2 The Department's oversight of three
PFI waste projects
11. The Department for the Environment, Transport
and the Regions signed a funding agreement with Surrey County
Council in June 1999 for £204.7 million of PFI grant and
with Herefordshire Council and Worcestershire County Councils
in December 1998 for £143 million.[19]
Payment of these grants to the local authorities began shortly
after. The terms of the original funding agreements did not allow
central government to unilaterally halt or alter the payment terms
in the event that key capital assets were not delivered.[20]
Although the Department has had responsibility for overseeing
these grants since it was created in 2001, it did not review these
agreements until 2011, and did not successfully renegotiate the
terms with Surrey and with Herefordshire and Worcestershire councils
until 2013.[21] As a
result, grant payments of £213.5 million were made over fifteen
years to Surrey and to Herefordshire and Worcestershire councils
even though key facilities were not built. The process of renegotiation
was time-consuming. In the case of the Herefordshire and Worcestershire
negotiations, Defra confirmed that it took them six months to
approve the new funding approach that the local authorities were
proposing.[22]
12. The renegotiations with Surrey did not alter
the total amount of funding that the Department will provide,
but 're-profiled' the schedule of payments. Surrey is expecting
a new waste management facility, including a gasifier to produce
fuel from waste, to be operational by 2016-17. Under the renegotiated
terms, the Department's payments to Surrey has been reduced for
the three years beginning 2013-14 and will continue to be lower
until the gasifier starts processing waste.[23]
13. The Department's negotiations with Herefordshire
and Worcestershire concluded with it reducing the total funding
it will provide by £30 million. The planned energy-from-waste
plant experienced serious delays in getting planning permission
and, by the time permission had been obtained, the contractor
could not arrange the necessary financing. The local authorities
ultimately decided to build and finance the plant outside the
PFI contract, without the PFI credits provided by the Department
for a lesser sum, with risks being transferred back to the public
sector.[24]
14. The Department signed a funding agreement with
Norfolk County Council in February 2012 to contribute £91
million of PFI credits towards a 25-year contract to build an
energy-from-waste facility. Norfolk County Council estimate that
this would have equated to £169 million in grant payments.
However, the planning application to build this facility near
King's Lynn was called in by the Secretary of State for Communities
and Local Government, and as a result the Council missed the deadline
in its funding agreement with the Department to obtain planning
permission by 10 June 2013. The Department subsequently revoked
its funding in October 2013 and, after initially deciding to proceed
without central government funding, Norfolk County Council terminated
the PFI contract in April 2014. The contract Norfolk County Council
had signed with its contractor included compensation clauses relating
to securing finance and foreign exchange hedging and the decision
to cancel the contract means that Norfolk County Council is expected
to pay the contractor an estimated £33.7 million.[25]
The bulk of this compensation relates to contractor costs (£20.3
million) which include fees paid for arranging finance, and fees
for unwinding hedging arrangements that were intended to mitigate
against foreign exchange risk (£11.8 million).[26]
15. The Department told us that such compensation
clauses are standard in the PFI contracts in the programme. Of
the eleven bank-funded projects in the programme, the nine that
did not have planning consent before financial close all had compensation
clauses covering the same sort of costs as the Norfolk contract.
Those funded by contractors' balance sheets also contained similar
compensation clauses, but without elements related to arranging
bank finance.[27] So
far, the Norfolk contract is the only one where the compensation
clauses have been triggered as no other contracts have been cancelled
after signature.[28]
16. The Department told us that, when signing the
funding agreement in 2012, it had had serious concerns that Norfolk
had not scheduled sufficient time to obtain planning permission.
The Department was also aware that any delay in obtaining planning
permission posed a serious financial risk to the local taxpayer,
as Norfolk had secured finance in advance and signed a related
compensation clause with the contractor. The Department raised
these concerns with Norfolk County Council as far back as 2010,
but the local authority was confident that it would achieve planning
permission within the proposed timetable.[29]
When asked why it had agreed to provide funding despite having
such serious misgivings about the project timetable, the Department
confirmed that it had been under no legal obligation to provide
funding, but had chosen to do so on the basis that it had been
a "reasonable decision" given that Norfolk met the Department's
criteria for funding and the local authority could have taken
the Department to judicial review if it had not provided funding.[30]
17. A major factor behind the Department's decision
to cancel the PFI funding agreement in October 2013 was that the
proposed waste facility in Norfolk was no longer needed to meet
England's contribution to the EU target.[31]
The decision to cancel the funding agreement came only 20 months
after it had been signed and was unprecedented within the programme.
[32]
18. The Department told us that when it made the
decision to withdraw PFI credits from the project, it had been
fully aware of the compensation clauses in Norfolk County Council's
contract and the compensation costs the council would face if
it cancelled the contract. The Department noted that it had considered
the impact of withdrawing funding on the affordability of the
project to Norfolk when making its decision.[33]
Norfolk County Council told us that the Department's withdrawal
of funding 'left the County Council limited opportunity to pursue
the substantial savings that could have been gained had it adopted
different contract terms to those in standard PFI contracts'.[34]
19 C&AG's Report, Oversight of three PFI waste
projects, paragraphs 1.10 and 1.14 Back
20
Q 22 Back
21
Qq 124-7 Back
22
Qq 113-17 Back
23
C&AG's Report, Oversight of three PFI waste projects,
paragraph 1.13 Back
24
Q 19 and C&AG's Report, Oversight of three PFI waste projects,
paragraphs 1.16-19 Back
25
C&AG's Report, Oversight of three PFI waste projects,
paragraph 1.20 Back
26
C&AG's Report, Oversight of three PFI waste projects,
paragraph 2.41 Back
27
Evidence from Defra Back
28
Q 37 Back
29
Qq 34, 58 Back
30
Qq 43-51 Back
31
Q 101 Back
32
Qq 86-90 Back
33
Qq 39, 85 Back
34
Evidence from Norfolk County Council to the Public Accounts Committee,
23 June 2014, p.2 Back
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