In principle, the Contractor should be liable for any changes in the operating costs associated with its technical solution, including the costs of any landfill (inclusive of landfill tax). However, the risk that the landfill tax rate varies from that assumed in the Contract (and reflected in the financial model) should lie with the Authority. This can be dealt with as a separate component or incorporated within other components of the Payment Mechanism. The Authority should ensure that its liability is restricted to the payment of any increase in the active landfill tax rate (in relation to the expected rate) multiplied by the lower of the Target Unprocessed Landfill Tonnage and the Actual Unprocessed Landfill Tonnage in a Contract Year.
Contract Waste that would attract the lower rate of landfill tax is generally capable of being diverted from landfill and therefore the Contractor should be responsible for choosing which disposal route it prefers and there should be no provisions for any landfill tax incurred to be passed to the Authority.
The payment to reimburse additional landfill tax arising from a rate rise should be reduced by a gain share deduction in certain circumstances. Specifically if the positive impact of landfilling less than the Target Landfill Tonnage outweighs the negative impact (if any) of higher tax rates and as a result the Contractor's overall landfill tax liability falls, then some of this gain should be shared with the Authority.
The recommended approach is for the Authority to require bidders to bid back a simple percentage share to be attributed to the Authority.19 However the Authority may also wish to consider whether it is appropriate to introduce a tiered gain share mechanism to incentivise higher levels of performance. The bottom tier could attract a zero percent share for the Authority to allow the Contractor to retain the entirety of the benefit of small improvements in performance.
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19 The percentage share is applied to the overall reduction in the Contractor's landfill tax liability. Hence avoided gate fee should be excluded from the calculation.