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  • DISCLAIMER

    The purpose and scope of this Pre Feasibility Study is to introduce the Project and

    provide a general idea and information on the said Project including its marketing,

    technical, locational and financial aspects. All the information included in this Pre-

    Feasibility is based on data/information gathered from various secondary and primary

    sources and is based on certain assumptions. Although, due care and diligence have been

    taken in compiling this document, the contained information may vary due to any change

    in the environment.

    The Planning & Development Division, Government of Pakistan, Mascon Associates

    (Pvt.) Ltd who have prepared this Pre-feasibility study, or National Management

    Consultants (Pvt.) Limited who have quality assured this document do not assume any

    liability for any financial or other loss resulting from this Study.

    The prospective user of this document is encouraged to carry out his/ her own due

    diligence and gather any information he/she considers necessary for making an informed

    decision

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    TABLE OF CONTENTS ACRONYMS .................................................................................................................. iii EXECUTIVE SUMMARY ...........................................................................................iv CHAPTER 1 INTRODUCTION...................................................................................1

    1.1 OBJECTIVE AND SCOPE OF THE STUDY.......................................................................... 3 1.2 METHODOLOGY ...................................................................................................................... 3 1.3 STUDY TEAM ........................................................................................................................... 4

    CHAPTER 2 MARKET/ NEEDS ASSESSSMENT ...................................................5

    2.1 PROFILE OF PAKISTANS DAIRY SECTOR....................................................................... 5 2.2 MODERN MILK PROCESSING IN PAKISTAN....................................................................... 7 2.3 PRODUCT PROFILE & MARKET SHARES OF THE PROCESSING SECTOR .................... 8 2.4 SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND CONSUMPTION............ 9 2.5 SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT PROCESSED MILK ............... 10 2.6 MARKETING OF MILK AND DAIRY PRODUCTS .......................................................... 13 2.7 MARKETING OF PROCESSED LIQUID MILK.................................................................. 17 2.8 MARKETING OF DAIRY PRODUCTS ................................................................................ 18

    CHAPTER 3 TECHNICAL EVALUTION................................................................21

    3.1 LOCATION PREFERENCE .................................................................................................... 21 3.2 SPECIALIZED MANPOWER ................................................................................................. 23 3.3 REGULATORY FRAMEWORK............................................................................................. 24 3.4 IN-HOUSE QUALITY ASSURANCE .................................................................................... 25 3.5 RATIONALE FOR SETTING UP A UHT MILK PROCESSING PLANT ....................... 25 3.6 PROPOSED UHT PROCESSING UNIT ................................................................................ 26 3.7 THE UHT PROCESS FLOW .................................................................................................. 31 3.8 TECHNICAL REQUIREMENTS & THEIR AVAILABILITY............................................. 33

    CHAPTER 4 GOVERNANCE AND MANAGEMENT STRUCTURE .................35

    4.1 GOVERNANCE STRUCTURE............................................................................................... 35 4.2 MANAGEMENT STRUCTURE .............................................................................................. 37 4.3 RAW MILK PROCURMENT & TRANSPORTATION ...................................................... 39 4.4 PLANT OPERATIONS AND QUALITY ASSURANCE....................................................... 39 4.5 MARKETING AND SALES.................................................................................................... 39 4.6 FINANCE DEPARTMENT ..................................................................................................... 40 4.7 HUMAN RESOURCE DEPARTMENT................................................................................. 41

    CHAPTER 5 FINANCIAL EVALUATION .............................................................42

    5.1 CAPITAL COST OF THE PROJECT................................................................................... 42 5.2 PROJECTED PROFIT & LOSS ACCOUNTS ..................................................................... 44 5.3 PROJECTED CASH FLOW ................................................................................................... 45 5.4 PROJECTED BALANCE SHEETS......................................................................................... 46 5.5 INTERNAL FINANCIAL RATE OF RETURN ................................................................. 47 5.6 RATES OF RETURN.............................................................................................................. 47 5.7 PAYBACK PERIOD................................................................................................................ 48 5.8 FUNDING OF THE PROJECT................................................................................................ 48

    CHAPTER 6 CONCLUSION ....................................................................................49

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    LIST OF TABLES TABLE 1 MILK PRODUCTION IN SELECTED COUNTRIES................................................................ 5 TABLE 2 MILK PRODUCTION (REGION WISE) ................................................................................... 6 TABLE 3 PROCESSOR CAPACITY.......................................................................................................... 8 TABLE 4 MARKET SHARE AND SELLING PRICE OF MILK PROCESSED IN THE FORMAL SECTOR ........................................................................................................... 9 TABLE 5 PROJECTION OF FRESH MILK PRODUCTION AND CONSUMPTION TO 2010....................................................................................................... 10 TABLE 6 MILK PRODUCTION (REGION WISE).................................................................................. 22 TABLE 7 MILK PRODUCTION IN PUNJAB ......................................................................................... 22 TABLE 8 INTERNATIONAL MILK PRODUCTION COST BENCHMARKS ...................................... 23 TABLE 9 UHT MILK PROCESSING PLANT PROJECTED CAPITAL COST...................................... 42 TABLE 10PROJECTED PROFIT & LOSS ACCOUNTS.......................................................................... 45 TABLE 11PROJECTED CASH FLOW ..................................................................................................... 45 TABLE 12PROJECTED BALANCE SHEET............................................................................................ 46 TABLE 13PROJECTED IFRR ................................................................................................................... 47 TABLE 14RATES OF RETURN................................................................................................................ 47 TABLE 15PAYBACK PERIOD................................................................................................................. 48 ANNEXURE- 1 PAKISTAN A PROFILE

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    ACRONYMS

    ADB Asian Development Bank ASEAN Association of South East Asian Nations BOO Build Operate Own BOT Build Operate Transfer CAA Civil Aviation Authority CAR Central Asian Republics CMER Center for Management and Economic Research (of LUMS) CNG Compressed Natural Gas ECO Economic Cooperation Organisation EIZ Eastern Industrial Zone FAOSTAT Food & Agricultural Organization of UN Statistics FDI Foreign Direct Investment FM Filling Machine GCC Gulf Cooperation Council GDP Gross Domestic Product GNP Gross National Product GoP Government of Pakistan HDIP Hydrocarbon Development Institute of Pakistan IFC International Finance Corporation IFCN International Farm Comparison Network km Kilometre KPT Karachi Port Trust LUMS Lahore University of Management Sciences MINFAL Ministry of Food, Agriculture and Livestock NHA National Highway Authority OEM Original Equipment Manufacturer PIA Pakistan International Airlines PISDAC Pakistan Initiative for Strategic Development And Competitiveness PNSC Pakistan National Shipping Corporation PTA Pakistan Telecommunication Authority PTCL Pakistan Telecommunication Limited Rs Pak. Rupees SAARC South Asian Association for Regional Cooperation SBP State Bank of Pakistan SMEDA Small and Medium Enterprise Development Authority SPS Sanitary and Phyto Sanitary SWOG Strategic Working Group UAE United Arab Emirate UHT Ultra High Temperature UNICEF United Nations International Childrens Emergency Fund WTO World Trade Organization

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    EXECUTIVE SUMMARY

    Pakistan is regarded as the fifth largest producer of milk in the world. In 2004 it produced

    more than 28 million tonnes of milk, based on current projections it is expected to

    produce more than 33 million tonnes in 2006.

    In addition, Pakistan is a milk surplus country in a milk deficient region, despite this,

    it had to import US$ 12 million worth of milk powder to even out seasonal supply

    imbalance. This Pre-feasibility Study explores the possibility of setting up a 100,000

    litres per day UHT milk processing unit near Lahore in the Punjab province of Pakistan.

    The rationale for setting up the plant is:

    The market for processed milk is estimated at 200 million litres per annum while supply is 139 million litres per annum; in addition the market is growing at around

    20% per annum.

    The consumers have developed a taste for UHT milk and also for its variants like flavoured milk, etc.

    The location of the plant is proposed near Lahore, as the surrounding areas of Lahore produce 70% of the total milk produced in Pakistan

    The Government of Pakistan has launched a program to increase milk yield per animal from the current 6 litres per day to 13 by 2012, in addition the GoP is

    launching a mass consumer awareness program aimed at highlighting the dangers of

    consuming raw unprocessed milk.

    The technology and the skills required for setting up a modern UHT plant and its milk collection infrastructure exists in the region. The first UHT plant which was set up in

    1977 is still operating and has seen continuous capacity increase over the years.

    The aseptic packaging which increases the shelf life of the UHT processed milk is ideally suited for the local climate in Pakistan which is characterized by high summer

    temperatures.

    The total cost of the project is estimated at Rs.670 million with a pay back period of

    approximately 4 years.

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    CHAPTER 1

    INTRODUCTION

    Agriculture is the largest sector of Pakistans economy, contributing nearly 22%

    of the total output (GDP) and employing around 45% of the total labor force.

