resource recovery plcini implement*
9Uides for
municipal officials
technologies risks
one) contracts markets
accounting format
financing procurement
further assistance
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This report replaces an earlier version entitled Resource Recovery
Plant Implementation: Interim Report (SW-152).
This publication is the first part of a special series of reports
prepared by the U.S. Environmental Protection Agency's Office of Solid
Waste Management Programs. These reports are designed to assist municipal
officials in the planning and implementation of processing plants to
recover resources from mixed municipal solid waste.
The title of this series is Resource Recovery Plant Implementation:
Guides for Municipal Officials. The parts of the series are as follows:
1. Planning and Overview (SW-157.1)
2. Technologies (SW-157.2)
3. Markets (SW-157.3)
4. Financing (SW-157.4)
5. Procurement (SW-157.5)
6. Accounting Format (SW-157.6)
7. Risks and Contracts (SW-157.7)
8. Further Assistance (SW-157.8)
An environmental protection publication (SW-157.1) in the solid waste
management series. Mention of commercial products does not constitute
endorsement by the U.S. Government. Editing and technical content of this
report were the responsibilities of the Resource Recovery Division of the
Office of Solid Waste Management Programs.
Single copies of this publication are available from Solid Waste
Information, U.S. Environmental Protection Agency, Cincinnati, Ohio 45268.
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Resource Recovery Plant Implementation:
Guides for Municipal Officials
PLANNING AND OVERVIEW
This guide (SW-157.1) was compiled
by Alan Shilepsky and Robert A. Lowe
U.S. ENVIRONMENTAL PROTECTION AGENCY
1976
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Contents
I. Introduction 1
II. Steps to Resource Recovery 2
III. Study 3
Resource Recovery Task Force 3
Areas for Study 4
Setting Local Goals 7
Outside Planning/Implementation Assistance 7
IV. Selection 13
Major Decisions to be Made 14
Technology - Market 15
Financing 16
Operation 17
Procurement Strategy 17
V. Procurement 24
Procuring a Consulting Engineer 24
Procuring a System Contractor 26
Footnotes 34
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RESOURCE RECOVERY PLANT IMPLEMENTATION
by Alan Shilepsky* and Robert A. Lowe**
Interest in resource recovery is growing rapidly. Scores of cities
are investigating processing systems that will divert their solid wastes
away from incinerators and landfills and back into the economic system,
to serve as replacements for expensive fuels and scarce virgin raw
materials. Not only does this new approach to the centuries-old garbage
problem make economic sense, but it is in accord with the public's
demand that wasteful, "throw-away" attitudes be reversed.
Cities caught up in the rush for resource recovery do have a problem
though, because they have little to guide them in making choices in this
new field. The prior experiences of city officials offer limited guidance
to the sophisticated technologies, procurement problems, and management
alternatives involved in resource recovery. Consequently, officials
often find decisions on resource recovery difficult and perplexing due
to the high capital requirements, the wide range of largely unproven
alternatives, the market and operational uncertainties, and the range of
procurement and management alternatives. They may ultimately decide to
wait until they see how other cities implement resource recovery. The
result, of course, is that many cities that could solve a major part of
their solid waste problem via resource recovery may lose years in the
waiting.
The U.S. Environmental Protection Agency (EPA) recognizes the gravity
of the problem city officials face. Consequently, EPA's Office of Solid
Waste Management Programs (OSWMP) has developed a series of guides that is
intended to facilitate the acquisition of resource recovery plants. This
series is based on OSWMP's experiences as well as those of pioneering cities
in the resource recovery field.
Entitled Resource Recovery Plant Implementation: Guides for Municipal
Officials, this series examines in detail a variety of important imple-
mentation issues, including planning, technology, markets, financing,
procurement, contracts, and an accounting format. A separate guide
treats each individual issue.
*Mr. Shilepsky, formerly a physical scientist/policy analyst in the
Resource Recovery Division of the U.S. Environmental Protection Agency's
Office of Solid Waste Management Programs, is currently working in the
Energy Special Programs of the U.S. General Accounting Office.
**Mr. Lowe heads the technical assistance program of the Resource
Recovery Division of the U.S. Environmental Protection Agency's Office
of Solid Waste Management Programs.
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STEPS TO RESOURCE RECOVERY
Resource recovery, namely the recapture and reutilization of
material and energy products from municipal solid wastes, can be accomplished
in two ways. Recovered resources can be segregated at the source (e.g.
the home) and separately collected, or they can be separated out of the
waste stream by means of high-technology mechanical processing systems.
The Office of Solid Waste Management Programs recommends both these
approaches, but this report concerns itself only with the latter.
There are three major steps to the implementation of high-technology
resource recovery: study, selection, and procurement, in that order.
Each of these steps is important to eventual success and must be conscien-
tiously executed in its turn. A general description of each follows:
Study. The study step lays the groundwork for the other two
steps, for it creates the Task Force that is necessary to bring resource
recovery into practice and it generates the knowledge base that is
essential for informed choice later on. It also specifies the city's
general goals in solid waste management and resource recovery, which are
important inputs to the selection step.
Selection. The selection step is the major decision step in
resource recovery implementation because through it the city determines
the general outlines of the resource recovery package to be procured.
This includes questions of technical concept, management alternatives,
financing, and strategy for actually procuring the recovery plant. In
practice, this step is usually combined with the study step into a
single "planning" step, the product of which may be a comprehensive
feasibility study and resource recovery plan.
Procurement. The procurement step starts with a conceptual plan
for resource recovery and ends with an operating plant. It includes
hiring the facility designer and builder, formulating a mutually acceptable
legal arrangement between the parties involved in procurement, and
securing financing for the system.
The city must obtain the active involvement of experts in each of these
three steps. Impartial management, engineering, and legal assistance is
necessary in the study and selection steps in order to devise a workable
plan. Later, in the procurement step, a system designer must be chosen to
actually design a plant. Project success will depend on how wisely the city
chooses and utilizes these various types of assistance as the implementation
progresses.
A discussion of the three major steps follows, with emphasis on the
issues and problems that OSWMP has found to be most significant to date
for cities involved in implementation.
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STUDY
Resource Recovery Task Force
Before any resource recovery effort can begin, those In political
authority in the interested city or region must charge a single group—
it might be called the Resource Recovery Task Force—to plan a recovery
system and shepherd its implementation. A specific set of tasks and a
schedule for completing them must be stipulated. The political authority--
it may be the mayor or the city or county council—must also assure that the
Task Force will be able to execute its responsibility effectively, and does
this by providing it with the following three elements necessary for
success.
Broad Participation. The Task Force might have as its core an
existing group, like the department of public works or the city planner's
office, or it could be specially constituted, like an ad hoc interdepartmenta
committee set up by the mayor. In any case, its effectiveness depends
on inputs and participation from all parts of the community that are
necessary for success. Besides obvious participants such as the department
of public works, the city attorney's office and the budget office,
others that might be included are local environmentalists, State officials,
private collection and disposal companies, any company that may prove to
be a major user of recovered products (e.g. a local electric utility),
and neighboring cities, if their wastes will be necessary to make the
economics of a plant acceptable.
A Task Force that lacks broad participation brings only one point
of view to the planning process, and may devise a plan that contains
embarrassing blind spots. For instance, a Task Force composed only of
public works officials may develop a recovery plan that can not be
implemented for legal or financial reasons, or which overlooks the
problem of market acceptability of the recovered products. Likewise,
city planners may overlook technical or operational difficulties. Such
questions should be raised and settled early in the planning and implemen-
tation process while there is still flexibility, and while they can still be
adjusted for without a great loss of money, time, or morale. The best
way to raise them early is to have a broadly constituted Task Force that
will bring many perspectives to bear on the problem.
Sufficient Authority. The Task Force must have enough authority to
execute its responsibility effectively, including the authority to hire
consultants, negotiate with system designers, and prepare requests for
proposals. The Task Force must also have the authority to make recommen-
dations on system designers, financial plans, and contractual arrangements.
