125.

PROFILE ON COMPOST
 125 - 2

TABLE OF CONTENTS
PAGE

I. SUMMARY 125-3

II. PRODUCT DESCRIPTION & APPLICATION 125-3

III. MARKET STUDY AND PLANT CAPACITY 125-4

A. MARKET STUDY 125-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 125-8

IV. MATERIALS AND INPUTS 125-8

A. RAW MATERIALS 125-8
B. UTILITIES 125-9

V. TECHNOLOGY & ENGINEERING 125-10

A. TECHNOLOGY 125-10
B. ENGINEERING 125-10

VI. MANPOWER & TRAINING REQUIREMENT 125-14

A. MANPOWER REQUIREMENT 125-14
B. TRAINING REQUIREMENT 125-14

VII. FINANCIAL ANLYSIS 125-15

A. TOTAL INITIAL INVESTMENT COST 125-15
B. PRODUCTION COST 125-16
C. FINANCIAL EVALUATION 125-17
D. ECONOMIC BENEFITS 125-19

I. SUMMARY

This profile envisages the establishment of a plant for the production of compost with a
capacity of 285 tonnes per annum. Composting has been practiced to reduce the amount
of waste being land filled. Nowadays compost production is highly encouraged since it
has found wide application as fertilizer in urban agriculture.

The present demand for the proposed product is estimated at 214 tonnes per annum. The
demand is expected to reach at 739 tonnes by the year 2020.
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The total investment requirement is estimated at Birr 8.38 million, out of which Birr 3.46
million is required for plant and machinery. The plant will create employment
opportunities for 26 persons.

The project is financially viable with an internal rate of return (IRR) of 23.55 % and a
net present value (NPV) of Birr 5.02 million, discounted at 8.5%.

The envisaged project will have a forward linkage with the agricultural sector of the
economy.

II. PRODUCT DESCRIPTION AND APPLICATION

Compost is partially decomposed organic material used in gardening to improve soil and
enhance plant growth. Compost improves the movement of water, dissolved nutrients,
and oxygen through the soil, making it easier for plant roots to absorb these vital
substances. Technically, compost may be made from any organic material. That is, it may
be made from any part of an organism, plant or animal, that contains carbon. In order for
organic material to combine the other materials and decompose in to compost, several
living organisms and microorganisms are needed. These include sow bugs, earthworms, a
verity of fungi, mold like bacteria, and many others.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

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Agriculture is the dominant economic sector in Ethiopia and it will dominate the
economy for the coming decades. Particularly, the challenge for food security is a top
priority of the economy. The challenge is expressed in terms of growth in agricultural
productivity which is directly related to, among other factors, with improved application
and usage of agricultural inputs like fertilizers.

The Ethiopian Government’s strategy for poverty reduction (A plan for Accelerated and
Sustained Development to End Poverty, PASDEP) aims to improve crop production and
productivity to make the country food self-sufficient and ensure household food security
for the rapidly growing population, as well as to improve the provision of quality
products for the local agro-industry and for the export market. This will be achieved
through increased crop productivity (intensification) and area expansion. Intensification
is to be achieved through integrated use of agricultural inputs including improved seeds,
fertilizer, effective pest control and better management practices. The main agricultural
products that will receive special focus and follow up in the coming five years include
cereals, oil seeds, pulse, fiber crops, fruits, and vegetable, coffee, tea and spice crops.

According to the plan to improve the soil fertility of food crops, over 8 million quintals of
DAP and Urea are estimated to be required by the end of the plan period. To meet the
fertilizer requirements of fruits and vegetables, it is planned to supply 53,658 tonnes of
DAP and urea. Similarly 16,000 tonnes of inorganic fertilizer (DAP & Urea), and
6,406,000 tonnes of manure is required for the targeted production increases in coffee, tea
and spice crops. By the end of the plan period, an estimated 8 million quintals of
chemical fertilizer and 12 thousand tonnes of compost will be required to meet the
targeted production.

In order to estimate the present demand for compost, which is an organic substitute of
chemical fertilizer, the actual consumption of fertilizer during the period 2000 – 2006
was collected and analyzed. The total supply of fertilizer which comprises only import is
shown in Table 3.1.
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Table 3.1
IMPORT OF FERTILIZER (TONNES)

Year Quantity Value

2000 155,082 229,003,770
2001 182,739 378,073,522
2002 319,412 566,784,396
2003 121,036 224,332,629
2004 405,605 1,198,460,522
2005 299,497 850,198,025
2006 356,065 1,074,699,736
Average 262,777 645,936,086

Source; External Trade Statistics.

