Managing the waste PFI programme

Departmet for Eviromet, Food ad Rural Affairs Maagig the waste PFI programme REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 66 Sessio 2008-2009 14 Jauary 2009

The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Tim Burr, is a Officer of the House of Commos. He is the head of the Natioal Audit Office which employs some 850 staff. He ad the Natioal Audit Office are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year: at least 9 for every 1 spet ruig the Office.

Departmet for Eviromet, Food ad Rural Affairs Maagig the waste PFI programme LONDON: The Statioery Office 14.35 Ordered by the House of Commos to be prited o 12 Jauary 2009 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 66 Sessio 2008-2009 14 Jauary 2009

This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Tim Burr Comptroller ad Auditor Geeral Natioal Audit Office 23 December 2008 The Natioal Audit Office study team cosisted of: Mark Wyiatt ad Ady Nichols, assisted by Jemma Due, Joatha Greefield ad Joseph Holde uder the directio of David Filay This report ca be foud o the Natioal Audit Office web site at www.ao.org.uk For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office 157-197 Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: 020 7798 7400 Email: equiries@ao.gsi.gov.uk Natioal Audit Office 2009

cotets summary 4 Part ONE The role of PFI i reducig muicipal waste 10 set to ladfill Part TWO The Departmet s maagemet of the waste 16 PFI programme Part THREE Achievig the ladfill targets 29 Appedices 1 Glossary 33 2 Study scope ad methodology 35 3 Risk i waste PFI projects 39 4 The process of deliverig a waste 41 PFI project 5 Wider issues affectig the waste 44 PFI programme 6 PFI Credit Allocatios: Waste 48 PFI projects 7 Defra s Ivestmet Programme 50 Maagemet Activities Frot cover image, Biffa Leicester`s Ball Mill. Page 4, summary, The Frog Islad waste maagemet facility (MBT) built for the East Lodo Waste Authority

SuMMARy 1 The Europea Uio (EU) itroduced a Directive i 1999 ( the EU Directive ) requirig all Member States to reduce the amout of biodegradable muicipal waste (BMW) set to ladfill. BMW, which accouts for 70 per cet of muicipal waste, is waste, such as food, vegetatio ad paper, that ca be broke dow by other livig orgaisms. 2 The EU has set targets for the reductio of BMW set to ladfill because: biodegradable material set to ladfill prevets the recyclig of waste ad the recovery of eergy from waste materials; ad it ca also release emissios: to the air, which may be harmful to the eviromet ad cotribute to climate chage; ad to soil ad water, which ca be harmful to health. 4 MANAGING THE WASTE PFI PROGRAMME

summary 3 EU Member States will be subject to fiacial pealties if they fail to meet the ladfill reductio targets for BMW. The targets for reductio i Eglad are: by 2010 to reduce the weight of BMW ladfilled to 11.25 millio toes per aum (75 per cet of BMW ladfilled i 1995); by 2013 to reduce the weight of BMW ladfilled to 7.5 millio toes per aum (50 per cet of BMW ladfilled i 1995); ad by 2020 to reduce the weight of BMW ladfilled to 5.25 millio toes per aum (35 per cet of BMW ladfilled i 1995). 4 The Departmet for the Eviromet, Food ad Rural Affairs (The Departmet) has a atioal strategy for waste disposal, which icludes plas for meetig the EU Ladfill Directive targets i Eglad. Local authorities have statutory resposibility for muicipal waste disposal. The Departmet decided that, to meet the targets, local authorities eeded to ivest i ew waste ifrastructure. 5 Local authorities decide the form of procuremet for their waste ifrastructure projects. Where authorities procure projects uder the Private Fiace Iitiative (PFI), cetral govermet fiacial support, kow as PFI credits, is available for approved projects. The PFI credit is a udertakig that cetral govermet will give aual grats to the value of the PFI credit to help local authorities service the cost of the projects. 6 So far, 18 local authorities have siged PFI cotracts with a combied capital value of 1.6 billio. The Departmet has allocated aroud 750 millio of PFI credits ad i the Comprehesive Spedig Review 2007 it received a further provisioal allocatio of 2 billio for waste projects. 7 PFI cotracts are expected to cover aroud 80 per cet of the waste processed by ew ifrastructure comig ito operatio by 2013. Some local authorities, however, use other types of procuremet for these projects. These other procuremets accout for most of the deals expected to close i 2008-09 ad 2009-10. The o- PFI procuremets are maily small capacity projects but PFI cotiues to be used for the larger projects. 8 A previous Natioal Audit Office report Reducig the Reliace o Ladfill i Eglad (HC1177 2005 06) examied the Departmet s iitial respose to the EU Directive. I this report we have examied the Departmet s maagemet of its PFI waste ifrastructure programme. We focus o three criteria: i ii iii whether a suitable programme of projects with a thrivig, competitive supply market has bee established; whether the projects have bee delivered i a timely fashio; ad whether the Departmet has applied appropriate oversight to the projects for which it is providig fiacial support. 9 This report focuses o PFI projects for which the Departmet has resposibility through gratig PFI credits to local authorities. May of the issues set out i the report will also be relevat to local authorities takig forward other forms of waste ifrastructure procuremet. Local Authorities are subject to ispectio by the Audit Commissio which published i September 2008 Well disposed: Respodig to the waste challege. The Audit Commissio s report focussed o the local authorities approach to the problem of BMW beig set to ladfill. Fidigs Maagig the programme 10 The risks faced by waste ifrastructure projects are differet from those foud i other PFI ifrastructure projects. They iclude: ucertaity over the volume of future waste throughput; plaig permissio difficulties due to cocer by residets about the ature of the facilities beig proposed; the risks of differet types of waste treatmet techology; ad fidig markets to sell products from waste treatmet. PFI projects require iterfaces betwee cetral ad local govermet ad sometimes betwee eighbourig local authorities. The supply side of the market was relatively udeveloped util recetly ad maily focussed o waste collectio ad ladfill. Maagig the waste PFI programme 5

