Managing waste in emerging markets
Growing economic
prosperity is rapidly increasing waste volumes in emerging countries. We
discuss how governments can react to contain human and ecological health risks.
Economic growth in
emerging economies is bringing prosperity, rising living standards, and overdue
relief from poverty, but increased consumption typically increases resource
use—especially the use of plastics—and waste production. As Exhibit 1
illustrates, the rapid surge in waste volumes since 2007 is straining
waste-management systems in many developing countries, with negative effects in
economic, health, and ecosystem terms. The Philippines is a case in point: it
produces 2.7 million metric tonsof
plastic waste per year—600,000 metric tons in metro Manila alone.While
the country has high waste-collection rates overall (84 percent nationwide), 17
percent of collected plastics is lost into the marine ecosystem after
collection because of illegal dumping and poor landfill siting and operating
practices. For uncollected plastics, the ocean-leakage rate is even higher, at
31 percent. The economic losses in tourism, fisheries, and healthcare are
considerable. We estimate that each metric ton of uncollected mixed waste
represents an average loss of approximately $375.As
Inge Lardinois and Arnold van de Klundert wrote 20 years ago: “By almost any
form of evaluation, solid waste management is a growing environmental and
financial problem in developing countries. Despite significant efforts in the
last decades, the majority of municipalities in the developing countries cannot
manage the growing volume of waste produced in their cities.”
While
the importance and urgency of protecting the ecosystem is increasingly
understood, the cost of the efforts required can be unaffordable for already
overstretched municipal budgets. While statistics are still spotty,
municipalities in developing countries might be spending 20 to 50 percent of
their budgets on solid-waste management.The
default solution has been to encourage private-sector waste operators to get
involved through concessions or other forms of public–private partnerships.
This can take away some of the financial pressure and inject much-needed
expertise into local waste-management systems. Our work with municipal waste
agencies around the world indicates it does not in itself guarantee any focus
on value recovery, since this is usually not an explicit part of the mandate.
From waste streams
to income streams
With
the right approach, many waste streams can become income streams, yielding
economic value with technology available today. Three examples from across the
waste spectrum indicate the potential. For instance, pound for pound, there is
more gold in electronic scrap than in gold ore.Collecting
and selling used polyethylene terephthalate (PET) bottles can earn a waste
picker a living ($3.50 a day).And
every metric ton of used clothing collected could generate revenue of $1,975,
if garments were sold at current secondary-market prices, comfortably
outweighing the cost of $680 required to collect and sort each metric ton.
Nevertheless,
the value in many waste flows is not being captured today. Even the stable and
relatively successful systems of PET-bottle and fiber recovery still extract
only 40 to 60 percent of their potential total value.Why
is this so? And how could the management of such relatively low-value products
and materials be rendered profitable?
Our
analysis suggests that the aggregate extractable value from consumer-waste
flows is often higher than people think, and certainly higher than current
recovery rates imply. The challenge that must be addressed to increase rates of
recovery and valorization lies in the aggregation of volumes: scale and volume
are needed to justify investment in technology and infrastructure that is
capable of extracting more value. In other words, the critical challenges are
the high degree of dispersion of many consumer materials and products, as well
as the lack of an integrated infrastructure and a well-managed—reverse—supply
chain operated at scale and based on sound management practices.
Keys
to success for waste-management systems in emerging economies are the ability
to aggregate waste flows into meaningful volumes around which
businesses can be developed and the ability to organize the
supply chain professionally at high levels of operational efficiency and
environmental and societal effectiveness. Who or what mandates or operates such
a system can vary, as long as the parties ramp up and yield results
fast—staying on top, and preferably ahead, of the large and growing volumes of
waste that are developing in emerging economies. Exhibit 2 illustrates the
potential positive effect of aggregating flows and providing the necessary
scale for high-performing value recovery:
·
The
PET-bottle-collection system that requires the lowest level of aggregation—collecting
PET bottles as part of mixed waste—allows for energy recovery via incineration,
yet its economic yield is so low as to require a so-called gate fee to cover
operations. At the next level, recovering the bottles’ material value via a mixed-recyclables
or mixed-plastics stream could yield approximately $150 to $300 per metric ton.
The highest values, approximately $350 to $600 per metric ton, require the
highest level of aggregation, in the form of a bottle-only collection system.
