Deposit return scheme for Scotland: full business case stage 1

3 Commercial Case

Commercial Case key messages

The key findings from the Commercial Case of the Full Business Case (FBC) are summarised below.

Four potential delivery models have been identified and considered for the Scheme Administrator:

• Option 1A - 100% Public sector ownership of non-profit Scheme Administrator. RVMs, Counting and Bulking centres procured by the public sector. Logistics outsourced. Public sector borrowing to fund upfront capital investment.
• Option 1B - As per Option 1A with the exception of RVMs which will be procured by Retailers who will be reimbursed by the Scheme Administrator through the Handling Fee.
• Option 2 - 100% Privately owned non-profit Scheme Administrator. Counting and Bulking centres procured by the Scheme Administrator. Logistics outsourced. RVMs procured by Retailers and reimbursed by the Scheme Administrator through the Handling Fee, and
• Option 3 - Public (20%): Private (80%) non-profit joint venture. Counting and Bulking centres procured by the Scheme Administrator. Logistics outsourced. RVMs procured by Retailers and reimbursed by the Scheme Administrator through the Handling Fee.

The analysis in this section concludes that Option 2 - a privately-owned non-profit Scheme Administrator - has the benefit of being the most common route adopted in recent international Deposit Return Schemes (DRS) and having a track record of minimising costs and achieving high rates of recycling. Specifically, this model:

• Ensures operational and financial risk exposure sits with Producers in line with Extended Producer Responsibility. A producer, for the purposes of DRS, is defined as the brand owner, resulting in a single point of responsibility within the supply chain.
• Has recent precedent, with a number of European, privately operated, non-profit schemes functioning effectively.
• Maximises scope for buy in from the private sector, with producers and retailers indicating through consultation that, should the scheme proceed, they would want to operate it and therefore as owners they will be more incentivised to perform.
• Requires public sector monitoring of performance through regulation rather than direct control.

A public sector Scheme Administrator would:

• Offer greater public sector control of the Scheme than would be available through a private sector solution, potentially realising the additional benefits identified in Section 3.6.2 to a greater degree than the private sector options.
• Require less sophisticated regulation, given the direct control of the Scottish Government.
• Be more aligned to the feedback received from the public via the public consultation that the preferred ownership model was involving the public sector, securing greater confidence in the scheme.
• Be likely to have a budgetary implication for the Scottish Government, including capital budgets during the establishment of the Scheme and on-going capital and revenue budget implications for the Scottish Government.

On balance, this FBC concludes that a 100% private sector non-profit solution is preferred. Further work remains (see Section 3.7) to determine the basis of procurement of a private sector Scheme Administrator, the detail of the regulatory regime to be applied and the detailed governance arrangements relating to the Scheme Administrator.

3.1 Introduction

3.0 This Commercial Case encompasses analysis of the ownership structure, funding solution and contractual arrangements required to deliver a successful Deposit Return Scheme (DRS) in Scotland.

3.2 Scope and Services

3.1 The scope of the services required by the Scheme Administrator is summarised below:

• Management of the inflows and outflows of the Scheme (including Deposits, Producer fees, Handling fees, income from sale of materials etc.).
• Management of performance of the scheme to ensure targets are achieved.
• Construction and commissioning of counting and bulking centres and the provision of IT infrastructure.
• Operation and maintenance of the centres for the life of the facility (or until such time as it is disposed of by the Scheme Administrator). The services will include:
  • Life cycle replacement.
  • Hard facilities management (building equipment and fabric maintenance, major equipment replacement and repairs).
• Logistics service contract for the collection of materials from retailers to the counting centres.
• Sale of materials - contract for sale of materials to re-processor.

3.2 It will be for the Scheme Administrator to formally determine which of these services are delivered in-house or contracted out at a later date, on the basis of the services required and the supplier market at that time.

3.3 Across all of these services, there will be the opportunity for local job creation, training and upskilling for local residents. Scheduling focussed 'Meet the Supplier' events within the procurement timetable can help maximise inclusive growth opportunities.

3.3 Contractual and Personnel Implications

3.3.1 Overview

3.4 Contractual and personnel implications will be directly influenced by the choice of delivery model. A public sector model will be required to follow public sector procurement regulations requiring a greater level of preparatory work, compared to a private sector one, where no direct contract exists between the public and private sector. Under a private sector arrangement, there would be a greater onus on the Scottish Government to provide oversight through the regulatory regime and to ensure robust non-contractual monitoring arrangements are put in place including, for example, regular progress reports to key stakeholders etc.

3.3.2 Key people related issues within the DRS Programme

3.5 While people-related issues will be influenced by the ultimate choice of delivery model, there are key shared issues across all models which are summarised below:

• Vision and Organisational Definition. Critical decisions need to be taken on the vision, objectives, structure and timing of implementation of a DRS.
• Leadership. An interim leadership team for a DRS needs to be assigned, to provide direction and ensure clear accountability for decisions.
• Clarity/communication. There needs to be regular and clear communication with the staff impacted by the project.
• Employee Relations. Employee relations implications could arise, specifically comprising of the appointment or transfer of employees to the Scheme Administrator and a new location, as well as the harmonisation of terms and conditions.

3.6 The need for a robust line of communications would be prioritised to ensure that any impacted staff are regularly and accurately briefed.

3.3.3 Transition Management Actions

3.7 To ensure critical decisions are taken, a detailed Transfer Plan will be developed by the programme, which will cover staff transfer issues (if relevant) and also consider the transfer of any data, contracts, processes and business knowledge, from the business planning phase into the implementation phase. This will ensure that all legal considerations and implications are addressed as decisions are taken. The key actions that will be taken in consultation with key stakeholders are:

• Identification of roles and responsibilities to own and manage transition activities.
• Appointment of legal advisors to provide input into key employee relations questions.
• Identification of any transferring contracts, asset and data.
• Development of a clear transition plan: outlining all the key milestones and time considerations.

3.4 Consultation Responses

3.8 This Commercial Case has been informed by consultation carried out by the Scottish Government and summarised below:

3.9 Consultation Feedback - Scheme Ownership (see Table 18)

3.10 The ownership of the Scheme Administrator was included as a question within the public consultation. The consultation did not provide a clear consensus on the ownership question, with a roughly equal split of views between privately owned and publicly owned schemes.

3.11 Where a joint ownership model was proposed, the majority of respondents suggested the public sector would take an oversight/governance role, while the private sector would be responsible for operational delivery.

Table 18: Public Consultation - Ownership

Number	Question	Summary Results
32	Which option do you think offers the best ownership model?	There is no clear consensus on the correct approach with 45% of organisations favouring a private not-for-profit scheme and 46% of individuals favouring a public scheme. Food and drink (77%), retailers (59%) and hospitality (80%) were the most likely organisations to favour a not-for-profit private scheme. Where a combination of public and private ownership was proposed, the public sector was primarily envisaged as adopting an oversight or governance role - setting the framework for the scheme and providing scrutiny and accountability. The value in industry having responsibility for operational delivery was identified by these responses.

