VII. FINANCIAL ASPECT

VII.1. Investment Requirements

1.1. Capital Goods

The investment necessary for the establishment of the hatchery and the commercial ponds is estimated at Rp.533,940,000.--. This amount will consist of :

Pre-operating Expenses will amount to Rp.74,920,000.--, including expenses for experts amounting to Rp. 73,040,000.--, to cover cost of two consultants for 16 months at US$.88,000.-- per year. The total land to be used will be 112 hectares, namely 7 hectares for the hatchery and 105 hectares for the commercial ponds. The price of land in the project areas is estimated at Rp.500,000.-- per hectare. Further specification of this investment amount can be seen in the appendices.

1.2. Working Capital

Working capital requirement for the hatchery is based on the following assumptions :

1. The schedule for juvenile production and other programs are running smoothly.

2. During the first year, the hatchery will deliver juveniles to PFC free of charge. PFC will further deliver the relative juveniles to the farmers also free of charges.

3. The sales proceeds will be deposited in the State Treasury, as these proceeds are State revenues. Therefore, the hatchery as a project within the Directorate General of Fisheries, will operate at cost. Thus, working capital required for the hatchery will consist of cash expenses in the first year, added with required funds for supplies.

On this basis, it is estimated, that the working capital required for the hatchery will amount to Rp.35,500,000.--, consisting of the following :

For the second year and onwards, the Routine Expenditures Budget for the project will only amount to Rp.34,520,000.--.

The calculation of the working capital requirement for the PFC is based on the following assumptions :

1. The time needed to cultivate prawns for the first batch is 5 months.

2. The time needed for catching (with fishing nets), sortation of shrimps and despatch to Jakarta, is one week.

3. The sales are conducted on the basis of cash on delivery.

4. The payment of interest is posponed until the company receives sales proceeds.

5. Shrimp feed and other requirements are purchased on cash basis.

6. The supplies are in the average required for 1 month's operation.

7. The farmers are subsidized by the PFC in the form of loans, as long as the ponds cannot yet produce (Rp. 15,000.-- per month per family).

On the basis of the above assumptions, it can be estimated, that the farmers will obtain proceeds from its operations only after 6–7 months. The working capital requirement for the PFC will amount to Rp. 21,600,000.--. This amount will consist of :

VII.2. Financing Sources and Schedule

2.1. Financing of the Hatchery

The hatchery is planned as a project management unit under the jurisdiction of the Directorate General of Fisheries and will be financed with funds from the State Budget. The investment costs will be included in the Development Budget and the working capital requirements will be included in the Routine Budget.

The Directorate General of Fisheries will draw up a D.U.P. (Project proposal List), among others containing the financing schedule or the funds utilization, in conformity with the physical development plan. The complete specification of the investment financing schedule can be observed in Appendix VII.8.

The utilization schedule of the Routine Budget funds in the D.I.P. (project Application List), is composed per quarter as follows :

(In Rupiah)

2.2. Financing of the Commercial Ponds

The capital requirement for the cooperative will be obtained from two principal sources, namely Credits from the Bank Rakyat Indonesia (BRI) and grant aid from the Government, allocated through the Directorate General of Fisheries (DGF) and/or the Directorate General of Cooperatives (DGC).

The funds cannot be expected from the farmers, who are Cooperative members, as these farmers cannot be expected to possess any significant resources. The respective Government aid will be regarded as equity capital.

In this study, 4 (four) combinations of financing sources will be considered as alternatives, namely :

1. Government Aid 40 pct. and Bank Rakyat Indonesia credits 60 pct.
2. Government Aid 50 pct. and Bank Rakyat Indonesia credits 50 pct.
3. Government Aid 60 pct. and Bank Rakyat Indonesia credits 40 pct.
4. Government Aid for all basic facilities, such as houses, ponds and water-channels.

The compositions of the financing sources can be prosented as follows :

The large contribution from the Government in Alternative IV, should be considered, if the development of the project will be connected with the Government's transmigration program.

With alternative IV the project cost to be borne by the Cooperative, will be less, as the ponds, water channels and housing will be financed by the Government and will eventually become the property of the farmers. In addition, it is also assumed that, like other transmigration projects, all the costs of moving the farmers from Java to Lampung, will be borne by the Government.

