POLICY REPORT
OTHER
Date: July 9, 1997
CC File: 3756
TO: Vancouver City Council
FROM: General Manager of Engineering Services
SUBJECT: City Solid Wastes Container Services
RECOMMENDATION
A. THAT Council receive the Ernst and Young report "Lift-on-Board
Container Service Study" for information.
B. THAT Council authorize the continuation of the City s
Container Service into 1998, with continuation in future years
subject to annual reporting on business operations.
C. THAT Council authorize the establishment of a temporary
Manager's position and temporary Container Marketing position
with classification subject to approval by the General Manager
of Human Resources.
D. THAT the 1997 costs of $69,000 be funded from Contingency
Reserve and the ongoing annual cost of $139,000 be funded from
the revenues from the City's Solid Waste Container Services.
GENERAL MANAGER'S COMMENTS
The General Manager of Engineering Services notes that the Solid
Waste Container Operation represents a small example of a public
service which has been viable in the past. Furthermore, it also
represents a good example of a service which must change if it is
to survive in a fully competitive environment. This change will
not be easy and may not be successful. It requires the cooperation
of all staff, including the Union, to make it work. However, staff
are fully committed to undertake, with Council support as required,
the necessary work to improve the effectiveness and efficiency of
the operation.
COUNCIL POLICY
In January 1991, City Council adopted a general policy which stated:
That every Department/Board review services for which fees are now
charged to ensure that fees are recovering the full cost of the
services to the City, or are equivalent to competitive charges
where the fee is of a market nature, rather than for cost recovery.
Where this is not the case, Department/Boards should report to
Council on the adjustment that would be required. In order to
ensure consistent treatment between departments, fee increases for
existing services should not be considered for a suitable source of
funds for unrelated new or expanded services.
There is no formal City policy with respect to the City's refuse
container operation. The practice has been for the operation to break
even annually in terms of costs and revenues although, in the recent
past, there have been excess annual revenues which have been returned to
the City s Operating Budget.
PURPOSE
The purpose of this report is to review the consultant's report on the
future of the City's Solid Waste Container Service and to seek Council
approval for the City to remain in the business.
BACKGROUND
The City of Vancouver has operated a front-end type container service
operation since 1960. Almost 50% of the City's business (700
containers) is generated by industrial, commercial and institutional
customers. In this area, the City competes directly with the private
sector. The remaining 50% of the City's business is with strata and
co-op multi-residential buildings.
At present, strata and co-ops receive free garbage collection for their
containers (although they pay for container rental and charged for extra
dumps). This practice is to ensure equity between owners in apartments
in comparison with owners in single family homes. Under this
arrangement, the City has a competitive advantage and about 70% of the
strata/co-op customers elect to receive their container service from the
City.
With the proposed introduction of the Solid Waste Utility in 1998, all
residential properties will receive a reduction in property taxes and
will pay user fees for garbage collection. For single family homes, the
user fee will appear on their annual property tax bill and the City will
continue to provide the service. Strata properties will pay their
collector directly for garbage collection. They may opt to continue
receiving service from the City, or they may choose to utilize a private
hauler for this service if they feel the price and/or service is better.
To enable the City to compete for this business, it is important City
crews be allowed to charge rates reflective of the lower cost of good
customers also. It is the possibility that the City might lose this
business to the private contractors and thus affect the overall
financial viability of the containerized garbage collection operation,
that has prompted this report.
The Container Operation is supported by user fees of $2.3 million and
property taxes of $1.3 million. The total cost of the Container
Operation is approximately $3.2 million. In the last five years, the
operation has returned over $1.5 million in profits to the City,
including a 1996 surplus of $387,000. In addition, in 1996
approximately $100,000 in overhead costs were distributed to this
operation.
The annual surplus, or profits, traditionally have been assigned to the
City's operating budget to help offset the City's overall expenditures.
The presence of the City in this business dominated by private
contractors has increased the competition. Being directly involved has
also considerably helped the City keep abreast of business practices and
customer issues.
Given concerns with the future financial viability of the operation, it
was decided to undertake a comprehensive review of the business. This
review by an outside consultant would determine whether or not it is
advisable to continue the operation and if a decision was made to
continue, what changes are required. Council was advised in September,
1995 on the need for the consultant review as a part of the Solid Waste
Utility discussions.
In addition, the Container Service review was identified as one of the
Better City Government initiatives.
DISCUSSION
Ernst and Young, Management Consultant, was retained to undertake this
review in consultation with City Staff.
