2010 wp13 Malky PDF

No.
2010-WP13
Financial and economic feasibility

of sugar cane production in
northern La Paz
Alfonso Farjan Malky Harb
Juan Carlos Ledezma Columba
February, 2010
Abstract/Resumen
During the last three decades northern La Paz has experienced the arrival of migrants establishing
settlements and clearing forest lands for agriculture. Increasing forest conversion for agricultural projects
is the basis of several national and local government development schemes. Today, the most significant
development proposal includes installation of a sugar cane mill in San Buenaventura to produce sugar
and ethyl alcohol.
This research aims to assess the financial and economic feasibility of this project. The initial investment is
expected to exceed US$ 90 million with an additional US$ 40 million invested later. These figures include
financing costs and supply of agricultural machinery to the farmers. The studys goal is to contribute to
the decision-making process on public policies that will promote efficient and equitable development and
conservation of environmental resources. At the same time, the research cannot cover all key questions;
it does not determine whether the investment analyzed represents the most efficient use of public
resources nor does it analyze the potential social and cultural changes that would occur due to the
introduction of this new crop to the region.
Financial and economic feasibility of sugar cane production in

northern La Paz
Alfonso Farjan Malky Harb

Juan Carlos Ledezma Columba
February, 2010
Summary ii
1 Background ................................................................................................................... 1
2 Analysis Method ............................................................................................................ 3
2.1
2.2
2.3
Cost benefit analysis .................................................................................................... 3

Sugar industry cost - benefit analysis .......................................................................... 5
Analysis organization .................................................................................................. 6
3 Assumptions and premises ............................................................................................ 7

3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
Population and crops expansion................................................................................... 7

Agricultural operation .................................................................................................. 7
Mill, capacity, investment and financial costs ............................................................. 8
Sugar mill operation, income and costs ....................................................................... 9
Taxes .......................................................................................................................... 10
Sugar crop implementation and substitution of traditional crops .............................. 10
Agricultural opportunity costs ................................................................................... 12
Deforestation and expansion of the agricultural frontier ........................................... 12
Economic value of forest ........................................................................................... 16
Electricity generation from the mill and CDM potential ........................................... 17
4 Results .......................................................................................................................... 18
4.1
4.2
4.3
4.4
4.5
4.6
Financial analysis of sugar cane production and its derived products ....................... 18
Economic analysis of sugar cane production and its derived products ...................... 19
Financial and economic analysis including electricity generation ............................. 19
Economic analysis with lack of community participation and assumptions validity 20
Risk analysis .............................................................................................................. 20
Distribution analysis .................................................................................................. 20
5 Conclusions and recommendations ............................................................................ 21

6 References .................................................................................................................... 23
List of Tables
Table 1 Sugar cane production parameters with reference to world standards ............................. 2
Table 2: Land development for sugar cane farming ...................................................................... 7
Table 3: Net profits of the current agricultural products ............................................................. 12
Table 4: Environmental externalities parameters ........................................................................ 17
Tabla 5: Financial and economic results including electricity generation .................................. 19
Table 6: Variables and parameters considered for the risk analysis............................................ 20
Table 7: Sugar industry probability for financial feasiblity ........................................................ 20
Table 8: Financial and economic results considering new profit percentages ............................ 21
List of Figures
Figure 1: Structure of costs and benefits of the sugar cane industry ............................................. 5
Figure 2: Current plot structure ................................................................................................... 11
Figure 3: Partial crop substitution scheme for a plot ................................................................... 12
Figure 4: Land cover change until 2006 ...................................................................................... 13
Figure 5: Annual deforestation rates between different observation periods derived
from Landsat TM satellite imagery prices trends ...................................................... 14
Figure 6: Comparison between the current use of a plot and the partial crop substitution
scheme for a plot ....................................................................................................... 15
Figure 7: Net accumulated deforestation..................................................................................... 16
Summary
During the last three decades northern La Paz has experienced the arrival of migrants establishing
settlements and clearing forest lands for agriculture. Increasing forest conversion for agricultural projects
is the basis of several national and local government development schemes. Today, the most significant
development proposal includes installation of a sugar cane mill in San Buenaventura to produce sugar and
ethyl alcohol.
This research aims to assess the financial and economic feasibility of this project. The initial investment is
expected to exceed US$ 90 million with an additional US$ 40 million invested later. These figures include
financing costs and supply of agricultural machinery to the farmers. The studys goal is to contribute to
the decision-making process on public policies that will promote efficient and equitable development and
conservation of environmental resources. At the same time, the research cannot cover all key questions; it
does not determine whether the investment analyzed represents the most efficient use of public resources
nor does it analyze the potential social and cultural changes that would occur due to the introduction of
this new crop to the region.
The sugar industry in Bolivia is typically composed of partnerships between corporate mill owners and
farmers. Our analysis estimates the viability of the San Buenaventura program as a whole, as well as
examining the agricultural and industrial production phases independently.
Results suggest that the programs feasibility hinges largely on crop yields and sucrose contents, which
are as yet unknown for this region. Another crucial variable is the price of refined sugar. Taking into
account a sucrose content of 12.5 percent, agricultural yields of 55 mt/ha (metric tons/hectare) and a price
of US$ 17 per quintal (1 quintal = 46 kilograms) of sugar, the project is economically beneficial for the
national economy. However, the mill would not be financially attractive to investors because their share of
revenues (negotiated with farmers) would not provide a return sufficient to cover costs. The industrial part
of the project would therefore either require public subsidies.
In terms of the impact on the forest, it is expected that if sugar cane is substituted for traditional crops the
project will not increase the deforestation rate in the region. On the contrary, during the timeframe of the
analysis (20 years), deforestation would be avoided for 19,000 hectares of mature forest. This is because
traditional crops demand new land each year whereas sugar cane is a long-lasting crop if managed
correctly. This projection is valid if: the cane industry is developed under community-based schemes; no
additional mills are built in the region; no new pro-migration policies are implemented; current land tenure
is respected and the Bolivian government maintains its position of not entering into the biofuels market.
However, if the project is implemented and the assumptions described above are not met, negative
environmental externalities would be generated and the economic losses would be significant for the
country.
ii
Background
The Regional Development Corporation for the Department of La Paz (Corporacin Regional de
Desarrollo para La Paz, CORDEPAZ) was created in 1971. Its main development proposal, Northbound
March (Marcha hacia el norte), set out three production strategies: i) the creation of a regional
development hub based on a sugar industry to be located in the Municipality of San Buenaventura, ii) the
construction of a hydroelectric dam in nearby Bala Canyon (with subsequent flooding of more than
200,000 hectares (ha) of natural forest) and, iii) the exploration and use of hydrocarbon resources in the
area. In order to be implemented, these production strategies called for the construction of roads and
establishing settlements in the region. The above mentioned objectives of CORDEPAZs development
proposal were not implemented. However, the construction of roads and the arrival of migrants took place
along with the subsequent occupation of important areas, developments that generated the creation of
latifundios (large land estates), and with the arrival of timber companies (Prefectura de La Paz 2006). As a
result, 44,800 ha were deforested in the municipalities of San Buenaventura and Ixiamas by 2007, with
increasing deforestation rates in the following years (Diagnstico del Plan de Ordenamiento Territorial de
San Buenaventura 2007).
The main economic activities carried out in the region of study are agriculture, cattle ranching and timber
harvesting. Some supplementary activities are fishing, harvesting of non-timber forest products,
subsistence hunting, apiculture and tourism (Plan de Desarrollo Municipal de San Buenaventura 2007;
Plan de Desarrollo Municipal de Ixiamas 2007). These activities are not only the populations main
sources of income but also the basis of their diet. Therefore, households are both production and
consumption units, for which family-based labor and natural surroundings are their key resources.
Currently, Bolivias central government, the Prefecture of La Paz (departmental government) and the
Municipality of San Buenaventura are reconsidering the projects proposed in 1971 for CORDEPAZ,
which were partially applied until 1993 (Robinson & McKean 2006) when CORDEPAZ ceased to exist.
Due to the increasing demand of ethylic alcohol in the international markets (Ministerio de Relaciones
Exteriores del Brasil, 2007; Bravo & Altieri 2007) and to the intended production of refined sugar for La
Paz and Oruro markets, San Buenaventuras sugar cane project once again has attracted the attention of
national and regional authorities and generated great hope among the local population (Prefectura de La
Paz 2006; Plan de Ordenamiento Territorial de San Buenaventura 2007).
In this context, San Buenaventuras sugar cane project is being reviewed as part of a package of regional
economic development projects. Furthermore, although sugar cane is not farmed commercially in the
region, the proposal to develop a large-scale project that would include a sugar cane mill and ethylic
alcohol production plant is gaining momentum. Such a mill would belong to a state-owned company
operating under the supervision of the Prefecture of La Paz.1 It would be located north of San
Buenaventura in one of the Prefectures condemned sites (the community of Porvenir) and would be
supplied with the sugar cane to be produced by indigenous and rural communities close to the San
Buenaventura-Ixiamas road, at a distance not greater than 85 km from the sugar mill.
According to the information provided by the Prefecture of La Paz and the Municipality of San
Buenaventura, the sugar cane production system would be semi-mechanized. More than 10,000 ha of land
The company named San Buenaventura Agro-Industry Complex was created through Law No. 3546 as a public
company with ownership equity and autonomy in technical, financial, administrative and legal affairs, of which its
highest decision-making body is its Board, which is formed by central- and prefecture-level government
representatives as well as by those of the regions rural and indigenous organizations.
would be needed in the short term (i.e., the first three years), with the possibility of expanding the
production to 20,000 ha in the medium term.
Within the international context, national sugar cane production demonstrates low competitive conditions
since the recorded sucrose contents and cane yields present levels that are lower than world averages
(Table 1). This fact and the trade distortions in the international sugar market limit export possibilities.
Table 1 Sugar cane production parameters with reference to world standards
(Source: FDTA, 2005)
Country
Colombia
Peru
Bolivia
Global average
% Sucrose
Mt of Cane/ha
15.8
14.7
12.5
14
123.1
114.0
51.6
65.0
Cutting cycles
4
5
8
5
Regarding the domestic market, sugar consumption is fully supplied by the national production of
Bolivias eastern region. In recent decades, it has recorded production surpluses that were placed in
preferential international markets. The sugar demand in the domestic market is of approximately 300,000
mt nation-wide, of which 95,000 mt correspond to the consumption of the departments of La Paz and
Oruro. A significant increase in this demand is not expected in the forthcoming years. Future increases in
demand will be due mainly to population growth, which is expected to be between two to three percent
annually (according to projections by INE). Despite an absence of markets, the revival of the San
Buenaventura project stems from the growing local demand for development projects that may improve
the populations living conditions and the firm support from the central government and the Prefecture of
La Paz.
On the other hand, some efforts to protect the high biological diversity of the regions natural ecosystems
coexist parallel to this and other production project proposals. The central and regional administrations as
well as international organizations linked to conservation also support these alternatives aimed at
sustainable development. However, all the projects representing efforts to improve the local populations
quality of life in general lack economic feasibility estimations or do not take into account environmental
externalities.
For the present study, the mills area of influence under consideration was 85 km from the place where the
sugar mill would be installed (Map 1). The reasons for considering this area of influence were: i) the
communities located further north actively harvest timber forest products and are located at a distance
greater than 85km from the mill2. This makes cane production hardly feasible in those communities, at
least during the time frame of the analysis; and, ii) the communities studied and the population living in
them have sufficient capacity to achieve the area of production proposed in the plans from the Prefecture
of La Paz and the Municipality of San Buenaventura, taking into account an average yield of 55 mt/ha.
Appendix 1 provides details of the communities that would participate in cane production, including distances to
the sugar mills expected location.
Map 1: Location and area of influence of the sugar mill

