FINANCIAL FEASIBILITY STUDY OF FIVE BROWN SUGAR MINI-PROCESSING FIRMS IN NIGERIA

ABSTRACT

Sugar generally has been described as an international commodity that has become the economic base of some developing countries (Wohlgenant 2008). Countries like Mauritius, Jamaica, and Sudan among others have gained enormous economic benefits like employment generation, increase in living standard of the citizenry from brown sugar processing, thus justifying their existence and improvement (Baron, 1975; 1979; TD, 2001). Why then Nigeria has not developed brown sugar?The broad objective of this project was to study the financial feasibility of five brown sugar mini-processing firms in Nigeria (Baizare, in Kaduna State, Sara in Jigawa State, Konar-Mada in Abuja – FCT, Gbajigi in Niger State and Omor in Anambra State). A reconnaissance survey was carried out to identify the locations and number of sugarcane farmers and sugar traders in the study areas as sample frame. Random sampling technique was used in selecting one hundred and sixty-three (163) sugarcane farmers and Purposive Sampling technique was used in selecting the five Brown Sugar Mini – Processing Firms/Processors. Both primary and secondary data were collected for this study. Analytical tools used include; Descriptive statistics, Undiscounted cash flow Measures, Discounted cash flow Measures and Sensitivity Analysis Test models. The results established that; (i). Over 250, 000 hectares of sugarcane land were available in Nigeria. (ii). An average yield of 55 tonnes per hectare was recorded from the respondents across the studied areas. (iii). The average simple rate of return of the brown sugar mini-processing firm was 64%, which was higher than the 25% interest rate prevailing in the capital market. (iv). The Pay-Back Period (PBP) for the investment was three years. (V). The Benefit-Cost Ratio (BCR) of 3.2 was obtained at a suitable discount rate of 25%, which was quite greater than

1. (vi). The average Net Present Value (NPV) at interest rate of 25% was N54,005,492.58. (vii).The Internal Rate of Return (IRR) was positive and even greater than 50%, which made the project worthwhile and financially viable and (viii). The sensitivity analysis test carried out using pooled data showed that both 10% and 20% either in increase in cost of processing or decline in prices of output had no negative impact on the project. (ix)The sensitivity indicators were less than 2%, the switching values ranges between 54% – 71%.

The Null Hypothesis, that brown sugar Mini processing firm in Nigeria is not profitable ‘was rejected, while the alternative hypothesis that ‘brown sugar mini -processing firm in Nigeria is Profitable’ was accepted. The study recommends that; (i). Nigerian government should encourage brown sugar processing using Mini-Processing firms to help in bridging the gap (about 98%) between domestic sugar production and consumption in Nigeria and reducing the heavy amount of foreign exchange being spent annually on sugar importation. It will also be of assistance in providing rural employment and reducing rural-urban migration of youths therby assist in alleviating the poverty of the rural poor. It will also play a part in the realization of the country’s vission 20 : 2020. (ii). Financial institutions such as micro-finance banks and Nigerian Agricultural co- operatives and Rural-Development Bank should be well-informed and given courage to grant credit facilities to both sugarcane farmers and prospective investors so as to enhance the brown sugar production in Nigeria.

PROJECT BACKGROUND

More than 100 countries produce sugar (both white crystal and brown sugar), 78% of which is made from sugar cane grown primarily in the tropical and sub-tropical zones of the southern hemisphere, and the balance of 22% from sugar beet which is grown mainly in the temperate zones of the northern hemisphere. Generally, the costs of producing sugar from sugar cane are lower than those of processing sugar beets. In the Year 2009, statistics show that 69% of the world’s sugar was consumed in the countries of origin, while the 31% was traded in world markets (ISO, 2009). Because of the residual nature of the world market, the free market price is one of the most unpredictable of all commodity price as indicated by Nadia (1987); Fry (2000); Mahmudulam and Samadmiah (2008) and ISO (2008).

The first sugar production in Nigeria occurred in 1964/1965, after commissioning of Sugar Plant at Bacita {Nigerian Sugar Company, (NISUCO)}, in 1962 (Oguntoyinbo, 1987). This was followed by the establishment of the Savannah Sugar Company (SSC) in Numan 1977 (National Sugar Development Council, 2003). The two sugar plants had a combined installed capacity of 105,000 tonnes/annum or about 10% of the country’s annual requirement. Production however, oscillated around 50,000 tonnes / annum, between 1978 and 1990, making Nigerian sugar production slightly less than 5 % of its annual requirement.

Another sugar plant at Lafiagi/Sunti, Kwara state, was established in the year 1991 with mini works producing insignificant amount of sugar. Since then, no new sugar plant has been established in Nigeria. This may possibly be as a result of the poor and low sugar output experienced from the already established plants. Even at their highest production levels, the two estates (Nigerian Sugar Company, (NISUCO) and Savannah Sugar Company (SSC) could only satisfy about 5 % of the nation’s requirement (Table 1.1). For example, as from 1999 to 2006, the production of sugar has been on the decline, reaching an all time low value of less than 2% (FOS, 1990-2005). Thus the wide gap between sugar requirement and production is usually filled through massive importation with huge amount of foreign exchange (NSDC, 2007). In 2008 sugar importation was 98.82% exchange (NSDC, 2008). This cost the country billions of Naira in foreign exchange.

Development of sugar processing technology at intermediate or rural levels with indigenous technology had reached a tertiary stage in several other third-worlds countries like India, Cuba, Brazil and Puerto-Rico (Raphael, 2004). In these countries, enormous socio-economic benefits have been reaped, such as generating employment, increasing incomes of the citizenry and raising the living standard of the rural dwellers, thus justifying their existence and improvement (Baron, 1975; Garg, 2007).