By Mesfin Raji Kiltu, EMBA Development of Agro-Logistics and Market Integration Hub (ALMIH) in West Part of Amahara National Regional State Project Pre-Feasibility Study A concept note from Indian success stories and is only adapted structurally to our country’s context while it needs further refinement for its technicality & functionality by agricultural specialists. Submitted to: ANRS 2012 Bahidar
The Project is a pre-feasibility study conducted on value chain of agricultural products and Inputs to alleviate the bottleneck of the marketing system in the agriculture sector.
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i
By
Mesfin Raji Kiltu, EMBA
Development of Agro-Logistics and Market Integration Hub (ALMIH) in West Part of Amahara National Regional State
Project Pre-Feasibility Study
A concept note from Indian success stories and is only
adapted structurally to our country’s context while it
needs further refinement for its technicality &
functionality by agricultural specialists.
Submitted to: ANRS
2012
Bahidar
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
ii
-
Development of Agro-Logistics and Market Integration Hub
(ALMIH) in West Part of Amahara National Regional State
Project Pre-Feasibility Study
By
Mesfin Raji Kiltu
June 2012
Bahidar
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
iii
Preface
In every developmental endeavour, sustainability is one of the major critical
issues that are to be given great emphasis based on systemic intervention. The provision
of policies and strategically emulated agendas by their own virtue has substantive
advantages in crafting the direction and soundness of purposes. Transformation from
agrarian economy to modern economy needs an immense effort not only allocation of
resources but solicitation of innovative ideas and systems which deemed to be
beneficial for accelerating the planned developmental programs. On account of this
notion, we can learn a great deal from developing nations who already make use of their
expertise knowledge and large expenditure for testing and verifying of system
functionality. The simplest thing to do is to search for these sound projects and make an
adaptation to our country specific. This concept note is one among such manoeuvres to
ensure sustainability in agriculture and alleviate poverty.
The project was formerly produced and submitted to Bahirdar University as part
of a term paper for the study of Masters of Business Administration in Executive. In
preparing the former as well as this revised document, even though I played the leading
role & devoted much of the time, energy and efforts from inception to preparing the
whole document, I extend my thanks to the following colleagues of mine; Amlaku
Adamu, Tamirat Dejene, Kindyehun Egezew, Gashaw Awoke, Tadesse Eshetu, and
Zerihun Tesefaye and would like to acknowledge their contribution as group member in
giving me constructive comments and in providing me with the relevant statistical data.
Therefore, they also indeed deserve for the credit perhaps, I didn’t consult with them on
submission of the document to third parties since for good reason I took the full
responsibility in doing so.
Finally, what I would like to emphasis at this point is I am providing the project
to the regional government in the notion of contributing something valuable even
though I may not specialized in the field but the document may serve as a start point as
it is stated clearly in the cover page, and advice the pertinent bodies to make
arrangement for a thorough review of the document by agricultural specialists before
endorsing, pending or totally rejecting the project idea since it cost nothing other than
benefiting the society at large.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
iv
Table of Contents PREFACE .................................................................................................................................. III
TABLE OF CONTENTS ......................................................................................................... IV
LIST OF FIGURES .................................................................................................................. VI
LIST OF TABLES ................................................................................................................... VII
LIST OF APPENDICES ....................................................................................................... VIII
ACRONYMS ............................................................................................................................. IX
EXECUTIVE SUMMERY ......................................................................................................... X
LIMITATION OF THE STUDY ............................................................................................ XII
1. INTRODUCTION .................................................................................................................. 1 1.1. Background of the project .............................................................................................. 2
1.1.1. Demographic situation of the Amahara ................................................................. 2
2. COMPATIBILITY WITH GOVERNMENT PRIORITIES ............................................ 15 2.1. Government Policies .................................................................................................... 15
2.2. Need for Integrated Approach...................................................................................... 16
2.3. Linkages with existing Marketing Channels ................................................................ 17
4.4.3. The role of Farmers Cooperatives ....................................................................... 22
5. TECHNICAL AND TECHNOLOGICAL ASPECTS....................................................... 24 5.1. Technical & technological requirements of the project ............................................... 27
5.2. Location and site Selection .......................................................................................... 28
5.2.1. Locations for Development of Agro-Logistics and Marketing Hub ..................... 28
5.2.2. Possible Locations for Development of Agro-Logistics Hub ............................... 28
5.2.3. Proposed site of ALMIH in West Gojjam Zone .................................................... 31
5.2.4. Details of Agro and Horticultural produce of B/dar Zuria and Mecha weredas. 31
5.2.5. Accessibility of the selected site to the rest of West part of Amhara regions ....... 32
5.3. Options for Project Implementation ............................................................................. 33
5.4. Modes of Implementation ............................................................................................ 35
5.4.1. Role and obligations of the Private Partner for development of ALMIH ............ 37
5.4.2. Role and obligations of the ANRS for development of ALMIH ............................ 38
5.4.3. Payment Terms and Mechanism .......................................................................... 38
6. ENVIRONMENTAL AND SOCIAL IMPACT ASSESSMENT ...................................... 39
7. FINANCIAL ANALYSIS AND FORECAST .................................................................... 41 7.1. Investment costs of the pilot project ............................................................................ 42
It is to be noted that the volume of production of the two weredas amounts
around 26.7% ,10.1%, and 7% from the Zone’s, West part of Amhara’s, and Region’s
production of all the Agricultural and Horticultural production that is harvested in
Meher and Irrigation respectively.
