This article provides an insight into the recycling industry for construction and demolition waste (C&D) in the wider Sydney regional area of NSW. It considers the historical context of the recognition of ?externalities? in our society, and how these issues should be dealt with. Clearly traditional market forces would be too slow to react to the need to increase recycling and so Government intervention is required to set the framework for the industry to successfully operate. The question is have they got it right ? or are there lessons to be learned? The Victorian Government last year significantly increased landfill levies in Victoria, followed by additional increases in the recent budget and so this may well follow the evolutionary process that occurred in NSW. But have the Victorian Government fallen short, or do the recent rises provide an indication of future increases to catch up to NSW?
HISTORY
For diehard fans of the free market economy, it is hoped that they have learned their lessons from the Global Financial Crisis and concluded that controlled economies, where government intervention controls many aspects of the wider economy, are perhaps the way forward. Neither model is perfect, but together they can be. The big question is: where does the ideal balance lie?
This same evolutionary economic process is happening right beneath our noses within the recycling industry. Society produces waste, which has to be disposed of, with the cheapest method being landfill.
Then came the advent of pollution in the 1970s. The rise of the Greens and other environmental activists made governments recognise what were termed ?externalities?. These involved issues such as pollution, congestion, acid rain, CO2 emissions, greenhouse gases, chlorofluorocarbons, depletion of the ozone layer and a range of other things we had never even heard of, let alone priced along with a commodity.
So governments around the world have grappled with these issues for over 30 years and introduced legislation and interventionist policies to try to capture the externalities into the prices we pay for goods and services. In other words, it constitutes a great ?scare campaign? to capture additional taxes from the masses. Unfortunately, one of the most obvious starting points for highlighting many of the wider issues involved landfills because they were potentially polluting the environment. Landfills were also something that society had to have, and they were easy to tax and pass the costs onto the population. Landfills were also the only issue about which politicians had a vague knowledge.
EXTERNALITIES IN RECYCLING
We hear how bad landfills are and how they produce CO2 emissions and landfill gas and pollute our rivers, but the reality is somewhat different. Many landfills are now required to have liners inserted to prevent any leachates escaping the site, but the landfill gas is also captured and used to generate electricity, without causing pollution or contamination. Solid waste landfills do not produce landfill gas, so have very little environmental impact.
The NSW Government was the first State Government to apply interventionist policies for the waste management industry, with the objective of minimising the damage to the environment by landfills by introducing significantly high landfill levies.
The theory was that if a tax or levy were imposed on waste deposited at landfills, then this would encourage more recycling to take place. This was – and still is – on the basis that there was a secondary market for recyclables ? and for materials like metals, glass, paper, cardboard, concrete, soils, rock, rubble, etc.
The greatest volume of potential recyclable materials within the market involved what is termed as construction and demolition (C&D) wastes which, once screened and crushed, can be reused for numerous applications and resold. So the tax or landfill levy not only produces an income for the State Government, it creates investment and jobs within the recycling industry. At the same time, it also minimises the requirement for primary aggregates, as recycled materials are cheaper and can quite happily co-exist in the market place. Some quarry operators have become actively involved within the recycling industry, as they have had the foresight to recognise the need to provide choices and the wider range of products to their clients.
INITIAL IMPACTS IN NSW RECYCLING
Recycling operations existed in NSW well before the upgrade of landfill levies in 2006, but the levy created the incentive to process marginal C&D waste materials that would have been landfilled in the past. There was, therefore, a surge in demand for recycling operations, as many were operating at full capacity due to the addition of the marginal materials being processed, and this encouraged other players to enter the market.
However, due to the often lengthy development approvals for sites, it took several years before additional capacity reached the market. Then, in 2008, the NSW Government decided to further increase the levies to speed up recycling rates yet again. However, the additional levies, despite being higher, were less effective for three reasons:
1. The recycling rates for C&D were very close to being maximised in any case.
2. There was additional capacity in the market to compete with the volumes.
3. There was later a slowdown in economic activity, which reduced both availability of material and markets for the products.
