Waste Management
Private Sector Participation in Integrated Sustainable Solid Waste Management in Low- and Middle Income Countries
DISSERTATION of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae
submitted by
Louigueur Dorvil from Haiti
Approved on the application of
Prof. Dr. Thomas Dyllick-Brenzinger and Prof. Dr. Matthias P. Finger
Dissertation Nr. 3381 Schmitt-Druck, Essen
The University of St Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation, without hereby expressing any opinion on the views herein expressed.
St. Gallen, October 15, 2007
The President:
Prof. Ernst Mohr, PhD
Foreword
Research into privatisation is not a new thing. But some publications smell of opinions held before the research started. Louigueur Dorvil does better. He critically looks at one of the big trends of our days, rapid urbanisation in low- and middle-income countries and the environmental challenges lying in this trend. He recognises that these countries typically lack the financial means to deal with the challenges and are therefore inclined to look for foreign financial aid. As a result of loans, high debts accumulated. In this situation many see privatisation of public assets as a means to overcome excessive indebtedness. Before assessing successes and failures in low- and middle-income countries, Dorvil looked into the past of European countries that since a long time had considered solid waste management as a private affair. They learned the hard way that this approach didn’t work and finally made waste management one of the most important public duties, mostly assumed by the municipalities. To finance the system, waste charges were imposed. Public perception prevails in Europe that waste management is and must remain a public responsibility. This does not preclude public-private partnerships as long as the ultimate responsibility remains with the state. Dorvil observes that the solid waste market in low- and middle-income countries is becoming attractive for private investors. But he argues that caution should be applied when it comes to achieving an integrated system of sustainable solid waste management. Private sector participation will not by itself solve all problems. The main issue is not privatisation but the avoidance of unhealthy monopoly or oligopoly situations with a lack of competition. Another important aspect of Dorvil’s study is insufficient information. Neither the state nor private operators have sufficient information about the services contracted, leading to inefficiencies. Rightly Dorvil argues that privatisation functions best under conditions of a strong regulatory framework and that public offices need to maintain clear information and oversight of the relevant operations. Dorvil offers a thorough treatise on the goods theory, the theory on market competition and market failure in the context of solid waste management. He emphasises the need for sustainable management in the waste sector. Numerous case studies illustrate his main
points. I was pleased to see that the author argues for a healthy balance between public responsibilities and private functions. I recommend the book to decision makers in developing countries and their partners in the private sector and in international agencies. I am confident that Dorvil’s work will stand the test of time.
Prof. Ernst Ulrich von Weizsäcker Dean, Bren School of Environmental Science and Management University of California Santa Barbara Lead author, Limits to Privatization: How to avoid too much of a good thing A Report to the Club of Rome (Earthscan, London)
Abstract
The need for investment in the Solid Waste (SW) sector in Low- and Middle Income Countries (LMIC) far outstrips their financial resources. The real challenge for LMIC is to set up sound SW management for both economic and ecological reasons. One of the solutions recommended is the involvement of the private sector. This study aims to demonstrate both theoretically and empirically the limitations of some Private Sector Participation (PSP) models to the concept of Integrated Sustainable Solid Waste Management (ISSWM), and to design an improved conceptual framework. The following major questions are addressed: What are the principal contradictions of PSP to the concept of ISSWM? What are the strategies of the international donor organisations? How should a workable concept for achieving ISSWM be designed? This investigation discovered that the main contradictions include the nature of solid waste (limitation of Standard Market Model to cope with public goods), the limitation of so-called “Pareto Efficiency”, the presence of externalities, free-rider issues, low-income areas, and a decided lack of accurate information and the prevalence of asymmetric information (or “symmetric lack of information”). The SWM policies of international donor organisations are theoretically aligned with the key principles of ISSWM. Based on a solid empirical foundation, this study demonstrates that the success of PSP does not necessarily depend on competition (due to long-term contracts), but rather on good inter-organisational relationships. The necessity for public awareness and cooperation between international and national private enterprises is considered to be a “conditio sine qua non” for the success of PSP. Empirically, this study confirms that the key principles of ISSWM are often welladdressed at the national level in LMIC, but that their application at a local level is lacking due to particular remuneration modes, difficulty in setting up performance thresholds, the financing systems in place, and a symmetric lack of information. Consequently, the managerial capacity of municipalities is weakened through thoughtless executed PSP. This dissertation highlights the crucial importance of good inter-organisational relationships between the public and private sectors. Government agencies or private agencies should enhance the monitoring of outsourced SW services, and new systems to strengthen the managerial capacity of municipal managers should be introduced. Also, clear mechanisms should be set up to address the unforeseen and ensure that support from public authorities is adequate for guaranteeing operational and organisational success. This study is highly relevant to private sector enterprises interested in sound business opportunities and policymakers interested in strengthening managerial capacity in LMIC and in avoiding SW project failure. Simply put, it is about creating strategic business opportunities that also improve the living conditions of millions of people.
Zusammenfassung
In Entwicklungs- und Schwellenländern übertrifft der Investitionsbedarf im Bereich der Abfallwirtschaft bei Weitem deren finanzielle Mittel. Diese Länder stehen nun vor der Herausforderung, aus ökonomischen wie auch aus ökologischen Gründen eine nachhaltige Abfallwirtschaft aufzubauen. Einer der Lösungsvorschläge sieht eine Beteiligung des Privatsektors (PSP) vor. In dieser Dissertation sollen die Grenzen einiger PSP-Modelle für das Konzept einer integrierten nachhaltigen Abfallwirtschaft (ISSWM) theoretisch aufgezeigt und empirisch nachgewiesen werden. Des Weiteren wird ein verbesserter konzeptioneller Rahmen entworfen. Die folgenden zentralen Fragen werden behandelt: Wo liegen die wesentlichen Widersprüche der Privatsektorbeteiligung zum ISSWM-Konzept? Wie sehen die Strategien der internationalen Geber-Organisationen aus? Wie lässt sich ein ISSWM-Konzept durch PSP ohne Widersprüche entwickeln? Diese Forschungsarbeit hat festgestellt, dass zu den zentralen Problemen u. a. die Limitierung des Standardmarktmodells beim angemessenen Umgang mit öffentlichen Gütern, die Grenzen des “Pareto Prinzips”, externe Effekte, Trittbrettfahrer-Aspekte und Gebiete mit niedrigem Einkommensniveau zählen. Weitere Schwierigkeiten sind i. a. auch ein deutlicher Mangel an akkuraten Informationen sowie die Verbreitung von asymmetrischen Informationen (bzw. „symmetrischem Informationsdefizit“). Die Politik der internationalen Geber-Organisationen für den Bereich der Abfallwirtschaft ist an den wichtigsten Prinzipien der integrierten nachhaltigen Abfallwirtschaft ausgerichtet. Auf der Basis solider empirischer Daten zeigt diese Forschungsarbeit, dass der Erfolg der Modelle mit Privatsektorbeteiligung (aufgrund langfristiger Verträge) nicht zwangsläufig vom Wettbewerb, sondern insbesondere von guten Beziehungen zwischen den staatlichen Institutionen und den privaten Auftragnehmern abhängig ist. Das öffentliche Bewusstsein und die Kooperation zwischen internationalen und nationalen privaten Unternehmen gelten als „conditio sine qua non“ für den Erfolg von PSP. Diese Dissertation bestätigt empirisch, dass die wichtigsten Prinzipien einer ISSWM auf nationaler Ebene weitgehend berücksichtigt werden. Schwierigkeiten bei der Definition der zu erbringenden Leistung sowie den besonderen Zahlungsmodalitäten, die bestehenden Finanzierungssysteme und das symmetrische Informationsdefizit verhindern jedoch eine wirksame Umsetzung auf lokaler Ebene. Klare Mechanismen sollten geschaffen werden, damit die öffentlichen Behörden bei unvorhergesehener Änderung der Ausgangslage angemessen reagieren können und so den Erfolg der Privatisierung sicherstellen. Diese Forschung ist für die politischen und unternehmerischen Entscheidungsträger von größter Relevanz bei der Umsetzung von PSP in der Abfallwirtschaft, um Grenzen frühzeitig zu erkennen und Fehler zu vermeiden.
Acknowledgements
Acknowledgement
First and foremost, I would like to extend my deepest gratitude to Prof. Dr. Thomas Dyllick for his invaluable guidance and support throughout this dissertation. I also wish to express my sincere gratitude to Prof. Dr. Dr. Matthias Finger of the EPFL for taking time out of his busy schedule to become the co-referee, and for offering his valuable insights and perspectives on the methodological and empirical aspects of my dissertation. His continuous support was vital and our discussions were always challenging and enlightening. I would also like to express my utmost gratitude to Prof. Dr. Dr. h.c. Ernst Ulrich von Weizsäcker. I am touched by the faith he expressed in my work in his foreword. I am also grateful to Dr.Ing Bernd Kordes and Dr.-Ing Abdelaziz Belherazem of the GKW for providing important case studies from the World Bank Group’s Project. This dissertation has benefited greatly from the advice and critical evaluation of Dr. Adrian Coad. His comments on my research design were fruitful. I also extend my thanks to Dr. Urs Egger, General Manager of SKAT in St. Gallen. Further, I wish to express my appreciation and indebtedness to Christian Zürbrügg and Silke Drescher at EAWAG/ SANDEC in Dübendorf for granting me access to their library facilities. I owe many thanks to Prof. Dr. Driss Zakarya, whose comments throughout are greatly appreciated, and to Dr. Peter Pluschke of the GTZ in Morocco for providing invaluable guidance, particularly with the Moroccan contacts to national institutions and local resources, and for helping me to clarify the whole concept. I would also like to acknowledge the valuable comments and contributions I received from Andrés Valverde Farré, the chief executive officer of CESPA in Tangier, for providing me with the most important information for the CESPA case study. I also wish to highlight the wonderful help granted to me by GTZ in Tangier, especially by Mr. Clemens Schrage. I highly appreciate the cooperation and assistance of Dr. Marc-Arthur Georges, Brigitte Otter and Mechtild Sifkowits who made the final document cohesive and readable. My exceptional thanks go to my wife, Andrea Dorvil, who has been always a source of inspiration and keen insight. Last but not least, I would like to thank Julienne Méus, Marc Méus and especially my parents Léonie and Arnoux Dorvil for incredibly unrestrained support. To everyone who provided time, effort and inspiration to this project I can simply say thanks. Essen, December 2007 Louigueur Dorvil
Table of Contents
Table of Contents
List of Figures ...................................................................................................................... VI List of Tables.......................................................................................................................VII Abbreviations......................................................................................................................IIX I. 1. 1.1 1.2 2. 2.1 2.2 2.3 2.4 2.5 2.6 II. 3. 3.1 3.2 3.3 4. 4.1 4.2 4.3 4.4 4.5 INTRODUCTION ......................................................................................................1 Background to the Research ................................................................................1 Integrated Sustainable Solid Waste Management in Low- and MiddleIncome Countries ....................................................................................................1 Private Sector Participation in Low- and Middle-Income Countries .....................4 Research Issues and Hypotheses..........................................................................6 Research Aims ......................................................................................................11 Research Questions...............................................................................................12 Justification for the Research................................................................................14 Research Procedure...............................................................................................15 Ethical Considerations ..........................................................................................17 Delimitations of Scope of this Dissertation ..........................................................19 LITERATURE REVIEW ........................................................................................21 Solid Waste Management...................................................................................22 Historical Background ..........................................................................................22 Solid Waste: Definitions .......................................................................................32 Concluding Remarks.............................................................................................35 Solid Waste Management in LMIC: Key Features .........................................38 Urbanisation in LMIC: Economic and Ecological Issues.....................................38 Waste Generation and Characteristics ..................................................................42 Institutional and Managerial Framework..............................................................45 Financing and Costs Recovery..............................................................................46 Informal Sector and Recycling .............................................................................49
I
Table of Contents
4.6 5. 5.1 5.2 5.3 5.4 5.5 6. 6.1 6.2 6.3 6.4 6.5 6.6
Concluding Remarks.............................................................................................52 Theoretical Principles of ISSWM......................................................................53 Hierarchy Principle ...............................................................................................56 Polluter Pays Principle..........................................................................................58 Effectiveness .........................................................................................................60 Efficiency ..............................................................................................................61 Concluding Remarks.............................................................................................62 Privatisation and Private Sector Participation ................................................64 Globalisation and Liberalisation ...........................................................................64 Deregulation and Regulation ................................................................................67 Privatisation: Academic and Empirical Discussion..............................................68 Privatisation: Advantages and Limitations ...........................................................70 Prerequisites for PSP.............................................................................................75 Analysis and Discussion of PSP Models ..............................................................77 6.6.1 6.6.2 6.6.3 6.6.4 6.6.5 Public-Private Partnerships......................................................................79 Contracting-out ........................................................................................81 Franchise..................................................................................................87 Concession ...............................................................................................89 Open Competition....................................................................................92
6.7 7. 7.1 7.2 7.3 7.4 7.5
Concluding Remarks and Discussion ...................................................................94 Goods, Market and Organisational Theory .....................................................98 Characteristics of Public Goods............................................................................98 Provision of Public Goods and Services.............................................................104 Economic Classification of Solid Waste Services..............................................108 Theory of Market Competition ...........................................................................109 Theory of Market Failures ..................................................................................111 7.5.1 7.5.2 Asymmetric Information .......................................................................112 Transaction Costs...................................................................................115 II
Table of Contents
7.6 8. 8.1 8.2 8.3 8.4 8.5 III. 9. 9.1 9.2 9.3 9.4 9.5 9.6
Concluding Remarks and Discussion .................................................................117 International Organisations and Privatisation Policy...................................120 Sovereign Debts ..................................................................................................120 Scope of the Debt and Financial Crises ..............................................................122 World Bank Group and Privatisation Policy ......................................................123 Solid Waste Management Policy ........................................................................126 Concluding Remarks...........................................................................................135 EMPIRICAL EVIDENCE.....................................................................................137 Illustrative Case Studies ...................................................................................138 Overview and Background of the Case Studies..................................................138 Key Features of the Solid Waste Sector in the METAP-RSWMP Region ........139 Illustrative Case Study: Egypt ............................................................................143 Illustrative Case Study: Lebanon ........................................................................150 Illustrative Case Study: Tunisia ..........................................................................154 Discussion of the Main Results...........................................................................159 9.6.1 9.6.2 9.6.3 9.6.4 9.6.5 Hierarchy Principle ................................................................................160 Polluter Pays Principle...........................................................................160 Inter-organisational Relationships .........................................................161 Effectiveness..........................................................................................162 Efficiency...............................................................................................163
10. 10.1
Single Case Study: CESPA ..............................................................................165 Methodological Approach ..................................................................................165 10.1.1 Design of the Case Study Protocol ........................................................166 10.1.2 Conducting the Case Study....................................................................168 10.1.3 Analysing the Case Study ......................................................................173
10.2
National Level.....................................................................................................176 10.2.1 Macroeconomic Framework ..................................................................176 10.2.2 Privatisation Policy ................................................................................178
III
Table of Contents
10.2.3 Legislative Framework ..........................................................................181 10.2.4 Solid Waste Management Issues ...........................................................184 10.2.5 Concluding Remarks and Discussion ....................................................186 10.3 Municipal Level ..................................................................................................189 10.3.1 Tangier: Socio-economic Background ..................................................189 10.3.2 Typological Classification of the Municipality of Tangier ...................191 10.3.3 Solid Waste Management in the Municipal Context.............................192 10.3.4 Key Features of the Contract Specifications with CESPA....................194 10.3.5 Economic Value of the Recycling Market.............................................196 10.4 Analysis and Discussion of the Key Principles ..................................................198 10.4.1 Hierarchy Principle ................................................................................199 10.4.2 Polluter Pays Principle...........................................................................203 10.4.3 Continuity Principle...............................................................................204 10.4.4 Monitoring .............................................................................................206 10.4.5 Principal-Agent Dilemma and Asymmetric Information ......................208 10.4.6 Inter-organisational Relationships .........................................................212 10.4.7 Effectiveness..........................................................................................215 10.4.8 Efficiency...............................................................................................217 10.4.9 Concluding Remarks..............................................................................218 IV. 11. 11.1 11.2 11.3 CONCLUSIONS AND IMPLICATIONS ............................................................221 Conclusion about the Research Questions and Hypotheses .........................222 Objective 1: Contradictions between existing Theories and ISSWM ................222 Objective 2: Strategy of international Donor Organisations ..............................227 Objective 3: Empirical Evidence of PSP ............................................................230 11.3.1 Illustrative Case Studies.........................................................................231 11.3.2 Single Case Study: CESPA ...................................................................235 11.4 11.5 Objective 4: Achieving ISSWM through comprehensive PSP...........................244 Implications and Directions for further Research...............................................250
IV
Table of Contents
11.6
Implications and Directions for Policy and Practice ..........................................251
List of References ................................................................................................................ XI List of Annexes ................................................................................................................. XXI
V
List of Figures
List of Figures
Figure 1: Figure 2: Figure 3: Causes and effects of indiscriminate solid waste management in LMIC...........3 Causes and effects of PSP in LMIC ...................................................................4 Conflict of interest between the hierarchy principle and private sector incentives ............................................................................................................7 Structure of the dissertation..............................................................................16 Delimitation of scope of the dissertation..........................................................19 World population projections, 1950–2050 (Billions).......................................39 Basic Idea of Agency theory: P (Principal) A (Agent)...................................113 Methodological approach: “National level” and “Municipal level” ..............169 Waste composition in Tangier........................................................................200 Direct investment of a sanitary landfill ..........................................................201 Waste quantities – estimated and contractual.................................................210 Effectiveness of CESPA over time.................................................................216
Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12:
VI
List of Tables
List of Tables
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Table 13: Table 14: Table 15: Table 16: Table 17: Table 18: Table 19: Table 20: Table 21: Table 22: Table 23: Table 24: Table 25: Table 26: Hypotheses on privatisation/PSP and resultant problems ................................10 Milestones in the history of SWM ...................................................................30 Definition of waste relating to their types ........................................................34 Percentage of population living in urban areas (with projections for 2015) ....41 Global perspective on solid waste quantities....................................................43 Key data of solid waste management in LMIC................................................48 Limitations of Public-Private Partnerships model to SW elements .................80 Limitations of contracting-out/delegation to SW elements..............................86 Limitations of franchise model to SW elements ..............................................88 Limitations of concession model to some SW elements ..................................90 Limitations of open competition model to SW elements.................................93 International organisations and their programmes regarding SWM ..............135 Overview of PSP in SWM in Egypt ...............................................................145 Fees charged per month to different beneficiaries .........................................146 Strengths and weaknesses of contracting-out in Egypt ..................................149 Strengths and weaknesses of contracting-out in Lebanon..............................153 Key data of the transfer stations .....................................................................155 Landfill Jebel Chekir ......................................................................................156 Strengths and weaknesses of contracting-out in Tunisia................................158 Case study tactics for four design tests...........................................................167 Case study analysis.........................................................................................174 Selected macroeconomic indicators ...............................................................177 Moroccan legislation relating to waste management .....................................181 Date of promulgation and subject...................................................................182 Analysis of principles in Moroccan law no. 11-03.........................................187 Analysis of some theoretical principles of law no. 13-03 ..............................187
VII
List of Tables
Table 27: Table 28: Table 29:
Theoretical principles and the legislation of law no. 28-00 ...........................188 Population of Tangier according to the 2004 census......................................190 Typological classification in terms of areas of the housing structure in Tangier. ........................................................................................................................192 Population of the municipality of Tangier including waste generated per year... ........................................................................................................................194 Quantity of recycled materials in [kg/week] from the landfill in Tangier .....197 Description of the services provided, including prices per ton ......................199 Quantitative data of the hierarchy principle in Tangier..................................202 Analysis of qualitative data of the hierarchy principle...................................202 Analysis of polluter pays principle ................................................................203 Control system in the contractual agreement in Tangier................................207 Population of Tangier according to the census 2004 .....................................210 Interpretation of the penalties.........................................................................212 Organisational theory and contract management ...........................................213 Ratios to achieve hierarchy principle .............................................................245 Towards a comprehensive framework of PSP models to achieve ISSWM ...249
Table 30:
Table 31: Table 32: Table 33: Table 34: Table 35: Table 36: Table 37: Table 38: Table 39: Table 40: Table 41:
VIII
Abbreviations
Abbreviations
ADB ANPE A.D. AGBAR BBO B.C. BOO BOT BOOT BTO CBO CDR CEDARE CESPA CP CWG CSCs DBO e.g. ESM Etc. EU FDI GDP GEF GNP GTZ IDRA ICSID IDB IEA IETC IPCC IFC Asian Development Bank National Agency for Environmental Protection (Agence Nationale pour la Protection de l’Environnement) Anno Domini Aguas de Barcelona Buy Build Operate Before Christ Build Operate and Own Build Operate and Transfer Build-own-operate-transfer Build Operate and Transfer Community Based Organisations Council for Development and Reconstruction Centre for Environment & Development for Arab Region and Europe Compania Espanola de Servicios Publicos Auxiliares Community Participation Collaborative Working Group Common Service Councils Design Build and Operate Exempli gratia. (for example) Environmentally sound management Et ectera (and so forth) European Union Foreign Direct Investment Gross Domestic Product Global Environment Facility Gross National Product German Technical Co-operation (Deutsche Gesellschaft für Technische Zusammenarbeit) International Debt Restructuring Agency International Centre for Settlement of Investment Disputes Inter-American Development Bank International Energy Agency International Environmental Technology Centre Intergovernmental Panel on Climate Change International Finance Corporation
IX
Abbreviations
IFI IMF IFI ISSWM LBO LMIC MCD MDG METAP MSWM NAFTA NDMC NGO NIMBY OECD PAHO PMO PPP PRS PSP RSWMP RTO SKAT SW SWM TZS UMP UN UNDP UNEP UNDP UNICEF US UWEP WASH WHO WRI WSSD WSSP
International financial institutions International Monetary Fund International Financial Institutions Integrated Sustainable Solid Waste Management Lease Build Operate Low- and Middle Income Countries Municipal Corporation of Delhi Millennium Development Goals Mediterranean Environmental Technical Assistance Project Municipal Solid Waste Management North American Free Trade Agreement New Delhi Municipal Corporation Non-governmental organisations Not In My Back Yard Organisation for Economic Co-operation and Development Pan American Health Organization Prime Minister 's Office Public Private Partnerships Poverty Reduction Strategy Private Sector Participation Regional Solid Waste Management Project Rehabilitate Transfer Operate Swiss Centre for Development and Cooperation Solid Waste Solid Waste Management Tanzanian shilling Urban Management Programme United Nations United Nations Development Programme United Nations Environmental Programme United Nations Development Programme United Nations Children’s Fund United States Urban Waste Expertise Programme Water Sanitation Hygiene World Health Organisation World Resources Institute World Summit on Sustainable Development Water and Sanitation Programme, UNDP/World Bank
X
1. Background to the Research
I. 1.
1.1
INTRODUCTION Background to the Research
Integrated Sustainable Solid Waste Management in Low- and Middle- Income Countries
The generation of Solid Waste (SW) is inevitable. It was not important in former times but became an issue as soon as people started to settle in communities. Ever since, Solid Waste Management (SWM) has been of great concern to municipal authorities worldwide. In the Middle Ages, badly managed waste was responsible for millions of deaths in Europe (see Table 2). In the 18th century, inappropriate waste management was the cause of the outbreak of diseases like the plague and cholera, which claimed more than 380,000 lives in Hamburg (Bilitewski, B. / Härdtle, G. / Marek, K, 1994). Approximately 590 to 880 million tons of methane (CH4) are released into the atmosphere every year. 90 % of the gases generated are due to the decomposition of biomass as a result of indiscriminate waste management, among other causes. Consequently, the ozone layer and the ecosystem are continually being destroyed. In short, today indiscriminate waste management is one of the biggest threats to ecosystems in the world. Cities, often overwhelmed by the continuous influx of new arrivals, have frequently been unable to keep up with the provision of basic services. Between one third and two-thirds of the solid waste generated goes uncollected, piling up on streets and in drains, contributing to flooding and the spread of disease (see Chapter 4.2). In addition, urban and metropolitan domestic and industrial effluents are often released into waterways with little or no treatment (World Bank 2000).1 In order to achieve sustainable development, policy makers in Low- and Middle-income Countries (LMIC) have to cope with the above-mentioned issues. Indiscriminate SWM leads not only to the destruction of the ecosystem, but also to lower economic productivity, and thus to poverty (see Figure 1). Consequently, Integrated Solid Waste Management (ISSWM) is crucial to the urban infrastructure in both “industrialised” countries and LMIC2 as it ensures environmental protection and safeguards human health. Cities are the drivers of economic growth. As countries develop, more national income is produced in urban areas, accounting for 55% of Gross National Product (GNP) in lowincome countries, 73% in middle-income countries and 85% in those of high income (World
Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xviii. Whereas nowadays solid waste is more or less under control in industrialised countries, in LMIC the problem is still crucial.
1 2
1
1. Background to the Research
Bank 1999).3 In LMIC, two-thirds (2/3) of the population live in cities and generate 60% to 70% of the Gross Domestic Product (GDP). Moreover, 80 % of GDP growth in LMIC is expected to come from cities in this decade. There will be 100 “mega cities,” each with a population of more than 5 million inhabitants (see Chapter 4.1).4 Thus, more solid waste will be generated. At present, 30% to 50% of the population of LMIC live in municipalities, generating 75% of the total amount of solid waste (see Chapter 4.2). Rapid urbanisation in LMIC is threatening the environment and urban productivity (see Chapter 4.1).5 For that reason, adequate SWM is urgently required; otherwise economic development will become counterproductive. ISSWM represents one of the outstanding challenges facing municipal authorities in LMIC (World Bank, 1996). Policy makers in LMIC face great difficulties in addressing waste issues due to the lack of sound managerial instruments, planning tools, and last but not least, financial means. These difficulties in turn create major solid waste problems for LMIC, including lack of equipment and/or obsolete equipment, inadequate public funds, the open burning of waste, and so forth. In addition, LMIC also face serious managerial problems, such as superfluous staff, cumbersome procurement, inflexibility, low cost-recovery, inadequate monitoring systems, tight public budgets and non-enforcement of legislation. It is difficult for municipalities to implement changes towards efficiency. The need for investment far outstrips the financial resources available from public budgets. Moreover, most of these countries are highly indebted (see chapter 8.2); as a result, foreign financial aid is always required. Municipalities are not able to cope with the ever-growing waste generated. Accordingly, the challenge for LMIC in this decade is to ensure the sound management of the environmental implications of this growth. The issue of sustainable development6 was discussed for the first time on a very broad level during the Earth Summit in Rio in 1992. In Rio, decision-makers agreed that sustainable SWM is the key to sustainable cities and inevitably to sustainable development. Whereas industrialised countries adopt principles like the hierarchy principle and the polluter pays principle, most LMIC are far behind. In brief, rapid urbanisation, inadequate financial means and indiscriminate waste management in LMIC result in a vicious circle which must be interrupted (see Figure 1).
3
Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xvii.
4 E. Bergmann & H.P.Gatzweiler, 1996; S. Schmitz et al. 5 Cointreau et al. 2000; Bartone et al., 1994, J. Leitmann 1995. 6 Since the Earth Conference in Rio, a certain fundamental change has occurred in the field of SWM. The “throwaway” mentality has been replaced with a focus on the protection of resources. Solid waste management has to be looked at holistically. Because of its characteristics, it is much more costly if the waste collected is entirely disposed of in a landfill than if it is partly recycled and treated.
2
1. Background to the Research
Rapid urbanisation, inadequate financial means
More waste managed indiscriminately, more pollution
Poverty, increase of external debts
Destruction of ecosystem, diseases, less economic growth
Figure 1: Causes and effects of indiscriminate solid waste management in LMIC Recently, the world’s governments committed themselves to achieving the Millennium Development Goals (MDG) (see Chapter 3.1). 7 Solid waste services are widely acknowledged as the principal means through which these goals can be achieved.8 The MDG emphasise poverty alleviation and access to sanitation and health services for all. The MDG have been adopted to ensure environmental sustainability. Within that goal, targets 9 and 11 of the MDG are “to integrate the principles of sustainable development into a country’s policies and programmes and reverse the loss of environmental resources.” Although there are no direct references to solid waste in the specific targets, the MDG call for appropriate environmental considerations as well as social awareness of the problems of waste pickers and other poor people in cities. Moreover, the issue of urban poverty is inextricably linked to waste management in LMIC (see Figure 1). In India, for instance, nearly 1 million9 people find livelihood opportunities by engaging in waste collection and recycling through well-organised but informal systems. If the MDG of poverty alleviation and access to adequate solid waste services are to be achieved, waste management must become one of the chief focus areas, particularly in haphazardly growing urban and metropolitan areas where it remains a low priority for municipalities but high on the agenda of the citizens. Private Sector Participation (PSP) is one paradigm which has clearly shown potential in achieving the above-mentioned goals. Therefore, the question of how SWM could be provided by the private sector by adopting the principles of sustainability is crucial.
7
The Millennium Development Goals identify specific gains that can be made to improve the lives of the world’s poor people. The aim is to reduce poverty while improving health, education, and the environment. These goals were endorsed by 189 countries at the September 2000 U.N. Millennium General Assembly in New York. Kessler, T./Alexander, N., Essential Services, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 229. Gupta, Sanjay K., SME in India, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 1.
8
9
3
1. Background to the Research
1.2
Private Sector Participation in Low- and Middle-Income Countries
Agenda 21 of the United Nations includes objectives that have to be undertaken to create sustainable cities and sustainable development. A long-term financial strategy to implement these goals in LMIC still fails to exist. Starting from the 1990s, one of the proposed solutions is privatisation in general, and PSP in particular. PSP is considered to be means of improving overall economic efficiency, and of reducing the fiscal burden and the external national debt in LMIC (see figure below).
Privatisation, economic growth
Less pressure on the municipal budget, more flexibility
Decrease of external debts
Foreign investment, competition, better service
Figure 2: Causes and effects of PSP in LMIC At the beginning of the 1980s, a shift towards privatisation occurred in OECD countries, in particular in the United States10 and in Great Britain11. The argument for more privatisation is normally based on the belief that profit-seeking and competition are necessary to provide the proper incentives for efficiency and quality. Economists use the standard market theory, also known as Pareto 12 Optimum, to argue in favour of privatisation policies (see Chapter 7.1). In LMIC, however, the arguments for involving privatisation and PSP are different from those in industrialised countries. The involvement of the private sector in LMIC is viewed as a way of reducing government loans, subsidies, and explicit or implicit government guarantees for borrowings (see Figure 2).13 Performance tended to be worse in LMIC where preconditions for successful PSP were not
10 11 12
With the election of Ronald Reagan in 1980 as President of the United States. With the election of Margaret Thatcher in 1979 as Prime Minister of Britain. Vilfredo Federico Damaso Pareto (1848 – 1923) made several important contributions to economics, sociology and moral philosophy. He introduced the concept of Pareto efficiency. In 1893, he was appointed Lecturer in Economics at the University of Lausanne in Switzerland. Since the crisis in 1982, the financing of development in LMIC has become one of the most controversial discussions with regard to the world economy. Another milestone of sovereign debts is the creation of the Bretton Woods Institutions after the Second World War. In actual fact, debts reach a peak as the budgets of many LMIC governments depend on them. (Gélinas, J. B., le Tiers Monde s’autofinancait, Montréal: Ecosociété, 1994, p. 61).
13
4
1. Background to the Research
met. These preconditions were stable macro-economic conditions, broad ownership among stakeholders (not just the government), policies conducive to competition, an existing robust private sector, and administrative capacities to implement the programme (see Chapter 6.5).14 Privatisation/PSP in LMIC has often been part of an adjustment agreement with the World Bank Group (see Chapter 8.3). The motives of privatisation have primarily been that the private sector works more efficiently than the public sector (see also discussion about PSP in Chapter 7); it is hence concluded that economic benefits will arise from privatising public sectors where there is no natural monopoly (Nellis and Kikeri, 1989; Kragh et al, 2000). 15 Another important aspect of the involvement of the private sector in LMIC is the debt issue (see Chapter 8.1 and Chapter 8.2). Most LMIC public budgets depend on external financial aid. Many international credit organisations impose the concept of privatisation to obtain less demand for loans. The World Bank Group is the leading institution in the preparation and support of privatisation programmes, providing advice and loans to cover costs associated with privatisation, and also providing investment loans to cover costs associated with privatisation as well as ones to help restructure private enterprises.16 Privatisation is consequently assimilated into the “corpus conditionality” of the donor community (Adam and Cavendish, 1990). Taking into consideration that 90% of municipal investments in LMIC today come from external aid (World Bank, 1998), the issue of privatisation is becoming inevitable for LMIC. In reality, the donor community imposes the principles of privatisation. It is a ‘conditio sine qua non’ for the continuation of external aid flows.17 Simply put, efficient SWM and privatisation are linked to LMIC.
14
Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 257. Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 253. Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 254. However, the decision to privatise a public service should not be based on ideological considerations but rather on economic merits.
15
16
17
5
2. Research Issues and Hypotheses
2.
Research Issues and Hypotheses
SWM, despite being crucial to any sustainable city, is still neglected by local authorities and by the private sector.18 The importance of SWM to sustainable development and cities is being ignored. 19 Very limited experiments in the field of PSP in solid waste in LMIC have been successfully implemented in this regard (World Bank, 1998). The World Bank Group is one of the few international institutions carrying out research in the field of privatisation in general, and in the field of PSP in SWM (see Chapter 8.4). It has published many surveys, various well-designed guidelines and contract forms for implementing private sector participation in solid waste (Cointreau-Levine et al, 2000 a,b,c). However, a thorough analysis of the natural complexities of solid waste services (collect, transfer station, transport, and landfill management) has yet to be carried out. Thus, the privatisation policy debate is subject to bias. More than 60% of the waste generated in LMIC is generally biodegradable, which makes it more appropriate for aerobic and anaerobic treatment 20 than disposal. What is much more concrete is the contradiction of the hierarchy principle (see Chapter 5.1), where in the case of a landfill concession, for instance, the private sector has no incentive to minimise the waste to be disposed of, since the private enterprise is normally paid according to the amount of waste disposed (see Figure 3). Table 1 summarises some hypotheses regarding privatisation models concerning solid waste elements in LMIC. Do national and local authorities create incentives to enterprises in PSP agreements to follow the waste hierarchy principle and, if so, how? How can the polluter pays principle and the user pays principle be applied in PSP agreements when people living in slum areas in LMIC face enormous difficulties to afford the services rendered? Finally, should a private enterprise go out of business, is the monitoring committee of the municipality capable of proposing alternatives within a short period to guarantee the continuity of the solid waste service?
18
Between 1990 and 2001, the private sector invested US$ 23 billion in LMIC: 68% in telecommunications, 13% in electricity, 8% in roads, and less than 0.1% in SWM. Governments are reluctant to support utilities such as solid waste services. Treatment involves the physical, chemical or biological processing of waste in order to reduce its volume or harmfulness, facilitate its handling, or enhance recovery.
19 20
6
2. Research Issues and Hypotheses
Hi e i r rar r
e ae vat Pi Pri
Figure 3: Conflict of interest between the hierarchy principle and private sector incentives Privatisation and PSP are useful wherever private firms operate in a competitive environment. However, depending on the service, it is not obvious to create competition in any market. Contracts between public authorities and private sectors can sometimes span 15 years or more. Moreover, private firms are not engaged in competition after the bidding procedure and during the contractual period negotiated. Therefore, other criteria than competition are crucial. In effect, SWM services encompass various system elements, such as street sweeping, waste collection, waste treatment, and waste disposal. Is it economically and ecologically sustainable for services such as landfill management, waste collection, or the management of a composting plant to be provided by many different suppliers in the same area? One might argue that it is possible that the privatisation of a monopolistic service like municipal landfill management can be effectively regulated. However, is the regulator likely to obtain accurate information on the real costs and the technical performances of any given private firm? Other issues are displayed in Table 1. Another privatisation issue includes the duration of the contract. Due to the investment required for SWM services (landfill management, composting plant, biogas plant, etc.), PSP contracts are typically written for multiyear periods. As a result, the nature of the contractoragency relationship will principally determine service quality and cost savings, and not the competitive marketplace, as stated in the Standard Market Model. The stronger the contractual terms and conditions, the more complex the service provided, the smaller the role played by market competition becomes in the costs and benefits of privatisation.21 The Standard Market Model, which is the basis for this individualised theory of organisational
21
Sclar, E. D., Economics of privatization, 2000, p. 14.
ch h y P ri n inc ipl e
Minimisation Collection Transport Treatment Landfill
r co cto Se
7
2. Research Issues and Hypotheses
change, actually has no inherent theory on organisational behaviour. It is a powerful theory about the operation of a decentralised system of resource allocation, but has nothing to say about the operation of organisations22 like municipalities and the private sector. Moreover, decisions to contract out usually involve complex transaction costs related to the specification of services, the negotiation of prices, the close monitoring of quality, and the need to anticipate unforeseen contingencies. In such cases, the managerial decision process involves analysing not only the comparative costs of the services rendered but also the transaction costs associated with contract design and monitoring (Williamson, 1996). In such situations, obtaining all the relevant information can be difficult, or may require a considerable amount of time and money. 23 Hence, the question is: are transactions costs taken into account when those advocating privatisation argue that the private sector is more efficient? Another issue is the output of some waste services as this output is very often uncertain. 24 The more uncertain the service environment, the more difficult it is to create a contract with low transaction costs. Where risk is a major factor, it becomes almost impossible for local authorities to avoid paying a risk premium to obtain competent work. The Standard Market Model is essentially a comprehensive and highly formal theory of exchange. However, whether it can be considered to be a theory of continuing relational behaviour between public sector and private enterprises is questionable. PSP advocates believe that the private sector has more people with superior managerial expertise. Nevertheless, it is important to remember that private sector 25 intends private firms, for instance, to provide SWM services, that is, in an area in which they have little experience by definition. The three most important forms of information scarcity in incomplete contracting situations are Principal-Agent 26 problems, adverse selection, 27 and moral hazards.28 In the case of ISSWM, PSP are based on the operation of specific services
22 23 24
Demsetz (1993) cited in Sclar, E. D., Economics of privatization, 2000, p. 15. Sclar, E. D., Economics of privatization, 2000, p. 19. No one can foresee, for instance, the environmental situation of a landfill which has been operated by a private firm after a long-term contract of 20 years. Experiences can include the field of solid waste management and/or the areas and/or the countries to be covered. Principal-agent problems typically arise when one party (the principal) hires another (the agent) to carry out an assignment, but the agent is able to serve its own interest at the apparent expense of the principal because of information asymmetry. Adverse selection is a situation in which the party with inferior information about the market situation acts first in seeking to establish a contractual relationship (Salanié, 1998). Moral hazards refer to potential problems of reduced incentives on the part of the agent to fulfil the goals of the principal.
25 26
27
28
8
2. Research Issues and Hypotheses
for which the public sector remains responsible; consequently, the degree of scrutiny29 has to be very high. Waste elements such as waste collection in the same areas by different private companies will lead to a collision effect (see Table 1 and Annex 8); there will hence be a contradiction of the continuity principle if one private firm goes out business. Some privatisation models do not match some waste elements, such as waste collection franchises.30 In this particular case, however, the fees for waste disposal and waste treatment are not considered. Furthermore, there will be a contradiction with the non-exclusivity principle and public goods theory due to the nature of solid waste (public goods) and the characteristics of the services rendered (non-exclusivity), in the case of non-payment by some beneficiaries. Hence, it is difficult to compare the performance of private firms and municipal management in the field of SWM, since these organisations pursue different goals and since there is little concrete experience in this sector. Private firms are indeed interested in maximising profit, whereas the objectives of municipal management are much more complex. Furthermore, public enterprises have a better chance of remaining inside their production frontiers than private ones (Bhaskar, 1992). Another relevant issue is cost recovery. For instance, in a PSP arrangement like a waste collection franchise where the private firm is collecting the fees from the beneficiaries, what would be the consequences if some beneficiaries cannot pay for the SW service? (see Table 1) Furthermore, in other PSP arrangements, such as landfill concessions31, BOOT32, or BOO 33 , which are normally agreed for many years, what would happen if the private contractor went bankrupt? Would the continuity of the SW service be guaranteed? As mentioned above, LMIC municipal managers lack know-how; thus, could they be expected to replace a private firm to ensure the continuity of the service?
29 30
Nevertheless, scrutiny process is costly in terms of time required and money needed. Collection of fees directly from polluters.
31 Finance and Owner of facilities, long-term contract. 32 BOOT means Build, Own, Operate and Transfer. 33 BOO means Build, Own and Operate.
9
2. Research Issues and Hypotheses
Hypotheses Privatisation: more foreign investment, more economic growth International private sector: high interest of more generation of waste Efficient PSP: competition PSP model: franchise34 Waste element: collection PSP model: contract management Waste element: collection PSP model: concession Waste element: landfill management
Problems • Bankruptcy: problems with “On again” / “Off again” • Bearer of hazards remediation costs • Conflict of interest with hierarchy principle • Long-term contract: no competition, risky • Competition in same areas: collision effect • Non-payment: contradiction of public goods theory • Low rate of cost recovery • Contradiction of polluter pays principle • No incentive for waste minimisation • In case of bankruptcy: contradiction of principle of continuity, • More waste to dispose of: contradiction of hierarchy principle • Bankruptcy: contradiction of principle of continuity • More waste to dispose of: contradiction of hierarchy principle • Non-payment: contradiction of public goods theory • Lack of adequate tariff: Asymmetric Information • Higher cost, contradiction of public goods theory, collision effect • Adequate tariff: Asymmetric Information • Higher cost, contradiction of continuity and of non-exclusivity principle • Lack of adequate tariff: Asymmetric Information • No transfer of facilities to LMIC: contradiction of public goods theory
PSP model: BOOT Waste element: landfill management
PSP model: open competition Waste element: collection PSP model: open competition Waste element: landfill management
PSP model: BOO
Table 1: Hypotheses on privatisation/PSP and resultant problems Finally, on the one hand, there are the concerns of ISSWM: lack of financial means, managerial competence, asymmetry of information, limits of the Standard Market Model by
34 Under a franchise agreement, the government gives a special monopoly privilege to a private firm to supply a particular service.
10
2. Research Issues and Hypotheses
delivering SW services, and so forth. On the other hand, there are PSP models that fit neither into the hierarchy principle, nor the polluter pays principle, or the continuity principle, etc. Few economists (Savas, Adler, Moshe, etc.) who carry out research on PSP in SWM take the ISSWM concept or the socio-economic and environmental realities in LMIC into consideration. Existing theories are inadequate to make PSP compatible with ISSWM principles. As the target is to achieve ISSWM, it is important to combine the well- devised use of PSP with respect to waste hierarchy and to the polluter pays principle.
2.1
Research Aims
This study aims to critically evaluate the theoretical contributions of the literature on privatisation/PSP in the field of SWM and to provide an analysis of the theoretical principles of ISSWM and the theory of public goods, together with market and organisational theory, in order to break new ground with respect to this theory. In pursuing these goals, major contributions in the field of PSP in ISSWM, especially in LMIC, will be analysed while emphasising, extending, and illuminating their contents. The overall goal of this investigation is to appropriate the best PSP model in order to provide SWM in a sustainable manner by examining the hierarchy principle, the polluter pays principle, and the continuity principle. Every effort will be made to focus on conceptual insights. Simply put, the principal objective of this study is to demonstrate theoretically and empirically the economic limitations and incompatibility of some PSP models with the concept of Integrated Sustainable Solid Waste Management (ISSWM) in Low- and Middle Income Countries (LMIC); secondly, this study sets out to design a practicable conceptual framework for the most appropriate model to achieve ISSWM in LMIC. The main objectives deriving from these aims are: 1. To identify controversial research issues between some PSP models and the principles of the ISSWM concept; 2. To assess the various strategies of international donor organisations in the solid waste sector; 3. To gain in-depth knowledge from illustrative case studies and a single case study in order to challenge the existing theories and design an appropriate concept; To design an appropriate conceptual framework for achieving ISSWM based on the results obtained from objectives 1, 2 and 3.
4.
11
2. Research Issues and Hypotheses
2.2
Research Questions
The research questions arising from the main objectives are: Objective 1 is addressed by the following question: What are the main contradictory issues of the existing theories on privatisation and goods theory towards achieving ISSWM in LMIC? One of the gaps in all the research carried out so far is that “waste” is not categorised. Are we concerned with private goods, public goods, pure public goods or collective goods? There is no clear scientific categorisation of the term “waste.” In addition, the services to be rendered, such as collection, transport, and disposal, are treated separately to the service in question. Nevertheless, by looking thoroughly at the product (that is, waste) together with the services required, conflicts between economic interests and sound environmental management arise. For instance, according to the hierarchy principle, there would be no incentive to minimise waste for a private landfill operator as he is paid by the amount of waste disposed of. In a franchise-based waste collection contract, residents failing to pay their fees (and hence being excluded from service) will compromise the whole collection system, even if the majority pays its fees. In reality, waste indiscriminately endangers the entire neighbourhood and not only the premises of non-paying residents. Moreover, the ecological and socio-economic situation abiding in LMIC differs from that in industrialised countries. Very often, unplanned and informal settlements surround cities in LMIC. Most of these informal settlement areas are very densely occupied, and the narrow and winding roads and paths are only accessible by modern vehicles. People with very low incomes, who cannot afford the charges of the services rendered, inhabit these areas. Is every PSP model affordable for any community? Objective 2 is addressed by the following question: What are the strategies of the international donor organisations and what are the economic limitations of the PSP policy towards ISSWM? The World Bank Group is the strongest financial donor in LMIC. It belongs to the few international institutions carrying out research in the field of privatisation in general and in the field of PSP/privatisation in SWM in particular. In line with recent policies, CointreauLevine et al (2000a,b,c) have published many surveys and especially diverse, well-designed guidelines and contract forms for strengthening the implementation of private sector participation in solid waste. Taking into consideration that 90% of municipal investment in LMIC today comes from external aid (World Bank, 1998), both the issue of
12
2. Research Issues and Hypotheses
privatisation/PSP and the World Bank Group strategy are becoming inevitable for these countries. Nevertheless, in comparison to other infrastructure services such as water supply and energy supply, solid waste is not successfully implemented despite its importance to any sustainable city. It is worth noting that US$ 23 billion was invested in LMIC between 1990 and 2001: 68% in telecommunications, 13% in electricity, 8% in roads, but less than 0.1% in the solid waste sector. Is there not enough interest for private investors in this sector? Are policy makers not aware of the importance of ISSWM for sustainable development? Comparisons with other sectors will be made to support the hypothesis posited in the first research question, namely that the category of goods is relevant to PSP. There are various reasons given by international donor organisations for PSP; they include higher efficiency, reduction of national debt, the benefits of more Foreign Direct Investment (FDI), and so forth. Academic discussion in this area is often ideological rather than substantiated by empirical evidence. However, is there any incentive for beneficiaries in LMIC to prevent or minimise the generation of waste according to the hierarchy principle when international donors support local waste services? In other words: is there a contradiction between the polluter pays principle and foreign aid? Objective 3 is addressed by the following question: What is the empirical evidence of the PSP models and the ISSWM concept? In order to challenge existing theories, illustrative case studies and a single case study will be analysed in-depth. The single case study has been chosen to answer the first research question, not only theoretically but also with empirical evidence as specified in the principal aim of this investigation. Proponents of the PSP model advocate theory building based on the notions of service effectiveness and efficiency. Therefore, the case study will answer those questions relating in particular to the hierarchy principle and the “Principal-Agent” dilemma. One waste element, “waste collection,” and one PSP model, “Contracting-out,” will be chosen to narrow the scope of the investigation and to build up comprehensive knowledge. Objective 4 is addressed by the following question: How can ISSWM be achieved in LMIC through PSP without contradiction? Having demonstrated the shortcomings of existing theoretical principles in the first section and having gained solid empirical evidence from both national and international strategy and the analysis of illustrative case studies and the single case study, a conceptual framework will be designed. The result of this investigation will be the best appropriate PSP model for each specific waste element. The parameters for the ISSWM concept, including service
13
2. Research Issues and Hypotheses
efficiency, the hierarchy principle, the polluter pays principle, and the principle of continuity will be considered holistically rather than separately. The findings of this research will be useful if implemented by decision-makers, national authorities in LMIC, private investors, and international donor organisations.
2.3
Justification for the Research
In the coming decades, as much as 80% of population growth and most economic growth in LMIC will occur in cities (see Chapter 4.1). In this context of rapid urbanisation, accompanied by pervasive globalisation, the outstanding challenges that public authorities and municipal managers face have increased in both scope and complexity due to a lack of resources, continuing urban migration, deteriorating infrastructure, and the need to tap a solid economic and financial base while maintaining the incentives necessary to attract investment and generate employmen. 35 This dissertation is also relevant to both international enterprises with strong financial and technical backgrounds and national smalland medium enterprises. It is also justified by the relative neglect of privatisation in the field of SWM in LMIC. Finally, it addresses decision-makers, local LMIC authorities, and international donor organisations. Its findings will prove useful to the potential applications undertaken by these stakeholders. There is an increasing understanding worldwide that the private sector is a competent and efficient partner and that there are several advantages to private sector involvement in ISSWM. The role of the public sector has shifted increasingly. It is often stated that PSP could be useful in delivering those services that are provided least efficiently by the public sector; or activities where new technologies are needed (such as solid waste treatment, disposal, or recycling). Strong evidence provided by both the illustrative case studies (see Chapter 9) and the single case study (see Chapter 10) will further clarify this statement. Other arguments include tight municipal budgets. Nonetheless, by outsourcing the SW services, public authorities have to bear the costs of the service provided by the private sector. How can one explain that some municipal authorities are in favour of PSP? This dissertation will address this issue with strong empirical evidence. In sum, the following arguments justify PSP: SWM is one of the largest, and often the largest, municipal expenditure in LMIC, but 1. benefits from these expenditures are often uncertain and are not maximised;
35
Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI Development Studies , 2001, p. vii.
14
2. Research Issues and Hypotheses
2. 3.
4.
Inadequate SWM is negatively impacting public health, the environment and the national economy in LMIC; Enhanced waste management is possible and affordable, and can simultaneously address national objectives for sustainable development, public health, environmental quality and ultimately meet the MDG; All citizens are indiscriminately and negatively affected by inadequate SWM.
2.4
Research Procedure
This dissertation seeks to identify controversial issues existing between some PSP models and the ISSWM concept neglected in academic discussion to date, and to present a sustainable one. This study is divided into four main sections, as shown in Figure 4. Section I introduces the dissertation by addressing among others the background to the research, the research aims, the research questions, the research procedure, etc. Section II is devoted to a literature review regarding ISSWM, privatisation, PSP, goods theory, market theory and organisational theory. However, it not only surveys the most relevant literature, but instead clarifies some key issues. This literature survey demonstrates the limitations of PSP models in theory. In effect, this section opens with the historical background to SWM (see Chapter 3.1). The first attempts to theorise PSP are discussed and their limitations or failures are underlined. Subsequently, several key definitions and preliminaries will be provided (see Chapter 3.2), thereby further clarifying various key ideas and assumptions. Furthermore, key characteristics of SWM in LMIC will be set out (see Chapter 4). These characteristics are relevant to further discussions in Chapters 6 and 7. The concept of ISSWM is detailed in both its historical background and its core principles. These theoretical principles are discussed in relation to PSP in Chapter 6. Evidence will then be furnished to demonstrate the limitations of PSP. Chapter 6.1 and Chapter 6.2 highlight the issue of liberalisation; regulation and deregulation are considered briefly prior to discussing privatisation/PSP, since these notions occur in the privatisation debate and are sometimes confused. Chapter 7 embraces market and organisational theory to challenge the Standard Market Model in providing public goods in general and SW services in particular. Chapter 7.1 considers theoretical issues on goods theory. Chapter 8 addresses the empirical theory of various international organisations, in particular that of the World Bank Group, as it is one of several prestigious international organisations to have financed and carried out research in the field of SWM in LMIC. The privatisation concepts of these organisations
15
2. Research Issues and Hypotheses
will be subject to careful analysis, in particular with regard to the compatibility of the concept of ISSWM with PSP models.
Introduction
T H E O R Y
ISSWM
{
Privatisation and PSP Goods and Market Theory
Strategy of International Organisations
E M P I R I C A L
METAP illustrative Case Studies CESPA Case study
Waste Collection
Contracting-out
CONCEPTUAL FRAMEWORK
Figure 4: Structure of the dissertation Section III is devoted to empirical illustration. Since this study has a clear conceptual approach, some examples of tangible PSP experiences gained in the Mediterranean Environmental Technical Assistance Project (METAP) Regional Solid Waste Management Project (RSWMP) are not presented until Chapter 9. This project, financed by the World Bank Group and the European Union Fund, has been developed with the national governments of the region to assist in catalysing appropriate responses to the challenge of effectively managing solid waste. It is worth noting that these examples are both qualitatively and quantitatively discussed in the context of the theoretical principles discussed in Chapter 9.6. The shortcomings of concrete examples are shown and elements for ISSWM are derived from these examples. These elements will be ultimately used to
16
2. Research Issues and Hypotheses
establish my own ISSWM concept in Section IV, and to analyse and interpret the singlecase study in Morocco. Furthermore, this empirical section provides a comprehensive analysis of a single case study in Chapter 10 (see Figure 4). This chapter takes a closer look at one key element of solid waste, namely solid waste collection, and at one single PSP model, namely contracting-out. This will allow for a deeper discussion in Chapter 10.4. Finally, Section IV delineates a conceptual approach. Chapter 11 attempts to respond to each research question and hypotheses. A conceptual approach is presented, including what the answers provided imply for policy-making and practice in this chapter. This investigation concludes with an agenda for further research. The core of my research includes the incentives in any PSP contract for private entrepreneurs to achieve ISSWM. A concept without any contradiction between PSP and ISSWM will be developed, thus creating a system without conflicts of interest (see Figure 1). This concept will be based on the theoretical background to important principles derived from both the concept of PSP and the ISSWM concept.
2.5
Ethical Considerations
The issue of ethics is considered in both the theoretical and empirical parts of this investigation. Ethics are a matter of principled sensitivity towards the rights of others. Ethical issues arise not merely in quantitative research, but also in qualitative research; neither is unencumbered by ethical dilemmas. There are no one-size-fits-all answers to many ethical issues encountered in qualitative research. In effect, there is no right or wrong answer. Nonetheless, this issue has to be taken into account. Bulmer (2001) identified the following ethical issues, to which due heed will be paid in this investigation: • What the respondent is told about the auspices and purpose of the study? • What the conditions are under which the names and addresses of respondents are used, and how the data will be published? • How the anonymity of individual respondents will be preserved, and how the confidentiality of the final dataset will be safeguarded?36 As far as this investigation is concerned, the research presented here is ethically sound. One key ethical principle observed here is that while truthfulness is good, respect for human
36 Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 53.
17
2. Research Issues and Hypotheses
dignity is better, even if, in the extreme case, respecting human dignity leaves one ignorant of human nature.37 Such ethical considerations impinge upon all scientific research, but they impinge particularly sharply upon research in the human sciences, where people are studying other people. The social researcher faced with potential ethical problems while conducting research may have to resort to guidance provided by codes of ethical conduct and to ethical guidelines provided by professional associations.38 Many principles have been cited to justify taking an ethical view of the activity of social research. One general principle is the need to strike a balance between the desire to expose the hidden processes at work in modern society on the one hand, and to protect the privacy of individuals and groups, on the other, and to recognise that there are private spheres into which the social scientist may not, and perhaps even should not, penetrate.39 Accordingly, questionnaires will not include any confidential information. Furthermore, Bulmer identified a second very important principle widely considered the key player of ethical behaviour in research, namely the doctrine of informed consent. This grants persons invited to participate in social research activities the freedom to choose to take part or to refuse, having been given all information concerning the nature and purpose of the research, including any risks which they might be exposed to, and the arrangements made for maintaining the confidentiality of the data, and so on.40 According to Bulmer, a continuing concern in social research has been not merely with the conditions under which data is collected, but also with how it is stored and disseminated. Therefore, the participants in the questionnaires or interviews conducted here were assured that this data is needed for the purposes of improving PSP, by contracting-out the solid waste services, and that the individual will not be identifiable in subsequent analysis. Finally, there has been considerable debate about the ethical implications of harm in social research, involving both harm to those being researched and harm to those conducting research.41 Deceit and lying in the course of research is another issue. As a general principle, the use of deception in research has been condemned, and concealing the fact that one is a researcher has attracted criticism. Finally, the views presented in this investigation are solely the author’s and do not represent
37 Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 45. 38 Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 47.
39
Barnes, 1979: 13-24 cited in Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 49. Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p.49. Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p.51.
40 41
18
2. Research Issues and Hypotheses
the views of the institutions from which the case studies were obtained. All information shown on any map in this research (such as boundaries, colours, denominations, and so forth) does not imply any judgment concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
2.6
Delimitations of Scope of this Dissertation
This investigation starts out from the broad area occupied by two principal notions – privatisation and SWM – and refines these continuously while considering all relevant aspects. It is worth noting that the answers to the research questions combined both key theoretical elements and profoundly empirical findings. Figure 5 delineates the scope of this study.
Privatisation in Low- and Middle Income Countries Privatisation Municipal SWM Mashreq / Maghred PSP Morocco Contractingout SW Collection SWM
Figure 5: Delimitation of scope of the dissertation LMIC will be defined in terms of their economic levels (see Chapter 4.1). This study focuses on privatisation in terms of financial policy; legislation and technical SWM issues will not play a major role. Moreover, it focuses on solid waste from private households due to the high percentage of such waste compared to commercial and industrial waste. The concept of integrated SWM will also be considered in this context. Large-scale privatisation (landfill, transfer station, high level transport companies, etc.) is discussed on account of the significant investment required. Natural disasters and other emergency situations tend to generate large quantities of debris that is difficult to handle under conventional waste management arrangements. Besides, it is also important to continue to manage regular municipal waste under emergency conditions.
19
2. Research Issues and Hypotheses
However, such cases of “force majeure” are not examined here. For the purposes of a clear-cut discussion, various key SWM terms (collection, transfer, recycling, resource recovery) refer exclusively to the disposal of municipal solid waste. By definition, municipal solid waste includes solid waste from households, non-hazardous solid (not sludge or semisolid) waste from industrial and commercial establishments, waste from institutions (including non-pathogenic waste from hospitals), market waste, yard waste, and street sweepings (see Chapter 3.2). In this study, construction and demolition debris is not included in the definition of municipal solid waste, because it could dramatically deform waste generation rates and waste composition, particularly in LMIC.
20
3. Solid Waste Management
II.
LITERATURE REVIEW
Introduction
T H E O R Y
ISSWM
{
Privatisation and PSP Goods and Market Theory
Strategy of International Organisations
E M P I R I C A L
METAP illustrative Case Studies CESPA Case study
Waste Collection
Contracting-out
CONCEPTUAL FRAMEWORK
The following chapters will take a closer look at key Solid Waste (SW) issues, privatisation and PSP, Goods and Market theory and finally the strategy of international organisations. Chapter 3.1 will consider its historical background. Parallels will be drawn between the SW situation in European cities in former times and the present situation of LMIC. PSP experiences in European municipalities will be underlined. This will not amount to a literature survey of SWM issues, but instead this chapter will attempt to show the limitations of some PSP models with regard to the principles of ISSWM used in the past. Furthermore, the definitions of Solid Waste will be discussed in the context of ISSWM. Chapter 4 will consider the key features of SWM in LMIC. Chapter 5 will address the theoretical principles of sustainability in the context of solid waste. Chapter 6 will discuss the issue of privatisation and PSP in rendering SW services. Chapter 7 will focus on Goods, Market and Organisational theory. Finally, Chapter 8 which is considered in this dissertation as empirical theory will highlight the privatisation policy of international organisations especially the World Bank Group. Each chapter concludes with observations relevant to the overall conclusion.
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3.
3.1
Solid Waste Management
Historical Background
To assess the recent issues of SWM in Low- and Middle Income Countries (LMIC) and to learn about appropriate management tools, it is imperative to consider the situation worldwide, in particular before the nineteenth century. Several comprehensive historical studies on solid waste issues in the European and Northern American context have been furnished by various authors, such as Savas, Silguy, Tchobanoglous, Bilitewski, Härdtle, Marek, Wittmaier, and others. The history of SWM is inevitably linked to urban history. Prior to Neolithic times (circa 10,000 B.C.), when the human race was mostly nomadic, the natural decomposition of waste was obvious. Waste became an issue as humans began to congregate in villages and communities and as the accumulation of waste became a consequence of life. The evergrowing municipalities in Europe and in Northern America made necessary the elaboration of appropriate systems to properly manage solid waste. In effect, urbanisation stopped the natural cycle of SWM. As a consequence, municipal managers and citizens have struggled with the problem of solid waste for six thousand years. Between 1347 and 1352, about 25 million people (circa 30% of the entire population) died in Europe from disease (see Table 2).42 Houses used to be swept and the contents of waste bins were simply flung into the streets. Until 1950, in some French cities like Marseilles, solid waste and faecal sludge were evacuated through the windows instead of being brought to the sidewalk every morning.43 Paris is known under the term Lutèce (from Latin “Lutum”) meaning sludge. People learned to dispose of the waste generated outside their own settlement as early as 8,000 to 9,000 B.C. The first experience with waste collection was made in ancient European and Asian cities. The first regulations dealing with waste management in general and with the sweeping of streets in particular were set up in Athens (320 B.C.).44 Physicians, like the Greek scholar Hippocrates (around 400 B.C.) and the Arab Avicenna (Ibn Sina, 1,000 A.D.), were the first to link epidemics to contaminated water. Therefore, Roman civilisation presents some positive indicators of the modern approach to SWM. In Crete, for instance, specific places had been set aside for the disposal of certain organic waste by 1500
Bilitewski, B/Härdtle, G/Marek, K: Abfallwirtschaft, Springer Verlag: Berlin/Heidelberg, 1994 cited in Wittmaier, M., Straßenreinigung, Neuruppin: TK Verlag Karl Thomé-Kozmiensky, 2003, p. 71. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 20. Tchobanoglous, et al., Solid waste, cited in Bilitewski, B./Härdtle, G./Marek, K., Waste Management, Heidelberg:Springer, 1994, p. 1.
42
43 44
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B.C.; such waste was subsequently reused as compost.45 The City of Athens can be cited as a good example in Europe. Indeed, solid waste was probably better organised there than in any other city prior to the nineteenth century. Nevertheless, the Athenean waste management system had several shortcomings; among others, it was unable to overcome the issue of how to dispose of a very large quantity of waste. Municipal waste collection was hence confined to state-sponsored events.46 Legally, property owners were responsible for the cleanliness of streets fronting their property, although this seems to have been generally ignored. However, independent scavengers collected a significant percentage of residential waste for resale as fertiliser, and wealthier residents were able to use their own slaves to perform any necessary further removal.47 In short, street sweeping can be traced back to the fifteenth century in many European cities, for instance in Bremen in 1450. From an early stage, municipal managers and authorities tried to contend with the waste issue with new regulations, legislation, decrees, fines, and even with prison sentences. However, if legislation and fines alone could not produce sustainable solutions to perennial waste problems, such decrees resulted in the first contracting-out measures. High-income residents hired poor ones or, as mentioned above, affluent residents used their slaves to carry out this task. Thus, the first municipal dumps were organised by the Greeks in circa 500 B.C.; at approximately this time, the Council of Athens began to enforce a regulation according to which scavengers were required to dump waste no less than one mile from the city walls. In 320 B.C., Athens promulgated the first known edict which forbade the throwing of refuse into the streets.48 In the same context, as early as 1243, the magistrates of Avignon (France) decreed that no one should throw any waste into the street, on the pain of a fine of two shillings per offence, of which the accuser would receive one-third. In the Netherlands, dumping waste in canals was first prohibited by guild bylaws, so that breweries would been assured a supply of clean water.49 In 1296, Siena officially employed a sow with four young pigs to clean the campo after every market; by 1382 six pigs had the official duty of cleaning the streets, which can be considered to be the first step to waste recycling. Venice and Florence also raised pigs especially for scavenging, while in Bologna the Ospitalieri di Sant’ Antonio had the privilege of feeding one hundred pigs in the streets.
45 46
Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 12. These events include the removal of the bodies of animals and men after the games and the cleansing of streets after parades as well as the regular cleaning of principal streets (the latter by decree of Caesar, 47 B.C (Savas, 1977, p. 13). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 13. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 13. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 17.
47 48 49
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Finally, in circa 1320, Paris took the first sanitary measures, which included street paving, waste canalisation (open sewers) and, of course, organised scavenging.50 In the United States of America, waste collection systems were established in various cities in the seventeenth century. Prior to 1691, according to official legislation, citizens were required to load their own waste onto waste carts, but could then outsource this task. However, in 1676, New York residents had a foretaste of what was to become a bane of urban existence, namely municipal strikes, when the cart men refused to move waste from the streets to protest what they considered a too low rate of pay.51 As mentioned above, Paris was not doing any better in 1666. In that year, given that the area under the Pont Marie was a favourite dumping ground, the city magistrate had to order local residents to remove the waste to a dumpsite because the Seine was no longer able to move freely under the arches. 52 Each Paris citizen generated 200g of SW in 1872, whereas production reached 700g per inhabitant in 1922 and 1.6 kg in 1994.53 Moreover, offenders were punishable by severe sanctions, including prison terms with limited access to bread and water. These sanctions had little effect and failed to curb reoffending. 54 Under the pressure of public opinion, the Parisian authorities required that the coercion of sweeping should be converted into a municipal tax that every owner was obliged to pay. This requirement was accepted and accordingly a specific solid waste tax was introduced in 1883. Gradually, individuals were relieved from street cleaning duties.55 On 24 November 1883, the prefect Eugène Poubelle published a decree obliging all house owners and landlords to provide their tenants with special bins for the purpose of waste disposal. Three different bins were necessary: one for organic waste, one for paper, and one for glass, earthenware, and so forth.56 In 1799, a regulation enacted by the municipal police obliged any owner or tenant of a house in Paris to sweep the public street in front of their house every day. 57 In 1782, J.-H. Ronesse 58 noticed that a number of edicts, decrees, and ordinances had been published in the last three centuries and that those laws had never been
50 51 52 53 54 55 56 57 58
Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 15. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 18. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 17. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 14. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 23. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 29. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 31. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 27. In his book „Vues sur la propreté de Paris, 1782“.
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enforced. L.-S. Mercier59 lamented the individualist mindset of Parisians.60 At the beginning of the twentieth century, waste collection and waste transport in Paris was undertaken on a daily basis by a private enterprise. In early 1662, Tokyo systematised its solid waste collection, contracted out the collection and the disposal of household waste, and provided a dumping ground. It is important to recognise the importance of regulations at the beginning of solid waste history, specifically as an economic instrument to enforce the so-called polluter pays principle or the hierarchy principle. Accordingly, the Roman emperor Vespian imposed a waste tax in 69-79 A.D. to prevent waste accumulating in public places. Several provincial English towns were providing collection and the fencing off of dumps by the end of the seventeenth century. In 1690, the Mayor of Portsmouth was fined for throwing garbage into the streets of his own town. It is reputed that Shakespeare’s61 father paid a fine in 1552 for depositing filth in a public street.62 An English law of 1714 required every municipality to engage a scavenger. By the end of the Middle Ages, general public awareness of waste as a health hazard had become quite common. 63 However, the knowledge and concomitant know-how gathered during that period about the importance of proper waste management has since been lost over time in Europe. One of the reasons cited is the disappearance of the Roman Empire and subsequent migration. As mentioned earlier, legislation and scavenging proved not to be the sustainable solution to the high quantity of waste generated. The main reason was the lack of inadequate alternatives to available methods of collection and disposal. After all, except for those living in heavily polluted areas, public opinion was very much against such measures.64
59
Louis-Sébastien Mercier (1740 - 1814), one of the first French writers of drames bourgeois. Mercier also wrote a work of prophetic imagination “Le Tableau de Paris”. Mercier was strongly influenced by Jean-Jacques Rousseau 's views of society, rejecting the prevalent belief in progress. As a moderate member of the Convention, he opposed the death penalty for Louis XVI. (Encyclopædia Britannica, 1994-1999). Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 27. William Shakespeare (1564 – 1616), English poet, dramatist, and actor, often called the English national poet and considered by many to be the greatest dramatist of all time (Encyclopædia Britannica, 2007). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 16. In 1462, the Aldermen in Amiens decided to hire certain men with horses and dung carts to remove the filth from the streets daily (Savas, 1977). People were asking themselves if the poor man should be deprived of his pigs to make way for the horses of the wealthy or if the poor man should be forced to spend his time carting garbage in order that lords and ladies not soil their costly garments (Savas, 1977, p. 16).
60 61
62 63
64
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3. Solid Waste Management
During the eighteenth century, Europe65 showed little of the change that was to characterise the next century.66 The nineteenth century marks the beginning of all modern concepts of solid waste collection and disposal. It brought a radical change in the history of humanity in terms of proper SWM. Until the publication of the works of Pasteur67, proving the existence of the microbe, hygienists adopted empirical methodology. Various nineteenth-century scientists, including Robert Koch68 and Ignaz Semmelweiß69, and engineers like William Lindle, 70 made pathbreaking contributions to elucidating the link 71 between SWM and hygiene (see Table 2). Gradually, European cities started to introduce solid waste collection and organised street sweeping. In this context, as mentioned above, the French Prefect Eugène Poubelle 72 introduced waste containers in Paris. 73 Table 2 presents the most important milestones in the history of SWM.
65
In comparison, in the United States the native population had not built any cities with populations much over 10,000. Mesoamerican civilizations, on the other hand, had maintained complex urban systems, including sophisticated drainage and waste collection, for at least a thousand years (Savas, 1977, p. 17). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 19. Louis Pasteur (1822-1895) French chemist and microbiologist. Pasteur has proved that micro organisms cause fermentation and disease. He was the first to use vaccines for rabies, anthrax, and chicken cholera. Louis Pasteur brought about a veritable revolution in the 19th-century scientific method (Encyclopædia Britannica, 1994-1999). Robert Heinrich Hermann Koch (1843 - 1910), German physician, one of the founders of the science of bacteriology, who discovered the tubercle bacillus (1882) and the cholera bacillus (1883). He cultivated the anthrax organisms in suitable media on microscope slides, demonstrated their growth into long filaments, and discovered the formation within them of oval, translucent bodies--dormant spores. He won the Nobel Prize for Physiology or Medicine in 1905 (Encyclopædia Britannica, 1994-1999). Ignaz Philipp Semmelweis (1818 – 1865), German-Hungarian physician who discovered the cause of puerperal ("childbed") fever and introduced antisepsis into medical practice. In 1861 Semmelweis published his principal work, Die Ätiologie, der Begriff und die Prophylaxis des Kindbettfiebers ("Etiology, Understanding and Preventing of Childbed Fever"). His influence on the development of knowledge and control of infection was hailed by Joseph Lister, the father of modern antisepsis (Encyclopædia Britannica, 1994-1999). William Lindley (1808 - 1900), British civil engineer who helped renovate the German city of Hamburg after a major fire. Lindley settled in Hamburg as engineer in chief to the Hamburg-Bergedorf Railway (1838-60). He constructed a system of sewers, waterworks, gasworks, and public baths and washhouses, and he planned extensions to the port. He constructed a sewerage system for Frankfurt am Main that was widely imitated in Europe and America (Encyclopædia Britannica, 1994-1999). Although the link was discovered, 9000 people died in Hamburg in 1892 through cholera disease (Wittmaier, M., Straßenreinigung, Neuruppin: TK Verlag Karl Thomé-Kozmiensky, 2003, p. 71). Eugene Poubelle (1831 – 1907), Eugene Poubelle became Prefect of the Seine in 1884 and created the final laws governing the garbage collection and street cleaning, building on the earlier regulations about sweeping in front of the building and not throwing anything out the window. He defined the garbage can as having a maximum of 120 liters and the time of passage of the tipcarts. Poubelle organized garbage collection in this manner to allow for the household waste to be composted at Saint Ouen. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 14.
66 67
68
69
70
71
72
73
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3. Solid Waste Management
In England, the Sanitary Act of 1845, and especially the Public Health Act of 1875, had a radical effect on the general level of sanitation, notably in working-class urban areas; they included provisions for the creation of “united districts” for “specified sanitary purposes”. Tokyo required each family to furnish a waste box in 1807, and began municipal waste collection in 1900. In New York City, George E. Waring was appointed commissioner of the Department of Street Cleaning in 1894 and, untroubled by political considerations, proceeded to reorganise and clean up the department. The organic waste fraction was sold to farmers as fertilisers, and some markets could be found for other waste. Until 1884, Boston sold all its waste to New England farmers.74 Although the idea of burning waste had been around for some time, the invention of the incinerator (in England in 1874) was a marked step forward in the clean disposal of solid waste. The search for technological solutions became relatively more intensive in the twentieth century. Waste grinding was invented in the 1920s and compactor trucks in the 30s (see Table 2). From 1913 to 1915, Chicago had a privately owned tunnel system which removed building debris, ashes, and delivered freight.75 In order to minimise environmental problems with dumpsites and especially to protect water resources, two Englishmen, Call and Dawed, introduced the concept of sanitary landfilling which was first experimented with in the city of Bradford in 1930.76 In London, the first incinerator was constructed in 1876, whereas in Hamburg/Germany77 the first one was constructed in 1893. Comprehensive management tools were also being introduced into the solid waste industry. Improved procedures were being employed to schedule work crews, route waste collection vehicles, and to locate disposal facilities. Major technological advances were taking place in the recovery and recycling of materials.78 Nevertheless, it took time before a real breakthrough in the solid waste industry occurred. For instance, a team of mules collected solid waste in Los Angeles until 1933; and as recently as 1941, several New Yorkers were prosecuted for keeping hogs.79 The nature of waste was also an issue from the beginning. Is it about “Pure Public Goods”
74 75 76 77
Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 21. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 22. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 52. Other relevant milestones in solid waste management in Germany are the following: In 1972, the Waste Disposal Act in Germany was published; in 1975, the first waste management programme of the German Government took place with the introduction of technical environmental studies into the curriculum of the Technical University of Berlin; finally, the first German Institute for Technical Environmental Protection in Berlin was created in 1977. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 22. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 22.