The specification of the investment cost allocations in this case, can be presented as follows :

(in thousand Rp.)

The investment financing shcedule of the Cooperative is composed on the basis of the physical construction plan and funds utilization saving efforts.

In the investment financing of the commercial ponds, the initial expenditure to be disbursed is for the release of land and then followed by the construction of water-channels, ponds and buildings. There are also disbursements for the purchase and installation of machineries and equipments insulated trucks and construction of insulated rooms. Shrimp processing equipments can be purchased at the time the ponds will start to produce, i.e. after the 32^nd month of the implementation period. The specification of this financing schedule can be observed in Appendix VII.8.

The working capital utilization of the Cooperative is practically evenly spread over the months, except for insurance cost, which is to be paid in the first month of operation.

In the first quarter of operation, the required working capital will amount to approximately Rp. 11,600,000.-- and in the second quarter approximately Rp. 10,000,000.--. In order to reduce the interest burden for the Cooperative, it is suggested to first utilize funds of grant aid from the Government.

From the point of view of the PFC, Government aid in the form of capital goods directly to the farmers, as referred to in the 4^th alternative, will on the one hand, reduce maintenance costs and spareparts requirements but on the other hand, will reduce rent revenues from the farmers. With the transfer of ownership to farmers, the net revenue of PFC will be reduced with Rp. 2,440,000.-- due to the loss of rent formerly paid to PFC.

However, the working capital requirement for the PFC is estimated to be the same with are alternative.

Maintenance costs and replacement of equipments still have to be borne by the PFC and will later be charged to the farmers, after they have produced.

Therefore, the working capital required for the Cooperative in alternative IV will still be Rp. 21,600,000.--, with the same utilization schedule.

VII.3. Financial Prospect

3.1. Profitability

An analysis of the profitability of the hatchery, as well as to commercial ponds, should include considerations of price and cost structure and the influence of volume of production. Particularly significant is the degree of success in cultivation and catch as well as the areal-extent of commercial ponds. Such an analysis is necessary for the projection of profit and loss and break-even analysis.

3.1.1. Price- and Cost Structures

a. Price- and Cost of Juveniles

Presently in Indonesia, there are no companies or agencies yet, which produce juveniles and operate giant freshwater prawn culture ponds commercially.

Thus, we have no data on commercial prices and costs of juveniles.

Shrimp juveniles caught at sea are traded at an average price of Rp. 5.-- per piece. The quality of these shrimp juveniles, is uncertain, as they consist of various kinds of shrimps and are difficult to differentiate from each other at the larve and juvenile stages.

The tiger prawn- and giant freshwater prawn juveniles which are produced by the Shrimp Research Centre of Jepara, are so far supplied to farmers free of charge through the Fisheries Services.

The shrimp juveniles to be produced by the hatchery as referred to in this report, will be sold to freshwater pond farmers.

In determining their prices, the cost factor, competition prices (including of natural shrimp juveniles as a substitution) and the purchasing power of farmers, will be considered.

The cost calculation composed for juveniles production levels of 9 million pieces and 18 million pieces show the following costs per unit :

Since the status of the hatchery is an agency under the jurisdiction of the Directorate General of Fisheries (DGF), it is assumed, that the price to be charged to the purchasers, will be based on the out of pocket cost.

Thus, the prices to be charged for juveniles will be Rp. 3.84 (rounded-off to Rp. 4.--) and Rp. 2.28 (rounded-off to Rp. 2.50) respectively.

Based on these prices, it is assumed that the PFC will in turn charge its members with Rp. 4.50 per juvenole.

Although this price of Rp. 4.50 is relatively low, in the first year the farmers will not be able yet to pay for their juveniles. If a farmer requires 300,000 pieces of juveniles a year, for his three hectares of ponds, that in one year he has to pay Rp. 1,350,000.-- for juveniles.

In the first year, in which the catch is expected to be only 50 pct. of the normal capacity, the farmers will suffer a loss of approximately Rp. 1,103,000.-- (with Alternative I) and Rp. 605,000.-- with Akternative II.

In order to cover this loss, it is suggested, that in the first year the farmers will obtain the relative juveniles free of charge. In addition, the hatchery project will be expected to perform an informational function to guide the farmers in their operational activities.

