Oral evidence: Defra’s oversight of three PFI waste projects, HC 106-i
Oral evidence, 25 June 2014.
Witnesses
Bronwyn Hill CBE, Permanent Secretary, Department for Environment, Food and Rural Affairs, and Dr Colin Church, Director, Resource, Atmosphere and Sustainability, Defra, and Senior Responsible Owner for the Waste Infrastructure Delivery Programme, gave evidence.
Chair
Welcome. Sorry we are a little late in starting. I know this policy for these large incinerators has travelled across Government to various Departments, but when was it set?
Bronwyn Hill
I would not describe it as a policy just for incinerators. I think it is driven by the need to reduce the amount of waste going to landfill.
Chair
I understand that. When was it set? Do I go to 2006, when you established the Waste Infrastructure Delivery Programme? Is that when it was set?
Bronwyn Hill
No, I think it is a much more long-standing programme that started under the previous Government. Some of the contracts go back to 1997-98. I think the Isle of Wight is probably the oldest.
Chair
And that is when the PFI was brought in?
Bronwyn Hill
That is when the original PFI was brought in.
Chair
What is your focus now on the need for waste facilities? How has that changed since you did the modelling in the 1990s and set up the programme?
Bronwyn Hill
Using a 1995 benchmark, we need to reduce to 35%. The target is to hit 35% of what we used to send to landfill in 1995.
Chair
Sorry, but I don’t get that. Given that we are all recycling more and wasting less—this is where my question is going—has the need for large incinerators to dispose of waste changed from when you first set the programme in the mid to late 1990s?
Bronwyn Hill
Yes, because we are now confident that we are on target to meet the 2020 reductions.
Chair
This question is really for you, Bronwyn. The predictions on waste have altered since the programme was set in the late 1990s, and technology in this environment moves very fast, so there is new and better technology, rather than these large incinerators that spurt out masses of CO2 emissions. How do you justify, today, the idea of having contracts such as the ones that we are considering, in which you enter into a PFI for 25 years on big incinerators?
Bronwyn Hill
We would not be on course to meet the 2020 target if we didn’t have some incinerators, lots of recycling and lots of other facilities that sort waste.
Chair
Is it a sensible policy today?
Bronwyn Hill
It is. It is a package of different types of facility.
Chair
Is it sensible to have these large incinerators, spurting out all these CO2 emissions, on a long, 25-year PFI contract? Maybe that is a partisan question.
Bronwyn Hill
I should stress that they are quite heavily regulated by the Environment Agency on their emissions.
Chair
Is it a sensible policy?
Bronwyn Hill
I believe it is a sensible policy.
Chair
How many have you cancelled?
Bronwyn Hill
Remember that the local authorities are the people who have the projects. What the Department does is offer credits.
Chair
It is your policy. How many have you cancelled?
Bronwyn Hill
We withdrew provisional credits from seven schemes in the 2010 spending review. Some of those have gone ahead without our credits. For example, Merseyside is still going ahead. We then reviewed a number and withdrew credits from a further three—I am just checking with Colin that I have the numbers right—and I cannot remember whether any of those went ahead[1].
Dr Church
Yes, two of them did.
Bronwyn Hill
Two of those went ahead. Even if we withdraw our credits, some projects will go ahead to fruition.
Chair
It is your policy, owned by your Department. I accept that, in the end, the contract is signed by the local authority, but it is your policy. Do you think it is still a sensible policy? I was giving you the opportunity to say that actually, in today’s world, given that the technology is moving so fast and that the current predictions around waste are so different from 15 or 20 years ago, it would not be sensible to lock yourselves into these large projects with massive financial commitments over 25 years; but you are not saying that.
Bronwyn Hill
No.
Chris Heaton-Harris
You said that a couple of the projects had gone ahead without your credits. Does that mean that some of these schemes did not need the added help of Government investment to get them off the ground?
Bronwyn Hill
Yes. There are 35 other projects happening without DEFRA’s contribution, and that is just the local authority contracts. Of course, private sector waste companies could set up their own schemes. I should stress that they are not all energy-from-waste projects. Some of them are different types of facility, such as sorting. They are a very different range of projects. I do not know whether Colin wants to say something, but some of them are what we call integrated facilities. I do not know if you have ever visited a waste recycling plant, but they are fascinating places. I would recommend a visit. There is one in Southwark, not far from here, where there is an awful lot of sorting. They take the paper out, they have massive magnets to get rid of the metal and they sort all the waste to get a residual amount. It is that residual amount that sometimes goes into waste incinerators as an alternative to going to landfill. The justification for the policy is that it is worse going to landfill.
Chris Heaton-Harris
I just wondered why central Government was in this space if it is operating reasonably well without central Government intervention.
Bronwyn Hill
When it first started, it was not. There were problems for local authorities in trying to raise the finance, in understanding the technology and, indeed, as we know—it is half the reason for this meeting today—there were significant problems around getting planning permission for facilities. In the 1990s, the programme was started to try to stimulate the market in not just PFI but other types of deal that would enable us to meet the landfill diversion targets.
Ian Swales
On plants, I should perhaps declare an interest: there is one in my constituency, and I think there are two more nearby, at Billingham. The Sembcorp project at Wilton, in my constituency, is not, as I understand it, in receipt of the credits you are talking about.
Bronwyn Hill
Sorry, we do not recognise the name. What is the location?
Ian Swales
It is about to start processing Merseyside waste. The plant is being built at the moment. There was a very competitive auction for the waste and, as far as I know, they are not getting the credits you are talking about. This builds on the Chair’s and Mr Heaton-Harris’s comments about setting this kind of policy for such a long period of time. If there is now such a competitive world for processing waste—as I say, Air Products are now building their second plant at Billingham—does that not call into question some of the amounts of money you have allocated to projects in the past?
Bronwyn Hill
No, I don’t think so. The difference is that we are saying we have no plans to allocate further PFI credits to such schemes in the future because we are confident about meeting the 2020 targets without them. However, we need the existing projects to deliver. In our programme of 28 PFI schemes, 18 are in operation, a further eight are in construction or are starting commissioning, and two are outstanding and have not quite got there. We need them to deliver to hit the target.
Mr Bacon
You mentioned earlier that the Department has withdrawn credits from seven different projects. Would it be fair to say—this might be a truism, but I want to get your view on it—that the value for money of a project, from the point of view of taxpayers as a whole, should not depend on whether your Department has put in a credit or not? That is correct, isn’t it?
Bronwyn Hill
Yes, absolutely.
Mr Bacon
I do not want to put words into your mouth, but is it fair to say that by definition the value for money for the taxpayer cannot change, because it is either there or not? Is it not merely a question of where the different funding streams have come from? Is that accurate?
Bronwyn Hill
Yes. That is an accurate description of our policy, as set out in the NAO Report.
Mr Bacon
In the case of the Herefordshire scheme, they decided to go ahead with what they called prudential borrowing after you withdrew your credit. By doing that, rather than pursuing the original approach, they reckoned they would generate a saving sufficient to offset the majority of the reduction in the Department’s funding—this is paragraph 2.35. That makes it sounds like the route that they are now going to take is cheaper than the one they would have taken, which gives rise to the question of why were they thinking about going down a more expensive route—I can see why they might; it is because you were giving them money—and why you were offering the money if a cheaper route was available. Presumably, the modelling would have shown that.
