Administrative Report
Date: April 18, 1997
Dept. File No.: 4604-8
C.C. File No.: 3758-1/1801-1
TO: Standing Committee of Council on Planning and Environment
FROM: General Manager of Engineering Services
SUBJECT: Award of Contract No. 9701: Processing and Marketing of
Residential Recyclable Materials
RECOMMENDATION
THAT Council authorize acceptance of the bid from Browning-Ferris
Industries Ltd. at an approximate minimum annual tender value of
$7,380 (annualized net revenue to the City based on December 1996
market prices) and an approximate upper annual tender value of
$143,500 (annualized net revenue to the City based on December 1996
market prices) to process and market the City s residential
recyclable materials for a two-year term, with options for three
one-year extensions by mutual agreement, subject to a contract
satisfactory to the Director of Legal Services.
COUNCIL POLICY
The policy of Council is to award contracts for the purchase of
equipment, supplies, and services that will give the best value to the
City based on quality, service, and price.
SUMMARY
On February 10, 1997, three bids were submitted for the City's contract
to process and market residential recyclable materials, which is a
complicated tender that is based on fixed and variable unit prices. Two
of three tenders - one submitted by Browning-Ferris Industries Ltd.
(BFI) and the other submitted by International Paper Industries Ltd.
(IPI) - were short-listed for further examination.
Further examination of both bids reveals that each bid has certain
advantages and disadvantages over the other. While the IPI bid is
expected to provide the City with roughly $8,600 higher annual recycling
revenues over the two-year term of the contract than the BFI bid, the
BFI bid is operationally superior since BFI s proposed receiving
facility is a more favorable site than IPI s. Further, there is
considerable risk that the IPI site may not be suitable for use under
the processing and marketing contract. Therefore, since the IPI bid is
expected to provide only marginally higher recycling revenues than the
BFI bid, the IPI bid is not the preferred bid.
Consequently, the BFI bid is the most favorable and least risky bid
satisfying all the requirements of the tender documents and is
recommended for award of the contract.
PURPOSE
The purpose of this report is to seek Council s authorization to award
the above-noted contract to Browning-Ferris Industries Ltd. (hereinafter
referred to as BFI).
BACKGROUND
The City currently collects recyclable materials through three recycling
programs: the Blue Box program; the Apartment Recycling Pilot Program;
and the Mini-Depot drop-off program. These programs generate roughly
16,100 tonnes of recyclable materials per year, which consist of the
following recyclable material categories: old newspapers (ONP); mixed
paper products (MPP); and mixed containers (MCO). The ONP category is
further split into two different categories to allow the City to benefit
from the higher revenues that are associated with the high quality ONP
that is typically collected by City crews. These two categories are:
(1) No. 8 ONP (high-grade); and, (2) No. 6 ONP (common-grade).
On January 1, 1997, the GVRD implemented a landfill disposal ban on all
recyclable old corrugated cardboard (OCC), which affects both the
residential and I,C&I (industrial, commercial, and institutional)
sectors. As a result of this disposal ban, the amount of OCC recovered
by these sectors should increase significantly in the near future.
Hence, to accommodate the expected increase in OCC volumes, the City
will be adding capacity to each of our six mini-depot sites by adding
new, separated OCC containers.
Although the City performs its own recycling collection services, we do
not perform the processing and marketing services that are required to
sell these materials on the open market. Rather, the City contracts
these services out to private industry through a "processing and
marketing of residential recyclable materials" contract. Under this
contract, the contractor is required to provide the following basic
services:
1. operate a receiving facility within City boundaries to receive,
weigh, and grade recyclable materials; and,
2. transfer the recyclable materials from the receiving facility to an
approved processing and marketing facility such that the materials
may be sold on the open market to be made into new products.
Form of Tender
The processing and marketing contract is a unit price contract
($/tonne), and monies due to either party (depending on bid prices and
market conditions) under this contract are settled on a monthly basis.