In the first stage, the hatchery will only serve the PFC, which is coordinating the farmers in the project. When commercial ponds activities can be extensified, the hatchery will also serve other freshwater pond farmers, in Lampung as well as in other regions, which can be reached in less than 24 hours' time from the hatchery.

b. Prices and Costs of Giant Freshwater Prawns for the Cooperative

The prices of domestic shrimps greatly depend on the prices of shrimps abroad.

The check prices of fresh shrimps in headless condition at present (April 1977), are as follows :

• Size A (1 through 25 pieces/1b.) = US$. 7,750/metric ton.

• Size B (26 through 40 pieces/1b.) = US$. 5,190/metric ton.

This means, that the check prices of shrimps per kilogram are: Size A Rp. 3,216.25 and Size B Rp. 2,153.85.

According to a shrimp exporting company in Jakarta, the deviation of the actual prices form the relative check prices, is approximately 20 pct.

At present, the company concerned is prepared to purchase fresh shrimps of Size A at Rp. 3,000.-- per kilogram, and Size B at Rp. 2,500.-- per kilogram. For the purposes of this report, these purchasing prices are used as a basis of calculations.

The purchasing price of giant freshwater prawn is expected to be lower than those of tiger prawn and marine shrimp, as the head proportion of giant freshwater prawn is larger compared to tiger prawn and marine shrimp.

In addition, giant freshwater prawn needs more ice than tiger prawn, since it is more easily perishable.

The Cooperative can sell giant freshwater prawns (head on) at collector trader locations at a selling-price of Rp. 1,200.-- per kilogram or sell them to Jakarta (headless) at a price of Rp. 3,000.-- per kilogram for Size A. By selling them to Jakarta, the Cooperative can still obtain a marginal income of approximately 8 pct., as described hereunder.

Assuming a sale of 500 kilograms of fresh prawn head on, with processing and sortation this will come to 200 kilograms Size A and 50 kilograms Size B, headless.

From the analysis it can be concluded, that the margin obtained by the Cooperative is still sufficient, approximately 8 pct., and this means, that for the Cooperative as well as the farmers it is more profitable to sell directly to Jakarta in headless condition than to sell them at the commercial ponds in head on condition.

With such a low margin, the private collector traders will not be able to stay in business at the above price. With an additional transportation cost of Rp. 40 per kilogram (from the fishermen locations to the airport), it means, that the traders will only obtain a margin of approximately 4 pct.

The transportation costs for collector traders who do not own transportation facilities means, are entirely of variable nature, whereas for the PFC using its own trucks, these costs are fixed, and comes to a lower unit cost with increasing sales volume.

Indeed for the PFC, the purchase price of Rp. 1,200.--, are in fact rather high . However, in order that PFC can develop members loyalty and raise the welfare of its members, PFC should continue to purchase at the above price.

Furthermore, this price is used as a basis, in order that the Profit-Loss Projection of the PFC will be sufficiently conservative.

c. Prices- and Costs of Giant Freshwater Prawn for the Farmers

The factors greatly influencing shrimp cultivation costs, are:

1. Price of juveniles.
2. Quantity of catch (mortality and size).
3. Price of feed.
4. The areal-extent of ponds in one area.

The areal-extent of commercial ponds will influence the efficiency of the hatchery and the auxiliary facilities of the commercial ponds, such as insulated rooms, diesels, insulated trucks and organizational facilities. With areal-extent of commercial ponds of 90 hectares, the hatchery can only distribute 9 million juveniles yearly at Rp.3.84 per piece.

If the areal-extent of ponds is extended to 180 hectares, the hatchery can produce and distribute juveniles up to 18 million pieces, at a lower per unit price of Rp.2.28. The commercial ponds should not be too far from the hatchery, otherwise transportation costs and risks of mortality of juveniles during transportation will become greater.

With the 90 hectares commercial ponds the use of auxiliary facilities will be relatively inefficient.

It is estimated that the some facilities can serve twice the size of the planned commercial ponds, as long as they are located nearby.

3.1.2. Profit-Loss Projection

The Profit-Loss Projection is composed for the PFC as an agency, coordinating the farmers, and for the farmers themselves as operators of 3 hectares ponds.

