Delays can be an inevitable part of large or complicated contracts such as waste authority private finance initiative (PFI) deals.
But setbacks can create extensive extra costs or even the possible loss of PFI credits.
The UKs two biggest PFI projects have both experienced delays. The deals of Greater Manchester Waste Disposal Authority (GMWDA) and Viridor/Laing worth £3.3bn, and the Merseyside Waste Disposal Authority (MWDA) worth £3bn are projects the industry is watching closely. But are there lessons for the other PFI projects in the pipeline?
GMWDA has been stuck at the point of financial close since March 2008. Part of the delay has been due to getting planning permission for new facilities as well as complexity and bureaucracy.
According to GMWDA: Negotiations at a senior level between Viridor/Laing and GMWDA continue in a positive manner towards a financial close and the start of the new contract. The complexity of the project and sheer volume of the documentation has caused a further slight delay.
When asked whether delays would jeapordise the authoritys PFI credits, it said: The GMWDAs £100m PFI credits validity are not being threatened despite the delays in reaching financial close; we keep the Department for Environment, Food and Rural Affairs fully informed on our progress. We are looking forward to signing the contract once Viridor/Laing and their bankers finish carrying out their funding approvals.
While GMWDA seems very positive about the eventual contract outcome, they have not provided a date when they expect to close the deal or provided
estimated costs of the delays.However, a report on delays to the Merseyside PFI deal earlier this year shed more light on the cost risks that delays could bring.
MDWA director Carl Beers explains: We didnt want to be accused of why didnt you tell us when council tax bills may go up as a result of us still using expensive and environmentally unfriendly landfill. This report is an honest assessment of all the risk factors involved in not delivering an effective waste solution for Merseyside.
Project assessors warned that unless immediate action was taken to pre-empt delays three years could be added onto the projects timeline and costs could spiral by between £192 million and £405m. It also said that if the authority missed its financial close deadline of September 30 2010, it could have its PFI credits withdrawn. Planning and site issues have been the problem for MWDA, as they were for GMWDA. With regard to Merseyside, in the report consultants Mouchel identified difficulties accessing sites to conduct surveys and entering into negotiations with landowners. It said planning and compulsory purchase orders could add three years to the project timetable.
Increases in construction costs were predicted to be bet-ween £99 million and 139 million based on predicted rising inflation. Such rising costs and planning uncertainty combined with extra competition from new, what could be considered more deliverable PFI projects could result in the withdrawal
On top of the possibility of losing sites, bidders, and PFI credits, as well as incurring increasing construction costs, the authority would also have to pay between £25m and £75m in additional landfill permits to deal with the waste.
Beer added: Equally as important [as the cost] is the environmental factor of finding more effective ways to use our waste as a resource.
The MDWA took immediate action to reduce its risks. Back in February it re-examined its waste procurement strategy for sites and planning. Alternatives to the authority acquiring sites were also considered. Like, for example, allowing the preferred bidder to apply for planning permission. But this option was deemed too risky and the original decision that MWDA would secure its own sites was final.
Beer then met with authority leaders and chief executives to inform them of the site selection process and outcomes, and the desire to work with all authorities to find a solution to the sites impasse, given the magnitude of the risks, the report said.
Longer term effects were also considered by the report. For example, delays would have had a knock on effect on jobs created, environmental benefits and council tax. The report suggested that the beneficial impact of infrastructure investment through the PFI deal was worth £7.6m. This would have been jeopardised by delays. So early action may have diverted some of the accruing risks.
Risk Base Case Delay Case Delay Case Loss of PFI funding - 87 175 Construction Cost - 99 139 Landfill Gate Fee - 34 34 Landfill Permits - 25 75 Landfill Tax - 72 107 Sub Total Additional costs 0 317 530 Reduction in Resource Recovery Contract Payment 1 -125 -125 Net Effect 192 405 (1)This reduction is the direct result of a shorter concession under the RRC contract in the Delay Case.
As more and more PFI credit laden projects amass to tempt bidders, are they taking notes from the big two, to avoid planning, land and financial issues? Considering the knock on effects theyd be mad not to.
Loss of PFI funding
Landfill Gate Fee
Sub Total Additional costs
Reduction in Resource Recovery Contract Payment 1
(1)This reduction is the direct result of a shorter concession under the RRC contract in the Delay Case.