A 14-page Assignment Paper for Costs And Benefits Analysis (CBA) subject, Master of Public Policy (mixed mode), University Malaya

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COST BENEFIT ANALYSIS (CBA) TERM PAPER
Program : Master of Public Policy, International Centre for
Public Policy and Management (INPUMA), University
Of Malaya Kuala Lumpur
Course Title : Cost Benefit Analysis
Course Code : ZIGP 6112
Student’s Name : Mohd Hasim Ujang
Student ID : ZGA110011
Prepared For : Dr. Md Saad Hashim (Supervisor)
Project Proposed : Cost and Benefit Analysis for Kota Kinabalu (KK)
Composting Project
Abstract
This paper intends to investigate what are the costs incurred and benefits accrued in
consequent to the construction of compost field in the District of Kota Kinabalu, State
of Sabah, Malaysia. The project is undertaken as an initiative to provide an
alternative treatment process to the organic fraction of the solid waste currently
disposed of at the Kayu Madang sanitary landfill. The project is located within the
boundaries of the currently operating landfill near the town of Telipok, which is
approximately 30 km northeast the City of Kota Kinabalu (abbreviated as ‘KK’).
This paper mainly refers the Project Design Document Form (CDM PDD) wich was
submitted to the World Bank in 2008 to get grant approval for the project. This paper
will then proceed with succinct analysis of cost to benefit ratio, taking into account
the actual costs and the projected environmental, social and economic benefits of

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the project. Consequently, the accuracy of the analysis is limited to the information
available at the material time.
Background of Kota Kinabalu City and Project Location
KK is the Capital City of the Sabah State, 6th
largest city in Malaysia and the largest
city in the island of Borneo in terms of population. The city holds strategic cultural,
logistic and economic importance as it houses the diverse indigenous ethnics of
Sabah and serves as the main entry point for the whole state of Sabah. The city also
serves as a transportation hub for a few major international airlines such as Dragon
Air (Hongkong), Thai Airways, Cathay Pacific, Royal Brunei and Silkair (Singapore),
aside from local airlines such as Malaysia Airlines, Air Asia, MasWings and Firefly.
The KK City Hall (DBKK) is the city’s governing local authority.
As of 2010, the city has a total population of 452,058, however this figure excludes
the unregistered illegal immigrants residing in the city who are significant in numbers.
As a major commercial centre, transportation hub and transit destination for tourists,
the need to allocate a dedicated sanitation and waste management facility for the
city is of paramount importance. Currently, solid wastes from the city are disposed at
the Kayu Madang landfill which began operation in 2005.
In of 2007 alone, the landfill became a dumping site for a total of 144,000 tonnes of
solid waste. This figure is projected to grow to 216,164 tonnes by 2015 when the
landfill’s capacity is expected to become exhausted. Apart from KK city, the Kayu
Madang landfill also takes in garbage from nearby municipality such as Penampang,
Putatan, Tuaran and Kota Belud. The local authority and the state government have
been taking necessary actions to prolong the lifespan of Kayu Madang Landfill.

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Among others, the landfill is already equipped with a Material Recovery Facility
(MRF) which houses huge sorting machines that are used to sift organic materials
and reusable parts from non-organic solid wastes. Since beginning operation in
2005, the reusable parts had been recycled to reduce the rate of pile up while in
2008, the government has proposed to build a compost processing facility within
Kayu Madang to enable a healthy decomposition of organic materials. This will
further lengthen the landfill’s lifespan and reduce environmental hazards commonly
associated with landfills.
Differences between Compost Processing and Normal Landfill Processing
In normal landfill process, the garbage are just buried underground without any
exposure to the atmosphere, hence no oxygen. Due to the absence of oxygen,
trashes would undergo anaerobic decomposition, and this produce huge amount of
methane, a toxic and inflammable gas that is not healthy for the environment. In
contrast, through compost processing, the organic components from the garbage will
be exposed to oxygen and regulated moisture to allow aerobic decomposition. This
method normally employs living organisms such as worms and bugs to accelerate
the decomposition process.
The main advantages of compost processing is that in produces mainly carbon
dioxide as a by-product which is much less harmful and much less toxic as
compared to methane. The end product, which is called ‘compost’ are of economic
value because it can be used as fertilizers and soil conditioners. The Kota Kinabalu
Compost Project is partly funded by the World Bank and the grant was approved on
30th
June 2008.

