- Thinking of a multi-sector approach to attracting private capital to public infrastructure (including our sector), what do we recommend for:
- Addis Ababa and Ethiopia. How to create additional value in the Industrial Parks strategy?
Ethiopia – Addis Ababa
Ethiopia’s growth model based on state-led industrial policy provides unique opportunities as well as challenges for the private sector because it requires a high degree of engagement and alignment with the medium-term industrial development strategies drafted by multiple ministries and government institutions.
Because of this unique relationship, the burden to provide attractive business conditions and infrastructure within industrial parks falls on the public sector. Some of these background conditions necessary for greater private sector investment in industrial parks include:
- Streamline information to facilitate transparency, reduce costs of doing business, and minimize red tape by increasing communication between the different nested levels of government (national, federal, local) and the management of individual industrial parks
- Communicate clearly the goals and priorities of the national industrial strategy and preferred industries to allow long-term planning and capital investment decisions for private companies
- Provide integrated infrastructure within industrial parks that can support future growth and more intensive industries. Private sector companies require not only reliable and affordable electricity tariffs or transport infrastructure for exports, but also solid waste, water, and sanitation services that can handle large volumes of waste.
In turn, private sector companies must understand the goals of the national industrial strategy and how they can fit in. For example, at this point companies engaged in the processing of agricultural products, textiles and garment, leather and leather products get priority in industrial parks, but there are numerous opportunities available for companies in other industries. Some of the strategies to create value in industrial parks include:
- Devise business models that make us of low-cost, abundant inputs in Ethiopia. For example, Ethiopia’s plentiful and cheap hydroelectric power is well-suited for energy-intensive industries. Agricultural waste (agriculture products represent more than 80% of Ethiopia’s exports) is another inexpensive and plentiful feedstock that can be used in various industrial processes. The low cost of local labor is also attractive.
- Make supply chains shorter and more resilient by optimization of inputs within Ethiopia. Currency controls in Ethiopia make importing of raw materials expensive and uncertain due to the difficult of accessing foreign currency. However, recycling of raw materials represents a large potential market that will grow the more industrial parks develop. Being able to match input feedstock needs with by-products from other companies and industrial processes reduce costs and feedstock uncertainty. For example, almost all of the metal in Ethiopia is recycled and reused, but there is large demand for glass, plastic, and copper as well.
- Provide B2B services for companies that are moving into Ethiopia’s industrial parks to fill in for services that government-owned parks does not yet offer. Because industrial parks are built from scratch in areas further away from developed locales, not all current needs of companies in terms of infrastructure needs are provided for. Virtuous cycles could thus be created, with better infrastructure and services attracting more companies into industrial parks.
- Dar es Salaam and Tanzania. How to create value by reducing sprawl and the impacts of sprawl?
Tanzania – Dar es Salaam
Tanzania is moving towards a middle-income state and has therefore undergone a large movement of population from rural to urban cities, primarily to Dar es Salaam. In a country where the population is growing at 2% per year, it is easy to see how investments have lagged the continuous migration of farmers to the inner-city. Planning, however, is not the issue when it comes to urban development in Tanzania. The problems arise in the execution of planning initiatives and the implementation of government policies. The people of Tanzania have grown frustrated with the local and central government and their inability to deliver efficient public services. The country’s socialist past has also led to a mistrust in the government, which has resulted in the private sector taking on a bigger role in the development of the state after an era of privatization in the 80s.
With agriculture making up 18% of the workforce, our team has identified a few opportunities for the public and private sectors to work together to slow down the massive migration of farmers to the city, which can therefore reduce sprawl in Dar es Salaam. The question lies on how to make farmers more efficient and competitive in a country where agriculture is the primary contributor to GDP. To solve this issue, we believe that the public sector should focus on energy, water, and waste solutions that help increase farmers’ output through investments in fertilizers and improved irrigation infrastructures. Efficiency improvements in the agricultural sector will ultimately help farmers as they benefit from an increase in the amount and in the value of output, making Tanzania more competitive as it strives to become the trading center of East Africa and the gateway to Asia.
We believe that investments in the energy sector can be made to develop microgrids in which power is generated through solar panels. This will ideally help farmers increase their output level as they benefit from an ongoing supply of energy. Investments in the irrigation system can then help farmers maintain and even improve the quality of their crops throughout the year. Finally, investments can be made to develop a market for fertilizers derived from organic waste, helping reduce the reliance of chemical fertilizers. These initiatives can ultimately bring power back to farmers in a country that is indirectly incentivizing people to migrate to cities in a search of a better life.
