Waste policy

My op-ed in yesterday’s Sunday Times (behind pay wall) expands on last week’s post. Here’s my version of the text:

The proposed reform of waste collection is a step in the right direction. Incineration is needed to meet our EU obligations. A few waste companies will lose money, but other companies and households will be better off.

The Department of the Environment is now moving to change the regulation of waste collection from “competition in the market” to “competition for the market”. Competition in the market does little for lower fees as few households shop around for the cheapest waste collector. Economies of density is another other reason to welcome this move. In my street, we have three bins (black, green, brown) and four companies collecting bins. Every fourth Monday, no less than 12 waste trucks drive up our road to the delight of the children and the annoyance of drivers. Three trucks (one company) could do the same work for a fraction of the cost, as they would spend less time driving and more time collecting waste.

That company would have a local monopoly. Monopolies charge more than competitive companies, but there would be cost savings for households too. Monopoly power is easily checked in this case. Waste collection concessions should be tendered, and granted to the company that guarantees the lowest fees for households. Such concessions should be renewed regularly, say every two years, to keep up competitive pressure.

The proposed change in regulation is a change for the good, therefore. It follows the recommendations in a number of reports, including the International Review of Waste Management Policy, commissioned by the previous Minister, and the Gorecki report of the ESRI.

A level-headed change in waste management is welcome in itself. The previous Minister openly campaigned against government waste policy, but did not change it. This was a source of much confusion and agitation. Investment and renewal in the waste sector ground to a halt. It can now start again.

The most urgent problem is that the European Union has put a cap on the amount of waste that can be landfilled. That cap has been in force for over a year now, but the government has yet to formulate a coherent plan on how to meet the target.

Incineration will be part of the solution. The proposed change in the rules for waste collection has been interpreted as a move to favour incineration. That is nonsense. The markets for waste collection and waste disposal are separate. Some people seem to think that waste collection and disposal must be done by the same company, but there is neither a legal nor an economic reason for this.

A number of Irish waste collectors have diversified into waste disposal, focusing on methods that curried political favour before the last election. Returns in waste collection are not great. Waste disposal looked more lucrative with the EU cap on landfill. That changed with the prospect of a large incinerator in Poolbeg. Incineration is, after landfill, the cheapest way to (legally) dispose of waste. Irish waste disposal companies have complained loudly about incineration – because they know they cannot compete. Waste collectors would be fools not to send their waste for incineration.

The Poolbeg incinerator is not without its faults. There would be few environmental or health concerns if it is properly run, but it is not sure that the Environmental Protection Agency has sharp enough teeth to stand up to a large, multinational company. The incinerator is financed through a mechanism that is, as far as I know, unique to Ireland. If the incinerator turns a profit, the spoils go to the shareholders. If it turns a loss, the taxpayer makes good the difference. The Poolbeg incinerator shares this peculiar model of privatizing gains and socializing losses with, among others, toll roads, renewable energy, and of course banks.

This does mean that the incinerator can charge lower fees if it needs to increase its market share. The Minister decided not to impose a levy on incineration. As there are small external costs from incineration, this is an implicit subsidy. The incinerator will therefore be a fierce competitor in the waste disposal market. Irish waste companies are right to be worried.

At the same time, the reform of waste collection is good news for them. Profit margins should be better if local monopolies are sold through a competitive tendering process.

The tender process should be well organized. That would be a task for the county councils. A number of county councils still run their own waste collection business. It is hard to see that tenders of private companies would get a fair hearing. The tendering should therefore be outsourced to an independent body or the public waste collection businesses should be privatized. The Commission for Utilities Regulation should oversee the tendering.

[UPDATE: See new CEPR paper; h/t Constantin Gurdgiev]

But if the new regulations are properly implemented, households and small companies should benefit. The government is working to reduce the costs of waste collection and waste disposal. Many things can still go wrong, but there is movement in the right direction.

