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How to make solid waste management financially sustainable

Lessons Learned in a GTZ Project in Nepal

by Eckardt Spreen

For solid waste management systems to be financially sustainable the cost of the service must be kept at very low levels. Public and private budgets are limited, especially in least developed countries. Lessons from a GTZ project in the Kathmandu Valley, Nepal.

When solid waste management in the Kathmandu Valley started to be reorganized in the second half of the 1970s, staff and advisers of the Solid Waste Management and Resource Recovery Center (SWMRMC) had to cope with a project area that was in urgent need of sanitation facilities. High densities of urban structures further complicated the task: After Calcutta, the density of Kathmandu is second in traditionally overcrowded Asia.

To imagine the implications of such a density, one must realize that this is not accounted for by high-rise buildings but by compact settlements of the traditional three-storey Newar house. At the beginning of the 1970s, almost every type of a functioning basic sanitary facility was lacking in these densely populated areas. Waste collection and sewage disposal were completely inadequate and only a few toilets were available. Sewage, excrete, waste and filth were lying at road sides and piled up in the courtyards of the towns.

The industrialized countries have a long tradition of well organized waste management. However, their financing systems, organization models and technology are not usually transferable to the entirely different conditions found in the Third World: Germans spend about the per capita income of the Nepal to pay for their solid waste management system! Hence, waste management appropriate for developing countries cannot be copied from the "first world". It has to be adapted to the economic and climatic conditions as well as to settlement patterns and to religious and cultural traditions prevailing in the specific country in question.

On this basis, the work in waste management had to be considered as a pioneer project: The establishment of a regular waste collection and disposal service requires not only technical solutions but poses a number of difficult financial and social problems as well. The success of the project is crucially dependent on the establishment of an efficient administration and on the willingness of the population to participate and to cooperate. To achieve financial sustainability, it is a precondition that the cost of the service is kept at very low levels. Neither public budgets nor private households are able to provide more than the absolute minimum of funds.

To cooperate under these circumstances is difficult- but not impossible. Development efforts aimed to establish a process which leads step by step to improvement: The project has gone through a long and difficult process. At the beginning, there was little practical experience in this field but problems were mounting and decisions had to be taken which involved considerable risks. In this situation, both project staff and advisers were learning by doing. Gradually this process of learning became more and more organized so that, today, a concept is available which provides solutions for a wide range of waste handling problems and which may be of some use for similar projects elsewhere.

The concept

Development efforts make sense only if in the end a sustainable process of change to the better is achieved. Whenever institutions are the "object" of development, they must be brought into a financially sound condition to survive without further external aid.

Unit cost (real ‘000 NRs)
SWMRMC - KATHMANDU


Figure

External investment in institutional development makes sense only if in the end a financially sustainable approach can be achieved. This implies that both

- the operation of services with a target coverage and a planned quality and
- the investment into necessary assets such as equipment and structures can be locally (internally) financed.

This precondition of sustainable development sounds simple. However, in the past hardly any public corporation in Nepal proved to be sustainable in this sense.

Theoretically, waste management institutions can achieve financial sustainability by the following means:

- sufficient cash generation by own direct income;
- credit financing over the capital market (which is indeed a short term concept only);
- financing by direct government contribution which should be guided by a formal agreement;
- cost reduction by optimizing both investment and operational strategies.

However, in less developed countries like Nepal cash generation by direct own income proves to be a relatively difficult task. Having in mind the negative cash flow of SWMRMC, credit financing is also understood to be a financing tool which can hardly be proposed. The trust into the willingness and capability of the local or central government to finance in the long run costs of waste management should not be overestimated, either.

This is why the management of SWMRMC decided to utilize all means to reduce costs with highest priority. Revenue collection got second priority only: It was not tried to cover unbearable costs, management aimed at the recovery of minimum expenditure only.

Over a period of at least 7 years this concept has been successfully implemented: Unit costs of the services could be reduced by more than 10% annually (before inflation)fromabout260NRsin 1985 to about 65 NRs in 1992!

At the same time a fee collection system was built up, which at first proved quite successful. Although only introduced in 1985, direct fee collection was already recovering about 35% of operating costs by 1989/90. However, since then no further improvement has been possible. On the contrary, total costs have increased due to higher performance and inflation, whereas the amount of fees collected has remained more or less unchanged. The recovery rate has fallen to about 20%.

