Packaging - extended producer responsibility: full business and regulatory impact assessment (BRIA)

5.0 Competition Assessment

92. This section helps to consider the impact of a regulation or policy on competition between producers, wholesalers, retailers and importers in the Scottish Market. The assessment will follow the Competition and Market Authority (CMA) guidelines, which outline how to determine any competition impact.^{[44], [45]} These guidelines recommend considering four key questions in order to assess whether a proposed policy would have an impact on competition.

93. A number of businesses and markets across the packaging supply will be impacted by packaging EPR. However, following an in-depth competition assessment we do not expect there to be any concerning and significant impacts on competition. The reasons for this conclusion are set out below.

94. The CMA in their competition impact assessment guidelines outline 4 broad areas of concern that ought to be considered:

• Whether the policy directly or indirectly limits the number or range of suppliers.
• Whether it limits the ability of suppliers to compete.
• Whether it increases incentives to collude.
• Whether it limits the choices and information available to consumers.

5.1 Scheme administrator

95. Regarding the potential impact of the SA on competition, we can ask what pre-existing markets the SA may enter and distort and also what markets it may create. As detailed in the government response the SA will undertake the following functions:

• undertake strategic and operational planning;
• calculate household packaging waste management costs to be paid by producers;
• determine the fee rates paid by producers for different types of packaging;
• calculate costs to be paid by individual producers annually;
• make payments to those who have incurred the household packaging waste management costs (LAs);
• provide support to producers in data reporting; and
• prepare annual reports.

96. In summary alongside providing a number of administrative and supportive functions, it primarily calculates what the cost for managing household waste is, how it ought to be recovered via fees, how the recovery is spread across producers; and then it makes payments of these fees to LAs.

97. The key functions of the SA therefore imply two main relationships. Firstly, a relationship with packaging producers – in determining the fees they pay and obtaining fees from them (functions 3 and 4). The SA will essentially act as an additional regulator of the market for packaging, such that it distorts the market in favour of packaging with the lowest management costs and environmental impact. The competition impacts of this on the packaging market are discussed in the next sections.

98. The second key relationship is with the LAs who incur household packaging waste management costs. The SA determines their household packaging waste management cost requirements and makes payments to them (functions 2 and 5). The SAs function and involvement vis a vis LAs does not constitute a competitive relationship in the sense the SA is a market actor. It rather provides finance to LAs to continue providing the service they already provide. The impact on markets LAs are involved in is discussed in more detail below.

5.2 Obligated producers and the packaging sector

99. We can consider the impacts on both obligated sellers of filled packaging (i.e., brand owners) and on the manufacturers of that packaging itself (the packaging sector)^[46]. As the obligations will fall primarily on brand owners the impact on the former is greater and more direct than on the latter, the impacts in that market are indirect knock-on effects.

100. The key intervention into the packaging market is the imposition of packaging EPR fees. In Year 1 of the scheme, producer fees will be proportional to the amount of packaging they place on the market through the use of base fees (in £/tonne of packaging placed on the market). These base fees will vary across the 8 packaging material categories, reflecting variations in LA waste management costs for these different materials. From Year 2 of the scheme, materials with a worst environmental impact (in a first instance less recyclable materials) will attract higher fees as a result of the implementation of fee modulation. Producers will also face costs associated with the running of the scheme administrator and regulation. There will also be data reporting costs relating to the reporting of tonnage data on the Report Packaging Data (RPD) online portal.

101. Concerns related to the first point raised by the Competition and Markets Authority – whether this will result in a reduction in the number or range of producers – while being most pertinent to packaging EPR, does not pose significant concerns to competition in this market. Firstly, packaging EPR does not directly limit the number of suppliers in this market. Any potential limitation that could arise will be indirect, due to producers not being able to financially meet the requirements. Furthermore, this outcome – though possible – we do not foresee as concerning.

102. Costs to producers of complying with packaging EPR payments are likely to be more significant and it must be considered whether this cost could cause some firms out of the market enhancing the market power of those that remain operative. A concern may be that the costs of packaging EPR are equivalent or similar across all producers, and hence would disproportionately impact smaller and medium sized firms, driving them out of the market and enhancing the market power of the larger firms better placed to absorb these costs. Indeed, the CMA guidelines note the importance of small businesses as a source of competitive constraint.

103. However, the most significant costs of packaging EPR are expected to be largely proportional to size. Notably fee payments depend on the amount of packaging placed on the market, which is correlated with the size of the business. Data reporting costs are also anticipated to be higher for larger producers. It is currently uncertain whether regulator costs will be split across producers equally – in a worst-case scenario they may be the same for all producers and hence will constitute a higher burden on smaller producers. Despite this however, regulator fees are expected to be small and hence seem unlikely to be large enough to provoke market exit from smaller producers. It is also worth mentioning that the smallest businesses will also be excluded due to the de minimis.

