Brendan Keane on Municipal Waste Management

Brendan Keane of the Irish Waste Management Association takes issue with Scott Whitney’s piece of last week.

You can see for yourself who has the better arguments.

A lot of people in this debate (incl. IWMA and DCC) seem to believe in the virtues of vertical integration of waste collection and waste disposal. I do not understand that at all. A collector should deliver waste to the disposer with the lowest cost, regardless of ownership. There are no economies of scope or issues with information or contracts that would favour vertical integration.

(There is a coordination problem between waste separation at source and final disposal. For example, mechanical-biological treatment (MBT) is more valuable for aggregated waste streams than for disaggregated ones.)

15 thoughts on “Brendan Keane on Municipal Waste Management”

  1. Where is the “200k tons by 2013” coming from? Is Mr Keane suggesting that the public will reduce the waste they produce from 700k to 200k in the space of 5 years? Surely that’s not a credible proposition?

  2. @DiarmuidC
    There are two things going on. First, the IWMA expects slower waste growth than others. Second, the IWMA that its members (privately owned waste companies) will not deliver any waste ever to the incinerator.

    200 kt is the amount of waste collected by the four Dublin city councils (according to IWMA)

    it’s hard to see how IWMA can enforce its buyers’ cartel: the first 320 kt of incinerated waste is already paid for, so public and private companies that collect waste for incineration can undercut the collection fees of companies that don’t

  3. “A lot of people in this debate (incl. IWMA and DCC) seem to believe in the virtues of vertical integration of waste collection and waste disposal. I do not understand that at all.”

    I suggest that it is a case of either (i) people believing what they want to believe, or (ii) using experts to bolster your predetermined position.

    There is a huge incentive for DCC and other local authorities in terms of revenues and in terms of managing staff to have vertical integration.

    If DCC win the rights to collect in a certain area without competition they have a cash cow. If they don’t then they can make staff redundant and reduce costs.

  4. @Diarmuid C.
    Not sure exactly where he comes up with the 200k figure but through recycling you could reduce it significantly. Also because many of ‘suspect’ they are paying over the odds for the incinerator, private waste companies will steal market share and take the waste elsewhere.

    Because local authorities are so inefficient at running waste operations they are withdrawing from the service all over the country. Following the court case this would happen in Dublin also as the private operators out-compete DCC. They may still out compete DCC (depending on gate fee for incineration) but instead of withdrawing from the market DCC will be tied into a loss making venture. They will be losing tax payers money on a daily basis yet remain in the market because they cannot leave.

    Cork city council is a good example of a LA seeing the waste it collects fall dramaticallye
    @richard.
    Do you know if Covanta allowed to sell incinerator capacity to the local private operators for less than DCC are paying?

  5. @Richard
    Sorry I don’t understand. do you mean
    (A)A contract clause preventing Covanta from setting a lower gate fee for private operators (on case by case basis) would be against competition law?
    or
    (B) Selling capacity to a private operator for less than DCC are paying would not be allowed under competition law
    or
    (C) Other

  6. @sam
    Price discrimination is allowed only under specific circumstances. Covanta cannot, without good reason, sell its services to one party at one price and to another party at another price if those parties compete in the same market.

  7. I understand (I am not a lawyer) that what competition law has to say on price discrimination by dominant players is very dependent on the facts. I’m not convinced that Covanta would be locked in to offering all market participants exactly the same price locked in with DCC for its first 320kt per annum. For example, as a thought experiment, consider if Covanta offered one price for locked-in supplies of waste and another price for non-locked in supplies.

    Depending on the market definition (incineration versus waste disposal) it might even be possible to argue that the law on price discrimination did not apply because Covanta did not have a dominant position in the market.

  8. Where Covanta are competing openly against other outlets for waste i am sure they will be allowed compete. Otherwise the DCC contract will have defined the price at which all waste enters the incinerator for 25 years. They will not have a dominant position as they do not control the supply of waste. The premium DCC will be paying will be for a secure capacity while smaller length contracts or waste acceptance without a contract would not be secure.

    All over the country waste facilities charge different gate fees so I don’t see why this incinerator should be an exception.

  9. Would vertical integration not make sense for someone who has invested heavily in a landfill for example? If company builds a landfill, most of the costs are up front in terms of buying the site, getting the permissions and then building the facility. They will want to fill that landfill. So it makes financial sense for them to become collectors, which guarantees them a supply for their landfill.

    They do not want to be forced to pay the owner of an incinerator to treat the waste when they can landfill it at little or no variable cost.

    We should look at this from the point of view of the citizens and the environment. How much waste was generated in the Dublin area in 2008? How much was landfilled? Around 700k tons. How much of that was landfilled in the Dublin area and how much did we export? What percentage recycling can we ambitiously achieve? How much will be left over for landfill or incineration? I imagine it would have to be at least 500k tons. And that is with ambitious recycling. We have to build a plant big enough to assume that we don’t hit our targets. So 600k tons seems about the right size.

  10. On the 200kt, I wonder if part of IWMA’s point may be that any waste they supply to Covanta for incineration will not count towards DCC’s 320kt obligation? This seems a plausible interpretation of the contractual arrangements as reported in the media, ‘though I very much hope it is incorrect.

  11. @Brendan
    Why would a landfill owner cross-subsidize a captive collector? Why not lower the price and let any collector come? Why would a captive collector be restricted to bringing waste to its owner when other landfills are cheaper?

  12. Hi Richard

    Investing in a landfill requires huge capital up front with a very long term uncertain payoff. It’s a very risky business.

