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ÙPolicy and Resources Committee 15.8.00  PFI and WASTE MANAGEMENT  Report of the Director of Environment SUMMARY On the 24 July the Treasury Project Review Group approved the Council’s PFI bid of £27 million. This provides the Council with a marvellous opportunity to build an innovative waste recycling and recovery facility and to develop an integrated waste management service capable of meeting the city’s needs for the next 25 Years. This report provides members with details of the PFI bid and the process and timescale for realisation of the PFI project. This is Leicester’s first approved PFI scheme and with contract payments expected to exceed £200m over 25 years will result in the largest contract ever placed by the Council. Future reports will brief members on progress during the contract procurement phase and formal approval will be sought from this committee for the eventual PFI contract. RECOMMENDATIONS It is recommended that Policy and Resources Committee: Recognise the success and deliverability of the PFI project relies on the Council being able to offer potential contractors a site on which to build a new recycling and composting facility. Agree to sites at Sunningdale Road and Bursom Industrial Estate being held in reserve for the new facility (subject to negotiations to secure the leasehold interests at Sunningdale, referred to in the report, being successful). Recognise the importance and complexity of the PFI procurement process and agree for the Director of Environment and Development under delegated powers, in conjunction with Head of Legal Services and Chief Financial Officer, to prepare and award contracts for the appointment of external specialist advisors to assist the Council. The estimated cost of appointing external advisors is detailed in paragraphs 2 and 6. Agree that any surplus funding in the early years of the contract be held in reserve to support future payments. Agree to the establishment of a corporate Project Board to oversee this project and to report to Members on a regular basis as detailed in paragraph 6. FINANCIAL IMPLICATIONS The Waste Management budget is currently £6.45 million for 2000/2001, comprising of £2.7 million for collection and £3.75 million for disposal. Whilst the collection element of the budget is forecast to remain at a fairly constant level, disposal costs are forecast to rise because of the increase in Landfill Tax, increased waste tonnage, and most significantly because of the loss of local landfill sites. It has been forecast that the waste management costs for 2004/05, the first year the Council will have to use distant landfill sites, could increase by 2.9 million on the previous year. The establishment of a new integrated waste management service, as detailed in the PFI bid, offers the opportunity of significantly reducing disposal costs, compared to the forecast cost of maintaining existing arrangements, whilst providing benefits in improved environmental performance. The new service is estimated to require capital investment of £32 million over 25 years. The approval of the scheme means that additional revenue support will be provided on the capital element of the project, through the provision of PFI credits. The level of external support is calculated on the same basis as if the project had been funded by borrowing approvals and attracted support through the Standard Spending Mechanism. It is estimated that this additional revenue support will be in the order of £3.2 million at the start of the scheme and will reduce to £1.2 million by the end. It is a feature of the funding of such schemes that government support is higher in the early years and declines over the period of the contract because of the effect of notional debt repayments. Support will not mirror payments made to the contractor, which will (by and large) be equal instalments. To assist in the smoothing of payments over the period of the contract, it is recommended that any surplus funding in the early part of the contract be held in reserve to support future payments. To assist in the delivery of this project it is anticipated that use will be made of external advisors to provide specialist skills to the project team during the procurement process. It has been estimated that the potential cost of using external advisors could be between £0.3m and £0.5m. The authority will seek to have these costs reimbursed by the successful bidder as part of the procurement process and the estimated level of government support reflects a provision for external advisors. However, pending this reimbursement these costs will require to be funded by reserves. To facilitate the realisation of the project a site for the new development will be made available to potential contractors, with consideration for this site being sought through the procurement process via a reduction in the gate fee for the service. It must be noted however that a potential contractor may have their own site and not wish to make use of the Council’s sites, and therefore any cost the Council incurs in securing a site is at risk. Officers are working to secure possession of the preferred sites at minimum financial cost to the Council. More detail on the site issues is outlines in section 4 of this report. Members are asked to note that, if contractors are asked to supply their own site, it will introduce a major uncertainty in contractors’ minds when they tender, which will of course increase the price. 3. BACKGROUND The Council has a target of recovering 40% of municipal waste by 2004. Whilst the target set by the Council is seen as challenging it is also seen as necessary in light of the economic and environmental pressures on continuing with landfill disposal. The landfill sites currently used by the Council are projected to be full by 2003/4, pressures on landfill disposal will be further intensified with the introduction of the Landfill Directive and the increasing cost of Landfill Tax. In responding positively and proactively to the challenges ahead the Council undertook a comprehensive strategic review of current waste management arrangements and appraisal of alternative options to establish an economic and environmental strategy to address the expected increases in waste management costs. The new waste strategy focuses on establishing a fully integrated waste management service with the potential to improve the Council’s landfill disposal rate from currently 91% to 59%, providing a recycling/recovery rate of over 40% Having consulted with the industry about what is deliverable in a Leicester City context, given projections about future waste levels, land use constraints and public support for particular waste treatment options, it is likely that the future service may include a combination of recycling and “mixed” waste composting. This will bring new innovative technology (currently utilised in Europe) into the U.K. with the potential to meet all the Council’s service, sustainability, environmental