Manakamana Agriculture Machinery Custom Hiring Center

Template Business Plan

Submitted to: Ministry of Land Management, Agriculture and Cooperatives

Gandaki Province, Pokhara

Sample Business Plan

Manakamana Agriculture Machinery Custom Hiring Center

Submitted by:

Gandaki Agriculture Farmers Cooperatives Ltd. (GAC)

Pokhara August 2020


Table of Content

EXECUTIVE SUMMARY ....................................................................................................................... 1 A. OVERVIEW AND OBJECTIVES ..................................................................................................... 2

A. 1. BACKGROUND ...................................................................................................................... 2 A. 2. SITUATIONAL ANALYSIS .......................................................................................................... 3 A. 3. CONSTRAINTS AND OPPORTUNITIES .......................................................................................... 4 A. 4. OBJECTIVE OF THE BUSINESS PLAN ............................................................................................ 5 A. 5. THE KEY ACTIVITIES ................................................................................................................ 6

B. MODELS OF CUSTOM HIRING .................................................................................................... 6 C. PRODUCTS AND SERVICES ......................................................................................................... 7

C.1. SERVICE TO PRODUCTION ACTIVITIES ......................................................................................... 7 C.2. SERVICE TO POSTHARVEST ACTIVITIES ........................................................................................ 8

D. CUSTOM HIRE MODULE AND MARKETING PLAN ....................................................................... 8 D.1. CH MARKET SITUATION, STRATEGY AND THE BUYERS OF THE MECHANIZATION SERVICE ........................ 8 D.2. PRICING STRATEGY ................................................................................................................ 9 D.3. SALES FORECAST ................................................................................................................. 10 D.4. PROMOTIONAL WORKS......................................................................................................... 10

E. OPERATION PLAN .................................................................................................................... 10 F.1. LOCATION ......................................................................................................................... 10 F.2. FACILITIES AND EQUIPMENT................................................................................................... 11 F.3. PLAN OF OPERATION AND MAINTENANCE ................................................................................. 11

F. MANAGEMENT AND ORGANIZATION ...................................................................................... 12 G. 1. HUMAN RESOURCES ............................................................................................................ 12 G. 2. ORGANIZATIONAL CHART...................................................................................................... 13

G. FINANCIAL PLAN ..................................................................................................................... 13 1. COST OF OWNERSHIP ............................................................................................................... 13 2. OPERATION COST .................................................................................................................... 15 3. INCOME ................................................................................................................................ 17 4. FINANCIAL VIABILITY OF THE PROJECT ........................................................................................... 18


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Executive Summary

The Gandaki Agriculture Cooperative Ltd. (GAC) was established in 1998 with the objectives to support small and medium farmers by (i) supplying inputs, (ii) output marketing, and (iii) provide credits to small and medium farmers. We have 599 active member farmers (with 35% women farmers) from Lekhnath Municipality. These farmers are operating nearly 390 ha and which is dominated by maize based cropping patter (primarily for household consumption). However, many of these farmers grow high value commodities for market. The total area covered by the HVCs is around 120 ha.

The proposed initiatives will promote commercialization of small and medium farmers, upgrade their production and post production system, improve labor productivity, and production efficiency and finally increase return to the member-farmers by promoting mechanization of the production and postharvest system. In the recent years the farm population especially, the work force is migrating to urban areas and abroad in search for more remunerative job, and the household in the rural areas are facing shortage of agriculture labor. Under such circumstances, agriculture mechanization would be very helpful in overcoming the shortage of labor. However, most of our farmers are small and medium holders with average cultivated land up to around 0.65 ha per household; and individual farming household cannot own and operate expensive farm machinery on their own. This issue was discussed at length and as a result we concluded that the cooperative should take initiative to start on establishing mechanization center to improve the farmers’ access to machinery and tools.

The growing scarcity of labor in agriculture food system, increasing labor costs, increasing pressure on smallholder farmers to reduce cost to compete in the increasing global market, new technology, while available are out of reach of smallholder, who cannot afford to purchase of these farm machineries.

The sector faces critical challenges in terms of large share of small and marginal farmers, declining land holding sizes, high cost of farm machinery and equipment, inappropriate technology, undeveloped markets, and insufficient policy framework. Land size, cropping pattern, market price of agriculture produces, and availability of labor and cost of labor are the major factors affecting the growth of agricultural mechanization. With continued decrease in average farm size, more farms will fall into the adverse category thereby making individual ownership of agricultural machinery increasingly uneconomical.

The Custom Hiring Centers (CHCs) offer farm equipment and machineries on rental basis to farmers who cannot afford to purchase high-end agricultural machineries and equipment. The CHCs play a pivotal role in introducing high technology agricultural machinery to even small farmers with the objective to boost crop production, improve quality, timeliness and efficiency of agriculture operations.

The core business model includes – (i) provisioning of agriculture mechanization service tailored to the need of smallholder farmers, (ii) provide technical service to the farmers on production and postharvest management, and (iii) support farmers in accessing the market. The initiated business will be helpful in reducing cost of production and increasing benefit by at least 20%. The CH service will also be helpful in achieving higher cropping intensity.


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Funding Requirements. Total Initial investment requirements estimated to be NPR 7.2 million; of which, NPR 4.4 million is bank financed and the remaining Rs 2.8 million is promoters’ equity. The financial analysis indicated that IRR of the business is 43.7% and the NPV at 10% discount rate is NPR 5,698,000. The business is profitable because IRR is greater than the opportunity cost of capital. Financial analysis was made to examine the profitability of investment and the finding shows high return to the investment. The finding of the analysis is given below. 1 Payback period 3.8 yrs 2 Net present value of the business (at 10%) NPR 5,698,000 3 Benefit cost ratio 2.7 4 Internal rate of return 43.7%

