Saturday, 7 February 2009

Introduction to Development Projects – Essay by Bogdan Craciun


About Bogdan Craciun

Martinez Dairy Project

Executive summary

Even if contains some positive aspects, the Martinez project is not comprehensively designed (missing the logical framework and the ranch’s cash flow), it arises a series of questions (technical; connected to revenues and expenses content), lacks important information, contains contradictions and does not reach entirely its objective. I recommend projects’ revising and resizing for a further re-analyzing.

For the project success is not sufficient to have only a possible 5 years contract with Manzanilla plant. I recommend concluding of a resolute contract for 15 years with Manzanilla plant before beginning of investment.

Considering the social and environmental implications of the project I recommend a careful valuation of the popular support for the project and especially an environmental impact appraisal.

The important private potential of the area for milk production and the low average family income, makes me recommend the support of projects that make use of this potential as alternative to the Martinez project.


Several questions need to be answered in project’s analyze:

1. What needs does the project satisfy?

2. Is the project as designed meeting its own objective?

3. What are the objective factors that can affect the project success?

4. Can be found alternatives to the project?

5. Who benefits and who loses from this project and what is its social impact?

6. What are the legal implications of the project?

7. Who will implement the project?

8. What is the project environmental impact?

9. Has the project economical justification?

10. What external factors can constrain the project?

11. Is it the project technically feasible?

12. Are all costs and revenues included? Are they relevant and correct?

13. What other questions needs project to answer to?

I present the results of project analysis, which consists of answers to these questions. For the economical appraisal I used the Net Present Value (NPV) method.


Project analysis results:

1. Martinez Project correctly identified the area’s massive demand for milk (according to demand forecast). But there is no information regarding the demand for ranch’s second important revenue source: the cull animals and heifers.

2. Using for analysis the data provided by schedule D, the project does not reach its objective (200.000lts of milk per year needed by Manzanilla plant to break-even), except in the 6th year. From 7th year on, the milk production is 7000lts less than the required quantity. My question is if the locals’ herds can supply the required extra milk. Otherwise it is required acquisition of larger herd from the beginning.

3. The output forecast level it is highly influenced by: the quality of environment where the animal lives; the cow’s individual biological characteristics, health and fertility level (and this includes both the number of calves and the quantity of milk obtained from each cow); the quality of water and nutrition – it is known that the quantity and quality of milk are directly influenced by nutritional level of the food. There is no information how the nutrition level varies through the year, directly connected to the type of food supplied to cattle (grass/hay/concentrates). The project does not specify if all of the above were taken into consideration when the output forecast was made.

The projects present a calving percentage of 0.79%, which is rather an optimistic figure (more realistic is about 0.67%). Therefore I am concerned with the output figures that could be negatively affected.

4. If the private large heards of cattle can satisfy the Manzanilla's need of raw milk, this suppling source can be exploited with minimal investment, with better social effects (by increasing the family income and keeping the pasture in common use) and without destructive ecological implications (no clearing). We are not told as well the import price for milk in order to compare it with Manzanilla’s plant milk price.

5. The project brings national benefits by saving foreign exchange.

The urban citizens gain by benefiting of fresh milk. Some of the Martinez’s villagers potential hired at the ranch can gain as well.

The direct beneficiary is Manzanilla plant, supplied now with the raw milk it needs.

The herds’ owners that were using the common pasture lose now the land taken by ranch. The social impact is severe negative as might affect their income.

6. If the local authorities do not agree with the price of 100$/ha offered by Government, could appear litigation and delay of the project, raising costs of waiting.

We are not told anything as well about: the companies that will work on clearing, fencing, water supply, electricity connection, buildings and access roads construction, and if the contracts were awarded following the legal auction procedures; the terms of the transport contract; the legal way of clearing close to forest reserve.

7. It is not clearly identified the person that is implementing the project, that will monitorize, control and is responsible for its realization and function.

