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Trang 3Promotion of sustainable commercial aquaculture in sub-Saharan Africa Volume 2: Investment and economic feasibility by Nathanael Hishamunda Fishery Planning Analyst
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PREPARATION OF THIS DOCUMENT
‘This second volume of the study on the "Promotion of sustainable commercial aquaculture in sub-Saharan Africa” was prepared within the framework of the FAO Fisheries Department's continued efforts to contribute, through sustainable development of commercial aguacultare, to poverty alleviation and eradication of hunger in developing countries, especially in sub- Saharan Africa Is specific goal i to assist developing member countries in the development aad implementation of policies that encourage the emergence or expansion of ‘entrepreneurship in aquaculture for a sustainable development of this sector The report focuses on one of the major impediments to aquaculture development in sub-Saharan Africa, namely the difficulty of entrepreneurs gaining access to capital, particularly in rural pats of the region Other constraints to development are discussed in’ Volumes 1, 3 and 4 of this study
Information reported in this document was obtained through wide-ranging studies covering, socio-economic, marketing, policy, legal, regulatory and institutional aspects of commercial faquaculture which were commissioned in Céxe dIvoire, Madagascar, Malawi, Mozambique, Nigeria, Zambia, Costa Rica and Hondurss Available literature on the access to credit in other countries, especially developing nations, was extensively used
Distribution: FAO Members
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Hishamnda, N¿ Manning, P
Promotion of sustainable commercial aquaculture in sub-Saharan Afca Volume 2: Investment and economic fessibiiy
FAO Fisheries Technical Paper No, 408/2 Rome, FAQ, 2002 S4p, ABSTRACT
This vohume ofthe report on the promotion of sstinsble commercial aguscuure i sb Stharan Afes discusses the difficult acess to Ivesnent capital, on of the major obstacles tothe development of sustainable commercial aquaculture inthe region The problem arises from a lck of colaeral excessively high ifres rales on Joan, banker” perceptions tat avocutare cares a paral high ik of Tae a lack of knowledge, by farmers ofthe | modalities of applying for loans and, on the pat of lenders ack of or hed nfraon | on, commercially succesful aquaculture enerpses inthe region
‘While some of the lenders’ perceptions are valid ~ particularly in instances where the industry is not yet established and difficulties could occur as a result of local unavailability of necessary inputs, the market is untested and there are no examples of commercial suecess that cauld offer an indication of viability ~ preliminary evidence seems to indicate that banks fend to exaggerate the likelihood of failure of commercial aquaculture projects in sub-Saharan | Atnica, Borrowers need to be able 1 formulate and present thesr business proposals im a | precise and concise manner that effectively offers the lender a comprehensive picture of the proposed business, communicates how they expect to profit from the proposed enterprises and | generate the funds for the repayment of the loans sought The problem of collateral could be tackled through the use of "no-collateral” strategies such as group lending, village banks and
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FOREWORD
“The unavailability of loans for the development of commercial aquaculture in sub-Saharan Africa and elsewhere is 2 major problem It appears to arise mostly from lenders’ perceptions Of high risk of failure associated with aquaculture and a lack of knowledge, on the part of farmers of the modalities of approaching financial institutions for a loan, as well as from a lack of adequate collateral and high bank interest rates, This report suggests some of the policies and strategies needed to tackle these issues However, information contained in this study with regard to the problem of investment capital in commercial aquaculture in sub- Saharan Africa is not exhaustive, Nevertheless, 1 trust that policies and strategies discussed herein will be useful in improving access to capital in the region In my view, Nathanael Hisharmunda of the FAO, Fishery Development Planning Service and Peter Manning, ‘Consultant, have made a very useful contnibution to overcoming a major stumbling block for aquaculiure development in Africa, T would like to recognize their sense of duty and dedication to this task,
UIEWijkstom
Trang 8CHAETERL CONTENTS: INTRODUCTION LÍ Background L2— Methodology 13 —Abour this volume CHAPTER 2 22 2a 24 a 32 34
CAPITAL IN COMMERCIAL AQUACULTURE,
‘The concept of capital in commercial aquaculture Source of capital for commercial aquaculture development: the rmle-and issue of loans ‘The types and sources of loans in commercial aquaculture
231 Types offoans
232 Sources ofoans ‘Aecessto bank loans for commercial aquaculture development 2.4.1 Fundamental requiremment for obtaining a bank Yoan 24.2 Most limiting factors to bank loans in commercial aquaculture in sub-Saharan Africa ‘Summary and conclusions
RISKS IN COMMERCIAL AQUACULTURE, VENTURES: ECONOMIC FEASIBILITY Seuing Description of farms analysed 3.2.1 Shrimp farms 322 Fish farms Resulis of economic analysis 33.1 Farm profitability 3.3.2 Cost structure analysis
Trang 9Page 42 Lessening 42.1 Addressing factors influencing interest rates the problem of high interest rates B a £22 Some ather options 35
‘Summary and conclusions 3
CHAPTERS ‘THE PROBLEM OF LACK OF KNOWLEDGE IN LOAN
5.1 Role and definition ofa business plan 31 32 Essential elements of a business plan fora commensal ‘aquaculture venture 31 52.1 Title page, table of contents and executive summan 38
52.2 The main body 38
5.2 Presenlation of the business plan ‘Summary and conclusions a 4
Ti IÄVÉE1FESNMMIREJAISSNEIRIURR a
BIBLIOGRAPHY a
Trang 101 CHAPTER 1 INTRODUCTION 11 Background
[As a par of its elforts to contribute to eradication of hunger and alleviation of poverty, the FAO Fisheries Department, through its Fishery Development Planning Service, has initiated the promotion of commercial aquacultare in developing countries, especially in sub-Saharan ‘Afvica, The goal of this aotivity is to assist developing member couniries in the development and implementation of policies that encourage the emergence or expansion of tetrepreneurship in aquaculture fora sustainable development of this sector
“To achieve -gulatory and institutional aspects of commeteial aquaculture were commissioned in Cote this goal, wide-ranging studies covering socio-economic, marketing, policy legal lvoe, Madagascar, Malawi, Mozambique, Nigeria, Zambia, Costa Rica and Honduras, Research also included literature pertinent to the topic The findings of the studies are reported indifferent volumes
In addition to discussing the concept of commercial aquaculture and outlining some pre- requisites for sts successful development, Volume 1 provided the rationsle for promoting sustainable commercial aquaculture, discussed the main constraints to its development and presented a general policy framework for is promotion
Commercial aquaculture, those farming operations of aquatic organisms whose gost is to ‘maximize profits (business-oriented) and primanty by the private sector, is promoted for its potential contribution to food security deetly by producing food fish and other products, and indirectly through employment creation and generation of income for the purchase of food It is also promoted for its ability to generate government revenues through tax collection, its non-retiance on government funds for financial survival and because ofits potential to assist small-scale rural aquaculture (Ridler and Hisharmunda, 2001),
A combination of factors impedes aquaculture development in sub-Saharan Africa, These factors include: limited direct domestic and foreign investment in the sector, limited availability of good quality seeds and feed, inadequate extension and training services, unavailability of suitable land in some countries, undefined or poorly defined land and water Tights, lack of legislation specifically for aquaculture in most countries, absence of or inaccessibility to capital and high cost of money {Ridler and Hishamunda, 2001; Percy and Hishamunda, 2001) Insufficient information on markets for farmed fish also limit or could limit aquaculture expansion in sub-Saharan Africa (Ridler and Hisharmunda, 2001),
[A mix of good governance, openness fo trade, macroeconomic growth policies, emphasis on Private investment as a source of wealth, guaranteed lund security, ta exemptions and lax holidays, loan guarantees, debt-equity swaps, promotion of large farms, producer associations, straegic plenning, and existence of transparent regulatory procedures are key ingredients in allracting investors to commercial aquaculture, addressing the issue of inadequate extension and icining services and in positively influencing long-term development of aquaculare in sub-Saharan Affica (Ridler and Hishamunda, 2001),
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Land and water related issues as well as the issue of legislation specific to aquaculture in most ‘countries are examined in depth in Volume 3 of this report, which deals with legal, regulatory and institutional framework for the promotion of sustainable commercial aquaculture, The market side of commercial aquaculture is analysed in Volume 4 of the report There remains the questions af absence or inaccessibility of capital and high cost of money in the sector, whieh isthe focus ofthis volume
1.2 Methodology
“The overall methodological approach to the stady Was discussed in Volume 1 Wide-ranging stuies covering socio-economic, marketing, policy, legal, reglatory and insitesonal aspects ‘of commercial equaculture were commissioned for six sub-Saharan African countries’ and two Latin American countries’ Parmers' enterprises that were successful and were considered sustainable were surveyed The study was limited to the three species: tilapia, catfish and shrimp’, which, in 1998, aecounted for more than ball of the aquaculture production in the Interviews with farmers were supplemented by further interviews with hankers, fish retailers and government officials, ‘The interviews identified constraints to the development of ‘commercial aguacullure, information about markets and policies that could encourage the development of aquaculture
‘To examine the problem of risk of failure of commercial aquaculture ventures more closely, economic feasibility of commercial aquaculture was assessed by analysing financial data, whieh were collected Irom a number of farms inthe six African counties surveyed Available
literature which describes experiences from developed und developing countries on how governments dealt with the problem of dificult access to capital to finance aquaculture was also reviewed und reported
1.3 About this volume
‘This volume of the report beings into sharp focus the key problem of adeguate financing of commercial aquaculture ventures in sub-Saharan Africa I frst reviews, in Chapter 2, capital ip commercial aquaculture ventures in the region, focusing on sougces and factors that hinder enlzepreneurs' ability 10 secure the investment capital necessary to establish a commercial ‘aquaculture business,
Subsequent chapters of the Volume are devoted to discussing factors identified in Chapter 2 + liting entrepreneurs” access 10 investment capital Specifically, Chapter 3 analyses the perception of risks in commercial aquaculture ventures and assesses economic feasibility of| selected commercial enterprises in sub-Saharan Africa Chapter 4 deals with the issue of collateral and high interest rates Chapter Š discusses the problem of lack of knowledge i Joan seeking, In addition to discussing the problem, each chaptet explores policies andar * cine vive, Madagaser, Malawi Mozambique, Nipstia and Zambia
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Trang 134 CHAPTER?