Source: Scottish Government analysis

3.12 Consultation Feedback - Regulation (see Table 19).

3.13 Regulatory oversight was a consideration of the public consultation. The main respondents indicated that the Scottish Government should be taking a role in regulating the Scheme Administrator and the majority of these respondents favoured the use of an existing regulator as opposed to a new body.

Table 19: Public Consultation - Regulatory Questions and Summary Results

Number	Question	Summary Results
35	Which option for regulating producers do you think is most appropriate?	67% (including 54% of organisations and 68% of individuals) support regulation by an existing body. 34% of organisations (including 61% food and drink producers, 70% of charities and 60% hospitality) think this should be the responsibility of the scheme administrator.
36	Who should be responsible for regulating return locations?	67% (including 54% of organisations and 68% of individuals) support the use of an existing body.
37	What regulatory powers should the Scheme Administrator have?	Individual responses stated that there should be sufficient or adequate regulatory powers to deliver a successful scheme. Organisations responded in more detail, with a requirement that punitive measures should be set out in statute and there should be a high level of autonomy to work within a framework set by the Scottish Government.
38	Should the Scheme Administrator have a role in product approval?	69% (59% of organisations and 70% of individuals) responded yes. Retailers (59%) hospitality, community bodies and packaging manufacturers (40%) were the most likely organisational types to say no.
39	Should the Scottish Government have a role in regulating the Scheme Administrator and if so how should it be delivered?	89% of responses (90% of organisations and 89% of individuals) agreed that this is a role for Scottish Government. The question was then asked if this should be delivered via SEPA. Organisations responses were 40% yes, 24% no and 36% don't know; individual responses were 56% yes, 9% no and 34% don't know.

Source: Scottish Government

3.14 The consultation responses have been considered in evaluating the delivery options described in this Full Business Case (FBC).

3.5 Delivery Model

3.5.1 Introduction

3.15 Work carried out as part of the Socio-Economic Case has identified the preferred scheme design, as summarised in the first part of Figure 7 below. The Commercial Case now seeks to identify a preferred delivery route, aligning to this design and factoring in the key levers of scheme ownership, scheme regulation, infrastructure, logistics/financing and realising additional benefits.

Figure 7: Scheme Design and Delivery Route Approach

3.16 The preferred delivery model has been identified in three stages:

• Identifying, documenting and analysing five key considerations:
  • Scheme ownership (Section 3.5.2).
  • Infrastructure and logistics (Section 3.5.3).
  • Realising additional benefits (Section 3.5.4).
  • Financing (Section 3.5.5).
  • Scheme Regulation (see Section 6.2).
• Informed by the above analysis of these five levers, and interdependencies between them, a shortlist of four potential delivery models has been identified (Section 3.5.6).
• Comparison and analysis of the four potential delivery models, to identify a preferred model (Section 3.6).

3.17 This analysis has been informed by public consultation and the results of those elements relevant to the delivery option have been summarised in section 3.4.

3.18 It is also assumed that for all delivery models being considered the Scheme Administrator will be considered to be acting as a Principal rather than Agent in relation to the Deposits inflow and outflow. The difference being that as a Principal the Scheme Administrator will recognise the deposits as revenue and expenditure in its profit and loss account, whereas an Agent would be responsible for managing the collection and disbursement of the deposits, but they would not be recognised as revenue and expenditure in the profit and loss account. This assumption is based on discussions with the Norwegian DRS Scheme. The impact of this is considered further in the Financial Case.

3.5.2 Scheme Ownership

3.5.2.1 Public v Private v Joint Ownership

3.19 Potential ownership models are identified in this FBC and cover a public/private/joint ownership matrix. Public ownership would offer increased levels of operational control and sharing in upside benefits but conversely has greater exposure to operational and financial risk. Private sector ownership meanwhile would mitigate these risks, but also reduce the level of operational and budgetary control that the Scottish Government can reasonably expect to exercise. A more detailed analysis of joint ownership models is set out below (Table 20):

Table 20: Summary Ownership Implications

	Public	Private	Joint Ownership
Description	Scottish Government owns and is responsible for the Scheme Administrator	Private sector ownership likely split between producers and retailers	Ownership is split between public sector (Scottish Government) and private sector (likely producers and retailers)
Control / Influence	100% public sector Full ownership and voting rights for public sector Consultative process with private sector	100% private sector (producers/retailers) Public sector influence through initial legislation and regulatory influence only	Various options available, key points to note: 25:75 ability to block special resolutions 20:80 maximum ownership for PPP structures 10:90 typical ownership for board appointments
Assets / Liabilities	Assets could be owned by public sector At risk if scheme fails Greater control over where counting centres are located Public sector can seek to mitigate potential initial capital outlay and risk on cost and ongoing maintenance by the setting of availability and service performance-based contracts The budgetary impact of these could not be confirmed until the full details of any contract design is agreed	Assets owned by private sector Private sector contractually at risk if scheme fails, although there may be an argument that the Scottish Government would step in even if not contractually bound to do so Without incentives private sector may locate counting centres in places not in need of regeneration (although risk may be mitigated as those areas are likely to be cheaper to locate in)	Public sector can seek to mitigate potential initial capital outlay and risk on cost and ongoing maintenance by the setting of availability and service performance-based contracts The budgetary impact of these could not be confirmed until the full details of any contract design is agreed
Risk transfer	Minor	Maximum	Joint risk ownership
Cost efficiency	Implied to be least cost efficient due to public sector managing costs of the Scheme Administrator that they are not funding. Moreover, there may be greater emphasis on delivering wider scheme objectives than reducing the cost base	Implied that the Scheme Administrator would be operated most efficiently due to the incentives for producers to minimise their own costs (as fee payers to the administrator)	Potential tension between cost efficiency drive against meeting wider scheme objectives
Pricing/ Regulation	Regulation unlikely to be substantively different whether the Scheme Administrator is owned by the public sector, private sector, or both. In all cases, the purpose, powers and tools of a regulator would likely remain very similar
Procurement	Public procurement rules would apply	Public procurement rules unlikely to apply	Likely public procurement rules would still apply
Budgetary (Further detail in section 6.1)	Will result in Resource Departmental Expenditure Limit (RDEL) implications and likely to result in Capital Departmental Expenditure Limit (CDEL) implications for assets unless some form of PPP type contract can mitigate, but this will further increase RDEL implications	Assuming classified to private sector, there should be no direct budgetary implications of the scheme	Budgetary implications will depend on overall classification of the scheme, which is considered further later in this case

Source: Scottish Government Analysis

3.5.2.2 Corporate Form

3.20 The Scottish Government has evaluated the different corporate structures available. Table 21 details the advantages and disadvantages of seven different corporate forms.

