Memorandum submitted by the Institution
of Civil Engineers (ICE) (X20)
The Institution of Civil Engineers (ICE) is
a UK-based international organisation with over 75,000 members
ranging from professional civil engineers to students. It is an
educational and qualifying body and has charitable status under
UK law. Founded in 1818, ICE has become recognised worldwide for
its excellence as a centre of learning, as a qualifying body and
as a public voice for the profession.
SUMMARY
The Institution believes the fundamental issue
for meeting the UK's obligations under the Landfill Directive
is the nation's ability to fund, construct and bring into operation
upwards of 1,500 new waste management facilities between now and
2020. These facilities will be required for the pre-treatment,
recycling, reprocessing and disposal of waste previously sent
to Landfill.
The government's preferred route for securing
facilities is through 25 year PFI contracts or PPP agreements
for an integrated waste management service between Waste Disposal
Authorities and the private sector. We believe that at present
the allocation of risk in these contracts and the cost of bidding
is creating a barrier to potential private sector players entering
the market. This situation will lead to either limited competition
(and poor value for taxpayers) or in the worst cases the failure
to let contracts endangering the UK's ability to meet its Directive
obligations.
Historically new waste facilities have taken
between two and 10 years to move from conception to operation.
The UK's obligations under the directive have to be met in 2010,
2015 and 2020 so action is required urgently to resolve these
problems and ensure the necessary facilities are in place and
operational. In practice the need for new facilities is even more
acute as under the Landfill Allowance Trading Scheme (LATS), Waste
Disposal Authorities (WDAs) have reducing annual limits on the
volume of biodegradable waste they can send to landfill without
attracting fines.
1. WHY IS
THE CONSTRUCTION
OF NEW
FACILITIES THE
FUNDAMENTAL ISSUE?
The central requirement of the Landfill Directive
is to divert biodegradable municipal waste from Landfill. Whilst
the reduction in absolute levels of waste sent to Landfill revealed
in the 2002-03 Municipal Waste survey is welcomed, municipal waste
arisings in England and Wales continue to grow at 1.8%. In these
circumstances the alternative facilities will be required to deal
with this material. We would like to stress that these facilities
will include recycling, reprocessing, composting etc sites allowing
the UK to recover value from surplus material and opening up job
creation opportunities in the secondary materials economy. The
Committee should also note that whilst its inquiry is focused
on the Landfill Directive, other Directives including the Waste
Electrical and Electronic Equipment Directive (WEEE) and the End
of Life Vehicles (ELV) Directive, also require many new facilities
to be brought on line.
2. HOW MANY
FACILITIES WILL
THE UK REQUIRE
AND HOW
MUCH WILL
THEY COST?
As in many areas of waste management policy
there is a lack of reliable data on the total number of facilities
required to meet the UK's obligations. The most comprehensive
study we are aware of is contained in Future Perfect (Biffa Waste
Services 2002). Its findings are summarised in the table below.
| Profile/Scenario
| High Landfill
and Recycling
| High Incineration with Energy Recovery and Recycling
| High Composting and Recycling | High Incineration with Energy Recovery and Composting
|
| Number of Facilities | 1,544
| 1,858 | 1,525 | 2,300
|
Capitalisation at Replacement Costs
(£ billion)
| 10.4 | 20.2 | 12.6
| 33.6 |
| Employment (000) | 40 | 42
| 40 | 78 |
| Hectares (000) | 28.8 | 11.4
| 13.3 | 28.4 |
| Potential Energy Generation (Mw) | 2,800
| 4,700 | 3,000 | 7,400
|
| | |
| |
This study implies that the UK will require between 1,500
and 2,300 new facilities costing between £10 billion and
£33 billion.
Improvements to the data on future requirements for facilities
would greatly assist the waste management industry and its partners
in other sectors plan future investment. In this context we would
like to see clear regional statements on the number, type, size
and preferred location of facilities required.
3. POLITICAL WILL
AND PRIVATE
SECTOR PRIORITIES
A concern of the Institution is that whilst the figures quoted
above are significant, waste is competing against other sectors
including schools, hospitals and energy for private sector investment.