78 79
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or “Public Goods” or “Private Goods”? The question is considerable. In 1506, Louis XII decided that the crown should be in charge of waste collection in the capital, including its evacuation. 80 The nineteenth century is commonly associated with “laissez-faire” 81 capitalism. Ever since, this has transformed society and created unprecedented levels of wealth, and also produced severe environmental destabilisation (Sclar, 2000). In her discussion of the century of modern public goods theory or so-called “municipal socialism,” Beatrice Webb82 has observed: “Neither a pure water supply nor the collective disposal of garbage could be left to private conscience or attended to only if they could be provided for a profit”. Public authorities recognised that the management of solid waste was their responsibility instead of leaving it to particular initiatives. Savas (1977) has affirmed that despite repeated attempts to legislate improvement, “almost every aspect of sanitary conditions was worse in 1825 than it had been at the end of the century… Instead of developing an effective garbage collection system, the City alternated between private contractors and a city-operated program, neither of which worked satisfactorily. A major part of the scavenging came to be done by the ever-present hogs.”83 This phenomenon called “On-again / Off-again” - will be addressed later in this dissertation (see Chapter 6.6.2). Europe was not the only continent to take first steps towards modern waste management in the Middle Ages. Nor was it the only continent where citizens faced tough sanitary problems especially due to badly managed waste. Prior to the nineteenth century, in waste terms, the world could not be divided into industrialised countries with comprehensive waste management, on the one hand, and LMIC with vulnerable sanitation systems, on the other. Good examples and bad examples of waste management outside Europe will be discussed in the following. According to archaeological surveys, the city of Haiderabad in India used appropriate bins as waste recipients over 6500 years ago. Sewerage systems made of ceramic materials were constructed in Turkey 8000 years ago. In Jerusalem, solid
80 81
Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 23. laissez-faire (French: "allow to do"), policy based on a minimum of governmental interference in the economic affairs of individuals and society. The policy of laissez-faire received strong support in classical economics under the influence of Adam Smith. It was a political as well as an economic doctrine. In the late 19th century the acute changes caused by industrial growth and the adoption of mass-production techniques proved the laissez-faire doctrine insufficient as a guiding philosophy. (Encyclopædia Britannica 1994-1999). Martha Beatrice WEBB (1858 – 1943), English Socialist economists, early members of the Fabian Society, and cofounders of the London School of Economics and Political Science. She pioneered in social and economic reforms as well as distinguished historians. She deeply affected social thought and institutions in England. In 1891 she published, “The Co-operative Movement in Great Britain”, which later became a classic. (Encyclopædia Britannica 1994-1999). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 20.
82
83
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waste was systematically composted and incinerated 2000 years ago.84 A Chinese “Record of Institutions” dating from around the second century B.C. mentions sanitary police charged with the removal of all carcasses, whether of men or animals, and traffic police whose duties, among others, was to organise street sweeping in the major cities. The Indus Valley city of Mahenjo-Daro, founded no later than 2500 B.C., represents a very significant conceptual leap in terms of waste management. Here, a well-designed drainage system was devised early on: each house had waste chutes and waste containers were provided at the foot of each building at street level; also, waste containers were placed at convenient locations in the streets from which scavengers, who were presumably under some central authority, removed the waste. 85 In the Egyptian town of Herakopolis (circa 2100 B.C.), waste in low-income districts was treated pretty much as of old in that organic waste was either left on the floor or dumped just outside the dwellings, while inorganic waste was put into nearby depressions, perhaps to level off the ground. 86 In the high-income districts, however, efforts were made to remove all kinds of waste, organic and inorganic, to locations outside the living and/or communal areas which usually meant into the river.87 Mosaic law (circa 1300 B.C.) specifically refers to public sanitary practices; everyone was expected to act as their own scavenger - to remove their own waste and bury it in the earth.88 In Chinese cities, by 900 A.D., the guilds provided street cleaning services (waste collection) for their own streets. By 1250 A.D., in the city of Hang Chow, the streets were cleansed by public authorities that had the waste removed to the countryside by boat, and once a year the prefecture undertook a thorough cleansing of the streets and a general cleaning out of the canals.89 Table 2 displays some milestones in the history of SWM.
84 85 86 87 88 89
Wittmaier, M., Straßenreinigung, Neuruppin: TK Verlag Karl Thomé-Kozmiensky, 2003, p. 66. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 11. This can be counted as the first experience of waste segregation in this country. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 12. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 1. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 14.
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Milestones 10,000 B.C. 2100 B.C. 81-96 A.D. 69-79 A.D. 6th to 14th 15th century 19th Century
Key Features Neolithic evolution: decomposition of organic waste on site First experience of waste segregation in Egypt Emperor Domitian (Roman Emperor) ordered pest control due to a lack of hygiene, proliferation of rats in the City Emperor Vespian imposed a urine tax to avoid urinals in public places Epidemics claim the lives of one-third of the population (25 million) in a few short years90 First paving of streets, introduction of garbage cans Creation of the Public Health Act in England 9 cholera epidemics claimed 380,000 lives in Prussia91 Construction of the first incinerators in England in 1876
1843 1850 to 1890
Introduction of the first mechanical street sweeping machine Breakthrough in waste management: scientists (Ignaz Semmelweiß, Louis Pasteur, Robert Koch) reveal bacteria and viruses as the causes of disease 9,000 people in Hamburg/Germany died due a cholera epidemic The Federal Government of Germany establishes the legal basis for the disposal of waste “Waste avalanche” due to economic growth in the post-war era Oil crisis, World economic crisis, first thoughts about sustainable resources management First breakthrough in integrated SWM: recycling, composting and anaerobic technology are a priority for waste disposal Table 2: Milestones in the history of SWM (Source: Bilitewski, B./Härdtle, G./Marek, K., Waste Management, 1994)
1892 Mid-1960s 1970s 1973/74 1980s
In recent years, solid waste has increasingly become a major issue on the agenda of many international organisations. There have been a number of international cooperation
90 Bilitewski, B./Härdtle, G./Marek, K., Waste Management, Heidelberg:Springer, 1994, p. 1. 91 Hösel, G, Beseitigung von Abfallstoffen, (Kennz 0120). Hösel/Schenkel/Schnurer: Müll-Handbuch. Berlin:Erich Schmidt 1991 cited in Bilitewski, B./Härdtle, G./Marek, K., Waste Management, Heidelberg:Springer, 1994.
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initiatives, seeking to promote shared regulations and measures. Some of these initiatives are summarised below. a) World Summit on Sustainable Development (WSSD) In June 1992, the United Nations Conference on Environment and Development (UNCED, the so-called “Earth Summit”) was held and adopted a global action plan called “Agenda 21” for international activities in environment protection. Ten years later, in August 2002, WSSD was held to review the action plan and to discuss new challenges. As far as SW is concerned, these include developing ISSWM systems, placing utmost priority on waste prevention and minimisation, re-use and recycling, and ultimately on environmentally sound disposal facilities; another challenge is to promote waste prevention and minimisation by encouraging the production of reusable consumer goods and biodegradable products. Hence, WSSD amounts to strengthening the application of the hierarchy principle. b) Millennium Development Goals (MDG) The MDG that were adopted by the U.N. General Assembly in 2000 include as their seventh goal the endeavour “to ensure environmental sustainability,” and within that goal targets 9 and 11 to integrate the principles of sustainable development into country policies and programmes, reverse the loss of environmental resources, and achieve significant improvement in the lives of at least 100 million slum dwellers by 2020. c) Action Plan (Science and Technology for Sustainable Development: "3R") At the June 2004, the G8 Summit came out with the “3R Initiative,” aimed at building a global recycling-oriented society through promoting the three R’s - Reduce, Reuse, Recycle. As far as foreign aid to LMIC is concerned, cooperation in areas such as capacity development, raising public awareness, and the implementation of recycling projects is being sought. d) Global Climate Change The Protocol came into force in February 2005. In the field of solid waste, two approaches – the recovery of methane (CH4) gas from landfill sites and recapturing energy from organic waste – are attracting increasing attention. In terms of cooperation with LMIC, possibilities of supporting financially underpinned projects under the Clean Development Mechanism (CDM) are being explored. At present, different SW initiatives in LMIC are being supported through the CDM mechanism.
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e) Transboundary movements of solid waste With regard to transboundary movements of hazardous waste, illegal “exports” of hazardous waste from industrialised countries to LMIC took place in the 1980s. The Basel Convention92 adopted on the Control of Transboundary Movements of Hazardous Waste and their Disposal regulates the ‘export’ of hazardous waste from a country with waste processing technologies to other countries.93 In effect, the Convention came into force in May 2002. In recent years, the export and import of solid waste for recycling purposes are on the rise also in LMIC.
3.2
Solid Waste: Definitions
This investigation addresses Municipal Solid Waste Management (MSWM) 94 in LMIC because in terms of quantity municipal waste makes up the largest part of waste generated compared to hospital waste, industrial waste, demolition waste, and hazardous waste. Based on the quantity of waste generated - and for other various reasons - the SW market in LMIC is becoming attractive to the private sector. MSWM includes the management of household waste, non-hazardous solid waste from industrial, commercial and institutional establishments, market waste, yard waste, and street sweeping. It excludes radioactive waste, hazardous waste and hospital waste, whose characteristics are beyond the scope of this research. Comprehensive MSWM 95 requires an appropriate distribution of responsibilities, authority and revenues between national, regional and local governments. There is still no single scientific definition of solid waste. According to Savas (1977), the notion of solid waste (SW) was not used in its current meaning until the twentieth century. Pongrácz (2002) states that the notion of waste96 is relative in two main respects. Firstly,
92 The "Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal." It controls exports of hazardous waste by transboundary movement, and obligates exporters to have approval for exporting hazardous waste, to make advance notice, and to import waste again if inappropriate export or treatment is carried out. http://www.mofa.go.jp/mofaj/gaiko/kankyo/jyoyaku/basel.html (Accessed in September 2004). 93 However, in August 2006, the Panamanian flagged ship Probo Koala unloaded more than 550 tonnes of toxic waste at Abidjan port in Côte d 'Ivoire. Emissions from that toxic waste have since killed seven people and poisoned thousands. The deadly cargo was shipped to Abidjan from Amsterdam, where port authorities rejected the tanker because of its toxic load. http://www.baselpretoria.org.za/Sept06.htm. 94 MSWM encompasses the functions of collection, transfer station, aerobe and anaerobe treatment, resource recovery and disposal of municipal waste. 95 Schübeler, P./Wehrle, K./Christen, J., Conceptual Framework, St Gallen: SKAT, 1996, p. 10. 96 Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, p. 70.
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something becomes waste when it loses its primary function for the user; hence, one person’s waste output is often someone else’s raw material input. Secondly, the notion of waste is also relative to the technological state of the art and to the location of its generation. Waste is therefore a very dynamic concept and the notion has to be understood within this context. Different international organisations like the EU97 , OECD98, UNEP99 have their own approach to, and definitions of, the notion of waste. In some literature, especially North American, the terms “refuse” or “garbage” are commonly used. Those wastes that are solid are referred to as “solid waste” or “refuse”. The two terms are used synonymously. 100 Pfeffer (1992)101 states that solid waste is defined as “any solid material in the material flow pattern that is rejected by society.” Other authors102 define solid waste as “all the wastes arising from human and animal activities that are normally solid and that are discarded as useless or unwanted.” Material discarded because it has served its purpose or is no longer useful is called solid waste. 103 According to German legislation 104 , wastes are portable objects that have been abandoned by the owner. Furthermore, German legislation has identified different types of waste; the German Technical Guidance for MSWM defines waste according to its type (see Table 3). Depending on the context, the term “waste”’ can have different meanings. One of the common definitions is that waste is ‘unwanted’ by the person who discards it. Accordingly, the most interesting definition comes from Indonesia, designating household waste as “Sampa,” that is, “the thing which has no use for the person which discards it.”105 It is therefore a product or material that no longer has a value for the first user and is therefore thrown away.106 However, ‘unwanted’ can also be a question of timing, that is, waste can have some value for the same person or society in different circumstances. Examples of
97
According to the EU: Waste shall mean any substance or object in the categories set out in by the EU which the holder discards or is required to discard (European Council 1991a) (Pongrácz, 2002). According to OECD: Wastes are materials other than radioactive materials intended for disposal, for reasons specified (OECD 1994) (Pongrácz, 2002). For the UNEP: Wastes are substances or objects, which are disposed of or are intended to be disposed of or are required to be disposed of by the provisions of national law (UNEP 1989) (Pongrácz, 2002). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 3. Pfeffer, J.T., Solid waste management engineering, 1992. Peavy, H.S. et al, Environmental Engineering, 1992; Tchobanoglous, G./Theisen, H./Eliassen, R., Solid wastes: Engineering principles and management issues, 1977. Encyclopædia Britannica 1994-1999. The term waste is defined in the German Waste Act of August 27, 1993. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 190. Klunder, A./Anschütz, J., Integrated Sustainable Waste Management, WASTE, 2001, p. 10.
98
99 100 101 102
103 104 105 106
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such waste are provided by societies that have suffered wars or natural catastrophes, where victims are more likely to use recycled materials that they would have discarded in better times. Waste Type Construction debris Organic waste Definition Detritus minerals from construction and demolition Biodegradable component of municipal waste (e.g. food and yard waste) Household waste Waste from private households Household-commercial Waste from commercial establishments, businesses, the service waste sector, public institutions, and industries that possess similar characteristics than household waste Commercial waste Waste with characteristics similar to household waste Municipal solid waste Household, bulky, household-like commercial, yard, open (MSW) market, and construction and demolition waste; street sweepings; etc. Table 3: Definition of waste relating to their types (Source: German Technical Guidance for MSWM) Solid waste today is increasingly defined as “natural resources out of place” or as “new materials for technologies not yet found.” Waste has come to be regarded as a useful material, providing a potential source of income. The recycling market, for instance, is now an important industry generating revenues and jobs for many people in LMIC. Increasingly, SW is being regarded as a resource to exploit rather than as a problem to be dealt with. In the LMIC context, SW can be either: a) a natural resource which has to be exploited, or b) a serious environmental and health issue which has to be coped with. It is commonly accepted that solid waste definitions are ambiguous and do not really give an insight into the ISSWM concept. Pongrácz (2002) rightly argues that the various definitions of waste do not fall under the sense of valuable materials. She states: “…despite its explicit wish of waste prevention, when, according to present legislation, a thing is assigned the label of a waste, it is going to be treated like waste... The philosophical ramifications inherent in such definitions mean that they are not capable of constructing a system that, by its very nature, results in a sustainable waste management system.”107 In other words, the ISSWM concept does not fit into the various definitions that waste is a
107 Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, Abstract.
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3. Solid Waste Management
thing to be discarded. If it were so, there would no longer be the desire to make this system sustainable.
3.3
Concluding Remarks
This chapter has begun with an analysis of the overall waste management situation in cities worldwide and especially in Europe. The present situation in LMIC is very similar to prenineteenth century Europe. Some parallels exist not only in terms of the quantity of waste generated and its composition, but also in terms of its management. Waste collection in residential areas in eighteenth-century Paris is comparable to the current situation in some LMIC capitals. In principle, ad-hoc programmes organised in LMIC on the occasion of public holidays, during an election period, due to the presence of politicians, and so forth, can be compared with events to remove SW after the games in Rome during Caesar’s era. The administration of municipal waste dumps in Athens in 500 B.C. has some parallels with the management of dumpsites in Tangier / Morocco in the twenty-first century. This chapter has also examined the consequences of haphazardly managed solid waste in Europe in the fourteenth century, which led to living conditions similar to those currently existing in LMIC. This chapter has also considered the consequences of haphazardly managed solid waste in fourteenth-century Europe that are very similar to the existing situation in LMIC. As well as looking at the similarities between current solid waste characteristics and management in LMIC and European countries in the past, we have also looked at the actual consequences of haphazardly managed solid waste in fourteenth-century Europe, realising that these gave rise to a situation similar to that in LMIC at present. We have seen that one consequence is the death of millions of people worldwide. At present in LMIC, just as it used to be in fourteenth-century Europe, people dispose of their waste in the streets with fatal environmental and economic consequences. It has been demonstrated that European citizens became aware of the seriousness of this situation once scientists proved the link between epidemics and irregularly managed solid waste. With regard to the nature of solid waste, it has been proved that in the past, public authorities have tried to consider SW as private goods, by placing the responsibility for managing their waste with waste generators. In this context, according to legislation in some European countries, property owners were responsible for cleaning the front of their houses. This attempt failed because as public goods (see discussion in Chapter 7.1), SW is deemed the responsibility of public authorities, a fact that will be considered in the PSP discussion.
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3. Solid Waste Management
This chapter has also looked at the opinions of some authors on the characteristics of solid waste (“private goods”/”public goods”). Many national and international organisations have conducted well-designed awareness campaigns on sound waste management that have failed mainly because of the characteristics of solid waste. For instance, a campaign instructing the citizens in LMIC that they have to identify with their city, and keep it clean accordingly, will be less effective than telling them that dirty cities will result in diseases and potentially the death of their children, as their children’s health is of utmost private concern. Another interesting issue examined in this chapter is the importance of legislation in SWM. The enforcement of appropriate legislation in Europe as well as its effectiveness has been seen as lacking. In many LMIC, waste legislation is very often well-designed; however, its enforcement remains a formidable challenge to public authorities. It is worth noting that the breakthrough in SWM in Europe occurred with the recognition that SW counts as public goods (as stipulated by Louis XII, for instance, in 1506), and accordingly by introducing public tax to cope with it. The discussion about considering solid waste to be public goods entered a decisive phase at the end of the nineteenth and the beginning of the twentieth century. Interesting results arose with the introduction of public taxation and the improvement of waste technology such as the introduction of waste containers and the publication of remarkable scientific works (for instance by Pasteur). This chapter has shown that waste recycling by waste pickers occurred on the same scale in Europe in the thirteenth and fourteenth centuries as currently in LMIC. Animals were used to recycle waste and waste recycling was informal as currently in LMIC with almost the same concerns. Even in terms of waste quantity and waste characteristics, the waste situations are similar. Overall, in order to set up comprehensive waste management in LMIC, including PSP, one should look carefully at the situation in Europe from the thirteenth century onwards. Mistakes can then be avoided and positive lessons can be learned. As far as the hierarchy principle is concerned, it has been demonstrated that waste segregation, waste reutilisation, and waste treatment were introduced in many countries and cultures at early stages of their development. The hierarchy principle focuses on the awareness of the natural limits of resources. It was somehow obvious in ancient times; in the meantime, however, this awareness has gradually been lost. With regard to PSP, this chapter has reviewed various experiences made across the world. PSP has been experimented with at a low level in many countries in Europe and elsewhere (in Japan, for instance) by contracting-out street cleaning (as enacted by legislation) to so-
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3. Solid Waste Management
called scavengers (waste pickers). At a higher level, SW collection on a citywide basis has also been experimented with in many cities, for instance in seventeenth-century Japan. Finally, the definitions of solid waste need be considered in context. For many, waste is what can be discarded, whereas for others it is a source of revenue, especially in LMIC. In these countries, it is considered both a natural resource and at the same time a serious environmental hazard, associated with health concerns. It has been demonstrated that the SW market in LMIC is becoming attractive to both the international and the national private sector, due to the quantity of waste generated, the demand for technology, the lack of sound public management, and the lack of financial means.
37
4. Solid Waste Management in LMIC: Key Features
4.
Solid Waste Management in LMIC: Key Features
In this research, the notion of Low- and Middle Income Countries (LMIC) is based on the economic classification of the World Bank Group; notably, the notion is merely economic rather than geopolitical. The World Bank Group characterises economies as low-income, middle-income (subdivided into lower-middle and upper-middle), and high-income (see Annex 1). Low-income and middle-income economies are sometimes referred to as developing countries or the so-called “Third World”. On the basis of 2001 gross national income, low-income countries are those with average annual per capita incomes of US$ 745 or less. For lower-middle-income countries, the figures are US$ 746 to US$ 2,975; for upper-middle-income countries, US$ 2,976 to US$ 9,205; and for high-income countries, US$ 9,206 or more. In this study, the term “developing” refers to countries whose economies are classified as low-income or middle-income. The terms “industrial countries” or “developed countries” refer to countries whose economies are high-income.108
4.1
Urbanisation in LMIC: Economic and Ecological Issues
According to Yue-man Yeung (1995), one of the most interesting developments since World War II has been rapid urbanisation in LMIC and the concentration of urban populations in large cities. Between 1950 and 1990, the number of “million cities” in the world more than tripled, from 78 to 276, and is now projected to reach 511 by 2010. In 1990, 33% of the world 's population lived in “million cities,” and 10 % in cities of more than 8 million inhabitants. 26 mega cities109 are expected to exist around the world by the year 2015, when the three largest urban agglomerations will be Tokyo, Bombay, and Lagos (U.N. 1998). 110 Where Africa was 80% rural in the 1960s, its rate of urbanisation had reached 50% by 1998.111 The growth of Africa’s cities has outstripped local management and financing capacities. 50 million people are expected to migrate to the cities of West Africa over the next 10 years. It is projected that by 2020, 63% of the population will live in
108 The World Bank „A guide to the World Bank“ Library of Congress, 2003, p. 73. 109 Cities of 10 million or more inhabitants. 110 Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xxiv. 111 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998, Foreword.
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4. Solid Waste Management in LMIC: Key Features
cities.112 There will be 100 so-called “mega cities,” each with a population of more than 5 million inhabitants113 (see also Annex 4). This will require further investment, among others in solid waste management. Asia alone will need to invest US$ 280 billion a year over the next 30 years (Brockman and Williams 1998).114 By the year 2025, one can expect a further 2 billion— almost all in LMIC. Figure 6 presents global population projections until 2050.
Figure 6: World population projections, 1950–2050 (Billions) (Source: United Nations, Critical Trends, 1997) This rapid urbanisation poses formidable challenges to the governments of LMIC and their societies, making environmental degradation, the declining quality of life, and the untapped wealth of human resources all the more easily observable. In addition, a typical municipality in LMIC is not homogenous. Two main areas are distinguished: high-income areas and lowincome areas. Even Plato observed in 400 BC that “….any city, however small, is in fact divided into two, one the city of the poor, the other of the rich.”115 In effect, SW collection is
112 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998, summary. 113 E. Bergmann & H.P.Gatzweiler; S. Schmitz et al, 1996. 114 Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xxvii. 115 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 337.
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4. Solid Waste Management in LMIC: Key Features
usually carried out in the city centre and high-income areas on a regular basis. Low-income municipal areas, on the other hand, do not benefit from the service regularly, and indeed sometimes never do. SWM in low-income areas means having a festering, stinking pile of waste, with erratic waste collection by a municipal agent.116 The rest remains on roadsides, in open drains, and in low-lying areas, worsening the physical environment of the municipality. Consequently, common features of urban areas in LMIC, most particularly of low-income areas, include haphazard waste disposal in roadsides, open spaces, or valleys.117 In addition, the rapid rate of uncontrolled and unplanned urbanisation in LMIC has caused environmental degradation. A.G. Onibokun and A.J. Kumuyi (1999) state that “Recent events in major urban centres in Africa have shown that the problem of waste management has become a monster that has aborted most efforts made by city authorities, state and federal governments, and professionals alike.” The problems posed by inadequate SWM in LMIC are numerous: health hazards from uncollected waste, health hazards from collected but poorly disposed of waste, the economic burden of waste disposal on cities, and social issues arising in connection with informal waste recyclers (waste pickers or waste scavengers) (see Annex 14). It has been estimated, for example, that about 50 million tons of solid waste in India, find its way into the coastal waters of the Arabian Sea and the Bay of Bengal. This results in intensified environmental damage and human health hazards.118 In LMIC, solid waste services often fail to keep pace with rapid urbanisation. Accordingly, the municipalities in LMIC are unable to cope with the ever-growing volumes of waste generated. Urbanisation poses also significant economic concerns. In fact, in LMIC, two-thirds (²/3) of the population live in cities (see Table 4) and generate 60% to 70% of the Gross Domestic Product (GDP). Moreover, 80 % of GDP growth in LMIC is expected to come from cities in this decade.
116 “Beyond Boundaries” PPIAF/ADB Manila: 2002, p. 5. 117 This situation was reflected in articles in East African newspapers in 1985 that referred to Dar es Salaam as a “garbage city” (Sunday News (Tanzania), 2 Nov 1985, p. 5) and a “litter city” (African Events, Nov 1985, pp. 3–5) and to Nairobi as a “city in a mess” (Weekly Review (Kenya), 25 Jan 1985, pp. 2–3). 118 Pearce, D./Turner, K.R., Economics and Solid Waste, Birmingham: CSERGE, 1994, p. 1.
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4. Solid Waste Management in LMIC: Key Features
Region Africa Asia119 Latin America Industrial countries120 World
1950 [%] 14.6 15.3 41.4 54.9 29.7
1975 [%] 25.2 22.2 61.2 69.9 37.8
1995 [%] 34.9 33.0 73.4 74.9 45.3
2015 [%] 46.4 45.6 79.9 80.0 54.4
Table 4: Percentage of population living in urban areas (with projections for 2015) (Source: O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 340 (cited from U.N. 1998) Table 4 displays the percentage of population living in urban areas by region between 1950 and 1995 with projections for 2015. It is especially difficult when the poor are living in rapidly growing, spontaneous, and oftenillegal settlements outside government control and which public providers may be restricted from serving by law.121 Low-income areas normally have the highest population densities and the lowest level of municipal SW service provision. It is worth noting that the unsanitary conditions abiding in such areas pose a health threat not only to their residents, but also to the wider population. This fact is fundamental to the present study in terms of proving the limitations of some PSP models regarding the ISSWM concept. Solid waste services being public goods (Chapter 7.1), it is not recommended to exclude a part of the population from benefiting. Therefore, franchising the collection service of SW, for instance, will most likely result in failure, especially in low-income areas in LMIC, since many people cannot afford the service. They will not contribute and will continue to throw away their waste on open sites or in drains, which will negatively affect everyone, even those who pay regularly. Moreover, the logistics of collecting waste from poorer areas are frequently challenging for the formal private sector and sometimes require unconventional approaches to be sustainable. Narrow, unpaved, and crowded streets place particular constraints on conventional waste collection systems that usually include large SW
119 Excluding Japan 120 Europe, Japan, Australia, New Zealand, and North America excluding Mexico. 121 “Beyond Boundaries” PPIAF/ADB Manila: 2002, p. 6.
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4. Solid Waste Management in LMIC: Key Features
containers and modern collection vehicles from the private sector. In low-income communities 122 , characterised by limited access to SW collection trucks, door-to-door collection service is not economically feasible, and only a communal container system is viable. Joint ventures between formal private firms and local ones are often required. At the end of her classic book on the urban environment, The Granite Garden, Anne Whiston Spirn (1984) reminds us that “in the present lies not only the nightmare of what the city will become if current trends continue, but also the dream of what the city could be.” Taking today’s urban problems to an apocalyptic conclusion, Spirn envisions an “infernal city” that has disintegrated, following uprisings by city dwellers denied water and other public services. Economic and environmental concerns have followed those fleeing cities into a countryside ravaged by suburban development. Numerous surveys have addressed the growing challenges of building and maintaining more sustainable cities, and have helped to reveal two key obstacles to progress in sustainable urban planning: first, a lack of financial means; and secondly, a lack of political strength (Carlson 1996; United Nations 1996).123 Simply put, sustainable cities including ISSWM are essential more than ever before. Nonetheless, rapid urbanisation in LMIC is threatening the environment and urban productivity.124 For this reason, adequate SWM is urgently required; otherwise economic development risks becoming counterproductive. ISSWM represents one of the outstanding challenges facing municipal authorities in LMIC (World Bank, 1996).
4.2
Waste Generation and Characteristics
The quantity of SW generated is a function of the population, the level of economic development (see Annex 3), the level of goods consumption, and not least the waste policy in place to endorse waste minimisation. Schübeler et al. (1996) argued that the waste generated by a population is primarily a function of consumption patterns and thus of socioeconomic characteristics and the interest in, and willingness to pay for, collection services.125 By comparison, cities in industrial countries generate up to 100 times more solid
122 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, p. 6. 123 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 347. 124 Cointreau et al. 2000; Bartone et al., 1994, Leitmann, J. 1995. 125 Schübeler, P./Wehrle, K./Christen, J., Conceptual Framework, St Gallen: SKAT, 1996, p. 35.
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4. Solid Waste Management in LMIC: Key Features
waste per person than their counterparts in LMIC (UNCHS, 1996).126 Income also affects the waste generation rate. 127 Upper and middle-income individuals tend to generate more waste than their low-income counterparts. Each person in low-income countries generates between 0.3 and 0.6 kg of waste every day, whereas in middle-income countries each person generates between 0.7 and 1.1 kg of waste every day (see Table 6) At present, 30% to 50% of the population of LMIC live in municipalities (see Chapter 4.1). LMIC generate approximately 158,000,000 tons/year of waste. By 2025, this figure will have increased to 480,000,000 tons/year of waste. LMIC generate 40% of the world’s solid waste and only one-third (1/3) of this amount is collected. Hence, less than 5% is properly disposed of.128 Consequently, there are over 200,000 open dumping areas in the world that will require environmental protection and rehabilitation in the future. Therefore, there is also a potential market for private firms with adequate sound know-how in such rehabilitation. Table 5 presents the waste generation in LMIC in comparison to high-income countries. Generation rates kg / capita/day Low-income Middle-income High-income country country country 0.5 to 0.75 0.55 to 1.1 0.75 to 2.2 0.35 to 0.65 0.25 to 0.45 0.45 to 0.75 0.35 to 0.65 0.65 to 1.5 0.55 to 1.0
Mixed urban waste – large city Mixed urban waste – small to medium city Residential waste only
Table 5: Global perspective on solid waste quantities (Source: Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 5) Regarding the characteristics of SW, Gouhier (1993) claimed: “….show me the type of waste, I will tell you what kind of society.”129 Accordingly, Solid Waste (SW) characteristics are directly correlated to the societies in question. SW is considered to be “a mirror of the society,” since SW generation, characteristics and management all reflect the economic,
126 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 344. 127 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 3. 128 Ahmad, I., Franchise in Pakistan: Master thesis, Trondheim: NTNU, 2003 (non published). 129 Jean Gouhier from Le Mans University (France) cited by Carde, Daniel [Waste Management in France] in Sander, A./Küppers, P. (eds.) [Environmentally Sound Waste Management?], Vol. 4, Frankfurt am Main: Lang, 1993, p. 171.
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4. Solid Waste Management in LMIC: Key Features
historical, cultural, and environmental aspects of a given country. The characteristics of solid waste are heterogeneous. The composition of the waste is influenced by various factors, such as geographical location, the standard of living, and the weather. On the basis of physical existence, SW includes food waste, paper, plastics, woods, animal dung, metal, glass, debris, and so forth. The nature of the waste can be organic, inorganic, putrescent, non-putrescent, combustible, and non-combustible. Classifying waste on the basis of material encompasses food waste, waste (degradable, non-degradable), market waste, ashes, street waste, dead animals, industrial waste, demolition waste, construction waste, hazardous, and special waste. Waste characteristics are also affected by income. 130 Currently, LMIC generate the highest quantity of waste on a mass basis (high-income countries on volumetric basis) and will be the largest generator on that very basis in 2025, too (see Annex 5). The densities calculated in low-, middle-, and high-income countries are 500 kg/m³, 300 kg/m³, and 150 kg/m³ respectively.131 Therefore, the lower the economic level of a country, the higher the waste density. LMIC generate highly organic (biodegradable) waste,132 consisting mostly of food residues with moisture content.133 Organic treatment is not yet well-established in LMIC in terms of generating revenue in comparison to the recycling market. Some LMIC even import recycling materials. According to Medina (2006), the United States134 is the world’s largest source of recyclable materials and the largest exporter. In fact, Mexico purchased recyclables worth 1 billion dollars from the US in 1998. The North American Free Trade Agreement (NAFTA) has eliminated most tariffs on recyclables, which has increased imports by Mexico from 700,000 tons in 1993 to 1.2 million tons in 1997. Mexican cartoneros 135 recover approximately 2,770 tons of cardboard every month. All the cardboard recovered in El Paso by Mexican cartoneros136 is transported across the border using pushcarts and pickup trucks to be recycled in Mexico.
130 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 3. 131 Ahmad, I., Franchise in Pakistan: Master thesis, Trondheim: NTNU, 2003 (non published), p. 2. 132 The presence of moisture content results in the variation of decomposition of solid wastes, which subsequently leads to leachate being produced and biogases generated. 133 Ahmad, I., Franchise in Pakistan: Master thesis, Trondheim: NTNU, 2003 (non published), p. 2. 134 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 3. 135 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, pp. 5-6. 136 The typical cartonero who recovers cardboard in Texas earns the equivalent of 10 times the minimum wage in Juarez. It is a stable activity that has allowed them to raise a family. The economic impact of scavenging in El Paso, Texas and Juarez, Mexico has been estimated at 2.5 million dollars a year.
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4. Solid Waste Management in LMIC: Key Features
According to various surveys, some 60-70% of the waste generated in LMIC is organic waste (biodegradable) compared to 40% in industrial countries that is appropriate for composting and between 5-10% which can be recycled. Based on the hierarchy principle of the ISSWM concept, those fractions should be treated or recycled prior to any disposal. The question which arises: what shall be the incentives of a private landfill manager to dispose of as less organic fraction of waste generated as possible? This is considered as the key issue of this dissertation.
4.3
Institutional and Managerial Framework
Any comprehensive SWM system requires the development of a responsible and competent regulatory institution and the setting up of a sound managerial system. In LMIC, waste management is very often a shared responsibility at national, regional and local level and, in turn, of various government ministries and agencies at a national level. Generally, the Ministry of the Environment or Environmental Agency is responsible for the provision of national level waste management services in any region. In most LMIC, institutional capacity to provide leadership on waste management issues remains weak. By and large, the SWM sector is inadequately structured and staffed by public authorities. The funding system is often outmoded and incapable of covering the total costs of the service. It is noteworthy that the legal frameworks addressing environmental issues in general, and SW in particular, often exist and are well-designed. However, the enforcement of these laws falls short for several reasons (among others, the regulatory framework, financial capacity, and technical means). For instance, India has some of the most detailed environmental legislation in the world; nonetheless, the country faces enormous environmental and solid waste-related concerns. Years ago, solid waste did not have priority on the political agenda in LMIC in comparison to other services like water supply or electricity. In response to this weakness, international organisations, such as the UNEP and the World Bank Group, have introduced sanitaryrelated topics such as “Ecosystem Management in Low Income Countries” to strengthen national initiatives. As the quantity of waste produced increases - due, among other factors, to urbanisation (see Chapter 4.1) - municipal budgets in LMIC for removing, transporting, and disposing waste are being stretched. In parts of some cities, this predicament results in local populations and municipalities facing major solid waste problems. Many municipalities in LMIC can obtain finance to cover capital costs from the potential
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4. Solid Waste Management in LMIC: Key Features
sources 137 , such as transfers from the central government, grants from multilateral and bilateral organisations, renewal funds from user fees, or other solid waste tariffs. Total government expenditure is roughly 20% of GNP in Low-Income countries and 30% of GNP in Middle-Income countries (see Table 6). This means that public spending in lowincome countries is relatively high for their level of development and provides very low returns. Hence, there is an urgent need for a more efficient public sector; accordingly, proponents of privatisation argue in favour of PSP. In most LMIC, SW service involves labour-intensive street sweeping and waste collection techniques. Because labour costs are relatively low, labour intensive techniques are appropriate. There are roughly 2,000 SW workers for every 1 million urban residents in LMIC. Finally, another key feature of SWM in LMIC 138 is that equipment costs often exceed 50% of the total costs, while labour costs are typically less than 25% of total costs. Therefore, any ISSWM has to take this factor into account in order to create jobs and save hard currency destined to buy expensive mechanical equipment abroad.
4.4
Financing and Costs Recovery
Any sound SW management service requires the allocation and management of sufficient financial means to do the job properly. As stated earlier, this is frequently insufficiently addressed in LMIC. Adequate allocation and proper management of these resources has to be made available. Sources of investment finance, in particular credits from international organisations and concessions arranged with the private sector, have to be assessed meticulously to ensure that their conditions are within the financial capacity of the local entity and the country to reimburse the credits. This could result in incentives from the side of public authorities to apply the hierarchy and polluter pays principles. Operational funding requirements and recurrent funding sources should be identified before investment funds are committed. At least a fraction of the costs to be recovered from a waste management system shall be paid directly by beneficiaries, within the economic context of their ability to pay. This proportion should be directly linked to the quantity of SW generated in order not to compromise the polluter pays or user pays principle. Various financing sources (very often a combination of different sources) are required in LMIC. The interest of public and private sector funding
137 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 31. 138 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 38.
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4. Solid Waste Management in LMIC: Key Features
sources at the national and international levels to finance SW services depends on the effectiveness with which initial funds are used. Negotiations can be held with the respective multilateral (World Bank Group, IMF, etc.) and bilateral (KfW, GTZ, AFD 139 , etc.) organisations through which national funds can be linked with the objectives of the national ISSWM policy to leverage international funds. Local and institutional structures for financing and recovering costs may need to be different for waste management than for other infrastructure services like drinking water given that SW is being considered a public good. Public authorities are generally unaware of the exact cost of their services. A recent largescale study has found that the true costs of a particular municipal service are 30% greater on average than the amounts reported in municipal budgets. 140 However, by knowing their financial costs, public authorities can control their own solid waste improvements, both financially and technically. To a large extent, this reflects the organisational arrangements through which the services are provided, the methods through which they are funded, and the accounting systems through which service costs are recorded. This situation, coupled with a lack of reliable information on the actual costs of new services, means that municipalities frequently find it particularly difficult to make available the financial resources necessary to sustain service quality and to establish proper contract specifications with the private sector. In most municipalities in low-income countries, SWM costs consume over 20% of the municipal budget (see Table 6). Despite the high level of expenditure on SWM management, collection service levels are low, that is, only 70% of urban residents receive service and most disposal is by unsafe open dumping (see Table 6). According to CointreauLevine (2000), SW services in LMIC do not satisfy the full demand existing in urban areas. In low-income areas, service sometimes only reaches 10% to 40% of the urban population. Cointreau-Levine states further that in LMIC, accounting systems show no clear delineation between recurrent and capital expenditures. There is no attempt to aggregate MSWM costs incurred by all the various organisations participating in the system. The result is that most LMIC estimate their costs for MSWM services to be less than half of what they actually are.
139 Agence Francaise de Développement (French Agency for Development). 140 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 25.
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Waste generation (kg/person/day) Collection coverage Disposal costs (US$/person/year) SWM expenditure in total municipal budget (%) Recycling
Low-income countries 0.3 ~ 0.6 Less than 70% Less than 1 15.4 ~ 38 Informal (metal, glass, plastic, composting)
Middle-income countries 0.7 ~ 1.1 80 to 90% 1–3 6 ~ 23,2 Formal + Informal (metal, glass, plastic, composting)
Table 6: Key data of solid waste management in LMIC (Source: Based on JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 64.) Finally, in LMIC 141 , most municipal authorities experience a serious shortcoming in meeting their revenue needs from their tax base. One solution often cited is user charges, as one of the key principles of the ISSWM concept, even though most solid waste management services are public goods. User charges force waste generators to minimise the production of waste. Moreover, LMIC municipalities are hard pressed to obtain enough capital to finance their solid waste systems and are burdened with political constraints limiting their ability to generate revenues. 142 This problem results from years of inadequate efforts to ensure effective cost accounting for cost recovery in solid waste management, and from competing political agendas. Municipalities143 may attempt to set solid waste management tariffs by charging owners or residents according to the area of their properties. Nevertheless, this system works well in countries where the cadastral (land survey) information is up to date and where billing landowners is relatively easy or automated and is not obliged to contend with informal settlements. Municipal government performance in the collection of waste service fees is often insufficient to cover the full cost of service. People are reluctant to pay for municipal waste collection services which are perceived to be unsatisfactory; at the same time, poor payment performance leads to a further deterioration of service quality, and a vicious circle may
141 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, p. 7. 142 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, p. 15. 143 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 32.
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4. Solid Waste Management in LMIC: Key Features
arise. 144 Public solid waste departments often employ large numbers of relatively unproductive workers. The sustainability of waste management facilities requires the establishment of cost recovery frameworks. The entity responsible for the environment has to work with the ministry responsible for municipalities. Other public agencies have to ensure that145: • Legal and institutional structures for financing and recovering costs for waste management are in place at national and local levels; • Economic instruments are applied, as appropriate, for the purposes of minimising waste generation and for encouraging desired waste management behaviours and actions; • Accounting, budgetary, and management systems are in place at the local level to support the effective implementation and operation of municipal solid waste management services by the private sector; • Contracting-out, cost recovery systems, and performance monitoring; • Waste management technologies are appropriate to fit local specifications.
4.5
Informal Sector and Recycling
As discussed in the previous chapter regarding waste characteristics, the recyclable fraction of SW is considered to be an important market generating employment and revenue. This sector remains mainly informal in LMIC. Informal waste management is highly efficient and the fact that such a high proportion of recyclables is separated before the waste goes to the landfill offers unequalled economic and ecological opportunities. In the 1950s and 1960s,146 the informal sector was not taken into consideration by most LMIC governments. However, this is changing increasingly. There is no scientific definition of the term “informal sector”. Among various definitions, one of the most commonly used is provided by the ILO,147 which defines some characteristics of the informal sector: existence of low entry barriers, utilisation of domestic (local) resources, predominance of family businesses and child labour, domination of small-sized enterprises, use of fairly labour-
144 Schübeler, P./Wehrle, K./Christen, J., Conceptual Framework, St Gallen: SKAT, 1996, p. 40. 145 Source: METAP-RSWMP project 146 Spies, S./Wehenpohl, G., Informal sector in SWM, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 2. 147 International Labour Organization.
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4. Solid Waste Management in LMIC: Key Features
intensive and adapted technologies, training for the skills required takes place outside the formal school system, utilisation of unregulated and competitive markets, etc. The informal sector subtracts a high proportion of recycled materials from landfilling. Suchada (2003) indicates that the amount of waste to be disposed of at the landfill is reduced by one-third.148 In fact, it is estimated that 90% of recyclable materials are diverted from landfilling. In LMIC, waste pickers are responsible for the informal recycling of solid waste (so-called scavenging), operating both upstream (collected from waste generators) and downstream (landfill). Waste pickers or scavengers operating on landfill sites, without proper facilities and equipment, are typically exposed to a range of public health 149 and environmental hazards associated with open landfill sites. Waste pickers have a long track record in some countries. In Cairo, the Zabbaleen150 people (see Chapter 9.3) have been waste pickers since they began coming to Cairo in the mid-twentieth century.151 Medina (2006) 152 identified three categories of waste pickers, namely: 1. Scavenging for self-consumption;153 2. Recovery of materials for sale to consumers;154 3. Recovery of materials for sale to industry.155 SWM from high-income areas tends to contain a greater percentage of recycling material, such as metals, glass, paper, and plastics. Waste pickers reduce the need for collection, transport and disposal equipment, facilities, and personnel. Further, as mentioned above, waste pickers diminish the amount of waste requiring final disposal. Hence, they contribute
148 Suchada P., J. Tränkler, Cholada K., W. Schöll (2003) The role of formal and informal sectors in solid waste management of developing countries, paper for 9th International Waste Management and Landfill Symposium 2003, Sardinia. 149 During periods of heavy rain, stagnant water ponds are commonly found on such sites. These serve as breeding grounds for mosquitoes, which act as vectors of infective agents spreading malaria and filariasis. 150 Two categories could be noted among the Zabbaleen. The first group are those who held a license for waste collection. The other category is the actual Zabbaleen (called Zarraba) who collect, transport, sort, and dump waste. Zarraba receive their fees from the service provider mainly in the form of waste, though occasionally they are paid a part of the fees collected by the service providers (Nagwa El-Karawy, CWG, Kolkata, India, 2006). 151 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 344. 152 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 5. 153 Waste pickers salvage old lamps, desks, sofas, chairs, tables, radios, pots, pans and other items that can be cleaned, refurbished, repaired and reused. 154 Entrepreneurs salvage reusable items, such as furniture, appliances, kitchen utensils and construction materials, which they then sell to their mostly low-income clientele. 155 The most important and steady source of income for scavengers is the recovery and sale of recyclable materials. Demand for a particular material depends on the kind of industries that are located in each region.
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to extending the life span of sanitary landfills. Hence, waste pickers in LMIC provide clear economic, social, and environmental benefits. The issue is how to integrate them in the formal sector, for instance in cooperation with the private sector, and how to improve their working conditions. As stated above, millions of people work in collecting, separating, and processing recycled materials. Thus, they contribute to using and reusing resources, returning material as a secondary raw material into industrial production cycles, increasing the life span of landfills, and generating income. In Delhi 156 , for instance, it is estimated that between 80,000 and 100,000 people work in the informal sector as waste recyclers. 157 Another example is the municipality of Buenos Aires, which has over 9,000 waste pickers.158 However, waste pickers pose a major challenge for public authorities. The presence of many people making a living from waste, often in unhealthy sanitary conditions, is an embarrassment to municipal authorities. One aim of improving waste management is to increase recycling so as to apply the hierarchy principle. Therefore, it makes sense to create incentives to promote the existing recycling system. A major challenge of waste management in LMIC is how best to work with the existing informal recycling sector to improve livelihoods, working conditions, and recycling efficiency.159 Municipalities in LMIC often fail to integrate the informal sector into their SW policy. Integrating them would, however, mean a sustainable and significant improvement of solid waste management – thereby curbing the need for trucks and personnel, ensuring a longer life for sanitary landfills, creating jobs, reducing poverty, preventing contamination, improving natural resources conservation, providing a better supply of cheap secondary raw material, and hence contributing to a better environment.160
156 Rouse, Jonathan, Embracing not displacing, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 2. 157 Assuming each earns just Rs50 per day, their daily turnover as a workforce is an astonishing Rs 50 lakh (more than US$ 100,000). 158 Jahan-E-Kabadi „Privatising Waste Services: Clearing Waste or People?“ July 2006. 159 UNEP, Waste Management Planning, 2004, p. 4. 160 Spies, S./Wehenpohl, G., Informal sector in SWM, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 8.
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4.6
Concluding Remarks
This chapter has covered a wide range of SW issues, such as waste generation, waste characteristics, the informal sector, and so forth. In terms of quantity, the municipalities in LMIC generate disproportionately more SW than the rural regions in LMIC. This chapter has shown that rapid urbanisation in LMIC is considered to present a serious environmental and economic challenge, especially for LMIC. Public authorities should therefore adopt the principles of ISSWM for environmental and economic reasons. However, PSP is being challenged by those principles especially due to low-income areas. These areas are usually characterised not only by low-income (people are not able to bear the full costs of the service), but also by narrow roads and a high density of waste. It has been highlighted that the abiding unsanitary conditions pose a health threat not only to the residents of those areas directly affected, but also to the wider population. It follows that some principles, such as the polluter pays principle, will prove enormously difficult to implement. As SW characteristics are directly correlated with the societies in question, this chapter has shown that solid waste generated in LMIC differs to that in industrialised countries. Moreover, public authorities in LMIC do not possess the exact figures of the cost of SW services. And finally, the recycling market in LMIC is considered an important market as it generates jobs and revenue. However, due to its informality, waste pickers drive this market, thereby challenging public authorities. Finally, a century ago, those who reflected on life-threatening urban pollution feared that cities might eventually self-destruct. Today, it is not only inhumane living conditions, but also the unsustainable use of resources that pose a threat. Efforts to overcome the political and financial barriers to sustainable city planning have one thing in common: the dynamism of committed people trading ideas and working together. It is this concentration of human energy that allowed cities to give birth to human civilisation, and that may ultimately save it.161
161 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 351.
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5. Theoretical Principles of ISSWM
5.
Theoretical Principles of ISSWM
This chapter introduces the key principles informing the notion of sustainability and integrated sustainable SWM underpinning this dissertation: the hierarchy principle, the polluter pays principle, effectiveness and efficiency. A brief definition of these principles in the context of SWM in LMIC will provide a useful focus to further clarify both the theoretical and the empirical discussion undertaken so far. Generally speaking, sustainability aims at providing the best outcomes for the human and natural environments both now and in the future. It is a concept relating to the continuity of economic, social, institutional and environmental aspects of human society. The word sustainability was first used in 1712 by the German forester and scientist Hans Carl von Carlowitz in his book Sylvicultura Oeconomica. 162 “Sustainability” and “sustainable development” are often used interchangeably in the literature. In 1987, the Brundtland Report defined sustainable development as development that “meets the needs of the present generation without compromising the ability of future generations to meet their own needs.” One of the important milestones of the development of the concept of sustainability is the 1992 Rio Conference, informally known as the “Earth Summit” (see Chapter 3.1). Later, in 2002, the World Summit on Sustainable Development expanded this definition by identifying the “three overarching objectives of sustainable development” to be (1) eradicating poverty, (2) protecting natural resources, and (3) changing unsustainable production and consumption patterns. As far as SWM is concerned, the Earth Summit produced the so-called Agenda 21.163 It stated that environmentally sound waste management should prioritise the recovery of waste and waste treatment and finally waste disposal. This is referred thereafter to the hierarchy principle (see Chapter 5.1). Furthermore, it stated that a preventive waste management approach focused on lifestyle changes, and ones in production and consumption patterns, offered the best chance for reversing current trends. However, Agenda 21 is not legally binding. Its implementation has been left more to national rather than international action. Few countries have been consistent in their Agenda 21-related policies so far.
162 Hans Carl von Carlowitz (1645 - 1714 ) was a german tax accountant and mining administrator. His book Sylvicultura oeconomica was the first comprehensive treatise about forestry. He is considered to be the father of sustainable yield forestry. The idea of sustainability emerges in time of crisis and scarcity. He was the first one to formulate the concept of sustainability. Source: “Grober, Ulrich -DER ERFINDER DER NACHHALTIGKEITDIE ZEIT Nr. 48/ 25.11.1999, page 98. 163 UNEP, Waste Management Planning, 2004, p. 5.
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Scientifically, there is no single definition of Sustainable Solid Waste Management (SSWM). SSWM means that the model is appropriate to local conditions and feasible from a technical, environmental, social, economic, financial, institutional, and political perspective. It can maintain itself over time without exhausting the resources upon which it depends meaning that the generators of waste (polluters) bear the whole costs of the service. Chapter 5.2 will discuss this issue as polluter pays principle. SSWM can be realised by using the technical, organisational, and financial resources available in a particular country. Some components are indispensable to implementing a system designed to achieve overall environmental objectives, such as national waste policy, waste planning, regulatory frameworks and law enforcement. The ISSWM164 concept has been developed by WASTE (Netherlands organisation), and has first been presented in 1995 during the UMP Workshop on Municipal Solid Waste Management in Ittingen, Switzerland165. It is an approach to reach better, more sustainable solutions to solid waste problems, especially in cities in LMIC. The ISSWM principles are based on studies carried out by different authors (Lardinois & van de Klundert, 1995, Hemelaar & Maksum, 1996, Moreno et al., 1999, Coffey, 1996, Schuebeler et al., 1996, van Beukering et al., 1999). ISSWM differs from conventional approaches towards solid waste management by seeking stakeholder participation, by including waste prevention and resource recovery explicitly, by encouraging the analysis of interactions with other urban systems and by promoting an integration of different habitat scales (city, neighbourhood, household) 166 . In this context “Integrated” means that the system uses a range of interrelated collection and treatment options, at different habitat scales (household, neighbourhood, city). In addition, it involves all stakeholders, be they governmental or nongovernmental, formal or informal, profit- or non-profit oriented. Finally, “Integrated” takes into account interactions between the waste management system and other urban systems. In the last fifteen years, the ISSWM concept has also evolved and is slowly becoming accepted by decision-makers. Although this process is successful in most industrial countries, it is rather slow in LMIC. There is a tendency in LMIC that only financial and technical means are required for implementing environmentally sound projects and therefore nothing can be contemplated without external funding. This mentality on the part
164 ISWM (Integrated Waste Management) is used by WASTE. However, ISWM and ISSWM are used interchangeably in this dissertation. 165 Klunder, A. /Anschütz, J., Sustainability in Waste Management, Working paper for UWEP/CWG, 2000, p. 2. 166 Klunder, A. /Anschütz, J., Sustainability in Waste Management, Working paper for UWEP/CWG, 2000, p. 2.
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of municipal officials represents the beginning of an alarming tendency towards donordependency.167 Klunder, Anschütz, and Scheinberg A. (2001) of the Netherlands organisation WASTE168 (see Annex 2) have carried out one of the most important studies on the concept of Integrated Sustainable Solid Waste Management (ISSWM) to date. 169 Accordingly, the ISSWM concept provides a systematic analysis of all issues relating to sound waste management. These include the technical, socio-economic, financial, 170 and managerial capacities of city councils as well as environmental and political aspects and not least the socio-cultural171 context. The ISSWM concept takes as a point of departure four basic principles172: 1. Equity: all citizens are entitled to an appropriate waste management system for environmental health reasons. 2. Effectiveness: the waste management model applied will lead to the safe removal of all waste. 3. Efficiency: the management of all waste is done by maximising the benefits, minimising the costs and optimising the use of resources, taking into account equity, effectiveness and sustainability. 4. Sustainability: the waste management system is appropriate to the local conditions and feasible from a technical, environmental, social, economic, financial, institutional and political perspective. It can maintain itself over time without exhausting the resources upon which it depends. Assessment of the degree of ‘integrated sustainability’ needs an analysis that uses a range of criteria, both quantitative and qualitative indicators. Some examples of indicators of ‘integrated sustainability’ are given below (see also PAHO, 1995)173: • Technical: amount of waste collected by area of the city and per source
167 Scheinberg, A, Central & Eastern Europe, WARMER Bulletin 68, 1999, p. 3.
168
www.waste.nl.
169 Klunder, Arnold van de/Anschütz, Justine/Scheinberg, Anne (eds.) [Concept of ISWM]: Integrated Sustainable Waste Management: The Concept: Tools for Decisions-makers: Experiences from the Urban Waste Expertise Programme (1995-2001), Gouda: WASTE, 2001. 170 In many cities, however, officials responsible for MSWM do not have accurate information concerning the real costs of operations. Where accounting expertise is lacking, it may be brought in from the private sector. 171 The principle social objectives are: to orient municipal waste management towards the real service needs and demands of the population, to encourage patterns of waste handling and disposal which contribute to the effectiveness and efficiency of municipal waste services. 172 Klunder, A./Anschütz, J./Scheinberg, A. (eds.), Concept of ISWM, Gouda: WASTE, 2001, p. 11. 173 Klunder, A./Anschütz, J., Design of Sustainable System, CEDARE/IETC Alexandria/Egypt, 1999, p. 10.
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Environmental: amount and % of waste recycled extent of pollution of air, soil and water • Financial: degree of cost recovery, overall cost of waste management services provided, Socio-economic: service coverage (% of citizens receiving minimum required waste collection service), user satisfaction with the service by area of the city • Institutional: degree of formalisation of informal sector The key principles of ISSWM namely: hierarchy principle, polluter pays principle, effectiveness and efficiency will be detailed in the following chapters.
•
5.1
Hierarchy Principle
According to Lardinois and Furedy174 (1999), the waste management hierarchy includes the following steps.175 1. Avoid the generation of SW 2. Reduce the negative impacts of the waste that is generated 3. Reuse the materials recovered from the waste stream 4. Recycle, compost, or recover materials to new products 5. Recover energy by incineration, anaerobic digestion or similar processes 6. Dispose of waste in sanitary landfills The hierarchy principle does not constitute compulsory legislation, but rather a guideline. It is considered one of the most important principles of ISSWM. Klunder and Anschütz (2001) stated that the hierarchy principle considers products from the ‘cradle’ to the ‘grave’.176 Waste avoidance, waste minimisation177, waste treatment, reuse and recycling occupy an important place in the waste management hierarchy. In sum, the hierarchy principle is about
174 cited in Klunder and Anschütz, 2001. 175 Klunder, A. /Anschütz, J., Concept of ISWM, Gouda: WASTE, 2001, p. 15. 176 Klunder, A. /Anschütz, J., Concept of ISWM, Gouda: WASTE, 2001, p. 15. 177 According to Riemer and Kristoffersen a definition of waste minimisation encompasses three elements in the following order or priority (Riemer & Kristoffersen 1999 cited in Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, p. 27): (1) preventing and/or reducing the generation of waste at source; (2) improving the quality of the waste generated, such as reducing the hazard; and (3) encouraging re-use, recycling and recovery.
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sound resource management.178 Based on the hierarchy principle, all waste recovery and treatment options have priority and controlled disposal and landfilling are at the bottom of the pyramid (see Klunder and Anschütz, 2001). The hierarchy principle promotes the socalled “4Rs”: reduce, reuse, recycle, and recover waste. Waste avoidance and waste minimisation actions address the importers, distributors, and manufacturers of products that become waste. They are responsible for the costs of managing these products when they become waste; production and sales data are available with which to calculate the extent of the waste management accountabilities of these entities. The last option of the pyramid regarding the hierarchy principle is sanitary landfilling. In effect, all waste management systems contain some residual materials for which environmentally sound waste disposal facilities are required. Therefore, the so-called “Zero Waste” discussion, which is currently in vogue, will remain a point of purely academic discussion for many years to come, especially in LMIC. Most local governments179 subscribed to “take or pay” contracts where quantities of waste to be supplied to a landfill managed by the private sector are fixed for very long periods of time (e.g. 20 years). This is a definite disincentive for recycling and waste avoidance. Another issue is contract duration. The duration of most contracts is oriented to the investment cycle of general disposal. This represents a major failure since the life cycle of waste can be left open to more flexible options instead, such as material recycling, waste avoidance, and resource efficiency. Such possibilities should also be analysed when PSP is introduced. According to Bleischwitz, R., Proske, A. (2005), economic incentives should be identified before the involvement of the private sector in SW industry.180 This does not mean a backward-looking return to the public provision of SWM. Instead, they may well lead to a waste management future where the positive effects of PSP and competition in the areas of recycling, reuse and waste avoidance are reconciled with public needs in the areas of disposal. The hierarchy should be applied in a flexible manner and should take account of the fact that, for many LMIC, the first priorities are to improve the collection service for a large part
178 “Integrated Resources Management is the recovery of economic value from any resource produced naturally or by society while considering ecological, economic, technological and social implications of recovery, recycling and re-integration technologies”. 179 Bleischwitz, R., Proske, A. [No time to waste]: in Weizsäcker, E./Yong, O./Finger (eds.), M., Limits to Privatization, London: Earthscan, 2005, p. 110. 180 Bleischwitz, R., Proske, A. [No time to waste]: in Weizsäcker, E./Yong, O./Finger (eds.), M., Limits to Privatization, London: Earthscan, 2005, p. 111.
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of the population, and to enhance the quality of landfills. 181 No matter how much prevention, reuse and recycling a society manages to realise, there will always be a role for landfills in an integrated waste management system. This means that landfills are a valuable and essential element of an integrated waste management system and should be recognised as such. 182 As the saying goes, “An illiterate person does not worry about the author’s rights.” Accordingly, since SWM in LMIC is a kind of stepchild of ISSWM, decisionmakers should prioritise waste separation, higher rates of waste collection in LMIC municipalities, and not least adequate disposal.183
5.2
Polluter Pays Principle
The polluter pays principle was first adopted in 1916 by Richmond in California. However, years later many municipalities have still not enforced this principle.184 The polluter pays principle has enjoyed quite a long history of acceptance in the USA and in the EU.185 The 1972 Stockholm Conference, however, did not mention this principle. Later on, Agenda 21 did not relate to this principle explicitly, but only echoed the allocation of responsibility. In Johannesburg in 2002, the polluter pays principle was reaffirmed as a framework within which sustainable development could be attained. The polluter pays principle states that those responsible for pollution should pay for the costs of this pollution whereas the “user pays” principle holds that those benefiting from a waste disposal service should bear the cost of this service. These two notions are used interchangeably here. The polluter pays principle is an economic policy which allocates the costs of pollution and environmental damage. It encompasses the costs to human health, environmental, natural resources, and social and cultural harm. In a waste management context, the amount paid for a waste disposal service should be proportional to the generation of waste. Nevertheless, the costs of the service depend not only on the quantity of waste generated, but also on the distance to the landfill, road accessibility, etc. Whereas
181 UNEP, Waste Management Planning, 2004, p. 2. 182 Scharff, Heijo, Sustainable landfills, in Waste management world Review, London: PennWell Corporation, issue May-June 2006, p. 78. 183 Dorvil L., PSP in Morocco, Solid Waste, health and the Millennium Development Goals – CWG SWM in LMIC and WASH Workshop 2006, Kolkata, India, 2006, p. 9. 184 Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 40. 185 Examples of Use of Polluter pays Principle: European Union (Convention on the protection of the environment through criminal law (Nov., 1998)); Germany (“Verpackungsverordnung” The Ordinance on the Avoidance of Packaging Waste (1991)); USA Superfund (EPA).
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waste collection traditionally falls under local jurisdiction, this is not the same for waste disposal. Another issue concerns the financial capacity of people living in low-income areas to pay for services; overall, such capacity is normally weak. Therefore, the strict application of this principle to householders is troublesome. The polluter pays principle implicates national and international law in liability for environmental damage. The fact that environmental damage is not confined to municipal boundaries or national borders means that the polluter pays principle should be part of international environmental legislation. Mechanisms like the so-called Clean Development Mechanism (CDM) have been recently set up to address this principle at an international level, since environmental pollution, including SW, does not necessarily occur in the country in which it is detected. Pongrácz (2002) discovered that the polluter pays principle 186 raises awareness and encourages householders to segregate their waste when a separate recyclables collection is available. In the same context, some economists187 rightly argue that when beneficiaries of the SW service must pay a fee, which increases as the quantity of SW generated increases, they will generate less waste than other beneficiaries. However, Pongrácz (2002) recognised that this principle can result in abuse. People put non-recyclables into the free collection waste container to avoid paying for their removal.188 However, the accountability of residents for the waste they generate continues to be reflected in the allocation of taxes for the management of their waste. Bird (2001) rightly argued that taxes are not directly correlated with the services that taxpayers receive. In contrast, financing local SW services through user fees not only provides financial means but also provides information on the type of services, the quantity and quality, and beneficiaries.189 Simply put, user charges promote economic efficiency. A well-designed tariff system is essential to achieve this objective. Bird (2001) stated that the economically efficient price for any service is the price that would be charged in a perfectly competitive market. 190 Sound SWM provides not only “private” benefits to direct beneficiaries, but also “public” benefit in the form of an externality.191 The obvious way to
186 Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, p. 96. 187 Savas, E. S./Baumol, D./ Wells, W. A., Financing Solid Waste, in Savas, E. S., Efficiency of Solid Waste, Lexington: The Trustees of Columbia University, 1977, p. 85. 188 When the City of Munich increased waste disposal charges by 42% in 1993, the illegal dumping of waste increased alarmingly (Pongrácz, E., 2002). 189 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 171. 190 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 172. 191 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 177.
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take external benefits into account in setting up an adequate tariff system for beneficiaries is to estimate the size of the marginal benefit provided to an additional user by the service in question, and then to set the price equal to marginal cost less this external benefit. The resulting financial deficit could then be funded from general revenues. It is always challenging to measure external social benefits in any convincing way. 192 In sum, the polluter pays principle or user pays principle cannot be strictly met in LMIC for many reasons, including SW being considered public goods. Furthermore, as mentioned earlier, SW is not necessarily generated where it is found. Hence, international organisations are increasingly addressing this issue in establishing new mechanisms. As far as PSP is concerned, some arrangement models are limited to franchising or licensing SW collection, for instance, where households have to pay the private contractor directly.
5.3
Effectiveness
Effectiveness 193 means producing or being capable of producing a result. Effectiveness stresses the power to produce an effect. Effectiveness in our context means providing effective SWM services for an entire population. This is measured by determining the extent to which the required quality of services is being provided. In this respect, the notion of equity is closely related to the notion of effectiveness. However, rapidly growing, informal settlements of low-income residential areas present a particular challenge to this principle in LMIC. These districts are also often characterised by physical constraints that present waste management challenges. Among other relevant factors are multi-storey buildings often constructed without in-depth reflection on waste collection. Streets in low-income areas are often very narrow, and are not readily accessible to the conventional waste collection vehicles mentioned in the contract specifications agreed with the private sector. Residents are often not sufficiently informed about preparations for waste collection, such as where they should place the waste for collection and at what time. Moreover, population densities in low-income areas that have inadequate waste management services are often very high. Although the quantity of waste generated per capita in low-income areas is lower than in high-income areas, the population density prevalent in such areas means that the amount of waste generated per unit area of ground can be correspondingly high. In principle, solid waste services have to be rendered in a satisfactory manner irrespective of the socio192 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 178. 193 Encyclopædia Britannica 1994-1999.
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economic situation of a given district (low-income areas or high-income areas). This is not only a moral issue, such as that of public goods, but bad SW waste management affects not only those who cannot afford the services in question. All citizens are entitled to an appropriate waste management system for environmental health reasons. Unlike other public services, such as water supply or electricity, which can be readily cut off for nonpayment of the services, solid waste collection cannot be discontinued without jeopardizing general public welfare. While the fees charged to beneficiaries of the service for waste collection services may cover primary collection costs, it seldom covers full transfer, treatment and disposal costs, especially in low-income districts. To render effective waste service access, some cross-subsidisation and/or financing out of general revenues will be required. As far as SW service is concerned, some indicators for effectiveness are calculated as follows: • Population provided with collection services divided by total population; • Households provided with collection services divided by total households; • Length of paved streets regularly cleaned divided by total length of paved streets.
5.4
Efficiency
Efficiency 194 is the quality or degree of being efficient; that is, effective operation as measured by a comparison of production with cost. The ratio of the useful energy delivered by a dynamic system to the energy supplied to it. Efficiency in terms of solid waste means providing the specified quantity and quality of service at minimum cost, thereby maximising the benefits and optimising the use of resources. The costs for the solid waste services in LMIC prior to PSP experience are commonly underestimated. Some of the reasons given for this include the organisational arrangements involved in the provision of services, the methods through which they are paid, and the accounting systems employed to record the costs of the service. On average, the costs after the introduction of PSP increased compared to municipal management. Very often, some relevant costs are not taken into consideration by comparing SW costs prior to and after PSP. These costs include transaction costs. Nonetheless, service accountability under
194 Encyclopædia Britannica 1994-1999.
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municipal management is often lacking. The monopoly of the municipal administration reduces the much-needed increases in efficiency. In theory, and in order to improve efficiency, public authorities are turning to the private sector. Strong evidence showing that this does actually improve efficiency is lacking, however. The provision of waste collection and waste disposal services are among those most often outsourced in this way. One of the largest problems faced by municipal waste management in LMIC is the difficulty in keeping expensive capital equipment operational. The problems include a lack of maintenance technicians, a shortage of spare parts, and insufficiently sound management. Finally, regarding SW services, efficiency can be calculated in terms of the following ratios: • Sum of all direct annual costs, indirect costs, social benefits, contract payments, financial costs, depreciation and others, for • Total cost divided by population served • Total cost divided by households served • Total cost divided by number of commercial outlets served.
5.5
Concluding Remarks
This section has covered the main key principles of the notion of sustainability in the context of solid waste management. Sustainability has been seen in this context as a concept relating to the continuity of the economic, social, institutional, and environmental aspects of human society. Solid waste has been viewed holistically (that is, in integral terms), encompassing the financial, technical, socio-economic, and managerial features of the municipalities in question. It has been established that the application of some principles like the polluter pays principle in LMIC, especially in low-income areas, challenges public and private sector for various reasons. Some of these include the beneficiaries’ low economic capacity to afford the full costs of the SWM services, physical constraints, etc. However, even such stakeholders must be provided with some incentive to minimise their waste. SW is considered to be a public goods (see Chapter 7.1). As such, solid waste services cannot exclude some beneficiaries. Concepts have to be developed in the municipality through which waste management services can be rendered to people living in low-income areas to ensure the application of those principles. The notion of effectiveness has been considered, since solid waste services have to be rendered both in low-income areas and high-income areas. This notion not only constitutes a moral imperative:
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environmental pollution negatively affects all citizens of a municipality. As far as the notion of efficiency is concerned, it has been noted that transaction costs are not usually considered when comparing SW costs prior to and after PSP to demonstrate its efficiency. There is certainly a long way to go to achieve ISSWM, in particular in LMIC. Over time, the implementation of these principles by public authorities and private sector will have the effect of encouraging the generation of reduced amounts of waste including their treatment and safe disposal. The question is how to make the private sector meet those principles in pursuing their “for profit” business?
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6.
Privatisation and Private Sector Participation
Before taking up the theoretical discussion of privatisation and PSP, the following chapters will deal with the notions of globalisation, liberalisation, regulation, and deregulation. These notions will be outlined briefly. The main reason is that these notions are often used improperly in both academic and public debate. Consequently, their interpretations are often misleading. A careful analysis of these notions will facilitate our understanding of the actual discussion of privatisation in general and of Private Sector Participation (PSP) in particular. Thereafter, Chapter 6.6 will consider privatisation. It will analyse and discuss the most relevant PSP models. Their limitations of the models will be highlighted. Chapter 6.7 is concluded with some pertinent remarks.
6.1
Globalisation and Liberalisation
In economic literature, globalisation refers to a situation of the increasing closeness of nations in economic terms through trade, capital flow, and a new international division of labour. For Alan Gilbert (1990), globalisation is the third most important reorganisation of the international division of labour, the first having been the use of colonies as suppliers of raw materials, and the second the industrialisation of LMIC through entrepreneurs. Accompanied by rapid technological innovation and falling raw materials prices, globalisation has brought about the tertiarisation195 of old metropolitan areas. At present, the notion of privatisation cannot be considered without taking into account the forces of globalisation. 196 Globalisation is the tendency of businesses or technologies to spread throughout the world, or the process of making this happen. The notion was first used as early as 1944 but economists only began applying it more consistently in the early 1980s. Theodore Levitt (1983) pioneered this notion, and is usually credited with its coining in the article he wrote in 1983 for the Harvard Business Review entitled “Globalization of Markets”. On the one hand, as an engine of commerce, the notion includes some positive economic and social aspects. Hypothetically, it results in an increased standard of living and economic prosperity in LMIC as well as bringing further wealth to industrial countries. On
195 Development of the service sector. 196 Yong, O., The Global Context, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 190.
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the other hand, globalisation is considered to be an engine of “corporate capitalism”. In this meaning, it encompasses negative economic, social, and ecological aspects. It is often considered to be a force trampling on the human rights of societies in LMIC, claiming to bring prosperity, yet often simply amounting to plundering and profiteering. From an economic point of view, a typical – and entirely positive – definition is provided by the International Monetary Fund (IMF), which stresses the growing economic interdependence of countries worldwide through an increasing volume and variety of crossborder transactions in goods and services, free international capital flows, and a more rapid and widespread diffusion of technology. According to Weizsäcker’s more realistic point of view (2005), globalisation has various strands, including the growth of international trade and financial flows, a weakening of the democratic nation state, the movement of human populations across borders, and the onset of global environmental changes. As far as PSP in SWM in LMIC is concerned, international private firms are playing an active role due to their financial and technical capacity. In Morocco, for instance, international firms from France, Spain, and USA are operating in the solid waste market. Global players like “Vivendi” and “Lyonnaise des Eaux” are also operating in this market, mostly in joint ventures with Moroccan firms (see Chapter 10). This is considered to be an effect of globalisation. It is not about stopping this process, but it is a question of finding the best approach to meet sustainable principles, especially in the SW sector. Other notions in the same context include liberalisation, deregulation, and so forth. There is a distinction between privatisation, deregulation 197 , and liberalisation, which all refer to actions undertaken by governments to stimulate competition among private firms. The following paragraphs will briefly outline these notions. Liberalisation means the introduction of competition into the provision of various public services customarily provided by state-owned companies, such as water, telecommunications, and SWM. Liberalisation is a form of deregulation because it requires changing the competition rules concerning infrastructural provision so that competition can occur. Liberalisation often requires unbundling198, so that the parts suitable to be exposed to competition are separated from the non-competitive (monopoly or oligopoly) elements of any given infrastructure. The most interesting liberalisation opportunities at present seem to concern a systematic recourse to contracting-out from the public to the private sector. Although economic
197 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 5. 198 That means splitting different stages of service delivery and allocating to different organisations.
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liberalisation is often associated with privatisation, the two terms have to be considered separately. For example, the European Union has liberalised some public markets, such as the gas and electricity markets, instituting a system of competition. However, state-owned companies like “Electricité de France” (EDF) remain under government ownership. In the context of SW, contrary to municipal solid waste, commercial and industrial waste is characterised by free competition. This is simply achieved by contracting-out the service. Why could the same regime not be adopted for household waste, which this dissertation is addressing? The following reasons might be cited. 1) Municipal solid waste services fall into the category of public goods (see Chapter 7.1), meaning that competition in some segments of this market does not always make sense. 2) Private operators of sanitary landfills are not willing to engage in the collection of separated SW since they have invested in disposal capacity. 199 In terms of the limitations of PSP, two points should be highlighted: firstly, different private firms cannot compete in the same area or district in solid waste collection (collision effect); and secondly, if the same private firm is used in SW collection and in landfill management, and if it is paid according to the quantity of waste collected and disposed, it will have no economic interest in supporting a waste minimisation programme or waste recycling. This is considered to limit ISSWM principles. 3) The questions that have to be addressed are: In which element is competition useful? In which element will liberalisation jeopardise the ISSWM concept? This can be accomplished by the unbundling of activities in which economies of scale are not important. Due to the characteristics of solid waste services, these activities can be separated by markets - either geographically or by system elements, such as street sweeping. The possibility of unbundling can create attractive opportunities for PSP in a competitive environment. 200 Nevertheless, unbundling is economic nonsense in some SWM sectors, such as landfill management. 4) A further question that has to be addressed is the capacity of people in LMIC to pay for SW services, especially those living in low-income areas. If the SW market is fully liberalised, issues such as cost recovery, or the effectiveness of the ISSWM, can challenge the private sector. Golakai (2005) rightly remarked that “evidence to date has shown that liberalisation can directly threaten the protection and
199 Massaruto, A., Waste management economic interest, Paris: LED, 2005, p. 13. 200 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 216.
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5)
promotion of consumer interest, particularly for poor consumers who cannot afford services provided on a purely commercial basis.” 201 The contracting-out of SW collection through franchising (that is, where private firms are directly paid by the beneficiaries) will fail in LMIC. Finally, another possibility for PSP is that while large private firms could be responsible for the integrated cycle, they could also subcontract some of the services out to small private firms, NGO or CBO. This model allows for more intense competition and leaves space for SME, especially in labour-intensive activities such as solid waste collection and in knowledge-based innovative segments (recycling opportunities). Large private firms could then concentrate on more complex business processes, such as treatment facilities.202
6.2
Deregulation and Regulation
In economic theory, deregulation is the process by which governments remove restrictions on businesses in order to raise the level of competitiveness, create more efficiency, and lower prices for the beneficiaries. Privatisation203 is not the same as deregulation, which means the removal or attenuation of restrictions, including the requirements and prohibitions imposed by a public authority on the actions of public or private actors or, in essence, any reductions of state control over the activities of societal actors. However, privatisation often comes with deregulation, especially the removal of exclusive rights and the opening-up of a service to competition. A liberalised market can be regulated to protect the rights of the beneficiaries, especially to prevent de facto oligopolies. However, the terms are often used interchangeably. Deregulation gained momentum in the 1970s, influenced not only by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others, but more importantly by the work of Alfred E. Kahn. The problems experienced with unregulated or weakly regulated private ownership have led many to conclude that private ownership can bring benefits if there is a strong framework of regulation to ensure that companies look after the needs of all their customers of goods and
201 Golakai, N., Experiences of African Consumers, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 212. 202 Massaruto, A., Waste management economic interest, Paris: LED, 2005, p. 17. 203 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 4.
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beneficiaries of services and support broader public policy goals, such as environmental protection and equal opportunities.204 Privatisation cannot solve public infrastructure issues in the absence of a strong regulation of the rules of the game that are widely understood and generally regarded as legitimate (Yong, 2000). Regulatory institutions that are independent and have access to necessary information about costs, prices and service quality, are important key players of successful infrastructure reform. Creating such institutions is a “conditio sine qua non” for the success of PSP in the solid waste market in LMIC. A privatisation process accompanied by regulation and corporate restructuring leads to higher growth.205 Accordingly, about 200 regulatory agencies have been created in LMIC over the last decade. Finally, if private operators decide to terminate the contract, there is generally little the regulator can do about it.206 To be precise, deregulating the SW market can only be successful if comprehensive steps are taken towards unbundling sectors, thereby enabling fair competition and at the same time building and developing capacity within municipal administrations in LMIC.
