Introduction to waste PFI
Waste Private Finance Initiative (PFI) sits within Local Authority Funding, together with the National Waste Minimisation and Recycling Fund.
In the Spending Review (SR) 2002 (covering the period 2003/04 to 2005/06) Defra was allocated £355m towards the funding of waste PFI projects. The SR 2004 (covering the period 2006/7 to 2008/9) allocated an additional £275m of PFI credits for waste PFI projects, over and above the £355m available from the 2002 Spending Review.
In September 2000, the Government introduced new criteria which changed the focus of waste PFI away from incineration towards recycling led solutions. The criteria ensured that projects submitted for PFI credits would follow the waste hierarchy (minimisation, re-use, recycling and composting, recovery and finally landfill) and placed a £25m cap on PFI projects in an effort to enable a larger number of projects to receive funding.
While the criteria succeeded in its aims, stakeholders levelled a number of criticisms against them, particularly regarding two key issues: the £25m cap on credits and the perceived negative stance on incineration.
After much discussion, in October 2003, Ministers approved changes to these two key criteria. The £25m cap was raised to £40m and specific references to incineration were removed and replaced with greater emphasis on the waste hierarchy. The 2003 criteria can be found for reference on this link.
In the last couple of years, there has been an increase in the number of projects submitted for consideration for PFI credits support to the Department (DEFRA). With that increase has come an improvement in the environmental solutions being proposed. Most of the recently submitted projects have proposed long-term recycling and composting solutions in excess of 50%; diversion from landfill in excess of EU targets and ambitious waste minimisation proposals that aim to reduce waste growth to 0% per annum in the long term.
Revised criteria for the Defra funding of waste PFI projects were announced on 18 May 2006:
Criteria for Securing Waste PFI Credits (Defra, May 2006)
These criteria, which waste projects must meet to be considered for PFI credits, are in addition to the general criteria set out in the Green Book which must be met by all PFI projects. Authorities should also be aware of the outcome of the Waste Strategy Review which is due to be published later this year (now due 2007).
1. Schemes (which may involve more than one Authority) must demonstrate how they will contribute to delivery of their authorities' adopted Municipal Waste Management Strategies (regardless of whether they are Unitary or Two-tier Authorities).
Local Authorities are strongly encouraged to have explored with neighbouring authorities the opportunities for joint working when considering a major procurement1. Scale and strategic impact are two important aspects to consider when proposing a scheme. In line with Government policy, PFI projects with a capital value below £20 million will not be supported. However, Defra’s upper threshold of £40m for the availability of PFI credits for individual projects no longer applies.
In two-tier areas, proposals should demonstrate how the two tiers of local government will work together to deliver their targets under legally binding agreements or constitutions, which should be in place by the start of procurement. By Outline Business Case (OBC) stage we would expect a minimum of a detailed Memorandum of Understanding (covering major points of principle), or establishment of joint waste management structures or formal contractual arrangements.
In two-tier areas, a Joint Municipal Waste Management Strategy will be a requirement towards this and should include clear, long-term targets for Biodegradable Municipal Waste diversion; recycling; etc. which have been adopted or are close to adoption by all stakeholders.
In other types of partnership, such as regional or multi-area partnerships, plans should demonstrate evidence of strong joint working and the intention to have legally binding agreements or arrangements (e.g. joint waste management boards) in place by the start of the dialogue process.
2. PFI credits are awarded to authorities primarily to deliver increased diversion of biodegradable municipal waste from landfill. Proposals should demonstrate how the schemes:-
- contribute to or complement longer-term national targets for recycling and composting as well as diversion of biodegradable and other municipal waste from landfill, indicating the amount of biodegradable and other municipal waste expected to be diverted from landfill over the whole life of the project;
- support or complement the authorities' plans for recycling set out in their Municipal Waste Management Strategies.
3. Proposals should show how schemes will provide additional contribution to national landfill diversion during the contract period and up to 2020 as required under the Landfill Directive, where appropriate.
4. Waste minimisation is at the top of the waste hierarchy. While PFI is frequently not an appropriate mechanism for addressing waste reduction, proposals should make clear what other action the authority is taking to reduce generation of MSW.
5. The use of residual waste treatment options involving recovery, including energy from waste solutions, will have an integral role in treating the waste we cannot ‘design out’, re-use or recycle. Such options should be considered while also demonstrating that there is no future barrier to meeting reduction, reuse and recycling targets.
The Authority should have done sufficient analysis of the technical, environmental and economic options to have identified a preferred solution within the OBC, so that bidders will not be expected or required to carry-out their own repetitious options appraisals.
