Aquaculmral Engineering 5 (1986) 109-113

Financing Aquaculture Projects RogerLeeds

International Finance Corporation, 1818 H Street NW, Washington DC. 20006, USA

ABSTRACT In recent years, as aquaculture has emerged from the R &D phase and begun the transition from small-scale enterprises to large-scale commercial ventures, most members of the international aquaculture community have been slow to learn about the realities associated with raising the capital required to finance these new ventures. The technical sophistication that characterizes this new industry has not yet been matched by an equally high level of business acumen.

INTRODUCTION T h e objective of my c o m m e n t s is to provide some insight into how a banker or an investor views your industry as a potential user of capital, which invariably is in short supply. Prior to making an investment decision, the lender or investor normally conducts a systematic appraisal of your aquaculture project, and identifies and assesses the various risks associated with the venture relative to other financing alternatives. This paper briefly focuses on the key factors that the banker considers in making this decision.

THE PROJECT APPRAISAL PROCESS Venture capital companies, commercial banks and development banks all approach the financing decision from a slightly different perspective. For example, my employer, the International Finance Corporation (IFC), is a d e v e l o p m e n t bank with a broader set of objectives than 109 Aquacultural Engineering 0144-8609/86/$03.50 -- Elsevier Applied Science Publishers Ltd, England, 1986. Printed in Great Britain

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most private commercial banks. Not only must decision makers at the [FC concern themselves with the projected profitability, of the project (i.e. the financial return to the investors), but as development bankers we have an equal concern that the project should also generate benefits for the countD' (e.g. income, jobs, technology transfer) as well as the shareholders. Except for this important distinction, both types of c r e d i t o r s - private banks and development b a n k s - tend to 'think' the same way about prospective project opportunities, and they choose acceptable projects according to an examination of a similar set of criteria. Although the risk assessment of the equity investor is somewhat different from that of a creditor, the project appraisal process is similar. From a banker's point of view, aquaculture projects are inherently risky for one primary reason: in commercial terms, the industry is new and untested. Because the number of unknowns is large compared to alternative investment opportunities, the risks are perceived to be high. Bankers feel most comfortable when they are able to make a systematic comparison of one project opportunity relative to others in the same industry. However, in the case of aquaculture, comparative analysis is difficult because there are few precedents for the types of projects that are seeking financing. For example, a banker appraising a new cement plant, an integrated poultry, enterprise and a shrimp farm is likely to apply the most conservative assumptions to the shrimp farm, simply because the least is known about the industry. Nevertheless, some financial institutions are now beginning to take an interest in the financing opportunities in the aquaculture industry, and it is useful to identify the factors that they are likely to consider when evaluating a project. Of course, these are only generalizations that can serve as benchmarks, and it is essential to remember that each project appraisal will have its distinguishing characteristics that will require an independent, objective appraisal. The analyst is likely to beNn by assessing the project relative to other opportunities in the same sector. For example, is the project size large enough to warrant the time and effort required for a thorough project appraisal? Although each bank will have a different set of guidelines, IFC's involvement is influenced by its reluctance to evaluate a commercial aquaculture venture that has a total project cost of less than USS4 to USS5 million, and the preference is for projects considerably larger. As you know, there are only a limited number of

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commercial aquaculture projects that meet these size requirements. Therefore, the tendency is to prefer projects that are i n t e ~ a t e d hatchery, growout, processing and marketing -- because of the larger capital requirements, or projects that use contract growers. This latter approach would lower the total capital costs allocated to the project. but this would be somewhat offset by the financing needs of the contract growers (as opposed to the project sponsors) to upgrade their ponds. Another factor that the banker will consider before delving into project-specifics is country location, which will significantly influence prospective foreign investors, as well as bankers. Where country risk is perceived to be high, for any one of a number of political, social or economic reasons, the likelihood of attracting foreign capital will diminish appreciably. Once the project size and country location are evaluated, possibly the most crucial factor to consider in an industry as new as aquaculture is people. In our experience, it is more likely that a project will succeed or fail because of the quality of the management and technical personnel rather than for technical or market-related reasons. Therefore, it stands to reason that an astute banker or investor will devote considerable time to evaluating the qualities of these key people. Even though this is partially a subjective exercise, it is essential to examine in detail their past performance, both in terms of their management capabilities and their technical expertise. After assessing these general factors, the evaluation process turns to a technical appraisal of the feasibility study, which is the point of departure for any serious project analysis. After decribing the origins of the project, and the backgrounds and experience of the key project sponsors, the feasibility study for an aquaculture project should include a thorough description and technical analysis of the project site. Then the study must carefully define and analyze the project's technical parameters and operating assumptions, such as hatchery output, pond size, stocking density, food conversion ratios, mortality rates, pond yields, and selling price. It is the job of the analyst to judge whether or not the project design and operating assumptions are realistic and achievable within the defined time frame. The architects of the project should create a set of operating and financial projections that estimate project performance for 10 or 15 years. The operating assumptions will provide estimates needed to

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determine total project output, which in turn provides the basis for estimating costs and revenues. The financial estimates should include a detailed breakdown of total project investment and operating costs, as well as projected income statements, balance sheets, a financial plan that indicates the source of debt and equity, and a funds flow statement. It is on the basis of these numbers that the analyst can estimate a number of useful financial ratios, as well as the internal rate of return for the project, which indicates the real return to the investors on a discounted cash flow basis. There must also be a market analysis. In the case of shrimp farming, until recently many experts believed that a market analysis was relatively unimportant, due to overconfidence about the high selling prices received for shrimp. However, the experience of 1984-85, when prices for some shrimp species and counts declined as much as 35%, provided convincing evidence that the market analysis is one of the most important aspects of the total project evaluation. A marketing strategy should be clearly defined and some effort should be made to realistically project prices for the species and sizes that will be produced. An inquisitive analyst of shrimp farming projects is likely to be amazed how little is known by the so-called experts about the factors that affect shrimp prices in the international market. Therefore, as with so many other aspects of the shrimp farming industry, the prospective investor should be wary of what he simply does not know. If preparation of a complete feasibility study appears to be a costly, time consuming and complicated process, it is! But this planning document is essential to the long-term success of the venture, and it should be prepared as professionally and thoroughly as possible. It also provides the technical information that will form the basis of the banker's decision.

CONCLUSION The key factors that are considered by the analyst in the project appraisal process do not change significantly from sector to sector. The same types of information are required for an appraisal of a steel mill or a shrimp farming project -- description of project sponsors, summary of the production process, estimated operating costs and

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financial projects, market analysis. But. returning to where we began, aquaculture projects entail an additional element of risk that distinguish them from other, more traditional ventures. In commercial terms the industry is new and relatively untested. Although there is mounting enthusiasm for the commercial potential of aquaculture, predictions about the future are highly speculative. This uncertainty heightens the risk factor, and wiU cause most prospective creditors and investors to be particularly cautious about risking their capital in aquaculture projects. Without a doubt, some aquaculture ventures will succeed in attracting the necessary, capital, but only those that are extremely well prepared, and realistically take into account the real concerns of bankers and investors.