FINANCIAL AND ECONOMIC ANALYSIS

Transcription

1 Horticulture Chain Development Sector Project (RRP AFG 51039) FINANCIAL AND ECONOMIC ANALYSIS A. Introduction 1. The proposed project will help strengthen Afghanistan s horticulture value chain by (i) improving processing efficiency and marketing capacity of domestic agro-business enterprises (ABEs); (ii) modernizing crop production through better planting material, trellising, modern greenhouses, and other on-farm facilities which are water and energy efficient; and (iii) contributing to the national effort in establishing internationally recognized brands of Afghani horticultural produce. It will increase value addition for horticultural commodities produced in 11 provinces in central, southern, and eastern Afghanistan. 1 It is expected that the project will create significant economic opportunities for agri-business development and strengthen market linkages between farmers and traders and/or processors, and hence contribute to improving horticulture value chain efficiency. B. Overall Project Benefits 2. The project will generate significant direct benefits for horticulture value chain stakeholders and the overall economy. Key benefits are (i) increased volume of processing and trading by domestic ABEs, resulting in increased import substitution and export expansion of horticultural products; (ii) a significant reduction in post-harvest losses as systems for the movement of goods from production areas to trader and/or processor facilities are progressively upgraded; (iii) a reduction in overhead costs in packhouses as they operate more efficiently, closer to full capacity; and (iv) an improvement in the quality of raw materials delivered by affiliated farmers to their associated traders and processors that results in lower processing costs and permits higher farm gate prices to be paid to raw material suppliers. Other benefits include (i) onfarm improvements in modernized production systems that result in substantially increased yields (planting material, water storage and distribution systems, high-density orchards, and modern trellising systems), (ii) improved quality of produce delivered to traders and/or processors; (iii) increased farm gate prices from off-season supply of stored root crop vegetables (potatoes and onions); and (iv) higher priced sale of off-season vegetables grown in modern greenhouses. In addition to these, there are short-term benefits arising from the construction of marketing infrastructure for ABEs and on-farm investments, and permanent long-term benefits accruing from employment opportunities created (especially for women) in the packhouses and processing facilities developed and expanded under the project. 3. The project will help establish or upgrade some 30 precooling rooms or controlled atmosphere storage facilities, 30 packhouses, 5 tissue culture laboratories, and 40 units of processing equipment in an effort to increase import substitution and/or expand export. The project will also help increase production from established planted areas and will result in incremental production of an estimated 300 hectares (ha) of newly planted high-density orchards and 400 ha of improved trellising on existing vineyards. Improved yields will be achieved from the establishment of some 500 water storage ponds and an associated 220 ha of high-tech irrigation systems. 2 1 Project provinces are Bamyan, Ghazni, Kabul, Khost, Kunar, Laghman, Logar, Nangahar, Paktika, Paktya, and Wardak. 2 Subproject eligibility criteria and selection and appraisal procedures are in Section E of the Project Administration Manual (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President).

