Nghe An Tate & Lyle Sugar Company (Vietnam)

In September 1998, Nghe An Tate & Lyle (NATL) had largely completed its $90 million sugar mill in northern Vietnam. The equity sponsors, Tate & Lyle, Mitr Phol (pronounced "Mit Pong") Sugar Company, the Vietnam Fund, and the Nghe An Sugar Company, had financed the project with their own equity, short-term loans, and a $40 million bridge loan from Rabobank, which was acting as an advisor and potential investor. The sponsors now wanted to refinance the loans with up to $45 million from the International Finance Corporation (IFC) and up to $20 million from other sources. They had originally approached the IFC in 1996, before construction had begun, but protracted negotiations over lending terms and uncertainties surrounding the Asian financial crisis prevented them from finalizing a deal. Now that the plant was essentially complete, Paul Cooper, Tate & Lyle's Divisional Commercial and Finance Director for international sugar investments, had asked the IFC to reconsider investing in the project. Ewen Cobban, an IFC agricultural specialist, was in charge of reviewing the project and making a recommendation to IFC management regarding a possible loan. As he reviewed the request, Cobban had a number of concerns. First, he was concerned whether NATL would be able to obtain a sufficient amount of cane from local farmers. Second, he wondered whether the government would follow through on its commitment to build new roads and bridges in the region that would be needed to transport cane from the fields to the mill. And finally, he was concerned by the fact that world sugar prices were falling and that sugar was a protected commodity. Like most countries, Vietnam protected its domestic sugar producers, but it was not clear whether the

Research Associate Carrie Fennan prepared this case under the supervision of Professor Benjamin C. Esty and Frank Lysy, Senior Advisor at the International Finance Corporation. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Participation by Dr. Lysy does not constitute an endorsement by the IFC, and the conclusions and judgments contained herein should not be attributed to, and do not necessarily reflect the views of, the IFC or its Board of Directors. Copyright© 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, calll-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any fonn or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of Harvard Business School.

190

The Sugar Industry • 191

IFC should support a project that depended on trade protection for commercial viability. Despite these concerns, he was intrigued by the potential for large social benefits resulting from the project. In order to make his recommendation, Cobban had to assess the project's financial viability and quantify its development impact.

THE SUGAR INDUSTRY1 Although all green plants contain some sucrose, a type of sugar used as a sweetening agent, the primary commercial sources of sucrose were sugar cane and sugar beets. As of 1998, more than half of the world's sugar supply came from sugar cane, a grass that thrived in tropical and subtropical climates. Farmers produced sugar cane by planting cuttings from mature stalks. Sugar cane generally took 11 to 18 months to mature, growing 12 to 15 feet high and about one to two inches thick. When it was time to harvest, farmers cut the stalks leaving only a stubble that would re-grow and provide up to three or four more crops (known as ratoons). They sent harvested cane to processing mills, usually located near the farms to minimize transportation costs and decay because the sugar content began to decline as soon as the cane stalks were cut. At the mill, the stalks were crushed. to extract juice, which was then clarified, boiled, and crystallized to produce raw or milled sugar. The milled sugar, usually 96% to 99% pure, could be consumed or processed further to produce fully refined or white sugar. Unlike harvesting, which was labor intensive, milling and refining were capital intensive. Significant economies of scale mad~ high-capacity utilization a requirement for low-

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Social Cost-Benefit Analysis • 201

SOCIAL COST-BENEFIT ANALYSIS Cobban began by calculating the sponsors' private return. With that as a base, he then began to add the net costs and benefits accruing to other groups, including employees, customers, producers of complementary goods, suppliers to the plant, competitors, new entrants, neighbors, and the rest of society (see Exhibits 10-7 and 10-8). The impacts on some of these groups would likely be significant, while for others the impacts might be quite small or even nonexistent. Cobban needed to think through each group to see if there was an impact and if so whether it was big or small, positive or negative. Where possible, he would attempt to quantify the impact.