CAPITAL IN COMMERCIAL AQUACULTURE VENTURES IN SUB-SAHARAN AFRICA, 2.1 The concept of eapital in commercial aquaculture
Agricultural evonomists define capital as the monetary represemtation of the physical inputs used in agricultural production, io addition to financtal assets (Kay, 1986), As sĩch, captal is moze than liguid savings such as cash and balances in checking and savings accounts: an aquaculture farmer's capital also includes the monetaty value of productive resources such as hroodstock, stock of feed machinery, ponds, buildings, on-farm roads and land Capital therefore can be liquid and exsily convened into purchasing power oF very illiquid This broader definition of capital will be adopted as the working definition inthis report he role and issue of 22 Source of capital for commercial aquaculture developmer loans
Farming as a business requires adequate capital Capital is necessary to exeate, maintain, and ‘expand business, crease efficiency, and to meet seasonal operating cash needs The lack of ‘capital in general isa problem for development in sub-Saharan Aftica, Its particularly acute ots of the economy such as aquaculture
Generally speaking, commercial farmers can get capital rough own savings (own equity) bormwing or through a combination of both In sub-Stharan Arica, annual per capita incomes are very lows in many instances, they are below USS300 (herealter USS is abbreviated to $) Such’ meagre revenues imply that most or all income earned is generally consumed As much of the population lives below the poverty line in most counties, earings are oflen insufficient to cover family needs, which limits the possibilty of savings, Thus, t can be argued that, with few exceptions, the marginal propensity to save in sub-Saharan Attica ts at best close to zero, The hkelihood for potential investors t9 build their vn equity
's limited,
‘The lack of own equity suggests that most investors in sub-Saharan Africa will depend on external funding to stat a commercial aquaculture business, the leveruge® will be important The most common external source of funding to provide capital for commercial ventures is borrowing, mainly from banks Unfortunately, however, in the ease of aquaculture, so far financial insotutions play 2 minor role in the provision of loans for the procurement of investment capital, Tre lack of capital remains one of the biggest harriers to aquaculture development in sub-Saharan Africa For this sector to develop, the issue of potential investors" aoeess to loans? needs 10 be addressed
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Loans can be vital for aquaculture farmers Aquaculure farmers need foans to meet farm fixed financial obligations Loans may be needed to purchase or rent land, machinery and equipment including boats, vehicles and aerators, to build ponds and/or cages as well as storage facilites, and for verically integrated farms, hatcheries, feed mills and processing plants These fixed costs, which are invariant of the level of production andthe degree of use ff the productive resources, ean be important inthe short run
Loans are also necessiry for farmers to meet variable costs, Money to cover expenses related to the purchase of items such as seed, feed, fertilizers, chemicals and fuel, or to pay labour, especially in the frst production eyele i not slways at hand Though they ean be increased or decreased at the manager’ discretion, with the output level, these variable costs can nevertheless be an important part of farm expenses An analysis of a sample of farms in sub Saharan Africa indicated that variable costs could cover between 74 and 97 percent of total production costs in shrimp farming, and 31 to 98 pereent in tilapia and catfish operations Such large operating expenses typically require loans
In adalition to anticipated needs for financing there may be wnexpected shocks that incur expenses A cyclone hit can severely damage a shrimp hatchery in Madagascar A flood in ‘Mozambigue can destzoy pond dikes or wash fish away An unexpected drought may put cage fish culture operations in Niger on a temporary halt These examples demonstrate chat farmers ‘may need emergency loans (0 restore normal operations after a natural disaster such as flood for drought, Yet, access to loans by prospective commercial aquaculture farmers in sub- Saharan Africa remains 2 serious concern Any effort that seeks to develop aquaculture as a business in sub-Saharan Arica has 10 understand and address the question of loans The following owo sections attempt to analyse the issue of loans in aquaculture in sub-Saharan Arica by discussing not only the types and sources of loans, but also the root causes of Fimited access to loans forthe procurement of capital investment in commercial aguseulture in the region, 2.3 The types and sources of loans in commercial aquaculture 23.1 Types of loans
To improve communication with lenders, prospective borrowers in aquaculture need 10 be familiar with the terminology used by lenders 1o describe the types of business loans Loans differ according to the classification system used Like in agriculture, aquaculture loans can be classified by length ofthe loun repayment period, the use ofthe intended loan, the secunty of the loan, and loan repayment plan (Kay, 1986) Based on length or period over which money borrowed will be repaid, the most widely used method of classification, loans can be short-term loans, intermediate-term loans or long-term loans Short-term loans, which can also be called production or operating loans as they are used to purchase inputs needed to operate through the curtent production cycle, include those which must be folly repaid in no more than the next 12 months following the borrowing dat, Funds borowed for the purchase of fingerlings, feed, ferlizers and chemicals or to pay
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labour would fall within this category: they must be repaid within a year or less when the erop is harvested and sold, Intermediate-term loans are those for which the full repayment can be ccampleted in more than one year, bu in less than ten years Money borrowed forthe purchase ‘of machinery, pond or cage Construction, holding tanks, Farm equipment including nets, trucks and boats, fish broadstock and some buildings such as storage facilities and hatcheries falls within intermeylate loans, Because these assets will be used in production for more than one ¥year and cannot be expected 10 pay for themselves in 2 short Ume, a short-term loan is not “appropriate For their purchase, Long-term loans are those wich most be repaid within a ten- year or longer period They are sought and granted for the acquisition of assets with a Tong (at Teast 20 yeurs) or indefinite useful life such as land and buildings An example of such buildings isa fish processing plant or a feed mill
Based on the use or purpose of the Ioan, business loans ean be real estate loans and non-real estate loans As the name indicates, realestate loans are those used for the purchase of real estates such as land and buildings They are equivalent of long-term loans Non-real estate Jouns include all business loans other than real estate loans: they consist of both short-term and intermediate-term loans’
‘As will be discussed in further detail in the following section, there is @ risk involved in lending capital the debtor may fail to repay the borrowed capital and the acerued interest AS ‘one of the conditions for lending, often the lender requires the borrower to pledge an asset, which the lender can seize and sei in case the borrower defaults This gives the lender greater assurance that the loan will be repaid and, hence, represents a measure of protection against risks, The asset pledged to the lender by the borrower until the borrower pays back the principal and interests is called security oF collateral, When classified based on security (collateral), loans can be secured loans if security (collateral) has been pledged tothe lender by the borrower before the loan is granted They can also be unsecured loans if no security has been required from the bortower as a conditian of granting the loan, Unsecured loans are also called signature loans, as the borrower's signature is the only security provided by the lender asa guarantee to repay the loan
Different lenders may have differen types of loan repayment plans for different borrowers depending on the borrower's ability to repay the loan However, there are two main types of repayment plans for aquaculture loans: single-payment plans and amortized-payment plans ‘Accordingly, loans can be single-payment loans or amortized payment loans, The characteristic of single-payment loans isthe payment of the principal at once when the loan is due, Accrued interests may be payable at once or periodicslly, Single-payment loans include short-term loans, Some intermediate-term loans that may require only annoal inerest ‘payments, with the total principal due at the end ofthe loan are also included inthis category ff loans, Amortized payment loans are the ones for which interest and prineipal payments are ‘made periodically by instalments, generally monthly Amortized loans often include {ntermediate-term loans and long-term loans
Trang 16232 Sources of loans
Sources of aquaculture Joan funds vary from country to country, In general, however, aquaculture farmers can borrow money from formal and informal lending sectors
Of the formal sector, commercial banks, rural development banks, agricultural development banks are the most’common sources of loan funds for agricultural development These financial institutions can be an important source of aquaculture Joan funds as well Banks in sub-Saharan Africa generally provide short- and intermediate-term loans for agricultural evelopment Specialized lending agencies such as production credit associations and credit, unions can also be format sourees of loans for aquaculture development Like agricultural ‘banks, they usually, provide only shon- and intermediate-term loans to farmers, Such loans may be used to purchase broodstock, seeds, feed, machinery, and buildings In some coustries such as the United States, some Iife insurance companies may invest funds trom the premiums paid on life insurance policies or from other earnings in various sectors, including, agriculture and aquaculture These companies tend to invest only’ in long-term real estate loans (Kay, 1986) ‘The informal lending sector includes individuals, institutions and groups The defining characteristic of an informal financial system is that it i outside the reach ofthe legal fiscal, latory and prudential framework of the monetary and financial authorities However, though unregulated, it covers lawful activities
