Recycling After the Crash
Market prices for recyclables declined severely in 2008, creating serious issues for many local government recycling programs.
Problems faced by local governments included significant revenue decreases, requests from processors to renegotiate agreements, and, in some cases, termination of existing agreements. For cities seeking to procure services after the 2008 market crash, there was a great deal of uncertainty concerning the terms and financial commitments that processors would be willing to include in new agreements.
Two cities facing the need for new agreements included Tucson, AZ, and Olathe, KS. This article chronicles the strategic approaches employed by these two cities to secure long-term processing agreements with favorable financial terms. To assist with the procurement, both cities enlisted SAIC, an engineering and technology applications company with consulting expertise in solid waste and recycling, to identify opportunities to develop competitive and successful procurements.
Both Tucson and Olathe provide solid waste and recycling collection service for single-family residential households. In addition, each city provides commercial collection services and has proactive recycling programs for the commercial and multi-family sectors.
The city of Tucson is located in southern Arizona, approximately 120 miles from Phoenix, with a population of about 525,000. Tucson has provided its residents with weekly single-stream recycling using 96-gallon carts since 2002. From its residential, neighborhood drop-off and commercial front-end recycling programs, Tucson collects approximately 48,000 tons of single-stream material annually. Tucson needed a new agreement to replace its current contract that expires in 2012.
The city of Olathe has a population of 125,000 and is located in the greater Kansas City metropolitan area in Johnson County. In January 2010, Olathe transitioned from a subscription, curbside-sort recycling program to an every other week single-stream recycling program for all single-family residential customers using 65-gallon carts. As a new program, the city has an average of 500-600 tons per month of collected single-stream material. Prior to 2010, Olathe did not have a formal agreement in place with a recycling processor. With the implementation of single-stream recycling, the city recognized the need for a formal agreement.
Multiple Processing Locations and Options
Prior to initiating their procurement processes, both cities evaluated various public and private recycling processing locations and options. This approach helped the cities to understand the financial feasibility of multiple options and identified various alternatives for vendors to consider as a part of the procurement process.
Olathe was interested in having a facility located within its city limits. Olathe evaluated two options:
- Expanding its existing transfer station to include a material recovery facility (MRF) or to allow for the transfer of recyclable materials
- Purchasing and converting a vacant industrial food processing facility into a material recovery facility
In evaluating whether to expand the transfer station, the city concluded that there was insufficient space on the site to allow for a MRF. However, there was potentially sufficient space to expand the station to allow for the separate transfer of recyclable material. Regarding the food processing facility, Olathe concluded that while a MRF could be constructed and would provide certain advantages (e.g. proximity to collection routes and rail access), it was a much larger facility than what the city alone could expect to utilize as a MRF in a cost-effective manner.
While the city ultimately decided to not pursue development of a publicly owned and operated facility, Olathe structured its procurement documents to allow options for vendors to consider use of the existing transfer station or the vacant food processing facility, as well as a site of their own choosing, in their proposals to the city. In addition, Olathe allowed vendors to submit multiple proposals based on different site locations. Olathe also shared the site evaluation reports to facilitate vendors’ efforts to consider the alternative sites.
Tucson also recognized the importance of balancing facility location with the capital cost impact on vendors. Similar to Olathe, Tucson wanted a facility in close proximity to its collection routes and identified two options for vendors within their request for proposal (RFP). Recognizing that several companies expected to have an interest in the Tucson contract already had MRFs in the Phoenix area, the procurement document allowed vendors to propose use of a recycling transfer station or a MRF. This approach provided flexibility to vendors that may have wanted to better utilize existing facilities. Tucson further addressed the importance of facility location in its evaluation criteria based on factors such as access to roadways and impacts on recycling collection routes and costs.
Both Tucson and Olathe ultimately decided to enter into processing agreements where the recyclable materials would go directly to a MRF owned by a third party. By providing various options, each city was able to better understand the viability of multiple alternatives and kept the process as competitive as possible by communicating that multiple alternatives were being considered.
Create Win-Win Financial Incentives
A key strategy utilized by both cities was to understand the impact that contractual terms would have on the vendors’ costs, and subsequent pricing for the cities. Each city employed several tactics to minimize costs, as described below.
Longer Contracts to Depreciate Capital Costs—Due to facility and processing equipment requirements, MRFs require significant capital expenditures. In developing pricing, vendors will typically depreciate costs over the life of the contract. Therefore, having a longer contract provides more years for vendors to depreciate contract costs. Tucson decided on a 15-year contract and an optional five-year renewal to allow for full depreciation. While Olathe also recognized the importance of a longer term contract, the city cannot enter into contracts of this nature longer than five years. In an effort to comply with this requirement while recognizing the benefits of a longer-term contract, Olathe offered an initial contract term of five years, with three additional five-year terms.
Allow Processing of Additional Material—Allowing MRFs to process as much recyclable material as possible can decrease per-ton operating costs. Tucson and Olathe provide collection services for residential customers, commercial customers, and neighborhood recycling centers in the community. By including all municipally collected recyclables, Tucson added an estimated 6,900 tons per year to the processing agreement.
