8.

PROFILE ON PEA CANNING

8-2

TABLE OF CONTENTS PAGE I. II. III. SUMMARY PRODUCT DESCRIPTION & APPLICATION MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME MATERIALS AND INPUTS A. RAW MATERIALS B. UTILITIES TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING VI. MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT FINANCIAL ANLYSIS A. TOTAL INITIAL INVESTMENT COST B. PRODUCTION COST C. FINANCIAL EVALUATION D. ECONOMIC BENEFITS 8-3 8-3 8-4 8-4 8-6 8-7 8-7 8-8 8-8 8-8 8-9 8-13 8-13 8-14 8-15 8-15 8-16 8-17 8-18

IV.

V.

VII.

I.

SUMMARY

This profile envisages the establishment of a plant for pea canning with a capacity of 6,500 tonnes per annum. The principal raw material required is dried pea, which is found locally. The present demand for the proposed product is estimated at 4,359 tones per annum. The demand is expected to reach 8,771 tonnes by the year 2020.

8-3

The plant will create employment opportunities for 104 persons. The total investment requirement is estimated at Birr 18.58 million, out of which Birr 2.77 million is required for plant and machinery. The project is financially viable with an internal rate of return (IRR) of 17.01% and a net present value (NPV) of Birr 8.60 million, discounted at 8.5%. The project will have a backward linkage effect on agriculture. The establishment of such plant will have a foreign exchange saving by substituting the import. Moreover, there is also a considerable export potential. II. PRODUCT DESCRIPTION AND APPLICATION Preservation of food stuffs has been conceived as an art of living ever since the dawn of human history. At present, various methods of preserving food can be cited, such as canning, refrigeration, drying, salt-pickling, sugar preservation and smoking. The scope of the study is the preservation of dried pea canning from the time it is delivered to the plant until it arrives at the wholesale customer. The protein concentration of peas range is from 15.5-39.7%, which can be consumed in either roasted, boiled or in any other forms. Dried pea canning is preferred than fresh pea canning, because of unstable high quality of packing of fresh pea. III. A. 1. MARKET STUDY AND PLANT CAPACITY MARKET STUDY Past Supply and Present Demand

8-4 The Country's requirement for pea has been met through domestic production and imports. Fresh and dried peas are the major types of exported peas. On the other hand, the imported item of peas is preserved or canned pea. Table 3.1 below indicates the quantity of fresh peas exported and the volume of canned peas imported during the past ten years. Table 3.1 FRESH PEAS EXPORTED AND CANNED PEAS IMPORTED Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 Average Exported Fresh Shelled or Unshelled Peas In Tones 46.3 41.5 90.2 127.7 42.2 645.6 508.9 676.6 292.5 274.6 Imported Canned (Preserved) Peas In Tonnes 0.4 19.7 6.7 41.6 15.7 17.7 434.3 5136.1 2622.8 921.7

Source: Customs Authority, External Trade Statistics, 1997-2005. As can be seen from Table 3.1, the country exports fresh peas to the foreign market at the same time imports processed peas from the international market. Both the volume of the export as well as that of the imports shows an increasing trend. The average size of exported peas during the first five years of the study period (1997-2001) was 70 tonnes. This figure has significantly grown to an average of 531 tonnes during the last four years of the study period (2002-2005). Similarly, the average magnitude of imported canned pea has grown from an average of 17 tonnes during the first five years of the study period to an average of 2,053 tonnes in the last four years. This clearly indicates that the demand for canned pea is rising significantly. This rising demand is supplemented by the availability of enough supply of non canned peas in the Country. Therefore, there is a favorable condition for the establishment of a pea canning

8-5 plant. As canned pea is mostly consumed by urban population, the demand for the product is influenced by rate of urbanization in particular and also by the rate of economic growth that has been successively registered by the country since the recent past. Accordingly, the demand for canned pea is estimated to increase at 6% per annum. Considering the average imported canned pea during the last two years as the import demand for the year 2006 and applying a growth rate of 6%, the present demand (2008) for canned pea is, thus, estimated at 4,359 tonnes. 2. Projected Demand

As stated above, the consumption of canned pea is associated with the rate of urbanization and the overall economic growth in the country. Considering all the influencing factors jointly, the future demand for canned peas is estimated to grow at 6% per year. Accordingly, the projected demand for the product is shown in Table 3.2.