(Source: own elaboration)
In this context, the general objective of the study is to determine whether sugar cane production and its
derived products are economically feasible in Northern La Paz, taking into account the opportunity costs
and environmental externalities that would be generated. With this information, the study aims to
contribute to the decision-making process for public policies aimed to promote the development and
conservation of the regions environmental resources.
Analysis Method
2.1 Cost benefit analysis

In order to evaluate whether a sugar industry would be economically and financially feasible, a Cost
Benefit Analysis (CBA) was conducted. The CBA measures the impact of an activity by taking into
account the value of the resources involved in it at a given time, which can be estimated with projected
incomes and costs using a discount rate that allows assigning them a present value. In this way, the value
is comparable to the present values of alternative activities and/or resources that may be considered in an
economic analysis.
This analysis may be carried out from a financial perspective, in which the analysis is based on the cash
earnings and expenditures that take place in a project or activity using market prices. On the other hand,
when carried out from an economic perspective, the analysis considers all costs and benefits for the
economy as a whole using economic prices, that is, adjusting for distortions and internalizing externalities.
By analyzing the financial or economic flows, feasibility indicators can be generated, such as the net
present value (NPV), the internal rate of return (IRR) and the benefit/cost ratio. This study performs an
economic analysis; thus, the indicators used in this analysis are the NPV and IRR, which are defined as
follows:
NPV
B0 C 0
(1 r ) 0
t n
NPV
t 0
( Bt
B1 C1
(1 r )1
B2 C 2
(1 r ) 2
........
Bn C n
(1 r ) n
Ct )
(1 r ) t
Where: Bt = Total benefits in year t

Ct = Total costs in year t
r = Discount rate
n = Number of periods (in this case, years) considered for the analysis
(1+r)t = Discount factor for year t
Since other investment opportunities or loan opportunities exist, money in general has a cost for the
investor who has access to it through loans. On the other hand, it represents a profit for the money-lender
loaning it. Under this framework, the following can be distinguished: the cost of capital, which measures
the investors lending price when the money needed is not available and must be borrowed from third
parties; and the opportunity cost of the money, which represents the money-lender sacrifice when earnings
are lower than the average IRR of other economic activities. In this context, the discount rate is the
opportunity rate of the money or the cost of capital, assuming that both are the same.3
The IRR is the value of discount rate that nullifies the NPV. This means that it is the discount rate that
equalizes the present value of inflows (positive) with the initial outflow and other updated/discounted
negative flows in an investment project. The IRR is compared to a minimum acceptable rate or a hurdle
rate which is the cost of capital. If an investments return rate, expressed by the IRR, is above the hurdle
rate, the investment can be accepted; if the opposite holds true, it is rejected. NPV is generally considered
the more reliable indicator of economic profitability because a project with more than one period of
negative net cash flows can present several values for the IRR.
The IRR is defined algebraically as follows:
+ ........+
Where:
r = Investments return rate or internal rate of return
A = Initial investment value
Qi = Net value of the different cash flows
n = Number of years
In this case, the NPV and IRR estimations for the sugar cane industry in northern La Paz survey a 23-year
period. In this period there is the need for liquidity in two important stages of the sugar cane industry:
first, the expansion of cane crops and installation of the sugar mill, and second, the harvest period.
Therefore, the first three years correspond to the preparation and investment stage and the remaining 20
years to the mills operation, which in turn correspond to four crop production cycles since growers must
renew the sugar cane plantations every five years to keep optimal yields.
This equivalence is fulfilled only when perfect conditions of economic equilibrium are in place.
At the end of the period, the share of the investments that would be recovered is analyzed. To determine
this share, the assets market value must be taken into account; it is understood as the price at which this
project may be sold taking into consideration a depreciation factor. If the depreciation factor is constant,
this salvage value (SV) might be determined by the relation:
SV = asset value (asset value x depreciation factor x number of years).
2.2
Sugar industry cost-benefit analysis
All income and financial costs directly linked to the sugar industry are considered within the timeframe of
the analysis, assuming that this industry comprises the agricultural production of cane sugar and its
transformation into derived products, such as refined sugar and alcohol.
Incomes come from the sales of sugar cane, alcohol and timber harvested for land development. Costs
comprise the following: the investment, operation, transportation and financial costs resulting from the
agricultural activity of sugar cane production; the mills or factorys investment, operation, management,
maintenance, tax and financial costs; and the transportation costs of the derived products (refined sugar
and alcohol). Figure 1 shows the incomes and costs considered in the CBA.
Figure 1: Structure of costs and benefits of the sugar cane industry