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Disposable and
non-biodegradable
components
Disposable and
biodegradable
components Composts
Recycled
Items
The Project: Costs and Planning
Kota Kinabalu Composting Project is being developed by MS Smart Recycling (M)
Private Limited (MSR) which has a 10 year contract with the Kota Kinabalu KK City
(KKCH) Hall to construct, operate and maintain the 500 tons per day sorting and
composting plant for Municipal Solid Waste. The plant facility is owned by MSR,
however the land is still owned by KKCH. The construction of the composting facility
began in December 2008 and completed in 2011.
The composting facility is actually not a stand-alone facility. It requires prior sorting of
solid wastes to sift organic wastes from inorganic materials. This job is done in the
Material Recovery Facility (MRF) which recovers and recycles any reusable
components from the waste (usually inorganic components). The disposable
components that are non-biodegradable are dumped into the Kayu Madang landfill
while the biodegradable components are sent to the composting facility to undergo
aerobic decomposition. The following diagram shows how the composting facility
works:
MRF
Incoming
Solid
Wastes
Landfill
Composting
Facility
Recycling
Facility

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The MRF was constructed with a total cost of RM30 million, while the projected cost
for the composting plant was around RM20.28 million, based on today’s exchange
rate (actual projection in 2008 was USD6,423,073.00). This cost actually consisted
of USD2,049,696.00 initial capital investment (RM6.48 million in today’s exchange
rate) plus USD4,373,378.00 for 10 years operation and maintenance (RM13.83
million in today’s exchange rate). The composting project was financed by the World
Bank and the grant was approved on 30th
June 2008.
Projected Benefits
The KK Composting Project was the first commercial scale municipal solid waste
composting initiative in Malaysia that is anticipated to yield the following benefits:
1. Environmental benefits – The project will be beneficial to the global environment
by minimizing methane generation at the Kayu Madang Sanitary Landfill, through
composting the organic material in the composting plant, instead of dumping
them into the landfill. The project will reduce the disposal rate of Municipal Solid
Waste (MSW) by as much as 60% and the overall lifespan of Kayu Madang
landfill will be extended by as much as 10 years. In addition, as highly
biodegradable materials will be recovered, the leachate will be reduced thereby
improving the quality of the treated leachate discharge. In addition, the risk of
fires due to methane will be reduced. The projected environmental benefits of
this project are in line with the environmental strategy under the 9th Malaysian
Plan (2006-2010).
2. Economic benefits – By diverting organic materials from land filling to
composting, the project offers savings in disposal costs and spread the
acquisition cost of a new landfill over a longer period of time because the lifetime

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of the existing Kayu Madang landfill will be prolonged. Furthermore, composting
transforms the biodegradable organic materials of the waste into a valuable
agricultural and landscaping resource (compost / soil conditioner) and provides
an opportunity to move organic material to areas that need organic soil
amendments. As the first commercial-scale MSW composting initiative in
Malaysia, this project has a good potential for setting an example of how to
address the growing MSW problem for the rest of the country.
3. Social benefits – The sorting facility is currently employing 89 workers, about 30
of which being former local waste pickers at the Kayu Madang Sanitary Landfill.
In addition, 15-20 local workers will be employed for the composting plant. The
current labour force is expected to expand by 19 employees with the
commissioning of the composting plant, some of which are expected to be the
current waste pickers at this landfill. The project activity will improve skills and
working conditions of these local waste pickers. In addition, the project will
promote technology transfer and capacity building of local staff in solid waste
management.
4. Technological benefits – This is the first composting project in Malaysia that
introduces composting technology on commercial scale to address the
increasing problem of MSW management in Malaysia. Whereas currently only
sorting and recycling of waste takes place, the project will introduce composting
processes, particularly to treat organic materials. The windrow technology will
provide for relatively cheap and effective composting.

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The Cost and Benefit Analysis
The table below lists the costs and projected revenues from KK Composting Project
that was extracted from page 13 and 14 of the Project Design Document Form (CDM
PDD):
*CER – Carbon Emission Reduction
The main revenue from this project is earned from the sale of Carbon Emission
Reduction under the Emission Reduction Purchase Agreement (ERPA). Under this
agreement, any country that manages to reduce carbon emission can gain
incentives from emission trading with larger industrial countries.
Based on the costs, CER Revenues and Discount Rates shown in Table 5 of the
Project Design Paper, the Internal Rate of Return Net Present Values based on the
three discount factors (10%, 15% and 18%) are calculated using Microsoft Excel.
The calculations are shown on the next page:

