June 2011 Waste LOP Cities

The Economics of Harnessing Waste
Document type delegation from South Africa Discussion with Date July 2011
CONFIDENTIAL AND PROPRIETARY CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited Any use of this material without specific permission of McKinsey & Company is strictly prohibited
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Topics for todays discussion

Unit of measure
Title Unit of measure
Why waste is increasingly important part of

sustainable development
What city authorities must do to optimize their

waste system
Why our project is an opportunity for you to

efficiently learn how to capture the waste opportunity
1 Footnote SOURCE: Source McKinsey & Company
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The Economics of Harnessing Waste Executive Summary

Unit of measure
Why harnessing waste? About 10 mio tons of waste are generated per day. 70% of the waste exit the economy into landfill, leading to leakage of energy, mass and labor out of our economic system. In addition solid waste management consumes up to 50% of the budget of municipalities. At the same time resource prices are souring, while improvements in Title technology, consumer preferences and public awareness improve the economics of collecting, sorting and recycling. Why this initiative? Therefore we are convinced that we are at the verge of a fundamental shift in the way that economies will treat waste and resource productivity. Together with a consortium of different players along the material chain from producers of products, retailers, waste management operators, technology providers, design and research institution as well as municipalities we are working on establishing a unique database and decision support tools, based on these we are building a comprehensive framework to quantify and evaluate different strategies to improve resource productivity. What does the initiative deliver? The work will focus on four main levers: Shifting from convenience to value analyze which resources in the current waste stream should be extracted due to strategic criticality and economic attractiveness (e.g., rare earths) rather than ease of collection and sorting only (e.g., glass, paper) Improving efficiency along the waste stream identifying economically most efficient treatment options to maintain critical resources in the economic loop and reduce total cost of the waste management Cradle to cradle transformation Improvements in design, production processes and logistics systems can significantly improve the reuse of components rather than recyclates, which will further reduce the leakage of labor, mass and energy Making it happen While the economics indicate many self-funding options exist to improve overall efficiency, crossindustry collaboration will be critical to close more loops and regulatory incentivation might be required to fast track scale and learning curve effects Why is this unique? Yes, there many obvious opportunities for improving resource productivity to reduce costs, and improve top-line and investment performance, and some of these are already pursued by innovative institutions, but consistent tools and superior databases are required the fundamental assessment of the material economics will create the foundation for shaping and benefiting from the new area of resource productivity Why McKinsey? McKinsey & Company has a track record in facilitating the development of such cross-industry agendas (e.g. climate change, water productivity). We now invite leading and innovative institutions to strengthen our existing consortium to develop a distinctive and integrated perspective on the future business opportunities in harnessing waste | 3 SOURCE: Source McKinsey & Company
1 Footnote
Unit of measure
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Waste generation and its disposal is an increasingly intractable problem Unit of measure is expected to worsen in the next decades globally and
Title The Unit of measure world generates ~10 million tons of waste per day, nearly 70% of which goes
Globally
directly to landfill destroying economic value and causing environmental damage The global waste market was around EUR 140bn in 2008 About 80% in services/ops; in low-income countries collection alone drains 80 90% of total waste management budget OECD: EUR 90bnMSW market Developing countries: 2050% of recurring municipal budget spent on solid waste management while only 50% of urban population is covered In the short term, the MSW market keeps growing strongly (8% cagr over 2007-11) Across the globe, waste volume growth should be at least partially decoupled from GDP growth by 2025
+2% 100 130
+3% 500 China 750
+2% 250 India 350
Mexico
2010 2025
2010 2025
2010 2025
1 Footnote Source: EPA; UNEP; Financial Times; The Guardian; The Chinese economy: fighting inflation, deepening reforms; McKinsey analysis SOURCE: Source McKinsey & Company Photo credits: Alex Hofford/EPA; Alex Brandon/AP
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Non-optimized waste disposal leads to 5 types of problems, Unit of measure related to landfills principally
Title Unit of measure Public health Environment Informal/illegal economic activity
Stomach and lung related diseases caused by improper waste disposal
Social afflictions Economic value destruction
Methane emissions generated in landfills Leachates percolating into aquifers Contamination of soil and water bodies
Criminal associations of informal networks involved in the waste collection and disposal A high percentage of the value chain is not taxed Limited capacity of informal networks to maximize value extraction
Poorest sections of society depend on waste and scavenging for survival Entire families work in miserable conditions Expanding cities have no space for landfills Communities do not want landfills near them since this lowers quality of life and property prices
Improper management of the waste value chain does not allow for maximum value extraction
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The time is right to define a new economic model for solid waste
Unit of measure
Demographics-driven growth in waste volumes Growing pressure on landfill utilization Drivers
Title Unit ofExhaustion of mandated landfill capacity (e.g., UK by 2018, Beijing by 2014) measure

Efforts to phase out landfills and illegal littering (e.g., EU Member States restricted to landfilling a maximum of 50% of the weight of biodegradable municipal waste produced in 1995) Surge in commodity and energy markets likely to support much higher reuse/recovery rates (e.g., iron ore quality down to 63% from 65% in 10 y time; more gold in a ton of e-waste than in a ton of gold-bearing rock; Japanese scrap iron price up by 50% over 3-year period; global potential of energy generation from waste agricultural biomass 50bn toe) Significant pipeline of investments (e.g., 700 million as PFI credits *for UK municipalities in 2010/11) Profitability gaining importance: Western European markets maturing quickly and EU legislation on waste transport giving access to overcapacity in Northern Europe Recycling programs multiplying fractions reduced in size, requiring strategic and operational adjustments Compliance requiring cash-strapped municipalities to purchase waste services, providing new opportunities for waste management companies and investors Increasingly volatile markets requiring ability to play commodity game and better contract design Favorable economics of distributed solutions (e.g., rural biogas digesters) European Extended Producer Responsibility regulation for packaging leading to development of 33cl drinks cans with 55% less weight and glass bottles that are 66% lighter Amazon already selling 143 e-books for every 100 hardcover books a trend that is growing Design for the Environment programs (EPA, EU, etc) including material reduction guidelines and research funding Global emissions from solid waste landfilling amounting to 750Mt CO2e per year in 2005; growing by 0.9% annually New focus on waste-driven emissions along all product value chains (waste avoidance resulting in less emissions from the extracting, transporting, and processing of raw materials) Waste sector with potential to eliminate its greenhouse gas emissions completely (60% through recycling), on average at a negative cost Relatively new technologies such as mechanical-biological (pre-)treatment (MBT), biomethanation, pyrolisis, and autoclaving (for bio-hazardous waste) changing economics of waste management Maturing operating concepts, for example around collection and recycling, taking hold across the globe McKinsey & Company
3 billion people entering income brackets with growing waste intensity Urbanization amplifying personal consumption and waste generation
Waste becoming a valuable resource
Shifting and more complex economics
Stronger mandate for waste avoidance at source Waste taking centre stage in climate debate
New technologies changing the game 1 Footnote
*Grant to support SOURCE: Sourcea Private Finance Initiative (PFI) with the private sector making capital investments
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Why waste and its management deserves your attention