A. Overview and Objectives

A. 1. Background

National Scenario. Nepal is predominantly an agricultural country with almost 70% of its total population directly engaged in agriculture production. For agricultural production, land tilling is one of the most power intensive operations. In traditional agriculture, farmers use animal drawn country plow in tilling land. This process is very slow and cumbersome in comparison to mechanically powered tilling implements. Moreover, with increasing cropping intensity, shortening turn around period between harvesting and planting of the subsequent crop, and lack of agriculture labor, there is rising demand for farm power. In the recent decade, agriculture situation has begun to change with the increase in cropping intensity, timeliness operations and draught power shortage. The situation demands power intensive mechanical tilling and tractor custom hire service become popular among farmers. The inadequacy of farm power and machinery with the farm operators and especially with the small and medium farmers, has always been perceived as one of the major impediments in increasing agriculture production and productivity. It has been envisaged that the farmers can benefit from the technological development in terms of machineries performing farm operations. But these machineries being costly remains out of reach of farmers. These tractors/power tillers are being used for land tilling and local transportation. The wholesalers and retailers of tractor/power tillers in the country do not have definite capacity building and after sales service programs for the tractor entrepreneurs. The entrepreneurs are mostly on their own to learn operation, maintenance and financial management of tractors/power tillers and other agriculture equipment. Therefore, they are always lacking of proper skill for operation, maintenance and financial management of tractor. As a result, the economic life of the tractors and other farm equipment become shorter and cause financial loss of entrepreneurs, farmer’s organizations and individual farmers. Government Strategy. The policy aims at achieving high and sustainable economic growth through commercial agriculture system contributing to food security and poverty reduction. It emphasizes increased agricultural production and productivity, and making agriculture competitive in the markets. In this relation transformation of subsistence-based agriculture


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into a commercial one through diversification and widespread realization of comparative advantage of high value commodities is the key strategy of agriculture development in Nepal. The ADS has proposed a mechanization strategy focusing on awareness creation, demand stimulation, a concessionary financing arrangement, technical capacity building of the dealer network, particularly for the 2-wheel power tillers and mini-tiller dealers throughout the country and some modifications in taxation. This strategy needs a lot of coordination with the private sector equipment providers and with the commercial banking sector. The approach would be oriented to: (i) power tillers with multifunctional tilling options in the terai; (ii) gradual increase in the numbers of mini 2-wheelers (with some optional attachments) in hilly areas; and (iii) labor- saving low energy implements and mechanized irrigation in the mountains. The ADS has also proposed to establishment of Agriculture Mechanization Centers in the terai (2), mid hills (1), and high hills (1) within existing research centers.

A. 2. Situational Analysis

Animate power is the main source of power, in Nepalese agriculture. Human power and animal power occupy 36.3 and 40.5 percent of the total farm power available in the country respectively. The available mechanical power in the country is 23 percent; most of which is concentrated in Terai. The share of available mechanical power in terai is 92.28% that of total available mechanical power of Nepal1.

The traditional wooden tools and implements continue to remain in use in the hills and mountains. There has been some improvement in their design and performance capabilities over time. Indigenous wooden plough, local hoes, sickle are the major implements/tools used for agricultural operation. In hills, only 2.7 percent of holdings own animal drawn iron plough for tillage. In the valleys near the road heads it is observed that farmers have started using power tiller for tillage operation and it is spreading along with the extension of rural road. Due to increasing cultivation of vegetables near urban and peri urban areas about 3 percent of the holdings in the hills own hand sprayer. In Terai, traditional animal drawn farm implements/tools are still widely used; however, the mechanical power operated machinery/implements are increasingly being popular. Four-wheel tractors as well 2-wheel power tillers are increasingly used for tillage, threshing and transportation.

Custom Hiring Services. Custom Hiring is a relatively new concept in Nepal and holds an immense potential to change the farm mechanization in Nepal. There is a need to develop and replicate successful business models along with incentives and policy support for the adoption, capacity building and skill enhancement, development and promotion of farm mechanization technologies.

The custom hiring services has the opportunities of spreading the equipment ownership cost over the large area. The farm size, availability of labor, and custom services, crop selection and cultivation practices, all effect the selection of an optimum equipment set and ultimately the equipment number crucial for farm operations. It is believed that the custom hiring services have enough scope for providing better equipment to their clients in competitive price. To provide the farm implement on custom hiring to farmers on time and at reasonable price, we intend to establish ‘Farm Mechanization Center’. It is expected that our initiative will reduce

1 Shreemat Shrestha, 2014. Status of agriculture mechanization in Nepal.


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drudgery, intensify production, reduce cost of production, postharvest and marketing, and finally increase farmers’ incomes.

Custom hiring - is an important mechanism through which most smallholder and medium sized farmer can access the services of agricultural machinery. It is one option that can ensure the use of improved farm machinery even to small and marginal farmers, and offers the prospects for facilitating rapid mechanization of agriculture system in the area. The custom hire services will enhance technical and economic efficiency across agri-food value chains.

The Custom Hiring model holds the potential to be the best way to introduce capital intensive, high quality and efficient farm mechanization to the small farming structures prevalent in Nepal. The Custom Hiring model enables new machines to be used at their maximum capacity and enables farmers to gain access to latest technology they would otherwise not be able to afford. Custom Hiring can significantly facilitate diversification in agriculture specifically from wheat and paddy to other crops. Custom Hiring through private entrepreneurs or co-operatives or even the farmers groups will help to increase annual use of these equipment thereby making them viable. Market situation. In the recent years the farm population especially, the work force is migrating to urban areas and abroad in search for more remunerative job, and the household in the rural areas are facing shortage of agriculture labor. Out migration of youth is leaving women, children, and old people in the villages. Labor shortage in the sector suggests need for increased mechanization. As indicated in the ADS outmigration might also accelerate the process of increasing farm size, as long as there is an effective land use management regulatory system. As the agricultural sector transforms to a more commercial and competitive industry, the demand for mechanization service will continue to increase. Under such circumstances, agriculture mechanization would be very helpful in overcoming the shortage of labor. However, most of our farmers are small and medium holders with average cultivated land up to around 0.65 ha per household; and individual farming household cannot own and operate expensive farm machinery on their own. The growing scarcity of labor in agriculture food system, increasing labor costs, and increasing pressure on smallholder farmers to reduce cost to compete in the market has been the recent trend in the sector. The new technology and practices, while available, are out of reach of smallholder, who cannot afford to invest into these technologies/machineries. This has created a demand for establishing mechanization center to improve the farmers’ access to machinery and tools.

