Investment opportunities for creating new sources of livelihoods in communities affected by Tsunami in Nagapattinam, India1 A feasibility study of three options

Bellarmine K.C.

Kochi/Nagapattinam, INDIA

August 2006

1 This document is not an ESCAP publication. The views expressed in it are the sole responsibility of the author. This document has not been edited

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INVESTMENT OPPORTUNITIES FOR CREATING NEW SOURCES OF LIVELIHOODS IN

COMMUNITIES AFFECTED BY TSUNAMI

TABLE OF CONTENTS

PART - I

1. Executive Summary………………………………………………………………………………… 3

PART - II

1. Introduction…………………………………………………………………………………………….. 6

2. Feasibility study on Knitted Garment Unit………………………………………………10

3. Feasibility study on Jatropha Cultivation………………………………………………..17

4. Feasibility study on Hygienically Dried Fish Unit…………………………………….29

5. Conclusion………………………………………………………………………………………………..35

PART – III List of Annexures

1. Annexure 1 a: Garmenting Unit : Cost of Project 2. Annexure 1 b : Garmenting Unit : Projected Profitability 3. Annexure 1 c : Garmenting Unit : Projected Cash Flows 4. Annexure 1 d : Garmenting Unit : Projected Balance Sheets 5. Annexure 2 a : Bio diesel – Jatropha Cultivation : Cost of Project 6. Annexure 2 b : Bio diesel – Jatropha Cultivation : Projected Profitability 7. Annexure 2 c : Bio diesel – Jatropha Cultivation : Projected Cash Flows 8. Annexure 2 d : Bio diesel – Jatropha Cultivation : Projected Balance Sheets 9. Annexure 3 a : Hygienically Dried-Fish Unit : Cost of Project 10. Annexure 3 b : Hygienically Dried-Fish Unit (Model 1 Single Unit): Projected Profitability 11. Annexure 3 c : Hygienically Dried-Fish Unit (Model 1 Single Unit): Projected Cash Flows 12. Annexure 3 d : Hygienically Dried-Fish Unit (Model 1 Single Unit): Projected Balance Sheets 13. Annexure 3 e : Hygienically Dried-Fish Unit (Model 1 Double Unit): Projected Profitability 14. Annexure 3 f : Hygienically Dried-Fish Unit (Model 1 Double Unit): Projected Cash Flows 15. Annexure 3 g : Hygienically Dried-Fish Unit (Model 1 Double Unit): Projected Balance Sheets 16. Annexure 3 h : Hygienically Dried-Fish Unit (Model 2): Projected Profitability 17. Annexure 3 i : Hygienically Dried-Fish Unit (Model 2): Projected Cash Flows 18. Annexure 3 j : Hygienically Dried-Fish Unit (Model 2): Projected Balance Sheets

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1. EXECUTIVE SUMMARY

Nagapattinam was severely affected by the 2004 tsunami with over 6000 deaths coupled with damages and losses estimated at over Rs.25 billion. Post rehabilitation efforts have since seen restoration of most of the damaged property. However, restoration of livelihoods primarily focused on employment generation through cash for work programs and other small-scale activities that lacked the dynamism to generate sustainable long-term income generation. Predominantly fishing dominated areas like Nagapattinam have also seen the rehabilitation efforts actually increasing the fishing craft and gear deployment in the area, increasing the threat of over fishing in the near future. With a view to minimize future economic disruption risks by diversifying the livelihood patterns, three investment alternatives that have the potential to attract private investment and capable of generating gainful employment to the community members have been identified and their feasibilities studied. As a matter of abundant precaution, the assumptions of profitability have been based on conservative estimates giving the investment ideas relatively lower downsides provided the enterprise is able to deliver the basic operational parameters. The three investment options examined are as follows: 1. Knitted Garmenting Unit: India is expected to be one of the biggest beneficiaries of the post quota regime and garment exports which have been growing at around 10% in the past has shown double growth rates post 2005 and the growth rate is expected to continue at least in the medium term. Tiruppur the main knitted garment-exporting centre in India is currently facing a shortage of trained work force and manufacturers are exploring alternate locations for setting up garmenting units especially for the manufacture of low end and simple items such as vests, briefs, basic T shirts, etc. One of the positive fallouts of the rehabilitation efforts in Nagapattinam has been the development of a pool of women talent trained in tailoring. The proposed knitted garmenting unit would utilize this trained talent pool for undertaking Cutting, Making and Trimming (CMT) jobs on per piece basis for the manufacture of basic knitted garments. The unit envisaging an investment of Rs.5.5 million with a capacity of 28 seats will produce 0.50 million basic T-shirts per annum. It would provide direct employment to 40 people of which at least 34 can be women. The unit will generate a turnover of Rs.4.50 million, an EBIDTA of 1.48 million and pre tax profits of Rs.0.95 million per annum. The return on capital employed (ROCE) in the normal year of operation works out to 17%. The IRR for the project works out to 21% (against a cost of capital of 15%) indicating reasonable strength. Given the social obligations this initiative is attempting to address, it would be prudent to presume that patronage in the form of preferential orders, if not initiatives to co-promote the venture, could be forthcoming from some large players in the industry. Moreover, as the deliverables are easily quantifiable and given that the products targeted are generic items that have more flexible delivery deadlines, as long as the unit can produce the desired quality, there is no significant risk that the garment manufacturer needs to share. While the key

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challenge would be to develop the talent available at Nagapattinam to deliver minimum acceptable levels, it would be quite a worthwhile effort and experiment, as there is a huge upside to the whole endeavor. Jatropha Cultivation: India ranks sixth in the world in terms of energy demand accounting for 3.5% of world commercial energy in 2001. Currently India imports almost two thirds of its requirement of petroleum products and with the firming up of crude prices, this has had a significant impact on the country’s economy. India is also fast emerging as a significant contributor to the world’s carbon emissions and as a signatory to the Kyoto protocol, is looking at various alternative non-conventional and cleaner energy resources such as solar, wind, bio fuels, etc. Of the various non-conventional energy sources being pursued, bio fuels – more particularly bio diesel - has been identified as having the most potential as far as India is concerned. Bio diesel is an eco-friendly, renewable alternative to petroleum diesel prepared from vegetable oils. It is produced by a relatively simple process of trans-esterification of vegetable oils. It is non-toxic, biodegradable and produces significantly less serious air pollutants when burnt as an engine fuel. The Government of India (GoI) has projected a requirement of about 13.38 million tones of bio diesel by 2011-2012. Among the raw materials used for bio diesel production, Jatropha have been given focus by the GoI due to its weighted advantages over other sources/species and has drawn up long term plans of Jatropha cultivation over an ambitious 11.19 million ha by 2012. Nagapattinam offers immense scope for the cultivation of Jatropha which has been identified as the second alternative investment option. Currently over 5000 ha of land is available in the area that can be brought under Jatropha cultivation. The agro climatic conditions prevailing in the area are conducive for Jatropha cultivation on a commercial scale. The investment proposal encompasses undertaking Jatropha cultivation on a pilot scale over a 100 ha area. Envisaging an investment of Rs.2.5 million, the project would provide 100 plantation jobs and 30 maintenance jobs. It will produce 200 tons of jatropha seeds per annum that is equivalent to 65 tons of bio diesel per annum, an income of Rs.1.20 million per annum and net profit of Rs.0.59 million per annum. An IRR of 22% (against a cost of capital of 14%) indicates inherent viability of the project. The ROCE in the normal year works out to 25%. The project provides potential for private sector participation by way of buying back the produce as well as to provide extension services including identification of land and suggestion of appropriate cultivation practices. Being agro based this initiative is likely to be more adaptable for the community than other industrial options and the perennial nature of Jatropha would ensure a minimum regular sustenance income to the fishing community that is used to vast fluctuations in their income streams. HYGENICALLY-DRIED FISH PRODUCTION UNITS: Commercial fishing though target/species specific, bring in large quantities of unintended, low value/low quality fishes. Mainly due to lack of adequate and appropriate post harvest solutions, these bountiful catches often do not fetch

