SOUTH CAMBRIDGESHIRE DISTRICT COUNCIL. Waste Management Advisory Group Leader and Cabinet Housing and Environmental Services Director

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1 SOUTH CAMBRIDGESHIRE DISTRICT COUNCIL REPORT TO: AUTHOR: Waste Management Advisory Group Leader and Cabinet Housing and Environmental Services Director 13 July July 2005 PROCUREMENT OPTIONS FOR THE CONTRACT FOR THE KERBSIDE COLLECTION OF RECYCLABLES Purpose 1. (a) To provide an overview of recent studies concerning future options for the District Council s waste management services and to link these to the future contractual arrangements for the Kerbside collection of dry recyclables in view of the expiry of the current contract in October (b) That Cabinet recommends to Council supplementary budget estimate approval for 2005/06. Effect on Corporate Objectives 1Quality, Accessible Services Village Life Sustainability Partnership The quality of village life and accessibility of service provided by kerbside collection of recyclable materials is more likely to be achieved by an efficient and cost effective service provided through partnership. Recycling is sustainability in action. Background 2. There are four elements to the Council s waste management service: a. Refuse collection and organic waste collection provided by the Environment Operations Unit. b. Street cleansing provided by the Environment Operations Unit c. Kerbside collection of dry recyclable materials provided by Cleanaway d. 85 bring sites serviced by a range of local contractors. Current year budgets for the various waste management service are at Appendix The Kerbside service contract was let in October 2000 and the scheme introduced in In the autumn of 2003, a three-stream service was introduced, supported by grant aid from the Government s waste minimisation and recycling fund. This comprises green waste and refuse collected in wheeled bins on a alternate weekly basis with the green box collection fortnightly; this configuration has proved extremely successful, enabling South Cambridgeshire to return a recycling rate of 47% in 2004/5 and to win the 2004 LetsRecycle.com National Award for Excellence. As anticipated, the switch to alternate weekly refuse collection provided a strong incentive for householders to recycle, and to meet this demand the Cleanaway contract was varied in December 2003 to provide 2 additional vehicles funded by SCDC and an upgrade in the type of vehicle employed. 4. Successful though the scheme is, the Council needs to review its position taking account of: a. The need to extend or re-tender the Kerbside collection contract from October 2005

2 b. The recently completed Best Value Review of waste management, recycling and street cleansing c. A financial and procurement options study commissioned from RSM Robson Rhodes as part of that Best Value Review d. A Value for Money study commissioned by the RECAP waste partnership, which looks at the options for all Cambridgeshire authorities in respect of alternative, means of collecting dry recyclables. This work is being funded by Waste Resources Action Programme (WRAP) and carried out by consultants Jacobs Babtie. 5. A number of other factors are also referred to in this report, including a. Preliminary discussions with Cleanaway. b. The current position in respect of the County Council s PFI procurement including the proposed partnering agreement. c. The imminent review of the joint municipal waste management strategy (MWMS) Considerations The Best Value Review Of Waste Management Recycling And Street Cleansing 6. This review was initiated in May 2003 but was later placed on hold while resources were diverted to implementing the three stream collection system. It has now been completed and is likely to be the subject of an Audit Commission inspection this year. 7. The methodology was to establish and report against eight hypotheses resulting in an action plan. The content and conclusions are not discussed in depth here, but those of direct relevance are: a. The Council s Recycling Plan forming part of the joint municipal waste management strategy needs to be updated following the introduction of the integrated (3 stream) refuse and recycling service b. The cost of collecting waste needs to be continually kept under review c. The market rate for kerbside collections needs to be identified 8. The first of these can be addressed in the forthcoming review of the Joint MWMS, which includes the recycling plans of each waste collection authority. The CCA Waste Forum asked for the strategy to be reviewed every three years and the Government has issued new draft guidance on the content of strategies; work is in hand to carry this out during The second recommendation is discussed in paragraphs The third, concerning the market rate for kerbside collections, has presented some problems; this is because systems where materials are sorted at kerbside are relatively new, methods vary considerably and comparisons between urban and rural areas are of limited value (but see footnote to paragraph 23). In view of this, in order to test Cleanaway s proposals for extended contract terms, Robson Rhodes were also asked to provide a shadow bid i.e. a price for the service using known service parameters and contractor costs for South Cambridgeshire, along with industry norm profit margins. The shadow bid is discussed in paragraphs 35 to 43 of this report. Robson Rhodes Report On Waste Management Procurement Strategy 11. RSM Robson Rhodes were commissioned in 2004 to advise the Council on the possible joint procurement of waste services within the partnership PFI project. Their recommendation was that the advantage for South Cambridgeshire lay not in joining the

