Asset Specificity

Yes and no. Modern incinerators rank with nuclear power plants in having extreme asset specificity. These capital-intensive, immobile, highly optimized machines are very good at converting waste to energy, but they have little value for anything else. They are very risky investments in an uncertain world, and governments have stepped in to help investors manage these risks. In 1993, some 58 per cent of US incinerator throughput was tied to captive markets through the mechanism of flow control, and another 31 per cent was guaranteed under long-term contracts, many with put-or-pay clauses, guaranteeing revenues regardless of waste flows (USEPA Office of Solid Waste Management 1995). A majority of the remaining 11 per cent of throughput went to publicly owned facilities. The demise of flow control has left these facilities exposed to market risks, with the result that many have been tagged 'stranded investments', instruments used to finance them have been downgraded to junk bond status and interest in new facilities has waned (Andrews and Decter 1997). Landfills and composting facilities suffer much less from the asset specificity problem because, once the site is purchased, remaining capital investment occurs only as needed over a period of years. In addition, former landfill sites frequently find subsequent uses. Transfer stations and materials recovery facilities typically have low-asset specificity because they are low-cost, generic industrial structures: a shed, concrete floor and truck bay. Collection vehicles likewise have low asset specificity. The policy question that some state and local governments only recently started asking is: are the benefits of large investments with high-asset specificity worth the risks?

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