3.21 The assessment of these corporate structures has identified a Company Limited by Guarantee (CLG) as the favoured structure as set out in the table below. While all options offer distinctive benefits, the CLG was felt to best meet the Scottish Government's requirements, offering significant flexibility in relation to questions of profit/non-profit, ownership and participation levels. Further discussions will be held prior to FBC Stage 2 to reconfirm this is the preferred structure after discussions with the private sector.

Table 21: Corporate Form Options - Summary Advantages and Disadvantages

	Public Body	Charity	Company Limited by Guarantee (CLG)	Company Limited by Shares (CLS)	Community Interest Company (CIC)	Community benefit societies (CBS)	Co-operative society (COS)
Description	This could either be a government executive agency (Transport Scotland) or a new corporate body created by statute/Royal charter (Sportscotland). It could also be a public company (Caledonian Maritime Assets Ltd (CMAL) or Scottish Water)	This could be either a company limited by guarantee, a community benefit society or a Scottish charitable incorporated organisation (SCIO) - an optional legal form for registered Scottish charities, managed and controlled by trustees who are acting in the interests of the charity and independently	A company owned by member(s) and managed by director(s)	A company owned by shareholder(s) and managed by director(s)	A type of company developed with non-charitable social enterprises in mind, with particular features to safeguard the social 'mission'. It could be a company limited by guarantee or shares	A society involved in industry, trade or business, set up to benefit the wider community, and managed by its committee	A society involved in industry, trade or business, set up to benefit its members only, and managed by its committee
Summary	A public body would be capable of delivering the key objectives. Its constitutional purposes could be framed through legislation, by reference to the key objectives and the attention of the board/management directed towards this. In addition, the framework agreement between the Scottish Government and the public body could contain specific performance metrics around delivery of the key objectives. Of course, the legal form by itself does not deliver on the key objectives, but the public body does provide the highest degree of Scottish Government influence; therefore the most direct control over achieving the key objectives. A degree of regulation and an effective and skilled board may also be required to achieve all of the objectives set.	A charity is capable of delivering the key objectives. Operations will be aligned to a charitable purpose of protecting the environment. However, it may not be capable of delivering all activities of the DRS if some activities are in fact non-charitable. As a result of charity regulation and charity trustee duties, charities can be more risk averse than other organisations. A SCIO is not considered a suitable vehicle for the DRS because using another corporate form as a charity would mean adding a third tier of regulation (the DRS regulation and the regulation of the Companies Act 2006 or the Co-operative and Community Benefit Societies Act 2014 already applying). These requirements will place an unnecessary burden on the entity as it begins to operate and may mean that too much focus is placed on compliance and not enough on delivery (at both the design stage of the DRS and delivery of the DRS, at least initially). It should be possible to build into the regulatory regime for the DRS the good points about the regime under the Charities Act and whoever designs the DRS regulatory regime will have less to be concerned about in relation to regulatory conflict.	A company limited by guarantee is capable of delivering the key objectives. Its constitutional purposes could be framed by reference to the key objectives and focus the attention of the directors. However, its legal form by itself does not deliver on the key objectives, which may require a combination of incentive, regulation and an effective board. There is nothing in the legal form that restricts the ability to deliver.	A company limited by shares is capable of delivering the key objectives. Its constitutional purposes could be framed by reference to the key objectives and focus the attention of the directors. However, that would be unusual in a company limited by shares, which is often incentivised by profit. If the DRS is to be not-for-profit, a company limited by guarantee is probably more appropriate, if it is not to be wholly owned. However, its legal form by itself does not deliver on the key objectives and it may still deliver with a combination of incentive, regulation and an effective board.	CIC is capable of delivering the key objectives. Its constitutional purposes could be framed by reference to the key objectives and focus the attention of the directors. However, its legal form by itself does not deliver on the key objectives and that may require a combination of incentive, regulation and an effective board. There is nothing in the legal form that restricts the ability to deliver but care would need to be taken with overall commercial arrangements and contracts in light of the asset lock. It may be restrictive.	CBS is capable of delivering the key objectives. Its constitutional purposes could be framed by reference to the key objectives and focus the attention of the directors. However, its legal form by itself does not deliver on the key objectives and that may require a combination of incentive, regulation and an effective board. A CBS cannot be wholly owned by the Scottish Government. There are difficulties associated with the Scottish Government having control (although 'influence' could be achieved through other means e.g. contractual arrangements).	A co-operative society is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. It is unlikely that the participants in the DRS will have a common, economic, social or cultural need or interest and therefore it is unlikely that the objectives could be achieved. The requirement that control of the co-operative lies with all the members equally means that this entity is not nearly as flexible as the others that we are considering in terms of control structure.

Source: Brodies LLP Analysis

3.5.2.3 Profit / Non-Profit

3.22 An analysis of existing DRS schemes (see Annex 6.1.2) indicates that most DRS schemes (and in particular more recent DRS schemes) have been set up as private sector classified vehicles on a non-profit basis. A non-profit approach enables the Scheme Administrator to retain a focus on minimising cost to producers and maximising income generation (e.g. though sale of recyclate), without requiring it to return profits or dividends to shareholders.

3.23 Adopting a for-profit structure may drive enhanced cost efficiencies, linked to the delivery body's accountability to external stakeholders, payment of dividends etc. Against a backdrop of austerity there has been an increasing trend in recent years for public sector bodies to set up profit-making subsidiaries as a route to drive revenue growth and cost efficiencies.

3.24 Adopting a not-for-profit scheme structure under either a public or private procurement would enable the Scheme Administrator to manage its activities with a view to minimising cost and the resulting fees charged to producers. Under a non-profit approach any surpluses generated in the scheme would be re-invested in the scheme or used to reduce the future costs to producers, rather than distributed to shareholders.

3.25 Informed by these factors and more detailed considerations as summarised below (Table 22), a non-profit structure is seen as most likely to deliver against the four key objectives of the scheme. The Memorandum and Articles of Association will be appropriately worded to embed a high performing environmental and social ethos into the company.

