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Fishery Planning Analyst

Fishery Policy and Planning Division

FAO Fisheries Department

408/2

iii

PREPARATION OF THIS DOCUMENT

‘This second volume of the study on the "Promotion of sustainable commercial aquaculture in sub-Saharan Africa” was prepared within the framework of the FAO Fisheries Department's continued efforts to contribute, through sustainable development of commercial aguacultare, to poverty alleviation and eradication of hunger in developing countries, especially in sub- Saharan Africa Is specific goal i to assist developing member countries in the development aad implementation of policies that encourage the emergence or expansion of

‘entrepreneurship in aquaculture for a sustainable development of this sector The report focuses on one of the major impediments to aquaculture development in sub-Saharan Africa, namely the difficulty of entrepreneurs gaining access to capital, particularly in rural pats of the region Other constraints to development are discussed in’ Volumes 1, 3 and 4 of this study

Information reported in this document was obtained through wide-ranging studies covering, socio-economic, marketing, policy, legal, regulatory and institutional aspects of commercial faquaculture which were commissioned in Céxe dIvoire, Madagascar, Malawi, Mozambique, Nigeria, Zambia, Costa Rica and Hondurss Available literature on the access to credit in other countries, especially developing nations, was extensively used

Distribution:

FAO Members

Other interested nations and national and international organizations FAO Fisheries Deparment

FAO Regional and Subregional offices

Hishamnda, N¿ Manning, P

Promotion of sustainable commercial aquaculture in sub-Saharan Afca Volume 2:

Investment and economic fessibiiy

FAO Fisheries Technical Paper No, 408/2 Rome, FAQ, 2002 S4p,

ABSTRACT

This vohume ofthe report on the promotion of sstinsble commercial aguscuure i sb Stharan Afes discusses the difficult acess to Ivesnent capital, on of the major obstacles tothe development of sustainable commercial aquaculture inthe region The problem arises from a lck of colaeral excessively high ifres rales on Joan, banker” perceptions tat avocutare cares a paral high ik of Tae a lack of knowledge, by farmers ofthe

| modalities of applying for loans and, on the pat of lenders ack of or hed nfraon

| on, commercially succesful aquaculture enerpses inthe region

‘While some of the lenders’ perceptions are valid ~ particularly in instances where the industry

is not yet established and difficulties could occur as a result of local unavailability of necessary inputs, the market is untested and there are no examples of commercial suecess that cauld offer an indication of viability ~ preliminary evidence seems to indicate that banks fend

to exaggerate the likelihood of failure of commercial aquaculture projects in sub-Saharan

| Atnica, Borrowers need to be able 1 formulate and present thesr business proposals im a

| precise and concise manner that effectively offers the lender a comprehensive picture of the proposed business, communicates how they expect to profit from the proposed enterprises and

| generate the funds for the repayment of the loans sought The problem of collateral could be tackled through the use of "no-collateral” strategies such as group lending, village banks and

solianty groups, altsmative collaterals such as tiled lan and moveable prope, hich in ‘any cases bespeaks the need for legal and regulatory reforms, and though government loan

| euurntees When afordsle, government loan guaramoes and subsidized interest ees could sso he used to lessen the problem af high teres rates

FOREWORD

“The unavailability of loans for the development of commercial aquaculture in sub-Saharan Africa and elsewhere is 2 major problem It appears to arise mostly from lenders’ perceptions

Of high risk of failure associated with aquaculture and a lack of knowledge, on the part of farmers of the modalities of approaching financial institutions for a loan, as well as from a lack of adequate collateral and high bank interest rates, This report suggests some of the policies and strategies needed to tackle these issues However, information contained in this study with regard to the problem of investment capital in commercial aquaculture in sub- Saharan Africa is not exhaustive, Nevertheless, 1 trust that policies and strategies discussed herein will be useful in improving access to capital in the region In my view, Nathanael Hisharmunda of the FAO, Fishery Development Planning Service and Peter Manning,

‘Consultant, have made a very useful contnibution to overcoming a major stumbling block for aquaculiure development in Africa, T would like to recognize their sense of duty and dedication to this task,

UIEWijkstom Chief, Fishery Development Planaing Service PAO Fisheries Deparment,

CAPITAL IN COMMERCIAL AQUACULTURE,

‘The concept of capital in commercial aquaculture Source of capital for commercial aquaculture development: the rmle-and issue of loans ‘The types and sources of loans in commercial aquaculture

231 Types offoans

232 Sources ofoans ‘Aecessto bank loans for commercial aquaculture development 2.4.1 Fundamental requiremment for obtaining a bank Yoan 24.2 Most limiting factors to bank loans in commercial aquaculture in sub-Saharan Africa

‘Summary and conclusions

RISKS IN COMMERCIAL AQUACULTURE, VENTURES: ECONOMIC FEASIBILITY Seuing

Description of farms analysed 3.2.1 Shrimp farms

322 Fish farms Resulis of economic analysis 33.1 Farm profitability 3.3.2 Cost structure analysis 33.3 Break-even and sensitivity analyses

‘Summary and conclusions

3212 Extension of te possibilities for securing loans 3

‘E13 Government Joan guarantees 33

Page

42 Lessening 42.1 Addressing factors influencing interest rates the problem of high interest rates B a

£22 Some ather options 35

CHAPTERS ‘THE PROBLEM OF LACK OF KNOWLEDGE IN LOAN

5.1 Role and definition ofa business plan 31

32 Essential elements of a business plan fora commensal ‘aquaculture venture 31

52.1 Title page, table of contents and executive summan 38

5.2 Presenlation of the business plan ‘Summary and conclusions a 4

APPENDIX: Checklist for the elements of a business plan a

1 CHAPTER 1 INTRODUCTION

11 Background

[As a par of its elforts to contribute to eradication of hunger and alleviation of poverty, the FAO Fisheries Department, through its Fishery Development Planning Service, has initiated the promotion of commercial aquacultare in developing countries, especially in sub-Saharan

‘Afvica, The goal of this aotivity is to assist developing member couniries in the development and implementation of policies that encourage the emergence or expansion of tetrepreneurship in aquaculture fora sustainable development of this sector

“To achieve -gulatory and institutional aspects of commeteial aquaculture were commissioned in Cote this goal, wide-ranging studies covering socio-economic, marketing, policy legal lvoe, Madagascar, Malawi, Mozambique, Nigeria, Zambia, Costa Rica and Honduras, Research also included literature pertinent to the topic The findings of the studies are reported indifferent volumes

