As communities have looked to decrease costs in recent years, more and more local governments have tried alternative approaches to delivering traditional services–including solid waste management.

By Tammy L. Hayes

Some communities have privatized MSW collection and/or disposal, while others–eager to remain in the solid waste business–have opted to compete with the private sector. The differences in the way public entities and private companies function, however, often preclude an apples-to-apples comparison of both the services offered and the actual cost of providing those services. There are a number of ways that municipalities across the country have dealt with this issue, and there are steps that can be taken to establish a fair playing field for what is now commonly called managed competition.

Some of the issues public entities must address if they are to fairly compete with the private sector are quite complicated, while others can be dealt with fairly easily. Those that can be implemented more simply include:

• allowing the same amount of time for both the governmental department and private companies to prepare their proposal or bid, requiring the same information from all proposing parties, and opening all bids at the same time.
• separating the functions of the purchaser and the provider of the services being bid by making sure that different public-sector employees, preferably even different departments, are involved in preparing the proposal from those evaluating the proposals.
• executing a memorandum of understanding, as is often done in private-sector contracting, to ensure the same services are being sought and the same standards are being upheld. Penalties can even be delineated for failure to perform and for cost or schedule overruns.
• using the same monitoring procedures for public-sector services that are already used to monitor private-sector services.
• providing an independent audit of public-sector proposals or bids.

The more complex issues come into play when comparing costs and determining what items those costs actually comprise. Private companies are used to competing for their clientele and exist to make a profit. Therefore they must perform efficiently and cost-effectively to stay in business. Local governments, on the other hand, provide a public service. They do not function in a competitive environment, nor do they have a profit motive. Although there are pressures on public officials to spend tax dollars wisely, city or county policies usually override economic considerations.

These differences can significantly impact the cost of doing business. For example, municipal governments offer pension plans–something that has become rare in today's corporate world–and other generous benefits when compared to the private sector (e.g., number of paid holidays, vacation, and sick time). These things all combine to increase labor rates and thus public-sector costs. Then again, cities and counties do not pay taxes and can usually get lower-interest loans or bond money to fund projects, which might give them an economic advantage. Another factor that can affect pricing is that local governments generally have strict procurement requirements limiting them to using specific vendors or service providers; private companies are free to do business with whomever they choose.

When bidding on a particular service provision, such as garbage collection, the total cost of private-sector delivery is identified in a contractor's proposal. That contractor is responsible for providing the service promised at the cost proposed.

For fair competition to occur, the public sector must also identify its total costs for providing that same service. This includes both direct and indirect costs (or overhead), which is where things become muddy. A big part of the problem is that municipalities have not traditionally broken down their costs in sufficient detail for a level comparison with the private sector. They may use other government departments for certain activities, such as fleet maintenance or contract administration, and often do not take into account such items as equipment depreciation because they do not have to consider the associated tax implications. All of these provisions are routinely included in a private company's allocated overhead costs.

As you can see from this discussion, there are a lot of issues involved in establishing a fair playing field for managed competition. Nevertheless, a number of communities throughout the country have chosen to participate in just such an activity and, when they do, often realize the benefits of cost efficiency and improved employee morale. The remainder of this article will focus on their experiences, what they have learned, and how they addressed some of these challenges.

Phoenix, Arizona

The City of Phoenix, AZ, with a population of approximately 1 million people, was probably one of the first to allow the existing public agency to bid for solid waste collection, having initially done so more than 20 years ago. Its original efforts were not so successful, but it learned a lot over the years, and today city employees still provide residential collection in two of the city's three franchise districts. Cost savings have been estimated at about $30 million since the inception of managed competition in Phoenix.

The city has taken some steps, however, to ensure that it remains in the residential garbage collection business. The purpose of managed competition here was to cut costs but not to completely privatize this service. The city does not bid out more than 50% of the city at any given time. It also implemented a number of requirements that make it difficult for private haulers to compete. For example, private firms must:

• follow the same schedule as the city's service and not collect garbage on Wednesdays and Saturdays,
• hire displaced city workers,
• carry employee medical insurance equivalent to that provided by the city,
• include the cost of new trucks in their bid and cannot use their vehicles for other purposes without express written permission.

While it has been criticized for this approach, the city also learned that local government could realize some of the efficiencies of business. For example, when the city's operations and maintenance costs exceeded projections, the city auditor gave the Public Works Department six months to reduce costs or risk rebidding. The Solid Waste and Equipment Management Divisions had been at odds over costs: Drivers claimed that trucks were not being repaired properly, and mechanics argued that drivers abused the trucks. The result was a partnership between the two divisions called "ROAM" (Reduce Operations and Maintenance costs). Under this program, work orders were analyzed to determine both high- and low-cost operators and vehicles in order to pinpoint the actual problems. Drivers and mechanics began meeting on a regular basis, and opportunities to save money were identified and implemented (e.g., rebuilt parts were used and routes were redesigned). Internal competitions were held, innovative practices were shared, and individuals with the greatest cost reductions were recognized. Communication and teamwork between the divisions improved dramatically as costs decreased. In fact, only eight months after their initial meeting with the city auditor, operating costs were reduced in one district by $277,000.