Table 22: Profit v Non-Profit Considerations

	Profit	Non-Profit
Public	It has become more common in recent years for public sector organisations to set up subsidiary structures, either wholly owned or joint ventures, with the purpose of delivering efficiencies, enhanced value and profits, which can then be used to re-invest in services. There is a risk that a public sector model with profit could be viewed as being used to levy a 'tax' on consumers which, in turn, could lead to significant issues with buy-in from private sector producers, retailers and consumers. There may also be 'vires' issues for the Scottish Government if the scheme is deemed to be a tax which is not contemplated under the Scotland Act.	More common position for public sector bodies as they seek to manage their funding on an annual basis to deliver services. This approach would allow the public sector to retain control, without being driven to generate maximum profits from the scheme - any surpluses would reduce fees to producers or be re-invested in the scheme. This approach would allow for costs and income to be optimised as far as possible within a public sector environment.
Private	This approach has a key motive to generate and maximise profits and to provide an appropriate return on capital for shareholders. The profit motive would focus on maximising achievable returns in the long term. A profit model would not necessarily lead to the lowest fees to producers, as the scheme would need to generate profits for returns paid to shareholders. Accountability to external shareholders may drive enhanced cost efficiencies.	Not-for-profit organisations are distinguished from profit maximising organisations by three characteristics. First, most not-for-profit organisations cannot distribute profits to external shareholders providing risk capital for the business. Secondly, they do not distribute dividends, so any profit (or surplus) generated is retained by the business as a further source of capital. Thirdly, their objectives usually include some social or charitable aim, which in their absence would not be readily provided efficiently through the workings of the market scheme. The private not-for-profit route retains the mechanism to optimise scheme costs and revenues but without making returns for shareholders. This could minimise the cost to producers and, through appropriate regulatory oversight, allow a number of wider social objectives to be met also (see Section 3.5.4).

Source Deloitte LLP

3.5.3 Infrastructure and Logistics

3.26 Infrastructure and logistics is the third key lever against which a potential delivery options shortlist has been assessed. This section focuses on the key physical scheme elements comprising the DRS scheme - RVMs, counting/bulking centres, and reprocessing centres, plus the logistical infrastructure which will need to be overlaid across these.

3.5.3.1 Reverse Vending Machines

3.27 The preferred scheme design is forecast to require approximately 3,000 RVMs to be installed across Scotland. The investment in these RVMs will be the largest of the upfront capital costs (approximately £60 million)^[48].

3.28 While the Scheme Administrator will outline the technical specification for the RVMs, retailers^[49] are expected to take the final decision for how the RVMs are to be procured, which may be influenced by the legal and regulatory framework of the scheme. It is expected that the retailers - as opposed to the Scheme Administrator - would be responsible for the acquisition/installation of the RVMs. This would allow the Scheme Administrator to mitigate upfront capital cost and potential for liabilities as a result of ownership. The cost of acquisition, on ongoing maintenance and operation of the RVMs would then be a constituent element of the handling fee paid to retailers (further detail provided in the Financial Case).

3.29 Retailers could choose to fund RVM purchase from their own cash reserves, or arrange their own financing; possibly under a leasing arrangement. The Scheme Administrator could also arrange a financing package for retailers potentially through a third party finance company. It will be key that flexibility is given to individual retailers, who will have different motivations based on their location, size and nature of their business.

3.5.3.2 Counting/Bulking Centres

3.30 The preferred scheme design identifies a need for four counting and bulking centres at an estimated upfront capital cost of around £27m^[50], to enable sorting of the collected recycled materials prior to the sale of materials to a reprocessing company.

3.31 Successful site acquisition and subsequent construction and mobilisation of the four centres will be integral to the scheme's success, with the FBC developed on the expectation that responsibility for this activity will fall to the Scheme Administrator. The Scheme Administrator may look at leasing or otherwise contracting with third parties as an alternative to outright ownership across some or all of the four centres, mitigating upfront cash investment and potential tax structuring benefits.

3.32 Further considerations of potential funding options for this are considered in section 3.5.5.

3.5.3.3 Processing

3.33 The Scheme Administrator is forecast to collect in excess of 1.7bn^[51] containers a year based on the preferred scheme design. There is a significant value to the material being collected and realising this value will partially fund the costs of operating the scheme and offer the opportunity to potentially realise additional benefits.

3.34 The Scheme Administrator will adopt one of three key reprocessing options:

• In-house provision - The most 'interventionist' strategy.
• Sale of Materials supported by Inward Investment - Catalysing established Scottish re-processor(s).
• Sale of Materials with no Inward Investment - Sale of materials to highest bidder.

3.35 Key considerations around reprocessing are detailed in Table 23 below. In summary:

• The In-house provision options would be challenging to deliver within the required timescales envisaged and would require further levels of investment by the Scheme Administrator, as well as taking on the risks of a complex area of business.
• A straight sale of materials to an established re-processing contractor located elsewhere is the least risky option. If inward investment can be encouraged, this may deliver further additional benefits of the Scheme, particularly CO₂ saving. This is particularly true if materials do need to be transported abroad as a result of the inward investment.
• It will be for the Scheme Administrator to make a final decision on the delivery route for re-processing. Although this will be influenced by the legislative and regulatory framework of the scheme.
• A private sector Scheme Administrator would ultimately be free to manage its use of recyclate and the net proceeds arising. Some degree of influence may be available to the Scottish Government through regulation and dialogue with the private sector Scheme Administrator, although the Scottish Government is unlikely to be able to require a private sector Scheme Administrator to utilise inward investment of this type.

Table 23: Re-processing Options - Key Considerations

Option	Description	Key Considerations
In-house provision	Scheme Administrator sets up its own reprocessing centre/business. There will be significant up-front capital investment costs and additional staffing requirements as opposed to an outsourced provision	Greater direct control of service delivery, reduced likelihood of governance and control issues Increased flexibility for change Ability to support SG 'Making Things Last' strategy Significant upfront costs Lack of skills and technological expertise
Sale of materials supported by Inward Investment	SG uses influence and investment to encourage established reprocessor company in Scotland	Supports achievement of circular economy Classification considerations as direction in key areas of operation such as this could result in a public classification whether the Scheme Administrator is owned by the public or private sector More limited market interest from producers which might face higher producer fees
Sale of Materials with no Inward Investment	Scheme Administrator sells materials to highest bidder	Potential to minimise costs of scheme to producers as sale value is maximised Does not support achievement of circular economy Simplest route to pursue and, if this ends up being the most cost-effective route, will potentially be the most attractive to a private sector Scheme Administrator

Source: Scottish Government

3.5.3.4 Logistics

3.36 The preferred scheme design will include the requirement of circa 17,000 businesses to provide a facility for the public to return their recyclate. This will in turn require a substantial logistics operation to collect on a regular basis from retailers and deliver to the counting centres.

3.37 The two key options for the provision of the logistics service are setting up of an in-house logistics service or outsourcing to an existing provider. The key considerations for each of these options are outlined in Table 24.

3.38 It is likely that the Scheme Administrator would outsource these services, given the competitive market for logistics suppliers who might be able to provide these services. This can minimise costs and avoid the need for capital funding of logistics systems and equipment, as well as minimising the financial risk to the Scheme Administrator from the required logistics services.

3.39 There may also be an opportunity for the large retailers to mitigate some of the costs by 'back-hauling', i.e. using their own logistics to return recyclate to the counting centres. At this point no costings for this have been undertaken but this will be examined as part of the FBC Stage 2 to ascertain market interest and the likely impact on cost.

