Friday, September 11, 2009

A Conversation

Abu: Ok guys, let’s have a topic to discuss.

Lim: Great, what do you think Samy?

Samy: Mmmmm, let’s discuss on whether the Government
should change the roads, that are presently on tarmac
to cement.

Abu: Good topic, but it’s a too broad thing to
discuss, hence we need to establish the scenarios and
thereafter set the parameters.

Samy: But we do not have facts and figures, everything
is purely on intuitive thinking.

Abu: No problem Bro. This is just a teh tarik
discussion, what matters is the structure and
framework of thinking. With that, we can use some
logical numbers and assumption.

Lim: Agreed. So, let me start first. When we talk
about roads, there are three types of roads namely
tarmac roads, non-tarmac and non-cemented roads and
cemented roads. Or you can also divide it into
highways, urban roads and rural roads.

Samy; I like the approach to divide it into highways,
urban roads and rural roads. For a few reasons…

Lim: What are they?

Samy: It gives us the opportunity to segment it on
priority basis at later time, two, road is a means
towards point to point connectivity and hence
geographical segmentation is the way to go and
thirdly, its more focussed.

Abu: Great but big picture big picture guys, hold your
thoughts on the details. Having said that, I have got
issues with your third point, as a statement like “its
more focussed”, could be interpreted as over
simplification or brushing statement.

Samy: Wait a minute Abu, what you said is also over
generalisation. I could expand my points, if you
want.

Abu: No need. The other parameters would be cost.

Lim: That is when we do cost benefit analysis. But
now, it’s still on the issues.

Samy: Yup, ok by the way, from what I read, Malaysian
road system is pretty extensive and covers 63,445 km.

Lim: Ok, assuming the ratio of highways to urban to
rural is 1: 10 : 9, then the breakdown would be
3,1725.25 km for highways, 31,725,5 km for urban roads
and 28, 550.25 km for rural.

Abu: Good. So lets start on why do we need to change
from tarmac to cement or concrete roads, then we think
about the advantages and disadvantages of doing so.

Samy: I think the two parts you said are interrelated
to one another, answering one would indirectly answers
the other.

Lim: I disagree as we have to be structured here.
Second, the advantages and disadvantages can include
and be expanded to implementation issues.

Samy: Ok.

Abu: The debates are not new, thus far the arguments
have always be in favour for cement roads, especially
roads that are subject to extensive and heavy traffic.
According to our Government, the road maintenance cost
is 30 to 40% lower than tarmac roads.

Lim: Further, tarmac, as an internationally traded
commodity has increased in price. Concrete roads
require less maintenance, have a longer life span and
do not crack easily.

Samy: But the cost to build them is more expensive.

Abu: Precisely. The cost can be divided into several
parts. One is cost of material, second is the
engineering works and the third is time cost. I was
made to understand that the time taken to build
concrete roads is longer than tarmac.

Lim: By how long?

Abu: I do not know, but let us assume that the cost to
build concrete roads in total is about 3 times more
than tarmac roads. We….

Samy: What do you mean by three times more? Is it from a
ratio or 3:1 or the delta cost is tripple than that
for tarmac.

Abu: The ratio is 3:1. Ok, let me just continue.

Lim: Go ahead

Abu: We know that the cost of maintenance is about 40%
lower, ok. Assuming that annual maintenance cost for
tarmac is about 5% of the road-building cost, then the
savings for concrete roads would be 2%.

Lim: So… it takes 100 years to even out the marginal
spending for concrete roads. That is quite long.
Unless, the share of maintenance is higher, for
example if its 10%, we can reduce it to 50 years.

Samy: There is another cost that you forgot to factor
in and that is the re-layering cost. For tarmac roads,
you need to put another layer after few years.

Abu: Which mean, short life span. According to Indian
Public Works Department study, average life span for
tarmac roads is about three to five years. The
corresponding period of cement or concrete roads is
twenty to twenty three years, and it can withstand not
only the monsoon but also the hear and the drainage
systems better.

Lim: This is great, lets go back to the numbers. This
means that you can actually knock out the marginal
cost for cement roads by year 6, even without
factoring in 12% savings you made for that 6 years.

Samy: And reduction in maintenance and cost of
re-layering means more than the numbers as you will
require less organisational and institutional supports
for maintenance, one, and two, you need not to tender
out the work again and again, three, the cost will
jump over time due to inflation and the works of
demand and supply and you are shielded by this long
term hedging you made by building a long term roads.

Abu: But, is it for all roads? By the way, that is a
stupid question as the answer is definitely not.

Lim: I agree. What the government should do is to come
out with a policy on concrete and tarmac roads. Then
set up selection criteria for concrete and tarmac
roads. For example, concrete roads are meant for heavy
traffic roads and the one that cannot tolerate
frequent maintenance.

Samy: do not forge that concrete roads are suitable
for risk-prone areas such as those that are
susceptible to flood etc.

Abu: Good point. Also, this policy can be used as a
guide in selecting which of the present roads that
need to be cemented, as a matter of prioritisation and
which should remain as tarmac roads. It can also be
used in the formulation of terms for highways
construction.

Lim: I think, by the criteria we discussed, majority
of the roads that need to be cemented are that on the
highways. Second would be urban and the last would be
that in the rural areas. Its probably further
justified by the economics of it.

Samy: The implications?

Abu: Good views. First would be budgetary constraints,
given high one-off expenditure. Second, impacts to
cement market and third, impact to small-time
contractors who do the tarmac roads.

Lim: I don’t think impact no 3 is high, as they are
mostly serving low targets for cement roads. What I am
more concerned about is on the cement market.

Abu: You know what to do when we are not sure.

Lim: Sce….

Samy: Scenarios brother, scenarios.

Lim: Ok, lets say three scenarios. One: supply is
sufficient, two, supply is tight and three supply is
abundant. Lets assume that they are generated
internally.

Abu: You are insulating us from international markets,
which I do not think is a fair assumption.

Lim: I know, but lets us just assume that. And, my
base case is a sufficient supply. Hence, on this
scenario, it might move to scenario one of tight
supply and hence increase in domestic cement prices.
This is bad, if not managed properly as it will affect
construction industry, road building cost and economic
growth.

Abu: Thus, if the government wants to implement a
policy for cement and tarmac roads, they have to look
into this aspect as well. They should also look into
elements like ways to increase cement production
capacity or ways to import more cement. But, I think
things should go well, unless the government wants to
implement a drastic and quick change.

Samy: do not forget that tarmac producers will not
simply let their business down so easily. They might
do research and development and come out with a very
high quality tarmac, at a relatively fair price, long
life span and able to endure heavy traffics and bad
weather better.

Lim: Yup, we should not discount that possibility.

Abu: What a good discussion we just had. Excellent

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