Y.C. Shang
University of Hawaii
Honolulu, Hawaii
1. INTRODUCTION
2. ECONOMIC CONSIDERATIONS IN SITE SELECTION
3. ECONOMIC CONSIDERATIONS IN CONSTRUCTION
4. ESTIMATION OF CONSTRUCTION AND EQUIPMENT COSTS
5. ECONOMIC EVALUATION
6. REFERENCES
In recent years, increasing attention has been given to aquaculture in many parts of the world. This is due in part to:
(a) the growing awareness of problems in the marine fisheries sector, such as the rising costs of fuel, water pollution, over fishing and the extension of exclusive fishing zones;(b) the major development possibilities in view of the extensive inland, brackish and marine water areas available for aquaculture in different parts of the world, and
(c) the suitability of aquaculture to small-scale and integrated operations.
However, for aquaculture to realize its potential, it should be technically, economically and socially feasible in a given area.
Profitability is the major concern of commercial fish farms. The farmers' profit is mainly affected by the level of production per unit of water area and the costs of production. Site selection and construction are crucial factors affecting the operating efficiency of the farm, thereby influencing initial capital costs, operating costs and level of yield.
The primary physical factors to be considered in site selection are topography, hydrology and soil conditions, as mentioned in other sections. There are also many bio-physical parameters which are equally important but are more species dependent. This section relates these physical factors with economics. As pond culture is the most prevalent kind of aquaculture practised today, it is emphasized in this section.
The ideal site for a fish farm is on land that is flat or nearly so. A slope of more than 5 percent is not desirable because of extra construction costs associated with back-filling, and the increased possibility of run-off problems. Areas with flooding possibilities are undesirable for aquacultural use because of the detritus effects on water quality, erosion potential and the introduction of undesirable species into the pond. Topography, aided by engineering, should permit the pond to be drained completely. Otherwise pumping is necessary with extra costs.
A constant supply of high-quality water must be available throughout the year to replace losses due to evaporation, seepage and drainage during management operation.
Surface water sources often fluctuate in quality and quantity. Well water tends to be more dependable and is usually free of disease organisms, parasites, predators and pollutants. In addition, consistent supplies of well water may permit more crops per year and increase farm income. However, it is costly to drill wells.
Discharge of untreated effluent from aquaculture systems is disallowed in some areas. Treatment of large quantities of water can be extremely costly. One alternative which has been practised in some developed countries is deep well injection of effluent. This will increase the initial capital cost and pumping costs of the operation.
Two aspects of soil quality are important: fertility and water retention. The fertility of the soil should be adequate enough to encourage the development of a benthic community. In culture systems where fish derive most of their food from naturally occurring organisms, fertility is very important and affects the cost of feed. Soils of high organic content should be avoided in level construction because of settling from decomposition which might cause cracking and seepage and thereby increase maintenance costs. In addition, the soil should be free of residual pesticides or other contaminants. Otherwise it affects the yield.
It is best to construct the pond on soil which retains water well. This will reduce or eliminate leakage problems and repair costs.
Besides the physical factors mentioned above, the cost of land and the clearing works involved are two other factors to be considered in site selection. If land has to be purchased, efforts should be made to avoid the selection of sites with competing uses. Sites with competing uses are usually highly valued. If suitable sites can be leased, then the terms of lease are important considerations. It is also essential that the operator is entitled to the legal or right use of the site to protect his investment. The clearing work involved in cutting trees, digging up roots, removing rocks, etc., should be minimal in order to reduce costs.
The size, depth, and shape of pond and the method of construction, are the major factors affecting the costs of construction.
There is no universal answer to the optimal size of pond. Generally, the larger the pond size the lower the cost of construction per unit of water area and the greater the efficiency in land utilization. Larger ponds require less land for road and ditches per unit of pond. Costs of equipment and other facilities per unit of pond are also less for larger ponds, therefore the depreciation of the capital investment is lower.