As can be seen from Table 3.1 during the period 2000-2006, through import of fertilizer
was fluctuating from year to year, it shows a general increasing trend, registering an
average annual growth rate of 13%.

For estimating the present demand for the product, the average import of the last three
years (2004 – 2006) is assumed to realistically approximate demand in year 2006.
Moreover, even though during the period under consideration (2000 – 2006) import of
fertilizer has registered an average annual growth rate of 13% in order to be conservative
a growth rate of 10% is used to estimate present (2008) demand. Accordingly, the present
demand for fertilizer is estimated at 428,004 tonnes. Assuming that organic fertilizer’s
(compost) share will be only 5% of the total fertilizer demand, the current demand for
compost is estimated at 21,400 tonnes. Moreover, according to Addis Ababa Urban
Agriculture Resource Assessment( IPS) during the period 2001 – 2006, the average total
cultivated land in Addis Ababa was 16,879 hectares, while at national level it was
9,022,000 hectares which means the share of Addis Ababa is about 0.19%.
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Accordingly from the total estimated present demand for compost, the share of Addis
Ababa is assumed to be about 1%. Thus, the estimated present demand for Addis Ababa
is estimated at 214 tonnes.

2. Projected Demand

There is always abundant demand for fertilizers as it is used by farmers to improve their
agricultural outputs. Since economic growth in the country is directly related to the
agricultural sector, the sector’s growth in turn is dependent on increased usage of
agricultural inputs like fertilizers. Moreover, the Ethiopian government is committed to
improve the productivity of the agricultural sector. Therefore in this study, a 10% growth
rate is considered for projecting the demand for compost. The projected demand for
compost is given in Table 3.2.
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Table 3. 2
PROJECTED DEMAND (TONNES)

Projected
Year Demand
2008 235
2009 259
2010 285
2011 313
2012 345
2013 379
2014 417
2015 459
2016 505
2017 555
2018 611
2019 672
2020 739

3. Pricing Distribution

A factory-gate price of Birr 35 per quintal is recommended for the envisaged factory.
Distribution of the product could be handled through agents in highly productive areas.
As a seasonal product providing farmers at the right time is extremely important, which
needs the capacity to handle enough stock.
 125 - 8

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Basing on the market study, the envisaged plant will have a capacity of 285 tonnes of
compost per annum working single shift of 8 hours a day for 300 days per year.

2. Production Programme

The production programme considers that there is a high demand for compost national
wide and in the first year will start with 90 % capacity and from the second year on ward
it will utilize its full capacity.

Table 3.3
PRODUCTION PROGRAMME

Product Year of Production

1 2-10
Capacity utilization rate (%) 90 100
Compost (tonnes) 256.5 285

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The raw material required for production of compost is yard wastes. Some part is converted
in gas in the biological decomposition and also some impurities can mix in time of
collection from Addis Ababa yard wastes. The amount of raw material required for the
envisaged plant will be 371 tonnes of yard wastes. The cost will be considered on facilities
 125 - 9

for collection, transportation and handling of solid waste, which is estimated, in local
currency at Birr 267,500.

Table 4.1
ANNUAL REQUIREMENT OF RAW MATERIAL & COST
AT FULL CAPACITY (TONNES)

Sr. Description Qty. Unit Cost Cost in '000

B. No. (Birr) (Birr)
1 Farm yard waste 371.0 721 267.50

Total 267.50
UTILITIES

Utilities required by the envisaged plant are water and electricity. The annual requirement
of utilities is given in Table 4.2.

Table 4.2
ANNUAL UTILITIES REQUIREMENT AND COST

Sr. Description Unit of Qty Cost

Measure
No. (Birr)
1 Electricity kWh 37,500 17,760
2 Water m3 7500 24,375
Total 42,135

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description
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The production of compost is both physical and biological process. The raw material
separated from unwanted materials; like rocks and excessive amount of dirt are
transported to the process site and dumped in piles. The piles are visually inspected, and
any over sized or unacceptable materials are manually removed.

The composting materials are cut in to 10 to 15 cm pieces and thoroughly mixed. The
composting material is damped with nitrogen fertilizer and Water spray over it. The
decomposition process continues to two months. During this period the material break
down in to smaller pieces. The internal temperature may reach to 54 oC which helps to kill
most plant diseases and many of the seed weeds that might be present. Mixing the
material well about once a week prevents lethal temperature increases by disturbing the
heat evenly through out the pile. After two months, decomposed material moved to a
large conical pile, where it is allowed to finish the decomposition process. Then the
material (compost) screened with 1 to 1.5cm meshes and ready for use.