The situation was decimated by other new entrants applying for development approvals after 2008, and recently granted development applications that may never see fruition.
So the Sydney regional market has seen the full evolution of the interventionist policy of landfill levies, and it clearly met its objectives in the early stages, but the later failures have involved the oversupply of recycling capacity, coupled with a downturn in economic activity.
WASTE HIERARCHY
We recognise that the waste management industry specialises in a wide variety of waste streams and deals with these in a range of ways and with many different methods and processes. The purpose of this article is to outline the general economic setting for C&D recycling operations, as these tend to form the greatest number of operators.
DEMAND, SUPPLY FOR C&D OPERATIONS
Landfills have been used by society since the stone ages. It is only since the inception of externalities that Government policies have tightened up and provided more controls. The normal market forces applying within the industry firstly involved the gate price of the landfill. Before any recycling could occur, the cost of separating the recycled material from the non-recycled material had to be calculated, and then once separated, had to then find a market for the recycled product, which had to be cheaper than quarry products operating in the same market. The problem was that only high value recycled materials, such as metals and crushed concrete, were suitable for recycling, and the rest of C&D materials were mostly landfilled.
Therefore, if the Government were to intervene, and artificially increase the gate price of landfills (by pricing the externalities), this would make even more recycled materials available for processing, and create a secondary market for some recycled materials. Thus, the introduction of sufficiently high landfill levies in NSW in 2006 would allow the recycled market to increase productivity.
The policy was initially a huge success because it reduced pressure on vastly declining landfill voids, created a secondary market for recycled products, minimised the externalities involved within the quarrying industry, created jobs, and allowed materials to be available locally, as compared to being imported into an area, thus reducing congestion and other associated costs.
So as can be seen from Figure 1, landfill levies in NSW in 2006, which at the time only involved the Sydney metropolitan area, increased to $30.50 per tonne. This levy should have created an incentive to increase recycling rates, but at the same time it also encouraged transportation of waste outside of Sydney to landfills that were not covered by the levy. Demand for existing recycling operations was also very strong and many found themselves operating at full capacity, and needed to expand their operations to cater for the new recycling market.
However, the planning system in NSW identified many recycling operations as being of State significance because the crushing and screening operations created noise, dust, and high vehicle movements. Consequently, many new development applications needed Environmental Impact Statements and it virtually took two years in order for approvals to be gained. This limited the ability of new entrants to the market and ensured that existing operators maintained their market share, at least in the early stages.
In 2008, the NSW Government increased the landfill levies further. However, this time it added the surrounding regions of the Sydney metropolitan area to the list of regulated areas and imposed levies on those areas as well. This change of policy prohibited wastes from being taken outside of the Sydney metropolitan area as before and was further strengthened by legislation which applied the landfill levy at its source, not at its disposal point. In essence, market forces would have allowed wastes to be transported further afield from Sydney, but the interventionist policies determined that wastes should be deposited within the region so that the Government could maximise its revenue.
Then enter the Global Financial Crisis, which ground developments to a halt and created a surplus of recycled materials with little demand. Coupled with this, many new sites had obtained development approvals, and recycling capacity had virtually doubled from levels in 2006, but with a reduced market. As a result, many recycling operations are now up for sale and there are additional recycling operations still in the planning system (or which have obtained approvals but have not yet been set up) that are also likely to be up for sale, with the recycling market again at the whim of the Government.
KEY REASONS FOR MARKET FAILURE
Given the successful introduction of increased landfill levies in NSW in 2006, then why has the system failed? The first reason goes back to demand and supply. If there is an oversupply of capacity or supply, then all recyclers are prepared to pay higher prices to obtain materials, and reduce margins to sell materials. But, at the same time, most recycling operations benefit from economies of scale in that the more they process, the cheaper per unit rate per tonne cost. However, when volumes drop, it may not be easy to reduce costs by shedding staff or selling unused plant and machinery and so the operator has to absorb losses, which in a declining market cannot be passed on, and so the losses are exaggerated further. In essence, they suffer from dis-economies of scale.