In addition to discussing the concept of commercial aquaculture and outlining some pre- requisites for sts successful development, Volume 1 provided the rationsle for promoting sustainable commercial aquaculture, discussed the main constraints to its development and presented a general policy framework for is promotion

Commercial aquaculture, those farming operations of aquatic organisms whose gost is to

‘maximize profits (business-oriented) and primanty by the private sector, is promoted for its potential contribution to food security deetly by producing food fish and other products, and indirectly through employment creation and generation of income for the purchase of food It

is also promoted for its ability to generate government revenues through tax collection, its non-retiance on government funds for financial survival and because ofits potential to assist small-scale rural aquaculture (Ridler and Hisharmunda, 2001),

A combination of factors impedes aquaculture development in sub-Saharan Africa, These factors include: limited direct domestic and foreign investment in the sector, limited availability of good quality seeds and feed, inadequate extension and training services, unavailability of suitable land in some countries, undefined or poorly defined land and water Tights, lack of legislation specifically for aquaculture in most countries, absence of or inaccessibility to capital and high cost of money {Ridler and Hishamunda, 2001; Percy and Hishamunda, 2001) Insufficient information on markets for farmed fish also limit or could limit aquaculture expansion in sub-Saharan Africa (Ridler and Hisharmunda, 2001),

[A mix of good governance, openness fo trade, macroeconomic growth policies, emphasis on Private investment as a source of wealth, guaranteed lund security, ta exemptions and lax holidays, loan guarantees, debt-equity swaps, promotion of large farms, producer associations, straegic plenning, and existence of transparent regulatory procedures are key ingredients in allracting investors to commercial aquaculture, addressing the issue of inadequate extension and icining services and in positively influencing long-term development of aquaculare in sub-Saharan Affica (Ridler and Hishamunda, 2001),

Land and water related issues as well as the issue of legislation specific to aquaculture in most

‘countries are examined in depth in Volume 3 of this report, which deals with legal, regulatory and institutional framework for the promotion of sustainable commercial aquaculture, The market side of commercial aquaculture is analysed in Volume 4 of the report There remains the questions af absence or inaccessibility of capital and high cost of money in the sector, whieh isthe focus ofthis volume

1.2 Methodology

“The overall methodological approach to the stady Was discussed in Volume 1 Wide-ranging stuies covering socio-economic, marketing, policy, legal, reglatory and insitesonal aspects

‘of commercial equaculture were commissioned for six sub-Saharan African countries’ and two Latin American countries’ Parmers' enterprises that were successful and were considered sustainable were surveyed The study was limited to the three species: tilapia, catfish and shrimp’, which, in 1998, aecounted for more than ball of the aquaculture production in the Interviews with farmers were supplemented by further interviews with hankers, fish retailers and government officials, ‘The interviews identified constraints to the development of

‘commercial aguacullure, information about markets and policies that could encourage the development of aquaculture

‘To examine the problem of risk of failure of commercial aquaculture ventures more closely, economic feasibility of commercial aquaculture was assessed by analysing financial data, whieh were collected Irom a number of farms inthe six African counties surveyed Available literature which describes experiences from developed und developing countries on how governments dealt with the problem of dificult access to capital to finance aquaculture was also reviewed und reported

1.3 About this volume

‘This volume of the report beings into sharp focus the key problem of adeguate financing of commercial aquaculture ventures in sub-Saharan Africa I frst reviews, in Chapter 2, capital ip commercial aquaculture ventures in the region, focusing on sougces and factors that hinder enlzepreneurs' ability 10 secure the investment capital necessary to establish a commercial

‘aquaculture business,

Subsequent chapters of the Volume are devoted to discussing factors identified in Chapter 2 + liting entrepreneurs” access 10 investment capital Specifically, Chapter 3 analyses the perception of risks in commercial aquaculture ventures and assesses economic feasibility of| selected commercial enterprises in sub-Saharan Africa Chapter 4 deals with the issue of collateral and high interest rates Chapter Š discusses the problem of lack of knowledge i Joan seeking, In addition to discussing the problem, each chaptet explores policies andar

* cine vive, Madagaser, Malawi Mozambique, Nipstia and Zambia

2 Conta Ric and Honduras ` Shùng tưng veợc susseyed in Madagascar ad Mozambique

3 strategies that could be used to ease the problem, The suggested policies are problem specific

as they are identified based on investment related issues that were uncovered by surveys

‘Chapter 6 consists of an overall summary, conclusions and recommendations

4 CHAPTER?

CAPITAL IN COMMERCIAL AQUACULTURE VENTURES IN SUB-SAHARAN AFRICA,

2.1 The concept of eapital in commercial aquaculture

Agricultural evonomists define capital as the monetary represemtation of the physical inputs used in agricultural production, io addition to financtal assets (Kay, 1986), As sóch, captal is moze than liguid savings such as cash and balances in checking and savings accounts: an aquaculture farmer's capital also includes the monetaty value of productive resources such as hroodstock, stock of feed machinery, ponds, buildings, on-farm roads and land Capital therefore can be liquid and exsily convened into purchasing power oF very illiquid This broader definition of capital will be adopted as the working definition inthis report

Farming as a business requires adequate capital Capital is necessary to exeate, maintain, and

‘expand business, crease efficiency, and to meet seasonal operating cash needs The lack of

‘capital in general isa problem for development in sub-Saharan Aftica, Its particularly acute ots of the economy such as aquaculture

Generally speaking, commercial farmers can get capital rough own savings (own equity) bormwing or through a combination of both In sub-Stharan Arica, annual per capita incomes are very lows in many instances, they are below USS300 (herealter USS is abbreviated to $) Such’ meagre revenues imply that most or all income earned is generally consumed As much of the population lives below the poverty line in most counties, earings are oflen insufficient to cover family needs, which limits the possibilty of savings, Thus, t can be argued that, with few exceptions, the marginal propensity to save in sub-Saharan Attica ts at best close to zero, The hkelihood for potential investors t9 build their vn equity 's limited,

‘The lack of own equity suggests that most investors in sub-Saharan Africa will depend on external funding to stat a commercial aquaculture business, the leveruge® will be important The most common external source of funding to provide capital for commercial ventures is borrowing, mainly from banks Unfortunately, however, in the ease of aquaculture, so far financial insotutions play 2 minor role in the provision of loans for the procurement of investment capital, Tre lack of capital remains one of the biggest harriers to aquaculture development in sub-Saharan Africa For this sector to develop, the issue of potential investors" aoeess to loans? needs 10 be addressed