The tender is structured such that the unit prices of the four fibre
materials - ONP No. 8, ONP No. 6, MPP, and OCC - are tied to published
monthly market indicator values. (The Newstech indicator is used for
ONP and the Paper Recycler indicator is used for MPP and OCC.) Each
tenderer is required to submit a fixed market indicator adjuster value
(either negative or positive) for each of ONP No.8, ONP No. 6, MPP, and
OCC, which is added to the appropriate market indicator value in a given
month to determine the actual monthly unit price for a particular fibre
material. As the market indicator values fluctuate on a month-to-month
basis in response to changing market conditions, the actual unit prices
of ONP No.8, ONP No. 6, MPP, and OCC will also fluctuate. For example,
if the Newstech indicator goes up in value from one month to the next,
the calculated unit price of ONP would also rise. Also, to reduce the
City s exposure to the downside risk associated with falling market
indicator values, each tenderer is required to submit a guaranteed fixed
floor value for each of ONP No. 8, ONP No. 6, MPP, and OCC. (Positive
fixed floor bid prices represent absolute minimum revenue per tonne
payable by the Contractor to the City, whereas negative fixed floor bid
prices represent absolute maximum cost per tonne payable by the City to
the Contractor.) Therefore, if the calculated unit price (i.e., the
market indicator value minus the fixed market indicator adjuster value)
of a particular fibre category is less than its fixed floor value, then
the fixed floor value will be used for that given month.
(To illustrate how the fixed floor value, fixed market indicator
adjuster value, and market indicator value works under varying market
conditions, three examples have been provided in the appendix.)
Unlike the four fibre recyclable material categories, MCO is not tied to
a market indicator value (principally because MCO is made up of a
combination of dissimilar materials for which no published indicator
value is available). As a result, a fixed market indicator adjuster
value is not required for MCO; rather, the unit price per tonne of MCO
is fixed for the duration of the contract, regardless of market
conditions.
Finally, each tenderer is required to submit a fixed price per tonne for
contaminated loads, which are loads of recyclable materials that contain
excessive amounts of non-recyclable materials. These contaminated loads
are defined as Mixed Loads and account for roughly 2% of the City s
annual tonnage of recyclable materials.
Existing Processing and Marketing Contract
The City s current processing and marketing contract with BFI began on
May 1, 1995 and is set to expire on April 30, 1997. Upon expiration,
this contract will have generated recycling revenues of $1,760,000
during its first year and approximately $890,000 during its second year.
This compares quite favorably to previous processing and marketing
contracts, which all resulted in net costs to the City. However,
significant revenues of this nature are unlikely to be seen again in the
near future, as the market prices of most recyclable materials have
dropped substantially over the last eighteen months and are unlikely to
reach the record highs that were achieved in 1995 during the two-year
term of this contract. These expectations are evident in the relatively
conservative bid prices of the latest processing and marketing tenders,
which are outlined below.
BID EVALUATION
Three tenders were submitted and opened on February 10, 1997 for the
processing and marketing of residential recyclable materials and were
evaluated based on the following two principal criteria:
1. the financial impact on the City s existing and future
recycling programs; and,
2. the layout and design of the proposed recycling receiving
facility.
Financial Impact on the City s Recycling Programs
The bid prices of each of the three submitted tenders are shown in Table
A1 in the Appendix.
Although each of the three bidders is fully qualified and capable of
performing the work outlined in the tender documents, the bids submitted
by both BFI and IPI are financially superior (i.e., they both provide
the City with net revenues, rather than net costs as per the ETL bid).
Accordingly, the BFI and IPI bids were short-listed for further
examination.
Upon first glancing at the calculated annual tender values of Table A1,
it appears that IPI s bid is financially superior to BFI s (since IPI s
upper and lower annual tender values show higher net revenues to the
City than the BFI bid). But upon further examination of the bid prices,
the following details become apparent:
1. The BFI and IPI bid prices for MPP, MCO, and OCC are reasonably
similar; however, the BFI bid prices would result in a lower net
annual cost to the City than the IPI bid prices (i.e., the BFI bid
prices for MPP, MCO, and OCC would result in a net annual cost to
the City of $237,940, whereas the IPI bid prices would result in a
net annual cost to the City of $251,875).
2. The BFI fixed bid price for Mixed Loads is far superior to IPI s:
IPI would charge the City $60/tonne (i.e., their fixed bid price is
- $60/tonne) and BFI would charge the City $20/tonne (i.e., their
fixed bid price is - $20/tonne). As the City s existing recycling
programs generate roughly 350 tonnes of Mixed Loads per year
(annual generation rates are shown in Table A1 in the Appendix),
these price differences result in an extra annual cost of $14,000
under the IPI bid.
Although Mixed Loads currently only account for 2% of the City s
annual recyclable materials, they are likely to increase to 5% upon
the expansion of the apartment recycling program (e.g., 2% of the
existing annual tonnage of 16,100 plus roughly 10% of the future
annual apartment recycling tonnage of 10,000 equals 1,350 tonnes of
Mixed Loads per year, or 5%), since contamination levels are
typically much higher for multi-family residences. Under this
scenario, the IPI bid would result in an extra annual Mixed Load
cost of $54,000 versus the BFI bid.
