INVESTMENT PROPOSAL

COMMERCIAL SCALE DAIRY FARMING

IN THE EASTERN PROVINCE
Ministry of Agriculture, Animal Production and Development,
Industries, Fisheries and Tourism
Eastern Province
i






Contact Information
Ministry of Agriculture, Animal Production & Development, Rural Industries Development,
Fisheries & Tourism, Eastern Province
Website: http://www.ep.gov.lk/minagriindex.asp
Email: minagriculture@ep.gov.lk

Mr. K. Pathmanathan, Secretary (+94)-026-3269976
Dr. R. Gnanasekar, Director Planning (+94)-026-2223076

Acknowledgements
The Ministry of Agriculture, Animal Production & Development, Rural Industries
Development, Fisheries & Tourism of the Eastern Province has developed this series of
investment proposals in consultation with several industry stakeholders. It wishes to thank all
relevant stakeholders and government institutions for sharing their valuable resources and
providing information that made the financial estimates possible. The Ministry wishes to thank
USAID and the USAID-supported VEGA FEG Program for the invaluable support rendered
towards the economic development of the Eastern Province, especially for encouraging large
scale investments and building capacity of human resources by providing technical assistance
since the end of the conflict.


This publication is made possible by the support of the American people through the United States Agency for
International Development (USAID). The contents are the sole responsibility of the Ministry of Agriculture, Animal
Production & Development, Rural Industries Development, Fisheries & Tourism of the Eastern Province and do not
necessarily reflect the views of USAID or the United States Government.
This publication was produced for review by the United States Agency for International Development. It was prepared
byMinistry of Agriculture, Animal Production & Development, Rural Industries Development, Fisheries& Tourism of the
Eastern Province.

ii

----------------------Hon. Ministers Message
The agricultural sector is the backbone of Eastern Province
economy and the means of livelihood for most of our rural
population. Sustained agricultural growth is critical for uplifting the
living standards of our people as well as generating rapid economic
growth. However, in spite of the importance of the agricultural
sector, farming in our province has for many years been
predominantly a small scale, rain fed and poorly mechanized
activity of low production and productivity. In order to address these
challenges, my ministry launched several agricultural development
programmes and I am pleased to note that implementation of such development initiatives has
been largely successful. As a result, the agriculture sector surpassed the growth target and
presently contributes towards 23% of the provincial GDP.

It is noteworthy to mention that under the policy framework of the government the Mahinda
Chinthana the Eastern Provincial Council has accorded highest priority during the last five
years to realize the full potential of the agriculture sector in Eastern Province. In the recent
past Eastern Province agriculture has undergone remarkable modernization thanks to several
initiatives by the government and donor institutions and this has made spectacular
productivity gains possible through rapid improvement in yields. As the Minister of
Agriculture, Animal Production and Development, Rural Industries Development Tourism and
Fisheries, Eastern Province I encourage private and foreign investment in the development of
these sectors. New investment will pave the way for infusion of capital and technology and
improve productivity and value addition leading to increased production and prosperity in
Eastern Province. My ministry is presently involved in implementing proactive development
initiatives with commitment to inclusive development and creation of an investor friendly
environment.

These agriculture sector investment proposals are an outcome of series of workshops and
discussions we had with relevant stake holders i.e. Government institutions, private sector
agencies and non-governmental agencies. These proposals clearly spell out the available
potential and resources involving production, avenues for value addition and marketing of
agricultural produce and focus all efforts towards achieving excellence in agriculture through
private and foreign investments in Eastern Province.

I also would like to take this opportunity to put on record my appreciation to the United States
Agency for International Development (USAID) and its VEGA FEG Program for the assistance
provided to the Eastern Province through its various economic growth and technical
assistance interventions.

I wish to reaffirm the commitment of my ministry in creating an enabling environment for the
private and foreign investments and I urge all stakeholders to play their respective roles in
ensuring that the Eastern Province of Sri Lanka transforms itself as a most preferred
destination for investments.