8-6 Table 3.2 PROJECTED DEMAND FOR CANNED PEA (TONNES)

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3. Pricing and Distribution

Projected Demand 4,359 4,620 4,898 5,192 5,503 5,833 6,183 6,554 6,948 7,364 7,806 8,275 8,771

Imported canned pea is currently retailed at Birr 15 20 per kg. Assuming the envisaged plant will produce competitive product and allowing 45 per cent for wholesale and retail margin, the factory-gate price for the product of the envisaged plant is estimated at Birr 8.25 per kg. The envisaged plant can use the existing wholesale and retail network, which includes department stores, merchandise shops and supermarkets to distribute its product. B. 1. PLANT CAPACITY AND PRODUCTION PROGRAMME Plant Capacity

Based on the above data of demand projection, the annual plant production capacity is set at 6,500 tones.

8-7 2. Production Programme

The plant is envisaged to operate eight hours per day for 300 days in a year on a single shift basis. The plant will operate at 75% and 85% capacity in the first and second years, respectively reaching 100% capacity in the third year of operation. The service programme is shown in Table 3.3. Table 3.3 PRODUCTION PROGRAMME Year Capacity Utilization (%) Production (tones) IV. MATERIALS AND INPUT A. RAW MATERIALS 1 75 4,875 85 5,525 2 100 6,500 3

The major raw materials required for the envisaged plant are dried pea, empty can and salt. All of the raw materials and inputs required for manufacturing of pea canning are locally available. The major raw material pea grows in different regions of the country. The estimated annual raw and auxiliary materials cost at full capacity is about Birr 44.94 million. The list of raw materials requirement is presented in Table 4.1. Table 4.1 RAW MATERIAL REQUIREMENT AND COST

Sr. No. 1 2 3 4 Total

Material Dried Pea Empty Can Table Salt Packaging Material

Qty. (MT) 7,150 2,248 112 483

Unit Cost (Birr) LC FC 5,500 0.65/can 1000 8.5 -

Total Cost ('000 Birr) LC FC TC 39,325. 0 39,325.0 1461.2 1,461.2 48.0 48.0 4,105.5 44,940. 7 4,105.5 44,940.7

8-8 B. UTILITIES

The utility required for the plant is electricity, furnace fuel and water. The annual required amount of utilities along with cost is shown in Table 4.2. Table 4.2 UTILITY REQUIREMENT AND COST Sr. No. 1 2 3 Unit Cost (Birr) LC FC 0.4736 3.25 5.84 Total Cost (Birr) LC FC TC 269,739.88 269,739.88 65,000.0 65,000.0 2,628,000.0 2,628,000.0 2,962,739.88

Material Electricity Water Furnace Fuel Total

Qty. (MT)
569,550KWH

20,000m3 450,000liter

V. A. 1.

TECHNOLOGY AND ENGINEERING TECHNOLOGY Process Description

Peas are delivered from the field in trucks. The peas are fed in to an electrically driven conveyor system that washes, removes vines and leaves, removes ends and cuts the peas and sorts them by diameter. About ten percent of the water used in this process is lost to spray and splashes. One quarter of the mass of the peas is removed in this process and sent to a dairy as feed. Water packed in the canned peas is not chlorinated. Prior to filling, the peas are weighed. When there is a direct filling undergoing a salting process in order to preserve the freshness of the raw materials.

