In March this year the Queensland Government announced its intention to reintroduce a waste levy. The previous waste levy, at $35 per tonne on general waste, was scrapped by former premier Campbell Newman in 2012. The new waste levy is proposed to commence in March 2019, at $70 per tonne on general waste and up to $100 or $150 per tonne on regulated wastes, with annual increases of $5 per tonne per annum up to at least 2022. While it won’t be as high as the equivalent metropolitan levy in New South Wales for example, zero to $70 is a steep cost increase in anyone’s language. What’s more, the new levy will apply to almost all types of general wastes, including municipal waste, unlike the narrower application of the previous levy.
Since the levy was announced there has been extensive discussion about its likely impact. Figures announced by the Queensland Treasurer in the 2018-19 State budget forecast that the new levy would generate a mammoth $1.3 billion for the Government by 2022. Queensland Government’s Recycling and Waste in Queensland 2017 report states that 9.8m tonnes of headline waste was disposed of in Queensland in the 2016/17 financial year, including 2.7m tonnes of municipal solid waste (MSW), 2.8m tonnes of commercial and industrial waste (C&I) and 4.4m tonnes of construction and demolition waste (C&D). Notwithstanding reasonable recovery rates (i.e. not sent to landfill) for these waste streams, 69% of MSW, 52% of C&I and 49% of C&D went to landfill. In summary, around 3.59m tonnes of general waste was dumped in Queensland landfill in 2016/17. For those who don’t think the new waste levy will have a significant economic impact, that equates to about $251m per annum in waste levies at $70 per tonne.
$251m is a lot of money. Who will foot the bill? Well, the new levy will be imposed on landfill operators only, but no doubt they will immediately increase their gate fees to recoup this cost, so it will be the waste collectors who will be the first to feel the impact. Now they, of course will want to pass it on down the line to their customers, who will in turn want to pass it further down the line to their customers, just like the proverbial hot potato. The Government expects this to happen. In fact, everyone assumes it will happen. In its explanatory memorandum when introducing the Waste Reduction and Recycling (Waste Levy) and Other Legislation Amendment Bill 2018 into Parliament on 6 September 2018, the Government stated “The primary purpose of the Bill is to introduce a waste levy that will…act as a price signal that encourages waste avoidance and resource recovery behaviours, and discourages disposal to landfill as the first option”.
Critics of the new levy say that it will result in increased costs to consumers, and while the Government is proposing some financial assistance to Local Councils to reduce this impact, some Councils argue that it will lead to increases in general rates. Felicity Caldwell, in an article titled “‘Tax on construction’: Industry claims new homes will cost more under waste levy” published in the Brisbane Times on 4 October 2018, reported that “Ratepayers could be slugged and the cost of building a new home in Queensland will rise by about $1000 to $1500 under the state government’s waste levy plans, industry groups have argued”. Caldwell quoted Paul Bidwell, the deputy CEO of Master Builders Queensland, as saying, “The levy is nothing but a tax on construction” and that “construction waste from new homes was unlikely to be recycled, particularly in regional areas, and would be dumped in landfill at a higher cost and passed on to consumers”. Steven Wardill in the Courier Mail on 5 October suggested that the extra cost to builders and customers could be as much as $3650 in metropolitan areas and even more in regional areas. Which all assumes, of course, that the cost of the levy is passed on from the landfill operator down the line to the consumer.
Unlike the GST, which contains a statutory mechanism for passing the tax down the line to the end consumer, the waste levy legislation relies on private contractual arrangements to pass the cost down the line to the waste generator. Everyone seems to assume this will happen, and in reasonably quick time. No-one seems to be asking “can it happen and if so how, when and to what extent?”. This, if you like, is the elephant in the room. In an article titled “Preparing for the Queensland Waste Levy” in the August 2018 edition of Waste Management Review, Lacey Webb from Mandalay Technologies seemed to acknowledge the elephant’s presence by stating, “It’s imperative that we understand how to change pricing. Do we have mechanisms in place to add a levy, or amend pricing that’s already promoted?”.
