The Contractor will have set the price for the Services, i.e. the Unitary Charge, by reference to a financial model which included forecasts of other income streams available to the Contractor. Depending on the scope of the project and the nature of the facilities these might have included:
a) gate fees charged to third parties for the treatment of their waste in the project facilities;
b) income from the sale of energy i.e. electricity and/or heat; and
c) income from the sale of recyclates and/or process residues.
The income shown in the Base Case Financial Model will usually be a fairly conservative estimate of the potential income, especially if the Contractor has used third party bank finance for the project. There is therefore a reasonable probability that actual figures may be higher than forecast, although there will also be some risk that the income is less than forecast, especially if the relevant market price is highly volatile.
If these variations in income are all at the Contractor's risk then the Contract will not contain any provisions relation to Third Party Income. However it is typically the case that the Contract will provide for some sharing of any upsides with the Authority. This will normally be affected by a deduction from the Unitary Charge although it is possible there could be a separate mechanism to pass the benefit to the Authority.
The WIDP Contract (Schedule 4) refers to the WIDP Guidance on the Payment Mechanism39. The drafting in the guidance includes a simple arrangement whereby aggregate Third Party Income is compared with the relevant forecast in the Base Case and any excess is shared with the Authority according to a defined percentage. In practice Contracts may have considerably more complex provisions especially if each source of income is subject to a separate arrangement. There may also be a profit sharing arrangement in addition to or instead of income sharing. Although rare in PFI contracts generally, these have been more common in the waste sector especially in the early integrated Contracts.
If the Contract provides for Third Party Income sharing then the Authority has an economic interest in the third party and off-take contracts. In this case the Contract should contain provisions that prevent the Contractor amending these contracts unilaterally in a way that adversely impacts on the Authority, either in relation to Third Party Income shares or in termination scenarios (see Section 8). The WIDP Contract (Clause 51.1) contains provisions that, in this scenario, require the Contractor to seek confirmation from the Authority that the third party or off-take contract:
• is on arm's length terms40, and consistent with the key commercial terms of the Contract;
• ontains breakages costs limited to the level that a prudent operation would accept and are limited to Direct Costs only;
• is assignable, free of charge, to the Authority on termination or expiry of the Contract; and
• applies Clause 51.4 (see Section 4.6.2 below) in the case of a Third Party Waste Contract.
The Contract Management Manual should highlight this obligation on the Contractor and include procedures for assessing whether the Contractor is complying with its contractual obligation.
This remainder of this Section addresses the specific issues in relation to each of the main sharing arrangements.
The Contract Manager should also be aware that, under the WIDP Contract (paragraph 6 of Schedule 19) where the Base Case Financial Model is adjusted there are specific rules applying to Third Party Income and that the approach depends on the cause of the revision i.e. whether it is an Authority Change (see Section 5.2), a Compensation Event (see Section 5.4), or a Qualifying Change in Law (see Section 5.5).
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39 This guidance is available online at
http://www.defra.gov.uk/environment/waste/local-authorities/widp/widp-procurement-pack/
40 On arm's length terms means on terms comparable that which would have been obtained with a third party with no economic relationship with the Contractor.