2014 Missouri Control Coalition Conference

After the Market Crash: Procuring Recycling Processing Agreements

Presented By: Laura Drescher

July 1, 2014

Presentation Overview

•  Importance of Recycling Processing Procurements to Communities

•  Procurement Experience

•  Procurement/Bid Process

•  Case Studies

•  Best Practices

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Importance of Recycling Processing Procurements to

Communities

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Recycling in Missouri

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•  In 1990, Senate Bill 530 established a statewide goal of reducing waste by 40 percent.

•  Each year, our state landfills over 4 million tons of materials which could have been diverted.

•  “Waste and Scrap are one of Missouri’s top ten exports totaling $451 million dollars in 2012.” – Missouri Department of Economic Development

•  $2,000,000+ has been saved by Missouri State Government on waste hauling services as a direct result of recycling from 2007-2012. – MO State Recycling Program, 2013

Effects of the Crash

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After the 2008 market crash, communities faced: •  Significant revenue decreases; •  Requests from processors to

renegotiate agreements; •  Termination of existing

agreements; and •  Uncertainty concerning terms

and financial commitments that processors would be willing to include in new agreements.

Procurement Experience

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Solid Waste Services

Burns & McDonnell provides a variety of solid waste services

ranging from comprehensive technical design and construction to long-range planning and procurement services.

Procurement Staff

Scott Pasternak spasternak@burnsmcd.com

Veronica Roof vtroof@burnsmcd.com

Bob Craggs rwcraggs@burnsmcd.com

Extensive Procurement Experience Provides Understanding of Key Issues

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Procurement Expertise •  Multiple procurements,

negotiations and evaluations •  Range of services: collection

processing, disposal and conversion technology

•  Authored best management practice manual for solid waste and recycling procurement

•  Published articles and conducted workshops on procurements

Solid Waste and Recycling Procurement Experience

Sampling of Procurement Projects City of Little Rock, AR Citrus County, FL City of Cedar Park, TX

City of Coolidge, AZ City of Hollywood, FL City of El Paso, TX

City of Phoenix, AZ Sarasota County, FL City of Fort Worth, TX

City of Nogales, AZ City of Olathe, KS City of Georgetown, TX

Town of Queen Creek, AZ Cities in Ramsey County, MN City of San Antonio, TX

City of Tempe, AZ City of Minneapolis, MN City of Victoria, TX

City of Tucson, AZ City of Oklahoma, OK City of Waco, TX

City of San Jose, CA City of Tulsa, OK H-GAC, TX

Broward County, FL Beaufort County, SC NCTCOG, TX

Charlotte County, FL City of Austin, TX The Woodlands, TX

NCTCOG Recycling Contract Negotiation Guidebook: Comprehensive Guide for Local Governments and Private

Companies

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Topics include –  Procurement process

description –  Processing and collection

contract provisions –  Commodity price discussion –  Detailed financial explanations –  Sample contract language –  Case studies from cities within

region and outside of region –  Available at www.nctcog.org

“Recycling After the Crash” Highlights Case Studies

Procurement/Bid Process

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Procurement Process Overview

•  Select a procurement approach; •  Define the scope of services; •  Develop the procurement documents; •  Issue the procurement documents; •  Evaluate the proposals; and •  Negotiate and award the contract.

Contract Length Factors to consider when determining contract length: •  Municipal bylaws; •  Amortizing equipment and facility costs; •  Change in law provision; and •  Contractor service and responsiveness. •  Collection: 7 years •  Disposal/Recycling Processing: 5-20

years Options for contract renewal at the end of the term.

Performance Specifications

Examples: •  The timeframe in which trash/

recycling should be collected (i.e. 7 a.m. to 5 p.m.);

•  Procedures for the municipality to communicate with the drivers regarding daily problems;

•  Procedures for weather emergencies and road access issues; and

•  Procedures for residents to use to communicate problems or complaints.

A contract should not specify means and methods, but instead specify the desired outcome or performance specifications.

Liquidated Damages and Penalties

•  Liquidated damages or administrative fees are not punitive, but reflect the actual costs incurred by the municipality as a result of the vendor’s failure to perform.

•  Contract penalty is a specific amount set forth in the contract as a disincentive for the vendor to violate a performance standard.

Pricing Structure •  Collection – monthly per household amount

•  Processing/disposal – fee per ton

•  Additional services, such as collection or processing of yard waste, bulky waste, CRTs or appliances, may be priced separately.