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commensurate returns. Nagapattinam being one of the prominent fish landing centers of Tamil Nadu, lands significant quantities of various commercially important varieties including anchovies, lesser sardines, white fish, sharks, skates and rays, ribbon fishes, prawns, etc. One of the traditional and cost effective preservation methods being employed by fisherfolk all along the Indian coast is salting and sun drying. Unfortunately, because of the delay in processing and the crude methods (drying in the open) employed, the quality of the product is low due to the presence of dust and sand, bacterial contamination due to uncontrolled humidity levels during drying, etc. This has resulted in very poor local, as well as outside market for these products. However, of late small quantities of quality fish, dried in hygienic conditions without salt, have been gaining acceptance in the markets. This appears to have a promising potential if the efforts are coupled with some coordinated raw material procurement and marketing efforts. Recently, the Central Institute of Fisheries Technology (CIFT) has successfully developed an energy efficient solar drier (with auto backup with LPG heating during periods of low sunlight). The model that has been brought out has a normal capacity of drying 1 tons of fish per day (in 8 hours). The third investment alternative envisages setting up a hygienically dried-fish production unit. Two operational models have been examined – one wherein the unit functions as a service provider where the fisherfolk can bring in their catches and gets the same hygienically dried by paying a user fee. This is ideal if the fisherfolk cooperatives can undertake the consolidation efforts and arranges for marketing of the dried fish. Under the second model the unit would buy raw fish at market rates, carry out the drying process and then sell the same under an arrangement with a private participant, either for export or for sale in the domestic market. Estimated to cost Rs.5.5 million for model 1 and Rs.6.0 million for model 2, the unit would process 450 tons of various types of raw fish delivering around 112.5 tons of hygienically dried fish. Since the model 2 envisages buying the raw material and subsequent processing and marketing, it is the preferred model and would earn a total income of Rs.12.60 million, EBIDTA of Rs.1.79 million and pre tax profits of Rs.1.42 million. The IRR for the model 2 works out to 22% indicating adequate project strength. Under the model 2 the private participant will have the scope to facilitate developing a good market for the product. As an expansion phase, the community could attempt the model 1 subsequently at various locations.

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Chapter 1

INTRODUCTION

Nagapattinam, a coastal district of the state of Tamil Nadu in India was one of the worst affected by the 2004 tsunami. Over 6000 people died, around 800 reported missing and over 196,000 were rendered homeless. The damages and losses were estimated at over Rs.25 billion. Rescue and rehabilitation efforts led by the Central and State Governments with support from NGO’s, UN agencies, Corporates and the civil society have been quite successful with most of the damaged property having been now reinstated. However, programs to restore livelihoods have largely focused on replacing lost or damaged assets, employment generation through cash for work programs/reconstruction, focus on cottage/small-scale activities, etc. These efforts, primarily by virtue of their ad hoc nature, lack the dynamism to generate sustainable long-term income generation. Moreover, places like Nagapattinam that are predominantly fishing dominated areas, have seen the rehabilitation efforts actually increasing the fishing craft and gear deployment in the area, increasing the threat of over fishing in the near future. It has become imperative that communities diversify their livelihood patterns to minimize the future risk, particularly economic disruption. The project “Building Community Resilience to Natural Disasters Through Partnerships”, implemented by ESCAP aims to identify self-sustaining alternatives that inter alia have the potential to attract private investment and are capable of generating gainful employment to the community members, especially the poor. Attempts will be made to ensure that the alternatives are, to the extent possible, complementary to the current activities of the communities and are in line with the overall developmental programs in the region. Against the above background, this study had examined in detail several opportunities and have short listed three feasible options. 1.1. OVERVIEW of NAGAPATTINAM The district of Nagapattinam lies on the shores of the Bay of Bengal (between Northern Latitude 10.7906 degrees and Eastern Longitude 79.8428 Degrees). Nagapattinam, an old Port Town that probably derived its name from Naval Pattanam (Pattanam = town), as a district, was carved out by bifurcating the composite Thanjavur district in 1991 and has traditionally been referred to as East Thanjavur. Also known as the paddy granary of South India, with paddy cultivation in over 150,000 hectares harvesting 3 times a year, the area has numerous places of historical importance. The total geographical area of the district is 3536 sq.km. Cropped area accounts for about 65.53% of the total area. Forest cover is very minimum accounting for only about 1.31% of the land. Lands not available for cultivation (including barren/uncultivable land and land put into non-agricultural uses) account for 22.83%. The other uncultivated lands, including permanent

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pastures/other gazing lands, miscellaneous tree crops/groves and cultivable waste land account for 5.35%. As many as 11 ports and a number of fish landing centers dot the coastline of 188 km. The district has a total population of around 1.5 million comprising 330,000 in the urban areas and 1.2 million people in the rural areas. 1.2. THE ESCAP INITIATIVE The broad objective of the project is to build capacities of Governments to mitigate the impact of natural disasters through community based initiatives that have the dynamism to generate long term and self sustainable livelihood patterns by attracting private sector participation into those initiatives.

1.3. INVESTMENT ALTERNATIVES After careful evaluation of a variety of options, three different investment opportunities that would best serve the project objectives have been identified. The identified options have diverse backgrounds – one is a purely industrial activity, the second is agro-industry related and the third is fishery based. Option 1. Knitted Garmenting Unit Option 2. Bio diesel : Jatropha cultivation Option 3. Hygienically Dried-Fish Production Unit

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Chapter 2

FEASIBILITY STUDY ON KNITTED GARMENTING UNIT The global garment industry is currently going through an era of institutional changes. Consequent to dismantling of quota restrictions in 2005 under the WTO and establishment of Agreement on Textiles and Clothing (ATC), the USD 50 billion Indian textile industry, especially its export segment, is poised for exponential growth. Given its strong presence across the entire value chain in the global textile market, India is expected to be one of the biggest beneficiaries of the ATC. Low cotton costs, cheap and efficient labour, reputed designing skills, flexibility and excellent turnarounds have been some of the key factors that have benefited India. Garment exports from India presently account for around USD 7 billion and have been growing at over 10% since 2002. The growth rate has more than doubled post 2005 and is expected to be sustained at least in the medium term. Conventionally the garment sector has been viewed as a major source for employment generation, especially non-agrarian employment, in the rural areas. Unlike other traditional industries, this sector is seen to have more potential to generate employment opportunities for the rural women, given its semi skilled nature. Low capital costs, relatively low technology, moderate skills, poor entry barriers, etc. have facilitated the garment manufacturers to outsource their labour intensive operations to weaker economies quite successfully. Contract manufacturing of garments perhaps started with the US taking advantage of the low wage cost in Japan in the 1950’s. Subsequently it moved to other countries such as Hong Kong, South Korea, Taiwan, and then to China, Thailand, India, Bangladesh, Sri Lanka, etc. Knitted garments have played a major role in India’s garment exports and Tiruppur has contributed significantly. Exports from Tiruppur, which commenced in the early 1980’s, have grown rapidly to the current level of around Rs.70 billion. This is despite the industry being largely unorganized - some estimates indicating the level of organized investments at less than 25%. However, things started to change as Tiruppur started preparations to capitalize on the wider opportunities in the ATC era, post 2005. Setting up of apparel parks, common effluent treatment plants and other infrastructure facilities have been some of the initial attempts in this regard. Several of the large players in Tiruppur have already transformed their enterprises from family run businesses to true professional corporates. This distinct change in the attitude would catalyze more institutional investments including both equity and debt. One of the major challenges Tiruppur is currently facing is a severe shortage of trained labour. While manufacturers of high end products – fashion garments, labeled garments and to some extent merchandised items - have been able to retain the available trained talent, manufacturers of generic and low value items are experiencing high turnaround rates as well as an acute shortage of labour. Manufacturers are inter alia exploring alternate locations that are away from Tiruppur for setting up garmenting units especially for the manufacture of low end and simple items such as vests, briefs, basic T shirts, etc. that do not require constant support and coordination from the various ancillary units located in and around Tiruppur.

