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Ditching the deals: is it the start of a trend?

manchester deal

As one industry figure told MRW recently: “This is the year that austerity bites”

Brexit dominating the news since the referendum last June has served as some distraction from the continued impact of further central Government funding cuts. We have seen depart­ments including Defra shed staff by 10% in the past year, with the remaining civil servants expected to improve per­formance while finding more ‘efficiency savings’.

Nowhere has austerity been felt more than in the pockets of councils, with three-quarters across England and Wales reporting little or no confidence in the sustainability of their finances in a survey by think-tank the Local Gov­ernment Information Unit.

An estimated 40% reduction in council funding since 2011 has coin­cided with flatlining recycling rates, and it has led authorities to rethink their waste services. The most dramatic of these revaluations has been seen this year with Peterborough and Sheffield councils ending their long-term waste deals prematurely.

Peterborough City Council announced in January plans to mutu­ally terminate its 23-year contract with Amey, in an effort to save £100,000 a year. Official minutes read: “Any new arrangement will allow the council more control over how services are pro­vided and ensure that a percentage of any income generated is returned to the council to provide services.”

Also in January, Sheffield City Coun­cil voted to reprocure the services cov­ered by its 35-year contract with Veolia, which was due to expire in 2036 and is not yet halfway through. The authority’s minutes show it favoured splitting the contract to enable it to “deliver a lower-cost, more flexible service overall”.

It recommends separately tendering shorter contracts for energy-from-waste (EfW) plant operation, waste disposal and collection. Both councils’ current contracts will continue until new service providers are in place.

“Long PFI contracts that typically last 25-30 years may be inappropriate for the waste sector where technology is continually evolving and the amount of waste that will be produced in the future could be hard to predict.”  

Margaret Hodge MP

England’s biggest waste authority, meanwhile, is privately developing options to reduce costs from its £3.8bn deal with Viridor Laing. The Greater Manchester Waste Disposal Authority (GMWDA) has questioned the value-for-money of its 25-year PFI deal, with frustrations growing on the progress of repairs to some facilities servicing it that have “significant rusting issues”.

Minutes in February read: “It is also now becoming clear that with reduced volumes of waste (compared to the expected levels of waste arising when facilities were proposed in 2006-07) that the GM contract is expensive com­pared to current market rates.”

All the councils mentioned want to save money from their all-inclusive deals with waste firms, and those who have decided to re-tender believe there are cheaper deals available, particularly with interest rates as low as they are. But to break such a long-term deal involves paying substantial costs, as the authorities are aware, including com­pensation to protect the contract’s investors and large legal fees.

Environmental Services Association (ESA) executive director Jacob Hayler said he thought it unlikely that an authority would be able to make sub­stantial savings from re-tendering such a contract, considering the associated charges: “The alternative is that they try to avoid paying the full compensation; if they did that, it would be potentially disastrous for investment in new infra­structure.”

But Lee Marshall, chief executive of the Local Authority Recycling Advisory Committee (Larac), is more positive about the potential for savings. He said it would depend on each council’s cir­cumstances, such as how the contract was structured, but said it was under­standable that councils would look to rethink arrangements made before funding cuts began.

“There will be opportunities in cer­tain circumstances for councils to save money,” he said. “In the current eco­nomic climate, they have got to at least consider the option [of re-tendering their contract] to see if it will or not.

“If they cannot save money that way, they are going to have to do so in a dif­ferent way.”

Some of the lengthy waste council contracts were supported by Defra’s PFI programme, which was set up to help the UK meet its landfill diversion tar­gets by supporting the construction of treatment facilities. The department established the Waste Infrastructure Delivery Programme (WIDP) to over­see the support, through which it allo­cated billions of pounds to local authorities.

There was a standard PFI contract an authority had to sign if it wanted to apply for Defra’s grants, which would typically cover around 30% of the charges payable under the deal. Most PFI credits were used to build EfW plants but some were for municipal bio­logical treatment (MBT) schemes.

Defra effectively killed off the funding by withdrawing credits for seven pro­jects in 2010 and three more in 2013, after deciding that the UK would have sufficient capacity to meet the 2020 landfill diversion targets. The WIDP subsequently changed its focus to help­ing councils scrutinise their long-term PFI deals for potential savings that could be made.

It is in this climate that authorities are now operating. Once the treatment infrastructure is built, Defra has no investment in the contract and is happy for councils to find efficiency savings as they bear the brunt of continued cuts. So, without Defra’s continued backing, are long-term waste contracts unsuitable?

Former chair of the public accounts committee, Margaret Hodge, said in a 2014 report: “Long PFI contracts that typically last 25-30 years may be inap­propriate for the waste sector where technology is continually evolving and the amount of waste that will be pro­duced in the future could be hard to predict.”

This assertion has been disputed by some councils and waste operators.

Hayler said that EfW plants are designed to last for decades so it made sense for there to be a contract attached with a similar length. He cited the Edmonton incinerator in London, which opened in 1971 and is still oper­ating, as an example.

“There is a lot of upfront money to build the plants and then there is the income the plant generates over its life­time that pays off that upfront invest­ment,” he said. “If these plants last for decades they can be supported by long-term contracts.”

Marshall agreed it could work in some situations, but thought that the economic incentive behind such deals had changed since the PFI programme.

“Some of these long contracts were a function of the time. The way they were financed was through guarantees that needed and wanted these long contracts in place for the finance to be available. The available finance will have changed so that can impact potentially on the length of the contracts going forward.”

The added scrutiny of all local gov­ernment expenses in recent years has led other services to change, with coun­cils charging for garden waste collec­tions and the disposal of certain items at recycling centres. Dozens of councils started charging residents for DIY waste at recycling centres in the second half of last year.

The Department for Communities and Local Government (DCLG) said at the time that councils were required to provide the service for free and pledged to “take action” on any authorities doing so. But the only ‘action’ the department has been reported as taking is encour­aging a concerned councillor in Surrey to start a legal case against his authority.

In January, council group Re3 moved to reassure residents the policy to charge residents was legal, because DIY materials such as plasterboard and rub­ble were in fact classified as construc­tion waste.

It appears that local authorities may have won that battle, with the DCLG quietly submitting, but it remains to be seen which other services are altered. All eyes will be on those councils mak­ing the drastic step to scrap their deals and re-tender because successful cost savings might lead to a trend.

The days of long contracts are over

sarah calkin

sarah calkin

The local government outsourcing market has changed dramatically since the advent of austerity in 2010.

During this time, councils’ funding from central Government has fallen by almost 40%, according to figures from the Institute for Fiscal Studies (IFS). Income from council tax, which has been on the rise during the past couple of years, has mitigated that slightly, but recent analysis by the IFS found that councils were planning to spend 22% less on services this year than in 2009-10.

Spiralling demand for social care services has meant those viewed as less life-critical have borne the brunt of spending cuts. For example, spending on planning and development has been cut by almost 60%. Environmental services have not fared too badly; the reduction in spend of around 14% is the lowest after social care. Nevertheless, in this climate the days of decades-long contracts with strict terms are over.

Last year LGC took a detailed look at the market for outsourced back office services. An analysis of such council spending, supplied by Porge Research, found it had fallen by 29% between 2013-14 and 2015-16. This suggested that councils were either taking services back in-house, squeezing efficiencies out of suppliers or, most likely, a combination of both.

The recent reviews in Sheffield and Greater Manchester suggest that the market for waste management is beginning to undergo similar changes. Austerity has forced local authorities to become more savvy customers – these days when they say something is unaffordable, they really mean it.

Sarah Calkin is acting editor of MRW’s sister title Local Government Chronicle (LGC)

 

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