Large ponds, however, are relatively less productive than small ones because: (a) they cannot be drained well or take a longer time to drain; (b) unsatisfactory ratio of the shore line to the area. The shore line of one large pond is shorter than that of several small ponds of the same area. The shore lines are the most productive zones of a pond, and the food resources of this zone are much higher than in the central part of ponds; (c) feed cannot be distributed easily in the central part of a pond; (d) difficulties in exercising effective control of weeds and predatory fish. Large ponds usually have higher losses compared to small ones; (e) difficulties in harvesting; and (f) higher maintenance costs caused by wind erosion.
On the other hand, the smaller the pond size the greater the convenience of pond management, but construction costs are relatively high. Smaller ponds require more land area and restrict automation.
The depth of the pond depends mainly on the climatic conditions and the species to be cultured. The ponds can be shallower in warm than in cold regions. As costs of construction increase in proportion to depth, excavation should be minimized. Ponds can be any shape but rectangular may be more convenient for feeding and harvesting.
In general, economy of construction, efficiency of operation and productivity of the pond are usually the primary factors in determining the size, shape and depth of a pond.
Fish ponds can be constructed in a number of ways. For instance, a fish pond can be constructed by manual labour or machines; machines can be rented or purchased; a water system can be supplied by PVC piping or by canal; pipes can be made with bamboo, plastic or cement; the sluice gate can be wooden or concrete; water tanks can be concrete or fabric made, etc. The choice from these alternatives should be based on the relative costs and efficiency of construction.
Construction of a fish farm includes five major types of work: farm layout or design, land clearing, earthwork, water system and sluice gates, and buildings. A fee is usually charged if the farm is designed by an engineering company. The cost of land clearing depends mainly upon the clearing works involved and labour and machine hours required.
Earthwork for a fish farm includes the excavation and completion of ponds and canals. These constitute the major cost of fish farm development and the bulk of the construction period. Ponds can be constructed by manual or mechanical methods. The choice depends mainly on the nature of the work, cost of construction, and time requirement. Generally, the mechanical method has the advantage of shortening the construction period, lessening the cost of construction and improving the quality of the work; whereas the manual method will generate employment. The cost of earthwork is usually estimated by calculating the expenses of moving and unit volume (cubic zone) of earth for excavation and diking. The cost can be also estimated on the basis of actual expenses for machinery, labour, tools, materials and management.
The cost of a water system and sluice gates can be estimated based on materials used, labour days required, and their unit cost. Cost of buildings can be estimated by square foot or by actual expenses.
Major equipment needed on a farm usually includes a pump, truck, holding tank, oxygen meter, and pH meter, etc. The amount of equipment required per farm depends mainly on the size of the farm.
Estimation of the costs of construction and equipment of a freshwater prawn farm in Hawaii (Shang, 1981).
Pond construction costs vary according to the topography of the site selected, the size of the farm being developed, and the size and shape of an individual pond. Current excavation and compaction costs for employing a licensed contractor to construct a rectangular-shaped 0.4 ha earthen pond on a properly selected site are approximately US$ 1.00 per 0.9 m3 (1 cubic yard) for earth moving and US$ 2.00 per 0.9 m3 for construction and compaction of berms/embankments and the pond bottom, including the costs of pond design, permits, insurance, etc.
For this study, the construction cost for an earthen pond was estimated based on a 0.4 ha pond with a total wetted area measuring 120.7 m long × 33.5 m wide × 0.9 to 1.2 m deep (396 feet long × 110 feet wide × 3 to 4 feet deep) and based on the volume of cut equalling the volume needed for constructing the embankments. The total amount of land required for a 0.4 ha pond farm is approximately 0.6 ha (1.5 acres) or 146.7 percent of the wetted area. For a large size farm with numerous ponds, however, only one half of the surrounding embankment is required for each pond. In this case, the total amount of land required for a 0.4 ha pond is about 0.5 ha (1.2 acres) or 117.6 percent of the wetted area.
Moreover, due to economics of scale, excavation and compaction costs per 0.9 m3 for larger farms are lower. As the construction project expands in terms of total acreage, the aggregate work effort required decreases (Table 1).