6. Proposals should demonstrate that other relevant authorities, the public, and interested parties have been consulted and that there is a broad consensus supporting a recognised long term waste management strategy which is reflected in the proposed solution.
7. Proposals should follow HMT value for money guidance and clearly demonstrate that the proposed project offers a value for money solution when compared with other procurement options. Evidence is required to demonstrate that the authorities have considered and approved all on-going funding requirements necessary to make the project affordable over its whole life. This evidence should include signed commitments from members, or minutes of members meetings clearly demonstrating that they have committed to the ongoing affordability of the project2.
8. Proposals must follow the extant guidance for PFI procurement; i.e. Defra-issued specific guidance, the 4Ps Waste Management Procurement Pack, SoPC33 and other HMT guidance on PFI procurement. Authorities should also be aware that even if a proposal receives PFI credits support from Defra all OBCs will have to gain final approval from the inter-departmental Project Review Group (PRG) that they are ready to proceed to procurement. The criteria for the PRG assessment of business cases is available on the HM Treasury website (http://www.hm-treasury.gov.uk/).
9. Residual disposal solutions (e.g. refuse derived fuel, fibre, soil improvers) must demonstrate the destination of any residual output and the existing or intended commitments for and cost of effecting such disposal. Proposals should include findings from soft market testing indicating a market appetite for the proposed residual product, so as to secure value for money.
Where there is a potential for third-party income (e.g. from sale of recyclates, electricity, heat, etc.), this should be considered as part of the value for money analysis. Where new or alternative technologies are proposed in the reference project, they should be shown to be bankable and deliverable.
10. Preferential consideration will be given to capital projects which focus on residual treatment plant only, including, but not limited to, Energy from Waste, Mechanical Biological Treatments, Anaerobic Digestion4.
11. Proposals should demonstrate how the potential for community sector involvement in service delivery through the project has been assessed. Where, as a result of such work, a decision is made to exclude or displace such services, a value for money case must be put to support such an approach.
12. Projects should consider the potential for including other waste streams such as commercial or industrial waste, on the basis of securing a value for money solution. However, projects must demonstrate that:
- the project continues to deliver value for money in relation to the biodegradable municipal waste being managed through it;
- any cross subsidisation of the costs of disposing of non-municipal waste streams is transparent and acceptable to all stakeholders.
13. Projects should have potential sites under consideration which accord with the relevant waste planning authority's statutory development plan. Where this is being updated to reflect Planning Policy Statement 10 (PPS10) projects should align with the policies in PPS10.
14. Authorities responsible for projects will be expected to engage in the preparation of the relevant regional spatial strategy and local development plan documents so as to help secure an up-to-date and supportive planning context in line with PPS10, including appropriate land allocations.
15. Authorities should take proactive action to acquire sites in line with the development plan, or which they are confident will accord with the development plan if components of the development plan are under review or in preparation.5
Consideration will be given on a case by case basis to the status and substance of those planning policies and plans currently in place at authorities.
[NOTES
Note 1- There are at least five reasons why co-operation with neighbouring Authorities is desirable: first, the role of scale in a project which may be particularly relevant in attracting strong market interest – an important driver of value-for-money (see section 7); second, the availability of suitable sites is not evenly distributed across the territories of all Authorities; third, transport links and logistics may dictate co-operation across Authority boundaries; fourth, failure by Authorities to co-operate may hand a significant negotiating advantage to a supplier who is sizing a facility to cater for more than one Authority’s needs; and fifth, economies of scale, which are another important driver of value-for-money.
Note 2 - The approval should be on the basis of members having a clear understanding of the range of possible costs based on a sensitivity analysis giving best and worst case scenarios.
Note 3 - A set of waste sector specific derogations to SoPC3 is being issued in tandem with these criteria. The Procurement Pack is being updated, with the second edition due in mid-2006, and will contain some standard drafting for waste PFI procurement.
Note 4 - This does not necessarily preclude projects comprising combined or integrated facilities or a wider scope of services, where such projects offer clear benefits such as improved value-for-money, deliverability and affordability and that substantive market interest exists through soft market testing. If there is not sufficient evidence for a real market for such projects, they are unlikely to be approved.
Note 5 - Availability of necessary site(s) identified and secured by the Authority does not preclude bidders offering alternative sites, but does provide a secure reserve position which increases competition, reduces bid costs (both thereby enhancing value-for-money) and improves deliverability of the project.]
