Model business plan

Model Business Plan for the Investment Program on the Construction of 6 ha Greenhouse in the Vicinity of Noragavit district of Yerevan

2012

2

2012

Model Business Plan for the Investment Program on the Construction of 6 ha Greenhouse in the Vicinity of Noragavit district of Yerevan

1 1 | Էջ Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Model Business Plan for the Investment Program on the Construction of 6 ha Greenhouse in the Vicinity of Noragavit district of Yerevan

The Investment Program on the Construction and Development of Greenhouses in the Vicinity of Yerevan has been approved by the Government and is implemented by the Armenian Harvest Promotion Centre

2 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Contents 1.

Preface ................................................................ ................................................................................................................................ ............................................................. 4

2.

Program Overview................................................................................................................................ ................................ ..................................................................... 6

3.

Marketing ................................................................ ................................................................................................................................ ................................................... 9

4.

5.

6.

7.

8.

3.1.

Target Market Research ................................................................................................................................ ................................ ........................................................ 9

3.2.

Marketing Mix (4P)................................ ................................................................................................................................ ............................................................. 16

3.2.1.

Product: Tomato ................................................................................................................................ ................................ ........................................................ 16

3.2.2.

Price-Pricing ................................................................................................................................ ................................ .............................................................. 16

3.2.3.

Distribution: Product Realization Channels. Sales Networks ................................................................ ................................................. 19

3.2.4.

Promotion ................................................................................................................................ ................................ .................................................................. 19

Production Planning................................................................................................................................ ................................ ..................................................................... 21 4.1.

Selection of the Greenhouse reenhouse Construction Site ................................................................................................ ................................................. 21

4.2.

Greenhouse Equipment ................................................................................................................................ ................................ ...................................................... 21

4.3.

Production technology ................................................................................................................................ ................................ ....................................................... 22

4.4.

Manpower for Production ................................................................................................................................ ................................ .................................................. 23

4.5.

Timeframes for Implementing the Program ................................................................................................ ...................................................... 24

Investment Planning ................................................................................................................................ ................................ .................................................................... 25 5.1.

Value of investment ................................................................................................................................ ................................ ............................................................ 25

5.2.

Financing ancing Methods, Terms and Sources ................................................................................................ ............................................................ 26

Financial Planning ................................................................................................................................ ................................ ........................................................................ 27 6.1.

Basic Data on the Program ................................................................................................................................ ................................ ................................................. 27

6.2.

The main assumptions for doing the calculations ................................................................ ............................................................................. 27

6.3.

Sales Forecast and Income Planning ................................................................................................ .................................................................. 28

6.4.

Cost Planning ................................................................................................................................ ................................ ....................................................................... 29

6.5.

Income Calculation ................................................................................................................................ ................................ ............................................................. 32

6.6.

Tax System................................ ................................................................................................................................ ........................................................................... 33

6.7.

Income Statement ................................................................................................................................ ................................ ............................................................... 33

6.8.

Cash Flow Statement (thousand ousand USD) USD ................................................................................................ ............................................................... 35

Evaluation of the Program Effectiveness ................................................................................................ ..................................................................... 36 7.1.

Methodology for Evaluating the Program Effectiveness ................................................................ ................................................................... 36

7.2.

Evaluation of Program Effectiveness ................................................................................................ .................................................................. 37

Evaluation of risks and means to mitigate them................................................................................................ them .......................................................... 38

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

1. Preface In the recent years, the average annual volume of vegetable crop production in Armenia has made up 800 000 tons, which is approximately 250kg per capita. This is quite a good figure.

Nevertheless,,

due

to

climatic

conditions,

crop

production

in

Armenia

is

highly

seasonal in nature. The development and expansion of state-of-the-art state art greenhouses is an effective measure for mitigating the seasonal fluctuations fluctuations of crop production in Armenia, increasing the competitiveness both in domestic and foreign markets, as well as for reducing the import volumes of crop production in the country.

For the purpose of developing and enhancing state-of-the-art state art greenhouses greenhou in Armenia, the Armenian Harvest Promotion Centre CJSC has developed the Investment Program on the Construction and Development of Greenhouses in the Vicinity of Noragavit District of Yerevan, which has been approved by the Government of the Republic of o Armenia.

The program is developed based on the climate data in the vicinity of Noragavit district of Yerevan, as well as on the study and analysis on communal infrastructure and the Yerevan TPP resources. While developing the program, the comparative advantages advantages of Armenia, such as the number of sunny days, the length of daylight, the availability of agricultural lands and water resources, as well as rather competitive tariffs of electric energy and gas have been taken into consideration.

The program assumes es constructing 50ha state-of-the-art state art greenhouses on 70ha of land in the vicinity of Noragavit district within three years. On the assumption of the optimum sizes of greenhouses, the positions of the existing maintenance facilities, as well as the positions position of those to be constructed, we anticipate dividing the land area into 9 separate lots each with 5-11 5 ha of area. The lots will be alienated to investors on installment plan, who will construct and operate the greenhouses within the period of 1-3 1 years.

The implementation of the program will give the opportunity to improve the efficiency of crop production and make it year-round, year round, to ensure the availability of the crop products in the domestic market, as well as to create large amounts of products for export. expo On the assumption of the sizes of the lots in the vicinity of Noragavit district and the international experience in the area of greenhouse construction, according to which the 4 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

optimum size of the greenhouses is 4-6 4 6 ha, the Armenian Harvest Promotion Centre has developed a business plan for the construction and operation of 6 ha greenhouse.

In the business plan we've chosen tomato as a crop, and the Russian Federation -as its sales markets based on its climate conditions are considered to be a large scale cale importing country.

According to the business plan, we anticipate constructing the 6 ha greenhouse through 6 phases. Nevertheless, eless, on the assumption of the current amount of financial resources required for the investment, the program may be implemented stepwise within three years, starting from 1-2 1 hectares.

5 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

2. Program Overview The business plan aims at evaluating tomato production in the greenhouse, situated in the vicinity of Noragavit district of Yerevan, studying its realization and evaluating its effectiveness.

Basic Data Program initiation Planning horizon Currency Exchange rate (USD/ AMD) Land area Greenhouse area Yield Cost price Average realization price (ex work) Long-term loan interest (%)

From the moment of financing 8 years USD 390 6,5 ha 5,8 ha 55 55-60 kg/m2 0,81-0,88 0,88 USD/ kg 1,2 USD/kg 10%

Greenhouse Equipment The program assumes using the following modern technological solutions and systems for constructing state-of-the-art art greenhouses.

