Agenda Item No.
3

HERTFORDSHIRE COUNTY COUNCIL

WASTE MANAGEMENT CABINET PANEL

Thursday 28 April 2011 10.00 AM

HERTFORDSHIRE WASTE PROCUREMENT PROGRAMME

Report of the Director Environment & Commercial Services

Author:Bryony Rothwell, Programme Manager

(Tel: 01992 588350)

Executive Member: Derrick Ashley Environment, Planning and Waste

Local Members: Stuart Pile (Hatfield South), Aislinn Lee (St Stephen’s) and Caroline Clapper (Watling)

  1. Purpose of report

1.1To provide the Panel with an update on progress with the Hertfordshire Waste Procurement Programme and details of the analysis of final tenders submitted by E.ON Energy from Waste AG and Veolia ES Aurora Limited.

1.2To provide information to support the recommendation to proceed to consider the appointment of a preferred bidder for the project and the process to award the PFI contract.

  1. Summary

2.1The Panel has previously received reports detailing progress with the Hertfordshire Waste Procurement Programme to secure a long term solution for Hertfordshire’s municipal waste treatment and disposal needs. This report summarises the process, the key aspects of the two final tenders received, the evaluation, the timetable for completion of the procurement programme and the process to be undertaken before the PFI contract is finalised to provide a deliverable and affordable solution.

2.2The programme has taken over 3 years since inception and has involved a rigorous and robust procurement process to satisfy the county council’s requirements and those of Defra and HM Treasury, in order to qualify for the PFI credits. There has been a substantial commitment from the county council with dedicated internal resources and commissioned specialists.

2.3This report is supported by more detailed information which is exempt under Part 1 of Schedule 12A to Local Government Act 1972 (as amended).

  1. Recommendations

3.1The Panel is asked to recommend to Cabinet that, having considered the matters set out in this report and the issues that have been raised during the Programme, Cabinet proceeds to appoint the Preferred Bidder for the Hertfordshire Waste Procurement Programme as set out in the Part 2 papers and, subject to the matters mentioned in the Part 2 papers, authorises the award of the contract to the Preferred Bidder.

  1. Background

4.1The Hertfordshire Waste Procurement Programme (HWPP) was initiated to assist the statutory duty of Hertfordshire County Council, as Waste Disposal Authority (WDA), to provide disposal facilities for all of the residual municipal waste collected by the county and district councils. Like other WDAs, Hertfordshire is facing decreasing landfill capacity, increasing costs for example from landfill tax and the legal responsibility through the Landfill Allowances + Trading Scheme (LATS) to reduce the amount of biodegradable waste landfilled.

4.2The process has its roots in the Joint Municipal Waste Management Strategy 2007 (JMWMS07) agreed by the Hertfordshire Waste Partnership (the ten district and borough councils and the county council) in November 2007. The JMWMS07 was prepared after a countywide public consultation exercise which received over 11,000 responses. The key findings arising from this consultation were:

  • 70% of respondents supported a target of recycling at least 50% of household waste by 2012.
  • 95% thought it was important to consider the environmental impacts of any waste disposal facility.
  • 95% said it was important to consider turning waste into energy.
  • 90% thought it was important to consider the cost effectiveness of any new facilities.
  • 86% thought the county council should seek to minimise the transportation to any facility.

As a result JMWMS07 concluded that there was a requirement for interim arrangements to meet the LATS targets set for 2013 and 2020 whilst a longer-term solution was put in place.

4.3These factors were incorporated in the Outline Business Case to Defra for PFI Credits and further into the subsequent procurement documents. The approach sought a solution to deal with all municipal residual waste rather than just the biodegradable portion as the continued increases in Landfill Tax alone, which will rise to £80 per tonne in 2014/15, represents a budgetary pressure of £2.4m p.a. for the county council.

5.The procurement process: Outline Business Case to Detailed Solutions

5.1Following the public consultation and the publication of the JMWMS07, the county council established the HWPP to seek a long term solution to meet residual waste treatment and disposal needs.