5.2.5. Accessibility of the selected site to the rest of West part of Amhara regions
The total space in which the project will be erected requires an area of 427,000
Sq.meter and apportioned for its facility accordingly (see Appendix 1) and since the
selected project site is located nearer to the seat of the regional government
administration, the road infrastructure of all the weredas situated in west part of Amhara
would lead them easily to the project site.
Even though the exact path and location of PCC’s should be determined by
further studying the geographic and landscape suitability for freight transportation, the
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Technical and technological aspects 33
theoretical model of flow of production from each PCC to ALMIH is depicted in the
following graphic picture;
Figure 17: Hypothetical Model of Flow of goods to ALMIH from all PCCs
5.3. Options for Project Implementation
The project facilities could be developed by Government Agencies (GA) concerned
either by deployment of its own resources or under an appropriate public private
partnership (PPP) framework.
The two primary development options comprise;
Option 1: Development, Operation and Maintenance by GA
Option 2: Development, Operation and Maintenance by Private Player
Option 1: Development, Operation and Maintenance by GA.
Under this option, the following activities would need to be undertaken by GA.
a) Select a contractor to undertake development of the project facilities.
b) Hire skilled manpower for carrying out the operations and maintenance of
the developed facilities.
Option 2: Development, Operation and Maintenance by Private Player with GA playing
the role of a facilitator
In this option, development, operation and maintenance would be undertaken by a
private operator(s). The private operator(s) would need to carry out their roles and
responsibilities as per the contractual agreement signed with ANRS.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Technical and technological aspects 34
A comparative analysis of the risks associated in an event of implementation of the two
options discussed above is set out in the table below:
Options Parameters Impact
Development, Operation and
Maintenance by Government
Manpower Development, Operation and Maintenance by GA.
Skill Set ANRS would need to appoint technical consultants for developing a strategy for development of ALMIH in Amhara. ANRS would also be required to hire skilled manpower to operate and maintain the project facilities.
Service Delivery
Since payments to operational staff are not performance based and often their motivation levels are low, this could affect the level of service delivery.
Finances GA would need to mobilize finances for procurement of tools / equipment and vehicles and for development of project facilities.
Projects Risks The projects related risks such as design risk, cost over-run risk, time risks etc. and adherence to applicable laws would be retained by GA.
Development, Operation and
Maintenance by Private Player.
Manpower GA would need only supervisory staff as the private operator would be responsible for deployment of staff for providing services as envisaged.
Skill Set The onus of providing skilled manpower would be with private operator.
Service Delivery
As the payment to the operator would be made subsequent to demonstration by him of adherence to performance standards specified by GA, the service delivery levels would be high.
Finances The private operator would need to mobilize finances for procurement of tools / equipment and vehicles and for development of project facilities.
Projects Risks The projects related risks such as design risk, cost over-run risk, time risks etc. and adherence to applicable laws would be retained by private operator.
Table 9: Risks associated with the implementation options
Under Option 1, GA would not only retain all the Project related risks and be required
to raise finances for undertaking the Project, but would also need to monitor and
manage the operational staff. In contrast, if GA implements the Project under Option 2,
it would need to appoint private sector operator and recruit only sector specialists for
overseeing their activities. In this regard there are potential candidates who are a
dependable development partner and are already engaged in similar activities in the
region with good reputation like “Tiret” Endowment Company would be attracted to
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Technical and technological aspects 35
take part on the project as it might help consolidate its operational activities through the
project by reducing its operational costs. Tiret under its conglomerate has an efficient
freight transport, “Tikur Abay Transport” and agricultural input distribution,
“Ambassel” firms which will give the company an equity advantage over its
competitors. In view of the local situation, and from the point of view of effective
implementation of the Project, Option 2 is more suitable for development of ALMIH in
Amhara.
5.4. Modes of Implementation
The following are the various modes of implementation under Option 2 that could be
considered for the development of the ALMIH:
a) Lease
ANRS will transfer the land to the private partner on the date of execution of
agreement for the development of ALMIH. The private partner will develop the
project facilities. Basic infrastructure and amenities like roads, drainage systems,
street lighting, water supply, power/electricity, communication networks –
telephone connections, cable and internet connectivity as per requirements of
agro-logistics industry would be provided by the private partner. In addition to
providing infrastructure requirements, the private partner could also be
responsible for maintenance and management of the common facilities for a
stipulated period of time. The private partner would be responsible for raising
finances and carrying out the construction activities.
b) Joint Venture between ANRS and a private developer
A Special Purpose Mechanism (SPM) could be created by ANRS and the private
developer under this option. The equity contribution of ANRS could be in the
form of land for development of the ALMIH.
The SPM could develop the project facilities. Basic infrastructure and amenities
like roads, drainage systems, street lighting, water supply, power/electricity,
communication networks – telephone connections, cable and internet
connectivity as per requirements of ago-logistics industry would be provided by
the SPM.