In a fixed-term contract, prices can only be increased in the manner and to the extent to which the contract allows, which makes sense if you think about it. If you’re a customer locked into a two-year contract at a fixed price, it wouldn’t be fair for the supplier to raise the contract prices whenever and by as much as the supplier wanted to, unless you had previously agreed to it. As a general rule, aside from “variations” (which generally involve compensation for change in the scope of work), if prices are adjusted during a fixed-term contract, it’s usually by one of two mechanisms: (a) a price adjustment clause (e.g. annual CPI review) or a “change in law” clause in the contract.
Long fixed-term contracts are standard in the waste management industry. Having looked at the standard terms and conditions for the largest waste companies operating in Queensland, I can say for certain that they can and will immediately pass the cost of the new waste levy onto their smaller customers. Their standard terms and conditions allow them to do this. Contracts between waste management clients and larger customers, which have been won by tender, are another matter. These contracts are usually for long fixed terms (three to ten years is common) and are almost always drafted by the customer in favour of the customer. So, whether XYZ Skips Pty Ltd can pass on the increased costs it incurs in having to pay an extra $70 per tonne to dispose of the C&D waste it collects from say, CPB Contractors, under a two-year project contract, will depend on whether its contract with CPB allows this.
Having reviewed over a thousand waste management service tenders over the last eleven years, I’m still amazed how many proposed tender contracts contain unsatisfactory price review clauses. For example, a few days ago I reviewed a tender contract in a waste management RFQ issued by a major university for a seven-year term, which contained no price adjustment mechanism apart from a “change in law clause”. Now given that the new waste levy is a change in law, you would think this clause would cover it, but in this case, “change in law” was defined as excluding new or amended taxes. Also, “change in law” clauses are often worded in such a way that they only apply in the case of taxes “directly” imposed on the contractor. The new waste levy will only be imposed “directly” on the landfill operator and with each contract pass down the line it becomes more remote and less “direct”.
Many long-term contracts contain price adjustment mechanisms that allow an annual price increase by reference to CPI, however this is not always appropriate. Firstly, it depends on which CPI index is being used. Waste disposal fees in Queensland have been rising by around 5% per annum for some years now, while the CPI (All Groups) index has gone up by an average of only 2% for the past few years, so annual increases by CPI (All Groups) only would have resulted in an annual decrease in profit margin. The longer the contract continues, the more damaging this becomes to the bottom line. Waste management companies over that time would have been better served having their prices indexed to the CPI (Transport) index (if any CPI index), which increased by 6% over the year to September 2018 and 5.2% the year before. Or, better still, having waste disposal fees listed as a separate price component and passing on any increases in waste disposal fees at cost, with the rest of the contract price increased by reference to CPI (Transport) index. Another option might be to have a portion of the price linked to the Australian Institute of Petroleum’s terminal gate price for diesel (TGP), as is common in many Local Council waste management contracts.
Gate fees charged by landfill disposal facilities across Queensland range from around $70 dollars per tonne for bulk discounted customers to around $140 per tonne (plus GST), depending on location, so the inclusion of an extra $70 per tonne for the waste levy could see disposal fees increase overnight by between 50-100%. If you’re a contractor or subcontractor paying someone else to collect and dispose of waste, and this forms a significant cost of providing your service, you’re going to want to make sure you can pass this sudden cost increase on to your customer (i.e. the head contractor or the principal). If your contract only allows you to adjust your prices by CPI, it’s really going to hurt you.
Now, waste disposal may or not be a significant operating cost in your business, however the takeaway lesson here is that all long-term contracts that you enter into (e.g. longer than about a year) should contain appropriate price review and adjustment mechanisms. Such price adjustment mechanisms should be framed in such a way as to allow you, as of right, to adjust your prices under the contract during the term to protect your profit margins from increases in relevant and significant operating costs over the life of the contract.
Stephen King
The Tender Lawyer
7 November 2018