Municipal waste companies will lose up to 50 million euros in the next few years from market-based sales - Will enough similar private services be created in the sector?

(For subscribers.) The majority of current municipal waste companies will be forced to cut their current market-based services. Two separate legislative changes will reduce the market-based waste management service selection of municipal companies in the future. First, the European Court of Justice (ECJ) ruled in January that the turnover of subsidiaries established by municipal affiliated entities must be included in the market-based sale. This means in practice that if a Finnish municipal waste company wants to maintain its affiliated unit status, its total out-selling of market-based services, even in subsidiaries, must not exceed a certain limit. Secondly, the government in Finland is now proposing that this sell-off limit be tightened in the waste management sector as well, to five percent from the current 10 percent. According to an impact assessment conducted by the consulting company Owal Group, the combined effects of these policies in Finland would result in a significant portion of current municipal waste companies exceeding the sales limits. They could have to downsize, reorganize, sell off or even close down their market-based service offerings in order to maintain their affiliated unit status. 16 municipal waste companies out of a total of 26 current waste companies would exceed the proposed five percent divestment limit. Waste fees are likely to increase. According to a study by a consulting company, the proposed regulatory changes would reduce the market-based operations of municipal waste companies by approximately 48–58 million euros. The European Court of Justice's decision alone reduces the permitted divestment of municipal companies by approximately 24 million euros per year. The government's proposal to tighten the sales limit to five percent would force municipal companies to cut their sales by much more than this. According to the study report, reducing market-based sales will reduce the amount of waste processed by waste companies and thereby increase the unit costs of processing. This may increase pressure to increase waste fees for residents and companies that purchase services. The policies may even lead to declines in service operations. The consulting company Owal Group, which has assessed the impacts, is examining the effects of the government's proposed amendment to the Waste Act on the Finnish waste management sector. The European Court of Justice's decision also has implications because it changes the established interpretation of the position of subsidiaries in affiliated entity regulation. The operations of subsidiaries will be taken into account as part of the divestment of affiliated units. The report emphasizes that, at the time of the study, questions related to the detailed effects of the ECJ's decision were still partly open. It is not yet known how the application of the ECJ's decision will affect the calculations in practice. In any case, the tightening of the sell-out limit proposed by the government and the EUT's policy require municipal waste companies to re-examine how they organize their operations and what kind of services they want to offer on the market. It may be that the policies would require municipal companies to sell, liquidate, or reorganize their subsidiaries. Reorganizations require administrative work. The tightening of the sales limit reduces the market-based operations of waste companies, which reduces the income of waste companies, reduces the amount of waste processed and thus weakens the utilization rate of treatment plants. The report predicts that significant changes in waste volume could lead to temporary interruptions or even shutdowns of facilities or services. Economies of scale may be lost. Municipal waste companies sell their services on market terms to companies and operators in, for example, the construction, trade, industry and agriculture sectors. In addition, private waste management companies that do not have the infrastructure to offer their customers such services, as well as small waste transport companies, purchase services from municipal waste companies, especially those related to waste incineration, landfilling and biowaste processing. The Owal Group report highlights that the construction of waste treatment plants requires long-term and large investments and sufficiently large waste volumes. Therefore, smaller operators generally do not have the opportunity to establish such facilities. Building parallel, competing plants is not economically efficient if it results in the plants operating at undercapacity. In waste management, large facilities produce economies of scale: as the amount of waste processed in a single facility or processing area increases, the unit costs of processing decrease. This principle has led to municipalities in Finland establishing joint waste management companies. They can build infrastructure such as plants, reception stations, processing fields and disposal areas to centrally and cost-effectively process the waste volumes in that area. Unit costs for waste transportation also decrease as the amount of waste transported increases. Waste fees may increase. Reducing market-based operations would affect the cost structure most in waste companies that have invested in their own processing capacity, such as bio- and incineration plants. In these areas, the decrease in the amount of waste received by the municipal waste company for processing increases unit costs the most. Based on interviews and data sources, Owal Group estimates that costs may increase by a few percent to almost 20 percent. Waste fees charged to residents and companies could also increase by an average of several percent, according to