* Lesage efecto the use of borrowed cpl to supplement an extend he wie of uy capital debug) "Theres poiverelatiosipbevwech loan a ced tut uli what tost people tink credit i erent from lon, Technically speaking loan cepesens bortoved mney whereas cre teperet the capac, the sty bortow, Credit sa valuable ssc 3 ally ap nn! or a baunexs tớ bom, The he th {ict soni the highs the chagses of geting 3 nan Tom the lene

5 Loans can be vital for aquaculture farmers Aquaculure farmers need foans to meet farm fixed financial obligations Loans may be needed to purchase or rent land, machinery and equipment including boats, vehicles and aerators, to build ponds and/or cages as well as storage facilites, and for verically integrated farms, hatcheries, feed mills and processing plants These fixed costs, which are invariant of the level of production andthe degree of use

ff the productive resources, ean be important inthe short run

Loans are also necessiry for farmers to meet variable costs, Money to cover expenses related

to the purchase of items such as seed, feed, fertilizers, chemicals and fuel, or to pay labour, especially in the frst production eyele i not slways at hand Though they ean be increased or decreased at the manager’ discretion, with the output level, these variable costs can nevertheless be an important part of farm expenses An analysis of a sample of farms in sub Saharan Africa indicated that variable costs could cover between 74 and 97 percent of total production costs in shrimp farming, and 31 to 98 pereent in tilapia and catfish operations Such large operating expenses typically require loans

be classified by length ofthe loun repayment period, the use ofthe intended loan, the secunty of the loan, and loan repayment plan (Kay, 1986) Based on length or period over which money borrowed will be repaid, the most widely used method of classification, loans can be short-term loans, intermediate-term loans or long-term loans Short-term loans, which can also be called production or operating loans as they are used to purchase inputs needed to operate through the curtent production cycle, include those which must be folly repaid in no more than the next 12 months following the borrowing dat, Funds borowed for the purchase of fingerlings, feed, ferlizers and chemicals or to pay

"ne long ron hee are Hae cots the frm ean expand or cntactin the lng, Hence al costs beofte vanable,

6 labour would fall within this category: they must be repaid within a year or less when the erop

is harvested and sold, Intermediate-term loans are those for which the full repayment can be ccampleted in more than one year, bu in less than ten years Money borrowed forthe purchase

‘of machinery, pond or cage Construction, holding tanks, Farm equipment including nets, trucks and boats, fish broadstock and some buildings such as storage facilities and hatcheries falls within intermeylate loans, Because these assets will be used in production for more than one

¥year and cannot be expected 10 pay for themselves in 2 short Ume, a short-term loan is not

“appropriate For their purchase, Long-term loans are those wich most be repaid within a ten- year or longer period They are sought and granted for the acquisition of assets with a Tong (at Teast 20 yeurs) or indefinite useful life such as land and buildings An example of such buildings isa fish processing plant or a feed mill

Based on the use or purpose of the Ioan, business loans ean be real estate loans and non-real estate loans As the name indicates, realestate loans are those used for the purchase of real estates such as land and buildings They are equivalent of long-term loans Non-real estate Jouns include all business loans other than real estate loans: they consist of both short-term

and intermediate-term loans’

‘As will be discussed in further detail in the following section, there is @ risk involved in lending capital the debtor may fail to repay the borrowed capital and the acerued interest AS ‘one of the conditions for lending, often the lender requires the borrower to pledge an asset, which the lender can seize and sei in case the borrower defaults This gives the lender greater assurance that the loan will be repaid and, hence, represents a measure of protection against risks, The asset pledged to the lender by the borrower until the borrower pays back the principal and interests is called security oF collateral, When classified based on security (collateral), loans can be secured loans if security (collateral) has been pledged tothe lender

by the borrower before the loan is granted They can also be unsecured loans if no security has been required from the bortower as a conditian of granting the loan, Unsecured loans are also called signature loans, as the borrower's signature is the only security provided by the lender asa guarantee to repay the loan

Different lenders may have differen types of loan repayment plans for different borrowers depending on the borrower's ability to repay the loan However, there are two main types of repayment plans for aquaculture loans: single-payment plans and amortized-payment plans

‘Accordingly, loans can be single-payment loans or amortized payment loans, The characteristic of single-payment loans isthe payment of the principal at once when the loan is due, Accrued interests may be payable at once or periodicslly, Single-payment loans include short-term loans, Some intermediate-term loans that may require only annoal inerest

‘payments, with the total principal due at the end ofthe loan are also included inthis category

ff loans, Amortized payment loans are the ones for which interest and prineipal payments are

‘made periodically by instalments, generally monthly Amortized loans often include {ntermediate-term loans and long-term loans

Some leer lo Hist “personal oa ia dis category Persona loans re non-business lan which ate used

to purchase persona assets sich bores, stones, and appliances Eventhough tey ae non-bosiness {nana ends sight want them inloded on Boomers fam balance sects Yo gta complete picture of thei financial sodition (Kay 1986),

232 Sources of loans

Sources of aquaculture Joan funds vary from country to country, In general, however,

aquaculture farmers can borrow money from formal and informal lending sectors

Of the formal sector, commercial banks, rural development banks, agricultural development banks are the most’common sources of loan funds for agricultural development These financial institutions can be an important source of aquaculture Joan funds as well Banks in sub-Saharan Africa generally provide short- and intermediate-term loans for agricultural evelopment Specialized lending agencies such as production credit associations and credit, unions can also be format sourees of loans for aquaculture development Like agricultural

‘banks, they usually, provide only shon- and intermediate-term loans to farmers, Such loans may be used to purchase broodstock, seeds, feed, machinery, and buildings In some coustries such as the United States, some Iife insurance companies may invest funds trom the premiums paid on life insurance policies or from other earnings in various sectors, including, agriculture and aquaculture These companies tend to invest only’ in long-term real estate loans (Kay, 1986)

‘The informal lending sector includes individuals, institutions and groups The defining characteristic of an informal financial system is that it i outside the reach ofthe legal fiscal, latory and prudential framework of the monetary and financial authorities However, though unregulated, it covers lawful activities

‘There are many categories of individual lenders, including moneylenders and moneykeepers, Jandlords, estate owners, traders, employers, friends, parents, and other relatives They all

‘would provide both non-real estate (short -and intermediate-term) and real estate (long-term) Joans However, moneylenders, moneykeepers and landlords generally provide more substantial amounts of loans, but at somewhat harsh conditions,

