Agenda item

The Committee received a presentation by the Chief Financial Officer which clarified the financial relationship with Mercia Waste Management Limited, the relationship of this Committee with Council, Cabinet and officers, features of the loan facility to Mercia Waste Management Ltd, the retained advisors to support the Committee and officers, waivers and consents, and provided a reminder of what the loan facility is for.

It was proposed that members of the Committee visited the site of the proposed Energy from Waste plant in Hartlebury.

The Chief Financial Officer made the following points in his presentation:

·         The Committee's role was to consider how non material issues had been discharged between meetings by the Chief Financial Officer and to consider for escalation to Council any critical issues such as potential defaulting of the loan arrangements. This was a matter that could not be delegated to officers given its consequence and implications for the Council in its Waste Disposal Authority role

·         Complete separation of roles was required in relation to the Senior Term Loan Facility (STLFA) between this Committee and the Cabinet's responsibilities as the Waste Disposal Authority. Members should be aware of this element of separation when considering matters of confidentiality at this Committee

·         The day-to-day management of the STLFA including waivers and consents was delegated to the Section 151 Officer. However he would consult the Chairman and Vice-Chairman of the Committee before taking action in relation to any consents and waivers that were significant in nature

·         The loan arrangements had to be at a commercial rate because the Council could not be seen to be providing Mercia with a commercial advantage. If Mercia were unable to pay back the loan then it was necessary for them to have access to other means of payment

·         Quarterly construction period cash flow tests would be undertaken to ensure that Mercia were turning over enough money to cover their equity for the project. If there were concerns about the company's turnover then controls could be put in place to secure the loan arrangements that were set out within the STLFA

·         Cover ratios had to be maintained by Mercia to ensure that they had enough money in reserve to cover future payments. If there were any concerns about the Cover Ratio, then controls would be introduced to secure the loan arrangements

·         Fichtner Consulting Engineers Limited had been appointed as the technical advisors to the project. There were two parts of this company, one of which was advising Mercia. The Council had received guarantees from the company regarding confidentiality and 'chinese walls'

·         Ashurst had been appointed as the legal advisors to the project and had lowered their fees to government rates to ensure that their bid to undertake the work demonstrated good value

·         Subject to the agreement of Cabinet, it was intended to appoint Deloitte as the financial advisor to the contract

·         All costs associated with the work of the advisors was recharged to Mercia and any additional costs would also be borne by Mercia

·         The repayment of the loan was the responsibility of Mercia over the 10 year loan period. There was a risk that when the facility was handed over to the Council it would not be worth the payment of £128m. There was a very strict handover regime and regular tests would be undertaken to envisage the value of the plant to be handed over at the end of the contract. These tests would be escalated nearer the end of the loan period. Mercia could be penalised by withdrawal of funding if the Council was not satisfied with the handover arrangements. (This was a Waste Disposal Authority responsibility/risk rather than loan)In addition, when the Council takes over the operation of the facility in 2023, the Council would be in the position to offer capacity to other users. With the change in attitudes to waste recycling following the recession, it was important to have a facility to deal with anticipated residual waste and this was set out in the December 2013 Cabinet Report

·         The intention was that on 31 December by 2023, the plant would be handed over to the councils.  The STLFA contained a mechanism that could be used to negate the obligation for Mercia to repay the outstanding loan facility and in return for the Council to review the asset for nil consideration to avoid the need to borrow £0.25 billion on one business day

·         There was a 31 day cycle to cater for the request from the Mercia's EPC contractor for payment until the money being made available for payment by Mercia to the Contractor (after drawing down on the STLFA) to minimise any working capital costs in the Mercia supply chain.

In the ensuing debate, the following principal points were raised:

·         What was the role of Herefordshire Council in any consideration over a potential default in repayment of the loan? The Chief Financial Officer advised that both councils would need to work closely with each other and arrive at the same conclusion before any decision could be made in relation to a default situation

·         How would the Council gain a surplus from the loan arrangements? The Chief Financial Officer explained that the Council would be lending at a higher rate than it borrowed. When the original PFI arrangements were agreed for the contract in 1998, the Council took up a significant proportion of the risk associated with the project and therefore the Council was already taking much of the risk that a bank now took on PFI projects as funder. This was explained in full within the January 2014 Council report

·         How close was the Council to its prudential borrowing limit as a result of these arrangements? The Chief Financial Officer stated that the Council had a prudential borrowing limit of around £450m.  Within this the Council had obtained internal borrowing of £200m. Therefore significant headroom remained within the Credit Ceiling/Borrowing Limit. The January Council had extended the credit ceiling by the value of the loan value – by around £125 million

·         Was the anticipated completion date of February 2017 the trigger date for the repayment of the loan? The Chief Financial Officer advised that this date related to the completion of the construction with the plant up and running. There were a limited number of situations that could lead to an extension of this date but Mercia would need to prove that such an event could be classed as a 'relief event'

·         What impact would a fire at the plant site have on the loan arrangements? The Chief Financial Officer commented that events of this nature were insured by Mercia and Mercia remain committed under the STLFA to meet the loan repayments as planned

·         Were the arrangements for the loan unique? The Chief Financial officer explained that the arrangements were not unique but it was the first time that they had been introduced in the context of a waste PFI contract

·         In response to a query, the Chief Financial Officer explained that it was important that the Council made arrangements to handle its waste within the county.  At present it was difficult to arrange contracts with external providers. The Council was only able to arrange short term contracts at present for example with Coventry City Council for the disposal of residual waste 

·         Were there any issues that had an impact on the loan arrangements arising from the original plans to locate the facility at the British Sugar plant site in Kidderminster? The Chief Financial Officer commented that planning permission for this site had been refused and as a result the Council was required to take more waste to landfill. The government had already funded the project under a PFI agreement and this money had therefore been used to pay for alternative disposal arrangements in the absence of this infrastructure. This was fully explained in the December 2013 Cabinet Report

·         A visit by members of the Committee to the location of the EfW plant was welcomed. If possible, members would wish to see a video of how the plant would operate. 

RESOLVED that:

a)    The content of the presentation by the Chief Financial Officer be noted; and

b)    Arrangements be made for members of the Committee to visit the proposed site.