Unit of measure You can improve your performance on typical city management KPIs by Title improving waste management and resource productivity Unit of measure Recycling and remanufacturing offer higher value add than GDP collection and land filling A considerable amount of your resources are spent on waste management The share of municipal budgets spent on waste management is typically around 5-15 percent
Job creation
Recycling is more labor-intensive than landfilling Bringing larger section of population under municipal waste collection will offer employment to unskilled labor Reduced dumping and landfills improve incidence of diseases, odors and related insects and animals Sound waste management plans minimize disturbance to neighborhoods and inhabitants Recycling reduces dependence on virgin materials production; virgin material production is generally more energy intensive Landfill avoidance for organic waste reduces GHG emissions Using recycled material in the production process usually saves significant energy and associated greenhouse gases
Stability
Energy efficiency
GHG reduction
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Unit of measure


waste system

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Your city can create an integrated waste management system Unit following three steps by of measure
STEP 1: Assess city
Focus of section
Title Unit STEP 2: of measure
Understand, choose, and evaluate options
STEP 3: Implement new system
2B Evaluate and choose options for new waste
3A Develop financing solutions
1 Assess current MSW system
2A Evaluate and choose options for existing waste 2C Develop collection and sorting methods to support options
3B Engage stakeholder groups
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The more you know about your current situation, Unit of measure your solutions are the stronger
Dimension Unit of measure A Volume and composition
Title
Rationale for assessment
Identify largest problem zones Choosing treatment options that extract maximum value Tailoring sectoral policies Assessing need for regional/national policies Understanding performance of existing infrastructure (in terms of collection coverage, greenhouse gas emissions, societal concerns) Identifying improvement potential Assessing financial performance of waste management system in order to better control waste management improvements
B Generators
Prioritize waste fractions that have highest impact across the value chain Prioritize action among the largest generators Tackle lack of coverage, excessive environmental effects, and over-/ underspending
C Current treatment
D Current cost
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A What are current and future waste volumes in your city?

Unit of measure
Rio will produce about 65-80 million tons of waste over the next 20 years Municipal solid waste Title Million tons 90
RIO EXAMPLE
Unit of measure
New waste in landfill Waste in existing open landfill Waste in existing closed landfill
New waste
60
30
New landfill and other waste management initiatives
Existing waste
Waste in existing landfill
06
1 Footnote SOURCE: Source Source:
10
14 Year
18
22
26
MCM Consultores; IBGE
McKinsey & Company
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B Who are the biggest generators?

Unit of measure
California gathered detailed info on its generators 2006, Percentage by weight, pounds per employee
Recycled, composted Incinerated, Landfilled
5 6 3 5 4 4 4 2 2 1 2 1 2 1 12
CALIFORNIA EXAMPLE
Food Stores
17 9
Building Material & Gardening, Big Box Stores Retail, Big Box Stores Non-Durable Wholesale Distributors Fast-Food Restaurants Full-Service Restaurants Large Hotels
2
3 3
8 7 7 6 5 5 5 4 4
and was therefore able to tailor its commercial waste programs
4 2 3
E.g., Food stores are typically very large waste producers but already recycle/compost 70 percent of the waste they generate Offices currently recycle less than 10% of their waste and offer therefore a good segment for a targeted program CalRecycle has made resources available to educate office managers on waste avoidance, paper and packaging recycling programs, purchasing guidelines, etc.
Durable Wholesale Distributors Building Material & Gardening, Other Stores Retail, Other Stores Anchor Stores at Shopping Malls1 Other Stores at Shopping Malls1 Large Office Buildings1 Public Venues and Events2
1 Footnote
2 2 2 0
02 02 00
SOURCE: Source California Targeted State-wide Waste Characterization Study State of
McKinsey & Company
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6.8% TRACKER
C What does the MSW system look like today?

Unit of measure
Waste management system map Collection Sorting Title Unit of measure Tianziling Phase I
HANGZHOU EXAMPLE
Key Hangzhou statistics Population: 8.7 million
Generation
Landfill
Incineration
Area: 16,847 km2 Total MSW generated daily: 6,856 t/day (2010) Composition of waste: Organic: 57% Paper: 15% Plastic: 3% Glass: 8% Metal: 3% Textile fiber: 2% Wood timber: 2% Ash: 4% Weather: Humid subtropical Landfill design: Sanitary landfill
1 collection contractor Trucks: 350 (including 54 trucks are for sourceseparated MSW1) Tricycles: 1,500 Waste collected everyday Starting 2010, there is no MSW transfer station in Hangzhou city
Landfill closed in 20072
Lv Neng 450 t/day
Hangzhou
Neng Da 800 t/day
Tianziling Phase II
Sorting Landfill (2,328 t/day)
Yu Hang Jin Jiang 800 t/day
Xiao Shan Jin Jiang 800 t/day
Evaluating current MSW system design and key statistics are necessary to understanding potential interventions, calculating the economics, and emission reduction potential of different options to reduce greenhouse gas emissions 1 MSW pre-sorting program started in 2009 in 100 communities; usess MSW bags in different colors to identify organic, recycable, dangerous and other 1 Footnote Landfill Phase I was closed in 2007 when it reached capacity. Between 1991 and 2007 9 million tons of MSW were landfilled in Tianziling Phase I 2 Tianziling SOURCE: Hangzhou Environment Report (2010); Zhang et.al, Municipal solid waste management in China: Status, SOURCE: Source problems and challenges (2010); Zhejiang Statistic Yearbook; Press search; SRP analysis McKinsey & Company
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D What are your financial costs?