(Source: Own elaboration)
Each one of the components described has sub-components whose values and relationships are described
in Appendix 2. The section 2.3 describes the values and criteria considered in the calculation of the most
relevant costs. In addition to these components, environmental externalities (those related to the impact on
forest cover) for the economic analysis were considered.
2.3
Analysis organization
Four cost-benefit analyses were made for analyzing possible situations and interests of decision makers:
a) Financial analysis of sugar cane production and its derived products. It is carried out in order to
establish if the industry is financially desirable for those involved in it, regardless of cost or benefit
that the project would create for society. This analysis considers market prices, tax obligations and
opportunity costs of the agricultural activities currently carried out in the region. The latter would
come to an end partially as a result of the land-use change derived from the sugar crop expansion.
b) Economic analysis of sugar cane production and its derived products. It is carried out in order to
establish the potential damage and benefits that a project could cause for the whole society. This
analysis does not consider tax obligations4 and considers agricultural opportunity costs, shadow
prices, and environmental externalities. The value of these externalities represents an approximation
of the total value of environmental damage or benefits generated by a given activity.
c) Economic analysis including electricity generation. This analysis considers the implicit costs of the
installation of an energy generation plant and the additional income coming from the power
generation from the burning of bagasse5. These additional revenues are exclusively for the factory.
d)
Economic analysis considering that the deforestation assumptions are not met. It describes the
feasibility of the project if the assumptions of deforestation raised in section 2 are not met, where
foreign farmers arrive and crops substitution does not occur and consequently additional
deforestation is caused for the project.
Given that there are uncertainties about the performance of some variables, especially about the
behavior of the crops, a sensitivity analysis was carried out for each of the four analysis presented
above. The financial and economic indicators were assessed through sensitivity analysis by varying
the most important factors that affect income to the industry, such as yields, sucrose contents and
prices of sugar and alcohol.
Also, risk and optimization analyses were developed to estimate their associated probabilities and
to allow discussions on alternatives that will allow the industry to reach better financial and equity
outcomes. To build the risk analysis Crystal Ball v. 11 was used as a tool.
Finally, a distribution analysis was carried out considering that the investments made for San
Buenaventuras sugar mill would be public for the mill itself and private or mixed with regards to
the machinery of the agricultural producers. The following stakeholders were identified in the
distribution analysis:
o The national and departmental governments, as investors and owners of the mill,
henceforth named the Government; and
o The farmers from the indigenous and rural communities.
Not considered because they represent a transfer between different stakeholders in the same society.
Bagasse is the fibrous residue remaining after sugarcane stalks are crushed to extract their juice.
3
3.1
Assumptions and premises
Population and crops expansion
According to the information of the Municipal Development Plans (Planes de Desarrollo Municipal) of
San Buenaventura and Ixiamas, the rural area of both municipalities meets the labor requirements for
crops and its population grows at a rate of 0.46% per year according to data for the 1991-2001 period. In
accordance with the natural population growth, the productive units or families considered should increase
from 1,193 to 1,302 in 23 years.
In addition, for the timeframe of the analysis a crops growth rate of 2,43 ha/family/year is considered,
which is the sugar cane growth rate of the last 26 years (Dossier de Estadsticas UDAPE 2008). Taking
into account these factors, the expansion of the agricultural frontier would reach an area of 11,399 ha by
the first year of milling and 20,650 ha by the final year6.
Table 2: Land development for sugar cane farming
Hectares/
family
Year -3
Year -2
Year -1
Year 1
Year 2
Communities near the

