All eyes on commercial waste

Why do so few councils closely scrutinise the budgetary performance of their commercial waste service? Eunomia's Peter Jones finds out why.

Around 70% of councils collect commercial waste. Their services come in all shapes and sizes, with a few amounting to multi-million pound operations. Some run dedicated rounds for commercial waste; others co-collect it with their household rounds. But all provide local businesses with a useful service that helps them to meet their waste management obligations – and contribute to keeping shopping streets clean and tidy.

However, commercial waste can be the Cinderella of the waste department.

It may be run by committed and organised teams, who strive to deliver a high quality service. But when a domestic waste vehicle breaks down, a commercial waste vehicle can be scrambled to fill the gap, throwing the day’s collections into confusion. Although businesses don’t pass judgement at the ballot box, unlike householders they can vote with their feet and choose another provider. Every time that happens, it costs the council money.

Whatever the wider benefits, one thing every commercial waste service should do is cover its costs. Yet a surprising number of the councils whose services I’ve reviewed haven’t had a clear picture of their finances. It has taken a bespoke modelling tool and a lot of work collating data from the waste, finance, IT and purchasing teams, to pull together all of the information needed to give a commercial overview.

Common issues I’ve found include:
·Hard to manage customer records, often held on a spreadsheet
·Incomplete records of contracts and duty of care documents
·A lack of information about whether customers have paid or not
·Little information about some key costs, such as the capital cost of vehicles and the amount of central overhead attributable to commercial waste.

However interested the commercial waste manager may be in whether the service makes money (they may have enough on their plate just keeping the service running smoothly!), gathering and analysing the necessary data will be challenging. The issue is exacerbated if there’s little management focus on commercial waste. That said, misguided attention can be more harmful than benign neglect – for example, from time to time there may be a sales “push” to draw in new customers. But if you’re unwittingly losing money on each bin you collect, more turnover could just mean bigger losses.

With austerity biting, councils can’t afford to run commercial waste services this way in an increasingly competitive and sophisticated market. One option is to sell the service, but Biffa’s recent low cost acquisition of PHS seems set to depress trade waste business values for some time to come.

To stay in the market, a clear understanding of the cost drivers for waste collections is essential, together with a smart approach to pricing.
Many local authorities have an egalitarian approach to prices – by and large they charge all customers the same price for emptying a certain size of bin.

That may be admirably straightforward, but it doesn’t reflect their costs.

A remote, rural business will take more time to drive to than one of many on an industrial estate – so collecting a small bin from distant location each week is likely to be a loss-maker, while the standard price may be too high to attract the cheaper to service customer. Still more commonplace is the impact bin weights.

As landfill tax has driven up disposal costs, the weight of a refuse bin has become the single biggest component of the collection cost. If disposal costs £100 per tonne, then every kilo of waste costs 10p to get rid of. Under a single price model, customers with light bins are effectively asked to subsidise the heavier ones.

At least, that’s how it would work if the council was the only contractor in town. In practice, it isn’t difficult to work out which businesses are likely to have light bins. Rival collectors with a better appreciation of cost drivers and a more flexibility on prices may be able to offer these customers a better deal.

The council will be left with more customers with heavy bins, on which they will make little money or even a loss. As the average weight of the bins it collects goes up, the council may have to increase its price to cover its costs, opening up further opportunities for competitors to undercut them.

Over time, the least sophisticated waste collector in town should end up holding all of the heavy bins, and making no money…. Councils need to make sure they understand their costs to avoid falling into this role.

Only one question about their commercial waste service should concern a council more than “does it cover its costs?” That is: “does it operate lawfully?” Councils are increasingly aware of and concerned about the implications the Waste Framework Directive: the phrase “TEEP” is muttered darkly, as officers wonder whether they will need to change their approach to household waste collection in order to meet the requirement to separately collect glass, metal, paper and plastic from 1 January 2015.

Few have yet thought about the implications for their commercial waste service.

The new requirements regarding separate collection could be particularly significant in commercial recycling, where the great majority is collected commingled. Local authorities are in a significantly different position from other collectors – having grappled with the requirements of the law for their household collections, they will have in place the vehicles and material contracts to handle whatever wastes they deem it necessary and practicable to collect separately.

This may be an advantage – it will mean that, compared with their competitors, it will be far more economical for local authorities to introduce any separate commercial waste recycling collections that they decide are necessary to comply with the law. However, this could prove to be a mixed blessing.

Conventional wisdom is that businesses prefer the simplicity of dry mixed recycling collection. But the law could mean that some local authorities must introduce separate collections because it is ‘economically practicable’ for them to do so; whilst competitors, who can argue that it wouldn’t be practicable, need not.

It’s surprising that councils haven’t pushed local business harder to take up recycling services. Some don’t even offer a commercial recycling service, and I’ve yet to encounter an example where recycling is a large share of turnover. Yet moving recyclables out of the residual bin is one of the best ways to save customers money.

Best of all, the saving doesn’t come at the collector’s expense. Some councils may need to look for exemplars that have made separate recycling collections attractive if they are to maintain market share and be legally watertight – but all commercial waste collectors will be navigating new territory from 2015.

Despite the challenges, commercial waste remains a rare relatively uncontroversial way in which a local authority can make a surplus.

Many small businesses think of their local council as a trustworthy first port of call for waste collection; an important competitive advantage. It’s up to councils to take a commercial view of their commercial waste services to make the most of this opportunity.

Peter Jones is a senior consultant at Eunomia Research and Consulting.

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