“Moneylenders® are reported to play a significant role in serving the loan needs of borrowers with limited access to formal finance In Asia and some parts of sub-Saharan Africa, they have also been credited with financing star-up capital for microenterpnises Sources of funds, for their lending vary from own savings to cheaper funds borrowed from other sources Including more efficient moneylenders and banks Loans from moneylenders, like most loans from informal lending sources, are not secured by collateral However, rates of interest are

reportedly high (Thillsirajah, 1994),

Moneykeepers” are recognized as individuals who are able to provide shor-term loans and capable of undertaking financial businesses at their own risks As is the case in Ghana and Nigeria, some moneykeepers may charge a fee for the safekeeping service (Thillairajah, 1994); others may render it as a free facility asin the Niger Because of the opportunity to

“Moneylenders ar indisiials involved i financial ansstons a part of det acceptin Some have as thet train aceopation the rating of loans sich as funds for smal and shoei emergeney ez, Mone keepers ace parsons generally ackPowledgod tobe ustworthy ima local, eh hor inBxidụnh and troupe fel somfonable a entrusting ther spate cas Cor safekeeping,

& guarantee for the loan repayment, most landlords require some form of security fom tenants

‘Trade credit is an important Source of financing for farms Seed and feed suppliers ofien are willing to supply credit to farmers 10 assist during seasonal cash shortalls Input traders provide loans in Kind, especially farm inputs und raw material supplies 10 đfffam

‘commercial enterprises, and as longer-term loans for capital investments, The experience of the Tanzania cashew and coconuts project demonstrated thatthe tsader-loan mechanism can

be successful in delivering loan to small farmers and small-scale businesses to whom

‘commercial banks have been reluctant to lend (Thillarajah, 1994) fecause they have been proven creditworthy and ate in a better position to enforce loan repayment Irom farmers, input Isuers often function as invermedianes between the lending banks andthe uliimate borsomers,

‘or throggh an affiliates finance company

Rotating savings and credit absocistions are examples of lending groups They are widespread

in sub-Saharan Africa, Prevailing in most developing countries, rotating savings and credit associations are known under different names in sub-Saharan Aicica Names vary from tontines in French-speaking Aftican countries such as Cote d'ivoire, Congo, and Togo (0 Susu in Ghana, Esusu in Nigeria, Ekub in Ethiopia and Nianst im Cameroon, Other names ure also used elsewhere, A rotating savings and ctedit association consists of members Who know each

‘ther on a personal basis, usually as a result of social or employment, and who agree © contribute a fixed sum of money periodically tọ a pool that distributes the money collected by Tot on agreed dates One member receives an eqnal amount on the agieed date, When every member has received the money, the cycle is completed: the association ean dissolve or reorganize (Thillaraj, 1994) Thus, the assoctations provide interest-free loans to members

‘These loans are shor-term loans snd can be used for any purpose, However, they are generally available in limited amounts

°

24 Access to bank loans for commercial aquaculture development in sub-Saharan Arica AAs discussed in the previous sections, loans avatluble from informal sources are generally limited and mainly intended for working capital needs and contingencies They have @ number of disadvantages such as high costs and unfavourable terms and conditions attiched

to Toans Thus, most funds for aquaculture development would be expected to come from the formal fending sector Banks have well defined rules, procedures and guidelines They also have well documented loun files, a legal backing to enforce their claims and have access to governmental schemes and technical assistance, However, as emphasized previously, prospective borrowers from the formal lending sector have difficulties meeting the sectors lending requirements, To understand the factors that limit potential borrowers" aecess to bank loans, i is tmportan 10 first review the fundamental factors that which banks consider when reviewing and deciding on a Toan application

24.1 Fundamental requirements for obtaining a bank loan

‘There are many factors that go into making bank foan decisions, but most ean be included in fone of the following categories: character, capacity, capital and collateral

‘The bormwer’ character will usually be researched and checked by the lender ifthe later is not acquainted with the borrower Character refers 10 the borrower's honesty, intesity, reputation, trustworthiness and judgement Character is in a sense synonymous of credit, Credit, which was defined asthe ability to borrow money, is a valuable asset forthe borrower In fact, borowing money can be thought of as exchanging the borrower’ credit for the lender's money dishonest and uniruthul indtvidval or business with the reputation of lack

‘of integrity in business dealings and sluggishness in loan repayments or mecting other Financial obligations is not creditworthy Such a borrower with unfit character would have difficulties obtaining a loan from the lender A lender will also evaluate the applicants 4udgement or decision-making ability The borrower’ ability t0 do the right judgement can affect the efficiency and productivity of the business, which ia tum ean impact on the profitability of the business and thus, influence the borrower's ability to repay the loan Entrenched farmers will be evaluated on their past record: a beginner witl be evaluated based

‘on personal background, education, and taining

Capacity refers to the borrower’ ability to repay the loan under consideration, Loans will be repaid only f enough money can be generated from the business to cover the borrower’ farm needs and family living expenses as well 28 the prineipal and interest payments on loans, Banks will want to check the borzossers repayment potential before a loan can be Eranted,

Most banks require borrowers to contribute a part of the capital needed to establish a business

‘The borrower’ contribution to the cost of capital needed to establish a business refers 10 as equity oF own eapital Thus, capital as a condition to get loan from a bank refers to the bomower own equity, and therefore to his risk bearing ability An individual or business

‘without sufficient own capital may not be able 10 borrow enough capital 10 produce as elficiently as the business should do was the capital resource not limited, The moze own

‘equity available the more capital can be borrowed a5 this ensures the bank of the borrower's ability o withstand unexpected losses

lũ

‘A borrower can be of goad character, demonstrate the capacity 10 repay the lộn and present tough equity to qualify for the loan applied for, but a bunk may still require collateral from the borrower to support the loan request As discussed earlier, collateral refers to tangible asset that a borrower pledges to the lender until the loan and consequent interests are paid back The lender can seize and sell the asset in ease the borrower defaults and fails to pay back Thus, collateral provides a vital back up to te loan request Ifthe unexpected happens sind the loan is im default, it may be the lender’s only means of recovering the loan turds,

‘Therefore, the provision of collateral enhances the borrower's access to loans Perhaps, collateral represents the primary factor in a loan decision

24.2 Most limiting factors to bank loans in commercial aquaculture in sub-Saharan Africa Four main factors were identified as impeding access of potential commercial aquaculture Farmers to bank loans in sub-Saharan Africa, Bach of these constrains is linked in one way or nother to the four fundamental considerations that go into making decisions on applications for bank loans

‘The first discouraging factor for potential borrowers is the banks" perception that commercial squaculture carries a particularly high sk of failure in sub-Salsaran Africa, This is essentially

‘due to past negative experiences with aquaculture development projects in the egion,