In the electricity generation sector, Powergen have recently estimated
that £70 billion will be needed over the next 10 years to
replace ageing power stations and distribution infrastructure.
In these circumstances there is a danger that waste management
will remain a low priority for politicians and that the private
sector will channel investment into other less risky sectors.
A potential solution is for government to take a more holistic
view of infrastructure provision. Private research conducted for
the ICE by Fichtner Associates indicates that incineration with
energy recovery of Resource Derived Fuel (RDF) produced from Mechanical
and Biological Treatment (MBT) plants has the potential to provide
1% of the UK's energy generation needs (and 10% of its renewable
energy generation commitment). This study is discussed in more
detail below.
4. PFI AND PPP IN
THE WASTE
MANAGEMENT SECTOR
Over the next four years around half of the WDA municipal
waste contract tonnage is to be let through 29 long term contracts
requiring new infrastructure (see Annex A). Defra is making available
£125 million in PFI credits to Local Authorities in 2004-05,
rising to £285 million in 2007-08. Authorities not choosing
to go down the PFI route are nevertheless seeking private sector
investment through Public Private Partnerships (PPP) as the funds
required for new waste facilities are well beyond the sums available
in local authority capital expenditure budgets.
The UK has seven major waste management companies. These
companies are relatively small and the waste management industry
is currently only worth £5 billion pa. In addition four of
these companies are owned by overseas parent companies with competing
international investment priorities. The Institution believes
that the number of contracts and level of investment is beyond
the capacity of the waste industry and that other players, need
to enter the market.
We acknowledge that the Waste Implementation Programme (WIP)
at Defra does recognise this situation and is taking some positive
steps but pressure needs to be maintained to ensure results are
delivered.
5. RISK ALLOCATION
AND OTHER
BARRIERS TO
NEW PLAYERS
ENTERING THE
WASTE MANAGEMENT
MARKET
5.1 An obvious source of new players in the waste PFI
Market is the construction sector, which includes a number of
large, well-capitalised companies with a proven track record of
delivering major PFI schemes. We would envisage these companies
entering into consortia with waste management companies and the
financial sector to form the Special Purpose Vehicles (SPVs) set
up under PFI contracts. However to date these companies have not
entered the market because, we believe, of serious concerns with
the nature and allocation of risk in waste PFI contracts and the
high upfront costs of bidding. Furthermore, contractors, leaving
risk allocation as a matter for the local authority and the contractor,
have financed many of the contracts let to date on balance sheet.
However as the volume of facilities required rises, contractors
will increasingly need to call on the project finance debt market.
It is therefore essential to establish a risk transfer regime
acceptable to senior lenders. Again we believe that Defra recognise
this problem and are taking steps to seek a resolution.
5.2 The risks to be allocated in a waste management PFI
include:
(i) Site identification and planning permission: PFI contractors
are being asked to identify sites and secure planning permission
for waste facilities. Given the unpopularity of waste facilities
this creates a major risk. ODPM reports that in 2002-03 86% of
applications for waste facilities are approved, however we believe
these figures do not adequately differentiate between new facilities
and extensions or modifications of existing sites or highlight
the lengthy delays often created by the planning process. An extreme
example is The Riverside Resource Recovery project in Belvedere,
London that has been through two public enquiries (1991 and 2003)
since application in 1989 and on which the final outcome is still
awaited. However there are plenty of less extreme examples of
major problems with planning. A planning application for a proposed
Energy from Waste Plant in Kidderminster which was central to
a PFI contract let by Hereford and Worcester Council had to be
withdrawn in August 2002 after facing initial refusal and a public
inquiry following its submission in September 2000.
In addition the operation of the planning system is unhelpful
to applications for waste facilities. As an example, we believe
the use of the concept of Best Practical Environmental Option
(BPEO) in relation to waste facilities requires revision and the
forthcoming Planning Policy Guidance note 10 is a major opportunity.
(ii) Term composition of the waste stream: The payment
mechanism in waste management PFIs is normally linked to material
specific recycling targets. However the composition of municipal
waste over a 25 year period will be affected by social changes
that are well beyond the ability of the waste industry to predict.