In addition to providing infrastructure requirements, SPM could also be
responsible for maintenance and management of the common facilities for a
stipulated time period. SPM would be responsible for raising finances and
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Technical and technological aspects 36
carrying out the construction activities. The roles and responsibilities of the
SPM are set out below
a. Mobilisation of finances and development of envisaged facilities as per
the scope of project.
b. Develop the facilities in accordance with design and construction
requirements set out by ANRS.
c. Maintenance of common facilities for a period of stipulated time period.
d. Market the project.
e. Share the revenue with ANRS as per the agreement.
c) Concession
The private partner could develop the project facilities. Basic infrastructure and
amenities like roads, drainage systems, street lighting, water supply, power/
electricity, communication networks – telephone connections, cable and internet
connectivity as per requirements of agro-logistics industry would be provided by
the private partner. The private partner would be responsible for raising finances
and carrying out the construction activities. The ownership of the land and the
properties developed would remain with the Government throughout the
concession period.
Structure Merits Demerits
Lease • Ownership of the Land would be vested with ANRS for a stipulated period of time.
• The development risk to be borne by the private partner.
• No marketing responsibility to ANRS.
• Developer would have to pay a huge upfront payment to ANRS.
• Mortgage rights would not be exercisable by the private partner although the land acquisition cost would be borne by the private partner.
• Land acquisition cost to be borne by the private partner.
• ANRS losses ownership of the land after the project development.
• All risk to be borne by the private partner during the development of the project.
Joint Venture
• Combination of sale and lease structure.
• ANRS could realise a portion of the revenues upfront.
• ANRS loses ownership over part of the site area.
• Allocation of share a major issue. • In case of pre-termination, handover
could lead to prolonged disputes. Concession • Ownership of the property vests with ANRS at
all times. • Private partner is allowed flexibility to develop
• Time for development may increase slightly.
• All risk borne by
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Technical and technological aspects 37
the area in accordance with bye-laws and in adherence to the minimum requirements set by ANRS.
• No marketing responsibility to ANRS. • The land and the facilities developed on it
would be transferred back to ANRS at the end of the concession period.
• Assured and fixed revenue stream. • Uniform quality of services. • Risk of time bound completion and revenue
risk is transferred to the private partner
private partner and may require higher returns.
• Skills required for contract management.
Table 10: Comparative study amongst the modes of implementation
Considering the issues discussed above, the requirement of upfront finances, manpower
and associated risks, it is proposed to develop the Project under a Concession
framework due to the following advantages;
• Mobilization of finances would be the responsibility of the private partner. The
entire finance required for the Project would have to be raised by the private
partner within a pre-specified time frame. Therefore, the Government would not
be responsible for raising the funds for meeting the initial capital expenditure.
• ANRS would lay down the technical specifications for the construction and
subsequent operations and maintenance of the Project, which would have to be
adhered to by the private partner. In the event that the private partner fails to
meet the technical specifications laid down by Government, ANRS would have
the option of substituting the private partner.
• The risk of time-bound completion of the Project would be passed on to the
private partner.
• Since the revenue streams from the Project would commence only after
completion of the Project, it would be in the interest of the private partner to
complete the Project as early as possible. GA may also stipulate a penalty to be
paid by the private partner in case of delay in implementation of the Project.
• The risk of over-runs in construction cost and operational expenses would be
passed on to the private partner. Since the private partner is responsible for the
implementation of the Project, any increase in cost of the Project would also be
borne by him.
5.4.1. Role and obligations of the Private Partner for development of ALMIH
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Technical and technological aspects 38
The private partner would be responsible for development of project facilities which
have been categorized into seven broad activities namely;
1. Development of project facilities – core facilities, specialized infrastructure,
common utilities, roads and other utilities;
2. Procurement of equipments as envisaged for the operation of the project
facilities;
3. Procurement of trucks required for the transportation of produce from collection
centres to the MIC;
4. Operations and maintenance of the project facilities;
5. Make annuity payment to the GA on a quarterly basis;
6. Obtain necessary permits as required under Applicable Law for development
and operation and maintenance of the project facilities.
7. Pay all taxes, duties and outgoings, including utility charges relating to the
project facilities, as may be applicable.
5.4.2. Role and obligations of the ANRS for development of ALMIH
1. Provide land to the private developer free of all encumbrances;
2. Provide assistance in obtaining required information/data from the stakeholders;
3. Provide assistance to obtain all clearances.
5.4.3. Payment Terms and Mechanism
Payment terms and mechanism would primarily depend upon the viability of the
project. In case the project is not viable on the stand-alone basis, financial support
would need to be provided to the private partner by ANRS in terms of one time capital
grant or in terms of operational grant during the operational period. In case the project is
viable on stand- alone basis, private partner would share operational profits with
Government. Sharing of profits could be carried out in two ways as set out below;
a) Percentage wise sharing of profits
Private partner could share operational profits with GA at a mutually agreed percentage
sharing mechanism. Percentage sharing could be ascertained based on the investments
of the respective parties. Disadvantage of such mechanism is to develop transparency in
the fund flow during the operational period. Revenue risk is mutually shared between
the private partner and GA.
b) Fixed Annuity Payments
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Environmental and Social impact assessment 39
In this option private partner would need to make mutually agreed fixed payments to
GA at regular intervals (say monthly or quarterly). Estimation of the fixed payments
could be ascertained based on the projected cash flows envisaged for the project.