mill (1,033 families)
0.4
2
10
10
10
Communities distant from

the mill (160 families)
0
0
0.2
1
5
Total sugar cane

area (ha)
436
2,186
10,955
11,399
12,367
Note: The year 0 is not considered, to distinguish the stage of agricultural development and installation of sugar mill
from the period of sugar milling.
With regards to the productive capacity, it is assumed that each family would farm from five to 10 ha of
sugar cane to guarantee the mills raw material requirements. It is assumed that not all the farmers would
participate immediately from the onset of the project and that not all would reach 10 ha of production
when they did participate in farming. Table 2 describes the number of families, relative to the mills
distance, involved in sugar cane plantations during the first five years.
3.2
Agricultural operation
A yield of 55 mt/ha with a sucrose content of 12.5% is expected if adequate soil management is made over
the years (Vargas 2009). This level of production will be reached if the families involved transform their
system to semi-mechanized crops. Currently, most of the families that have been involved have areas of
agricultural production of less than 5 ha. However, for the requirements of the mill, a semi-mechanized
agricultural system should be introduced to allow duplicating the area of family-based production.
According to the Prefecture of La Paz Comprehensive Project Program for the North (Programa Integrado
de Proyectos para el Norte), funding for the agricultural machinery necessary would come from the
Prefecture itself and the Banco de Desarrollo Productivo at an interest rate of 10%. In the analysis,
machinery equipment has been considered for every 50 ha of cane crop, as in the case of Santa Cruz
production cane industry. The owners of agricultural machinery are the farmers, under a collective or
solidarity ownership system.
In Bolivia, the area of sugar cane showed a growth of more than 100% in the last 20 years (UDAPE 2008).
Agricultural operation costs include: soil preparation, plot preparation, sowing, weed control, harvesting,
transportation and commercialization. Costs were estimated according to unit costs per area of production
(ha) or per quantity produced (mt). The value of equipment comprising a tractor, a rome-plow, a
cultivator, a furrow-opener and three winnowers is US$ 28,300; the total investment is US$ 16 million for
the entire region, including the financial costs. The payment of capital and interests would be made
annually. The grace period would be one year, excluding insurance and commission costs.
Sugar cane transportation costs were estimated according to the corresponding distances from the
communities to the site where the sugar mill would be installed. A cost per kilometer and per metric ton,
differentiated according to distances for each community, was applied.
3.3
Mill, capacity, investment and financial costs
With regards to the mill, it will be the property of a public company operating under the supervision of the
Prefecture of La Paz. Therefore, the purchase of raw material would be restricted to the communities that
belong to the Department of La Paz only. This assumption is reinforced by the fact that the members of
the companys Board are the Federation of Colonists, Indigenous and Economic Rural Organizations of
Northern La Paz (Federacin de Colonizadores, Organizaciones Indgenas y Econmicas Campesinas del
Norte de La Paz) who as the main stakeholders of the project will demand exclusive rights as suppliers of
raw material for the mill.
A processing plant which turns cane into refined sugar and alcohol is assumed. The estimated size of the
sugar mill is determined by the cane processing capacity, the expected yields and the projected growth.
The estimations indicate that the regions production capacity would allow reaching 11,300 ha of
production in the region by the first year of milling, increasing annually to 15,500 ha in Year 10 and
20,600 ha by Year 20. Thus, the mill would have a milling capacity of 3,400 tm/day the first year and
6.300 tm/day in Year 20.
The initial investment considers the volume of cane available for milling in Year 10 (854,000 mt), at a
price of US$ 75 per metric ton that enters the factory (UNAGRO 2008); then the initial investment for the
sugar mill would amount to US$ 64 million7. The expansion at Year 10 would involve an additional
investment of US$ 21 million; then the mill would reach a milling capacity of 1.1 millions mt/year,
enough to absorb the sugar cane supply until the end of the analysis period. 8 Therefore, the total
investment for the sugar mill during the timeframe of the analysis would be over US$ 85 million as a
nominal amount. According to the proposal announced by the Prefecture of La Paz, 44.25% of the total
investment will be financed with Prefectures and the National Governments resources, while the
remaining 55.75% would be financed by a bank with a term of 11 years if annual payments are
established.
Larger areas of production would be possible only if another mill is installed or if a greater investment is
considered. Further, this should be accompanied by an intensive migration process, providing enough
labor to reach cane production levels that would justify an additional investment. However, that scenario
is hardly feasible in the short term due to the following factors:
According to information obtained from the Sugar Cane Growers Federation of Santa Cruz, a sugar mill with the
milling capacity required for San Buenaventura would cost approximately US$ 60 to 70 million.
8
The expansion of the facilities in Year 10 is included in the project of the Prefecture of La Paz.
The sugar mills production system would be community-based; therefore, intensive access by
migrant laborers into the region would not be easy.
The main investor would be the National Government and/or the Prefecture.
Sugar production from Northern La Paz would compete with the national production markets from a
position of disadvantage since the traditional sugar industry has long-standing experience in this
field.9
Although global demand for bio-fuels has grown significantly in recent years, the sugar cane industry
in Bolivia has reacted slowly and it gets 82% of its incomes from the refined sugar production (FDTA
2005). Consequently, alcohol is still deemed a high-risk business, considering trade uncertainties,
volatility of fossil fuel prices and the prospect that the bio-fuel emerging market can adjust itself in a
mid-term.
Sugar mill operation, income and costs
3.4
These include production, management, maintenance and transportation costs to markets. Operation costs
were estimated according to the financial information of the sugar mills visited. Although the information
could not be obtained in a disaggregated manner, it was possible to estimate a percentage ratio based on
the mills sales, which depends on the quantity produced. Maintenance costs consider an estimated annual
cost according to the area of production and a machinery replacement cost every five milling years.
Transportation costs to markets were calculated according to the quantity produced annually by the mill,
measured in quintals, and to the transportation cost per quintal from San Buenaventura to the cities of La
Paz and Oruro, considering that 86% of the production would be commercialized in the city of La Paz and
14% in the city of Oruro. The consumption percentages for these two cities were estimated according to
the population in both departments and the national average consumption per capita, based on the INE
information for 2007.
Some important considerations regarding the sugar mill that were used in the cost-benefit analysis are the
following:
Sucrose losses represent 8% of the total sucrose extracted. This percentage is technically valid for
new industries with modern technology.
The distribution of the mills production profits follows a maquila system, with 57% of the
sugar production allocated to the sugar cane growers and 43% to the mill. This system is applied
in most of the countrys mills with the exception of the Bermejo mill in Tarija, which buys raw
material from the sugar cane growers.
100% of the income from alcohol sales is allocated to the mill.
The sugar price recorded during the second round of field work conducted (November 2008) is
considered, which is US$ 17 per quintal (1 quintal equals 46 kg) of refined sugar10.
At present, the annual sugar consumption in La Paz and Oruro is over 167,200 mt (Instituto Nacional de
Estadsticas, INE 2005). Therefore, the production reached with 12,000 ha of sugar cane in Northern La Paz would
satisfy 37% of this demand. On the other hand, if the 20,000 ha projected for milling year 20 are reached, 49% of the
market would be covered.
10
World production of sugar in the 2008/09 period decreased and an increase in global consumption occurred;
however, given the global stocks (in excess supply since 2005), dramatic changes in international prices of sugar are
not expected during the next few years (FAO, 2009). Anyway, considering that the sugar market in general is
distorted, domestic prices are always vulnerable to changes in the internal trade policies of the countries followed.
3.5
We converted financial prices into economic ones by excluding taxes. We also adjusted the sugar
price to its international price (US$ 16.3 per quintal), by including transportation costs from
Puerto Suarez (on the border with Brazil) to Santa Cruz. There are no other significant price
distortions to justify the use of tiered pricing.
A price of US$ 0.42 per liter of alcohol at the factory is applied.11
A 10% real discount rate (without considering inflation) is applied to the cost benefit analysis,
which corresponds to the 2007 active average interest rate for banks and mutual companies that
facilitate commercial credits in Bolivias financial system.
A zero salvage value is considered for the initial investments made for both the processing plant
and the agricultural machinery. In addition, the following salvage values are considered: US$ 10.5
million for the sugar mill investment made in Year 10 (0.05 depreciation factor); and US$ 786.2
thousand for the agricultural machinery also procured in Year 10 (0.075 depreciation factor).
The opportunity cost for land is zero; in other words, access to land is free. This is because there is
no land market in the region and all the lands were endowed by the State.
It is assumed that farmers, with support from the public actors, will have the capability to move
from a traditional production system to another, semi-mechanized, one.
It is assumed that a previous research and testing stage will take place, during which suitable
sugar cane varieties will be obtained. These activities were and continue to be conducted by the
Municipality of San Buenaventura. However, their costs are not considered in this analysis.
Taxes
The Bolivian tax system stipulates that productive activities carried out within the country by public
and/or private companies are subject to value added tax (VAT), transaction tax (TT) and profit tax (PT).
VAT is levied on those who carry out commercial operations that involve selling products and/or services.
It has a single general tax rate of 13%, which is paid monthly over the total income generated by the
activity during the declared period. The TT levies the total gross income accrued from any lucrative or
non-lucrative activity, such as trade or industry, and has a single tax rate of 3%. The PT is paid over gross
profits in the case of public and private companies and has a tax rate of 25%, which may be deducted from
the VAT and TT paid each year. Also, the depreciation of assets can be deducted from the PT. In terms of
the PT, the San Buenaventura Sugar Mill taxing status could be sheltered under Article 18 of the
Investments Law (Ley de Inversiones), which allows tax exemption over profits and total revenues of the
investment during the first 10 years for companies that generate employment in underdeveloped areas of
the country.
3.6
Sugar crop implementation and substitution of traditional crops
Figure 2 describes the current average 50 hectares plot structure in the region, a structure that was
established through our field work12. Aside from this initial situation, the sugar mills installation and the
subsequent expansion of sugar cane production would generate processes of forest, fallow and traditional
crop substitution in favor of sugar cane crops. This would establish a new scenario in terms of plot
distribution.
11
The countrys sugar mills producing alcohol currently sell their production by delivering it to the mills door.
12
These percentages reflect the current situation; there is no evidence of the distribution of plots in the past.
10
Forest
65%
Fallow
27%
Crops
8%
Cassava, 0.5 ha/family
For sale 55%
Banana, 0.89 ha/family
For sale 57%
Corn, 1 ha/family
For sale 40%
Rice, 1.25 ha/family

For sale 67%
Figure 2: Current plot structure

Information regarding the local growers predisposition to substitute their current crops, forest reserves
and fallow lands with cane was used first to calculate the areas of substitution. According to the field
information collected for this study, at an initial stage, 42% of the land developed for sugar cane
production would be forests13, 31.5% would correspond to crop substitution, and 26.5% to fallow lands.
Next, the percentage of the current area for each crop to be replaced with cane was determined, also based
on the field information collected for this study. During the initial substitution, in the year prior to the first
milling, growers would replace 13.7% of their rice crops, 5.4% of their cassava crops, 4.1% of their
banana crops, 4.1% of their corn crops and 4 % of other products they farm (the amount corresponds to
31.5% of crop substitution).
The partial substitution of crops assumes that, although the cane cultivation is more profitable than
traditional crops, farmers are risk adverse and while engaged in the cane business, also maintain an area of
traditional crops. The percentage of commercialized crops decreases 25% each year from Year 1 until all
the area of production for commercialization is replaced by Year 5. Acknowledging that cane would
probably be more profitable than other crops, the area of production required for each familys own
consumption is maintained, as Figure 3 describes.
Current
structure
Year -3
Year -2
Year -1
Year 1
13
Year 2
Year 3
Year 4
Year 5
According to Melonis study for the Institute for International Trade Negotiations, during the period 2002-2006
the growth of sugarcane in forest areas in Mato Grosso-Brasil accounted for just 32% of the total surface increased.
The rest of the expansion occurred in crops and fallow land.
11
Figure 3: Partial crop substitution scheme for a plot.

