Private Sector Participation in Municipal Solid Waste Management: Lessons from LAC

1. Private Sector Participation in Municipal Solid Waste Management:Lessons from LAC Carl R. Bartone Transport, Water & Urban Department 7 May, 1999

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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

14. 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

15. Sao Paulo (cont.) • 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

16. Sao Paulo Metropolitan Region • 21 of 39 constituent municipalities contact out entire service, and another 4 contract collection and transport services

17. 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)

18. 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

19. 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

20. 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

21. 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

22. 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)

23. 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%

24. 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

25. 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)

26. 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

27. 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)

28. The Bottom Line