We should use the term “Service Fee” instead of “Gate Fee”
By: Mike Ritchie, MRA Consulting Group
Most people in the waste/recycling/circular economy space, use the term “Gate Fee” to represent the fee charged at the front gate of a landfill, MRF, EfW, Reprocessing Facility, etc.
I want to suggest that it is a misguided term and is limiting understanding of the sector.
This article may look too nerdy, but hopefully you will read on to why it is important.
Background
How often have you heard “Waste is a resource. It is a commodity. We need to start thinking that way”.
The reality is all waste and most recycling is a resource only if more money is spent converting/reprocessing it, than it is currently worth.
The reason it is a waste is that it has negative value. Someone has it and wants to get rid of it for the least cost possible.
That is equally true for most recyclables (see below).
So, most waste is only a resource if you are completely blind to the economics of using it. A “latent resource” yes, a “potential resource” yes, a “reservoir of resource” yes but a resource only if someone subsidises its reuse/reprocessing so that it becomes something valuable. When it is valuable (positive economic value) we call it a commodity.
Show me a market where commodities are sold for negative value. They don’t exist.
We need to get beyond simple slogans and look properly at the economics of the sector. And explain it.
I am so tired of reading reports by the Big 4 and others, who fundamentally misunderstand the economics of waste/recycling.
Very few materials in the waste sector can be treated as commodities until they are reprocessed, refined, decontaminated etc (below). That requires funding.
Gate fee
Firstly, let me explain what the gate fee is, for those that may be new to the term.
It is the fee charged by waste and recycling facility operators to take the material and process it.
In the case of landfill the gate fee covers the operating costs of putting a tonne of waste into the ground, covering it, monitoring it, paying any taxes (e.g. landfill levies) and profit.
In the case of most recycling facilities, the “gate fee” ensures the difference between revenue from sales of recyclables and operating costs, is overall positive, so that the business can make a profit. Profit= (Sales revenue + gate fee revenue) – opex. Without a gate fee, most recyclers would go broke. The only difference with landfill is that for landfills there is never any sales revenue.
But some recyclables are sold as commodities
Of course, there are some recyclables that have enough inherent value that they don’t need a gate fee. The value of the material covers all of the costs of reprocessing and sales. Think cardboard, steel and aluminium. These materials are sold just like other commodities such as a tube of toothpaste. I pay you and you give me the toothpaste. Simple.
But for most recycling in Australia this is not true. (And is never true for landfill or EfW).
If most recyclers did not charge a gate fee, they would lose money and go broke. Think yellow bin mixed recyclables, plastic, soft plastic, glass, timber, mixed construction waste, mixed food and commercial waste, batteries, mattresses etc etc. The costs of collection, reprocessing and sales is more than the product is worth. This includes all the materials that we love to talk about – coffee cups, plastic bags, packaging, pharmaceutical trays, mobile phones, paint, batteries, polystyrene etc, etc, etc. All of these materials require a gate fee for the recycling operation to be viable.
IF they are commodities, then they are commodities with negative value.
I think that distinction confuses a lot of people. Some recyclables are traded like a commodity (cardboard, steel, aluminium) but most are not. Unless you are in the sector you may not know which materials require subsidies and which do not.
I think we should make the distinction clearer by using a term that better tells people what we are doing.
Most recycling and all waste disposal facilities are providing a service – recycling it, landfilling it, incinerating it etc. The gate fee is a service fee.
Supply and Demand
Why is that important?
Back to my toothpaste example. Toothpaste is traded like any other commodity. I hand over cash and I get the toothpaste. For high value recyclables (cardboard, steel, aluminium) it works. I give you a tonne of cardboard and you give me $100. Aluminium $1200/t. etc
But for most waste and recyclables, they have no inherent commodity value in their current form. They have negative value because the recycler has to spend more money processing than they get in sales revenue. (Always true for waste).
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Therefore, when we think of a tonne of waste or recyclables as a commodity, the Supply and Demand curves don’t work. The material has negative value. Very often I read reports from people who should know better which assume the economics of cardboard, steel and aluminium apply to all other recyclables. They don’t. So, how do we rethink negative value. Simple. Think of the service we are offering as just that. A service.
When we think of waste/recycling primarily as a service, Supply and Demand work.
Service
I hand over cash AND I hand over my tonne of waste or tonne of recyclables. The service provider then takes that material and does something with it (for me).
So, it is more realistic to think of the Gate Fee as more like the fee you might pay a house-cleaner. You pay the money. You get a service.
The key point is that the Service is never free. And all waste and most recycling requires this service fee.
(Yet we still have thousands of landfills in Australia not charging a fee.)
Using a “Service Fee” nomenclature properly tells the community and politicians what we are doing. We are providing a service.
It may be a bit of a letdown to some, but it is reality.
Furthermore and most importantly, the less recyclable the material is (the more mixed or contaminated it is), the higher the costs of reprocessing it and thus the higher the Service Fee needs to be.
For the economists, the supply and demand curves also work.
As the Service Fee (Price) rises the demand for the Service (e.g. landfill disposal of my waste) falls.
As the Service Fee for landfill rises, other Suppliers (e.g. recyclers) want to provide the Service and enter the market. Rising Service Fees encourage more recyclers to enter the market. (Hence the role of the landfill levy in driving up the Service Fee).
Conclusion
Put this way we can more easily explain to economists, politicians, and policy makers what the waste/recycling industry actually does.
We provide a processing and disposal service for most negative value material (all waste and most recyclables) and trade in recyclable commodities where it has positive value. The Service Fee allows us to convert negative value materials into positive value materials which can be sold (as commodities).
This explains why some materials require a gate fee and others do not.
So, my simple pitch is to change all the signage and policy papers etc from “Gate Fee” to “Service Fee” where appropriate and start distinguishing service functions from commodities, along the supply chain.
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It is only a commodity when it has been converted from negative value to positive value, and someone needs to pay for that service.
Mike Ritchie is the Managing Director at MRA Consulting Group.
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