Current structure: Forest 65%, Fallow 27%, Crops 8%. Year -3 & -2: 0.4 hectares planting for
seed production. Year -1: 10 ha of sugar cane planted and replacement of 30% of crops, 42% of
forest and 28% of fallow. Year 1: First milling. 25% of sales substituted. Year 2: 50% of sales
substituted. Year 3: 75% of sales substituted. Year 4: 100% of sales substituted, only subsistence
crops remain. Year 5: 100% of crops substituted. (Source: own elaboration).
Once crop replacement areas are calculated, the areas of forest and fallow land substitution are then
estimated, considering the land formerly developed for cane. The previously developed areas and the areas
of substitution comprise the basis for each year in question. The rest of the area required each year is
obtained from percentage ratios based on the primary information collected (42% of forest and 26% of
fallow land).
The assumption that growers will not only occupy forest and fallow land areas to produce cane but will
carry out crop substitution as well is supported by the fact that currently each family grows 3.64 ha of
traditional crops. Therefore, based on the assumption that by taking part in sugar cane production through
a semi-mechanized production system each family would grow from 5 to 10 ha of the crop, it may be
inferred that these families will not have enough labor and financial resources to maintain their traditional
crops in a stable way.
3.7
Agricultural opportunity costs
Opportunity costs are based on substitution areas of current crops (from other agricultural products to
cane). In addition, net profits per ha are considered for each of the four most economically important
agricultural products in the region. Table 3 describes net profits per hectare according to product, average
area farmed per family, and the percentage of the total production commercialized for each product.
Table 3: Net profits of current agricultural products
Description
Rice
Cassava
Banana
Corn
Marketed percentage
Average household area (hectare)
Annual net benefit by hectare (US$)
66
1.25
958.2
55
0.50
784.7
56
0.89
637.8
40
0.98
337.6
The difference in net earnings that would not be gained as a result of shifting the physical and human
capital toward cane production were obtained from the net profits achieved per substituted area of each
product. The sum of these net earnings represents the agricultural opportunity cost of cane production.
3.8
Deforestation and expansion of the agricultural frontier
Figure 4 shows that human intervention within the studied area started before 1976; at that time the impact
on the forest cover was relatively low and located mainly in the south-eastern area around San
Buenaventura. After the road was opened in the early 80s and mines in the highlands of Bolivia closed,
migration waves toward this area started. After the main settlements were consolidated, the deforestation
was more intense around these settlements and the road. Currently, this is the main axis of
communication; the growing population is deforesting by the sides of the road, showing the typical fishbone pattern found in the Amazon.
12
Until 1976
1.670 ha
1993-2001
5.716 ha
714 ha/year
1976-1987
5.834 ha
530 ha/year
2001-2004
2.338 ha
779 ha/year
1987-1993
6.403 ha
1.067 ha/year
2004-2006
4.885 ha
2.442 ha/year
2006-2008
4.079 ha
2.040 ha/year
Study Area
Deforestation
Forest
Figure 4: Land cover change through 2006

(Source: own elaboration using information from Killeen et al. 2007, Diagnostic Information for the Municipal Land
management Plans of San Buenaventura and Ixiamas and CI-Bolivia)
Current deforestation in the area of study basically results from the expansion of rice and corn crops.
Primary forest areas are habitually developed each year for both crops, and the farmed area in general is
not used again the following year for the same crop. The use of primary forestland is favored because
yields are higher due to the favorable soil conditions. In addition, less investment is necessary to maintain
the crops since no weeds grow the first year.
Information derived from satellite imagery shows that within the study area 27,000 hectares were
deforested up to date. The deforestation rates are increasing from 530 ha/year, figures from the late 70s
and early 80s, to 2,500 ha/year, figures from 2004 and 2006 (Figure 4).
The increasing rates of deforestation can be explained by several factors, which influence it in different
proportions, but in all cases have a negative impact on forest cover. Among the main factors are the
following:
i.
ii.
iii.
The population size observed in the late 70s was less than half the population of 2001 and onethird of the current population. This growth represents an increase in domestic demand for food,
such as the production of rice and corn.
Economic growth observed over the past few years in neighboring towns such as Ixiamas and
Rurrenabaque, where the tourist and timber forest activities respectively are growing, caused an
increase in food demand in the region. Both activities are expected to continue to grow over the
coming years.
The increase observed in international prices of rice and corn, which have grown rapidly since
200014 and reached a peak in 2008, demonstrates a trend of keeping this level of prices over the
coming years (FAO 2008) (Figure 5). According to projections made by FAO and the OECD, it is
expected that for the next 10 years the price of corn will increase by 27% and rice by 9% (Cox
14
The international price of rice (the main agricultural product in the region) increased by 50% between 2000 and
2006.
13
3000
400
2500
350
2000
300
1500
250
1000
200
500
150
Rice and corn prices ($US/TM)
Deforestation (ha)
2008). In this context, and assuming normal climate conditions, land conversion for the
production of both cereals will keep growing in the medium term.
100
1976
1980
1984
1988
1992
1996
2000
2002
2006
2008
2012
2016
Year
Deforestation (ha)
Corn price
Rice price
Figure 5: Annual deforestation rates between different observation periods derived from Landsat TM
satellite imagery prices trends
(Source: own elaboration based on FAO & OECD, Cox 2008 and CI-Bolivia)
The deforestation rates measured with remote sensors (2004-2006) correlate with the information gathered
from surveys a year later, in which the 1,252 families within the study area reveal their land need at a level
of 2,800 ha/year, given that each family needs 2,25 ha/year for planting rice and corn. If the sugar cane
industry is implemented, and growers involved at the beginning replace 50% of their production and keep
50% for subsistence, at least 1,400 hectares of forest will not be used for rice and corn planting every year.
With sugar cane, the developed area is expected to be re-used every year since crop rotation is not
necessary. Consequently, once the basic area for the first milling is achieved, areas ranging between 100
and 350 ha/year are developed in subsequent years, which represents only a 25% growth of the current
agricultural frontier. Due to the substitution of traditional crops with cane, a deforestation reduction is
expected equivalent to 19,000 ha of primary forest for a period of 20 years, owing to a more efficient crop
that does not demand the development of new areas each year.
The projection of deforestation shown in Figure 6 compares the average current situation with the
predicted situation if sugar cane is introduced among the main crops of families. Should cane be grown,
deforestation increases very much in the first few years but later decreases gradually, whereas without
cane, increasing and constant deforestation takes place.
14
Year -3
Year -2
Year -1
Year 1
Year 2
Year 3
Year 4
Year 5
Partial crop substitution with sugarcane
Current conditions
Current
structure
Figure 6: Comparison between the current use of a plot and the partial crop substitution scheme for a plot
The total projection of deforestation for sugar cane was estimated with: i) the number of families involved
in the business; ii) the estimated population growth for the rural areas of the study area; iii) the plan for
establishing sugar cane plantations according to the timetable shown in Table 6; and, iv) annual average
growth of cane plantations in the country as a possible explanation of a modest migration process coming
from neighboring regions.
Figure 7 compares the net accumulated deforestation with and without the sugar cane project. It shows
that the absolute deforestation with the project is less than deforestation with the current crop system in
the area, as between one and four hectares per family are deforested each year to farm rice and corn while
sugar cane does not require development of new land once a given area has been farmed.
During the first few years, when areas are expanded for sugar cane crops, deforestation is greater owing to
the forest land developed for sugar cane farming. However, deforestation with the sugar cane project
reduces in the following years due to the crops characteristics, in that they are more efficient in terms of
land requirements. In the case that every family deforests 2.25 has/year, 19,000 hectares of forest will not
be deforested with the sugar cane project until the 20th year of the project; meanwhile, considering a lower
deforestation rate, (half of the current deforestation) which will happen if the productive units do not have
incentives to grow more rice and corn), avoided deforestation will occur; finally, if the lowest possible
deforestation rate is observed (maintaining only subsistence crops) there is still avoided deforestation15.
Only if a third party develops the industry is it expected that 18,700 additional hectares will be deforested.
15
Considering the lowest possible deforestation, the deforestation with the sugar cane will be reduced to 932 ha
instead of 19,000.
15
Deforestation (has/year)
9000
8000
Case i - Current
With sugar cane
7000
6000
5000
4000
3000
2000
1000
0
Years
-3
-2 -1
10 11 12 13 14 15 16 17 18 19 20
Figure 7: Net accumulated deforestation

3.9
Economic value of the forest
Considering that most of this impact affects forest cover it was possible to establish whether the sugar
cane project represented a positive or negative environmental externality on the forest cover, taking into
account deforestation projections.
According to Seroa da Motta (2008), the Total Economic Value (TEV) of a forest hectare is given by its
use and non-use values. Its use values are represented by its Direct Use Value (DUV), Indirect Use Value
(IUV) and its Option Values (OV). Its non-use values are represented by its Existence Value (EV). This
can be expressed by the following formula:
TEV = DUV + IUV + OV + VE
This formula allows estimating an approximate value of forest; thus, it allows researchers to determine the
monetary value of gains and losses caused by an environmental impact, which in this case is related to an
increase or decrease of forest cover.
It is rare for all values to be quantified for a specific site and this case is not an exception. DUV was not
quantified. The IUV considered maintenance of water quality and supplies, local and global climate
regulation; as OV bio-prospecting potential for agricultural and pharmaceutical products were considered;
and as EV, the biodiversity was considered (Table 4).
16
Table 4: Environmental externalities parameters

