Encouraging Resource Recovery Solutions

for Industrial Waste in Indonesia

Vincent Aloysius. Maastricht School of Management
Dadan Umar Daihani. Trisakti University

CONTACT

Name: Vincent Aloysius

E-mail: vincentaloysius@yahoo.com

EXECUTIVE SUMMARY

Twelve million tonnes of hazardous waste was estimated to be generated in Indonesia a c-

cording to the World Waste Survey 2009 by Chalmin and Gaillochet. Only a small fraction
of this waste, an estimated one million tonnes or just over eight percent of the total waste
generated was reported to be managed. Such a large amount of waste being unmanaged indi-
cates a high pollution risk. It also highlights a significant opportunity lost from not practic-
ing resource recovery from waste. How can we close the gap between waste generated and
waste managed? What instruments can policy makers use to encourage industries to adopt
resource recovery waste solutions? The well-established Indonesian environmental monitor-
ing and disclosure program called PROPER (Program for Pollution Control, Evaluation and
Rating) seems to tackle this by introducing waste management aspects into the program’s
ranking criterion. Is this working? Or are improvements simply a result of the firm’s own
internal awareness, commitment and efforts to fulfill internal as well as external policies on
waste management?

This paper is based on a research focused on the perception of environmental management

practitioners towards internal and external drivers that can influence firms to adopt resource
recovery solutions. More than two hundred environmental practitioners representing foreign
and local owned entities participating in the PROPER program responded to a survey con-
ducted. Structural equation modeling was employed to test several hypotheses derived from
a conceptual framework model developed. This conceptual model was based on environmen-
tal practitioners’ perception towards the firm’s awareness of impacts from waste, commit-
ment to improve on these impacts, the desire to improve the rating in PROPER, compliance
to the firm’s internal and external policies on waste management and finally the degree to
which resource recovery waste solutions that had been planned and adopted. The outcomes
of the analysis indicate that the conceptual model represented well the overall relationship
between the variables considered. It revealed also that environmental practitioners perceived
that the effort to improve the rating in PROPER through better management of waste result-
ed in a desirable shift towards resource recovery solutions. This study suggests that policy
makers responsible for developing waste management strategy should consider the value of
a program like PROPER as a vehicle to encourage resource recovery waste solutions. Such a
program when equipped with waste management related criterion may be a lever to close the
industrial waste gap in Indonesia and possibly in similar emerging economies.
INTRODUCTION

In Indonesia and possibly in most emerging economies, management of industrial waste re-
mains an area that requires significant attention. The gap between waste generated by indus-
tries and the capacity to manage this volume of waste remains a problem that leads to i m-
proper disposal of waste and pollution.

The magnitude of this problem is many a time misunderstood due to the poor quality of data
available on waste. Many factors contribute to the poor data quality. Chalmin and Guillochet
in their 2009 waste survey report explained that untrained personnel responsible for report-
ing and estimation, reluctance of firms to release information on processes that generate
waste and poor assessment of hazardous waste were main reasons leading to misinterpreta-
tion of the magnitude of the problem. Discrepancies also occur from country to country due
to varying classification and definitions. They predict that in 2009, the hazardous waste gen-
erated in Indonesia to be approximately twelve million tonnes. Only one million tonnes out
of this volume was estimated to be managed properly. This significant volume of unman-
aged waste poses a high pollution risk but it also at the same time offers an opportunity for
resource recovery. One can assume that most of the unreported waste is possibly illegally
dumped or managed by environmentally unsound or informal methods.

How do we close the gap between waste generated and waste managed by increasing the
shift to resource recovery type waste solutions? How do we encourage those practicing non-
resource recovery solutions to shift to resource recovery waste solutions and for others who
are not yet managing their waste properly to seek resource recovery solutions for the waste
they generate?

Background of the Research

Indonesia has been successful in implementing a well accepted environmental rating and
disclosure program called PROPER (Program for Pollution Control, Evaluation and Rating).
The participation in the PROPER program has been steadily increasing as seen in figure 1.
As management of the firm’s waste has become part of the rating criterion for the PROPER
program, this could now mean that PROPER may well be one of the influencing factors in
encouraging the shift to resource recovery waste solutions.

