9. PROJECT COSTS & RETURNS

9.1 Definition of project costs and returns

Project costs are limited to the irrigation and drainage network, access roads, farm clearing including levelling and drainage, project administration, farmer transfer and -settlement and those incremental ancillary works and services which contribute directly to the production potential of the area. Welfare and schooling facilities which would anyway be required somewhere in the island if they were not provided in tile project area, either because of the growth of population or because they raise the standard of living of the people (which in itself is an advantage not included in project returns) are not considered as project costs. Processing investment and operating costs are not included in project costs because processing will be handled by authorities and departments which do not depend on the project administration and because these departments are responsible for making the necessary provision to implement these investments in due time.

Project returns are those above the present returns. They are appraised at farm gate level, excluding processing profits and fringe or indirect benefits that may be attributed to the project, such as its impact on urban drift.

9.2 Basis of evaluation of costs and returns

The financial feasibility of the project is evaluated by reference to the accounting (or nominal) value of all project costs and proceeds. The economic feasibility of the project is analysed by considering the scarcity of various inputs and outputs, including foreign exchange and manpower. All these factors are evaluated at their opportunity cost, which is the cost to the economy of not using them for other substitutional purposes. Income transfers such as taxes and subsidies are kept out of opportunity costing.

The shortage in foreign exchange brings its opportunity cost close to 2.5 times the parity rate of exchange. No major improvement to this situation being expected in the immediate future, imports, import substitutions and exports and evaluated at Rs.15 per U.S. dollar, to appraise the economic worthiness of the project. Bilateral barter agreements entered into by Ceylon make systematic reference to world prices and therefore the substitution value of crops purchased by Ceylon on barter terms can be estimated directly from CIF world prices. A special note should however be made of groundnuts which are not presently imported and the substitution value of which is equal to the FOB export value of coconuts with an equivalent oil content. It is assumed that outputs at farm gate substitute themselves to unprocessed imports. on dock.

The opportunity cost of skilled workers in the project construction, and which are among the least under-employed workers of Ceylon, is assumed equal to their accounting cost. Unskilled labour has been evaluated at a third of its nominal wage rate. Family labour, according to the usual practice, has not been coasted. Fringe farm benefits, from gardening and poultry breeding have also been kept out of project returns.

Land purchased for channel construction has been evaluated at its nominal cost. Local services and inputs are accounted for at their nominal cost. Project returns are computed over a life-span of 50 years.

A cash flow balance is established for the agricultural sector in the project as a whole.

A second cash-flow balance is computed for the project authority, to determine the respective shares of land and water charges and government participation in the project management’s budget.

A final cash-flow balance, between government subsidies and participation to project costs on one side and government income on the other side, gives the position on the government budget along the 50 years of project life.

The internal rate of return of the project is computed only on the basis of economic opportunity values because of the theoretical nature of assumptions on future farmgate prices. These prices are recommended to induce the farmers to implement the expected production pattern and not as an observation of objective price trends. The sensitivity of returns to more elaborate turnout equipment, to a decrease in yields or world prices and to a lower yield build-up are also analysed.

9.3 Unit Costs

Unit cost data for a number of items of work have been established by taking into consideration the mode of execution, procurement and production rates. The resulting costs are comparable with unit prices of similar works carried out by local and foreign contractors.

The unit cost for earthwork on main channels is based on the use of heavy equipment such as tractors, scrappers, shovels, graders, etc. Small channels will be generally made by hand with the minimum of equipment. The larger structures will be cast in site excepting bridge decks which will be present and prestressed. Some of the small structures and pipes will also be precast.

Farm machinery prices have been estimated from a breakdown of catalogue prices of a local company which assembles locally built and imported parts into farm equipment. These prices are slightly higher than foreign quotations but they benefit the local industry. The high demand caused by the project may bring the industry to lower its prices, thus obtaining a fringe consumer benefit.

9.4 Project Costs

The cost of the main and branch irrigation channels, main drainage channel, structures and main road has been obtained from the bill of quantities computed from the drawings. The cost of secondary irrigation and drainage network, minor roads and land levelling has been estimated from bill of quantities computed for the sample area. The sample area covers an extent of 7,415 acres of farm area which is about 10% of the project area.

