Contract clarity

If municipalities, haulers and material recovery facility (MRF) operators have learned one thing over the last four years, it’s that commodity markets and values are fickle. As China’s imported “waste” ban has illustrated, a recyclable commodity’s value can shift virtually overnight.

Similarly, COVID-19 stay-at-home orders and commercial shutdowns over the past year and a half have shown how volumes and material stream composition can fluctuate markedly over a brief period.

These sudden changes have been shown to have significant ramifications for those locked into static, long-term contracts. To avoid being left on the hook, MRF operators, local governments and haulers are reevaluating the recycling contracts they enter into.

Managing market turbulence

Along with a survey, Recycling Today conducted State of the Municipal Recycling Industry roundtable discussions earlier this year to gauge current industry perception of the sector. As part of these discussions, Kyle O’Keefe, director of innovations and programs for the Solid Waste Authority of Central Ohio (SWACO) in Franklin County, Ohio, said the pandemic helped show the need for flexible contracts.

“We [have been] evaluating aspects of our contracts with our municipalities and the private sector to say, ‘How can we give our communities as much flexibility as possible?’ [How can we make it so] that if these issues arise in the future, they’ve got more options and levers they can pull so they do not have to break the contract, but they can give a little flexibility to the hauler, and we can do that in a way that is a win-win situation,” he said.

Shelby Lewis, recycling coordinator for the city of Tampa, Florida, Department of Solid Waste & Environmental Program Management, said market turbulence, while potentially painful in the short term, allows municipalities the ability to reassess priorities and focus on things such as community education to improve the success and profitability of recycling programs. These kinds of insights can be pivotal when it comes time to renew a contract but do come with challenges, she said. 

 

“We were very lucky last year to have our contract from 2013 expire with our material recovery facility, so we kind of got to see the market for what it really was [and that was reflected in our new contract],” Lewis said. “And, obviously, everyone has experienced much higher processing fees; they have different accepted items, which bring on a really big challenge of educating people on those changes when you are already trying to educate people on things like not bagging their recyclables or not trying to recycle items that use to be accepted [in their recycling bins].” 

When it comes to contracting for hauling purposes, the majority of municipal recycling coordinators and government officials who responded to the survey indicated working with a single hauler, while 34 percent said the community or agency didn’t work with private haulers for recycling collection.

 

Forty percent of haulers who responded to the survey noted that more favorable contracts likely would boost their respective location’s 2021 revenues, while 21 percent noted that unfavorable contracts were likely to provide a business challenge for their locations.

To help ensure they’re protected regardless of commodity value ebbs and flows, Lou Perez, project director for the Larimer County, Colorado, Solid Waste Department, said larger MRF operators, in particular, have almost ubiquitously adopted a fee-for-service model in recent years. He said this type of model is likely to be the norm going forward for MRF operators. 

 

He said MRF operators of all sizes “are going to want to make their money upfront with their processing fee,” rather than solely with revenue-sharing programs.

In Recycling Today’s State of the Municipal Recycling Industry survey, 43 percent of MRF operators said they added a processing fee to their contracts within the last 36 months, while 32 percent of the recycling coordinators and government officials who responded to the survey said they paid a processing fee to their MRF operator.

MRF operators who responded to the survey indicated that difficulty retaining and hiring staff would be more likely to restrict their 2021 revenues than unfavorable contract terms would. However, when asked which factors could boost their 2021 revenues, 48 percent of MRF respondents noted favorable contract terms. The majority (83 percent) of MRF respondents said they thought increased U.S. demand for recyclables was more likely to increase revenues in 2021, while 74 percent indicated commodity prices would be more likely to increase it.

 

With contracts, David Friedman, CEO of Phoenix-based Friedman Recycling, said the fee-for-service model has become a staple of his company’s pricing structure. This formula, he said, is almost certain to remain for the foreseeable future. 

“We’ve completely transitioned,” Friedman said. “There are a few municipalities that just won’t budge, but 90 percent of our contracts we’ve renegotiated for a fee-for-service contract. We’ve shifted virtually all market risks to the municipality, and we have our fixed fee for processing to let the market go wherever it goes. And to be frank, we will not go back. We will not consider a contract without that model. That last few years were extraordinarily painful for us, and we are not looking back.”

 

Jeff Snyder, senior recycling manager for Cincinnati, Ohio-based Rumpke Waste & Recycling, said that while Rumpke largely has adopted the fee-for-service model, the company works to have an equitable relationship with the municipalities it serves by allowing them to share in some of the revenue gleaned from higher commodity prices via a payback program. 

“In most of the contracts that we have here in the Midwest, there is always that fee for service,” he said. “You never would share [revenues from commodities back with municipalities] in a down market, but now that we’ve got something that’s a little bit better [in terms of contracts], there is definitely sharing going on. [We do a 75/25] split here in the Midwest for the cities and the municipalities. It’s just the right thing to do,” he added.

Addressing contamination

Synder said Rumpke also found that inbound contamination had risen to such a level a couple of years ago that Rumpke started charging a fee “to make ourselves whole on the low commodity prices.”

Lewis said Tampa opted to go with a short-term contract for recycling services when its previous contract with Waste Management Recycle America expired last year. The city’s signed a one-year contract with the company in July 2020 that included an excess contamination fee. “So, on top of your processing fee, they do a [composition] study. It was designated materials versus non-designated materials, and then it came out with what our composition contamination rate is.”

Lewis said the contamination rate was determined to be 35 percent and Tampa pays an excess contamination fee of $150 per ton in addition to its $90 per ton processing fee.

“It was a huge hit to us because that is a huge cost,” she added. “We are hoping that as the market recovers, something like that won’t be necessary in the contracts.”

“Everyone [in Michigan] has seen those fees, and they are not going anywhere,” said Emily Freeman, recycling specialist, Materials Management Division, Michigan Department of Environment, Great Lakes and Energy (EGLE).

When addressing issues such as contamination in contracts, O’Keefe said SWACO’s goal is to develop a public-private partnership model. “We are thinking about the future and what a public-private partnership facility looks like. What skin can we put in the game? What can we leverage, and how does that ultimately translate to a more equitable system among the public and private partners?”

The author is the editor of Waste Today and can be contacted at aredling@gie.net.