It has been well documented that, from 1 October 2018 the Councils ( Derby City and Derbyshire County) have had the right to terminate the Sinfin Incinerator Project Agreement with the main contractor, Resource Recovery Solutions (RRS).
This would never have precipitated the simple end to the Incinerator that most people hoped for.
Complex contractual clauses could still result in significant compensation payable by the Councils of up to around £200m if the banks are not successful in their option to find an alternative organisation to run the plant. Certainly there will be protracted negotiations over the value of the plant, to agree the “Exit”.
RRS were given a stay of execution until 31 December 2018. The Councils have seen no evidence from RRS that it has made any substantial moves to get the Plant into a fully commissioned state. On 23 January 2019, the Councils wrote to RRS presenting them with an ultimatum – to paraphrase, “make significant progress, soon, towards completion, or the Councils will terminate”. Although progress has been made, Officers have not seen anything with sufficient certainty that will ensure satisfactory, timely, completion.
The Councils believe that, if they continue to delay exercising their termination right, then that right may be lost ( this seems like a low risk). There is a concern, although it is difficult to see how this could be remotely likely, that RRS could put a counter claim onto the Council.
The plant is being built by a subcontractor to RRS, called Interserve Construction Ltd ( a subsidiary of one of the main shareholders). The plant has not been commissioned, and has not been handed over to Renewi plc ( the waste management company responsible for managing the plant in the long term). At present , this construction company is managing a waste processing plant – a task for which they are not suitably qualified. This represents an insurance risk and one which the current insurer is managing on a month by month basis. The longer that this “limbo” position continues, the greater the risk that the insurance company will discontinue cover.
It is worth noting that, if the contract is terminated, and the plant transfers ownership to the Councils, then there is a risk that they could also not get insurance cover.
The plant is currently responsible for receiving the entirety of the County’s ( including Derby City) waste. The waste actually accepted, since 1 September 2018, at the plant is around 60% of target, and the availability of the machinery for electricity generation at the back-end is around 70%. This loss of this availability is due to internal weld failures within the boilers. The plan was that a proportion of the waste received would be recycled/processed elsewhere ( e.g. metals, some plastics, hazardous/clinical waste) the performance against this target is around 50%.
Whilst these performance failures don’t necessarily affect the environmental impact of the plant, it has a substantial effect on its value for money. The business case for the plant is already marginal. The £/tonne through the Incinerator is around the same as depositing the waste in landfill, assuming 191,000 tonnes pa of waste and maximum power output from the generators. If these current performance losses became operational then the cost per tonne would rise from around £100/tonne to £200/tonne
The Council does not have a good track record in directly managing complex project issues – the A52 fiasco is the “best” example. This is a complex project issue.
The Councils have stated that, even if the contract is terminated then any future solution will involve the continued use of the Sinfin Incinerator. If the contract is terminated, the Councils could not directly manage the Incinerator. They would need to find another organisation who would accept the challenge of taking on a plant that doesn’t perform to specification, is unpopular, locally, and would, most likely, be uneconomical to run. No willing volunteers have raised their hands just yet! If the contract is terminated then all of the risk associated with the plant’s operation will fall to the Councils – whereas, currently, that rests with RRS, and its shareholders. A further burden to the tax payer.
The Council is suggesting that the way forward has to be better ‘value for money’ than the current position. That is, to achieve an improvement on the excessive £200/tonne – not to achieve the current landfill rate, and original business case, of £100/tonne.
RRS’s latest accounts highlight a “Going Concern” issue. The Directors have stated that completion and full service will be achieved by 31 March 2019 – at which point the £50m contribution from the Councils will become payable. This will allow payment of the Capital Contribution Loan that RRS has with its funder. The Directors highlight a risk that beyond 31 March 2019 then the loan could become repayable immediately, at which point
“….these conditions give rise to a material uncertainty which may cast significant doubt over the Company’s ability to continue as a going concern”.
If this happens, then there will be a likely knock-on effect to the ailing Interserve plc.
There is no evidence that anyone in the Council is in possession of a fully risk assessed plan which delivers project completion by 31 March 2019 and which clarifies what constitutes ‘completion’. There is equally no evidence that anyone in the Council is reviewing this on a daily basis that challenges any slippage. A project management approach which involves periodic interchange of letters from legal representatives is bound to be unsuccessful. One would have hoped that the Council Executive team would have learnt a number of lessons from the A52 fiasco.
There is no simple “Hard Exit” which would prove popular in Sinfin.
The ‘die was cast’ when a standard Private Finance Initiative (PFI) style contract was used. PFI contracts should not be used where there is a technology risk of this magnitude. Interserve had the option to pull out when their technology provider collapsed; they continued with a plan. The Councils and Funders accepted their word. Interserve covered the risk and consequently, now, they should take the hit.
The Councils need to take this whole sorry saga into a “post-termination” phase. “Travelling hopefully” is never a successful policy and with the 31 March a short time away the Councils need to be decisive in their approach following that point.
The Council Cabinet is considering a proposal which suggests some form of “negotiated settlement” – although it is not clear on what grounds or how this would be discussed. The person who this will be delegated to? The Strategic Director for Communities and Place….the person responsible for the A52 fiasco. Whatever next?
Categories: Sinfin Incinerator