CDS contract renegotiations: Mike Ritchie

Mike Ritchie, Director of MRA Consulting Group, explains the alternative revenue stream created through the Container Deposit Scheme in NSW and offers advice on how to handle contract renegotiations.

Under the NSW Container Deposit Scheme (CDS), Return and Earn, operators of materials recovery facilities (MRFs) are eligible to claim a refund on containers collected from kerbside recycling.

Introduced on 1 December 2017, Return and Earn gave consumers the power to collect a 10 cent refund from their drink containers by returning them to a reverse vending machine (RVM) or an eligible drop-off facility. In 2012, resource recovery and waste management experts MRA Consulting, commissioned by the Office of Local Government NSW, set out to investigate the impacts, including cost and benefits, of the introduction of a CDS on kerbside recycling and councils.

The report found that by redeeming the eligible containers remaining in the kerbside bin, MRFs stand to gain as do councils, which would benefit by receiving a proportion of the revenue from unredeemed deposits. As a result, NSW councils would cut their overall recycling costs by 19-47 per cent. 

The findings have recently been corroborated by data published by the Office of Local Government. It was stated that the additional revenue stream from eligible containers through kerbside recycling could be worth about $100 million per annum for councils and MRFs. The Office of Local Government indicates on its website that the proportion of eligible containers processed through kerbside is a significant revenue stream for both parties.

This led to the NSW Government allowing MRFs to claim the refund on containers they process for councils. However, to ensure a level playing field, the government requires that a refund-sharing agreement must be arranged before 1 December 2018 by councils and MRFs or no claims can be made.

COMPLEX OVERLAPS

The NSW CDS comes as China implements its strict restrictions on recyclables imports that has resulted in an effective ban on the importation of kerbside recyclables into the country. 

First came China’s customs crackdown on loads with contamination of 1.5 per cent a tonne in 2013, Green Fence, then National Sword in 2017, a similar one-year campaign that was enforced much more stringently. This was followed by the Chinese Government’s announcement to ban 24 import materials with a contaminant level of more than 0.5 per cent. Enforcement of this is covered under China’s Blue Sky 2018 policy, which includes plastic waste, unsorted waste paper and waste textile materials. 

China has been the market for close to 50 per cent of all of Australia’s recyclables, offering a significant and steady revenue stream for local MRFs which subsequently could offer relatively cheap gate fees to councils around Australia for taking in kerbside recyclables. 

Amid the implementation of National Sword, the value of recyclables around the world has plunged and Australian MRFs have sought to increase gate fees to maintain their overall revenue and not go into liquidation. 

As reported by Waste Management Review, many councils are now undergoing contract renegotiations with their MRFs across Australia as a direct result of China’s ban on waste imports. 

According to MRA Consulting Group, the key argument of many MRFs is that the loss of revenue from China triggers contract clauses such as “unforeseen circumstances”, “force majeure” or “change in law”. At the time of publication, no one had stopped service in Australia as a result of this. 

According to Mike Ritchie, MRA Director, the CDS offers a timely opportunity for NSW MRFs to substitute some of their lost export (China) revenue. 

He says this is also true for MRFs in other states considering the introduction of CDS, in particular Queensland, Western Australia and the ACT. Mike says the key issue for MRFs in those states is: would they have access to the redemption of the 10-cent deposit? 

“The key issues facing councils today is how they allocate or share the new revenue arising from the CDS,” Mike says. 

“Obviously, councils want to ensure that MRF operators remain viable and, as such, most are prepared to offset the losses arising because of China.”

For a pre-existing contract, councils have until 1 December 2018 to make a sharing agreement on CDS revenues. It is important to note that for existing contracts, if no sharing agreement is reached before 1 December 2018, then both parties get nothing, unless the council has notified the EPA that the lack of sharing agreement is “fair and reasonable”. 