Table 24: Logistics Options - Key Considerations

Option	Description	Key Considerations
In-house provision	Scheme Administrator sets up its own in-house logistics service There will be upfront capital investment costs and additional staffing requirements as opposed to an outsourced provision	Greater direct control of service delivery, reduced likelihood of governance and control issues Increased flexibility for change Reduced exposure of logistics failure Upfront investment cost
Outsourced	Scheme Administrator tenders for an existing logistics provider to deliver service to agreed level in return for contractual payments	Mature logistics market already in place, competitive environment driving innovation and price Allows Scheme Administrator to better focus on the achievement of the key targets for recycling Controlled costs - agreement of fixed contract price will give greater certainty for the operation of the Scheme Administrator Increased reach - outsourcing can give you access to capabilities and facilities which would otherwise require significant upfront investment

Source: Scottish Government

3.5.4 Additional Benefits

3.40 A total of 18 additional benefits were considered in relation to the DRS, with the nature of the benefit and applicability to each of the delivery options. These benefits are summarised in Table 25 below and evaluated against the alternative delivery options in Section 3.6.2.

Table 25: Additional Benefits Identified

	Additional Benefit	Description
1	Improved material quality	One of the most significant benefits from DRS is the improvement in quality of materials generated for recycling. The collection method almost eliminates the potential for contamination.
2	Attracting and securing processing capacity to Scotland	The benefit of attracting or securing manufacturing within Scotland to make use of supply side improvement that this high quality stream of recyclate represents.
3	Influencing packaging design	Producer fees could be varied based on rewarding positive design choice i.e. lightweight or use of recycled content.
4	Wider litter impacts	Indirect costs associated with waste being in the wrong place.
5	Reduction in propensity to litter	Ability to reduce people's propensity to litter through conscious and subliminal messaging.
6	Magnified impacts of litter on certain socio-demographic groups	Any reduction in litter is likely to have a larger positive impact on certain socio-demographic groups.
7	Contribution to sector sustainability strategies	All of the sectors, which represent the products within scope of the DRS, have an environmental strategy.
8	Increased footfall for retailers	There is evidence to suggest that where the public come to redeem their deposits, they are likely to spend their redeemed deposit in the store they receive it from.
9	Collection efficiencies - utilising existing facilities	The use of existing infrastructure, such as existing fleet movements or waste management facilities, could be utilised to minimise costs of the scheme.
10	Supporting economies of scale in collections	The national nature of the scheme would allow the comprehensive infrastructure to be utilised for a variety of purposes.
11	Non-local authority litter savings	The increased recycling rate will have a direct impact on the level of littering which results in savings through reduced litter collections.
12	Involvement of third sector in delivery	Use of third sector organisations to create additional benefits such as employment opportunities to young people or socially disadvantaged groups.
13	Financial benefits for community organisations	The DRS operates a number of opportunities for good causes to benefit financially.
14	Increase in recycling of non-DRS materials	The DRS will increase capture levels of non-DRS materials. CO2e benefits plus additional revenue from recycled content.
15	Wider behaviour change messaging	The roll-out of the physical DRS infrastructure across the country will provide an excellent foundation to communicate scheme benefits to both operatives and wider public.
16	Improved data quality and transparency	Provided robust data systems are set up. Implementation of the DRS scheme will provide a rich data source on recycling attitudes and trends.
17	Other environmental benefits - carbon pricing	The DRS scheme can contribute positively to help relevant stakeholders meet carbon pricing targets/avoid financial penalties as a result.
18	Creating a circular economy exemplar	Delivering a successful 'closed loop' DRS scheme would bring positive wider PR and interest from other entities looking to deliver DRS schemes.

Source: Scottish Government

3.41 The overall scheme design, governance and regulatory regime will have an influence on the achievability of these wider objectives:

• A public sector owned and classified Scheme Administrator would provide the Scottish Government with the maximum flexibility in relation to all aspects of the scheme including its ability to realise additional benefits of the type identified above.
• A private sector classified Scheme Administrator may still be able to deliver some of these benefits, although direct public sector control or material influence (e.g. in areas such as the location of a materials recycling facility in Scotland, involvement of third party/sector in delivery or establishing a circular economy exemplar) are likely to lead to a public sector classification.

3.42 Through effective design and regulation of the scheme, the Scottish Government will maximise the realisation of ancillary benefits delivered by a private sector Scheme Administrator and those other businesses with a role in DRS.

3.5.5 Financing

3.43 The detailed costing and funding of the scheme is set out in the Financial Case but the following section gives an overview of the costs (capital and operating) which will be incurred and how these may be funded.

3.5.5.1 Funding the Costs of the Scheme

3.44 The scheme will require upfront capital investment and ongoing operational costs. If the scheme will be non-profit, the key principle is that ongoing operational costs will be funded by revenue from unredeemed deposits and the sale of redeemed materials for re-processing. The balance of costs would then be charged to the producers by way of a producer fee. The producer fee could be set as a single amount per container or allocated as an alternative figure for different material types. The latter approach is more consistent with other schemes and aims to avoid different material types subsidising one another. Producers would provide a report to the Scheme Administrator detailing the quantity of containers sold to the wholesalers. The Scheme Administrator would then invoice the producers based on the quantity at the appropriate deposit rate per container.

3.45 The producer, for the purposes of DRS, is defined as the brand owner, resulting in a single point of responsibility within the supply chain. This would include large and small manufacturing businesses who make their own products and also retailers who sell their own brand products.

3.46 A summary of the key constituent cost elements and the funding route is set out in Figure 8 Operational Costs and Funding. The estimated costs and resultant producer fees are examined as part of the Financial Case.

Figure 8: Operational Costs and Funding

Source: Deloitte Analysis

3.47 In addition to the annual operating costs of the scheme, there are upfront capital investment requirements in relation to the acquisition of around 3,000 RVMs, four counting/bulking centres and the IT software requirements. The options for the financing of these assets has been summarised in section 3.5.5.2.

3.5.5.2 Financing Options

3.48 The key options for funding the upfront capital are considered below. The most effective solution will be selected as part of the subsequent market testing work and confirmed as part of the FBC Stage 2.