Table 1 Estimated Excavation and Compacting Costs by Farm Size
|
|
Farm Size | ||||
|
|
0.4 ha |
4 ha |
8 ha |
20 ha |
40 ha |
|
|
(1 acre) |
(10 acres) |
(20 acres) |
(50 acres) |
(100 acres) |
|
Excavation cost |
1.00 |
0.80 |
0.75 |
0.70 |
0.65 |
|
Compaction cost |
2.00 |
1.60 |
1.50 |
1.40 |
1.30 |
About 40 percent of all prawn farmers in Hawaii hired licensed contractors to construct their ponds. The rest constructed their own ponds by renting, purchasing, or borrowing construction equipment. The cost for constructing a pond by renting heavy industrial equipment can be estimated using the following information:
(a) Renting a medium-sized bulldozer at US$ 2 500 per month, plus a required insurance fee of US$ 500.(b) Using diesel fuel at a rate of 18.9 to 56.8 litres per day (5 to 15 gallons per day) .
(c) Hiring a unionized construction equipment operator at the current wage rate of about US$ 11 per hour.
Only a few prawn farmers can operate a bulldozer, thus eliminating the need to hire a licensed operator. The cost of renting construction equipment and hiring an operator often exceeds the cost of hiring a licensed contractor to build the pond.
The cost for constructing a well, if the site selected does not have an available water supply, is high and dependent upon the size of a farm, the quantity of water required (per minute, per hour, or per day), and the depth required. For example, a 0.3 metre (1 foot) diameter well built by a licensed contractor currently costs US$ 1 150 per metre (US$ 350 per foot). If drilled to a greater depth than 60 metres (200 feet), the total cost will be at least US$ 70 000, and possibly more.
Because there are public restrictions on well construction, a permit must be secured before drilling begins. The City and County of Honolulu's Board of Water Supply is the governing municipal body on Oahu which issues permits based strictly upon the available supply of water for uses other than human consumption. The neighbouring islands have no well permit requirements. However, all the existing farms in Hawaii have had an available source of water at hand; therefore, the construction cost for a well is not included in the calculations.
For a water delivery system the cost per pond varies with the following:
(a) the distance from the existing water supply to prawn pond(s);
(b) the type(s) and sizes of pipe accessories used;
(c) the size and shape of a pond;
(d) total farm size.
Based on a 0.4 ha pond measuring 120 m long × 33 m wide of the wetted area as mentioned earlier, only the purchasing cost for approximately 45 m (148 feet) of PVC equipment is used in the calculations. The installation cost shall be assumed to have been included during the initial construction of the earthen ponds. The size, and hence the cost, of PVC equipment increases as farm size increases.
In addition, the construction cost for a sluice gate system at the deeper end of a pond, which allows rapid discharging of water with minimal maintenance and easy regulation of water level, is about US$ 800 per 0.4 ha pond.
Lastly, the construction cost for a work and storage building is estimated for a 0.4 ha and a 4.4 ha farm at between US$ 100 and 1 000 for an easily assembled metal hut sold by most major department Stores. For 8, 20 and 40 ha (20, 50 and 100 acre) farm sizes, the average market construction costs are about US$ 20/0.09 m2 (1 square foot) by hiring a contractor. This generally includes a concrete foundation, prefabricated walls, and electrical wiring and water pipe installation.
The total average construction cost per 0.4 ha pond varies with farm size. It costs about US$ 7 000 per pond for a 0.4 ha farm, and about US$ 6 400 for a 40 ha farm (Table 2).
