CALLING ON CEOs 831

Waste Age: How has the public sector side of the waste business — both contractors and operations — changed?

Mickey: Economics have a dynamic impact on the public sector. When the economy is tight, cities, counties and states will look to create additional revenue sources. We see that in the Northeast through taxes — and that's what they are — on disposal, etc. What is troubling is when the city turns and gets back into the collection side of the business because they take away the private company's ability to perform and provide service. And they're doing so in most cases with economics that are driven [by circumstances that are a lot different] than what the privates face. On the landfill side, it's a competitive business. I would hope that the same application of [regulations] apply to the counties and the cities as they do to the private side of the business. In many cases they do, but in some cases they don't.

Bill: It all goes back to politics. I don't like to hear when a city takes back a service like I think they're doing around St. Louis right now. That's a bad omen. That's telling the private industry, “Hey you guys aren't doing a job.”

Ron: People have talked about privatization of the solid waste industry, meaning municipal government getting out of the business, for 20 years now. The reality is, it moves glacially. The single largest risk to our industry is local government kicking private industries out of their market and reverse privatizing it to themselves. We are seeing a number of small efforts like that in the South and Midwest, where private industry has provided service for 30 to 60 years in open competition, and the government comes in and says, “As of tomorrow, pick up your containers and your trucks. We're in this.” They're trying to make money to fill local budget holes. I do not necessarily, except on the West Coast where it's a franchised business, view them as a customer there, or a partner there. Local government is something that we look at very cautiously because they are really a competitor, and a competitor that plays by a different set of rules.

Mike: Looking at the franchise model Ron alluded to, you have a situation where cities are doing couple of things: providing more regulation and telling you how to do things where they don't always have the experience or know-how. On a [WasteExpo] panel yesterday, we talked about trends in urban recycling in San Francisco, Toronto and San Jose. We've been the service-providers in San Francisco forever, and we have been the service-provider in San Jose since 2002. The panelist from San Jose said, “You know, after listening to how things are done in San Francisco, I think the implementation of a new program like you did there is probably the way I should have gone.” We phased-in [San Francisco's recycling program] over time and educated customers on a one-to-one basis versus in San Jose, in which they had us start up 152,000 homes in one week and didn't allow us to deliver carts ahead of time. Well, why don't you listen to us, seek some advice from people that do this for a living before you just go do it?

The other thing I'd like to say is that [the public sector] seems to find the franchise system as a great new way of providing government revenues. Lots of new fees and taxes.

Jim Perry: The [public sector] has found that we're a great source of revenues, so if they can manage the contracts and skim off the top to bolster some of their revenue shortfalls, then that's a great thing. The other phenomena that has taken place in the Southeast is that 30 years ago, counties and towns didn't talk to each other and they honored the political boundaries very rigidly. That's changed. Now, they're forming new boundaries, new entities and authorities to leverage their purchasing power. They're seizing that as a way to control the waste stream and pick-off the revenues inside those waste streams. Where they are some of our best customers, they're also a threat. There's an old expression: You keep your friends close and your enemies closer. We enjoy about 30 percent of our revenue in that segment and some of our best customers in that segment, but we have to be leery of their motives and objectives. We try to stay out in front far and long enough so that we don't get surprised.

Paul: I spent a part of my early career in government and, for a time, in a regulatory capacity. Therefore, I have a unique perspective on this issue. The answer is, I do not see any specific trends, as it varies from jurisdiction to jurisdiction. The issue is, as it has always been, should government act as a regulator and assure the proper provision of a critical service, or should they provide the service and compete with the private sector? This debate is far larger than this article will allow, but it varies. And, it is most damaging when government acts in both roles at the same time.

Jim O'Connor: In the past, the public sector has looked to partner with the private sector when revenue was tight. Due to the weak economy, we have seen an increased interest in privatization over the past three years compared to historic levels. It has been our opportunity to assist municipalities as they struggle to continue to provide cost-effective and environmentally sound waste collection, recycling and disposal services.

David: Over the past several years, there has been a greater emphasis on the budget shortfalls that many cities and counties are facing. As a national company, we have increased our efforts to partner with public sector entities to help them to be more efficient in the areas of solid waste services.

Where is recycling in terms of it's evolution in the waste business?