Since there are many powers necessary to implementation that are
not delegateable by the mayor (or whoever else set up the group), the
Task Force must have and maintain access to him, and keep him apprised
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of its activities and decisions. In particular, the Task Force must not
get so far out in front of him that he can not or will not support it at
critical stages in the implementation process.
Adequate Resources. A third Task Force requirement is sufficient
resources, in terms of money, time, and manpower. Though cities are often
reluctant to allocate large sums of money for planning activities, the
investment is well worth it. Cities under one million population can
usually contract for resource recovery planning assistance for less than
a fraction of a percent of the $10 to $100 million or more a large-scale
recovery plant will cost. Therefore, planning assistance can easily pay
for itself many times over by helping optimize system selection at the
outset.
Personnel resources are even more important than money, because the
problems in recovery implementation are complex and far-reaching. The
city must commit knowledgeable staff and sufficient time to the activity.
This is especially important in the appointment of the Project Manager,
whose responsibility it is to direct the Task Force and see that its
implementation schedule is followed. The project manager should
be able to devote the majority of his or her time to this assignment;
otherwise, resource recovery will bog down when other responsibilities
demand attention.
A mistake made in some cities is to set up an ad hoc Task Force
comprised solely of the department heads of the relevant city departments,
all of whom have concerns much more immediate than resource recovery and
who probably focus on this problem only during the infrequently called
meetings. Then, if adequate full-time staff support is lacking, and if
the leader has as little time for the project as his colleagues, the
process will move purposelessly and fitfully, if it moves at all.
Areas for Study
Probably the most important steps city officials take in preparing
for resource recovery are the first ones, for a successful system hinges
on the quality of the initial plannning and analysis. There are many
areas that require study at this stage, and the main ones are discussed
below.
Local Solid Waste Situation. Obvious items for study include the
dimensions of the local solid waste problem. To determine the necessary
plant capacity, approximate disposal tonnages must be learned, both on
the average and under seasonal fluctuations. Additionally, the increase
in local solid waste generation must be projected over the life of the
recovery system.
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Waste composition, both seasonal and yearly average, is another
important factor, especially if the averages differ significantly from
national averages. Knowledge of the composition is necessary to determine
the marketability and quantities of possible recovered products. For
instance, a low aluminum can content would indicate that the economics
were not right for add-on aluminum recovery equipment. Effects that
must be anticipated and taken into consideration include changes that
may occur from the introduction of other solid waste management strategies,
such as a change in collection practices (e.g. separate collection of
newspapers) or waste reduction (e.g. mandatory beverage container
deposits). Separate collection, waste reduction, and resource recovery plants
are compatible if properly planned.
Other solid waste system factors that must be surveyed include:
current and anticipated disposal costs (to get a baseline for comparison
with recovery system economics), the presence of special wastes, and
prospective locations for a plant and a residual landfill.
Available Technologies. The Task Force must next consider the
range of technologies available for processing and recovering solid
waste, and the characteristics of each. Factors for study include the
concept itself, its feasibility, its reliability, its projected economics,
and the form and quality of the products it generates.
The analysis of technology is a two-step process. First, general
information on vaious technologies can be obtained through seminars and
publications prepared by various groups including EPA's Office of Solid
Waste Management Programs, the International City Managers Association,
the National Association of Counties, and the National League of Cities -
U.S. Conference of Mayors. OSWMP, in particular, is demonstrating
technologies, evaluating their economics, and is generally serving as an
information clearing house for resource recovery information.
Later, with the assistance of technical consultants, the Task Force
should select from the general gamut of technologies a few that appear
most applicable to its city's needs and circumstances, and concentrate
on them in depth. The Task Force, or its representatives, can accomplish
this focused study by visiting pilot plants and discussing options with
firms that are familiar with the most interesting resource recovery
concepts.
Local Markets. Once the Task Force has a feeling for the available
technologies and their products, it can analyze the local market situation
to determine which of these products can be sold locally, and at what
prices. This analysis is crucial, for a suitable agreeable market is
essential if the recovery circle is to be closed.
Success hinges on two factors: local industries and economics.
First, an industry must be present that can use the recovered product,
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otherwise it will be nothing more than a residual that must still be
disposed. Second, the product must be able to command a sufficiently
high price on the market to reasonably offset recovery costs, otherwise
it might be cheaper to shut down the plant and haul the incoming wastes
to a low cost landfill.
Superficial market studies are insufficient since only a detailed
look at local industries can determine if they can use and will buy waste-based
products. Nothing can be assumed. For instance, some cities assume
any electric utility can take shredded solid waste as a fuel. But if the
utility's boilers burn oil, they may not have the ash-handling capability
necessary for utilizing shredded waste. Or, even if a utility does have coal-
burning, ash-handling boilers, the boilers may only be fully fired during
peak-loading periods (a few hours a day), in which case they may not
constitute a viable market for a waste fuel. Specific details are important
for ascertaining materials recovery markets also; a scrap dealer may not
be willing to pay premium prices (or anything) for a low-quality ferrous
material, or a detinner may not want can stock that has been balled up by
a shredder and has little exposed surface area.
An adequate market study should identify a number of potential
markets and determine the specifications, quantities, and price each
would set for recovered products. It should also recognize the possibility
of market displacement, where new recovered products may displace old
ones from their traditional markets and thus create a new solid waste
problem.
Institutional Factors. The final subject for study concerns institutional
factors, as distinguished from technical and market factors. These
include the legal, organizational, and financial factors that impact on
the city's ability to plan a system, procure it, finance it, and operate
it. Questions to be raised here include: what are the laws affecting
the process by which the city can procure a recovery system; can the
city efficiently operate a recovery plant and market the product itself;
can the city assure that wastes will be delivered to the plant; what
financing options are available to the city; and what arrangements
(such as "put or pay" clauses) must be made to meet the requirements of
the financial community. The complexity of such considerations can be
seen by expanding on just one of these questions, that pertaining to
procurement.
Many States allow their cities little flexibility in procuring
capital improvements. Often State laws require competitive bidding and
forbid negotiated procurements and turn-key construction contracts.
Similarly, there may be constraints on the procurement of services, such
as prohibitions of long-term contracts. The Task Force must be aware of
these constraints so it can determine a workable and legal recovery
plan. (Conversely, it may wish to petition its State legislature for
remedial legislation.) The interrelation of legal and other institutional
factors will become obvious in later sections of this paper.
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Many communities begin by studying technologies and markets, but
they make the mistake of waiting until that study is well advanced
before considering institutional factors. The result is usually
the loss of time and the wasting of money. Instead, institutional
factors should be considered from the beginning.
Setting Local Goals
The Task Force must do more than gather factual information during
the study stage; it must also begin to consider the city's various
resource recovery goals and their relative importance. Possible goals
include low cost, dependability, minimum environmental impact, maximum
resource recovery, and minimum land requirements (to forestall a controversial
search for a new landfill).
Consideration of goals is important because different goals dictate
different approaches to the disposal problem, as is suggested in Table I.
If cost is the only concern, for instance, then close-in landfill
should be considered even in the face of possible citizen dissatisfaction.
Conversely, if maximum resource recovery is the goal, a sophisticated
"total" materials recovery technology may be called for, even in the face
of technological and economic uncertainties. Clearly, it is a fallacy
to think that any one approach will satisfy all goals equally.
The earlier the Task Force can ascertain its primary goals, the
sooner it can eliminate unacceptable systems from consideration. This
will speed the decision process and give the Task Force time to concentrate
on a few options in depth. It also will benefit any system vendor who
might otherwise have gone to a great deal of expense to prepare a
proposal for the city only to learn that his system was in conflict with
hitherto unstated goals of the Task Force.
Finally, a Task Force that specifies its key goals early is less
likely to find itself in the position of merely responding to the proposals
of outsiders, and running the risk of failing to acquire an important
system feature such as hazardous waste-handling equipment or built-in
redundancy because no proposal included such a feature. This would be
like a shopper given to impulsive buying who defines grocery needs while
pushing the supermarket cart down the aisles, and who forgets to buy the
butter because it is not plainly in view. A comprehensive system selection
shopping list is needed, and such a list is more easily prepared if the
Task Force tries to lay out its goals explicitly beforehand.