A. 3. Constraints and Opportunities

Custom Hiring in Nepal faces constraints like high initial cost of equipment, lack of knowledge in the aspects of operation, maintenance and repair of equipment, lack of space for shelter/parking space, orientation towards the use of tractors and allied equipment, sub-optimal asset capacity utilization on account of crop specific requirements. To overcome this, virtual or real consolidation of the widely fragmented and scattered land holdings, extension of benefits of mechanization to multiple cropping systems, enhancement of the average farm power availability to assure timeliness and quality in field operations and use of precision (in terai region) and efficient equipment to improve the quality of operations is required.

Key constraints


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The sector faces critical challenges in terms of - Large share of small and marginal farmers and declining land holding sizes. Small and

fragmented land holding with largely subsistence agriculture is the major constraints for promotion of agricultural mechanization;

- high cost of farm machinery and equipment, - The lack of access to repair and maintenance service/workshop facilities - Lack of smallholder farmers’ and FOs’ access to finance/ difficulties in bank financing.

Farmers’ co-operatives and micro credit institutions have been providing service, but they lack capacity to address the current need of sector in relation to agriculture mechanization and commercialization (access to finance);

- inappropriate technology including postharvest management - The issues are also related to the availability and quality of spare parts, lack of training

on operation and maintenance of farm machinery, inadequate facility for servicing and repair of farm machinery.

- Undeveloped markets. However, the demand for custom hiring services for farm machinery and equipment (tractor, power tiller, combine harvester, thresher, etc.) is in increasing trend especially in plan areas;

- Organized service providers are lacking; - Policy framework. Due to lack of clear-cut policy on agricultural mechanization, the

agricultural mechanization is not found to be streamlined as per the need of the farming communities and national development goals on commercialization of agriculture in Nepal2.

Land size, change in cropping pattern and increasing cropping intensity, increasing market price of agriculture produces, scarcity and cost of labor are the major factors generating the growth of agricultural mechanization. With continued decrease in average farm size, more farms will fall into the adverse category thereby making individual ownership of agricultural machinery increasingly uneconomical.

Key opportunities

- Government’s increasing focus on commercialization and use of agriculture mechanization

- virtual or real consolidation of the widely fragmented and scattered land holdings, - extension of benefits of mechanization to multiple cropping systems, - enhancement of the average farm power availability to assure timeliness and quality in

field operations and use of precision tools/equipment - efficient equipment available to improve the quality of operations - Increasing number of private companies involved in supplying agriculture

mechanization tools and equipment (easily available in the market) including spare parts

A. 4. Objective of the business plan

2 Shreemat Shrestha, 2014. Status of Agriculture Mechanization in Nepal.


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Overall Objectives. The Custom Hiring model holds the potential to be the best way to introduce capital intensive, high quality and efficient farm mechanization to the small farming structures prevalent in Nepal. The Custom Hiring model enables new machines to be used at their maximum capacity and enables farmers to gain access to latest technology they would otherwise not be able to afford. Custom Hiring through private entrepreneurs or co-operatives or farmers groups will help to increase annual use of these equipment thereby making them viable. The objective of this business is to operate a custom hiring center, especially focusing on the stallholder farmers involved in HVCs commercial production in the hills of Gandaki Province to enable any farm operation timely manner without losing a favorable window of rainfall or soil moisture available.

A. 5. The key activities

The proposed custom hire services will focus on two primary function of the agricultural value chains - (i) primary production, and (ii) postharvest management as presented in the figure below. However, the transportation service will be available to across many value chain functions.

B. Models of Custom Hiring

There are two prevailing models of Custom Hiring, namely

Tractor centric model Operation specific model

The key characteristics of these models are discussed below:

The tractor centric model focuses on tractors along with range of equipment. This model offers only basic services like leveling, ploughing, harrowing, threshing etc. Mostly local entrepreneurs with limited financial capability implement this model in focused territories.

The operation specific model entails one type of high cost machinery with operations in larger territory, even in multiple districts/provinces for better utilization of the machine. This model offers services for operations like cereal harvesting. A very successful example of Custom Hiring is the model used in paddy in Terai districts. Individual entrepreneurs travel across districts/provinces to hire out their machines (rice harvester/combines) to maximize the


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machines potential, thus earning income. Increasing popularity of such CH is noticeable in Province 2 and 1 in the use of paddy harvesters. The farmer engages the services on call on a “pay for use” basis avoiding the need for owning or operating any of the equipment (on hours, day’s basis).

In terms of institution, the first type of CH business is private service provider model where the CHC is own and operated by service provider company and wants to ‘uberize’ the agriculture mechanization services. The second type of business model is FOs based models where farmers’ groups or farmers cooperatives own and operate CHC, and provide services primarily to their member farmers, and as well to non-members in the same area. The advantage of this business model is its ability to pool resources and to utilize economies of scale in lowering the cost of doing business and the cost of equipment. The business risk is spread across beneficiary farmers3.

C. Products and Services

The main criteria for selecting particular farm implement in CHCs is to enable any farm operation timely without losing a favorable window, climatic and soil conditions. We are committed to provide wide range of farm mechanization services focusing on smallholder farmers involved in commercial production of HVCs in hilly areas of Gandaki province. The targeted market for our service is Rural Municipality of Syangja district. Since consumers are smallholders with fragmented parcel, we will be focusing on farm equipment that are suitable for the targeted geographic and socioeconomic settings at highly competitive price. At the initial stage we will provide two types of custom hiring service on the mechanization of agricultural activities – (i) mechanization of production related activities, and (ii) mechanization of postharvest activities. The details are presented below –

C.1. Service to production activities

As mentioned earlier, land tilling is one of the most power intensive operations. In traditional agriculture, farmers use animal drawn country plow in tilling land. This process is very slow and cumbersome in comparison to mechanically powered tilling implements. Moreover, with increasing cropping intensity, shortening turn around period between harvesting and planting of the subsequent crop, and lack of agriculture labor, there is rising demand for farm power. The CHC will provide a full range of production related mechanization custom hiring services including tilling, weeding, irrigation, spraying, rice and maize harvesting, corn harvesting, potato digging in highly competitive price. The CHC service will ensure (i) timely completion of activity, improve efficiency of the production system, (iii) reduce cost and losses, and (iv) increase farmers margin. The proposed custom hiring center will provide its services to the hilly areas with terraced agriculture land. The lower-priced 2WTs in the 4-9 horsepower range that can be safely operated in the small, narrow terraces, and are light enough to be lifted and lowered from one terrace to the next will be used for the purpose. (See table 1 for the details). This business plan

3 Group ownership model is often well intended but faces a number of challenges associated with group dynamics, leadership and business

management that more often than not lead to the disintegration of the groups. Other challenges include slow decision-making mechanisms, slow pace of service provision that lead to member dissatisfaction, and relatively low profits per member. Group dissolution is often high. The model encompasses cooperative unions, community-based groups such as mixed groups, youth groups, women groups and etc.


