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Finance

Background

Three financial instruments have been introduced in the UK to reduce the volume of waste disposed to landfill and to fund the development of alternative treatment infrastructure: the Landfill Tax Escalator, the Landfill Allowance Trading Scheme, and the Private Finance Initiative.

The Landfill Tax Escalator was originally introduced in 1999 and now stands at £8 per tonne per year. The escalator is due to continue to 2014 – and beyond as a floor – when the standard rate of Landfill Tax will be £80 per tonne. At current rates of Landfill Tax, alternative treatment technologies start to become economically competitive with landfill disposal. Hand-in-hand with the Landfill Allowance Trading Scheme (which sets a cap on the amount of biodegradable municipal waste a local authority is permitted to send to landfill each year) these mechanisms have driven landfill diversion since 2000.

Government has also encouraged the development of alternative waste treatment infrastructure through the Private Finance Initiative scheme. Waste Private Finance Initiative projects differ from those in other sectors in that the capital value of the contract is outweighed by the value of the ongoing service during the life of the contract. Waste projects are also process-based and have an added element of technology risk which is not present in other Private Finance Initiative sectors, such as schools or hospitals.

The Issues

It has been estimated that the UK must invest between £10 billion and £20 billion by 2020 to build the treatment facilities required to handle the waste diverted from landfill during that time. Funders need to be able to build financial models based on stable long-term assumptions. Greater uncertainty surrounding those assumptions will lead to an increase in the risk weighted return. This adds to the cost of providing those facilities and reduces public sector value for money.

The UK's tax regime is notoriously complicated. It does however provide the opportunity to incentivise sustainable waste management technologies and processes by using enhanced capital allowances to encourage investment in sustainable alternatives to landfill.

Procurement of waste Private Finance Initiative contracts is extremely complex and requires significant resources, both in time and money, for the public and private sectors. The introduction of competitive dialogue has increased procurement costs for bidders by requiring more detailed information at an earlier stage of the process and this places an increased strain on contractors' ability to bid for multiple contracts simultaneously. Procuring authorities should be granted more flexibility within the Private Finance Initiative system so that they are able to choose an appropriate level of risk transfer to the private sector which best suits their local needs and ensures public sector value for money.

ESA Policy Recommendations

  1. A stable financial framework that reduces uncertainty is an important cornerstone for increased investment in infrastructure. Government should consider using the enhanced capital allowance regime to provide targeted support for sustainable waste treatment technologies.

  2. Government should re-examine the procurement process for waste projects to reduce time and costs, both for bidding contractors and local authorities, to speed up the delivery of new infrastructure.

  3. If future investments are to be encouraged, it is vital that previous investments are not undermined. Government should fully embed the 'grandfathering' principle into all incentive schemes, as was recently approved for support under the Renewables Obligation.

  4. Attempts by governments to pick winning technologies and solutions have often ended in failure. Government must ensure a level playing field for financial instruments available for different technologies in achieving a particular outcome and let the market decide the most efficient response.
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