The production process of compost is environmental friendly

2. Source of Technology

The technology is well developed in America, Europe, Asia and Middle East. In this case
the technology can be adopted by visiting or by arranging a training progamme with
countries located in the above mentioned continents or especially in developing countries
located in Africa.

B. ENGINEERING

1. Machinery and Equipment

 125 - 11

The list of production machinery and equipment required for the plant is provided in Table
5.1. The total cost of plant machinery and equipment is estimated at Birr 3,460,525, out of
which Birr 1,860,412 will be required in foreign currency.

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Cost in’000 Birr

Description Qty
No. FC LC TC
1 Tub grinder 1 640.04 640.04
2 Truck with water tank 1 744.165 744.16
3 Rotating screen 1 960.06 960.06
4 Trucks 2 1,116.24 1,116.24
Grand Total 1,860.41 1,600.11 3,460.52

2. Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 1,000 m 2. Out of this,
250 m2 is built-up area; out of which 50 m 2 is used for office purpose, 150m 2 for
production facility and the remaining 50 m2 is used for store. Cost of building
construction with a rate of Birr 2100 per m2 amounts to Birr 525,000.

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
 125 - 12

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 City’s 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 City’s Investment Authority. However,
if the land request is above 5,000 m2 the request is evaluated by the City’s 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 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.
 125 - 13

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 this
profile, which is a manufacturing project a land lease rate of Birr 346 per m2 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
Grace Completion Down
Scored Point Period Period Payment
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.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years, i.e.,
Birr 667,286 annually.
 125 - 14

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

In order to run the envisaged plant efficiently, it needs 26 employees. The estimated
annual cost of manpower is Birr 258,0000. The detail of which is shown in Table 6.1.

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED ANNUAL COST

Sr. Req. Monthly Annual

Description
No. No. Salary(Birr) Salary(Birr)
1 Manager 1 2,500 30,000
2 Secretary 1 750 9,000
3 Administration & Finance head 1 1,800 21,000
4 Sales man 1 1,200 14,400
5 Production Supervisor 1 1,500 18,000
6 Biologist 1 1,000 12,000
7 Auto mechanic 2 1,200 14,400
8 Auto electrician 1 600 7,200
9 Mechanic 1 600 7,200
10 Laborers 10 3,500 42,000
11 Drivers 1 500 18000
11 Guards 4 1,400 12,600
Sub-Total 26 206,400
Employee benefit (25% ) 36,360
Total 258,000

B. TRAINING REQUIREMENT

Since, the production of compost in large quantity is new technology in our country the
supervisor and the Biologist need a one weeks training abroad, which will be arranged
with the suppliers of machineries. Also a one-week visiting programme to Compost
producers from municipal yard waste in Africa will help to share experience in proper
management of the compost production. Total cost of training and visiting is estimated at
Birr 50, 000.
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VII. FINANCIAL ANALYSIS

The financial analysis of the compost 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 30 days
Work in progress 1 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
8.38 million, of which 22 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

 125 - 16

Cost Cost Cost

No.
1 Land lease value 2,076.00 - 2,076.00
2 Building and Civil Work 525.00 - 525.00
3 Plant Machinery and 1,860.41 3,460.52
Equipment 1,600.1
4 Office Furniture and 1600.11 - 1,600.11
Equipment
5 Vehicle 100.00 - 100.00
6 Pre-production 560.36 - 560.36
Expenditure*
7 Working Capital 63.46 - 63.46
  Total Investment cost 6,525.04 1,860.41 8,385.45

* N.B Pre-production expenditure includes interest during construction ( Birr 410.36

thousand), training ( Birr 50 thousand) and Birr 100 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 1.57
million (see Table 7.2). The major components of the production cost are depreciation,
financial cost and raw material which account for 31.99 %, 20.85% and 17.03%
respectively. The remaining 30.13% is the share of direct labour, utility, repair and
maintenance, administration cost and labour overhead.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
 125 - 17

Items Cost %
Raw Material and Inputs
267.50 17.03
Utilities 42.13 2.68
Maintenance and repair
173.03 11.02
Labour direct 123.84 7.89
Labour overheads
51.60 3.29
Administration Costs 82.56 5.26
Land lease cost
- -
Total Operating Costs 740.66 47.17
Depreciation 502.30 31.99
Cost of Finance 327.38 20.85
Total Production Cost
1,570.34 100

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 959.60 thousand to
Birr 1.22 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 10.29 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
 125 - 18

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
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 = 23 %
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
project’s 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 23.55 %
indicating the vaiability of the project.

6. Net Present Value

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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
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 5.02 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 26 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.2 million in terms of tax revenue. The envisaged
project will have a forward linkage with the agricultural sector.