Inquiry finds Defra handled PFI funding 'poorly'

An inquiry into the Department for Environment, Food and Rural Affairs’ (Defra) handling of three private finance initiative (PFI) waste projects has found that the government department ‘failed to exercise good judgement’.

The findings were published in the 'The Department for Environment, Food and Rural Affairs: oversight of three PFI waste projects' report, released by the House of Commons Committee of Public Accounts today (17 September), which focused on Defra’s support of two PFI waste projects run by Norfolk County Council, Surrey County Council and a joint project managed by Herefordshire Council and Worcestershire County Council. (However, several local authorities, including Norfolk County Council, had their funding withdrawn, after Defra found that it was on track to meet the EU’s 2020 landfill diversion targets.)

At the beginning of the report, the committee states: ‘PFI contracts typically last for 25-30 years and this does not offer the necessary flexibility to respond to rapidly changing technology and changing policy requirements for waste disposal. Furthermore, the department has been unacceptably slow to intervene in projects that are struggling to deliver the required waste management infrastructure leading to delays and incurring extra costs.’

It added: ‘Defra’s handling of the Norfolk PFI waste project has been particularly poor with Defra failing to exercise good judgement by agreeing to give funding to the project then failing to give sufficient consideration to the local impact of its decision to withdraw funding to that project. This contributed to the contract being cancelled, which has left Norfolk taxpayers facing a bill of around £33.7 million.’

However, Defra told the inquiry that ‘despite higher recycling rates and new waste-management technologies, it still thought that it was right to provide long-term funding for waste incineration plants’. (It has overseen the allocation £1.7 billion of PFI credits to 28 local authorities under the Waste Infrastructure Delivery Programme, and to several others that predate the programme.)

Artist's impression of the now-abandoned incinerator in Kings Lynn, Norfolk

Findings and recommendations

The inquiry’s other findings include:

  • Defra’s support of PFI to build waste management infrastructure may result in long-term contracts that are too inflexible for a sector where technology is continually evolving and the amount of waste produced can be hard to predict;
  • Funding agreements for the early PFI waste deals were 'poorly drafted' and 'too lax', as they require payments to be made even though some of the key assets planned have not been built;
  • Defra waited ‘far too long’ before renegotiating its funding agreements with Surrey, Herefordshire and Worcestershire councils. Since taking over responsibility for overseeing the PFI grants, the department continued to allow payments to be made even though key infrastructures had not been built;
  • Defra supported the Norfolk scheme despite strong reservations about the council’s timetable for securing planning permission. Although the department warned Norfolk County Council that its timetable was too ambitious, the department still agreed in February 2012 to provide £91 million of PFI credits to part-fund the project. By later withdrawing support, it contributed to the decision to subsequently terminate the contract, which has left local taxpayers facing an estimated £33.7 million bill for compensation to the contractor; and
  • Defra made decisions focused entirely on the need to meet the EU targets ‘without due regard to the impact of its decisions on local authorities’.

The report also made several recommendations for Defra, including:

  • Defra should consider including other forms of support to help local authorities to manage their waste;
  • it should act with far greater urgency when it has concerns about a project’s progress;
  • it should not agree to fund schemes until all its concerns have been resolved;
  • Defra should make better use of its position and expertise to support local authorities in negotiating PFI contracts and achieve value for money for local taxpayers; and
  • it should place more weight in its decision-making on the cost to the public when it considers withdrawing its support to individual projects, and balance the need to meet the EU targets at minimum cost with making sure its decisions serve taxpayers interests as a whole.

“It’s scandalous”

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, said: “It’s scandalous that taxpayers in Norfolk have been left in the lurch.

“The department judged that the Norfolk plant was no longer needed to meet the 2020 EU landfill target, and yet it was fully aware of the likely compensation costs that would be incurred when it decided to withdraw funding.”

She added: “The department has more work to do to improve local authorities’ contracting capability, especially for PFI projects, and ensure that they only pay for what is delivered in future without getting locked into long, inflexible contracts.”

Responding to the report, a Defra spokesperson said: “Defra’s responsibility is to ensure public money is used appropriately, and we were very clear in the advice we provided to these PFI projects, as the NAO has previously recognised.

“Due to factors at local level, these projects could not proceed as planned.”

Read the full report here or find out more about Defra’s withdrawal of funding from Norfolk incinerator