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, LGC’s sister title Materials Recycling World reports.
The industry was rocked last month when the Suez subsidiary Nordic Recycling entered insolvency, ending prematurely its fixed-price contract with Thurrock Council (see story below).
The Environmental Services Association (ESA) argues that shared-revenue deals between authorities and contractors are best practice and are less prone to being unsustainable.
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, Mr Hayler said, in order to incentivise it to produce quality recyclates to sell for a decent price.
Biffa said it had driven a shift to shared-revenue contracts because its corporate governance had 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 materials recycling facility 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.
Bromley LBC 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 recycling 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.”
Thurrock seeks to recover costs from collapsed contractor
Thurrock Council is withholding £120,000 owed to Nordic Recycling after the organisation went into liquidation, terminating its materials recycling facility contract, it has been revealed.
Nordic ceased operations at its 100,000-tonne-a-year Port of Tilbury MRF facility in July, curtailing a seven-year contract with Thurrock due to end in April 2017. As a result the council has been forced to enter into an alternative arrangement which means the council will have to pay £40 a tonne more to process its mixed dry recycling.
LGC’s sister title Materials Recycling World has learned that as well as withholding £120,000 owed the council has activated an option to call in a bond with the Bank of Scotland for £119,000, saying Nordic breached its contract when it was put into liquidation. According to the council, the bond could be called in at any time until 12 April 2017, in full or in part, should Nordic fail to deliver the specified services.
Thurrock’s head of environment Michael Heath confirmed that the authority would be seeking to claim full payment for the losses incurred as a result of the terminated contract. Thurrock believes parent company Suez UK may be liable to pick up the extra costs for waste collection.
Mr Heath told MRW: “We are seeking legal counsel on the matter to recover any costs that we are able, including from the liquidator.
“It’s is going to cost an extra £650,000 a year [to process the waste], at a time when we are trying to make savings. The council has made provision for it but it’s not something which is in our control.
Thurrock paid £15 per tonne with Nordic but the council has now made new arrangements with Bywaters which is processing material at £55 per tonne on an 18-month agreement at its MRF plant in Bow, east London.
Mr Heath said: “£15 was a very good deal, there’s no doubt about that, but it was a deal which is signed in good faith. I am aware that other nearby boroughs are paying £25 per tonne and that the market may have moved on from there but this contract appears to have been deliberately abandoned.”
A statement issued on behalf of Suez UK said: “Nordic Recycling Limited (NRL) is in the process of appointing an insolvency practitioner and this process is expected to be concluded later this month.
“As such, Suez is not in a position to comment further until the formal insolvency process has been concluded.”
By Tim Clark