As an example, would a company tendering for a waste management
contract in 1979 have been in any position to predict the explosion
in mobile phone and personal computer use in the last 10 years,
items which now turn up in the municipal waste stream. This aspect
of the payment mechanism therefore requires re-examination.
In addition PFI contractors are being tied to a particular
treatment technology at the start of a 25 year contract, which
as waste composition changes may cease to be suitable.
(iii) Markets for recycled/residual material, specifically
Resource Derived Fuel (RDF): PFI contractors face the task of
finding markets for recycled and residual materials produced by
their facilities. WRAP has been successful in stimulating the
market for recycled paper there is little evidence of any new
large scale markets emerging for other materials.
We believe that government is too complacent about the existence
of a ready market for many materials. A key problem will be that
of Resource Derived Fuel (RDF). The current limited bankability
of Mechanical and Biological Treatment (MBT) has led to it going
forward as the main component of a number of major waste PFIs
including the contract recently let by the East London Waste Authority.
A report RDF Opportunities: Coal and Cement Industries by Fichtner
Associates for the Resource Recovery Forum in June 2004 suggested
that should MBT become the dominant waste treatment technology
in the UK, it will be necessary to recover energy from 3.4 million
tonnes of RDF in 2013, rising to 4.6 million tonnes in 2020. The
study also revealed that the opportunities to use RDF as a fuel
in other sectors eg cement kilns was strictly limited. Using RDF
as an alternative fuel in the UK's existing coal fired power stations
looks, at first glance an attractive option. However to take RDF
these facilities will need to be upgraded to meet the requirements
of the Waste Incineration Directive (WID). ICE commissioned Fichtner
to calculate the cost of this upgrade or the construction of new
WID compliant energy facilities to take RDF. This cost was £1
billion or £1.125 billion respectively. Given the current
financial constraints under which the UK energy industry is operating
an investment in upgrading plants to take RDF appears unlikely,
particularly as at present it does not qualify for Renewable Obligations
Certificates (ROC).
(iv) Construction timing and cost uncertainty. Typically
a waste contract will require new plant to be phased in over periods
of at least five years. As multiple facilities and therefore multiple
planning permissions and PPC licences are required there is danger
of construction being delayed beyond this point. At present there
is no opportunity for a review of construction costs during the
life of the project or an indexation of construction specific
costs at the start of the contract.
5.3 Bidding Process/Costs of Bidding. The upfront costs
of bidding for waste PFI are extremely high, with both private
sector consortia and Local Authorities typically setting aside
£2 million.
5.4 Local Authority Officers have little experience in
letting contracts of this scale and there is a general lack of
PFI experience and expertise in the whole sector. We therefore
welcome the work of 4PS in creating its procurement pack but believe
that further refinement is required to overcome the problems outlined
above.
6. POTENTIAL SOLUTIONS—RECOMMENDATIONS
6.1 The Institution believes that the PFI model used
for waste facilities needs to be altered to allow for a more equitable
allocation of risk. This could be achieved in a number of ways
including:
(i) The introduction of a waste specific relief clause
into 4PS' waste PFI contract document similar to a force majeure
clause in a standard PFI contract. This would reduce the private
sector's exposure in the case of events that could not reasonably
be contemplated in advance and had a fundamental impact on costs.
An example may be a significant change in the composition of waste.
(ii) Local Authorities identifying specific sites for
waste facilities in their local development frameworks.
(iii) The introduction of a capital cost indexation mechanism
for the construction element of waste management PFIs.
6.2 We also believe that much can be learnt from experience
in other sectors, including schools, the NHS and transport in
resolving problems in risk allocation in PFI/PPP arrangements.
6.3 We also propose the following as a means of improving
the current situation:
(i) Regional waste management plans to contain clear guidance
on number, type, size and preferred location of waste facilities.
(ii) Government to review the opportunity for synergy
between waste management and energy policy. In particular we urge
DTI to make RDF and other residual waste left after intensive
recycling eligible for Renewable Obligations Certificates in the
forthcoming Renewables Obligation Review.
(iii) The forthcoming consultation on Planning Policy
Statement 10 must clarify the role of BPEO in planning applications
for waste management facilities or remove it altogether.
8 October 2004
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