PUBLIC PROTECTION COMMITTEE 22ND JANUARY 1992
WASTE DISPOSAL SUB-COMMITTEE 21ST JANUARY 1992 ITEM 2
ENVIRONMENTAL PROTECTION ACT - EVALUATION OF JOINT VENTURE/DIRECT
COMPETITION OPTIONS FOR FUTURE WASTE DISPOSAL OPERATIONS
REPORT OF THE COUNTY CHIEF EXECUTIVE AND COUNTY SURVEYOR
1 Introduction
1.1 The Sub-Committee received a report at their last meeting
dealing with the requirement under the Environmental
Protection Act (EPA) 1990 to subject waste disposal
operational activities to competition and examining the
options for the future operation of the County Council's
existing waste management facilities. The report, which is
attached as an Appendix, identified three broad options:
(i) to form a Local Authority Waste Disposal Company
(LAWDC) to tender for waste disposal contracts;
(ii) to establish a joint venture with one or more waste
disposal contractors to tender for waste disposal
contracts; and
(iii) to proceed directly to the invitation of tenders from
the private sector.
1.2 The Sub-Committee agreed to recommend to the Public
Protection Committee that the option of establishing a LAWDC
be not pursued but felt that further evaluation of the
remaining options was required. To assist in that process,
it was resolved that expressions of interest in a joint
venture partnership be invited from six firms and that a
further report be submitted to the Public Protection
Committee on 22nd January 1992, to enable an appropriate
recommendation on the principle of joint venture to be made
to the Policy and Resources Committee on 10th February. The
tight timescale for reaching a decision in principle is
dictated by the proposed tendering programme, which
envisages the invitation of tenders in July 1992 for
contracts to commence on 1st April 1993.
1.3 This report examines the main features of the alternative
options, considers the responses from waste disposal
contractors to the invitation to express an interest in a
joint venture partnership and reviews the arguments for the
joint venture approach in the light of the responses.
2 Key Features of the Options
2.1 The key features of the alternative approaches are as
follows:
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2.2 Direct Competition
(i) As Waste Disposal Authority (WDA), the County Council
would invite tenders from the private sector for the
disposal of waste, setting out their preferred waste
disposal strategy.
(ii) The Council's waste disposal assets would be made
available in the tendering process probably either on
a leasehold or management contract basis to enable
the County Council to maintain some control of
strategic assets. The detailed arrangements for
making sites available will be subject to further
consideration.
(iii) The County Council could consider private sector
proposals which did not involve the use of the
Council's assets in addition to proposals for use of
their existing sites.
(iv) The County Council in evaluating tenders are not
required to accept the lowest tender but may also
take into account environmental factors, in
particular maximising recycling and the minimisation
of pollution or harm to health.
2.3 Joint Venture
(i) A special purpose company would be established in
which the County Council and the joint venture
partner or partners would be the shareholders.
(ii) The restrictions imposed by the Local Government and
Housing Act 1989 would, in practice, almost certainly
limit the County Council to a 20% interest in the
company and to appointing no more than one-fifth of
its directors.
(iii) The joint venture company would have to tender for
waste management contracts let by the WDA under the
EPA, in competition with other waste disposal
contractors. Consequently, the County Council, as
WDA would still follow the tendering process outlined
in paragraph 2.2 if a joint venture approach was
adopted. The main distinction, depending upon the
nature of the joint venture arrangement, is that
other companies might not be able to tender on the
basis of being able to use the Council's waste
disposal assets.
(iv) The principle of separation between the
responsibility for making arrangements for the
disposal of waste and the operation of waste disposal
facilities underlies the EPA. Consequently any
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officer or Member associated with the WDA could not
also serve as a director of the joint venture
company.
(v) There are a number of different approaches to
establishing a joint venture which can be broadly
classified as follows:
(a) A 'fully committed joint venture' - in which
the County Council would select a partner,
establish a joint venture company and then
grant that company exclusive access to the
County Council's waste disposal assets, prior
to the invitation of tenders for waste
disposal contracts.
(b) A 'joint venture to tender' - would be
similar to a fully committed joint venture
except that the opportunity to manage or
lease the County Council's waste disposal
assets would be made available to all
tenderers.
