Competition isn't just for private contractors anymore.
Privatizing solidservices is nothing new, with at least 50 percent of the nation's cities and counties having turned part or all of them over to private industry. But, while many communities have privatized sanitation services, others have allowed their own departments to bid for contracts, or, in some cases, unprivatize and re-establish their in-house operations.
The reasons for contracting vary, but it most often comes down to money. For example, in early 2003, Pontiac, Mich., was struggling to find a way to plug a $1.7 million annual sanitation deficit that had been flooding out of the city's coffers for the past decade. With the help of a task force composed of city staff, a citizens' advisory committee and two consulting firms, Pontiac bid out its solid waste services with the prize being an unusual, if not unprecedented, 20-year contract.
The winner of the bid announced in June — Onyx Waste Services of Michigan — awarded the city a $1 million bonus for signing the contract and is paying an additional $13,000 a month to lease landfill space. The city estimates the contract will save it approximately $1.5 million annually over the next 20 years. The company will receive an estimated $250 million over the course of the contract, which also requires it to build a new transfer station.
“We weren't able to provide the service and generate the type of revenue to [overcome the deficit],” says Pontiac Mayor Willie Payne. “It was the fact that we didn't have the resources to do it.” The company, however, does and will upgrade the system from manual to automated collection, which also will aid in servicing several plannedprojects and help reduce workers compensation costs.
While the contract did not require Onyx to hire displaced sanitation workers, the company gives preferential treatment to public employees and local residents. Norm Wood, Onyx sales manager, says hiring city employees who wish to come on board only makes sense because they already have experience and know the routes.
The company's performance will be monitored daily through Pontiac's customer service call line. The company took over the service in July, and after one month, complaints have been reduced from 45 to only six a day in the community of 19,000 residents.
While Pontiac found economic relief through, Phoenix found another route to managing its refuse costs by creating competition between the public and private sectors for its garbage collection contracts. For the past 25 years, the city has used a process called “managed competition” in which the city operation bids against private contractors.
The impetus to try managed competition came during a downturn in the local economy in the 1970s. Phoenix's 60,000 residences are split into six geographic service areas, one of which is bid out every two years for a six-year contract. The only caveat is that the city council requires half of the city's residential accounts to remain with Phoenix.
“The first two bids were won by private companies,” says Phoenix Public Works Director Mark Leonard. “About that time there was a concerted effort to evaluate why we weren't competitive in those two and what we needed to do.” The city found its solution by creating a program called ROAM (Reduce Operating and Maintenance Expenses), which established a culture of competition within the department. ROAM involved employees, union representatives and supervisors who worked together to create a cost-effective way to provide solid waste services. Since 1979, the city has won five of the 11 contracts.
“We are constantly looking for ways to cut expenses,” Leonard says. “We made dramatic reductions [in overtime expenses] and through our routing efficiency.” It also reduced the number of employees per truck from three to two by automating the collection service. In-housemaintenance also helps keep the city competitive.
To help determine the effectiveness of the service, Phoenix collects customer feedback through a call center. Performance also is rated every three months by a company that conducts a customer satisfaction survey. In addition, the city conducts a survey of all public services every two years.
Leonard cautions other jurisdictions to tread carefully when considering switching over to managed competition. “Go into it with your eyes open. It is difficult to administer. If you want to do it right, be willing to make changes and develop good contracts and performance standards and measure yourself,” he says.
Wayman Pearson, key business executive for Charlotte, N.C., Solid Waste Services, agrees. Since 1996, Charlotte's solid waste services have been subject to managed competition. The city is divided into four zones that include 80 percent of the population of Mecklenberg County, or 178,000 homes citywide. Of the four zones, three are under private contract. “We've competed in one of the zones and only lost one managed competition [bid],” Pearson says.
Managed competition also keeps public employees on their toes. “Employees know that their jobs could be put up for bid, so they have a stake in the company,” Pearson says. While personnel performance is a factor in running the city's solid waste department like a business, Charlotte also invested in automated collection vehicles and carts that increased productivity and decreased labor needs.
