Private Finance Projects and off-balance sheet debt - Economic Affairs Committee Contents


Memorandum by Ms Jane Green on behalf of Coventry Friends of the Earth (FOE) and CRACIN (Campaign for Recycling and Against Coventry Incinerator)

  1.  I am making this submission as a Coventry resident and on behalf of Coventry Friends of the Earth and CRACIN, Campaign for Recycling and Against Coventry Incinerator.

PFI: COSTS AND ADVERSE INCENTIVES IN RELATION ENVIRONMENTAL AND SOCIAL GOALS

  2.  I became aware of the social and environmental costs of PFI procedures when our PFI "Super Hospital" was procured 10 years ago. The cost of refurbishing the then present hospital, which was only 30 years old, was to be £30 million. This was not possible as the Government informed the council that PFI "was the only game in town". PFI funding was only available on projects worth over £60 million so a complete rebuild was decided upon.

  3.  The debate then became centred on where the hospital should be sited: with strong social and environmental reasons for a central site. These included improved transport links and inner-city regeneration and avoiding building on a green-field site. A council run consultation revealed 85% in favour of the city site. The costs were equal for both "inner" and "out-of-town" sites but the out of town site was chosen because the officers in charge said that their "best guess" was that it would be preferred by the European PFI bidders.

  4.  My developing interest in PFI, its extra costs and inability to take into account social and environmental values, led me to take a degree in "Economics and Administration" as a mature student.

  5.  The consensus even amongst the orthodox economists at Warwick University is that PFI is often a very expensive way to fund public infrastructure and is certainly completely inappropriate for any procurement which involves changes to the independent variables.

  6.  All the various factors which Coventry City Council Officers have predicted to be constant for the next 30 years (ie max 50% recycling) are subject to rapid change: what can be recycled, new green technologies, housing and jobs growth, legislation for carbon taxes etc.

  7.  Because PFI is a contract to operate as well as build infrastructure, the council will promise to pay £92 per tonne regardless of whether the waste exists until beyond 2040. This is likely to mean future Council Tax being wasted on fines for not providing the promised waste.

  8.  For example the Treasury has just announced that it wants to introduce a tax on incinerator ash going to landfill. (Much to DEFRA's dismay -it is reported.) Any development such as this would leave councils which had already signed up to a PFI incinerator with the same inescapable extra costs that council's with landfill sites now face.

  9.  Waste tonnages and its calorific value (ie set proportions of plastics) are contracted to be burnt for 30 years, so the incentive is to avoid too much recycling.

  10.  This is illustrated by an entry on Coventry and Solihull Waste Partnerships' website, `A certain amount of plastic is needed in the rubbish sent to be incinerated to ensure the waste burns well. This is especially important, as there is little paper in the rubbish left to burn—due to our residents being keen paper recyclers!' (Now removed from site—authenticated copy available.)

  11.  Many assets are classed as "risk" for PFI purposes in order to tip the balance of risk to the Private Partner (PP). This allows a case to be made for the project being "hire-purchase" and therefore off balance books.

  12.  This is the case with the car-park of our PFI hospital. There is great resentment amongst residents at having to pay high parking fees to contribute to the £2,700,000 profits—none of which can be used for the NHS. (Wales is about to abolish all hospital car-parking fees in its publically funded hospitals.)

  13.  The proposed Coventry waste PFI would give away the value of the recyclate even though prices of nearly all recyclate is now well above trend prices, having quickly recovered from a dip in October 2008. The Outline Business Case (OBC) states that there is now an established market for the metal retrieved during the incineration process yet it will promise to pay the PP £92 tonne and the PP keeps its market value as well.

  14.  There is now a pilot project in London to weigh recyclate collected from residents and return the monetary value. So far the amounts being paid to residents are around £300+ per year. This would massively incentivise recycling and could be part of neighbourhood schemes which could choose how to spend the income for community facilities. PFI would rule this out as the recyclate becomes the property of the private investor.

PFI encourages over-large infrastructure and obsolete technologies

  15.  Decisions about procurement, of both the Coventry PFI hospital and now the proposed £1 billion PFI waste facility were subject to the urgent threat of losing government subsidies or losing the facility to another authority.

  16.  The head of the Health Authority regularly stated that the hospital must be out of town because of the urgency of appealing to international finance. We were also treated to the unedifying spectacle of council officers urging an immediate decision on their residents "or Birmingham will get it". The question of which city might most need a new hospital on the grounds of health needs was not mentioned.

