RECYCLING WASTE: A PFI CASE STUDY

Paul Coleshill and James Sheffield.

Comhairle,

The Scottish Centre for European public sector studies,

Faculty of Business, University of Paisley.

Abstract.

Local government capital investment has been financed by long term public sector debt. The Private Finance Initiative (PFI) and Public Private Partnerships (PPPs) substitute for borrowing, reducing total public sector borrowing but increase future charges to the revenue account. In this case study, a Scottish Local Authority is `free' to meet the increased standards imposed by EU environmental agencies by borrowing or by PPP. The authority must ensure costly capital improvements are made to land fill and recycling plant. The authority's capital borrowing consent has fallen by one third over the past four years. Approximately 80% of its revenue flows from central government. Ring fenced money (`Level Playing Field' funding) is obtainable to part fund PFI/PPP work. The Local Authority can only meet capital costly waste management standards by diverting 100% of its capital or precommitting revenue payments to a private firm. The evaluation of Best Value or Value For Money is thus constrained. As there is no possibility of a publicly funded alternative, to secure a PFI / PPP deal, private finance must be `shown' to be `cost effective'. This case study illustrates the heroic assumptions made in project appraisal and the tendering process. Assessed risk transfer from public to private sector reduced anticipated cost, but new risks generated by the process itself are left unaccounted for. The specificity of the assets created in this project are high. Theory predicts (and this study demonstrates) that relative to an in house solution, the transaction costs of contract construction are also high.

Keywords Scottish local government: Private finance initiative; public I private partnerships; waste management; option appraisal.