These are the types of programs that can result from managed competition. To remain competitive, a department must run efficiently. Indeed, the overall process of competing against others to retain a specific service naturally brings employees together and instills pride in their work.

Clearwater, Florida

In Clearwater, a city of about 110,000 people on the central west coast of Florida, the Solid Waste Department is run as a business. It was directed to do this by the City Commission in 1993, and employees believe it is the best thing that ever happened to them. At that time, they had to bid on the city's own recycling program against private companies. The purchasing department handled receiving and evaluating the bids in order to avoid any improprieties. It developed a business plan and established cost centers, which are still analyzed by a certified public accountant controller on a monthly basis.

Winning that bid meant buying nine new trucks, a baler, and other processing equipment, but Clearwater has never looked back. It has made a profit processing and marketing its own recovered materials every year since the program's inception. In fiscal years 1994-1995 and 1999-2000, it realized $1 million in gross revenue from the sale of recyclable commodities. Profits have ranged from $250,000 to $750,000 annually, depending on the markets. The City of Clearwater now processes and markets recovered materials for the neighboring communities of Belleair, Dunedin, Gulfport, Indian Rocks Beach, Largo, Safety Harbor, and the unincorporated areas of north Pinellas County. The city pays them an agreed-upon share of fair market value, less a processing fee. City Solid Waste Director Bob Brumback remarks, "It is a win-win situation, because some of these smaller communities were in the position of having to pay to get rid of their recovered materials, particularly when market values were low." Besides bidding on its own recycling program, the City of Clearwater bid on and won a recycling collection contract in Belleair and a contract for drop-offs in the northern portion of unincorporated Pinellas County (the county in which Clearwater is located).

The City of Clearwater believes that providing garbage collection service to its residents is the city's own responsibility and does not contract out this service. It considers it a matter of public health and safety and is concerned about keeping the whole city clean. Clearwater provides its citizens with fully integrated solid waste management: garbage collection, curbside recycling, yardwaste pickup, and special pickups for bulk items or special events at no extra charge. It keeps a late truck for emergency calls and only suspends collection service for three holidays a year (holiday routes get picked up on either the day before or after but are never cancelled). Brumback says, "The bottom line is service" and refuses to put in a voicemail system, insisting that everyone who calls will talk to a real person. This level of service takes commitment from all employees–at all levels–and cannot be bought. The city believes that if it contracted for residential collection, it would get minimum service and its costs for illegal dumping, nuisance enforcement, and code enforcement would increase.

The city, however, does compete for its commercial rolloff and compactor accounts against the private sector–and retains about a 40% market share. Again, it attributes its success to providing the best service. It washes and deodorizes its containers, for example, and picks up within 24 hours; private companies in the area do neither of these. One of the issues the city identifies as troublesome in the competition process is that everything it does is a matter of public record, while private firms can keep some of its business acumen private. Nevertheless, the city continues to compete and retain the business it wins.

Although it realizes that it generally pays its work force a higher salary and provides increased benefits, the city feels it gets it back in productivity. The City of Clearwater has never claimed to be the cheapest but prides itself on quality customer service that encompasses responsiveness, convenience, and courtesy. These are the things that keep businesses in business and keep the city in control of its solid waste.

Manchester, New Hampshire

In 1995, the Manchester Board of Mayor and Aldermen decided to competitively bid all solid waste services for this New Hampshire city of approximately 102,000 people. These services included curbside collection of both refuse and yardwaste (services the city was already providing), curbside collection of recyclables (a new service), and disposal. At that time, the city's landfill was closing and the board wanted to ensure that these services were competitively priced. Recycling was being introduced to city residents at the same time to reduce the amount of garbage going to the landfill.

A committee was formed with representatives from different city departments and an outside consultant to prepare the Request for Quotes and the Request for Proposals (RFP) and to evaluate the submittals. The Manchester Highway Department–responsible for solid waste, wastewater, street maintenance, public building maintenance, and storm sewer drains (basically everything in the right of way with the exception of potable water)–prepared the city's proposal and bid. This kept these functions separate and impartial.