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has been prepared especially focusing on the farmers who are involved in the production of maize, rice, wheat, and potato crops in the terraced field. However, at the later stage, the CHC will also extend its service to the farmers in flat land areas with intensive agricultural activities. The set of equipment required for flat land area is presented in the annex of this business plan.

C.2. Service to postharvest activities

Poor postharvest management is one of the key issues in HVCs supply chains. Inadequate adoption of postharvest operation has resulted in reduced self-life, increased percentage of losses, low margin to farmers and other value chain actors. We will provide CHC service that will reduce harvesting time, product collection, packing, and transpiration. This will assist farmers to reduce the time required for harvesting, and other postharvest operation including transpiration, storage and marketing. The Center will also provide technical advice to farmers on production and postproduction system by mobilizing agriculture technician. The following is a breakdown of farm equipment and anticipated services – Table 1: List of equipment and anticipated services

SN Particulars Nos. Service Type

1 14 HP Power tiller with trolley, cultivator, disc harrow, rotovator

3 Land preparation, weeding, transportation

2 Mini tiller - 5.5 HP with MB plough 3 Land preparation

3 Honda 6.5 HP 2-wheel mini tiller with rotovator

3 Land preparation

4 Rice reaper 1 Harvesting

5 Mini corn harvester 3 Harvesting

6 Mini corn Sheller 6 Threshing

7 Multi-crop thresher (rice, wheat) 1 Threshing

8 Power sprayer 3 Disease and pest management

9 Sprayer 5 Disease and pest management

10 Irrigation pump 3 Irrigation

11 Maintenance tools and equipment / spare parts

1 set Primarily for own purpose; but the service will be available to other equipment owners

Furthermore, we will also maintain a reasonable stock of spare parts and operate maintenance workshop. This will be primarily for O&M of own farm equipment but also for other costumers.

D. Custom hire module and Marketing Plan

D.1. CH Market situation, Strategy and the buyers of the mechanization service

The targeted area for the proposed agriculture mechanization service is ABC Rural Municipality. The production area is well connected to the market due to all weather road access and the farmers are commercially oriented with around 80% of the production (HVCs) going to local and regional markets. HVCs such as tomato, cauliflower, cabbage, beans, potato are widely grown at commercial scale in around 135 ha of irrigated land. Maize is the major crop of the area, which is grown in more than 500 ha. The other crops include rice and wheat. However, in the recent years, the production is stagnated due to the lack of availability of labor (both household labor and waged labor). The agriculture production system is traditionally labor intensive. The use of agriculture equipment is far from desirable.


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Our service will be available in at least 3 wards of Rural Municipality with farming population of around 1500 household operating a total of 500 ha of land (cultivated). Rice, maize, potato and vegetables are the main crops grown in the area. Our service is tailored to the need of the smallholder farmers of the area and involved in rice, maize, potato and other HVCs production for market. The farmers will have a number of options to hire the mechanization service, which include (i) custom hiring of implements on hourly basis, (ii) lease equipment on rental basis, and (iii) work accomplishment basis. As there are no mechanization service providers in the area, we will not face any competition. Yet, some big farmers have mini tractors for personal use but they do not possess the full set of equipment and therefore will not be able to provide the range of services that we are planning for. We are planning to provide following service –

1. Land preparation 2. Weeding 3. Irrigation 4. Spraying service 5. Rice and maize harvesting 6. Grain drying 7. Threshing 8. Postharvest operation (collection, grading, packaging, storage) 9. Transportation

D.2. Pricing Strategy

The focus of the service is to support farmers in increasing cropping intensity, shortening turn around period between harvesting and planting of the subsequent crop that will subsequently increase labor and land productivity and return to the farmers. The strategy is to provide quality service at highly competitive price (competitive to traditional practice requiring high labor cost). The CH service will be tailored to the need of the smallholder farmers. Further, it will also be bundled with other services including technical, input supply and marketing of the produce. The price offered by the CHC is presented in Table 2. The mechanization service will be provided on hire and the price will be applied on an hourly basis. Table 2: Custom hiring service price structure

SN Particulars Rate, NRs/hrs.

1 14 HP Power tiller with trolley, cultivator, disc harrow, rotovator 700

2 Mini tiller - 5.5 HP with MB plough 400

3 Honda 6.5 HP 2-wheel mini tiller with rotovator 400

4 Rice reaper 1100

5 Mini corn harvester 800

6 Mini corn Sheller 150

7 Multi-crop thresher (rice, wheat) (including 14 HP power tiller) 1500

8 Power sprayer 50

9 Sprayer 5


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10 Irrigation pump 250

D.3. Sales forecast

The farmers can hire the services/equipment on hourly basis or take on lease (daily rate of equipment + pay for operator/driver, fuel and lubricants), or hire the service on the basis of work volume. The costumer will have to book for the service at least 1 week before by landline/mobile or by visiting our service center. As per our preliminary estimate, the sales forecast is as follows – Table 3: Mechanization service sales forecast

SN Particulars Unit Qty. Rate, Rs. Amount, Rs.

A Vehicles Rental 9,060,000

1 14 HP Power tiller with accessories Hrs./year 2400 700 1680000

2 Mini tiller - 5.5 HP with MB plough Hrs./year 2400 400 960000

3 Honda 6.5 HP 2-wheel mini tiller / rotavator Hrs./year 2400 400 960000

4 Rice reaper Hrs./year 800 1100 880000

5 Mini corn harvester Hrs./year 2400 800 1920000

6 Mini corn Sheller Hrs./year 4800 150 720000

7 Multi-crop thresher with power source Hrs./year 800 1500 1200000

8 Power sprayer Hrs./year 2400 50 120000

9 Sprayer Hrs./year 4000 5 20000

10 Irrigation pump Hrs./year 2400 250 600000

B. Machinery servicing Months 12 10000 120000

Total 9,180,000

Most of our customer are located within the rage of 5-7 KM from our proposed mechanization custom hiring center.