Employees and Other Labor NATL would employ approximately 525 workers year-round and an additional200 during the crushing season. From the financial projections, Cobban could estimate wages, standard bonuses, and other labor costs (e.g., meals provided, etc.). For expatriate labor, it was reasonable to assume that recruitment was being done on a competitive basis. As a result, there would be no "extra" benefit to these employees above their opportunity cost (what they would have received elsewhere). To estimate the economic benefit for the Vietnamese labor, Cobban needed to compare NATL's compensation package with what the workers could earn elsewhere in Vietnam. Technically, Cobban needed to compare NATL's compensation package to what the workers would have earned if the project had not been built. Economists referred

EXHIBIT 10-7 GROUPS AFFECTED BY PROJECT DEVELOPMENT (IFC FRAMEWORK)

Financiers (FRR)

Employees

Source: Casewriter.

EXHIBIT 10-8 FINANCIAL PROJECTIONS ASSUMING THE IFC REFINANCES THE NATL PROJECT (US$ IN THOUSANDS) 19961998a

Production Cane crushed (000 tons) Yield of sugar/ ton of cane (%) Revenue Sugar produced (000 tons) World sugar price per tonh Domestic sugar price per ton Total revenue with VAT

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

0

64

400

750

850

900

900

900

900

900

900

900

900

900

900

900

900

900

0

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

10.3

0

6.6

41.2

77.3

87.6

92.7

92.7

92.7

92.7

92.7

92.7

92.7

92.7

92.7

92.7

92.7

92.7

92.7

0

300

314

331

348

366

385

405

417

426

435

444

454

459

463

468

472

476

0

390

~

~

~

476

~

527

542

554

~

~

~

~

~

~

~

~

0

2,857

18,701

36,920

44,024

49,045

51,603

54,294

55,853

57,043

58,258

59,499

60,765

61,496

62,049

62,607

63,171

63,739

Expenses Admin., operating, and selling Cost for caned Other cost of sales VAT

0 0 0 0

5,712 853 1,099 (234)

3,109 5,333 1,788 1,329

2,587 10,000 2,550 3,188

3,244 11,333 2,858 3,784

3,500 12,000 3,017 4,236

3,605 12,360 3,107 4,472

3,714 12,731 3,200 4,720

3,825 13,113 3,296 4,855

3,940 13,506 3,395 4,952

4,058 13,911 3,497 5,051

4,180 14,329 3,602 5,151

4,305 14,758 3,710 5,254

4,434 15,201 3,821 5,303

4,567 15,657 3,936 5,332

4,704 16,127 4,054 5,362

4,845 16,611 4,176 5,391

4,991 17,109 4,301 5,421

Total expenses

0

7,429

11,559

18,325

21,220

22,753

23,544

24,365

25,089

25,793

26,517

27,262

28,028

28,759

29,493

30,248

31,024

31,822

EBITDA Depreciation

0 0

(4,572) _ _0

7,142 3,307

18,595 3,472

22,805 3,642

26,292 3,818

28,059 3,999

29,929 4,185

30,764 4,376

31,250 4,574

31,741 4,777

32,237 4,986

32,737 5,202

32,736 5,424

32,556 5,653

32,360 5,889

32,147 6,132

31,918 3,075

EBIT Interest expensee

0 0

(4,572) 4,500

3,835 5,600

15,122 5,594

19,162 5,419

22,474 4,798

24,060 3,807

25,744 2,719

26,388 1,632

26,676 544

26,964 __ 0

27,250 _ _0

27,535 _ _0

27,312 _ _0

26,903 __ 0

26,471 __ 0

26,015 _ _0

28,843 _ _0

(1,765) 0

9,529 0

13,743 0

17,677 0

20,253 0

23,025 0

24,756 6,189

26,132 6,533

26,964 6,741

27,250 6,813

27,535 6,884

27,312 6,828

26,903 6,726

26,471 6,618

26,015 6,504

28,843 7,211

9,529

13,743

17,677

20,253

23,025

18,567

19,599

20,223

20,438

20,651

20,484

20,177

19,853

19,512

21,632

Profit before taxes Profit taxes @25% Net income

0

(9,072)

_Q

__o

0

(9,072)

(1,765)

(Continued)