Selection Criteria

•  Price;

•  Company stability and finances;

•  History and relationship with the

city;

•  References;

•  Proposal service plan; and

•  Location of processing facility.

Procurement Challenges

•  Unfamiliarity with procurement for processing services.

•  Unfamiliarity with open-ended procurement.

•  Analyzing financial proposals.

•  Lack of staff with procurement expertise.

Role of Outside Advisors

•  Since contracts are typically long term, a professional with 20 years of experience may conduct one or two procurements in his or her career.

•  Outside advisors are typically attorneys and consultants.

•  Cost of advisors much lower than the cost of an unfavorable contract.

•  Some communities require the selected contractor embed the cost of outside advisors into the contract fees.

Case Studies

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Case Study Overview

•  City of Olathe, Kansas •  City of Tucson, Arizona •  Broward County, Florida •  City of Hypothetical, Texas •  City of Sample, Hawaii •  City of Moscow, Idaho

Olathe, Kansas

•  Population of 125,000 •  Located in the greater Kansas City metropolitan area in

Johnson County. •  In January 2010, transition from a subscription, curbside-

sort recycling program to an every other week single-stream recycling program for all single-family residential customers using 65-gallon carts.

•  500-600 tons per month of collected single-stream material. •  Prior to 2010, no formal agreement in place with a recycling

processor.

Olathe, Kansas

City of Olathe Recyclable Revenue Share Blended Value Rebate $0.00 to $49.99 $0.00 $50.00 to $74.99 $5.00 to $11.00 $75.00 to $99.99 $11.75 to $29.75

$100.00 to $124.99 $30.67 to $52.75 Over $150.00 $79.79 and up

Tucson, Arizona

•  Population of 525,000. •  Located in Southern Arizona. •  Weekly single-stream recycling using 96-gallon carts since

2002. •  From its residential, neighborhood drop-off and commercial

front-end recycling programs, Tucson collects approximately •  48,000 tons of single-stream material annually from

residential, neighborhood drop-off and commercial front-end recycling programs.

•  Contract expiration in 2012.

Tucson, Arizona

Estimated Annual Tonnage of Recyclables Collected by the City of Tucson Program Tons Percent of Total

Residential Collection 41,200 85.7% Commercial Collection 4,000 8.3%

Neighborhood Recycling Centers

2,900 6.0%

Total 48,100 100.00%

City of Olathe and City of Tucson: Consider Multiple Processing locations and Options

Issue: Balance facility location with capital cost impact

Olathe Solution: Provided option for vendors to utilize facilities considered by the City for a City operated MRF

Tucson Solution: Allow vendors to propose use of MRF or transfer station to access the Phoenix market

City of Olathe and City of Tucson: Create Win-Win Financial Incentives

Issue: Minimize cost of facility and equipment requirements

Tucson Solution: 15 year contract with 5 year option to allow for full depreciation Olathe Solution: 5 year contract, with three 5 year extensions

Issue: Maximize facility throughout to decrease per ton costs

Solution: Exclusively commit all tons collected by the City and contract provision for cooperative purchasing

Issue: How to minimize contract provisions that increase costs

Example: Require MRF to process 95% of program materials, but operator has flexibility on technical approach providing a performance-based contract terms

Broward County: Regional Procurement Increased Competition and Financial Benefit to Local Governments

•  27 communities conducted a joint procurement for recycling processing

•  Annual tonnage per community varied:

–  Minimum: 38 tons –  Maximum: 8,416 tons

•  Regional procurement resulted in award of processing agreement for approximately 63,000 tons annually

Structure Contracts to Share Market Risk

•  Cyclical nature of pricing in the past reflects variable commodity pricing in the future

•  Critical to develop financial terms that are fair in “good” and “bad” markets

•  Consider financial terms that include a processing fee and revenue share •  Processing fee: compensate processors for cost to

provide service, typical range of $30–70 per ton •  Revenue share: Based on market prices for recyclable

materials, typical range of 40–70 percent

USA Weighted Average Commodity Pricing (Oct 2008–April 2013)

Variability of Market Prices

City of Hypothetical, Texas: Pricing Submitted in Response to RFP

Company A Company B Company C

Per Ton Processing Fee $25 $40 $75

Revenue Share Percentage to City 25%

35% and when average revenue per ton is greater than $100, 75%

share to the City

75%

Hypothetical Example

 $(3,000,000)  

