10 October 2008
Impending restrictions on landfill mean local authorities must take crucial decisions soon on funding and organising waste disposal
Nobody argues that landfill is a long-term solution for waste disposal. In fact, throwing our waste into holes in the ground is just about the worst thing we can do – environmentally and financially.
Of course, it is best not to generate waste at all, but once it exists it is better to recycle it than to treat it, and better to treat it than to dump it in landfill sites.
This received wisdom is reinforced by the European Union's Landfill Directive, which requires the UK to reduce the amount of biodegradable municipal waste it puts in landfills to 75%, 50% and 35% of its 1995 level by 2010, 2013 and 2020, respectively.
The first target is only two years away, and the pressure on councils to act is increasing. For some, this means making decisions that could cost them billions of pounds by signing the most expensive contracts they've ever entered into. All are expecting the costs of waste disposal to rise by at least a third; some expect them to double.
An Audit Commission report, Well disposed: responding to the waste challenge, draws on the most up-to-date survey of English local authorities' plans for waste disposal. The data suggest that the 2010 target will be met through a combination of increased recycling – councils have succeeded in quadrupling recycling over the past ten years – and building new waste treatment facilities. The 2013 and 2020 targets are also achievable as long as these plans come to fruition without delay.
We can't recycle everything and that's why councils must consider what to do with what's left over. But providing expensive new waste treatment facilities over a relatively short time brings with it significant risks to value for money. Councils might find themselves choosing the wrong technology for their size or the composition of their waste stream, misjudging the capacity they might need, paying too much for new infrastructure or using the wrong funding mechanism. This is a challenging agenda and the Audit Commission's report provides practical guidance to help authorities build value for money into their decision-making.
Not all councils will need to invest in new infrastructure themselves. They could test the Landfill Allowance Trading Scheme market or establish partnerships with other waste disposal authorities.
Lats trading enables one council to share in the landfill diversion achievement of another by helping to pay for it. This could be a good interim option for authorities that have not procured new facilities, so long as they continue to promote waste minimisation and increase reuse and recycling at the same time.
Councils that know they will remain heavily dependent on landfill will have no option but to buy allowances. Even if, overall, England meets its 2012/13 target, the third of councils that are likely to miss theirs face Lats costs of up to £2m a year. If England misses its target, that figure could rise to £7m.
Even councils that expect to meet their targets, but know that there is a risk that they won't, should consider Lats trading, which is likely to be the best option for any who miss their target by a small margin. Such councils are in the advantageous position of being able to observe how others fare as new capacity comes on stream. They should be clear where they are on the surplus/deficit continuum and think about a more sophisticated approach to Lats trading – such as starting early negotiations with authorities that are in surplus. The regional efficiency and improvement partnerships are setting up a trading platform that should improve the market's transparency and make trading an increasingly realistic option.
Councils should also consider collaborating with others to procure joint facilities. Statutory waste disposal partnerships cover Greater Manchester, Merseyside and much of London, and there is scope for more. Few local authority areas generate sufficient waste to justify an incinerator of the most efficient scale. Figure 1 illustrates that conventional incinerators dealing with significantly less than 200,000 tonnes of residual waste per year face significantly higher costs per tonne. Councils expecting this level of residual waste after recycling and composting would benefit from a partnership arrangement (the figure assumes that 50% of waste arising is dealt with through recycling and composting). As well as building joint facilities, these arrangements enable waste disposal authorities to share modelling and procurement costs and develop a more strategic view of what the wider area needs.
But partnerships bring their own challenges. Waste is a contentious issue, and proposals to build new facilities often generate local opposition. Local communities might be even more resistant to the idea of paying for a plant that will be treating waste from another authority area. Authorities need to be ready to lead a public debate where transport effects can be weighed against benefits, such as a reduced impact on council tax and the environmental benefits of moving up the waste hierarchy. These issues can test councils' ability to lead their communities. The Audit Commission report highlights the ways in which some councils and their members have been successful in leading behavioural change and how they have used public consultation to good effect.
Even if councils have a good grip on the value-for-money considerations, realising their plans depends on funding. Most major new facilities are built through public-private partnerships supported by the government through Private Finance Initiative credits. So far, 18 local authority waste PFI contracts have been signed, 13 are in or about to start procurement, and five more projects are awaiting government approval.
The waste PFI programme has become accepted as the conventional procurement method for large waste treatment facilities, such as energy-from-waste plants. Councils receive support under the Department for Environment, Food and Rural Affairs' Waste Infrastructure Delivery Programme. The programme has been organised to reduce approval delays, but market delays might have replaced them. Recent reports suggest that turmoil in the credit and insurance markets might be making it slower or more expensive for private sector partners to arrange the financing to underpin PFI deals. It is difficult to predict whether this is a short-term phenomenon or an issue that will disrupt future rounds of PFI funding for waste projects. The waste PFI programme is currently being investigated by the National Audit Office, which will report soon.
The uncertainties in the financial markets and the lack of a guarantee of government support for future rounds of the PFI suggest that councils might wish to consider other funding options. But few are available.
One route is prudential borrowing, which allows councils to borrow from the Public Works Loans Board, rather than contractors borrowing on their behalf on the troubled private markets. This might make for cheaper or easier access to capital. Although under-exploited, prudential borrowing is increasingly being used alongside the PFI or PPP: it can be used for the infrastructure required to support increased recycling, such as composting or sorting facilities, while the private finance contract is restricted to covering the facilities for dealing with residual waste. Councils starting non-PFI procurements should consider the role that prudential borrowing might play in securing value for money, the availability of private finance and the guidance on risk transfer. For more information, see Defra's guidance note on prudential borrowing in the waste sector, published in August.
The Audit Commission's report highlights the significant collective expenditure being incurred to meet the landfill reduction targets and the risks to the public purse of failing to do so. But there is no 'do nothing' option: it will cost councils to act but it will cost them more to do nothing. Waste disposal authorities must find the most affordable and deliverable way to comply with or exceed regulatory standards, meet local environmental priorities and minimise future risks. This is a big challenge. The Audit Commission's report and associated guidance will help councils meet it.
Katie Smith is head of studies and Cameron Paton is a researcher at the Audit Commission. They both worked on the commission's report, Well disposed: responding to the waste challenge. Defra's note is available at www.defra.gov.uk/environment/waste/localauth/ funding/pfi/pdf/module-3.pdf
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