Ocacc 2017 - Toronto Garbage Collection - Case PDF

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Ontario College Accounting Case Competition 2017 Toronto Garbage Collection East of Yonge Street: To Privatize or Not

Ontario College Accounting Case Competiton 2017

Toronto Garbage Collection East of Yonge Street To Privatize or Not “It’s a simple question so why can’t I get a simple answer? Should we privatize garbage collection in the remaining two districts of the city or not?” That was what the mayor’s office wanted Kathryn Winslet, CPA to answer. Kathryn was the chief financial analyst for the City of Toronto’s Solid Waste Management (SWM) department and it was her department that was given the job of examining the option of privatizing garbage pickup in the remaining two districts in Toronto east of Yonge Street. If either or both of the remaining districts were to be privatized, the contracts would begin in 2017 and run for 7 years. Curbside garbage pickup west of Yonge Street (Districts 1 and 2) was privatized starting in 2011 under the previous mayor and now the decision whether or not to privatize one, both, or neither of the remaining two districts, Districts 3 and 4, had to be resolved. See Exhibit 1 for maps of the districts. There were many opinions on the matter and Kathryn knew she had to make a recommendation based upon both quantitative and qualitative factors. She looked through the information she and her team had collected and began the analysis. Current Data Privatized curbside collections west of Yonge Street began in 2011 so there was some data which could be examined and used to help with the current analysis. Since there has not been an official RFP1 created for the possible privatization of Districts 3 and 4 Kathryn looked at the bids they had received when the RFPs for Districts 1 and 2 were sent out. When analyzing the districts Kathryn determined that for the purpose of her analysis she would be able to compare Districts 2 and 3 with each other due to their similarity in nature and complexity even though there was a difference in the total amount of garbage collected. She would also compare Districts 1 and 4 with each other due to their similarity in nature and complexity even though there was a difference in the total amount of garbage collected. Exhibit 2 has the bid details that were received for Districts 1 and 2 when the RFPs went out in 2011 and 2014. Exhibit 3 has a summary of the current curbside collection service providers. Exhibit 4 contains details regarding the number of customers, curbside stops, and estimates of the tonnes of garbage collected in 2014. Almost all of the night collection routes are in Districts 1, 2, and 3. District 3 also includes the Toronto Island/toxic taxi garbage collection and that cannot be separated if collection in the district is privatized. That is, District 3 cost estimates will include the Toronto Island/toxic taxi garbage collection. Costs if In-House Garbage Collection is Continued for District 3 and 4 Kathryn examined the previous 3 years of city costs for Districts 3 and 4 (2014 to 2016) and would use these as the basis for estimating what it would cost the city to keep the garbage collection in house from 2017 to 2023. Her estimates would include a 2%/year increase which was consistent with the past 3 years. Exhibit 5 has the costs for Districts 3 and 4 for the past 3 years. Costs if Districts 3 and/or 4 are Privatized Kathryn was having some difficulties estimating what the cost for contracting out District 3 and/or 4 would be since there were no formal RFPs issued and therefore no actual bids to compare. She had the information from the 2011 and 2014 bids and was thinking about how to make a reasonable estimate for possible contracts which would run from 2017 to 2023.

1 RFP – Request for Proposal. This is the request by the city to ask companies to bid on the proposed garbage collection. The city provided a list of requirements in the RFP and companies submitted their bids based upon the RFP.

Although there were no official RFPs issued yet, Kathryn did have some informal conversations with some of her colleagues in other municipalities who have also privatized some or all of their garbage collection. “You have to be careful when you are negotiating and make certain you are taking a long term perspective.” one of her colleagues told her. “The contract terms are for 7 years but you need to think about the 7 years after that as well.” When discussing the garbage collection specifics of the two districts east of Yonge Street her colleagues thought the contractor bids might come in at between $20,750,000 and $25,750,000 per year for District 3 and between $16,500,000 and $21,500,000 per year for District 4. These would be the 2017 bids for the first year of the 7 year contract. Kathryn was surprised at how much higher the District 4 costs might be compared to when the first bids went out for District 1 in 2014. If the garbage collection was privatized the city would have expenses involved with re-deploying or terminating the existing employees. Some could be re-deployed to other departments to replace existing contract or seasonal workers but most would not. Kathryn collected the information from the Human Resources department and summarized the data in Exhibit 6. If the garbage collection for District 3 and/or 4 was privatized then the city would no longer need the garbage trucks they currently have. The current fleet of trucks would be sold and there would also be the annual maintenance and equipment replacement savings. Kathryn knew that it would take some time to sell all of the trucks so she decided to assume that they were sold evenly throughout the life of the contract. Therefore she estimated that there would be an average maintenance savings of $2.4 million per year per district. In addition, the sale of the trucks would bring in approximately $2.4 million per year per district. Both of these inflows would take place during the 7 year life of the contract and by the end of the contract all of the trucks will have been sold. If one or both of the districts were privatized the city would still have to monitor the contracts to ensure compliance, process payments to the contractors, etc. Kathryn estimated that this would total $835,000 per year per district. Other Considerations Kathryn knew that there was going to be more to this decision than just the numbers. The topic of garbage privatization in the city was a very political issue. There were very strong views on both sides and she wondered how much, if any, weight she would need to give to these factors. See Exhibit 7 for a summary of some of the advantages and disadvantages of privatization from the EY Independent Review - 2015. Privatizing the remaining two districts would be a big commitment by the city and Kathryn wondered what, if any, consideration she should give beyond the seven years this contract would cover. Exhibit 8 contains some articles for and against privatization. Exhibit 9 is the present value table and Kathryn will use a 3% cost of capital. There are no tax considerations since Toronto is a municipality. Required In two hours Kathryn has to make a presentation to the mayor’s office with her recommendations on whether or not to privatize garbage collection in Districts 3 and/or 4. The city is looking at privatizing one of the districts, both of the districts or neither of the districts. She knows she will have to back up her recommendations with the evidence and be ready to answer any questions the mayor’s office will have.

Exhibit 1 Toronto Garbage Collection Districts2

District 1

District 2

Exhibit 2 Bids Received for Districts 1 and 23 District 1 Bids – From 2014

District 2 Bids – From 2011

2 3

EY Independent Review – 2015 ibid

District 3

District 4

Exhibit 3 Current Curbside Collection Providers4

Exhibit 4 Curbside Collection Stops by Customer Type/Total Garbage Collected – 20145

4 5

Solid Waste Management (SWM) Report – September 2015 ibid

Exhibit 5 Districts 3 and 4 Collection Costs – 2014 to 20166

Exhibit 6 Estimated Employee Termination Costs7 District 3 – 217 Employees Would Be Terminated 89 of Which Have 15 Years or More of Seniority

District 4 – 23 Employees Would Be Terminated HR Estimates This Would Be Completed in 1 Year

6 7

ibid EY Independent Review – 2015

Exhibit 7 Some Privatization Advantages and Disadvantages8

8

EY Independent Review – 2015

Exhibit 8

City workers made up of

Exhibit 9 Present Value Table...