3.49 Where costs are met through direct investment by a public sector Scheme Administrator, capital and revenue budgets would be required investments. However, there are a number of further financing considerations for a public sector scheme administrator:

• Early investment and pre-operating costs would generally be met by the Scheme Administrator.
• Under Option 1B (as well as the private sector options), the RVMs are assumed to be financed by the equipment suppliers, the retailers or other third-party funders. The decision on which route to pursue may vary for each site as, for example:
  • Major retailers may determine that the lowest cost approach would be to acquire and maintain these RVMs directly using corporate borrowing or other available corporate capital.
  • Equipment providers may offer finance such that the retailers have an option to rent or lease the RVMs.
  • Alternative finance companies may develop to acquire the RVMs and to offer these on lease or hire to retailers. It is possible that this funding could come from commercial providers and could also include commercially-based finance from the Building Scotland Fund (BSF) or the Scottish National investment Bank (SNIB). BSF and SNIB are Scottish Government initiatives that will offer commercial finance to private businesses. Specifically, the novel nature of the technology and the Scottish Government's greater ability to take policy risk (e.g. if changes are made to the scheme which alter the need for RVMs or otherwise affect the ability of the retailers to finance these) might make BSF or SNIB attractive lenders to the scheme and potentially help attract other providers of finance.
• It would be possible for the Scheme Administrator to develop financing packages for RVMs along the lines of the above, and retailers could understand the financing options available.
• The Scheme Administrator may be able to utilise cash inflows from deposits, but this will depend upon both the level of evidence the Scheme Administrator can provide in relation to the level of deposits which will never be redeemed (see Financial Case) and the detailed regulatory framework of the scheme which will be developed as part of FBC Stage 2.

3.50 The Scheme Administrator would need to have access to finance to meet the set-up costs of the scheme. This could include finance from:

• A producer fee being charged in the start-up year.
• The Scheme Administrator's capital as provided by way of debt or equity from the producers which own the non-profit Scheme Administrator.
• Banks or other financial institutions providing finance to the Scheme Administrator.
• As with RVMs, BSF or SNIB finance may also be appropriate to finance the Scheme Administrator. These Scottish Government lenders and investors, allied to the Scottish Government's unique position in implementing the DRS, may have a greater level of understanding of policy risks surrounding the scheme and potentially attract other providers of finance.

3.51 The final financing approach will be the responsibility of the Scheme Administrator when it is formed. Details of the financing assumptions used in this FBC are described in the Financial Case.

3.5.6 The Delivery Options Shortlist

3.52 Informed by the analysis as set out in sections 3.5.2 - 3.5.5 above, a shortlist of four potential delivery options have been identified under which the Scheme Administrator might deliver a successful non-profit scheme. In all options the corporate form is a CLG.

3.53 The four delivery options are set out below. The key differentials are the ownership and voting structure and how the constituent elements of the scheme are delivered (i.e. publicly procured or procured by private sector).

• Option 1A - Public Owned Scheme Administrator and RVMs
  • Ownership & Influence - 100% public sector owned with full ownership and voting rights, consultative engagement with the private sector.
  • Infrastructure and Logistics - Counting and bulking centres procured by public sector (Scheme Administrator) who assumes construction and development risk. Logistics outsourced. RVMs procured by Scheme Administrator.
  • Financing - Public sector borrowing to fund upfront capital investment. Potential need for ongoing public sector revenue funding based on scheme performance.
• Option 1B - Public Owned Scheme Administrator
  • As per Option 1A but with retailers bearing responsibility for acquiring/financing/owning the RVMs. The retailers would be reimbursed by the public sector Scheme Administrator through the handling fee.
• Option 2 - Private Owned
  • Ownership and Influence - 100% private sector owned. Public sector influence through legislation, regulation and establishing robust feedback loops.
  • Infrastructure and Logistics - Counting and bulking centres procured by private sector who assumes construction and development risk. Logistics outsourced. RVMs procured by retailers.
  • Financing - Private sector classified Scheme Administrator responsible for managing early cash balances and securing financing necessary to deliver the scheme. The RVMs would be financed by retailers, rather than the Scheme Administrator, in this approach. The retailers would be reimbursed by the Scheme Administrator through the handling fee.
• Option 3 - Public/Private
  • Ownership and Influence - 80% private sector 20% public sector owned. With public sector share limited to 20% to minimise potential risk of reclassification.
  • Infrastructure and Logistics - Counting and bulking centres procured by private sector who assumes construction and development risk. Logistics outsourced. RVMs procured by retailers.
  • Financing - Private sector classified Scheme Administrator responsible for managing early cash balances and securing financing necessary to deliver the scheme. The RVMs would be financed by retailers, rather than the scheme administrator, in this approach. The retailers would be reimbursed by the Scheme Administrator through the handling fee.

3.6 Delivery Option Assessment

3.54 With previous HM Treasury guidance for comparing public versus private models still to be replaced, the comparison of the different delivery options has instead been assessed against eight key factors, including:

• Previous scheme precedents - Number and effectiveness.
• Realising additional benefits.
• Control/influence over the Scheme Administrator.
• Achieving industry buy-in.
• Regulatory.
• Impact to the Scottish Government.
• Fraud prevention.
• Budgetary control.

3.55 The choice of factors has been directly informed by research into existing DRS schemes. Each of these elements are considered in turn below:

3.6.1 Precedents - Comparison to other DRS Schemes

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Number
Effectiveness

There are numerous DRS schemes implemented across Europe and beyond. These schemes provide a significant evidence base for performance and have been used as a consideration for the selection of the preferred delivery option.

The majority of recent schemes and particularly in Europe:

• Have successfully followed and operated a private sector operated, non-profit model.
• Been efficient in managing the operating costs of the scheme efficiently. The private sector is incentivised to run on an efficient basis and therefore maximises recycling rates and minimises fees to producers.
  

More detailed analysis of these schemes can be found at Annex 6.1.2

3.6.2 Realising Additional Benefits

3.56 As discussed in Section 3.5.4, there are a variety of additional benefits that the scheme might deliver. These have been considered against the delivery options in Table 26 below.