Outside Planning/Implementation Assistance
Few cities have all the information and expertise necessary for
resource recovery implementation; rather, success will depend on help
from the outside. It is important that the Task Force knows what kind
of help it needs, where to get it, and how to use it.
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Different types of assistance are required at different times in the
implementation process. It is useful to make a distinction between the
general technical and managerial services required by the Task Force lead-
ing up to the choice of a .specific technical concept, and the specific
engineering design services required once the specific technical concept
has been chosen. (In this paper, the term "consultant" is used to
designate the provider of the former type of assistance and "system
designer" is used to designate the provider of the latter type.) It
should be noted that only consulting engineers can be considered as
potential providers of both types of services. Management consultants,
for instance, would be unable to prepare the engineering drawings
required of a system designer, and system contractors with proprietary
technologies would be unable to provide the impartial advice required
of a consultant.
Consultants. There are a variety of types of consultants who have
proven helpful to cities engaged in resource recovery implementation,
including consulting engineers, management consultants, legal consultants
and financial consultants. They have been called upon to prepare necessary
implementation documents like feasibility studies, market analyses,
requests for proposals, and contracts, and to perform functions such as
assessing the legality of financial and management packages and evaluating
recovery system proposals. Their help is also necessary for other tasks
the Task Force lacks the time or the expertise to execute, such as
formulating new procurement strategies or writing long-term market and
service contracts.
Because of the complexities involved in the overall resource
recovery implementation process, the Task Force should require that each
consultant it hires has the expertise necessary to execute all the specific
tasks he is assigned. This means, for instance, that a consulting
engineer or management consultant hired to do a complete planning study
must possess or acquire the appropriate personnel to execute the technical,
marketing, legal, and financing aspects of the work. Frequently, all of
these skills do not reside in a single firm, and then a team approach may
be useful.
Cities that hire consulting engineers to develop their resource
recovery plans should be sure that the firm it hires is capable of
analyzing and evaluating all available resource recovery alternatives.
This can be assured by selecting firms with personnel who are familiar
with the full spectrum of current technologies, including the more
developmental ones like pyrolysis, wet processing, and glass and nonferrous
recovery, or who plan to work jointly with such a firm on the project.
Consultant teams without a broad focus may tend to recommend approaches
that unjustifiably rely on only those technologies with which they are most
familiar.
Prior to the choice of a system designer, the Task Force needs
impartial advice and should not rely heavily upon any company with a
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technological ax to grind. Therefore, it should choose as its technical
consultant an independent firm rather than any company that is marketing
a proprietary process. On the other hand, the Task Force should recognize
the existence of a possible conflict of interest in any situation where a
consultant of any kind has the opportunity for future work in some --but not
all--of the options which he/she is called on to investigate. To eliminate
any potential bias caused by the possible inducement of subsequent work, one
county explicitly excluded the firm that helped plan its system from competing
for its design and operation. The same arrangement could be made with
financial and legal advisers.
Utilization of Consultants. Before the Task Force commits itself
to a major resource recovery study, it should perform a rough preliminary
study of local conditions to determine if resource recovery is locally
possible at all. A quick survey of the city's goals, its existing dis-
posal options, the costs of resource recovery, and the possibility of
local markets may rule out resource recovery in the near-term altogether.
On the other hand, the preliminary study may indicate the need to retain
a consultant to conduct further investigations. Then, the preliminary
study would serve as the basis for intelligently hiring and guiding him,
by indicating the areas that need more examination.
Guidance is important. The Task Force should require that the
consultants perform problem-oriented work geared to the specific situation
and problems of the city. Their work should be managed closely by the
Task Force. The Task Force should be careful not to abdicate its respon-
sibility to set goals and make policy decisions. This will require that
the Task Force expend effort and time itself, planning the consultant's
scope of work and monitoring his progress.
The consultant's work should not be confined to gathering general
resource recovery information that may have only limited relevance to
the city's specific problems. What a Task Force needs and should ask its
consultant for is individualized information about how recovery problems
and technologies apply to the local situation. For instance, that energy
prices are going up is a cliche; what is important is how this national
trend affects the prices that nearby markets will pay for specific products
that can be generated from local waste. What is needed are the names of
companies that might buy, the particular specifications of the products
that would be bought, the types and costs of specific technologies that
can provide the product, and the procedures involved in actually getting
a system underway.
System Designers. It is important during the study stage for the
Task Force to obtain direct and specific information on the forms of
technology that are available. This is done by initiating discussions
with the system designers that are offering to design systems for cities,
namely consulting engineering companies and system contractors.
10
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Cities are familiar with consulting engineers and the services they
provide in planning capital improvements. In fact, a consulting engineer
may already be serving the TasK Force as an impartial consultant to
analyze resource recovery technologies and formulate a plan. On the other
hand, system contractors are relatively new to the experience of cities.
A resource recovery system contractor is a company that has developed
a particular recovery concept and has tested it out in a pilot plant
operation. Now it is offering to design and construct a scaled-up plant
for a city, and possibly to handle other aspects of getting a plant operating,
such as financing, operating the plant, and marketing the products. It may
subcontract major portions of the work to other companies. For instance,
plant design may be subcontracted out to an engineering firm, or operations
and residual disposal to a waste management firm.
A distinguishing characteristic of a system contractor is that it
is a monolithic legal entity that signs a two-party contract for a
resource recovery plan with the city and, therefore, must bear full legal
responsibility for plant failure. (1) This is in contrast to the situation
where the city retains one party, a consulting engineer, to design a
plant, and another party, a construction firm, to build it. Such an
arrangement clouds the issue of responsibility if difficulties in perfor-
mance arise.
Obtaining Preliminary Information. The types of information that
the Task Force should acquire from system designers include the following:
t technical aspects—this includes the proposed technology, as
well as recovered products, markets, and environmental impacts.
Pilot plant experience should also be specified.
• economics-this will include rough estimates of the capital and
operating costs of a facility that would suit the city's needs, as
well as a rough idea of the revenues that might be expected from
the recovered products.
t management packages—this will give the Task Force an idea of the
types of institutional arrangements (operation, financing, risk
sharing, etc.) that are available. Since the management package
has a strong impact on risk, costs, and efficiency, this informa-
tion is as important as information about economics and
technology.
A good way a Task Force can obtain the above information from
system designers is to request qualifications and conceptual proposals
from a number of companies through a Request for Qualifications (RFQ).
The responses would include detailed information on the company's technical
and financial capabilities, as well as a general idea of the type of
11
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system each company would propose to build for the city, and under what
type of management, cost, and risk arrangements. The city should stipulate
that no final contract award would be made on the basis of these proposals,
but that they will serve as the starting point for city-company discussions.
The responses to the RFQ will enable the Task Force to eliminate
some technical concepts on the basis of the city's particular constraints,
such as finances, lack of particular markets, or city goals. Then, the
field of possible designers can be narrowed on the basis of whether they
offer the type of system and arrangement the city wants and whether
they have proven themselves qualified.
It is important to distinguish between an RFQ and a formal Request
for Proposals (RFP, to be discussed in detail later), because some
cities make the mistake of issuing the latter while they are still in
the study stage. A formal RFP calls upon each company to propose a
highly specific technical system, including plant layout, equipment
specifications, expected product output, etc. The company is also asked
to specify the contractual obligations that will exist between the
parties-, and to bid a fixed price for this package. This is in contrast
to the less exacting RFQ, which requires only a conceptual plan and no
precise price or contract. Another difference is that the RFP implies
an intent on the city's part to make a prompt contract award on the
basis of the proposals received, while the RFQ expressly denies this
intent.
The problem with using an RFP during the planning stage is that the
Task Force is in no position to make a final choice, and it will be
using the companies' formal proposals as a means of defining its own
needs and goals. It likely will find that it wants a technical and
managerial package that is a combination of many proposals, and will
have to throw out all proposals and prepare a new RFP that specifies the
city's new requirements. This will be demoralizing and unfair to the
bidders who may have spent considerable time and upwards of $50,000 to
$100,000 in preparing their proposals.
