The devil in the details

Scott Pasternak is a senior project manager for Burns & McDonnell, a full-service engineering, architecture, construction, environmental and consulting solutions firm that is based in Kansas City, Missouri. Working out of the company’s Austin, Texas, office, he often represents local governments across the United States in procuring and negotiating contracts for recycling processing, disposal and collection services.

Pasternak’s clients have ranged from small cities with one contract for all services to large cities that have contracted for specific services, such as recycling processing. He represented the city of Dallas in its effort to develop a public-private partnership with FCC Environmental Services, The Woodlands, Texas-based environmental services subsidiary of the Spanish company FCC Group, to design, build and operate a material recovery facility (MRF) at the city’s landfill.

Recycling Today recently interviewed Pasternak to get his perspectives on a number of issues related to recycling contracts.

“The key is to have two financial components in a contract: 1. processing fee and 2. revenue share.” – Scott Pasternak, Burns & McDonnell

Recycling Today (RT): Have many clients approached you for help renegotiating their municipal recycling contracts in light of actions out of China and the effect they have had on markets?

Scott Pasternak (SP): We’ve discussed the implications from the China market activities with many of our municipal clients. In a few cases, recycling processors have requested changes in the contractual terms.

On the other hand, we worked with multiple cities over many years to set contractual financial terms that work for both parties when markets are good and when markets are very challenging (like now).

The key is to have two financial components in a contract: 1. processing fee and 2. revenue share. The processing fee is typically a cost per incoming ton, and the revenue share is usually a percentage of the value of the sold material.

By structuring contracts this way, processors have been able to “live” with the current terms.

RT: What trends have emerged in the contracts you’ve helped to negotiate over the last year? How is this different than in the past?

SP: For cities that have reached the end of their current agreements, we have documented a strong trend of processors increasing the per ton processing fee while also sharing more of the revenue. For example, five to 10 years ago, processing fees were $30-40 per ton, with a 40-70 percent revenue share. Today, processing fees are in the range of $60-90 per ton, with revenue shares of 50-90 percent.

However, the challenge for local governments is that the value of the material has decreased substantially over the past year, so a higher revenue share is not as meaningful as it would have been in the past.

Basically, the MRFs want to get paid upfront and are not willing to count on revenue from selling material to offset any operational shortfalls.

RT: What changes can have the greatest impact on a program’s sustainability and profitability and make the contract equitable to both parties?

SP: Reducing contamination is the key. Having a contamination rate of close to 20 percent is pretty common for many cities across the U.S. For example, when we completed the “Study on the Economic Impacts of Recycling” (available at www.tceq.texas.gov/p2/recycle/study-on-the-economic-impacts-of-recycling) in 2017 for the state of Texas, we received data from more than 20 Texas MRFs, resulting in an average contamination rate across the state of more than 18 percent. Almost 1 of every 5 tons is trash. This means that a city may be paying $60-90 per ton to run garbage across the recycling system, only for it to ultimately be landfilled. Keep in mind that contamination generates zero revenue and increases costs for transporting unrecyclable material for disposal.

Minneapolis is proof that reducing contamination translates to lower costs. Its contamination rate is well under 10 percent. When we worked with that city a couple of years ago on its recycling processing procurement, Minneapolis realized lower per ton pricing as compared to cities with higher contamination rates.

RT: How can incoming contamination be best addressed in contracts?

SP: A solution to contamination is to set the contractual terms to incent the city to decrease contamination rates.

For example, a contract may include an allowable contamination rate of 18 percent. If the contamination rate is higher, the city is responsible for the added disposal cost. This places the responsibility and financial implications directly on the city since it can most significantly drive [reductions in] contamination.

On the other hand, processing costs could also decrease if contamination levels are below 18 percent. It’s important to keep the MRF contractually obligated by requiring it to capture a minimum amount of program materials, typically 95 percent.

Under this type of scenario, it’s also critical to periodically audit material to verify the actual contamination rate. This can be a pretty tedious process, and we recommend describing the auditing process within the recycling processing contract.

RT: What concessions might municipalities have to make?

SP: Cities are recognizing that their costs are increasing. Where recycling processing may have generated substantial annual revenue in the past, multiple cities are now paying to have recyclables processed. While this could change when markets rebound, we don’t know when that will happen. Cities should budget for recycling processing to be a cost for the foreseeable future.

RT: Are you seeing an increase in public-private partnerships such as the one FCC and Dallas have agreed to? What benefits do they offer to both parties?

SP: Several communities have expressed an interest in a public-private partnership similar to the one in place for Dallas. The challenge is being able to send enough recyclables to the facility to justify what could be a $20 million-plus capital project. To make the numbers work, you’ll need in the range of 50,000 to 100,000 annual tons.

One of the key strategies for the Dallas procurement was to provide benefits to both the city and FCC to attract tonnages from third parties. This was important for the Dallas project because the city generates about 50,000 to 60,000 tons of recyclables per year. Increasing tonnages helps FCC process more material, allowing the company to spread its capital and other fixed costs over more tons, which helps to decrease per ton processing costs and increase its profitability.

For Dallas, the contract includes a host fee that provides revenue to the city for each ton from third parties. Incentivizing third-party tonnages also demonstrates the city’s commitment to be a recycling leader in the Dallas-Fort Worth Metroplex.

RT: What portions of the FCC-Dallas contract might other municipalities and processors be able to replicate easily? What might prove to be more challenging?

SP: While the concept of the FCC-Dallas contract is pretty straightforward, there are many details that municipalities need to be aware of regarding the contractual relationship between the parties.

I’d encourage other cities to collaborate with a combination of their city attorney and a solid waste consultant that focused on representing cities on their procurement issues. As the saying goes, the devil is in the details.

The Dallas agreement is for a minimum of 15 years, so it is really important to establish the contractual relationship between the parties with a long-term perspective.

Scott Pasternak of Burns & McDonnell can be contacted at spasternak@burnsmcd.com.