Options for Financial Arrangements Across District and County

Options for Financial Arrangements Across District and County

Hertfordshire Waste Partnership

Authors:

Dominic Hogg

James Fulford

25/07/06

Report for:

Hertfordshire Waste Partnership

Prepared by:

Dr Dominic Hogg

Web:

Disclaimer

Eunomia Research & Consulting has taken due care in the preparation of this report to ensure that all facts and analysis presented are as accurate as possible within the scope of the project. However no guarantee is provided in respect of the information presented, and Eunomia Research & Consulting is not responsible for decisions or actions taken on the basis of the content of this report.

Contents

1.0Introduction

1.1Changes to the System of Recycling Credits

2.0Key Issues Framing the Discussion

2.1Levels of Recycling Credits Under The Environmental Protection (Waste Recycling Payments) Regulations 2006

2.2Incentives for Waste Prevention

2.3Dealing with Trade Waste Collections

2.4Third Parties

3.0Desirable Features

3.1Acceptable Level of Certainty

3.2Strengthen the Business Case for All

3.3Encourage Waste Prevention

3.4Match Reward with Cost (maximising the value of spend)

3.5Winners and Losers / Transitional Arrangements

3.6Equal Treatment of WCAs

3.7Support an Environmental Case

3.8Summary

4.0VALUE OF WCA ACTIONS TO THE WDA

5.0OPTIONS PROPOSED

5.1Option 1: Existing System

5.2Option 2: Adapted Recycling Credit – Increasing Payments

5.3Option 3: Adapted Recycling Credit – Payments for Above-Target Recycling

5.3.1Option 3a: Payments for ‘Above Lowest Target’ Recycling with Existing Recycling Credit for ‘Below Lowest Target’

5.3.2Option 3b: Payments for ‘Above Lowest Target’ Recycling, Phased Introduction

5.4Option 4: Adapted Recycling Credit – Increasing Marginal Rewards

5.5Option 5: Adapted Recycling Credit – Payments by Material Type

5.6Option 6: Pay for Specific Service Configuration (all-or-nothing Lancs Model)

5.7Option 7: Tiered Payments in Relation to Service (payments related to service level)

5.8Option 8: Residual Waste Incentive

5.9Option 9: Payments in Line with WDA Benefits

5.10Option 10: Hybrid Environmental / Financial System

1.0Introduction

Partnership working between authorities, specifically, between and across tiers of local government in waste management, is being encouraged by Government. In the past, Government has considered – but has always shied away from – bringing responsibilities for collection and ‘disposal’ together under a single tier of local Government. The separation of responsibilities is generally regarded as being ‘less than optimal’, and is regarded as being quite peculiar by most European neighbours. Government has threatened, in the past, that if joint working did not become a reality, it would re-visit the separation of responsibilities.

One of the reasons why the arrangement is regarded as less than optimal is that neither of the two tiers of government ‘sees’ the whole system cost of collecting, treating and disposing of waste. The costs of managing waste, understood in ‘whole system terms’, consist of each of these functions. As the costs of managing residual waste increase, a rational single authority would be expected to shift the balance of its investment in the management of waste increasingly towards means other than disposal.

Districts, as waste collection authorities, have responsibility for the collection of waste. How they choose to collect waste is largely left up to them, though two key factors affect, or may affect, their decisions:

a)the WCAs are faced with statutory recycling targets, as well as stretches on these targets resulting from an agreed LAA;

b)the WET Act gives, to WDAs, certain powers of direction, which the WDA may exercise subject to certain constraints. Included within these is a requirement that, should the WDA ask the WCA to collect waste in a specific way, then as long as the WCA is achieving its statutory performance targets, the WDA would need to compensate the WCA for the additional costs it would incur in changing its approach to collection in the manner requested by the WDA.

Counties, as waste disposal authorities, are required to arrange for the disposal of waste. They do this effectively independently of collection activity. However, in recent times, the LATS has become a key driver in WDAs’ decision making.

