Deposit return scheme for Scotland: full business case addendum

2 NPV Analysis – Summary of Changes

2.1 This section provides an overview of the changes to NPV to individual actors within the DRS, taking account of the updates made to underlying assumptions and figures since FBC Stage 1.

2.1 Scheme Administrator

2.2 The total costs of delivery of the scheme over 25 years is £1,514 million - £1,817 million and correspondingly the total benefit is £1,836 million - £2,139 million. No assumptions are made about how this accumulated balance is then distributed.

2.3 Operating expenditure has risen since FBC Stage 1, driven mainly by the impact of increased container numbers which has resulted in increased costs relating to logistics, processing (counting centre costs), and fraud. In addition, the revised assumptions adopted for the handling fee calculation have also increased scheme administrator costs.

2.4 The range of figures associated with these costs are shown in Table 2 below:

Table 2: Scheme Administrator costs

Scheme Administrator Tasks	Cost Range
Handling Fee to Retailers	(£937 million-£1,125 million)
Cost of Collection Logistics	(£333 million-£400 million)
Staff and Infrastructure Costs	(£135 million-£162 million)
Fraud	(£109 million-£131 million)
Total	(£1,514 million-£1,817 million)

2.5 While the main income streams for the scheme administrator remain unchanged since FBC Stage 1, the proportion coming from unredeemed deposits has increased (due to increased container numbers) and the revenue from the sale of materials has decreased (due to adjustment in material market values). The producer fee contribution has risen to balance increased return point handling fees.

2.6 The range of figures associated with these benefits are shown in Table 3 below:

Table 3: Scheme Administrator benefits

Scheme Administrator Tasks	Cost Range
Unredeemed deposits	£854 million
Revenue from material sales (selling individual materials collected for recycling)	£277 million
Producer Fee (producer financial contribution to scheme costs)	£705 million-£1,008 million
Total	£1,836 million-£2,139 million

2.7 Over the course of Year 0 to Year 5, referred to as the Observatory Period, the scheme administrator will be collecting evidence on consumer behaviour to support the establishment of an assumption that reflects the amount of deposits that are never to be redeemed in a given period, and therefore can be recognised as revenue. Unredeemed deposits are therefore reserved in years 1-5, resulting in a £322 million increase in the producer fee contribution required to cover the scheme costs. No assumptions are made about how this accumulated balance is then distributed. However it is clear that providing the necessary evidence to allow access to this revenue stream would dramatically reduce producer costs.

2.2 Return Points

2.8 The total cost to return points of facilitating returns over 25 years is £937 million - £1,125 million and the total benefit is £963 million - £1,151 million. The net benefit is therefore £26 million, which is the estimated value of RVM advertising space previously apportioned to society as a benefit.

2.9 Return point costs have increased since FBC Stage 1 due to the increased throughput of containers, refinements to the assumptions concerning installation, running, and maintenance costs of automated return points and updates to staffing costs, following industry and supplier feedback. This is balanced with an equivalent increase in handling fees.

2.10 This results in the return profile shown in Table 4.

2.3 Producers

2.11 The total cost to Producers from implementation of the scheme over 25 years is £824 million - £1,150 million and correspondingly the total benefit is £720 million. The net cost is therefore £104 million - £430 million.

2.12 Increases to the producer fee since FBC Stage 1 have been driven by the increase in the return point handling fee and a reduction in the sale of materials revenue, in combination requiring a greater contribution from producers to balance costs.

2.13 The range of figures associated with these costs is shown in Table 5. The producer fee balancing figure incorporates the £322 million of unredeemed deposits which the scheme administrator must reserve throughout the in years 1-5. This results in an increase of £322m to the producer fee across the first 5 years.

Table 4: Return profile

Return Point Type	Automatic		Manual
No of containers returned per year	1,661 million		293 million
Return point costs	(£937 million - £1,125 million)
Handling Fee	£937 million - £1,125 million
Value of RVM advertising space	£26 million	N/A
Total net benefit	£26 million	£0

Table 5: Producer costs

Producer Costs	Cost Range
Set-up costs for establishing separate label	(£46 million-£55 million)
Ongoing costs associated with creation of two labels for UK market	(£73 million-£88 million)
Producer Fee	(£705 million-£1,008 million)
Total	(£824 million- £1,150 million)

2.4 Local Authorities

2.14 The total cost to Local Authorities over 25 years, as a result of DRS, is £46 million and correspondingly the total benefit is £214 million. The net benefit is therefore £168 million. £137 million of these benefits come in the form of reduced disposal costs.

