Pre-Feasibility StudyHigh Efficiency Irrigation Systems Services Business
PRE-FESIBILITY STUDY
High Efficiency Irrigation System Services Business
PAKISTAN AGRICULTURE RESEARCH COUNCIL ISLAMABAD
MINISTRY OF NATIONAL FOOD SECURITY AND RESEARCH
Government of Pakistan
February, 2014
TABLE OF CONTENTS
1DISCLAIMER
2.PURPOSE OF THE DOCUMENT...... 2
3.INTRODUCTION TO PARC...... 2
4.INTRODUCTION TO SCHEME...... 3
5.EXECUTIVE SUMMARY...... 3
6.BRIEF DESCRIPTION OF PROJECT & PRODUCT...... 5
7.CRITICAL FACTORS...... 5
8. INSTALLED & OPERATIONAL CAPACITIES...... 6
9. POTENTIAL TARGET MARKETS / CITIES...... 6
10.PROJECT COST SUMMARY...... 6
10.1 Project Economics...... 7
10.1 Project Financing...... 7
10.1 Project Cost...... 8
10.2Space Requirement...... 8
10.3 Equipment and Office Furniture...... 9
10.4Furniture and Fixtures...... 9
10.5Raw Material Requirements...... 9
10.6Human Resource Requirement...... 10
10.7Operating Cost...... 10
10.8Revenue Generation...... 11
11. KEY ASSUMPTIONS...... 11
12.CONTACT DETAILS OF EXPERTS AND COMPANIES...... 12
13.ANNEXURE...... 13
LIST OF TABLES
Table 1:Project Economics...... 7
Table 1: Project Financing...... 8
Table 1: Capital Investment for the Project...... 8
Table 1: Space Requirements and its Cost...... 9
Table 2: List of Office Equipment and Machinery...... 9
Table 3: Furniture and Fixture...... 9
Table 4: Human Resource Requirement...... 10
Table 6: Operating Cost...... 10
Table 5: Revenue Generation...... 11
Table 7: Key Assumptions...... 11
Table 8: Details of Experts and Companies...... 12
Table 9: Income Statement...... 13
Table 10: Cash Flow Statement...... 14
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1.DISCLAIMER
This information memorandum is to introduce the subject matter and provide a general idea and information on the subject. Although, the material included in this document is based on data/information generated from experiments and field testing by a team of relevant scientists; however, it is based upon certain assumptions which may differ from case to case. The contained information may vary due to any change in any of the concerned factors, and the actual results may differ accordingly from the presented information. The PARC and its employees do not assume any liability for any financial or other loss resulting from this memorandum in consequence of undertaking this activity. The prospective user of this memorandum is encouraged to contact qualified consultant/technical expert, especially designated focal person(s) of this enterprise for reaching to an informed decision.
2.PURPOSE OF THE DOCUMENT
The objective of the pre-feasibility study is primarily to facilitate potential entrepreneurs in project identification for investment. The project pre-feasibility may form the basis of an important investment decision and in order to serve this objective, the document/study covers various aspects of project concept development, start-up, production, marketing, finance and business management. The document also provides sectoral information, brief government policies and international scenario, which have some bearing on the project itself. The purpose of this document is to facilitate potential investors in High Efficiency Irrigation Systems Services Business (Drip, Sprinkler and Furrow Bed Irrigation Systems Business) by providing them a holistic as well as a micro view of business with the hope that such information as provided herein will help the potential investors in crucial investment decisions. The need to come up with pre-feasibility reports for undocumented or minimally documented sectors attains greater imminence as the research that precedes such reports reveal certain thumbs of rules; best practices developed by existing enterprises by trial and error, and certain industrial norms that become a guiding source regarding various aspects of business set-up and it’s successful management. Apart from carefully studying the whole document one must consider critical aspects provided later on, which form basis of any Investment Decision.
3.INTRODUCTION TO PARC
Pakistan Agricultural Research Council (PARC) is an apex national organization working in collaboration with federal, provincial and international organizations to provide science based solutions to agriculture in Pakistan. Its functions according PARC Ordinance 1981 are as follows:
- To undertake, aid, promote and coordinate agricultural research
- To arrange expeditious utilization of research results
- To fill the gaps in existing programs of agricultural research
- To arrange the training of high level scientific manpower in agricultural sciences
- To generate, acquire and disseminate information relating to agriculture
- To establish and maintain a reference and research library.
