Deposit Return Scheme – gateway review: report – June 2021

5.0 Review Team findings and recommendations

5.1. Policy and business context

5.1.1 The Review Team found that the DRS Programme is solidly founded in SG policy and underpinned by legislation in the Deposit and Return Scheme for Scotland Regulations 2020. Further, the Programme is an early component within a roadmap of other Extended Producer Responsibility policy initiatives aimed to meet the aspirations of Scottish and wider society for major environmental change. It was noted by some interviewees that there has been recent progress in the development of an England-Wales-Northern Ireland deposit return scheme; interviewees, and the Review Team, believe that prolonged delays to the implementation of a Scottish

DRS significantly weaken the justification of a Scotland only system. There was recognition that a Scottish DRS has values of leadership, demonstration and 'proofing' that could shape and benefit an 'other UK' system(s).

5.1.2 The Review Team (and interviewees) recognised that this Scheme is very ambitious, and its aspirations are world leading. The Review Team was pleased to find strong commitment from all interviewees, reflecting robust support from all stakeholders to deliver a society changing Scheme, it was seen as "the right thing to do".

5.1.3 Interviewees were eager to raise a number of policy issues that, they believed, need urgent attention. The Review Team also believe that policy and regulations adjustments are most likely to be required as previous assumptions are tested and refined as this major change programme moves through implementation. Foremost amongst interviewee concerns was a decision by HMRC to include VAT on deposits, this was described by some as "fundamentally changing business models". It was understood that HMRC's interpretation has been shared with CSL, though some interviewees stated that their counsel had advised that this decision could be challenged. The VAT position is not a devolved issue and it is believed that Scottish ministers have previously sought clarification. To enable all parties to 'move-on', and develop business models with, or without, VAT inclusion, it is recommended that the Programme Team take urgent action to draw this decision to a definitive conclusion and communicate this to all stakeholders.

Recommendation 1. It is recommended that that the Programme Team take urgent action to draw the HMRC VAT decision to a definitive conclusion and communicate this clarification to all stakeholders. Critical

5.1.4 A further concern raised by interviewees was the inclusion in the Scheme of on-line sales; it was understood that it is less commonplace for other schemes in the world to include e-commerce sales. Interviewees were eager for detail of how this could be achieved and noted a number of policy decisions required on operational issues such as carriage of waste in food delivery vehicles. On-line sales have significant impact on the DRS operational model and have significant potential to raise reputational issues, particularly from customers in remote areas of Scotland. Resolution of some of the practical issues for achieving an effective deposit return scheme for on-line sales is urgently required to demonstrate that this is achievable; it is recommended that prompt action is taken to resolve these concerns, and ease the development of operational models; the collaboration with CSL to explore and develop potential solutions will be imperative.

Recommendation 2. It is recommended that the Programme Team take prompt action to develop and resolve the practical issues for delivering an effective deposit return solution for on-line sales and agree this at Programme Board (this will require the collaboration with CSL to develop potential solutions). Critical

5.2 Schedule and Delivery Plan (Review of current outcomes)

5.2.1 The Review Team noted that having delivered the DRS Regulations and now that a SA has been approved, the Programme enters its implementation phase. This should require an appropriate adjustment to the Programme approach, and it was noted that key decision makers from SRO through to ministers have recently changed; this is a useful opportunity to aid this approach change.

5.2.2 All parties were clear that delivery schedule is the major and significant issue in the Programme. Indeed, this Review has been specifically tasked with paying particular attention to the delivery schedule especially in-light of the impact of COVID-19.

Following interviews and consideration of Programme documents, the Review Team conclude, with full confidence, that the July 2022 'go-live' target for the Programme is not achievable.

5.2.3 The Review Team found clear evidence that Covid-19 has had an impact on delivery schedules; EU transition activities have also had an impact. However, the Review Team were assured that schedule delays could not be wholly attributed to these challenges (3-6 months delay seems attributable); the Review Team are confident that schedules are unlikely to have been met had Covid not arisen. Importantly, interviewees gave a number of examples where Covid and EU exit are likely to have a continued impact, particularly in the responsiveness to change amongst supply chains, their ability to deliver new products (RVM's and labelling) and the ability of areas such as retail to prepare for the change with new facilities. This should be taken into account in future planning.

5.2.4 The Review Team sought to ascertain the critical path for delivery of a 'golive' Scheme. Many interviewees, and Programme documents, identified the SA (CSL) being able to 'make meaningful decisions' as a critical milestone. In documents, and reinforced by interview discussions, the Review Team did not find a critical path as mature and defined as they would expect for a Programme, let alone one of this significance and schedule pressure; detail on areas such as development of an ICT system was not yet available. The Review Team agree that central to such decisions is the formation of CSL and its ability to make decisions. From interviews, the Review Team were clear that to achieve this CSL must first secure a fully functioning Board and financial support (estimate 2-6 months), must then secure a programme development team (3-6 months) and only then will be in a position to develop and agree an operational blueprint (3-6 months), which all stakeholders require to develop and roll-out their own operational systems, facilities and resources. Some CSL activities can be carried out in parallel, but this will incur significant risk and resource. Key delivery stakeholders interviewed, such as retailers, gave a preparedness estimate of 12-24 months for their individual operations. The Review Team understood that in most cases retailers had been preparing for DRS but were limited in further action until the detail of an operational blueprint has been received from CSL.

