The Feasebility Analysis of Public Investment: Evidence of Reservoir

Sardi

, B. Tresno Sumbodo

,Yavida Nurim

and Handoko Arwi Hasthoro

Univeristas Janabadra Yogyakarta

Keywords:

Indonesia, Reservoir, Feasibility Analysis, Economic Analysis

Abstract:

Farmers need water urgently, especially in District of Gunungkidul, because their farm’s irrigation depend

on rainfall. It is not a lucky condition. They face drought in dry season, but rudundant water is in rainy

season. Moreover, their area covered by water signiﬁcantly. Therefore, irrigation management is urgent for

the local government, such as build a reservoir for providing water supply constantly. This study aims to

perform feasibility analysis approach, namely net present value, beneﬁt cost ratio, and internal return rate.

This study also implement sensivity analysis through different schema of interest rate. Prior research has

implemented economic analysis to examine public investment, but in this case, the reservoir’s project has

to release communities’ land and communities’ vegetation. This study reveals that the project of Embung

Kedung Poh is eligible to execute and this result contributes to reseach about public investment that have to

sacriﬁce private land and vegetation.

1 INTRODUCTION

Farmers who depend on ﬁeld, farm, or livestock to

earn money consider the important role of water in

their life. According to sustainable water supply,

farmer needs guarrantee that their ﬁeld or farm get

enough irrigation in order to optimize the growth.

However, the increasing of population affects to in-

creasing of food, therefore an irrigation management

should consider the need of food beyond to the pop-

ulation (Indarto, 2012). As a consequnce, manage-

ment of irrigation also involve analysis of public in-

vestment. This analysis requires an understand about

feasibility of project, so the result of study regards to

decide whether project be able to be implemented or

not (Jo et al., 2015).

A study about public investment reveals that Hun-

dred Billion Plan in Cina could increase food output

signiﬁcantly approximately 4.34% from 2007 – 2013

through improving productivity (He et al., 2019). In

general, public investment has negative relationship

with debt to GDP ratio, especially in short term, and

public investment can also reduce unemployment rate

in short term (ADB et al., 2016).

This study examines the public investment in

Nglipar Subdistrict of Gunung Kidul District, Special

Region of Yogyakarta Province. Generally, people in

Subdistrict of Nglipar, District of Gunungkidul works

as farmer, so they depend on irrigation as water supply

to grow their plants and vegetables. Unfortunately,

the irrigation supply is only provided by rain, so in

several times, they experience crop failure, especially

when the lack of rain intensity. Therefore, local gov-

ernment has to build a reservoir (as Javanese People

called it as embung) to guarantee the consistency of

water supply for the farmers.

According to the geography characteristic of Sub-

district of Nglipar, District of Gunungkidul, the reser-

voir (embung) mainly accommodates the overwhelm-

ing water during rainy season. Actually, infertility

soil in this distict also deteriorate the productivity of

farmers, so the reservoir also has a function to reserve

abundant water supply during rainy season. There-

fore, the reservoir has two functions: contribute to

water supply during dry season and reduce the vol-

ume of ﬂood during rainy season.

Prior research such as (He et al., 2019) implement

internal return rate as beneﬁt cost analysis on China’s

Hundred Million Plan to estimate the project’s eco-

nomic return. (Jo et al., 2015) combine system dy-

namics (SD) and agent based modelling to examine

the project’s feasibility and in the system dynamics

step, the analysis uses NPV and B/C ratio. This study

also use NPV, B/C ratio, and IRR for project’s eco-

nomic analysis, but this study have to consider the

value of vegetations that are obviously sunk under the

water and the value of ﬁeld that is released for the

reservoir project. Therefore, this study performs sen-

Sardi, ., Sumbodo, B., Nurim, Y. and Hasthoro, H.

The Feasebility Analysis of Public Investment: Evidence of Reservoir.

DOI: 10.5220/0009877700480053

In Proceedings of the 2nd International Conference on Applied Science, Engineering and Social Sciences (ICASESS 2019), pages 48-53

ISBN: 978-989-758-452-7

sivity analysis to estimate the project’s return on sev-

eral cost and interest rate schema.

