Private growth?: A fluid market for solid waste

Many municipalities in Europe and the US are handing over their waste collection and treatment to private companies. While the huge waste market is increasingly being dominated by a number of large companies, there is more to it than mergers and acquisitions alone …

by Gérard Bertolini

Local authorities are in general responsible for managing municipal solid waste (MSW). Some provide the service themselves while others entrust it to private operators. Today, there is a trend towards privatization of waste collection in Europe and the US, but the nature and extent of privatization in the waste sector differs between countries. The advantages and disadvantages of privatization can be considered in a number of ways. In order to compare approaches and regions, it is necessary to take into account not only direct costs, but also the characteristics of the collection area, the quality of the service, and both social and environmental externalities. Furthermore it is important to consider the short- and long-term impacts of privatization and to remember that, even if the service is privatized, the private enterprise is often supported by public money (via local authorities).

Waste treatment, however, is more likely than waste collection to be in the hands of private companies. And the more technical the treatment (such as the treatment of hazardous waste), the more likely a private operator will be involved.

The size of the market

Approximately 1840 million tonnes of MSW were produced worldwide in 2004; this figure is expected to rise by 31.1% between 2004 and 2008.1 Moving from a global to a national level, unsurprisingly the size of the waste market varies from country to country. It depends not only on population size and waste production, but also on the collection and treatment methods employed (and their associated costs). Table 1 gives an indication of the relative size of the waste market in different continents.

Again it is no surprise that some of the largest companies in this sector such as Waste Management, Inc. (US), Allied Waste Industries, Inc. (US), Suez Environnement (France), Véolia Environnement (France) and Remondis (Germany) operate in North America and Europe.

The bigger the better?

When considering the size of the market - and the merits of privatization - it also appropriate to consider what is the optimal size of the companies involved. There are a number of reasons why enterprises in this sector tend to increase in size.

• Only larger companies tend to have the resources available to plan, build and operate treatment plants.
• The restricted scope/geographical space for development - linked with ‘Not in My Backyard’ (NIMBY) pressures - encourages larger organizations to make best use of the sites available.
• More technical knowledge can accumulate and be exploited in larger companies.
• Larger companies benefit from the basic economies of scale.

There is no ‘free entrance’ into any market place - the price of the ticket to enter tends to increase in parallel with the evolving waste industry.

The final disposal stage lies at the heart of the market. As a result, a ‘hub and spoke’ model emerges - that is, treatment (the hub) provides the base from which collection strategies (spokes) radiate.

The fact that disposal tends to ‘lock’ the system is a particular concern for hazardous waste management. For example, there are currently 12 hazardous waste landfills in France (see Table 2), excluding those owned and operated privately by larger industrial companies. Eleven of these are operated by Suez and Véolia (mainly Suez through its subsidiary France-Déchets), and one by Séché. The most recent site was opened in Charenton/Cher in 1998. These landfills are not evenly distributed geographically throughout the country. Consequently there are restrictions on the type of collection strategies that can be offered and few companies have the capacity to fulfil the market requirements.

An overview of the main private operators in selected countries

United States

Traditionally the US market was led by Waste Management Inc (WMI) and Browning Ferris Industries (BFI). In 1997, WMI merged with (or fell under the control of, even if the name of WMI was retained) US Waste, which had earlier acquired American Waste, City Management Holdings Trust and Trans American Waste among others. In 1998, BFI was bought by Allied Waste - another big company in the U.S. market.

Waste collection and treatment are increasinly being handed over to private companiesClick here to enlarge image

Having previously made acquisitions in Sweden, the UK, Italy, the Netherlands and Spain, both BFI and WMI have since reduced their presence in Europe, with BFI selling its European activities to Sita (Suez) and WMI to several operators. WMI has bought the activities of BFI in Canada, and of Sita in Australia and New Zealand.

Looking at more recent figures, the final quarter earnings for WMI in 2005 were US$3.37 billion (compared with US$3.21 billion in the 4th quarter of 2004). Allied Waste reported total revenues in 2005 of approximately US$5.7 billion (compared with $5.36 billion in 2004) from the operation of 310 collection companies, 166 transfer stations, 169 active landfills and 57 recycling facilities.

France

Suez and Véolia are the market leaders in France. On the domestic front, they avoid direct competition where possible, preferring to opt for win-win solutions that expand their market share against other operators and which develop the size of the market. In addition, they look to expand into foreign markets such as Belgium, the Netherlands and UK for Suez and the UK and US for Véolia.