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An outstanding achievement of the post tsunami rehabilitation efforts carried out by the various NGO’s at Nagapattinam has been the establishment of a pool of talent trained in tailoring. Initial rough estimates indicate that presently there are close to 600 trained and currently unemployed women in Nagapattinam making it an ideal location to set up a small garmenting and finishing unit. 2.1. Feasibility Study of the Proposed Garmenting Unit The proposed garmenting unit would undertake CMT (cutting, making and trimming) jobs on per piece rate basis mainly for the domestic market. The unit, to start with, will cater only to the low end large volume products such as basic T shirts, vests and briefs, etc. The unit will also have facilities to finish the product as retail packs depending on the client’s requirements so that the output can be directly sent to the final markets. Attempts would be made to get patronage from one or two large players in the industry such as VIP, Dixy, etc., if not as the private partner for this proposal at least as an outsourcing partner by way of a long term standing order on a first right of refusal basis. 2.2. Project Highlights : Industry : Textiles/Garments Cost : Rs.5.5 million Capacities

• No. of seats : 28 • Output (npa) : 0.50 million pieces of basic T shirts

Employment generation : Direct : 35 IRR : 21.46% BEP Cash : 34.43% Operating : 46.33% DSCR (average) : 2.83 times ROCE : 17.33% in the normal year of operations 2.3. Cost of Project The break up of the cost of project of Rs.5.5 million is given below. More details are given in Annexure 1. (‘000 Rupees)

Land incl. leveling, fencing, etc. 300 Buildings and civil works 1,200 Sewing machines and other implements 2,240 Misc. fixed assets 1,000 Preoperative/training expenses 400 Contingencies 260 TOTAL CAPITAL COST 5,400 Margin money for working capital 100 TOTAL PROJECT COST 5,500

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2.3.1. Land: An amount of Rs.0.25 million has been allocated towards cost of land for an extent of 25 cents (0.25 acre = approximately 1012 sq.m.) at the currently prevailing rate of Rs.1 million per acre. A lump sum provision of Rs.50,000 has been provided towards leveling and fencing. 2.3.2. Buildings: An aggregate of 250 sq.m. of buildings would be required for the unit comprising a main shed of 200 sq.m. and an ancillary shed of area 50 sq.m. Based on the current construction costs including architect’s fees, a provision of Rs.1.2 million has been provided. 2.3.3. Machines: Sewing machine mix provided in the cost of project has been balanced for the production of basic T-shirts. Accordingly, provisions have been made for 8 Flatlock machines, 16 Interlock machines and 4 Single lock machines. The cost of Flatlock, Interlock and Singlelock machines have been assumed at the current rates of Rs.55,000, Rs.27,000 and Rs.18,000 respectively. Provision of Rs.0.84 million has been made towards cost of other accessories including for cutting, pressing and finishing jobs. In case the unit needs to get equipped for under garments such as vests and briefs, the machine mix will comprise Outer and Inner elastic attaching machines, Single needle, Flat lock and Over lock machines, etc. which could also be acquired without a significant change in the cost. 2.3.4. Miscellaneous Fixed Assets: Comprises electrical installations, office and communication equipment and other utilities towards which a provision of Rs.1 million has been provided for in the cost of project. 2.3.5. Preoperative Expenses: Includes establishment expenses (Rs.0.1 million), training costs (Rs.0.2 million) and capitalised interest (Rs.0.1 million). 2.3.6. Contingency Provision: has been made at 5%. 2.3.7. Margin money for working capital: Even though the unit is intended to undertake only job works, a provision of Rs.0.1 million towards essential consumables, mainly as a backup, has been provided in the cost of the project. 2.4. Means of Financing The above cost of project is proposed to be financed as follows : Equity from the community/Government : Rs.1.925 million Equity from the corporate : Rs.1.925 million Term Loan : Rs.1.650 million

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The above means of financing would result in a leverage of 0.43. 2.5. Expected implementation schedule: The identification and acquisition formalities of the land are expected to be completed by December 2006. Construction of buildings would take approximately 3 months and after the acquisition and installation of the machines, the unit is expected to be ready for production by May 2007. After 1 months’ of training, the commercial scale operations are expected to commence from June 1, 2007. 2.6. Private Partnership: The scope of collaboration for the private sector will encompass the three key aspects of the project viz. finance (as a funding agency), technical inputs (as an operator) and marketing (as a buyer). Since the three aspects are involved, the project may need to collaborate with more than one private partner. The role of the government may be in the form of allotment of land (in lieu of which the company may allot equity shares), exemption/concessions in sales tax/other levies, other grants or viability funding to augment the overall viability of the project, etc. The community participation will be in the form of equity contribution that would be raised from UNESCAP. 2.7. Projected profitability: The main assumptions of profitability are given below: 1. No of seats : 28 2. Normal year of operations : from the 2nd year onwards 3. Productivity per seat per 8 hr shift : 71 pieces

(based on 1500 pieces per 12 hr shift from a 14 seater standard unit)

4. Capacity utilization : 76% (100% capacity utilization would indicate output levels currently prevailing at Tiruppur) 5. CMT (incl. packing) rate per piece : Rs.9 6. Labour cost : Rs.150 per operator per shift 7. Salaries : 1 Manager, 3 Supervisors,

2 watchmen, 1 Electrician and 2 Helpers

7. Consumables : Rs.0.5 per piece 8. Power cost : 9 kVA per seat per hour @ Rs.4 per kWh 9. Interest on term loans : 12% p.a. 10.Depreciation : SLM 11.Corporate Tax : At current rates of 33.6% incl. surcharges and cess.

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The efficiency in terms of output has been conservatively estimated considering the challenges involved. The normal output from a 28 seater unit in Tiruppur is 3000 npd for a 12 hour shift. Adjusting the latter for an 8 hour shift, (Nagapattinam will have an 8 hour shift to start with) the average productivity works out to 2000 npd. Against this an output of 0.50 million pieces per annum (1515 npd or around 75% productivity) is conservatively assumed. Since packing is also included, the project could comfortably expect to earn a per piece rate of around Rs.10 to Rs.12; however the same has been assumed on a conservative basis at Rs.9 per piece. The EBIDAT margins currently prevailing in the market for CMT jobs is between 35% and 40% whereas this project has assumed only 33%. The IRR (with life of the project assumed at 15 years) works out to 21% indicating reasonable project strength. This also compares favorably with the cost of capital of 15%. The break even points at 46% (operating) and 34% (cash) indicate comfortable operating parameters. More details on the projected profitability are included in Annexure 1b. The projected cash flow statement and the projected balance sheets are included as Annexure 1c and 1d respectively.

Year Ending December 31, 2008 (normal year)

(Rs million)

No of seats 28 Productivity (No of pieces per seat per shift) 71 No of days in operation per annum 330 Total Output (million no. of pieces) 0.50 Total Income 4.50 Salaries and Wages 1.58 Consumables 0.25 Power and fuel 0.33 Admin. & Misc. expenses 0.85 Total Expenses 3.02 EBIDTA 1.48 Interest on Loans 0.21 Profit Before Tax 0.91 Tax 0.08 Profit After Tax 0.83 Net Cash Accruals 1.19 EBIDTA / Total Income 32.92% PAT / Total Income 18.37% Return On Capital Employed (ROCE) 17.33% BEP – Operating 46.33% BEP – Cash 34.43% Cost of capital (with equity @ 18%) 14.99% Average DSCR 2.83 times IRR 21.46%

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2.8. SELLING ARRANGEMENTS: The unit proposes to undertake CMT jobs on a piece rate basis, which is the normal practice in the industry. The raw materials including grey/dyed fabrics, threads, labels, etc. would be delivered to the unit alongwith deliverables and time lines. To optimise on logistics, the unit will, in addition to CMT, also undertake finishing and packing as per client specifications. The finished product would be offered FOR, Nagapattinam. 2.9. SWOT Analysis: Strengths • Extensive employment generation

potential • Substantial spill over effects • Modular expansion of capacities

feasible • Benefits even the poorest of the

poor • Most suited for women folk; men

could continue with their existing activities

• Capable of attracting a range of investment options to suit the private sector participant

Opportunities • Potential to develop the area into an

EOU hub • Scope for developing allied

backward industries such as dyeing, processing, etc.