‘There are many categories of individual lenders, including moneylenders and moneykeepers, Jandlords, estate owners, traders, employers, friends, parents, and other relatives They all ‘would provide both non-real estate (short -and intermediate-term) and real estate (long-term) Joans However, moneylenders, moneykeepers and landlords generally provide more substantial amounts of loans, but at somewhat harsh conditions,
“Moneylenders® are reported to play a significant role in serving the loan needs of borrowers with limited access to formal finance In Asia and some parts of sub-Saharan Africa, they have also been credited with financing star-up capital for microenterpnises Sources of funds, for their lending vary from own savings to cheaper funds borrowed from other sources Including more efficient moneylenders and banks Loans from moneylenders, like most loans from informal lending sources, are not secured by collateral However, rates of interest are reportedly high (Thillsirajah, 1994),
Moneykeepers” are recognized as individuals who are able to provide shor-term loans and capable of undertaking financial businesses at their own risks As is the case in Ghana and Nigeria, some moneykeepers may charge a fee for the safekeeping service (Thillairajah, 1994); others may render it as a free facility asin the Niger Because of the opportunity to “Moneylenders ar indisiials involved i financial ansstons a part of det acceptin Some have as thet train aceopation the rating of loans sich as funds for smal and shoei emergeney ez, Mone keepers ace parsons generally ackPowledgod tobe ustworthy ima local, eh hor inBxidụnh and
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‘make loans at higher interest rates as mortgage brokers do in Sei Lanka, or to use the funds for personal investments, moneykeepers may Pay some interest on the deposits (Gore, 2001)
Many landlords complete tand sales by uilising lund purchase conteacts in which the landlord (seller) provides the land to the buyer under the condition that the buyer makes pesiodic payments ditectly to the landlord This policy is essentially a provision of loan from the landlord tothe land buyer This form of oan differs fram the wsual cash sale where the buyer borrows from a bank, pays the seller cash forthe full purchase price, and then makes pesiodie payments to the lending bank, Land purchase contracts benefit both the sellers and the buyers, sellers pay Fewer income taxes at me and buyers may he able to bargin for lower dawn payments, lower interest rates, and more flexible repayment srrangements with landlords, However, although for a number of them the tenants’ signatute is the only security neoded 28 & guarantee for the loan repayment, most landlords require some form of security fom tenants
‘Trade credit is an important Source of financing for farms Seed and feed suppliers ofien are willing to supply credit to farmers 10 assist during seasonal cash shortalls Input traders provide loans in Kind, especially farm inputs und raw material supplies 10 đfffam ‘commercial enterprises, and as longer-term loans for capital investments, The experience of the Tanzania cashew and coconuts project demonstrated thatthe tsader-loan mechanism can be successful in delivering loan to small farmers and small-scale businesses to whom ‘commercial banks have been reluctant to lend (Thillarajah, 1994) fecause they have been proven creditworthy and ate in a better position to enforce loan repayment Irom farmers, input Isuers often function as invermedianes between the lending banks andthe uliimate borsomers,
In many countries in the developed orld, institutions such as farm supply stores often finance the purchases of farm equipment anc! machinery through an instalment sales contract From time to time, they allow customers months (sometimes a yeu) tơ clear their debts before any interest is charged; they may also finance & purchase for a longer period with interes Farm equipment and automobile dealers also provide loans by financing purchases themselves ‘or throggh an affiliates finance company
Rotating savings and credit absocistions are examples of lending groups They are widespread in sub-Saharan Africa, Prevailing in most developing countries, rotating savings and credit associations are known under different names in sub-Saharan Aicica Names vary from tontines in French-speaking Aftican countries such as Cote d'ivoire, Congo, and Togo (0 Susu in Ghana, Esusu in Nigeria, Ekub in Ethiopia and Nianst im Cameroon, Other names ure also used elsewhere, A rotating savings and ctedit association consists of members Who know each ‘ther on a personal basis, usually as a result of social or employment, and who agree © contribute a fixed sum of money periodically tọ a pool that distributes the money collected by Tot on agreed dates One member receives an eqnal amount on the agieed date, When every member has received the money, the cycle is completed: the association ean dissolve or reorganize (Thillaraj, 1994) Thus, the assoctations provide interest-free loans to members ‘These loans are shor-term loans snd can be used for any purpose, However, they are generally available in limited amounts
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24 Access to bank loans for commercial aquaculture development in sub-Saharan Arica AAs discussed in the previous sections, loans avatluble from informal sources are generally limited and mainly intended for working capital needs and contingencies They have @ number of disadvantages such as high costs and unfavourable terms and conditions attiched to Toans Thus, most funds for aquaculture development would be expected to come from the formal fending sector Banks have well defined rules, procedures and guidelines They also have well documented loun files, a legal backing to enforce their claims and have access to governmental schemes and technical assistance, However, as emphasized previously, prospective borrowers from the formal lending sector have difficulties meeting the sectors lending requirements, To understand the factors that limit potential borrowers" aecess to bank loans, i is tmportan 10 first review the fundamental factors that which banks consider when reviewing and deciding on a Toan application
24.1 Fundamental requirements for obtaining a bank loan
‘There are many factors that go into making bank foan decisions, but most ean be included in fone of the following categories: character, capacity, capital and collateral ‘The bormwer’ character will usually be researched and checked by the lender ifthe later is not acquainted with the borrower Character refers 10 the borrower's honesty, intesity, reputation, trustworthiness and judgement Character is in a sense synonymous of credit, Credit, which was defined asthe ability to borrow money, is a valuable asset forthe borrower In fact, borowing money can be thought of as exchanging the borrower’ credit for the
lender's money dishonest and uniruthul indtvidval or business with the reputation of lack ‘of integrity in business dealings and sluggishness in loan repayments or mecting other Financial obligations is not creditworthy Such a borrower with unfit character would have difficulties obtaining a loan from the lender A lender will also evaluate the applicants 4udgement or decision-making ability The borrower’ ability t0 do the right judgement can affect the efficiency and productivity of the business, which ia tum ean impact on the profitability of the business and thus, influence the borrower's ability to repay the loan Entrenched farmers will be evaluated on their past record: a beginner witl be evaluated based ‘on personal background, education, and taining
Capacity refers to the borrower’ ability to repay the loan under consideration, Loans will be repaid only f enough money can be generated from the business to cover the borrower’ farm needs and family living expenses as well 28 the prineipal and interest payments on loans,
Banks will want to check the borzossers repayment potential before a loan can be Eranted,
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‘A borrower can be of goad character, demonstrate the capacity 10 repay the lộn and present tough equity to qualify for the loan applied for, but a bunk may still require collateral from the borrower to support the loan request As discussed earlier, collateral refers to tangible asset that a borrower pledges to the lender until the loan and consequent interests are paid back The lender can seize and sell the asset in ease the borrower defaults and fails to pay back Thus, collateral provides a vital back up to te loan request Ifthe unexpected happens sind the loan is im default, it may be the lender’s only means of recovering the loan turds, ‘Therefore, the provision of collateral enhances the borrower's access to loans Perhaps, collateral represents the primary factor in a loan decision
24.2 Most limiting factors to bank loans in commercial aquaculture in sub-Saharan Africa Four main factors were identified as impeding access of potential commercial aquaculture Farmers to bank loans in sub-Saharan Africa, Bach of these constrains is linked in one way or nother to the four fundamental considerations that go into making decisions on applications for bank loans
‘The first discouraging factor for potential borrowers is the banks" perception that commercial squaculture carries a particularly high sk of failure in sub-Salsaran Africa, This is essentially ‘due to past negative experiences with aquaculture development projects in the egion,
