48823 MAY 2009 ABOUT THE AUTHORS Increasing Energy Efficiency in the SHEIKH MOHAMMED HASAN IQBAL Manufacturing Process in Bangladesh's is the task manager for the Light Engineering Sector at Re-Rolling Mills IFC's South Aisa Enterprise Development Facility (SEDF). He joined SEDF in April 2006 The re-rolling mill (RRM) industry, which turns scrap material into and brings a lot of experi- ences from private-sector finishedsteel,isoneofthemostimportantsupplierstotheconstruction manufacturing. Prior to joining IFC, he was with industry in Bangladesh. Yet local RRM owners are unaware of, and International Development left unaccountable for, their industry's adverse effects on the Enterprises and Bata Shoe Company Bangladesh Ltd. environment. This SmartLesson describes the challenges and lessons MUHAMMAD TAIF UL learned from the IFC SouthAsia Enterprise Development Facility's ISLAM (SEDF) experience in working with RRM owners in Bangladesh to is the task manager for the Light Engineering Sector at demonstrate the business case for looking after social and SEDF. He joined SEDF in March 2006. Earlier, he was involved environmental concerns. in many market development assignments in Bangladesh in different roles. Background sustainable and eco-friendly production MUSTAHID HOSSAIN methods might have been to purchase is the task manager for With the economy booming (a growth rate of expensive machinery, but that requires monitoring and evaluation at 5.7 percent per year for the past 15 years) and investment by a sector for which access to SEDF. Prior to joining SEDF in the construction industry in particular finance is a major issue. Therefore, SEDF November 2004, Hossain was with the General Electric accounting for 9.2 percent of gross domestic looked to modify technology to reduce the Company, Merrill Lynch product (GDP) and growing at 8 percent per emission of burnt gases into the atmosphere. Investment Bank, and Dell year,1 the scope and potential of the RRM Computers. industry are huge. Currently, there are around SEDF Intervention Special thanks to Mrinal Sircar, 150 RRMs operating in the market, and their Rajeev Gopal, Afifa Raihana, total average output is 2.4 million tons per In 2006, SEDF brought in an international and Abdullah Al-Mamun. year. consultant to help identify interventions in RRMs. The consultant teamed up with a local APPROVING MANAGER Despite the growing insatiable domestic and service provider and identified interested Mrinal Sircar, Coordinator, global demand for steel products, the local RRMs to participate in a pilot project. The main Sustainable Value Chain, SEDF. RRM industry has not invested in improving objective of the pilot project was to change product quality or even business expansion. the mind-set of the RRM owners, who had not Lack of modernization prevails within the thought about using energy-efficient industry. Most RRMs operate below optimal methodologies to improve work processes, capacity due to constraints such as frequent increaseproductivity,reducecosts,anddevelop power disruptions, low-pressure gas supplies, local resources knowledgeable in energy- and low-quality raw materials. One bottleneck efficient methodologies. is a traditional mind-set that tends to focus only on the domestic market, resulting in basic SEDF's consultant facilitated the design of a low-value products and lower consolidation recuperator and a modified burner nozzle for with the global supply chain. In addition, the mill furnace to reduce gas consumption apathy from policymakers, civil society, and and raw material waste, known as scale loss. financial institutions has had little effect in This was the first time any Bangladeshi RRM shaking this stagnation. had used this technique. The result was lower carbon emissions into the atmosphere and One solution to help RRMs grow by achieving better cost savings for the mill. After the first few cases of outstanding success (and cost 1 2005-2006. http://www.mccibd.org/bdecon.html IFC SMARTLESSONS -- MAY 2009 1 savings), more RRMs started approaching us for help. In $6,300 to install the devices resulted in monthly average sav- doing this, SEDF picked one technician from each mill, ings of around $15,000 for one mill, as shown in Table 2. recommended by the owner, and facilitated training for them in the basic design, fabrication, and installation of In the course of achieving these results, we learned a number these devices. Altogether, these SEDF-trained technicians of useful lessons. completed 21 interventions. Now the technicians are offering their services commercially to mills across the Lessons Learned industry on a part-time basis in addition to their regular work, to supplement their normal salaries. 1) Choose your area of intervention wisely based on where you can realistically make an impact. Results The main raw material source for RRM is the ship-breaking industry, which demolishes ships for scrap. Apparently, only "We were struggling badly with the rising raw mate- five to six ship-breaking industries control the market price rial (scrap metal) cost that made us uncompetitive in the market in terms of production costs. SEDF's inter- of raw scrap material in the entire market by forming a vention brought about a relief, as it decreased our syndicate. As the RRM industry is one of the most important production cost by reducing gas consumption and building-material suppliers, it has a direct impact on the scale loss by ~29% and ~32% respectively." construction industry. In 2004, a ton of iron rod was sold at - Mr. Hafiz, Factory Manager,Al-Aksa Steel and Re-Rolling Mill 18,000 Bangladeshi Taka (BDT), or $257. In 2007, leveraging a temporary shortage of ships ready for