sw 5 economic variability analysis for used tyre

Danida-Malaysian Government

Used Tyre Collection and Treatment System in Sarawak

Economic Viability Analysis

Draft Final Report

May 2002

Danida-Malaysian Government


Economic Viability Analysis

Draft Final Report

May 2002

Report no. 1

Issue no. 3

Date of issue 14 June 2002

Prepared snb, chemsain

Checked

Approved


C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc

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Table of Contents

1 Introduction 3

2 Project description 5

2.1 Tyre generation and geographical distribution 5

2.2 Tyre Collection 7

2.3 Recycling methodology 7

3 Description of the System 11

3.1 Collection and Transportation System 11

3.2 Transit Sub-centres 12

3.3 Used tyre recycling facility 12

4 Cost Estimate 13

4.1 Capital expenditure 13

4.2 Operating costs 14

5 Revenue Generation 18

5.1 Pioneer Status 18

6 Economic and Financial analysis 19

6.1 General considerations 19

6.2 Basic Assumptions 20

6.3 Key Economic Indicators 21

6.4 Financial calculation-Base case 22

6.5 Key Financial Indicators 22

6.6 Sensitivity analysis 23

6.7 Conclusions 25

7 Next step 26

7.1 Legislative Regulatory Framework 26

7.2 Design of the Recovery Fee Collection 26

7.3 Incentive Payment to Recycling Facility 31



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7.4 Information campaign 31

7.5 Campaign for off road tyres (obligatory return system) 31



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1 Introduction

The Sustainable Urban Development Project-Kuching funded by DANCED and the

National Resources and Environment Board in Sarawak has developed a proposal for

collecting and recycling used tyres. The project has asked for assistance from the

DANCED-project in the EPU in order to carry out a feasibility study to recommend a

viable method of treating used tyres, using economic instruments as part of the collec-

tion- and recycling- system.

Used tyres constitutes an important resource which should be recovered by reuse (re-

treading), recycling (rubber, steel and textiles) or incineration with energy recovery.

There are a lot of products that one can produce from recycled tyre such as powder,

which is sold as a raw material for other rubber industries, rubber carpets and rubber

tiles for the direct use.

If used tyres are stored in landfills or illegal dumpsites, they only disintegrate very

slowly and create environmental problems:

The tyres may accumulate rainwater and in this way establish insect breeding grounds for mosquitoes (health risk)

The tyres occupy a great volume of the landfill space, as compaction of the tyres is not possible, and as the disintegration is very slow.

The tyres may self-ignite and the tyre fire may contaminate air, soil, surface water and groundwater

A local private company was formed in 1999 with the vision to deal with the used tyre

problem. The company has established a temporary storage facility containing around

0.5 million used tyres.

A demonstration project on used car tyre in Sarawak (and Sabah) fulfils the following

conditions, which are in accordance with the project document of the EA-project:

it has to do with solving a significant environmental problem (reducing amounts of harmful solid waste on landfills)

it could be a good example of how to use economic instruments to ensure collec-tion and reuse/recycling of solid waste (substituting the use of new resources by

reuse and recycling)



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it implies a co-operation between two DANCED-projects

it implies a demonstration-project on state level

it has got commitment from a counterpart (implying that the proposal would be car-ried out)

it could be replicable in other environmental areas (as e.g. construction and demoli-tion waste, which is under consideration in Kuching to be developed as a future

project).

The objective of the project is to consider how economic instruments can be used to

improve the collection and treatment system for used (post-consumer) tyres, including

a feasibility study of a tyre recycling facility in Sarawak. This report is the final output

from the working group established to carry out the feasibility study.



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2 Project description

2.1 Tyre generation and geographical distribution

Used tyres are generated at various sources within metropolitan Kuching and other ur-

ban and rural areas of Sarawak, ranging from tyre shops, automobile workshops, car

importers to retreading facilities. Tyre generation and geographical distribution are vi-

tal information for the design of a used tyre collection and treatment system.

At this juncture, there is no official registration of used tyre generation and distribution.

Therefore the figures used for this viability study is based on existing information from

previous surveys as well as the consultants professional estimation. The following sources of information were used for the estimation:

Used tyre generation survey carried out by SUD project in Kuching;

Used tyre amount received at Zhen Hak Ann Used Tyre Temporary Storage Site at 9th Mile, Jln Penrissen, Kuching and at Kayu Madang Landfill, Sabah;

Used tyre recycling system proposal submitted by Zhen Hak Ann Tyre Recy-cling Sdn. Bhd.;

Sarawak Tyre Dealers Association

Generation rate per capita based on data generated from survey in Kuching;

Local councils estimate

Consultants estimate

The annual used tyre generation and geographical estimation for 4 major urban centres

in Sarawak and Kota Kinabalu is estimated as below:

Table 1. Used tyre generation in major urban centres in Sarawak including KK



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City/Town Passenger tyre* /year Truck Tyres** / Year Total Tonnage

Kuching 200,000 30,000 2,750

Sibu 84,000 12,600 1,155

Miri 84,000 12,600 1,155

Bintulu 50,000 7,500 917

Kota Kinabalu 200,000 30,000 2,750

Total no. of tyres 618,000 92,700 8,498

Average Weight (kg)/ tyre 7 45

Total annual tonnage (Sarawak only) 2,926 2,484 5,410

Total tonnage 4,326 4,172 8,498

* passenger cars including 4WD (pickup, landcruiser)

** commercial trucks/lorries > 1.5 tonnes

The used tyres generated in Kota Kinabalu are included in the system design to ensure

sufficient used tyre supply required to sustain the recycling plant operation capacity.

