Agenda item

The Committee considered the unmitigated and mitigated risks of the EfW project as set out in the Risk Register.

The Chief Financial Officer introduced the report and indicated that there were six key risks associated with the project. None of the residual risk scores had been identified as being red following mitigation measures.

The Committee considered each risk separately and in the ensuing debate, the following principal points were raised:

a) Default of loan repayments by borrower to lenders due to SPV (Mercia) or HZI falling into administration.

·         The Chief Financial Officer explained that the maximum exposure of this risk to the Council was £6m. For this risk to become an eventuality, all seven companies involved in the project would need to go out of business. To mitigate that risk, the Council maintained a reserve of £12m. The risk to the Council would relate to the need to procure someone to replace Mercia Waste Management. He would maintain a watching brief on behalf of the Council over the financial affairs of all the companies involved in the project

·         Was the Chief Financial Officer satisfied with the assurances being provided for the £600m refinancing of HZI? The Chief Financial Officer had raised the matter with representatives of the company and received assurances that its balance sheet had been strengthened by cash moved into the company as a result of its reorganisation

·         On what basis was it determined that the maximum exposure of this risk to the Council be limited to £6m? The Chief Financial Officer explained that a range of financial security packages had been introduced at each stage of the supply chain e.g. insurances, bonds. Should each of the security packages need to be activated, then the maximum risk exposure to the Council would be £6m

·         If the maximum exposure to the Council of the risk was £6m, why had the Council set aside a reserve of £12m? The Chief Financial Officer advised that the amount had been agreed by Cabinet and Council as a prudent approach to handling the risk

·         The Chief Financial Officer undertook to inform members of the full name of the Spanish company providing the Parent Company Guarantee.

b) Construction completion date of EFW is delayed and delays repayment of loan to lenders.

·         The Chief Financial Officer explained that any delay in the construction of the plant and consequently the planned takeover of the plant by the County Council would not impact on the loan being repaid by Mercia Waste Management. Mercia Waste Management had taken out insurance policies to mitigate the risks

·         In response to a query about the risks borne by Mercia Waste Management, the Chief Financial Officer stated the liquidated damages were to pay back the loan in the first instance. The first money at risk would be Mercia Waste Management's return on the £30m and the 30m itself

·         What was meant by the reference in the mitigated action to a "long stop date"? The Chief Financial Officer explained that this was the date that the Council could forcibly stop the contract with Mercia Waste Management which would be 18 months after the construction date. At that stage the Council would be permitted to re-negotiate the contract.

c) PWLB borrowing rates increase more than estimated in the Councils' prudential borrowing model. Higher rates would reduce the surplus generated on the loan arrangements with Mercia.

·         The Chief Financial Officer stated that the Council's borrowing rates were set by the PWLB. The risk would be Gilt interest rates rose more than estimated in the Councils' prudential borrowing model above the rate set by the PWLB and thereby increased the cost of borrowing. Consideration had been given to purchasing a financial product to protect the Council against such a risk. However the product cost £20m and it was decided that the Council should instead maintain its own reserve. In addition interest rates had remained low and at present, the Council was saving more money than originally calculated.

d) Loan drawdowns are slower than set out in the STFLA. Delayed drawdowns would result in reduced interest payments to the Councils and potentially reduced surplus if PWLB loan rates increase between the expected draw date and actual.

·         The Chief Financial Officer explained that due to the slow start to the build programme, only £20m of funds had been drawn-down by Mercia Waste Management which was less than expected at this stage. At present, this was being offset by the PWLB loan rates remaining lower than estimated in the Councils' prudential borrowing model and also although the Council would receive reduced interest receipts, less interest would also be paid to the PWLB. The Council had built in prudent planning for any issues of this nature that might arise.

e) Drawdown requests from Mercia are not actioned by the Councils or not actioned within the required contracted time period.

·         The Chief Financial Officer indicated that the Council had 8 working days in which to action draw-down requests from Mercia Waste Management. The Council's Treasury Management team were aware of the actions to fulfil the requests and all requests to date had been handled within 5 working days

·         Did the Council have to finance loans through the PWLB or could it use its internal reserves? The Chief Financial Officer advised that the Council could be flexible with its approach. The Council had the option to draw from its monthly balance of £60-90m should it wish to. It was also possible to draw funding from the PWLB at short notice however approval of transactions of this nature required his signature. It was considered that the risk associated with this approach was low as if he was absent, his deputy had authority to sign the document.

f) Mercia loan principal and / or interest repayments are below the required values as per the rates agreed in the STFLA .

·         The Chief Financial Officer explained that the Council's Treasury Team maintained a record of the draw-downs and expected future principal and interest payments. This record was then reconciled with Mercia Waste Management's record.  There was a low risk that these records would be misaligned.

RESOLVED that:

a)    the unmitigated and mitigated risks set out in the Risk Register be noted; and

b)    a report on the Risk Register be brought to each Committee meeting.