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YEAR COSTS
REVENUES
FROM CER NET BENEFITS
DISCOUNT
FACTOR 1
DISCOUNT
FACTOR 2
DISCOUNT
FACTOR 3
PRESENT
VALUE 1
PRESENT
VALUE 2
PRESENT
VALUE 3
0 RM6,480,000.00 RM0.00 -RM6,480,000.00 100.00% 100.00% 100.00% -RM6,480,000.00 -RM6,480,000.00 -RM6,480,000.00
1 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 90.91% 86.96% 84.75% RM1,499,250.55 RM1,434,065.74 RM1,397,606.44
2 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 82.64% 75.61% 71.82% RM1,362,955.04 RM1,247,013.69 RM1,184,412.24
3 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 75.13% 65.75% 60.86% RM1,239,050.04 RM1,084,359.73 RM1,003,739.18
4 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 68.30% 57.18% 51.58% RM1,126,409.13 RM942,921.50 RM850,626.43
5 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 62.09% 49.72% 43.71% RM1,024,008.30 RM819,931.74 RM720,869.85
6 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 56.45% 43.23% 37.04% RM930,916.63 RM712,984.12 RM610,906.66
7 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 51.32% 37.59% 31.39% RM846,287.85 RM619,986.19 RM517,717.50
8 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 46.65% 32.69% 26.60% RM769,352.59 RM539,118.43 RM438,743.65
9 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 42.41% 28.43% 22.55% RM699,411.44 RM468,798.63 RM371,816.65
10 RM1,383,000.00 RM3,032,175.60 RM1,649,175.60 38.55% 24.72% 19.11% RM635,828.59 RM407,650.99 RM315,098.86
NPV = RM3,653,470.14 RM1,796,830.76 RM931,537.46
NPV = RM3,653,470.14 RM1,796,830.76 RM931,537.46
DISCOUNT
RATE 1 0.1
DISCOUNT
RATE 2 0.15
DISCOUNT
RATE 3 0.18
IRR 22%
The Calculations above shows that the KK Composting Project has an Internal Rate of Return of 22% and its Net Present Value after the
expected lifespan of 10 years is equal to:
RM3,653,470.14, using 10% Discount Rate
RM1,796,830.76, using 15% Discount Rate
RM931,537.46 using 18% Discount Rate

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The figures IRR and NPV from Excel calculation differs slightly from the figures
presented on page 14 of the Project Design Document mainly because of the
difference in currency exchanges. However, the bottom line is both the calculation
and the information presented in the document shows that this project has a positive
IRR and a positive NPV at the end of its lifespan. Thus this project is feasible
because it yields remarkable benefits to the public throughout its entire life span.
To reaffirm this finding, the benefit-to-cost ration of the project is calculated further as
follows:
Total Costs for initial capital investment, operation and maintenance cost for 10
years = RM20,280,000.00
Total Revenues projected from Carbon Emission Reduction throughout project life
span = RM30,226,332.51
Benefit-to-Cost ratio = B/C = 1.492
Positive Benefit-to-Cost ratio shows that this project yields higher benefits than costs
and thus, feasible to be implemented.
Qualitative Analysis of KK Composting Project
As explained in the previous section, this project guarantees economic,
environmental, technological and social benefits to the government and the public as
a whole. Other than carbon emission reduction, prolonged lifespan of the existing
landfill, and revenue generated from Carbon Emission Reduction, this project also
poses other positive externalities and benefits in terms of cost saving such as:

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1. Usable materials recovered from MRF are still useful, especially those that were
made of metal. For example, old automobile parts and other metal junks that are
regularly dumped at the landfill can be recycled and sold to any smelter industry
at cheap prices to be reproduced in the form of metal sheets which are important
components in the manufacturing of automobile, machineries and construction
material. This also reduces the consumption rate of non-renewable metals that
are extracted naturally from mining activities. Without this project, such an
environmental and financial austerity could not be achieved.
2. Composts produced from the composting facility can be used as fertilizers and
soil conditioners in agriculture and landscaping projects. Hence, the KK
Composting Project actually yields good spillover to the agriculture and
landscaping sector.
3. With the prolonged lifetime of the existing landfill in Kayu Madang, the Sabah
State Government can defer the acquisition of a new replacement landfill to a
later date. Thus, the opportunity cost of having to replace the landfill earlier is
saved and could be channelled to other useful purposes such as to improve civil
roads, drains, other civil infrastructure and so on.
4. Finally the technology transfer and foreign capital injection that has been
procured is very useful for the government and the public. These benefits can be
replicated elsewhere when similar projects are constructed in other parts of the
country, especially in the Peninsular Malaysia where problems of depleting
landfill capacity need immediate addressing.

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Conclusion
KK Composting Project was proposed and implemented based on sound planning
and good cost-to-benefit analysis. This should be a very good lesson for public policy
practitioners, public managers and urban planners who need to come out with
practical and effective solution to address problems faced by the public. More
academic exposure on this type of project should be undertaken and such studies
should be widely published to instil public awareness on the need to choose carefully
when it comes to implementing public projects using public money.
Moreover, it is also noteworthy that composting as a means to dispose domestic
rubbishes can actually be done at home. With a little effort to learn, villagers,
residents, farmers and agricultural firms can turn their rubbishes and industrial by-
products into compost using simple methods and thus saves a lot of cost that would
otherwise be spent for waste collection and disposal. In this respect, the KK City Hall
has embarked on education and campaign efforts to instil awareness among the
public and agricultural entrepreneurs regarding the valuable outcomes from self-
initiative to dispose waste via composting method. The effort may be slow to take
effect, however with smart partnership and positive cooperation from academic and
government sector, the positive effects from such campaign and education on a
quicker pace.

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APPENDIX
Pictures from Kayu Madang Landfill, Material Recovery Facility and
Composting Plant
The landfill
The sorting machine

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Workers stuffing in non-biodegradable solid waste for recycling and disposal
Sabah Minister of Housing and Local Government visiting the Composting Plant

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Processing unrefined compost
A sample of how a refine compost should look like