- To perform any other functions related to the matters aforesaid
4.INTRODUCTION TO SCHEME
The ‘Prime Minister’s Youth Business Loan Scheme’ is for young entrepreneurs, with an allocated budget of Rs. 5.0 Billion for the year 2013-14. It is designed to provide subsidized financing at 8% mark-up per annum for one hundred thousand (100,000) beneficiaries, through designated financial institutions, initially by the National Bank of Pakistan (NBP) and the First Women Bank Ltd. (FWBL). Small business loans up to 2 million with tenure up to 8 years, inclusive of a 1 year grace-period and a debt : equity of 90:10 will be disbursed to SME beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwah, Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA).
5.EXECUTIVE SUMMARY
The High Efficiency Irrigation System Services Business is service oriented and larger potential for profit. The increase in demand for irrigation water due to rising demand for food and fiber caused by rising population and climate change necessitate the need for enhancing the irrigation performance on farm. This is only possible by adopting high efficiency irrigation systems on farms. This system is already in priority areas of the government and the increasing awareness in farming community is increasing its market demand. Therefore the proposed high efficiency irrigation systems services business is feasible and has a greater scope. Importantly the demand for high efficiency irrigation systems will rise with time. The capital cost for services of HEIS is estimated 0.456 million rupees. The project will provide employment opportunity to 03 individuals including the manager (owner). The revenue potential of the project varies according to the type of service and market segmentation. The project is expected to achieve the revenues of around Rs. 1.23 million in the first year. This project can be started as a sole proprietorship, partnership or a limited company after getting distribution license from high efficiency irrigation systems companies and liaison with local agriculture machinery rental.
6.BRIEF DESCRIPTION OF PROJECT & PRODUCT
This feasibility report describes the investment opportunity for setting up a business of High Efficiency Irrigation Systems (HEIS) to offer services to variety of clients covering farmers and corporate oriented farmers including home gardening and off/on season vegetable and crop growers under tunnel farming through drip and sprinkler irrigation system. The business will also offer services in improving field layout, topography and irrigation infrastructure under furrow bed irrigation systems on farms. The HEIS business will work in close contact with high efficiency system companies (drip/sprinkler) for the supply of required material on farmers cost. Similarly, the local agricultural machinery rental services will be used in developing a furrow bed irrigation system while the HEIS service will charge service charges at 10% of total cost. The project is proposed to be established in a rented building having covered area of 1800 sq ft. preferably in proximity of area, where these drip and sprinkler irrigation system are being used in Pakistan. Other areas where there is water scarcity, ground water is pumped or water has been stored in small dams also have potential for this business. Such locations can be selected based on local demand, farmer's awareness, resources availability and market conditions. This business has been estimated to handle 44 projects covering 240 acres of land per year.
7.CRITICAL FACTORS
Following critical factors are to be taken care of for a successful HEIS.
- Entrepreneur’s knowledge and background in the respective fields.
- Location considerations; proximity of office to the near area where the HEIS already being functioning or in demand.
- License of distribution services from drip and sprinkler irrigation systems companies
- Local availability of machinery rental services for land leveling and furrow bed farming system management
- Efficient utilization of resources to ensure delivery within specified financial resources and timeframe.
- Linkage with suppliers especially those related to PE, UPVC, LDPE, HDPE and drip and sprinkler irrigation system, related accessories and related material companies.
- Reasonable marketing and awareness to showcase portfolio of services. Quality of services and post transaction ancillary services.
8. INSTALLED & OPERATIONAL CAPACITIES
The facility may be run by 03 member team of professionals / support staff led by the owner / manager (Agricultural engineer, surveyer/technician/plumber and Helper). The project is expected to handle 44 projects in the first year while the total handling capacity with the specified human resource is 440 projects in ten year plan.