Aquaculture was introduced in most sub-Saharan African counties in the 1950s At the end of the decade, there were approximately 300 000 ponds in 20 countries (Satia, 1991) In the 1960s, politcal unrest, lack of fingerlings, drought, and poor economic returns led many farmers to abandon fish ponds, which resulted in a decline in aquaculture output (Hanison, 1997) Another wave of expansion occurred in the 1980s Between 1988 and 1995, approximately $160 million was spent on aquaculture research and development in Africa, most of it oriented to the eural sector and diversification However, development has been slow with (tal aquaculcore output ofall aquatic organisms in Africa just lose to 122 000 in 1997 (FAO, 1999) This output was only 0.34 percent of world output a smaller share than in 1989, In the early 1980s, aquaculture also attracted institutional loans, thanks to optimistic business plans prepared by "instant consultants”, but losses were high Failure of many of these operations soured financial institutions on aquaculture (FAO, 1996) Since then, there hhas been lite instiational financing of aguaculture as the lending institutions lack records on aquaculture as a profitable business and thus have serious doubts on the repayment capacity fof aquaculture proposals,
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‘The availability of collateral also influences the amount that « bank is willing to lend and the interest rates at which it might be lent Everywhere, when the borrower can offer the lender collateral fora Joan, private creditors offer larger loans, at lower interest rates, payable over longer periods of time In many instances, compared to a debtor who canmot offer good collateral, one with such collateral can anticipate receiving six to eight times more loan, taking to 10 ten times longer for repayment, and paying interest rates 30 to SO percent lower {Asian Development Bank, 2000),
Elsewhere, buildings and tiled Jand are generally the most provided collateral for long-term loans, Machinery and equipment aze often used as collateral for intermaediate-trm loans Most farmers in sub-Saharan Africa frequently have none of these assets available to offer as security for loans Ths is pacticulatly so where the lund and buildings belong to the village or clan or are rented from a landlord,
For reasons discussed above, lenders favour secured loans However, a borrower with good credit and a history of prompt loan repayment may be able fo borrow some money, especially shor-term loans, without pledging any specific collateral In sub-Suharan Africa, often farmers have neither the credit nor the bistory of prompt loan repayment to qualify for dansecured loans; collateral is almost always required
“The thind constraining factor for potential borrowers is the high interest rates Interest represents the cost of using borrowed money, High amerest rates charged by banks are ‘common disincentive to borrowing in sub-Saharan Arica, They arise for a numberof reasons, whieh include perceived high risks of the venture being Financed and lack of collateral, lack of a properly functioning market in financial services, high rates of default on loans, Inefficient means of outreach resulting in high transaction costs, the rediscount rates of the cenual banks and high jnflation rates prevailing in most sub-Saharan African economies, ‘These factors wall be revisited in Chapter 4
‘The fourth problem faced by entrepreneurs in securing loans is the lack of knowledge, on their pust, of how to prepare and present a loan application 10 a bank and what specific Information the bank might require, As emphasized in this report, a bank will lend money coy i is convinced thatthe project is profitable, That is, if there is evidence that the loan can be repaid The loan repayment capacity is best measured by the cash flow generated by the business Thus, the borrowers repayment capacity will be best addressed with the claboration of 2 good business plan, However very often, potential horrawers in sub-Saharan Arica for commercial development lack the expertise in preparing a business plan
Summary and conclusions
This chapter discussed the concept and role of capital as well as its source for the evelopment of commercial aquaculture in sub-Saharan Aftica, It also reviewed the types and agcess to loans for the development of the sector in the region, the banks" requirements 10 grant a loan and the major constraints to accessing bank Joans for commercial aquaculture evelopment
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cash needs, Because of the lack of own equity, most investors in sub-Saharan Africa will Sepend on external funding, to start a commercial aguaculure venture Funds will be borrowed especially from the formal lending sector, as the loans available from informal sources are generally, not only costly, but also limited and mainly intended for working ‘cepital needs and contingencies
However, prospective borrowers have difficulties meeting the banks' lending requirements “They have to be checked for character, capacity, equity and especially collateral Specifically, there are four major factors which limit access to bank loans by potential entrepreneurs in commercial aquaculture in Africa south of the Sahara: the banks’ perception that commercial ‘aquaculture carries particularly high risk of failure in sub-Saharan Africa, the banks" insistence on secured loans and the lack of adequate collateral by borrowers, the high interest sales charged by banks and the lack of knowledge, on the part of borrowers, of how to prepare land present a loan application to a bank, notably @ business plan, Because oftheir importance,
Trang 22B CHAPTER 3
RISKS IN COMMERCIAL AQUACULTURE VENTURES: ECONOMIC FEASIBILITY 3A Setting
‘This chapter attemps (o address the problem of perceiving commercial aquaculture projects in sub-Saharan Airica as highly risky As discussed in the previous chapter, the perception by lendine institutions that investment in aguaculture bears a high risk of failure relates in part t6 past negative experiences with aquaculture development projects Project achievements have generally been short-lived and unsustainable There are several reasons for this, including Insufficient project duration the very weak institutional context in which these projects are implemented, the changing priorities of donors and governments, and limited follow-up capabilites The review of aquaculture in sub-Saharan Africa showed that in most countries aquaculture production is still ineipient or erratic (FAO, 1996) Apart from the doubtful ‘uality of the data on production, this demonstrates that only a few countries have actualy given duc emphasis to aquaculture, which can make banks sceptical about the profitability potential of the sector Banks iso rate commercial aquaculture projects highly risky Investments because commercial aquaculture 3s sil a relaively new concept in sub-Saharan ‘Atria, which implies the lack ofa track record of successful cases in commercial aquaculture im the area This chapler aims at easing this concer by evaluating economic feasibilly of some commercial farms inthe region
In this evaluation, examples of commercial aquaculture ventures are analysed Cases studies are completed for two shrimp farms, one integrated polyculture tilapia-catfish-pigs farm (ZAM) one integrated tlspia-pigs-ducks farm (ZAM2}, and one polyculture tlspis-carp farm (NIG2), The purpose ofthe analysis i not to report results of analysis ofa representative sample of commercial aquaculture businesses in sub-Saharan fica; it i to illustrate that such enterprises can be successfully established and can be profitable businesses
While the uimost care has been taken to analyse availible data as accurately as possible, the findings presented in this chapter shall be interpreted with caution ‘They were generated based on data provided by a limited number of Farm owners oF managers, and shall only be taken as preliminary The process of verification of economic feasibility and evaluation of risks in commercial aquaculture is not yet complete; it is expected to cover a more representative sample of farms, and, where possible, species by species and system by system, For reasons of commercial confidentiality, the identity of the entesprises has been with
32 Description of farms analysed 32.1 Shrimp farms
3.2.41 Farm MDI
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mangroves, the ponds are separated from the mangroves by a belt of land between 200 and 500 m ide The impact ofthe farm on the mangroves appears to be neutral The use of agro- chemicals is generally limited to lime and fertilizers and the company relies on good _management practices to prevent diseases The far has been in production since 1992,
“The Farm produces Panaews monodon, using a semi-intonsive technique, No aeration is used Physical conditions forthe goowing of shrimp are good The ponds use clean, brackish water with temperatuee of about 30.5°C during the hot season and about 23.5°C during the cooler part of the year, The activities of the farm are almost fully vertically integrated, ranging from hatchery operations, to nursery activities (post larvae production), grow-out (marketsized snip production), processing and packaging
‘The larval stags (rom sauphi to 2000 1 mysis) take 10 1015 days Larvae ate stocked imo rusty ponds at an average stocking density of 150’ The nursery pase lst for about 20 to 30 days, which implies thatthe enie hatchery cyele takes between 30 and 45 days The average survival rate im mursry ponds is about 68 pereent Grow-out ponds, which range from 255 to 10 ha in size and are designed and consteucted with Water depth averaging 1.5m, are Stocked at densities of 10 10 12 post larvae or PL’ Size at stocking Is PLiz-PLv with an average of PLas (0.20 | p/PL)
Shrimps are fed a 38-40 percent protein feed at an average of 2.5 percent of body weight Lime and fenilizers (Di-amnmonium Phosphate and Urea) are applied at diferent rates and frequencies, but in general the average ratio phosphate/urea is 1/6 No chemicals (antibiotics) fare used in nursery oF grow-out ponds, Waler exchange is initially kept at 2 to 3 percent per day and gradually inereased 0 10 percent as biomass increases until i reaches 20 percent close to harvest