For the hatchery, no profit-loss projection is composed, as this is a non-profit undertaking. In calculating the costs and benefits of the project as a whole, the combined profit-loss and cash-flow projection of the hatchery, the farmers and the PFC, are composed.

a. Profit-Loss Projection of the Cooperative

In calculating the profit-loss projection of the Cooperative, two alternative production levels and four alternative financing sources are used, namely :

Alternative production levels :

1. A normal production level of 1,350 kilograms per year per hectare.

2. A normal production level of 2,000 kilograms per year per hectare.

Alternative financing sources :

1. Equity 40 pct. and debt 60 pct.

2. Equity 50 pct. and debt 50 pct.

3. Equity 60 pct. and debt 40 pct.

4. Equity 87 pct. and debt 13 pct.

The financing sources of the Cooperative are :

1. The difference between the selling-price of shrimp juveniles to member farmers and the purchasing price from the hatchery.

2. The difference between the selling-prices of shrimp feed and fertilizers to member farmers and the milling price of the relative material.

3. The difference between the selling-price of shrimps to Jakarta and the purchasing price from farmers added with the processing- and transportation costs.

In the profit-loss projection composed, it is assumed, that the Cooperative will take margins of 12.5 pct from shrimp juveniles, 10 pct from feed and fertilizers, and approximately 8 pct from shrimp sales.

The costs to be borne by the Cooperative outside the purchasing prices of juveniles, - feed and -fertilizers, and the purchasing price of shrimps, are :

1. Personnel Expenses.
2. Costs for shrimp processing, ice usage, transportation costs and fuel costs.
3. Retribution to the Regional Government.
4. Maintenance costs, insurance and small equipments costs.
5. Depreciation costs.
6. Interest.

The facilities owned by the Cooperative will be rented to farmers at nominal cost.

These costs are practically all fixed costs, and will amount to Rp. 22,205,000.-- each year, with the following specification:

These costs will be evenly charged to the farmers on the basis of rent status, amounting to approximately Rp.740,000.-- per month.

In case the ponds and water channels become the property of the Cooperative (Alternative IV), then the maintenance costs and the depreciation of ponds and water-channels will be the responsibility of the farmers themselves.

For the PFC, this will be a reduction of costs, but at the same time it will also mean a reduction of rent revenues.

From the profit-loss projection composed on the basis of the preceeding assumptions, it can be observed, that up to the fifth year the Cooperative will still sustain a loss, although in the first year alone, the Cooperative can already gain a profit before deduction of interests and taxes to the amount of Rp. 2,369,000.-- (at a production level of 1,350 kilograms) and Rp. 3,804,000.-- (at a production level of 2,000 kilograms/ hectare/year).

However, this profit cannot cover the interest costs, of which the amounts are sufficiently large. A comparison between the Earnings Before Interests and Taxes (EBIT) and the interest costs can be presented as follows :

The interest costs figures in the above table, are also includes interests during the construction period, amounting to Rp.22,560,000.-- (Alternative I), Rp.17,120,000.-- (Alternative II), Rp. 11,920,000.-- (Alternative III) and Rp. 2,278,000.-- (Alternative IV).

Since in the first year the PFC is still unable to pay interest, it is compelled to postpone the payment of interest until later.

In this report, the cash flow projection is composed with the assumption, that the postponed interests are considered as loans.

As mentioned earlier, Earnings Before Interests and Taxes (EBIT) after the first year will continuously increase up to the sixth year. However, the Cooperative will still sustain losses due to the relatively large interest burden.

The Cooperative will start to obtain net profits in different years for each alternative, which can be specified as follows:

The above table indicates the great influence of the interest burden on the Cooperative.

In alternative I, the interest to be borne by the Cooperative will steadily increase from year to year, due to the accumulation of the postponed interest.

The interest burden in the first year (without interest during the construction period) amounts to Rp.24,955,000.--, whereas the interest in the eleventh year will amount to Rp. 38,339,000.--

The condition of the Cooperative will naturally be better, if no interest is imposed on the postponed interest.

The financial condition of the PFC can also be improved by increasing the margin received by the PFC by way of reducing the purchasing price of juveniles from the hatchery or by raising the selling prices of juveniles and feed to the farmers.

However, as mentioned earlier, the purchasing price from the hatchery is considered sufficiently low (at out-of-pocket cost of the hatchery), and the price to farmers is determined in order that members can obtain a sufficiently attractive margin.