EXHIBIT 10-8

(Continued) 19961998a

Free cash flow calculation EBIT Profit taxes @25%

0 0

--

EBIAT Plus: Depreciation Less: Capital expenditure Less: Incr. net working capital Tenninal valuec

0 0 56,482

Nominal free cash flow Inflation Deflator Real free cash flow

1,457 0

2000

1999

2001

2002

2003

2004

2005

2006

(4,572) 0

3,835 15,122 19,162 22,474 24,060 25,744 26,388 6,597 0 0 0 0 0 0 -- -- -- -- -- -- -(4,572) 3,835 15,122 19,162 22,474 24,060 25,744 19,791 4,185 3,307 3,472 3,642 3,818 3,999 4,376 0 1,585 3,307 3,406 3,508 3,613 3,722 3,833 10,376 310 0

220 0

1,822 0

710 0

502

256

269

156

0 0 0 0 -- -- -- -22,282 24,189 25,938 20,178

2007

2008

2009

2010

2011

2012

2013

2014

2015

26,676 6,669

26,964 6,741

27,250 6,813

27,535 6,884

27,312 6,828

26,903 6,726

26,471 6,618

26,015 6,504

28,843 7,211

20,007 4,574 3,948

20,223 4,777 4,067

20,438 4,986 4,189

20,651 5,202 4,315

20,484 5,424 4,444

20,177 5,653 4,577

19,853 5,889 4,715

19,512 6,132 4,856

21,632 3,075 5,002

119

122

124

127

73

55

56

56

57

0 -20,972 20,731

196,485

-- --

0

0

--

--

-- --

0

0

20,514

20,811

21,111

21,412

21,391

21,198

0.744 . 0.722

0.701

0.681

0.661

0.642

0.623

0.605

15,018

14,566

14,014

13,461

12,919

130,764

--

--

--

--

(57,939)

(15,258)

5,337

13,466

18,688

1.000

0.971

0.943

0.915

0.888

0.863

0.837

0.813

0.789

0.766

(57,939)

(14,814)

5,031

12,323

16,604

19,221

20,258

21,090

15,929

15,722

15,486

0

15,251

0

Note: Some numbers have been disguised to protect confidentiality. Assumes all cash flows from harvesting cane from November of year T to April of year T

0

--

216,133

+ 1 occur in year T+1; assumes

no change in the $US/Dong nominal exchange rate; and ignores withholding taxes due to IFC participation. Numbers are present values as of year-end 1998. Price for mill white grade of sugar, which is close to the average price received for the mix of grades produced by NATL. Assumes a cyclical recovery in sugar prices by 2005. c Terminal value equals a growing perpetuity based on final year free cash flow; [19,648 (1 + 3%)]/(13.3% - 3%) = 196,485, where the inflation rate is 3%, the real discount rate is 10%, and the nominal discount rate is 13.3%. d Includes amounts paid to both fanners for cane and truckers for transportation.

a

h

e

Assumes $65 million of debt at expected borrowing rates.

Source: Casewriter estimates.

, 204 • Chapter 10: Nghe An Tate & Lyle Sugar Company (Vietnam) to this opportunity cost as the "shadow wage" for the workers, and formally should be taken from society's point of view. However, the distinction between the opportunity cost to society and the opportunity cost to the individual worker was a distinction that Cobban was willing to ignore. NATL projected total payments to Vietnamese workers of $3 million per year during construction and $1.5 million during operations (including wages and benefits such as housing and meals, health insurance, and pensions). Cobban knew that NATL put a premium on its compensation package so it could be selective and retain good workers. He believed that NATL wages were eight or nine times as high as wages paid to workers with similar backgrounds and equivalent responsibilities in the nearby state enterprises. However, interviews with local workers revealed that state enterprises offered other benefits, which the formal wage scales did not capture. After valuing these benefits, Cobban assumed for the purposes of the analysis that NATL workers would be paid roughly double what they earned at alternative jobs such as the state-owned firms.

Customers NATL would sell sugar that otherwise would be imported at a price that was close to the import price, inclusive of tariffs and taxes (i.e., the value-added tax (VAT)). As aresult, consumers would pay the same price regardless of whether they bought NATL or imported sugar. Although the convenience of having domestic production of sugar with defined quality would appeal to customers, Cobban thought this benefit was probably small and would be difficult to assess.

