Derailed or still on track - what now for the PFI seven?

Seven major local authority waste projects were dealt a cruel blow in the Government's spending review, losing their PFI grant allocations. So is there a plan B for this much-needed infrastructure? asks David Burrows

There were always going to be winners and losers. The Government has billions of debt to clear and its comprehensive spending review was expected to include significant cuts to public spending. For the country's local authorities that came in the form of real terms reductions of 28% in their budgets over the next four years - compared with overall cuts of 8.3% across all departmental budgets.

As the Local Government Association said on the day: town halls will now face some "extremely tough choices" about which services they can keep on running. Indeed, most authorities' cuts are significantly front-loaded to 2011-12, which means services covering everything from street safety to cleanliness could be affected. And that means waste services will come under scrutiny. According to Pete Dickson, development director at Biffa's municipal division, the severe impact of the cuts will "push local authorities to the limit" in balancing income and costs.

Crucial to negotiating this balancing act is ensuring services are developed strategically and by design. Seven major council infrastructure projects are now having to rethink their sustainable long-term plans for waste ¬- as part of the spending review, Defra reviewed its PFI grant allocations and for the likes of Gloucestershire, Leicestershire and Milton Keynes and Northamptonshire, that meant their provisional offer of funding was withdrawn.

Shock reaction
The announcement was met with shock, not least because an initial review of the PFI programme in June had spared the waste sector when schools and hospitals were cut. There was also confusion among the 'unfortunate seven' regarding the rationale behind the decision over which projects could proceed with PFI and which would not.

Defra says a system was developed with a set of objectives and criteria based on: value for money - measured by the amount of biodegradable waste diverted per pound of PFI funding; delivery likelihood - based on how advanced the procurement process is and the status of the project in relation to planning; and timing of the benefits - based on number of months remaining until expected operational commencement date as stated in the current project plan.

Cheshire West and Chester and Cheshire East councils have already been in to see Defra officials to discuss the methodology. At the beginning of November they were told that more details would be forthcoming in "two to three weeks' time". Cheshire East Councillor, Peter Mason, says the set back is "very disappointing" given that the project would have "solved the problem of the disposal of Cheshire's household waste". It has also taken five years and £4M to get to the preferred bidder stage - in this case Viridor.

However, the line from Defra currently is that the projects withdrawn "will no longer be needed in order to meet the 2020 landfill diversion targets set by the European Union". There are concerns over this assumption. Steve Lee, CIWM chief executive, raises three: the assumption that all the other PFI projects will come good; the fact that the seven local authorities without funding will be left looking for alternatives; and finally there is the fact that the Government could - and should - be looking beyond the 2020 targets and the role the waste industry can play in meeting the 80% cuts in carbon emissions by 2050.

The reality, in the short-term at least, is the review has left a lot of waste tonnage with nowhere to go. As AEA's global practice lead for waste management and resource efficiency Adam Read explains, it's too early to say whether the UK can definitely still meet its 2020 targets, but the fact remains that this announcement has derailed some major progress. "We are supporting the Essex Waste partnership which still has its funding in place, so this week there was a sigh of relief from them as without PFI their entire procurement process, choice of technology and short list of providers could have been undermined," he says.

"We're also supporting the North London Waste Authority where the credits have been cut. The waste in north London will not magically disappear because there is no PFI funding available - a long term treatment and disposal solution will still be required. The authorities involved are petitioning Government to reconsider and are considering alternative forms of funding. They may need to reconsider their plans in terms of technologies and sites to ensure alternative private sector funding is found, but there is no doubt that the project will continue and deliver the necessary infrastructure."

Looking elsewhere
Indeed, for those that have lost the potential sweetener of PFI funding, some have already begun conversations to ensure their needs are also met. "Defra's decision was taken from a national perspective and the authorities will have to take their own view on whether to proceed with their plans taking account, in particular, of the potential impact of rising landfill tax at local level," says John Gibbs, corporate finance partner at PwC. "So far, affected authorities look to be taking the view that continued procurement remains the best option."

The two Cheshire councils are talking to Viridor, which was selected as their preferred bidder just before the review. In Gloucestershire, where there are four companies bidding for the project, plans have been temporarily put on hold so the council can work with Defra to find a way of moving forward. "We need more time to sort out the financial issues we are facing," says Councillor Stan Waddington. "Whatever happens we need to find an alternative for dealing with our county's household waste, so there's no question of us dropping the project and doing nothing."

Some authorities may well look at interim solutions to get them to 2020 - perhaps buying capacity at neighbouring facilities. Harry Waters, commercial director at Agrivert, says councils should be working together. "Some have already started, and some have made sure their procurement processes are done with value in mind."

Waters hopes the review will force councils to be efficient in their procurement process. "A lot of procurement processes in the £5-10M bracket that we do are very expensive - overly so for the infrastructure and services they provide. Many councils are delivering very localised infrastructure that doesn't deliver value. Some, for instance, want a facility but have less than ten thousand tonnes of that waste stream so dramatically increase their gate fee. Councils need to think about the bigger picture."

To manage budget cuts while improving recycling rates, increasing renewable energy generation, reducing carbon footprint and maintaining standards of living is no easy task. The review has, inevitably, provided another rung to the waste sector's ladder of uncertainty. There is already the policy review, the green investment bank, the localisation bill and the energy review. "We are almost at the maximum point of uncertainty," says CIWM's Lee.

David Burrows is a freelance journalist

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