The danger zone? Defra’s commercial waste franchising proposals

A group of six medium sized waste collection companies are protesting that Defra’s proposal to introduce exclusive commercial waste collection franchises or “zones” is based on a flawed analysis and could drive them out of business. Are their concerns well-founded?

Separation principle

Defra included the suggestion of franchising in its Consultation on Consistency in Household and Business Recycling Collections in England, issued in February. However, it was one of several proposals affecting businesses. The key one is that the government proposes to legislate to require businesses to source separate recycling. As a minimum, this might involve separating a mixed dry recycling stream, perhaps augmented by glass as a separate stream and food waste as a separate stream (see p53).

This is a move I’ve long argued for – it would bring to an end the absurd situation we’ve had since 2015, where collectors are required to separately collect recycling from businesses, but there’s no duty on waste producers to source separate. Unsurprisingly, that requirement has had next to no impact on commercial sector recycling.

WRAP has carried out analysis for Defra, summarised in the impact assessment that accompanies the consultation. It shows that, while such requirements would save money for large and medium-sized businesses, it would be a cost to small and micro businesses.

Defra-gmenting the market

Defra therefore proposes ways to minimise these costs. Seven possibilities are discussed in brief on pp57-59. The most interesting are:

• Collaborative procurement – a model that can be successful, but can only be deployed in areas where there is a co-ordinating body like a Business Improvement District (BID).
• Exclusive franchising, or “zoning”, which would allow “local authorities or other operators to issue contracts for the collection of commercial waste in a particular area of a town or city”.
• Co-collection of household waste and commercial waste, presumably by local authorities.

Each of these options aims to reduce costs by improving collection logistics. Instead of multiple collection companies driving up and down each street, collecting from a small proportion of businesses, one company collects from every business. Less time spent driving and more time spent emptying bins means the cost of each collection is lower. This reduces vehicle movements, contributing to air quality – and can allow for better, more convenient services to be offered.

Collaborative procurement has limitations as a means of improving efficiency: businesses must opt in and for a variety of reasons not all will do so. For example, chain stores often have national contracts that can’t easily be varied locally. If legal provision was made to allow franchising, it could be a more effective option because it ensures that all businesses in an area have the same collector.

Co-collection is potentially the most efficient, because all businesses and households share a collector – but only if the services that commercial customers require are compatible with the service offered to households (e.g. in terms of collection frequency). It also relies on some prior action (like franchising, collaborative procurement or perhaps giving local authorities a duty to collect commercial waste from certain premises) to get it off the ground.

Bins of contention

What reasons do the medium-size collectors give for their concerns? Bill Swan of BPR Group, speaking on their behalf takes issue with part of Defra’s rationale. On p52 of the consultation, Defra says:

“Having to pay extra to recycle provides no incentive for businesses to arrange for the separate collection of recyclables and particularly the separate collection of food waste. Moreover, many businesses are not even offered a separate recycling service and might have to go out of their way to obtain these.”

The second of these points does seem to be an error. Very few commercial waste collectors offer no recycling service, and businesses that want to recycle should have no difficulty finding someone a mixed dry recycling service – though accessing multistream collections or food waste collections can be rather trickier. But this error has little bearing on Defra’s policy rationale, which is about mitigating the costs they think that some businesses will experience if recycling is made compulsory.

The first point is more interesting. Defra’s wording is a bit imprecise, and on one interpretation, Swan is right to push back on it. Having a dry recycling bin collected will usually be cheaper than having a residual waste bin of the same size emptied – though the same can’t always be said of food waste bins. If you’re a big enough business to need two waste bins, and you can convert one of them to recycling, you will save money because it’s cheaper to handle the recycling than residual waste.

However, this doesn’t always apply to smaller businesses. If you have one residual bin, and you switch to two smaller ones (one for residual, one for recycling) you may well end up paying more in total. The price of collection has to cover both the cost of the vehicle turning up, and of dealing with the waste the bin contains. As a result, a bin that’s half the size is considerably more than half the price.

That’s probably why WRAP found that bigger businesses (with multiple bins) would save money if required to recycle, while smaller businesses would incur costs. I found the same pattern when I looked at the costs of requiring businesses to separate food waste. And since there are far more small businesses than big ones, Defra’s proposals to reduce collection costs address a real concern.

Trashing arguments?

Why, then, does Swan object to franchising? He advances three inter-related arguments, of varying quality.

One is that it creates a monopoly, allowing franchisees to simply push up prices once they’ve won the work. That doesn’t seem very plausible – the BID contracts I’ve negotiated all limit price increases, and any sensible franchising system will do the same. A more interesting question is what happens at the end of the first franchise term – if all of the competitors have been wiped out, can you have an effective competition the second time around? A couple of solutions spring to mind:

• In Los Angeles, where franchising has been implemented, the bidding system ensured that no one company could dominate, making sure that there were enough companies operating in the city to maintain competition in future bid rounds.
• Franchising could be limited to high streets and back streets, where the local environment benefits would be greatest – while leaving the open market to deal with trading estates, out of town stores and other such locations.

A second is that big businesses would win the franchises and wipe out smaller collectors. This is linked to the point above – Swan says that the franchises “would go to major firms who would be able to afford to bid aggressively then jack prices up”. As we’ve seen, that’s not a plausible concern in a properly designed franchise, so if a collector under-bids they will be stuck running an unprofitable service for several years.

One might respond that no business has a “right” to exist. If fair competition reveals that smaller companies can’t match the big boys on value for money, they deserve to lose out. However, a more realistic concern, based on my experience with BIDs, is that big companies are better equipped to write impressive tenders than are smaller ones that lack experience of formal procurement. It takes a good deal of insight to see through the sales pitch and get to the core of the offer – but I’ve found that smaller companies can offer services that are just as good as larger ones. Another option, adopted by Los Angeles, is to carve out certain franchise areas that can only be bid for by smaller companies.

Swan’s final point is that local authorities aren’t the right organisations to run franchise competitions – and on this, I largely agree with his conclusion, though not his reasons. He says that local authorities would simply award work to themselves, or their contractors. My experience of public procurement says this is unlikely – but the responsibility would still be an awkward one for councils that collect trade waste.

I’m more concerned that many local authority areas are too small geographically for multiple franchises to be viable. A better option might be for Defra to hold the responsibility, and for WRAP to deliver it on their behalf, working across local authority boundaries where necessary. Local authorities could bid on the same basis as any other contractor.

It’s understandable that waste collectors should be nervous about the huge shake-up of the commercial waste market that is in prospect. If Defra opts to move forward with franchising – and I hope they do explore it further – a great deal of design work needs to be done to allay such concerns, and to develop a fair system that benefits business and the local environment. A franchising system poses many real challenges, which I hope to discuss in a future article – but the concerns raised by Swan are relatively easily addressed.

Featured Image: William Warby (CC BY 2.0), via Flickr.