Producers of Complementary Products Complementary products are products whose demand increases if there is increased availability of related products. Because NATL would provide the same product at basically the same price as what customers could get currently from imports, there would be no impact on this group.

Suppliers Cane farmers and truckers delivering cane would benefit from the project; as would any group that provided supplies directly to the mill or to the mill's suppliers. The Cane Farmers Cobban tried to estimate the economic gain to the farmers from conversion to cane, which was equal to the difference between the returns (revenues less costs) from growing cane and the returns from growing alternative crops. The difference was not only an indication of whether the farmers would convert, it was also a social benefit. To the extent the farmers earned more fro1n growing cane than from growing alternative crops or holding alternative jobs, the project would be creating social value. Using NATL's assumptions, Cobban computed the total revenues that cane growers would receive from the project per hectare. Through interviews with NATL, he estimated that an average of 10% of total revenues would be paid for haulage, which left the farmers with 90% of total revenues. The net return would require an estimate of costs, which Cobban found in Booker Tate's feasibility study and later confirmed with Cooper (see Exhibit 10-9). The cost estimates included both variable crop costs andrequired labor costs. Labor costs, assuming alternative employment opportunities existed

Social Cost-Benefit Analysis • 205

EXHIBIT 10-9 NET RETURNS TO FARMERS PER HECTARE (HA) FROM GROWING SUGAR CANE Sugar Cane

Year 0

Year 1

Year 2

Year 3

In Dong (000): Revenue Tons per hectare Price per ton Total Revenue Costs Labor a Fertilizer Seeds Land preparation Cane transportation Total Cost

0 0 -0

50 200 10,000

50 200 10,000

50 200 10,000

3,000 1,300 1,700 1,200 0 7,200

3,000 1,300 0 0 1,000 5,300

3,000 1,300 0 0 1,000 5,300

3,000 1,300 0 0 1,000 5,300

Net Retum

(7,200)

4,700

4,700

4,700

In US$:h Total Revenue Total Cost Net Retum

$ 0 480 -($480)

$667 353 -$313

$667 353 -$313

$667 353

a

b

-$313

Assumes the opportunity cost of labor is 15,000 Dong per day. Exchange rate equals 15,000 Dong per US$1.00.

Source: Casewriter estimated based on the Booker Tate 1995 Feasibility Study and company documents.

in the region, were equal to US$1.00 or Vietnamese Dong (VND) 15,000 per day. After multiplying the estimated cost per hectare by the total number of hectares under cultivation, Cobban was able to calculate the net return from cane. He followed a similar process to estimate the returns on both cash crops (crops grown for resale) and subsistence crops. The most common cash crops in Nghe An Province were pineapple, coffee, and rubber (see Exhibit 10-10). Cobban estimated the revenues and costs per hectare for each of the crops and then calculated the net return for each (see Exhibit 10-11). Cobban then compared the net returns from growing alternative crops against the net returns from growing cane. He conducted a similar analysis for subsistence crops such as rice, beans, peanuts, and maize, which farmers tended to grow in combination (see Exhibit 10-10 and 10-11). Although farmers did notreceive cash for these crops, the crops had an implicit value. By comparing the explicit value of growing cane against the implicit value of growing subsistence crops, he could determine whether it made sense for farmers to switch to cane. As part of this analysis, he had to consider the risks as well as the returns of converting to cane.

Truck Haulers Cobban also needed to understand the incentives for local people to purchase trucks or use their existing trucks to haul cane. Because NATL needed only 300 truckers at full capacity, the impact on the ERR would probably be relatively small. However, if it

206 • Chapter 10: Nghe An Tate & Lyle Sugar Company (Vietnam)

EXHIBIT 10-10 COMPARISON OF CROP ECONOMICS (DONG PER HECTARE, UNLESS NOTED, IN THOUSANDS) Subsistence Cropsa

Cash Crops

Crop Life Cycle (years)