There is no payment made from the WCA to the WDA in lieu of the quantity sent for treatment / disposal. The only financial transfer made between the WCAs and the WDA is through the recycling credit system.

The recycling credit has been seen as the key mechanism for encouraging recycling in two-tier areas has been the mechanism of recycling credits. The recycling credit scheme was introduced under the EPA 1990 (see Box 1) and was intended to provide an incentive for recycling by waste collection authorities (WCAs) in two-tier areas, and by third parties. Payments were designed to reflect the net saving a waste disposal authority (WDA), or WCA, makes by not having to dispose of the tonnages that have been diverted for recycling. The scheme was not designed to cover the additional collection costs associated with recycling. However, insofar as the scheme affected WCAs, by reflecting the avoided cost of disposal, it provided an incentive to WCAs to shift the balance of their investment in collection systems towards separate collection and away from collection of residual waste for treatment and / or disposal.

As Box 1makes clear (see 52(6)), the value of a recycling credit must be equal to the net saving made through not having to collect or dispose of the recycled material. In the case of these credits for disposal, the saving must be based on the cost of the most expensive form of disposal used.

Box1: Extract from the Environmental Protection Act 1990

52.—(1)Where, under section 48(2) above, a waste collection authority retains for recycling waste collected by it under section 45 above, the waste disposal authority for the area which includes the area of the waste collection authority shall make to that authority payments, in respect of the waste so retained, of such amounts representing its net saving of expenditure on the disposal of the waste as the authority determines.
(2) Where, by reason of the discharge by a waste disposal authority of its functions, waste arising in its area does not fall to be collected by a waste collection authority under section 45 above, the waste collection authority shall make to the waste disposal authority payments, in respect of the waste not falling to be so collected, of such amounts representing its net saving of expenditure on the collection of the waste as the authority determines.
(3) Where a person other than a waste collection authority, for the purpose of recycling it, collects waste arising in the area of a waste disposal authority which would fall to be collected under section 45 above, the waste disposal authority may make to that person payments, in respect of the waste so collected, of such amounts representing its net saving of expenditure on the disposal of the waste as the authority determines.
(4) Where a person other than a waste collection authority, for the purpose of recycling it, collects waste which would fall to be collected under section 45 above, the waste collection authority may make to that person payments, in respect of the waste so collected, of such amounts representing its net saving of expenditure on the collection of the waste as the authority determines.
(5) The Secretary of State may, by regulations, impose on waste disposal authorities a duty to make payments corresponding to the payments which are authorised by subsection (3) above to such persons in such circumstances and in respect of such descriptions or quantities of waste as are specified in the regulations.
(6) For the purposes of subsections (1), (3) and (5) above the net saving of expenditure of a waste disposal authority on the disposal of any waste retained or collected for recycling is the amount of the expenditure which the authority would, but for the retention or collection, have incurred in having it disposed of less any amount payable by the authority to any person in consequence of the retention or collection for recycling (instead of the disposal) of the waste.
(7) For the purposes of subsections (2) and (4) above the net saving of expenditure of a waste collection authority on the collection of any waste not falling to be collected by it is the amount of the expenditure which the authority would, if it had had to collect the waste, have incurred in collecting it .

The prevailing reality, therefore, has been one where:

• WCAs fund the collection of waste – whatever the approach – through Council Tax and Revenue Support Grant;
• WDAs fund treatment and disposal through Council Tax and Revenue Support Grant;
• WCAs receive, from WDAs, payments in lieu of avoided disposal for all materials collected for recycling.

Questions arise as to whether this system of funding is likely to lead to an outcome which:

reflects Best Value for citizens; and

creates the proper incentive structure for the development of a quality waste management system.

1.1Changes to the System of Recycling Credits

Until recently, the system of recycling credits was one in which WDAs were required to make payments to WCAs in accordance with principles set out in the EPA 1990.