summary 11 The Departmet iitially respoded too slowly to these challeges. The EU Directive i 1999 created a eed for a strategy for sigificatly icreasig diversio of waste away from ladfill. Before 2003 the Departmet s strategies lacked practical plas for reducig reliace o ladfill. Oly the did the Departmet start to address the complex issues ivolved i buildig ew waste treatmet ifrastructure. As a result, the market for waste ifrastructure projects developed slowly. Oly two of the ew waste ifrastructure projects developed sice the EU Directive (1999) have completed costructio of all plaed assets. 12 The Departmet has improved its approach to buildig a market for ew waste ifrastructure projects. I July 2006, the Departmet established a delivery uit, the Waste Ifrastructure Delivery Programme (WIDP), to accelerate the delivery of waste ifrastructure ad to provide greater support to local authorities udertakig the projects. WIDP comprises staff from Defra, Parterships UK ad 4ps, who are maaged as a sigle uified team led by the Defra Programme Director. WIDP curretly has aroud 30 staff. The WIDP team has made cosiderable progress sice 2006 i developig the market, icludig a icreasig focus o eergy from waste solutios. It has also sought to achieve value for moey through agreeig with the market PFI cotract terms relevat to waste projects ad by improvig oversight of the projects. 13 The actios implemeted by WIDP have accelerated the rollout of ew, larger projects with more cotractors iterested i biddig for these projects. Nie ew cotracts were siged i the two years to March 2008. At the time of our audit, Jue 2008, the Departmet had a pipelie of 19 other projects to be advertised i the ext three years. The Departmet has bee focusig o larger projects. Projects curretly i procuremet will, o average, process over twice as much waste as past cotracts. The Departmet has also ecouraged local authorities to secure ecoomies of scale by promotig joit projects betwee eighbourig authorities. There was iitially a small umber of bidders but the Departmet s actios have helped stimulate bids from compaies ot previously ivolved, icludig overseas compaies. 14 The cost of fiace reflects the risks of waste projects ad, i recet times, ucertaities i the fiacig markets. The risk margi for debt fiace is higher for waste PFI projects tha other PFI projects such as hospitals or schools. This margi reflects the complex risks of the waste projects. Also, leders are ot yet able to draw cofidece from a flow of successful operatioal projects. I additio, all PFI projects have bee facig higher fiacig costs i 2008 because of the ucertaities i the fiacial markets. I the loger term, there may be opportuities for the private sector to secure refiacig gais if these risks reduce. The Treasury has itroduced a slidig scale whereby the public sector is ow etitled to up to 70 per cet of refiacig gais o all PFI cotracts siged durig the curret disruptio to the credit markets compared with the previous ormal arragemet of 50 per cet. Deliverig projects 15 There are log lead times for developig projects ad brigig the assets ito operatio. It takes five to ie years to develop projects ad brig assets ito operatio. Delays ca occur prior to cotract award ad i brigig the ew facilities ito operatio. Prior to cotract award, PFI projects have bee delayed by a average of 19 moths compared to the origial timetables. Some delays occur because projects eed to improve their busiess cases to gai cetral govermet approval. The curret difficulties i the fiacig markets are also delayig large deals. Some projects have, however, bee fuded by cotractors out of existig fiacial resources givig the prospect of faster deal closure. After cotract award, delays have occurred because some projects have ecoutered difficulty i obtaiig plaig permissio. Oversight of projects to esure value for moey 16 The Departmet has improved the oversight ad support available to local authorities. The Departmet, through WIDP, has stregtheed its oversight of projects. This actio is aimed at reducig delays ad achievig better deals. The Departmet has developed a rage of guidace. WIDP is providig practical support by placig experieced commercial staff (kow as Trasactors) i procuremet teams. The Departmet has also stregtheed its quality assurace processes for scrutiisig ad challegig authorities projects. 6 Maagig the waste PFI programme

summary Achievig ladfill targets 17 There is ow pressure o the fulfilmet of the EU ladfill targets. The Departmet s slow start to programme maagemet ad the log timescales eeded for brigig these complex projects ito operatio has created pressure o the EU ladfill diversio targets. Based o curret data: a b c d it is likely that the 2010 target for ladfill reductio will be met. the 2013 target is challegig. It will ot be met if there cotiue to be programme delays or the ifrastructure built does ot work as efficietly as expected. If the 2013 target is missed the EU is expected to levy fies o the UK, although the EU has yet to aouce the rate of such fies. Cetral govermet has said that it will levy a fie of 150 per toe if local authorities fail to meet their 2013 ladfill targets. It is harder to assess whether the 2020 target will be met. The likelihood of meetig the target will deped o two factors: success of the PFI ivestmet programme; ad efforts by local authorities ad cosumers to produce less waste ad recycle more. Achievemet of the ladfill targets is also depedet o brigig ito operatio the icreasig proportio of projects which local authorities are carryig out uder o-pfi procuremets. As cetral govermet fudig support is ot give to these projects there is at preset o requiremet for local authorities to submit iformatio about these to the Departmet. Without this iformatio the Departmet s ability to moitor progress is limited. Value for moey coclusio 18 The Departmet has allocated aroud 750 millio worth of PFI credits to local authorities udertakig PFI waste ifrastructure projects ad i the Comprehesive Spedig Review 2007 it received a further provisioal allocatio of 2 billio. Achievig value for moey from this commitmet depeds o whether: eough PFI facilities are delivered to meet EU ladfill targets; the deals give the prospect of value for moey; ad the projects are subsequetly maaged well i operatio. The Departmet was iitially slow to address these issues ad prior to 2006 few ew PFI facilities were delivered. Sice 2006, the Departmet has adopted a programme maagemet approach which has developed the market ad achieved a more rapid flow of ew ad larger PFI cotracts. It has stregtheed its arragemets for oversight of, ad support to, local authorities who eter ito waste PFI cotracts. Eglad is likely to meet its 2010 ladfill reductio targets but to meet the 2013 target the Departmet will eed to reduce substatially the time take to procure projects ad brig them ito operatio. 1 Projected performace agaist EU ladfill targets ad potetial fies if 2013 ladfill target exceeded A B C = (A-B) D E = (C x D) Projected Biodegradable Muicipal Waste to Ladfill 000 s of toes Total allowace 000 s of toes Total excess over allowace 000 s of toes Fie per toe of excess Total estimated fie for 2013 m Sceario 1 The Departmet s Base case High Delivery 7,512 7,460 52 150 8 Sceario 2 Medium Delivery 8,853 7,460 1,393 150 209 Sceario 3 Low Delivery 9,898 7,460 2,438 150 366 Source: Defra NOTE The fies are based o 150 per toe set to ladfill i 2013 i excess of the 2013 EU ladfill target. This is the rate that cetral govermet will fie local authorities for missig the 2013 targets. Maagig the waste PFI programme 7