The total cost of the initial investment is estimated at Rs.765.9 million. Its opportunity equivalent is Rs.1058.5 million. Foreign exchange requirements represent U. S. $ 35.00 million. These costs include various percentages of contingencies detailed thereafter. The major components of project costs are shown in Table below.

Major Components of Project Cost

	Final Cost	Opportunity Cost	Foreign Exchange Component	Contingen cies
	10^6 Rs	10^6 Rs	10^3 Rs
Final Designs and Supervision	42.6	42.6		20%
Irrigation work	435.7	494.7	20,402	20%
Roads & Telecommunication	44.5	69.3	3,226	20%
Land preparation	72.3	91.7	3,327	20%
Selection & Settlement	13.8	14.4	79	10%
Project management (^1)	36.9	54.1	2,133	15%
Special services	8.8	19.5	1,197	20%
Project Authority Investments	656.6	786.3	30,364
Farm Investments	109.3	272.2	5,394	10%
Total Investment	765.9	1,058.5	35,758

(1) Including co-operative stores.

Rural electrification, domestic water supply, welfare and service facilities such as schools, post-offices and hospitals and processing units are not included in these costs. Roads have been included in investment costs, but the maintenance of the major road network is assumed to be done by the Territorial Civil Engineering Organisation on its own budget. Half of the cost of staff houses has been included as project costs for the purpose of economic analysis.

Operating and maintenance costs at cruising speed are shown in Table below.

Operating and Maintenance Costs at Cruising Speed

Financial Opportunity

cost cost

Farm Operation .. .. 73.5 141.1
Network Maintenance .. .. 4.9 7.1
Administration .. .. .. 10.4 12.6

Total .. .. .. 88.8 160.8

Farm operating costs do not include water charges or land taxes, which are internal transfers within the project when considered as a whole. These charges will however be considered for the financial analysis of the farm sector of the project and for government revenues only.

Service charges at full operation will add up to Rs.10.2 million per year. Land will be sold on an instalment basis. Annual land revenues will add up to Rs.15.8 million from 13 to 39 years. The financial cost of farm operation excludes government subsidies and considers only the actual amount paid by the farmers for their inputs. -

Network maintenance costs are computed on the basis of 1% of main channel investments and 2% of distributaries and drainage networks.

Administration investment and operating costs include extension and other agricultural services, which need not be necessarily considered as project costs. They have a depressive influence on the rate of return of the project.

9.5 Market Prospects

Project returns depend essentially on market prospects for its agricultural output.

9. 5. 1 Rice

The yields of paddy in the country have been increasing at an average rate of 3.5 percent per year over the last 10 years. Present production represents about 70 percent of local demand which is increasing by about 2 percent per year. Assuming extension of these trends, no market limitation constraining paddy production in the project area is anticipated. The annual production expected from the project from 1985 is 8.5 million bushels of paddy which represents about four to five times the yearly increases in demand.

9. 5. 2 Chillies & Onions

The government has recently banned the import of chillies and onions with a view to increase their local production in the shortest time possible. Consequently the production of chillies and onions is expected to reach a level close to self-sufficiency before 1976.

The total production of onions in 1970 was 716,000 cwt. The projected demand in 1976 on the basis of consumption prior to the ban is 2.4 million cwt. and in 1985 about 3.7 million cwt. The anticipated annual production from the project after full development in 1985 is 170,000 cwt. equivalents to less than 5 percent of the demand.

The total production of chillies in 1970 was 125,000 cwt. The projected demand for 1976 is 670,000 cwt. and 1985 about 985,000 cwt. The project aims at producing 113,000 cwt. of chillies annually from 1985 which is about 1100 of the demand.

9. 5. 3 Pulses

95% of the requirements of pulses, which are very important from the nutritional point of view, are imported. The average annual imports are 70,000 metric tons. Consumption increases slightly faster than population. The Five Year Plan aims at producing only 15 percent of local needs by 1976. Pulses produced in the project area will have a great capacity for foreign exchange saving.

