Economic evaluation of a transport development programme for small-scale cane growers.

Abstract

The recent deregulation measures in the South African sugar industry have the effect of removing most of the previous restrictions to entry faced by potential small-scale cane growers. To accommodate the current and envisaged expansion the Government of KwaZulu-Natal is implementing an infrastructure programme as part of a comprehensive Small-Scale Cane Grower Expansion Programme. This study uses Cost-Benefit Analysis procedure to determine the viability of the first phase of this infrastructure programme aimed at improving transport routes for small growers in ten mill areas. Two representative mill areas were evaluated, namely Amatikulu and Sezela, situated on KwaZuluNatal's North and South coasts respectively. Three models were constructed as the Sezela area was subdivided into the Kwa-Hlongwa (labour intensive) and Cabhane (plant hire) projects. Both financial (reflecting returns to resources engaged before financing) and economic (reflecting the contribution to the total economy) results were computed, using a real discount rate of 8%. The financial Net Present Values (NPVs) calculated for Amatikulu, Cabhane (Sezela) and KwaHlongwa (Sezela) respectively are: R3.2 million, R7.61 million and R911 thousand. The economic NPVs calculated for Amatikulu, Cabhane and Kwa-Hlongwa respectively are: R8.18 million, R7.91 million and Rl.91 million. These results, reflecting the tangible costs and benefits, indicate that all the projects are viable as measured in both financial prices (before financing) and economic prices (after shadow pricing and transfer payment correction). A sensitivity analysis was conducted as a risk analysis procedure to see what effect the changing of key variables would have on the investment criteria. Indications are that the economic NPV criterion (which measures the contribution to the total economy) is positive for a wide range of discount rates for all projects. Indications are that the financial NPV becomes positive after 9, 13 and 18 years for Cabhane, Amatikulu and Kwa-Hlongwa respectively. It is expected that since the economic NPVs for the different projects are higher than the corresponding financial NPVs, the economic NPVs will become positive after a shorter period of time than that indicated by the financial NPVs. The Amatikulu model was found to be sensitive to changes in yield and B Pool sucrose price (as measured by changes in the economic NPV criterion), while the Cabhane and Kwa-Hlongwa models were found to be sensitive to changes in yield, % cane adoption and the B Pool sucrose price. The economic NPVs of the Amatikulu and Cabhane models are, however, still positive after a 30% ceteris paribus decrease in the individual assumptions experimented with. Kwa-Hlongwa's economic NPV becomes negative if the base assumption of yield or B Pool sucrose price is reduced by 30%. It is, however, unlikely that the base assumptions of yield or B Pool sucrose price would drop by 30% for an extended period of time. In addition to this, the base results obtained for the Kwa-Hlongwa model could be seen as conservative as the delayed cane development projected for the base model could well be accelerated and the intangible benefits characteristic of the labour intensive construction method present at Kwa-Hlongwa are not accounted for in the results obtained. In view of results obtained in the base models and sensitivity analyses, indications are that the benefits of the project will outweigh the costs by a considerable margin, making the project a viable investment decision.