Advantage of such mechanism is that GA could be assured of the fixed payments during
the concession period and private partner would, well in advance, be aware of the fixed
liabilities during the operational period. Revenue risk is passed on to the private partner.
6. Environmental and Social impact assessment
The Environmental impact assessment should take into account the following
points both at construction and operation phases: Measures to mitigate the adverse
environmental impacts during construction phase;
a) Site preparation
The development of site will involve the movement of top soil, removal of trees,
shrubs, soils, rocks, debris etc. The site grading operation will also involve stock
piling of backfill material. All the distorted slopes need to be stabilized suitably.
During dry weather, control of the dust nuisance created by excavation, levelling
and transportation activities will be carried out by water sprinkling. It should be
ensured that both petrol and diesel powered construction vehicles are properly
maintained to minimize smoke in the exhaust emission.
b) Sanitation
The construction work force shall be provided with sufficient sanitation facilities
in order to maintain adequate hygienic conditions. Low cost sanitation system
like septic tanks / soak pits will be provided. This will be done by provisions in
contracts with the contractors.
c) Construction equipment & waste
The project would involve lot of construction activities for infrastructural
facilities and thereby structures are likely to come up on the proposed site and
would thus involve the use of construction equipment/instruments. These at
times would require onsite maintenance and repairing. It will be ensured that
both petrol and diesel powered construction vehicles are properly maintained by
the contractors to minimize pollutant emission from exhaust. The vehicle
maintenance area will be so located that contamination of surface water bodies
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Environmental and Social impact assessment 40
by accidental spillage is avoided. Unauthorized dumping of waste oil will be
prohibited.
d) Installation of machineries
The project would involve the use of modern machineries like drying and
ripening refrigerators and forklifts for manoeuvring stacks of pallets from place
to place that needs care of spillage of gases and falling of loads on human
beings. There should be an informative safety signs in all work areas and
premises.
e) Storage of hazardous material/dumping materials
Petrol, diesel, lubricating oil etc. will be required to be stored at site. These
materials will be stored as per stipulated safety standards. Also a lot of material
may be generated for disposal during construction activity. These, if disposed
off haphazardly can pollute the nearby water bodies adversely. They would
increase the accident incidences also. Utmost care will be taken to store these
materials at a suitable place and then disposed off at a place in consultation with
and as per the implementation guideline.
f) Site security and Safety
To ensure that the surrounding population is not exposed to these hazards, the
site will be properly secured by fencing or by construction of a boundary wall
and also guards will be posted at entry points. First aid facilities should be
created at different locations for immediate assistance in case of emergencies
and accidents. In case inflammable materials are to be kept at the site, they
should be stored and handled in accordance with guidelines of inspectorate of
safety and health of the state and central governments. Fire hydrants and
extinguishers should be located at all vulnerable sites.
Measures to mitigate the adverse environmental impacts during operation phase;
a) Operation of various collection, and disposal facilities for emission, wastewater
and solid waste.
The scrap materials generated would include packaging materials, scrap wood,
cardboard, plastics, unused metal pieces, garbage in the form of papers, cloth
fibers, polythene bags, electric components, wire, scrap metal, glass bottles,
thermocol etc. Most of the above material is useful. A special place will be
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Financial analysis and forecast 41
designated for administering the whole of the food park area to collect these
generated Non Hazardous solid waste, which can be recycled.
b) Health facility
Medical facilities, first aid centre and health centre near the site, which would be
provided by project authorities, will help to protect the health of the project staff.
c) Green Space
An additional mitigation measure that has a broad definition in as much as it can
be used to alleviate a number of adverse impacts due to air and noise emissions
is the development of a green space around the facility. It has been proposed to
develop green belt around the compound as per the master planning guidelines.
These would not only absorb air and water pollutants but also help in arresting
noise and soil erosion and creating favourable aesthetic condition. Pollutants in
air settle on the ground and vegetation of surrounding area. Plants interact with
the pollutants, absorb them and thus remove them from the atmosphere. Plants
intercept incoming and outgoing radiation, precipitation and wind and thus have
a marked effect on the microclimate. They filter dust from the air and absorb it.
The importance of plants in reducing the pollution hazard is therefore of
considerable significance.
d) Manpower for environmental management.
It is imperative that a concrete and feasible plan be made to promote
employment to the local people with equal opportunities to people.
7. Financial analysis and forecast
The Agro-Logistics Hub is an integral mix of specialized infrastructure with
processing requirements of envisaged industry. Hence, it is imperative to understand the
various specialized infrastructure facilities required to be housed in the hub meeting the
needs of the captive market and this could be one of the single largest factor in deciding
the viability of the project. As a conscious strategy, it is proposed to establish the
ALMIH at nearby Merawi town which would propel the industrial growth in the region.