9. 5. 4 Soya Beans

Soya beans are intended for the Oils and Fats Corporation for producing oil and foodstuff to replace fish meal imports (Rs.4.2 million for 3,600 tons at present). Soya bean could also be used for human consumption but there is no plan yet to put soya bean to this use. The soya bean production from the project annually will be around 150,000 cwt. from the year 1985.

9. 5. 5 Maize

The local production of maize in .1970 was 409,000 cwt. Maize is used for human consumption and for animal food processing. Only about 1,000 to 2,000 metric tons are imported annually. The Five Year Plan target for 1976 is 660,000 cwt. The project will produce 256,000 cwt. of maize annually from 19851.

9. 5. 6 Ground nuts

The local production of groundnuts is very small and used only for human consumption as nuts. An increase of this crop will allow its processing into oil. The projected production could easily be converted to oil for human consumption but this will require-a promotional effort with the public. When the public takes to groundnut oil the coconut production can be saved for export purposes. The present domestic consumption of coconut tends to increase dangerously.

9. 5. 7 Cotton

Sri Lanka imports some 3 million pounds of cotton each year and textile requirements increase at 3 to 4 percent per annum. The National Textile Corporation can absorb all the projected production after building a ginning plant for raw cotton. Cotton seeds can be exported to Japan at a price of U. S. $ 112/- per ton.

9. 6 Import Prices

Import prices have all remained quite constant over the last ten years beyond yearly variations which have mostly affected onion prices. The average prices are indicated in table below.

Imports Prices of Agricultural Produces

Unit :US $ / Cwt.

Produces	Dried Chillies	Rice	Maize	Dhal	Green Gram	Red Onion	Bombay Onion	Cotton
CIF cost	20	6 to 7	5	8	8	3.5	3.5	45

The quality of rice presently imported by the country is not fully acceptable to local consumers. It is generally expected that the fall in price which may occur in the World Market will be compensated for by the necessity to import higher standard rice or to produce it locally.

The processing of paddy is under the responsibility of the Paddy Marketing Board and thus lies outside the scope of the project which will only produce paddy. The substitution value of paddy grown through the project has been estimated at about half the import price of rice, i.e. 1.40 U. S. $ per bushel.

The price of cotton varies widely according to the quality and length of the fibre. It has been assumed for purposes of computation that the selection of varieties and the quality of plant protection and the care of harvest will allow the obtaining of a produce, which would have been imported at a probable price of 42 U.S.$ per cwt.

The processing of seed cotton has been considered outside the scope of the project as it will be done by the National Textile Corporation. After provision for the possible export of cotton seed and for the cost of ginning and marketing, the assumed price for seed cotton is 15 U.S. $ per cwt.

The production of groundnut on a large scale would allow the export of more coconut products. The substitution price of groundnut is taken as the FOB value of the equivalent amount of copra or desiccated coconut or coconut oil which would be available for export. The computed equivalent value of unshelled groundnut is thus taken as 4 U.S. $ per cwt.

Soya beans are not presently imported in any significant scale. The import substitution value has been estimated at 8.6 U.S. $ per cwt.

The substitution value of pulses, including pigeon pea, green gram and cow-pea, has been estimated at 7.5 U.S.$/cwt.

Local market prices have been affected by the guaranteed price scheme except for fruit and vegetables. Market prices for the latter have been subject to large variations during recent years.

Local prices have not given sufficient incentives for farmers to increase significantly their own crops. It can be expected, considering the present policy of the government that the price for commodities to be locally developed will increase at least up to a level favourable to the farmers.

9.7 Project Returns

It is assumed that the maximum yield of agricultural output will be attained by the 10th year after the first farmers settle in the area. The farm investment schedule and operating cost schedule as well as project returns have been computed on this basis.

From thereon (i.e. from the 15th year of the project) gross returns will have a farm gate value of Rs.236.5 million per year. The import substitution value of this production is Rs.135.6 million (US $ 22.6 million per year) and its opportunity value is Rs.339.1 million per year.