The primary purpose of this study was two-fold. Firstly, the study was
to determine if the Container Operation can remain financially viable,
on a total cost recovery basis, in a fully competitive marketplace.
Secondly, a business plan was to be developed laying out steps the City
should take to ensure the operation remain financially viable in the
long run or, if this is not possible, steps the City should take to exit
the business. Other jurisdictions were examined to determine if
alternative options existed.
In order to effectively compete in the container service business, the
consultant identified several key "success factors". These include:
Very often service becomes the most critical factor as managers
"want 'no hassle' waste management services at a fair, but not
necessarily lowest, price".
It is important to establish a customer base to maximize the
utilization of semi-fixed costs and allocate fixed overheads.
It is important to have aggressive marketing skills.
Management must have an understanding of market shifts and
operating costs including an ability to respond to changing needs.
All competitors will need to provide recycling services in the
future.
There must be an "autonomy to make decisions on pricing, staffing,
equipment inventory and other key operating issues".
In conclusion, the consultant stated that the container operation can
remain viable in a fully competitive market if key changes are made.
These changes are identified in Appendix A. The consultant concludes by
stating:
"To compete in a fully competitive market, it is crucial that the
City Container Operation address its weaknesses in operational
flexibility in autonomy by obtaining the ability to:
1. charge variable prices to customers that reflect differing
costs to provide service
2. sign longer term service contracts with customers
3. purchase equipment as needed through a more effective process
than the existing City procurement process."
In order to break even, the consultant recommends that the container
service retain 30% of the strata/co-op business (the City currently has
70%) and increase its market share of the commercial business from about
10% to 12%. Failure to achieve these levels of business will result in
operating losses.
Appendix A briefly outlines the proposed improvements recommended by the
consultant. The intention is that the new Operation manager, using
these proposed improvements as a guide, would develop a "Business Plan",
and report back as required to City Council on the implementation
decisions. The consultant indicates that by implementing these
improvements, there is a potential to earn $600,000 to $700,00 in annual
surpluses. The consultant reviewed other scenarios also, including an
exit option, if the new operation is not viable in the long term.
The objective, if approval is given to proceed, is to maintain a
profitable operation (net return to the City) and retain a market share
of around 12% or more. If we are unable to maintain market share and
incur losses, then the City should exit the business in favor of a 100%
private sector service. There would be some costs to exit the business
and these are estimated to be around $100,000 following the sale of the
remaining assets.
Management and Operating staff are committed to make changes in the
Operation, recognizing that there is a potential that these measures may
not be successful. It is further recognized that the financial downside
is manageable, particularly in light of the past returns to the City.
PERSONNEL IMPLICATIONS
The report recommends the hiring of a manager and marketing person in
order to aggressively proceed with the development of a business plan
and the changes as recommended by the consultant. These positions will
initially be temporary in order to maximize the City's flexibility. The
new manager and the marketing positions would be subject to
classification review by the General Manager of Human Resource Services.
In addition to the new positions, it is also important to address the
need for change in the operating staff resources. The City needs to
improve its labor practices by achieving greater productivity, reduced
absenteeism, and more flexible, broader job descriptions. This requires
direct negotiations with the Union.
FINANCIAL IMPLICATIONS
The cost implications for the additional staff and related support
equipment are detailed in Appendix B. The annual operating costs are
estimated to be $139,000 and the 1997 costs are estimated at $69,000.
The 1997 operating surplus from the container service has already been
accounted for in the 1997 Operating Budget. As a result, the 1997 cost
of $69,000 needs to be funded from Contingency Reserve. In future
years, the increased costs would be budgeted and funded within the
container operations function.
It is expected that there will be an operating surplus in 1997 and in
future years if the business changes are successfully implemented. If
completely successful, the consultant estimates that profits of between
$600,000 to $700,000 are possible within two years.
The issue of an exit strategy is raised in the event the City
determines, based on subsequent operational experience, that it is not
possible to make a profit, or at least break even. The exit strategy
would consist of selling off the container truck fleet and garbage
containers (one, two and three-yard units). It is anticipated that the
City would recover most of the depreciated value of this equipment
inventory (noting that the three proposed replacement container trucks
would result in a net cost of $25,000 per truck if they are disposed of
after less than a year s service).
CONCLUSION
If the City Solid Waste Container Operations are to remain competitive
in a full user pay system, a number of changes must be made to the
business. A consultant's analysis and report on the operation provides
guidance on the areas of change. Staff are committed to this change
and, if successful, the container operations can remain viable and
profitable.
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