A review and consultation were carried out in 2004 and proposals for changes to the scheme were included in section 49 of the Clean Neighbourhoods and Environment Act 2005(CNEA 2005) alongside a commitment to developing guidance on the scheme. These key changes were:

• to increase flexibility of payments from waste disposal to waste collection authorities in two-tier areas by giving authorities the option to agree alternative arrangements;
• to give the Secretary of State powers to set the calculation of recycling credits through secondary legislation; and
• to clarify that credits can be paid for re-use.

Defra then consulted again on proposals for change to the scheme.

Most recently, Government issued the The Environmental Protection (Waste Recycling Payments) Regulations 2006,[1] and accompanying Guidance.[2] In line with proposals in CNEA 2005, this actually opens up the possibilities for WDAs and WCAs to agree new mechanisms for financial transfers, including those that might actually incentivise waste prevention on the part of the WCAs (through recognising the implications for system costs of their actions in the sphere of waste collection), as of early April 2006. The Regulations have also led to a revision of the relevant paragraphs in the Environmental Protection Act 1990 as set out inBox 1.

Importantly, the new text allows for arrangements to be concluded between a WCA and a WDA such that the existing mechanism – which has been replaced by a default approach that caps the level of the recycling credit (even as disposal costs increase) – can be jettisoned if the WCA and WDA agree to do so. Hence para. 52(1B) of the EPA, as amended, now reads:

(1B) A waste disposal authority is not required to make payments to a waste collection authority under subsection (1) above where, on the basis of arrangements involving the two authorities, the waste collection authority has agreed that such payments need not be made.

Furthermore, the new legislation allows for payment of re-use credits. Para 52(12) reads:

(12) In this section, references to recycling waste include re-using it (whether or not the waste is subjected to any process).

This measure has been welcomed by the Furniture Recycling Network, the umbrella organization which includes, among its members, furniture and WEEE re-use organizations. Hitherto, very few Councils have paid any credit to incentivise re-use. Now, it is likely that more will do so.

This is a potentially important change in the law, since it paves the way for a change in the way WCAs and WDAs relate to each other in the financial sense. It is important to stress that new arrangements do not have to be related to the amount of material recycled. Essentially, WCAs and a WDA are free to discuss the nature of financial transfers between them so as to align their interests, and help achieve joint objectives, whilst seeking to deliver Best Value for their residents.

This paper is intended to open discussion of these issues in seeking a way forward for Hertfordshire to agree a financial arrangement which might replace the existing system of recycling credits.

2.0Key Issues Framing the Discussion

A number of key issues are relevant in discussing possible changes to the existing recycling credits arrangement:

2.1Levels of Recycling Credits Under The Environmental Protection (Waste Recycling Payments) Regulations 2006

Prior to the new law entering into force, the WCAs might have expected that recycling credits would increase as the landfill tax increased. They might further have anticipated that the level of credits would reach even higher levels as the County sought to deploy treatments other than landfill for residual waste.

The default mechanism for payment under the new legislation actually caps the level of payment, albeit that a 3% annual increase (to allow for inflation) is allowed for each year. The WDA’s ‘net saving of expenditure’ will be calculated for the year 2006/7 in line with Section 3 of The Environmental Protection (Waste Recycling Payments) Regulations 2006, and be subject to the 3% inflator thereafter.

From the WCA perspective, this is possibly disappointing – it implies a reduction in the payment for recycled material, and a diminished incentive to enhance investment in recycling, certainly any level exceeding statutory target levels. A recycling credit paid at the level of avoided disposal which the County is likely to be paying in future would almost certainly make the picture appear very different indeed for the WCA, and indeed, recycling would almost certainly appear a most attractive option.

From the perspective of the WDA, the change in the system is:

a)good to the extent that it reduces outlays below levels that would otherwise prevail; and

b)not so good to the extent that the WDA may be keen to see WCAs continue to increase recycling rates, partly so as to avoid the possibility of exposure to the landfill allowances market. A higher recycling credit may have been one way of conveying an incentive to the WCAs, though there are clearly issues regarding how high this would have to be set to encourage recycling.