38 thoughts on “Waste policy”

  1. Genuine question about something I don’t understand. If there is competition for the market in a given area, and a company wins a monopoly for five years , how can a potential competing company stay in business to later compete for the market in the second round of tenders?

    Won’t there simply be a monopoly after a few years as potential competitors are completely shut out of the market?

  2. Competition in the market does little for lower fees as few households shop around for the cheapest waste collector.

    Well, fancy that.

  3. @Pidge
    The monopoly would be local. There would probably be hundreds of concession areas. If the tendering process is stacked, a number of companies would be active.

  4. A question about the idea that the concessions that the collection monopoly on would be re-tendered every two years. Would this time-frame have to lengthened to promote a genuinely better service than what is now in place? My thinking is that the length of the monopoly would have to be long enough that the eventual winner could make a decent profit (in their own opinion), but also short enough to avoid the traditional disadvantages of a monopoly.

  5. Most Irish waste sent to landfill last year was biowaste: 1 million tonnes of it.

    Should we burn that million tonnes of biowaste? Rotten fruit and vegetables have low calorific value and the licence for Poolbeg specifically forbids low calorific waste (inline with efficiency rules in the Waste Framework Directive, 2008)

    The EU is developing policy around biowaste. They point towards the benefits of composting and recovering biogas fuel through digestion. Biowaste treatment targets are mooted.

  6. Richard, in the last paragraph you should have written the ‘if’ in bold, text size 48 highlighted in yellow.

  7. Ossian – I like biodigestion and I think Ireland is particularly suited given both municipal and agricultural waste streams. Problem is that a proposed plant may attract objectors like flies to… decomposing organic matter.

    In Toronto we have organics composting but there have been problems with odour control from the companies doing the composting and with the quality of the resulting compost which has been found in some cases to have sodium levels high enough for it to be essentially best used as a herbicide.

  8. @Richard,
    An important aspect which you haven’t discussed in the implentation of ‘competition for the market’ is whether or not the awarding authority will have the power to direct the waste to specific disposal/recovery outlets.
    It is vital that waste collectors remain in control of the waste so that they can take advantage of whatever innovations/market changes occur in the waste disposal/recovery sector.
    The landfill levy acts as a sufficient deterrent for disposal to landfill and the EPA has banned excessive biodegredable waste from being landfilled. The EPA also applies environmental controls on large disposal/recovery operations. Beyond these market interventions I see no reason why the tender awarding authority should act to futher direct the market.

    The above point is very relevant to Poolbeg but it is also a vital issue across the country where I would fear the potential for waste managment to become highly politicized if this awarding authority is given such powers.

    You previously argued against ‘vertical integration’ in the market. If the awarding authority holds control of both the collection and disposal of the waste then this is essentially vertical integration. If the collectors have the freedom to bring this waste to wherever suits their business model (whether to Poolbeg or to the collectors own facility) then this is not vertical integration.
    There is no need therefore to impose ‘vertical integration’ or whatever the term for the opposite is, on the market. Allowing flexibility will enable waste collectors to find the most economically advantageous solutions.

    I would be grateful for your opinion on this Richard

  9. Nb Biowaste does not equal biodegradable waste, biodegradable waste includes high calorific waste such as paper, wood and certain textlies

    These waste are not particularly suitable for anerobic digestion, cellulose is not directly amenable to anaerobic digestion whereas they are suitable for energy recovery through incineration

    EPA report has 1.7 million tonnes of waste going to landfill (table 3 of 2009 national waste report) in 2009

  10. @Sam
    Sorry for not being explicit.

    Local authorities should not have the right or the opportunity to direct waste towards any particular method of disposal.

    One solution is to have a two-stage tender. In the first stage, disposal plans are checked by the EPA. In the second stage, the local authorities would only know that the proposed method of disposal is compliant with all necessary regulations.

  11. Local authorities should not have the right or the opportunity to direct waste towards any particular method of disposal.

    The reasoning on this one should be good.