8-9 Before seaming, each can must be weighed in order to prevent shortage of weight. Then the blanching is performed (Blanching means rapidly heating peas to denatures the enzymes contribute to loss of color). It is performed using boiling of water or steam, either in rotating drums or in drench baskets. Then after testing of cans for leakage, cooling of cans inside the cooling tank, the material is ready for dispatch. The technological process has no any adverse environmental impact. 2. Sources of Technology

The machinery and equipment required can be obtained from the following company. 1. LAKASHMI INDUSTRIES 59/14, 4th Main Industrial Town Rajaji nagar, Bangalore-560044

2.NAZEER INDUSTRIES 59/513, Saravanapuram Rajiv Gandhi Road, chittoor INDIA B. 1. ENGINEERING Machinery and Equipment

The list of machinery and equipment is given in Table 5.1. The total machinery and equipment cost is estimated at Birr 2.8 million, of which Birr 622.20 is in local currency.

8-10 Table 5.1 MACHINERY AND EQUIPMENT REQUIREMENT AND COST Sr. No. 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Description Belt Conveyor for peas Nobbing and Cutting Washing Tank Salt Soaking Tank Empty Can Conveyor Packing Conveyor Table for Balance Tray Can Assembling Table Cooking Box (Steamer) Drainer Can Supplying Table Rotary Filler Vacuum Seamer Vacuum Pump Can Washer Chain hoist with Trolley Rail Clutch Door Type Horizontal retort Basket Cooler Jacketed Steam Kettle Stainless Tank Gear Pump Balance Seaming Micrometer Seaming Wire Gauge Seaming Scale Seam Band Saw Frame Seam Band Saw Vacuum Can Tester Hand Can Tester Saccharimeter Inspection Bar Thermometer Salinometer Boiler Sub Total Insurance, Custom duty, Inland transport, Bank Charge, etc Grand Total Qty. 1Set 1 4 4 2 1 2 400 1 1 2 2 2 2 2 1 1 5 50 3 2 1 20 2 2 2 2 10 2 2 2 2 15 2 1 LC 48.00 34.00 0.85 -. 1.10 83.95 538.21 622.16 Cost, 000 Birr FC TC 45.00 45.00 30.00 30.00 48.00 34.00 54.00 54.00 75.00 75.00 7.00 7.00 10.00 10.00 0.85 0.25 0.25 0.25 0.25 1.10 150.00 150.00 74.00 74.00 30.00 30.00 1.95 1.95 85.00 85.00 67.50 280.00 4.50 30.00 27.00 60.00 0.70 0.36 10.00 0.15 0.25 15.00 12.00 9.00 0.60 0.25 0.13 1,072.96 2,152.85 2152.85 67.50 280.00 4.50 30.00 27.00 60.00 0.70 0.36 10.00 0.15 0.25 15.00 12.00 9.00 0.60 0.25 0.13 1,072.96 2,236.80 538.21 2,775.01

8-11 2. Land, Building and Civil Works

The envisaged plant will require a total land area of 2,500m2 of which 1,000m2 will be covered by factory and office buildings, stores, etc. Out of the total built up area, 600m 2 will be occupied by production facility, 250m2 by stores for raw material and finished product and 150 m2 will be occupied by office building. The total cost of building and civil works at a rate of about Birr 2300 per m2 will be Birr 2.3 million. According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis, however, the time and condition of applying the proclamation shall be determined by the concerned regional or city government depending on the level of development. The legislation has also set the maximum on lease period and the payment of lease prices. The lease period ranges from 99 years for education, cultural research health, sport, NGO , religious and residential area to 80 years for industry and 70 years for trade while the lease payment period ranges from 10 years to 60 years based on the towns grade and type of investment. Moreover, advance payment of lease based on the type of investment ranges from 5% to 10%.The lease price is payable after the grace period annually. For those that pay the entire amount of the lease will receive 0.5% discount from the total lease value and those that pay in installments will be charged interest based on the prevailing interest rate of banks. Moreover, based on the type of investment, two to seven years grace period shall also be provided. However, the Federal Legislation on the Lease Holding of Urban Land apart from setting the maximum has conferred on regional and city governments the power to issue regulations on the exact terms based on the development level of each region.

