October 17th, 2014

Is the waste PFI credit crunch justified?

by Dominic Hogg

 

I’ve just made it back to the office following a thoroughly enjoyable LARAC conference. As well as staying up way too late on Wednesday night after a scrumptious dinner, I sat on a panel earlier in the same day which was asked a question regarding whether the withdrawal of PFI credits from various local authority waste projects was justified.

The announcement yesterday that Defra is pulling back the credits from Hertfordshire County Council’s proposed New Barnfield incinerator at Hatfield will no doubt come as another disappointment to the infrastructure developers who made up the rest of the panel. However, it is a clear indication that the Department believes the rationale that led to credits being withdrawn for other incinerator projects (in February and October of 2013) still applies.

 

Got it in forum

My own view is that the case for PFI credits is nowhere near as strong as it once was. I was never a fan of them. In 2002, I took part in a study for the National Resources and Waste Forum, a cross-sectoral body looking to develop some consensus on waste matters, which looked at the various policies and mechanisms in place to encourage the movement of waste up the hierarchy. The aim was to understand whether the policies in place supported, in financial terms, recycling. The conclusion was pretty telling:

“The key message from this study is that the legislative instruments currently in place generate economic incentives which, in relative terms, actively discourage recycling when compared with other waste management options. Specifically, there is not one policy initiative which introduces an economic incentive that makes recycling and / or composting the operation of choice in the management of resources.”

The study made nine recommendations, all of which could be made with more or less the same force today, indicating the remaining scope for ‘doing better’ in terms of the economic incentives which the sector is confronted with.

 

Exclusive deals

One of these related to PFI. The study looked at the effect of PFI credits and noted the following:

“PFI distorts the choice of technique from amongst competing options. The messages it sends are that local authorities will receive greater financial support for the most capital intense treatments. Yet the most capital intense treatments are the less sustainable ones, and the ones which appear to be least popular with the public. In addition, because of the considerable chunks of capital inevitably used to support PFI projects, the mechanism tends to be ‘exclusionary’ (only some local authorities are ‘chosen’).”

On occasion, over intervening years, I and my colleagues did ask those involved in PFI whether, if we were to package a contract in such a way that it supported collection and the treatment of source segregated biowaste across a waste partnership area, that could qualify for credits. We were generally advised that the aim was to deal with strategic facilities designed to reduce the landfilling of waste. Only projects of which the larger (or only) part was residual waste treatment would qualify. In reality, the ‘infrastructure’ that built around PFI credits tended, furthermore, to exclude even some residual waste treatment options, notably those with lower capital costs, leading to an even stronger exclusionary effect.

Interestingly, in the period since 2000/01, the increase in local authority collected waste in England has been of the order 3 million tonnes. The drop in local authority collected residual waste, on the other hand, is of the order 10 million tonnes – as the graphic below shows.

 

Residual Graph

Residual image: non-recycled waste has been on the decline for over a decade.

 

Importantly, as regards the rationale for PFI credits, it will not have escaped anyone’s attention that the landfill tax has risen to £80 per tonne. Landfilling, for most local authorities, now costs something of the order £100 plus haulage costs (more in some areas, less in others).

 

Credit and credibility

Back in 2000, the tax had only just moved out of single figures. If a local authority was going to procure a residual waste treatment facility, it would probably pay more than it would for landfilling. There was a clear affordability gap, and the PFI credits could largely be justified through appeal to that affordability gap. But as the landfill tax has increased, so the affordability gap has diminished, and might be said to have disappeared altogether, given the price of treatment in the market today.

So, it does not seem surprising to me that Government, at times of financial crisis, would want to withdraw credits in support of projects for which one of the main underlying rationales no longer exists. In essence, continuing to give out credits has a doubly negative impact on the nation’s finances. On the one hand, the credits have to be funded; on the other, the outcome of their award is an erosion in the tax take from landfill tax.

What is less impressive is the approach that Government has taken in making the withdrawals. In the case of Hatfield, the fact that planning permission had been refused for the site (subject to appeal), gives the sudden withdrawal of credits a degree of cogency that has not always been in evidence in previous such announcements. Policy makers do not gain credibility when they make decisions that appear to have no regard for the processes which ‘Government’ (whether this one, or the one before, or the one before that) has already set in train.

Perhaps the only thing that can be said in defence of the somewhat hasty and random announcements that have been made is that there is not much ‘credibility’ left in the tank where waste policy in England is concerned. In which case, when the economy is still struggling under a mountain of debt, pulling credits from projects which no longer appear to deserve them might seem sensible, whatever the manner and timing of the announcement.

 

Dominic Hogg

 

Dominic Hogg

 

Leave a Reply

2 Comments on "Is the waste PFI credit crunch justified?"

Notify of
avatar
Sort by:   newest | oldest | most voted
Shlomo Dowen
Guest
I have certainly experienced PFI pushing local authorities towards incineration over recycling by focussing on large-scale landfill diversion infrastructure rather than increased recycling (with almost no focus on waste minimisation). The contracts are then framed so as to ensure the councils pay for the availability of the incineration capacity whether they use it or not, removing incentives to invest in increased reduction, re-use, recycling and composting (not to mention the general costs associated with changes to the contract itself). For example, the minutes of Nottinghamshire’s Joint Waste Officer Board meeting of 28th November 2007 record that a Nottinghamshire waste collection… Read more »
Peter
Guest
You have raised a very interesting issue that transcends more than the Waste Industry through the whole misguided use of the PFI (Private Finance initiative) which has been shown up to be totally wanting in all its uses across the UK and elsewhere. A programme which was set up to off-set Public Sector Borrowing (PSB) has proven now to be additive to the borrowing rather than the opposite and at a phenomenal legacy to the Tax Paying Public – You and Me! Did you listen to – or watch- or attend the Public Accounts Committee at Westminster in July 2014?… Read more »
wpDiscuz