Bidding Goodbye?

Kim A. O'Connell

ALTHOUGH PRIVATIZATION HAS long been hailed as a dominant trend in waste collection, the reality is much more fluid and complex.

Sioux City, Iowa, for example, has struggled with the decision. For more than 20 years, the city contracted out its solid waste collection, with as many as seven waste haulers at a time collecting trash for various neighborhoods. When the waste service was opened for bid in 1996, however, the Sioux City Utilities Department approached the Washington-based American Federation of State, County and Municipal Employees (AFSCME), a labor union, about developing a plan to take back the service. Public employees ultimately won the contract that year, with the lowest of three bids. In late 2004, however, Sioux City reversed its decision, sending trash collection back out to the private sector.

Sioux City's changing decisions over whether to privatize waste services or keep them in house are mirrored across the nation. In the face of a fluctuating economy and continuing budget woes, municipalities often struggle with which method is the most efficient and economical. According to the National Solid Wastes Management Association (NSWMA), Washington, privatizing solid waste services offers four primary benefits to municipalities: 1) lower costs, because privatization can take advantage of market economies; 2) high-quality service, which benefits from a competitive environment and less bureaucracy; 3) management efficiency, especially when private companies can rely on waste specialists and industry experts; and 4) risk sharing, because private companies often assume the burden of liability and environmental compliance.

Yet privatization is no longer considered the one-stop solution for solid waste services that it was touted as in the 1990s. Although a popular option for decades, privatizing public sector services has frequently come under fire, causing some local governments to rethink their choices. [See “Not an Either-Or Proposition” on p. 44.]

Taking the Trash Out

In the 1990s, when Sioux City brought its solid waste services back in-house, it wanted, in part, to make sanitation workers feel like a valued part of city government — and by extension, city life. “We can make these workers part of the community,” AFSCME Member Garland Treloar told the Sioux City Council during the bidding process. “We can offer them a decent wage to support their families. And we can be sure that the money the city spends stays here in Sioux City. Or, we can continue with business as usual and send half of what we spend on trash collection off to some corporate headquarters [someplace else].”

The transition to city-run waste services, which began in 1998, was smooth, according to AFSCME, largely because private contractors already had been using city-owned trucks and maintenance facilities. In addition, private waste workers always had worn uniforms with the Sioux City logo, so the switch back to the city was fairly transparent to residents. Over nearly a decade, city employees had built up a track record with few public complaints, no lawsuits and good service, AFSCME reported. The union pointed to Sioux City as a positive example of reverse contracting of city services.

In late 2004, however, the city opted to privatize its solid waste services once again, citing concerns over a $1.3 million deficit in the city's solid waste fund, as well as its failure to comply with state waste reduction regulations. Last summer, a citizens committee concluded that the city could save nearly $1 million over five years if its solid waste services were contracted to Gill Hauling, Jackson, Neb. Although union representatives questioned that number's validity and offered a counter-proposal, the private hauler won the bid.

The city's decision to privatize was never about the quality of the government-run service, says City Manager Paul Eckert. It was about saving taxpayer money and reducing the solid waste deficit, he says. In fact, city workers were considered so effective that Gill hired as many city employees as possible when it took over the service. Additionally, the hauler has purchased some equipment from the sanitation department, providing additional revenue to the city. The company still houses trucks at the city maintenance facility, where city employees perform equipment upkeep and repairs.

Leonard Gill, president of L.P. Gill Inc., the parent company of Gill Hauling, says that residents have benefited in several ways. For one, Gill rolled out a new multi-cart system (the city had previously been using bags) with separate containers for trash, yard waste and recyclables. Furthermore, residents can now commingle their recyclables in a single container, which requires fewer trucks running the routes. “Whenever you have change, there are always going to be people who want it and those who don't want it,” Gill says. “But the transition has gone very smoothly, and we have gotten some nice letters about the new carts. The city's cooperation was and still is excellent.”

Bringing It Back In

Washington city officials, on the other hand, have decided to bring recycling collection back in-house, after many years of working with the private sector. Private haulers have been picking up or processing recyclables since 1990, although the city temporarily cancelled the curbside program twice because of budget cuts, first in 1995 and again in 1997. In addition to drawing sharp criticism from residents and environmentalists in both instances, the 1997 cancellation embroiled the city in a major dispute with the local private hauler, now-defunct Eagle Maintenance. As the city struggled to pay off the company's backlogged invoices, government officials accused the company of inflating its projected revenues from the sale of recyclables, which were counted on to help fund the program.

Even after Houston-based Waste Management Inc.'s local subsidiary began picking up the city's recycling in 1998, local officials noted numerous service complaints. Washington's recycling rate subsequently lagged in the teens, topping out at approximately 17 percent, only about half the rate of nearby large, suburban counties.

In January 2005, however, government officials hoped to make up for the city's spotty recycling history by taking over recycling services from Waste Management, but they were understandably cautious about the move. In 2002, the city's Department of Public Works (DPW) began studying various ways to manage a city-run program. By June 2003, the city had launched a pilot recycling program with only 582 households in one city ward. Central to the new program was a legion of new, blue rolling carts, into which residents could place all their recyclables, such as paper, cans and containers, without separating them.

