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PFI contracts to build waste incinerators burned more money than rubbish

This calls for a Private Finance Initiative. Owen Humphreys/PA

More than £200m has been spent on failed waste management projects, according to a scathing report by a cross-party group of MPs. The Public Accounts Committee blamed “lax” and “poorly drafted” public-private funding arrangements.

But though MPs are right to criticise these contracts, they fail to oppose the obsession with private finance itself. We shouldn’t be afraid to say it: waste management is simply cheaper and more effective in public hands.

The problems date back to Private Finance Initiative (PFI) contracts signed in the late 90s. Under PFI, private businesses stump up the money to build new infrastructure and the public sector pays them back over time.

Such schemes have proven controversial and MPs have in the past criticised PFI in roads, hospitals, schools and the London underground, as well as waste management.

In this case, some projects have simply not been finished. For instance the UK government has paid Surrey County Council £124m since 1999, tied to the council’s deal with a contractor to build two waste-to-energy plants. Fifteen years on, these plants have still not been built. And the money? If only waste could be incinerated this easily.

Predictable problems

The latest report shows how the commercial interest in profitable incinerators can distort policies for dealing with waste, at the expense of recycling and re-use.

Waste disposal is rapidly developing and MPs are right to highlight how inflexible these contracts are in the face of such change. Fixed 25-30 year contracts are standard in PFI deals, but they struggle to factor in new technologies and uncertain forecasts of the amount of rubbish produced and the extent of recycling.

But these problems were predictable – and clearly identified by critics of privately financed incinerators. Friends of the Earth warned in 2008 that PFI waste operators were pressing councils to commit to high and growing future waste levels, despite evidence of a levelling-out and even decline. The problems with a proposed PFI waste incinerator in Norfolk, highlighted in the committee report, were very clearly set out several years ago by Chris Edwards of the University of East Anglia. Even waste management firms themselves sometimes admit there is excess incineration capacity across Europe.

The deals nevertheless went ahead, driven by the well-known problem of exaggerated demand forecasts in all kinds of public-private partnerships. Just as road and rail schemes come with excessive traffic forecasts, and new stadiums or sporting events exaggerate their supposed “economic impact”, so proposals for waste treatment plants come with unrealistic consumption projections. Such claims – usually made by consultants with a vested interest – make the projects more likely to be approved.

Exaggeration also raises the level of business guaranteed under PFI contracts – a further incentive. According to a survey by Danish academics, the distortion of forecasts is so consistent and widespread it was only explicable as:

systematic misrepresentation, that is, lying … The problem of misinformation is an issue of power and profit and must be dealt with as such, using the mechanisms of transparency and accountability.

The UK government was responding to the problems after they emerged, not challenging the projections or the investigating alternative possibilities beforehand. Even the EU, despite its own enthusiasm for uniting the public and private sectors, has proved capable of saying no. Earlier this year, for instance, it refused to subsidise a number of incinerators in the Czech republic where demand couldn’t justify the costs.

Taking it in-house

One obvious solution to the whole financing mess would be for local councils to simply build, own and operate incinerators themselves. However, government credits are only available for PFI schemes, and the committee report is also silent about the option of direct public financing.

Local authorities are effectively locked in to public-private deals for waste management if they want to get the benefit of government “PFI credits”. As the MPs report puts it, this “incentivises the use of PFI to construct waste management assets over other options for reducing the amount of waste sent to landfill”.

In Sweden, Germany and Denmark, groups of municipalities have built and run incinerators themselves. Some local authorities in the US own their own incinerators too, including at least two in New York state.

This reduces and shares risks, but it also erodes potential profits from the market and the dominance of the private companies. No surprises then that the waste-to-energy companies aren’t too pleased – but the European Court of Justice rejected a legal challenge against an inter-municipal incinerator set up by a group of local authorities around Hamburg.

Going public

The core reason to build new infrastructure with public funds is financial. It is intrinsically less expensive than PFI or other public-private partnerships and avoids the risk of expensive and inflexible long-term commitments.

Even the Republican governor of Alaska – successor to Sarah Palin – has recently scrapped a public-private plan for a bridge in favour of direct government provision, because: “Having the state, rather than a private developer, fund the project could save hundreds of millions of dollars.”

The UK, however, remains frozen in its commitment to private operators, in waste and elsewhere – as far as government support is concerned, there really is no alternative.

The committee’s report does nothing to change this. It calls for the government to help “improve local authorities’ contracting capability”, but not to develop the capacity to run their own systems. It concludes that 25-30 year PFI contracts are too inflexible, but without acknowledging that the private sector will not build and operate incineration plants without such contracts.

While the report provides further evidence of the need for a break from the political orthodoxy of the past 25 years in order to recreate a mainstream option of direct municipal operations, the PAC itself does not make that break.

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