Deposit return scheme for Scotland: full business case stage 1

Phase 1 of the Full Business Case (FBC) that underpins the design for the deposit return scheme for Scotland.


Executive Summary

Introduction

The Scottish Government is committed to creating a more circular economy where things are made to last, preventing litter and addressing climate change for the betterment of our environment, economy and society. The Scottish Government is committed to ambitious targets to increase the recycling rate and recognises that fresh interventions are needed to bring about the systemic and behaviour change necessary to fulfil these aspirations.

It is against this backdrop that in the 2017 Programme for Government, the First Minister committed to introducing a Deposit Return Scheme (DRS) for drinks containers for Scotland.

This Full Business Case (FBC) Stage 1 demonstrates how a successful scheme will contribute to Scotland's 2025 target to increase the national recycling rate to 70% and to Towards a Litter-Free Scotland, the national litter strategy which aims to effect a wholesale shift in national policy and practice towards prevention. It reflects the aim of Scotland's circular economy strategy, Making Things Last, to ensure that as many materials as possible are kept in high-value use, through a closed loop system and/or high-value recycling. The DRS, and the social and economic benefits which it seeks to deliver, also sit within the context of the Scottish Government's Economic Action Plan.

The case for Scotland's DRS is being presented in two stages. Stage 1 provides the overarching framework for the preferred scheme design and commercial approach. Stage 2 will offer a greater level of technical and commercial detail.

This FBC Stage 1 identifies a preferred scheme design, building on the Outline Business Case (OBC) published in May 2018 and further analysis and consultation that has subsequently taken place.

The document follows HM Treasury's Five Case Model of business case development and comprises: the Strategic Case, the Socio-Economic Case, the Commercial Case, the Financial Case and the Management Case.

The Strategic Case sets the international and European strategic drivers for change, with a focus on the Scottish policy and strategic context. It demonstrates how the spending proposal provides synergy and strategic fit and is based on a robust and evidence-based case for change. This includes the rationale of why intervention is needed, as well as a clear definition of outcomes and the potential of what can be achieved.

Four investment objectives have been identified which inform the development of the preferred scheme design and against which its impact will be measured:

  • Improving recycling quantity.
  • Improving recycling quality.
  • Encouraging wider behaviour change around materials.
  • Delivering maximum economic and societal benefit for Scotland during the transition to a low carbon world.

Of the 12 components of the scheme design identified in the OBC, seven are considered in the Socio-Economic Case and five (which relate to the most effective means of delivering the final scheme) are considered in the Commercial Case.

The selection of individual components has been informed by:

  • The public consultation responses. The consultation received 3,215 submissions.
  • Evidence and the revised Net Present Value (NPV) model, business and regulatory impact assessment (BRIA), equalities impact assessment (EQIA) etc.
  • A review of international best practice.
  • Feedback from a series of stakeholder engagements.

The key output from the Socio-Economic Case is the preferred scheme design. This is described as:

  • Return to any place of purchase.
  • Including PET, metal cans and glass bottles.
  • With a 20p deposit.
  • A target capture rate of 90%.

Infographic:

infographic - Scotland's Deposit Return Scheme

Infographic text:

Scotland’s Deposit Return Scheme
Buy drink. Pay deposit
20p deposit

Containers recycled
Pet plastic bottles
Glass bottles
Steel/aluminium cans

Take back to a place that sells drinks to take away*
*some businesses, like restaurants, will only take back drinks sold on premises
Deposits returned here
Around 17,000 return points nationwide
Local shop
Restaurant
Take away

Return options
Counter
Machine
Online delivery return

Deposit returned to you
Bottles & cans recycled

Deposit return increases quality so bottles can be recycled
Back into bottles
Target capture rate: 90%
1 2 3

The NPV and Benefit-Cost Ratio (BCR) for the preferred scheme design are:

Scheme Design Net Present Value Benefit-Cost Ratio
Preferred Scheme £705m - £141m 1.2 - 1.03

The remaining five components, which relate to the most effective means of delivering the final scheme, are considered in the Commercial Case, which presents the recommendation for the establishment of the Scheme Administrator.

The key findings from the Commercial Case of the 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 public sector. Logistics outsourced. Public sector borrowing to fund upfront capital investment.
  • Option 1B - As per Option 1A, with the exception of reverse vending machines (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 Scheme Administrator. Logistics outsourced. RVMs procured by retailers and reimbursed by the Scheme Administrator through the handling fee.
  • Option 3 - Public:Private (20%:80%) non-profit joint venture. Counting and bulking centres procured by 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 and has a track record of minimising costs and achieving high rates of recycling. Specifically, this model:

  • Places operational and financial risk exposure with producers[1], in line with Extended Producer Responsibility.
  • Has recent precedent, with several European, privately operated, non-profit model 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 and funders 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 budgets .

Taking into account the evidence, 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.

The Financial Case presents modelling on the upfront capital costs, overall investment requirements, operating costs, estimated profits, income from sale of materials and other key financial data relating to the preferred scheme design.

The financial forecast and associated financial statements are developed across a ten-year period which comprises the 'Observatory Period' (Year 0 to Year 5) and steady state operations (Year 6 to Year 9). It is developed from the Scheme Administrator's perspective and has adopted a similar treatment of deposit inflows and outflows as the Norwegian deposit return scheme, whereby the net benefit of these flows i.e. the value of unredeemed deposits, can be recognised as revenue in the profit and loss accounts of the Scheme Administrator and applied against scheme expenses.

A key assumption is the non-recognition of accrued cash as unredeemed deposit revenue in the profit and loss accounts until Year 6 onwards. In practice, the Observatory Period will be dictated by the volume and quality of evidence the Scheme Administrator is able to collate in the initial years of the scheme in order to provide sufficient audit comfort that a reasonable assumption with respect to the volume of deposits has been made.

In addition, the financial modelling has assumed that this accrued cash balance (approximately £190 million) remains within the scheme across the steady state. However, the Scheme Administrator may choose to use this in alternative ways e.g. to be applied to scheme expenses, thereby offsetting producer fees or to fund future borrowing requirements.

The final section, the Management Case, outlines the governance, management and resourcing structures and procedures which have been put in place during the design phase of the scheme, providing robust project management and accountability suitable to a project of this scope and complexity.

Contact

Email: timothy.chant@gov.scot

Back to top