Contractors are not very happy about it and I cannot think of a single reason why a contractor would be happy about it," says Paul Gavin, head of partnerships for waste company Sita. But what’s got waste contractors down in the dumps, so to speak? Planning, of course.
Recent surveys – and much anecdotal evidence – show that despite the various problems plaguing the market, planning remains the greatest bugbear. To try to protect local councils from bearing the cost of planning delays, waste officials are asking the private sector to take on more of the risk. But it’s not going down well.
Earlier this year, an Ernst & Young survey reported that half of the country’s waste disposal authorities believed planning was the key barrier to meeting landfill targets. And planning delays on waste projects are legion.
Cornwall County Council has recently been refused planning permission for its energy recovery centre; the appeal by its delivery partner, Sita, could take up to nine months to complete, and has no guarantee of success. Lancashire County Council, meanwhile, has just paid out an undisclosed sum to its PFI partner, waste firm Global Renewables, after an appeal by a local opposition group delayed construction.
On a more positive note, West Berkshire District Council saw a judicial review attempt by opposition groups quashed this summer. But it has still taken the council nearly nine months to get started on construction after planning permission was granted last year.
To tackle these problems, the environment ministry’s Waste Infrastructure Delivery Programme (WIDP) will before the end of the year publish a new set of waste project guidelines. Its aim – made clear in the draft guidance released earlier this year – is to save time and cost for the public sector, in particular by getting contractors to take on a larger share of the development costs involved in obtaining planning permission.
If a council is obliged to pay anything, the draft guidance says, it will only be a capped sum. The implication is that councils will not compensate the contractor if they fail to get planning permission.
"Without the proposed WIDP drafting, development costs would all be refinanced at financial close," says Amar Qureshi, head of commercial and contracts for WIDP. "And then if planning fails, the authority would be liable to pay out all the amounts outstanding on the loan documents.
"Getting contractors to take more risk around development costs when planning fails is something which, particularly in light of feedback from some contractors, the private sector seems able to take."
The change is needed, says, because waste PFI contracts have changed. Where older projects were ‘integrated’ schemes with several waste solutions being delivered under one contract, newer projects are more often ‘desegregated’ – split into several parts to make procurement simpler.
"It is worth recognising that the older contracts were integrated," Qureshi says. "So you would have work starting from day one and your planning for your main facility is maybe four years down the line. And so the old planning provisions and the risk sharing was really developed in that context.
"I think the current proposed risk sharing … presents a better balancing risk between the public and private sectors."
Contractors, unsurprisingly, disagree. Sita’s Paul Gavin says: "As long as a contractor conforms with its reasonable endeavours obligation, we don’t really understand why they shouldn’t get paid back their costs if there isn’t a satisfactory planning permission."
He argues that the WIDP proposal will add an unnecessary competitive element to obtaining planning permission. "It plays towards contractors who have got an existing planning permission.
"If you have got one contractor who has got planning permission in a particular area, then they have an advantage over the other bidders. That is going to make a contract unattractive to the other bidders, so in the end from a competitive point of view, is that in your local authority’s best interest?"
Paul Levett, deputy chief executive of waste firm Veolia, says the private sector has limited control over planning. "The authority has arguably more influence over the outcome of the planning than the contractor does.
"The authority at a member level will have the relationship with the residents and will understand the overall local picture," he says.
Passing on such a risk to the private sector, industry experts argue, will also scare away funders, who need assurances that costs can be recouped if a project collapses or is delayed because of planning problems.
It also fails to reflect what is happening in the market, argues Ashurst partner Cameron Smith. "It may reflect the position that Partnerships UK … or the Treasury or Defra [the environment ministry] wants to get to, but it is certainly not the waste market’s position," he says.
"The problem is, in a good market it may be feasible, but in a market like we have got now, with a very limited number of banks, limited number of projects going through to close and with concerns over the risk transfer generally, no one is going to touch that."
As well the private sector being up in arms about having to take on more risk, there is also the question of how much extra councils will have to pay for it. If the cost is too high, can the risk transfer be justified?
"If a party is asked to take a risk which it cannot effectively manage, it will either refuse to take that risk, or charge a premium," says John Chandler, a partner at law firm K&L Gates.
"Market competition means that not all risks are priced at their true value, which explains how the public sector can continuously push the risk envelope and still receive value for money.
"Pushing the risk transfer envelope only becomes problematic when the transfer of a risk becomes mandatory and the private sector is forced to take a risk which it totally outside its control."
But what do local councils think? Phil Davies, an advisor on Cumbria County Council’s waste project, welcomes the new guidance, claiming it will bring much-needed protection for local authorities. "If we didn’t have standardisation, councils would get ripped off one by one by the private sector."
And it’s right that the private sector should take on the risk, he adds. "If they [the private sector] are in charge of going for a planning application, they should be responsible for delivering that, and the delay in that shouldn’t be down to the local authority."
He worries, though, that the change may make it harder to strike deals. "The private sector is going to kick off substantially against certain issues. The change in planning is something they won’t be very keen on."
For Greater Manchester’s Waste Disposal Authority, it made sense to retain planning risk on its flagship project, says its treasurer, John Bland. But Greater Manchester’s case was "very project specific". Bland adds: "The majority of planning risk rests with the contractor. If the Defra guidance was the other way around and said the risk should lie with the public sector, you’d get private sector bids coming in which were just ludicrous in terms of planning."
Nearby Lancashire County Council has just had to foot the bill for early planning delays on its waste project. But Dick Ellis, the council’s head of waste services, doesn’t necessarily believe that’s the wrong way to do things. "The issue is one of who is best placed to take and manage risk," he says. Some schemes are delayed because of private sector failures. But, he adds: "If the authority is best placed to take that risk, then there is no sound argument for that not to happen.
"Performance, diversion, markets and meeting targets should be the focus of the private sector, along with managing build costs and funding."
Qureshi, at any rate, insists the guidance has enough room for manoeuvre to keep contractors happy. "If they have got different appetites for how much risk they are willing to take," he says, "that can be reflected in what they bid back. I think part of a bidder’s appetite will be dependent on their view of the particular planning circumstances of the project."
An honest merchant
Despite these assurances, however, many contractors remain deeply worried about planning risk. As a result, they’re looking at alternatives – including the possibility of building their own merchant waste facilities that can also take commercial waste. "Waste companies will always go for waste contracts," says Sita’s Paul Gavin. "But we are already beginning to see now the move towards more merchant-type facilities." Sita have bought several commercial plants, while Veolia and Biffa are "evaluating opportunities", says one contractor. "I think most of the waste companies are looking at doing this."
Contractors like the confidence that comes with choosing their own sites, as they can be sure it has good planning prospects. And owning a site means a firm is happier to spend money on planning risk because it is seen as an investment. "If it is an authority site, you don’t own it," says Gavin. "If you have got your own site, you are prepared to spend money on planning."
Waste company Covanta recently bid for Buckinghamshire County Council’s waste PPP scheme – and won – with a proposal to send the council’s waste to its own merchant plant. But there are potential problems.
"What happens if they [the council] are not the only user of the facility, what happens in 25 years’ time?" says one contractor. "How do you deal with that situation, how can you hand the facility back to the authority if there are other local authority customers who are using it as well?"
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