It is certainly an interesting time to be in the waste management sector, with so many potential developments under discussion which could have a huge impact on the way that services are delivered.
To name but a few: the Government’s recent announcement that it will consult on deposit return schemes before 2020; the unknown impacts of Brexit; the fall in material values; the increase in quality demands as a result of China’s National Sword Operation; the adoption of the revised EU circular economy package; and revised producer responsibility requirements.
Added to this is the sheer number of local authority waste contracts which are currently up for renewal, with research by BDS Marketing Research showing that nearly 50% of contracts will expire by the end of 2019.
The procurement of waste contracts has changed significantly during my 12 years in the sector, with contracts getting tighter on both sides. One the one hand there are more rigorously worded contract conditions while, on the other, contractors are more risk adverse, resulting in a departure from the ‘race to the bottom’ approach which affected a good number of procurements earlier in this decade.
In the current uncertain times, outsourcing may not insulate councils against risks (and thus increased costs) resulting from legislative change in the way it once did. It is highly unlikely that a contractor would accept terms and conditions which placed this risk on them, given that it is entirely beyond their control.
In addition, there has been significant consolidation in the waste contractor market, with the likes of Accord being purchased by Enterprise, which was in turn purchased by Amey; May Gurney being purchased by Kier; and Biffa acquiring Cory’s waste collection operations. This consolidation is compounded by the fact that some contractors appear to be divesting themselves of problem contracts, particularly those which placed all the materials market risk on the contractor.
This suggests that some contractors, perhaps in their eagerness to win deals, have struggled to turn winning bids into profitable business. Such a bidding strategy was brought sharply into focus by Carillion’s recent collapse, thought to have resulted largely from a contract portfolio with an over-emphasis on fixed-price and under-priced tenders.
With the future of some providers remaining doubtful and following this period of consolidation, contract opportunities are likely to attract fewer bids than they would have done in the past. With so many opportunities in the marketplace, waste contractors have the luxury of being able to pick and choose contracts which offer palatable risk profiles.
So local authorities need to balance their desire for budget certainty against the contractor’s need to deliver a profitable business.
Although there are thought to be around 300 operators delivering waste contracts, the move towards partnership working and procurement of single contracts covering multiple services – street cleansing, waste collection and grounds maintenance – is ruling out smaller operators. SMEs simply do not have the resources, the financial standing, turnover nor the track record to pass the supplier questionnaire for contracts of this nature. BDS research shows that Veolia, Suez, FCC, Biffa and Viridor account for almost one-third of deals.
Leaner client management teams in councils restricts the time and resources available to manage waste contracts, and authorities may as a result be attracted to procuring services which cut the number of points of contact and therefore the effort expended on contract management.
Based on recent procurements, the two current biggest areas for concern in waste collection and allied services contracts appear to be the risk apportionment and contract performance requirements.
The challenge for councils is revising deals that were fit for purpose when they were let seven years ago, to make them fit for purpose in the current marketplace. A recent report on outsourcing by the Environmental Services Association cites risk transfer as one of the key reasons that local authorities opt for a contract instead of an in-house operation. But evidence from recent deals shows that there needs to be a delicate balance between minimising risks to the council and deterring competition.
Transferring too much risk to bidders, particularly relating to material risk, may result in few or possibly no bidders coming to the table. The same is true of unrealistic performance standards – for example, placing risk on the contractor to achieve a recycling rate of 95% with no guarantees from the local authority on the quality of the inputs.
Recent procurements highlight changes in the way in which outsourced contracts are being tendered for and managed. It appears that some councils are underestimating the shift in risk appetite and some are starting procurement processes too late to have sufficient time to fully consider the available options and implications.
The effect of this is amplified by the sheer number of opportunities and the reduced number of contractors in the sector.
A carefully planned procurement which sets out a fair apportionment of risk between the council and contractor, and places the risks with whoever is best able to manage them, will result in a much smoother procurement process. Hand in hand with the management of risk is building flexibility into the contract to ensure that future industry developments – be they technological, policy or legislation-related – can be incorporated into the contract and allow services to be modified accordingly.
So the key problem is how to face off the uncertainties about the future direction of the waste industry and get the most out of local authority procurement.
Based on recent procurement experiences, there are a number of key tasks which, if undertaken soon enough, can allow for a more straightforward procurement process. These include early engagement with stakeholders such as elected members; market engagement (on an individual basis) to determine how best to design the contract; how it should be packaged; and how risks should be managed.
With such a large number of opportunities being presented to the market at the same time, it is inevitable that some will garner more interest than others. But early engagement ensures that councils maximise their opportunity for competition, innovation and value for money.
With a shrinking client function comes the loss of skills and expertise within the public sector. This places additional pressures on stretched staff. The use of technical, financial and legal advisers can be extremely valuable for identifying best practice and lessons learnt, as well as incorporating the most up to date understanding of the market into documentation presented to the market.
Clearly, there will never be a one-size-fits-all approach to waste collection, and the individual risk appetites of councils will affect their chosen service delivery model. But what recent procurements highlight is a greater need for collaborative working with the private sector, and this has been demonstrated through the popularity of the new competitive procedure with negotiation.
Well thought-out and carefully designed procurement, which places risk with those most suited to managing them and realistic performance standards on the contractor, can achieve good competition as well as successful contract delivery.
Victoria Hutchin is an associate waste and resource management consultant at WYG