Derby City Council

Council has ‘right to terminate’ Sinfin ‘Incinerator’ contract on 1 October 2018. Time to be decisive!

By the end of this month, the contractor for the Sinfin Incinerator (Sinfin Lane), Resource Receovery Solutions (Derbyshire) Ltd (RRS) will have failed to have secured the Completion Certificate for the plant. This is considered to be contract default and, as such, a termination notice can be served for cancellation of the contract, by both Derby City , and Derbyshire County Councils ( joint signatories).

Background

When the contract was signed in December 2009, it specified the planned completion date as 31 March 2017. It also defined a “Long Stop date”, being 18 months later, namely 30 September 2018. Subsection (m) of the clause on “Contract Default” states that default happens if a completion certificate has not been obtained by the “Long Stop Date”, 30 September.

The completion certificate is prepared by the Independent Certifier. The certifier confirms the results of a variety of defined tests which demonstrate that the plant is operating in line with the contract. A significant test involves the full plant running for 14 consecutive days.

RRS need to give the Councils, and the Independent Certifier, 20 days notice of the start of all of the acceptance testing.

This notice has not been given, yet – there is not enough time left before the 30 September 2018.

Who’s involved? What is their financial state?

RRS is a Joint Venture company owned 50:50 ,through intermediary companies, by Interserve plc and Renewi plc.


RRS’s last set of published accounts (31 March 2017) showed that it was illiquid. It could not service its short term liabilities with available cash and short term assets. A note to the accounts highlighted that the Capital Contribution Loan of £42.5m was due for repayment on 30 June 2018. It was relying on the plant being in operation by then so the outstanding “completion” amounts from the Councils, of £50m, could be paid. The note continues that if:

“…full service commencement is delayed until after 30 June 2018…the Company (RRS) would not have sufficient funds to repay the loan”

By March 2018, the directors clearly knew that the plant would not be running on time so a 2nd mortgage was taken out on the leasehold land, and plant from Sumitomo Mitsui Bank.

Interserve plc is a large company operating on wafer-thin margins. It’s net worth has dropped by 90% in just over 2 years, and it is now technically illiquid.  It declared a few years ago that it wanted to exit from the “Energy for Waste” Business of which the Sinfin plant is a part.

Renewi plc was formed from a merger including the original Incinerator contractor of Shanks Waste Management. Renewi also work on tight margins, and is technically illiquid in the short term.

What happens now?

A joint decision has to be made by both Derby City Council and Derbyshire County Council.

There are essentially 2 options under the contract:

  1. Do nothing – continue to wait for RRS to commission the plant. There are no committed timescales. When formally certified pay the outstanding £50m
  2. Submit a Termination notice on 1 October 2018. Theoretically, at that point, the plant would be closed to avoid further costs.

What might confuse matters if option 2 is chosen?

  • RRS are clearly aware of the “Contractor default” clause in the contract. Have any “private guarantees” been given to RRS which might “kick back” on the Council?
  • The Contract is not just for the Incineration plant, it includes all existing County wide waste management activities. This is not a profitable activity, so they might see it as an opportunity to get out, or negotiate a price increase.
  • The £50m from the Councils is required for cash flow. Contract cancellation will almost inevitably mean that RRS would go bust, as well as Interserve plc.  As they are a public limited company then there is an issue about “share price sensitive information”.

Comment

With a plant of this nature, there will be very few people, who have any real objective view of how far away formal completion is; Interserve plc have continually slipped their reported dates. If the Council allow RRS to “recover the situation” then the likelihood is of continuing programme creep.

The £50m, to be paid, by the Councils, will not improve the facility it will simply pay off loans. There is still no assurance over the long term financial viability of any element of this consortium. A worst case scenario is:

  • RRS just scrape through on the acceptance tests which confirms completion
  • The Councils pay the £50m
  • One , or many of the company’s go into administration – the plant is seized by the bank, leaving an unknown party to run the facility.
  • Councils “Wasted” £50m

There has been some disquiet over the fact that the decision on the contract will be taken by Cabinet  in private. It is a matter of normal process for commercially confidential matters to be conducted in Cabinet after the Press and Public have been asked to leave. Given that the consequences of a termination decision could be share price sensitive then , in my opinion, it has to be done in private. This could include Cllrs from the affected wards, plus cross party representation.

Should there be a different set of circumstances where the Councils decide to pay the £50m, then I believe that that should be held in public, before any payments are made. It should also include a detailed financial viability of the contractor companies.

The £25m contribution from Derby City Council could be better spent on facilities that the people of Derby actually want. There is a question mark over whether the business case savings  of £2m pa are still valid. The “Long stop date” was set in the contract for a purpose,… to be used! It is now time to be decisive!

If the decision to terminate is taken, then I’m sure it will be messy….but it will be the right thing to do for the long term prosperity of the City and, especially, the immediate neighbourhood.

 

 

 

 

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