SOLID WASTE OUTSOURCING

1. This presentation will probably involve audience discussion, which will create action items. Use PowerPoint to keep track of these action items during your presentation • In Slide Show, click on the right mouse button • Select “Meeting Minder” • Select the “Action Items” tab • Type in action items as they come up • Click OK to dismiss this box • This will automatically create an Action Item slide at the end of your presentation with your points entered. SOLID WASTE OUTSOURCING Constance Hornig, Esq.

2. This presentation will probably involve audience discussion, which will create action items. Use PowerPoint to keep track of these action items during your presentation • In Slide Show, click on the right mouse button • Select “Meeting Minder” • Select the “Action Items” tab • Type in action items as they come up • Click OK to dismiss this box • This will automatically create an Action Item slide at the end of your presentation with your points entered. Day I: THE BUSINESS AGREEMENT Clinchingthe Win-Win Deal

3. INTRODUCTION / OVERVIEW A. CONTRACT AS POLICY TOOL AND REGULATORY SURROGATE • 1. Command-and-control model: performance specifications • 2. Economic Instruments paradigm: performance-based compensation – economic (dis)incentives • 3. Self-funding procurement reimbursement and contract administration, oversight and enforcement

4. INTRODUCTION / OVERVIEW B. CONTRACTOR’S CAPITAL RISK AND RECOVERY • 1. Attracting bidders / minimizing contractor’s risk: rate covenants and pledged revenues (municipal bond and utility analogs) • 2. Capital recovery and term – implications for rate adjustment methodology • 3. Public ownership / private operation – policy control and program flexibility

5. A. CONTRACT AS POLICY TOOL AND REGULATORY SURROGATE • Command-and-control model: performance specifications – the flexibility of contractual enforcement over regulatory penalties (1) Local / siting laws (conditional use, use-and-occupancy permits; municipal code): *Access road improvements (traffic control - turn lanes, signals; increased weight limits) *Fencing / landscaping (appearance – aesthetics, noise barriers, litter control) *queue time guaranties

6. Policy Tool / Regulatory Surrogate Con’t. *Delivery / operating limitations (hours, vehicle types – self haul, collection vehicles, transfer trailers) *Host fees (NIMBY dispute resolution, improvements & amenities, property depreciation buyout, support of alternative disposal technology development; visiting /education facilities)

7. Local / siting con’t. *Security (fencing, gates/locks, controlled/emergency access, live patrol) *Parking (off street; staff, customers) *Open space / buffer (recreational development, ecological preservation or replacement) *Nuisances – noise, vectors, litter (facility specifications – barriers, fences; frequency and parameter of prevention) *Fire code-type requirements (building specs) *Labor code-type requirements (hours, over time, facilities, minimum wages)

8. (2) State/provincial, national environmental laws (operating permits and regulations) *Emissions levels – surface water, leachate, LFG (site specificity) *Design requirements (LF liners, slopes, fill) *Cover (material specification - ADC) *Closure, post-closure, remediation funding – amount and security *(Un)permitted / banned materials

9. Environmental con’t. *Acceptance screening protocols & cost allocation for inadvertently accepted unpermitted materials *Customer and employee non-discrimination *Weigh master / scale certification (testing protocols and frequency, printed records & reports, tare weights)

10. (3) Policy *Use of recycled materials (re-refined oil, re-tread tires, minimum recycled paper content) *Recycling mandates (oil, oil filters, gray water) *Diversion specifications (materials separation for green, C&D materials; transfer station floor sorting of white goods, metals, OCC) *Targeted labor pool (scavengers, handicapped, minorities)

11. A. CONTRACT AS POLICY TOOL AND REGULATORY SURROGATE 2. Economic instruments paradigm: performance-based compensation – economic (dis)incentives *Contract term extension for super-performance (low complaints, rate increases, regulatory violations, compaction/diversion etc. guaranties)

12. Performance-based compensation con’t. *Listed bonuses / liquidated damages (assessed as contracting party, not governmental regulator) *Incremental rates of return (if cost-plus rate methodology) *Franchise / concession fee decrease or increase Caveat: limit incentive amounts to excess above minimum contract administration & program costs budget

13. Performance-based compensation con’t. Especially for MRF: *Recovered materials revenue sharing *Avoided disposal cost sharing (materials recovery)

14. Example performance indicators *Compliance with law (warnings, violations - consider level of documentation by regulatory agency and contest / appeal process) *Labor productivity / attendance (if cost-plus rate methodology) *Complaints *Diversion (especially MRF) *Compaction (landfill)