All efforts to further increase fee collection failed during the last three years: Concepts to recover expenditure incurring in foreign currency by the introduction of an environmental fee to be paid by tourists have not so far materialized Adequate systems to recover waste management costs from industries, hotels etc. could not be introduced. Efforts to adapt inflation in the various fee positions could not be implemented due to the resistance of customers. However, awareness of policy makers is now focussing on the issue. It is hoped that in the coming months appropriate measures will be taken to further lower costs and establish a firm basis for improved fee collection.

Management tools for cost reduction

Institutional development in waste management can be successful in the long run only if it is based on a concept of cost reduction. An acceptable rate of cost recovery can be achieved only if all possibilities of cost reduction are exploited Quite often the potentials of cost reduction are higher than those if improvement in fee collection.

1. The unit cost system - Simple tool for the choice of waste collection and waste transport equipment: Waste collection and waste transport need different types of equipment and vehicles depending upon specific tasks such as short distance or long distance transport. Decisions regarding the choice of a transport fleet must be based on proper economic assessment. Unit cost calculations are a viable tool. These models designed e.g. a simple LOTUS 1-2-3 spreadsheet calculate transport costs per cubic metre over various distances (and other variables) for different types of equipment. They in fact are a basic financial assessment tool which should be used before any investment in a collection and transport fleet is done.

Cost recovery (‘000 NRs)
SWMRMC - KATHMANDU


Figure

In the Kathmandu experience unit cost calculation proved that a properly managed skip (small container) system is about four times cheaper than the traditional street cleaning system combined with tractor and trailers for primary waste collection and waste transport. The cost effectiveness of the skip system is due to two principles, namely the KIS principle and the HOO principle. KIS stands for "keep it simple" and HOO stands for "handle once only"! These principles are integral part of the whole solid waste management scheme designed.

2. Dynamic financial and economic assessment - Precondition for sound decision-making in bigger investment programs: For bigger investment programs dynamic financial and economic assessment techniques have to be applied (e.g. average incremental cost approach, cost benefit analysis etc.). Only then can management decisions be based on transparent scenarios of future financial implications. If assessment is not carried out, funds may in the long run be misallocated.

In the Kathmandu example, calculations proved that an envisaged early close down of a landfill site will imply costs similar to one annual budget of waste management. The assessment model was used, too, to prove that small scale composting is the most promising concept to be implemented in a country like Nepal. Any other strategy will be endangered due to unbearable costs.

3. Financial and economic assessment - proof of the need to subsidize compost production: Economic assessment can be based on private and on socio-economic costs and revenues. If socioeconomic results are more favorable than financial calculations, financial decisions may be reorientated in favor of socioeconomic concepts. In these cases, however, the operator is losing the difference between the financial and economic costs! If for example compost production is to be enhanced for the sake of its positive environmental effects (beyond the value farmers are willing to pay for), the producer of compost does not directly receive any income for the additional positive environmental effects. Production then might prove to be financially not viable. In these cases it is to be decided whether the government subsidizes compost production to cover the implied private losses.

In the Kathmandu case it was learned, that the production of compost from municipal waste can be enhanced only if it is subsidized to bridge differences between private and economic (social) costs and revenues.

4. System assessment for optimal choice of transport chain: If long distance transport of waste is necessary to compost plants and landfill sites, alternative concepts of waste transport have to be assessed. The system evaluation with reveal whether it is viable or not to develop a transfer station concept.

In Kathmandu it was decided to operate up to five simple transfer stations to reduce operational costs of primary and secondary waste transport. This concept will reduce transport costs by more than 20%!

5. Optimization of daily operation: In bigger towns the optimal use of the transport fleet may prove to be quite complicated. It may be useful to organize and control operation of the fleet using a computer based optimization model. The control of fleet operation should be organized by radio. It is estimated that a cost reduction of 10% 20% is possible by adopting this concept.

In summary it can be stated, that there is ample room for cost reduction. Possibilities seemingly go far beyond the opportunities to recover high costs by fees to be collected from the waste generators. However, it is felt that proper cost management is just part of the problem. In the long run concepts which improve knowledge, skills and attitudes of the population towards avoidance of waste generation, towards waste recycling and proper waste handling are preconditions of sustainable success in cost reduction.

Lessons learned in fee collection

Sustainable development in waste management is possible only if cost recovery is achieved. In least developed countries only part of the cost can be recovered by direct waste fees. The remaining balance must be reclaimed from government contributions as a subsidy on the basis of a contractual obligation.

