lack of tableware to eat meals; (4) insufficient sanitary facilities; (5) lack of adequate space for workers to have their meals; (6) lodging of workers without adequate facilities; and (7) insufficient showers and bedclothes. And there were two crucial issues: (8) absence of potable drinking water in the workplace, and (9) a “commercial linkage” controlled by the contractor which was designed to create a debt spiral and prevent workers to be able to leave the workplace because they would always be indebted to the contractor. In other words: Debt Indenture.

This issue of debt indenture is extremely important. A newspaper quoted a spokesperson of the Labour Inspections Secretariat as saying that: “The intermediary (i.e. contractor) hired by COSAN had a sort of warehouse where he sold products to the employees (workers) and, in this way, he controlled the wages the workers got.” In my own research on the cane and sugar sector in several countries, it was common to find this mechanism to get workers indebted and at the mercy of the employer – whoever he or she is. In rural areas, where goods are not readily available, the employer used to sell the workers the goods they needed, at credit and at inflated prices. They, the workers, got into debt (sometimes adding to the cash advances received at the moment of agreeing to work), which the contractor-cum-shopkeeper used as a control mechanism. The vicious circle accelerated very soon and the longer the workers worked under these conditions, the higher their debt got. Eventually, workers found extremely difficult to repay their debt. That’s a situation akin to slavery with a dark twist: slave masters had to feed, lodged and clothed their “possessions” who, albeit human beings, were mainly a financial investment.

As the spokesperson for the Labour Inspection agency put it: “We are not going to list a company (as a “dirty one”) because of lack of sheets or because the washroom was dirty… these processes take from two to two and a half years (to be completed).” Of course, readers should wholeheartedly agree: it’s not enough to have dirty linen or to establish the absence of tableware to claim that working conditions are similar to slavery… but a mechanism which binds the workers to a degrading situation by using debt indenture is a different story.

The findings of the Labour Inspection shepherded COSAN S.A. to the “dirty ones” list.

COSAN issued a press release the following day: 8 January, Friday, which said that the issues raised by the labour inspection were in actuality problems of a contractor, José Luiz Bispo Colheita (“colheita” in Portuguese means ‘harvest”), who provided cane cutting services to “several” producers in the Sao Paulo state. COSAN said that the irregularities of “that” company (i.e. José Luiz Bispo) involved, or spilled onto, them because of “solidarity responsibility.” COSAN decided to assume payments related to the workers, and terminated the contract with José Luiz Bispo in 2007. COSAN offered workers to relocate them to other factories within the group, but all of them decided to return to Pernambuco, their state of origin, according to the Labour Inspections agency.

The same day, 8 January, some companies made public their stand on the COSAN affair. In addition to the announcement by BNDES that it would suspend financial agreements with COSAN, Walmart said it would suspend the supplying contracts on COSAN’s Açúcar União and Açúcar da Barra, and Petrobras (Petroleos Brasileiros S.A.), a state agency, said they would review their ethanol supply contracts with COSAN.

But, then, the Minister of Agriculture Reinhold Stephanes came very strongly in favour of COSAN. In his opinion, a quoted by press reports, there had been an “exaggeration” and a “mistake” to place COSAN in the “dirty ones” list. He said that the case was a three-year old case with one of COSAN’s “providers”, and COSAN had “hundreds” of them. Moreover, he said, COSAN had “immediately resolved the problem,” even though the problem with the 42 workers was the contractor’s and not theirs. Or was it?

The same day, January 8, COSAN filed an injunction with the 10th regional labour tribunal to remove their name from the “dirty ones” list, to be effective three days after the injunction was granted. Failing to do so carries a daily fine of 50,000 reais (USD 26,000). In the following days, Walmart said that it would reinstate their sugar contracts, and BNDES that it expected to resume dealings with COSAN. Brasil’s attorney general office said his office will appeal the injunction, and was to submit evidence by 12 January to maintain COSAN in the “dirty ones” list. The appeal may take up to six months to reach a decision; meanwhile the injunction to remove COSAN from the list is valid.

That was mid January.

By early February, more COSAN news was marking the beat in the cane, sugar and ethanol complex. On 12 February, Royal Dutch Shell and COSAN announced a memorandum of understanding on a USD 12 billion joint venture for the production and distribution of cane-based ethanol. The joint venture would start by producing 529 million gallons per year, with plans to expand production to 1.3 billion gallons – a volume that would place the Shell-COSAN venture among the world’s top three ethanol producers. The other two are ADM (Archer-Daniels-Midland) and POET, both based in the US.

