Case: Nghe an Tate & Lyle Sugar Company (vietnam)

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NATL will be selling sugar to its customers at the same price as the imported sugar is being sold right now. Therefore, there is no impact on the customers.

Suppliers will clearly benefit from the NATL facility as they would have an additional market player to conduct business with.

To be successful, NATL needs to attract a critical amount of cane farmers. Farmers will switch to growing cane over other crops if their returns from cane exceed the potential returns from other crops. It seems that growing sugar cane requires lower start-up costs (such as spending resources on planting sugar cane in year zero) compared to other high yield crops such as coffee. Coffee on the other side has a longer life cycle compared to sugar cane. Ultimately, the decision which crops to grow will have to rely also on the projected demand for the specific crop. It seems that the growing demand for sugar in Vietnam will make growing sugar cane more profitable and will benefit the farmers in the long run.

Having sufficient number of truck haulers is critical to NATL but the company will only require 300 truckers at full capacity, which is estimated to have a negligible impact on the community.

There is not enough local sugar production in Vietnam to satisfy the demand, so the impact on the competitors is relatively mild. They can benefit from NATL by imitating its best practices and improve their own production methods.

The establishment of the NATL facility has several positive benefits for business environment in Vietnam. This investment can boost the confidence in the market and encourage other players to consider the country for future investments. The facility meets World Bank’s strict guidelines on air and water emissions and employs workplace health and safety policies. This project also is contingent upon the government providing infrastructure support such as roads and transportation. This will prompt faster development of the more rural Northern Vietnam.

The government will be losing tariff revenues as less sugar will be imported. This will be offset by increase in tax revenue paid on sugar from NATL, by taxes paid by the NATL workers and suppliers as well as by the increase in overall wealth of the Northern Vietnamese region.

7. Should IFC support the project?

To make a decision, the IFC agricultural unit must answer two questions. Is the project economically viable? Does it offer ample additionality reflected in an ERR of 10% or greater?

On the first question, NATL looks good. Its sponsors are creditworthy. They possess robust sugar industry experience – both in SE Asia and across the world. As discussed above, NATL enjoys strong government support. Its economic fundamentals – low supply and growing demand – appear strong as well. Sugar consumption is set to skyrocket as Vietnam’s population grows and its economy develops. The protectionist regulatory environment is also a plus, as it will lock in above-market sugar prices. Finally, given the fact that the mill is almost complete ahead of schedule and under budget, construction risk is a non-issue.

Unstable future cashflows, however, would certainly give the IFC investment committee pause. Sugar is a volatile commodity. With or without high-tariffs, NATL is selling into a merchant market without a contractual offtaker. Even if the mill can quickly achieve capacity, a goal that is far from certain, there is no guarantee that NATL could reliably service its debt and maintain a DSCR of 1.5 or above. Also, given the willingness of Rabobank and presumably other commercial lenders to loan NATL money, I would question the need for concessionary finance.

To alleviate these concerns and assure bankability, the IFC credit committee seeks three covenants:

(1) A sugar purchasing agreement (SFA) with MAFI or some other dominant national sugar vendor, like a large supermarket chain. This agreement would contractually lock in an offtaker AND set a floor price for sugar (dong/ton). That floor price would be sufficient to service any IFC debt facility with a cushion. This SFA must be backed by the central government.

(2) A debt service reserve account (DSRA) able to satisfy one to two debt payments.

(3) A long-term sugarcane supply agreement (SSA) with local famers. We realize that achieving this contracts will necessitate extensive community engagement and will require either a national or international agriculture credit facility. Small holders in Nghe An will need capital if they are to switch to sugarcane cultivation. Moreover, they will need to invest in mechanized equipment to raise the productivity of their plots to meet the can input needs of NATL.

On the second question, we have estimate the ERR of the project to be around 16% (see excel file). Therefore, the second requirement of the IFC is met and we believe that is reasonable to finance project as the ERR indicator shows that both social and financial benefits are sufficient.