About 6 200 tonnes of feed are consumed annually, Feed is primarily imported from different sources Historical commercial ties and risk diversification explain feed import from different suppliers
An 1999, the farm employed about 407 workers, with an employment multiplier effect of L9 in the processing industry (Hishamunda, 2000) The employees receive wages that are higher than in tae public sector and in most other private companies The company benefits from a stable labour force
Thote are two growing cycles ø year The warm season (28-32°C) cycle, which covers November through April lasts between 120 to 145 days: the cold season (23-27°C) eycle ‘extends from May to October takes between 140 and 160 days Average growth rate is 0.5 giweek in cold seasons and 2 giweek in warm cycles, On the average, shrimps weigh 25 g/individual at harvest Yields vary from 1 $00 t0 3 500 kyfhafeycle depending on the season'®, with an average of about 2500 kyha/eyele, or 3.000 kyhu/yeat The average survival rate 8 90 percent; loner and upper limits recorded were 80 and 96 percent Feed Conversion ratio varies from 1.8 to 2.5, with a mean of 1.9, In 1999 the farm produced 3.050 tonnes of shrimp, 64 percent of national production of 5 024 tonnes on 62.5 percent of
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is
the land being used for shrimp farming nationally All shrimp produced is exported, mainly to France, the United Kingdom, Portugal, Spain and haiy
3.2.1.2 Farm MD2
Farm MD2 has 197 ha of land under water, 138 ha of which ate utilized as production ponds, the average size of which is 25 ha It was established in 1995 jn the same under populated coastal 2one as Farm MDI The water is clean, brackish with a similar temperature range t0 that of Parm MDI The farm is also situated on low-lying coastal plain, set back between 200 mand 500 m from the coastal mangrove forest,
Like Farm MDI, farm MD2 produces P monodon, However, this farm uses production rethods that are much move intensive than on Farm MDI The average stocking density in Podvction ponds i 20 PLshe™ Size a stocking is PL-PLo with an average of PLis (0210 1 gIPL), Shemp are fed «40 percem protein feed Farm MD2 used more than 50 percent the đan of feed than on Farm MDL Pond aeration is frequently used, All the feed is iinported The application of lime and ferttizers (Di-smmonium Phosphate and Urea) is
ăn mui
Activities of the farm are also almost fully vertically integrated, ranging from hatchery ‘operations, to mursery activities (post larvae production), grow-out (marketsized shaimp production), processing and packaging, In 1999, Farm MD2 employed 301 people on the farm but the employment multiplier effec in the processing industry sas 1.6 compared to 1.9 for Fatma MDE Workers are also paid better ‘than in the public service and most ofthe private sectos:
In 1999, the farm produced an average of 9 098 kg of shrimp per hectare; almost double the ‘production per hectare on Farm MDI All the produce is exported to Europe
322 Fish farms
‘Three farms: ZAMI, ZAM2 and NIG2 were analysed under this categoty Farm ZAMI is a moderate sized polyculture farm growing Glapia and carp integrated with pig farming The Farm has 40 hectares under water, 32 hectares of which are given over to production ponds, ‘The farm is situated about 40 km from a major urban area in which the production is sold
Farm ZAM? is a smal, integrated tilapia, pigs and ducks farm Ithas 7 hectares of land under ‘water, $ hestares of which are used as preuction ponds of an average size of 0.125 ha, The farm uses an extensive system of production utilising the pig and duck manure to fertilize the ponds The farm has plentiful supply of tresh and clean river water, which it gets by gravity to Dl up the ponds The farm has been producing tilapia for 7 years The tilapia output is sold mostly at the pond dikes to retailers andlor lo neighbouring commulnities for direct consumption In 1999, the farm emplayed 38 poople,
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allocated to production ponds The farm also produces fingerlings for its own use and for sale, (ther biological parameters of the theee Farms are summarized i Table 1
Table 1 Biological parameters of fish farms evaluated
Parner ZaMi ‘Na ofthe mm ` Tơng Farm ie (al 40 7 Integration Bạc Pigs and Ducks
Stocking densiy FRAT) Tilapia 1 as 4 Canh Cảm L ' | average weight at oot | wes) Than 2 5 ” ” Giữn sp | carp
Feeding - Now formulate No Formate ed Feria Leng of owing epee Manse 3 Manus ° ——|~Superphospate T “mg
teen) Average vied Cigale) † = Tilia sis s00 10000 | cash Cap 1360 — _ 300 ‘Average weigh at hanes Em 200 200 250 | Tapia 300 Cats Cặp 380 Sunival ate) ¬ = 3 Fingelings hareewsd | tamberhyn ° ° TT 125 000 | ia Cats ° 112500 Cup 33 Results of economic analysis 33.1 Farm profitability
3.3.1.1 Ordinary enterprise budget method
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Because 10 of the three fish farms analysed were integrated with livestock such as pigs and ducks, budgets were developed by excluding animals and by allocating shased productive resources among enterprises on the farm This was dane for the purpose of enabling inte farm comparisons For this same reason and because shrimp is sold on the internation market after being processed whereas fish is sokl domestically without undergoing processing, the analysis of profitability of the businesses was completed excepting value Added of the farm products, In adtion, the reluctance of shrimp farm owners/managers to ‘eveal all economic information on off-arm activities, especially the price at which shrimp is sold iniernationally, rendered the complete economic evaluation of the businesses difficult, Results of the investigation completed for both shrimp and fish farms are summarized in Table 2
Table2 Summary of annual enterprise budgets for one-hectare of commercially ‘managed shrimp and tsh enterprises Shrimp forme — Fah fame ——] MADI | MADI | ZAMI | ZAM2 | NIG2 (Grass Revenues (SIM) 2@| Too] 368] S98] S3
Variable Costs (Sa) II: Tor[ aes | 1515 Tneome Abave Variable Coss 377] as | 3886 Ties
(stu) “: a
Fined Coats Sia) Tar wpe
“Tora Costs (tha) 90 4369| — Hi ‘Net Rewms wo Manigement(Sihay_) 20055 [37255 S19] ám Rate of Retry o investment) ny, 35 7
As shown in Table 2 commercial auaculture farms analysed are profitable, 0 he short and Jong tun: income above varisble costs and net returns to management are positive in all cases, ‘Moreover, all farms show positive rates of return on investments
Shrimp farming is more profitable than fish farming On the average, net retums to ‘management are about seven times higher en a shnmp farm than on a fish farm, or about 531 64S/ha/yr compared to S4 500Mhalyt Rates of returns on investment are also higher on shrimp than on fish farms; on the average, a shrimp farmer gets $1.05 for every dollar Invested whereas a fish farms ears $0.64 However, although fish farming i less profitable than shrimp culture, it still yields reasonably good rates of rtarn on investment, canging from 13 percent to 108 percent,
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18
error process which can take time Though Farm MAD2 was established am 1995, 11 had completed 1wo yeuts of production in 1999, it eould sull be considered to be in the process of discovering its optimum production technology Intensification does not necessarily lead to higher profit margins,
33.1.2 Discounted enterprise budget method: time value of money Concept
Investment implies sacrificing consumption of current units of goods and services in anticipation of higher future uulity which will result from future consumption of cusrent and expected additional units generated from investment These units occur in the future, Thus, ny investment cartes atime dimension that can affect the profitability of a business It could be useful to take this factor into account when evaluating the economic feasibility of an aquaculture venture In fact, some lending institutions might require borrowers 10 use evaluation method which accounts for ume, In a simple model, the value of the units accruing from an investment represents the difference between revenues (R) obtained from sales of the investment ouput aid costs (C) incurred from production 10 marketing This value is the net mem (NR) oF benehit on ‘nvestment Mathematically, beoelits or net returns from investinent can be expressed a AR=RC (D, ‘where, NR = net reves R= revenues; C= costs
‘Other things being equsl, banks should approve all projects with postive net returns wt these imply thatthe propasals are economically viable lenders re 10 choose one project among the many others with positive net retumns, the one withthe highest benefits should be retained, ‘The greater the NR the higher the utility From investment, This method of evaluating projects is relerred 10 as the “Onhnary Enterprise Budget Method”, It was used in the previous section 1 assess the economic viability of selected shrimp and fish enterprises im sub-Saharan Attica {ee Table 2)
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9
to compare them to operating costs incurred and revenues obisined a yeur later One dollar today i$ not equal to $1 nest year or in two years It is commonly accepted that $I today is worth more than SI next year: in fact, $1 plus the opportunity cost of postponing the consumption of the doltar today to next year Thus, in order to make current fixed costs and future operating costs and cevenues comparable, tere is « need to Find today's equivalent of future expenses and revenues, or their present value, The process of computing the present value of future amouns i called discounting (Kimmel, Weygandt and Kieso, 2000),
Application: discounting future costs and revenues