Figure 1 Graph showing number of firms participating in the PROPER p rogram

Macauley (2009) observed how in a matured waste management market, regulation induced
changes encouraged technology change and a shift in waste solutions technology. The waste
management criterion introduced in PROPER could very well have a similar effect on the
waste management business landscape as in formal regulation induced changes. With the
criterion of PROPER evolving to include elements of good waste management practices, this
could possibly lead to an increased demand for resource recovery waste solutions. This d e-
mand may also be further enhanced by the authorities encouraging for better industrial waste
management through resource recovery solutions. With the high potential to increase re-
source recovery solutions from the volume of waste that goes unmanaged in Indonesia, it is
important to understand what can be the enabling vehicles to encourage this further.

Environmental practitioners possess an important influencing role in matters pertaining to

waste management for the firm. As such, the perception of the practitioners towards the fa c-
tors relevant to waste management was made the focus of this research. This provided a dif-
ferent angle from past research carried out in this area that depended on secondary data f o-
cused on the statistics of waste. Part of the problem in utilizing secondary data is the inaccu-
racies related to waste statistics mention earlier.

In the early part of this research, the theories, concepts and paradigms which facilitate d the
understanding of the waste management business in the context of sustainable development,
industrial ecology, environmental protection and climate change initiatives were explored.
Past research in this area was found to be mainly dealing with changes in the waste man-
agement landscape as a response to changes in technology and regulations. Observati on of
the nascent waste management business landscape in Indonesia, interviews with key figures
in the environment and waste businesses and considering a preliminary study as part of this
research, a revised conceptual framework model was developed. The preliminary study and
outcomes were detailed in a paper by Aloysius and Daihani (2010). In the revised model,
awareness of impacts from waste was considered as an antecedent to gaining commitment to
improve on the impacts. In addition, compliance to the firm’s own internal policy on waste
management was included in the model as a latent variable. This was to address both inte r-
nal and external policies that may be relevant to the firm’s decision on adopting resourc e
recovery solutions.

Research Question, Hypotheses and the Conceptual Model

In this research, the overarching question we wish to be able to answer is how we can pr e-
vent pollution and encourage resource recovery waste solutions with the aim of harnessing
resources from waste. Thus, the major research question in this study is posed as; “What are
the factors that influence industrial waste management in Indonesia and how can these fa c-
tors influence the shift towards resource recovery type waste solutions?”

Observing the situation in Indonesia and considering the findings of Macauley (2009) on
regulatory induced changes, Garcia, Afsah and Sterner (2008) on the firm’s sensitivity to the
environmental rating and disclosure programs and Mamingi, Dasgupta, Laplante and Hong
(2006) on sensitivity to media exposure of the performance of firms in the ratings program,
this paper explores a possible conceptual model as illustrated in figure 2 b elow. This con-
ceptual framework is a system consisting of the following variables: (i) the firm’s awareness
of the potential impacts from the waste they generate, (ii) the firm’s commitment to improve
on the impacts from waste and management of the waste, (iii) the firm’s desire to improve
their standing in the environmental ratings and disclosure program (PROPER ), (iv) the
firm’s internal policies on waste management and (v) the external policies on waste ma n-
agement. These latent variables form the interacting system to influence the endogenous va r-
iable being (vi) the level of adoption of resource recovery waste solutions.

From the above relationships, several hypotheses based on the relationship between the la-
tent variables were developed. These hypotheses are described in Table 1 below:
 Table 1 Description of the hypotheses formulated from the relationships b etween the variables
H1 The better the firm's awareness of impacts from waste, the higher the commitment to
improve on the impacts.
H2 The stronger the commitment to improve on impacts from waste, the higher the effort to
improve rating of PROPER through waste management aspects.
H3 The higher the commitment to improve on the impacts from waste, the greater the effort
to comply with internal policies on waste.
H4 The higher the commitment to improve on the impacts from waste, the greater the effort
to comply with external policies on waste.
H5 The greater the effort to improve the rating of PROPER through waste management, the
greater degree of resource recovery waste solutions adopted.
H6 The greater the effort to comply with internal policies on waste , the greater the effort to
improve the rating of PROPER through waste management.
H7 The greater the effort to comply with external policies on waste, the greater the effort to
improve the rating of PROPER through waste management.