9. POTENTIAL TARGET MARKETS / CITIES
The potential target markets for different high efficiency irrigation systems may vary according to water, crops, market demand and land conditions. However, the drip and sprinkler irrigation systems are suitable for the mountainous areas (northern areas, Mansehra, Swat, Dir, FATA and AJK), Coastal areas, areas of Baluchistan where surface water exist, Potowar and southern deserts of Punjab and Sindh province having potential of fruit plants, vegetable and high value crops. The increasing awareness and decreasing available water is also increasing demand for sprinkler and drip irrigation systems in canal and groundwater irrigated areas like the Indus Basin. The furrow bed irrigation systems service may be beneficial in canal and groundwater irrigated areas (Indus Basin) of all four provinces, areas where row crops (maize, cotton, tobacco, sugar beet etc) and vegetables are grown (Mardan, Charsadda, Sargodha, Okara, Multan, Sukkur etc) and on farms whose economies are of scale.
10.PROJECT COST SUMMARY
A detailed financial model has been developed to analyze the commercial viability of this business under the ‘Prime Minister’s Youth Business Loan’ program. The HEIS services business involves a relatively less capital cost, because the cost of machinery and equipment will be the responsibility of the farmers or local rental/high efficiency irrigation systems companies. This HEIS services business will provide expert advice, install systems on farms with extra labor met by the farmer and will generate income as service charges. Various cost and revenue related assumptions along with results of the analysis are outlined in the following sections; while the Project Income statement and cash flow are attached as annexure.
10.1ProjectEconomics
The following table shows the Net Present Value (NPV), Benefit Cost Ratio (BCR), Internal Rate of Return (IRR) and payback period.
Table 1: Project Economics
Description / DetailsNet Present Value (NPV) / 750661
Benefits Cost Ratio (BCR) / 1.11
Internal Rate of Return (IRR) / 17%
Payback Period (years) / 6.17
Returns on the scheme and its profitability are highly dependent on the entrepreneur having some practical knowledge and skilled about design, layout and installation of drip and sprinkler irrigation systems. Moreover, selection of best material, and link with various required material companies and selection of right farm for providing the services.
10.2Project Financing
Following table provides details of the equity required and variables related to bank loan;
Table 2: Project Financing
Description / DetailsProject life (Years) / 10
Equity Ratio (10%) / 153600
Debit Ratio (90%) / 1382400
Interest Rate on Loan / 8%
Debt Tenure (Years) / 8
10.3 Project Cost
The total project cost is summarized in the following table.
Table 3: Capital Investment for the Project
Capital Investment / Unit cost (Rs.) / Total Amount (Rs.)Furniture & fixtures / 23000 / 23000
Office equipment and machinery / 73000 / 73000
Motor Cycle / 90000 / 90000
Cash in hand (@3 month of operating cost) / 270000 / 270000
Total capital cost / 456000
10.4Space Requirement
The space requirement for the office of proposed high efficiency irrigation system services of mainly consists of management office, work shop and storage room. For this purpose it is recommended that 1800 sq.ft area to be acquired on rental basis in the vicinity in the city. The monthly rent of the building is estimated as Rs. 10,000 per month. The available space may be divided in to the following main areas:
1)Room for Manager Operations 2) Office Staff Space for designing system
3)Meeting Room 4) Store Room
Table 6: Space Requirement and its Cost
Space Requirement(1800 Sq. ft.) / Cost
Rs/Month / Quantity
(No) / Area (Sq.ft) / Total Cost (Rs/Year)
Building Rental Cost / 10,000 / 01 / 1800 / 1,20000
Total / 1,20000
10.5 Equipment and Office Furniture
The list of equipment and machinery required are summarized in table 2:
Table 4:List of Office Equipment and Machinery
Description of item / Qty / Unit cost (Rs.) / Amount (Rs.)Laptop (used) / 1 / 20000 / 20000
Printer with scanner / 1 / 15000 / 15000
Telephone Set / 1 / 1000 / 1000
Installation Tool kit / 1 / 10000 / 10000
Survey level / 1 / 12000 / 12000
Digital Camera / 1 / 15000 / 15000
Total / 6 / 73000
10.6Furniture and Fixtures
The details of furniture and fixture required for the proposed venture are provided in the following table 3.