summary Recommedatios We make the followig recommedatios to help the Departmet accelerate the successful delivery of waste maagemet PFI projects. I The Departmet is egaged i takig forward a challegig programme of procuremets of projects which have complex risks. To help evaluatio of the programme ad the idetificatio of areas for improvemet, the Departmet should build o its existig maagemet iformatio ad develop Key Performace Idicators. The Departmet should the publish aual performace statistics for the projects which it approves. These statistics should iclude: a b c d e project delivery timescales, icludig separate moitorig of project approval, procuremet ad costructio periods; the umber ad rage of bidders for local authority waste PFI projects; the extet of price chages after selectio of preferred bidder; authority satisfactio with support received from WIDP; ad whether the services i operatioal projects are beig delivered i lie with the cotract. II Local authorities would value greater access to bechmarkig iformatio ad data that could help them pla procuremets effectively. The Departmet should complete its curret work i compilig bechmarked costs of ifrastructure for differet types of waste project. This iformatio will help local authorities to pla projects ad to evaluate bids. The Departmet should also supplemet its existig guidace by collatig the followig iformatio ad makig it available to authorities to assist i the developmet of projects: a b c Iteral ad exteral resource requiremets for differet types ad size of project icludig appropriate budgets for the use of exteral advisers. A stadard set of assumptios for authorities to use i project plas o key variables such as waste growth. Local authorities may still wish to carry out sesitivity aalysis based o alterative assumptios. Iformatio o how to hadle the iterfaces withi the waste maagemet system where waste collectio is excluded from the PFI cotract. III The fiacig costs for waste PFI projects are higher tha may other types of PFI projects ad, like other PFI projects, are affected by the curret ucertaities i the fiacig markets. The Departmet should: a b c check that the cost of fiace for waste PFI projects ca be show to be reasoable for the risks bore either through a fudig competitio or bechmarkig; aalyse treds i the differetial betwee the cost of fiace for PFI waste projects ad other types of PFI project to establish the scale of, ad reasos for, the differece; ad set out the assessmet local authorities should udertake where a cotractor proposes to fiace costructio through its ow resources. This form of fiacig may avoid delays or price ucertaities i raisig project fiace i the curret fiacig markets. Authorities should, however, ot see faster deal closure as the mai reaso for choosig a cotractor but should weigh this alogside other value for moey cosideratios. IV To date the Departmet s support to local authorities has maily focused o project developmet ad procuremet. It is ow begiig to cosider cotract maagemet. The Departmet should icrease its oversight of projects after cotract award ad particularly durig the costructio phase by: a b c buildig o its existig model of providig experieced idividuals to assist with project developmet ad procuremet ad makig sure iput is available after cotract award if required; establishig miimum stadards for resourcig cotract maagemet ad ecouragig local authorities to pla for the hadover from procuremet to operatioal cotract maagemet; ad icreasig the frequecy of moitorig returs from local authorities durig the costructio phase to at least quarterly, rather tha six mothly, from cotract award util asset costructio is complete ad all facilities are operatioal. 8 Maagig the waste PFI programme

summary V Gaiig plaig permissio for ew waste treatmet facilities is a challege for local authorities. There is ofte cocer by residets about the ature of the facilities beig proposed, resultig i objectios which ca cause substatial delays to the Departmet s programme. The Departmet should ecourage local authorities to cosult early with residets to idetify issues which residets are likely to raise about differet types of techical solutio. The Departmet should complete its plaed commuicatios toolkit to assist authorities. VI The achievemet of the EU ladfill targets will be depedet o local authority projects usig forms of procuremet other tha PFI. The Departmet should obtai sufficiet iformatio from local authorities i the form of busiess cases ad progress reports to eable the Departmet to assess the deliverability of these projects withi the forecast timetables. The Departmet s oversight disciplies for PFI projects, for example its review of busiess cases ad the ivolvemet of Trasactors as a support to project teams, may also be helpful to local authorities usig other forms of procuremet. Maagig the waste PFI programme 9