The latent variables and the conceptual framework representing the relationships amongst
these variables are illustrated in figure 2 below.

Figure 2 The conceptual model of the system encouraging the shift towards resource recovery waste
solutions

The conceptual model in figure 2 describes how the awareness of impacts from waste influ-
ences commitment to improve on these impacts. This commitment in turn influences the e f-
fort to improve on the compliance to the internal and external policies on waste management
as well as the effort to improve on the rating of firm in the environmental monitoring and
disclosure program. Addressing the criterion the environment monitoring and disclosure
program has on waste management; the effort to improve on the firm’s rating through waste
management influences the level to which resource recovery solutions are adopted. The la-
tent variables in the conceptual model are described in the following table 2.
 Table 2 Description of the latent variables in the conceptual model
Latent Variables Description
Awareness of Impacts from Waste Gener- Perception of the awareness of the firm on the impacts from
ated the waste generated and the waste management methods
adopted by the firm.
Commitment To Improve on Impacts Perception of the commitment of the firm to improve its envi-
ronmental impacts through management of waste.
Compliance to Firm’s Internal Policies on Perception of the firm’s effort to comply with its own internal
Waste Management policies specific to waste.
Compliance to External Policies on Waste Perception of the firm’s effort to comply with external policy
Management of government specific on waste to promote resource recov-
ery.
Effort to Improve Firm’s Rating on Envi- Perception of the firm’s effort to improve its rating in the
ronmental Monitoring and Disclosure Pro- PROPER program by adopting resource recovery solutions
gram (by meeting waste management cri- and improving waste management.
terion of the PROPER program)
Resource Recovery Solutions Adopted Portion of the waste the firm plans to and managed to shift to
resource recovery solutions or higher up in the waste hierar-
chy. (Expressed as a percentage of the total waste the firm
generates).

METHODOLOGY

The measures of the constructs in the conceptual model outlined in Figure 2 are latent varia-
bles not possible to be measured directly. These latent variables are measured by several in-
dicator variables that represent various dimensions of the latent variables. Measures of the
constructs were mainly adapted from past research works while those measuring the level of
resource recovery solution that had been planned and achieved were developed for this
study. This process mirrored the process of scale development as suggested by Churchill
(1979). Awareness to impacts from waste focused on the dimension of knowledge of envi-
ronmental impacts as a result of the generation of waste and impacts from the management
of this waste. This dimension was be measured through the responses to Likert scaled ques-
tions on knowledge of the impacts from waste and the current or desired waste management
options adapted from Banerjee (2002) and Gadenne, Kennedy and McKeiver (2009).

Next, for commitment to improve on impacts from waste; this looked into the level of effort
the firm made to measure and reduce the impacts from waste generated. This was measured
through responses to questions related to waste policy, staff training on waste management
and communications on waste management practices which were measures adapted from
Henriques and Sadorsky (1999) as well as Williamson and Lynch-Wood (2001). As for the
compliance to the firm’s internal policies, this emphasized on the importance the firm placed
on its internal policies, how the performance against this was measured, how the firm audit-
ed its operations and how it communicated this. Similarly, for the compliance to Govern-
ment policy, this was seen as the level of knowledge and importance it placed on these poli-
cies and effort the firm took to fulfill and comply with the government policies on manage-
ment of waste. The measures for these were adapted from Afshah, Garcia and Sterner
(2008), Banerjee (2002) and the others studies mentioned above.

The firm’s desire to better its rating in the environmental monitoring and disclosure program
(PROPER) on the other hand was focused on the level of importance the firm placed on ob-
taining a desirable rating; its sensitivity to exposure and further its knowledge and effort on
the requirements the program placed on waste management. The endogenous variable of the
level of shift to resource recovery waste options was measured based on the targeted as well
as the level of resource recovery waste management the firm had achieved. The waste data
collected included the portion of which was managed by resource recovery methods. As
firms were expected to be reluctant to reveal the quantum of waste generated, this measure
was expressed as in the other parts of the survey questionnaire in a Likert scaled format rep-
resenting the percentage of waste managed by resource recovery methods over the total
waste generated.