The program assumes using the following modern technological solutions and systems for constructing state-of-the-art state greenhouses.

Vertical and Horisontal Screening system Drip irrigation system; UV disinfection system; system Condensation water harvesting and reusing system; Automatic heating system; CO2 dosing system;; High pressure fogging system; system Ventilation system;; Microclimate computer omputer control system.

Product We anticipate growing tomatoes in the whole area of the greenhouse. 6 ha greenhouse is capable to produce 3500 tones of tomato per year, and, in case of using assimilation lighting, the productivity may increase by approximately 20%.

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Production Technology From agronomic and financial viewpoints, it is expedient to to start tomato production in September, because in this case, due to the seasonality factor, factor the heaviest crop is got in the period from January till May, when the price of tomato reaches its peak.

Pricing On the assumption of production data and the RF market research results, the realization price of 1 kg tomato set directly by the producer is 1,2 USD. In case of transporting the tomato to Moscow, the price of tomato will increase by 0,28 USD per kilo due to transportation and other expenses, and the final price will make up 1,48 USD.

Market Potential Considerable positive developments have been recorded in vegetable, in particular tomato’s consumption volumes in the Russian Federation, which is not harmonious with the development of greenhouse production in the RF.. Recently, tomato market volume has made de up 852 mln USD, USD while tomato import volumes have increased. increase . The significant difference between consumption and production in the RF makes the RF tomato market attractive to tomato exporting countries.

Product Realization In the first stage of activities, we anticipate organizing the realization of the produce through specialized exporting organizations, as well as through cooperating cooperat with Russian ussian wholesalers and large retail networks.

7 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Capital investments 10, 64 mln USD investment is needed in order to implement the program on the construction of 5,8 ha greenhouse on 6,5 ha land area, the major part of which (approximately imately 82,7%) is needed for building the greenhouse and for technical equipment. The rest of the amount is needed for purchase of land (7%), obtaining the right to use the infrastructures infrastructures (3,2%) as well as for the replenishment of working capital (7,1%).

(7,1%)

Program Finance We anticipate implementing the program through borrowings (80%) and own equity (20%).

Evaluation Criteria for Program Effectiveness In the result of calculations the following data have been received for the evaluation of the program effectiveness: Data Payback period Discounted payback period Profit margin for the first 6 years Profit margin starting from the 7th year ROE (return eturn on investment)/ Net present value (NPV) Internal rate of return (IRR) Profitability Index (PI)

Value

Unit

4,97 6,77

year year

39,60% 54,08% 19,42% 9 368 547,91 21,95% 1,91

% % % USD %

8 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

3. Marketing 3.1.

Target Market Research

Crop production is considered to be one of the key branches of agriculture. Vegetables is one of the most important and irreplaceable components of the human diet. Vegetables are grown both in open field and on the protected ground Protected ground means heated and unheated glass, polycarbonate and polyethylene greenhouse, spring spring greenhouses, as well as the protected area, established for the purpose of growing crops in any way. Today, protected ground production is actively developing by covering larger areas. China is considered to be the leading country in the world by its large protected ground areas, where 1 700 000 ha land is allocated for this purpose. Based on the areas of protected ground, some of the leading countries are presented below.

Land area allocated to protected ground by countries /ha/ 52000 42000 41000

Japan 20000

Italy 10000 10000 8500 6300

Morocco Poland 2100 Belarus

200

As you can see, in terms of the areas allocated for the purpose of protected ground protection, the RF comes after a series of countries, including those located in warm climate zones and taking advantage of open-field open field crops for longer period. For example, Spain, which is located in the warm climate zone, 52 000 ha land is allocated for protected ground production, while in Russia only 2100 ha land is allocated for this purpose. As a result, the volumes of consumption and growing in Russia considerably differ dif from each other, other and consumption is mainly ensured through imported vegetables. The major part of vegetables imported into the RF falls to tomato. On the assumption of the aforementioned factors and in the result of the

9 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

program’s financial calculations and studies, the RF tomato’s market is being observed as an export market for tomato.

•

The Volume and Structure of the RF Tomato Market Since 2005, sustainable growth has been recorded in the volumes of tomato in the RF

market along with the increase in the volume of global food. The total volume of the RF tomato market made up 852 mln USD in 2010.

The RF tomato market structure is observed by dividing the market in accordance with the following two factors: By the growing type: grown in an open field and on a protected ground; ground By the country where it’s grown: grown in the RF and imported. import On the assumption of climate data, local open-field products are available in the market only during the period from July till November. During the season, when the local open-field open produce is available, the imported tomato’s share in the market decreases de dramatically, nevertheless, it makes up 50% of the market. During the rest of the year the produce grown on a protected ground is consumed. During off-season months, imported tomato prevails in the market, which constitutes over 90% of the market during those months. During the winter months one can meet only imported tomatoes almost in all shops.

Below please find the share of local tomato grown on the protected ground in the Russian tomato market on an annual basis. basis Structure of the RF tomato market by producers 9% Ռուսական փակon գրունտում աճեցրած Tomato grown the Russian protected ground

91%

Open grown and imported tomato Հողի եվfield ներմուծվող

10 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

•

Import According to the data provided by the RF Federal Customs Services, Services 3mln tonnes of

vegetable was imported into Russia by foreign suppliers in 2010 and 3,4 mln tonnes – during the first 9 months of 2011. The figures demonstrate that import volumes in overall vegetable market tend to increase.

Tomato is one of the largely imported vegetables. Total Total import volume of tomato in the RF made up 766 622 000 USD and, and accordingly, 696 890 tonnes in 2010. The following import dynamics have been recorded in the RF during the period from 2007-2010: 2007 :

Import dynamics of tomato 20072007-2010 691943 642184

657454 623085

766622 696890

Tomatos import dynamics/in USD/ USD

477784 458210

Tomato import dynamics /in tonnes/

2007

Moreover,

2008

over

50%

2009

of

the

2010

imported

tomato

is

imported

from

Turkey.

Below please find the he structure of imported tomato by countries /in tonnes/. tonnes Tomato import structure by countries for 2011

Tomato prices in 2011 by importing countries

Թուրքիա - 379020,9 տ. t Turkey-379020.9 379020.9

$2.10

Ուկրաինա - 83381.9t 83381,9տ.

Ukraine-83381.9t

Մարոկո - 43512,87 տ.