  17.  DEFRA is distributing £2 billion pot as incentives to councils to enter a PFI waste contract before PFI may cease post-2011. This urgency creates a backward logic which leads to the choice of "tried and tested" technology.

  18.  This urgency has been further increased by the uncertainty of the legality of PFI post April 2011. The legality of the accounting procedures which allow the proposed PFI scheme to be kept as an "off-balance" sheet debt seems of major concern to the council. Its request to the independent auditor received this reply.

    "In terms of IFRS, GT noted the government's intention to move towards applying International Financial Reporting Standards in the public sector (from 2010-11). However, no guidance has yet been published as to the implications for accounting for UK PFI transactions, and `as such the accounting opinion and any accounting guidance that is given by Grant Thornton remains caveated subject to these developments.' At the point where public sector financial statements are prepared under IFRS (from 2010-11), my views may also have to be reconsidered."

  19.  The need for "financial close is March 2011" (OBC) I would suggest, might be linked to this uncertainty. This raises the possibility of future surcharges on the council for poor stewardship of public funds. The Sunday times recently included the comment, "local tax payers faced with surcharges will want to see the authors of this folly—former councillors and officials—in court". (Sunday Times 12 July 2009.)

  20.  This urgency to attract private bidders has led to a disproportional weighting being given to "tried and tested" technology. In the OBC this is given twice the weight given to social and environmental factors combined. This bias towards outdated technology is compounded by the need to attract PPs which again has a weighting of twice that of social and environmental factors.

  21.  The OBC states that PPs will not invest in technologies that have not been operational for 24 months. This rules out many rapidly developing greener technologies including the government's flagship "closed-loop" plastic recycling plants and Anaerobic Digesters capable of producing renewable fuel from waste.

  22.  The recent "credit crunch" has meant that the government now owns the larger part of the banks that provide finance for PFIs. The rates of interest remain much higher than public borrowing. This tax-payers money should be used to promote green technology and jobs. Public procurement is seen as having an increasing importance in supporting new green technologies and discouraging the "sweating" of old technologies such as incineration.

Under PFI political judgement is being passed to market mechanisms and unelected officers. This is resulting in an increase in secrecy and anti-democratic procedures.

  23.  The decision on the type of PFI waste facility procured is being portrayed as a purely technical decision which can be taken by the private market mechanism. In fact officers are deciding on the "evaluation criteria" to be given to bidders on the basis of unprecedented political judgement (or guesswork.)

  24.  They must consider whether they think there might be carbon taxes in the future, whether the population will go up or down, whether the financial system will lead to more or less employment over the next 30 year period etc.

  25.  What they cannot do, according to the director of Coventry's PFI residual project, is stipulate a flexible and modular system capable of responding to change in waste flows and comparative costs of waste treatment. This we have been told will prevent the private bidders from participating.

  26.  Secrecy and lack of democratic accountability are key results of the PFI system which guards even the simplest requests for information as "commercially confidential". In contrast, under public procurement it was seen as a vital safeguard for the public to be given full and detailed access to council spending.

  27.  Those officers appointed to manage the PFI process have begun a new regime of secrecy. A FOI request for the amount spent on a new chimney for the present incinerator was fought for several months by officers who have so far been successful.

  28.  In previous years the annual right to view and copy all details of Coventry Council spending, under the Audit Commission Act, (dating back to the Poor Law Acts!) has been granted. This year they have been denied and it is not even possible to know the relative costs associated with different waste treatments being used by the council.

  29.  In Nottingham the PP has taken the council partner to the High Court to try to enforce a re-interpretation of this ancient right in favour of secrecy. If Veolia is successful all democratic accountability will be further obstructed.

  30.  The head of the PFI waste project has told the local media, Mr Daly said: "The public don't get to have a say [on the choice of technology]. That's not a public decision." (Coventry Telegraph 10 September 2009) This is greatly resented by residents.

CONCLUSION

  31.   hope to have drawn attention to ways in which PFI procurement interacts with financial, social and environmental factors.

  32.  I became aware of this House of Lords Inquiry, "Private Finance Projects and off-balance sheet debt Inquiry", only on the last day for submissions.

  33.  I would very much welcome the opportunity to contribute further, either in writing or person to this Inquiry.


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2010