Table 2 Estimated Average Construction and Equipment Costs per 0.4 ha Pond by Farm Size
|
|
Farm Size | |||||
|
|
0.4 ha |
4 ha |
8 ha |
20 ha |
40 ha | |
|
|
(1 acre) |
(10 acres) |
(20 acres) |
(50 acres) |
(100 acres) | |
|
|
US$ |
US$ |
US$ |
US$ |
US$ | |
|
Construction Costs | ||||||
|
|
Pond |
5 724 |
4 579 |
4 293 |
4 007 |
3 721 |
|
|
PVC |
295 |
1 018 |
1 587 |
1 587 |
1 587 |
|
|
Gate |
800 |
800 |
800 |
800 |
800 |
|
|
Storage |
150 |
100 |
100 |
300 |
300 |
|
Sub-total |
6 969 |
6 497 |
6 780 |
6 694 |
6 408 | |
|
Equipment Costs* | ||||||
|
|
Seine and net |
869 |
174 |
87 |
70 |
70 |
|
|
Holding and transporting tanks |
400 |
100 |
50 |
40 |
30 |
|
|
Portable pump |
300 |
60 |
30 |
24 |
18 |
|
|
Mowing equipment |
300 |
1 000 |
500 |
200 |
100 |
|
|
Truck |
7 000 |
700 |
350 |
300 |
220 |
|
|
Freezer |
- |
- |
- |
200 |
200 |
|
|
Water pump |
- |
150 |
150 |
120 |
90 |
|
|
Oxygen meter |
700 |
70 |
35 |
28 |
14 |
|
|
pH meter |
150 |
15 |
8 |
6 |
3 |
|
|
Ice machine |
- |
300 |
150 |
60 |
30 |
|
|
Miscellaneous |
486 |
129 |
75 |
52 |
39 |
|
Sub-total |
10 205 |
2 698 |
1 435 |
1 100 |
814 | |
|
Total |
17 174 |
9 195 |
8 215 |
7 794 |
7 222 | |
*Does not include the automatic feeder which costs about US$ 400 to US$ 2 000
Major equipment needed on a farm includes: net, holding transportation tank, portable pump, mowing equipment, truck, freezer, water pump, ice machine, oxygen meter, pH meter, etc. The amount of equipment required per farm by farm size is estimated. The estimated average cost for equipment per 0.4 ha pond varies also with farm size (see Table 2). The total cost of equipment decreases from US$ 10 205 per pond for a 0.4 ha farm to about US$ 814 for a 40 ha farm, due to economies of scale.
The total construction and equipment cost per pond decreases with an increase in farm size. The cost per pond for a 0.4 ha farm would be about US$ 17 000, whereas it would be about US$ 7 200 for a 40 ha farm (Table 2).
5.1 Comparison of Initial Costs
5.2 Cost-Return Analysis
5.3 Partial Budgeting
5.4 Present Value Method
Four basic methods can be used to evaluate the economics of different ways of construction: comparison of the initial construction costs, cost-return analysis, partial budgeting and present value analysis.
Once the costs of construction and equipment are estimated for different facility designs, their initial capital cost can be compared. The one with the lowest cost would be a better design if the physical life of these systems were comparable and if there are no significant differences in the operating costs and in the levels of production. Otherwise, comparison of average annual costs and returns may be more appropriate.
5.2.1 Capital costs
5.2.2 Annual operating costs
5.2.3 Gross revenue
5.2.4 Indicators of performance
5.2.5 Example of cost-return analysis
Cost-return analysis needs detailed input and output data, both in quantitative and value terms.
The capital costs include the costs of assets and services incurred in the establishment of facilities, such as engineering design, permit fee, land clearing, construction and installation, equipment and tools. The estimation of the value of assets, their useful life, and their salvage value are important for the calculation of annual depreciation on each item. The simplest way of calculation of annual depreciation is the straight line method:
Operating costs can be classified as variable costs and fixed variable costs. Variable costs are those varying with the level of production, such as fry, feeds, fertilizers, hired labour, electricity, fuel, supplies. For each item, the kind, unit, number of units, unit price and total cost should be specified. Fixed variable costs are those that do not change with the level of production, such as land lease, interest payment, depreciation, maintenance, wages of management personnel, etc.
It is defined as the quantity of production multiplied by the unit farm price of output. Gross revenue should include the cash and credit sales, the inputed value consumed on farm, given away, and used for in-kind payments by using the market price.
After all of the cost and revenue data are estimated, different indicators can be calculated as measurements of economic performance.