‘Consider an entrepreneur ia Sierra Leone who is interested in investing in aquaculture with the objective of maximising net returns from investment Assume the entrepreneur will have incurred toxal costs of $100 000, including $30 000 in fixed costs", in the aquaculture business alter che first year of the operation Assume also that an ex ante evaluation of the proposal indicates that the project will yield $120 000 in gross revenues atthe end of the frst ‘operating year The question for the entrepreneur is to know whether or not the project is ‘worthwhile As stated above, because operating costs and revenues are expected at least one {year aller the fixed production costs are incurred, i ¥$ inaccurate to just take the difference etwcen revenues ($120 000) and costs ($100 000) in arder to assess ifthe net returns from ‘his project sre positive, Future costs und revenues need to be discounted fist
‘The discounting process stats from the assumption thatthe investor's $1 placed in a bank at the time the aquaculture business related costs are incureed would be worth $1 plus interest “i", or S(L4i, atthe time revenues from investment in aquaculture are collected Inversely $1 at the time of collecting revenues (next year) is worth S1/(L4i) atthe ime of incurring the costs (today) That is, the discountea/present value of next yeat's dollar is SU/(L+) This ‘implies thatthe $120 000 in revenues expected next year are equivalent to $120 0061+) today Assuming the intrest rate i = 10 percent", the next year's $120 (XX) in gross revenues ‘would be equivalent to $109 091 or ($120 G00Vt.1) today" By following the same reasoning the corresponding discounted (present) value of the $70 000 incurred as operating costs next year would be $63 636 Because both costs (fined and variable) and revenues are current, they ean now be compared The subiraction of curent costs from current revenues yields current net revenves, Curren net revenues (beneit) refer to as net present value (NPV), The [NPV for the project in Siera Leone would thus be $109 091-($30 000+863 636), or $15 455, Iimplying thatthe investment is worth consiering
“Though the same conclusion thatthe project in Sierra Leone is worthwhile would have been reached by using Ordinary and Discounted Enterprise Budget methods in the analysis, it is Important to note that the magnitude of net returns obtained through the two methods are substantially different, The Ordinary Enterprise Budget method would yield 2 $20 000 net revenue, which is about 23 percent higher than the value obtained by’ using the Discounted
ya commercial aguaculre venues, variable costs generally represen the mijor part 0 the proaction ggfemen They typically cover t east 70 percent ofl cos a the Aten cinta "The intrest rt represent the portant cot of pospang day omsumptin of SL Ao net yet
The iene of counting” i ealed “compounding Sen 996) Ut consns of Gnding atte values of fcuners aman Thi i done by muliplying cure value by (Lv Thus sto T0 perent, $10 9091 today i {Suvalent wo year $120 O00 nề yea S1GD GUD today equivalent «S110 000 next year The $120 G00 represen th cpunied alu of S109 OD S110 00, the compounded vale of $100 000
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Enteyprise Budget ($15 455), The difference in net revenues would have heen still higher had an interest rate of more than 10 percent been assumed By inflating net revenues and fulure eosts, the Ordinary Enterprise Budget method can lesd fo erroneously funding uneconomical projects oF rejecting economically sound proposals, especially when dealing with projects with different time horizons
Economic feasibility of commercially managed shrimp and fish farms was re-evaluated by Using the Discounted Enterprise Budget in order to compate results of this and the Ordinary Enterprise Budget method An interest rate of 10 percent was assumed Results are presented in Table 3 Table3 Summary of time adjusted annual enterprise budgets for one-hectare of commercially managed shrimp and fish entesprises
Tem MADI | MADZ | ZAMI | ZAM [NIG? Ship Farms Fash frm Gross Present Revenues Sa) 4381| are] +ã2| 4735| 389 resent Variable Costs (Sibu) — — 1509| 38778 [Toe | oso | D257 resent Income Above Variabis Coss (Thad [om [S300 [ess | toss
Fined Costs (Sha! Tại Tart,
[Present Tal Coss ha) ‘Net Present Value (00 Management) Shad BDHRETOIREETIN:EDI sinus | 2tos| sig [9334 resent Rate of Return to Investment (PRI) MỊ MỊ HỊ
@
| Nou Pissed WatusiNer Value (UNRMIZ 3a a9 [ PRRE-Cndiscounted BRIE) H fof is 21s
Findings presented in Table 3 lead 10 similar conclusions as those obtained by using the Ordinary Enterprise Budget method However, as expected, the Discounted Enterprise Budget ‘method leads to lower levels of profitability ofthe farms analysed Net retums to management fall by 9 percent 10 13 percent when gross revenues and operating expenditures are “iscounted, The discounting of these items also results in lower rates of lam on investment Most rates range from 70 percent to 112 percent, which represents an 8 percent to 15 percent reduction compared to those obtained with the Ordinary Enterprise Budget method,
4.3.1.3 Discounted enterprise budget method over time: stream of present costs and Re-consider the example of the aquaculture entrepreneur in Sierra Leone, The evalustion of this project implicitly assumed thatthe business is # one-year project Because the project is economically sound, other things remaining the same, itis expected to lst for more than @ year, thereby generating steam of revenues, For ease of illustration, let us assume that about 10 years will go by before any major expenses (besides operating costs) are made to the project and that the same revenue ($120 000) will be generated every year from the
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“The key point in evaluating the profitability of the proposal isto discount revenues generated a the end of each production year 3s well as any production expenses incurred during the year in which revenues are generated As discussed earlier, the idea of discounting future amounts seams from the concept of the opportunity cost of not using the dollar invested in an ahernaive manner sich as a placement in a bank, A $1 placed in a bank at the time an aquaculture project stats will be worth $(1¥i) after a one-year period, when revenues from invesiment in aguaculture are collected This amount collected next year is worth $1/(+i) today’ (when production and marketing costs are incurred) This is equivalent to saying, that the S(14i) collected after year one of the project is worth $L/(L4i}' todays the same dollar invested at the beginning of the project will bring in $(1+i) in two years after the beginning ‘of the project and the present value of the amount brought in is worth $1/(L+i)? In the third year, the dollar is expected to bring in S{14i)°, which is worth $1/(1+i), and so on until the last year ofthe project
i we designate by “T" the expected life ofthe project and by “t" the year in which revenues are generated, then the discounted! present value of revenues generated in exch one year can be expressed as: S/CL+)' The stream of present revenues generated (PR) fom the project can he denoted as: PR = SH(Lsipls §I/(1xƯÊ+ §I/(130))3§ 10, This Formula can be written in a condensed way as: (1Ư + 04 SIAL,
where
pe = 8510+" where T =10
Applying this formota to evaluating the project in Sierra Leone still assuming a 10 percent Interest rate, we get results reported in Table 4
Results presented in Table 4 indicate that overall, the projet is profitable However, from its sixth year, i does not generate enough revenues to cover fixed and operating costs, which suggests that it would have made more economic sense to design the project for a five year Period instead of ten I is norewonby that the Ordinary Enterprise Budget method would not have detected the life span over which the project is profitable
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Tabled, Discounted results of economic analysis of hypothetical aquaculture project in ‘Siem Leone ‘Gros Present Revenuss @) | Present Toul Cows @)_ [Nai Present Ravens ©) 109 091 9917 93 656, 87851 15455 1322 90158 328g —— 7546 51962 — Ti 31” 71 | 71468 Tote 61737 sis “776 ors7) | 68 ae 55981 — _85688 “6675 50892 46.265 T+— 56 988 se “07a “S15 Trae 730120 1238 Table ‘commercially managed shrimp farm MADI Summary of discounted annual enterprise budgets for one-hectare of ‘Year —[ Grows Present Revenues (@) | Present Total Costs) Net Present Revenues (S)_] i ~ 207 z ie “19366 + = r E5 6 7 1212 10383 = 3108 7 1757 E8] in 6333 [am L— ma#z 157 980 3.3.2 Cost structure analy
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sble6, Rests of cot stature analysis for ship farming
~ ‘AS a % of variable costs, ‘AS a % of total costs
T_Varable cons pera Fann MADI-[ Fam MAB? | Farm MADI [Farm MADE 3 m1 “I 5 m 3 ol ss + Đ 3 a F 3 1 3 4 5.Eletnciy 5 5 6 Other expenses 6 g T Total variable cous per ToD Tơn 78 ha Ti Fredo I 5 E 2 :
[As indicated in Table 3, variable costs are an important part of shrimp farm expenses They ‘make up 74 percent and 97 percent of total costs for MADI and MAD2 farms, respectively Por each farm, feed absorbs most of the farm budget, accounting for 4S to 65 percent of total costs and 60 to 65 percent of operating expenses These results confirm previous findings that fed represents about 60 pereent of operating costs in shrimp farming in Madagascar (Hishamunds, 2000)
One explanation for the high share of feed cost in the farm budget could be that feed is imported Feed is primarily imported from Mauritius and the Seychelles, and secondarily from Taiwan, Province of China, ot vice versa depending ace sometimes purchased from the United States, Importing from long distances means high on the company Limited quantities feed price at farm gate due (0 transport costs The cost of the curteacy in which feed is purchased, especially when the local currency weakens against the hard currency, constitutes other possible explanation
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Table7, Results of cost structure analysis fo fish Asathof vanable coats [Asa of total costs (Gite pre aa ae a Ng Erssi apse [Feed 1Ì 3S
[ E Enumragemsi | ——0— HT [ro — aa; ast
[Seas & Warr 0 [~aa os I
Osher varie coat [ot 1
TE Tota sare costs por iio) tae |
| Ti Paste | i Boe