Table 26: Realising Additional Benefits - Evaluation of Delivery Options

Additional Benefit		Description	Public Options (1A, 1B)	Private Options (2, 3)	Options Commentary
1	Improved material quality	One of the most significant benefits from DRS is the improvement in quality of materials generated for recycling. The collection method almost eliminates the potential for contamination.			All the options would deliver this benefit. Under Options 2 and 3, regulation could be used to incentivise the private sector to continually generate high-quality recyclate in order to maintain the performance of the scheme. Options 1A and 1B would rely on the public sector trying to encourage the private sector to use the best quality of material.
2	Attracting and securing processing capacity to Scotland	The benefit of attracting or securing manufacturing within Scotland to make use of supply side improvement that this high-quality stream of recyclate represents.			Option 1A and 1B are likely to offer slightly higher benefits as the ongoing involvement of the public sector allows greater opportunity to use targeted incentives to encourage success.
3	Influencing Packaging Design	Producer fees could be varied based on rewarding positive design choice, i.e. lightweight or use of recycled content.			Options 1A and 1B offer greater opportunity to ensure that this approach is adopted and covers the widest range of packaging.
4	Wider litter impacts	Indirect costs associated with waste being in the wrong place.			All the options would deliver this benefit. There is not considered to be a significant difference between the options.
5	Reduction in propensity to litter	Ability to reduce people's propensity to litter through conscious and subliminal messaging.			All delivery options would deliver this benefit. Options 1A and 1B as public sector operated would provide the greatest opportunity for direct influence through conscious messaging, although it can be argued that the performance targets set to a private sector operator will encourage them to innovate to ensure that these targets are met. There is little difference between the delivery options.
6	Magnified impacts of litter on certain socio-demographic groups	Any reduction in litter is likely to have a larger positive impact on certain socio-demographic groups.			All delivery options would deliver this benefit.
7	Contribution to sector sustainability strategies	All of the sectors, which represent the products within scope of the DRS, have an environmental strategy.			All delivery options would deliver this benefit. Options 2 and 3 will allow the private sector to better shape the Scheme Administrator to ensure the scheme can support delivery of their own strategies/targets.
8	Increased footfall for retailers	There is evidence to suggest that where the public come to redeem their deposits, they are likely to spend their redeemed deposit in the store they receive it.			All delivery options would deliver this benefit.
9	Collection efficiencies and utilising existing facilities	The use of existing infrastructure, such as existing fleet movements or waste management facilities could be utilised to minimise costs of the scheme			As outline earlier the use of an outsourcing delivery for the logistics has been identified as part of the preferred delivery option and therefore the benefit is expected to be achieved by all delivery options.
10	Supporting economies of scale in collections	The national nature of the scheme would allow the comprehensive infrastructure to be utilised for a variety of purposes.			As outlined earlier the use of an outsourcing delivery for logistics has been identified as part of the preferred delivery option and therefore the benefit is expected to be achieved by all delivery options.
11	Non-local authority litter savings	The increased recycling rate will have a direct impact on the level of littering which results in savings through reduced litter collections.			This will be driven by the performance of the Scheme Administrator. All delivery options would deliver this benefit
12	Involvement of third sector in delivery	Use of third sector organisations to create additional benefits such as employment opportunities to young people or socially disadvantaged groups			The public sector delivery options provide more scope for making use of the third sector. The private sector may need additional encouragement to make use of the third sector unless there is a perceived commercial benefit from their involvement.
13	Financial benefits for community organisations	The DRS operates a number of opportunities for good causes to benefit financially			It is expected that all delivery options can help deliver this benefit. The decision of an individual to donate their deposit to a charitable cause does not financially disadvantage the private sector so there is no significant difference between the options.
14	Increase in recycling of non-DRS materials	The DRS will increase capture levels of non-DRS materials. CO2e benefits plus additional revenue from recycled content			All delivery options would deliver this benefit The scheme will encourage the public to recognise the benefits of recycling more generally and this will result in an uptake in additional recycling of non-DRS materials.
15	Wider behaviour change messaging	The roll-out of the physical DRS infrastructure across the country will provide an excellent foundation to communicate scheme benefits to both operatives and wider public.			All delivery options would deliver this benefit. Options 1A and 1B as public sector operated would provide the greatest opportunity for direct influence through conscious messaging.
16	Improved data quality and transparency	Provided robust data systems are set up, implementation of the DRS scheme will provide a rich data source on recycling attitudes and trends			All delivery options would deliver this benefit. Options 1A and 1B as public sector operated would provide the greatest opportunities here given that the public sector would be the direct owner of all data generated although careful compliance with public data controls would need to be ensured.
17	Other environmental benefits - carbon pricing	The DRS scheme can contribute positively to help relevant stakeholders meet carbon pricing targets/avoid financial penalties as a result.			All delivery options would deliver this benefit.
18	Creating a circular economy exemplar	Delivering a successful 'closed loop' DRS scheme would bring positive wider PR and interest from other entities looking to deliver DRS schemes.			It is expected that all delivery options can help deliver this benefit. The public sector options are considered more likely to achieve benefits as the private sector would be less inclined to deliver on this if it was more expensive or complicated to achieve.

Source Scottish Government

3.57 The overall scheme design, governance and regulatory regime will have an influence on the achievability of these wider objectives:

• A public sector owned and classified Scheme Administrator would provide the Scottish Government with more flexibility in relation to all aspects of the scheme, including its ability to realise additional benefits of the type identified above.
• A private sector classified Scheme Administrator may still be able to deliver some of these benefits, although benefits that lead to specific areas of public sector control or material overall level of public sector control are likely to lead to a public sector classification.

3.58 Further work on the detailed scheme design will be undertaken to determine the extent to which the identified ancillary benefits might be achieved through a private sector solution. To support the design of the Scheme Administrator to maximise the realisation of the additional benefits an 'Additional Benefits' work package is being developed with the Implementation Advisory Group (see Management Case for further detail).

3.59 Some influence of a private sector Scheme Administrator may be possible through the original scheme design and the underlying regulatory regime. Nevertheless, taken in the round, the influence available to the Scottish Government will be limited if a private sector classification is to be achieved.

3.60 A private sector classified DRS will still be able to achieve on the majority of the identified additional benefits which has been evidenced by the performance of other schemes in Europe. Overall, the options are evaluated for these potential ancillary benefits below.

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Realising additional benefits

In addition to the eight key factors against which delivery models have been assessed, the OBC identified an additional 20 potential wider benefits that could result from a successfully delivered scheme to some degree dependent on the chosen delivery model. Two of these benefits (impact on producer operational efficiencies and local authority waste collection optimisation) have now been quantified and incorporated within the Net Present Value (NPV) calculation within the Socio-Economic Case.

Overall, the two public sector options were found to be more conducive to enabling these benefits to be realised than the private sector options. There would still be scope to achieve these benefits under a private sector option, but this would be dependent on the Scottish Government putting in place a robust and flexible regulatory regime that incentivises private sector partners to help achieve these additional benefits, without putting at risk the private sector classification of the scheme.

3.6.3 Control / Influence over Scheme Administration

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Control/influence over scheme administration

The public sector ownership of Options 1A and 1B provide the clearest and simplest opportunity for the public sector to direct the way in which the scheme is operated. Under these options, assuming the scheme would be public sector classified, the control and influence is only limited by legislative restrictions.

The 100% private sector ownership of the Scheme Administrator under Option 2 means that control/ influence for the public sector may only be achieved in other more limited ways. The public sector will be limited to ensuring the legislative and regulatory framework for the scheme is set in an effective way to incentivise the private sector to perform in terms of the targets set.

Under Option 3, partial ownership of the scheme by the public sector, would offer some degree of influence although the private sector would always have a majority vote and control.

3.6.4 Achieving Industry Buy-In

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Achieving industry buy-in

The feedback from industry (both producers and retailers), as part of the formal public consultation and further informal discussions, has indicated their preference to own and operate the scheme. The industry view is they are better placed to control and manage the scheme, to ensure it is operated in the most effective and efficient manner.

