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A more efficient alternative to PFI

Peterborough council is raising its own finance and procuring its waste treatment facilities collaboratively. By Neil Jarrett

Local authorities are struggling to meet the costs of waste management due to the diversion of waste from landfill.

Landfill tax accelerator is increasing by £8 per tonne a year. This, along with higher efficiency targets, puts councils under pressure to be sustainable.

Some councils are setting even higher targets. Peterborough City Council has set a minimum of 65 per cent recycling and composting by 2020.

Following research commissioned by an all-party working group, Peterborough decided to set up waste treatment facilities including one that converts waste into energy.

The council needed to work out how to finance this. The Department of Environment, Food and Rural Affairs is moving away from PFI because it can mean high tender, finance and capital costs and even higher operating costs.

Some authorities are recognising that the perceived risk transfer and budget stability achieved with PFI procurement comes at a cost.

PFI estimates

The Collaborative Working Centre’s analysis for Peterborough concluded that a PFI contract would be more expensive despite the 25 to 30 per cent ‘free capital’ included in PFI credits.

Unpredictable regulation, operation costs and technology mean that 25-year PFI contracts have significant risk contingencies built into the price.

Also, the market will change and the winning tenderer is unlikely to provide best value for money over the entire period.

Many PFI contracts are being sold on, delivering huge profits to the initial bidders and showing the high cost of the approach.

PCC developed a business model to reduce PFI’s risk-associated costs. It decided to raise its own finance and to procure collaboratively to cut cost.

Councillors accepted CWC’s recommendations to establish a local authority controlled business to raise finance, procure facilities and manage collection.

Early supplier involvement

The idea is for the client and supplier to collaborate in specification, design and risk management. The client offers participants incentives to reduce costs and jointly solve problems. This will allow PCC to save 20 per cent to 30 per cent of capital and revenue costs.

PCC’s business model involves long-term financing secured against a contract commitment to municipal waste treatment. The cost of finance is 5.2 per cent compared with 10 per cent through a PFI deal.

PCC’s waste delivery company will minimise the cost of procurement and operations and maximise acceptable revenue from commercial sources.

Contractors and designers will be chosen by value for money. They will then form an integrated team of designers, civil contractors and waste technology suppliers.

There is also further scope to develop joint ventures with private sector partners to provide commercial waste treatment services.

PCC’s collaborative model is designed to reduce municipal waste collection prices and the council plans to bring the prices down even more by reducing municipal collection costs through management of commercial waste. CWC has shown that PCC can treat its waste at less than £70 per tonne.

By opting for conventional borrowing, PCC will save nearly £3 million a year.

The council calculates that it could reduce the cost of the municipal waste treatment service to £50 per tonne, with no waste going to landfill, if it offers facilities to the commercial sector.

The challenge is to convince local authorities to raise private sector finance outside PFI.

The value of collaborative working, joint procurement and supplier alliances are not always fully understood.

Hopefully, pioneering projects like PCC’s will serve as best practice examples.

Neil Jarrett is chief executive of CWC