Apart from the used tyres to be generated, it is estimated that there are 425000 passen-

ger car tyres and 75000 truck/bus tyres stockpiled at a temporary storage at 9th mile

Penrissen Road.

With the increase in number of vehicles as well as the expected increase in annual

travel distance, the used tyres generation rate is estimated to grow at 5% per year. The

estimation of used tyre generation for the next 10 years in Sarawak is illustrated in Fig-

ure 1 below:

Figure 1. Used tyre Generation in Major Urban Centres in Sarawak and Sabah (KK)

Used tyre Generation (2002-2011)

0

200000

400000

600000

800000

1000000

1200000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year

Number of Tyres

Passenger car tyres (Sarawak) Other tyres (Sarawak) Passenger car tyres (Sarawak+KK) Other tyres (Sarawak+KK)



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2.2 Tyre Collection

Presently, most tyres in the Kuching area are either delivered to the Used Tyre Tempo-

rary Storage Site at 9th Mile, Jln Penrissen, Kuching or indiscriminately dumped at the

roadside or other illegal locations. It is believed that most used tyres outside Kuching

are dumped illegally. Introduction of a recycling system is expected to result in a grad-

ual increase in the number of tyres collected and treated legally. Initially, the following

tyre collection percentages have been assumed:

Collection Area: Kuching Other Sarawak Kota Kinabalu

Collection percentage 75 % 55 % 55 %

These percentages, which have been applied throughout the period of analysis, are ex-

pected to increase to 100 percent for Kuching and 80 percent for other areas after the

system has been fully implemented and the awareness campaign has had its full effect.

2.3 Recycling methodology

Tyres are designed to be abrasive, road hugging, load carrying, indestructible made to

stringent quality standards. These distinctive properties that ensure a safe ride and a

long service life make scrap tire disposal a difficult task.

Presently, the reuse and recycling application of used tyres can be divided into the fol-

lowing four main categories:

Table 2. Typical used tyre application

Application Category Description Market Product

Retreading Reapplying new layer of

rubber on used tyres. Well

established application but

restricted to certain per-

centage and quality re-

quired for retreading

Retreaded tyres to be re-

used

Physical application

Whole tire

Shredded tire

Discarded tyres reused as

original whole tyre

Shredding without steel

and fibre separation

Shredding with full mate-

Floating break waters,

Landscaping etc.

Commonly used as porous

filling material in landfills,

wastewater ponds etc.



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rial separation

(by physical separation

machinery or cryogenic

methodology freezing tires, crush and separate)

3 main products :

Rubber crumb (a lot of downstream

application e.g.

rubber tiles, mats,

car bumpers etc.)

Steel (raw material)

Fibre (nylon)

Chemical processes Common method em-

ployed known as pyrolysis,

a process of degradation

without the supply of air

3 main downstream prod-

ucts :

Oil

Carbon

Gas

Energy Utilisation Discarded tyres used as

alternative fuel for com-

bustion

Industrial application such

as cement factories

For the case of Kuching, apart from the well-established tyre retreading business, the

rest of the used tyres need to be handled using physical recycling applications. The

chemical processes of used tyres are technically complex and capital intensive while

the energy utilisation option is also ruled out with the necessity of modification to the

processing equipment which is not preferable by existing industries. Replacement of

used tyres as alternative fuel consumes higher oxygen and thus reducing the capacity of

the combustion process without any modification to the existing process.

Physical tyre recycling and crumb rubber processing are highly specialized industries

offering a unique challenge to our modern world. In order to ensure a material recy-

cling of the tyres reduced in size, a complete separation of the components - rubber,

steel, and textile fibres is deemed to be necessary.

Commercially crumbing tyres is a relatively new industry. Most machines for crumb-

ing (not primary shredding) have been developed only over the last ten years.

The proposed scrap tyre recycling system for Kuching for this viability study is the

SSK-TR 1200 model manufactured in Taiwan. The criteria of technology preference

are based on considerations such as economical affordability, proven of technology etc.

The system is further described below:



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SSK-TR 1200 Scrap Tyre Recycling System

The SSK TR 1200 system comprises of a series of physical processes that offers the

abilities to separate a used tire into three individual components i.e. crumb rubber,

steel, and nylon textile. This is completed at ambient temperatures and pressures.

The maximum annual capacity of the plant is estimated to be about 8,800 tonnes based

on processing of 1,400 kg /hour, 21 hours per day and 300 days per year. However, the

average yearly processing is estimated to be 80 percent of maximum production equal

to 7,056 tonnes per year.

