Contact: Ian Fielding, ext 7022

1. Summary

1.1 The following decisions are sought:

(i) That, subject to the approval of the Executive Member for Policy and Resources, the County Surveyor and County Treasurer be authorised to complete negotiations with Hampshire Waste Services Limited to provide a further 43,000 tonnes per annum of materials recovery facility capacity at Alton on the basis that the additional fixed costs can be offset by associated revenue savings and so that the County Council benefits from the marketing of any capacity not required by Project Integra.

(ii) That Portsmouth and Southampton City Councils be invited as joint clients in the contract with Hampshire Waste Services Limited to share in the investment outlined in (i) above, and potential benefits and risks associated with it.

2. Reasons

2.1 To deliver future needs for recyclables processing capacity.

2.2 To take advantage of an investment opportunity to deliver future requirements for processing capacity at the most economically advantageous time and price.

2.3 To enable delivery of future statutory recycling performance standards.

3. Other Options Considered and Rejected

3.1 See attached report to Environment Policy Review Committee of 4 September 2002.

4. Conflicts of Interest Declared by the Decision Maker or a Member or Officer consulted - None.

5. Dispensation granted by the Standards Committee - Not applicable.

6. Reason(s) for the Matter being dealt with if Urgent - Not applicable.

Approved by: Date:

Councillor K B Estlin

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Contact: Ian Fielding, ext 7022

1. Summary

1.1 This report seeks endorsement of proposals to instruct Hampshire Waste Services Limited (HWS) to provide an additional 43,000 tonnes per annum of Materials Recovery Facility (MRF) capacity above current contract requirements, to be constructed at Alton.

2. Introduction

2.1 The long term waste disposal contract agreed with HWS in 1996 requires the provision of 114,000 tonnes per annum (tpa) MRF processing capacity. The County Council has statutory recycling performance standards of 33% and 40% for 2003/04 and 2005/06 respectively, and similar performance targets have been adopted by the Project Integra management board. Delivery of these performance standards will ultimately require up to 190,000 tpa of MRF capacity, some 76,000 tpa beyond that currently ordered.

2.2 HWS has secured planning permission for an MRF, transfer station and vehicle depot at a site near Froyle, Alton. The planning permission allows for development of an MRF to process up to 85,000 tpa, some 43,000 tpa beyond that which HWS need to provide to meet its contractual obligations. However, HWS requires an instruction from the County Council to build to this higher capacity, and for the County Council to underwrite any resulting additional costs the company incurs. A failure to give such an instruction will result either in the plant being built at the smaller size or a larger plant being built and the additional capacity being contracted to other local authorities.

3. Financial Issues

3.1 HWS has indicated that it would require an additional fixed annual fee of £433,000 for the remainder of the contract term (21 years) if it is required to build the full size MRF at Alton. This sum would be over and above the payments already contractually committed, ie the premium is a payment for increasing the annual available MRF processing capacity beyond 114,000 tonnes.

3.2 However, at known future rates this extra cost would be offset if the MRF were fully used, primarily due to savings in avoided landfill tax. Indeed, if landfill tax levels increase, as expected, beyond £15, to say £20 per tonne, then additional `savings' from landfill avoidance would generate a net revenue saving of some £155,000 per annum.

3.3 The obvious risk with this strategy is the ability or otherwise of the district councils (WCAs) to deliver the amounts of recyclables required to fully utilise the larger MRF. It is unlikely that the WCAs will be able to improve their performance to such an extent that the new processing limits can be fully utilised straight away. In view of these inherent risks, different capital repayment options have been discussed with HWS. These include a `payment holiday' for the first two years, and the County Council fully funding the capital investment.

3.4 The `payment holiday' approach provides the advantage of avoiding potential additional budget pressures which might arise from under-use of the additional capacity in the first two years. However, this option does lead to a greater overall payment over the 21 year period.

3.5 The most cost-effective funding solution is for the County Council to directly fund the capital investment of some £3.2 million. The annual fixed cost is reduced to £123,000 per annum and capital debt charges will be significantly less than the difference between the lower fixed fee and the charge made by HWS to repay its investment. However, it is recognised that it is very unlikely that the County Council will be able to make such capital funds available from its own resources.