estimates. However, the magnitude of the impacts also depends on whether market-based waste streams can be replaced by other waste streams. Private companies purchase the services of municipal waste companies. The services of municipal companies are needed especially for construction and demolition waste, soil, industrial waste, mixed waste directed for energy recovery, and sludge. Private operators also purchase hazardous waste and special waste processing services, such as healthcare waste, from municipal companies. Subsidiaries of municipal waste companies sell similar services, especially the reception and processing of soil and rock materials, the processing of waste for use as fuel, heat production, the reception of contaminated land, the production and distribution of biogas, and more specialized services such as the processing of information security materials. In addition to market-based sales, waste producers and private waste management companies purchase treatment services from municipally owned waste companies as services provided under the TSV service, i.e. secondary responsibility. TSV services practically include the same services and waste fractions as services offered on market terms. However, they are negotiated differently than market-based services. In practice, TSV services must be implemented through the Material Market. The process has been criticized as slow and impractical. The government's proposal includes proposals to streamline the use of the Material Market, but the proposals would also increase the administrative burden. How are waste station services handled in sparsely populated areas? Owal Group anticipates that as sell-out limits tighten, some of the services previously offered on market terms may transition to TSV services in areas where there is a market shortage for the services in question. Whether municipal waste companies offer their own services to market operators as TSV in this case depends on whether the TSV procedure is suitable for the waste company's processing capacity. In the new regulatory situation, waste companies choose which services they will continue to provide. The report notes that as a result, certain treatment services or services related to certain waste fractions may be significantly reduced or cease completely. It may become more difficult for companies to obtain, for example, landfill services. The establishment, maintenance, permit processes and after-care of landfills cause large fixed costs for municipal waste companies. They must be taken care of in any case, even if market-based sales decrease due to sell-out restrictions. If the costs cannot be covered, some landfills may have to be closed early. The waste station operations needed by companies may also decrease. There are an estimated 250–300 municipally owned waste management company waste stations operating in Finland. The waste station network of private waste management companies is significantly smaller: approximately 50–60 waste stations. Transfer stations and transport services partially fill regional gaps. However, Owal Group anticipates that a genuine market shortage may arise in receiving small loads from companies, especially in sparsely populated areas. If the practices of the Material Market and the associated administrative bureaucracy are too rigid for services provided under secondary responsibility, there is also a risk that small waste loads will end up being dumped into nature. Where is the waste that companies burn treated? The availability of incineration treatment for corporate waste in particular may decline. Of the nine waste incineration plants operating in Finland, eight are owned by municipalities, municipally owned energy companies or waste companies. If waste companies were able to sell waste incineration capacity on less market terms, private waste management companies would either have to purchase waste incineration services directly from incineration plants that provide them or deliver their waste to be burned for export abroad. Although there is currently overcapacity in waste-to-energy plants, due to contracts and ownership structures, only a limited amount of incineration capacity can be purchased from the market. Municipal companies are concerned about where companies' non-recyclable mixed waste will be processed in the future if municipal waste companies can no longer sell this service. The situation is better when it comes to biowaste treatment, as there are also private or state-owned companies offering biowaste management on the market. Business opportunities open up in construction and demolition waste. As municipal waste companies reduce and curtail their market-based services, this opens up new markets for private companies in the waste management sector. Tightening the sales limit may lead to part of the waste management market's turnover being transferred from municipally owned companies to private companies. The report sees that business opportunities for waste management companies can grow, especially in the processing of construction and demolition waste, biowaste processing, and specialized recycling services. The private waste management companies interviewed for the study assessed the impacts of the regulatory changes on their own business positively. Companies estimate that tightening sales limits will increase companies' turnover and employ new employees. Companies were likely planning to increase their investments by up to millions of euros. The study report notes that some of the sales would, however, be transferred to the TSV service and not to the business of individual waste management companies. Private companies are not able to significantly offer landfill placement or incineration, at least in the short term, because the investments are large and require consistent, large waste volumes. Regarding incineration capacity