In big projects people have got to appreciate that there are risks
Carl Beer, MWDA
The report was issued to members of the Merseyside Waste Disposal Authority (MWDA) at its June 27 annual general meeting, telling them that progress on acquiring the sites needed to build two 325,000 tonne-a-year capacity energy recovery facilities had reached an “impasse”.
And, the Authority was warned that issues with accessing sites and negotiating with landowners could delay the project by up to three years, with resulting increases in construction and landfill costs, as well as a “significant risk” of losing PFI credits, potentially costing £405 million.
Speaking to letsrecycle.com on Friday (August 8), the director of the MWDA, Carl Beer, confirmed that while the procurement of the contract was making “great progress”, there currently remained a risk that “we will get to a preferred bidder, but the danger is that we don't have the sites”.
Acquisition
The MWDA has made the early acquisition of two sites a key part of its contract award plans, and the report stated that “a failure to deliver sites represents the biggest single risk to the project”.
The sites would be used for waste treatment facilities, and while no technology has been ruled out, the project's reference solution was mechanical biological treatment which would be used to produce a refuse-derived fuel to then be processed to produce electricity and/or heat.
The MWDA report warned that the impacts of a delay could directly affect residents of the six councils within the MWDA, leading to increased costs that would be passed on through Council Tax.
And, as a result, it called on the director of the Authority, Carl Beer to discuss the findings of the report with the leaders and chief executives of the six member councils of the MWDA.
Until now, progress on the contract has been relatively straightforward, with the Authority revealing last month that it had narrowed the list of bidders for it to just four contenders (see letsrecycle.com story), but the report warns that delays could lead to some of these withdrawing from the process as costs increase.
Warning
The site situation was made clear to the MWDA by a May 2008 Gateway Review of the current state of the Merseyside PFI process which was undertaken by 4Ps, government procurement advisors to local authorities.
Cited in the report, the Review had called for the MWDA to take immediate action to re-examine its Waste Procurement Strategy for Sites and Planning, due to an “impasse of achieving progress in this issue”.
And, it also “identified some weakness in the integrated management of communications with key stakeholders”.
Speaking to letsrecycle.com, Mr Beer confirmed that action had been taken to resolve the communication issue – in the shape of consultations with the member councils.
And, following a review process, the authority had decided to retain its Procurement Strategy for Sites and Planning of aiming to secure the two sites before contract award.
However, it is believed that there is reluctance on the part of some, or all, of the MWDA's constituent councils to have on of the waste treatment facilities built within their boundaries.
And, Mr Beer acknowledged that two of the councils in the MWDA had passed resolutions to state that they would not build certain types of facilities.
Delay
Mr Beer explained that the decision was made to publish the report, including the 4Ps Review, to make clear to councillors exactly what impact a delay could have on the success of the project, stating that “in big projects people have got to appreciate that there are risks”.
However, he explained that “we're not trying to threaten local councils or scaremonger councils about the risks”.
But, he did state that, while councils had passed resolutions against building certain facilities those represented a “statement of council policy”, and when it came to any planning application, that would be considered according to “separate tests that are within planning”.
In the report, the MWDA's planning consultants, Mouchel, outlined exactly what the planning issues are that have created “a likelihood of significant delay on the sites issue”.
They listed four key factors: a failure to access sites; lengthy contractual negotiations; a planning period longer than two years and, a Compulsory Purchase Order determination period lasting longer than 18 months.
And, they concluded that, “if the process is subject to prolonged planning and CPO determination periods, this delay could be as long as three years”.
This would result in the facilities becoming operational in 2016, and not the target date of 2013 originally envisaged.
Risk
Clearly, any delay in the sites and planning issues has a knock-on effect on the ability to let the contract and therefore, also has the knock-on effect of delaying the realisation of the economic and employment benefits
Deloittes
Quantifying the impacts of the delay, the MWDA report warned that the current popularity of PFI-funded waste contracts among councils meant that, if the MWDA contract was delayed, “then the MWDA runs the risk of withdrawal of bidders from the procurement process, and turning their resources to procurements that they consider 'more deliverable'”.
In particular, it cited the effect delays would have on “additional costs” for bidders, as well as “the prospects of sites not being available on which to deliver bidders solutions”.
Within the report, the MWDA's financial advisors Ernst & Young also outlined the cost implications of a three year delay in securing the waste treatment sites.
Firstly, they warned that if the sites are not secured, the project will not achieve financial close by its 2010 target date, and, as a result it could lose the PFI funding it was awarded in July 2007 (see letsrecycle.com story), with Defra instead allocating resources to a “deliverable project”.
Though it was awarded £90 million in PFI credits, Ernst & Young equated this to £175 million over the 25-year life time of the project, due to the effect of inflation.
And, it assessed the cost impact of the loss of PFI credits as being between £87 million and £175 million.
Examining the impact of a three-year delay on the original estimate of construction costing £300 million, the advisors suggested that, taking into account annual inflation, the delay could result in additional costs of £5.5 million a year.
Over the course of the 25-year contract, they estimated this would lead to a total extra construction cost of between £99 million and £139 million.
Ernst & Young also stated that “during the three year period, an additional 500,000 tonnes of landfill permits will need to be purchased,” adding that, at a cost of £50 per permit, this would equal £25 million in additional costs.
And, this would rise to nearer £75 million if no LATS were available and the authority had to pay a £150-per-tonne fine for landfilling above its permitted quantity.
The financial analysis concludes that, once the £125 million costs of paying a contractor to deliver the resource recovery facilities over the three-year period had been deducted, the best-case scenario for the level of additional costs was £192 million, and, at the worst, £405 million.
Deloittes
The report went on to cite an independent Economic Impact Study, undertaken by accountants Deloittes, which considered the wider economic benefits of both the construction of the plants and their operation in terms of jobs created and electricity generated by the plants.
Deloittes' study concluded that the plants' development and operation would add £7.7 million to the economic value of Merseyside and the surrounding area, alongside “not easily quantifiable” benefits such as increasing trade in waste and recyclates.
It warned that: “Clearly, any delay in the sites and planning issues has a knock-on effect on the ability to let the contract and therefore, also has the knock-on effect of delaying the realisation of these economic and employment benefits.”
And, the report also included research by consultants Enviros which claimed that a delay could impact on carbon emissions, stating that “in all cases the carbon benefits of recycling are substantially lost through the significant carbon emissions associated with the continued landfilling of residual waste”.
Explaining that the building of the two facilities, using either MBT or Energy-from-Waste, would deliver “significant carbon benefits,” it concluded that “therefore, a three-year delay in the delivery of the RRC facilities would be responsible for an additional carbon burden equivalent to the emission of around 285,000,000 kg of CO2”.
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