Table 5:Furniture and Fixture
Description / Qty / Unit cost (RS) / Amount (RS)Sitting table / 2 / 2500 / 5000
Chairs / 6 / 1500 / 9000
Frames/racks / 2 / 1000 / 2000
Cupboard / 2 / 3500 / 7000
Total / 12 / 23000
10.5Raw Material Requirements
The material requirement would vary as per the client requirements and preferences. However, the material will be purchased from the supplier as per farm requirements and the cost will be met by the farmer. The material for drip system includes LDPE drip lines, head unit, pumping unit and other accessories and for sprinkler system includes sprinklers, drive unit, HDPE pipe and other fitting accessories. However, the furrow bed former, sowing drill and land leveler will be hired from the local market on farmer cost while this business will only charge for services.
10.6Human Resource Requirement
The details of human resource required for the successful operation of HEIS business is summarized in table 4. The Owner/ Manager should be technical person preferably in the field of agricultural engineering and shall formulate policies and should take strategic decisions. Above HR team shall be engaged in order to manage the operational affairs of this project under the supervision of Owner/Manager. Appropriate experience along with high level of vision will be key requirements for these professionals.The entrepreneur will be responsible for getting necessary training from the concerned departments working on HEIS. The training and field facilitation by PARC will depend on resources availability, number of candidates and availability of expertise in the required area.
Table 6: Human Resource Requirement
Description / No of workers / Monthly SalarySkilled Manager/Agricultural Engineer/owner / 1 / 30000
Surveyor/technician / 1 / 15000
Helper / 1 / 10000
Total / 3 / 55000
10.7Operating Cost
The expected operating cost is summarized in the following table.
Table 8: Operating Cost
Description / Rs. per month / Annual CostSalary / 55000 / 660000
Fuel / 15000 / 180000
Refreshment & meals / 5000 / 60000
Rent of office cum store / 10000 / 120000
Utilities / 5000 / 60000
Total / 1080000
10.8Revenue Generation
Table No. 7 provide details of revenue expected to be generated from the HEIS business during the first year of launching of this business.
Table 7: Revenue Generation
Services / No. of projects/year / Area (Acres) / Project cost (Rs.) / Service charges @10%Drip Irrigation System / 5 / 1 / 450000 / 45000
6 / 5 / 2700000 / 270000
3 / 10 / 2700000 / 270000
1 / 15 / 1350000 / 135000
Sprinkler Irrigation System / 5 / 1 / 375000 / 37500
5 / 5 / 1875000 / 187500
2 / 10 / 1500000 / 150000
1 / 15 / 1125000 / 112500
Furrow Bed Irrigation System / 5 / 1 / 10000 / 1000
5 / 5 / 50000 / 5000
5 / 10 / 100000 / 10000
1 / 15 / 30000 / 3000
Total / 44 / 240 / 12265000 / 1226500
11. KEY ASSUMPTIONS
The key assumptions are summarized in table:
Table 9: Key Assumptions
Particulars / AssumptionSales Price Growth Rate / 10% per year
Increase in cost of raw material / 5% per year
Increase in utilities / 10% per year
Debt/Equity Ratio / 90:10
Service Charges / 10%
Loan Period / 8 years
Grace Period / 1 year
Loan Installments / Yearly
Markup / 8%
CONTACT DETAILS OF GOVT. INSTITUTIONS/ EXPERTS/CONSULTANTS
Name: Dr. M. Munir AhmadDesignation:Principal Scientific Officer (PSO)
Institute:Climate Change, Alternate Energy and Water Resources Institute, (CAEWRI), National Agricultural Research Centre, Park Road, Islamabad
Email Address:Tel: +92-51-8443757
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FINANCIAL ANALYSIS