Z. A. Naseer Ahamed (Eng), M.P.C
Minister of Agriculture, Animal Production & Development,
Rural Industries Development, Fisheries & Tourism,Eastern Province


COMMERCIAL SCALE DAIRY FARMING IN
THE EASTERN PROVINCE


Contents







Page No


The Eastern Province and Livestock Production.
01
Investment Opportunity for Establishment of Commercial Dairy Farm
02
The Investment Proposal
03
Markets for Milk..
05
Potential Locations for the Project
06
Investment Incentives
07
Procedure for Long Term Lease of State Lands
09
Useful Contacts
11
1

The Eastern Province and Livestock Production
The Eastern Province is one of
the nine administrative provinces
in Sri Lanka comprising 15% of
the total land area of the country,
25% of the coastal belt and 8% of
the countrys population. The
land area is 9,361 sq km and
inland water resources to the
extent of 635sq. km totaling 9,996
sq. km. The Province contributes
6% to the national GDP. The total
agriculture sector accounts for
approximately 23% of the
provincial GDP in Eastern
Province compared with 12% for
the entire country.


The Eastern Province contributes
20% to milk production and 8%
to meat production in the
country. Approximately 70% of
the population is dependent on
agriculture and livestock for
their livelihoods. The
topography and agro climatic
conditions of Eastern Province
are ideal for livestock
development. Suitable farmland
and water are available as
unutilized resources in the
province. The necessary
manpower, both skilled and
unskilled, is available in
abundance. Scarcity of quality
breeding material was identified as a major constraint in developing this sector to its full potential.
Therefore the establishment of commercial livestock farms have been facilitated by the government
and private sector as an urgent priority to meet demand and to create self-employment
opportunities in this province.


Public sector support in livestock rearing, veterinary extension services and increasing the supply of
breeding animals have been intensified to support the industry. The government is committed to
encouraging private sector and community participation in livestock production; value addition and
marketing; production of breeding material; and supply of feed ingredients such as maize, rice bran,
gingelly and coconut poonac. A high priority is accorded to the establishment of production units for
rural based animal feed resources. The development of a commercially viable private sector with
investment in modern livestock farming technology is vital to transform the present subsistence
level livestock production into commercial livestock production.




2

Investment Opportunity for Establishment of Commercial
Dairy Farm

Total availability of milk and milk products in
Sri Lanka is around 900 Mn liters of Liquid Milk
Equivalent (domestic production and imports)
and per capita availability is 120 ml/day.
Around 290 million liters of fresh milk is
produced in Sri Lanka with an average annual
increase of 10%. Even so, 70% of Sri Lanka
milk requirements continue to be imported in
powdered form to meet the growing market
demand.
There has been a gradual consumer shift
towards fresh milk in the last few years, with
improvements in packaging technology which
extend shelf life. Nevertheless, the market
price of fresh milk is still higher than
powdered milk alternatives.

In the recent past government has intervened to make significant improvement to farm gate
prices and encourage dairying. Productivity improvements have been made through
improved small scale dairy farming technology and the supply of better breed stock. The
establishment of dairy breeder farms has been facilitated by the government and private
sector to supply livestock breeding material to dairy farmers.

The significant opportunity now is to invest in commercial dairy farming which will meet the
growing market demand in Sri Lanka for milk and milk based products.








Dairy Farming in the Eastern Province
Dairying is an important rural economic
activity in the Eastern Province in which it
has emerged as the fourth largest milk
producer.The annual production of 64Mn
liters of milk accounts for 20% of the
national production. Of this amount,
19.68Mn liters (31%), is collected through
a network of chilling and collection
centers. A significant amount is collected
by small scale processors and processed
into curd, yoghurt and other product. Most
of the value addition is done in nearby
provinces and towns. There is potential to
produce a wide range of high quality dairy
products such as yoghurt and specialized
dairy products such as a variety of cheeses
within the Eastern Province.
The practice of intensive management of
dairy cattle in Eastern Province remains at
low level. Nevertheless, supplementation
of pasture with grain, crop residues and
other feeds has become an accepted
management practice and the cost of
production is low.
While Eastern Province milk production
has increased significantly over the past
five years, restricted access to domestic
markets and value addition has limited the
potential growth of the dairy industry
3