·
ƒƒSimilarly, metals are
commonly extracted from tires in small backyard operations where tires are
burned in open fires—posing great risks to health and environment. Aggregating
tires to feed them as fuel into industrial processes (rather than just backyard
fires) could increase the value extracted from old tires tenfold. And when
initiatives to organize the tire-waste flow cover not only collection but also
the processes to recycle specific materials (not just using tires as industrial
fuel), the value extraction from tires could see a further doubling.
·
In the processing of
electronic and electrical waste, too, shifting from backyard recycling—harmful
to workers and environment—to processing in smelters with strong environmental
controls could multiply the value that can be extracted. Currently, the
required scale, and hence waste-volume aggregation, for smelters is
significant, and only a few plants are available around the world to produce
these high yields. Recently, technology companies have developed hydrometallurgical
alternatives, which they claim generate higher yields and can be run profitably
with smaller feedstock volumes. Once commercial installations are fully
operational, they might therefore pose an interesting challenge to today’s
large-scale paradigm for (precious) metals extraction. These smaller
installations would, however, still require incoming materials that have been
aggregated into “clean” unmixed waste flows.
How aggregation can
work—fast
Solutions
for aggregating and organizing solid-waste flows—increasingly augmented by
product-stewardship or extended-producer-responsibility programs—already exist
at the municipal and regional levels, providing some instructive examples.
We
will illustrate this with a few examples. Each example provides evidence that
volume aggregation can be organized, creates significant economic value, and
changes the complete material supply chain. Take organic waste. It typically
makes up around 30 percent of household waste in developed countries, and up to
65 percent in developing ones. It
is the biggest source of odors and pests in places where collection services
are inadequate, causes groundwater contamination where disposal methods are
substandard, and emits powerful greenhouse gases that are often not prevented
from entering the atmosphere. Moreover, such “wet” organic materials contaminate
other materials, dramatically reducing their recycling value. A growing number
of cities in Europe and North America, however, have set up successful programs
to divert organics away from conventional landfills or incinerators; in in the
Flemish region of Belgium, for example, diversion volumes for organic household
waste via municipal channels grew from 0 to over 350,000 metric tons over a
ten-year period, despite initial public resistance and numerous challenges in
producing marketable outputs such as certified compost.
Cities
are continuously tweaking programs to fit local needs. For example, Toronto
decided to increase convenience for its citizens in order to raise
participation and diversion rates, even though this means their processing
facilities now need to remove plastic bags and the plastic parts of diapers. The
city of Portland, Oregon, adjusted its program in the other direction, banning
all nonfood items, even compostable ones, from its organics flow—in order to
produce better-quality composts. Both programs have met their different,
self-defined goals for diverting organic waste.
Successful
programs are not limited to developed countries. Santa Cruz, the second-largest
island of the Galapagos Archipelago, has separately collected organic waste
since 2006, and the program covers nearly 100 percent of households.
In
Telangana, India, a group of young entrepreneurs recognized both the urgent and
growing need for waste-collection services in tier-three cities and the need to
restore the surrounding farmland, where soil had been losing its fertility.
These entrepreneurs founded Waste Ventures India (WVI), which turns
municipalities’ organic waste into compost that fetches sufficiently high
prices from farmers to cover about 45 percent of project operations, even at
low municipal separation rates of approximately 8 percent of the waste stream.
This allows WVI to charge competitive rates for its collection activities.
In
a different part of the world, the Recycling and Economic Development
Initiative of South Africa (REDISA) was set up in late 2012 to tackle
scrap-tire collection and distribution to processors for the whole territory of
South Africa. With a double mandate to reduce the environmental and health
threats from poor tire-management practices and improve the lives of
underprivileged South Africans, REDISA quickly put in place a management
structure and collection network to address the most pressing problem:
discarded tires were burned locally in open fires, with no protection
whatsoever for public health or the environment. As a result of REDISA’s
concerted effort to put out tire fires, collected volumes increased from 4 to
70 percent of end-of-life volumes from 2013 to 2015 (Exhibit 3). In the
meantime, the team started to develop treatment capacity. It is already moving
all collected tires into environmentally preferable treatment routes and is
ramping up to have all recoverable scrap tires collected and treated within the
country by 2016. By 2020, the initiative plans to have the majority of scrap
tires going into a high-value material-recovery process.