Sugar Cane

Pineapple

Coffee

Rubber

Peanuts and Maize

Peanuts and Peanuts

Peanuts and Rice

4

3

10

28

1

1

1

200 200

175 425 4 18,000

260 250

200/200 200/200

1 10,000

60 135 1 14,125

8 10,000

0 6,800

200/200 200/200 0 9,600

200/230 200/230 0 9,175

7,200 4,300

11,400 5,925

13,125 11,175

11,000 5,925

8,800 8,800

9,200 9,200

9,300 9,300

Labor Days per Hectare in a planting year in a typical year Years to Revenue Revenue in a Typical Year Total Costs in a planting yearb in a typical yearb

a Partial year crops are grouped and can be grown during a single year. For labor days, 200/200 means that it takes 400 labor days to grow both crops.

b Total

cost includes labor costs based on the required number of working days but excludes transportation costs. The total cost

in a typical year is representative of the cost in all years except the planting year.

Source: Casewriter estimates.

was not a profitable activity for the truckers, no one would haul the cane to the mill. Cobban needed to estimate how profitable trucking would likely be. He knew the expected revenue stream to the trucking industry as a whole. He also knew that NATL was under some pressure from local governmental authorities to give preference to the local population when they signed the trucking contracts. These people would probably be involved in local farming or similar work before, but would likely be towards the upper end of the local income scale and would likely need to borrow (formally or informally from family and friends) enough to buy a second-hand (i.e., used) truck. The feasibility study provided Cobban with the other assumptions needed to calculate the profit margin for a single truck driver for a representative season (including the opportunity cost of labor of a typical trucker, as well as the cost of capital he would face; see Exhibit 10-12). From this, he could work out the net returns the truckers would earn as a group.

Other Suppliers The mill would utilize a variety of other suppliers. However, most of the supplies (e.g., spare parts, chemicals, and fuels) would come from competitive markets or from imports. As a result, the new mill would not have much, if any, ilnpact on these suppliers. There would also be suppliers to the suppliers, such as fertilizer to the cane growers or fuel to the truckers. But again, these goods were sold in competitive markets or from imports (ultiinately) and would not generate much of a social gain.

EXHIBIT 10-11 CROP CASH FLOWS (NOMINAL US$ IN THOUSANDS)

Hectares under cultivation (000)

1998

1999

2000

1.28

8.00

15.00

Opportunity Cost of Labor= $1.00/day: Net Return from:a (614) (2,825) Cane (1,010) (5,474) Cash Crops (avg.)b (973) (4,557) Pineapple (1,120) (6,535) Coffee (939) (5,329) Rubber (171) (1,067) Combo Apeanuts & maize 34 213 Combo Bpeanuts & peanuts (11) (67) Combo Cpeanuts & rice

(853)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

17.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

18.00

3,740

4,599

4,341

4,611

5,911

6,201

5,696

6,007

7,349

7,682

7,222

7,578

8,968

9,349

8,939

4,232 5,638 8,190 (1,133) (2,400)

3,161 (1,837) 709 272 90 4,898 3,848 187 175 5,638 187 175 5,638 187 6,488 (1,985) (9,323) (10,197) (4,407) 4,557 6,857 2,810 3,937 4,500 4,500 4,500 4,500 4,500 (2,400) (2,400) (2,400) (2,400) (2,400) (2,400) (2,400)

2001

(6,636) (3,948) (3,427) (1,581) 4,975 187 (10,688) (10,652) (4,407) (6,167) (6,060) (7,640) (2,000) (2,267) (2,400)

(303) 2,285 912 1,149 187 175 175 5,638 8,190 8,190 4,557 6,857 (5,640) (5,640) (5,640) (4,919) (2,400) (2,400) (2,400) (2,400)

4,288 175 8,190 4,500 (2,400)

400

453

480

480

480

480

480

480

480

480

480

480

480

480

480

480

(125)

(142)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

(150)

Opportunity Cost of Labor = $0.00/day: Net Retum from:a (358) (1,225) 2,147 Cane

7,140

8,199

8,211

9,511

9,801

9,296

9,607

10,949

11,282

10,822

11,178

12,568

12,949

12,539

4,382 7,063 5,579 5,834 9,010 1,160 400 2,080 7,822 2,080 7,822 2,038 7,024 2,038 (3,927) 2,993 12,207 14,507 15,840 15,840 15,840 (419) 3,367 (1,897) (1,550) (1,140) (1,140) (1,140) 4,800 4,800 4,800 4,800 4,800 4,800 4,533