Careful Pace Required. A recurrent danger in resource recovery
decision-making is that Task Force will seize upon the first resource
recovery system that is proposed to it, even though better approaches
may be available. This rush to judgment may stem from impatience or
from ignorance of other possibilities. It usually occurs when an advocate
of a particular type of system is able to convince city officials to buy
his system before they have considered in depth the relative strengths
and weaknesses of all available systems.
The most troublesome "advocate" to the city is the "blue skies"
system promoter who takes advantage of the city's enthusiasm for resource
recovery and its ignorance of the actual processes involved. These
entrepreneurs themselves may know relatively little about technology,
though they are usually sincere in the belief that their system will
12
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work if it is "only given a chanceV They may be sure that their 15-
ton-per-day pilot plant will readily scale up to 1000-ton-per-day, or
they may feel that a pilot plant is not necessary at all. Such naive
technological optimism is a danger the city should avoid.
The city should likewise be wary of promoters (or subsidiary
companies) who do not have the financial backing to implement
their systems themselves, but instead want the city to put up all the
necessary capital or, at least, to provide the legitimacy of a city
contract so construction funds can be borrowed. The city should also
be wary of appeals to extraneous factors such as local pride-if local
citizens are involved as inventors or stockholders.
Obviously, the city should avoid an arrangement where its partner
in resource recovery has neither proven technical ability nor the
capacity to limit the city's financial risk if the system does not
perform. For this reason, the Task Force should not closet itself early
with a single vendor, but should get information from and maintain
contacts with many outside parties, including other system designers and
impartial observers like the EPA. Open discussions with many points of
view ex-pressed bring out the flaws of the undesirable options, and may
save the city money, time, and embarrassment in the long run.
SELECTION
All of the information - gathering and goal-setting of the
study stage should be directed toward making decisions in the selection
stage. The end-product of the selection stage should be a set of
choices integrated into an implementation plan. As already noted, the
selection stage is often combined with the study stage in a single phase
of the overall process, namely the planning phase. A Task Force, for
instance, may prepare a single report combining the conclusions of the
selection stage with the justifying backup data of the study stage.
Similarly, a consultant may be asked to prepare this comprehensive document.
Though, in that case, the Task Force should participate significantly in the
selection stage of the consultant's work to insure that the tradeoffs
and decisions made reflect the city's goals.
Just as the consultant should coordinate closely with the Task
Force during the selection stage, the Task Force must coordinate with
the political authorities to which it is responsible, such as the mayor
or the city council. Only in this way can it be assured that the decisions
reached are understood by, and have the backing of, those who have the
power to carry them out.
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Major Decisions to be Made
There are a number of individual but interrelated decisions to be
made in the selection stage which, when taken together, add up to a
complete plan for resource recovery. These decisions will have to be
made under conditions of uncertainty (that is, in the absence of perfect
information). Investing in a project requires assuming risk. The
greater the uncertainty and the greater the amount of money at stake,
the greater the risk.
The mention of risk usually draws newspaper headlines that can
paralyze public officials because cities are expected not to take
risks. But cities dp_ take risks in many projects (civic centers,
transportation systems, even schools); therefore, some risk must be
acceptable. The effective manager will not be intimidated by the
possibility of risk but instead will manage the risks.
Management of risk is a three-step process:
a) Identify and quantify risks
b) Reduce risk, in either of two ways:
,1) Absolutely, by selecting a more proven technology
over a more developmental one, or
2) By assignment, by obtaining performance guarantees
from a system contractor
c) Decide on which types of risks are appropriate and
whether the levels of risk are acceptable.
The individual decisions that must be made in the selection stage
include the following:
a) Site - specific sites for recovery operations and residual
disposal must be determined. The problem of winning public acceptance
of these must also be considered.
b) Markets - specific markets for recovered major products must be
established. The selection of the technology depends upon which products
can be sold.
c) Technology - the Task Force must choose between technologies
for conversion of waste to energy such as waterwalled incineration,
shredded fuel processing, wet pulping, pyrolysis, etc., and must decide
between materials recovery options for fiber, ferrous, glass, and aluminum.
»
d) Operation - operational responsibility must be determined. It
can be assigned to the city's department of public works, a newly-
constituted public authority, the company that designed the plant, or a
local service contractor.
e) Ownership - ownership can be public or private.
14
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f) Financing - a variety of capital financing options are available.
g) Procurement Strategy - this includes choices between using
consulting engineers or system contractors, and whether to use an architec-
tural and engineering approach, a turn-key approach, or a full service
approach.
h) Schedule - a schedule should be formulated that indicates the
time-phasing of all the steps necessary to complete the plan.
Interrelationship of Choices. All of the above decisions must be
combined to form a coherent, logical implementation plan. Choices in
one category may preclude certain options in another category; for
instance, a pyrolysis system may not be procurable from a consulting
engineer, or a public operation may make private ownership unlikely. If
the Task Force is unsure whether its plan is workable, it must consult
with experts.
The Task Force does not have to make its decisions in the order
listed above, since "pacing" constraints will vary from city to city.
For example, a city may have procurement laws that forbid design and
construction by the same company, thus limiting the Task Force's choice
of technology to only those that are available from independent consulting
engineers (i.e. do not construct). The Task Force must understand its
own city's constraints and the interrelationship between the choices so
it can determine which decisions must come first and how they will affect
the others.
Some of the general tradeoffs in the various categories are sketched
below. Further data and considerations are discussed in other EPA
publications.
Technology - Markets
Since each technology has characteristic output products that must
be matched against the needs and constraints of potential users, the
choice of a technical system must be made concurrently with the identification
of markets for recovered products. The reader is referred to two companion
sections of this Guide series: Technologies (SW-157.2) and Markets
(SW-157.3).
A city that fails to identify markets at an early date takes the
risk of choosing a system that will produce unmarketable outputs. At
its worse, this can create a new waste problem, such as the cases of
composting plants that surrounded themselves with their unsaleable
product. But even if the major "output" is readily disposable, such as
steam from a waterwalled incinerator, the economics of the facility may
be completely undermined. OSWMP knows of two examples in the United
States where steam went unused because the problem of marketing this
product was downplayed until after the facilities were constructed.
15
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Financing
Long-term municipal financial alternatives can be categorized into
two broad types:
1. General obligation financing, and
2. Revenue bond (project) financing.
General obligation bonds are secured by the full faith and credit
of the issuer, which can be either a municipality or a corporation.
Revenue bonds (project financing) are secured by the project's revenues
(from tipping fees and sale of products in the case of resource recovery).
Project financing can be arranged so that the debt is not a liability
of either the municipality or the corporation. This is especially
important to a city that cannot tolerate further impingement on its
debt ceiling; it is equally important to a company that is not large
enough to carry on its balance sheet the liability for a project as large
as a resource recovery facility. Sometimes, however, the liability for
revenue bonds will be deemed to be a liability of either the city or the
corporation. Whether this occurs depends upon the applicable State Laws
and upon the terms of contracts for supply of waste, purchase of products,
technical performance, etc.
At the present time, the risks of resource recovery combined with its
low return on investment (relative to other investment opportunities)
makes it unable to attract a significant amount of equity capital or
general corporate obligation financing. Moreover, most corporations
are unable or unwilling to finance a project in such a way that it
will appear on the corporation's balance sheet. Therefore, in the for-
seeable future, resource recovery projects will be financed primarily
through general municipal obligations or project financing, which may or
may not be charged against the municipality's debt ceiling, depending
on the circumstances.
An important factor in the selection of the financing mechanism
is the determination of ownership of the facilities, whether for legal
or tax purposes. Some financing mechanisms are not possible with public
ownership; others are not possible with corporate ownership.
It cannot be overemphasized that the requirements of the financing
mechanism affect all aspects of the project and, therefore, must be
considered as early as possible. To do this, the decision-maker is
referred to the Financing (SW-157.4) section of this Guide series and
is encouraged to acquire the services of a financial consultant.
