INSTITUT Veolia Environnement

  • Home
  • Report n°2: An integrated approach to economic and social contestability in business

Report n°2: An integrated approach to economic and social contestability in business

Threats weighing on access to the resources

Two forms of threats on the recycler's economic position arise out of these basic traits.

A first threat is the loss of access to resources previously available to the fleet of independent collectors working for the recycler. The historic operator must evaluate the plausibility of a threat a new operator entering the collection area, and that the newcomer might enjoy reserved access to resources that would then become prohibited to other operators, including the historic operator. This second threat might result from the emergence of a risk to the community attributed to the materials for collection. That threat is all the more credible since for scrap iron recycling there is no compartmentalised channel for each type of waste and it is impossible to systematically separate on purchase the material to be recycled from its associated wastes(18), for instance heavy oils from industrial dynamos, batteries from cars or trucks. All it takes is for the public to question the harmlessness of a waste associated with the material for recycling and the public authorities may be willing to make sweeping changes in the organisation of the collection and processing of the relevant materials and wastes, with the consequent degradation of the modes of procurement and access to the recycler's scrap resources. If the recycler cannot act effectively and preventively to reduce the risks associated with such wastes, for example by introducing its own channel for the de-contamination of the objects after shredding, this will increase his external economic contestability. In other terms, and paradoxically, it is in the recycler's interest to reduce the objective bases of an environmental or health risk because in doing so he reduces his exposure to a threat of economic deterioration on the input side of his activity resulting from the introduction of new public or private operators (external threat from the competition).

Secondly, the public authorities can allow access to flows of material to a restricted number of new or existing collection operators who meet specific conditions. This would increase the negotiating power of these suppliers who could use it either to influence the pricing structure practised by the historic operator (transfer of the rents generated by the transaction towards these traditional suppliers with increased bargaining power). Or to demand more or less costly capital investments as a condition of their obtaining access to the flows under consideration (cf. the case of a car manufacturer). This prospect is similar to a leverage effect, from inside the branch, operated on the historic recycling operator. An internal leverage effect exists if one of the operator's customers or suppliers is in a position to impose the recycler's compliance with particular standards, legal or voluntary. The purpose of such a step is to eliminate a possible source of a social contestation on an environmental or safety issue that would affect at least one of the parties, but perhaps also the entire branch of activity. For instance, an industrial vehicle manufacturer may want to ensure that the process of recycling his "dead stock" takes place in conditions that will avoid any social contestation aimed at the recycling operator from impacting him (the vehicle manufacturer) indirectly.

We note however that if the restriction on access to the resources works in favour of the historic operator, once that limitation is introduced (1) it may constitute a barrier against the entry of new operators, (2) for the historic recycler it further reduces the interest of an alternative site outside of the collection area affected by the rules restricting access to the resources (exit barrier) and lastly (3) it can offer him the possibility of competing with other recycling operators by extending his collection perimeter if the regime of limitations exerted on access to the different resources are not equally favourable to the other established recycling operators.

The box below summarises the different elements of reasoning used so far.

(18) A ususal expression states that "it is necessary to pay the non-valuable waste fraction to have access the valuable ferrous fraction".

assets within the upstream perspective

Upstream perspective, based on:

  •  "Production equipment = asset whose profitability depends on the supply of materials"

We identify the factors determining entry to and exit from the upstream market

  • Cost of investment in the productive equipment (shredder) defining a minimum business horizon and measured as the cost of making the production site operationally compliant.

- Barrier to entry for a new operator, exit barrier for a historic operator
- Reduces exposure to a threat of external economic contestation up to the business horizon

  • Collection area with good potential near sources of both types (urban and industrial),

with no restrictions on access to resources

  • Lack of access barrier to resources attracts a new entrant
  • Cost of relocation for a historic operator if an alternative geographical area has lower potential

- High exposure to contestation by competition = high external economic contestability

  • Location at the hub of transportation networks that are public assets,

not rival and not excludable asset

  • Available to a new entrant
  • Cost associated with an alternative location for the historic operator if the facilities are less well-developed

- Exposure to contestation by strong competition = high external economic contestability

Restriction of access to resources

  • On the public authority initiative, because of the collective risks imputed to the materials collected or to the waste associated with those materials

If it is in favour of the recycler

- Reduces the probability of new entry in future = low external economic contestability

- Increase in the negotiating power of collectors knowledgeable about the value of the materials = high potential internal contestation to the position of the recycler

If it is not in favour of the recycler

- Arrival of a new entrant: increased exposure to contestation from competitors

- To reduce his exposure to the threat of economic contestation, the incumbent operator must reduce the sources of risks associated with the resources to which he has access, or must anticipate the restrictions on access that result from those risks.