    Livestock contributes nearly 50 percent to the value addition in the agricultural

    sector, and almost 11 percent to Pakistans GDP. Livestock is the main supplier

    of basic raw material to the Pakistani food processing industry, with milk being

    the most important sub-sector; the value of milk produced is higher than the value

    of two major crops, i.e. wheat and cotton.

    Pakistan is regarded as the fifth largest producer of milk in the world with a total

    production of about 28 million metric tons in 2004, despite such a huge volume

    the country is a net importer of milk and milk products. The major reason for this

    is that 12 15% of the milk produced is lost during transportation and storage

    due to lack of proper processing facilities.

    The Government of Pakistan (GoP) in cooperation with various multilateral donor

    agencies, apart from utilizing its own in-house capabilities, has prepared a

    comprehensive strategy for bringing about a White Revolution in Pakistan. The

    main objective of the GoP is poverty alleviation in the rural areas by helping the

    subsistence farmer, who provides the bulk of the milk, to increase the yield of

    milk. Currently, animal productivity is well behind other major dairy producers.

    Pakistan has three times the animals that Germany has, but milkyield per animal

    is one fifth of Germany and one third of New Zealand representing a significant

    loss in economic potential.

    The strategy developed by the GoP will focus on raising productivity and to do

    so, the dairy industry will:

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    Establish model commercial dairy farms across full range of farm sizes to increase overall farm productivity by demonstrating new technologies and

    better practices;

    Upgrade rural and urban supply chains by facilitating investment in chilling tanks for purchase and collection of milk which will give farmers a guaranteed

    sale for quality milk;

    Investigate modern technologies, systems, and underlying seasonal economics of dairy production to improve quality of investment decisions and to correct

    market distortions;

    Expand supply pockets to increase the milk supply and create new income earning opportunities; and

    Improve the quality of animal feed to ensure better quality of milk.

    As per the GoP strategy in order to improve the business and regulatory

    environment, workforce, and industry organization the milk processing industry

    will be duly supported to:

    Rseolve the health and safety problems associated with poor quality milk; Improve and enforce existing food safety standards in line with international

    standards;

    Promote policies which will support the development of an expanding export industry;

    Provide practical training to farmers on modern farming practices; Raise capacity of training institutions to provide required training and

    qualifications;

    Establish a permanent industry organization, Dairy Pakistan, representing farmers, processors, and government stakeholders with responsibility to carry

    out the Dairy Industry Strategic Plan.

    This Strategy for increasing productivity and quality of milk, is expected to

    deliver value to both the producers and consumers. Conservative estimates show

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    an additional Rs.11million per day of income generated for farmers, with more

    optimistic scenarios showing over Rs.30million. The average farm income per

    year stands to increase by a factor of four by 2015, significantly reducing rural

    poverty. In addition, the Strategy aims at increasing average yield per animal from

    the current 6 liters per day to 13 liters by 2015. As a first step, the Government of

    Pakistan has established Dairy Pakistan to ensure that the targets set forth by

    the Strategy are achieved.

    The expected increased availability of milk will help Pakistan enter the export

    market, as it is located in a dairy deficient area where most of its neighbors to

    the west are net importers.

    1.1 OBJECTIVE AND SCOPE OF THE STUDY The purpose of this Pre-Feasibility Study is to establish the need for setting up of

    a milk processing plant to avail more than 20 percent growth per annum in the

    Sector. Pakistan has got large quantities of raw milk which in 2004 was estimated

    at close to 28 million tonnes per annum with only 2 3% actually being

    processed by the dairy industry.

    The scope of the study is to undertake, inter alia, need assessment, technical

    evaluation, assessment of governance and management structure and financial

    evaluation of the project, on the basis of which recommendations are to be

    developed for setting up the said project.

    1.2 METHODOLOGY The methodology employed for this study consists of review of published data as

    well as exhaustive interviews of the stakeholders including farmers, dairy experts,

    dairy marketing companies, multilateral agencies and Government of Pakistan

    officials as well as those belonging to MINFAL and the Government of Punjab.

    Lastly, we would like to bring on record the cooperation extended by those

    individuals and companies who though no longer associated with the Industry,

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    were willing to share their opinions and experiences to facilitate new entrants

    coming into the industry.

    The data collected has been analyzed using quantitative and qualitative

    techniques, where required necessary assumptions have been made which have

    been mentioned in the report.

    1.3 STUDY TEAM The study team comprised of experts in the fields of dairy and animal husbandry,

    economics, engineering, food processing, marketing and finance.

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    CHAPTER 2

    MARKET/ NEED ASSESSSMENT

    2.1 PROFILE OF PAKISTANS DAIRY SECTOR As stated earlier, agriculture is the largest sector of Pakistans economy,

    contributing nearly 22% of the total output (GDP) and employing around 45% of

    the total labor force. Livestock contributes nearly 50 percent to the value addition

    in the agricultural sector, and almost 11 percent to Pakistans GDP. Livestock is

    the main supplier of basic raw material to the Pakistani food processing industry,

    with milk being the most important sub-sector; the value of milk produced is

    higher than the value of two major crops, i.e., wheat and cotton. Pakistan is

    regarded as the fifth largest producer of milk in the world with a total production

    of about 28 million metric tons in 2004.

    TABLE - 1

    MILK PRODUCTION IN SELECTED COUNTRIES (1,000 Metric Tonnes)

    Total Production Sr. No. Country 1999 2000 2001 2002 2003 2004 1. India 78,100 81,000 84,800 89,500 91,200 90,4202. U.S.A 73,804 76,023 75,068 77,139 77,252 77,5653. Russia 32,300 32,276 32,905 33,503 33,300 31,1404. Germany 28,356 28,353 28,213 27,899 28,380 28,0285. Pakistan 24,281 24,949 25,646 26,372 27,140 27,9346. France 25,388 25,484 25,415 25,733 25,160 24,7507. Brazil 19,802 20,527 21,284 22,453 23,453 23,4588. UK 15,014 14,488 14,707 14,869 15,056 14,6009. Ukraine 13,344 12,640 13,411 14,108 13,633 13,993

    10. Poland 12,284 11,889 11,884 11,873 11,892 12,40011. World 561,175 571,077 580,608 593,723 605,516 605,263

    Source: FAOSTAT

    The average per capita production of milk in Pakistan at about 230 liters/year is

    the highest of all South Asian countries. Punjab has by far the lion's share in both

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    milk production and number of dairy animals. It produces over twenty million

    metric tons of milk or about 70% of the countrys total.

    The production of milk in different provinces of Pakistan is given below:

    TABLE -2

    MILK PRODUCTION (REGION WISE)

    (mllion Tonnes)Milk Production Milk Production by Regions Year

    Buffalo Others Punjab Sindh Others 1996 18.0 9.0 19.0 7.0 3.0 1997 20.0 9.0 21.0 5.5 4.0 1998 20.0 9.0 21.0 5.5 4.0 1999 21.0 9.5 21.5 6.0 5.0 2000 21.7 10.0 22.0 5.0 5.0 2001 21.8 9.5 22.5 4.5 5.0 2002 23.0 10.0 23.0 6.0 5.6

    Source: International Farm Comparison Network (IFCN), 2003

    Dairy product mostly distributed and sold in Pakistan is still fresh milk.

    However, as per study conducted by Unilever Pakistan Ltd., processed milk

    consumption is growing at above 20% per year. Of the different types of

    processed liquid milk, pasteurized milk and UHT milk in Tetrapacks are by far

    the most popular products. Yogurt, butter, cheese and ice cream represent a small

    proportion of the processed dairy products. The informal sector produces Lassi (a

    drink from boiled and/or raw milk), which is very popular in the summer months.

    Other common indigenous milk products are boiled milk and sweet-meats

    produced by condensing liquid milk, which is called Khoyia (condensed milk

    with or without sugar).

    Only 3-4% of total milk production is processed and marketed through formal

    channels. For the other 97%, an extensive, multilayered distribution system of

    middlemen has evolved to supply milk produced for immediate consumption.

    Katcha Dodhies collect their milk from villages and either sell to the local

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    market or to Pacca Dodhies. Pacca Dodhies then supply milk to distributors

    and retailers in urban areas, Gawallas and dairy processors. The Gawalla

    supplies milk directly to urban and rural households. The current value chain is

    illustrated below:

    A long tradition of dairy consumption, a sizeable domestic market, high per capita

    rates, and yet underdeveloped processing and value-added products present

    significant potential to increase both the economic and social value of the

    industry.

    2.2 MODERN MILK PROCESSING IN PAKISTAN Modern milk processing in Pakistan started in the early 1960s when the first

    modern milk sterilization plant was set up. By the mid-1970s 23 milk

    pasteurization and sterilization plants had been set up. However, due to the

    logistic difficulties in setting up an efficient milk collection system, short shelf-

    life of the product and lack of skilled labor, all but one of these plants shut down.

