The transition to full producer responsibility (FPR) will see the role of municipalities change dramatically. CIF Project 1017, conducted with the Region of Niagara (Niagara), is designed to walk municipalities through the factors municipalities should consider to determine the role they might play once Ontario transitions to FPR.
Processing and marketing Blue Box recyclables is the key area of interest. It’s broadly expected that municipalities will have to compete with the private sector to provide material sorting services for producers. If so, municipalities that own a MRF should assess options to determine their role while minimizing the financial impact to taxpayers. Through this project, we developed a series of steps to work through, which Niagara staff suggests are “systematic and necessary in order to obtain a better understanding of our options under transition and their potential implications.” A summary of the steps is shown in the chart on this page and described in this blog.
1a. Regulatory/Waste Policy Review
It is not yet certain how Ontario will move towards FPR, so municipalities should review current and future policy documents related to transition plans to identify and evaluate options, considering:
- The role for municipalities for providing Blue Box services (e.g., first right-of-refusal)
- Inclusions/exclusions of materials to be collected after transition
- Responsibilities for sourcing Blue Box materials (i.e., who controls the flow of the materials)
- Potential changes to service levels (e.g., weekly to bi-weekly collection)
- Costs eligible/ineligible for compensation during and after transition
- Fees or penalties for not complying with service provider agreement
- Timing for transition of all municipal programs
- Potential contract term
1b. Review Of Existing Contracts
Municipalities that have contracted out recycling services should review existing contract(s) to determine the opportunities and risks to meet proposed changes in the transition plan. As contract lengths tend to range from 5 to 10 years, and may be bundled with other waste services, it’s vital that municipalities review the language carefully to understand all options, considering:
- Ability to modify, change, reassign or terminate existing contract and associated costs/penalties
- Timing for contract expiry or renewal
- Ability to extend contract or exercise options
- Impacts of unbundling Blue Box services from combined waste services contract
- Responsibility for marketing of recyclables, and municipal share of proceeds from the sale of marketed materials
2. Define Options/Assumptions
For recycling assets, municipalities have four key management options and sub-options that can provide greater control or ensure certain criteria are met to minimize impacts to residents and/or maximize the sale value.
3. Financial And Risk Assessment
Financial and Risk Assessment involves developing financial/valuation models for the status quo and options listed above to assess the potential financial impacts of change. Municipalities that decide to maintain and operate their recycling assets will compete with the private sector and potentially other municipalities to provide processing services. The business valuation of recycling assets is based on the cash flow that recycling assets generate.
When developing the financial/valuation model, municipalities should consider:
- Current EPR funding should be viewed as time limited funding rather than as revenue attributable to the recycling asset
- Under the proposed a-BBPP, municipalities and private sector entities are expected to bid for the right to provide processing services. As such, some sort of “cost-plus” model (the ability to charge an amount over and above operating and capital costs) should be employed to model revenues under the baseline scenario and relevant options
- Full and partial divestiture options should be aligned with the valuation of land, buildings and equipment of the recycling asset
- Having a strong understanding of the recycling asset’s cost structure and the interplay between capital and operating costs is essential to assessing each option
Municipalities that decide to stay in the ‘business,’ should know where they can successfully secure the tonnage necessary to operate. For each short-listed option, consider evaluating the probability of securing tonnage from various sources, such as other municipalities, IC&I tonnes and value-added services as well as the net revenue from each to assess risk and profitability of each option.
4. Multiple Account Evaluation
Financial and risk considerations are important but are not the only factors that municipalities should consider. Municipalities often have a broader public policy mandate and a Multiple Account Evaluation (MAE) is one tool to consider a wider set of factors more formally. MAE incorporates local economic impact, control/service quality, timing for implementation and other factors (e.g. environmental) in addition to financial and risk considerations to determine the advantages and disadvantages of various options.
Each consideration is weighted, then ranked against each option to arrive at a weighted score for each of the selected options. The weighting for each consideration should reflect the municipality’s priorities.
5. Communication/Next Steps/Final Decisions
Engaging key stakeholders throughout the decision-making process is essential to the successful operationalization of a MAE framework. Key stakeholders, such as municipal financial and public works staff, senior administration and possibly municipal committees/council and other potential stakeholders should be consulted in:
- Selection of options to consider for evaluation;
- Identification and definition of factors/accounts to consider as part of the MAE framework; and
- Determination of the basis for relative scoring for each account.
We recommend reporting results of the analysis in a clear and concise report that documents the methodology, data and assumptions. This facilitates transparency and allows users of the report to assess the voracity of the analysis.