The Investment Proposal

The total capital outlay for the establishment of a commercial dairy farm consisting 1,000 dairy
cows is LKR 99 million. Annual operating costs will be in the region of LKR 98 million. It is
envisaged that the investor will lease 150ha of State land that has been identified for this
purpose and develop it into a modern dairy farm. Improved cross bred cows which are suited
to the climatic conditions of the Eastern Province may be procured locally from state breeder
farms and private breeders. Around 500-700 calves will be born per year. Calves born under
this project will be registered and reared separately in a calf rearing unit. It is envisaged to
sell the male calves and to rear the female calves for future production. The farm will yield
around 2.6 Mn liters of milk annually. Technical assistance and guidance may be obtained
from the Department of Animal Production and Health. The capital and recurrent cost
breakdown is shown in Table 1 and Table 2 below.
1


Table 1: Capital Cost of Dairy Farm

Cost Element Value in LKR
1. Cross bred cows 1,000 Nos . (including transport and
insurance)
70,000,000
2. Shed for Adult Animals (40 sq. ft/ animal) 20,000,000
3. Equipment 1,000,000
4. Milking Plant (20 cows/ machine) 5,000,000
5. Establishment of fodder Unit 10 acres 450,000
6. Wells (1 No) 100,000
7. Land Lease (150 ha) 1,125,000
8. Irrigation System & Maintenance including electricity 800,000
9. Building 400,000
Total Capital Cost 98,875,000
























1
These cost estimates are meant to be indicative only and investors will need to do their own financial feasibility analysis
based on their proposed project design.
4

Table 2: Average Annual Operating Cost and Revenue

Description Total Value in LKR
1. Feeding Cost
During Lactation Period (295 Days)
Concentrate Feed for milking (1kg/3 lit/day) 47,200,000
Concentrate Feed for maintenance and Pregnancy 11,800,000
Dry Fodder ( 5 kg/cow) 4,425,000
During Dry Period (70 Days)
Concentrate Feed for maintenance and Pregnancy (1.5kg/ cow) 4,200,000
Dry Fodder (5 kg/ cow) 1,050,000
2. Feeding and other management of calf 6,600,000
3. Labour Cost (1 labour/ 20cows/ day) 9,125,000
4. Veterinary Cost (Cow/ Year) 3,000,000
5. Cost of death and Losses 5,000,000
6. Breeding and Miscellaneous 4,000,000
Total Cost 97,625,000

Annual Revenue Estimate
Sale of Milk (Average 14 liters/cow/day for lactation length 208 days) 145,600,000
Sale of Male calves 2,500,000
Sale of Manure 2,000,000
Total Revenue per annum 150,100,000

At current local raw milk rates the milk collection may be sold at LKR 50/liter. Based on these
rates the investment will generate a payback in under two years with an internal rate of return
of 67%. Table 3 shows the investment ratios. Profitability may be significantly enhanced by
value adding on dairy milk such as the production of cheese, yoghurt, UHT fresh milk packs.

Table 3 Investment Ratios
Pay Back Period
1.50
NPV (LKR)
89,559,925
IRR
66.78%
ROI
27.87%
Present Value of Cost (LKR)
430,205,805
Present Value of Benefit (LKR)
519,765,730
Benefit Cost Ratio
1.21







5

Markets for Milk

The financial projections are based on supplying milk directly to one of the collecting centers
of the milk processing companies which will undertake all further processing activities. There
are two major milk collectors and several smaller companies that collect milk from the Eastern
Province. Alternatively an investment can be made in milk processing, please see Investment
Proposal for Milk Processing Centre.
















































SUPPLY CHAIN FOR MILK IN SRI LANKA
Domestic

Collection Centres Home

40%
15%
Local Sales
45%
Traders Hotels Neighbours Curd/ Yoghurt
Dairy Cooperatives
Local Sales/products
15% 6%
17% 7%
1%
30%
Milco
70% 39%

Nestle
Others
73%

Consumers
36 kg


20%
17%

Unprocessed
Local Milk
Processed
Milk
27%
Imports
6

Potential Locations for the Project

The following locations in the
Eastern Province have the
necessarylocational advantages
to establish a dairy farm
investment.