6.3
Privatisation: Academic and Empirical Discussion
The intellectual foundation for privatisation was laid and pioneered by Milton Friedman.207 However, the veritable conception of privatisation was first proposed in 1969 by Peter Ferdinand Drucker.208 Other influential scholars include Gordon Tullock, Anthony Downs, and William Niskamen who coined the term “re-privatise”, the precursor of privatisation, also in 1969. 209 Considerable academic attention has been devoted to the theoretical
204 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 9. 205 Stiglitz, J. E., Democratizing the IMF, Columbia University, 2005, p. 122. 206 Wolff, P., Private Funding of Infrastructure, in Weizsäcker, E. /Yong, O../Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 322. 207 Milton Friedman (1912 – 2006), American economist criticising government intervention in consumer product safety, one of the leading proponents of monetarism. Friedman 's best-known contributions are in the realm of monetary economics, where he is seen as the founder of monetarism and as one of the successors of the “Chicago school” tradition of economics. He was awarded the Nobel Prize for Economics in 1976 (Encyclopædia Britannica, 2007). 208 Peter Ferdinand Drucker (1909 – 2005), Austrian-born American management consultant, educator, and author. His early works discuss the nature of industrial society. A second line of books explains general ideas about modern business management. A third body of work offers speculation on the future impact of such developments as technological change. Finally, there are writings that address questions of practical corporate management (Encyclopædia Britannica 2007). 209 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. xiv.
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differences in the motivation and performance of public and private organisations. William Niskamen Jr., Graham Allison, et al. are among the many who have considered the matter. 210 Further research was conducted in the 1970s by R. W. Poole, R. M. Spann, Rothbard, and Fisk et al., who all strengthened the case for privatisation. 211 Since the beginning of the 1970s, much academic research has been carried out, devoted to privatisation in general, Public-Private Partnerships 212 (the notion of Public-Private Partnerships is used interchangeably with the notion of PSP; see Chapter 6) and their impact on the performance of public enterprises. Important researchers include E. Savas, 1970; R. W. Poole, 1976; R. M. Spann, 1977; M. N. Rothbard, and D. Fisk in 1978. Other authors (Williamson, Powel, McNeil,) also furnished thorough studies on specific PSP models. In the 1970s, E. Savas contributed to strengthening the case for Public-Private Partnerships in solid waste services, especially waste collection services. E. Sclar and M. Harper recently carried out an in-depth study on privatisation and PSP in relation to the goods and services required. Other researchers, including Gädeke, 2002; Ludwig, 1997; Pippke, 1999; Völmicke, 1996, investigated the link between PSP and SWM. Their research comprised German case studies, and the PSP discussion differs in its essence from LMIC to industrialised countries like Germany. Privatisation can be broadly defined as relying more on private institutions and less on the government to deliver public services. It is the act of reducing the role of government or increasing the role of other institutions in producing goods, providing services, and owning property.213 There are several types and degrees of privatisation. One involves the sale to private owners of state-owned assets, and this is most correctly called privatisation. Others, where public services have been contracted out to private firms, and where the public authorities remain legally responsible for the public services, are called PSP in this study. Throughout the world, privatisation has sometimes been adopted improperly. Very often, it is considered to be key to a vibrant economy and, ultimately, to achieving a better society for all. 214 However, the historical record suggests that private provision might not be enough.
210 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 78. 211 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 15. 212 According to Savas, a public-private partnership is defined as any arrangement between a government and the private sector in which partially or traditionally public activities are performed by the private sector. 213 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 3. 214 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. xiv.
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The elections of Margaret Thatcher as Prime Minister of Great Britain and of Ronald Reagan as President of the United States of America, in 1979 and 1980 respectively215, afforded high visibility and a pronounced ideological impetus to what became the privatisation movement.216 It has been flourishing throughout the world since the end of the 1980s, in terms of both the number of transactions conducted and the amount of revenue generated. According to Sader (1995), the number of privatisations worldwide rose from 62 in 1988 to 868 in 1993, while the total number of transactions over this period in 93 countries amounted to 2,655 at a total value of US$ 271 billion. However, the success of privatisation has been erratic, differing from one country and one region to another. Between 1988 and 1993, most privatisations (85% of all transactions) took place in industrialised countries, generating US$ 175 billion, compared to US$ 96 billion for LMIC. Thus, privatisation has been more successful in developed economies, in particular in OECD countries. Nonetheless, there is a discrepancy between the statistical evidence of privatisation and public perceptions. To some people, the very word “privatise” causes misunderstanding and polarisation. None of the empirical studies undertaken so far adequately explains the growing popular disenchantment with such reforms.217
6.4
Privatisation: Advantages and Limitations
Neoclassical economic theory218 and recent theories of state failure advocate competitive market mechanisms, essentially on the grounds of efficiency. It is argued that, by comparison, non-competitive provision leads to inefficiency and productive (sometimes known as internal or technical) inefficiency. Savas is famous for his work in this area and has conducted remarkable research on privatisation in general and Public-Private Partnerships in particular. As the discussion on privatisation is not ideologically free, Savas can be considered to be one of the advocates of privatisation amongst North American economists. Savas (2000) states that the word govern comes from Greek “kybern,” “to steer.”219 In his opinion, it is the duty of the government to
215 The rallying cry of the Reagan Revolution was “Get the Governments back off our backs and out of our pockets”, while in Thatcherite Britain it was “Rolling back the frontiers of the state (Savas 2000)”. 216 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 15. 217 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p. 28. 218 Batley, R., PPP for Urban Services, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 201. 219 The same root appears in cybernetics, the science of control.
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steer, not to row.220 According to him, privatisation is a fundamental strategy to improve the productivity of government agencies. It invokes the power of private property rights, market forces, and competition to give people more for their money.221 Furthermore, he argues that mercenary troops have been used since ancient times and private air forces came into being in recent times to conduct wars under contract.222 In his opinion, privatisation is normally based on the conviction that profit motives and competition are necessary to provide the proper incentives for efficiency and quality.223 He states, perhaps a little provocatively, that “It’s fun spending other people’s money! Those who have served in government and made expenditure decisions may admit to the satisfying thrill, the power, and the regal sense of self importance-to say nothing of the flattery from grateful beneficiaries-that comes with dispensing tax money, all at no cost to one’s own pocket!”224 Compared to the considerable previous work he undertook in the 1970s, his more recent arguments, particularly in a study published in 2000, are anything but serious research. Supporting the benefits of privatisation by citing the example of mercenary troops without due ethical consideration is irresponsible. One of the most frequently cited advantages of the private sector over government is its management flexibility. Private sector management has greater ease in firing personnel for non-performance and in providing upward mobility for workers with good performance. Also, the private sector is not constrained to government hours and overtime constraints. It is generally easier for a public agency to influence the behaviour of a private organisation than the behaviour of another public agency.225 Public administration does not pursue public agencies in court. Regarding LMIC, PSP advocates argue that privatisation results in more competition226 , better service, economic growth, reduction of national debt, and benefiting from more Foreign Direct Investment (FDI). Privatisation means less pressure on municipal budgets, and therefore provides more flexibility. It is also perceived as a way of reducing overall public deficits by increasing short-run revenues. A key argument for privatisation is that compared to state-owned, non-competitive utilities, private owners and operators have
220 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 7. 221 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 6. 222 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 71. 223 Sclar, E. D., Economics of privatisation, 2000, Foreword Page viii. 224 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 29. 225 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 101. 226 However evidence in the field of ISSWM in LMIC is still lacking.
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stronger incentives and are better able to control costs, respond more effectively to consumer needs, and adopt new technologies and management practices.227 As far as public services are concerned, this argument is not true. In addition, those advocating228 privatisation advance three lines of argument: (a) Privatisation promotes efficiency and enhances social welfare by creating incentives to allocate resources to their highest use. (b) Transferring property from the public domain to the private sector and reducing regulatory restrictions increases personal freedom, avoids the effects of rigid bureaucracies, and reduces corruption and cronyism in public places. (c) A combination of private property and appropriate incentives and rules produces equitable results in the sense of rewarding those who work hard, take risks, and exercise ingenuity. The following paragraphs will discuss this issue with regard to SW services. Cointreau-Levine (2000) observes that the main reasons229 for this enhancement are that private sector service providers are accountable to their customers and are obliged to react to customer dissatisfaction. Competition between the private and public sectors is effective in improving cost-effectiveness. If thresholds are specified in the contractual agreement, and the private sector operator is monitored effectively, good standards of operation can be achieved. Private sector management has more flexibility to hire qualified staff, to pay staff according to their performance, to terminate the employment of unsatisfactory workers, and to adjust working hours according to service demand. The private sector can optimise the size of the work force and the ratio of professional to operational staff, and to concentrate its resources on the service for which they are intended, without staff or equipment being requisitioned for other purposes. In her opinion, private sector companies are both less restricted by bureaucratic procedures and more able to concentrate resources where they are needed. Competition, accountability, and transparency are the three keywords in this respect. 230 There should be competition between different private sector companies, and also, if possible, between the private and public sectors. Public support can be expected to result in more widespread payment of charges or taxes, and fair competition to result in lower costs
227 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p.25. 228 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 11. 229 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 10. 230 Cointreau-Levine, S./Coad, A., PSP in MSWM, Part I : Executive overview , St Gallen: SKAT, 2000, p.8.
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and better services. According to Cointreau-Levine (2000), some reasons 231 for this increasing focus by municipalities on alternative arrangements include: • Many requirements of the MSW rules have not been fulfilled by municipalities in the past – such as primary door-to-door collection or sanitary landfilling – and therefore, there are very limited skills and knowledge within municipalities to handle these activities. • Most municipalities lack the finance to expand operations into new geographic areas or into new activities. • The increased need to focus on efficiency improvements to reduce cost and reallocate expenses within the waste management chain to activities like treatment and disposal. In theory, the main reasons for private sector engagement in ISSWM are the following: first, the private sector has easy access to specialist skills; secondly, it can form joint ventures; and thirdly, it has better access to capital financing, which in turn enables the private sector to mobilise appropriate equipment and other resources quickly. Very often, the private firm has to make high initial investments and will only be paid during the contract period. However, other authors like Sclar (2000), Kessides (2005), and others argue that privatisation is oversimplified, oversold, and ultimately somewhat disappointing. Kessides (2005) remarks that privatisation has proved to be more difficult to implement effectively; it is also less magical in its accomplishments than what was believed or promised beforehand. 232 Privatisation, although useful, is easily overworked. It is not an uncontroversial solution to the problem of providing public goods when both costs and benefits are hard to measure. Without sound public management, PSP does little to enhance public value (Sclar, 2000). Opponents 233 of privatisation advance a parallel set of propositions. Firstly, privatisation tends to weaken the state and its capacity to care for social equity. By weakening the state, privatisation also erodes the significance of democratic participation at national and subnational levels. Secondly, privatisation subordinates broader public goods, including longterm ecological and cultural values, to commercial imperatives. Thirdly, the need of private providers to make a commercial return (in the form of profits, dividends, rents and/or interest) adds to the cost of providing public services. Thus, the costs of services are higher
231 Mehta, R./Dasgupta, S., municipal waste services in Delhi, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 2. 232 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p. 21. 233 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, pp. 11-12.
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when supplied by the private sector. Commercially, optimal decisions are often suboptimal for public goals, and competition forces providers to ignore externalities (see Chapter 7.1). The private sector never really assumes risks in providing public services. Where costs exceed revenues, private operators respond by demanding subsidies, raising charges, cutting necessary investment and maintenance, or walking away. Finally, new operators may generally start shedding excess employees – one of the most vexing problems facing stateowned utilities in nearly every developing and transition economy.234 Finally, even in the USA, the country which most forcefully advocates the principles of privatisation, there are some public services that are not allowed to be provided by the private sector. These services include 3,304 commercial airports. These airports are stateowned, by municipalities and cities respectively. Although these airports are locked into competition, they are not profit-oriented. In 2004, James May, President of the American Transport Association, stated in the House of Representatives: “They are not private enterprises. They are public utilities developed and maintained with important input of public money.”235 Federal laws prohibit these airports from using their profits to other ends than the improvement of their infrastructure. This system is called the “Principle of Diversion of Income”. On balance, the privatisation policy debate has largely amounted to little more than competing anecdotal evidence. Those favouring privatisation tell their favourite stories, and those opposed peddle theirs. According to Sclar (2000), this is “Like the blind men who each touch a single part of an elephant and self-assuredly contradict each other, they extrapolate their narrow experiential evidence into general descriptions of entirely different creatures.” 236 Hence, the question is not whether privatisation and private sector development should occur, but about how it can be done in an optimal way, that is, how to reach social goals through enterprise growth, how to avoid market distortions by supporting enterprises, and how to regulate and enter into dialogue with the business sector (Nellis and Kikeri, 2002; Kikeri and Nellis, 2004).237 The decision to privatise a public service should not be based on ideological considerations but rather on economic merits. 238 One of the most fundamental determinants of the
234 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p. 25. 235 Leser, Eric « Un service public que les Etats-Unis n’envisagent absolument pas de privatiser » Daily Newspaper « Le Monde », 3 June 2005. 236 Sclar, E. D., Economics of privatisation, 2000, p. 13. 237 Obser, A. Privatisation and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 260. 238 Sclar, E. D., Economics of privatisation, 2000, p. 44.
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efficiency and effectiveness of any PSP arrangement is competition. That is, the degree of competition that an arrangement permits will, to a major extent, determine how efficiently that arrangement will supply a service. 239 As far as SWM is concerned, the formidable question is in which SW element fair competition is possible during and after the bidding procedure?
6.5
Prerequisites for PSP
Cointreau-Levine (2000) argues that various issues are necessary when addressing the involvement of the PSP in SW services. They include efficiency, accountability, management, legislation, finance, and costs. Cost effective and adequate service standards can only be reached by creating effective competition amongst several private sector contractors, transparent bidding procedures, and fair competition; accountability for both contract parties; and the comprehensive monitoring of contracted services. Tailor-made benchmarks need to be defined and followed up in order to assess the effectiveness of private sector services. To achieve successful PSP, she recommends observing the following principles240: Maintain a balance between the private sector and public management; Develop contractual periods that enable economic depreciation of assets and repayment of loans; Develop techniques and facility sizes that are appropriate and economically viable; Define private sector service zones that are equitable and comparable for optimum competition and achieve economies of scale and optimum spans of management; Rationalise collection and transfer haul distances to minimise costs; Seek harmony and co-operation with private sector partners for win-win contractual and operational relationships; Build government capacity to work as an effective partner in contracting and performance monitoring; Encourage private sector joint ventures that bring in foreign expertise and optimise the use of local knowledge and skills.
239 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 94. 240 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 23.
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Furthermore, the following points are essential to ensuring the sustainable participation of the private sector in providing public services: a) Contestability To achieve optimum contestability, the zones served by public authorities should cover at least 30% of the population of the urban area. To create contestability and to guarantee a minimum managerial capacity of the municipalities, the private sector should service no more than 70% of any city; the remainder should be serviced by the government.241 b) Capacity building The introduction of PSP usually requires municipal strengthening.242 Municipal managers should be able to set up contract specifications or delegate these to private agencies. New responsibilities encompass monitoring the performance of the new private operators. c) Competition Competition is the key condition for successful PSP as it results ultimately in more efficiency and effectiveness. However, competition strongly depends on the type of services to be provided. As PSP in ISSWM is not fully developed in LMIC, all approaches need to consider the current number, capability, and interests of private contractors. Options to develop the market by offering attractive and contestable packages or involving international operators need to be assessed. Savas (2000) observes that the most thorough studies included the costs encumbered by cities for contract preparation, bidding, monitoring contractor performance, contract administration, and the like in the cost of the contract work. These studies concluded that the cost of municipal collection is about 35% greater than the total cost to the city of contract collection. In these studies, municipal collection was monopolistic and not the result of managed competition.243 d) Provision of accurate information All relevant financial and technical information and data needs to be clearly and transparently outlined in the bidding documents. Contract specifications need to be comprehensive and objective to avoid Asymmetric Information. They need to be applied in a fair manner during the operation period.
241 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 15. 242 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 32. 243 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 161.
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e) Accountability Both contract partners, the public and the private sector, should embrace the principle of accountability. The private partners should sense that they are accountable to the beneficiaries of the service and to the contractual authorities. Contract performance should be managed by good inter-organisational relationships, the use of performance bonds, and finally the use of penalties. Such accountability results from well-designed and cutting-edge contract specifications and effective contract enforcement. f) Monitoring Performance monitoring is a key condition to establishing a proper basis for evaluating efficiency and service effectiveness. Capacity building and adequate means are required in order to develop adequate contract monitoring units to follow up the performance of service. However, contract specifications or conditions often fail to reflect the actual features of the city in question. The service level is often not affordable by residents living in low-income areas. Public management often has no accurate information on the real costs of the service. Finally, comprehensive unbundling of service areas in order to allow several private contractors to provide sweeping and waste collection services, as well as the participation of public service providers in tender procedures, are among the options to facilitate more competition in the SW market.
6.6
Analysis and Discussion of PSP Models
PSP covers a wide spectrum of arrangements in which private enterprises are involved in the provision of services that have hitherto been provided by public authorities. In theory, the private sector has three important roles to play in the SWM field. Firstly, where the public authority renders SWM services inefficiently and inadequately, PSP offers a means of enhancing efficiency. Secondly, in situations where local public funds for investment are restricted by budgetary constraints 244 , the private sector has easier access to financial institutions and can mobilise the necessary financial means. Thirdly, the private sector is
244 Between 1994 – 1995 in Dar Es Salaam, the DCC (Public authorities) requested 89 million TZS from the central government to repair existing vehicles and equipment and buy new ones. Vehicles aside, the DCC usually lacks money to buy fuel. This study found that in each of the months of July and August 1994, work at the landfill site came to a standstill for 6 days for lack of fuel for the bulldozer.
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well-positioned to draw on international technical know-how, as these companies can introduce sound new technologies245 into LMIC. The economic importance of SWM for the private sector has rapidly increased in the last 20 years, not least because of increasing public awareness especially in industrial countries. Solid waste has for a long time remained an activity of local interest with limited market implications. The private sector has essentially been involved as a provider of labourintensive activities, having little value added and industrial complexity, or as suppliers of disposal capacity in landfills (Massaruto, 2005). This tendency is changing increasingly in both LMIC and industrial countries. In fact, private firms in France collect 45% of all waste and 87% of all waste is treated by private firms.246 Because PSP can be accomplished using many different models or arrangements, confusion arises when discussing PSP issues in LMIC. Various models have been experimented with in the past, such as Public-Private Partnerships, contracting-out, franchising, leasing, concessions, BOT, and the like. The selection of an appropriate contract model depends on the type of service to be provided (street-sweeping, waste collection, waste treatment, management of transfer station, waste disposal), service standards, the typology of the district in question, funding ability, and finally the existence of a marketplace with regard to the interests and financial and technical capability of the private firm. In addition, many of these arrangement models are complex to set up, and they may call for explicit guarantees from the government, meaning that the government is left with significant contingent liabilities. The differences between some of these models can be subtle. Public authorities in LMIC have to assess which PSP method will deliver good results and achieve ISSWM. For example, should a landfill be implemented through a turnkey contract or concession, or should the government build the facility and outsource a service contract for its operation? Should a contractor under franchise arrangement collect all solid waste in a given area? In this chapter, delegation and concession models will be focused on. Contracting-out will be analysed in-depth due to its importance in this investigation. The first broad PSP arrangement model is delegation. 247 Sometimes called partial privatisation, delegation requires continuous and active government involvement. The state effectively remains legally responsible for the functions by simply delegating SW services
245 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 215. 246 Drefus, M., Régulation service public, Paris : LED, Colloque international, 2005. 247 In French “Gestion déléguée”.
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to the private sector. Delegation 248 is carried out in Public-Private Partnerships (PPP), contracting-out, franchise, etc. These will be detailed in the following.
6.6.1
Public-Private Partnerships
There is no single definition of Public-Private Partnerships (PPP). Various international organisations have their own interpretations. For some, it means any form of private sector involvement, or joint ventures involving a public sector and a private sector partner; for others (for instance the German Technical Cooperation -GTZ)249, it refers to a particular programme or development tool. For instance, PPP is a legally defined term in Indonesia to designate a joint venture. Therefore, the present study refers to Private Sector Participation (PSP) rather than PPP in order to avoid confusion. As municipalities are legally responsible for solid waste services, PPP is the arrangement model most used in this field. When a public-private partnership is based on the operation of highly specific public assets for which the public sector retains responsibility, such as SWM, the degree of scrutiny must be extraordinarily high, but scrutiny is costly in terms of both time and money (Higby, 1995).250 The debate on PPP in public services began more than 100 years ago. Among others, Emmanuel Savas has researched this area in-depth. Indeed, Savas was the first to link the PPP model to municipal waste services in the 1970s. More recently, the economist Moshe Adler carried out investigations into PPP in SW. He investigated the phenomenon of “onagain / off-again” in PPP history, that is, the process of involving the private sector in SWM, then returning the service to public administration, and then back again to the private sector, and so forth. Examples of “on-again / off-again” will be discussed in the following chapter. As stated above, PPP251 are usually defined as any arrangement between a government and the private sector in which partially or traditionally public activities are performed by the
248 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 126. 249 Within PPP, also known as development partnerships with the private sector, GTZ cooperates with businesses and business associations in developing and transition countries. The PPP programme combines the respective strengths of public and private partners: PPP projects are planned, financed, and implemented jointly. Since the PPP programme began, GTZ has formed more than 300 partnerships with private firms and associations in more than 60 countries. More than 140 million euro have been invested in these projects, with the public share averaging around 40 percent.(http://www.gtz.de/en/themen/uebergreifende-themen/ppp/2362.htm). 250 Sclar, E. D., Economics of privatisation, 2000, p. 121. 251 These schemes are sometimes referred to as PPP or P3.
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private sector.252 Theoretically, PPP recognises that both the public sector and the private sector have certain advantages relative to the other in the performance of specific tasks. In some types of PPP, the government uses tax revenue to provide capital for investment, with operations run jointly with the private sector or under contract (see next section on contracting-out). As this dissertation takes a holistic view of solid waste elements, each PSP model is assessed in terms of its suitability to the ISSWM concept. Regarding the limitations of this model to some waste elements, Table 7 includes: symmetric lack of information, high degree of scrutiny required, difficulties in applying penalties, etc. Key characteristic of this model is the sharing of costs and profit. However, due to the fact that this model is about a joint venture between public management and private sector, it might be very difficult to apply penalties in case of non-performance of the contract. Table 7 reveals some limitations to the PPP model.
Application Not usual Not usual Not usual Feasible Duration Features Limitations
Street sweeping Waste collection Waste transport Transfer station
3 years to 15 years
Recycling treatment plant
Feasible
3 years to 15 years
Composting treatment plant
Feasible
5 years to 30 years
Landfill management
Feasible
6 months to 2 years
• Joint venture between public and private • Costs and profit sharing • Private sector makes investment • Private sector provides technical expertise • Joint venture between public and private • Costs and profit sharing • Private sector provides technical expertise • Joint venture between public and private • Costs and profit sharing • Private sector provides technical expertise • Joint venture between public and private • Costs and profit sharing • Private sector provides technical expertise
• Symmetric Lack of Information • High degree of scrutiny required • Contestability • Difficulties in applying penalties • Symmetric Lack of Information • Contestability • Difficulties in applying penalties • Degree of scrutiny must be high • Contestability • Difficulties in applying penalties • Symmetric Lack of Information • Contestability • Difficulties in applying penalties
Table 7: Limitations of Public-Private Partnerships model to SW elements
252 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 4.
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6.6.2
Contracting-out
Contracting-out became a popular buzzword in business management in the 1990s. Contracting-out or outsourcing253 is often defined as the delegation of operations from a public to a private firm with strong financial capacity and sound technical background in the field in question. Under this arrangement, the public authority remains legally responsible for the service, and it bears the same risks. Private contractors usually receive payment according to contract specifications and not their operational efficiency. Contracting-out is a business decision that is often based on more efficiency or a focus on core competencies. It is instructive to look closely at the most studied SWM service worldwide: SW collection. Many large research studies were conducted in the 1970s and 1980s, offering a great deal of compelling evidence concerning the efficiency, effectiveness, and equity of contracting-out. In the United States, 38% of all cities were using contract collection for household waste collection in 1992, and 50% of large cities were doing so.254 The same surveys revealed that contracting for exclusive collection zones is much more efficient than having open private competition along common collection routes. The private sector can operate more efficiently than the public sector in providing municipal solid waste services, as long as the requirements for contestable markets are met255 (see Chapter 6.5). Sclar (2000) raised another issue in the discussion on contracting-out, namely cost. He argued that decisions to contract out usually involve complex transaction costs related to product specifications (here, the term “product” designates the service), the negotiation of prices, the close monitoring of quality, and the need to anticipate unforeseen contingencies. In such cases, the managerial decision process involves analysing not only the comparative costs but also the transaction costs associated with contract design and monitoring. In such situations, obtaining all the relevant information can be difficult or can require considerable time and money.256 The hypothesis that involving the private sector makes for higher levels of efficiency received only cautious endorsement. There were often knock-on effects of PSP that actually increased the costs of the public sector: the need to manage private contractors and to retain a reserve capacity, and the inability to shed staff in spite of PSP. These additional costs are
253 These two terms are often used interchangeably in the relevant literature. 254 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 160. 255 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 219. 256 Sclar, E. D., Economics of privatisation, 2000, p. 19.
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called transaction costs, as stated above. Very often, those costs are not considered by comparing SW costs prior to and after PSP. A key conclusion is that the effects of PSP must be considered “all around”. That is, it is essential to take into account not just the possibly greater efficiency of the private part of a service but the gross effects on the total cost of providing the service.257 Three sets of costs must be considered when deciding between “contracting-out”, “contracting-in” (public management), and direct public management: the direct costs of public management, the costs of the outside service contractor, and the internal costs include personnel, equipment, and materials. The costs of outside service typically include the agreed-upon price of the contract. Internal costs include everything related to bidding and monitoring the contractual agreement. The comparative cost analysis of public and private management must take into account the transaction costs incurred regardless of whether the private sector is more efficient at providing the service than the public sector. The crucial issue is whether the sum of the contractually agreed price and the transaction costs is less than the cost of direct public provision.258 Contracting-out is the arrangement most commonly referred to when talking about SWM services. In this contractual arrangement, the government259 is ideally a skillful purchasing agent, a sophisticated monitor of the services rendered by the private sector, an efficient collector of taxes, and a parsimonious disburser of proper and timely payments to the contractor. However, prima facie evidence is still lacking, especially in LMIC where municipal authorities (or public authorities) manage SW services inadequately and do not even know the exact costs of the services, possess no accurate information on the quantity and characteristics of waste generated, and have difficulty in establishing thresholds. The issue is how one can expect a municipal authority to monitor a service properly when it has no experience of what a sound SW service should look like. In addition, contracting-out arrangements in some waste elements are short, typically lasting 5 years, and they usually only focus on improving services to existing customers rather than reaching the urban poor, which normally challenges the effectiveness of the SW service. Another key issue of contracting-out is the “On-again / Off-again” phenomenon. As mentioned above, Adler conducted an in-depth survey on the “On-again / Off-again” type
257 Batley, R., PPP for Urban Services, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 211. 258 Sclar, E. D., Economics of privatisation, 2000, p. 64. 259 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 70.
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of contracting-out to show the limitations of this arrangement. He260 states symbolically that to cure governmental ills with contracting-out, one might just as well cure anaemia with blood letting. Adler reported that in 1849 when Mayor Caleb Woodhull evaluated the performance of this round of contracting-out, he stated: “The system of cleaning the streets by contract has signally failed of fulfilling public expectations, and I assume that it is no longer entitled to public favor. At first it seemed to promise important advantages, both as to economy and efficiency, but in its operation it has proved entirely inadequate to accomplish either of these desired results....” Once again, the city had no choice but to hire government employees to do the job, and once again they got the job done. Furthermore, Adler mentioned that in 1851 Woodhull summed up their performance in the following way: “I believe I echo the sentiments of every citizen in according my commendation to the system now in operation: Of having the streets cleaned by the city authorities.” But the charter mandated contracting-out, which one member of the Committee on Street Cleaning lamented bitterly: “The amended charter of 1853, so far as cleaning the streets is concerned, has proved (sic.) an utter abortion.... The proceedings of the Common Council teem with....information of contracts broken, engagements unfulfilled on the part of the contractors, and the consequent filthy condition of the streets.” Similar assessments were issued over the next 25 years, until finally, in 1880, the Committee on the Affairs of Cities signed the death certificate for contracting-out: the contract system has since been tried repeatedly in all kinds of forms. Adler argued that even when sophisticated contract specifications are established, contracting-out remains cumbersome. Adler found that municipal authorities each time municipal authorities revised the issue of contracting-out, they asserted that this time they really knew how to write a foolproof contract; nonetheless, they never really succeeded in this task. Adler found that every single contemporary argument for and against privatisation had already been used in the past. Every single trick to overcome Principal-Agent problems has been tried.261 As far as LMIC are concerned, the situation is no different. In Abidjan / Côte d’Ivoire, for instance, three different stages comprise the principal history of SWM. 262 The period between 1953 and 1990 involved waste management undertaken by a private company.263 From 1991 to September 1992, the public waste department of the city of Abidjan
260 Adler, Moshe “Why Do We Have Government Employees” Columbia University, Dept. of Urban Planning, General Accounting Office, Commercial Activities Panel, June 11, 2001 (http://www.gao.gov/a76panel/adler1.pdf). 261 Sclar, E. D., Economics of privatisation, 2000, p. 154. 262 Attahi, K., Abidjan, Côte D’Ivoire, in Onibokun, A. G. (eds.): Managing the Monster: Ottawa: IDRC, 1999, p. 19. 263 Société industrielle des transports automobiles africain (SITAF, private solid-waste operator).
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undertook management under the auspices of the state. Finally, the period starting from September 1992 consisted of managed contracting-out. Under the contract, SITAF264 had to undertake the clearance of household SW and sweep the principal streets of Abidjan. The municipal administration paid the company a fee for the services provided. This was also a long-term contract renegotiated every 5 years. The calculation of the monthly fee was based on a formula combining the tonnage of waste transported and the distance covered, as declared by SITAF. The monitoring of the service provider was not considered. The whole arrangement was based on mutual trust until the beginning of the 1980s, when doubts about the escalating costs of the services were expressed.265 Once again, due to Principal-Agent difficulties (Asymmetric Information), this contractual agreement failed. Another example of “On-again / Off-again” is the PSP experience in Ghana. Over a decade ago, concerted efforts were made to involve PSP to deliver solid waste collection services in Ghana. Over the years, the local authorities had provided the services directly and then decided to outsource SW services in some municipalities. The purpose of contracting-out SW services to the private contractors was to improve the efficiency of the SW service. Indeed, between 1985 and 1995, the German Technical Agency (GTZ) provided equipment and financial means, backed by 5 years of spare parts supplies for SW services. There was a big gap after German technical assistance was withdrawn. Thereafter, SW services were contracted out to a private company. This resulted in a private monopoly which charged public authorities US$ 12/ton collection266, which is considered too high for the economic level of the country. Simply put, this PSP experience was anything but efficient. Consequently, the government terminated the contract in 2001. The SW waste service was returned to public and municipal authorities, and now involved the participation of small local entrepreneurs. The experience in Ghana has shown that simply turning over public service delivery to private contractors, without ensuring that the fundamentals that make them successful are put in place, results in weakening public management capacity. Successful contracting-out is feasible under the following set of conditions267 : unambiguous service specifications, the availability of several potential providers, and a competitive climate. The government should be able to monitor the performance of the firm contracted; appropriate terms and conditions should be included in the contract document and enforced.
264 Société Industrielle des Transports Automobiles Africain. 265 Attahi, K., Abidjan, Côte D’Ivoire, in Onibokun, A. G. (eds.): Managing the Monster: Ottawa: IDRC, 1999, p. 19. 266 Boakye Charles “Solid Waste Collection Systems in Ghana” World Bank Urban Forum, 2005 http://www.worldbank.org/urban/uswm downloaded, 2006. 267 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 75.
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As far as limitations of this model are concerned, the utmost challenge is to establish comprehensive threshold in the contractual agreement. More precisely, it is difficult to state in a contract when waste collection is not performed or when a landfill is not comprehensively managed by the private sector. Another important issue are the transactions cost. Very often these costs are not considered by comparing public management to private sector. Other problems concern Principal-Agent dilemma, Asymmetric information, etc. Table 8 summarises some limitations to the contracting-out model.
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Street sweeping
Application common
Duration 6 months to 2 years
• • • • • • • • • •
Waste collection and transport
common
6 months to 2 years
Features Public authorities legally responsible for the service Low technology required Unbundling in geographical section High involvement of national SME Low economic risk Labour intensive Low technology required Unbundling in geographical section High involvement of national SME Low economic risk
Limitations • Challenge in establishing threshold in contractual agreement • Sound public awareness required • High transaction costs
Transfer station
common
3 years to 10 years
• Competition foreclosed after bidding
Recycling common treatment plant Composting common treatment plant Landfill common management
3 years to 15 years 3 years to 15 years 5 years to 30 years
• Competition foreclosed after bidding • Competition foreclosed after bidding • Competition foreclosed after bidding
• Setting up threshold in the contract challenges • Sound public awareness required • High transaction costs • Risk “On-again / Offagain” • Principal-Agent problem • Asymmetric Information (Symmetric Lack of Information) • Risk “On-again / Offagain” due to weakness of public management • No incentive from private sector side to strengthen and develop public managerial capacity • Principal-Agent problem • Asymmetric Information (Symmetric Lack of Information) • same as above
• same as above
• same as above
Table 8: Limitations of contracting-out/delegation to SW elements
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6.6.3
Franchise
A franchise is an award of monopoly privileges to a private firm to supply a particular service in a specified area, usually with a price regulation imposed by a government agency. The private firm collects its own revenues from generators within the zone or from the sale of solid waste by-products removed from the zone. Concession is another term for this arrangement. 268 Public authorities own all the waste within their boundaries, once it has been discharged for collection and disposal. The public authority is allowed to give qualified private firms the exclusive right and responsibility to provide services to beneficiaries in various zones under its jurisdiction. In return for such an exclusive franchise, the private firms pay a fee to the municipality. They subsequently charge their customers appropriate fees to cover the costs of services. Public authorities remain responsible for the monitoring of the performance of private contractors, including some regulation of user charges; they also retain the right to renew or terminate licences in accordance with contract specifications. The biggest concern 269 associated with using private subscription and franchise systems for solid waste collection is that some waste generators would not be willing to pay for the service and that they would not properly dispose of their waste themselves (the so-called “free-rider” problem). Such conduct will even affect those who regularly pay270 their fees. Chapter 7.1, Chapter 7.2, and Chapter 7.3 (on Goods theory) will examine this issue more closely. Table 9 summarises some limitations of this model.
268 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 79. 269 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 20. 270 The private sector has been given a major role in SW collection in the central area of Dar es Salaam. The contractor has only been able to collect 10% of the expected RCCs, even though it collects 70% of the waste. It has not, therefore, made the expected investments in equipment, and this keeps the collection service from being what it was intended to be. (Lusugga K., J.M., Dar Es Salaam, Tanzania, in Onibokun, A. G. (eds.): Managing the Monster: Ottawa: The IDRC, 1999, p. 130).
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Application Duration Features Street Not very 6 months • Exclusive rights to sweeping common to perform in a zone 2 years • Private sector pays a fee for the license and charge directly beneficiaries • Low technology required • Unbundling in geographical section • High involvement of national SME Waste Quite 6 months • Exclusive rights to collection Common to perform in a zone 2 years • Private sector pays a fee and transport for the license • Low technology required • Unbundling in geographical section • High involvement of national SME Transfer Not very 3 years • Competition foreclosed station common to after bidding 10 years • Private sector pays a fee for the license Recycling Not very 3 years see above treatment common To plant 15 years Composting Not very 3 years see above treatment common to plant 15 years Landfill Not very 5 years see above management common to 30 years
Limitations • Difficulties in establishing threshold • Challenge public goods theory by non-payment of beneficiaries
• Collision effect • Challenge public goods theory by non-payment of beneficiaries • Free-rider problems
• Weakening public management • Free-rider problems • Weakening public management • Free-rider problems • Weakening public management • Free-rider problems • Weakening public management • Free-rider problems
Table 9: Limitations of franchise model to SW elements According to Table 9 limitations include difficulties in establishing threshold, for instance, for street sweeping (when is a street not carefully swept?). Another relevant issue is the non payment for the service rendered to the private firm, what would be the consequences if some beneficiaries cannot pay for the SW service? However, bad SW waste management affects not only those who cannot afford the services in question. All citizens are entitled to an appropriate waste management system for environmental health reasons. Solid waste collection cannot be discontinued without jeopardizing general public welfare.
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6.6.4 Concession
Concession includes a number of variations of contractual arrangements, such as Build and Transfer (BT), Build-Lease-Transfer (BLT), Build-Operate-Transfer (BOT), Build-OwnOperate (BOO), Build-Transfer-Operate (BTO), Contract-Add-Operate (CAO), DevelopOperate-Transfer (DOT), Rehabilitate-Operate-Transfer (ROT), Rehabilitate-Own-Operate (ROO), etc. It is noteworthy that the nomenclature used to describe all concession models has not been standardised. There are several terms which are often used interchangeably – such as turnkey and Build-Operate- Transfer (BOT), for example. There are also single terms that are used loosely and can be applied to situations that are fundamentally different. Indeed, the terminology debate surrounding the definition of PSP arrangements itself mirrors the evolution of PSP approaches and the evolving regulatory environment defining PSP.271 A concession is awarded, for instance, by a municipality to a private company to Design-Build-Operate (DBO) a facility for the transfer, treatment, or disposal of solid waste. Variations include Build-Own-Operate (BOO) when a private sector company provides funding, and Build-Own-Transfer (BOT) when ownership transfers to the public authorities on an agreed date. Concession agreements are commonly long-term agreements wherein the private firm provides the capital investment for a new facility. However, a concession also means that a private firm is given the opportunity to generate revenue from the waste management activity, typically by charging a gate fee for receiving waste and through the sale of compost or recyclables. Under concession arrangements, the private sector finances and owns SWM facilities during the period contractually agreed. In return, the municipality typically grants and enables access to a specified quantity and quality of SWM services and provides some fees. The concession agreement might specify performance standards, methods of judging performance, liquidated damages for delay or non-performance, risk assignment, dispute resolution, standards for worker safety, health protection and environmental standards, and so forth. A concession arrangement generally lasts between 10 and 45 years. The private company makes all the investments, including major ones.272
271 Guidelines for successful Public-Private Partnerships, European Commission Directorate – General Regional Policy, March 2003, http://ec.europa.eu/regional_policy/sources/docgener/guides/pppguide.htm. 272 Finger, M., Privatization of the Infrastructures, in Weizsäcker, E. /Yong, O. /Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 238.
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Concessions for sanitary landfill operations are a highly interesting business opportunity for the international private sector because they have significant economies of scale and major environmental spillover effects, along with greater investment and skills requirements. These characteristics offer opportunities for PSP private-sector involvement through comprehensive management contracts, lease contracts, or concession arrangements to build and operate disposal and recycling facilities.273 The following table displays the key features and limitations of this arrangement.
Application Not very common Not very common Quite common Duration 6 months to 2 years 6 months to 2 years 3 years to 10 years Features Limitations
Street sweeping Waste collection and transport Transfer station
Recycling treatment plant
Quite common
3 years to 15 years
Composting treatment plant
Quite common
3 years to 15 years
Landfill management
Very common
5 years to 30 years
• Private sector provides financing • Key driver: Polluter pays principle (user charging) • Key driver: Polluter pays principle (user charging) • Generation of fees by selling recycling materials • Key driver: Polluter pays principle (user charging) • Generation of fees by selling compost • Key driver: Polluter pays principle (user charging) • Competition foreclosed after bidding
• Weakening public management • Competition foreclosed after bidding • See above
• See above
• High quantity of waste required • Minimum quantity of waste required • No incentive in waste treatment • Weakening public management • Problems with hierarchy principle
Table 10: Limitations of concession model to some SW elements
273 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 221.
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Concerning the limitations of this model, Table 10 underlines the necessity of high quantity of waste for the private landfill manager. Hence, the hierarchy is compromised. Furthermore, this model if thoughtless applied could result in weakening the managerial capacity of municipalities in LMIC. The question which arises: what should be the incentive of the private sector to build capacity of municipal managers? Most concessions are operated on a “take or pay” basis, where fees are paid even if the guaranteed daily quantity of waste is not reached. The international private sector is usually interested in a minimum landfill capacity of 300 tons per day274, both for the full utilisation of landfill equipment and its amortisation. This represents a limit to the ISSWM concept, as public authorities are forced to deliver the maximum quantity of waste whenever possible; besides, they have no incentive to minimise, recycle, or treat waste. Since few cities have this quantity of waste, bundling the needs of several small to medium-sized cities into one regional facility needs to be considered if private sector investment (such as through a “design, build, own, and operate” concession agreement) is desired. Concessions always involve operations and maintenance by the concessionaire, and they must last long enough to recover investments. Therefore, if major private sector investments are needed (LBO, BTO, BOT, BBO, BOO), concessions will need to be granted for a longer duration, sometimes even for more than 20 years. In contrast, if the public sector is responsible for investment, as in a lease-and-operate arrangement, the period can be as little as five to fifteen years (see Table 10). Other arrangements include DBO275, BTO276, Build and Sell, RTO 277 . They are commonly used in the privatisation of infrastructure. Other concession arrangements include Build Operate Transfer and Build Own Operate and Transfer. They are discussed in the following. a) Build Operate Transfer Build Operate Transfer (BOT) and Build Own Operate (BOO) contracts are similar to Design Build Operate (DBO) contracts, but leave facility ownership and financing obligations in the hands of the private firm. BOT 278 and its many variations are used
274 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 28. 275 Design, build, operate contracts that combine design, construction and operation for 15 to 20 years of a facility, such as sanitary landfills, treatment plants, and transfer stations. 276 Build Transfer Operate. 277 Rehabilitate-transfer-operate (RTO): this is like BTO, but is based on rehabilitating existing infrastructure rather than building new facilities. The duration and type of the contract depends upon primarily the amount of money that the private operator had to put up for the rehabilitation (Finger, M., Privatization of the Infrastructures, in Weizsäcker, E. /Yong, O. /Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 239). 278 “Beyond Boundaries” PPIAF/ADB Manila: 2002, p. 8.
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primarily for specific large investments, among others in sanitary landfills. Such arrangements can last up to 30 year, depending on the size of investment that has to be amortised. The private firm treats guaranteed amounts of waste in exchange for guaranteed prices, although usually including some amount of demand risk. A private developer is awarded a franchise (concession) to finance, build, own, and operate a facility. This is sometimes referred to as BOOT (build, own, operate, and transfer); here, user fees are collected for a specified period, after which ownership of the facility is transferred to the public sector.279 Limitations of this arrangement are similar to those displayed in Table 10. b) Build-Own-Operate-Transfer Many public authorities in LMIC promote the (Build-Own-Operate-Transfer) BOOT arrangement of PSP. BOOT involves the private sector in building, owning, operating, and after a pre-specified number of years, transferring infrastructure to a public authority. The BOOT arrangement is considered to be a means of having private sector financed facilities whose ownership will be transferred to municipality authorities. BOOT arrangements require a high level of scrutiny by formulating contract specifications. However, as underlined above, no one can foresee all potential contingencies, so this arrangement is cumbersome. Regarding a foolproof contract, Adler states that no matter what safeguards are placed around it, the system remains vicious. 280 Most importantly, they outline the regular maintenance requirements which the private sector must ensure are fulfilled for the facilities in question, as well as the final condition in which the facilities must be presented to the local authority at the time of ownership transfer. One issue is that if the private firm goes out of business before the termination deadline stated in the contract specifications, public management with its lack of know-how has to continue providing the service without interruption. This is considered one of the principal challenges of this arrangement. Table 10 presents an overview of the principal limitations of this arrangement.
6.6.5
Open Competition
In open competition of SWM collection services, each household contracts a private collection firm and pays the SWM removal fees charged by the contractor. However, if several firms are competing with each other in the same neighbourhood, a certain collision
279 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 244. 280 Sclar, E. D., Economics of privatisation, 2000, p. 154.
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effect occurs. Governments license private firms to compete with each other in providing SWM services. No firm has a monopoly within a zone and price regulation is not required. Each firm collects its own revenues from its beneficiaries. Strong empirical evidence proves that this arrangement is useful for commercial and industrial waste. However, this could be cumbersome regarding municipal waste. An example of the flaws of open competition is provided by Nigeria. The private waste collectors in Ibadan are all members of the Association of Environmental Contractors. In 1994, they served an estimated 10,000 households in the Ibadan urban area. No particular part of the city is allocated to any contractor, and they are free to make their own arrangements. Many companies in the city make use of these private collectors. Some SME use low-tech equipment to collect over short distances. They operate in the Sabo area and in some markets and motor parks, charging their clients agreed fees. However, they dispose of the waste collected in dumpsites within the neighbourhood. These are often not cleared regularly and therefore constitute both an environmental hazard and an impediment to traffic. 281 The following table presents both key features and limitations of this PSP arrangement.
Application Not very common Common Duration Features Limitations
Street sweeping Waste collection and transport Transfer station Recycling treatment plant Composting treatment plant Landfill management
Not very common Not very common Not very common Not very common
6 months • Waste generator • Collision effect – 2 years contracts directly • Contradiction to the private firms public goods theory 3 years – Competition foreclosed after bidding 10 years Private monopoly/oligopoly instead of public monopoly 3 years – Competition foreclosed after bidding 15 years Private monopoly/oligopoly instead of public monopoly 3 years – Competition foreclosed after bidding 15 years Private monopoly/oligopoly instead of public monopoly 5 years – Competition foreclosed after bidding 30 years Private monopoly/oligopoly instead of public monopoly
Table 11: Limitations of open competition model to SW elements
281 Onibokun, A.G./ Kumuyi, A.J, Ibadan, Nigeria, in Onibokun, Adepoju G. (eds.): Managing the Monster: Ottawa: IDRC, 1999, p. 46.
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Regarding the limitations of open competition, Table 11 underlines the collision effect. In effect, it is not economic sound to bring different firms in the same waste collection area for instance. As far as management of transfer station, recycling treatment plant, composting treatment plant and landfill are concerned open competition is foreclosed. Furthermore, due to the fact that competition is foreclosed after the bidding procedure, public monopoly could turn to private monopoly/oligopoly (see Chapter 9.4).
6.7
Concluding Remarks and Discussion
This chapter has examined the privatisation issue in-depth in general and in SWM in particular. The notions of globalisation, liberalisation, deregulation, etc., have been introduced. The differences between them have been highlighted. It has been shown that the general public very often wrongly perceives the notion of privatisation. As far as SWM is concerned, the only options are Private Sector Participation (PSP) or Public-Private Partnerships (PPP) as public authorities are legally responsible for SWM. On balance, it is not about privatisation or not, but about whether fair competition is possible or not. Both international and national private firms are playing an active role in SWM services in LMIC for many reasons, among others on financial and technical grounds. One positive effect of globalisation is that the so-called “global players” (that is, large international firms) are now operating (and very often successfully) in LMIC. The remaining challenge is to apply sustainable principles like the hierarchy principle, polluter pays principle, effectiveness, and efficiency in the SW sector by carrying out private business. As far as SWM is concerned, PSP arrangements present some limitations in terms of both the “collision effect” and the economic interest of some systems. This chapter has shown that a private landfill operator who collects SW at the same time in a municipality will have no interest in minimising SW if paid according to the quantity of waste collected. With such an arrangement, the hierarchy principle will be jeopardised. Thus, the solid waste market should be unbundled into segments where proper competition can be created. As observed, another approach is geographical division. Introducing PSP into SWM in LMIC can only have benefits if a strong regulatory framework is in place. Capacity building, capacity development, and institutional strengthening are some key requirements facing municipal management when dealing with this issue. However, the formidable question remains: how can private firms achieve capacity building and the strengthening of municipal institutions in LMIC by performing their profit-making business operations?
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The privatisation debate is a polarised one. Privatisation advocates argue that privatisation results in more competition, better service, economic growth, reduction of national debt, and beneficially attracts more Foreign Direct Investment (FDI). Opponents, on the other hand, argue that privatisation is oversimplified, oversold, and disappointing. It should not be considered to be a panacea to SWM problems in LMIC. Sound public management is essential to PSP. The issue is not about being “for” or “against” privatisation. It has been stressed that the issue is merely about “monopoly” or “competition”. The decision to involve the private sector in providing public services, such as SWM, should not be based on ideological considerations but rather on economic merits. Echoing Cointreau-Levine (2000) and Weizsäcker (2005), some key lessons learned are: • Develop strong regulations and regulatory units within public management; • ”Contracting-in” prior to “contracting-out”; • PSP should be based on economic merits and not on ideological ones; • Secure control over regulatory institutions and enable the state to provide the service in case of failure; • Improvement of solid waste planning, analysis of the efficiency of the public and private services; • Reorganisation of public services, capacity building and training to develop a competent public partner; • Analysis of the contract models available in order to assess possible alternatives and furnish stringent criteria to ensure the best choice as well as effective guidelines and regulations. Another issue discussed in this chapter is the notion of transaction costs. When the arranger and the provider of the service are one and the same, a bureaucratic cost is incurred, that is, the cost of maintaining and operating a hierarchical system. When the arranger is different from the provider, there is a transaction cost, that is, the cost of hiring and dealing with a private enterprise. The relative magnitude of these two costs determines whether it is worth separating the arrangement and provision of functions.282 While certain advantages certainly exist and can be leveraged, PSP should not be regarded as representing either a miracle cure or indeed a quick solution to SW services. As a result, public authorities should become increasingly involved as regulators and focus resources on
282 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 66.
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service planning, performance monitoring, and contract management. PSP requires effective contract monitoring procedures to be successful. SWM is not a homogeneous product that can be uniformly provided. Every municipality or every jurisdiction is idiosyncratic. The service must be tailor-made to local requirements, which makes it difficult to change providers with sufficient frequency to sustain effective competition while maintaining product quality.283 Success in PSP depends on how much the service in question lends itself to competitive versus non-competitive market structures. To summarise, competitive bidding and a careful definition of the area and service in question are essential for the success of PSP. In addition, the municipality should render the service in one of the districts (waste collection for instance), in order to maintain its capacity to replace private firms which go out of business or those failing to perform well without interrupting the service. Where the privatised service operates in a competitive environment, no new problems arise. Where privatisation occurs but monopoly continues, however, there are new difficulties. The question to be raised is whether it is uneconomical for services such as landfill management, waste collection, or the management of a composting plant to be provided by many different suppliers in the same area. However, a single private firm might be expected to exploit its monopoly.284 If privatisation merely converts a public monopoly into a private monopoly/oligopoly, the service will not be compelled by competitive pressures to improve its productive efficiency, while at the same time the traditional allocative efficiency problem will arise (Killick and Commander, 1988). One may argue that it is possible that the privatisation of a monopolistic service like municipal landfill management can be effectively regulated. However, the regulator is unlikely to obtain accurate information on the real costs and the technical performances of the private firm. In a world in which existing information, regardless of its adequacy, is not uniformly distributed, organisations with diverse access to superior information are in a position to act opportunistically, and frequently at the expense of the other, less-informed party to the contract. This situation is called information asymmetry (see Chapter 7.5.1). As a result of information asymmetry, the transaction costs imposed by contracting during the life of the contract have to be considered.285 In a situation where Asymmetric Information exists, the regulated firm enjoys some payments which may prove to be costly to extract. This is particularly important in LMIC, where influence can often override regulations and good political intentions (Henley,
283 Sclar, E. D., Economics of privatisation, 2000, p. 83. 284 Harper, M., Micro-Privatization, 2000, p. 14. 285 Sclar, E. D., Economics of privatization, 2000, p. 97.
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1993; Jome, 1993). In LMIC, this risk is real, due to the weak capacities of public administrations (Krueger, 1974). As far as limitations of some PSP models are concerned, another relevant issue is the number of private contractors involved. More precisely, is it about one single private firm delivering solid waste collection, managing a transfer station, or managing a sanitary landfill? This fact is highly relevant especially in Europe where instead of contracting different companies for different services, municipalities are increasingly relying on a single big enterprise for the whole service. Consequently, large and medium-size enterprises providing a wide range of services, including waste collection, waste transport and waste treatment, have the best chances of surviving. This structure will lead to "vertical integration," in which one firm controls every aspect of a solid waste management of a region. Policy makers shall avoid potential problems associated with vertical integration to control for instance raise prices. Contracts may stipulate renegotiation if a merger brings all services under one firm. The takeover of RWE Umwelt AG by Remondis AG in Germany can be cited as a case in point. There will be an increase in private monopolies in the SWM sector in the future due to this “takeover” strategy, leading to less competition and presenting an increasing challenge to the principles of ISSWM. The limitations of some models described in hypothetical terms above presume that one private contractor provides each waste element. If this is not the case, ISSWM principles might be contradicted.
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7.
Goods, Market and Organisational Theory
The starting point for determining the proper roles and the economic limitations of the private sector in rendering solid waste services is an all-encompassing examination of the economic characteristics of these services. Due to the characteristics involved, sectors such as telecommunication are more easily rendered by private industry than sectors like SWM. 286 The following paragraphs will not only survey the literature on public goods, market and organisational theory in an exhaustive manner, but also point out some of the key issues relating to the provision of SW by the private sector.
7.1
Characteristics of Public Goods
More than 2,000 years ago, Aristotle suggested that a public good is “that which is owned in common by the greatest number has the least care devoted to it.”287 Furthermore, before Adam Smith’s pathbreaking Inquiry into the Nature and Causes of the Wealth of Nations288, David Hume289 published an unambiguous statement about public goods: “Two neighbours may agree to drain a meadow, which they possess in common; because ‘tis easy for them to know each other’s mind; and each must perceive, that the immediate consequence of his failing in his part, is the abandoning of the whole project. But it’s very difficult, and indeed impossible, that a thousand persons [should] agree in any such action; it being difficult for them to execute it: while each seeks a pretext to free himself of the trouble and expense, and [would] lay the whole burden on others. Political society easily remedies both these inconveniences.”290 Research interest in public goods grew rapidly with the publication of the works of Samuelson in 1954 and in 1955. Samuelson developed various ideas addressed by other earlier economists, such as Lindale, Sax and Wicksell (Musgrave and Peacock 1958). Initially, economists focused on the two poles of a spectrum of goods, namely pure public goods and pure private goods. According to their definitions, private goods could be
286 See van de Walle, 1989; Kragh et al, 2000 cited in Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 260. 287 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 52. 288 Inquiry into the Nature and Causes of the Wealth of Nations. 289 The work of David Hume entitled „Treatise of Human Nature“ was first published in 1739. 290 Hume, D. (1976, p. 538) cited in Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 3.
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parcelled out among individuals and efficiently provided by the market, whereas public goods could not be divided among individuals. Furthermore, as developed later, public goods have two main characteristics, among others, namely non-rivalry and nonexcludability. Since the 1960s, many economists have devoted their research to the theory of public goods. After the publication291 of Mancur Olson’s “’Logic of Collective Action” and James M. Buchanan’s “An Economic Theory of Clubs” in 1965, economists undertook a meticulous analysis of the whole spectrum of goods, including impure public goods. The definition of a public good is sometimes controversial. Further, Buchanan argued in 1967 that “any good or service that the group or the community of individuals decides, for any reason, to provide through collective organisation will be defined as public.” More recently, Sandler and Cornes (2003) presented a comprehensive theoretical treatment of public goods, externalities, and club goods. The second edition of Sandler and Cornes is the authoritative work that provides an outstanding overview of the economic issues associated with public goods. Indeed the economic development of any nation depends upon two main types of goods: private and public. Nevertheless, there are numerous other goods between these two poles. Impure public goods, whose benefits are partially rival and/or partially excludable, occupy the in-between points along this spectrum. If, therefore, a good does not display both excludability (non-excludability292) and rivalry (non-rivalry293) in their pure forms, the good is called impurely public. An important subclass of such goods comprises those whose benefits are excludable but partially non-rival; these are club goods. 294 They include individual goods295, toll goods296, common-pool goods297 and worthy goods298. Simply put,
291 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 4. 292 Meaning that once it is provided to some portion of a community it benefits the overall public welfare, not only the resident that specifically receives the service. 293 Any resident can enjoy the benefit of the service without diminishing the benefit to anyone else. Beyond this, it is not feasible to exclude from service those who do not pay, because public cleanliness and the safe disposal of waste are essential to public health and environmental protection. 294 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 9. 295 Individual goods pose no conceptual problem of supply. The marketplace provides them. 296 Like individual goods, toll goods can be supplied by the marketplace. Because exclusion is readily possible, users have to pay and then suppliers will supply the goods. Individuals and organizations, for-profit or not-for-profit, can purchase and give away toll goods, such as recreational facilities and libraries (Savas, 2000). 297 Unlike individual and toll goods, common-pool goods pose a supply problem. With no need to pay for such goods, and with no means to prevent their consumption, such goods will be consumed-even squandered-to the point of exhaustion, as long as the cost of collecting, harvesting, extracting, appropriating, or otherwise taking direct possession of the free goods does not exceed the value of the goods to the consumer (Savas, 2000).
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private goods are goods with excludable benefits.299 Public goods, by contrast, are in the public domain, available for all to consume or affecting all. In recent years, transnational, global or regional public goods have become a field of great interest for many economists. These are goods whose benefits are public and cut across several countries (in the case of regional public goods) or countries in several regions, as well as several generations (in the case of global public goods).300 Recently, a debate has arisen concerning the idea of “global public goods”. Inge Paul and Ronald Mendoza (2003) have identified a set of public goods, such as the global environment, whose benefits are not limited to a particular country but are global in nature. According to this principal, global public goods are “goods whose benefits extend to all countries, people and generations”. They are, quite naturally, referred to as global public goods.301 Putting in place good environmental policies is costly, and when the benefits are global public goods (such as reduced atmospheric concentrations of greenhouse gases), it is appropriate that those most able to bear the costs of providing for these global public goods should do so. Attention has focused on the need for global collective action and requisite political institutions, owing to a host of environmental phenomena with worldwide spillovers, including ozone shield depletion from chlorofluocarbons, atmospheric warming from greenhouse gases, tropical deforestation, acid rain from the release of sulphur dioxide and nitrogen oxides, and so forth. 302 The Global Environmental Facility administered by the World Bank Group can be cited as one of the international programmes coping with this category of goods. However, more similar programmes will be necessary before there is a real impact on global public goods. The main characteristics of public goods, namely Non-rivalry, Non-excludability, Theory of Externalities and Groups Theory are discussed in relation to SW services in the following.
298 If no use is made of the exclusion property of individual and toll goods, that is, if there is little or no charge for their use, then in effect the good is being treated as a common-pool or collective good (Savas, 2000). 299 Individuals can appropriate them and prevent others from enjoying the good. 300 Kaul, I., Global Public Goods, in Weizsäcker, E. /Yong, O. /Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 312. 301 Stiglitz, J. E., Globalization, Columbia University, 2005, pp. 9-5. 302 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 33.
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a) Non-Rivalry As far as the economy is concerned, the basis for the classification of different goods is exclusivity and non-rivalry. The expressions non-rivalry303 of consumption and indivisibility of benefits are used interchangeably in the relevant literature. A good is non-rival or indivisible when one individual can consume a unit of the good without detracting, in the slightest, from the consumption opportunities still available to others from the same unit.304 The resulting classification determines the roles of the government and of the private sector in supplying goods and services.305 Samuelson306 identified two categories of goods: firstly, ordinary private consumption goods (X1, …, Xn), which can be parcelled out among different individuals (I, 2, …, i, …, s) according to the relations s i
Xj =
1
X j Secondly, he identified collective consumption goods (Xn+1, …., Xn+m), which everyone can enjoy in common, in the sense that each individual’s consumption of such a good leads to no subtraction from any other individual’s consumption of that good, so that Xn+j=Xin+j holds simultaneously for every ith individual and each collective consumptive good. Regarding SWM, the required services are enjoyed by individuals without detracting from the other beneficiaries, hence constituting non-rivalry. One of the characteristics of public goods and services has to do with consumption. Many consumers may consume such goods and services jointly and simultaneously, without being diminished in quality or quantity, while private goods are available only to the individual. Of the above-mentioned examples, food and fuel can be qualified as private goods, whereas environmental quality control is purely a public good. They are generally hard to measure and they offer little choice to the consumer. Moreover, they raise a basic question about the size of the collective entity that should make decisions about public goods and services. Efforts to supply public goods give rise to the “free-rider307” problem. The more “freeriders” a society has, the more difficult it is to supply such goods. As far as SWM is
303 Sunsets are for instance non rival or indivisible when views are unobstructed. 304 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 8. 305 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 41. 306 Samuelson, P. A., Theory of Public Expenditure, The Review of Economics and Statistics, Volume 36, Issue 4 (Nov., 1954), p. 387. 307 Free riders are those who enjoy a public good without contributing to its production, preservation or replenishment.
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concerned, the size of the group will be discussed below. In contrast to private goods, public goods and services pose a serious problem whenever they have to be provided by the private sector. The main characteristics are detailed below. b) Non-excludability Mancur Olson (1965) was one of the pioneers to spell out the criterion of non-excludability: “If a good is provided to any individual member of a group, no one else in the group can feasibly be excluded from consuming it, as well.” Olson was actually referring to “collective goods”, but the two terms “public goods” and “collective goods” are used interchangeably. Accordingly, benefits that are available to all, once the good is provided, are termed nonexcludable. Comprehensive SWM services yield non-excludable benefits, because once they are provided, it is difficult, if not impossible, to exclude individuals from their benefits. For instance, in a franchise-based waste collection contract, residents failing to pay their fees (and hence being excluded from service) will compromise the whole collection system, even if the majority pays its fees. Indeed, waste indiscriminately endangers the entire neighbourhood and not only the premises of non-paying residents. c) Theory of Externalities Externalities are considered as a cost or benefit from an economic transaction that parties “external” to the transaction bear. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is imposed upon others. For instance, industrial production, which causes pollution, may impose costs on others, by making use of good public air. In one of the best discussions of the theory of externalities to date, Meade (1973) states: “An external economy (diseconomy) is an event which confers an appreciable benefit (inflicts an appreciable damage) on some person or persons who were not fully consenting parties in reaching the decision or decisions which led directly or indirectly to the event in question.”308 In addition to Meade’s treatment309, further discussion of definitional issues has been provided by Baumol and Oates (1988), Buchanan and Stubblebine (1962), and Heller and Starrett (1976). Instead of pursuing this debate, it is more important to underline the alternative formulation of the notion of an externality presented by Arrow (1970). In contrast to Meade, Arrow places the definition of an externality within a very specific
308 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 39. 309 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 40.
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institutional framework – namely that of competitive markets. In addition, although ultimately motivated by the search for allocations that are Pareto-efficient, Arrow relies on a definition that is in the first place more analytical, inviting one to consider why it is that externality recipients may be unable to consent fully to actions that affect them. To return to SW: landfilling carries with it external costs that are not reflected in the price of landfill disposal, while recycling has ecological benefits that are not reflected in either recycling market revenues or avoided disposal costs. Recycling, in fact, is a prime example of the failure of competitive markets to correctly cost and price goods and services that provide ecological and economic benefits. Conversely, landfilling is an example of the failure of competitive markets to correctly cost and price goods and services that are ecologically damaging. d) Groups Theory and Solid Waste Services A fourth relevant characteristic is the size of the group affected by the benefits of public goods. When a public good confers benefits outside the political jurisdiction providing it, and no compensation is paid by these outside recipients, a spillover of benefits exists. If, for example, two nations border a polluted lake and only one expends resources to clean the lake, then the non-paying country receives a benefit spillover from the other nation’s action.310 The discussion about the size of the group is essential for a comprehensive understanding of SWM. As these services are often not rendered in low-income areas in LMIC, communities often organise the provision of basic services, such as solid waste collection. Nevertheless, this entails voluntary action and therefore they cannot be qualified as a sustainable service. Olson has devoted remarkable work to this field in his book The Logic of Collective Action: Public Goods and the Theory of Groups (1980). Indeed, unless the number of individuals in a group is quite small, or unless there is some degree of coercion to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common interest. However, if the members of a large group rationally seek to maximise their personal interest, they will not act to advance their common objectives unless they are compelled to do so, or unless some separate incentive is offered to the members of the group individually on condition that they help bear the costs or burdens involved in the achievement of the group objectives.311
310 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 32. 311 Olson, M., Theory of Groups, Cambridge: Harvard University Press, 1980, p. 2.
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Such participation represents a significant voluntary contribution by a community’s residents. Also, it is not feasible to conduct an accurate accounting of which residents bring solid waste to the municipal collection point. Municipal systems of solid waste collection are considered a public good, and direct charges are difficult to implement unless a strong community organisation exists to enable cost recovery. However, if voluntary action fails to provide an adequate supply of collective goods, for example in cities, where the social unit is large and diverse, contributions must thus be obtained by legally sanctioned coercion, such as tax collection. As far as solid waste services are concerned, they can be seen as an individual good in a rural area whereas they are a collective good in a city, because all citizens will benefit from the regular collection of solid waste and will be harmed if this service is not in place. Another reason is that people can and do create the need for public services by transforming their individual goods, thereby shifting the burden of payment onto public management. In this context Savas provides an interesting example: “the small-town resident who throws his waste on the side of the road instead of subscribing to a refuse-collection service eschews the individual good called waste collection and creates a need for the collective good called highway cleaning.”312 Street cleaning is another illustration of a joint-consumption good. The well-being one enjoys from cleaned streets in no way diminishes the well-being available to our neighbour.
7.2
Provision of Public Goods and Services
After providing some definitions and preliminaries of different goods, this section discusses the provision of such goods. In the case of private goods, the solution is quite simple: the market will allocate the provision of private goods according to the theory of the Standard Market Model. The provision of public goods, however, is troublesome. The first historical traces of the private provision of public goods and services did not appear until the late nineteenth century. It would appear that the worldwide move for such public provision began at that time. In their well-known textbook, Atkinson and Stiglitz (1980)313 began by making a distinction between the public production and the public provision of public
312 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 57. 313 Private Provision of Public Goods and Services (Deepak Lal).
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goods.314 Their definition seeks to include any good and service that is provided freely to all members of society so that with public provision there is not necessarily any monitoring of usage. They provide the standard reasons for the public provision of such goods, such as the non-excludability of those who do not pay for the good, non-rivalry in consumption, and distributional considerations for merit goods such as environmental protection. For the provision of public goods and services, many economists argue in terms of the necessity of the state. The two notions “the necessity of the state” and “the necessity of government” are often used interchangeably. For the purpose of this discussion, both terms will be used hereafter. Indeed, the argument that the state is a natural and efficient alternative to the market concurs with the first mid-twentieth century vision when neoclassical economics envisaged central planning as a perfect substitute for the market with regard to resource allocation. Accordingly, the state should manage public goods in order to avoid the issues of free-riders, externalities, etc. The marketplace is unable to supply such goods because, as mentioned above, by their nature, many people use them simultaneously and no one can be excluded from enjoying them. Every individual has an economic incentive to be a “free-rider,” that is, to use public goods without paying for them. Thus, the state has to provide such goods by using coerced contributions, taxes, subsidies, etc. Even Adam Smith, often regarded as a champion of laissez-faire, recognised a need for government intervention. Thus, the interest in public goods, whose benefits simultaneously affect a group of individuals, can be traced back to classical economics.315 In political and economic theory 316 , it is commonplace to assert that government is necessary because of the existence of public goods. This justification for government dates back to Hobbes. According to Hobbes, rational individuals in a “state of nature” enter into a social contract by which each submits to an absolute sovereign, provided everyone else does the same. In The Limits of Government, David Schmidtz takes on the second of these ideas, the public goods justification for the state. The state can step in and force us all to contribute toward the production of these goods, and we can all thereby be made better off. Schmidtz317 reminds us that “the state is coercing people for their own good… Moreover,
314 They cite defence as an example of a good that is publicly provided but is often purchased from private producers. 315 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 3. 316 Sugden Robert “Suckers, Free Riders, and Public Goods” Humane Studies Review Volume 7, Number 1 Winter 1991/92. 317 See the beginning of Chapter 5, " From Prisoner 's Dilemma to Public Goods".
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they want the state to do this, because they cannot get what they want with voluntary provision mechanisms.” 318 Another argument for public intervention is the presence of non-excludable319 goods: a large coalition of private interests in a city is unstable, for instance. The assumption is that individual members of large coalition may easily defect (not contributing to the costs) while continuing to benefit from the collective good (free-rider). This third version of the freeriding hypothesis is indebted to Olson’s theory of collective action (1965). It considers that the propensity to contribute to collective goods diminishes with the size of the group. The underlying idea is that the larger the group, the easier it is for individuals to cheat, because the probability of non-compliance to be noticed and sanctioned is lower. This is usually considered a disadvantage for the private supply of collective goods versus state supply in a large community. In other terms, private systems of monitoring compliance and sanctioning are implicitly assumed to be weaker than state enforcement capacities. Economists argue that governments intervene in urban markets to compensate for “market failures,” that is, those factors that prevent free private markets from achieving an efficient allocation of resources. Market failures include the existence of public goods whose consumption by some consumers does not imply non-consumption by others, such as street lighting or fire protection; natural monopoly; large transactions costs; and externalities. Due to the existence of market failures, the social costs (benefits) of producing a given commodity or service are higher (lower) than the private costs incurred. In this context, if the service were left to the discretion of the private sector, it would be produced at levels that would be lower than the social optimum. Public intervention is required to bring production to the point of social equilibrium.320 Indeed, the idea that the state should provide public goods and services goes back more than a century (Olson, 1980).321 The most notable tradition in the nineteenth century (the British laissez-faire) largely ignored the theory of public goods. More than a century and a half after Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, Pigou (1946) introduced another rationale for government intervention. The Pigouvian correction concerned externalities in which the action of one economic agent influences the utility or production function of another and where no mechanism for compensation exists. The relationship with public goods was perhaps disguised by the fact that the latter were
318 Garrett, D. “Public Goods and the Justification for the State” Humane Studies Review, 1992. 319 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 13. 320 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 233. 321 Olson, M., Theory of Groups, Cambridge: Harvard University Press, 1980, p. 98.
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identified with particular goods and services, while externalities were often thought of as essentially unintended by-products of activities undertaken primarily with a view to generating private benefits.322 Governments were viewed as outside agents who, through the imposition of taxes (subsidies), could induce the externality generator to limit (or increase) their activities so as to achieve efficiency.323 Another analytical argument about the natural necessity of state intervention to control pollution is provided by the theory of public goods (Samuelson, 1954). Environmental damage, and SWM in particular, often displays non-excludability and non-rivalry, that is, precisely those features characterising mainly public goods. Pollution324 is characterised by an externality325 feature. In order to cope with externality and collective goods issues, the traditional recommendation of normative economics is to call for government intervention. In setting a tax or environmental standards, governments will remedy market failures. Economists inferring that state intervention is strictly necessary to cope with the harmful effects of pollution on the environment often use the concepts of externality and public goods. Since Pigou (1932)326, externalities are associated with market failures, and state intervention is the natural means to resolve this. The competitive market diverges from a Pareto equilibrium. Finally, Coase (1960)327 was the first economist to envisage the treatment of externalities without state intervention, such as via direct bargaining between polluter and polluted and the integration of the generator and recipient of externality within the same firm. This concept might be true whenever public services are rendered in a small community. When the number of affected individuals is large and interests are diverse, purely voluntary action is no longer adequate to provide collective goods.328 This particularity is also considered in the chapter concerning scope for further research later on this study.
322 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 5. 323 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 6. 324 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 3. 325 An externality occurs when a transaction between two parties does not take into account a benefit or a loss for a third party who is not in the market arena. 326 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 6. 327 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 7. 328 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 64.
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7.3
Economic Classification of Solid Waste Services
As Lévêque (1996) rightly remarked about SWM, it seems more suitable to speak about “bads” rather than “goods”.329 However, the terms are perfectly substitutable because the non-provision of a desired collective good is a collective bad (Brubaker, 1975) and the remission of a collective bad is a collective good.330 The first argument for government intervention 331 is that sanitation is a public good, or is characterised by significant externalities (see above). Strictly speaking, a public good is characterised by zero marginal social cost and/or by the inability to exclude additional people from enjoying it, whether or not they contribute to its provision. The economic classification of solid waste services is not uncontroversial. Edwards and Stevens (1977) thus stated: ““Law and order” and “national defense” are such goods. Clearly, refuse collection does not fit this mold”. However, according to Cointreau-Levine, solid waste collection and disposal services332 are essential333, non-exclusive334, and non-rivalled335. Therefore, SWM can be categorised as public goods336 (see Annexes 6 and 7). These features of being non-exclusive, non-rivalled, and essential place responsibility for SWM with public authorities. Essential services337 are public goods. As such, their benefits, such as public health and economic productivity, extend well beyond the particular individuals who consume them. Annex 6 provides a framework for categorising various activities of SWM as pure public goods (also called collective goods) or as pure private goods. Annex 7 also categorises the activities that fall somewhere between these two categories, such as toll goods and common-pool goods.
329 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 10. 330 Public goods and bads have the same nature just as negative and positive externalities have the same nature. The change in the sign does not affect the problem except when one considers that the individual behaviour is differently sensitive to a loss and a gain. However, the hypothesis of loss aversion as proposed by Kahneman (1991) is not considered here (cited in Lévêque, 1996). 331 Edwards, F. R./Stevens, B. J., Local Government Regulation, in Savas, E. S., Efficiency of Solid Waste, Lexington: The Trustees of Columbia University, 1977, p. 141. 332 Cointreau-Levine, 1994. 333 The services are essential to public welfare. 334 Meaning that once it is provided to some portion of a community it benefits the overall public welfare, not only the resident that specifically receives the service. 335 Any resident can enjoy the benefit of the service without diminishing the benefit to anyone else. Beyond this, it is not feasible to exclude from service those who do not pay, because public cleanliness and the safe disposal of waste are essential to public health and environmental protection. 336 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, executive summary. 337 At the 2003 Human Development Report states, governments have traditionally provided essential services because “their market value alone would not capture their intrinsic value and social benefits” (UNDP, 2003, p111) cited in Kessler, T./Alexander, N., Essential Services, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 229.
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According to the characteristics discussed above SWM is seen in this dissertation as public goods. As such the state shall be legally responsible for providing the service.
7.4
Theory of Market Competition
The competitive contract market as privatisation advocates generally envision it, is derived from the modification of the Standard Market Model, the bedrock of neoclassical economic theory.338 Some economists use Pareto efficiency as an argument to justify privatisation or PSP. Pareto efficiency339 is an important notion in neoclassical economics with applications in social sciences among others. It is the most frequently used normative criterion of modern economics. Given a set of alternative allocations and a set of individuals, a movement from one allocation of resources to another that cannot make one individual better off, without making any other individual worse off, is called a Pareto optimisation (also called Pareto optimality). The term is named after Vilfredo Pareto, an Italian economist, who used the concept in his studies of economic efficiency and income distribution. One of the fundamental theorems of welfare economics states that every perfectly competitive equilibrium is a Pareto optimum in the absence of externalities and public goods. For private goods, exchange efficiency is achieved when the Marginal Rate of Substitution (MRS)340 between each pair of goods is the same for all consumers consuming both goods. Hence, for goods x and y, we have i j MRS xy = MRS xy for all i and j, (exchange efficiency)
341
where the superscripts refer to the individuals, and the subscripts indicate the two goods being exchanged. Furthermore, production efficiency is achieved for any type of good when the marginal rate of technical substitution (MRTS)342 between each pair of inputs is the same across all industries using these inputs.