    The first UHT plant was set up in 1977 and proved quite successful. With the

    exception of army and Idara-e-Kisan dairy plants, the production of liquid

    pasteurized milk has ceased since the first units producing UHT long-life milk

    went into operation. Table 3 presents basic information on the UHT milk-

    CHART -1

    DAIRY VALUE CHAIN IN PAKISTAN

    Farmer (Rs. 10)

    Middleman (Rs. 11)

    Contractor (Rs. 13)

    Processors (Rs. 15)

    Milk-man (Rs. 15)

    Processed, Unpackaged Milk (Rs. 23)

    Loose Milk (Rs. 20-28)

    Packaged Milk (Rs. 29)

    Source: SWOG Estimates

    Bacterial count>5 mio./ ml

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    processing plants that are operating currently. The data in the table referring to

    installed daily capacity are based on shifts including preparation and cleaning.

    TABLE 3

    PROCESSING CAPACITY

    Capacity i i i

    Sr. No. Processors

    Daily Capacity (million liters) Flush Lean

    Average Daily (million liters)

    1. Nestle 1.30 1.30 0.780 1.0400 2. HFL 0.90 0.90 0.540 0.7200 3. Millac 0.30 0.30 0.180 0.2400 4. Vita 0.05 0.03 0.018 0.0240 5. Halla 0.15 0.15 0.090 0.1200 6. Prime 0.10 0.10 0.060 0.0800 7. Nurpur 0.15 0.15 0.090 0.1200 8. Nirala 1.00 0.10 0.060 0.0800 9. DairyCrest 0.15 0.15 0.090 0.1200 10. Engro Foods 0.20 0.60 - 0.6000 11. K&K 0.40 - - - 12. Butt Dairies 0.06 0.06 0.036 0.0480 13. Munno Dairies 0.02 0.02 0.012 0.0160 14. Karachi Dairies 0.10 - - - 15. Military Dairy Farms 0.18 0.18 0.108 0.1440

    Total 5.30 3.44 2.064 2.7520 Source: SWOG Estimates

    2.3 PRODUCT PROFILE & MARKET SHARES OF THE

    PROCESSING SECTOR The main products of Pakistans dairy industry are Ultra Heat Treated (UHT) and

    pasteurized milk, dry milk powder and condensed milk. Other products of less

    importance include butter, yogurt, ice cream, cheese, cream, and butter oil (ghee).

    Roughly 50% of the milk that is made available to the processing industry (not

    counting gawallas) is processed into UHT, 40% into powdered milk, and the

    remaining 10% into other by-products. The majority of the dairy processing

    facilities are located near Lahore, which serves as the hub for the industry. The

    total volume of industrially processed milk sold is about 139,000 metric tons a

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    year, roughly equal to about 0.5% of total (raw) milk produced. However, the

    domestic market for packaged milk is estimated at about 200,000 metric tons a

    year, or a bit more than US$100 million at prevailing price levels of Rs32/liter

    (refer to Table 4 for details on market share of different types of milk in the formal

    sector).1

    TABLE 4

    MARKET SHARE AND SELLING PRICE OF

    MILK PROCESSED IN THE FORMAL SECTOR

    Types of Milk Market Share in Volume Sale Price Rs/Liter Open Gawalla (Milkmen) Milk 90.00% 12-14

    UHT Tetra Pack 4.98% 32 Open Pasteurized Milk 3.76% 14-15 Open Milk Sold at Milk Shops 0.98% 18

    Pasteurized Pouch 0.24% 20 UHT Poly Pack 0.02% 22 Direct to Home 0.02% 15-18 Source: SMEDA. (Small & Medium Enterprise Development Authority)

    2.4 SEASONAL FLUCTUATIONS IN MILK PRODUCTION AND

    CONSUMPTION The production (supply) and consumption (demand) for milk and milk products in

    Pakistan is characterized by conflicting seasonal fluctuations. Milk production is

    at its maximum during the period between January and April and at its minimum

    during May August when fodder is limited. Milk consumption is at its peak in

    summer. At this time, because of the warmer ambient temperatures, people

    increase their milk intake and consume a greater range of dairy products including

    ice cream and yogurt.

    1 The market share of industrially processed (sold) milk estimated by SMEDA at around 5% of milk processed in the formal sector should not be confused with that share of 0.5% of milk produced in the country.

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    Milk supply from rural animal holders decreases by half in mid-summer. In

    contrast, the peri-urban producers (13% of all producers) have better control over

    their contribution to supply, which fluctuates less through the months. It is

    assumed that the overall supply reaches a low point in mid-June; at this point,

    supply is only 55% of what is supplied during the peak period in mid-February.

    Based on preliminary results from several small surveys, the overall demand

    varies from its highest point in June to an estimated low of 60% in December.

    2.5 SUPPLY - DEMAND GAP AND PROJECTIONS FOR UHT

    PROCESSED MILK Although Pakistan is the 5th largest producer of milk in the world, it faces a

    shortage of milk primarily because not all of its production actually makes it to

    the market. It is estimated that only 45% of the milk produced is actually

    available for sale. Of the milk that is sold by farmers, an additional 15-19% is

    wasted enroute-to-market due to spoilage from lack of proper cooling, storage,

    and transport systems. In total, 55-60% of current milk production is lost from

    potential income generation and value addition. A study done by the Lahore

    University of Management Sciences shows Demand and Supply for milk as

    follows:

    TABLE 5

    PROJECTION OF FRESH MILK PRODUCTION AND CONSUMPTION TO 2010)

    (million Liters)

    Years Average Production Average

    Consumption Annual Deficit

    Average 1971-2004 15,498.15 15,601.53 (103.38) 2004-2005 29,882.92 31,194.59 (1,311.67) 2005-2006 31,211.81 32,532.09 (1,320.28) 2006-2007 32,504.91 33,785.13 (1,280.22) 2007-2008 33,805.10 34,929.54 (1,124.43) 2008-2009 35,495.25 36,361.25 (866.00) 2009-2010 37,669.75 38,188.92 (519.17)

    Average 2005-2010 33,428.29 34,498.70 (1,170.41) Source: Lahore University of Management Sciences, 2005

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    -5,000

    0

    5,000

    10,000

    15,000

    20,00025,000

    30,000

    35,000

    40,000

    45,000

    Avg.1971-2004

    2004-2005

    2005-2006

    2006-2007

    2007-2008

    2008-2009

    2009-2010

    Avg.2005-2010

    AverageProductionAverageConsumptionAnnual Deficit

    Currently this gap is being filled by the import of powdered milk. About 6,000 to

    8,000 tons or between US$10 million and US$12 million worth of powdered milk

    is imported on an annual basis to fill the mismatch between an ever increasing

    demand and local supply. Powdered milk is imported in the form of Dry Whole

    Milk, Dry Skim Milk and to a lesser degree, Dry Whey. Imports of Dry Skim

    Milk vary between 15% and 25% of the total powdered milk imports. However,

    the trend reversed in 2003 with Dry Skim Milk imports comprising about 70% of

    total powder milk imports.

    Another factor that is contributing to this gap is the concentration of milk

    production in the Punjab where nearly 70% of the milk is produced and because

    of its very perishable nature it cannot be transported over long distances unless it

    is processed using UHT. This has seen UHT milk being marketed in the remotest

    areas of Pakistan including Gilgit, Gawadar, Punjgur etc.

    With increased urbanization in the country and the movement of Dairy animals

    out of the city limits, farms which are in the peri-urban areas of large cities like

    Karachi and Lahore are unable to cater to the demands of the rapidly increasing

    population. This leads to frequent price increases and chronic shortages. It is

    PROJECTION OF FRESH MILK PRODUCTION AND

    CONSUMPTION, TO 2010 (MILLION LITERS)

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    therefore no wonder that the main centers for UHT milk consumption are the

    urban areas like Karachi, Lahore, Islamabad etc.

    As stated earlier, there is greater awareness of the current milk handling processes

    in the traditional system by the urban consumer and he is extremely reluctant to

    consume fresh milk that has been handled in the traditional manner. Traditional

    milk is collected in an unhygienic manner and there is no enforcement of

    standards, resulting in poor quality product. In order to keep milk temporarily

    fresh, middlemen commonly add ice to the milk, which results in dilution of milk

    solids by up to 30% and often micro contamination takes place due to poor quality

    water in the ice.

    Although consumers have a greater preference for fresh milk, it needs to be boiled

    before consumption. Working women in the cities have realized the convenience

    of using UHT milk as it can be consumed directly from the packaging as it has a

    greater storage life.

    Fresh milk has high fat content, with greater health consciousness among the

    population, consumers are shifting to the use of UHT milk that has got lower fat

    content.

    According to a report prepared by Unilever Pakistan Limited, titled: Modern

    Dairy Technology and Prospects for Growth, The packaged milk market is

    estimated at 200 million liters per annum, valued at over Rs.6 billion, with a

    yearly growth rate of close to 20 percent over the last few years.

    With the large investments that the Government of Pakistan is making in the milk

    production side of the supply chain, both the quantity as well as the quality of the

    milk available for processing is going to improve. In addition, a comprehensive

    strategy is being prepared to increase consumer awareness about the current state

    of the quality of milk that is being sold as well as strengthening implementation of

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    food laws to international levels. These steps are expected to see a surge in the

    demand for UHT processed milk in Pakistan; also exportable surpluses are

    expected to be generated because of the increased supply of milk.