3.6 The same theoretical risk of under-use of the capacity applies, although the value associated with this risk is reduced from £430,000 to £123,000 per annum. A `payment holiday' could also be taken with this option, reducing the level of risk even further.

3.7 The financial risks of Project Integra not fully utilising capacity in the short term can also be offset by `selling' that capacity to other local authorities or commercial organisations. The demand for MRF capacity will increase significantly as local authorities strive to achieve their statutory performance standards, and it is almost certain that any spare capacity at Alton could be marketed at commercial rates.

3.8 An instruction to HWS for additional MRF capacity will need to reserve the ability to, and benefit of, the marketing of spare capacity to the County Council. Selling of spare capacity in this way is financially a more attractive option, and will provide further revenue income of as much as £0.5 to £1.0 million over the first two years. This mechanism provides further comfort against the financial risks arising from constructing more MRF capacity, but is not a preferred choice as it will indicate a failure on behalf of Project Integra to achieve recycling targets.

Alternative Options

3.9 The alternatives to issuing an instruction to HWS to construct the larger MRF now are:

(i) do nothing; and

(ii) delay the instruction pending the outcome of a bid to Government for funding under the £140 million recycling and waste minimisation fund.

Do Nothing

3.10 This option will force HWS to build a smaller size plant. Opportunities for economies of scale will be lost and any further capacity required at a later stage will consequently be more expensive. Such an option will significantly prejudice the ability of the County Council to achieve even its lower recycling standard and will incur future avoidable revenue costs as landfill tax increases. Alternatively, the `do nothing' option may result in HWS developing the additional capacity at its own risk and selling it under long term contract arrangements to third parties. Hampshire authorities would then not only risk failing to deliver on statutory performance standards, but would have the added embarrassment of other areas' recyclables being processed in favour of theirs.

Delay

3.11 This option would require HWS to delay its development programme for Alton by up to four months, and would consequently impact significantly on its waste transfer and depot operating costs. The provision of an MRF at Alton will also trigger the termination of sub-contract arrangements HWS has for MRF capacity in Essex. Delaying developments will therefore lead to HWS incurring additional costs. These costs have not been qualified but will be significant, and will need to be borne by the County Council irrespective of whether an instruction to build a larger MRF follows.

3.12 The greatest risk associated with this option is that the bid may not be successful. The earlier bid made in May 2002 included for the costs of providing the Alton MRF amongst other priority items needed to deliver statutory recycling standards. The total of the bid was some £7.432 million. Informal advice is that the bid failed mainly due to its size, therefore any similar-sized bid cannot be guaranteed. Funding the MRF development locally reduces the size of the future bid and increases the likelihood of its success. In summary, this option presents certain additional costs with little confidence that it would be successful. This option is, therefore, not recommended.

4. Conclusion

4.1 There is a need to go beyond 114,000 tonnes of contracted MRF capacity in order to meet Project Integra recycling aspirations and statutory Best Value performance standards. Other legislative changes, including the impending landfill directive, mean that additional waste processing facilities will be required in the future. Constructing a larger MRF at Alton provides an opportunity to deliver further processing capacity in a cost-effective manner.

4.2 Building a larger MRF at this time brings financial risks. These risks can be mitigated to acceptable levels but, by comparison, the risks of doing nothing are greater. A smaller plant will stifle immediate performance aspirations, and will also mean that statutory future targets are certain to be missed. In addition, it is almost certain that such investment opportunity is unlikely to present itself again.

Recommendation

That the Executive Member for Environment be advised that this Committee endorses the following proposals that:

(i) subject to the approval of the Executive Member for Policy and Resources, the County Surveyor and County Treasurer be authorised to complete negotiations with Hampshire Waste Services Limited to provide a further 43,000 tonnes per annum of materials recovery facility capacity at Alton on the basis that the additional fixed costs can be offset by associated revenue savings and so that the County Council benefits from the marketing of any capacity not required by Project Integra; and

(ii) Portsmouth and Southampton City Councils be invited as joint clients in the contract with Hampshire Waste Services Limited to share in the investment outlined in (i) above, and potential benefits and risks associated with it.

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