  12. @Richard.
    Thanks

    ”A number of county councils still run their own waste collection business. It is hard to see that tenders of private companies would get a fair hearing. The tendering should therefore be outsourced to an independent body or the public waste collection businesses should be privatized”
    I agree, but where does this leave Dublin City Councils contract with Covanta. If Dublin City Councils waste collection service is not protected from competition then it will lose market share (as is happening at the moment) and they will be forced to exit the waste collection business just as has happened in nearly all other local authorities.
    Then Dublin City Council will be paying for 320,000 tonnes of incinerator capacity but no gaurantee that they will be demand for this capacity from those that continue to collect waste.
    Even assuming they there is demand, would it be legal under the contract for Covanta to deal directly with waste collectors to meet their demand (with the remaining capacity) and thereby leave Dublin City Council without a market for its capacity?
    Did the contract ever become publicly available?

  13. @Sam
    The Poolbeg incinerator would be the cheapest way to dispose of waste. If waste collection is run as a commercial business, the incinerator will be used at full capacity.

  14. @EWI ”The reasoning on this one should be good”

    If local authorities had the power to direct the waste they would simply divert the waste to their own ailing landfills even if the disposal costs are uneconomic. The houeholder would pay the premium.
    Indeed the county & city managers association called for the power to direct waste a couple of years back. Waste collection companies were bringing waste to the cheapest landfills which meant that the local authorities were competing with eachother and this was driving gate fees down. The county & city managers were explicity calling for the power to direct the waste so that their would be no competition. The waste collectors and by extension the public would just have to pay for whatever costs the county managers felt appropriate.

  15. @Richard
    What makes you so sure? What will gate fee be?

    I’m sure in long run the capacity will be used but in the short/medium term I’m not so sure. DCC may have to subside it for a good while.
    And for what when their waste collection operation is in terminal decline?

  16. @ Richard

    “At the same time, the reform of waste collection is good news for them.” (Waste Companies)

    Have you talked to many waste companies about this? With one or two exceptions, waste companies are very strongly opposed to restructuring the market. They fear for their livelihoods and those of their employees.

    Is there any real evidence to support your contentions? You use broad brush simple economic theory to support your case, but this is not as simple as you suggest.

    you refer (indirectly) to economies of density, but have you considered the synergies between household waste collection and commercial waste collection, particularly outside the major cities? commercial business in towns and villages around Ireland benefit from competitive pressures due to several waste companies operating in every area. If you have only one operator servicing households in a county, that company will gain a monopoly on commercial customers as no others could compete without having the economy of density provided by their household customers. An operator won’t survive on a small number of commercial customers in a village or town. It’s different in Dublin.

    The price to these commercial customers will not be controlled by the tender, so you will have uncontrolled monopoly conditions adding cost to business in Ireland. Have you considered the economic impact of this scenario?

    We (SLR Consulting) conducted a survey recently comparing 2004 prices to householders to current prices. The average price per house in Ireland has decreased by 26% in that time. Cost to businesses has decreased equally, if not by a greater amount. The reduced cost of landfill disposal accounts for only half of that fall. Competitive pressures are equally influential.

    Another factor to consider. Look at page 14 of yesterdays’s Irish Times (Pricewatch). It describes the appalling service that Frank McDonald received under competitive tendering in Dublin, i.e. the Dublin green bin service. The proposed ‘Competition for the Market’ system supports service to the Authority, not to the customer. This is another factor that your broad brush economic theory ignores.

    In summary, the customers are doing well, the waste companies are happy to compete, even if their margins are tight. Where is the evidence that we have a real problem? Why is there such a rush to change a functioning market, when we see constant price rises in other markets that are controlled by regulators? Why was this consultation rushed through, one month ahead of the main waste policy consultation? Are you sure that it has nothing to do with Poolbeg and the decision that needs to be made by November?