Conducting the Survey

Based on the feedback and suggestions of respondents from the initial survey, this survey
was carried out via the internet for the sake of efficiency as the structured survey question-
naire conducted by a face-to-face approach in the initial survey was not time efficient and
inconvenienced the respondents. The respondents were able to answer directly the question-
naire on the web based survey form. However, in order to clarify any areas o f the question-
naire as well as to avoid any incomplete parts, each respondent was reached by telephone by
a team of trained survey officers. These officers also communicated with the respondents by
telephone to encourage respondents to complete the survey.

The survey questionnaire was sent out individually to environmental practitioners whose
firms were participating in the PROPER program by electronic mail. Survey invitations were
sent out to 600 respondents selected at random from 995 entities participating in the 2010-
2011 PROPER program. A key factor that resulted in a good level of participation was the
official supporting letter issued from the Indonesian Chamber of Commerce and Industry
(KADIN) in support of this research. Out of the 240 responses, data from 201, being full re-
sponses to the questionnaire were analyzed while the remainder was set aside as incomplete
responses. Mindful of responses that could be skewed by the notion of socially desirable re-
sponses, anonymity of respondents was assured. Further, the format of framing such ques-
tions as suggested by Sudman, Bradburn and Stocking (1989) was taken to minimize the
threat of responding to such questionnaires. Studies like that of Williamson and Lynch-
Wood (2001) have also suggested that a good level of maturity is shown when environmen-
tal practitioners responded to such surveys.

Data Analysis
The structural equation modeling (SEM) approach (using the Lisrel 8.5 software) was em-
ployed to test the hypotheses and analyze the factors of the conceptual model shown in Fig-
ure 2. The data analysis procedure consisted of confirmatory factor analysis to assess the
model. This procedure was intended to evaluate the level of fit of the data with the model,
the validity and reliability of the measurement model and also the coefficient of significance
for the structural model. With the SEM analysis we were able to determine the significance
of the relationship between constructs and hence also test the hypotheses developed based
on the conceptual model.

The SEM approach was opted to assess the conceptual model in this study due to the a d-
vantages if offers for complex models with constructs which are latent variable that are not
possible to measure directly. According to Kline (1998), SEM allows for the modeling and
testing of complex patterns of relationships while handling a multitude of hypotheses simu l-
taneously as is the case in this study. Sample size is an important factor for analysis using
SEM. The number of responses of 201 in this study is considered sufficient for SEM. Kline
(1998) suggested that more than two hundred responses was considered a large sample size
sufficient for SEM application. While some researchers recommend a ratio of cases to free
parameters of above 10:1, Kline (1998) suggests based on the work of Marsh and Hau
(1999) that a lower than 10:1 ratio of cases to free parameters is acceptable with a high
standardized loading factor of 0.6 as is in this case. With the exception on one measure for
the internal policy variable that was subsequently omitted from the analysis, all other
measures were represented by a high loading factor. The loading factor reflected the validity
or rather the degree to which the measures represented the latent variables. Apart from the
validity of the measures, the reliability of the constructs was also found to be very good by
referring to the construct reliability of higher than 0.8 for all variables.

RESULTS AND DISCUSSION

Confirmatory factor analysis (CFA), using LISREL 8.5 with maximum-likelihood (ML) estima-
tion following the approach of Joreskog and Sorbom (1993) was performed on the survey data.
Assessment of the overall model was made referring to the commonly employed multiple fit in-
dexes, these are: Root mean square error of approximation (RMSEA), Non-Normed Fit Index
(NNFI), Comparative Fit Index (CFI) and the Goodness-of-Fit Index. Overall, the model fit in-
dexes indicated that the data was consistent with the model, with all fit indexes equal to, or better
than the recommended values ( RMSEA=.037 indicating a close fit, NNFI=0.96 indicating a
good fit, CFI=0.96 indicating a good fit, GFI=0.87 indicating marginal good fit). This confirmed
that the data supported well the conceptual model developed to represent the system that could
encourage the shift to more resource recovery solutions for industrial waste.

