13.

PROFILE ON TEA PROCESSING AND

PACKING
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TABLE OF CONTENTS

PAGE

I. SUMMARY 13-3

II. PRODUCT DESCRIPTION & APPLICATION 13-3

III. MARKET STUDY AND PLANT CAPACITY 13-4

A. MARKET STUDY 13-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 13-8

IV. MATERIALS AND INPUTS 13-8

A. RAW & AUXILIARY MATERIALS 13-8
B. UTILITIES 13-9

V. TECHNOLOGY & ENGINEERING 13-10

A. TECHNOLOGY 13-10
B. ENGINEERING 13-10

VI. MANPOWER & TRAINING REQUIREMENT 13-13

A. MANPOWER REQUIREMENT 13-13
B. TRAINING REQUIREMENT 13-14

VII. FINANCIAL ANLYSIS 13-14

A. TOTAL INITIAL INVESTMENT COST 13-15
B. PRODUCTION COST 13-16
C. FINANCIAL EVALUATION 13-16
D. ECONOMIC BENEFITS 13-18
I. SUMMARY

This profile envisages the establishment of a plant for the processing and packing of tea
with a capacity of 100 tonnes per annum.

The principal raw material required for production of processed tea is the leaves, leaf
buds and internodes of the tea plant which are available locally.

The present demand for the proposed product is estimated at 8,081 tonnes per annum.
The demand is expected to reach at 13,811 tonnes by the year 2020.
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The total investment requirement is estimated at Birr 2.54 million, out of which Birr 116
thousand is required for plant and machinery. The plant will create employment
opportunities for 10 persons.

The project is financially viable with an internal rate of return (IRR) of 27.23% and a net
present value (NPV) of Birr 2.19 million, discounted at 8.5%.

The plant will have a backward linkage effect with tea plantations. The establishment of
such factory will have a foreign exchange saving effect to the country by substituting the
current imports. Moreover, there is also a considerable export potential.

II. PRODUCT DESCRIPTION AND APPLICATION

Blended tea is a product prepared by mixing processed tea varieties in tea blending plant.
Tea is blended in order to meet various taste and quality requirements. Blended tea is
consumed at home and work places. The need for blended tea is particularly high in
urban centers.
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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The country's requirement for tea has been met through domestic production and imports.
Table 3.1 shows the supply of the product from domestic production and imports during
1997-2006. During the period under reference, total supply averaged at 5192.4 tonnes, of
which 4897.2 tonnes constituted domestic production and the remaining 295.2 tonnes is
supplied through imports. Thus, on the average, domestic production accounted for 94
percent of the Country's requirement for tea.

Table 3.1
SUPPLY OF TEA (TONNES)

Year Domestic Import Total

Production Supply
1997 4693 5 4698
1998 5391 142 5533
1999 3608 1002 4610
2000 3776 1508 5284
2001 3973 134 4107
2002 3188 50 3238
2003 4976 35 5011
2004 5976 30 6006
2005 6864 19 6883
2006 6527 27 6554
Average 4897.2 295.2 5192.4
Source: Customs Authority, External Trade Statistics, 1997-2006. CSA, Statistical
Abstract, 1997-2006.
Assuming supply was driven by demand, the average total supply of tea for the last three
years (2004-2006) which amounts to 6481 tonnes is considered to reflect the effective
demand of the product for the year 2007.
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Since the consumption of industrial processed and packed tea is mainly associated with
the urban population; therefore, the demand for the product is assumed to grow by 4%
which corresponds to the annual growth rate of urban population.

Accordingly, taking the estimated present demand as a base and applying a growth rate of
4%, the present (2008) effective demand for tea is estimated at 6740 tonnes

Although much of the domestic production is meant for domestic consumption, the
Country also exports tea. The amount of tea exported during 1997-2006 is depicted in
Table 3.2. Varying from a minimum of 35.24 tonnes in 1999 to a maximum of 2193.02
tonnes in 2003, exports highly fluctuated during the period under reference. On the
average, the Country exported 707.15 tonnes of tea during the reference period.

Table 3.2
EXPORTED TEA (TONNES)

Year Export
1997 253
1998 406
1999 35
2000 92
2001 75
2002 410
2003 2193
2004 1832
2005 1292
2006 482
Average 707.15
Source: Customs Authority, External Trade Statistics, 1997-2006.
The volume of exports of the product is generally increasing during the period under
reference. The average volume of export during the first five years (19997-2001) and the
last five years (2002-2006) was 172.4 tonnes and 1241.9 tonnes, respectively. As values
of current years have more influence on the future demand, the average amount of export
during the last five years is considered as the effective export demand for tea for the year
 13-6

2007. Taking the remarkable growth in exports into account, a growth rate of 7% is
adopted in estimating the export demand for the product. Therefore, the present export
demand for the product (i.e., for 2008) is, therefore, estimated at 1,341 tonnes. Thus, the
total demand for the year 2008 becomes 8,081 tonnes.

As the country is engaged on import and export market of the product, the apparent
consumption of tea is composed of domestic production plus import minus export.
Accordingly, Table 3.3 summarizes the past local production, import, export and apparent
consumption of the product.

Table 3.3
APPARENT CONSUMPTION OF TEA (TONNES)

Apparent
Year Local Import Export Consumption
1997 4,693 5 253 4,445
1998 5,391 142 406 5,127
1999 3,608 1,002 35 4,575
2000 3,776 1,508 92 5,192
2001 3,973 134 75 4,032
2002 3,188 50 410 2,828
2003 4,976 35 2193 2,818
2004 5,976 30 1832 4,174
2005 6,864 19 1292 5,591
2006 6,527 27 482 6,072

2. Projected Demand

As stated above, a growth rate of 4% and 7%, respectively, is considered in projecting the
domestic and export demand for tea. The total projected demand for the product is shown
in Table 3.4
Table 3.4
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PROJECTED DEMAND FOR TEA (TONNES)

Year
Projected Demand
2009 8,444
2010 8,825
2011 9,224
2012 9,643
2013 10,081
2014 10,541
2015 11,023
2016 11,528
2017 12,058
2018 12,615
2019 13,199
2020 13,811

3. Pricing and Distribution

Currently, a 100 gm pack of domestically produced tea is retailed at Birr 30. Allowing 30
per cent for wholesale and retail margin, the envisaged plant is expected to sell its
product at Birr 21 per kg.

The product can get its market outlet through the existing wholesale and retail network
that includes department stores, merchandise shops and super markets.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

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1. Plant Capacity

The plant capacity is determined, primarily, on the basis of the technology that is
available locally. Accordingly, a small scale blending plant of 100 tonnes per annum
capacity is envisaged.

2. Production Programme

In view of the straight forward technology envisaged, the plant can start operation at full
capacity in the first year. The plant will operate a single shift of 8 hours a day and for
300 days a year.

IV. MATERIAL AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The raw materials required to blend tea are processed tea from tea processing plants
operating in the Country. The auxiliary materials required are packing materials.
Processed tea can be sourced from tea processing plants in the Country such as Ethio-
Agri- Ceft and East Africa Group. Packing materials are also locally available. The
details are shown in Table 4.1

Table 4.1
RAW & AUXILIARY MATERIALS REQUIREMENT AND COST

Sr. Material Qty Cost, 000

No. (tonnes) Birr
1 Processed tea 100 1,000
2 Packing Paper, labels, etc 0.5 63
3 Cartons 10,000 70
Total 1,133
 13-9

B. UTILITIES

Utilities required by the plant are electricity and water. The details are shown in table
4.2.

Table 4.2
UTILITIES REQUIREMENT AND ESTIMATED COST

Sr. Unit of Unit

No. Material Measure Rate Qty. Cost( Birr)
1 Electricity kWh 0.4736 48,000 22,733
2 Water m3 3.25 1000 3,250

Total 25,983

V. TECHNOLOGY AND ENGINEERING

A TECHNOLOGY

1. Production Process

A small scale tea blending and packing plant is envisaged. The production process
involved would, therefore, be simple. Processed tea of the desired variety of grades is
unloaded into the blender. There are typically three types of tea that are involved in the
blending process. These are: fine tea, BMF and dust types. These types measured in the
required proportions are blended until the desired grade is achieved. The resultant grade
is then packed in pouches of the desired sizes. The project has no any adverse impact on
environment since the process involves mixing and packing of food item.
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2. Source of Technology

In view of the simple technology involved the blending and packing machines can be
fabricated in some of the local machine shops in the City.