 $(2,000,000)  

 $(1,000,000)  

 $-­‐    

 $1,000,000    

 $2,000,000    

 $3,000,000    

 $4,000,000    

 $5,000,000    

 $70      $80      $90      $100      $110      $120      $130      $140    

Pay

men

t / (C

ost)

to th

e C

ity

Weighted Average Market Rate ($/Ton)

Comparison of Results

Company  B  

Company  A  

Company  C  

Recommended Processing/Revenue Share Formula

Factors to Consider for Revenue Sharing

•  Publicity potential. Municipalities may be able to generate additional public interest in recycling by publicizing that “the more that’s recycled, the more the municipality earns”.

•  Variability in budgets. Most municipalities want to know the fixed cost of their recycling program for budgeting purposes. If a contract includes revenue sharing, it might be better to exclude the revenue projections from your anticipated budget.

•  Market index. It is common to use a market index such as the “Official Board Markets” when setting a price threshold above which revenue sharing will occur. For example, when the price for #8 newsprint exceeds $30/ton, the vendor and municipality will split 50/50 the proceeds above $30/ton.

Advantages and Disadvantages of Revenue Sharing

Advantages to Revenue Sharing: •  provides a direct financial incentive for a city to increase the quantity of material

recycled due to increased revenues for city; •  provides a financial incentive to educate residents on placing the correct

materials into the recycling stream due to increased revenues for city; •  ensures that the city receives detailed data regarding the quantity and

composition of material recycled to calculate revenue sharing and assist with public education; and

•  allows the municipality to reap the benefits of strong commodity markets and can provide a revenue stream to offset the costs of a program.

Disadvantages to Revenue Sharing: •  it is based on market prices and the revenue stream can be unpredictable •  the level of effort required for contract administration can be higher with revenue

sharing, which can make it challenging to manage, especially in smaller cities.

City of Moscow, Idaho: Contract Language can Substantially Impact Revenue Sharing

City of Moscow Formula Recommended Formula Commodity Volume

(example) 1,000 tons Commodity Volume (example) 1,000 tons

Weighted Commodity Sales Price

(Contract ceiling price) $115

Weighted Commodity Sales Price

(Contract ceiling price) $115

Revenue From Sale of Recyclables $115,000 Revenue From Sale of

Recyclables $115,000

City’s % of Revenue Share 60% Processing Cost ($60,000)

City’s Revenue Share $69,000 Net Recyclable Revenue $55,000

Processing Cost ($60,000) City’s % of Revenue Share 60%

City’s Net Revenue Share $9,000 City’s Net Revenue Share $33,000

Formula to Determine City’s Revenue Share

City of Sample, Hawaii: Understanding Local Market is Critical to Success

Processing Fees

Disposal Charges

Revenue Share

Education Fees

Net Revenue

Net Revenue per Ton

City A ($1,506,938) $0 $4,345,020 $42,750 $2,880,832 $67.39

City B ($1,371,420) ($154,381) $4,301,818 $51,300 $2,827,317 $66.14

City C ($1,710,000) ($58,193) $4,301,818 $75,000 $2,608,625 $61.02

City D ($1,496,250) ($58,193) $3,842,957 $42,750 $2,331,264 $54.53

City E ($1,150,000) $0 $3,154,667 $64,125 $2,068,792 $48.39

City F $0 ($45,000) $1,585,652 $1,000 $1,541,652 $36.06

City G $0 $0 $534,375 $34,200 $568,575 $13.30

Best Practices

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Proper Planning Leads to a Successful Procurement

After contract award, may need 6-18 months before starting contract if there is a need to build a new facility.

Conduct a Procurement Workshop: Forum to Provide Key Decisions for Procurement Documents

Recycling Processing

Procurement Documents (RFP and Contract)

Evaluation Criteria

Selection Process

Scope of Services

Performance Standards

Initial and Renewal Terms

Education and Outreach

RFP vs. RFB

Proposal/Bid Format

Preparation of Procurement Documents

Recycling Processing

Procurement Documents

Procurement Process/

Proposal Format

Background Information Rate Structures and Administrative Fees

Disposal and Processing

Requirements

Equipment and Personnel Requirements

Facility Location, Capacity and Other Requirements

Material Acceptance /

Rejection Protocol

Public Education and Outreach Requirements

Questions

Laura Drescher lrdrescher@burnsmcd.com

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