104. As well as potentially causing incumbent firms to leave, it ought to be considered whether packaging EPR fees – which will raise the cost of entry – are significant enough to deter new entrants to enter. The post-policy competitive constraint relative to the baseline may hence be reduced as the threat of new entrants entering is lowered. The key issue to consider here is the size of the costs relative to the size of revenues. Total costs on average per producer are expected to be around £208,000 a year. The median revenue of current producers can be obtained from the National Packaging Waste Database (NPWD) and was found to be around £26 million^[47]. Thus, for the average producer, cost increases due to packaging EPR are less than 1% of revenue. This cost is unlikely to be high enough to reduce new entrants to the sector.

105. Another consideration is how producer base fees – to be set by the Scheme Administrator based on LA net management costs – will impact different material sectors. Variations in costs across these sectors will mainly arise from 1) differences in base fees across materials, which reflect local authority waste management net costs and 2) variations in the weight of packaging units, with heavier units attracting higher fees for producers. These fees will be variable, and so are not expected to place a disproportionate impact on smaller producers or new entrants. There is potential for indirect competition impacts across materials, reflecting their underlying difference in cost. These impacts are however uncertain as they depend on a range of market and business financial drivers that can vary significantly across industries and individual companies. This includes specific price elasticities, the ability of producers to pass through costs, the size of payments relative to turnover as well as variations in virgin packaging material and recyclate costs. The consumer impacts section above estimates that the majority of cost, under the central scenario, would be passed through. In the wider context, average producer costs are small in relation to producer revenue (though this will differ between producers), and competition across packaging materials has many non-price elements, such as design and perceived quality. Another distinct issue arises due to the proposed modulation of packaging EPR fees. Certain producers who are important for competition (e.g., sellers of a cheaply packaged version of a good) may use packaging materials that are cheaper, but more difficult to recycle and hence may attract greater fees. Hence somewhat asymmetrical costs would be imposed, at least until these producers switch packaging types. This would be concerning if it disproportionately advantages these firms relative to the others such that they were forced to leave the market because they were not able to switch packaging material types, i.e., a new barrier to entry. It should be noted that guidance on modulated fees should be published in 2025 and modulated fees will not be implemented until 2026. This will give producers who use unfavourable packaging time to adjust before costs are imposed, ensuring there is a more level playing field by the time modulation in packaging EPR is implemented.

106. The switching of packaging types fee modulation seeks to provoke may have a knock-on impact in the packaging sector (producers of packaging). Manufacturers of packaging materials that attract a higher fee may face a fall in demand. If they are competing with packaging manufacturers who produce low fee attracting materials, they will be supplying to the same market and as such they may no longer be able to compete in that market and the market power of remaining producers would be augmented. Two mitigating factors should be noted regarding this. Firstly, that the market for packaging is a global market, any reduction in demand due to packaging EPR needs to be weighed against global trends which should lessen the impact. Secondly, it is possible that the manufacturers of packaging may be able to switch packaging types relatively easily (within the same material type). As noted, modulated fees will not be coming in until 2026. As such producers will have time to think about what packaging types are more viable to sell and switch, if necessary, before any negative impacts.

107. The second point of concern from the CMA is on the limitation of suppliers' ability to compete. In a sense packaging EPR places restrictions on the nature of the packaging as it will penalise the use of unrecyclable packaging types. While this may appear to constitute a limitation, on all other aspects of packaging, suppliers will retain the ability to differentiate their producers and compete. For example, they may still vary their branding and packaging design. As such we cannot say, as per the CMA guidance, that the measure ‘substantially influences […] the characteristics of the product supplied’. It should also be noted that regardless of competitive concern, this is the key function of the policy – the societal cost of packaging is becoming internalised in this market. Most importantly, it should be considered that packaging is not the primary concern of consumers, and modulated fees should account for the ability of producers to switch to alternative packaging types such that this does not cause a lessening in the number of products on the market.

108. The third point raised by the CMA is regards to supplier’s incentives to compete. The key things to look at here are whether policy directly or indirectly impacts incentives to collude. Incentives to collude tend to increase as producers share more information amongst each other and indeed under packaging EPR obligated producers report a lot more data to the SA and regulator. However, data on individual metrics ought not to be shared more broadly than the SA and regulators, and while the SA will publish annual reports on packaging and fees paid, this information is aggregated. As noted by the CMA, this carries a lesser risk of provoking collusion. Collusion may also increase if there are changes to market conditions. A given market will be more prone to collusion if there are fewer firms, and they are more similar. With regard to this it ought to be noted that the number of obligated producers potentially impacted by packaging EPR is around 10,500. As such a significant number of producers would have to leave for this number to reduce to such an extent that there are few enough firms operative to increase incentives collude. Given the prior discussion on the impact on the number of firms in the market, this does not seem likely. There are also likely to be a significant number of producers in the packaging sector^[48] and we anticipate no direct incentives to collude being imposed on the packaging sector.