2 2 4. Since the demand-led sector financing modality is used for the project, the exact scale of the reduction in post-harvest losses, increased import substitution, and expanded export is dependent upon the composition of fruit and vegetables produced and processed as a result of both commercial trader and/or processor and on-farm subprojects. These benefits will be readily quantifiable at the completion of the project. However, to illustrate, a financial and economic analysis of two representative subprojects will provide some indications of the above-stated incremental benefits (paras. 2 3). C. Project Rationale 5. Despite its significant role in Afghanistan s economy, horticulture value chain development is constrained by a large number of small-scale producers that are geographically scattered yet poorly served by underdeveloped logistical infrastructure. On-farm productivity is low and postharvest losses are extremely high post-harvest losses for fruit and vegetables are in the range of 30% 60% of total production. 3 The main causes include (i) lack of precooling facilities, cold storage, refrigerated transport, and packhouse facilities; (ii) inadequate processing facilities; (iii) poor transportation and high transportation costs; and (iv) lack of appropriate on-farm production facilities and technology; farmers' knowledge of good post-harvest practices for handling, packing, sorting, grading, precooling, observing quality standards including good agricultural production, and marketing practices; food safety; and processing. Horticulture value chain development is further constrained by limited outreach of the domestic banking industry. As of December 2017, overall credit supply to the private sector was just 4% of the national gross domestic product (GDP), and the loan asset ratio was less than 15%. Only 2% of enterprises can access bank loans to finance investments because (i) loan interest rates are extremely high (12% 20% per annum); and (ii) loans are mainly short term, with an average maturity of 10 months. While there is a high demand for medium- and long-term loans, banks are not able to extend loans of the same terms because of their lack of equivalent medium- and long-term funding sources, and access to finance for individuals and enterprises is constrained by limited branch networks. While bank funding sources are highly liquid, most liquidity is short term and credit growth is negligible. D. Demand Analysis 6. Afghanistan currently exports some fruit and vegetables, yet there has been increasing dependence on seasonal imports of both fresh and processed horticultural produce. Imports result from the absence of domestic supplies because of limited in-country processing, post-harvest handling, and appropriate storage to stabilize sources of supply throughout the year and ease seasonal shortages. Production gains can be achieved through a reduction in post-harvest handling and storage losses and increased production output. 7. Domestic demand is estimated at 0.9 million tons for fruit and 1.4 million tons for vegetables. 4 In 2017, Afghanistan produced 3.9 million tons of horticultural produce (1.5 million tons of fruit and 2.4 million tons of vegetables). Of the surplus of 1.6 million tons of fruit and vegetables, an estimated 0.5 million tons were exported, and the balance of 1.1 million tons might have been post-harvest losses, while a small percentage is used for seeds. Over 85% of horticultural produce is unprocessed, whether being marketed domestically or for export. Afghanistan has a comparative advantage (unique varieties and climate) compared to many of 3 United Nations Economic and Social Commission for Asia and the Pacific, Center for Alleviation of Poverty through Sustainable Agriculture Post-harvest Losses of Vegetables in South Asia. (accessed on 6 May 2018). 4 Based on minimum per-capita consumption of 0.11 kilograms of vegetables and 0.07 kilograms of fruit per day, and the 2016 national population of 34.7 million.

3 3 the world s producers and its exports (shelled almonds, apples, dried apricots, dried figs, pistachios, potatoes, and raisins) have reached over 30 countries. 5 This suggests that the country has the potential to expand its exports both in traditional south Asian markets and in newer Middle Eastern and European markets. However, to increase exports while easing dependence on seasonal imports of both fresh and processed horticultural produce, interventions proposed under the project are essential. E. Financial and Economic Analysis Approach 8. The project is designed using the sector financing modality, wherein the entire scope of project financing is demand led and will be fully determined during the project implementation. Therefore, the current financial and economic analysis is conducted to evaluate the viability of two representative subprojects selected for feasibility studies rather than that of the whole project. These representative subprojects are the Arya Kabul (Tabasom) subproject and the Tak Dana subproject, which were both proposed to increase the proposing ABEs capacity in packing, grading, and cold storage for reducing post-harvest losses from farms to facilities while increasing quality and stock for both immediate and off-season sales. 9. For both subprojects, the financial and economic analysis compared with- and withoutproject scenarios. For the Arya Kabul (Tabasom) subproject, estimates for the with-project scenario already represent incremental values because the production and operation of the enterprise in the without-project case is sporadic and minimal. For the Tak Dana subproject, the estimation of financial and economic values was done separately for the with- and without-project scenarios. Detailed assumptions for estimating the streams of project costs and benefits are in the detailed financial and economic analysis. 6 F. Arya Kabul (Tabasom) Subproject Financial and Economic Analysis 10. The summaries of financial and economic cash flows, together with related viability indicators for the Arya Kabul (Tabasom) subproject, are presented in Tables 1 and 2. Table 1: Arya Kabul (Tabasom) Subproject Summary Financial Cash (AF) s Corporate Income Tax Year Revenue s Total ,150, ,150,000 0 (63,150,000) ,105, ,111,348 70,111,348 2,798,916 11,195, ,311, ,292,415 73,292,415 3,003,762 12,015, ,726, ,632,536 76,632,536 3,218,850 12,875, ,363, ,139,662 80,139,662 3,444,692 13,778, ,231, ,822,146 83,822,146 3,681,827 14,727, ,342, ,000,000 87,688,753 89,688,753 3,530,818 14,123, ,342, ,000,000 87,688,753 90,688,753 3,330,818 13,323, ,342, ,688,753 87,688,753 3,930,818 15,723, ,342, ,688,753 87,688,753 3,930,818 15,723, ,342, ,688,753 87,688,753 3,930,818 15,723, ,342, ,000,000 87,688,753 89,688,753 3,530,818 14,123,274 5 See Annex - Revealed Comparative Advantage of Afghanistan s Horticulture Exports, in Detailed Financial and Economic Analysis (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President). 6 Detailed Financial and Economic Analysis (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President).

