Information Asymmetry in the informal waste ecosystem | Selling in the dark

As a general rule the most successful man in life is the man who has the best information.
– Benjamin Disraeli

Learning from the experiences of the Agricultural Sector:

What do Indian farmers and rag-pickers have in common? At face level, both groups couldn’t be more different: one’s livelihood is based on producing crops, while the other earns a living by salvaging waste. But interestingly, both operate within sectors that are structured in a very inequitable fashion.

Consider these statistics: according to a report published by the National Sample Survey Organization (NSSO) in 2013, the average monthly income of an agricultural household is INR 6426. Dr Rahul Singh, from the Birla Institute of Management Technology, estimates that Indian rag-pickers earn anything between Rs. 45 to 80 in a day - an average of Rs. 1875 each month. In both sectors, however, the final product accrues much more value at the higher end of the supply chain, and is traded for much higher prices than what farmers and rag-pickers receive. 

There are many reasons attributed to the unequal distribution of profits, especially at the lower end of the supply chain; one important factor is the unequal access to crucial information relating to the market. 

In technical terms, this is referred to as ‘information asymmetry’ - a market economy which has ‘imperfect information’ between all the players. Information asymmetry can be defined as a situation where some party in a transaction benefits from having preferential access to information, leading to power imbalances in transactions. 

Information asymmetry can exist across different industries and verticals. In India, it is particularly prevalent in the agriculture sector. A recent report describes the disconnect that exists between the industry’s multiple activities - including planning production, growing, harvesting, packing and transport, among others - which can lead to increased transaction costs, market friction and a situation in which particular stakeholders wield more power than others. 

Selling in the dark | Commonalities between the waste and agricultural markets

In the agricultural sector, this asymmetry manifests itself in a variety of ways. In terms of structure, the industry comprises of farmers who produce crops, traders and middlemen who aggregate, wholesalers who bid for the produce aggregated by the traders, and eventually, consumers. Buying and selling of produce takes place at specified neighborhood markets, or ‘mandis’ and these are largely dominated by traders. 

In general, farmers at the bottom of the supply chain are completely dependent on these traders to push their wares to consumers. They are particularly disadvantaged because of fewer opportunities of what is called ‘spatial arbitrage’; since they are not mobile, they cannot collect cumulative information on current prices and patterns of demand across different markets. This is an expensive operation that is far beyond their capability and as a result, they are unable to make decisions that would maximise their profits 

This situation is clearly illustrated in the survey conducted by the NSSO. According to this data, farming households are relatively unaware of government procurement options for crops and crop insurance schemes. They are also far removed from new technologies and guidance from state-run research institutes.

On the other hand, large traders have the capacity to collect this information from different markets, which gives them better bargaining power over the farmers. It also gives them an understanding of how to hike the prices of produce, significantly increasing their mark-up. Besides this, large traders have the advantage of temporal arbitrage; that is, those who have the capital to store large quantities of produce for longer periods of time can also affect market prices in specific localities by doing so. The end result is fairly straightforward: while consumers pay competitive prices for produce, farmers receive only a fraction of the income. 

Interestingly, Kabadiwalla Connect’s primary research has shown similar cases of information asymmetry in the waste space. Much like the structuring of the agricultural sector, the informal waste space includes a variety of buyers and sellers along a complicated chain. At the bottom-most level are mobile rag-pickers, who source waste manually from street dumps, landfills and homes. Waste is then passed on to itinerant buyers (who have the added benefit of a vehicle) and stationary scrap-dealers of varying capacities and scales. Finally, waste is routed to recyclers who upcycle it to a product of a much higher value.

The informal waste ecosystem | Lack of information hits the bottom of the supply chain harder.

Predictably, it’s the rag-pickers and itinerant buyers who are most disadvantaged because of the lack of information. While they source and salvage waste, they do not have the knowledge or ability to add value to it in any way. On the other hand, scrap-dealers (especially those at the higher end of the chain), are much better equipped to do so. They purchase waste at extraordinarily low prices from rag-pickers and then align their management process to better meet industry demands. As you travel up the waste chain, they sort waste into increasingly specialized categories and aggregate it to the extent that will make them maximum profit. They also know to transport waste to geographies where demand is highest.

The knowledge of these dynamics is what allows scrap-dealers and wholesalers to push up their revenue while simultaneously paying their suppliers a bare minimum. What results is that players at the base level of the supply chain are highly underpaid – in countries like Nicaragua for example, waste-pickers earn between $1.50 to $2 per day, while in Mexico, the average is around $7 a day. In his paper ‘Waste Picker Cooperatives in Developing Countries’, Martin Medina writes about how waste-pickers in Colombian, Indian and Mexican cities receive only 5 percent of what the recycling industry eventually pays for waste they supply.

Learnings from our primary research

One of the scrap-dealers whom we interviewed is based in MMDA Colony. Most of his competitors work out of rented or makeshift locations and purchase several categories of waste in small quantities. However, he has utilized his financial capability and knowledge to build a more successful enterprise. He invested in a 2400 square foot yard to aggregate material, and chose to specialize in only one category: paper. Rather than source his material from several stakeholders, he worked out contracts with a few printing presses in the city. These presses not only produce vast amounts of waste paper, ensuring a steady supply, but also shred it before handing it over to him, cutting down on the processing procedures he has to implement in his yard. Once the paper is brought to his yard, his staff sort it into super-specialized categories and bale it to save space. The scrap paper is aggregated until it can be sold for the highest price. His monthly revenue is over INR 1,00,000 - several times what an average kabadiwalla would make.

On the other hand, another scrap-dealer whom we spoke to in Kotturpuram had a very different model. He deals with 13 categories of waste, running the gamut from plastic and paper to metals like copper and aluminium. His suppliers are varied and operate in an ad hoc manner, and he has no understanding of the volume game, neglecting to aggregate his waste before selling it. He makes less than INR 10,000 every month.

Technology interventions | Opportunities and caveats

There have been various attempts at tackling the information asymmetry in the agricultural sector. An interesting model sought to make market information available on a mobile platform, since cellphones are easily accessible in rural parts of the country. However, there are a few factors that limit the efficiency of these systems. For instance, many farmers are unable to bear the cost of using an online or mobile platform, which means that the service has to be free in order to have a wide reach; but on the flipside, services that are not economically self-sustaining also tend to lose support in the long run. Moreover, these systems are not always created and implemented with a good enough understanding of the needs of the farmers. 

There don’t seem to have been any highly successful technological interventions tackling information asymmetry in the waste space. However, governments that have lent support to informal waste networks by regularising their functioning have, to an extent, managed to facilitate the free flow of information. In Brazil, for instance, the informal waste sector has been provided with institutional support and organised into unions and cooperatives, making it easier for rag-pickers and scrap-dealers to access information collectively. In India, while there are instances of self-organisation within the informal waste sector, we still have a long way to go until there is no exploitation within the ecosystem. 

- Written by Siddharth Hande and Kavya Balaraman

‘Waste Picker Cooperatives in Developing Countries’ - Martin Medina
‘Role of AMIS in Resolving Information Asymmetries in Agricultural Markets: Guidelines for AMIS Design’ - Laxmi Gunupudi and Rahul De, Indian Institute of Management, Bangalore
‘Socio-Economic Issues in Waste Management By Informal Sector in India’ - Dr Rahul Singh, Birla Institute of Management Technology

Picture sources: