In late August, the City of New York Department of Sanitation (DSNY) and the Business Integrity Commission (BIC) released a long-awaited study of New York City’s private carting industry with the resultant plan to establish commercial waste zones, or franchises.
The Study and its Proposal
The private carting study, which was commissioned by the city, examined various economic and environmental aspects and impacts of the industry and concluded from the results that the current open-market, competitive system should be transformed into a zoned system for commercial waste collection.
The process is expected to take five to seven years—two years to put a plan in place and three to five years to implement the plan. The process will also involve extensive participation and feedback from all the stakeholders.
The study envisioned 11 zones, but Kathryn Garcia, commissioner of the DSNY, thought 20+ zones were more likely because they would allow for more participation from small and mid-size haulers. Although there are more than 200 private carters in the city, the study focused on the 90 companies that provide more comprehensive waste services to nearly 108,000 commercial customers. The proposal needs City Council approval, but a number of council members have already expressed their support.
Current Market Dynamics
The study estimated that the size of the commercial waste market in NYC is $500 million annually, handling about 10,000 tons of waste a night. (The DSNY services the residential market in the city.) The BIC licenses the private haulers and sets the rate cap, which is currently $18.27 per cubic yard. The BIC’s traditional focus has been on competitive rates, likely given its antecedents as the Trade Waste Commission that was formed to combat and regulate the previously mob-controlled garbage business in NYC. That focus, combined with the large number of haulers in NYC, ensures that the business is characterized by intense price competition—commercial customers pay an average rate of $12.68 per cubic yard, which is approximately 30 percent below the rate cap! As a result, the industry operates on very thin operating margins.
Mirroring the waste industry nationwide, consolidation is constantly occurring, offset by the ease and number of small startups, given low barriers to entry. Similarly, there are two large players, Action Environmental and IESI New York (now owned by Waste Connections), and the top twenty haulers control 84 percent of the market by revenue, with a very “long tail” of small haulers competing for the remainder. Plus, two-thirds of the industry is unionized.
The study also found that there is little transparency in pricing, as geography, weight or business type showed little differentiation, and very short, or even nonexistent, contracts are the industry norm. The positive offset to this is much tailored to service to individual customer needs. But, the study also reached two big pricing conclusions: Large customers pay on average 38 percent less than small customers, and the collection cost of recyclable waste is only 5 percent less than that of putrescible waste. The larger, more sophisticated customers (particularly office buildings) can obviously drive a harder bargain, but what was also concluded from the study was that recycled paper was often subsidizing heavier (food) waste. Commercial recycling rates in the city are estimated to be around 20 percent, and the assumption was that small commercial customers have less incentive to recycle as they really do not perceive a benefit from it in a noticeably lower waste removal cost.
Environmental and Quality of Life Benefits Obvious …
The study’s results (and Garcia’s emphasis when talking about them) demonstrate significant environmental benefits, particularly with regard to expectations for reduced truck traffic (by as much as 68 percent) and miles driven (15 million), due to the routing efficiencies inherent in a franchise system. Stemming from this were expectations for a significant decline in greenhouse gases (by up to 64 percent) and noise pollution, reduced fuel usage ($10 million) and likely lower injury/safety incidents, all from having less trucks on city streets.
Indirect, but likely, benefits from a zone system may also include more equitable pay and more recycling infrastructure (and thus more recycling). Although the study noted that employment in the industry was growing, with many well-paid jobs, it appeared that helpers were more likely to be day laborers, without protection or benefits. Under a zone system, wages, and labor and safety standards in general, could be more tightly regulated. In a similar vein, in contracting out the zones, DSNY and BIC could more easily mandate and increase recycling and more types of it (i.e. organics).
It’s also likely that New York Mayor Bill de Blasio’s OneNYC plan played a part. The plan’s waste diversion goals looked very difficult to achieve under the current open-market system (at least as it’s currently operated and regulated). For the carters, the emphasis was that a zone system would provide more economic security and likely better operating margins (provided you won a zone!). Predictably, most environmental and labor groups have come out in favor of the commercial zone plan.
Cost Savings, Not so Much …
Although routing efficiencies under a zone system should yield fuel and maintenance savings at a minimum, the study’s benchmarking to other cities that switched to a franchise system yielded extremely variable results on cost. The study noted that the industry’s two biggest costs are labor (37 percent) and disposal (34 percent), the latter likely to be unchanged (at least directly) by a franchise system, with the former more likely to rise.
Truck maintenance and fuel (where the obvious savings would be) account for only 14 percent of the industry’s cost structure. And, notably, Garcia is not touting cost savings as a benefit—the commissioner’s expectation is that the savings and added costs would roughly balance out, in large part due to city policy decisions, such as increasing recycling and worker-safety programs.
On a strict per cubic yard basis, the costs at the case study cities, such as San Jose, were much higher. With regard to the cost side, unsurprisingly, it all comes down to what services and mandates are added and what the assumed operating margins are in the franchise zones.
Carter and Customer Response
The carters are generally not in favor of the plan, given the large number of companies that could possibly go out of business and the resultant job losses. They also note that given the unique nature of NYC, the routing efficiencies are probably overstated because of the extremely varied service requirements on any given block in the city with the diversity of businesses on every street.
The carters also argue that many of the city’s goals—less truck traffic, safety programs, higher recycling rates—can be accomplished through subcontracting, regulation and mandates, without resorting to zoning.
Interestingly, at least initially, customer reaction appears a bit leery—a number had concerns about a return to “the bad old days”—another form of monopoly/cartel. Additionally, customers are concerned that the tailored service to their needs and flexibility may be lost, particularly in light of many firms’ space constraints. Despite the lack of transparency, the study found that customers are generally happy with their service and its cost, though small customers (often restaurants) have relatively more issues.