Bronwyn Hill
We did not withdraw our credits, per se. We started to talk to them, because we had been paying them under what we call one of the legacy projects—it was one of the very early ones. We had been paying them for their services, but they had not built the infrastructure that was envisaged at the start. We started to discuss with them the need to realign that problem, and they came to us with a proposal, saying that they wished to become the sole lender to the project that they were involved in. They took the initiative to say they would prefer to do it that way round. You asked why they would do that, but that is for them to determine. We reduced our credits to them to reflect the fact that they are now the sole lender. Bear in mind that being the sole lender means they have now taken back some of the risk from their contractor.
Mr Bacon
Yes, but they are saving quite a lot of money by doing so. There was a model available that said that one could do this and it would save money, yet you, as accounting officer, were prepared to countenance a different route that would have cost more. That is my point.
Bronwyn Hill
No, I think both were value for money. The issue about value for money is: what are you paying to transfer the risk out to the private sector, given that that might get a better product and a better result? We would say that they made a judgment to bring that risk back in-house, but clearly they face a higher risk. Whether they deliver better value as a whole depends on their ability to manage the construction risk.
Mr Bacon
Okay, fair enough. You mentioned legacy projects—the Herefordshire, Worcestershire and Surrey ones. The Report says they were inherited from the old DETR. The clear statement in the Report is that once some services were being provided, the annual unitary charge payments kicked in—the full payment kicked in, in fact. What interests me is that although you inherited these projects, a central Government Department at the time must have sanctioned them. The arrangement was always going to be in the interest of the central Government Department, whatever name it happened to have, because at the end of the day there would be an asset, rather than just a payment of an annual unitary charge for services. Are we to suppose that the contract did not provide for ensuring that the planned infrastructure happened by a certain time, and for certain milestones, so you did not end up, as both these examples appear to have done, with the full amount being paid without the infrastructure being delivered?
Bronwyn Hill
Yes.
Mr Bacon
How could that happen? How did central Government allow that to happen?
Bronwyn Hill
The reason they did it—I’m not saying it was the best outcome; we have changed the approach since then—was that the projects were based on outcomes, such as whether they were delivering the recycling targets and the recovery targets. To give you a flavour, in the case of Surrey the target for waste recycling was 25% recycled in a given year; the contractor exceeded that and got up to about 50% over a period of years. In effect, because it was an outcome-based PFI and because they were hitting their targets—I can see why you might be concerned about that—the payments had to be made. When we inherited them, we said, “Let’s have a look at this.” We were contractually committed—clearly you have to think carefully about what you can do at that stage—to paying the money to the authority who then had a contract with the contractor.
Mr Bacon
Wouldn’t the question for the central Government Department and indeed the Treasury have been: outcome for whom? The outcome the central Government Department that is chipping in, big time, wanted was an asset. We employ all these expensive lawyers to draw up these PFI contracts and I know it was an early one, but even the early ones cost millions and millions of pounds. Are we seriously being told that no one thought that making sure that central Government had some assets at the end of it was a factor that should be taken into account?
Bronwyn Hill
I think they did. Remember, what we are trying to do is reduce landfill diversion. Surrey was what we call an integrated project, so there was an infrastructure part—I think there were two energy-from-waste incinerators planned, which for various reasons did not happen—but they were delivering a lot of the other outcomes that they had been contracted to do. We have now changed that approach, as the Report says. My concern as the accounting officer when I arrived in 2011 was, “What is going to happen when the contractor does eventually find a solution to the infrastructure part of the equation?”—because they were looking at it—“How are Surrey going to pay them?” So what we did was embark on a series of conversations with Surrey, saying, “Look, we think this is a problem. Where are you going to get the money?” because you would expect the payments to increase slightly once the infrastructure comes online. We had a series of conversations with Surrey to help them fix that problem. The solution that we agreed was that we would reduce our payments to Surrey until such time as the infrastructure appeared, and then increase them to enable them to buy that asset. So we have regularised the situation.
Mr Bacon
That is the re-profiling that the Report talks about?
Bronwyn Hill
The net impact should be the same; we have just re-profiled the cash flows from us to Surrey. I understand—it is the Report—from Surrey that they have created sinking fund, so that when the infrastructure does come on stream, they have the ability to pay for it.
Chair
My question there would be: do we need that infrastructure, given the changes in technology? Do we need something that big? The thing in Southwark that you described is a very different animal, because that is presumably a cheaper capital investment. It does sorting, so it sorts out—
Bronwyn Hill
Yes.
Chair
It is about a third of the price—[Interruption.] Say it to me, Dr Church.
Dr Church
It would be millions of pounds, rather than tens or hundreds of millions to build the kind of facilities—
Chair
Say that again?
Dr Church
Millions of pounds rather than tens or hundreds of millions of pounds to build the facilities—
Chair
Yes, it is much, much cheaper, and that is the whole point. These big infrastructure incinerators do not do the sorting, which you quite sensibly said Southwark’s now does and I think we would all buy into that, and therefore you need less. I do not understand for the life of me how you, owning the policy, are letting Surrey even think about developing a hulking great incinerator at a massive capital cost somewhere to the taxpayer when it is not needed?
Bronwyn Hill
I think our argument is that we need a mixture of facilities.
Chair
But why? Your own predictions say we have got enough now to fulfil our landfill obligations.
Bronwyn Hill
In that, we have assumed that Surrey will go ahead and deliver the infrastructure—I think it is now a gasifier plant in an eco-park in Surrey. Our assumptions about hitting the 2020 target take account of all of the programmed plans from now until 2020. We still need that plant.
Chair
Your assessments on waste have been dead out, haven’t they? It is very difficult to predict what waste levels will—
Bronwyn Hill
It is very difficult to predict. Actually, the good news is that we are all doing better at recycling, so if we can keep that up—
Chair
Yes, quite. That is why it seems daft to put that up. I will tell you what it feels like to me, sitting here in PAC. We see a lot of these big PFI—we have done the PFI on hospitals and we have looked at other big PFIs. For the Government, it is a nice big project, PFI is the fashionable thing to do, and you commit yourself to a 25-year contract for a facility which does have massive emissions—if you don’t do the sorting, your CO2 emissions are enormous—and you don’t need it. We end up paying for something down the line that we don’t need.
Bronwyn Hill
Can I add a short bit? We do need the projects in the programme to deliver up to 2020 because we need a package, and individual authorities may need them. What about the authorities that still haven’t found a way of disposing of their residual waste? There are some of them. They need to find spare capacity somewhere else to deal with it. What I am trying to say is that we have to look at the programme as a sort of portfolio of projects that will keep us on course for 2020.
Chair
My understanding is that in France and Holland, for example, they have built a lot of these incinerators, which feed into their district heating schemes. Right? We have done a bit of that, but they have done lots of it. Everybody has got less waste because everybody is now recycling much more, so they are short of waste to keep their district heating systems going, so they are buying the stuff. Looking at the policy in the round, it just seems daft that we are building horrible incinerators that give out CO2 at a huge cost when we could be selling waste to, I think, France, Germany and Holland—I may be wrong on my countries, but Germany is certainly one—and making a profit for the local authorities. It does not seem logical. We are stuck in a decision we took 20 years ago that we are finding it very difficult to revisit with a value-for-money perspective that makes sense in a different world where we can recycle, there are cheaper ways of doing it and there isn’t as much waste as we thought.
