Local authorities stand to gain from expiring private finance initiative contracts in the waste sector, but they will need to manage the end stages of these agreements carefully to reap all the benefits on offer, writes Bob Couth FCIWM, Frith Resource Management.
The private finance initiative (PFI) has been controversial since its introduction in 1992. The policy – launched by Conservative Prime Minister John Major and expanded under Tony Blair’s 1997 Labour government – was seen as a way of creating public-private partnerships, with private firms being contracted to complete and manage public projects.
PFI was ended in 2018 by the then Chancellor Philip Hammond, but the length of such agreements means that many contracts are still running today. Of the 28 PFIs established in the waste sector since 1997, 24 are ongoing, with eight due to end in the next seven years. Expiring contracts such as these need urgent attention from local authorities if all the potential benefits are to be realised.
Under PFI contracts, the private sector has provided: waste-transfer stations; materials recovery facilities; household waste recycling centres and anaerobic digesters; plus mechanical biological treatment, composting and energy from waste (EfW) infrastructure. Around half of the waste PFI contracts have included conventional EfW as a key element, and these projects have been largely successful.
The private finance initiative (PFI) has been controversial since its introduction in 1992.
All PFI contracts after 1998 use HM Treasury Standardisation of PFI Contracts (SoPC) terms but with project-specific derogations. SoPC terms require the PFI contractor to transfer well-maintained PFI assets to the contracting authority on expiry. If assets are not returned in a well-maintained condition, the PFI contractor should provide adequate funds to make good.
In February 2022, the HM Infrastructure and Projects Authority issued detailed guidance on managing the expiry of, and service transition from, PFI contracts. This says contracting authorities should allow seven years for the planning and management of PFI contract expiry.
The National Audit Office, meanwhile, has found that authorities risk underestimating the time, resources and complexity involved in ending contracts and that they should build capability and mitigate risks in this area.
Preparing for inevitability
PFI expiry is a complex process and should not be considered a distant event. Preparing for it requires key decisions to be made on handing back and future use of assets, as well as consideration of the strategic vision of future services, to which PFI expiry should be aligned.
Local authorities have several options for providing ongoing waste treatment once a PFI has expired. They can: operate services and assets through a local authority trading company or partnership; outsource the operation and maintenance of facilities; or demolish facilities and make new arrangements for waste facilities. These options – in this order – have reduced risk, but increased cost, to a contracting local authority.
There is also the impact on climate change to consider: embodied carbon within existing assets; additional carbon impacts for demolition and reconstruction; and the improved operating efficiency of new technology compared with existing facilities.
PFI expiry is a complex process and should not be considered a distant event.
Local authorities should think about reviewing assets and their condition, including any governance issues or special clauses surrounding their return. Appraise the options and come up with a post-PFI strategy, including any necessary procurement plans, ongoing financial viability, and transfer of undertakings (protection of employment) regulations – otherwise known as TUPE.
A contracting authority will need to identify works that can reasonably be expected to be completed to maintain assets in compliant operating condition for handover, and then identify a programme of capital life-cycle works, some of which may need to be allowed for in a newly procured contract.
It may also want to plan future enhancement – or, perhaps, reduction in operating scale/scope – for new services and existing assets. This might include new operating lines; replacement of emissions control and treatment; new recycling facilities; and development of new heat off-take systems.
Profit from incineration
PFI contracts with returning EfW infrastructure are likely to be treated as an asset to the contracting authority. The EfW facility could provide relatively low-cost waste treatment with the potential for income from the sale of surplus incineration capacity and electricity and even the recovery of waste heat. The Energy Price Index has risen 100% over the past year and contracting authorities have the potential to make significant income from the electricity spot market.
However, EfW facilities returning from PFI contracts will require some special consideration of their own. Local authorities should plan for increasing future maintenance costs and the potential for an Emissions Trading Scheme (ETS) payment to HM Treasury, potentially from 2028.
An effective fee of around £36 per tonne for waste incinerated is being discussed for ETS. This would be a variable figure and linked to carbon prices, but this cost burden could be mitigated if the contracting authority invests in heat recovery, or carbon capture, use and storage (CCUS). That would also be a significant cost burden, but CCUS is currently subject to government innovation funding and is a factor in the location and viability of carbon sinks and applications.
If the public sector does not take a strategic approach to managing expiring PFI contracts, it risks failing to secure value for money.
In addition to an ETS, there is much pending legislation related to zero-carbon emissions that needs to be considered in the context of expiring PFI contracts. Environmental targets for residual waste should reduce the amount of material a contracting authority needs to deal with, freeing up capacity for third-party waste.
Extended producer responsibility, deposit return schemes, the plastic tax, and consistent collections should all reduce the tonnage and alter the composition of residual waste requiring treatment by a contracting local authority. For existing contracts, the implications of these changes in law are likely to fall on the contracting authority.
If the public sector does not take a strategic approach to managing expiring PFI contracts, it risks failing to secure value for money during negotiations with the private sector. Some authorities have insufficient knowledge of assets’ condition, which risks them being returned to the public sector in a worse-than-expected state.
These risks need to be managed by applying the expertise and resources available to local authorities. Additional budgets will probably also be needed.