9.8 Financial balance of individual farms

The cash flow balance of representative farms during the development period is based on the following assumptions:

(1) Future farm gate prices are those recommended in this report.

(2) Target yields are obtained ten years after the start of land development.

(3) Tractor and machinery services are remunerated at a fair rate. The extra income of machinery owning farmers is not shown in the Table.

(4) Provision is made for interest on the working fund, for payment of water charges on the basis of Rs.250/- per acre per year, for the gradual self-financing of the working-fund and for the purchase of developed land from the government in instalments of Rs. 300/- per acre per year during 25 years after a 5 year grace period.

Paddy farms of 3 acres requiring about 260 workdays per year will bring to their owners an available net annual income above Rs.3,600/- after ten years. This is the target proposed by the Settlement Planning and Development Board of the Ministry of Agriculture for similar projects. During the development period of the ten years the net income will be above Rs.2,500/- per annum.

Upland farms of 3 acres using about 350 workdays per year will bring, on the average, an annual net income of Rs. 3,000/- after 3 years and more than Rs.5,800/- from the tenth year.

The higher returns which can be obtained on uplands farms are justified by possible fluctuations of output prices, by the more sophisticated and more time consuming farm management they involve and by the necessity to offer incentives to farmers to grow non-traditional crops.

SOCIAL AND ECONOMIC BENEFITS

9. 9. 1 Basic economic indicators

The project will directly create 31,000 new agricultural jobs with an average of two jobs per farm, and some 1,200 jobs in the project’s administration. Further a few thousand indirect jobs will be created through the development of local trade and services. The project also has a direct effect on employment in agricultural industries which have been kept outside the scope of this survey.

Some basic economic indicators of the project are as follows:—

Economic Indicators

	Investment per acre (Rs)	Investment per job Created (Rs)	Value added 10^6 Rs. (Rs)	Value added per acre (Rs)	Value Added per new job (Rs)	Capital Out put ratio (2)
Financial Cost Opportunity Cost	10,790 14,910	23,860 32,980	156.8 188.6	2,210 2,655	4,880 5,875	4.9 5.6

(1) Value added at full operation
= agricultural (output-inputs}—maintenance and operation costs less salaries
= (339.1 — 141.l)—9.4
= 188.6 (opportunity)
= (236.5—73.s) - 6.8
= 156.8 (financial)

(2) Capital/Output ratio

= initial capital outlay/value added. at full operation,

= 1058.5/ 188.6 = 5.6 (opportunity)

= 765.9/156.8 4.9 (financial)

The internal rate of economic return of the project is 12.4 percent.

If world prices for project crops were to decrease by 10 percent, the economic rate of return of the project would be 10.2 percent. If farm yield and equipment build-up were to take 20 years instead of 10, the rate of return would be 10.6 percent.

9. 9. 2 Social impact

The first social impact of the project is through the creation of new jobs at a rate of 6.200 per year during 5 years. This figure corresponds to 5 percent of the national requirements of new job opportunities during that period. Possibilities for new industrial jobs are also created through the improved reallocation of foreign exchange to the purchase of industrial production goods.

It is forecast that, correctly implemented; the project will generate a wide range of social changes, many of which are not included within the narrow definition of project objectives. On the farmers’ side, it is expected that consumption patterns and standards of living will significantly improve. These benefits will be accompanied by an increase of monetary consumption and the development of trade between the agricultural and industrial sectors of the economy with multiplier effects attached to it.

The increase of peasants’ initiative and the promotion of leadership among the villagers will create a new pattern of relationships between farmers and officials. Settlers will gain self-reliance and thus relieve the administration of a costly burden and reduce the present distrust of farmers to the interventions of officials. This result will also be achieved, as the officials learn to deal with farmers on equal terms and become more conscious of the villagers’ real needs and concerns.

The introduction of new cropping patterns is a technological improvement and will result in a better food balance in the country. The systematic use of light farm machinery and the relatively intensive training of the farmers will have a further educative value.

Finally, the economic improvements brought by the project will contribute to restore stability to the project area.