6. Business case options

6.1 Summary of options

There are three options for the Ministry for the Environment and stakeholders which are:

do nothing
implement the proposed project with limited coverage
implement on a national roll out basis.

Each of these options has different financial implications, particularly as each option may include different levels of:

advertising
business funding
funding from environmental groups and charitable organisations (e.g. Lotteries Grants Board)
central and local government funding, particularly for advertising.

6.2 Do nothing

Should an advertising based scheme not proceed, it will most likely fall to local government to facilitate recycling options in public places. While many people may argue that this is in fact a primary responsibility of local government, there are a number of practical difficulties standing in the way of such a solution. These include:

Most metropolitan councils would be unable to use the funding through advertising model, due to long term exclusive rights they have granted to Adshel. Under these agreements, only Adshel or an Adshel-approved scheme may advertise on street furniture in council areas.
This means that councils would need to pay for the recycling bins from their own funding sources, which are already under pressure from infrastructure requirements and new regulatory obligations. It should be noted, however, that if waste levies are introduced then these funds may become available to support schemes, such as this Initiative.
It is likely that councils would adopt their own specific approach to addressing the problem. This could lead to a variety of approaches throughout the country, with differing bin designs, labelling and levels of availability.
This could create confusion for consumers and tourists alike, making it more difficult to promote the recycling ethos, which would perhaps be the most important aspect of an "Out and About" Initiative.
Given the large number of councils in New Zealand, there is likely to be considerable delay in the rate of implementation across the country.

In conclusion, failure to implement some form of national scheme is likely to defer the recycling improvements hoped for.

6.3 Implementation options

Assuming that a decision is taken to proceed with the implementation of the Initiative then there are essentially two options:

Project with limited coverage.
Project with extensive nationwide coverage.

The factors evaluated in considering these options include:

Tenure. In order to allow sufficient time to pay back the cost of the bins, sites will need to be secured for a suitable duration.
The amount of funding available. The capital cost of acquiring the bins is significant. If funds are limited, it may be possible to proceed with a smaller scheme. The scheme may then be expanded from internally generated cash flows or from outside sources as investors gain confidence from the initial success.
Critical mass. A smaller scheme may be less attractive to advertisers. Larger advertisers in particular may not be interested in a media channel lacking nationwide coverage.
Remote locations. Transport costs and low volumes of recyclables collected mean that many remote locations will never be viable from a business point of view, because of the high cost of servicing these bins.

The other important issue that applies to both options is the speed of roll out. A rapid roll out will require the full investment to be committed up front, with all the risks this entails. Due to the significant up front funding requirement and the inability to test and modify the concept based on knowledge gained during the early stages, this is not considered a viable option.

The alternative is that the development company undertakes a staged implementation. Such an approach will:

minimise risk
allow valuable additional data to be obtained to refine the concept for full roll out
maximise the initial cash flow and thereby minimise the payback period.

Stage 1 would involve installing around 300 bins in Auckland. These initial sites would be selected taking account of the following factors:

creating a mix of locations attractive to advertisers
maximising the volume of recyclables collected
minimising the collection costs.

Subsequent stages would take in other major metropolitan areas followed by major highways and selected provincial towns and tourist destinations. The financial model demonstrates such a progression.

6.3.1 Project on a limited coverage basis

Undertaking a more limited project of approximately 1,000 bins would have a number of advantages:

A reduced funding requirement of approximately $2.5 million and therefore less financial risk.
Allow the Initiative to be focused on the most attractive locations from an advertising and collection point of view (i.e. initially excluding more remote locations).
The lower funding requirement may also lead to a quicker start to the project.

However, as noted above, a limited scheme may be less attractive to advertisers and would probably not extend to the South Island. It may also make it easier for competitors to enter the market. In addition, such a scheme could not be expected to have as wide an impact on consumer behaviour, because with fewer bins there will be less reinforcement of the recycling message.

The financial model for the limited roll out scenario displays considerable sensitivity to both advertising occupancy rate and advertising revenue per bin. This indicates that a limited roll out approach is highly vulnerable to shifts in demand for outdoor advertising and there are substantially higher risks.

6.3.2 Implementation on a national basis

Implementation on a nationwide basis would create a much wider awareness for the recycling message through greater reach. We estimate up to 2,000 bins would be needed. The total investment is approximated to be around $4 million.

A nationally focused approach has the advantage of securing the best locations across the country before competitors enter the market, whilst also providing advertisers with a more attractive offer. However, as the Initiative grows in size it is likely that bins will begin to be placed in less profitable locations. Our financial modelling suggests that significant economies of scale are generated by adopting a nationwide approach. Sensitivity to fluctuations in both Advertising Revenue per Bin and Advertising Occupancy Rate are greatly reduced, mitigating the risk to the Initiative in the event of a downturn in advertising demand or a decline in the price of outdoor advertising through competition.

6.4 Key establishment tasks

There will be a number of key activities that will be required to establish the Initiative. These will include:

establish appropriate governance arrangements and company structure as described in section 9.0 of this report
negotiate and establish funding facilities
hire an experienced CEO
negotiate contracts with suppliers including advertising resellers
develop a site licence or lease agreement
finalise the design of the bin and arrange delivery and installation of the first order.

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