In the study, the OFT cautions that characteristics of the municipal waste treatment sector “may facilitate collusion” by bidders, particularly on a regional basis.
It also takes a swipe at local authorities accusing them of possibly “unduly restricting competition” for municipal waste collection contracts through opting for procurement processes such as restricted or negotiated.
Secrecy
And, in what could be seen as a surprise recommendation in the light of transparency and freedom of information, the OFT would like a veil of secrecy drawn over the winning tender price for municipal collection contracts. Despite the dominance of local authority in-house contractors in collection contracts, the OFT says it would be “best practice” not to reveal “information about the price of the winning bid”.
” Taxpayers will benefit from greater competitive pressures in this sector.“
– John Fingleton, OFT chief executive
The report also suggests that councils should change their bidding requirements to help “community sector firms” to tender.
Commenting, John Fingleton, OFT chief executive, said: “Taxpayers will benefit from greater competitive pressures in this sector. Our report makes a number of practical recommendations to central and local government to ensure that they maximise the benefits of competition.”
Recycling and waste minister Ben Bradshaw said: “The OFT report, together with the Office of Government Commerce's separate report, has made a significant contribution to the government's plans to tackle and cut the amount of municipal waste going to landfill.
“We have already begun implementing proposals by the OFT and OGC, which are very much in line with those highlighted in Defra's public consultation its review of the waste strategy for England.
“I am announcing today plans for a new waste infrastructure development programme led by Defra, along with changes and simplifications to arrangements for the award of waste sector PFI contracts.”
Competition
The OFT study, More competition, less waste, looks at public procurement and competition in dealing with municipal waste. Much of the 113 page study is a run through the complexities of waste management as well as giving a clear message about the potential for collusion among waste contractors.
Pointing to growth in waste treatment as an alternative to landfill, the study says: “It is vital that local authorities avoid the pitfalls associated with over dependency on a limited number of suppliers.”
The report is broken down into two main sections: municipal waste collection and municipal waste treatment.
Collection
The findings on municipal waste collection are that small firms are likely “to be able to deliver waste collection contracts as efficiently as larger firms in the absence of signify cant economies of scale and scope”.
According to the OFT, direct service operators (DSOs) – in-house local authority departments – in tonnage terms are the “major players” holding around 52% of contracts – handling 7.3 million tonnes of waste. But no in-depth discussion of is undertaken as to whether DSOs bids’ need to be more transparent. Instead the report shies away from any serious discussion of the market share of local authorities, merely saying that councils “should take care to ensure fair competition”.
But, it does say that “it is difficult to understand” why almost a quarter of councils are choosing a restricted or negotiated procurement route for collection contracts, representing 37% of contracts.
The study confirms that four contractors, Onyx, Cleanaway, SITA and Biffa have a 27% share of the collection market. Individually they have shares of 9%, 8%, 6% and 4% although not necessarily in this order – the relevant figure is not allocated to the company on grounds of confidentiality.
Collection – Tenders
Despite the fact that DSOs have the lion’s share of the work, holding as much as 76% of contracts in the East Midlands and 73% in the Yorkshire and Humber region, the OFT makes scarce comment on this. It comes up with a curious view that by getting a DSO to tender even if there is only one or two tenderers this is a major boost to competition.
The report also looks at businesses, such as ECT Recycling, in the community sector, suggesting councils drop pre-qualification criteria such as having experience of waste collection, to let in “firms in the voluntary/community sector who are already supplying recycling collection services to expand into the collection of municipal household waste.”
Another recommendation is that to help encourage bidding for collection contracts, councils should acquire suitable operational sites or secure access to such sites.
Furthermore, “bundling collection with other waste management services, particularly landfill, may significantly restrict the number and type of bidders.”
Treatment
The section of the report on municipal waste treatment comes with a strong health warning to councils about the risks of regional monopolies by waste companies.
The OFT states: “Finding mechanisms to deliver bids from a number of suppliers, both within and outside the region, is a priority to mitigate the risk of regional monopolies developing and becoming entrenched.”
To tackle this, one suggestion from the OFT is of breaking down contracts into smaller ones.
The report lists eight “major” waste management companies as operating in the treatment sector: SITA UK, Biffa UK, Cleanaway, WRG, Shanks Group, Viridor and Onyx UK (now Veolia).
It says that to look at their performance nationally does not give a fair reflection of the structure of the sector. “Different suppliers are much more prevalent in some regions than others.” It suggests that one company, “appears to have a near monopoly position” in North East England.
The study finds that “29% of treatment contracts received only one or two bidders at the invitation to tender stage, which suggests that some authorities face very limited competition between suppliers for their contracts.”
A number of factors are preventing entry to the sector, says the OFT. This includes planning delays and regulatory changes which can raise cost for suppliers and public policy towards some treatment processes.
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Bid costs are often given by the waste management industry as one of the major burdens in tendering. The OFT confirms that “bid costs are very high” but says that these are broadly similar for other services financed through a PFI or non-PFI route. It puts getting to financial close for a contract as costing a company 4 million.
Collusion
The OFT says that there are characteristics of the treatment sector that could facilitate collusion. This includes the fact that there are few suppliers, there could be interaction between suppliers because of the need for new facilities and that the large waste firms have strong regional positions.
The regional situation could change, suggests the OFT, if suppliers bid for contracts to build new facilities outside of their regions where they don’t have landfills.
Among recommendations are:
- Weigh up the costs and benefits of specifying inputs as opposed to outputs;
- Arrange sites and planning permission priot to putting contracts out to tender where possible or share the risk with suppliers;
- Remain open to consortia bids, especiall including smaller waste firms and companies from other sectors are involved;
- Consider building waste treatment facilities that can meet the needs of the industrial and commercial sector as well as local authority demand.
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