Bill: Right now, the recycling markets are high. I love it; I love China. They've taken a lot of our product over there. And with new laws coming on, recycling is still going to grow. It's a fact of life, and it's going to get bigger over the years. If we can get markets out there to absorb this stuff so we can make a dollar on it, then let it grow.

Ron: For a long time, our industry fought recycling and hoped it would go away. The reality is it's not going to go away. The West Coast is very advanced in recycling. In California, we have a mandatory, statewide law requiring a minimum of 50 percent diversion of material from a landfill. The state is now looking at taking the rate to 65 percent diversion over the next three to five years. We have cities like San Jose — where we're a service provider along with Norcal Waste — that is actually diverting up to 70 percent of its volume away from disposal. So the West Coast is very advanced in recycling and has been for at least the past decade and a half. We are seeing beginning movements — in the Rocky Mountains states, the Midwest, Great Plains states and the Southwest — toward implementing mandatory recycling programs both commercially and residentially. Most of those states do not have legislation like the West Coast. It is mostly driven by customer demand or basic economics. But the states have found that that leads to very low recycling recovery levels and really has to be legislated. You're going to see more states in the next decade move to more of a West Coast model of state legislation and mandating service providers to implement.

Mike: I agree that what is going on in the West Coast will migrate to the rest of the country. It gets easier to do as landfill prices go up. I don't understand why New York City isn't recycling a hell of a lot more than they do today. They can do that and actually save money. But in California, in two of the cities that we operate in, San Francisco announced a 63 percent diversion rate for 2002 and San Jose announced a 62 percent diversion rate. Those cities are going to do a lot more [recycling] than they're doing now. San Francisco's goal of 75 percent by 2010 is very achievable. And when they get to that, they're not going to stop there either. We have communities that want to be totally non-reliant on landfill disposal, incineration and waste-to-energy. The communities want to find ways to recover [waste] and put materials back into beneficial use, and we're going to be there.

Jim Perry: Recycling is emotionally driven on the East Coast. They got out in front of the processing capability and the infrastructure. When the prices fell away, it left a lot of people sitting there with a problem. This time around, you will see that recycling is a volume-driven business. The infrastructure will be more geared to knowing where the volume's at and the sustainability of those volumes. Smaller companies will not be engaged other than on the collection side. Larger companies will spend a lot of resources to put in that infrastructure.

Mickey: Recycling is economically driven and consumer and legislatively driven. In the Northeast, we do a significant amount of recycling in New York City on the commercial side. We do 350 to 400 tons a night in fiber. It is a profitable business for us because we basically are diverting disposal costs and with the commodity markets higher now, it's even a better business. As an aside, we have a long term contract with Weyerhauser, and we would prefer not to play the commodity market. So we basically have taken the ups and downs out of our New York City activities. When you look to the South and Southwest, it is more legislatively or consumer-driven, and residential recycling is subsidized. It is subsidized by the consumer who wants this. There needs to be more incentives on the part of government [to create] users of recycled products and to put more recycled products back into the stream. That would be very helpful and would drive that subsidization down to where it pays for itself.

Paul: I am never sure how to answer this question. Americans want recycling and programs that are good for the environment. However, it has been my experience that the vast number of Americans are not willing to pay a significant premium for such services. Therefore, recycling will expand as it becomes more cost competitive or government mandates it. I do not see government mandating programs that are terribly costly unless the national good or health is proven to be at risk.

Jim O'Connor: Recycling has flourished where it makes economic sense. Unfortunately, some recycling efforts continue to struggle because the markets simply don't exist or are still underdeveloped. Customers and lawmakers need to understand the economics of recycling and work to develop and improve markets for recyclable materials.

David: As the largest recycler of MSW in North America, we recognize that we must proactively search for ways to make recycling more profitable and, therefore, more sustainable. Because the recycling industry is still very fragmented in the United States and processing capacity far exceeds demand, we took steps in early 2003 to combine our recycling operations with The Peltz Group in an effort to increase capacity utilization, in part by rationalizing our facilities.

Are there other key issues under the radar the industry should pay attention to?

Ron: The biggest issue facing our company is rising costs of all insurance lines. There's really no end in sight. Look at medical costs alone. We went to $4,100 a year to $10,000, and we're under a long-term agreement with Blue Cross/Blue Shield, arguably one of the nation's largest providers. We have basically been told that a $10,000 a year family plan by 2007 will be somewhere between the $15,000 to $18,000 a year per family. Medical cost is rising dramatically. Liability insurance has risen dramatically. And our industry — all industries — are going to have to figure out how to get that back out of their rate structure.

