Where the Contractor landfills more processed Contract Waste or unprocessed Contract Waste than the relevant target tonnage, diversion deductions should apply for each tonne of Contract Waste which is sent to landfill in excess of the target. The level of the deductions should be set at a level so as to ensure that the Contractor is sufficiently incentivised to divert Contract Waste rather than send it to landfill and should provide the Authority with compensation for any Landfill Allowance Trading Scheme (LATS) implications (i.e. purchase of LATS allocations, LATS fines or failure to achieve revenues from LATS surpluses).4 Additional MSW disposal costs (e.g. landfill gate fees and landfill tax) will be borne by the Contractor if the Contract Waste has been accepted by the Contractor, so no deduction is required in this respect. Section 2.5 "Non Acceptance Deductions" addresses the situation where the Contractor does not accept the Contract Waste.
There are three main options to determine the level of deduction per tonne for diversion underperformance, as follows:
Option A: | fix the level of deduction at Contract signature for the duration on the Contract based on a reasonable estimate of the anticipated LATS implications in each Contract Year; |
Option B: | calculate the deduction based on the actual LATS costs incurred by the Authority at the time5 subject to a cap per tonne6. See Section 8 of the Defra "Standardisation of waste management PFI contracts: guidance on SoPC4 derogations" (Defra Derogations); or |
Option C: | fix the level of the deduction annually based on an estimate of the LATS implications at the start of each Contract Year. |
Because of the time delay in establishing the actual LATS price (LATS trading positions are only finalised after diversion data is complied after the Contract Year End), the difficulty in attributing which aspect of the waste management service (e.g. waste growth or recycling) led to the failure, the potential volatility in LATS prices especially around Target Years and the fact that the allocations under the trading scheme are only known up to 2020, it is recommended that Authorities follow option A.
Where the Authority follows Option A, it should be aware of the potential discrepancy that may arise between the actual market value of LATS and the deductions as circumstances may vary at the time of the performance failure. For example, LATS allowance trading prices or fines could potentially range from £0 to £150 per tonne. Furthermore, there is likely to be a timing difference between the performance failure and the financial implications of LATS.
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4 To the extent that the tonnage landfilled is bottom ash, there will be no LATS implications as the BMW content is zero.
5 Authorities should be aware that Option B creates a financial interest for the Contractor in the Authority's trading of LATS. As a result bidders may seek to have a degree of control over the trading activities of the Authority. Option B is therefore not recommended.
6 The Contract should not include any overall cap on the Diversion Performance Deduction.