Illegal State Aid and the Javelin Park Incinerator Contract
Community R4C and local residents will be submitting an ‘illegal state aid’ complaint to the European Commission shortly. The aim is to recover £10millions of illegal payments back to GCC for local services, to reduce forward waste treatment costs by c£10m pa, and to pave the way for far more environmentally sustainable treatment of waste in the County. This briefing sheet has been produced without the benefit of legal advice, however we are confident that the information is accurate.
In 2016 a small group in Gloucestershire County Council (GCC) (a ‘cabal’ identified in court) awarded a contract worth £613million to a consortium backed by Urbaser (a Chinese owned Spanish waste group) and Balfour Beatty (the UK civil engineer) (UBB). This contract was awarded in secret and without competitive tender, a serious breach of proper process and democratic accountability. Councillors and the public were misled about the cost of the contract, the increase and the costs of cancellation of the previous contract. Councillors were told that the choice was between “saving £150 million” and “spending £100m to cancel the contract”. We now know both figures to be untruthful. In particular, we now know that the savings claim included ‘saving’ the inflated £100m figure to cancel the contract.
As a matter of fact, the Council’s expenditure on ‘waste disposal’ has increased by £8.5m, c50% between 2018/19 immediately prior to the operation of the incinerator, and now.
Cllr Jeremy Hilton spoke up in late 2015 to question the cabinet stating that the “£37m increase in cost was a financial disaster for the County”. We now know that the true cost increase was significantly more, at £163m.
It is a fundamental of public procurement that all contracts go to public tender – this ensures competitive pressure to deliver best value and prevents fraud and corruption.
Awarding a contract without a competitive tender is illegal State Aid, illegal in UK and European law. Put simply you may not simply award public money to your personally preferred contractor. In such situations the recipient of the illegal benefit – in this case UBB and its parent companies – must return all of the illegal aid to the ‘state’ – in this case GCC. It is irrelevant as to whether GCC is also at fault, the law takes the position that the people must not lose out from such illegal procurement, and therefore puts a heavy burden of responsibility on the recipient.
The previous, 2013 contract was for £450 million (not the £500 million claimed). So the new contract is £163m more, 36% more expensive. This new contract was awarded without a fresh tender process as is required in cases where there is an increase in cost of more than 10%.
There is no obvious defence for UBB e.g. that this was simply a variation of the previous contract, allowed for by a clause in that contract. There is no such clause.
Had the contract been ruled illegal within 6 months of grant, it could and would have been ruled void and a new tender process commenced. However, it was deliberately kept secret so this couldn’t happen. Subsequent to that the only penalty is compensation to injured parties, which has to be raised within 30 days of the contract details being made known, and reimbursement of all illegal state aid from UBB to GCC.
It is perhaps clear therefore why the Cabinet and UBB wanted to keep details of this contract secret, defying numerous Information Commissioners Office (ICO) rulings to do so. It spent £100k’s fighting and losing an appeal to keep the information about the 2013 contract secret, and then continued to not comply with the spirit of the tribunal ruling by withholding the 2016 contract details on the basis that it was an entirely new contract (although GCC since claimed in court that they merely amended the previous contract). It then appealed a second ICO ruling before finally releasing information, with a further ‘explanatory note’ just before Christmas 2018. Clearly it was felt that no potential alternative bidder for the contract would be able to launch a procurement challenge within the strict 30-day timescale of this release. Of course, no commercial waste company was in a position to take on this unplanned action over the busy, annual leave strewn festive period – however, a small but determined community group took it on instead. The preliminary hearing this summer threw another blocker in our path regarding our ‘standing’ (commercial status) but we were advised to appeal the judgement, which currently prevents the full case going forward, by an expert public procurement lawyer who feels this is not appropriate application of a detailed point of law.
GCC also successfully blocked information being shared through the independent audit on value for money being conducted by Grant Thornton, frustrating that audit process which is now 3 years in. As a consequence of this audit, Grant Thornton have qualified the Councils accounts for the last three years, on Value for Money grounds of the incinerator. Nevertheless the Council has still included a misleading claim of “£100m saving from the incinerator” in the accounts, despite the real increase of £8.5m per annum.
State Aid / The Law
The new (2016) contract appears to be clear State Aid – the only exception would be if UBB can prove that the contract was fairly awarded after a proper competitive tender process. As HH Judge Russen underlined this would take an exception on grounds of “not substantial” (36% increase is more than the 10% threshold for this) or “the consequence of a clear and explicit change clause”. Clearly it is not the latter or there would not have been a negotiation on the new price.
State Aid is when the following five conditions are met cumulatively: (reference European Commission, here)
- Use of state resources
- Economic advantage
- Selectivity (i.e. the aid favours certain commercial undertakings or the production of certain goods)
- Effect on competition
- Effect on trade between Member States
The state aid is illegal unless it has been properly approved by the EU, which requires notification etc. This has not occurred.
In this case we have a clear tick in all those boxes – so it is illegal state aid, albeit not absolutely proven in court yet.