Part Oe The role of PFI i reducig muicipal waste set to ladfill 1.1 The Europea Uio itroduced a Directive i 1999 requirig all Member States to reduce the amout of BMW disposed of i ladfill sites. Eglad, i commo with the UK as a whole, has historically relied heavily o ladfill. The EU ladfill targets for Eglad are set out i Figure 2. May other Europea coutries have already met their EU ladfill targets. Eglad is havig to icrease waste recyclig ad ivest i substatial ew waste treatmet ifrastructure to achieve its targets. 1.2 Eglad has 121 waste disposal authorities, comprisig 34 couty coucils, 81 uitary authorities ad 6 statutory waste disposal authorities. The waste disposal authorities have resposibility for the treatmet ad disposal of muicipal waste. The Govermet has created the followig fiacial icetives for these authorities to divert waste from ladfill i lie with the Europea Uio targets. The Ladfill Allowace Tradig Scheme (LATS): itroduced i 2005. Local authorities are each assiged a ladfill allowace, which is reduced each year to reflect the atioal ladfill reductio targets. If local authorities exceed their allowace, they must purchase additioal allowaces from authorities with a surplus of LATS, at a market rate. Ladfill Tax: this tax, itroduced i 1996, applies to all users of ladfill. The 2007 Budget Statemet aouced that the ladfill tax would icrease more quickly ad to a higher level tha previously plaed. Icreases of 8 per toe per year for active waste were aouced from 2008-09 to at least 2010-11, risig to a rate of 48 per toe. Ladfill tax receipts have rise from 333 millio i 1998-99 to 877 millio i 2007-08. 1.3 Local authorities ad cosumers have respoded to the challeges of reducig ladfill ad waste. Over the last three years recyclig has icreased ad waste growth has slowed from a rate of 3 per cet i 2001-02 to 1.4 per cet i 2006-07. 1 Together these factors have led to a sigificat decrease i the amout of muicipal waste set to ladfill compared with 2001 levels (Figure 3). Waste is also a icreasigly importat source of reewable eergy: i 2006, 82 per cet of all reewable eergy i the UK was derived from bio fuels ad waste. 2 The waste elemet icluded both waste combustio (such as icieratio) ad ladfill gas. 2 EU Ladfill directive targets for reducig the amout of BMW set to ladfill i Eglad eu Ladfill Directive Target 1 Year Target as a proportio Equivalet i millios of (by weight) of BMW toes per aum produced i 1995 (compared with (%) 15m toes i 1995) 2010 75 11.25 2013 50 7.50 2020 35 5.25 Source: Defra Note 1 The Europea Uio agreed to defer the target dates for the Uited Kigdom ad Spai by four years because they set more tha 80 per cet of their muicipal waste to ladfill i the baselie year (1995). 1 Source: Defra. 2 Source: BERR (2007) UK Eergy i Brief, July 2007. 10 Maagig the waste PFI programme

part oe 3 The amout ad proportio of muicipal waste beig set to ladfill has reduced i recet years as recyclig has icreased Thousads of toes 35 30 25 20 15 10 5 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Ladfill Recycled/composted Icieratio with EfW Source: Natioal Audit Office aalysis of Defra s muicipal waste statistics 1.4 The Departmet caot madate local actio o waste maagemet. Local authorities have statutory resposibility for waste disposal. It is for local authorities to decide how to maage waste, whether to ivest i ew ifrastructure ad how to fiace ad maage this ivestmet. 1.5 The PFI has bee a importat meas for local authorities to fiace ad build the facilities required. Cetral govermet fiacial support i the form of a aual grat paymet, followig the allocatio of what is kow as a PFI Credit (Figure 4 overleaf), is available to local authorities for projects approved by cetral govermet. Local authorities also use other types of procuremet, however, icludig other public private parterships. These projects do ot receive PFI credits. Although PFI cotracts accout for most of the ew waste treatmet capacity beig brought ito operatio by 2013 these other procuremets accout for most of the deals expected to close i 2008-09 ad 2009-10. 1.6 To get PFI credits the authorities must have their plas approved first by the Departmet ad the by the cross-departmet Project Review Group. The Project Review Group is a pael of experts chaired by the Treasury, with permaet represetatio from the Departmet for Commuities ad Local Govermet ad the Public Private Parterships Programme (4ps). 4ps work i partership with all local authorities to secure fudig ad accelerate the developmet, procuremet ad implemetatio of PFI schemes, public private parterships ad other complex projects ad programmes. The approval process is set out i detail i Appedix 4. 1.7 At the time of our audit, 18 local authorities had siged PFI cotracts with a combied capital value of 1.6 billio. The Departmet has allocated 750 millio i grat through PFI Credits to support these projects throughout their term. Nie more were i procuremet ad a further 19 were i developmet. I the Comprehesive Spedig Review 2007 the Departmet received a further provisioal allocatio of 2 billio for waste projects. Maagig the waste PFI programme 11

