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Shatterproof contract

There is a clear logic behind the packaging recovery note (PRN) system: reward those who recycle materials and charge those who choose not to participate. But like most legislation and regulation, it has had unintended consequences.

In this case, markets have been established in which the value of the material collected depends in its entirety on what someone is prepared to pay for the PRN, rather than any inherent worth in the material itself. It means that recycled materials become no more than a form of currency.

This principle seems good when PRN prices are high. But as we saw towards the end of 2010, it collapses like the proverbial pack of cards when the PRN price falls sharply.

Glass reprocessor O-I has never been down this route. The contracts it signs with councils and contractors are based firmly on the value of the glass as a raw material for remelt. The strength of the O-I manufacturing base - at its two UK plants and its European operations - means that suppliers get a long-term commitment and a guaranteed, stable price for their material, no matter what happens to the PRN price.

O-I clearly gets PRNs for every tonne of glass it recycles and the company uses this income in several ways. It sells PRNs to its customer base and others in the industry to help them meet their recycling obligations where they cannot trade in recycled materials themselves. It also uses the funds to promote recycling, working with councils on educational projects, publicity and to fund extensions to their recycling schemes.

In some cases, it may offer the council or contractor a rebate, based on the PRN price. Clearly, this will be subject to fluctuations in the value of those PRNs.

On virtually every occasion when it includes a PRN rebate, O-I does not treat this as part of its main contract with the supplier. Any variable terms and conditions based around the PRN price will be the subject of a side letter, appended to the contract. This ensures that the supplier’s core revenue stream and O-I’s continued supply of recycled glass will continue uninterrupted, should the PRN price either spike or plummet.

O-I believes this is the best way to construct its contracts. The core element remains the real value of the material collected. This means the supplier can negotiate the best price for that material before getting involved in any discussion about hypothetical future values of PRNs.

The entire glass PRN episode has brought into sharp relief the fragility of the system and the danger of selling material without a thought to its intrinsic value. Glass is not the only material to which this warning applies.

Local authorities and contractors which collect dry recyclables so they can supply to the closed loop market are inherently more likely to create a sustainable business model for residents and shareholders. They are also ensuring that the materials they collect are being recycled in the most environmentally useful way; something which is, after all, the fundamental purpose behind recycling in the first place.

O-I recognises that it may well be more complex to set up the collection system in the first instance. But many councils which got their fingers burnt at the end of 2010 may now be recognising that the closed loop market provides a much more secure long-term return and is a lot more appealing to residents.
Jim Powell is a recycling consultant for O-I

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