Back in the Game

Kim A. O'Connell

In the past, many cities conceded that the private sector could run its waste operations more efficiently and affordably than they could. But as the public sector became more sophisticated, another phenomenon occurred: “reverse privatization,” where public entities are competing with and successfully taking back waste services from the private sector.

For example, Waste Age recently reported that the city of Compton, Calif., decided that it could provide its residents and commercial customers with better service at more affordable rates than its private sector counterparts [November 2000 page 96].

Some industry analysts see this as a trend, and warn that the era of mega-mergers could lead to neglecting the small-fry municipality and reducing customer service. As a result, business-savvy cities are beginning to believe that they can operate waste operations as well as the big private companies, if not better.

“Pricing is important, but the relationship with customers is important too,” says Kosti Shirvanian, founder of Western Waste Industries and a former board member for USA Waste (which acquired Western Waste several years ago and now operates as Waste Management Inc.). “When a city has a municipal contract, it often is very active in the community. Private companies are not always so active in the community.”

The Home Court Advantage

The public sector has several advantages over the private sector, according to “Competitive Neutrality: Ensuring a Level Playing Field in Managed Competitions,” published in 1998 by the Los Angeles-based Reason Public Policy Institute. Municipalities, it says, have lower capital costs, pay little to no taxes, do not have to earn a profit and are exempt from certain laws and regulations.

“There are certain areas or large cities that have taken back certain segments of the solid waste system, meaning they've taken back certain collection routes or recycling, but it's always been through competitive bidding,” says Geoffrey Segal, a policy analyst with the Reason Institute, which studies privatization trends. “Competition should make everyone better, and it can make the public sector better.”

Segal says that there could be some merit to the claim that mega-companies neglect customer service. “The larger the company gets, with the smaller companies getting gobbled up into larger firms, the company becomes less interested in the smaller clients,” Segal says. He admits that customers may question whether a large company based in Texas, for example, can provide quality service to a “podunk city in South Dakota.”

Opposition to privatization remains high in certain circles, according to a recent Reason study. Some opponents fear that privatization will leave the public “at the mercy” of the private sector, particularly if a company fails to perform. Others are concerned about the potential for lay-offs, “a idea often voiced by public sector employees,” the study says.

But Segal is quick to point out that responsibility for waste service still rests on the public sector's shoulders, regardless of who actually is providing the service. “It all comes down to how the contract is written with the provider, and how the city monitors the contract,” he says. “If the [private companies] provide poor service, the contract can provide penalties or allow firing the provider. The government never sheds itself of the service.”

As one example, the city of Freemont, Calif., actually has access to the private contractor's database so it can monitor how the company is handling its customers. The company, in turn, can tell when the city has checked on it.

For some municipalities, high-quality customer service may be their niche in the local marketplace — the quality that gives the home team the competitive edge. In privatization, “when larger companies come in, there is a potential vacuum that municipalities can possibly fill,” says Jonathan Burgiel, national director, solid waste management services, for R.W. Beck, a consulting firm in Orlando, Fla. “Like any other market, there are people who want high-end service, and this is something the mom-and-pop [waste firms] and municipal sector operations have been proven to be able to provide successfully.”

Deprivatization, as this process also is called, tends to occur where cities and municipalities have solid waste managers with experience in the private sector. “The communities that have really progressive solid waste managers, that have business and finance backgrounds as opposed to operations, know how to operate their system as a business,” Burgiel says. “We're seeing a new breed of public sector solid waste managers.”

Another impetus for public sector managers to seek operational control is to expand their operations and increase revenues generated by the municipal solid waste system, especially in the post-Carbone era. The landmark Supreme Court case, Carbone v. Town of Clarkston, 511 U.S. 383 (1994), declared flow control unconstitutional, which meant that municipalities could not direct waste into their facilities, and as a result, some lost the tipping fees from previous customers. In addition, Carbone said states could not limit incoming trash. Consequently, many municipalities had to make up the lost revenues elsewhere by expanding their waste operations.

“At the same time, many municipal solid waste systems are being asked to provide additional services such as street sweeping without a commensurate increase in revenues,” Burgiel says. “As a result, many communities are considering expanding their solid waste collection systems as a way to fill this funding shortfall.”

Because waste disposal often is a very expensive line item for a city, often third behind fire and police protection, city managers often desperately want to control their costs, says Jim Thompson, president of Chartwell Information Publishers, a consulting and research firm in Alexandria, Va. “There is the fear that if they give up all control, they're completely beholden to the private players, and there's a sense that the private players could tacitly collude to keep prices high,” he says. “Also, it's a revenue stream.” He agrees that counties and municipalities generally are becoming much more sophisticated about the solid waste business.

Thompson does not, however, buy the argument that gigantic private companies neglect customer service. “It doesn't pay for companies to alienate customers,” he says. “For all these companies, their strategy now is to become more customer-oriented. The business actually has gotten more competitive. There's a lot more capacity going after a relatively limited waste disposal stream. They're competing in every way they can, and an easy way is to provide excellent customer service.”

Thompson points out areas such as Cobb County, Ga., which has subscriber markets. There, the customer decides which of three private companies will dispose of its waste, he says.