part oe 4 Meetig the cost of local authorities PFI cotracts Cetral govermet PFI Grat paymet Local authority Aual cotract charge paymet PFI Credits Cotractor Source: Natioal Audit Office Cetral govermet makes a aual paymet to the local authority based o the amout of PFI credits allocated. This covers a proportio of the aual cotract charge. The local authority pays the cotractor a sigle paymet (uitary charge) for services as set out i the cotract. Local authority PFI support is allocated by cetral govermet i the form of PFI Credits for projects which gai cetral govermet approval. PFI Credits act as a promise that a aual PFI Grat ca be claimed oce the project is operatioal. Requests for additioal credits if the cost of the project icreases durig the procuremet are scrutiised by the Departmet o a case-by-case basis. To date the Departmet has ot provided additioal fiacial support for chages to projects made or proposed after cotract sigature. 1.8 As a result of this icreased ivestmet, the aggregate aual paymets are ow aroud 220 millio o all PFI waste cotracts. The aggregate paymets are expected to rise substatially as more projects are approved ad come ito operatio. Figure 5 compares the projected spedig o the Departmet s waste PFI projects to the spedig of other departmets who are major users of PFI. 1.9 Waste PFI projects ca be complex ad differ from traditioal uses of PFI i several importat respects. Waste maagemet is a idustrial process, with several compoets icludig collectio, recyclig ad compostig ad fially treatmet of waste (Figure 6 o pages 14 ad 15). More risk is carried ito the operatioal phase tha a serviced asset such as a school or hospital because of the reliace o techology ad the differet parts of the waste maagemet process workig together. Where local authorities seek PFI credits from the Departmet, the project requires coordiatio betwee cetral ad local govermet. Some projects serve more tha oe local authority ad therefore require coordiatio across authority boudaries. Projects have risks which are differet from those foud i other PFI ifrastructure projects, icludig ucertaity over future waste throughput; plaig permissio difficulties; the risks of differet types of techology; ad fidig markets to sell products from waste treatmet. There are other Govermet objectives to cosider, such as icreasig the use of reewable eergy ad reducig the impact of climate chage (Appedix 5). 12 Maagig the waste PFI programme

part oe 5 Compariso of projected spedig o waste PFI projects with the PFI portfolios of other departmets Sum of uitary charge ( m) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Health Miistry of Defece Departmet for Trasport Departmet for Childre, Schools ad Families Departmet for Eviromet Food ad Rural Affairs Source: HM Treasury NOTES The uitary charge figures for Defra comprise: 1 Uitary charge paymets for waste projects by local authorities (98 per cet of total paymets to 2020). 2 Three small (o-waste) PFI projects: (2 per cet of the total uitary charge paymets to 2020). Maagig the waste PFI programme 13

part oe 6 A overview of the facilities that may be procured ad operated as part of a waste maagemet PFI cotract Itegrated waste maagemet cotracts may iclude all these services uder oe cotract, although oly a miority iclude collectio. Waste Collectio Services Residets ofte take materials directly to recyclig cetres A facility provided by the Waste Disposal Authority which is available to the public to deposit waste which caot be collected by the ormal household waste collectio roud. Also referred to as Civic Ameity Site or Household Waste Disposal Compoud. Waste from our homes is geerally collected uder cotract with the local waste collectio authority, which is typically a district coucil (i areas with a two-tier system) or a uitary authority. Sice May 2006 PFI cotracts will maily be for treatmet facilities oly. Local authorities will eed to procure separate cotracts for other facilities ad maage the iterfaces betwee them. Waste Treatmet Facilities No-thermal treatmet processes Segregated orgaic waste Mixed materials Compostig methods such as i-vessel compostig ad widrow compostig (where waste is piled i log rows called widrows) ivolve breakig dow biodegradable material to form compost. Autoclavig systems where waste is treated by steam to eable the recovery of mixed orgaic waste. Aaerobic Digestio ivolves breakig dow biodegradable material i the absece of oxyge. Mechaical Biological Treatmet (MBT) ivolves a series of treatmet steps to covert the residual waste ito a stabilised product that ca either be applied to lad, used as a fuel or set to ladfill, depedig o the process ad what other facilities are i place. Sometimes these facilities are procured alogside a thermal treatmet to bur the fuel. Source: Natioal Audit Office 14 Maagig the waste PFI programme

part oe Recyclig ad Processig facilities Material Reclamatio Facility Waste Trasfer Statio Trasfer Statios are used as a base for the operatio of refuse collectio vehicles i additio to waste disposal. Oce collected the waste is ofte brought to a trasfer statio. After beig checked for dagerous or hazardous materials that may be preset waste may the be set to recyclig or disposal facilities. Trasfer Statios are also used as a base for refuse collectio vehicles. Accepts recyclable commigled materials that have bee collected at kerbside ad separated at source, or from a recyclig cetre. Thermal treatmets Gasificatio ad Pyrolysis ivolves heatig the waste, so that it is tured ito a fuel, which ca be used to geerate eergy. Waste that caot be recycled or otherwise treated is set to ladfill. I additio, some treatmet processes produce material (such as ash) that is sometimes set to ladfill. Eergy from waste icieratio these systems bur, or icierate, the waste directly ad recover eergy ad/or heat. Ladfill Ladfill capacity is still required to store waste that caot be recycled or recovered usig other facilities. Maagig the waste PFI programme 15

Part two The Departmet s maagemet of the waste PFI programme 2.1 The Departmet s maagemet of the waste PFI programme has required it to address three mai issues: i ii iii the establishmet of a programme of projects ad a thrivig, competitive supply market (sectio A); the delivery of the projects i a timely fashio (sectio B); ad the appropriate oversight of idividual projects so that the deals etered ito by local authorities are likely to secure value for moey for the taxpayer (sectio C). A) Establishig a programme of projects ad a supply market Establishig a programme of projects The amout of PFI Credits available 2.2 The amout of PFI credits allocated to the Departmet as part of the Govermet spedig reviews has bee a factor affectig the umber ad size of PFI projects local authorities have udertake. PFI credits were limited i the early years of the programme (especially prior to 2003) (Figure 7). There were ot always sufficiet PFI credits available to fud all local authorities requests for fiacial support ad it was ecessary to ratio fuds betwee projects. The Departmet s iitial approach to programme maagemet 2.3 The Departmet eeded to ecourage local authorities to make the best use of resources available. However, the Departmet was slow to develop a rigorous approach to establishig a programme of projects, which limited the umber ad size of projects beig developed. Prior to 2003 i particular, there were shortcomigs i three areas. 7 The Departmet s allocatio of PFI credits was icreased substatially i the 2007 Spedig Review Spedig PFI Credits maximum PFI Review allocated to credit for ay (Year) the Departmet project allowed ( m) by the Departmet ( m) 2002 355 25 2004 275 40 2007 2,000 No absolute limit (credit capped at maximum of 50 per cet of capital cost of projects) Source: Defra PFI project approval criteria 16 Maagig the waste PFI programme