Unit of measure How?
Why?
Title Aggregate all costs incurred for Know your systemof measure Unit the waste management system costs
Understand the cost of each activity
Provides transparency and accountability and helps planning future investments Helps identify expensive activities and decide on costcutting and resource allocation Avoids surprises down the road when full effect of system changes kicks in
Practice activity-based costing
Be comprehensive
Look at all operating costs, not only regular cash expenditures Understand the full cost impact of investments made to improve the service
Managua (Nicaragua) example
From: only budgeting and reporting the costs designated to the Public Cleansing department at the central municipal level To: accounting for fuel purchases by a central depot; spare parts and tires purchased by the procurement unit, protective clothing procured by HR, repairs done by a central municipal workshop, and sweeping and illegal dumping clean-up activities within the municipal district offices Costs were underestimated by more than 50 percent
1 Footnote SOURCE: UN Habitat Source
McKinsey & Company
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Start measuring the performance of your waste management

Unit of measure Goals Possible performance metrics
ILLUSTRATIVE
System must process 12,500 tons of waste per day Title Provide adequate 90% of the daily organic waste stream needs to be composted capacity Unit of measure All saleable recyclables must be recycled
Reduce greenhouse gas emissions
Reduce greenhouse gas emissions from landfill by at least 90% by 2010 Reduce waste to landfill by at least 30% by 2012 Contractor must maintain the same labor level as it currently exists in sorting and collection Contractor must offer workers basic healthcare on par with government employees Profits in excess of 15% IRR for contractor shall be returned to the government
Minimize social impact
Allow city to share in unexpected surplus
Minimize NIMBY effects

1 Footnote SOURCE: Source
Contractor must conduct ambience surveys (e.g., level of smell, noise, traffic) of neighboring residents; results of the surveys will determine level of ambience bonus paid to the contractor
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McKinsey & Company
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STEP 1: Assess city
Focus of section
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The climate change impact of existing waste sitting in landfills can be Unit of measure greatly reduced
Landfill generates methane . . . . . . and can be used in three primary ways
Title Waste in landfill Unit of measure typically begins

generating gas after 6 months, 50% of which is methane Amount of methane depends on: Waste volume Organic content Moisture level Weather Landfill design A Flare
Description
Revenue sources
Recovered gas ignited in candle (open) or shrouded flare
Carbon credits
Generate electricity
. . . which is collected . . .
Recovered methane is compressed and sent to an internal combustion engine or gas turbine Electricity generated and transferred to power grid
Sale of electricity Carbon credits
1 Footnote SOURCE: Source US EPA
Vertical or horizontal wells in landfill collect gas and send it to collection header Operator can monitor and adjust gas flow
Direct gas use
Recovered methane is compressed and cleaned before being piped directly to captive player
Sale of gas Carbon credits
McKinsey & Company
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Direct gas use is the most profitable option for larger landfills
Unit of measure
Annual cost assumptions for 1,500,000 tons of Waste in Place (WIP)
RIO EXAMPLE
Title Full cost1 /ton Unit of measure waste

A Flare -14
Price output2 /ton waste
Carbon credit3 EBIT Margin /ton waste /ton waste
Unlevered IRR Percent
36 0
22
23
B Generate electricity4
36
42
16
-32
38
C Direct gas use4 -19
36
57 40
51
1 Full cost includes O&M costs and capital expenditure. Does not include depreciation 2 Assuming 6.5/kWh for electricity generation and $5/MMBtu for direct gas use 3 Assuming a ton of WIP emits 0.032 tCO2e per year for 30 years and all technologies capture the same amount of methane; Carbon credit of $12/tCO2e 4 Footnote 1 Includes collection and flaring costs SOURCE: Source EPA; UNFCCC McKinsey & Company
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STEP 1: Assess city
Focus of section
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A city can improve its MSW system by capturing methane, reducing waste, Unit ofexploring landfill alternatives and measure
High-priority options
Composting and A anaerobic digestion
Produce compost through biological process where organic waste biodegrades Anaerobic digestion obtains methane through a process where microorganisms break down biodegradable material in the absence of oxygen Recycle raw materials (e.g., metals, paper) for use as inputs in new production
B Recycling
Waster-to-Energy options Conventional C incineration
Burn waste to generate electricity through a steam turbine
D Gasification
Turn waste into electricity-producing gas by reacting the waste at high temperatures with a controlled amount of oxygen
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A There are 3 broad types of composting

Options
Unit of measure
Description
Key perspectives
Windrow

In-vessel
Regularly turned elongated organic waste pile, triangular in cross section Windrows are turned using specialized turning machines to increase porosity, redistribute material, and break up clumps Forced aeration can also be used In-vessel systems are enclosed technologies where air flow and temperature can be controlled (e.g., vertical reactor, horizontal reactor, and rotation drum)
Scalable solution with medium capital cost Most tested and commonly used composting technology Suitable for municipalities with large amounts of usable land Relatively novel technology Faster but more risky and capital intensive Suitable for municipalities with limited amounts of usable land, and large waste budgets
Gorecovered

Cornell University; EPA
Gore cover system leverages cover and forced aeration to control the temperature and moisture of the decomposition process Provides in-vessel-like composting without the need for buildings, boxes, or bins Claims to require no odor treatment
Novel A lower cost alternative to in-vessel options
Source:
McKinsey & Company
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A Anaerobic digestion speeds up decomposition and reduces space Unit of measure requirements of composting
Title Unit of measure Facultative bacteria breaks down
organic materials in the absence of oxygen and produce methane and carbon dioxide Methane can be captured and used to operate the process or sold as natural gas Output still needs to go through the composting process before becoming marketable fertilizer, but, the process takes significantly less time and space, due to 50-70% reduction in waste volume during the anaerobic digestion process Humus
Thermal energy
Mixer
Biogas Air
Organic fraction of MSW Blend tank
High-solids anaerobic digester Plug flow reactor
Aerobic composter
Aerobic reactor Soil amendment