(a) Profit: the difference between gross revenue and total annual operating cost of production:(b) Rate of return on initial investment:
Return on capital
(c) Productivity per unit of major input: kg/ha, kg/man-month, US$/kg, kg/unit of feed, etc.
(d) Payback period: number of years required to recover the initial investment (profit + depreciation)
(e) Break-even analysis: the level of price and production at which the project just covers its operating cost
(a) Initial capital costs:
|
Item |
Cost |
Useful |
Salvage |
Annual depreciation |
|
Pond construction |
10 000 |
20 |
0 |
500 |
|
Well |
3 000 |
15 |
0 |
200 |
|
PVC |
1 000 |
10 |
0 |
100 |
|
Storage |
1 000 |
5 |
0 |
200 |
|
Nets |
200 |
5 |
0 |
40 |
|
Pump |
500 |
5 |
0 |
100 |
|
Miscellaneous |
500 |
5 |
0 |
100 |
|
Total |
16 200 |
|
|
1 240 |
(b) Annual operating costs:
|
Variable cost |
Quantity |
Unit price |
Total cost |
|
|
|
|
|
|
Fry |
20 000 |
10/1 000 |
200 |
|
Feed |
2 000 kg |
0.5 |
1 000 |
|
Electricity |
|
|
200 |
|
Hired labour |
2 man-months |
1 000/month |
2 000 |
|
|
Sub-total |
|
3 400 |
|
Fixed variable cost |
Quantity |
Unit price US$ |
Total cost |
|
Land lease |
|
|
200 |
|
Interest on capital (10%) |
|
|
1 620 |
|
Depreciation |
|
|
1 240 |
|
Operator's labour |
1 man-month |
1 500/month |
1 500 |
|
Sub-total |
|
|
4 560 |
|
Total operating cost |
|
|
7 960 |
(c) Revenue
|
Item |
quantity of production |
Unit price US$ |
Revenue US$ |
|
Shrimp |
2 000 kg |
5 |
10 000 |
(d) Indicators(a) Profit = 10 000 - 7 960 = US$ 2 040(b) Rate of return on initial cost = (2 040 + 1 620) ÷ 16 200 = 22.6%
(c) Productivity:
kg/ha = 2 000 kg
kg/man-month = 2 000 ÷ 3 = 667 kg
kg/unit of feed = 2 000 ÷ 2 000 = 1 kg(d) Payback period = 16 200 ÷ (2 040 + 1 240) = 16 200 ÷ 3 280 = 4.9 years
(e) Break-even price = 7 960 ÷ 2 000 = US$ 3.98
(f) Break-even production = 7 960 ÷5=1 592 kg
This method has also been used quite often to evaluate the economic performance of a farm or to compare the economic aspects of different farm management systems, such as monoculture versus polyculture, extensive versus intensive, etc.
When there is a minor change in a facility design resulting in a partial change in cost-return structure, the partial budgeting method may be used to recalculate economic viability without going through the detailed procedures of the cost-return analysis.
Four basic stages are involved in the partial budgeting analysis:
Benefits1. Estimation of the increase in income due to the change. Ignore the income that will not change as the result of the venture.2. Estimation of the reduction in costs if one proceeds with the venture.
Costs
3. Estimation of the cost that will be added due to the change. Again, ignore the cost that will not change.4. Estimation of the income foregone due to the change.
Once these calculations are completed, the sum of increased cost should be subtracted from the sum of increased benefit. A positive result would mean that the change would be profitable. A negative result would mean that the change would not be economically feasible.
Adding a nursery pond to production ponds costs about US$ 2 000 with a useful life of about 10 years. Money needed for construction is withdrawn from the bank savings account which is earning 5 percent interest. Adding a nursery pond will reduce the mortality rate of the stock and thus increase production by about 500 kg at a farm price of US$ 3/kg. The increase in production will also add feed cost of US$ 500/year. Estimate the economic feasibility of this change:
Benefit1. Added income = US$ 500 × 3 = US$ 1 500
2. Reduced cost = noneCost
3. Added cost = US$ 2 000 ÷ 10 = US$ 200/year
4. Income foregone = US$ 2 000 × 0.05 = US$ 100Benefit minus cost
US$ 1 500 - US$ 300 = US$ 1 200In this case, it is highly profitable to add a nursery pond.