In facing these “financial pressures”, it is assumed, that the PFC will eventually be supported by its members through their principal and obligatory savings, after the project shows reasonable results.

b. Profit-Loss Projection from Pond Operations by Farmers

As stated earlier, the PFC will purchase fresh shrimps (head-on) from the farmers at a price of Rp. 1,200.-- per kilogram and sell shrimp juveniles at a price of Rp. 4.50 per piece and shrimp feed at Rp.110.-- per kilogram.

In the first year the PFC will deliver juveniles to its members free of charge. The purchasing price of shrimps by the Cooperative will constitute a source of revenues for the farmers. On the other hand, the sale of shrimp juveniles and shrimp feed by the PFC will constitute costs for the farmers.

Other costs to be borne by the farmers, are rent of pond facilities and cost-of-living for the families of the farmers. These costs are estimated at Rp. 15,000.-- per month for each family.

On the basis of the above assumptions, the profit-loss projection for one farmer family operating commercial ponds of 3 hectares is presented in Appendix VII.11.

From this projection, it appears, that each farmer family will obtain sufficiently large profits, namely as follows :

In alternative I above, in the first year the farmers will obtain a profit of Rp. 221,000.--, but in the second year they will sustain a loss of Rp. 147,000.--. This is caused by the provision of shrimp juvenile subsidies in the first year.

The actual gain enjoyed by the farmers, are more than just the profits gained. These figures should be added with the cost-of-living calculated as labour cost of Rp. 180,000.-- per year, and the wages received by the farmers from processing of shrimps, repairs of ponds, water channels, etcetera.

To support the existence of the PFC and in order to realise the Cooperative ideals, the respective revenues of the farmers should be deducated with Principal and Obligatory Savings. The deductions can be performed after the third year (at a production level of 2,000 kilograms/hectare/year) or after the fifth year (at a production level of 1,350 kilograms/hectare/year).

It is estimated that after the sixth year, with normal production, the farmers can obtain a yearly nett revenue of approximately Rp. 750,000.-- (Alternative I) or Rp. 1,200,000.-- (Alternative II) per family.

c. Profit-Loss Projection for the Hatchery

The relevance of Profit-Loss Projection for the hatchery is considered less since the hatchery will constitute a non-profit undertaking.

For the hatchery, only the cost-price calculation is composed, as presented in Appendix VII.9.

In the preceding part, it was stated, that the hatchery will sell its production at out-of-pocket cost.

If the total production is 9 million larve each year, then the cost-price per unit will be Rp. 3.84 and if the production is 18 million pieces, then the cost per unit will be Rp. 2.28. If the production of 18 million pieces is sold at a price of Rp. 4.-- per piece, then the hatchery will be able to obtain a small gross margin, but the nett margin will still be negative.

In this study, the hatchery is assumed to continue selling at out-of-pocket cost, so that it can be projected, that the hatchery will always sustain losses.

For the purpose of cost projection, the hatchery will have a zero cash flow each year, except in the first year where it is negative.

3.2. Liquidity

a. Projected Cash Flow

In this section, the projected liquidity of the commercial ponds, will be discussed.

The funds resources for the PFC will consist of :

1. Funds generated by operations of the undertaking.
2. Credits from Bank Rakyat Indonesia (BRI) for the initial stage and for additions/supplements required after the operations.
3. Aids from the Government in the form of grants to member farmers.
4. Contributions from Cooperative members, in the form of Principal and Obligatory Saving, after the ponds start producing.

The funds generated by operations of the undertaking, are Earnings Before Interests and Taxes (EBIT), deducted with taxes and additional working capital required.

The funds are utilized for :

1. Project investment
2. Working capital
3. Replacement of Fixed Assets.
4. Debt repayments consisting of interest- and loan payments.

Replacement of fixed assets will be effected at the end of the usage period. The replacement value at that time is estimated at the purchasing price deducted with the estimated residual value of the fixed asset concerned.

The first replacement will occur in the eighth year, followed by the 10^th year, the 15^th year and the 16^th year.