Aquaculture was introduced in most sub-Saharan African counties in the 1950s At the end

of the decade, there were approximately 300 000 ponds in 20 countries (Satia, 1991) In the 1960s, politcal unrest, lack of fingerlings, drought, and poor economic returns led many farmers to abandon fish ponds, which resulted in a decline in aquaculture output (Hanison, 1997) Another wave of expansion occurred in the 1980s Between 1988 and 1995, approximately $160 million was spent on aquaculture research and development in Africa, most of it oriented to the eural sector and diversification However, development has been slow with (tal aquaculcore output ofall aquatic organisms in Africa just lose to 122 000 in 1997 (FAO, 1999) This output was only 0.34 percent of world output a smaller share than in

1989, In the early 1980s, aquaculture also attracted institutional loans, thanks to optimistic business plans prepared by "instant consultants”, but losses were high Failure of many of these operations soured financial institutions on aquaculture (FAO, 1996) Since then, there hhas been lite instiational financing of aguaculture as the lending institutions lack records on aquaculture as a profitable business and thus have serious doubts on the repayment capacity

fof aquaculture proposals,

‘The second barrier in accessing loans isthe banks” insistence on collateral, Collateral has long, played a central role in the lending function of banks in the formal sector It is a well established and sound mechanism for providing the lender with a form of guarantee that the borrower will not default on repayment of the loan and the imerest it accrues By offering, collateral, the borrower risks the seizure and sale of property in case of failure to repay the loan, This is in itself an incentive for the borrower to respect repayment obligations, which reduces the lender's risk, thereby increasing the borrowers chances of obtaining the loan, Thus the availability of collateral plays a major role in influencing banks’ decision to lend

"

‘The availability of collateral also influences the amount that « bank is willing to lend and the interest rates at which it might be lent Everywhere, when the borrower can offer the lender collateral fora Joan, private creditors offer larger loans, at lower interest rates, payable over longer periods of time In many instances, compared to a debtor who canmot offer good collateral, one with such collateral can anticipate receiving six to eight times more loan, taking to 10 ten times longer for repayment, and paying interest rates 30 to SO percent lower {Asian Development Bank, 2000),

Elsewhere, buildings and tiled Jand are generally the most provided collateral for long-term loans, Machinery and equipment aze often used as collateral for intermaediate-trm loans Most farmers in sub-Saharan Africa frequently have none of these assets available to offer as security for loans Ths is pacticulatly so where the lund and buildings belong to the village or clan or are rented from a landlord,

For reasons discussed above, lenders favour secured loans However, a borrower with good credit and a history of prompt loan repayment may be able fo borrow some money, especially shor-term loans, without pledging any specific collateral In sub-Suharan Africa, often farmers have neither the credit nor the bistory of prompt loan repayment to qualify for dansecured loans; collateral is almost always required

“The thind constraining factor for potential borrowers is the high interest rates Interest represents the cost of using borrowed money, High amerest rates charged by banks are

‘common disincentive to borrowing in sub-Saharan Arica, They arise for a numberof reasons, whieh include perceived high risks of the venture being Financed and lack of collateral, lack

of a properly functioning market in financial services, high rates of default on loans, Inefficient means of outreach resulting in high transaction costs, the rediscount rates of the cenual banks and high jnflation rates prevailing in most sub-Saharan African economies,

‘These factors wall be revisited in Chapter 4

‘The fourth problem faced by entrepreneurs in securing loans is the lack of knowledge, on their pust, of how to prepare and present a loan application 10 a bank and what specific Information the bank might require, As emphasized in this report, a bank will lend money coy i is convinced thatthe project is profitable, That is, if there is evidence that the loan can be repaid The loan repayment capacity is best measured by the cash flow generated by the business Thus, the borrowers repayment capacity will be best addressed with the claboration of 2 good business plan, However very often, potential horrawers in sub-Saharan

Arica for commercial development lack the expertise in preparing a business plan

Summary and conclusions

This chapter discussed the concept and role of capital as well as its source for the evelopment of commercial aquaculture in sub-Saharan Aftica, It also reviewed the types and agcess to loans for the development of the sector in the region, the banks" requirements 10 grant a loan and the major constraints to accessing bank Joans for commercial aquaculture evelopment

Capital, the monetary value of all factors of production used in an enterprise is necessary 10

‘create, maintain, and expand a business, increase efficiency, and to mest seasonal operating

cash needs, Because of the lack of own equity, most investors in sub-Saharan Africa will Sepend on external funding, to start a commercial aguaculure venture Funds will be borrowed especially from the formal lending sector, as the loans available from informal sources are generally, not only costly, but also limited and mainly intended for working

‘cepital needs and contingencies

However, prospective borrowers have difficulties meeting the banks' lending requirements

“They have to be checked for character, capacity, equity and especially collateral Specifically, there are four major factors which limit access to bank loans by potential entrepreneurs in commercial aquaculture in Africa south of the Sahara: the banks’ perception that commercial

‘aquaculture carries particularly high risk of failure in sub-Saharan Africa, the banks" insistence on secured loans and the lack of adequate collateral by borrowers, the high interest sales charged by banks and the lack of knowledge, on the part of borrowers, of how to prepare land present a loan application to a bank, notably @ business plan, Because oftheir importance, the rest ofthe report devotes a separate chapter to discussing some of the strategies that can be used to ease each of these constrains,

B CHAPTER 3 RISKS IN COMMERCIAL AQUACULTURE VENTURES: ECONOMIC FEASIBILITY 3A Setting

‘This chapter attemps (o address the problem of perceiving commercial aquaculture projects in sub-Saharan Airica as highly risky As discussed in the previous chapter, the perception by lendine institutions that investment in aguaculture bears a high risk of failure relates in part t6 past negative experiences with aquaculture development projects Project achievements have generally been short-lived and unsustainable There are several reasons for this, including Insufficient project duration the very weak institutional context in which these projects are implemented, the changing priorities of donors and governments, and limited follow-up capabilites The review of aquaculture in sub-Saharan Africa showed that in most countries aquaculture production is still ineipient or erratic (FAO, 1996) Apart from the doubtful

‘uality of the data on production, this demonstrates that only a few countries have actualy given duc emphasis to aquaculture, which can make banks sceptical about the profitability potential of the sector Banks iso rate commercial aquaculture projects highly risky Investments because commercial aquaculture 3s sil a relaively new concept in sub-Saharan

‘Atria, which implies the lack ofa track record of successful cases in commercial aquaculture

im the area This chapler aims at easing this concer by evaluating economic feasibilly of some commercial farms inthe region

