Defra: funding allocation and oversight of three PFI waste projects
17 September 2014
Public Accounts Committee publishes its report into Defra's oversight and handling of three PFI waste projects.
- Report: Department for Environment, Food and Rural Affairs: oversight of three PFI waste projects
- Report: Department for Environment, Food and Rural Affairs: oversight of three PFI waste projects (PDF 176KB)
- Inquiry: Department for Environment, Food and Rural Affairs: oversight of three PFI waste projects
- Public Accounts Committee
The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"It is appalling that lax, poorly drafted PFI funding agreements to support the building of local authority waste processing plants have led to hundreds of millions of pounds worth of grants being made to three councils even though the main waste assets – such as incinerators – have not yet been built.
Funding agreements with Surrey and with Herefordshire and Worcestershire councils signed by the old Department for Environment, Transport and the Regions, meant 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 £213.5 million in grants having been paid to the councils over the last 15 years with none of the main waste assets to show for it.
Later, the Department for Environment, Food and Rural Affairs 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.
It’s scandalous that taxpayers in Norfolk have been left in the lurch and landed with a bill of around £33.7 million because the Department withdrew its funding for the Norfolk waste plant in October 2013. This decision was a contributing factor to the Council’s decision to cancel the contract the following year.
The Department judged that the Norfolk plant was no longer needed to meet the 2020 EU landfill target, and yet it was fully aware of the likely compensation costs that would be incurred when it decided to withdraw funding.
Long PFI contracts that typically last 25-30 years may be inappropriate for the waste sector where technology is continually evolving and the amount of waste that will be produced in the future could be hard to predict.
The Department has more work to do to improve local authorities’ contracting capability, especially for PFI projects, and ensure that they only pay for what is delivered in future without getting locked into long, inflexible contracts.
It should act with far greater urgency when it has concerns about a project’s progress and support local authorities to negotiate PFI contracts that are better value for money for local taxpayers.
The Department should balance the need to meet the EU target at minimum cost with making sure that its decisions serve taxpayers’ interests as a whole."
Margaret Hodge was speaking as the Committee published its 14th Report of this Session which, on the basis of evidence from Bronwyn Hill CBE, Permanent Secretary, Department for Environment, Food and Rural Affairs and Dr Colin Church, Director, Resource, Atmosphere and Sustainability, Defra, and Senior Responsible Owner for the Waste Infrastructure Delivery Programme, examined Defra’s oversight of three PFI waste projects.
The Department for Environment, Food and Rural Affairs (the Department) is responsible for ensuring that the national portfolio of projects is sufficient to reduce the amount of waste sent to landfill to meet the EU target. The Department provides grants to some local authorities using the Private Finance Initiative (PFI) to build new waste management infrastructure. However the Department does not accept responsibility for projects delivered by local authorities to meet the national targets for which the Department is responsible. PFI contracts typically last for 25-30 years and this does not offer the necessary flexibility to respond to rapidly changing technology and changing policy requirements for waste disposal. Furthermore, the Department has been unacceptably slow to intervene in projects that are struggling to deliver the required waste management infrastructure leading to delays and incurring extra costs. The Department’s handling of the Norfolk PFI waste project has been particularly poor with the Department failing to exercise good judgement by agreeing to give funding to the project and then failing to give sufficient consideration to the local impact of its decision to withdraw funding to that project. This contributed to the contract being cancelled which has left Norfolk taxpayers facing a bill of some £33.7 million.
Conclusions and Recommendations
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.
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.
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.
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.
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.
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.
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.