Incentive Programs for Local Government Recycling and Waste Reduction

• Franchise Hauler Incentives
• Franchise Contractor Payments
• Avoided Disposal Costs
• Avoided Collection Costs
• Revenue Sharing
• Penalties for Nonperformance

Franchise Contractor Payments. Some garbage companies say they make more money in garbage collection and disposal, instead of recycling, because that’s how cities pay them. The basis of paying contractors has not changed much over the past 50 years.

Residential payments to contractors are often made on the basis of the number of households serviced. This does not provide any incentive to recycle more and dispose less. Payments per household value the speed at which garbage can be collected per household, over all over factors. This led to the compactor truck and the elimination of a well-established recycling infrastructure after World War II.

For residential payments to contractors, other ways to structure those could include payments:

• For every ton recycled
• For every ton landfilled

By paying contractors solely on the basis of the tons they recycled, they would make more money with increases in recycling tonnage. If contractors were paid inversely to the amount they landfilled wastes, they would have an incentive to maximize both waste prevention and recycling.

In considering how to pay contractors, cities must weigh the benefits of new incentives, such as the above, vs. the increased costs that will result from increasing uncertainty and risks to the contractors. Since most contractors have no experience with a garbage collection system based on these new incentives, they will need to inflate their estimates of how much they would like to be paid in order to assure that they have a sufficient cushion to account for unknowns and contingencies.

San Jose, California, has pioneered these types of incentive programs (see profile below). Seattle, Washington, also has explored these concepts in some depth.

In Seattle, the new integrated garbage and recycling contracts starting April 1, 2000, pay their contractors on two bases:

• Per household
• Per ton recycled

This is a good transition from past practices, as the contractors have the comfort of estimating the amount of revenue they can expect from payments per household. They can also reasonably project the amount of revenue they can expect from recycling tonnage. Because Seattle also changed the design of its citywide recycling program at the same time, there is some risk to the contractor about how much recycling tonnage is to be expected. Overall, the city estimates that it saved $2 million per year through the competitive bidding process it used and by integrating a variety of garbage and recycling contracts into full-service contracts for the city.

Commercial payments to contractors have historically been based on the number and size of bins serviced and the frequency of service. This provides generators with a strong incentive to recycle. However, it is in the hauler’s interest to recommend the largest number of small bins to service most frequently. The more garbage service specified (whether needed or not), the more money the hauler makes.

One of the common results of this approach is that haulers encourage generators to design their system for peak loads. Haulers will often "haul air" because they dump whatever is in a bin, even if the bins are usually half empty. This is usually only mitigated by competition. If there is little or no competition in an area (e.g., if there is an exclusive franchise or an oligopoly situation), generators will usually pay more without knowing it.

In any comprehensive waste audit of a system (see related CIWMB case study in this series on "Waste Audits"), an auditor will usually reduce the amount of garbage service regularly scheduled. This can provide significant savings to the generator.

However, commercial rates based (at least in part) on tons recycled or landfilled would be an improvement over the current system. By introducing payments for recycled tonnage or landfilled tonnage, commercial haulers would find they could make more money by reducing garbage service and increasing recycling service.

Some municipalities are exploring changing their franchise fee structures as initiatives for haulers who increase recycling. None appear to be experimenting with commercial rate structures in the way San Jose and Seattle have done with residential rates.

Avoided Disposal Costs. In structuring payments for landfill disposal, one of the incentives for increased recycling is the responsibility for disposal payments. If contractors are responsible for paying disposal fees out of their contract prices, they will be motivated to find ways to avoid paying those disposal fees.

Avoided Collection Costs. When tipping fees for waste disposal are less than $30 per ton (as they are in most of California today), avoided disposal costs need to be enhanced by avoided collection costs. The average costs collection in most solid waste and recycling systems is 80 percent; usually 10 to 20 percent is the cost of processing and marketing recyclables or disposing of wastes in a landfill. With higher recycling and reuse rates, municipalities need fewer garbage collection trucks. The cost savings for each garbage truck—about $150,000—can help offset the costs of recycling services.

Revenue Sharing. One of the more popular incentives curbside programs offer to their haulers is a share in the revenue from the sale of materials (usually 50/50).

The theory behind this is that such revenue sharing provides an incentive to both the city and the contractor to improve the system. The contractors get more revenue if they:

• Collect more materials.
• Keep the materials cleaner on route.
• Process materials to higher quality standards.

The city gets more revenue if it promotes public participation in the program and increases the value of materials recycled through market development initiatives.

In practice, some haulers have viewed the 50/50 revenue sharing proposition as a penalty to the hauler. They viewed it as having to share 50 percent of the benefit with the city without the city being required to split 50 percent of the costs of achieving that benefit.

Consequently, revenue sharing is most appropriately considered at the local level, where the city and the hauler can agree in advance on the goals of such a structure.

Penalties for Nonperformance. Penalties for nonperformance as "liquidated damages" are becoming more popular in solid waste and recycling contracts. The following situations are examples of such nonperformance at a MRF:

• Takes more than 30 minutes for contracted vehicles to enter, dump and leave.
• MRF does not achieve a minimum recycling or diversion rate.
• Facility is unable to transport residue to landfill on a timely basis.
• Contracted landfill is not able to accept residue upon delivery.

Public agencies find, and contractors agree, that it is difficult to reasonably determine the extent of damages from these and other similar problems, but that:

Substantial damage to public health and safety may result to members of the public who are denied services or denied quality or reliable service.

Such breaches cause inconvenience, anxiety, frustration, and deprivation of the benefits of an agreement to individual members of the general public for whose benefit an agreement exists, in subjective ways and in varying degrees of intensity which are incapable of measurement in precise monetary terms.

The actual monetary loss resulting from denial of services or denial of quality or reliable services is impossible to calculate in precise monetary terms in most instances.

Agreements recognize that consistent, reliable services are of utmost importance to the public, and that public agencies rely on the contractor’s representations as to its knowledge, experience and commitment to quality of service when awarding the work to it. Agreements recognize that some quantified standards of performance are necessary and appropriate to ensure consistent and reliable service and performance. Agreements also recognize that if a contractor fails to achieve such performance standards, the agency and/or residents will suffer unknown damages. As a result, in agreements liquidated damage amounts are included to represent a reasonable estimate of the amount of such damages considering all of the circumstances existing on the date of the agreement.

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Last updated: October 26, 2007