You are on page 1of 2

REVISITING QUALITATIVE PART

1. From the sponsors perspective, using the financials provided, the NPV of
the project is positive and amounts to $60.8m as on 1998 year-end. However,
all the risks and assumptions mentioned in the qualitative part hold and
overall the project looks to be fairly risky. Two key modeling assumptions
used in NPV calculations are the stability of US/Dong nominal exchange rate
forever and fairly high terminal growth rate of 3%.

4. From the IFC perspective, there are multiple effects that factory would have
on local economy:
- Shareholders: for the shareholders, the value created can be measured by
NPV of NATL, which is $60.8m. From the IFC perspective, NATL is partially
owned by local companies and partially by foreign, so the value created for
the economy should be proportionate to the shareholdings of local entities.
Nghe An Sugar Co. and Mitr Pol Sugar Co. jointly own 47.5% of NATL,
therefore, value created for the local economy is $28.9m.
- Employee and Other Labor: the factory is expected to have 525 permanent
workers and additional 200 workers in high season, paying them in total $3m
during construction phase and $1.5m during operating phase. As the capacity
is expected to be reached by 2002/03, we assume that all construction will be
done by 2001, and from then it is the question of fine-tuning the operations to
maximum efficiency. Also, the factory is expected to pay the workers double
the amount they would get in similar jobs in the region (all the benefits
included), so the value created by the factory can be measured as half of the
labor expense over the life of the factory (which is assumed to be going
concern), discounted to today. This amounts to $8.2m of social value created.
- Customers: no impact expected, since the price and quality the customers
will face remains unchanged, whether the sugar is produced locally or
imported.
- Suppliers: it is important to split suppliers in three major categories:
Farmers, Truckers and Others.
-- For Farmers, the value created from committing to sugar cane crops is
highest, when compared to alternative crops, such as pineapple, coffee or
peanuts irrespective of whether alternative employment opportunities exist
in the region or not.

Value created from committing to crops (NPV $m)
Only farming Other employment options
Cane 63'395 36'649
Cash crops 28'781 (4'513)
Pineapple 18'995 4'791
Coffee 51'422 (651)
Rubber 15'903 (17'676)
Peanuts + Maze 35'660 (17'831)
Peanuts + Peanuts 57'056 3'565
Peanuts + Rice 56'388 (1'115)

Taking the prudent approach, we assume that the incremental value created
by switching to sugar cane is obtained by comparing Only Farming option of
growing cane (NPV of $63.4m) and peanuts (NPV of $57.1m), or $6.4m of
additional value.
-- For Truckers, this is a new employment opportunity, so it is rather the
question of its profitability, rather than offsetting it against other employment
options. Running the financial projections, it turns out that the NPV of
aggregate trucking business is positive and amounts to $2.5m, which is new
value created for the region.
-- For Other suppliers, the effect is negligible and hardly quantifiable, since
the nature of other supplies is either highly technical (imported spare parts) or
the scale is not large enough (fertilizers).
- Competitors: in this context, the effect is somewhat ambiguous. On the one
hand, local handycraft producers are likely to be squeezed out of the market
but at the same time, given their operating flexibility, they can easily re-
launch their operations if needed, for example, to consume higher than
needed crop yields. Also, the local market so far is a net importer and has
high growth potential (in terms of per capita consumption), so there would not
be any negative impact on local competitors if anything, it can create a
positive signal to invest in the industry.
- New Entrants: again, hardly quantifiable aspect. Most likely, should this
project be successful, it will become a good indicator for further FDI in the
Thailand economy, which would be a positive effect.
- Neighbors: ecological concerns are of high priority for NATL, therefore, the
neighborhoods should not be negatively affected by the factory operations. At
the same time, government investment in the infrastructure would increase
the quality of life of the region inhabitants, so local society would be better off
having a factory around.
- Income Taxes: sizeable benefit for the government comes in the form of
stream of corporate income taxes, paid by the factory. It is expected that the
factory will pay a total of $67m in taxes between 1999 and 2015 or the NPV
of $21.8m over the lifetime of the factory (assuming going concern).
- Tariff: one of the concerns is the loss of tariff payments to the government
from the local production, which would amount to $75.6m (NPV). However, it
is questionable whether it is actually a social cost, since this tariff was
eventually paid by the consumers. So, from the overall economy standpoint,
this is just the transfer of wealth from local consumers to local government,
and as such is not value created or destroyed. It can be debated, whether
government or individuals can find better uses for these funds, but it is safe to
assume that on the overall scale it should not be affecting the balance of
social costs that NATL is facing.

Value Created (NPV, $m)
Local Shareholders 28.9
Employees 8.2
Farmers 6.4
Truckers 2.5
Income Taxes 21.8
Total 67.8

As we can see from the quantifiable cost/benefit analysis, the project creates
substantial social value, therefore IFC should definitely consider it.

You might also like