5.2Outline Business Case. In order to achieve a suitable financing solution, the county council made an application for Waste PFI Credits through the submission of an Outline Business Case (OBC) to Defra in October 2008. The OBC detailed the work carried out to prepare a potentially deliverable Reference Case which consisted of treating Hertfordshire’s residual municipal waste at an Energy from Waste (EfW) plus Combined Heat and Power (CHP) facility. The OBC confirmed that a facility could be operational from 2014/15 for a period of 25 years. The Reference Site location for the facility was given as the county council owned site at New Barnfield, South Hatfield. The OBC and the supporting documentation provided the baseline for the evaluation of tenders although the county council remained strictly technology and site neutral throughout the process and remained open to the offer of alternative waste treatment technologies and sites both within and outside the county. Further discussions with Defra resulted in a revised OBC being approved by the Cabinet on 19 January 2009. At the same Cabinet meeting it was acknowledged that the potential use of New Barnfield required a programme of projects to address the range of impacts that this would have. Papers were thus presented regarding the relocation of services from New Barnfield and requesting Cabinet approval to release the site from its then current function.

5.3The OBC received Ministerial approval on 12 February 2009 and was forwarded to HM Treasury’s Project Review Group (PRG) for consideration. The application for £115.3 million of Waste PFI Credits was provisionally approved on 9 April 2009 with a condition that the county council had two years to complete the procurement process.

5.4For the purpose of compliance with the Waste Infrastructure Development Programme (WIDP), when considering the OBC the Cabinet was required to approve the range between the cost of delivering the contract compared to the current projected service budget, this being described as the Affordability Gap. In addition, in order to understand the impact of risks on the cost of delivering the contract, the Affordability Gap was based on two scenarios, the first recognising the delivery of the contract in accordance with the planned timetable etc, the second calculation, based on certain risks being realised, such as increased capital costs, and planning delays. This latter, higher cost of delivering the project (than the current projected budget) provides an upper limit to the range of the Affordability Gap.In October 2008, an overall affordability gap of £144.2m was identified. Members were also made aware of an overall affordability range of £144.2m up to £338.5m. Following further developments entailing reviews to the financial model and assumptions relating to the project timetable the Cabinet agreed in January 2009 that the Director of Finance, Information and Commercial Services issued on 27 January 2009 the Section 151 letter indicating that the county council was committed to meet a best case affordability gap of £176.7m over the life of the contract. The county council also acknowledged that a worst case scenario indicated an affordability gap of £375m.

5.5Procurement Process. The county council placed a Contract Notice in the Official Journal of the European Union (OJEU)on 9 April 2009. The OJEU notice stated that "Hertfordshire County Council, a Waste Disposal Authority for the purpose of the UK Environmental Protection Act 1990 is seeking to enter into a long term PFI/PPP contract with a single contractor (or consortium) for the design, build, finance and operation of, or capacity at, a residual waste treatment and disposal facility or facilities". It also stated that "the Residual Waste Project will be procured using Competitive Dialogue procedure in accordance with Regulation 18 of the 2006 Regulations". It was at this early stage of the process that the procurement needed to make clear the exact methodology for evaluation, with defined criteria, in order that Bidders were fully aware of the basis upon which they would be assessed as they developed their solutions.

5.6Thirteen pre-qualification questionnaires (PQQs) expressions of interest were submitted to the county council in response to the OJEU by the deadline of 15 May 2009. The thirteen are set out in the table below.

Applicant
Waste Recycling Group Limited
Biffa Waste Services Limited
Covanta Energy Limited
Veolia ES Aurora Limited
Ethos Recycling Limited / Murphy Group consortium
SITA UK Limited
E.ON Energy from Waste AG (EEW)
Shanks PFI Investments Limited / Wheelabrator Technologies Inc consortium
Urbaser S.A
John Laing Investments Limited / United Utilities Waste Management Ltd / Keppel Seghers Belgium nv consortium
Kier Construction Limited
VT Group plc
MVV Umwelt GmbH

5.7The submitted PQQs were assessed against published criteria in accordance with the requirements of the Public Contracts Regulations 2006 as below:

  • Criteria for the rejection of economic operators (Regulation 23)
  • Economic and financial standing (Regulation 18(10)(b)(i) and Regulation 24); and
  • Technical or professional ability (Regulation 18(10)(b)(ii) and Regulation 25); and