(c) A 'post-tender joint venture' - would not
involve the County Council selecting a joint
venture partner in advance of the tender
process, but would be achieved by requesting
an option, when inviting tenders, that the
service be provided by a special purpose
company in which the County Council would
take a minority stake.
3 Invitation to Potential Joint Venture Partners
3.1 Since the last meeting of the Sub-Committee a questionnaire
has been sent to eight potential joint venture partners.
3.2 The questionnaire was designed to establish the degree of
private sector interest in establishing a joint venture with
the County Council and to obtain the views of the industry on
a range of related issues. The key issues that the
questionnaire sought to elicit views on were:
(i) the relative merits to the company of the joint
venture and direct competition approaches;
(ii) the benefits of the joint venture option to the
County Council, where this was the company's favoured
option;
(iii) the extent to which the company would be willing to
contribute waste disposal assets to the joint venture
company and the effect of the alternative methods by
which the County Council might make their assets
available to the joint venture.
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(iv) set up costs associated with establishing the joint
venture;
(v) protection for the County Council's interests in the
Articles of Association in view of their minority
interest shareholding;
(vi) the impact upon the County Council of future joint
venture capital requirements; and
(vii) the alternative approaches to establishing a joint
venture, involving different levels of commitment
from the County Council to the joint venture in the
tendering processes outlined in paragraph 2.3 above.
4 Responses to questionnaire
4.1 Responses were received from seven of the eight companies to
whom the questionnaire was sent and all of these expressed an
interest in forming a joint venture partnership if the County
Council chose to pursue this option. Other points arising
from the responses were as follows:
(i) Four respondents expressed a preference for the joint
venture approach, although one company indicated a
preference for the direct competition approach and
the remaining two companies expressed a neutral view.
Nonetheless all of the companies also indicated an
interest in tendering directly for contracts if the
County Council were to opt for this approach.
(ii) Those companies who expressed a preference for the
joint venture approach also favoured the 'fully
committed joint venture' concept.
(iii) All except one of the companies indicated a
willingness, in principle, to transfer assets or
guarantees of void space to a joint venture company.
No consistent view was expressed about the preferred
basis on which the County Council's sites might be
made available, i.e. on a freehold, leasehold or
management contract basis.
(iv) The majority of respondents envisaged that after the
initial setting up of the joint venture any future
requirements for additional capital would be
principally met from retained profits.
(v) One of the companies set out in detail some examples
of the type of specific matters that the Articles of
Association might stipulate would be subject to
Hampshire County Council approval:
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e.g. definition of the company's business;
sale of all or part of the business;
the annual budget or capital expenditure
plan; and acquisition of additional
companies.
(vi) The main benefits to the County Council of adopting a
joint venture option were envisaged by those
companies favouring this approach to be:
(a) the opportunity to continue to participate in
the strategy, policies and operations of a
waste disposal company;
(b) as legislation and technology change, the
County Council would be able to adopt a
proactive role rather than merely reacting to
contractors' proposals;
(c) the opportunity to bring to bear the County
Council's expertise in Waste Disposal
operations in order to enable the joint
venture company to deliver a better service
than would be provided by a waste disposal
contractor acting alone;
(d) the ability to share in the profits generated
by the company; and
(e) being in a stronger position to promote the
career prospects/protect the interests of
current waste disposal operational employees.
5 Evaluation of Options
5.1 The response from potential joint venture partners indicates
that there is both interest in forming a joint venture
partnership with the County Council or in tendering directly
for waste disposal business. The questionnaire responses
have not served to highlight any major new arguments for the
joint venture approach, though they have demonstrated that a
number of the companies have given some thought to ways in
which some of the practical difficulties associated with the
setting up of a joint venture might be overcome.
5.2 The extent to which the benefits outlined in paragraph 4.1
can only be achieved by involvement in a joint venture,
rather than through contract arrangements or as landlord, is
a matter of judgement. The degree of involvement which the
County Council would have in the waste disposal business as a
joint venture partner is circumscribed by the requirements of
the EPA and by the restrictions on Local Authority companies
in the Local Government and Housing Act 1989. A decision to
adopt a joint venture approach on waste disposal rather than
on business grounds might weaken the influence of the WDA in
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determining future waste disposal policy and strategy.