3. The BFI and IPI bid prices for ONP are significantly different: the
fixed floor values of IPI s bid are superior to BFI s, whereas the
opposite is true for the adjuster values. (IPI s fixed floor value
bid price for ONP No. 8 is significantly higher than BFI s; in
fact, it is nearly two times larger than BFI s and nearly three
times larger than ETL s, as shown in Table A1 in the Appendix.)
Further analysis of the above ONP bid prices reveals that the IPI
bid would be more favorable to the City (i.e., they provide more
revenue to the City) if the average monthly market price of ONP No.
8 is below $90/tonne for the duration of the contract. Conversely,
the BFI bid would be more favorable to the City if the average
monthly market price of ONP No. 8 is greater than $90/tonne. (The
current market price of ONP No. 8 is $83.50/tonne and is expected
to drop to $60.50/tonne on May 1, 1997.) Forecasting whether or
not the average monthly market price of No. 8 ONP is expected to
exceed $90/tonne for the duration of the contract is a difficult
task, since recovered paper markets are influenced by several
economic and psychological factors. Therefore, Engineering
Services sought the services of an industry analyst who has several
years experience with analyzing and forecasting recovered
wastepaper markets.
Engineering Services obtained reports from two independent
consulting firms:
(i) Franklin Associates Ltd.; and,
(ii) Resource Information Services Inc.
Franklin Associates Ltd. provided very conservative estimates for
future ONP prices. They forecast the average market price of No. 8
ONP to be $75/tonne in 1997 and $83/tonne in 1998. On the other
hand, Resource Information Services Inc. (RISI) believes that the
ONP market will gain significant momentum through the next two
years. They forecast the average market price for No. 8 ONP to be
$80/tonne in 1997 and $190/tonne in 1998. Using (a) the Franklin
and RISI No. 8 ONP market price forecasts, (b) the December, 1996
market price for MPP (c) the actual floor and adjuster values as
submitted by BFI and IPI and shown in Table 1, and (d) the
estimated annual tonnage of each material (as shown in Table A1 of
the Appendix), the estimated annual tender values of both bids are
shown in the following table. Also shown in Table 1 is the annual
tender values of both bids using the actual April, 1997 Newstech
price for No. 8 ONP of $83.50/tonne.
Table 1
Tenderer 1997 1998 Total Two-Year Average
Annual Annual Two-Year Tender Value Annual
Tender Tender Tender Difference Tender
Value Value Value Value
Difference
Using data supplied by Franklin Associates Ltd.
BFI +$ 87,060 +$140,180 +$227,240 -- --
IPI +$158,725 +$158,725 +$317,450 +$ 90,210 +$ 45,105
Using data supplied by Resource Information Services Inc.
BFI +$120,260 +$850,660 +$970,920 -- --
IPI +$158,725 +$743,045 +$901,770 -$ 69,150 -$ 34,575
Using actual April, 1997 Newstech price for No. 8 ONP
BFI +$143,500 +$143,500 +$287,000 -- --
IPI +$158,725 +$158,725 +$317,450 +$ 30,450 +$ 15,225
NOTE: The superior tender values are shown in bold and italics in the
above table.
Unfortunately, this data produces conflicting results: (a) the
Franklin data produces a financially favorable IPI bid; (b) the
RISI data produces a financially favorable BFI bid; and (c)
existing price data produces a financially favorable IPI bid.
Hence, these results suggest that using market price projections
to evaluate the bids does not produce convincing conclusions.
However, assuming that each of the above three scenarios have
equal probability of occurring (i.e., each has a 33.3% chance of
occurring), Engineering Services expects that the IPI bid will
provide the City with roughly $8,600 more annual recycling
revenues than the BFI bid.
In conclusion, the two bids have their financial strengths and
weaknesses and, as a result, neither is financially superior over
the other. Notwithstanding, the IPI bid is expected to provide
the City with marginally higher recycling revenues.
Layout and Design of Proposed Receiving Facility
As the success of the processing and marketing contract is
largely attributed to the proper layout and design of the
receiving facility, each bidder s proposed receiving facility was
fully evaluated.
BFI s Receiving Facility
BFI s proposed receiving facility which is currently being used
exclusively by the City under the current processing and
marketing contract is a large, open site that clearly meets
all the conditions and requirements of the contract documents.
On April 4, 1997, the City Planning Department granted BFI a
two-year development permit extension for this site. Hence, the
BFI site would be fully operational by the May 1, 1997
commencement of the contract. - 2 -
IPI s Receiving Facility
Unlike BFI s receiving facility, IPI s proposed receiving
facility has never before been used by the City; consequently,
this site required extensive examination.
