Should Your Community Own Or Operate A Landfill?

Marc J. Rogoff

In these days of hefty regs and limited flow control capabilities, many municipalities are debating whether do-it-yourself landfill management or privatization is the best approach.

Due to the high costs of landfill design, construction and operation, communities increasingly are turning to national and regional solid waste management firms to provide disposal services.

Landfill privatization is driven by several trends. For example, communities that relinquish solid waste collection and disposal to the private sector also are inclined to privatize landfill ownership or operation. Meanwhile, many private sector businesses that operate collection and/or disposal systems are developing landfills as part of their continuing business venture. Finally, legal restrictions such as special labor regulations and bidding laws or lack of cooperation between multiple communities often make it too expensive or impossible to maintain public ownership.

Still, despite these trends, most local governments continue to own and operate their existing landfills and many are planning to expand or develop new sites well into the future. Before choosing between public or private ownership and/or operation, community decision makers must first analyze the project's economics, control options, risks and financing security.

Economics And Control Assume that the costs to construct and operate a landfill remain the same regardless of ownership. The reason private ownership is attractive is the availability of federal tax benefits to subsidize project costs. Private equity contributions also have been viewed as a means to reduce a community's debt service requirements and public funding needs, either through an initial contribution from the private owner (i.e. a down payment) and subsequent smaller bond size or through annual contributions during the early years of operation.

Part of the private owner's return on this investment comes from the available tax benefits. The private owner considers this when setting a tipping fee. Computer models are available to estimate the vendor's return and to optimize the equity contribution.

Communities have no assurance, however, that they will be given full credit for the available tax benefits. The tax benefits' value for the individual owner also is difficult to determine during negotiations. In addition, an annual operating profit would be included as part of the operations and maintenance expense. This profit would be common for both public and private ownership, as long as a private company operates the landfill.

Operational control is the second area of concern to address when evaluating private or public ownership. Solid waste projects can undergo intense public scrutiny due to environmental concerns. To alleviate these concerns, some public officials prefer to retain more extensive control over a project's operation than is afforded by private ownership. With public ownership, the community controls all aspects of construction and operation.

On the other hand, some public officials would rather distance themselves from public involvement and opt for private ownership. With a privately owned landfill, however, a community's control usually is limited to the right to inspect the plant and to require periodic tests to demonstrate guaranteed performance levels. Thus, the community must weigh public reactions against project control when making the ownership decision.

Risk And Financing Security Project risk is another important consideration (see table on page 44). The basic potential risks are the same with public or private ownership. In private ownership, however, the company may be willing to assume responsibility for some un-foreseen risks.

To protect against risks, the owner must provide additional capital in proportion to its initial equity contribution; the amount of capital is generally limited to the available tax benefits. In addition, the private owner may ask the municipality to assume the risk of losing anticipated tax benefits due to changes in tax laws (i.e. tax indemnification).

For financing security, public ownership backed by a general obligation pledge works best. If revenue bonds are used, the vendor may be willing to supply a corporate guarantee or letter of credit (LOC) as additional security. Factors in the in-vestor's security analysis include the corporation's credit worthiness and the extent to which limited subsidiaries are used.

A risk assessment outlines all possible risks, their impacts and the methods to reduce or to share them. This data will help define contractual arrangements, procurement ap-proach and financing structure.

Risks can arise in the following general areas: the waste stream, construction, operations, financing and contracts. Risks can be further categorized according to the cause and the appropriate mitigation or risk sharing measures taken.

It's difficult to assess the probability that a risk will occur. While both the contractor and the community will be responsible for any risks they cause, the community will be re-sponsible for circumstances beyond the contractor's control.

The impacts of a risk occurrence are primarily financial. They include cost overruns and increased capital requirements; increased operating and/or maintenance costs; lost or lower than anticipated tipping fees; temporary or permanent landfill shutdown; and failure to make debt service payments.

Methods to mitigate risks include choosing creditworthy contractors with demonstrated performance and management skills; selecting design and operating criteria to compensate for variations in waste supply; screening for hazardous wastes; protecting against force majeure; establishing reserve funds for landfill closure; and securing reasonable in- surance policies.

Although private contractors will accept risks, adequate compensation will be expected and the risks must be allocated equitably among all parties. A good working relationship between the community and the vendor is critical. To ensure performance, positive incentives such as revenue sharing should be used. Long-term operating agreements must be flexible so that the contractor can maintain a minimum profit during hardships to avoid bankruptcy or insolvency.

Ultimately, there is no right or wrong answer when choosing be-tween private or public landfill ownership and/or operation. By weighing the pros and cons, communities can determine the right approach for them.

Going private or staying public both have advantages. Two Florida counties, for example, have taken very different routes and neither regrets its decision.

On Florida's west coast, Pinellas County has owned a municipal solid waste (MSW) landfill since the late 1970s, when it assumed disposal responsibilities for 23 cities and their unincorporated areas.

The county's current integrated MSW management system includes a 3,000-ton-per-day resource recovery facility, a 750-acre MSW complex that includes a 550-acre landfill, and several recycling and special waste collection programs. Although Pinellas contracted several private companies to design and operate these facilities, the county retains permitting, procurement, financing and ownership responsibilities.

Pinellas opted to privatize operations for several reasons. First, the private/public partnership maximizes economic efficiencies and operating flexibility, while minimizing the county's day-to-day operational risks. In addition, the county's contract with the private landfill operator guarantees that the contractor will provide all labor, equipment and materials at a fixed fee over an extended period.

About 100 miles south along the coast, Charlotte County, Fla., has taken the opposite management approach. It owns and operates all of its MSW facilities, including the landfill and leachate management facilities. The county's debt for the solid waste system is limited to a recent $12 million landfill expansion.

Several years ago, the county received an unsolicited proposal from a major solid waste disposal firm, which prompted officials to review its solid waste operations costs. Although the proposal appeared cost effective, the county concluded that it could meet the private firm's long-term costs and still retain full control of its own MSW disposal destiny.

Due to this decision, the county was later able to consider an alternative landfill construction design, a sodium bentonite slurry wall, which reportedly saved the county more than $12 million. If a private operator had played a role in the process, it may have chosen a more conservative, conventional bottom liner and ultimately passed the costs along to the county's rate payers through higher tipping fees or non-ad valorem property assessments.