This aim of study is to contribute to reseach about

public investment that recently focus in railway, air-

port, energy, because the reservoir commonly is built

naturally. The second contribution is the cost bene-

ﬁt analysis relate to private land that should be sacri-

ﬁced for this project. The next detail below will de-

scribe about area and data, and ﬁnally this study will

describe the analysis of net present value, beneﬁt to

cost ratio, and internal rate of return and implication

of the analysis.

2 METHODOLOGY

2.1 Area and Data

The Kedung Poh Reservoir lies on Kedung Poh Lor

Village, Nglipar Subdistrict of Gunung Kidul District,

Special Region of Yogyakarta Province and approx-

imately + 530 metres above sea level (MASL) (see

ﬁgure 1). The building of this reservoir implements

a rainfall management system, because the source ir-

rigation of the reservoir comes from rainfall. There-

fore, the reservoir will be built through a soil dig. This

study uses the project costs include operating costs,

legal consulting cost, and administration and contin-

gency cost. Then, this study emphasizes in both cost

and beneﬁt aspects based on the project costs.

2.2 Analysis

This study performs economic analysis, such as nett

present value, beneﬁt to cost ratio, and internal rate of

return. This analysis of project focus in from econom-

ical perspective with several cost and return alterna-

tive for sensivity analysis. There are some asumption,

such as project uses a shadow price as price indicator

uses shadow price, project analysis exclude tax pay-

ment, and market price of goods that is resulted by

farmer must include government’s subsidy (Suyanto

et al., 2001). The detail of economic analysis formula

be described below. First, net present value indicate

the progress of project’s proﬁt economically, so this

analysis compares cost and beneﬁt regarding in cost

rate of project or interest rate of bank. The formula

of present value (PV) uses formula of (Kuiper, 1971)

and (De Garmo and Sullivan, ).

PV =

(1 + i)

(1)

Notes:

PV: present value

F: year x (cardinal) variable

I: interest rate

N: ﬁrst,second,third year (ordinal)....so on

According to net present value evaluation, current

loan of interest rate should exceed to 0 (morethan

zero). It means that project will result proﬁt or as a

proﬁtable project. If the net present value of project

has value zero, so the return of project is not more

than the initial investment. However, if net present

value of project is less than zero, it indicates that the

project has to be delayed. It also imply that the project

does not have beneﬁt economically. For economic

analysis, this study also consider net present value of

cash out ﬂow scenario based on several discount rate

(I) alternative.

Figure 1: The location of Kedung Poh Reservoir

Second, analysis beneﬁt to cost ratio is a com-

parison present value of cash in ﬂow that shows the

project’s value and present value of cash out ﬂow (to-

tal investment costs of maintenance) that indicates the

project’s cost. This comparison is based on deter-

mined discount rate (i) that is formulated by (Kuiper,

1971) and (De Garmo and Sullivan, ).

BCR =

∑

t=1

(1+I)

∑

t=1

(1+I)

(2)

Notes:

I: dicount rate

t: year index

According to beneﬁt to cost evaluation, if the

value of comparison has more than 1 (x > 1), it means

the project has proﬁtability. However, if the value of

ratio is less than 1 (x < 1), it means the project should

be delayed. The project can not be able to earn proﬁt.

Third, this study also analyze the internal rate of

return that shows discount rate (I) causes the value of

net present value has zero. The calculation of interanl

rate of return includes cash out ﬂow and cash in ﬂow

per year. This study performs several schema of rate

that has assupmtions as followed below :

a We should assume the discount rate (I) that has

value as close as IRR variable. Then we calculate

The Feasebility Analysis of Public Investment: Evidence of Reservoir

NPV variable per year and NPV’s cummulative.

b The value of discount rate (I) should b modiﬁed

as accurate as possible to seek the cummulative

of NPV’s value equal to zero at the end of the

project. This study also implement convergency

approach as a possible way to seek the value of

NPV’s cummulative that closes to zero (Kuiper,

1971) (De Garmo and Sullivan, ). The formula of

IRR is stated as below:

IRR = I

NPV

− NPV

(I” − I

) (3)

Notes:

I’ :ﬁrst trial

II”: second trial

NPV’: ﬁrst cummulative NPV variable

NPV”: second cummulative NPV variable

After the analysis of NPV, B/C ratio, and IRR, the

second step is an sensivity analysis that considers the

probability of project’s return based on the possibility

of project’s cost and proﬁt. This approch is important

in project’s analysis because we have to predict the

possibility of poject’s proﬁt based on rate changing.