Keeping Some Control

Some industry observers are watching a trend toward, if not full deprivatization, then having the public sector retain some aspect of the waste services operation. “Public entities are maintaining an element of control by keeping a hand in the system, by, say, holding on to a transfer station but giving up a landfill or an incinerator,” Thompson says. “Rather than contracting with a private entity outright, they can have more control over the waste stream by owning the transfer station. Or in some cases, it might make sense to also own the hauling operation.”

Several cities have successfully participated in managed competitions and won back a portion of their waste operations. Charlotte, N.C., is just one example. The city divides itself into quadrants, each of which is contracted out separately. Currently, waste services for two of the quadrants are provided by the private sector; the other two by the city.

According to Segal, the competition for waste contracts has led the city to become more efficient. “We benchmark the best practices of the private sector,” Wayman Pearson, the city's business executive for solid waste, told Waste Age in 1998.

The city of Phoenix spearheaded the managed competition model more than 20 years ago. Since 1979, the city has competed successfully with the private sector, winning about half the contracts. The city is broken into six bid areas, and no more than 50 percent of the waste operation is contracted out at any given time, according to city policy.

The city cites several reasons for the 50 percent rule. “It's done to ensure that if we have a faulty contract, the city is in a position to take over the service on short notice,” explains Juan Martin, public works director for the city. “Another reason is we want to protect ourselves against price-creep, and the way the companies acquire each other in the service business, there's no guarantee that there wouldn't be just one company competing in the Phoenix area. The biggest enemy to low costs and good service is a monopoly. We think competition has been very helpful for the city of Phoenix.”

As far as customer service is concerned, Martin says he sees very little difference between the public and private sectors. “There's nothing magical about customer service,” he adds. “We've proven that we can do it as well as the private sector, and the private sector can do it as well as us.”

Martin offers three pieces of advice to cities considering participation in a managed competition: First and foremost, he says, develop precise specifications. Secondly, be prepared to monitor and enforce the contract that goes to the private sector, because “if you don't, they only will provide what they'll get away with.”

Lastly, develop a “managed competition attitude.” A city has to be prepared to enforce a contract to the point of litigation, if necessary, Martin says. “If you're going to have a good managed competition program, you need to prepare to play hard ball,” he says. “Play fair ball, but play hard ball.”

Although R.W. Beck's Burgiel believes that the trend of splitting service between public and private entities has “played itself out” a bit, he admits that it “keeps the public sector in the game. It provides some impetus for the public sector to improve the cost-effectiveness of its operations, and it holds over the heads of the private sector to do its job well too.”

Praising Privatization

Despite the successes of Phoenix, Charlotte and other competitive municipalities, however, there is strong evidence that privatization is still on the rise. According to a 1999 survey by R.W. Beck, privatization of various types of solid waste activities is growing at a rate of about 1 percent a year. The Reason Institute has performed similar research that confirms this trend.

“There's still a wide interest from municipalities and counties to use privatization,” Segal says. “It's increasingly becoming so in landfills. With the rise of the ‘megafill’ and regional landfill, capital costs are so intensive that the cities can't always handle it.”

According to the Reason study, the percentage of publicly owned facilities has declined from 83 percent in 1984 to 73 percent in 1997. At the same time, 27 percent of municipalities with populations of more than 100,000 are considering landfill privatization in the future. The report further notes that private-sector solid waste disposal often enjoys substantial economies of scale, and that privatization enables many governments to significantly lower public debt.

“The private sector has a competitive advantage because of its ability to raise capital without raising taxes,” Segal says. “It has the ability to get things sited and permitted without political problems.”

Chartwell's Thompson agrees. It is usually less expensive, he says, for a private entity to build a landfill, for example, than a public entity, because private companies are limited by geographic or political boundaries. “It's hard for counties or municipalities to build a big facility because they have to ban together to do it, and there's often a lot of bickering,” Thompson says. “A lot of counties are realizing that many municipalities are operating on a shoestring budget, and the whole waste stream is one less hassle they have to deal with.”

The Environmental Industry Associations, Washington, D.C., has quoted independent studies that have found the private sector to be more efficient than the public sector, generally speaking. According to EIA, private haulers usually use smaller, more efficient pickup crews; have lower absenteeism; have high productivity because private haulers generally serve more households per hour; and have less downtime because private haulers tend to buy standardized trucks with larger capacity.

Even Indianapolis, a city that has steadfastly held on to a portion of its waste collection services, has extolled the virtues of privatization.

“Since 1992, my administration has allowed private companies to compete for contracts to provide more than 75 city services,” Mayor Stephen Goldsmith told USA Today last January. “In the process, we have reduced our operating budget, lowered taxes three times, and cut our non-public safety workforce by nearly 50 percent … Equally important, competition has dramatically improved the quality of city services, increasing productivity and boosting customer satisfaction.”

A Level Playing Field

So, who provides better waste services? As in politics, the winner of the competition can sometimes depend on whom you talk to. “To those who say that privatization always works, I say ‘no.’ But to those who say that there is not some deprivatization happening, I say there is always going to be some,” Segal says. “Some cities change their mind. They use deprivatization as a quick-fix solution, if the economy's good, etc., and they potentially revisit privatization in a few years.”

For the time being, at least, it appears that the private sector will remain a force to be reckoned with when it comes to municipal collection and landfill operations. However, it was not so long ago that industry observers predicted that privatization was going to wipe the public sector off the map.

Not only is the public sector still standing, it may be more prepared than ever to give the private companies a run for their money.

Kim A. O'Connell is a Waste Age contributing editor based in Arlington, Va.