Blackpools and Lancashires Joint Waste PFI Contract

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Blackpools and LancashiresJoint Waste PFI
Contract
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Many Dimensions?

• Background to the Procurement
• Scope of the Project
• The Procurement process
• Examples of some of the risk issues in the PFI
  Waste Sector

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The future of waste management in Blackpool and
Lancashire until 2035

• Culmination of a process that started in
  1997with the establishment of the Joint Waste
  Strategy Steering Group (Subsequently renamed
  Lancashire Waste Partnership)
• Forward-looking action recognising the risks to
  the Authorities of the Landfill Directive to take
  effect in 2010 and the long lead-times to
  successfully deliver new waste infrastructure

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Risks identified in 1997

• Implications of Landfill Directive limits on
  landfill (against 1995/6 levels)
• Max 75 municipal waste to landfill by 2010
• Max 50 municipal waste to landfill by 2013
• Max 35 municipal waste to landfill by 2020
• Lancashire Minerals and Waste Local Plan
  under-provision of landfill capacity, against
  known demand, by 25 in Lancashire by 2006
• No waste disposal assets following the sale of
  the LAWDC by 2003
• Recognition that waste management needed to be
  plannedon an integrated basis of both collection
  and disposal
• Recognition of the long lead-in time to new
  infrastructure provision (7years?)

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The Lancashire Waste Strategy
The Lancashire Waste Strategy

• The result of 3 years work by all fifteen
  authorities
• Two major public consultation exercises

1999
2000
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Strategy Approved 2001

• 20,000 Responses to Draft Strategy
• 75 satisfaction
• Everyone wanted by higher and earlier targets for
  recycling
• Serving 1.4 million residents and managing 1
  million tonnes of waste per year
• 400,000 tonne per year waste reduction target by
  2020 (growth reduced from 3 to 1 by 2005)
• 40 recycling composting by 2005
• 56 by 2015
• 90 of households to receive 3-stream collection
  service by 2005
• 50 recovery from recycling centres
• Landfill reduced from 85 to 20
• Network of new waste management infrastructure

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Energy from Waste Incineration

• Provide capacity for 325,000 tonnes of Energy
  from Waste incineration by 2010, if the
  Strategys waste minimisation and recycling
  targets are not exceeded.
• A final review of the decision to build will take
  place in 2005.
• Environmental Standards will be equivalent to the
  highest operational standards anywhere in the
  world.
• Most controversial - a commitment to do
  everything possible to avoid incineration

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Mechanical Biological Treatment (MBT)

• In the two years following the approval of the
  Strategy the Partnership continued to explore
  alternatives to EfW
• In 2003 the Lancashire Waste Partnership endorsed
  a revision to the Strategy that replaced the need
  for EfW Incineration with Mechanical Biological
  Treatment of residual waste
• MBT is a generic term applied to a range of
  technologies that in-effect compost the waste
  and mechanically recover recyclable materials.
  Most systems produce Refuse Derived Fuel as part
  of the process or alternatively pre-treat the
  waste prior to landfill and produce a soil
  improver
• Factory processing of waste

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Risk context to the PFI Procurement

• Primary Risks relate to service failure
• Secondary Risks are financial and land use
  planning risks

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Service failure risks

• After April 2010 the Council has no assets or
  contracts to dispose of Lancashires waste
  without them Councils cannot collect rubbish
• The only significant landfill capacity left in
  Lancashire around this time will be the Whinney
  Hill landfill in Hyndburn (based upon current
  rates of disposal)
• Geographical differences long term contractual
  arrangements mean some sites will have longer
  life eg Jamieson Road at Fleetwood could be
  available to 2016
• Theses site are controlled by SITA and there is
  no guarantee that the Council will be able to
  secure capacity at these sites if it wished to
  move to a landfill based strategy there are
  regional demands
• However, we have procured sufficient capacity in
  the context of the low PFI landfill demand until
  2025 to mitigate this risk

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Service failure risks

• Significant price exposure to monopoly supplier
• Collection Authorities will not be able to
  operate without local disposal points
• New permissions for landfills would only be
  possible based upon capacity assumptions that
  assume the Landfill Directive has been
  complied-with and sites would need to be
  identified in the in the context of the Local
  Development Framework
• The PFI infrastructure is designed to mitigate
  these risks greatly reducing landfill
  dependence and providing transfer facilities to
  distant disposal points if needed
• Our strategy and procurement is based upon 1
  annual waste growth, if this is exceeded our
  problems are greatly magnified

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Financial Risks

• Costs of final landfill disposal with monopoly
  supplier and/or long distance disposal ( If this
  can be achieved at all)
• Landfill tax rising to 35 per tonne by 2010 (Now
  a minimum of 48)
• Waste Emissions Trading Act Penalties of 150 per
  tonne for exceeding the the Councils landfill
  allowances (LATS)
• These financial instruments are designed to
  encourage Councils to deliver the Landfill
  Directive
• The need to secure over 280 million of capital
  to fund the required investment programme
• Cost forecasts are based upon 1 annual growth in
  waste. If this is exceeded these costs will
  increase greatly