• High scale up potential

Weakness • Ability of the local talent to deliver

acceptable levels of output/efficiency

Threats • Uncontrolled development,

especially of the ancillary and back end processing activities, could lead to pollution issues

2.10. CONCLUSION: Tiruppur, backbone of the Indian knitted garment industry, is going through a severe manpower crisis. The latter could not have come at a more inappropriate time and entrepreneurs are looking at various alternatives to meet this challenge. Nagapattinam on the other hand is sitting on a pool of trained unutilized work force and it would seem quite appropriate to synergize these opportunities. As mentioned earlier the garment industry is known for its resilience to adopt and absorb agrarian and women talent successfully. Besides bringing in regular income into the rural household, this initiative would empower the fisherwomen of the area by making them economically independent. Given the social obligations this initiative is attempting to address, it would be prudent to presume that patronage in the form of preferential orders, if not initiatives to co-promote the venture, could be forthcoming from some large players in the industry. Moreover, as the deliverables are easily quantifiable and given that the products targeted are generic items that have more flexible

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delivery deadlines, as long as the unit can produce the desired quality, there is no significant risk that the garment manufacturer would need to share. While the key challenge would be to develop the talent available at Nagapattinam to deliver minimum acceptable levels, it would be quite a worthwhile effort and experiment, as there is a huge upside to the whole endeavor.

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Chapter 3

FEASIBILITY STUDY ON BIO DIESEL – Jatropha cultivation Global demand for fossil fuel is currently rising at more than 2% a year. In the past 3 decades, energy use has increased by about 30% in Latin America, 40% in Africa and 50% in Asia. Energy demand worldwide is expected to rise by 50-60% over the next 20 years. India ranks sixth in the world in terms of energy demand accounting for 3.5% of world commercial energy in 2001. The demand for petroleum diesel is projected to grow at 5.6% per annum from 39.81 million metric tons in 2001-02 to 52.32 million metric tons in 2006-07. Currently India imports almost two thirds of its requirement of petroleum products. It has been estimated that crude oil imports would go up to around 147 million metric tons (MMT) per annum by the end of 2006-07. With the current firming up of crude prices, this has had a significant impact on the country’s economy. In line with the increasing use of fossil fuels, especially by the ever-rising vehicle population, vehicular pollution is estimated to have increased eight times over the last two decades contributing to about 70% of the total air pollution. India is ranked 5th in the world behind the US, China, Russia and Japan in contribution to world’s carbon emissions and is expected to increase in the coming years due to rapid increase in urbanization. As a signatory to the Kyoto protocol, India is also looking at various alternative non-conventional energy resources such as solar, wind, bio fuels, etc. These alternatives besides providing another energy resource would also enable the country to meet its emission obligations as well as profitably trade through accruals of carbon credits – India has set an ambitious target of earning Euro 2.5 billion through carbon trading in the medium term. Of the various non-conventional energy sources being pursued, bio fuels – more particularly bio diesel - has been identified as having the most potential as far as India is concerned. 3.1. What is Bio diesel? Bio diesel is an eco-friendly, renewable alternative to petroleum diesel prepared from vegetable oils - mainly non-edible vegetable oil. It is non-toxic, biodegradable and produces significantly less serious air pollutants such as particulates, carbon monoxide, hydrocarbons and other air toxics when burnt as an engine fuel. Blends of 20% bio diesel with 80% petroleum diesel (commonly referred to as B20) can generally be used in unmodified diesel engines. It can also be used in its pure form (B100), with minimal engine modifications. 3.2. Bio diesel as fuel: Bio diesel has been registered as a fuel and fuel additive with the Environmental Protection Agency (EPA) and meets the clean fuel standards established by several agencies. Neat (100 percent – B100) bio diesel has been designated as an alternative fuel by the Department of Energy of the United States and the US Department of Transportation. It is the only alternative fuel to have fully completed satisfactorily the health effects requirements of the Clean Air Act. The National Bio diesel Board of the United States has estimated a sales volume of 75 million gallons for the year 2005.

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3.3. Bio diesel is eco friendly: Bio diesel is the first and only alternative fuel to have a complete evaluation of emission results and potential health effects submitted to the U.S. Environmental Protection Agency (EPA) under the Clean Air Act. These programs include the most stringent emissions testing protocols ever required by EPA for certification of fuels or fuel additives. The use of bio diesel in compression engines decreases the emission of solid carbon fraction of particulate matter (since the oxygen in bio diesel enables more complete combustion to CO2) and reduces the sulfate fraction (bio diesel contains less than 15 ppm sulfur), while the soluble or hydrocarbon fraction stays the same. Therefore, bio diesel works well with emission control technologies such as diesel oxidation catalysts (which reduce the soluble fraction of diesel particulate but not the solid carbon fraction). Of the major exhaust pollutants, both unburnt hydrocarbons and nitrogen oxides are ozone or smog forming precursors. The use of bio diesel results in a substantial reduction of unburned hydrocarbons. Emissions of nitrogen oxides are either slightly reduced or slightly increased depending on the duty cycle of the engine. Consequently the overall ozone forming potential of the hydrocarbon emissions from bio diesel is nearly 50 percent less than that measured for petroleum diesel. The exhaust emissions of carbon monoxide (a poisonous gas) from bio diesel are also on average 48 percent lower than those from diesel. Bio diesel emissions also show significantly decreased levels of polycyclic aromatic hydrocarbons and nitrated polycyclic aromatic hydrocarbons, which are considered to be the most potential cancer causing compounds. 3.4. Properties of Bio Diesel The properties of bio diesel are very similar to that of conventional diesel and are given below.

Specific gravity 0.87 to 0.89 Kinematic viscosity @ 40°C 3.7 to 5.8 Flash Point 130oC Cetane number 46 to 70 Higher heating value (btu/lb) 16,928 to 17,996 Sulfur, wt% 0.0 to 0.0024 Cloud point °C -11 to 16 Pour point °C -15 to 13 Iodine number 60 to 135 Lower heating value (btu/lb) 15,700 to 16,735

3.5. Demand for Bio diesel The Committee for development of Bio fuels, constituted by the Planning Commission, GoI has projected a requirement of about 13.38 million tones of bio diesel by 2011-2012 as follows:

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Year Diesel

Demand MMT

Bio-Diesel @ 5% MMT

Area for 5% Mha

Bio-Diesel @ 10% MMT

Area for 10% Mha

Bio-Diesel @ 20% MMT

Area for 20% Mha

2001-02 39.81 1.99 N.A. 3.98 N.A. 7.96 N.A. 2006-07 52.33 2.62 2.19 5.23 4.38 10.47 8.76 2011-12 66.90 3.35 2.79 6.69 5.58 13.38 11.19

3.6 Relevance of Jatropha Among the raw materials used for bio diesel production Sunflower, Rapeseed, Soyabean, oil Palm, Jatropha and Pongamia are the most prominent. India being deficit in edible vegetable oils cannot afford to divert the edible oil to bio diesel production. Therefore, the use of Tree Borne Oil Seeds (TBOS) of non-edible nature has been identified as the best alternative. Though there are more than 100 species of TBOS, the prominent among them are Neem, Mahua, Sal, Kamala, Rubber, Jatropha, Pongamia, Salvadora and Jojoba. Out of these, Jatropha have been given focus by the GoI due to its weighted advantages over other sources/species and has drawn up long term plans of Jatropha plantation over 2.19 to 11.19 million ha from 2006-07 to 2011-12 for blending of 5% to 20%. 3.7. Advantages of Jatropha: • Jatropha is a widely occurring plant variety • The plant can survive on almost any soil type viz., degraded and barren lands

under forest and non-forest use, dry and drought prone areas, marginal lands and as agro forestry crop.