and financial objectives. It was recognised that significant capital investment is required in order to establish a new infrastructure to treat the City’s municipal waste. Therefore a bid under the Government’s Private Finance Initiative was submitted in September 1999. PFI was launched in 1992 and re-launched in 1997 by the Labour administration with the focus on supporting capital intensive services. The key principals of PFI relate to sufficient risk being assumed by the private sector for the performance of an asset/service over an extended period. Also that contracts will generally be excess of 15 years and more usually 25 years to cover the considerable capital costs that are likely to be involved. With procurement being “output” based giving the private sector the maximum opportunity to manage the risk involved. In practice, however, constraints on local authority capital expenditure have meant that PFI is often the only available option for new major investment schemes. SITE FOR NEW RECYCLING AND COMPOSTING FACILITY To facilitate the realisation of the project a site for the new development will be made available to potential contractors on a leasehold basis lasting the length of the contract, with recoupment of the cost being sought through the procurement process. The success and deliverability of the PFI project relies on the Council being able to offer potential contractors a site on which to build the new facility. Officers over the last year have looked at a number of potential sites across the city for the proposed new facility. The general requirement against which sites were considered suitable related to: size, proximity to residential areas, road access, environmental impact, planning policy, availability within project timetable. It is important to note that the new facility will utilise the newest technologies of waste treatment and resource recovery, meeting both sustainability and environmental standards. Two sites identified as being suitable for the new facility are Sunningdale Road and Bursom Industrial Estate. Sunningdale Road: This site is highlighted as suitable for the PFI project due its location, existing use, and the potential for the transport of waste by rail. The site, which is owned by the City Council, is located within existing industrial development. However, the site is subject to a number of leasehold interests that would have to be acquired, in order to secure vacant possession, before the site could be offered to potential contractors. Discussions have already taken place with the head lessees and the availability of the site will be subject to negotiations to acquire the various leasehold interests, or options to do so, being successful. In acquiring the leasehold interests there may be financial costs incurred at risk by the Council. This risk relates to costs associated with obtaining option agreements. The successful contractor will have to meet the full costs of realising the leasehold interests, which may be significant and which may reduce the scope for the Council in obtaining a reduction in the gate fee. The Council will also forego income from rent, which is currently £27,000 per annum. Bursom Industrial Estate: This site, which is designated for employment use and owned by the City Council, is currently undeveloped. Although the Council is foregoing a potential significant capital receipt in making this site available to a contractor (estimated to be £1.5 million on the basis of a 7 acre site with infrastructure), financial consideration would be obtained for the site through the procurement process by a reduction in the gate fee. Other Sites: Given the potential for difficulties to arise in securing the two sites, officers will continue to investigate the possibility of other suitable alternative sites. PROJECT TIMETABLE The timetable at appendix A details the key stages of the procurement process up to contract award. The need for the procurement process to begin as soon as possible is essential if the successful contractor is to have sufficient time to develop new waste treatment facilities before local landfill sites are due to become full. It is intended that the contract tender notice would be issued in the Official Journal of the European Community (OJEC) in December. It is important that any issues surrounding the identified sites are resolved by this date and so the Council is able to include details of the site to potential contractors. The target date for contract award is September 2002, from which date the PFI service provider will take over the operation of the current Materials Recycling facility (Planet Works) and the contract for disposal. The contractor will take over the remaining obligations, e.g. refuse collection, as current contracts expire. APPOINTMENT OF ADVISORS To assist in the delivery of this project it is anticipated that use will be made of external advisors to provide specialist skills to the project team during the procurement process. It is intended to maximise value for money by making the most use of internal resources where possible. Where there is a need to draw upon additional specialist support this will be done in such a way as to provide opportunities for the transfer of skills so that in subsequent procurements there is less dependence on external advisers. It is envisaged that specialist support will be sought in the areas of legal advice, corporate finance, and project management. The costs of external advisors have been estimated between £0.3m and £0.5m, and the funding of these costs has been outlined in paragraph 2.4. PROJECT MANAGEMENT ARRANGEMENTS 7.1 A Project Board will be established which will have overall responsibility for the strategic management, development and delivery of the project. Project Board members will include the Director of Environment and Development, the Chief Financial Officer, and the Head of Legal Services. The Project Board will be responsible for reporting on progress to members. LEGAL IMPLICATIONS 8.1 These are largely set out in the body of the report. The PFI contract will require complex legal arrangements involving the Council and the contractor. The exact contractual structure will not be clearer until later in the procurement process and therefore will be reported to Members in due course. SUSTAINABILITY AND ENVRIONMENTAL IMPLICATIONS 9.1 Waste Management is a key aspect of the Council’s commitment to the protection of the environment. The development of a new integrated waste management service will meet Government and Council’s recycling and recovery targets and provide the City with a sustainable, innovative and affordable way of dealing with household waste for the next 25 years. POLICY IMPLICATIONS The development and implementation of an integrated waste management service will contribute to the Council’s corporate environmental objectives and targets under EMAS CRIME AND DISORDER IMPLICATIONS None arising from this report EQUAL OPPORTUNITY IMPLICATIONS 12.1 None arising from this report CONSU