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Land-use Planning Risks

• We cannot deliver our services without new
  infrastructure whether it be landfill,
  incineration, MBT, compost plants, MRFs or simple
  transfer stations
• The single biggest obstacle to building such
  infrastucture is site acquisition and planning
  consents
• Currently we are in a strong position because we
  have a fully integrated strategy underpinning our
  planning application / decisions and they comply
  with the development plan, national and European
  policy
• Any application based upon a landfill future,
  without meeting the Landfill Directive, is likely
  to fail and will also be be open to challenge
  through judicial review

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PFI Procurement

• Is therefore essentially an exercise in risk
  mitigation
• Cannot eliminate all the Councils risks
• Seeks to minimise those risks as far as possible

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2004-5 Procurement process

• Four companies short-listed
• Two withdrew leaving two
• SITA and Global Renewables Ltd (GRL)
• 3 bids received 28th February 2005
• A) Biological drying with RDF output (Council to
  find market)
• B) Biological drying with RDF output plus EfW
  plant to burn the RDF
• C) Combined anaerobic digestion(biogas) and
  bio-stabilisation (composting) process
  plus soil improver
• All bids exceeded Outline Business Case
  affordability levels previously approved by
  Cabinet
• Output specification re-scoped and Revise and
  Confirm bids returned 11th July 2005

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Affordability proportionately the same impacts
for Blackpool Council

• GRL appointed preferred bidder for the PFI
  contract September 2005
• Basis of that appointment was to negotiate a
  reduced budget impact
• Full service costs reduced from 104 million per
  annum to 91 million per annum (LCC budget
  position)
• 13th July 2006 Cabinet authorised move to
  financial close of the contract based upon this
  affordability position
• Increased by 3 million per annum by financial
  close
• Do minimum costs are higher over project life
• but based upon assumed continuation of the
  governments fiscal policies and regime for waste
  (taxes and penalties)

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What are we buying through the PFI contract ?

• Two strategic processing facilities at Thornton
  and Leyland
• 340 tonnes per annum residual waste processing
  (MBT)
• 110,000 tonnes per annum enclosed vessel
  composting
• 55,000 tonnes per annum MRF
• 56 diversion of residual waste from landfill
• 95 diversion of kitchen and garden waste from
  landfill
• 93 diversion of separately collected co-mingled
  plastics, metals and glass from landfill
• 100 diversion of separately collected paper,
  cardboard, textiles, plastics, metals and glass
  from landfill
• An environmental education service
• A waste minimisation and community engagement
  programme
• A local market development programme
• 2500 acres of woodland planted 2.5 million trees

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What we are buying In place of landfill
Bio-gas production
Residual waste composting
OGM storage
Bio-filters
Kitchen garden waste composting
Percolation
Residual waste reception
Mechanical separation
Materials recycling facility (MRF)
Environmental Education Centre
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PFI in the Waste Sector

• Waste projects exhibit a significantly different
  risk profile to accommodation projects schools,
  hospitals, etc
• Process performance risk
• Biggest risks in the operational phase not the
  construction phase unlike accommodation projects
• Major financial penalties for under-performance

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Bidding Consortium

• Global Renewables Ltd (50) and Bovis Lend Lease
  (50)
• Joint owners of the
• SPV
• The Construction Joint Venture
• The Operating Company
• 5 Banks

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Risk transferSite abnormals and contamination

• Planning policy meant that our sites are former
  brown-field sites
• Procurement bidding based on assumption of normal
  site conditions (including estimated provisional
  sums)
• Major part of the procurement post preferred
  bidder was transferring construction cost and
  programming risk for site abnormals to the
  contractor
• At a cost of over 40 million
• Chemical contamination and 8000 piles per site
• Gain share

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Risk transferProcess performance

• Banks at risk (over 200 million) until plant has
  passed its acceptance tests
• Ability to achieve landfill diversion targets,
  environmental emissions and performance levels,
  bio-stabilisation guarantees
• Massive technical due-diligence on new technology
  both funders and council

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Risk transferBio-stabilisation

• At the heart of the process is the diversion of
  BMW from landfill through bio-stabilisation
• Key to mitigating LATS penalties
• Evolving UK regulatory framework for MBT (no UK
  plants)
• Established German methodologies
• Italian sub-contactors providing process
  guarantees

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Risk transferWaste volume and composition

• Shared volume risk minimum guaranteed tonnages
• 3-stream volumes a contractor risk
• Waste composition in terms of metal, plastic,
  kitchen waste etc, critical to processing
  performance shared risk
• Complex waste-auditingand diversion performance
  model

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Planning and licensing risks retained

• Could add a further 20 million to the capital
  costs
• Current Judicial Review application in relation
  to grant of planning permission for the Leyland
  site
• Delay also means potential for LATS penalties

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Where we are today

• Our service failure risks significantly mitigated
  for a key front line service
• Big increases in expenditure but largely fixed
  and known
• One of the most environment friendly waste
  management solutions in the world
• A deal that has not only closed but construction
  starts immediately
• We are not there yet but we are a lot closer

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• Thanks for listening
• Any questions?