The path diagram from the structural equation modeling revealed the overall fit of the model
as well as the significance of the relationships within the conceptual model between the la-
tent variables. The t values from the path diagram confirmed the significance of the relation-
ships between the latent variables. With the exception of the relationship between both the
internal policies and external policies towards effort to improve rating in PROPER all other
relationships were found to be significant. The hypotheses developed based on the relation-
ship between variables in the model were then tested against the t values from the path dia-
gram. The hypotheses, the t values from the path diagram and the outcome of the hypothesis
test are detailed in table 3 below.
Table 3 Outcome of hypothesis testing
Path
Hypotheses Hypothesis Statement Diagram Hypothesis
t Values Supported/unsupported
The better the firm's awareness of impacts from waste,
H1 the higher the commitment to improve on the impacts. 8.72 Data supports hypothesis
The stronger the commitment to improve on impacts from
H2 waste, the higher the effort to improve rating of PROPER 3.53 Data supports hypothesis
through waste management aspect.
The higher the commitment to improve on the impact
H3 from waste, the greater the effort to comply with internal 11.69 Data supports hypothesis
policies on waste.
The higher the commitment to improve on the impact
H4 from waste, the greater the effort to comply with external 7.54 Data supports hypothesis
policies on waste.
The greater the effort to improve the rating of PROPER
H5 through waste management, the greater degree of re- 6.75 Data supports hypothesis
source recovery waste solutions adopted.
The greater the effort to comply with internal policies on
H6 waste, the greater the effort to improve the rating of -1.46 Hypothesis unsupported
PROPER through waste management.
The greater the effort to comply with external policies on
H7 waste, the greater the effort to improve the rating of -0.43 Hypothesis unsupported
PROPER through waste management.

Perhaps the significant and positive effect of awareness of impacts from waste on increasing
commitment to improve on these impacts is not at all surprising. What is interesting is the
effect that commitment had on increasing the effort to meet internal and external policies on
waste as well as the effort to better the rating in the PROPER program by improving waste
management options. Very important also is the finding that this effort in turn had a positive
and significant effort in increasing the degree of resource recovery solutions adopted. The
hypotheses on the relationship between internal and external policies and PROPER were re-
jected as the relationship from the data was found to be not significant. One possible expla-
nation to this is perhaps the fact that for those firms that focused on only external policies,
additional effort to improve the PROPER rating may not seem necess ary as both are gov-
ernment driven initiatives. On the other hand, for those firms that already had internal poli-
cies it may not matter that PROPER also had waste management criteria as this could be a
“business as usual” scenario for these firms. Firms that found it important to have a good
rating in PROPER possibly saw the waste management component in PROPER as important.
This could have brought about specific effort to embrace resource recovery waste solutions.

The effort to improve the rating in the PROPER program had a significant effect on the
adoption of resource recovery solutions. This finding is important as it shows us that the
PROPER program can be an effective vehicle to drive adoption of resource recovery solu-
tions for industrial waste.

CONCLUSION

The perception of environmental practitioners on internal and external factors play an im-
portant part in the level of effort a firm would invests in management of their waste to im-
prove its environmental performance. The role of the environment al monitoring and report-
ing program (PROPER) can be seen as an important one which perhaps can be further en-
hanced to encourage the shift towards resource recovery type waste solutions. While encour-
aging movement upwards in the waste hierarchy, this shift can certainly help to close the
waste gap in Indonesia. It is hoped that as demand for sound waste management solution s
increased, there would be more investments in waste management infrastructure and capaci-
ty. Hopefully this journey can be quickened to avoid pollution from industrial waste and bet-
ter use of resources in our resource scarce world.

This study has revealed the ability of PROPER, the environmental monitoring and reporting
program to be used to shift firms towards resource recovery solutions for managing industri-
al waste. With this knowledge, policy makers may be able to draw upon another tool at their
disposal to help improve the current state of industrial waste management in Indonesia. Ef-
fort is required to raise awareness of impacts from waste and waste management while more
focus on the criterion on waste management in the environmental monitoring and disclosure
program is required if indeed we wish to see the gap between industrial waste generated and
that managed reduced.