Anaerobic digestion produces enough methane to operate the process with potential excess gas for sale Though anaerobic digestion has higher up-front costs, it reduces land requirements downstream, making this option especially attractive for land constrained municipalities
Cornell University; EPA; Tchobanoglous
McKinsey & Company
Source:
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A Sale of compost, carbon credits, and potential for waste diversion Unit of measure drive composting revenue
Revenue sources for all technologies
Title Demand for compost is determined by Quality of the compost in comparison to alternatives CompostingUnit of measure
Quantity supply of compost Price and availability of alternative (e.g., nitrogen fertilizer)
Carbon credits from landfill gas prevention
Methodology (AM0025) exists for composting and anaerobic digestion to generate carbon credits The methodology is relatively novel and unproven As the methodology matures, it could become an important revenue stream for composting operators Composting diverts organic waste from landfill, freeing up capacity and extending life of the facility Excess landfill capacity can be sold to alternative municipality to generate additional revenue Ability to capture revenues from waste diversion will depend on who controls the landfill, tipping fees, and how tipping fees are determined
Waste diversion
Additional revenue for anaerobic digestion Methane and carbon credits for renewable energy
In anaerobic digestion, methane can be captured to power the operation with excess sold as gas/electricity A second carbon credit may be available for renewable energy
Source:
Cornell University; EPA
McKinsey & Company
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B Two factors drive recycling economics and emissions reduction

Unit of measure
Collection and sorting Collection and sorting methods Title determine recovery rates and Unit of measure costs Residential and commercial waste is generated, presorted and collected
Market price Demand for recyclable materials determined by cost of using recycled materials compared with virgin materials
Waste is sorted at a transfer center or Materials Recovery Facility (MRF) Glass End product Paper Metal Plastic
Different manufacturing facilities, e.g., paper mills, glass manufacturers, metal preparing converters
McKinsey & Company
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C Factors driving incineration decision-making

Unit of measure
Incineration process Title Economics
Unit of measure Burning waste to eliminate waste, produce energy, and produce ash Three incineration technologies: Mass burn Fluidized bed Modular
Costs: Include waste separation, capital costs, labor and investment in pollution-control equipment If average annual caloric value of waste is < 7,000 BTU/lb, waste must be supplemented with fuel to produce electricity and gas Revenues: Electricity generation: Ability to sell to local power grid or captive end-user Heating/cooling: Ability to sell to captive end-user Diversion from landfill: Ability to sell excess landfill capacity
Impact
Solid waste volume reduced as much as 90% Solid waste weight reduced as much as 75% Bottom and fly ash is collected and landfilled as hzardous waste
1 Footnote SOURCE: Source EPA; United Nations Environment Programme, World Bank; EPA McKinsey & Company
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C Incineration reduces waste weight and methane emissions

Unit of measure
Waste

Incinerator
75% of weight Heat from combustion
Heating/cooling Steam used for heating or cooling Electricity Steam used to run turbine, generating electricity
100% of weight
Three types of incinerators: Mass burn Modular Fluidized bed
Non-incinerable Hazardous waste Construction waste Liquids Metal Glass
25% Toxic waste Bottom ash (toxic, captured at bottom of incinerator) Fly ash (very toxic, captured by filtration system)
Incineration cuts methane emissions by 66% by eliminating 30-year emission lifecycle of waste
Landfill Ash ideally disposed of in special section of landfill Ash monofill can be used
1 Footnote SOURCE: SourceNations Environment Programme; World Bank; EPA United McKinsey & Company
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C Toxic incinerator ashes must be controlled

Unit of measure
About 25% of total waste volume remains as two types of toxic ash . . . . . . which ends up in hazardous landfills and filters
Title 75-85% of total ash Unit of measure with

concentrations of mercury, cadmium, lead and other toxins
Bottom ash
Collects at base of incinerator Must be landfilled, typically in a hazardous landfill or an ashonly monofill
15-25% of total ash with

Fly ash
concentrations of mercury, cadmium, lead, chromium, arsenic, selenium and other toxins
Captured from flue gas by air-pollution control system through Fabric filters: Cylindrical bags, or baghouses, that filter
emissions Electrostatic precipitators: Draw charged particles to oppositely charged collection plates Scrubbers: Neutralize acids using alkaline May be recyclable, most often as aggregate in concrete
Air pollution control equipment can remove up to: 99% of dioxins and furans 99% of heavy metals, particulate matter and hydrogen chloride 90% of sulfur dioxide 65% of nitrogen oxides
1 Footnote SOURCE: Source EPA; United Nations Environment Programme; World Bank; EPA McKinsey & Company
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C The caloric value of waste determines combustibility

Unit of measure
Energy content differs by waste type Waste energy content BTU per pound Title
Plastic Paper Yard Food
0
and composition of waste type differs by region Solid waste composition 100%
Unit of measure
17,000 7,700 4,200
Other* Glass Metal Plastic Paper 3
19 3
19
15 1 10 3
9
30
20
6
29 5 8 11
1510
` 735
50 52 26
11
35
1,800 1,000 Food
12
25
Other Glass Metal
16
12
China
Rio
Scotland
Europe
USA
If average annual caloric value of waste is less than 7,000 BTU per pound, incinerators must be supplemented with fuel, driving up costs As population becomes wealthier, the average caloric value of waste stream increases because organics as a percent of total waste decline and paper (packaging) as a percent of total waste increases Fluidized-bed incineration requires less combustible waste such as paper and wood
1 Footnote included in other category Yard waste SOURCE: Source World Bank; EPA; Dresden University; SLR McKinsey & Company
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D Gasification may be cost competitive with conventional Unit of measure incineration, but is less proven at commercial scale
Economics and annual emissions prevented per ton of Unit of measure waste for advanced and conventional technologies2 Tipping fees required for 15% IRR3 USD
85
PRELIMINARY ESTIMATES
Title
Emissions prevented tCO2e
Incineration (mass burner)1

67
0.6
Gasification
0.9
Advanced technologies are economical compared to conventional incineration Lack of commercialscale experience for gasification may limit use Economics depend on well-sorted incoming stream, high marginal cost of landfill, and environmental credits
1 Incineration creates other pollutants and may be difficult to implement due to public perception. Gasification technology is not yet proven on a large scale 2 Based on city with 9,000 tons of waste and no sorting, carbon credit is $12/ton, all capex amortized over 20-year project life 3 IRR from 1 Footnote the cities perspective SOURCE: Source McKinsey McKinsey & Company
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STEP 1: Assess city
Focus of section
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Waste separation can occur at two locations