Bronwyn Hill
Recycling has gone up, but it has gone up because of all the things that we are doing and that other people are doing outside the PFI programme. The only issue about sending our waste abroad or, indeed, any long distance, is that that generates traffic movements and so on—
Chair
I accept that, but it still means you can make money rather than spend money. In that totality—
Mr Bacon
We are importing biomass from north America. That generates traffic movement. We are bringing it here and burning it to meet some ludicrous target, are we not? That is correct, isn’t it?
Bronwyn Hill
I am not sure that I know about biomass from America—
Chair
Explain to me why we are going for this traditional solution that somebody dreamt up 20 years ago when we got this EU target on landfill, and you are not moving it although times have changed.
Chris Heaton-Harris
That was going to be my line as well. It is more the kind of flexibility within the policy and getting the value for money. For example, when we initially recycled food waste, you were not allowed to use ordinary plastic bags. You had to get a special disposable bag to put your food waste in and that then went to recycling. Then, my local authority decided that ordinary plastic bags were fine because they were going to shred them and do something with them when they got there. Now there is technology out there that means you can get proper disposable plastic bags that will disappear within a few months, yet we are still stuck with a plant that can’t deal with these changes. How do you future-proof to these projects? That is what we are trying to ask.
Dr Church
One of the things to bear in mind is that we set up the programme, the activity, to deliver these things in a context where if we didn’t do that, we could see no way, at that time, of meeting our targets. In order to get a marketplace to deliver these things, we had to give a degree of certainty. That is one of the reasons why you have 20-ish-year contracts. Otherwise, local authorities and contractors cannot get the finance together to deal with it. All of these contracts have some elements of negotiation in them, so that over time you can change some of the things as you go along. We have a programme of activities looking at, for example, helping local authorities realise efficiency savings because of some of the changes that the chair has pointed out. For example, can they sell some of the material—some of the recyclate or the refuse-derived fuel—that is coming out of these projects and therefore reduce the overall cost to the local taxpayer in the system? If we had not given the market, the construction firms and the waste operating firms the kind of certainty that we did, it would not have been built. Before we started this process, you were getting about one plant a year, and we were not going to meet our targets. Our targets for 2020 are 50% recycling and 35% of 1995 levels going to landfill. There is still a gap, and that is the gap that we have to fill with—at the moment—forms of energy from waste.
Mr Bacon
May I pursue the earlier line of questioning about the three plants mentioned in the Report? You described the Herefordshire, Worcestershire and Surrey ones as legacy projects. The Norfolk project was much more recent. According to paragraph 2.36, the terms and conditions were stricter than the earlier agreements. That was signed in 2012, but you had said—paragraph 2.5 refers to this—“From 2010, the Department raised specific concerns with Norfolk that its proposed timetable might not be achievable.” In the light of that, why did you sign the funding agreement?
Bronwyn Hill
Because that was a question for them to assess the risks on. The risk we were pointing out was not that the project would not work, but that they had signed this compensation clause linked to the planning timetable, which we thought was over-optimistic.
Mr Bacon
You thought—
Bronwyn Hill
We thought there was a risk in relation to the compensation clause, which is standard in PFI contracts. Because it is not in Norfolk’s gift to guarantee planning permission, we thought they had underestimated the time scale within which they would get the project. We had an exchange with them about that risk. We wrote to their chief executive officer at the time, and he wrote back saying very firmly and very clearly that they had looked carefully at the risks and considered the alternatives that we had suggested to them, but they were confident that they could mitigate those risks. So we did challenge them at the time, but this is the contract that they are going to sign with the developer, and at some stage we have to say, “You are a local, democratically elected independent authority. If you and your members wish to proceed, we do not have grounds on which to prevent you, other than to point out that you are bearing that risk.”
Mr Bacon
You could have withheld your signature from the funding agreement. You are the ones who are, at the end of day, spending that portion of the taxpayers’ money. You could have said, “This is not a risk that we are prepared to back financially.”
Bronwyn Hill
They met the criteria for us to award the PFI credits.
Mr Bacon
Are you saying you tied your own arm behind your back? You listed some criteria, they met them; ergo, you had no choice in the matter?
Bronwyn Hill
No. This is the outcome of a long process of DEFRA scrutinising Norfolk’s plans, from outline business case through to full business case. There is an awful lot to scrutinise and challenge, and that is what we have done. Ultimately, they met our criteria. All these projects bear some risk; the question is who bears it. Our experience of planning risk in other cases was that it tended to take longer than most authorities thought it would, but at the end of the day that was not sufficient reason for us not to grant the PFI credits.
Mr Bacon
You used a phrase earlier in relation to the compensation clause, which you said you were worried about. You said that compensation of this kind was standard practice. I raised this issue with the National Audit Office four years ago, because our local newspaper ran a story based on a well-sourced document, which said that the compensation, were the incinerator not to go ahead, would be in the region of £20 million. This was before you signed the funding agreement. I had an e-mail from the head of PFI at the National Audit Office on 25 November 2010 in which the NAO’s David Finlay, who was then the head of PFI, wrote: “There is no standard practice, but it is not unusual for contracts to include some agreement that the authority will pay some compensation to the contractor if the project is abandoned as a result of failure to get planning permission. I understand that where these amounts are paid, they are usually modest amounts. We have no detailed knowledge of the project in Norfolk, but the £20 million potential compensation you mentioned”—I sent them the article from the local newspaper, the Eastern Daily Press—“on the face of it sounds very high.” It is now considerably higher than that. As it says in the Report, it is now £33.7 million. Do you think that the Department should bear in mind the impact of its decisions on local taxpayers when taking those decisions?
Bronwyn Hill
We should certainly bear in mind the impact of our decisions on the affordability to Norfolk, which we did when we took the decision in October 2013 to withdraw credits.
Chair
Can you speak up, Bronwyn?
Bronwyn Hill
Yes. We should certainly take account of the impact. For example, we took a decision to withdraw credits, as you know, from the project in October 2013 because they had missed the planning timetable that they had set. To go back to your question about whether these clauses were standard or not, I think that it is probably more accurate to describe them as principles. They reflected the Treasury’s guidance that when there are what they call “no fault matters”, which is a failure to get planning—provided both the contractor and the authority have used their best endeavours, if it is outside their control it is known as a no fault compensation—it is good practice to cap the compensation costs and to have a clause so that when bidders put in their bids, they bid for what sort of compensation clauses, capped, they would like so that the authority has competed them. It is important to bear in mind that these are competed clauses in most PFI contracts.
Mr Bacon
Did your guidance state that these caps should be in place?
Bronwyn Hill
I have not got the guidance in front of me but my understanding is that that would be best practice. You have to think what the alternative would be—what if the contract said nothing? You would then probably be faced with a long-drawn-out court case to decide who owed what to whom. It is a series of principles, which then need to be negotiated in detail in relation to the individual project.
