The pressure to terminate the Sinfin Incinerator contract is unceasing.
Many locals just want it to close down and for the noise, odour and airborne pollutants to stop. They are calling for the Council to exercise the contractual break clause and for operations to cease immediately – however this is based on a false hope. Any reading of the contract will quickly conclude that this outcome is most unlikely….unless both Councils pay considerable compensation to the contractor, Resource Recovery Solutions Ltd, of around £200m+….and then “moth ball” it.
This is all contained in the contract that is public. There are no additional legal documents that are being withheld – the only information that is currently considered to be private and confidential is the range of compensation numbers, and negotiating positions.
Everything else is public!
This has been confirmed with Senior Council Officers.
Why is there compensation?
The contract between the 2 Councils ( Derby City and Derbyshire County) and Resource Recovery Solutions is not a standard service contract that most people would be familiar with. It is a Private Finance Initiative (PFI) ‘style’ arrangement.
The PFI mechanism for financing public sector projects was always controversial and has now become discredited. It was established as a way of using private finance to develop infrastructure projects ( e.g. roads, hospitals, schools etc) which was then paid back by the local authority over, typically, 25 years. The biggest flaw in the whole system was the illusion that the project risks had been transferred to the private sector – this was not the case.
In short, as described by Will Hutton of the Observer “…heads the contractor wins, tails the taxpayer loses”
On termination, the plant is automatically transferred to the Councils, working, or otherwise – this has to be paid for – hence the “compensation”
What does the contract say?
The Councils have had the right to terminate, due to “Contractor Default” since 30 September 2018. This is on the basis that no formal completion certificate has been issued which confirms that the plant is functioning to pre-determined criteria. In the event that both Councils formally give notice of termination, then the procedure is:
- The Contractor’s Bank has the option to find a “Substitute Contractor” to protect the loan repayment.
- If that option is not exercised, or is not successful, then the Councils have the option to re-tender.
- If an alternative contractor cannot be found then the next option is the “no re-tender” procedure.
This is the point when the plant transfers to the Councils resulting in the “compensation”. The full details of the calculation ( including numbers in many cases) is contained within the contract. This compensation pays the contractor for all of the capital costs, and future expected returns. The Councils would then own the plant. If they chose not to operate it, and revert back to using landfill then, theoretically, that is an option. There would be an on-going impact to the revenue budget through interest payments.
- The “buy-out” compensation could be in the region of at least £200m. This would be subject to negotiation by all parties; any costs associated with “rectification” would be deducted from the compensation.
Issues to consider
- PFI contracts should be, technically, low risk. They should be satisfying a clear infrastructure need, so the notion of termination would normally be a distant prospect. The HM Treasury document on the “Standardisation of PFI contracts” refers to “.. the undesirable consequences of a termination” and that “It should be the Authority’s last resort to exercise rights of termination.”
The Sinfin Incinerator has technology risks which have a bearing on the environmental hazards. The standard PFI contract does not address this complication other than through completion delay.
- Given the nature of the project, and the way PFI works, there is no concept of the project being “handed back”, or “rejected”. It assumes that the basic desire of the local authority is that the project is needed. Whilst the concept of avoiding landfill remains, the use of Incineration was always controversial – herein lies the root of many of the contractual problems.
- A rough calculation based on the contract suggests that the business case is around break even. i.e the cost per tonne of processing through the Incinerator is around the same as for putting it in landfill. The original plan assumed a large increase in landfill charges which has yet to transpire. It also assumes:
- that around 95% of all waste taken to the plant avoids landfill – most will be burnt. There is little scope for this being exceeded.
- that there will be electricity generated to the value of 14000 homes’ annual bills.
- that there will be 191000 tonnes of waste processed by the plant each year. As the vast majority of the costs are fixed, a lower tonnage level will just feed through into a higher £/tonne rate to the Council, or vice versa.
The poor communications around this whole subject has created a lot of mistrust within the community. This has been exacerbated by there being private Council meetings and documentation being deemed confidential. This has led to widespread suspicion which has been fuelled by party politics and Councillors implying things which are not borne out by fact.
Clear statements could have been made in September which explained to the public the process I have outlined above. This would have dealt with the general belief that simple termination was just not an option. Briefings could easily have been given on the nature of the contract, the rights of the Bank on termination and the principle of significant compensation. None of this would have breached any form of confidentiality – it would have been a helpful, but neutral interpretation of a complicated contract.
As it is, the public have been left thinking that there are vital details being withheld when this is not the case…..very little is actually confidential.
- Councils terminate
- If the Banks don’t step-in, the Incinerator transfers to the Councils
- Councils have to pay Contractor for the plant ~ £200m. This will be lower, as the rectification costs become higher
- Councils have the choice whether to:
- continue to run the plant, and avoid landfill charges – as per original plan ( not acceptable to residents)
- close the plant down ( with associated costs) and return to landfill – effectively pay twice for a period.
- There is no option to close the plant down, with the Contractor retaining ownership, and the Councils just “walking away”.
Categories: Sinfin Incinerator