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PFI costs councils dear and fails recycling rates

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Private finance initiative (PFI) funding of public sector services has been much criticised lately, and a number of councils have joined in the chorus of disapproval over their PFI waste contracts.

The Greater Manchester Waste Disposal Authority was the highest profile PFI casualty last year, when it brought its 25-year, £3.8bn deal with Viridor Laing to an end. Peterborough City Council also ended its 23-year PFI with Amey by mutual consent, while Sheffield City Council and Veolia are in protracted talks over ending their deal.

In all these cases, the authorities found their PFI payments did not provide value for money. But MRW has learned that some councils are deeply unhappy about being stuck with longterm deals that companies are unwilling to change.

Last summer, resources minister Therese Coffey wrote to 34 local authorities in England to ask why their household recycling rate was below 30% and what could be done to remedy the situation. Following a freedom of information request, MRW obtained the letters and the councils’ responses to Coffey. They offer a rare and candid insight into what some councils really think about their waste management partners.

PFIs are generally used to build costly facilities, such as specialist MRFs and energy-from-waste (EfW) plants. This can have the effect of forcing a council to carry on with a waste disposal route when market changes make that route less efficient.

A case in point is the London Borough of Newham. Mayor Robin Wales’ letter to Coffey said the council’s “expensive and inflexible” PFI deal prevented it from boosting its household recycling rate, which in 2016-17 was lowest in England at just 14.1%.

Newham is part of the East London Waste Authority (ELWA), which has a 25-year PFI contract with Renewi – formerly Shanks – to collect and dispose of around 121,000 tonnes a year of waste.

Wales wrote: “The contract presents a major obstacle when it comes to recycling performance due to restrictions on what materials can be collected separately, the overall cost of the waste levy and the lack of any financial incentives for the council to invest in achieving higher recycling rates.

“Newham is tied to the ELWA by statute and must deliver all its waste to that authority.

“Having been encouraged to adopt this approach by central Government, we are now caught in an expensive PFI contract where we lack the choice, flexibility and savings opportunities through recycling solutions that many other authorities are able to exercise.”

“Many contracts probably need to be renegotiated. The government was involved in setting them up and should be prepared to be involved again.” 

Fellow ELWA member Barking & Dagenham Council also has complaints. Council leader Darren Rodwell said the waste disposal contract lacked a differential gate fee for recycling and domestic waste. He added: “We are bound by a contract that currently charges £125 per tonne for waste and recycling disposal, making ELWA one of the most expensive levy rates for recycling in London.”

The authority’s payment to Shanks in 2016-17 was £58.8m. There is £538.6m left to be repaid on the contract, as of March 2017. The Government will contribute around £85m of PFI grant funding during the contract’s life span.

Part of the deal was to build infrastructure such as the Jenkins Lane bio- MRF. Phillip Ward, owner of Falcutt Consultancy, is a former head of waste at the Department of the Environment, and was on a Defra PFI group as a WRAP representative in the mid-2000s.

“The ELWA contract was one of the early ones,” he told MRW. “It was conceived when recycling targets were lower and the focus was on reducing biodegradable waste to landfill.

“The problem with the Shanks solution – and a number of the other PFI projects that have got into difficulty – is that they had little flexibility to adjust to changing legislative and market conditions or to learn from the growing understanding of consumer behaviour.

“These contracts probably need to be renegotiated. The Government was involved in setting them up and should be prepared to be involved again.”

A Renewi spokesperson told MRW: “We work very closely with our customers to ensure that we are aligned in our goal to maximise recycling and diversion from landfill. The current statistics for ELWA councils’ waste show that the amount sent to landfill has fallen dramatically over the past 10 years, and we will continue to sustain high diversion levels through a combination of our leading waste-to-product and recycling technology and the education programme being led by the council.”

An ELWA spokesperson said: “The ELWA, like all public authorities, has a commitment to deliver best value in relation to managing waste disposal. Therefore, periodically the authority conducts contract reviews to identify scope for efficiencies and improvements to benefit local residents wherever possible. The ELWA is not presently considering termination of its PFI contract.”

Brighton & Hove City Council also complained that it is being prevented from recycling some materials because Veolia is refusing to alter the terms of its £1bn PFI waste disposal contract.

The council said Veolia took only “limited types of materials” for recycling, including some types of plastic, because it cannot find a guaranteed end market. But under the PFI agreement, the council is required to provide all residual or recyclable material for disposal by Veolia.

Brighton & Hove’s letter to Coffey said other councils were not restricted by their contracts and added: “We have raised this anomaly with Veolia on a number of occasions, but they are not willing to change their position on this.”

The letter indicated that the council was reviewing the PFI deal in conjunction with the Treasury-backed Local Partnerships and Defra. Brighton & Hove has confirmed to MRW that the review is ongoing, but declined to reveal further details due to commercial sensitivity.

A waste disposal PFI contract between Brighton & Hove, Veolia and East Sussex County Council was signed in 2003. The contract provided significant investment in a new facilities including the Hollingdean MRF and the Newhaven energy recovery facility.