Ian Swales
May I ask a clarification question? Paragraph 2.41 talks about the compensation amounts that were paid and paragraph 2.42 mentions that nearly £15 million is still going to have to be paid, basically by council tax payers. I guess the point is the extent to which the Department gets involved in what the financing arrangements are—remembering this is for a project that did not happen and for which planning permission basically never occurred. We are led to believe that the contractor incurred, well, the Report says that the first item—£20.3 million—is “mainly fees paid by the contractor to secure bank financing”. That is a heck of a lot of money.
Mr Bacon
For a loan that didn’t happen.
Ian Swales
Exactly. Are you satisfied that that money was actually paid out because, presumably, they never drew down the loan? Did they pay the best part of £20 million for a loan they never took? Even more ludicrous is nearly £12 million for hedging arrangements “against long-term changes in foreign exchange and interest rates”.
Chair
Ian, there is a letter from the county council.
Bronwyn Hill
There is a helpful letter from Norfolk county council explaining some of the background to those choices. It might be helpful to the Committee if I explain what DEFRA’s role was when they, as it were, put that arrangement in. This is something that they have negotiated with their preferred bidder, along the lines of the principles set down by the Treasury. What we would normally say, and did, in this case, was: given our concerns about planning risk, which are common to a lot projects and we knew the strength of the local opposition, particularly in Norfolk, to the site they had chosen for their waste facility, we invited Norfolk to consider—this is their choice—whether there were alternative ways of having a financial close but knowing that you have not got planning. There are pros and cons with those options as well, if you are interested in what the options are. Instead of having the banking facilities ready to go or put in place with a firm price, they could have done something called a split close, which says, “Don’t get those in place at that stage. Wait until you have planning permission and then go back to the banks and the finance companies.”
Mr Bacon
Other things equal, something with planning permission is going to be a lower risk than something without, so it should be cheaper, shouldn’t it?
Bronwyn Hill
Yes, so we suggested that they looked at the pros and cons of doing one or the other. The problem is that if you do that and you do not know when you are going to get planning and, as Mr Swales pointed out, they have not got it yet—
Chair
The Secretary of State did say to them they would get it by January.
Bronwyn Hill
I understand. You then need to ask what is going to happen to the markets between now and the date, which I don’t know, when I have planning permission. I am taking a risk that the market might move in the wrong way. Similarly, on hedging, you can either hedge when you close the deal or you could defer hedging. I certainly think from the letter that Norfolk has written to the Chairman, they said they were particularly worried about hedging. They had some exposure to foreign exchange because some of the equipment they were using was coming from—
Dr Church
Switzerland.
Bronwyn Hill
Switzerland.
Mr Bacon
But this is the contractors. It ought to be the contractor’s risk in a sensible contract. It is not normal for clients to indemnify their suppliers for foreign exchange risk. It is quite routine, when you pick up an annual report of a publicly quoted company, that it says, “Due to foreign exchange movements our operations in Europe, South America or Australasia, produced less income than we would have expected.” I don’t understand why you, advising authorities such as this one, Norfolk, on its negotiations did not say, “Well, you are not going to indemnify them for that, are you? Surely that is on their ticket if they want to take this contract.”
Bronwyn Hill
Sorry, no. The hedging is on the back of the price that they want for the contract with the developer to build the plant, or whatever they were doing. The issue is not who is at fault or who is taking the risk at that stage; it is the risk that the planning timetable, over which neither Norfolk nor the contractor had control, would push them to a point where the prices would go up, so that when they did get planning, Norfolk would be faced with that choice that you have. Either you fix the price before you get planning, so you know what it is and there is hedging. Or you say, “I won’t fix it because I don’t know when I am going to get planning.” Then, when you get the planning, prices may have changed and the developer, because he has not closed the deal, will then say, “It will cost you more.” It is a balance; it’s a judgment.
Mr Bacon
I go back to my earlier question. Given all this uncertainty, and the fact that you were flagging up two years prior to signing the funding agreement, that you thought that the timetable was far too optimistic, why did you sign the funding agreement?
Bronwyn Hill
Because it met our PFI criteria. There are certain issues in these deals that are for the local authority to determine. We are talking about independent legal entities.
Mr Bacon
Yes, but they don’t have any legal rights over you. For all Government programmes, Government issues a policy, announces a policy and says, “Here is some money if you meet the following criteria.” Then you see what interest there is. If it turns out there is too much you can always revise them. It is not like they could have sued you, saying, “We met the criteria and you have decided not to fund us.” Could they? They had no legal standing to do that, did they?
Dr Church
They could have.
Mr Bacon
You could always try your luck in court.
Bronwyn Hill
They could have taken us to judicial review.
Mr Bacon
You are not seriously saying that the Government was legally tied into this. Are you saying that you had no legal option but to sign the funding agreement? I find that very difficult to believe.
Bronwyn Hill
We assessed.
Chair
Are you saying yes or no to that? Did you have a legal obligation?
Bronwyn Hill
I said if it met our criteria, which we had pre-published, and we had gone through a long process of scrutiny and challenge—
Chair
You had a legal obligation?
Bronwyn Hill
No.
Mr Bacon
You had a legal obligation to sign the funding agreement?
Bronwyn Hill
It is a reasonableness test.
Chair
Did you have a legal obligation to sign? All of us here think it is daft that you gave them the agreement in 2012. Did you have a legal obligation to do so or did you choose to do so?
Bronwyn Hill
It was a reasonable decision.
Chair
Did you choose to do so or did you have a legal obligation?
Bronwyn Hill
Of course we chose. Of course, our Ministers chose.
Mr Bacon
When you use the word reasonableness you make it sound like you were scared that if you had decided not to sign the funding agreement they would have JRed you on the basis that they had met the criteria. Is that really what you are saying?
Bronwyn Hill
No. This was not our project. This was us making a contribution to a local authority-led project. That is what I am trying to do.
Chair
This is your policy. Bronwyn, I have got a real problem with this. Local authorities only do this once. You have an overarching view. One thing the Report is quite complimentary to you about is that you were trying to share experience. You can’t expect a local authority to do this alone when they do it once in a generation, whereas you are overseeing 28, which is what you told us. You have got to use your expertise. If you thought in 2012—
Mr Bacon
2010.
Chair
2012 was when they got permission.
Mr Bacon
2010 is when the Report says that you had concerns about the optimistic timetable. Two years later you still signed the agreement.
Chair
If you thought it was daft—it is public money, whether taxpayers’ money or council tax payers’ money—you should have exerted your influence in a much more direct way, rather than just say, “They meet our rules, we’ll give it a tick,” but two years later remove the funding, which they say to us is unprecedented.
Bronwyn Hill
I hear your views but I do not agree with that assessment.
Chair
Why not?
Bronwyn Hill
For the reasons I have set out. This is a local authority coming to us with a very complex business case, which we scrutinise and challenge. We point out to them alternative options for dealing with the risk. I am not saying that Norfolk were wrong to go ahead; I am saying they were taking considered risks on what might or might not happen with something that is outside their control.