In this evaluation, examples of commercial aquaculture ventures are analysed Cases studies are completed for two shrimp farms, one integrated polyculture tilapia-catfish-pigs farm (ZAM) one integrated tlspia-pigs-ducks farm (ZAM2}, and one polyculture tlspis-carp farm (NIG2), The purpose ofthe analysis i not to report results of analysis ofa representative sample of commercial aquaculture businesses in sub-Saharan fica; it i to illustrate that such enterprises can be successfully established and can be profitable businesses

While the uimost care has been taken to analyse availible data as accurately as possible, the findings presented in this chapter shall be interpreted with caution ‘They were generated based on data provided by a limited number of Farm owners oF managers, and shall only be taken as preliminary The process of verification of economic feasibility and evaluation of risks in commercial aquaculture is not yet complete; it is expected to cover a more representative sample of farms, and, where possible, species by species and system by system, For reasons of commercial confidentiality, the identity of the entesprises has been with

32 Description of farms analysed

32.1 Shrimp farms

3.2.41 Farm MDI

Farm MDI js located in an under-populated area of coastal plain, It cavers 688 ha under

‘water, 610 ha of which are production ponds The coast has mangrove forests To preserve the

H mangroves, the ponds are separated from the mangroves by a belt of land between 200 and

500 m ide The impact ofthe farm on the mangroves appears to be neutral The use of agro- chemicals is generally limited to lime and fertilizers and the company relies on good _management practices to prevent diseases The far has been in production since 1992,

“The Farm produces Panaews monodon, using a semi-intonsive technique, No aeration is used Physical conditions forthe goowing of shrimp are good The ponds use clean, brackish water with temperatuee of about 30.5°C during the hot season and about 23.5°C during the cooler part of the year, The activities of the farm are almost fully vertically integrated, ranging from hatchery operations, to nursery activities (post larvae production), grow-out (marketsized snip production), processing and packaging

‘The larval stags (rom sauphi to 2000 1 mysis) take 10 1015 days Larvae ate stocked imo rusty ponds at an average stocking density of 150’ The nursery pase lst for about 20

to 30 days, which implies thatthe enie hatchery cyele takes between 30 and 45 days The average survival rate im mursry ponds is about 68 pereent Grow-out ponds, which range from

255 to 10 ha in size and are designed and consteucted with Water depth averaging 1.5m, are Stocked at densities of 10 10 12 post larvae or PL’ Size at stocking Is PLiz-PLv with an average of PLas (0.20 | p/PL)

Shrimps are fed a 38-40 percent protein feed at an average of 2.5 percent of body weight Lime and fenilizers (Di-amnmonium Phosphate and Urea) are applied at diferent rates and frequencies, but in general the average ratio phosphate/urea is 1/6 No chemicals (antibiotics) fare used in nursery oF grow-out ponds, Waler exchange is initially kept at 2 to 3 percent per day and gradually inereased 0 10 percent as biomass increases until i reaches 20 percent close to harvest

About 6 200 tonnes of feed are consumed annually, Feed is primarily imported from different sources Historical commercial ties and risk diversification explain feed import from different suppliers

An 1999, the farm employed about 407 workers, with an employment multiplier effect of L9

in the processing industry (Hishamunda, 2000) The employees receive wages that are higher than in tae public sector and in most other private companies The company benefits from a stable labour force

Thote are two growing cycles ø year The warm season (28-32°C) cycle, which covers November through April lasts between 120 to 145 days: the cold season (23-27°C) eycle

‘extends from May to October takes between 140 and 160 days Average growth rate is 0.5 giweek in cold seasons and 2 giweek in warm cycles, On the average, shrimps weigh 25 g/individual at harvest Yields vary from 1 $00 t0 3 500 kyfhafeycle depending on the season'®, with an average of about 2500 kyha/eyele, or 3.000 kyhu/yeat The average survival rate 8 90 percent; loner and upper limits recorded were 80 and 96 percent Feed Conversion ratio varies from 1.8 to 2.5, with a mean of 1.9, In 1999 the farm produced 3.050 tonnes of shrimp, 64 percent of national production of 5 024 tonnes on 62.5 percent of

is the land being used for shrimp farming nationally All shrimp produced is exported, mainly

to France, the United Kingdom, Portugal, Spain and haiy

3.2.1.2 Farm MD2

Farm MD2 has 197 ha of land under water, 138 ha of which ate utilized as production ponds, the average size of which is 25 ha It was established in 1995 jn the same under populated coastal 2one as Farm MDI The water is clean, brackish with a similar temperature range t0 that of Parm MDI The farm is also situated on low-lying coastal plain, set back between

200 mand 500 m from the coastal mangrove forest,

Like Farm MDI, farm MD2 produces P monodon, However, this farm uses production rethods that are much move intensive than on Farm MDI The average stocking density in Podvction ponds i 20 PLshe™ Size a stocking is PL-PLo with an average of PLis (0210 1 gIPL), Shemp are fed «40 percem protein feed Farm MD2 used more than 50 percent the đan of feed than on Farm MDL Pond aeration is frequently used, All the feed is iinported The application of lime and ferttizers (Di-smmonium Phosphate and Urea) is

ăn mui

Activities of the farm are also almost fully vertically integrated, ranging from hatchery

‘operations, to mursery activities (post larvae production), grow-out (marketsized shaimp production), processing and packaging,

In 1999, Farm MD2 employed 301 people on the farm but the employment multiplier effec in the processing industry sas 1.6 compared to 1.9 for Fatma MDE Workers are also paid better

‘than in the public service and most ofthe private sectos:

In 1999, the farm produced an average of 9 098 kg of shrimp per hectare; almost double the

‘production per hectare on Farm MDI All the produce is exported to Europe

322 Fish farms

‘Three farms: ZAMI, ZAM2 and NIG2 were analysed under this categoty Farm ZAMI is a moderate sized polyculture farm growing Glapia and carp integrated with pig farming The Farm has 40 hectares under water, 32 hectares of which are given over to production ponds,

‘The farm is situated about 40 km from a major urban area in which the production is sold

Farm ZAM? is a smal, integrated tilapia, pigs and ducks farm Ithas 7 hectares of land under

‘water, $ hestares of which are used as preuction ponds of an average size of 0.125 ha, The farm uses an extensive system of production utilising the pig and duck manure to fertilize the ponds The farm has plentiful supply of tresh and clean river water, which it gets by gravity to Dl up the ponds The farm has been producing tilapia for 7 years The tilapia output is sold mostly at the pond dikes to retailers andlor lo neighbouring commulnities for direct consumption In 1999, the farm emplayed 38 poople,

