Private Sector Participation in Municipal Solid Waste

Management:Lessons from LAC

Carl R. BartoneTransport, Water & Urban Department

7 May, 1999

MSWM often costly and vexing problem for local authorities Low service coverage

• 50-70% in capitals of low-income countries• 80-85% in capitals of middle-income countries

Substantial inefficiencies• high costs but low quality service• labor intensive but low labor productivity

Insufficient resources• little cost recovery• dependent on general revenues or transfers

Widespread uncontrolled dumping

Commonly proposed solution

Contract service provision with the private sector• belief that service efficiency and coverage

can be improved• should view as possible opportunity -- not a

panacea• important questions are whether and how to

involve private sector

Roles for the private sector

Improve efficiency and lower costs by introducing commercial principles• limited and well-focused performance

objectives• financial and managerial autonomy• hard budget constraint• clear accountability to customers and

providers of capital Provide new ideas, technologies, skills Mobilize needed investment funds

• especially for short-lived collection vehicles

Evidence from around the world

Studies of over 2,000 cities in UK, USA and Canada• public monopolies cost 25 to 41% more

than competitively contracted services Malaysian national study

• cost of contractor services 23% lower (after taxes)

Latin American 5 city study• service costs halved, higher labor and

vehicle productivity

Key Characteristics of MSWM

Public good nature (public health objective)• ineffective without universal coverage• some WTP for collection• little WTP for disposal

Cost recovery problematic• traditionally paid from general revenues• trend to bill with property tax or utility

Easy to unbundle Easy to compete for residential collection

• easy entry and exit -- limited economies of scale but high economies of contiguity

PSP Options for Collection Zonal service contracts

• exclusive right to provide service• privately owned fleet• municipality charges and pays• takes advantage of contestability for greater

competition and efficiency “Managed Competition” variation

• municipal SWM department competes on equal terms for zonal service contract

• requires corporatization and clear separation of regulatory, client and operator functions

• popular in USA (by zones) and UK (by system)

PSP Options for Collection (cont.) Zonal or city-wide concession or franchise

• difficult for private operator to bill customers directly

• used in Fernando de la Mora (Asuncion) and Guayaquil respectively

Open competition• used in Guatemala City (<80% participation)• costliest option for households• OK for large ICI generators

Micro- or small-enterprises• good for servicing poor periurban areas or

inaccessible areas

PSP Options for Transfer, Treatment and Disposal Management contracts

• easy to unbundle services• private sector unlikely to make major capital

investments (enforcement and payment risks) Concessions

• Hong Kong DBO model (with public investment)• BOT/BOO

Open competition• private mega-fills in USA• regional hospital waste incinerators

PSP Experiences in Latin America Big cities started contracting out in 1970’s

• Buenos Aires, Caracas, Sao Paulo• zonal service contacts for collection• management contracts for transfer, treatment

and disposal Today spreading to intermediate cities

• between 40-50% of LAC urban population served by private operators

• in Brazil, 40 firms collect 65% of urban waste nationwide (up from 40% in 1982)

• almost all options observed now, but still mostly contracting out

Typical LAC Contractual Arrangements

5 - 8 year contracts with renewal options• allow for full depreciation of equipment• multiple zones and periodic rebidding

increases competition for the market Payment linked to performance

• per ton collected, per km swept, per ton disposed

• requires direct measurement (eg, weighbridge) Periodic price adjustment based on cost

indices and/or inflation rates

Types of Firms Entering Market

Typically small and medium firms In Brazil, of 40 firms:

• 5 large contractors in road or dam construction sectors

• 20 medium and 15 small haulers or transportation companies

Increasing international participation• important for management know how and

environmental technology transfer• trend to integrate with WSS? (eg, Dominican

Republic)

Microenterprise Participation

Survey of 80 LAC microenterprises in 8 countries found:• ME’s service areas that larger private

companies cannot serve by conventional trucks• ME’s provide cost-effective and affordable

services for which poor urban households are willing to pay

• to be effective, ME’s must be integrated with city-wide management system

• to promote ME’s, facilitate access to commercial micro-credits and technical assistance

Sao Paulo Municipality (11 million) In 1977, LIMPURB contracted out 2/3 of

collection to 3 firms By 1987, all services were contracted out:

• including collection, street sweeping, transfer, composting, incinerators, hospital waste collection & treatment, sanitary landfills

Today, have 16 contracts for 13,000 tpd worth US$30 million per month• separate contract with engineering

management firm for monitoring and control led to 10% reduction in cost of contracts

Presently bidding out 2 large incinerators with energy recovery (1250 tpd each) and large composting plants• BOT concessions

Issues:• disposal costs will more than double• plan calls for source separation into wet and

dry fractions, requiring high public participation

• decentralized monitoring and control important since collection and sweeping contracts are so large (1.6, 3.6 and 5.8 million population) that collusion/cartel a concern

Sao Paulo (cont.)