The development of the first pilot ALMIH has been spread over the period of 5 years.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Financial analysis and forecast 42
7.1. Investment costs of the pilot project
The following assumptions were used in calculating the project’s initial outlay;
• The 2009/10 total marketable agricultural & horticultural produce (meher and
irrigation) of the region was 116.65 million quintals (Forecasted five years from
now = 139.77 qtls)
• West part of Amhara Share from the total Production - 67% of the total production
= 78.16 million of quintals
• Marketable surplus - 35% of the yearly marketable surplus (referenced from GTP)
= 27.35 million of quintals (Forecasted five years from now = 32.77 qtls)
• Inputs – 1.35 million quintals (Forecasted five years from now = 2.1 million qtls)
• Total size of logistics 28.7 million qtls per annum (up to 34.87 million qtls in five
years)
• Lease of land – 100 birr/Sq.meter
• Required number of vehicles [NB: All prices include transportation costs]
• light trucks installed with refrigerator- 25 (uplifting capacity 20
tonnes/truck) [Unit cost 1.58 million birr]
• Station wagon – 4[Unit cost 2.0million birr]
• Four wheel drive pickups- 6[Unit cost 1.5million birr]
• Motor bicycles- 10[Unit cost 80thousand birr]
• Forklifts – 2[Unit cost 1.5million birr]
• Weighbridge 40 tone (3 meter * 12.3 meter) – 1[560,000]
• All 135 trucks can uplift 80 tonnes/week X 52 = 561,600 tonnes per annum which
is only 20% of all the logistics
• Capacity utilization of the project: 50% in the first year of operation and increase
by 5% each year.
• Escalation of prices: 5% year on year during the project’s period.
• All service charges exclude VAT (for periodic costs see Appendix 2)
The estimated break-up of the project cost is set out in the table below
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Financial analysis and forecast 43
Table 11: Breakup of the project Cost
No Particulars Amount in Birr 1 Civil works and land acquisition 280,500,000.00 2 Land leasing cost 42,700,000.00 3 Outdoor works 16,000,000.00 4 Site preparation and development 21,800,000.00 5 Buildings and structures 200,000,000.00 6 Machinery and Equipments 399,460,000.00 7 Working Capital 50,000,000.00 8 Contingency (5%) 36,498,000.00 Total 766,458,000.00
7.2. Projected cash flow
The details of revenues and expenses sources are as set out below
1) Rental Receipts
The operating income from rental receipts includes rentals for premises rented
for warehouse facilities, cold storage facilities, commercial space, various office
and services, etc. These will be the incomes which will be generated year after
year. Corresponding to these incomes, the expenditures will cover items like
general maintenance, power supply charges, maintenance of water supply and
distribution, general maintenance of constructed premises, major repairs of road,
water supply system, establishment expenditure for administering and
maintaining the specialized infrastructure facilities provision for business
promotion expenses, service facilities, etc.
2) Revenues from Grading and Sorting
Grading and sorting facilities are provided to the small and marginal farmers,
large hold farmers, producers etc. to provide value additions to the agro produce
and hence help market the produce better, resulting in higher revenue to the
farmers. Nominal charges are envisaged to be collected from the users for
utilization of such services.
3) Operation of Transport Fleet
Nominal charges could be collected from the small and marginal farmers/large
hold farmers/producers for transporting the produce from the collection centres
to the ALMIH and inputs back to farmers’ localities.
The revenue and expenses estimates for the first 5 years of operations are as set
out in the table below.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Financial analysis and forecast 44
Table 12: Revenue and Expenses Estimates for the first 5 years of operations (Million Birr)
No Particulars Year 1 Year 2 Year 3 Year 4 Year 5 A Revenues Warehouse rentals 173.50 199.98 228.88 259.57 292.04 Sorting and grading facilities 39.38 43.31 47.25 51.19 55.13 Weigh bridge 0.16 0.17 0.19 0.20 0.22 Operation of trucks 7.09 7.80 8.51 9.21 9.92 Commercial space rentals 0.26 0.29 0.32 0.34 0.37 Cold Storage rentals 10.40 12.42 14.62 17.01 19.57 Total Revenues 230.78 263.98 299.77 337.52 377.25
B Expenses
Administrative expenses 8.69 8.69 8.69 8.69 8.69 Water supply charges 0.10 0.11 0.12 0.13 0.14 Power supply charges 0.13 0.14 0.15 0.16 0.18 Transport fleet – Fuel charges 15.06 16.57 18.07 19.58 21.09 Repairs and maintenance –
Transport fleet. 0.79 0.87 0.95 1.03 1.11
Other Maintenance Charges 1.30 1.39 1.47 1.55 1.64 Total Expenses 26.076 27.77 29.46 31.15 32.85
C Annual Net Profit 204.70 236.21 270.31 306.37 344.40 The following assumptions were used in preparing the project’s cash flows;
• The investment outlay on the project will be 766.5 million Birr. This consists of
680 million on plant and machinery and 50 million on working capital with 36.5
million contingency.
• The entire outlay (V) will be incurred at the beginning of the project. 30% of the
project is assumed to be financed with 229.9 million of equity capital (E),
• 20% of the project will be financed with 153.3 million of preference capital (P),
and the remaining 50% of the capital will be financed with 383.2 million of debt
capital (D) from bilateral/multilateral sources.
• The project is estimated to have an investment rate (Re) of return 15% and
preferred capital will carry a dividend rate (Rp) of 14%, debt capital will carry
an interest rate (Rd) of 10.5%.
