Four contractors are battling to provide facilities to treat the residual waste collected by Edinburgh and Midlothian councils from 2017.
Spanish firm FCC Medio Ambiente SA is on the shortlist, as is Urbaser, the Gloucestershire-based arm of Spanish-headquartered ACS Group.
Veolia Environmental Services Aurora and Viridor Waste Management Services also made the cut.
The successful firm will deliver a modern waste treatment service to separate materials that can be recycled and produce energy from the remainder.
Gordon Pollock, project director for Zero Waste: Edinburgh and Midlothian, said: “We are delighted to move to the next stage of the procurement process for state-of-the-art residual waste treatment facilities.
“We can now engage with the bidders in more detail to ensure we get the best possible long-term solutions for Edinburgh and Midlothian.”
The bidders will submit detailed tenders by the end of the year.
It is expected that the residual waste treatment contract will be awarded in 2014, with the facilities operational in 2017.