What a load of rubbish
2009 has been a tough year for PFI, with limited credit availability and nervous banks setting the pace. Nonetheless, says United Utilities’ Peter Luke, the model could still have a bright future in the waste treatment arena.
Almost ten years have passed since the UK’s first waste treatment PFI programme went live in Scotland, and as time passes Luke says it’s important not to lose sight of why we turned to the PFI
model in the first place: “In the case of waste management, it’s a huge area to fund,” he
says. “And the reasoning behind using PFI now remains exactly the same as it was in Tay back in 2000.
“That first programme had been costed by the authority’s own estimates at over £200m, while the council would have then gone on to shoulder all the risk associated with operating the facilities once they were complete. The potential cost, then, was massive. The up front figure alone represents a sum that few councils could expect to have lying around in reserve. The complicated risks associated with operating such infrastructure when built under traditional procurement methods make matters potentially even worse for authorities.
Luke explains: “Under traditional methods, authorities individually procure a designer, a builder and someone to operate the completed facilities, or perhaps operate it in house. But then if a breakdown occurs, the builder says ‘well – I only built according to the design you gave me’. The designer likewise says ‘I only designed according to your specification’, and the responsibility ends up with the council.
By entering into a PFI partnership, the design, construction and risk are packaged together, and the huge risk is transferred away from the council.”
In the case of the Tay scheme, this resulted in a private sector bid to build the necessary infrastructure for £80m less than the authority’s own estimates, and the completed facilities have now met all environmental targets for 10 years, with no risk to the council in the event of failure.
In this atmosphere of private companies successfully running such facilities, and often being handsomely rewarded to so, its perhaps inevitable that a degree of PFI backlash has kicked in, but Lukes argues that the model is still the right one for the sector: Its easy to look at the returns coming out of PFI now and forget about when the authority were facing a £200m budget deficit and potentially years of financial risk from the completed programme.
People just think it looks easy to manage that risk and make money, but the PFI partners had to be prepared to take that risk on, and the endeavours only work if the PFI partner does their job well and makes sure that the authority gets an efficient service, and they consequently make the profit.
“In fact, what I see as the biggest risk with PFI is that councils can be too keen to pass that risk on, meaning that it ends up paying someone to take the risk who probably really shouldn’t, or can’t. This is what leads to the inflated prices that can lead to criticism of the model.”
Financial matters are perhaps subject to even greater scrutiny in an economic climate such as the current one, but Lukes does not feel that providers need to be unduly concerned about the sector’s strength. Indeed, with legislation on both landfill and carbon emissions set to increasingly tighten yearon- year for the foreseeable future, the waste management sector is perhaps one of the safest there is.
Lukes’ own organisation can offer a twopronged attack here – as well as the financial advantages to councils from outsourcing the outlay and risk of new waste management strategies, United Utilities’ methods score highly on the green chart too. Pending final acceptance of its bid to build and manage three treatment plants and transfer stations in Derby, the authority will become the first in the UK to use the very latest gasification technology. This removes the need for incineration, replacing it with a much more efficient process which in turn generates electricity. Thus, United Utilities’ method both reduces the council’s carbon emissions from landfill and incineration, and also creates an income stream by selling electricity back into the grid, in effect delivering green energy to thousands of homes in the region.
The system could equally be used to supply energy direct to local industry, and is entirely adaptable to the needs of individual authorities. So, an authority with a high emphasis on encouraging recycling may wish to keep the energy generation side smaller scale so as not to discourage recycling, while a council with a higher focus on self-generation could maximise this side of the process.
Of course, part of the problem faced by private sector companies in recent months has been that the viability of their offering has been largely irrelevant in the face of a simple lack of credit for any applicant, however solid the business case, but Lukes remains confident of unlocking the funding for all the projects United Utilities currently has on the table.
Looking further ahead, Lukes says the process could become a source of hydrogen energy as technology advances (hydrogen is produced through the gasification process), while wider take up of the model should also create a number of good quality, skilled, local jobs throughout the UK. Both energy and waste look set to be major issues for many years to come, and by combining the two to reduce landfill and emissions, and generate clean electricity, United Utilities and the other companies following this path look set to insure themselves from this recession and those doubtless yet to come.