The crumb rubber produced is from 6 to 60 mesh and will contain less than 0.01 per-

cent steel and less than one percent textile. The expected composition of outputs from

the process used in the viability analysis is based on the following:

Table 3. Product outputs from SSK-TR1200 Recycling System

% product Total tonnage/yr

Rubber crumb 55% 3881

Steel 20% 1411

Textile / Fibre 25% 1764

Total 7056

The detail process of the system is illustrated in Figure 2 below:



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Hydraulic Shear Cutting & Sidewall Steel Removal

Rubber Crumb Crushing

Coarse Fibre Screening

Fine Fibre Screening

Pulverizing

Crumb Rubber

Wired Steel

Fibre

Figure 2. Schematic Diagram of SSK-TR 1200 Used Tyre Recycling System



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3 Description of the System

The establishment of a used tyre collection and treatment system will include the de-

sign of a logical collection and transportation system as well as the setting up of a facil-

ity for receiving and processing the used tyres collected. The system will also include

setting up transit centres located strategically at other major towns throughout Sarawak

in order to extend the coverage of the collection system to include all major town cen-

tres in Sarawak as well as Kota Kinabalu in Sabah. In the following the main compo-

nents of the recycling system is described.

3.1 Collection and Transportation System

The collection and transportation of used tyres from generators to the recycling facility

presents an important component of the overall system. The collection and transporta-

tion can be divided into 2 categories:

Transportation from generators to the recycling facility and transit centres

Transportation from major transit centres to the recycling facility

3.1.1 Generators to recycling facility and transit centres

As tyre generators are distributed throughout the urban centres, a well-planned logistic

system is required to ensure that the designated collection targets mentioned in Section

2.2 are achieved. It is proposed that the respective local authorities or its sub-

contractors implement the collection and transportation.

3.1.2 Transit centres to recycling facility

The transportation of tyres from other transit centres (Sibu, Miri, Bintulu and Kota Ki-

nabalu) is calculated based on the following assumptions:

Tyres collected at transit centres are pre-cut before transportation to Kuching.

Pre-cut tyres are delivered to the recycling facility in Kuching in 20ft contain-ers either by land transport using container trucks (Sibu and Miri) or by sea

cargo ships (Bintulu and Kota Kinabalu)



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Hauling cost of containers from transit centres to Kuching ranging from RM 500 to 700 as quoted by shipment companies

Average distance of transit centres from tyre generators assumed to be similar to Kuching and the average cost of collection from generators to transit centres

is estimated based on Kuching's unit cost.

3.2 Transit Sub-centres

Transit centres in other major towns in Sarawak as well as Kota Kinabalu of Sabah are

proposed to be set up for decentralised collection at various town centres. Major towns

in Sarawak proposed include Sibu, Bintulu and Miri.

The cost of transit centres include:

Land

Transit centre construction cost, including consultancy, equipment, auxiliary works etc.

Equipment required for transit centres include a shredder, weigh bridge, fork-lift, trucks etc.

It is proposed that the collection system will cover other towns in Sarawak i.e. Sibu,

Miri and Bintulu only from the 3rd year of the operation of the used tyre recycling sys-

tem. Thus, the investment cost for transit centres at these 3 locations will only be in-

cluded from year 3 of the financial calculation.

3.3 Used tyre recycling facility

The used tyre recycling facility will be the final receiving point which all used tyres

collected will be delivered to. The facility is proposed to be located at the Samarahan

Industrial Zone, approximately 30 km from Kuching urban centre. The facility will in-

clude the following:

Registration of incoming trucks and amount of tyres (weight bridge)

Unloading area for used tyres

Storage area for stockpiling of used tyres

State of the art used tyre recycling machine for separating rubber, textiles and steel

Packing and storage of products

Machinery workshops



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4 Cost Estimate

4.1 Capital expenditure

The capital expenditure for establishing the used tyre collection and recycling system

as described in Chapter 3 is described in detail in this Chapter.

4.1.1 Assumptions

For this viability study, the cost estimation of the used tyre recycling facility included

the following considerations and assumptions:

Land cost including clearing, filling and basic infrastructure (based on available 3 acres land approved for this purpose by the State)

Site preparation cost (including clearing, levelling and basic infrastructure)

Plant / factory construction (divided into storage and processing building. The size of storage building is approximately 5 times that of the processing build-

ing. The processing building will be a completely enclosed structure while the

storage building will be an open storage warehouse with industrial roof. Cost

estimation include sub-power station as well as consultancy and supervision of

the construction)

Main process equipment SSK TR 1200 Used Tyre Recycling System (as de-scribed in section 1.2.2). The cost of transportation and inflation was estimated

at 15% of the equipment price. The proposed used tyre recycling system (SSK-

TR 1200) has a full capacity of 8800 tonnes per year based on a total operating

hours of 6300 per year. For this viability study, an assumption of 80% actual

processing rate was estimated per year.

Other equipment includes weighbridge and registration station, forklifts, trucks etc.)