Financial advice is available from investment banking firms, commercial
banks, independent consultants, attorneys, and accounting firms.
16
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Operation
The responsibilities for operation of a recovery plant can be
assigned to the public sector or the private sector.
The Task Force's choice depends on a diversity of factors including:
(a) Price. A private company may offer to build and operate its
own plant and process the city's wastes for a lower price than the city
could do itself.
(b) Efficiency. In some cities, the operation of sophisticated
facilities by public employees has proven to be unsatisfactory for a
number of reasons. These include: union and civil service rules and
pay scales that make it difficult to hire and promote only motivated and
competent employees, the city's lack of the necessary technical and
marketing sophistication, and the lack of profit incentives for public
managers to run an efficient operation.
(c) Control. The city may be committed to maintaining direct
operational control over its solid waste management system since it may
fear that substandard disposal practices or possible plant shutdowns may
result if it lacks direct operational authority. Also, it may not wish
to give up job opportunities for public employees.
(d) Public Authority Advantages. It may be advantageous to create
a public authority to manage resource recovery in an area. An authority
may simplify regionalization, facilitate implementation, or be eligible
for State funds. A drawback of authorities is that they are less
responsive to the public than elected bodies are.
Procurement Strategy
Just as there is more than one technology for recycling municipal
solid wastes, there is more than one strategy a city can choose to
procure resource recovery services. In fact, when deciding its strategy,
a city must make two related choices. The first is who should be the
system designer, a consulting engineer who specializes in design and
engineering services, or a system contractor whose services encompass both
design and construction. Related to this choice is the second one, whether
to acquire the plant by the traditional architectural and engineering (A & E)
approach, to use a turn-key or full service approach, or to use a variation
of these. (Actually there are many variations on these approaches, but
these three are stressed for the purposes of demonstrating basic types
of responsibility and risk allocations. Further variations, as well
as the types of companies that can execute them, are discussed below.)
These choices are related, since consulting engineers usually offer
only the A & E approach, while system contractors usually will only serve
17
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on turn-key or full service projects. The methods by which the city hires
these different system designers are also distinct, since consulting
engineers and engineer-constructors are usually hired via negotiations,
while system contractors are usually hired via a "competitively" bid
RFP. (2)
Because the choices of designer and approach are coupled, they need
not be discussed separately. The remainder of this section will be
organized around the tradeoffs between the alternative approaches. (The
techniques by which the services of a consulting engineer or of a system
contractor are procured are discussed in the Procurement section of this
paper.)
The three procurement approaches—A & E, turn-key, and full service--
differ on the basis of how the various responsibilities of design,
construction and operation are allocated between the city and the design
firm. Table 2 displays the various job assignments. Each approach will
now be discussed in detail.
Architectural and Engineering. This is the traditional approach
cities have taken to procure public works like schools, bridges, or
incinerators. It involves two main steps, the retention of an engineer
to draw up plans and specifications for the desired capital improvement
and the hiring of a construction contractor to construct the facility
from these plans.
In the first step, the city hires an experienced consultant to
perform the necessary architectural and engineering services for the
desired facility. He is told specifically what the city wants and where
to locate it. In the case of Ames, Iowa, for instance, the consultant
was told to draw up plans for a plant to be located on East Lincoln Way
that would mill and air classify 50 tons of waste an hour, modelled
after the St. Louis-Union Electric Company project.
Later, with these plans firmly in hand, the city would go out for
construction bids and would award the contract to the construction
contractor with the lowest bid. His task would be to order the steel,
cement, and process equipment, to hire the laborers, to supervise
construction, and to bring the facility to completion.
This approach is almost always coupled with city ownership and
operation and with public financing.
Turn-key. Under the turn-key approach, the city hires a system
contractor to design, build, and start up a recovery system for the city
for a price. Some pricing arrangements include cost plus fixed or percentage
fee, a target price with incentives, or, though rarely, a guaranteed maximum
price. As Table 2 shows, the city assigns sole responsibility for the
execution of these steps to a single party.
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A turn-key approach usually puts the city in the position of not having
to accept the plant until it has been shown to operate according to specifi-
cations. The contract between the city and the contractor will stipulate
acceptance tests that the plant must pass if the city is to take it over and
pay for it. If it does not operate as specified in the contract, the city
can refuse to accept it, leaving the contractor bearing the capital cost of
construction. In reality, of course, the division of losses between the two
parties is affected by the strength of the contract, the payment arrange-
ments, and possibility that the city will be willing to accept an imper-
fect processing plant as opposed to a continuing solid waste problem.
Generally speaking, a turn-key approach involves much less risk to the city
than the alternative of constructing its plant via the traditional A & E
approach mode.
The turn-key approach can be modified to increase the participation
of the consulting engineer. One city built a steam-generating incinerator
by dividing the project in two:
a) All components essential to the production of steam
(crane-to-stack), including the grate system, furnace, boilers,
electricial controls, pollution control equipment, fans, feedwater
treatment, and ash-removal system, were designed and supplied
by a system contractor.
b) The rest of the facility, consisting of more conventional
components (buildings, driveways, tipping floor, etc.), were
designed by the consulting engineer (working closely with
the system contractor) and procured in the conventional manner.
Full Service. In the case of the full service approach, the system
contractor offers the city a resource recovery service instead of a plant.
The contractor finances and builds a plant to perform this service. The
contractor owns it and is responsible for ensuring that it performs the
recovery service throughout the life of the city's disposal contract
(Table 2).
The system contractor will usually charge a set dump fee for each ton
of solid waste delivered by the city for processing. This fee will vary over
the life of the plant, according to escalator and renegotiation clauses in the
contract between the city and the contractor. The contractor will make its
profit and pay for its plant with the revenues from the dump fee and from
the product sales. Contract life must be long enough to enable plant pay-off,
usually 15 to 20 years.
A full-service contract shifts even more risk from the city to the
system contractor since the system contractor is obligated to perform a
certain service at a stipulated price. Cost escalators in the contract
may transfer to the city some of the risks of higher than anticipated
19
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capital and operating costs, but, as in a turn-key approach, catastrophic
failures would be the contractor's worry. (The city, in that case,
would still have its solid waste to dispose of, but a performance bond
by the contractor could somewhat compensate the city for its trouble.)
Other Procurement Approaches. There are several other ways to arrange
for design, construction and start-up services. These arrangements
differ from one another in the way in which lines of contractual
accountability are drawn. For example, a project manager can be hired
by a city to act as its agent in hiring and supervising the work of
design and construction services and in procuring equipment and
materials. Another example is the engineer- constructor, who performs
the same services as a turn-key contractor (design, procurement of
equipment, construction and start-up); but unlike turn-key contractors,
engineer-constructors work under a cost-plus-fixed-fee or similar
arrangement that does not involve a predetermined price. The engineer-
constructor is similar to the project manager except that the engineer-
constructor acts for himself and not as the city's agent.
The choice among these and other options is based on several
criteria, including potential for process guarantee, responsibility
to (and control by) the city, and the firmness of facility cost at
the time the construction contract is awarded.
The amount of detail necessary to explain these other procurement
approaches is beyond the scope of this report. For further information,
the reader is referred to a report entitled Study of Single-Responsibility
Concepts for Water Pollution Control Projects prepared for the
U.S. Environmental Protection Agency by Bechtel Incorporated in April, 1974.
Relative Merits of Different Approaches. No one approach fits the
needs of all cities.The Task Force s weighing of various factors will
determine which approach to follow: A & E, turn-key, or full service.
A & E Approach Advantages and Disadvantages. One advantage is ease of
procurement. Many cities planning for resource recovery prefer the A & E
approach because it is easier to perform organizationally since the
"rulebook" for it is "tried and tested", and since all the relevant city
personnel know what is expected of them. In fact, State laws governing
municipal procurement often make deviations from the A & E approach
procedures difficult.
Ironically the turn-key and full service approaches to building a
recovery plant should be faster than the A & E approach because one
party is responsible for design and construction and can save time by
ordering major equipment before all the design work is completed. But
usually city law and tradition are ill-suited to these approaches and
can cancel out the time-saving advantage.