3 PFI procurement but in developing its own procurement strategy. Cabinet accepted this on 14 th October Subsequently Robson Rhodes has completed a second stage study, with the aim of assisting the Council to select the most appropriate waste management procurement option. This study covers a. The need for change and the range of waste and environmental services to include in an independent procurement strategy; b. The opportunity to outsource or to retain in house existing waste and environmental services; c. Detailed financial modelling to support all options; d. A review of, and comment on the financial and commercial feasibility of the preferred solution, including Capex and Opex impacts and potential sources of revenues. 13. The financial model examines three scenarios: a. Retaining the refuse collection service in house b. Externalising the refuse collection service along with the recycling service (which is already provided by a commercial operator), and c. Externalisation with a more aggressive approach to building the commercial waste collection business. The model shows that if both the refuse collection and the recycling services were externalised and option 3 pursued, the saving for the Council compared to option 1 would be 39,270 per annum or 247,890 over a 7-year contract period. 14. The model has been subjected to a sensitivity analysis and risk assessment. The risk matrix shows that under the current arrangements the Council retains most of the risks associated with the waste management services; under externalisation, the risks are either shared or passed to the private sector operator. The costs used are industry norms in which operators have already priced for these risks, though in reality only a tender and negotiation process can confirm the extent to which risks are priced into the contract. 15. The Robson Rhodes financial model does not include street cleansing but the report notes that if included, the procurement package would be more attractive to the market and enable operational and management efficiencies to be made. The study recognises that in coming to a decision on its procurement strategy for waste management services, factors other than financial ones will be taken into account by the Council. It suggests that if externalisation is preferred, a carefully timed approach linked to the outcome of the County Council s PFI procurement would be advantageous; if the South Cambridgeshire preferred not to go down this road then the financial models could provide a benchmark against which to seek efficiency savings in the in-house service. 16. This report was part of the Best Value Review and is the subject of a separate report to Members. At the time of writing the Waste Management Advisory Group and Scrutiny and Overview Committee had considered its contents and are recommending to Cabinet to fund, subject to the outcome of the Council tax capping, a full options appraisal of the various externalisation models, including in-house bids, and this to be reported back to Members for decision. 17. The significance of the procurement strategy report is that if externalisation is a realistic option under consideration by the Council, then a decision on the kerbside collection contract should take account of that. The WRAP / Jacobs Babtie Study