8-12 In Addis Ababa the Citys Land Administration and Development Authority is directly responsible in dealing with matters concerning land. However, regarding the manufacturing sector, industrial zone preparation is one of the strategic intervention measures adopted by the City Administration for the promotion of the sector and all manufacturing projects are assumed to be located in the developed industrial zones. Regarding land allocation of industrial zones if the land requirement of the project is blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone Development and Coordination Committee of the Citys Investment Authority. However, if the land request is above 5,000 m2 the request is evaluated by the Citys Investment Authority and passed with recommendation to the Land Development and Administration Authority for decision, while the lease price is the same for both cases. The land lease price in the industrial zones varies from one place to the other. For example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr 341/ m2 in Lebu and recently the citys Investment Agency has proposed a lease price of Birr 346 per m2 for all industrial zones. Accordingly, in order to estimate the land lease cost of the project profiles it is assumed that all manufacturing projects will be located in the industrial zones. Therefore, for the this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is adopted. On the other hand, some of the investment incentives arranged by the Addis Ababa City Administration on lease payment for industrial projects are granting longer grace period and extending the lease payment period. The criterions are creation of job opportunity, foreign exchange saving, investment capital and land utilization tendency etc. Accordingly, Table 5.2 shows incentives for lease payment.

8-13 Table 5.2 INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS Payment Completion Period 30 Years 28 Years 25 Years Down Paymen t 10% 10% 10%

Scored point Above 75% From 50 - 75% From 25 - 49%

Grace period 5 Years 5 Years 4 Years

For the purpose of this project profile the average i.e. five years grace period, 28 years payment completion period and 10% down payment is used. The period of lease for industry is 60 years. Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m2, is estimated at Birr 51.90 million of which 10% or Birr 5,190,000 will be paid in advance. The remaining Birr 46.71 million will be paid in equal installments with in 28 years i.e. Birr 1,668,214 annually. VI. A. MANPOWER & TRAINING REQUIREMENT MANPOWER REQUIREMENT

The plant will require 104 workers. The annual labor cost is estimated at Birr 921,600. The detail breakdown of manpower requirement and annual salary expense is shown in Table 6.1.

8-14 Table 6.1 MANPOWER REQUIREMENT AND LABOUR COST Sr. No. 1 2 3 4 5 6 7 8 9 10 11 Material Plant Manager Secretary Finance/Administration Senior Clerical Worker Assistant Clerical Worker General Service Technical and Production Head Food Technologist General Mechanic Operators Driver Sub Total Employee's Benefits ( 20% of Basic salary) Grand Total B. TRAINING REQUIREMENT No. Required 1 1 1 1 2 1 1 1 3 90 2 104 Salary (Birr) Monthly Annual 3000 36,000 900 10,800 2000 24,000 700 8,400 550 13,200 350 4,200 2,200 26,400 1,800 21,600 800 28,800 550 594,000 300 7,200 774,600 154,920 104 929,520

It is suggested to train technical and production head as well as three general mechanics for a period of one month. The training will be given by the machinery supplier in the country of the supplier. The cost of the training is estimated at Birr 288,000.

8-15 VII. FINANCIAL ANALYSIS

The financial analysis of the pea canning project is based on the data presented in the previous chapters and the following assumptions:Construction period Source of finance Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Work in progress Finished products Cash in hand Accounts payable Repair and maintenance 1 year 30 % equity 70 % loan 3 years 8.5% 8.5% 30 days 30 days 1 days 10 days 5 days 30 days 5% of machinery cost

A.

TOTAL INITIAL INVESTMENT COST Birr

The total investment cost of the project including working capital is estimated at 18.58 million, of which 12 per cent will be required in foreign currency. The major breakdown of the total initial investment cost is shown in Table 7.1.