15. A. CONTRACT AS POLICY TOOL AND REGULATORY SURROGATE 3. Self-funding procurement reimbursement and contract administration, oversight and enforcement *Contractor lump sum obligation to reimburse contract procurement cost (NPV calculations & risk of nonpayment in event of early termination v. rate increase impact) *Periodic fee to fund contract administration & enforcement *Liquidated damages for non-responsiveness (return calls, attend meetings, etc.) *Reimbursable costs for handling contractor complaints, taking enforcement action

16. Self-funding con’t. Consider careful definition of government party’s (in)direct costs and mark up for cost reimbursement *Fully loaded benefits *Related third-party, out-of-pocket costs such as consulting, financial advisor and legal fees

17. B. CONTRACTOR’S CAPITAL RISK AND RECOVERY 1. Attracting bidders / minimizing contractor’s risk: rate covenants and pledged revenue (municipal bond and utility analog) *General fund obligation (backed by full-faith-and-credit / taxes) or *Special fund limited obligation (payable from revenues /rates)

18. General fund obligations con’t. Consider: *Budget constraints *Political vulnerability *Lack of cost-accounting

19. Special fund limited obligations Consider: *Customer / tipping fees (MSW facility revenues): flow control / waste generation & diversion vulnerability; tipping fee “death spiral” and illegal dumping implications *Generator fees (property based): political issues but low delinquency - lien *Utility surcharges (billed with water, power use): low delinquency – turn off utilities – potential subsidy

20. Special fund limited obligations con’t. Note increased policy and regulatory requirements of enterprise funding: *Cost-based budgeting and accounting *Intra-municipal departmental cost allocation (risk management, general administration, personnel, vehicle maintenance, in-house counsel) *MSW service cost transparency

21. B. CONTRACTOR’S CAPITAL RISK AND RECOVERY 2. Capital recovery and term – implications for rate adjustment methodology: short (public capital). . . mid (private capital / equipment) . . . long term (private capital / facilities) • No adjustment (2) Index-based adjustment (3) Cost-based adjustment (4) Pass-through costs adjustment (5) Hybrid index- & cost-based adjustment (6) Industry standard-based adjustment

22. (1) No adjustment Consider: *Length of contract term *Expected competition *Whether one values no adjustment / stable rates, or rate adjustment and initially lower rates, more *Expected program or regulatory change

23. (2) Index-based adjustment Consider: *Length of contract term (mid-term) *Competitive procurement of initial, base rate -Research bundle of goods-and-services in a CPI-type index; compare actual history of possible indices -Consider other indices for portions of rate and weighting factors for cost categories (labor, fuel, vehicle replacement or maintenance, etc.)

24. (2) Index-based adjustment con’t. *Offsetting overstated inflation indices with portion of index on year-to-year basis (not base-to-year basis) *Capping inflation *Comparing annual average index changes rather than point-to-point index changes *Coordinating index publication dates with annual budget process

25. (3) Cost-based adjustment Consider: *Length of contract term (mid- to long-term) *Rate impact of contractor’s cost-of-compliance with rate review *Sufficient public staff and budget to perform rate review / hire consultants *Size of contract service base and gross receipts *Likelihood of securing competitive rates / guarantied profit

26. (3) Cost-based adjustment con’t. *Whether the cost-based methodology encourages efficient operations -Defining dis-allowable costs -Specifying allowable costs without mark-up -Defining “necessary and reasonable” costs -Providing for cost savings incentives

27. (3) Cost-based adjustment con’t. *Ability to analyze true costs: -Receive audited financials for contract service -Assure fair cost allocation among contract service and other contractor operations -Assure fair compensation of principals -Assure arms-length, fair market cost of goods and services supplied by contractor affiliates

28. (3) Cost-based adjustment con’t. -Assure fair attribution of parent corporation overhead -Adjust projected depreciation for actual number and cost of assets acquired (especially for assets not yet purchased)

29. (4) Pass-through cost adjustment Consider: *Reimbursing contractor for certain actual costs such as disposal, regulatory fees and interest expense *Pre-agreeing on conversion ratios to translate costs into contract rates (e.g. MSW weight/volume)

30. (4) Pass-through cost adjustment con’t. Footnote for disposal & collection procurement: Consider assigning refuse disposal volume risk to collection contractor by passing through tipping fee increases only for a fixed waste volume (which can be proposed by contractor during procurement).

31. (5) Hybrid cost-based / index-based adjustment Consider adjusting rates per index for several years, punctuated by occasional cost-based adjustment

32. (6) Industry-based costs Consider use of agreed industry-standard costs applied to actual operating conditions (number of routes, terrain, type of services) . . . But not on actual costs. Caveat: individual contractors have differing actual capital and operating costs and required rates of return.