and landfill placement, the report predicts that regulatory changes may even weaken the position of private waste management companies if they are no longer able to procure these processing services from municipal companies. Regulatory changes may also increase costs for private waste management companies. The 20 percent sell-out limit was not examined. When the ECJ's decision was made public in January, many representatives of municipal waste companies hoped that Finland would raise the sell-out limit to the same level, i.e. 20 percent, which is generally followed in Europe. This would provide opportunities to continue to utilize the already built processing infrastructure cost-effectively. In Finland, a stricter sell-off limit has previously been justified in Parliament specifically by the fact that the sell-off limit only applies to the parent company, and the operations of subsidiaries are not restricted based on the sell-off regulation. According to the ECJ's decision, this interpretation is no longer valid. Now, the sale of subsidiaries is also counted as a sale of the parent company. However, the government or the Ministry of the Environment did not ask Owal Group to assess what kind of effects it would have if, instead of tightening the sales limits, Finland were to increase the sales limit for waste companies to the European level, to 20 percent. The government's progress draft states that raising the sell-off limit to 20 percent is not proposed because the proposal would not be in line with the government program. However, the justification for the Waste Bill states that a 20 percent sell-off limit would better prevent any unforeseen and uncontrollable consequences that may arise from the ECJ's decision. The sell-off limit is not being maintained as it is now. Owal Group therefore examined three options: a 10 percent sell-off limit, i.e. the current sell-off limit in a situation where the possible effects of the European Court of Justice's decision have been taken into account, a five percent sell-off limit, and a limit of five percent and 500,000 euros per company. Of these options, the 10 percent sell-out limit had the smallest reduction in market-based sales compared to the current situation. The justification for the Waste Bill states that keeping the sell-out limit unchanged could, to some extent, make the use of available waste treatment capacity more efficient compared to a situation where the limit were reduced to five percent. A higher sell-out limit would provide room for maneuver, allowing a municipally owned waste company to sell its available recovery and processing capacity to its customers on market terms, if necessary. A 10 percent sell-out limit would allow for a market-based operation of 47 million euros, the waste bill states. However, the sales limit will not remain unchanged at 10 percent in the current waste bill, because the purpose of the government program is to significantly limit the market-based operations of municipal waste companies. According to the justifications for the Waste Bill, the ECJ's decision will have direct consequences for only six municipal waste companies, while other municipal waste companies could in practice maintain their market-based operations in line with the current situation. Significant consequences for the waste management system Owal Group estimates that overall the proposed regulatory changes would have a significant impact on the functioning of Finnish waste management. They would increase business opportunities for private waste management companies, but at the same time they could increase waste fees not only for local residents but also for private waste management companies. The changes may reduce the availability of some waste management services, lengthen transport distances and thereby increase transport emissions and reduce the cost-effectiveness of waste management. However, there are considerable uncertainties associated with the impact assessment in a situation where the interpretation by the European Court of Justice is still pending. Text: Elina Saarinen,Uusiouutiset

(For subscribers.) The majority of current municipal waste companies will be forced to cut their current market-based services. The range of market-based waste management services offered by municipal companies will be reduced in the future by two separate legislative changes. Firstly, the European Court of Justice (ECJ) ruled in January that the turnover of subsidiaries established by municipal affiliated entities must be included in the market-based divestment. This means in practice that if a Finnish municipal waste company wants to maintain its affiliated entity status, its total market-based divestment of services, even in subsidiaries, must not exceed a certain limit. Secondly, the government in Finland is now proposing that this divestment limit will also be tightened in the waste management sector to five percent from the current 10 percent. According to an impact assessment carried out by the consulting company Owal Group, the combined effects of these policies in Finland would result in a significant proportion of current municipal waste companies exceeding the divestment limits. They could have to downsize, restructure, sell off or even close down their market-based service packages in order to maintain their affiliated unit status. 16 municipal waste companies out of a total of 26 current waste companies would exceed the proposed five percent divestment limit. Photo: Table Owal Group. Number of waste companies exceeding the divestment limit and population in the waste companies' operating areas with different divestment limits, taking into account the ECJ's decision. Waste charges are likely to increase The proposed regulatory changes would reduce the consultancy company's...

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