EFITA 2003 Conference

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AGRIVENTURE: A DECISION SUPPORT SYSTEM FOR AGROINDUSTRIAL PROJECT PREPARATION AND EVALUATION Carlos Arthur B. da Silva, Ronaldo Perez, Aline R. Fernandes e José V. Machado1 Department of Food Technology, Federal University of Viçosa, Brazil; [email protected]; [email protected]; [email protected]. 1 Agricultural Services Division, FAO, Rome; [email protected] ABSTRACT We describe a decision support system to assist in the preparation and evaluation of agroindustrial investment projects, called Agriventure. This system has been specifically designed to address the special characteristics of agroindustrial projects. The system facilitates the laborious process of organizing the technical and economic information needed to assess a project’s financial feasibility. Furthermore, it automates the estimation of costs, investments and revenues, and generates the financial cash flows and associated financial feasibility indicators. The system is being distributed by FAO as part of its InphO program, which disseminates information on post-harvest and agroindustrial technologies. Keywords : agroindustrial projects, decision support systems, project analysis

1.

Introduction1

The promotion of value aggregation in the agricultural sector through agroindustrialization is generally considered to be one of the most efficient policies that can be implemented to achieve sustainable economic development. Indeed, investments in agroprocessing are known to have significant multiplier effects, due to the backward and forward linkages in the sector’s productive chains. Other benefits from agroindustrial investments arise from the relatively high level of employment generation, the improvement in food and fiber quality, and the possibility of efficient operation, at least on small scales. Realizing the benefits of agroindustrialization, governments and international organizations have created several such development programs. These programs typically include the provision of credit and technical assistance to potential investors, and many specifically target groups of small farmers and small-scale investors. In order to assess the feasibility of an agroindustrial enterprise, a potential investor, whether governmental or private, must consider a number of issues, ranging from marketing strategies to technological, financial, and organizational concerns. Several inherent sources of risk and uncertainty must also be carefully considered, in order to minimize the likelihood of enterprise failure. For these reasons, proper formulation and analysis becomes instrumental for the success of any agroindustrial development program. Information technology can provide an effective means to reduce the difficulties associated with preparing and evaluating an investment project. Software systems to support preparation and evaluation tasks, such as COMFAR, from the United Nations Industrial Development Organization (UNIDO), and others specifically developed by donors and financing institutes, are known to exist. However, none of these is distinctively designed to deal with the specific characteristics of agroindustrial projects. 1

This introductory part draws heavily from Agriventure’s guideline texts, originally prepared by the first author.

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EFITA 2003 Conference

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In fact, the agroprocessing industry operates under a set of special constraints, which are primarily related to the biological nature of their raw materials. These are known to be largely perishable, irregular with regard to quality characteristics and subject to supply seasonality. Agroindustries also have a wide range of product mix alternatives, a feature that imposes unique challenges to production planning and control. Other special features of agroindustries are discussed in AUSTIN (1992) and SILVA (2002). In view of the particularities of agroindustrial projects, Agriventure - a decision support system addressing the issues of project planning and evaluation, has been designed. It is the product of a cooperative effort between the Food and Agricultural Organization of the United Nations and the Food Technology Department of the Federal University of Viçosa, in Brazil. This paper discusses its structure and illustrates its application. 2.

System structure and operation

Built for the WINDOWS environment with the Delphi 5 software development tool, Agriventure is composed of a user interface, a database and a model base, which are seamlessly integrated in an independent program. The interface has a number of icons, pull down menus, dialog boxes, text boxes, grids and other means of interaction with the user. The database stores and allows the manipulation of all information entered, while the model base offers the means to perform financial and sensitivity analysis of the project. Figure 1 shows the system’s main screen.

Figure 1. Agriventure’s main screen

At this entry point, users have the option of getting information on the general procedures used for preparing and evaluating a project. These “Guidelines” are displayed in PDF files, which can either be printed out or read on-screen. A second option (Web Links) allows either a direct INTERNET connection to the FAO WEB site, or local access to FAO’s

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“InphO” CD-ROM2. An extensive, context sensitive help file can also be accessed at this point or at any point during system usage. Moreover, the entry screen offers information on the system’s background and its development institutions (the “About” icon) The option “Agroindustrial Project Preparation” leads to the system’s main functions, which are shown in Figure 2.