Parameters
Value
Units
Local and global climate regulation16
2261.3
US$/ha/year
IUV of water recycling (1)
10
US$/ha/year
IUV of local climate regulation (2)
19
US$/ha/year
Bio-prospection OV (3)
0.2
US$/ha/year
Biodiversity EV (3)
31.2
US$/ha/year
(1) Andersen, 1997
(2) Fearnside, 1997
(3) Seroa da Motta 2002; Clarkson 2000 and Simpson, Sedjo and Reid, 1996
The TEV does not consider other values of forest, such as the value of non-timber forest products, flood
and erosion control of forest, nutrient recycling and forest fire protection. Even when the study considers
water and waste management as production costs of the mill, it does not consider environmental
externalities that could come from possible water and air pollution caused by unexpected discharges of
waste and use of fertilizers. Externalities of soil and water pollution when fertilizers and pesticides are
used for management were not considered either; the environmental impacts of these inputs for managing
crops in the study area are not known, because these costs could not be estimated for this area.
Due to the characteristics of the area, e.g. gentle slopes (0-3%) and the quick regeneration of vegetation,
soil erosion is likely to be minimal. Soil erosion may possibly occur in areas near rivers and streams, but
even in this area, less erosion is expected because crops will not be developed there. Hence, erosion costs
were not considered because of the very minimal effect from sugar cane crops.
Eutrophication might occur in areas where water courses become stagnant due to the topography. It could
impact on aquatic life because of fertilizer use in the sugar cane fields that would be near streams and
water courses. However, most of the production will not be concentrated in that kind of vulnerable area,
but possible environmental effects could be generated, though these were not considered.
Finally, emissions from the burning of bagasse17 and diesel combustion18 were not considered as negative
externalities since every ha of cane farmed captures a minimum of 25 mt of carbon, while only 12.8 mt are
emitted in burnings. If we considered these last issues, the net environmental costs of the sugar business
would be less than those calculated in this study.
3.10
Electricity generation from the mill and CDM potential
Northern La Paz is an area that lacks electrical power for its population; most of the inhabitants obtain
their power from isolated systems functioning on fossil fuels. Instituting a sugar cane industry could
substitute to a great extent the provision of energy coming from subsidized diesel through the use of
cleaner energy coming from a vapor system obtained from the bagasse 19. This sugar cane industry could
16
This value considers 225,7 TM/ha of biomass (Murakami & Jorgensen 2008), a conversion factor from biomass to
carbon of 0.5, a conversion factor of 3.67 from Carbon to CO2 equivalent and a price of 5.46 $US TM CO2.
17
60% of bagasse is burned to generate energy for the factorys operation.
18
0.0026 CO2 mt per liter (CAO, 2008).
19
Each mt of bagasse produced by the mill could generate 3.0125 MWh from energy.
17
also during the harvest months constantly supply energy to the populations of San Buenaventura, Ixiamas
and Rurrenabaque.
In order to generate electricity from the sugar industry, an additional investment should be made for a
local co-generation system. This surplus energy could be sold to the National Interconnected System
(SIN). The additional investment is around 7 US$ Million for a 16 MW installed power plant (according
to the National Committee for Charge Delivery), including a reserve of 15% of the power.
The income from the energy is US$ 7.000 for MW installed and 12.5 US$ for MWh generated20.
Additional income could be obtained from a CDM project, obtaining 0.5 certificates for every MWh
generated, which could be sold to the voluntary market at a price of US$ 10 per certificate.
4
4.1
Results
Financial analysis of sugar cane production and its derived products
From the assumptions described in the previous section, and taking into consideration the average levels
of yield and sucrose content discussed here, a negative NPV of US$ 15 million and an IRR equivalent to
6.16% for the industry as a whole (agricultural producers and factory) was obtained for the financial
analysis.
Nevertheless, this result depends on the yields and sucrose content which are uncertain. A sensitivity
analysis was carried out; thus it was possible to determine that obtaining a positive NPV for the industry
would require achieving yields equal to or greater than 60 mt/ha and sucrose content greater than 12.5%
(Appendix 3).
In a differentiated financial analysis of agricultural production of sugar cane and the factory, the following
results are reached from the assumptions under review: there is a positive NPV of US$ 19.3 million and an
IRR equivalent to 31.9% for agricultural production; and, there is a negative NPV of US$ 34.3 million and
an IRR smaller than zero for the factory. Consequently, it is possible to conclude that financially there is a
winning sector, i.e. the farmers, and a losing sector, i.e. the investors and owners of the factory. Ultimately
the processing activity could not continue without subsidies or a different allocation of revenues between
the farmers and the sugar mill.
Other variables that may influence the industrys feasibility are the prices of final products produced by
the mill, namely, refined sugar and alcohol. As mentioned, the analysis was carried out considering
current prices at the time primary information was collected. However, the prices of both products,
especially of refined sugar, are quite volatile. Thus, it is necessary to analyze the industrys viability in
terms of price fluctuations, which is the reason a price sensibility analysis is included here.
By conducting the price sensitivity analysis, it is possible to determine that the industry as a whole would
reach a financial viability if the price of sugar increases from US$ 17 to US$ 18 per quintal and
simultaneously the price of alcohol increases from US$ 0.42 to US$ 0.52. Through this analysis it was
20
According to the Bolivian regulation, a power plant receives a payment from the National Electricity
Interconnected System, which is US$ 7.000 a year per MW installed, plus 12.5 US$ per MW h produced.
18
possible to determine that the industry is much more sensitive to variations in the price of sugar than to
variations in the price of alcohol (Appendix 4).
4.2
Economic analysis of sugar cane production and its derived products
After tax corrections, including the positive externality of reducing deforestation and taking into account
the average yields and sucrose contents, a positive NPV of US$ 12.1 million and an IRR of 12.2% is
obtained for the entire industry. From this result the following conclusion may be arrived at: if the
assumptions considered are fulfilled, the industry would be economically desirable.
A yields and sucrose contents sensitivity analysis was concluded; through this analysis it was ascertained
that the whole industry would not be economically desirable if sucrose contents are lower than 12.5% and
yields lower than 55 mt/ha at the same time (Appendix 5).
In a differentiated analysis of the agricultural production of sugar cane and sugar and alcohol factory, the
following results are reached: there is a positive NPV of US$ 25.3 million and an IRR equivalent to 23.2%
for agricultural production; on the other hand, there is a negative NPV of US$ 7.18 million and an IRR
equivalent to 8.34% for the factory. Consequently, it is possible to conclude that the sugar cane industry is
desirable for the national economy, despite the fact that there is a losing sector, which is comprised of the
investors in and owners of the factory.
Performing a price sensitivity analysis in the economic analysis, it is possible to determine that if the price
of sugar falls to US$ 16 per quintal and the price of alcohol is maintained, the industry as a whole could
not be economically feasible (Appendix 6).
4.3
Financial and economic analysis, including electricity generation
Considering an additional income source from electricity generation, the whole industry could have a
higher economic NPV of US$ 16.5 million and thus the economic loss of the factory is reduced to only
US$ 2.7 million. However, the financial situation of the factory alone would still be negative US$ 29.9
million, which means that the mill would still need public subsidies (Table 5).
Table 5: Financial and economic results, including electricity generation
Analysis
Financial
Economic
Stakeholders
Whole industry
Farmers
Factory (mill)
Whole industry
Farmers
Factory (mill)
NPV (US$ million)

