A Tuna Cannery in Papua New Guinea

Transcription

1 ECON7740, Case Study Assignment, Semester 2, 2007 A Tuna Cannery in Papua New Guinea Western Pacific Tuna Products (WPTP), a company registered in the Philippines, proposes to set up a tuna harvesting and processing operation on the north coast of Papua New Guinea (PNG). It plans to import 12 medium size purse seine vessels, together with support vessels, to catch metric tonnes (mt) of skipjack and yellowfin tuna per annum in PNG's Exclusive Economic Zone (EEZ). A processing plant will be constructed to can the tuna for export to the European Union (EU), and fishmeal will be produced as a by-product and sold locally. The project will take one year to establish and will run for a further 20 years, operating at 30% capacity in year 1, 70% in year 2 and at full capacity thereafter. All costs are estimated in 2007 US dollars. Capital Costs $US Salvage Value** *Vessels 18,000,000 20% Land&Improvements 2,000,000 80% Buildings&Facilities 6,000,000 50% *Equipment 4,250,000 15% *Working Capital 3,600, % *includes 5% import duty ** percentage of initial capital cost at market price The firm plans to borrow 60% of the cost of vessels, land and improvements, buildings and facilities, equipment and working capital at a real interest rate of 12% from a foreign bank with the loan repayable over 10 years. It will be able to depreciate vessels, buildings and facilities, and equipment using the straight line method: vessels are depreciated over 15 years, buildings and facilities over 20 years and equipment over 10 years for tax purposes. A major refit of vessels and equipment will occur in year 11 of the project, costing 25% of the initial cost of vessels and 50% of the initial cost of equipment, and these costs can also be depreciated for tax purposes at the annual rates indicated above. Salvage values are estimated market values, at the end of the project, of assets sold in PNG and sale receipts are treated as income for tax purposes. Company tax is levied on taxable income, defined as revenue net of export tax and EU duty, less operating costs, access fees, and interest and depreciation expenses. Resident company tax rate is 25%, and non-resident company tax rate is 48%. If taxable income is negative in any year the company receives a tax refund in the same year calculated as the tax rate times the amount of the loss.

2 Operating Costs (at full capacity) $US pa Labour 8,250, *Materials 5,000, Maintenance 2,500, **Fuel 24,000, Electricity 1,000, Insurance 100, ***Miscellaneous 4,500, * includes 5% import duty ** includes 10% fuel tax *** includes 10% Value Added Tax (VAT) In Years 1 and 2 all operating costs, except insurance, will be incurred at 30% and 70% of full capacity costs respectively. In subsequent years operating costs are at full capacity level irrespective of the volume of catch. The proportion of the wage bill accounted for by local labour is 80%. Local labour pays an average income tax rate of 3%, and foreign labour 15%. The processing plant will produce 50 cases of canned tuna and 0.15 mt of fishmeal per mt of raw tuna processed. Canned tuna sells for $35 per case in Europe and fishmeal sells for $430 per mt in PNG. The company will have to pay EU import duty and PNG export tax levied on the market value of canned tuna sold in the EU: the EU import duty rate for this class of product is 10% and the PNG export duty rate is 5% (both taxes levied as a percentage of the price in the European market). Under the Lome Convention EU duties on imports from developing counties can be waived and WPTP wants the PNG government to apply for this exemption for the project (at no cost to PNG). Tuna purse seiners operating in PNG's EEZ pay an annual fee for access to the tuna stocks. Distant water fishing nation (DWFN) vessels pay an annual royalty of 6% of the anticipated value of their catch, based on the Bangkok price of tuna ($700 per mt). Domestic vessels pay an annual fee of $3000 per vessel. PNG's tuna stocks are judged to be close to fully exploited (ie. total sustainable catch by all fleets cannot be increased) and it is thought that fishing activity by DWFN vessels will have to be curtailed to accommodate the catch of the proposed project. WPTP has asked for its vessels to be treated as domestic vessels (domestic flagged). There is significant unemployment in the coastal region of PNG and a study has estimated that the opportunity cost of local labour is 50% of the pre-tax wage. A further study has concluded that the fishing and canning operation will cause significant water, air and noise pollution. While an exact figure could not be placed on the cost of pollution, one expert suggested that it might be around $20 per mt of tuna processed per annum. WPTP requires a 20% real rate of return on equity capital for projects in the Pacific Islands Region. It emphasizes the employment benefits the project will bring to 2