D.4. Promotional works

In the first year of service, we will establish demonstration plots to show the effectiveness and efficiency of mechanization service in the area. The center will also work with local government to train farmers in improved cultivation practices and use of mechanization equipment. Contract farmers/leader farmers and junior technicians will also be mobilized to aware farmers about the benefit of the mechanization services. Our preliminary estimate indicate that the center will function on 50% capacity in year one and from the year 2 we will have enough demand to run the center in full capacity.

E. Operation Plan

F.1. Location

The Center will be established in Bhagawan tol, Ward no. 3 of ABC RM, where the Cooperative has 3 Ropani of land. The proposed location is centrally located with all-weather road connectivity. The targeted service area is within 5 KM radius.


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F.2. Facilities and equipment

The agriculture mechanization custom hiring center will be established with the following facilities and equipment – Table 4 Facilities and equipment

SM Items Remarks

A. Facilities/Building construction

A.1 A shed for machinery with office room and storage room 1

A.2 A shed/garage for servicing, repair and maintenance of equipment and a guard room attached with it.

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A.3 Storage facility (for farmers willing to store product before marketing) 1 B. Machinery (will be procured from the Bhairahawa market)

B.1 14 HP Power tiller with trolley, cultivator, disc harrow, rotovator 3

B.2 Mini tiller - 5.5 HP with MB plough 3

B.3 Honda 6.5 HP 2-wheel mini tiller with rotavator 3

B.4 Rice reaper 1

B.5 Mini corn harvester 3

B.6 Mini corn Sheller 6 B.7 Multi-crop thresher (rice, wheat) 5

B.8 Power sprayer 3

B.9 Sprayer 5

B10 Irrigation pump 3

B.11 Spare parts, fuel, lubricants and accessories As per

B.12 Maintenance tools and equipment 1 set

F.3. Plan of operation and maintenance

The Manakamana Custom Hiring Center is committed to provide its service throughout the year. Our plan of operation and maintenance work is dictated by the cropping calendar and the service will be tailored to the need of the farming household of the area. Table 5 provide a preliminary plan of operation. However, more practical and equipment wise plan will be prepared before the start of the service. Table 5: Plan of operation

SN Tools 1 2 3 4 5 6 7 8 9 10 11 12

1 14 HP power tiller with accessories

2 Mini hand tractor- 5.5 HP with moldboard plough

3 Honda 6.5 2-wheel mini tractor with rotavator

4 Sprayer

5 Power sprayer

6 Irrigation pump

7 Rice reaper

8 Mini corn harvester

9 Corn sheller

10 Storage facility


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The CHC will provide various (listed below) services to farmers for around 430 days (land preparation, weeding, rice and maize harvesting, spraying, transportation. In addition, 2000 hrs of service to irrigate the field. (Table 6). Table 6 provide an estimate of quantity of service and machinery work days

SN Work Nos of

equipment Qty of work Time

Land preparation 9 250 ha two times 630 working days

Weeding 1 50 ha 2 times 50 working days

Rice harvesting 1 50 ha 70 working days

Maize harvesting 3 50 ha 210 working days

Spraying 3 100 ha 210 working days

Transportation 3 100 trips 150 working days

Irrigation 3 100 ha 2000 hrs

Besides the listed services (Table 7), the CHC will also provide postharvest/marketing service to the farmers (product collection, grading, packaging, short term storage and transportation to the market) at minimum fee (on per kg basis). The primary objective of the CHC is to provide farmers custom hiring service on agriculture mechanization. However, it will also provide postharvest/marketing related services to the farmers. Table xx presents the CHC work plan – quantity of work (in number of work days and hours) by type of services. Table 7: work plan by type of service

Service Months Total work

days J F M A M J J A S O N D

Land preparation 85 days

Weeding 50 days

Irrigation 2000 hrs

Spraying service 150 days

Rice and maize harvesting 45 days

Rice and maize drying 25 days

Transportation 50 days

Postharvest/marketing service

F. Management and Organization

G. 1. Human Resources

A team of well experienced persons will be involved in the implementation of the business activities. The implementation team will consist of one manager (Mr. Binod Hamal), and one agriculture technician. Furthermore, at least 3 contract farmers will be mobilized in the targeted wards to communicate with the costumers and demonstration of the services. The details of the human resources and organization is presented below:

Table 8: List of staff


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SN Position Name

Full time

1. Manger Mr. Binod Hamal

4. Agriculture Technician TBN

5. Driver TBN

6. Office Assistant/Helper TBN

7. Watchman TBN

Part time

1. Part time driver TBN

2. Mechanic TBN

G. 2. Organizational Chart

Figure 1 presents the company organization chart that is tailored to successfully operate the businesses. The team will be led by Mr. Hamal, B., Manager. The details are provided in organizational chart in Fig. xx.

Fig. 1: Organizational Chart of the organization

G. Financial Plan

1. Cost of Ownership

Equipment Depreciation: The cost of equipment depreciation accounts for purchase price, salvage value, and years of service (also called optimal life).

The years of service (or optimal life) is defined as when the equipment value has declined to 1/3 of its original value. Therefore, the salvage value is assumed to always be 33% of the

Manager

CHC O&M

Driver

Agriculture Technician

Part time driver

Office Assistant

Mechanic


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original purchase price, but the years of service varies for each piece of equipment. In reality, a machine’s years of service depends on many factors and may vary greatly in years and hours. The optimal life and estimated annual hours of use for all equipment used in this guide are listed in Appendix D.

For this guide, the depreciated value (purchase price – salvage value) is split equally among the years of service of the equipment because after the first year of use, most machinery depreciates at a fairly consistent rate over the next 10 to 15 years (with typical use).

Financing Cost: It is assumed that 20% of the initial cost will be covered by cash payment from the cooperative/farmers group/enterprise promoters and 80% will be financed through bank loan financing. It is also assumed that the loan will be paid back through equal biannual installments over five years.

The cost to borrow 80% of the purchase price was based on an average interest rate for agriculture loans with a five-year payback. The annual borrowing rate is set at 10%.

Insurance and Housing: the equipment and facilities will carry suitable insurance against accidental damage and for liability. Suitable housing is also a reasonable measure for maintaining equipment value and performance. These annual costs have been set at 10% of the original purchase price of the machine.

