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

Forms of contestability identified

An established recycling operator has two specific assets that diminish the opportunities available to a newcomer to the field to compete for his sources of supply. First of all, the recycler's location, providing optimum access to the resource via the fleet of independent collectors who come to offer him their collection batches, and easy access to road and rail networks, etc., so that he can deliver the secondary raw materials to his customers (the steel manufacturers) at least cost. Then, the incentive mechanisms used to support transactions on the input market: on the one hand, development of a reputation network among a sub-group of collectors, and on the other hand regulation of the collection effort via the selective transfer of information and expertise, which becomes a specific local asset for the suppliers.

To compete over the longer term with a historic recycler, potential new entrants would have to fulfil the following requirements:

  • [C1] install their business activities in the centre of a collection area of considerable size offering ready access to available resources in the spectrum of grades matching the profile of the materials to be produced for the output market,
  • [C3] have a site connected to the hub of transportation networks so as to transport the different grades of materials to the users,
  • [C4] equip the production site in compliance with prevailing regulations;
  • [C5] invest in material processing tools (shredder, shearing machine and waste processing technology),
  • [C6] develop within that collection perimeter the reputation network needed to support and coordinate collectors' efforts in order to overcome the sources of market failure when quality cannot be objectively assessed

If he is unable to meet conditions C1, C3 and C6, the potential entrant will be unable to generate the necessary flows of material (in quality and quantity) to ensure a profitable activity and the costs incurred to fulfil conditions C4 and C5 will prove to be wasted investments.

From the standpoint of the historic recycling operator, if he were obliged to relocate his business the collection capabilities would have to be deployed over the new area. He would have to find a site offering the same potential and re-constituting the specific local assets he would have abandoned on leaving his previous location. The cost of relocating is therefore potentially high, in this case, for the recycler would have to (i) find a new area with resources offering sufficient potential(24), (ii) reconstitute the necessary reputation network needed for his transactions with suppliers situated in the new area, (iii) invest in bringing the new site into conformity and (iv) ensure that the site connects up with the pre-existing transportation networks.

From the sole standpoint of the profitability of his business it is therefore preferable for the recycler to concern himself with any problems that might challenge his right to exercise his economic activities across the geographical area currently occupied. Among the threats to be countered, it is in the recycler's interests to identify all sources of environmental and health risks that might threaten his social licence to operate and that might result in a reduction in his access to the sources needed for his activity, or perhaps even cause him to have to relocate.

When exposed to a threat of contestation of his activities on environmental or public health issues, the recycler who wishes to avoid losing the benefits of access to its present area of collection must manage ahead of time any potential risks to the community arising out his activity, his products, his waste or the processes he uses. If the risks to the public are directly attributable to his activity, to the point of threatening its continuance, the recycler will be unable to disengage himself without considerable economic loss. Even if the potential risks are attributed solely to the material resources for collection, the recycler's access to those resources alone may be restricted and this will affect the profitability of his business. It is therefore rational from the standpoint of the recycling firm to make every effort to prevent the emergence of risks to the public relating (i) either to the business itself or (ii) to the flows of materials processed. For the recycler to ignore those risks would recklessly endanger the sustainability of the business in its current location. Within the context of a risk prevention approach, the recycler must carefully watch all sources of collective risk whose presence might be likely to encourage the arrival of competitor firms or new collectors whose size might allow them to encroach upon and reduce the profitability of his activity.

To summarize the aforesaid, it is necessary to take into account the transactional conditions on the input market to explain the link between economic contestability and social contestability. Indeed, some of those failures on the input market are likely to trigger protest movements against the activity and siting of an established scrap metal recycling firm.

By generating nuisances for residents living within the vicinity of the recycling plant, a link is established between market failure and the awakening of a protest movement or "Nimby" process. Indeed, mistrust of a recycler suspected of taking advantage of his greater expertise can induce some suppliers to choose a strategy of defection in quality that would increase the risk of incidents and nuisances generated by the metal recycling activities. To this finding related to local nuisances can be added another in terms of more general risks to the public: market failures and the consequent lack of trust during transactions between the recycler and his suppliers might create industrial and environmental risks of such scope that they affect both players outside of the branch of activity and operators active within it.

(24) Remember that the collection area should ideally be near industrial sites and urban areas, providing sources of different types of scrap metal for recycling.