    2.6 MARKETING OF MILK AND DAIRY PRODUCTS

    2.6.1 MARKETING OF RAW LIQUID MILK

    Because of the various systems of milk production in Pakistan and the task of

    supplying fresh milk regularly to consumers and manufacturers in both rural and

    urban areas, different marketing systems have been developed that often involve

    several intermediaries who form the marketing chain. Intermediaries are rural

    milk traders (katcha dodhis), highway collectors (pacca dodhis), rural vendors /

    processors, commission agents, urban wholesalers, shopkeepers/processors and

    street and door-to-door vendors. The flow chart is shown below in chart 2.

    CHART - 2

    SIMPLIFIED DIAGRAM OF FLOW CHANNELS FOR

    MILK IN PAKISTAN

    Source: Strategy Development in Milk Production and Distribution (SMEDA Report, 2000)

    Dairy Farmer

    Milk Collection Agency

    Milk Processing Plant

    Distributor/ Retailer

    Consumer

    Gawalla (milk man)

    Formal Sector 2-3%

    Share

    Milk Collector

    Informal Sector 98%

    Share

    Retailer

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    2.6.2 MARKETING THROUGH RURAL MILK TRADERS

    Traditionally, the most important middlemen are the numerous rural milk traders,

    commonly called katcha dodhis. Equipped with a bicycle or horse cart, or in some

    cases now with a motorcycle and two to four milk cans, they make daily visits to

    1520 small milk producers, collecting some 7590 litres of raw milk. This may

    take three hours and the distance cycled can easily be 20 km. Most of the katcha

    dodhis are independent. Larger highway collectors, however employ a few of

    these katcha dodhis. Under the traditional system, women sell the milk to the

    middlemen.

    Where competition is strong, usually in production areas with good access, the

    katcha dodhis often have contracts with the producers to secure milk supply for a

    certain period. Then the purchasing price may be fixed, interest free advances

    may be given or both mechanisms may be used. The value of advances usually

    corresponds to the value of milk supplied within two to four weeks. As most

    katcha dodhis do not have sufficient resources to finance their suppliers, they in

    turn get advances from the larger collectors and sometimes from rural

    shopkeepers. If no advances are granted, payment is normally effected within one

    week after milk collection.

    With a few exceptions, milk is collected only in the morning, the evening milk

    being used mainly for home consumption. Milk is always collected by volume,

    never by weight, using measures of varying types and sizes. Milk producers

    normally supply pure, unadulterated milk; however, to prevent deterioration of the

    milk during their collecting tour, especially in the hot season, the katcha dodhis

    add certain quantities of ice to prevent the milk from turning sour.

    2.6.3 MARKETING THROUGH RURAL & HIGHWAY MILK COLLECTORS

    The highway milk collectors, or pacca dodhis, obtain their supply of milk almost

    exclusively from the katcha dodhis. The daily volume collected by a pacca dodhi

    often exceeds 2000 litres, especially in the Punjab. The number of katcha dodhis

  • 15

    supplying a single pacca dodhi ranges from 8 to 500, with a maximum of about

    70 per collection point.

    At their collection points along or near the main roads, most pacca dodhis check

    the milk visually, test fat and solids-not-fat (SNF) contents and measure the

    volume by pouring the milk into their own cans. If the quality meets

    requirements, the agreed price will be paid. Collectors supplying to dairy plants

    all use fat testing equipment.

    The pacca dodhis do not own chilling facilities, but most of them have one or

    more motor vehicles. Only the smaller collectors send milk to town by public

    transport or join other collectors who own or hire a small pick-up truck. One

    pacca dodhi may supply between 1 and 40 clients, depending on the milk volume

    marketed and the demand of the individual contractor, milk shop or manufacturer.

    Advances from shopkeepers seem to be rare. The rural collector has cash

    expenses of about Rs. 1/litre for ice and octroi (communal merchandise tax), the

    highway collector pays a similar amount and eventually Rs. 1/litre for hired

    transport. The vendor increases his margin through the sale of sweetened milk and

    the manufacture of dahi or sweetmeats.

    2.6.4 MILK COLLECTORS SUPPLYING DAIRY PROCESSORS

    Since the establishment of milk processing plants, highway milk collectors have

    been their most important and effective suppliers. Despite rigid quality testing and

    payment according to butterfat content, plants procure the major part of their raw

    milk through private milk collectors. This leads to difficulties during the lean

    production season when the supply gap results in price increase, which the

    manufacturers are not generally willing or able to pay.

    2.6.5 MILK SALE TO COLLECTION CENTRES OF DAIRY PROCESSORS

    Neither factory linked livestock farms nor dairy co-operatives have managed to

    become major suppliers to dairy processing plants. Size and production of the

  • 16

    commercial farms have limited their contribution. Of the milk marketed by the

    functioning co-operatives and Village Livestock Associations, created in some

    districts of Punjab to supply the Lahore Milk Plant (their designated long-term

    marketing partner), only a small proportion is channeled to the dairy plants.

    To improve the handling of raw milk and achieve a better quality for processing at

    the plant site, some dairy plants have started to equip milk collection centres with

    chilling units and to use insulated road tankers for bulk transport from the centres

    to the plant. This enables them to buy milk directly from the katcha dodhis. Some

    plants already collect 80% of their procurement themselves. Large-scale

    collectors supply the balance milk.

    Milk collection is undertaken by dodhis or co-operative organizations, but the

    milk producers may also deliver to the centres themselves and receive a higher

    price. The farm-gate price in winter is Rs. 810 and in summer Rs. 1012 per litre

    (6% fat basis). Some processing plants pay a bonus of Rs. 1.00/litre, if the milk is

    put into chilling tanks provided by the plants but operated by the producers.

    2.6.6 DIRECT MARKETING & CONTRACT SALE

    Some producers manage to market their milk without the help of dodhis.

    They produce quantities large enough to contract regular supplies with urban

    wholesalers/retailers or they sell straight to consumers (at the farm, in their own

    urban retail outlets or at the consumers door).

    The peri-urban milk producers, especially in Sindh, sell most of their milk on a

    contract basis (one year, fixed price) to urban distributors, milk shops and

    institutional consumers (hotels and restaurants). Milk in excess of the contracted

    quantities is sold through commission agents in the free wholesale market

    (auction sale). If a milk producer cannot supply the agreed quantity in full, he is

    obliged to make up the deficit from outside purchases (e.g. in the wholesale

    market). Some of the milk producers at Landhi Cattle Colony near Karachi have

  • 17

    established an association. Most peri-urban and rural commercial milk producers

    who market milk themselves do not maintain additional or better facilities than

    the pacca dodhis. Milk, with ice added, is transported in their own cans and

    usually their own vehicles to the customers or the wholesale markets. In general,

    milk is distributed in cans with volumes of 4050 litres.

    Milk producers who own transport facilities usually deliver milk to their urban

    contractors receiving about Rs. 14/litre of undiluted milk. Contractors are often

    milk shops converting part of the milk into customary products. In summer, the

    margins of intermediaries are much higher as more ice is added to cool the milk.

    2.6.7 MILK RETAILERS

    The final middlemen in raw milk marketing are the milk shops, which in urban

    centres often exercise distribution functions (supply to the small retailers) and/or

    transform milk into local yogurt (dahi), yogurt drinks and a simmered, sweetened

    concentrate (khoa) for sweet meats or ice cream. They often separate cream from

    part of the milk purchased.

    The major part of the raw milk reaching the milk shops is sold untreated within

    one to two hours after arrival. Some shops, particularly those operated by

    commercial milk producers keep the milk in cooling tanks (5001000 litres

    contents) or fill a certain proportion into plastic sachets, which after sealing are

    kept in a refrigerator. Milk, which is not sold immediately, is boiled for sale later

    or converted into dahi, khoa etc. Nevertheless, the consumers boil all liquid milk

    bought before consumption.

    2.7 MARKETING OF PROCESSED MILK The only type of processed liquid milk that is found in markets all over the

    country is sterilised long-life (ultra heat treated; UHT) milk. Standardised UHT

    milk is marketed in 250, 500, 1,000 and 1,500 ml packages, mostly as tetra briks.

  • 18

    The 500-ml packages account for about 60% of the total quantity sold, 250ml

    packages for 2025% and the 1,000 ml tetra briks for 1520%.

    The marketing chain is short; from the factories, the milk is transported by truck

    to regional distributors/wholesalers who in turn supply it to general stores and

    supermarkets in the big cities. Regional distribution of sales demonstrates that the

    majority of milk is consumed within a limited area around the Regional

    Distributors.

    Ex-factory prices vary according to the destination of sales and freight costs

    involved. The distributorwholesaler receives commission of between Rs. 1.00

    and 2.00/litre, depending on brand and package size. Most manufacturers refund

    or replace damaged and expired packages.

