A heated holiday case study
Few today would disagree that decisions should be evidence based. But how can this be when decisions on infrastructure are decisions about the future – about future demand and future supply. Consider the following decision about the wisdom of expanding waste incineration capacity in the UK. The facts were not in dispute, but the disagreement was heated.
The facts were these. In Europe incineration had been widely adopted by member states with eight large incinerators burning more than one third of municipal waste. However, re-use and recycling are more profitable as well as sounder environmentally, so countries were doing their best to first, reduce the total amount of waste generated, and then to re-use and re-cycle as much of the rest as possible. The more successful they were in this environmental move, the less the feedstock that became available for the incinerators. Concern then started to grow over excess capacity in the expensive incinerators.
Compounding this problem was the European Commission’s green paper on “A European Strategy on Plastics” that reported that just over 20% of plastics used in Europe were recycled, half going to landfill and the rest going to energy recovery, i.e incineration. The Commission called for 100% collection rate for plastics alongside efforts by manufacturers to use plastics more sustainably and to make re-use and re-cycling easier.
Now this is where the story gets interesting. At the time, the UK had about 18m metric tons per year of incineration capacity (either existing or under construction) and about 27m tons of residual waste – or a gap of about 9m tons, material for landfill. If the EU targets were met, increasing recycling from less than 42% to over 78% it would take out all 9m tons, This was before considering reductions in commercial and industrial waste which were also subject to waste reduction programs.
Development consents had already been given for between 2m to 4m tons of further incinerator development and were continuing to be given.
Over – or under Capacity? This gave rise to a very public, and very fiery, debate between two major environmental consultants. One argued that the UK was headed for over-capacity in incineration, the other said not. Both had access to the same information given above and did not dispute it. So why were they in such disagreement?
1. They were in dispute not over the current situation but the likely future. One argued that heavy oversupply of incineration capacity in Europe would attract feedstock from the UK at more favourable prices than could be offered by local incineration. The other argued that, although there was excess supply in Europe, the export markets were volatile, unpredictable and prices unreliable and this would encourage UK facilities to regain self sufficiency and treat waste at home.
2. They also disagreed on future trends in waste generation (essentially how successful the waste reduction programs would be and how quickly they would achieve their targets).
3. But the most important source of disagreement – and one that can affect any market – was how effective the market will be in sorting out any potential oversupply. Both consultants agreed that market oversupply would have a dampening effect on new development – investors in the early stages of their development would choose not to go ahead when they saw that the market was already full. The difficulty here is how efficient and effective is the market? A perfect market would handle this with ease, but we do not have perfect markets. The consultant arguing for overcapacity said “There is a juggernaut effect as projects reach financial close which means that there will not be an immediate response to reaching capacity. Yes, new project development will eventually tail off- but there will still be a capacity overshoot due to the time lag between changing market conditions and the response to this.”
This dilemma is really about when it becomes obvious to the players that the market is already full. When can they ‘see’ it? Those who can remember when fried chicken shops were first introduced in Australia will recognise this juggernaut effect – for a period we were swamped with fried chicken shops. Over half of them were subsequently closed. However, it wasn’t until this oversupply was visible that new construction tapered off. Perhaps not so important with chicken shops, but with large and expensive public infrastructure it is a different matter.)
What are the important lessons from this story?
Analysing demand side data, unlike supply side asset data, is a matter of opinion rather than fact, because we are not looking at what is, but what might be. This is not so much a matter of evidence, but a matter of inference. It requires trend analysis and understanding markets.