-10.5
19.3
-29.9
16.5
25.3
-2.7
IRR (%)
7.6
32.0
0.4
12.8
23.3
9.4
These results consider the revenue that would be generated through a CDM project. If this additional
income is not considered, the NPV of the whole industry will be US$ 15 million, and the factory will have
a negative economic NPV of US$ 4.3 million. Again, the financial situation of the Mill alone is negative
(US$ 31.5 million).
19
4.4
Economic analysis with lack of community participation, and assumptions validity
Up to this point in this research project, the results were formulated considering that the assumptions
presented above are met. However, many factors could affect the final decision-making process, with the
result that the proposed systems might not be met, and further, deforestation might increase to a great
extent.
By losing forest cover environmental externalities will occur. If these externalities are included in the
CBA analysis, a negative NPV of US$ 13.6 millions with an IRR of 7.9% was estimated. This value, as is
explained above, represents only a part of the total value of the economic losses because it is considered
only a part of the total value of the forest. Therefore, a project of this type will not be economically
feasible, thus generating loss for the national economy.
4.5
Risk analysis
In the risk analysis the following factors were considered: variations in yield, sucrose content and the
efficiency of the mill measured by the percentage of sucrose loss. The considered values and parameters
for each of these variables are described in the Table 6.
Table 6: Variables and parameters considered for the risk analysis
Variable
Yield
Sucrose content
Loss of sucrose
Number of families
Average value
55 mt/ha
12.5%
8%
1,252
Distribution
Triangular
Triangular
Normal
Triangular
Maximum
70 mt/ha
15%
8%
2,250
Minimum
40 mt/ha
10%
0%
750
Table 7 describes the probability that the activity would be financially and economically feasible,
considering the industry as a whole as well as each of the parties.
Table 7: Sugar industry probability for financial feasiblity
Result
Industry financially
Farmers financially
Mill financially
Industry economically
Farmers economically
Mill economically
Industry if the deforestation assumptions are not met
Probability (%)
14.5
84.8
0
62.5
92.6
7.4
20.9
Note: The probabilistic distribution of statistic data is described in Appendix 7.
4.6
Distribution analysis
Considering the information and assumptions used to analyze the financial viability, it was possible to
establish that for the Government, as the sugar mills owner, the NPV would have a negative value of US$
34.3 million. On the other hand, for the farmers the NPV would have a positive value of US$ 19.3 million.
20
One way the mill could attain financial sustainability would be by modifying the profit percentages, that
is, by increasing the mills profit percentages while reducing the farmers profit percentages. Applying an
optimization analysis and using Crystal Ball v.11 as a tool it was possible to reach the following results:
A redistribution of revenue from the sale of sugar that minimizes the mills losses in financial
terms would be 51.6% for the mill and 48.4% for the producers. With this distribution the
financial NPV for farmers would be US$ 178,000, while the financial NPV for the mill would still
have a negative value of US$ 15.2 million. Although the losses are lower, the whole industry
would be still having a financial negative NPV. However, in economic terms, it is possible to
obtain a positive NPV for the factory (Table 8).
It is not possible to reach a solution without financial loss, a fact that indicates that public
subsidies will be needed whatever the scenario.
Table 8: Financial and economic results considering new profit percentages
Analysis
Stakeholders
Whole industry
Farmers
Factory (mill)
Whole industry
Farmers
Factory (mill)
Financial
Economic
NPV (US$ million)

-15.0
0.178
-15.2
16.5
6.1
16.4
IRR (%)
6.4
10.2
5.5
12.8
13.6
13.2
No quantitative analysis has been carried out for the consumers of refined sugar in the departments of La
Paz and Oruro and for the producers from Santa Cruz. However, based on economic criteria, it is possible
to infer that with a new producer, the supply sugar prices could drop, thus benefiting consumers. On the
other hand, Santa Cruzs producers would be the potential losers as a result of the possible price and
market reduction.
However, the reduction of prices could also affect the new sugar producers, modifying the results of this
analysis. In other words, price variations could influence the financial and economic feasibility of San
Buenaventuras sugar industry, as the price feasibility analysis demonstrated. Although this analysis is not
part of this research study, it nonetheless helps reflect on the relevance of developing an industry to supply
a market when the demand is fully satisfied at present.
Conclusions and recommendations
The viability of San Buenaventuras agro-industry project largely depends on the competitiveness that
may be achieved in raw material production in the agricultural phase, that is, of the yields and sucrose
contents that may be reached. The results presented consider the average levels of sucrose and yields.
However, as the level of sucrose and yields sensitivity analyses shows, the results of the financial and
economic feasibility analysis will also change.
Therefore it is recommended that the yields and sucrose levels that may be achieved must be tested during
a previous phase of agricultural experimentation before making any investment, by which a versatility
range for both variables and for the different cane varieties may be established accurately. Being certain
about these issues is possibly the most important issue for investors to consider.
21
According to the assumptions, the cane project is financially non-viable. Disaggregating the analysis in
terms of agricultural production and the mill, it is possible to observe that agricultural producers are the
winners while the mills investors could be the losers. This implies that if higher yields and sucrose
contents than those considered are not achieved, the sugar mill would operate under losses and require
public subsidies. This problem would not be solved by redistributing the benefits among the producers and
the factory, but it is possible that through this mechanism the financial losses for the mill would be
reduced.
On the other hand, after carrying out the tax corrections and taking into account the positive
environmental externalities generated by the project, if the assumptions are met it is possible to conclude
that the project would generate more benefits than costs to the national economy. But, if the deforestation
assumptions are not met, the project would generate an economic loss for the country.
Regarding the investments, the analysis is based on the assumption that important investments are made
for both the agricultural and industrial phase. Consequently, the project will depend on: i) the capacity
producers have to purchase the necessary agricultural machinery (US$ 28,300 for every five farming
families or 50 ha of cane) to replace the traditional manual production system with a semi-mechanized
system; and ii) the resources public stakeholders have available to invest, around US$ 110 million in the
factory (including the financial costs).
Most of the agricultural producers in the region lack the financial resources to purchase the necessary
agricultural machinery; thus, the support of the investors could be an effective mechanism to restrict the
entry of new economic actors in the region, and consequently could be a way of controlling the expansion
of the cane crops in accordance with the requirements of the mill and a scheme of environmental
responsibility.
According to the information gathered for this research, sugar cane production for the proposed factory
can be implemented by the farmers already settled in the area. New labor coming from other regions
would not be attractive because the mill under review cannot process more sugar cane than that from the
actual local farmers. Additionally, the property rights around the sugar mills area of influence are almost
consolidated; thus, there is also a strong rejection on the part of local actors regarding the possible arrival
of new producers.
Finally, another aspect that must be evaluated is connected to the market. According to the government
project proposals, the production of sugar would be aimed at markets being supplied at present. Therefore,
unless the region offers important competitive advantages in terms of the biophysical capabilities for sugar
cane production, the uncertainty about accessing the market would be great. Bolivias sugar industry has
more than half a century of experience and competing with consolidated industries requires favorable
conditions.
22
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26
ANNEXES
27
ANNEX 1
Potential sugar cane communities: distances to the mill,
population and area of production
Community Name
San Felipe
Esmeralda 1
Bella Altura
Everest
Eyiyoquivo
San Silvestre
7 de diciembre
Santa Ana
Buena Vista
Tahua
San Buenaventura
Santa Rosa de Maravilla
Capaina
Flor de Mayo
25 de Mayo
Hurehuapo
San Isidro
Cinteo
La Esmeralda
Tumupasa
Nueva Jerusalen
El Dorado
El Porvenir
Totals
Distance (Km) Number of Families Year 5

72
12
12
14
11
18
14
18
11
32
45
25
29
38
19
39
14
66
85
54
16
348
64
13
14
18
74
22
24
25
50
20
6
31
56
41
30
73
37
306
3
20
3
14
4
25
1,274
28
Cultivated Area
- Year 5 (ha)
64
148
190
190
327
264
391
401
687
282
3,612
67
190
114
264
106
317
211
760
3169
207
145
259
12,367
ANNEX 2
Number of families and crops expansion
Sugar cane production
Total production Area = Number of production units

= Area x Yield (families) 10 ha/family (close to the
mill) or 5 ha/family (far from the mill)
Sugar and alcohol

production
Sucrose concentration
Sucrose lost
Volume of
production
Yield = 55 TM/ha
Number of families
Crops growing rate
1.250 families growing at 0.43% annual