Sao Paulo Metropolitan Region 21 of 39 constituent municipalities

contact out entire service, and another 4 contract collection and transport services

Rio de Janeiro (6 million) Prior to 1990, COMLURB prevented by law

from contracting with private operators• significant inefficiencies (eg, 12 year old fleet)

Today, several PSP arrangements• traditional zonal collection service contracts• zonal contact for multiple services (street

sweeping, beach cleansing, weed removal, drain cleaning, container management)

• COMLURB leases vehicles and drivers• concession to licensed private operators who

are free to contract directly with larger waste generators (>100 lpd)

Santiago (5 million) Communes responsible for all services By 1989, 21 of 23 communes contracted

out collection services• payment on monthly lump sum basis, not

tonnage• 7 small to medium firms provide service• average commune population of 170,000

In 1984, 14 communes created EMERES (a joint commercial entity) as a disposal authority• subcontracts sanitary landfills• today oversee state-of-the-art landfills with

methane gas recovery and utilization

Metropolitan Lima (6 million)

Recent contract with Relima, a Peruvian, Brazilian, French consortium• collection and street sweeping in Lima

Cercado District (500 tpd)• transfer and disposal for metropolitan regions

(2 landfills totaling 2000 tpd capacity)• adjust prices every 6 months using cost index

Other districts now bidding out collection• mainly with local firms, but some richer

districts attracting international bidders ME’s service large parts of poor districts

Bogota (6 million)

Starting in 1989, contracted out 3 zones with 3 consortia• only with international firms in joint venture

with local firms• initially municipality kept 1/3 of city• due to inefficiencies and labor strike, that

zone eventually was privatized too Today, 7 collection zones contracted out

• with 4 consortia plus joint company to collect user fees

• bids awarded on basis of smallest percentage of existing tariffs

Bogota (cont.)

Landfill operation was also contracted out• in 1998, major landfill slide occurred probably as a

result of excessive leachate recirculation and steep topography (2 million tons of waste slipped)

PSP in line with Colombian national policy• national regulatory and institutional framework• competitive bidding in all major cities• regulated tariff with cross-subsidy billed with water• national commission for monitoring performance

Lessons from LAC

Trend toward national PSP policies• initial experience was strictly ad hoc• still so in many countries (eg, Brazil)• many countries now moving toward

definition of national solid waste policy framework (with support of World Bank, IADB, PAHO/WHO) that includes privatization policy

• some countries have well defined PSP frameworks (eg, Colombia) or are developing it (eg, Dominican Republic)

Lessons from LAC

Cost recovery needs special attention• critical to avoid payment risk• most countries now apply user charge (benefit

tax) or tariff• cross-subsidization common• billing and collection with property tax most

common but not efficient (eg, 70% in Brazil)• trend to billing and collection with other utility

• water (eg, Colombia)• power (eg, Ecuador has 10-12% surcharge

on electric bill)• pay commission to utility of up to 5%

Lessons from LAC Labor issues should be dealt with up front

• solid waste department biggest employer in city government

• labor redundancy must be resolved or efficiency gains will be ephemeral (eg, Caracas)• severance packages• strategy of natural attrition and voluntary

retirement (eg, Quito)• encourage workers to form enterprises and

compete (eg, UK)• worker health and safety can’t be sacrificed

• contractual agreements to cover worker protection

Lessons from LAC

Strengthen municipal/metropolitan institutions to assume regulatory and client functions• early successes largely due to strong

institutions with good knowledge of costs and technical requirements (eg, LIMPURB)

• basically evolve into contracting agencies (eg, EMERES, COMLURB)

• capacity for monitoring and supervision of contracts is essential (eg, Sao Paulo)

Lessons from LAC Successful PSP models well known

• To collect -- divide and conquer• most international experience is in

contracting out for defined zones (50-100,000 minimum; > 400,000 for ICB)

• responsibility and revenue collection remain with municipal government

• franchise is less used, less appropriate• Consolidate (city-wide or metro-wide) for

environmentally-safe disposal• management contracts common• focus on DBO rather than BOT in the

short term

Lessons from LAC

Accountability -- emphasize performance measures• Contracts should clearly define operational

standards and regulatory requirements (financial, occupational, environmental)

• Contracts should specify enforceable performance measures and link to payments

• Conduct performance monitoring• regular inspections• direct measurements (e.g., weighbridges,

landfill monitoring wells, etc.)• public involvement (e.g., Complaints

Bureau)

The Bottom Line

Competition

Transparency

Accountability