Economic
and environmental benefits need not be mutually exclusive. The
collection and sorting of recyclables, such as tires, can provide livelihoods
for many individuals outside of larger companies—and often outside of the
formal labor market altogether. Moreover, processing and recycling can give
birth to a number of small to midsize companies. For every 1,000 metric tons of
tires REDISA collects, up to ten full-time jobs are created, often in parts of
the country where customary employment schemes have less reach, thus offering
livelihoods to people who may otherwise have limited access to the job market.
All in all, the REDISA system is on track to be operating cost neutrally from a
societal perspective by 2017, just five years from its inception. By 2020, it
is expected to deliver an aggregated economic benefit of approximately $6
million to South Africa. In addition, if REDISA reaches its planned objectives
for collection and treatment, we estimate that, by 2020, the system will also
generate an annual environmental benefit of $22 million, and the employment it
creates will have grown further, to the equivalent of approximately 1,900
full-time jobs.
Success factors:
Today and tomorrow
From
strong roots in Europe, product-stewardship programs are growing around the
world, including in developing and emerging markets; for instance, there are
programs for electronic waste in China, plastic packaging in Tunisia, and
various material flows in Brazil. Some of these schemes are industry owned, and
some are run by third-party organizations or government agencies. Regardless of
who is in charge of a waste-management scheme, the most successful programs
share a number of common elements, which need to be in place to deliver
positive outcomes in a cost-efficient way. Analysis suggests there are at least
three factors that really make a difference.
Cash-backed
reliability
A
thriving resource-recovery system requires a strong balance sheet of some sort.
Recyclers or other downstream users of the waste must be comfortable to
invest—sometimes significant amounts—in commodity industries with razor-thin
margins. This is essential to be able to build capacity that absorbs most if
not all collected materials. They need access to feedstock in sufficient
volumes and with consistent quality. Processors need reliable off-take
agreements with assurances on volume and consistency in order to plan, invest,
and create commercially and operationally viable product flows.
The
South African tire aggregator, for example, actively supports the development
of processing capacity by researching new processing options and paying out
gate fees in the start-up phase of new facilities. It also reduces the access
barrier by entering into contractual agreements with the various tire
processors and guaranteeing them a minimum volume of feedstock.16
For
such feedstock guarantees to be credible, processors and other system partners
need to be able to hold the management of a waste-management scheme
accountable. This means any private-system operator needs to have a strong,
externally audited balance sheet and cash-flow position. If the system operator
is an industry itself, the companies behind it will be held liable; with a
government-run scheme, it is the public sector that assumes the risk. In the
model pioneered by WVI, the company worked with the local government to craft a
more effective contractual arrangement where the authorities provide the use of
capital expenditures in lieu of monetary payment.17The
land, a shed, and equipment are made available by the municipality and operated
by WVI, so buyers of WVI’s products and services have visibility into
operations and can be confident about the system’s staying power.
Transparency
When
a private company takes on the system-management mandate, maintaining full
transparency on material flows is critical to operate successfully. Transparency
builds credibility with system suppliers and partners and facilitates
government monitoring of system outcomes (ecosystem and public health, as well
as social impact). Transparency also enables producers that pay into the system
to assess efficiency and continuous-improvement efforts. Internally, such
visibility allows the company to make adjustments to chosen collection and
treatment methods, systems management, or the approach to regulatory support.
WVI
tracks both Progress Out of Poverty indicators and job creation, including
compensation levels. WVI also has built out a full-fledged IT infrastructure to
track its core impact and business metrics. The WVI IT system has a fully
built-out front end that allows it to move from an operating model based on
formal employees to one that allows workers to remain “their own boss” and is
therefore more suited to pull in large numbers of informal workers. The back
end of the system supports managerial decisions and aggregates reporting into
an easy-to-use dashboard for key performance indicators (KPIs).
REDISA
maintains a detailed management dashboard, reports to the South African
authorities on a monthly basis, and is audited on an annual basis. Its mandate
is assigned on an initial five-year basis, renewable after review by the
government, ensuring continued high performance against its government-mandated
KPIs. Its advanced IT systems help recognize pockets of value (and the absence
of such value) and tailor approaches, support swift management decisions, and
facilitate reporting and accounting. REDISA has also built out tracking
facilities across the country, allowing for better follow-up on problems,
swifter payouts, and focused capacity building.