Private vs. public
Not everyone thinks that the public sector is equipped to compete. “In theory, government should always be cheaper because they don't have to make a profit,” says Adrian Moore, vice president of Los Angeles-based Reason Foundation, a free-market think tank. “But if you gather every cost comparison study that was ever done, you will find that, in 98 percent of the cases, the private sector costs are lower.”
In managed competition, Moore says local governments learn how to become more cost effective and to provide a higher quality of service. “They win bids enough times to show that it can be done, but they also lose most of the time, which shows it's very hard for them to be efficient.” When local governments win contracts, Moore suggests using a watchdog system — much like Phoenix — where the service is monitored as closely as any private service would be, and the city is held accountable to the contract terms.
Outsourcing, however, is not always the best solution, according to George Johnson, executive director of the American Federation of State, County and Municipal Employees (AFSCME) District Council 20 in Washington, D.C. In the late 1980s, Washington contracted the city'sto private industry and sold its recycling trucks and equipment. Soon after, “Residents found that their recycling items were often left, not picked up on time, or if it snowed or there was inclement weather, they were not picked up at all. Residents [blamed] the Department of Public Works employees,” Johnson says.
By the late 1990s, the community began considering its options. “We asked how it would benefit the city if it took the contracts back over,” Johnson says. To answer that question, the city established a pilot program, which led to a return of in-house recycling services. It also committed toup-to-date trucks and equipment. Johnson ultimately blames the failure of privatizing recycling services on a lack of accountability and rising contract prices.
Staying in the game
Abilene, Texas, considered outsourcing in the past but kept services in-house. “So far, we've been able to prove we can do the job better with better service and more service at a better rate,” says Solid Waste Services Manager Mike Wenger. “We provide a lot of services to our citizens that are not normally provided by contractors, such as going back to collect containers set out late, picking up pretty much anything you throw out and picking up dead animals out of the street.” Being service-oriented has paid off for Abilene's Public Works Department, which currently receives money from the general fund but is transitioning to an enterprise fund and will be self-sustaining.
Wenger believes the city is able to provide a higher level of service because it does not need to make a profit. “If a private business makes a profit, it goes to corporate headquarters someplace else, but it all stays in town when the city does it. The municipalities do not have to make a profit like a private company. They just have to break even,” he says.
In the future, whether local governments remain in the solid waste business may depend on their ability to successfully compete with private industry, Moore says. “[Setting] up a competitive system, constantly updates the best way to do things,” he says.
And, while contracting solid waste services to private industry is often tied to the overall health of an economy, just considering it can prove beneficial to cities and counties that want to have faith that their employees are doing the best job for the least money. “Local officials and staff have nothing to compare performance with but past experience, and, over time that comparison gets weaker. Competition brings it in sharp,” Moore says.
Sibley Fleming is an Atlanta-based freelance writer.
3 steps to contracting
The Los Angeles-based Reason Foundation suggests three basic steps to help create a successful solid waste contract:
ONE Choose the contractor
Many communities have moved away from a single-tier bidding system that simply selects the lowest bidder. Instead, some are using a two-tier process. The first step is asking for a request for qualifications, which determines a firm's ability to meet basic performance, financial, regulatory and other criteria. The second bidding tier — the request for proposals or request for bids — evaluates the comparative cost-effectiveness of competing proposals.
TWO Set performance standards
Competitive contracting for waste services also requires provisions to ensure that specified performance levels are maintained. Procurement documents need to spell out reporting requirements, performance standards and guarantees against non-performance.
THREE Determine contract length
Refuse and recycling contract terms are the subject of considerable debate. On the one hand, short-term contracts (less than seven years) increase the opportunity for competition. However, short-term contracts can reduce the level of competition and increase the cost of service to the consumer. Longer contracts (seven to 10 years) likely will attract the most bidders and the most favorable rates. Although the quality of service should remain constant throughout the contract term, the operating efficiencies of the contractor can improve over time.
Source: Reason Public Policy Institute, Los Angeles