To fully evaluate the IPI site, the City performed a five-day
pilot study at the site by diverting our recycling trucks from
the existing BFI contract. This study allowed us to test the
design and layout of the IPI site to ensure that the conditions
and requirements of the contract documents would be fully
satisfied. By the end of the pilot study, several concerns were
identified, as follows:
1. The site is extremely narrow and, as a result, our trucks
often had difficulty maneuvering around the site. (This
problem became notably worse during busy periods when, for
example, more than ten trucks arrived at the site at the same
time.)
2. The site is not operated for the exclusive use by the City.
That is, the site is open to other recycling trucks, which
had the occasional effect of restricting our recycling trucks
from entering, off-loading, and exiting the site in a fast,
efficient manner. (This problem could become worse if
apartment recycling is fully expanded and utilizes this
contract for processing and marketing, since the number of
recycling trucks using the receiving facility would increase
from twenty to roughly thirty-five).
3. Due to excessive noise levels that emanated from the IPI site
during the pilot study and complaints from adjacent neighbors
about noise generated from IPI's usual operating conditions,
the Planning Department is imposing new conditions on the
site that significantly limit the site s suitability for the
processing and marketing contract. This is described in more
detail below.
The noise levels that were generated at the IPI site during
the pilot study were notably loud. Consequently, Engineering
Services obtained the services of the Environmental Health
Division (EHD) of the Vancouver Health Board to perform a
noise compliance study to determine whether or not the Noise
Bylaw was being violated. The results of the EHD study
indicated that, under the current operating conditions of the
site, the noise levels that were being generated during the
pilot study were exceeding the maximum permissible levels as
governed by the Noise Bylaw. In fact, the EHD determined
that, during the pilot study, certain continuous noise
levels (e.g., the backup beepers of the City recycling
trucks) exceeded the Noise Bylaw by more than 5%, while
certain non-continuous noise levels (e.g., the dumping of
mixed containers) exceeded the Noise Bylaw by as much as 25%.
Accordingly, the EHD noted that if IPI was awarded the
contract, the noise levels that would be generated at this
site would likely exceed the sound limits of the Noise Bylaw.
As a result, the EHD recommended to both the Planning
Department and Engineering Services that the north exit gate
to the site remain permanently closed to reduce the noise
levels at those surrounding properties that are most
affected. However, this recommendation makes the IPI site
far less attractive, since the pilot study showed that
separate entrance and exit gates at this site allow the most
efficient flow of traffic into and out of the site.
Otherwise, the site becomes far too restricted.
In response to the EHD s recommendations, IPI submitted two
acoustical engineering reports to the Planning Department
(who in turn submitted the report to the EHD for comments) to
address the noise concerns at this site. Upon reviewing
these reports, the EHD concludes that the recommended noise
mitigation measures outlined in the acoustical engineering
reports could likely achieve the desired results, but the
north exit gate should remain closed to further reduce noise
levels. As a result of the EHD s conclusions, the Planning
Department will be imposing the following conditions on an
existing IPI temporary development permit, regardless of
whether or not IPI is awarded the processing and marketing
contract:
(i) The gate that is located at the north-west corner
of the lot must be removed and replaced with a
permanent, sound proof fence. This fence will act
as a barrier to noise and would restrict any
vehicles from using the lane that exits at the
existing gate location.
(ii) Noise mitigation measures will be required such
that all continuous noise levels do not exceed the
70 dBA and all non-continuous noise levels do not
exceed 75 dBA (as per the City Noise Bylaw). The
scalehouse development permit will be granted on a
six month temporary basis, at which time the
Planning Department will reassess whether or not
the above noise levels have been complied with.
These two new development permit conditions pose significant
risk to the City's recycling operation if IPI is awarded the
processing and marketing contract, since the noise mitigation
measures outlined in the acoustical engineering reports are
not guaranteed to be successful. If the noise levels are
excessive, the Planning Department may determine six months
into the contract that IPI s receiving facility is no longer
permitable for use. Consequently, the City would have to
find an alternative, interim receiving facility until a new
processing and marketing contract could be tendered, which
could potentially result in significant extra costs to the
City. Although a $250,000 performance bond will form part of
this contract, it should not be considered to eliminate the
above-noted risk.
The EHD performed a similar noise compliance study at the BFI
site. The results of this study indicate that the noise
levels generated at the BFI site are within acceptable
levels. Although the operations at the IPI site would be
similar to those at the BFI site, the sound levels that are
generated at the IPI site are significantly different due to
the site s particular location the IPI site is located
directly beneath the Oak Street bridge, which tends to
amplify the sounds that emanate from the operations below.
In conclusion, due to the three concerns discussed above, IPI s
proposed receiving facility is far less attractive than BFI s.