5.2.5 The Review Team conclude that a 'go-live' likelihood of July-September 2023 is possible but carries significant risk to achievement, which may materialise in further delay or a reduction in Scheme scope robustness and effectiveness. Beyond risks, the consequences of delay and/or Scheme scope change and the possible reputational issues should be understood by all parties before decisions on a revised schedule are made. It is recommended that key parties are brought together to develop and agree a robust critical path to identify possible 'go-live' targets and associated risks.

Recommendation 3. It is recommended that the SRO brings together key stakeholders to analyse and agree a critical path (and keep this updated) for delivering a viable product by the agreed start date. Critical

5.2.6 Interviewees consistently talked of a full system (big-bang) delivery approach. The Review Team did not see any evidence of consideration of alternative delivery options, although such consideration may exist. This is a major change programme that cuts-across many areas of Scottish society. Conventional project management wisdom would suggest consideration of a 'soft-launch' approach for such a significant project with major implications and risks across a complex range of stakeholders. It is recognised that the technical and operational complexities of a DRS make consideration of a soft-launch difficult to design, however, the Review Team believe that soft-launch options should be fully explored and recommend that such a consideration is fully documented to justify the agreed delivery approach.

Recommendation 4. It is recommended that the Programme Team explore and document the options for the most suitable delivery approach and agree this at Programme Board. Essential

5.2.7 An important component of delivering a working DRS for Scotland, is the establishment of an effective regulator in SEPA. The Review Team explored the preparedness of SEPA. Whilst SEPA are limited in their preparations by the availability of an operational blueprint, the Review Team were given confidence that SEPA is well prepared and organised to meet delivery schedules. An important early functionality for the Scheme, to be provided by SEPA, is a producer registration system. Legislation requires producers to register between January and March 2022. It is certain that producers will not have the operational details that registration currently requires, within this required schedule. SEPA are working towards a minimum viable product (MVP) registration option that would initially only require producer company details. Some interviewees were concerned that this may cause confusion and registration inconsistencies later-on. However, other interviewees believed that an MVP approach would provide valuable data for operational development and would offer some momentum to the Scheme. An MVP approach may require adjustment to legislation. Given that a full registration system is not feasible, then further exploration of the requirements and relative merits of delayed and/or phased approach to registration is necessary. It is recommended that in collaboration with SEPA, the Programme Team examine registration system options and present these to the Programme Board for a decision on the preferred option, at the earliest opportunity.

Recommendation 5. It is recommended that in collaboration with SEPA, the Programme Team examine registration system options and present these to the Programme Board for a decision on the preferred option, at the earliest opportunity. Critical

5.2.8 Many interviewees, and the Review Team, recognised that through the continuing progress of the Programme, previous assumptions can now be refined and that previously unknown details are progressively being better understood. Any revision of the Programme schedule presents an opportunity to capitalise on this developing knowledge, this includes refinement of operational details and the revision of organisational structures to maximise the partnership approach of the wide range of stakeholders and to provide a more effective DRS.

5.3 Roles, Responsibilities and Management of intended outcomes

5.3.1 The Programme Team has made significant progress in spite of other priorities (e.g. Covid) impacting the progress of DRS. The Programme has benefitted from capable and experienced team members. Recent changes in the sponsor organisation has resulted in new leadership for the Programme, this comes at a key inflection point in the Programme and offers the opportunity to reappraise the requirements for oversight, governance, co-ordination, decision making, communication and assurance in the Programme.

5.3.2 Strategic Oversight and Decision Making. The current governance and leadership structure has been appropriate for the past phases of the Programme. However, the Review Team heard from all interviewees that this Programme carries a major reputational risk for all key stakeholders, is highly complex, requires massive logistical solutions for it to succeed and requires the collaboration of a number of key producers, with existing and mature systems already serving their businesses. This highly dynamic and commercial environment demands a sensitive and collaborative approach. It is recommended that the organisational and governance structure of the Programme is reviewed to best reflect the needs of the implementation phase of the Programme. This will enable all key stakeholders to share best practice, coordinate plans to ensure a critical path is identified and managed, and provide the Scottish Government with assurance that the chosen path to achieving its circularity vision is achievable.

