(click on the Figure to enlarge)
Industrial production is important to meet our needs and generate employment. To ensure that the industrial production is economically feasible, the industry must operate above a Minimum Efficient Scale (MES).
MES can be computed by equating average cost with marginal cost . The rationale behind this is that if an industry were to produce a small number of units, its average cost per output would be high because the bulk of the costs would come from fixed costs. But if the industry produces more units, then the average cost incurred per unit will be lower as the fixed costs are spread over a larger number of units.In such a case, the marginal cost is below the average cost, pulling the latter down. An efficient scale of production is reached when the average cost is at its minimum and therefore the same as the marginal cost. If we exceed the MES, then the marginal costs may increase due to pressures on product distribution (logistics), additional labor oversight and need for tapping more resources that are not locally available.
I was reading on the concept of MES. I told my Professor Friend that Government of India should make a toolkit for all the entrepreneurs to guide on choosing the right MES for their business focusing on the priority manufacturing areas.
“Well, you have a point Dr Modak” said the Professor lighting his cigar. “ Perhaps we should train the lenders (bankers) and investors on this subject so that they do not finance industries that are way off from the MES. This could help reduce the Non Performing Assets (NPAs) as well – Professor winked.
Professor took a deep puff, walked to the window and turned back to me and asked “You mentioned about the Minimum Efficient Scale or MES, but do you think there could be a concept of Minimum Environmental Care Size (MECS) for the polluting industries? The MECS must accommodate the costs of environmental pollution control that have often no economic return”
I liked the term Minimum Environmental Care Size.
“Dr Modak, many industries don’t do well because they arrive at MES without considering or sometimes not adequately internalizing the costs that they must incur on environmental pollution control. When they approach the Pollution Control Board (PCB) for a consent, they are stipulated several conditions on permissible pollution discharge. Compliance to these conditions often upsets the overall profitability of their operations. Consequently, many industries receive closure orders from the PCBs and judiciary directives due to non-compliance. The case often gets a political overtone as a closure means loss of employment. So, the industry is “allowed” to operate while not in compliance and the environment continues to deteriorate”
I thought the Professor was right. Why should we let these industries to come up at less than MECS in the first place”? I thought of including Department of Industry and Department of Environment in Professors training program (By the way, have you ever seen these two departments talking to each other? – but thats another story)
Could MECS be generally be higher than a conventional MES?
Professor smiled when I asked this question. He walked to the white board in his room and drew Figure as below. The Figure was complex but self-explanatory.
(click on the Figure to enlarge)
“This is just one scenario” – Professor said. “There would a number of variations based on the context”
I noted the following points
- Many times, industries that operate on the MES are unable to do an environmentally sound or responsible business. Perhaps scales higher than MES allow use of more resource minimal and efficient technologies. A minimum environmental care size or MECS may therefore be higher than a conventional MES.
- At this scale, the costs/output would be lower and hence even if the costs of investments may be higher, the overall economic returns will be impressive.
- Besides, the MECS will exhibit higher resilience to the volatility of the markets. (I thought this perspective is interesting and requires a good case study)
While agreeing to my observations, Professor further elaborated
“Dr Modak, apart from the economic objectives, we need to ensure that products we produce have least life cycle impacts and the waste streams we generate in the “overall system” (i.e. covering extraction, processing, transportation etc.) are reused, recycled and recovered (3Rs) to the extent possible. Only the residues that are left need to be treated and disposed in a secured manner. All these costs and benefits must be included in the computation of MECS. In all above, we need to ensure that resource are minimally extracted, used at high efficiency and the 3Rs are followed to the letter and spirit”
I said “Professor, Indeed both scale and technology will play a significant role in arriving at the MECS. Of course, there are other equally important variables such as the location (where resources are extracted and processed) and the demand on the products (especially the green products) from the market”
An analysis of the cost of production break down between a large forest based pulp mill in India with chemical recovery and an agrobased small mill without chemical recovery has shown that the chemical cost alone is 30% of the total cost of production against a figure of 21% for forest based mills. A decade ago, Indian machinery manufacturing companies have shown that, when the mills reach a level of 100 TPD Black liquor solids, it is viable to set up a chemical recovery plant. Today, this threshold could be lower.
Pulp mills of small sizes (20-30 TPD capacity) cannot afford a chemical recovery unit and they would continue to discharge harmful chemicals into the environment. As the society and the State cannot allow continuation of discharge of polluted effluent, either the industry will have to close down or find out alternative methods production to stop pollution or take production to higher scale. This is often not possible due to shortage of finance.
(Do read, though dated, a very interesting report on above)
When I cited this example on MECS and the challenge of financing, Professor got up and responded while extinguishing his Cigar.
“Dr Modak, in such cases, one may conceive a central or common chemical recovery for a number of pulp mills, where Black liquor of individual mills can be collected and processed in a Central Recovery Plant. The white cooking liquor produced in the Central Chemical recovery plant can be transported to the individual mills for their use. Again, the Central chemical recovery unit shall be of a capacity which is technically desirable and is viable financially.
In order to make this concept implementable, one must identify a cluster of pulp mills suitably located within an economic zone. The cluster can harbor at least 6-8 mills. The economic zone can be of a radius of 60-75 Km. The Centralized Recovery unit can either be an independent unit or an integrated unit with one of large mills in the cluster.
There are advantages and disadvantages of setting up an independent central recovery plant. A recovery plant, independent of the pulp mills, and non-integrated with any pulp mill, must have its own infrastructural facilities, such as water supply, steam and power supply, workshop and laboratory in addition to its own Management. The Management which would control the functioning of the central recovery, is independent of the pulp and paper mill operation. Its function is to procure black liquor free of cost from the mills and in return sell the white (cooking) liquor to them at the market price. It must generate its own steam and power required to run the various sections of the Recovery unit. The extra power can be sold to the State Electricity grid system.
Professor walked back to the white board and drew a New Figure as below.
(click on the Figure to enlarge)
“Look at Points B and C carefully. The MECS with support of a common resource recovery center and a common end of pipe solution will be lower than the MECS for a larger industry. The Small and Medium Enterprises (SMEs) under a cooperative agreement can still do business sustainably on a smaller production scale. What you need is a proper industrial planning, right institutional set up and an interested technology provider/investor for a joint venture” He said
I could see potential of this concept for chrome recovery in tannery clusters, metal recovery in the cluster of electroplating industries and spent acid recovery in chemical industries. There will be several such examples I thought that we could use to develop guidelines for key polluting SMEs.
“So Dr Modak, what we need is to deepen the concept of MECS and guide the industries, lenders & investors, PCBs, Industry and Environment departments. There is so much to do”
Professor left the room for a meeting
Indeed, we want to see more of Make in India but on a scale that will ensure environmentally and socially sound production – I decided to bring this topic to the attention of MoEFCC and Central PCB when next in Delhi. On a second thought, I thought that it should be the job of the Niti Ayog (India’s earlier Planning Commission). They are the Gurus and can bring in a change at national level.
Friends, whats your take?
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