What Has Happened?
The Victorian government has now released the Guidance Notes and Model Contract Clauses (Model Clauses) for local governments who in 2018 entered into a Funding Agreement with the Victorian government as part of the Recycling Services Temporary Relief Funding Program (Funding Program).
The Model Clauses propose to re-shape the risk allocation of local government recycling contracts by providing additional relief for recyclers in the event of market fluctuations in prices for recyclable materials.
In this Alert, we set out the background, the key features and implications for local government of the Model Clauses.
Background
In 2018 the recycling industry in Victoria and across Australia experienced significant disruption and market challenges as a result of greater restrictions on the importation of recyclable waste into China under the “National Sword” policy. China was the largest importer of recyclable materials from Australia and the effective closure of that market left recyclers scrambling to find alternative markets for recyclable materials.
The Victorian government responded with the Funding Program which provided $13 million in funding to local governments. As a condition of funding, the Funding Program required councils to:
At the time the Funding Program was announced, the Model Clauses were not available but the Victorian government indicated that the purpose of the Model Clauses was to share costs and risks between councils and recyclers which may include:
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pricing models comprising a fixed gate fee (for fixed costs) and an income sharing fee (for the variable pricing of recycling commodities);
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income sharing fees linked to internationally recognised commodity price indexes;
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upper and lower price thresholds providing appropriate and agreed triggers for price renegotiation; and
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agreement to keep track of fluctuating market conditions to manage contract and budgetary expectations for parties.
Key Features of the Model Clauses
The Model Clauses provide:
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commercial advice to local government on how future agreements with recyclers should be amended or re-tendered; and
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a set of model contract clauses that reflect the Victorian government’s commercial advice.
The Model Clauses are not mandatory. That is because each council must make any procurement decision in accordance with council policy and the requirements of the Local Government Act 1989 (Vic).
The key features and implications of the Model Clauses can be summarised as follows:
Pricing Review
Councils accept a pricing review mechanism based on a range of different indexes on the basis that recyclers will provide a full and verified breakdown of costs.
Fixed and Variable Pricing
Councils accept the risk of price increases on the basis that recyclers will disclose to councils their fixed and variable costs on an “open book” basis.
Change in Law
Councils accept the risk of a change in law, include a change in foreign law and policy. This would expose councils to the risks of further changes in law or policy in foreign markets in, for instance, South East Asia.
Contamination
Councils accept the risk of contamination, including landfill and transport costs.
Compaction
Councils accept greater risk in relation to over compaction of loads delivered to recyclers for processing.
Force Majeure
Councils accept the risk of a “force majeure” event, including a fire. The Model Clauses do not specify what happens in the case of a prolonged force majeure event.
Termination for Convenience
Councils should have the right to terminate for convenience (if they do not already have such a right).
Interestingly, there is no obligation for recyclers to sell recyclable materials into the secondary market for reprocessing. In theory, the Model Clauses would allow recyclers to send recyclable material to landfill.
Implications for Local Government Contracts
If councils adopt the Model Clauses, the implications for local government could be far reaching.
The Model Clauses have been developed on the assumption that recyclable material will continue to be processed by material recovery facilities for export to secondary markets in South East Asia. It does not contemplate alternative technology or uses for the recyclable materials.
The Model Clauses propose that councils accept significantly more risk than they have in the past. They have not been tested in an open tender scenario and therefore for it is difficult to predict their impact. Local governments will be watching closely the first council that chooses to adopt the Model Clauses in an open tender scenario.
What appears likely with a fixed and variable pricing model, is that councils will have increased uncertainty regarding their annual budget processes and the calculation of their waste management charges. In the current rate capping environment, there could be increased scrutiny and councils may need to manage changes in pricing from year to year.
Given the Funding Program and any Ministerial exemptions for current recycling contracts will soon expire, it is vital that councils start planning now for future procurement, including joint procurements with other councils.
Each council will need to consider the specific circumstances of their own recyclables collection and receipt requirements and seek advice regarding the risks and implications of Victorian government’s proposed Model Clauses.
If you require any further information, please contact Kyle Gillan or Stefan Fiedler.
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