The weakness of the cost-return analysis is the failure to consider the timing of expected earnings and costs. Future money is not as valuable as present money. Usually the initial capital costs have to be paid at the beginning of the project, but benefits begin to accrue only at some future date. The economic feasibility of a project can be measured more accurately by discounting the future benefits and costs into present value. Five basic steps are involved in the discounting benefit-cost analysis:
(a) Estimation of the capital costs and the timing of the capital costs over the life of the project. The capital costs include the costs of assets and services incurred in the establishment of facilities and the renewal and replacement costs. If there is salvage value at the end of the project, it should be treated as income in the end year.(b) Estimation of the annual operating cost for various inputs over the life of the project. Inflation in the future must be considered.
(c) Estimation of annual revenue based on the expected yield and prices.
(d) Discounting annual benefit and cost into present value (or the annual net revenue can be calculated by subtracting the annual cost, both capital and operating, from the annual revenue and the net annual revenue then be discounted into present value). The discount rate used should reflect the rate of return that one might reasonably expect to be the best alternative investment of comparable risk.
(e) Benefit-cost ratio and net present value calculation
Where
B = annual gross income
C = annual cost
S = sum
i = interval of time in years from year zero
r = discount rate
Figure
Where
NB = Net annual income
Figure
Different facility designs may all be economically feasible, but the one which gives highest benefit-cost ratio or net present value would be the best choice.
|
Initial Capital Costs (in US$) |
Year | ||||
|
|
1 |
2 |
3 |
4 |
5 |
|
Pond construction |
5 000 |
|
|
|
|
|
Well |
1 000 |
- |
- |
- |
- |
|
Office and storage |
1 000 |
|
|
|
|
|
Pump |
300 |
|
|
320 |
|
|
Nets |
100 |
- |
- |
- |
- |
|
Miscellaneous |
500 |
- |
- |
- |
- |
|
Sub-Total |
7 900 |
- |
- |
320 |
- |
|
Operating Costs (excluding interest and depreciation) |
1 500 |
3 800 |
4 000 |
4 500 |
4 800 |
|
Gross Revenue |
3 000 |
5 000 |
7 000 |
8 000 |
9 000 |
|
Net Income |
- 6 400 |
1 200 |
3 000 |
3 200 |
4 200 |
|
Calculation of Present Value | |||||||
|
Year |
Total Revenue (US$) |
Total Cost (US$) |
Net Income (US$) |
Discount Rate (12%) (US$) |
Discounted Revenue (US$) |
Discounted Cost (US$) |
Discounted Net Income (US$) |
|
1 |
3 000 |
9 400 |
- 6 400 |
0.89 |
2 670 |
8 366 |
- 5 696 |
|
2 |
5 000 |
3 800 |
1 200 |
0.80 |
4 000 |
3 040 |
960 |
|
3 |
7 000 |
4 000 |
3 000 |
0.71 |
4 970 |
2 840 |
2 130 |
|
4 |
8 000 |
4 800 |
3 200 |
0.64 |
5 120 |
3 085 |
2 048 |
|
5 |
9 000 |
4 800 |
4 200 |
0.57 |
5 130 |
2 736 |
2 394 |
|
|
|
|
|
|
21 890 |
20 067 |
1 836 |
Net Present Value = US$ 1 836
Gedney, R.H., Y.C. Shang and H.L. Cook, 1983, Comparative study of tidal and pumped water supply for brackishwater aquaculture ponds in Malaysia. Manila, South China Sea Fisheries Development and Coordinating Programme, SCS/83/WP/l17
Shang, Y.C., 1981, Aquaculture economics: basic concepts and methods of analysis. Boulder, Colorado, Westview Press, 153 p.
Shang, Y.C., 1981a, Freshwater prawn production in Hawaii: practices and economics. Honolulu, Hawaii, University of Hawaii Sea Grant Program
