With Ontario’s Circular Economy Strategy being finalized in the coming months, the shift from the monopolized stewardship organizations towards an open and competitive system of multiple Producer Responsibility Organizations and/or individual company programs has been the source of significant debate. There has been a lot said and discussed over the last few years about competition for the Ontario Waste Diversion Act (WDA) programs, and Printed Paper and Packaging (PPP) in particular.

Some people wanted competition so that they wouldn’t have to deal with the Industry Funded Organizations (IFOs), while some felt that they would get less expensive services. Some wanted to just have a choice to deal with a service provider or do their own thing. That being said, the majority of stakeholders seem to believe that competition is the most viable option in Ontario’s and Canada’s resource recovery (waste diversion) sector as it is in their own day to day business world.

Now that the government has responded to what so many producers, retailers, service providers and other stakeholders wanted, we are hearing some kind of about-face. ‘Oh we don’t know, maybe it will be cheaper with just one Producer Responsibility Organization (PRO)’, ‘the economy of scale will make it cheaper than if there are more service providers’, etc.

Overall Reduced Costs

The program management and administration costs for the WDA programs fall within the 5% to 10% range.  Of these costs, some are fixed and some are variable. Having multiple PROs handle these programs would not mean the full 5% – 10% of costs are replicated. Would there be benefits from competition? Likely. Would the total program management/administration costs be higher? Possibly. Maybe as much as a 30% increase in the program management costs, or 1.5% to 3% of total costs, which is quite nominal in the grand scheme of things.

The more significant costs are material management and other service costs, which cover 90%-95% of the total e.g., shipping, processing, promotion & education. The use of competition here brings clear benefits from innovation, negotiation outcomes, standardization, etc. Cost reductions have been identified in several jurisdictions that have embraced competition, including up to an over 50% reduction in Germany. Staying conservative, an estimate of a 20% cost reduction of program operating costs in Ontario would result in a reduction of 18% to 19% of total costs.

The potential cost improvements clearly dwarfs any increased costs in program management and administration. A net 15% decrease in total WDA program costs could be in the area of $50M.

Competition is Nothing New

There have been numerous examples where industry sectors moved from a monopoly to an open market competitive structure with positive results, in Canada and other jurisdictions, in a variety of sectors, such as internet service, or telecommunications. It can be painful as it makes people change what they are doing. Are there net benefits at the end of the day? Most definitely.

The following are a few examples from other jurisdictions that have moved from monopoly to competition in the resource recovery sector.  A key example is the German experience. Many people use the example of the packaging compliance market opening in Germany in the early 2000’s. The analysis of the change to competition by the German Federal Cartel Office was outlined in its ‘Sector Analysis of Dual Systems, December 2012’. The case study summary states that when the system changed from 1 PRO to 10 PROs, the former monopoly’s (DSD’s) market share declined to 44% by 2011. The key outcomes included; a reduction in recycling costs by more than 50%, increased investment and innovation, along with improved recovered material quality. Alongside these benefits, the collected amounts remained stable. This progress was achieved by standardized collection programs and innovation in the collection and material sorting technologies.

An excellent educational report for EPR transition is the OECD’s document titled Extended Producer Responsibility – Updated Guidance, April 12, 2016. This report provides specific discussions and rationale for competition vs. monopolies in the EPR space, along with various examples.

Other examples of sectors moving to a competitive model includes the Canadian telecommunications industry. Even with the challenges of the CRTC, resulting benefits included; faster development and acceptance of new technologies, wider coverage, and improved service. Canada for a number of years in the early 2000s was regarded as the number one connected country in the world and is still ranked among the highest. Many other countries de-regulated their telecommunications sectors, following Canada’s lead and model, and have experienced significant cost reductions and improved service for consumers.

Producer Choice

Another issue that key stakeholders should consider is that of future choice. If there is only one choice and one player in the market place then when new contracts come up or there is a fee review period, where is the choice? Or stated another way, where is the pressure to keep costs down and innovative services improving? If there is no competition, we can be sure that costs will increase and service will degrade or at least not keep up to expectations.  Another component that can illustrate the downside of a single agency is where other similar service providers or service providers further down the supply chain exit the marketplace. This results in reduced competition and choice in the future, and subsequently, higher costs.

The comments by some stakeholders that this could mean fragmentation in the industry and that it is better to remain with a single agency are resisting change and increased choice for producers. To illustrate, think about how so many of our other industry sectors should then be changed to monopolies to reduce fragmentation. Most stakeholders, when told something like “we would be better off with a monopoly, rather than having all that fragmentation with multiple grocery store chains”, quickly see how the protection of a single agency model is illogical.  Clearly producers, like consumers, want choice.

Should there be blind faith in competitive markets as being the best? No. But there is ample proof that the EPR systems across Canada could benefit from some innovation, value-add services, and competition.  Moreover, a shift to multiple PROs is expected to increase innovation, increase the level of service, and reduce cost. The Waste Free Ontario Act and associated documents clearly foresaw the benefits of a competitive compliance market.

Competition and Complexity

Somewhat tied to the change of allowing competition is the issue of complexity. Some stakeholders point out that it is so complex to change that it would be much easier to keep it as it is. For the people that benefit with the status quo, that argument is quite understandable. But there are many complex systems in our world – much more complex than collecting some material and reusing or recycling it. The changes contemplated in Ontario have been managed in different countries already.  They got people involved that are experts at changing systems. Not the people that are only familiar with maintaining the current system. This requires different thinking, which we will comment on shortly.

Sources:

http://www.oecd.org/environment/waste/Global%20Forum%20Tokyo%20Issues%20Paper%2030-5-2014.pdf

http://c.ymcdn.com/sites/www.productstewardship.us/resource/resmgr/PSI_Reports/Updated-OECD-EPR-Guidance.pdf