Unit of measure
Waste generation Collection

Waste Landfill
Materials Recovery Facility Before collection After collection
Waste may be sorted by households before collection Sorting before collection reduces waste contamination, increasing the recovery rate Priority is to separate dry recyclables from organic waste
Waste may be sorted after collection at a transfer center such as a Materials Recovery Facility (MRF) MRFs range in complexity from manual hand-sorting to automated systems such as magnets, trommel screens and wet separators
Lower investments in collection (e.g., single-stream or mixed waste collection) must be compensated by more investments in sorting
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Materials Recovery Facilities separate out recyclables

Unit of measure

Materials Recovery Facility (MRF)

Waste
Dirty MRF separates recyclables from organic waste and further into fractions Clean MRF starts with dry recyclables which it separates into further fractions Separation technologies vary and choice depends on waste being sorted and economics A typical MRF may process waste using:
Sale of recyclables Paper, glass, metals, plastic
Compost facility Organic waste
Hand-sorting Magnet to with conveyor separate belts metals
Screen to separate cardboard
Baler to prepare waste for shipping
Landfill or incinerator Residue

Sophisticated MRFs can achieve recyclable recovery rates of 80-85% (~10% lower than pre-sorted rates) at $20 less per ton of waste Effective pre-sorting requires high household adoption rates
McKinsey & Company
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STEP 1: Assess city
Focus of section
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Municipal solid waste projects are good investment opportunities Unit of should be able to attract investment and measure
Title Integrated municipal solid waste projects have baseline returns Unit of measure
starting at 9%
MSW projects provide high potential returns
These returns can be bolstered by higher carbon credits prices to reach return rates of 25% and higher MSW projects are based on familiar PPP models Long term concessions underlie investments MSW systems are long-lived systems, allowing for long-term investments A portion of returns are fixed (tipping fees) while a portion fluctuate with the market (compost, recyclable, and CER prices) providing mix MSW projects can give investors access to potential other investments, such as collection logistics and truck leasing Projects can be applied in both western and emerging markets Projects may be located in potentially attractive markets
Investment models are stable and familiar
MSW projects can lead to new investment opportunities
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Risk drivers for investments in waste management systems

Unit of measure
Title Risk Unit of measure

Country risks
Mitigants Raising funding in a foreign currency and ensuring contracts maintain the balance between costs and revenue will mitigate risks to financing costs and future revenue
GDP and demographic growth Inflation Real interest rates Currency risks
Construction/ development risks
Construction / development
risks Vendor risk
Contract terms are crucial to

mitigating construction and development risks. For example, a fixed price, turn-key construction contract will avoid cost overruns or a failure of vendors to perform as expected
Performance risks
Operations risk Liability risk Liquidity risk Output quality Liability risk Conversion risk
Insurance and contracts terms that

provide for damages if operational targets are not met will mitigate performance risks
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Potential financiers of solid waste management solutions

Unit of measure
Type of investor Examples
Title World Bank InternationalUnit of measure

financial institutions
IFC
ADB Global Environmental Facility World Wide Recycling All investors want projects that are: Commercially viable Able to be financed Benefit the region Provide good returns International financial institutions (e.g., World Bank) may provide finance for projects unable to obtain full funding from private sources
Funds, MLAs and other financial NGOs
US EXIM KfW of Germany
Export credit agencies
Commercial and investment banks
Goldman Sachs, Credit Suisse Chinese commercial banks, e.g., Bank of China Climate Change Capital FourWInds Capital Management
Private-equity investors and carbon funds

McKinsey & Company
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STEP 1: Assess city
Focus of section
3B Develop financing solutions
3A Engage stakeholder groups
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What obstacles does your city face in improving its MSW systems?
Unit of measure Potential obstacles facing cities To overcome these obstacles, cities should:
Title Unit of measure NIMBY sentiments could create obstacles

to building new waste management facilities (e.g., landfill, recycling, composting)
Articulate the positive environmental impact of the new waste management system to reduce NIMBY sentiments Choose technologies that minimize the effect on manual labor Identify proven CDM methodologies to increase predictability of cash flow Bundle profitable parts of the value chain with cost centers to finance an integrated waste management system Recognize that financiers may be more reluctant to experiment with unproven technologies
Social costs could arise from changes that negatively impact formal and informal workers (e.g., mechanized sorting will displace manual sorters) Limited attractiveness to financing an integrated waste management system Financiers will demand predictability of cash flow despite potential variability in waste flow and carbon credit revenue Certain parts of the value chain are cost centers (e.g., collection system) Exist for emerging waste treatment technologies (e.g., gasification)
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Several categories of stakeholders will need to be involved in the Unit of measure and strategy development process to ensure success of diagnostic implementation
Category Executive
Title Stakeholders Unit of measure

Mayor Deputy Mayor(s) Sustainability Office City level
Details
Mayors strongest interest is in topics X and Y Deputy Mayor X has the strongest interest in
waste-related issues Main success factors in city:
Will be running the effort Has to approve all legislation relating to X, Y, Z;

person X is particularly involved in waste Has to approve all legislation relating to A, B, C; person Z is particularly involved in waste Operationally involved with residential collection and disposal; will need to be consulted on other scenarios Operationally involved with recycling large organic waste generators Need to engage community leaders on questions of recycling and gasification
Start early: begin
Legislative
State/national level
Operational Sanitation agency
stakeholder discussions early, and maintain constant contact throughout get 10-15 NGO leaders in a room on several occasions; then follow up in one-on-one discussions with key figures
Focus on grass tops:
Private companies
Affected parties
Engage community
groups through regular town hall style meetings, also discussing other topics
Businesses Communities Advisory Board NGOs Press
Need to consult with commercial carters and
Use press office to handle

all press relationships
Opinion leaders
- NGO X, Y, Z focuses most on waste issues Reporter X, Y, Z would cover this topic at
newspaper A, B, C
| 39
TRACKER

Unit of measure


waste system

| 40
TRACKER
We have launched a new multi-stakeholder initiative: Unit ofEconomics of Harnessing Waste The measure
Solid waste (bn tons)
CONCEPTUAL