2.15 There has been a reduction in benefits since FBC Stage 1 due to changes in the split between DRS and non-DRS containers, which has increased the quantity of materials remaining at kerbside for collection, and the associated costs for local authorities.

2.5 Commercial Premises

2.16 There are £0 costs to commercial premises over 25 years and £23 million in benefits. The net benefit is therefore £23 million.

2.17 There has been a reduction in the net benefit since FBC Stage 1 due to changes in the split between DRS and non-DRS drinks containers, resulting in a smaller proportion of materials being collected free of charge by the scheme administrator.

2.6 Other Sectors

2.18 Costs to regulators over 25 years are £17.3 million and there are £0 benefits, resulting in a net cost of £17.3 million. The costs are staff and overhead costs associated with ensuring compliance across all actors involved in DRS. Costs primarily fall to the Scottish Environment Protection Agency (SEPA) (£16.9 million), with the remaining amount (£0.4 million) accounting for ad hoc contact with other regulators such as Fire and Police services.

2.19 The cost to regulators has increased since FBC Stage 1 based on updated estimates provided by SEPA who will regulate the scheme. As there are no financial benefits, this has resulted in an increase to the net reduction in NPV over the 25-year period.

2.20 Commercial waste management operator costs over 25 years are £23.4 million and the benefits are £22.7 million, resulting in a net cost of £0.7 million. The cost and benefits to private waste management companies has decreased as a result of the reduced weights of containers applied since FBC Stage 1, in turn impacting on collection costs and material income. This has resulted in a small decrease in overall net cost over the 25-year period.

2.21 RVM service provider costs over 25 years are £124 million and the benefits are £128 million, resulting in a net benefit of £4 million. The cost and benefits to RVM suppliers has increased since FBC Stage 1 due to revised figures for installation and maintenance costs provided by industry. This has resulted in a small increase in net benefit over the 25-year period.

2.7 Public

2.22 The total cost of the scheme to the public over 25 years is £1,019 million and the total benefit is £1,187 million. The net benefit is therefore £168 million.

2.23 Costs to the public have increased slightly since FBC Stage 1 due to the increase in container numbers and the corresponding value of unredeemed deposits.

2.24 Benefits to the public have increased since FBC Stage 1 following revisions to the value of carbon based on current traded carbon values (£/tCO2e), provided by BEIS^[4].

2.25 The figures associated with these costs and benefits are (Table 6):

Table 6: Impact on the public

Impact on Public	Costs	Benefits
Unredeemed deposits	(£854 million)	N/A
Value of public time	(£165 million)	N/A
Improved amenity resulting from the reduction in litter	N/A	£998 million
Monetised benefit from carbon emission reduction	N/A	£190 million
Total	(£1,019 million)	£1,187 million

2.8 Sensitivities

2.26 Section 3.4 sets out the Highest Foreseeable Cost Case modelled on industry feedback, where the impact of a 25% increase in the number of RVMs and an increase in lost staff time per machine from 1.5 hours to 7 hours per week is calculated.

2.27 To assess the sensitivity of the costs to these factors, Table 7 summarises the resultant Net Present Value under the Highest Foreseeable Cost Case. Even at this significantly higher cost level the 25-year NPV of DRS is still positive.

Table 7: Highest Foreseeable Cost Case based on industry feedback: Net Present Value

Actor	Scheme Design: 25 Year NPV (£)
	Costs (£m)	Benefits (£m)	Net benefit (£m)
Scheme Administrator	(2,008)	2,330	322
Return Points	(1,403)	1,429	26
Producers / Supply Chain	(1,317)	720	(597)
Local Authorities	(46)	214	168
Commercial Premises	0	23	23
Other Sectors	(165)	151	(14)
Public	(1,019)	1,187	168
Total	(5,959)	6,054	96