Morocco-43512.87t 43512.87t

Israel

Belgium

Macedonia

MacedoniaՀանրապետություն - 3968,2տ Macedonia-3968.2t Մակեդոնիայի

Netherlands

Israel-9422.2t Իսրայել - 9422.2t 9422,2տ.

Spain

Բելգիա Belgium-17028.07t - 17028,07 17028.07t տ.

Azerbaijan

Հոլանդիա - 30055,84տ.

Netherlands Netherlands-30055.84t

12%

$1.01

Իսպանիա - 30192,12տ.

Spain-30192.12t 30192.12t

Turkey

52% 11%

$1.38 $1.36

$0.75

$0.54

Ադրբեջան - 43220,28տ.

Azerbaijan Azerbaijan-433220.28t

6%

$1.21

$1.11

Morocco

6%

$1.55

$1.42

Չինաստան - 76945,97տ.

China-76945.97t 76945.97t

4%

China

2%1%

Ukraine

4%

ԱյլOther-7987t - 7987տ7987t .

11 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

• Tomato Prices Offered by Producers and Importers Both the volumes and prices of world food market have increased during the last decade.

Tomato prices in the Russian market have also increased, despite some short declines conditioned by specific factors and situations. Below please find changes in the price of imported tomato during ring the period from 2007-2011 2007 by importing countries: Importer price per 1 kilo of tomato Turkey

2007 $0,9

2008 $1,0

2009 $1,0

2010 $1,1

China

$1,0

$1,0

$1,0

$1,0

Uzbekistan

$1,9

$1,0

$0,7

$1,1

Price Dynamics of Imported Tomato 20072007-2011 2011 $1.1 $1.21 $1.38

The Netherlands

$1,5

$0,8

$0,8

$1.25

$1.04

$1,4

$0.95

$0.93

2008

2009

$1.10

$1.53 Morocco

$1,1

$1,0

$1,1

$1,3

Spain

$1,2

$1,1

$1,2

$1,4

Israel

$2,2

$1,4

$1,3

$1,7

$1.42 $1.55 $2.10 All the countries

$1,04

$0,95

$0,93

2007

2010

2011

$1,10 $1.25

Dynamics of the RF local tomato prices /kg/ 2007 $1,50

2008 $1,76

2009 $1,56

2010 $1,79

Tomato Price Dynamics of Russian Producers/ Producers/kg

2011

$2.22 $1.76

$1.50

$2,22

2007

2008

$1.79

$1.56

2009

2010

2011

As you can see, imported tomato’s price is lower than the price of the tomato produced in the territory of the Russian Federation. Despite additional transport expenses and 15% import taxes (customs duty), producers from Turkey, China and several other countries cou offer Russian shops cheaper tomato than local greenhouses do. In the result of which, during off-season off months the Russian tomato market is full of imported product. The non-competitive competitive price of the Russian tomato is conditioned by unfavorable climate climate conditions, the low level of development of the greenhouses, as well as by expensiveness of the cost price components. Due to unfavorable climate conditions and poor technical equipment, equipment, the RF agricultural producers consume more

12 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

resources for heating and assimilation lighting, which considerably increases the cost price of the produced vegetable.

According to estimations of specialists, based on the aforementioned factors, climate conditions and the vegetables’ volume of consumption, the RF will not be able to avoid largescale tomato imports during the upcoming decade. As a seasonal product, tomato’s price differs both in terms of producing country and seasonality. The highest tomato price offered both by producer and importer is recorded in the period from February till May, and the lower price – in the period from July till November, when open-field open field crop is available in the market.

Tomato’s import volume by months tones// /tones 2010

1.60

150000

$1,11

$1,18

32131

33285

1.40

130000

$1,08

$1,16

39984

42071

1.20

110000

March

$1,08

$1,18

55836

61635

1.00

90000

April May

$1,08 $1,08

$1,18 $1,13

76462 127262

88051 140944

0.80

70000

June July August

$0,66

$0,88

0.60

50000

$0,63 $0,65 $0,65 $0,63 $1,11 $1,14

$0,89 $0,85 $0,81 $0,79 ∗ $1,38 ∗ $1,42 ∗

0.40

30000

0.20

10000

0.00

-10000

RF tomato producer’s prices by months

$1,79

$2,79

$2.21

February

$2,33

$3,12

$2.35

March

$2,50

$3,19

$ 2.46

April

$2,55

$3,13

$ 2.57

May

$2,60

$2,88

June

$0,95

$2,70 $1,97

July

$0,90

August

$0,70

$1,62

September

$1,28

$1,15

October

$1,59

$1,03

November

$1,91

$1,22

December

$2,37

$1,81

The quantity of imported tomato in 2010

$3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

August

January

July

2012

June

2011

May

2010

The quantity of imported tomato in 2009

Monthly Tomato Prices Offered by Russian Producers

April

28612 33476∗ 66952∗ 78397∗

March

19710 22989 46229 54056

February

137711 30526 17536

January

September October November December

147736 49812 23463

Price of imported tomato in 2010

January February March April May June July August September October November December

January February

Price of imported tomato in 2009

December

2009

October

2010

November

2009

Price and quantity of imported tomato by months

September

Imported tomato prices per kilo (by months)

Geographical factor has its impact on tomato price also. For instance, the most expensive district of the RF for the tomato grown on the protected ground is considered to be Eastern Federal District, where the average tomato price offered by a producer in 2010 made up 4,5$ , 13 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

and the cheapest district is Southern Federal District, where the producer’s price made up 1,6 $ during the main period.

•

Market Potential According to the studies of nutritionists of the “Scientific Research Institute of Food”, Food” in

order to take the needed annual dose of vitamins, vitamins a RF resident must consume 87.6 kg vegetable per year, 13 kg of which, based on climate conditions, falls to off-season off season period, i.e. when vegetable is grown in greenhouses. During the mentioned period, the RF residents resident need 1,9 mln tonnes es of vegetable. While, according to the data provided by Growth Technology (“Технологии Роста”) Company, ompany, totally 560 000-570 000 570 000 tonnes of vegetable was grown on the local protected ground within the period from 2009-2011.

2009 However, owever, the mentioned volume of vegetable is not consumed. While, in the Central District and Moscow 7 kg protected ground vegetable is consumed per capita, in the total area of the RF it makes only 4,3 kg.

Vegetable consumption in the consumer basket during dur off-season season months is minimized.

