Creating successful partnerships involves risk sharing

As a general rule, local government is in the business of providing essential public services. Private sector companies are in the business of providing services to make a profit. When local government and private sector companies work together, they seek to provide essential public services in a cost-effective manner. This is the basic principle of public-private partnerships (PPPs).

Recycling services often are implemented through PPPs. Multiple components make up the provision of recycling services: supply of carts or bins to store recyclables; collection and transportation of the recyclables from the point of generation; processing of the recyclables at a material recovery facility (MRF); marketing of segregated recyclables; and effective education and outreach. A recycling service PPP may involve some, if not all, of these components.

Also, as a general rule, it is safe to say that local governments and private sector companies are risk adverse. All kinds of uncertainties are intrinsic when it comes to providing recycling services, including:

• Will residents and businesses participate in the program?
• Will the quantity and quality of the recyclables meet program expectations?
• How much contamination will be present in the recyclables?
• Will the carts and bins hold up under regular use?
• Will the labor be reliable and affordable?
• Will fuel costs be predictable?
• Will collection trucks operate safely and effectively?
• Will the MRF operate safely and effectively?
• How will the value of recyclables change during the term of the contract?

Over the past eight or so years, a significant focus has been on the last risk listed: the market value of sorted recyclables. Those of us involved in the recycling business in 1995 may remember the good old days. As a county solid waste director responsible for collecting and marketing recyclables, their value positively spiked significantly during that time. While most were not willing to think the value would decline, it was clearly a market bubble.

The notion of risk and reward in recycling was different in 1995 than it is today. During contract negotiations, markets were willing to guarantee very high floor values for recyclables. Recycling was considered a profitable venture. We also had several elderly ladies in our county driving around in a pickup truck stealing aluminum cans from our curbside program. Their truck might have had a bumper sticker reading “No Risk, No Reward.”

We need to create successful recycling PPPs that will address both the risks and rewards of recycling for all parties.

However, all good things must come to an end. Since 1995, we have seen significant volatility in recyclable commodities markets. Much of the blame has been placed on China’s Green Fence, but there also are concerns about the evolving ton and the role of single-stream recycling in material quality and increased contamination.

Market prices for recyclables generally have seen a downward trend since 2011, making 2016 one of the lowest average pricing years for recyclables since the plummet in market values in the fall of 2008. However, have you noticed the uptick in recyclables value that has taken place recently, and is anyone experiencing recycling companies passing along those pricing benefits with cost reductions?

Recycling companies have responded to the pricing drop for recyclables by attempting to derisk their recycling contracts. Over the past several years, former Waste Management (WM) CEO David Steiner helped make the cost of recycling and contract risk a national discussion item. In the first quarter of 2015, WM’s recycling division lost approximately $16 million. It was also reported that the company had shut down 10 percent of its largest MRFs. As of November 2016, incoming CEO Jim Fish Jr. reported that WM’s recycling contract derisking is almost complete, and this is intended to stem the losses associated with recycling for the company.

Looking forward, we need to create successful recycling PPPs that will address the risks and rewards of recycling for all parties. Call me an optimist, but I trust the value of recyclables will continue to rebound. Nevertheless, PPPs entered into for recycling should follow several guiding principles:

• The quality and quantity of recyclables cannot be guaranteed by the local governmental entity. Aspects such as the overall economy, the evolving ton and potential migration of people and businesses into or out from the local area will affect the quality and the quantity of recyclables.
• The cost of any service should be addressed independently of commodity pricing.
• Commodity pricing and value should be shared in a formula approach so market risk and reward are shared as pricing goes up or down.
• The contract term should be long enough to amortize initial capital costs and provide working capital for repairs.
• The cost of service should include a service fee formula that adjusts prices at least annually based on indexed and variable costs for items such as fuel and labor.
• Technology used in collection and processing should be matched to local market commodity specifications. It is important that the technology be flexible to address the evolving tons and changes in market commodity specifications.
• MRFs should have reasonable performance standards for residue. It may be necessary to tie a residue level to incoming contamination level confirmed through regular audits.
• The local governmental entity and the private sector service provider should have roles in outreach and education, and the local governmental entity should coordinate these roles.

A successful recycling PPP will result in good service at a competitive cost to all residents and businesses served.

As recycling markets will continue to rise and fall, recycling might not always be profitable to local governments, and businesses might not see large upside profits. But, by attempting to address the risks and setting yourself up for maximum performance, there will continue to be sustainable diversion from materials that can be used again and again—which is a great reward for all of us.