JULY 2011

Privatization saves dollars and makes sense for municipalities Click to Enlarge
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Mayors and city councils across the country are faced with the biggest budget shortfalls in history and are mired in debt. They are caught between diminished revenues caused by the recession, the tepid recovery and rising costs for municipal employees, particularly long-term pension and healthcare costs that in many cases are underfunded and in others deemed unsustainable. The debate over whether or not to privatize waste hauling is heating up.

By necessity, governments are being forced to tighten their belts to maintain critical services such as roads, police and fire. Many cities have found, and are increasingly finding, financial relief by contracting out residential waste services to private companies, not only to save money, but in many instances actually improving value to fee and tax payers while improving recycling rates. Other cities believe they run highly efficient collection operations and prefer to manage their own fleets. Still others attempt to benchmark city department performance by having them bid against private contractors.

For an overview of the private versus public refuse collection debate, American Recycler spoke with Bob Wallace. Wallace is a principal and vice president of client solutions at WIH Resource Group, an integrated solutions provider that serves the public and private waste management clients with a full range of analytical and support services. Prior to WIH, Wallace spent six years with Waste Management, Inc. as their director of transportation and logistics.

“Privatization has mixed reviews depending on who you talk to. Of course, the private sector companies are always pushing for cities to privatize. I would say it’s almost a fifty-fifty split between public and private residential collection. You look at areas like Seattle where they subcontract all those operations. Then, cities like Phoenix do managed competition where they have their own residential collection fleet, but every five years they go out to bid for one of their service areas. Cities like Phoenix argue they can do it more cost effectively with their own fleet than through outsourcing. In Phoenix’s case they probably can as they have strong operational management, many of whom came from the private sector. Through managed competition, the city bids against private contractors. They put it up for bid through a third-party contracting agency. However, the agency is within the city. They are supposed to be non-biased in their evaluation of the proposals and selection process.”

“Other cities around the United States are considering similar strategies. San Diego has started considering managed competition for various city managed services and is seeing financial gains from privatizing many functions. When you look at the solid waste enterprise funds that cities have, they can be huge revenue sources for them and quite often these revenues help subsidize or enhance other city activities and operations. If cities have collection fleets in place, and unless there’s some big incentive to privatize, I will think we will see cities continue to operate their own fleets because it’s a large source of revenue. If cities manage their fund surpluses correctly, solid waste and recycling collection revenues can be a win-win for cities, assisting them in paying for other critical services.”

“We’ve done several studies for governmental agencies on whether or not to privatize and we performed cost analysis of their fleet operations. One thing we noticed is that quite often the incentives that the private sector companies are able to offer their drivers for fleet performance and productivity are much greater than the government agencies. Government agencies often get bound by the unions, too.

“When we did studies for small to medium sized cities in the total economic sense for them to continue operating their fleets, they were efficient on the residential collection side, but when they were competing with the private sector in the industrial and commercial lines of business, it made no sense for them to be in that. They were not efficient, the routing was poor and it was costing the city and rate payers a lot more money than it would have been if they had privatized those lines of business. In a few larger cities where we performed studies our research showed that they could save millions of dollars a year by outsourcing commercial and residential collection and/or creating an open market, whereby the private sector companies compete with one another and the city no longer provides commercial or industrial collection services. If cities are smart about it they can actually assess a host fee from the private collection companies for collection of commercial and industrial waste and make money from it for their waste enterprise fund or contribute to their general fund. Most cities have minimal costs for administering private sector collection programs for commercial and industrial collection.”

“I would not say that every city could do better by outsourcing or privatizing their residential fleet. I think there are a lot of them that do a pretty good job of it, but probably under 50 percent. Of the cities that want to maintain their own collection, city councils have pushed for a high level of service that they are typically not going to get from a contractor because they want city residents to be happy with their solid waste and recycling collection services, and they want a clean city. It’s really a matter of how well a city government administers its contracts through the performance clauses in the agreement with the private sector contractor and how well they hold the feet to the fire, so to speak, of the private sector contractor to make sure they are performing at the specified contract level. That’s another thing, writing the contracts correctly are critical for a city to maintain performance of the private sector contractor when they elect to outsource, especially given the longer nature of these contracts,” Wallace concluded.