Recommendation 6. It is recommended that the SRO review the governance structure for DRS preparation and implementation to ensure appropriate representation, input, assurance and oversight for all stakeholders. Critical

5.3.3 Communication. Interviewees were well informed about the vision and general direction of the DRS Programme; a significant proportion were also well informed about deposit schemes in other nations, and/or because their companies use DRS in other countries. At an operational level it was apparent from many interviews that useful information was lacking to assist individual operators, whether producers, suppliers or potential transporters. Some interviewees showed the Review Team individual plans that they had drawn up, even at the level of detail of critical path; sharing of this information would be useful. It appeared that the previously valuable Implementation Advisory Group had stopped meeting, as a result of Covid, and a number of interviewees sought a new forum where they could share information. The Review Team did not see information that provides assurance that all parties in key sectors (e.g. individual small producers or retailers) are receiving information about DRS. The Review Team also recognises that this Programme will impact many other sectors of society such as Local Authorities and community groups – communication with these groups was not obvious. It is apparent from listening to the wide range of stakeholders that a more specific stakeholder communications strategy is needed to meet the needs of all those affected. Further, communication targeted on specific groups would be invaluable in engaging with and involving those able to take the initiative forward. All communications need to be coordinated between the responsible stakeholders to offer consistent messages.

Recommendation 7. It is recommended that the Programme Board establish a cross-party forum that enables stakeholders to share best practice relevant to DRS and support the adoption of a unified approach. Critical

Recommendation 8. It is recommended that the Programme Board cooperate with CSL to create a CSL centric stakeholder communications strategy to inform key operational groups on progress made. Essential

5.3.4 External impartial assurance. Whilst those interviewed were able to name some key milestones on the path to delivering DRS in Scotland, an agreed coherent and shared sequence or timeframe was not apparent. Whilst the Review Team had high confidence in the SG Programme Team, the Review Team identified that they had limited experience in some key areas such commercial, finance arrangements and the challenges of establishing a new business; this limited awareness is a major source of weakness in the previous schedule assumptions. The Programme now has limited opportunities to get this right, there will be no time for re-engineering or reworking stages if they are inadequate. Objective assurance is needed before progressing to the next stage, this includes key areas in which officials are not well positioned to offer insight. It is recommended that the Programme establish assurance regimes appropriate for both the pre and post 'go-live' environments and that these are aligned with key milestones and provide an appropriate level of detail for assurance. This will provide the appropriate security to keep Ministers informed of progress.

Recommendation 9. It is recommended that the SRO establish an assurance regime for both pre and post 'go-live' environments, that align with key milestones and provide an appropriate level of detail for assurance. Critical

5.4 Readiness for next phase

5.4.1 As described earlier, the Programme is entering a critical phase in its development. The selection of CSL as the SA enables the formative work to begin. CSL has a newly appointed Chair and CEO who must now develop a detailed business case and secure sufficient funds ([redacted]) to establish the Company and an operational capability. The Review Team received a good level of assurance that an answer for provision of this finance is in development and can be achieved within a reasonable timeframe, although this could still be 2-6 months.

5.4.2 The Review Team understands that CSL represents organisations responsible for 85-90% of the Scheme articles placed on the market in Scotland, including the large producers, retailers, retail and wholesale associations. Interviewees were positive that CSL had been formed with wide sector support and engagement. However, interviewees also recognised the diverse range of business models and operations that need to be represented, even within single sectors; some interviewees felt that that they are not being sufficiently heard – this presents a reputational risk of which SG should maintain awareness. SG may wish to, as far as it is able, encourage CSL to establish specialist groups working on key operational sectors that collectively create a total operational plan.

5.4.3 The Review Team understand that the UK government is minded to establish an England-Wales-Northern Ireland DRS. It is understood that Scotland is keeping DEFRA and the other administrations informed as its DRS operational detail is developed. It seems valuable that this happens, and that feedback is obtained; this will go some way to 'future proofing' the outputs of Scotland's DRS. A particular area of concern raised was labelling with particular respect to preventing fraud, but also with regard to establishing a UK wide DRS standardised labelling system in the future. DRS standards adopted by Scotland have a number of other ramifications. For example, it is understood that smaller producers could be impacted by low volume issues of labelling. Products that are currently supplied to the UK and Scotland alike (in limited volumes) could be withdrawn from Scotland's shelves as it may be uneconomic to produce Scotland specific labels. This presents significant reputational risks from Scottish consumers of which SG should maintain awareness and management. However, it is understood that CSL's proposed approach does not involve mandating a separate label for Scotland.

5.4.4 The Review Team are aware that the rescheduling of DRS will be of critical concern to many stakeholders. We recommend that priority is given to preparing stakeholders for this change. Accordingly, from our experience of stakeholder management we would suggest:

1. First produce an Action Plan that addresses the recommendations in this report.

2. Produce a 'consequences document' that describes the reputational risk of continuing with the current schedule v's rescheduling.

3. Convene a special meeting of the Programme Board to explain this Report and the actions needed as stated in the Action Plan.

4. Record feedback from that meeting and make any amendments to the plan, should that be necessary.

5. Communicate that to Ministers in the appropriate way.

6. Then, manage wider communication to all stakeholders.

As discussed earlier, none of the stakeholders are in a position to give impartial full oversight assurance to the overall Programme, therefore the dynamics and criticality of the Programme demand a tight external assurance regime.