scrapping, the ship- breaking industries increased the market price of scrap Data for 14 mills before and after installation suggest input metal for RRMs almost fivefold. To survive in the significant reductions in gas consumption and scale loss market, the RRMs thus had to raise the market price for one among RRMs that modified their reheating furnaces. As ton of iron rod to as high as 85,000 BDT ($1,214). In a chain shown in Table 1, on average, gas consumption was 63.2 reaction, this compelled the construction industry to hike cubic meters per ton finished product prior to modification their building prices at least four to five times. As a result, of the reheating furnace. After the installation of the the construction sector lost a significant market because the devices that SEDF advised, gas consumption decreased to building price went beyond the purchasing capacity of a big 43.4 cubic meters per ton. This represents an average middle-class society. To tackle this recession, the construction consumption reduction of 19.8 cubic meters per ton, or 31 industry cut costs in their projects by reducing manpower, percent. but that affected the country's labor market, as the construction industry itself employs Table 1: Intervention Results for Gas Consumption around 1.5 million manual laborers.2 N=14 Minimum Maximum Mean We initially thought of starting our Gas consumption (m3) per ton (PRE) 42.4 98.3 63.2 intervention at the raw-material supply Gas consumption (m3) per ton (POST) 33.7 57.0 43.4 node of the value chain, but negotiating with the ship-breaker's syndicate was Change in gas consumption (m3) per ton (PRE-POST) -8.7 -41.3 -19.8 political and beyond our capacity. As a % change in gas consumption (m3) per ton -20% -42% -31% result, we shifted our focus to a process- (PRE-POST) oriented intervention. 2) Landing the first client is often the On the other hand, such intervention also brought signifi- biggest hurdle, but be persistent. cant savings in scale loss by reducing raw waste by about 32 percent per mill. If we translate these benefits (gas and After having decided to focus on the processing step of the scale) in terms of money for 21 mills, the total net annual value chain, we faced some challenges in creating demand benefit is about $2.9 million. A one-time investment of among RRM owners to improve their mill production, Table 2. Data for Al-Aksa Mill Produc- Gas con- Gas saving, Monthly gas Scale loss, Scale savings, Monthly scale Total monthly tion in sumption, cubic meter savings in $ Kg/ton, G Kg/ton (C-G) savings in $, savings in $ ton, P cubic meter, F (A-F) (A-F)*B*P (C-G)*D*P Jul 06 1,248 42 28 5,241 44 16 8,546 13,787 Aug 06 1,420 46 24 5,112 45 15 9,116 14,228 Sep 06 1,342 44 26 5,234 42 18 10,338 15,575 Base data:Average gas consumption,A = 70 cubic meter/ton, price of gas, B= $ 0.15/cubic meter, average scale loss, C= 60 Kg/ton, price of scrap metal, D= $ 428/ton , conversion rate, E: 1 US$ = Bangladeshi Taka 70.00 2 Source: Bangladesh Bureau of Statistics, 2005-06. 2 IFC SMARTLESSONS -- MAY 2009 because local RRM owners were unaware and also not held burner nozzle design, fabrication, and installation in the to account for the environmental consequences of their industry, even after our exit. The natural preference was for production. Further, entrepreneurs in this field tend to think enthusiastic, technically sound, and business-minded of the environment as part of their corporate social individuals from the industry. However, the nature of the responsibility activities but not part of their cost-cutting industry is such that long-serving employees may not be strategies. Therefore, we knew we had to demonstrate interested in giving up their jobs, losing ties to their masters, tangible savings from gas consumption and scale loss from and, upon becoming entrepreneurs, compromising a regular our proposed devices if we were to get real engagement monthly salary. At Al-Aksa Steel and Re-Rolling Mill, the from the mills, as owners could not immediately see the third mill to accept IFC's business advice, the owner value-added from our approach. recommended someone who had skills and entrepreneurial spirit. Impressed by the interest and technical knowledge of To identify potential clients, the SEDF consultant and local Vivenker Ganguly, a regular RRM maintenance worker, the service provider traveled from mill to mill to discuss the SEDF project team engaged him in this project through project with the owners and highlight the benefits of the practical demonstration and also motivated him to take the new technology. After repeated visits and discussions, we job of designing, fabricating, and installing those devices for were able to convince the owner of the New Alambagh the sector. Steel mill to be the first pilot when the mill's production was closed for a few days during a scrap metal shortage. While Because he saw a substantial source of additional income we had to show significant patience (seven to eight months) potential, Vivenker decided to quit his 15-year career with a in finding the first client who was willing to test our steel mill. To meet the growing demand of other RRMs, he recommendation before we were able to replicate the best established a workshop with a team of five laborers in a practice, given the oral-based culture that prevails in short period of time. Within the next 12 to 15 months, his Bangladeshi society and the fact that the sector players team installed 14 recuperators in other RRMs. This work know each other and keep a close watch on what others are raised Vivenker's monthly income from BDT 10,000/month doing, we knew others would soon follow. We discovered ($143) to BDT 