  17. @ Richard
    You can’t ignore the fact that these companies have spent up to 30 years building their businesses and the current proposal intends to take those businesses away and tender them out. Would you give up your job in the hope of winning a better one in a tender process?

  18. @Richard
    The Government can’t just take your job from you and tender it out. (unfortunately) Similarly, the owners of waste companies have constitutional rights to protect their business, their employees and their property.

    You must also remember that these companies built infrastructure to process the recyclables and the biowaste that they collect. Should we close down these facilities in the hope that tender processes will deliver better ones? That’s a bit risky when you look at the history of failed PPP processes in the waste sector in Ireland.

    Again it comes back to the question of whether the market is broken and examining the evidence to support such a conclusion. You can’t disassemble an existing functional market because an economist has a theory about a better one. Where’s the evidence? What about the principles of better regulation that demand evidence-based policy making?

  19. @Conor
    It is sad to see the sense of entitlement in what is supposed to be the private sector.

    My grandfather grew cauliflower. Do I have a constitutional right to grow cauliflower? Yes, I do. Do I have a constitutional right to a subsidy because I cannot make a living growing cauliflower? No, I don’t.

  20. @ Richard
    The only waste company looking for a subsidy is Covanta. The rest have privately financed their infrastructure at no cost to the State. I don’t get your ‘subsidy’ argument.

    Who says that waste companies can’t make a living competing side-by-side? Is that another assumption with no evidence to back it up?

  21. Helo Richard

    Surley the Public Sector needs fixing before the
    Waste Sector????

    The LAs left Collection in 1990 [Meath been the first]
    And the Private sector picked up the peaces
    So 22 Years later with millions invested you expect the
    Private sector just to leave????

    Eamon

  22. @Richard
    Consider this scenario. You realise that you are better at cauliflower growing than at economic analysis, so you leave the ESRI to take over the family cauliflower growing business in north Dublin. After a few years of growing prize-cauliflowers, you are informed that the Government has decided (upon advice from the ESRI) that it would be economically and environmentally more efficient for cauliflower production to be awarded to a single company to supply the whole country. Would you then be happy enough to take your chances in that tender, knowing that if you lose it, you will have to go back to the ESRI leaving all your horticultural hopes and dreams behind you. Would you fight for your right to grow cauliflowers? More importantly, would the Government action be legal?

  23. @Eamon
    Nobody is talking about an exit for the private sector. Your company is being given a new opportunity.

    @Conor
    If I stake my company on a political whim, I should not complain if I lose.

  24. @ Richard
    But you are the one expecting people to stake their companies on a political whim (Programme for Government). They are the ones opposing it.

  25. @Richard
    ”If I stake my company on a political whim, I should not complain if I lose”

    Private waste businesses have almost all grown organically from small beginings to meet demand. It is a politcal whim that threatens their future.

    All those hundreds of ‘directors of services’ or whatever they call themselves want something to direct, a market to manipulate, winners to select.

  26. @Sam
    The reform in waste collection is good for the companies involved.

    The “whim” referred to is on waste disposal. Some people have bet their company on Gormley’s ability to stop incineration.

  27. That being the incineration plant that is being guaranteed by the taxpayer.

    The market couldn’t get more lop sided.

  28. @Richard
    Nobody has bet their company on Gormley. They built their businesses long before Gormley was in power. IWMA members have built more than 3 million tonnes of MSW treatment infrastructure, including recycling, composting, incineration, Solid Recovered Fuel production and transfer stations (not including landfill). Some will build alternative infrastructure if Poolbeg doesn’t proceed, but that’s a different story. Those facilities are currently on hold.

    The impact of the current political decision goes well beyond the waste companies operating in the Greater Dublin Area. Are you really saying that waste collection companies in Kerry, Cork, Clare, Galway, Mayo and Donegal should hand over their keys to the State to facilitate the development of an incinerator in Dublin? We won’t get a lot of support in Croke Park next Sunday if that’s the case.

