Governments Winning: The Bidding War

Jeremy O'Brien

As a city or county manager, you are concerned about the escalating costs of your solid waste collection operation, your ability to comply with new recycling regulations and the need to upgrade collection vehicles.

To add to your stress, you receive numerous calls from elected officials, urging you to privatize.

You concede to explore this option, and soon a proposal is placed on your desk, submitted in response to your staff's request for proposal (RFP). It presents an innovative approach to providing contractual collection services with these provisions:

* a multi-year contract with a guaranteed annual fee;

* the purchase of new collection vehicles, to be included in the annual fee;

* commitments to meet performance and regulatory requirements established in the RFP; and

* performance incentives, including a gain-sharing program, provided for collection staff.

The proposed annual fee, as well as the terms and conditions of the offering, are attractive and will save your community millions of dollars over the contract term.

Based on an independent review by outside consultants, this proposal is deemed to be the most cost-effective submission among offerings from some of the largest private solid waste firms in the world. To your surprise and delight, the winning proposal was submitted by your own solid waste collection division.

This scenario is becoming more common as governmental agencies use "managed competition" to procure solid waste services.

The managed competition approach presents a new business method whereby public agencies are allowed to develop competitive "bids" to provide solid waste collection, processing or disposal services.

Charlotte, N.C.'s Successful Bid The Charlotte (N.C.) Solid Waste Services Department (SWSD) has a history of providing the city with excellent refuse collection. In 1990, the department implemented a citywide curbside recycling program, which has been recognized as one of the most successful in the country.

SWSD's most noticeable change transpired in July 1994 when it switched from twice-per-week backyard collection to once-per-week automated collection.

From 1990 to 1997, the collection division streamlined its workforce from more than 345 employees to 156 employees a transition that has improved efficiency and increased customer satisfaction.

In January 1997, the city of Charlotte issued an RFP to provide collection services to 31,871 residential units - or one-fourth of the city's collection area. It solicited regularly-scheduled, once-per-week refuse, yard waste and recycling collection services on the same day from the curb (or other designated collection area) and transportation to city-designated disposal sites.

The city also required the winning contractor to provide bulky waste collection on an as-needed basis, with one-week notification. The contract term was five years, with two one-year renewable terms at the city's option.

On February 24, 1997, the SWSD, through a separate accounting division called "SWS-Contract Collections" (SWS-ConCol), submitted a proposal to provide the requested collection services under the terms and conditions stated in the RFP, for a five-year period. The city also received bids from four private companies.

An initial review of the bid prices indicated that the SWS-ConCol proposal was the lowest cost bid, with a proposed annual fee that was $1.1 million lower than the nearest competitor. (At presstime, the Charlotte collection bids were still under evaluation. More information will be provided in a later article in this series.)

HDR Engineering Inc., Omaha, Neb., which helped SWSD with the bid, dubbed this approach "public contract operations" (PCO).

The ABCs Of PCOs PCOs involve the delivery of services by a public agency to a city or county government through the development and execution of a public "contract," which is actually a memorandum of understanding (MOU) between the local government and the public agency.

The MOU contains all of the terms and conditions that the local government would include in a service contract with a private company. In the SWS-ConCol case, it will be similar to the agreement included by the city in the RFP.

To respond to the RFP and provide the requested services, the SWSD formed SWS-ConCol, which served as a separate operating and accounting structure.

As illustrated in the SWSD case, service delivery through PCOs enables communities to receive the best elements of the private-sector and public-sector approaches. PCOs meld the performance incentives and automation investments of the private sector with the public sector's goals and policies:

* Private-sector performance incentives and automation investments. The SWS-ConCol staff will have many of the same performance incentives used by a private contractor. The SWS-ConCol collectors will share directly in cost savings, which will be allocated quarterly.

The operators will be cross-trained to perform all tasks related to the four collection services and will be empowered to make on-the-spot decisions to enhance performance and minimize operational costs. Additionally, they will be provided with state-of-the-art collection vehicles which will be financed out of the annual contract fee.

* Public sector policies and service objectives. PCOs allow public policies and service objectives to guide the overall provision of collection services. Employees continue as public sector workers, and savings are reinvested in the community.

Who's Affected? How will PCOs affect the community? For example:

* The employees. Most local government employees have few performance incentives to reduce costs. The PCO approach encourages them to participate in the benefits and risks associated with efficient operations.

* The collection services manager. Under the PCO approach, the collection services manager has the authority and responsibility to op- erate the service contract as a "profit center." The manager knows, in advance, what his or her annual budget will be and is secure that it cannot be chang-ed. He or she also has, in writing, the expected performance parameters.

The manager has the authority to use a portion of the costs savings (proposed annual fee minus actual annual costs) to reinvest in the collection services for efficiency improvements.

* The solid waste agency or utility. Under the PCO approach, the agency is no longer at the mercy of arbitrary budget cuts made by newly-elected officials. The agency can point to an MOU which defines not only the service level agreed to by the PCO, but also commits the local government to provide an annual fee for the services.

* The taxpayer. As a customer, the taxpayer receives the benefits of service from a long-standing public agency as well as significant cost savings achieved through managed competition.

* The elected official. PCOs provide an alternative for elected officials under political pressure to privatize operations. Elected officials can retain public sector control while achieving the benefits of using private firms.

The proposal prepared and submitted by SWS-ConCol met or exceeded all the requirements established by Charlotte for contract collections. In this case, the "public contractor" won.

This victory not only will result in collection equipment improvements and cost savings for this quarter, but may help usher in a new era of redefined and improved service using PCOs.