• At the end of 5 years, fixed asset will fetch a net salvage value of 149.4 million
whereas net working capital will be liquidated at its book value.
• The effective tax rate (Tc) will be 30%. Plant and machinery will be depreciated
at the rate of 25% per year as per the declining book value method of
depreciation. Hence, the formula that is used in calculating the WACC is as
follows; WACC = [(E/V) x Re] + [(P/V) x Rp] + (D/V) x Rd X (1-Tc)
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Project Risk 45
Based on the calculation, WACC will found to be 11%.
Table 13: Cash flow over the next five years (Million Birr)
No Years 0 1 2 3 4 5 1 Capital requirement (with 5%
contingency) (763.92)
2 Land leasing cost (44.80) 3 Outdoor works (16.80) 4 Site preparation and development (22.89) 5 Buildings and structures (210.00) 6 Machinery and Equipments (419.43) 7 Working Capital requirement (50.00) 8 Revenues 230.78 263.98 299.77 337.52 377.25 9 Expenses (other than deprec. & Int.) 26.07 27.76 29.45 31.14 32.84
10 Depreciation (yearly 25% at DBV) 157.36 118.02 88.51 66.39 49.79 11 PBT (8-9-10) 47.35 118.19 181.80 239.99 294.61 12 Income Tax (30%) 14.20 35.46 54.54 72.00 88.38 13 PAT (11-12) 33.14 82.73 127.26 168.00 206.23 14 Net salvage value 149.37 15 Recovery of WC 50.00 16 Initial outlay (763.92) 17 Operating cash inflow (10+13) 190.50 200.75 215.78 234.38 256.02 18 Terminal cash inflow 199.37 19 Net cash flow (16+17+18) (763.92) 190.50 200.75 215.78 234.38 455.39 20 Discounted at 11% cost of capital (763.92) 171.62 162.94 157.77 154.39 270.25 21 NPV 153.05 22 Discounted Pay Back (years) 4.07 23 IRR 17.65%
Since the project NPV is positive and IRR 17.65% is still greater than the cost of
capital 11%, it shows the Project is profitable in implementing in the Amhara region. It will recover its investment cost within the first phase of the project. This is good news
for the development of the second phase of the project in Eastern Amhara Region.
8. Project Risk The anticipated risk associated with the execution of the project that is expected
to come is listed with mitigating measures as follows;
• Use of supplementary irrigation significantly will reduce the risk of low yields
or crop failures and attracts private sector investment.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Social cost benefit analysis 46
• Rigorous screening of contract growers in terms of credit and husbandry
rating through community representatives will reduce the risk of side
marketing and poor farming practice
• Peer review mechanism will be used in many schemes where groups instituted
‘self policing’ and underwrote the loans of all members of the group.
• Insurance of crop inputs and in some cases the entire crop may prove a major
incentive to investors as well as farmers.
• Access to storage facilities such as grain silos might reduce the risk of price
volatility.
9. Social cost benefit analysis
9.1. Considerations
The social cost benefit analysis is carried out following the UNIDO’s five step
approach in which only two of the major steps emphasized in the report. The remaining
three steps namely; adjustment for the impact of the project on saving and investment,
adjustment for the impact of the project on income distribution, and adjustment for the
impact of the project on merit/demerit goods will be further assessed in the future
depending on the necessity that arise by the sponsor.
Since the financial profitability of project is already determined in the first step
of the UNIDO’s approach, the second step is obtaining the net benefit of the project
measured in terms of economic (efficiency) prices. Therefore, cost benefit analysis of
the project was determined using the shadow pricing of resources taking the following
factors into account; a) Choice of numeraire, b) Concept of tradability, c) Sources of
shadow prices, d) Treatment of taxes, e) Externalities, and labour.
a) Choice of numeraire
In general, based on UNIDO’s specification, numeraire is determined at;
domestic currency in Birr, constant price, and net present Consumption of the
agricultural and horticultural produce.
b) Tradability
The project utilizes both tradable and non-tradable resources in which the
tradable resources are valued at their border price. Hence, all vehicles used for
transportation and machineries which are used for cold storage, sorting and grading
were valued using the international currency USD translated in domestic currency at
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Social cost benefit analysis 47
market exchange rate (20 birr/USD). Whereas, the value on non-traded good such as
grain crops, vegetables, and agricultural inputs are measured in terms of what
domestic consumers are willing to pay for the service provided by the project
because still the government is striving to fulfil the country’s food self-sufficiency
level in all agricultural produces. Therefore, on the output side, since the impact of
the project is to increase the consumption of the product in the economy, the
measure of value is taken the marginal consumers’ willingness to pay. Hence, the
following price adjustment was carried out based on shadow prices;
• Warehouse fasciitis – birr 20/metric tonne
• Cold storage fasciitis – birr 25/metric tonne
• Grading and sorting facilities – birr 700/metric tonne
• Weighbridge – birr 70/truck
• Freight transportation – birr 5/km
On the input side also, since the impact of the project is to reduce the
availability of the input to other users, their willingness to pay for that input is
considered as social value. Hence, the following price adjustment was carried out
based on shadow prices;
• Power supply – birr 2/kwh
• Water supply – birr 15/cubic meter
c) Sources of shadow pricing
In calculating the social cost and benefit of the project, UNIDO approach
was used that suggests three sources of shadow pricing, depending on the impact of
the project on national economy. Therefore, from the project’s objectives point of
view the impact of the project is assumed to be mainly influences the consumption
in the economy which evidently makes our basis of shadow pricing to become the
consumer’s willingness to pay.
