1. Trends
In recent years, dramatic increases in capital and operational costs have made solid waste facilities an ideal candidate for privatization. Even though the rate of privatization has slowed, the percentage of facilities owned by the public sector declined from 64 percent in 1998 to 63 percent in 2000. (The 1 percent increase represents approximately 64 facilities). During the past year, private sector presence increased in 22 states.
Despite the fact that the public sector owns a majority of landfills, the private sector continues to own a majority (61 percent) of disposal facilities and continues to manage a majority (60 percent) of waste disposal at landfills. The average size of private disposal sites is also larger than public sector counterparts. As stated in the Directory of Solid Waste Disposal Facilities, “the private sector, with its superior access to capital and its freedom from geographic boundaries, is better able to build larger landfills and to locate them more strategically where costs are lower.”
Flow Control and Megafills in the U.S.
Local governments continue to struggle with flow control in their attempts to restrict the interstate trash trade. The courts have continued to strike down these attempts time and time again.
Subtitle D regulations of the 1976 Resource Conservation and Recovery Act caused the costs of disposal to skyrocket, forcing the closure of thousands of small, environmentally unfit sites and the construction of new facilities. The most cost-effective solution became regional facilities, or “megafills.” A megafill differs from other landfills only in its size. Its capacity far exceeds that of other landfills, using economies of scale in construction and service delivery. Megafills are constructed with the most advanced technology and can cost more than $500,000 per acre but remain the lowest unit-cost solution to solid waste disposal.
The move to megafills has increased the appeal of privatization. Private companies seeking to reduce costs over time through improved efficiency are naturally drawn to the concept of megafills, and they can raise the capital for them more easily than can local governments, without using tax dollars.
Solid Waste Privatization in Canada
Recent government surveys show that more local governments in Canada are contracting more solid waste services to the private sector. Nationally in 1998, the latest year for which information is available, 59 percent of waste management expenditures were paid to contractors—up from 54 percent in 1996.
Collection and transportation services continue to be the largest avenue for privatization of solid waste services in Canada. Sixty-nine percent of collection was privatized in 1998 (a rate larger than in the U.S.), up from 61 percent in 1996 and 55 percent in 1994. More disposal facilities i.e., landfills and incinerators, have also been privatized in recent years-up from 41 percent in 1994 to 48 percent in 1998.
Water and Wastewater Privatization Survey Shows Continued Growth
The municipal market for water and wastewater privatization continues to grow, although at a slower pace than in previous years. That is one of several key findings in the fifth annual survey of the United States water and wastewater outsourcing industry, conducted by the newsletter Public Works Financing/PWF International.
According to the survey, the 17 largest firms competing to sell utility operations, maintenance, design-build, and asset management services in the U.S. reported government operation and maintenance (O&M) increased 14 percent in calendar year 2000 to $917 million. In 1999, government O&M revenues increased 22 percent. The firms said they operated 2,273 publicly owned facilities in 2000 with an aggregate design flow of more than 6.9 billion gallons per day.
Figure 1. Water Industry Government Operation and Maintenance Revenue Growth, 1996-2000
Source: Public Works Financing, March 2001.
In addition, revenues from government design-build (as part of design-build-operate) contracts were up 22 percent to $217 million. The rate of growth in 1999 was 95 percent above 1998 revenues.
Market share for private contract operations of municipal utility systems remains at less than 5 percent of the $35 billion spent by government on water and wastewater. PWF Editor/Publisher Bill Reinhardt doesn’t expect the municipal market share to shrink noticeably until more large cities contract operations of water and wastewater services.
Other market trends noted in the PWF survey:
- Most firms surveyed predict the market for privatized water services should improve as the economy softens because demand by governments for operating efficiency and cost savings is counter-cyclical;
- There was little consolidation in the water industry last year; and
- Only about 5 percent of the 166 private O&M contracts that came up for renewal in 2000 were taken back in-house for municipal operations. Of the 95 percent that stayed in private hands, 89 percent renewed through negotiation and 11 percent by competition.
An electronic version of PWF's March outsourcing report may be purchased by contacting PWFinance@aol.com.
Moody's Predicts More Water Privatization
Municipalities that have outsourced the management and operation of their water utilities to private companies will be increasingly likely over the next few years to take the next step and privatize their systems, according to Moody's Investors Services' June report, "Consolidation Will Pressure Ratings of the Water Utilities."
Over the last few years, several cities and towns, including Atlanta, GA; Buffalo, NY; and Gary, IN; have hired private water companies to take over most aspects of their local water systems, except ownership of the assets themselves. Moody's predicts this trend will likely escalate into actual asset sales.
According to the Moody report, "public policymakers will turn to the private sector for financial, technical, and operating assistance when the municipal water system receives reliable and reasonably priced services. Furthermore, with supportive state regulation, the investor-owned water company is more inclined to acquire the public system."
While the U.S. water industry remains fragmented today, it is likely to consolidate over the next decade, the rating agency said. Municipalities, challenged by rising operating expenses and escalating infrastructure needs, are increasingly unable to handle their water system needs on their own. This could lead to more privatization as companies seek improved economies of scale.
Standard and Poor analysts also predicted in a 1999 teleconference that privatization of municipal water utilities will start taking more varied forms. Some localities may begin modestly by contracting for billing services, while others may take a more comprehensive approach.
According to the June 27, 2000 Bond Buyer, "Pushing the trend is a 1997 Internal Revenue Service rule that allows private companies to operate and manage localities' water systems for up to 20 years without making taxable the bonds sold to finance the assets."