In principle the WHOLE of the £613m would be illegal state aid (once paid) since it was not notified. No doubt there are mitigation arguments that somehow some payment was lawful, however the rules state:
“The national court must therefore in principle order the full recovery of unlawful State aid from the beneficiary”
Note: “a beneficiary of unlawful aid cannot plead legitimate expectation against a Commission recovery order (54). This is because a diligent businessman would have been able to verify whether the aid he received was notified or notification or not”
This places a clear obligation on the beneficiary, and explains why there was collusion and secrecy between a select group of UBB and GCC. They all knew there was no State Aid notification, and presumably understood the serious consequences of a state aid claim.
Consequences and Enforcement
If agreed the EU issues an enforcement notice which the national courts are obliged to enforce. In principle this would persist post Brexit, but many things are up in the air on this.
The UK courts then have an obligation to recover the illegal State Aid AND recover damages for competitors etc. See rules here
- Prevent all future payments of illegal aid (so this would reduce forward price)
- Recover amounts already paid plus interest (i.e. capital payments plus annual charges so far)
- Recover damages for competitors (this would come from GCC, but could come from the beneficiary). We are not clear whether this is superseded by our procurement claim.
- Impose interim measures – and obligation on the UK court to apply all interim measures available to it to avoid further competitive compromise – so for example all further payments to UBB to be immediately stopped. Delay is explicitly to be avoided, since it increases the competitive harm (as we have suffered)
This would result in UBB suffering an untenable loss in forward income, which they renegotiated to meet their increased financial needs since signing the 2013 contract, and it would go bust without a substantial bailout – which no-one would give we can reasonably assume, particularly having seen the smaller amounts leading to contract breakdown with UBB in Essex.
The beneficiaries of the illegal State Aid are liable – and would have to return all illegal aid already received. The beneficiaries in this case include UBB, Urbaser, Balfour Beatty, possibly also the major contractors and banks.
In practice we are talking about a refund of payments made by GCC to date – which may include:
- Capital and other payments to support build. Some or all of c£38m, plus interest
- Payments already made for waste treatment. C £25m pa, so some or all of another c £40m?
- PLUS NO further payments going forward, which would save the County c £8.5m pa (based on recent landfill costs vs the incinerator, other alternatives could be better still as per our report.) The latest Government-sponsored Gate Fee report (2019 by WRAP) comparing prices at 68 incinerators across the country shows that the median price is £89/tonne compared to £189/tonne for the first 108,000 tpa being paid to UBB.
This MIGHT be reduced by the amount that GCC might reasonably have paid anyway – c£15m pa – but a refund of >£50m is reasonable and should be expected (+ £8.5m reduction pa going forward)
In addition there will be no more payments to UBB – see below.
So what happens to the Contract, UBB and To the Incinerator?
This is to be determined, but the following points are relevant:
- It is highly unlikely that the contract – i.e. obligations GCC to UBB and visa versa – would survive this, there are almost certainly clauses in the contract which remove all obligations from GCC in this scenario
- UBB was a beneficiary, so will have an obligation to repay illegal aid, and this will sit as a higher obligation than its debt to banks etc. It will be the legal owner of the plant (we believe) with a charge (mortgage) to the banks. The receiver would then seek to sell the plant to repay creditors. GCC will be a major creditor and will (by court order) rank highest (Note: this seems obvious and is consistent with what we have been told by our advisers, however further confirmation required)
- UBB will not be able to repay these costs and if it has a forward contract it will be on terms it cannot afford; more likely it will not have a contract. This would mean that UBB was insolvent and would go bust, unless there is a large bailout from Urbaser or Balfour Beatty which is very unlikely.
- The plant would sell to the highest bidder. It is unlikely that this bidder could rely on winning a future contract from GCC (since this would have to go to competitive tender). So the people likely to bid for this are:
- An interested party – eg Urbaser. They would balance up the losses they face with the potential to move forward, and would (if they could get Board support) be in the best position to make the highest offer. They could for example offer to buy the plant for £50m (so repaying the GCC debt as above) and then assume they could sell the capacity to GCC and others. They would assume this would be at much lower prices – so £15m pa to GCC. It would also be reasonable to assume that GCC would only award on a flat price basis, so removing the incentive to waste more / burn recyclates.
Note: this would be difficult to sell internally within Urbaser (or Balfour Beatty) given the very embarrassing huge losses that will flow. They will have losses of £100m+ they will have to own up to.
- An unconnected party who wanted an incinerator in Gloucestershire. They might offer less, but would not have the baggage and would find it easier to get this past their Board and investors. However, the county waste contract is separate so this is a risk.