Mike: At Bruce Parker's reception [at WasteExpo in May], there were a lot of gray-haired people. It reminded me of something we're working on in our own company — where are we going to get the next generation of management in this business? I wonder if we're doing enough to make [the industry] interesting to young people to want to get in and have careers. There's a tremendous amount of opportunity and amount of fun you can have, but there's just something not sexy enough that college grads are running into this business. We know that in our company, we need to do a lot as our management group grays and ages to bring in some new blood and get that next generation going along behind us.

Jim Perry: That's a good point. We've left an entrepreneurial era, and we've built an industry. While those gray-haired guys were doing it and are still in the business, we're in the execution phase now. Our company has spent a great deal of time looking at and focusing on trying to grow our own. We recognize that's a need, because yours truly [has been in it for] 33 years and I don't think I'll be here another 33. The management of companies today is more professional, more financially driven. They don't get the excitement of having built [the industry] as maybe some of us do. They get more excitement out of growing it, and they're smarter and faster.

Mickey: My colleagues have covered two important points: people succession and the recovery of insurance costs. I'd like to add a couple other thoughts. I am concerned that landfill space is being given away and the ability to re-permit and seek expansions is becoming more of a political fight than it is an environmental and/or siting issue. Through the Internet, we are facing a very sophisticated group that is against all landfills. The fact of the matter is there is nothing more environmentally secure and/or economically prudent than a landfill. I see that permit process becoming extremely difficult, and that's troubling.

The other thing I'd like to ask is, in what industry can you put competitors who have fought each other for so many years together in one room and give them a standing ovation when they achieve notoriety and recognition? The waste industry really is a unique business made up of entrepreneurs. It's made of people who have chosen a very difficult task, which I think is also the reason that succession planning is difficult. Our industry's tough. There are a lot of easier ways to make a living, but it is managed by unique individuals. The good part, as we saw this morning [at the EIA Awards breakfast] was when we recognize competitors and friends and foes alike with a standing ovation for what they have achieved in the business that we all make a living in.

Bill: As far as gray-haired guys … I've got my partner, three sons, three son-in-laws, and they're all vying for position. So succession is going to be big with Rumpke, but it's going to be fun to watch.

Paul: Ah, the radar. I think you have covered most if not all of the topical issues of the day.

See Waste Age's August 2004 issue [page 28] and September issue [page 66] for parts 1 & 2 of the CEO Roundtable.

Top industry CEOs share their views on recycling and public-private sector dynamics in Part 3 of Waste Age's CEO roundtable.

IT'S NO SECRET THAT THE WASTE INDUSTRY faces a myriad of challenges — not only in collecting and managing waste, but also in handling typical business tasks such as maintaining budgets and recruiting employees. And according to the CEOs who participated in Waste Age's roundtable discussion, held at WasteExpo 2004, the list of hurdles just grows from there.

“The biggest issue facing our company is rising cost of all insurance lines,” said Waste Connections' Ron Mittelstaedt.

“What is troubling is when a city turns and gets back into the collection side of the business because they take away the private company's ability to perform and provide service,” said IESI's Mickey Flood, adding reverse privatization as a concern.

How do the industry's leading companies remain optimistic when tackling so many tasks? Read on in this third installment of our exclusive CEO Roundtable.

The roundtable participants were Mickey Flood of IESI Corp., Ft. Worth, Texas; Jim Perry of Waste Industries, Raleigh, N.C.; Ronald Mittelstaedt of Waste Connections, Folsom, Calif.; Bill Rumpke Sr. of Rumpke Consolidated Companies, Cincinnati; and Mike Sangiacomo of Norcal Waste Systems, San Francisco. The discussion was moderated by Bill Wolpin, Waste Age editorial director, and Patti Tom, Waste Age editor.

CEOs Paul Jenks of Onyx Waste Services, Milwaukee, Wis.; James O'Connor of Republic Services Inc., Ft. Lauderdale, Fla.; and David Steiner of Waste Management Inc., Houston, were unable to participate because of scheduling conflicts. So, their responses were added at a later date.

Editor's note: This is the third article in the three-part CEO Roundtable series. Part one of this discussion appeared in Waste Age's August 2004 issue [page 28] Part two was published in Waste Age's September issue [page 66]..