Economic analysis of replanting on tea estates in West Java, Indonesia

Abstract

This study is a preliminary economic analysis of tea industry development programs begun in West Java in 1971. Its main objective is to compare the profitability of existing plantations against that of rehabilitation and replanting projects. Two government Estates Groups, Perseroan-Perseroan Terbatas Perkebunan (PTP's) XII and XIII, comprising 26 tea estates in the main tea area of the region, form the basis of the study. In Chapter 1 the economic and social significance of the tea industry to Indonesia, particularly the West Java region, are discussed. The history of the industry, from its establishment in 1826 to the present, is described, and existing conditions are outlined, with the need for development being stressed. Factors affecting development, such as capital constraints and uncertain market prices, are then examined. Chapter 2 describes the four alternative projects examined in this study, i.e. Project A, to do nothing to the existing plantation; Project B, to rehabilitate old plantations by improving bush condition, field husbandry, transportation, and processing facilities; Project C, to replant the old tea plantations with selected seedling materials; and Project D, to replant old tea plantations with high-yielding clonal cutting materials. The analysis is based on one hectare of a tea plantation, profitability being calculated from estimates of future yields, prices, and costs. Chapter 3 discusses the method of analysis and project assessments in general. Three discounted criteria are examined, i.e., the net present value (SNPV), the internal rate of return (IRR), and the benefit-cost ratio (B-C ratio). The SNPV criterion is chosen for this study because of the type of data available and the nature of the PTP as a 'private enterprise'. The IRR is used as a supplement to the SNPV on occasion. Chapter 4 sets out data on yields, prices, and costs, necessary in the analysis. Some data have been drawn from surveys commenced by the RRC Getas and CDC teams in 1970 and 1971 respectively. The remainder come from the Annual Reports of PTP XII and PTP XIII (1968 - 1971), and from personal communications from the Research Institute for Estate Crops (RIEC, 1971). Yield and cost streams are presented and discussed and the effects of changes in tea prices are examined. Finally, the cost structure in the Indonesian tea industry is discussed and the derivation of the cost structure used in the analysis is described. Chapter 5 comprises an analysis of the capital requirements for whole development projects in the tea industry, particularly financial resources, interest rates and the cost of capital. Several discount rates are examined and 12 per cent per annum is selected as being appropriate for this study. Chapter 6 contains the result of the analysis. The most important conclusion is that, by the SNPV criterion. Project D (replanting with high-yielding clonal cutting materials) is the most desirable project and should be implemented. However, changes in project ranking may occur as a result of changes in rates of discount, price levels, projects life, or cost levels. These changes are examined. Chapter 7 outlines the prospects for the Indonesian tea industry in view of its production cost problems and the uncertain market for its product. The major features of replanted tea gardens are described and some conclusions are drawn.