Table 9: Fixed Capital Investment (Initial Investment)

SN Particulars Unit Qty. Rate, Rs. Amount, ‘000

Total, ‘000

1 Land & Land Development Rop. 5 0

2 Building & Civil Works 3300

2.1 - Garage/Workshop Sqft 3000 700 2100

2.2 - Office/store Sqft 1000 1200 1200

3 Plant and Machinery 540

3.1 - Hydraulic Machine Set 0 0

3.2 - Compressor machines Set 1 225000 225

3.3 - Vehicle wash unit Set 1 15000 15

3.4 - Workshop kits and accessories Set 1 300000 300

4 Furniture and office equipment 175 4.1 - Chairs, Tables, Cupboards & Others Set 1 100000 100

4.2 - Computer and accessories Set 1 75000 75

5 Vehicles & others (for hire) 2540

5.1 14 HP Power tiller with accessories No 3 230000 690

5.2 Mini tiller - 5.5 HP with MB plough No 3 90000 270

5.3 Honda 6.5 HP mini tiller with accessories No 3 90000 270

5.4 Rice reaper No 1 250000 250

5.5 Mini corn harvester No 3 125000 375

5.6 Mini corn sheller No 6 25000 150

5.7 Multi-crop thresher (rice, wheat) No 1 350000 350

5.8 Power sprayer No 3 30000 90

5.9 Sprayer No 5 4000 20


15

SN Particulars Unit Qty. Rate, Rs. Amount, ‘000

Total, ‘000

5.10 Irrigation pump No 3 25000 75

6 Pre-operating expenses 200

6.1 - Feasibility, Design and Engineering, etc. 100

6.2 - Registration/renewals 50

6.3 - Travelling 50

TOTAL FIXED CAPITAL INVESTMENT : 6755

2. Operation cost

The equipment operation cost consists of (a) fixed cost - depreciation, interest on invest, taxes, insurance and housing; (b) variable cost - labor, fuel, oil, repair and maintenance. CHC operation cost. The cost was calculated using the information collected from the interaction with stakeholders; (2) Inflation rates were ignored in the calculation; (3) The interest rate is equal to 5%. Fixed cost Fixed cost is defined as one, which does not change when level of output alters (i.e., it applies to a resource that is fixed in quantity). The straight-line method is the simplest for calculating depreciation and is normally used in budgeting, since the concern is usually only with the average annual cost of machine. Therefore, in calculation of fixed cost, a straight-line depreciation is assumed and the following equation was used for calculating the annual depreciation:

𝐷 =𝑃 − 𝑆

𝐿

Where, D = Depreciation, NPR/yr; P = Purchase price of assets, NPR; S = Salvage value of assets, NPR; and L = Life of assets, yr. (The salvage value of machinery after 10 years of useful life is considered zero.) The interest on investment is included in fixed cost estimation. (Even if the investment money is not actually borrowed, a charge is made since that money cannot be used for some other interest paying enterprises). We are planning to borrow 80% of the investment cost from bank (with the 10% borrowing rate). Table 10 Fixed Costs

(Rs. in ‘000) SN Particulars Unit Qty. Rate Amount Total

1 Depreciation: 663

- Building & Civil Works sqft 3300 2% 66

- Plant & Machinery 540 10% 54

- Furniture & Office Equipment 175 20% 35

- Vehicles & others 2540 20% 508


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SN Particulars Unit Qty. Rate Amount Total

2 Amortization of Pre-operating expenses 200 10% 20 20

3 Insurance, @1% of fixed asset 6555 1% 65.55 65.55

(excluding land value & P/O cost)

4 Office Overhead 70

- Stationery & others LS 20

- Communication LS 25

- Auditing and Legal services LS 25

5 Fixed Electricity Charge LS 80 80

6 Indirect Labor Months 60 818.4

- Manager, months 12 Rs. 15000 180 - Agriculture Technician Months 12 Rs. 15000 180

- Office Assistant Months 12 Rs. 10000 120

- Drivers, @Rs.12000/month Months 12 Rs. 12000 144

- Watchmen, @Rs.10000/month Months 12 Rs. 10000 120

- Allowance/perks 10% 74.4

7 Interest on Term Loan 4088 0.1 408.8 408.8

Total Fixed Costs 2125.75

Variable cost The variable cost is direct costs needed in the operation of the businesses and which changes when the level of output alters. Variable cost depends on labor cost, fuel, oil, repair and maintenance cost and other cost resulting from the provisioning of the mechanization services. The cost of operator/labor was calculated as the market rates. The fuel and oil cost were estimated from consumption rate and multiplied by their respective prices. Table 11: CHC Variable Cost

(Rs. in '000)

SN Particulars Unit Qty. Rate, Rs. Amount Total

1 Lubricants and spare parts 32

- Lubricants Ltr 15 300 5

- Break pads/shoes No 2 500 1

- Bearings no 6 250 2

- Mobil filters no 3 500 2 - Deisel filters no 3 500 2

- Oil seals no 3 500 2

- Battery no 1 10000 10

- Miscellaneous LS 10

2 Direct Labour 208 264

- Driver months 4 15000 60

- Skilled labour , @Rs.15000/month days 200 500 100 - Helpers, @Rs.12000/month Months 4 10000 40

- Mechanic days 22 2000 44

- Perks and Allowances, @10% 20

3 Utilities: 372

- Electricity months 12 5000 60

- Fuel, Liters 3000 100 300

- Water Months 12 1000 12 4 Repair & Maintenance: 269

- Building & civil structure 3300 4% 132


- Furniture & office equipment 175 5% 9


5 Interest on Short Term Loan 273 10% 27 27

6 Promotional Expenses, @5% sales 7593 0.5% 38 38 Total Variable Costs 1002


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Total Fixed Costs 2126

TOTAL ANNUAL OPERATING COST: 3128

Payment for replacement Uniform annual payments to a fund are of such a size that by the end of the life of the tractor, the funds and their interest have accumulated to an amount that will purchase another tractor. The payment for replacement (PFR) was calculated as follows:

𝑃𝐹𝑅 = (𝑃 − 𝑆) 𝑥 𝑖

(1 + 𝑖)𝐿 − 1

Where, P = Purchase price of tractor, NPR; S = Salvage value of tractor, NPR; i = Interest rate, decimal; and L = Life of tractor, yr.