The cash flow projection is limited to 20 years and the balance of the working capital at the end of the twentieth year is also regarded as cash inflow, estimated at about 50 pct. of the initial working capital.

b. Credit Repayment Schedule

The credit repayments will be postponed until operations show results. The ability to repay credits will be greatly influenced by the results of operations (varying with different production levels), and by the amounts of interest to be paid.

For this purpose, 4 (four) projected cash flows are composed, as presented in Appendices VII.14, VII.15, VII.16 and VII.17.

From these projections, the mutations of debts from year to year for each alternative, can be observed. The capability of the PFC to repay the loans varied from one alternative to the other as presented in the table hereunder.

Capability of the Cooperative to Repay
the Credits in Various Alternatives

VII.4. Financial Rate of Return

On the basis of the projected cash flow specified in the preceding section, the Financial Rates of Return of the PFC and for pond operations by the farmers, can be calculated.

The calculation of the Internal Financial Rate of Return is effected for both alternative production levels and the 3^rd and 4^th financing alternatives.

The results of these calculations can be presented as follows :

With the fourth financing alternative, in which the ponds are provided by the Government to the farmers, a high Internal Financial Rate of Return (IRR) will be obtained (56 pct. & 74 pct.), as the capital outlay for the Cooperative is very low, namely only Rp. 25,320,000.--, whereas the margin obtained by the Cooperative is sufficiently large.

With the third financing alternative, in which the Cooperative will obtain a grant of 60 pct. and a loan of 40 pct, a low Internal Financial Rate of Return (IRR) will be obtained, as the capital outlay is sufficiently large, namely Rp. 343,320,000.--. In this case, the grant to be received by the Cooperative, is still regarded as a part of the outflow.

For the individual farmers, assuming the ponds are given to the farmers (alternative IV) and considered as capital outlay of the farmers, the Internal Financial Rate of Return (IRR) is only 6.65 pct. and 9 pct. per year respectively. On the other hand, if the farmers are renting the ponds (Alternative I, II, III), then the farmers will not have an out flow, but will obtain an inflow.

In this case, the Internal Financial Rate of Return (IRR) will naturally become infinitely large. The large variations in the Internal Financial Rates of Returns between the pond farmers and the PFC, besides being caused by the different financing alternatives, are also caused by the price of the PFC's output, which becomes cost of input for the farmers and visa versa, is determined arbitrarily.

The Internal Financial Rates of Return (IRR) for the Cooperative and the farmers as a whole, appears to be rather moderate, namely 10 pct. at a production level of 1,350 kilograms/hectare/year and 19.83 pct. at a production level of 2,000 kilograms/hectare/year.

For the purposes of overall analysis of the project, these combined IRR figures are more relevant than the IRR figures separately calculated for the PFC and for the farmers.

VII.5. Economic Rate of Return

Looking at the project as a whole, we can observe that operations of the hatchery, commercial ponds, and processing and marketing of power by PFC are interrelated.

The success of each part will greatly depend on the success of other parts of the project. Therefore, economically the parts of the project can not be evaluated separately, but should be evaluated as an integrated whole.

Therefore, the reciprocal items of input and output of these three parts of the project should be eliminated. Furhermore, tax and interest need not be taken into account, as these elements are a part of the inflow in calculating the economic rate of return.

The Projected Income Statement is composed for a shrimp production level of 1,350 kilograms/hectare/year and 9 million larve per year, and for a shrimp production level of 2,000 kilograms/hectare/year. Similarly, the projected cash flows are composed for these two levels.

On the basis of the combined profit-loss projection, it can be concluded, that with a production level of 1,350 kilograms/hectare/year, the project will start to obtain a positive Earning Before Interest and Taxes (EBIT) in the fourth year and with a production level of 2,000 kilograms/hectare/ year, the Earning Before Interest and Taxes (EBIT) will become positive as from the second year.

The combined Projected Cash Flow shows the existence of a Sufficient Cash inflow, but as this amount will only be obtained after the sixth year and onwards, its present value is not so high.

The calculations of the projected combined net cahh flow concerned can be observed in Appendix VII.20 and VII.21. From these calculations, it can be concluded, that, with a production level of 1,350 kilograms/ hectare/year, the Internal Economic Rate of Return (I.E.R.R.) will be 5.27 pct, and with a production level of 2,000 kilograms/hectare/year, the Internal Economic Rate of Return (I.E.R.R.) will be 13.44 pct.