OPINION: Outsourcing services allows councils to share risk in uncertain times

Jacob Hayler, executive director of the ESA, discusses how the private sector can help share risks in waste contracts in uncertain economic times.

OPINION: Everyone in the sector knows the incredible period of change and uncertainty we are currently facing. The Government is proposing the most radical changes to recycling systems for 15 years with the introduction of consistency, packaging EPR and a DRS.

Additionally, post-pandemic disruption to supply chains, amplified by the current war in Ukraine, is driving inflation to 40-year highs with costs for fuel, labour and construction all rising, while delivery timelines for new trucks and equipment are extended and a lack of permitting capacity at the Environment Agency is leading to significant delays for permit applications.

Jacob Hayler
Jacob Hayler is executive director of the ESA

Against this backdrop of emerging challenges, heightened risk and pressure on services, the case for outsourcing municipal services is stronger than ever. Private sector contractors have a wealth of experience in delivering service change for councils under varying local conditions around the country. This will prove invaluable as the sector navigates the challenges and changes of the next few years. By learning from similar arrangements provided for councils elsewhere, contractors are able to drive efficiency in their service provision, increasing recycling and reducing residual waste, while performance and budgetary certainty are transparently enforced through the contract.

The Covid period demonstrated the resilience and flexibility of contractors in being able to maintain services for their client Authorities. Throughout the pandemic ESA Members were able to draw on their resources across the country to minimise impacts on front-line services, while some Authorities with stand-alone DSOs needed the support of local private-sector operators and neighbouring Authorities to get through these challenging times.

Providing waste services across multiple properties at varying times, as well as sourcing market outlets and disposal routes for collected materials, presents multiple risks and potential service failure points. These risks are particularly acute under circumstances where significant change and modernisation of services is being introduced – the forthcoming period of legislative and regulatory change being an extreme example which will introduce operational challenges, and which contractors are well placed to use their expertise and experience to overcome.

Experience shows that service costs tend to rise faster than general inflation

These service changes will also have to be introduced during a period when the broader economy is going through challenging times. Experience shows that service costs tend to rise faster than general inflation and recent increases in labour and fuel costs, as well as National Insurance changes, have been absorbed by contractors this year. This comes after a number of years in which contractors have absorbed other cost increases resulting from general changes in law, such as changes to the National Minimum Wage, new holiday pay and pension entitlements, and the Apprenticeships Levy. Throughout this period contractors have found savings to offset rising costs and service demands.

By finding the appropriate balance of risk allocation with their contractor, councils are able to insulate themselves from unforeseen costs and gain greater certainty over their budgets, which would not occur under in-house or LATCO alternatives. The risk for delivering a quality service to a budget lies with the contractor and is enforced through its legal obligations under the contract. This provides transparency and accountability in the delivery of the services, which improves outcomes for local council tax-payers and maximises value for money.

Challenging economic times are reflected in current market conditions with market participants very risk-aware. This makes it critical for Authorities to test the market properly and identify fully those risks which best sit with the contractor and those over which they have no control.

Eunomia research, commissioned by ESA in 2020, demonstrated that outsourced services deliver better value for money. Budgetary pressures have not gone away for Local Authorities and in these uncertain times partnering with a proven private sector contractor provides councils with the safest route to delivering the changes we need to see as we aim to make a step-change in recycling performance and realise a more circular economy.

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