3. Income

Equipment rent-out charge Equipment rent-out charge can be estimated from the following expression: Rent-out charge (NPR/ha) = OC+ PFR + Profit4 Where, OC= Operation Cost; PFR= Payment for Replacement However, we have fixed the equipment rent-out charge based on the market situation (current rent-out charge in other areas). Table xx below provide equipment rent-out charge proposed at this stage by the Center. The major income is generated out of custom hiring; however, some additional income will be generated from equipment maintenance works for other operators. The recurring cost involved are fuel / lubricant cost for the machinery, driver charges, repair maintenance charges, labor, interest on bank loan and insurance are the major recurring cost taken into consideration. The details of assumptions leading to the income and expenditure are indicated in Annex 5 and the statement of income and expenditure is given in Annex 8. Table 12: Annual Revenue Estimation

SN Particulars Unit Qty. of work Rent-out

charge. NRs Revenue, NRs

A Custom Hiring 6,525,000

1 14 HP Power tiller with accessories Hrs./year 2400 500 1200000

2 Mini tiller - 5.5 HP with MB plough Hrs./year 2400 350 840000

3 Honda 6.5 HP 2-wheel mini tiller /rotovator Hrs./year 2400 350 840000 4 Rice reaper Hrs./year 800 400 320000

5 Mini corn harvester Hrs./year 2400 400 960000

6 Mini corn Sheller Hrs./year 4800 200 960000

7 Multi-crop thresher (rice, wheat) Hrs./year 800 250 200000

8 Power sprayer Hrs./year 2400 100 240000

9 Sprayer Hrs./year 4000 5 20000

10 Irrigation pump Hrs./year 2400 300 720000

4 The profit of the entrepreneur depends on the socio-economic condition of the service users. A good margin will vary considerably by industry, but as a general rule of

thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low. Again, these guidelines vary widely by

industry and company size, and can be impacted by a variety of other factors.


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11 Transportation Trips/yrs 100 2250 225000

B. Maintenance service to other operators

Machinery servicing Months 12 10000 120,000

Total 6,645,000

4. Financial viability of the project

[Business appraisal method Return on investment, benefit – cost ratio, payback period, net present value, internal rate of return is commonly applied in the appraisal of the businesses and the same have been used in appraisal of this CHC business plan.

This appraisal is based on four assumptions, which are (1) All the devices are purchased with cash; (2) Operation technology is remaining unchanged throughout the project life; (3) Prices of all input and outputs are given and constant throughout the project life; and (4) Interest rate of 10% has been assumed for calculating BCR and NPV.

Benefit-cost ratio Benefit-cost ratio (B/C ratio) is defined as the ratio of benefits to costs (expressed either in present or annual worth). If the B/C ratio is greater than one, then it will be economically accepted. B/C ratio = ∑ Present worth of Benefits (PWB) / ∑ Present worth of costs (PWC) Net present value The NPV is a scientific method of calculating the present value of cash flows, both inflows and outflows of an investment proposal, using a discount rate and subtracting the present value of outflows to get the net present value. NPV is calculated by using the following formula:

Net present value = ∑ Present worth of Benefits (PWB) ∑ Present worth of costs (PWC) Internal rate of return The internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does. Formula and Calculation for IRR It is important for a business to look at the IRR as the plan for future growth and expansion. The formula and calculation used to determine this figure follows.

0 = NPV = ∑Ct

(1 + IRR)t

T

t=1

− C0

Where: Ct = Net cash inflow during the period t C0 = Total initial investment costs IRR = Internal rate of return T = Number of time periods Payback period


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The payback refers to the time period within which the costs of investment can be covered by revenues. In other words, it is the length of time required for the stream of cash proceeds produced by an investment to equal the initial expenditure incurred. This can be computed by applying the following formula: Payback period = Investment (total initial, NPR)/Net benefit (NPR/Yrs.) Financial ratios. The financial viability assessment is given in Annex. The outcome is summarized as below:

Net Present Value @ 10 % discounting factor = Rs. 5,698,000

Benefit - Cost Ratio = 2.7

Internal Rate Return = 43.7%.

Payback period = 3.8 years


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Financial Analysis

Custom Hiring Center


21

Annex 1

(Rs. in '000)


1 Land & Land Development Rop. 5 0

2 Building & Civil Works 3300

2.1 - Garage/Workshop Sqft 3000 700 2100

2.2 - Office/store Sqft 1000 1200 1200

3 Plant and Machinery 540

3.1 - Hydraulic Machine Set 0 0

3.2 - Compressor machines Set 1 225000 225

3.3 - Vehicle wash unit Set 1 15000 15

3.4 - Workshop kits and accessories Set 1 300000 300

4 Furniture and office equipment 175

4.1 - Chairs, Tables, Cupboards & Others Set 1 100000 100

4.2 - Computer and accessories Set 1 75000 75

5 Vehicles & others (for hire) 2540

5.1 14 HP Power tiller with trolley, cultivator, disc harrow, rotovatorNo 3 230000 690000

5.2 Mini tiller - 5.5 HP with MB plough No 3 90000 270000

5.3 Honda 6.5 HP 2-wheel mini tiller with rotavator No 3 90000 270000

5.4 Rice reaper No 1 250000 250000

5.5 Mini corn harvester No 3 125000 375000

5.6 Mini corn sheller No 6 25000 150000

5.7 Multicrop thresher (rice, wheat) No 1 350000 350000

5.8 Power sprayer No 3 30000 90000

5.9 Sprayer No 5 4000 20000

5.10 Irrigation pump No 3 25000 75000

6 Pre-operating expenses 200

6.1 - Feasibility, Design and Engineering, etc. 100

6.2 - Registration/renewals 50

6.3 - Travelling 50

TOTAL FIXED CAPITAL INVESTMENT : 6755

FIXED CAPITAL INVESTMENT


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Annex 2

Fixed Cost Estimation (Rs. in '000)


1 Depreciation: 663

- Building & Civil Works 3300 2% 66


- Furniture & Office Equipment 175 20% 35


2 Amortization of Pre Operating

Expenses

3 Insurance, @1% of fixed asset

(excluding land value & P/O cost)

