PROCESSING: Navigating MRF Contracts

Anyone who's purchased a home understands that negotiating can be a trying process. During the next few years, many of the operating contracts for the nation's 500 materials recovery facilities (MRFs) will be re-bid or re-negotiated. But by familiarizing themselves with the following trends, MRF owners and operators can ensure the process won't be overwhelming.

Before issuing a request for proposals (RFP), MRF owners should bring their facility up to acceptable working conditions, taking into consideration their plant's age and how well it has been maintained. Like preparing a house for sale, owners should perform a facility inspection and identify repairs before a new operator is chosen or an existing contract is extended.

When examining a facility's condition, consider:

  • What are the facility's existing deficiencies?

  • How much investment capital is needed to raise facility standards?

  • Which party should pay for repairs and upgrades — the existing facility operator or the community?

  • Are re-pairs necessary because of normal wear and tear or a result of relaxed maintenance?

  • Have adequate records been kept on maintenance and repairs?

  • MRF owners also should consider whether the facility needs additional capacity. Expansion often is triggered by population growth, increased collection materials for residential recycling, and program expansions to include multi-family or commercial recycling.

    There has been a recent trend to regionalize MRF capacity. This is when a facility serves a larger area because a smaller municipality has closed its inefficient MRF operations. Regionalization allows MRFs to operate more efficiently by processing materials during two or three shifts, instead of one. This allows owners to spread fixed capital costs over a greater number of tons. Thus, the average cost of processing each ton is reduced.

    Regardless of whether a municipality owns the MRF or delivers materials to a host facility, it's important to determine a fair price for processing another community's recyclables. Usually, the host MRF's private sector operator determines the price, and then pays the facility owner a flat per ton “host fee.” In other cases, the host fee can escalate based on the material volume coming from other communities.

    MRF contracts also should examine revenue sharing. This allows MRF operators to “lock in” future material prices using financial hedging futures. When negotiating the contract, community decision-makers should understand how hedging contracts can translate into better revenue sharing for the community.

    Other variables that MRF owners should address include:

  • Whether the processing fee should be reduced because of the depreciated facility value;

  • Whether additional educational activities, such as an educational center at the facility, will be paid for by the operator;

  • Whether to reduce residual levels below the 5 percent standard used in many older contracts;

  • What technology upgrades are necessary to improve plant efficiency and reduce material residue (e.g., edicurrents, cyclones, optical scanners);

  • Will contract provisions allow for future material additions or changes in how recyclables are delivered to decrease community program costs (e.g. if a community implements single-stream collection to reduce collection costs); and

  • Should the contract allow for ownership facility purchase and operator ownership options.

  • Sarasota County, Fla., has addressed MRF contract renewal twice in the past four years. The county currently has a contract with FCR Inc., Charlotte, N.C., to own and operate its MRF. When the latest contract expired in 1999, Sarasota considered rebidding the contract but decided to extend the contract to 2003, after recognizing that its collection franchises also would expire that year. Aligning the contract expiration dates in 2003 allowed the county to modify its approach to collecting and processing recyclables.

    Nevertheless, several issues were factored into the contract renegotiation process. First, significant plant upgrades were needed. The existing contract also did not allow the county to benefit from upside movements in materials commodity prices. And the processing fee needed to be reduced to reflect the MRF's depreciated building and equipment value.

    To develop a strategy, the county hired R.W. Beck, Orlando, Fla., to help negotiate a contract. Eventually, Sarasota extended a contract that provided for $1.25 million in capital repairs and upgrades paid for by FCR. A revenue share clause also was added to allow the county to benefit from any material market pricing increase. And the processing fee was reduced to $9 per ton from $28 per ton to reflect the depreciated plant and equipment carrying cost. The contract extension now is expected to net a $3 million savings.

    As the extension nears its expiration next fall, Sarasota County currently is receiving bids for solid waste, recyclables and yard waste collections, and MRF processing under separate RFPs. Under the current procurement process, the county will conduct side-by-side cost and benefit comparisons of public vs. private ownership and operation.

    Vendors have two RFP options. One will allow existing facilities to work under a service contract with a tolling agreement in which the county delivers recyclables to an existing vendor for a fixed processing fee and shares the revenues with the company when certain material price thresholds are met. The other option will require a bidder to build a new county-owned facility at the county landfill.

    Like any maturing industry, the recyclables processing industry is seeing significant changes in the way it operates, how it contracts with customers and how it alleviates material market risks. The next wave of municipal MRF contracting will recast the way communities process their recyclables and what they ultimately will have to pay for this maturing industry service.