2.43% annual (traditional production areas)
Forest 59.8%
Crop areas
Crops replacement 40.1%
12,50%
8% of sucrose
2.5 qq/mt cane(1qq=0.046008mt)
11.6 liters of alcohol/mt cane
Income and cost of the mill

Income
Sugar sales
Alcohol sales
Industry rescue value
Machinery investment
Maintenance
Mill
Costs
Operation costs
Transportation to markets
Taxes
Depreciation of machinery
42.8% and 17$US each quintal of sugar

0.42 $US per liter
depreciation rate of 0.05
44% without financial cost and 56% at 10% interest rate
Fixed costs
$US 80/ha
Applied every 5 years
Machinery replacement
3 times maintenance costs
Administration
7% of sales
Production
18% of sales
Transport to La Paz and Oruro
86% to La Paz and 14% to Oruro
IVA
13% of sales
IT
3% of sales
IU
25% of utilities
5% annual
29
Income and cost of the farmers

Income
Producers
Costs
57% of sugar sales at 17 $US/quintal

$US 1271/ha
Agricultural machinery rescue value
depreciation rate of 0.075
Caterpillar
$US 20000
Romeplaws
$US 800
Agricultural machinery for 50 has
Cultivadoras
$US 3.5
Surcadoras
$US 1.5
Chatas
$US 2.5
interes rate =10% annual
Credit for machinery
$US 250 Fallow
Deforestation
$US 400 Forest
Applied every 4 years
Nitrogen, 11.5 $US/ha, 19.85 Kg Urea 46-0-0
Fertilization
Phosphorus, 26.09$US/ha, 32.6 Kg DAP 18-46-0
Terrain preparation
Potassium, 24.05$US/ha, 25 Kg MOP 0-0-60
Dolomita, 102.8$US/ha, 3 TM
Applied every 5 years for replacing old sugar cane
Physic land habilitation to renew
crops
the crop
Cleaning ($US 100/ha)
Soils preparation ($US 150/ha)
Applying at the establishment of crops and every 5 years
Seeds
$US 150/ha
Seedtime
Labor
$US 80/ha
Transport
$US 13.5/ha
Applied every year
Cultivation
$US 20.2/ha
Carpida
$US 62.1/ha
Slash
$US 2.7/ha
Herbicides 1
$US 8.1/ha
Weeds control
Herbicides 2
$US 5.4/ha
Arsonex
$US 6.7/ha
Ametrex
$US 10.8/ha
2,4 D
$US 4.0/ha
Glifosato
$US 9.4/ha
Oil
$US 0.4/ha
$US 279/ha
Harvest and transport
$US 0.3/TM
Commercialization
7.5% anual
Depreciation of agricultural machinery
Sugar sales
Wood sales
30
ANNEX 3: Sensitivity analysis for yield and sucrose content Financial

NPV
Sucrose
content
(15.005.412)
11,5%
12,0%
12,5%
13,0%
13,5%
45
(45.943.172)
(40.726.997)
(35.510.822)
(30.294.647)
(25.078.472)
50
(36.849.617)
(31.053.867)
(25.258.117)
(19.462.367)
(13.666.617)
Yield mt/ha
55
(27.756.062)
(21.380.737)
(15.005.412)
(8.630.087)
(2.254.761)
60
(18.662.506)
(11.707.606)
(4.752.706)
2.202.194
9.157.094
65
(9.568.951)
(2.034.476)
5.499.999
13.034.474
20.568.949
ANNEX 4: Price sensitivity analysis Financial

NPV
Sugar price
($US/quintal)
(15.005.412)
16,0
16,5
17,0
17,5
18,0
0,22
(35.754.361)
(29.981.844)
(24.209.327)
(18.436.809)
(12.664.292)
Alcohol price ($US/liter)

0,32
0,42
0,52
(31.152.404) (26.550.446)
(21.948.489)
(25.379.886) (20.777.929)
(16.175.971)
(19.607.369) (15.005.412)
(10.403.454)
(13.834.852)
(9.232.894)
(4.630.937)
(8.062.335)
(3.460.377)
1.141.580
0,62
(17.346.531)
(11.574.014)
(5.801.497)
(28.979)
5.743.538
ANNEX 5: Sensitivity analysis for yield and sucrose content Economic

NPV
Sucrose
content
$12.167.135
11,5%
12,0%
12,5%
13,0%
13,5%
45
(24.222.635)
(18.280.658)
(12.338.680)
(6.396.703)
(454.726)
50
(13.290.167)
(6.687.970)
(85.773)
6.516.424
13.118.621
Yield mt/ha
55
(2.357.698)
4.904.718
12.167.135
19.429.552
26.691.968
60
8.574.770
16.497.406
24.420.043
32.342.679
40.265.315
65
19.507.238
28.090.094
36.672.950
45.255.806
53.838.662
ANNEX 6: Price sensitivity analysis Economic

NPV
Sugar price
($US/quintal)
12.167.135
16,0
16,5
17,0
17,5
18,0
0,22
(12.623.924)
(6.216.573)
190.778
6.598.129
13.005.480
Alcohol price ($US/liter)

0,32
0,42
0,52
(6.635.745)
(647.567)
5.340.611
(228.394)
5.759.784
11.747.962
6.178.956
12.167.135
18.155.313
12.586.307
18.574.486
24.562.664
18.993.658
24.981.837
30.970.015
0,62
11.328.790
17.736.141
24.143.492
30.550.843
36.958.194
ANNEX 7
Assumption: Sucrose content

Triangular distribution with parameters:
Minimum
Likeliest
Maximum
10,0%
12,5%
15,0%
Assumption: Yield
Triangular distribution with parameters:
Minimum
Likeliest
Maximum
40,00
55,00
70,00
Assumption: Loss of sucrose

Normal distribution with parameters:
Mean
Std. Dev.
0,08
0,03
Selected range is from 0,08 to Infinito
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Financial and economic feasibility

Financial and economic feasibility of sugar cane production in

Alfonso Farjan Malky Harb

Cost benefit analysis .................................................................................................... 3

3 Assumptions and premises ............................................................................................ 7

Population and crops expansion................................................................................... 7

5 Conclusions and recommendations ............................................................................ 21

Map 1: Location and area of influence of the sugar mill

2.1 Cost benefit analysis

Where: Bt = Total benefits in year t

Sugar industry cost-benefit analysis

Figure 1: Structure of costs and benefits of the sugar cane industry

Assumptions and premises

Population and crops expansion

Communities near the

Communities distant from

Total sugar cane

Mill, capacity, investment and financial costs

Sugar mill operation, income and costs

Sugar crop implementation and substitution of traditional crops

Rice, 1.25 ha/family

Figure 2: Current plot structure

Figure 3: Partial crop substitution scheme for a plot.

Agricultural opportunity costs

Deforestation and expansion of the agricultural frontier

Figure 4: Land cover change through 2006

Rice and corn prices ($US/TM)

Partial crop substitution with sugarcane

Figure 7: Net accumulated deforestation

Economic value of the forest

Table 4: Environmental externalities parameters

Electricity generation from the mill and CDM potential

60% of bagasse is burned to generate energy for the factorys operation.

0.0026 CO2 mt per liter (CAO, 2008).

Financial analysis of sugar cane production and its derived products

Economic analysis of sugar cane production and its derived products

Financial and economic analysis, including electricity generation

NPV (US$ million)

Economic analysis with lack of community participation, and assumptions validity

Note: The probabilistic distribution of statistic data is described in Appendix 7.

NPV (US$ million)

Conclusions and recommendations

Distance (Km) Number of Families Year 5

Sugar cane production

Total production Area = Number of production units

Sugar and alcohol

1.250 families growing at 0.43% annual

Income and cost of the mill

42.8% and 17$US each quintal of sugar

Income and cost of the farmers

57% of sugar sales at 17 $US/quintal

ANNEX 3: Sensitivity analysis for yield and sucrose content Financial

ANNEX 4: Price sensitivity analysis Financial

Alcohol price ($US/liter)

ANNEX 5: Sensitivity analysis for yield and sucrose content Economic

ANNEX 6: Price sensitivity analysis Economic

Alcohol price ($US/liter)

Assumption: Sucrose content

Assumption: Loss of sucrose

Selected range is from 0,08 to Infinito

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