Public-private competition for long term best value
By: Beth Goodger
The issue of private versus public collection of municipal waste has been in the news recently. This year, the City of Windsor, Ontario privatized waste collection services and Toronto City Council approved privatizing waste collection for 165,000 households in that city’s west end. In April 2011, Hamilton City Council gave approval to explore expanding its competitive model to recycling collection.
At the heart of the debate is the desire to achieve cost-effective service delivery and whether or not privatizing waste collection (an important service) is the only way to achieve this.
A review of waste collection services began in 2001 when six municipalities came together as the newly amalgamated City of Hamilton. At that time there were six different service levels and 17 waste collection zones. Four of the six municipalities contracted out waste collection; two collected waste with public workers.
Staff developed a waste collection service delivery model to assess a business case for the collection services for the new city. The system that emerged harmonized service levels and described a public/private service delivery model that would encourage competition yet retain public sector jobs.
In operation for almost ten years, the results show this approach promotes continuous improvement in both sectors and provides the best long-term value for the city.
Split model benefits
Hamilton has found that operating a split waste collection model offers several advantages.
A primary benefits is the competitive atmosphere between service providers, which reduces potential complacency and motivates the public sector to operate in a manner similar to the private sector. On the private side, knowing that the municipality is in the same business encourages the private sector to provide better pricing.
The split model also allows the city to maintain control of service delivery without the capital and operating costs of maintaining a city-wide waste collection fleet. Direct supervision of collection activities is reduced and staff time is focused on contract administration. Having some control has been particularly helpful with developing the pilot programs that have helped shape the city’s waste collection system.
“Getting into the municipal waste collection business can be a costly venture so it’s important that the public sector maintains a substantial presence in the delivery of this service to keep the private sector honest,” says Blair Smith, Hamilton’s Manager of Collections, who has overseen the city’s public/private collection programs since the 2001 amalgamation. The split model reduces exposure to possible higher costs in the future (in the case of a private sector monopoly).
Being in the same business allows municipal staff to have the same expertise as the private sector. The city can boast having some of the best collection operators in the business, several of whom have won prizes or placed well against their private sector colleagues at the Ontario Waste Management Association’s annual Truck Driving Championship.
Contracts & ABC model
Careful contract management is essential to ensure the City receives the best value and service from its private sector service providers. Over the years, Hamilton has developed waste collection contracts that clearly define the expectations from the private sector service provider. Having a private waste collection contractor also provides some flexibility and has lower impact on services in the event of a municipal labour disruption.
Local unions have supported the municipality providing some waste collection services. The city has paid close attention to the union requirements over the years since union representatives may view a split model as a step to full privatization.
Hamilton developed an Activity Based Costing (ABC) model to measure costs and effectiveness between the public and contracted service delivery providers. The ABC model identifies the resources required to operate the waste collection programs while measuring the costs and effort to provide these services. This model takes into consideration “direct,” “indirect” and “overhead” costs for waste collection. Public sector direct costs include employee wages and benefits as well as fleet costs such as fuel, insurance, and maintenance. In comparison, the direct costs for the private sector are based on the contracted price, which typically includes their labour costs, fleet requirements, administrative costs and profit margin.
To make the public costs comparable, indirect costs take into consideration a range of expenses including waste collection administration, customer service, operating and maintenance supplies, building costs and contract supervision. Overhead expenditures are based on resources required to perform the city’s business activities such as solid waste planning services, senior management and finance/administration.
The ABC model tracks several outputs including waste tonnage collected and customer service calls. In both cases, these outputs are comparable between the public and private service providers. Analysis indicates that the competitive model continues to be effective, with public and private sector costs remaining comparable: the public cost $95.29 and the private sector cost $96.45 per eligible property in 2009. Previous results had shown the city’s costs to be higher than the private sector, which illustrates the benefits of a competitive model. (See page 10)
Beyond price there’s performance: the city’s waste management team has used the information from the ABC model to identify where attention is needed to improve efficiencies, and the model’s results show that the public sector service provision of waste collection services is competitive.
