5. Financial drivers

5.1 Overview

Set out in this section is a discussion on the main financial drivers for the business case, namely:

potential revenue source
operational costs
business funding sources.

This information has been used to develop business case options and for financial modelling purposes.

5.2 Revenue sources

There are two key sources of revenue:

advertising sales
sales of recyclables.

5.2.1 Advertising

The current model is dependent on advertising as the value of recyclables may only cover the collection cost. Glomedia has suggested that an advertising fee of up to $1,200 per month per bin is achievable although Cranleigh was advised that at present Keri Juice (a Coca-Cola Amatil brand) are paying a maximum of $700 per month per bin.

The value is based on an assessment of foot traffic and in quiet locations it appears that advertisements may only achieve $200 per month. This rate is for 10 bins but it can be expected that an advertiser would negotiate bulk discounts of, say 10% if they were to take 50 bins plus a further 10% if they commit to one year of advertising. From a modelling perspective, iSite have advised that they would allow for only 75% of all bins to have advertising at any one point in time and suggested we use an average rate of $500 per month per bin.

A potentially important point to note is that Adshel, who have the contract to advertise on bus shelters, may have an exclusive contract with many councils covering council controlled public outdoor areas and this may preclude advertising on the bins sited within any exclusion zones.

There will be a cost in obtaining advertising. The option could include a company employing a person to obtain advertising or to contract an agency to undertake this task. In the short-term a prudent approach would be to contract an experienced agency to undertake this role as this would limit the financial risks of employing a person and ensure an immediate start-up. Accordingly, we have budgeted for a cost of 25% of the average advertising revenue of $500 per bin to cover the contracted advertising fee.

The bins will need to be serviced to periodically install new advertising into the bins. The normal arrangement for installing new signs is for the advertiser to be charged a one-off amount to install posters (iSite pay their own sub-contractor installers $30 per bin to do this). The advertiser also provides the posters for each bin.

5.2.2 Recycling

Recycling service providers who Cranleigh interviewed provided the following information on the local economics of recycling:

The last 10% to 15% of recycling stream is very hard to recycle economically.
The mean recycling value of recyclables is approximately $75 per tonne, being comprised of:
- glass @ $10/t gross income, $10/t to $0/t income net of processing (72% of total recyclables currently being collected during the Botany trial)
- plastics @ $200-$500/t gross, $300/t to $200/t net (26% of recyclables collected in trial)
- aluminium @ $2000/t gross, $1,900/t to $1,000/t net of processing (2% of collected recyclables)
- paper @ $140/t gross, $65/t net of processing (0% currently being collected in pilot trial).

These values have been used in modelling the financial aspects of the different business options.

5.3 Operational costs

5.3.1 Collection costs

The trial indicates that volumes collected will be insufficient to cover the cost of collection from the sale of recyclable material and it will be essential to keep recycling costs as low as possible. Some potential solutions include:

Envirowaste believe that collection needs to tie in with residential collection to reduce costs. Household collection should not cost less than $30 per household per annum net of recycling revenue.
Streetsmart have charged $4,500 per annum for the weekly clearing of the 10 bins. Coca-Cola Amatil felt that this was a concessionary rate.
Streetsmart are supportive of waste levies, but only if it is implemented on a national basis and promotes a systems approach. Should be on a 50/50 public private partnership basis for infrastructure.
Sorting costs are typically $30-$60/t.
At present bin collection is weekly (a number of bins can have no rubbish in them at all).
Volumes collected per week vary but the average seems to be 10-15 50 litre bags per week. Recyclables by volume are mostly plastic and little glass. It is estimated about 2 tonne per annum is being collected.
Bin emptying will vary depending on location (for example, 3-4 days/week in CBD areas, 2-5 days/week in commercial areas and in other remote areas one day/week).
Emptying rate is an estimated $75 per hour minimum, servicing 200 bins. This excludes post collection sorting costs.
An important issue for this scheme are the logistics, as it is very difficult to achieve scalability which means the model is dependent on advertising to make it pay.
Local government pays about $50/tonne for sorting co-mingled rubbish (dry, no organics).
As a general rule, the value of recyclables covers the cost of sorting.
Collection costs vary considerably but the lowest is about $2 per bin in high density areas using a truck and one armed bandit. The most profitable method is using a front end loading system. The key is high density and less people to make higher returns.

5.3.2 People

Staff will need to be taken on progressively to establish and grow the business. We have assumed that a manager, salesperson, maintenance supervisor and office assistant will be recruited with the following roles and costs:

Manager will be primarily responsible for establishing the business, including arranging the building/importing of bins, storage, development of contractual arrangements with suppliers and advertisers and other users of the bins, establishment of the office, including development of an appropriate accounting and management information systems. Estimated cost $100,000 per annum, including bonuses.
Salesperson will have an immediate task of selling the concept and advertising space to agencies and direct users. Likely to be on a small base with large bonus incentive scheme. Estimated cost $90,000 per annum, including bonuses.
Maintenance supervisor will oversee the construction, installation and maintenance of the bins. This will include arranging for the storage and transport of bins to sites, potentially throughout the country. Estimated cost $60,000 per annum, including bonuses.
An office assistant will be required to support the three other employees and to management. Estimated cost $50,000 per annum, including bonuses.
In the event that a nationwide scheme is introduced, we have assumed that in year 3 an extra salesperson and maintenance supervisor will need to be added at an estimated cost of $150,000 per annum.

5.3.3 Administration costs

We have allowed for $25,000 to be spent annually on accounting and information management systems. For example, there will be a need to closely track and monitor all bins, particularly with regard to location, maintenance programme, parts and storage location.

We have allowed $50,000 for rental of an office and $25,000 to run the office, such as electricity, telephones, leased office equipment and the running costs of a vehicle.

5.4 Funding sources

There are a number of possible funding sources:

corporate funding
government subsidy
waste levies.

5.4.1 Corporate funding

It is possible that iSite's owner, Infratil, would consider investing in the Initiative, but only on a commercial basis.
Envirowaste have also indicated that they would consider investing in the Initiative.
Adshel would also consider developing the Initiative.

5.4.2 Sponsorship

Likely sponsors of this project include drinks and fast food companies and members of the Packaging Council. Applications could also be made to the Lotteries Grants Board and other charitable donors.

Sponsors may wish to have their contribution acknowledged by some form of signage on the bins.

5.4.3 Government subsidy

It may be possible to attract Government subsidies to support this project. For example, advertising, such as "Proudly supported by Manukau City Council" may work to get buy-in from local authorities, although it is unlikely they would become an investor in the Initiative.

5.4.4 Waste levies

350 tonne of recyclables is estimated to be collected per annum, based on the trial results scaled up to 2,000 bins nationwide.
Assuming that waste levies would apply only to waste going to landfill then the levies would apply to just the contamination or non-recyclable material placed in the bins. Based on the trial results, this should not exceed 70 tonne per annum. Any waste levies on this weight would be unlikely to make a significant impact on cash flows.
If waste levies are implemented, they could provide funding to support the project.

[ Previous|Next ]