    Compared with the margins in the retail marketing of raw liquid milk (especially

    the extra margins resulting from dilution), the margins on processed milk are

    much smaller and cannot be increased by adulteration. However, retailers do not

    deal exclusively in UHT milk, it is just one of many items sold; this applies to

    most wholesalers as well.

    2.8 MARKETING OF DAIRY PRODUCTS Traditional dairy products like dahi and khoa are manufactured and sold by most

    milk shops across Pakistan. On average, these shops convert about 20% of the raw

    milk purchased into dahi and/or khoa. During Ramadan and in summer, dahi

    consumption increases considerably.

    Milk Farmers mainly produce butter or desi ghee in areas that are not penetrated

    by milk collectors. The major part of ghee is home consumed but an estimated

    annual volume of 34% is marketed through wholesalers, vendors and

    shopkeepers, both in rural and urban areas. Because of its relatively high price

    (consumers have to pay between Rs. 160 and 180/kg), it cannot compete with

  • 19

    vegetable ghee or oil, which costs only a third of the price and is used

    increasingly as a substitute.

    In contrast, desi butter seems to have a stable market, especially during the winter

    months. The quantity marketed may reach 60 thousand tonnes/year. The larger

    dairy shops in the cities and special creameries are the principal manufacturers of

    local butter. They usually buy cream from wholesalers or pacca dodhis and

    produce only what can be sold the same day.

    Some milk processing plants have introduced a number of new dairy products into

    the market like:

    Yogurt (natural and flavoured) Drinking yogurt (lassi) Sweetened, flavoured milk UHT and pasteurised cream Butter Ghee Cheese and Ice cream mix. The quantities sold, however, are very modest for most items; only yogurt and

    butter sales have reached significant volumes. Three major yogurt manufacturers

    sell about 4000 tonnes annually. Consumer prices of Rs. 1721 per 450 ml cup

    (3.5% fat) assure a good margin despite high packaging costs. The modern butter

    manufacturers produce about 800 tonnes per year. It is mainly packed and sold in

    portions of 200 g with ex-factory prices from Rs. 3035/pack and consumer prices

    from Rs. 3540/pack.

    The ice cream industry, producing 910 thousand tonnes of ice cream/annum,

    uses mainly dairy ingredients, especially fresh cream. Fresh milk is mostly

    substituted by imported milk powder.

  • 20

    As discussed above, in view of the growing acceptance by the consumers of UHT

    milk and the expected white revolution which should see milk production more

    than double in the medium term, it is proposed to set up a UHT milk processing

    plant of 100,000 liters per day capacity. This is an economically viable sized

    plant, although the market demand justifies a larger capacity, it is suggested that

    the sponsors work with a smaller capacity till such time that they are able to

    organize the milk collection system to provide larger raw milk inputs. Raw milk

    input for a 100,000 liters per day plant located in central Punjab should not be a

    problem with the existing milk supply chain.

  • 21

    Milk Production by Region

    0

    5

    10

    15

    20

    25

    30

    35

    40

    1996 1997 1998 1999 2000 2001 2002

    Liters (bn)

    Others

    Sindh

    Punjab

    CHAPTER 3

    TECHNICAL EVALUATION

    In view of the growing acceptance by the consumers of UHT milk and the

    expected white revolution which should see milk production and consumption

    of processed milk more than double in the medium term, it is proposed to set up a

    UHT milk processing plant of 100,000 liters per day capacity. This is an

    economically viable sized plant, although the market demand justifies a larger

    capacity, it is suggested that the sponsors work with a smaller capacity till such

    time that they are able to organize the milk collection system to provide larger

    raw milk inputs. Raw milk input for 100,000 liters per day plant located in

    central Punjab should not be a problem with the existing milk supply chain.

    The technical assessment of the viability for setting up a 100,000 litres per day

    UHT milk processing plant depends on several major factors. These are discussed

    below:

    3.1 LOCATION PREFERENCE The vicinity of the city of Lahore has been chosen for setting up the plant, the

    major reason being the availability of fresh milk in the region. Punjab, of which

    Lahore is the capital, produces 70% of Pakistans milk;

    PAKISTAN MILK PRODUCTION STATISTICS

    Source: International Farm Comparison Network (IFCN) 2003.

  • 22

    TABLE -6

    MILK PRODUCTION (REGION WISE)

    (million Tonnes)Milk Production Milk Production by Regions Year

    Buffalo Others Punjab Sindh Others 1996 18.0 9.0 19.0 7.0 3.0 1997 20.0 9.0 21.0 5.5 4.0 1998 20.0 9.0 21.0 5.5 4.0 1999 21.0 9.5 21.5 6.0 5.0 2000 21.7 10.0 22.0 5.0 5.0 2001 21.8 9.5 22.5 4.5 5.0 2002 23.0 10.0 23.0 6.0 5.6

    Source: IFCN, 2003

    TABLE 7

    MILK PRODUCTION IN PUNJAB

    (million Tonnes)

    Milk Production by Regions in Punjab (MillionTons)

    Composition of the Dairy Herd

    Punjab Milk Production Years

    Center Souther Potohar Buffal Others Buffalo Others 1996 16.0 2.0 1.0 7.5 3.5 13.5 6.0 1997 16.5 3.0 1.5 7.8 4.1 14.0 7.0 1998 16.4 3.3 2.0 8.0 3.5 14.0 6.7 1999 17.0 3.0 1.5 8.2 4.0 14.2 7.0 2000 17.2 3.6 2.0 8.3 4 15.0 8.0 2001 17.5 3.9 1.0 8.5 4.6 15.0 7.5 2002 18.0 4.0 2.0 8.7 5.5 15.1 8.5

    Source: IFCN, 2003

    As can be seen from the above Table, out of the approximately 24 million tonnes

    of milk produced annually in the Punjab, 18 million tones or about 75% is

    produced in the Central Region of Punjab. This region will be the milk catchment

    area for the proposed Plant. In addition a supply chain has already been developed

    in the area which ensures that milk from the smaller farmers who have among the

    lowest production costs in the world is made available to the milk processing

    plants:

  • 23

    TABLE 8

    INTERNATIONAL MILK PRODUCTION COST BENCHMARKS

    Country US$/100kg milk Argentina 7-11 Pakistan 9-12 Australia 10-14 India 10-11 Austria 57 Switzerland 79 Source: IFCN, 2003

    The setting up of the first UHT plant in 1977 in the area has ensured that the skill

    levels of the workers have developed to the required level, in addition local

    engineering expertise, transportation network, marketing channels and support

    services for the plant as well as marketing have developed.

    Karachi, the main city of Pakistan and the largest market for UHT, is not

    considered as a location for the plant because of the higher cost of raw milk. Raw

    milk prices in Karachi, because of the shortage of green fodder and greater

    emphasis on higher priced concentrates as diet for the milch animals means that

    prices of raw milk are approximately 30% higher in Karachi as compared to

    Lahore.

    3.2 SPECIALIZED MANPOWER The plant will require technically qualified and experienced professionals in the

    areas of production management, operations and marketing. These will include

    dairy processing experts; food chemists; cold storage technologists; laboratory

    technicians; milk collection experts; marketing, human resource, accounting and

    finance experts; etc. The presence of a large number of milk and food processors

    including Nestle, Unilever, Cadbury, Shezan, Mitchells, and Haleeb etc. ensures

    the availability of a constant supply of trained and experienced professionals.

    As stated earlier, the Government of Pakistan has also accorded a high priority

    to the Dairy Industry and has set up a company known as Dairy Pakistan on the

  • 24

    lines of Dairy Australia; among the areas in which Dairy Pakistan is

    concentrating includes human skill development of the professionals

    required for the Dairy industry.

    3.3 REGULATORY FRAMEWORK The legislative framework that guides food markets in Pakistan is governed by the

    Pure Food Rules (PFR) of 1965(and Cantonment Pure Food Rules of 1967 for

    military areas), and the Pure Food Ordinance of 1960. The most important

    aspects of regulation that guides milk industry are to be found in PFR, and include

    the following:

    Section 18: Containers for milk sales, distribution or storage must be labeled. Metallic containers (typically used by gawallas in the delivery of milk) must

    have a clear and distinct label attached.

    Section 19: Imperfect enameling and tinning of containers is illegal. Section 20: Milk from diseased animals is illegal. Section 21: Persons with contagious diseases are disallowed from milking

    animals, working at dairy farms, handling milk or any container meant to be

    used for storage or transportation of milk.

    Section 22: Pasteurization and sterilization parameters are laid down. Section 23: Equipment and processes needed for gaining approval by the

    government to operate milk processing plant have been specified

    Sections 272 and 273 of the Pakistan Penal Code deal with the issues of penalties

    for adulteration of food and drinks. The prescribed penalty for food adulteration

    is six months in prison, and/or one thousand rupees fine. PFR gives authority to

    provincial governments to appoint public analysts for investigation of quality and

    safety of food. There is no federal structure of a food safety program in Pakistan.