Trincomalee District:
Kuchchaveli,
Kinniya,
Muttur,
Eachchilampattu

Batticaloa District:
Vaharai,
Valaichenai,
Chenkalady
Kiran

Ampara District:
Thirukovil
MahaOya
Padiyathalawa
Damana








7

Investment Incentives

Government incentives are available in the agriculture sector for farming associated with
advanced technology, distribution, collection & marketing, storage, cold rooms, ice plants,
animal husbandry and out grower schemes, plant & nursery, pre/post-harvest management,
cultivation of plants of any description. Table 4 below shows the current investment incentives
available for new companies.

Table 4: Investment Incentives for Investors under BOI Regulations
Investment Category Minimum Investment Tax Holiday
Small investment LKR 25 Million 04 Years
Medium scale investment LKR 50 100 Million 04 Years
LKR 100 200 Million 05 Years
LKR Over 200 Million 06 Years
Large scale Investment LKR 300 500 Million 06 Years
LKR 500 700 Million 07 Years
LKR 700 1,000 Million 08 Years
LKR 1,000 1,500 Million 09 Years
LKR 1,500 2,500 Million 10 Years
Above LKR 2,000 Million 12 Years

Sri Lanka scores well on the World Bank Ease of Doing Business Index ranking 81 out of 189
countries surveyed and is far ahead of comparative countries in the region.



Source: World Bank, Doing Business Report 2013

Figure 2 below charts the procedure for application for Board of Investment approval.
132
129
121
108
107
95
81
0 20 40 60 80 100 120 140
India
Bangladesh
Regional Average South Asia
Nepal
Pakistan
Maldives
Sri Lanka

8

Figure 2: Investment Approval Process








BOI Approvals
Application Submission for BOI
Approval
Letter of Acknowledgement of
Business Activity
Incorporation of Company
(Department of Registrar of Company)

Formal Letter of Approval

Signing of BOI Agreement
(Section 17 Projects)

Commence Implementation
(Within the specified
period)

Certificate of Conformity (COC)
Environment Protection License
(EPL)
Commence Commercial Operation

Assigning of a
Project Officer to
Guide the Investor
Site Approval
(Engineering
Approvals Dept-
BOI)
Environmental
Clearance
(Environment Dept.
BOI/ CEA)

Collect the Draft
Agreement
(Legal Dept- BOI)

Opening of
Bank A/C S/A
(Optional)
Preliminary Clearance (If applicable only)
For the project Activity
Rules of Origin Certificate
Import/ Export License




Initial Environment Examination (IEE)/
Environmental Impact Assessment (EIA)
(If applicable)




Sourcing of raw materials
(If applicable)




Preliminary Planning Clearance for the
Building (If applicable only)




Opening of
Bank A/C
(FCBU/SIA)
Development Permit
(If applicable only)



Registration for VAT/ TIN
(Inland Revenue Dept)
Import Export Registration
(Sri Lanka Customs)
Utilities
Electricity:
- Ceylon Electricity
Board
Water:
- National Water
Supply &Drainage
Board
Telecommunication:
- SLT/ Private

Work Permit & Residence
Visa (Ministry of Defense &
Dept. of Immigration &
Emigration
Certificate of
Conformity
(COC)
(If applicable only)

Import (duty free items)/ Export
- BOI Approval
(IFC Unit/ Engineering)
- Registration
(Investor Services Dept - BOI

Recommendation for Work Permit &
Residence Visa
(Investor Facilitation Unit - BOI

SIA : Securities Investment Account
FCBU : Foreign Currency Banking Unit
* for details please refer infrastructure
brochure
* residence visa can be obtained at any stage of
the process
Source : Board of Investment


9

Procedure for Long Term Lease of State Lands
Lease permits are granted under State Land Ordinance No.8 of 1947. Lands are leased to
people and institutions for a 30 year of period for residential, agricultural or commercial
purposes. The leasing period can be extended to 50 years for special projects. Upon the
success of the initial lease a request may be made for the extension of the period of lease.
These permits can be transferred and mortgaged with prior approval of the Land
Commissioner.

