Post on 03-Feb-2022
Danida-Malaysian Government
Used Tyre Collection and Treatment System in Sarawak
Economic Viability Analysis
Draft Final Report
May 2002
Danida-Malaysian Government
Used Tyre Collection and Treatment System in Sarawak
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
1
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
2
7.4 Information campaign 31
7.5 Campaign for off road tyres (obligatory return system) 31
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
3
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)
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
4
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
5
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
Consultant’s 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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
6
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)
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
7
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
8
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:
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
9
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:
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
10
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
11
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)
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
12
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
13
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:
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
14
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
15
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
16
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-
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
17
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
18
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
19
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
20
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
21
- 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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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 %
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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:
Scenario NPV (RM Million) IRR (Percent p.a.)
Base case w/o government
investment
-0.01 9.9
Government investment 10
percent (about RM 1 mil-
lion)
0.71 14,9
Government investment 25
percent (about RM 2.5 mil-
lion)
1.18 21.0
Government investment 50
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:
Scenario NPV (RM Million) IRR (Percent p.a.)
RM 300 per tonne -0.91 -3.4
RM 400 per tonne -0.01 9.9
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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:
Scenario NPV (RM Million) IRR (Percent p.a.)
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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:
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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:
stringent enforcement
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:
stringent enforcement
on tyre dealers
strengthen awareness
and information dis-
semination - consum-
ers must be made fully
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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.
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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
Used Tyre Collection and Treatment System in Sarawak
C:\Documents and Settings\user\Desktop\Tyre Project_DraftFinal_140602 (1).doc
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.