Conclusions and Recommendations
1. In 1999, the European Union introduced a Directive
requiring all member states to reduce the amount of biodegradable
municipal waste sent to landfill. The Department has responsibility
for ensuring that England diverts sufficient waste from landfill
to enable the UK to meet its target under this Directive of sending
less than 10.2 million tonnes of waste to landfill a year by 2020.
Local authorities have statutory responsibility for disposing
of their municipal waste. The Department established a programme
in 2006 to encourage the development of local authority waste
infrastructure by providing support, guidance and funding to local
authorities undertaking waste projects through PFI contracts.
The Department part-funds local PFI projects through this programme.
Local authorities are the signatories to the PFI contracts and
are responsible for ensuring that their waste contracts represent
value for money. The Department contracts staff from an organisation,
Local Partnerships, to provide the technical support to local
authorities. The Department, which oversees the allocation of
funds and scrutinises local authorities' plans, has allocated
£1.7 billion of PFI credits to 28 local authorities under
the programme. Our inquiry focused on the Department's support
to three PFI waste projects run by Norfolk County Council, Surrey
County Council and a joint project managed by Herefordshire Council
and Worcestershire County Council.
2. The Department's support of PFI to build
waste management infrastructure may result in long term contracts
that are too inflexible for a sector where technology is continually
evolving and the amount of waste produced can be hard to predict.
The Department's approach incentivises the use of PFI to construct
waste management assets over other options for reducing the amount
of waste sent to landfill. While the Department has told local
authorities that there are alternatives to PFI contracts for constructing
waste management infrastructure, such as selling the waste, it
has more work to do to improve local authorities' contracting
capability, especially for PFI projects. PFI contracts typically
last 25-30 years and may be inappropriate for the waste sector
where technology is continually evolving and the amount of waste
that will be produced in the future can be hard to predict. For
example, the Department conceded that future waste infrastructure
will need to generate both electricity and heat to be environmentally
sensible, rather than just generating electricity as some older
plants do. Moreover, domestic recycling rates are higher now than
was predicted when some of the older projects were approved.
Recommendation:
The Department should consider including other
forms of support to help local authorities to manage their waste
in ways that are flexible enough to deal with changes in technology
and waste levels to ensure local authorities are not locked into
projects that provide more capacity than is required and are very
expensive.
3. The funding agreements for the early PFI
waste deals were poorly drafted and too lax as they require payments
to be made even though some of the key assets planned have not
been built. The Department's predecessor, the Department for
Environment, Transport and the Regions, signed funding agreements
with Surrey and with Herefordshire and Worcestershire councils
for waste projects in 1998 and 1999. Under these agreements, central
government started paying grants to the local authorities as soon
as the contractors began to deliver waste management services
rather than waste management assets. The supporting PFI contracts
signed by the local authorities did not require all of the expected
assets to be constructed, resulting in the Department having paid
£213.5 million in grants to the councils over the last 15
years even though the main waste assets have not yet been built.
The Department maintains that later funding agreements are more
robust.
Recommendation: The Department has more
work to do to improve local authorities' contracting capability, especially for
PFI projects. It needs to be much clearer about the outputs and
outcomes it requires when funding future waste projects and ensure
that it only pays for what is delivered.
4. The Department waited far too long before
renegotiating its funding agreements with Surrey and with Herefordshire
and Worcestershire Councils. Since taking over responsibility
for overseeing these PFI grants in 2001, the Department continued
to allow payments to be made to Surrey and to Herefordshire and
Worcestershire councils even though key infrastructure had not
been built. The Department only altered its funding agreements
with these councils in 2013 when the Department negotiated a £30
million reduction in its payments to Herefordshire and Worcestershire
Councils, and a change in the timing of its payments to Surrey
County Council.
Recommendation: The Department should act
with far greater urgency when it has concerns about a project's
progress.
5. The Department supported the Norfolk scheme
despite having strong reservations about the local authority's
timetable for securing planning permission. This contributed to
the £33.7 million bill Norfolk taxpayers now face. The
Department had serious concerns as far back as 2010 over Norfolk
County Council's timetable for obtaining planning permission for
its proposed energy-from-waste facility. Although the Department
warned the council that its timetable was too ambitious, the Department
still agreed in February 2012 to provide £91 million of PFI
credits to part-fund the Norfolk project. We do not accept the
Department's assertion that because the Norfolk PFI contract met
its funding criteria, it was a reasonable decision for the Department
to agree to part-fund the project. If the Department had not promised
funding support in early 2012 it might have prevented the Council
from signing the contract. By later withdrawing support the Department
contributed to the decision to subsequently terminate the contract,
which has left local taxpayers facing an estimated £33.7
million bill for compensation to the contractor.
Recommendation: The Department should not
agree to fund schemes until all its concerns have been resolved.
6. Local authorities need better advice on
negotiating PFI contracts, particularly on technical aspects such
as when to secure finance, and compensation arrangements.
PFI contracts are complex and require specialist knowledge to
achieve value for money. Local authorities, who are likely to
enter into such contracts only once in a generation, lack the
significant expertise that resides in central government. The
Department and the Treasury provide local authorities with guidance
and point them towards specialist external advisors, but they
do not provide direct advice. This has resulted in some councils
making poor decisions and wasting taxpayers' money as exemplified
by the cancellation of Norfolk's PFI contract where the council
decided to put the finance for the facility in place before planning
permission had been received, resulting in it having to pay more
compensation to the contractor when the contract was terminated.
Similarly the terms of the contract signed by both Surrey County
Council and Hereford and Worcestershire Councils obliged the councils
and the Government to pay contractors for services without a capital
asset, which the Councils intend should be built, being provided.
Recommendation: The Department should make
better use of its position and expertise to support local authorities
in negotiating PFI contracts and achieve value for money for local
taxpayers.
7. The Department has made decisions on this
programme focused entirely on the need to meet the EU target without
due regard to the impact of its decisions on local authorities.
The Department agreed to provide funding support to the Norfolk
project in February 2012 but withdrew its funding in October 2013
because it judged that the Norfolk plant was no longer needed
to meet the 2020 EU landfill target. The Department's decision
to withdraw funding was a contributing factor to the Council's
decision to cancel the contract the following year, at an estimated
cost to Norfolk taxpayers of £33.7 million. The Department
was fully aware of the likely compensation costs that would be
incurred when it decided to withdraw funding.
Recommendation: The Department needs to
balance the need to meet the EU target at minimum cost, with making
sure that its decisions serve taxpayers' interests as a whole
and do not result in additional costs for local authorities. The
Department should place more weight in its decision-making on
the cost to the public in the round when it considers withdrawing
its support to individual projects.
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