4.1.2 Cost Estimate

The capital expenditure of the above components estimated is illustrated the table be-

low:



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Items Capital Expenditure (RM)

Land cost (including site preparation) RM 1,310,300

Factory construction RM 1,383,500

Recycling system and other equipment RM 5,681,000

Sub-centre in Kota-Kinabalu RM 512,250

Total Capital Expenditure (Yr 0) RM 8,887,050

The construction of the sub-centres to be constructed in Sibu, Miri and Bintulu is

planned at the beginning year 3 of the recycling facility's operation. The cost of these

three centres is estimated to be RM 1,927,000.

The detailed cost estimates are provided in detail in Appendix 1.

4.1.3 Tax free incentives for waste recycling

As stipulated in the official 2001 Budget (Income tax section item no.31), companies

undertaking waste recycling activities shall be granted the following incentives:

1. Accelerated capital allowance on expenditure incurred on waste recycling ma-

chinery and equipment, to be fully claimed within a period of 3 years; and

2. Import duty and sales tax exemption on machinery and equipment not produced locally and sales tax exemption if produced locally.

4.2 Operating costs

The operating costs of maintaining the used tyre recycling system is estimated as be-

low:

Item Estimated operating cost (RM/yr)

Collection and Transportation 529,600

Maintenance of equipment 445,000

Personnel cost 529,000

Utility cost 206,000

Insurance 128,000

Account and audit 6,000

Misc. expenses 200,000

Total Operating Cost* 1,915,000

* Total operating cost with the addition of other major towns in Sarawak after year 3

will increase to RM2,496,000 per annum



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Out of these total operating costs, 70% are estimated to be variable costs while 30% are

fixed costs. The operating costs of maintaining the used tyre recycling system is further

discussed in detail in the following sections with relevant assumptions highlighted:

4.2.1 Collection and transportation costs

Collection and transportation of used tyres from generator to transit centres and recy-

cling facility is a major operating cost of the overall system. The calculation of collec-

tion and transportation cost is based on the following assumptions:

The collection of used tyre from generators to the facilities or transit centres is proposed to be transported by using various sizes (between 1.5 to 5 T) of ap-

proved trucks with side-guard. The average truck size used for the viability cal-

culation is assumed to be the 3 T trucks

The average truck is expected to have the capacity of transporting 100 passen-ger tyres or 50 truck tyres per trip

The proposed recycling facility will be set up at Kota Samarahan Industrial Es-tate, which is in average approximately 30km from tyre generators within

Kuching. The distance of transit centres from generators is also estimated to be

around 30km.

The average cost of diesel is RM0.10 per Km

Each trip includes a driver and 2 workers to be paid RM30 per person per trip

To ensure an effective collection system is achieved, a proposed collection and transportation incentives of 50% of transportation cost upon delivery is in-

cluded in the overall viability study for Kuching. The proposed incentives are

estimated at RM 0.07/kg for passenger tyres while RM0.02/kg for commercial

truck tyres. The cost of providing this incentive is estimated to be RM134,000

per annum.

With the above assumptions, the total cost estimated for collection and transportation

can be illustrated in the following table:

Collection zone Collection and Transportation

Cost (RM)

Kuching 401700

Kota Kinabalu 117860

Other major towns in Sarawak 463200

Total (first 2 years KCH &KK only) 519600

Total (after year 3) 982760



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4.2.2 Maintenance cost - used tyre recycling equipment

Due to the heavy shearing of the recycling equipment, the cost of replacing parts such

as blades must not be underestimated. The calculation is based on standard mainte-

nance rate from recycling system operated in other places. The maintenance includes

cost of spare parts (especially blades), sharpening of blades as well as other technical

maintenance. The following equipment of the recycling system requires regular main-

tenance:

Maintenance item Replacement rate

(life hours)

Cost (RM per year)

SKTR300/SK-TS 75 6000 140,448

SKTR300/SK-TS 76 1500 117,466

SKFP120 4800 43,890

Re-sharpen blades 1600 43,092

Other maintenance 6000 100,000

Total cost per year 444,896

4.2.3 Personnel cost

The personnel cost included expenses related to staff wages as well as employers con-tribution to employee provisional fund (EPF). The staff to be employed includes:

Position Number of

Positions

Salary

RM/Month

Gross salary

(RM/Year)

Executive Director 1 5000 66600

General Manager 1 3500 46620

Assistant Manager 1 3000 39960

Engineer 1 2500 33300

Technicians 2 1200 31968

Equipment workers 18 800 191808

Labourers 8 600 63936

Accountant 1 1500 19980

Clerks 2 800 21312

Cleaner 1 500 6660

Office boy 1 500 6660

Total 37 19900 528804

The total personnel cost estimated to be RM528,804.

4.2.4 Utilities

The main utility cost incurred from recycling facility will be the energy consumption of

the main recycling equipment i.e. SSK TR-1200. The recycling system is designed to

consume 240 KWh and this corresponds to approximately 126000 MW being con-

sumed per month. For this amount of energy consumption, the energy charges is calcu-



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lated based on industrial category 2 (I2) of an average of RM0.17 per KWh. The en-

ergy requirement for other factory consumption e.g. lighting, air-conditioning etc. is

estimated based on standard industrial consumption (approximately 40 employees) at

RM 2000 per month. The total energy consumption cost per year is therefore estimated

to be RM 206,000 annually.