IMPACT OF BOTTLE DEPOSIT LEGISLATION ON RECYCLING OPERATIONS
On April 7, 1997, the Provincial Government released news that
the Province's 27-year-old deposit/refund system for beverage
containers will be expanded in April 1998 to include all
ready-to-drink beverages with the exception of milk and milk
substitutes. Currently, only beer, cider, coolers, and some soft
drink beverage containers carry deposits. However, under the
expanded system, beverages that will carry a deposit in 1998
include bottled water, all carbonated and non-carbonated drinks,
ice teas, wine, spirits, thirst quenchers, fruit and vegetable
juices. The expanded system will involve a shift from a
primarily retail-based collection system to a permanent
province-wide depot system and will include a number of
collection methods, such as reverse-vending machines and mobile
collection depots.
Since many of the existing non-deposit beverage containers are
currently accepted and collected in the City's recycling
programs, an expanded deposit/refund system could ultimately
result in less tonnage and volume of recyclable material to be
collected by the City, which could potentially result in lower
recycling costs (since containers are typically the most
expensive material to process and market). However, this result
would only be achieved if the proposed province-wide depot system
is implemented in such a way that would make returning the
beverage containers very convenient for generators. Conversely,
if the depots are not convenient, then the opposite effect could
occur. The processing and marketing tender documents noted that
the bottle deposit legislation was likely to change and, as a
result, the mixed container tonnages would also likely change.
As both BFI and IPI had similar bids for mixed containers (MCO),
the expanded bottle deposit legislation is not a factor in
determining the preferred bid.
CONCLUSIONS
Bid No. 1, the tender submitted by BFI, is the most favorable and
least risky bid satisfying all the requirements of the tender
documents and, thus, is recommended for award at an approximate
lower annual tender value of $7,380 (annualized net revenue to
the City based on December 1996 market prices) and an approximate
upper annual tender value of $143,500 (annualized net revenue to
the City based on December 1996 market prices).
* * * * *
The three examples that follow are based on the following
assumptions of bid prices and initial market conditions:
(a) fixed floor bid price for No. 8 ONP = + $50/tonne
(b) fixed market indicator adjuster bid price for No. 8 ONP =
- $20/tonne
(c) Newstech market indicator as for the month of April, 1997
= + $83.50/tonne
Example 1: Assume market conditions remain unchanged and the
Newstech value holds constant at $83.50/tonne for
the month of May, 1997. Under this condition, the
actual contract price for No. 8 ONP for the month
of May, 1997 would be the greater of:
(i) the fixed floor value = $50/tonne; or,
(ii) the Newstech value plus the fixed market
indicator adjuster value ($83.50/tonne +
(- $20/tonne)) = $63.50/tonne.
Thus, the actual contract price for No. 8 ONP for the month of
May, 1997 would be $63.50/tonne (net revenue to the City).
Example 2: Assume market conditions improve and the Newstech
value rises to $100.00/tonne for the month of May, 1997. Under
this condition, the actual contract price for No. 8 ONP for the
month of May, 1997 would be the greater of:
(i) the fixed floor value = $50/tonne; or,
(ii) the Newstech value plus the fixed market
indicator adjuster value ($100.00/tonne +
(- $20/tonne)) = $80.00/tonne.
Thus, the actual contract price for No. 8 ONP for the month of
May, 1997 would be $80.00/tonne (net revenue to the City).
Example 3: Assume market conditions worsen and the Newstech
value drops to $40/tonne for the month of May,
1997. Under this condition, the actual contract
price for No. 8 ONP for the month of May, 1997
would be the greater of:
(i) the fixed floor value = $50/tonne; or,
(ii) the Newstech value plus the fixed market
indicator adjuster value ($40.00/tonne +
(- $20/tonne)) = $20.00/tonne.
Thus, the actual contract price for No. 8 ONP for the month of
May, 1997 would be $50.00/tonne (net revenue to the City). Note
that the contract price cannot fall below the fixed floor value.
In the following table, the actual bid prices are shown in
columns "C" and "D", and the calculated tender values are shown
in columns "E", "F", and "G". Also, a "+" sign indicates net
revenue to the City, whereas a "-" sign indicates a net cost to
the City.
The upper annual tender values in column "G" of Table 1 are based
on actual recyclable material market prices that were paid to
processors during December, 1996. As these prices are expected
to fluctuate on a monthly basis, the actual annual tender values
are expected to be either higher or lower than those noted above;
however, they will not fall below their respective lower annual
tender values in column "F" (assuming that the material tonnes
per year in column "A" do not fluctuate).