Private Finance Initiatives
A PricewaterhouseCoopers case study

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Page 5: The contract and the risks

Pricewaterhousecoopers 4 Image 7A PFI in waste management allowed Hereford and Worcester local authorities the opportunity to integrate the various waste management systems into one contract, and gain access to capital investment and PFI government credits. The cost of the services was negotiated according to the level of services gained (amount of waste disposed) and included environmental targets for recycling with financial incentives if these were achieved.

Hereford and Worcester were also the first local authorities to consider a PFI in fully-integrated waste management and the process involved a highly complex series of contractual obligations for the public and private sector. This unprecedented action met with some concerns - there were no previous examples to follow and procurement processes are a costly exercise. This PFI also tied the authority into a long-term contract of 25 years during which time environmental laws may change.

An integrated waste management contract was agreed for 25 years, with key recycling and recovery targets set. A minimum number of household waste tips for public access and a minimum number of treatment facilities (landfill, ‘waste to energy’ plants, recycling stations) were agreed and ‘risks’ identified and retained or transferred to the private sector.

Pricewaterhousecoopers 4 Diagram 2Risks are assessed and agreed for every PFI. The contractor manages the project and carries the responsibility if these risks materialise. It is important to agree these risks before the final contract is negotiated. In this case, the contractor’s responsibility for risks included:

  • Facility design and construction by agreed deadline
  • Quality of service provided
  • Contamination of the environment
  • Increase in waste tonnage above estimate and ability to handle demand
  • Achievement of recycling/recovery targets
  • Increase in landfill tax
  • Change in interest rates.

PricewaterhouseCoopers | Private Finance Initiatives