The result was a recommendation approved by the Cabinet on 6 June 2009 that the top scoring 6 companies and consortia be Invited to Participate in Dialogue (ITPD). These companies were:-

  • Covanta Energy Limited
  • E.ON Energy from Waste AG (EEW)
  • MVV Umwelt GmbH
  • Shanks PFI Investments Ltd / Wheelabrator Technologies Inc consortium
  • SITA UK Limited
  • Veolia ES Aurora Limited

5.8In order to ensure that there was both a competitive environment and issues of key importance to the county council could be considered at an early stage, the procurement documents created by the county council invited the companies to submit Outline Solutions (ISOS), with submissions received on 2 October 2009.

The Outline Solutions addressed the following issues:-

Sites and Planning. The county council owned site at New Barnfield, South Hatfield was made available to the market. However, its use wasnot mandatory and Bidders could promote different sites. In response to questions on sites and planning, Bidders needed to demonstrate the deliverability of site(s) and how they would mitigate planning risk in the context of the county council’s extant and emerging waste policies.

Funding Routes. Due to the changes in financial markets, the county council had to be certain that Bidders were able to fully-fund any solution. The county council wished to receive proposals from Bidders on how they would deliver a fully funded solution.

Technology and Contract Waste. The procurement documentation stated the county council was technology neutral and willing to entertain any proven technology capable of meeting its requirements as set out in the draft Output Specification. In addition to exploring different technology solutions, the county council wished to consider any proposals for the treatment of the whole of the residual municipal waste stream including the 75,000 tonnes per annum ofwaste identified in the OBC as "potentially untreatable" residual waste. In terms of the contract waste of 345,000 tonnes p.a. in 2039/40, the county council explored with Bidders how much waste could be diverted from landfill and what guarantees could be offered, the amount that could not be treated by the proposed solution (and therefore needed to be landfilled or treated off-site) and any opportunities for recycling. All Bidders at ISOS proposed EfW as the technology they thought was the best solution for the county council.

Spare Capacity and Third Party Waste. The county council recognised that, in addition to the forecast contract waste, there was a substantial quantity of commercial waste arising in Hertfordshire. The county council wished to explore with Bidders any operational and/or financial advantages of treating and disposing of third party waste at the facility but, in considering third party waste, there would be caveats to ensure that county council's contract waste took priority and acceptance of third party waste offered value for money. In addition, the proposed solution should not be reliant on third party waste for its successful operation either from anoperational or financial perspective.

Delivery Vehicle. The county council wanted to ensure that the proposed Special Purpose Vehicle (SPV) was a robust and cohesive entity and, where Bidders were proposing a consortia and/or Significant Sub-Contractors, how it would ensure that the parties remaincommitted throughout the process.

Combined Heat + Power (CHP) benefits. The benefit of the recovery and utilisation of energy in the form of electricity or heat was recognisedin the procurement documents, therefore Bidders were encouraged to propose innovative adoption of CHP within theirSolution(s) to maximise energy recovery.

Environmental and Social Sustainability (ESS). The county council wished to ensure that any solution provided tangible benefits to Hertfordshire in terms of its whole life environmental impact, its contribution to the better use of energy, the provision of employment, particularly in the local area, the management of traffic and engagement with local people to raise awareness through the Hertfordshire WasteAware campaign of the impact of their waste.

5.9The Outline Solution evaluation process applied the agreed evaluation criteria and methodology. The Waste Management Panel considered the result of the evaluation at a meeting on 18 November 2009. The agreed short-list recommended and adopted by Cabinet were the following top 4 scoring companies and consortia (in alphabetical order):

  • E.ON Energy from Waste AG (EEW)
  • MVV Umwelt GmbH
  • Shanks PFI Investments Ltd / Wheelabrator Technologies
  • Veolia ES Aurora Limited

After the Cabinet decision the four Bidders were Invited to Submit Detailed Solutions by April 2010.

