Taking on a larger role

Looking ahead from where we are with managing our nation’s wastes (about 60 percent going to landfills) to something better (closer to zero waste to landfill (ZWLF), new infrastructure and services will need to be put in place. The capital requirement is significant—$60 billion to $180 billion might be a reasonable estimated range. The net service fee requirement is hard to estimate, as it depends on whether there is added cost using current proven technology or lower costs if the promises of emerging conversion technologies come true. Regardless, adding the infrastructure will be a significant undertaking that will need to be made by someone.

The infrastructure can be sponsored and put forward by the public sector—because of their responsibilities to manage waste, respond to public policy and protect the public health—or by the private sector responding to market- or policy-driven demand for new equipment, facilities and services. This discussion focuses on the public sector-driven procurements.
 

Building blocks

In the late 1970s, under President Jimmy Carter, the U.S. Environmental Protection Agency (EPA) managed the Urban Grant Planning program. This program provided technical assistance and grant funding for the planning and implementation of recycling and resource recovery (waste-to-energy) projects. The focus was on proper planning, procurement and funding for local governments and regional agencies to undertake a thoughtful process to bring about changes to their local solid waste management systems. These efforts provided the foundation for what we now call public-private partnerships (P3s), then known as full-service contracting. It has been shown that proper planning for procurement has a greater chance for achieving results that can be win-win for the public and private parties involved than the more traditional public works architect/engineer procurement approach.

Proper planning entails key project building blocks for a sustainable service to be put in place in a reasonable amount of time, especially one requiring significant capital investment and off-take agreements for products. What is a reasonable amount of time? It can vary, depending upon the type. For infrastructure requiring significant capital—such as for mixed waste processing, anaerobic digestion, waste-to-energy or other emerging conversion technologies—the timeline might be three to five years. (Or it might be as long as “forever,” meaning it doesn’t happen at all.)

The long timeline includes the planning, procurement and negotiation process; contracting activities with other parties for site and take-away agreements; permitting; and project financing activities. The actual design, build and startup, and finally reaching acceptance for commercial operations, may take another one to three years depending upon the complexity of the infrastructure. This timeline itself presents an inherent problem, because the local government officials and leadership sponsoring the effort often serve terms that are shorter than the timeline to get all the project agreements signed and the project implemented into the build phase.

Development strategies and tactical activities need to be constantly planned and executed as the process moves forward. What is really happening is the development and implementation of a major, sustainable business that needs to be managed reliably with predictable economics and in a manner that protects the environment locally and in a macro sense too. This is not an easy undertaking and requires a dedicated level of effort supported by experienced advisers with a broad range of skill sets to bring this about in an informed and locally acceptable manner.

The procurement

Early on, decisions need to be made as to the procurement approach, ownership preference and risk allocation for the service agreement. Procurements can take several approaches. Because of the many new technologies and developers offering them, many exploratory procurements have started with a request for information or expression of interest. It may be spawned at political levels as a result of developers promoting their proprietary “gold-in-the-garbage” processes also known as “black boxes.” These ask for general information and ideas. There is often little project planning and development effort put into a specific project; the hope is that the request will bring forward ideas that can be considered and developed further on a path not yet understood and on a site not yet identified.

Not having a site identified and provided by the public agency for the project may be the single greatest fatal flaw a potential procurement activity can have. If the existing region already provides the services desired, then that can be fine to approach and allow to be included. But if no sites are provided, or more than one is, long delays and high development costs (as well as the probability of no project at all) are likely.

Another approach to procurement is issuing a request for qualifications (RFQ) as the first and only step to selecting a developer with whom to advance a project. After selection, the project is to be defined with the selected proposer based on concepts presented. Either with or without a site in mind, this approach can lead to time delays since most of the project building blocks have not been addressed. In this approach, the public attempts to shift the cost of project development to the private sector rather than taking it on themselves and then offering it out for proposals.

When the RFQ is employed to qualify proposers to respond to a second-stage request for proposals (RFP), the public sector is forced to think about what it wants. It has the opportunity and time to address some of the aforementioned project building blocks and define the project so that it can attract the right kind of contractors with the desired technology and services.

The public sector also can use the time during the RFQ stage to engage the public with the need for new infrastructure, educate them on what is available and on what the expected outcomes might be. The public sector also can take time to identify and develop some of the potential take-away partners for product. For example, if the public sector has identified and developed a customer for refuse-derived fuel (RDF), the project should include producing that product. Perhaps there is a district energy business or system that is interested to be interconnected and is close enough to a potential site: the procurement should then be focused on that. Through this approach, the RFQ responders can be evaluated and shortlisted with a more specific project outcome in mind.