The size of national waste markets varies depending on population size, waste production, and the collection and treatment methods employedClick here to enlarge image

In 2005, the Suez Group recorded a net income of € 2.5 billion (up 48.1% from 2004), with Suez Environment contributing € 655 million (up 170% from 2004). Véolia Environment posted a net income for 2005 of € 623 million, up 59.1% from 2004.

Companies such as Séché and Electricité de France (EdF) are also big players in the French waste market. In 2002, Séché took the control of Trédi, which specializes in thermal and physico-chemical treatments of hazardous waste. Séché has also developed collection and disposal activities for non-hazardous wastes. In 2004, Séché’s annual revenue was € 333 million and it employed 2500 people. Tiru, a subsidiary of EdF, operates the major incineration plants for Paris. In 2005, the company’s revenue reached € 240 million (up 8.4% from 2004). Shares in Tiru are held by EdF (51%), Suez (25%) and Véolia (24%), but EdF recently announced its intention to withdraw from Tiru.

United Kingdom

In the UK, private investment increased following the requirement in the local Government Act 1988 that new collection and disposal facilities must include an invitation to tender. This opened up the UK market following the country’s more municipal approach dating from the early 20th century.

Estimates of the total value of the UK waste market vary. According to the Local Authority Waste Recycling, Recovery and Disposal (LAWRRD) model developed by the Department for Environment, Food and Rural Affairs (Defra), the UK MSW management sector is estimated to be approximately £2 billion (€ 2.9 million).2 Data from Biffa suggest the total value of the waste sector is approaching £3.3 billion (including MSW and industrial wastes), with five companies sharing about 56% of the market.

The trend toward privatization in the UK market opened up opportunities for foreign companies such as WMI and BFI, followed by Suez and Véolia. The market has seen numerous mergers, acquisitions and sales in recent years. Table 4 lists the main current players in the UK waste market.

Severn Trent, which acquired Biffa in 1991, took control of Waste Management UK in 2002 and became one of the market leaders. In April 2006, Severn Trent announced its intention to demerge Biffa to focus again on water, its core activity. Then, in May 2006, Severn Trent announced the sale of Biffa Belgium to Véolia for €45 million. In June 2006, Severn Trent announced its Group results for the year to 31 March 2006: turnover was up 13.2% to £712.3 million (€1000 million), with collection up 14.8%, landfill up 14.3%, special waste up 5.1% and power generation up 32.2%. Looking at earlier figures, the Group’s total turnover in 2005 was £2081 million (€3000 million), compared with £2015 million (€2900 million) in 2004.

Terra Firma Capital Partners bought Waste Recycling in 2003 for £531 million. Then in 2004, Shanks sold its 24 UK landfill sites to Terra Firma for £227.5 million (€328 million). At the time, the Shanks Board stated that technological and regulatory changes had increased the capital intensity of all segments of the waste management industry and, as a result, consolidation in the UK landfill sector was inevitable.

Further moves have taken place, including the sale of Cleanaway UK by Brambles to Véolia on 30 June 2006 for £595 million (€859 million). Brambles has previously sold Cleanaway Australia and New Zealand and Cleanaway Germany.

Belgium

A large part of the Belgian market is operated by groups from other countries. And, once again, the market has been active. Table 5 lists the main players as of 2003.

During the merger between Suez and Lyonnaise des Eaux et de l’Eclairage in 1999 at the request of the EU authorities, selected activities in MSW collection, industrial cleaning and treatments of hazardous wastes were sold to Shanks. Since then, Shanks has sold its hazardous waste treatment facilities to Véolia for £28 million (€40 million).

Suez has cemented its position as leading company in this market, having acquired Société Générale de Belgique, Tractebel, Fabricom, Europénne de Services, Electrabel and Watco. In 2006, Suez sold its industrial cleaning activities in Belgium to Remondis.

Germany

The value of the German solid waste market has been estimated (by Dorvil) to be approximately €35 billion, with about 10 large firms and 5000 small and medium-sized companies.

RWE was a market leader in this market, acquiring about 400 small and medium enterprises between 1989 and 1997. Then in 2004 it sold most of its waste activity to Remondis. In 2005, Remondis had a turnover of €3.3 billion and employed over 17,000 people.

In the metal recycling field, TSR Recycling GmbH & Co. KG is one of the major players in the German market, with over 80 sites operating in Germany and abroad. The company is owned by the Dutch corporation SHV (Steenkolen Handels-Vereeniging). SHV has stated that recycling activities in the US and Europe were 10.8% down in 2005, mainly resulting from lower scrap prices compared with 2004. Early in 2006, SHV announced its intention to sell TSR.