4 4 Year Revenue s s Total Corporate Income Tax ,342,845 24,253, ,688,753 87,688,753 8,781,602 35,126,407 FNPV 784,918,556 10,601,374 67,260, ,911, ,171,935 29,299,599 FIRR 19.3% SV 6.9% 80.4% 8.4% ( ) = negative, FIRR = financial internal rate of return, FNPV = financial net present value, SV = switching value, WACC = weighted average cost of capital. Source: Asian Development Bank estimates. Table 2: Arya Kabul (Tabasom) Subproject Summary Economic Cash (AF) Year Revenue s and Fixed s Total ,693, ,693,594 (52,693,594) ,980, ,952,167 58,952,167 9,028, ,379, ,625,641 61,625,641 9,754, ,948, ,432,788 64,432,788 10,516, ,696, ,380,293 67,380,293 11,315, ,631, ,475,173 70,475,173 12,155, ,762, ,527,641 73,724,798 75,252,439 11,510, ,762, ,291,462 73,724,798 76,016,259 10,746, ,762, ,724,798 73,724,798 13,037, ,762, ,724,798 73,724,798 13,037, ,762, ,724,798 73,724,798 13,037, ,762, ,527,641 73,724,798 75,252,439 11,510, ,762,615 19,919, ,724,798 73,724,798 32,957, ,582,746 7,081,988 55,449, ,404, ,854,751 34,809,983 EIRR 19.0% SV 6.1% 62.8% 7.1% ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value, EOCC = economic cost of capital, SV = switching value. Source: Asian Development Bank estimates. 1. Subproject s 11. Capital costs. The Arya Kabul (Tabasom) subproject will require a financial capital outlay of AF63 million (equivalent to $880,000) to cover the expense of establishing the packing line (building construction, purchase of packing equipment, purchase of mechanical forklifts, purchase of furniture and fixtures, and hazard analysis and critical control points [HACCP] certification) and cold storage facility (building construction and purchase of back-up generator, compressors and blowers and other machinery, refrigerated trucks, and wooden plates and boxes). The economic capital cost is AF52.7 million (equivalent to $734,000), calculated based on the estimated total financial cost and duly adjusted for taxes and duties, and other market distortions. 12. and fixed costs. The subproject s annual financial incremental operating and fixed costs during the first year of operation are AF70.1 million (equivalent to $997,000), and AF59.0 million (equivalent to $822,000) in economic terms. The annual operating costs are directly linked to the annual quantity of raw materials entering the facilities, which is assumed to increase by 5% per year from years 1 to 6 and remain constant thereafter. From year 6 to 12, the subproject s annual financial operating and fixed costs are AF87.7 million (equivalent to $1.2 million). In economic terms, the annual operating and fixed costs from year 6 to 12 are AF73.7 million (equivalent to $1.03 million).

5 5 2. Subproject Benefits 13. Quantified benefits. The main sources of quantified benefit are revenues from the processing, packing, and storage of the following products: apples, apricots, grapes, and pomegranates. The financial revenue is AF84.1 million (equivalent to $1.2 million) in year 1 and increasing by 5% per year until year 6. From year 6 to 12, the annual financial revenue is AF107.3 million (equivalent to $1.5 million). Meanwhile, the subproject s economic revenue in year 1 is AF68.0 million (equivalent to $947,000) and AF86.7 million (equivalent to $1.2 million) in year 6 and remains constant until year 12. The incremental revenue structure is as follows: 40% from apples, 26% from grapes, 28% from pomegranates, and 6% from apricots. Aside from the sales revenues, project benefits can be generated from the sale of project assets at the end of the project life. This is represented by the asset residual value in year 12, which is AF24.2 million (equivalent to $338,000). In economic terms, the subproject s asset residual value is AF19.9 million (equivalent to $227,000). 14. Unquantified benefits. It should be noted that the above benefits capture only partial subproject benefits from economic perspectives. One of the other significant benefits generated by the subproject is reduced post-harvest losses along the supply chain from farm to market. Assuming the current level of such losses of 30% of harvest, the subproject would add another AF20.4 million (equivalent to $284,000) in year 1 and another AF26.0 million (equivalent to $360,000) in year 6 in economic terms. However, these benefits were not included in the estimation of the subproject rate of return since their exact scale is not readily quantifiable and will depend upon the actual mix and volume of fruit and vegetables handled by the subproject facilities as well as those of other value chain facilities to be financed by the project. 15. In addition to the quantified benefits included in the analysis, there are additional, less easily quantified short- and long-term benefits associated with the subproject. Short-term indirect benefits include the increase in economic activity that will be generated during the construction and installation of the processing and cold storage facilities. Long-term indirect benefits include (i) improvement in farm productivity because of contractual arrangements between the enterprise and affiliated farmers; (ii) reduction in crop losses because of proper handling of produce from farms to processing and packing facilities; (iii) increase in exports and/or import substitutes of fruit and vegetables; (iv) efficiencies gained in the fruit and vegetable value chain, which include reduced handling cost and better and/or safer product quality; and (v) more transparent price identification and formation and stabilization of fruit and vegetable prices throughout the year. 3. Financial and Economic Viability 16. The analysis indicates that the Arya Kabul (Tabasom) subproject is both financially and economically viable, with a financial internal rate of return (FIRR) of 19.3% compared to the weighted average cost of capital of 7.14%, and an economic internal rate of return (EIRR) of 19.0% compared to the economic cost of capital of 9.0%. The subproject s financial net present value is AF54.0 million (equivalent to $753,000), while its economic net present value is AF34.8 million (equivalent to $485,000). Meanwhile, the sensitivity tests suggest that the subproject s viability is highly sensitive to reduced revenue and increased operating costs, with FIRR switching values of 6.9% for revenue change and 8.4% for operating cost change, and EIRR switching values of 6.1% for revenue change and 7.1% for operating cost change. However, the analysis is still robust since all operating costs have been assumed to be at the highest level, while the sale prices and incremental sale quantity have been assumed to be at the most conservative level. To minimize risks and ensure long-term sustainability, the project will provide training to agro-