d) Treatment of taxes
Since the project’s operation augments domestic production significantly, no
tax was levied in calculating the social value of the project.
e) Externalities
The project is figure out to impart both benefit and negative consequences on
the locality of the project area in terms of creating job opportunities and clustering
of agro-processing plants within the vicinity of the project that may considered as a
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Social cost benefit analysis 48
benefit to the society around the project. However, the development of such big
project by itself needs conducive landscape and work area that can only be realized
at the expense of displacement or relocation of settlement areas. In this case some
households will definitely be affected by the measure that would be taken. Hence,
due to its complexity of valuing the benefit at this stage the negative effects just
incorporated by assuming somewhat 10% of the cost of setting up of the plant as
cost of negative externalities.
f) Labour inputs
The project is assumed to be run totally by local expertise and workforce
however takes labor away from other employments, and the shadow price of labor is
taken only for non-professionals that is assumed to be equal to what other users of
labor are willing to pay for this labor. Average wage rate;
• Field supervisors – birr 1,500/person/month
• Drivers – birr 2,000/person/month
• Other staffs – birr 1,500/person/month
At present conditions, for professionals the market is assumed relatively free and
there is no shadow price for wage in the labour market.
9.2. Determination of social value of the project
Valuation of the project from social point of view was done taking the factors
outlined under the preceding topic and contrasting the project from private and social
point of view. The details are given in the following table.
By Mesfin Raji | Social cost benefit analysis 49
Table 14: Social cost benefit analysis of the project No
Years
Form Private Investor point of view (Million Birr) From social point of view (shadow pricing)(Million Birr) 0 1 2 3 4 5 0 1 2 3 4 5
1 One Shot Costs 2 land acquisition (44.80) 3 Civil works (249.69) (261.58) 4 Machinery and Equipments (419.43) (466.04) 5 Skilled Labour (3.00) (3.00) 6 Semi-skilled Labour (38.40) (27.30) 7 Working Capital requirement (50.00) (50.00) 8 Subtotal of One Shot Costs (805.32) (807.92) 9 Benefits/revenues 10 Warehouse facilities 173.50 199.98 228.88 259.57 292.04 347.00 399.97 457.77 519.14 584.08 11 Cold Storage facilities 10.40 12.42 14.62 17.01 19.57 17.33 20.70 24.37 28.35 32.62 12 Grading and Sorting facilities 39.38 43.31 47.25 51.19 55.13 55.13 60.64 66.15 71.66 77.18 13 Operation of freight
NB: The NPV and IRR of the Private shows some variation from the previous figure due to a rounding of error in the computation
By Mesfin Raji | Conclusion and recommendations 51
10. Conclusion and recommendations
The genesis of agro-logistics somewhat related to the idea of Harvard professor
Michael Porter who introduced the concept of industry “clusters” to denote the grouping
of actors involved in one industry (different firms producing one or related products,
their suppliers, buyers and supporting services, etc.) in a specific location(ICRA, n d).
Efforts to link small-scale farmers to markets face a number of constraints some
of them are: a) The need to diversify into new markets for higher value products, or add
value to current products through improved quality, niche markets. b) The need to build
economies of scale to compete with large farms and increase bargaining power with
buyers that require certain quantities, e.g. through collective action, farmer associations,
etc.; c) The risks associated with change: e.g. the change to new production systems or
to new relationships with other actors. d) The need to reorient research and extension
from a “supply-driven” mode of generating information led by researchers to a
“demand-driven” or “client-oriented” mode of service delivery. e) The need to improve
information flows and develops synergy between the different actors in the production
and marketing system.
Therefore, the conceived project’s main objectives will be met if only if there is
a robust and dependable supply value chain start to stimulate the agricultural practices.
That is what the government is planned and anticipating to transform the country’s
agrarian mode of cultivation and boost its competitiveness in the global market.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | References 52
References
BoFED. (2009). Development Indicators of Amhara Region (2009/10). ANRS (p. 10).
BoFED. (2010a). 2009/10 Budget year Annual Statistical Bulletin.
BoFED. (2010b). Amhara National Regional State GTP (Amharic version). Working paper.
Bosona, T. G. (2010). Cluster Building and Logistics Network Integration of Local Food Supply Chain. SLU, Swedish University of Agricultural Sciences (p. 9).
CSA. (2009). Area and Production of Crops (Private Peasant Holdings, Meher season). Agricultural sample survey 2008/2009 (2001 E.C.) (Vol. 2009, pp. 27-38).
CSA. (2011). Area and Production of Belg Season Crops for Private Peasant Holdings. Agricultural sample survey 2010/11 (2003 E.C.) (Vol. V, pp. 24 & 40).
DOA, W.-G. (2011). West Gojjam Department of Agriculture 2003EC Annual report.
ECX. (2010). Rules of The Ethiopia Commodity Exchange.
