by Dominic Hogg
5 minute read
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 However, it is a clear indication that the Department believes the rationale that led to credits being withdrawn for other incinerator projects (in February and October of 2013) still applies.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 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.
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 authority “asked if there were any plans to look at food waste collection in the future”. In reply, Nottinghamshire County Council “confirmed that not at the present time as the [Nottinghamshire Waste PFI] contract can deliver [landfill diversion] targets promised to Defra without [separate collection of] food waste”.
I note that Malcolm Chilton (then Managing Director of Covanta Energy) noted back in 2010 that: “I don’t really see the big need for PFI in this sector because it tends to encourage people to go for more expensive solutions…” [Getting EfW back on track in the UK. MRW, 13 August 2010].
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? You should have! It was an interesting discussion forum and a declaration of total abhorrence to the PFI use in the Waste Sector. The committee is, as you are aware, very vociferous and damming. It called in DEFRA to account for the Total Shambles of its Waste PFI Schemes and the mis-handling of the Procurement Issues and the inordinate consequences of the Civil Service running Government who are absolved from any consequences of their actions even though – in this instance – they alleged that the cost-consequences for stopping a PFI Waste Project was not that expensive and that paying off a PFI Bidder £32 Million for not doing any work on the Norfolk Scheme a few weeks after being a declared a “Preferred Bidder” was money well spent to avoid “potential” litigation – REALLY!
Wouldn’t you like to be rewarded for doing nothing when in the Tender Documents the pre-amble suggests that the project may not even go ahead? Did any Civil Service Heads roll! The meeting as recorded was very useful for it showed up the failings in the administration of the Civil Service. See if you can reach back to here and see the recordings again.
The attendees were:- Margaret Hodge PC, MP, (Labour) Madame Chairman of the Public Accounts Committee calling in the DEFRA PFI Waste Committee: Richard Baker PC MP, (Conservative) Norfolk South, Chris Heaton-Harris PC MP, (Conservative) Daventry, Ian Swales MP, (Liberal Democrat) Redcar, Austin Mitchell PC, MP (Labour) Grimsby. The attendees from DEFRA included the Permanent Secretariat in front of a huge audience (alas I did not see you there!) and across the BBC network in the programme “Today in Parliament” at the beginning of July 2014.
This discussion and implication of incompetence by the Public Accounts Committee also heralded amongst other things the disquiet about the whole PFI Issue in Waste and the fact that it forced Local Authorities to go for the most expensive options and the least acceptable to the public persona of Incineration or its soft names as EFW (Energy from Waste) and W2E (Waste to Energy) or Gasification and the other names often used. Now this sounds familiar and in tune with your thought processes.
The fact that certain projects in North Yorkshire County Council / York City Council and Leeds City Council and Norfolk South and Kings Lynn, and elsewhere with the latest addition of Hatfield falling in line with cancellations were mentioned was interesting. You may also be aware that Chris Edwards who is a senior fellow at the University of East Anglia wrote an article in the Economist and elsewhere where he stated that “Incineration is too high a price to pay” reiterating the issue … “Defra admits that incineration is not paying its proper price in carbon terms”…see the article published on 20th January 2012.
So how then have we got ourselves in to this malady and malaise of an issue? Of course – there is always a scape-goat – and the Waste Directive is one of these but is it wholly that? Are there not other issues that are perhaps equally contentious? Why was the Ringsend Incineration Project for Dublin so paraded around as being acceptable to the City and Hinterlands of Dublin when it was blatantly unaffordable, and needed a “put or pay” contract behind it to guarantee payments to Banks and Financiers. (Put or Pay is illegal and counts as a subsidy under European Union [EU] Laws!)
It also had inflated Gate Fees to make the PFI work. Fortunately the recession in the EU and the bail out of the Irish Government has stopped the malady of progressing this as intended, and now we hear that the Irish Government has been advised that they can build their proposed waste treatment plant for a third the estimated costs with a zero gate fee. There also other precedents across the World!
The Mauritius Incineration Plant should be paraded around as an equally unaffordable option! It was promoted to treat wastes and had to be backed up by a contract that implied “a put or pay” principle, also declared illegal by its Government, because it encouraged making plants too big and the Purchasers and the Public would always end up as being the fall guys bailing it out.
Yet another project, remember the story “Alice does not live here any more!” about the programme for Broga – Kuala Lumpur? A similar issue over too high a cost to build something that was never credible defrayed against the local community not wanting the scheme in their back-yard. Now they are looking at another series of cheaper options that would seemingly cost a quarter of the original contract, without a Design Build Finance option.
Let’s then return home again to the programme highlighted in the Public Accounts Committee, after 15 years Hereford and Worcester still has not resolved its waste treatment issue! Yet here again a proposal has been highlighted where an entrepreneurial offer to treat the areas waste was heard and discussed and proposed to be considerably less than incineration, and had a gate fee that was incredibly low and would be reduced to zero after five years.
We read also about the North Yorkshire / York City programme in the local Yorkshire press over the years way before the project went belly-up and before the PFI credits were called in. It seems that a development nearby was already being organised which could have accepted the waste stream from the area for just a gate fee. There was apparently no need for capital expenditure from the Councils and thus no PFI credits requested at all. The Councils in the area would have had a solution being developed by another recycling company locally would have got them out of a mess! Apparently the local councils even knew that the development way before the idea of the proposed incineration plant was proposed in the first place, they ignored it, and still went out to tender regardless! Joined up thinking, hardly the alternative was being promoted before the call of tenders! And then we read that Norfolk South has failed its PFI remit, Kings Lynn and West Sussex and others.
Then the case of Hertfordshire and Hatfield was mentioned. Apparently like North Yorkshire / York City when this was advertised and presentations were made an alternative was also proposed at the presentation that would have avoided the whole PFI issue again. It was ignored like the other project and in between they went out to tender. Yet again there seems to be little if any redress, for the final scheme in Hatfield was also proposed at a lower cost with no need for huge capital investments and no PFI attached.
Throughout this time the potential to develop different approaches that had a lower capital cost and a remarkably low initial gate fee declining to a zero gate fee within 5 years seems to have been bypassed. How is it that the industry seems to be blinkered here? This is money being wasted from the Public Purse, and yet the Public are not informed as to why. So the original issue you raised is of interest to us all but how much further than these cloistered walls (or these writings) are these comments going? There are developments happening in the waste treatment industry which we are not hearing about.