Paving the way for privatization

Pub date July 8, 2009

City officials are considering shutting down the municipal asphalt plant — the source of material for repaving roads and fixing potholes — in order to facilitate construction of a private plant on the waterfront that the city would agree to help finance and support over the long term.

While the privatization plan is being billed by project proponents as a way to save money during tough financial times, it raises questions about whether relying on the private sector for this essential material could hurt the city’s ability to make emergency repairs and ultimately end up costing taxpayers even more.

For the cash-strapped Port of San Francisco, which will make millions of dollars leasing land for the new facility, this is unquestionably a good deal. But for the rest of the city, which is losing a potentially valuable public resource it has operated since 1909 when the first municipal plant opened, the answer is a bit less clear.

Douglas Legg, manager of finance and budget at the Department of Public Works (DPW), argues that the municipal plant is not cost-effective and that the city would pay less if it contracts with an outside vendor. In a 2006 study, Legg found that the city’s cost to produce a ton of asphalt was $75 while private plants offered it for $67.

"It’s true that E.B.I. Aggregates and Graniterock are a little cheaper because they have a market advantage: they own their own gravel quarries," admits Ben Santana, who has managed the municipal plant in the Bayview for the last 21 years. But he still thinks his facility plays an important role. "Otherwise they would have gotten rid of us long ago. We can mobilize in a few hours and city trucks don’t have to wait in line with other clients."

In the aftermath of the 1989 Loma Prieta earthquake, the municipal plant proved to be a valuable asset. "The plant wasn’t damaged. We sent our crews to take care of cracks and voids that had suddenly opened up," Santana recalls. "So the city didn’t have to go south to get material, or pay to get the private plants to open."

Indeed, in 2006, DPW held off the proposed shutdown in order to maintain its access to asphalt in emergencies. Officials worried about being dependant on plants outside city limits, especially since E.B.I. in Brisbane was slated to cease operations in the upcoming years, which would have left Graniterock potentially enjoying a monopoly that could result in price increases.

Although the agency recognizes that it has to have an asphalt plant inside city limits to function well, it is losing the political will to maintain its own. So when port officials approached DPW with their plan to attract a private asphalt operator, the threat to close down the municipal plant resurfaced.

The port has issued a request for proposal (RFP) for an asphalt-batching plant to be built on Pier 94. The selected bidder would be bound to negotiate a long-term contract with the city guaranteeing it would supply asphalt at a price tied to the Northern California asphalt price index.

The port and DPW assume the potential market for asphalt in the city will be large enough to draw private operators. But that belief seems to contradict the rationale behind the decision to close the municipal plant in the first place, which was that it couldn’t produce volumes large enough to bring the price per ton down.

"The demand from the street resurfacing program was nowhere near as high as we thought it would be," Legg says. In 2004, DPW installed two silos on the site to store hot asphalt and increase production. DPW was hoping to generate additional revenue for the department by selling asphalt to private contractors and other agencies. But two years later, Legg concluded in his report that the plant not only failed to turn a profit, it was facing a $100,000 shortfall to repay its investment.

Demand might be picking up, though: city officials expressed their intention to make up for years of neglect in the upkeep of San Francisco streets by introducing a $368 million safe street and road repair bond measure for the November ballot. The plan would boost the number of blocks to be resurfaced from 100 to 400 for the next 10 years, something that might make the city-owned plant more cost-effective. But Legg skeptically points out that the plant still requires replacement of some key components.

"Last year we had a $60 million capital budget for all capital improvement needs in the city from the general fund sources. This year, we’ve got $22 million," Legg says. "They’re scarce dollars. I can’t speak for what the Board [of Supervisors] will chose to do, but it’s challenging to get capital money."

Legg also noted the city plant’s "frequent breakdowns" and limited capacity to store raw materials, criticism countered by Santana. "The plant was modernized in 1993. Sure, some equipment does date to 1953, and I’ve been pushing to replace them for years. But it’s nothing the city can’t afford. Yes, it does sometimes go down. That’s part of operating a plant. But we’ve never run out of material because I always make sure to have some on ground or en route."

Brad Benson, project manager at the Port of San Francisco, discounts the recent limited asphalt consumption in the city, noting major development proposals in the city’s future. "Think about shipyard development, Treasure Island development, Caltrain, parking lots," Benson says. "If there’s not the demand, there won’t be bids. No one is going to invest $3 [million] to $10 million, whatever it costs to build an asphalt plant, if they don’t perceive a market."

But what might also hook prospective bidders is the provision, stated in the RFP, that the "risk capital to construct the facility (may be offset by city financing)." Benson explains that "this concept was introduced here in the midst of the financial crisis when people were having trouble finding sources of capital. The city may have access to some lower cost sources of debt."

Benson said he doesn’t know if city financing would be needed. "Obviously, the port prefers bidders that come in with their own sources of financing. That has been the model to build the neighboring concrete plants. The only reason to consider it is if the city combines lower-cost financing and could get lower cost asphalt in return. Then it might be worth doing."

It’s an interesting paradox: the city wouldn’t have funds to upgrade its plant, but would be ready to chip in to outsource?

But there are other issues driving the proposal. Karen Pierce, a Bayview- Hunters Point community activist who sits on the port’s Southern Waterfront Advisory Committee, told us she would "like to see the municipal plant move away from where people live. There needs to be a buffer area. A newer plant on port property would be further away, and we would have the opportunity to make sure it uses technologies that reduce the amount of pollution."

The municipal asphalt plant, which has never received complaints for pollution, currently incorporates 15 percent of recycled asphalt in its production. The RFP requests its potential tenant raise this amount up to 45 percent.

The proposed lot is also three times bigger than the existing one on Jerrold Avenue and has the advantage of being located near a maritime terminal where sand and gravel, the aggregates mixed with tar to produce asphalt, are imported. Also, there are two concrete batching plants and a construction material recycling center in the vicinity.

"Co-locating businesses that share each other’s products and reducing long-haul truck trips are the kernels of a broader idea for an ecoindustrial park that the port is developing in this area of the waterfront," Benson says.

If the asphalt plant project falls through, the port does have a backup plan: it is considering leasing the site to yet another concrete plant. Bids on both proposals are due in September, after which the Board of Supervisors will consider whether to close the city’s plant.