In October 2010, Defra announced, as part of the comprehensive spending review, that private finance initiative (PFI) credits would be withdrawn for seven out of 18 waste projects which had, at that stage, achieved preliminary allocation. It is also expected that credits will not be available for future waste projects. So solutions for waste management must be developed in the absence of central Government funding.
While the nature of waste processing will change, with the right approach from waste providers, it could provide a real opportunity to smaller and more innovative waste management companies that have so far struggled to achieve the conditions necessary to finance and build facilities.
The process of bidding for contracts under PFI is an extremely expensive one, with bid costs of several millions of pounds being typical. As a result, PFI has encouraged local authorities to opt for large-scale waste management provision to the exclusion of both smaller scale solutions and newer technologies. Of the 32 waste projects in England which have or will still receive PFI credits, all but four are either led by large energy-from-waste (EfW) incineration or mechanical biological treatment (MBT) facilities.
The end of PFI funding for future waste projects is likely to introduce a greater degree of flexibility in waste management procurement. While EfW and MBT projects will still be built by integrated waste management companies and specialist providers, these facilities are likely to focus on large urban waste streams. The financing for such projects will, by definition, need to change and we see traditional project finance and public-private partnership schemes taking the lead.
But the potential now exists to open the municipal waste market to different technologies, companies and structures. If local authorities are willing to think in more flexible ways, the demise of PFI could provide a significant opportunity for innovators in the sector. And with fewer PFI projects to finance in the future, and an improving outlook for debt and project finance, banks and other financial institutions are more likely to consider alternative projects to finance in the sector.
The key brake on investment in the sector to date has been the lack of long-term waste supply contracts. It is here particularly where the public sector, effectively freed of the constraints of PFI, should be able to make a significant impact in making independent waste management solutions viable. Of course, most waste in the UK is commercial and industrial rather than municipal, but few companies provide anywhere near the volume of waste by themselves to underwrite the financial viability of a waste management facility.
The financial sector currently requires a waste contract to cover at least the timescale of the debt finance. In reality, this does not mean that a waste provider needs to commit to a 25 or 30-year PFI-type timescale because many commercial project finance facilities will be for a much shorter time than this.
But a commitment by local authorities to provide some of the municipal waste stream for an eight to 10-year period to newer, smaller and more innovative waste management companies could provide enormous credibility and impetus to the sector. Such smaller scale facilities are generally more acceptable to local residents for planning purposes, and could provide significant additional benefit in more efficient recycling and energy generation.
To tap into this opportunity, local authorities in particular must be willing to be more open-minded and innovative about waste management solutions that make sense in their local environment.
Even now, there is money available for investment. The private sector is good at assessing project operating and technical risk but has found it difficult simultaneously to manage feedstock supply and regulatory risk in a changing industry. A new approach can help to solve this.
John Edwards is a senior advisor with merchant bank Augusta & Co. Richard Dyton is a partner at law firm Simmons & Simmons