part two The approach to programme maagemet was ot sufficietly well orgaised. Util 2003 it was ot clear to local authorities where resposibility for maagig the programme lay withi the Departmet. I 2003 the Departmet itroduced a Waste Implemetatio Programme to oversee its overall strategy o recyclig ad waste maagemet, which established a idetifiable leadership ad maagemet structure. Local authorities have oticed a improvemet i commuicatio as a result of this chage. The PFI programme was ot focused o ladfill diversio. The Departmet s first stadard criteria for the approval of PFI projects, released i 2001, did ot focus explicitly o ladfill diversio or the EU directive. I 2003 the Departmet updated its criteria so that project targets had to be specified i terms of the ladfill diversio targets. The 2001 criteria also discouraged the use of eergy from waste (icieratio) as a meas of divertig waste from ladfill. The 2003 criteria removed this restrictio. There was o systematic approach to brigig forward ad prioritisig projects. Projects were approved o a case by case basis. There was o explicit focus o ecouragig the authorities that were sedig the most waste to ladfill to develop ew ifrastructure. The Departmet s subsequet actio to improve programme maagemet 2.4 I July 2006, the Departmet set up a delivery uit, the Waste Ifrastructure Delivery Programme (WIDP), to accelerate the delivery of waste ifrastructure. WIDP is supported by Parterships UK ad 4ps, the project advisory bodies for cetral ad local govermet. WIDP s aual budget is over 4 millio. Curretly it has aroud 30 full time equivalet staff comprisig a mix of departmetal staff, staff cotracted from Parterships UK ad 4ps ad specialists secoded from other agecies (Figures 8 opposite ad 9 overleaf). Programme maagemet activities udertake by WIDP are listed at Appedix 7. 2.5 WIDP has oversee major chages to both the fiacial resources associated with the programme ad the way i which projects are orgaised ad prioritised: 8 Year The 2007 Spedig Review allocated a substatial icrease i PFI Credits for waste projects. The Departmet has received a provisioal allocatio of 2 billio (figure 7). The Departmet is usig this icrease both to fud more projects ad also to provide idividual projects with more PFI Credits. There is o loger a limit o the PFI Credits available to each project although the credit is capped at a maximum of 50 per cet of the capital cost. WIDP has improved the orgaisatio of the forward programme. It ow ivites local authorities to develop projects for the Departmet s approval i orgaised procuremet rouds. This replaces the previous first come, first served approach. The Departmet publishes the forward programme o its website to allow cotractors ad other authorities to see what projects are likely to be comig to market. Source: Defra Budget allocatio for ruig WIDP Budgeted Cost ( m) 2006-07 2.7 2007-08 4.5 2008-09 4.4 Maagig the waste PFI programme 17

part two 9 WIDP orgaisatio chart Staffig figures give i full time equivalet (FTE) Policy Developmet Waste Implemetatio Programme (WIP) Programme Office Waste Recyclig Actio Programme New Techologies Waste Ifrastructure Delivery Programme (WIDP) PUK Board represetative WIDP Programme Director (1) 4ps Board represetative Project Developmet Guidace Trasactors Policy Liaiso Data Programme Office Secodee (1) SEO (0.75) EO (0.75) Vacacy (1) Cotractors (4.25) Secodee (1) SEO (1) HEO (1) EO (1) Grade 7 (1) SEO (0.25) HEO (1) EO (0.25) AO (2) SEO (2) HEO (2) EO (1) Secodee (1) Cotractor (1) Secodee (1) Cotractor (3.5) Vacacy (1) Secodee (1) Defra Parterships UK 4ps RPS Source: Defra The effect o the umber ad timig of projects 2.6 PFI projects were advertised ad siged at a slow rate prior to 2004. This rate has ow icreased (Figure 10 overleaf), reflectig both the improvemets i programme maagemet ad the icreasigly tough ladfill restrictios that local authorities face. 2.7 The Departmet expects a substatial umber of further cotracts to be let over the ext five years (Figure 11). Although PFI will cotiue to play a sigificat role i deliverig these projects, ot all of these will ecessarily be fuded by PFI. For example, a local authority ca raise its ow fiace, kow as Prudetial Borrowig, if it ca prove that it ca repay the loa through its ow resources. The Local Govermet Act 2003 etitles authorities to borrow o this basis without the coset of cetral govermet. Figure 10 overleaf 18 Maagig the waste PFI programme