4 18. This study is currently examining the value for money aspects of a number of different systems for the collection dry recyclable materials: a. A kerbside sorting system as operated by South Cambridgeshire, b. Co-mingled collection using wheeled bins and requiring a Materials Recycling Facility (MRF) to sort the materials (i.e. the system operated in Huntingdonshire and Fenland Districts) and c. Co-mingled collection using boxes, with only glass segregated at the kerbside, the other materials being sorted at a MRF. Other variations of these systems may be examined in the final report. 19. There have been some delays with this study and unfortunately the final report will not be available until later in the summer. However, a preliminary draft shows that there may be cost advantages associated with the third of these systems; it should be emphasised however that this is based on draft figures. No figures are available yet on whether collection authorities could make further savings if they all operated the same system. The final report will require close scrutiny. If it then indicates that there are efficiency gains to be made, the RECAP partners might wish to consider how this could be done, i.e. how a MRF service or bulking for transport to an existing MRF located outside the county could be delivered. 20. The WRAP / Jacobs Babtie study should not, in its present incomplete form be used for guidance on the immediate issue for the current kerbside collection contract. However, it does signal that in the medium term there may be a more cost effective way of delivering the same outcome; in view of this the Council might be wise not to commit itself to one system for the long term i.e. longer than 5 years. Cleanaway Proposals 21. Preliminary discussions have been held with Cleanaway to hear their proposals for a possible extension of the contract. 22. The current contract is based upon a fixed price assuming a certain tonnage of materials; this tonnage is now constantly exceeded, and despite the variation in 2003 and the additional vehicles provided, Cleanaway report that the current contract is not economic for them (The Chief Environmental Health Officer can provide Members with further details if requested). Their proposals are based on a re-pricing to ensure a reasonable return and hence a stable basis for the service over the next period. Kerbside collection of textiles would cease. Options have been discussed around a 5 or 10-year extension, and around either Cleanaway or SCDC providing the collection vehicles. 23. Annual charges under the company s proposals would be: 5 year extension 10 year extension Cleanaway to provide 812 K 694 K vehicles SCDC to provide vehicles 661 K 611 K An attractive option would appear to be a 5-year extension with the Council meeting the capital cost of the vehicles. This capital cost is estimated to be 431,000 in 05/06 and 236,000 in 08/09 for the purchase of the vehicles. These one-off costs would translate into a notional capital charge of about 76,000 annually (rising to 112,000 in 08/09 when the two currently District owned vehicles would be replaced). Although these capital-financing charges will be shown as an additional cost to the overall service, it must be stressed that they are a notional charge that will not be passed onto the Council taxpayer. For a 5-year extension with South Cambridgeshire providing the

5 vehicles, the ongoing revenue cost would be 661K (compared to 812K); this is discussed further in paragraphs of this report. 24. At this stage however it should be emphasised that these figures are only proposals; officers believe that there is scope for further negotiation. However, it is clear that any extension will entail a price increase if the same level of service and performance is to be maintained. Other Factors The County Council PFI Contract 25. The proposed PFI contract will ensure a delivery point for refuse and for green waste within each District. It could theoretically provide a delivery point for dry recyclables (either for bulking or a MRF) if that is what waste collection authorities collectively wish, but this is not in the current specification or financial model. 26. The County Council will seek agreement with each District Council that the latter will sustain the three-stream collection service in its area throughout the contract period (25 years). At present it is not clear whether this will be underpinned by agreed recycling levels but what is important to the County Council is that it is able to give its bidders certainty on which waste streams will be collected separately, and what materials in broadly what quantities the collection authorities will retain, (to sell on themselves directly or through their own contractors). In return, the County will pay recycling credits or some other contributory payment (to be negotiated locally) towards the District Council s collection costs. All of this will be contained within a Partnering Agreement. 27. A decision to either extend or re-tender the kerbside collection contract is not dependent on the proposed Partnering Agreement, and can be taken now. If, as indicated in paragraph 21, a MRF or bulking facility were required in the future, this could be the subject of separate procurement in which the PFI contractor might be a strong bidder. There is no particular benefit in extending the current contract for two years to tie in with the PFI timetable, because the MRF option is not part of the PFI specification. Household Waste Recycling Act The above Act requires that Waste Collection Authorities shall collect at least two types of recyclable waste by 31 st December 2010 separate from the remainder of the waste. 29. In the guidance it is pointed out that the contamination of textiles is the most important single factor to those involved with re-use and recycling this material, with value being lost due to it. The kerbside collection of the material is a small contributor to SCDC s overall recycling rate i.e. 39 tonnes or 0.007% in 04/05. The kerbside collection of these materials can have a small but noticeable effect on charity collections and donations and has provided the contractor with some operational difficulties. It is therefore suggested that this is material removed from the kerbside collection service in favour of charitable collection arrangements. Other Sources Of Support For The Cost Of Kerbside Recycling 30. Members should note the income streams available to support the cost of the kerbside contract. One of these is recycling credits, which were the subject of a review and consultation before the recent general election. The previous Secretary of State indicated that she wished to see a framework in which Counties and Districts could make local agreements of mutual benefit to replace the statutory system. The LGA put forward that in the absence of local agreements, credits should reflect the level being