Chair
But you felt you didn’t even need it to meet the targets. That is why you withdrew the funding. You withdrew the funding on a technical issue because they hadn’t yet got planning permission. We all know that planning permissions, particularly on controversial things like that, run over. You know that. I know that. Anybody who is in this world knows that. On that technical point you withdraw it, but it is but actually because you don’t need it. Yet you gave permission two years previously. It is just daft.
Bronwyn Hill
Can I come back to the criticism that Mr Bacon made of the early legacy projects? The reason we inserted the planning timetable condition and linked it to a review by us was to give us the option to assess the progress of the project against all the other projects in the portfolio. Remember we have to manage this whole portfolio of 28 projects and we need to get—
Chair
You just said you don’t. Do you or don’t you? Is it a local authority decision or your decision?
Bronwyn Hill
No, my apologies. We manage the overall portfolio. The local authorities have to take their own judgments about the contracts that they are entering into with contractors and for the credits that they get from us. We insert review clauses so that we will have the opportunity to review them. Norfolk was fully aware of that because of all the conversations that we had had throughout 2011 about our concerns. So we—
Mr Bacon
Including your concerns about the optimistic timetable?
Bronwyn Hill
Yes.
Mr Bacon
But you then went ahead and signed the funding agreement which committed you to supplying taxpayers’ money. It is not as if planning permission being delayed is unusual. One of these projects in south London sat on the Secretary of State’s desk for two and a half years. These things happen. It is quite normal, actually.
Bronwyn Hill
What I am trying to say is that we were very clear in our letters, correspondence and discussions with Norfolk where the risk lay if they failed to meet the planning longstop date.
Chair
I need to put this on the record. In their letter to us they say, “The scrutiny was very detailed and precise. Whilst led by DEFRA it also involved Treasury”—I don’t know whether Treasury wants to comment—“The nature of the Department’s involvement was such that dialogue with bidders could not close until DEFRA had accepted the positions reached, for example in relation to compensation payments for termination scenarios. In addition DEFRA also had to approve the appointment of a preferred bidder and a final business case before the county council could award the contract.” Then they go on to say: “The grant would have been worth £169 million over the life…the removal of this grant after a contract had been awarded was unprecedented and whilst legitimised by the strict terms of its award we consider it very questionable on many grounds.”
Bronwyn Hill
We removed the credits in October 2013. Their full council, I understand, considered a revised project plan from the contractor and decided that it would still represent value for money for the authority at that stage—this is 29 October 2013—to proceed without our credits. So I go back to the point that even when DEFRA chooses, I would believe quite legitimately for wider portfolio reasons, that a project is getting to the stage where we don’t need it to fulfil our national requirements, there is nothing to stop that authority going away, doing a slightly different deal, looking for savings, finding new sources of funding with the contractor that it has entered into an agreement with. That is what Norfolk did in this case. At that stage they obviously satisfied themselves that they would get planning permission within the time scale that they envisaged.
Chair
They thought that they were completely closely controlled by you. That is what their letter says to us.
Guto Bebb
I want to be a bit of an anorak and ask you to what extent the Department would have any overview of the financial decisions made to underpin the proposed borrowing. I am fascinated that Norfolk appears to take out an interest rate hedging product. Would the Department or the Treasury have given any advice on that issue?
Bronwyn Hill
On hedging?
Guto Bebb
Yes. It says in the letter that the Department and Treasury were both offering advice. I am just wondering whether advice was given on the interest rate hedging project.
Bronwyn Hill
We asked Norfolk to consider whether they would want to defer hedging or not. There are pros and cons with both options. That was ultimately a choice for Norfolk to take.
Guto Bebb
In terms of the pros and cons, who was offering that advice? I would be amazed if a local authority’s finance department would have the expertise to take on an interest rate hedging project without advice from outside.
Dr Church
As part of the process of working with the council, one thing we would do is try to help them understand what skills they would need. We would advise them on the sorts of adviser they would need and, if they did not have that kind of expertise within their own local finance, how they might acquire that through some form of external advice. We would then say, “These are the sorts of thing you need to think about,” but it was never a case of us just substituting our judgment for the local authority’s. We would point out what we thought the issues were and help them to find expert, hands-dirty kinds of advisers. They would then have to take a view on that and come back to us. Only where what they were saying to us was not on-market—was not comparable to the other things we were seeing—would we say, “No. That is not on-market. You should try again, because you might get a better deal with your contractor.”
Ian Swales
Do you know what advice they took?
Dr Church
Not off the top of my head.
Mr Bacon
Why does the Treasury not have some sort of policies in this area?
Chair
What did the Treasury do on this?
Marius Gallaher
I think the Treasury would only signpost local authorities through the Department to get the best advice. We would not give them detailed advice on this sort of arrangement. That would be for them—
Chair
“The scrutiny was very detailed and precise. It also involved Treasury.” I do not know why they would lie.
Dr Church
The way that the programme works is that DEFRA pay an organisation called Local Partnerships, which is jointly owned by Government and the Local Government Association.
Mr Bacon
Could you speak a bit more slowly and just say that again?
Dr Church
Okay. We pay an organisation called Local Partnerships, which is owned by Treasury and the Local Government Association. It contains a number of people with different expertise—commercial, technical, legal—in these kinds of deal. We allocate one of them as the lead transactor in a particular project—in this case, Norfolk. They will work with them, and if they say to us, “How do we approach hedging?” or another financial thing, we will first provide them with the guidance we have for all projects. If they have more detailed questions, we will discus with them. In terms of working through exactly how they will do it, they then acquire their own advice, whether internally or paid for externally—however they wish to do it. We will help them and say, “Here is a list of the sorts of organisations, or the sorts of skills, you need in order to understand, for example, the interest rate hedging. Here are the pros and cons and the different kinds of thing you need to think about.” In the end, though, we do not substitute our judgment for that of—
Mr Bacon
You said that you or these transactors would indicate if something was not on-market, or was adrift.
Dr Church
Yes.
Mr Bacon
How many other projects are there where there has been £32 million of compensation for financial fees, bank loans and foreign exchange hedging in a £500 million project that has not gone ahead and where the finance was not required?
Dr Church
I do not have the exact number in front of me, but it was the judgment of the team at the time that that was comparable to the other PFIs we were involved in looking at.
Mr Bacon
The compensation arrangements were similar in the other ones?
Dr Church
Comparable, yes.
Bronwyn Hill
I think the question was whether any other cases where the deal has been signed and reached financial close have triggered the compensation claim because planning was not achieved. No; Norfolk is unique.
Mr Bacon
I still do not understand how you could have got anywhere near this quantum of financial compensation for a project that has not happened and for which the finance was not required. I simply do not understand how you could get to that point.
Bronwyn Hill
I think we are saying that that is not atypical.
Mr Bacon
You said a moment ago that one of your jobs, and the jobs of the transactors in Local Partnerships and Infrastructure UK, was to flag up whether something was on-market or adrift of the normal position. I have asked you to identify other projects where this type of compensation arrangement existed on this scale, because if others were as egregious as this, you would presumably know about them.
Dr Church
I do not have the numbers in front of me. If you want us to provide you with a note, we are happy to do that.
Mr Bacon
How can you know whether it is on-market or off-market if you cannot think of other examples?
