Project Appraisal & Finance

Anoop 140301004Mustafa 140301011

Nghe An Tate & Lyle Sugar Company (Vietnam)

INTRODUCTION

Tate & Lyle asked the International Finance Corporation (IFC) to consider lending up to $45 million to finance a $90 million sugar mill in Northern Vietnam.

To make decision the IFC agricultural unit has been conducting a research investigating the following questions:

• The project’s commercial viability and attractiveness from the sponsor’s perspective.

• The assessment of project’s development impact.• The major risks facing the project.

PROJECT COMMERCIAL VIABILITY Construction and operation of sugar mill in Northern Vietnam. Intend to capitalize on the rapid growth in domestic demand for

sugar forecast for the country.

Critical factors: Expanding population. Low current sugar consumption.

• 9kg/person expected to grow to 14 kg by 2005 Deficit sugar country (imports sugar) Domestic demand (700,000 tons in 1997) vs. Domestic supply

(360,000 tons) Strong quotas/high tariffs system – profitable domestic production. Government support, as it is considered strategically important

project for the country: Need to develop the northern part of the country Employment creation, skills development in the regional labor

force and industrialization of the rural economy.

PROJECT COMMERCIAL VIABILITY…. Economies of scale: Use of better technology in milling,

training of farmers in better farming methods.

Able to set up longer term contracts with farmers for sugar cane supply(low cost price and additional revenues).

Calculated IRR for the project is about 18%. Directly comparing it with organization's cost of capital, we will see that project covers its cost of capital.

The economic rate of return (ERR) is about 19%, which is much more high than IFC threshold value of 10%.

PROJECT IMPACT ANALYSIS – ERR Direct employment of an estimated 725 mill workers

(premiums and approximately twice higher salaries).

Sugar produced by NATL includes tarifs and taxes: Imported and domestic sugar prices will be equalize->attractive for the consumers and hence competetive in the market.

Researches show that the revenues from sugar cane will exceed the ones that farmers gain from alternative crops.

NATL needs 300 trucks for cane delivery. Preference will be given to locals while signing trucking contracts.

Infrastructural development: Connect neighboring regions thereby improving speed and quality of trade as well as facilitate the delivery of cane to the mill.

PROJECT RISKS Cane supply/feedstock risk: About 22000 farmers should supply

the company so NATL will encourage local farmer to convert to cane. The payment mechanisms also increase the risk of supply, because farmers want to get their money in whole, in one payment. • Farmers for many decades supply local sugar companies, and it

will take some time from NATL to convince farmers to change their habit.

Transportation risk: Bad transportation infrastructure means trucks will need to be repaired frequently; as well the fuel consumption will rise, which is additional burden for the farmers.• cane deteriorates very fast: cane should be transported as fast as

possible. Many farmers do not have their own trucks, and they have to find additional money to buy or rent trucks.

Sponsors risk could be neglected because of the reputation of the sponsor company.

RECOMMENDATIONS Taking into account the results of research, we can conclude

that overall risk of project is below the moderate level and IFC can finance the project.

The project implementation provides wide range of high social benefits, including employment creation, skills development in the regional labor force, a contribution to the reduction of hunger and poverty in rural areas, and industrialization of the rural economy.

It is reasonable to finance project as the ERR indicator shows that both social and financial benefits are sufficient.

Thank you