6 paid in 2005/6 (which for South Cambridgeshire is per tonne), plus inflation, but not rising in parallel with landfill tax. A final Government announcement is awaited. Income from recycling credits is already taken into account in the budget for the kerbside (and recycling bank) services; for the kerbside collection budget in 2005/6 it is estimated at 255K. 31. The Government has announced that for 2005/6 every authority will receive a Performance and Efficiency Grant to support the cost of achieving higher recycling rates; for the current year South Cambridgeshire s grant is 43,473. The overall level of grant will increase by about 2.5 times in 2006/7 and 2007/8 but the Government has not yet decided on the method of distribution; it has suggested allocating it in blocks to partnerships in two tier areas. This funding will be in addition to existing budgets. The Imminent Review Of The Joint Municipal Waste Management Strategy (MWMS) 32. As mentioned in paragraph 9 the RECAP partners have the opportunity to review their joint strategy this year and to update their individual recycling plans. The partners should consider as part of this exercise what their overall direction might be in the next period (i.e. 3 year cycle between strategy reviews). After the recent step change in recycling performance the choices are broadly between continued emphasis on recycling and on the aspirational targets (45-50% recycling by 2010, 50-55% by 2015), a cost led approach seeking to comply with but not necessarily exceed statutory targets, and a prudent approach, seeking increased cost effectiveness of existing systems whilst awaiting the outcome of the PFI procurement. 33. South Cambridgeshire already makes its full contribution to the aspirational 2010 target. Meanwhile the extension or re-tendering of its kerbside-recycling contract is necessary for consolidation and cost effectiveness. Options For The Kerbside Collection Contract 34. There are four options available to the Council; 1. Extend the contract of 10 years 2. Extend the contract for 5 years 3. Extend for 2 years (to fit with the PFI procurement timetable) 4. Re-tender now Of these, the 5-year extension and re-tendering are the most realistic. 35. The two year extension, at one time thought desirable in relation to the PFI, is no longer of particular benefit in that context (paragraph 28) It is likely to entail high costs because of unfavourable terms for contract hire of vehicles over a short period, whilst the Council would gain no medium term efficiencies; it was not therefore costed. Similarly a 10 year extension, whilst offered by Cleanaway and at first sight attractive, is generally considered too long a period without market testing, and could lock the Council into the current collection system. Comparative Costs 36. Robson Rhodes shadow bid figures assume that the contractor provides the vehicles; these can be compared with Cleanaway s proposals for Year 1 of the contract, and with the option of the Council providing vehicles: Comparative revenue costs of an extended contract Cleanaway proposal 5-year extension, SCDC to 661K ( 737K) RR Shadow Bid

7 provide vehicles. (Figure including notional capital charge) Cost per household of above ( 13.13) 5 years, Cleanaway to provide vehicles 812K 785K Cost per household of above year SCDC to provide vehicles Not costed 10 year, Cleanaway to provide 694K vehicles 37. The capital cost to the Council of providing vehicles is likely to include the replacement midway through the five-year period of the two vehicles already in its ownership; this is assumed to be in Therefore, the costs over 5 years would be: Cleanaway to provide vehicles 4,060,000 (5x annual charge of 812K) South Cambridgeshire DC to provide vehicles 3,750,000 (5x Cleanaway charge of 661K) + capital charges of 445K 38. On the basis of Cleanaway s proposals and the shadow bid, it would be preferable for the Council to provide the vehicles itself, or to re-tender the service. Since the estimated cost of a 5-year extension with the Council providing vehicles is similar to that of the shadow bid, it can be deduced that this option represents reasonable value for money and would save on actual re-tendering costs. 39. The shadow bid assessment is 785K compared to Cleanaway s proposal of 812K; this suggests that it should be possible to secure improvements to the company s proposal by negotiation. Similarly it would be sensible to negotiate further on the company s price for the non vehicle option. 40. The risks inherent in re-tendering now are that there may be weak market interest (as there was in 2000), and / or that prices may be higher than the proposals on the table. Strengths And Weaknesses Of Options 41. Financial and non-financial aspects need to be considered together. It is suggested that a five-year extension could potentially be tied in with any future externalisation of the waste collection service by means of a price review clause; this would be implemented if Cleanaway secured both contracts. Alternatively if re-tendering were the preferred option, combining with another collection authority would be worth considering in order to secure economies of the sort envisaged by Gershon. 42. The strengths and weakness of the options are summarised below: Strengths Extend by 10 years Lowest offer from Cleanaway Extend by 5 years Reasonable deal on offer (subject to further negotiation) Weaknesses Too long without market testing. Could constrain the council in respect of potential savings from different collection methods, and possibly from the synergies of externalising all aspects of the waste management service. Cost increase compared to current budget