The other factor that has been overlooked is that the NSW Government via the Environmental Protection Agency decided not to regulate small companies that operated below a specific threshold. This saw the rise of many small skip companies in the market that did not have the same controls as their larger competitors and did not have stringent development approvals for noise and dust emissions, nor for any leachates escaping the sites. These companies have led to the downfall of the system because of low entry costs into the market, quicker set-up times, less business regulation costs, and when the market turns sour, they can get out quickly, as they have little capital invested in their operations, and sometimes leave pollution behind at their sites with little prospect of landowners recovering their losses.
So the NSW Government has to date ignored requests from legitimate recycling companies that operate under the tight regulations to regulate the smaller operators so that there is a fair playing field for all. The difficulty is also to identify what percentage of market share the smaller unregulated companies have within the total market; because they are unregulated there is no way to measure their impact.
There are additional calls from the larger recycling operators for the NSW Government to provide subsidies for recycling materials to allow the recyclers to get through the difficult times. However, the reality of market forces means that many recycling operations will either not get off the ground, or others will fail and liquidate their assets, which will eventually reduce the over-supply in the market.
Therefore, should the recycling market be regulated from the top down or from the bottom up? There should at least be a level playing field and certainly tighter regulation needs to be applied to smaller operators.
THE VICTORIAN MARKET
We next look at the recent increases to landfill levies in Victoria. Figure 2 sets out the proposed changes to the levy up to 2014.
We then compare the Victorian increases to the current future increases to the NSW landfill levy proposals as set out in Figure 3.
It is likely that the Victorian recycling market will go through the same evolutionary process as NSW did from 2006. They both have the same starting point of circa $30 a tonne. It has been suggested that the Victorian market is very different to that of NSW, but the market forces are likely to be exactly the same. The original hike in new Victorian levies were effective from July 2010, with additional increases being announced in the recent budget and effective from July 2011. So it is still perhaps too early to measure any notable changes but the first phase should involve waste being transported from metropolitan to rural areas. The second phase should then involve many new small skip companies entering the market. This will, in turn, reduce the volumes currently processed at the larger, more established recyclers. Quarry operators should also see declines in primary aggregates, as recycled material volumes are increased. Once many of these issues come to light over the next few years, then we consider that the Victorian Government will have to address the issues and likely further increase the landfill levies year after year in order to maintain parity with NSW.
INNOVATION
In rural India, cow manure is collected and stored in a large container in the village centre, where gas is then produced for lighting and cooking. In pig farms in Holland, pig urine and manure is collected separately and later blended to produce ammonia, which can be used to produce gas for electricity generation. Landfill gas capture for electricity generation is now very common throughout the world. The introduction of approved wastewater treatment systems in Australia is also at the forefront of innovation, but, at present, the economics are not quite there.
So while many involved in the waste management and recycling industry tend to run with the landfill levy scheme, there are a few who see the opportunity for innovation, who try to design new machines to process wastes, maximise the capture of recyclables, and try to find new ways and new products from waste that in the past has been uneconomic to produce. To those few, we congratulate you. However, it will take several years, and certainly in NSW, whose clear intention is to increase landfill levies up to 2017, then this should encourage new innovation to not only create and develop new systems and new products, but to create jobs as well.
Investment and innovation can only take place where you have a level playing field and this needs to be fixed in NSW as a matter of urgency. Innovation is often rewarded where market forces are concerned by either higher prices or cheaper costs or both but this process could be speeded up by additional government intervention through offering incentives or grants or landfill levy offsets. So we are heading in the right direction, but still have a long way to go.
Roderick Stephens is an associate of the Australian Property Institute with the Certified Practising Valuer designation. Email: rodstephens@optusnet.com.au