Reduction 3 Recycling/ composting Incineration 2030 2040
BAU
The economics of the "three transitions" 1 Towards organized waste management and landscape protection What are economic requirements for complete collection? What are the effects on (in-/formal) employment? 2 Towards landfill avoidance What are optimum disposal routes for new waste (plus existing landfills) per fraction, as function of landfill/ energy/commodity/labor costs? What value pools will emerge for investors? What are implications for participating sectors? 3 Towards the "circular economy" What are the aggregate economic benefits? What are required threshold incentives for waste generators? What are effects on utility levels? (How to run the transformation?)
McKinsey & Company
2 Landfills Littering 1 2010 2020
2050
What are the economics of each transition? Aggregate and fraction-level benefits/costs Investments required Incentives required (regulatory interventions) (Some) social implications 1 Footnote Role will private vs. public sector
SOURCE: Source SOURCE: McKinsey
| 41
TRACKER
Emerging storyline zero-waste economy

Unit of measure
1.
PRELIMINARY
Global industrial output contains significant material, energetic and strategic value that goes uncaptured (materials perspective)

1.
Title The global industrial end-of-pipe paradigm is wasteful and inefficient in financial, social and environmental terms Unit economies to critical resource bottlenecks It also exposes of measure Overall, the cost of the leakage amounts to x
Existing waste systems (with given products) can be rearranged today to recover a significant share of that value (regional perspective)

1.
Here are 5 regional waste management examples where stringent optimization unleashes significant value We identified three archetypes, depending on highest value leap: a) Organized landfill (vs littering, see Delhi), b) Incineration/recycling (vs landfill, see USA), c) Advanced recycling (vs glass, paper, etc only, see Germany) The cost/benefit model can be used by operators, generators and regulators to optimize their system To fully capture the resource value of the industrial production, new circular product concepts are required and possible (product perspective)

1.
Anecdotal evidence exists for the real step-change that can be brought about by the circular economy the challenge is then to measure system-level effects We have analyzed [5] indicator products that together represent [75]% of industrial output Three product archetypes predominate Total circularity effects to the economy are estimated to be approximately [ x] EUR, total non-financial effects are these Moving towards such a circular economy requires a fundamental transformation which can be attained if a set of guiding principles are followed, e.g.:

1 Footnote
End-of-life considerations are taken into account during the product design phase, and where necessary lightweighting efforts are balanced with the end-of-life impacts these may have Individual companies cannot bring about the necessary scale and coordination that is required to build an economically attractive circularity model For each actor, a discrete, 20-year migration plan can be outlined
McKinsey & Company
SOURCE: Source SOURCE: McKinsey
| 42
TRACKER
1. Much material is leaking from this system, unchecked

Example: US polypropylene demand 2004, Million Unit of measure tonnes
Every year, 6.6 mn tonnes are produced Only 1.1 mn tonnes are recycled
Title Unit of measure 36% injection molding:
Packaging, electronics, lead-acid battery encasings, caps and closures, toys, luggage
24% fiber: Carpet backing, textiles, e.g., sportswear
85%
we lose track off!
97% of car battery casings are recovered and recycled proof that a closed loop is possible
13% film and sheet: Packaging, food containers, capacitors, labels, photo apps 1% blow molding: Containers 25% other: Automotive applications, and other
15% is recycled, mostly (90%) from car battery casings

1 Footnote SOURCE: Source McKinsey McKinsey & Company
| 43
TRACKER
1. Above-ground stocks are gaining in importance

Unit of measure
Copper example In-use stocks driven by standard of living Kg/capita
30 230 600
Beijing City Center 2004
Average Sydney City industrialized Center 2002 countries, 200?
Stocks unlocked through recycling China 2010, million tonnes

1.0
<0.5 Recovery Production in largest in largest municipal copper mine recycling park Landfill stocks growing in significance Global 2010, million tonnes
630 225
1 Footnote SOURCE: SourceInternational Resource Panel Working Group on the Global Metal Flows; USGS UNEP
Landfill stockpile
Underground reserves
McKinsey & Company
| 44
TRACKER
1. Criticality: our model is unique, allowing for cost comparisons Unitprimary and secondary material sources of of measure
Example: Indium, 2020
Decrease unrecovered production waste - high grade
ILLUSTRATIVE
Margin arbitrage opportunity Percent 200 0 -200
Title Decrease unrecovered Unit of measure production waste - medium grade
1 Increase volume of extraction 2 Increase refining capacity 3 Increase refining yield Decrease unrecovered production waste 4 5 Increase post-consumer recycling
Increase volume of extraction - high grade Increase refining yield - high grade Increase volume of extraction - medium grade
Resource supply* mnUSD Demandsupply gap USD mn

Increase refining capacity high grade Decrease unrecovered production waste - low grade Increase post-consumer recycling - high grade Increase refining yield - medium grade Increase volume of extraction - low grade Increase refining capacity medium grade Increase post-consumer recycling medium grade Increase refining yield - low grade Increase refining capacity low grade
1 Footnote * At 2010 prices SOURCE: Source SOURCE: McKinsey
Increase post-consumer recycling - low grade McKinsey & Company
| 245
TRACKER
2. Waste management: providing deep insights on optimization across the Unit of measure chain in terms of cost, landfilled volumes, and GHG emissions waste value
A NAM metropolis We helped its mayors office discover a broader perspective had this in mind Title
Unit of measure Wanted to reduce

health hazards from truck PM2.5 emissions by switching to rail and barge Example: Residential municipal solid waste Transfer waste through rail/barge Harness wasteThe city thought.. -6% 0% to-energy options Increase resid. recycling compliance -10% -3% Increase in city spend - % of waste budget Example new insights 5% 12% 0% 0% Example original question 1% 5%
Had only little idea