There are four assumptions to consider in sensivity

analysis: cost overrun, a change in price compare to

price level in general (for exampledecreasing price on

agricultural products), delayed time for the project ex-

ecution, and project’s result deviation. According to

sensivity analysis, this study uses any kind of con-

ditions as followed (Suyanto et al., 2001): normal

condition (stable worth and ﬁxed cost), cost condi-

tion increased up to 10% stable worth,cost condition

increased up to 10% worth decreased up to 10%, and

cost condition decreased up to 10% worth increased

up to 10%.

3 RESULTS AND DISCUSSION

3.1 Economic Analysis

This study calculates project’s cost, such as land re-

leasing cost, construction cost, and operating and

maintaning cost, and project’s beneﬁts, such as irriga-

tion, ﬁshery, and recreation (see table 1). The project

proper analysis is done based on the calculation of

the project costs by applying NPV, B/C ratio and IRR

variables, with current interest rate up to 12 %. The

detail of analysis as depicted below.

First, estimated project’s cost is an estimation of

resources that is required by a project, namely Em-

bung Poh Reservoir. This study calculates inital in-

vestment of project and project’s beneﬁt, such as the

amount of project costs is calculated in detail as fol-

lowed, namely land releasing cost, contruction cost,

and operating and maintaining cost. Land releasing

cost is an acquiring cost of land owned by community

affected by this project. The community also plant

vegetable plants and trees, such as manggo, banana,

coconut, to earn money from it. Therefore, this study

estimates the cost of dry ﬁeld and the value of veg-

etation. Concerning on the land of Embung Kedung

Poh covers approximitly 5.000 m. The total cost of

land is IDR200,000,000, includes released land, veg-

etation, and trees price. Constructing cost is a build-

ing cost of the reservoir and facility surrounding the

reservoir from reservoir’s blueprint until the reservior

able to irrigate the land. Estimated construction cost

is IDR3,000,000,000, include blue print, planning,

drainage, spillway building, fence surrounding reser-

voir, and gazebo and sign board. Operating and main-

taining cost is a cost to optimize the reservoir’s ben-

eﬁt. This study estimates 2% of constructing cost as

estimated maintaining cost, namely IDR60,000,000.

Second, Calculation of project’s beneﬁt is an anal-

ysis the possibility of beneﬁts that can be taken by so-

ciety sorrounding the project directly and indirectly.

Therefore this study analyze direct beneﬁt, such as

irrigation and ﬁshery, and also indirect beneﬁt, such

as water tour and recreation. Analysis of irrigation is

an analysis of the reservoir’s beneﬁt to irrigate ﬁeld

and create other possibility economic’s beneﬁt from

the abudant of water source. This study assumes that

the cost of land’s cultivation, land’s fertilization, pest

prevention, and harvest approximately 25% of har-

vest’s value and crop productitvity. If the ﬁeld can

result 3 tons per hectare of crop in one period of

plantation and the farmers can plant the ﬁeld three

times in a year. It also assume the price of harvest

is IDR10,000 per kilogram, so the revenue can be cal-

culated as follow: (1.0 – 0.25) x (3 x 10.000 x 1000)

= IDR22,500,000 per year per hectare.

Table 1: Economic Analysis

No Criteria Cost(IDR)

Estimated Project’s Cost

1 Land Releasing Cost 200, 000,000

2 Construction Cost 3,000,000,000

3 Operating and Main-

taning Cost

60,000,000

Total of Project Cost 3,260,000,000

Project’s Beneﬁt

1 Analysis of Irrigation 355,000,000

2 Analysis of Fishery 112,200,000

3 Analysis of Fishery 112,200,000

Total of Revenue within a Year 474,400,000

ICASESS 2019 - International Conference on Applied Science, Engineering and Social Science

This study also assume that farmers able to plant

palawija (a kind of crop that does not need much wa-

ter in growing, such as beans, corn, chili, casava,

or sweet potato) 2 times within a year and it is pre-

dicted producing 2 tons per hectares. The farmer

can sale within IDR5,000 per kilogram of palaw-

ija. If the cost of plantation is approximately 35%

of the harvest’s value, so the revenue of two times

in harvest is 2 x 2 x 1000 x 0.65 x IDR5,000 =

IDR13,00,.000. Therefore, this study assumes the

farmer who has 5 hectares of ﬁeld will result ap-

proximately IDR355,000,000 within a year (10 x

(IDR22,500,000 + IDR13,000,000)).