Both Tucson and Olathe explicitly promoted the processing of other recyclables at the recycling facility in the procurement process. Tucson included a cooperative purchasing provision in the procurement document allowing for other public and nonprofit agencies to receive services under the city’s processing agreement.
As one of 20 cities within Johnson County, Olathe recognized the importance of exploring options for the development of a regional MRF. The procurement document described Johnson County’s commitment to increasing diversion and recycling on a regional basis in order to preserve the county’s disposal capacity. It also documented the potential quantity of recycling materials that could be collected throughout the county.
Develop Performance-Based Contract Terms—One of the key reasons cities contract with private vendors to provide recycling processing services is that vendors often possess key industry knowledge and provide efficient operating practices. Sometimes, cities can compromise a vendor’s ability to offer cost-effective processing based on the inclusion of terms that lead to greater costs. Tucson and Olathe avoided onerous contractual terms by including continuous review of details in their procurement documents. For example, Tucson stated that the facility would need to have sufficient capacity to process the city’s material over the life of the contract. Furthermore, Tucson required that the MRF recover a minimum of 95% of the recyclable material. The city did not dictate the size of the facility, type of equipment to be utilized, or number of staff. Instead, Tucson asked vendors to demonstrate how their facility, equipment, and staffing would meet the performance standard and then evaluated the vendors’ proposals relative to their capability to meet the performance standard.
Encourage Competitive Fees and Revenue Sharing—The price of recyclable materials fluctuates on a daily basis according to supply and demand in the marketplace. Both Tucson and Olathe recognized that it was critical to develop financial terms that are viable to both the city and its contractor in both strong and weak commodities markets, such as the one experienced in late 2008 and early 2009. Each city developed a variation of a market-based revenue sharing approach in which payments to the city are directly tied to the market value of recyclable materials.
Prior to deciding whether to request a revenue sharing arrangement, each city considered the advantages and disadvantages of participating in revenue sharing. Advantages for revenue sharing are that it
- provides a direct financial incentive for a city to increase the quantity of material recycled due to increased revenues for city;
- provides a financial incentive to educate residents on placing the correct materials into the recycling stream due to increased revenues for city;
- ensures that the city receives detailed data regarding the quantity and composition of material recycled to calculate revenue sharing and assist with public education; and
- allows the municipality to reap the benefits of strong commodity markets and can provide a revenue stream to offset the costs of a program.
- Conversely, revenue sharing is disadvantageous because
- it is based on market prices and the revenue stream can be unpredictable; and
- the level of effort required for contract administration can be higher with revenue sharing, which can make it challenging to manage, especially in smaller cities.
Tucson utilized an approach that included two main components. First, Tucson required vendors to provide pricing for the amount per-ton that they would charge or rebate to the city for the processing of materials. Second, vendors were required to state the percentage of revenue from the sale of recyclables that would be paid to the city.
Tucson was also interested in understanding the financial impacts from processing additional types of materials and committing material from the city’s neighborhood recycling centers and commercial collection programs. Tucson structured its pricing forms to require vendors to document how their pricing would change based on accepting additional material such as plastic film, scrap metal, and textiles. In addition, Tucson specifically required vendors to complete separate pricing forms—one for including material from the city’s neighborhood recycling centers and commercial collection program, and another without. This approach allowed the city to understand the financial impacts of these options.
Tucson selected Hudson Baylor Corp. Hudson Baylor’s financial proposal included a tip fee of $30 per ton and baseline revenue sharing of 50% to the city. Hudson Baylor also agreed to cap the annual processing cost at $1,150,000. Based on a $30-per-ton processing fee, this means that any tons over 38,333 per year will effectively be processed for no additional charge. This provides substantial incentive for the city to maximize its recycling tonnage. In addition, the city’s revenue share can increase incrementally from 50% to 55% based on increases in the value of materials sold.
Olathe was accustomed to not paying directly for processing recyclables and to receiving a relatively small rebate. Based on its prior concept, Olathe developed a variation of a revenue sharing approach that would provide the opportunity for vendors to propose rebates that would increase as the market value of recyclables increased. Figure 2 summarizes the weighted per-ton average based on commodity pricing (e.g., blended value) and the actual rebate proposed by the selected vendor.
Olathe decided to enter into an agreement with an existing MRF operated by Deffenbaugh Industries that is located approximately 10 miles from the city limits. While the city would have preferred a MRF located closer, Olathe recognized that the financial benefits of increased rebates would quickly offset the cost of additional time for collection crews to drive to the Deffenbaugh MRF. In fact, Olathe’s agreement provided immediate financial benefits according to Kent Seyfried, solid waste manager for the city of Olathe. “With new agreements with Deffenbaugh, we will have a rebate of $68.35 per ton for our December recycling materials. We had only been receiving $30 per ton for most of 2010. This represents almost a 130% increase in revenue,” said Seyfried.
By having a well-structured and fair procurement process that considered impacts on the city as well as prospective vendors, Olathe and Tucson were able to develop recycling processing agreements that will serve their cities well.
Author's Bio: Scott Pasternak is with Reed, Stowe & Yanke LLC in Austin, TX.
Author's Bio: Veronica Roof is a task manager with SAIC in Atlanta, Georgia.
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