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

RecycleWorlds (
Wed, 14 Apr 1999 11:43:39 -0500

Doug has raised several considerations that he feels may offset the
concerns that I had raised on the issue whether solid waste consolidation
will help or hurt recycling (per his ** comments below). Here are my
thoughts about his points, but, I think that he is well put to highlight
this on the web for cities with actual experience to comment on as well.

1. SPLIT BIDS. Doug indicates that he would expect most joint bidding
(as regards waste and recycling contracts) is done in the residential
sector. My general impression (that is not supported by comprehensive
data) is that a majority of commercial contracts are jointly let as well.
But, by all means, let's get some more real-world feed back on this one.

2. SYNERGIES. Here is the issue laid on with a concrete example. For
City X, let's say by way of illustration, an effective recycling program
will cost $1 million for collection and $1/4 million for processing and
raise $1/4 million in sales. The solid waste program without recycling
will cost $4 million, but with recycling that diverts material from the
landfill (lowering tipping fees) and from the waste trucks (lowering waste
haul costs), it will only cost $3 million.

We have just three firms competing for that City's business, one is a
Combined Waste/Recycle company, another is a Waste Only and the other is a
Recycle-Only firm. If both have the same cost structure within their own
worlds, then the Combined firm's costs for the recycle side of his joint
bid will be zero (i.e. $1 million for collection, processing costs nets out
against sales for everyone, and then the $1 million in offsetting waste
savings). On the other hand, the Recycle-Only firm will have $1 million in
costs. The Waste-Only firm can't snatch away the Combined firm because he
is not in control over the recycle operations to bet on those savings
coming through. Indeed, if the City separates the two sides for bidding
with the distinct prospect that a Combined company will not get both sides,
no one will bet those savings into their bid. Only other Combined firms
can match for those synergies, and they will not compete if there is an
oligopoly division of market share. Moreover, many cities have not yet
demanded waste reductions for the obvious avoided tipping fee, and very few
understand the substantial savings in waste trucks to be in a position to
assert their existence and demand bids that recognize them.

That is to say, the only way that the City will likely see those
savings which recycling can make possible actually reflected in bids is if
(1) the waste and recycle are jointly bid and (2) there is real competition
among the Combined firms.

3. MRF CONSOLIDATION. I agree with a lot of what Doug says and then
more so. My personal suspicion is that -- absent a new element --
horizontal MRF consolidation will not have any legs in the mid to long
term. KTI's recent swoon on the Street is only one more nail in that coffin
in my view. However, their own stated business plans in their K-1 filings
with the SEC indicate that they want to link up with national waste firms'
recycling contract operations. Here is an avenue that can provide some
sustainable basis for market power. Remember beginning three years ago as
landfill supply was recognized to be in excess in some regions. In those
regions with excess disposal capacity, but with concentrated hauling, the
integrated waste giants instituted "reverse price squeezes" on stand-alone
(including publicly owned) landfills. MRF's are increasingly capital
intensive and a merchant MRF by a recycle only firm outside of these
arrangements that KTI is outlining could wind up in trouble.

-----Original Message-----
From: Doug Koplow <>
To: <>; <>
Date: Wednesday, April 14, 1999 11:02 AM
Subject: Re: [GRRN] Impact of Consolidation in Waste Industry onRecycling

**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. KTI is
describing a synergistic relationship with the integrated mega waste firms
in this way and it will be interesting to see how things develop, assuming
of course Wall Street doesn't tire of MRF consolidation before they reach
the necessary critical mass to bargain national contracts.


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 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.

***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

***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 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.

****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 disadvantage.

***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 hauler
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

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

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