Another consideration in using a public-private model is ensuring transparency in the costing and Request for Proposals (RFP) process. Referred to as “managed competition,” a clear process is set out as to service delivery requirements, evaluation and selection processes. The RFP document clearly sets out the process being followed for both the private and public sector submissions. A separate internal team is responsible for working independently on the public sector costing, around whom a “Chinese wall” is established. The costing is submitted in a sealed envelope at the same time as the private sector responses to the RFP.
In conclusion, the City of Hamilton has discovered that this competitive approach for waste collection services results is cost effective and shows that simple privatization isn’t the only way to achieve good results.
Beth Goodger, Senior Director, Operations & Waste Management Division, Public Works Department, City of Hamilton. The author wishes to thank Raffaella Morello (Project Manager, Operations Group) and Pat Parker (Director of Support Services) from the Operations & Waste Management Division, Public Works Department, City of Hamilton for their contributions to this article.
SIDEBAR: Public-Private Competition in Hamilton
Hamilton, with a population of 530,000, has a fully integrated waste management system that manages 247,000 tonnes (2010) of waste each year from the community. The system includes: a waste collection system (garbage, recycling, organics, leaf and yard waste, bulk waste), three community recycling centres, three transfer stations, materials recycling facility, central composting facility, leaf-and-yard waste composting and municipal a landfill site. An education and outreach program is also in place to ensure residents are participating in the programs.. The city has set an aggressive target of 65 per cent diversion from landfill and is currently achieving a residential diversion rate of 49 per cent (2010).
The City of Hamilton began a public-private competitive approach to waste collection in 2002. The concept was approved by Council in 2001, with the objective that: “Maintaining a blend of both public and private service will prevent a monopoly from being developed yet instil a competitive attitude amongst service providers.” (From City of Hamilton Committee of the Whole Report TOE01118, Harmonization of Waste Collection Services, p. 12, August 2001)
A competitive model was established for garbage, leaf-and-yard waste and bulk collection services, with half the city being collected by public forces and half by the private sector. To compare the costs, the city was divided into three pairs of collection zones with similar characteristics as shown in Table 1. In conjunction with this structure, an Activity Based Costing model was developed to compare the zone performance and costs of the public sector service delivery with the contract costs of the private service delivery.
A Request for Proposals (RFP) was issued for the half of the city to be collected by the private sector (B Zones) and an internal costing process was undertaken for the areas served by public forces, with the new collection system being implemented in April 2002. The Activity Based Costing approach was selected as a way to compare costs over time, rather than a full competition for work across the city.
In October 2004 a comparison of these costs was updated in preparation for the next contract period that was to start in 2006 with the implementation of the Green Cart program. Although the analysis showed the public sector costs of $71.91 per household to be higher than the private sector cost of $60.88, the results were positive in terms of the combination of service delivery and costs. Council approved the continuation of the model for the contract period from 2006 to 2013, with the addition of organic waste collection. Recycling collection and front bin collection continued to be fully contracted services. The successful company in the RFP process was National Waste Services Inc., which has recently amalgamated with GFL Environmental Corporation East (GFL East).
In preparation for the 2013-2020 collection contract period, the ABC results for the competitive model were reviewed in April 2011 and are provided in Table 2.
The results show that the city has benefited by seeing more efficient public service delivery as a result of the competition, in addition to receiving competitive pricing for the contracted collection services. This positive result supports a recent commentary by the C.D. Howe Institute, which indicates: “The key to better service is not necessarily private operation, but an environment that encourages both public and private providers to innovate by improving service quality relative to costs.” (Picking up Savings: The Benefits of Competition in Municipal Waste Services, Benjamin Dachis, Commentary 308, C.D. Howe Institute, September 2010, p. 5.)
Through the internal costing processes, the city will explore the possibility of adding recycling collection for the A zones to the competitive model based on the ABC results. Recycling collection for the A zones will also be included in the RFP to seek private sector proposals for the service. Results will be presented to council for consideration and approval in early 2012.