Strong management
bench
Much
of the waste-management sector has traditionally been dominated by the informal
economy; it was prone to opportunistic practices and fragmentation, too often
rife with corruption, and avoided by top talent. Given the economic and social
importance of waste recovery in fast-growing economies, this setup will need to
be replaced by a more industrial approach, stronger performance management, and
better management talent. The most successful systems have shifted the sector
toward a more industrial culture, recruited competitively for people with
in-demand skills, and built high-performing leadership teams—all on a bedrock
of strong analytics to inform strategic and operational decisions.
REDISA’s
top team has a combined 140 years of management experience in business, backed
by strong academic credentials.WVI
has complemented its leadership’s local anchoring with analytical and
innovation talent from leading consultancies and top-ranked universities around
the world. It has also taken a strong analytical approach to workforce
retention and performance—studying in detail the needs and motivations of
informal workers in the waste-management space, and adjusting compensation
models accordingly.
Planning ahead to
enhance value creation
Many
waste-management solutions are path dependent. This means actions that address
the problem now can lock out superior solutions (such as new materials or
waste-avoidance practices) later because they shape materials markets for
decades. Europe’s dense incineration infrastructure has often been cited as a
hindrance to the market environment for increased recycling. It is feasible,
however, to tackle the immediate needs that come with the growing volumes of waste,
derive value today, and set up the system to create further value in the
future. To do so requires a system setup that respects the principles of the
circular economy, which strives to create more economic, environmental, and
social value by moving from landfill to recycling or—better still—to reuse, by
extending product lifetime or by moving toward a new generation of regenerative
materials.
WVI
is fully “upwardly compatible” with more circular solutions and takes a
technology-agnostic approach to organic-waste processing, seamlessly connecting
collection systems, government cooperation, and processing. It started out with
composting, which fulfills the immediate demands of stabilizing the material,
reducing its volume, and reducing harmful greenhouse gases. Moreover, it yields
sellable products in the form of compost and composting liquor. But WVI is also
considering anaerobic digestion or the production of refuse-derived fuel in its
new city contracts—which both offer more flexibility in the quality of the
waste intake.
In
South Africa, REDISA is already developing infrastructure for commercially and
environmentally preferable treatments. In addition, it has the potential to
redirect tires to retreaders in even higher volumes by making greater use of its
own logistics network and IT infrastructure. The system is also able to support
product tagging to further enhance the performance of this and other recovery
loops, for example, by providing an incentive for improved tire design.
Producers who make tagged tires with less toxic materials can be rewarded with
a more attractive tariff. Furthermore, REDISA is directly stimulating research
into such designs.
In
Europe, national activities to address the collection and processing
requirements of the EU’s Directive on Waste Electrical and Electronic Equipment
have focused on safely disposing of and recycling materials, most frequently
through shared compliance mechanisms. These have proved effective in avoiding
the worst risks to environmental and public health. They could also include or
be complemented with incentives to move beyond materials recycling—for example,
to design for disassembly or to create refurbishing programs. The Netherlands,
for instance, has recently introduced a new mechanism called the Register.
Here, manufacturers can officially register any volumes that they themselves or
their service providers have taken back for the purposes of value recovery.
Allowing for such volumes to be tracked and counted against manufacturers’
compliance obligations could stimulate further initiatives by manufacturers to
recover higher value.
High-growth
countries are facing a paradigm shift because the volume of waste grows faster
than they can deal with it. Public–private partnerships in themselves cannot guarantee
success: cleaning up alone will not do the job. More systemic solutions—from
waste avoidance to reuse—are needed. In emerging economies, we are also
starting to see a new role for industries, as they are pushed to take ownership
of their end-of-life waste streams.
In
such an environment, a crucial new capability is knowing how to set up
industrial operating platforms for waste aggregation. These platforms must be
cost effective from the start. This is achieved in two ways: first, by
aggregating waste flows into streams large enough for business development and,
second, by managing the supply chain—with its upstream and downstream
contracts—professionally, with a strong IT backbone, and at a high level of
operating efficiency and transparency. The assurances such a platform offers
could build trust and stimulate investment in a business that traditionally has
suffered from a lot of volatility.
The
chance to tap into new sources of value through better waste management and win
the “race against waste” is cause for optimism. There are few areas where
entrepreneurial success comes with more benefits to the economy and society at
large.
About the Authors
Hauke Engel is a consultant in McKinsey’s Frankfurt office, Martin
Stuchteyis a director in the Munich office, and Helga Vanthournout is
a senior expert in the Geneva office.
http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/managing-waste-in-emerging-markets?cid=other-eml-alt-mip-mck-oth-1602
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