• It is drought resistant and needs minimal inputs or management. Moderate irrigation is required only in the initial 2 years

• It improves soil fertility, restores degraded land over a period, and controls wind and water erosions.

• The plant being a hedge does not grow too tall making it convenient to grow on field boundaries, alongside railways, highways, irrigation canals, townships etc.

• Jatropha is easy to propagate and its growth is rapid. • Practically disease and pest resistant, cattle or sheep do not browse it. • Commercial yield of seeds start from second year onwards and continues for

over 30 years. • Collection of seeds is easy because of the short stature of the plant. • The seeds are available mainly during the non-rainy season facilitating better

and easy collection and processing. • Integrated utilization of the Jatropha plant based systems is a boon for rural

development and creates a positive correlation between energy production, food production and poverty reduction.

• Fruit bearing for more than 6 months in a year • The seeds have oil contents of up to 40%. Improved seeds that yield

significantly more oil (up to 150% of normal values) are now available.

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Jatropha also has the following additional uses: • Jatropha oil has a very high saponification value and is ideal for soap

manufacture. Soap manufactured from non-petroleum sources is gaining increasing popularity especially in the European countries.

• It can also be used as an illuminant in lamps as it burns without emitting smoke

• The latex of Jatropha contains jatrophine, an alkaloid which is believed to have anti-cancerous properties. It is also used as an external applicant for skin diseases, rheumatism, livestock sores, piles and as an antidote for certain snake-bites

• The dark blue dye extracted from the bark of Jatropha is a useful dye. • Jatropha oil cake is rich in nitrogen, phosphorous and potassium and can be

used as organic manure. • Jatropha leaves are used as food for the tusser silkworm. • The seeds are considered anti helmintic in Brazil, and the leaves are used for

fumigating houses against bed bugs. In addition, the ether extract shows antibacterial properties against Staphylococcus aureus and Escherichia coli.

3.8. Botanical features of Jatropha

Family: Euphorbiaceae

Vernacular/common names:

English Physic nut, Purging nut Hindi Ratanjyot Jangli erandi Malayalam Katamanak Tamil Kattamanakku Telugu Pepalam Kannada Kadaharalu Gujarathi Jepal Sanskrit Kanana randa

Physical properties:

It is a small tree or shrub with smooth gray bark, which exudes whitish colored, watery, latex when cut. Normally, it grows between three and five meters in height, but can attain a height of up to eight or ten meters under favorable conditions.

Leaves:

It has large green to pale-green leaves, alternate to sub-opposite, three-to five-lobed with a spiral phyllotaxis.

Flowers:

The petiole length ranges between 6-23 mm. The inflorescence is formed in the leaf axil. Flowers are formed terminally, individually, with female flowers usually slightly larger and occurs in the hot seasons. In conditions where continuous growth occurs, an unbalance of pistillate or staminate flower production results in a higher number of female flowers.

Fruits:

Fruits are produced in winter when the shrub is leafless, or it may produce several crops during the year if soil moisture is good and temperatures are sufficiently high. Each inflorescence yields a bunch of approximately 10 or more

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ovoid fruits. A three, bi-valved cocci is formed after the seeds mature and the fleshy exocarp dries.

Seeds:

The seeds become mature when the capsule changes from green to yellow, after two to four months

Flowering and fruiting habit:

The trees are deciduous, shedding the leaves in the dry season. Flowering occurs during the wet season and two flowering peaks are often seen. In permanently humid regions, flowering occurs throughout the year. The seeds mature about three months after flowering. Early growth is fast and with good rainfall conditions nursery plants may bear fruits after the first rainy season, direct sown plants after the second rainy season. The flowers are pollinated by insects especially honey bees.

3.9. Ecological requirements:

Jatropha grows almost anywhere, even on gravelly, sandy and saline soils. It can thrive on the poorest stony soil. It can grow even in the crevices of rocks. The leaves shed during the winter months and forms mulch around the base of the plant. The organic matter from shed leaves enhance earthworm activity in the soil around the root-zone of the plants, which improves the fertility of the soil.

Jatropha is found in the tropics and subtropics and likes heat, although it does well even in lower temperatures and can withstand a light frost. Its water requirement is extremely low and it can stand long periods of drought by shedding most of its leaves to reduce transpiration loss. Jatropha is also suitable for preventing soil erosion and shifting of sand dunes.

3.10. Biophysical limits:

Altitude: 0-500 m, Mean annual temperature: 20-28 deg. C,

Mean annual rainfall: 300-1000 mm or more.

Soil type:

Grows on well-drained soils with good aeration and is well adapted to marginal soils with low nutrient content. On heavy soils, root formation is reduced.

3.11. AGRO PRACTICES (as per NOVOD, Ministry of Agriculture, GOI): Nursery raising: Nurseries may be raised in poly-bags filled with mixture of soil and farm yard manure in the ratio of 4:1. Two seeds are sown in each bag. Plantation: 30 cm x 30 cm x 30 cm pits are dug. Farmyard manure (2-3 kg), 20 gm urea, 12 gm Single Super Phosphate (SSP) & 16 gm Mono Phosphate (MP)

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Planting density: 2500 plants / ha at 2m x 2m Transplantation: It should be done preferably during rainy reason. Fertilizer : From second year in the ratio of 40:60:20 Nitrogen Phosphorous and Potassium (NPK) kg/ha Irrigation : It is required only for the first two years Pruning : During the first year when branches reach a height of 40-60 cms Pest & Disease control: No disease or insects noticed to be harmful Flowering: Sept.- Dec. & March- April Fruiting: After 2 months of flowering. Collection and processing: Ripe fruits collected from trees. 3.12. Employment potential estimates: (as per Planning Commission, GoI, report on bio-fuels, 2003)

• Likely demand of petroleum diesel by 2006-07 will be 52 MMT and by 2011-12 it will increase to 67 MMT.

• 5% blend of Bio-diesel with petroleum diesel will require 2.6 MMT of Bio-diesel in 2006-07

• By 2011-12, for 20% blend with petroleum diesel, the likely demand will be 13.4 MMT.

• To meet the requirement of 2.6 MMT of bio-diesel, plantation of Jatropha should be done on 2.2 - 2.6 million ha area.

• 11.2 - 13.4 million ha of land should be covered by 2011 - 12 for 20% bio-diesel blending

• It will generate following no. of jobs in following areas.

Year Plantation Jobs Maintenance Operation of BD units 2006 – 07 2.5 million 0.75 million 0.10 million 2011 – 12 13.0 million 3.9 million 0.30 million

3.13. TRANS ESTERIFICATION: The process of converting the triglycerides (fatty acids) in the vegetable oil into methyl or ethyl esters (the methyl/ethyl ester is bio diesel) is called trans esterification. Chemically, trans esterification involves taking a triglyceride molecule or a complex fatty acid molecule, neutralizing its free fatty acids, removing the glycerol component and creating an alcohol ester or bio diesel. If 100 gm of vegetable oil is taken, 1 gm of the alkaline catalyst (Potassium Hydroxide), and 12 gm of Methanol would be required. As a first step, the alkaline catalyst is mixed with methanol and the mixture is stirred for half an hour for its homogenization. This mixture is mixed with vegetable oil and the resultant mixture is made to pass through reflux condensation at 65oC. The mixture at the end is allowed to settle. The lower layer will be of glycerin and it

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is drained off. The yield of glycerin (a by-product having medicinal value) is about 11%. The upper layer of bio-diesel (a methyl ester) is washed to remove entrained glycerin. The excess methanol is recycled by distillation. This reaction works well with high quality oil. If the oil contains up to 1% Free Fatty Acid (FFA), then difficulty arises because of soap formation. If FFA content is more than 2% the reaction becomes unworkable and the FFA will have to be removed or transformed into bio diesel using special pretreatment technologies. Methanol is inflammable and Potassium Hydroxide is caustic, hence proper and safe handling of these chemicals is a must. The bio diesel yield is 95%. 3.14. Current usage of bio diesel: Usages of bio-diesel are similar to that of petro-diesel

• Shatabadi Express of the India Railways was successfully run on 5% blend of bio-diesel from Delhi to Amritsar on 31st December 2002 in association with Indian Oil Corporation (IOC)

• Field trials of 10% bio-diesel blend were also done on Lucknow-Allahabad Jan Shatabdi Express also through association with IOC.