Figure 3: Procedure for Lease of State Lands





















Source: Land Commissioner Generals Department

Applicant
Survey
Superintendent
Divisional Secretary
Reques

9 Charging of rental &
handing over physical
possession

1
8 Survey
Requisition

7
Valuation
Calling

Valuation
Department
PLC
Recommendation

2
Land Commissioner
General
6
Approvals

Recommendation

3
Secretary to the Ministry
of Lands/ Minister of
Lands

4
Recommendation

5
Approval

Presidential Secretariat

11 Leases for
Signature

12
Lease
Indenture

Preparation of
Lease

10
Diagram

13
Lease
Indenture

Land
Registry
14
15
Lease
Indenture


10

Conditions for granting state lands on long term lease for the special promotion projects
1. Special Promotion Projects are:
i. Approved cabinet project
ii. A project approved by the board of investment
iii. A project approved by the ministry of industries
iv. A project with a special patronage of any state affiliated institution


2. General documents which the applicant should submit
i. Request
ii. Project Report.
iii. Project Approved by Board of Investment/ Ministry of Industry/ the other
institution
iv. Registration of company.
v. If a joint venture, the details of the directory (the details under the form 48 of
the company registration Act).
vi. Affidavits as per format issued by the Divisional Secretary, which affirms that
the properties belong to them, are within the limit of 50 Acres.


3. General conditions applied to the lessees
i. Term of lease is thirty years (30).
ii. This will be extended up to 50 years under the special approved of the
cabinet.
iii. Rental must be annually paid.
iv. The amount of lease will be quinquennially revised by 50%.
v. The Land cannot be used for any purpose for which the land was obtained.
vi. The land must be maintained in a proper state of development.
vii. No sub-leasing, mortgage and vesting can be done without due permission.
viii. Special conditions which could be stipulated by the other institution.
ix. Actions could be taken in order to cancel the lease indenture on the occasion
of violating the conditions.



11

Useful Contacts


Ministry of Agriculture, Animal Production &
Development, Rural Industries Development,
Fisheries & Tourism
Eastern Province
Kanniya Road
Varothayanagar
Trincomalee
Sri Lanka
Tel : +94 26 2222441
Fax: +94 11 2222025
E -mail: minagriculture@ep.gov.lk
Website: www.ep.gov.lk


Department of Animal Production and Health
Eastern Province
Inner Harbour Road
Trincomalee
Sri Lanka
Tel : +94 26 2221008
Fax: +94 262222566

Board of Investment
Level 24 &26 West Tower
World Trade Centre
Echelo Square
Colombo 01
Sri Lanka
Tel : +94 11 2434403
Fax: +94 11 2447994
E -mail: infoboi@boi.lk
Website: www.investsrilanka.com


Ministry of Livestock and Rural Community
Development
45, St. Michaels Road,
Colombo 03
Sri Lanka
Tel : +94 11 2541369, 2338278
Fax: +94 11 2328117
E -mail: secretary@livestock.gov.lk
Website: www.livestock.gov.lk


Central Environmental Authority
104, Denzil Kobbekaduwa Mawatha
Battaramulla
Sri Lanka
Tel : +94 11 2872359
Fax: +94 11 2872608
E -mail: dg@cea.lk
Website: www.cea.lk



Department of Animal Production and Health
P. O. Box 13,
Getambe,
Peradeniya
Sri Lanka
Tel : +94 81 2388184, 2388189,2388337
Fax: +94 81 2388619
E -mail: dgdaph@sltnet.lk
Website: www.daph.gov.lk


Department of Forest Conservation
82, Sampathpaya
Rajamalwatta Road,
Battaramulla
Sri Lanka
Tel : +94 11 2866631- 2
Fax: +94 11 2866633


Department of Registrar of Companies
400, D R WijewardenaMawatha
Colombo 10
Sri Lanka
Tel : +94 11 2689208, 2689209
Fax: +94 11 2689211
E -mail: registrar@drc.gov.lk
Website: www.drc.gov.lk




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