B. ENGINEERING

1. Machinery and Equipment

The major machinery required for the plant are Blending and Packing Machines( one set
each) which can be fabricated locally at a cost of Birr 116,000.The breakdown is shown
in Table 5.1 below.

Table 5.1
MACHINERY & EQUIPMENT REQUIREMENT AND COST

Description Qty. Price (Birr)

Blending machine 1 set 70,000
Packing machine 1 set 46,000
Total 116,000

2. Land, Building and Civil Works

The total land requirement of the plant is estimated to be about 500 m 2; of which about
200m2 would be built up area comprising of 100m 2 for production hall, 60m2 and 40m 2
for store and office, respectively. Construction cost of buildings (at Birr 2500/m 2) is
estimated to be Birr 500,000.
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According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the Citys Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2. The land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the Citys Investment Authority.
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However, if the land request is above 5,000 m2 the request is evaluated by the Citys
Investment Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the citys Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion Paymen
Scored point Period Period t
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years .
 13-13

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 10.38 million of which 10% or Birr 1,038,000 will be paid in advance.
The remaining Birr 9.34 million will be paid in equal installments with in 28 years i.e.
Birr 333,643, annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

Manpower required for the plant is 10 and the total annual manpower cost is estimated
at Birr 103,800. The details are given in Table 6.1.

Table 6.1
MANPOWER REQUIREMENTS & LABOUR COST

Sr. Position Req. Salary, Birr

Monthly Annual
No. No.
1 Manager 1 3000 36,000
2 Secretary 1 1000 12,000
3 Supervisor 1 1500 18,000
4 Storekeeper 1 600 7200
5 Technician 1 800 9600
6 Packer 5 1750 21,000
Total 10 8650 103,800

B. TRAINING REQUIREMENT

In view of the simple technology involved, no training would be required.

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VII. FINANCIAL ANALYSIS

The financial analysis of the tea processing and packing project is based on the data
presented in the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 15 days
Work in progress 2 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
2.54 million. The major breakdown of the total initial investment cost is shown in Table
7.1.

Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
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Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 1,038.00 - 1,038.00
2 Building and Civil Work 500.00 - 500.00
3 Plant Machinery and Equipment 116.00 - 116.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 250.00 - 250.00
6 Pre-production Expenditure* 280.73 - 280.73
7 Working Capital 263.51 - 263.51
Total Investment cost 2,548.24 - 2,548.24

* N.B Pre-production expenditure includes interest during construction ( 130.73

thousand) and Birr 150 thousand costs of registration, licensing and formation of the
company including legal fees, commissioning expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 1.52
million (see Table 7.2). The raw material cost accounts for 74.27 per cent of the
production cost. The other major components of the production cost are depreciation, cost
of finance and direct labour cost which account for 8.30 %, 6.84% and 4.08%
respectively. The remaining 6.51 % is the share of repair and maintenance, utility cost
and other administration cost.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
1,133.00 74.27
Utilities 25.98 1.70
Maintenance and repair
5.80 0.38
Labour direct 62.28 4.08
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Labour overheads
25.95 1.70
Administration Costs 41.52 2.72
Land lease cost
- -
Total Operating Costs 1,294.53 84.86
Depreciation 126.60 8.30
Cost of Finance 104.29 6.84
Total Production Cost
1,525.42 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 539.81 thousand to
Birr 557.19 thousand during the life of the project. Moreover, at the end of the project life
the accumulated cash flow amounts to Birr 4.46 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
 13-17

break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 29 %
Sales Variable Cost

4. Payback Period

The pay back period, also called pay off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
projects initial investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 27.23 %
indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
 13-18

is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 2.19 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 10 persons. In addition to supply of the domestic
needs, the project will generate Birr 935.19 thousand in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. The project will create a back ward linkage effect with
the agricultural sector. Moreover, there is also a considerable export potential.