If a tender has been signed after 1 December 2017, then the contract that arises from it needs to specifically state how the CDS revenue is to be shared – otherwise it all stays with the MRF. Therefore, councils are advised by the Office of Local Government to seek professional and independent advice before finalising any agreement with MRFs.

MRF-COUNCIL SHARING 

MRA has been working with councils and MRFs to ensure the claims around China’s ban on waste and the value of the CDS are transparent. 

Mike says the NSW CDS is currently only recovering around 30 per cent of eligible containers. The remaining 70 per cent still goes through the kerbside recycling, or the garbage bin.

“If I’m a resident and I put my container into an RVM I get the 10 cents, but if I put it into a yellow top bin, I’ve donated that 10 cents to the council and therefore the community,” Mike explains.

He says that some will choose to cash in the refund, but there are also many people that will continue using the kerbside bin. 

Mike says MRA’s pre and post-CDS audits have clearly illustrated this point. He says that across all audits, the CDS value of the remaining containers significantly outstrips any losses to MRFs due to a reduction in the volume of recyclables and the fall in commodity price due to China.

“The increased value of the CDS for a MRF is upwards of between $130 and $200 a tonne in increased value (depending on where they are in NSW). Then the question is: how much of that is given back to the MRF and how much to the council to hold the MRF commercially constant and not send them broke?

“At the same time, councils want as much of the CDS money as they can get.” 

OFFSETTING THE LOSS 

Mike says many councils are including the impact of China’s waste ban in the discussions on CDS. MRA agrees that councils should use their CDS refund to offset the losses from China. 

However, it does not advise they tie these together over the same contract period. International commodity prices may bounce back through increased demand by other manufacturing nations for what is now a significantly cheaper input material (paper, cardboard and plastic) and China’s policies may change yet again. On the other hand, the CDS is a contractual price adjustment for the life of the MRF contract. Linking the two contractually could backfire in the future. 

“While I think it’s justifiable that National Sword costs get passed through to councils, I also think there is a normal due diligence and transparency process that councils have to embark on and the way to do that is to make sure the MRFs supply their international sales dockets, otherwise it’s just a free for all.” 

While the CDS is now worth about $130 to $200 per tonne of kerbside recyclables, he says this could decline over time as more RVMs are rolled out.

“It is extremely difficult to enter a long-term CDS sharing agreement, as required by the NSW state legislation, because no one knows how many RVMs and drop-off points will be rolled out over coming years. This will obviously erode MRF-CDS revenues. The key will be an annual revenue sharing system and transparency,” Mike says.

On the matter of contract renegotiations, he says that while the Office of Local Government has made a good model for the CDS value, only expert advice from a commercial adviser or lawyer can highlight issues of contract stability, the loss to China or a council’s bargaining power.

A REVENUE SQUEEZE

Mike explains that MRFs are getting their revenue squeezed at the back gate. He notes that MRFs make their money as a gate fee paid by councils to process the recyclables and from the sales of the commodity out the back gate.

“As a result of the National Sword policy, the value of the commodity out the back gate has fallen by between 60 to 80 per cent on may streams, plus fibre and plastic and then glass separately has fallen in price as well, but this is not related to China.” Of course, the uplift depends on what price they were paying to start with and Mike estimates the increase most councils are facing is between $60-$120 per input tonne, which does not include glass. 

CHINESE MARKETS

Mike argues China’s policy provides Australia with a unique opportunity to rapidly grow its own circular economy system.

“We can build pelletising plants in Australia pretty cheaply, we can build glass processing plants in Australia to make sand. We need to get on and do this now. 

“However, it is not so simple to build a paper mill in Australia, so we will remain dependent on international markets for at least 50 per cent of our recovered fibre. 

“The solution to fibre would be to sell more to India, Thailand and Vietnam and Korea, as well as cleaning up paper in Australian MRFs as much as possible and look for alternative uses locally.”

 This article appeared in the September issue of Waste Management Review.