The National Solid Wastes Management Association (NSWMA) represents for-profit companies in North America that provide solid, hazardous and medical waste collection, recycling and disposal services. Bruce Parker, NSWMA president and CEO commented on the current state of privatization – “There has always been some privatization activity going on here and there, but never to the degree that I am seeing now in the 30 years I have been involved in this business. The driver, of course, is the tremendous aggregate deficits that states and local government are facing. When that happens, local governments are forced to cut programs, economize and be more efficient. Privatizing waste collection and processing is one of the low hanging fruits, so to speak, that reaches results.”

Parker is naturally biased. Privatization has always been one of the basic issues for NSWMA. “We believe the private sector has better efficiencies, higher motivation and many other factors in its favor that the public sector does not. That is not to say that all local communities are not efficient and not to cast aspersions on the public sector, but generally speaking, we are much more efficient because we have a profit motive.”

The profit motive is the key to understanding the benefits of private company collection and processing of residential waste because it inspires competition to provide the highest quality service at the lowest possible cost. Performance results of a private fixed-term contract can be evaluated by residents, fed-back loud and clear to city administrators who can look for a better or cheaper provider vendor when the contract expires.

According to a new study released by NSWMA in late March, privatized waste services generate significant cost savings, lower financial risks and are safer and more environmentally protective than their public sector counterparts.

Key study findings were:

•Competitive delivery of solid waste services typically generate cost savings of 20 to 40 percent. Private companies have the economies of scale to spread investment, environmental protection and procurement costs across multiple contracts and facilities, and are not hindered by governmental bureaucracies.

•Cities with the highest recycling rates like San Francisco and Seattle have fully privatized recycling. Private recyclers have more experience and financial ability to assume and manage risks in volatile commodities market.

•According to the U.S. Department of Labor, solid waste management services operated by local governments have an injury rate more than four times greater than private counterparts. Private sector employees also missed fewer work days than public sector employees due to injury.

Naturally, there has been and continues to be resistance from public sector interests against privatization, but now even the City of Chicago is in the process of seriously considering going private.

On March 31, the Chicago Sun-Times reported that the Daley administration is considering curbside recycling to approximately 359,000 Chicago households under a contract with a private company. City of Chicago’s Procurement Services spokeswoman Shannon Andrews said a January 12 bid opening attracted 8 proposals that were still being reviewed. No contacts have been finalized and none of the bidders will comment on the status of contracts, although we inquired.

The Lucas County, Ohio, board of commissioners and the Mayor of Toledo recently agreed to privatize their refuse operations in an effort to reduce trash collection costs for the city, by bringing privately operated waste services to more than 180,000 households in northwestern Ohio. Toledo’s Mayor, Mike Bell, said the switch to a private hauler will save $2.8 million this year and between $5 million and $6 million next year. The council approved a five year agreement between Lucas County and Allied Waste Services to handle the job. The privatization of the city’s trash service was deemed necessary to balance the city’s budget while bolstering the city’s police force.

Fees collected in Toledo for trash collection was a money-losing enterprise in recent years. Fees collected from residents only covered about $9 million of the annual $16 million cost of trash collection.

While states, counties and cities across the country are cutting services, raising taxes, and some contemplating bankruptcy, something extraordinary in privatization has occurred in Sandy Springs, Georgia, a suburban city just north of Atlanta. It may be a template for the future privatization of municipal services.

Dissatisfied with high taxes and poor services that were being provided by Fulton County, Sandy Springs incorporated as a city in 2005. With a population over 93,000, it became the third-largest city in the United States to ever incorporate. The new mayor and council, however, took a novel approach and created a new kind of city, one that outsourced everything to provide quality services at a reasonable price. Instead of hiring municipal workers, they contracted with CH2M Hill, a global provider of engineering, construction, and operations services to manage most city services. In turn, CH2M Hill hired local, private subcontractors to pick up trash, pave streets, maintain parks and do virtually everything else.

In the first year, CH2M Hill did its job for $25 million, whereas in a traditionally run city of a similar size those same services would have cost $60 million. The only services not outsourced are police and fire. By operating more efficiently, Sandy Springs has been able to make the kind of capital investment in infrastructure improvements that Fulton County had failed to make for decades, and the city has no long term liabilities.

No doubt the debate over whether or not to privatize will rage on. The private sector will continue to innovate and offer economies of scale that drive collection costs down and service value up. This will drive city governments and municipal workers to be more operationally creative, more cost efficient and justify their existence in the competitive arena. Hopefully, in the end, the will of the people, the cost for service and the quality of that service will be the deciding factors.