Sub Project Financial and Economic Assessment

Economic Analysis

The basic purpose of the project-based economic analysis is to help design and select projects that contribute to the welfare of a country and its people. Costbenefit and related economic appraisal approaches are applied to determine the highest return to investment in a project, facilitate a rational comparison of available options and ensure that investment decisions are accountable. Economic analysis is also potentially useful in identifying and clarifying the issues involved in making particular decisions. Economic analysis also helps in better allocation of resources which leads to enhancement of income for investment or consumption. It also tries to assess the overall impact of a project on improving the economic welfare of the population of the project area.Steps in carrying out the economic analysis of a project include the following:(i) Identifying and quantifying (in physical terms) the costs and benefits;(ii) Valuing the costs and benefits, to the extent feasible, in monetary terms;(iii) Estimating the EIRR or economic net present value (NPV) discounted at Economic Opportunity Cost of Capital @ 12 percent by comparing benefits with the costs.

Breakwaters were constructed at Ullal in 1995 to provide safe navigation and a more permanent channel for fishing vessels entering the inlet and the fishing port at Mangalore. The beach has been seriously eroding and now the local people are under severe attack from the waves. Land and many houses have been damaged or lost over the years along the 5.5 km or so stretch of the coast to the south of the entrance training walls. The affected area is located in 16 coastal wards of Ullal. Along the spit from Ullal town itself north to the base of the existing southern breakwater there are 14 fish processing factories that together produce up to 45,000 tons of fish meal and 25,000 tons of fish oil annually. These factories provide direct employment to 1000 persons and indirect employment to nearly 5000 persons. These factories represent an estimated total investment of about Rs. 65 crores. Furthermore, to provide some protection for the factories from monsoon storms, a wall of dumped rocks has been established along the seaward side of the spit. These defences require annual maintenance as the sea tends to undermine the rocks, year by year. The cost of this maintenance is borne by the fish factory owners (coordinated by their association) in last three years association had spend average Rs 1.85 crores.

Rock protection has also been provided at several locations along the affected coast, particularly in the northern section, as part of an attempt by the Port Engineering Department to protect the coastline and nearby houses. As on the spit, it is easily seen that some portions of these rock defences have been sinking, forcing the dumping of still more rocks. Erosion of the southern beach disrupts fishing from the coastal villages. At present Ullal fishing families land their catches at Someshwara, 5 km south of Ullal. Restoration of the beach would mean that they can resume launching their boats and landing their catches at Ullal. This will save some transportation costs and will certainly be more convenient for these families.

The old Mangalore harbor is one of the major fishing ports on the Karnataka coast and a significant portion of the marine fisheries catch of the state is landed there and is processed locally or distributed through local market networks. The operation of the port and its associated facilities depends on the navigation through the inlet entrance at Ullal. At present, access across the bar at the mouth of the inlet is not possible at low tide for larger fishing vessels.

Without the project, in addition to damage caused to houses and other structures close to the coast in the area south of the breakwater, there is a high risk that the spit of land between the south breakwater and the start of Ullal village could be broken by a monsoon storm. This would result in the loss of the fish processing factories located on this spit of land, together with the production and employment associated with them. Destruction of the spit would most probably result in multiple entrances to the inlet, all of which would be too shallow to allow shipping access to Mangalore fish harbour with the consequence that fish marketing and processing facilities at Mangalore would be unable to operate. It would therefore be necessary to replace the spit with an impervious bund, closing all outlets to the sea except the present one, in order to maintain access to Mangalore port.

Without the project, the coastline south of the breakwaters will continue to erode, damaging land and houses and other buildings. It is estimated that about 110 ha. of land will be at high risk of erosion over the next 25 years and a further 65 ha faces a moderate risk of erosion.

Sub-project Cost

The costs of the proposed interventions at Ullal are summarized in Table below. The total cost is almost Rs 152.49 Crores. In addition to these capital costs, it is expected that operation & maintenance for the breakwaters, amounting to 10% of their capital cost, will be required once every 5 years. A detailed breakdown of the costs for Ullal is given in Supplementary Appendix I - Project Costs.