• HPCL is also carrying out field trials in association with BEST (Mumbai’s city bus operator)

• Bio-Diesel blend from IOC (R&D) is being used in buses in Mumbai as well as in Rewari, in Haryana on trial basis

• CSIR and Daimler Chrysler have jointly undertaken a successful 5000 km trial run of Mercedes cars using bio-diesel as fuel

• NOVOD has initiated test run by blending 10% bio diesel in collaboration with IIT, Delhi in Tata Sumo & Swaraj Mazda vehicles

The Government of India is aggressively pushing cultivation in the various states. In Tamil Nadu an area of 60 ha has already been identified for pilot scale Jatropha cultivation by the NOVODB. 3.15. Feasibility study on Jatropha cultivation in Nagapattinam: Nagapattinam offers immense scope for the cultivation of Jatropha. Currently over 5000 ha of land is available in the area that can be brought under Jatropha cultivation. The agro climatic conditions prevailing in the area are conducive for Jatropha cultivation on a commercial scale. A feasibility analysis of Jatropha cultivation on a pilot scale over a 100 ha area has been attempted and is detailed below. Since the primary focus has been given to the cultivation part, the project has assumed that the jatropha oil would be its final output. 3.13. Project Highlights: Industry : Agriculture/Non Conventional Energy Cost : Rs.2.5 million Capacities

• Area : 100 ha • Output (in normal year) : 200 tons of jatropha seeds per annum

equivalent to 65 tons of bio diesel p.a. Employment generation : 100 plantation jobs

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30 maintenance jobs Income generation : Rs.1.2 million per annum in normal year IRR : 22.46% DSCR (average) : 2.33 times ROCE : 25.38% in the normal year of operations 3.17. Cost of the Project: The proposal envisages setting up jatropha cultivation over an area of 100 ha on a pilot basis at a total cost of Rs.2.5 million. As indicated earlier, Jatropha cultivation is a focus area and various Governments have been heavily subsidizing the farmers who undertake its cultivation by giving them as much as 90% of the cost of all inputs. Certain state Governments have also leased out idle Government lands to private companies for Jatropha cultivation on long-term basis. Given the vast availability of Government land suitable for Jatropha cultivation at Nagapattinam, it is proposed to undertake the cultivation on Government land made available to the project at nominal rates on long term basis. Moreover, in view of the returns from Jatropha cultivation being comparatively lower than other crops, acquiring land on commercial rates for undertaking this venture may not be viable. Therefore no cost has been assumed towards cost of land in the project cost. The details of cost of project are given below. Replanting costs which happen through the second year, weeding and irrigation expenses through the third year have been capitalised in pre operative expenses. (‘000 Rupees)

Year 1 Year 2 Year 3 TOTAL Site preparation 84 84 Initial ploughing 90 90 Alignment and staking 49 49 Digging and refilling of pits 308 308 Cost of fertilizers 270 270 Cost of plants and planting expenses 323 33 356 Weeding and irrigation 350 350 350 1,050 Pre operative expenses 200 200 Contingencies 93 93 TOTAL 1,767 383 350 2,500

3.17.1. Site preparation and initial ploughing: Labour costs required for site preparation including leveling, etc. have been assumed at 12 man-days per hectare. Cost of labour has been assumed based on the current levels at Rs.70 per man-day. Initial ploughing costs have been assumed at the rate of 6 hours per hectare at Rs.150 per hour or Rs.900 per ha. 3.17.2. Alignment and staking: at the rate of 7 man-days per ha. 3.17.3. Digging and refilling of pits: Planting density has been assumed at 1100 trees to get, on a conservative basis, fruiting from 1000 trees. At the rate of 25 pits per man-day the requirement of total man days for digging and refilling has been worked out at 4,400 man days.

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3.17.4. Initial fertilizing: Requirement of organic manure, chemical fertilizers and insecticides have been assumed at 2 kg, 100 gm and 30 gm respectively per pit. Based on the current prices for fertilizers the rates have been assumed at Rs.2 per kg, Rs.10 per kg and Rs.15 per kg for organic manure, chemical fertilizers and insecticides respectively. 3.17.5. Cost of plants and planting expenses: Cost of seedlings has been assumed at Rs.2 per plant and 75 plantings per man-day. Around 10% replanting will be required in the second year. 3.17.6. Weeding and irrigation expenses: 30 man-days per ha for weeding and 20 man days per ha for initial irrigation have been assumed. Both weeding and irrigation expenses will be required for the initial 3 years and have been accordingly provided in the cost of the project. 3.17.7. Pre operative expenses: A lump sum amount of Rs.200,000 has been provided in the cost of the project towards pre operative expenses. 3.17.8. Contingency: Provision for contingencies has been provided at 5%. 3.18. Means of Financing: The above cost of project is proposed to be financed as follows: Equity from the community : Rs.1.25 million Term Loan : Rs.1.25 million 3.18.1. Term Loan: Being a priority sector enterprise, the project will easily be able to raise a term debt. Even though the project would also qualify for a capital subsidy from the government, the same has not been assumed in the means of financing. In the event the capital subsidy becomes available, the term debt component would be correspondingly reduced. More details on the cost of project are included in Annexure 2a. 3.19. Expected implementation schedule: It has been assumed that the entire 100 ha of land shall be planted by June 2007. 3.20. Private Partnership: The scope of collaboration for the private sector will primarily encompass buying back the produce as well as to provide extension services including

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identification of land and suggestion of appropriate cultivation practices. Various Government agencies are also keenly promoting Jatropha cultivation and this project could expect significant support from these agencies. Their role would need to be structured based on the scope of their participation in the project. An indicative interest for collaborating with this initiative has been received from a corporate that is currently setting up a bio diesel plant of capacity 100,000 tons per annum envisaging an investment of USD 31 million. They have offered to provide assistance in identifying the land for the proposed pilot project, suggest appropriate cultivation practices and arrange for a buy back of the produce on mutually agreeable long term basis. 3.21. Projected profitability: The main assumptions for working out the profitability of the proposed Jatropha cultivation are given below :

1. Cultivated area : 100 ha 2. Normal year of operations : from the 4th year onwards 3. Yield (seeds per ha) : 2 tons in the normal year 4. Sale price of seeds : Rs.6.00 (based on sale of oil) 5. Planting costs (Labour) : 150 man-days per ha 6. Harvesting and pruning costs : 50 man-days per ha 7. Cost per man-day : Rs.70 8. Interest on term loans : 12% p.a. 9. Depreciation : SLM 10.Corporate Tax : Nil

Year Ending December 31, 2010 (normal year) (Rs million) Cultivated area (hectares) 100 No of fruiting trees per hectare 1,000 Yield (kg of seeds per fruiting tree) 2.00 Total Output (tons seeds) 200 Total Income 1.20 Weeding costs 0.14 Irrigation costs 0.11 Harvesting and irrigation costs 0.14 Admin. & Misc. expenses 0.06 Total Expenses 0.45 EBIDTA 0.76 Interest on Loans 0.17

Year ending December 31, 2010 (normal year) (Rs. millions) Profit After Tax 0.59 Net Cash Accruals 0.59 EBIDTA / Total Income 62.92% PAT / Total Income 48.89% Return On Capital Employed (ROCE) 25.38% Average DSCR 2.33 times IRR 22.46%