- Our sector only. What are our recommendations for the main avenues to attract private capital to the finance and delivery of public infrastructure in our sector in the next decade? P/E
Solid Waste Management (“SWM”)
Ethiopia – Addis Ababa
The existing waste management system in Addis is generally split between municipal collection (70% of collected waste) and waste that is delivered to illegal dumping sites (the remaining 30%). Beyond this, a significant amount of waste remains uncollected, and is often abandoned on the side of the street or in rivers.
The waste that is collected through municipalities is triaged in a labor-intensive process and finds its way either to the Reppie landfill within the city, or to manufacturing plants as feedstock for their operations. The remaining waste that is collected attracts rag-pickers, who sift through the waste to extract any material of value that can be re-sold. These rag-pickers often bring the waste to a large, local marketplace called Merkato, where a network of merchants and dealers purchase sorted waste that is brought in (e.g., plastic oil cans), and then re-sell the waste to manufacturers or recyclers at a profit. As mentioned above, any waste with no value generally finds itself on the side of the road and ignored.
The Merkato marketplace represents an efficiently-organized eco-system like India’s Dharavi in which waste is collected, sorted, and recycled for future use. However, while helpful, the system is lacking in a number of areas that, if addressed, could drastically improve the city’s waste management system: (i) disposal: a large amount of waste is still discarded on the streets and is not disposed of efficiently, and (ii) collection: insufficient collection and transportation systems exist to transport waste from where it is generated to Merkato, Reppie or manufacturing plants, and results in the build-up of waste at landfills throughout the city, further supporting disease, odor and seepage into water systems.
Disposal: Private Sector
In order to improve the Addis’ waste disposal systems, the private sector should consider creating a transparent, two-sided marketplace for waste products. Prices would initially be set by manufacturers (end users of waste) and communicated to existing brokers, dealers and rag-pickers for any type of product. Once tested, this platform could then be expanded to allow any entity to place purchase/sale bids for any product, including waste that is seemingly void of value today (e.g., the HBS team discovered that the leather industry would benefit from such a platform). Communication would occur through mobile texts, similarly to how the Ethiopian Agriculture Transformation Agency communicates with farmers currently.
Disposal: Public Sector
The public sector should act in tandem to formalize the many rag-picker cooperatives that exist at the individual neighborhood (kebeles) level to streamline their operations and increase efficiencies (e.g., formalize waste collection routes). Organizing into a formal operational structure would then allow for easier payment tracking and logistics management. Additionally, the public sector should evaluate the requirement to bundle low-value waste with high-value waste within this system (i.e., any high-value waste that is sold must include a certain amount of low-value waste that has been collected), thereby incentivizing the collection of trash that is currently discarded on city streets and in rivers.
Collection: Private Sector
The Addis government has provided slightly over 60 trucks for waste management collection. These trucks are unable to remove trash as quickly as it is generated. Therefore, the existing private sector in Addis that owns and/or operates trucks (e.g., Rucker Industries) could rent their trucks during inoperative hours for waste management purposes. These private companies would be compensated through a fee generated every time a transaction occurs in this new marketplace (further described below). Additionally, a similar communication system to the one used by the ATA can be put in place, allowing individual dump-sites to coordinate directly with the collection trucks to alert them when sorted trash is ready to be collected, thereby allowing for better route planning and reducing inefficiencies in the system.
Collection: Public Sector
Along with the formalization of cooperatives, the public sector can establish specific pick-up routes and hours of operation that would result in a more reliable service throughout the city of Addis. A more reliable service allows inhabitants to know when trash will be collected and incentivizes them to time the collection of their trash accordingly. Finally, the public sector could also offer tax exemptions on the sale of products manufactured from recycled materials, given the government does not collect any such revenues currently. In the future, this could be a tax source once the system has been established.
The key players in our proposed system are (1) manufacturing plants, (2) entrepreneurs, (3) collectors, and (4) trucks/logistics operators. The process would proceed as follows:
1.The manufacturer creates a list of desired inputs, as demonstrated below.
2. Entrepreneurs receive the information and calculate appropriate bundled prices to show collectors.
3. Collectors receive the prices via text message and begin to collect recyclables/waste, similar to below.
4. At the end of the day, off-duty trucks pick up the recyclables to deliver to manufacturers.
5. Once delivery has occurred, the manufacturers pay the entrepreneurs, and the entrepreneurs pay the collectors and trucks.