Table: Summary of Costs2013-142014-152015-162016-17O & M CostTotal

Rs. Lakh2,911.86,154.73,798.42,384185617,105

$ 000

Schedule of Operation and Maintenance expenditure is mention in below table:

Table: Schedule of Operation & Maintenance Cost2021-222026-272031-322036-37Total O & M Cost

Rs. Lakh4644644644641856

$ 000

Benefits of the subproject come from:

(i) Protection of the spit on the southern side of the inlet entrance from possible breaching

(ii) Protection of land and buildings along the coast south of the existing breakwaters from damage and erosion

(iii) Avoidance of resettlement costs that may arise if land and buildings are eroded

(iv) Enhance tourism with implementation of the proposed interventions.

It is estimated that the risk of the spit breaching is 80% over the 25 year economic life of the project. Implementing the subproject will remove this risk. Benefits of the project are therefore the annual value of the potential loss of the investment in the fish factories located on the spit, their annual production (represented by estimated total annual turnover) and the saving of annual maintenance expenditures on the rock wall currently providing protection to these factories. If the spit breached and the factories were lost, the loss of production would probably be temporary since it would shift elsewhere, either to other factories making the same products or to new factories built by the owners of the existing plants. Discussion was held with Ullal Fish Meal Factory Association according to president of association asset value of all 14 factories is nearly Rs. 75 crores and combined annual turnover is nearly Rs. 500 crores. In analysis only Rs. 350 crores as one years production is included in the estimate.

If the spit were breached, access to the Mangalore fish harbour would be interrupted and the facilities and assets at the harbor could not be used. To protect these investments and the associated employment, it would be necessary to rebuild the spit in effect replace the spit with an impermeable sea wall. Since it is assumed that the construction of such a seawall could not be avoided, its cost is included in the analysis in lieu of the value of fishing port assets protected.

The benefits included in the analysis that arise from the prevention of a breach of the spit are therefore: (i) 14 fish processing factories with an estimated total value of Rs 65 crore

(ii) Annual turnover of these factories of Rs 350 crores

(iii) Annual spending for the maintenance of the rock protection of Rs.1.85 crores

The second group of benefits accruing from the subproject is the protection of land and buildings. The areas estimated to be at risk of erosion are summarized in Table below.

Table: Areas at Risk of Erosion

LocationLength affected (m)Distance from beach line (m)Area (ha.)

High RiskModerate RiskHigh RiskModerate Risk

North1500300-45-

Middle25002002005050

South15001001001515

To understand extent of damage causing to housing properties every year, preliminary survey was carried out in affected areas and Information were collected from TMC office. Based on collected information, it is assumed that up to 90 buildings are damaged each year during the monsoon season, with varying degrees of damage. Some buildings close to the beach line may be damaged each year if the land under it is not eroded. It is assumed that buildings are divided 50:50 between Pucca and Kutcha construction and that the average values of each type of buildings are Rs.3, 50,000 and Rs.40, 000 respectively. The type and extent of damage sustained naturally varies. For the purpose of the analysis it is assumed that for buildings that are damaged each year, the average damage for Kutcha houses is equivalent to 75% of their value while for Pucca houses it is 40%.

Resettlement costs that would arise if land and buildings were eroded are also a benefit of the subproject, which will protect against this eventuality. It is assumed that without the project all vulnerable households along the coast will need to be resettled. The saved costs for the estimated 1552 households (one third of the total in Ullal and the at risk coastal area) are included at Rs. 5.5 lakh per household for house and buildings, Rs.1 lakh for land (since it is assumed that resettlement will be on Government land for this purpose estimated production value of land is considered) and Rs.25000 per household for miscellaneous resettlement costs.