The joint venture will develop two different companies. One, the A&E (sugar and ethanol, for the initials in Portuguese) will focus on operations related to sugar, ethanol and co-generation of electricity; the second, the DS (downstream), will be in charge of the distribution and marketing of fuels, with some 4,500 distribution stations.

After the joint venture with Shell was announced, COSAN said that their third quarter of fiscal 2010 (Oct.-Dec. 2009) closed with a net profit of 167.1 million reais (USD 87 million), which is 32 times the 5.3 million reais profit in the same period of the previous year.

COSAN is a huge company in the world’s cane, sugar and ethanol system; it is really an agricultural giant which is rapidly transforming itself into an energy/agriculture hybrid. Only in terms of its cane and sugar and ethanol segment COSAN processed some 44 million tonnes of cane in the 2008/09 harvest, to be increased to 60 million tonnes with the integration of the Novamerica assets. COSAN manufactures several products: the very high pol sugar (VHP), granulated refined sugar, organic sugar, liquid sugar and inverted liquid sugar, ethanol, and bagasse-based electricity. Its records place them as the world’s third largest sugar producer, the world’s fifth largest ethanol producer, and among the world’s largest ethanol exporters. In Brazil it controls 23 factories, four refineries, and two shipping terminals – for sugar and ethanol. Although the bulk of COSAN operations are located in Sao Paulo – underlining the relevance of the state in the world’s cane, sugar and ethanol system -, it has also ventured into Matto Grosso do Sul and Goiás. In 2008, COSAN acquired the assets of Esso Brasileira de Petróleo S.A for USD 826 million, with about 1,500 distribution stations and concerns in the manufacturing and distribution of lubricants and aviation fuels, and the use of the brand names Esso and Mobil.

Now, the readers should allow themselves a pause. How come such a large company gets involved with a contractor (“provider”) who so fragrantly abuses the workers he hires? And the Brazilian minister of agriculture says that COSAN has “hundreds” of contractors. While it has become common for companies, big and small, to outsource operations in order to cut costs, it is really remarkable that a company like COSAN, which only in the last quarter of 2009 sold 379 million litres of ethanol; 890,000 tonnes of sugar; 1.5 billion litres of fuels and 30.7 million litres of lubricants, has to resort to outsourcing practices.

In my work with the IUF Sugar Global Program I have met workers employed in the cleaning of cake filters in sugar factories (a must-do job every single minute that the factory is operating), who were employed on a casual basis. Sometimes, their employer is the same mill; most of the time is a contractor hired by the mill. When I have asked local management about these workers’ terms and conditions, their answer was: “they are not our workers.” COSAN’s story should show these companies – as their own national labour legislation actually does – that companies are responsible for every worker in their work place, no matter who formally employs them.

The COSAN affair, even if a decision on the appeal by Brazil’s attorney general is six months away, is a lesson on who should be bear the responsibility and be accountable for conditions of all workers in a workplace. As the Labour Inspection agency spokesperson said on the COSAN’s case, when COSAN paid the fines incurred and compensated the workers, it showed that they (COSAN) understood those workers were under their responsibility, and not only the contractor’s. It should not be a surprise that a combination of social responsibility practices with the risk of losing multimillion dollar public financing in addition to commercial contracts because of the labour inspection’s findings, COSAN promptly resolved the labour issues with the 42 workers hired by José Luiz Bisop to cut canes in the Usina Junquera. Probably it would be better for COSAN to get rid of their “hundreds” of contractors, if they still have some after this experience.

On an equally relevant matter, the COSAN story is an instance of the way big cane and sugar companies are becoming agricultural & energy conglomerates. COSAN bought ESSO Brazilian assets in 2008, and they will develop a joint venture with Shell. Ethanol from cane has been among us for some decades, and will not go away. Workers in cane plantations have even more opportunities to strengthen alliances with workers in two other sectors: food (sugar processors) and energy (ethanol producers), both becoming integral part of the same production chain. This joint work is a guarantor that labour rights are indeed respected, and that government agencies bring companies, big and small, into compliance with national labour laws and international labour standards.

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