Other utility cost such as water consumption will be minimal as the main processing

equipment does not utilise significant amount of water.

4.2.5 Insurance cost

The insurance cost for the recycling facility is important as the recycling facility is sub-

jected to risk especially fire risk due to stockpiling of used tyres. The insurance cost is

estimated at RM128,000 per year based on quotation obtained from insurance com-

pany.

4.2.6 Accounts & Audit

Companies of similar size estimate the annual accounting and auditing cost to be RM

6000 based on standard auditing expenses.

4.2.7 Miscellaneous expenditure

Miscellaneous expenses are estimated at RM200,000 to cover any other unexpected

cost incurred. These expenses can include cost for breakdown or replacement of other

equipment other than the recycling system, differentiation of cost estimated with actual

expenditure, inflation over the years etc.



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5 Revenue Generation

The revenue to be generated from the recycling process will be from the sale of product

from the process as well as the collection of tipping fee from used tyre generators. This

is based on the assumption that all products generated from the process have a market

and the collection of tipping fees from consumer will be implemented successfully.

The annual revenue is calculated as follows:

Revenue item Amount genera-

tion/yr

Unit amount (RM) Total (RM)

Crumb Rubber 3880 tonnes 300 1,164,240

Steel 1410 tonnes 200 282,240

Textile (fibre) 1770 tonnes 50 88,200

Disposal fee* 555600 tyres 5.08 2,822,400

Total 4,357,080

*Based on disposal fee of RM400/tonne. If the disposal fee is charged not according to

average but using the actual number of tyres @ RM 3 per passenger tyres and RM18

per truck tyre (which will be the real case of collection in practice), the amount of dis-

posal fee calculated is slightly higher RM 2927055.

5.1 Pioneer Status

There are currently two schemes under MIDA for exemption of corporate tax. Firstly,

under the Incentive Investment Act, the company may be awarded pioneer status where

85% of statutory income is tax-free for the first five years of operation. It is also import

duty and sales tax exempted on equipment for direct processing. It is a pre-condition

that the company is incorporated under the Companies Act.

Secondly, as alternative to pioneer status is the Investment Tax Allowance (ITA) which

is suitable for capital-intensive projects with long gestation period. The allowance is

provided at 85% of approved capital expenditure excluding land price. It may include

building construction and equipment. The allowance can be carried forward if no profit

is recorded in the beginning year. Investment must be done within 5 years of com-

mencement.



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6 Economic and Financial analysis

6.1 General considerations

The economic analysis deals with several issues related to the used tyre system in rela-

tion to a strict economic analysis and environmental considerations.

The analysis requires a number of assumptions to be made to reduce the complexity of

the analysis. These assumptions may at a later stage be subject to further analysis and

assessment.

Ideally, the product charge on used tyres should be set so as to correct the distortion

caused in the market when tyre users do not pay for the proper disposal of the tyres

they use. Free disposal as well as the environmental costs of improper disposal, leads to

excess consumption and production.

The cost of processing the tyre charge will depend on whether the charge will be levied

on the producers/importers or whether it will be levied at the retail level. Provided the

charge is levied on the producers / importers it is assumed that the cost of processing

the fee collection is minimal considering that other collections are already being made

in the form of import duty and sales taxes. If the tyre charge is paid at the factory gate

together with the producer's other fiscal obligations (ex: sales tax), then there would be

little extra effort and costs to the fiscal department to also receive the tyre charge.

However, until the system of recycling used tyres is extended to the whole of Malaysia

rather than Sarawak (and Sabah) alone, this model would not be viable.

The cost of the education program is determined by political considerations. It is im-

portant for the success of the scheme that a sum is allocated for educating the public.

6.1.1 Costs

The product charge will be levied on new tyres produced or imported into Sarawak and

the charge will be transferred to qualified used tyre disposal and recycling facility op-

erators.

The result will be an increase in the cost of production and import prices of tyres to re-

flect the real resource costs of used tyre disposal and recycling by qualified disposal

options. This will reduce the economic welfare of the tyre consumers and eventually of

other consumers through additional transport costs of goods.



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6.1.2 Benefits

The subsidy on tyre disposal will increase the demand and consumption of used tyres

and lead to the disposal of both newly generated used tyres and used tyre stockpiles and

hopefully even the littered used tyres.

The result will be a reduction in environmental damages through a reduction in the risk

and size of tyre fires, reduced landfill, air and water contamination and the number of

tyres indiscriminately dumped and littering the landscape. The valuation of the envi-

ronmental damage is difficult to assess.

Due to the complexity and expense of assessing the environmental impact of scrap

tyres a full-fledged benefit cost evaluation is not possible. An alternative approach is to

focus on the cost effectiveness of the program as measured by the net non-

environmental costs per scrap tyre properly disposed or recycled. In this study this will

be derived from the proposal for recycling received from the recycling company.

