PROFILE ON THE PRODUCTION OF ALCOHOL FROM

POTATOES AND RICE

 108-2

TABLE OF CONTENTS
PAGE

I. SUMMARY 108-3

II. PRODUCT DESCRIPTION & APPLICATION 108-4

III. MARKET STUDY AND PLANT CAPACITY 108-4

A. MARKET STUDY 108-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 108-7

IV. MATERIALS AND INPUTS 108-8

A. RAW & AUXILIARY MATERIALS 108-8
B. UTILITIES 108-8

V. TECHNOLOGY & ENGINEERING 108-9

A. TECHNOLOGY 108-9
B. ENGINEERING 108-11

VI. MANPOWER & TRAINING REQUIREMENT 108-14

A. MANPOWER REQUIREMENT 108-14
B. TRAINING REQUIREMENT 108-15

VII. FINANCIAL ANLYSIS 108-16

A. TOTAL INITIAL INVESTMENT COST 108-16
B. PRODUCTION COST 108-17
C. FINANCIAL EVALUATION 108-18
D. ECONOMIC BENEFITS 108-20
 108-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of alcohol from
potato and rice with annual capacity of 4,997 hectoliters per annum. The project will
also produce 382.38 tonnes of carbon dioxide as a byproduct. Alcohol, also called ethanol
or ethyl alcohol, grain alcohol, or drinking alcohol, is a flammable, colorless, chemical
compound. Ethanol has widespread use as a solvent for substances intended for human
contact or consumption, including flavorings, colourings, and medicines. The major raw
materials required for the production of alcohol are potato and rice which are locally
available.

The demand for alcohol is mainly influenced by the growth of alcoholic liquors
production and expansion of other user industries such as pharmaceutical, chemical and
cosmetics. The demand for alcoholic liquors and other manufactured goods is in turn
depends on population growth and income rise. The present demand for the proposed
product is estimated at 9,930 hectoliter per annum. The unsatisfied demand for the
product is expected to reach at 14,832 hectoliter by the year 2018.

The total investment requirement is estimated at Birr 10.30 million, out of which Birr
1.65 million is required for plant and machinery. The plant will create employment
opportunities for 38 persons.

The project is financially viable with an internal rate of return (IRR) of 28.45 % and a
net present value (NPV) of Birr 8.43 million discounted at 8.5%.

The project will have a backward linkage with the agriculture sector and a forward
linkage with the alcoholic beverage processing plants, pharmaceuticals, medical facilities
and other organic chemical producing industries. The establishment of such factory will
have a foreign exchange saving effect to the country by substituting the current imports.
 108-4

II. PRODUCT DESCRIPTION AND APPLICATION

Alcohol, also called ethanol or ethyl alcohol, grain alcohol, or drinking alcohol, is a
flammable, colorless, chemical compound. Ethanol has widespread use as a solvent for
substances intended for human contact or consumption, including flavorings, colourings,
and medicines. In chemistry it is both an essential solvent and a feedstock for the
synthesis of other products. Ethanol has a long history as a fuel, including as a fuel for
internal combustion engines.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Alcohol is an intermediate input for the liquor factories. In addition it is chiefly used in
medicines, cosmetics, and making variety of chemicals. The demand for alcohol is
therefore a derived demand, determined by the volume of liquor production and other
user industries.

At present the National Alcohol and Liquor Factory (NALF) is the only local supplier of
alcohol. In addition to the local production Ethiopia imports a variety of alcohols from
the international market. The major types of alcohols imported from abroad include
methanol (methyl alcohol), propan 1&2 (proply and isopropyl alcohol), n-butyl alcohol,
acrylic alcohol, unsaturated monohydric alcohols, undenatured ethyl alcohol and others.
The domestic production and import of alcohol is presented in Table 3.1.
 108-5

Table 3.1
DOMESTIC PRODUCTION & IMPORT OF ALCOHOL (H.L)

Year Domestic Production Import Total

2002 19,982 470 20,342
2003 12,878 927 13,805
2004 7,211 671 7,882
2005 6,605 780 7,385
2006 6,605* 1,172 7,777
* 2005 level of production is assumed to be maintained for year 2006
Source: - Survey of Large & Medium Scale and Electricity Industries, CSA and Customs
Authority.