3.6.5 Regulatory

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Regulatory

Regulatory powers would normally be created and entrusted by the Scottish Government. The regulator may be created for the sole purpose of regulating the DRS, or the powers and functions required to fulfil these duties may be entrusted to an existing authority, such as the Scottish Environment Protection Agency (SEPA). At an overarching level, scheme regulation will seek to satisfy three key criteria:

• Ensure the DRS Scheme Administrator is able to meet its objectives.
• Ensure the overall scheme is operated efficiently and effectively, capturing appropriate materials and enforcing scheme performance.
• Provide an effective incentive regime to maximise recycling rates, which will contribute to development of a circular economy in Scotland.

Key to effective regulatory oversight will be developing appropriately calibrated KPIs and incentive mechanisms to penalise failures and achieve targets, but also reward outperformance - for example by reducing producer fees in future years.

While many of the details of the scheme's design and its regulations remain to be determined, at a high level any regulator would need to set out a range of 'rules', along with compliance and enforcement activities. These will encompass deposits, handling fees, materials in scope, packaging tracing/marking, registration and collateral, and helping to facilitate the wider additional benefits offered by the DRS (see Section 3.6.2).

Regulation, and more specifically excessive regulation, needs to be considered in the context of the classification (public or private) of the scheme. This is relevant to Options 2 and 3 (private and joint venture) where excessive regulation could potentially impact on a private sector classification. This issue is discussed further in Annex 6.2.

A critical element of successful regulation will be to ensure effective interplay with the wider additional benefits offered by the scheme - see Section 3.5.4. With greater operational control offered under a public sector delivery option, there should be less need for regulation to ensure these benefits are realised and vice versa.

3.6.6 Impact to the Scottish Government

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Impact to the Scottish Government

While potentially offering greater upside reward, the two public sector options - and particularly Option 1A - would significantly increase the Scottish Government's exposure to project risk. The public sector will be responsible for the Scheme Administrator ensuring collection and redemption of deposits, minimising fraud, minimising costs, regulatory compliance and managing liabilities.

Options 2 and 3 substantially transfer risk from the Scottish Government to the private sector. The performance and cost efficiency of the scheme will be the responsibility of the private sector. The public sector will use the regulator to manage the performance risks of the scheme.

3.6.7 Fraud Prevention

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Number

Evidence from established jurisdictions indicates that a level of fraud should be anticipated within the scheme. This might occur in a number of ways and can include:

• Ineligible materials^[52] are accepted manually by retailers and deposits are paid. However, material is ineligible for sale and potentially contaminates eligible sale material.
• Ineligible materials are accepted through the automatic RVM and deposits are paid. However, material is ineligible for sale and potentially contaminates eligible sale material.
• Illegally manipulating/tampering with RVMs to claim additional deposits for the same material.

The various types of fraud can include a decrease in unredeemed deposits revenue, a decrease in sale of materials revenue and potentially an increase in handling fees due to the introduction of additional material into the DRS eco-system.

The Scheme Administrator will have a key role in ensuring the minimisation of fraud and, generally, the public and private sector can place the same level of assurance checks and safeguards in place to mitigate. A private sector operated model would however have greater control over the introduction of labelling which can further minimise potential fraud in the system.

3.6.8 Impact on Public Sector Budgets

3.61 Alongside value for money, the budgetary implications of each feasible delivery option has also been considered. This incorporates analysis of the various revenue and cost streams that can impact on the Scottish Government, along with how the scheme is classified for accounting purposes under relevant regulations.

3.62 On the basis of the expected scheme design of a private sector model (Options 2 and 3) we assume the Scheme is likely to be classified as private sector under relevant accounting regulations, meaning there will be no additional budgetary implications for the Scottish Government as a result of the scheme. The Scottish Government would, however, need to ensure that regulatory or other systems of control are not deemed sufficiently onerous to threaten this classification.

3.63 The public sector may incur additional regulatory costs, but it is expected these would be charged back to the private sector as a compliance fee in line with other regulated activities such as utility companies, and this would result in a net nil impact to budgets.

3.64 The final classification of the Scheme Administrator would be undertaken by the Office for National Statistics (ONS) and can only be completed once the full commercial details have been finalised, as a number of elements will need to be considered to achieve a final view.

3.65 Further detailed analysis of accounting and budgetary implications can be found at Annex 6.1.

	Option 1A Public sector - RVM	Option 1B Public sector - no RVM	Option 2 Private sector	Option 3 Joint venture
Impact on public sector Budgets

In line with control and influence over scheme administration, public sector ownership of Options 1A and 1B provide the clearest and simplest opportunity for the public sector to direct the way in which project budgets are operated.

Public sector classified schemes will impact on public sector capital and revenue budgets. A private sector owned and managed scheme will not. Full consideration of these issues is set out at Annex 6.1

3.6.9 Summary Assessment of Delivery Options

3.66 The findings of the assessment in sections 3.6.1 to 3.6.8 are summarised in Figure 9 below:

Figure 9: Summary of delivery options

Source: Scottish Government Analysis

3.7 Preferred Delivery Options

3.67 The process of choosing a delivery model for the DRS will necessarily involve a process of an 'informed trade-off', whereby Scottish Ministers are able to accurately benchmark their aspirations around influence, risk, timeframe and efficiency against a range of feasible models.

3.68 The decision-making process also needs to be flexible going-forward and able to react quickly and efficiently to future events. For example, the recommendation to move forward with a process of 'inward investment', using existing Scottish reprocessors, would need to be revisited if market sounding indicated a lack of appetite from these core stakeholders. Likewise, a robust market-sounding process would be essential to confirm levels of industry appetite for the proposed procurement under a private sector led non-profit model.

3.69 Work performed would indicate that of the four delivery models considered it is Option 2 - a Non-Profit, private sector owned/operated model - that best aligns with Scottish Ministers' aspirations for the scheme. Specifically, this model:

• Has recent precedent, with a number of recent European schemes functioning effectively from a privately operated, non-Profit model.
• Maximises scope for buy-in from the private sector, with producers and retailers indicating through consultation this would be their preferred approach. Ownership by producers will also incentivise efficiency, as they are the organisations responsible for any shortfall in scheme finance.
• Minimises requirement for public sector monitoring/management of performance against budget. However, the Scottish Government should still ensure robust systems of engagement with its private sector partner, given the strategic importance of the scheme.
• Minimises levels of operational and financial risk exposure for the Scottish Government.

3.70 The private sector model would, however, potentially restrict the achievement of wider benefits from the scheme that might better be achieved under a public sector model. This emphasises the importance of the Scottish Government implementing a robust and flexible regulatory regime to drive out these benefits, whilst still ensuring a private sector scheme classification.

3.7.1 Procurement and State Aid

3.71 The approach to achieving the preferred scheme and delivery route is being developed as part of the FBC Stage 2. An achievable approach will be a pre-requisite for implementation of a private sector classified scheme.

3.72 In framing the procurement approach, the Scottish Government will also need to test against relevant state aid provisions, to ensure these do not prevent or delay the go-to-market approach.