Bronwyn Hill
I think he is saying that there are a lot of PFI deals. All of them will be different. Some may have different compensation, but most will have some form of capped compensation agreement in the event of a planning failure that is no one’s fault. We could look at the other projects and say, “Are there any that look a bit like this?”
Chair
You have cancelled your PFI credits for 11 projects, have you not? Have I got my figures right?
Dr Church
Seven plus three plus one, yes.
Chair
Have any of those cancellations triggered compensation payments?
Dr Church
Only Norfolk.
Bronwyn Hill
Compensation on financing?
Mr Bacon
Compensation of any kind, including finance.
Dr Church
We withdrew our offer for 10 of the projects before financial close, so there wasn’t a binding contract covering everything. One of the authorities had what is called a split close—we talked about that earlier—so there was some discussion between them and the contractor about exactly who pays what because of that. For the remaining nine, we are not aware of there being any compensation between the local authority and the contractor. There may have been some that they did not tell us about, but not that we are aware of.
Mr Bacon
So far from this being on-market, this was the one that was adrift.
Dr Church
No, because those contracts were in a very different position from that of Norfolk. Norfolk had signed, financial close—
Mr Bacon
But I am saying that what they signed was adrift, and your advice did not appear to stop them, or help them to stop themselves.
Dr Church
No, it was not adrift.
Mr Bacon
If it was not adrift, why were the other 10 different?
Bronwyn Hill
They had not got to financial close.
Mr Bacon
I understand that one had financial close and the others had not, but your whole point was that in the period leading up to this, before you sign anything, you give advice through the transactors from Local Partnerships and Infrastructure UK about what is and is not, to use your expression, on-market. Yet here we have this compensation arrangement that seems out of all proportion, given what actually happened and how much loan had to be drawn down—i.e. none. You are saying that it was not adrift, and that it was perfectly mainstream and normal, yet in none of the other cases were compensation arrangements of this order extant. I am just not with you.
Dr Church
No, I did not say that, sorry. What I said was that none of the compensation clauses were triggered, because the contracts that contained them were not signed.
Mr Bacon
Right. Okay, fair enough, but my point is that you positioned yourselves, with your partners—you mentioned Local Partnerships, and the Report refers to Infrastructure UK—as advisers to those local authorities. As Mr Bebb said, it is highly unlikely that an individual local authority has the expertise to do one of these projects by itself, because it does it only once. You were looking at an overview of a whole portfolio of them, so you were positioning yourselves, with your partners, as expert advisers. How did you allow this to go ahead? What I am really asking is, why was your advice so inadequate?
Dr Church
We didn’t consider that it was.
Mr Bacon
So you think this is an acceptable outcome, do you?
Bronwyn Hill
We advised Norfolk about the nature of the planning risk and our view that they were over-optimistic—that is the best way I can put it—about the planning timetable.
Mr Bacon
I feel that this is a bit like the story of “There’s a hole in my bucket”, which is why I am going back to the original question. Why did you sign the finance agreement two years after you warned them that you thought the planning timetable was over-optimistic, based on your expert advice?
Bronwyn Hill
That was not a basis on which we could have refused to sign it.
Mr Bacon
So you were legally committed?
Guto Bebb
Can I clarify one other thing? Was the funding package that was in place actually ever drawn down? It looks as if the best part of £7 million was paid out on the cancellation of an interest rate derivative product. Was the funding relating to that derivative product ever drawn down?
Bronwyn Hill
I assume it cannot have been. You would have to ask Norfolk, but I am assuming it was not. It is a cancellation fee.
Chair
It is your money. You ought to know whether it was drawn down.
Guto Bebb
Just to get this right, what we are looking at is a cancellation fee in relation to money that was never drawn down.
Vikki Keilthy
May I come in on that? My understanding is that if the funds are available—
Guto Bebb
They must have been drawn down.
Vikki Keilthy
They haven’t been drawn down, but there were fees involved in having the financing available and ready to go.
Guto Bebb
Therefore the timing is important. In effect, the advisers were informing the county council that they should be taking out an interest rate hedging product, when the Bank of England was saying pretty clearly that there was no likelihood of interest rate increases for the next four years.
Vikki Keilthy
May I also come in on that? I think the letter says that the financiers required the hedges to be in place. They would not have issued the finance without them.
Guto Bebb
If the finance is required, that is technically a mis-sale. The Financial Conduct Authority has agreed that to require a hedging product in relation to a loan is technically a mis-sale. I think Norfolk county council should be looking for compensation from the advisers. That is an aside, perhaps, but £7 million of taxpayers’ money, in relation to money that was never made available, is shocking.
Chair
Can I just get clear in my brain that you cancelled it because you thought we did not need that additional waste facility in that area?
Bronwyn Hill
No. That is not quite correct.
Chair
What is correct?
Bronwyn Hill
We withdrew our credits, which were a contribution to the way that Norfolk was going to finance the project. It was not a view of whether it was needed in Norfolk or not, because we take a view of what is needed for England as a whole, given that local authorities have choices about sending their waste to another authority or sending it abroad, as you were saying earlier. We take a national view of what is needed as a whole to meet a target that is in 2020.
Chair
What have you just said that contradicts what I said? I said that you cancelled it because you took the view that we did not need this additional incinerator.
Bronwyn Hill
I though you said “in this area”, in Norfolk.
Chair
So you led them slightly up the mountain and down again.
Bronwyn Hill
I need to distinguish what Norfolk needs, to help the Committee. Norfolk still needs to decide what to do with its residual waste. It needs to decide whether it can send it to another local authority, and whether it needs a facility or not. That is a matter for Norfolk county council to consider.
Chair
No. You have the national policy. Norfolk implements the national policy, taking advantage of Government funding for PFI credits. You chose—in an unprecedented way, according to Norfolk—to cancel because you took a view that there were sufficient incinerators nationwide. Norfolk suffered. That is an additional point to Guto’s point that they had never drawn down any money anyway. It is not a good way of running a policy from a Department.
Bronwyn Hill
I think the issue is that we need a national policy to meet the landfill diversion targets in 2020. Local waste authorities such as Norfolk need to decide what they are going to do with their waste. We both need—
Chair
I think you are trying to pass the buck, with the greatest respect, Bronwyn. This is a national policy. We are going over the same ground. I am going to pass you to Austin, but I will say once more that it is a national policy, with national funding and national expertise. Places such as Norfolk, clearly from their letter, depend on you to advise them. What you did was change your mind, and Norfolk council tax payers—Richard’s constituents—are picking up the bill for your change of mind. That is what is happening.
Austin Mitchell
Just to reinforce that, you were effectively in loco parentis to Norfolk county council. You were advising them, doing the contract. You were supervising the contract. You are a big influence on the contract, and it is your responsibility to tell them if there is something wrong with that contract, because you authorised it. In that situation, you have been very unhelpful, and you allowed them to be financially penalised substantially. Paragraph 2.36 says the contract was signed in 2012. There was a planning deadline of 10 June 2013, which you agreed to, even though you had doubts about it, according to paragraph 2.44. I would have thought there might have been some co-ordination between Government Departments. The Secretary of State for Communities and Local Government undertook to issue his decision on or before 14 January 2014. That was another Department. You could have co-ordinated to some degree and found out what they were delaying it for. You cancelled the contract. Why, if the contract was that dicey, particularly on timing, did you allow it to be subjected to such substantial compensation clauses?