IDCL. (2009). Development of Agri-Logistics Hub In Various Regions of Karnataka. Government of Karnataka.
IDCL. (2010). Pre-Feasibility Study for (Storage & Distribution) Logistics Architecture in Karnataka. Government of Karnataka (Vol. II).
MoFED. (2003). Brief Note on the 2003 (EFY) GDP Estimates series. Ethiopian Government (Vol. 2003, pp. 1-8).
MoFED. (2010). Ethiopia GTP English. Working paper.
Thornton, G. (2007). Setting up “ Composite Logistics Hub ”at Pawarkheda, District Hoshangabad in state of Madhya Pradesh on PPP Model. Government of Madhya Pradesh (pp. 1-76).
Website. (2011). ECX. Retrieved October 5, 2011, from www.ecx.com.et
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Appendices 53
Appendices Appendix 1: Area Allocation of the Facilities Proposed for the ALMIH in west part of Amhara
No Particulars Unit Area
A Common facilities (Specialized Infra, Utilities and Special Amenities)
1 Auction Centre Sq.m 15,000 2 Loading, Unloading and dispatch centre Sq.m 46,000 3 Quality Testing Laboratory Sq.m 1,000 4 Admin Block Sq.m 1,500 5 Commercial Block Sq.m 15,500 6 Security Block Sq.m 500 7 Sub-Station Sq.m 1,000 8 Generator Room Sq.m 1,000 9 Weigh Bridge Room Sq.m 150 10 Cold Storage Sq.m 4,400 11 Warehouse Sq.m 160,000 12 Playing field for outdoor Games Sq.m 10,500 13 Grading and Packaging Hall Sq.m 4,700 14 Other amenities (canteen, Hotel, bank etc.) Sq.m 16,800 15 Rejected Produce Shed Sq.m 1,000 16 Truck parking Area Sq.m 15,000 17 Driver Dormitories Sq.m 5,000 18 Dispensary Sq.m 1,000 19 Fuel Station Sq.m 3,000 20 Service Station Sq.m 1,000 21 Admin Office - logistics Centre Sq.m 1,500
TOTAL A Sq.m 306,550 B Roads, foothath and Parking area Sq.m 70,225 C Open Space Sq.m 50,225
Total (A+B+C) Sq.m 427,000
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Appendices 54
Appendix 2: Assumptions for the Project
Assumption taken in calculating Revenues and expenses of the Project 1. Revenues
a) Service charges Receipts i. Warehouse facilities
• Annual total Agricultural Freight available 2,754,000 tonnes • Rentals assumed to be Birr 10 per tonnes per month.
ii. Cold storage facilities • Annual total Horticultural Freight available 110,000.0 tonnes • Rentals assumed to be Birr 15 per tonnes per month.
iii. Commercial space • Space available is to an extent of 50,000 square meter. • Lease rentals assumed to be Birr 10 per square meter per month. b) Grading and Sorting Facilities • Capacity of the sorting and grading lines: 500 tonnes per day. • Rentals: Birr 500 per metric tonne. c) Weigh Bridge • Number of trucks utilizing the facility: 20 trucks per day. • Rentals per truck: Birr 50 per truck. d) Operation of trucks • Number of trucks to be operated: 135. • Total distance travelled per annum per truck from the collection centres to the
ALMIH: approximately 50,000 kilometre • Revenues from operation of truck: Birr 2 per kilometre of distance travelled.
2. Operating Expenses a) Administrative expenses – Salary expenses • General Manager : Birr 20,000 per month • Assistant Manager (2 nos.): Birr 15,000 per month per person • Field supervisors(10 nos.): Birr 4, 000 per month per person • Driver and assistants (270 nos.): average salary of Birr 2,000 per month per
person • Others (20 nos.): average salary of Birr 3,000 per month per person b) Water Supply Charges • Quantity of water required to be supplied to the facilities: approximately 2000
cubic meter per month. • Water charges: Birr 8.2 per cubic meter. c) Power supply charges Electric consumption • Amount of electric power required to be supplied to the facilities:
approximately 20,000 kwh per month.
Pre-Feasibility Study [Agro-Logistics and Market Integration Hub (ALMIH)]
By Mesfin Raji | Appendices 55
• Electric charges: Birr 1.0 per kwh. d) Rolling stock expenses • Total distance travelled by the transport fleet per annum: approximately
6,750,000 kilometers • Fuel mileage: 4 kilometers per litre of fuel. • Cost of fuel: Birr 16 per litre. Repairs and Maintenance cost: Rolling Stock • Approximately 5% of the cost of the rolling stock. Other maintenance cost • 5% of the project cost.
By Mesfin Raji | Appendices 56
Appendix 3: Agricultural and horticultural production and supply of inputs in Amhara in the year 2009/10
Zone Cultivated Area in ha Meher Production in Qt Productivity
(Qt/ha)
Input Supply in Qt
Irrigation
Meher Total Grain Crops
Vegetables Root Crops
Fruits Total Fertilizers Improved seed
Total
West Amhara West Gojjam 9,095.0 567,549.4 576,644.4 9,214,516.0 239,754.7 538,947.3 43,385.0 10,036,603.0 17.4 660,450.0 25,940.0 686,390.0