21
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A second advantage of the A & E approach is that it can be potentially
the lowest cost solution to a city's problem. If the city hired a
system contractor to design, construct, and possibly operate a recovery
facility for the city, the cost to the city would include management
fees (e.g. hiring and supervising of construction contractors) and a
profit for the company. The city would pay a lower total price for the
same physical facility by managing the procurement itself via the A & E
appreach route. Many people do argue that the inherent inefficiency of
publicly-managed projects would wash out any savings here, though; the
truth of this depends on the particular municipality and its track
record in managing public works.
Another cost-reducing feature of the A & E approach is that the
city need not pay a premium for the risk of system failure, which it
would if a system contractor underwrote that risk. The city does not
have the option of refusing a plant if it has accepted the A & E approach
drawings from its consultant and farmed them out to a construction
contractor. The contractor can only be liable for faults such as
failing to put an I-beam where the blueprint specifies or putting too
much sand in the cement. A faulty system concept is not his fault.
If the city selects the A & E approach, it is hoping to save the cost
of the risk premium a system contractor would charge. The key disadvantage
of the A & E approach is on the other side of the risk coin, for if the
system fails to operate at the expected price or, worse yet, does not
operate at all, the city has a financial and political embarrassment on
its hands.
Another potential limitation of the A & E approach is that it is not
applicable to those technologies that are patented by system contractors
that require a turn-key of full service arrangement. It is also less
likely to be used to implement the more developmental, and consequently
more risky, technologies, since in those cases cautious city officials
will probably prefer to transfer as much risk as possible over to a system
contractor.
Turn-key and Full Service Advantages and Disadvantages. Turn-key
and full service approaches are especially important today in light of
the state of resource recovery technology, which is complex, expensive,
and still largely unproven at the scale of operations that many cities
require. It is generally assumed that there may be some scale-up problems
when the larger systems are built, even if the pilot plants worked
perfectly. Also, even in the best of circumstances, system debugging
will be a necessary and non-trivial task. A laundry list of unexpected
problems at OSWMP's St. Louis-Union Electric demonstration project gives
a sampling of the variety of problems that require solution: materials
bridging in conveyors, excessive wear in pneumatic feed pipes, air
pollution uncertainties, and fire hazards.
22
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The owner and operator of a recovery plant will have to come to
grips with these malfunctions as they occur. From the standpoint of
risk, it can be seen that turn-key or full service offers two key benefits
for cities:
1. Deferred acceptance. The city bears only a fraction of the
risk that these problems will be insoluble, since it pays for the plant
only after it is working.
2. Direct experience. Turn-key and full service approaches allow
the system developers' engineers to design and start up the plant,
increasing the likelihood of success because they developed the concept
and they have the most experience with it through their pilot plant work.
Full service has still other features. One is that it does not
necessitate the city to staff the new plant with its existing sanitation
workers, who may be ill-prepared to operate the new technology and
possibly may even resent its introduction. Another is that it exempts
the city from the problem of marketing the recovered products, transferring
that responsibility to the contractor who may have more proficiency in
that role anyway.
Most of the disadvantages of turn-key and full service approaches
have already been discussed, such as possibly higher cost and the difficulties
of procurement. An additional one is the city's loss of control in the
selection of specific process equipment and design. This could have signi-
ficant effect on economics. In the case of turn-key, the system contractor
could, in his design, sacrifice operating economics in order to lower
initial equipment and construction costs. The city might then be penalized
over the lifetime of the plant by paying larger than necessary maintenance
and operating costs. In the case of full service, the city may have no
recourse in the event that the system contractor, for some reason, fails
to install dump fee reducing technological or operational innovations that
were unknown when the original contract was signed.
The problem of procuring a system designer to design and construct a
resource recovery plant will now be discussed.
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PROCUREMENT
Once the Task Force has selected the complete system package it
desires, it must procure the services it needs to implement it. Depending
on whether the Task Force wants to go the A & E approach, the turn-key,
or the full service approach, it will have to retain the services of a
system designer, be it a consulting engineer or a system contractor. It
is the purpose of this section to examine the methods of doing so.
In the following, the stress will be on the hiring of system contrac-
tors, (in particular, on the use of RFP's), because this technique is relatively
new to city officials and has proved to be a stumbling block.
Procuring a Consulting Engineer
The A & E approach in which the consulting engineer does the design
work is often viewed as a price competitive approach, but this is only half
right. The first step is not price competitive in the sense that the
lowest bidder gets the contract, for the hiring of a consulting engineer
never involves competition on the basis of price; the engineering community
recommends against it. This is because bid prices do not reflect the com-
petency and efficiency of the bidders, and a city's choice of a consultant
is instead based upon such factors as technical qualifications, professional
experience, prior performance, and personal and professional intergrity.
Cities normally hire consulting engineers via a process of screening
professional proposals, interviewing three to five of the top-ranking
firms, and then negotiating a contract and a scope of work with the winner.
General factors to be considered in evaluating and ranking are available
from professional societies, as the various methods of contracting and
compensation.
The second step of the A & E approach is price competitive, as any
number of construction firms can respond when the city advertises for bids
to construct the facility according to the consulting engineer's plans
and specifications. The lowest responsible bidder will win the contract
and will construct the facility, or the part he bid on, for the price he
bid.
The first step in the A & E approach is the key one: choosing a
consulting engineer. The Task Force must assure itself that the consulting
engineer it chooses can design a system that will perform satisfactorily
and can be constructed at a reasonable price. This assurance can only come
from the Task Force's examination of three factors.
• whether the consulting engineer can demonstrate relevant and
comprehensive experience in the recovery field. This includes
knowledge of solid waste and its problems, as well as knowledge
of the particular technology under discussion. One indicator
would be experience, having successfully designed a plant of a
similar size and technical concept.
24
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• whether the proposed technical concept has been proven anywhere,
either at pilot-or full-scale size. Since the city's money is at
stake in the A & E approach, a "show-me" attitude is in order.
• whether the consulting engineer is confident of the product speci-
fications of the plant's recovered output and whether he has matched
them against the input requirements of the local markets. Here
again, it is the city's loss if its products are unmarketable.
Not all engineering firms are likely to be able to fullfill the above
conditions. The highly specialized nature of resource recovery coupled
with the relatively small market for it means that only a relatively few
firms will be able to allocate the manpower to study the field in depth
and acquire sufficient "hands-on" design experience. Of course, a firm
experienced in recovery technology may want to retain a local consulting
engineer for his knowledge and perspective on the local disposal system
and its problems.
The Task Force should not rest once it has chosen a consulting
engineer to begin design; there are many preparations to be made for
plant start-up. First, the management framework for the plant must be
developed, to determine who will manage it, who will operate it, how the
various jobs will be carried out, etc. Ideally, the city and its system
designer will have developed "operating manuals" and will have recruited
personnel for the facility before construction is complete.
A second task is marketing. The city must not wait until a product
is being produced to sign contracts for its purchase; rather this should
be an important activity all through the planning, design, and construction
stages. If necessary, arrangements can be made to obtain sample products
for marketing purposes from similar recovery plants in other cities.
Officials of Lane County, Oregon, for instance, obtained shredded, air-
classified solid waste from the St. Louis resource recovery plant to use
for test-burning purposes in a local electric utility boiler.
With adequate preparation of personnel and other arrangements, the
city will be able to begin operations soon after the construction contractor
has finished his work.
Finally, the city usually will want an arrangement with the consulting
engineer to assist the city during the shakedown phase. It also may want
him to redesign any plant features that are found to perform inadequately,
possibly without further charge. This is one form of performance guarantee
the city can acquire under the A & E approach.
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Procuring a System Contractor
The RFP approach for hiring a system contractor requires a great
deal of sophistication on the Task Force's part to be successful, both
in RFP preparation and in follow-through, the Task Force and its consultants
must perform the following steps:
a) prepare an RFP and distribute it to possible bidders,
b) evaluate proposals and choose a winner,
c) negotiate a contract and arrange financing.