part two 10 Overview of waste PFI projects (siged ad i procuremet) ad key developmets policy (top) ad programme maagemet (bottom) Isle of Wight Coucil Hereford ad Worcester Coucils Kirklees Surrey Couty Coucil Siged Project Bar represets tederig period (date advertised i OJEU to Cotract award) Project i procuremet Bar represets predicted tederig period (date advertised i OJEU to projected date of Cotract award) * Deotes case study project South Gloucs District Coucil East Sussex, Brighto ad Hove West Sussex Couty Coucil East Lodo Waste Disposal Authority * Leicester City Coucil * Nottighamshire Couty Coucil Cetral Berkshire (Readig, Wokigham ad Brackell Forest) * Corwall Couty Coucil April 1996 Public Private Partership Programme (4ps) itroduced September 1997 Treasury Taskforce formed to advise Departmets o PFI projects July 1999 Stadardisatio of PFI Cotracts (SoPC) 1 released by the Treasury April 2000 Office of Govermet Commerce (OGC) formed Jue 2000 Partership UK (PUK) formed September 2002 SoPC 2 released July 2003 PFI Meetig the Ivestmet Challege released West Berkshire Coucil April 2004 SoPC 3 released March 2006 SoPC 4 ad PFI Stregtheig the Log Term Partership released 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 May 2000 Waste Strategy 2000 published September 2000 1st Waste PFI project criteria issued Jue 2001 Defra formed from MAFF ad DETR April 2003 Itroductio of Waste Implemetatio Programme May 2006 2d Kelly Market Report idetifies actios to improve the muicipal waste maagemet market Jue 2006 WIDP formed Revised Waste project PFI criteria issued May 2007 Waste Strategy 2007 published Lacashire Couty Coucil Northumberlad Couty Coucil * Shropshire Couty Coucil * Wakefield Metropolita Borough Coucil Greater Machester Waste Disposal Authority * Cambridge Couty Coucil Lodo Borough of Southwark Cheshire Couty Coucil Merseyside Waste Disposal Authority North Yorkshire Couty, City of York Coucils Barsley, Docaster ad Rotherham Coucils Suffolk Couty Coucil Leeds City Coucil Bradford City Coucil

part two 2.8 Local authorities are developig projects i greater umbers tha i previous years: at summer 2008, ie projects were i procuremet ad a further 19 had submitted a busiess case, or expressed a iterest i usig PFI. Projects yet to start procuremet will ot cotribute sigificatly to ladfill diversio i time for 2013, though they will make a substatial differece to the 2020 target. The effect o the size of projects 2.9 Authorities sigig cotracts to date were ot those resposible, o average, for sedig the largest amouts of waste to ladfill. I our 2006 report we recommeded that the Departmet prioritised authorities that historically set the largest amouts of waste to ladfill. 2.10 The Departmet has made progress i this area. Projects i procuremet i the summer of 2008 were sigificatly larger i terms of toes of waste set to ladfill, because the sposorig authorities origially set more waste to ladfill (Figure 12). These larger projects are critical to deliverig the 2013 ladfill target. 2.11 The Departmet has also sought to icrease the size of projects by ecouragig eighbourig authorities to develop joit projects. The potetial beefits of joit projects are: fewer facilities eedig plaig permissio; ecoomies of scale i project costs; the poolig of risks; ad possible operatig beefits from a joied up local approach to waste maagemet. The majority of cotracts siged to date have bee sigle-authority deals. There are, however, good examples of collaborative workig betwee local authorities to date, icludig: eighbourig authorities workig together such as East Sussex ad Brighto ad Hove Coucils, Herefordshire ad Worcestershire, three coucils withi Cetral Berkshire (Wokigham, Brackell Forest ad Readig) ad Lacashire with Blackpool; ad where a waste disposal authority has worked with collectio authorities i its area to agree a itegrated strategy to procure joied up services which iclude residual waste facilities. Examples have bee East Lodo Waste Authority ad Greater Machester Waste Authority. 11 The Departmet s plaed programme of cotracts to be let 2007-08 2008-09 2009-10 2010-11 2011-12 total (Actual) 4 5 6 13 12 40 Source: Defra NOTE These projects will be delivered by PFI or other forms of procuremet. 12 The average amout of waste beig dealt with i each future PFI project is expected to be greater tha that dealt with i the projects where cotracts have already bee etered ito Status of project at the time of our audit Etered ito PFI cotract PFI project i procuremet Developed project plas (Outlie Busiess Case submitted) Iitial expressio of iterest No PFI solutio curretly proposed Waste to ladfill (thousads of toes i 2006-07) Average (per project) 171 376 291 299 /a Average (per authority ivolved) 140 260 174 166 90 Source: Defra muicipal waste statistics Maagig the waste PFI programme 19

part two 2.12 The Departmet s efforts to ecourage joit workig have had a effect. Projects i procuremet ad at a early stage of developmet are ivolvig a greater umber of authorities for each project tha the projects for which cotracts have bee let (Figure 13). Establishig a supply market Developig a competitive marketplace 2.13 Competitio betwee bidders is a importat factor i achievig value for moey. Developig a competitive supply market i the waste sector has bee challegig. Up util 2006: the waste cotractor market i the UK as a whole had bee domiated by a small umber of firms 3, whose activities had bee cetred o waste collectio ad ladfill; cotractors ad leders eeded to assess a rage of ew risks, icludig the possibilities of usig differet techologies; ad there were very few suppliers equipped to develop plas for waste treatmet ifrastructure of the size required or to bid simultaeously for a umber of projects. 2.14 There has evertheless bee competitio for waste PFI cotracts. Twelve of the 17 projects developed sice the Departmet was formed i 2001 received three or more bids (Figure 14). Iitially there were oly a small umber of projects comig to the market. The Departmet has worked with the Departmet of Busiess, Eterprise & Regulatory Reform ad UK Trade ad Idustry to ecourage firms to bid for these cotracts. Sice the Departmet started to icrease the umber of projects, there has bee a correspodig icrease i the umber of firms iterested i biddig. 2.15 Although there have bee sufficiet bidders to geerate competitio for the cotracts, the rage of successful bidders has bee relatively restricted. Two firms, SITA ad Veolia, have wo te out of the 18 PFI waste cotracts let to date, icludig six of the ie projects siged i 2006-07 ad 2007-08 (Figure 15). Veolia wo three of the four cotracts let i 2007-08. Veolia s bids proposed to fiace the projects out of Veolia s existig fiacial resources, rather tha seekig specific ew project related fiace. Amogst the factors i appoitig Veolia was the prospect of faster deal closure tha alterative bids relyig o project fiace. 13 The umber of authorities ivolved i idividual PFI projects is icreasig Status at the time of our audit Etered ito PFI cotract PFI project i procuremet Developed project plas (Outlie Busiess Case submitted) Iitial expressio of iterest No PFI solutio curretly proposed Number of Projects Waste Disposal Authorities ivolved Authorities per project 18 22 1.2 9 13 1.4 9 15 1.7 10 18 1.8 /a 51 /a Source: PFI pipelie ad Defra muicipal waste maagemet statistics NOTE The umber of authorities is oe greater tha the umber of waste disposal authorities i Eglad (122 as opposed to 121) because oe authority that has already let a cotract is also part of aother potetial project at a early stage of developmet 3 OGC (2006) OGC Kelly Report to the Fiacial Secretary to the Treasury. 20 Maagig the waste PFI programme