6 6 business enterprises and affiliated farmers in contractual farming arrangements, inventory management, technical extension services for production, and pre- and post-harvest handling, all of which will contribute to increased farm productivity and value chain efficiency, and hence reduce costs at all stages. G. Tak Dana Subproject Financial and Economic Analysis 17. Summaries of the financial and economic cash flows, together with related viability indicators for the Tak Dana subproject, are presented in Tables 3 and 4. Table 3: Tak Dana Subproject Summary Financial Cash (AF) s Corporate Income Tax Year Revenue s Total ,908, ,908,588 0 (17,908,588) ,753, ,042,960 14,042, ,189 3,768, ,691, ,742,308 14,742, ,858 3,959, ,676, ,476,624 15,476,624 1,039,911 4,159, ,709, ,236,500 16,247,655 18,484, ,167 2,580, ,795, ,057,238 17,057,238 1,147,650 4,590, ,935, ,907,300 17,907,300 1,205,592 4,822, ,935, ,874,150 17,907,300 22,781, , , ,935, ,907,300 17,907,300 1,205,592 4,822, ,935, ,907,300 17,907,300 1,205,592 4,822, ,935, ,236,500 17,907,300 20,143, ,292 3,033, ,935, ,907,300 17,907,300 1,205,592 4,822, ,935,261 6,348, ,907,300 17,907,300 2,475,388 9,901,552 FNPV 175,020,802 2,775,135 23,735, ,974, ,710,573 8,198,790 FIRR 19.5% SV 8.5% 62.7% 11.4% ( ) = negative, FIRR = financial internal rate of return, FNPV = financial net present value, SV = switching value, WACC = weighted average cost of capital. Source: Asian Development Bank estimates. Table 4: Tak Dana Subproject Summary Economic Cash (AF) s Year Revenue s Total ,675, ,675,193 (12,675,193) ,551, ,818,425 11,818,425 2,733, ,279, ,406,826 12,406,826 2,872, ,043, ,024,647 13,024,647 3,018, ,845, ,236,500 13,673,360 15,909, , ,688, ,354,508 14,354,508 3,333, ,572, ,069,713 15,069,713 3,502, ,572, ,448,709 15,069,713 18,518,422 54, ,572, ,069,713 15,069,713 3,502, ,572, ,069,713 15,069,713 3,502, ,572, ,236,500 15,069,713 17,306,213 1,266, ,572, ,069,713 15,069,713 3,502, ,572,439 4,822, ,069,713 15,069,713 8,325,313 ENPV 122,781,344 1,714,597 17,090,870 1,666, ,743,601 EIRR 18.9%