  29. Hello Richard

    First of all i am not against Incineration but what i have a problem
    with is Private Companies getting “Special Treatment”
    Indaver built an Incinerator without any contract without any waste
    They are happy to operate in the market at market rates
    Covanta want half their capacity guaranteed by the Irish Tax Payer for 20 Years
    Has the Irish Tax payer not suffered enough?

    Eamon

  30. @ Richard Tol

    It is sad to see the sense of entitlement in what is supposed to be the private sector.

    It’s also sad to see the ESRI kabuki show in aid of the Covanta incinerator, which is what all this smoke and mirrors is about.

  31. @ Richard
    For some reason best known to political pundits, we have a programme for government cut and pasted and horse-traded from a Labour political manifesto. Minister Hogan is now lumbered with implimenting this cut and pasted concept. This does not make it good policy. It is cleraly designed to supply the put-or-pay contract for Poolbeg as DCC is the last authority left in the sector as an LA. And someone has to sort out the problem to source 320,000t of waste, if the unit gets built under its current guise. This remonoplisation of the market is designed to meet this need. These are I believe the facts.

    Should 12 trucks drive down your road is a different question. I believe not, but markets take time to change and adapt and the government trying to re monopolise a market in 6 months that LA’s abandoned over a 20 year time frame does not make good sense for jobs, investment, nor consumers. I believe that a market should change and develop and to run your analogy of Cauliflowers, I have to advise that private waste industry is the sector that is changing the growning habits in this ‘vegetable’ patch. LA’s were wed to landfill as it was cheap, easy and generated cash without requiring too much capital investment. They also were dealing with there own legacy of old and badly run landfills a fact that all nations end up dealing with. Industry on the other hand saw change coming and started to invest and develop their offering, they also did not own old or problematic landfills. Many invested in both collection and treatment as they are intrincically linked. Yes, I know you dont like to hear that, but it helps if you control what you collect to feed your process and it becomes even more critical if you are trying to run a recycling operation as opposed to landfill or mass burn which can is hugely adabtable to different mixes.

    The new government policy I believe is misguided

    Do I have a neat solution? No!.
    But I am prepared to engage in sensible debate to develop the market into something sustainable, profitable and both environmentally / consumer friendly. Conor’s point about current competitivness is valid proof that the market is not really broken. The current government documents have only served to put more confusion into the market and destabilised it even further. Asking for unbiased input from entities such as engineering consultants involved in building specific plants or LA’s who are contracted to certain technologies makes no sense. I honestly feel that the industry players who serve the market and actully collect the material every day are the ones that need to be listened to first. Understand the market first before you decide to patch a problem caused by an out of date contract. Inputs by all parties have to be regarded as carrying a risk warning but at present I do not believe that the right people or story is being heard.

    Individual peoples jobs, livelihoods and very significant corporate investment is at risk here. It cannot be dealt with so glibly and we as an industry are certainly not looking to stay growing Cauliflowers …..

  32. Richard

    I can’t understand how you can continue to harp on about improving market efficiency in waste collection while simply ignoring the impact of Coventa contract.

    It undermines your credibility.

    The general impression is that the Coventa contract is an act of corruption and you are associating yourself with it.

  33. @Fergaloh

    ”The general impression is that the Coventa contract is an act of corruption and you are associating yourself with it”

    I have been following the debate about the Covanta contract fairly closely over the last 4 years or so and have certainly not encountered any ‘general impression’ of corruption.

    Among whom does this ‘general impression’ reside?
    Perhaps you should challenge the holders of this impression to provide evidence as to why they have it. If there is something you know that we don’t then let us hear it, otherwise stick to what is known and don’t engage in fantasy.

  34. There’s a simple test to apply
    Cui bono?
    If public bodies are not working for benefit the taxpayer then they are failing either because of incompetence or because they have been subverted.

    In the case of Dublin waste the taxpayer is heading for a general shafting as they will be on the hook for Coventa losses while Coventa will reap any profits.

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