UK: OFT Calls for More Competition in Municipal Waste

This initiative is part of the Kelly Action Plan, a Government initiative aimed at improving competition in procurement and, in particular, increasing competition and long term planning in markets where the Government possesses significant purchasing power.

The OFT considers that competitive markets are vital to the delivery of Defra's objectives to ensure the diversion of MSW from landfill and to help local authorities deliver around £300 million worth of efficiency gains in waste services.

The OGC report concluded that competition within the MSW sector was limited because there were too few suppliers in the market, there was an over-reliance on regional presence to succeed with bids, and the lack of a systematic and clear procurement policy amongst procuring authorities. It recommends a more centralised approach to procurement with greater co-ordination between local and central government, standardised procurement procedures and centralised monitoring of contracts. It also considers that funding and procurement models should follow set outlines with fewer integrated contracts.

The OFT makes several recommendations to encourage local authorities to maximise the benefits of competition including:

• Restricting waste collection contracts to 5 years which would allow suppliers only to recover their sunk costs. This would encourage other firms to bid and reduce the advantages enjoyed by incumbent suppliers.

• In order to maximise the number of bidders, the bundling of waste treatment and landfill contracts, and collection and other waste management services, should be avoided unless significant cost savings would arise.

• In order to encourage smaller suppliers to bid, procuring authorities should ensure that their selection criteria for waste collection contracts are not overly restrictive. In particular, authorities should remain open to consortia bids and previous experience of providing such services should not be required. In relation to waste treatment technology, the specification of outputs rather than inputs should also be considered.

• The creation or maintenance of regional monopolies should be avoided. Therefore, bids from suppliers outside the region should be encouraged. Authorities should also provide access to necessary facilities such as waste treatment facilities, vehicle depots or transfer stations so as not to deter potential suppliers who may not have access to such facilities.

• The use of restricted or negotiated procurement procedures should be avoided in favour of open procurement procedures. There should also be open and fair competition between local authority in-house service providers (DSOs/LAWDCs) and private sector bidders.

• Finally, the OFT also warns local authorities to be aware of the ‘risk of collusion’ between bidders, especially in relation to bid-rigging and marketsharing. Encouraging bids from suppliers outside the region could help to overcome this risk.

While some of the recommendations are general in their application and show a lack of understanding of current waste management procurement procedures they are likely to give rise to pressure for some change most notably in the proliferation of regional players and the length of contracts.

Paul Rice, Environment Partner at Pinsent Masons, commented that "the recommendation on reducing the number of integrated contracts will be unpopular with many in the waste management industry who, because of the sheer size of bid costs, are more selective in choosing those tenders where they are willing to submit a bid. Moreover, with regard to the proposal to limit waste collection contracts to 5 years, the ability to recover sunk costs in such a short timeframe in all but the simplest of collection contracts is questionable."

Alan Davis, Competition Partner at Pinsent Masons, also said that "the OFT has concluded that there are certain characteristics of the sector that could facilitate collusion and have encouraged local authorities to keep an eye out for this type of behaviour. As has happened in other sectors, including construction, the OFT's report signals that the MSW sector is likely to come under scrutiny by the OFT for anti-competitive practices for some time to come. Companies in the sector should therefore consider implementing appropriate competition compliance programmes."

The Government has responded by stating that it has already begun implementing proposals by the OFT and OGC. They also announced plans for a new waste infrastructure development programme led by Defra, along with changes and simplifications to arrangements for the award of waste sector PFI contracts.