It will be up to the Sarawak government to decide whether they value the environ-

mental costs of improper disposal above or below this amount or whether they wish to

carry out further studies to compare costs with true benefits. From a strict economic

point of view the product charge should be set at the point where the additional social

benefits of reduced environmental pollution from used tyres equals the additional social

costs of further reductions. To do this obviously requires that benefits be estimated.

6.2 Basic Assumptions

The analysis has been carried out for a base case scenario with the following assump-

tions:

- Ownership model: Private ownership in the form of a private company.

- Financing: It is assumed that the company will provide 40 percent equity and obtain the remaining 60 percent of the investment and working capital as bank

loans. The loans are assumed to have a grace period of four percent followed

by a six-year repayment period. The average interest rate has been estimated

at 8 percent p.a.

- Period of analysis: The period of analysis is assumed to be 10 years following

the year of initial investment.

- Project costs: A detailed description of the various components of capital ex-

penditure as well as operating and maintenance costs is provided in the previ-

ous sections. It should be noted that equipment costs and replacement parts

are net of import duty and sales taxes in accordance with the pioneer status.

- Depreciation: Depreciation is based on a ten-year economic life span of the

major components of the equipment. Depreciation of the equipment has been

done on a linear basis over a ten-year period. The base case operates with two

scenarios regarding scrap value at the end of year 10: RM 0 and RM 2.814

million representing the non-depreciable assets like land, etc.

- Revenue from by-products: The by-products from the recycling process will be sold in the open market. The recyclers have provided the estimated market

prices.



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- Prices: The analysis has been carried out with constant prices at the present price level assuming that all prices of inputs and outputs will change at the

same rate during the planning period.

- Revenue from product charge: The product charge for the Base-case scenario

is RM 400 per tonne of tyres corresponding to RM 2.80 per passenger car tyre

and RM 18 per truck tyre. The disposal fee payable to the recycling facility is

also RM 400 per tonne.

- Collection of product charge: It is assumed that the authority responsible for

the collection of the product charge is able to collect 100 percent of the prod-

uct charge due. It is also assumed that a product charge is levied on tyres sold

in Sabah, or alternatively that the Sabah government pay the product charge to

the Sarawak recycling facility.

- Taxation: It is assumed that the company will obtain pioneer status and will be taxed as suck, i.e. 85% of statutory income is tax-free for the first five

years of operation.

6.3 Key Economic Indicators

Two key economic indicators have been calculated: the Net Present Value and the In-

ternal Rate of Return.

Net present Value (NPV): NPV is calculated by adding the initial investment (repre-

senting a negative cash flow) to the present value of the anticipated future cash flows.

The interest rate will be referred to in this discussion of NPV and IRR as the rate of

return on investment. The value of NPV indicates the results of the investment:

If NPV were positive, the financial value of the investor's assets would be increased:

the investment is financially attractive.

If NPV were negative, the financial value of the investor's assets would be decreased:

the investment is not financially attractive.

Internal Rate of Return (IRR) is the rate of return at which the discounted future cash

flows equal the initial cash outlay: IRR is the discount rate at which NPV is zero. The

value of IRR relative to the present value discount rate also indicates the result of the

investment:

If IRR is greater than the desired rate of return, the investment is financially attractive.

If the IRR is less than the desired rate of return, the investment is not financially attrac-

tive.

It should be noted that the First Year Rate of Return, which is normally used to deter-

mine the optimum year of investment, is constant throughout the period of analysis as

the facility is expected to run a virtually full capacity from the beginning. This indi-

cates that the facility, when financially viable, should be opened as soon as possible.



22

6.4 Financial calculation-Base case

The detailed analysis and results of the financial calculation of the base case is pre-

sented in Appendix 1. A summary of the main results and conclusions are presented

below.

Base Case (Without Government / Equity 40 percent)

Salvage value

RM (Million)

Net Present Value (NPV)

RM (Million)

Internal Rate of Return (IRR)

Percent p.a.

0.00 -2.42 4.0

2.81 -0.01 9.9

If the salvage value is included the result is just on the borderline with an IRR of 9.9

percent p.a. and a NPV close to zero-indicating investor indifference toward the in-

vestment. However, if the salvage value is excluded from the calculation, the result is

clearly not financially viable with an IRR of 4 percent and negative NPV. In the fol-

lowing the base case will be considered to include a salvage value of RM 2.81 million.

6.5 Key Financial Indicators

The following key financial indicators have been calculated for all years in the evalua-

tion period (the indicators are almost constant throughout the period as the facility is

expected to produce almost the same volume every year.