After these steps, the winning system contractor will design and construct
the facility. Then the contractor will either operate it or turn it
over to the city to operate it, depending on whether the arrangement is
for the turn-key approach or for the full service approach.
In the following, a general set of rules is offered that will
increase the chance of success of the RFP approach. For specific help,
the Task Force probably should obtain the services of consultants, for
few cities can marshal! internally all the necessary technical, managerial,
legal, financial, and marketing expertise. To date, consulting engineers
and management consultants have been especially helpful to cities,
counties, and states involved in RFP preparation and proposal evaluation.
It is important to obtain their help early to insure that avoidable
complications do not arise in the later stages when they can be rectified
only at the price of serious delay and great effort.
Specialized, in-depth help is mandatory because one city cannot
adopt in its entirety the RFP or procurement procedures of another city,
since each city has a unique set of opportunities and constraints. The
following rules are intended only as general guidance and are insufficient
in themselves to guide a city through a procurement.
In preparing and issuing the RFP, cities must be sensitive to
how system contractors will react to it. Recently, system contractors
have become increasingly concerned that cities are preparing RFP's and
are "coming to the bargaining table" with inadequate preparation and
with unreasonable demands. For example, RFP's have been issued by cities
that have neglected to determine whether issuing an RFP and negotiating
a contract were legal. Yet the cities expected the companies to spend
$50,000 in preparing a proposal and to make certain cost and performance
guarantees. The results usually are postponed projects, which is
unfortunate because most system contractors are new companies or new
divisions in established companies, that cannot tolerate more than a few
"false starts" or "blind alleys" before their managements decide to terminate
their involvement in resource recovery.
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Preparing the RFP. The RFP is a major document that details with
a high level of specificity the city's desired resource recovery system,
how system contractors may bid to provide this system, and how bids will
be evaluated. It must be the culmination of the Task Force's and its
consultants' conscientious work in the study and selection stages, and
its final determination of the city's resource recovery requirements.
Once the RFP is distributed to potential bidders, it cannot be amended
without embarrassment to the Task Force and inconvenience to the bidders.
Thorough review can avoid the need for later RFP amendment. One
procedure, recommended by EPA and followed by several cities, is to provide
prospective bidders with a draft RFP and invite them to a "pre-solicitation
conference" to discuss and comment on it. The burden on the systems
contractors is small relative to the cost of preparing a proposal, and
the city can change the draft RFP with relative ease. Then, after the
final RFP has been issued a "bidder's conference" can be held to answer
further questions. Cities should be mindful, however, that corporations
may not be able or willing to communicate publically their negative re-
actions to an RFP. After all, cities want a "can do" attitude from all
bidders; -and corporations fear that criticism of the city's RFP may
jeopardize their chances for winning the contract. Private sessions with
individual bidders may be the best way for a city to receive candid
comments on the draft RFP.
Four rules for RFP preparation follow:
1. Specify technical parameters. The RFP must contain specific
technical parameters so that bidders know exactly what is desired of
them. Performance specifications must be detailed and explicit so that
(a) the companies know precisely what the city wants and (b) the proposals
from these different companies will be comparable. Unless a specific
process is required by a major customer (e.g., a utility agreeable
to purchasing fuel), RFP's should not attempt to dictate specific
system components. If the city wants the system contractor to be
responsible for the performance of the system, (including saleability
of the products), the contractor must have control over the design and
construction of the system.
Of course, certain specifications for materials, labor, or
design are required by local or Federal Laws (building codes and
OSHA regulations are examples). The RFP should notify the bidders
about all such requirements.
The RFP should specify that proposals must contain information
in sufficient detail to enable the city to verify and evaluate the
bidder's claims. For example, the city may stipulate in the RFP
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that the facility must accommodate as many as 100 packer trucks
per hour at peak periods and that no queuing will be permitted off
the premises and that no truck shall be on the premises longer
than 10 minutes. To determine whether a bidder's system will
satisfy these requirements, the city should expect the proposal
to contain information about such things as traffic patterns,
length of driveways, number and types of scales, size of unloading
areas, etc. But the city should not specify in the RFP how many
scales are required; that is for the bidder to decide.
One group of specifications, environmental emissions, may
be difficult to write, especially, for example, when air emissions
from a new source must be integrated into a State Implementation
Plan. To assure that a firm specification is developed and to
assure close cooperation between the city and the local pollution
control authorities, it is recommended that the pollution control
authorities themselves write the appropriate sections of the RFP.
Performance specifications are an important part of the definition
of the city's desired system and will have a significant impact on price.
The lack of performance specifications will affect proposal comparability.
For example, a city may desire a fail-safe processing plant to lower its
dependence on its backup landfill. If this requirement for dependable
performance is not explicit in the RFP, problems will arise when low-cost,
non-redundant systems are proposed and must be evaluated alongside systems
with dual processing lines and other reliability-increasing features.
The Task Force group may have to decide questions such as:
a) whether a system contractor with an otherwise good proposal
should be allowed to revise his bid to include redundancy,
b) whether a high-price proposal can legally be accepted if a non-
redundant system proposal was low bid,
c) whether a low-bidding, non-redundant proposal is just being
used to "buy into" the project, since the system contractor may plan to
raise his price drastically when the redundancy requirements become
explicit.
2. Specify business arrangements. The RFP must specify the
legal, financial, and managerial arrangements required by the city, so
that all contractors can bid on the same overall package. This includes
who will own and operate the plant, how and who will finance the plant,
how dump fees will be paid, how product revenues will be shared, etc.
The RFP should also contain a preliminary contract spelling out most
of this information and explicitly stating how risks and responsibilities
will be divided between the parties and what expectations the city has
of the contractor.
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These non-technical factors must be spelled out just as the technical
specifications must be. Otherwise, it will be difficult to compare bid
packages against each other since they may vary in so many factors.
Also, the Task Force may find it likes one system contractor's technical
ability and another one's management package. If the Task Force had
specified a preferred management package in the RFP, the first company
could have bid to it and could have given the Task Force all of what it
wanted.
Another reason why the non-technical features must be explicit is
that they impact strongly on price. Obviously, public versus private
financing and 15 versus 20 year amortization periods will affect cost,
but so too will contract provision about risks and responsibilities.
Suppose the dependability-minded city in number 1 above decided to go
full service and to insure reliability by making the cost of shutdowns
great by putting a $200,000 per day damage clause in the contract. If
the system contractor knows this will be in the contract, he will certainly
build in redundancy and make the city pay for it. But if this is not
stipulated in the RFP, bidders will propose lower cost, non-redundant
systems .and will properly balk when the Task Force broaches it later.
Actually, any risk responsibility the Task Force puts upon the
system contractor will affect the contingency he will add to his bid
price and will thus affect the cost of the total system to the city. So
the city must spell out all these risk assignments in the RFP if it is
to get a true estimate of cost.
3. Dictate proposal format. The proposal procedure itself should
stress comparability by laying down ground rules for proposals that will
facilitate their eventual evaluation. The format of the proposals
should be dictated; for instance, bid price sheets and a proposal table
of contents should be included in the RFP. Of course, if the city's
definition of what it wants is vague (10 year, 20 year contract?, city
finances, company finances?), such refinements as bid sheets only give a
dangerous illusion of comparability, for the factors that are not included
on the bid sheets are far more important than the conditional numbers
that are.
The Procurement section (SW-157.5) of this Guide series discusses
the RFP process in greater detail and gives a listing of the variety of
items that might be included in an RFP, from the technical specifications,
to the bid format, to the contract. Not all items listed there are
necessary, but each should be explicitly considered by the Task Force
being excluded.
4. Require qualifications. The RFP should require that bidders
demonstrate technical and financial capability. The Task Force might
even pre-qualify bidders in cities where that is legal.
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Stressing qualifications is important because it is a rare city
that will be able to judge accurately the technical and eponomic merits
of a complex resource recovery proposal, even with the help of a consultant.
But it can hedge against the risks of escalating costs, unmarketable
products, and process breakdowns by depending on companies with demonstrable
prior experience in solid waste and resource recovery, and with the
financial capability to stay afloat through the false starts and down
periods that are inevitable.