7,722 2,038 13,818 7,310 4,800

4,834 2,080 3,985 8,437 4,800

4,466 7,822 (3,423) 9,000 4,800

2,664 2,038 (3,047) 9,000 4,800

4,691 2,080 2,993 9,000 4,800

9,676 7,822 12,207 9,000 4,800

8,515 2,038 14,507 9,000 4,800

8,973 2,080 15,840 9,000 4,800

Cash Crops (avg.)b Pineapple Coffee Rubber Combo Apeanuts and maize Combo B-peanuts and peanuts Combo Cpeanuts and rice

(799) (4,019) (896) (3,981) (896) (4,815) (606) (3,262) 2,133 341

(3,321) (81) (6,063) (3,820) 4,000

7,941

546

3,413

6,400

7,253

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

7,680

540

3,373

6,325

7,168

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

7,590

a Returns for each year are a function of the total number of hectares under cultivation, the year each hectare was planted, and the crop economics from. Exhibit 10. The analysis ignores taxes (profit and VAT) and transportation costs. b Assumes an equal proportion of each crop: pineapple, coffee, and rubber. Source: Casewriter estimates.

208 • Chapter 10: Nghe An Tate

& Lyle Sugar Company (Vietnam)

EXHIBIT 10-12 TRUCKING (LORRY) ECONOMICSa Exchange Rate (Dong per US$) 15,000 Revenue Assumptions Average travel distance round trip (km) 20 Cost to deliver (Dong per ton) VND 23,000 Tons per load (payload) 5.5 Average trips per day 3.5 Number of days 150 Cost Assumptions Gasoline Lorry: kilometers per gallon 12 Fuel: US$ per gallon $1.50 Labor Average wage per day VND 30,000 Maintenance per season VND 10,000,000 Lorry Costs VND 100,000,000 Average cost per lorry Annual interest rate 12% Deprecation per kilometerb VND 625 a

Ignores VAT and profit taxes.

b Assumes

straight-line depreciation and a 160,000 Ian life for lorries.

Source: Casewriter estimates.

Competitors Currently, local residents grew some sugar cane for home consumption and for small "handicraft" mills. Because these mills were relatively inefficient, NATL could pay a higher price for the cane, thereby giving an incremental gain to the farmers. Those residents who had money invested in "handicraft" mills would lose their investment if they chose to sell their cane to NATL. Presumably, they would only sell their cane to NATL if that was a more attractive option financially. Overall this impact would be quite small. There were also other larger sugar mills in Vietnam that competed with NATL. Most of these mills, however, were much smaller and less efficient than NATL. These competitors might benefit in that they would learn how to operate more efficiently. It would be difficult to quantify the value of the demonstration effects, but Cobban would certainly highlight them to IFC management.

New Entrants Should N ATL be successful, it would provide a good example to other foreign investors of the possibilities that existed in Vietnam. Like the demonstration effects for competitors, coming up with an estimate of this value would be difficult, but he would note this benefit as well.

Neighbors He had to consider two key impacts on neighboring residents: environmental impacts and transportation benefits from the improved roads and new bridges. Environment

Social Cost-Benefit Analysis • 209

hnpacts could occur from the air emissions generated at the plant, the liquid effluent produced from crushing cane, and the solid waste generated by the process. Cobban analyzed the ilnpacts carefully lmowing that environmental impacts were a major concern for the IFC. He lmew the 1nill was designed not only to 1neet, but also beat the World Bank's strict guidelines on air and water emissions. With regard to the mill's solid waste-the main byproducts were bagasse and filter 1nud-both would be used. The bagasse would be used as fuel at the mill, and the filter mud would be given to fanners as low-grade fertilizer. NATL also implemented a workplace health and safety policy co1nmensurate with Tate & Lyle's worldwide procedures. Safety equipment and protective clothing would be issued to all personnel working in or around hazardous substances. Given the plant's design and the various environmental safeguards, it appeared that the environmental hnpacts would be negligible. The value of the new transportation infrastructure to NATL was already captured in the private returns-the haulage fee paid to the truckers would have been higher if the roads and bridges had not been upgraded. However, the local residents could also use the same roads and bridges for their daily activities. The benefits would be difficult to assess but would certainly be positive. As an offset, however, the local authorities would need to spend the $800,000 to upgrade the roads and build the bridges, funds that could potentially go to other social uses. In the end, Cobban decided that it would be reasonable to assu1ne that the extra benefits to the local residents would 1natch, and hence, offset the costs.