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The main assumptions of profitability have been based on the data and practices recommended by NOVOD and NABARD. Certain parameters have been adjusted for the local conditions. Even though the project will be able to negotiate a subsidized rate of interest being in the priority sector, interest rate for the proposed term loan has been calculated at 12%. The average DSCR of 2.33 times would ensure prompt servicing of the availed term loan. The IRR for the project (with life of project at 15 years) of 22.46% compares favourably with the cost of capital of 14.21%. More details on the projected profitability is included in Annexure 2b. The projected cash flow statement and the projected balance sheets are included as Annexure 2c and 2d respectively. 3.22. SELLING ARRANGEMENTS: The Jatropha seeds have a comparatively longer shelf life as compared to other popular oil sources like oil palm, etc. This renders them capable of being transported for reasonable distances for post harvest processing. The oil from the seeds may be extracted either by oil expellers or through the solvent extraction process. Currently there is a huge idle capacity in the oil extraction industry in India. NABARD has estimated following capacities and utilisation levels in India: Segment Number of

Units Total Installed Capacity

(million tons) Capacity Utilisation

Mechanical Crushers 152,000 55.0 29% Solvent Extractors 421 26.7 34%

As per current industry practices, especially in rural areas, the seeds are sold through traders to the oil expellers at prices adjusted to the oil content and prevailing Jatropha oil prices. Oil recovery of upto 75% happens at the expellers; the expellers subsequently sell the oil cake to solvent extraction units where the oil recovery of upto 90% happens. Given the availability of spare capacity for oil expelling, it is ideal that that the project would sell Jatropha oil as its final output. Towards this, it would tie up with a nearby oil-expelling unit having adequate capacity to process the harvested seeds. The unit would also enter into a long-term arrangement with a large bio diesel manufacturer for the sale of Jatropha oil on FOR (Nagapattinam) basis. 3.23. SWOT analysis: Strengths • Jatropha cultivation is already in

vogue in the state of Tamil Nadu • Climatic conditions quite conducive

for its cultivation • Hardy crop requiring little or no

extension services • Low gestation periods • Identification of private sector

partners for the PPP easy • Good employment potential

Opportunities • Potential for scale up of operations

bright • Capable of implementation in other

areas • Intercropping with other

commercially valuable crops possible

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Weakness • Moderate labour generation

potential • Scattered land holdings may

hamper large scale cultivation

Threats • May invade into other more

valuable crops currently in vogue

6.24. CONCLUSION: Bio fuels – especially bio diesels - are fast emerging to become one of the more viable, sustainable and cleaner options for meeting the ever increasing energy demand. Emerging economies such as India with its vast wastelands and tropical climate can benefit immensely from these renewable energy resources. The GoI has identified Jatropha cultivation as a thrust area and have initiated several projects to capitalize on this vast potential – Tamil Nadu has been chosen as one of the priority states by the GoI in this regard. NABARD has assessed a credit need of over Rs.3.00 billion for Jatropha cultivation and is aggressively pushing agriculture loans for Jatropha cultivation. Besides fruitfully utilizing the lands available at Nagapattinam, this alternative will also serve as a micro mission to the GoI’s initiative to develop bio fuel alternatives. Being agro based this initiative is likely to be more adaptable for the community than other industrial options. Being a perennial crop Jatropha would to some extent ensure a minimum regular sustenance income to the fishing community that is used to vast fluctuations in their income streams.

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Chapter 4

HYGENICALLY-DRIED FISH PRODUCTION UNITS Most of modern day fishing is target/species specific. Yet, they bring in large quantities of unintended, low value/low quality fishes. The sheer quantity of such fish currently being landed merits more attention, because better preservation, value addition and proper marketing can bring in considerable additional income to the fisher folk. Besides, there are several species – especially those smaller varieties - which are normally harvested in bulk during certain seasons, often leading to a glut in the market. Mainly due to lack of adequate and appropriate post harvest solutions, these bountiful catches often do not offer commensurate returns. One of the traditional and cost effective methods being employed by fisher folk all along the Indian coast is salting and sun-drying. Unfortunately, because of the delay in processing and the crude methods (drying in the open) employed, the quality of the product is abysmally low mainly due to the presence of dust and sand, bacterial contamination due to uncontrolled humidity levels during drying, even faecal contamination, etc. This has resulted in very poor local, as well as outside market for these products. However, of late small quantities of quality fish, dried in hygienic conditions, have been gaining acceptance in the markets. This appears to have a promising potential if the efforts are coupled with some coordinated raw material procurement and marketing efforts. Past attempts at developing a suitable method for the large-scale production of quality dried fish have been unsuccessful due to lack of a suitable and practical technology. Attempts at producing good quality dried fish using tunnel driers also did not gain popularity on account of the prohibitive cost of tunnel driers. Recently, the Central Institute of Fisheries Technology (CIFT) has successfully developed an energy efficient solar drier (with auto backup with LPG heating during periods of low sunlight). The model that has been brought out has a normal capacity of drying 1 tons of fish per day (8 hours). The unit is successful in drying vegetables also – when the capacity almost doubles. Since the equipment is currently going through the process of getting patent rights, the details of the equipment is not discussed. 4.1. Feasibility Study on Hygienically Dried-Fish Unit: Nagapattinam is one of the prominent fish landing centers of Tamil Nadu. Significant quantities of various commercially important varieties including those that are ideally suited for drying are available here almost throughout the year. The latter include several commercially important varieties such as anchovies, lesser sardines, white fish, sharks, skates and rays, ribbon fishes, prawns, etc. The project envisages setting up a solar drying unit having a capacity of 1 ton per day for the manufacture of hygienically dried fish. The unit will also have facilities to store raw fish for upto 5 days to achieve good capacity utilizations. Two models have been examined:

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Model 1: The unit will operate as an independent drying unit where the users can pay and use the facility

Model 2: The unit would buy the raw fish at market rates, process it and then

sell the same under an arrangement with a private participant. It is recommended that the project be implemented under the Model 2 as it would best serve to fulfill the overall objectives of the ESCAP initiative. 4.2. Project highlights: Industry : Fishery – fish processing Cost : Rs.6.0 million Installed capacity : 600 tpa of raw fish Employment generation : 12 direct Income : Rs.12.6 million IRR : 23.95% BEP Operating : 23.62% Cash : 19.58% ROCE (normal year) : 16.98% 4.3. Cost of the Project: As mentioned earlier, Model 2 is the recommended option. However, the cost details of both the models are given below: (Rs. in 000’s)

Single drying unit

Double drying unit

Land and development 300 300 Buildings and civil works 900 1150 Plant and machinery 1750 3300 Misc. fixed assets 250 300 Preoperative expenses 100 150 Contingencies 200 300 Margin money for WC 300 500 TOTAL (Model 1) 3500 5500 TOTAL (Model 2) 3800 6000

4.3.1. Land: An amount of Rs.0.25 million has been allocated towards cost of land for an extent of 25 cents (0.25 acre) at the currently prevailing rate of Rs.1 million per acre. A lump sum provision of Rs.50,000 has been provided towards leveling and fencing. 4.3.2. Buildings: Foundation space for has been provided at 25 sq.m. and 50 sq.m. respectively for the single and double unit alternatives. Raw fish storage area of 150 sq.m. and 200 m has been provided at a cost of Rs.4500 per sq.m. A 100 sq.m area has been provided towards reception, sorting and washing area.

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4.3.3. Plant and Machinery: The main drying unit having a capacity of 1 tons per day is estimated to cost Rs.1.5 million. The cost of other implements including cleaning and accessories has been estimated at Rs.0.25 million for the single unit and Rs.0.30 for the double unit. 4.3.4. Miscellaneous Fixed Assets: Would comprise facilities for water and utilities, waste disposal, etc. towards which lump sum provisions have been made at Rs.0.25 million and Rs.0.30 million respectively for the single and double units. 4.3.5. Preoperative Expenses: Lump sum amounts of Rs.0.10 million and Rs.0.15 million respectively have been provided for the single and double units. 4.3.6. Contingency Provision: has been made at 5%. 4.3.7. Margin money for working capital: Implementing the project under the Model 2 would involve payment for raw material purchases. With a view to eliminate middlemen it is imperative that on the spot cash payments are made by the unit for purchase of raw materials. This would also enable the unit to procure raw materials at the most optimum rates. Towards the above a provision to the extent of around 7 days’ requirement of raw materials has been made in the cost of the project. 4.4. Means of Financing: The cost of the project is proposed to be financed entirely out of equity. Given that the main equipment viz. the solar fish drier is more in the nature of customized item, it is possible that prospective lenders may perceive the same to be an illiquid security and insist on additional assets as collateral to cover the loan. However, in case a term loan is possible, mainly based on the credentials of the private participant, the equity contribution will accordingly be adjusted pro rata. Equity from the Corporate/Government : 50% Equity from the Community : 50% 4.5. Expected implementation schedule: The identification and acquisition formalities of the land are expected to be completed by December 2006. Construction of buildings would take approximately 3 months and after the acquisition and installation of the machines, the unit is expected to be ready for production by June 2007.