338 Sclar, E. D., Economics of privatisation, 2000, p. 6. 339 It is also called Pareto optimality. 340 MRS is the rate at which consumers are willing to give up units of one good in exchange for more units of another good. For instance, the MRS of good X for good Y is the amount of good Y that a person is willing to give up to obtain one additional unit of good X. 341 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 22. 342 In economics, the marginal rate of technical substitution (MRTS) is the amount by which the quantity of one input can be reduced ( - x2) when one extra unit of another input is used ( x1 = 1), so that output remains constant ). (http://www.answers.com/topic/marginal-rate-of-technical-substitution). (
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That is p q MRTS KL = MRTS KL for all p and q, (production efficiency)343
In the case of private goods, a Pareto optimum is achieved when exchange efficiency, production efficiency, and a top-level condition are all satisfied. This top-level condition ties together the exchange and production sides and requires
MRS xy = MRT xy (top-level conditions)
344
The Standard Market Model assumes a world of markets, each of which is composed of a large number of unrelated buyers and sellers. Each is assumed to be pursuing his or her own gain independent of other agents. In the Standard Market Model world, economic decisionmaking can be essentially reduced to a technical matter – a mere mathematical algorithm.345 Consequently, the Standard Market Model is essentially a highly formal theory of exchange. It is not necessarily a theory of continuing relational behaviour between individuals or organisations.346 For pure public goods, a different top-level condition must be satisfied. Because the pure public good simultaneously benefits all citizens in a community, each of these individuals’ marginal valuation must be accounted for when resource allocation is being decided. Samuelson (1954, 1944) has shown that Pareto optimality for pure public goods requires that the following first-order condition be satisfied:347 n MRS i=1 i zy
= MRT
zy
where n is the number of individuals in the community, and z is the pure public good. Pure public goods do not have an exchange efficiency requirement, because of the nonexcludability characteristic of those goods.
343 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 22. 344 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 23. 345 Sclar, E. D., Economics of privatisation, 2000, p. 8. 346 Sclar, E. D., Economics of privatisation, 2000, p. 95. 347 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 23.
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However, Armatya Sen states that “A society or an economy can be Pareto optimal and still be perfectly disgusting.”348 If economists argue that an economic system is Pareto efficient, then it is the case as mentioned above that no individual can be made better off without another being made worse off. This could obviously be true under certain idealised conditions; a system of free markets will lead to a Pareto efficient outcome. Kenneth Arrow and Gerard Debreu first demonstrated this mathematically. To be Pareto efficient, the following conditions have to be fulfilled: markets exist for all possible goods, markets are perfectly competitive, and transaction costs are negligible. Nonetheless, these conditions are not necessarily fulfilled in welfare economics. These ideal conditions rule out the existence of externalities, public goods, Asymmetric Information, etc. (Bator 1957; Arrow 1970).349 Bringing this back to SWM, due to the investment required for some segments of SWM services (landfill management, composting plant, biogas plant, etc.), PSP contracts are typically written for multiyear periods. As a result, it is the character of the contractoragency relationship which principally determines effectiveness and efficiency, and not the competitive marketplace, as stated in the Standard Market Model. The stronger the terms of the contract and the more complex the service provided, the smaller the role played by market competition becomes in the costs and benefits of privatisation.350 Thus, the Standard Market Model, which serves as the basis for this individualised theory of organisational change, actually has no inherent theory on organisational behaviour. It is a powerful theory with regard to the operation of a decentralised system of resource allocation, but has nothing to say about the operation of organisations351 , such as municipalities and private sector companies.
7.5
Theory of Market Failures
Market failure applies to a situation in which markets do not efficiently allocate goods and services. The term “market failure” is also often used to describe situations where market forces do not serve the perceived public interest. The two main reasons why markets fail are:
348 Amartya Sen (Economist and Nobel Prize winner) cited in Sclar, E. D., Economics of privatisation, 2000, p. 8. 349 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 23. 350 Sclar, E. D., Economics of privatization, 2000, p. 14. 351 Demsetz (1993) cited in Sclar, E. D., Economics of privatization, 2000, p. 15.
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1. 2.
Costs or benefits are inadequately expressed in prices; Presence of sub-optimal market structures.
The different types of market failures include imperfect competition (monopoly, oligopoly), externality (pure public goods), transaction costs, information asymmetry (incomplete markets, quality uncertainty), and organisational failures (Principal-Agent problem). When the market fails for a certain economic activity, it is often argued that market forces should not direct the activity in question. The most common response to a market failure is to fall back on the government to produce certain goods and to provide public services. The following chapters will address the most relevant types of market failures, namely public goods, Asymmetric Information, and transactions costs.
7.5.1
Asymmetric Information
In 1970, Akerlof 352 established the fundamentals of asymmetrical information theory. Market failure may occur when any of the following are present: public goods 353 ; externalities 354 ; incomplete markets 355 ; imperfect markets and especially markets with imperfect competition. The theory of Pareto Optimisation, which shows how free markets achieve efficiency, also assumes that information and knowledge is fixed. However, in general, whenever information is imperfect (or markets incomplete) the economy is not Pareto efficient.356 Information asymmetry (also called asymmetrical information) occurs when one contractual party to a transaction has more or better information than the other contractual party. In economics, one party is referred to as Principal and the other as Agent.
352 "The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. Akerlof, Michael Spence, and Joseph Stiglitz jointly received the Nobel Prize of Economics in 2001 for their research related to asymmetric information. 353 Items that are difficult to exclude people from enjoying, and where the cost of an additional individual enjoying them, is zero or very low. 354 Situations in which the action of an individual has repercussions (negative or positive) on others for which the individual neither pays nor is compensated. 355 Situations in which certain markets are absent, especially risk markets and markets for intertemporal trades. 356 Stiglitz, J. E., Globalization, Columbia University, 2005, p. 9-4.
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Kenneth J. Arrow first described this situation. 357 Simply put, Asymmetric Information results in the so-called Principal-Agent problem, namely the difficulties that arise under conditions of incomplete and Asymmetric Information when a principal hires an agent. Spence and Zeckhauser (1971) and Ross (1973) pioneered the Principal-Agent framework. The theory was soon generalised to cover dilemmas associated with contracts in other contexts by Jenson and Mecklin (1976) and Harris and Raviv (1978). An agency relationship exists when one individual, called the agent, acts on behalf of another, called the principal. Often the principal owns an asset and hires the agent to increase its value. Many examples of Principal-Agent relationships exist in society, such as a municipal authority and the contractors it uses to provide public services.
Figure 7: Basic Idea of Agency theory: P (Principal) A (Agent) (Source: www.wikimedia.org) The Principal-Agent problem arises when a principal compensates an agency for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe. To some extent, this applies to all contracts written in a world of information asymmetry and uncertainty. In a world in which existing information, regardless of its adequacy, is not uniformly distributed, organisations with differential access to accurate information are in a position to act opportunistically and frequently at the expense of others.
357 Kenneth J. Arrow described asymmetrical information in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. George Akerlof later used the term asymmetric information in his 1970 work “The Market for Lemons”.
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Based on the theory of perfect competition, privatisation is effectively advocated as a process of wholesale remote-control organisational change. Nevertheless, the following points need to be highlighted: • The degree of uncertainty (Asymmetric Information) about services; • Bounded rationality of the principal and the agent; • Opportunistic guile of principal and agent. Feigenbaum and Henig (1997) argue that privatisation is too often pushed as an ideological proposition with little or no basis in good agency management.358 The questions that arise are as follows: why should an agency that could not competently manage itself automatically be able to competently manage private contractors? Why would a market necessarily produce desirable contractor behaviour? Or why would an agency left to its own devices more likely reward positive behaviour than negative behaviour, given the pressures of the market?359 The three most important forms of information scarcity in incomplete contracting situations are Principal-Agent problems, adverse selection 360 , and moral hazards. 361 A difficulty in drafting contracts is dealing fairly and adequately with unforeseen circumstances. A wellconstructed contractual framework will include not only a comprehensive specification of services, but also provide delineating procedures for amending or modifying the contractor’s objections, as well as any other part of the contract, as dictated by altered circumstances.362 The bottom line is that public contracting continues to be a cumbersome and expensive instrument for the delivery of public services. There is an ongoing cost tradeoff between the inherent risk of moral hazard and the cost of effective monitoring. If additional contractors are foreclosed (especially in long-term contracts over five years), the greater the lack of access to sound information on the part of public authorities will be, and the less likely it is that contracting will provide meaningful improvement. In this case, the notion that privatisation is a quick and easy way to overcome bureaucratic inefficiency and move us closer to a state of Pareto optimality is seriously compromised.363
358 Sclar, E. D., Economics of privatisation, 2000, p. 166. 359 Sclar, E. D., Economics of privatisation, 2000, p. 132. 360 Adverse selection is a situation in which the party with inferior information about the market situation acts first in seeking to establish a contractual relationship (Salanié 1998 cited in Sclar 2000). 361 Moral hazards refer to potential problems of reduced incentives on the part of the agent to fulfil the goals of the principal (Sclar, 2000). 362 Jaffee, B. C., Contracts for Refuse Collection, in Savas, E. S., Efficiency of Solid Waste, Lexington: The Trustees of Columbia University, 1977, p. 154. 363 Sclar, E. D., Economics of privatisation, 2000, p. 9.
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Considering this problem with regard to SWM in LMIC, public authorities very often do not have accurate information on the quantity and characteristics of the solid waste generated in their municipalities. On the other hand, private firms do not possess accurate information on the typology of different districts of municipalities (in particular low-income districts with narrow roads). Moreover, they lack information regarding public awareness (for instance if citizens are going to put their waste in containers on time). However, such information is highly relevant when setting out contract specifications. A lack of this information results in disputes between contractual parties. Whereas the term Asymmetric Information refers to a situation where one party has more information than the other, in this case neither of the contractual parties possesses the relevant information in LMIC, so that one could call this scenario a “Symmetric Lack of Information”. Due to information asymmetry (or Symmetric Lack of Information), the transaction costs imposed by contracting in the form of opportunistic actions taken by one party or the other during the life of the contract364 are considered to be the most serious concern (see also case study CESPA Chapter 12). The following chapter will deal with this issue.
7.5.2
Transaction Costs
Transaction costs are the costs incurred in engaging in an economic exchange. The term “transaction costs” is frequently thought to have been coined by Ronald Coase. Coase did indeed pioneer the concept of transaction costs in his 1937 paper “The Nature of the Firm”. The term “transaction costs” itself can be traced back to the monetary economics literature of the 1950s. Arguably, transaction costs reasoning became most widely known through Oliver E. Williamson’s Transaction Cost Economics. According to Williamson, the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behaviour. Steven N. S. Cheung has broadly defined transaction costs as any costs that are not conceivable in a “Robinson Crusoe economy,” in other words, any costs that arise due to the existence of institutions. Starting with the broad definition, many economists then ask what kind of institutions minimise the transaction costs of providing a particular service. Often, these relationships are categorised by the kind of contract involved. In effect, three main factors result in the inefficiency of a contract:
364 Sclar, E. D., Economics of privatisation, 2000, p. 97.
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1) The frequency or volume of transactions engendered by the relationship, 2) The degree of uncertainty in the contract situation, and 3) The need to make asset-specific investments to carry out the contractual agreement. To expand on each of these points: (1) The more frequently the parties to an agreement must do business with one another, the more cost-effective it becomes to integrate the two operations organisationally. (2) In addition, the higher the degree of uncertainty about output quality, the more expensive transaction costs are in relation to thwarting opportunistic behaviour. (3) Finally, the more asset-specific investment required to foster a contractual relationship, the higher the costs are to respond to any of the parties’ opportunism, for instance by pulling out of the relationship. Owing to the presence of such asset specificity, in a context of uncertainty (Asymmetric Information) it is often more rational to expand organisational size to accomplish the task in question. Similarly, the lower the volume of transactions, the easier it is to assess the quality of the output; and the lower the asset specificity of the investments required, the easier it is to use marketbased contracting relative to larger organisations.365 On the one hand, there are the concerns of transaction-cost economics. On the other hand, we have organisational alternatives: market-related ones (classical contracting, hierarchy, in-house production) and hybrid ones (relational contracting). It is important to recognise public agencies as historically evolved and institutionally complex in social, political, and economic terms. Besides, a one-size-fits-all approach to the concept of a contract has no basis in reality in either the private or the public sector. Thus, public agencies need to move forward on two tracks: firstly, internal relations reform; and secondly, the establishment of stable and long-term external networks, that is, the antithesis of competitive contracting.366 Various techniques can attract potential contractors to compete, and “contracting-in” can supplement “contracting-out”. The former term refers to “managed competition” in that government agencies bid for contracts on a fair and equitable basis against private contractors. Where feasible, dividing the work among several contractors and an in-house
365 Sclar, E. D., Economics of privatisation, 2000, p. 98. 366 Sclar, E. D., Economics of privatisation, 2000, p. 129.
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unit assures effective competition, knowledgeable contract supervision, a safeguard against possible collision effects, and certainty of service. In addition, contract specifications do not describe the services in an unambiguous manner. Payment procedures do not include fair rules for price adjustment. Payments are often considerably delayed without any chance for the contractor to receive compensation; moreover, penalties are often applied in the case of non-performance. Contract specifications must be comprehensive because they will affect overall success. Comparing in-house and contract costs must be carried out astutely. Once a contract is in effect, performance must be monitored systematically. A basic concept during the development and implementation of PSP in ISSWM is to ensure that both parties understand the project and the services required, and know the various contract specifications and the critical contract issues in sufficient detail to build up enough confidence and a solid basis to enable each partner to assume its responsibility. One main criterion for the selection of the most appropriate contract model is the scope of a given project, which is often linked to the size of the municipality.
7.6
Concluding Remarks and Discussion
This chapter has covered a great deal of ground, focusing primarily on the main characteristics of different types of goods and especially public goods. Private goods by definition could be parcelled out among individuals and efficiently provided by the private market, whereas public goods could not be divided among individuals. This chapter has also examined the main characteristics of public goods: non-rivalry, non-excludability, presence of externalities, etc. Furthermore, transnational, global or regional public goods have been discussed. Indeed, these are goods (or bads) whose benefits are public and cut across several countries. Another issue mentioned in this chapter is group size. As highlighted, the larger the group (for instance a municipality), the easier it is for individuals to cheat (by not paying for the solid waste service, for instance, or discarding waste in neighbouring containers). In summary, some privatisation models are limited in terms of achieving ISSWM because the probability of non-compliance to be noticed and sanctioned is lower. The characterisation of solid waste begs a crucial question: who should provide SWM services? Therefore, this section has discussed in some detail the notion of the necessity of the state. Given that every individual has an economic incentive to be a “free-rider,” that is,
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to use public goods or to enjoy public service without paying for them, the state has to provide these goods by using coerced contributions, such as taxes. This section has also suggested that SWM is characterised by non-excludability, non-rivalry, and externalities. In order to cope with this fact, governments should intervene to remedy market failures. Following Coase, this chapter argues that the treatment of externalities should occur without state intervention, such as via direct bargaining between polluters and the polluted and the integration of the generator and recipient of externality within the same firm. This idea might be true whenever the public services are rendered in a small community. In the case of a municipality, however, voluntary action is no longer adequate to provide SWM services. Based on the principal features of goods, and although such economic classification is not uncontroversial, solid waste services are classified here as public ones based on various characteristics of public goods (see chapter 7.1). This does not mean that such services cannot be delegated to the private sector. The more the private sector becomes engaged in service delivery, the more public sector parties have to focus on capacity building and development, and on furnishing a sound regulatory framework. The roles of government are to increase the efficiency and the effectiveness of SW services and to meet standard requirements. PSP, if well-designed, can make a major contribution to these objectives by ensuring that adequate services are delivered at an affordable price over a defined period, provided that the most appropriate choice of contract model is selected for each special case and that sound inter-organisational relationships with the private sector are established. Despite national environmental awareness and the bond of a common culture, no major state in modern history has been able to support itself through voluntary dues or contributions. Taxes, that is, compulsory payments by definition, are needed. Therefore, there is the “conditio sine qua non” for any municipal authority. Olson rightly observes that “If the state, with all of the emotional resources at its command, cannot finance its most basic and vital activities without resorting to compulsion, it would seem that large private organisations might also have difficulty in getting the individuals in the groups whose interests they attempt to advance to make the necessary contributions voluntarily.”367 Economists rely on the theory of Pareto efficiency to rationalise the privatisation or PSP of goods and services. However, it has been demonstrated in this chapter that to be Pareto efficient, markets must be perfectly competitive and transaction costs should be negligible. This is not the case in welfare economics due to externalities, public goods, and Asymmetric Information. In some segments of SWM (solid waste collection, landfill
367 Olson, M., Theory of Groups, Cambridge: Harvard University Press, 1980, p. 13.
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management, composting plant), PSP contracts are agreed for many years. Thus, it is sound Principal-Agent relationships that principally determine the effectiveness and efficiency of the service and not the competitive marketplace, as stated in the Standard Market Model (Pareto efficiency). The Standard Market Model is being challenged with regard to the provision of public goods. In addition, public authorities and private contractors lack highly relevant information when setting out contract specifications. As far as SWM in LMIC is concerned, one should not only discuss Asymmetric Information, but also a “Symmetric Lack of Information”. As a result, transaction costs are considered to be the most serious concern. Public authorities have to consider, among other alternatives, in-house contracting and assess contract costs realistically prior to involving the private sector. Simply put, the well-formulated Standard Market Model is very compromised in rendering SWM services, especially in LMIC, due to Asymmetric Information, the limited rationality of the principal and the agent, and the opportunistic guile of the principal and agent. In other words, Pareto efficiency has little to do with good agency management and sound interorganisational relationships. Public services can only be improved if the wise use of contracting is combined with a strategy of internal agency reform. Sclar (2000) presents some rules for improving the public sector368, including carefully delineating the output of any public service considered for reorganisation, knowing the fundamentals369, comparing privatisation with in-house operation by using avoidable cost accounting, fully addressing the reality of transaction costs, and removing politics from contracting.
368 Sclar, E. D., Economics of privatisation, 2000, p. 157. 369 ABC stands for activity-based cost accounting.
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8.
International Organisations and Privatisation Policy
In contrast to the privatisation debate in industrialised countries, the debate in LMIC is tightly linked to the strategy of international donor organisations as many LMIC depend financially on development aid from these organisations. Chapter 8.1 opens a new discussion regarding the issue of sovereign debt, particularly regarding its scope. The privatisation policy of international donor organisations, especially the privatisation policy of the World Bank Group, will be focused on. Thereafter, Chapter 8.4 will consider these International Organisations policies regarding SWM. This section will conclude with some remarks.
8.1
Sovereign Debts
Privatisation in LMIC is generally directly linked to debt issues. In order to demonstrate the strategy of the international organisations, the debt issues in LMIC will be discussed below. The absence of a well-established insolvency concept, stringent workout procedures, and limited formal access to debtors, drives a wedge between the parties involved in debt management. The sovereign insolvency process is crucial to the management of debts for both debtors and creditors; it ensures the stability of the world economy. Due to its complexity, policy makers and international institutions, such as the International Monetary Fund (IMF), the World Bank Group, and the financial experts of the Paris Club face difficulties in setting up sustainable concepts that all parties could agree with. Nevertheless, some progress has been made in the debate on sovereign insolvency over the past few years. The most important improvement is the increased level of awareness in important creditors’ institutions like the IMF. Its experts agree that the current situation is not sustainable. In any sovereign country, there are bankruptcy laws dealing with the protection of both debtors and creditors. For sovereign debt, however, there is no legal framework. The discussion about the insolvency procedure for sovereign countries is not new. The first idea of applying bankruptcy principles to sovereign countries goes back to Adam Smith (1776), who states: “When national debts have once accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completed paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy…When it becomes necessary for a state to declare itself
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bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor (Smith, 1910, II: 412-413).” Rogoff and Zettelmeyer (2002) focused on early academic studies on creating bankruptcy reorganisation procedures. They started to analyse propositions made in the late 70s and then analysed some proposals made by Oechsli in 1981. Concerning the bankruptcy issue, Ohlin (1976) referred particularly to LMIC. He noted that “Development finance needs something like the institution of ‘honourable bankruptcy’ (…). It is not recognised how important the institution of bankruptcy is to enable the credit system to work without too much risk aversion and to recover quickly from failures.” Sachs (1995) provided one of the major contributions to the bankruptcy debate. His “Theoretical Issues in International Borrowing” (1984) can be considered a milestone in the discussion on sovereign insolvency. Sachs’ main argument was that “Even in bank syndicates significant free rider problems remain”. In other words, individually these creditors have an incentive to call in their claims against the overextended debtor countries, even if doing so injures the economic performance of the debtor so much that the creditors suffer collectively. This idea was promoted by a range of scholars in the 1980s; subsequently, it was strongly endorsed by UNCTAD in its groundbreaking 1986 Trade and Development Report. Further, Raffer (1990) proposed an international insolvency procedure based on Chapter 9 of the US bankruptcy code. In this respect, Reinisch (1994) called for an “independent international insolvency tribunal”. Much of the existing sovereign debt literature is devoted to identifying such incentives so as to explain why sovereign debt markets exist at all. In summary, the existing sovereign debt literature is primarily focused on the repayment incentive of the borrower and the existence of a positive lending equilibrium. Most works in the sovereign debt literature assume an exogenous interest rate and do not characterise the sovereign yield spread over a risk free rate. The influential works by Eaton and Gersovitz (1981) and Bulow and Rogoff (1989a) make the same assumption. Kulatilaka and Marcus (1987) also modelled the sovereign debt in a continuous time framework. Some other authors like Eichengreeen and Portes, 1995; Chun, 1996, Schwarcz, 2000, Yilmaz Akyux, 2001; Krueger, 2002, also suggest adopting a sustainable approach so as to ensure the orderly resolution of debt crises.
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8.2
Scope of the Debt and Financial Crises
The debts of the LMIC soared from US$ 9 billion in 1955 to US$ 572 billion in 1980. Apart from weakening the G77, developing countries were also hit very badly by another development from 1979 onwards. The US Federal Reserve Bank under Paul Volcker sharply raised interest rates on the US dollar to peak levels of over 20%. LMIC, mostly indebted in US currency, were suddenly confronted with huge burdens of debt servicing. This marked the beginning of the debt crisis (Gyothen and Volcker, 1992, p. 198).370 In 1994, the aggregate debt of LMIC was about US$ 1,800 billion. This debt has been increasing since, not only in absolute figures but also in percentage of these countries’ GDP: in 1980, it represented 27% of the GDP; in 1991 it was 40%. For the countries situated in sub-Saharan regions, it amounted to 101%. The debts of Egypt, Jamaica, Madagascar, and Panama represent 130% of their GDP. Annexes 27 through 29 present the actual scope of LMIC debts in a comprehensive fashion. The increase in international private capital flows is a negative consequence of globalisation in the past decade and has caused a number of financial crises. Indeed, a crisis is usually a point of discontinuity, such as a market collapse. For LMIC, however, such crises are a continuous process. Short-term finance and unpaid debts have become a serious threat to the world economy. They are causing widespread popular concern. The biggest financial crisis of the last century occurred in the 1920s and the early 1930s in the USA and in Europe. At the beginning of the 1980s, a debt crisis broke out in Mexico and other countries in Latin America. The crisis of the European monetary system followed in 1992/1993. Other crises occurred in Mexico (1994/1995), Asia (1997/1998), Russia (1998,) Brazil (1998/1999), and Argentina (2001). Since the crisis in 1982, funding development in LMIC has become one of the most controversial discussions of the world economy. As these countries require foreign financial aid for implementing development projects, debts are accumulated. In fact, 90% of investment today comes from external aid. Another milestone of sovereign debt was the creation of the Bretton Wood institutions after the Second World War, especially the World Bank Group and the IMF. Currently, debts are reaching a peak as the budgets of many governments in LMIC increasingly depend on them. Hence, they are not able to pay back the money borrowed, not even so-called debt servicing fees. Consequently, they have to
370 Weizsäcker, E., Post-War History, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p.184.
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obtain more credits just to pay for debt servicing. Most seriously, these countries are not able to stop this vicious cycle of over-indebtedness. There is no mechanism in place today to resolve the sovereign debt crises in a timely fashion. At present, different organisations are dealing with debt issues in different ways. These organisations include governmental creditors (Paris Club 371 ), commercial banks (London Club), and multilateral creditors (IMF, World Bank Group and Regional Development Banks). Actual procedures for sovereign insolvency have so far failed to prevent national debt crises and to manage them in a sustainable manner. Whenever countries fall into extreme debt distress, they are affected for many years. As stated above, 90% of investment today comes from external aid. This assistance remains vital.372 Consequently, most LMIC are under pressure to privatise or to introduce PSP in the public sector, due to the scarcity of government resources or the influence of aid donors.373
8.3
World Bank Group and Privatisation Policy
The World Bank Group is an independent specialised agency of the United Nations, and it works particularly in close cooperation with the International Monetary Fund (IMF). The World Bank and the IMF were both established in 1944 at a conference of world leaders in Bretton Woods, New Hampshire, with the aim of placing the international economy on a sound footing after World War II. To become a member374 of the IBRD, a country must first join the IMF. Consequently, these two institutions are often referred to collectively as the Bretton Woods institutions. While these institutions were primarily established to promote the reconstruction of Europe as an afterthought, the World Bank was also charged with promoting the development of LMIC.375
371 The Paris Club as the most important organisation and was created in 1956. It is an informal body representing all creditors, including the IMF. It has no legal status. The measures of the Paris Club include currency devaluation, reduction of public services, market policies, and trade policies. 372 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998, summary. 373 Batley, R., PPP for Urban Services, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 200. 374 For more information consult http://worldbank.org/members. 375 Stiglitz, J. E., Globalization, Columbia University, 2005, p. 9-1.
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The terms “World Bank376” and “the Bank” refer only to IBRD and IDA, whereas the terms “World Bank Group” and “the Bank Group” include all five institutions. These five institutions are IBRD, IDA, IFC, MIGA, and ICSD. Through its five institutions377, the Bank Group works in more than 100 LMIC. Its role has grown in relative importance in the world of international finance in recent years as private sector 378 net financial flows to LMIC have declined; hence, the less private sector investment is made in LMIC, the greater the necessity of the World Bank Group is. The World Bank Group supports a broad range of programmes through its loans, policy advice, and technical assistance. It divides its work between IBRD379, which assists middleincome and creditworthy poorer countries, and IDA380, which focuses exclusively on the poorest countries of the world. 381 Together with IFC, the Bank also helps countries strengthen and sustain the fundamental conditions they require to attract and retain private investment. The following paragraphs will summarise the key features of the five institutions of the World Bank Group and their role in supporting privatisation policies. a) IBRD, established in 1945, is the original institution of the World Bank Group. The IBRD plays an important role in development policy in LMIC by providing LMIC with loans and advisory services. b) IDA lends to very poor developing countries on easier terms by providing credits. The objective of IDA is to reduce disparities across and within countries – especially in terms of access to primary education, basic health care, water supply, and sanitation.382 c) IFC promotes economic development through the private sector. In contrast to IBRD and IDA, which can lend only to sovereign states, IFC can lend directly to the private
376 The term “World Bank” was first used in reference to IBRD in an article in the Economist on July 22, 1944, in a report on the Bretton Woods Conference. What began as a nickname became an official shorthand for IBRD and IDA in 1975 (The World Bank “A guide to the World Bank” Library of Congress, 2003, p. 11). 377 Each of the five institutions of the World Bank Group has its own articles of agreement or an equivalent founding document. By signing these documents and meeting the requirements set forth in them, a country can become a member of the Bank Group institutions (The World Bank “A guide to the World Bank” Library of Congress, 2003). 378 The World Bank “A guide to the World Bank” Library of Congress, 2003, p. 4. 379 IBRD: International Bank for Reconstruction and Development; Year established: 1945; Number of member countries: 184; Cumulative lending: US$ 371 billion; Fiscal 2002 lending: US$ 11.5 billion for 96 new operations in 40 countries; http://www.worldbank.org/ibrd. 380 IDA: International Development Association; Year established: 1960; Number of member countries: 164; Cumulative lending: US$ 135 billion; Fiscal 2002 lending: US$ 8.1 billion for 133 new operations in 62 countries; http://www.worldbank.org/ida. 381 The World Bank “A guide to the World Bank” Library of Congress, 2003, p. 11. 382 The World Bank „A guide to the World Bank“ Library of Congress, 2003, p. 15.
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d)
e)
sector.383 It also provides guidance on attracting Foreign Direct Investment (FDI). IFC has been interested in financing municipal projects. The latest example is IFC’s participation in a municipal fund in Johannesburg, South Africa. 384 The fund is financing infrastructure projects, including solid waste management throughout the city. IFC’s Environmental Finance Group has conducted feasibility studies of solid waste disposal options for Durban, South Africa, and solid waste processing centres for the Greater Moscow area. MIGA385 encourages foreign investment in LMIC by providing guarantees to foreign investors against losses cause by non-commercial risks. MIGA’s technical assistance services also play an integral role in catalysing FDI, by helping developing countries and implementing strategies to promote investment.386 Finally, the International Centre for Settlement of Investment Disputes (ICSID) 387 helps encourage foreign investment by providing international facilities for conciliation and arbitration of investment disputes, thus helping to foster an atmosphere of mutual confidence between states and foreign investors.
Today, the World Bank Group is the most important source of financial aid (as opposed to investment) for LMIC. In fact, it provides nearly US$ 18 billion in loans annually to more than 100 client countries. The policy of the World Bank Group is a dynamic one. It has evolved considerably in the last 15 years. Indeed, during the 1960s and 1970s388, the focus of the World Bank Group was on the provision of classic “development aid” rather than the promotion of private investment. After the reorganisation of the Bank in 1987, Private Sector Development (PSD) became a programme of special emphasis. After 1993, PSD became a general principle. PSD divisions and departments were created throughout all institutions of the Bank. During the last 15 years, the World Bank Group has been assisting privatisation in more than 80 countries. More than 8,500 state-owned
383 The World Bank „A guide to the World Bank“ Library of Congress, 2003, p. 18. 384 Paimela-Wheler, A., World Bank Financed Waste Management Projects, Washington, 2004, p. 7. 385 MIGA: The Multilateral Investment Guarantee Agency; Year established: 1988; Number of member countries: 163; Cumulative guarantees issued: US$ 10.34 billion; Fiscal 2002 guarantees issued: US$ 1.36 billion; http://www.miga.org. 386 The World Bank „A guide to the World Bank“ Library of Congress, 2003, pp. 20-21. 387 Year established: 1966; Number of member countries: 139; Total cases registered: 103; Fiscal 2002 cases registered: 16; Web: http://worldbank.org/icsid. 388 Katharina Hay in Weizsäcker, E./Yong, O./Finger, M., Limits to Privatization, London: Earthscan, 2005, p. 261.
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enterprises (SOEs) have been privatised, transferring close to US$ 1 trillion in assets from government-controlled enterprises into private hands.389 FDI is often considered the driving force behind PSP. According to the World Bank Group, approximately 1,707 private infrastructure projects worth US$ 458.2 billion were completed between 1990 and 1998. During this period, LMIC received approximately US$ 138.3 billion in FDI (Sader, 2000). However, FDI made in LMIC in infrastructure and services was not the same across all sectors (roads, telecommunications, electricity, water sector, waste water, solid waste). Developing countries saw investment of nearly US$ 755 billion in nearly 2,500 infrastructure projects between 1990 and 2001.390 In sum, almost all five institutions of the World Bank Group work in one way or another to promote and strengthen the private sector. For the World Bank Group, a “vital private sector” is essential for success in the development of a country. There is growing evidence that private investment in some economic sectors is smaller than expected. Accordingly, the World Bank economist Nemat Safik grants that “we were too optimistic concerning the willingness to invest in these countries… despite far-reaching reforms, many countries do not find investors.”391
8.4
Solid Waste Management Policy
Contrary to conventional belief, PSP, both in financing and managing public infrastructure, is not a new phenomenon. In 1562, Sully contracted a private enterprise for waste collection in Paris (see Chapter 3.1). In 1662, the city of Tokyo contracted out waste collection, including waste disposal, to private contractors.392 Recently, both in industrialised countries and in LMIC, municipal infrastructure and services markets have undergone unprecedented change in terms of the financial volume of transaction, mostly in the last two decades. Figure 10 displays comprehensively three general developments in foreign aid for SWM.
389 Dyck, 2001 cited in Weizsäcker, E./Yong, O./Finger, M., Limits to Privatization, London: Earthscan, 2005, p. 261. 390 Wolff, P., Private Funding of Infrastructure, in Weizsäcker, E. /Yong, O../Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 319. 391 Hoering, 2003 cited in Weizsäcker, E./Yong, O./Finger, M., Limits to Privatization, London: Earthscan, 2005, p. 261. 392 Dorvil L., PSP in Morocco, Solid Waste, health and the Millennium Development Goals – CWG SWM in LMIC and WASH Workshop 2006, Kolkata, India, 2006, p. 1.
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They are:393 1. 1970s - 1980s (Hardware Approach) 2. 1980s – 1990s (Software Approach), focused on planning management and operation and maintenance 3. Since 1990s (Capacity Development Approach) Those approaches will be discussed separately below. 1. 1970s - 1980s (Hardware Approach) Since the World Bank’s first urban project was launched in Senegal in 1972, some 7,500 projects (all sectors included and representing investments of close to US$ 500 billion), have been completed. The first urban projects financed by the Bank in some LMIC were usually devoted to upgrading technical services, at great expense in terms of both equipment and technical assistance. These undertakings improved services for a few years, but they eventually failed due to a plethora of problems -- principally, the lack of sustainable funding. As a result, equipment was eventually abandoned, technical staff drifted away, know-how was lost, and the service typically ended up meeting less than 10% of actual demand.394 The Bank’s urban strategy document (World Bank, 1999) recognised that, while these projects brought benefits, they fell short of a sufficient recognition that achieving sustainable urban development requires a more integrated approach across the physical environment, infrastructure networks, finance, and institutional and social activities.395 In fact, from 1976, the World Bank Group promoted projects in 40 cities around the world, including Cairo, Alexandria, Manila, Djakarta, and Singapore. 396 More than US$ 500 million was invested in SWM as part of this programme. However, although much hardware has been provided, this approach has a short-lived, unsustainable effect; it can even have adverse consequences. In effect, LMIC very often lack managerial know-how to utilise and maintain the equipment and facilities provided, or they have an outmoded administrative system.
393 JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, page V. 394 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998. 395 Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xix. 396 Cointreau, 1982 cited in JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 16.
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2. 1980s - 1990s (Software Approach) The urban policy analysis developed during the late 1980s and early 1990s, building in part on Bank-supported research, remains a sound guide to the Bank’s assistance activities.397 This shift in the Bank’s approach to urban development was articulated in its urban strategy, which maintains that municipalities are to promote the welfare of their residents. The approach in the late 1980s is defined as the “Software approach”. This approach is defined as the provision of assistance for planning, the development of waste management systems, and technology transfer. The aim of the World Bank’s urban strategy was to promote sustainable municipalities. According to the Bank, sustainable cities are first and foremost liveable, competitive, bankable, well-managed and well-governed. A well-managed municipality represents and includes all groups. Further, it is characterised by the accountability, integrity, and transparency of government actions; finally, it rests on strong local government capacity to fulfil public responsibilities based on knowledge, skills, resources, and procedures anchored in workable partnerships.398 3. Since 1990s (Capacity Development Approach) Taking integrated approaches to supporting LMIC to improve their overall waste management capacity has become more apparent in recent years. Since the 1990s399, a new approach has been emerging. This new approach is called the “capacity development” approach. This approach is defined as a process of comprehensive environmental policy. It also includes the level of capacity of LMIC according to their socio-economic background as well as an examination of the most appropriate contents, strategy, and methodology of the assistance granted. The concept of capacity development emerged through the process of self-critical evaluation with respect to technical cooperation and foreign aid projects promoted during the previous four decades. Simply put, traditional foreign aid cooperation was focused on “What and Why” questions, but had neglected the “How” questions for the parties involved in LMIC. Therefore, one should focus on capacity development as one of the key elements. Thus, the capacity development approach emphasises the primary role of LMIC; it should be coupled
397 World Bank policy papers issued in this period include Urban Policy and Economic Development: An Agenda for the 1990s, 1991; Housing: Enabling Markets to Work, 1993; Better Urban Services: Finding the Right Incentives, 1995; and an unpublished sector review, "An Agenda for Infrastructure Reform and Development," INU, 1993, which served as an input to the Banks 1994 World Development Report cited in Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xx. 398 Griffin, A., Sustainable Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 63. 399 JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 15.
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with developing a comprehensive understanding of the institutions dealing with SWM. Based on the experiences of past technical cooperation in SWM, the method of assistance for capacity development can be roughly grouped into the following five categories:400 Increase: to provide the expertise, know-how, equipment and ‘software’, and help enhance skills, management capabilities, and planning capabilities; Build: to help build up the institutional/organisational capacity, such as a legal system for SWM, administrative organisation for SWM, and a forum for citizens to participate in SWM; Disseminate: to set the SWM system of a specific area as a model, and disseminate it to other areas with similar conditions; Sustain: to help sustain an existing or newly structured SWM system through proper financial management and/or economic incentives; Reduce loss: to help achieve more efficient utilisation of human and physical assets and improve management through modification/improvement of the existing SWM system. The next section reviews the general global trends and evolution in foreign aid with regard to SWM in LMIC. It 401 includes an overview of the activities of the most important international organisations in the last decade. a) The World Bank Group and Regional Development Banks The World Bank Group is the world’s largest foreign aid organisation in SWM. The first municipal solid waste project financed by the World Bank Group was for Singapore in 1973. Since then, lending has slowly risen to 72 projects, totalling over one billion dollars. About 15 new projects, with a total estimated value of about US$ 660 million, have been approved or are being approved.402 Since the 1980s, the Bank has promoted more than 100 SWM projects worth an aggregate of more than US$ 1 billion in LMIC. These projects were carried out by adopting two approaches: • Assistance in SWM improvement from the viewpoint of urban development, and • SWM and disposal from the viewpoint of environmental protection, pollution abatement, and removal of environmental contamination.
400 Categorization based on Mabuchi and Kuwajima (2004) cited in JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 21. 401 JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 24. 402 Paimela-Wheler, A., World Bank Financed Waste Management Projects, Washington, 2004, p. 5.
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These approaches took the form of two different programmes. The first is called the Urban Development Programme 403 , and the latter is included in the New Ideas in Pollution Regulation as projects for hazardous waste disposal. For the Bank, the key issues are strategic service planning, institutional arrangements, PSP, financial management, and environmental management. The World Bank Group approved a new infrastructure action plan in 2003; this plan strongly supports substantial increases in infrastructure lending, including solid waste.404 It is worth noting that the regional banks essentially very often follow the same policy regarding SWM in LMIC as the World Bank Group. Thus, like the World Bank Group, the Inter-American Development Bank (IDB) extends assistance for MSWM to Caribbean and Latin American countries, as a component of urban development. IDB has clearly indicated its preferred assistance to PSP projects. Furthermore, the Asian Development Bank (ADB) has extended assistance to projects that include SWM as a part of urban development. The European Bank for Reconstruction and Development (EBRD) is also actively engaged in a number of MSWM improvement projects in former Soviet Union cities. Together with the improvement of obsolete facilities and systems, EBRD has decided to strongly advocate PSP. Finally, the African Development Bank (AfDB) has few records of assistance in the SWM sector. Cointreau-Levine, one of the well-known solid waste specialists within the Bank, has been carrying out outstanding research work in the field of SW for over two decades. Recently, she undertook an interesting survey, applying well-designed guidelines and a contract form to strengthen the implementation of private sector participation in solid waste (CointreauLevine et al, 2000a, b, c). Although her opinion does not necessarily express the policy of the World Bank Group on SWM, some of her ideas will be analysed and discussed below in terms of the economic limitations of some PSP models. According to Cointreau-Levine (see Chapter 6), PSP in delivering SW services is more efficient than public management because efficiency is driven by competition. However, competition occurs in some SWM elements without challenge. Competition in long-term contracts, especially in SW infrastructure management, is foreclosed. Thus, efficiency and effectiveness can only be achieved through sound inter-organisational relationships. In her opinion, different arrangements between the private sector and the public authorities can be made, such as Public-Private Partnerships, franchise, concessions, etc. A private-public
403 http://www.worldbank.org/urban/solid_wm/swm_body.htm (Accessed in October 2004). This World Bank portal for solid waste management contains much basic literature on foreign aid granted to developing countries to promote solid waste management. 404 Paimela-Wheler, A., World Bank Financed Waste Management Projects, Washington, 2004, p. 6.
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partnership is a joint venture of public authorities and the private sector. However, there are some limitations in this arrangement in terms of the contestability existing between public authorities and the private sector. As a partner of this joint venture, a public authority might have difficulty to sanction itself (as a partner) if this partnership is not performing very well. Another, albeit less obvious, issue is the termination of this partnership. Although this arrangement presents some advantages in theory, strong evidence is still lacking. Another PSP arrangement examined in-depth by Cointreau-Levine is the franchise. In her opinion, a franchise arrangement is created whenever a firm is given exclusive monopoly in a specified zone to provide SW services. Residents sign up to pay for the service and a private sector contractor collects and transports their waste to a transfer station or to a landfill. The beneficiaries of the services pay the franchisee directly. Cointreau-Levine argues that this arrangement is suitable where beneficiaries would not be willing to pay user charges to the government or would be willing to pay more to the private sector. It is also suitable where the fee for the service needs to be determined for each customer. She recommends that franchise arrangements must be long enough for a depreciation of assets to occur as well as the development of a good cost recovery relationship with customers. Four key issues should be highlighted regarding the arguments concerning this arrangement. First, this arrangement is challenged by the theory of public goods, which states that it is not recommended to exclude beneficiaries from this service. Bad SW management has widespread negative effects, even those who regularly pay the fees required. Another relevant issue in this context is affordability, especially in low-income areas in LMIC. Thirdly, the theory of market failure (see Chapter 7.5) challenges this argument; due to Asymmetric Information (or Symmetric Lack of Information), the private sector could impose inadequate tariffs without the intervention of the state, since information on the quantity of SW generated and on related costs is usually lacking in LMIC. Finally, if the contract must be long, competition is foreclosed during the contractual term. Thus, a state monopoly could be turned into a private monopoly/oligopoly. A concession arrangement is realised when a private firm is given exclusive access to public SW facilities management. This is common in management of transfer stations as well as landfill management. The beneficiaries of the service pay a tipping fee to the private firm. The private sector finances and owns the facility for a long-term period (20 years for instance). Cointreau-Levine proposes some useful guidelines for PSP. Accordingly, local public capacity has to be built to develop technical specifications, tender competitively, and comparatively monitor performance. Further, capacity has to be built to provide a contestable government service. Local capacity has to be strengthened to generate revenue
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and operate as an accountable cost centre. If capacity building and capacity development are on the actual agenda of international donors, there is as yet no comprehensive policy as to how the private sector should build the capacity of municipal managers, since there is no incentive to do so. One reason cited in favour of private sector involvement is the inefficiency of public management. Why should the private sector strengthen the managerial and technical capacity of municipal managers? Further, municipal managers quantify output to enable comparative performance monitoring. However, the analysis of the CESPA case study has proved that establishing a threshold for monitoring the SW service is anything but obvious. Is a street considered not cleaned if the private entrepreneur does not collect 1 kg of SW or is the SW collection performance not achieved if a SW container is not empty at a specific time according to the contract specifications? Moreover, public awareness plays a vital role in setting up a monitoring system. Citizens have to be aware of the private entrepreneur’s collection schedule. Should they impose penalties on the private firm for failing to respect the collection schedule? Does competitive, transparent procurement create efficiency? Are agreements long enough to allow for the full depreciation of investment? However, as stated above, LMIC lack sound technical and managerial capacity in the field of SWM. Therefore, most relevant private enterprises are international ones. Contractual agreements that are long enough to allow economies of scale limit competition during the contract period. Cointreau-Levine rightly argues that efficiency, which is the basic of positive argument in favour of PSP in delivering SW services, is driven by competition. However, SWM in LMIC encompasses various waste elements, such as street sweeping, waste collection, waste transport, waste recycling, waste composting, management of transfer stations, landfill management, etc. Not every waste element allows for fair competition. If competition in a solid waste element like street sweeping is obvious due to the availability of staff, low technology and management, and the short duration of contract, competition in SW infrastructure with heavy investment, like sanitary landfill management, is limited within the time frame of the contract. It is often advocated by international organisations that PSP policy will ultimately result in more foreign investment and more economic growth. However, the issues of bankruptcy and “On-again / Off-again” are not considered despite their importance to guaranteeing continuity of service. Who should bear the costs of hazard remediation if a private company goes out of business? Another concern is the affordability of the service. Very often, SWM elements financed by international credit organisations are technically upgraded in terms of providing mechanical equipment and financial means without any consideration of the polluter pays/user pays principle.
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According to Cointreau-Levine, the international private sector, for instance, typically looks for a minimum landfill capacity of 300 tons per day, both for the efficient utilisation of landfill equipment and for having an adequate base of income to support the cost of foreign expertise. Thus, with an average waste generation of 0.60 kg per day per inhabitant, and taking into account the waste treatment sector (recycling and composting), only a municipality with more than 600,000 inhabitants is attractive to the private sector in terms of landfill management or management of transfer stations. Therefore, small to medium-size cities and small islands are not attractive to the international private sector. Simply put, some PSP models are limited because of the size of the population. If the international private sector is highly interested in more waste generation by managing a landfill, a conflict of interest with the hierarchy principle will arise. Another concern is the collision effect whenever different private entrepreneurs are operating in the same collection areas. Cointreau-Levine argues that to create contestability, the private sector should service no more than 70% of any city.405 If this is true for some SW elements, such as street sweeping and SW collection, this argument is challenged by managing treatment and disposal facilities. Finally, she asserts that in transfer, treatment and disposal contracts, flow control needs to be carefully addressed to minimise the risks borne by private investors. Flow control involves the guarantee that a minimum quantity of waste will be delivered to a facility. PSP contracts should specify the minimum amount of waste to be delivered. Public authorities should be committed to ensuring that the agreed amount of waste is brought to the facility or alternatively that it pays the sum that it would pay for that specified minimum.406 According to the hierarchy principle, however, the main purpose of any comprehensive SWM should be recycling and treatment. Thus, as far as landfill management is concerned, the target should be to dispose of as little waste as possible and not vice versa. How could municipal authorities conduct a waste minimisation awareness campaign and at the same time promise the private sector that more waste is possible? The empirical section of this dissertation demonstrates that if the private firm is paid according to the quantity of waste disposed, this will result in the non-application of the hierarchy principle. In sum, the overall objectives of the World Bank projects for solid waste collection and disposal are to:407
405 Cointreau-Levine, Sandra, PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 15. 406 Cointreau-Levine, Sandra, PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 24. 407 Environmental Assessment Sourcebook 1999 CHAPTER 9 “Population Health and Nutrition; Urban Development; Transportation; Water supply and Sewerage”, http://lnweb18.worldbank.org/ESSD/envext.nsf/47ByDocName/ Chapter9PopulationHealthandNutritionTransportationUrbanDevelopmentWaterSupplyandSewerage/$FILE/ Chapter9PopulationHealthAndNutritionTransportationUrbanDevelopmentWaterSupplyAndSewerage.pdf.
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• Provide appropriate and efficient collection of solid waste in municipalities; • Provide effective and economic transport of collected waste to disposal facilities; • Provide environmentally safe, technically practical, and low-cost disposal; and • Strengthen institutions technically and financially to ensure cost effective operation and the long-term maintenance of solid waste systems. There is no incentive for beneficiaries in LMIC to prevent or minimise the generation of waste according to the hierarchy principle when international donors bear the full costs of local waste services. Simply put, there is a contradiction between the polluter pays principle and foreign aid. In general, PSP is viewed by the most important international organisations, including the World Bank Group, as more efficient and more effective than the public sector. Potential benefits of PSP in delivering SW services are usually presented. Figures of efficiency gained are put on view without economic limitations. More advantages but fewer disadvantages are cited and anecdotal evidence is used only to illustrate successful applications of the PSP concept. Simply turning over public service delivery to private agents, without ensuring that the principles of sustainability and the key issues of PSP making these successful are put in place, leads to a worse situation than portrayed in surveys conducted by specialists of international organisations like the World Bank Group. b) United Nations organisations Different United Nations organisations render assistance to SWM in LMIC (see Table 12). The following table summarises these organisations, including the objectives of their programmes.
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International Organisations 1 United Nations Environment Programme (International Environmental Technology Centre) 2 United Nations Development Programme 3 United Nations Industrial Development Organisation 4 United Nations Institute for Training and Research
Objectives Collection of technical information and accumulation of appropriate technologies for SWM Promotion of SWM in LMIC in cooperation with the World Bank, UNIDO, UNEP, and UNCHS Assistance to SWM focusing on African cities Promotion of “Chemical and Waste Management Programme”; training and capacity building programme for implementation of the globally harmonised system of classification and labelling of chemicals Promotion of “Chemical and Waste Management Programme”; training and capacity building programme for implementation of the globally Harmonized System of classification and labelling of Chemicals Urban Management Programme, assistance projects for MSWM
5 International Labour Organisation
6 United Nations Centre for Human Settlements (UNCHS-Habitat)
Table 12: International organisations and their programmes regarding SWM (Source: JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005) Finally, bilateral cooperation through bilateral institutions (GTZ, KfW, DANIDA, etc.) plays an important role in assisting LMIC in SWM. Mutual partnership and coordination will be a crucial challenge.
8.5
Concluding Remarks
This chapter has introduced the issue of debt in relation to privatisation in LMIC. The link between sovereign debt and privatisation has been shown unambiguously. As yet, no sustainable concept exists to resolve the debt issues facing creditors and debtors alike. Unpaid debts result in popular concern. In effect, most investment in LMIC comes from international aid and most LMIC governments depend on it. The influence of the so-called donor organisations is therefore very high. International organisations, especially the World Bank Group and the IMF, force these countries to privatise state-owned companies or to introduce PSP in public services. Two key points should be noted. Firstly, the success of PSP differs from one country to another. Secondly, PSP is not the same across all sectors. Due to the lack of financial means to achieve the MDG in LMIC, the issue of PSP,
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especially in the solid waste industry, will preoccupy academic and professional discussion for at least the next 15 years. As these countries require foreign financial aid to implement development projects, debts are accumulated. In order to stop this vicious circle of overindebtedness, the concept of PSP is crucial to the development process. Accordingly, the issue is no longer one of public versus private. Meeting financing needs and the MDG will require resources from all possible sources, including aid from international organisations and comprehensive PSP. The international institutions mentioned promote and strengthen the private sector in LMIC. As shown, Foreign Direct Investment (FDI) is often considered the driving force behind PSP. This chapter has demonstrated that the privatisation discussion is not free of ideological beliefs. The opponents and advocates of privatisation argue according to their ideological preferences rather than in terms of environmental and economic merits. Finally, this chapter has identified the issues of SWM in LMIC, including donors trends. It has been demonstrated that the “1970s-1980s” (“hardware”) approach does not have a lasting effect unless it is accompanied by a sound management system. Credits from international organisations can result in LMIC failing to assess the suitability of the technology to be funded, its full costs, and the affordability of the services provided. Not enough attention may be paid to whether the technology is proven to fit the specific conditions of a given country, whether the total costs have been recognised, and whether sufficient attention has been given to how facilities will be replaced at the end of their useful lives.
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III. EMPIRICAL EVIDENCE
Introduction
T H E O R Y
ISSWM
{
Privatisation and PSP Goods and Market Theory
Strategy of International Organisations
E M P I R I C A L
METAP illustrative Case Studies CESPA Case study
Waste Collection
Contracting-out
CONCEPTUAL FRAMEWORK
This section is assigned to the empirical foundation of this dissertation. It encompasses three illustrative case studies from Egypt, Lebanon and Tunisia which will be presented and analysed. Thereafter, a single case study (CESPA) addressing one solid waste element (Solid waste collection) and one PSP model (Contracting-out) will be analysed and discussed.
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9.
Illustrative Case Studies
This section presents empirical illustrations and applications of PSP experiences in some LMIC. After presenting the overview and background of the case studies, key features of the solid waste section in the project region will be taken up. Thereafter, three PSP case studies from Egypt, Lebanon and Tunisia will be presented and analysed. A discussion of the main results regarding the hierarchy principle, the polluter pays principle, effectiveness, efficiency and inter-organisational relationships will conclude this section.
9.1
Overview and Background of the Case Studies
These illustrative case studies of PSP experiences have been obtained from the Mediterranean Environmental Technical Assistance Project (METAP) - Regional Solid Waste Management Project (RSWMP). The beneficiary countries of the METAP-RSWMP project are Algeria, Egypt, Jordan, Lebanon, Morocco, the Palestinian Authority, Syria, and Tunisia. Hereafter, these countries will be referred to either as METAP-RSWMP region or simply the project region. The project is funded by the European Commission and executed by the World Bank Group. These examples will be analysed both qualitatively and quantitatively with respect to some of the principles of integrated sustainable solid waste management (ISSWM), such as the hierarchy principle and the polluter pays principle; various core elements of PSP will be considered as well, including inter-organisational relationships, effectiveness, and efficiency. Significant insights regarding both the economic limitations of PSP and its appropriateness will be gained from these illustrative case studies. This knowledge will ultimately be used to set up the conceptual framework of this dissertation. Unlike the single case study, which deals in-depth with SWM at a national level (Morocco), these three illustrative cases will focus on SWM at a broader level, namely in the Maghreb and Mashreq regions. The data presented are obtained from the documents of the METAPRSWMP project. The Mannheim-based GKW consultancy is the joint owner of the documents. The main documents are: Volume 1: Overall Introduction: Decision Maker’s Support Document: Glossary Volume 2: Policy, Legal and Institutional Guidelines & Aids to Implementation Volume 3: Regional Guidelines: Finance and Cost Recovery Guideline & Aids to Implementation Volume 4: Private Sector Participation Guideline & Aids to Implementation 138
9. Illustrative Case Studies
Volume 5: Regional Guidelines: Public Awareness & Community Participation Guidelines & Aids to Implementation Volume 6: Case Studies PLI, FCR, PSP, PA&CP, TEC Unlike the single case study, the author does not claim to be presenting his own fieldwork here. These illustrative case studies cover a wide range of solid waste services, including landfill management, collection systems, treatment facilities, etc.; by contrast, the single case study treats one single Solid Waste (SW) system, albeit in detail, namely SW collection, and one single PSP model, namely contracting-out. The main results are displayed in Table 15, Table 16 and Table 19 as strengths and weaknesses. The strengths will be used in establishing a conceptual framework at the end of this dissertation, while the weaknesses are useful in addressing its main objectives, namely the economic limitations of PSP.
9.2
Key Features of the Solid Waste Sector in the METAP-RSWMP Region
The following sections address some key features of SWM in the region. These are PSP, institutional issues, waste generation, the management of solid waste, and the economic value of the recycling sector. These are discussed in accordance with the regional PSP concept. a) Private Sector Participation Countries in the METAP-RSWMP region have traditionally funded SWM services out of national and municipal budgets, against a background of non-accurate information. Progress in the region to render the SW service more effective and efficient, and to comply with stricter environmental standards, has meant that countries and municipalities are faced with financial challenges within the context of limited municipal financial resources. As a result, the private sector is financing the achievement of public policy waste management objectives in some countries of the region. However, the strategy regarding the Private Sector Participation (PSP) policy in the field of SWM differs from one country to another. It is considered advanced in Egypt, Lebanon, Syria, and Morocco. In recent years, several projects for waste collection, transfer and disposal, have been tendered nationally and internationally. Long-term contracts have been agreed in Lebanon, Egypt, and Morocco.
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However, some contractual agreements have failed, due to insufficient funding and nonfulfilment of contractual obligations (e.g., Tunisia, Algeria, and Morocco), due to inefficiency, poor performance by the service provider, and poor monitoring by the public sector. Successful implementation of a PSP approach requires a comprehensive framework, within which both contractual parties can operate with continuity, and which defines both the rules and the interfaces (see Chapter 6.6). b) Institutional Issues In the project region, waste management is a shared responsibility at national, regional, and local levels and, at the national level, of various government ministries and agencies. Generally, the Ministry of the Environment or Environmental Agency is responsible for the provision of waste management services in the region. In 2002, for instance, Algeria created a dedicated SWM agency through which it sought to promote enhanced SWM services. In Tunisia, a National Waste Agency has been considered; this agency would undertake waste management studies as well as the implementation of waste management facilities and cost recovery on behalf of local communities. In most countries of this region, institutional capacity to provide leadership on waste management issues remains weak, nevertheless. Generally, across the region, the SWM sector is inadequately structured and regulated by public authorities. Although SW services consume between 20 and 50 % of the annual budget of the municipalities in the region, solid waste is not prioritised on the political agenda. However, the prerequisite for institutional capacity building for the effective regulation of public sector services is a very important step towards mobilising private entrepreneurs in the ISSWM projects. Instead of the usual two parties, independent experts or regulatory agencies can assist public institutions. c) Waste Generation Approximately 160 million people live in the project region, and the population is growing rapidly. More than 50% of the population live in urban areas. The region generates about 35 million tons of municipal waste per year. It is estimated that waste generation will increase across the region by up to almost 50%, due to increasing urbanisation, ever-growing populations, and nonetheless, the increasing levels of economic development. This will result in changes in both the quantity and the characteristics of the waste generated. Many cities remain under-serviced in terms of SWM which represents a great opportunity for both national and international private firms. As a rough guide, Germany, with a population of 82.5 million, generates about 380 million tons of SW each year. As one of the biggest in
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Europe, the SW market in Germany generates a turnover of more than € 35 billion every year. About 75% of the market are run by the private sector. These figures obviously have to be understood within the socio-economic context of the country. While they can obviously not be projected onto the METAP-RSWMP countries, they suggest what the solid waste market could look like in future. Finally, there is little accountability for waste generation, so that accurate data is lacking. d) Waste Management In the region, SWM is considered inadequately managed. It has focused primarily on the removal of waste from the municipalities and its subsequent disposal, giving no priority to avoidance and treatment as the hierarchy principle requires (see Chapter 5.1). Accordingly, open dumps, which pose a serious threat to environmental quality, are legion. In Tunisia, for instance, the government has identified over 400 unregulated dumps in need of rehabilitation. In Morocco, there are over 180 dumpsites.408 In fact, 90% of the waste generated in the project region, amounting to over 30 million tons per year, is disposed in inappropriate places with inadequate environmental standards. This has resulted in transferring health and environmental issues from one place to another at great cost, and has furthermore created new and costly problems such as the rehabilitation of dumpsites. The central issue is that environmental remediation is more costly than prevention. According to the World Health Organisation (WHO), over 10% of preventable illness is due partly to inadequate SWM. The latter also poses a serious threat to the national economy in general, and in particular to the tourism-driven economy. For instance, inadequate SWM in Tangier leads to the pollution of beaches and US$ 23 million in lost revenues for hotels.409 This figure will increase as more waste is generated due to an ever-improving standard of living, urbanisation, and not least due to the ambitious programme of the Moroccan government to strengthen the tourist industry. Furthermore, in 1999, the cost of environmental degradation in Tunisia is estimated at about US$ 565 million (representing 2.7% of the GDP). In Morocco, the annual cost of environmental degradation is estimated at between 2.75% and 4.65% of the GDP, representing about € 1.3 billion410, and the cost of inadequate SWM alone is estimated to be about 0.5% of the GDP.
408 « Les nouvelles bases d’une politique “déchets” : Enfin une loi ! www.lopinion.ma, 9th August 2006. 409 Royaume du Maroc « Evaluation du Coût de la dégradation de l’environnement », June 2003, Rapport No. 25992MOR World Bank, www.worlbank.org , June 2003, p. 1. 410 Royaume du Maroc « Evaluation du Coût de la Dégradation de l’Environnement » Document de la Banque Mondiale, Rapport No. 25992-MOR, 2003.
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e) Informal Sector and Recycling Recycling is largely undertaken by the informal sector in all Maghreb and Mashreq regions in question, due to a lack of formal recycling processing plants. The informal sector operates differently in each country, and sometimes it even operates differently within one city. In fact, 10,000 people across the METAP-RSWMP region live on the revenue derived from waste management-related activities in the informal sector. The impact of the informal sector on the amount of waste requiring disposal varies across the region. It is considered the highest in Cairo411, where the Zabbaleen community (waste pickers) has developed an internal economy based on the collection, recovery, sale, and reutilisation of waste materials. SW is collected by the Zabbaleen through agreements with individual residents, and specifically those living in higher income areas of the city. Over 80% of the waste collected by the Zabbaleen community is utilised. This has created over 3,000 jobs, as well as a micro-enterprise based on the materials recovered. Across the city as a whole, this translates into a reduction of the amount of waste requiring disposal, of less than 10% of the waste generated. In other parts of the region, the impact of the informal sector on the total amount of waste requiring disposal, is probably in the range of 5 – 20% of the waste generated. In Lebanon, 40% or more of all solid waste has been estimated to be handled by the informal sector. In Tunisia, the ECO-Lef412 initiative has created other opportunities for the integration of the informal sector into the formal sector. Finally, the informal sector leads to direct economic and environmental benefits and removes non-organic materials from the waste stream, and hence facilitates the achievement of the hierarchy principle. Simply put, any PSP initiative in LMIC should consider and integrate the informal sector into its activities. In light of the above, PSP initiatives should not create conflict with informal waste management activities. This has occurred in Cairo in connection with the contracting-out of waste management services, resulting in the isolation of the informal sector. Door-to-door collection by the informal sector is replaced by a modern collection system, and waste separation in the street and on new sanitary landfills is restricted, thus considerably limiting the extraction of recyclable materials from the waste stream and at the same time affecting the revenues of the informal sector. Recycling is an important socio-economic activity across the region and the informal sector plays a considerable role in this activity. In fact, recyclable materials comprise between 20 30% of the waste generated in METAP-RSWMP countries in terms of weight. The extent of
411 Within the households served by Zabbaleen collection contracts. 412 Eco-Lef is a waste packaging system for the collection of used packaging and its treatment in Tunisia.
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this activity varies widely within a country. In some cities (Cairo/Egypt), the recycling activities of the informal sector remove virtually all the recyclable materials from the waste generated from at least some parts of the city. In the year 2000, there were about 220 recycling workshops in Alexandria/Egypt with an average number of six workers. These carry out sorting and loading activities. The METAP-RSWMP experts have identified three ways to enhance the recovery of recyclable materials in the region: • The provision of incentives in return for specific recyclable materials; • The separation of dry materials from wet materials at the source of waste generation; • The recovery of recyclable materials from mixed waste, following collection.
9.3
Illustrative Case Study: Egypt
The quantity of solid waste generated in Egypt is estimated to be around 60 million tons a year. Solid Waste generated from urban and rural areas amounts to about 15 million tons yearly, while the remaining quantities include agricultural waste, demolition waste, etc. The major SWM issues include insufficient SW collection and a lack of sanitary disposal. The SWM services used to depend on three main players: • Municipalities responsible for street cleaning and servicing municipal SW containers. • The Zabbaleen 413 traditional system, in which they “contract” with individual households to collect their waste in exchange for a fee that ranges between L.E.414 1-5 per month. They offer a door-to-door service daily or once every two days in return for a monthly fee. Waste collected either by the private sector is delivered to the Zabbaleen communities or directly to disposal sites (see Chapter 4.8 on the informal sector). • Additional Non Governmental Organisations (NGO) also perform some limited solid waste services. The solid waste issues only came onto the agenda of the government as a priority in 1999, when a severe air pollution episode attacked Greater Cairo due to the open burning of accumulated waste disposed in inappropriate places. Since then, important measures have
413 Common name of waste pickers in Egypt. 414 Exchange rate in November 2003: approximately 6.2 Egyptian Pounds to 1.0 US Dollar.
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been undertaken to tackle these issues. Thus, a Ministerial SWM Committee co-chaired by the Minister of the Environment and the Minister of Local Development was funded in order to address the institutional and financial aspects of the system. In December 2000, the Committee prepared a “National Programme for Waste Management”. The programme addressed the policy and institutional actions, as well as the projects needed to manage different streams of waste. A policy decision has been taken by the Government of Egypt (GoE) to introduce economic incentives for SWM services. These included a tax break for at least 5 years, as well as exemption from custom duties for the equipment used in waste management services. One of the initiatives was to transfer the integrated SWM services to the private sector. A private service has since been started in Alexandria, 3 zones of Cairo, 2 zones of Giza, Suez, and Aswan. The first step was to establish a Ministerial SWM Committee, and then the necessary decrees allowing for the contracting-out of the service were issued, including a decree allowing the inclusion of solid waste fees from the service beneficiary in electricity bills. Afterwards, experienced private operators were invited to provide the services in some Governorates (see Table 13). The Qena-Egypt project has been self-financed without using any funds from sources outside Qena City. The SWM services have been commercialised through the collection of a monthly fee from households. In reality, alongside the above-mentioned revenues, households today are requested to pay 2 L.E.415 per month for waste collection. By taking account of some 45,000 households of which 90% regularly pay the fee, an annual amount of about 1 million L.E. is collected directly from the waste generators. In addition to the revenues collected for the cleansing fund, fees are also collected along with the issue of car and business licenses, so that almost 50% of the revenue comes from private sources whereas the remaining part is still financed by the public sector. There are some goods examples of improvement of national institutions dealing with SWM. One of them is given in Egypt (Qena) where 20 employees have carried out monitoring and enforcement policies. Furthermore, the project is supervised by a project steering committee, personally headed by the Governor. In addition to the operational crews, about 20 people are involved in performance monitoring. Reports are directed to the project manager, who takes immediate action in the case of mismanagement. A committee which represents the Governorate, the City Council, and the police, supports enforcement. The Governor himself and his key staff are involved in monitoring and instructing the waste collection crews to achieve best SWM practice.
415
Exchange rate in November 2003: approximately 6.2 Egyptian Pounds to 1.0 US Dollar.
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The progress achieved by the different governorates in Egypt on the PSP process is not homogeneous. The larger, urban governorates, have progressed steadily, while others, especially rural governorates, have failed. Table 13 provides data concerning the governorates that have completed their outsourcing and have entered into a contractual agreement with private operators. Accordingly, the SW sector is driven mostly by international private companies. The issue is how to integrate local SME and the informal sector into the business?
Governorate Total quantity of waste (tons/day) 2,700 Annual contract value at start of service (L.E. Million) 85 52 59.5 48 1,400 1,600 325 435 36 44.9 9 12 75 Price (L.E./ton) Operator
Alexandria Cairo North District Cairo East District Cairo West District Giza Urban District I Giza Urban District II Suez Aswan
86
CGEA Onyx416 (International) AAEC417 (International) (FCC and Urbaser) (International) FCC and Urbaser (International) Jacorossi418 (International) FCC419 (International) Tanzifco420 / MD (Regional) ICC (Consortium National & International)
Table 13: Overview of PSP in SWM in Egypt (Source: METAP-RSWMP project)
416 A division of Vivenvi http://www.cgea-onyx.fr. 417 AMA Arab Environment Company (AAEC) of Italy and Arab Contractors (Osman Ahmed Osman & Company) 418 Jacorossi: Italian Company (Jacorossi company – El Dawallia). 419 (FCC – Giza for environmental services): Spanish Company. FCC was created in 1992 by the merger of CONSTRUCCIONES Y CONTRATAS, S.A. and FOMENTO DE OBRAS Y CONSTRUCCIONES, S.A. http://www.fcc.es/fcc/corp/ing/sdp_n_ddln_250.htm. 420 Tanzifco is one of the leading cleaning companies in Kuwait as well as the gulf. Tanzifco was established on the January 29, 1963.Today Tanzifco executes over 200 cleaning contracts, ranging from complete buildings, airports, workshops and personal homes. Tanzifco has progressively and successfully expanded in the cleaning industry throughout the gulf, in Egypt, Dubai, etc. http://www.tanzifco.com/index-1.html.
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Alexandria Governorate421 was the first to contract an international private sector operator to render SW services in the area. In October 2000 three companies (SoClean of Lebanon, FCC of Spain and CGEA Onyx of France bid for the contract. In the end, CGEA Onyx signed the contract. The city is extensively industrialised, including about 40% of the industrial base of Egypt. The full scope of the SWM services included the collection, transportation, treatment and final disposal of all kinds of non-hazardous solid waste, such as municipal, healthcare, and industrial non-hazardous waste has been contracted-out. The annual contract value at the start of the provision of the integrated service in Alexandria city was L.E. 85 million. 422 Table 14 displays the fees charged per month to different beneficiaries based on their electricity consumption. Beneficiaries Households Small offices, workshops and commercial shops Commercial, industrial and medical activities Large consumers, hospitals, tourist establishments, hotels, etc. Fees per Month [L.E.] 2 – 15 3 – 65 5 – 80 5 – 150
Table 14: Fees charged per month to different beneficiaries Nevertheless, the correlation between electricity consumption and the service fee for commercial, tourist, and industrial activities does not reflect the quantity of waste generated by these activities. As a result, many people refused to pay, arguing that a shop processing diamonds and using a lot of electricity, by implication, but producing little waste, paid more than a butcher using little electricity, but generating a huge quantity of waste. Hence, the strict application of the polluter pays principle was challenged. In 1999, the municipal administration contracted-out the full scope of the city’s waste services (cleanliness, SW collection, transport, treatment and final disposal) for a duration of 15 years. Responsibility for funding the necessary SWM infrastructure was assigned to the private sector operator. The international private operator was estimated to have invested about L.E. 200 million by the end of the first month of operations. The annual contract value, together with the income from the sale of organic compost, represented the annual revenues of the international private operator during the operation of this project.
421 Alexandria is Egypt’s second largest city, with a population approximately 3.5 million. 422 L.E. 85 million including sales taxes, approx. 14 million US$.
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As presented in Table 15, the international private operator introduced a new collection system for the municipal solid waste, using a collection fleet appropriate for the type and the size of the streets and areas served in Alexandria city. The collection service also included new areas which were not previously served, thus increasing effectiveness (see Table 15). The introduction of new mechanical equipment for beach cleaning was also one of the tools for the success of this service. Trucks of varying sizes run collection routes between their respective zones and the three transfer stations. As a result of good effectiveness, the number of complaints from residents and visitors about the project’s progress decreased significantly following the contracting-out of the SW service, accompanied by a rapid increase in public satisfaction with the quality of the service provided by the international operator (see Table 15). The project also provided a large employment opportunity: around 4,000 employees joined the international private operator in addition to around 130 employees by Alexandria Governorate as monitors for the quality of service provided by the private operator. The project was monitored by the Alexandria Governorate. The awareness campaign represented one of the main factors contributing to the success of the international operator in providing the foreseen services in Alexandria City. A targeted awareness campaign at the beginning of the project was directed at all residents to be served, and prior to the operation phase. According to the contract, at least 60% of the families in residential units had to be informed and made aware of the provision of the waste collection services from the first day of operation. In addition, at least 90% of all businesses and residential units in the service area had to be made fully aware of the provision of the waste collection services within six months of the commencement of operation. Finally, at least 80% of housewives in residential units as well as businesses had to be fully aware of their duties in participating in the service of waste collection. It was also learned that the role of the local private sector in the consortium with an international company is very important for the optimal execution of further projects. Regarding inter-organisational relationships, the contractual authority set up a system of fines for dealing with violations of the contract specifications by the private operator (see Table 15). According to the contract specifications, if the private firm delayed the work programme laid down for executing the general cleaning service for one day beyond the date of starting work mentioned in the contract, a fine amounting to L.E. 5,000.00 was imposed for each day of delay. Furthermore, if the private firm disposed of the waste in places other than those designated by the first party, a fine amounting to L.E. 2,000.00 was imposed for each violation. In addition, if the streets were in a bad condition (scattered dust,
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waste from workshops and residential units on sidewalks and in the streets), a fine amounting to L.E. 200 was imposed for each violation. However, an unambiguous definition of threshold for non-performance of contract was lacking. Furthermore, according to the contract specifications, if any kind of dispute related to this contract arises, it was set out that both parties of the contract would seek settlement of such a dispute within thirty days through amicable negotiations. If such negotiations proved unsuccessful during the fixed period, both parties were obliged to refer disputes to arbitration. A company or a contractor might assist the private firm with prequalification in the same activity, provided that this contractor/company worked under his umbrella with the same conditions and specifications. Such arrangements had to be carried out with the approval of the contractual authority. Table 15 summarises the strengths and weaknesses of the Egyptian case study. Regarding the application of the hierarchy principle, it is stated that the ration of waste to be recycled and waste recycled is almost 1 (at least theoretically). The reason is that the Egyptian legislation (Law No 4 for 1994) considers the application of this principle explicitly. In addition, according to the remuneration modes the private firm is paid partly from the revenue of the sale of compost. Other positive measures regarding the application of the hierarchy principle include the transport of SW to the Zabbaleen area. It is noteworthy that the monitoring system set up by the public authorities is considered as ground-breaking. Nonetheless, regarding the weaknesses of this case study the cost recovery, the non-accurate information with regards to quantity of waste generated and not at least the absence of clear mechanism to address unforeseen circumstances must be cited.
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Principles Theories Hierarchy principle
/ Analysed Parameters
Weaknesses
Strengths 1
%R % Rd
I S S W M
%O %Od %L % Ld
Analysis of national waste legislation with respect to “Hierarchy Principle” Accompanying measures for recycling Accompanying measures for organic treatment % Cost recovery Areas covered / Areas to be covered Local Know-how
1 1 Law No.4 for 1994 takes into account SW treatment
SW transport to the Zabbaleen area for recycling SW transport to the Zabbaleen area
References: Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xviii. Whereas nowadays solid waste is more or less under control in industrialised countries, in LMIC the problem is still crucial. 1. Background to the Research Bank 1999).3 In LMIC, two-thirds (2/3) of the population live in cities and generate 60% to 70% of the Gross Domestic Product (GDP)
DISSERTATION of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae
submitted by
Louigueur Dorvil from Haiti
Approved on the application of
Prof. Dr. Thomas Dyllick-Brenzinger and Prof. Dr. Matthias P. Finger
Dissertation Nr. 3381 Schmitt-Druck, Essen
The University of St Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation, without hereby expressing any opinion on the views herein expressed.