    The finances are very difficult to plan. It costs virtually nothing extra to take in the waste after the landfill is built. So, in the short and medium term, it makes no sense for a captive collection company to pay a third party hard cash to take the waste when you can dispose of it for little additional cash cost yourself. (This becomes less clear after a few years when the landfill site is beginning to run out of capacity)

    I understand that most of the waste contractors own their own landfill sites. They don’t want to pay a third party for incineration when they can dump it for “free” in their own landfills.

    Setting the price for landfill is extremely difficult. The landfill owners need cashflow to pay off the costs of building the facility. If there is excess currrent capacity, prices will be driven down and while prices may continue to cover the variable costs, they may not make sufficient contribution to the fixed costs. A well financed landfill operator may withdraw capacity from the market until prices recover.

  13. @Richard,
    You would certainly lower the price and let others come (this is what Covanta will do if the contract allows it), but it is important for raising finance for the project to lower the risk and have at least one long term contract which will cover a large proportion of the ‘sunk’ costs.
    A waste collector may therefore undertake to supply into a disposal outlet that it is building. If the market goes bad it may end up subsidising the disposal outlets ‘sunk’ costs but if costs for disposal go up dramaticallly then it will benefit from a fixed lower cost in comparison to its competitors and the disposal outlet will be sorted also (accepting from other sources aswell).
    Why are we talking about landfills all of a sudden, this is DCC and Covanta……and you know who I suspect will end up subsidising who!!

    The benefit when the disposal outlet and collector are the same company is that where the market price for service falls, the disposal outlet can be flexible and reduce the price for the waste collection wing (particularly if its cost and the cost of other disposal outlets are reducing). It will be subsidising the collector but this may be justifiable to some extent as again they have the benefit of a secure supply of revenue. No big bully boy is going to wipe them out tomorrow by operating below cost Walmart style.

    Otherwise richard, why would anyone sign a long term contract to accept or deliver waste? Both sides want to be able to sleep at night.

  14. Is Covanta getting cold feet?

    Covanta yesterday (Thursday) held a conference call for analysts discussing their 1st Q 2010 results during which they addressed the development of the Dublin incinerator.

    The project is now effectively on hold after spending some US$ 3 million.

    Tony Orlando seems to suggest that this project is a foreign direct investment but Covanta state in the 10Q that they expect “to fund construction through existing sources of liquidity and effect project financing as the project progresses”.

    Project financing is further described as being raised from local sources. The debt is secured on the project revenues which in Dublin come from a municipally guaranteed put or pay contract.

    Covanta increased the cost of this project from € 300m to € 350m in 1Q 2009 (using debt financing). We do not know why they increased the cost by € 50m at a time when construction costs are dropping but we suspect it has something to do with the high cost of debt financing.

    Covanta are really providing mezzanine style finance for this incinerator with a view to taking the long term profits back to New Jersey. This is not a foreign direct investment.

    The comments are very guarded – CEOs do not usually put their foot in it – but you can read between the lines. They are frustrated and must be feeling somewhat bruised by the “hostile environment”.

    At this stage Covanta are discussing the return of available capital to shareholders rather then spending it in Dublin.

    This project seems to be a dead duck.

    ——————–

    The following are the relevant extracts from the conference call:

    CVA – Q1 2010 Covanta Holding Corporation Earnings Conference Call

    Event Date/Time: Apr. 22. 2010 / 12:30PM GMT

    Tony Orlando – Covanta Holding Corporation – President, CEO
    However, by its nature project development in our business is difficult, time-consuming and always entails a level of uncertainty as we’ve experienced in Dublin.

    … and we will return capital to shareholders if we believe that is the best way to create long-term value.

    Paul Clegg – Jefferies – Analyst
    On the Dublin issue, can you just remind us what specifically is still missing from a permitting or regulatory standpoint? Is it that water permit still? And then how much — just kind of how much are you willing to spend there on a run rate basis until you’re sure that you’re going to get that final approval?

    Tony Orlando – Covanta Holding Corporation – President, CEO
    The final approval is called a for sure (sic – he meant “foreshore”) permit. We believe it’s — it’s largely administrative in nature, but it clearly has become fairly politicized. So we’re moving forward in what we believe is a very prudent fashion. You can see when you look at our financials this past quarter there was just a little bit less than $3 million in development projects, that’s almost entirely Dublin. So we’re spending in a prudent fashion at this point, and we will continue to make assessments as events unfold.

    Jeffrey Coviello – Duquesne Capital – Analyst
    And I guess on the Dublin project specifically, if you read the press in Ireland it seems like on its face the Irish government is kind of trying to create a hostile investment environment. And if you have opportunities in Canada and the UK to put capital to work in friendly regulatory environments, do you feel confident that even if you get the for sure (sic) license that there won’t need the ability to change economics going forward in Ireland and that money you could put there wouldn’t be better put somewhere else?

    Tony Orlando – Covanta Holding Corporation – President, CEO
    Well, I have to say we are quite disappointed and your assessment of a hostile environment for foreign investment is not one we would have anticipated. But it does feel that that’s the direction that it’s going.

    I do believe that that atmosphere is going to change and that we are going to, at the end of the day, see the Irish government take steps because they do want to attract foreign direct investment. I think they’ve certainly done a lot of things over the years and taken some really proactive steps to deal with their fiscal situation.

    So I think that this is a short-term issue that is not going to be the long-term dynamics in Ireland. But it is a little bit frustrating right now that that’s kind of how it’s gone thus far.

    In terms of other environments, Canada, elsewhere — look, we continue to believe that when we look generally speaking at where we think is a good place to do business and a good place to invest, we like the business climate in the UK. We do generally like it in Ireland notwithstanding these challenges. And I think Canada is also going to be a good market for us to invest in and have certainty that we’ll be able to get reasonable returns and be treated fairly.


    J & V

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