Contribution Ratio: (Revenue-variable Costs)/Revenue

Safety margin: Gross income/(Revenue-variable costs)

Break even: (Fixed costs+Depreciation+Interest)/(Total income-Var. cost)

Debt/equity ratio: Bank loans/(Investment costs+current balance-bank loans)

Equity/balance ratio: 1/(Debt/equity ratio-1)

Simple rate of return (on all capital investments): Income after tax-net interest income /

(Cap. investment)

Simple rate of return (on equity capital): Income after tax/ Share capital

The results of the base case are as follows:

Key indicator Year 1 Range Year 1-10

Contribution ratio 60.2 % 57.9 %-60.2 %

Safety margin 24.2 % 20.4 %-39.0 %



23

Debt/equity ratio -1.43 -0.06

Equity/balance ratio -41.2 % -94.2 %-47.7 %

Simple rate of return (on

capital investments)

11.6 % 9.0 %-11.9 %

Simple rate of return (on

equity capital)

15.4 % 11.9 %-24.8 %

6.6 Sensitivity analysis

In order to test the robustness of the financial viability - measured in terms of NPV and

IRR - the base case has been subjected to a range of variations in the underlying as-

sumptions as follows:

Capital Costs plus/minus-20 %

Revenue from product sales plus minus 20 %

Worst case scenario combining both the above

Government investment in the facility ranging from 10 to 50 percent of capital costs

Collection percentage of tyre product charge reduced from 100 % to 75 and 50 per-cent.

Product charge variation from RM 300 to 600 per ton.

Each of the above scenarios are discussed in the following:

6.6.1 Changes in Cost and revenue estimate

A change in cost and revenue estimates by 20 percent in either direction will have the

following effect on the NPV and IRR:

Scenario NPV (RM Million) IRR (Percent p.a.)

Base case -0.01 9.9

Cost increase by 20 % -.82 5.3



24

Cost decrease by 20 % .63 15.8

Revenue increase by 20 % 0.15 17.1

Revenue decrease by 20 % -0.34 2.5

Worst case (Cost plus 20 %

and revenue minus 20 %)

-1.06 -2.0

6.6.2 Government investment

The base case scenario without government investment and with three levels of gov-

ernment investment is shown below:


Base case w/o government

investment

-0.01 9.9

Government investment 10

percent (about RM 1 mil-

lion)

0.71 14,9


percent (about RM 2.5 mil-

lion)

1.18 21.0


percent (about RM 5 mil-

lion)

0.96 23.9

It should be noted that the Government investment in the calculation is treated as a per-

petual non-interest-bearing loan. As such its purpose is to reduce the bank loans and the

interest payable to the banks. It also reduces the amount of equity capital, which the

private operator needs to raise.

6.6.3 Product charge

The base case assumed a product charge of RM 400 per ton. In the following the result

of varying this figure from RM 300 to RM 600 per ton is assessed:


RM 300 per tonne -0.91 -3.4

RM 400 per tonne -0.01 9.9



25

RM 500 per tonne 0.46 26.6

RM 600 per tonne 1.02 43,78

6.6.4 Collection of product charge

The base case assumes that the collection rate for the product charge is 100 percent. If

for some reason this target were not achieved, the results of a reduction in collection

rate would be as follows:


Base case 100 % collection -0.01 9.9

Collection rate: 75 % -0.91 -3,4

Collection rate: 50 % N/A N/A

The viability is obviously highly dependent on the efficiency of the collection system.

A drop of 25 percent will create substantial losses to the facility. It may therefore be

necessary to include a clause in any agreement that Government will reimburse the fa-

cility for any shortfall in the collection.

6.7 Conclusions

Preliminary comments will be inserted before the Workgroup meeting and adjusted as a

result of the discussion during the meeting.



26

7 Next step

7.1 Legislative Regulatory Framework

The setting up of a regulatory framework plays an important role in setting up a collec-

tion and treatment system for used tyres. The existence of a legislative requirement im-

plies obligations to all relevant parties (generators, transporters and recycling facility)

to comply with the law and adhere to specified actions.

A draft rule titled The Natural Resources and Environment (Collection and Treatment of Used Tyres) Rules 2001 had been prepared under Section 18 of the Natural Re-sources and Environment Ordinance 1993. The draft rule includes obligations of gen-

erators, transporters of used tyres and used tyre recycling facility to comply with regis-

tration and documentation requirement (e.g. licenses and reporting of tyre amount), de-

livery of tyres to designated facility, supervisions of recycling facilities, incentives

payment to recycling facility as well as other administrative conditions. The draft rule

shall need to be revised after taking consideration of the results from this viability

study to accommodate the re-design of the overall used tyres recovery scheme (see

Section 1.9.2 below).

Licensing of tyre generators, transporters and recycling facilities must be carried out to

facilitate the implementation of the system. With the implementation of the above men-

tioned rule, other subsidiary legislations especially related to illegal disposal of used

tyres need to be strengthened collectively to support the success of the collection and

treatment scheme for used tyres.

7.2 Design of the Recovery Fee Collection

As the viability of this scheme is dependent on the assumption that recovery fee will be

collected as one of the main revenue generation, the design of the recovery fee collec-

tion is important. The recovery fee will be channelled to a used tyre recovery manage-

ment fund, managed by a governmental authority.