Proven technical experience can often take the form of resource
recovery pilot plant work and large-scale solid waste operations. A
functioning plant, even of pilot-scale, is worth a thousand advertising
brochures.
Financial capability is another qualification cities should require
since performance guarantees in the contract do not help the city if
they only drive the system contractor to the bankruptcy court. In fact,
there is the danger that a small company will assume the city's disposal
function long enough for the city to lose its own disposal capability
and then find that it can not continue at its quoted disposal price.
The company can issue the valid ultimatum: "increase the dump fee or we
will go under." All the contract guarantees in the world will not make
the city's garbage disappear the next day.
The city might guard against such a scenario by hiring a company
with a solid financial background. It might require from bidders things
like a strong financial history, substantial assets (or performance bonds),
and experience with projects of comparable magnitude. Naturally, if a
subsidiary is set up locally to bid a project, the final contracts must
look through the subsidiary back to the parent company.
The above bidder qualifications should be called for and considered
in the proposals stage, but the city should address itself to this
whole question much earlier as well. If a city is sure that a potential
bidder will not meet the experience or financial qualifications, it is
foolish to allow him to enter a substantive bid. It is hard to throw
out a low bidder after he has outlined his plan, especially if the plan
has flaws which are obvious only to the technically sophisticated.
Therefore, a pre-qualifying round of bids, where allowed by law, is
a good idea. The city can zero in on a particular system concept and
call for the technical and financial qualifications of companies with
relevant experience. Then, the city can set a minimun standard and
narrow the field substantially. It must be remembered, of course, that
the remaining bidders are still not "equal" and the lowest bid should
not necessarily be accepted; rather, relative capability should still be
a criterion in the bidding round to follow, albeit a less important one.
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Non-competitive Procurement. An option open to some cities is to
bypass the RFP altogether and negotiate directly with one or a few system
designers to procure a system. These might be selected on the basis of
the RFQ competition (as discussed on page 11). In a new field like
resource recovery, it may be as wise to "go with the man," as to "go with
the system." The technologies available may be uncertain, but many
reputations are not.
A negotiated procurement allows the Task Force to engage in one-to-
one discussions phased over many months, during which time it can gain
and digest the information needed to choose a system that serves the
city's purposes and to develop the outline of a contract that protects
its interests. Such negotiations do not necessarily have to lead to a
final contract award or preclude concurrent discussions with other
companies or outside consultants. Nor do they preclude an eventual RFP,
if the city decides that many companies could provide the decided-upon
service.
Of course, in most cities, a negotiated award is probably unacceptable,
either legally or politically. Negotiated procurement has its advantages.
This is testified to by its common use by the private sector.
Proposal Evaluation. The better the RFP, the easier the job of
evaluating proposals because each company will be bidding comparable
system packages and the choice will be between "apples and apples."
Price can now play the key role in the decision: the construction price
if it is a turn-key project, or the dump fee if it is a full service project.
The Procurement section of this Guides Series discusses the evaluation
process in detail.
Contract Negotiation. In most cases, even with a good RFP, proposals
may not be comparable in all respects. Therefore, some negotiation will
be necessary. The city will have two choices:
(a) select a winner and negotiate a contract.
(b) select two or more finalists and negotiate in one of
the following ways:
(1) sequentially, beginning with the best proposer.
(2) simultaneously with all finalists.
Selecting two or more finalists is recommended to retain the proposers
in a competitive situation; and the city can retain some leverage at
the.bargaining table.
The basis for negotiations will be the preliminary contract
contained in the RFP, though deviations from it will probably be necessary
to accommodate particular needs and concerns of the finalists. Substantial
deviations should be avoided as they could appreciably affect the cost
picture and would be unfair to the bidders who have been eliminated.
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Legal and financial counsel at this stage is important, and both
the Task Force and the system contractor may wish to retain it. This is
especially true in the case of the full service approach bcause the
contract will be complicated since it must span a 15 to 20 year period
to assure a reasonable plant payback time. The contract must anticipate
the myriad of situations that could occur in this time-new technologies,
natural disasters, new laws-and make provisions for them.
City attorneys usually do not have sufficient experience in writing
contracts for long-lived, capital-intensive service facilities; they are
more familiar with short-term service contracts or outright purchases of
capital facilities. Expertise with turn-key and full service contracts
will likely be found in law firms that deal with the private sector
where long-term contracts are more common.
Financial assistance must be recruited, too, if it has not been
done already, to insure that the contract that is signed can be financed.
This can be a problem if project financing by PCRB's or municipal
revenue bonds is involved. This is because bond buyers must be convinced
that the project will succeed and that the bonds can be paid off. Not
only does this require that the technical plan get the seal of approval
from independent engineers, but that the contract between the city and
the contractor insure that a sufficient stream of revenues will be
generated to amortize the investment, even in the face of changing solid
waste and market conditions over a period of 15 to 20 years. Therefore,
provisions that may be necessary include:
a) Put or pay provisions.--requiring that the city pay for a
guaranteed minimum tonnage of waste to be processed, whether it is
delivered or not,
b) Composition change adjustments.—to compensate the plant
operators for changes in the waste stream that affect the recovered
product revenues (e.g., can bans, separate collection drives),
c) Price adjustment.--if new environmental standards require
further capitalization or more expensive operating procedures.
In effect, the city must be willing to share some or all of the
risks of such changes if construction funds are to be raised.
It is to the benefit of all parties that the contract be as explicit
as possible to avoid misunderstandings later. Terms like "recovered
resources" and "inert residue" must be defined in operational terms that
a court can understand. In the case of a turn-key approach, the standards
for acceptance of the facility after start-up must be spelled out;
requirements that the plant "perform satisfactorily" are vague and
unenforceable. Instead, a set of test procedures should be specified.
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Such precision is also necessary in the area of environmental
standards that the plant must meet. Agreements reached in advance must
include: procedures for calling for tests, responsibility for performing
the tests, and the method of correcting deficiencies.
In the case of the full service approach, it may be useful to set
up in the contract an arbitration board so that adjustments in the city-
contractor relationship can be made over the life of the contract as
required. Some contingencies are certain to be overlooked, and only an
arbitration procedure can give the project the flexibility necessary. A
threat to break the contract on a technicality is a very blunt instrument
for accommodation ten years down the road.
Construction Completion and Start-up. The construction completion
and plant start-up stages should create no problems for the city if a
reliable firm has been hired and a comprehensive contract has been
written. Technical problems may appear and may be costly to correct,
but a clear specification of responsibilities will insure that the
contractor will put his effort into solving problems rather than searching
for a way to break the contract. And troubleshooting by the system
contractor is encouraged if the contract contains financial incentives
like delay penalties and dump fees that depend on the quality of processing.
This discussion ends here because, at this stage, the city is
beginning to return to familiar ground; if its Task Force has done its
work properly, there should be no catastrophic surprises ahead.
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FOOTNOTES
1. A system designer need not be a single company, but can be a
consortium of companies acting as a single body in relation to
the city. Consortiums might include an engineering firm and a
construction firm, or an engineering firm, a construction firm, and
an operations firm, in a joint venture to handle the city's wastes.
2. Naturally, there are exceptions, such as in Monroe County, New York,
where the County is following a modified A & E approach in which a
system contractor, selected by an RFP competition, provides only
"professional services". This variation was used because the County
might have violated New York State's competitive bidding laws if the
contractor had been given formal responsibility for construction.
Another variation is a negotiated procurement of a system contractor's
services. This approach is often impossible under existing laws.
3. This table indicates only those services provided by system designers
that relate to plant design, construction, and operation. Other
services are also necessary, although they are not included in the
table. Regardless of which of the three approaches is followed, cities
will require consultants to execute a myriad of tasks, including
performing feasibility studies, surveying markets, drafting authorizing
legislation, preparing RFP's, evaluating proposals, preparing contracts,
obtaining financing, and acting as a liaison between the city and its
chosen system designer. Such services may be provided by consulting
engineers, management consultants, law firms, etc.
ya!383
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