Brighton & Hove estimates its remaining PFI payments amount to £223m, covering the rest of the contract term to 2033. Payments totalling more than £124m have made since 2003 and in 2017-18 the cost to the council was £12m. Annually, it receives around £1.5m in PFI credits.

A Veolia spokesperson said the PFI contract delivered the infrastructure needed to “accept a wide range of materials”.

She added: “In addition to our original contractual requirements, we have added the following waste streams at our household waste recycling sites: books, DVDs, household batteries, mobile phones, paint, printer and toner cartridges, timber and waste electrical and electronic equipment. Carton and Tetrapak recycling is also available at Brighton & Hove sites.”

But it is not all doom-and-gloom over PFIs. Kirklees Council said its EfW facility was provided by the “best value PFI contract in the country”. The council signed a 25-year deal with Suez, formerly known as Sita, in 1998.

But in his letter to Coffey, council leader David Sheard said the authority’s recycling ambitions will been hit by the end of the contract, and that “several million pounds” would be added to disposal costs through the loss of PFI credits and a return to the market.

Some waste management firms are just as dissatisfied as councils. In a reversal of the ELWA situation, Renewi is looking to withdraw from its PFI waste contract with Dumfries & Galloway Council. Renewi said it had lost £3m in the past year on the operating contract and that it cannot match landfill diversion or recycling targets.

In a statement, the company said: “The Dumfries & Galloway PFI project is unable to address the needs of the Waste (Scotland) Regulations that set demanding new requirements regarding landfill diversion and recycling from 2021.

“Renewi has been working with the council and other stakeholders for a number of years to determine how this 15-year-old PFI waste project and the related operating contract could be amended to meet the requirements of Waste (Scotland) Regulations. However, despite these discussions, a workable solution compliant with the regulations has not been found.”

The termination, expected to take effect in the next financial year, means a loss of £9m overall to Renewi as contracts are written off.

The company is also writing off “increased onerous contract provisions” on PFI deals with Barnsley, Doncaster and Rotherham (BDR) and Wakefield councils, worth £54 in all. It said this reflected “prudent recognition of expected future losses for the remaining lives of the contracts”.

Stephen Wise, waste sector director at engineering and support services firm Wood plc, said variations to PFI contracts can be discussed by both sides under certain conditions, but exiting from them entirely was more difficult.

“Under extreme changes, such as those currently being seen, termination of the contract by either party may be the ultimate outcome,” he said. “Whether the termination is the default of the local authority or the operator has potentially significant financial implications for either party.

“Non-PFI contracts may be structured more collaboratively or may mean that the local authority is the owner of the infrastructure. Therefore, this may provide greater flexibility when looking at changing the contract.”

A year ago, an MRW briefing asked whether ditching PFI deals was the start of a trend. Since then, a National Audit Office report found that PFIs were often more expensive than using public money to fund infrastructure, and a number MPs and councillors voiced their opposition to PFIs.

Carole Taylor, chair of local authority body Larac, and waste and recycling co-ordinator for Pendle Borough Council, said: “I think it is already a trend. Lancashire County Council talked to the contractor to get out of it and reached an amicable agreement. The county and Blackpool Council have taken over the PFI facilities. None of us wants to be tied by expensive contracts if they are not working.

“If you try to build flexibility into a contract, whether PFI or not, it’s probably going to cost more. It also depends on what stage of the contract you are in. At the end of it there is probably more negotiation available.

“Pendle runs its own in-house waste services and we’ve managed to make the savings that our members have asked for year-on-year. If you have an external contractor, I’m assuming that is a lot harder to do because they are there to make the money they signed up to.”

As all councils kick off a new budget year, these issues are not going away.

In addition to PFI contract woes, letters from local authorities to the resources minister, released to MRW, revealed a wide range of factors affecting their recycling rates.

Funding cuts from central Government was a common theme, with councils including Camden arguing that they had been hit harder than most. Another concern was market volatility and the lack of a UK-wide resources strategy.

Councils that are part of Project Integra, the Hampshire-wide partnership with Veolia, had clearly got together to co-ordinate their responses. Portsmouth, New Forest, Gosport and Basingstoke & Deane all said the contract length and cost of investment in infrastructure made it difficult to pursue new opportunities as markets and technology change.

Integra, which includes two composting and three EfW facilities, was set up before PFIs were available, but the concern with Veolia is similar to that in Brighton.

Sunderland City Council and the Hampshire authorities all said that including incinerator bottom ash as recycling would help – which Coffey must have listened to because the latest Defra statistics take the metal element into consideration.

Sunderland also said its low recycling rate was in part due to having weekly residual collections. The authority used to have the DCLG weekly funding, set up by former communities secretary Eric Pickles.

Tendring District Council said it was considering a move to alternate weekly residual collections after its recycling contract ends in 2019.

South Holland District Council said the disposal authority, Lincolnshire County Council, served its right to retain recycling collected by the district councils. The county withdrew recycling credit payments, and South Holland said this had “severely impacted” funding on waste education.

PFI costs councils dear and fails recycling rates

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