Under the default system, therefore, which essentially keeps recycling credits constant in real terms, one of the key objectives of the MWMS – to increase recycling rates for the foreseeable future – is compromised by the low level of reward that WCAs might receive for additional efforts and investments in collection. In the absence of higher statutory recycling targets, there is no real incentive for WCAs to increase investment in services for the separate collection of different materials.

A revised mechanism ought to ensure that WCAs have an incentive to make those investments which the WDA would like them to make. At the same time, from the perspective of the WDA (and residents generally), the incentive should not be so great as to ‘over-reward’ the WCAs (and so, generate less value per unit of spend than might otherwise be the case).

2.2Incentives for Waste Prevention

Currently, WCAs can collect as much material as they like and deliver it to the WDA for disposal with no financial implications for themselves. Because there is no mechanism which links the quantity of waste delivered by the WCA, the WCA has no incentive to engage in waste prevention activities, other than to the extent that they save – at the margin – on waste collection costs.

Considered as a waste management system, the savings in respect of waste prevention include some savings on waste collection – which are likely to be a proportion of refuse collection costs (some £25 per tonne) – and savings on waste treatment / disposal. The ‘shadow cost’ of landfill disposal, estimated for a fifteen year contract period, is shown in Figure 1. It is clear from comparing the savings on collection, and those which result from disposal, that the major savings from waste prevention relate to those of treatment / disposal, and these accrue to the WDA. Yet responsibility for measures which affect collected waste quantities rest largely with the WCA.

Figure 1: Estimated Shadow Cost of Avoided Disposal (landfill gate fee plus tax plus landfill allowance value of 1 tonne residual waste)

If a measure is to be implemented which is intended to deliver best value to residents, and to align the interests of the WCA with those of the WDA, then the WCAs ought to ‘see’ the costs of disposal in some way.

2.3Dealing with Trade Waste Collections

Trade waste collections are being reviewed by the WCAs. There are competing influences on WCAs where trade waste is concerned. Some of these are summarized in brief in Table 1. Generally, there are good reasons to provide a commercial waste collection service, related to keeping streets clean, and ensuring that a service is available to commercial entities. On the other hand, the provision of commercial waste services is open to competition from the private sector. Consequently, market risks clearly exist. In addition, the fact that, by virtue of being collected by, or on behalf of, the local authority, the waste becomes part of the municipal stream means that each tonne of commercial waste collected implies a worsening of the county’s balance of landfill allowances (by 0.68 tonnes BMW for every tonne collected). For the WDA, therefore, the shadow cost of having this material collected is not simply the cost of landfill disposal, but is given by the cost of landfilling plus either the cost of acquiring,or the foregone revenue from selling, 0.68 tonnes of landfill allowances.

Table 1: Pros and Cons of Trade Waste Service Provision

Urban / Rural
Pros / Provision of service to local businesses - ensures businesses keep within the law
Reduced congestion (from competing firms)
Potential for ‘revenue generation’
Possibilities for provision of environmentally-oriented service
Improved street cleanliness
Less likelihood of street-scene services being ‘abused’ (especially in Zone 1 areas)
Improved efficiencies in collection logistics / Provision of service to local businesses - ensures businesses keep within the law (often provider of last resort)
Potential for ‘revenue generation’
Possibilities for provision of environmentally-oriented service
Less likelihood of tipping in areas of the countryside
Improved efficiencies in collection logistics
Cons / LATS liabilities
Deflects attention from ‘main job’
Issues of service delivery and contractual arrangements
Costs not always recovered
Market risk issues (competition from private sector) / LATS liabilities
Deflects attention from ‘main job’
Issues of service delivery and contractual arrangements
Costs not always recovered

How to deal with commercial waste in future is clearly a problematic issue. Different WCAs in the County have different views as to what type of policy should be pursued, whilst several authorities are due to review their policies in this regard. What seems clear, however, is that the WDA will find it difficult – particularly in respect of trade waste – to resist ensuring that the full costs of treatment / disposal are passed on to WCAs, irrespective of the exact nature of the mechanism discussed in this paper.