Analysis of ﬁshery is an analysis to predict the

reservoir’s extraordinary result. This study assumes

that a pond within 1 m3 is optimum for approximately

10 ﬁsh and net proﬁt from ﬁshery is IDR30,000.00

within 8 months. According to the volume of reser-

voir aproximately 3,740 m

, the reservoir results

proﬁt IDR112,200,000. Analysis of proﬁt from recre-

ation activity, such as water tour, also can be predicted

and it is based on the number of reservoir’s visitor. If

there are 10 persons/each day and each of visitor has

to pay IDR2,000.00, therefore revenue from recre-

ation activity is approximately IDR7,200,000 within

a year.

Based on estimated project’s cost, the total of

initial project’s investment is IDR3,200,000,000 and

the project’s operation cost is IDR60,000,000 within

a year. This study also estimate the project’s

beneﬁts and the estimation of reservoir’s result is

IDR474,000,000 within a year. The next step is to an-

alyze NPV, B/C ratio, dan IRR of project. Why is the

analysis impoartant? The project requires investment

and operating cost, but the project’s beneﬁts only can

be acquired periodically after project’s building.

Table 2: The Economic Analysis of Embung Kedung Poh

No Discount

Rate (i)

NPV (IDR) B/C

Ra-

tio

IRR(%)

1 8% 1.834.573.580 1.467

13.62

2 10% 1.019.098.513 1.267

3 12% 398.169.008 1.107

4 14% (83.367.534) 0.977

5 16% (463.340.090) 0.871

The analysis of NPV, B/C ratio, and IRR need

assumptions as stated follow (Salsabiila, 2016): dis-

count rate up to 12%, the length time of the project

up to 25 years, the length time of constructing up to

1 year, the optimum estimated land developing after

10 years, the beneﬁt increases during the term of the

time in line, 1 US$ = IDR10,000 and the bank’s in-

terest rate up to 12.00%. Based on that assumption,

the result of analysis is NPV = IDR398,169,008, B/C

ratio = 1.107, and IRR = 13.62% (see table 2).

The analysis of NPV determines the execution of

the project whether ﬁxed or unﬁxed. If NPV > 0

means a project is ﬁxed economically. According

to NPV analysis with bank interest rate up to 12%,

project results IDR398,169,008, so the project of Em-

bunng Kedung Poh has ﬁxed economically. The anal-

ysis of B/C ratio reveals that the project is also ﬁxed

economically, because the value of B/C ratio is more

than 1 (one). The analysis of IRR is based on discount

rate determination, which all future revenue possibil-

ity is predicted in certain discount rate. Therefore

this study calculates IRR’s value in some interest rate

schema, such as smallest positive NPV and smallest

negative NPV.

3.2 Sensivity Analysis

The second step of the analysis is a sensivity anal-

ysis that describes several economic result on sev-

eral assupmtions. This study applies present worth

(PW) method to capture the several possibility of eco-

nomic value. As an ilustration, this study determines

the interest rate i.=.12% , so the value of NPV is

IDR398,169,008. If this study determines the interest

rate i.=.14%, so the value of NPV is IDR- 83.367.534

(see tabel 2). This study also consider the value of

IRR up to 13.62%. If the value of IRR is higher than

market return that has interest rate up to 12 %, so the

project is economically eligible to execute.

This study also apply different schema of inter-

est rate to reveal different of economic result, such

as detailed in three schema. First, this study as-

sumes that cost increases up to 10% within stable

beneﬁt, so the study reveals that the value of NPV

= IDR346,071,967 (positive), the value of B/C ratio =

1.092, and the value of IRR = 13.41%. Second, this

study assumes that the beneﬁt of project decreases up

to 10% within stable cost, so this study reveals that the

value of NPV = IDR13,744,934 (negative), the value

of B/C ratio = 0.996, and the value of IRR = 11.94%.

Finally, this study assumes the cost increases up to

10%, but the beneﬁt of project decreases up to 10%.

Therefore, the value of NPV = IDR65,841,976 (nega-

tive), the value of B/C ratio = 0.983, and the value of

IRR = 11.73%. This sensivity analysis indicates that

the optimum of IRR’s value approximately on 12%

interest rate, because the value of NPV and the value

of B/C ratio has lowest.