St. Gallen, October 15, 2007
The President:
Prof. Ernst Mohr, PhD
Foreword
Research into privatisation is not a new thing. But some publications smell of opinions held before the research started. Louigueur Dorvil does better. He critically looks at one of the big trends of our days, rapid urbanisation in low- and middle-income countries and the environmental challenges lying in this trend. He recognises that these countries typically lack the financial means to deal with the challenges and are therefore inclined to look for foreign financial aid. As a result of loans, high debts accumulated. In this situation many see privatisation of public assets as a means to overcome excessive indebtedness. Before assessing successes and failures in low- and middle-income countries, Dorvil looked into the past of European countries that since a long time had considered solid waste management as a private affair. They learned the hard way that this approach didn’t work and finally made waste management one of the most important public duties, mostly assumed by the municipalities. To finance the system, waste charges were imposed. Public perception prevails in Europe that waste management is and must remain a public responsibility. This does not preclude public-private partnerships as long as the ultimate responsibility remains with the state. Dorvil observes that the solid waste market in low- and middle-income countries is becoming attractive for private investors. But he argues that caution should be applied when it comes to achieving an integrated system of sustainable solid waste management. Private sector participation will not by itself solve all problems. The main issue is not privatisation but the avoidance of unhealthy monopoly or oligopoly situations with a lack of competition. Another important aspect of Dorvil’s study is insufficient information. Neither the state nor private operators have sufficient information about the services contracted, leading to inefficiencies. Rightly Dorvil argues that privatisation functions best under conditions of a strong regulatory framework and that public offices need to maintain clear information and oversight of the relevant operations. Dorvil offers a thorough treatise on the goods theory, the theory on market competition and market failure in the context of solid waste management. He emphasises the need for sustainable management in the waste sector. Numerous case studies illustrate his main
points. I was pleased to see that the author argues for a healthy balance between public responsibilities and private functions. I recommend the book to decision makers in developing countries and their partners in the private sector and in international agencies. I am confident that Dorvil’s work will stand the test of time.
Prof. Ernst Ulrich von Weizsäcker Dean, Bren School of Environmental Science and Management University of California Santa Barbara Lead author, Limits to Privatization: How to avoid too much of a good thing A Report to the Club of Rome (Earthscan, London)
Abstract
The need for investment in the Solid Waste (SW) sector in Low- and Middle Income Countries (LMIC) far outstrips their financial resources. The real challenge for LMIC is to set up sound SW management for both economic and ecological reasons. One of the solutions recommended is the involvement of the private sector. This study aims to demonstrate both theoretically and empirically the limitations of some Private Sector Participation (PSP) models to the concept of Integrated Sustainable Solid Waste Management (ISSWM), and to design an improved conceptual framework. The following major questions are addressed: What are the principal contradictions of PSP to the concept of ISSWM? What are the strategies of the international donor organisations? How should a workable concept for achieving ISSWM be designed? This investigation discovered that the main contradictions include the nature of solid waste (limitation of Standard Market Model to cope with public goods), the limitation of so-called “Pareto Efficiency”, the presence of externalities, free-rider issues, low-income areas, and a decided lack of accurate information and the prevalence of asymmetric information (or “symmetric lack of information”). The SWM policies of international donor organisations are theoretically aligned with the key principles of ISSWM. Based on a solid empirical foundation, this study demonstrates that the success of PSP does not necessarily depend on competition (due to long-term contracts), but rather on good inter-organisational relationships. The necessity for public awareness and cooperation between international and national private enterprises is considered to be a “conditio sine qua non” for the success of PSP. Empirically, this study confirms that the key principles of ISSWM are often welladdressed at the national level in LMIC, but that their application at a local level is lacking due to particular remuneration modes, difficulty in setting up performance thresholds, the financing systems in place, and a symmetric lack of information. Consequently, the managerial capacity of municipalities is weakened through thoughtless executed PSP. This dissertation highlights the crucial importance of good inter-organisational relationships between the public and private sectors. Government agencies or private agencies should enhance the monitoring of outsourced SW services, and new systems to strengthen the managerial capacity of municipal managers should be introduced. Also, clear mechanisms should be set up to address the unforeseen and ensure that support from public authorities is adequate for guaranteeing operational and organisational success. This study is highly relevant to private sector enterprises interested in sound business opportunities and policymakers interested in strengthening managerial capacity in LMIC and in avoiding SW project failure. Simply put, it is about creating strategic business opportunities that also improve the living conditions of millions of people.
Zusammenfassung
In Entwicklungs- und Schwellenländern übertrifft der Investitionsbedarf im Bereich der Abfallwirtschaft bei Weitem deren finanzielle Mittel. Diese Länder stehen nun vor der Herausforderung, aus ökonomischen wie auch aus ökologischen Gründen eine nachhaltige Abfallwirtschaft aufzubauen. Einer der Lösungsvorschläge sieht eine Beteiligung des Privatsektors (PSP) vor. In dieser Dissertation sollen die Grenzen einiger PSP-Modelle für das Konzept einer integrierten nachhaltigen Abfallwirtschaft (ISSWM) theoretisch aufgezeigt und empirisch nachgewiesen werden. Des Weiteren wird ein verbesserter konzeptioneller Rahmen entworfen. Die folgenden zentralen Fragen werden behandelt: Wo liegen die wesentlichen Widersprüche der Privatsektorbeteiligung zum ISSWM-Konzept? Wie sehen die Strategien der internationalen Geber-Organisationen aus? Wie lässt sich ein ISSWM-Konzept durch PSP ohne Widersprüche entwickeln? Diese Forschungsarbeit hat festgestellt, dass zu den zentralen Problemen u. a. die Limitierung des Standardmarktmodells beim angemessenen Umgang mit öffentlichen Gütern, die Grenzen des “Pareto Prinzips”, externe Effekte, Trittbrettfahrer-Aspekte und Gebiete mit niedrigem Einkommensniveau zählen. Weitere Schwierigkeiten sind i. a. auch ein deutlicher Mangel an akkuraten Informationen sowie die Verbreitung von asymmetrischen Informationen (bzw. „symmetrischem Informationsdefizit“). Die Politik der internationalen Geber-Organisationen für den Bereich der Abfallwirtschaft ist an den wichtigsten Prinzipien der integrierten nachhaltigen Abfallwirtschaft ausgerichtet. Auf der Basis solider empirischer Daten zeigt diese Forschungsarbeit, dass der Erfolg der Modelle mit Privatsektorbeteiligung (aufgrund langfristiger Verträge) nicht zwangsläufig vom Wettbewerb, sondern insbesondere von guten Beziehungen zwischen den staatlichen Institutionen und den privaten Auftragnehmern abhängig ist. Das öffentliche Bewusstsein und die Kooperation zwischen internationalen und nationalen privaten Unternehmen gelten als „conditio sine qua non“ für den Erfolg von PSP. Diese Dissertation bestätigt empirisch, dass die wichtigsten Prinzipien einer ISSWM auf nationaler Ebene weitgehend berücksichtigt werden. Schwierigkeiten bei der Definition der zu erbringenden Leistung sowie den besonderen Zahlungsmodalitäten, die bestehenden Finanzierungssysteme und das symmetrische Informationsdefizit verhindern jedoch eine wirksame Umsetzung auf lokaler Ebene. Klare Mechanismen sollten geschaffen werden, damit die öffentlichen Behörden bei unvorhergesehener Änderung der Ausgangslage angemessen reagieren können und so den Erfolg der Privatisierung sicherstellen. Diese Forschung ist für die politischen und unternehmerischen Entscheidungsträger von größter Relevanz bei der Umsetzung von PSP in der Abfallwirtschaft, um Grenzen frühzeitig zu erkennen und Fehler zu vermeiden.
Acknowledgements
Acknowledgement
First and foremost, I would like to extend my deepest gratitude to Prof. Dr. Thomas Dyllick for his invaluable guidance and support throughout this dissertation. I also wish to express my sincere gratitude to Prof. Dr. Dr. Matthias Finger of the EPFL for taking time out of his busy schedule to become the co-referee, and for offering his valuable insights and perspectives on the methodological and empirical aspects of my dissertation. His continuous support was vital and our discussions were always challenging and enlightening. I would also like to express my utmost gratitude to Prof. Dr. Dr. h.c. Ernst Ulrich von Weizsäcker. I am touched by the faith he expressed in my work in his foreword. I am also grateful to Dr.Ing Bernd Kordes and Dr.-Ing Abdelaziz Belherazem of the GKW for providing important case studies from the World Bank Group’s Project. This dissertation has benefited greatly from the advice and critical evaluation of Dr. Adrian Coad. His comments on my research design were fruitful. I also extend my thanks to Dr. Urs Egger, General Manager of SKAT in St. Gallen. Further, I wish to express my appreciation and indebtedness to Christian Zürbrügg and Silke Drescher at EAWAG/ SANDEC in Dübendorf for granting me access to their library facilities. I owe many thanks to Prof. Dr. Driss Zakarya, whose comments throughout are greatly appreciated, and to Dr. Peter Pluschke of the GTZ in Morocco for providing invaluable guidance, particularly with the Moroccan contacts to national institutions and local resources, and for helping me to clarify the whole concept. I would also like to acknowledge the valuable comments and contributions I received from Andrés Valverde Farré, the chief executive officer of CESPA in Tangier, for providing me with the most important information for the CESPA case study. I also wish to highlight the wonderful help granted to me by GTZ in Tangier, especially by Mr. Clemens Schrage. I highly appreciate the cooperation and assistance of Dr. Marc-Arthur Georges, Brigitte Otter and Mechtild Sifkowits who made the final document cohesive and readable. My exceptional thanks go to my wife, Andrea Dorvil, who has been always a source of inspiration and keen insight. Last but not least, I would like to thank Julienne Méus, Marc Méus and especially my parents Léonie and Arnoux Dorvil for incredibly unrestrained support. To everyone who provided time, effort and inspiration to this project I can simply say thanks. Essen, December 2007 Louigueur Dorvil
Table of Contents
Table of Contents
List of Figures ...................................................................................................................... VI List of Tables.......................................................................................................................VII Abbreviations......................................................................................................................IIX I. 1. 1.1 1.2 2. 2.1 2.2 2.3 2.4 2.5 2.6 II. 3. 3.1 3.2 3.3 4. 4.1 4.2 4.3 4.4 4.5 INTRODUCTION ......................................................................................................1 Background to the Research ................................................................................1 Integrated Sustainable Solid Waste Management in Low- and MiddleIncome Countries ....................................................................................................1 Private Sector Participation in Low- and Middle-Income Countries .....................4 Research Issues and Hypotheses..........................................................................6 Research Aims ......................................................................................................11 Research Questions...............................................................................................12 Justification for the Research................................................................................14 Research Procedure...............................................................................................15 Ethical Considerations ..........................................................................................17 Delimitations of Scope of this Dissertation ..........................................................19 LITERATURE REVIEW ........................................................................................21 Solid Waste Management...................................................................................22 Historical Background ..........................................................................................22 Solid Waste: Definitions .......................................................................................32 Concluding Remarks.............................................................................................35 Solid Waste Management in LMIC: Key Features .........................................38 Urbanisation in LMIC: Economic and Ecological Issues.....................................38 Waste Generation and Characteristics ..................................................................42 Institutional and Managerial Framework..............................................................45 Financing and Costs Recovery..............................................................................46 Informal Sector and Recycling .............................................................................49
I
Table of Contents
4.6 5. 5.1 5.2 5.3 5.4 5.5 6. 6.1 6.2 6.3 6.4 6.5 6.6
Concluding Remarks.............................................................................................52 Theoretical Principles of ISSWM......................................................................53 Hierarchy Principle ...............................................................................................56 Polluter Pays Principle..........................................................................................58 Effectiveness .........................................................................................................60 Efficiency ..............................................................................................................61 Concluding Remarks.............................................................................................62 Privatisation and Private Sector Participation ................................................64 Globalisation and Liberalisation ...........................................................................64 Deregulation and Regulation ................................................................................67 Privatisation: Academic and Empirical Discussion..............................................68 Privatisation: Advantages and Limitations ...........................................................70 Prerequisites for PSP.............................................................................................75 Analysis and Discussion of PSP Models ..............................................................77 6.6.1 6.6.2 6.6.3 6.6.4 6.6.5 Public-Private Partnerships......................................................................79 Contracting-out ........................................................................................81 Franchise..................................................................................................87 Concession ...............................................................................................89 Open Competition....................................................................................92
6.7 7. 7.1 7.2 7.3 7.4 7.5
Concluding Remarks and Discussion ...................................................................94 Goods, Market and Organisational Theory .....................................................98 Characteristics of Public Goods............................................................................98 Provision of Public Goods and Services.............................................................104 Economic Classification of Solid Waste Services..............................................108 Theory of Market Competition ...........................................................................109 Theory of Market Failures ..................................................................................111 7.5.1 7.5.2 Asymmetric Information .......................................................................112 Transaction Costs...................................................................................115 II
Table of Contents
7.6 8. 8.1 8.2 8.3 8.4 8.5 III. 9. 9.1 9.2 9.3 9.4 9.5 9.6
Concluding Remarks and Discussion .................................................................117 International Organisations and Privatisation Policy...................................120 Sovereign Debts ..................................................................................................120 Scope of the Debt and Financial Crises ..............................................................122 World Bank Group and Privatisation Policy ......................................................123 Solid Waste Management Policy ........................................................................126 Concluding Remarks...........................................................................................135 EMPIRICAL EVIDENCE.....................................................................................137 Illustrative Case Studies ...................................................................................138 Overview and Background of the Case Studies..................................................138 Key Features of the Solid Waste Sector in the METAP-RSWMP Region ........139 Illustrative Case Study: Egypt ............................................................................143 Illustrative Case Study: Lebanon ........................................................................150 Illustrative Case Study: Tunisia ..........................................................................154 Discussion of the Main Results...........................................................................159 9.6.1 9.6.2 9.6.3 9.6.4 9.6.5 Hierarchy Principle ................................................................................160 Polluter Pays Principle...........................................................................160 Inter-organisational Relationships .........................................................161 Effectiveness..........................................................................................162 Efficiency...............................................................................................163
10. 10.1
Single Case Study: CESPA ..............................................................................165 Methodological Approach ..................................................................................165 10.1.1 Design of the Case Study Protocol ........................................................166 10.1.2 Conducting the Case Study....................................................................168 10.1.3 Analysing the Case Study ......................................................................173
10.2
National Level.....................................................................................................176 10.2.1 Macroeconomic Framework ..................................................................176 10.2.2 Privatisation Policy ................................................................................178
III
Table of Contents
10.2.3 Legislative Framework ..........................................................................181 10.2.4 Solid Waste Management Issues ...........................................................184 10.2.5 Concluding Remarks and Discussion ....................................................186 10.3 Municipal Level ..................................................................................................189 10.3.1 Tangier: Socio-economic Background ..................................................189 10.3.2 Typological Classification of the Municipality of Tangier ...................191 10.3.3 Solid Waste Management in the Municipal Context.............................192 10.3.4 Key Features of the Contract Specifications with CESPA....................194 10.3.5 Economic Value of the Recycling Market.............................................196 10.4 Analysis and Discussion of the Key Principles ..................................................198 10.4.1 Hierarchy Principle ................................................................................199 10.4.2 Polluter Pays Principle...........................................................................203 10.4.3 Continuity Principle...............................................................................204 10.4.4 Monitoring .............................................................................................206 10.4.5 Principal-Agent Dilemma and Asymmetric Information ......................208 10.4.6 Inter-organisational Relationships .........................................................212 10.4.7 Effectiveness..........................................................................................215 10.4.8 Efficiency...............................................................................................217 10.4.9 Concluding Remarks..............................................................................218 IV. 11. 11.1 11.2 11.3 CONCLUSIONS AND IMPLICATIONS ............................................................221 Conclusion about the Research Questions and Hypotheses .........................222 Objective 1: Contradictions between existing Theories and ISSWM ................222 Objective 2: Strategy of international Donor Organisations ..............................227 Objective 3: Empirical Evidence of PSP ............................................................230 11.3.1 Illustrative Case Studies.........................................................................231 11.3.2 Single Case Study: CESPA ...................................................................235 11.4 11.5 Objective 4: Achieving ISSWM through comprehensive PSP...........................244 Implications and Directions for further Research...............................................250
IV
Table of Contents
11.6
Implications and Directions for Policy and Practice ..........................................251
List of References ................................................................................................................ XI List of Annexes ................................................................................................................. XXI
V
List of Figures
List of Figures
Figure 1: Figure 2: Figure 3: Causes and effects of indiscriminate solid waste management in LMIC...........3 Causes and effects of PSP in LMIC ...................................................................4 Conflict of interest between the hierarchy principle and private sector incentives ............................................................................................................7 Structure of the dissertation..............................................................................16 Delimitation of scope of the dissertation..........................................................19 World population projections, 1950–2050 (Billions).......................................39 Basic Idea of Agency theory: P (Principal) A (Agent)...................................113 Methodological approach: “National level” and “Municipal level” ..............169 Waste composition in Tangier........................................................................200 Direct investment of a sanitary landfill ..........................................................201 Waste quantities – estimated and contractual.................................................210 Effectiveness of CESPA over time.................................................................216
Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12:
VI
List of Tables
List of Tables
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Table 10: Table 11: Table 12: Table 13: Table 14: Table 15: Table 16: Table 17: Table 18: Table 19: Table 20: Table 21: Table 22: Table 23: Table 24: Table 25: Table 26: Hypotheses on privatisation/PSP and resultant problems ................................10 Milestones in the history of SWM ...................................................................30 Definition of waste relating to their types ........................................................34 Percentage of population living in urban areas (with projections for 2015) ....41 Global perspective on solid waste quantities....................................................43 Key data of solid waste management in LMIC................................................48 Limitations of Public-Private Partnerships model to SW elements .................80 Limitations of contracting-out/delegation to SW elements..............................86 Limitations of franchise model to SW elements ..............................................88 Limitations of concession model to some SW elements ..................................90 Limitations of open competition model to SW elements.................................93 International organisations and their programmes regarding SWM ..............135 Overview of PSP in SWM in Egypt ...............................................................145 Fees charged per month to different beneficiaries .........................................146 Strengths and weaknesses of contracting-out in Egypt ..................................149 Strengths and weaknesses of contracting-out in Lebanon..............................153 Key data of the transfer stations .....................................................................155 Landfill Jebel Chekir ......................................................................................156 Strengths and weaknesses of contracting-out in Tunisia................................158 Case study tactics for four design tests...........................................................167 Case study analysis.........................................................................................174 Selected macroeconomic indicators ...............................................................177 Moroccan legislation relating to waste management .....................................181 Date of promulgation and subject...................................................................182 Analysis of principles in Moroccan law no. 11-03.........................................187 Analysis of some theoretical principles of law no. 13-03 ..............................187
VII
List of Tables
Table 27: Table 28: Table 29:
Theoretical principles and the legislation of law no. 28-00 ...........................188 Population of Tangier according to the 2004 census......................................190 Typological classification in terms of areas of the housing structure in Tangier. ........................................................................................................................192 Population of the municipality of Tangier including waste generated per year... ........................................................................................................................194 Quantity of recycled materials in [kg/week] from the landfill in Tangier .....197 Description of the services provided, including prices per ton ......................199 Quantitative data of the hierarchy principle in Tangier..................................202 Analysis of qualitative data of the hierarchy principle...................................202 Analysis of polluter pays principle ................................................................203 Control system in the contractual agreement in Tangier................................207 Population of Tangier according to the census 2004 .....................................210 Interpretation of the penalties.........................................................................212 Organisational theory and contract management ...........................................213 Ratios to achieve hierarchy principle .............................................................245 Towards a comprehensive framework of PSP models to achieve ISSWM ...249
Table 30:
Table 31: Table 32: Table 33: Table 34: Table 35: Table 36: Table 37: Table 38: Table 39: Table 40: Table 41:
VIII
Abbreviations
Abbreviations
ADB ANPE A.D. AGBAR BBO B.C. BOO BOT BOOT BTO CBO CDR CEDARE CESPA CP CWG CSCs DBO e.g. ESM Etc. EU FDI GDP GEF GNP GTZ IDRA ICSID IDB IEA IETC IPCC IFC Asian Development Bank National Agency for Environmental Protection (Agence Nationale pour la Protection de l’Environnement) Anno Domini Aguas de Barcelona Buy Build Operate Before Christ Build Operate and Own Build Operate and Transfer Build-own-operate-transfer Build Operate and Transfer Community Based Organisations Council for Development and Reconstruction Centre for Environment & Development for Arab Region and Europe Compania Espanola de Servicios Publicos Auxiliares Community Participation Collaborative Working Group Common Service Councils Design Build and Operate Exempli gratia. (for example) Environmentally sound management Et ectera (and so forth) European Union Foreign Direct Investment Gross Domestic Product Global Environment Facility Gross National Product German Technical Co-operation (Deutsche Gesellschaft für Technische Zusammenarbeit) International Debt Restructuring Agency International Centre for Settlement of Investment Disputes Inter-American Development Bank International Energy Agency International Environmental Technology Centre Intergovernmental Panel on Climate Change International Finance Corporation
IX
Abbreviations
IFI IMF IFI ISSWM LBO LMIC MCD MDG METAP MSWM NAFTA NDMC NGO NIMBY OECD PAHO PMO PPP PRS PSP RSWMP RTO SKAT SW SWM TZS UMP UN UNDP UNEP UNDP UNICEF US UWEP WASH WHO WRI WSSD WSSP
International financial institutions International Monetary Fund International Financial Institutions Integrated Sustainable Solid Waste Management Lease Build Operate Low- and Middle Income Countries Municipal Corporation of Delhi Millennium Development Goals Mediterranean Environmental Technical Assistance Project Municipal Solid Waste Management North American Free Trade Agreement New Delhi Municipal Corporation Non-governmental organisations Not In My Back Yard Organisation for Economic Co-operation and Development Pan American Health Organization Prime Minister 's Office Public Private Partnerships Poverty Reduction Strategy Private Sector Participation Regional Solid Waste Management Project Rehabilitate Transfer Operate Swiss Centre for Development and Cooperation Solid Waste Solid Waste Management Tanzanian shilling Urban Management Programme United Nations United Nations Development Programme United Nations Environmental Programme United Nations Development Programme United Nations Children’s Fund United States Urban Waste Expertise Programme Water Sanitation Hygiene World Health Organisation World Resources Institute World Summit on Sustainable Development Water and Sanitation Programme, UNDP/World Bank
X
1. Background to the Research
I. 1.
1.1
INTRODUCTION Background to the Research
Integrated Sustainable Solid Waste Management in Low- and Middle- Income Countries
The generation of Solid Waste (SW) is inevitable. It was not important in former times but became an issue as soon as people started to settle in communities. Ever since, Solid Waste Management (SWM) has been of great concern to municipal authorities worldwide. In the Middle Ages, badly managed waste was responsible for millions of deaths in Europe (see Table 2). In the 18th century, inappropriate waste management was the cause of the outbreak of diseases like the plague and cholera, which claimed more than 380,000 lives in Hamburg (Bilitewski, B. / Härdtle, G. / Marek, K, 1994). Approximately 590 to 880 million tons of methane (CH4) are released into the atmosphere every year. 90 % of the gases generated are due to the decomposition of biomass as a result of indiscriminate waste management, among other causes. Consequently, the ozone layer and the ecosystem are continually being destroyed. In short, today indiscriminate waste management is one of the biggest threats to ecosystems in the world. Cities, often overwhelmed by the continuous influx of new arrivals, have frequently been unable to keep up with the provision of basic services. Between one third and two-thirds of the solid waste generated goes uncollected, piling up on streets and in drains, contributing to flooding and the spread of disease (see Chapter 4.2). In addition, urban and metropolitan domestic and industrial effluents are often released into waterways with little or no treatment (World Bank 2000).1 In order to achieve sustainable development, policy makers in Low- and Middle-income Countries (LMIC) have to cope with the above-mentioned issues. Indiscriminate SWM leads not only to the destruction of the ecosystem, but also to lower economic productivity, and thus to poverty (see Figure 1). Consequently, Integrated Solid Waste Management (ISSWM) is crucial to the urban infrastructure in both “industrialised” countries and LMIC2 as it ensures environmental protection and safeguards human health. Cities are the drivers of economic growth. As countries develop, more national income is produced in urban areas, accounting for 55% of Gross National Product (GNP) in lowincome countries, 73% in middle-income countries and 85% in those of high income (World
Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xviii. Whereas nowadays solid waste is more or less under control in industrialised countries, in LMIC the problem is still crucial.
1 2
1
1. Background to the Research
Bank 1999).3 In LMIC, two-thirds (2/3) of the population live in cities and generate 60% to 70% of the Gross Domestic Product (GDP). Moreover, 80 % of GDP growth in LMIC is expected to come from cities in this decade. There will be 100 “mega cities,” each with a population of more than 5 million inhabitants (see Chapter 4.1).4 Thus, more solid waste will be generated. At present, 30% to 50% of the population of LMIC live in municipalities, generating 75% of the total amount of solid waste (see Chapter 4.2). Rapid urbanisation in LMIC is threatening the environment and urban productivity (see Chapter 4.1).5 For that reason, adequate SWM is urgently required; otherwise economic development will become counterproductive. ISSWM represents one of the outstanding challenges facing municipal authorities in LMIC (World Bank, 1996). Policy makers in LMIC face great difficulties in addressing waste issues due to the lack of sound managerial instruments, planning tools, and last but not least, financial means. These difficulties in turn create major solid waste problems for LMIC, including lack of equipment and/or obsolete equipment, inadequate public funds, the open burning of waste, and so forth. In addition, LMIC also face serious managerial problems, such as superfluous staff, cumbersome procurement, inflexibility, low cost-recovery, inadequate monitoring systems, tight public budgets and non-enforcement of legislation. It is difficult for municipalities to implement changes towards efficiency. The need for investment far outstrips the financial resources available from public budgets. Moreover, most of these countries are highly indebted (see chapter 8.2); as a result, foreign financial aid is always required. Municipalities are not able to cope with the ever-growing waste generated. Accordingly, the challenge for LMIC in this decade is to ensure the sound management of the environmental implications of this growth. The issue of sustainable development6 was discussed for the first time on a very broad level during the Earth Summit in Rio in 1992. In Rio, decision-makers agreed that sustainable SWM is the key to sustainable cities and inevitably to sustainable development. Whereas industrialised countries adopt principles like the hierarchy principle and the polluter pays principle, most LMIC are far behind. In brief, rapid urbanisation, inadequate financial means and indiscriminate waste management in LMIC result in a vicious circle which must be interrupted (see Figure 1).
3
Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xvii.
4 E. Bergmann & H.P.Gatzweiler, 1996; S. Schmitz et al. 5 Cointreau et al. 2000; Bartone et al., 1994, J. Leitmann 1995. 6 Since the Earth Conference in Rio, a certain fundamental change has occurred in the field of SWM. The “throwaway” mentality has been replaced with a focus on the protection of resources. Solid waste management has to be looked at holistically. Because of its characteristics, it is much more costly if the waste collected is entirely disposed of in a landfill than if it is partly recycled and treated.
2
1. Background to the Research
Rapid urbanisation, inadequate financial means
More waste managed indiscriminately, more pollution
Poverty, increase of external debts
Destruction of ecosystem, diseases, less economic growth
Figure 1: Causes and effects of indiscriminate solid waste management in LMIC Recently, the world’s governments committed themselves to achieving the Millennium Development Goals (MDG) (see Chapter 3.1). 7 Solid waste services are widely acknowledged as the principal means through which these goals can be achieved.8 The MDG emphasise poverty alleviation and access to sanitation and health services for all. The MDG have been adopted to ensure environmental sustainability. Within that goal, targets 9 and 11 of the MDG are “to integrate the principles of sustainable development into a country’s policies and programmes and reverse the loss of environmental resources.” Although there are no direct references to solid waste in the specific targets, the MDG call for appropriate environmental considerations as well as social awareness of the problems of waste pickers and other poor people in cities. Moreover, the issue of urban poverty is inextricably linked to waste management in LMIC (see Figure 1). In India, for instance, nearly 1 million9 people find livelihood opportunities by engaging in waste collection and recycling through well-organised but informal systems. If the MDG of poverty alleviation and access to adequate solid waste services are to be achieved, waste management must become one of the chief focus areas, particularly in haphazardly growing urban and metropolitan areas where it remains a low priority for municipalities but high on the agenda of the citizens. Private Sector Participation (PSP) is one paradigm which has clearly shown potential in achieving the above-mentioned goals. Therefore, the question of how SWM could be provided by the private sector by adopting the principles of sustainability is crucial.
7
The Millennium Development Goals identify specific gains that can be made to improve the lives of the world’s poor people. The aim is to reduce poverty while improving health, education, and the environment. These goals were endorsed by 189 countries at the September 2000 U.N. Millennium General Assembly in New York. Kessler, T./Alexander, N., Essential Services, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 229. Gupta, Sanjay K., SME in India, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 1.
8
9
3
1. Background to the Research
1.2
Private Sector Participation in Low- and Middle-Income Countries
Agenda 21 of the United Nations includes objectives that have to be undertaken to create sustainable cities and sustainable development. A long-term financial strategy to implement these goals in LMIC still fails to exist. Starting from the 1990s, one of the proposed solutions is privatisation in general, and PSP in particular. PSP is considered to be means of improving overall economic efficiency, and of reducing the fiscal burden and the external national debt in LMIC (see figure below).
Privatisation, economic growth
Less pressure on the municipal budget, more flexibility
Decrease of external debts
Foreign investment, competition, better service
Figure 2: Causes and effects of PSP in LMIC At the beginning of the 1980s, a shift towards privatisation occurred in OECD countries, in particular in the United States10 and in Great Britain11. The argument for more privatisation is normally based on the belief that profit-seeking and competition are necessary to provide the proper incentives for efficiency and quality. Economists use the standard market theory, also known as Pareto 12 Optimum, to argue in favour of privatisation policies (see Chapter 7.1). In LMIC, however, the arguments for involving privatisation and PSP are different from those in industrialised countries. The involvement of the private sector in LMIC is viewed as a way of reducing government loans, subsidies, and explicit or implicit government guarantees for borrowings (see Figure 2).13 Performance tended to be worse in LMIC where preconditions for successful PSP were not
10 11 12
With the election of Ronald Reagan in 1980 as President of the United States. With the election of Margaret Thatcher in 1979 as Prime Minister of Britain. Vilfredo Federico Damaso Pareto (1848 – 1923) made several important contributions to economics, sociology and moral philosophy. He introduced the concept of Pareto efficiency. In 1893, he was appointed Lecturer in Economics at the University of Lausanne in Switzerland. Since the crisis in 1982, the financing of development in LMIC has become one of the most controversial discussions with regard to the world economy. Another milestone of sovereign debts is the creation of the Bretton Woods Institutions after the Second World War. In actual fact, debts reach a peak as the budgets of many LMIC governments depend on them. (Gélinas, J. B., le Tiers Monde s’autofinancait, Montréal: Ecosociété, 1994, p. 61).
13
4
1. Background to the Research
met. These preconditions were stable macro-economic conditions, broad ownership among stakeholders (not just the government), policies conducive to competition, an existing robust private sector, and administrative capacities to implement the programme (see Chapter 6.5).14 Privatisation/PSP in LMIC has often been part of an adjustment agreement with the World Bank Group (see Chapter 8.3). The motives of privatisation have primarily been that the private sector works more efficiently than the public sector (see also discussion about PSP in Chapter 7); it is hence concluded that economic benefits will arise from privatising public sectors where there is no natural monopoly (Nellis and Kikeri, 1989; Kragh et al, 2000). 15 Another important aspect of the involvement of the private sector in LMIC is the debt issue (see Chapter 8.1 and Chapter 8.2). Most LMIC public budgets depend on external financial aid. Many international credit organisations impose the concept of privatisation to obtain less demand for loans. The World Bank Group is the leading institution in the preparation and support of privatisation programmes, providing advice and loans to cover costs associated with privatisation, and also providing investment loans to cover costs associated with privatisation as well as ones to help restructure private enterprises.16 Privatisation is consequently assimilated into the “corpus conditionality” of the donor community (Adam and Cavendish, 1990). Taking into consideration that 90% of municipal investments in LMIC today come from external aid (World Bank, 1998), the issue of privatisation is becoming inevitable for LMIC. In reality, the donor community imposes the principles of privatisation. It is a ‘conditio sine qua non’ for the continuation of external aid flows.17 Simply put, efficient SWM and privatisation are linked to LMIC.
14
Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 257. Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 253. Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 254. However, the decision to privatise a public service should not be based on ideological considerations but rather on economic merits.
15
16
17
5
2. Research Issues and Hypotheses
2.
Research Issues and Hypotheses
SWM, despite being crucial to any sustainable city, is still neglected by local authorities and by the private sector.18 The importance of SWM to sustainable development and cities is being ignored. 19 Very limited experiments in the field of PSP in solid waste in LMIC have been successfully implemented in this regard (World Bank, 1998). The World Bank Group is one of the few international institutions carrying out research in the field of privatisation in general, and in the field of PSP in SWM (see Chapter 8.4). It has published many surveys, various well-designed guidelines and contract forms for implementing private sector participation in solid waste (Cointreau-Levine et al, 2000 a,b,c). However, a thorough analysis of the natural complexities of solid waste services (collect, transfer station, transport, and landfill management) has yet to be carried out. Thus, the privatisation policy debate is subject to bias. More than 60% of the waste generated in LMIC is generally biodegradable, which makes it more appropriate for aerobic and anaerobic treatment 20 than disposal. What is much more concrete is the contradiction of the hierarchy principle (see Chapter 5.1), where in the case of a landfill concession, for instance, the private sector has no incentive to minimise the waste to be disposed of, since the private enterprise is normally paid according to the amount of waste disposed (see Figure 3). Table 1 summarises some hypotheses regarding privatisation models concerning solid waste elements in LMIC. Do national and local authorities create incentives to enterprises in PSP agreements to follow the waste hierarchy principle and, if so, how? How can the polluter pays principle and the user pays principle be applied in PSP agreements when people living in slum areas in LMIC face enormous difficulties to afford the services rendered? Finally, should a private enterprise go out of business, is the monitoring committee of the municipality capable of proposing alternatives within a short period to guarantee the continuity of the solid waste service?
18
Between 1990 and 2001, the private sector invested US$ 23 billion in LMIC: 68% in telecommunications, 13% in electricity, 8% in roads, and less than 0.1% in SWM. Governments are reluctant to support utilities such as solid waste services. Treatment involves the physical, chemical or biological processing of waste in order to reduce its volume or harmfulness, facilitate its handling, or enhance recovery.
19 20
6
2. Research Issues and Hypotheses
Hi e i r rar r
e ae vat Pi Pri
Figure 3: Conflict of interest between the hierarchy principle and private sector incentives Privatisation and PSP are useful wherever private firms operate in a competitive environment. However, depending on the service, it is not obvious to create competition in any market. Contracts between public authorities and private sectors can sometimes span 15 years or more. Moreover, private firms are not engaged in competition after the bidding procedure and during the contractual period negotiated. Therefore, other criteria than competition are crucial. In effect, SWM services encompass various system elements, such as street sweeping, waste collection, waste treatment, and waste disposal. Is it economically and ecologically sustainable for services such as landfill management, waste collection, or the management of a composting plant to be provided by many different suppliers in the same area? One might argue that it is possible that the privatisation of a monopolistic service like municipal landfill management can be effectively regulated. However, is the regulator likely to obtain accurate information on the real costs and the technical performances of any given private firm? Other issues are displayed in Table 1. Another privatisation issue includes the duration of the contract. Due to the investment required for SWM services (landfill management, composting plant, biogas plant, etc.), PSP contracts are typically written for multiyear periods. As a result, the nature of the contractoragency relationship will principally determine service quality and cost savings, and not the competitive marketplace, as stated in the Standard Market Model. The stronger the contractual terms and conditions, the more complex the service provided, the smaller the role played by market competition becomes in the costs and benefits of privatisation.21 The Standard Market Model, which is the basis for this individualised theory of organisational
21
Sclar, E. D., Economics of privatization, 2000, p. 14.
ch h y P ri n inc ipl e
Minimisation Collection Transport Treatment Landfill
r co cto Se
7
2. Research Issues and Hypotheses
change, actually has no inherent theory on organisational behaviour. It is a powerful theory about the operation of a decentralised system of resource allocation, but has nothing to say about the operation of organisations22 like municipalities and the private sector. Moreover, decisions to contract out usually involve complex transaction costs related to the specification of services, the negotiation of prices, the close monitoring of quality, and the need to anticipate unforeseen contingencies. In such cases, the managerial decision process involves analysing not only the comparative costs of the services rendered but also the transaction costs associated with contract design and monitoring (Williamson, 1996). In such situations, obtaining all the relevant information can be difficult, or may require a considerable amount of time and money. 23 Hence, the question is: are transactions costs taken into account when those advocating privatisation argue that the private sector is more efficient? Another issue is the output of some waste services as this output is very often uncertain. 24 The more uncertain the service environment, the more difficult it is to create a contract with low transaction costs. Where risk is a major factor, it becomes almost impossible for local authorities to avoid paying a risk premium to obtain competent work. The Standard Market Model is essentially a comprehensive and highly formal theory of exchange. However, whether it can be considered to be a theory of continuing relational behaviour between public sector and private enterprises is questionable. PSP advocates believe that the private sector has more people with superior managerial expertise. Nevertheless, it is important to remember that private sector 25 intends private firms, for instance, to provide SWM services, that is, in an area in which they have little experience by definition. The three most important forms of information scarcity in incomplete contracting situations are Principal-Agent 26 problems, adverse selection, 27 and moral hazards.28 In the case of ISSWM, PSP are based on the operation of specific services
22 23 24
Demsetz (1993) cited in Sclar, E. D., Economics of privatization, 2000, p. 15. Sclar, E. D., Economics of privatization, 2000, p. 19. No one can foresee, for instance, the environmental situation of a landfill which has been operated by a private firm after a long-term contract of 20 years. Experiences can include the field of solid waste management and/or the areas and/or the countries to be covered. Principal-agent problems typically arise when one party (the principal) hires another (the agent) to carry out an assignment, but the agent is able to serve its own interest at the apparent expense of the principal because of information asymmetry. Adverse selection is a situation in which the party with inferior information about the market situation acts first in seeking to establish a contractual relationship (Salanié, 1998). Moral hazards refer to potential problems of reduced incentives on the part of the agent to fulfil the goals of the principal.
25 26
27
28
8
2. Research Issues and Hypotheses
for which the public sector remains responsible; consequently, the degree of scrutiny29 has to be very high. Waste elements such as waste collection in the same areas by different private companies will lead to a collision effect (see Table 1 and Annex 8); there will hence be a contradiction of the continuity principle if one private firm goes out business. Some privatisation models do not match some waste elements, such as waste collection franchises.30 In this particular case, however, the fees for waste disposal and waste treatment are not considered. Furthermore, there will be a contradiction with the non-exclusivity principle and public goods theory due to the nature of solid waste (public goods) and the characteristics of the services rendered (non-exclusivity), in the case of non-payment by some beneficiaries. Hence, it is difficult to compare the performance of private firms and municipal management in the field of SWM, since these organisations pursue different goals and since there is little concrete experience in this sector. Private firms are indeed interested in maximising profit, whereas the objectives of municipal management are much more complex. Furthermore, public enterprises have a better chance of remaining inside their production frontiers than private ones (Bhaskar, 1992). Another relevant issue is cost recovery. For instance, in a PSP arrangement like a waste collection franchise where the private firm is collecting the fees from the beneficiaries, what would be the consequences if some beneficiaries cannot pay for the SW service? (see Table 1) Furthermore, in other PSP arrangements, such as landfill concessions31, BOOT32, or BOO 33 , which are normally agreed for many years, what would happen if the private contractor went bankrupt? Would the continuity of the SW service be guaranteed? As mentioned above, LMIC municipal managers lack know-how; thus, could they be expected to replace a private firm to ensure the continuity of the service?
29 30
Nevertheless, scrutiny process is costly in terms of time required and money needed. Collection of fees directly from polluters.
31 Finance and Owner of facilities, long-term contract. 32 BOOT means Build, Own, Operate and Transfer. 33 BOO means Build, Own and Operate.
9
2. Research Issues and Hypotheses
Hypotheses Privatisation: more foreign investment, more economic growth International private sector: high interest of more generation of waste Efficient PSP: competition PSP model: franchise34 Waste element: collection PSP model: contract management Waste element: collection PSP model: concession Waste element: landfill management
Problems • Bankruptcy: problems with “On again” / “Off again” • Bearer of hazards remediation costs • Conflict of interest with hierarchy principle • Long-term contract: no competition, risky • Competition in same areas: collision effect • Non-payment: contradiction of public goods theory • Low rate of cost recovery • Contradiction of polluter pays principle • No incentive for waste minimisation • In case of bankruptcy: contradiction of principle of continuity, • More waste to dispose of: contradiction of hierarchy principle • Bankruptcy: contradiction of principle of continuity • More waste to dispose of: contradiction of hierarchy principle • Non-payment: contradiction of public goods theory • Lack of adequate tariff: Asymmetric Information • Higher cost, contradiction of public goods theory, collision effect • Adequate tariff: Asymmetric Information • Higher cost, contradiction of continuity and of non-exclusivity principle • Lack of adequate tariff: Asymmetric Information • No transfer of facilities to LMIC: contradiction of public goods theory
PSP model: BOOT Waste element: landfill management
PSP model: open competition Waste element: collection PSP model: open competition Waste element: landfill management
PSP model: BOO
Table 1: Hypotheses on privatisation/PSP and resultant problems Finally, on the one hand, there are the concerns of ISSWM: lack of financial means, managerial competence, asymmetry of information, limits of the Standard Market Model by
34 Under a franchise agreement, the government gives a special monopoly privilege to a private firm to supply a particular service.
10
2. Research Issues and Hypotheses
delivering SW services, and so forth. On the other hand, there are PSP models that fit neither into the hierarchy principle, nor the polluter pays principle, or the continuity principle, etc. Few economists (Savas, Adler, Moshe, etc.) who carry out research on PSP in SWM take the ISSWM concept or the socio-economic and environmental realities in LMIC into consideration. Existing theories are inadequate to make PSP compatible with ISSWM principles. As the target is to achieve ISSWM, it is important to combine the well- devised use of PSP with respect to waste hierarchy and to the polluter pays principle.
2.1
Research Aims
This study aims to critically evaluate the theoretical contributions of the literature on privatisation/PSP in the field of SWM and to provide an analysis of the theoretical principles of ISSWM and the theory of public goods, together with market and organisational theory, in order to break new ground with respect to this theory. In pursuing these goals, major contributions in the field of PSP in ISSWM, especially in LMIC, will be analysed while emphasising, extending, and illuminating their contents. The overall goal of this investigation is to appropriate the best PSP model in order to provide SWM in a sustainable manner by examining the hierarchy principle, the polluter pays principle, and the continuity principle. Every effort will be made to focus on conceptual insights. Simply put, the principal objective of this study is to demonstrate theoretically and empirically the economic limitations and incompatibility of some PSP models with the concept of Integrated Sustainable Solid Waste Management (ISSWM) in Low- and Middle Income Countries (LMIC); secondly, this study sets out to design a practicable conceptual framework for the most appropriate model to achieve ISSWM in LMIC. The main objectives deriving from these aims are: 1. To identify controversial research issues between some PSP models and the principles of the ISSWM concept; 2. To assess the various strategies of international donor organisations in the solid waste sector; 3. To gain in-depth knowledge from illustrative case studies and a single case study in order to challenge the existing theories and design an appropriate concept; To design an appropriate conceptual framework for achieving ISSWM based on the results obtained from objectives 1, 2 and 3.
4.
11
2. Research Issues and Hypotheses
2.2
Research Questions
The research questions arising from the main objectives are: Objective 1 is addressed by the following question: What are the main contradictory issues of the existing theories on privatisation and goods theory towards achieving ISSWM in LMIC? One of the gaps in all the research carried out so far is that “waste” is not categorised. Are we concerned with private goods, public goods, pure public goods or collective goods? There is no clear scientific categorisation of the term “waste.” In addition, the services to be rendered, such as collection, transport, and disposal, are treated separately to the service in question. Nevertheless, by looking thoroughly at the product (that is, waste) together with the services required, conflicts between economic interests and sound environmental management arise. For instance, according to the hierarchy principle, there would be no incentive to minimise waste for a private landfill operator as he is paid by the amount of waste disposed of. In a franchise-based waste collection contract, residents failing to pay their fees (and hence being excluded from service) will compromise the whole collection system, even if the majority pays its fees. In reality, waste indiscriminately endangers the entire neighbourhood and not only the premises of non-paying residents. Moreover, the ecological and socio-economic situation abiding in LMIC differs from that in industrialised countries. Very often, unplanned and informal settlements surround cities in LMIC. Most of these informal settlement areas are very densely occupied, and the narrow and winding roads and paths are only accessible by modern vehicles. People with very low incomes, who cannot afford the charges of the services rendered, inhabit these areas. Is every PSP model affordable for any community? Objective 2 is addressed by the following question: What are the strategies of the international donor organisations and what are the economic limitations of the PSP policy towards ISSWM? The World Bank Group is the strongest financial donor in LMIC. It belongs to the few international institutions carrying out research in the field of privatisation in general and in the field of PSP/privatisation in SWM in particular. In line with recent policies, CointreauLevine et al (2000a,b,c) have published many surveys and especially diverse, well-designed guidelines and contract forms for strengthening the implementation of private sector participation in solid waste. Taking into consideration that 90% of municipal investment in LMIC today comes from external aid (World Bank, 1998), both the issue of
12
2. Research Issues and Hypotheses
privatisation/PSP and the World Bank Group strategy are becoming inevitable for these countries. Nevertheless, in comparison to other infrastructure services such as water supply and energy supply, solid waste is not successfully implemented despite its importance to any sustainable city. It is worth noting that US$ 23 billion was invested in LMIC between 1990 and 2001: 68% in telecommunications, 13% in electricity, 8% in roads, but less than 0.1% in the solid waste sector. Is there not enough interest for private investors in this sector? Are policy makers not aware of the importance of ISSWM for sustainable development? Comparisons with other sectors will be made to support the hypothesis posited in the first research question, namely that the category of goods is relevant to PSP. There are various reasons given by international donor organisations for PSP; they include higher efficiency, reduction of national debt, the benefits of more Foreign Direct Investment (FDI), and so forth. Academic discussion in this area is often ideological rather than substantiated by empirical evidence. However, is there any incentive for beneficiaries in LMIC to prevent or minimise the generation of waste according to the hierarchy principle when international donors support local waste services? In other words: is there a contradiction between the polluter pays principle and foreign aid? Objective 3 is addressed by the following question: What is the empirical evidence of the PSP models and the ISSWM concept? In order to challenge existing theories, illustrative case studies and a single case study will be analysed in-depth. The single case study has been chosen to answer the first research question, not only theoretically but also with empirical evidence as specified in the principal aim of this investigation. Proponents of the PSP model advocate theory building based on the notions of service effectiveness and efficiency. Therefore, the case study will answer those questions relating in particular to the hierarchy principle and the “Principal-Agent” dilemma. One waste element, “waste collection,” and one PSP model, “Contracting-out,” will be chosen to narrow the scope of the investigation and to build up comprehensive knowledge. Objective 4 is addressed by the following question: How can ISSWM be achieved in LMIC through PSP without contradiction? Having demonstrated the shortcomings of existing theoretical principles in the first section and having gained solid empirical evidence from both national and international strategy and the analysis of illustrative case studies and the single case study, a conceptual framework will be designed. The result of this investigation will be the best appropriate PSP model for each specific waste element. The parameters for the ISSWM concept, including service
13
2. Research Issues and Hypotheses
efficiency, the hierarchy principle, the polluter pays principle, and the principle of continuity will be considered holistically rather than separately. The findings of this research will be useful if implemented by decision-makers, national authorities in LMIC, private investors, and international donor organisations.
2.3
Justification for the Research
In the coming decades, as much as 80% of population growth and most economic growth in LMIC will occur in cities (see Chapter 4.1). In this context of rapid urbanisation, accompanied by pervasive globalisation, the outstanding challenges that public authorities and municipal managers face have increased in both scope and complexity due to a lack of resources, continuing urban migration, deteriorating infrastructure, and the need to tap a solid economic and financial base while maintaining the incentives necessary to attract investment and generate employmen. 35 This dissertation is also relevant to both international enterprises with strong financial and technical backgrounds and national smalland medium enterprises. It is also justified by the relative neglect of privatisation in the field of SWM in LMIC. Finally, it addresses decision-makers, local LMIC authorities, and international donor organisations. Its findings will prove useful to the potential applications undertaken by these stakeholders. There is an increasing understanding worldwide that the private sector is a competent and efficient partner and that there are several advantages to private sector involvement in ISSWM. The role of the public sector has shifted increasingly. It is often stated that PSP could be useful in delivering those services that are provided least efficiently by the public sector; or activities where new technologies are needed (such as solid waste treatment, disposal, or recycling). Strong evidence provided by both the illustrative case studies (see Chapter 9) and the single case study (see Chapter 10) will further clarify this statement. Other arguments include tight municipal budgets. Nonetheless, by outsourcing the SW services, public authorities have to bear the costs of the service provided by the private sector. How can one explain that some municipal authorities are in favour of PSP? This dissertation will address this issue with strong empirical evidence. In sum, the following arguments justify PSP: SWM is one of the largest, and often the largest, municipal expenditure in LMIC, but 1. benefits from these expenditures are often uncertain and are not maximised;
35
Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI Development Studies , 2001, p. vii.
14
2. Research Issues and Hypotheses
2. 3.
4.
Inadequate SWM is negatively impacting public health, the environment and the national economy in LMIC; Enhanced waste management is possible and affordable, and can simultaneously address national objectives for sustainable development, public health, environmental quality and ultimately meet the MDG; All citizens are indiscriminately and negatively affected by inadequate SWM.
2.4
Research Procedure
This dissertation seeks to identify controversial issues existing between some PSP models and the ISSWM concept neglected in academic discussion to date, and to present a sustainable one. This study is divided into four main sections, as shown in Figure 4. Section I introduces the dissertation by addressing among others the background to the research, the research aims, the research questions, the research procedure, etc. Section II is devoted to a literature review regarding ISSWM, privatisation, PSP, goods theory, market theory and organisational theory. However, it not only surveys the most relevant literature, but instead clarifies some key issues. This literature survey demonstrates the limitations of PSP models in theory. In effect, this section opens with the historical background to SWM (see Chapter 3.1). The first attempts to theorise PSP are discussed and their limitations or failures are underlined. Subsequently, several key definitions and preliminaries will be provided (see Chapter 3.2), thereby further clarifying various key ideas and assumptions. Furthermore, key characteristics of SWM in LMIC will be set out (see Chapter 4). These characteristics are relevant to further discussions in Chapters 6 and 7. The concept of ISSWM is detailed in both its historical background and its core principles. These theoretical principles are discussed in relation to PSP in Chapter 6. Evidence will then be furnished to demonstrate the limitations of PSP. Chapter 6.1 and Chapter 6.2 highlight the issue of liberalisation; regulation and deregulation are considered briefly prior to discussing privatisation/PSP, since these notions occur in the privatisation debate and are sometimes confused. Chapter 7 embraces market and organisational theory to challenge the Standard Market Model in providing public goods in general and SW services in particular. Chapter 7.1 considers theoretical issues on goods theory. Chapter 8 addresses the empirical theory of various international organisations, in particular that of the World Bank Group, as it is one of several prestigious international organisations to have financed and carried out research in the field of SWM in LMIC. The privatisation concepts of these organisations
15
2. Research Issues and Hypotheses
will be subject to careful analysis, in particular with regard to the compatibility of the concept of ISSWM with PSP models.
Introduction
T H E O R Y
ISSWM
{
Privatisation and PSP Goods and Market Theory
Strategy of International Organisations
E M P I R I C A L
METAP illustrative Case Studies CESPA Case study
Waste Collection
Contracting-out
CONCEPTUAL FRAMEWORK
Figure 4: Structure of the dissertation Section III is devoted to empirical illustration. Since this study has a clear conceptual approach, some examples of tangible PSP experiences gained in the Mediterranean Environmental Technical Assistance Project (METAP) Regional Solid Waste Management Project (RSWMP) are not presented until Chapter 9. This project, financed by the World Bank Group and the European Union Fund, has been developed with the national governments of the region to assist in catalysing appropriate responses to the challenge of effectively managing solid waste. It is worth noting that these examples are both qualitatively and quantitatively discussed in the context of the theoretical principles discussed in Chapter 9.6. The shortcomings of concrete examples are shown and elements for ISSWM are derived from these examples. These elements will be ultimately used to
16
2. Research Issues and Hypotheses
establish my own ISSWM concept in Section IV, and to analyse and interpret the singlecase study in Morocco. Furthermore, this empirical section provides a comprehensive analysis of a single case study in Chapter 10 (see Figure 4). This chapter takes a closer look at one key element of solid waste, namely solid waste collection, and at one single PSP model, namely contracting-out. This will allow for a deeper discussion in Chapter 10.4. Finally, Section IV delineates a conceptual approach. Chapter 11 attempts to respond to each research question and hypotheses. A conceptual approach is presented, including what the answers provided imply for policy-making and practice in this chapter. This investigation concludes with an agenda for further research. The core of my research includes the incentives in any PSP contract for private entrepreneurs to achieve ISSWM. A concept without any contradiction between PSP and ISSWM will be developed, thus creating a system without conflicts of interest (see Figure 1). This concept will be based on the theoretical background to important principles derived from both the concept of PSP and the ISSWM concept.
2.5
Ethical Considerations
The issue of ethics is considered in both the theoretical and empirical parts of this investigation. Ethics are a matter of principled sensitivity towards the rights of others. Ethical issues arise not merely in quantitative research, but also in qualitative research; neither is unencumbered by ethical dilemmas. There are no one-size-fits-all answers to many ethical issues encountered in qualitative research. In effect, there is no right or wrong answer. Nonetheless, this issue has to be taken into account. Bulmer (2001) identified the following ethical issues, to which due heed will be paid in this investigation: • What the respondent is told about the auspices and purpose of the study? • What the conditions are under which the names and addresses of respondents are used, and how the data will be published? • How the anonymity of individual respondents will be preserved, and how the confidentiality of the final dataset will be safeguarded?36 As far as this investigation is concerned, the research presented here is ethically sound. One key ethical principle observed here is that while truthfulness is good, respect for human
36 Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 53.
17
2. Research Issues and Hypotheses
dignity is better, even if, in the extreme case, respecting human dignity leaves one ignorant of human nature.37 Such ethical considerations impinge upon all scientific research, but they impinge particularly sharply upon research in the human sciences, where people are studying other people. The social researcher faced with potential ethical problems while conducting research may have to resort to guidance provided by codes of ethical conduct and to ethical guidelines provided by professional associations.38 Many principles have been cited to justify taking an ethical view of the activity of social research. One general principle is the need to strike a balance between the desire to expose the hidden processes at work in modern society on the one hand, and to protect the privacy of individuals and groups, on the other, and to recognise that there are private spheres into which the social scientist may not, and perhaps even should not, penetrate.39 Accordingly, questionnaires will not include any confidential information. Furthermore, Bulmer identified a second very important principle widely considered the key player of ethical behaviour in research, namely the doctrine of informed consent. This grants persons invited to participate in social research activities the freedom to choose to take part or to refuse, having been given all information concerning the nature and purpose of the research, including any risks which they might be exposed to, and the arrangements made for maintaining the confidentiality of the data, and so on.40 According to Bulmer, a continuing concern in social research has been not merely with the conditions under which data is collected, but also with how it is stored and disseminated. Therefore, the participants in the questionnaires or interviews conducted here were assured that this data is needed for the purposes of improving PSP, by contracting-out the solid waste services, and that the individual will not be identifiable in subsequent analysis. Finally, there has been considerable debate about the ethical implications of harm in social research, involving both harm to those being researched and harm to those conducting research.41 Deceit and lying in the course of research is another issue. As a general principle, the use of deception in research has been condemned, and concealing the fact that one is a researcher has attracted criticism. Finally, the views presented in this investigation are solely the author’s and do not represent
37 Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 45. 38 Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 47.
39
Barnes, 1979: 13-24 cited in Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p. 49. Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p.49. Bulmer, M., the Ethics, in Gilbert, N., Researching Social life, London: Sage publications, 2001, p.51.
40 41
18
2. Research Issues and Hypotheses
the views of the institutions from which the case studies were obtained. All information shown on any map in this research (such as boundaries, colours, denominations, and so forth) does not imply any judgment concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
2.6
Delimitations of Scope of this Dissertation
This investigation starts out from the broad area occupied by two principal notions – privatisation and SWM – and refines these continuously while considering all relevant aspects. It is worth noting that the answers to the research questions combined both key theoretical elements and profoundly empirical findings. Figure 5 delineates the scope of this study.
Privatisation in Low- and Middle Income Countries Privatisation Municipal SWM Mashreq / Maghred PSP Morocco Contractingout SW Collection SWM
Figure 5: Delimitation of scope of the dissertation LMIC will be defined in terms of their economic levels (see Chapter 4.1). This study focuses on privatisation in terms of financial policy; legislation and technical SWM issues will not play a major role. Moreover, it focuses on solid waste from private households due to the high percentage of such waste compared to commercial and industrial waste. The concept of integrated SWM will also be considered in this context. Large-scale privatisation (landfill, transfer station, high level transport companies, etc.) is discussed on account of the significant investment required. Natural disasters and other emergency situations tend to generate large quantities of debris that is difficult to handle under conventional waste management arrangements. Besides, it is also important to continue to manage regular municipal waste under emergency conditions.
19
2. Research Issues and Hypotheses
However, such cases of “force majeure” are not examined here. For the purposes of a clear-cut discussion, various key SWM terms (collection, transfer, recycling, resource recovery) refer exclusively to the disposal of municipal solid waste. By definition, municipal solid waste includes solid waste from households, non-hazardous solid (not sludge or semisolid) waste from industrial and commercial establishments, waste from institutions (including non-pathogenic waste from hospitals), market waste, yard waste, and street sweepings (see Chapter 3.2). In this study, construction and demolition debris is not included in the definition of municipal solid waste, because it could dramatically deform waste generation rates and waste composition, particularly in LMIC.
20
3. Solid Waste Management
II.
LITERATURE REVIEW
Introduction
T H E O R Y
ISSWM
{
Privatisation and PSP Goods and Market Theory
Strategy of International Organisations
E M P I R I C A L
METAP illustrative Case Studies CESPA Case study
Waste Collection
Contracting-out
CONCEPTUAL FRAMEWORK
The following chapters will take a closer look at key Solid Waste (SW) issues, privatisation and PSP, Goods and Market theory and finally the strategy of international organisations. Chapter 3.1 will consider its historical background. Parallels will be drawn between the SW situation in European cities in former times and the present situation of LMIC. PSP experiences in European municipalities will be underlined. This will not amount to a literature survey of SWM issues, but instead this chapter will attempt to show the limitations of some PSP models with regard to the principles of ISSWM used in the past. Furthermore, the definitions of Solid Waste will be discussed in the context of ISSWM. Chapter 4 will consider the key features of SWM in LMIC. Chapter 5 will address the theoretical principles of sustainability in the context of solid waste. Chapter 6 will discuss the issue of privatisation and PSP in rendering SW services. Chapter 7 will focus on Goods, Market and Organisational theory. Finally, Chapter 8 which is considered in this dissertation as empirical theory will highlight the privatisation policy of international organisations especially the World Bank Group. Each chapter concludes with observations relevant to the overall conclusion.
21
3. Solid Waste Management
3.
3.1
Solid Waste Management
Historical Background
To assess the recent issues of SWM in Low- and Middle Income Countries (LMIC) and to learn about appropriate management tools, it is imperative to consider the situation worldwide, in particular before the nineteenth century. Several comprehensive historical studies on solid waste issues in the European and Northern American context have been furnished by various authors, such as Savas, Silguy, Tchobanoglous, Bilitewski, Härdtle, Marek, Wittmaier, and others. The history of SWM is inevitably linked to urban history. Prior to Neolithic times (circa 10,000 B.C.), when the human race was mostly nomadic, the natural decomposition of waste was obvious. Waste became an issue as humans began to congregate in villages and communities and as the accumulation of waste became a consequence of life. The evergrowing municipalities in Europe and in Northern America made necessary the elaboration of appropriate systems to properly manage solid waste. In effect, urbanisation stopped the natural cycle of SWM. As a consequence, municipal managers and citizens have struggled with the problem of solid waste for six thousand years. Between 1347 and 1352, about 25 million people (circa 30% of the entire population) died in Europe from disease (see Table 2).42 Houses used to be swept and the contents of waste bins were simply flung into the streets. Until 1950, in some French cities like Marseilles, solid waste and faecal sludge were evacuated through the windows instead of being brought to the sidewalk every morning.43 Paris is known under the term Lutèce (from Latin “Lutum”) meaning sludge. People learned to dispose of the waste generated outside their own settlement as early as 8,000 to 9,000 B.C. The first experience with waste collection was made in ancient European and Asian cities. The first regulations dealing with waste management in general and with the sweeping of streets in particular were set up in Athens (320 B.C.).44 Physicians, like the Greek scholar Hippocrates (around 400 B.C.) and the Arab Avicenna (Ibn Sina, 1,000 A.D.), were the first to link epidemics to contaminated water. Therefore, Roman civilisation presents some positive indicators of the modern approach to SWM. In Crete, for instance, specific places had been set aside for the disposal of certain organic waste by 1500
Bilitewski, B/Härdtle, G/Marek, K: Abfallwirtschaft, Springer Verlag: Berlin/Heidelberg, 1994 cited in Wittmaier, M., Straßenreinigung, Neuruppin: TK Verlag Karl Thomé-Kozmiensky, 2003, p. 71. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 20. Tchobanoglous, et al., Solid waste, cited in Bilitewski, B./Härdtle, G./Marek, K., Waste Management, Heidelberg:Springer, 1994, p. 1.
42
43 44
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B.C.; such waste was subsequently reused as compost.45 The City of Athens can be cited as a good example in Europe. Indeed, solid waste was probably better organised there than in any other city prior to the nineteenth century. Nevertheless, the Athenean waste management system had several shortcomings; among others, it was unable to overcome the issue of how to dispose of a very large quantity of waste. Municipal waste collection was hence confined to state-sponsored events.46 Legally, property owners were responsible for the cleanliness of streets fronting their property, although this seems to have been generally ignored. However, independent scavengers collected a significant percentage of residential waste for resale as fertiliser, and wealthier residents were able to use their own slaves to perform any necessary further removal.47 In short, street sweeping can be traced back to the fifteenth century in many European cities, for instance in Bremen in 1450. From an early stage, municipal managers and authorities tried to contend with the waste issue with new regulations, legislation, decrees, fines, and even with prison sentences. However, if legislation and fines alone could not produce sustainable solutions to perennial waste problems, such decrees resulted in the first contracting-out measures. High-income residents hired poor ones or, as mentioned above, affluent residents used their slaves to carry out this task. Thus, the first municipal dumps were organised by the Greeks in circa 500 B.C.; at approximately this time, the Council of Athens began to enforce a regulation according to which scavengers were required to dump waste no less than one mile from the city walls. In 320 B.C., Athens promulgated the first known edict which forbade the throwing of refuse into the streets.48 In the same context, as early as 1243, the magistrates of Avignon (France) decreed that no one should throw any waste into the street, on the pain of a fine of two shillings per offence, of which the accuser would receive one-third. In the Netherlands, dumping waste in canals was first prohibited by guild bylaws, so that breweries would been assured a supply of clean water.49 In 1296, Siena officially employed a sow with four young pigs to clean the campo after every market; by 1382 six pigs had the official duty of cleaning the streets, which can be considered to be the first step to waste recycling. Venice and Florence also raised pigs especially for scavenging, while in Bologna the Ospitalieri di Sant’ Antonio had the privilege of feeding one hundred pigs in the streets.
45 46
Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 12. These events include the removal of the bodies of animals and men after the games and the cleansing of streets after parades as well as the regular cleaning of principal streets (the latter by decree of Caesar, 47 B.C (Savas, 1977, p. 13). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 13. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 13. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 17.
47 48 49
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Finally, in circa 1320, Paris took the first sanitary measures, which included street paving, waste canalisation (open sewers) and, of course, organised scavenging.50 In the United States of America, waste collection systems were established in various cities in the seventeenth century. Prior to 1691, according to official legislation, citizens were required to load their own waste onto waste carts, but could then outsource this task. However, in 1676, New York residents had a foretaste of what was to become a bane of urban existence, namely municipal strikes, when the cart men refused to move waste from the streets to protest what they considered a too low rate of pay.51 As mentioned above, Paris was not doing any better in 1666. In that year, given that the area under the Pont Marie was a favourite dumping ground, the city magistrate had to order local residents to remove the waste to a dumpsite because the Seine was no longer able to move freely under the arches. 52 Each Paris citizen generated 200g of SW in 1872, whereas production reached 700g per inhabitant in 1922 and 1.6 kg in 1994.53 Moreover, offenders were punishable by severe sanctions, including prison terms with limited access to bread and water. These sanctions had little effect and failed to curb reoffending. 54 Under the pressure of public opinion, the Parisian authorities required that the coercion of sweeping should be converted into a municipal tax that every owner was obliged to pay. This requirement was accepted and accordingly a specific solid waste tax was introduced in 1883. Gradually, individuals were relieved from street cleaning duties.55 On 24 November 1883, the prefect Eugène Poubelle published a decree obliging all house owners and landlords to provide their tenants with special bins for the purpose of waste disposal. Three different bins were necessary: one for organic waste, one for paper, and one for glass, earthenware, and so forth.56 In 1799, a regulation enacted by the municipal police obliged any owner or tenant of a house in Paris to sweep the public street in front of their house every day. 57 In 1782, J.-H. Ronesse 58 noticed that a number of edicts, decrees, and ordinances had been published in the last three centuries and that those laws had never been
50 51 52 53 54 55 56 57 58
Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 15. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 18. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 17. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 14. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 23. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 29. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 31. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 27. In his book „Vues sur la propreté de Paris, 1782“.
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enforced. L.-S. Mercier59 lamented the individualist mindset of Parisians.60 At the beginning of the twentieth century, waste collection and waste transport in Paris was undertaken on a daily basis by a private enterprise. In early 1662, Tokyo systematised its solid waste collection, contracted out the collection and the disposal of household waste, and provided a dumping ground. It is important to recognise the importance of regulations at the beginning of solid waste history, specifically as an economic instrument to enforce the so-called polluter pays principle or the hierarchy principle. Accordingly, the Roman emperor Vespian imposed a waste tax in 69-79 A.D. to prevent waste accumulating in public places. Several provincial English towns were providing collection and the fencing off of dumps by the end of the seventeenth century. In 1690, the Mayor of Portsmouth was fined for throwing garbage into the streets of his own town. It is reputed that Shakespeare’s61 father paid a fine in 1552 for depositing filth in a public street.62 An English law of 1714 required every municipality to engage a scavenger. By the end of the Middle Ages, general public awareness of waste as a health hazard had become quite common. 63 However, the knowledge and concomitant know-how gathered during that period about the importance of proper waste management has since been lost over time in Europe. One of the reasons cited is the disappearance of the Roman Empire and subsequent migration. As mentioned earlier, legislation and scavenging proved not to be the sustainable solution to the high quantity of waste generated. The main reason was the lack of inadequate alternatives to available methods of collection and disposal. After all, except for those living in heavily polluted areas, public opinion was very much against such measures.64
59
Louis-Sébastien Mercier (1740 - 1814), one of the first French writers of drames bourgeois. Mercier also wrote a work of prophetic imagination “Le Tableau de Paris”. Mercier was strongly influenced by Jean-Jacques Rousseau 's views of society, rejecting the prevalent belief in progress. As a moderate member of the Convention, he opposed the death penalty for Louis XVI. (Encyclopædia Britannica, 1994-1999). Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 27. William Shakespeare (1564 – 1616), English poet, dramatist, and actor, often called the English national poet and considered by many to be the greatest dramatist of all time (Encyclopædia Britannica, 2007). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 16. In 1462, the Aldermen in Amiens decided to hire certain men with horses and dung carts to remove the filth from the streets daily (Savas, 1977). People were asking themselves if the poor man should be deprived of his pigs to make way for the horses of the wealthy or if the poor man should be forced to spend his time carting garbage in order that lords and ladies not soil their costly garments (Savas, 1977, p. 16).
60 61
62 63
64
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During the eighteenth century, Europe65 showed little of the change that was to characterise the next century.66 The nineteenth century marks the beginning of all modern concepts of solid waste collection and disposal. It brought a radical change in the history of humanity in terms of proper SWM. Until the publication of the works of Pasteur67, proving the existence of the microbe, hygienists adopted empirical methodology. Various nineteenth-century scientists, including Robert Koch68 and Ignaz Semmelweiß69, and engineers like William Lindle, 70 made pathbreaking contributions to elucidating the link 71 between SWM and hygiene (see Table 2). Gradually, European cities started to introduce solid waste collection and organised street sweeping. In this context, as mentioned above, the French Prefect Eugène Poubelle 72 introduced waste containers in Paris. 73 Table 2 presents the most important milestones in the history of SWM.
65
In comparison, in the United States the native population had not built any cities with populations much over 10,000. Mesoamerican civilizations, on the other hand, had maintained complex urban systems, including sophisticated drainage and waste collection, for at least a thousand years (Savas, 1977, p. 17). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 19. Louis Pasteur (1822-1895) French chemist and microbiologist. Pasteur has proved that micro organisms cause fermentation and disease. He was the first to use vaccines for rabies, anthrax, and chicken cholera. Louis Pasteur brought about a veritable revolution in the 19th-century scientific method (Encyclopædia Britannica, 1994-1999). Robert Heinrich Hermann Koch (1843 - 1910), German physician, one of the founders of the science of bacteriology, who discovered the tubercle bacillus (1882) and the cholera bacillus (1883). He cultivated the anthrax organisms in suitable media on microscope slides, demonstrated their growth into long filaments, and discovered the formation within them of oval, translucent bodies--dormant spores. He won the Nobel Prize for Physiology or Medicine in 1905 (Encyclopædia Britannica, 1994-1999). Ignaz Philipp Semmelweis (1818 – 1865), German-Hungarian physician who discovered the cause of puerperal ("childbed") fever and introduced antisepsis into medical practice. In 1861 Semmelweis published his principal work, Die Ätiologie, der Begriff und die Prophylaxis des Kindbettfiebers ("Etiology, Understanding and Preventing of Childbed Fever"). His influence on the development of knowledge and control of infection was hailed by Joseph Lister, the father of modern antisepsis (Encyclopædia Britannica, 1994-1999). William Lindley (1808 - 1900), British civil engineer who helped renovate the German city of Hamburg after a major fire. Lindley settled in Hamburg as engineer in chief to the Hamburg-Bergedorf Railway (1838-60). He constructed a system of sewers, waterworks, gasworks, and public baths and washhouses, and he planned extensions to the port. He constructed a sewerage system for Frankfurt am Main that was widely imitated in Europe and America (Encyclopædia Britannica, 1994-1999). Although the link was discovered, 9000 people died in Hamburg in 1892 through cholera disease (Wittmaier, M., Straßenreinigung, Neuruppin: TK Verlag Karl Thomé-Kozmiensky, 2003, p. 71). Eugene Poubelle (1831 – 1907), Eugene Poubelle became Prefect of the Seine in 1884 and created the final laws governing the garbage collection and street cleaning, building on the earlier regulations about sweeping in front of the building and not throwing anything out the window. He defined the garbage can as having a maximum of 120 liters and the time of passage of the tipcarts. Poubelle organized garbage collection in this manner to allow for the household waste to be composted at Saint Ouen. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 14.
66 67
68
69
70
71
72
73
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In England, the Sanitary Act of 1845, and especially the Public Health Act of 1875, had a radical effect on the general level of sanitation, notably in working-class urban areas; they included provisions for the creation of “united districts” for “specified sanitary purposes”. Tokyo required each family to furnish a waste box in 1807, and began municipal waste collection in 1900. In New York City, George E. Waring was appointed commissioner of the Department of Street Cleaning in 1894 and, untroubled by political considerations, proceeded to reorganise and clean up the department. The organic waste fraction was sold to farmers as fertilisers, and some markets could be found for other waste. Until 1884, Boston sold all its waste to New England farmers.74 Although the idea of burning waste had been around for some time, the invention of the incinerator (in England in 1874) was a marked step forward in the clean disposal of solid waste. The search for technological solutions became relatively more intensive in the twentieth century. Waste grinding was invented in the 1920s and compactor trucks in the 30s (see Table 2). From 1913 to 1915, Chicago had a privately owned tunnel system which removed building debris, ashes, and delivered freight.75 In order to minimise environmental problems with dumpsites and especially to protect water resources, two Englishmen, Call and Dawed, introduced the concept of sanitary landfilling which was first experimented with in the city of Bradford in 1930.76 In London, the first incinerator was constructed in 1876, whereas in Hamburg/Germany77 the first one was constructed in 1893. Comprehensive management tools were also being introduced into the solid waste industry. Improved procedures were being employed to schedule work crews, route waste collection vehicles, and to locate disposal facilities. Major technological advances were taking place in the recovery and recycling of materials.78 Nevertheless, it took time before a real breakthrough in the solid waste industry occurred. For instance, a team of mules collected solid waste in Los Angeles until 1933; and as recently as 1941, several New Yorkers were prosecuted for keeping hogs.79 The nature of waste was also an issue from the beginning. Is it about “Pure Public Goods”
74 75 76 77
Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 21. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 22. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 52. Other relevant milestones in solid waste management in Germany are the following: In 1972, the Waste Disposal Act in Germany was published; in 1975, the first waste management programme of the German Government took place with the introduction of technical environmental studies into the curriculum of the Technical University of Berlin; finally, the first German Institute for Technical Environmental Protection in Berlin was created in 1977. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 22. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 22.
78 79
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or “Public Goods” or “Private Goods”? The question is considerable. In 1506, Louis XII decided that the crown should be in charge of waste collection in the capital, including its evacuation. 80 The nineteenth century is commonly associated with “laissez-faire” 81 capitalism. Ever since, this has transformed society and created unprecedented levels of wealth, and also produced severe environmental destabilisation (Sclar, 2000). In her discussion of the century of modern public goods theory or so-called “municipal socialism,” Beatrice Webb82 has observed: “Neither a pure water supply nor the collective disposal of garbage could be left to private conscience or attended to only if they could be provided for a profit”. Public authorities recognised that the management of solid waste was their responsibility instead of leaving it to particular initiatives. Savas (1977) has affirmed that despite repeated attempts to legislate improvement, “almost every aspect of sanitary conditions was worse in 1825 than it had been at the end of the century… Instead of developing an effective garbage collection system, the City alternated between private contractors and a city-operated program, neither of which worked satisfactorily. A major part of the scavenging came to be done by the ever-present hogs.”83 This phenomenon called “On-again / Off-again” - will be addressed later in this dissertation (see Chapter 6.6.2). Europe was not the only continent to take first steps towards modern waste management in the Middle Ages. Nor was it the only continent where citizens faced tough sanitary problems especially due to badly managed waste. Prior to the nineteenth century, in waste terms, the world could not be divided into industrialised countries with comprehensive waste management, on the one hand, and LMIC with vulnerable sanitation systems, on the other. Good examples and bad examples of waste management outside Europe will be discussed in the following. According to archaeological surveys, the city of Haiderabad in India used appropriate bins as waste recipients over 6500 years ago. Sewerage systems made of ceramic materials were constructed in Turkey 8000 years ago. In Jerusalem, solid
80 81
Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 23. laissez-faire (French: "allow to do"), policy based on a minimum of governmental interference in the economic affairs of individuals and society. The policy of laissez-faire received strong support in classical economics under the influence of Adam Smith. It was a political as well as an economic doctrine. In the late 19th century the acute changes caused by industrial growth and the adoption of mass-production techniques proved the laissez-faire doctrine insufficient as a guiding philosophy. (Encyclopædia Britannica 1994-1999). Martha Beatrice WEBB (1858 – 1943), English Socialist economists, early members of the Fabian Society, and cofounders of the London School of Economics and Political Science. She pioneered in social and economic reforms as well as distinguished historians. She deeply affected social thought and institutions in England. In 1891 she published, “The Co-operative Movement in Great Britain”, which later became a classic. (Encyclopædia Britannica 1994-1999). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 20.
