Eoin Reeves: In late December 2009 the Irish Times reported that High Court judge (Mr Justice Liam McKechnie) ruled that Dublin’s four local authorities had breached competition law by abusing their dominant position in the household waste collection market in a bid to remove rival private operators. According to the Irish Times:
“Mr Justice Liam McKechnie today quashed a variation to the Dublin region waste management plan whereby only the councils, or contractors appointed by them, could collect household waste”.
A number of interesting issues arise from this particular ruling.
First, according to the Irish Times (December 21st) the judge stated that the actions of the local authorities:
“substantially strengthen the position of the local authorities and substantially influence the structure of the market to the detriment of competition.”
My understanding is that the local authorities sought to exercise more control over the waste collection market by putting contract(s) for waste collection out to competitive tender. The successful bidder would then enjoy monopoly rights to collect waste in accordance with a written contract. This would replace the current system where private operators such as Panda and Greenstar collect waste on the basis of permits (not contracts) issued by the local authorities. These private collectors then compete against each other for customers. Would the change to competitive tendering influence the structure of the market to the detriment of competition as the judge stated?
In my view this argument is very questionable and I have strong reservations about the soundness of the judgement (as reported in the media). It is not clear that the judge has made the distinction between competition in the market and competition for the market.
When the privatisation of refuse collection services came into vogue in the Great Britain in the late 1980s the proponents of privatisation argued that the benefits of competition could be reaped via competitive tendering (competition for the market) and that this was an efficient substitute for competition in the market. In terms of cost efficiency they were proved correct with a host of empirical studies demonstrating that significant costs savings (between 15%-20% on average) were made by moving from direct public provision to private provision after competitive tendering (notwithstanding issues in relation to deterioration of working conditions etc). A key point was that the competitive tension inherent in the tendering process was the key to efficiency gains. These gains were not attributable to privatisation per se. This was evident in cases where local authorities won contracts and also delivered cost savings after competitive tendering.
For a service like refuse collection the argument for competitive tendering is compelling in terms of cost savings. Moreover, the nature of the service is straightforward so writing and enforcing contracts should not be problematic. The contract serves as an instrument for regulating a market where externalities are potentially significant (e.g. illegal dumping in the face of prices set by the private sector) and where market concentration can emerge as dominant private operators squeeze out rivals. The implication of the ‘McKechnie ruling’ is that a market free-for-all is necessary if arrangements are not to be anti-competitive. This results in a light-touch form of regulation compared to contracting out.
It is interesting the note that the Competition Authority has examined this issue in a document published in 2005. Mr. Paul Gorecki, who was then Director of the Monopolies Division in The Competition Authority summarised the findings of the report as follows
“The market for household waste collection is not working well for consumers. Competition law is neither an appropriate or effective remedy in this case. However extensive international experience demonstrates that competitive tendering is the best method of ensuring that household waste collection providers deliver consumers good service at competitive prices.”
Assuming that Dublin’s local authorities were indeed seeking to replace a permit system with competitive tendering there are serious question around the economic reasoning behind the McKechnie ruling.
Some other issues arose from this ruling. These concern the PPP contract for the Poolbeg Incinerator as well as the role of consultants and their influence in shaping public policy. I hope to return to these issues in later posts.
Eoin Reeves is head of the Department of Economics at UL and Director of the Privatisation and PPP Research Group. His research interests lie primarily in the economics of infrastructure and the public-private mix in public service delivery. This includes issues such as privatisation, liberalisation, and different forms of private sector participation in the delivery of public services.
Eoin has published a number of economic studies of such reforms in edited books and international peer-reviewed journals. These include analysis of the privatisation of state owned enterprises (Annals of Public and Co-operative Economics, Telecommunications Policy), employee share ownership in the context of privatisation (Economic and Industrial Democracy, Employee Relations), contracting out public services (Economic and Social Review), PPP in schools (Public Administration, Public Money and Management) and PPP in Water Services (Economic and Social Review). He recently co-authored a book titled Privatisation in Ireland – Lessons from a European Economy.