    Enforcement is done through health service delivery channels of provincial

    governments. The District Health Officer and Deputy Health Officer function as

    food inspectors for sampling and inspection. On the other hand, the concerned

  • 25

    Municipality Corporation may also appoint food inspectors and sanitary

    inspectors for sampling purposes. Any other public servant can also be appointed

    as inspector and can execute the power of food inspector. The Sanitary and Phyto

    Sanitary (SPS) Agreement lays down certain requirements that aim to ensure

    transparency in the implementation of SPS measures in member countries.

    Members are required to establish specific contact points to facilitate

    communication regarding SPS measures. This involves firstly, a single national

    enquiry point, which is responsible for responding to queries from a single

    national notification authority, which is responsible for all procedures

    associated with notification of new or amended SPS measures. These

    notifications and measures serve as guidelines for customs and health authorities

    in importing countries in assessing risk failure to notify and convince importing

    countries that SPS measures are up to date and implemented results most of the

    time in time-consuming inspections and quarantine measures which effectively

    hurts exporters by creating trade barriers.

    3.4 IN-HOUSE QUALITY ASSURANCE Physical dispersal of gawallas and small dairy farms makes enforcement of

    quality standards difficult, but crucial. One factor would be the tracking of milk

    that is largely collected through informal channels, from hundreds and thousands

    of farmers and gawallas to the processing unit. Other issues where control is

    expected to yield positive results include adequate testing/laboratory facilities and

    close monitoring of staff to ensure that necessary quality checks are made and

    standards enforced.

    3.5 RATIONALE FOR SETTING UP A UHT MILK PROCESSING PLANT

    The rationale for setting up the proposed UHT milk processing plant of 100,000

    litres per day capacity includes:

  • 26

    Current availability of more than 33.0 million tonnes per day (projected figure 2006) of raw milk, out of which only 2 3% is actually being processed.

    A current market size of more than 200 million litres per annum of processed milk, market for processed milk growing at more than 20% per annum for the

    past 3 years and projected to continue growing at the same rate for the next

    5years.

    The Government of Pakistans Strategic initiative for the milk processing industry which includes; increasing milk yield per animal, stronger

    enforcement of laws relating to adulteration and hygiene, a media program

    aimed at informing consumers about the dangers of consuming raw milk, a

    concentrated program by the dairy industry promoting the use of UHT treated

    milk.

    Availability of requisite technology for setting up a UHT processing plant and trained manpower for running the same.

    Huge export potential for UHT treated milk in the Region, with Pakistan being the only milk surplus country in the Region.

    In view of the above it is suggested to establish a UHT milk processing unit of

    100,000 litres per day capacity with provision of expansion in the future.

    3.6 PROPOSED UHT PROCESSING UNIT As already stated in Chapter 2, the demand for UHT milk is currently estimated at

    200 million litres per annum which is increasing at an annual rate of 20%. With

    only 2 3% of the more than 33.0 million tonnes of milk produced annually,

    (projected figure for 2006) being processed and the abundant availability of milk,

    especially in central Punjab the case for setting up of a UHT milk processing plant

    very strong.

    3.6.1 THE UHT PROCESS Although pasteurization effectively eliminates potential pathogenic

    micro-organisms, it is not sufficient to inactivate the thermo resistant spores in

  • 27

    milk. The term sterilization refers to the complete elimination of all micro

    organisms. The food industry uses the more realistic term "commercial

    sterilization"; a product is not necessarily free of all micro organisms, but those

    that survive the sterilization process are unlikely to grow during storage causing

    product spoilage.

    Milk can be made commercially sterile by subjecting it to temperatures in excess

    of 100 C, and packaging it in air-tight containers. The milk may be packaged

    either before or after sterilization. The basis of UHT, or ultra-high temperature, is

    the sterilization of food before packaging, then filling into pre-sterilized

    containers in a sterile atmosphere. Milk that is processed in this way using

    temperatures exceeding 135 C, permits a decrease in the necessary holding time

    (to 2-5 s) enabling a continuous flow operation.

    3.6.2 ADVANTAGES OF UHT

    High quality:

    The reduction in process time due to higher temperature (UHTST) and the

    minimal come-up and cool-down time leads to a high quality product.

    Long shelf life:

    Shelf-life greater than 6 months, without refrigeration, can be expected.

    Packaging size:

    Processing conditions are independent of container size, thus allowing for the

    filling of large containers for food-service or sale to food manufacturers.

    Cheaper packaging:

    Cost of package and storage; transportation costs; laminated packaging allows for

    use of extensive graphics.

  • 28

    3.6.3 DIFFICULTIES WITH UHT

    Sterility:

    High performance equipment and plant are needed to maintain sterile atmosphere

    between processing and packaging (packaging materials, pipe works, tanks,

    pumps); sterility must be maintained through aseptic packaging; this would

    require higher skilled operators.

    Keeping Quality:

    Heat stable lipases or proteases can lead to flavor deterioration, age gelation of the

    milk over time - nothing lasts forever! There is also a more pronounced cooked

    flavor to UHT milk.

    3.6.4 UHT METHODS

    There are two principal methods of UHT treatment:

    Direct Heating

    Indirect Heating

    Direct heating systems:

    The product is heated by direct contact with steam of potable or culinary quality.

    The main advantage of direct heating is that the product is held at the elevated

    temperature for a shorter period of time. For a heat-sensitive product such as milk,

    this means less damage.

    There are two methods of direct heating:

    1. injection

    2. infusion

    Injection: High pressure steam is injected into pre-heated liquid by a steam

    injector leading to a rapid rise in temperature. After holding, the product is flash-

    cooled in a vacuum to remove water equivalent to amount of condensed steam

  • 29

    used. This method allows fast heating and cooling, and volatile removal, but is

    only suitable for some products. It is energy intensive and because the product

    comes in contact with hot equipment, there is potential for flavour damage.

    Infusion: The milk product stream is pumped through a distributing nozzle into a chamber of high pressure steam. This system is characterized by a large steam

    volume and a small product volume, distributed in a large surface area of product.

    Product temperature is accurately controlled via pressure. Additional holding time

    may be accomplished through the use of plate or tubular heat exchangers,

    followed by flash cooling in vacuum chamber. This method has several

    advantages:

    instantaneous heating and rapid cooling no localized overheating or burn-on suitable for low and higher viscosity products

    Indirect heating systems The heating medium and product are not in direct contact, but separated by

    equipment contact surfaces. Several types of heat exchangers are applicable:

    plate tubular scraped surface

    Plate Heat Exchangers: Similar to that used in HTST but operating pressures are

    limited by gaskets. Liquid velocities are low which could lead to uneven heating

    and burn-on. This method is economical in floor space, easily inspected, and

    allows for potential regeneration.

  • 30

    Tubular Heat Exchangers: There are several types:

    shell and tube shell and coil double tube triple tube

    All of these tubular heat exchangers have fewer seals involved than with plates.

    This allows for higher pressures, thus higher flow rates and higher temperatures.

    The heating is more uniform but difficult to inspect.

    Scraped Surface Heat Exchangers: The product flows through a jacketed tube,

    which contains the heating medium, and is scraped from the sides with a rotating

    knife. This method is suitable for viscous products and particulates (< 1 cm) such

    as fruit sauces, and can be adjusted for different products by changing

    configuration of rotor. There is a problem with larger particulates; the long

    process time for particulates would mean long holding sections which is

    impractical. This may lead to damaged solids and over processing of some

    liquids.

    3.6.5 PACKAGING OF UHT PROCESSED MILK The most important point to remember is that packaging must be sterile! All

    handling of post-process product must be within a sterile environment.

    There are 5 basic types of aseptic packaging lines which can be used for

    packaging UHT processed milk:

    1. Fill and seal: preformed containers made of thermoformed plastic, glass or

    metal are sterilized, filled in aseptic environment, and sealed.

    2. Form, fill and seal: roll of material is sterilized, formed in sterile

    environment, filled and sealed e.g. tetrapak.

  • 31

    3. Erect, fill and seal: using knocked-down blanks, erected, sterilized, filled,

    sealed. e.g. gable-top cartons, cambri-blocs.

    4. Thermoform, fill, sealed roll stock sterilized, thermoformed, filled, sealed

    aseptically. e.g. creamers, plastic soup cans.

    5. Blow mold, fill, seal:

    There are several different package forms that are used in aseptic UHT

    processing:

    cans paperboard/plastic/foil/plastic laminates flexible pouches thermoformed plastic containers flow molded containers bag-in-box bulk totes

    It is also worth mentioning that many products that are UHT heat treated are not

    aseptically packaged. This gives them the advantage of a longer shelf life at

    refrigeration temperatures compared to pasteurization, but it does not produce a

    shelf-stable product at ambient temperatures, due to the possibility of

    recontamination post-processing.