of potential impact on GHG emissions and landfill volume of other waste management options
32%
55%
16% 18%
4% 16% Landfill reduction % of resid. MSW currently landfilled
12%
43%
Starting position
with many restrictions, e.g., using existing sorting facilities
GHG reduction % of waste related emissions
We helped the mayors office unlock the power of a comprehensive waste mgmt perspective by assessing the cost, landfill volume impact and GHG reduction potential associated with 11 levers along the waste value chain identifying for example GHG savings of at least 33%
Also helped think through the associated challenges
Long-term disposal contracts in place offering a disincentive to reduce waste or improve recycling Waste reduction measures offering benefits throughout the waste value chain, yet most difficult to implement Negative public perception of waste-to-energy and anaerobic digestion resulting in political barriers Sub-optimal allocation of responsibilities for dealing with waste in the citys organizational setup Environmental trade-offs not always transparent; considerable program and education cost to induce people to accept new plan 1 Footnote
SOURCE: McKinsey SOURCE: Source McKinsey & Company
| 46
TRACKER
2. Example of scenario detail: Disposal cost dynamics of anaerobic digestion Unit ofimproved recycling or source separation with measure
Situation today:Title 39% of the commercial Only putrescible waste is recycled, no sorting before Unit of measure digestion anaerobic digestion will be cheaper than landfill if net processing cost is below $60/ton
Total commercial putrescible waste .. m tons
Separate collection of organics or a high-end dirty MRF anaerobic digestion will be cheaper than landfill if net processing cost is below the landfill tipping fee
Total commercial putrescible waste .. m tons
% recycled 39%
% mixed waste 61%
% recycled maximum possible % organics in refuse- above 80% 30-35% of this becomes digestate can be used as compost
% mixed waste lowest possible
% organics in refuse 47% Digestate (3035% of original weight) -- needs to be landfilled Total residue for landfilling 69% of input waste 1 Footnote
% non organics in refuse 53% Assume no recovery pre or post digestion Assuming this can be landfilled at 50% fee disposal cost is $33/ton
% non organics in refuse below 20% Assume most of it can be screened in pre/post treatment Zero disposal cost, might be negative if compost can be sold
Total residue for landfilling ~0 of input waste
SOURCE: Phone SOURCE: Source interviews with technology providers, team analysis
McKinsey & Company
| 47
TRACKER
3. Our Circular Economy work quantifies the potential of both leakage Unit of measure reduction and re-entry optimization and translates these aspirations into a workable system
1. Create baseline 1
How much waste are we talking about? What are the current treatment methods? 3. Establish recycling and 3 circularity targets 4. Determine system 4 requirements
2. Assess costs and benefits 2 of improvements
How far could we drive recycling? Reuse? Recovery? Material reduction at source?
What changes are required in terms of markets, coordination, behavior?
What cost is associated with the required technologies? How much value can be recovered?
| 48
TRACKER
3. Building a circular economy with ever-tightening recovery loops means Unit of measure more material and energy are kept in the system
Littering
Title Unit of measure Raw material Parts

extraction production
Assembly
Usage
Uncontrolled disposal/ littering
Negative effects on health and environment + Loss of all embedded material and energy
Controlled disposal Raw material extraction
Parts production
Assembly
Usage
Collection and controlled disposal Loss of all embedded Sanitary landfill material and energy Incineration with or without energy recovery
Recycling Raw material extraction Parts production Assembly Usage Collection and controlled disposal Loss of manufacturing energy
Recycling Reuse/circular economy Raw material extraction Parts production Assembly Usage Collection and controlled disposal Materials, processingand manufacturing energy recovered
Re-use/remanufacturing Recycling
| 49
TRACKER
3. We apply this methodology to selected signature products that cover Unit major waste streams and different product characteristics CONCEPTUAL all of measure
Title Automotive
Glass Metals Plastics Paper Organics Wood E-waste C&D
1 Footnote SOURCE: Source McKinsey
White Consumer Processed goods Furniture electronics Packaging food Print
Construction
Unit of measure
The objective is to model the most relevant waste streams with a set of signature products covering typical industrial output/consumer demand
McKinsey & Company
| 50
2TRACKER
4. To reach targeted state of circular economy the development of a Unit of measure migration plan will be critical
The redirection of waste streams faces fundamental challenges Title We aim to develop a consistent migration framework for overcoming these hurdles
Unit of measure Contamination By design (e.g., paper with certain kinds of

printing ink)
Identify mechanisms to address physical
Through inadequate collection process (e.g.,

electronics in the recycling bin)
Failing economics Imports of low-priced new parts (e.g., car parts) Low price making it hard to justify expense of
fixing or refurbishing (e.g., toasters)
Lack of demand Rapid changes in fashion and technology (e.g.,

personal electronics)
challenge of closing the loop Stimulate Design for the Environment (DfE): modular, towards reuse of components modular, for better separation of materials reduced use of materials restricted use of contaminants Build collection systems: for reusable modules for recyclables Develop markets for reusables and recyclables
Describe likely development paths under different assumptions
Lack of confidence in quality of remanufactured

products (e.g., medical devices)
Use a rolling-back-the-future approach What do we need to believe in order to make this come true? Create the basis for a contract on moving towards a circular economy Where are the incentives in an un-moderated system? Where is regulatory intervention required? What policies are most effective?
| 51
TRACKER
Past achievements in the climate change and water arenas indicate Unit of measureindeed aim high we should
Highlights of our climate change work
Highlights of our water work
Global abatement potential identified in industry, power, transport, buildings, forestry, agriculture, and waste Local cost curves for 24 countries completed (incl. Australia, Brazil, China, Germany, Netherlands, Sweden, Switzerland, UK, US), and more to follow Climate Desk: combining climate economics simulation models and expert support towards insights on economic impact of climate change regulation on sectors, regions, technologies Convened Economics of Climate Adaptation working group and developed authoritative report
Global water demand supply view up to 2020/2030 Global database of water mitigation measures (cost/impact) Regional water studies in 5 geographies1 Report presented by Robert Zoellik at World Bank, November 2009 Sponsored by World Bank/IFC, ADB, Nestl, Coke, Pepsi, Syngenta, Veolia, Standard Chartered, etc. Working with leading water utilities to identify what a low-cost 21st century utility looks like and how we can help to get there
1 Footnote India, China, South Africa, Brazil, GCC SOURCE: Source McKinsey McKinsey & Company
| 52
TRACKER
Relevance of our effort along the entire material chain