7 7 Year Revenue s s Total SV 6.3% 45.4% 7.8% ( ) = negative, EIRR = economic internal rate of return, ENPV = economic net present value, EOCC = economic cost of capital, SV = switching value. Source: Asian Development Bank estimates. 1. Subproject s 18. Capital costs. The Tak Dana subproject will require a financial capital outlay of AF17.9 million (equivalent to $249,000) to cover the expenses of establishing a new cold storage facility (building construction and purchase of back-up generator, compressors and blowers, and other machinery) and purchase of refrigerated trucks. The economic capital cost is AF12.6 million (equivalent to $176,000), calculated based on the estimated total financial cost and duly adjusted for taxes and duties, and other market distortions. 19. and fixed costs. The subproject s annual financial incremental operating and fixed costs during the first year of operation are AF14.0 million (equivalent to $195,000), and AF11.8 million (equivalent to $165,000) in economic terms. The annual operating costs are directly linked to annual quantity of raw materials entering the facilities, which is assumed to increase by 5% per year from years 1 to 6 and remain constant thereafter. From year 6 to 12, the subproject s annual financial operating and fixed costs are AF17.9 million (equivalent to $249,000). In economic terms, the annual operating and fixed costs from year 6 to 12 are AF15.0 million (equivalent to $210,000). 2. Subproject Benefits 20. Quantified benefits. The main sources of quantified benefit are revenues from the processing, packing, and storage of the following products: apples, grapes, pomegranates, apricots, cherries, onions, and potatoes. The financial revenue is AF18.7 million (equivalent to $261,000) in year 1 and increases by 5% per year until year 6. From year 6 to 12, the annual financial revenue is AF23.9 million (equivalent to $333,000). The subproject s economic revenue in year 1 is AF14.5 million (equivalent to $202,000), and AF18.6 million (equivalent to $258,000) in year 6, and remains constant until year 12. The incremental revenue structure is as follows: 45% from apples, 20% from pomegranates, 12% from cherries, 9% from onions, 8% from grapes, and 6% from potatoes. It is noted that apricots do not add any incremental revenue. Aside from the sales revenues, project benefits can be generated from the sale of project assets at the end of the project life. This is represented by the asset residual value in year 12 of AF6.3 million (equivalent to $88,000). In economic terms, the subproject s asset residual value is AF4.8 million (equivalent to $67,000). 21. Unquantified benefits. It is important to note that the above benefits represent only part of the overall benefits of the subproject from economic perspectives. One of the other significant benefits generated by the subproject is reduced post-harvest losses along the supply chain from farm to market. Assuming the current level of such losses of 30% of harvest, the subproject would add another AF4.3 million (equivalent to $60,000) in year 1 and another AF5.6 million (equivalent to $77,000) in year 6, in economic terms. However, these benefits were not included in the estimation of the subproject rate of return since their exact scale is not readily quantifiable and will depend upon the actual mix and volume of fruit and vegetables handled by the subproject facilities as well as those of other value chain facilities to be financed by the project.

8 8 22. Like in the Arya Kabul (Tabasom) subproject, besides the quantified benefits included in the analysis, there are additional, less easily quantified short- and long-term benefits associated with the subproject. Short-term indirect benefits include the increase in economic activity that will be generated during the construction and installation of the processing and cold storage facilities. Long-term indirect benefits include (i) improvement in farm productivity because of contractual arrangements between the enterprise and affiliated farmers; (ii) reduction in crop losses because of proper handling of produce from farms to processing and packing facilities; (iii) increase in exports and/or import substitutes of fruit and vegetables; (iv) efficiencies gained in the fruit and vegetable value chain, which include reduced handling costs and better and/or safer product quality; and (v) more transparent price identification and formation and stabilization of fruit and vegetable prices throughout the year. 3. Financial Viability and Sensitivity Analysis 23. The analysis indicates that the Tak Dana subproject is both financially and economically viable, with an FIRR of 19.5% compared to the weighted average cost of capital of 7.14%, and an EIRR of 18.9% compared to the economic cost of capital of 9.0%. The subproject s financial net present value is AF14.8 million (equivalent to $207,000), while its economic net present value is AF7.7 million (equivalent to $108,000). Meanwhile, the sensitivity tests suggest that the subproject s financial and economic viability is highly sensitive to reduced revenue and increased operating costs, with FIRR switching values of 8.5% for revenue change and 11.4% for operating cost change, and EIRR switching values of 6.3% for revenue change and 7.8% for operating cost change. Like in the Arya Kabul (Tabasom) subproject, the analysis is still robust since all operating costs have been assumed to be at the highest level, while the sale prices and incremental sale quantity have been assumed to be at the most conservative level. To minimize risks and ensure long-term sustainability, the project will provide training to agro-business enterprises and affiliated farmers in contractual farming arrangements, inventory management, technical extension services for production, and pre- and post-harvest handling, all of which will contribute to increased farm productivity and value chain efficiency, and hence reduce costs at all stages.