6. The process repeats.
In order to facilitate such a system, a private player (“entrepreneur”) can create and manage the aforementioned independently-owned exchange, with a business model similar to existing exchanges around the world (e.g., the NYSE). The initial and primary revenue stream to this private entity would stem from transaction fees, paid by the end purchaser of waste materials. Transactions would be tracked through mobile call-ins and physical receipts at transaction points that would be brought to the company’s offices for payment. Additional revenues would be possible as the exchange evolves, including listing fees and market data fees, offsetting expenses such as labor, website management and call-center operations.
Ethiopia – Industrial Parks
While not the primary focus while in Addis, the HBS team did also consider waste management practices within Ethiopia’s industrial parks, notably Hawassa. Hawassa has already planned for both a common effluent treatment plant as well as a sewage treatment plant to manage the waste generated by its locators. However, these plants themselves generate waste and the Ethiopian government has not outlined any plans or funding proposals for how to manage this waste. The relevant waste includes organic sludge, inorganic sludge and salt.
Each of these outputs requires separate treatment. Given the Ethiopian government’s desire to construct over a dozen such industrial parks, it is important to outline early on possible waste management techniques that can be leveraged over the next decade as each park becomes operational. For organic sludge, we propose contracting with industrials such as compost-to-waste facilities (e.g., the one currently being developed by Mummet Trading). Inorganic sludge, given its chemical composition, should be transported to existing treatment facilities such as Douda, which is located in Djibouti and is accessible via Ethiopia’s new rail line. Finally, salt can be converted to bricks and sold to the construction industry or can be used as feedstock for cement.
Tanzania – Dar es Salaam
Dar es Salaam’s current solid waste management system is decentralized, with over 200 private players serving 5 uncoordinated municipalities.
- 4,500 tons waste/day; 10% growth/year
- Less than 50% of households serviced
- Only ~20% of waste reaches dump site
- Pugu is a long, brutal ride for garbage trucks
- Waste fee collection is highly insufficient
- Waste contributes to cholera outbreaks
Major opportunities exist in the potential to centralize the currently disorganized waste management system. For example, each municipality should construct an official waste transfer site, which would serve as temporary holding spots for waste during high-traffic hours. At night time, larger trucks could pick up the conglomerated waste from the transfer sites to deliver to Pugu. Tipping fees at transfer sites would be elevated relative to current Pugu fees because trucks will save time, drive shorter distances, and avoid the wear-and-tear & depreciation of driving through Pugu’s treacherous obstacles.
Another synergistic opportunity is to streamline the fee-payment process by implementing a tokenized payment system. For example, households would purchase tokens at a nearby storefront. Upon collection, these tokens would then be given to waste collectors by households. Collectors could then exchange the tokens for cash at transfer sites. This system would eliminate the current pilferage that currently occurs when collectors receive cash directly from households and guarantees that the waste will end up at the transfer sites instead of in rivers or illegal dump sites.
A pillar of any successful system is education. At the very least, the population must be taught proper disposal methods and become cognizant of both the environmental & public health issues resulting from improper waste management. Currently, there is nothing in the Tanzanian curriculum addressing environmental issues, and many citizens are simply unaware that current disposal methods (such as burning trash) can be hazardous to health. Implementation of the novel curriculum will need to occur at both the governmental and community level.
A fundamental component to improving Dar es Salaam’s waste management system is the refurbishment of the Pugu dumpsite and the reorganization of the transportation system that moves waste there. The Dutch embassy has spearheaded a study that outlines a €60MM proposal to that effect, outlining an upgrade of Pugu in conjunction with new waste transfer stations and the development of metropolitan waste management organizations. This proposed solution stipulates the Dutch government would contribute €30MM, with the remainder coming from Tanzania.
While the plan is operationally attractive, implementation of the plan could be accelerated by reducing the need for government-level funding. While the government could support these initiatives through centralization and education as outlined above, the private sector could realize significant benefits from this plan that would allow them to fund the €30MM Tanzanian component themselves. Given the difficult conditions at Pugu, garbage trucks only have a useful life of three years. If it wasn’t for the harsh conditions, trucks would have a useful life of nine years. This represents significant savings to private companies if the Pugu refurbishment plan is implemented. Therefore, the private sector should be willing to fund this plan up to the amount they would save and recognize an economic benefit as a result. Stakeholders in Dar es Salaam have expressed interest, and Green Waste Pro indicated the high-level math they were presented with could be further refined to more precisely understand how much capital the private sector could contribute.