According to the studies conducted by Growth Technology Company, the main reasons for consuming small amounts during off-season off months are as follows: Extremely high prices; prices Suspicious origin of imported vegetable; vegetable Deficit of high quality products in retail shops.

Nevertheless, it must be mentioned that the RF vegetable's consumer behavior has been changed during the last few years to the benefit of the development of the sector, and, today, the consumer is ready to spend more money from his/her pocket for vegetable consumption, than 10 years ago. The modern “Healthy food” tendency, the world propaganda of nutritionists, the close relations with pro-western western civilization promotes increase in the share of vegetable in the citizens' everyday diet.

•

The RF Greenhouse Sector The RF greenhouse sector has declined dramatically during the last two decades. During

the Soviet era the RF greenhouses covered 4700 ha territory, and in the beginning of 20122012 14 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

approximately 2000 ha. Every year, 70-100 100 ha greenhouses stop working because of poor technical equipment which makes make their product non-competitive. competitive. The increase in consumer demand and decrease in the volume of local greenhouse produce has resulted in more increase in the import volumes mes during the last few years. Therefore, the whole vegetable and flower market is full of imported product, and, in case of tomato, tomato the imported product constitutes 90%.

According to official data published, the annual import volumes of tomato exceed 700 000,0 thousand USD. In specialists' opinion, the actual volumes exceed the presented data two-fold. two Since 2000, some positive developments have ha been recorded in the area of greenhouse construction. They were mainly conditioned not by the construction of new greenhouses, but by re-equipment of the existing greenhouses.

Thus, during off-season season months the demand for vegetable is not combined with the positive development of the RF greenhouse sector. The greenhouse product deficit is compensated by imported products. product According to the sector’s specialists, import of several vegetables, in particular, tomato, pepper and eggplant, has never been possible to completely exchange with Russian products, product because they require long vegetation period for which considerable heating and assimilation lighting expenses are required.. Therefore, during several months, for instance, during the period from December till May, it is impossible to avoid large scale vegetable import volumes.

Today, 200 greenhouses operate operate in the territory of the RF with 6-10 6 ha land area, the major part of which is located in Central (33%) and Povolzhye (22%) districts.

The main vegetables grown in the RF greenhouses are cucumber (60%) and tomato (35%).

In the RF only 5% of the protected ground is allocated for growing the rest of crops.

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

3.2.

Marketing Mix (4P (4P)

3.2.1. Product: Product: Tomato Tomato According to the data provided by the Food and Agriculture Organization (FAO) of the UN, on the assumption of the production and sales volumes, tomato is considered to be the most widely used vegetable. World tomato production covers 4 mln ha land area, 60% of which falls to the protected ground.

Tomato (Solanum lycopersicum) is a crop from Solanaceae family and is considered c to be one of the most widely used and highest value vegetables. vegetables. There are thousand sorts of it, which differ from each other both in taste, appearance, quality and price. The implementation of the program assumes growing highly productive, durable, durab non-cracking, cracking, disease-resistant disease and very tasty tomato in a 6ha greenhouse area situated in the vicinity of Noragavit district. district

3.2.2. PricePrice-Pricing Pricing is consiered to be the most important component of Marketing Mix, because the selected price defines both the program’s percentage of profit and the competittiveness of the product. Therefore, efore, pricing requires a responsible approach and must be based on the following factors: Fixed and variable costs; Competitors’ price; Objectives of the organization; Strategic approach; Solvency level of the target group.

In the result of combining all these aforementioned factors and, taking into account the fact that the product, as well as the qualitative features of the product, the company adopts specific pricing policy and forms specific pricing policy.

Fixed and variable iable costs are presented in the financial part of business plan.

Competitors’ price – the tomato, which is going to be grown will be exported into the Russian market, therefore the competitive price of the RF tomato market is being observed. Taking into consideration consideration the structural features of the RF tomato market, 16 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

the countries importing tomato to the RF and others will be considered direct competitors for the tomato exported from Armenia into Russia, because over 90% of the tomato available in the market during off-season season months falls to imported tomato.

Hence, let us observe the realization prices set by large-scale large scale importing countries during off-season season months, including customs duty and transportation costs. The off-season off price offered by importers is being observed, because the program assumes exporting tomato during off-season off months and offers an appropriate price.

Thus, as the program offers off-season off season price, the importers prices for off-season off months have been calculated in order to compare with those those of importing countries. According to the statistics of the previous years, the annual average and seasonal importer prices differ by 11%.

Most of the large-scale scale tomato importing countries pay 15% customs duty (the CIS countries are exempt from customss duties), which was also included into calculations.

Importing country

Turkey Ukraine China Morocco Azerbaijan Spain Netherlands Belgium Israel Macedonia Other Average import price

1

Tomato price per 1 kilo throughout offoff-season months (annual average + 11%) 2

Tomato price per 1 kilo throughout offoff-season months , including customs duty (column (column 2 + 15%) 3

$1,11 $0,54 $1,21 $1,42 $0,75 $1,55 $1,38 $1,36 $2,10 $1,01 $1,33 $1,25

$1,23 $0,60 $1,33 $1,58 $0,83 $1,72 $1,53 $1,51 $2,33 $1,12 $1,48 $1,39

$1,38 $0,60 $1,48 $1,73 $0,83 $1,87 $1,68 $1,66 $2,48 $1,27 $1,63 $1,54

Average annual price of tomato per 1 kilo

The Ukraine and Azerbaijan mainly import open field tomato into Russia during the season, therefore, annual average price makes up 1 $. In January, 2012, the Ukraine imported

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

small amounts of tomato at 4,05$ per kilo. That means during off-season off season months the th produce of these countries is not competitive because the level of greenhouse activity in the mentioned countries is low.

Despite the share of Turkish tomato in the RF market consumer basket, it as a low quality product with suspicious origin. Turkey and China offer 1,5$ per 1 kilo of tomato.

In terms of quality, Israel, Spain, the Netherlands and other European countries offer better products, nevertheless, they offer 1.5-2.5$ 1.5 per kilo of tomato.

Hence, it is possible to divide the RF imported tomato by 3 categories in accordance with qualitative features and wholesaler realization price:

1. Tomato imported during the season – max. 1$ 2. Low quality tomato –max. max. 1.5$ 3. High quality tomato– 1.5-2.5$ 1.5 The implementation of the program assumes exporting tomato from Armenia into the RF market, which will be equal to the tomato offered by the European countries in terms of quality standards.