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4.6. Private Partnership: The project implementation has been examined under two alternatives – Model 1 : as a service provider offering drying services on payment of a user fee and Model 2 : as a full fledged manufacturer of hygienically dried fish. Model 1 could accommodate the participation of the private sector mainly as a funding agency. For Model 2 the scope of collaboration for the private sector will encompass marketing (as a buyer) and finance (as a funding agency). Ideal private sector company for the partnership could be a seafood exporter who is primarily exporting to the gulf countries having a significant south Indian expatriate population or a local food chain store such as Nilgris Supermarket Stores, Spencers, etc. for sales into the domestic market. The role of the government may be in the form of allotment of land (in lieu of which the company may allot equity shares), exemption/concessions in sales tax/other levies, other grants or viability funding to augment the overall viability of the project, etc. Other government agencies like the Marine Products Export Development Authority (MPEDA) may also be interested in participating in this project. 4.7. Projected Profitability: The main assumptions of profitability are given below:

1. Drying mix: 60% by solar drying and 40% with LPG. A higher LPG usage is assumed so as achieve higher capacity utilization levels

2. Capacity utilization: 75% 3. Cost of LPG: Rs.40 per kg. 4. LPG consumption:14 kg per ton of raw fish 5. Drying time: 5 hrs for 1 ton with LPG and 8 hr with solar energy 6. Consumables includes, detergents, disinfectants, etc. have been assumed

at Re.0.25 per kg of raw fish 7. Packing costs (including packing materials under Model 2) have been

assumed at Rs.9.75 per kg of dried fish 8. Drying charges have been assumed at Rs.4 for solar drying and at Rs.4.75

for LPG drying 9. Power, water and fuel charges have been assumed at Rs.5000 per month 10.Average cost of raw fish based on a basket of varieties have been

assumed at Rs.20 per kg 11.Average moisture content in fish has been assumed at 70 - 75% 12.Value addition for hygienically dried fish retail packed has been

conservatively assumed at 140% 13.Depreciation has been assumed on SLM basis 14.Corporate tax has been charged at 33.6% including surcharges

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The single unit scenario under Model1 appears unviable as the unit will have to levy a very high drying charge for sustenance. Even at drying rates of Rs.4/Rs.4.75 per kg, the IRR is only 14.59% for the single unit as against an IRR of 19.70% for the double unit. Considering the role the private sector is expected to play in the proposed initiative, it is the Model 2 that offers more scope to the private participant. The key financial parameters for the Model 2 also appears satisfactory and on the overall Model 2 is recommended. 4.8. PRODUCTION and SELLING ARRANGEMENTS Under Model 1, the unit would function merely as a service point offering drying services to interested parties. Fisher folk cooperatives, for example, could take the initiative to coordinate the catches and arrange for the drying and subsequent sale of the dried product. Under Model 2 the unit would have active participation from an interested existing private company. The latter would clearly indicate its preferences as to the varieties as well as the price ranges based on which the unit would purchase the varieties directly from the fishing community at the prevailing market prices

(Rs million)

Year Ending December 31, 2008

Model 1 Single

Unit

Model 1 Double

Unit Model 2 Installed capacity (tpa of raw fish) 300 600 600 Output (tpa of dried fish) 56.2 112.5 112.5 Capacity Utilisation (%) 75% 75% 75% Drying charges (Rs.per kg.) 4.00/4.75 4.00/4.75 - Total Income 0.97 1.94 12.60 Cost of raw fish - - 9.00 Salaries and Wages 0.11 0.17 0.32 Consumables & packing materials 0.06 0.11 1.13 Power and fuel 0.08 0.16 0.16 Admin. & Misc. expenses 0.02 0.02 0.20 Total Expenses 0.27 0.47 10.81 EBIDTA 0.70 1.47 1.79 Profit Before Tax 0.52 1.29 1.42 Tax 0.05 0.31 0.42 Profit After Tax 0.48 0.98 1.01 Net Cash Accruals 0.65 1.16 1.37 EBIDTA / Total Income 72.03% 75.85% 14.21% PAT / Total Income 49.22% 50.90% 7.99% ROCE (Return On Capital Employed) 12.05% 15.31% 14.53% BEP – Operating 27.89% 16.65% 23.62% BEP – Cash 12.10% 8.76% 6.48% Cost of capital (with equity @ 18%) 18.00% 18.00% 18.00% IRR 14.59% 19.70% 22.39%

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(or at levels lower than the indicated maximum prices) on cash and carry basis. The processed (dried) fish is converted into retail packs as per buyer specifications and offered FOR. 4.9. SWOT ANALYSIS Strengths • Easily adaptable to the communities

as it is an extension of their existing activities

• Better utilization of the existing resources

• Scope for modular expansion of capacities

• Easily replicable to other locations • Adaptable to include other non fish

items, such as vegetables • Environmentally friendly operations

Opportunities • Can be implemented in other

coastal areas • Significant untapped demand for

quality dried fish products both in the domestic and export markets

Weakness • Corporate role largely restricted to

marketing efforts • Manufacturing and marketing

distinctly different cultures • Procuring quality raw materials and

maintaining quality standards may be challenging

Threats • May encourage over fishing

4.10. CONCLUSION Lack of adequate post harvest facilities have been one of the biggest challenges faced by the seafood industry. Except for the seafood that is exported – primarily as frozen seafood – bulk of the catch is marketed either raw or chilled. The latter has always resulted in fisher folk not getting optimum price realizations for their catches. Moreover, in a place like Nagapattinam where the catches are predominantly multi species, lack of adequate post harvest technologies have a very adverse impact on the fishing community. Given that dried fish is a popular delicacy with excellent nutritional qualities and improved shelf life, this unit if successfully implemented, has the potential to trigger a new post harvest scenario that is scientific, commercially viable and completely in alignment with the traditional practices of the fishing community.

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Chapter 5

CONCLUSION The coordinated rehabilitation efforts by the various agencies has restored near normalcy to an area that was very severely affected by the December 2004 tsunami. Most of the lost and damaged property has since been restored and time is now appropriate to implement radical and sustainable long-term measures that would help the community to develop the self vitality necessary to mitigate future risks, especially economic risks. Radical changes are important, as only these would have the ability to render some amount of the much needed psychological comfort to a community deeply traumatized and left feeling vulnerable after a natural disaster. Partnerships provide opportunities to synergize their competencies in designing, financing, constructing and operating enterprises. The role of partnerships in successfully implementing various critical government/ community based welfare initiatives is well recognized and has become an accepted option. The three investment opportunities that are discussed in this report have great potential to extract the best out of the participating private entities and transform them into successful and mutually rewarding business models. While the objective of this ESCAP initiative is to develop a diversified and sustainable livelihood pattern for the affected communities, the intended goal would be achieved only if the enterprise delivers its key commitment of creating value to all the stake holders including the client – a key concept often ignored in the implementation of various social initiatives. Adequate care should therefore be taken to ensure that the private participant identified for the project should have the willingness to value such initiatives. Given that the identified opportunities are equally rewarding with significant spin off potential and belong to three different industry segments, it would be worthwhile to attempt implementing at least two of the initiatives simultaneously.