Re: [GRRN] Impact of Consolidation in Waste Industry on

Doug Koplow (
Wed, 14 Apr 1999 12:00:55 -0400

**I'm having trouble reconciling the various statements on waste industry =
consolidation and its impact on recycling. The topic is important because =
some planning is likely needed if consolidation is to help, rather than =
harm, recycling. My questions/comments are preceded by asterisks.

Doug Koplow
Industrial Economics, Inc.
2067 Massachusetts Avenue
Cambridge, MA 02140
tel: 617/354-0074
fax: 617/354-0463

>>> "RecycleWorlds" <> 04/14 10:28 AM >>>
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 =
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 =
companies out of a few loosely linked haulers are asleep at the switch.

The reason for this anomoly is because, when monopoly rents are =
on waste services, then it should be expected that the customer will tend
to pursue recycling efforts more (just as they pursued conservation in =
in response to the Arab Oil Embargo's quadrupling of gas prices).
Essentially, doubling tipping fees, for example, would likely create =
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 =
to consolidate trash and recycle collection in one hauler.

***According to Bill McGowan's post, joint contracting is not an issue and =
recycling is competitive. While this may be the case in commercial =
markets, I tend to agree with Peter in the residential arena. If =
non-integrated firms can't even submit bids on municipal RFPs, then you =
have effectively greatly increased the economies of scale in the recycling =
industry by making them enter the waste hauling and disposal business as =
well. =20

***I'd be interested in the opinions from some of the municipalities on =
the list serve regarding whether joint contracts are generally done, and =
what options there might be for separating them without creating a great =
deal of additional administrative oversight.

2. Synergies

Also, there are very substantial synergies from combined
waste/recycling services. Recycling diverts waste from the trash truck =
from the landfill that makes possible avoided waste collection and =
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.

****This line of reasoning does not make sense if there is a relatively =
competitive market for waste and recycling services. Avoided tipping fees =
and savings from reduced trash fleets benefit any private sector provider =
of trash services where there is also curbside recycling. Competitive =
bids would therefore be lowered to reflect this fact, or the firm would =
not win the contract. Most of the savings from these synergies should, =
therefore, flow to the municipality, not to the waste hauler. As a =
result, they would not put recycling-only firms at a competitive disadvanta=

***This holds true whether one hauler provides recycling and waste =
services, or different vendors provide each one. It is likely that =
integrated service providers apply some of the savings in trash hauling to =
reduce their bids on the recycling services (or to increase the services =
they provide). Bill McGowan noted that John Drury at WMX went on record =
saying he will only provide recycling services at a charge, not for free. =
It is likely that WMX always "charged" for these programs, but did so =
perhaps through cross-subsidies on waste hauling rather than overtly. =
However, the presence of cross-subsidies would not change the underlying =
economics of the services provided, even though it does change the market =
response by altering the observed price signals.

****The only true synergies in a joint bid are likely to be in reduced =
administrative costs. I suspect these savings are not that large relative =
to other costs.

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 =
who is challenging the waste oligopoly.

***The observed consolidation in MRFs, waste hauling, and landfills is one =
example of a general market reaction in a capital-intensive industry with =
a prolonged period of low capacity utilization. Horizontal consolidation, =
where the number of landfill owners, for example, declines as they merge =
with each other, is often a necessary condition for a reasonable level of =
profitability to be returned to the overcapacity market. Obviously, too =
much horizontal consolidation can be a problem, and can lead to too much =
market power for one or two firms.

**How is consolidation affecting pricing? Though prices are rising, I've =
not heard people on this list making the claim that the prices are rising =
so high that the firms are earning above-normal profits. If past =
overcapacity led to prices too low to recover the cost in invested =
capital, even fairly substantial price increases could (though may not =
necessarily) reflect break-even costs rather than price gouging. For =
example with a 40% price increase in Virginia tipping fees, how do prices =
compare with those that prevailed prior to the glut in landfill capacity?

***Peter also alludes to vertical consolidation, where firms are buying =
different parts of the handling chain (e.g., hauling, landfills, MRFs). I =
see this as a potentially significant problem. To the extent that =
purchases and partnering agreements reduce the market choices for =
municipalities, this type of consolidation can not only drive up prices in =
the industry, but can lead to suboptimal recycling choices. For example, =
a consolidated owner may earn more by disposing of wastes in its landfill =
than it does sending it through its MRF, and may choose not to recycle the =
material though it would have been economic for an independent MRF to do =
so. =20

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 =
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

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