In the result of financial calculations and market research, the annual average price for the tomato produced in the territory of Armenia, is defined 1.20 USD/kilo. Transportation to Moscow city, RF will cost 0.28 USD/kilo. The realization price set by the Russian wholesalers will make up 1.48 USD. Therefore, the program will offer low price/high quality combination, which is an important ortant precondition for the product competitiveness as well as for entering the market. The high quality of the product is conditioned by favorable climate conditions, the number of sunny days, the intensity of solar radiation, water quality and other factors fact needed for high quality crop.

The program objectives and strategic approach comply with the realization price in the RF territory, which has been approved by the program, because the program objectives and strategy assume large-scale scale imports for which a competitive price is needed.

The level of solvency for the target group. Moscow has been chosen as a target market in the RF, taking into account the solvency of its population, because, in terms of income

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

per capita, it is the leader in the RF and, according according to statistical data, income per capita is $1500 in Moscow.

3.2.3. Distribution: Product Realization Channels. Sales Networks The program assumes realizing large volumes of tomato in the RF market and, in the first phase of activity, it anticipates organizing indirect distribution, i.e. organizing product realization through cooperating with wholesalers and retailers. Therefore, the cooperation is going to be both with large sales networks, i.e. wholesalers and with the leading supermarkets in the observed served market. As soon as the produce adopts in the Russian market, we can move to direct distribution channels.

3.2.4. Promotion There are several approved promotion methods, such as ads, PR, sales promotion, individual sale, targeted marketing, internet marketing. market The mentioned promotion means can be ineffective for promoting tomato, because they can be quite expensive to attract the whole target market and they can promote the competitors’ product also.

Thus, a specific orientation is needed for selecting the subject of promotion. In is case, it is possible to observe 3 variants of promotion: 1. To promote the consumption of tomatotomato in this case meanwhile we also promote the competitor’s product. On the one hand, we have a large “tomato consuming” target group, which ich requires large investments to attract it. On the other hand, tomato consumer has an approved amount of sorts and dose of tomato to consume which requires global approaches to influence them.

2. Promoting Armenian tomato, which can be done through propaganda-The propagan main goal will be to raise the reputation of the Armenian harvest, which will directly promote increase in sales volumes. It is effective, but requires large-scale large scale investments.

3. To promote the brand - in this case tomato is presented under a pan-Armenian pan brand, which is to be introduced be the Armenian Harvest Promotion Centre implementing the 19 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

program. Under the brand, the agricultural products with appropriate qualification can be introduced in foreign and domestic markets by any producers.

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

4. Production Planning 4.1. Selection of the Greenhouse Construction Site

Selection of the area in the vicinity of Noragavit district as greenhouse construction site was conditioned by availability of the Yerevan TPP's thermal resources and availability of appropriate lands, as well as convenience of the site to construct centralized infrastructures.

The availability of the centralized system of the main infrastructures will enable the investors to avoid rather sophisticated, time and resource consuming solutions for electric energy, water and gas supply, as well as for water discharge. As to the heat supply, the construction of the main supply infrastructure for the greenhouse zone will allow the investors to compensate the most part off the thermal energy generation cost. Meanwhile, the use of the TPP's thermal energy will promote the stability of the TPP's product consumption, on the one hand, and the investors will benefit from more affordable supply, on the other. Consequently, the product roduct cost price will decrease; and the level of profitability and the product competitiveness will increase. The aforementioned factors will positively influence on the price of the investments’ payback period also.

4.2. Greenhouse Equipment State-of-the-art greenhouses are at least 4 m high glass or polycarbonate steel frame structures with their heating, screening, blacking out, assimilation lighting (or without this), drip irrigation, modern automatic electric and computer climate control systems, as well as with their supporting operation and maintenance (cool storage, sorting, packaging, etc.) facilities for hydroponic and soil-based based crop production: According to the leading greenhouse producing companies with 10 years of experience in the field the price for 1 m2 greenhouse fluctuates between 140 and 200 USD depending on the level of technical equipment applied.

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Under the program the greenhouses will be equipped with the following main technologies and systems: • Vertical and horizontal screening system; • Drip irrigation system; • UV disinfection system; • Condensation water harvesting and reusing system; • Automat heating system; • CO2 dosing system; • High pressure fogging system; • Ventilation system; • Microclimate computer control system.

4.3. Production technology Tomato will be grown in hydroponic method under the control of central automatic system.

The first crop is harvested in 2 months after planting the seedling. The productivity of the tomato fluctuates between 1.5-10 10 kg/m2 depending on the season.

From agronomic omic and financial viewpoints, production of tomato is expedient to start in September, because in this case due to seasonality factor the highest crop is got during the period from January till May, when the price of tomato reaches its peak.

During the first rst year (2012) the crop is harvested only in November and December.

Below please find monthly product volumes, since the 2nd year of operation.

Tomato Production by months

Production (kg/m2)/ Month January February March

Season ality factor 11,0% 12,0% 14,0%

2013 6,05 6,60 7,70

2014 6,05 6,60 7,70

2015 6,60 7,20 8,40

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

April May June July August September October November

15,0% 16,0% 18,0% 3,0% 0,0% 0,0% 0,0% 3,0%

8,25 8,80 9,90 1,65 0,00 0,00 0,00 1,65

8,25 8,80 9,90 1,65 0,00 0,00 0,00 1,65

9,00 9,60 10,80 1,80 0,00 0,00 0,00 1,80

December Total production from unit/ unit/ (kg/m2)/

8,0% 100,0%

4,40 55,00

4,40 55,00

4,80 60,00

3 223 000

3 223 000

3 516 000

Total tomato production (kg/year)/

4.4. Manpower for Production The normal operation of a 6 ha greenhouse requires 105 employees – 15 administrative employees and 90 workers. The major part of the works is automated and controlled by the central system.

Exept the key manpower, we anticipate inviting a Dutch master growing specialist for providing consultation on tomato growing techniques.

Position

Number of employees

Full monthly salary USD) per person (USD)

Total annual salary (USD) USD)

Director/Production manager/ Deputy manager (supply, sales) Financial manager /Chief accountant

1 1 1

2 190 1 651 1 517

26 277 19 815 18 200

Accountant Agronomist Crop protection specialist Engineer Computer system specialist Heating system specialist Electrician Plumber Guard

1 1 1 1 1 1 1 1 4

574 1 382 1 382 1 382 1 382 1 382 709 709 246

6 892 16 585 16 585 16 585 16 585 16 585 8 508 8 508 11 815 23 | Page

Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Dutch master grower (following years) Total fixed salary Workers Total variable salary Total salary costs

15 90 90 105

14 506 330 330 14 836

21 000 203 938 356 289 356 289 560 8

4.5. Timeframes for Implementing the Program We anticipate starting greenhouse construction from the moment of financing. According to Dutch and other foreign greenhouse construction companies, construction of a 6 ha state-ofstate the-art takes 4-88 months depending on the number of factors.

The first crop p is harvested 2 months after planting seedlings.

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

5. Investment Planning 5.1. Value of investment On the assumption of the average prices set by a number of greenhouse producing and supplying companies, the amount of investment fluctuates between 140-200 140 USD per 1m2 depending on the level of technical equipment adopted.

10, 64 mln USD investment is needed in order to implement the program on the construction of 5,8 ha greenhouse on 6,5 ha land area, the major part of which (approximately 82,7%) is needed for building the greenhouse and for technical equipment. The rest of the amount is needed for purchase of land (7%), obtaining the right to use the infrastructures (3,2%) as well as for the replenishment of working capital (7,1%).

Investment structure Replanishment of working capital 7% Other systems and equipment 13%

Land 7%

Irrigation system 11%

Right to use infrastructures 3%

Greenhouse consrtuctions(including glass) 35%

Screening system 6%

Heating system(including CO2 unit) 18%

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Investments Description

Land acquisition The right to use infrastructures Greenhouse constructions(including glass Heating system (including CO2 system) Screening system Irrigation system Other systems and equipment Replenishment of working capital Total investment

Price [USD USD]

Share in the overall amount of investment

743 333,3 337 500,0 3 690 901,4 1 894 435,2 637 965,2 1 136 599,4 1 436 765,2 760 000 10 637 499,7

7,0% 3,2% 34,7% 17,8% 6,0% 10,7% 13,5% 7,1% 100%

Replenishment of Working Capital During the first few years of operation approximately 760 000 USD will be required for the replenishment of working capital.

The major part of current expenses includes the VAT paid to suppliers for the obtained products, long-term term loan interest expenses, variable and fixed labour costs, as well as expenses for obtaining planting materials.

5.2. Financing Methods, Terms and Sources Sources • Through Armenian banks receiving rather accessible long-term term loans from the financial institutions of greenhouse producing (or supplying) countries on the amount equal to the equities of the greenhouse producers. For receiving the aforementioned foreign loans, insurance will be required by the same countries’ insurance companies.

• Accomplishment of the greenhouse construction by foreign greenhouse constructers through financial leasing.

• Lending up to 80% of the price of the investment program through Armenian banks in the condition ion to ensure 20% of the program value through the investors’ own equity.

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

6. Financial Planning 6.1. Basic Data on the Program

The following financial calculations have been made for a 5,8 ha greenhouse constructed in a 6,5 ha land area.

Project initiation

from the moment of financing

Planning horizon Currency Exchange rate USD / AMD Long-term loan interest nterest (%)

8 Years USD 390 10%

6.2. The main assumptions for doing the calculations In order to calculate and evaluate the effectiveness of an investment plan, specialists use some index systems.

The financial analysis of the programs aims at evaluating its profitability. It’s necessary to persuade that investing financial resources in the program is more profitable than an alternative utilization ion of the resources. Alternative options can be as follows: • To refuse to participate in the program – in this case the investor does not lose or receive anything.

• To Use the financial resources in order to receive guaranteed average income (e.g. from a bank deposit).

At least the 2 aforementioned alternative variants should be taken into consideration when carrying out financial analysis.

Discount Rate As a discount factor, we have considered the waited average capital cost (WACC). The formula of the WACC is as follows:

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

!"##

!$ %& ' ( ) * +, !-

Whereby:

%

%

As the program is going to be implemented through 80% borrowings and 20% own equity, wd and wc will make 0,8 and 0,2 accordingly. rd is the long-term term loan interest and equals to 10%. Usually it is used in the formula of the WACC after imposing taxes on variable assets, nevertheless, taking into account that income tax will not be imposed during the activities, under the program we use

instead of

.

In case of not investing financial resources in the program, the money can be deposited in a bank. This fact should be taken into account when calculating the WACC. Consequently, the cost of equity – , is considered as average annual interest rate (7%) available in the Republic.

Hence, WACC= 0.8*10%+0.2*7%= 9.4%

6.3. Sales Forecast and Income Planning

Monthly Tomato Production kg/m2 for 2013

6.60

9.90

8.80

8.25

4.40 1.65

1.65

28 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

December

0.00 October

0.00 September

August

July

June

May

April

March

February

January

0.00

November

6.05

7.70

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

In terms of 1m the monthly profitability of tomato fluctuates between 1.5-10 1.5 kg/m2 depending on the seasonality factor. The lowest crop is got in the period from July till November, and the highest crop in the period from May till June.

Taking into consideration Armenia’s climate conditions and the assessments assessm of Dutch specialists, the productivity of tomato has been calculated 55 kg/m2 for the first year and 60 kg/m2 since the second year.

In the result of market research and financial calculations, the average annual realization price set by the producer er (ex work), was 1,2 USA.

Tomato production, sales revenue and net profit on an annual basis

Production Sales revenue Net profit

Unit

2012

tonnes thousand USD/kg

355 425

2013 2014 2015 2016 2017 2018 2019 TOMATO 2020 3223 3223 3516 3516 3516 3516 3516 3516 3868 3868 4219 4219 4219 4219 4219 4219

-353

1103 1343 1904 2112 2279 2288 2283

2276

6.4. Cost Planning Gross expenditure for the tomato grown in the greenhouse is as follows: 36% 36 -variable costs and 64% -total total fixed costs.

Structure of Total Tomato Costs

Total variable costs 64%

Total fixed costs 36%

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Variable costs include costs for heating (27%), variable labour (28,8%), %), as well as costs for obtaining planting material (15%) %).