part two 14 Projects ad bidders sice 2001 Number of projects 14 12 2.16 I exceptioal cases where competitio is abset, local authorities ad the Departmet adopt alterative procedures to provide assurace o value for moey. Case Example 1 overleaf shows how oe local authority dealt with a lack of competitio for its project after a umber of bidders withdrew from the competitio. 10 8 6 4 2 0 1 2 3 or more Number of bids received 2.17 The Departmet s recet strategy, implemeted by WIDP, has sought to stregthe competitio for these projects by: educatig the busiess commuity about the waste sector to wide the rage of potetial bidders; ad focussig o cotracts for waste processig ad disposal that exclude other aspects of waste maagemet, such as waste collectio ad recyclig. Source: Defra 15 Successful bidders for PFI cotracts sice 1997 Project Siged SITA Veolia Biffa Doarbo Focsa Shaks Viridor Global Waste Total reewables Recyclig Group 1997-98 1 1 1998-99 1 1 1 2 1999-00 1 1 2000-01 1 1 1 2001-02 2002-03 1 1 2 2003-04 1 1 2 2004-05 2005-06 2006-07 2 1 1 1 5 2007-08 3 1 4 Total 5 5 2 1 1 1 1 1 1 18 Source: Defra portfolio of projects NOTE 1 I these cases SITA acquired the cotracts through merger with or acquisitio of the origial cotractor. Maagig the waste PFI programme 21

part two Case Example 1 Northumberlad Couty Coucil: dealig with a sigle teder I 2004 five bidders pre-qualified ad submitted outlie solutios for this project. Of these, oe experieced fiacial difficulties ad oe was deselected by the Authority. Two more bidders subsequetly withdrew, citig commercial reasos. A sigle teder was received from SITA, the icumbet waste service provider. The Authority udertook a full evaluatio of SITA s bid. From this the Authority cosidered it worthwhile to proceed with the procuremet process. I seekig approval the Authority also detailed the measures it would take to determie value for moey i the absece of direct competitio. The mai measures were: trasparet egotiatio, icludig bechmarkig agaist other PFI projects where possible; ad the use of advisers to review SITA s proposal. The focus of the egotiatios with SITA was improvig project affordability. The mechaical biological treatmet based proposal was elimiated. The focus was placed o eergy from waste ad icreasig the projected ladfill diversio rate. This strategy achieved the desired objectives ad resulted i a sigificat reductio i price betwee SITA s teder submissio ad its appoitmet as preferred bidder. Further price reductios were achieved prior to cotract sigature. Throughout the process, the Authority, together with the bidder SITA, the Departmet, the Treasury ad Parterships UK, used the methods the Authority had proposed to secure value for moey i the absece of direct competitio. I additio there was a three moth review, coducted by the Treasury. Overall the procuremet took 32 moths to complete, which although loger tha origially plaed, was i lie with the experiece of waste PFI projects at this time see figure 10. The Departmet agreed that the procuremet process could cotiue o this basis, but that the project would be subject to a detailed review prior to progressig to appoitmet of preferred bidder status. 2.18 These approaches have started to make a impact. Geeral costructio compaies ad overseas compaies have made bids for recet projects. For example, the Australia firm Global Reewables i partership with Led Lease Corporatio has wo a PFI cotract with Lacashire Couty Coucil ad Cambridgeshire Couty Coucil has etered ito a cotract with Doarbo Waste Maagemet Ltd, a local firm. More ew etrats are curretly egaged o projects at a advaced stage of egotiatio ad have bee appoited as preferred bidders: i Greater Machester a cosortium of Viridor ad Joh Laig ad i Wakefield VT Group plc, through VT Evirometal Egieerig ad its recetly acquired Estech Europe subsidiaries. Commercial terms 2.19 The Departmet developed, i cosultatio with the private sector, cotract terms which vary the Treasury s stadard PFI terms. These ameded terms seek to secure value for moey o issues specific to PFI waste projects. Local authorities are expected to icorporate these terms i their PFI waste cotracts. Fiacig projects 2.20 May of the baks ad other fuders that fiace other PFI projects are ow iterested i waste PFI. There are two mai compoets to the cost of debt fiace for waste PFI projects: the uderlyig iterest rate ad the risk margi. The risk margi reflects the complex risks of waste projects ad the fact that waste projects do ot display the uiformity of other PFI buildig projects such as hospitals or schools. I additio, all PFI projects have bee facig higher risk margis i 2008 compared with previous years because of ucertaities i fiacial markets (Figure 16). Recet decreases i uderlyig iterest rates should, however, be a offsettig factor i future deals. 2.21 If fiacig markets recover there may be opportuities for the ivestors to refiace PFI waste projects o improved terms. As from October 2008, the Treasury expects all PFI cotracts that are siged durig the curret disruptio to the credit markets to require up to 70 per cet of refiacig gais to be give to the public sector. The previous ormal arragemet was 50 per cet. 22 Maagig the waste PFI programme