Another leading German recycler company is Interseroh, whose steel and metal recycling segment contributed the largest share in the company’s turnover, accounting for €698.16 million (compared with €810.49 million the year before). Like TSR, lower scrap prices in 2005 have impacted on revenue. (For a closer look at the German waste market, refer to the May/June issue of Waste Management World.)

Specialized versus diversified profiles

In the US, major companies have emerged which specialize in waste, some focusing on sub-markets. For example, Stericycle was created in 1989 - soon after the Medical Waste Tracking Act of 1988 - to treat infectious medical waste. After several acquisitions, it acquired (for US$410 million) the medical activities of BFI in 1998 and then the medical activities of WMI. It offers integrated collection and treatment, not only by microwaving but also autoclaving and incineration. Stericycle has developed activities in several other countries, increasing its revenue from US$46 million in 1997 to US$609 million in 2005. In 2006, Stericycle Inc purchased Sterile Technologies Group Ltd, a medical waste management business operating in Ireland and the UK for US$131 million.

Waste management is an active global market with large sums of money involvedClick here to enlarge image

In contrast, major companies in Europe have tended to run diversified profiles. In 2005, Suez generated total revenues of €41.5 billion, with almost three-quarters coming from energy activities, 14% from water and only 10% from waste. Similarly Véolia, which gained total revenues of €25 billion in 2005, generated 18% of its income from water, 24% from waste, 16% from energy and 12% from other activities. As a final example, the market leaders in the waste sector in Spain (FCC, Ferrovial and Dragados) have a broad ‘public’ focus ranging from waste management to quarrying and the building industry. Both Suez and Véolia have engaged then disengaged in Spain.

Most of the corporate groups have, after a period of major acquisitions, generally encountered difficulties, in particular excessive debt. This has led to demergers and the sale of assets, enabling the groups to focus on their core activities. It is interesting to note that some companies are more vulnerable to takeover bids than others. For example, the shares of Véolia are held mainly by financial ‘institutions’ (with only 8.8% being on the market), while 90% of the shares of Suez are on the market.

Is it a complementarity between energy, water and waste?

The relationship between energy and waste primarily relates to incineration with energy recovery and, to a lesser extent, biogas from landfills or methane plants. Exemplifying this bond is the planned merger between Gaz de France and Suez. Both groups have stated their objective to put the proposed merger to their respective shareholders during December 2006. In May 2006, the respective bosses Gérard Mestrallet (Suez) and Jean-François Cirelli (Gaz de France) commented: ‘The plan to merge Suez and Gaz de France derived from the shared objective of becoming a major player in the energy and environment sector. The work accomplished jointly by Suez and Gaz de France teams over the last month has already resulted in identifying more than €1 billion in synergies. The upward revision confirms our conviction that this merger is based on a sustainable industrial project which will create significant value for shareholders, clients and employees of the two groups.’

With water, the relationship is less obvious and relates primarily to the treatment of sludges. Like water, and indeed energy, one can consider waste services as a ‘utility’, delivering a parallel service to the same (industrial or municipal) customers.

Concluding remarks

Market activity in recent years has demonstrated that sustainable mergers in the waste sector are not easy to achieve. That said, the question over whether to pursue a specialized or diversified profile has yet to be resolved. Further re-arrangements in the industry are probable.

The increasing role of financing in the waste sector has the potential to be a stabilizing or destabilizing force, depending on the nature of the finance (institutional investment, stock market, investment funds or hedge funds). What is clear is that chaotic movements would be detrimental to a sector with good results and favourable prospects.

Gérard Bertolini is an economist at the French National Centre of Scientific Research, University of Lyon, France.
e-mail: berto@univ-lyon1.fr

Notes

1. Global waste management - Market assessment, March 2004, Key Note Publications Ltd.

2. Office of Fair Trading (OFT), More Competition, Less Waste, OFT, May 2006. See www.oft.gov.uk/News/Press+releases/2006/87-06.htm

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The global recycling trade

The recycling trade is dominated by the import and export of recycled metallic (ferrous and non-ferrous) scrap, waste paper and plastics. The US is the top exporter in terms of quantity - mainly to Asia (particularly China). In Europe, approximately 23% of ferrous metal scrap was traded between Member States in 2001 while 10% was exported outside the EU. About a quarter of the waste paper collected was exported, with approximately 8% heading out of the EU and 15% remaining within Europe.