82
83
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waste was systematically composted and incinerated 2000 years ago.84 A Chinese “Record of Institutions” dating from around the second century B.C. mentions sanitary police charged with the removal of all carcasses, whether of men or animals, and traffic police whose duties, among others, was to organise street sweeping in the major cities. The Indus Valley city of Mahenjo-Daro, founded no later than 2500 B.C., represents a very significant conceptual leap in terms of waste management. Here, a well-designed drainage system was devised early on: each house had waste chutes and waste containers were provided at the foot of each building at street level; also, waste containers were placed at convenient locations in the streets from which scavengers, who were presumably under some central authority, removed the waste. 85 In the Egyptian town of Herakopolis (circa 2100 B.C.), waste in low-income districts was treated pretty much as of old in that organic waste was either left on the floor or dumped just outside the dwellings, while inorganic waste was put into nearby depressions, perhaps to level off the ground. 86 In the high-income districts, however, efforts were made to remove all kinds of waste, organic and inorganic, to locations outside the living and/or communal areas which usually meant into the river.87 Mosaic law (circa 1300 B.C.) specifically refers to public sanitary practices; everyone was expected to act as their own scavenger - to remove their own waste and bury it in the earth.88 In Chinese cities, by 900 A.D., the guilds provided street cleaning services (waste collection) for their own streets. By 1250 A.D., in the city of Hang Chow, the streets were cleansed by public authorities that had the waste removed to the countryside by boat, and once a year the prefecture undertook a thorough cleansing of the streets and a general cleaning out of the canals.89 Table 2 displays some milestones in the history of SWM.
84 85 86 87 88 89
Wittmaier, M., Straßenreinigung, Neuruppin: TK Verlag Karl Thomé-Kozmiensky, 2003, p. 66. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 11. This can be counted as the first experience of waste segregation in this country. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 12. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 1. Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 14.
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Milestones 10,000 B.C. 2100 B.C. 81-96 A.D. 69-79 A.D. 6th to 14th 15th century 19th Century
Key Features Neolithic evolution: decomposition of organic waste on site First experience of waste segregation in Egypt Emperor Domitian (Roman Emperor) ordered pest control due to a lack of hygiene, proliferation of rats in the City Emperor Vespian imposed a urine tax to avoid urinals in public places Epidemics claim the lives of one-third of the population (25 million) in a few short years90 First paving of streets, introduction of garbage cans Creation of the Public Health Act in England 9 cholera epidemics claimed 380,000 lives in Prussia91 Construction of the first incinerators in England in 1876
1843 1850 to 1890
Introduction of the first mechanical street sweeping machine Breakthrough in waste management: scientists (Ignaz Semmelweiß, Louis Pasteur, Robert Koch) reveal bacteria and viruses as the causes of disease 9,000 people in Hamburg/Germany died due a cholera epidemic The Federal Government of Germany establishes the legal basis for the disposal of waste “Waste avalanche” due to economic growth in the post-war era Oil crisis, World economic crisis, first thoughts about sustainable resources management First breakthrough in integrated SWM: recycling, composting and anaerobic technology are a priority for waste disposal Table 2: Milestones in the history of SWM (Source: Bilitewski, B./Härdtle, G./Marek, K., Waste Management, 1994)
1892 Mid-1960s 1970s 1973/74 1980s
In recent years, solid waste has increasingly become a major issue on the agenda of many international organisations. There have been a number of international cooperation
90 Bilitewski, B./Härdtle, G./Marek, K., Waste Management, Heidelberg:Springer, 1994, p. 1. 91 Hösel, G, Beseitigung von Abfallstoffen, (Kennz 0120). Hösel/Schenkel/Schnurer: Müll-Handbuch. Berlin:Erich Schmidt 1991 cited in Bilitewski, B./Härdtle, G./Marek, K., Waste Management, Heidelberg:Springer, 1994.
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initiatives, seeking to promote shared regulations and measures. Some of these initiatives are summarised below. a) World Summit on Sustainable Development (WSSD) In June 1992, the United Nations Conference on Environment and Development (UNCED, the so-called “Earth Summit”) was held and adopted a global action plan called “Agenda 21” for international activities in environment protection. Ten years later, in August 2002, WSSD was held to review the action plan and to discuss new challenges. As far as SW is concerned, these include developing ISSWM systems, placing utmost priority on waste prevention and minimisation, re-use and recycling, and ultimately on environmentally sound disposal facilities; another challenge is to promote waste prevention and minimisation by encouraging the production of reusable consumer goods and biodegradable products. Hence, WSSD amounts to strengthening the application of the hierarchy principle. b) Millennium Development Goals (MDG) The MDG that were adopted by the U.N. General Assembly in 2000 include as their seventh goal the endeavour “to ensure environmental sustainability,” and within that goal targets 9 and 11 to integrate the principles of sustainable development into country policies and programmes, reverse the loss of environmental resources, and achieve significant improvement in the lives of at least 100 million slum dwellers by 2020. c) Action Plan (Science and Technology for Sustainable Development: "3R") At the June 2004, the G8 Summit came out with the “3R Initiative,” aimed at building a global recycling-oriented society through promoting the three R’s - Reduce, Reuse, Recycle. As far as foreign aid to LMIC is concerned, cooperation in areas such as capacity development, raising public awareness, and the implementation of recycling projects is being sought. d) Global Climate Change The Protocol came into force in February 2005. In the field of solid waste, two approaches – the recovery of methane (CH4) gas from landfill sites and recapturing energy from organic waste – are attracting increasing attention. In terms of cooperation with LMIC, possibilities of supporting financially underpinned projects under the Clean Development Mechanism (CDM) are being explored. At present, different SW initiatives in LMIC are being supported through the CDM mechanism.
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e) Transboundary movements of solid waste With regard to transboundary movements of hazardous waste, illegal “exports” of hazardous waste from industrialised countries to LMIC took place in the 1980s. The Basel Convention92 adopted on the Control of Transboundary Movements of Hazardous Waste and their Disposal regulates the ‘export’ of hazardous waste from a country with waste processing technologies to other countries.93 In effect, the Convention came into force in May 2002. In recent years, the export and import of solid waste for recycling purposes are on the rise also in LMIC.
3.2
Solid Waste: Definitions
This investigation addresses Municipal Solid Waste Management (MSWM) 94 in LMIC because in terms of quantity municipal waste makes up the largest part of waste generated compared to hospital waste, industrial waste, demolition waste, and hazardous waste. Based on the quantity of waste generated - and for other various reasons - the SW market in LMIC is becoming attractive to the private sector. MSWM includes the management of household waste, non-hazardous solid waste from industrial, commercial and institutional establishments, market waste, yard waste, and street sweeping. It excludes radioactive waste, hazardous waste and hospital waste, whose characteristics are beyond the scope of this research. Comprehensive MSWM 95 requires an appropriate distribution of responsibilities, authority and revenues between national, regional and local governments. There is still no single scientific definition of solid waste. According to Savas (1977), the notion of solid waste (SW) was not used in its current meaning until the twentieth century. Pongrácz (2002) states that the notion of waste96 is relative in two main respects. Firstly,
92 The "Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal." It controls exports of hazardous waste by transboundary movement, and obligates exporters to have approval for exporting hazardous waste, to make advance notice, and to import waste again if inappropriate export or treatment is carried out. http://www.mofa.go.jp/mofaj/gaiko/kankyo/jyoyaku/basel.html (Accessed in September 2004). 93 However, in August 2006, the Panamanian flagged ship Probo Koala unloaded more than 550 tonnes of toxic waste at Abidjan port in Côte d 'Ivoire. Emissions from that toxic waste have since killed seven people and poisoned thousands. The deadly cargo was shipped to Abidjan from Amsterdam, where port authorities rejected the tanker because of its toxic load. http://www.baselpretoria.org.za/Sept06.htm. 94 MSWM encompasses the functions of collection, transfer station, aerobe and anaerobe treatment, resource recovery and disposal of municipal waste. 95 Schübeler, P./Wehrle, K./Christen, J., Conceptual Framework, St Gallen: SKAT, 1996, p. 10. 96 Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, p. 70.
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something becomes waste when it loses its primary function for the user; hence, one person’s waste output is often someone else’s raw material input. Secondly, the notion of waste is also relative to the technological state of the art and to the location of its generation. Waste is therefore a very dynamic concept and the notion has to be understood within this context. Different international organisations like the EU97 , OECD98, UNEP99 have their own approach to, and definitions of, the notion of waste. In some literature, especially North American, the terms “refuse” or “garbage” are commonly used. Those wastes that are solid are referred to as “solid waste” or “refuse”. The two terms are used synonymously. 100 Pfeffer (1992)101 states that solid waste is defined as “any solid material in the material flow pattern that is rejected by society.” Other authors102 define solid waste as “all the wastes arising from human and animal activities that are normally solid and that are discarded as useless or unwanted.” Material discarded because it has served its purpose or is no longer useful is called solid waste. 103 According to German legislation 104 , wastes are portable objects that have been abandoned by the owner. Furthermore, German legislation has identified different types of waste; the German Technical Guidance for MSWM defines waste according to its type (see Table 3). Depending on the context, the term “waste”’ can have different meanings. One of the common definitions is that waste is ‘unwanted’ by the person who discards it. Accordingly, the most interesting definition comes from Indonesia, designating household waste as “Sampa,” that is, “the thing which has no use for the person which discards it.”105 It is therefore a product or material that no longer has a value for the first user and is therefore thrown away.106 However, ‘unwanted’ can also be a question of timing, that is, waste can have some value for the same person or society in different circumstances. Examples of
97
According to the EU: Waste shall mean any substance or object in the categories set out in by the EU which the holder discards or is required to discard (European Council 1991a) (Pongrácz, 2002). According to OECD: Wastes are materials other than radioactive materials intended for disposal, for reasons specified (OECD 1994) (Pongrácz, 2002). For the UNEP: Wastes are substances or objects, which are disposed of or are intended to be disposed of or are required to be disposed of by the provisions of national law (UNEP 1989) (Pongrácz, 2002). Savas, E. S., Efficiency of Solid Waste, Lexington: Columbia University, 1977, p. 3. Pfeffer, J.T., Solid waste management engineering, 1992. Peavy, H.S. et al, Environmental Engineering, 1992; Tchobanoglous, G./Theisen, H./Eliassen, R., Solid wastes: Engineering principles and management issues, 1977. Encyclopædia Britannica 1994-1999. The term waste is defined in the German Waste Act of August 27, 1993. Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 190. Klunder, A./Anschütz, J., Integrated Sustainable Waste Management, WASTE, 2001, p. 10.
98
99 100 101 102
103 104 105 106
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such waste are provided by societies that have suffered wars or natural catastrophes, where victims are more likely to use recycled materials that they would have discarded in better times. Waste Type Construction debris Organic waste Definition Detritus minerals from construction and demolition Biodegradable component of municipal waste (e.g. food and yard waste) Household waste Waste from private households Household-commercial Waste from commercial establishments, businesses, the service waste sector, public institutions, and industries that possess similar characteristics than household waste Commercial waste Waste with characteristics similar to household waste Municipal solid waste Household, bulky, household-like commercial, yard, open (MSW) market, and construction and demolition waste; street sweepings; etc. Table 3: Definition of waste relating to their types (Source: German Technical Guidance for MSWM) Solid waste today is increasingly defined as “natural resources out of place” or as “new materials for technologies not yet found.” Waste has come to be regarded as a useful material, providing a potential source of income. The recycling market, for instance, is now an important industry generating revenues and jobs for many people in LMIC. Increasingly, SW is being regarded as a resource to exploit rather than as a problem to be dealt with. In the LMIC context, SW can be either: a) a natural resource which has to be exploited, or b) a serious environmental and health issue which has to be coped with. It is commonly accepted that solid waste definitions are ambiguous and do not really give an insight into the ISSWM concept. Pongrácz (2002) rightly argues that the various definitions of waste do not fall under the sense of valuable materials. She states: “…despite its explicit wish of waste prevention, when, according to present legislation, a thing is assigned the label of a waste, it is going to be treated like waste... The philosophical ramifications inherent in such definitions mean that they are not capable of constructing a system that, by its very nature, results in a sustainable waste management system.”107 In other words, the ISSWM concept does not fit into the various definitions that waste is a
107 Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, Abstract.
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3. Solid Waste Management
thing to be discarded. If it were so, there would no longer be the desire to make this system sustainable.
3.3
Concluding Remarks
This chapter has begun with an analysis of the overall waste management situation in cities worldwide and especially in Europe. The present situation in LMIC is very similar to prenineteenth century Europe. Some parallels exist not only in terms of the quantity of waste generated and its composition, but also in terms of its management. Waste collection in residential areas in eighteenth-century Paris is comparable to the current situation in some LMIC capitals. In principle, ad-hoc programmes organised in LMIC on the occasion of public holidays, during an election period, due to the presence of politicians, and so forth, can be compared with events to remove SW after the games in Rome during Caesar’s era. The administration of municipal waste dumps in Athens in 500 B.C. has some parallels with the management of dumpsites in Tangier / Morocco in the twenty-first century. This chapter has also examined the consequences of haphazardly managed solid waste in Europe in the fourteenth century, which led to living conditions similar to those currently existing in LMIC. This chapter has also considered the consequences of haphazardly managed solid waste in fourteenth-century Europe that are very similar to the existing situation in LMIC. As well as looking at the similarities between current solid waste characteristics and management in LMIC and European countries in the past, we have also looked at the actual consequences of haphazardly managed solid waste in fourteenth-century Europe, realising that these gave rise to a situation similar to that in LMIC at present. We have seen that one consequence is the death of millions of people worldwide. At present in LMIC, just as it used to be in fourteenth-century Europe, people dispose of their waste in the streets with fatal environmental and economic consequences. It has been demonstrated that European citizens became aware of the seriousness of this situation once scientists proved the link between epidemics and irregularly managed solid waste. With regard to the nature of solid waste, it has been proved that in the past, public authorities have tried to consider SW as private goods, by placing the responsibility for managing their waste with waste generators. In this context, according to legislation in some European countries, property owners were responsible for cleaning the front of their houses. This attempt failed because as public goods (see discussion in Chapter 7.1), SW is deemed the responsibility of public authorities, a fact that will be considered in the PSP discussion.
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3. Solid Waste Management
This chapter has also looked at the opinions of some authors on the characteristics of solid waste (“private goods”/”public goods”). Many national and international organisations have conducted well-designed awareness campaigns on sound waste management that have failed mainly because of the characteristics of solid waste. For instance, a campaign instructing the citizens in LMIC that they have to identify with their city, and keep it clean accordingly, will be less effective than telling them that dirty cities will result in diseases and potentially the death of their children, as their children’s health is of utmost private concern. Another interesting issue examined in this chapter is the importance of legislation in SWM. The enforcement of appropriate legislation in Europe as well as its effectiveness has been seen as lacking. In many LMIC, waste legislation is very often well-designed; however, its enforcement remains a formidable challenge to public authorities. It is worth noting that the breakthrough in SWM in Europe occurred with the recognition that SW counts as public goods (as stipulated by Louis XII, for instance, in 1506), and accordingly by introducing public tax to cope with it. The discussion about considering solid waste to be public goods entered a decisive phase at the end of the nineteenth and the beginning of the twentieth century. Interesting results arose with the introduction of public taxation and the improvement of waste technology such as the introduction of waste containers and the publication of remarkable scientific works (for instance by Pasteur). This chapter has shown that waste recycling by waste pickers occurred on the same scale in Europe in the thirteenth and fourteenth centuries as currently in LMIC. Animals were used to recycle waste and waste recycling was informal as currently in LMIC with almost the same concerns. Even in terms of waste quantity and waste characteristics, the waste situations are similar. Overall, in order to set up comprehensive waste management in LMIC, including PSP, one should look carefully at the situation in Europe from the thirteenth century onwards. Mistakes can then be avoided and positive lessons can be learned. As far as the hierarchy principle is concerned, it has been demonstrated that waste segregation, waste reutilisation, and waste treatment were introduced in many countries and cultures at early stages of their development. The hierarchy principle focuses on the awareness of the natural limits of resources. It was somehow obvious in ancient times; in the meantime, however, this awareness has gradually been lost. With regard to PSP, this chapter has reviewed various experiences made across the world. PSP has been experimented with at a low level in many countries in Europe and elsewhere (in Japan, for instance) by contracting-out street cleaning (as enacted by legislation) to so-
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3. Solid Waste Management
called scavengers (waste pickers). At a higher level, SW collection on a citywide basis has also been experimented with in many cities, for instance in seventeenth-century Japan. Finally, the definitions of solid waste need be considered in context. For many, waste is what can be discarded, whereas for others it is a source of revenue, especially in LMIC. In these countries, it is considered both a natural resource and at the same time a serious environmental hazard, associated with health concerns. It has been demonstrated that the SW market in LMIC is becoming attractive to both the international and the national private sector, due to the quantity of waste generated, the demand for technology, the lack of sound public management, and the lack of financial means.
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4. Solid Waste Management in LMIC: Key Features
4.
Solid Waste Management in LMIC: Key Features
In this research, the notion of Low- and Middle Income Countries (LMIC) is based on the economic classification of the World Bank Group; notably, the notion is merely economic rather than geopolitical. The World Bank Group characterises economies as low-income, middle-income (subdivided into lower-middle and upper-middle), and high-income (see Annex 1). Low-income and middle-income economies are sometimes referred to as developing countries or the so-called “Third World”. On the basis of 2001 gross national income, low-income countries are those with average annual per capita incomes of US$ 745 or less. For lower-middle-income countries, the figures are US$ 746 to US$ 2,975; for upper-middle-income countries, US$ 2,976 to US$ 9,205; and for high-income countries, US$ 9,206 or more. In this study, the term “developing” refers to countries whose economies are classified as low-income or middle-income. The terms “industrial countries” or “developed countries” refer to countries whose economies are high-income.108
4.1
Urbanisation in LMIC: Economic and Ecological Issues
According to Yue-man Yeung (1995), one of the most interesting developments since World War II has been rapid urbanisation in LMIC and the concentration of urban populations in large cities. Between 1950 and 1990, the number of “million cities” in the world more than tripled, from 78 to 276, and is now projected to reach 511 by 2010. In 1990, 33% of the world 's population lived in “million cities,” and 10 % in cities of more than 8 million inhabitants. 26 mega cities109 are expected to exist around the world by the year 2015, when the three largest urban agglomerations will be Tokyo, Bombay, and Lagos (U.N. 1998). 110 Where Africa was 80% rural in the 1960s, its rate of urbanisation had reached 50% by 1998.111 The growth of Africa’s cities has outstripped local management and financing capacities. 50 million people are expected to migrate to the cities of West Africa over the next 10 years. It is projected that by 2020, 63% of the population will live in
108 The World Bank „A guide to the World Bank“ Library of Congress, 2003, p. 73. 109 Cities of 10 million or more inhabitants. 110 Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xxiv. 111 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998, Foreword.
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4. Solid Waste Management in LMIC: Key Features
cities.112 There will be 100 so-called “mega cities,” each with a population of more than 5 million inhabitants113 (see also Annex 4). This will require further investment, among others in solid waste management. Asia alone will need to invest US$ 280 billion a year over the next 30 years (Brockman and Williams 1998).114 By the year 2025, one can expect a further 2 billion— almost all in LMIC. Figure 6 presents global population projections until 2050.
Figure 6: World population projections, 1950–2050 (Billions) (Source: United Nations, Critical Trends, 1997) This rapid urbanisation poses formidable challenges to the governments of LMIC and their societies, making environmental degradation, the declining quality of life, and the untapped wealth of human resources all the more easily observable. In addition, a typical municipality in LMIC is not homogenous. Two main areas are distinguished: high-income areas and lowincome areas. Even Plato observed in 400 BC that “….any city, however small, is in fact divided into two, one the city of the poor, the other of the rich.”115 In effect, SW collection is
112 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998, summary. 113 E. Bergmann & H.P.Gatzweiler; S. Schmitz et al, 1996. 114 Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xxvii. 115 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 337.
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4. Solid Waste Management in LMIC: Key Features
usually carried out in the city centre and high-income areas on a regular basis. Low-income municipal areas, on the other hand, do not benefit from the service regularly, and indeed sometimes never do. SWM in low-income areas means having a festering, stinking pile of waste, with erratic waste collection by a municipal agent.116 The rest remains on roadsides, in open drains, and in low-lying areas, worsening the physical environment of the municipality. Consequently, common features of urban areas in LMIC, most particularly of low-income areas, include haphazard waste disposal in roadsides, open spaces, or valleys.117 In addition, the rapid rate of uncontrolled and unplanned urbanisation in LMIC has caused environmental degradation. A.G. Onibokun and A.J. Kumuyi (1999) state that “Recent events in major urban centres in Africa have shown that the problem of waste management has become a monster that has aborted most efforts made by city authorities, state and federal governments, and professionals alike.” The problems posed by inadequate SWM in LMIC are numerous: health hazards from uncollected waste, health hazards from collected but poorly disposed of waste, the economic burden of waste disposal on cities, and social issues arising in connection with informal waste recyclers (waste pickers or waste scavengers) (see Annex 14). It has been estimated, for example, that about 50 million tons of solid waste in India, find its way into the coastal waters of the Arabian Sea and the Bay of Bengal. This results in intensified environmental damage and human health hazards.118 In LMIC, solid waste services often fail to keep pace with rapid urbanisation. Accordingly, the municipalities in LMIC are unable to cope with the ever-growing volumes of waste generated. Urbanisation poses also significant economic concerns. In fact, in LMIC, two-thirds (²/3) of the population live in cities (see Table 4) and generate 60% to 70% of the Gross Domestic Product (GDP). Moreover, 80 % of GDP growth in LMIC is expected to come from cities in this decade.
116 “Beyond Boundaries” PPIAF/ADB Manila: 2002, p. 5. 117 This situation was reflected in articles in East African newspapers in 1985 that referred to Dar es Salaam as a “garbage city” (Sunday News (Tanzania), 2 Nov 1985, p. 5) and a “litter city” (African Events, Nov 1985, pp. 3–5) and to Nairobi as a “city in a mess” (Weekly Review (Kenya), 25 Jan 1985, pp. 2–3). 118 Pearce, D./Turner, K.R., Economics and Solid Waste, Birmingham: CSERGE, 1994, p. 1.
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4. Solid Waste Management in LMIC: Key Features
Region Africa Asia119 Latin America Industrial countries120 World
1950 [%] 14.6 15.3 41.4 54.9 29.7
1975 [%] 25.2 22.2 61.2 69.9 37.8
1995 [%] 34.9 33.0 73.4 74.9 45.3
2015 [%] 46.4 45.6 79.9 80.0 54.4
Table 4: Percentage of population living in urban areas (with projections for 2015) (Source: O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 340 (cited from U.N. 1998) Table 4 displays the percentage of population living in urban areas by region between 1950 and 1995 with projections for 2015. It is especially difficult when the poor are living in rapidly growing, spontaneous, and oftenillegal settlements outside government control and which public providers may be restricted from serving by law.121 Low-income areas normally have the highest population densities and the lowest level of municipal SW service provision. It is worth noting that the unsanitary conditions abiding in such areas pose a health threat not only to their residents, but also to the wider population. This fact is fundamental to the present study in terms of proving the limitations of some PSP models regarding the ISSWM concept. Solid waste services being public goods (Chapter 7.1), it is not recommended to exclude a part of the population from benefiting. Therefore, franchising the collection service of SW, for instance, will most likely result in failure, especially in low-income areas in LMIC, since many people cannot afford the service. They will not contribute and will continue to throw away their waste on open sites or in drains, which will negatively affect everyone, even those who pay regularly. Moreover, the logistics of collecting waste from poorer areas are frequently challenging for the formal private sector and sometimes require unconventional approaches to be sustainable. Narrow, unpaved, and crowded streets place particular constraints on conventional waste collection systems that usually include large SW
119 Excluding Japan 120 Europe, Japan, Australia, New Zealand, and North America excluding Mexico. 121 “Beyond Boundaries” PPIAF/ADB Manila: 2002, p. 6.
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4. Solid Waste Management in LMIC: Key Features
containers and modern collection vehicles from the private sector. In low-income communities 122 , characterised by limited access to SW collection trucks, door-to-door collection service is not economically feasible, and only a communal container system is viable. Joint ventures between formal private firms and local ones are often required. At the end of her classic book on the urban environment, The Granite Garden, Anne Whiston Spirn (1984) reminds us that “in the present lies not only the nightmare of what the city will become if current trends continue, but also the dream of what the city could be.” Taking today’s urban problems to an apocalyptic conclusion, Spirn envisions an “infernal city” that has disintegrated, following uprisings by city dwellers denied water and other public services. Economic and environmental concerns have followed those fleeing cities into a countryside ravaged by suburban development. Numerous surveys have addressed the growing challenges of building and maintaining more sustainable cities, and have helped to reveal two key obstacles to progress in sustainable urban planning: first, a lack of financial means; and secondly, a lack of political strength (Carlson 1996; United Nations 1996).123 Simply put, sustainable cities including ISSWM are essential more than ever before. Nonetheless, rapid urbanisation in LMIC is threatening the environment and urban productivity.124 For this reason, adequate SWM is urgently required; otherwise economic development risks becoming counterproductive. ISSWM represents one of the outstanding challenges facing municipal authorities in LMIC (World Bank, 1996).
4.2
Waste Generation and Characteristics
The quantity of SW generated is a function of the population, the level of economic development (see Annex 3), the level of goods consumption, and not least the waste policy in place to endorse waste minimisation. Schübeler et al. (1996) argued that the waste generated by a population is primarily a function of consumption patterns and thus of socioeconomic characteristics and the interest in, and willingness to pay for, collection services.125 By comparison, cities in industrial countries generate up to 100 times more solid
122 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, p. 6. 123 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 347. 124 Cointreau et al. 2000; Bartone et al., 1994, Leitmann, J. 1995. 125 Schübeler, P./Wehrle, K./Christen, J., Conceptual Framework, St Gallen: SKAT, 1996, p. 35.
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4. Solid Waste Management in LMIC: Key Features
waste per person than their counterparts in LMIC (UNCHS, 1996).126 Income also affects the waste generation rate. 127 Upper and middle-income individuals tend to generate more waste than their low-income counterparts. Each person in low-income countries generates between 0.3 and 0.6 kg of waste every day, whereas in middle-income countries each person generates between 0.7 and 1.1 kg of waste every day (see Table 6) At present, 30% to 50% of the population of LMIC live in municipalities (see Chapter 4.1). LMIC generate approximately 158,000,000 tons/year of waste. By 2025, this figure will have increased to 480,000,000 tons/year of waste. LMIC generate 40% of the world’s solid waste and only one-third (1/3) of this amount is collected. Hence, less than 5% is properly disposed of.128 Consequently, there are over 200,000 open dumping areas in the world that will require environmental protection and rehabilitation in the future. Therefore, there is also a potential market for private firms with adequate sound know-how in such rehabilitation. Table 5 presents the waste generation in LMIC in comparison to high-income countries. Generation rates kg / capita/day Low-income Middle-income High-income country country country 0.5 to 0.75 0.55 to 1.1 0.75 to 2.2 0.35 to 0.65 0.25 to 0.45 0.45 to 0.75 0.35 to 0.65 0.65 to 1.5 0.55 to 1.0
Mixed urban waste – large city Mixed urban waste – small to medium city Residential waste only
Table 5: Global perspective on solid waste quantities (Source: Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 5) Regarding the characteristics of SW, Gouhier (1993) claimed: “….show me the type of waste, I will tell you what kind of society.”129 Accordingly, Solid Waste (SW) characteristics are directly correlated to the societies in question. SW is considered to be “a mirror of the society,” since SW generation, characteristics and management all reflect the economic,
126 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 344. 127 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 3. 128 Ahmad, I., Franchise in Pakistan: Master thesis, Trondheim: NTNU, 2003 (non published). 129 Jean Gouhier from Le Mans University (France) cited by Carde, Daniel [Waste Management in France] in Sander, A./Küppers, P. (eds.) [Environmentally Sound Waste Management?], Vol. 4, Frankfurt am Main: Lang, 1993, p. 171.
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4. Solid Waste Management in LMIC: Key Features
historical, cultural, and environmental aspects of a given country. The characteristics of solid waste are heterogeneous. The composition of the waste is influenced by various factors, such as geographical location, the standard of living, and the weather. On the basis of physical existence, SW includes food waste, paper, plastics, woods, animal dung, metal, glass, debris, and so forth. The nature of the waste can be organic, inorganic, putrescent, non-putrescent, combustible, and non-combustible. Classifying waste on the basis of material encompasses food waste, waste (degradable, non-degradable), market waste, ashes, street waste, dead animals, industrial waste, demolition waste, construction waste, hazardous, and special waste. Waste characteristics are also affected by income. 130 Currently, LMIC generate the highest quantity of waste on a mass basis (high-income countries on volumetric basis) and will be the largest generator on that very basis in 2025, too (see Annex 5). The densities calculated in low-, middle-, and high-income countries are 500 kg/m³, 300 kg/m³, and 150 kg/m³ respectively.131 Therefore, the lower the economic level of a country, the higher the waste density. LMIC generate highly organic (biodegradable) waste,132 consisting mostly of food residues with moisture content.133 Organic treatment is not yet well-established in LMIC in terms of generating revenue in comparison to the recycling market. Some LMIC even import recycling materials. According to Medina (2006), the United States134 is the world’s largest source of recyclable materials and the largest exporter. In fact, Mexico purchased recyclables worth 1 billion dollars from the US in 1998. The North American Free Trade Agreement (NAFTA) has eliminated most tariffs on recyclables, which has increased imports by Mexico from 700,000 tons in 1993 to 1.2 million tons in 1997. Mexican cartoneros 135 recover approximately 2,770 tons of cardboard every month. All the cardboard recovered in El Paso by Mexican cartoneros136 is transported across the border using pushcarts and pickup trucks to be recycled in Mexico.
130 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 3. 131 Ahmad, I., Franchise in Pakistan: Master thesis, Trondheim: NTNU, 2003 (non published), p. 2. 132 The presence of moisture content results in the variation of decomposition of solid wastes, which subsequently leads to leachate being produced and biogases generated. 133 Ahmad, I., Franchise in Pakistan: Master thesis, Trondheim: NTNU, 2003 (non published), p. 2. 134 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 3. 135 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, pp. 5-6. 136 The typical cartonero who recovers cardboard in Texas earns the equivalent of 10 times the minimum wage in Juarez. It is a stable activity that has allowed them to raise a family. The economic impact of scavenging in El Paso, Texas and Juarez, Mexico has been estimated at 2.5 million dollars a year.
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4. Solid Waste Management in LMIC: Key Features
According to various surveys, some 60-70% of the waste generated in LMIC is organic waste (biodegradable) compared to 40% in industrial countries that is appropriate for composting and between 5-10% which can be recycled. Based on the hierarchy principle of the ISSWM concept, those fractions should be treated or recycled prior to any disposal. The question which arises: what shall be the incentives of a private landfill manager to dispose of as less organic fraction of waste generated as possible? This is considered as the key issue of this dissertation.
4.3
Institutional and Managerial Framework
Any comprehensive SWM system requires the development of a responsible and competent regulatory institution and the setting up of a sound managerial system. In LMIC, waste management is very often a shared responsibility at national, regional and local level and, in turn, of various government ministries and agencies at a national level. Generally, the Ministry of the Environment or Environmental Agency is responsible for the provision of national level waste management services in any region. In most LMIC, institutional capacity to provide leadership on waste management issues remains weak. By and large, the SWM sector is inadequately structured and staffed by public authorities. The funding system is often outmoded and incapable of covering the total costs of the service. It is noteworthy that the legal frameworks addressing environmental issues in general, and SW in particular, often exist and are well-designed. However, the enforcement of these laws falls short for several reasons (among others, the regulatory framework, financial capacity, and technical means). For instance, India has some of the most detailed environmental legislation in the world; nonetheless, the country faces enormous environmental and solid waste-related concerns. Years ago, solid waste did not have priority on the political agenda in LMIC in comparison to other services like water supply or electricity. In response to this weakness, international organisations, such as the UNEP and the World Bank Group, have introduced sanitaryrelated topics such as “Ecosystem Management in Low Income Countries” to strengthen national initiatives. As the quantity of waste produced increases - due, among other factors, to urbanisation (see Chapter 4.1) - municipal budgets in LMIC for removing, transporting, and disposing waste are being stretched. In parts of some cities, this predicament results in local populations and municipalities facing major solid waste problems. Many municipalities in LMIC can obtain finance to cover capital costs from the potential
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4. Solid Waste Management in LMIC: Key Features
sources 137 , such as transfers from the central government, grants from multilateral and bilateral organisations, renewal funds from user fees, or other solid waste tariffs. Total government expenditure is roughly 20% of GNP in Low-Income countries and 30% of GNP in Middle-Income countries (see Table 6). This means that public spending in lowincome countries is relatively high for their level of development and provides very low returns. Hence, there is an urgent need for a more efficient public sector; accordingly, proponents of privatisation argue in favour of PSP. In most LMIC, SW service involves labour-intensive street sweeping and waste collection techniques. Because labour costs are relatively low, labour intensive techniques are appropriate. There are roughly 2,000 SW workers for every 1 million urban residents in LMIC. Finally, another key feature of SWM in LMIC 138 is that equipment costs often exceed 50% of the total costs, while labour costs are typically less than 25% of total costs. Therefore, any ISSWM has to take this factor into account in order to create jobs and save hard currency destined to buy expensive mechanical equipment abroad.
4.4
Financing and Costs Recovery
Any sound SW management service requires the allocation and management of sufficient financial means to do the job properly. As stated earlier, this is frequently insufficiently addressed in LMIC. Adequate allocation and proper management of these resources has to be made available. Sources of investment finance, in particular credits from international organisations and concessions arranged with the private sector, have to be assessed meticulously to ensure that their conditions are within the financial capacity of the local entity and the country to reimburse the credits. This could result in incentives from the side of public authorities to apply the hierarchy and polluter pays principles. Operational funding requirements and recurrent funding sources should be identified before investment funds are committed. At least a fraction of the costs to be recovered from a waste management system shall be paid directly by beneficiaries, within the economic context of their ability to pay. This proportion should be directly linked to the quantity of SW generated in order not to compromise the polluter pays or user pays principle. Various financing sources (very often a combination of different sources) are required in LMIC. The interest of public and private sector funding
137 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 31. 138 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 38.
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4. Solid Waste Management in LMIC: Key Features
sources at the national and international levels to finance SW services depends on the effectiveness with which initial funds are used. Negotiations can be held with the respective multilateral (World Bank Group, IMF, etc.) and bilateral (KfW, GTZ, AFD 139 , etc.) organisations through which national funds can be linked with the objectives of the national ISSWM policy to leverage international funds. Local and institutional structures for financing and recovering costs may need to be different for waste management than for other infrastructure services like drinking water given that SW is being considered a public good. Public authorities are generally unaware of the exact cost of their services. A recent largescale study has found that the true costs of a particular municipal service are 30% greater on average than the amounts reported in municipal budgets. 140 However, by knowing their financial costs, public authorities can control their own solid waste improvements, both financially and technically. To a large extent, this reflects the organisational arrangements through which the services are provided, the methods through which they are funded, and the accounting systems through which service costs are recorded. This situation, coupled with a lack of reliable information on the actual costs of new services, means that municipalities frequently find it particularly difficult to make available the financial resources necessary to sustain service quality and to establish proper contract specifications with the private sector. In most municipalities in low-income countries, SWM costs consume over 20% of the municipal budget (see Table 6). Despite the high level of expenditure on SWM management, collection service levels are low, that is, only 70% of urban residents receive service and most disposal is by unsafe open dumping (see Table 6). According to CointreauLevine (2000), SW services in LMIC do not satisfy the full demand existing in urban areas. In low-income areas, service sometimes only reaches 10% to 40% of the urban population. Cointreau-Levine states further that in LMIC, accounting systems show no clear delineation between recurrent and capital expenditures. There is no attempt to aggregate MSWM costs incurred by all the various organisations participating in the system. The result is that most LMIC estimate their costs for MSWM services to be less than half of what they actually are.
139 Agence Francaise de Développement (French Agency for Development). 140 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 25.
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4. Solid Waste Management in LMIC: Key Features
Waste generation (kg/person/day) Collection coverage Disposal costs (US$/person/year) SWM expenditure in total municipal budget (%) Recycling
Low-income countries 0.3 ~ 0.6 Less than 70% Less than 1 15.4 ~ 38 Informal (metal, glass, plastic, composting)
Middle-income countries 0.7 ~ 1.1 80 to 90% 1–3 6 ~ 23,2 Formal + Informal (metal, glass, plastic, composting)
Table 6: Key data of solid waste management in LMIC (Source: Based on JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 64.) Finally, in LMIC 141 , most municipal authorities experience a serious shortcoming in meeting their revenue needs from their tax base. One solution often cited is user charges, as one of the key principles of the ISSWM concept, even though most solid waste management services are public goods. User charges force waste generators to minimise the production of waste. Moreover, LMIC municipalities are hard pressed to obtain enough capital to finance their solid waste systems and are burdened with political constraints limiting their ability to generate revenues. 142 This problem results from years of inadequate efforts to ensure effective cost accounting for cost recovery in solid waste management, and from competing political agendas. Municipalities143 may attempt to set solid waste management tariffs by charging owners or residents according to the area of their properties. Nevertheless, this system works well in countries where the cadastral (land survey) information is up to date and where billing landowners is relatively easy or automated and is not obliged to contend with informal settlements. Municipal government performance in the collection of waste service fees is often insufficient to cover the full cost of service. People are reluctant to pay for municipal waste collection services which are perceived to be unsatisfactory; at the same time, poor payment performance leads to a further deterioration of service quality, and a vicious circle may
141 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, p. 7. 142 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, p. 15. 143 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 32.
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4. Solid Waste Management in LMIC: Key Features
arise. 144 Public solid waste departments often employ large numbers of relatively unproductive workers. The sustainability of waste management facilities requires the establishment of cost recovery frameworks. The entity responsible for the environment has to work with the ministry responsible for municipalities. Other public agencies have to ensure that145: • Legal and institutional structures for financing and recovering costs for waste management are in place at national and local levels; • Economic instruments are applied, as appropriate, for the purposes of minimising waste generation and for encouraging desired waste management behaviours and actions; • Accounting, budgetary, and management systems are in place at the local level to support the effective implementation and operation of municipal solid waste management services by the private sector; • Contracting-out, cost recovery systems, and performance monitoring; • Waste management technologies are appropriate to fit local specifications.
4.5
Informal Sector and Recycling
As discussed in the previous chapter regarding waste characteristics, the recyclable fraction of SW is considered to be an important market generating employment and revenue. This sector remains mainly informal in LMIC. Informal waste management is highly efficient and the fact that such a high proportion of recyclables is separated before the waste goes to the landfill offers unequalled economic and ecological opportunities. In the 1950s and 1960s,146 the informal sector was not taken into consideration by most LMIC governments. However, this is changing increasingly. There is no scientific definition of the term “informal sector”. Among various definitions, one of the most commonly used is provided by the ILO,147 which defines some characteristics of the informal sector: existence of low entry barriers, utilisation of domestic (local) resources, predominance of family businesses and child labour, domination of small-sized enterprises, use of fairly labour-
144 Schübeler, P./Wehrle, K./Christen, J., Conceptual Framework, St Gallen: SKAT, 1996, p. 40. 145 Source: METAP-RSWMP project 146 Spies, S./Wehenpohl, G., Informal sector in SWM, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 2. 147 International Labour Organization.
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4. Solid Waste Management in LMIC: Key Features
intensive and adapted technologies, training for the skills required takes place outside the formal school system, utilisation of unregulated and competitive markets, etc. The informal sector subtracts a high proportion of recycled materials from landfilling. Suchada (2003) indicates that the amount of waste to be disposed of at the landfill is reduced by one-third.148 In fact, it is estimated that 90% of recyclable materials are diverted from landfilling. In LMIC, waste pickers are responsible for the informal recycling of solid waste (so-called scavenging), operating both upstream (collected from waste generators) and downstream (landfill). Waste pickers or scavengers operating on landfill sites, without proper facilities and equipment, are typically exposed to a range of public health 149 and environmental hazards associated with open landfill sites. Waste pickers have a long track record in some countries. In Cairo, the Zabbaleen150 people (see Chapter 9.3) have been waste pickers since they began coming to Cairo in the mid-twentieth century.151 Medina (2006) 152 identified three categories of waste pickers, namely: 1. Scavenging for self-consumption;153 2. Recovery of materials for sale to consumers;154 3. Recovery of materials for sale to industry.155 SWM from high-income areas tends to contain a greater percentage of recycling material, such as metals, glass, paper, and plastics. Waste pickers reduce the need for collection, transport and disposal equipment, facilities, and personnel. Further, as mentioned above, waste pickers diminish the amount of waste requiring final disposal. Hence, they contribute
148 Suchada P., J. Tränkler, Cholada K., W. Schöll (2003) The role of formal and informal sectors in solid waste management of developing countries, paper for 9th International Waste Management and Landfill Symposium 2003, Sardinia. 149 During periods of heavy rain, stagnant water ponds are commonly found on such sites. These serve as breeding grounds for mosquitoes, which act as vectors of infective agents spreading malaria and filariasis. 150 Two categories could be noted among the Zabbaleen. The first group are those who held a license for waste collection. The other category is the actual Zabbaleen (called Zarraba) who collect, transport, sort, and dump waste. Zarraba receive their fees from the service provider mainly in the form of waste, though occasionally they are paid a part of the fees collected by the service providers (Nagwa El-Karawy, CWG, Kolkata, India, 2006). 151 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 344. 152 Medina, M., Recycling sector in northern Mexico, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 5. 153 Waste pickers salvage old lamps, desks, sofas, chairs, tables, radios, pots, pans and other items that can be cleaned, refurbished, repaired and reused. 154 Entrepreneurs salvage reusable items, such as furniture, appliances, kitchen utensils and construction materials, which they then sell to their mostly low-income clientele. 155 The most important and steady source of income for scavengers is the recovery and sale of recyclable materials. Demand for a particular material depends on the kind of industries that are located in each region.
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to extending the life span of sanitary landfills. Hence, waste pickers in LMIC provide clear economic, social, and environmental benefits. The issue is how to integrate them in the formal sector, for instance in cooperation with the private sector, and how to improve their working conditions. As stated above, millions of people work in collecting, separating, and processing recycled materials. Thus, they contribute to using and reusing resources, returning material as a secondary raw material into industrial production cycles, increasing the life span of landfills, and generating income. In Delhi 156 , for instance, it is estimated that between 80,000 and 100,000 people work in the informal sector as waste recyclers. 157 Another example is the municipality of Buenos Aires, which has over 9,000 waste pickers.158 However, waste pickers pose a major challenge for public authorities. The presence of many people making a living from waste, often in unhealthy sanitary conditions, is an embarrassment to municipal authorities. One aim of improving waste management is to increase recycling so as to apply the hierarchy principle. Therefore, it makes sense to create incentives to promote the existing recycling system. A major challenge of waste management in LMIC is how best to work with the existing informal recycling sector to improve livelihoods, working conditions, and recycling efficiency.159 Municipalities in LMIC often fail to integrate the informal sector into their SW policy. Integrating them would, however, mean a sustainable and significant improvement of solid waste management – thereby curbing the need for trucks and personnel, ensuring a longer life for sanitary landfills, creating jobs, reducing poverty, preventing contamination, improving natural resources conservation, providing a better supply of cheap secondary raw material, and hence contributing to a better environment.160
156 Rouse, Jonathan, Embracing not displacing, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 2. 157 Assuming each earns just Rs50 per day, their daily turnover as a workforce is an astonishing Rs 50 lakh (more than US$ 100,000). 158 Jahan-E-Kabadi „Privatising Waste Services: Clearing Waste or People?“ July 2006. 159 UNEP, Waste Management Planning, 2004, p. 4. 160 Spies, S./Wehenpohl, G., Informal sector in SWM, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 8.
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4.6
Concluding Remarks
This chapter has covered a wide range of SW issues, such as waste generation, waste characteristics, the informal sector, and so forth. In terms of quantity, the municipalities in LMIC generate disproportionately more SW than the rural regions in LMIC. This chapter has shown that rapid urbanisation in LMIC is considered to present a serious environmental and economic challenge, especially for LMIC. Public authorities should therefore adopt the principles of ISSWM for environmental and economic reasons. However, PSP is being challenged by those principles especially due to low-income areas. These areas are usually characterised not only by low-income (people are not able to bear the full costs of the service), but also by narrow roads and a high density of waste. It has been highlighted that the abiding unsanitary conditions pose a health threat not only to the residents of those areas directly affected, but also to the wider population. It follows that some principles, such as the polluter pays principle, will prove enormously difficult to implement. As SW characteristics are directly correlated with the societies in question, this chapter has shown that solid waste generated in LMIC differs to that in industrialised countries. Moreover, public authorities in LMIC do not possess the exact figures of the cost of SW services. And finally, the recycling market in LMIC is considered an important market as it generates jobs and revenue. However, due to its informality, waste pickers drive this market, thereby challenging public authorities. Finally, a century ago, those who reflected on life-threatening urban pollution feared that cities might eventually self-destruct. Today, it is not only inhumane living conditions, but also the unsustainable use of resources that pose a threat. Efforts to overcome the political and financial barriers to sustainable city planning have one thing in common: the dynamism of committed people trading ideas and working together. It is this concentration of human energy that allowed cities to give birth to human civilisation, and that may ultimately save it.161
161 O 'Meara, M., New Vision for Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 351.
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5.
Theoretical Principles of ISSWM
This chapter introduces the key principles informing the notion of sustainability and integrated sustainable SWM underpinning this dissertation: the hierarchy principle, the polluter pays principle, effectiveness and efficiency. A brief definition of these principles in the context of SWM in LMIC will provide a useful focus to further clarify both the theoretical and the empirical discussion undertaken so far. Generally speaking, sustainability aims at providing the best outcomes for the human and natural environments both now and in the future. It is a concept relating to the continuity of economic, social, institutional and environmental aspects of human society. The word sustainability was first used in 1712 by the German forester and scientist Hans Carl von Carlowitz in his book Sylvicultura Oeconomica. 162 “Sustainability” and “sustainable development” are often used interchangeably in the literature. In 1987, the Brundtland Report defined sustainable development as development that “meets the needs of the present generation without compromising the ability of future generations to meet their own needs.” One of the important milestones of the development of the concept of sustainability is the 1992 Rio Conference, informally known as the “Earth Summit” (see Chapter 3.1). Later, in 2002, the World Summit on Sustainable Development expanded this definition by identifying the “three overarching objectives of sustainable development” to be (1) eradicating poverty, (2) protecting natural resources, and (3) changing unsustainable production and consumption patterns. As far as SWM is concerned, the Earth Summit produced the so-called Agenda 21.163 It stated that environmentally sound waste management should prioritise the recovery of waste and waste treatment and finally waste disposal. This is referred thereafter to the hierarchy principle (see Chapter 5.1). Furthermore, it stated that a preventive waste management approach focused on lifestyle changes, and ones in production and consumption patterns, offered the best chance for reversing current trends. However, Agenda 21 is not legally binding. Its implementation has been left more to national rather than international action. Few countries have been consistent in their Agenda 21-related policies so far.
162 Hans Carl von Carlowitz (1645 - 1714 ) was a german tax accountant and mining administrator. His book Sylvicultura oeconomica was the first comprehensive treatise about forestry. He is considered to be the father of sustainable yield forestry. The idea of sustainability emerges in time of crisis and scarcity. He was the first one to formulate the concept of sustainability. Source: “Grober, Ulrich -DER ERFINDER DER NACHHALTIGKEITDIE ZEIT Nr. 48/ 25.11.1999, page 98. 163 UNEP, Waste Management Planning, 2004, p. 5.
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Scientifically, there is no single definition of Sustainable Solid Waste Management (SSWM). SSWM means that the model is appropriate to local conditions and feasible from a technical, environmental, social, economic, financial, institutional, and political perspective. It can maintain itself over time without exhausting the resources upon which it depends meaning that the generators of waste (polluters) bear the whole costs of the service. Chapter 5.2 will discuss this issue as polluter pays principle. SSWM can be realised by using the technical, organisational, and financial resources available in a particular country. Some components are indispensable to implementing a system designed to achieve overall environmental objectives, such as national waste policy, waste planning, regulatory frameworks and law enforcement. The ISSWM164 concept has been developed by WASTE (Netherlands organisation), and has first been presented in 1995 during the UMP Workshop on Municipal Solid Waste Management in Ittingen, Switzerland165. It is an approach to reach better, more sustainable solutions to solid waste problems, especially in cities in LMIC. The ISSWM principles are based on studies carried out by different authors (Lardinois & van de Klundert, 1995, Hemelaar & Maksum, 1996, Moreno et al., 1999, Coffey, 1996, Schuebeler et al., 1996, van Beukering et al., 1999). ISSWM differs from conventional approaches towards solid waste management by seeking stakeholder participation, by including waste prevention and resource recovery explicitly, by encouraging the analysis of interactions with other urban systems and by promoting an integration of different habitat scales (city, neighbourhood, household) 166 . In this context “Integrated” means that the system uses a range of interrelated collection and treatment options, at different habitat scales (household, neighbourhood, city). In addition, it involves all stakeholders, be they governmental or nongovernmental, formal or informal, profit- or non-profit oriented. Finally, “Integrated” takes into account interactions between the waste management system and other urban systems. In the last fifteen years, the ISSWM concept has also evolved and is slowly becoming accepted by decision-makers. Although this process is successful in most industrial countries, it is rather slow in LMIC. There is a tendency in LMIC that only financial and technical means are required for implementing environmentally sound projects and therefore nothing can be contemplated without external funding. This mentality on the part
164 ISWM (Integrated Waste Management) is used by WASTE. However, ISWM and ISSWM are used interchangeably in this dissertation. 165 Klunder, A. /Anschütz, J., Sustainability in Waste Management, Working paper for UWEP/CWG, 2000, p. 2. 166 Klunder, A. /Anschütz, J., Sustainability in Waste Management, Working paper for UWEP/CWG, 2000, p. 2.
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of municipal officials represents the beginning of an alarming tendency towards donordependency.167 Klunder, Anschütz, and Scheinberg A. (2001) of the Netherlands organisation WASTE168 (see Annex 2) have carried out one of the most important studies on the concept of Integrated Sustainable Solid Waste Management (ISSWM) to date. 169 Accordingly, the ISSWM concept provides a systematic analysis of all issues relating to sound waste management. These include the technical, socio-economic, financial, 170 and managerial capacities of city councils as well as environmental and political aspects and not least the socio-cultural171 context. The ISSWM concept takes as a point of departure four basic principles172: 1. Equity: all citizens are entitled to an appropriate waste management system for environmental health reasons. 2. Effectiveness: the waste management model applied will lead to the safe removal of all waste. 3. Efficiency: the management of all waste is done by maximising the benefits, minimising the costs and optimising the use of resources, taking into account equity, effectiveness and sustainability. 4. Sustainability: the waste management system is appropriate to the local conditions and feasible from a technical, environmental, social, economic, financial, institutional and political perspective. It can maintain itself over time without exhausting the resources upon which it depends. Assessment of the degree of ‘integrated sustainability’ needs an analysis that uses a range of criteria, both quantitative and qualitative indicators. Some examples of indicators of ‘integrated sustainability’ are given below (see also PAHO, 1995)173: • Technical: amount of waste collected by area of the city and per source
167 Scheinberg, A, Central & Eastern Europe, WARMER Bulletin 68, 1999, p. 3.
168
www.waste.nl.
169 Klunder, Arnold van de/Anschütz, Justine/Scheinberg, Anne (eds.) [Concept of ISWM]: Integrated Sustainable Waste Management: The Concept: Tools for Decisions-makers: Experiences from the Urban Waste Expertise Programme (1995-2001), Gouda: WASTE, 2001. 170 In many cities, however, officials responsible for MSWM do not have accurate information concerning the real costs of operations. Where accounting expertise is lacking, it may be brought in from the private sector. 171 The principle social objectives are: to orient municipal waste management towards the real service needs and demands of the population, to encourage patterns of waste handling and disposal which contribute to the effectiveness and efficiency of municipal waste services. 172 Klunder, A./Anschütz, J./Scheinberg, A. (eds.), Concept of ISWM, Gouda: WASTE, 2001, p. 11. 173 Klunder, A./Anschütz, J., Design of Sustainable System, CEDARE/IETC Alexandria/Egypt, 1999, p. 10.
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Environmental: amount and % of waste recycled extent of pollution of air, soil and water • Financial: degree of cost recovery, overall cost of waste management services provided, Socio-economic: service coverage (% of citizens receiving minimum required waste collection service), user satisfaction with the service by area of the city • Institutional: degree of formalisation of informal sector The key principles of ISSWM namely: hierarchy principle, polluter pays principle, effectiveness and efficiency will be detailed in the following chapters.
•
5.1
Hierarchy Principle
According to Lardinois and Furedy174 (1999), the waste management hierarchy includes the following steps.175 1. Avoid the generation of SW 2. Reduce the negative impacts of the waste that is generated 3. Reuse the materials recovered from the waste stream 4. Recycle, compost, or recover materials to new products 5. Recover energy by incineration, anaerobic digestion or similar processes 6. Dispose of waste in sanitary landfills The hierarchy principle does not constitute compulsory legislation, but rather a guideline. It is considered one of the most important principles of ISSWM. Klunder and Anschütz (2001) stated that the hierarchy principle considers products from the ‘cradle’ to the ‘grave’.176 Waste avoidance, waste minimisation177, waste treatment, reuse and recycling occupy an important place in the waste management hierarchy. In sum, the hierarchy principle is about
174 cited in Klunder and Anschütz, 2001. 175 Klunder, A. /Anschütz, J., Concept of ISWM, Gouda: WASTE, 2001, p. 15. 176 Klunder, A. /Anschütz, J., Concept of ISWM, Gouda: WASTE, 2001, p. 15. 177 According to Riemer and Kristoffersen a definition of waste minimisation encompasses three elements in the following order or priority (Riemer & Kristoffersen 1999 cited in Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, p. 27): (1) preventing and/or reducing the generation of waste at source; (2) improving the quality of the waste generated, such as reducing the hazard; and (3) encouraging re-use, recycling and recovery.
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sound resource management.178 Based on the hierarchy principle, all waste recovery and treatment options have priority and controlled disposal and landfilling are at the bottom of the pyramid (see Klunder and Anschütz, 2001). The hierarchy principle promotes the socalled “4Rs”: reduce, reuse, recycle, and recover waste. Waste avoidance and waste minimisation actions address the importers, distributors, and manufacturers of products that become waste. They are responsible for the costs of managing these products when they become waste; production and sales data are available with which to calculate the extent of the waste management accountabilities of these entities. The last option of the pyramid regarding the hierarchy principle is sanitary landfilling. In effect, all waste management systems contain some residual materials for which environmentally sound waste disposal facilities are required. Therefore, the so-called “Zero Waste” discussion, which is currently in vogue, will remain a point of purely academic discussion for many years to come, especially in LMIC. Most local governments179 subscribed to “take or pay” contracts where quantities of waste to be supplied to a landfill managed by the private sector are fixed for very long periods of time (e.g. 20 years). This is a definite disincentive for recycling and waste avoidance. Another issue is contract duration. The duration of most contracts is oriented to the investment cycle of general disposal. This represents a major failure since the life cycle of waste can be left open to more flexible options instead, such as material recycling, waste avoidance, and resource efficiency. Such possibilities should also be analysed when PSP is introduced. According to Bleischwitz, R., Proske, A. (2005), economic incentives should be identified before the involvement of the private sector in SW industry.180 This does not mean a backward-looking return to the public provision of SWM. Instead, they may well lead to a waste management future where the positive effects of PSP and competition in the areas of recycling, reuse and waste avoidance are reconciled with public needs in the areas of disposal. The hierarchy should be applied in a flexible manner and should take account of the fact that, for many LMIC, the first priorities are to improve the collection service for a large part
178 “Integrated Resources Management is the recovery of economic value from any resource produced naturally or by society while considering ecological, economic, technological and social implications of recovery, recycling and re-integration technologies”. 179 Bleischwitz, R., Proske, A. [No time to waste]: in Weizsäcker, E./Yong, O./Finger (eds.), M., Limits to Privatization, London: Earthscan, 2005, p. 110. 180 Bleischwitz, R., Proske, A. [No time to waste]: in Weizsäcker, E./Yong, O./Finger (eds.), M., Limits to Privatization, London: Earthscan, 2005, p. 111.
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of the population, and to enhance the quality of landfills. 181 No matter how much prevention, reuse and recycling a society manages to realise, there will always be a role for landfills in an integrated waste management system. This means that landfills are a valuable and essential element of an integrated waste management system and should be recognised as such. 182 As the saying goes, “An illiterate person does not worry about the author’s rights.” Accordingly, since SWM in LMIC is a kind of stepchild of ISSWM, decisionmakers should prioritise waste separation, higher rates of waste collection in LMIC municipalities, and not least adequate disposal.183
5.2
Polluter Pays Principle
The polluter pays principle was first adopted in 1916 by Richmond in California. However, years later many municipalities have still not enforced this principle.184 The polluter pays principle has enjoyed quite a long history of acceptance in the USA and in the EU.185 The 1972 Stockholm Conference, however, did not mention this principle. Later on, Agenda 21 did not relate to this principle explicitly, but only echoed the allocation of responsibility. In Johannesburg in 2002, the polluter pays principle was reaffirmed as a framework within which sustainable development could be attained. The polluter pays principle states that those responsible for pollution should pay for the costs of this pollution whereas the “user pays” principle holds that those benefiting from a waste disposal service should bear the cost of this service. These two notions are used interchangeably here. The polluter pays principle is an economic policy which allocates the costs of pollution and environmental damage. It encompasses the costs to human health, environmental, natural resources, and social and cultural harm. In a waste management context, the amount paid for a waste disposal service should be proportional to the generation of waste. Nevertheless, the costs of the service depend not only on the quantity of waste generated, but also on the distance to the landfill, road accessibility, etc. Whereas
181 UNEP, Waste Management Planning, 2004, p. 2. 182 Scharff, Heijo, Sustainable landfills, in Waste management world Review, London: PennWell Corporation, issue May-June 2006, p. 78. 183 Dorvil L., PSP in Morocco, Solid Waste, health and the Millennium Development Goals – CWG SWM in LMIC and WASH Workshop 2006, Kolkata, India, 2006, p. 9. 184 Silguy, C., Hommes et Ordures, Le Cherche Midi éditeur, 1996, p. 40. 185 Examples of Use of Polluter pays Principle: European Union (Convention on the protection of the environment through criminal law (Nov., 1998)); Germany (“Verpackungsverordnung” The Ordinance on the Avoidance of Packaging Waste (1991)); USA Superfund (EPA).
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waste collection traditionally falls under local jurisdiction, this is not the same for waste disposal. Another issue concerns the financial capacity of people living in low-income areas to pay for services; overall, such capacity is normally weak. Therefore, the strict application of this principle to householders is troublesome. The polluter pays principle implicates national and international law in liability for environmental damage. The fact that environmental damage is not confined to municipal boundaries or national borders means that the polluter pays principle should be part of international environmental legislation. Mechanisms like the so-called Clean Development Mechanism (CDM) have been recently set up to address this principle at an international level, since environmental pollution, including SW, does not necessarily occur in the country in which it is detected. Pongrácz (2002) discovered that the polluter pays principle 186 raises awareness and encourages householders to segregate their waste when a separate recyclables collection is available. In the same context, some economists187 rightly argue that when beneficiaries of the SW service must pay a fee, which increases as the quantity of SW generated increases, they will generate less waste than other beneficiaries. However, Pongrácz (2002) recognised that this principle can result in abuse. People put non-recyclables into the free collection waste container to avoid paying for their removal.188 However, the accountability of residents for the waste they generate continues to be reflected in the allocation of taxes for the management of their waste. Bird (2001) rightly argued that taxes are not directly correlated with the services that taxpayers receive. In contrast, financing local SW services through user fees not only provides financial means but also provides information on the type of services, the quantity and quality, and beneficiaries.189 Simply put, user charges promote economic efficiency. A well-designed tariff system is essential to achieve this objective. Bird (2001) stated that the economically efficient price for any service is the price that would be charged in a perfectly competitive market. 190 Sound SWM provides not only “private” benefits to direct beneficiaries, but also “public” benefit in the form of an externality.191 The obvious way to
186 Pongrácz, E., Re-Defining the Concepts, Oulu, 2002, p. 96. 187 Savas, E. S./Baumol, D./ Wells, W. A., Financing Solid Waste, in Savas, E. S., Efficiency of Solid Waste, Lexington: The Trustees of Columbia University, 1977, p. 85. 188 When the City of Munich increased waste disposal charges by 42% in 1993, the illegal dumping of waste increased alarmingly (Pongrácz, E., 2002). 189 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 171. 190 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 172. 191 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 177.
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take external benefits into account in setting up an adequate tariff system for beneficiaries is to estimate the size of the marginal benefit provided to an additional user by the service in question, and then to set the price equal to marginal cost less this external benefit. The resulting financial deficit could then be funded from general revenues. It is always challenging to measure external social benefits in any convincing way. 192 In sum, the polluter pays principle or user pays principle cannot be strictly met in LMIC for many reasons, including SW being considered public goods. Furthermore, as mentioned earlier, SW is not necessarily generated where it is found. Hence, international organisations are increasingly addressing this issue in establishing new mechanisms. As far as PSP is concerned, some arrangement models are limited to franchising or licensing SW collection, for instance, where households have to pay the private contractor directly.
5.3
Effectiveness
Effectiveness 193 means producing or being capable of producing a result. Effectiveness stresses the power to produce an effect. Effectiveness in our context means providing effective SWM services for an entire population. This is measured by determining the extent to which the required quality of services is being provided. In this respect, the notion of equity is closely related to the notion of effectiveness. However, rapidly growing, informal settlements of low-income residential areas present a particular challenge to this principle in LMIC. These districts are also often characterised by physical constraints that present waste management challenges. Among other relevant factors are multi-storey buildings often constructed without in-depth reflection on waste collection. Streets in low-income areas are often very narrow, and are not readily accessible to the conventional waste collection vehicles mentioned in the contract specifications agreed with the private sector. Residents are often not sufficiently informed about preparations for waste collection, such as where they should place the waste for collection and at what time. Moreover, population densities in low-income areas that have inadequate waste management services are often very high. Although the quantity of waste generated per capita in low-income areas is lower than in high-income areas, the population density prevalent in such areas means that the amount of waste generated per unit area of ground can be correspondingly high. In principle, solid waste services have to be rendered in a satisfactory manner irrespective of the socio192 Bird, R. M., User Charges, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 178. 193 Encyclopædia Britannica 1994-1999.
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economic situation of a given district (low-income areas or high-income areas). This is not only a moral issue, such as that of public goods, but bad SW waste management affects not only those who cannot afford the services in question. All citizens are entitled to an appropriate waste management system for environmental health reasons. Unlike other public services, such as water supply or electricity, which can be readily cut off for nonpayment of the services, solid waste collection cannot be discontinued without jeopardizing general public welfare. While the fees charged to beneficiaries of the service for waste collection services may cover primary collection costs, it seldom covers full transfer, treatment and disposal costs, especially in low-income districts. To render effective waste service access, some cross-subsidisation and/or financing out of general revenues will be required. As far as SW service is concerned, some indicators for effectiveness are calculated as follows: • Population provided with collection services divided by total population; • Households provided with collection services divided by total households; • Length of paved streets regularly cleaned divided by total length of paved streets.
5.4
Efficiency
Efficiency 194 is the quality or degree of being efficient; that is, effective operation as measured by a comparison of production with cost. The ratio of the useful energy delivered by a dynamic system to the energy supplied to it. Efficiency in terms of solid waste means providing the specified quantity and quality of service at minimum cost, thereby maximising the benefits and optimising the use of resources. The costs for the solid waste services in LMIC prior to PSP experience are commonly underestimated. Some of the reasons given for this include the organisational arrangements involved in the provision of services, the methods through which they are paid, and the accounting systems employed to record the costs of the service. On average, the costs after the introduction of PSP increased compared to municipal management. Very often, some relevant costs are not taken into consideration by comparing SW costs prior to and after PSP. These costs include transaction costs. Nonetheless, service accountability under
194 Encyclopædia Britannica 1994-1999.
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municipal management is often lacking. The monopoly of the municipal administration reduces the much-needed increases in efficiency. In theory, and in order to improve efficiency, public authorities are turning to the private sector. Strong evidence showing that this does actually improve efficiency is lacking, however. The provision of waste collection and waste disposal services are among those most often outsourced in this way. One of the largest problems faced by municipal waste management in LMIC is the difficulty in keeping expensive capital equipment operational. The problems include a lack of maintenance technicians, a shortage of spare parts, and insufficiently sound management. Finally, regarding SW services, efficiency can be calculated in terms of the following ratios: • Sum of all direct annual costs, indirect costs, social benefits, contract payments, financial costs, depreciation and others, for • Total cost divided by population served • Total cost divided by households served • Total cost divided by number of commercial outlets served.
5.5
Concluding Remarks
This section has covered the main key principles of the notion of sustainability in the context of solid waste management. Sustainability has been seen in this context as a concept relating to the continuity of the economic, social, institutional, and environmental aspects of human society. Solid waste has been viewed holistically (that is, in integral terms), encompassing the financial, technical, socio-economic, and managerial features of the municipalities in question. It has been established that the application of some principles like the polluter pays principle in LMIC, especially in low-income areas, challenges public and private sector for various reasons. Some of these include the beneficiaries’ low economic capacity to afford the full costs of the SWM services, physical constraints, etc. However, even such stakeholders must be provided with some incentive to minimise their waste. SW is considered to be a public goods (see Chapter 7.1). As such, solid waste services cannot exclude some beneficiaries. Concepts have to be developed in the municipality through which waste management services can be rendered to people living in low-income areas to ensure the application of those principles. The notion of effectiveness has been considered, since solid waste services have to be rendered both in low-income areas and high-income areas. This notion not only constitutes a moral imperative:
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environmental pollution negatively affects all citizens of a municipality. As far as the notion of efficiency is concerned, it has been noted that transaction costs are not usually considered when comparing SW costs prior to and after PSP to demonstrate its efficiency. There is certainly a long way to go to achieve ISSWM, in particular in LMIC. Over time, the implementation of these principles by public authorities and private sector will have the effect of encouraging the generation of reduced amounts of waste including their treatment and safe disposal. The question is how to make the private sector meet those principles in pursuing their “for profit” business?
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6. Privatisation and Private Sector Participation
6.
Privatisation and Private Sector Participation
Before taking up the theoretical discussion of privatisation and PSP, the following chapters will deal with the notions of globalisation, liberalisation, regulation, and deregulation. These notions will be outlined briefly. The main reason is that these notions are often used improperly in both academic and public debate. Consequently, their interpretations are often misleading. A careful analysis of these notions will facilitate our understanding of the actual discussion of privatisation in general and of Private Sector Participation (PSP) in particular. Thereafter, Chapter 6.6 will consider privatisation. It will analyse and discuss the most relevant PSP models. Their limitations of the models will be highlighted. Chapter 6.7 is concluded with some pertinent remarks.
6.1
Globalisation and Liberalisation
In economic literature, globalisation refers to a situation of the increasing closeness of nations in economic terms through trade, capital flow, and a new international division of labour. For Alan Gilbert (1990), globalisation is the third most important reorganisation of the international division of labour, the first having been the use of colonies as suppliers of raw materials, and the second the industrialisation of LMIC through entrepreneurs. Accompanied by rapid technological innovation and falling raw materials prices, globalisation has brought about the tertiarisation195 of old metropolitan areas. At present, the notion of privatisation cannot be considered without taking into account the forces of globalisation. 196 Globalisation is the tendency of businesses or technologies to spread throughout the world, or the process of making this happen. The notion was first used as early as 1944 but economists only began applying it more consistently in the early 1980s. Theodore Levitt (1983) pioneered this notion, and is usually credited with its coining in the article he wrote in 1983 for the Harvard Business Review entitled “Globalization of Markets”. On the one hand, as an engine of commerce, the notion includes some positive economic and social aspects. Hypothetically, it results in an increased standard of living and economic prosperity in LMIC as well as bringing further wealth to industrial countries. On
195 Development of the service sector. 196 Yong, O., The Global Context, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 190.
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the other hand, globalisation is considered to be an engine of “corporate capitalism”. In this meaning, it encompasses negative economic, social, and ecological aspects. It is often considered to be a force trampling on the human rights of societies in LMIC, claiming to bring prosperity, yet often simply amounting to plundering and profiteering. From an economic point of view, a typical – and entirely positive – definition is provided by the International Monetary Fund (IMF), which stresses the growing economic interdependence of countries worldwide through an increasing volume and variety of crossborder transactions in goods and services, free international capital flows, and a more rapid and widespread diffusion of technology. According to Weizsäcker’s more realistic point of view (2005), globalisation has various strands, including the growth of international trade and financial flows, a weakening of the democratic nation state, the movement of human populations across borders, and the onset of global environmental changes. As far as PSP in SWM in LMIC is concerned, international private firms are playing an active role due to their financial and technical capacity. In Morocco, for instance, international firms from France, Spain, and USA are operating in the solid waste market. Global players like “Vivendi” and “Lyonnaise des Eaux” are also operating in this market, mostly in joint ventures with Moroccan firms (see Chapter 10). This is considered to be an effect of globalisation. It is not about stopping this process, but it is a question of finding the best approach to meet sustainable principles, especially in the SW sector. Other notions in the same context include liberalisation, deregulation, and so forth. There is a distinction between privatisation, deregulation 197 , and liberalisation, which all refer to actions undertaken by governments to stimulate competition among private firms. The following paragraphs will briefly outline these notions. Liberalisation means the introduction of competition into the provision of various public services customarily provided by state-owned companies, such as water, telecommunications, and SWM. Liberalisation is a form of deregulation because it requires changing the competition rules concerning infrastructural provision so that competition can occur. Liberalisation often requires unbundling198, so that the parts suitable to be exposed to competition are separated from the non-competitive (monopoly or oligopoly) elements of any given infrastructure. The most interesting liberalisation opportunities at present seem to concern a systematic recourse to contracting-out from the public to the private sector. Although economic
197 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 5. 198 That means splitting different stages of service delivery and allocating to different organisations.
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liberalisation is often associated with privatisation, the two terms have to be considered separately. For example, the European Union has liberalised some public markets, such as the gas and electricity markets, instituting a system of competition. However, state-owned companies like “Electricité de France” (EDF) remain under government ownership. In the context of SW, contrary to municipal solid waste, commercial and industrial waste is characterised by free competition. This is simply achieved by contracting-out the service. Why could the same regime not be adopted for household waste, which this dissertation is addressing? The following reasons might be cited. 1) Municipal solid waste services fall into the category of public goods (see Chapter 7.1), meaning that competition in some segments of this market does not always make sense. 2) Private operators of sanitary landfills are not willing to engage in the collection of separated SW since they have invested in disposal capacity. 199 In terms of the limitations of PSP, two points should be highlighted: firstly, different private firms cannot compete in the same area or district in solid waste collection (collision effect); and secondly, if the same private firm is used in SW collection and in landfill management, and if it is paid according to the quantity of waste collected and disposed, it will have no economic interest in supporting a waste minimisation programme or waste recycling. This is considered to limit ISSWM principles. 3) The questions that have to be addressed are: In which element is competition useful? In which element will liberalisation jeopardise the ISSWM concept? This can be accomplished by the unbundling of activities in which economies of scale are not important. Due to the characteristics of solid waste services, these activities can be separated by markets - either geographically or by system elements, such as street sweeping. The possibility of unbundling can create attractive opportunities for PSP in a competitive environment. 200 Nevertheless, unbundling is economic nonsense in some SWM sectors, such as landfill management. 4) A further question that has to be addressed is the capacity of people in LMIC to pay for SW services, especially those living in low-income areas. If the SW market is fully liberalised, issues such as cost recovery, or the effectiveness of the ISSWM, can challenge the private sector. Golakai (2005) rightly remarked that “evidence to date has shown that liberalisation can directly threaten the protection and
199 Massaruto, A., Waste management economic interest, Paris: LED, 2005, p. 13. 200 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 216.
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5)
promotion of consumer interest, particularly for poor consumers who cannot afford services provided on a purely commercial basis.” 201 The contracting-out of SW collection through franchising (that is, where private firms are directly paid by the beneficiaries) will fail in LMIC. Finally, another possibility for PSP is that while large private firms could be responsible for the integrated cycle, they could also subcontract some of the services out to small private firms, NGO or CBO. This model allows for more intense competition and leaves space for SME, especially in labour-intensive activities such as solid waste collection and in knowledge-based innovative segments (recycling opportunities). Large private firms could then concentrate on more complex business processes, such as treatment facilities.202
6.2
Deregulation and Regulation
In economic theory, deregulation is the process by which governments remove restrictions on businesses in order to raise the level of competitiveness, create more efficiency, and lower prices for the beneficiaries. Privatisation203 is not the same as deregulation, which means the removal or attenuation of restrictions, including the requirements and prohibitions imposed by a public authority on the actions of public or private actors or, in essence, any reductions of state control over the activities of societal actors. However, privatisation often comes with deregulation, especially the removal of exclusive rights and the opening-up of a service to competition. A liberalised market can be regulated to protect the rights of the beneficiaries, especially to prevent de facto oligopolies. However, the terms are often used interchangeably. Deregulation gained momentum in the 1970s, influenced not only by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others, but more importantly by the work of Alfred E. Kahn. The problems experienced with unregulated or weakly regulated private ownership have led many to conclude that private ownership can bring benefits if there is a strong framework of regulation to ensure that companies look after the needs of all their customers of goods and
201 Golakai, N., Experiences of African Consumers, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 212. 202 Massaruto, A., Waste management economic interest, Paris: LED, 2005, p. 17. 203 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 4.
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beneficiaries of services and support broader public policy goals, such as environmental protection and equal opportunities.204 Privatisation cannot solve public infrastructure issues in the absence of a strong regulation of the rules of the game that are widely understood and generally regarded as legitimate (Yong, 2000). Regulatory institutions that are independent and have access to necessary information about costs, prices and service quality, are important key players of successful infrastructure reform. Creating such institutions is a “conditio sine qua non” for the success of PSP in the solid waste market in LMIC. A privatisation process accompanied by regulation and corporate restructuring leads to higher growth.205 Accordingly, about 200 regulatory agencies have been created in LMIC over the last decade. Finally, if private operators decide to terminate the contract, there is generally little the regulator can do about it.206 To be precise, deregulating the SW market can only be successful if comprehensive steps are taken towards unbundling sectors, thereby enabling fair competition and at the same time building and developing capacity within municipal administrations in LMIC.
6.3
Privatisation: Academic and Empirical Discussion
The intellectual foundation for privatisation was laid and pioneered by Milton Friedman.207 However, the veritable conception of privatisation was first proposed in 1969 by Peter Ferdinand Drucker.208 Other influential scholars include Gordon Tullock, Anthony Downs, and William Niskamen who coined the term “re-privatise”, the precursor of privatisation, also in 1969. 209 Considerable academic attention has been devoted to the theoretical
204 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 9. 205 Stiglitz, J. E., Democratizing the IMF, Columbia University, 2005, p. 122. 206 Wolff, P., Private Funding of Infrastructure, in Weizsäcker, E. /Yong, O../Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 322. 207 Milton Friedman (1912 – 2006), American economist criticising government intervention in consumer product safety, one of the leading proponents of monetarism. Friedman 's best-known contributions are in the realm of monetary economics, where he is seen as the founder of monetarism and as one of the successors of the “Chicago school” tradition of economics. He was awarded the Nobel Prize for Economics in 1976 (Encyclopædia Britannica, 2007). 208 Peter Ferdinand Drucker (1909 – 2005), Austrian-born American management consultant, educator, and author. His early works discuss the nature of industrial society. A second line of books explains general ideas about modern business management. A third body of work offers speculation on the future impact of such developments as technological change. Finally, there are writings that address questions of practical corporate management (Encyclopædia Britannica 2007). 209 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. xiv.