With implementation of the subproject and restoration of the Ullal beach there are expected to be some benefits accruing from local tourism. There is one well known tourist resort near Ullal itself that has guests during the dry season, as well as conference business throughout the year. However, its tourist business has been affected by the erosion of the beach. It is difficult to assess what the impact of the beach restoration on the number of visitors to the beach and their spending might be since tourism is a minor activity in the area. Based on information collected from Panambur beach, a conservative estimate is consider the incremental tourism impact is estimated at 300 day visitors and 40 overnight visitors for an average 180 days per year, starting at 25% of this level in the third year of the project and building up to the full number over 4 years. It is expected that a high proportion of these visitors would be from Mangalore or other nearby areas. Foreign tourists would be very few. It is assumed that day visitor will spend Rs 200/ day and overnight visitor will spend Rs. 1200/ day. These numbers relate to domestic tourists. This full level of this benefit is Rs.1.94 Crores per year.

Beneficiaries

There are several groups of beneficiaries of this subproject. Some of these groups probably overlap. The beneficiaries include:

(i) The population of 42,000 people living in Ullal and on the land at risk from erosion along the coast from Ullal to the south, especially those owning land, houses and other buildings directly at risk

(ii) The owners and employees of the fish factories

(iii) The owners of fish processing facilities, ice factories and other facilities at Mangalore fish harbour

(iv) All employees at Mangalore fish harbour, including those in factories, employed by the port authorities or involved in the marketing and distribution of fish

(v) The Mangalore port authorities

(vi) The owners and employees of the one tourist resort on the Ullal beach and any others involved in the provision of services to tourists along the Ullal beach

The owners of and workers on fishing boats operating from Mangalore may also be beneficiaries, at least partially. However, if the port became inoperable, it is more likely that the boats would just move their operations to some other fish landing port along the coast.

Families engaged in artisanal fishing from the beach south of Ullal would benefit since they would be able to operate from near their own villages, instead of further south as at present.

Economic Indicators and Sensitivity Analysis

The project at Ullal has an EIRR of 19.3% and a NPV in economic prices of Rs. 3,910 lakh. An increase in investment costs of 32% would reduce the EIRR to 12%, as would a decrease in all benefits of 24%. Almost all the benefits are linked to the probability of erosion of land south of the existing breakwaters if there is no intervention to halt the current trend of events. For those areas at high risk of erosion, the probability that erosion will occur is 80% over the next 25 years. The EIRR of the proposed interventions is greater than 12% so long as this probability is greater than 67%.

The effect of a change in value of individual benefits is small in all cases. Only for the value of lost fish production does a decrease in value reduce the EIRR below 18%. A delay in benefits of 1 year reduces the EIRR to 15.1%. This is due to the effect of a delay in realizing the expected tourism benefits because all other benefits are linked to the probability of damage and are uniform in each year.

Table: EIRR, NPV & Sensitivity Analysis EIRRNPV(Rs. Lakh)Switching Value

Base Case

19.3%

3,910

Total Benefits+10%-10%22.7%16.2%5,5082,312-24%

Investment Costs+10%-10%16.5%23%2,7375,082+32%

Incremental Tourism+10%-10%19.4%19.2%3,9673,852-68%

Value of Fish Production Loss+10%-10%21%17.6%4,7443,075-44%

Delay in Benefits1 year2 years15.1%12.6%2,086458

Project Overhead Cost Included12%5

All the costs of technical assistance, project management, training and institutional strengthening for Karnataka under Project 1 were added to the project, the EIRR for would be 12%. However, a significant proportion of these costs, including most of those for training and institutional strengthening and some of those for technical assistance, relate to the overall project and to the long establishment of coastal protection and management skills and technology and do not properly belong to any specific subproject intervention.

Economic RiskThe greatest risk to the economic viability of this project would be an increase of costs greater than 32%. There is also a risk that benefits have been overestimated, but the impact of the changes in the value of any individual benefit category is small so the overestimation would have to apply across the board, which does not seem likely. There is also a possibility that the risk of damage has been overestimated, but given the observable trends of erosion from recent years, this also seems unlikely.

Poverty and Distribution AnalysisA distribution and poverty analysis has been made for the subproject. Quantified benefits accrue to government, the owners of the fish factories on the spit and to the householders along the affected part of the coastline at Ullal and further south. The poverty impact ratio for the subproject is estimated to be 23.3%.