    3.7 THE UHT PROCESS FLOW The UHT Milk Production Flow Chart is shown in Figure 5 below, the basic

    functions performed are as follows:

  • 32

    CHART - 3

    UHT PROCESSING AND PACKAGING PLANT

    BASIC BLOCK DIAGRAM

    Receipt and filtration of the raw milk: In this stage, raw milk which is received

    from the farms is tested for quality and filtered before being stored at a

    temperature of 4oC. This temperature reduces the formation of micro-organisms.

    Pasteurisation of Milk: This mild form of heat treatment kills pathogenic

    bacteria that may be present without affecting the nutritional value or flavour. It

    also extends the shelf life by reducing the spoilage bacteria. Pasteurised milk can

    be kept for up to five days. The process involves heating milk to 71 oC for at least

    15 seconds and then cooling it rapidly to less than 6oC. The device used for

    heating and cooling is called a heat exchanger or pasteurizer.

    Homogenisation of Milk: Homogenization is a process that involves forcing

    milk through a tiny hole under considerable pressure. This breaks up the fat

    globules making them smaller and of a uniform size. If large gat globules are left

    in the milk, these will rise to the surface and form a layer of cream, but in

    homogenized milk, the fat stays evenly distributed throughout the bottle or

    carton.

    Raw milk reception Raw milk storage

    Milk pasteurisation,deaeration

    homogenisation & standardisation

    Raw milk cooling

    Past. Milk storage

    Distribution & Warehousing

    UHT treatment

    Utilities: -Electricity - Steam - Cooling water - Compressed air

    Automation

    CIP

  • 33

    Standardization of Milk: UHT Milk is toned to a butter fat content of 3.5%

    and solid-not-fat content of 8.9% (standardized milk). Assuming the supply of

    pure milk (either from buffalo or cows), the only adjustment needed before

    processing should be a reduction of the butter fat content, this is usually done by

    either removing cream or adding 800 litres of water to every 1,000 litres of raw

    milk, this reduces fat to 3,5% but also reduces the SNF content to less than that

    allowed under the law, to make up for this we add 83Kgs of Skim Powder Milk to

    the 1,800 litres of milk.

    UHT: This form of heat treatment kills all bacteria in milk and it practically

    becomes sterile. The UHT process involves sterilising homogenised milk by

    a continuous process using direct or indirect heating. With direct heating the

    temperature reaches 140 150oC either by injecting steam directly into the milk

    or by forcing milk through a fine nozzle into a tank filled with steam. The milk

    is then cooled in a sterile vacuum chamber, where added steam or excess water is

    evaporated.

    3.8 TECHNICAL REQUIREMENTS & THEIR AVAILABILITY

    3.8.1 LAND: A plot of land having an area of around 10 acres near Lahore has been proposed.

    The present value of land near Lahore is estimated at Rs.0.45 million per acre.

    3.8.2 BUILDING & CONSTRUCTION:

    The total constructed area has been envisaged at 7,000 square meters to house the

    main production facility and storage of the packaged milk, UHT milk needs to

    stay in the factory warehouse for a minimum of 3 days to allow for stabilization

    before it can be transported. The total cost of the building and civil works has

    been estimated at Rs.70.0 million.

  • 34

    3.8.3 MACHINERY AND EQUIPMENT:

    A modern UHT plant of 100,000 liters per day needs to be purchased from a

    supplier of UHT processing machinery. There are a number of suppliers or their

    agents in Pakistan. It is estimated that a plant of the capacity specified above

    would cost Rs.400.0 million including storage tanks, processing machinery,

    packaging machinery, quality control laboratories, installation, startup etc.

    3.8.4 OTHER MISCELLANEOUS ITEMS:

    This would include fixed assets like office equipment, workshop equipment,

    tools, furniture and fixtures, vehicles etc amounting to Rs.20.0 million.

    3.8.5 WORKING CAPITAL:

    Milk is a business in which cash flow is very high and companies in the industry

    tend to generate cash surplus on a regular basis, most of the milk is purchased on

    a 1-week credit basis and the finished product is sold on cash. Some advance is

    paid especially in the summer months when raw milk production goes down.

    Working capital is mostly required for paying for packing material, finished

    goods in warehouse that needs to be stabilized before release into the market, for

    paying of utility bills, wages, petrol for vehicles and for spares. The Working

    Capital requirements have been estimated at Rs.70 million.

    3.8.6 CONTINGENCIES:

    Contingencies for the first year of operation have been estimated at 20.0 million.

  • 35

    CHAPTER 4

    GOVERNANCE AND MANAGEMENT STRUCTURE

    4.1 GOVERNANCE STRUCTURE It is proposed that a special purpose company be set-up to establish and operate the proposed dairy unit. The Companies Ordinance 1984 with amendments

    thereof, and Code of Corporate Governance issued by the Security and

    Exchange Commission of Pakistan (SECP) regulate establishment and

    governance of a limited company (public or private) in Pakistan.

    Corporate Governance is a set of institutional and market-based mechanisms that

    encourage controllers of a company to maximize the value of a company for its

    owners. The conduct of the corporation is a three-way process involving the board

    of directors, top management and the employees. At the core of corporate

    governance is empowerment at all levels shareholders, the board, and top

    management. The law applicable to a company is the law of the country.

    Principles and rules on corporate governance need to be laid down in the Articles

    & Memorandum of Association (Incorporation) and the Regulations of Board of

    Directors. The proposed governance structure is illustrated on the following page.

    The business of the company is to be managed under the directions of the Board

    of Directors. The Board is responsible for establishing broad corporate policies

    and for the overall performance of the company. The core responsibility of the

    directors is to exercise their business judgment and to act in what they reasonably

    believe to be in the best interests of the company.

    The Boards Corporate Governance Committee is required to review the

    principles and rules regularly in the light of prevailing best practices and it is

    required to forward suggestions for improvement to the Board for approval.

  • 36

    The Boards Corporate Governance Committee is also responsible for considering

    matters of corporate social responsibility and matters of significance in areas

    related to corporate public affairs and the companys employees and shareholders.

    The Boards job should be to create and maintain a structure that will ensure

    harmony and cooperation between management and the employees in pursuing

    the goals and objectives of the organization rather than simply rubber-stamping

    the actions of management.

    The Boards Audit Committee will have two fundamental responsibilities;

    internally it will oversee the annual external audit to ensure the accuracy and

    integrity of the financial statements as required by legislation. It will also ensure

    that there are no breakdowns in corporate governance rules and procedures,

    including the rules of ethical conduct and internal control. The Audit Committee

    would also be the practical monitor collecting information regarding corporate

    misconduct and encouraging those with such information to come forward.

    CHART 4

    PROPOSED GOVERNANCE STRUCTURE

    The Company Share-Holders

    Board of Directors

    Chairman

    Chief Executive

    Officer

    Corporate Governance Committee

    Corporate Audit Committee

    Manager Procurement

    Manager Marketing

    Manager Finance

    Internal Auditor & Quality Assurance

    Manager HR &

    Admin.

    Plant Manager

  • 37

    4.2 MANAGEMENT STRUCTURE The paramount duty of the Board of Directors is to select a Chief Executive

    Officer (CEO) and to oversee the CEO and the other senior management staff in

    the proper and ethical operation of the company.

    The Board would identify, and periodically update the qualities and

    characteristics necessary for an effective CEO of the company. With these

    principles in mind, the Board should periodically monitor and review the

    development and progression of potential internal candidates against these

    standards.

    The CEO will be in-charge of the day-to-day management of operations and is

    responsible for ensuring that the company and management functions are

    organized, run and developed in accordance with the law, Articles of Association

    and decisions taken by the Board, and the Annual General Meeting of the

    Shareholders.

    The management structure, presented in Figure 7 comprises of various

    departments including milk procurement, plant operation, quality assurance,

    human resource, finance, marketing & sales, internal audit and field staff.

    The structure is characterized by clear assignment of responsibilities as well as a

    reduced number of interfaces.

    The selected CEO will be responsible for delivering policy and performance for

    customers, society, staff, suppliers and the business. The core activities are briefly

    described as under:

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    HUMAN RESOURCE DEPLOYMENT

    Plant Manager

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    - Chairman- Directors (6)

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  • 39

    4.3 RAW MILK PROCURMENT & TRANSPORTATION This department will be responsible for purchasing milk from the pucca dhodis

    the success of the plant will hinge on this crucial function, as the plant will only

    be successful in the long run if it is able to have a secure raw milk supply. To

    ensure that milk quality is maintained, chillers will be provided to the pucca

    dhodis who will be paid for the maintenance of these chillers. In addition to

    maintaining the quality of the milk at the collection points, the department will

    also be responsible for transporting the raw milk to the plant. As milk will be

    collected from a number of collection points, the department will be responsible

    for ensuring that inferior milk from one supplier does not mix with the milk

    collected from another supplier. Also the department will be responsible for

    measuring the fat and the solid not fat content of the milk.