This research has enabled us to address the main research question to identify the driving
factors and how these factors influence industrial waste management in Indonesia. Perhaps
the findings of this research may be able useful not only to the waste management sector in
Indonesia but possibly also be relevant to other emerging economies in encouraging re-
source recovery solutions for industrial waste.

ACKNOWLEDGEMENTS

A special acknowledgement and gratitude is expressed to the Indonesian Chamber of Com-

merce and Industry (KADIN), for the support provided to encourage its member companies
to participate and respond to the survey conducted.

The author wishes to acknowledge also the valuable guidance and advice received from Pro-
fessor Meine Pieter van Dijk and Professor Robert Geodegebuure of the Maastricht School
of Management in shaping the research design during the course of developing this research
proposal.

REFERENCES

Aloysius, V., Daihani, D. U. (2010): The Growing Demand for Alternative Solutions for In-
dustrial waste; The Experience of Indonesia. In: Proceedings of the International Solid
Waste Association Congress 2010, Hamburg, 15-18 November, www.iswa2010.org

Banerjee, Subhabrata Bobby (2002). Corporate Environmentalism: the constructs and its
measurement. Journal of Business Research, 55(3): pp 177-191.

Bradburn, N.M., Sudman, S., Blair, E. and Stocking, C. (1989). Question Threat and Re-
sponse Bias, in Singer, E. and Presser, S. (Eds), Survey Research Methods: A Reader, Un i-
versity of Chicago Press, Chicago and London, pp. 371-84.

Chalmin, P., Gaillochet, C. From Waste to Resource: World Waste Survey 2009. Paris: Ec o-
nomica.

Churchill, Gilbert A. Jr. (1978). A Paradigm for developing better measures for marketing
constructs. Journal of Marketing Research, 16 (1): pp 64-73.

Dasgupta, S., Hong, J.H., Laplante, B., and Namingi, N. (2004): Disclosure of environmen-
tal violations and the stock market in the Republic of Korea. World Bank Policy Research
Working Paper 3344.

Gadenne, D.L., Kennedy, J., McKeiver C. (2009): An Empirical study of environmental

awareness and practices in SMEs. Journal of Business Ethics 84:45-63.

Garcia, J., Afsah, S., Sterner, T. (2008): Which firms are more sensitive to public disclosure
schemes for pollution control? Evidence from Indonesia’s PROPER program. Environ Re-
source Econ, pp.151-168.

Henriques, I., Sadorsky, P. (1999): The relationship between environmental commitment and
managerial perceptions of stakeholder importance. Academy of Management Journal, Vol
42, No1, 87-99.

Joreskog, K. G. And Sorbom, D. (1993). Latent Variable Scores and Their Uses.
http://www.ssicentral.com/lisrel/column6.html (Mar. 30, 2012)

Kline, R.B. (1998). Principles and practice of structural equation modeling. New York:
Guildford.

Macauley, M. K. (2009): Waste not, want not: Economic and Legal Challenges of Regula-
tion-Induced Changes in Waste Technology and Management.
Resources for the Future, Discussion Paper. RFF DP 09-11.

Mamingi, N., Dasgupta, S., Laplante, B., Hong, J. H. (2006): Firms’ Environmental Perfor-
mance: Does News Matter. World Bank Policy research Paper 3888.
Marsh, H. W., Hau, K. T. (1999). Confirmatory Factor Analysis: Strategies for Small Sam-
ple Sizes. In R. H. Hoyle (Ed.), Statistical Strategies for Small Sample Research (pp. 252-
284). Thousand oaks, CA: Sage.

Stafford, S. L. (2007). Can consumers enforce environmental regulations? The role of the
market in hazardous waste regulation. Regul Econ 31, pp. 83-107

Williamson, D., Lynch-wood, G. (2001). A new paradigm for SME environmental practice.
TQM Journal, 13, 6, pg 424-432.