Variable costs, thousand USD Unit cost (USD/ USD/m2)

2012

2013

2014

2015

2016

2017

2018

2019

2020

Plant material Substrate

2,94 0,70

172,28 41,02

172,28 41,02

172,28 41,02

172,28 41,02

172,28 41,02

172,28 41,02

172,28 41,02

172,28 41,02

172,28 41,02

Crop protection Water Fertilizer application Heating Electricity (Cool) storage Variable salary

1,54 0,17 1,40 5,72 1,18 0,25 6,08

15,04 1,70 13,67 55,91 11,52 0,00 59,38

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

90,24 10,20 82,04 335,45 69,10 14,65 356,29

Other variable Costs Total variable costs

0,82 20,81

10,90 381,4

47,93 1215,7

47,93 1215,7

47,93 1215,7

47,93 1215,7

47,93 1215,7

47,93 1215,7

47,93 1215,7

47,93 1215,7

Variable Costs' Structure

Տնկանյութ

Planting material

Սուբստրատ

Rockwool

Բերքի պաշտպանություն

Crop protection

4%

15%

4%

Ջուր

Water

29% 7% 1% 7%

Պարարտանյութի Fertilizer application օգտագործում Ջեռուցում

Heating

5% 27% 1%

Էլեկտրաէներգիա

Electric energy

Պահեստավորում Պահեստավորում/պաղեցում

Cool storage

Փոփոխուն աշխատավարձ

Variable salary

Այլ փոփոխուն ծախսեր

Other variable costs

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Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Fixed costs include depreciation costs (55%), fixed salary fund (31,72%), (3 maintenance costs (7%) and office costs (4%)..

Depreciation has been calculated in accordance with straight line depreciation method, without considering salvage value. Maintenance costs have been calculated based on the amount of annual depreciation allocations.

Maintenance costs for the first two years have been calculated accordingly 5% and 10% of depreciation costs. And after that it is assumed that maintenance costs will increase increas by 10% annually.

Fixed costs, costs, thousand USD

Unit cost 2012 (USD/ (USD/ m2 ) Fixed salary Office costs Maintenance Depreciation Other fixed costs Total

2013

2014

2015

2016

2017

2018

2019

2020

3,5

96,97

262,94

203,94

203,94

203,94

203,94

203,94

203,94

203,94

0,5

14,01

28,01

28,01

28,01

28,01

28,01

28,01

28,01

28,01

2,3

0,00

19,07

38,13

41,95

46,14

50,75

55,83

61,41

67,55

6,7 0,3

0,00 2,22

389,76 14,00

389,76 13,20

389,76 13,27

389,76 13,36

389,76 13,45

389,76 13,55

389,76 13,66

389,76 13,79

13,1

113,19

713,77

673,04

676,93

681,21

685,91

691,09

696,79

703,05

Fixed Costs' Structure Other fixed costs 2%

Fixed Salary 32%

Depreciation 55% Office costs 4%

Maintenance 7%

31 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

6.5.

Income Calculation

Unit costs

USD/ USD/m2

USD / kg/ 1st year

USD / kg/ 2nd year

USD / kg/ 3d year

Total Variable costs per unit Heating

20,81 5,72

0,38 0,10

0,38 0,10

0,35 0,10

Variable salary Planting material

6,08 2,94

0,11 0,05

0,11 0,05

0,10 0,05

Other variable costs

6,06

0,33

0,33

0,10

Total fixed costs per unit

13,12

0,24

0,24

0,22

Maintenance

2,25

0,04

0,04

0,04

Depreciation

6,65

0,12

0,12

0,11

Other fixed costs

4,22

0,08

0,08

0,07

Total production costs per unit

33,92

0,62

0,62

0,57

Loan intereset

15,58

0,28

0,28

0,26

Total

49,50

0,90

0,90

0,83

Income Structure Heating 12% Interest on loan 31%

Variable Salary 12%

Planting material 6%

Other fixed costs 9% Other variable costs 12% Depreciation 14%

Maintenance 4%

In the major part of the self-cost self structure falls to the interest expenses (31%), (3 which is conditioned by the fact that 80% of investments are financed through borrowings. borrowings After full loan repayment, the self-coast coast of tomato will make 0,83 USD, in3 years it will

decrease by

approximately 31% and will make up 0,57 USD. 32 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

6.6.

Tax System

Profit tax - According to the RF law on “Profit tax”, tax payers producing agricultural products are exempt from Profit tax in terms of income from the realization of their agricultural product, in particular root crops, vegetables and melon crops, as well as protected ground produce. Consequently, under the program, the income from the realization of the greenhouse product is not subject of profit tax.

VAT – As for VAT payers, according to the RA Law on the Value Va Added Tax, the payment deadlines for the VAT calculated by the customs offices for specific products defined by the same law are postponed for three years after customs declaration, in case if the customs value of the products exceeds 300 mln AMD. Consequently, sequently, the deadline for paying the VAT of the imported goods and equipment required for the construction of the greenhouses under the program is postponed for 3 years.

According to the RA Law on the Value Added Tax zero tariffs are applied in terms of the products exported out of the RA customs border under the customs regime of "export for free circulation".

As under the program we anticipate, will be exported, thus the VAT paid to the suppliers and for import, is full subject to return.

Customs duty – according to the RA legislation, legislation 10% customs duty is imposed for 20% of the equipment needed for greenhouse construction, and for the rest 80% - 0% customs duty is envisiged.

6.7.

Income Statement

Income statement (annual/ USD)

2012

2013

2014

2015

2016

2017

2018

2019

2020

Sales from tomatoes

425,44

3 867,60

3 867,6

4219,20

4219,20

4219,20

4219,20

4219,20

4219,20

Tomatoes Production Variable costs Marginal profit Fixed costs

381,42

1 219,21

1 219,21

1219,21

1219,21

1219,21

1219,21

1219,21

1219,21

44,01 113,19

2 648,39 713,77

2 648,39 673,04

2999,99 676,93

2999,99 681,21

2999,99 999,99 685,91

2999,99 691,09

2999,99 696,79

2999,99 703,05

33 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

-

20,51

20,51

20,51

20,51

20,51

20,51

20,51

20,51

(69,18)

1 914,10

1 954,84

2302,55

2298,27

2293,56

2288,39

2282,69

2276,43

283,67

811,07

611,53

398,78

186,71

14,77

-

-

-

Earnings before taxes Income tax

(352,85)

1 103,03

1 343,30

1903,76

2111,55

2278,80

2288,39

2282,69

2276,43

-

-

-

-

-

-

-

-

-

Net profit

(352,85)

1 103,03

1 343,30

1903,76

2111,55

2278,80

2288,39

2282,69

2276,43

Selling expenses Earnings before interest and taxes Long term loan interest expense

34 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Model Business Plan for the Investment Program on the Construction of 6 ha Greenhouse in the Vicinity of Noragavit district of Yerevan

6.8.