Table 3.1 reveals that import of alcohol has been generally rising during the past five
years while domestic production is declining. The decline of domestic production is due
to the old age of the factories under the NALF and not lack of demand. As per the
information obtained from liquor factories, the existing domestic supply is very limited to
satisfy the demand. As a result, shortage of the product is always hampering the
production of different types of alcoholic liquors.

In order to estimate the current demand for alcohol the trend in historical domestic
production and import of alcohol as well as domestic production trend of alcoholic
liquors are considered. During 2006 the total domestic production and import i.e.
apparent consumption of alcohol was about 7,777 hecto liters. During the past five years,
annual average increase of alcoholic liquors production was about 13%. Accordingly,
applying 13% growth rate on the apparent consumption of year 2006 the current (year
2008) demand is estimated at 9,930 hecto liters.

2. Projected Demand

The demand for alcohol is mainly influenced by the growth alcoholic liquors production
and expansion of other user industries such as pharmaceutical, chemical and cosmetics.
 108-6

The demand for alcoholic liquors and other manufactured goods is in turn depends on
population growth and income rise. Annual average growth rate of alcoholic liquors in
the past five years was about 13%. Urban population and GDP have been also growing
by about 4% and 7%, respectively, in the past few years. Taking the combined effect of
the above factors demand for alcohol is estimated to grow by 8% per annum (see Table
3.2.).

Table 3.2
PROJECTED DEMAND FOR ALCOHOL (H.L)

Un Satisfied
Year Projected Demand Existing Supply Demand
2009 10,724 6,605 4,119
2010 11,582 6,605 4,997
2011 12,508 6,605 5,904
2012 13,510 6,605 6,905
2013 14,590 6,605 7,985
2014 15,757 6,605 9,152
2015 17,018 6,605 10,413
2016 18,379 6,605 11,774
2017 19,850 6,605 13,245
2018 21,437 6,605 14,832

Table 3.2 reveals that the unsatisfied demand for alcohol will increase from 4,977
hectoliters in the year 2010 to 7,985 hectoliters and 14,832 hectoliter by the year 2013
and 2018 respectively

3. Pricing and Distribution

The average producer’s price of alcohol is Birr 1,747.11 per hectoliter. This price is
proposed for testing the financial viability of the project. Moreover, based on the CIF
 108-7

price of the external trade statistics for 2006 (the latest data available), and allowing 30%
for import duty and other clearing expenses, the factory gate price for carbon dioxide is
estimated at Birr 17,000 per tonne.

The product will be sold directly to the liquor factories. Some special alcohols will be
distributed through pharmacies, and relevant distributing enterprises.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Based on the market study, the envisaged plant will have a daily capacity of 1,665 liter
i.e. 4,997 hectoliters per annum to cover the unsatisfied demand of alcohol working 300
days per annum.

2. Production programme

Since, the technology of alcohol production is well known and since the unsatisfied
demand for the product in increasing, the envisaged plant will start production the first
year with 90 % capacity and then after with full capacity. The production programme is
indicated in Table 3.2 below.

Table 3.3
PRODUCTION PROGRAMME

Sr. Production Year

No. Product 2009 2010 -25
1 Capacity utilization (%) 90 100
2 Alcohol(hectoliter) 4,497 4,997
3 By product Carbon dioxide (ton) 344.14 382.38
 108-8

IV. MATERIAL AND INPUTS

A. RAW MATERIAL

The usual sources of raw material for alcohol production from starch are cereal grains
such as corn, wheat, barley, rice, etc. Other types of starch are available from potatoes.
Starch conversion is a standard method of alcohol production.

For the envisaged plant the raw materials to be used are potato and rice. Both raw
materials are found locally from different regions. The quantity of raw materials and cost
when the plant is producing at full capacity is given in Table 4.1.