Rest of Society Finally, there would be other societal effects, principally increases in tax revenue paid by NATL and a decrease in tariffs fro1n imported sugar. Cobban had to work through the effect on profit taxes, net receipts from value-added taxes (the VAT), and net receipts from hnport tariffs. The su1n would be the project's net hnpact on the governlnent and, by extension, the general taxpayer.

Profit Taxes Like other foreign-invested co1npanies in Vietna1n, NATL would pay a 25% profit tax after a five-year tax holiday from the first operating profit. Whereas the profit tax was a cost from the co1npany's perspective, the tax revenues were a benefit from society's perspective. Hence, the profit tax was simply a transfer of value fro1n the private to the public sector. Because the tax was already subtracted from the private returns (the private investors receive a return after tax), it had to be added back to calculate the ERR. To the extent the government spent these tax revenues in a way that benefited society, there could be second, third, or higher order benefits from the project. The creation of new wealth and expenditure of tax revenues would be especially ilnportant in a low-income country like Vietnam. Because quantifying these 1nultiplier effects was very difficult to do and because they were likely to be small, Cobban decided to ignore them.

Value-added Taxes NATL would pay VAT at the standard 10% rate on its gross revenues. It could deduct the VAT paid by its suppliers (including the sugar cane growers), which is what n1akes this a tax on value-added only. While the cane growers would pay VAT at a lower rate than the standard 10%, this just shifted the tax burden to NATL, which meant that total VAT collections would not change. The govemn1ent would receive, from either NATL or the suppliers to NATL, a total VAT collection of 10% of NATr..:s gross revenues fro1n

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sugar sales. However, the government also charged a VAT on gross revenues from imported sugar. Because of NATL's output, imported sugar would be expected to fall by an equal amount. That is, the mill would be substituting domestic production for imported sugar. Therefore, the VAT received by the government from NATL would offset the VAT lost as a result of the decrease in imports. This result would apply even if the sugar coming into the country was smuggled because the VAT was due and collected up to the retail level. In reality, of course, it could be a bit more complicated because some sales could evade the VAT system altogether such as smuggled imports (or production of sugar from the small "handicraft" mills) being sold directly to households and other end users. Cobban believed it was reasonable to assume that such effects would likely be very small because NATL production would be substituting for sugar sold through formal channels subject to VAT collection.

Tariffs on Imports NATL expected to sell its sugar at a price equal to the world price plus a 30% tariff, to match what Vietnamese companies would have to pay for imported sugar. As a result, this investment neither helped nor hurt consumers; they would pay the same price for domestic or imported sugar. The Vietnamese government, on the other hand, would be affected because the amount it would receive from tariffs would decline. To calculate this reduction for a given year (say 2004), Cobban multiplied the expected world sugar price for that year ($385 per ton for the mill white grade of sugar) by the 30% tariff rate to get a local price. Cobban then multiplied the price by the expected number of tons (92,700) to get a total value of $10.7 million ($385/ton * 30% * 92,700 tons). Thus~ the government would lose a little less than $11 million in tariff revenues that year. Across the project's life, this loss to the government could be substantial.

CONCLUSION For Cobban to recommend loan approval, he had to do two things. First, he had to understand whether the project was commercially viable. Second, he had to assess the project's development impact as measured by ~e economic rate of return. In part, this meant determining whether the farmers were likely to switch to cane, and in part it meant determining whether the government would complete the transportation infrastructure. The higher the project's social returns, the more likely it was the government would invest in the region. With these answers, Cobban could prepare his recommendation on whether to proceed with a loan.