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differences in the motivation and performance of public and private organisations. William Niskamen Jr., Graham Allison, et al. are among the many who have considered the matter. 210 Further research was conducted in the 1970s by R. W. Poole, R. M. Spann, Rothbard, and Fisk et al., who all strengthened the case for privatisation. 211 Since the beginning of the 1970s, much academic research has been carried out, devoted to privatisation in general, Public-Private Partnerships 212 (the notion of Public-Private Partnerships is used interchangeably with the notion of PSP; see Chapter 6) and their impact on the performance of public enterprises. Important researchers include E. Savas, 1970; R. W. Poole, 1976; R. M. Spann, 1977; M. N. Rothbard, and D. Fisk in 1978. Other authors (Williamson, Powel, McNeil,) also furnished thorough studies on specific PSP models. In the 1970s, E. Savas contributed to strengthening the case for Public-Private Partnerships in solid waste services, especially waste collection services. E. Sclar and M. Harper recently carried out an in-depth study on privatisation and PSP in relation to the goods and services required. Other researchers, including Gädeke, 2002; Ludwig, 1997; Pippke, 1999; Völmicke, 1996, investigated the link between PSP and SWM. Their research comprised German case studies, and the PSP discussion differs in its essence from LMIC to industrialised countries like Germany. Privatisation can be broadly defined as relying more on private institutions and less on the government to deliver public services. It is the act of reducing the role of government or increasing the role of other institutions in producing goods, providing services, and owning property.213 There are several types and degrees of privatisation. One involves the sale to private owners of state-owned assets, and this is most correctly called privatisation. Others, where public services have been contracted out to private firms, and where the public authorities remain legally responsible for the public services, are called PSP in this study. Throughout the world, privatisation has sometimes been adopted improperly. Very often, it is considered to be key to a vibrant economy and, ultimately, to achieving a better society for all. 214 However, the historical record suggests that private provision might not be enough.
210 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 78. 211 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 15. 212 According to Savas, a public-private partnership is defined as any arrangement between a government and the private sector in which partially or traditionally public activities are performed by the private sector. 213 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 3. 214 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. xiv.
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The elections of Margaret Thatcher as Prime Minister of Great Britain and of Ronald Reagan as President of the United States of America, in 1979 and 1980 respectively215, afforded high visibility and a pronounced ideological impetus to what became the privatisation movement.216 It has been flourishing throughout the world since the end of the 1980s, in terms of both the number of transactions conducted and the amount of revenue generated. According to Sader (1995), the number of privatisations worldwide rose from 62 in 1988 to 868 in 1993, while the total number of transactions over this period in 93 countries amounted to 2,655 at a total value of US$ 271 billion. However, the success of privatisation has been erratic, differing from one country and one region to another. Between 1988 and 1993, most privatisations (85% of all transactions) took place in industrialised countries, generating US$ 175 billion, compared to US$ 96 billion for LMIC. Thus, privatisation has been more successful in developed economies, in particular in OECD countries. Nonetheless, there is a discrepancy between the statistical evidence of privatisation and public perceptions. To some people, the very word “privatise” causes misunderstanding and polarisation. None of the empirical studies undertaken so far adequately explains the growing popular disenchantment with such reforms.217
6.4
Privatisation: Advantages and Limitations
Neoclassical economic theory218 and recent theories of state failure advocate competitive market mechanisms, essentially on the grounds of efficiency. It is argued that, by comparison, non-competitive provision leads to inefficiency and productive (sometimes known as internal or technical) inefficiency. Savas is famous for his work in this area and has conducted remarkable research on privatisation in general and Public-Private Partnerships in particular. As the discussion on privatisation is not ideologically free, Savas can be considered to be one of the advocates of privatisation amongst North American economists. Savas (2000) states that the word govern comes from Greek “kybern,” “to steer.”219 In his opinion, it is the duty of the government to
215 The rallying cry of the Reagan Revolution was “Get the Governments back off our backs and out of our pockets”, while in Thatcherite Britain it was “Rolling back the frontiers of the state (Savas 2000)”. 216 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 15. 217 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p. 28. 218 Batley, R., PPP for Urban Services, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 201. 219 The same root appears in cybernetics, the science of control.
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steer, not to row.220 According to him, privatisation is a fundamental strategy to improve the productivity of government agencies. It invokes the power of private property rights, market forces, and competition to give people more for their money.221 Furthermore, he argues that mercenary troops have been used since ancient times and private air forces came into being in recent times to conduct wars under contract.222 In his opinion, privatisation is normally based on the conviction that profit motives and competition are necessary to provide the proper incentives for efficiency and quality.223 He states, perhaps a little provocatively, that “It’s fun spending other people’s money! Those who have served in government and made expenditure decisions may admit to the satisfying thrill, the power, and the regal sense of self importance-to say nothing of the flattery from grateful beneficiaries-that comes with dispensing tax money, all at no cost to one’s own pocket!”224 Compared to the considerable previous work he undertook in the 1970s, his more recent arguments, particularly in a study published in 2000, are anything but serious research. Supporting the benefits of privatisation by citing the example of mercenary troops without due ethical consideration is irresponsible. One of the most frequently cited advantages of the private sector over government is its management flexibility. Private sector management has greater ease in firing personnel for non-performance and in providing upward mobility for workers with good performance. Also, the private sector is not constrained to government hours and overtime constraints. It is generally easier for a public agency to influence the behaviour of a private organisation than the behaviour of another public agency.225 Public administration does not pursue public agencies in court. Regarding LMIC, PSP advocates argue that privatisation results in more competition226 , better service, economic growth, reduction of national debt, and benefiting from more Foreign Direct Investment (FDI). Privatisation means less pressure on municipal budgets, and therefore provides more flexibility. It is also perceived as a way of reducing overall public deficits by increasing short-run revenues. A key argument for privatisation is that compared to state-owned, non-competitive utilities, private owners and operators have
220 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 7. 221 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 6. 222 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 71. 223 Sclar, E. D., Economics of privatisation, 2000, Foreword Page viii. 224 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 29. 225 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 101. 226 However evidence in the field of ISSWM in LMIC is still lacking.
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stronger incentives and are better able to control costs, respond more effectively to consumer needs, and adopt new technologies and management practices.227 As far as public services are concerned, this argument is not true. In addition, those advocating228 privatisation advance three lines of argument: (a) Privatisation promotes efficiency and enhances social welfare by creating incentives to allocate resources to their highest use. (b) Transferring property from the public domain to the private sector and reducing regulatory restrictions increases personal freedom, avoids the effects of rigid bureaucracies, and reduces corruption and cronyism in public places. (c) A combination of private property and appropriate incentives and rules produces equitable results in the sense of rewarding those who work hard, take risks, and exercise ingenuity. The following paragraphs will discuss this issue with regard to SW services. Cointreau-Levine (2000) observes that the main reasons229 for this enhancement are that private sector service providers are accountable to their customers and are obliged to react to customer dissatisfaction. Competition between the private and public sectors is effective in improving cost-effectiveness. If thresholds are specified in the contractual agreement, and the private sector operator is monitored effectively, good standards of operation can be achieved. Private sector management has more flexibility to hire qualified staff, to pay staff according to their performance, to terminate the employment of unsatisfactory workers, and to adjust working hours according to service demand. The private sector can optimise the size of the work force and the ratio of professional to operational staff, and to concentrate its resources on the service for which they are intended, without staff or equipment being requisitioned for other purposes. In her opinion, private sector companies are both less restricted by bureaucratic procedures and more able to concentrate resources where they are needed. Competition, accountability, and transparency are the three keywords in this respect. 230 There should be competition between different private sector companies, and also, if possible, between the private and public sectors. Public support can be expected to result in more widespread payment of charges or taxes, and fair competition to result in lower costs
227 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p.25. 228 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, p. 11. 229 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 10. 230 Cointreau-Levine, S./Coad, A., PSP in MSWM, Part I : Executive overview , St Gallen: SKAT, 2000, p.8.
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and better services. According to Cointreau-Levine (2000), some reasons 231 for this increasing focus by municipalities on alternative arrangements include: • Many requirements of the MSW rules have not been fulfilled by municipalities in the past – such as primary door-to-door collection or sanitary landfilling – and therefore, there are very limited skills and knowledge within municipalities to handle these activities. • Most municipalities lack the finance to expand operations into new geographic areas or into new activities. • The increased need to focus on efficiency improvements to reduce cost and reallocate expenses within the waste management chain to activities like treatment and disposal. In theory, the main reasons for private sector engagement in ISSWM are the following: first, the private sector has easy access to specialist skills; secondly, it can form joint ventures; and thirdly, it has better access to capital financing, which in turn enables the private sector to mobilise appropriate equipment and other resources quickly. Very often, the private firm has to make high initial investments and will only be paid during the contract period. However, other authors like Sclar (2000), Kessides (2005), and others argue that privatisation is oversimplified, oversold, and ultimately somewhat disappointing. Kessides (2005) remarks that privatisation has proved to be more difficult to implement effectively; it is also less magical in its accomplishments than what was believed or promised beforehand. 232 Privatisation, although useful, is easily overworked. It is not an uncontroversial solution to the problem of providing public goods when both costs and benefits are hard to measure. Without sound public management, PSP does little to enhance public value (Sclar, 2000). Opponents 233 of privatisation advance a parallel set of propositions. Firstly, privatisation tends to weaken the state and its capacity to care for social equity. By weakening the state, privatisation also erodes the significance of democratic participation at national and subnational levels. Secondly, privatisation subordinates broader public goods, including longterm ecological and cultural values, to commercial imperatives. Thirdly, the need of private providers to make a commercial return (in the form of profits, dividends, rents and/or interest) adds to the cost of providing public services. Thus, the costs of services are higher
231 Mehta, R./Dasgupta, S., municipal waste services in Delhi, CWG on SWM in LMIC and WASH Workshop 2006, Kolkata/India, 2006, p. 2. 232 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p. 21. 233 Weizsäcker, E./Yong, O./Finger, M., Limits to Privatisation, London: Earthscan, 2005, pp. 11-12.
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when supplied by the private sector. Commercially, optimal decisions are often suboptimal for public goals, and competition forces providers to ignore externalities (see Chapter 7.1). The private sector never really assumes risks in providing public services. Where costs exceed revenues, private operators respond by demanding subsidies, raising charges, cutting necessary investment and maintenance, or walking away. Finally, new operators may generally start shedding excess employees – one of the most vexing problems facing stateowned utilities in nearly every developing and transition economy.234 Finally, even in the USA, the country which most forcefully advocates the principles of privatisation, there are some public services that are not allowed to be provided by the private sector. These services include 3,304 commercial airports. These airports are stateowned, by municipalities and cities respectively. Although these airports are locked into competition, they are not profit-oriented. In 2004, James May, President of the American Transport Association, stated in the House of Representatives: “They are not private enterprises. They are public utilities developed and maintained with important input of public money.”235 Federal laws prohibit these airports from using their profits to other ends than the improvement of their infrastructure. This system is called the “Principle of Diversion of Income”. On balance, the privatisation policy debate has largely amounted to little more than competing anecdotal evidence. Those favouring privatisation tell their favourite stories, and those opposed peddle theirs. According to Sclar (2000), this is “Like the blind men who each touch a single part of an elephant and self-assuredly contradict each other, they extrapolate their narrow experiential evidence into general descriptions of entirely different creatures.” 236 Hence, the question is not whether privatisation and private sector development should occur, but about how it can be done in an optimal way, that is, how to reach social goals through enterprise growth, how to avoid market distortions by supporting enterprises, and how to regulate and enter into dialogue with the business sector (Nellis and Kikeri, 2002; Kikeri and Nellis, 2004).237 The decision to privatise a public service should not be based on ideological considerations but rather on economic merits. 238 One of the most fundamental determinants of the
234 Kessides, I. N., Infrastructure Privatisation, The World Bank, 2005, p. 25. 235 Leser, Eric « Un service public que les Etats-Unis n’envisagent absolument pas de privatiser » Daily Newspaper « Le Monde », 3 June 2005. 236 Sclar, E. D., Economics of privatisation, 2000, p. 13. 237 Obser, A. Privatisation and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatisation, London: Earthscan, 2005, p. 260. 238 Sclar, E. D., Economics of privatisation, 2000, p. 44.
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efficiency and effectiveness of any PSP arrangement is competition. That is, the degree of competition that an arrangement permits will, to a major extent, determine how efficiently that arrangement will supply a service. 239 As far as SWM is concerned, the formidable question is in which SW element fair competition is possible during and after the bidding procedure?
6.5
Prerequisites for PSP
Cointreau-Levine (2000) argues that various issues are necessary when addressing the involvement of the PSP in SW services. They include efficiency, accountability, management, legislation, finance, and costs. Cost effective and adequate service standards can only be reached by creating effective competition amongst several private sector contractors, transparent bidding procedures, and fair competition; accountability for both contract parties; and the comprehensive monitoring of contracted services. Tailor-made benchmarks need to be defined and followed up in order to assess the effectiveness of private sector services. To achieve successful PSP, she recommends observing the following principles240: Maintain a balance between the private sector and public management; Develop contractual periods that enable economic depreciation of assets and repayment of loans; Develop techniques and facility sizes that are appropriate and economically viable; Define private sector service zones that are equitable and comparable for optimum competition and achieve economies of scale and optimum spans of management; Rationalise collection and transfer haul distances to minimise costs; Seek harmony and co-operation with private sector partners for win-win contractual and operational relationships; Build government capacity to work as an effective partner in contracting and performance monitoring; Encourage private sector joint ventures that bring in foreign expertise and optimise the use of local knowledge and skills.
239 Savas, E., Privatisation and PPP, New York: Seven Bridges Press, 2000, p. 94. 240 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 23.
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Furthermore, the following points are essential to ensuring the sustainable participation of the private sector in providing public services: a) Contestability To achieve optimum contestability, the zones served by public authorities should cover at least 30% of the population of the urban area. To create contestability and to guarantee a minimum managerial capacity of the municipalities, the private sector should service no more than 70% of any city; the remainder should be serviced by the government.241 b) Capacity building The introduction of PSP usually requires municipal strengthening.242 Municipal managers should be able to set up contract specifications or delegate these to private agencies. New responsibilities encompass monitoring the performance of the new private operators. c) Competition Competition is the key condition for successful PSP as it results ultimately in more efficiency and effectiveness. However, competition strongly depends on the type of services to be provided. As PSP in ISSWM is not fully developed in LMIC, all approaches need to consider the current number, capability, and interests of private contractors. Options to develop the market by offering attractive and contestable packages or involving international operators need to be assessed. Savas (2000) observes that the most thorough studies included the costs encumbered by cities for contract preparation, bidding, monitoring contractor performance, contract administration, and the like in the cost of the contract work. These studies concluded that the cost of municipal collection is about 35% greater than the total cost to the city of contract collection. In these studies, municipal collection was monopolistic and not the result of managed competition.243 d) Provision of accurate information All relevant financial and technical information and data needs to be clearly and transparently outlined in the bidding documents. Contract specifications need to be comprehensive and objective to avoid Asymmetric Information. They need to be applied in a fair manner during the operation period.
241 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 15. 242 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 32. 243 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 161.
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e) Accountability Both contract partners, the public and the private sector, should embrace the principle of accountability. The private partners should sense that they are accountable to the beneficiaries of the service and to the contractual authorities. Contract performance should be managed by good inter-organisational relationships, the use of performance bonds, and finally the use of penalties. Such accountability results from well-designed and cutting-edge contract specifications and effective contract enforcement. f) Monitoring Performance monitoring is a key condition to establishing a proper basis for evaluating efficiency and service effectiveness. Capacity building and adequate means are required in order to develop adequate contract monitoring units to follow up the performance of service. However, contract specifications or conditions often fail to reflect the actual features of the city in question. The service level is often not affordable by residents living in low-income areas. Public management often has no accurate information on the real costs of the service. Finally, comprehensive unbundling of service areas in order to allow several private contractors to provide sweeping and waste collection services, as well as the participation of public service providers in tender procedures, are among the options to facilitate more competition in the SW market.
6.6
Analysis and Discussion of PSP Models
PSP covers a wide spectrum of arrangements in which private enterprises are involved in the provision of services that have hitherto been provided by public authorities. In theory, the private sector has three important roles to play in the SWM field. Firstly, where the public authority renders SWM services inefficiently and inadequately, PSP offers a means of enhancing efficiency. Secondly, in situations where local public funds for investment are restricted by budgetary constraints 244 , the private sector has easier access to financial institutions and can mobilise the necessary financial means. Thirdly, the private sector is
244 Between 1994 – 1995 in Dar Es Salaam, the DCC (Public authorities) requested 89 million TZS from the central government to repair existing vehicles and equipment and buy new ones. Vehicles aside, the DCC usually lacks money to buy fuel. This study found that in each of the months of July and August 1994, work at the landfill site came to a standstill for 6 days for lack of fuel for the bulldozer.
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well-positioned to draw on international technical know-how, as these companies can introduce sound new technologies245 into LMIC. The economic importance of SWM for the private sector has rapidly increased in the last 20 years, not least because of increasing public awareness especially in industrial countries. Solid waste has for a long time remained an activity of local interest with limited market implications. The private sector has essentially been involved as a provider of labourintensive activities, having little value added and industrial complexity, or as suppliers of disposal capacity in landfills (Massaruto, 2005). This tendency is changing increasingly in both LMIC and industrial countries. In fact, private firms in France collect 45% of all waste and 87% of all waste is treated by private firms.246 Because PSP can be accomplished using many different models or arrangements, confusion arises when discussing PSP issues in LMIC. Various models have been experimented with in the past, such as Public-Private Partnerships, contracting-out, franchising, leasing, concessions, BOT, and the like. The selection of an appropriate contract model depends on the type of service to be provided (street-sweeping, waste collection, waste treatment, management of transfer station, waste disposal), service standards, the typology of the district in question, funding ability, and finally the existence of a marketplace with regard to the interests and financial and technical capability of the private firm. In addition, many of these arrangement models are complex to set up, and they may call for explicit guarantees from the government, meaning that the government is left with significant contingent liabilities. The differences between some of these models can be subtle. Public authorities in LMIC have to assess which PSP method will deliver good results and achieve ISSWM. For example, should a landfill be implemented through a turnkey contract or concession, or should the government build the facility and outsource a service contract for its operation? Should a contractor under franchise arrangement collect all solid waste in a given area? In this chapter, delegation and concession models will be focused on. Contracting-out will be analysed in-depth due to its importance in this investigation. The first broad PSP arrangement model is delegation. 247 Sometimes called partial privatisation, delegation requires continuous and active government involvement. The state effectively remains legally responsible for the functions by simply delegating SW services
245 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 215. 246 Drefus, M., Régulation service public, Paris : LED, Colloque international, 2005. 247 In French “Gestion déléguée”.
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to the private sector. Delegation 248 is carried out in Public-Private Partnerships (PPP), contracting-out, franchise, etc. These will be detailed in the following.
6.6.1
Public-Private Partnerships
There is no single definition of Public-Private Partnerships (PPP). Various international organisations have their own interpretations. For some, it means any form of private sector involvement, or joint ventures involving a public sector and a private sector partner; for others (for instance the German Technical Cooperation -GTZ)249, it refers to a particular programme or development tool. For instance, PPP is a legally defined term in Indonesia to designate a joint venture. Therefore, the present study refers to Private Sector Participation (PSP) rather than PPP in order to avoid confusion. As municipalities are legally responsible for solid waste services, PPP is the arrangement model most used in this field. When a public-private partnership is based on the operation of highly specific public assets for which the public sector retains responsibility, such as SWM, the degree of scrutiny must be extraordinarily high, but scrutiny is costly in terms of both time and money (Higby, 1995).250 The debate on PPP in public services began more than 100 years ago. Among others, Emmanuel Savas has researched this area in-depth. Indeed, Savas was the first to link the PPP model to municipal waste services in the 1970s. More recently, the economist Moshe Adler carried out investigations into PPP in SW. He investigated the phenomenon of “onagain / off-again” in PPP history, that is, the process of involving the private sector in SWM, then returning the service to public administration, and then back again to the private sector, and so forth. Examples of “on-again / off-again” will be discussed in the following chapter. As stated above, PPP251 are usually defined as any arrangement between a government and the private sector in which partially or traditionally public activities are performed by the
248 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 126. 249 Within PPP, also known as development partnerships with the private sector, GTZ cooperates with businesses and business associations in developing and transition countries. The PPP programme combines the respective strengths of public and private partners: PPP projects are planned, financed, and implemented jointly. Since the PPP programme began, GTZ has formed more than 300 partnerships with private firms and associations in more than 60 countries. More than 140 million euro have been invested in these projects, with the public share averaging around 40 percent.(http://www.gtz.de/en/themen/uebergreifende-themen/ppp/2362.htm). 250 Sclar, E. D., Economics of privatisation, 2000, p. 121. 251 These schemes are sometimes referred to as PPP or P3.
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private sector.252 Theoretically, PPP recognises that both the public sector and the private sector have certain advantages relative to the other in the performance of specific tasks. In some types of PPP, the government uses tax revenue to provide capital for investment, with operations run jointly with the private sector or under contract (see next section on contracting-out). As this dissertation takes a holistic view of solid waste elements, each PSP model is assessed in terms of its suitability to the ISSWM concept. Regarding the limitations of this model to some waste elements, Table 7 includes: symmetric lack of information, high degree of scrutiny required, difficulties in applying penalties, etc. Key characteristic of this model is the sharing of costs and profit. However, due to the fact that this model is about a joint venture between public management and private sector, it might be very difficult to apply penalties in case of non-performance of the contract. Table 7 reveals some limitations to the PPP model.
Application Not usual Not usual Not usual Feasible Duration Features Limitations
Street sweeping Waste collection Waste transport Transfer station
3 years to 15 years
Recycling treatment plant
Feasible
3 years to 15 years
Composting treatment plant
Feasible
5 years to 30 years
Landfill management
Feasible
6 months to 2 years
• Joint venture between public and private • Costs and profit sharing • Private sector makes investment • Private sector provides technical expertise • Joint venture between public and private • Costs and profit sharing • Private sector provides technical expertise • Joint venture between public and private • Costs and profit sharing • Private sector provides technical expertise • Joint venture between public and private • Costs and profit sharing • Private sector provides technical expertise
• Symmetric Lack of Information • High degree of scrutiny required • Contestability • Difficulties in applying penalties • Symmetric Lack of Information • Contestability • Difficulties in applying penalties • Degree of scrutiny must be high • Contestability • Difficulties in applying penalties • Symmetric Lack of Information • Contestability • Difficulties in applying penalties
Table 7: Limitations of Public-Private Partnerships model to SW elements
252 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 4.
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6.6.2
Contracting-out
Contracting-out became a popular buzzword in business management in the 1990s. Contracting-out or outsourcing253 is often defined as the delegation of operations from a public to a private firm with strong financial capacity and sound technical background in the field in question. Under this arrangement, the public authority remains legally responsible for the service, and it bears the same risks. Private contractors usually receive payment according to contract specifications and not their operational efficiency. Contracting-out is a business decision that is often based on more efficiency or a focus on core competencies. It is instructive to look closely at the most studied SWM service worldwide: SW collection. Many large research studies were conducted in the 1970s and 1980s, offering a great deal of compelling evidence concerning the efficiency, effectiveness, and equity of contracting-out. In the United States, 38% of all cities were using contract collection for household waste collection in 1992, and 50% of large cities were doing so.254 The same surveys revealed that contracting for exclusive collection zones is much more efficient than having open private competition along common collection routes. The private sector can operate more efficiently than the public sector in providing municipal solid waste services, as long as the requirements for contestable markets are met255 (see Chapter 6.5). Sclar (2000) raised another issue in the discussion on contracting-out, namely cost. He argued that decisions to contract out usually involve complex transaction costs related to product specifications (here, the term “product” designates the service), the negotiation of prices, the close monitoring of quality, and the need to anticipate unforeseen contingencies. In such cases, the managerial decision process involves analysing not only the comparative costs but also the transaction costs associated with contract design and monitoring. In such situations, obtaining all the relevant information can be difficult or can require considerable time and money.256 The hypothesis that involving the private sector makes for higher levels of efficiency received only cautious endorsement. There were often knock-on effects of PSP that actually increased the costs of the public sector: the need to manage private contractors and to retain a reserve capacity, and the inability to shed staff in spite of PSP. These additional costs are
253 These two terms are often used interchangeably in the relevant literature. 254 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 160. 255 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 219. 256 Sclar, E. D., Economics of privatisation, 2000, p. 19.
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called transaction costs, as stated above. Very often, those costs are not considered by comparing SW costs prior to and after PSP. A key conclusion is that the effects of PSP must be considered “all around”. That is, it is essential to take into account not just the possibly greater efficiency of the private part of a service but the gross effects on the total cost of providing the service.257 Three sets of costs must be considered when deciding between “contracting-out”, “contracting-in” (public management), and direct public management: the direct costs of public management, the costs of the outside service contractor, and the internal costs include personnel, equipment, and materials. The costs of outside service typically include the agreed-upon price of the contract. Internal costs include everything related to bidding and monitoring the contractual agreement. The comparative cost analysis of public and private management must take into account the transaction costs incurred regardless of whether the private sector is more efficient at providing the service than the public sector. The crucial issue is whether the sum of the contractually agreed price and the transaction costs is less than the cost of direct public provision.258 Contracting-out is the arrangement most commonly referred to when talking about SWM services. In this contractual arrangement, the government259 is ideally a skillful purchasing agent, a sophisticated monitor of the services rendered by the private sector, an efficient collector of taxes, and a parsimonious disburser of proper and timely payments to the contractor. However, prima facie evidence is still lacking, especially in LMIC where municipal authorities (or public authorities) manage SW services inadequately and do not even know the exact costs of the services, possess no accurate information on the quantity and characteristics of waste generated, and have difficulty in establishing thresholds. The issue is how one can expect a municipal authority to monitor a service properly when it has no experience of what a sound SW service should look like. In addition, contracting-out arrangements in some waste elements are short, typically lasting 5 years, and they usually only focus on improving services to existing customers rather than reaching the urban poor, which normally challenges the effectiveness of the SW service. Another key issue of contracting-out is the “On-again / Off-again” phenomenon. As mentioned above, Adler conducted an in-depth survey on the “On-again / Off-again” type
257 Batley, R., PPP for Urban Services, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 211. 258 Sclar, E. D., Economics of privatisation, 2000, p. 64. 259 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 70.
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of contracting-out to show the limitations of this arrangement. He260 states symbolically that to cure governmental ills with contracting-out, one might just as well cure anaemia with blood letting. Adler reported that in 1849 when Mayor Caleb Woodhull evaluated the performance of this round of contracting-out, he stated: “The system of cleaning the streets by contract has signally failed of fulfilling public expectations, and I assume that it is no longer entitled to public favor. At first it seemed to promise important advantages, both as to economy and efficiency, but in its operation it has proved entirely inadequate to accomplish either of these desired results....” Once again, the city had no choice but to hire government employees to do the job, and once again they got the job done. Furthermore, Adler mentioned that in 1851 Woodhull summed up their performance in the following way: “I believe I echo the sentiments of every citizen in according my commendation to the system now in operation: Of having the streets cleaned by the city authorities.” But the charter mandated contracting-out, which one member of the Committee on Street Cleaning lamented bitterly: “The amended charter of 1853, so far as cleaning the streets is concerned, has proved (sic.) an utter abortion.... The proceedings of the Common Council teem with....information of contracts broken, engagements unfulfilled on the part of the contractors, and the consequent filthy condition of the streets.” Similar assessments were issued over the next 25 years, until finally, in 1880, the Committee on the Affairs of Cities signed the death certificate for contracting-out: the contract system has since been tried repeatedly in all kinds of forms. Adler argued that even when sophisticated contract specifications are established, contracting-out remains cumbersome. Adler found that municipal authorities each time municipal authorities revised the issue of contracting-out, they asserted that this time they really knew how to write a foolproof contract; nonetheless, they never really succeeded in this task. Adler found that every single contemporary argument for and against privatisation had already been used in the past. Every single trick to overcome Principal-Agent problems has been tried.261 As far as LMIC are concerned, the situation is no different. In Abidjan / Côte d’Ivoire, for instance, three different stages comprise the principal history of SWM. 262 The period between 1953 and 1990 involved waste management undertaken by a private company.263 From 1991 to September 1992, the public waste department of the city of Abidjan
260 Adler, Moshe “Why Do We Have Government Employees” Columbia University, Dept. of Urban Planning, General Accounting Office, Commercial Activities Panel, June 11, 2001 (http://www.gao.gov/a76panel/adler1.pdf). 261 Sclar, E. D., Economics of privatisation, 2000, p. 154. 262 Attahi, K., Abidjan, Côte D’Ivoire, in Onibokun, A. G. (eds.): Managing the Monster: Ottawa: IDRC, 1999, p. 19. 263 Société industrielle des transports automobiles africain (SITAF, private solid-waste operator).
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undertook management under the auspices of the state. Finally, the period starting from September 1992 consisted of managed contracting-out. Under the contract, SITAF264 had to undertake the clearance of household SW and sweep the principal streets of Abidjan. The municipal administration paid the company a fee for the services provided. This was also a long-term contract renegotiated every 5 years. The calculation of the monthly fee was based on a formula combining the tonnage of waste transported and the distance covered, as declared by SITAF. The monitoring of the service provider was not considered. The whole arrangement was based on mutual trust until the beginning of the 1980s, when doubts about the escalating costs of the services were expressed.265 Once again, due to Principal-Agent difficulties (Asymmetric Information), this contractual agreement failed. Another example of “On-again / Off-again” is the PSP experience in Ghana. Over a decade ago, concerted efforts were made to involve PSP to deliver solid waste collection services in Ghana. Over the years, the local authorities had provided the services directly and then decided to outsource SW services in some municipalities. The purpose of contracting-out SW services to the private contractors was to improve the efficiency of the SW service. Indeed, between 1985 and 1995, the German Technical Agency (GTZ) provided equipment and financial means, backed by 5 years of spare parts supplies for SW services. There was a big gap after German technical assistance was withdrawn. Thereafter, SW services were contracted out to a private company. This resulted in a private monopoly which charged public authorities US$ 12/ton collection266, which is considered too high for the economic level of the country. Simply put, this PSP experience was anything but efficient. Consequently, the government terminated the contract in 2001. The SW waste service was returned to public and municipal authorities, and now involved the participation of small local entrepreneurs. The experience in Ghana has shown that simply turning over public service delivery to private contractors, without ensuring that the fundamentals that make them successful are put in place, results in weakening public management capacity. Successful contracting-out is feasible under the following set of conditions267 : unambiguous service specifications, the availability of several potential providers, and a competitive climate. The government should be able to monitor the performance of the firm contracted; appropriate terms and conditions should be included in the contract document and enforced.
264 Société Industrielle des Transports Automobiles Africain. 265 Attahi, K., Abidjan, Côte D’Ivoire, in Onibokun, A. G. (eds.): Managing the Monster: Ottawa: IDRC, 1999, p. 19. 266 Boakye Charles “Solid Waste Collection Systems in Ghana” World Bank Urban Forum, 2005 http://www.worldbank.org/urban/uswm downloaded, 2006. 267 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 75.
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As far as limitations of this model are concerned, the utmost challenge is to establish comprehensive threshold in the contractual agreement. More precisely, it is difficult to state in a contract when waste collection is not performed or when a landfill is not comprehensively managed by the private sector. Another important issue are the transactions cost. Very often these costs are not considered by comparing public management to private sector. Other problems concern Principal-Agent dilemma, Asymmetric information, etc. Table 8 summarises some limitations to the contracting-out model.
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Street sweeping
Application common
Duration 6 months to 2 years
• • • • • • • • • •
Waste collection and transport
common
6 months to 2 years
Features Public authorities legally responsible for the service Low technology required Unbundling in geographical section High involvement of national SME Low economic risk Labour intensive Low technology required Unbundling in geographical section High involvement of national SME Low economic risk
Limitations • Challenge in establishing threshold in contractual agreement • Sound public awareness required • High transaction costs
Transfer station
common
3 years to 10 years
• Competition foreclosed after bidding
Recycling common treatment plant Composting common treatment plant Landfill common management
3 years to 15 years 3 years to 15 years 5 years to 30 years
• Competition foreclosed after bidding • Competition foreclosed after bidding • Competition foreclosed after bidding
• Setting up threshold in the contract challenges • Sound public awareness required • High transaction costs • Risk “On-again / Offagain” • Principal-Agent problem • Asymmetric Information (Symmetric Lack of Information) • Risk “On-again / Offagain” due to weakness of public management • No incentive from private sector side to strengthen and develop public managerial capacity • Principal-Agent problem • Asymmetric Information (Symmetric Lack of Information) • same as above
• same as above
• same as above
Table 8: Limitations of contracting-out/delegation to SW elements
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6.6.3
Franchise
A franchise is an award of monopoly privileges to a private firm to supply a particular service in a specified area, usually with a price regulation imposed by a government agency. The private firm collects its own revenues from generators within the zone or from the sale of solid waste by-products removed from the zone. Concession is another term for this arrangement. 268 Public authorities own all the waste within their boundaries, once it has been discharged for collection and disposal. The public authority is allowed to give qualified private firms the exclusive right and responsibility to provide services to beneficiaries in various zones under its jurisdiction. In return for such an exclusive franchise, the private firms pay a fee to the municipality. They subsequently charge their customers appropriate fees to cover the costs of services. Public authorities remain responsible for the monitoring of the performance of private contractors, including some regulation of user charges; they also retain the right to renew or terminate licences in accordance with contract specifications. The biggest concern 269 associated with using private subscription and franchise systems for solid waste collection is that some waste generators would not be willing to pay for the service and that they would not properly dispose of their waste themselves (the so-called “free-rider” problem). Such conduct will even affect those who regularly pay270 their fees. Chapter 7.1, Chapter 7.2, and Chapter 7.3 (on Goods theory) will examine this issue more closely. Table 9 summarises some limitations of this model.
268 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 79. 269 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 20. 270 The private sector has been given a major role in SW collection in the central area of Dar es Salaam. The contractor has only been able to collect 10% of the expected RCCs, even though it collects 70% of the waste. It has not, therefore, made the expected investments in equipment, and this keeps the collection service from being what it was intended to be. (Lusugga K., J.M., Dar Es Salaam, Tanzania, in Onibokun, A. G. (eds.): Managing the Monster: Ottawa: The IDRC, 1999, p. 130).
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Application Duration Features Street Not very 6 months • Exclusive rights to sweeping common to perform in a zone 2 years • Private sector pays a fee for the license and charge directly beneficiaries • Low technology required • Unbundling in geographical section • High involvement of national SME Waste Quite 6 months • Exclusive rights to collection Common to perform in a zone 2 years • Private sector pays a fee and transport for the license • Low technology required • Unbundling in geographical section • High involvement of national SME Transfer Not very 3 years • Competition foreclosed station common to after bidding 10 years • Private sector pays a fee for the license Recycling Not very 3 years see above treatment common To plant 15 years Composting Not very 3 years see above treatment common to plant 15 years Landfill Not very 5 years see above management common to 30 years
Limitations • Difficulties in establishing threshold • Challenge public goods theory by non-payment of beneficiaries
• Collision effect • Challenge public goods theory by non-payment of beneficiaries • Free-rider problems
• Weakening public management • Free-rider problems • Weakening public management • Free-rider problems • Weakening public management • Free-rider problems • Weakening public management • Free-rider problems
Table 9: Limitations of franchise model to SW elements According to Table 9 limitations include difficulties in establishing threshold, for instance, for street sweeping (when is a street not carefully swept?). Another relevant issue is the non payment for the service rendered to the private firm, what would be the consequences if some beneficiaries cannot pay for the SW service? However, bad SW waste management affects not only those who cannot afford the services in question. All citizens are entitled to an appropriate waste management system for environmental health reasons. Solid waste collection cannot be discontinued without jeopardizing general public welfare.
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6.6.4 Concession
Concession includes a number of variations of contractual arrangements, such as Build and Transfer (BT), Build-Lease-Transfer (BLT), Build-Operate-Transfer (BOT), Build-OwnOperate (BOO), Build-Transfer-Operate (BTO), Contract-Add-Operate (CAO), DevelopOperate-Transfer (DOT), Rehabilitate-Operate-Transfer (ROT), Rehabilitate-Own-Operate (ROO), etc. It is noteworthy that the nomenclature used to describe all concession models has not been standardised. There are several terms which are often used interchangeably – such as turnkey and Build-Operate- Transfer (BOT), for example. There are also single terms that are used loosely and can be applied to situations that are fundamentally different. Indeed, the terminology debate surrounding the definition of PSP arrangements itself mirrors the evolution of PSP approaches and the evolving regulatory environment defining PSP.271 A concession is awarded, for instance, by a municipality to a private company to Design-Build-Operate (DBO) a facility for the transfer, treatment, or disposal of solid waste. Variations include Build-Own-Operate (BOO) when a private sector company provides funding, and Build-Own-Transfer (BOT) when ownership transfers to the public authorities on an agreed date. Concession agreements are commonly long-term agreements wherein the private firm provides the capital investment for a new facility. However, a concession also means that a private firm is given the opportunity to generate revenue from the waste management activity, typically by charging a gate fee for receiving waste and through the sale of compost or recyclables. Under concession arrangements, the private sector finances and owns SWM facilities during the period contractually agreed. In return, the municipality typically grants and enables access to a specified quantity and quality of SWM services and provides some fees. The concession agreement might specify performance standards, methods of judging performance, liquidated damages for delay or non-performance, risk assignment, dispute resolution, standards for worker safety, health protection and environmental standards, and so forth. A concession arrangement generally lasts between 10 and 45 years. The private company makes all the investments, including major ones.272
271 Guidelines for successful Public-Private Partnerships, European Commission Directorate – General Regional Policy, March 2003, http://ec.europa.eu/regional_policy/sources/docgener/guides/pppguide.htm. 272 Finger, M., Privatization of the Infrastructures, in Weizsäcker, E. /Yong, O. /Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 238.
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Concessions for sanitary landfill operations are a highly interesting business opportunity for the international private sector because they have significant economies of scale and major environmental spillover effects, along with greater investment and skills requirements. These characteristics offer opportunities for PSP private-sector involvement through comprehensive management contracts, lease contracts, or concession arrangements to build and operate disposal and recycling facilities.273 The following table displays the key features and limitations of this arrangement.
Application Not very common Not very common Quite common Duration 6 months to 2 years 6 months to 2 years 3 years to 10 years Features Limitations
Street sweeping Waste collection and transport Transfer station
Recycling treatment plant
Quite common
3 years to 15 years
Composting treatment plant
Quite common
3 years to 15 years
Landfill management
Very common
5 years to 30 years
• Private sector provides financing • Key driver: Polluter pays principle (user charging) • Key driver: Polluter pays principle (user charging) • Generation of fees by selling recycling materials • Key driver: Polluter pays principle (user charging) • Generation of fees by selling compost • Key driver: Polluter pays principle (user charging) • Competition foreclosed after bidding
• Weakening public management • Competition foreclosed after bidding • See above
• See above
• High quantity of waste required • Minimum quantity of waste required • No incentive in waste treatment • Weakening public management • Problems with hierarchy principle
Table 10: Limitations of concession model to some SW elements
273 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 221.
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Concerning the limitations of this model, Table 10 underlines the necessity of high quantity of waste for the private landfill manager. Hence, the hierarchy is compromised. Furthermore, this model if thoughtless applied could result in weakening the managerial capacity of municipalities in LMIC. The question which arises: what should be the incentive of the private sector to build capacity of municipal managers? Most concessions are operated on a “take or pay” basis, where fees are paid even if the guaranteed daily quantity of waste is not reached. The international private sector is usually interested in a minimum landfill capacity of 300 tons per day274, both for the full utilisation of landfill equipment and its amortisation. This represents a limit to the ISSWM concept, as public authorities are forced to deliver the maximum quantity of waste whenever possible; besides, they have no incentive to minimise, recycle, or treat waste. Since few cities have this quantity of waste, bundling the needs of several small to medium-sized cities into one regional facility needs to be considered if private sector investment (such as through a “design, build, own, and operate” concession agreement) is desired. Concessions always involve operations and maintenance by the concessionaire, and they must last long enough to recover investments. Therefore, if major private sector investments are needed (LBO, BTO, BOT, BBO, BOO), concessions will need to be granted for a longer duration, sometimes even for more than 20 years. In contrast, if the public sector is responsible for investment, as in a lease-and-operate arrangement, the period can be as little as five to fifteen years (see Table 10). Other arrangements include DBO275, BTO276, Build and Sell, RTO 277 . They are commonly used in the privatisation of infrastructure. Other concession arrangements include Build Operate Transfer and Build Own Operate and Transfer. They are discussed in the following. a) Build Operate Transfer Build Operate Transfer (BOT) and Build Own Operate (BOO) contracts are similar to Design Build Operate (DBO) contracts, but leave facility ownership and financing obligations in the hands of the private firm. BOT 278 and its many variations are used
274 Cointreau-Levine, S., PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 28. 275 Design, build, operate contracts that combine design, construction and operation for 15 to 20 years of a facility, such as sanitary landfills, treatment plants, and transfer stations. 276 Build Transfer Operate. 277 Rehabilitate-transfer-operate (RTO): this is like BTO, but is based on rehabilitating existing infrastructure rather than building new facilities. The duration and type of the contract depends upon primarily the amount of money that the private operator had to put up for the rehabilitation (Finger, M., Privatization of the Infrastructures, in Weizsäcker, E. /Yong, O. /Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 239). 278 “Beyond Boundaries” PPIAF/ADB Manila: 2002, p. 8.
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primarily for specific large investments, among others in sanitary landfills. Such arrangements can last up to 30 year, depending on the size of investment that has to be amortised. The private firm treats guaranteed amounts of waste in exchange for guaranteed prices, although usually including some amount of demand risk. A private developer is awarded a franchise (concession) to finance, build, own, and operate a facility. This is sometimes referred to as BOOT (build, own, operate, and transfer); here, user fees are collected for a specified period, after which ownership of the facility is transferred to the public sector.279 Limitations of this arrangement are similar to those displayed in Table 10. b) Build-Own-Operate-Transfer Many public authorities in LMIC promote the (Build-Own-Operate-Transfer) BOOT arrangement of PSP. BOOT involves the private sector in building, owning, operating, and after a pre-specified number of years, transferring infrastructure to a public authority. The BOOT arrangement is considered to be a means of having private sector financed facilities whose ownership will be transferred to municipality authorities. BOOT arrangements require a high level of scrutiny by formulating contract specifications. However, as underlined above, no one can foresee all potential contingencies, so this arrangement is cumbersome. Regarding a foolproof contract, Adler states that no matter what safeguards are placed around it, the system remains vicious. 280 Most importantly, they outline the regular maintenance requirements which the private sector must ensure are fulfilled for the facilities in question, as well as the final condition in which the facilities must be presented to the local authority at the time of ownership transfer. One issue is that if the private firm goes out of business before the termination deadline stated in the contract specifications, public management with its lack of know-how has to continue providing the service without interruption. This is considered one of the principal challenges of this arrangement. Table 10 presents an overview of the principal limitations of this arrangement.
6.6.5
Open Competition
In open competition of SWM collection services, each household contracts a private collection firm and pays the SWM removal fees charged by the contractor. However, if several firms are competing with each other in the same neighbourhood, a certain collision
279 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 244. 280 Sclar, E. D., Economics of privatisation, 2000, p. 154.
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effect occurs. Governments license private firms to compete with each other in providing SWM services. No firm has a monopoly within a zone and price regulation is not required. Each firm collects its own revenues from its beneficiaries. Strong empirical evidence proves that this arrangement is useful for commercial and industrial waste. However, this could be cumbersome regarding municipal waste. An example of the flaws of open competition is provided by Nigeria. The private waste collectors in Ibadan are all members of the Association of Environmental Contractors. In 1994, they served an estimated 10,000 households in the Ibadan urban area. No particular part of the city is allocated to any contractor, and they are free to make their own arrangements. Many companies in the city make use of these private collectors. Some SME use low-tech equipment to collect over short distances. They operate in the Sabo area and in some markets and motor parks, charging their clients agreed fees. However, they dispose of the waste collected in dumpsites within the neighbourhood. These are often not cleared regularly and therefore constitute both an environmental hazard and an impediment to traffic. 281 The following table presents both key features and limitations of this PSP arrangement.
Application Not very common Common Duration Features Limitations
Street sweeping Waste collection and transport Transfer station Recycling treatment plant Composting treatment plant Landfill management
Not very common Not very common Not very common Not very common
6 months • Waste generator • Collision effect – 2 years contracts directly • Contradiction to the private firms public goods theory 3 years – Competition foreclosed after bidding 10 years Private monopoly/oligopoly instead of public monopoly 3 years – Competition foreclosed after bidding 15 years Private monopoly/oligopoly instead of public monopoly 3 years – Competition foreclosed after bidding 15 years Private monopoly/oligopoly instead of public monopoly 5 years – Competition foreclosed after bidding 30 years Private monopoly/oligopoly instead of public monopoly
Table 11: Limitations of open competition model to SW elements
281 Onibokun, A.G./ Kumuyi, A.J, Ibadan, Nigeria, in Onibokun, Adepoju G. (eds.): Managing the Monster: Ottawa: IDRC, 1999, p. 46.
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Regarding the limitations of open competition, Table 11 underlines the collision effect. In effect, it is not economic sound to bring different firms in the same waste collection area for instance. As far as management of transfer station, recycling treatment plant, composting treatment plant and landfill are concerned open competition is foreclosed. Furthermore, due to the fact that competition is foreclosed after the bidding procedure, public monopoly could turn to private monopoly/oligopoly (see Chapter 9.4).
6.7
Concluding Remarks and Discussion
This chapter has examined the privatisation issue in-depth in general and in SWM in particular. The notions of globalisation, liberalisation, deregulation, etc., have been introduced. The differences between them have been highlighted. It has been shown that the general public very often wrongly perceives the notion of privatisation. As far as SWM is concerned, the only options are Private Sector Participation (PSP) or Public-Private Partnerships (PPP) as public authorities are legally responsible for SWM. On balance, it is not about privatisation or not, but about whether fair competition is possible or not. Both international and national private firms are playing an active role in SWM services in LMIC for many reasons, among others on financial and technical grounds. One positive effect of globalisation is that the so-called “global players” (that is, large international firms) are now operating (and very often successfully) in LMIC. The remaining challenge is to apply sustainable principles like the hierarchy principle, polluter pays principle, effectiveness, and efficiency in the SW sector by carrying out private business. As far as SWM is concerned, PSP arrangements present some limitations in terms of both the “collision effect” and the economic interest of some systems. This chapter has shown that a private landfill operator who collects SW at the same time in a municipality will have no interest in minimising SW if paid according to the quantity of waste collected. With such an arrangement, the hierarchy principle will be jeopardised. Thus, the solid waste market should be unbundled into segments where proper competition can be created. As observed, another approach is geographical division. Introducing PSP into SWM in LMIC can only have benefits if a strong regulatory framework is in place. Capacity building, capacity development, and institutional strengthening are some key requirements facing municipal management when dealing with this issue. However, the formidable question remains: how can private firms achieve capacity building and the strengthening of municipal institutions in LMIC by performing their profit-making business operations?
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The privatisation debate is a polarised one. Privatisation advocates argue that privatisation results in more competition, better service, economic growth, reduction of national debt, and beneficially attracts more Foreign Direct Investment (FDI). Opponents, on the other hand, argue that privatisation is oversimplified, oversold, and disappointing. It should not be considered to be a panacea to SWM problems in LMIC. Sound public management is essential to PSP. The issue is not about being “for” or “against” privatisation. It has been stressed that the issue is merely about “monopoly” or “competition”. The decision to involve the private sector in providing public services, such as SWM, should not be based on ideological considerations but rather on economic merits. Echoing Cointreau-Levine (2000) and Weizsäcker (2005), some key lessons learned are: • Develop strong regulations and regulatory units within public management; • ”Contracting-in” prior to “contracting-out”; • PSP should be based on economic merits and not on ideological ones; • Secure control over regulatory institutions and enable the state to provide the service in case of failure; • Improvement of solid waste planning, analysis of the efficiency of the public and private services; • Reorganisation of public services, capacity building and training to develop a competent public partner; • Analysis of the contract models available in order to assess possible alternatives and furnish stringent criteria to ensure the best choice as well as effective guidelines and regulations. Another issue discussed in this chapter is the notion of transaction costs. When the arranger and the provider of the service are one and the same, a bureaucratic cost is incurred, that is, the cost of maintaining and operating a hierarchical system. When the arranger is different from the provider, there is a transaction cost, that is, the cost of hiring and dealing with a private enterprise. The relative magnitude of these two costs determines whether it is worth separating the arrangement and provision of functions.282 While certain advantages certainly exist and can be leveraged, PSP should not be regarded as representing either a miracle cure or indeed a quick solution to SW services. As a result, public authorities should become increasingly involved as regulators and focus resources on
282 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 66.
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service planning, performance monitoring, and contract management. PSP requires effective contract monitoring procedures to be successful. SWM is not a homogeneous product that can be uniformly provided. Every municipality or every jurisdiction is idiosyncratic. The service must be tailor-made to local requirements, which makes it difficult to change providers with sufficient frequency to sustain effective competition while maintaining product quality.283 Success in PSP depends on how much the service in question lends itself to competitive versus non-competitive market structures. To summarise, competitive bidding and a careful definition of the area and service in question are essential for the success of PSP. In addition, the municipality should render the service in one of the districts (waste collection for instance), in order to maintain its capacity to replace private firms which go out of business or those failing to perform well without interrupting the service. Where the privatised service operates in a competitive environment, no new problems arise. Where privatisation occurs but monopoly continues, however, there are new difficulties. The question to be raised is whether it is uneconomical for services such as landfill management, waste collection, or the management of a composting plant to be provided by many different suppliers in the same area. However, a single private firm might be expected to exploit its monopoly.284 If privatisation merely converts a public monopoly into a private monopoly/oligopoly, the service will not be compelled by competitive pressures to improve its productive efficiency, while at the same time the traditional allocative efficiency problem will arise (Killick and Commander, 1988). One may argue that it is possible that the privatisation of a monopolistic service like municipal landfill management can be effectively regulated. However, the regulator is unlikely to obtain accurate information on the real costs and the technical performances of the private firm. In a world in which existing information, regardless of its adequacy, is not uniformly distributed, organisations with diverse access to superior information are in a position to act opportunistically, and frequently at the expense of the other, less-informed party to the contract. This situation is called information asymmetry (see Chapter 7.5.1). As a result of information asymmetry, the transaction costs imposed by contracting during the life of the contract have to be considered.285 In a situation where Asymmetric Information exists, the regulated firm enjoys some payments which may prove to be costly to extract. This is particularly important in LMIC, where influence can often override regulations and good political intentions (Henley,
283 Sclar, E. D., Economics of privatisation, 2000, p. 83. 284 Harper, M., Micro-Privatization, 2000, p. 14. 285 Sclar, E. D., Economics of privatization, 2000, p. 97.
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1993; Jome, 1993). In LMIC, this risk is real, due to the weak capacities of public administrations (Krueger, 1974). As far as limitations of some PSP models are concerned, another relevant issue is the number of private contractors involved. More precisely, is it about one single private firm delivering solid waste collection, managing a transfer station, or managing a sanitary landfill? This fact is highly relevant especially in Europe where instead of contracting different companies for different services, municipalities are increasingly relying on a single big enterprise for the whole service. Consequently, large and medium-size enterprises providing a wide range of services, including waste collection, waste transport and waste treatment, have the best chances of surviving. This structure will lead to "vertical integration," in which one firm controls every aspect of a solid waste management of a region. Policy makers shall avoid potential problems associated with vertical integration to control for instance raise prices. Contracts may stipulate renegotiation if a merger brings all services under one firm. The takeover of RWE Umwelt AG by Remondis AG in Germany can be cited as a case in point. There will be an increase in private monopolies in the SWM sector in the future due to this “takeover” strategy, leading to less competition and presenting an increasing challenge to the principles of ISSWM. The limitations of some models described in hypothetical terms above presume that one private contractor provides each waste element. If this is not the case, ISSWM principles might be contradicted.
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7.
Goods, Market and Organisational Theory
The starting point for determining the proper roles and the economic limitations of the private sector in rendering solid waste services is an all-encompassing examination of the economic characteristics of these services. Due to the characteristics involved, sectors such as telecommunication are more easily rendered by private industry than sectors like SWM. 286 The following paragraphs will not only survey the literature on public goods, market and organisational theory in an exhaustive manner, but also point out some of the key issues relating to the provision of SW by the private sector.
7.1
Characteristics of Public Goods
More than 2,000 years ago, Aristotle suggested that a public good is “that which is owned in common by the greatest number has the least care devoted to it.”287 Furthermore, before Adam Smith’s pathbreaking Inquiry into the Nature and Causes of the Wealth of Nations288, David Hume289 published an unambiguous statement about public goods: “Two neighbours may agree to drain a meadow, which they possess in common; because ‘tis easy for them to know each other’s mind; and each must perceive, that the immediate consequence of his failing in his part, is the abandoning of the whole project. But it’s very difficult, and indeed impossible, that a thousand persons [should] agree in any such action; it being difficult for them to execute it: while each seeks a pretext to free himself of the trouble and expense, and [would] lay the whole burden on others. Political society easily remedies both these inconveniences.”290 Research interest in public goods grew rapidly with the publication of the works of Samuelson in 1954 and in 1955. Samuelson developed various ideas addressed by other earlier economists, such as Lindale, Sax and Wicksell (Musgrave and Peacock 1958). Initially, economists focused on the two poles of a spectrum of goods, namely pure public goods and pure private goods. According to their definitions, private goods could be
286 See van de Walle, 1989; Kragh et al, 2000 cited in Obser, A. Privatization and Development, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 260. 287 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 52. 288 Inquiry into the Nature and Causes of the Wealth of Nations. 289 The work of David Hume entitled „Treatise of Human Nature“ was first published in 1739. 290 Hume, D. (1976, p. 538) cited in Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 3.
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parcelled out among individuals and efficiently provided by the market, whereas public goods could not be divided among individuals. Furthermore, as developed later, public goods have two main characteristics, among others, namely non-rivalry and nonexcludability. Since the 1960s, many economists have devoted their research to the theory of public goods. After the publication291 of Mancur Olson’s “’Logic of Collective Action” and James M. Buchanan’s “An Economic Theory of Clubs” in 1965, economists undertook a meticulous analysis of the whole spectrum of goods, including impure public goods. The definition of a public good is sometimes controversial. Further, Buchanan argued in 1967 that “any good or service that the group or the community of individuals decides, for any reason, to provide through collective organisation will be defined as public.” More recently, Sandler and Cornes (2003) presented a comprehensive theoretical treatment of public goods, externalities, and club goods. The second edition of Sandler and Cornes is the authoritative work that provides an outstanding overview of the economic issues associated with public goods. Indeed the economic development of any nation depends upon two main types of goods: private and public. Nevertheless, there are numerous other goods between these two poles. Impure public goods, whose benefits are partially rival and/or partially excludable, occupy the in-between points along this spectrum. If, therefore, a good does not display both excludability (non-excludability292) and rivalry (non-rivalry293) in their pure forms, the good is called impurely public. An important subclass of such goods comprises those whose benefits are excludable but partially non-rival; these are club goods. 294 They include individual goods295, toll goods296, common-pool goods297 and worthy goods298. Simply put,
291 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 4. 292 Meaning that once it is provided to some portion of a community it benefits the overall public welfare, not only the resident that specifically receives the service. 293 Any resident can enjoy the benefit of the service without diminishing the benefit to anyone else. Beyond this, it is not feasible to exclude from service those who do not pay, because public cleanliness and the safe disposal of waste are essential to public health and environmental protection. 294 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 9. 295 Individual goods pose no conceptual problem of supply. The marketplace provides them. 296 Like individual goods, toll goods can be supplied by the marketplace. Because exclusion is readily possible, users have to pay and then suppliers will supply the goods. Individuals and organizations, for-profit or not-for-profit, can purchase and give away toll goods, such as recreational facilities and libraries (Savas, 2000). 297 Unlike individual and toll goods, common-pool goods pose a supply problem. With no need to pay for such goods, and with no means to prevent their consumption, such goods will be consumed-even squandered-to the point of exhaustion, as long as the cost of collecting, harvesting, extracting, appropriating, or otherwise taking direct possession of the free goods does not exceed the value of the goods to the consumer (Savas, 2000).
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private goods are goods with excludable benefits.299 Public goods, by contrast, are in the public domain, available for all to consume or affecting all. In recent years, transnational, global or regional public goods have become a field of great interest for many economists. These are goods whose benefits are public and cut across several countries (in the case of regional public goods) or countries in several regions, as well as several generations (in the case of global public goods).300 Recently, a debate has arisen concerning the idea of “global public goods”. Inge Paul and Ronald Mendoza (2003) have identified a set of public goods, such as the global environment, whose benefits are not limited to a particular country but are global in nature. According to this principal, global public goods are “goods whose benefits extend to all countries, people and generations”. They are, quite naturally, referred to as global public goods.301 Putting in place good environmental policies is costly, and when the benefits are global public goods (such as reduced atmospheric concentrations of greenhouse gases), it is appropriate that those most able to bear the costs of providing for these global public goods should do so. Attention has focused on the need for global collective action and requisite political institutions, owing to a host of environmental phenomena with worldwide spillovers, including ozone shield depletion from chlorofluocarbons, atmospheric warming from greenhouse gases, tropical deforestation, acid rain from the release of sulphur dioxide and nitrogen oxides, and so forth. 302 The Global Environmental Facility administered by the World Bank Group can be cited as one of the international programmes coping with this category of goods. However, more similar programmes will be necessary before there is a real impact on global public goods. The main characteristics of public goods, namely Non-rivalry, Non-excludability, Theory of Externalities and Groups Theory are discussed in relation to SW services in the following.
298 If no use is made of the exclusion property of individual and toll goods, that is, if there is little or no charge for their use, then in effect the good is being treated as a common-pool or collective good (Savas, 2000). 299 Individuals can appropriate them and prevent others from enjoying the good. 300 Kaul, I., Global Public Goods, in Weizsäcker, E. /Yong, O. /Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 312. 301 Stiglitz, J. E., Globalization, Columbia University, 2005, pp. 9-5. 302 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 33.
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a) Non-Rivalry As far as the economy is concerned, the basis for the classification of different goods is exclusivity and non-rivalry. The expressions non-rivalry303 of consumption and indivisibility of benefits are used interchangeably in the relevant literature. A good is non-rival or indivisible when one individual can consume a unit of the good without detracting, in the slightest, from the consumption opportunities still available to others from the same unit.304 The resulting classification determines the roles of the government and of the private sector in supplying goods and services.305 Samuelson306 identified two categories of goods: firstly, ordinary private consumption goods (X1, …, Xn), which can be parcelled out among different individuals (I, 2, …, i, …, s) according to the relations s i
Xj =
1
X j Secondly, he identified collective consumption goods (Xn+1, …., Xn+m), which everyone can enjoy in common, in the sense that each individual’s consumption of such a good leads to no subtraction from any other individual’s consumption of that good, so that Xn+j=Xin+j holds simultaneously for every ith individual and each collective consumptive good. Regarding SWM, the required services are enjoyed by individuals without detracting from the other beneficiaries, hence constituting non-rivalry. One of the characteristics of public goods and services has to do with consumption. Many consumers may consume such goods and services jointly and simultaneously, without being diminished in quality or quantity, while private goods are available only to the individual. Of the above-mentioned examples, food and fuel can be qualified as private goods, whereas environmental quality control is purely a public good. They are generally hard to measure and they offer little choice to the consumer. Moreover, they raise a basic question about the size of the collective entity that should make decisions about public goods and services. Efforts to supply public goods give rise to the “free-rider307” problem. The more “freeriders” a society has, the more difficult it is to supply such goods. As far as SWM is
303 Sunsets are for instance non rival or indivisible when views are unobstructed. 304 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 8. 305 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 41. 306 Samuelson, P. A., Theory of Public Expenditure, The Review of Economics and Statistics, Volume 36, Issue 4 (Nov., 1954), p. 387. 307 Free riders are those who enjoy a public good without contributing to its production, preservation or replenishment.
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concerned, the size of the group will be discussed below. In contrast to private goods, public goods and services pose a serious problem whenever they have to be provided by the private sector. The main characteristics are detailed below. b) Non-excludability Mancur Olson (1965) was one of the pioneers to spell out the criterion of non-excludability: “If a good is provided to any individual member of a group, no one else in the group can feasibly be excluded from consuming it, as well.” Olson was actually referring to “collective goods”, but the two terms “public goods” and “collective goods” are used interchangeably. Accordingly, benefits that are available to all, once the good is provided, are termed nonexcludable. Comprehensive SWM services yield non-excludable benefits, because once they are provided, it is difficult, if not impossible, to exclude individuals from their benefits. For instance, in a franchise-based waste collection contract, residents failing to pay their fees (and hence being excluded from service) will compromise the whole collection system, even if the majority pays its fees. Indeed, waste indiscriminately endangers the entire neighbourhood and not only the premises of non-paying residents. c) Theory of Externalities Externalities are considered as a cost or benefit from an economic transaction that parties “external” to the transaction bear. Externalities can be either positive, when an external benefit is generated, or negative, when an external cost is imposed upon others. For instance, industrial production, which causes pollution, may impose costs on others, by making use of good public air. In one of the best discussions of the theory of externalities to date, Meade (1973) states: “An external economy (diseconomy) is an event which confers an appreciable benefit (inflicts an appreciable damage) on some person or persons who were not fully consenting parties in reaching the decision or decisions which led directly or indirectly to the event in question.”308 In addition to Meade’s treatment309, further discussion of definitional issues has been provided by Baumol and Oates (1988), Buchanan and Stubblebine (1962), and Heller and Starrett (1976). Instead of pursuing this debate, it is more important to underline the alternative formulation of the notion of an externality presented by Arrow (1970). In contrast to Meade, Arrow places the definition of an externality within a very specific
308 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 39. 309 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 40.
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institutional framework – namely that of competitive markets. In addition, although ultimately motivated by the search for allocations that are Pareto-efficient, Arrow relies on a definition that is in the first place more analytical, inviting one to consider why it is that externality recipients may be unable to consent fully to actions that affect them. To return to SW: landfilling carries with it external costs that are not reflected in the price of landfill disposal, while recycling has ecological benefits that are not reflected in either recycling market revenues or avoided disposal costs. Recycling, in fact, is a prime example of the failure of competitive markets to correctly cost and price goods and services that provide ecological and economic benefits. Conversely, landfilling is an example of the failure of competitive markets to correctly cost and price goods and services that are ecologically damaging. d) Groups Theory and Solid Waste Services A fourth relevant characteristic is the size of the group affected by the benefits of public goods. When a public good confers benefits outside the political jurisdiction providing it, and no compensation is paid by these outside recipients, a spillover of benefits exists. If, for example, two nations border a polluted lake and only one expends resources to clean the lake, then the non-paying country receives a benefit spillover from the other nation’s action.310 The discussion about the size of the group is essential for a comprehensive understanding of SWM. As these services are often not rendered in low-income areas in LMIC, communities often organise the provision of basic services, such as solid waste collection. Nevertheless, this entails voluntary action and therefore they cannot be qualified as a sustainable service. Olson has devoted remarkable work to this field in his book The Logic of Collective Action: Public Goods and the Theory of Groups (1980). Indeed, unless the number of individuals in a group is quite small, or unless there is some degree of coercion to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common interest. However, if the members of a large group rationally seek to maximise their personal interest, they will not act to advance their common objectives unless they are compelled to do so, or unless some separate incentive is offered to the members of the group individually on condition that they help bear the costs or burdens involved in the achievement of the group objectives.311
310 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 32. 311 Olson, M., Theory of Groups, Cambridge: Harvard University Press, 1980, p. 2.
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Such participation represents a significant voluntary contribution by a community’s residents. Also, it is not feasible to conduct an accurate accounting of which residents bring solid waste to the municipal collection point. Municipal systems of solid waste collection are considered a public good, and direct charges are difficult to implement unless a strong community organisation exists to enable cost recovery. However, if voluntary action fails to provide an adequate supply of collective goods, for example in cities, where the social unit is large and diverse, contributions must thus be obtained by legally sanctioned coercion, such as tax collection. As far as solid waste services are concerned, they can be seen as an individual good in a rural area whereas they are a collective good in a city, because all citizens will benefit from the regular collection of solid waste and will be harmed if this service is not in place. Another reason is that people can and do create the need for public services by transforming their individual goods, thereby shifting the burden of payment onto public management. In this context Savas provides an interesting example: “the small-town resident who throws his waste on the side of the road instead of subscribing to a refuse-collection service eschews the individual good called waste collection and creates a need for the collective good called highway cleaning.”312 Street cleaning is another illustration of a joint-consumption good. The well-being one enjoys from cleaned streets in no way diminishes the well-being available to our neighbour.
7.2
Provision of Public Goods and Services
After providing some definitions and preliminaries of different goods, this section discusses the provision of such goods. In the case of private goods, the solution is quite simple: the market will allocate the provision of private goods according to the theory of the Standard Market Model. The provision of public goods, however, is troublesome. The first historical traces of the private provision of public goods and services did not appear until the late nineteenth century. It would appear that the worldwide move for such public provision began at that time. In their well-known textbook, Atkinson and Stiglitz (1980)313 began by making a distinction between the public production and the public provision of public
312 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 57. 313 Private Provision of Public Goods and Services (Deepak Lal).
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goods.314 Their definition seeks to include any good and service that is provided freely to all members of society so that with public provision there is not necessarily any monitoring of usage. They provide the standard reasons for the public provision of such goods, such as the non-excludability of those who do not pay for the good, non-rivalry in consumption, and distributional considerations for merit goods such as environmental protection. For the provision of public goods and services, many economists argue in terms of the necessity of the state. The two notions “the necessity of the state” and “the necessity of government” are often used interchangeably. For the purpose of this discussion, both terms will be used hereafter. Indeed, the argument that the state is a natural and efficient alternative to the market concurs with the first mid-twentieth century vision when neoclassical economics envisaged central planning as a perfect substitute for the market with regard to resource allocation. Accordingly, the state should manage public goods in order to avoid the issues of free-riders, externalities, etc. The marketplace is unable to supply such goods because, as mentioned above, by their nature, many people use them simultaneously and no one can be excluded from enjoying them. Every individual has an economic incentive to be a “free-rider,” that is, to use public goods without paying for them. Thus, the state has to provide such goods by using coerced contributions, taxes, subsidies, etc. Even Adam Smith, often regarded as a champion of laissez-faire, recognised a need for government intervention. Thus, the interest in public goods, whose benefits simultaneously affect a group of individuals, can be traced back to classical economics.315 In political and economic theory 316 , it is commonplace to assert that government is necessary because of the existence of public goods. This justification for government dates back to Hobbes. According to Hobbes, rational individuals in a “state of nature” enter into a social contract by which each submits to an absolute sovereign, provided everyone else does the same. In The Limits of Government, David Schmidtz takes on the second of these ideas, the public goods justification for the state. The state can step in and force us all to contribute toward the production of these goods, and we can all thereby be made better off. Schmidtz317 reminds us that “the state is coercing people for their own good… Moreover,
314 They cite defence as an example of a good that is publicly provided but is often purchased from private producers. 315 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 3. 316 Sugden Robert “Suckers, Free Riders, and Public Goods” Humane Studies Review Volume 7, Number 1 Winter 1991/92. 317 See the beginning of Chapter 5, " From Prisoner 's Dilemma to Public Goods".
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they want the state to do this, because they cannot get what they want with voluntary provision mechanisms.” 318 Another argument for public intervention is the presence of non-excludable319 goods: a large coalition of private interests in a city is unstable, for instance. The assumption is that individual members of large coalition may easily defect (not contributing to the costs) while continuing to benefit from the collective good (free-rider). This third version of the freeriding hypothesis is indebted to Olson’s theory of collective action (1965). It considers that the propensity to contribute to collective goods diminishes with the size of the group. The underlying idea is that the larger the group, the easier it is for individuals to cheat, because the probability of non-compliance to be noticed and sanctioned is lower. This is usually considered a disadvantage for the private supply of collective goods versus state supply in a large community. In other terms, private systems of monitoring compliance and sanctioning are implicitly assumed to be weaker than state enforcement capacities. Economists argue that governments intervene in urban markets to compensate for “market failures,” that is, those factors that prevent free private markets from achieving an efficient allocation of resources. Market failures include the existence of public goods whose consumption by some consumers does not imply non-consumption by others, such as street lighting or fire protection; natural monopoly; large transactions costs; and externalities. Due to the existence of market failures, the social costs (benefits) of producing a given commodity or service are higher (lower) than the private costs incurred. In this context, if the service were left to the discretion of the private sector, it would be produced at levels that would be lower than the social optimum. Public intervention is required to bring production to the point of social equilibrium.320 Indeed, the idea that the state should provide public goods and services goes back more than a century (Olson, 1980).321 The most notable tradition in the nineteenth century (the British laissez-faire) largely ignored the theory of public goods. More than a century and a half after Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, Pigou (1946) introduced another rationale for government intervention. The Pigouvian correction concerned externalities in which the action of one economic agent influences the utility or production function of another and where no mechanism for compensation exists. The relationship with public goods was perhaps disguised by the fact that the latter were
318 Garrett, D. “Public Goods and the Justification for the State” Humane Studies Review, 1992. 319 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 13. 320 Bartone, C. R., Private Sector in MSW, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 233. 321 Olson, M., Theory of Groups, Cambridge: Harvard University Press, 1980, p. 98.
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identified with particular goods and services, while externalities were often thought of as essentially unintended by-products of activities undertaken primarily with a view to generating private benefits.322 Governments were viewed as outside agents who, through the imposition of taxes (subsidies), could induce the externality generator to limit (or increase) their activities so as to achieve efficiency.323 Another analytical argument about the natural necessity of state intervention to control pollution is provided by the theory of public goods (Samuelson, 1954). Environmental damage, and SWM in particular, often displays non-excludability and non-rivalry, that is, precisely those features characterising mainly public goods. Pollution324 is characterised by an externality325 feature. In order to cope with externality and collective goods issues, the traditional recommendation of normative economics is to call for government intervention. In setting a tax or environmental standards, governments will remedy market failures. Economists inferring that state intervention is strictly necessary to cope with the harmful effects of pollution on the environment often use the concepts of externality and public goods. Since Pigou (1932)326, externalities are associated with market failures, and state intervention is the natural means to resolve this. The competitive market diverges from a Pareto equilibrium. Finally, Coase (1960)327 was the first economist to envisage the treatment of externalities without state intervention, such as via direct bargaining between polluter and polluted and the integration of the generator and recipient of externality within the same firm. This concept might be true whenever public services are rendered in a small community. When the number of affected individuals is large and interests are diverse, purely voluntary action is no longer adequate to provide collective goods.328 This particularity is also considered in the chapter concerning scope for further research later on this study.
322 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 5. 323 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 6. 324 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 3. 325 An externality occurs when a transaction between two parties does not take into account a benefit or a loss for a third party who is not in the market arena. 326 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 6. 327 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 7. 328 Savas, E., Privatization and PPP, New York: Seven Bridges Press, 2000, p. 64.
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7.3
Economic Classification of Solid Waste Services
As Lévêque (1996) rightly remarked about SWM, it seems more suitable to speak about “bads” rather than “goods”.329 However, the terms are perfectly substitutable because the non-provision of a desired collective good is a collective bad (Brubaker, 1975) and the remission of a collective bad is a collective good.330 The first argument for government intervention 331 is that sanitation is a public good, or is characterised by significant externalities (see above). Strictly speaking, a public good is characterised by zero marginal social cost and/or by the inability to exclude additional people from enjoying it, whether or not they contribute to its provision. The economic classification of solid waste services is not uncontroversial. Edwards and Stevens (1977) thus stated: ““Law and order” and “national defense” are such goods. Clearly, refuse collection does not fit this mold”. However, according to Cointreau-Levine, solid waste collection and disposal services332 are essential333, non-exclusive334, and non-rivalled335. Therefore, SWM can be categorised as public goods336 (see Annexes 6 and 7). These features of being non-exclusive, non-rivalled, and essential place responsibility for SWM with public authorities. Essential services337 are public goods. As such, their benefits, such as public health and economic productivity, extend well beyond the particular individuals who consume them. Annex 6 provides a framework for categorising various activities of SWM as pure public goods (also called collective goods) or as pure private goods. Annex 7 also categorises the activities that fall somewhere between these two categories, such as toll goods and common-pool goods.
329 Lévêque, F., Externalities, public good, CERNA, Venice, 1996, p. 10. 330 Public goods and bads have the same nature just as negative and positive externalities have the same nature. The change in the sign does not affect the problem except when one considers that the individual behaviour is differently sensitive to a loss and a gain. However, the hypothesis of loss aversion as proposed by Kahneman (1991) is not considered here (cited in Lévêque, 1996). 331 Edwards, F. R./Stevens, B. J., Local Government Regulation, in Savas, E. S., Efficiency of Solid Waste, Lexington: The Trustees of Columbia University, 1977, p. 141. 332 Cointreau-Levine, 1994. 333 The services are essential to public welfare. 334 Meaning that once it is provided to some portion of a community it benefits the overall public welfare, not only the resident that specifically receives the service. 335 Any resident can enjoy the benefit of the service without diminishing the benefit to anyone else. Beyond this, it is not feasible to exclude from service those who do not pay, because public cleanliness and the safe disposal of waste are essential to public health and environmental protection. 336 Cointreau-Levine, S., PSP in MSW services, UMP, Washington, D.C.: World Bank, 1994, executive summary. 337 At the 2003 Human Development Report states, governments have traditionally provided essential services because “their market value alone would not capture their intrinsic value and social benefits” (UNDP, 2003, p111) cited in Kessler, T./Alexander, N., Essential Services, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 229.
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According to the characteristics discussed above SWM is seen in this dissertation as public goods. As such the state shall be legally responsible for providing the service.
7.4
Theory of Market Competition
The competitive contract market as privatisation advocates generally envision it, is derived from the modification of the Standard Market Model, the bedrock of neoclassical economic theory.338 Some economists use Pareto efficiency as an argument to justify privatisation or PSP. Pareto efficiency339 is an important notion in neoclassical economics with applications in social sciences among others. It is the most frequently used normative criterion of modern economics. Given a set of alternative allocations and a set of individuals, a movement from one allocation of resources to another that cannot make one individual better off, without making any other individual worse off, is called a Pareto optimisation (also called Pareto optimality). The term is named after Vilfredo Pareto, an Italian economist, who used the concept in his studies of economic efficiency and income distribution. One of the fundamental theorems of welfare economics states that every perfectly competitive equilibrium is a Pareto optimum in the absence of externalities and public goods. For private goods, exchange efficiency is achieved when the Marginal Rate of Substitution (MRS)340 between each pair of goods is the same for all consumers consuming both goods. Hence, for goods x and y, we have i j MRS xy = MRS xy for all i and j, (exchange efficiency)
341
where the superscripts refer to the individuals, and the subscripts indicate the two goods being exchanged. Furthermore, production efficiency is achieved for any type of good when the marginal rate of technical substitution (MRTS)342 between each pair of inputs is the same across all industries using these inputs.