25,000-30,000/month ($357-428), which later from our clients who installed the technology that helped him afford tuition fees for his two school-age neighboring mill owners and their technicians visited their children. At present, he is recognized as an important part mills to see what was done after hearing from other of the value chain in the RRM sector. stakeholders. Even the owner of this first mill solicited our help in doing the same intervention at a second mill after 4) Seek other ways to achieve your goals if the industry seeing the tangible benefits at the first one. We also is not ready to commit to certain reforms. disseminated the results of our work through leaflets, videos, and stakeholder meetings. Donors and development experts with a Western mind-set often refer to the need for compliance with workplace safety and environmental standards. Unfortunately, such standards often are not very convincing to entrepreneurs from their perspective. We learned from our experience in working with stakeholders such as the mill owners, researchers, association leaders, etc., that gender and workplace safety issues are not necessarily appealing to an industry that values immediate gains over compliance costs. Given all this, SEDF did not push workplace safety and other compliance issues to the industry, but proposed quality and productivity improvement initiatives in the hope that the Vivenker: Successful RRM Service Provider 3) Spend time developing not just the technical skills but the entrepreneurial spirit of key service providers. To accomplish our objectives, we needed to find individuals Gender is an important M&E indicator in RRM yet ignored whocouldcaterservicesrelatedtorecuperatorandmodified IFC SMARTLESSONS -- MAY 2009 3 in the recuperator and burner nozzle is around $6,300. Considering the benefits, invest-ment, and payback period, this solution is an attractive option to RRM owners. We also view the pilot as a great success be- cause we used local resources and local service providers to implement the initia- tive. However, in order to achieve long-term sector-wide impact, a well-planned, com- prehensive, and fo- cused intervention is Workers in action with inappropriate shoes and safety measures. needed from the very beginning. Replica- tion will always be a industry would grow to the point where it major challenge in project sustainability. We would invite initiatives to resolve workplace were taken aback when we discovered that safety and compliance situations on its own. some RRM owners take advantage of the absence of--or barely present--basic law For example, bare-handed women manually enforcement. Many RRMs regularly do not pay collect scrap metal that otherwise could easily for the gas they use in their mills. They have an be collected using magnetic field tools. But illegal agreement with the operational staff of due to a lack of better business practices, they the government-owned gas distribution do not know the alternatives or the cost/ authority in which the government staff benefit of using such tools. In some cases, they report back incorrect gas consumption also take advantage of the nonexistent buyer readings or allow mill owners to connect with pressure; in the local readymade garment the gas line without official approval. In this sector, such pressure had been a catalyst for way, these mill owners can save a lot of money, immense improvements in the working which in most cases is higher than the amount environment, including for workplace safety. they could save by adopting IFC's suggestions. As a result, the RRM owners put a great Thus, such owners are not interested in premium on being myopic and pocketing the replicating our interventions. We came across cash they save through noncompliance. some RRMs whose entire energy consumption (gas and electricity) was hooked to the Conclusion government-owned gas pipe or connection DISCLAIMER illegally. As a result, the industries that do IFC SmartLessons is an awards The huge investment required for buying new follow standard protocols and pay their bills program to share lessons learned technology is one of the major obstacles to on a regular basis become frustrated. in development-oriented advisory promoting energy efficiency in industries most services and investment operations. The findings, of the time. We started this project with a view With our experience and all the lessons interpretations, and conclusions to demonstrating the economic benefits of learned, we look forward to implementing expressed in this paper are those switching to energy-efficient technology by thisknowledgeinfutureinitiatives,particularly of the author(s) and do not upgrading the existing technology. in the foundry subsector, as it is running necessarily reflect the views of IFC inefficiently from an energy-consumption or its partner organizations, the Executive Directors of The World In our view, the pilot has been extremely (coal)perspective,andalotcanbeincorporated. Bank or the governments they successful, as it created a true demonstration Now that we have acquired the technical represent. IFC does not assume effect that encouraged many RRMs to pick up know-how, we have the confidence and any responsibility for the the changes and replicate them in their mills. courage to make things happen. completeness or accuracy of the information contained in this Two service providers were developed that are document. Please see the terms currently serving the market, thus and conditions at www.ifc.org/ demonstrating that this is a cost-effective and smartlessons or contact the self-sustaining model. The average investment program at smartlessons@ifc.org. 4 IFC SMARTLESSONS -- MAY 2009