The devil was in the detail of the coalition Government’s Comprehensive Spending Review (CSR). In his House of Commons statement, chancellor George Osborne said only one sentence during the announcement of an 8% cut a year to Defra’s budget. It eventually turned out to be a more accurate 29% reduction over four years.
But hidden away on page 64 of the Spending Review complete report was the news that seven waste PFI projects were having their funding withdrawn by Defra, saving £3m by 2014-15 and supposedly more in the longer-term. Defra later revealed that 11 local authority projects would retain funding.
The seven projects losing credits are: Cheshire West and Chester, and Cheshire East; Coventry, Solihull and Warwickshire (Project Transform); Gloucestershire; Leicestershire; Milton Keynes and Northamptonshire; North London Waste Authority; and South London Waste Partnership. This came as a bit of a surprise - not only for the local authorities involved, but also the sector as a whole.
“The Government pulled the plug on these projects at short notice without consultation,” says LARAC principal policy officer Andrew Craig. “It was a waste of time for the local authorities that have gone down the road of procurement. It now means they will have to be thought through again, unpicked, and different methods of financing will need to be investigated.”
A director at a waste management company who declined to be named shared the surprise: “One or two of these contracts were down to the last two bidders. I imagine they would be very upset to be so close to preferred bidder stage, having spent an awful lot of money, only for the process to collapse.”
MRW understands it is highly likely that the companies involved will not be able to recover any costs involved in the bidding process, although Craig suggests that “the local authorities will need to discuss the situation with lawyers as well as get members involved again to decide on what route to take”. The waste management director also feared that this would sour the appetite for the private sector to get involved with further PFI projects because it created more uncertainty around the process.
But Craig sees benefits if this signals the demise of further local authority waste PFI projects: “I don’t think many tears would be shed by local authorities if it is the end of PFI. But tears might be shed if it signals the end of Government funding. I suspect the Government will now drop PFI for waste management. This is a big hint that it will do this. I do strongly feel, though, that the Government needs to provide public subsidy for clear market failures where the private sector has not built infrastructure, such as high-tech MRFs or advanced thermal treatment plants, without public subsidy.”
But he believes it does provide an opportunity for the public sector to work more closely with the private sector. He sees a situation will arise where private sector waste management companies will seek to get the finance for facilities by councils paying gate fees to use them.
Sita UK chief executive David Palmer-Jones agrees on this point. “If a project is sound, with a long-term contract, it could be procured without PFI,” he says. “Big waste management companies such as Sita are able to get the funding. The difficulties are areas such as planning. There will need to be more local responsibility on areas such as planning and political support to get facilities built.
“There is an opportunity for the private sector where we can step back and offer merchant facilities on the back of this. It could be that these merchant facilities will look after the needs of a number of local authorities. Indeed, there is a trend for local authorities to get together to procure anyway. But the private sector will want to see an easier process to build these facilities.”
Additionally, he believes that new processes should be developed to help companies get to preferred bidder status more quickly so that facilities get built sooner.
“I don’t think many tears would be shed by local authorities if it is the end of PFI. But tears might be shed if it signals the end of Government funding”
And because local authorities will have less finance available, Palmer-Jones sees a situation where those that currently operate recycling and waste management collections in-house will look to see if better value can be found in the private sector through a tender process. This potentially leads to more new contracts for the private sector to win or it could mean in-house systems becoming more cost efficient. In fact, this could lead to “more councils moving away from weekly recycling collections on the grounds of cost and biting the bullet to introduce alternate weekly collections,” he says.
Another announcement in the CSR was the creation of a Green Investment Bank (GIB), with £1bn of Government funding and possibly more to come from the sale of Government assets such as the Tote. But the detail in the report shows that this £1bn is budgeted for 2013/14, suggesting that it will not emerge until then. It is also unclear whether it will be of any benefit to the recycling and waste industry, with it being speculated that it would more likely focus on technologies such as solar and wind energy.
At an Aldersgate Group meeting analysing the CSR, Lord Taylor of Holbeach confirmed that the GIB was indeed a bank rather than a fund as some had questioned. But concerns were raised around the £1bn not being available until 2013/14.
KPMG UK head of global infrastructure and projects Richard Threlfall expressed surprise at this: “I don’t think we can wait - we need more certainty around capitalisation.” And Aldersgate Group chairman Peter Young warned: “We need to make sure this reaches into significant areas of the economy with sufficient pace.”
Last month, the Aldersgate Group suggested that the GIB would need to be capitalised by at least £4bn-£6bn during the next four years to fulfil its potential and help to make the UK a world leader in the supply and deployment of low-carbon technology.
The Confederation of British Industry has warned that the Government must get the design of the bank right so that it is attractive to private investors, while Threlfall adds that the Government needs to take on the risks around new technology and show leadership to encourage private investment.
There was, however, certainty provided in the CSR around the renewable heat incentive (RHI). This is designed to support households and businesses investing in renewable heat technologies, including anaerobic digestion (AD) and biomass boilers.
Osbourne announced £860m in funding for the RHI, to be introduced from 2011/12. This was received positively by the renewables and AD sectors but not by some wood recyclers, who fear it will divert recyclable material to biomass burning. But more detail is needed to see its full effect.
The Department of Energy and Climate Change (DECC) says that as part of the spending review process, it had looked again at the RHI to target the scheme more effectively. It says: “We have more work to do to determine support levels, but we believe the level of savings required from the spending review will enable us to meet our key targets in renewables deployment and carbon savings”.
DECC adds that it “expects to be in a position to announce the details of the scheme, including RHI tariffs and technologies supported, before the end of the year and be open for business from June 2011”.
The Anaerobic Digestion and Biogas Association has called for AD to be prioritised, with chairman Lord Redesdale pledging to “work with the Government to ensure RHI levels are set for AD which will deliver the Government’s aims”. The association has called for a 25% premium on top of a minimum base tariff of 9p/kWh for plants below 1MW in size and 6p/kWh for input above 1MW to encourage plants to come online early.
With regard to feed-in tariffs, the CSR document said the “efficiency of feed-in tariffs will be improved at the next formal review, rebalancing them in favour of more cost-effective carbon abatement technologies”. Its inclusion in the CSR was seen as positive, helping to give investors the confidence that renewable energy is a crucial part of Government plans.
All eyes and ears now will be on the announcements still to come.