    4.4 PLANT OPERATIONS AND QUALITY ASSURANCE A Plant Engineer with a degree in food processing will be appointed to run the

    processing plant, he will be assisted by qualified and experienced quality

    assurance staff headed by a food technologist. Very high quality standards need to

    be maintained, as one of the reasons for urban consumers switching to UHT milk

    is the hygiene aspect of the process. The plant maintenance staff will be

    responsible for daily washing and sterilization of the plant. Plant is normally run

    for 16 hours followed by a mandatory 8 hour shutdown period to allow for

    cleaning of the plant and its peripheral machinery.

    4.5 MARKETING & SALES A General Manager will head the marketing and sales function; he should have

    vast experience in the field of FMCG marketing. Area Managers who will have

    Sales Representatives working under them will assist the GM Marketing and

    Sales. Distributors who will be appointed in all the major towns of Pakistan will

    provide the selling function. The existing milk processing units currently employ

    the suggested distribution network. In addition an institutional sales force will be

    developed which will sell directly to large customers like the Canteen Stores

  • 40

    Department (CSD), the Utility Stores Corporation (USC), major hospitals, hotels,

    large restaurants, food caterers etc.

    CHART - 6

    PROPOSED MANAGEMENT STRUCTURE

    4.6 FINANCE DEPARTMENT The finance department will handle all financial matters in terms of billing,

    settlement of invoices, negotiating and finalizing deals, effectively managing the

    huge amount of cash that a business like this generates, managing administrative

    expenses etc. Payment recovery and preparation of accounts in terms of quarterly,

    half yearly and annual reports in line with audit requirements will be some of the

    other responsibilities of the Finance Department. The personnel required will

    include a Senior Finance Manager assisted by Accountants and Assistant

    Accountants.

    Plant Manager

    Works Manager

    Technicians

    Chemists Technical - Supervisors

    Electrician

    CEO

    Manager Milk Procurement

    HR Manager

    Marketing Manager

    Field Manager

    Field Supervisor

    Institutional Marketing Manager

    Chemists Cold Storage Technical Logistic In charge

    VeterinaryDoctor

    Finance Manager

    AccountsStaff

    Finance Staff

  • 41

    4.7 HUMAN RESOURCE DEPARTMENT The Human Resource department will focus on developing the human capital of

    the company, keeping in mind the underlying importance of human capital in

    modern business. The department will take a strategic approach to human

    resources management for attainment of organizations strategic objectives. A

    professional approach based on maximizing returns on investment through

    development of farsighted policies to attract, train and retain human capital.

    Additionally the department will determine compensations and grievance

    handling procedures, set objectives, develop standards, appraise performance and

    review results in order to meet the challenges of the present age.

  • 42

    CHAPTER 5

    FINANCIAL EVALUATION

    5.1 CAPITAL COST OF THE PROJECT The estimated capital cost of the project would be around Rs.670.0 million, this

    would include cost of land, building, machinery, other capital assets, working

    capital etc.

    TABLE 9

    UHT MILK PROCESSING PLANT PROJECTED CAPITAL COST

    (Rs in 000s)

    S. # DESCRIPTION AMOUNT

    1. Cost of Land (10 acres @ Rs. 0.45 million/ per acre) 45,000 2. Cost of construction of Plant Building (7,000 Sq.

    meter @ Rs.10,000/ per m2) 70,000 3. Machinery & Equipment 400,000

    4. Collection Chillers / Refrigerated Milk Collection Trucks 30,000

    5. Other Vehicles 10,000

    6. Other Plant and Machinery 20,000

    7. Furniture & Fixtures 5,000

    8. Working Capital 70,000

    9. Contingencies 20,000

    TOTAL 670,000

    Funds have been provided for the purchase of raw milk, installation of chillers at

    collection points, chiller trucks, a modern 100,000-liter per day UHT milk

    processing plant with packaging facilities etc. The production process is a

    continuous process and capacity has been calculated at 16 hours per day, the plant

    must be compulsorily shut down for cleaning on a daily basis and the cleaning

    and sterilization time is 8 hours. It is expected that the plant will run for 350 days

    a year and in the first year capacity utilization will, on an average, be 50%, this

  • 43

    conservative figure has been taken keeping in mind the difficulties in setting up a

    milk collection network.

    Land:

    The plot of land having an area of around 10 acres near Lahore has been

    proposed, justification for location of plant has been established in the Technical

    Evaluation of the Pre-feasibility. The present value of land near Lahore is

    estimated at Rs.0.45 million per acre.

    Building & Construction:

    The total constructed area has been envisaged as 7,000 square meters to house the

    main production facility and storage of the packaged milk, UHT milk needs to

    stay in the factory warehouse for a minimum of 3 days to allow for stabilization

    before it can be transported. The total cost of the building and civil works has

    been estimated at Rs.70.0 million.

    Machinery and Equipment:

    A modern UHT plant of 100,000 liters per day needs to be purchased from a

    supplier of UHT processing machinery. There are a number of suppliers or their

    agents in Pakistan. It is estimated that a plant of the capacity specified above

    would cost Rs.400.0 million including storage tanks, processing machinery,

    packaging machinery, quality control laboratories, installation, startup etc.

    On Farm Chillers, Refrigerated Trucks Etc.

    As part of the collection chain, the Company will need to provide Chillers for

    collection of raw milk as well as infrastructure like generators etc to run these

    chillers, in addition refrigerated trucks would be required to bring the raw milk

    from collection points to the factory, it is estimated that this will cost Rs.30.0

    million.

  • 44

    Other Vehicles:

    This will include other support vehicles like service vans for in-field chillers, for

    transporting of workers, vehicles for short haul deliveries to the regional

    distributors as well as cars for executives. It is estimated that these will cost

    Rs.10.0 million.

    Other Plant and Machinery:

    This will include stand by generators, water treatment facilities, tube wells etc.,

    the cost is estimated at Rs.20.0 million.

    Furniture & Fixtures:

    This will include office furniture and fixtures as well as office equipment like

    computers, operational software etc. The total cost is estimated at Rs.5.0 million.

    Working Capital:

    Milk is a business in which cash flow is very high and companies in the industry

    tend to generate cash surpluses on a regular basis, most of the milk is purchased

    on a 1-week credit basis and the finished product is sold on cash. Some advances

    are paid especially in the summer months when raw milk production goes down.

    Working capital is mostly required for paying for packing material, finished

    goods in warehouse that has to be stabilized before release into the market, for

    paying of utility bills, wages, petrol for vehicles and for spares. The Working

    Capital requirements have been estimated at Rs.70 million.

    Contingencies:

    Contingencies for the first year of operation have been estimated at 15.0 million.

    5.2 PROJECTED PROFIT & LOSS ACCOUNTS The projected income statements for the UHT milk processing plant for 5 years

    are given in Table 10:

  • 45

    TABLE 10

    PROJECTED PROFIT & LOSS ACCOUNTS

    (Rs in 000)

    Description Year 1 Year 2 Year 3 Year 4 Year 5

    Sales 560,000 616,000 672,000 728,000 784,000

    Cost of Good Sold 287,875 316,663 345,450 374,238 403,025

    Gross Profit 272,125 299,338 326,550 353,763 380,975 Admin & Related Expenses 70,550 76,265 82,047 87,899 93,826 Operating Profit 201,575 223,073 244,503 265,863 287,149

    Depreciation 54,500 54,500 54,500 54,500 54,500

    Net Profit Before Tax 147,075 168,573 190,003 211,363 232,649

    Income Taxes (35%) 51,476 59,000 66,501 73,977 81,427 Net Profit after Income Tax 95,599 109,572 123,502 137,386 151,222

    5.3 PROJECTED CASH FLOW The projected cash flow of the Project for 5 years is shown as under:

    TABLE 11

    PROJECTED CASH FLOW (Rs in 000)

    Expected Cash Inflow Year 0 Year - 1 Year - 2 Year - 3 Year - 4 Year - 5

    Equity Contribution 670,000 - - - - -

    Operating Profit - 201,575 223,073 244,503 265,863 287,149

    TOTAL 670,000 201,575 223,073 244,503 265,863 287,149

    EXPECTED CASH OUTFLOW

    Capital Investment 670,000 - - - - -

    Payment of Taxes - - 51,476 59,000 66,501 73,977

    Total 670,000 - 51,476 59,000 66,501 73,977

    SUMMARY

    Expected Cash Inflow 670,000 201,575 223,073 244,503 265,863 287,149 Expected Cash Outflow 670,000 - 51,476 59,000 66,501 73,977 Net Cash flow - 201,575 171,596 185,503 199,362 213,172 Cumulative Cash Flow - 201,575 373,171 558,674 758,036 971,208

  • 46

    5.4 PROJECTED BALANCE SHEETS The projected Balance Sheet for the first 5 years is given below:

    TABLE 12

    PROJECTED BALANCE SHEET

    (Rs in 000)

    Description Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

    CAPITAL

    Equity Contribution 670,000 670,000 670,000 670,000 670,000 670,000 Accumulated Profit & Loss - 95,599 205,171 328,673 466,059 617,281 Total Capital 670,000 765,599 875,171 998,673 1,136,059 1,287,281

    LIABILITY

    Long Term Liability - - - - - -

    Tax Payable - 51,476 59,000 66,501