Unlike in shrimp farming where feed represents the major cast, fish farms tend to spend mast ‘money on labour though seed and feed costs can also be important On the average, on fish farms, labour cost represents about 30 percent of the total production costs and about 37 percent of operating capital On the other hand, fingerling costs, which constitutes the second Targest cash expense on fish farms accounts for 28 percent of vanble costs whereas the feed share of the operating expenditures averages about 19 percent, Perhaps because of the iced 10 move the bulky livestock manure to ferulize ponds, integrated fish-lvestock farms tend to use more labour than nonintegrated fish farms, Which instead, tend to use more feed, Nevertheless, savings from high feed pnces und good returns from fish sales seem 10 ‘encourage integrated systems of fish production for small 1o medium seale farms,
[Break-even and sensitivity analyses were completed for each shrimp and fish farm, These types of analyses are important: they are one of the metbods of assessing risks associated with business,
Shrimp farms
‘The break-even analysis on shrimp Farm MADI shows that, if, atthe present yield level of the farm, price was to fall by 54 percent from its present level of $8.46Vku to $3.90/kg, the farm would stil caver all production costs Variable costs would still be covered i the price received by the Former fell 0 S2.9/kg This result suugests that if prices received by farmers were to fall as a result of an increase of shnimp supply on the international market for example, they would have to drop dramatically before the compsny is unable 4 continue ‘operations, In other words, the company would shut down ifthe price decreases by more than {65.5 percent trom its present level
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2s
technology A sensitivity analysis on yield showed tha if the output price remains unchanged, 1 10 percent increase in yield could raise profits by 19 percent, while a 20 percent increase it yield would produce a 37 percent increase in profit
As the cost of the imported feed accounts for 65 percent of operating expenses and 45 percent ff total costs, factors affecting the price of feed ar likely to influence the profitability level of the farm, A local production of feed could bring about a significant reduction in production costs, which would have a positive impact on profits, simulation of effects of price changes fn the profitability of the Farm MADI indicated that @ 10 percent fal in feed price from its current level of $1.1/kg would result n a4 percent increase in profit I the price of feed were reduced by 25 percent, the farm would enjoy an increase in profit of about 12 percent Halving the price of feed would lead to 4 23 percent increase in profits
(On the other hand, by increasing the price of imported feed, other Factors can have a negative |mpact on profits The inerease in oi price, for example, could raise transport costs ane, thus, Increase the farm gale price of feed, which would cause profit to dectine, It was found that if the price of feed were to increase by 10 percent from its current level, the profit from Farm MAD! would drop by 5 percent Assuming the price of feed doubles as a result of an ‘ncrease in prices of oil world-wide or a shortage of feed from suppliers, the profit of Farm MADI would fall by 47 percent; the farm would lose 94 percent of is curtent per-hectare net returns if the price of feed triples
“These resulls imply that this farm has very good profit margins Because feed is the most determinant factor of profit in shrimp farming in sub-Saharan Afri, it can be inferred from ‘hese findings that the likelihood of economic failure for this farm is slim, Everything else remaining the same, this fur’ profit would vanish when the price of feed increases to about $3.44/Kg, of about 3.12 times higher is current level, Even then, the farm would stil be able to operate in the short run, Shor-run profits would dry out and the farm would close once the price of feed reaches $3.9/kg, or 3.55 times the current level
“The same analysis was completed for Farm MAD2; similar conclusions were reached Results indicated that would the shrimp farm gate price fall by 50.8 percent, or to $4.30/kg from the estimated $8.46/ke, revenues obtained would still be Sufficient to offset both variable and fixed costs As vanble evsts are 97 percent of total costs on this farm, the break-even price for covering vanable costs is $4.20/kg, This means that Farm MAD2 too had comionable profit margins Because the farm is still n the earch ofits optimum production technology, t scems likely that chunges in the technology mix in forthcoming years could improve these Figures This could in turn, reinforce the already bright economic viability ofthe fact,
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of the same currency against the Eotopean monies Therefore, in terms of the currency of the shrimp producing country, the increase in cost of feed resulting from an increase im pace of Feed as a result of the local currency depreciation against the US dollar i likely to be offset by the increase in gross revenves resulting from an increase in shrimp price received by farmers as a result of the local cưzeney depreciation against the European currencies Thus, the ‘impact of a depreciation ofthe local cureney sn the producing countey where the main factor ‘of production s imported and the output is exposted is likely to be profit neutral
‘The effect of the strengthening of the dollar vis-2-vis the local currency would be @ serious concern to farmers if the feed was being imported but the shrimp market was domestic Evidence from Cote dilvoire seems t0 support this hypothesis, With the successive devaluation of the CPA franc beginaing in 1994, smalt and medium scale commercial lapis tnd catfish farms in the Man region, west of the country, whose mais destination of the harvest is domestic consumers, saw continuing reduction in the market for aquaculture output, Lately, the problem of market for aquaculture products for these farmees has been ‘compounded by competition from cheaper fish imports and the eroding purchasing poser of the local communities which results from the country’s dificult macroeconomic conditions, ‘The problem is also exacerbated by farmers’ attitude Strugeling te cover production costs and to remain in business, and, perhaps, to maintain the same level of farm profits 2s previous to the devaluation of the CFA, farmers are reluctant to decrease fish prices Ifthe problem persists, there is ask for farms to close, In Casta Rica, the devaluation also Forced a tilapia tage culture project to close because it depended on imported feed why
foulput was sold on the domestic market (Porras, 2000)
eas the projeets Fish farms
A break-even analysis for Farm ZAMI indicated that the price needed to cover total costs is S0.50ikg To cover variable costs, the farm would charge 50.20/kg This implies that ifthe courtent price falls by 23 percent, the farm would still caver cota costs if it falls by 65 percent, vanable costs would still be covered, allowing the farm to funetion for a short period, about tbo production eycles, The yield needed to caver total costs, with the price remaining the same is MM67kg/h, of 51 peroent lower than present production level If for sone reasons, such as a disease that would result in a higher mortality rate, yields fall 10 1 695kgha, “Te percent lower than the present yield, revenues generated [rom the farm would still be enough to compensate forthe operating expenses These results are suggestive of 2 long-term
economic sustainability of the farm, ‘At the price of $1 04/kg received for tilapia, farm ZAM2 would need to achieve at least a yield of 4 443 kgfhuệr to cover total costs This yield is only 11 percent lower than the present yield The farm would be unable to cover its operating costs, and therefore shut down, 1 the yield was to fall below 4 371 ky/ha/y, which is bout 86.3 percent of the eurrent yield yields remain constant, dh farmer would have to sell fish at $0.92/Kg, oF 88.5 percent of the current price, to break-even To remain in business, a last in the short run, the owner would have to sell the fish at $0.90/kg, which represents 86.5 percent af the price at which fish is ccureatly sold
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repeated fish poaching or a lack of oxygen in the ponds which would reduce yields hy about 14 percent would force the farm out of business Similarly, a drop in fish market price by bout 13.7 percent from its current levet would result inthe closure ofthe farm as short-ran profits would soon dry out Such events often occur in aquaculture
To continue operating the farm would have to either reduce costs or increase revenues, oF both Costs are often difficult to cut in the short run: farmers often seek to increase revenues instead nu competitive world, however, fish Farmers have little conteol over prices at which fish ure sold: they are price takers Through the choice of appropriate production technologies and good management practices, they can only influence yields, thereby increasing revenues, Because farm ZAM2 relies mostly on manure produced on the farm to produce fish, i seems reasonable thatthe farm could improve its profitability level by using supplemental feeding Farm ZAMI, that produces tlapis and earp under similar physical conditions as Farm ZAM, lses pig manure 10 fertilize the ponds but supplements this with feed, The yield on Farm ‘ZAML is 40 percent higher than on Farm ZAM2 Assuming other conditions remain the same, 4 Farm ZAM2 increased yields by 40 percent there would be @ 359 percent increase in profi”
ZAM2 has also land for expansion and a plentiful supply of fresh water for additional ponds 1 also appears that there is considerable untapped market demand, Virwally, all of the preduction is sold at the farm whereas there is a major urban area 20 kilometres From the farm bflering the possibility of an expanded market This implies thatthe fong-run cost-reducing strategy of the farm could be to expand until the evonomies of scale are reached"
ind conclusions
Summary