Shortly after the pilot began, Washington reported an increase from a 17 percent recycling rate and 1.5 pounds per household per week to a 46 percent recycling rate and 6 pounds per household per week. The program had expanded city-wide by late spring, and the city even issued recommendations on how residents could reuse their old recycling containers as laundry baskets, composting bins or planters. DPW Director William Howland says that the program “is going to improve service to our residents and increase recycling across the city.” Considering the city's track record with waste collection, however, only time will tell.

Even in rural areas, solid waste departments are looking to take more control over their waste. In Alabama, whose cities have always trended toward privatized waste collection, less populated areas have struggled in recent years to keep up with the increasing costs of contracting. Rural Colbert County, for example, had contracted out its solid waste collection for nearly 30 years when it decided to bring the service in-house in September 2002.

“When you're dealing with a 4 or 5 percent increase [in private collection rates] over that long a period of time, it gets unreal,” says Howard Keeton, Colbert County commissioner. “The economics become unfeasible — between the fuel, the insurance, workman's comp, and so on — with private companies.” Since the county took over waste collection, Keeton says residents feel that they have better access to county sanitation workers when they have concerns or questions.

Keeton also has consulted with commissioners in other counties, helping to spark a trend in the state's most economically challenged areas. Winston County, Ala., for example, took back its waste services about four years ago. “We have realized a cost savings,” says Jerry Mobley, chairman of the county commission. “We have no plans on returning to the private sector for residential waste collection.”

A Cautious Approach

When it comes to competing for solid waste services, both the public and private sectors have had reason to be wary of each other. Each side has accused the other of having an unfair advantage — the private sector benefits from market economies and specialized expertise, while the public sector has the inside edge and may even be a subdivision of the purchasing entity. For its part, NSWMA has worked to promote the concept of “competitive neutrality” in the bidding process — leveling the playing field for both public and private service providers. In an ideally managed competition, NSWMA advocates, the costs of taxes and health and safety regulations — which private companies must include in their bids, but governmental entities are usually exempt from — should be accounted for.

One way to level the playing field is to not allow either public or private employees to take waste services for granted. One city that has taken this approach is Lubbock, Texas. In May 1995, after a competitive bidding process, Lubbock hired former waste giant Browning-Ferris Industries (BFI) to provide one-third of its residential trash collection services. Like many cities, Lubbock had considered privatization cautiously, choosing to bid out only a portion of its waste routes. According to AFSCME, the city viewed that as a hedge against the possibility that a private hauler would not provide sufficiently high-quality service. Although private waste collection saved the city about $150,000 each year, AFSCME says the city received “significantly” more complaints about the privately provided service than when the city collected the waste.

Despite that concern, the city opened another bidding process when BFI's contract ended in 1998. This time, however, Lubbock was extending the contract to five years instead of three and increasing the collection area to 40 percent of the city's households instead of one-third. In addition, the contract was going to be altered from the earlier version so that the service provider would set its collection rate based on the amount of “tipped” waste, rather than the number of households served. (BFI had unsuccessfully tried to renegotiate its contract at a higher rate, based on unexpectedly high waste volumes and tipping fees.) The bidding process yielded responses from three private haulers and the city, with its sanitation department submitting a winning bid of $3.6 million over five years, about half of the cost that the private haulers were proposing.

According to published reports, Lubbock was able to lower its costs by reducing the number of pickups to once a week during the winter months and keeping its twice-weekly collection during warmer periods. In addition, the work week was extended from 40 hours to 53 hours. Even with overtime pay, the city asserted that the new system cost less than hiring additional full-time employees. As might be expected, the bidding process raised concerns because the city did not have to pay taxes on its buildings and equipment, and benefited from exemptions on fuel taxes and other fees.

To avoid the appearance of bias, the city hired a team of independent certified public accountants to review the department's estimates before it submitted its bid. City officials say they are committed to keeping a significant fraction of the city's waste routes in-house.

While privatization will always be a viable solution for some municipalities, others may choose to keep solid waste in-house. The most foolproof solution, however, might be a combination of the two — or at least a willingness to consider both options as market forces and budgets change.

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

NOT AN EITHER-OR PROPOSITION

For the past couple of decades, privatization has been widely hailed as the most efficient way to deliver government services. However, according to Cornell University researchers Amir Hefetz and Mildred Warner, that view may be based on limited information. In a 2004 report, Hefetz and Warner cited studies proving that privatized contracts are not always stable over time. They say that from 1992 to 1997, 96 percent of all governments privatized some services, but during the same period, 88 percent brought some previously privatized work back in.

Several factors can lead a government to take back key services such as solid waste operations, the report states. The change can be caused by a new competitive bidding opportunity, unstable market forces, improved internal processes, unhappiness with the quality of private service or a combination of those factors. “Local government contracting has been treated as a one-way process — toward markets — and most studies have only looked at contracting out,” Hefetz and Warner write. “Those studies that have acknowledged the possibility of reverse privatization … have not given it detailed attention.”

Many local governments, they add, understand that contracting does not have to be an either-or proposition. “Pragmatic local government managers use markets in a dynamic approach; they contract out and bring unsuccessful contracts back in-house for direct public provision,” Hefetz and Warner say. “They also mix public provision and private contracts for the same service.”

In the past, contracting was viewed as a choice between either failure of the market-driven private sector or of a bureaucracy-addled government. Hefetz and Warner say municipalities should view privatization and de-privatization as two possible options for successful governing. “The same concerns with efficiency, quality and innovation that motivate privatization,” they say, “may also promote contracting back in.”
— KAO