The design of such a system is rather complex as it involves multi-stakeholders at dif-

ferent levels, ranging from governmental department, tyre importers, custom depart-

ment, tyre dealers, and tyre recycling companies to consumers. (Refer to Figure 3)

Prior to the design of such as fee collection scheme, the following considerations and

assumptions had been made:



27

There are no tyre manufacturers in Sarawak. All tyres are imported, either le-gally or illegally. Legal imports will be declared to custom department. The

size of illegal importing of tyres is not known. The Tyre Dealer and Retreaders

Association estimated that approximately 20% of the total tyre generated in

Kuching are illegally imported.

Whether the tyres are legally or illegally imported, almost all of them will be distributed to tyre dealers (including automobile workshops, governmental and

private workshops, car importers etc.)

The local authorities or its approved contractors will hold full responsibility on the collection and transportation of used tyres from tyre dealers to the recycling

facility.

For this viability study, 3 possible schemes (options) for collecting the recovery fee has

been identified:

1. Option 1 - Collection upon import (tyre importers / distributors)

This is a typical system used in other countries e.g. Taiwan that is by far the most direct

way of collecting the fees. Fees are paid by tyre importers / distributors upon importing

the tyres and the cost implied will be put on to the distribution price to tyre dealers

which will finally include the fee to consumers.

Custom department during the declaration of the imports will carry out registration of

tyres imported.

Used tyre amount received at the recycling facility can be used to determine the cover-

age of the fee collection.

2. Option 2 - Collection from tyre dealers via coupon system

This is a more complex but comprehensive fee collection system that requires the co-

operation of both public and private sectors. Fees are collected via recovery fee cou-

pons to be purchased by all registered tyre dealers. Consumers will need to purchase

the coupon on top of the tyre replacement cost (the recovery fee can be included in the

selling price of new tyres. No transaction of tyres should be made without the purchase

of the coupons.

Collectors of used tyres will document tyres collected with the same amount of cou-

pons collected.

Used tyres registered at the recycling facility will be documented via receipt which can

be counter-checked with the amount collected from tyre dealers. Trends of used tyre

generation from individual sources can be established once the system is in place and it

will provide an easy check for local authorities during the collection of tyres from the premises. This system will provide a good tracking record of used tyre flow.

3. Option 3 - Collection from consumers via pre-paid coupon system



28

This is an option that places the responsibility of paying the recovery fee directly to

consumers. Consumers are required to purchase recovery fee coupon prior to replacing

used tyres. The system can be integrated with existing fee collection system e.g. park-

ing coupons.

Amount of used tyres received at recycling facilities can be counter-checked with the

amount of coupons sold by the local authorities as well as the collection from tyre deal-

ers.

These 3 options can be illustrated in Figure 3.

A comparison of pros and cons of the above options are illustrated in the table below:

Option

no.

Pros Cons Expected fund recov-

ery rate (%)

1 Less administrative work

with direct flow of fees

from importers to the re-

covery fund

Do not include illegally

imported tyres which

will end up in the used

tyre stream

Recovery of fees via

custom department may

be difficult

80%<

preconditions:

stringent enforcement

on illegal imports

2 Most used tyres (legal or

illegally imported) included

With the introduction of

recovery fee coupons, reg-

istration of used tyres

amount from tyre dealers

made easier, better tracking

system

Long collection path-

ways from consumer to

the resource fund,

greater chance of fees

not recovered along the

way

Fee recovery may be

impaired if tyre dealers

are not cooperative increase cases of illegal

dumping

90%<

preconditions:


on illegal disposal of

tyres

3 Reduce work load of local

authorities, promoting user-

pay principles

Good registration of

amount and ease monitor-

ing of overall used tyre

flow

Consumers may find it

troublesome and have

difficulty complying to

the requirement

Tyre dealers may not

comply and there might

be an increase in pri-

vate dealers which are

not licensed

70%<

preconditions:


on tyre dealers

strengthen awareness

and information dis-

semination - consum-

ers must be made fully



29

aware and be informed

on the new require-

ment

With the consideration of the pros and cons of the available options, option 2 is rec-

ommended.



30

Tyre Importers

Tyre Dealers

Consumers

Local Councils

Custom Dept Illegal Imports

Scrap tyre

management

Fund

Recycling Plant

New tyre flow

Used tyre flow

Recovery Fee Option1

Recovery Fee Option 2

Recovery Fee Coll- Option 3

Treatment Fee Subsidy Flow

Retreaders



31

7.3 Incentive Payment to Recycling Facility

Part of the used tyre recovery fund will be paid as incentive subsidy to the recycling

facility based on actual amount of tyres recycled. The amount of fees and specific /

guaranteed amount of recycling need to be documented in the contract between the au-

thorities and the recycling company. The recycling facility will need to comply with

conditions set under the contract.

Include tyre association in project?

Expansion to rest of Sarawak (year 3)

7.4 Information campaign

Information campaigns must be launched to introduce the new system and obligations.

Awareness campaigns towards public and tyre dealers need to be organised to secure

support and cooperation.

Initial incentives may be considered to encourage participation.

7.5 Campaign for off road tyres (obligatory return system)

Used tyres not generated at the premises of tyre dealers must be recovered as well. The

local authorities may establish collection centres at strategic locations to receive used

tyres. Recovery fee coupons can be purchased in these collection centres.