Bronwyn Hill
There are two things I need to put on the record. One, we did not cancel Norfolk’s contract. They chose to proceed with it in October when we withdrew the credits that we had previously agreed.
Chair
You cancelled how much money? Let’s just put that on the record. How much money was Norfolk expecting to get from you?
Bronwyn Hill
It was £91 million in PFI credits.
Chair
No. It was £169 million over the life of the contract.
Bronwyn Hill
It is equivalent to £169 million. The second thing I must get on record to answer Mr Mitchell’s question is that DEFRA is prohibited from intervening in the planning process that is run by CLG Ministers, because it is a quasi judicial process, so any suggestion that DEFRA could have an influence over that process, I really have to correct. I have to put that on the record.
Chair
Nobody is suggesting that.
Austin Mitchell
But you did not allow such hefty compensation clauses to be put into other contracts. We had the evidence from Richard Bacon earlier that they were optional and usually minimal.
Bronwyn Hill
Could I just read out the letter we sent to Norfolk in 2011, since this is obviously of interest?
Austin Mitchell
Why were they so heavy in the case of Norfolk?
Bronwyn Hill
We wrote to them on 6 September 2011—we can provide a copy, we have given copies to the NAO—saying various things: “I understand that the Council is confident that it will achieve a successful planning outcome within a period of time that is consistent with the assumptions made in the project’s “base case””. Whilst this is your view—of achieving it— it “is ultimately something for the Council to take”. To assist their view we attached a very detailed scrutiny note about the risks that we wanted to alert them to; about the risks on planning. It goes on to say, “I also would seek your confirmation”—this is to Norfolk—“that your view on the likelihood of obtaining planning is made in recognition of the costs to the Council were the proposed contract to be terminated. I understand that such costs could amount to £20.3 million in addition to any interest or foreign exchange...” This is us very clearly saying, “This is your choice, you are taking these risks.” We got a letter back saying we are confident that we will achieve the planning timetable. All I am saying is that our view is that we warned them of the risks, but they are a legally separate entity to DEFRA and they chose, as a full council, to enter into this deal with the contractor.
Mr Bacon
This whole approach doesn’t really help Mr and Mrs Taxpayer though, does it? Going back to the Chair’s first question, is this a sensible policy if you can have these sorts of results? The whole point about PFI is, supposedly, to manage the risks and to get things delivered on budget and on time. All that this has ended up with is a train wreck. It is your policy.
Bronwyn Hill
I think the thing that led to the cancellation by Norfolk of its contract was their failure to obtain planning permission, over which DEFRA has no control.
Mr Bacon
No, they don’t have any control, but you did flag up that risk with them in 2010 and then signed the funding agreement two years later. I’m afraid a shrug won’t show on the transcript.
Bronwyn Hill
I can say something else if you wish, but I would only repeat what I have said earlier. We were very clear with Norfolk that this was their decision and they were at risk as a council. I regret that that money has been wasted and we have not got a result for it. They were aware of the very significant local opposition, led by local MPs and others, to that project. They went into this with their eyes open. I am not trying to blame them; they had some difficult choices. They still need to decide what to do with their waste and we would like to help them with that.
Chair
That’s all true, but you withdrew the PFI credits. They didn’t know that you were going to take a different view on what was required nationally in terms of these incinerators. You withdrew £90 million, or whatever it is, from them on the basis of your assessment of national need.
Bronwyn Hill
We did.
Chair
How on earth could they ever be expected to think about that? No local authority can come to that view.
Bronwyn Hill
But after we withdrew it, they nevertheless had a further meeting of the council, or whatever committee, and decided to go ahead. So they must have been confident at that stage that they could still deliver the project, as other local authorities have done, without our PFI credits.
Chair
Had they signed the contract before you withdrew the PFI?
Bronwyn Hill
Yes.
Chair
Yes. They signed the contract; you then withdrew the PFI because you thought we didn’t need it nationally. There is no way that even the most brilliant Norfolk county council could have come to a sensible view on the national need from their local need. You actually lost them money—
Bronwyn Hill
They didn’t need to take a view on national need. They signed a contract that they knew, because we had been writing to them—
Chair
You withdrew the money on the view of national need.
Bronwyn Hill
We said, “If you don’t achieve planning to the timetable you have assured us you will reach, we will review it.” There was a very explicit condition. Despite that review, they nevertheless went ahead.
Chair
We are going round the houses. Don’t be unfair; they did have a planning problem, there is always a planning problem with these issues. They still don’t know whether they have got planning permission on not because that has never been determined by the Secretary of State. You withdrew the PFI—nothing to do with planning—because of your view of the national need. It was nothing to do with the planning.
Bronwyn Hill
It was triggered by their failure to achieve the planning in the date they had set in the contract.
Austin Mitchell
They must be a very smiling, friendly people in Norfolk, judging by Mr Bacon and by the fact that they put up with this rubbish. There is another problem, which Richard Bacon raised, about the residual value of the asset. Was it the Department’s policy that the asset should be retained by the council at the end? The council tell us that the withdrawal of your support left the county council with limited opportunity to pursue the substantial savings that could have been gained had it adopted different contract terms from those that are standard—you made them standard—in PFI contracts, such as opting not to retain the residual value of the asset. Had it not been for you, they could have negotiated a cheaper contract by not retaining the residual value of the asset. You made them. Was that your policy?
Bronwyn Hill
My understanding is that it is an option. They can either retain it or not. Presumably, they came to us with a business case—
Austin Mitchell
But would it have been cheaper not to retain it?
Bronwyn Hill
I don’t know. There is an option for any local authority. I think most of them retain the assets, so, after the 20 to 25 years, the asset reverts to the local authority, presumably because that is what they want it to do. I understand that there is always an option not to have that contractual clause when it is a choice for the local authority. I am not sure why they imply that we made them do it. I can look into it.
Austin Mitchell
Okay. One final point. I’d like to drag us out of lovely Norfolk and go to other parts of the country. Paragraphs 1.14 and 2.27 say that the projects in Herefordshire and Worcestershire have been running for 15 years—you were obviously much more lax with other authorities than you were with poor old Norfolk—without construction of the main asset that you were part funding, so how much taxpayers’ money has been wasted on funding contractors for non-existent assets through contracts that you have authorised?
Bronwyn Hill
No money has been wasted. As I said earlier—
Austin Mitchell
But you continued payments, even though the asset had not been created.
Bronwyn Hill
Presumably, they were delivering the outcomes that they had been contracted to deliver. Hereford and Worcestershire have now decided to deliver that asset in a different way with them becoming the sole lender, and we have reduced our payments by agreement with Hereford and Worcestershire by roughly £30 million over the remaining lifetime of the contract.
Austin Mitchell
Paragraph 1.14 states, “the Department and its predecessors paid each of the planned grant payments in full even though the planned energy-from-waste facility had not been built.” That seems extraordinarily lax.