Cash Flow Statement (thousand (thousand USD) USD)

2012

2013

2014

OPERATING ACTIVITIES Net income

(352,8)

1103,0

1 343,3

1 903,8

2 111,6

2 278,8

2 288,4

Depreciation and amortization

-

389,8

389,8

389,8

389,8

389,8

389,8

389,8

389,8

-

-

-

-

-

-

-

-

-

85,1

184,8

188,5

189,2

190,1

191,0

192,1

193,2

194,5

-

-

-

-

-

Increase (decrease) in non-interest bearing current liabilities Increase in other operating activities (VAT) Decrease/ increase in accounts receivable Decrease in other operating activities (VAT)

Net cash flow from operating activities

2015

405,4 (490,5) (758,3)

2016

2017

2018

2019 2 282,7

2020 2 276,4

(184,8) 1 898,2

(188,5) 1 733,1

(189,2) 2 293,5

(190,1) 2 501,3

(191,0) 2 668,6

(192,1) 2 678,1

(193,2) 2 672,5

(194,5) 2 666,2

(1418,3)

(2127,5)

(2 127,5)

(2 127,5)

(709,2)

-

-

-

INVESTING ACTIVITIES Cash outflow from investing activity

(9877,5)

Other cash flows from investing activities

Net cash flows from investing activities

(9 877,5)

FINANCING ACTIVITIES Increase (decrease) in long term loans/

8 510,0

Common stock

2 127,5

Dividends paid Other cash flows from financing activities/

Net cash flows from financing activities

10637,5

(1418,3)

(2127,5)

(2 127,5)

(2 127,5)

(709,2)

-

-

-

Net change in cash

1,7

479,9

(394,4)

166,0

373,8

1 959,4

2 678,1

2 672,5

2 666,2

Cash at the beginning of the year Closing cash balance

-

1,7

481,6

87,2

253,2

627,0

2 586,4

5 264,5

7 937,0

1,7

481,6

87,2

253,2

627,0

2 586,4

5 264,5

7 937,0

10603,2

35 35 | Էջ Copyright © Armenian Harvest Promotion Center www.ahpc.am

Model Business Plan for the Investment Program on the Construction of 6 ha Greenhouse in the Vicinity of Noragavit district of Yerevan

7. Evaluation of the Program Effectiveness 7.1. Methodology for Evaluating the Program Effectiveness The following indices have been considered for the evaluation of the program effectiveness: •

Net Present Value (NPV NPV);

•

Internal Rate of Return (IRR); (

•

Payback Period;

•

Discounted Payback Period eriod;

•

Profitability Index .

Net Present Value (NPV) – is the net present value of financial resources, which has been

calculated through the following formula: ./0

12ₒ * *

128 1 * 611

8

5

; 1*

*

129 1 * 611

9

* ⋯*

12< 1 * 611

1(

*

<

< 611

Whereby:

CF =Cash Flows 611

7

NPV has been calculated on the basis of free cash flows expected within 8 years after the construction of the greenhouse. Free cash flows are the difference between operating cash flows and capital expenditures. It is assumed that in the end of the 8th year it will be possible to sell the greenhouse at book value.

Internal Rate of Return (IRR) – is the inner rate, in case of which the NPV is considered equal to zero. In case if the IRR exceeds the WACC, the program is considered to be profitable.

Payback period - The length of time required to recover the cost of an investment. investment

36 36 | Էջ Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Discounted Payback periodperiod- A normal payback period formula just uses the initial cost of investment and the amount of time it will take to recover the cost. A discounted payback period formula takes into account the time value of the t money Profitability Index - An index that attempts to identify the relationship between the costs and

benefits

of

a

proposed

project

through

the

use

of

a

ratio

calculated

as:

Any value lower than 1.0 would indicate that the project's PV is less than the initial investment.

Return on Equity (ROE) - The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit

a

company

generates with

the

money

shareholders

have

invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

7.2. Evaluation of Program Effectiveness In the result of calculations the following data have been received on the program effectiveness: Payback Period

4,97

Year

Discounted Payback Period

6,77

Year

Profit margin for the first 6 years

39,60%

%

Profit margin starting from the 7th year

54,08%

%

19,42%

%

9 368 547,91

USD

21,95%

%

Return

on

Net Present Value (NPV) Internal Rate of Return(IRR) Profitability Index (PI)

Equity

(ROE)

1,91

37 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

8. Evaluation of risks and means to mitigate them There are a series of risks in the greenhouse construction and operation business under the program, which should be taken into consideration and take respective measures for their mitigation.

Risk Description Less crop yield than it was planned

Measures and Comments to Mitigate Risks The calculations are based on the average productivity index offered by greenhouse producers, producers which is often guaranteed by greenhouse constructors, and, during the first two years of operation, the entire re tomato production will be organized under the control of Western European specialists, who will also provide professional consultation.

On top of that, the crop yield of experienced Western European greenhouses exceeds the index of our calculations by 50%.

38 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

Risks of transporting the product to export The risk is conditioned by the fact that freight market transportation from Armenia to the RF is mostly organized through hrough the territory of Georgia (Upper Lars checkpoint). Besides, due to a series of (weather, economic, political) factors the mentioned route sometimes does nott work unimpeded. In order to ensure unimpeded freight transportation, we anticipate developing and using alternative transportation routes.

Besides the aforementioned water and land transportation routes, we anticipate organizing air transportation.

The development of the new transportation routes will strengthen the reliability of the freight transportation and will lead to increase in competitiveness, decrease in transportation expenses and mitigation of the unilateral dependence on the Georgian side.

Limited number of export markets

Lack of skilled (agronomists)

human

During the first few years of operation, we anticipate exporting the produce to the RF and several CIS countries.

As the quality of the products produc will comply with international standards and criteria, in order to mitigate the risk of dependence on the limited number of export markets,, during the upcoming years of operation special measures will be undertaken for exporting the products into European countries and the Middle East. resources During the first few years year of operation, the entire production process will organized under the control of Western European specialists, specialists and, later, in order to provide high quality personnel we anticipate organizing trainings for our local specialists.

On top of that, in cooperation with the State Agrarian University of Armenia we are going to organize education of high quality agronomists and trainings for the existing specialists abroad.

39 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am

Երևանի ջերմատնային գոտու ներդրումների կատարման մեխանիզմները Model Business Plan ծրագրի for the Investment Program on the աջակցման Construction of 6 ha

Greenhouse in the Vicinity of Noragavit district of Yerevan

40 | Page Copyright © Armenian Harvest Promotion Center www.ahpc.am