The RFP included a bid form in which different prices were requested for:

• Refuse collection–separate costs to include recycling, without recycling, and one with a bag-and-tag program
• Recycling collection–with and without a bag-and-tag program
• Yardwaste collection
• Miscellaneous other services, such as street sweepings, disposal, and hauling materials from citizen drop-offs (e.g., tires and small construction and demolition debris items)

The city won the bid for curbside collection of refuse, which it felt was the most important because it meant that about 33 city employees would keep their jobs. Waste Management won the contracts for yardwaste collection and recycling. Since the city had not previously provided recycling services, no city workers were unemployed, and only three people lost their positions on the yardwaste contract. Because the city's landfill closed, it now hauls its residential waste to a transfer facility. The city has a separate 10-year disposal contract with Waste Management, with an option to renew that contract four times for a term of five years; thus, it has a 30-year potential.

According to Deputy Public Works Director Kevin Sheppard, "The bid process was time-consuming, but it was also a good learning experience." The City of Manchester had a good cost accounting system in place and felt it could be competitive, although it did confirm existing costs to prepare its bid. The city also had to calculate equipment replacement, which had not been in its budget. Proposal preparation was a collaborative effort among highway department management, the union, and the highway commission. The bid comprised labor and equipment and took into account such items as overtime, employee benefits, wage raises, gas, and equipment maintenance.

Sheppard feels that one of the important benefits of the city providing refuse collection services versus contracting with a private firm is flexibility. It estimates there is a 5-10% increased value in city employees for its ability to provide other services, such as emergency functions. For example, in Manchester, refuse workers are also used to assist with snow plowing in the winter. Part of this service would have to be contracted out if the city had lost its bid. Also, its yardwaste contract runs for eight months, beginning in April until the end of November, but weather conditions sometimes warrant these services longer. In 2001, as a result of unseasonably warm autumn temperatures, city workers were collecting yardwaste in December because people were still raking leaves from their yards. Without that availability, the city would have to pay extra for that service as well.

When the city initially prepared its bid, with recycling it was estimated that 36,500 tpy of residential waste would need to be collected. In 2000, however, it collected 46,800 tons of refuse using the same manpower. This is an increase of more than 30%, and using a private contractor probably would have increased the city's costs accordingly.

The Manchester Highway Department does not have a contract for the portion of the work it won because the city attorney ruled that the city could not enter into a contract with another city department. This can be a difficult situation at times because its bid included a specific equipment replacement schedule that is sometimes not followed; yet it is expected to perform at the level specified in its proposal. Still, the city feels it performs efficiently and provides a high level of service at competitive prices to the citizens of Manchester.

Summary

What becomes blatantly obvious in researching this issue and in talking with municipalities that have both won and lost competitive bids is that, to truly compete, local governments must reorganize to run like a business. They must use full-cost accounting versus traditional cash-flow accounting to convey actual expenditures. And they must continually look for ways to operate more efficiently.

One of the major concerns of cities and counties that provide solid waste services is that once control is relinquished and contracted out, it is extremely difficult to get back. If a municipality loses a bid to a private company, it generally means that expensive equipment is sold and employees are laid off. Should that arrangement not be satisfactory in the future, the capital expenditures involved in reestablishing a collection operation, for example, often preclude the possibility of going back.

While viewpoints differ as to whether or not a city or a county should have to compete to provide services for which it is responsible, most seem to agree that, when it does, the process should be fair. Actually implementing that process is time-consuming and can sometimes be painful. Although managed competition seems to be a growing trend, there are still not a lot of local governments in this country that have gone through the process. Those that have, for the most part, made some mistakes but learned valuable lessons and are better prepared for next time. They are also willing to share their experiences to help other municipalities in the same situation. So before your governing board decides that you need to compete to keep your department intact, it's never too soon to start getting ready.

References

"A Quick Guide to Competitive Neutrality and Managed Competitions." RPPI Privatization Database, www.privatization.org. Condensed from Competitive Neutrality: Ensuring a Level Playing Field in Managed Competitions by William D. Eggers, RPPI How-to Guide No. 18. 1998.

"Avoiding Managed Competition Pitfalls." RPPI Privatization Database, www.privatization.org.

Franciosi, Robert. "Garbage In, Garbage Out: An Examination of Private/Public Competition by the City of Phoenix." Arizona Issue Analysis No. 147. Goldwater Institute, Phoenix, AZ. January 1998.

"Internal Partnership Averts Privatization of Operations and Maintenance Functions." Alliance for Redesigning Government, National Academy of Public Administration. July 1995.

"Managed Competition: A Tool for Achieving Excellence in Government." Alliance for Redesigning Government, National Academy of Public Administration. 1995.

Martin, Lawrence L. "Determining a Level Playing Field for Public-Private Competition," Grant Report. Columbia University, School of Social Work. November 1999.

Tammy L. Hayes is solid waste coordinating director at Camp Dresser & McKee in Tampa, FL.