Unit of measure
ROUGH ESTIMATES
Waste operators could generate revenues of EUR 55 bn a year by setting up incinerators to treat just 20% of the waste generated in Beijing Technology providers have the opportunity to capture the MRF market in US which needs to invest in 381 Unit of measure MRFs (new and retrofit); NPV of this investment is $2.1 bn Basic materials companies a single German automotive OEM sold ~7.2 mn cars in 2010; if it were able to recover the steel it put into those, it would get its hands on ~EUR 0.9 bn of materials Packaging companies an aluminum company can save 90% in labor and energy by recycling aluminum cans rather than producing it from virgin material Fast moving consumer goods FMCG companies should have strong motivation to reduce packaging; for beverages for example it makes up 19-21% of COGS; for cosmetics the potential is even higher as packaging makes up to 25% of COGS and there are less demands on its physical properties Electronics and white goods companies Only 2% of cell-phones are currently recycled; this means EUR 600 mn is being lost to landfills and incinerators every year, or lost out of sight between its useful life and controlled disposal Retailers A large European retailer could reduce their store labor by an equivalent of thousands of FTE by reducing the packaging it needs to handle by 50% City governments NYC could save up to $ 30 mn a year on its waste budget by increasing its residential recycling compliance rate Venture capitalists and PE funds In emerging and least-developed countries there is potential to create municipal solid waste management markets to the tune of EUR 130bn Funding government bodies Making simple improvements in solid waste management through landfilling in China requires investing EUR 0.6bn a year in an urban infrastructure construction program Foundations with an interest in waste and sanitation Indian cities need an investment of EUR 12 bn in investments over the next 20 years to build solid waste management services
McKinsey & Company
Title
1 Footnote
SOURCE: Source McKinsey
| 53
TRACKER
A consortium approach is required to address resource efficiency and Unit of measure Issues addressed by conservation along the value chain
Optimization efforts can have upstream and downstream effects and cannot be tackled in isolation

Processing
our effort Optimization effort Secondary effects
Extraction
Assembly
Distribution
Consumption
Treatment
Disposal
E.g., less hazardous extraction process makes waste processing land-filling easy
E.g., introduction of biodegradable plastics makes recycling difficult
E.g., creating modular products enhances their reusability
E.g., better shrinkage management, optimized secondary packaging and source separation programs reduce burden on treatment and disposal E.g., consumer behavior can change the dynamics of treatment E.g., treatment method affects volume and type of disposal
E.g., better recovery rate in the treatment process reduces dependence on virgin material
1 Footnote SOURCE: Source McKinsey
E.g., better disposal does not help in any other stage of product development; better landfill management reduces the environmental damage but this damage can be avoided to a larger extent by optimizing prior stages
McKinsey & Company
| 54
TRACKER
This initiative offers multiple benefits for participating cities

Unit of measure
The results of this project can be used directly by cities to optimize Title Quantitative their waste management system: making choices around source Unit your assessment of of measure separation and collection, whether and how to build up recycling closed loop strategy capacity , optimizing landfill fees and incentive structures, developing local markets for material resources, etc.
Access to world-class expertise
The projects corporate consortium partners, together with the Fraunhofer Institute Europes largest research group and worldwide renown for its applied research and McKinsey provide participating cities with access to the kind of world-class expertise that is typically difficult to locate or finance for cities The project and its outreach activities cities invite city managers to exchange know-how and experiences with peers through McKinseys global network (NYC, London, Mexico City, Kuala Lumpur, Chicago, Rio, etc.) and through internal organizations such as McKinseys China Urban Institute Every year at the world top in Davos, the 5 countries that participate in the Water Resources Group which McKinsey initiated a few years ago report back on their progress; outreach at a similar level is planned for the Zero Waste initiative
Developing your city network
Excellent public relation opportunity
| 55
TRACKER
What we expect from city participants

Unit of measure McKinsey contribution Participants' contribution
Title Commit a full team and significant leadership time Unit of measure for the entire duration of the project
Minimize overall process burden Heavily leverage global network of industry and functional experts and provide access to senior management judgment and leadership in relevant sectors Build a comprehensive network" model on waste leveraging McKinsey's existing models Offer significant discount on fees of overall effort
Value Proposition: Be part of a unique network of leading global players Get tailored insights for your specific decision needs Jointly develop a comprehensive, integrated view of the global waste issues
Provide access to city hall and waste management leadership as required by the project Share expert input and data on city-specific questions Contribute 80k towards the development of an optimized waste management solution specifically for your city Includes expenses One consultant working with you on the ground Full access to central team and models
We value your partnership and believe the answer will be better if we can jointly develop new insights and apply them to your specific situation
| 56

June 2011 Waste LOP Cities

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June 2011 Waste LOP Cities

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The Economics of Harnessing Waste

Topics for todays discussion

Title Unit of measure

Why waste is increasingly important part of

What city authorities must do to optimize their

Why our project is an opportunity for you to

1 Footnote SOURCE: Source McKinsey & Company

The Economics of Harnessing Waste Executive Summary

+2% 100 130

+3% 500 China 750

+2% 250 India 350

Stomach and lung related diseases caused by improper waste disposal

Social afflictions Economic value destruction

1 Footnote SOURCE: Source McKinsey & Company

Waste becoming a valuable resource

Shifting and more complex economics

New technologies changing the game 1 Footnote

Why waste and its management deserves your attention

1 Footnote SOURCE: Source McKinsey & Company

Topics for todays discussion

Title Unit of measure

Why waste is increasingly important part of

What city authorities must do to optimize their

Why our project is an opportunity for you to

1 Footnote SOURCE: Source McKinsey & Company

Title Unit STEP 2: of measure

Understand, choose, and evaluate options

STEP 3: Implement new system

2B Evaluate and choose options for new waste

3A Develop financing solutions

1 Assess current MSW system

3B Engage stakeholder groups

1 Footnote SOURCE: Source McKinsey & Company

Rationale for assessment

1 Footnote SOURCE: Source McKinsey & Company

A What are current and future waste volumes in your city?

New landfill and other waste management initiatives

Waste in existing landfill

MCM Consultores; IBGE

McKinsey & Company

B Who are the biggest generators?

Title Unit of measure

and was therefore able to tailor its commercial waste programs

SOURCE: Source California Targeted State-wide Waste Characterization Study State of

McKinsey & Company

C What does the MSW system look like today?

Landfill closed in 20072

Lv Neng 450 t/day

Neng Da 800 t/day

Sorting Landfill (2,328 t/day)

Yu Hang Jin Jiang 800 t/day

Xiao Shan Jin Jiang 800 t/day

D What are your financial costs?

Practice activity-based costing

Managua (Nicaragua) example

1 Footnote SOURCE: UN Habitat Source

McKinsey & Company

Start measuring the performance of your waste management

Minimize social impact

Allow city to share in unexpected surplus

Minimize NIMBY effects

McKinsey & Company

Title Unit STEP 2: of measure