This study implements feasibility analysis on

reservoir’s project kedung poh (embung kedung poh)

at District Gunung Kidul and the analysis includes

The Feasebility Analysis of Public Investment: Evidence of Reservoir

economic analysis and sensivity analysis. Result

shows that this project is eligible to execute. Prior re-

search has implemented feasibility analysis on public

investment because it enhances understanding deci-

sion maker about project’s viability (Jo et al., 2015).

Study of (Jo et al., 2015) consider dynamic aspects

ecompass micro level or system level and micro level

or individual level. The effect of macro level relates

to economic, social, and environmental effect, but the

effect of micro level relates to individual who inter-

acts to the project directly. Therefore, (Jo et al., 2015)

analys beneﬁt, cost, feasibility (NPV and B/C ratio)

of project. According to the agents who are possible

affected by project, (Jo et al., 2015) predict individual

who can not do activities during the project contruc-

tion. However, this study considers the community’s

sacriﬁce such as land, ﬁeld, and vegatation for the re-

servior project.

Study of (He et al., 2019)) implement beneﬁt

– cost analysis, namely internal return rate (IRR),

forHunderd Billion Plan in China form 2007 – 2013

and the analysis is to understand the effcientcy level

of project. This program has an objective to enhance

food security, so this investment has impact to large

scale output. According to (He et al., 2019), the

investment are categorized into irrigation, land im-

provements, and farm support because the three kinds

of project support HBP output directly. According to

kedung poh reservoir, this study also consider ﬁsh-

ery and recreation beneﬁt of project beside irrigation

beneﬁt. The community sorrounding the reservoir can

earn from ﬁshery that be culltivated or developed to-

gether by this community.

Study of (Rolfe, 2019) about public investment

evaluation in sporting events in Australi implements

evaluation stage that involve possible generated bene-

ﬁt from this project. Therefore, the study identiﬁes

direct beneﬁt, such as spending for local economy,

tourism attraction, and attraction synergies, and in-

tangible beneﬁt, such as additional positive images for

the local community or region (Rolfe, 2019). Accord-

ing to kedung poh reservoir, water recreation also be-

come positive effect of the project, however this study

only consider the minimum income from recreation.

We predict that if the local government encourages lo-

cal community manage the potential water recreation

profesioanally, so community earns optimum indirect

beneﬁt from kedung poh reservoir

Next study should be performed especially about

the water quality of this reservoir. Why is it impor-

tant? The infertility soil characteristic of District Gu-

nung Kidul causes the community severe by drought

longer than other Distict at Yogyakarta Province.

Therefore, the community can take beneﬁt from reser-

voir to supply clean water. However, the intensive re-

search should be done because the quality of water

has impact for the community health. For an ilustra-

tion, based on compiled data within 13 years of 142

lakes and reservoirs in China, an empirical study re-

veals that the quality of water increases during 2005 –

2013, although during this period, the pollutan is sta-

ble. However, the pollutan of water decreases during

2014 – 2016. This study also reveal that eutrophian

causes the deteroriation of China’s lakes and reservoir

during 2005 – 2011, but heavy metal pollution causes

the reduction of water quality in China’s lakes and

reservoirs during 2011 – 2017. The non point source

pollution indicates China needs a consolidation effort

of government on ecosystem and environmental man-

agement (Huang et al., 2019). (Kerr et al., 2016) sug-

gest that the involvement of farmers on conservation

program be able to reduce the sediment of non point

source pollution. ((Kerr et al., 2016).

4 CONCLUSIONS

This study be encouraged by the unique characterictis

of public investment, namely kedung poh reservoir,

such as realising cost from community land and veg-

atation, indirect beneﬁt from ﬁshery and water recre-

ation, although the main objective of reservoir’s on-

struction provides irrigation supply constantly. Based

on the feasibility analysis, this project is eligible to

execute. The next study should be performed re-

garding to water quality analysis, because the drought

problem during the dry season.

ACKNOWLEDGEMENTS

Thankfull to Seia Cons that has already provided us

with some facilities on the project of Embung Ke-

dung Poh in subDistrict of Nglipar, District of Gu-

nungkidul, Special Region of Yogyakarta.

ICASESS 2019 - International Conference on Applied Science, Engineering and Social Science

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The Feasebility Analysis of Public Investment: Evidence of Reservoir