338 Sclar, E. D., Economics of privatisation, 2000, p. 6. 339 It is also called Pareto optimality. 340 MRS is the rate at which consumers are willing to give up units of one good in exchange for more units of another good. For instance, the MRS of good X for good Y is the amount of good Y that a person is willing to give up to obtain one additional unit of good X. 341 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 22. 342 In economics, the marginal rate of technical substitution (MRTS) is the amount by which the quantity of one input can be reduced ( - x2) when one extra unit of another input is used ( x1 = 1), so that output remains constant ). (http://www.answers.com/topic/marginal-rate-of-technical-substitution). (
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That is p q MRTS KL = MRTS KL for all p and q, (production efficiency)343
In the case of private goods, a Pareto optimum is achieved when exchange efficiency, production efficiency, and a top-level condition are all satisfied. This top-level condition ties together the exchange and production sides and requires
MRS xy = MRT xy (top-level conditions)
344
The Standard Market Model assumes a world of markets, each of which is composed of a large number of unrelated buyers and sellers. Each is assumed to be pursuing his or her own gain independent of other agents. In the Standard Market Model world, economic decisionmaking can be essentially reduced to a technical matter – a mere mathematical algorithm.345 Consequently, the Standard Market Model is essentially a highly formal theory of exchange. It is not necessarily a theory of continuing relational behaviour between individuals or organisations.346 For pure public goods, a different top-level condition must be satisfied. Because the pure public good simultaneously benefits all citizens in a community, each of these individuals’ marginal valuation must be accounted for when resource allocation is being decided. Samuelson (1954, 1944) has shown that Pareto optimality for pure public goods requires that the following first-order condition be satisfied:347 n MRS i=1 i zy
= MRT
zy
where n is the number of individuals in the community, and z is the pure public good. Pure public goods do not have an exchange efficiency requirement, because of the nonexcludability characteristic of those goods.
343 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 22. 344 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 23. 345 Sclar, E. D., Economics of privatisation, 2000, p. 8. 346 Sclar, E. D., Economics of privatisation, 2000, p. 95. 347 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 23.
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However, Armatya Sen states that “A society or an economy can be Pareto optimal and still be perfectly disgusting.”348 If economists argue that an economic system is Pareto efficient, then it is the case as mentioned above that no individual can be made better off without another being made worse off. This could obviously be true under certain idealised conditions; a system of free markets will lead to a Pareto efficient outcome. Kenneth Arrow and Gerard Debreu first demonstrated this mathematically. To be Pareto efficient, the following conditions have to be fulfilled: markets exist for all possible goods, markets are perfectly competitive, and transaction costs are negligible. Nonetheless, these conditions are not necessarily fulfilled in welfare economics. These ideal conditions rule out the existence of externalities, public goods, Asymmetric Information, etc. (Bator 1957; Arrow 1970).349 Bringing this back to SWM, due to the investment required for some segments of SWM services (landfill management, composting plant, biogas plant, etc.), PSP contracts are typically written for multiyear periods. As a result, it is the character of the contractoragency relationship which principally determines effectiveness and efficiency, and not the competitive marketplace, as stated in the Standard Market Model. The stronger the terms of the contract and the more complex the service provided, the smaller the role played by market competition becomes in the costs and benefits of privatisation.350 Thus, the Standard Market Model, which serves as the basis for this individualised theory of organisational change, actually has no inherent theory on organisational behaviour. It is a powerful theory with regard to the operation of a decentralised system of resource allocation, but has nothing to say about the operation of organisations351 , such as municipalities and private sector companies.
7.5
Theory of Market Failures
Market failure applies to a situation in which markets do not efficiently allocate goods and services. The term “market failure” is also often used to describe situations where market forces do not serve the perceived public interest. The two main reasons why markets fail are:
348 Amartya Sen (Economist and Nobel Prize winner) cited in Sclar, E. D., Economics of privatisation, 2000, p. 8. 349 Cornes, R./ Sandler, T., Theory of public goods and club goods, Cambridge: Cambridge University Press, 2nd edition, 2003, p. 23. 350 Sclar, E. D., Economics of privatization, 2000, p. 14. 351 Demsetz (1993) cited in Sclar, E. D., Economics of privatization, 2000, p. 15.
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1. 2.
Costs or benefits are inadequately expressed in prices; Presence of sub-optimal market structures.
The different types of market failures include imperfect competition (monopoly, oligopoly), externality (pure public goods), transaction costs, information asymmetry (incomplete markets, quality uncertainty), and organisational failures (Principal-Agent problem). When the market fails for a certain economic activity, it is often argued that market forces should not direct the activity in question. The most common response to a market failure is to fall back on the government to produce certain goods and to provide public services. The following chapters will address the most relevant types of market failures, namely public goods, Asymmetric Information, and transactions costs.
7.5.1
Asymmetric Information
In 1970, Akerlof 352 established the fundamentals of asymmetrical information theory. Market failure may occur when any of the following are present: public goods 353 ; externalities 354 ; incomplete markets 355 ; imperfect markets and especially markets with imperfect competition. The theory of Pareto Optimisation, which shows how free markets achieve efficiency, also assumes that information and knowledge is fixed. However, in general, whenever information is imperfect (or markets incomplete) the economy is not Pareto efficient.356 Information asymmetry (also called asymmetrical information) occurs when one contractual party to a transaction has more or better information than the other contractual party. In economics, one party is referred to as Principal and the other as Agent.
352 "The Market for Lemons: Quality Uncertainty and the Market Mechanism" is a paper by George Akerlof written in 1970 that established the fundamentals of asymmetrical information theory. Akerlof, Michael Spence, and Joseph Stiglitz jointly received the Nobel Prize of Economics in 2001 for their research related to asymmetric information. 353 Items that are difficult to exclude people from enjoying, and where the cost of an additional individual enjoying them, is zero or very low. 354 Situations in which the action of an individual has repercussions (negative or positive) on others for which the individual neither pays nor is compensated. 355 Situations in which certain markets are absent, especially risk markets and markets for intertemporal trades. 356 Stiglitz, J. E., Globalization, Columbia University, 2005, p. 9-4.
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Kenneth J. Arrow first described this situation. 357 Simply put, Asymmetric Information results in the so-called Principal-Agent problem, namely the difficulties that arise under conditions of incomplete and Asymmetric Information when a principal hires an agent. Spence and Zeckhauser (1971) and Ross (1973) pioneered the Principal-Agent framework. The theory was soon generalised to cover dilemmas associated with contracts in other contexts by Jenson and Mecklin (1976) and Harris and Raviv (1978). An agency relationship exists when one individual, called the agent, acts on behalf of another, called the principal. Often the principal owns an asset and hires the agent to increase its value. Many examples of Principal-Agent relationships exist in society, such as a municipal authority and the contractors it uses to provide public services.
Figure 7: Basic Idea of Agency theory: P (Principal) A (Agent) (Source: www.wikimedia.org) The Principal-Agent problem arises when a principal compensates an agency for performing certain acts that are useful to the principal and costly to the agent, and where there are elements of the performance that are costly to observe. To some extent, this applies to all contracts written in a world of information asymmetry and uncertainty. In a world in which existing information, regardless of its adequacy, is not uniformly distributed, organisations with differential access to accurate information are in a position to act opportunistically and frequently at the expense of others.
357 Kenneth J. Arrow described asymmetrical information in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. George Akerlof later used the term asymmetric information in his 1970 work “The Market for Lemons”.
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Based on the theory of perfect competition, privatisation is effectively advocated as a process of wholesale remote-control organisational change. Nevertheless, the following points need to be highlighted: • The degree of uncertainty (Asymmetric Information) about services; • Bounded rationality of the principal and the agent; • Opportunistic guile of principal and agent. Feigenbaum and Henig (1997) argue that privatisation is too often pushed as an ideological proposition with little or no basis in good agency management.358 The questions that arise are as follows: why should an agency that could not competently manage itself automatically be able to competently manage private contractors? Why would a market necessarily produce desirable contractor behaviour? Or why would an agency left to its own devices more likely reward positive behaviour than negative behaviour, given the pressures of the market?359 The three most important forms of information scarcity in incomplete contracting situations are Principal-Agent problems, adverse selection 360 , and moral hazards. 361 A difficulty in drafting contracts is dealing fairly and adequately with unforeseen circumstances. A wellconstructed contractual framework will include not only a comprehensive specification of services, but also provide delineating procedures for amending or modifying the contractor’s objections, as well as any other part of the contract, as dictated by altered circumstances.362 The bottom line is that public contracting continues to be a cumbersome and expensive instrument for the delivery of public services. There is an ongoing cost tradeoff between the inherent risk of moral hazard and the cost of effective monitoring. If additional contractors are foreclosed (especially in long-term contracts over five years), the greater the lack of access to sound information on the part of public authorities will be, and the less likely it is that contracting will provide meaningful improvement. In this case, the notion that privatisation is a quick and easy way to overcome bureaucratic inefficiency and move us closer to a state of Pareto optimality is seriously compromised.363
358 Sclar, E. D., Economics of privatisation, 2000, p. 166. 359 Sclar, E. D., Economics of privatisation, 2000, p. 132. 360 Adverse selection is a situation in which the party with inferior information about the market situation acts first in seeking to establish a contractual relationship (Salanié 1998 cited in Sclar 2000). 361 Moral hazards refer to potential problems of reduced incentives on the part of the agent to fulfil the goals of the principal (Sclar, 2000). 362 Jaffee, B. C., Contracts for Refuse Collection, in Savas, E. S., Efficiency of Solid Waste, Lexington: The Trustees of Columbia University, 1977, p. 154. 363 Sclar, E. D., Economics of privatisation, 2000, p. 9.
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Considering this problem with regard to SWM in LMIC, public authorities very often do not have accurate information on the quantity and characteristics of the solid waste generated in their municipalities. On the other hand, private firms do not possess accurate information on the typology of different districts of municipalities (in particular low-income districts with narrow roads). Moreover, they lack information regarding public awareness (for instance if citizens are going to put their waste in containers on time). However, such information is highly relevant when setting out contract specifications. A lack of this information results in disputes between contractual parties. Whereas the term Asymmetric Information refers to a situation where one party has more information than the other, in this case neither of the contractual parties possesses the relevant information in LMIC, so that one could call this scenario a “Symmetric Lack of Information”. Due to information asymmetry (or Symmetric Lack of Information), the transaction costs imposed by contracting in the form of opportunistic actions taken by one party or the other during the life of the contract364 are considered to be the most serious concern (see also case study CESPA Chapter 12). The following chapter will deal with this issue.
7.5.2
Transaction Costs
Transaction costs are the costs incurred in engaging in an economic exchange. The term “transaction costs” is frequently thought to have been coined by Ronald Coase. Coase did indeed pioneer the concept of transaction costs in his 1937 paper “The Nature of the Firm”. The term “transaction costs” itself can be traced back to the monetary economics literature of the 1950s. Arguably, transaction costs reasoning became most widely known through Oliver E. Williamson’s Transaction Cost Economics. According to Williamson, the determinants of transaction costs are frequency, specificity, uncertainty, limited rationality, and opportunistic behaviour. Steven N. S. Cheung has broadly defined transaction costs as any costs that are not conceivable in a “Robinson Crusoe economy,” in other words, any costs that arise due to the existence of institutions. Starting with the broad definition, many economists then ask what kind of institutions minimise the transaction costs of providing a particular service. Often, these relationships are categorised by the kind of contract involved. In effect, three main factors result in the inefficiency of a contract:
364 Sclar, E. D., Economics of privatisation, 2000, p. 97.
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1) The frequency or volume of transactions engendered by the relationship, 2) The degree of uncertainty in the contract situation, and 3) The need to make asset-specific investments to carry out the contractual agreement. To expand on each of these points: (1) The more frequently the parties to an agreement must do business with one another, the more cost-effective it becomes to integrate the two operations organisationally. (2) In addition, the higher the degree of uncertainty about output quality, the more expensive transaction costs are in relation to thwarting opportunistic behaviour. (3) Finally, the more asset-specific investment required to foster a contractual relationship, the higher the costs are to respond to any of the parties’ opportunism, for instance by pulling out of the relationship. Owing to the presence of such asset specificity, in a context of uncertainty (Asymmetric Information) it is often more rational to expand organisational size to accomplish the task in question. Similarly, the lower the volume of transactions, the easier it is to assess the quality of the output; and the lower the asset specificity of the investments required, the easier it is to use marketbased contracting relative to larger organisations.365 On the one hand, there are the concerns of transaction-cost economics. On the other hand, we have organisational alternatives: market-related ones (classical contracting, hierarchy, in-house production) and hybrid ones (relational contracting). It is important to recognise public agencies as historically evolved and institutionally complex in social, political, and economic terms. Besides, a one-size-fits-all approach to the concept of a contract has no basis in reality in either the private or the public sector. Thus, public agencies need to move forward on two tracks: firstly, internal relations reform; and secondly, the establishment of stable and long-term external networks, that is, the antithesis of competitive contracting.366 Various techniques can attract potential contractors to compete, and “contracting-in” can supplement “contracting-out”. The former term refers to “managed competition” in that government agencies bid for contracts on a fair and equitable basis against private contractors. Where feasible, dividing the work among several contractors and an in-house
365 Sclar, E. D., Economics of privatisation, 2000, p. 98. 366 Sclar, E. D., Economics of privatisation, 2000, p. 129.
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unit assures effective competition, knowledgeable contract supervision, a safeguard against possible collision effects, and certainty of service. In addition, contract specifications do not describe the services in an unambiguous manner. Payment procedures do not include fair rules for price adjustment. Payments are often considerably delayed without any chance for the contractor to receive compensation; moreover, penalties are often applied in the case of non-performance. Contract specifications must be comprehensive because they will affect overall success. Comparing in-house and contract costs must be carried out astutely. Once a contract is in effect, performance must be monitored systematically. A basic concept during the development and implementation of PSP in ISSWM is to ensure that both parties understand the project and the services required, and know the various contract specifications and the critical contract issues in sufficient detail to build up enough confidence and a solid basis to enable each partner to assume its responsibility. One main criterion for the selection of the most appropriate contract model is the scope of a given project, which is often linked to the size of the municipality.
7.6
Concluding Remarks and Discussion
This chapter has covered a great deal of ground, focusing primarily on the main characteristics of different types of goods and especially public goods. Private goods by definition could be parcelled out among individuals and efficiently provided by the private market, whereas public goods could not be divided among individuals. This chapter has also examined the main characteristics of public goods: non-rivalry, non-excludability, presence of externalities, etc. Furthermore, transnational, global or regional public goods have been discussed. Indeed, these are goods (or bads) whose benefits are public and cut across several countries. Another issue mentioned in this chapter is group size. As highlighted, the larger the group (for instance a municipality), the easier it is for individuals to cheat (by not paying for the solid waste service, for instance, or discarding waste in neighbouring containers). In summary, some privatisation models are limited in terms of achieving ISSWM because the probability of non-compliance to be noticed and sanctioned is lower. The characterisation of solid waste begs a crucial question: who should provide SWM services? Therefore, this section has discussed in some detail the notion of the necessity of the state. Given that every individual has an economic incentive to be a “free-rider,” that is,
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to use public goods or to enjoy public service without paying for them, the state has to provide these goods by using coerced contributions, such as taxes. This section has also suggested that SWM is characterised by non-excludability, non-rivalry, and externalities. In order to cope with this fact, governments should intervene to remedy market failures. Following Coase, this chapter argues that the treatment of externalities should occur without state intervention, such as via direct bargaining between polluters and the polluted and the integration of the generator and recipient of externality within the same firm. This idea might be true whenever the public services are rendered in a small community. In the case of a municipality, however, voluntary action is no longer adequate to provide SWM services. Based on the principal features of goods, and although such economic classification is not uncontroversial, solid waste services are classified here as public ones based on various characteristics of public goods (see chapter 7.1). This does not mean that such services cannot be delegated to the private sector. The more the private sector becomes engaged in service delivery, the more public sector parties have to focus on capacity building and development, and on furnishing a sound regulatory framework. The roles of government are to increase the efficiency and the effectiveness of SW services and to meet standard requirements. PSP, if well-designed, can make a major contribution to these objectives by ensuring that adequate services are delivered at an affordable price over a defined period, provided that the most appropriate choice of contract model is selected for each special case and that sound inter-organisational relationships with the private sector are established. Despite national environmental awareness and the bond of a common culture, no major state in modern history has been able to support itself through voluntary dues or contributions. Taxes, that is, compulsory payments by definition, are needed. Therefore, there is the “conditio sine qua non” for any municipal authority. Olson rightly observes that “If the state, with all of the emotional resources at its command, cannot finance its most basic and vital activities without resorting to compulsion, it would seem that large private organisations might also have difficulty in getting the individuals in the groups whose interests they attempt to advance to make the necessary contributions voluntarily.”367 Economists rely on the theory of Pareto efficiency to rationalise the privatisation or PSP of goods and services. However, it has been demonstrated in this chapter that to be Pareto efficient, markets must be perfectly competitive and transaction costs should be negligible. This is not the case in welfare economics due to externalities, public goods, and Asymmetric Information. In some segments of SWM (solid waste collection, landfill
367 Olson, M., Theory of Groups, Cambridge: Harvard University Press, 1980, p. 13.
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management, composting plant), PSP contracts are agreed for many years. Thus, it is sound Principal-Agent relationships that principally determine the effectiveness and efficiency of the service and not the competitive marketplace, as stated in the Standard Market Model (Pareto efficiency). The Standard Market Model is being challenged with regard to the provision of public goods. In addition, public authorities and private contractors lack highly relevant information when setting out contract specifications. As far as SWM in LMIC is concerned, one should not only discuss Asymmetric Information, but also a “Symmetric Lack of Information”. As a result, transaction costs are considered to be the most serious concern. Public authorities have to consider, among other alternatives, in-house contracting and assess contract costs realistically prior to involving the private sector. Simply put, the well-formulated Standard Market Model is very compromised in rendering SWM services, especially in LMIC, due to Asymmetric Information, the limited rationality of the principal and the agent, and the opportunistic guile of the principal and agent. In other words, Pareto efficiency has little to do with good agency management and sound interorganisational relationships. Public services can only be improved if the wise use of contracting is combined with a strategy of internal agency reform. Sclar (2000) presents some rules for improving the public sector368, including carefully delineating the output of any public service considered for reorganisation, knowing the fundamentals369, comparing privatisation with in-house operation by using avoidable cost accounting, fully addressing the reality of transaction costs, and removing politics from contracting.
368 Sclar, E. D., Economics of privatisation, 2000, p. 157. 369 ABC stands for activity-based cost accounting.
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8.
International Organisations and Privatisation Policy
In contrast to the privatisation debate in industrialised countries, the debate in LMIC is tightly linked to the strategy of international donor organisations as many LMIC depend financially on development aid from these organisations. Chapter 8.1 opens a new discussion regarding the issue of sovereign debt, particularly regarding its scope. The privatisation policy of international donor organisations, especially the privatisation policy of the World Bank Group, will be focused on. Thereafter, Chapter 8.4 will consider these International Organisations policies regarding SWM. This section will conclude with some remarks.
8.1
Sovereign Debts
Privatisation in LMIC is generally directly linked to debt issues. In order to demonstrate the strategy of the international organisations, the debt issues in LMIC will be discussed below. The absence of a well-established insolvency concept, stringent workout procedures, and limited formal access to debtors, drives a wedge between the parties involved in debt management. The sovereign insolvency process is crucial to the management of debts for both debtors and creditors; it ensures the stability of the world economy. Due to its complexity, policy makers and international institutions, such as the International Monetary Fund (IMF), the World Bank Group, and the financial experts of the Paris Club face difficulties in setting up sustainable concepts that all parties could agree with. Nevertheless, some progress has been made in the debate on sovereign insolvency over the past few years. The most important improvement is the increased level of awareness in important creditors’ institutions like the IMF. Its experts agree that the current situation is not sustainable. In any sovereign country, there are bankruptcy laws dealing with the protection of both debtors and creditors. For sovereign debt, however, there is no legal framework. The discussion about the insolvency procedure for sovereign countries is not new. The first idea of applying bankruptcy principles to sovereign countries goes back to Adam Smith (1776), who states: “When national debts have once accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completed paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy…When it becomes necessary for a state to declare itself
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bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor (Smith, 1910, II: 412-413).” Rogoff and Zettelmeyer (2002) focused on early academic studies on creating bankruptcy reorganisation procedures. They started to analyse propositions made in the late 70s and then analysed some proposals made by Oechsli in 1981. Concerning the bankruptcy issue, Ohlin (1976) referred particularly to LMIC. He noted that “Development finance needs something like the institution of ‘honourable bankruptcy’ (…). It is not recognised how important the institution of bankruptcy is to enable the credit system to work without too much risk aversion and to recover quickly from failures.” Sachs (1995) provided one of the major contributions to the bankruptcy debate. His “Theoretical Issues in International Borrowing” (1984) can be considered a milestone in the discussion on sovereign insolvency. Sachs’ main argument was that “Even in bank syndicates significant free rider problems remain”. In other words, individually these creditors have an incentive to call in their claims against the overextended debtor countries, even if doing so injures the economic performance of the debtor so much that the creditors suffer collectively. This idea was promoted by a range of scholars in the 1980s; subsequently, it was strongly endorsed by UNCTAD in its groundbreaking 1986 Trade and Development Report. Further, Raffer (1990) proposed an international insolvency procedure based on Chapter 9 of the US bankruptcy code. In this respect, Reinisch (1994) called for an “independent international insolvency tribunal”. Much of the existing sovereign debt literature is devoted to identifying such incentives so as to explain why sovereign debt markets exist at all. In summary, the existing sovereign debt literature is primarily focused on the repayment incentive of the borrower and the existence of a positive lending equilibrium. Most works in the sovereign debt literature assume an exogenous interest rate and do not characterise the sovereign yield spread over a risk free rate. The influential works by Eaton and Gersovitz (1981) and Bulow and Rogoff (1989a) make the same assumption. Kulatilaka and Marcus (1987) also modelled the sovereign debt in a continuous time framework. Some other authors like Eichengreeen and Portes, 1995; Chun, 1996, Schwarcz, 2000, Yilmaz Akyux, 2001; Krueger, 2002, also suggest adopting a sustainable approach so as to ensure the orderly resolution of debt crises.
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8.2
Scope of the Debt and Financial Crises
The debts of the LMIC soared from US$ 9 billion in 1955 to US$ 572 billion in 1980. Apart from weakening the G77, developing countries were also hit very badly by another development from 1979 onwards. The US Federal Reserve Bank under Paul Volcker sharply raised interest rates on the US dollar to peak levels of over 20%. LMIC, mostly indebted in US currency, were suddenly confronted with huge burdens of debt servicing. This marked the beginning of the debt crisis (Gyothen and Volcker, 1992, p. 198).370 In 1994, the aggregate debt of LMIC was about US$ 1,800 billion. This debt has been increasing since, not only in absolute figures but also in percentage of these countries’ GDP: in 1980, it represented 27% of the GDP; in 1991 it was 40%. For the countries situated in sub-Saharan regions, it amounted to 101%. The debts of Egypt, Jamaica, Madagascar, and Panama represent 130% of their GDP. Annexes 27 through 29 present the actual scope of LMIC debts in a comprehensive fashion. The increase in international private capital flows is a negative consequence of globalisation in the past decade and has caused a number of financial crises. Indeed, a crisis is usually a point of discontinuity, such as a market collapse. For LMIC, however, such crises are a continuous process. Short-term finance and unpaid debts have become a serious threat to the world economy. They are causing widespread popular concern. The biggest financial crisis of the last century occurred in the 1920s and the early 1930s in the USA and in Europe. At the beginning of the 1980s, a debt crisis broke out in Mexico and other countries in Latin America. The crisis of the European monetary system followed in 1992/1993. Other crises occurred in Mexico (1994/1995), Asia (1997/1998), Russia (1998,) Brazil (1998/1999), and Argentina (2001). Since the crisis in 1982, funding development in LMIC has become one of the most controversial discussions of the world economy. As these countries require foreign financial aid for implementing development projects, debts are accumulated. In fact, 90% of investment today comes from external aid. Another milestone of sovereign debt was the creation of the Bretton Wood institutions after the Second World War, especially the World Bank Group and the IMF. Currently, debts are reaching a peak as the budgets of many governments in LMIC increasingly depend on them. Hence, they are not able to pay back the money borrowed, not even so-called debt servicing fees. Consequently, they have to
370 Weizsäcker, E., Post-War History, in Weizsäcker, E./Yong, O./Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p.184.
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obtain more credits just to pay for debt servicing. Most seriously, these countries are not able to stop this vicious cycle of over-indebtedness. There is no mechanism in place today to resolve the sovereign debt crises in a timely fashion. At present, different organisations are dealing with debt issues in different ways. These organisations include governmental creditors (Paris Club 371 ), commercial banks (London Club), and multilateral creditors (IMF, World Bank Group and Regional Development Banks). Actual procedures for sovereign insolvency have so far failed to prevent national debt crises and to manage them in a sustainable manner. Whenever countries fall into extreme debt distress, they are affected for many years. As stated above, 90% of investment today comes from external aid. This assistance remains vital.372 Consequently, most LMIC are under pressure to privatise or to introduce PSP in the public sector, due to the scarcity of government resources or the influence of aid donors.373
8.3
World Bank Group and Privatisation Policy
The World Bank Group is an independent specialised agency of the United Nations, and it works particularly in close cooperation with the International Monetary Fund (IMF). The World Bank and the IMF were both established in 1944 at a conference of world leaders in Bretton Woods, New Hampshire, with the aim of placing the international economy on a sound footing after World War II. To become a member374 of the IBRD, a country must first join the IMF. Consequently, these two institutions are often referred to collectively as the Bretton Woods institutions. While these institutions were primarily established to promote the reconstruction of Europe as an afterthought, the World Bank was also charged with promoting the development of LMIC.375
371 The Paris Club as the most important organisation and was created in 1956. It is an informal body representing all creditors, including the IMF. It has no legal status. The measures of the Paris Club include currency devaluation, reduction of public services, market policies, and trade policies. 372 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998, summary. 373 Batley, R., PPP for Urban Services, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 200. 374 For more information consult http://worldbank.org/members. 375 Stiglitz, J. E., Globalization, Columbia University, 2005, p. 9-1.
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The terms “World Bank376” and “the Bank” refer only to IBRD and IDA, whereas the terms “World Bank Group” and “the Bank Group” include all five institutions. These five institutions are IBRD, IDA, IFC, MIGA, and ICSD. Through its five institutions377, the Bank Group works in more than 100 LMIC. Its role has grown in relative importance in the world of international finance in recent years as private sector 378 net financial flows to LMIC have declined; hence, the less private sector investment is made in LMIC, the greater the necessity of the World Bank Group is. The World Bank Group supports a broad range of programmes through its loans, policy advice, and technical assistance. It divides its work between IBRD379, which assists middleincome and creditworthy poorer countries, and IDA380, which focuses exclusively on the poorest countries of the world. 381 Together with IFC, the Bank also helps countries strengthen and sustain the fundamental conditions they require to attract and retain private investment. The following paragraphs will summarise the key features of the five institutions of the World Bank Group and their role in supporting privatisation policies. a) IBRD, established in 1945, is the original institution of the World Bank Group. The IBRD plays an important role in development policy in LMIC by providing LMIC with loans and advisory services. b) IDA lends to very poor developing countries on easier terms by providing credits. The objective of IDA is to reduce disparities across and within countries – especially in terms of access to primary education, basic health care, water supply, and sanitation.382 c) IFC promotes economic development through the private sector. In contrast to IBRD and IDA, which can lend only to sovereign states, IFC can lend directly to the private
376 The term “World Bank” was first used in reference to IBRD in an article in the Economist on July 22, 1944, in a report on the Bretton Woods Conference. What began as a nickname became an official shorthand for IBRD and IDA in 1975 (The World Bank “A guide to the World Bank” Library of Congress, 2003, p. 11). 377 Each of the five institutions of the World Bank Group has its own articles of agreement or an equivalent founding document. By signing these documents and meeting the requirements set forth in them, a country can become a member of the Bank Group institutions (The World Bank “A guide to the World Bank” Library of Congress, 2003). 378 The World Bank “A guide to the World Bank” Library of Congress, 2003, p. 4. 379 IBRD: International Bank for Reconstruction and Development; Year established: 1945; Number of member countries: 184; Cumulative lending: US$ 371 billion; Fiscal 2002 lending: US$ 11.5 billion for 96 new operations in 40 countries; http://www.worldbank.org/ibrd. 380 IDA: International Development Association; Year established: 1960; Number of member countries: 164; Cumulative lending: US$ 135 billion; Fiscal 2002 lending: US$ 8.1 billion for 133 new operations in 62 countries; http://www.worldbank.org/ida. 381 The World Bank “A guide to the World Bank” Library of Congress, 2003, p. 11. 382 The World Bank „A guide to the World Bank“ Library of Congress, 2003, p. 15.
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d)
e)
sector.383 It also provides guidance on attracting Foreign Direct Investment (FDI). IFC has been interested in financing municipal projects. The latest example is IFC’s participation in a municipal fund in Johannesburg, South Africa. 384 The fund is financing infrastructure projects, including solid waste management throughout the city. IFC’s Environmental Finance Group has conducted feasibility studies of solid waste disposal options for Durban, South Africa, and solid waste processing centres for the Greater Moscow area. MIGA385 encourages foreign investment in LMIC by providing guarantees to foreign investors against losses cause by non-commercial risks. MIGA’s technical assistance services also play an integral role in catalysing FDI, by helping developing countries and implementing strategies to promote investment.386 Finally, the International Centre for Settlement of Investment Disputes (ICSID) 387 helps encourage foreign investment by providing international facilities for conciliation and arbitration of investment disputes, thus helping to foster an atmosphere of mutual confidence between states and foreign investors.
Today, the World Bank Group is the most important source of financial aid (as opposed to investment) for LMIC. In fact, it provides nearly US$ 18 billion in loans annually to more than 100 client countries. The policy of the World Bank Group is a dynamic one. It has evolved considerably in the last 15 years. Indeed, during the 1960s and 1970s388, the focus of the World Bank Group was on the provision of classic “development aid” rather than the promotion of private investment. After the reorganisation of the Bank in 1987, Private Sector Development (PSD) became a programme of special emphasis. After 1993, PSD became a general principle. PSD divisions and departments were created throughout all institutions of the Bank. During the last 15 years, the World Bank Group has been assisting privatisation in more than 80 countries. More than 8,500 state-owned
383 The World Bank „A guide to the World Bank“ Library of Congress, 2003, p. 18. 384 Paimela-Wheler, A., World Bank Financed Waste Management Projects, Washington, 2004, p. 7. 385 MIGA: The Multilateral Investment Guarantee Agency; Year established: 1988; Number of member countries: 163; Cumulative guarantees issued: US$ 10.34 billion; Fiscal 2002 guarantees issued: US$ 1.36 billion; http://www.miga.org. 386 The World Bank „A guide to the World Bank“ Library of Congress, 2003, pp. 20-21. 387 Year established: 1966; Number of member countries: 139; Total cases registered: 103; Fiscal 2002 cases registered: 16; Web: http://worldbank.org/icsid. 388 Katharina Hay in Weizsäcker, E./Yong, O./Finger, M., Limits to Privatization, London: Earthscan, 2005, p. 261.
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enterprises (SOEs) have been privatised, transferring close to US$ 1 trillion in assets from government-controlled enterprises into private hands.389 FDI is often considered the driving force behind PSP. According to the World Bank Group, approximately 1,707 private infrastructure projects worth US$ 458.2 billion were completed between 1990 and 1998. During this period, LMIC received approximately US$ 138.3 billion in FDI (Sader, 2000). However, FDI made in LMIC in infrastructure and services was not the same across all sectors (roads, telecommunications, electricity, water sector, waste water, solid waste). Developing countries saw investment of nearly US$ 755 billion in nearly 2,500 infrastructure projects between 1990 and 2001.390 In sum, almost all five institutions of the World Bank Group work in one way or another to promote and strengthen the private sector. For the World Bank Group, a “vital private sector” is essential for success in the development of a country. There is growing evidence that private investment in some economic sectors is smaller than expected. Accordingly, the World Bank economist Nemat Safik grants that “we were too optimistic concerning the willingness to invest in these countries… despite far-reaching reforms, many countries do not find investors.”391
8.4
Solid Waste Management Policy
Contrary to conventional belief, PSP, both in financing and managing public infrastructure, is not a new phenomenon. In 1562, Sully contracted a private enterprise for waste collection in Paris (see Chapter 3.1). In 1662, the city of Tokyo contracted out waste collection, including waste disposal, to private contractors.392 Recently, both in industrialised countries and in LMIC, municipal infrastructure and services markets have undergone unprecedented change in terms of the financial volume of transaction, mostly in the last two decades. Figure 10 displays comprehensively three general developments in foreign aid for SWM.
389 Dyck, 2001 cited in Weizsäcker, E./Yong, O./Finger, M., Limits to Privatization, London: Earthscan, 2005, p. 261. 390 Wolff, P., Private Funding of Infrastructure, in Weizsäcker, E. /Yong, O../Finger, M. (eds.), Limits to Privatization, London: Earthscan, 2005, p. 319. 391 Hoering, 2003 cited in Weizsäcker, E./Yong, O./Finger, M., Limits to Privatization, London: Earthscan, 2005, p. 261. 392 Dorvil L., PSP in Morocco, Solid Waste, health and the Millennium Development Goals – CWG SWM in LMIC and WASH Workshop 2006, Kolkata, India, 2006, p. 1.
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They are:393 1. 1970s - 1980s (Hardware Approach) 2. 1980s – 1990s (Software Approach), focused on planning management and operation and maintenance 3. Since 1990s (Capacity Development Approach) Those approaches will be discussed separately below. 1. 1970s - 1980s (Hardware Approach) Since the World Bank’s first urban project was launched in Senegal in 1972, some 7,500 projects (all sectors included and representing investments of close to US$ 500 billion), have been completed. The first urban projects financed by the Bank in some LMIC were usually devoted to upgrading technical services, at great expense in terms of both equipment and technical assistance. These undertakings improved services for a few years, but they eventually failed due to a plethora of problems -- principally, the lack of sustainable funding. As a result, equipment was eventually abandoned, technical staff drifted away, know-how was lost, and the service typically ended up meeting less than 10% of actual demand.394 The Bank’s urban strategy document (World Bank, 1999) recognised that, while these projects brought benefits, they fell short of a sufficient recognition that achieving sustainable urban development requires a more integrated approach across the physical environment, infrastructure networks, finance, and institutional and social activities.395 In fact, from 1976, the World Bank Group promoted projects in 40 cities around the world, including Cairo, Alexandria, Manila, Djakarta, and Singapore. 396 More than US$ 500 million was invested in SWM as part of this programme. However, although much hardware has been provided, this approach has a short-lived, unsustainable effect; it can even have adverse consequences. In effect, LMIC very often lack managerial know-how to utilise and maintain the equipment and facilities provided, or they have an outmoded administrative system.
393 JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, page V. 394 Farvacque-Vitkovic, C./ Godin, L. , Future of African Cities, The World Bank: Washington, D.C.,1998. 395 Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xix. 396 Cointreau, 1982 cited in JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 16.
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2. 1980s - 1990s (Software Approach) The urban policy analysis developed during the late 1980s and early 1990s, building in part on Bank-supported research, remains a sound guide to the Bank’s assistance activities.397 This shift in the Bank’s approach to urban development was articulated in its urban strategy, which maintains that municipalities are to promote the welfare of their residents. The approach in the late 1980s is defined as the “Software approach”. This approach is defined as the provision of assistance for planning, the development of waste management systems, and technology transfer. The aim of the World Bank’s urban strategy was to promote sustainable municipalities. According to the Bank, sustainable cities are first and foremost liveable, competitive, bankable, well-managed and well-governed. A well-managed municipality represents and includes all groups. Further, it is characterised by the accountability, integrity, and transparency of government actions; finally, it rests on strong local government capacity to fulfil public responsibilities based on knowledge, skills, resources, and procedures anchored in workable partnerships.398 3. Since 1990s (Capacity Development Approach) Taking integrated approaches to supporting LMIC to improve their overall waste management capacity has become more apparent in recent years. Since the 1990s399, a new approach has been emerging. This new approach is called the “capacity development” approach. This approach is defined as a process of comprehensive environmental policy. It also includes the level of capacity of LMIC according to their socio-economic background as well as an examination of the most appropriate contents, strategy, and methodology of the assistance granted. The concept of capacity development emerged through the process of self-critical evaluation with respect to technical cooperation and foreign aid projects promoted during the previous four decades. Simply put, traditional foreign aid cooperation was focused on “What and Why” questions, but had neglected the “How” questions for the parties involved in LMIC. Therefore, one should focus on capacity development as one of the key elements. Thus, the capacity development approach emphasises the primary role of LMIC; it should be coupled
397 World Bank policy papers issued in this period include Urban Policy and Economic Development: An Agenda for the 1990s, 1991; Housing: Enabling Markets to Work, 1993; Better Urban Services: Finding the Right Incentives, 1995; and an unpublished sector review, "An Agenda for Infrastructure Reform and Development," INU, 1993, which served as an input to the Banks 1994 World Development Report cited in Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xx. 398 Griffin, A., Sustainable Cities, in Freire, M./ Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. 63. 399 JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 15.
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with developing a comprehensive understanding of the institutions dealing with SWM. Based on the experiences of past technical cooperation in SWM, the method of assistance for capacity development can be roughly grouped into the following five categories:400 Increase: to provide the expertise, know-how, equipment and ‘software’, and help enhance skills, management capabilities, and planning capabilities; Build: to help build up the institutional/organisational capacity, such as a legal system for SWM, administrative organisation for SWM, and a forum for citizens to participate in SWM; Disseminate: to set the SWM system of a specific area as a model, and disseminate it to other areas with similar conditions; Sustain: to help sustain an existing or newly structured SWM system through proper financial management and/or economic incentives; Reduce loss: to help achieve more efficient utilisation of human and physical assets and improve management through modification/improvement of the existing SWM system. The next section reviews the general global trends and evolution in foreign aid with regard to SWM in LMIC. It 401 includes an overview of the activities of the most important international organisations in the last decade. a) The World Bank Group and Regional Development Banks The World Bank Group is the world’s largest foreign aid organisation in SWM. The first municipal solid waste project financed by the World Bank Group was for Singapore in 1973. Since then, lending has slowly risen to 72 projects, totalling over one billion dollars. About 15 new projects, with a total estimated value of about US$ 660 million, have been approved or are being approved.402 Since the 1980s, the Bank has promoted more than 100 SWM projects worth an aggregate of more than US$ 1 billion in LMIC. These projects were carried out by adopting two approaches: • Assistance in SWM improvement from the viewpoint of urban development, and • SWM and disposal from the viewpoint of environmental protection, pollution abatement, and removal of environmental contamination.
400 Categorization based on Mabuchi and Kuwajima (2004) cited in JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 21. 401 JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005, p. 24. 402 Paimela-Wheler, A., World Bank Financed Waste Management Projects, Washington, 2004, p. 5.
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These approaches took the form of two different programmes. The first is called the Urban Development Programme 403 , and the latter is included in the New Ideas in Pollution Regulation as projects for hazardous waste disposal. For the Bank, the key issues are strategic service planning, institutional arrangements, PSP, financial management, and environmental management. The World Bank Group approved a new infrastructure action plan in 2003; this plan strongly supports substantial increases in infrastructure lending, including solid waste.404 It is worth noting that the regional banks essentially very often follow the same policy regarding SWM in LMIC as the World Bank Group. Thus, like the World Bank Group, the Inter-American Development Bank (IDB) extends assistance for MSWM to Caribbean and Latin American countries, as a component of urban development. IDB has clearly indicated its preferred assistance to PSP projects. Furthermore, the Asian Development Bank (ADB) has extended assistance to projects that include SWM as a part of urban development. The European Bank for Reconstruction and Development (EBRD) is also actively engaged in a number of MSWM improvement projects in former Soviet Union cities. Together with the improvement of obsolete facilities and systems, EBRD has decided to strongly advocate PSP. Finally, the African Development Bank (AfDB) has few records of assistance in the SWM sector. Cointreau-Levine, one of the well-known solid waste specialists within the Bank, has been carrying out outstanding research work in the field of SW for over two decades. Recently, she undertook an interesting survey, applying well-designed guidelines and a contract form to strengthen the implementation of private sector participation in solid waste (CointreauLevine et al, 2000a, b, c). Although her opinion does not necessarily express the policy of the World Bank Group on SWM, some of her ideas will be analysed and discussed below in terms of the economic limitations of some PSP models. According to Cointreau-Levine (see Chapter 6), PSP in delivering SW services is more efficient than public management because efficiency is driven by competition. However, competition occurs in some SWM elements without challenge. Competition in long-term contracts, especially in SW infrastructure management, is foreclosed. Thus, efficiency and effectiveness can only be achieved through sound inter-organisational relationships. In her opinion, different arrangements between the private sector and the public authorities can be made, such as Public-Private Partnerships, franchise, concessions, etc. A private-public
403 http://www.worldbank.org/urban/solid_wm/swm_body.htm (Accessed in October 2004). This World Bank portal for solid waste management contains much basic literature on foreign aid granted to developing countries to promote solid waste management. 404 Paimela-Wheler, A., World Bank Financed Waste Management Projects, Washington, 2004, p. 6.
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partnership is a joint venture of public authorities and the private sector. However, there are some limitations in this arrangement in terms of the contestability existing between public authorities and the private sector. As a partner of this joint venture, a public authority might have difficulty to sanction itself (as a partner) if this partnership is not performing very well. Another, albeit less obvious, issue is the termination of this partnership. Although this arrangement presents some advantages in theory, strong evidence is still lacking. Another PSP arrangement examined in-depth by Cointreau-Levine is the franchise. In her opinion, a franchise arrangement is created whenever a firm is given exclusive monopoly in a specified zone to provide SW services. Residents sign up to pay for the service and a private sector contractor collects and transports their waste to a transfer station or to a landfill. The beneficiaries of the services pay the franchisee directly. Cointreau-Levine argues that this arrangement is suitable where beneficiaries would not be willing to pay user charges to the government or would be willing to pay more to the private sector. It is also suitable where the fee for the service needs to be determined for each customer. She recommends that franchise arrangements must be long enough for a depreciation of assets to occur as well as the development of a good cost recovery relationship with customers. Four key issues should be highlighted regarding the arguments concerning this arrangement. First, this arrangement is challenged by the theory of public goods, which states that it is not recommended to exclude beneficiaries from this service. Bad SW management has widespread negative effects, even those who regularly pay the fees required. Another relevant issue in this context is affordability, especially in low-income areas in LMIC. Thirdly, the theory of market failure (see Chapter 7.5) challenges this argument; due to Asymmetric Information (or Symmetric Lack of Information), the private sector could impose inadequate tariffs without the intervention of the state, since information on the quantity of SW generated and on related costs is usually lacking in LMIC. Finally, if the contract must be long, competition is foreclosed during the contractual term. Thus, a state monopoly could be turned into a private monopoly/oligopoly. A concession arrangement is realised when a private firm is given exclusive access to public SW facilities management. This is common in management of transfer stations as well as landfill management. The beneficiaries of the service pay a tipping fee to the private firm. The private sector finances and owns the facility for a long-term period (20 years for instance). Cointreau-Levine proposes some useful guidelines for PSP. Accordingly, local public capacity has to be built to develop technical specifications, tender competitively, and comparatively monitor performance. Further, capacity has to be built to provide a contestable government service. Local capacity has to be strengthened to generate revenue
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and operate as an accountable cost centre. If capacity building and capacity development are on the actual agenda of international donors, there is as yet no comprehensive policy as to how the private sector should build the capacity of municipal managers, since there is no incentive to do so. One reason cited in favour of private sector involvement is the inefficiency of public management. Why should the private sector strengthen the managerial and technical capacity of municipal managers? Further, municipal managers quantify output to enable comparative performance monitoring. However, the analysis of the CESPA case study has proved that establishing a threshold for monitoring the SW service is anything but obvious. Is a street considered not cleaned if the private entrepreneur does not collect 1 kg of SW or is the SW collection performance not achieved if a SW container is not empty at a specific time according to the contract specifications? Moreover, public awareness plays a vital role in setting up a monitoring system. Citizens have to be aware of the private entrepreneur’s collection schedule. Should they impose penalties on the private firm for failing to respect the collection schedule? Does competitive, transparent procurement create efficiency? Are agreements long enough to allow for the full depreciation of investment? However, as stated above, LMIC lack sound technical and managerial capacity in the field of SWM. Therefore, most relevant private enterprises are international ones. Contractual agreements that are long enough to allow economies of scale limit competition during the contract period. Cointreau-Levine rightly argues that efficiency, which is the basic of positive argument in favour of PSP in delivering SW services, is driven by competition. However, SWM in LMIC encompasses various waste elements, such as street sweeping, waste collection, waste transport, waste recycling, waste composting, management of transfer stations, landfill management, etc. Not every waste element allows for fair competition. If competition in a solid waste element like street sweeping is obvious due to the availability of staff, low technology and management, and the short duration of contract, competition in SW infrastructure with heavy investment, like sanitary landfill management, is limited within the time frame of the contract. It is often advocated by international organisations that PSP policy will ultimately result in more foreign investment and more economic growth. However, the issues of bankruptcy and “On-again / Off-again” are not considered despite their importance to guaranteeing continuity of service. Who should bear the costs of hazard remediation if a private company goes out of business? Another concern is the affordability of the service. Very often, SWM elements financed by international credit organisations are technically upgraded in terms of providing mechanical equipment and financial means without any consideration of the polluter pays/user pays principle.
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According to Cointreau-Levine, the international private sector, for instance, typically looks for a minimum landfill capacity of 300 tons per day, both for the efficient utilisation of landfill equipment and for having an adequate base of income to support the cost of foreign expertise. Thus, with an average waste generation of 0.60 kg per day per inhabitant, and taking into account the waste treatment sector (recycling and composting), only a municipality with more than 600,000 inhabitants is attractive to the private sector in terms of landfill management or management of transfer stations. Therefore, small to medium-size cities and small islands are not attractive to the international private sector. Simply put, some PSP models are limited because of the size of the population. If the international private sector is highly interested in more waste generation by managing a landfill, a conflict of interest with the hierarchy principle will arise. Another concern is the collision effect whenever different private entrepreneurs are operating in the same collection areas. Cointreau-Levine argues that to create contestability, the private sector should service no more than 70% of any city.405 If this is true for some SW elements, such as street sweeping and SW collection, this argument is challenged by managing treatment and disposal facilities. Finally, she asserts that in transfer, treatment and disposal contracts, flow control needs to be carefully addressed to minimise the risks borne by private investors. Flow control involves the guarantee that a minimum quantity of waste will be delivered to a facility. PSP contracts should specify the minimum amount of waste to be delivered. Public authorities should be committed to ensuring that the agreed amount of waste is brought to the facility or alternatively that it pays the sum that it would pay for that specified minimum.406 According to the hierarchy principle, however, the main purpose of any comprehensive SWM should be recycling and treatment. Thus, as far as landfill management is concerned, the target should be to dispose of as little waste as possible and not vice versa. How could municipal authorities conduct a waste minimisation awareness campaign and at the same time promise the private sector that more waste is possible? The empirical section of this dissertation demonstrates that if the private firm is paid according to the quantity of waste disposed, this will result in the non-application of the hierarchy principle. In sum, the overall objectives of the World Bank projects for solid waste collection and disposal are to:407
405 Cointreau-Levine, Sandra, PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 15. 406 Cointreau-Levine, Sandra, PSP in MSWM, Part II : Guidance Note, St Gallen: SKAT, 2000, p. 24. 407 Environmental Assessment Sourcebook 1999 CHAPTER 9 “Population Health and Nutrition; Urban Development; Transportation; Water supply and Sewerage”, http://lnweb18.worldbank.org/ESSD/envext.nsf/47ByDocName/ Chapter9PopulationHealthandNutritionTransportationUrbanDevelopmentWaterSupplyandSewerage/$FILE/ Chapter9PopulationHealthAndNutritionTransportationUrbanDevelopmentWaterSupplyAndSewerage.pdf.
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• Provide appropriate and efficient collection of solid waste in municipalities; • Provide effective and economic transport of collected waste to disposal facilities; • Provide environmentally safe, technically practical, and low-cost disposal; and • Strengthen institutions technically and financially to ensure cost effective operation and the long-term maintenance of solid waste systems. There is no incentive for beneficiaries in LMIC to prevent or minimise the generation of waste according to the hierarchy principle when international donors bear the full costs of local waste services. Simply put, there is a contradiction between the polluter pays principle and foreign aid. In general, PSP is viewed by the most important international organisations, including the World Bank Group, as more efficient and more effective than the public sector. Potential benefits of PSP in delivering SW services are usually presented. Figures of efficiency gained are put on view without economic limitations. More advantages but fewer disadvantages are cited and anecdotal evidence is used only to illustrate successful applications of the PSP concept. Simply turning over public service delivery to private agents, without ensuring that the principles of sustainability and the key issues of PSP making these successful are put in place, leads to a worse situation than portrayed in surveys conducted by specialists of international organisations like the World Bank Group. b) United Nations organisations Different United Nations organisations render assistance to SWM in LMIC (see Table 12). The following table summarises these organisations, including the objectives of their programmes.
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International Organisations 1 United Nations Environment Programme (International Environmental Technology Centre) 2 United Nations Development Programme 3 United Nations Industrial Development Organisation 4 United Nations Institute for Training and Research
Objectives Collection of technical information and accumulation of appropriate technologies for SWM Promotion of SWM in LMIC in cooperation with the World Bank, UNIDO, UNEP, and UNCHS Assistance to SWM focusing on African cities Promotion of “Chemical and Waste Management Programme”; training and capacity building programme for implementation of the globally harmonised system of classification and labelling of chemicals Promotion of “Chemical and Waste Management Programme”; training and capacity building programme for implementation of the globally Harmonized System of classification and labelling of Chemicals Urban Management Programme, assistance projects for MSWM
5 International Labour Organisation
6 United Nations Centre for Human Settlements (UNCHS-Habitat)
Table 12: International organisations and their programmes regarding SWM (Source: JICA, Capacity Development in Solid Waste, Tokyo: IFIC, 2005) Finally, bilateral cooperation through bilateral institutions (GTZ, KfW, DANIDA, etc.) plays an important role in assisting LMIC in SWM. Mutual partnership and coordination will be a crucial challenge.
8.5
Concluding Remarks
This chapter has introduced the issue of debt in relation to privatisation in LMIC. The link between sovereign debt and privatisation has been shown unambiguously. As yet, no sustainable concept exists to resolve the debt issues facing creditors and debtors alike. Unpaid debts result in popular concern. In effect, most investment in LMIC comes from international aid and most LMIC governments depend on it. The influence of the so-called donor organisations is therefore very high. International organisations, especially the World Bank Group and the IMF, force these countries to privatise state-owned companies or to introduce PSP in public services. Two key points should be noted. Firstly, the success of PSP differs from one country to another. Secondly, PSP is not the same across all sectors. Due to the lack of financial means to achieve the MDG in LMIC, the issue of PSP,
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especially in the solid waste industry, will preoccupy academic and professional discussion for at least the next 15 years. As these countries require foreign financial aid to implement development projects, debts are accumulated. In order to stop this vicious circle of overindebtedness, the concept of PSP is crucial to the development process. Accordingly, the issue is no longer one of public versus private. Meeting financing needs and the MDG will require resources from all possible sources, including aid from international organisations and comprehensive PSP. The international institutions mentioned promote and strengthen the private sector in LMIC. As shown, Foreign Direct Investment (FDI) is often considered the driving force behind PSP. This chapter has demonstrated that the privatisation discussion is not free of ideological beliefs. The opponents and advocates of privatisation argue according to their ideological preferences rather than in terms of environmental and economic merits. Finally, this chapter has identified the issues of SWM in LMIC, including donors trends. It has been demonstrated that the “1970s-1980s” (“hardware”) approach does not have a lasting effect unless it is accompanied by a sound management system. Credits from international organisations can result in LMIC failing to assess the suitability of the technology to be funded, its full costs, and the affordability of the services provided. Not enough attention may be paid to whether the technology is proven to fit the specific conditions of a given country, whether the total costs have been recognised, and whether sufficient attention has been given to how facilities will be replaced at the end of their useful lives.
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III. EMPIRICAL EVIDENCE
Introduction
T H E O R Y
ISSWM
{
Privatisation and PSP Goods and Market Theory
Strategy of International Organisations
E M P I R I C A L
METAP illustrative Case Studies CESPA Case study
Waste Collection
Contracting-out
CONCEPTUAL FRAMEWORK
This section is assigned to the empirical foundation of this dissertation. It encompasses three illustrative case studies from Egypt, Lebanon and Tunisia which will be presented and analysed. Thereafter, a single case study (CESPA) addressing one solid waste element (Solid waste collection) and one PSP model (Contracting-out) will be analysed and discussed.
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9.
Illustrative Case Studies
This section presents empirical illustrations and applications of PSP experiences in some LMIC. After presenting the overview and background of the case studies, key features of the solid waste section in the project region will be taken up. Thereafter, three PSP case studies from Egypt, Lebanon and Tunisia will be presented and analysed. A discussion of the main results regarding the hierarchy principle, the polluter pays principle, effectiveness, efficiency and inter-organisational relationships will conclude this section.
9.1
Overview and Background of the Case Studies
These illustrative case studies of PSP experiences have been obtained from the Mediterranean Environmental Technical Assistance Project (METAP) - Regional Solid Waste Management Project (RSWMP). The beneficiary countries of the METAP-RSWMP project are Algeria, Egypt, Jordan, Lebanon, Morocco, the Palestinian Authority, Syria, and Tunisia. Hereafter, these countries will be referred to either as METAP-RSWMP region or simply the project region. The project is funded by the European Commission and executed by the World Bank Group. These examples will be analysed both qualitatively and quantitatively with respect to some of the principles of integrated sustainable solid waste management (ISSWM), such as the hierarchy principle and the polluter pays principle; various core elements of PSP will be considered as well, including inter-organisational relationships, effectiveness, and efficiency. Significant insights regarding both the economic limitations of PSP and its appropriateness will be gained from these illustrative case studies. This knowledge will ultimately be used to set up the conceptual framework of this dissertation. Unlike the single case study, which deals in-depth with SWM at a national level (Morocco), these three illustrative cases will focus on SWM at a broader level, namely in the Maghreb and Mashreq regions. The data presented are obtained from the documents of the METAPRSWMP project. The Mannheim-based GKW consultancy is the joint owner of the documents. The main documents are: Volume 1: Overall Introduction: Decision Maker’s Support Document: Glossary Volume 2: Policy, Legal and Institutional Guidelines & Aids to Implementation Volume 3: Regional Guidelines: Finance and Cost Recovery Guideline & Aids to Implementation Volume 4: Private Sector Participation Guideline & Aids to Implementation 138
9. Illustrative Case Studies
Volume 5: Regional Guidelines: Public Awareness & Community Participation Guidelines & Aids to Implementation Volume 6: Case Studies PLI, FCR, PSP, PA&CP, TEC Unlike the single case study, the author does not claim to be presenting his own fieldwork here. These illustrative case studies cover a wide range of solid waste services, including landfill management, collection systems, treatment facilities, etc.; by contrast, the single case study treats one single Solid Waste (SW) system, albeit in detail, namely SW collection, and one single PSP model, namely contracting-out. The main results are displayed in Table 15, Table 16 and Table 19 as strengths and weaknesses. The strengths will be used in establishing a conceptual framework at the end of this dissertation, while the weaknesses are useful in addressing its main objectives, namely the economic limitations of PSP.
9.2
Key Features of the Solid Waste Sector in the METAP-RSWMP Region
The following sections address some key features of SWM in the region. These are PSP, institutional issues, waste generation, the management of solid waste, and the economic value of the recycling sector. These are discussed in accordance with the regional PSP concept. a) Private Sector Participation Countries in the METAP-RSWMP region have traditionally funded SWM services out of national and municipal budgets, against a background of non-accurate information. Progress in the region to render the SW service more effective and efficient, and to comply with stricter environmental standards, has meant that countries and municipalities are faced with financial challenges within the context of limited municipal financial resources. As a result, the private sector is financing the achievement of public policy waste management objectives in some countries of the region. However, the strategy regarding the Private Sector Participation (PSP) policy in the field of SWM differs from one country to another. It is considered advanced in Egypt, Lebanon, Syria, and Morocco. In recent years, several projects for waste collection, transfer and disposal, have been tendered nationally and internationally. Long-term contracts have been agreed in Lebanon, Egypt, and Morocco.
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9. Illustrative Case Studies
However, some contractual agreements have failed, due to insufficient funding and nonfulfilment of contractual obligations (e.g., Tunisia, Algeria, and Morocco), due to inefficiency, poor performance by the service provider, and poor monitoring by the public sector. Successful implementation of a PSP approach requires a comprehensive framework, within which both contractual parties can operate with continuity, and which defines both the rules and the interfaces (see Chapter 6.6). b) Institutional Issues In the project region, waste management is a shared responsibility at national, regional, and local levels and, at the national level, of various government ministries and agencies. Generally, the Ministry of the Environment or Environmental Agency is responsible for the provision of waste management services in the region. In 2002, for instance, Algeria created a dedicated SWM agency through which it sought to promote enhanced SWM services. In Tunisia, a National Waste Agency has been considered; this agency would undertake waste management studies as well as the implementation of waste management facilities and cost recovery on behalf of local communities. In most countries of this region, institutional capacity to provide leadership on waste management issues remains weak, nevertheless. Generally, across the region, the SWM sector is inadequately structured and regulated by public authorities. Although SW services consume between 20 and 50 % of the annual budget of the municipalities in the region, solid waste is not prioritised on the political agenda. However, the prerequisite for institutional capacity building for the effective regulation of public sector services is a very important step towards mobilising private entrepreneurs in the ISSWM projects. Instead of the usual two parties, independent experts or regulatory agencies can assist public institutions. c) Waste Generation Approximately 160 million people live in the project region, and the population is growing rapidly. More than 50% of the population live in urban areas. The region generates about 35 million tons of municipal waste per year. It is estimated that waste generation will increase across the region by up to almost 50%, due to increasing urbanisation, ever-growing populations, and nonetheless, the increasing levels of economic development. This will result in changes in both the quantity and the characteristics of the waste generated. Many cities remain under-serviced in terms of SWM which represents a great opportunity for both national and international private firms. As a rough guide, Germany, with a population of 82.5 million, generates about 380 million tons of SW each year. As one of the biggest in
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9. Illustrative Case Studies
Europe, the SW market in Germany generates a turnover of more than € 35 billion every year. About 75% of the market are run by the private sector. These figures obviously have to be understood within the socio-economic context of the country. While they can obviously not be projected onto the METAP-RSWMP countries, they suggest what the solid waste market could look like in future. Finally, there is little accountability for waste generation, so that accurate data is lacking. d) Waste Management In the region, SWM is considered inadequately managed. It has focused primarily on the removal of waste from the municipalities and its subsequent disposal, giving no priority to avoidance and treatment as the hierarchy principle requires (see Chapter 5.1). Accordingly, open dumps, which pose a serious threat to environmental quality, are legion. In Tunisia, for instance, the government has identified over 400 unregulated dumps in need of rehabilitation. In Morocco, there are over 180 dumpsites.408 In fact, 90% of the waste generated in the project region, amounting to over 30 million tons per year, is disposed in inappropriate places with inadequate environmental standards. This has resulted in transferring health and environmental issues from one place to another at great cost, and has furthermore created new and costly problems such as the rehabilitation of dumpsites. The central issue is that environmental remediation is more costly than prevention. According to the World Health Organisation (WHO), over 10% of preventable illness is due partly to inadequate SWM. The latter also poses a serious threat to the national economy in general, and in particular to the tourism-driven economy. For instance, inadequate SWM in Tangier leads to the pollution of beaches and US$ 23 million in lost revenues for hotels.409 This figure will increase as more waste is generated due to an ever-improving standard of living, urbanisation, and not least due to the ambitious programme of the Moroccan government to strengthen the tourist industry. Furthermore, in 1999, the cost of environmental degradation in Tunisia is estimated at about US$ 565 million (representing 2.7% of the GDP). In Morocco, the annual cost of environmental degradation is estimated at between 2.75% and 4.65% of the GDP, representing about € 1.3 billion410, and the cost of inadequate SWM alone is estimated to be about 0.5% of the GDP.
408 « Les nouvelles bases d’une politique “déchets” : Enfin une loi ! www.lopinion.ma, 9th August 2006. 409 Royaume du Maroc « Evaluation du Coût de la dégradation de l’environnement », June 2003, Rapport No. 25992MOR World Bank, www.worlbank.org , June 2003, p. 1. 410 Royaume du Maroc « Evaluation du Coût de la Dégradation de l’Environnement » Document de la Banque Mondiale, Rapport No. 25992-MOR, 2003.
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9. Illustrative Case Studies
e) Informal Sector and Recycling Recycling is largely undertaken by the informal sector in all Maghreb and Mashreq regions in question, due to a lack of formal recycling processing plants. The informal sector operates differently in each country, and sometimes it even operates differently within one city. In fact, 10,000 people across the METAP-RSWMP region live on the revenue derived from waste management-related activities in the informal sector. The impact of the informal sector on the amount of waste requiring disposal varies across the region. It is considered the highest in Cairo411, where the Zabbaleen community (waste pickers) has developed an internal economy based on the collection, recovery, sale, and reutilisation of waste materials. SW is collected by the Zabbaleen through agreements with individual residents, and specifically those living in higher income areas of the city. Over 80% of the waste collected by the Zabbaleen community is utilised. This has created over 3,000 jobs, as well as a micro-enterprise based on the materials recovered. Across the city as a whole, this translates into a reduction of the amount of waste requiring disposal, of less than 10% of the waste generated. In other parts of the region, the impact of the informal sector on the total amount of waste requiring disposal, is probably in the range of 5 – 20% of the waste generated. In Lebanon, 40% or more of all solid waste has been estimated to be handled by the informal sector. In Tunisia, the ECO-Lef412 initiative has created other opportunities for the integration of the informal sector into the formal sector. Finally, the informal sector leads to direct economic and environmental benefits and removes non-organic materials from the waste stream, and hence facilitates the achievement of the hierarchy principle. Simply put, any PSP initiative in LMIC should consider and integrate the informal sector into its activities. In light of the above, PSP initiatives should not create conflict with informal waste management activities. This has occurred in Cairo in connection with the contracting-out of waste management services, resulting in the isolation of the informal sector. Door-to-door collection by the informal sector is replaced by a modern collection system, and waste separation in the street and on new sanitary landfills is restricted, thus considerably limiting the extraction of recyclable materials from the waste stream and at the same time affecting the revenues of the informal sector. Recycling is an important socio-economic activity across the region and the informal sector plays a considerable role in this activity. In fact, recyclable materials comprise between 20 30% of the waste generated in METAP-RSWMP countries in terms of weight. The extent of
411 Within the households served by Zabbaleen collection contracts. 412 Eco-Lef is a waste packaging system for the collection of used packaging and its treatment in Tunisia.
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9. Illustrative Case Studies
this activity varies widely within a country. In some cities (Cairo/Egypt), the recycling activities of the informal sector remove virtually all the recyclable materials from the waste generated from at least some parts of the city. In the year 2000, there were about 220 recycling workshops in Alexandria/Egypt with an average number of six workers. These carry out sorting and loading activities. The METAP-RSWMP experts have identified three ways to enhance the recovery of recyclable materials in the region: • The provision of incentives in return for specific recyclable materials; • The separation of dry materials from wet materials at the source of waste generation; • The recovery of recyclable materials from mixed waste, following collection.
9.3
Illustrative Case Study: Egypt
The quantity of solid waste generated in Egypt is estimated to be around 60 million tons a year. Solid Waste generated from urban and rural areas amounts to about 15 million tons yearly, while the remaining quantities include agricultural waste, demolition waste, etc. The major SWM issues include insufficient SW collection and a lack of sanitary disposal. The SWM services used to depend on three main players: • Municipalities responsible for street cleaning and servicing municipal SW containers. • The Zabbaleen 413 traditional system, in which they “contract” with individual households to collect their waste in exchange for a fee that ranges between L.E.414 1-5 per month. They offer a door-to-door service daily or once every two days in return for a monthly fee. Waste collected either by the private sector is delivered to the Zabbaleen communities or directly to disposal sites (see Chapter 4.8 on the informal sector). • Additional Non Governmental Organisations (NGO) also perform some limited solid waste services. The solid waste issues only came onto the agenda of the government as a priority in 1999, when a severe air pollution episode attacked Greater Cairo due to the open burning of accumulated waste disposed in inappropriate places. Since then, important measures have
413 Common name of waste pickers in Egypt. 414 Exchange rate in November 2003: approximately 6.2 Egyptian Pounds to 1.0 US Dollar.
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9. Illustrative Case Studies
been undertaken to tackle these issues. Thus, a Ministerial SWM Committee co-chaired by the Minister of the Environment and the Minister of Local Development was funded in order to address the institutional and financial aspects of the system. In December 2000, the Committee prepared a “National Programme for Waste Management”. The programme addressed the policy and institutional actions, as well as the projects needed to manage different streams of waste. A policy decision has been taken by the Government of Egypt (GoE) to introduce economic incentives for SWM services. These included a tax break for at least 5 years, as well as exemption from custom duties for the equipment used in waste management services. One of the initiatives was to transfer the integrated SWM services to the private sector. A private service has since been started in Alexandria, 3 zones of Cairo, 2 zones of Giza, Suez, and Aswan. The first step was to establish a Ministerial SWM Committee, and then the necessary decrees allowing for the contracting-out of the service were issued, including a decree allowing the inclusion of solid waste fees from the service beneficiary in electricity bills. Afterwards, experienced private operators were invited to provide the services in some Governorates (see Table 13). The Qena-Egypt project has been self-financed without using any funds from sources outside Qena City. The SWM services have been commercialised through the collection of a monthly fee from households. In reality, alongside the above-mentioned revenues, households today are requested to pay 2 L.E.415 per month for waste collection. By taking account of some 45,000 households of which 90% regularly pay the fee, an annual amount of about 1 million L.E. is collected directly from the waste generators. In addition to the revenues collected for the cleansing fund, fees are also collected along with the issue of car and business licenses, so that almost 50% of the revenue comes from private sources whereas the remaining part is still financed by the public sector. There are some goods examples of improvement of national institutions dealing with SWM. One of them is given in Egypt (Qena) where 20 employees have carried out monitoring and enforcement policies. Furthermore, the project is supervised by a project steering committee, personally headed by the Governor. In addition to the operational crews, about 20 people are involved in performance monitoring. Reports are directed to the project manager, who takes immediate action in the case of mismanagement. A committee which represents the Governorate, the City Council, and the police, supports enforcement. The Governor himself and his key staff are involved in monitoring and instructing the waste collection crews to achieve best SWM practice.
415
Exchange rate in November 2003: approximately 6.2 Egyptian Pounds to 1.0 US Dollar.
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9. Illustrative Case Studies
The progress achieved by the different governorates in Egypt on the PSP process is not homogeneous. The larger, urban governorates, have progressed steadily, while others, especially rural governorates, have failed. Table 13 provides data concerning the governorates that have completed their outsourcing and have entered into a contractual agreement with private operators. Accordingly, the SW sector is driven mostly by international private companies. The issue is how to integrate local SME and the informal sector into the business?
Governorate Total quantity of waste (tons/day) 2,700 Annual contract value at start of service (L.E. Million) 85 52 59.5 48 1,400 1,600 325 435 36 44.9 9 12 75 Price (L.E./ton) Operator
Alexandria Cairo North District Cairo East District Cairo West District Giza Urban District I Giza Urban District II Suez Aswan
86
CGEA Onyx416 (International) AAEC417 (International) (FCC and Urbaser) (International) FCC and Urbaser (International) Jacorossi418 (International) FCC419 (International) Tanzifco420 / MD (Regional) ICC (Consortium National & International)
Table 13: Overview of PSP in SWM in Egypt (Source: METAP-RSWMP project)
416 A division of Vivenvi http://www.cgea-onyx.fr. 417 AMA Arab Environment Company (AAEC) of Italy and Arab Contractors (Osman Ahmed Osman & Company) 418 Jacorossi: Italian Company (Jacorossi company – El Dawallia). 419 (FCC – Giza for environmental services): Spanish Company. FCC was created in 1992 by the merger of CONSTRUCCIONES Y CONTRATAS, S.A. and FOMENTO DE OBRAS Y CONSTRUCCIONES, S.A. http://www.fcc.es/fcc/corp/ing/sdp_n_ddln_250.htm. 420 Tanzifco is one of the leading cleaning companies in Kuwait as well as the gulf. Tanzifco was established on the January 29, 1963.Today Tanzifco executes over 200 cleaning contracts, ranging from complete buildings, airports, workshops and personal homes. Tanzifco has progressively and successfully expanded in the cleaning industry throughout the gulf, in Egypt, Dubai, etc. http://www.tanzifco.com/index-1.html.
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Alexandria Governorate421 was the first to contract an international private sector operator to render SW services in the area. In October 2000 three companies (SoClean of Lebanon, FCC of Spain and CGEA Onyx of France bid for the contract. In the end, CGEA Onyx signed the contract. The city is extensively industrialised, including about 40% of the industrial base of Egypt. The full scope of the SWM services included the collection, transportation, treatment and final disposal of all kinds of non-hazardous solid waste, such as municipal, healthcare, and industrial non-hazardous waste has been contracted-out. The annual contract value at the start of the provision of the integrated service in Alexandria city was L.E. 85 million. 422 Table 14 displays the fees charged per month to different beneficiaries based on their electricity consumption. Beneficiaries Households Small offices, workshops and commercial shops Commercial, industrial and medical activities Large consumers, hospitals, tourist establishments, hotels, etc. Fees per Month [L.E.] 2 – 15 3 – 65 5 – 80 5 – 150
Table 14: Fees charged per month to different beneficiaries Nevertheless, the correlation between electricity consumption and the service fee for commercial, tourist, and industrial activities does not reflect the quantity of waste generated by these activities. As a result, many people refused to pay, arguing that a shop processing diamonds and using a lot of electricity, by implication, but producing little waste, paid more than a butcher using little electricity, but generating a huge quantity of waste. Hence, the strict application of the polluter pays principle was challenged. In 1999, the municipal administration contracted-out the full scope of the city’s waste services (cleanliness, SW collection, transport, treatment and final disposal) for a duration of 15 years. Responsibility for funding the necessary SWM infrastructure was assigned to the private sector operator. The international private operator was estimated to have invested about L.E. 200 million by the end of the first month of operations. The annual contract value, together with the income from the sale of organic compost, represented the annual revenues of the international private operator during the operation of this project.
421 Alexandria is Egypt’s second largest city, with a population approximately 3.5 million. 422 L.E. 85 million including sales taxes, approx. 14 million US$.
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As presented in Table 15, the international private operator introduced a new collection system for the municipal solid waste, using a collection fleet appropriate for the type and the size of the streets and areas served in Alexandria city. The collection service also included new areas which were not previously served, thus increasing effectiveness (see Table 15). The introduction of new mechanical equipment for beach cleaning was also one of the tools for the success of this service. Trucks of varying sizes run collection routes between their respective zones and the three transfer stations. As a result of good effectiveness, the number of complaints from residents and visitors about the project’s progress decreased significantly following the contracting-out of the SW service, accompanied by a rapid increase in public satisfaction with the quality of the service provided by the international operator (see Table 15). The project also provided a large employment opportunity: around 4,000 employees joined the international private operator in addition to around 130 employees by Alexandria Governorate as monitors for the quality of service provided by the private operator. The project was monitored by the Alexandria Governorate. The awareness campaign represented one of the main factors contributing to the success of the international operator in providing the foreseen services in Alexandria City. A targeted awareness campaign at the beginning of the project was directed at all residents to be served, and prior to the operation phase. According to the contract, at least 60% of the families in residential units had to be informed and made aware of the provision of the waste collection services from the first day of operation. In addition, at least 90% of all businesses and residential units in the service area had to be made fully aware of the provision of the waste collection services within six months of the commencement of operation. Finally, at least 80% of housewives in residential units as well as businesses had to be fully aware of their duties in participating in the service of waste collection. It was also learned that the role of the local private sector in the consortium with an international company is very important for the optimal execution of further projects. Regarding inter-organisational relationships, the contractual authority set up a system of fines for dealing with violations of the contract specifications by the private operator (see Table 15). According to the contract specifications, if the private firm delayed the work programme laid down for executing the general cleaning service for one day beyond the date of starting work mentioned in the contract, a fine amounting to L.E. 5,000.00 was imposed for each day of delay. Furthermore, if the private firm disposed of the waste in places other than those designated by the first party, a fine amounting to L.E. 2,000.00 was imposed for each violation. In addition, if the streets were in a bad condition (scattered dust,
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9. Illustrative Case Studies
waste from workshops and residential units on sidewalks and in the streets), a fine amounting to L.E. 200 was imposed for each violation. However, an unambiguous definition of threshold for non-performance of contract was lacking. Furthermore, according to the contract specifications, if any kind of dispute related to this contract arises, it was set out that both parties of the contract would seek settlement of such a dispute within thirty days through amicable negotiations. If such negotiations proved unsuccessful during the fixed period, both parties were obliged to refer disputes to arbitration. A company or a contractor might assist the private firm with prequalification in the same activity, provided that this contractor/company worked under his umbrella with the same conditions and specifications. Such arrangements had to be carried out with the approval of the contractual authority. Table 15 summarises the strengths and weaknesses of the Egyptian case study. Regarding the application of the hierarchy principle, it is stated that the ration of waste to be recycled and waste recycled is almost 1 (at least theoretically). The reason is that the Egyptian legislation (Law No 4 for 1994) considers the application of this principle explicitly. In addition, according to the remuneration modes the private firm is paid partly from the revenue of the sale of compost. Other positive measures regarding the application of the hierarchy principle include the transport of SW to the Zabbaleen area. It is noteworthy that the monitoring system set up by the public authorities is considered as ground-breaking. Nonetheless, regarding the weaknesses of this case study the cost recovery, the non-accurate information with regards to quantity of waste generated and not at least the absence of clear mechanism to address unforeseen circumstances must be cited.
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Principles Theories Hierarchy principle
/ Analysed Parameters
Weaknesses
Strengths 1
%R % Rd
I S S W M
%O %Od %L % Ld
Analysis of national waste legislation with respect to “Hierarchy Principle” Accompanying measures for recycling Accompanying measures for organic treatment % Cost recovery Areas covered / Areas to be covered Local Know-how
1 1 Law No.4 for 1994 takes into account SW treatment
SW transport to the Zabbaleen area for recycling SW transport to the Zabbaleen area
References: Freire M., The Challenges, in Freire, M./Stren R. (eds.), Urban Government, Washington: WBI, 2001, p. xviii. Whereas nowadays solid waste is more or less under control in industrialised countries, in LMIC the problem is still crucial. 1. Background to the Research Bank 1999).3 In LMIC, two-thirds (2/3) of the population live in cities and generate 60% to 70% of the Gross Domestic Product (GDP)
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