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Low recyclate prices drive shift towards shared-revenue deals

Waste management companies are pushing councils to accept more of the risk in their contracts because of the continuing distressed market for secondary raw materials.

The industry was rocked in July when the Suez subsidiary Nordic Recycling entered insolvency, ending prematurely its fixed-price contract with Thurrock Council. The move has prompted the council to seek compensation.

The Environmental Services Association (ESA) has argued that shared-revenue deals between authorities and contractors are best practice and are less prone to being unsustainable.

Biffa said it had driven a shift to shared-revenue contracts because its corporate governance has dictated for the past year that it will not bid on council contracts without such a clause. The company recently withdrew from a large procurement by a waste disposal authority on behalf of a number of districts in which any loss would be solely covered by the firm.

National commercial MRF manager Steve Oulds said: “We would bid for fixed-price contracts based on what we thought the commodities were worth and are now making a loss on those. So it was too big a risk to take.

“Any movement in material prices is particularly linked to what is going on in the global economy, so it is right that we should seek to share the risk.”

Under the traditional fixed-price arrangement, a contractor estimates how much it can sell its recyclates for, using that amount to subsidise whatever it charges the council.

In shared-revenue agreements, the contractor charges the authority for the cost of the service and processing the materials, and the two parties share any revenue from the sale of recyclates. The split between council and contractor can vary.

ESA executive director Jacob Hayler said shared-revenue contracts were becoming increasingly common and were recommended as best practice.

“Local authorities have historically not liked a shared-revenue arrangement because they tend to have fixed budgets each year and this gives them a variable cost,” he said. “But we have increasingly seen more examples of that model. The reason is that, today, we have increased recycling rates, with targets for even higher ones, so there is greater exposure to these variable revenues from contractors.”

It was good business for the contractor to retain at least a small percentage of the profit, Hayler said, in order to incentivise it to produce quality recyclates to sell for a decent price.

London Borough of Bromley head of waste services John Woodruff said councils preferred fixed-price agreements because they offered more certainty: “Both parties have to be willing to let a fixed-price agreement run long enough that, overall, it will balance out. That works if the fixed price you’ve chosen is a good mean figure over a long period of time.”

He said he thought that a shared-risk agreement related to market indices could also work.

In the past month, councils including Liverpool and Bristol have chosen to provide their own collection services after previously outsourcing the operation.

The Chartered Institution of Wastes Management (CIWM) policy operations director Ricky Burnett said that councils would now be looking at different delivery mechanisms in more detail rather than a simple procurement from the private sector.

“In-house collections enable a local authority to be much more in control of the service that is delivered, and does away with lengthy and expensive procurement exercises.”

He added that councils will be watching the outcome of the European Commission’s circular economy package with great interest because it could include recyc-ling rates of 70% for municipal waste by 2030.

Commercial director of Biffa’s municipal division, Pete Dickson, said: “The big concern for us on increased targets is when councils are looking to widen the range of materials they can get into their stream of collections to improve their recycling.

“The more poor quality we receive, it becomes more difficult to achieve those targets. So I think the two are counter-intuitive and that would be a concern.”

Readers' comments (2)

  • This is a national scandal that I have been fighting for at least four years. Instead of the industry working in necessary collaboration (for the good of all parties) it seems it tried to steal a march on one another leading to everyone losing money and bankruptcy and plant closures. The consultant WYG appears to carry a heavy responsibility for encouraging local authorities to adopt inflexible contracts with no element of sustainability and reality in a fast changing world. Since 2008 the average world commodity basket has dropped 13% (Bloomberg) and the average amount of non-recyclable material in commingled jumped to 20% and more. Contracts need to reflect all the costs of operations, both positive and negative. In addition horrendous business rates on the most environmental and sustainable operations have strangled the ongoing development of facilities.

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  • Response from WYG:<br/>"WYG is grateful to be given the opportunity to rectify these comments. In recent years, the advice given by our experts to local authorities regarding such contracts has been to share the risks and rewards of changing commodity prices. This is reflected in a number of procurement exercises in which WYG has supported local authorities."

  • Inconsistent figures - There is a big debate regarding very recent inconsistent data from MRFs, particularly revolving around the low values and negative cost elements of MRF outputs. There are raging arguments about definitions but the first thing to do is allocate ALL the positive and negative costs of materials leaving a MRF and to establish how the ongoing value can be improved or the ongoing costs reduced - This is sustainability and substantial new investment will be required to improve the overall result. However, if the economics don't stack up who is going to pay to do the "right" thing? It can't be MRF operators who are struggling with low commodity prices and lack of profitability. Has everyone, except me, sat on their hands for the last four years?

    Regarding MRF statistics are they reflecting the whole input and output of individual MRF's? There is now a suggestion that some MRFs are ignoring rejected (contaminated) loads and are only reporting on "acceptable" loads, thus reporting incorrectly overall to satisfy what the "contract" requires...... Who wrote the contract?

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