Herefordshire Council puts off payment for "white elephant" incinerator

The cabinet level decision - confirmed last month - exercises a contract clause that means the council won’t have to make immediate moves to borrow nearly £2 million to cover a purchase cost for just short of 25 per cent of the site.

 Instead, that purchase can be completed in 2023.

Over the interim, the council can keep up a waste disposal reserve while the incinerator to be shared with Worcestershire is built.

Critics say the incinerator will be out of date as soon as it starts working, saddling taxpayers with a “white elephant” that could cost as much as £1.6 billion over its lifetime.

The House of Commons public accounts committee has questioned the basis of  government grant funding for the project and its future in a sector where technology is continually evolving.

A report from the council’s external auditors Grant Thornton found that cabinet members did not get the detail  of why officers – rather than consultants - saw an incinerator as the future with a relevant appraisal recommending cabinet support lacking detail and clarity.

Construction of the incinerator is underway.

 A final agreement on a variation to the PFI contract that gets the incinerator built was reached between Herefordshire Council, Worcestershire County Council and Mercia Waste Management (MWM) Ltd in May last year.

Six months earlier, cabinet authorised a variation to the council’s joint waste management contract with Worcestershire and MWM to build and operate the incinerator to take household waste from both councils and significantly reduce the amount taken to landfill.

With the variation agreed, a Deed of Trust was entered into over the Hartlebury site.

Worcestershire holds all its interest in the plant on trust for both councils in the same proportion as their respective funding percentages – with Herefordshire’s interest being 24.2 per cent.

Herefordshire Council has also registered a restriction against Worcestershire’s title to record and protect Herefordshire’s interest in relation to  the site.

This protection means Herefordshire Council does not need to purchase its share now and can put purchase off until the contract expires in 2023.

The cost of acquisition is based on Herefordshire share of the acquisition cost  plus debt charges incurred by Worcestershire from the date of acquisition until Herefordshire’s date of purchase.

This gives an estimated total acquisition cost of £1.7 million by December 2023, which will be funded by Herefordshire Council’s waste disposal reserve balance expected to be held at that date.

Both councils are  funding the incinerator through borrowing.

Draw downs of funding from MWM will continue over the estimated 33 month construction period to 2017 before loan repayments fall due in February that year.

The total loan facility is for £163.5 million with Herefordshire providing that 24.2 per cent or £40 million.

This is split between an interest only loan of £31 million and a repayment loan of £9 million.

The interest only loan value is equivalent to the written down value of the incinerator when it is returned to the councils in 2023.

With an estimated economic life of 25 years, the incinerator will be returned after six years of operation  making the written down value equal to the remaining 19 year life span.

Total loan interest and fees chargeable to MWM are fixed and representative of commercial bank charges, these total £69 million - £17 million for Herefordshire - during the loan period and repayable before the PFI contract ends.

The outstanding loan balance in 2023 will reflect the expected net book value of the incinerator at that date, the remaining loan principal balance of £31 million is to be repaid after the end of the PFI contract period (2023) until the end of the incinerators expected life in 2042.

Earlier this year, the incinerator was blasted in the European Parliament by Herefordshire MEP James Carver who  accused Herefordshire Council of having "money to burn" on the project.

Herefordshire Council stood by the incinerator in September last year when MPs turned the heat on the near  £90 million paid to the project so far - without the incinerator being built.

The Commons public accounts committee questioned the basis of  government grant funding for the project and its future in a sector where technology is continually evolving.

A report from the council’s external auditors Grant Thornton found that cabinet members did not get the detail  of why officers – rather than consultants - saw an incinerator as the future with a relevant appraisal recommending cabinet support lacking detail and clarity.

Grant Thornton said it could not conclude its 2013-14 audit of the council or issue the council with its audit certificate until it had “completed consideration”  of specific issues raised around the incinerator plan.

The incinerator  is integral to a joint 25 year waste disposal contract with West Mercia Waste signed by Herefordshire Council and Worcestershire County Council.

An initial capital cost for the project is reported to be more than £160 million, but opponents claim ongoing maintenance will at least double this over the 25 years  while the cost using PFI funding could triple.

In February last year, the council passed its 2014-15 budget committing itself to paying £40 million for the incinerator over three years.

A budget strategy estimated council borrowing as increasing by £50.8 million over 2014/15, pushing the overall debt up to £218.2 million, including £11 million borrowed over the year for the incinerator.

The issue came to a head at full council last September when questions were raised as to the future effectiveness of the incinerator and “confidence” in the related borrowing plan.

In response, Cllr Harry Bramer, then cabinet member for contracts and assets, stood by a financial and options appraisal put to Cabinet that support the incinerator as the most “cost effective and viable solution” for the county’s waste over 25 years

Cllr Bramer said confidence in capital borrowing as a best value option came from analysis and appraisals  in both the joint waste management strategy and a cabinet report completed in accordance with relevant government guidance.

The most strident criticism came from Commons public accounts committee and its conclusion that the Department for Environment, Food and Rural Affairs made decisions on waste projects focused on the need to meet EU targets without regard to the impact on local authorities.

PFI contracts of  25-30 years were found by the committee to be “inappropriate” for the waste sector where technology is continually evolving with the amount of waste in  hard to predict.

Funding agreements for early PFI waste deals were “poorly drafted”  by the then Department for Environment, Transport and the Regions (DETR)  and “too lax” in requiring payments for key assets that had not been built.

As such, the committee found that the funding agreement signed with Herefordshire and Worcestershire councils highlighted the “shortcomings” of early PFI projects, with payments to the council aligned with payment made by the councils to the contractor.

Grant payments started as soon as the councils started to pay the contractor, with the government, through either the DETR or its successor the Department for Environment, Food and Rural Affairs (DEFRA),  legally committed to making grant payments ever since.

In December 1998, the DETR signed a funding agreement with Herefordshire Council and Worcestershire County Council for £143 million and the payment of related grants started shortly after.

The terms of the original funding agreements did not allow central government to stop payment or alter the payment terms in the event that key capital assets were not delivered.

Since its creation in 2001, DEFRA  has had responsibility for overseeing these grants and did not review the agreements until 2011.

Terms with Herefordshire and Worcestershire councils were not successfully renegotiated until 2013, resulting in a £30 million cut in total funding.

The process of renegotiation was time-consuming. In the case, of the Herefordshire and Worcestershire DEFRA confirmed to the committee that it took them six months to approve the new funding approach the councils were proposing.

With contractor apparently unwilling to fund the incinerator, the councils were left considering using the rate income generated from the populations of both counties to cover the cost of the contract.

At the end of the 2013-14 financial year, both councils had received nearly £90 million for an incinerator plant that had still to be built.