5.10To ensure a robust and transparent process in accordance with the Public Contracts Regulations 2006, the Invitation to Submit Detailed Solutions (ISDS)documentation, was very clear and explicit and the requirements for Bidder responses were structured to reflect the agreed evaluation criteria and were therefore sub-divided into the following categories:

Legal. A key requirement was for the Bidders to respond to the draft Project Agreement, which is based on the Waste Infrastructure Delivery Programme (WIDP) Residual Waste Treatment Contract. This document required the Bidders to identify their commercial positions including risk transfer back to the county council over the full elements of what will become the contract. The county council also considered the extent of the proposed changes from WIDP’s standard form contract as any such changes may involve a risk transfer to the county council and would need approval from Defra and HM Treasury to ensure continued PFI support

Technical. The operational requirements were described in the Output Specification, which included a Performance Management Framework that is reflected in the Payment Mechanism. Bidders were required to propose their detailed technical responses to these requirements in the form of developed designs and method statements.

Financial. A central part of this requirement was the completion of the payment mechanism that set out in detail how the annual charge to the county council is created through a set of components including payments for non-performance, income and associated profit sharing mechanisms. The financial requirements also required Bidders to confirm their funding proposals and their “Base Case” assumptions for pricing and income share with the county council on the basis of projected electricity sales and income from third party sources (including sale of recyclate and spare capacity).

Environmental and Social Sustainability. The county council sought to encourage Bidders during the pre-submission meetings to consider in particular the local benefits of heat exploitation.

5.11Evaluation of ISDS bids was undertaken by the programme team officers supported by their external advisors. The agreed evaluation methodology for ISDS stage was applied to arrive at scores for the four Detailed Solutions received. This evaluation was considered by the review team, which comprised of senior officers meeting on 24 June 2010. The review team recommendation was further considered by the ratification team (which comprises of the Director of Environment and Commercial Services, the Assistant Director of Environment & Commercial Service responsible for the project and the Programme Director) on 28 June 2010. The recommended list of Bidders was approved by Cabinet on 19 July 2010 and an Invitation to Participate in further Dialogue was issued to the top 2 scoring Bidders:-

  • E.ON Energy from Waste AG (EEW) proposing Harper Lane, Nr Radlett
  • Veolia ES Aurora Limited– proposing New Barnfield, South Hatfield

6.The procurement process to Final Tender

6.1A range of issues was identified from the detailed solutions submitted by the Bidders that needed to be addressed during further Competitive Dialogue. These issues included:-

  • Ensuring that there is a deliverable town planning strategy.
  • Ensuring that adequate mitigation measures were in place and the county council had sufficient contractual remedies if the planned operational commencement date is delayed.
  • Ensuring that the operational arrangements of the plant, such as waste delivery and weighing arrangements are practical, that the traffic management arrangements around the site and the tipping hall are adequate, that the bunker is sized appropriately to deal with any down time due to maintenance, that there are alternative arrangements,other than landfill, to treat the Contract Waste in the event of longer site closures, and that the treatment of Bottom Ash and Flue Gas Treatment residues is effective. By its very nature, an Energy from Waste plant is a complex facility and it is, therefore, important to fully address the operational details before the close of Competitive Dialogue.
  • A wide range of financial issues with regard to construction of the unitary charge to be levied on the county council. A particular issue is the amount of guaranteed income from energy production and the treatment of third party waste together with the mechanisms for income sharing above the guarantee and the issue of index linking of the price structure.
  • Bidders proposed commercial positions and how these align with the WIDP Residual Waste Treatment Contract (latest version published December 2010) (see 6.2 below).

6.2In order to secure revenue grant support, Private Finance Initiative (PFI) contracts must comply with standard principles and drafting in HM Treasury’s guidance known as the “Standardisation of PFI Contracts” Version 4 (SoPC4). Further, such contracts must also comply with guidance set out by the relevant sponsoring department. In the case of waste PFI, the sponsoring department is Defra which has published its own model contact complying with HM Treasury guidance and containing approved derogations specific to the waste sector(WIDP Residual Waste Treatment Contract (latest version published December 2010)(see Appendix B). This contract was the discussed in Competitive Dialogue and save for solution specific changes was largely adopted by both Bidders. It provides an appropriate balance of risk between the parties and is a generally accepted position in current waste procurements.