Figure 2. Project Preparation Screen

The main information category of Agriventure is the Project, which must have a unique title. Each project encompasses all the necessary data for the performance of its financial evaluation. Users can utilize previously saved information to create new projects or they can start entirely new ones. A Check List detailing the data needed to create a new project is provided. For each project, the information entered is organized as a group of related tables. The data entry sequence follows the typical steps of the project preparation endeavor, as illustrated by the arrows linking the icons portrayed in Figure 2. The initial information category for a project is its group of products. After clicking the “products” icon, users can enter data on the product mix (types and quantities produced yearly). For each product in the mix, a new screen is opened, allowing the detailing of its technical and marketing features. These include the measurement unit (kg, pounds, liters, etc.), the processing and storage time periods, selling prices, sales taxes and other sales costs. Furthermore, information on the raw materials and other inputs that go into each product should be entered, along with the respective technical coefficients (input / output ratios), unit costs and average storage period. These data will be used later to compute raw material needs and costs. They will also be employed in the estimation of working capital requirements. Figure 3 illustrates one of the product data input screens.

2

Inpho is a comprehensive FAO information base on agroindustrial and post-harvest technologies. It can be accessed by INTERNET (www.fao.org/inpho). The FAO also distributes a CD-ROM with Inpho’s content.

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EFITA 2003 Conference

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Figure 3. Example of a product input screen

Information inputs in the Product category are used by Agriventure to generate a yearly revenue schedule throughout the project’s life cycle. Users have the option of providing additional revenue sources from non-operational activities (e.g., rents, subsidies). The Revenue icon leads to a screen displaying a grid for this specific data entry purpose. Following the data entry sequence, users should enter the investment needs, which are categorized by major items such as land, civil works, engineering costs and, most importantly, equipment costs. Equipment items must be discriminated in a piecewise fashion; for each piece of equipment, the related life cycle, investment estimate and year of disbursement must be entered. Depreciation costs can then be automatically calculated. Labor needs and costs are the next information category to be completed. Here, users will typically create a number of labor groups (e.g.; managers, production line personnel, etc.) and enter the average salary and social charges. Moreover, they should associate the labor groups to the product mix, in the form of a percentage. For example, one group can have its costs associated entirely to a product, otherwise, these costs can be partially linked to several products. In this way, product costs can be estimated at a later point. A further group of cost items is the one that comprises the utilities and other assorted supplies required by the agroindustrial project. These entail items such as electric power, other sources of energy, industrial water, office supplies or laboratory materials, to name only a few such examples. Data must be provided on the unit costs, the measurement units and the input/output ratios, with the agroindustrial plant’s most important raw material as the basis for this computation. Once the investment and costs items have been entered, the system automatically computes working capital needs and generates several tables of results, as listed in the results screen menu shown in Figure 4.

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Figure 4. Results Menu Screen

The results detail fixed and working capital estimates, product cost estimates (fixed and variable) and revenue estimates. Additionally, details about the project’s financing plans are presented, including information on the total amounts of loans and equity capital required, as well as interest rates, the grace period and the total disbursement period. All of this information is then employed in the financial analysis part of Agriventure, where the project’s cash flow and its cash flow for liquidity ana lysis are computed. The internal rate of return, payback period and net present value of the project are calculated from the cash flow information. Results are also displayed in the form of graphs, for break-even analysis and sensitivity analysis, respectively. The latter graph is of particular interest, as it depicts the behavior of the internal rate of the return when key project variables are submitted to 5% percentage changes over the -25% to +25% range. These graphs are known as “spiderplots” and are used in sensitivity analysis to indicate a particular project’s degree of exposure to uncertainty factors. A final resource offered by Agriventure is the ability to compare the results of several different projects. The function “Compare Projects” is also useful when different versions of the same project are created to represent different plant scales, product mixes, sales schedules or any other change in the original project plans.

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5-9. July 2003, Debrecen, Hungary

Concluding remarks

Agriventure has been tested among potential users, who generally found it to be a flexible and relevant supporting tool for agroindustrial project preparation and evaluation. This primarily meets the needs of extension agents, agroindustrial experts and other professionals involved in feasibility studies and in the design of business plans for agroindustrial enterprises. A simpler version, Agriventure-Mini (GONÇALVES et al., 2003), has also been developed, covering only a sub-set of the features contained in the main system. This simplified version does not perform the intermediary steps in the computations of costs, revenues and investment estimations. It only handles the total estimates, based on which the financial tables are automatically computed. The motivation for its development was to provide a simple tool for initial feasibility assessments. The FAO has recently made the main version of Agriventure available through its WEB page and a version in Spanish will be released soon.

BIBLIOGRAPHICAL REFERENCES Austin, J.; Agroindustrial Project Analysis, The World Bank, Washington DC, 1992 Gonçalves, R., Silva, C.A.B. and Braga, J.L.; Desenvolvimento de um Sistema de Apoio à Formulação e Análise de Projetos Agroindustriais. Project Report. Viçosa, 2003. Silva, C.A.B.; An Introduction to Agroindustrial Project Preparation and Evaluation, Part I: Project Preparation. AGST-FAO, Rome, 2002

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