8 SCDC could insert a clause giving itself an option to require a price review if at any time Cleanaway won a contract to deliver other services to the Council (i.e. in the event of externalisation of the refuse service) Achievable timetable if this option were combined with changing to commingled collection in 5 years Extend 2 years Convenient period leading up to possible procurement for linked refuse and recycling services That procurement could take account of the outcome of the PFI procurement Could possibly switch to a comingled system in two years time, but >> Re-tender now Tests fair price in the market place rather than notionally Potential to join with another LA to create a more attractive package and Gershon savings. No opportunity to link the service with the refuse collection service if SCDC decided to externalise that within a 3-5 year timescale (unless Cleanaway won that contract too) Likely to be more costly than the 5 year extension Unlikely to be able to make any efficiency gains within a short period >> probably only for delivery to an existing MRF (there is unlikely to time to agree on and deliver a facility locally within two years) Risk that the price may be higher than what is currently on offer Possible service issues connected with change over of contractors which the Council may not want at this time Scale of a single district contract may not be conducive to competition (which was weak in 2000) Financial Implications 43. The Council obtained a very financially advantageous contract price when the service was last let and it is clear that whatever choice is made this advantage will be lost, leading to an increase in costs. If Members choose the option of a 5-year extension with the Council providing the vehicles, the full year effect increase over current year s budget estimates is anticipated to be in the order of 129,500 (impacting on the General Fund) plus 76,000 notional capital charge. The budget estimate for this financial year would need to increase by 64,750 plus the notional capital charges. 44. In addition to this the Council would need to purchase the vehicles at an estimated total price of 431,200 in 05/06 and a further 235,600 in 08/09 (if necessary). The purchase of the vehicles was not included in the current capital programme and this would therefore require amendment. Legal Implications 45. Tendering would have to meet all EU and national legislative requirements including the pre-requisite timetables. This is still thought to be achievable but time is extremely limited given the contract termination date.

9 46. None. Staffing Implications Risk Management Implications 47. As detailed in the report. Consultations 48. Cleanaway as detailed in the report. Conclusions/Summary 49. Overall, a 5-year extension appears to offer the Council the best mix of certainty in the medium term and flexibility if it wishes to change the collection system in the next few years to make efficiency savings. Extending the current service contract would not hinder the County s PFI procurement or vice versa. Further negotiations may be able to secure better terms from Cleanaway and mitigate the cost pressures, which are inevitable from October. Recommendations 50. It is recommended that Cabinet: a. Agrees to a 5-year extension of the current Kerbside Collection Contract (not including textiles) with the Council providing the vehicles, thereby saving on the costs of tendering; and b. Delegates to the Portfolio Holder for Environmental Health and the Chief Environmental Health Officer authority to negotiate with Cleanaway on obtaining best price ; and c. Notes the likely increase in the budget requirement for the service as included in the financial implications, and d. Recommends to Council supplementary budget estimate approval for 05/06 of 64,750 plus the notional capital charges and the amendment of the Capital Programme to allow for the purchase of the vehicles at an estimated total price in 05/06 of 431,200. Background Papers: the following background papers were used in the preparation of this report: RSM Robson Rhodes Kerbside Collection Services Shadow Bid Study; RSM Robson Rhodes SCDC Waste Management Procurement Strategy Stages 1 and 2; SCDC Waste Management Best Value Review 2005; Cambridgeshire and Peterborough Joint Municipal Waste Management Strategy. Contact Officers: Dale Robinson Chief Environmental Health Officer Telephone: (01954) David Hill Accountant Telephone: (01954)

10 APPENDIX 1 Waste Management Budgets 2005/06 Gross Income Net Waste Collection 2,387,100 (383,710) 2,003,290 Kerbside Recycling 598,170 ( 255,020) 343,150 Recycling Banks 128,590 ( 56,270) 72,320 Street Cleansing 461,900 ( 13,500) 448,400