4 Office Overhead 70

- Stationery & others 20

- Communication 25

- Auditing and Legal services 25

5 Fixed Electricity Charge LS 80 80

6 Indirect Labor 60 818

- Manager, months 12 15000 180

- Agriculture Technician Months 12 15000 180

- Office Assistant Months 12 10000 120

- Drivers, @Rs.12000/month Months 12 12000 144

- Watchmen, @Rs.10000/month Months 12 10000 120

- Allowance/perks 10% 74

7 Interest on Term Loan 4088 10% 409 409


contd.,

ANNUAL OPERATING COST ESTIMATION

6555 1% 66 66

200 10% 20 20


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Annex 3

(Rs. in '000)


1 Lubricants and spare parts 32

- Lubricants Ltr 15 300 5

- Break pads/shoes No 2 500 1

- Bearings no 6 250 2

- Mobil filters no 3 500 2

- Deisel filters no 3 500 2

- Oil seals no 3 500 2

- Battery no 1 10000 10

- Miscellaneous LS 10

2 Direct Labour 208 264

- Driver months 4 15000 60

- Skilled labour , @Rs.15000/month days 200 500 100

- Helpers, @Rs.12000/month Months 4 10000 40

- Mechanic days 22 2000 44

- Perks and Allowances, @10% 20

3 Utilities: 372

- Electricity months 12 5000 60

- Fuel, Litres 3000 100 300

- Water Months 12 1000 12

4 Repair & Maintenance: 269

- Building & civil structure 3300 4% 132


- Furniture & office equipment 175 5% 9


5 Interest on Short Term Loan 273 10% 27 27

6 Promotional Expenses, @5% sales 7593 0.5% 38 38

Total Variable Costs 1002


TOTAL ANNUAL OPERATING COST: 3128

VARIABLE COST ESTIMATION


24

Annex 4

(Rs. in '000)


A Vehicles Rental 7593

14 HP Power tiller with trolley, cultivator, disc harrow, rotovatorHrs./year 1920 700 1344

Mini tiller - 5.5 HP with MB plough Hrs./year 1920 400 768

Honda 6.5 HP 2-wheel mini tiller with rotavator Hrs./year 1920 400 768

Rice reaper Hrs./year 640 1100 704

Mini corn harvester Hrs./year 1920 800 1536

Mini corn sheller Hrs./year 3840 150 576

Multicrop thresher (rice, wheat) Hrs./year 640 1500 960

Power sprayer Hrs./year 1920 50 96

Sprayer Hrs./year 3200 5 16

Irrigation pump Hrs./year 1920 250 480

Transportation trip/year 100 2250 225

Maintinance Charge to other operatiors month 12 10000 120

Total 7593

Assumptions:

Annual working days: 200

Particulars Nos. Hrs/unit Hrs./Year

14 HP Power tiller with trolley, cultivator, disc harrow, rotovator3 640 1920

Mini tiller - 5.5 HP with MB plough 3 640 1920

Honda 6.5 HP 2-wheel mini tiller with rotavator 3 640 1920

Rice reaper 1 640 640

Mini corn harvester 3 640 1920

Mini corn sheller 6 640 3840

Multicrop thresher (rice, wheat) 1 640 640

Power sprayer 3 640 1920

Sprayer 5 640 3200

Irrigation pump 3 640 1920

ANNUAL REVENUE ESTIMATION

(At 100 % Capacity Utilisation)


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Annex 5

I. Repayment Schedule with Equal Installment

Medium Term Loan : 4088

Interest Rate : 10%

Capital Recovery Factor : 0.26380

Installment : 1078

Repayment Time: 5 Year

(Rs. in '000)

SN Year 0 1 2 3 4 5

1 Installment 1078 1078 1078 1078 1078

2 Principal 670 737 810 891 980

3 Interest 409 342 268 187 98

4 Loan Outstanding 4088 3418 2682 1872 980 0

REPAYMENT SCHEDULE OF TERM LOAN


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Annex 7

(Rs. in '000)

Year of Operation 0 1 2 3 4 5

Capacity Utilisation 35% 40% 60% 70% 80%

I. CASH INFLOW: 0 2658 3037 4556 5315 6074

Sales Revenue 2658 3037 4556 5315 6074

Salvage Value

II. CASH OUTFLOW: 6755 1385 1483 1852 2042 2233

Capital Expenditure 6755

Operating expenses 1362 1409 1596 1690 1783

Tax 23 75 256 352 449

III.NET CASHFLOW (before finance) -6755 1273 1554 2704 3273 3842

FINANCING

Loan I 4088

Loan II 273 302 416 474 531

Debt services

- Interest I 409 342 268 187 98

- Interest II 27 30 42 47 53

- Principal I 670 737 810 891 980

- Principal II 273 302 416 474 531

Net financing 1379 1410 1536 1599 1662

IV. NET CASHFLOW after Fin. (C+D) -6755 2651 2964 4240 4873 5504

CASH FLOW PROJECTION


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Annex 8

(Rs. in '000)

Break Even Point

2126

1. Total Fixed Cost

1002

2. Total Variable Cost

7593

3. Annual Sales Revenue

________________

BEP in Percentage = Sales - Variable Cost

2126

________

= 6591

= 32%

BEP in Sales, Rs. = 2449

Simple Payback Period

(Rs. in '000)

SN Year Of Operation 0 1 2 3 4 5

1 Net Profit -6755 154 499 1711 2356 3007

2 Depreciation & Amortisation 683 683 683 683 683

3 Profit before Dep. & Amortization 837 1182 2394 3039 3690

4 Cumulative Profit -6755 -5918 -4736 -2342 697 4387

Simple Pay Back Period = 3.8 Years

FINANCIAL INDICATORS

Fixed Cost


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Annex Table 1.1: List of equipment suitable for flat land agricultural area in the hills

SN Items Unit cost Remarks

1 4W Tractor 47 HP 1,200,000 The prices are indicative and

may differ from place to

place also depending on

the brand

2 Rotovator 1,65,000

3 Disc harrow 65,000

4 Heavy duty cultivator 40,000

5 Mini harvester for rice 1,350,000

6 Rice thresher 360,000

7 Rice planter 250000

8 Irrigation pump electric 5 hp 35000

9 Pump, diesel, 5hp 45,000

10 Trolley 250,000

Manakamana Agriculture Machinery Custom Hiring Center

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