5.3 In evaluating the arguments for the joint venture approach,
consideration needs to be given to the relative merits of the
three alternative approaches to establishing a joint venture,
which are described in paragraph 2.3 above.
5.4 There is a major disadvantage to the County Council in
adopting the option referred to as the 'fully committed joint
venture' approach in that the County Council lose the benefit
of any price competition from making available their waste
disposal assets. This is particularly important given the
scarcity of sites suitable for household waste disposal in
Hampshire and the long term strategic importance of the
incinerator and transfer station sites, and is only partially
compensated for by being a shareholder in the joint venture.
It is difficult to envisage a way in which the benefits of
price competition in ensuring that the County Council obtain
the best value for their assets could be incorporated in the
process of selecting a joint venture partner in the 'fully
committed' option. The criteria for such a selection process
would need to be given further consideration, but a
substantial risk and operating compatibility assessment would
be required. Nonetheless, if the County Council were to give
priority to retaining an involvement in the waste disposal
business following implementation of the EPA and to securing
the success of the joint venture, this would be the best
route.
5.5 The 'fully committed joint venture' option is the one
favoured by those companies preferring the joint venture
option. It is understandable that this would be viewed as
preferable to the 'joint venture to tender' option because
the former option provides the joint venture company with a
much greater likelihood of being successful in the tender
process because of its exclusive access to the County
Council's waste disposal assets. It is also a disadvantage
to the County Council of the 'joint venture to tender' option
that it may be difficult to identify the joint venture
partner who is most likely to be successful in the tender
process and, therefore, there is a greater risk of committing
resources to establishing an abortive joint venture. Though
there might be benefits to the County Council of involvement
in the preparation of the tender proposal, it is not felt
that the 'joint venture to tender' option is likely to be an
attractive option either to the County Council or to
potential joint venture partners.
5.6 The final joint venture option, the 'post-tender joint
venture' is very similar to the direct competition approach,
other than that it provides a possible opportunity for
involvement in the operation of the waste disposal contract,
once a decision on the award of the contract has been made.
The County Council would not need to commit themselves to a
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joint venture until the award of the contract, though their
only choice of partner would be the successful tenderer.
6 Summary
6.1 There are some benefits from continuing to be involved in the
operation of waste disposal facilities and a joint venture
provides a possible way of enjoying at least some of those
benefits, though they are difficult to quantify and
ultimately their evaluation is a matter of judgement.
6.2 However, the private sector's preferred joint venture
approach, the 'fully committed joint venture' has the major
disadvantage of ruling out any effective price competition
for the use of the County Council's assets and cannot be
recommended on this basis. The 'joint venture to tender'
option is likely to be the least attractive of the joint
venture options to the private sector and has disadvantages
to the County Council.
6.3 The evaluation of the responses from potential joint venture
partners has not changed the view of the officers that there
are no clearcut and significant benefits to be achieved by
the joint venture approach. However, the Committee may feel
that there would be some merit in pursuing the 'post-tender
joint venture' approach. This would allow the Public
Protection Committee to fulfil their prime responsibility
under the EPA, of exercising the County Council's powers as
WDA, for making arrangements for exposing waste disposal
operational activities to competition, while retaining an
option for the County Council in a separate capacity, of
maintaining a degree of involvement in the operation of the
'household waste disposal service'.
6.4 Members will be aware that whatever arrangements are agreed
for subjecting waste disposal operations to competition will
have to be sanctioned by the Secretary of State for the
Environment.
It is, therefore,
RECOMMENDED
1 That the principle of seeking to obtain price competition for
the use by the private sector of the County Council's assets
be affirmed, and therefore the 'fully committed joint
venture' option be not pursued.
2 That, subject to the conclusions of the Committee, that it be
a recommendation to Policy and Resources Committee:
(i) That the option of establishing a permanent Local
Authority Waste Disposal Company (LAWDC) be not
pursued.
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(ii) That the 'post-tender joint venture' option be
adopted in inviting tenders for waste disposal
contracts.
1125/NWG
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