March-April 2012

More Than Garbage Hauling and Dumps

Vertically integrated contracting for resources management

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• Market entry barriers.
• Economies of scale.
• Vertical integration.

These are economic concepts that roll trippingly off our tongues, as Hamlet might say. Familiar, rather intuitive, not difficult to understand.

• Market entry barriers—New businesses might not be able to jump the high hurdles that existing businesses have already vaulted: large capital investment, brand recognition . . . economies of scale and vertical integration. Market entry barriers can be a bad thing for consumers: less competition and higher prices.
• Economies of scale—The average cost per widget decreases as one makes more widgets. This can be a good thing for consumers: lower prices. (Although it is a market entry barrier that disadvantages smaller competitors.)
• Vertical integration—A single company owns multiple links in a chain of goods and services, like Andrew Carnegie in the steel industry. This can cut both ways for consumers: internalized costs might be lower…but then there could be less competition at each level with consequent higher costs.

Market Entry Barriers
Evident constraints on solid waste management—So, agreed: Market entry barriers, economies of scale, and vertical integration are easy concepts to grasp. But they can be difficult realties to deal with. Small to midsize municipalities and businesses have already experienced the potentially anticompetitive effects of this troika on solid waste management, which is a highly regulated, capital-intensive industry. For example, consider landfills:

• Market entry barriers—Siting, permitting, and constructing a new landfill takes years of struggle and millions dollars, and may ultimately be unsuccessful. The investment of personnel and money—and risk—is too great for all but the largest local governments and corporations.
• Economies of scale—The cost per ton of solid waste occasionally self-hauled in a pickup truck to a remote, rural, 0.2TPD landfill that must comply with costly regulations is relatively high compared to the cost per ton of solid waste continuously transported in transfer trailers to a mega landfill that receives 7,000 tons per day.
• Vertical integration of MSW service providers—The name of the waste management game is not Monopoly (as in horizontal monopoly of owning all the lots from Baltic to Boardwalk), but Chutes and Ladders (as in vertical integration of climbing incremental rungs to the top). Big business plans no longer aim to secure the largest collection market share, but focus on markets where the company owns all the links in the chain—every level of MSW management service—from discard to disposal.
• Similar constraints on resources management—Solid waste management is morphing into resource management. (See SWANA Executive Director John Skinner’s guest editorial, “From Waste to Resource Management” and John Trotti’s editorial, “The New Deal,” in the January/February 2012 issue of MSW Management.) Like solid waste management, resource management is capital intensive: conversion technologies (gasification, pyrolysis, plasma arc, hydrolysis and anaerobic digestion facilities that transform waste into fuel, chemical feed stocks and energy); or regional MRFs and marketing systems. As does solid waste management, resource management faces the same potential market entry barriers.

Question: Can small to mid-sized municipalities and businesses dodge the potentially anti-competitive bullets of market entry barriers, economies of scale and vertical integration?

Answer: Yes.

Vertically integrated contracting allows direct municipality control over each level of integrated solid waste management service through multiple contract services, while preserving competition at each level.

Historically, small to mid-sized municipalities that contract for waste management services have usually hired a hauler who collects, transports, and disposes of the municipalities’ refuse under a single umbrella contract. The contract hauler—not the municipalities—has arranged for disposal services. Contractually, municipalities can look only to that one contractor/hauler to provide disposal services…even though that contractor/hauler may rely on other MSW service providers further up the MSW services ladder to meet its contractual disposal obligations to the municipalities. Unlike a vertically integrated company that owns and controls collection and disposal facilities, municipalities have not controlled downstream waste management services like waste disposal.

However, today municipalities increasingly contract directly for collection and disposal services separately. Like vertically integrated companies, municipalities directly control each level of MSW service.