The Third Party Income sharing mechanism should be structured to allow the Authority to share in net revenues from specific process outputs where the revenue exceeds an agreed pre-defined threshold. This can be done on an individual process output basis or a combined position (i.e. recovering recyclates, electricity and heat related sales and processing Third Party Waste).14 The revenue shared should be net of additional marginal costs incurred by the Contractor in generating the additional income. There should be no downside risk to the Authority.
Given that the Third Party Income in the base case financial model will not be subject to sharing there will be an incentive for bidders to make optimistic assumptions regarding such income, offset by pessimistic assumptions regarding unrelated costs. Authorities should be mindful of over optimistic assumptions in the base case relating to Third Party Income (see Section 4.2 of the Defra Derogations).
It is recommended that, in addition to the Third Party Income sharing mechanisms, it is appropriate to include a super profits clause to ensure that
profits, which are substantially in excess of the forecast levels are shared with the Authority.15
Super profits clauses should only apply to profits not already subject to specific Third Party Income sharing mechanisms.
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14 Authorities should be aware that the combined position means that Third Party Income from one source will be offset by a deficit from another source, which makes it less likely that the Authority will receive any share. Authorities should therefore ask less bidders to demonstrate the impact on the Unitary Charge of a combined approach and then make a choice based on value for money.
15 The issues arising in relation to super profits clauses generally go wider than the calculation of the Unitary Charge. There are therefore advantages in keeping the drafting separate from the Payment Mechanism Schedule. WIDP is currently reviewing the need for specific guidance on this issue.