The economic viability of a proposed commercial aquaculture venture may he questioned if the industry is 90t yet established in the country concemed and if the necessary inputs are not readily available Good quality seed in sufficient quantity to meet the needs of the proposed venture needs to be available Because of the environmental sensitivity of the seed and the teanspon cost, the closer the source of seed isto the proposed venture the better However, seed {i unlikely t© be available if there are no existing aquaculture ventures providing & rmsrket for the seed Similarly if feed is not readily available or i it needs to be imported at ‘considerable cast, the viability of the proposed venture might be questioned Feed often accounts for more than half of the operating costs, panicularly were intensive technology is employed If the feed is imported, its cost could escalate ifthe local currency depreciated gang that of the country from which the feed is imported, which could be particularly
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serious for the viability of the business if the ourput of the venture isto be sold on the focal marke
‘The lack of locally produced seed or feed can bring about the failure of un enterprise There ray be intentions to establish hatcheries and/or feed mills or encourage their establishment, but timing can be all-important Banks would recognize such shortcomings, which would, at the very least rightly inerease their perception of risk and, atthe worst, result ina rejection of the application, However, the claim of high-risk assessments with which commercial aquaculture ventures in the sub-Saharan Africa are burdened, is not justified by available evidence Examples of successful commercial aquaculture ventures in sub-Saharan Africa discussed in this report demonstrate that i is possible to establish and run highly profitable ‘commercial aquaculture projects in the region The farms analysed showed rates return on investment of between 71 percent and 117 percent per year The exception is @ farm whose rate of relum on javestment is 13 pereent, and a rears that could probably be dramatically improved with the use of feed These rates of return on investment are high and provide & comfortable cushion against any major negative developments that either reduce prices or yields
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» CHAPTER 4
‘TACKLING THE ISSUES OF COLLATERAL AND HIGH INTEREST RATES [As discussed previously, common difficulty confionting many potential enirepreneurs seeking 8 loanto develop « commercial aquaculture venture in sub-Saharan Affica isthe lack fof the adequate collateral required by the banks, If a loan is offered, the interest rates slemnded are prohibitively high This chapter reviews some of the commonly used strategies to tackle these problems
AL Alleviating the Inek of collateral
Borrowers’ failure to meet banks’ collateral requirement may be because they simply do not have any asset that they could offer as collateral it ca also arise when borrowers have assets that have a value but which the bank would have difficulty accepting as collateral In both cases banks have tended to reject loan applications that are not accompanied by the offer of collateral acceptable 10 them Approaches of alleviating the issue change accordingly They ‘ary from “no-collateral” stategies fo govemment interventions 4.1.1 "No-collateral" approaches: promotion of group lending
Recent decades have witnessed 9 rethinking of conventional banking practice in particular circumstances where it has become evident that there was market failure The formal banking sector has long held to the assumption that loan risk 3S inversely related 0 asset ownership ‘The experience of the lst three decades, however, suggests that lack of asset ownership does rot necessarily mean that there exists a high risk of default on loans The following experiences in group lending a a siratezy of tackling the problem of lack of collateral illustrates this assertion
41.1.1 Group lending: the Asian experience with Grameen Bank
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repayment relies on group lending" This approach utilizes peer pressure, small weekly repayments, and personal contact with borrowers Interest rates are set 10 raise evenues that will cover costs, making the Grameen Bank a sustainable, commercial financial institution servicing the rural poor (Grameen, 2001a) The Grameen Bunk has since established the Grameen Trust Fund for the purpose of providing loans primarily to ventures that are “risky, technology-orignted and otherwise deprived of financing from existing formal lending institutions” (Grameen, 20014) This Fund, operating on the same lending principles as the Bunk, was covering all costs by 1999 (Grameen, 2001e)
Although this example does not deal with the loan needs of potential commercial aquaculture ventures, it does establish that itis possible, through developing ismovative approaches, to rant loans to borrowers who are unable to provide collateral
4.1.1.2 Group lending: some African experiences
Examples of initiatives similar to the Green Bank experience can be found in sub-Saharan ‘Africa, In Benin, state-owned commercial banks were liquidated in 1990, making way forthe ‘emergence of a strong network of pnvate hanks serving urban areas, and the re-emergence of the Rural Savings and Loan Project, providing loans in rural areas An adaptation of the Grameen model was developed for the project OF Benin’s 54 million people, some GS percent live in rural areas: most of them are poor and had difficulty: making savings and sceessing loun serviees (Mosele, 2001), Loans are only granted to members who have had a savings account for a minimum of six months: loans cannot be more than double the amount deposited Loan revovery rates had risen to 98 percent by 1995 The pre-requisite of a saving account encourages the mobilization of rural savings, which are utilized for loans Decentralized decision-making helps reduce the screening, monitoring and enforcement costs ff lending, and empowers members 10 both tke decisions and help ensure repayment (Mosele, 2001),
In Burkina Faso, the "Projet le Promotion du Petit Credit Rural (PPPCR)" was established in 1988; wa+ also modelled on the Grameen Bank, However, 2 significant modification was necessary because of the particular context of the counity, especially the much lower popaladon density The PPPCR groups are formed in each village and group members carry pint responsibilty for repayment of the loans In addition, no group in 2 village can receive new loans if another group has defaulted (Panton, 2001) Ths peer pressure plays a significant role in loan repayment The arrears rate on loans was 2.3 percent in 1995, Although loan fepayment rates are high, the project had not yet achieved sel-sustainability because of the nh casts of providing loans toa widely dispersed, very poor population (Paxton, 2001), ‘The Kenya Rural Enterprise Program (KREP) was established in 1984 as an intermediary NGO providing loans 10 other NGOs which supplied rural loans, KREP later established & irect lending program for people who would olberwise find it extremely dificult to access loans from commercial banks It adopted the group lending methodology used by the
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Grameen Bank and facilitated the forming of groups of five to seven members The groups, in turn, are federated to form larger groups (Charitoneko, Fruman and Pederson, 1998), These larger groups are administrative and legal entities through which loan transactions to individuals are carried out Savings ftom individual members are collected at group meetings, recorded and banked in the group savings uecounts to which KREP is a signatory The interest ceamed on savings belongs to the group A.0.5 peroeat insurance levy covers the loan amount in the event of death, incapacitation or prolonged illness of the borrower When each loan is repaid, the Borrower gains access toa larger loan The group's savings serve as collateral for the loans and each member agrees to forfeit hisher savings inthe event of default by a group member (Charitoneko, Fruman and Pederson, 1998) Tis places considerable peer pressure fon the horrower wo repay the loan
Grants on which KREP were initially dependent were being phased out By 1996 operating income excluding grants covered 98 percent of operating expenses, thus approaching a Position of being self-sustaining It was anticipated that by 1998 Financial Services Division ‘of KREP would become a formally chartered bank (Charitoneko, Fruman and Pederson, 1998), The Land Bank of South Africa has launched financial services for more ambitious commercial ventures It has launched a “silver range” of financial products, targeting farmers who have proven agricultural abilities and experience but lack collateral (Anonymous 1998), ‘and a "bronze range" of products targeting people who have no track record or venture capital at all The latter will be required 10 pay an additional "risk-fund” levy in retum for intensive afte-loun support services (Anonymous, 1998) The performance of these services remains to be assessed,
4.1.1.3 Village banks and solidarity groups
Village banks and solidarity groups are the (wo other popular modes used to tackle the problem of collateral In the village banking approach, an institution goes into a village and ‘organtzeses a group of 20 10 50 members which then functions as a bank Group members select a management committee, which is trained to run the bank One loan is made to the village bank alter the passage of some time The bank must repay the whole loan with interest, at the end of the term before it can receive a subsequent loan In effect all members of the group are fully accountable for the loan
4.1.2 Extension of the possibilities or securing loans 41.2.1 Use of non-moveable assets as collateral: land
‘The incapacity to offer calateral acceptable to a bank as security fora loan, may arise when ‘the applicant for the foan has assets which have a value but which are in @ form that makes it difficult, if not impossible, for a bank to accept them as collateral This may arise in instances ‘where the legal and regulative environment is inadequate to enable the use of certain assets as collateral, The most commonly unused and yet availabe asset for use as collateral is land