Bronwyn Hill
It is because of the way the contracts were structured, which I am not trying to defend. I am saying we have improved since then. We have tightened up our scrutiny and the contracts, but our advice was that the contracts required us to do that. The contract was not just for the delivery of an energy-from-waste infrastructure project; I am guessing it was for the delivery of recycling, recovery and other facilities. So they were meeting the outcomes and therefore we had to pay, but, because I was not happy about paying in advance of the asset being delivered, we embarked on negotiations with those authorities to say, “We are not happy with this; contractually we are obliged to pay. Can we come to some sort of renegotiation to change those arrangements so that we get a better alignment?”
Chair
Why did you interfere there, but not in Norfolk?
Bronwyn Hill
They’re very different cases.
Chair
They’re not. I would suggest that you have chosen to distance yourself in Norfolk so that the Norfolk taxpayers pick up the tab of a ridiculous situation, whereas in Surrey you do interfere. It took you a long time. I don’t know how long they have been renegotiating—18 months or something ridiculous. But you do interfere.
Bronwyn Hill
I think the authorities might, to use your words, Chair, say that we had interfered in all those projects. We intervened in all those projects, because there were things that were not going according to plan.
Mr Bacon
On that point, in relation to the project that Mr Mitchell was talking about where you paid £89.5 million because you were contractually obliged to, even though the facility had not been built, paragraph 2.17 states, “The Department does not hold an original business case for the Herefordshire and Worcestershire contract. Herefordshire and Worcestershire told us that they do not believe a business case document was produced.” So you ended up paying the authority £89.5 million to compensate them for this contract that you had agreed you would help pay for, when they did not get an energy-from-waste facility and you did not have a business case. Isn’t that extraordinary?
Bronwyn Hill
Shall I respond to that?
Mr Bacon
Yes, please.
Bronwyn Hill
It is true—
Mr Bacon
I mean, actually, it isn’t extraordinary. You might say it is par for the course, but if you want to answer my question directly—
Bronwyn Hill
It is true that the original business case cannot be found, and we have had a very thorough search of the archives that we inherited from DETR and neither can Hereford and Worcester find them, but we are pretty sure that a business case would have gone to a project approval group, which was known in those days as PRG—project review group—for approval. What we then had, I understand, I am just checking my notes, in August of the same year—so this business case that I do regret; it is not good that we can’t find it—was an outline business case. It went to the project review group in March 1998, but in August that same year Hereford and Worcestershire applied for an increase in PFI credits to support a higher outcome—or something. They produced a briefing note at that time which addressed the issues that we needed to be satisfied on to assure the Department at that time, DETR, that it met our criteria for PFI credits. So we do have that document and we have documents that were, if you like, the agreement between us and Hereford and Worcester that say, this is the credits that we will pay you. I will say that we have learnt our lessons. A, we will look after the paperwork and B, we have changed the way that we do these contracts, so there are much tighter conditions on the local authority about what happens to the money and what triggers penalties or payments.
Mr Bacon
As Norfolk has discovered.
Bronwyn Hill
As Norfolk has discovered.
Mr Bacon
It just seems extraordinary. The spectrum is, from one end you hose money over them, whether they have got the details or not, whether they have got the business case or not, whether they get the facilities or not, and at the other end of the spectrum, you penalise them—even after the contract has been signed and you have agreed the funding agreement. It does seem rather an extreme variation, doesn’t it?
Bronwyn Hill
I think that is a bit of a caricature, if I may say so?
Mr Bacon
A characterisation, I think.
Bronwyn Hill
A characterisation, but I would say we have improved significantly our scrutiny, our support and our challenge to these projects over a long period of time.
Chair
Can I ask why it took you two years to support the renegotiation of the contract that Surrey county council had? Why did that take two years if you are so greatly efficient?
Bronwyn Hill
It’s not about efficiency; I suspect it is because they wanted to have a debate about the renegotiation. If I was sitting in Surrey’s shoes—I am guessing as it wasn’t me—I imagine they would want to hang on to the money.
Chair
One of the things that the Report says is that it sat in your Department for six months.
Dr Church
There was a complaint against the way that Surrey had gone about the procurement which was referred to the European Commission, so we had to wait until that was resolved. There was also some technical information that they needed to give us from their contractor that they could not give us until late in 2012, so they could not finalise what they were putting in front of us until quite late—
Chair
They say it sat in your Department for six months, even accepting those; it sat with you for six months.
Bronwyn Hill
I think we disagree. We can’t do the scrutiny if we have not got the information that we have asked for.
Chair
Did it take you six months to do the scrutiny?
Bronwyn Hill
In that case—
Dr Church
I don’t remember.
Chair
According to the Report, it did.
Bronwyn Hill
No, I think six months was the other authority. This is Hereford and Worcester.
Chair
Somewhere I read, it did. Here we are. Page 19, paragraph 2.20.
Bronwyn Hill
It says—I’m sorry—“The Department’s review of Herefordshire and Worcestershire…for making changes…took approximately six months.”
Chair
I think that is a lot.
Bronwyn Hill
That is how long it took.
Chair
I cannot imagine any private sector organisation taking—when you know you are giving out money for things that you are not getting in the way that we have described. It took you six months to come to a view?
Dr Church
In the case of Hereford and Worcester, this was where they were proposing this novel approach to paying for the energy-from-waste facility. We needed to discuss internally and with Treasury colleagues and others.
Chair
Six months?
Dr Church
Yes.
Chair
I think that is an inordinately long time for when we know that taxpayer’s money was not being spent effectively.
Bronwyn Hill
I think what Colin is trying to say, in case you have missed the point, is that it was a very unusual proposition so it was important that we took appropriate time to scrutinise it. And we were contractually committed to making the payments.
Chair
I’ll just go back to a few other things. I think we have covered most things. It was Denmark and Germany that are buying waste. Are we encouraging anybody to sell their waste rather than to build facilities to get rid of it?
Dr Church
It is one of the options for a local authority.
Chair
Are you encouraging it?
Dr Church
We don’t encourage or discourage.
Chair
You do encourage and discourage. It is simply the use of the PFI. You do encourage and discourage. You have this unit that supports them and you do have advice. Are you encouraging it?
Dr Church
We are not encouraging or discouraging the exports of what is called RDF, waste for use in incinerators.
Chair
If Worcestershire cannot raise the finance for the proposition they have, doesn’t that suggest it is not good value for money for council tax payers?
Bronwyn Hill
Hereford and Worcester went to the Public Works Loan Board.
Chair
They can’t raise the money—
Bronwyn Hill
Oh, privately you mean. I think it was their choice to go to the Public Works Loan Board. I don’t know what their reasons for that were.
Dr Church
My understanding is that because of the short period of time left to repay the loan, they couldn’t get a deal that was affordable for them in that period of time from a private lender.
Chair
Say that again.
Dr Church
There was only seven years left on the contract, or nine—I forget which. A private lender would have required repayment in equal instalments over those nine years and Hereford and Worcester did not want to repay in equal instalments over those nine years.
Chair
Do you think the taxpayer and council tax payer should be happy that it took you 13 years to renegotiate the contract? If I go to appendix 2, let us take the Surrey one or the Worcester one. Let us take the Worcester one. In December 1998—have I got the right one? It is longer than 13 years. I must have been looking at the other one.
Vikki Keilthy
They were both 15 years: Surrey and Hereford and Worcestershire.
Chair
Fifteen years. And for the Surrey one, 13?