- Break up. This is perhaps the most likely scenario, especially if GCC implement the recommendations of their own Residual Waste Working Group November 2014, to either procure a Mechanical and Biological Treatment Plant or similar, or contract with a provider of an existing facility, for instance in Avonmouth. UK, GCC and District carbon commitments would make this kind of incinerator without pre-treatment an untenable candidate for a contract let in current times. The plant (equipment) can be sold and relocated, and the building sold to the highest bidder. This might get say £30m for UBB which would go towards settling the debt with GCC. Other state aid refund to GCC would then come from parent companies – Urbaser and Balfour Beatty. The banks will lose everything unless they have parent company guarantees they can rely on. In this case the unsightly building would be empty, could be reduced in height and the chimney removed, to accommodate a more appropriate industry in a climate emergency – it would then probably be bought by a commercial property business, available for rent for industrial use
Where will GCC Send Waste if not the Incinerator?
- Short term it would contract out waste on short term contracts. There is plenty of capacity available in the South West – landfill and incineration – and this would be far cheaper than the historical contract. Community R4C’s work on alternatives was published in 2017 and can be updated, however we can be confident that the Council will end up paying no more than the recently historical £15m pa (so £8.5m pa saving to the Council). This is consistent with national averages; indeed lower prices are likely.
- Longer term we should aim to have a much better waste treatment / waste reduction system. Community R4C could / would be one of the bidders for this, and would bring best in class waste sort technology, along with community engagement and circular economy principles. Our bid would likely be c £8m pa (so 1/3rd the cost of the incinerator contract), and might include renting the existing but height reduced building to house our recycling centre, R4C and an innovation hub for processing the resulting materials. GCC would be free to choose the best long-term solution, which would no doubt aim to be flexible, low waste, low cost etc – while having the time and comfort of much lower cost treatment through capacity at other facilities. We can and should achieve an exemplar of community engaged, carbon efficient waste treatment drawing on the best examples from across Europe.
- If the Javelin Park incinerator was bought by a new operator then they would certainly bid for the new GCC contract. However, GCC would be able to insist on much better contract terms which reduce costs and protect resources.
In this scenario we can expect:
- Pricing no higher than private sector / commercial operators. The median incinerator gate fee price is £89 per tonne, compared to a price starting at £189 per tonne for GCC.
- Much lower price – <£15m pa to the County, saving £10m per annum
Flat single tier pricing – removing the incentive to burn more waste rather than reduce or recycle
- Pre-sort – an auto plant as is typical in most new incinerators (eg Allerton) which removes recyclable material and food waste prior to burning the true residue
- Waste reduction measures
In summary it looks to be about an evens chance that following meaningful State Aid action, the incinerator could stay at Javelin Park – but if it does it will be in MUCH better form and at MUCH lower costs. It is equally likely we will be able to pursue the type of sustainable waste reduction and treatment Community R4C advocates, with huge cost and environmental benefits.
A win/win outcome.
- What happens if Community R4C does not win its appeal or the full procurement case? This is immaterial to the state aid claim since if it loses it will be to do with Community R4C’s economic standing, not the underlying breach of procurement law. It would be helpful to win the full case since we would then have a High Court ruling on illegal procurement, however there is no need to delay action on State Aid further.
What happens if UBB goes bust, as has occurred for UBB in Essex?
We would expect UBB to go bust, and this will lead to the substantial benefits to the County and environment detailed above. GCC would then have cheaper, environmentally superior waste treatment. UBB would sell assets to repay state aid to GCC, any shortfall would be made up from Urbaser and Balfour Beatty.
- Is there a risk waste won’t be collected?
No, this is not realistic. Waste is collected by the district councils, not UBB. If UBB cannot take the waste they would be failing under their obligations under the contract and would have to reimburse GCC for any increased cost. However, in practice the alternatives would be considerably cheaper. There are many options in the South West for waste ‘disposal’ which have spare capacity and are cheaper than the incinerator. Medium term we would develop our own alternative waste reduction and treatment options as outlined above.
- How quickly will this happen?
We can expect an initial outcome from the European Commission in a matter of weeks. They will either dismiss the case, or (far more likely) will consider an in depth investigation followed by a demand placed on UK courts. However the pressures this will bring to the contract will be pretty immediate and this may present an opportunity for a negotiated outcome with UBB consistent with the direction of travel above. So perhaps less cost to UBB, but an immediate move to single tier pricing and lower costs going forward. In any case any compensation will be back dated.
- Does this change now we have left Europe?
We are still within transitional arrangements so this complaint is properly dealt with by the European Commission, and the contract itself was of course awarded under EU rules. State Aid laws will persist and will in future be managed by the
Competition and Markets Authority (CMA). We have an existing complaint with the CMA which would no doubt be re-opened. However future arrangements are unclear. It is clearly important to initiate this action under the current regime, even if it is later picked up by the CMA
- What can our county Councillors do?
This action is independent of Council and Councillors – it is clear this is in the interests of the people of Gloucestershire whose money has been wrongly spent in this way. We hope we can help support interested Councillors to drive change within the Council and ensure the independent audit being done by Grant Thornton now progresses expeditiously and is no longer frustrated by the ruling ‘cabal’ that entered into this hugely harmful contract in the first place. We support openness, transparency, democratic accountability and actions to stop wrongdoing in the name of the Council. We are politically neutral and have supporters from all parties.