The ensuing RFP should include detailed information concerning:

• the site that will be made available;
• a draft service agreement for proposers to comment on;
• a draft land lease for proposers to comment on;
• the extent of the public agency’s commitment for waste supply, and whether yard waste and organics are to be included;
• clarification on if the contractor is allowed to provide a facility larger than the public agency’s need;
• the future plans of any current and planned recycling infrastructure and services that are to coexist with the new infrastructure;
• alternative take-away customers and products that can be considered;
• specific pricing for the offerings being made;
• any special local purchasing requirements for local/minority hiring, etc.; and,
• schedule objectives for moving forward.

Not to be overlooked or glossed over, the draft service agreement included in the procurement is a very important document. It will influence heavily how the proposers frame their projects, or even decide to propose at all. It needs to address the major risk areas and allocate them accordingly. The proposers need to price taking the risks the public agency asks them to take. Pushing risk off to the private sector will cost money.

If a contractor takes risks, make sure the contractor has the resources to back its operation with more than performance bonds. Otherwise, don’t saddle the contractors with too many risks. Shown in the table online at www.REWmag.com/rew0615-solid-waste-management-procurement.aspx are various project risks and their assignment as a starting point under the full-service public-private partnership procurement approach.

Procuring new infrastructure should not be taken lightly; it should be approached with careful planning, resources, and a developer’s perspective to bring forward an opportunity that prospective private-sector partners will be attracted to. They need to be willing to invest perhaps hundreds of thousands of dollars from their business development budgets—if selected, that figure can rise to $1 million or more—to bring about the infrastructure that the public has sought.
 

The service fee

Often facilities or services are provided by private contractors who are paid on a fee-for-service basis or based upon a calculated service fee formula. Regardless, there is a formula behind every fee-for-service calculation a private contractor keeps in mind when responding to a procurement. A private contractor’s fee has various components, many of which can be “deal” driven based on the terms of the procurement and service agreement. The formula will also be reflective of the period of time during which the project was implemented.

The operation and maintenance component is often multifaceted. It can consist of many components. Management fees, return-on-equity and risk-factor elements are also applied when the private contractor is providing services and/or it is a privately owned facility.

The level of profit included in the calculations will typically depend upon the degree of risk allocated to the private party, the certainty of a long-term contracting relationship and the level of revenue sharing included. For greater levels of revenue sharing, lower profit margins are typically included. Much of these terms are subject to negotiation if procurement procedures allow for a competitive negotiation process.
 

Evaluation

The individuals reviewing RFQs and RFPs must be appropriate and qualified. Some larger organizations prefer to have procurement professionals—i.e., staff from a purchasing agency, not a solid waste management agency—evaluate the RFQs and produce a short list. In the next stage, solid waste professionals evaluate the RFPs. Organizations with smaller staffs should still seek team members outside the immediate agency, in order to create a review process that is transparent, in-depth, defensible and which produces the desired result of the best choice.

Candidates for evaluation teams include procurement staff, solid waste managers, colleagues from sister agencies, outside consultants or members of established advisory committees. If allowed by law, colleagues from neighboring jurisdictions or membership organizations also can be helpful. (Elected officials are not recommended for this process as they will likely have to cast a vote for or against the team’s decision.)
 

Learning from others

There are many past and current experiences to learn from. There is a saying that one can learn more from mistakes than successes. Presented in the table on page 36 is a list of selected procurements for major infrastructure in the U.S.—some have gone forward, while others haven’t. Comments are included about each. We need to learn from both the ones that have advanced and the ones that haven’t.

At the upcoming Renewable Energy from Waste (REW) Conference, Nov. 16-19, 2015, in Orlando, Florida, a half-day preconference workshop, titled “Planning for Success – Public Sector Planning and Implementation of Waste Conversion Projects,” will provide in-depth discussion and exchange on how to approach new projects to maximize return and address the many risks that need to be addressed in structuring the project agreements.

This is a great opportunity to both learn from and exchange ideas with industry experts to learn their recent experiences in other communities in a workshop setting.

The author is president of Gershman, Brickner & Bratton Inc. (GBB), based in Fairfax, Virginia, and an be reached at hgershman@gbbinc.com. Elizabeth Rice and Kate Vasquez, GBB senior consultants; and Eric Weiss, GBB consultant, provided research support.