By Tash Shifrin
The total contract price of Greater Manchester’s huge waste and recycling Private Finance Initiative project is £4.7bn, up almost a fifth on the sum set out in the 2008/09 budget, Public Finance can reveal.
The total contract price of Greater Manchester’s huge waste and recycling Private Finance Initiative project is £4.7bn, up almost a fifth on the sum set out in the 2008/09 budget, can reveal.The deal, signed off on April 8 after two years of delay, is the first to receive funding from the Treasury’s infrastructure lending unit. The unit was set up last month to support PFI schemes struggling to secure private finance in the credit crunch.
Greater Manchester Waste Disposal Authority announced that contractor Viridor Laing would receive £3.8bn in unitary charge payments under the deal.
But the full contract cost will be £4.7bn – up 18% from the £3.98bn set out in GMWDA’s 2008/09 budget. Deputy treasurer Paul Howarth said the rise was caused mainly by the increased cost of finance and greater transfer of risk to the contractor.
The waste scheme will add more than £50 a year to council tax bills for every household in Greater Manchester.
GMWDA’s deal has been sealed with £337m of a total of £582m senior debt provided by the public sector. Of this, £182m has come from the European Investment Bank, and £120m from the Treasury’s arm’s-length unit.
In a highly unusual move, GMWDA has also become a lender to its own PFI project, providing £35m towards the debt package, as well as its more conventional £68m capital contribution.
Edinburgh University PFI expert Mark Hellowell said there was ‘a clear conflict of interest’ as the authority was acting as both lender and client.
But Howarth told PF the move was brought about by ‘force of circumstance’. GMWDA had acted as ‘a lender of last resort when commercial sources dried up’. Like the Treasury unit, the authority was lending ‘on commercial terms... as if we were a bank’. The loan would be accounted for separately, he said.
Hellowell described the deal as ‘massively complex’, adding: ‘There are huge transaction costs associated with getting all these entities together.’
The PFI scheme has also been set up unusually, with two special purpose vehicles. The first, Viridor Laing Greater Manchester, will provide facilities to allow recycling of 50% of the city’s waste by 2015. In turn, VLGM has established a joint venture with chemicals firm Ineos ChlorVinyls to build a power plant on the Runcorn site of Ineos’s chlorine factory.
This second SPV will subcontract with VLGM, but the two newly established ventures have been financed separately – albeit through the same lenders.
Residual waste that cannot be recycled will be converted into fuel to feed the power plant, which will supply electricity to the chlorine factory. Howarth said the sale of power would provide a ‘return on investment’ to shareholders of Viridor Laing and Ineos, but not to the authority under normal circumstances.
He added: ‘Should super-profits occur, the authority is entitled to a share of those.’ But there was ‘not a simple answer’ to what would constitute super-profits.
A spokesman for the Department for Environment, Food and Rural Affairs, which provided £125m in PFI credits, defended the use of public money to fund development of the power plant. ‘The amount paid by GMWDA for the disposal of its waste is reduced due to the fact that the contractor will also earn revenue from the sale of electricity.’