33. B. CONTRACTOR’S CAPITAL RISK AND RECOVERY 3. Public ownership / private operation – policy control and program flexibility Consider: relative practical and financial ease -and lesser time - to terminate operating agreement (for default or convenience) and procure new operator, than to terminate service agreement and newly procure design, permitting, financing and construction of new facility, (And if private ownership, consider: operating scale house if tip fee compensation or measurement of operating guaranty depend on tonnage.)

34. Termination for convenience *Secure certain proposed / bid amounts *Remember: capital is off the table – only lost profits are relevant *Create alternative to avoid costly litigation over breaches / default / termination *Provide flexibility for program adaptations, changes in law *Provide opportunity to re-procure / re-negotiate price if compensation escalates disproportionate to costs

35. Termination for uncontrollable cost increase Share risk of cost increase due to uncontrollable circumstances (force majeure) such as changes in law by: (1) public acceptance of passed through increased cost up to agreed maximum rate compensation cap (including debt service, shared operating expense) over contract term or rolling period-of-years, and (2) public right to terminate if cap exceeded.

36. This presentation will probably involve audience discussion, which will create action items. Use PowerPoint to keep track of these action items during your presentation • In Slide Show, click on the right mouse button • Select “Meeting Minder” • Select the “Action Items” tab • Type in action items as they come up • Click OK to dismiss this box • This will automatically create an Action Item slide at the end of your presentation with your points entered. Day 2: CONTRACT SERVICES Getting what you bargained for

37. INTRODUCTION / OVERVIEW A. ADMINISTRATION AND ENFORCEMENT OF AGREEMENT • 1. Performance assurances and guaranties – liquidity and sustained creditworthiness • 2. Effectiveness of liquidated damages and compensation offsets • 3. Breaches and default: the contract as “pre-nuptial” agreement

38. INTRODUCTION / OVERVIEW B. PROCUREMENT OF AGREEMENT • 1. Corruption & contract constraints – procurement transparency and competition • 2. Bids v. proposals – procurement preferences as economic instrument • 3. Writing the procurement rules – strategies to maximize competition

39. A. ADMINISTRATION AND ENFORCEMENT OF AGREEMENT • Performance assurances and guaranties – liquidity and sustained creditworthiness Performance bonds: *don’t secure illusory protection *size dependant on contract terms: • Substitute service - cash flow offset? • Lost franchise, contract administration fees • Reprocurement costs

40. Performance bonds, con’t. Form: *Substitute contractors *Reprocurement option / draw for excess . . . And consider letter of credit for superior liquidity

41. Parent Corporate Guaranties • General lack of financial covenants to assure ongoing creditworthiness of guarantor • Guarantor not necessarily operating company, but ultimate parent (e.g. with audited financials, publicly traded)

42. A. ADMINISTRATION AND ENFORCEMENT OF AGREEMENT 2. Effectiveness of liquidated damages and compensation offsets *An intermediary remedy to termination *An attention-getter, not money maker *Can provide leverage for remedial amendment *Caveat: damages void as penalties, alternative structure as performance-based compensation

43. A. ADMINISTRATION AND ENFORCEMENT OF AGREEMENT 3. Breaches and default: the contract as “pre-nuptial” agreement *Avoid arguments over “material” breaches – list major breaches as defaults *Limit cure period for balance of breaches, extendable at government discretion . . . *But limit right to cure if repeated breaches *Consider independent engineer as mediator for operational disputes

44. B. PROCUREMENT OF AGREEMENT • Corruption & contract constraints – procurement transparency and competition *Contact constraints *Black out period *Process integrity rules Potential proposers are prohibited from contacting elected officials and/or staff persons, except for a named liaison.

45. Why adopt contact constraints? • Create a level playing field among proposers. • Validate objective criteria • Prevent subtle subjectivity • Create a level playing field between proposer and municipal staff on negotiating team (5) Avoid even the appearance of impropriety.

46. B. PROCUREMENT OF AGREEMENT 2. Bids v. proposals – procurement preferences as economic instrument *Environmental record *Litigation history *Diversion achievements *Labor relations *Financial creditworthiness *Acceptance of contract terms *Experience *References

47. B. PROCUREMENT OF AGREEMENT 3. Writing the procurement rules – strategies to maximize competition • Where permitted by law, consider conducting proposals, not bids for service agreements. • Solicit proposer comments on draft contract and include it in your procurement package to reduce rates and enhance competition.

48. Maximizing competition, con’t. (3) Do not make pre-proposer conferences mandatory. (4) Weigh exceptions to / acceptance of draft contract in award. (5) Consider negotiating liquidated damages. (6) Incorporate proposers’ service enhancements into a single draft agreement for a Best and Final Offer (BAFO).

49. Maximizing competition, con’t. (7) If no single proposer wins, conduct simultaneous negotiations with finalists, subject to deadline established by elected governing body.