Table 4.1
ANNUAL CONSUMPTION OF RAW-MATERIALS & COST

S.No. Description Unit Of Qty.Reqd. For Unit Cost Cost In

Meas. 100 % Plant (Birr) '000
Output (Birr)

1 Potatoes Ton - 3,500 3,888.5

2 Rice Ton 294.4 8000 2,355.2

3 Sulfuric acid Kg 6.2 10.25 0.636

Total 6,244.366

B. UTILITIES

Utilities required for manufacturing alcohol from potato and rice includes electric power,
furnace oil and water. The requirement for utilities and their estimated cost is given in Table
4.2.
 108-9

Table 4.2
ANNUAL CONSUMPTION OF UTILITIES & COST

Sr/ No Description Unit of meas. Qty. Cost in ‘000 Birr

1 Electricity kWh 204,000 96.614

2 Furnace oil m3 132 770.88

3 Water m3 660 2.145

Total 869.639

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

Generally alcohol produced from starch based feedstock by fermentation comprises

hydrolysis, fermentation and separation, the main product and by product of the process
are ethanol and carbon dioxide respectively.

a) Alcohol from grains

Grain is milled (ground) and then mixed with water to form slurry. The grain slurry is
cooked to boiling, and special enzymes and/or acids added to make the starch soluble.
Additional water is then added and a different enzyme used to convert the solubilized
starch to sugar.
 108-10

b) Alcohol from potatoes

The potato is Sliced and crushed then water is added, heated and PH adjusted, the slurry
is then treated with several enzymes, the first reduces starch to dextrin then the mash is
cooled and treated with a second enzyme to reduce the dextrin into sugar.
The mixture (mash) is cooled to and placed in large fermentation vats. Yeast is added and
fermentation takes place over about three days during which the sugar is mostly
converted to alcohol and carbon dioxide. Heat produced during fermentation is removed
by external cooling; cooling is necessary for good yields.

Most factories discharge the carbon dioxide to the atmosphere. However, it is economical
to manufacture dry ice or liquid carbon dioxide from this gas.

Alcohol is removed from the fermentation mash with steam and further purified, and all
water removed by distillation. The still bottoms (slop-containing unfermented byproducts
and water) are fed to animals wet or processed to dried distiller's grains for animal feeds.
The system can be designed to process alcohol from potatoes. But, also grains can be
processed with modification to the feed handling system on the milling/grinding step and
with minor changes required in the operating parameters of the cooking section. Since the
by product i.e. still bottoms is used as animal feed the plant will have no adverse impact
on the environment. Any liquid waste to be generated in the factory will be collected in a
concrete made containment for the water to be evaporated and the solid will be collected
and disposed as solid waste. The concrete containment cost is treated in the machinery
and equipment cost.

2. Source of Technology

The following Italian company may be contacted for an offer.

 108-11

I.M.A Industria Macchine Automatiche S.P.A

Via 1o Maggio 16
40064 Ozzano Emilia (Bologna) Italy
Tel. 051.651411 - Fax 051 799330
E-mail: givlianellia@ ima.it

B. ENGINEERING

1. Machinery and equipments

The list of production machinery and equipment required for the plant is provided in Table
5.1. The total cost of plant machinery and equipment is estimated at Birr 1,650,000 out of
which Birr 526,000 will be in foreign currency.

Table 5.1
MACHINERY AND EQUIPMENT REQUIRED

S/No Description Qty

FC LC Total
1 Mincing machine 1 105.20 105.20
2 Mill 1 - 112.40 112.40
3 Mixing tank 2 - 112.40 112.40
4 Dilution tank 1 - 112.40 112.40
5 Mother tank 1 - 112.40 112.40
6 Fermentation tank 2 - 224.80 224.80
7 Decanter 1 - 56.20 56.20
8 Pumps 4 - 56.20 56.20
9 Storage tanks 2 - 112.40 112.40
10 Air compressor 1 - 112.40 112.40
11 Boiler 1 210.40 - 210.40
12 Distillation column 1 210.40 - 210.40
13 Concrete containment vessel, 50m3 1 - 112.40 112.40
Total cost 526.00 1,124.0 1,650.00
 108-12

2. Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 2,000 m2 out of this 850
m2 is built-up area. From the 850m2 built up areas, 500m2 will be covered by the
production facility including laboratory, 250m2 will be covered by stores and 100m2 by
office building. Cost of building construction at rate of birr 2,300 per m2 amounts to Birr
1,955,000.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.
 108-13

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial
Zone Development and Coordination Committee of the City’s Investment Authority.
However, if the land request is above 5,000 m2 the request is evaluated by the City’s
Investment Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for this
profile, which is a manufacturing project a land lease rate of Birr 346 per m2 is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.
 108-14

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion
Scored point period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m2, is
estimated at Birr 41.52 million of which 10% or Birr 4,152,000 will be paid in advance.
The remaining Birr 37.37 million will be paid in equal installments with in 28 years i.e.
Birr 1,334,571 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The manpower requirement and cost of labour are indicated in Table 6.1.
 108-15

Table 6.1
MANPOWER REQUIREMENT & LABOUR COST

Sr. Manpower Req. Monthly Annual

No. No. Salary (Birr) Salary (Birr)
1. General manger 1 3,000 36,000
2. Admin. & Finance head 1 2,000 24,000
3. Secretary 1 700 8,400
4. Accountant 1 1,500 18,000
5. Sales men 1 1,000 12,000
6. Purchaser 1 1,000 12,000
7. Production head 1 2,000 24,000
8. Operators 7 4,200 50,400
9. Laborers 20 6,000 72,000
10. General Service 4 2,400 28,800
Sub-Total 38 23,800 285,600
Benefit (25% BS) 5,950 71,400
Total 29,750 357,000

B. TRAINING REQUIREMENT

On-the-job training shall be carried out during plant erection & commissioning. This
may cost about Birr 30,000. The experts of machinery and equipment supplier may
provide the training.
 108-16

VII. FINANCIAL ANALYSIS

The financial analysis of the alcohol from potato and rice project is based on the data
presented in the previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 15 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
10.30 million, of which 5 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.
 108-17

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

No. Cost Cost Cost
1 Land lease value 4,152.00 - 4,152.00
2 Building and Civil Work 1,955.00 - 1,955.00
3 Plant Machinery and Equipment 1,124.0 526.00 1,650.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 661.74 - 661.74
7 Working Capital 1,362.26 - 1,362.26
Total Investment cost 9,780.00 526.00 10,306.00

* N.B Pre-production expenditure includes interest during construction ( Birr 531.74

thousand), training ( Birr 30 thousand) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning
expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 8.35
million (see Table 7.2). The raw material cost accounts for 74.76 per cent of the
production cost. The other major components of the production cost are utility, financial
cost and depreciation which account for 10.41%, 4.89% and 4.67% respectively. The
remaining 5.26 % is the share of labour direct, repair and maintenance, labour overhead,
and other administration cost.
 108-18

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
6,244.37 74.76
Utilities 869.64 10.41
Maintenance and repair
82.50 0.99
Labour direct 171.36 2.05
Labour overheads
71.40 0.85
Administration Costs 114.24 1.37
Land lease cost
- -
Total Operating Costs 7,553.51 90.44
Depreciation 390.25 4.67
Cost of Finance 408.26 4.89
Total Production Cost
8,352.02 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 3.01 million to Birr
2.82 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 20.68 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
 108-19

dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 28 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
 108-20

in a bank account. Accordingly, the IRR of this project is computed to be 28.45 %

indicating the viability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 8.43 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 38 persons. In addition to supply of the domestic
needs, the project will generate Birr 4.67 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. The project will have a backward linkage with the
agriculture and a forward linkage with the alcoholic beverage processing plants,
pharmaceuticals, medical facilities and other organic chemical producing industries.