8. The environmental impact analysis it is difficult to be done as the project puts us into a major dilemma: the land commandeered is it already pasture or it is forested? From "Location" paragraph we understand that the land is at present used for grazing, this means it does not need to be cleared. From "Farm development" paragraph and schedule A emerges that the land will be cleared, and this means the land is forested.

If the land is already a pasture, the environmental impact resumes to the fertilizers’ type (artificial or natural). I recommend the using of the resulted manure as fertilizer (an excellent and cheap natural one) that could bring ecological and economical benefits.

If the land is forested, the environmental impact will be disastrous (will be cleared 70ha of forest).

9. The economical analysis (annex 1) show that the project is more feasible under first finance scheme (NPV=153.27), than under second one (NPV=60.46). Even if this analysis allows me to recommend the project to be undertaken, we find from annexes that the value of NPV banks on the residual value inputs (of the 15th year) more than on actual output results.

10. The using for daily milk’s transport from ranch to plant of a third person weighs down, brings constraints and may financial unbalances the project. I recommend providing the transport through own means (maybe using the 1000lts capacity pick-up truck found in schedule A), solution that could lead to a substantial operating costs' cut-down and to constraints elimination.

11. The purchase of the best productive cow breed, the rainfall quantity suited for pasture, the annual medium temperature and the size of the ranch in standards for the number of cows, make the project one with chances to succeed. Still are a number of technical questions raise: how long in a year does frost affect the soils? Will the staff be recruited from locals? Is there required unskilled staff, or must be trained through special training?

12. With a standard contingency level of 5%, there are still several questions regarding the other costs of the project:

· If the premium payment is the rent of 1500$/year (schedule C), in 15 years the total amount is 22500$ and comparatively with the 7000$ initial payment, this gets the ranch to a renegotiation of this called ‘’small’’ payment.

· The insemination is done naturally or artificially? If naturally is one bull enough? If artificially, what are the costs?

· As the frost is not unknown, the project did not take into account the costs of building of a silo.

· Is there a permanent veterinary doctor? Does not the ranch need a minilaboratory for medical analyses for cows and for milk’s sanitary quality?

· Is the generator purchased the main source of electricity for ranch purposes? Is the nearby electrical source of power (22KV) suitable for ranch’s needs? If not, the electrical power connection costs are not pointed out in the capital costs. The price for electricity (as utility) is not marked out in the operating costs schedule.

· If necessary, what are the costs for personnel training?

· There is another question linked to the revenues: the project does not take into account any revenues from timber selling after clearing (if any clearing).

13. What is the deadline for constructions finalizing and for the start of ranch operations? Here is the risk for costs of waiting apparition; does the insurance cover cattle, milk’s transport, equipments/buildings/machinery, or all?; Is the distance (75km) from ranch to plant short enough to transport in safe conditions the raw milk (a very perishable product)?


Financial analysis

After the financial analysis results that the recapitalisation can be funded from own capital and the first financial loan scheme is to be preferred to the second (annex 1). But even if the projects benefits of a good value discount factor (8%) and we must not take into account the taxes (being a project of national interest), the projects is highly geared (1:9) and presents negative cash flow for the second, third and fourth year. The project is financially risky and my recommendation is the search for external or internal grants, numerous and suitable for agricultural projects.

Using existing data, I propose as solutions for a positive cash-flow, two financing schemes (annex 2), using the 2% interest rate and 1 year grace period. The initial loan is reduced from 417.300$ to 414.000$ and is followed by:

  • other 3 loans (in second year 40.000$; on third 35.000$ and on fourth 12.000$). The cash flow becomes positive for all years and the total amount borrowed is 501.000$. In this case we would have a sustainable project;
  • grants for second year (40.000$), for third year (31.000$) and for fourth year (5.000$). The project is not only sustainable now, but even with a better NPV (199.58).

Another important solution could be the backing up of the project by a larger equity share. And this brings us to another question: who is paying the equity (19.100$), when, how and under what conditions?


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Introduction to Development Projects de Bogdan Craciun este licenţiat printr-o Licenţă Creative Commons Atribuire-Necomercial-Fără Opere Derivate 3.0 România.

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