8-16 Table 7.1 INITIAL INVESTMENT COST ( 000 Birr) Sr. Cost Items Local Cost 5,190.00 1,150.00 622.16 125.00 450.00 985.19 7,904.93 16,427.2 8 Foreign Cost 2,152.8 5 2,152.8 5 Total Cost 5,190.00 1,150.00 2,775.01 125.00 450.00 985.19 7,904.93 18,580.13

No. 1 Land lease value 2 3 4 5 6 7 Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment cost

N.B

Pre-production expenditure includes interest during construction ( 597.19 288 thousand ) and Birr 100 thousand costs of

thousand , training (Birr expenses, etc.

registration, licensing and formation of the company including legal fees, commissioning

B.

PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 49.96 million (see Table 7.2). The raw material cost accounts for 89.95 per cent of the production cost. The other major components of the production cost are cost of utility and depreciation which account for 5.93 % and 1.03 % respectively. The remaining 3.09 % is the share of repair and maintenance, direct labour and other administration cost.

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Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR) Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Labour overheads Administration Costs Land lease cost Total Operating Costs Depreciation Cost of Finance Total Production Cost 49,962.54 100

Cost 44,940.00 2,962.74 138.75 464.76 154.92 309.84 48,971.01 515.10 476.43

% 89.95 5.93 0.28 0.93 0.31 0.62 98.02 1.03 0.95

C. 1.

FINANCIAL EVALUATION Profitability

Based on the projected profit and loss statement, the project will generate a profit through out its operation life. Annual net profit after tax will grow from Birr 2.3 million to Birr 3.5 million during the life of the project. Moreover, at the end of the project life the accumulated cash flow amounts to Birr 33.69 million. 2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick for evaluating the financial position of a firm. It is also an indicator for the strength and weakness of the firm or a project. Using the year-end balance sheet figures and other

8-18 relevant data, the most important ratios such as return on sales which is computed by dividing net income by revenue, return on assets ( operating income divided by assets), return on equity ( net profit divided by equity) and return on total investment ( net profit plus interest divided by total investment) has been carried out over the period of the project life and all the results are found to be satisfactory. 3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues. It indicates the level at which costs and revenue are in equilibrium. To this end, the break-even point of the project including cost of finance when it starts to operate at full capacity ( year 3) is estimated by using income statement projection. BE = Fixed Cost Sales Variable Cost 4. Payback Period = 25 %

The pay back period, also called pay off period is defined as the period required to recover the original investment outlay through the accumulated net cash flows earned by the project. Accordingly, based on the projected cash flow it is estimated that the projects initial investment will be fully recovered within 7 years. 5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that can be earned on the invested capital, i.e., the yield on the investment. Put another way, the internal rate of return for an investment is the discount rate that makes the net present value of the investment's income stream total to zero. It is an indicator of the efficiency or quality of an investment. A project is a good investment proposition if its IRR is greater

8-19 than the rate of return that could be earned by alternate investments or putting the money in a bank account. Accordingly, the IRR of this porject is computed to be 17.01 % indicating the vaiability of the project. 6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time series of cash flows. NPV aggregates cash flows that occur during different periods of time during the life of a project in to a common measuring unit i.e. present value. It is a standard method for using the time value of money to appraise long-term projects. NPV is an indicator of how much value an investment or project adds to the capital invested. In principal a project is accepted if the NPV is non-negative. Accordingly, the net present value of the project at 8.5% discount rate is found to be Birr 8.60 million which is acceptable. D. ECONOMIC BENEFITS In addition to supply of the

The project can create employment for 104 persons.

domestic needs, the project will generate Birr 5.94 million in terms of tax revenue. The establishment of such factory will have a foreign exchange saving effect to the country by substituting the current imports. The project will create a back ward linkage effect with the agricultural sector. .