New structure for PFIs to aid £11 billion infrastructure investment (9 February 2007)
"This change of approach is one of a number of steps which Defra is taking to ensure that England will meet its EU Landfill Diversion targets on a timely and cost-effective basis"
John Burns, Director of WIP
Based on experience so far, a more streamlined process for applying to Defra for waste PFI credits has been announced today (9.2.2007).
The new revised system will include "award rounds" rather than the acceptance of applications at any time of the year. The award rounds system is used by other government departments and will result in time windows for the submission of applications.
However the Defra PFI rules issued in 2006 continue to apply.
Waste-to-EnergyFacility, Flanders (Indevar)
PFI has proved to play a crucial role in enabling many local authorities to finance the estimated £11bn of infrastructure required. This level of investment is necessary to establish sufficient waste treatment facilities to ensure that the UK meets its targets for reducing dependence on landfill.
Defra's new Waste Infrastructure Delivery Programme (part of the Waste Implementation Programme) will manage the allocation of PFI credits to the waste investment sector. WIDP comprises a partnership of expertise from the Partnership UK (PUK), and 4ps organisations working together with Defra, to deliver this programme and providing support to all procurements within the programme. Support applies whether local authority funding is through PFI credits or otherwise.
The old system of PFI applications at any time made assessment of the comparative contribution of each case to the overall PFI programme difficult to judge. The new arrangement is intended to address this and encourage a partnership approach. It is anticipated that a partnership approach should produce increased value for money and other delivery benefits.
Privatisation will focus on a number of criteria including scale, deliverability, readiness and environmental objectives.
Director of Defra's Waste Implementation Programme John Burns has written to all local authority chief executives to explain how the system will operate.
Key changes
* The introduction of a new process of Award Rounds for Local Authorities to use when submitting an Outline Business Case for PFI credits.
* The requirement for Local Authorities to complete a new Planning Health checklist when submitting their OBC.
* Eligibility will be based in part on compliance with published PFI criteria, and in part on additional criteria which will enable a managed pipeline of investments to be procured, supporting the acceleration of Infrastructure delivery whilst offering value for money.
The strategy is to learn from the experience of earlier submissions and application of the knowledge so gained to future submission "waves". It is also important to match procurements to the capacity requirements of the waste treatment market as it expands.
Defra indicates that it expects that the "deal-flow will progressively ramp up to a peak in 2010/11 before declining. It will give confidence to the supply side of the market that there will be sufficient projects coming forward in an orderly process to justify investment in bidding and supply capacity."
The strategy is also expected to encourage new entrants to the waste market helping to remove the constraint of having only a limited number of players involved in bidding. This should in turn encourage more competition in bidding and help to build momentum into the programme.
John Burns commented:
"This change of approach is one of a number of steps which Defra is taking to ensure that England will meet its EU Landfill Diversion targets on a timely and cost-effective basis."
Further information on the new procedures and the PFI process in general can be found on the Defra website.
Additional Guidance
Additional guidance shown below can be found at the Defra website.
Waste-specific derogations to the standard PFI contract set out in SoPC3 have been agreed with HM Treasury. Guidance on the derogations has been published:
Standardisation of waste management PFI contracts: guidance on SoPC derogations - May 2006
More information on the Defra's waste PFI:
- The assessment process
- Waste PFI procurement pack
- Projects so far
- Potential future waste PFI schemes
Guidance documents:
- Final Business Case (FBC): guidance for local authorities - July 2006
- Standardisation of waste management PFI contracts: guidance on SoPC derogations - May 2006
- Waste Derogations from SoPC3 - Help Desk Facility
- Supplementary Waste Specific Value for Money Assessment Guidance
Moving towards a standard PFI contract for waste
- Payment Start Date for PFI Grant and Other PFI Issues
- Investment opportunities: municipal waste and PFI - conference report
- Implementation of VfM Stages 2 & 3 in Waste PFI Projects
- Advice to Local Authorities for Procurement - Responsibility for Private Sector Bid Costs
- HM Treasury VfM Assessment Model (PFI Quantitative Evaluation Spreadsheet)B
- Business opportunities for investment in municipal waste management through PFI
- Implementation of Standardisation of PFI Contracts (SoPC)3 in Waste Projects
- HM Treasury Application Note: Value for Money in Refinancing - February 2005
The application note interprets existing guidance in order to assist authorities in determining value for money when approving refinancing requests. This includes guidance on maximum levels of debt and increases in termination liabilities.
Application Note: Value for Money in Refinancings on HM Treasury site
Covering Note: Value for Money in Refinancings on HM Treasury site
[parts of this article Crown © 2006 - Source: Defra website]