3 PNG, and claims that it will require a range of concessions to make the project viable from the viewpoint of its equity holders. It has asked for exemption from duties on imports of vessels, equipment, working capital and materials; exemption from export tax; exemption from fuel tax, and exemption from VAT on miscellaneous items. It wishes to be treated as a resident company for income tax purposes, and for its vessels to be domestic flagged for the purposes of determining access fees. It requests that PNG apply to have its sales in the EU classified as developing country in origin and exempt from EU duty under the Lome Convention. The application process must be conducted by PNG but can be assumed to be costless to PNG. Assignment Instructions On behalf of the government of Papua New Guinea, you are required to undertake and report the findings of a benefit-cost analysis of the WPTP proposal. The analysis is to be conducted in millions of 2007 US$, to two decimal places. You should calculate IRRs for the Project, Private and Efficiency analysis and report NPVs for the Referent Group on an aggregated and disaggregated basis for the year 2007 (the present year.) The PNG government uses a 5% discount rate (real) for investment decision-making, but is interested in knowing the sensitivity of the results at 3% and 8% discount rates. The government of PNG also wishes advice on which, if any, of the concessions requested by WPTP should be granted. You should conduct and report the results of a risk analysis in which you calculate and comment on the sensitivity of the results to: (i) the expected annual catch of the fleet, and (ii) the price of canned tuna in Europe. You should also conduct an analysis of the sensitivity of the results to a small number of other variables with a view to identifying those that have most impact on the results and that would warrant further investigation. In your report you should also indicate if there are any omitted costs and benefits that could be of potential significance to the decision-maker. In constructing your spreadsheet tables you are required to use the template Excel spreadsheets downloadable from Blackboard. These are a useful guide to the structure of the spreadsheet model. Note that the Summary sheet includes a set of switch variables to be used in analysing the effects of granting various concessions to the company, and these are to be activated in your model. Your written report should not be more than 12 pages in length, excluding tables, and a one-page executive summary. Printouts of base-case scenario spreadsheets only should be included as appendixes, and each BCA (ie. Project, Private, etc.) printed on one A4 size page. Results of the sensitivity analyses should be reported in summary tables included in the text, and where necessary, in detailed tables in Appendix. While there is no need for the full details of all risk and sensitivity scenarios to be presented in appendix tables, they should be included in the electronic copy. The electronic copy of all your spreadsheets (on CD) must be attached to your printed assignment. 3

4 Your submission is to have the standard cover sheet required by the Faculty Resource Centre, and immediately after the cover sheet must contain the assessment sheet which you can print out from the last page of this outline. Assignments are to be submitted no later than 4pm on Friday 26 October at the Faculty Resource Centre, Level 1, Colin Clark Building. See course profile for further details of the marking criteria and weights and the penalties for late submissions and other penalties. Electronic files containing work-in-progress in spreadsheets should not be e- mailed or brought to instructors for uploading to their PCs. We can provide assistance during the lab sessions or we can comment on spreadsheet files (in the template format only) which are printed out or are accessible in laptop computers during consultation times. 4

5 THIS SHEET SHOULD BE STAPLED TO YOUR ASSIGNMENT IMMEDIATELY AFTER THE BEL RESOURCE CENTRE COVER SHEET ECON7740 Benefit-Cost Analysis Case Study Assessment Sheet 1. Accuracy (15%): This refers primarily to the spreadsheeting, especially the formulae, and the printouts, but also to (i) the accuracy of the tables reported in the text and appendixes (excluding sensitivity analysis); and (ii) the quality of the written interpretation of the results (excluding sensitivity analysis). 2. Statement of Approach and Methodology (10%): This refers to the first sections of the written report (including the Executive Summary) relating to the statement of the project, its objectives, the alternatives and the choice to be made, the methodology, who the key stakeholders/players are and the assumptions made. 3. Presentation and Discussion of Results (35%). This refers primarily to how the results are summarized, interpreted and conveyed to the decision-maker. It also refers to how more general issues are discussed, including risks, data gaps, questionable assumptions etc. 4. Risk and Sensitivity Analysis and Conclusions (40%). This refers to the choice of variables for sensitivity analysis, justification of that choice, accuracy of the sensitivity analysis, presentation of results in a logical and coherent manner, while adopting a reader-friendly format making the comparisons easy to observe, and avoiding information-overload. Conclusions should be succinct and to the point and should be well integrated with the sensitivity analysis and previous sections, including the Executive Summary. Student Name: Student Number: Accuracy (15) Approach/Method (10) Presentation and Discussion of Results (35) Sensitivity Analysis and Conclusions (40) Final Mark (100) 5