Table 11: Project Income Statement
INCOME STATEMENTYear / Year / Year / Year / Year / Year / Year / Year / Year / Year
Revenues / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10
1,226,500 / 1,349,150 / 1,484,065 / 1,632,472 / 1,795,719 / 1,975,291 / 2,172,820 / 2,390,102 / 2,629,112 / 2,892,023
Fuel / 180,000 / 189,000 / 198,450 / 208,373 / 218,791 / 229,731 / 241,217 / 253,278 / 265,942 / 279,239
Cost of Goods Sold / 180,000 / 189,000 / 198,450 / 208,373 / 218,791 / 229,731 / 241,217 / 253,278 / 265,942 / 279,239
Gross Profit / 1,046,500 / 1,160,150 / 1,285,615 / 1,424,099 / 1,576,928 / 1,745,560 / 1,931,602 / 2,136,823 / 2,363,170 / 2,612,784
Salaries / 660,000 / 726,000 / 798,600 / 878,460 / 966,306 / 1,062,937 / 1,169,230 / 1,286,153 / 1,414,769 / 1,556,245
Rent / 120,000 / 132,000 / 145,200 / 159,720 / 175,692 / 193,261 / 212,587 / 233,846 / 257,231 / 282,954
Utilities / 60,000 / 66,000 / 72,600 / 79,860 / 87,846 / 96,631 / 106,294 / 116,923 / 128,615 / 141,477
Depreciation / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600
Other Office Expenditure / 60,000 / 66,000 / 72,600 / 79,860 / 87,846 / 96,631 / 106,294 / 116,923 / 128,615 / 141,477
Interest on Loan / 110,592 / 110,592 / 98,198 / 84,812 / 70,355 / 54,742 / 37,880 / 19,668 / - / -
Sub - Total / 1,029,192 / 1,119,192 / 1,205,798 / 1,301,312 / 1,406,645 / 1,522,801 / 1,650,884 / 1,792,114 / 1,947,830 / 2,140,753
Operating Income / 17,308 / 40,958 / 79,817 / 122,787 / 170,282 / 222,759 / 280,718 / 344,710 / 415,340 / 472,031
Tax / - / - / - / - / - / - / - / - / 1,534 / 7,203
Net Income / 17,308 / 40,958 / 79,817 / 122,787 / 170,282 / 222,759 / 280,718 / 344,710 / 413,806 / 464,828
Table 12: Project Cash flow Statement
CASHFLOW STATEMENTYear-0 / Year-1 / Year-2 / Year-3 / Year-4 / Year-5 / Year-6 / Year-7 / Year-8 / Year-9 / Year-10
Net Income / 17,308 / 40,958 / 79,817 / 122,787 / 170,282 / 222,759 / 280,718 / 344,710 / 413,806 / 464,828
Depreciation / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600 / 18,600
Net Inventory / (180,000) / (19,800) / (21,780) / (23,958) / (26,354) / (28,989) / (31,888) / (35,077) / (38,585) / (42,443) / 466,874
Tax / - / - / - / - / - / - / - / - / 1,534 / 7,203
Cash from Operations
Inflow / Outflow / (180,000) / (2,492) / 37,778 / 74,459 / 115,033 / 159,893 / 209,471 / 264,241 / 324,725 / 391,497 / 957,504
Interest on Loan / 110,592 / 110,592 / 98,198 / 84,812 / 70,355 / 54,742 / 37,880 / 19,668 / - / -
Net Cash from Operations / (180,000) / (113,084) / (72,814) / (23,738) / 30,222 / 89,538 / 154,729 / 226,361 / 305,057 / 391,497 / 957,504
Owners Equity / 153,600
Principal Amount / - / 154,929 / 167,323 / 180,709 / 195,166 / 210,779 / 227,641 / 245,853 / - / -
Long Term Loan / 1,382,400
Cash from Financing
Inflow / Outflow / 1,536,000 / - / 154,929 / 167,323 / 180,709 / 195,166 / 210,779 / 227,641 / 245,853 / - / -
Furniture and Fixture / (23,000)
Land Rent (Building) / (120,000)
Machinery and Equipment / (163,000)
Net Cash from Investing Activities / (306,000) / - / - / - / - / - / - / - / - / - / -
Net Cash
Inflow / Outflow / 1,050,000 / (113,084) / 82,115 / 143,585 / 210,931 / 284,704 / 365,508 / 454,003 / 550,910 / 391,497 / 957,504
Opening Balance / - / 1,050,000 / 936,916 / 1,019,031 / 1,162,616 / 1,373,546 / 1,658,250 / 2,023,758 / 2,477,761 / 3,028,671 / 3,420,168
Closing Balance / 1,050,000 / 936,916 / 1,019,031 / 1,162,616 / 1,373,546 / 1,658,250 / 2,023,758 / 2,477,761 / 3,028,671 / 3,420,168 / 4,377,672
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