Farm NIG2 is a polyculture tilapis-catfish farm using intensive production techniques, including seration, The farm covers has 4.3 hectares under water, 3.7 hectares of which are

16 allocated to production ponds The farm also produces fingerlings for its own use and for sale, (ther biological parameters of the theee Farms are summarized i Table 1

Table 1 Biological parameters of fish farms evaluated

Parner ZaMi ‘Na ofthe mm ` Tông

Farm ie (al 40 7

Integration Bạc Pigs and Ducks

Stocking densiy FRAT) Tilapia 1 as 4

| ia Cats ° 112500 Cup

33 Results of economic analysis

33.1 Farm profitability

3.3.1.1 Ordinary enterprise budget method

“The "Budget Analysis” technique, which is based on estimated costs and returns, was used 10 evaluate economic (casibility of the farms deserited above Estimated costs and retumS to farm enterprises helps producers examine their operations and evahiate the profitability of each enterprise (Ifishamunda, 1993) Enterprise budgets were developed for each of the two shrimp farms andthe thre fish farms

„ Because 10 of the three fish farms analysed were integrated with livestock such as pigs and ducks, budgets were developed by excluding animals and by allocating shased productive resources among enterprises on the farm This was dane for the purpose of enabling inte farm comparisons For this same reason and because shrimp is sold on the internation market after being processed whereas fish is sokl domestically without undergoing processing, the analysis of profitability of the businesses was completed excepting value Added of the farm products, In adtion, the reluctance of shrimp farm owners/managers to

‘eveal all economic information on off-arm activities, especially the price at which shrimp is sold iniernationally, rendered the complete economic evaluation of the businesses difficult, Results of the investigation completed for both shrimp and fish farms are summarized in Table 2

Table2 Summary of annual enterprise budgets for one-hectare of commercially ‘managed shrimp and tsh enterprises

Shrimp forme — Fah fame ——] MADI | MADI | ZAMI | ZAM2 | NIG2 (Grass Revenues (SIM) 2@| Too] 368] S98] S3

Variable Costs (Sa) II: Tor[ aes | 1515 Tneome Abave Variable Coss 377] as | 3886 Ties

“Tora Costs (tha) 90 4369| — Hi

‘Net Rewms wo Manigement(Sihay_) 20055 [37255 S19] ám Rate of Retry o investment) ny, 35 7

Shrimp farming is more profitable than fish farming On the average, net retums to

‘management are about seven times higher en a shnmp farm than on a fish farm, or about

531 64S/ha/yr compared to S4 500Mhalyt Rates of returns on investment are also higher on shrimp than on fish farms; on the average, a shrimp farmer gets $1.05 for every dollar Invested whereas a fish farms ears $0.64 However, although fish farming i less profitable than shrimp culture, it still yields reasonably good rates of rtarn on investment, canging from 13 percent to 108 percent,

In the case of shrimp farming, because the yield on Farm MAD? was alanost double that of Farm MADI, the annual per-hectare net returns on Farm MAD2 ($37 25S/ha) were about 43 percent higher than on Farm MADI (§26 035/ha) However, the additional costs of additional Inputs incurred from farming more intensively meant thatthe estimated peoft per kilogram of shrimp was $4.11 on Farm MAD2, about 10 percent less than the $4.56 profit per kilogram ceamed by Farm MADI Similarly, though high (5 percent), for Farm MAD2, is 22 percent lower than the 117 percent achieved on Farm MADI This the rate of return on investment finding implies that, for an aquaculture enterprise to be profitable, the choice of production technologies is important The search for appropriate production technology can be a tal and

18 error process which can take time Though Farm MAD2 was established am 1995, 11 had completed 1wo yeuts of production in 1999, it eould sull be considered to be in the process of discovering its optimum production technology Intensification does not necessarily lead to higher profit margins,

ny investment cartes atime dimension that can affect the profitability of a business It could

be useful to take this factor into account when evaluating the economic feasibility of an aquaculture venture In fact, some lending institutions might require borrowers 10 use evaluation method which accounts for ume,

In a simple model, the value of the units accruing from an investment represents the difference between revenues (R) obtained from sales of the investment ouput aid costs (C) incurred from production 10 marketing This value is the net mem (NR) oF benehit on

‘nvestment Mathematically, beoelits or net returns from investinent can be expressed a

‘The greater the NR the higher the utility From investment, This method of evaluating projects is relerred 10 as the “Onhnary Enterprise Budget Method”, It was used in the previous section

1 assess the economic viability of selected shrimp and fish enterprises im sub-Saharan Attica {ee Table 2)

Although this approach is widely accepted as 2 good investment decision making tol, i does

‘ot take into account the effect of me on the value of money, which reduces its accuracy The use of inaccurate methods to assess investtnent proposals can lead to wrong inferences and bad invesiment decisions Refer to equation (1) above In aquaculture, 2 good deal of time tan elapse between the time of the purchase of the machinery required 49 construct a farm, to build & fish processing plant or 10 establish a hatchery, and the ine of harvesting or processing the fish, or selling fingerings The time lapse can be one year or more depending fon working conditions, species raised and market availability, among other factors, fn otter words, in aquaculture, a par of the costs (C), namely fixed costs, occur before the fist production and marketing petiod Operating expenses are made in the year following the establishment of the productive capital, That is, compared to fixed casts they occur in the future Revenues (R) are also collected in the future, precisely in the same year in sehich

‘operating costs occur Thus, because fixed costs occur in the current period, i is not accurate

9

to compare them to operating costs incurred and revenues obisined a yeur later One dollar today i$ not equal to $1 nest year or in two years It is commonly accepted that $I today is worth more than SI next year: in fact, $1 plus the opportunity cost of postponing the consumption of the doltar today to next year Thus, in order to make current fixed costs and future operating costs and cevenues comparable, tere is « need to Find today's equivalent of future expenses and revenues, or their present value, The process of computing the present value of future amouns i called discounting (Kimmel, Weygandt and Kieso, 2000),

Application: discounting future costs and revenues

‘Consider an entrepreneur ia Sierra Leone who is interested in investing in aquaculture with the objective of maximising net returns from investment Assume the entrepreneur will have incurred toxal costs of $100 000, including $30 000 in fixed costs", in the aquaculture business alter che first year of the operation Assume also that an ex ante evaluation of the proposal indicates that the project will yield $120 000 in gross revenues atthe end of the frst

‘operating year The question for the entrepreneur is to know whether or not the project is

‘worthwhile As stated above, because operating costs and revenues are expected at least one {year aller the fixed production costs are incurred, i ¥$ inaccurate to just take the difference etwcen revenues ($120 000) and costs ($100 000) in arder to assess ifthe net returns from