109. The final area raised by the CMA is regarding the choices and information available to consumers. Packaging EPR may restrict consumers ability to spur competition between firms by choosing who to purchase from. As noted, consumers choice may become more limited in what types of packaging they can purchase as unrecyclable packaging types are phased out. Certain consumers may be forced to purchase goods in packaging that is of a higher quality and price than they prefer. We foresee however no restriction in consumers being able to decide from which packaging producers they purchase from; nor should the information available that aids consumers in the choice of supplier be reduced. It ought also to be emphasised, that the packaging of a product is not the primary concern of the consumer – rather the actual product. Though packaging types may become less varied there should be no reduction in the availability of actual products.

5.3 Public sector

110. Competition concerns regarding the impact of packaging EPR on the public sector will not relate directly to impacts on LAs, but rather on the markets they in turn operate in. LAs will retain the choice to provide waste management services in house or to outsource to private waste management companies. It is unlikely these markets will be impacted as all that is changing is how the service is paid for by LAs; as they will now receive payments from the SA. In terms of efficiency, it should be noted that although finance is provided by the SA, LAs will need to prove that their costs are necessary costs towards an efficient and effective service, and the SA has power to determine what costs are reasonable for each authority, based on benchmarking of LAs with similar characteristics. As such, there will be pressure on LAs to remain efficient were they to provide services in house or to outsource.

5.4 Reprocessors and exporters

111. Reprocessors and exporters will be required to register with a regulator and report data on the quantity and quality of packaging waste recycled or exported for recycling. Exporters will also be required to obtain greater evidence that the exported packaging waste was received at its final recycling site. As with other actors in the supply chain, there may be concerns regarding the associated costs of these measures indirectly limiting the number or range of suppliers who are able to compete in the market. Stakeholders have however advised us that collecting this information is already necessary for business purposes as the price paid for inputs and price gained for outputs depends significantly on quality and quantity. As these businesses already collect this data, these burdens are likely to be small.

112. Regarding mandatory registration costs however, it was suggested by stakeholders that the number of reprocessors and exporters who are currently in scope but unaccredited would be low, hence the impacts of these costs on changing market structure would likely be small. Additionally on a per business basis, costs of compliance are relatively small (expected here to be £3.0k). Furthermore, the businesses that are unaccredited are also assumed to be small and – though it is liable to change – in the expected scenario regulation will be organised such that smaller reprocessors or exporters pay a lower regulator fee of £500. Hence these costs are expected to be very minimal and unlikely significant enough to provoke changes to the market structure.

5.5 Materials Facilities

113. EPR will also impose costs on materials facilities as they will be required to undertake enhanced sampling and compositional analysis (financing the capital and operational costs for this) as well as meet regulator and familiarisation costs. These additional costs increase the cost of entry to the sector and may reduce the number of competitors. It should also be noted that some materials recovery facilities (MRFs) are already required to submit sampling and compositional data under the current regulations and as such they have something of an incumbency advantage having already made the capital and operational investments necessary to comply with packaging EPR. It should be noted however that, as discussed in the cost benefit analysis section, these requirements are only expected to increase costs by around 1.0-1.5%.

114. Increased operational costs related to sampling are also expected to be lower for larger materials facilities, likely due to economies of scale, and we have found a negative correlation between cost per tonne and site size. As such, smaller facilities are at a greater risk of being unable to compete as effectively in this market due to packaging EPR. In light of this, we have introduced a de minimis exemption to protect the smallest firms from an unduly cumbersome disadvantage here and so they should remain in the market as an important competitive constraint.

5.6 Compliance Schemes

115. Additionally, to the key actors across the supply chain, we can consider compliance schemes. It is proposed that compliance schemes wishing to operate under the packaging EPR system will need to apply for approval under the new packaging EPR regulations. Approval will depend on a fit and proper person test. This constitutes a minimum standard in the market which may result in a direct reduction in competitors, particularly low-quality ones. There are currently 44 packaging compliances schemes registered with the regulators and these adjustments are not expected to be significant.

5.7 Waste management companies

116. Since the consultation IA the decision has been taken to focus solely on packaging EPR payments to local authorities for household packaging waste. We are not planning to introduce packaging EPR payments to cover packaging collected from NHM businesses at this time, and therefore there will be no centrally set fees for this packaging. Producers will cover partial costs of NHM packaging waste collections through the PRN system; however this is the current situation. There is therefore not expected to be any impact on contracts between waste management companies and businesses disposing of packaging waste.