[GRRN] Impact of Consolidation in Waste Industry on Recycling

RecycleWorlds (anderson@msn.fullfeed.com)
Wed, 14 Apr 1999 09:28:58 -0500

A number of comments in the last few days have opined that it is good
for recycling if the growing consolidation in solid waste results in higher
fees for waste services. This would be the case, under this line of
thinking, because recycling effectively competes against waste and, if
waste becomes more expensive, than the avoided costs that diversion
captures become greater.

Unfortunately, for this theory to hold, one has to assume that
gentlemen like John Drury and Tom Van Weelden who have built billion dollar
companies out of a few loosely linked haulers are asleep at the switch.

The reason for this anomoly is because, when monopoly rents are imposed
on waste services, then it should be expected that the customer will tend
to pursue recycling efforts more (just as they pursued conservation in 1979
in response to the Arab Oil Embargo's quadrupling of gas prices).
Essentially, doubling tipping fees, for example, would likely create market
driven forces that would double the diversion rate from slightly less than
30% to substantially more than 50%. That is to say, waste would be the
"tail" and recycling the "dog", instead of the other way around. The
prospect of increasing diversion rates would create a tempering force on
the market power of integrated waste firms.

This fact is known to the members of the oligopoly in waste services,
and it is not reasonable to expect them to forgo countermeasures that are
within their power.

It is true that there is no parallel bottleneck, such as landfills in
the waste industry, in the market for recycling that makes it possible to
directly achieve monopoly power. However, for three reasons, a oligopoly
in the market for waste will tend to "naturally" extend itself to

1. Combined Contracts

Many franchise contracts for residential trash collection will be bid
out combined with recycle collection for ease of administration. If your
competitor can offer combined service and you cannot, you will be out of
competition. Similarly, many large and small commercial customers will want
to consolidate trash and recycle collection in one hauler.

2. Synergies

Also, there are very substantial synergies from combined
waste/recycling services. Recycling diverts waste from the trash truck and
from the landfill that makes possible avoided waste collection and disposal
costs. These very substantial savings that can offset as much as one half
of the cost of waste services will be lost by a recycle-only firm. This
will make it more difficult if not impossible for a recycle-only hauler to
compete with a combined operation, because it will not realize those
offsetting savings on the waste side to reflect in its recycle-only bid.
While sophisticated contracting can normalize for this effect, that is
certainly not the norm.

3. Consolidated MRF's

There is presently ongoing extensive consolidation in the material
recovery facility market. KTI is engaged in an extensive consolidation
effort among MRFs, including the recent takeover of a competing
consolidator, FCR, and with both acquisitions, will own 25 MRFs in 14
states. Their statements to investors indicates that they intend to market
successfully to national hauling firms who want a consistent partner. If
the MRF consolidators succeed (which is not certain as evinced by the
bankruptcy of Prins in 1996, and KTI's recent poor earnings reports), one
element in their market plan will be to partner with recycle collection
operations of the national firms. This will make it very difficult for
them to offer favorable terms to a competing non- integrated recycle hauler
who is challenging the waste oligopoly.

4. Lack of Capital

The past decade's disappointing returns, rollercoaster earnings,
bankrupcies and phase out of government loan and grant assistance have
subtantially reduced the access to capital to finance a reentry by
dedicated entrepreneurs into recycle hauling operations--even if, for the
sake of argument, new Waste Management and BFI wanted to divest their
recycle fleets and put new competitors on the route to compete against

For all of these reasons, I would not be as sanguine as those who see
hope for recycling in the coming monopolization over waste. It will be in
the oligopoly's interest to make recycling unattractive and it will be in
their power to do so (only limited by the fact that public support for
recycling will preclude overt efforts in that vein). I'm not
prognosticating a "big bang" death, but rather the "slow drip" type of
steady imperceptible deterioration of service and increase in prices (i.e.
offering bi-weekly pickup to cash strapped cities to avoid price
increases, followed by falling participation, to "is it really worth it",

Soon (witness last months 40% tipping fee increases in Pennsylvania and
Virginia) the cities will awaken to what is happening to them with regard
to the cost of waste services. It will then be in the recyclers interest
to join with the cities in raising concern rather than sitting back
expecting those price hikes to rebound in recyclers' favor.

Peter Anderson
RecycleWorlds Consulting
4513 Vernon Blvd. Ste. 15
Madison, WI 53705-4964
Phone:(608) 231-1100/Fax: (608) 233-0011