‘his project sre positive, Future costs und revenues need to be discounted fist

‘The discounting process stats from the assumption thatthe investor's $1 placed in a bank at the time the aquaculture business related costs are incureed would be worth $1 plus interest

“i", or S(L4i, atthe time revenues from investment in aquaculture are collected Inversely

$1 at the time of collecting revenues (next year) is worth S1/(L4i) atthe ime of incurring the costs (today) That is, the discountea/present value of next yeat's dollar is SU/(L+) This

‘implies thatthe $120 000 in revenues expected next year are equivalent to $120 0061+) today Assuming the intrest rate i = 10 percent", the next year's $120 (XX) in gross revenues

‘would be equivalent to $109 091 or ($120 G00Vt.1) today" By following the same reasoning the corresponding discounted (present) value of the $70 000 incurred as operating costs next year would be $63 636 Because both costs (fined and variable) and revenues are current, they ean now be compared The subiraction of curent costs from current revenues yields current net revenves, Curren net revenues (beneit) refer to as net present value (NPV), The [NPV for the project in Siera Leone would thus be $109 091-($30 000+863 636), or $15 455, Iimplying thatthe investment is worth consiering

“Though the same conclusion thatthe project in Sierra Leone is worthwhile would have been reached by using Ordinary and Discounted Enterprise Budget methods in the analysis, it is Important to note that the magnitude of net returns obtained through the two methods are substantially different, The Ordinary Enterprise Budget method would yield 2 $20 000 net revenue, which is about 23 percent higher than the value obtained by’ using the Discounted

20

Enteyprise Budget ($15 455), The difference in net revenues would have heen still higher had

an interest rate of more than 10 percent been assumed By inflating net revenues and fulure eosts, the Ordinary Enterprise Budget method can lesd fo erroneously funding uneconomical projects oF rejecting economically sound proposals, especially when dealing with projects

with different time horizons

Economic feasibility of commercially managed shrimp and fish farms was re-evaluated by Using the Discounted Enterprise Budget in order to compate results of this and the Ordinary Enterprise Budget method An interest rate of 10 percent was assumed Results are presented

in Table 3

Table3 Summary of time adjusted annual enterprise budgets for one-hectare of commercially managed shrimp and fish entesprises

[Present Tal Coss ha) ‘Net Present Value (00 Management) Shad BDHRETOIREETIN:EDI sinus | 2tos| sig [9334 resent Rate of Return to Investment (PRI) MỊ MỊ HỊ

* Undscounes Net Retro Manageiet

2

“The key point in evaluating the profitability of the proposal isto discount revenues generated a the end of each production year 3s well as any production expenses incurred during the year

in which revenues are generated As discussed earlier, the idea of discounting future amounts seams from the concept of the opportunity cost of not using the dollar invested in an ahernaive manner sich as a placement in a bank, A $1 placed in a bank at the time an aquaculture project stats will be worth $(1¥i) after a one-year period, when revenues from invesiment in aguaculture are collected This amount collected next year is worth $1/(+i) today’ (when production and marketing costs are incurred) This is equivalent to saying, that the S(14i) collected after year one of the project is worth $L/(L4i}' todays the same dollar invested at the beginning of the project will bring in $(1+i) in two years after the beginning

‘of the project and the present value of the amount brought in is worth $1/(L+i)? In the third year, the dollar is expected to bring in S{14i)°, which is worth $1/(1+i), and so on until the last year ofthe project

i we designate by “T" the expected life ofthe project and by “t" the year in which revenues are generated, then the discounted! present value of revenues generated in exch one year can be expressed as: S/CL+)' The stream of present revenues generated (PR) fom the project can he denoted as: PR = SH(Lsipls §I/(1xÖÊ+ §I/(130))3§ 10, This Formula can be written in a condensed way as: (1Ö + 04 SIAL,

‘The same formula was applied te farm MADI Results are presented in Table 5 for illustration of the application ofthe formula

‘There are several assumptions underlying results presented in Tables 4 and 5 In addition to those discussed earlier the Discounted Enterprise Budget method assumes a constant interest rate over the life of the project and a constant price af the output for the duration of the project, among other things These two factors, which are likely to change with time, greatly affect the profitability level of an aquaculture projet Thus, results presented herein should be taken for didactic purposes only

Tabled, Discounted results of economic analysis of hypothetical aquaculture project in ‘Siem Leone

‘quantity of the expensive feed needed to produce the desired fish output

sble6, Rests of cot stature analysis for ship farming

~ ‘AS a % of variable costs, ‘AS a % of total costs

T_Varable cons pera Fann MADI-[ Fam MAB? | Farm MADI [Farm MADE 3 m1 “I 5 m

[As indicated in Table 3, variable costs are an important part of shrimp farm expenses They

‘make up 74 percent and 97 percent of total costs for MADI and MAD2 farms, respectively Por each farm, feed absorbs most of the farm budget, accounting for 4S to 65 percent of total costs and 60 to 65 percent of operating expenses These results confirm previous findings that fed represents about 60 pereent of operating costs in shrimp farming in Madagascar (Hishamunds, 2000)

One explanation for the high share of feed cost in the farm budget could be that feed is imported Feed is primarily imported from Mauritius and the Seychelles, and secondarily from Taiwan, Province of China, ot vice versa depending ace sometimes purchased from the United States, Importing from long distances means high on the company Limited quantities feed price at farm gate due (0 transport costs The cost of the curteacy in which feed is purchased, especially when the local currency weakens against the hard currency, constitutes other possible explanation

‘The same explanation holds for the cost of seed, which represents about 10 percent of the fam’s total production costs and about 12 percent of the operating expenses Though seed is

produced locally, the artemia used to feed shrimp larvae is imported from the United States Establishment of domestic feed mils could alleviate the problem by lowering feed prices, Which could result in an increase in profit margins from the farms, However, current low feed consumption and the need to import some key Feed ingredients such as fish meal, wheat flour and vitamin pre-mixes which are not locally available makes it difficult for each company t0 produce its own feed The largest company’s demand is about 6 200 tonnes of feed per year One company reported thst an snnual consumption of at least 12 000 tonnes would economically justify the construction of i own teed mill, Nevertheless, with new shrioip farms being established in the country and existing ones expanding, potential demand for shtimp feed looks great; there are pood reasons to explore the possibilities of establishing at Feast one domestic shrimp and fish feed ml to supply all farms The staring point could be to encourage the existing local company that produces livestock and poultry feed to diversity

‘The cost structure of tish farms (Table 7) differs from that of shrimp farms