As a principle, fees should reflect costs incurred. This will have two positive effects:

- Costs will be recovered as far as possible by direct fees to be collected from the waste generator to recover the costs of the waste management institution;

- the burden of fees will induce the waste generator to reduce waste production.

It must be clearly understood that as soon as one stops collecting fees based on both costs and the amount of waste generated directly from the waste generator, the objective of providing incentives to avoid waste no longer exists.

Against this background, an attempt was made to build up a suitable fee collection system for CWMRMC, bearing the following considerations in mind:

1. To achieve cost recovery, fees must be based on proven unit costs of service.

2. With regard to the concept of cross-subsidization, the target rate of cost recovery must be achieved as an average value. High-income groups must subsidize the low-income groups.

3. Fee collection must be linked to intensive public relations work to make people aware waste management is a service from which they benefit. This will increase their willingness to pay.

4. Fee collection must be started as soon as adequate services are provided. Only then will the target group accept it as normal to pay for the service.

5. The design of fee systems must be such that they can be administered easily. Only then is effective and efficient fee collection possible. Effective fee collection means that people who have to pay a fee will be requested to pay. Efficient fee collection means that the costs of collection are low as compared to the revenues from fees.

6. A streamlined, well-organized administration must be built up m waste management institutions. Proper debtor control is imperative, and management should give high priority to this task. Only then will effective fee collection be possible.

7. To keep fee management simple, fee items which prove negligible should be ignored.

8. In less developed countries, the unit cost of waste management per month and person may prove to be low. If a cross-subsidization system is implemented, the fee to be paid by the low income groups may become negligible. in these cases, fee collection costs will be unacceptably high as compared to Nepal is sharply increasing the cost of c/imbing its side of Mt. Everest, and now insists that teams take all their rubbish back down the mountain revenues from fees. An indirect fee system is suggested for such cases (e.g. a property tax).


Nepal is sharply increasing the cost of climbing its side of Mt. Everest, and now insists that teams take all their rubbish back down the mountain. Cartoon: Panos

The lesson learned in Kathmandu is abundantly clear in a least developed country it will be difficult to collect sufficient fees directly from generators of waste. Special difficulties arise because the cheap skip (container) system provides only an indirect service and people are somewhat reluctant to pay for a service of this kind.

Supplementary indirect collection systems and taxes must be introduced to finance costs.

Basing development on experience, some of the intellectual logic of the system was lost: the inadequate results of direct fee collection suggest that personal fees are no longer any - or sufficient - incentive to reduce waste generation. Low-cost indirect services combined with a limited willingness to pay are the cause. However, the weakness of indirect fee collection or financing by taxation has to be accepted to permit financial sustainability.

Conclusion

There is no "definitive" solution to enhance financial sustainability in solid waste management in least developed countries. There is not even any "definitive" concept for minimizing waste generation, enhancing recycling and facilitating proper waste management.

The call for change must not focus only on ambitious goals. At the same time, it must be oriented towards establishing a process leading in the right direction. Being "on the right track" is more important than having only important "development objectives" in mind. This kind of process orientation can be established only if we follow an integrated approach. It is not the lawyer, nor the financial expert, technocrat or sociologist who will solve the problem: a combined approach by the entire population is needed to achieve environmental improvement.

To enhance financial sustainability, top priority must be given to reducing costs for an appropriate service. If sufficient fees cannot be collected directly, indirect fee collection must be improved. Alternatively, as a last resort, direct government subsidies and taxes can be introduced to balance costs and revenues.

Abstract

Waste management can only be sustained if operating costs are recovered. Above all in the poorest developing countries these costs can only partially be recovered through fees. The author explains why, taking a project in Nepal as an example.

Rm

La gestion des dets ne peut e durable que si les dnses courantes vent couvertes. Et prsnt dans les pays en vole de dloppement les plus pauvres, ces dnses ne peuvent e couvertes que partiellement par le prvement de taxes. C'est ce qu'explique l'auteur en se rrant a un projet au Nl.

Extracto

La gestie desechos solo puede tener efecto duradero al cubrirse los gastos corrientes. Precisamente en los pas en v de desarrollo mas pobres, dichos pueden cubrirse solo en parte a travde tasas. El autor explica esta situaciediante un proyecto en Nepal.